SEBI proposes more scrutiny on how startups use IPO funds and extended lock-in for anchor investors

1.  Whether there is a need for monitoring of GCP and continual disclosures of the utilisation of the funds so raised?

Extending lock-in for anchor investors

• Proposed regulation: Anchor investors are allotted funds one day prior to the issue opening date and their shares are locked in for a period of 30 days from the date of allotment. These investors are expected to inspire confidence in the issue and provide an indication of price as well as improve the price discovery during IPO, SEBI explains. SEBI proposes that at least 50 percent of the portion allocated to anchor investors should be given to anchor investors who agree to 90 days or longer lock-in.
• Why? SEBI is of the view that the 30 days lock-in period is short and a longer lock-in period for anchor investors will provide more confidence to other investors.

Questions for public consultation:

1. Whether there is a need for an increase in the lock-in period for Anchor Investors? If so, what should be the lock-in period for Anchor Investors? or
2. Instead of increasing the lock-in period for all Anchor Investors, whether there should be a reservation for Anchor Investors who are agreeable to a higher lock-in period, say 90 days or more? How much portion of Anchor Book should be reserved for Anchor Investors who are agreeable to a higher lock-in period?

Limiting offer for sale (OFS) by significant shareholders in the absence of promoters

• Proposed regulation: Issuer companies with promoters are required to maintain up to at least 20% of post-issue capital as Minimum Promoter Contribution (MPC), which is locked–in for 18 months post listing. This “is meant principally to ensure skin in the game for the promoters to inspire confidence while approaching the public shareholder to raise fresh capital,” SEBI states. Other shareholders who are not promoters can divest a part or even their entire investment through the offer for sale portion of the IPO as long as they’ve held the shares for a period of at least one year prior to the filing of the draft offer document. SEBI proposes that in the absence of identifiable promoters, significant shareholders, identified as entities holding more than 20 percent of pre-issue capital, should have their divestment of stake capped at 50 percent of their pre-issue holding and their remaining post issue shareholding should be locked in for a period of 6 months from the date of allotment in IPO.
• Why? In some cases, there is no promoter and hence no requirement of MPC and lock-in post listing. In such cases, there is still “a need to bring some parity to inspire confidence amongst the investors,” SEBI states.

Questions for public consultation:

1. Whether there is a need for capping OFS in IPO by significant shareholders in IPOs where there is no identifiable promoter and therefore no MPC?
2. If so, whether such capping should only be for loss-making companies or for all companies?
3. What should be the capping on OFS by such shareholders in terms of % of their pre-issue holding
4. Whether there should be post-issue lock-in of 6 months for significant shareholders (irrespective of the category of investors)?

How can stakeholders submit feedback to SEBI?

SEBI is welcoming public comments on the aforementioned proposals from companies, investors, and other market participants and stakeholders. These comments can either be emailed to consultationcfd@sebi.gov.in or sent by post latest by November 30, 2021. For the exact formatting of the comments and for postal address, please refer to this document.