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

This proposal comes on the heels of many tech startups going public in recent months.

SEBI

The Securities and Exchange Board of India (SEBI) on November 16 published a consultation paper proposing a number of changes to the initial public offering (IPO) framework. The proposed changes include more scrutiny on how startups raising funds through an initial public offering (IPO) use that money including how they use it for future acquisitions or investments. This proposal comes on the heels of many tech startups going public in recent months including Zomato, Nykaa, Policybazaar, and Paytm. Zomato in fact announced last week that it is planning to invest nearly $1 billion in startups in the next couple of years presumably from funds raised through its IPO. Such investment plans have to be revealed before the IPO if the rules proposed below are incorporated into the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. In addition to proposing additional scrutiny, SEBI also proposes extended lock-in periods for anchor investors and restrictions on how significant shareholders can offload in an IPO. Here are all the proposed changes. Using IPO funds to make future acquisitions or strategic investments Proposed regulation: The company issuing an IPO is required to broadly state how the funds raised from the fresh issue portion of the offering will be used. Many companies state "Funding of Inorganic Growth Initiatives" as one of their objectives, which covers future acquisitions and strategic investments. SEBI proposes that inorganic growth initiatives and general corporate purposes have a combined limit of up to 35 percent of the fresh issue size if the intended acquisition or strategic investment is unidentified…

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