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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.


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 in the objects of the offer. However, if the proposed acquisition or strategic investment is explicitly identified and suitable disclosures about them are made, there is no limit.
  • Why? Many new-age technology companies (NATCs) are asset-light organisations that do not require funds traditionally required by the companies for objects such as investment for fixed assets or capital expenditure. “The growth in such businesses comes from expanding into new micro-markets and adding or acquiring new customers, companies, technology etc,” SEBI explains. But since there is no identification of the target acquisition or specific investments under the “Funding of Inorganic Growth Initiatives” header, it “leads to some amount of uncertainty/ambiguity,” SEBI states. “These uncertainties about the objects of the issue increase further in case a major portion of the fresh issue portion is earmarked for such unidentified acquisition,” SEBI adds.

Questions for public consultation:

  1. Is there a need for limiting a specific portion of fresh issue size for objects where companies have not specifically identified their intended acquisition/investment target in the offer document?
  2. If so, what should be the maximum cap in terms of % of the fresh issue for such objects?
  3. Whether a combined limit may be placed on such unidentified objects and GCP? If so, what should be this limit as a % of the total fresh issue size?

Monitoring of General Corporate Purpose amount

  • Proposed regulation: Companies issuing IPOs are allowed to specify that a certain portion of the funds raised will be used for general corporate purposes (GCP). Companies do not need to disclose any specific object regarding deployment of GCP amount and the amount is not covered in the monitoring agency report. As per current regulations, funds earmarked for GCP cannot be more than 25 percent of the fresh issue portion. SEBI proposes that issue proceeds earmarked under GCP should also be brought under monitoring and the utilisation of GCP amount must be disclosed in the quarterly Monitoring Agency report.
  • Why? SEBI argues that issuer companies are coming up with issues that are very large in size and that the GCP amount is very substantial in terms of absolute numbers. As an example, SEBI states that in a Rs 10,000 crore fresh issue the company can have Rs 2,500 crore earmarked under GCP. Given this, “there is a need to provide adequate information about the utilisation and monitoring of such a large portion of issue proceeds,” SEBI says.

Questions for public consultation:

  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.

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