The Securities and Exchange Board of India (SEBI) issued new rules for initial public offerings (IPOs) on Tuesday.
The new regulations will govern how firms price their shares, how they spend the money they get from investors, how much of a company’s stake promoters may sell during an IPO, and how quickly anchor investors can sell the holdings they purchased before the IPO.
What exactly is it?
The price band of an IPO should be set in such a way that the ceiling price is at least 105% of the floor price, according to the new SEBI guidelines.
Second, unless they provide sufficient details, companies will not be able to utilise more than 35 percent of the money raised via IPOs to support the acquisition of other enterprises.
Third, promoters having more than 20% ownership in a company are prohibited from selling more than half of their stock in an IPO.
Finally, anchor investors would be unable to sell more than half of their shares before 90 days from the IPO date, as opposed to the present 30-day limit.
What prompted SEBI to enact these new rules?
Companies have raised a record amount of capital via initial public offerings (IPOs) on stock exchanges throughout the world. This year, almost $1 trillion in capital has been raised via IPOs in India alone. During a bull market, it’s normal for the quantity and magnitude of IPOs to increase. Bull markets, in which a lot of investor money is chasing equities and leading them to be overpriced, are seen by companies as a chance to gather the capital they need for expansion. Many business owners may perceive the IPO boom as a chance to sell their ownership in the company at a bargain price.
Many of the companies that raised funds via IPOs this year, such as Zomato, Paytm, and others, are loss money. This puts investors who have placed money into these IPOs at risk of losing a lot of money if the values of these shares fall sharply. Paytm, for example, has lost more than a third of its value since its initial public offering. According to SEBI, the new measures would guarantee that company promoters have more skin in the game. On the other hand, its pricing band guideline seems to be intended to combat the inclination among companies to establish a restricted price range for their problems. A tight price range, according to SEBI, obstructs the price discovery process.
Will the new rules be beneficial?
SEBI’s new guidelines have been largely praised for attempting to shield individual investors from the hazards associated with the expanding IPO industry. Some worry, however, that the new laws may make it more difficult for businesses to get additional money to drive expansion.
For example, requiring companies to be detailed about how they would utilise money raised via IPOs might limit flexibility, given how quickly business circumstances change in the real world. Furthermore, the anchor investor limit may hinder market liquidity since many major investors may not be prepared to retain their assets for more than 90 days and hence opt-out of IPOs entirely.
Some critics also question whether SEBI should strive to assist investors in making investing choices at all. They feel that investors, who stand to lose or gain the most from their investments, are best suited to do the essential due diligence before to participating in IPOs. The same may be said for how corporations price their first public offerings. Companies normally avoid underpricing or overpricing their issues since it limits the amount of cash they may obtain. Setting tight price ranges, in fact, might be a method to eliminate valuation uncertainty, which can stymie fundraising efforts.