SEBI notifies IPO reforms; funds usage comes under scrutiny

MDT/PTI 16 October 2012

The IPO reforms would help large number of small applicants get shares in an oversubscribed issue and minimum application size for all investors has also been increased to Rs10,000-Rs15,000 from Rs5,000-Rs7,000 at present

Mumbai: Market regulator Securities and Exchange Board of India (SEBI) has notified wide-ranging reforms in initial public offering (IPO) market, including a strict vigil on usage of issue proceeds, greater disclosure by companies and their bankers and allotment of a minimum number of shares to retail investors, reports PTI.

As per the notification issued by SEBI, no company can deploy more than 25% of the public offer proceeds in the name of "general corporate purposes". Besides, any issue-related expenses cannot be considered as a part of 'general corporate purpose' merely because no specific amount has been allocated for such expenses in draft offer document.

Among other measures, which have been approved by SEBI's board and are now being notified, any merchant banker that is an associate of the issuer would have to limit its role to marketing of the offer and declare itself as a marketing lead manager.

The company would also have to open the issue at least three working days from the date of registering the red herring prospectus with the Registrar of Companies.

Also, the disclosures made in the red herring prospectus while making an IPO, would need to be updated on an annual basis and made public by the issuer.

The companies would have to disclose the price band at least five days before the opening of the offer period, as against the current provision of two days. This will give the investors more time to analyse the IPO.

As per the notification, the issuer would need to allot a minimum lot of shares to each retail investor.

The measure would help larger number of smaller applicants get shares in oversubscribed issues. The minimum application size for all investors has also been increased to Rs10,000-Rs15,000, as against the existing Rs5,000-Rs7,000.

Among these, the eligibility criteria for the issuers coming through the "profitability route" has been redesigned to improve the quality of public offerings and enhance investor protection.

Now, only issuers with a minimum average pre-tax operating profit of Rs15 crore will be able to come through this route.

However, other issuers can access the capital market through either the SME platform or compulsory book building route with increased qualified institutional buyer (QIB) participation of 75%, as against existing 50%.

The companies can also offer a discount of up to 5% on the price in qualified institutions placement, subject to the shareholders' approval.

To help the companies achieve minimum public holding of 25%, SEBI has also amended the rules to allow sale of up to 10% stake to Alternative Investment Funds (AIF), a newly created category that includes venture funds, hedge funds, SME Funds among others.

Also, the companies would have to file fresh offer documents with SEBI if any changes in their issue objects leads to a decline of more than 20% in the offer size.

In another step aimed at helping the retail investors, SEBI has allowed retail individual investors to either withdraw or revise their bids until finalisation of the allotment, but institutional buyers and the non-institutional investors can neither withdraw nor lower the size of their bids at any stage.

The move is aimed at avoiding any misleading signals to retail investors about the extent of issue subscription.

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