What are the New IPO Rules You Need to Know About

In this article, we will be discussing some of the new IPO rules which have been amended sometime back which becomes important to discuss currently. In 2021, IPOs raised around Rs. 1.4 Lakh Cr. which is quite huge, while in 2022, the amount raised from IPO by companies was just around Rs. 80,000 Cr. So, what are the changes which have resulted in a reduction in the amount raised via IPO?

6 New IPO Rules:

1) Use of Proceeds:

• A company can generally raise the amount via public issues through 2 options: Fresh Issue- where a company issues new equity shares or an Offer for Sale where the company’s promoters or early investors can sell their stake here.
• If a company is doing a fresh issue, then the company needs to specify how will the IPO proceeds will be utilized. This has to be mentioned in the Draft Red Herring Prospectus (DRHP)/Red Herring Prospectus (RHP).
• Earlier there were no restrictions on where and how the IPO proceeds will be utilized.
• New Rules in case of fresh issue:
  • Now as per the new rules, 25% of the amount raised via fresh issues cannot be utilized for inorganic growth (ex.: Acquisitions, etc.), if the target company is not identified. In case the target company is identified, then this 25% limit is not applicable.
  • In many cases, a certain amount of fresh issues is allocated to general corporate purposes which are not needed to be disclosed exactly where these amounts will be utilized. Here, as per the new rules, not more than 35% of the issue amount can be utilized for general corporate purposes.
• New Rules in case of Offer for Sale (OFS):
  • Earlier in the case of OFS, there were no restrictions on how much the early investors can sell their stake. Now as per the new rules, if the existing shareholders own more than 20% of the shareholding, then they only can sell their stake up to 50% of their holding. For example: If an investor is holding around 25% stake in the company, then post issue, his/her shareholding should not be less than 12.5%.
  • If the existing shareholders own less than 20% of the shareholding, then they only can sell their stake up to 10% of their holding.

2) Anchor Investor Lock-In:

• Anchor Investors like Mutual Fund Houses, etc. can invest in the IPO before the IPO windows open for the retail investor. Here, earlier, there was a lock-in period of around 30 days for these anchor investors for their entire shareholding in the company. But now as per the new amendments, the lock-in period of 30 days is just applicable for 50% of their shareholding and 90 days lock-in period for the rest shareholding.

3) HNI Subscriptions:

• Earlier there was no restriction for Non-Banking Financial Corporations (NBFCs) for financing the IPOs to help the investors to apply for the IPO in High Networth Individuals (HNIs) quota. Now as per the new rules, NBFCs now cannot lend more than Rs. 1 Cr. for financing the IPO.
• There were also no restrictions for earmarking the non-institutional shareholding. As per the current update of SEBI, out of the total allocation to non-institutional shareholding, 1/3^rd will be reserved for ranging between Rs. 2 Lakh and Rs. 10 Lakh, and the rest will be reserved for this.

4) Price Band Amendment:

• The company bringing the IPO generally specifies the IPO price band i.e., for instance, IPO Price ranging between Rs. 400-Rs. 420. In case of oversubscription, an investor will only be allocated to the investor if he/she has applied at the upper price band limit.
• Earlier, the price band was free and there was no limit on the upper and lower price cap. And now, as per the new rules, the upper price band should be 105% of the lower price band of the issue.

5) Disclosure of Past Indicators:

• Earlier there were no requirements for the company to disclose past fundraised- the price, investors, derivation for the price. Now, as per the new rules of SEBI, this practice has become mandatory. Also, the price at which earlier fund is raised should be quoted at the Weighted Average Cost of Acquisition.

What Should Investors Do?

All the above-discussed changes are some of the new rules which SEBI has implemented for IPO-bound companies. These are the new rules which companies need to adhere to in case proceeding with fundraising plans. Investors investing in IPO should also be cautious and should thoroughly deep dive into the RHPs of the company and should follow due diligence before making investment decisions.

Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.