SEBI board meet on December 28; to discuss major issues related to IPO reforms

by Brajesh Kumar & Tarun Sharma 

Capital and commodities market regulator, Securities and Exchange Board of India (SEBI) board is meeting next week to discuss major issues related to Initial Public Offer (IPO) reforms, enhance brokers and trading members net worth criteria. Apart from this SEBI board may discuss amendment in settlement regulations.  

Big reforms related to IPOs 

This  meeting could be the last meeting before Union Budget and meeting is held on December 28th. SEBI had issued discussion paper on October 4th this year on removing discrepancy in IPO price bands, as per the sources told Zee Business  “SEBI board may discuss minimum 5% gap in price band of IPOs and dedicated quota for smaller Non Institutional Investors (NIIs)”, Source further said “ The idea is to ensure that smaller HNIs are not crowded out in issues”. 

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SEBI बोर्ड की इस महीने के आखिर में होगी बैठक, IPO से जुड़े कई नियमों में अहम बदलाव की तैयारी और किन किन मुद्दों पर हो सकती है चर्चा बता रहे हैं ब्रजेश कुमार। @SEBI_India | @BrajeshKMZee | @AnilSinghvi_ | @SwatiKJain pic.twitter.com/B3kqYyOBGG

— Zee Business (@ZeeBusiness) December 22, 2021

SEBI consultation paper proposed 33% reservation for such smaller HNIs and 67% for those who bid above Rs 10 lakhs, this quota will be within the NIIs quota.

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Another major issue which is expected to be discussed in the board is putting some restrictions on sale of shares by significant investors (who have 20% or more stake) through OFS (Offer for sale) on listing, specially seeing exit in many new age technology companies, where there are no identifiable promoters.  

As per the SEBI regulations Issuer companies with  promoters  are  required  to  maintain  Minimum  Promoter Contribution (MPC), up to at least 20% of post issue capital as MPC which is locked – in for 18 months post listing. 

Monitoring of funds of General Corporate Purpose and higher lock for Anchor investors  

Board is also expected to deliberate the issue of uncertainty/ ambiguity  in  the  IPO  objects. SEBI may cap a combined limit of up to 35% of the fresh issue size for deployment on such objects of inorganic growth initiatives and general corporate purpose. Many new age technology companies disclose objects in their offer documents under such heads as 'Funding of Inorganic Growth Initiatives’ without identifying the target  acquisition  or  specific  investments  proposed  to  be  deployed  out  of  issue proceeds, at the time of filing offer document.  

To inspire confidence and avoid uncertainty, SEBI is also considering for increasing the lock in of anchor investors. The board may consider the lock in from existing 30 days to 90 days post allotment of issue. Or allotment of more shares to those anchors who agree for a 90 days or longer lock in. SEBI is of the view that a longer lock-in for Anchor Investors will provide more  confidence to  other  investors. 

Revamping Preferential issue guidelines post PNB HFC case  

SEBI board is also likely to discuss and approve the preferential issue guidelines. SEBI had floated a consultation paper on the issue post PNB Housing Finance controversy. Consultation paper suggested to replace the existing formula of weekly high and low of volume weighted  average  price (VWAP) of 26 weeks with VWAP of 60 trading days and replace average of weekly high and low VWAP of 2 weeks with VWAP of 10 trading days. SEBI had received representations suggesting the norm of 26  weeks is very long for price determination considering  market  volatility.  

The board is also expected to make it mandatory for valuation report in cases where preferential issue allotment may result in change in control or allotment of more than 5% shares. Also companies will have to consider stricter provisions of pricing of preferential issue, if provided, under the Article of Association of the Issuer company, in addition to pricing  guidelines  under  ICDR Regulations for the purpose of making any preferential issue.  

PMAC suggested, in case of any proposed preferential allotment results in change in control, the valuation  report/certificate  from registered valuer should also cover guidance on control premium. Valuation report shall be hosted on the company’s  website  and a reference  to  the  same  shall  be  made in  the  notice  for calling  a general meeting of the shareholders.  

It suggested that any  preferential  issue allotment resulting in change  in  control can be done only after a reasoned recommendation from a committee of independent  directors.  

Lock in for promoters is also expected to be reduced. SEBIs PMAC has suggested a reduction in lock-in  for  preferential  issuance  to  promoters/  promoter  group from  3  years  to  18  months  and  for non promoters to be reduced from  1 year  to  6  months. Securities allotted to promoters under preferential issue and which are under lock-in, may be permitted to be pledged to lenders.    

Limiting time frame for settlement applications 

SEBI board  is also expected to take up the issue of tightening time frame for settlement applications. Currently parties are allowed to settle case within 60 days from the receipt of show cause notice or supplementary notice but additional time period of 120 days may be availed subject to the payment of  an additional sum of 25% over and above the regular settlement amount. SEBI is of the view that extending the time frame delays the enforcement process. SEBI is also in favour of reducing the revised settlement terms by fixing it to 15 days. Time frame for remittance of settlement amount be fixed to maximum 30 days.  

Review of Brokers Net Worth  

SEBI board is also expected to clear the new net worth regulations for brokers and clearing members. SEBI is of the view that with considerable increase in turnover in various segments of the exchanges over the years and that the significant increase in number of investors participating in the securities market, it is appropriate to review net worth of the members in different segments of the exchanges. SEBI has suggested that for a base net worth of  Rs 1 Cr for trading member (TM, 5 Cr for Trading Member-Self clearing member (TM-SCM), 15 Cr for Trading Member Clearing Member (TM CM) and 50 Cr for professional clearing member ( PCM) or 10%  of  average  daily  cash balance  of  clients  retained with  the  member  across segments/exchanges  in  the previous 6 months. The said net worth requirement is suggested to be complied by October 2023.