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Amid Startups IPO Frenzy, SEBI Proposes Cumulative 35% Cap On Use Of Proceeds For M&As & GCP

Amid Startups IPO Frenzy, SEBI Proposes Cumulative 35% Cap On Use Of Proceeds For M&As & GCP

The existing rules have set the limit to earmark 25% of the funds to “fund inorganic growth activities” and another 25% funds reserved for general corporate purposes (GCP), marking uncertain use cases of a large portion of the issue

Further, in the absence of significant shareholders within startups, the market regulator has proposed that only investors with more than 20% shareholding can sell through OFS

It has also stated that >50% of the anchor book be given to investors who agree with 90 days or longer lock-in period, to inspire confidence in retail investors in loss-making companies

Given the increasing number of startups going through the public listing mode, the Securities and Exchange Board of India (SEBI) has proposed a slew of changes in a discussion paper published on Tuesday (November 16).

The market regulator has proposed putting a cap on IPO proceeds earmarked for making future acquisitions without identifying specific targets. Currently, in the draft offer documents, issuer companies have the limit to earmark 25% of the funds to, “fund inorganic growth activities”. These include new business initiatives, partnerships, without setting a target or specific acquisition.

On the other hand, startups or “new age technology companies” (NATCs), as SEBI puts it, have another 25% capping on booking funds reserved for general corporate purposes (GCP). GCPs are funds allocated with no specific object and are unmonitored by SEBI.

These uncertainties about the objects of the issue increase, as a large portion of the fresh issue is earmarked for such unidentified acquisition; especially when NATCs already have the flexibility to earmark up to 25% of the fresh issue size under GCP, the market regulator said.

Thus, SEBI has been mulling putting a combined cap of 35% on funds earmarked for “inorganic growth activities” and GCP. However, it has added that such limits will not apply if the proposed acquisition or strategic investment object has been identified and suitable specific disclosures are made at the time of filing of the offer document.

The discussion paper has also invited public comments on the proposals till November 30.

Further, the regulator also suggested certain conditions for the offer for sale (OFS) by the significant shareholder. It has recommended that 50% of the anchor book should be given to those investors who agree with 90 days or longer lock-in.

To identify a significant shareholder, in case of no Minimum Promoter Contribution, it has proposed a 20% lower limit on entities holding pre-issue capital.

Further, for such significant shareholders, who are selling through OFS in IPO, their remaining post issue shareholding can be locked-in for six months from the date of allotment in an initial share sale, the paper proposed.

This should also be applicable even if significant shareholders are of venture capital fund, category I and category II alternative investment fund (AIF).

“There may therefore be a need to bring some parity to inspire confidence amongst the investors by existing shareholders, who are having significant shareholding. This may be specially required for loss-making companies coming with IPO,” SEBI noted.

Lastly, it added that instead of increasing the lock-in period for all anchor investors from 30 days, >50% of the anchor book should be given to those anchor investors who may be agreeable with 90 days or longer lock-in period.