Sebi board set to clear changes to listing rules

A red-hot stock market that encouraged many new-age companies to go public and exposed some of the gaps in regulation has prompted the market watchdog to consider new rules, likely to be cleared at its next board meeting on 28 December.

At its last board meeting of the year, the Securities and Exchange Board of India (Sebi) will widen IPO price bands, extend anchor investor lock-in periods, and cap the amount a majority investor can sell in a share sale, two people aware of the matter said.

The changes are based on a 16 November discussion paper and will aim to curb extreme volatility on listing day or when anchor investors exit, the people cited above said on condition of anonymity.

At an event on Wednesday, Sebi chairman Ajay Tyagi pointed to additional regulatory challenges posed by what he called “companies with non-traditional business models”.

Currently, shareholders can sell some or all of their holding through an offer-for-sale (OFS) in an IPO. But in the case of new-age companies, many of which do not have an identifiable promoter and are making consistent losses, a full exit by large shareholders could erode investor confidence.

Sebi will mandate that investors holding over 20% stake can sell a maximum of 50% of their shares through the OFS, said one of the two people quoted above; the rest can be sold only six months after listing.

Sebi also plans to tighten disclosures about IPO proceeds.

In its November discussion paper, Sebi had observed many new-age companies cite ‘funding of inorganic growth initiatives’ as one reason for the fund-raising.

“Raising funds for unidentified acquisition leads to some amount of uncertainty/ambiguity in the IPO objects,” Sebi had said.

Now, the companies will be able to use only 35% of the IPO proceeds for such growth initiatives, the second of the two people quoted above said.

In any public offer, the presence of institutional investors and the continued presence of anchor investors inspires confidence in the broader market.

But when the anchor investors exit as soon as the mandatory lock-in period of 30 days ends, it brings about volatility in the stock.

Shares of food delivery major Zomato tanked 8.8% when anchor investors exited their holding after the one-month lock-in.

Shares of One97 Communications, the parent of Paytm, plunged as much as 13% on 15 December as anchor investors exited.

Even FSN E-Commerce Ventures Ltd, which operates beauty startup Nykaa, swung between an intraday gain of 4.4% and a loss of 5.91% after the anchor investors’ lock-in ended.

The regulator will now extend the lock-in period to 90 days, said the second person, as it believes this will stabilize the share price and prevent losses for retail investors.

Taking cues from the failed deal between PNB Housing Finance Ltd and Carlyle Group, Sebi also plans to tweak norms on valuing a company’s shares when there is a change of control.

In June this year, PNB Housing said it plans to issue preferential shares and warrants to Carlyle Group, as part of a ₹4,000 crore equity fund infusion led by existing investor Carlyle group, which would also result in the transfer of control.

This was to be done without an independent valuation of PNB Housing Finance—which was in accordance with Sebi norms, though the company’s Articles of Association (AoA) mandated an independent valuation.

The transaction ran into trouble, as a group of investors insisted on valuing the shares. Finally, the sale was scrapped.

Listed entities will henceforth need to adhere to the AoA and Sebi norms. Further, if a company is allotting more than 5% shares to any entity, a valuation report must be furnished.

Sebi will also tweak the price band norms. In future, the difference between the floor price and the upper price shall be at least 5%. Sebi has recently observed that the price band offered by companies was extremely narrow.

“A narrow price band presents an opportunity to an issuer company to camouflage a fixed price issue as a book-built issue,” said the first person.