Category II includes private equity funds and real estate funds, while Category I includes venture capital funds and infrastructure funds. So far, Category-I investors could sell their shares any time after the IPO, while category-II investors had to hold them for at least a year.
“Presently, in case of an IPO, there are relaxed rules for lock-in provision to category-I AIFs. The board approved the proposal for extending such relaxation to category-II AIFs also. This would bring about uniformity, ease of doing business and expand the investor base available for capital raising," the Securities and Exchange Board of India, or Sebi, announced on Wednesday.
Industry experts welcomed the market regulator’s move.
“It makes a lot of sense as there is no restriction on a private equity investor in selling off their entire stake on the day of the IPO. So, why should there be a restriction of one year after the IPO? This was an anomaly," said Prithvi Haldea, chairman of Prime Database group, a primary market tracker.
Lock-in is important for promoters, as you don’t want them to sell off immediately after the IPO, Haldea added.
The Indian IPO market, which has seen a strong revival over the past two years on the back of private-equity-funded companies tapping the primary markets to give exit to these investors, is likely to see a further boost thanks to the Sebi move.
In 2015 and 2016, 47 companies raised a total of Rs40,177 crore through IPOs, data from Prime Database shows. More than two-thirds of these companies were backed by private equity firms.
Sebi’s move will improve the attraction of IPOs as an exit route for private equity funds, by providing investors more flexibility in timing their exit.
“It allows this category of investors to analyse their exit without the restriction of a one-year holding period. They now have more flexibility to determine the number of shares they will sell in the IPO vs holding and selling shares in the aftermarket following the IPO. This change gives them more flexibility to determine their exit in the public markets and will be positive from an IPO activity perspective," said Sandip Bhagat, partner at law firm S&R Associates.
The move will also make exiting through the IPO route more attractive vis-a-vis other routes for such private equity funds, as timelines for exiting through an IPO will be shortened considerably.
“Earlier, investors would have to factor in a time frame of almost two years when exiting through an IPO, given six-nine months to get an IPO done and another one year of lock-in and then at least a couple of months to sell your stake," said Munish Aggarwal, director at investment bank Equirus Capital.
Now, we are looking at almost a year’s time, which is similar to the time that one needs for strategic sale, he said.
“It shows that the regulator is trying to ease things both for the issuers and the investors," added Aggarwal.
More flexibility on the exit side could also boost demand for AIFs.
“All the money in AIFs is coming from domestic investors. We are seeing a trend towards financialization of savings and people are looking for better risk-adjusted returns. So, if anything benefits the AIF industry, it only creates more demand for these funds from investors," said Nalin Moniz, chief investment officer, alternative equity, Edelweiss Global Asset Management.
According to data from Sebi, in the 12 months ended 31 March, AIFs across all categories raised funds worth Rs18,264 crore, compared to Rs22,691 crore raised in the previous three years.
While Sebi has granted an exemption on lock-in for category II AIFs, a long pending demand of the industry to exempt private equity investors holding majority share in a company from being categorized as promoters is yet to come through.
“It would have been a more radical move. But it would have helped fewer investors, where private equity funds have a majority or near majority. Relaxation of lock-in is expected to help a broader set of people," said Aggarwal of Equirus.