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MUMBAI : The markets regulator on Tuesday tightened rules for initial public offerings aimed at tackling regulatory gaps and extreme stock price volatility on their trading debut, after a record year for IPOs that saw Indian companies raise 1.19 trillion.

The new rules address how companies set IPO price bands, when anchor investors can sell their shares, disclosures about how the company can spend share sale proceeds, and how much large shareholders can sell on listing day.

The changes made by the Securities Exchange Board of India (Sebi), ratifying proposals made in a 16 November discussion paper, address some of the regulatory gaps that have emerged after the regulator relaxed rules to allow startups, without a track record of profitability and low founder stakes, to list on the main board of Indian exchanges.

Shares of One97 Communications, Paytm’s parent, plunged as much as 13% on 15 December as anchor investors sold their holdings.
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Shares of One97 Communications, Paytm’s parent, plunged as much as 13% on 15 December as anchor investors sold their holdings.

The new rules bar large shareholders, with more than 20% stakes in the company, from selling their entire holdings on listing day. However, they can sell 50% of their shares on listing.

Currently, large shareholders can sell their entire holding through the offer-for-sale (OFS) route. But with new-age companies having neither a profit track record nor an identifiable promoter, a complete exit by prominent shareholders may lead to a crisis of confidence among retail investors, Sebi reasoned.

“This proposal should not be viewed negatively, as it gives more stability post issue and could help in rationalizing the IPO pricing," said Darshan Upadhyay, managing partner, Stratage Law Partners.

The regulator also tightened disclosure norms around how companies can spend the proceeds from public fundraising.

They will now use only 25% of the IPO proceeds for unidentified acquisitions. For others, the spending on acquisitions will be capped at 35%. In addition, rating agencies will monitor how the funds are used.

“Rating agencies will strengthen the monitoring process and ensure that the proceeds are being used for stated purposes," Sebi chairman Ajay Tyagi told reporters at a press conference after the regulator’s board meeting.

Sebi also increased the lock-in period for anchor investors from 30 days to 90 days to prevent share-price volatility and losses for retail investors. This will apply to only 50% of the allocation to anchor investors and will take effect in April.

The regulator observed that the presence of institutional and anchor investors offers confidence to the broader market. But when the anchor investors exit as soon as the mandatory lock-in period of 30 days end, it turns the stock price volatile.

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

Shares of One97 Communications, Paytm’s parent, plunged as much as 13% on 15 December as anchor investors sold their holdings.

Following the collapse of the PNB Housing Finance Ltd-Carlyle Group transaction, Sebi tweaked how shares need to be valued when there is a change of control of a company.

Publicly traded companies will now have to adhere to their articles of association (AoA) and Sebi’s pricing norms while valuing a deal.

Further, a valuation report would need to be furnished if a company allots more than 5% shares to any entity.

In June, PNB Housing announced a 4,000 crore preferential sale of shares and warrants to Carlyle Group and other investors. However, the deal ran into trouble as some investors claimed that the shares needed to be valued by an independent agency, as stated in the company’s articles of association.

Sebi also tweaked the price band norms. The difference between the floor price and the upper price band shall be at least 5%.

The regulator also observed that the price band offered by companies was extremely narrow. Currently, large, non-institutional investors have a quota of 15% of the issue size in an IPO.

The regulator has bifurcated the quota by mandating that one-third of the retail investor quota will be reserved for investors with an application size of more than 2 lakh and less than 10 lakh.

The rest will be offered to investors with an application size of more than 10 lakh.

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