Home / Markets / Stock Markets /  Sebi tightens rules for IPOs, tweaks OFS norms

Markets regulator Securities and Exchange Board of India (SEBI) has tightened IPO (initial public offering) rules, according to a notification issued on 14 January.

Earlier, the SEBI board had approved tightening of rules amid a record IPO frenzy, with 63 companies mopping as much as 1.19 lakh crore in 2021.

To give effect to these new norms, Sebi has amended various aspects of the regulatory framework under the ICDR (Issue of Capital and Disclosure Requirements) Regulations.

Under the new rules for offer for sale (OFS), shareholders with more than a 20% stake in the company before the IPO will not be allowed to sell more than 50% of their shares.

Currently, large shareholders can sell their entire holding through the 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.

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.

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.

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

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.

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