SEBI Strengthens IPO Rules in Interest of Retail Investors

In Wednesday’s trading session, the prices of IPO stocks listed recently recovered from the healthy correction. The surge in prices was backed by the high volumes as the regulator SEBI amended new rules in favour of the initial public offerings for selling the shares.

All the recently listed companies gained from 3-10% after the new rules were approved by the Securities and Exchange Board of India. The highest gainer amongst them was the Latent View Analytics.

A day before Wednesday’s session, on 28th December 2021, the SEBI approved the new rules. The IPOs that launched around the year-end together raised Rs. 1.2 Lakh Crores.

Let us know more about the new rules by SEBI.

What are the new rules about?

The new rules revolve around the objectives of the IPOs, how the sum raised by the companies will be utilized, issue price bands, the lock-in period for the anchor investors, and the maximum quantity an investor can off-load on the day of its listing.

The new rules will minimize the risk around the IPOs and may encourage more people to participate in the IPO market.

As of now, there is no limit on how many stocks a shareholder can sell in the stock market. For now, the investor can off-load all the holding on the listing day itself. But as the new rules are now applicable, the restrictions have been imposed on shareholders who hold the significant value of the stocks.

The shareholder with 20% or higher shareholding can sell a maximum of half of their holdings on the day the stock lists. It is important to note that this limit of selling a maximum of 50% applies only to those shareholders who own a minimum of 20% of the stocks.

This will protect the interest of small shareholders as the major price drop might not happen due to off-loading of existing stakeholders’ stocks on the day of listing.

To prevent the loss of huge funds to high-net-worth investors, the lock-in period for newly listed firms was increased to 90 days from 30 days.

As per the new rules, in case there is any change in the control of the company due to the preferential issue, an independent committee of directors may be asked to look into the matter and give a reasoned recommendation.

Impact of New Rules

The companies have to define a clear objective about raising the funds as per the new rules. If not identifies the utility of funds to be raised, restrictions on the amount to be raised for a specific purpose shall be imposed.

As there is a lock-in period for anchor investors, only those investors willing to invest for a longer period will be attracted. As per the new rules on the price band, the difference between the two prices should be such that the higher band is at least 105% more than the lower price band.

Let us understand this with an example. Suppose the lower price band is Rs. 200. Then the upper price must be at least Rs. 410 [ Rs. 200 + (105% of Rs. 200) ].

The impact of this will be on the final issue price. A more realistic price band and fair issue price for the IPO can be expected with this rule.

FAQs

What is a lock-in period?

A lock-in period is a period that an investment cannot be sold or redeemed. It will help the investors keep their money invested for a long time. In case of the lock-in period for anchor investors from selling their IPOs holdings, the interest of small shareholders will be protected.

Who are anchor investors?

A qualified institutional investor buying more than the Rs. 10 value of IPO stocks is usually called the anchor investor. These investors are given a separate window to apply for the shares of the company that issues an IPO usually a day before the date on which the offer opens for the general public.

What is the preferential issue?

A preferential issue is a type of share or securities that a listed company may issue to a select group of persons. A preferential issue is a faster way to raise capital. The issuer has to follow the rules and regulations of SEBI for preferential allotment.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.