To check offer for sale (OFS) garbed as initial public offering (IPO), Securities and Exchange Board of India (SEBI) has announced several key measures that could throw a spanner in the works for venture capitalists who were making handsome exit from low-or-no profit unicorns. The regulator’s recent announcements could also impact launches of initial public offerings as well as inorganic growth plans charted out by these companies through the IPO proceeds.

As per the new directives by the regulator, pre-IPO shareholders individually or acting in concert, having more than 20% pre-issue shareholding, would be able to offload shares only up to 50% of their shareholding. The pre-issue shareholders individually or acting in concert with less than 20% would be able to offload up to only 10% of the pre-issue shareholding of the issuer. The current calendar year will always be remembered as the golden year for investment bankers and unicorns struggling to make profits. Year-to-date, over 60% of all IPO money was OFS where existing investors and promoters sold their shares to retail public and mutual funds.

Another significant announcement relates to the inorganic growth path adopted by these companies after raising money through IPO. The regulator stated that the issuer companies that mention the object for future inorganic growth in its offer documents, but has not identified any acquisition or investment target, can only spend upto 35% of its IPO proceeds. If the issuer has not mentioned any investment or acquisitions target in their offer document then they can only use upto 25% of the proceeds in such inorganic growth activities. This limit will not apply if the proposed acquisition or strategic investment object has been identified and suitable specific disclosures about such investments are made in the offer document at the time of filing of IPO.

Another significant step taken by SEBI includes permitting the credit rating agencies, registered with the board to act as monitoring agencies, instead of scheduled commercial banks and public financial institutions. The monitoring shall continue till 100% of the issue proceeds. The board has also directed the CRAs acting as monitoring agencies to submit quarterly reports before the board’s audit committee rather than just an annual report.

For the book-built issues opening on or after April 1, 2022, the anchor investors will be able to off-load only up to 50% of their shareholding even after the lock-in period of 30 days. The remaining 50% of the shareholding shall be locked up for the next 60 days.

Also, from April 1, 2022, the allocation of shares for the NII category will be done through draw-of-lots, as is currently applicable for retail investors only. Even within the NII category, the board has directed reservation of allocation of one-third of portion to applicants with application size of more than 2 lakh, while two-third of portion should be reserved for allocating to application size of more than 10 lakh.

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