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SEBI- Modifying the Game Rules

Posted in Finance Articles, Total Reads: 3103 , Published on July 08, 2014

The Indian stock market has witnessed a decline in the companies going public since the start of the new decade. One of the major reason for the decline in IPOs can be attributed to the considered ‘stringent’ regulations by the supervisory and regulatory body, SEBI, and the reluctant mind-set of the promoters. No doubt, that the economic as well as the political scenario in our nation have also served as resistance for the companies to go for IPO and raise funds through the Equity markets.

The table below displays the decline in the number of IPOs made in the Indian Stock Exchange.

1 Number of IPOs in Indian Stock Exchanges

Although the capital raised from the public issues has increased 2003-04 onward, the number of issues have not substantially increased, substantiating that in recent years larger issue size with lesser number of issues have been made.

2 Ratio of amount raised through of IPOs

Modification of Rules

On May 16th, 2014, prior to election verdict for India’s 16th Lok Sabha, Mr. Narendra Mod’s win was expected. The dilemma was that whether NDA would be able to get majority votes or it would also have to form a coalition with other parties like previous Governments of India. These coalition governments were a major obstacle in implementing effective economic reforms in the last 10 years. At around 12:37 PM, it became clear that NDA had a spectacular win with 335 seat of its own and the path for economic reforms was clear which was already factored in SENSEX which rose with peak of around 1200 points on that day.

SEBI’s proposed reforms and rules on 19th June, 2014 for the primary market

With the NDA election win, an economic reform now seemed plausible, it was time for Securities and Exchange Board of India to play its role, to give life and promise “Acche Din Aane Vale Hai”( Good days are about to come). So on 19th June, 2014 SEBI proposed new regulations which raises hope for “Acche Din” (Good Days) to both Equity issuers as well as investors on a single day.

  • Accentuating ‘Anchoring’ In IPOs

When a company makes a public issue, these are the allocation bucket which is available to investors:

3 Public Issue Break-up

IPO Allocation Breakup

Qualified Institutional Buyers (QIBs): Financial Institutions, Banks, FII's and Mutual Funds who are registered with SEBI.

High Net Worth Individuals (HNI): These are investors who have subscription size of more than Rs. 2,00,000 in one bid.

Retail Investors: They are allotted a maximum 35% of the IPO issue size. Retail investors are defined as those individuals who cannot have subscription of more than Rs. 2,00,000 in an issue.

Anchor Investor: Anchor investors are part of QIBs to whom allocation is done prior to opening of issue. This allocation is discretionary, on the basis of a mutual agreement between issuer and QIBs interested to subscribe to the issue. To be qualified as an anchor investor, one has to invest at least Rs 10 Crore to the public issue with a maximum limit of 250 Crore, and can’t be the merchant banker or any person related to the promoter/promoter group. The anchor investors pay 100% of the purchase price when placing the order. A lock-in period of 30 days is applicable after the issue gets listed.

According to new guidelines SEBI has doubled the portion meant for anchor investors in IPOs — the old limit which was 15% for these investors has been increased 30% of the issue size. The shares, however, this allocation will reduce after issue opening size of institutional investor bucket to 30% of overall IPO size.

Advantages of increase in anchor investment:

The increase in subscription limit for anchor investors provides better chances of an IPO being successful, better surety of minimum subscription, increase in confidence of retail investors, brings certainty to the issue and helps promoters create a demand for their shares and get a better price discovery.

It also sends out a positive signal to the market, due to confidence the anchor investor induces. The anchor investors would benefit from this move, as they could divest their ownership on the expiration of the 30-day lock-in period. A quick look at recent IPOs in which allotment is done to anchor investors will show that 80% of the time anchor investors were in profit at the end of 30 Days. It shows this allocation is also beneficial to Anchor Investors.

4 Returns to Anchor Investor (30 Days)

  • Changes in minimum issue size

In its second reform which is focused on promoters of company to encourage them to raise equity from Security Markets, SEBI has relaxed the minimum public offering which has to be made by promoters of company in and IPO. The earlier norms forced companies with valuations of less than ₹4,000 crore to sell a minimum of 25% stake in IPOs, and those with valuations greater than ₹4000 crore had to sell only 10%. But this led to companies to deliberately increase their valuations to greater than ₹4000 crore. Now, the regulator has introduced a new threshold of ₹400 crore. Going ahead, a company will have to divest either at least ₹400 crore or 25%, whichever is lower, through an IPO.

5 Company Valuation vs Minimum Issue Float size

This measure is a viewed as a motivator for companies to go for an IPO, as reduction in the percentage issue to the public would help the current owners still maintain a high percentage stake in the company, without risking loss of control. This amendment would provide an opportunity for companies to divest in a phased manner, with minimal risk.

However, the chances that companies with lesser valuations would appreciate this measure and go ahead with an IPO is questionable considering the high fixed cost in raising Equity through the primary market.

The darker side is that the selection of anchor is discretionary, and without strict provisions. This may create chances of lobbying and may cause market distortion.

Also the higher stake in the IPO, would give a greater control to the anchor investors, which may lead to price manipulation.

Further measures that SEBI could take to make the IPO process transparent and attractive are -

  • To make the anchor investor allocation process non-discretionary
  • Increase the lock-in period for anchor investors to a minimum of 180 days

At the end of the day, it is the state of liquidity and the sentiment that determine flows into the markets but revisiting the rules never really hurts.

The article has been authored Aseem Madan and Preetinisha Gupta, TAPMI Manipal

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