In keeping with the goal of easing doing business in India and taking cognisance of the booming number of differently-bred technology-driven companies, Sebi has announced a major and timely initiative to provide such firms with an alternative capital-raising platform. The condition is that at least 25% of the pre-issue capital should be held by Qualified Institutional Buyers (QIBs). This means that only companies which have already been validated by private investors shall be allowed to use this platform, thereby ensuring a higher degree of quality. Such companies where any person individually or collectively holds 25% or more of the post-issue share capital shall not be allowed to tap this route. This is to ensure that the facility is limited to professionally-managed firms and not promoter-driven ones.
This policy is in response to the imminent threat of losing these companies to foreign stock exchanges and ensuring that their wealth is rightfully shared with domestic investors.
Recognising the peculiarities of such companies, compared to the regular brick-and-mortar firms, and based on extensive consultations with stakeholders, Sebi relaxed several existing IPO provisions in terms of disclosures, lock-in and issue objects for companies which are intensive in their use of technology, information technology, intellectual property, data analytics, biotechnology and nanotechnology to provide products, services or business platforms with substantial value addition.
Such firms can now tap the market for any purpose, as the objects of the issue can only be for general corporate purposes instead of the 25% cap that exists at present. The lock-in of the entire pre-issue capital across all shareholders shall only be for a period of six months post-issue as against three years currently. Such firms can also use their own formulae to justify their offer price.
An important change is the inclusion as QIBs of family trusts, systematically important NBFCs registered with RBI and all intermediaries registered with Sebi, all with a net worth of more than R500 crore. This will significantly enlarge the domestic investor base.
Such companies shall be allowed to make allotments of up to 75% of the issue size on a discretionary basis to institutional investors, with a cap of 10% per investor, and such allotments shall be locked-in for 30 days to prevent flipping gains. Since these are perceived to be high-risk companies, the small investor has been kept out by keeping the minimum application size as well as minimum trading lot at R10 lakh. The retail investor would, however, have the opportunity of buying into such companies after a three-year period, when the company may decide to migrate to the main board of the stock exchanges. Retail can get indirect access to such companies right away by investing in mutual fund schemes which would be investing in such startups.
To respond to representations of non-tech companies that have high PE/VC investments, Sebi has allowed them to use the above platform if at least 50% of the pre-issue capital is held by QIBs.
The creation of the above platform will not see a flurry of IPOs. While there are thousands of tech startups in India, a majority are still not mature enough to go public markets. For many of the remaining, the question would be of getting the right valuations in India and the issue of liquidity as the new platform would be limited to institutional/high networth investors. Yet this measure is a welcome move as companies which are desirous of listing in India would be encouraged to do so, and this would also facilitate exits by PE/VC firms which would then only attract more such investors to India. The downside is the fear that many of these tech companies are part of a huge bubble which is building up globally, and that while pre-IPO investors may make huge returns, IPO investors may face the brunt. Surely, the new policy is not the last word; it would undergo changes with new learnings.
Another measure on the capital-raising front is to allow more companies to use the fast-track route for FPOs and rights issues. The argument forwarded by this author for several years was that if everything is right with a company to allow it to be traded on a daily basis (including F&O trading in many companies) with the extant continuing disclosures, and where the trading turnover could be in multiples of the issue amount, and where new investors (including small ones) come daily based on continuing disclosures, why is there a need to be so circumspect to require elaborate disclosures—akin to IPOs—when it comes to the same company wanting to raise fresh capital or undertake a disinvestment or do a rights issue to its own shareholders? Though not completely, Sebi has enlarged the base for the number of companies that can take the fast-track route by reducing the minimum market cap of public holdings from R3,000 crore to R1,000 crore in the case of FPOs and to R250 crore in case of rights issues.
A major reform has also come on the processes front. The IPO application and allotment/refund system has come a long way, especially in the last decade. A much-needed step has been announced by Sebi, by making ASBA mandatory for retail investors (it was already so in case of non-retail investors) and making forms available online. One, this would cut down on processing time, making it possible to list a company within six days of issue closure against 12 days currently, thereby reducing the interest costs for investors who borrow to apply as also reduce the period of uncertainty between the issue date and listing date. Two, the retail investor would be better off as his application money would now be blocked for a lesser period as also all problems related to refunds would become a thing of the past. Three, this would significantly reduce costs, saving in the process tonnes of paper used for printing millions of application forms. Finally, by extending the centres for receipt of applications from only brokers and banks to depositories and registrars, the reach will further increase. This announcement is a recognition of the IT strength of our banking and capital market sectors.
On the disclosures front, Sebi has decided that to prevent over-disclosures which are happening right now—which tend to then hide critical disclosures—disclosures in the offer documents with respect to group companies, litigations and creditors shall be limited to the policy on materiality as defined by the issuer, whether intending to list on the main board or the proposed ITP.
Another sensible decision is with regard to product advertisements of issue-intending companies. At present, a company is required to disclose details of its forthcoming IPO or rights issue even in product advertisements. It has been done away with.
On prevention of malpractices, a major initiative is with reference to the offer for sale (OFS) of shares through stock exchange mechanism. We have witnessed how a given PSU stock was hammered down after the announcement of its OFS till the date of OFS, forcing the government to either sell at a lower price or just call off the sale. This problem was corrected to require a notice of just two days prior to the sale date. Now, this T-2 day shall be reckoned from the banking day instead of trading day. This means that an OFS can be announced on a Friday evening and open for subscription the following Monday. So there will be no trading (or hammering) taking place between the OFS announcement and its opening for subscription. Yet, since Saturday is a banking day, retail and other investors will get that day (in addition to Monday) for arranging funds. This should curb market manipulations, but if it still happens on the OFS day, Sebi has to increase surveillance and punish ill-doers. Ideally, trading in the company’s stock should be suspended on the day of OFS. Another retail-friendly feature is to allow them to place bids at the cut-off price.
Another measure to reduce malpractices is an important decision with regard to the interim use of public/rights issues proceeds pending utilisation for issue objects. During investigations of several IPOs, Sebi had discovered that proceeds were being used for non-issue purposes, but more damagingly, for market malpractices. Henceforth, such issue proceeds can be deposited only in a scheduled commercial bank.
On policy front, an important issue pending with Sebi has been resolved, that of reclassification of promoters as public shareholders. Finally, the board has discussed and approved several operational issues relating to the merger of the Forward Markets Commission with Sebi. The sooner the merger becomes effective, the better it would be for effective regulation, and more importantly for a rapid but transparent growth of the commodities market.
The author is chairman of PRIME Database