Encourage start-ups to list on the bourses

SEBI also wants to lengthen the lock-in period for anchor investors or, alternatively, reserve a bigger share of the anchor book for those who agree to a longer lock-in period.

Even so, it is necessary to encourage start-ups to list on the Indian bourses.
Even so, it is necessary to encourage start-ups to list on the Indian bourses.

Despite the economy being in a slump, 2021 has been one of the best years for the stock markets and for IPOs, from which close to Rs 1.20 lakh crore has been mopped up. While most stocks have done well post listing, some start-ups like Paytm have been big flops. This has prompted SEBI chief Ajay Tyagi to nudge merchant bankers to review their due diligence standards. He wants them to better explain the basis of the pricing of the issue, especially for the new-age companies, many of which are loss-making. That is a tall ask given that, in many cases, there is simply no rationale for the valuations. Financial experts have valued these businesses way below the valuations that they have earned via the IPOs. Merchant bankers, as one has seen over the last three decades, will work to fetch companies—who pay their fees—the best possible valuation; investors’ interests are not their priority. If retail investors are getting carried away by the hype, they have only themselves to blame.

Even so, it is necessary to encourage start-ups to list on the Indian bourses. To this end, SEBI is taking cognizance of the changing corporate ownership structures, by which the traditional family-owned constructs are giving way to frameworks where there are several owners or partners, but no distinct owner. For instance, the regulator suggests a limit be imposed on the number of shares that can be put on sale by existing shareholders—those who own more than 20% of the pre-issue capital—by way of an Offer for Sale (OFS). It wants only 50% of the pre-issue shareholding to be divested via an OFS in an IPO and the remaining shares to be subjected to a lock-in period of six months from the date of allotment. These rules would relate specifically to IPOs of companies where there are no identifiable promoters. The idea seems to be to try and prevent large chunks of equity from being offloaded in one go so that price discovery is not hurt. While promoters could skirt the rule by capping their holdings at 19.5%, it will limit the supply of promoter shares coming into the market.

Ultimately, though, such factors matter less than the intrinsic strength of the business and the quality of the management. The business can’t be considered to be weak simply because several promoters want to pare their stakes. Conversely, even if promoters hold on to their stakes, it is no guarantee the business is in great shape. If the promoters and the management are committed, they will not let down the minority shareholders, no matter what their ownership levels. In India, however, both have a chequered history.

SEBI also wants to lengthen the lock-in period for anchor investors or, alternatively, reserve a bigger share of the anchor book for those who agree to a longer lock-in period. If investors are promised a bigger allocation, they might not object to holding the shares for a longer period. As we have seen, prices of several stocks have fallen sharply post the expiry of the lock-in period; so, lengthening the lock-in period from the current 30 days would, no doubt, help.

But again, such measures can’t help if the IPO has been overpriced and not in keeping with the strength and potential of the business. Which is why it does not also make too much of a difference if companies are allowed to earmark a larger share of the IPO proceeds—35%—for general corporate purposes, M&A and strategic investments. Companies will spend as they wish; if they spot a good buy or a merger opportunity, they will cash in on it. It would be hard to pin them down on specifics and there is no need to do that. Managements must be trusted with these decisions.

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