On Tuesday, the SEBI board voted to tighten the norms for shareholders with a stake of more than 20%, looking to sell a stake via an Offer for Sale (OFS). The rules apply to companies without a track record, and these shareholders can, post April 2022, sell only 50% of their holding on the day the company lists post an Initial Public Offering (IPO). Those owning a stake of less than 20% cannot sell more than 10% via an OFS.
Hitherto, shareholders could, if they wished, exit their entire holding.The rules would apply more to start-ups which, very often, lack a distinct promoter and where the equity capital may be owned by several partners. SEBI appears to want to limit volatility—or a big fall in the price—and ensure a soft landing for retail investors. However, nothing can save the stock if the business has been over-valued and over-priced, as seems to have been the case with companies like Paytm.
By preventing shareholders from offloading all their stake in one lot, the fall in the price can, no doubt, be arrested for some time. It is true that the business models of start-ups—and their finances—are hard to understand. Indeed, if the companies do not have a track record, small investors would not be in a position to gauge the intrinsic worth of the business. Ideally, they need to be cautious and stay away from such IPOs.
Even otherwise, the whole idea of small investors relying on institutional investors to guide them is somewhat misplaced.Again, asking anchor investors to stay locked-in for a longer period—90 days from the current 30 days—to ensure retail investors don’t make losses is unwarranted. This may be applicable for only half of the allocation—for the remainder, the existing 30-day limit continues—but that is nonetheless unfair.
Confidence in a company must come not from the presence of institutional holding, but from the quality of the business and management.Expanding the range for the price band for IPOs to 105% for book-built issues—the difference between the floor and the ceiling—may help. However, one is not sure whether this would result in the business being valued correctly; after all, the promoters and the merchant bankers can continue to overprice the issue even when the price band is broader.
The SEBI board has also voted to limit the amount that can be spent by a company on inorganic growth opportunities, in instances where there is intent mentioned in the offer document but no targets have yet been identified. Together with spends on general corporate purposes, the spends on such inorganic activity are capped at 35%. The idea is to allow companies to raise funds to grow inorganically and also ensure the money mopped up from the markets is spent in line with what is mentioned in the offer documents.
Monitoring the end-use of funds is not easy, but is needed. However, whether credit rating agencies will be able to monitor this better than the banks is questionable. One would expect banks, which have a bigger interest in the company, to be able to assert themselves more than rating agencies. However, it is a good idea that the audit committee will take a look at the report of the monitoring agency once a quarter rather than annually.
SEBI has done well to decide that the appointment or re-appointment of persons including the managing director or a whole-time director, once rejected by shareholders at a general meeting, can be done only with the prior approval of shareholders. Companies have been treating minority shareholders rather shabbily and this rule would give the latter a little more say.