• HDFC
• 28 Jun 2018
• Knowledge Centre

HDFC, Tester

In a move that will be beneficial in parts for investors as well as companies, the Securities and Exchange Board of India (SEBI) recently loosened the noose on several rules related to primary market offerings or Initial Public Offers (IPOs), takeovers, rights issues, and buybacks.

 

These alterations were made in accordance with the SEBI-approved Issue of Capital and Disclosure Requirements Regulations (ICDR Regulations) 2018.

 

Main thrust areas

 

The main focus of the market regulator was on tweaking the guidelines for IPOs.

 

• The timeline for the disclosure of price bands by the IPO issuer will stand at two days before the issue opens for subscription, as opposed to five days currently. This move brings with it many advantages. Along with allowing companies more time to decide on the price band, it will enable greater flexibility to factor in developments or volatility in both overseas and domestic markets, along with the prevailing investor sentiment.
• SEBI has also reduced the minimum anchor investor size in SME IPOs to Rs. 2 crores from Rs. 10 crores currently.
• Another noteworthy change was made in the timeline of financial disclosures. It stated that financial disclosures should be made by companies for a period of three years as against five years currently.

 

Mr. V K Sharma, Head - PCG and Capital Market Strategy, HDFC securities lauds this move. “Reducing the financial disclosure time requirement from five years to three years would make the process relatively easier for companies, with a reduction in paperwork,” he says. “On the flip side, investors will have access to lesser information than they did earlier in order to check the company’s credentials,” he adds.

 

Moving ahead

 

Another prominent change was made in the realm of rights issues. The threshold for submission of a draft offer letter to the market regulator in case of rights issues has been increased to Rs. 10 crores as against Rs. 50 lakh currently. SEBI’s updated rules on rights issues have also been viewed as a welcome move.

 

“Increasing the threshold for the submission of a draft letter of offer to SEBI in case of rights issues to Rs. 10 crores as against Rs. 50 lakh earlier will mean that a substantial number of rights issues can bypass the requirement. This will notably reduce the time taken to raise funds through rights issues,” says Mr. Sharma.

 

The inclusion of insurers and foreign portfolio investors in the anchor investor category is believed to be another big positive that would boost investor sentiment. As Mr. Sharma explains, “The broadening of the anchor investor category by including insurance companies, private equity funds, and venture capital funds will increase the confidence of prospective investors and lend credence to the issue. This is owing to the fact that anchor investors will stay invested in the company for a longer period of time, as against the short timeframe of the merchant banker. This will add value to the stock,” he says.

 

Additional changes

 

Other than these, there were a host of other changes made including those of revamping the rules for ownership and governance norms for market infrastructure institutions (MIIs), and doing away with the category of sub-brokers as market intermediaries.

 

“No fresh registration shall be granted as sub-brokers. Registered sub-brokers shall migrate to authorized persons or trading members. Sub-brokers who do not choose to migrate shall be deemed to have surrendered their registration as sub-broker,” the SEBI release stated.

 

In this vast array of changes, it can be believed that a larger number tilt in favor of the corporates rather than the investors. However, the fact that they hold the potential to revamp the primary market cannot be overlooked. “The steps taken by the market regulator on IPO-related processes would help the issuers much more than the applicants. Nevertheless, they bode well for the primary markets,” Mr. Sharma concludes.