India’s market regulator has made the IPO process easier for companies

Following a board meeting on 21 June, the Securities and Exchange Board of India (SEBI) unveiled a number of changes in the country’s initial public offering (IPO) rules as well as governance norms. The move by the capital markets regulator was part of a concerted effort to make the IPO process easier and in alignment with the rules in other countries.

The updated rules will be included in the recent Companies Act of 2014. They were based on the recommendations of panel of market experts led by Prithvi Haldea, the founder of the country’s first database on primary capital markets.

Here are the major changes that SEBI made:-

  • Companies looking to go public will only be required to provide financial accounts and disclosures for the three years prior to the issue, as opposed to five years, in line with international norms. The disclosure process will also be made less cumbersome as companies will only be required to submit their consolidated financial statements instead of both the standalone statements for group companies and the consolidated statements of the parent company.
  • The pricing band, or the envisioned share price, for a company’s rights offering can be made public two days prior to the IPO instead of five days earlier. This will help prevent wide deviations from the price band owing to market volatility.
  • The category of anchor investors, or institutional investors taking a large portion of shares in the offering, has been expanded to include mutual funds, insurers and venture capital funds in addition to investment banks. As a result, they can fill in for a shortfall in the contribution of a promoter if needed. Furthermore, to qualify as an anchor investor for the IPO of a small-and-medium-sized enterprises, a fund can invest a minimum of ₹20 million instead of ₹100 million.
The regulator did, however, impose a few restrictions to prevent any fraud or tax evasion through IPOs. It expanded the definition of “promoter groups” to include immediate family members and relatives, and lowered the shareholding threshold for being categorised as a promoter group from 20% to 10%. Promoters are subject to higher regulatory scrutiny than public shareholders.

Another strong year for IPOs?

The new rules will likely encourage more companies to go public and tap capital markets for funds. In terms of IPOs, India had a solid 2017, with 38 offerings raising over ₹750 billion - nearly a threefold jump from 2016.

However, the IPO market has been muted so far in 2018 in terms of deal value amid a deterioration in India’s macroeconomic fundamentals. While there have been 17 IPOs, they have only raised ₹221 billion. Ernst and Young, a consultancy, forecasts that the amount raised for the year will total around ₹350 billion, but the new rules could prove to be the boost the IPO market needs.