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What are the SEBI Guidelines for an IPO? Latest modifications

SEBI Guidelines for an IPO

The 2021’s IPO frenzy saw a listing of 60+ fresh IPOs. However, some IPO rules were changed to protect the interests of retail and non-institutional investors (NIIs).

The Securities and Exchange Board of India (SEBI) is a statutory regulatory body that regulates the Indian security market and protects the interests of investors investing in securities. SEBI guidelines for an IPO were already laid out, but recently some amendments were made to them.

The 2021’s IPO frenzy saw a listing of 60+ fresh IPOs. However, some IPO rules were changed to protect the interests of retail and non-institutional investors (NIIs). Logicalnivesh believes that these updated guidelines will help investors find the right IPOs to invest in. Below is the list of amendments made by SEBI to the IPO guidelines.

EBI Guidelines for an IPO
  • Increased transparency – IPO trading should always be based on transparency. As per the new SEBI guidelines for an IPO, companies raising money for inorganic growth objectives must clearly specify their goals and targets. If the company cannot qualify for the targets, the company must not exceed 25% of the total amount raised for investments and acquisitions. Such clarity will help investors make the right investment decisions for upcoming IPO stocks.
  • High lock-in time for anchor investors – Several companies that launch IPOs allocate some portion of their stocks to anchor investors to gain traction. But their immediate exit after 30 days increases the volatility of stock prices, leading to reduced confidence among regular investors. To combat such situations, anchor investors were allowed to sell only 50% of investments after a lock-in time of 30 days. To sell the remaining 50%, anchor investors will have to wait for 90 days.
  • Limit on offer to sell (OFS) – According to the new SEBI guidelines for IPO in stock market, the existing shareholders who own more than 20% of company stocks are not allowed to sell more than 50% of their shares. Those below 20% are not allowed to sell more than 10% of their shareholding. It is the best option to prevent promotors or stakeholders from exiting using the IPO route.

Sub-categories for NII investors – Many individual investors are not really small but also don’t fit into the high net-worth individual (HNI) category. Now here is a new bifurcation for them. IPO companies allotted 15% of the issue size to NIIs with no other bifurcation. But currently, one-third of the shares allocated to NIIs will be reserved for those with application sizes between Rs 2-10 lakh and two-thirds for those who exceed Rs 10 lakh.

  • Minimum price band – Earlier, companies looking for stock and IPO investment could set their price band as per their wish. However, to ensure proper price discovery and realistic pricing, SEBI mandated that the upper price band has to be a minimum of 105% of the lower price band.
  • Utilization of IPO proceeds – Scheduled commercial banks or public financial institutions will no longer monitor the IPO stocks. Instead, registered credit rating agencies will monitor the IPO proceeds, including the general corporate spending, till 100% of the funds are not utilized. This will help prevent the misuse of funds raised through IPO in trading.
  • Valuation report – During an IPO stock raise, the valuation report made by the independent valuer has to be furnished if a company allots 5% shares to an entity.

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