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The board of Securities and Exchange Board of India took a row of decisions in relaxation of IPO norms along with decisions in continuous listing requirements for companies, amendments to mutual funds regulations and venture capital norms. These changes took effect early this year.

In a move to create a level playing field, Sebi extended to all companies the right to offload just 10 per cent of their post-issue capital instead of the current minimum of 25 per cent. Earlier, only firms in the ICE sectors were allowed to offer 10 per cent. The rule was relaxed to avoid discrimination against firms. Relaxation of this norm is advantageous both from the company’s point of view and from the retail investor’s point of view. The right to offload 10 percent of their post issue capital instead of 25 percent, means that only 10 percent is available for the retail investor now instead of 25 percent available before. The company will have more of the capital with them now, which can be offered to institutional investors. For a public issue the number of institutional investors form a major chunk of the total investors, while retail investors form a small portion of the total investors. In the recent times we saw a number of issues getting devolved due to non-subscription of the issue. There was a mismatch between the portion of the capital offered to institutional investors and retail investors. Issues were oversubscribed by the institutional investors and undersubscribed by retail investors. Therefore with 15 percent more of post-issue capital available to them they can have more subscriptions and allotment. From the retail investors’ point of view, when there are not enough subscriptions from them, and when the scrip gets listed on the stock exchange it receives poor response from them and the price of the scrip would fall. According to the new changed norm the institutional investors have more capital for them and therefore there are less chances of lack of subscriptions from retail investors and therefore when the scrip gets listed it would receive good response and the price of it may rise.

Another argument for the reduction in IPO from 25 percent to 10 percent of the total paid up capital, is as follows. To avail this facility, market capitalisation of a company should not be less than Rs 2,500 cr. As Sebi has already allowed Software, Telecommunication, Media and Entertainment companies to offer only 10 percent of their paid up capital in IPO, this relaxation in the norm was required for the new economy companies, as it was found that there were large number of companies with market capitalisation of over Rs 10,000 cr who wanted to get themselves listed. If a minimum requirement of 25 percent of paid up capital was made applicable to them, the issue size of the offer should have been in the vicinity of Rs 2,500 cr. This would have forced these companies to go to international market to get themselves listed. But in the old economy, there is hardly any company which has market capitalisation of over Rs 1000 cr and is not listed. Therefore, even if this suggestion were accepted by Sebi to make it a guideline, there would hardly be any company to accept it.

The board also decided that the issue should be made only through Book Building method with allocation of 60 per cent to Qualified Institutional Buyers (QIBs). Book Building method is a good method of price determination of the issue. The price is determined by the investors themselves i.e., the market itself decides the price. There is no scope for price manipulation. There are two types of Book Building methods. One is 90 - 10, where 90 percent of the total issue size is for book building, 10 percent is fixed price. The other is 75 - 25, where 75 percent of the total issue size is for book building and 25 percent is for fixed price. From the portion which is there for book building (90% or 75% as the case may be), 60 percent should be allocated to QIBs, 15 percent to Non Institutional Investors and 15 percent to Retail Investors. This means that QIBs hold majority stake in the company. In other words QIBs manage the company. Since QIBs are Financial Institutions, Mutual Funds etc., they can manage the company in a better way. Efficiency of the management increases. Promoters find no scope for price manipulation.

But the conflicting area, is compatibility with the company’s listing agreement with the stock exchanges. The BSE requires companies to have minimum five shareholders for every Rs 1 lakh of capital issued. If the companies have to follow new IPO norms, they would not be able to comply with this condition of the BSE as 60 percent of the IPO has to be allotted to QIBs. And for a small issue of say Rs 10 cr, the entire portion allotted to QIBs i.e., Rs 6 cr may be picked up by just one or two entities.

Sebi also made amendments to Venture Capital Regulations, 2000. According to the amendment made in the Venture Capital regulations, with the approval of the Ministry of Finance, venture funds can remain invested in a venture more than a year after an initial public offering and can claim benefit of tax pass-through. The original regulations had insisted on compulsory exit one year after an IPO of forfeiture of the tax pass-through advantage. This change will prove to be a good boost to venture capital funds in our country. Venture Financing is still in a dormant stage and definitely requires a major thrust. This amendment should prove to be a boon to this area, an area which will keep our primary market alive and active and in turn improve our economy.

All in all, whether the changes in the IPO regulations are likely to have a tremendous impact or not, only time will tell. But sources say that these changes would eliminate unwanted elements from participating in money raising activities in the market and give Sebi an opportunity to bring more transparency in the market.

S Suma

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