What you must Know about SEBI’s New Primary Market Reforms

Introduction

India’s capital markets have been at the centre of the country’s financial developments. The stock market regulator Securities and Exchange Board of India (SEBI), implemented some crucial primary market reforms that will change the course of India’s primary markets, especially for companies set to have an Initial Public Offering.

From monitoring funds for general corporate purposes to revising IPO norms and regulations, here are some of the changes you need to know.

SEBI guidelines for Primary Market

1.  IPO spending

Companies filing their Draft Red Herring Prospectus (DRHP) for an IPO will have more flexibility with capital allocations. SEBI has announced that for companies aiming for inorganic growth through mergers and acquisitions but have not identified a target, 25% of the raised amount can be used for the same. Further, a 35% quota has been granted for general corporate purposes and inorganic growth combined.

On the other hand, if the company has identified its strategic investment opportunity, no limits will be applied.

2.  Offer for Sale conditions

The majority shareholders, who hold more than 20% of the pre-issue shareholding, can sell only up to half of their shareholding when going public. If they own below 20%, the limit to sell is set up to 10% shareholding in IPO via OFS (Offer for Sale).

3.  Monitoring of funds raised through IPO

As part of its primary changes, SEBI has permitted Credit Rating Agencies to monitor the utilisation of funds raised through IPO. They need to submit the quarterly report to the audit committee on the fund utilisation. At present, Scheduled Commercial Banks have this responsibility. The credit rating agencies will also monitor funds raised for general corporate purposes until the last rupee is used.

4.  Lock-in period for Anchor investors

Starting April 1, 2022, the lock-in period for anchor investors has been extended. The current 30-day lock-in period will be applicable for 50% of the shares they own. The remaining 50% will have to be held for a minimum of 90 days.

5.  Changes to preferential issues

The lookback period to set the floor price for preferential shares has been shortened to 60 days from the current 26 weeks, on the other hand, the lock-in period for promoters has been cut down to 18 months from three years. The lock-in period has been set to 6 months from one year for other investors.

Additional Read: Can I apply for IPO without a Demat account? 

6.  Changes to IPO allocation norms

SEBI revised the allocation norms for non-institutional investors (NII). Now, two-thirds of the NII quota will be reserved for those investors applying for more than Rs. 10 lakh in the IPO. Rest will be available for those whose bidding value will be between Rs. 2 lakh to Rs. 10 lakh.

7.  Other Primary Market and Secondary Market changes

Apart from these, SEBI has also introduced a minimum price band of at least 105% of the floor price for all book building issues. In addition, SEBI has introduced some significant changes in mutual funds. When a mutual fund scheme wants to wind up prematurely, most of the trustees and unitholders will have to grant their approval for the same. The vote results have to be published within 45 days after the winding-up announcement has been published. If the votes are against winding up, the scheme will continue.

Additional Read: How to track upcoming initial public offerings (IPOs)

Conclusion

Outlined above are some of the key primary market reforms that the SEBI board implemented to streamline the capital markets in the country. With these changes, SEBI has put in place important checks and balances for the functioning of financial markets. With a slew of IPOs slated for next year, these changes will help enhance the primary markets in India.