Sharekhan Blog

What are the SEBI Guidelines for an IPO?

  • Mar 5, 2024

In response to the increased activity, it was decided that in the IPO guidelines, at least 60 IPOs would be introduced by 2021; SEBI has tried to amend some rules.

These rule changes are aimed at creating those who are not protected by the interests of institutional investors. Examining these important regulatory changes provides insight into the process of helping investors achieve returns. In this blog, we will explore the new criteria for IPO that the SEBI (Securities Exchange Board of India) has imposed.

Changing SEBI Guidelines For IPO

SEBI’s amended guidelines Increased transparency. The recent SEBI guidelines on initial public offerings (IPOs) emphasize the important focus on transparency in the fundraising process. One of the most important rules in this guide relates to organizations seeking funding for inorganic development, obliging them to state their goals and objectives unambiguously.

If such organizations fail to provide a statement of their objectives in the absence of a clear one, the share allotted to investments and acquisitions should not exceed 25 % of the total amount allocated. These strict transparency requirements empower potential investors to make informed decisions about their participation in an upcoming IPO. Companies must meet these disclosure standards to avoid being denied permission to offer an IPO.

Longer Lock-In Period For Investors

The guidelines introduce a substantial revision in the lock-in period for anchor investors. These investors are now permitted to sell only 50% of their investments after a lock-in duration of 30 days. The remaining 50% can only be divested after an extended lock-in period of 90 days. This represents a departure from the prior practice where anchor investors, often allocated a significant portion of IPO stock, could exit after 30 days, potentially causing a rapid decline in share value for regular investors post-listing.

The revised guidelines aim to protect the interests of new investors by curbing the immediate sell-off by anchor investors and promoting a more stable market environment following IPO listings. SEBI's proactive stance is evident in prioritizing investor protection and market stability in these updated regulations.

Restricted Sale on IPO Before SEBI Guidelines Implementation

Prior to the introduction of SEBI’s new guidelines on initial public offerings (IPOs), many companies chose to launch IPOs primarily as a means by which promoters and existing shareholders, especially independents already entered, will take over from their positions in the company. As a result, early investors reaped significantly larger returns compared to retail investors who participated in IPOs.

Under the previous regime, there were few restrictions on the number of shares large shareholders could sell during an IPO. This lack of regulation has created situations where some participants, particularly those with large equity holdings, may liquidate a large portion of their shareholdings, potentially obscuring the interests of smaller investors.

New SEBI Guidelines Bring Fairness In IPOs

Concerned with the current financial scenario, SEBI has implemented stringent guidelines that bring a sense of transparency to the IPO process. With the implementation of the new guidelines, there has been a curb on the shareholders selling in the IPO sector. With the new implementation, holders with shares of 20% of a company are currently restricted from selling more than 50% of their shares; on the other hand, those with less than 20% are restricted from selling a maximum of 10% of their total holdings. The guidelines are like the commitment of SEBI to monitor the use of funds raised through IPOs and ensure that they are in line with the stated objectives of the offering.

This system of monitoring activities not only protects the interests of investors but maintains the stability of finances in the capital market.

Opportunities for Investors in the New Regulatory Scenario

With these developments and a new set of guidelines, there has been a positive shift in the investment pattern of investors, who are feeling secure and having development. The stricter guidelines in place have brought assurance of equitable treatment and protection of investor rights, helping them to seize this opportunity and enhance their investment portfolio with Demat accounts, thereby capitalizing on the potential for equitable distribution and growth.

The Bottom Line

The new SEBI guidelines, in effect, have reshaped the financial ecosystem and Initial Public Offerings. There has been a secure way of capital market investment, giving a sense of credibility and stability, with lock-in periods for anchor investors and restrictions on selling by major shareholders. The new guidelines made a shift in the economy and paved the way for a lot of investors without any kind of fear and insecurity, ensuring transparency.

Team Sharekhan
by Team Sharekhan

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