The market frenzy for initial public offerings (IPO) is infecting more and more investors. A lot of people invest in the stock market only to make short-term profits in IPOs. This has caught SEBI’s attention especially because few IPOs open with a premium but then end on a negative note. Unfair, right? As a result, to protect the interest of smaller investors, the market regulator is mulling on introducing new rules to IPOs.
What’s Wrong?
Private equity investors are beneficiaries of new-age IPOs. PE investors buy the shares of the startups at low prices and then sell them to make huge profits. This is affecting the retail investors who are either selling the shares at lower prices or are waiting for the stock to recover. Either way, it’s unfair, and SEBI has decided to interfere.
What Has SEBI Proposed?
In its consultation paper, the market regulator has suggested a few proposals, which include:
A maximum of 35% IPO proceeds can be used for inorganic growth opportunities and general corporate purposes.
Technology companies need to be more specific about the fundraise, rather than stating ‘for future acquisitions’ in their objectives.
With no identifiable promoters, significant shareholders’ (with over 20% holding) share sales will be capped at 50% at the pre-IPO issue.
Significant shareholders will have a lock-in period of six months.
At least 50% of the anchor investors should be those who are willing to stay invested for at least 90 days as compared to 30 days currently.
Why Should It Bother You?
If the consultation paper is implemented, then it's positive news for the retail investors, who can continue to stay invested in the new public issues. Private equity investors, FPIs and HNIs with over 20% shareholding in the companies will have a lock-in period, which means they can’t sell their shares. Generally, when significant investors sell, the stock spirals down, resulting in a massive selling by other investors too.
What's Going To Happen Now?
The rule change will make it tough for startups and new-age technology companies to raise funds from the securities market. Currently, there’s a surge of IPOs in the market which is making it hectic for everyone. Also, it’s propelling the equity market to high levels, which should not ideally be the case. After all, the stock market is not just about IPOs but listed companies.
