Sebi notifies IPO reforms; funds under scrutiny

Market regulator Sebi on Monday notified wide-ranging reforms in IPO market, including a strict vigil on usage of issue proceeds, greater disclosure by companies and their bankers and allotment of a minimum number of shares to retail investors.

As per the notification issued by Sebi, no company can deploy more than 25 per cent of the public offer proceeds in the name of "general corporate purposes".

Besides, any issue-related expenses can not be considered as a part of 'General Corporate Purpose' merely because no specific amount has been allocated for such expenses in draft offer document.

Among other measures, which have been approved by Sebi's board and are now being notified, any merchant banker that is an associate of the issuer would have to limit its role to marketing of the offer and declare itself as a marketing lead manager.

The company would also have to open the issue at least three working days from the date of registering the red herring prospectus with the Registrar of Companies.

Also, the disclosures made in the red herring prospectus while making an IPO, would need to be updated on an annual basis and made public by the issuer.

The companies would have to disclose the price band at least five days before the opening of the offer period, as against the current provision of two days. This will give the investors more time to analyse the IPO.

As per the notification, the issuer would need to allot a minimum lot of shares to each retail investor.

The measure would help larger number of smaller applicants get shares in oversubscribed issues. The minimum application size for all investors has also been increased to Rs 10,000-Rs 15,000, as against the existing Rs 5,000-Rs 7,000.

Among these, the eligibility criteria for the issuers coming through the "profitability route" has been redesigned to improve the quality of public offerings and enhance investor protection.

Now, only issuers with a minimum average pre-tax operating profit of Rs 15 crore will be able to come through this route.

However, other issuers can access the capital market through either the SME platform or compulsory book building route with increased QIB (Qualified Institutional Buyer) participation of 75 per cent, as against existing 50 per cent.

The companies can also offer a discount of up to five per cent on the price in qualified institutions placement, subject to the shareholders' approval.

To help the companies achieve minimum public holding of 25 per cent, Sebi has also amended the rules to allow sale of up to 10 per cent stake to Alternative Investment Funds (AIF), a newly created category that includes venture funds, hedge funds, SME Funds among others.