SEBI comes out with stringent norms to save IPO investors from losing big money

• The market regulator has tightened some regulations for companies that are launching IPOs to protect investor interest and prevent volatility in stock prices.
• Along with new norms for IPOs, SEBI has come up with stringent norms for winding up of a mutual fund scheme.
• Check out our weekly explainers on the hottest topics and sign up if you like them.

India’s financial markets regulator has come up with a slew of measures to tighten the rules for companies coming out with an initial public offering (IPO) to protect investor interest and prevent volatility in such stocks.

The new regulations pertain to change in lock-in period of anchor investors, utilisation of IPO proceeds, restrictions on large shareholdings and a cap on sale of promoter shares via IPO.

This comes after shares of several IPOs including Paytm and Zomato facing huge volatility after anchor investors sold shares right after their 30-day lock-in period leading to a huge fall in the share price.

Note that the share sale by big institutional investors shakes investors’ confidence, which can lead to hasty selling by investors. Securities and Exchange Board of India (SEBI) is trying to prevent this by increasing the lock-in period to 90 days from 30 days. Anchor investors can only sell 50% of their holding after 30 days.

Anchor investors are institutional investors who are allotted shares just before an IPO opens for subscription.

The market regulator has also addressed the ongoing trend of promoters selling their entire stake in the company through IPO. When promoters of companies or rather startups that are not doing well financially sell their entire stake in the company, it is bound to shake investor confidence in the IPO.

From now, shareholders with over 20% stake can sell only half of its shares through the IPO.

Here are the key changes put forward by SEBI:

• New regulation restricts large shareholders (with more than 20% stake) from selling their entire stake in the company. Now they can only sell half of their overall shareholding.
• Companies can only use 25% of the IPO proceeds for unidentified acquisitions in the draft red herring prospectus (DRHP). This comes after companies not disclosing usage of IPO proceeds in detail.
• Existing lock-in period of 30 days for anchor investors shall continue only for 50% of the holdings, the remaining 50% shares can only be sold after 90 days.
• About 33% of the portion will be reserved for non-institutional investors (NIIs) with investment between ₹2 lakh - ₹10 lakh.
• Remaining 66% of the portion will be reserved for NIIs with more than ₹10 lakh investment.
• Winding up of mutual fund schemes would now be possible only after the consent of majority unitholders.
  

SEE ALSO: India’s market watchdog warns mutual funds to stay away from crypto assets at least until regulations come in
Urban Company is not the best place for gig workers anymore and Ola, Uber are the worst