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Current Affairs

Revised IPO rules

Date: 05 January 2022 Tags: Financial Markets

Issue

New rules for Initial Public Offerings (IPO) have been announced by the Securities and Exchange Board of India (SEBI).

 

Details

The new rules will be regarding how companies will price their shares, how money from investors is used, how much stake promoters can sell and how fast can anchor investors sell their share picked before IPO.

 

The rules

  • The price band of IPO should be such that ceiling price is at least 105% of floor prices.

  • Companies cannot use more than 35% of money raised during IPO to buy other business.

  • In an IPO, promoters with at least 20% stake cannot sell more than half their stake.

  • Anchor investors cannot sell more than half their shares before 90 days of IPO.

 

Need for such regulations

  • Stocks markets across the world has witnessed record amount of money being raised through public investors.

  • The amount of capital and number of companies going public is increasing as a result of bullish market. In India alone, more than Rs 1 trillion has been raised.

  • Promoters are feeling that it is the perfect opportunity to sell their stake at an attractive profit as the value of share is over-valued.

 

Risks in the market

  • Digital companies such as Zomato and Paytm, which have raised capital through IPOs, are loss-making. This puts investors at huge risk.

  • The price band rules will tackle narrow price band used for issue. This will see that real price of shares can be discovered.

 

Concerns of rules

  • The new rules are criticized for hindering the process of raising fresh capital by companies, affecting growth.

  • Mandatory disclosure of use of money raised through IPO will affect business flexibility as conditions change very fast.

  • Restrictions on anchor investors will prevent them from participating in the IPO as they may not be ready to hold their shares for 90 days.

  • There are also suggestions that investment decisions should be left to investors and companies should be given opportunity to list their price.