In the last two years, many new IPOs have been launched by corporate entities in India. Amidst the IPO frenzy, the Securities and Exchange Board of India (SEBI) has launched some new rules for IPO allotment. Companies looking to launch their IPOs in 2023 must adapt to the new guidelines. New IPO rules also impact retail investors, and they should learn about them.
With a new IPO allotment, a private company goes public. However, a company must file a DRHP (Draft Red Herring Prospectus) with the SEBI. It is a document used by SEBI to collect complete information about the company launching a new IPO. Companies aren’t the only ones affected by the new SEBI rules. Institutional and retail investors can take advantage of the Upcoming IPO allotment rules.
New SEBI Rules for IPO Allotments in India
SEBI has implemented the Upcoming IPO allotment rules from the 1st of April 2022. Here are the new IPO allotment rules and how they will impact investors:
Constraints on selling holdings
After some discussion, SEBI concluded that existing shareholders in a company cannot sell more than 50% of their shares. However, the rule applies to large shareholders with over 20% stake in the corporate entity. Shareholders with less than 20% stake in the corporate entity cannot sell more than 10% of their shares. It was observed that large investors sold their entire holding and made an exit. Since they sold entire holdings, small investors incurred a loss. To prevent small shareholders from losing value and reducing market volatility, this new rule is implemented by SEBI.
Usage of funds raised by an IPO
When investors Buy IPO online, the corporate entity raises funds. Companies can raise IPO funds for organic or inorganic growth purposes. As per the new rules, companies must specify how the funds will be used for acquisition or investment targets. If companies fail to specify the same, up to 25% of the total amount raised from an IPO can be used for acquisition or investment targets. Also, the total amount used for inorganic growth and business processes cannot be more than 35% of the IPO funding. It will help retail investment as companies will give complete information on how the money will be used.
Lock-in period rule
As per the new rule, institutional investors cannot sell more than 50% of their shares after 30 days. They will have to wait for a minimum of 90 days to sell the remaining shares. Since institutional investors cannot sell all their holdings immediately, price volatility will be maintained. However, it will help retail investors looking to hold shares for some time after the IPO launch.
The rule for the price band
According to the new rule, there must be a minimum difference between the upper and lower price band. The upper price band must be 105% or more of the lower price band. To ensure price discovery and reduce volatility, SEBI has come up with this new rule.
Reserved applications for HNIs
IPO applications above Rs 2 lakhs are reserved for NIIs (Non-Institutional Investors). Some NIIs who buy IPO online might not fit into the high net-worth individuals (HNIs) category. For the same rationale, 1/3rd of applications will be reserved for investors with a budget between Rs 2 lakhs and 10 lakhs. The remaining will be available for applications with a value of more than Rs 10 lakhs.
Price of preferential shares
SEBI has now restricted the floor price of preferential shares issued to investors. According to the new rule, companies cannot offer shares to preferred investors at a low price. In addition, it will prevent retail investors from getting fooled by companies during an IPO launch.
In a nutshell
Are you keeping an eye on the new IPO allotments in India? If yes, you can depend on the trading platforms to make investments. However, do not forget to consider the new SEBI rules for IPO allotment before investing!