Why has Sebi tightened the IPO norms?

The debacle of Paytm IPO, wherein its share price crashed by nearly 50 per cent in just two days, ruffled the market regulator SEBI. In the past few IPOs, it was noticed that the new age fintech companies raised money at exorbitant prices and there was room for the anchor investors to get out in just a few days of the listing of the IPOs. Moreover, those large investors who had invested very little money in these fintech companies a few years prior to the IPO made a killing in the share sale as market frenzy ensured that even the IPOs with obscene price-to-earnings multiple sailed through. The grey market operations played a major role in aiding the exit of pre-IPO investors at sky high valuations. But the crash in Paytm share price immediately on listing was the last nail in the coffin. Hence, SEBI has come up with strict IPO related rules.

Why has it chosen to focus on utilisation of funds?

Most new age fintech companies have a novel concept of providing digital platforms to their customers, thereby making them an instant hit in the consumer market. But these companies are loss-making and when it came to providing a roadmap for futures profits, they are vague ideas and offer nothing concrete that investors could read in the IPO prospectus. Paytm, Zomato, Policybazaar are a few examples of companies that have remained loss-making since their inception. Nykaa turned profitable just a year ahead of its IPO but it is not certain how it could sustain and keep growing its profits. It managed to get an unbelievable PE of nearly 2,000 post listing. In the absence of a business model that could churn profits for such companies immediately, all they wanted was more fund raising from new investors to keep the ball rolling and give an exit to the earlier investors. Thus, when they came to the IPO market to raise money from retail clients, these companies gave vague reasons like 'future acquisitions' for fundraising and yet managed to get money purely due to the market frenzy. Hence, SEBI has decided to tighten norms to ensure that there is no mis-use of the funds.

Why an increase in lock-in period for anchor investors?

SEBI has imposed a 90-day lock-in for the anchor investors, who get shares allotted pre-IPO. Earlier, these investors could exit in 30 days of a company's listing. SEBI believes that if the anchor investors are forced to take a longer than one month view on IPO bound companies then there would be rationalising of IPO pricing for the retail investors as well. If the IPO price is exorbitant, anchor investors would stay away and companies and merchant bankers would be compelled to bring some rationality in the pricing of their IPO. Grey market operators too could find it difficult to hold the shares higher for three months due to cost of funds and this will discourage IPO price manipulation.

Will these measures make IPOs less attractive for the corporates?

It is too early to say that. But SEBI's move could work in the sense that it will bring rationality to IPO-pricing. The regulator believes that if the IPO price is rational, it may not stop anchor investors from taking a long-term bet.

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