The slew of ‘new-age’ businesses that have recently lined up to tap the markets seem to have prompted SEBI to rethink its Issue of Capital and Disclosure Requirements (ICDR) rules governing public offers. In a consultation paper, the regulator has proposed to tweak regulations to more closely monitor the use of issue proceeds and enhance skin-in-the-game for incumbent investors. However, given that it is abnormal valuations and inherent business risks that make new-age IPOs such dicey propositions for retail investors, it is moot if safeguards such as these can completely mitigate the risks.

Many new-age ventures raising IPO funds don’t seem to really need the money to fund expansion plans or acquire customers, given that they are already sitting pretty on war-chests raised from private investors. They usually get around the ICDR requirement to detail objects of the offer by promising to deploy the proceeds under vague heads such as ‘inorganic growth initiatives’ or ‘general corporate purposes’. SEBI is seeking to regulate this practice by capping the offer proceeds set aside towards unidentified acquisitions or general corporate purposes at 35 per cent and to have monitoring agencies keeping tabs on the latter. This is sensible given that very large acquisitions in unrelated lines of business can change the very character of the business and its risk profile on the basis of which investors participate in IPOs. With many new-age companies being loss-making and defying conventional valuation metrics, retail investors set a lot of store by marquee institutions queuing up for their reserved anchor portions just before opening date. But this can be misleading as many anchor investors, given the short 30-day lock-ins for these shares, are in the game for flipping them on listing. SEBI’s idea of carving out 50 per cent of the anchor book for institutions willing to subject themselves to a 90-day lock-in allows some discretion to anchor investors, while ensuring at least some of them are of a serious nature.

While the above moves strike a balance between sustaining a favourable regulatory environment for new-age IPOs and protecting investor interests, the proposal to allow large investors with over 20 per cent equity to sell only 50 per cent of their shares in offers for sale, irrespective of their vintage, may put a serious damper on PE-funded companies seeking a local listing. PE investors who seek exits through listing have usually stayed with a company for several years and have obligations to their own investors on timely exits. If SEBI’s intent is to ensure skin-in-the-game for incumbent management, this objective may be better served by treating controlling shareholders with a significant say in the company’s management, in the same manner as its promoters. Promoters of companies going public are presently required to retain a minimum 20 per cent equity stake post-listing with their shares subject to a 18 month lock-in period. The same rules can be applied to controlling shareholders too.