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SEBI has simplified a major problem related to IPO. Now even if the old shares of a company have already been pledged against the loan, they will be automatically locked after the IPO. For this, a new technology system has been introduced, due to which companies will not have to run after shareholders.
New Delhi. SEBI has taken a big and important decision for both companies and investors preparing for IPO. The Board of Securities and Exchange Board of India i.e. SEBI has approved such amendments in the IPO rules, which are going to solve two major long standing problems. The first problem was the lock-in of pledged pre-issue shares and the second was the very heavy and complex draft red herring prospectus i.e. DRHP for investors. SEBI believes that if the IPO process is made easy, transparent and technology based, then more companies will be able to enter the market and investors will be helped in taking right decisions. These changes have been made under this thinking. After listing in IPO, lock in is imposed on the old shares i.e. pre issue capital of the company. Promoters’ shares generally remain locked in for 3 years, while shares of non-promoter shareholders cannot be sold for at least 6 months. The purpose of this lock-in is that after the IPO, shares are not suddenly sold on a large scale in the market and the share price does not fall drastically.
That means market stability should be maintained. But the problem arose when a non-promoter shareholder had already pledged his shares against a loan. In the current system, depositories like NSDL and CDSL were not able to mark such pledged shares as technically locked in. The result was that the company bringing the IPO had to find such shareholders separately. Many times shareholders did not co-operate or were untraceable. This disrupted the IPO timeline and increased the risk of compliance.
What changes has SEBI made now?
SEBI has solved this problem through technology. The Board has approved a new technology based mechanism, through which the depository will now be able to automatically lock in and mark the pledged pre issue shares. Now such shares will be non-transferable during the lock-in period. That means they cannot be sold or transferred. Even if the pledge is invoked or released later, the lock-in will not end and the shares will remain locked-in for the remaining period. After this change, companies will not need to take co-operation from different shareholders and the entire process will become much smoother.
Why was DRHP so burdensome and what will change now?
The second major concern faced by SEBI was that the documents related to IPO, especially DRHP, were becoming very long and complex. It became difficult for common investors to understand what exactly was the important information. During the public consultation, a suggestion came that a short and simple summary document should be given. SEBI decided that the better solution would be to strengthen the abridged prospectus. Now IPO companies will have to give a summary of the offer document while filing DRHP. An abridged prospectus will be made available at the draft stage itself, which will also have a QR code. Through this QR code, investors will be able to easily see all the important announcements and details related to the company. SEBI Chairman Tuhin Kanta Pandey said that the objective is that investors can understand the necessary information in less time, while complete documents should also be available for those who want to do deep research.
What else will IPO companies have to do?
It was also revealed in the consultation process of SEBI that the companies launching IPO will have to make changes in their Articles of Association i.e. AoA. It will be clearly written in this that the pledged shares will also remain locked in till the fixed lock in period. Apart from this, companies will have to inform all their lenders and pledgees about these changes and disclose it prominently in DRHP and RHP.
Who will benefit from what?
Compliance will become easier for companies doing IPO and the risk of delay in listing will be reduced. Paperwork and operational hassles will reduce for merchant bankers and other intermediaries. Investors will get indirect benefits because more companies will be able to launch IPOs without any hindrance and there will be stability in the market. At the same time, the rights of the lenders who have a pledge will also be protected. Overall, this step of SEBI is being considered as a major improvement in the direction of making the IPO market more efficient, transparent and investor friendly.
