Jun 15, 2000|
Sebi – Stiffening IPO norms
The market watchdog, Securities Exchange Board of India, in a move to tighten the norms of Initial Public Offering (IPO), has framed new guidelines to bring in much more discipline in the pricing and the quality of new issues.
Under the new guidelines,
- The companies without any track record of profitability can tap the market provided they do so through the book building route and ensure that qualified institutional buyers subscribe 60% of the issue. Earlier, only information technology companies were allowed to tap the market without any profitability record.
- All issues above five times the pre-issue net worth of the company will be made through the book building route and qualified institutional buyers should subscribe 60% of the issue. This is also applicable for listed companies that raise additional capital from the market.
- Henceforth, the minimum promoters’ contribution would be locked in for three years and the rest of the pre-issue holdings of the company would be locked in for one year.
- The amount of promoters’ contribution brought in the form of cash will have to kept in an escrow account and released to the company with the public issue proceeds.
The recent trend in the primary market has been a matter of concern for both investors as well as the regulator. After a brief tug of war between the merchant bankers, Sebi has now taken a step forward to regulate and bring in sufficient due diligence on the merchant bankers’ part.
With compulsory lock in periods in both the pre-issue and post-issue holdings, additional responsibility has been imposed on promoters since they are responsible for investor’s money. Further, the escrow norm is expected to bring in more transparency in the system regarding the utilisation of the proceeds.
We have witnessed new issues in the last six months or so, from companies which neither had profitability record nor management expertise, especially in the information technology sector. With these regulations in place we can expect an improvement in the quality of forthcoming new issues.
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