SEBI makes 25% public offer mandatory in IPOs

The Securities and Exchange Board of India (SEBI) today announced a number of measures, including a proposal to hike public holding in all PSUs to a minimum 25 per cent besides new norms for research analysts and ESOPs given by listed firms, to give a boost to the primary market and make it easier for companies to raise funds.

Besides, the offer for sale mechanism, the current route of PSU divestment, will be revamped to allow non-promoters to sell shares and a provision of 10 per cent reservation will be provided to retail investors, SEBI said.

In order to ensure wider market participation by investors, SEBI has prescribed a minimum dilution to public in an IPO of 25 per cent to make market rules uniform and promoter neutral across all companies.

SEBI has fixed the minimum IPO size at 25 per cent of the post-issue capital, or Rs400 crore, whichever is lower.

SEBI said this would remove the anomaly that a company just short of Rs4,000 crore market capitalisation was required to dilute about Rs1,000 crore while another company at Rs4,000 crore market capitalisation was required to dilute only Rs400 crore.

In case of dilution of less than 25 per cent, minimum public shareholding of 25 per cent to be achieved within three years of listing, where required under the rules.

In order to make regulatory requirements consistent across the companies irrespective of post-issue capitalisation and to facilitate mid size issuers who may not be in need of large funds, SEBI has decided to take up the following proposal with finance ministry to carry out suitable amendments to Securities Contract (Regulations) Rules 1957 (SCRR).

Under the current rule, while non-PSUs are required to have minimum 25 per cent public shareholding, PSUs are required to have only 10 per cent, which is discriminatory and inconsistent with the broader market design.

Therefore, SEBI has decided to recommend to ministry of finance that SCRR should be amended so that all the listed companies, including PSUs, shall be required to achieve and maintain minimum public shareholding of 25 per cent of the total number of issued shares, within a time period of three years.

In order to increase the share of serious, committed investors, SEBI has decided to increase the anchor investor's bucket to 60 per cent from the current requirement of 30 per cent of the institutional bucket.

The SEBI board approved the proposal to permit bonus shares issued in the last one year prior to filing of the draft offer document to be offered for sale, provided that these bonus shares were issued out of the free reserves or share premium.

In order to bring consistency between various regulations and to clarify certain regulations governing the preferential issue norms, SEBI board decided to replace the 'closing price' with 'volume weighted average price' in the pricing formula for preferential issues.

The regulations concerning pricing of QIPs take into account the effect of stock split, bonus, etc. However, this has not been explicitly provided for in the regulations concerning preferential issues. SEBI has decided to extend the same treatment to preferential issues also.

The regulations concerning preferential issues do not provide specifically for pricing of infrequently traded shares. However, SEBI (SAST) Regulations explicitly specifies the pricing methodology in case of infrequently traded shares. SEBI has decided to extend similar treatment to preferential issues also.

The SEBI board approved the proposals to review the existing regulatory framework on Employee Stock Option Scheme (ESOS) and Employee Stock Purchase Scheme (ESPS) for listed entities and frame regulations for employee benefit schemes involving shares of the company, replacing the existing SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.

The proposed regulations intend to address issues regarding composition of trusts, facilitate secondary market acquisitions, enhanced disclosures and better enforceability. The regulations cover employee benefit schemes which deal in shares of the company, in addition to ESOS and ESPS. Such schemes would also be permitted to acquire shares from secondary market under certain conditions so as to avoid forced dilution of capital and to be in line with international practice.

SEBI has put in place certain safeguards to improve governance and transparency of the schemes and also address concerns regarding potential market abuse.

Accordingly, shareholders' approval through special resolution would now be required for undertaking secondary market acquisitions. SEBI has also placed certain limits on secondary market acquisitions.

A limit of 10 per cent of the assets held by general employee benefit schemes other than ESOS type of schemes has been prescribed for owning shares of the company / listed holding company.

Trusts should undertake only delivery based transactions and not deal in derivatives. SEBI has prescribed a minimum six-month holding period for shares acquired by trusts from secondary market and has classified shareholding of such trusts separately from 'promoter' and 'public' category, with stricter disclosure and other regulatory obligations.

To ensure a smooth transition for complying with the new regulatory framework, the existing employee benefit schemes have been provided with a time period of one year from the date of notification.

Further, a longer transition period of five years has been provided for re-classifying shareholding of existing employee benefit schemes separately from 'promoter' and 'public' category.

Besides, SEBI has prescribed permissible limits for the level of shares acquired from secondary market and reduced own share component to 10 per cent of the total assets of general employee benefit schemes.

In order to encourage retail participation in OFS, to enable all large shareholders, including non-promoter shareholders, to use the OFS mechanism and also to expand the universe of companies to whom OFS mechanism is available, presently being 100 top companies only, the board has approved minimum 10 per cent reservation for retail individual investors, ie, for the investors bidding for amounts less than Rs2 lakh. In case this percentage is not fully utilised, the unutilised portion may be offered to other investors.

Seller of shares may offer a discount to retail investors in accordance with the framework specified from time to time.

Non-promoter shareholders are allowed to offer shares through OFS. Such shareholders having shareholding of more than 10 per cent or such percentage as specified by SEBI from time to time shall be eligible to use OFS.

OFS mechanism shall now be made available for shareholders of top 200 companies by market capitalisation, instead of the top 100 at present.

The client who has already done the KYC with any SEBI registered intermediary need not undergo the same process again when he approaches another intermediary.

Currently, the facility of sharing of KYC information is available only among SEBI registered intermediaries. Board has now approved the amendment to the KYC Regulations for sharing of KYC information available on the centralised system with the entities regulated by other financial sector regulators. This would further facilitate the KYC process for the investors in the entire financial sector. This will  not only reduce the paper-work and bring down cost of operations for the investors as well as for the intermediaries, but will also save the investors from the hassle of getting KYC done again by the intermediaries regulated by other financial sector regulators.