Inability to raise money for future unidentifiable acquisitions would impact capital raising plans of some unicorns, experts said after SEBI announced new IPO norms. Yash Ashar, Partner and Head, Capital Markets, Cyril Amarchand Mangaldas, said the companies impacted are particularly those which may not have any other use of capital and where the existing shareholders are not keen to sell.
SEBI, at its recently-concluded last board meeting for 2021, among other proposals, made certain changes to the issue structure of an IPO in India. These include restricting the quantum of issue proceeds a company can use for unidentified inorganic growth, as well as restricting the number of shares that can be offered by selling shareholders and increasing the lock up of shares subscribed by anchor investors.
"Inability to raise money for future unidentifiable acquisitions would impact capital raising plans of some unicorns, particularly where such companies may not have any other use of capital and where existing shareholders are not keen to sell," Ashar said. Ashar said large amount of flexibility to use funds is a hallmark of those listing their equity shares on international stock exchanges, and investors vote with their feet when they are not happy with the use of such funds, including any new acquisition which they don't like.
These amendments are mainly a reaction to several IPOs earlier this year and follow after consultation papers were issued by SEBI. These proposed changes to the law could have long-term impact, he added. "The regulator could have prescribed additional and more detailed continuous disclosures and monitoring, keeping in mind the existing requirements, including shareholder approval for proposed acquisitions. These changes may impact the plans of the issuers planning to list on Indian stock exchanges," Ashar said.
SEBI has prescribed changes in the Draft Red Herring Prospectus (DRHP) filed on or after notification in the Official Gazette. In the conditions for objects of the issue, it said where the issuer company in its offer documents sets out an object for future inorganic growth but has not identified any acquisition or investment target, the amount for such objects and the amount for general corporate purpose (GCP) shall not exceed 35 per cent of the total amount being raised.
The amount so earmarked for such objects where the issuer company has not identified acquisition or investment target, as mentioned in objects of the issue in the draft offer document and the offer document, shall not exceed 25 per cent of the amount being raised by the issuer.