IPO: 5 things Sebi can do to make the hot IPO market more attractive

Ajay Garg

Founder & MD, Equirus Capital

Ajay Garg has over 23 years of experience as an investment banker and a solid track record in spotting investment trends. Garg founded Equirus in 2007 as a boutique advisory firm involved in mid-market investment banking with dedicated teams for advisory, ECM, institutional equities, PMS and wealth practices.

We are in the midst of a booming capital market in terms of issuances and there are various factors driving the same. We have seen close to $30-40 billion being invested each year ever since the last strong capital market in 2007-08 by private equity and venture capital investors in many interesting companies. As these companies have matured and the private investors seek to exit, the public market investors (institutional as well as retail) are getting very different flavours of businesses from waste management, wealth management, online food services, and many more.

Sebi’s attempts at streamlining capital raising process

In these dynamic times, Sebi has proactively tweaked many of its regulations this past year. It continues to review some of the existing regulations so as to streamline processes, engender flexibility, and in general make the capital raising process easier and more efficient. Here are some aspects the market regulator can look into:

• Review of Regulation 6(2) of the Sebi (ICDR) Regulations, where companies without operating profit in even one of the preceding three years, need to allot 75 per cent portion of the net offer in an IPO to Qualified Institutional Buyers (QIBs), thereby reducing the retail portion from 35% to 10%. The impact from the same can be seen in the case of Zomato, where if we calculate the benefit of the opening price on the day of listing, retail investors lost ~Rs 1200 crore as they only got 10% of the issue. Now, many quality companies looking to undertake an IPO will have an impact in FY21 on account of the extraordinary circumstances due to Covid. Quite a few of them will show losses. So, unless and until Sebi makes an exception for FY21, retail investors will continue to lose out due to reduced book availability for them
• More and more companies that are doing IPOs have been built on intangible assets like tech buildout, brands and marketing spend. Currently, what may be allowed as use of proceeds is very restrictive for these companies. Sebi should look at permitting 50 per cent of the primary issuance to be used for general corporate purposes from the current 25 per cent. Otherwise, you force companies in these spaces to tap private markets and only approach the public capital markets when they have a large OFS (Offer for Sale) portion to make the requisite deal size
• Post the reclassification of mutual funds, smallcap funds are a small portion of the total funds available with mutual funds. As a large number of IPOs are going to be in the smallcap category, Sebi should evaluate how they can increase available QIB funds for smallcap companies. Sebi should also consider allowing Portfolio Management Schemes (PMS), which have become a large pool (currently 4-5x available funds with smallcaps), to be classified as QIBs. Recently, Sebi had included Systemically Important NBFCs in the definition of QIBs to bring them at par with bank treasuries. Sebi could use the same principle to bring PMS at par with MFs
• Recently, Sebi has made the post-issue merchant banker responsible if there is a delay of unblocking of funds by the bankers to the issues and has instituted a financial penalty for the same. Merchant bankers have no control on the banks’ functioning and continued application will force the community to appeal to Sebi to work with fewer banks with better systems and turnaround times. These, therefore, again make accessibility of IPOs harder for everyone. These rules need to be relooked and banks that are registered for this activity with Sebi should only be fined for these lapses
• The IPO process continues to insist on physical forms being printed and dispatched whereas for all the listed companies, all shareholder communication vis-à-vis all corporate action has moved seamlessly to a digital format. Even MF subscriptions are now being done digitally and there is no need to fill physical forms for continuing subscriptions. Sebi should seriously relook at the element of physical forms being printed and dispatched. This is essential given the digital drive and strong emphasis on reducing paper usage due to environmental concerns, and the ease it will bring to the processes. Summing Up!

The IPO process has come a long way in the level of disclosures and efficiency since my first IPO in 1999, thanks to proactive and continuous engagement with all stakeholders by Sebi. On the back of that, this year could turn out to be the best year for capital markets in the last two decades!