Mumbai: Companies looking to raise money through initial public offerings (IPOs) will have to give precise details about the end use of the funds.
The Securities and Exchange Board of India (Sebi) has increased scrutiny of IPO disclosures and, in several cases, has asked companies to revise their release documents because it has observed that funds are being used for purposes other than those listed in the application to the regulator. This is done to avoid longer lock-up of promoter shareholders’ shares mandatory after an IPO.
Currently, if most of the IPO proceeds are to be used for capital expenditure, then the lock-in for the promoters’ shares is 36 months. But if the IPO-linked company states that the purpose is for loan repayments, then the lock-in is only for 18 months.
Sebi noted that while a company may state in the offer documents that the IPO money will be used for loan repayments, it is used for capex requirements.
“If it is a term loan, then the share lock-up cannot be 18 months, promoters will have to go for a three-year lock-up,” said a person familiar with the development, Sebi has started informally telling companies. to enforce the rules, he said.
Even if a new loan was taken to repay an existing loan but the underlying loan was for capital financing, the lock-in for promoters’ shares should be 36 months, the person said.
If the IPO proceeds are used for working capital requirements, then the lock-in may be for 18 months, the person said.
“Sebi has started asking companies for details of their loans, their borrowing targets and repayment schedules,” said an investment banker handling equity offerings.
Indian companies are looking to raise over ₹1 lakh crore through IPOs in 2024, which is double the amount they raised in 2023.
Lawyers said that these share lock-up rules for promoters were put in place because of project implementation risks. “This ensures that the promoters maintain a minimum hold of 20% during the implementation stage of capex. This also ensures skin in the game for promoters during the implementation stage,” said Khaitan & Co executive director Sudhir Bassi.