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Steps to Woo Investor Interest

SEBI has announced reforms aimed to increase retail investor participation as well as protect investors’ interests…

In an effort to expand the reach of IPOs and mutual funds across the country, the market regulator Sebi announced some very far-reaching reforms, which are not only targeted at facilitating an increase in retail investor participation but to also protect the interests of the small investor. Also, stringent rules have been put in place to bring in more discipline and do away with various market malpractices

Move to bring in more market makers Faster completion and simplification of fund-raising process, and lowering of the cost of fund-raising and rationalising disclosures to increase companies looking for market listing

Reduced free float and promoter holding: The average free float market cap reduced from Rs 5,000 crore to Rs 3,000 crore to facilitate further public offerings (FPOs) and rights issues through fast-track route. Also, professionals and entrepreneurs who are unable to meet the requisite 20 per cent contribution by themselves as promoters, will be allowed to meet the same with the contribution of Sebi-registered Alternative Investment Funds such as SME Funds, Infra Funds, PE funds and VCFs, subject to a 10 per cent cap

Concessions to issuers: There will be no need to re-file the Red Herring Prospectus (RHP), in case of the proposal to raise the issue size by 20 per cent as against the the existing 10 per cent limit. Also, companies will be allowed additional routes including rights and bonus issue to facilitate them to reach minimum public shareholding requirements under the Securities Contracts Regulation Rules (SCRR). Sebi will also specify other options which may enable (non-compliant) listed entities to reach minimum public shareholding requirements subject to appropriate checks and balances. Moreover, qualified institutional placements (QIPs) will be offered a maximum discount of 5 per cent to the price calculated as per the Sebi regulations, especially in a falling market.

Impact
Lowering the free float market capitalisation will help companies float FPOs and raise money faster, especially in a bear market
By seeking continuous discloser of information, it will be difficult for companies to deceive investors and portray a different picture altogether, which they could earlier
Flexibility for promoters to raise funds will lead to more entities looking at raising capital, fuelling an increase in stock market volume and value

Sebi bats for retail investors
Confirmed IPO allotment and approving the e-IPO procedure for electronic bidding in public offers is a sign of facilitating higher retail participation in the primary markets
Modified share allocation: The new system ensures every retail investor, irrespective of the application size, gets allotted a minimum bid lot, subject to availability of shares in aggregate. This approach will be beneficial for small investors as they will get a minimum amount, especially in case of IPOs that are over subscribed
Reduced time from issue closure to listing: To further bring down the time taken from issue closing to listing, the reach of Applications Supported by Blocked Amount (ASBA) facility will be enhanced. Brokers, banks and issuers to be incentivised for encouraging use of ASBA by retail individual investors
e-IPO: The nationwide broker network of stock exchanges at more than 1,000 locations will be made available for distributing IPOs in electronic form. This will be besides the existing distribution channels. Further, investors can approach any of the brokers in these locations for applying in IPOs, either physically or electronically with ASBA facility

Impact
e-IPOs will significantly improve the reach of IPOs and the restrictions on revision of bids will help prevent malpractices
Guaranteed share allocation will enthuse an increased retail investor participation in IPOs
As stock exchanges will provide for download of application forms on their website, investors will be able to view the application status online, similar to secondary market transactions

Thrust on investor confidence
Stringent rules to discipline issuers and market intermediaries along with increased transparency to improve investor belief in the markets and increase participation.
Enhanced investor protection: Eligibility criteria for the issuers coming through the profitability route to be redesigned, with a minimum average pre-tax operating profit of Rs 15 crore. Only credible issuers with adequate disclosures in their offer documents to be allowed to access the public issuances route with Sebi putting in a place a framework for rejection of draft offer documents. To increase transparency, only 25 per cent of the capital raised will go towards general corporate purposes, instead of unlimited proceeds in the past
Quality of offerings: The issue price band along with relevant financial information will be published at least five working days prior to opening of the issue, as against the current provision of just two working days in the case of IPOs. Non-retail investors will not be permitted to withdraw or lower the size of bids at any stage. Companies will be allowed to revise the bid but only on an upward side Moreover, additional mechanisms for monitoring of issue proceeds will be put in place with the extant legal framework

Impact
There will be more time to analyse the issue
Misleading signals to retail investors about the extent of subscription in the issue to go away
Capital raised will be used for the stated purpose and not be treated as issue raising expenses
A framework for faster clearance of offer documents will help reduce repeated queries and resultant delays in dealing with DRHPs by Sebi