The Securities and Exchange Board of India (Sebi) on Friday relaxed the lock-in period on pre-IPO shareholding and also approved the concept of ‘controlling shareholders.’ The regulator also eased the framework for issuance of stock options and increased the investment headroom for alternative investment funds (AIFs) in unlisted companies.
The regulator has halved the lock-in period to 18 months that promoters have to observe on 20 per cent of their shareholding following an initial public offering (IPO). Meanwhile, the lock-in on pre-IPO shareholding of non-promoters has also been halved to six months and minimum lock-in for venture capital funds will be six months from the date of acquisition instead of existing one year.
Market experts said Sebi’s move will encourage more companies to go public. The relaxation comes at a time when the IPO market is witnessing record fundraising.
Currently, 20 per cent of the promoter shareholding—known as minimum contribution— is subject to a three-year lock-in and the rest of the shareholding is locked in for one year. The lock-in on minimum contribution will be reduced to just 18 months if the IPO is entirely an offer for sale or where 50 per cent of the issue proceeds are not meant for capital expenditure.
The requirement is to ensure that promoters have skin-in-the-game, particularly in case of companies that raise public capital for project financing or setting up of a greenfield project.
The reduction in lock-in period for non-promoter shareholding, experts said will boost the sentiment of private equity (PEs) investors.
“This liberalisation will provide impetus to promoters who were otherwise apprehensive towards listing, as the reduction in the tenure for lock-in assuages the liquidity concerns that promoters otherwise faced post the listing,” said Gaurav Mistry, Associate Partner, DSK Legal.
To reduce the disclosure burden at the time of IPO, Sebi has excluded companies having common financial investors from the definition of promoter group. Also, the disclosure requirements on group companies have been eased.
Controlling shareholders
In a move that will usher the domestic capital markets into a new era, Sebi’s board agreed in-principle to replace the concept of promoter with ‘controlling shareholders’. However, as this will involve rewriting of several existing regulations, it will be done in a “smooth, progressive and holistic manner.”
Sebi has said it will engage with other regulators to resolve regulatory hurdles, prepare draft amendments to securities market regulations and develop a roadmap for implementation of the proposed transition.
“In recent years, a number of businesses and new-age companies with diversified shareholding and professional management that are coming into the listed space are non-family owned and do not have a distinctly identifiable promoter group. Further, there is increasing focus on better corporate governance with responsibilities and liabilities shifting to the board of directors and management,” Sebi said in a release.
Experts said the concept will help pin responsibility on individuals in cases where companies have zero promoter shareholding.
The above changes approved by the Sebi board were part of a consultation paper it had issued in May.
ESOP framework eased
The Sebi board approved the merger of ‘sweat equity’ and ‘share based employee benefits’ regulations into a single regulation called the Sebi (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. Under this, the time period for appropriating the unappropriated inventory has been extended from existing 1 year to 2 years. Also, the minimum vesting period and lock-in period for all share benefit schemes in the event of death have been done away with. The maximum yearly limit of sweat equity shares has been set at 15 per cent of existing share capital within the overall limit of 25 per cent for listed companies and 50 per cent in case of companies listed on the Innovators Growth Platform.
Changes to AIF regulations
Sebi has said done away with the investment restrictions on the residual portion of investable funds of venture capital funds (VCF). It has also allowed category -I AIF –VCF to invest at least 75 per cent of investable funds in unlisted equity shares or in companies listed or proposed to be listed on a SME exchange. “Now Category-I VCFs will have more flexibility to deploy the 25 per cent of the investible funds in debts of companies which they are not invested in as well as investments in listed firms. This should make the Category I VCF structure more flexible for the investment managers,” said Yashesh Ashar, partner, Bhuta Shah & Co.
‘Fit and proper’ criteria
Sebi has said the ‘fit and proper’ status of persons acquiring less than two percent of its shareholding shall also be made applicable to unlisted stock exchanges and depositories. Also, the existing requirement of seeking post-facto approval of Sebi for acquisitions between 2 per cent and 5 per cent shareholding has been discontinued for all eligible shareholders. Stock exchanges and depositories being systemically important institutions, their shareholding is tightly regulated by Sebi.
