New Delhi, Nov. 14 -- Companies looking to list in India may soon have a big operational hurdle removed, with the capital markets regulator proposing to ease lock-in requirements for existing shareholders.
In a consultation paper, the Securities and Exchange Board of India has proposed a mechanism to deal with the issue of shares pledged by existing shareholders. Here's all you need to know.
What is the problem faced by IPO-bound companies regarding lock-in of shares?
There is a lock-in period mandated for shares held by promoters and non-promoters when a company wants to float an IPO. Under SEBI's Issue of Capital and Disclosure Requirements Regulations (ICDR Regulations), promoter shares must be locked in for one to three years and non-promoter holding for six months from the date of allotment.
But, as the consultation paper notes, before the IPO allotment date, promoters and non-promoters can freely pledge the shares. However, pledged shares can stall an IPO process.
For one, depositories don't have a mechanism to lock-in such shares. The issue is particularly problematic when there are untraceable or uncooperative shareholders who have pledged their shares. Releasing the pledge on their shares could delay the IPO process and stop the issuer company from meeting mandated timelines in the process.
What has SEBI proposed?
The regulator has proposed three changes.
One, the ICDR Regulations should be modified to include provisions to deal with lock-in of pledged shares.
Two, the Articles of Association (AoA) of the company should add provisions to deal with such shares. These provisions should say that equity shares, if pledged, be treated as locked-in for mandated period; that if the pledge is invoked, then shares will be locked-in in the pledgee's account for the remaining period; and that if the pledge is released, then the shares will be locked-in in the pledger's account for the remaining period.
Three, the issuer should keep all stakeholders informed, particularly the pledgees or lenders, about the shares being subjected to the mandatory lock-in.
What other changes has SEBI suggested?
To help the retail investors understand the offer documents better, the regulator has suggested that the issuer company also release a concise and focussed offer-document summary.
With this, the abridged prospectus can then be done away with.
The retail investor can then better scrutinise the IPO and not have to rely on unregulated sources of information, like social-media posts or videos.
Published by HT Digital Content Services with permission from VC Circle.