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Market regulator Sebi is considering overhauling regulations related to Initial Public Offerings (IPOs), with the intent to make regulations easier to understand and comply with, remove existing ambiguities, and address loopholes that may be misused by companies or promoters, two sources familiar with the development told Moneycontrol.
"A panel has been formed under the Sebi committee concerning primary issuances, and has been tasked with simplifying regulations, removing anomalies and redundancies, and addressing any loopholes in the Issue of Capital and Disclosure Requirements (ICDR) Regulations," one of the sources said. The panel has been mandated to ‘demystify the IPO process and regulations’.
The ICDR Regulations were last amended in 2018, and a periodic full review was due as market dynamics have significantly changed since then. Sebi, it is learnt, wants the regulations to be both optimal and effective, and as part of this plan, a review is being undertaken, including the ICDR norms.
The 2018 ICDR Regulations, notified in September 2018, comprise 475 pages, considered too lengthy and including many provisions likely less relevant in the current context. Though ICDR Regulation has been amended from time to time as per the need and issues raised by the stakeholders, a holistic review is what is required, said the source.
A second source added, "Compliance with the ICDR Regulations often results in DRHPs and RHPs running 600-900 pages. Even after all these disclosures and compliances, issues of non-disclosure or improper disclosure arise, and sometimes issues get stuck."
Draft Red Herring Prospectus (DRHP) is designed to inform the investors, so they can understand the business and take a decision. However, often it is dense, with legal and financial jargons. As retail participation deepens, there may be a requirement for the regulatory playbook to evolve, said experts. One of the market participants said what is needed is not more rules, but better ones, rooted in consistency, accessibility, and trust. Sebi had issued advisories in the past to merchant bankers on simplification and display of pricing history, and risk factors upfront in advertisments.
The panel for the revamp of the ICDR Regulations 2018 comprises of merchant bankers, industry representatives and legal experts with expertise in securities markets, it is learnt, and is expected to submit its findings by September. After that, the matter will be placed before the advisory committee for primary markets, and a public consultation followed by the subsequent board approval process may follow.
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What to Expect?
Securities market experts have pointed out issues in the existing ICDR Regulations like valuation practices. Ravi Prakash, Associate Partner, Corporate Professionals said, "Sebi does not mandate consistent valuation methods like DCF or EV/EBITDA, particularly for loss-making companies. Without standard benchmarks, inflated valuations go unchecked, exposing investors to unnecessary risk. Mandating uniform valuation frameworks and disclosure of key assumptions would greatly improve pricing transparency".
He further raised the issue of influence of existing shareholders in pricing of a public issue. "Sebi has already flagged the involvement of selling shareholders in IPO pricing, recognising the conflict when those seeking exits also influence price bands. Restricting this practice through regulation would ensure better alignment with investor interests," said Ravi Prakash.
Legal experts have also pointed out the treatment of Small and Medium Enterprises (SME) and main board IPOs under ICDR Regulations. One expert said, "Companies seeking a SME IPO have to show operating profitability, with positive EBITDA in at least two of the past three financial years. Which is a reasonable standard to safeguard investors. However, Main Board listings have no such threshold. Even loss-making companies can access public capital, often backed by institutional hype.
Meanwhile, smaller, profitable firms face tighter scrutiny" Retail investors, drawn to larger names, often subscribe to IPOs without realising the business may still be unviable, bearing the consequences post-listing, the market expert added.
Another market participant said that in an OFS, this asymmetry gets even more pronounced while examining how IPO proceeds are utilised. "In SME IPOs, Sebi rightly caps the OFS at 20%, ensuring the company receives growth capital. Main Board IPOs, however, are often entirely OFS-driven. Promoters, selling shareholders and early investors exit fully, while the company raises nothing.
Retail investors end up investing in businesses that gain no operational boost from the listing. A similar cap on Main Board OFS components is necessary to restore fairness and realign the IPO process with its intended purpose," said the expert.
An email seeking comments from Sebi did not elicit any response till the time of publishing the story.
The ICDR Regulations apply to IPOs of unlisted companies, rights issues, FPOs, preferential issues, QIPs, IPOs of IDRs, rights issues of IDRs, IPOs by SMEs, and bonus issues by listed companies.
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