acquisitions: Sebi proposes cap on startup IPO proceeds for mergers and acquisitions

The Securities and Exchange Board of India (Sebi) proposed a limit on the funds from initial public offerings (IPOs) that startups can use for mergers and acquisitions (M&As), unless takeover targets have been specifically set beforehand.

“The raising of funds for unidentified acquisitions leads to a certain ambiguity in the IPO objects,” said Sebi in a discussion paper on Tuesday. The regulator has obtained stakeholder comments on the proposals by November 30th. The paper comes after blockbuster IPOs from startups like

, Paytm and. The initial public offering of Rs 18,300 crore Paytm is India’s largest IPO to date.

“It is proposed to impose a combined limit of up to 35% of the new issue volume for use on such properties from inorganic growth initiatives and GCP (general corporate purpose) if the intended acquisition / strategic investment is not in the properties of the offer,” it says in the Sebi newspaper.

Most proposal documents cite acquisition plans without specifying likely goals. Sebi noted that, unlike traditional manufacturing companies, many startups are asset-light and do not require funds for fixed assets and investments. Their growth results from the acquisition of new customers and technologies.

“Acquisitions by new age technology companies will be an increasing trend and it is important for them to have cash to adapt quickly to market conditions,” said Ausang Shukla, managing director and co-head, investment banking, Ambit . “A cap on this may limit your options for such acquisitions in more difficult market conditions, which could be the ideal time for such acquisitions.”

The Sebi rules require an issuer to indicate the items of an IPO in the offer document.

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“Investors in the public market will evaluate the management teams’ ability and track record to make acquisitions before submitting a subscription,” Shukla said. “In addition, the requirement to monitor the GCP (general corporate purpose) and specific M&A initiatives would ensure adequate controls and balances for companies.”

Sebi said that a limit would not apply once the proposed acquisition was identified and specific disclosures about such investments were made in the offer document.

The paper also proposed an increase in the blocking period for anchor investors in IPOs of startups from the current 30 days to 90 days. Sebi believes this will instill more confidence in other investors.

Investment bankers said many startups choose to go public primarily to provide early-stage liquidity to investors.

“Most shareholders have inter-se arrangements for managing the timing and amount of OFS (offer for sale),” said Shukla of Ambit. “The introduction of incremental restrictions could instead discourage larger investors from considering IPOs and make shareholder agreements more difficult.”

The regulator’s expert advisory board believed that instead of extending the lock-in period for all anchor investors, at least 50% of the anchor book should be given to those investors who could agree 90 days or more, according to the paper.

Currently, companies can allocate 60% of the portion designated for Qualified Institutional Buyers (QIBs) to anchor investors on a discretionary basis, of which a third is reserved for mutual funds.

The allocation to anchor investors takes place one day before the start of the issue.

The regulator has also proposed monitoring issuance proceeds under the GCP. The use of the GCP amount by the issuing company may have to be disclosed in the quarterly report of the monitoring body.

Companies are currently not obliged to disclose a specific object with regard to the use of the GCP amount and their use is not recorded in the report of the monitoring body.

“Given the large number of IPOs, there is a need to provide adequate information about the use and monitoring of such a large portion of the proceeds from issuance that are earmarked under the GCP,” said Sebi.

The regulator has also proposed that when companies go public that do not have identifiable promoters, significant shareholders (who hold more than 20%) limit the sale of shares to 50% of their pre-issue stake.

Also, such significant shareholders, including private equity funds sold through OFS upon initial public offering, will have their remaining post-IPO holdings on hold for a period of six months from the date of initial public offering, Sebi said.