The Securities and Exchange Board of India (Sebi) released a consultation paper on Friday, indicating that it was considering a reduction in the minimum stake offered in an initial public offer (IPO) with regard to larger companies. It will also extend the timeframe for meeting the minimum public shareholding (MPS) requirements for larger companies. Currently, any IPO of a company with a market cap of less than Rs 1,600 crore must offer a 25 per cent stake, while those with a market cap of Rs 1,600-4,000 crore must sell stake of at least Rs 400 crore (all calculated in terms of the post-issue paid-up capital at the offer price). Any IPO with a post-issue market cap of over Rs 4,000 crore must offer at least a 10 per cent stake. All listed companies must ensure there is an MPS of 25 per cent within three years of the IPO. These stipulations have been in place since 2014. The regulator now proposes the minimum offer threshold be reduced to 5 per cent in the case of IPOs with market caps exceeding Rs 10,000 crore. It will also extend the time period given for meeting MPS for larger IPOs.
Further, the regulator has suggested providing additional time to comply with the MPS of 25 per cent in the case of very large issuers with post issue market capitalisation of Rs 1 trillion and above. For such issuers, it has been proposed that a minimum of 10 per cent should be achieved in two years and 25 per cent within five years of the date of listing. Sebi says a review of IPOs indicated that the average issue size increased to Rs 1,488 crore (2019-20) from Rs 394 crore (2014-15). About 24 per cent of larger issues (above Rs 4,000 crore) barely met the minimum 10 per cent requirements and large issuers have problems meeting MPS of 25 per cent in three years. The Sebi data indicates that, of the 20 issues with a market cap of over Rs 10,000 crore (by March 2020), as many as eight have not reached the 25 per cent MPS. Several large companies have shelved plans to raise capital in India and sought to find funds abroad instead. If eight of the 20 large IPOs struggled to comply with the MPS, it may be argued the current mandated period is unrealistic.
The data indicates a review and realignment of MPS and IPO thresholds, and the MPS timeframe is timely. In practical terms, this may have been prompted by the disinvestment policy, which envisages the listing of mega public-sector companies like the Life Insurance Corporation (LIC), which could easily achieve a post-issue market cap of near Rs 10 trillion, which means that it would need to raise a huge amount to comply with the 10 per cent MPS requirement. Balanced against that, very closely-held issues do tend to see valuation distortions because of lack of liquidity. However, companies which raise over Rs 10,000 crore in IPOs will probably sell enough shares to ensure baseline liquidity in absolute terms. Allowing large companies to launch relatively small IPOs and giving them more time to meet MPS requirements is a pragmatic step. It should offer comfort to larger firms and would be beneficial for investors in the primary market.