Sebi mulls lower dilution, 5 years for achieving 25% float for large IPOs

While the move will benefit companies, it also raises the price distortion due to low free-float
The country’s markets regulator on Friday proposed changes to the rules governing initial public offerings (IPO) to encourage issuances by large companies.  Under the new framework, big firms may be able to list with just 5 per cent dilution and get more time to achieve the 25 per cent minimum public shareholding requirements.

At present, a company with post-listing market capitalisation (m-cap) of Rs 4,000 crore needs offer at least 10 per cent stake to public shareholders, and the public shareholding needs to be increased to at least 25 per cent within three years of listing.

In a discussion paper, the Securities and Exchange Board of India (Sebi) said companies with post-listing m-cap of up to Rs 10,000 crore can offer 10 per cent, but for incremental m-cap beyond Rs 10,000 crore, the dilution can be just 5 per cent. 

The move will benefit Life Insurance Corporation (LIC), projected to hit the market this financial year with a mega IPO. To illustrate, assuming LIC’s m-cap is Rs 10 trillion. Under current regulations, the insurance behemoth would have had to come out with an IPO of Rs 1 trillion to ensure 10 per cent dilution. However, under the proposed norm the IPO size can be just Rs 50,500 crore.

Further, firms with m-cap of more than Rs 10,000 crore will get to increase their public shareholding to 10 per cent in two years, and 25 per cent within five years from the date of listing.

“It's a positive step. This will especially encourage large issuers to come out with their IPOs. The 10 per cent rule was a constraining factor. For some of the larger issues, looking at raising money overseas, this announcement will nudge them to look at India instead of the overseas market," said Pranav Haldea, managing director, Prime Database.

While the move will benefit companies, it also raises the risk of price distortion due to low free-float. However, experts say it won't be an issue in case of large companies.

The market regulator has invited public feedback on the proposals until December 7.

"There is a need to rationalise the minimum dilution needed at the time of listing. A lot of IPO aspirants have scaled up significantly and a dilution of 10 per cent or more would not be commercially attractive. The key to drawing a line is there should be enough liquidity, which in larger companies can be achieved by lesser than 10 per cent dilution," said Manan Lahoty, Partner, IndusLaw.

“Of course, some parameters on m-cap and number of shares may be needed. Also, once the unlisted companies are allowed to list overseas, a smaller dilution for India listing will encourage a dual/second listing in India," Lahoty added. 

According to Sebi data, only 20 companies have launched IPOs where the post-issue m-cap has been more than Rs 10,000 crore at the time of listing. Of these, eight firms have diluted only the mandatory 10 per cent in the IPO.

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