Concerns Raised by SEBI on Bunching of IPOs

  • November 24, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Concerns Raised by SEBI on Bunching of IPOs

Subject :Economy

Section : Capital market  

The Securities and Exchange Board of India (SEBI) has expressed concern over the clustering of initial public offerings (IPOs) this week. SEBI has urged investment bankers to exercise caution regarding potential stress on intermediary infrastructure, especially IPO registrars.

Previous Alert and Current Scenario:

  • SEBI had issued a similar alert in March 2021, emphasizing the importance of avoiding glitches and recommending a staggered approach to IPO offerings.
  • The current alert is prompted by the simultaneous launch of IPOs by five companies: IREDA, Tata Technologies, Gandhar Oil Refinery, Flair Writing Industries, and Fedbank Financial Services.

Issues at Hand:

  • The five IPOs collectively aim to raise over ₹7,000 crore.
  • All five IPOs are being handled by a single registrar, Link Intime India.
  • The share allotment process, carried out by the registrar, faces challenges due to a high volume of applications and a shift to a shorter timeline for listing.
  • The possibility of over 1 crore applications for the five issues poses a potential strain on the system.

Potential Challenges:

  • Bunching up of IPOs could lead to concerns, especially with a large number of applications involved.
  • The processing, although electronic due to online bidding, may face issues related to reconciliation or incorrect credit allocations.
  • Tata Technologies and IREDA, in particular, have witnessed significant application numbers.

The IPO Processing Workflow:

  1. All applications are uploaded on the exchange software.
  2. Consolidation of applications is done, followed by the allotment process.
  3. The registrar needs to extract information from NSDL and CDSL based on the PAN.
  4. Despite the electronic nature, concerns arise if there are reconciliation issues or incorrect credit allocations.

Market Observations:

  • Market observers acknowledge the challenge but suggest that SEBI is unlikely to micromanage IPO timelines in the future.
  • Investment bankers discuss timelines with banks and registrars, but issues such as bunching up can be unavoidable due to market conditions, investor appetite, and regulatory approvals.
  • The transition to a T+3 timeline, mandatory from December 1, is viewed as reasonably smooth, and any identified pain points are expected to be addressed.

Appetite for IPOs Amid Bunching:

  • Despite the clustering of IPOs, there is a strong appetite for four out of the five offerings.
  • Robust responses are attributed to domestic liquidity, reasonable valuations, and anticipated listing gains.

SEBI’s alert highlights the need for cautious management of IPO processes, especially in scenarios of multiple offerings within a short timeframe.

Primary Market Reforms in India:

  1. Abolition of Controller of Capital Issues:
    • Background: The Capital Issues (Control) Act, 1947, governed capital issues in India, administered by the Controller of Capital Issues (CCI).
    • Reform: The Narasimham Committee (1991) recommended the abolition of CCI. Consequently, the government replaced the Capital Issues (Control) Act and eliminated the CCI.
    • Result: Companies can approach the capital market without prior government permission, with offer documents cleared by SEBI.
  2. Formation of SEBI (Securities and Exchange Board of India):
    • Establishment: SEBI was set up as a non-statutory body in 1988 and gained statutory status in January 1992.
    • Reform Measures Introduced by SEBI:
      • Disclosure of all material facts and specific risk factors by companies.
      • Introduction of a code of advertisement for public issues to ensure fair and truthful disclosures.
      • Companies allowed to determine the par value of shares.
      • Introduction of the “book building” process for IPOs.
  1. FIIs (Foreign Institutional Investors) Permitted:
    • Reform: Foreign institutional investors, including mutual funds and pension funds, are allowed to invest in equity shares and debt market instruments such as government securities and treasury bills.
  2. Accessing Global Funds Market:
    • Reform: Indian companies can access the global finance market to benefit from lower-cost funds.
    • Permitted Instruments:
      • American Depository Receipts (ADRs).
      • Global Depository Receipts (GDRs).
      • Foreign Currency Convertible Bonds (FCCBs).
      • External Commercial Borrowings (ECBs).
    • Listing on Foreign Stock Exchanges: Indian companies can list securities on foreign stock exchanges through ADR/GDR issues.
  3. Inclusion of Intermediaries under SEBI’s Purview:
    • Intermediaries: Merchant bankers, mutual funds (including UTI), portfolio managers, registrars to an issue, share transfer agents, underwriters, debenture trustees, bankers to an issue, custodians of securities, and venture capital funds.
    • Reform: These intermediaries have been brought under the regulatory purview of SEBI.
  4. Credit Rating Agencies:
    • Establishment: Various credit rating agencies, including CRISIL (1988), ICRA (1991), CARE (1993), were set up to meet the emerging needs of the capital market.
    • Reform: These agencies play a crucial role in evaluating the creditworthiness of companies and debt instruments, providing investors with reliable information for decision-making.

American Depository Receipts (ADRs):

  • Definition: ADRs are financial instruments representing shares in a foreign company, traded on a U.S. stock exchange. They allow non-U.S. companies to raise capital from American investors without directly listing on U.S. exchanges.
  • Process: A U.S. bank issues ADRs by purchasing shares of the foreign company and then issuing corresponding ADRs to be traded on U.S. markets.
  • Advantages: Provides a convenient way for U.S. investors to invest in foreign companies without dealing with foreign exchanges. It enhances a foreign company’s access to U.S. capital markets.

Global Depository Receipts (GDRs):

  • Definition: GDRs are similar to ADRs but are traded on exchanges outside the United States. They represent shares in a foreign company and are denominated in a currency other than the issuer’s domestic currency.
  • Issuance: GDRs are typically issued by international banks, and the underlying shares are held in the depository bank, which issues GDRs to investors.
  • Purpose: Allows foreign companies to raise capital in global markets, broadening their investor base. It provides international investors with a way to invest in foreign securities without dealing with multiple local exchanges.

Foreign Currency Convertible Bonds (FCCBs):

  • Definition: FCCBs are bonds issued by a company in a foreign currency with an embedded option allowing bondholders to convert the bonds into the issuer’s equity at predetermined conversion rates.
  • Convertible Feature: The conversion feature provides bondholders with the option to exchange the bonds for a specified number of shares, offering potential equity ownership in the issuing company.
  • Benefits: Attracts capital from international markets, providing an avenue for companies to raise funds while offering investors the potential for capital appreciation through equity conversion.

External Commercial Borrowings (ECBs):

  • Definition: ECBs refer to loans in foreign currency taken by Indian companies or entities from non-resident lenders.
  • Usage: Typically used for expansion, modernization, or diversification of existing production activities. The funds can also be utilized for refinancing existing high-cost debt.
  • Regulation: The Reserve Bank of India (RBI) regulates ECBs, and there are guidelines on the eligible borrowers, recognized lenders, permitted end-uses, and other aspects.
  • Currencies: ECBs can be denominated in various foreign currencies, and the interest rates can be fixed or floating.
  • Maturity: The maturity period for ECBs varies based on the type and amount of borrowing, ranging from short-term to long-term.

IPO Registrars: Key Points

  1. Role and Function:
    • IPO (Initial Public Offering) registrars play a crucial role in the process of a company going public.
    • They act as intermediaries between the company issuing shares and the investors.
  2. Share Allotment Process:
    • The IPO registrar is responsible for managing the share allotment process.
    • This involves allocating shares to investors based on the subscription received during the IPO.
  3. Electronic Processing:
    • The processing of share applications and allotment is predominantly electronic in modern times, facilitated by the registrar.
  4. Handling Multiple IPOs:
    • IPO registrars often handle multiple IPOs simultaneously, especially during periods of increased market activity.
    • This can include managing applications, verifying details, and ensuring a smooth allotment process.
  5. Single or Multiple Registrars:
    • In some cases, a single registrar may handle all aspects of an IPO.
    • In other situations, multiple registrars may be involved, each managing a portion of the IPO process.

Greenshoe Option

A “greenshoe” option, also known as an “over-allotment option,” is a provision in the underwriting agreement of an initial public offering (IPO) that grants the underwriter the right to sell additional shares to the public at the offering price, usually up to 15% of the original offering size.

This option is named after the first company, Green Shoe Manufacturing (now part of Nike, Inc.), that used it in 1960.

  1. IPO Process:
    • A company decides to go public and issues new shares in the primary market through an IPO.
    • An underwriter, typically an investment bank, facilitates the IPO by purchasing shares from the company and reselling them to the public.
  2. Greenshoe Option Activation:
    • When there is high demand for the IPO and the stock starts trading on the secondary market, the underwriter may activate the greenshoe option.
    • This allows the underwriter to purchase additional shares (up to the greenshoe option limit) from the company at the offering price.
  3. Market Stabilization:
    • The underwriter can use the additional shares to stabilize the stock price in the secondary market.
    • If the stock price falls below the offering price, the underwriter can buy back shares and provide support to the stock.
  4. Overallotment Impact:
    • The overallotment option increases the total number of shares available to the public, potentially generating additional proceeds for the company.
  5. Closing the Greenshoe:
    • The greenshoe option is typically exercised within 30 days of the IPO.
    • After stabilizing the stock and assessing market conditions, the underwriter decides whether to exercise the greenshoe option.

The greenshoe option benefits both the underwriter and the issuing company. For the underwriter, it provides a tool to manage price volatility in the aftermarket and potentially generate additional profits. For the issuing company, it allows flexibility in responding to market demand and may result in increased capital raised.

Concerns Raised by SEBI on Bunching of IPOs economy