SEBI’s New Directive: Auditors Must Certify Use of Pre-IPO Funds

SEBI’s New Directive: Auditors Must Certify Use of Pre-IPO Funds

Sub: Economy

Sec: Capital market

The Securities and Exchange Board of India (SEBI) has issued a new directive requiring auditor-certified disclosures on the utilization of pre-IPO funds.

This move aims to ensure transparency and accountability in the use of funds raised before a company’s initial public offering (IPO).

Key Provisions

• Auditor Certification: Companies must provide certified disclosures about how pre-IPO proceeds are used in relation to the objectives stated in the IPO issue.
• General Corporate Purposes (GCP): If the disclosures are not made, the funds will be adjusted towards the GCP portion of the IPO.
• GCP Limitation: Companies can allocate a maximum of 25% of IPO proceeds to GCP. This rule potentially limits the flexibility of managing pre-IPO funds.

Implications for Companies

• Reduced Flexibility: Companies may face restrictions in managing their pre-IPO proceeds. For example, if a company raises 20% of its total IPO proceeds through a pre-IPO, its GCP allocation will significantly decrease. For a ₹100 crore issue with ₹20 crore raised pre-IPO, the GCP portion would reduce to ₹5 crore from ₹25 crore.
• Need for Clarity: Companies seek clarity on whether certified pre-IPO utilization allows flexibility in fund usage or if pre-IPO funds must strictly adhere to the objects stated in the IPO offer document.

Conclusion

SEBI’s directive aims to bring greater transparency and control over the utilization of pre-IPO funds. While the move is intended to safeguard investor interests and ensure proper use of funds, it also imposes stricter guidelines that may limit corporate flexibility. The industry awaits further clarification to understand the full implications of these regulations.

IPO

• IPO is the selling of securities to the public in the primary market.
• Primary market deals with new securities being issued for the first time. It is also known as the new issues market.
• It is different from secondary market where existing securities are bought and sold. It is also known as the stock market or stock exchange.
• It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public.
• It is generally used by new and medium-sized firms that are looking for funds to grow and expand their business.