SEBI Acts to Limit Selling Shareholders' Influence on IPO Price

The Securities and Exchange Board of India (SEBI) has embarked on a new regulatory path, requiring IPO-bound companies to exclude private equity (PE) or venture capital (VC) shareholders, as well as other shareholders intending to sell their shares, from the decision-making process regarding IPO pricing. This move, as reported by media sources, aims to curb the undue influence that these "selling shareholders" might have on the pricing of IPOs and, subsequently, the performance of the IPOs.

SEBI is concerned that selling shareholders may prioritise maximising their return on investment, potentially pushing for higher price bands. Such actions could impact the broader interests of the IPO-bound company and the interests of new incoming investors seeking to subscribe to the IPO, according to media sources.

This latest directive from SEBI comes on the heels of its review of Draft Red Herring Prospectuses (DRHPs), where it found instances of selling shareholders being involved in the decision-making process of IPO pricing. It's important to note that a selling shareholder can be any shareholder intending to sell their shares in the IPO, holding a minority stake in the company, and not identified as part of the promoter group.

This category is not limited to just PE or VC investors.SEBI's recent action is part of its ongoing efforts to enhance transparency in IPO pricing. Many IPOs today include an offer-for-sale component involving significant secondary share sales by existing shareholders, often PE or VC funds.

This move also comes at a time when the Indian primary markets are witnessing unprecedented activity, with multiple IPOs launching every week.

SEBI has expressed dissatisfaction with shareholders being consulted in the allocation of shares to institutional investors. IPOs in India typically cater to three investor categories: qualified institutional buyers (QIBs), high-net-worth individuals (HNIs), and retail investors.

In IPO processes, selling shareholders must not influence share allocation to institutional investors, including discretionary anchor book allotment. SEBI's scrutiny extends to the role of merchant bankers, as emphasised by the regulatory body, "SEBI."

The regulator has instructed merchant bankers to ensure that selling shareholders, including their nominee directors, are not involved in determining the IPO price or the allocation of equity shares.

Furthermore, SEBI has urged merchant bankers to refrain from mentioning selling shareholders in the allocation of the QIB portion to anchor investors.Examples from recent IPO filings highlight SEBI's concerns.

The draft prospectus of Ola Electric, for instance, mentions that the price determination will involve consultation with both the company and its selling shareholders, which include prominent investors like Tiger Global, Temasek, and Softbank Vision Fund.

SEBI's latest measures aim to prevent selling shareholders from unduly influencing IPO pricing, thereby ensuring a fair and transparent process for all stakeholders involved. By safeguarding the integrity of IPO pricing mechanisms, SEBI seeks to bolster investor confidence and support the continued growth of India's capital market.