SEBI Tightens Norms Around Offers For Sale (Draft Red Herring Prospectus)

SEBI Norms for Offers For Sale – Tightened through the SEBI (Issue of Capital and Disclosure Requirements) (Amendment) Regulations, 2022. As per existing regulations by the Securities and Exchange Board of India (“SEBI”), both profitable and non- profitable entities can file for an Initial Public Offering (“IPO”) to access public funds. The route taken by non- profitable entities required that at least 75% of the issue under the IPO be allotted to Qualified Institutional Buyers to safeguard and reduce retail exposure.

Considering the surge of IPOs in the last year, SEBI – through the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Amendment) Regulations, 2022 (“Regulations”) notified on January 14th 2022 – has sought to further restrict non-profitable entities in their access to public funds.

SEBI Norms for Offers For Sale

One of the major changes is regarding the Offer for Sale clause (“OFS”), which allows existing shareholders to offer their shares for sale in the IPO. The regulations have placed restrictions on shareholders in the following manner:

1. Shareholders holding (individually or together with persons acting in concert) more than 20% of the pre-IPO shareholding of the issuer, shall not offer for sale more than 50% of their pre-IPO shareholding. Further, the shareholders will be restricted from undertaking a secondary sale.

2. Shareholders holding (individually or together with persons acting in concert) less than 20% of the pre-IPO shareholding of the issuer, shall not offer for sale more than 10% of the pre-IPO shareholding of the issuer.

The key difference to note is that shareholders in the second bracket holding less than 20% can completely exit in the OFS, as their shareholding could be less than 10% of the share capital of the issuer. Whereas those shareholders with over 20% shareholding will not be able to completely exit even post the IPO for a significant period.

This change will ensure that the majority of shareholders of these non-profitable entities that go in for public funding will be tied to the entity for longer periods rather than exit with ease

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