Context: Sebi has introduced new guidelines for initial public offerings (IPOs) and rights issues.
More on news:
- Extending the time period:The Securities and Exchange Board of India (Sebi) has extended its period of approval for initial public offerings (IPOs) and rights issues by six months.
- Applicability: This will be applicable to companies where Sebi’s approvals have expired or are due to expire between 1 March and 30 September.
- SEBI has granted a one-time relaxation in its primary market fund-raising norms to make it easier for companies to raise capital amid the covid-19 pandemic.
- A primary market issues new securities on an exchange for companies, governments, and other groups to obtain financing through debt-based or equity-based securities.
- It's in this market that firms sell (float) new stocks and bonds to the public for the first time. An initial public offering, or IPO, is an example of a primary market.
- These trades provide an opportunity for investors to buy securities from the bank that did the initial underwriting for a particular stock.
Changed norms on fresh issue component within the IPO
- The regulator also relaxed norms on changing the fresh issue component within the IPO, with businesses now allowed to tweak up to 50% of the estimated issue size without having to re-file the draft offer prospectus.
- Previously, companies were required to re-file the draft offer prospectus if they increased or decreased the estimated fresh issue size by more than 20%.
Change in rights issue guidelines
- Based on the new norms, a company that has been listed on the stock exchanges for 18 months can raise funds via a rights issue, as opposed to the earlier norms that allowed firms that were listed for at least three years to undertake a rights offer.
- Previous regulation: it is mandatory for companies to go public or complete the rights issue within 12 months of the date of issuance of observations by Sebi.
- The to be considered successful has also been relaxed to 75% from the previous 90%
Eligibility criteria for market capitalization
- the eligibility criteria of average market capitalization of public shareholding of the issuer has been relaxed to ₹100 crore from the earlier ₹250 crore.
Significance of new rules:
- Big relief to these companies: There are many companies that have got Sebi approvals for IPOs but are unable to list within the permitted time-frame due to the existing market conditions.
- Help companies re-evaluate their issue size and pricing: The other change on allowing companies to tweak their fresh component of the public issue would also help them increase or decrease their issue size based on the current market conditions.
An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors
- it also allows public investors to participate in the offering.
- An IPO is underwritten by one or more investment banks, who also arrange for the shares to be listed on one or more stock exchanges.
- Through this process, colloquially known as floating, or going public, a privately held company is transformed into a public company.
- Initial public offerings can be used to raise new equity capital for companies, to monetize the investments of private shareholders such as company founders or private equity investors, and to enable easy trading of existing holdings or future capital raising by becoming publicly traded.
- A rights issue or rights offer is a dividend of subscription rights to buy additional securities in a company made to the company's existing security holders.
- When the rights are for equity securities, such as shares, in a public company, it is a non-dilutive(can be dilutive) pro rata way to raise capital. Rights issues are typically sold via a prospectus or prospectus supplement.
- With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the issuer at a specified price within a subscription period.
- Offer for sale (OFS) is a simpler method of share sale through the exchange platform for listed companies.
- The mechanism was first introduced by India’s securities market regulator Sebi, in 2012, to make it easier for promoters of publicly-traded companies to cut their holdings and comply with the minimum public shareholding norms by June 2013.
- The method was largely adopted by listed companies, both state-run and private, to adhere to the Sebi order
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