Sebi says no to 'upsizing' option in LIC share sale; allows few exemptions

But allows a few exemptions, such as a 30-day lock for anchor investors

The market regulators, Securities and Exchange Board of India (Sebi), didn’t allow the option of retaining excess subscriptions -- known as “upsizing” in investment banking parlance -- for the initial public offering (IPO) of Life Insurance Corporation of India (LIC), said three people in the know.

According to the sources, LIC and investment bankers had come up with a plan to have a base issue size of Rs 21,000 crore (3.5 per cent dilution) and an option to upsize it by Rs 9,000 crore (1.5 per cent). This would have given the option to the government to raise up to Rs 30,000 crore by divesting 5 per cent, if there was strong demand.

But, Sebi didn’t permit such a move, citing lack of regulations around it. “The option of plain upsizing is not permitted as there is no such provision regarding IPOs. Allowing such a move for LIC would set a wrong precedent and other companies, too, would demand such an option,” said a person involved in the LIC IPO process.

This meant the investment bankers involved with the offering had to settle for an issue size of either Rs 21,000 crore or Rs 30,000 crore. They decided to opt for the former as volatile market conditions created demand uncertainty, said the sources said.

Legal experts said Sebi regulations allow a “greenshoe” option, which is similar to upsizing, but works a bit differently.

A greenshoe option in the context of an IPO means “an option of allotting equity shares in excess of the equity shares offered in the public issue as a post-listing price stabilising mechanism,” according to Sebi regulations. 

This option was exercised by a few companies, such as ICICI Bank and Tata Consultancy Services (TCS), more than a decade ago. However, there is a process to be followed for exercising the green-shoe option, said legal experts. One, an IPO-bound company is required to state that it plans to use the greenshoe option in its draft red herring prospectus -- which was not done in the case of LIC. Also, the process involves appointing a so-called “stabilising agent”, which is usually an investment bank authorised to buy shares from the secondary market after listing to stablise the stock price.

The greenshoe option used during an offer for sale (OFS) or public issue of non-convertible debentures (NCDs) is different from that used in IPOs as it allows plain upsizing in case of oversubscription

While Sebi didn’t allow the upsizing option, it has allowed other special carve-outs for LIC’s IPO. These include permitting the company to do an IPO with just 3.5 per cent equity dilution. Under Sebi rules, a company with a Rs 6-trillion market cap would have been required to dilute at least 5.8 per cent stake in the IPO. Also, Sebi has waived the new rule around the 90-day lock-in requirement for anchor investors. In the case of LIC, anchor investors will have to observe only a 30-day lock-in. Further, the insurer was not asked to refile its DRHP even though the alteration in the issue structure exceeded the 50 per cent threshold.

“For a fresh issue, up to 20 per cent upward or downward revision in the estimated issue size, and for an offer for sale of shares up to 50 per cent, upward or downward revision in the number of shares offered or estimated issue size are allowed. If the change exceeds any of these thresholds, the DRHP has to be refiled with Sebi. However, in extreme circumstances -- if an exemption is applied for -- the market regulator may consider an exception depending on the specific facts and circumstances in accordance with the provisions of Regulation 300 of SEBI ICDR (Issue of Capital and Disclosure Requirements),” said Gaurav Mistry, partner, DSK Legal.

In February, when LIC filed its draft IPO papers, the government intended to offload 316.25 million shares. This number has now been revised to 221.37 million shares.

According to the investment bankers, in terms of number of shares, the downward revision has been 30 per cent but in terms of price, it exceeds 50 per cent.

Sebi in its communication to LIC has said that these are one-time exemptions given in national interest and should not be treated as precedence, said one of the persons cited above.