Sebi to exempt private equity funds from IPO lock-in

Currently, the entire pre-IPO shareholding of PE investors cannot be sold for one year after listing

The Securities and Exchange Board of India (Sebi) is planning to exempt private equity (PE) funds from the one-year lock-in requirement in initial public offerings (IPOs). Under the current norms, the entire pre-IPO shareholding of PE investors cannot be sold for one year after listing.

According to sources, the capital market regulator will relax the lock-in requirement for the category II alternative investment funds (AIFs). “The regulator will extend the Regulation 37 of the ICDR Regulations to category II AIFs,” said a person with direct knowledge of the development.

The decision is likely to be taken at Sebi’s board meeting on Wednesday.

AIFs are privately pooled investment vehicles that collect funds from wealthy investors. ICDR is Issue of Capital and Disclosure Requirement — regulations governing issue of securities. 

AIFs are categorised into three — socially and economically desirable funds, such as infrastructure funds, SME funds and venture capital funds (VCFs), fall in category I; PE funds, real estate funds and funds that invest in distressed assets are in category II; and hedge funds and other funds that invest in derivatives are in category III.

Currently, the Regulation 37 of the ICDR is applicable to only category I AIFs and for shares allotted to employees under the stock option scheme.

The move to extend the relaxation to category II AIFs could give a fillip to these investment vehicles, which are sitting on commitments of Rs 52,000 crore.

Industry players say most IPOs these days have PE investors —more so in professionally-managed companies. The lock-in requirement often clash with their investment philosophy as it prevents them from making time-bound exits, they say.

“Over 80 per cent of IPOs have been backed by PEs, which include AIFs, and hence it (the relaxation) will bring more capital and stronger companies into the pre-IPO market,” said Gopal Srinivasan, chairman, TVS Capital Funds. Some of the recent listings of professionally managed companies where PEs had to undergo the compulsory one-year lock-in include Equitas Holdings, Ujjivan Financial, and RBL Bank.

“The lock-in, essentially, is for promoters so that they don’t list a company, create some buzz and run away. However, PEs also get categorised with promoters for the lock-in. The idea of PE investing is timely exit and the lock-in goes against it,” said Harish HV, partner at Grant Thornton, a consultancy firm.

In December, the Indian Private Equity and Venture Capital Association (IVCA), an industry lobby, had made a representation to Sebi, seeking relaxation from the lock-in requirement by amending the Regulation 37 of ICDR.

“Such an amendment is justified because it would assist category II AIFs to provide exits, thus promoting investments in AIFs in the long term…Any concession available to financial investors such as VCFs should be available to AIFs. Hence, the post-IPO lock in requirements should not apply to category II AIFs as well,” IVCA president Rajat Tandon had said in a letter to Sebi.

Exemption not for all Pes

The lock-in exemption by Sebi will be given to PE funds that are registered with it under AIF regulations. Also, the minimum investment period has to be at least one year for the relaxation to be applicable.

Experts say there are several other PEs that are not registered as AIFs but are big investors in the Indian unlisted space and may not get the benefit unless they register themselves as AIFs.

“Only those PEs registered as AIFs may get the benefit. A lot of international, well-known PEs won’t get the benefit. The relaxation could force them to think whether they want to register as AIFs. However, there are other considerations such as taxation to it,” said Harish.

Other announcements likely at Sebi board meeting

• Easing of FPI regulations
• Tightening of p-note norms
• Takeover code relaxation in cases of distressed companies
• Status check of decisions taken in past board meeting
• Release of 2016-17 annual report