Tighter norms for pre-IPO placements

The Securities and Exchange Board of India (Sebi) today tightened the norms for placements to domestic and foreign venture capital investors made by companies ahead of their initial public offers (IPOs).

The capital market watchdog barred such funds from selling their stakes in unlisted companies at the time of IPOs, if they have not held the stakes for at least one year from the date of filing the draft prospectus with it.

Sebi has also made the one-year lock-in period applicable to convertible instruments issued to venture capital funds and foreign venture capital funds ahead of a company's IPO.

At present, pre-issue shares of an unlisted company making an IPO are not required to be locked in if they are held by venture capital funds or foreign venture capital funds.

The new rules have been incorporated by an amendment in the Sebi (Disclosure and Investor Protection) Guidelines, 2000. Industry analysts said Sebi's move was triggered by several pre-IPO placements in the market.

They said companies preferred to place their shares with venture and foreign venture capital funds immediately before an IPO to get a pre-issue valuation and these funds generally made an exit during the IPO.

The regulator said the move was aimed at making the Indian primary market more efficient and transparent.

"At present, according to the Sebi guidelines, pre-issue shares of an unlisted company making an IPO are not required to be locked in if the same are held by venture and foreign venture capital funds registered with Sebi. It has now been decided to restrict the benefit of this exemption from lock-in," the circular said.

Making the new rule mandatory for convertible bond issuances to these funds, Sebi said: "Shares issued to Sebi-registered venture and foreign venture capital funds upon conversion of convertible instruments during the period of one year prior to the date of filing of draft prospectus with Sebi, provided that the period of holdings of such convertible instruments as fully paid up, together with the period of holding shares from conversion, by the venture capital funds and foreign venture capital investors is at least one-year as on the date of filing the draft prospectus with Sebi."