Sebi relaxes stance on the IPOs of companies with high public float

Business Standard

3 days ago

The Securities and Exchange Board of India (Sebi) has softened its position on approving initial public offerings (IPOs) by companies with a large number of public shareholders, resolving a grey area that had stalled several high-profile listings.
As a result, five such companies – including HDB Financial Services and Hero FinCorp -- which had filed their draft red herring prospectus last year, have recently received regulatory nod for their IPOs.
The delay in Sebi's approval, according to people in the know, stemmed from ambiguity over whether a large number of public shareholders, without any prior public fundraising, violated provisions of the Companies Act.
The capital markets regulator has now clarified that a high public shareholder count, by itself, doesn't breach regulations if the company hasn't raised capital through a public offer, the sources said. 'The matter is now settled,' said one of the people. 'If the company hasn't raised public funds through these share issuances, it's not an issue. Many of these cases involve ESOP (employee stock ownership plan) conversions or unlisted market trades.'
At the time of their DRHP filing, HDB Financial had more than 41,500 public shareholders, Hero FinCorp had around 7,500, and Vikram Solar about 7,000. All three have received Sebi approval in the past two weeks. Waaree Energies, which has since listed, had about 2,600 public shareholders when it filed IPO papers.
Separately, the National Stock Exchange -- also eyeing an IPO -- has seen its shareholder base swell to more than 100,000 due to heightened investor interest.
Sebi did not respond to emailed queries until the time of press.
The regulator, according to legal experts, now acknowledges that secondary transfers of ESOP-converted shares, where the company is not involved directly and no capital is raised, do not necessarily violate norms. However, the distinction remains fact-dependent.
'The Companies Act permits ESOP grants and their eventual conversion to equity, even if that results in a large number of shareholders, as it doesn't fall under the purview of private placement norms,' said Ankita Singh, managing partner at Sarvaank Associates. 'Where the legal line starts to blur is when these shares, ostensibly meant as employee incentives, become a tool for indirect public participation in a pre-IPO company.'
'Unless the company is found to be raising funds through these transfers, the law doesn't view it as a breach, but it certainly raises regulatory and governance questions around intent and transparency,' Singh added.
Apurva Kanvinde, partner at Juris Corp, said Sebi may continue to assess potential securities law violations on a case-by-case basis and may also consult the Ministry of Corporate Affairs (MCA).
'Under the Companies Act, 2013, an offer made to more than 200 persons in a financial year is treated as a public issue,' Kanvinde said. 'Securities issued under ESOP schemes are exempt from this threshold. The earlier Companies Act, 1956, had similar exemptions for internal corporate concerns and for NBFCs issuing shares or debentures.'
'In negotiated private sales, the company neither participates nor receives consideration,' said Saumya Ramakrishnan, partner at Bombay Law Chambers. 'Yet even genuine trades have drawn Sebi scrutiny at the DRHP stage due to technicalities.'