India Public Markets Reforms | Several New Flexibilities for Financial Sponsors

Ø  

The lock-up obligation of all pre-IPO shareholders (barring the lock-up restrictions on promoters) has been reduced to 6 months; from the existing 1 year lock-up.

Ø  

The obligation on promoters to lock-up 20% of the aggregate share capital, post IPO, is reduced to 18 months (from 3 years).

¡   

There are a few conditionalities on this relaxation of the promoter lock-in, which may not be difficult to satisfy:

·        

The entire IPO involves a secondary sale / offer for sale of shares; or

·        

The IPO does not contemplate more than 50% of the primary raise proceeds being deployed for capital expenditure on a project.

Ø  

No post-IPO lock up on FVCIs and AIFs to continue; except that in order to be eligible for the exemption, they must have held the equity securities for at least 6 months prior to the IPO (instead of the existing 1 year).  

Ø  

SEBI has acknowledged that PE / institutional investors holding significant shareholding do not fall within the conventional concept of “promoter”, and responsibilities / liabilities are now shifting towards the Board / management.

Ø  

Accordingly, it has in-principle agreed on a shift away from the concept of promoter to that of “person in control” / “controlling shareholder” – in making a determination of rights and obligations of such persons in an IPO.  To this effect, SEBI will engage with other relevant regulators and prepare an implementation roadmap.

Ø  

SEBI has re-assessed the scope of IPO disclosures, with the current formulation veering towards excess. In the new regime, amongst others, requirement to disclosure ‘promoter group’ will exclude companies having common financial investors (where promoter is a corporate body).

Ø  

The disclosure obligations on acquirers and promoters pertaining to acquisition of shares in listed stock (ie, initial 5%, and subsequent change of 2%), annual disclosure of holding, creation or release of encumbrance registered in the depository system will be removed (effective 1 April 2022).

Ø  

All such disclosures would be recorded and disseminated through a system driven disclosure mechanism which effectively automates the process based on data aggregated with Indian depositories.

Ø  

SEBI regulations limited share-based benefits to only a listed company's own employees and those of its subsidiaries. SEBI has now also allowed employees of an 'associate company' (presumably, as defined under the Companies Act, 2013) to be granted benefits under an ESOP scheme floated by a listed company. Thus, if a listed company holds 20% or more in, or exercises significant control over business decisions of another company, it can now grant share-based benefits to the employees of such company as well.

Ø  

SEBI has (welcomingly) increased the time limits for appropriation of “inventory”. Currently, if a listed company implements an ESOP or SAR scheme which involves purchasing shares from the market via a trust, the regulations required that the purchase should be backed by grants before the expiry of the financial year subsequent to the year of purchase. This limit has now been increased from 1 financial year to 2 financial years.