Anchor investors permitted in Indian IPOs

India's stockmarket watchdog, the Securities and Exchange Board of India (Sebi), last week announced new guidelines governing initial public offerings and follow-on offerings. In the most significant change announced, Sebi will now allow "anchor investors" to buy up to 30% of the portion reserved for qualified institutional buyers (QIBs) in an IPO.

"Companies faced with a volatile market on the eve of issue launch, are most likely to make use of this provision," said Donald D'souza, president at India InfoLine investment banking. And, indeed, in its notice issuing the guideline Sebi clarified that the measure is intended to provide more certainty to IPOs launched in the prevailing volatile stock market conditions.

"This is a positive step, especially when there are bouts of volatility," added D'souza. "Potential investors can now see the book filled and the IPO can get further traction on the back of a reputable investor in the book."

The relaxation comes with caveats. The minimum application size for an anchor investment is Rs100 million ($2.1 million). The anchor investor is also required to pay 25% of the entire investment upfront and the balance within two days of the IPO closing. Shares allotted to the anchor investor will be subject to a 30-day lock-up.

"The guidelines provide an excellent mechanism for issuers to manage their IPOs through turbulent markets," reckoned Chetan Savla, executive director at Kotak Mahindra Capital Company. "Issuers can provide assured allocation against an assurance of participation for part of the issue, which, in turn, will serve as a benchmark for other investors, especially in the retail and high-net-worth segments."
 
Sebi will not allow anyone related to the founder or controlling shareholder of the company or the bookrunning lead manager to be given the status of anchor investor.
 
"When bookbuilt issues started off in India in 1999, discretionary allocation was available for the entire QIB portion," explained Savla. "The new guidelines bring back such discretion partially with reasonable checks and balances, such as the lock-up and minimum size."

Sebi also relaxed timing requirements governing offers for sale. Currently, a shareholder has to hold securities in the form of equity shares for one year before they can be sold via an offer for sale. So, for any convertible instrument and also for depository receipts and warrants, the one-year clock used to start ticking only after conversion into shares. Sebi will now take into account the total duration that the securities were held, even prior to their conversion into equity, when determining the minimum one-year holding period.
 
With respect to follow-on offerings, commonly referred to in India as rights issues, Sebi relaxed disclosure requirements in the offer document. The regulator said it recognises that existing shareholders are kept abreast by the company of developments on a regular basis.
 
Savla termed the new guidelines governing rights issue offer documents very welcome, saying "these companies are already making disclosures on a regular basis under the terms of the listing agreement".
 
Consequently, Sebi agreed that the offer document no longer needs to contain a summary of the industry and business of the issuer company, a section titled "promise versus performance" which compares the actual performance with projections made in earlier offer documents and a section titled "management discussion and analysis". Other disclosures related to financial statements, litigation and risk factors have also been simplified. The regulator said that the move is intended to streamline the rights issue process with respect to both timing and cost.
 
Sebi also banned the issue of shares with differential voting rights, to protect minority shareholders from controlling shareholders issuing themselves shares with superior voting rights.