Soon, startups raising fresh capital through initial public offers (IPOs) may see some restriction on the amount that they can use from the IPO proceeds for purposes like mergers and acquisitions (M&As). The Securities and Exchange Board of India (Sebi) has proposed a limit on the money raised from IPOs that startups can use for M&As unless takeover targets are explicitly identified beforehand.
“Raising funds for unidentified acquisitions leads to some amount of ambiguity in the IPO objects,” the Economic Times quoted Sebi as saying in a discussion paper on Tuesday. The regulator has sought comments by stakeholders to the proposals by November 30. The paper comes in the wake of blockbuster IPOs from startups such as Zomato, Paytm and Nykaa.
“It is proposed to prescribe a combined limit of up to 35% of the fresh issue size for deployment on such objects of inorganic growth initiatives and GCP (general corporate purpose), where the intended acquisition / strategic investment is unidentified in the objects of the offer,” said the Sebi paper.
Most offer documents cite acquisition plans without naming likely targets.
Sebi noted that many startups, unlike traditional manufacturing companies, are asset light and do not require funds for fixed assets and capital expenditure. Their growth comes from acquiring new customers and technologies.
“Acquisitions by the newage technology companies are going to be an increasing trend and it is important for them to have ready cash to move swiftly in line with the market conditions,” the financial daily quoted Ausang Shukla, managing director and co-head, investment banking, Ambit as saying. “A cap on this may limit their options to make such acquisitions in tougher market conditions, which may be the ideal time to make such acquisitions.”
Sebi rules require an issuer to state the objects of an IPO in the offer document.
“Public market investors will evaluate the ability and track record of the management teams to make acquisitions before subscribing,” Shukla said. “Also, the requirement of monitoring of GCP (general corporate purpose) and specific M&A initiatives would keep appropriate checks and balances for companies.”
Sebi said a limit would not apply if the proposed acquisition has been identified and specific disclosures about such investments were made in the offer document.
The paper also proposed an increase in the lock-in for anchor investors in startup IPOs to 90 days from the current 30 days. Sebi is of the view that this will provide more confidence to other investors.
Investment bankers said many startups opt for IPOs primarily to give liquidity to early stage investors.
“Most shareholders have inter-se arrangements for managing the timing and amount of OFS,” Shukla of Ambit said. “Bringing in incremental restrictions on this may instead disincentivise the larger investors from considering IPOs and complicate shareholders arrangements.”
