Market Beat

The Securities and Exchange Board of India (SEBI) has proposed regulatory changes aimed at streamlining the IPO process by removing long-standing operational bottlenecks and improving transparency for investors evaluating upcoming listings.

SEBI has suggested amendments to the Issue of Capital and Disclosure Requirements (ICDR) Regulations, specifically to introduce a new technology-enabled framework that would allow pledged shares to be locked in seamlessly.

Currently, all pre-issue shares held by non-promoter investors'except for a few exempt categories'must remain locked in for six months after allotment in an IPO.

However, depositories are not equipped to mark pledged shares as 'locked-in,' creating significant compliance hurdles for companies preparing to go public. The proposed changes seek to address this gap and simplify the process for issuers.

SEBI noted that it has received several representations from market participants highlighting the difficulties issuers face when pre-issue shares are pledged before filing for an IPO. Since pledged shares remain freely transferable, shareholders can create pledges at any time before the issue.

This makes it challenging for issuers to track or coordinate with such shareholders within the tight IPO timelines, with some companies even reporting non-cooperation or untraceable investors.

To resolve these issues, SEBI has proposed a new enabling framework that allows pledged shares held by non-promoters to be treated as locked-in without affecting existing lending arrangements or delaying the IPO process.

Under the proposed changes, a new provision will be added to the ICDR Regulations empowering depositories to classify these pledged shares as 'non-transferable' for the lock-in duration, based on instructions from the issuer.

Depository systems will also automatically ensure that, upon pledge invocation or release, the shares continue to remain locked-in for the remaining period.

Additionally, companies planning an IPO will need to amend their Articles of Association (AoA) to formalize this requirement and ensure that pledged shares remain locked-in even after invocation or release.

Issuers must also inform all lenders and pledgees of these amendments and disclose the changes clearly in both the draft and final offer documents (DRHP and RHP).

SEBI emphasized that these proposals are a response to persistent challenges raised by market participants regarding compliance with lock-in rules for pre-issue capital held by non-promoter shareholders when pledges are created before an IPO.

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