There were also worries about companies who changed the details about end-use of funds in the issue document from those given in the application form, leading to legitimate concerns that these changes are being made to reduce the promoters’ lock-in period. For example, current guidelines say that if the funds raised through the IPO are earmarked for debt reduction, the promoters and major shareholders’ shares would be locked in for a period of 18 months. However, if the end-use is capital expenditure, the lock-in period extends to 36 months. It seems many have been changing the end-use from capex to loan repayment to reduce the lock-in period. Industry experts say the difference in tenures is justified as capex entails a significant element of project implementation risk. As a result, the market regulator has been seeking granular details from promoters. In fact, it has also said that the firms using IPO proceeds to repay loans taken for capex will have to keep the lock-in period at 36 months since the project risks continue to exist.
Sebi isn’t alone. Other regulators like the Reserve Bank of India (RBI) have also been tightening their screws on the end-use of funds. In January, it tweaked norms for the issuance of commercial papers (CPs) and non-convertible debentures (NCDs) up to one year to regulate short-term investments. One of the key changes that will take effect from April 1 is that the issuers have to mention the exact end-use of the funds raised through these instruments for better transparency. Of course, there have been/will be complaints that the process will become more onerous for IPO-bound firms, especially at a time when many companies are beginning to get out of their addiction of bank loans and the equity cult, especially amid domestic investors, is on the rise.
But that is precisely the argument that favours the market regulator or the RBI’s decisions. The idea is to help investors make informed decisions about the risks associated with the instrument. Anyway, enough leeway has been given to firms, as far as end-use of funds go. According to Sebi regulations, funds raised through IPOs can be allocated for various purposes including capital expenditure, debt reduction, general corporate needs, and acquisitions. And a good 25% of the net proceeds can be earmarked for general corporate purpose and an additional 10% (total 35%) can be kept aside towards unidentified future acquisitions. So, seeking granular details for certain key items isn’t being too harsh. The regulator clearly believes that it’s better safe than sorry.
