Pre-IPO Market in a Tizzy as SEBI Flags 200-Investor Cap: Report
Moneylife Digital Team 17 May 2024
The booming market for pre-IPO placements, particularly in small and micro-cap companies, has been jolted by market regulator Securities and Exchange Board of India (SEBI), making merchant bankers and high net-worth individual (HNI) investors anxious. Referring to Section 42(2) of the Companies Act, SEBI says an unlisted company cannot offer shares to more than 200 investors in the same financial year, except through an initial public offering (IPO), says a report.
 
According to the report from Moneycontrol, some merchant bankers are suggesting a workaround where the IPO-bound company allots shares to a front which, in turn, sells those shares to HNIs looking to invest in pre-IPO rounds. 
 
"But this solution is unlikely to work. In April, the registrar of companies (Roc) fined crowdsourcing platform Planify and some companies for violating Section 42 of the Companies Act. The companies had allotted shares to Planify Capital or its group company, and later, using the online platform, the securities were sold in the open market," the report says.
 
Earlier this week, Moneycontrol reported that SEBI had delayed the approval for Mobikwik and some other companies' IPOs after finding that they had allotted shares to over 200 investors in a single year.
 
An HNI told Moneycontrol that he had refused at least two pre-IPO proposals and insisted that the merchant banker get an undertaking from the company that it has not allotted shares to more than 200 investors in a year.
 
There is another arrangement that merchant bankers have been suggesting to prospective investors in pre-IPO rounds, the report says. "The HNIs pool the money and make a loan to the company, on the condition that the company gets approval for the IPO within six months," the above HNI told Moneycontrol, adding, "Once the approval comes, the loan will be shortly converted into equity."
 
IPOs of small and medium enterprises (SMEs) are approved by the stock exchanges where it will be listed. 
 
Market sources told Moneycontrol that after SEBI flagged the froth in SME stocks, exchanges have been approving IPOs at a slower pace than before.
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