SEBI relaxes lock-in norms


The Securities and Exchange Board of India (SEBI) has notified relaxations to lock-in requirements for shareholdings of promoters and non-promoters under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

The amendments, in effect from 31 August, reduce the lock-in period for promoters’ shareholding to 18 months from three years: If the object of the issue involves only an offer for sale of existing shares; if it is an issue of new shares, then less than 50% of the money raised should be used for capital expenditure for a project; or in case of a mix of share sale and new share issuance, then the end-use of less than 50% of the money raised from the issue of news shares should be for capital expenditure for a project, according to the SEBI.

In all cases, the promoter shareholding over the minimum promoter contribution will be locked in for six months, compared with one year previously. The non-promoter shareholders’ lock-in requirement has been reduced to six months against the earlier one-year lock-in requirement.

The period of holding equity shares for a venture capital fund or alternative investment fund of category I or category II or a foreign venture capital investor shall be reduced to six months from the date of their acquisition of such equity shares, instead of one year now.

A lock-in period is a time in which the shareholder and promoters are not allowed to sell their shareholding to ensure that the promoters continue to have “skin in the game”, and do not
cash out at the time of an IPO or a
follow-on offering.

According to a SEBI consultation paper issued in May: “Historically, a 20% lock-in of promoters’ shareholding for three years was considered necessary when companies raised public capital for project financing/greenfield projects with an objective to ensure continuous ‘skin in the game’ by the promoters.”

The consultation paper noted that an analysis of data of companies listed from 2007-2015 revealed that in a large number of companies promoters did not materially sell their shares, even after the expiry of the lock-in period. Besides, greenfield financing through IPOs is presently almost non-existent.

Further, IPOs exceeding INR1 billion (USD13.59 million), excluding the component of the offer for sale, are required to have a monitoring agency seeking to ensure that the funds mobilised are used for the intended purpose of the objects of the issue, making the need for a lock-in less relevant.

The move will provide more flexibility to promoters as they can now exit their stakes earlier after a public offering. It also helps venture capital and private equity funds, which are often non-promoters but are of late more accepting of being categorised as promoters, according to a Nishith Desai analysis.

The Business Law Digest is researched and written by Mithun Varkey.