On 18 December, the Securities and Exchange Board of India (Sebi) approved several key amendments to improve business operations, investor protection, and the efficiency of market participants. The changes impact various sectors, particularly small and medium enterprises (SMEs), merchant bankers, and mutual funds. Mint explains:
Which of Sebi’s decisions was the most anticipated?
One of the major reforms approved by Sebi focuses on small and medium enterprises and their ability to access public capital markets through initial public offerings (IPOs). In its 208th board meeting, Sebi strengthened the SME IPO framework by introducing stricter requirements for financial viability and new regulations for risk-verification, related-party transactions, and lock-in periods, while also establishing the Past Risk and Return Verification Agency (PaRRVA) to validate risk-return metrics for financial service providers.
How has Sebi tightened the framework for small businesses to access the public markets?
The amendments impose stricter requirements to ensure that only financially sound and operationally viable SMEs can raise capital through IPOs. Under the new framework, an SME can launch an IPO only if it had a minimum operating profit of ₹1 crore in at least two out of its three most-recent financial years while filing its draft red herring prospectus (DRHP). This is to ensure that only businesses with a proven track record can access public funding, thus reducing risks for investors.
Sebi also proposed increasing the minimum application size for such IPOs from ₹1 lakh to ₹2-4 lakh to limit participation to more well-informed investors with a higher risk appetite, but its board did not approve this.
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That apart, Sebi has imposed new restrictions on the offer for sale (OFS) portion in an SME IPO. Shareholders in a pre-IPO SME can now sell up to 20% of the total issue size, but not more than 50% of their total holdings in the company. The lock-in period for promoters’ shares has also been revised: 50% of excess shares will be unlocked one year after the IPO, and the remaining 50% after two years.
What is PaRRVA?
This agency will verify and validate the risk-return metrics associated with various financial services providers, including investment advisors (IAs), research analysts (RAs), and algorithmic trading services. The goal is to provide investors with independent verification of the risk and return characteristics of these services before they invest.
PaRRVA will focus solely on verifying the metrics provided by financial service providers. The verification process will involve ensuring that the calculations, assumptions, and representations of risk-return data are accurate, reliable, and adhere to recognized standards.
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PaRRVA will be operated by a credit rating agency that has expertise in verifying risk-return data provided by service providers.
A recognized stock exchange will serve as the PaRRVA Data Centre (PDC), which will act as the repository for all the verified data. It will verify prospective risk-return metrics, starting from the date when a service provider opts to use PaRRVA’s services.
The agency will operate on a pilot basis for two months and verify these metrics on a prospective basis, helping investors assess future risk-return scenarios.
What were some of Sebi’s other proposals?
Sebi also updated the merchant bankers (MB) regulations to enhance efficiency. Merchant bankers can now only engage in Sebi-approved activities; non-approved activities have to be hived off as a separate legal entity within two years.
Category 1 merchant bankers, with a ₹50 crore net worth, must earn a minimum revenue of ₹25 crore to retain registration. Category 2 merchant bankers, with ₹10 crore net worth, are restricted from managing mainboard equity issues and must earn a minimum revenue of ₹5 crore.
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Merchant bankers must maintain at least 25% of the minimum net worth requirement as liquid net worth. They are also prohibited from managing public issues if their key personnel or employees hold over 0.1% of an issuer’s shares.
What are the amendments to mutual fund regulations?
Key changes include allowing employees of an asset management company (AMC), such as fund managers, to invest in schemes with a reduced minimum investment amount. The frequency of disclosures has been reduced, easing operational burdens while maintaining transparency.
Relaxed requirements apply to employees managing liquid funds as these carry less risk. AMCs are now required to conduct and disclose stress testing for their schemes, assessing the impact of adverse market conditions and helping investors better understand potential risks.
