IPOs: retail investors earn on float + promoters get more flexibility

This Sebi circular was issued on August 29.

The first part is an important development for investors and the second for issuers.
a. IPO applications, without moving funds out from an investor’s account
Investors in IPOs can make applications by marking a lien on the funds in their bank accounts. The Securities Exchange Board of India has announced September 1, 2008 as the effective date for the start of the ASBA (Applications supported by blocked amount) process. Five banks have been certified on the date of the circular: Corporation Bank, HDFC Bank, ICICI Bank, State Bank of India and Union Bank of India. There is no reason now for retail investors to pay by cheque for an IPO application (as long as you bid at the cut-off). Investors can earn at least savings bank interest on funds blocked because of an IPO application.
b. Debt portion of projects, for which a public issue is being made
Under the public issue guidelines of SEBI (DIP), an IPO for a project which has a debt component, is allowed to go ahead only if the debt is firmly tied up. And it is considered as a firm arrangement of finance only when the banks issue a final sanction letter for the same. Such a firm arrangement has to be in place for 75% of the debt portion. Apparently, Sebi has got feedback that this causes problems when mega projects are being planned, as the final sanction letter takes a long time in coming.

So, for projects with a debt component of more than Rs 1,000 crore, companies can now get along by obtaining an in-principle sanction letter. Now, that leaves the equity investor in a precarious position if the bank were to develop cold feet later. Hence, promoters need to give a guarantee that they will meet the funding gap, in case the banks back out.
But what if the promoters do not have the funds? So the funding gap to be met by the promoters cannot exceed 33% of their free networth. What that means is if Rs 1,000 crore is the funding needed (excluding the equity proceeds), firm arrangements have to be made for Rs 750 crore. So, if the promoters networth is above Rs 2272 crore, then they can cover the entire gap (33% of Rs 2,272 crore). But say, the networth is only Rs 1000 crore, then Rs 330 crore of funding can be based on in-principle approvals.
For the rest the company will have to get firm sanction letters. This will make a big difference for large companies or groups which are raising money. Especially because for calculating promoters networth, the unencumbered holding in group companies will be valued, based on average 26 weeks market price. In addition, the lead managers have to ensure that they are confident of the issuer’s ability to meet the funding gap. The biggest beneficiaries will be the large corporate houses who have a number of companies listed on the bourses, as their listed networth is quite high. But what is not clear is if their networth can include assets other than their holding in listed companies or not.

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