SEBI’s Tightened Grip: New IPO Rules Curb Promoter Loan Repayments to Protect Investors

SEBI has issued directives to ensure greater transparency and accountability in the use of IPO proceeds, especially with regard to the repayment of loans. These changes are designed to protect the interests of retail investors and prevent the misuse of funds for the personal benefit of promoters.

Here are the key aspects of SEBI’s latest directive on the use of IPO proceeds for the repayment of loans, particularly promoter loans:

1. Restrictions on Promoter Loans Repayment:

• SEBI’s latest amendments to the Issue of Capital and Disclosure Requirements (ICDR) Regulations in 2021 and 2022 reinforce the restriction on using IPO proceeds for repaying loans taken by promoters.
• Companies are explicitly prohibited from using more than 35% of the total proceeds for general corporate purposes. This general corporate category includes loan repayments, but companies are now required to provide a detailed breakdown if the funds are being used to pay down any debt, including loans from promoters.
• If any part of the IPO funds will be used to repay loans from promoters or promoter-group entities, this must be fully disclosed in the IPO prospectus, and companies must justify how the repayment benefits the company and its shareholders.

2. Detailed Disclosures in the Prospectus:

• SEBI now requires more granular disclosures in the offer document, including: A detailed description of the end-use of IPO proceeds, specifically mentioning the repayment of any debts. If the proceeds are to be used for debt repayment, the nature and details of these loans must be disclosed, such as who the lender is (whether it is the promoter or a promoter-group entity), and the terms of repayment. If loans from promoters or promoter-related entities are being repaid, companies must provide a clear explanation of why this is in the best interest of the company.

3. Monitoring and Oversight:

• SEBI has mandated that funds raised through IPOs be placed under stricter scrutiny. Monitoring agencies (typically credit rating agencies) are now required to oversee the usage of IPO proceeds and ensure that the company uses the funds for the purposes disclosed in the offer document.
• If the IPO proceeds are used to repay promoter loans without appropriate disclosure, SEBI can take regulatory action, and the monitoring agencies may flag this in their reports.

4. Corporate Governance and Investor Protection:

• SEBI’s push for more robust corporate governance is also reflected in these rules. The aim is to protect retail investors by ensuring that IPO funds are used for the company’s growth and operations, not to bail out promoters from personal financial obligations.
• The regulator’s emphasis is on long-term investor value, with less reliance on using IPO funds to settle personal liabilities of the promoters, which may otherwise undermine investor confidence.

Example of Recent IPOs:

In light of these stricter regulations, many companies have refrained from using IPO proceeds for the repayment of promoter loans. For instance, large IPOs in recent years, such as Zomato, Paytm, and Nykaa, adhered to the SEBI mandate by providing a detailed disclosure of their fund usage, focusing more on business expansion and working capital than on repaying promoter-linked debt.

Summary of Key SEBI Guidelines on IPO Fund Usage (2021-2022):

1. Purpose Disclosure: Full disclosure on how proceeds will be used, including any debt repayment plans.
2. Loan Repayment Limits: Restricting the use of IPO proceeds for loan repayment to prevent misuse by promoters.
3. Transparency: Enhanced transparency requirements around the use of funds for general corporate purposes, debt repayment, and promoter loans.
4. Monitoring: Post-IPO fund usage is to be monitored by agencies to ensure compliance.

The latest SEBI guidelines aim to increase transparency in how companies use IPO funds, especially regarding repayment of loans from promoters. The primary focus of these rules is on ensuring that the funds raised benefit the company and shareholders, not just the promoters.