Market regulators must strike the right balance between facilitating ease of doing business for stakeholders and maintaining correct market behaviour. The amendments proposed by the Securities and Exchange Board of India (SEBI) to the rules governing minimum public offer and the timelines to achieve minimum public shareholding do not seem to tick these boxes. By appearing more favourable to large corporate issuers, these guidelines could pose a governance risk and put retail investors at a disadvantage.
According to the existing rules, initial public offers with the post-issue market cap at ₹1-5 lakh crore are mandated to set the offer size at 5 per cent of the post-issue market cap. Companies have been given five years to move the public shareholding to 25 per cent. With issuers complaining about the challenges in diluting bulky stakes, SEBI has proposed that such issuers can set the offer size at 2.75 per cent of the market cap. The time limit for achieving 25 per cent minimum public shareholding has been extended to 10 years. In the case of issues over ₹5 lakh crore, only 1 per cent of market cap needs to be offered in the issue.
Decreasing the limit for minimum public offer is far from desirable as it poses governance risk. If public shareholders do not have enough voting rights, they will be unable to call out management decisions which are not in their favour. The extended timeline for minimum public shareholding makes matters worse. SEBI has also complicated the rules by specifying varying minimum public offer sizes based on the post-issue market capitalisation. This differentiation is unnecessary given the voracious appetite being displayed by individual investors for fair priced offers, irrespective of the issue size. Specifying a uniform public offer limit of 5 per cent of market cap for all issues, to be increased to 25 per cent in five years, would have been a better way to manage this.
It is, however, welcome that SEBI is not proposing to reduce the retail investor quota in IPOs from 35 per cent to 25 per cent, as proposed earlier. This would not have been fair to individual investors who prefer taking bets on IPO listing gains. While such trades are indeed risky, regulators need not micro-manage the activities of individual investors. Stringent regulations can nudge them towards riskier segments such as derivatives, unregulated cryptocurrencies or forex trading. Similarly, a reduction in the maximum limit in mutual fund exit load from 5 per cent to 3 per cent is also good for investors. Increasing the permissible number of anchor investors in an IPO and including life insurance companies and pension funds in the anchor investor portion will help companies secure the requisite anchor investor subscriptions. Finally, at a time when foreign portfolio investors have turned net sellers, it is good that SEBI is trying to ease the compliance burden. These steps are necessary to compete effectively with countries such as China for portfolio funds.
Published on September 15, 2025
