Rights, Risks, and Reforms: Decoding SEBI's Game-Changing IPO Regulations

Vaibhav Singh Tiwari* and Yash Sharan+

INTRODUCTION

On 3rd March 2025, the Securities and Exchange Board of India (“SEBI”) issued the SEBI (Issue of Capital and Disclosure Requirements) (Amendment) Regulations, 2025 (the “Regulations”), which were published in the official gazette on 8th March 2025. SEBI amended the regulations to restructure the capital issuance framework by incorporating evolving market instruments, in accordance with the global best practices. With this move, SEBI aims to boost transparency while speeding up capital-raising activities and protecting investors within the Indian securities market framework. The main aims of these amendments are to decrease the duration of the rights issue and add Stock Appreciation Rights (“SARs”) as financial tools while demanding complete issuer disclosure from companies.

These reforms were necessitated by the need to address delays in fundraising processes, enhance corporate governance standards, and provide more flexible compensation tools amid India’s rapidly evolving capital markets and increasing retail investor participation. Thus, it becomes imperative to analyse this regulation and highlight SEBI’s reforms that seek to overhaul the regulation of stock market trading and align India with global standards.

Through this article, the authors delve into the intricacies of the Regulations in three parts. Firstly, it discusses the major provisions and tenets of the Regulations and the changes they aim to bring. Secondly, it underscores the shortcomings and hurdles of the Regulations. Thirdly, it also puts forth suggestions to resolve these roadblocks. Lastly, the article concludes with a summary and a way forward for moving upward and ahead.

FROM COMPLEXITY TO CLARITY: HOW THE REGULATIONS RESHAPE INVESTOR CONFIDENCE

The Regulations aim at balancing the issuer’s autonomy, investors’ protection, and procedural efficiency. This section analyses major provisions of the Regulations and looks into their broader implications. 

Firstly, there has been a decrease in the timeline of rights issues. Before this amendment, the fast-track rights issues took 12-14 weeks, while the non-fast track right issues took approximately 6-7 months from the date of the board meeting approving the right issues until the date of closure of the right issues. The amended Regulation 85 has provided that the right issues may be completed within 23 working days from the date of approval by the date of board of directors of the issuer approving the rights issue, aiming at enhancing market efficiency and improving liquidity access for the issuers.

Secondly, the Regulations integrated SARs into the Issue of Capital and Disclosure Requirements (“ICDR”) framework, particularly regarding IPO eligibility, a novel recognition of equity-linked compensation instruments. SARs have been used as a non-dilutive equity incentive mechanism where employees can benefit from stock appreciation, without purchasing the shares upfront. As per Regulation 5(2), the issuer can convert the outstanding SARs into equity shares before filing the IPO, reducing regulatory uncertainty surrounding SARs. Regulations 14 and 236 extend the SARs inclusion within the promoters’ contribution. 

Lock-in exemptions for SARs: 

Regulations 17 and 288(1) provided the lock-in exemptions on SARs. Previously, companies could not file a Draft Red Herring Prospectus (“DRHP”) if there were any outstanding convertible securities, except for any Mandatory Convertible Securities and Employee Stock Ownership Plans (“ESOP”). The Regulations has introduced SARs as the third exception, where those SARs that are fully exercised for equity shares before the filing of the red herring prospectus are to be excluded from the IPO eligibility restrictions. The Regulations also provided that the exercise of SARs will be considered in the post IPO capital, ensuring minimum promoter contribution. Thus, by exempting the SARs from lock-in and IPO restrictions, the changes aim to promote employee equity participation in listed companies.

THE HIDDEN PITFALLS: UNPACKING THE RISKS IN SEBI’S REGULATORY FRAMEWORK

While the Regulations have been largely applauded, concerns persist over enforcement challenges and other risks.

Firstly, Regulation 7(3) of Regulation 7(3) of the ICDR Regulations bars issuers from using IPO funds to repay loans to promoters, promoter‑group entities, or related parties. The regulatory protection exists to stop controlling shareholders from misusing public funds for their personal gain. The Regulation fails to address the potential dangers of non-promoter-linked debt, especially the expensive loans from shadow banks and alternative investment funds and private lenders, which Small and Medium Enterprises (“SMEs”) frequently use because traditional credit options are unavailable to them.

SMEs operating in India depend heavily on Non-Banking Financial Companies (“NBFCs”) and venture debt funds as well as private financiers through debt agreements that charge interest rates which exceed 18-24% per annum beyond the prime lending rates of commercial banks. These debt instruments differ from promoter-linked debt because businesses use them to maintain operations when institutional credit proves too expensive to obtain. The present SEBI policy blocks SMEs from using IPO funds to eliminate their costly debt obligations, which requires these companies to keep servicing their high-interest liabilities after public capital issuance. The post-IPO liquidity crisis creates difficulties for the company, which directly opposes the main purpose of raising capital and may eventually lead to financial problems or lowered credit ratings.

Secondly, the Regulations now provide companies with flexible rights issue allotment methods that let them give shares to particular investors instead of distributing them equally among all current shareholders. This amendment for increased capital-raising efficiency introduces a significant danger of unauthorized preferential share distributions and corporate governance abuses which promoters and insiders can exploit.

Regulation 76 of the ICDR Regulations, require that rights issues get distributed among shareholders according to their original shareholding percentages. The new flexible allotment provision enables companies to choose which shares they will distribute from unsubscribed portions yet this method poses risks since promoters or insiders could use it to acquire additional shares at a reduced price without complying with Regulation 158 preferential allotment rules. The new mechanism allows insiders to accumulate shares preferentially thus enabling them to increase their ownership without minority shareholder approval which may ultimately harm their stake.

The Supreme Court determined in Dale & Carrington Investment (P) Ltd. v. P.K. Prathapan, that issuing shares with dilution intent toward minority ownership amounts to Section 241 mismanagement or oppression according to the Companies Act, 2013. Further, the Supreme Court clarified through Kanaiyalal Baldevbhai Patel v. SEBI that protecting transparency and equal opportunity in securities allotment protects promoters from gaining unfair advantages.

Thirdly, the ICDR Regulations has lowered the GCP distribution threshold for SME IPOs to 15% from its initial 25% of the total issue amount. The regulatory changes seek better disclosure practices and intended business usage of funds from IPOs. The standard limitation does not take into account the changing capital needs of SME businesses since it overlooks their operations across cyclical and capital-intensive sectors.

The provisions of Section 7(3) of ICDR Regulations allow GCP funds to cover operational costs, administrative expenses and non-capital investment strategies. The 15% limitation on GCP fund allocation creates working capital challenges for SMEs in manufacturing and retail and logistics sectors and seasonal businesses because it reduces their liquidity and leads to operational issues and potential financial risks.

The main problem arises because SME businesses use IPO funds to fill short-term cash shortages but these funds do not easily match debt repayment or capital expenditure classifications. The rigid sector-unspecified rules implemented by SEBI might restrict the growth prospects of SMEs who struggle with limited access to funding. The regulations require flexibility in financial matters and market efficiency, according to the Supreme Court of India in Sahara India Real Estate Corp Ltd. & Ors. v. SEBI.

STRIKING THE RIGHT CHORD: REFINING SEBI’S REGULATIONS FOR MARKET INTEGRITY

Firstly, a regulatory balance should establish distinctions between illegitimate insider loan repayments and genuine debt restructuring activities that help business survival. The regulatory body SEBI should implement a controlled repayment system after following the U.S. SEC’s Rule 13e-3 of the Securities Exchange Act of 1934 which establishes guidelines for transactions that grant benefits to insiders at public investors' expense. A calibrated framework could include:

1.          The maximum debt repayment amount should be set to 25% of IPO proceeds to prevent substantial funds from being used for debt servicing.

2.          The repayment of loans should be permitted only if the interest rates surpass a specific benchmark (12% or 150% of the current repo rate) after adjusting for risk.

3.          The requirement for lenders to provide full documentation within Draft Red Herring Prospectus makes SMEs reveal their loan agreements and payment rates and exact lender information to maintain fund transparency.

The capital market needs regulatory equilibrium as established through judicial precedents. In SEBI v. Rakhi Trading Pvt. Ltd., the Supreme Court validated SEBI’s protective role for investors and market efficiency. Businesses should be allowed to use IPO funds for genuine needs but strict limitations should exist to detect abusive debt repayments from necessary ones. By establishing an organised policy for loan repayment which imposes quantitative requirements alongside transparent financial reporting standards and business rationale criteria the system can balance protection rights of stakeholders against business sustainability allowing SMEs to effectively manage their debt structure beyond IPOs.

Secondly, SEBI should implement sector-based flexibility for the GCP cap by permitting specific industries with proven working capital volatility to utilize a maximum GCP limit up to 25%. The U.S. SEC implements risk-based fund allocation rules under Regulation D Rule 504 similarly to this approach adopted by SEBI.

SEBI should implement a GCP cap waiver system through the ICDR Regulations which enables SMEs to seek higher fundraising limits when they fulfill particular financial requirements.

1.          The company has proven its seasonal cash flow patterns through audited financial statements from the previous three years.

2.          The company has shown multiple years of working capital shortages which necessitate flexible funding options.

3.          The IPO funding must not be used for excessive leverage since the debt-equity ratio remains below 1.5.

The implementation of a structured waiver system enables certain regulatory clarity to prevent unnecessary financial pressure on SMEs so they can use IPO proceeds effectively without damaging investor trust. This method will maintain competitive SME capital markets and protect SEBI’s core mission of market integrity and investor protection.                                         

Thirdly,  SEBI should establish specific regulatory measures to prevent insiders from benefiting from rights issue allocations which include the following requirements:

1.          Mandatory Price Cap Mechanism:

All flexible allotments in rights issues need to have a minimum 5% price advantage above the weighted average price from the last 30 days.

The ICDR Regulations under Regulation 164 require preferential allotment to have a floor pricing model which prevents unfair discounts in share allocations for insiders.

2.          Mandatory Disclosure of Allocation Rationale:

The companies which utilise flexible allotment need to provide extensive reasoning about their selection process for specific investors.

The Audit Committee needs to review these disclosures according to Clause 49 of SEBI’s Listing Obligations and Disclosure Requirements Regulations, 2015.

3.          Minority Shareholder Objection Mechanism:

Companies should implement a Minority Shareholder Objection Clause that enables non-promoter stakeholders owning 20% or more of the non-promoter shares to contest flexible allotments.

SEBI should authorize the allotment only after performing an independent review upon receiving an objection from minority shareholders. In the case of Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd. & Ors., the Supreme Court asserted that minority shareholders need protection within corporate governance systems.

Such measures will create transparent practices while stopping insider abuse and protecting minority shareholder interests by following international standards from the United Kingdom Financial Conduct Authority's Listing Rules, which require proportional fairness in rights issues. The specific market safeguards implemented by SEBI create a balance of market integrity and intended flexibility benefits within rights issue programs.

CONCLUSION AND WAY FORWARD

While the SEBI has crafted the amendment, considering the countries’ evolving securities law landscape, the regulations have potential concerns over enforcement and regulatory challenges. The limitations introduced on repayment of capex loans through IPOs may create a post-IPO liquidity crisis, defeating the purpose of raising capital. Similarly, the amendments have also introduced a flexible rights issues allotment method that creates the risk of unauthorized preferential share distributions, and the lowering of the GCP distribution threshold for SME IPOs to 15% from 25% may bring working capital challenges for SMEs. At this juncture, there is a need to distinguish between illegitimate insider loan repayment and genuine debt restructuring that helps business revival, a sector-based GCP cap so that the SME could utilise the IPO proceeds effectively, and adoption of transparent practices to curb insider abuse and to protect minority shareholders.

*****

* Vaibhav Singh Tiwari is a second-year B.A. LL.B. student at Dharmashastra National Law University, Jabalpur.

+ Yash Sharan is a second-year B.A. LL.B. student at Hidayatullah National Law University, Raipur.

SEBI's IPO Regulations - Vaibhav and Yash.pdf

Download PDF • 190KB