Major Policy Initiatives by SEBI for Primary Market

Address by Chairman, SEBI

Association of Investment Bankers of India Annual Summit 2021

December 22, 2021

1. Ladies and Gentlemen, a very good morning to all of you. I would like to thank the Association of Investment Bankers of India for giving me this opportunity to address their annual summit, which this year has been drawn around the theme “Indian Capital Market – A Leap Ahead”. There cannot be a better time than the year end to assess the what, how and why of the market activity so as to draw up promises for the New Year!

2. This year has been particularly exciting for primary market. Along with the sheer size and scale of public issues, the year has seen listing of many companies having non-traditional business models. Let’s take a look at some trends and policy initiatives in this space, before delving into the issues and challenges related to primary market.

Trends in Primary Market

3. Globally and domestically, securities markets have witnessed phenomenal growth during the recent two years.

4. During 2020, global equity issuance amounted to USD 826.8 billion, while global long term bond issuance amounted to USD 27.34 trillion. The Emerging Market Economies (EMEs) collectively accounted for 22.9 per cent of the global equity issuance during 2020 and 29.6 per cent of the global long term bond issuance. As at end-2020, the EMEs collectively accounted for about one-fifth of the global equity market capitalization and about one-sixth of the global bond market outstanding.

5. 2021 proved to be a bumper year for the global IPO market: 2,388 deals raised USD 453 billion. While the number of deals went up by 64 per cent, the amount of IPO proceeds increased by 67 per cent. The global equity issuance during 2021 amounted to USD 1.12 trillion through 6,790 deals. The optimism on the COVID-19 vaccination drive, earnings optimism, abundant liquidity, low interest rate environment, global stock market rally, technological innovations and ESG agenda made 2021 an active year for global equity issuance.

6. The Indian securities market also witnessed robust growth during this period, both in terms of number of issues and the amount raised from equity market. In 2021, the Indian stock exchanges ranked 7th in terms of number of IPOs and 8th in terms of IPO proceeds globally. On both accounts, the Indian stock exchanges ranked 10th during the previous year.

7. During 2020-21, 344 issues raised around INR 2.3 lakh crore through issuance of equity securities in the Indian securities market. Of this, 55 were IPOs which raised around INR 31,000 crore. Till November 2021 of 2021­22, 348 issues have raised around INR 1.8 lakh crore through issuance of equity securities, of which 76 were IPOs that raised more than INR 90,000 crore. In just eight months, the IPO proceeds almost trebled, compared to the level for the previous whole year. The average size of IPOs has also grown from about INR 350 crore during 2019-20 to about INR 1,200 crore in this financial year.

8. Participation by retail investors in equity primary market has witnessed a significant jump. Upto November 2021 in 2021-22, the number of applications from retail individual investors in equity IPOs numbered 5.43 crore. During 2019-20, there were only 76.94 lakh applications and during 2020-21 there were 3.80 crore applications from the retail individual investors in IPOs.

9. This increase in retail individual applications is not just owing to the increase in the number of IPOs. The average number of applications received per issue in the retail individual category has also increased. The average number of applications in retail category per IPO on the Main Board for 2019-20 and 2020-21 was 6.8 lakh and 13.64 lakh, respectively, which stands at 15.65 lakh for 2021-22.

10. Investment by retail individual investors in IPOs has grown from about INR 5,000 crore during 2019-20 to about INR 8,300 crore during 2020-21 and to about INR 15,100 crore till November 2021.

11. The extent of oversubscription has also reached new levels. Almost all the IPOs during 2020-21 and till November 2021 were fully subscribed. During 2020-21, 20 IPOs were oversubscribed at least 10 times, of which 10 were oversubscribed 100 times. This year, 36 IPOs were oversubscribed at least 10 times, of which 13 were oversubscribed more than 100 times.

12. The IPO market activity has also impacted other market segments very positively. Partly on account of the investors’ urge to participate in the IPOs, on an average 27.63 lakh new demat accounts are being opened every month now (i.e., 2021-22). Those preferring mutual fund route for the portfolio diversification and the professional fund management benefits also increased their purchases of equity-oriented schemes to ride the IPO bull run. In this regard, the growing popularity of SIP mode of investment and investor awareness initiatives in the B-30 cities drew more and more new investors besides attracting fresh investments from the existing investors. On an average 23.91 lakh new investor folios are being added every month now with the domestic mutual fund industry.

Major Policy Initiatives by SEBI for Primary Market

13. SEBI has been engaging with Merchant bankers, Industry Associations and other stakeholders on an active basis to continuously develop the primary market. SEBI also receives inputs from advisory committees on various critical policy matters from time to time. These efforts endeavour to have a right balance in regulatory architecture. Various steps have been taken in the recent years to make fund raising through capital markets easier, faster and cost effective as well as to ease up the process of investing. Let us take a look at some of them relating to equity market.

14. To facilitate listing by large issuers, the minimum public offer requirements have been relaxed for issuers with post issue market capitalization beyond INR 1 lakh crore. The time line to achieve Minimum Public Shareholding has also been relaxed for such issuers.

15. The lock-in requirements in case of public issues have been reduced. The lock-in for minimum promoters’ contribution has been brought down to 18 months from earlier requirement of 3 years. Similarly, in the case of other pre-IPO shareholders the lock-in has been reduced to 6 months from earlier requirement of 1 year.

16. We have rationalized the definition of Promoter Group and reduced disclosure requirements in respect of Group Companies in offer documents. SEBI is also taking steps for moving from the concept of Promoter to that of Controlling Shareholder.

17. For fund raising through Rights issues, the timeline for completion of issue has been reduced, dematerialization and trading of Rights Entitlements on Stock Exchanges have been introduced and the eligibility and disclosure requirements have been rationalized.

18. Differential Voting Rights (DVR) framework has been introduced considering the typical capital structure of new age tech companies and demand for such a framework. Recently, SEBI relaxed the eligibility criteria for Superior Rights (SR) shareholders, permitting issuance of SR shares to individuals having net-worth upto INR 1000 Crore. The minimum gap between issuance of SR shares and filing of RHP has also been reduced to 3 months.

19. A host of initiatives by SEBI eased up the process of investing. The T+6 listing timeline ensures faster turnaround of investors’ moneys. The Aadhaar based paperless offline e-KYC enables investor on-boarding without any physical visits. Also noteworthy is the introduction earlier of ASBA and now the world’s most efficient payment infrastructure UPI with ASBA modes of payments in the IPOs.

New Age Tech Companies

20. Recently, there has been an increasing trend of New Age Tech Companies also known as Growth Companies coming out with their IPOs. Such companies are characterized by their significantly different business model and are asset light in nature. In 2021-22, out of the 23 IPOs on the Main Board with issue size over INR 1,000 Crore, 5 were by companies with non­traditional business models. Such companies access capital markets both to provide exit to existing investors and to fund their growth ambitions. These non-traditional companies offer additional regulatory challenges.

21. Having an appropriate regulatory framework for listing of such companies is also important to attract fresh PE/VC investments in Start-Ups. As you are aware, not only has there been an IPO boom in 2021, the year has also seen the birth of a record number of new unicorns.

22. Typically, the new age tech companies are loss making at the time of listing and the extant regulatory framework acknowledges that. Going forward, based on experience gained and stakeholders’ feedback, there would be learnings and the need for appropriate tweaking of regulations.

23. It is in this context that SEBI had taken out a public consultation paper on the subject in November 2021. We would be soon taking a view on the issues raised in this paper.

Merchant Bankers’ Role

24. The merchant bankers have an important role to play in ensuring market integrity.

25. The growth in the primary market is accompanied by various challenges, including in the form of non-traditional business models of issuers, disclosure requirements for new age technology companies and valuation related apprehensions.

26. Appropriate pricing of the issue is a crucial aspect. A proper balancing act between the issuers’ aspirations and investors’ interests is required. The merchant bankers need to engage with a wider set of potential investors.

27. Duties and responsibilities of a merchant banker and code of conduct for them have been specified by SEBI. The responsibility cast upon them includes protecting interest of investors, conducting business with fairness and integrity, ensuring true disclosures to investors in a timely manner so that investors are made aware of attendant risks before taking investment decision. It is incumbent upon the Merchant banker community to not only follow the Regulations in letter but also in spirit. It may be an opportune time for AIBI to reflect upon and review the standards of due diligence adopted by merchant bankers in various issue management activities offered by them. Needless to say, SEBI will not shy away from taking required action if it finds any intermediary not adhering to its mandate.

Concluding Remarks

28. The enthusiastic reception of issuances by investors, including retail investors, is a reflection of the confidence reposed by them in the Indian securities market. The members of investment banking fraternity are the custodians of this faith.

29. Merchant bankers have the responsibility to ensure that the trust that the investors have shown in capital markets is not misplaced. By doing so, all stakeholders stand to gain.

On that note, I wish this summit and you all, the very best.