SEBI Plugs Loophole for Unnecessarily High IPO Dilution

Comments Off Written on June 19th, 2014 by
Categories: IPO

In SEBI’s latest board meeting, SEBI has diluted the IPO rules for listing, as we had mentioned in our earlier post (SEBI For IPO Reform, Might Remove Barriers to Lower IPO Dilution).

Minimum dilution to public in an IPO shall  be 25% or Rs. 400 crore, whichever is lower, for companies with post capitalisation of less than Rs. 4000 crore. This will remove the anomaly that a company just short of Rs. 4000 crore market capitalisation, was required to dilute about Rs. 1000 crore while another company at Rs. 4000 crore market capitalisation was required to dilute only Rs. 400 crore.

Which resolves the distinction of the earlier rule that said:

  • if your market cap is 3800 cr. you have to dilute 25% (950 cr. IPO)
  • if your market cap is 4200 cr. you can dilute 10% (420 cr. IPO)

Now:

  • If your market cap is 3800 cr. you have to dilute 400 cr. worth (since it’s lower than 25% of market cap)
  • if your market cap is 4200 cr. you still have to do 420 cr.
  • if your market cap is 1000 cr. you have to dilute 250 cr. (since it’s 25% and that’s lower than 400 cr.)

Excellently done. This would have really helped companies like JustDial where the investors didn’t want to dilute that much, but the post market cap was just short of 4,000 cr.

  • In any case, within three years of listing, the company must dilute 25% in total.
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The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at deepakshenoy@gmail.com.