The Securities and Exchange Board of India ("SEBI") amended the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 ("ICDR Regulations 2018") by way of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations, 2021 ("ICDR Amendment 2021/the Amendment") in August 2021.

The key aspects of the ICDR Amendment 2021 relate to the reduction of lock in period for promoters post an initial public officer ("IPO").

What the new provisions entail

As per the new provision 16(1)(a) of ICDR Regulations, the minimum promoter's contribution ("MPC") post an IPO has a lock-in period of 18 months (vis-à-vis the lock-in period of 3 years earlier). The rider is that if majority of the issue proceeds are proposed to be utilized for capital expenditure – the lock-in is for a period of 3 years. The same conditions also apply for promoters holding an excess of MPC [Regulation 16 (1)(b)].

Additionally, the new amendment to Regulation 17 is that the lock-in period for persons (other than promoters) who hold the entire pre-issue capital is 6 months (the earlier lock-in period was 1 year).

Rationale for reduction of lock-in period

Previously, the lock-in of promoters' shareholding for 3 years was considered necessary in order to ensure continuous 'skin in the game' by the promoters post an IPO.

However, current trends indicate that companies which go public are well established with mature businesses, have pre-existing institutional investors and their promoters have already demonstrated 'skin in the game' for several years before going public. There is no longer a need to have a lock-in period of 3 years with respect to the aspect of ensuring participation by the promoters, which plays into the concept of "personality driven" public issues.

Moreover, an analysis which was carried out of the companies that got listed during 2007–15 indicated that in several of these companies, the promoters did not materially sell their shares even after the expiry of the lock-in period.

Interpretation and applicability of the ICDR Amendment 2021

There is nothing explicit in the text of the ICDR Amendment 2021 to demonstrate that the intention behind the Amendment was to apply it retrospectively. Thus, in our interpretation, the ICDR Amendment 2021 will now apply prospectively.

There are however certain interpretational issues, in the ICDR Amendment 2021, which may arise with respect to different classes of promoters. For instance, if companies have not yet completed their public issue will they be eligible for the new ICDR Amendment? In our view, the answer is in the affirmative. The Red Herring Prospectus may be amended and these companies should be given the benefit of the amendment, upon application to SEBI.

On the other hand, a company, which has completed its public issue prior to the ICDR Amendment 2021, was governed by the pre-existing ICDR Regulations, 2018 as it stood at the time of completing the public issue.

The Way Forward and Rights of Shareholders

Given this scenario, it is important to understand the rights of the shareholders.

A prospectus is a contract between the promoters and the investing shareholders. As per the Companies Act 2013 ("Companies Act"), any changes proposed to be made to the terms of contracts in the prospectus must be ratified by shareholders.

Given the above compliance with the Companies Act, corporate India is still ambivalent if the changes in lock-in period (as prescribed by the ICDR Amendment 2021) need to be modified in the prospectus and ratified by shareholders. It would be prudent for promoters to clarify the above with SEBI.

Assuming SEBI were to allow the promoters and persons other than promoters to modify their lock-in period, the pertinent question would be whether SEBI's approval is suffice or whether the promoters and persons other than promoters would then need to approach the shareholders for approval of change in lock-in period, as per Section 27 of the Companies Act.

Also, once the promoters approach the shareholders, another contentious issued would be, whether the promoter can be allowed to vote in the shareholder's ratification for change in lock-in period.

A clarification from SEBI on all these aspects would be much welcomed by the securities market.

This article has been published in Business World Legal.

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