MUMBAI: The monitoring of IPO proceeds is about to get much stricter. Regulators are planning to make the process more stringent. They will likely allow rating agencies to update stock exchanges directly with data on how companies comply with end-use norms.
Current Monitoring System
Right now, SEBI requires equity issuers to appoint a credit rating agency for most equity issues. This excludes offer-for-sale transactions where the company does not receive any money. The appointed CRA tracks the end-use of IPO funds. It files quarterly reports in a specific format until full utilisation occurs. These reports are then placed before the audit committee for review.
Proposed Changes for Better Oversight
Manu Sehgal, CEO of Brickworks Ratings, revealed the new proposal. He said, "There is now a proposal to strengthen the monitoring process. It involves giving rating agencies access to the stock exchange to update the end-use report." Sehgal added that regulators also want to standardise and structure the objects of the issue. This move aims to facilitate better monitoring and ensure funds are used as intended.
Background and Framework
The monitoring requirement for issues above Rs 100 crore originates from the ICDR framework. SEBI made an important amendment on January 14, 2022. This amendment designated CRAs as the sole monitoring agencies for such issues. Later proposals in 2022 expanded the coverage. They included preferential issues and QIP issues under the monitoring umbrella.
Impact on Issuer Behavior
According to Sehgal, the end-use monitoring requirement has already shown positive effects. It has resulted in better behavior among issuers. In the past, bull runs in the markets created opportunities for misuse. Some issuers took advantage of strong equity conditions to raise funds. They subsequently diverted these funds for other purposes not disclosed in the IPO documents.
New Opportunities for Rating Agencies
Fresh equity issuances and a surge in corporates tapping debt markets have opened new avenues. Rating agencies are benefiting from this increased activity. Brickworks Ratings serves as an interesting case. The agency came under a SEBI ban from rating activities previously. It repositioned itself last year after a complete restructuring. The company also changed its board and top management to comply with regulatory standards.
The proposed changes signal a significant shift in how IPO funds will be monitored in India. Direct reporting to stock exchanges could enhance transparency. It may also deter companies from misusing investor money. Market participants are watching these developments closely as they could reshape compliance practices in the capital markets.
