SEBI Objects to Companies Using IPO Funds for Promoter Loan Repayment - Read Here

The Securities and Exchange Board of India (SEBI) is taking a firm stance against companies that intend to use funds from their initial public offerings (IPOs) to pay back loans taken from promoters or promoter entities. Sources have informed Moneycontrol that this objection has led to delays in several IPO processes, as SEBI has directed companies to either modify their use of proceeds or find alternative financing methods to repay these loans.

While existing capital market regulations do not explicitly prohibit the use of IPO proceeds for repaying promoter loans, SEBI is currently hesitant to approve these applications. This has left some companies in a state of uncertainty, as they must now revise their plans for the funds they aim to raise.

For instance, when companies submit their IPO documentation, they are required to clearly outline their intended use of funds. In several cases, SEBI has suggested that companies refinance their promoter loans through financial institutions and then utilize the IPO proceeds to repay those institutions instead.

Merchant banks have responded by reaching out to SEBI to reconsider its position. A meeting is expected to take place this week to explore potential solutions to this issue. Interestingly, in the past, SEBI has allowed similar uses of IPO funds, although there are limited precedents.

One notable case is that of Afcons Infrastructure, a construction firm under the Shapoorji Pallonji Group. The company had to drop its plans to allocate part of its IPO proceeds for repaying a loan from Shapoorji Pallonji Finance, a related party within its promoter group. Following SEBI's observations on its draft prospectus, the Rs 100 crore originally earmarked for this loan will now be redirected to pay off loans from State Bank of India.

As companies navigate this regulatory landscape, SEBI’s new directive raises important questions about funding practices and the relationship between promoters and their businesses. Investors and market participants will be keenly watching how this situation unfolds.

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