SEBI proposes easing offer-for-sale norms: What investors need to know about exemption for holding period

The Securities and Exchange Board of India (SEBI) has proposed easing the offer-for-sale (OFS) norms by relaxing the mandatory one-year holding period for equity shares to be eligible for OFS in an initial public offering (IPO) or follow-on public offering (FPO).

An Offer-for-Sale (OFS) happens when existing shareholders like founders, promoters, or early investors sell their shares to the public during an Initial Public Offering (IPO) or Follow-on Public Offering (FPO).

Under the current regulations, these shares must be fully paid-up equity shares held for at least one year before the draft offer document is filed.

However, an exemption exists for shares acquired through a court- or government-approved scheme, provided the business and invested capital have existed for over a year before the scheme’s approval.

In a consultation paper, SEBI said it has identified an ambiguity in cases where shareholders receive fully paid-up compulsorily convertible securities (CCCS) under such schemes, which are later converted into equity shares for sale.

The current rules don’t clearly say whether these converted shares qualify for the exemption.

The regulator has proposed amendments to explicitly include equity shares from converted CCCS under the exemption.

"The rationale behind the one-year holding period under Regulation 8 of the SEBI ICDR Regulations serves objective of demonstration of long term commitment by shareholders before shares are offered for sale," SEBI said.

"Accordingly, eligibility of equity shares to be offered for sale would need to be calculated based on the period of existence of “invested capital”."

SEBI's proposal

SEBI has proposed that Regulation 8 proviso be amended and read to include equity shares arising out of the conversion of fully paid-up compulsorily convertible securities acquired pursuant to any such scheme.