Untested rule takes bite out of Zomato IPO

Many early stage foreign investors in Zomato are unable to buy shares in the company’s
initial public offering (IPO) with the Reserve Bank of India (RBI) telling large MNC custodian banks on the eve of the issue to stick to a 2019 regulation that restricts a foreign investor from holding equity as foreign direct investor (FDI) and as foreign portfolio investor (FPI) in the same company.

Tuesday’s RBI communication was in response to a clarification sought by banks like HSBC, JP Morgan, Citi, and Deutsche, which act as custodians, holding shares on behalf of offshore investors. An overseas investor buying stocks of an unlisted Indian firm steps in via the FDI route, but requires an FPI licence from Sebi for subscribing to an IPO or buying shares of a listed firm in the secondary market.

Earlier, the same entity could take both the routes. However, the ‘non-debt regulations of October 2019’, which largely escaped attention so far and are now being tested with the Zomato IPO, have complicated matters.

Most FDI investors in Zomato were keen to participate in the IPO to avoid a post-issue dilution of their stakes. Their absence, however, would improve chances of other foreign investors (i.e FPIs) to get a slice of the issue.

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“Technically, an FDI investor in Zomato can take an FPI registration and apply for the IPO. But practically, it’s difficult as registration formalities with Sebi takes about a month,” a senior banker told ET.

One of the FDI fund investors in Zomato has used another existing FPI vehicle to come in as an anchor to the IPO. But it’s not the same as the underlying group of investors in the two vehicles (FDI and FPI) may be entirely different,” a senior banker told ET.

In this case, investors who had contributed to the FDI pool may not be in a position to gain from any possible upside from the IPO which is being subscribed or anchored by the FPI entity that has probably raised money from another set of investors having a different investment outlook and thesis — though the asset manager of both vehicles is the same global group.