Where the money goes

Chapter 1 established that only the fresh issue part of an IPO reaches the company. This chapter is about what it says it will do with it, and it is the section of the offer document with the best ratio of insight to reading time.

The objects of the issue

A fresh issue must disclose its objects — a list of uses with an amount against each. Typically: repay debt, build a plant, fund working capital, invest in a subsidiary, pay the issue expenses, and general corporate purposes.

The list is a set of claims about the future, and it is the clearest statement of intent a company ever makes. Two features are worth reading closely.

Specific beats vague. "Repayment of identified borrowings of ₹420 crore" is checkable — the borrowings are listed, and repaying them has a known effect on the interest bill. "Funding organic growth initiatives" is not checkable by anyone.

The proportions are the message. An issue that is mostly debt repayment is a balance sheet being repaired. One that is mostly capital expenditure is a bet on capacity the company believes it can fill. One that is mostly general corporate purposes has told you very little.

The two caps

Vagueness is not unlimited, and the limits are specific.

Under Regulation 7(2) of the ICDR regulations, the amount for general corporate purposes "shall not exceed 25% of the total amount being raised by the issuer".

SEBI later added Regulation 7(3), which deals with money earmarked for acquisitions the company has not yet identified. In SEBI's own drafting:

The amount for general corporate purposes, and such objects where issuer company has not identified acquisition / investment target … shall not exceed thirty five per cent. of the amount being raised by the issuer.

with a proviso that the unidentified-acquisition part alone "shall not exceed twenty five per cent".

So there are two tests, and both must hold:

• unidentified acquisitions ≤ 25% of the fresh issue,
• unidentified acquisitions plus general corporate purposes ≤ 35%.

SEBI's own example of how an issuer may use the room: allot 25% to the unidentified object and 10% to general corporate purposes, or 25% to GCP and 10% to the unidentified object. Either way, at least 65% of a fresh issue must have a stated, identified use.

The caps fall away if the acquisition target is identified and specifically disclosed — which is the regulation's way of saying that naming what you are buying buys you freedom.

The hole in the monitoring

Larger fresh issues appoint a monitoring agency to report on whether the money went where the document said. It is a genuinely useful mechanism, and it has one exemption.

Under Regulation 41(2), proceeds raised for general corporate purposes are not required to be monitored by the monitoring agency.

Put the two rules next to each other and the shape is clear. Up to a quarter of a fresh issue can be earmarked for a purpose that is not specified, and that same quarter is the part nobody has to report on afterwards. The cap exists precisely because the category is unaccountable.

This is not a scandal — every company needs some unallocated cash, and 25% is a cap rather than a target. It is a reason to treat the general corporate purposes line as the least informative rupees in the issue, and to notice when it is at the limit.

Reading an offer for sale in the same breath

An offer for sale has no objects section, because the company receives nothing. The document will say so directly: the company will not receive any proceeds from the offer for sale.

That is why chapter 1 insisted on the split. A ₹3,000 crore issue with ₹500 crore fresh has one-sixth of the money going to work and five-sixths going to sellers, and the objects section — with all its caps and monitoring — governs only that one-sixth.

The questions to ask

1. How much is fresh, and how much is offer for sale?
2. Of the fresh issue, how much has a named, checkable use?
3. Is general corporate purposes at or near its 25% cap?
4. Is money set aside for acquisitions with no target named?
5. If debt is being repaid, what does that do to the interest bill — and why was the debt there?

Five questions, answerable from one section, and they cover most of what an IPO's stated purpose can tell you.

The point

General corporate purposes is capped at 25% of the amount raised, unidentified acquisitions at 25%, and the two together at 35% — so at least 65% of a fresh issue must have a named use. The unmonitored part is the unspecified part.