Sebi Alters Market Capitalization Rules, Adopts 6-Month Average

The Securities and Exchange Board of India (SEBI), the country's capital markets regulator, has announced a revised methodology for calculating the market capitalization of publicly listed companies.

The new amendment, effective December 31, 2024, will change the compliance ranking system. It will now be based on the average market capitalization between June 1 and December 31. This change follows a recommendation from an expert committee headed by former SEBI member SK Mohanty, aimed at improving the ease of doing business.

This amendment aims to provide a more accurate representation of an entity's market capitalization and its ranking by considering a longer timeframe, rather than relying on a single day's market cap, which can be volatile.

As per SEBI's recent amendments, all publicly traded companies will utilize the six-month average market capitalization. Industry experts note that market forces cause the market capitalization of a listed company to vary on a daily basis. Consequently, employing an average market capitalization over six months offers a more reliable assessment of a company's market size and comparative standing within its industry.

Upon the initial listing of a company on the stock exchange, relevant provisions become applicable to the listed entity for the first time. If an interim period has elapsed, the provisions apply three months after December 31st (i.e., April 1st) or at the commencement of the subsequent fiscal year, whichever is later.

To facilitate regulatory compliance for companies seeking an initial public offering (IPO), SEBI has introduced a provision allowing non-promoter shareholders to contribute towards the minimum promoter contribution without being classified as promoters.

Before this amendment, SEBI's promoter contribution norms mandated that at least 20% of promoters' shares be held in lock-in for a specified duration following an IPO listing.

In addition to these measures, the Securities and Exchange Board of India (SEBI) has provided a relaxation for companies seeking to fill vacancies in key managerial personnel (KMPs). SEBI has extended the timeline for filling such vacancies from three months to six months.  

Following SEBI's recent amendment to the SEBI (Issue of Capital and Disclosure Requirements) Regulation 2018, companies preparing for IPOs or fundraising will now experience a simplified process, promoting ease of doing business.

SEBI’s new method for calculating market capitalization aims to provide a more accurate and stable representation of a company's size in the market. This change, alongside other modifications, is part of SEBI's continuous efforts to simplify regulatory procedures and improve the business environment in India.