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SEBI widens disclosure norms for IPOs

The Securities and Exchange Board of India (SEBI) has sent a 31-point advisory to investment bankers, requiring enhanced disclosures and increased due diligence on companies tapping the market for initial public offerings (IPOs).

The advisories may make life difficult for companies, bankers and legal firms alike, make offer documents bulkier and push back IPO timelines considerably. The frequent use of such advisories – which are more informal in nature and not law – may end up undermining the current ICDR (Issue of Capital and Disclosure Requirements) Regulations as well, cautioned experts.

Offer documents not in conformity with the guidelines will be returned, a mail sent to bankers last week said.

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Fiat to bankers

Bankers, for instance, have been advised to ensure that any entity or person having any special right under articles of association or shareholders’ agreement (SHA) should be cancelled before filing the updated draft red herring prospectus. Until a few months ago, such rights were cancelled post listing – the objective being that all non-promoter shareholders should have equal rights once the company is listed.

In the past few months, however, the regulator has been insisting on cancelling these rights before the filing of red herring prospectus. This could mean that the shareholders, including private equity players, will forfeit their special rights even if the IPO does not go through.

“An amendment to the SHA is structured in a manner that it automatically terminates on listing or restores to the original if the IPO is withdrawn or SEBI’s final observations expire. The 3-5 weeks from filing of UDRHP until listing will now be nerve-wracking for PE investors given the uncertainty on exercising their SHA rights,” said an industry official.

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Bankers have been told to intimate the Registrar of Companies (RoC) about any missing or untraceable RoC filings before filing the draft prospectus. “In a way, this is like forcing the company to approach a regulator and say you have a problem. The RoC may not be aware of these filings. Subsequent to intimation, if the RoC initiates any action, the company will not be able to defend itself,” said a banker.

Bankers have to confirm and disclose, along with justification, if the issuer company is in compliance with The Companies Act, 2013 with respect to issuance of securities since inception till the date of filing the draft prospectus. They need to confirm if any of the investors in the company is directly or indirectly related with the book running lead managers and their associates.

“Each banker will have to go through the list of all shareholders, which could be in thousands. This information will be of no real relevance to investors and simply make the offer document bulkier,” said a lawyer.

Lack of disclosures

While some of the advisories may have been driven by past missteps or lack of disclosures by companies, market watchers believe that these could have been more carefully worded and less open-ended.

“The regulator should go through a proper consultative process and amend the regulations. So many informal observations will end up undermining the sanctity of the ICDR regulations,” said a lawyer.

An email sent to SEBI did not get an immediate response.

To be clear, SEBI has been issuing these advisories through the Association of Investment Bankers of India for over two years now. Advisories that are clarificatory in nature help interpret SEBI regulations and align companies to standard market practices.

Pointers

Information overload?

Bankers to disclose if allottees under disclosed ESOPs scheme are employees only and all grant of options are as per Companies Act, 2013

Give details of employees whose Provident Fund dues are paid and unpaid

To incorporate all regulatory comments or observations in future filings

Provide details of acquisition of securities of issuer through secondary transactions

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