SEBI’s demand for more disclosures creates hurdles in IPO process

Recent directives by the Securities and Exchange Board of India (SEBI) on enhanced disclosure for companies filing for initial public offerings (IPO) has put law firms and investment banks in a quandary as they feel that some of the disclosures are not relevant to the business of the companies and there is little clarity in them, prolonging the entire process.

“It is important to strike a balance such that information which is material for investors to make an investment decision does not get obscured in this process,” said Abhimanyu Bhattacharya, Partner, Khaitan & Co.

In May, the markets watchdog issued a long list of 31 additional disclosures to be made by IPO-bound companies “for faster processing of documents”. But the enhanced disclosures have only created more headache for the intermediaries as some of the asks from SEBI are not clear, entailing the need for more clarifications. The general feeling is that the disclosures may not be relevant and important enough for investors to make investment decisions.

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Sources in the legal fraternity said the regulator started asking for more disclosures when a couple of years back some new age tech companies listed at considerable discounts to their issue prices and the shares languished for quite a while, leading to losses for investors in the short term.

Another flashpoint was in the case of FirstCry IPO filing where SEBI asked for more disclosures in respect of its key performance indicators. Now the regulator is also asking for information on key performance indicators (KPIs) that have been shared with some large investors while raising funds in private rounds.

Case of overkill?

SEBI has been insistent that disclosures would help investors in their investment decision. But in this laudable endeavour to protect investor interest, lawyers and bankers feel that there may be a case of overkill.

A law firm executive, who deals regularly with IPOs, pointed out that every data point that is asked for by the regulator is followed by considerable due diligence, data retrieval, verification process at the back-end, requiring “tremendous time and effort from the issuer and has a corresponding cost attached to this exercise which may not be justified in all cases”.

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Some of the disclosures pertain to allottees of ESOP schemes, utilisation of pre-IPO proceeds, pre-IPO placement price and names of shareholders to whom the allotment has been made, conflict of interest between suppliers of raw material and third party service providers and the company, among others.

A senior partner in a law firm, who did not want to be named, said that information should be left to market demand. “If the investors want this information then they will ask for it,” he said. Companies have complained to law firms that some of the information being sought is critical to their work and cannot be disclosed to the public.

However there are others who feel that the disclosures are justified.

“The disclosures that SEBI is increasingly asking for such as clarity around the business model, growth strategy, segmental performance details, KPIs, supplier, customer dependence, pre-IPO placement details, are customary in any private market transaction,” said Ashish Bagadia, Partner, Corporate Finance, and Investment Banking, BDO India.

“Disclosing most of these factual details should not be a challenge,” he added.

These disclosures and follow-on clarifications sought by SEBI could prolong the approval process, Bagadia agreed, but added that speed can’t supersede investor protection.