Making a sense of pre-filing of IPO documents

What has the market regulator proposed?

Sebi has proposed that the companies should submit the initial offer document only with itself and the stock exchanges. The market regulator will seek clarification from the lead managers of the issue and make observations within 30 days from the receipt of the clarifications. The issuer company will then have to file an updated draft red herring prospectus (UDRHP), which will be a public document, along with the observations that have been made by the regulator. The company can then decide whether to go public on the basis of the market conditions and their own financial requirements.

What prompted Sebi to make the proposal?

Market participants had raised concerns about safety of sensitive information contained in their draft offer documents, access to which may benefit competitors. Another problem is timing of IPOs. Any delay caused by market conditions raises questions about the “recency" of comments received from potential institutional investors during roadshows, affecting price and issue size estimates, Sebi said. Typically, the RHP is available for two-five days before the issue opens. Sebi’s observations and the latest financials for investors are not available in the public domain for long, which adds to concerns.

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What is the system followed in the scenario worldwide?

Many jurisdictions, such as the UK, Canada and the US, permit pre-filing of the offer document for review by regulators. If issuers decide to proceed with the offer, the document is made public. Indian companies are required to file a draft prospectus that is made public for 21 days. A final prospectus is filed for approval after integrating regulatory inputs.

What can introducing the system resolve?

Experts are divided. On the one hand they say it will benefit issuer and investors by alleviating some concerns around sensitive company information being disclosed upfront in offer papers. On the other, they say the discussion paper suggests multiple filings, including the pre-IPO papers, a UDRHP, and yet another DRHP that captures all the necessary observations of the market regulator, which may lengthen the IPO approval process. It may upset investors at large, experts said.

How can the proposed system be effected?

Sebi has merely come out with a discussion paper and invited comments from the public, as it generally does for other substantive changes. Following feedback from the public, including that of stakeholders, Sebi will decide whether it wants to codify and incorporate this as a rule or not. Even if the rule is introduced, it may take time to be implemented, as the scale of change that will be needed is substantial. As such, the current filing procedure will be followed for the time being.