SEBI’s revised framework for issuance of observations on draft offer documents in public offerings

Introduction

• When an offer document is filed by an issuer with the Securities and Exchange Board of India (SEBI), SEBI on its review can either prohibit the company from issuing the prospectus or offer document or provide observations specifying conditions subject to which these can be issued.On 8 December 2006, SEBI issued the SEBI (Issuing Observations on Draft Offer Documents Pending Regulatory Actions) Order, 2006 (2006 Order) to formalise the issuance of observations on draft offer documents filed for a public offering (Observations), where an investigation, enquiry, adjudication, prosecution or other regulatory action is pending against the issuer or its promoters/directors/group companies (collectively, the Parties). On 5 February 2020, the 2006 Order has been replaced by the SEBI (Issuing Observations on Draft Offer Documents Pending Regulatory Actions) Order, 2020 (General Order) to streamline and bring certainty to timelines for the issue of Observations by SEBI.

  While determining the permissibility of a public offering, SEBI takes into consideration pending adjudicatory, regulatory and other proceedings against the Parties and therefore timelines for the issuance of Observations are critical. Although the 2006 Order clarified the approach and timelines for keeping Observations in abeyance (if a probable cause of violation was found or show cause notice issued), it did not adequately address timelines to be followed for keeping Observations in abeyance when proceedings against Parties were not concluded within given timelines for reasons beyond SEBI’s control or owing to the conduct of the Parties themselves. Further, there was no provision to address cases where (i) proceedings for recovery against any of the Parties was initiated by SEBI; (ii) an order for disgorgement or monetary penalty was passed against any of the Parties and was not complied with; (iii) any direction issued by SEBI was not complied with by any of the Parties; or (iv) the issuer was restrained by a court from making a public issue or filing offer document.

  The General Order therefore addresses some of these gaps.

• Key Changes

  • Reduction in timeline for keeping Observations on draft offer documents in abeyance to 30 days (earlier 45 days)

    Where there is a probable cause for investigation/enquiry or where an investigation or enquiry is ongoing, the timeline for keeping Observations in abeyance has been reduced to 30 days (earlier 45 days) from the later of, (i) the date of such probable cause of violation being found; or (ii) the date of filing of the draft offer document.

    Further, the General Order provides that if SEBI cannot conclude proceedings within this period for reasons beyond its control or owing to the conduct of entities other than the Parties, Observations should be kept in abeyance for a further 30 days. However, if the delay in concluding proceedings is due to the conduct of any of the Parties, Observations should be kept in abeyance until the conclusion of the investigation, enquiry or examination.

  • Timeline where show-cause notice is issued and conclusion of proceeding is delayed

    Under the 2006 Order, if a show-cause notice was issued to Parties, Observations were to be kept in abeyance for 90 days from the filing of the draft offer document. In the absence of an interim or final order within this period, the Observations were issued, subject to relevant disclosures in the offer document about the show cause notice and the possible adverse impact of an order.

    The General Order retains the timeline provided under the 2006 Order, but clarifies that if SEBI cannot conclude proceedings in 90 days for reasons beyond its control or owing to the conduct of entities other than the Parties, Observations should be kept in abeyance for a further period of 45 days. Then again, where the delay is due to the conduct of the Parties, the General Order provides that the Observations should be kept in abeyance until the conclusion of the proceedings.

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