Capital Markets

Richa ChoudharyPartner

Avanti KaleSenior Associate

Key Developments

• Confidential filing for initial public offerings

  The Securities and Exchange Board of India (SEBI) had issued a consultation paper in May 2022 on ‘Pre–filing of Offer Document in case of Initial Public Offerings’. On 21 November 2022, it notified the SEBI Issue of Capital and Disclosure Requirements (Fourth Amendment) Regulations, 2018 (SEBI ICDR Amendment Regulations) to allow issuers the option for confidential filing of draft offer documents (Confidential Filing). This will help issuers obtain confidential regulatory feedback on the offer document, before making it available to the public.

  • Process

    • The pre-filed draft offer document is required to be submitted to SEBI and stock exchanges for their comments and/or approvals on a confidential basis (Pre-filed DRHP). SEBI will then issue observations on the document within a stipulated time prescribed under the SEBI ICDR Amendment Regulations (SEBI Observations). A public announcement of the Confidential Filing must be made along with other processes required by a general initial public offering (IPO).
    • After receiving the SEBI Observations, the issuer may file an updated draft offer document with SEBI, no later than 16 months from the issuance of the SEBI Observations (UDRHP-I) and the issue may be opened not later than 18 months after that date.
    • The UDRHP-I must be made available to the public for comment for a period of 21 days. Once this period ends, another updated draft offer document will be filed with SEBI incorporating comments from the public in the UDRHP-I (UDRHP-II). After the issue opens, the procedure for general IPO must be followed.

  • Key features

    • The Pre-filed DRHP may be used for limited marketing with qualified institutional buyers (QIBs) and a list of QIBs must be maintained by the issuer and the merchant bankers. SEBI must be informed once interactions with QIBs are closed.
    • Outstanding convertible securities, or any other right which would entitle any person with any option to receive equity shares, may subsist till issuance of SEBI Observations on the Pre-filed DRHP.
    • The one year prior holding period for the purposes of offer for sale by a shareholder will be considered from the date the UDRHP-I is filed.
    • The re-filing criteria of the Pre-filed DRHP will be similar to the existing re-filing requirements for general IPOs such as addition/deletion to the objects of the offer, increase/decrease in the offer size or fresh issue component. The only difference is that under the Confidential Filing, the threshold for re-filing has been increased to 50% as compared to 20% of the offer size for general IPOs in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (SEBI ICDR Regulations). There are also additional criteria that apply to general IPOs which will also apply to filings of updated Pre-filed DRHP and UDRHP-II, along with fee payments.

    The introduction of a confidential filing regime, which has been tested successfully in several overseas jurisdictions, will help to make the capital raising process attractive to all types of issuers. Although the intent is to give the issuers the benefit of pre-cleared disclosures without compromising on confidential competitive information, these benefits will need to be balanced with extended IPO timelines and the risk of losing the market.

• Disclosures related to key performance indicators

  Considering the increased scrutiny of valuation of IPOs, the SEBI ICDR Amendment Regulations have proposed detailed disclosures of financial and operational key performance indicators (KPIs) to justify the offer price determined.

  Historically, SEBI ICDR Regulations mandated disclosure of select financial ratios in the offer documents. However, over the last several months SEBI has sought justification, by way of specific observations, for the IPO valuation, based on the valuation considered for recent private investment rounds.

  The key changes to disclosure requirements proposed by the amendments are:

  • Comprehensive disclosure of KPIs and alignment of the KPI period with the financial information disclosed in the offer documents;
  • KPIs to be approved by the audit committee and certified either by the statutory auditor or a peer reviewed chartered accountant;
  • Details of the primary and secondary transactions undertaken by the issuer and the price at which a significant number of shares (exceeding 5% of the fully diluted pre-transaction share capital) have been issued in the last 18 months (whether in a single tranche or on a rolling basis over a 30 day period);
  • Disclosures must also include the comparison of the floor price and cap price in the IPO against the weighted average cost of acquisition (WACA) based on primary or secondary transaction(s);
  • Recommendation of a committee of independent directors of the issuer for justification of the price band based on quantitative factors/KPIs vis-à-vis the WACA; and
  • Disclosure of KPIs on a periodic basis for at least a year after listing, or until all issue proceeds have been utilised.

• Other key amendments

  • The SEBI ICDR Amendment Regulations now mandate monitoring the utilisation of the issue proceeds, by SEBI registered credit rating agencies, for qualified institutional placement and preferential issues where issue size exceeds INR 100 crore, aligning with provisions for public issues and rights issues.
  • Issuers now must file the offer documents for IPOs, rights issues, and further public offers with SEBI at its head office, and not with the relevant regional office of SEBI.

The latest round of amendments aim to address several challenges on valuation and disclosure related sensitivities. The year 2023 has already started on an interesting note, with SEBI amending the ‘offer for sale (OFS) through stock exchanges’ route for listed companies. The recent changes expand the OFS route to non-promoter shareholders of listed entities with market capitalisation of INR 1,000 crore or above (for a period of six months prior to OFS opening), subject to a minimum offer size of INR 25 crore. This is noteworthy because the OFS route was previously only available to promoters and the promoter group entities of listed companies, who used it as a preferred method for offloading partial stakes to meet regulatory minimum public shareholding norms (often breached during M&A transactions). These changes would now permit institutional investors in mid-large listed entities to achieve relatively quick sales of their holdings through stock exchanges, providing an effective alternative for exiting residual holdings or complying with regulatory requirements, compared to negotiated off-market transfers.

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