The board of Securities and Exchange Board of India last week approved a proposal to introduce pre-filing of offer documents as an optional alternative mechanism to launch IPOs on the main board of the stock exchanges.

A pre-filing mechanism allows issuers to carry out limited interactions without having to make any sensitive information public. Further, the document, which incorporates SEBI’s initial observations, would be available to investors for a period of at least 21 days, thereby assisting them in their investment decision-making process. 

“The existing mechanism of processing offer document shall continue in addition to this alternative mechanism of pre-filing,” SEBI said.

Current procedure

When a company decides to go for initial public offering to raise funds from investors, the first step is to prepare a draft red herring prospectus (DRHP). For that, the company reaches out to underwriters, merchant bankers, investment bankers and company auditors to do a due diligence and prepare DRHP.

Once initial papers are ready, the next step is to approach SEBI. The registrar on behalf of the company files a DRHP and related documents with SEBI, and responds to and satisfies the regulator’s comments.

If satisfied with responses, SEBI issues ‘observations’ on the offer document with clearance to the issuer to go ahead with IPO within 12 months. The company then files the red herring prospectus with the Registrar of Companies and simultaneously discloses price of the issue.

Then the IPO will be marketed through roadshows and other advertisement tools, and finally be launched on the proposed exchanges. Once successful, shares are listed at the bourses. The whole process can take less than 3 months.

Key reforms

SEBI has made several reforms in the IPO process, especially introduction of ASBA and reduction of offer window, which has been reduced to just 3 days now.

Getting allotment or refund was not that easy earlier. Besides, there were several instances where only select investors garnered shares in the guise of retail investors to make listing gains. To check these malpractices and protect investors from fly-by-night promoters, SEBI had introduced applications supported by blocked amount or ASBA framework through which the application amount will be blocked in the investor’s account itself. On allotment or non-allotment, cash would either be moved or unblocked.

SEBI has now introduced a process to undertake draft filings confidentially as an alternative, in addition to the current process. It has aimed to balance the public review process by adding 21 days subsequently.

Testing waters

Only time will tell how effective the process is, though there is no harm in testing the waters with new proposals. 

“Given that the initial filing is confidential, it will have its own benefits and align with processes in other jurisdictions around the world. Whilst detailed amendments are awaited, one hopes that this subsequent public review will not result in timeline impact on launch of the IPO. Coming at the back end of the process, in volatile markets, every day can be quite crucial,” Yash J Ashar, Partner (Head – Capital Markets), Cyril Amarchand Mangaldas, said.

Preventing price speculation

According to Arka Mookerjee, Partner at JSA (law firm), the introduction of pre-filing of an offer document is a well-established procedure in several mature international jurisdictions, it is a move in the right direction by the regulator aimed at preserving confidentiality of nuanced business and financial information from competitors until an issuer is certain of a launch. This will go a long way in preventing price speculation, which currently happens way before the official IPO.

It will, however, be interesting to take a view on the content of the roadshow presentations and the procedures around that, keeping in mind the current publicity regulations, he said.

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