MC Explains: What is confidential IPO filing and why do companies do it?

On December 1, Tata Play became the first ever firm to pre-file confidential papers with the Securities and Exchange Board of India (SEBI) for an initial public offering (IPO).

As the name suggests, details filed about the business have not been released to the public, unlike the normal route when the entire draft red herring prospectus (DRHP) is publicly available as soon as it is filed with the market regulator.

Also Read: Tata Play becomes first firm in India to take ‘confidential’ pre-filing route

Here is all you need to know about the new IPO filing mechanism:

What is the existing concept?
The existing mechanism has certain steps that companies have to follow ahead of the launch of an IPO. This includes appointing merchant bankers, filing DRHP with the Sebi which consists of detailed information about the company, issue of Sebi’s observations on the draft, filing updated DRHP incorporating Sebi’s observation, and then refiling red herring prospectus with Sebi and Registrar of Companies.

Most of the information filed with Sebi is publicly available at every step except the updated DRHP. The confidential filing will make the IPO paper public only after a company files updated DRHP after Sebi has issued its observations on DRHP.

Has the old concept been removed?
No. Confidential filing or “pre-filing” is an optional mechanism that will be available to companies seeking to raise money via IPO route. Those who want to use the traditional method can do so as well.

What is this new concept?
To be correct, confidential filing of IPO papers is not new. It has been practiced in developed markets such as the UK, Canada and US for a long time. However, in India this concept was introduced in November 2022.

Most of the process of filing IPO papers is the same except that details of the IPO will be made public at a different juncture.

So, will the public be kept in the dark about the IPO?
Not really. Companies will have to disclose the fact that they have filed papers for IPO with the Sebi as happened in case of Tata Play. Only the DRHP will be disclosed later.

What was the need for confidential filing?
The need arises because of two reasons: A DRHP contains a lot of sensitive information and many companies decide not to go for an IPO even after filing the DRHP as market conditions evolve.

By law, DRHP needs to have a multitude of information. This includes business plans, risks, legal cases and other information that may not be otherwise available to its competitors who may exploit the information following a DRHP is made public.

Juxtapose it with the fact that during FY19-21, out of 129 companies that filed IPO documents 57 companies decided not to go for an IPO due to volatility in market conditions or some other factors.

This means the sensitive information was laid bare for everyone to see even when the companies remained privately held after deferring their IPO plans. For some, this may have a negative bearing on their business.

Thus, practice of confidential filing facilitates disclosure of an information rich document for investors to consume at an appropriate time when the issuer is ready to go for listing and at at the same time protects the interests of the issuers who want to call off their IPO plans.

Are there any constraints on companies in the new mechanism?
Yes. Unlike the traditional method where companies can market their IPO in whatever way they want, if companies choose confidential filing, they will be allowed for limited marketing for testing the waters with qualified institutional investors (QIBs).

Extensive marketing can only be done after updated DRHP is filed with Sebi.

What will be the timeline of IPO under the new mechanism?
Since companies will be allowed to fully market their IPO only after updated DRHP is filed, the Sebi has also extended the timeline for such IPOs. Unlike in the traditional method where companies are allowed to launch IPO within 12 months from the date of Sebi Observation is issued, in the confidential filing the IPO can be launched within 18 months from the date of Sebi Observation. This is subject to issuers filing an updated DRHP within 16 months from the date of Sebi observation.

What are the other benefits for companies choosing the confidential filing route?
There are a couple of more benefits for companies that choose this route. Until the Sebi observation on initial draft is issued, companies will have flexibility to issuance of new Shares or compulsory convertibles securities. Moreover, they may also make changes in director, promoter, objects of issue, etc. without requirement of refiling. This will be a big positive for new age companies who can raise money privately even after filing for an IPO.