Dalal Street Confidential: Why has India Inc warmed up to pre-filing of IPOs?

Then, there was a long lull until Swiggy took the plunge and in the last year, as many as seven firms, including the food delivery major, have warmed up to the option.

Why?

Let us take a closer look at the emergence of this latest capital market trend, which has found favour earlier in US, UK, Hong Kong, and Singapore.

Since when has pre-filing existed in India?

The route was introduced by the market regulator in November 2022 as an alternate for main board issuers by amending the ICDR (issue of capital and disclosure requirements) norms. The route allows issuers to file draft offer documents on a confidential basis with the regulator as compared to the standard format, in which the draft offer document becomes public immediately post filing. Issuers have to make a public announcement though, post the pre-filing.

Alright. So, why is it popular among Indian issuers today?

By opting for this alternate route, issuers can keep their commercially sensitive information concealed and withdraw plans later if market conditions are unfavourable.

Ajay Saraf, Executive Director, ICICI Securities believes the key triggers for this shift are "better market windows without exposing the IPO plans to public scrutiny".

According to Abhimanyu Bhattacharya, Partner, Khaitan & Co, "The confidential filing route has certain advantages, which include data confidentiality and evaluating investment interest from QIBs during the confidential review period, colloquially understood as “testing the waters. This process helps companies refine their pricing, determine the size of the offering, and potentially accelerate the IPO timeline if the feedback is positive."

That's great. But is the procedure similar to the public filing mechanism?

No, the procedure is different and takes longer.

"Since this involves the preparation of 4 sets of offer documents (PRDHP, UDRHP 1, UDRHP II/ RHP, Prospectus) as opposed to 3 for a public filing, and the period for public comments follows the SEBI review sequentially, it may potentially require an additional period of audit and adds 1-1.5 months to the overall process," Abhinav Bharti, Head of India Equity Capital Markets, JP Morgan explains.

On the other hand, Saraf believes confidential filing gives flexibility but stretches the IPO timeline by 2-3 months versus public filing.

Plus, there is the cost factor.

"It requires more extensive documentation compared to the regular public filing process. Additionally, it is generally more expensive than the normal filing route, due to the longer duration of engagement with intermediaries and the need for multiple rounds of document preparation and updates," Saraf shares.

Why is the mechanism being increasingly considered more by new-age firms (Oyo, Swiggy, PhysicsWallah, boAT) as compared to other sectors?

The intense competition in the startup segment, which spills out in social media and public forums on occasions, coupled with high growth rates, seems to have pushed IPO aspirants towards the pre-filing route.

" Public filing, backed by better financials as these are improving at a faster clip every quarter, cuts the noise that could be created by potential complaints by competition or consumers, and offers enhanced flexibility on changes in capital structure in a confidentially filed document," Bharti adds.

Here is why Saraf feels that pre-filing is a smarter and safer method for new -age companies as compared to a full public filing.

"New-age firms often have fast-changing business models and confidential filing lets them tweak positioning, metrics, and disclosures based on regulatory feedback. Many firms have volatile financials that need careful explanation and public scrutiny too early could create a negative notion among media or investor community, hence confidential filing allows fine-tuning of the story before facing the public."

Big IPOs like Airbnb, Spotify, and Uber were initially filed confidentially, he adds.

Gotcha! What are the rules of the game concerning issue launch, impact on selling shareholders and deal structure?

Under the traditional regime, the issue has to be opened within 12 months of the date of Sebi's final observations (approval). That is the validity period of the nod, which, if crossed, requires a re-filing of documents. Under pre-filing, the issue has to open within 18 months from the date of the regulator's nod, provided UDRHP-I is filed within 16 months.

Under the pre-filing method, there are certain requirements, which are effective from the date of public filing and not the date of confidential filing.

"For example, shares that are permitted to be sold in an IPO are required to be held for a period of at least 12 months prior to the DRHP filing date. In a confidential filing process, this requirement needs to be met at the first public filing stage and not at the time of filing the confidential document with the regulator," says Bhattacharya.

How does that help?

"The eligibility for OFS (offer for sale) is tested at the public filing stage which helps in getting the SEBI review done while the one-year eligibility period is completed," Bharti points out.

According to Saraf, "Filing confidentially allows issuers more time to sort out OFS eligibility issues. Issuer, regulators, merchant bankers and counsels can privately discuss and correct any deficiencies in the shareholding structure and lock-in requirements. By the time the DRHP becomes public all such OFS eligibility conditions are fully compliant, making the final OFS cleaner."

That's not all. The issuer can also make key changes to the issue structure (to the extent of 50% of the fresh issue, as opposed to the 20% permitted under the traditional route) and objects of the fresh issue (up to 50% in certain situations as compared to 20% under the earlier era).

Net-net, in the current volatile market setup, pre-filing offers listing aspirants' greater freedom and flexibility, if the issuer is willing to wait longer and shell out more. Who will be next in line?