Sebi asks IPO-bound companies to disclose whistleblower complaints

Last month Sebi encountered two Small and Medium Enterprise (SME) IPOs where whistleblowers made allegations of fraud and incomplete disclosures.

Market regulator Securities and Exchange Board of India (Sebi) has asked some of the soon-to-be-listed companies to disclose complaints from any whistleblower or company insider or anonymous person against it or its promoters filed after submitting the draft papers for the public issue.

The development comes as the regulator made a rare intervention to stop initial public offerings (IPO) of at least two companies in the recent past following whistleblower complaints of lapses in disclosures made by the companies in their offer documents.

In the last couple of months, Sebi has reviewed whistleblower allegations of fraud and incomplete disclosure against two small and medium enterprises seeking to go public.

Rosmerta Digital Services was scheduled to launch its Rs 206-crore IPO on November 16. It was supposed to be the biggest SME fund-raising. Sebi received several complaints against the promoters including that of security market violations by their close associates and incomplete disclosures. The company called off its offering for the time being.

In another unique case, Sebi asked another SME issuer Trafiksol to refund money to the investors after the company had concluded its IPO. This was in light of a whistleblower complaint received by Sebi regarding material misstatements in the company’s offer documents and suspected collusion with a shell entity.

Also Read: SEBI directs BSE to put Trafiksol ITS Tech's listing on hold

Sebi generally does not interfere in capital market offerings. It neither approves nor rejects  any offer document but does make observations. It usually communicates to the investment bankers in case of any reservations.

Recent instances where the regulator has asked companies to disclose such complaints include Denta Water and Infra Solutions, which recently filed an addendum to its offer document disclosing an old case against one of the promoters, C Mruthyunjaya Swamy, which was probed by the enforcement directorate (ED). The company in its disclosure added that it was unable to identify the complainant and the case was closed by the ED in June 2022.

“Although the complaints are frivolous and the identity of the complainant is bogus, the disclosures have been made based on Sebi directives,” argued Denta Water and Infra Solutions in response to a query sent by Moneycontrol.

Last week, another IPO-bound company, Smartworks Coworking Space, filed a detailed addendum to its offer document disclosing several anonymous complaints against its promoters. The complaints sent to the market regulator and the merchant bankers to the issue alleged that the promoters of Smartworks were being probed by several agencies, including the ED and the Central Bureau of Investigation(CBI). The company provided pointwise response on the allegations made by the anonymous complainant.

“Sebi is being very cautious about such complaints due to the impact it could have on investors. And thus even though there are no active investigations or liabilities arising out of the allegations made in these complaints, depending on the seriousness of the complaints, the regulator is taking a case-by-case approach and asking some companies to make these disclosures,” said an investment banker, speaking on the condition of anonymity. “In some cases, companies are also proactively making such disclosures once such complaints come to light.”

An email sent to Sebi did not elicit a response till the time of publication.

“Disclosures are always an admirable move, it is an insurance for the issuer company as well as enables an informed decision making environment. However, as a word of caution, we have witnessed several instances of motivated complaints or complaints not having any bearing on the issuer or the issue. Such risk factors provide additional information to investors who cannot gauge any potential impact on the issuer and therefore can become information overload,” said Arka Mookerjee, partner at law firm JSA.

He added that these complaints are at times made after the issue closure, making it very difficult for a detailed impact analysis and therefore quality disclosure.