Stock market regulator Securities and Exchange Board of India (SEBI) has warned investment bankers that the public offering documents they have lined up for submission run a risk of being returned unapproved if there are omissions around disclosures, people familiar with the development told Moneycontrol.
SEBI has communicated to merchant bankers against being callous regarding disclosures or repeating omissions highlighted earlier, and has laid down a broad set of declarations and confirmations needed in the draft red herring prospectus (DRHP) that are being filed.
An email query sent to SEBI remained unanswered at the time of filing this story.
Importantly, the SEBI's recent communique said that any failure on the part of the merchant banker could lead to the DRHP being returned – a mechanism introduced by in February this year.
Moneycontrol has reviewed SEBI's email in this regard.
What SEBI's Communique Says
“The offer documents which are not in conformity… shall be dealt in terms of the SEBI circular dated February 06, 2024 and SEBI General Orders,” the Sebi communique dated February 6 said. SEBI's circular relates to the framework for returning the DRHPs without the regulatory nod.
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SEBI's email has listed a total of 21 disclosures that merchant bankers need to include in the DRHP, which, as per the capital market watchdog, would help in “faster processing of documents”. The process of DRHP approval is often delayed due to repeated back-and-forth between the regulator and the lead managers of the issue over lack of disclosures in the IPO prospectus.
Among other things, SEBI wants merchant bankers to disclose and confirm there are no findings or observations by any regulator that could be material in nature, and there is no conflict of interest between the issuer company’s suppliers/third-party suppliers and the promoters and key management personnels (KMPs).
SEBI further wants lead managers to disclose whether they or their associates are directly or indirectly linked with any of the investors of the company, and that the issuer company is in compliance with the Companies Act, 2013 regarding issuance of securities since inception till the time of filing of the DRHP.
The regulator wants merchant bankers to bifurcate the risk factors into internal and external, based on parameters including, but not limited to, financial risks and investigations or probes by regulatory or investigative agencies.
Also Read: MC Exclusive: SEBI gets strict with KPI disclosures to ensure fair IPO valuations
What Issue Managers Say
Some merchant bankers Moneycontrol spoke to, are of the view that the regualtor's move aims to achieve the twin objectives of hastening the IPO clearing process and ensuring bankers excercise greater care in filing the DRHPs.
“The list of additional disclosures and confirmations has been created based on data analysis of all the recent IPOs and will actually help in getting faster clearance for DRHPs,” said the head of a domestic merchant banking entity.
“One may feel that SEBI is taking a strict view, but it is based on evidence that the DRHP approval process gets delayed due to inadequate disclosures and more often that not it is sheer oversight by the merchant banker. Now faced with the risk of DRHPs getting returned, the merchant bankers will be extra cautious in their approach,” said the merchant banker who did not wish to be identified.
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