Remove all special rights given to select shareholders before IPO, Sebi tells bankers

This is one of the many initiatives and actions taken by Sebi in the last few months that are part of its larger scheme of things to improve the overall transparency and disclosure standards.

As part of its attempts to ensure that a company treats all shareholders equally, the Securities and Exchange Board of India (Sebi) has started insisting on removal of special rights given to an investor or select set of investors or shareholders when a company files its document for an initial public offer (IPO).

In quite a few cases recently, the regulator directed bankers to drop special rights like buyback guarantee that a company might have entered into with certain shareholders. At times, such rights are included in the shareholding agreements to ensure that the shareholder gets an exit option if the IPO does not go through.

For instance, in the case of Transrail Lighting, an addendum was submitted after the draft red herring prospectus (DRHP) was already filed with Sebi, stating that Asiana Alternative Investment Fund has waived the clause related to the buy-back arrangement that it had with the company.

“Accordingly, our company is no longer required to buy-back the equity shares held by Asiana in the event our company and/or our promoter selling shareholder, are unable to facilitate an exit for Asiana,” stated the addendum.

Similarly, in the case of Akum Drugs and Pharmaceuticals, Ruby QC Holdings Pte. Ltd waived off a similar clause, which stated the company will buy-back the shares from the investor in case an exit option is not facilitated.

Merchant bankers opine that the regulatory stance stems from the belief that there has to be a level-playing field between all shareholders with absolutely no discrimination between a pre-IPO institutional investor or a retail investor at the time of an IPO.

“Of late, most of the communication from the regulator is aimed at enhancing the disclosure level in DRHPs while creating a level-playing field between all shareholders,” said an official of a foreign merchant banking firm.

“While ensuring that any preferential treatment given to an investor or a set of investor is waived off, the regulator also insists that all such actions are properly documented and disclosed by way of addendums in the public domain so that there is no information asymmetry,” he added.

Also Read: Sebi nudge ensures IPO-bound firms come clean on list of promoters

Interestingly, this is one of the many initiatives and actions taken by Sebi in the last few months that are part of its larger scheme of things to improve the overall transparency and disclosure standards.

Moneycontrol had recently reported that the last few months have seen many IPO-bound companies change the list of their promoter entities after filing their DRHPs as both, Sebi and the stock exchanges, have become strict in terms of parameters on which certain entities need to be classified as promoters.

Another important action of the capital market watchdog in the primary market has been the trend of returning IPO draft documents, which it believes are not proper in terms of due diligence or disclosures.

Also Read: Citing omissions, Sebi returns over 10 IPO papers in a strong signal to merchant bankers

The last few months have seen the regulator returning more than 10 DRHPs with companies like Garuda Construction, Jaykay Enterprises, KRN Heat Exchange, Diffusion Engineers, Shree Tirupati Balaji Agro Trading, Gretex Share Broking, and Stallion India Flurochemicals, among others all seeing the draft red herring prospectuses (DRHPs) getting returned.

To be sure, companies have the option of refiling the DRHPs though the overall timeline for the IPO process gets stretched if the regulator returns the draft document.