The market regulator is trying to reduce private equity (PE) investors' influence over the pricing of public issues of their portfolio companies through various steps, according to sources.
A recent advisory issued by the Securities and Exchange Board of India (Sebi) to investment bankers asked them to ensure that any special rights issued to any entity through Articles of Association (AoA) and shareholders' agreement (SHA) are cancelled before a company file's its updated draft red herring prospectus (UDRHP).
Also read: PE investors will need to forgo special rights in IPO-bound cos without certainty of exit
While there were concerns that this will shortchange PE investors by taking away any say they have in the running of their portfolio companies before they get an exit through listing, sources said that the advisory was driven by the regulator’s concern over PE investors' influence over crucial IPO decisions.
These decisions, including pricing of the issue, choosing of anchor investors and allocation to anchor investors, are done in this "sensitive period" between the UDRHP being filed and the listing of the shares. The recent advisory issued to the LMs, therefore, eliminates the any sway that PE investors have—through their special rights--over this period.
Why the concern?
According to market sources, the regulator has been concerned about PE investors' influence over the IPO process after a few newage tech companies saw their pre-IPO investors exit at exorbitant profits while the public investors were left to deal with a dramatic fall in prices. Therefore, the regulator has been asking for the investors to be kept out of the IPO decisions through various steps, according to insiders.
The regulator’s major concern, going by the comments they have made on IPO offer documents, seem to have been the influence selling shareholders, such as PE investors, have over the pricing of the issue. The investors exercise this power either by nominating their candidates as directors on the IPO Committee of the portfolio company or through special rights given in shareholder agreements (SHAs).
According to sources, the regulator has already discouraged the appointment of such nominee directors on the IPO Committee. Now, this advisory to LMs takes out the special rights enshrined in the SHAs.
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Why SHAs?
PE investors, like other pre-IPO investors, have their rights captured in Articles of Association (AoA) and SHAs. First there was a regulatory nudge to remove these special rights from AoA; this was implemented through issues’ underwriters insisting that these rights be removed before the filing of the DRHP. But these rights were still retained in the SHA.
To ensure that PE investors don't have these special rights even through the SHA, the regulator has asked the lead managers to ensure that all special rights whether under AoA or SHA be cancelled before the filing of the UDRHP.
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