HAL's proposed IPO faces 'disclosure' hurdles

The proposed initial public offering (IPO) of state-owned aerospace and defence company Hindustan Aeronautics Limited (HAL) has hit rough weather. The company has expressed reservations about making certain information public in its offer document, citing a security risk, which could delay the launch of its IPO, slated for 2013.

The two investment banks working on HAL's IPO offer document have written to the Securities and Exchange Board of India (Sebi), seeking exemptions from making certain disclosures under the Issue of Capital and Disclosure Requirements (ICDR), said people with direct knowledge of the development. SBI Capital Markets and Axis Capital are the two lead merchant bankers appointed by the government to handle the IPO, the size of which is pegged between Rs 3,000 crore and Rs 3,500 crore.

The nature of the disclosure the company doesn't want to disclose could not be ascertained. However, one source said it is to do with plant location and certain key officials. Along with the department of disinvestment, the defence ministry, too, is involved in the IPO of HAL, which is engaged in development and manufacturing of fighter aircraft and helicopters. While the government intends to launch the IPO this calendar year, the HAL offer document is yet to be filed with market regulator Sebi.

"We don't want to take the risk of submitting the offer document with inadequate information. And, have asked Sebi to amend the ICDR (issue of capital and disclosure requirements) regulations or provide specific exemption to the company," said one of the bankers handling the issue, requesting anonymity.

Under Sebi's ICDR regulations, any company coming out with a public issue has to provide all material information including general and financial information, object of the issue and risk factors. According to a securities law expert, Sebi can provide exemptions in the case of HAL on the grounds of it being a national security issue.

Former Sebi whole-time member, M S Sahoo, said in lieu of certain disclosures, the company can provide a defence lawyer's certificate, which can be taken at face value by investors.

"Both Sebi and HAL should be judicious. HAL also should not take undue advantage of the situation. It can state necessary financial information about its revenue and profitability. It need not tell what kind of products it is making or whom it is selling to," he said.

"Broadly, there is no clause in the ICDR to provide an exemption for a company from providing key disclosures. However, being a national security issue, there could be a way out," said Sandeep Parekh, founder, Finsec Law Advisors.

An email query sent to Sebi on this issue remained unanswered. According to people familiar with US securities law, listed defence contractors such as Northrop and Boeing often do not make any announcements whenever they are awarded big contracts from the Defense Department. Also, the US market regulator SEC deals lightly with such companies because the Defense Department already has oversight powers over them.