Sebi takes more stringent approach towards initial public offerings

Regulator insisting firms identify promoter entities wherever possible, say investment bankers

The Securities and Exchange Board of India (Sebi) has pivoted towards a more stringent approach towards initial public offerings (IPOs). This shift in fulcrum follows a meltdown in shares of new-age technology (tech) companies that saw over a Rs 3-trillion wipeout of investor wealth.

According to investment bankers and other industry players, the capital markets regulator has insisted companies identify promoter entities wherever possible.

Click here to connect with us on WhatsApp

Additionally, it has been returning draft red herring prospectuses (DRHPs) with inadequate filings and keeping a tight vigil on company comments in the run-up to their IPOs.

Some practices are a departure from the past and exert pressure on issuers, say industry players.

Last week, health-tech start-up HealthVista India (Portea Medical) got the green light for its Rs 1,000-crore IPO only after certain shareholders of the company re-categorised themselves as promoters, from shareholders.

Sources say there are two, maybe three more professionally-run companies that have been nudged by Sebi to identify their promoters.

Names of these companies haven’t been identified. Queries sent to Sebi on the issue remained unanswered until the time of going to press. 

“If the founder is the original subscriber to the memorandum and founded the company, then Sebi is asking the company to categorise him/her as a promoter. He/she cannot take shelter under a professionally-managed company tag if he/she has founded the company and is on the capitalisation table,” says Siddharth Mody, senior partner, Desai & Diwanji.

Legal experts say certain entities deliberately circumvent the promoter label to shake off the regulatory yoke.

With the exception of Nykaa, all four major start-ups listed have no identifiable promoters.

“In some cases, founders have optically kept their shareholding below 10 per cent by transferring excess shares to a trust. Such practices passed muster earlier. Not anymore,” says a lawyer.

Sebi rules do not allow employee stock ownership issuance to those holding more than a 10 per cent stake. Legal experts say some companies are meeting this requirement only in spirit and hence, Sebi must plug this loophole. 

“In the context of many start-ups, it might need to be assessed if their respective founders (not classified as promoters) vested with stock options have control over the company’s affairs, given other relevant facts. Sebi may consider defining relevant parameters encircling a founder’s position in the context of granting employee stock ownerships which is otherwise restricted to the promoter, not specifically to the founder,” says Harish Kumar, partner, Luthra & Luthra Law Offices India.

Shares of Zomato, Nykaa, Paytm, PolicyBazaar, and Delhivery are down between 54 per cent and 71 per cent from their peaks. The enormous wealth erosion has put pressure on the regulator to act more strictly, observe investment bankers, adding that start-ups are chary of approaching public markets.

In the previous financial year, Sebi returned the DRHP of six companies, one of which has been re-filed with updated details, while the other has been pre-filed for the IPO.

In certain cases, companies are being asked to update DRHP where certain material disclosures, ongoing litigations or employee stock ownership structures have not been properly disclosed or are not in adherence to the norms prescribed.

New-age tech companies have achieved exponential growth in size and valuation, with frequent capital infusions leading to more documentation and disclosures.

Further, Sebi has introduced many new documentation and disclosures with key performance indicators that were earlier not covered in the financial statements but were being shared with private equity investors in some cases.

These disclosures were mandated keeping start-ups and loss-making companies in mind where traditional metrics were either not possible or did not bring in transparency.

Issuers are also now required to disclose details of the basis of the pricing of shares for transactions carried out ahead of listing.