Complaints, litigation threaten to stretch timelines for marquee issues

Rising instances of complaints by competitors against companies ahead of their IPOs

A slew of complaints and litigations threaten to stretch the IPO timelines for marquee issues such as Oyo and Paytm.

Market regulator Securities and Exchange Board of India (Sebi) takes on average a little over two months to clear a draft red herring prospectus (DRHP), an analysis of data provided by Prime Database shows.

However, there have been instances in the past where complaints, litigations or regulatory challenges have delayed the clearance process by another two or four months. For instance, CAMS IPO took 190 days to obtain Sebi approval due to the controversy around NSE shareholding. In the case of UTI Mutual Fund, the approval took 180 days due to a disagreement between its major shareholders.

Earlier this week, hospitality startup Oyo Rooms (Oravel Stays) was at the receiving end after it filed papers for its Rs 8,430-crore IPO. Rival Zostel (Zo Rooms) threatened to move Sebi seeking a stay in the IPO or any change in the shareholding structure. The company also faced allegations of inadequate disclosures in its DRHP. In August, after Paytm filed the DRHP for India’s largest-ever IPO, a former director of the company urged Sebi to halt its IPO claiming his stake was not being acknowledged.

On one hand it is in the interest of investors that all critical matters are highlighted in the public domain at the time of the IPO to help them with their investment decisions. However, industry players say most complaints are timed around the IPO and derail the IPO process.

“The process of listing and especially the requirements of disclosures often act as an impetus for miscreants to undertake actions which at times may also be contrived with the intent to extort, arm-twist or in some cases to try and jeopardise the listing by stirring up attention through claims that are engineered at the cusp of listing,” said Gaurav Mistry, associate partner, DSK Legal.

Experts say such instances complicate and delay the IPO clearance process as Sebi has to ensure the public shareholders are protected.

“Companies looking to access markets by way of IPOs are sometimes hit with lawsuits and complaints from former employees, vendors, and even competitors, typically alleging breach of past contracts and non-payment of dues, creating uncertainties for the timelines of the IPO and casting doubts over their post-listing share performance. While there are several instances of mala fide intent in such lawsuits and complaints, Sebi will inspect and analyze each situation on a case to case basis, in order to protect the interests of investors in the public markets. During this year itself, we have seen Sebi placing several high profile companies' draft offer documents in abeyance until the complaints are resolved,” said Murtaza Zoomkawala, partner, Saraf & Partners.

In 2012, Sebi’s erstwhile Chairman UK Sinha had said a large number of complaints at the time of IPO are from competing companies and the trend was disturbing.

India follows a disclosure-based regime for IPOs. A company planning to tap public funds is required to disclose all material information pertaining to the company in the offer documents. The investors are then left to judge whether they should invest in the company or not.

Currently, close to 60 DRHPs are awaiting Sebi clearance for their IPOs. Most firms are looking to expedite their IPO launch process to tap into the ongoing bullish sentiment. Any delay in the approval process could potentially thwart the listing plans if market sentiment turns sour.