Firms pre-filing for IPOs may get to market to institutional investors

New clause to help issuers gauge institutional investor demand

The Securities and Exchange Board of India (Sebi) plans to allow companies taking the confidential pre-filing route for their initial public offerings (IPOs) to market their issues to institutional investors to gauge demand and arrive at fair pricing.

This follows industry feedback to the market regulator, seeking more flexibility over information flow. Earlier, it was envisaged that firms would only inform the regulator and the stock exchanges under the confidential filing mechanism.

However, the final framework — expected to be notified by the regulator soon — will include a ‘test the water’ (TTW) clause.

The clause will help issuers gauge investor interest in advance. The limited purpose marketing is aimed only at qualified institutional buyers (QIBs), said people in the know.

The move alleviates concern that restraints on any form of marketing for the intended offer till the point of its launch might create uncertainty for the company going public.

The TTW option is also allowed in jurisdictions such as the US and Canada, which have permitted confidential filings. The regulators there allow the issuers and lead managers to engage in oral or written communication with potential investors like QIBs to explore whether they are harbouring any interest in their offers.

The TTW exercise with QIBs will be limited to the information provided in pre-filed draft red herring prospectus (PDRHP) to the regulator. No information extraneous to the PDRHP should be shared with the potential investors.

Moreover, a cooling-off period could be mandated to avoid companies from utilising the TTW mechanism for full-fledged marketing. The publication of any research report based on TTW interactions will also be prohibited.

Furthermore, investment bankers will be required to maintain a list of investors that have participated in a TTW exercise. The bankers will have to indicate the closure of TTW interactions to Sebi to enable it to issue observations.

The validity of Sebi’s observations may be increased to 18 months, as against the current 12 months, to give sufficient time to issuers for marketing and advertisements.

The confidential pre-filing will also allow companies the flexibility to freeze the size of the issue by permitting changes in the issue size, changes in promoters or directors, issuance of certain convertible securities, and issuance of new shares to existing or new investors only till the time they have not received Sebi observations.

Confidential filing is the new optional route to be introduced by Sebi for IPO-bound companies. The need for this route was felt as many companies despite obtaining the Sebi go-ahead for IPOs are not able to launch their issue. As the DRHP requires companies to disclose tonnes of information, there were concerns raised about competitors misusing the same.

Under the new route, the details of the offer documents will remain confidential and an issuer will merely have to disclose that they have pre-filed for an IPO and it does not necessarily mean that the issuer shall undertake an IPO. The updated DRHP will be the first public document from the issuer, and before this the company will not showcase key performance indicators through any means to the public.

Legal experts believe that the new optional route will help reduce unwarranted public scrutiny and may, to some extent, assuage concerns that companies have with regard to opportunistic litigation.

While the primary market has gained momentum in November, many companies, including some family-owned businesses, have been awaiting the formulation of guidelines to explore confidential filing.

“This progressive and widely accepted move by the regulator is definitely one of the key considerations for new-age high-growth companies, which are generally asset light and/or order book based, and whose valuation is driven by high Ebitda/revenue multiples, and we understand that many such companies are eagerly awaiting promulgation of the formal guidelines,” said Gaurav Mistry, partner DSK Legal.