Simplifying disclosures

Abridged prospectus will help retail investors

The Securities and Exchange Board of India (Sebi) recently issued a new circular relating to the disclosure of information on the application form for initial public offerings (IPOs). This goes into effect immediately. While the salient information to be provided isn’t subject to much alteration or addition, the regulator appears to be making a creditable effort to ensure this information is easily read and comprehensible. This is clearly aimed at making life easier for retail investors, who often rely purely on information given in the application form — institutions will surely analyse the extended documentation that is mandatorily available on the website. The market regulator has said a copy of the abridged prospectus must be made available on the website of the issuer, the lead managers, and the registrar to an issue. In addition, a link for downloading the abridged prospectus must be provided in the price band advertisement. This may be in the form of a QR code that can be scanned for easy download of the full prospectus, and the abridged version.

Further, the information should be “adequate, accurate and not contain any misleading or mis-statement”. The issuer should also ensure that any qualitative statements in the abridged prospectus are substantiated with key performance indicators (KPIs) and other quantitative factors. No qualitative statement must be made that cannot be substantiated with KPIs. In the circular, Sebi also said the front page of the application was often crowded and difficult to read due to the large amount of statutory information. The circular includes an annexe, which illustrates by presenting a dummy prospectus what details should be listed and the format in which they should be presented. Under the revised format, a company will have to disclose the name of the promoter and the details of the offer to the public — the type of issue, fresh issue and the offer for sale (OFS) component, and total issue size — and also share reservation details on the front page of the abridged prospectus.
 

Additionally, the following pages of the abridged prospectus must contain a general disclosure of risk; details about the promoters’ relevant experience and education; the directors’ experience and education; a brief overview of business strategies including revenue segmentation by product or service; geographical coverage of the firm; intellectual properties, if any; market share; employee strength; factory locations, etc. Also, the segmentation of objects of the issue by amount allocated, the shareholding pattern and the consolidated financials must be mentioned. The top five risk factors as stated in the draft red herring prospectus (DRHP) must also be stated, and any litigation or criminal actions against the promoters must be mentioned. All these details and more are listed in the DRHP and RHP, but those tend to be lengthy documents, which retail investors may lack the ability to comprehend. By ensuring that the above information is easily available in the application form and presented in a fixed template, the regulator will definitely make it easier to comprehend. 

The IPO market has seen a drop in sentiment after the deep correction in Paytm and several other newly listed companies. This comes after an extraordinary bull run through 2021, when many companies raised money at highly optimistic valuations. Investors are likely to be more cautious now, in the face of tightening liquidity. Transparent disclosure is likely to make their task of assessing IPO prospects better.