Sebi asks companies to disclose whistleblower complaints in IPO filings

Sebi mandates that companies disclose any whistleblower complaints related to promoters in their IPO documents, aiming for increased transparency after recent interventions in IPOs

The Securities and Exchange Board of India (Sebi) has directed companies preparing for public offerings to disclose any complaints received from whistleblowers, company insiders, or anonymous sources, especially those related to the company's promoters, after submitting their draft offer documents for initial public offerings (IPOs), according to a report by Moneycontrol.

 

This development comes as Sebi makes a rare intervention in halting the IPOs of two companies in recent months due to whistleblower complaints about insufficient or misleading disclosures in their offer documents. Sebi has recently reviewed allegations of fraud and incomplete disclosures against two small and medium-sized enterprises (SMEs) that were looking to go public.

 

 

Rosmerta Digital Services calls off IPO

 

One such company, Rosmerta Digital Services, had planned to launch its Rs 206-crore IPO in mid-November last year, aiming to become the largest SME fundraise. However, after Sebi received several whistleblower complaints regarding the promoters’ associates’ alleged violations of securities market regulations and concerns about incomplete disclosures, the company decided to postpone its IPO indefinitely, the report said.

 

In another case, Sebi took action against Trafiksol, an SME that had completed its IPO, after receiving a whistleblower complaint about misstatements in the company’s offer documents and potential collusion with a shell entity. Sebi instructed Trafiksol to refund investors' money due to these concerns, the report mentioned.

 

Sebi generally does not approve or reject IPO offer documents but provides observations and communicates concerns, often to the investment bankers. It is uncommon for Sebi to intervene directly in capital market offerings, but in light of recent whistleblower complaints, the regulator is taking a more cautious, case-by-case approach.

 

Disclosures in recent IPOs

 

Sebi's scrutiny has led to increased transparency in recent IPO filings. For example, Denta Water and Infra Solutions added an addendum to its offer document revealing an old case against one of its promoters, C Mruthyunjaya Swamy, which had been investigated by the Enforcement Directorate (ED). Although the company dismissed the complaint as frivolous and the case was closed in 2022, it complied with Sebi’s request for disclosure, the report said.

 

Similarly, Smartworks Coworking Space included an addendum in its offer document detailing anonymous complaints against its promoters. These complaints alleged investigations by the ED and the Central Bureau of Investigation (CBI). The company responded point-by-point to the allegations.

 

Experts indicate that Sebi is being particularly vigilant regarding whistleblower complaints, recognising their potential to affect investor sentiment. While there may be no active investigations or formal liabilities arising from these complaints, Sebi is ensuring companies disclose such information to maintain transparency. In some cases, companies are voluntarily making these disclosures once complaints are made public, the report mentioned.