SEBI plans to tweak IPO norms. All you need to know

India’s stock market regulator could soon make it easier for companies to file for initial public offerings (IPOs) by letting them to pre-file offer documents confidentially and allowing them several other relaxations. 

The other relaxations that the Securities and Exchange Board of India (SEBI) could allow companies may include relaxed open offer pricing norms for the disinvestment of public sector undertakings (PSUs), and seeking enhanced disclosures from startups in offer documents on the IPO issue price, according to a report by The Economic Times.

By when is SEBI likely to decide on the matter?

SEBI could take a call on the matter in its board meeting on 30 September. The ET report said that the meeting could also clear a proposal to bring buying and selling by mutual funds under insider trading rules; they are currently excluded. The move comes in the wake of the Franklin Templeton episode in which some executives were accused of insider trading.

So, how will confidential pre-filing work?

Companies only have to make a public announcement that they have pre-filed offer documents with SEBI and exchanges. The issuer company will also have to state that pre-filing doesn’t necessarily mean it will hold an IPO.

Later, if the company decides to proceed with the offer, it will have to update the document with SEBI’s observations and the latest financials before putting it in the public domain. Currently, an issuer has to file a draft offer document with SEBI with detailed disclosures, which may be beneficial to competitors. 

Typically, the approval process takes 30-70 days after filing of the draft offer document. An issuer may choose not to pursue an IPO after undergoing the whole process, the report said

Do other countries also allow confidential pre-filing?

Yes. Apart from the US, the UK and Canada are among those that permit the pre-filing of offer documents for review by the regulator.

How will pre-filing help companies?

The few months of data confidentiality will be significant for high-growth firms compared with more mature ones that have steady state revenues and margins.

What does SEBI plan to do on PSU pricing?

The market regulator’s board is also likely to approve the proposal on disclosure of key performance indicators (KPIs) and certain additional parameters such as valuation based on past transactions and fund raising by new-age technology companies.

At present, companies are required to disclose accounting ratios such as earnings per share, price to earnings, return on net worth and net asset value. These parameters may not help investors in taking investment decisions in the case of new-age technology companies that are generally loss making. Startups may have to disclose material KPIs made to pre-IPO investors during the three years prior to the initial share sale.

What new rules could SEBI propose for mutual funds?

The report said that SEBI will also tighten insider trading rules so that it can initiate enforcement action against those who misuse sensitive information relating to mutual fund schemes directly or indirectly to which they have access by virtue of their fiduciary capacity. Insider trading rules are applicable to those dealing in the securities of listed companies or those proposed to be listed, when in possession of price-sensitive information.

SEBI’s move comes in the wake of the Franklin Templeton crisis of 2020, where senior executives—including Asia-Pacific head Vivek Kudva—and their immediate relatives were alleged to have indulged in practices such as withdrawing some of their investments ahead of the six debt schemes shutting for redemptions on April 23.