Explained: What is IPO pre-filing and why is SEBI weighing the proposal

Primary market activity in India has remained strong over the past couple of years and, despite some market volatility this year, more and more companies are looking to float their initial public offerings.

In fact, as many as 63 companies floated their IPOs in 2021 in what was a new record for fundraising. These companies raised a total of Rs 1.18 trillion by selling fresh shares as well as secondary sales. And the momentum has continued this year with a dozen companies, including Life Insurance Corp, already launching their IPOs and more than 50 companies in the queue planning to do so.

Amid this hectic activity, the Securities and Exchange Board of India has come out with a proposal to allow companies that are planning to tap the capital markets with their IPOs to submit “pre-filing” documents confidentially.

So, what exactly is pre-filing?

Effectively, what this means is that any company desirous of launching an IPO will be able to file the initial IPO document with SEBI and stock exchanges only. The company will have the option to make public the IPO plan after it gets SEBI approval.

What is the IPO filing process currently?

Currently, companies first file a draft red herring prospectus (DRHP) with SEBI containing all relevant disclosures. The lead manager of the IPO and the issuer can market the issue based on financials provided in the DRHP.

The DRHP is also hosted on the website of SEBI, lead managers and stock exchanges for at least 21 days, seeking public comments. SEBI may seek clarification on the DRHP.

After stock exchanges provide in-principle approval for listing of securities, SEBI issues its observation within 30 days. Thereafter, the company can file the red herring prospectus with the Registrar of Companies for its approval.

The RHP incorporates SEBI observations and updates facts and figures as well as financials of the issuer. This step is followed by the company announcing a price band for the IPO. The share sale opens at least two days after the announcement.

So, what are SEBI’s concerns with the current process?

SEBI said the move to allow pre-filing aims to help companies safeguard their sensitive business information.

According to SEBI, one of the concerns for companies is the disclosure of sensitive information in the DRHP. Such information “may be beneficial to its competitors, without the certainty that the initial public issuance would be executed," SEBI said.

The regulator noted that the IPO approval process currently entails at least 30 to 70 days after filing of DRHP. Moreover, a company may choose to not pursue coming out with its IPO after undergoing the approval process.

Another concern is with regards to timing the public issue vis-à-vis market conditions. Any delay due to such factors results in concerns regarding the “recency” of the feedback obtained from potential institutional investors during the roadshows, thus impacting the pricing as well estimating the issue size, SEBI said.

In addition, the RHP is typically available for only two to five days before the issue opens. Thus, updated information (which has incorporated SEBI observations and latest financials) for consumption of investors is not available in public domain for a significantly longer period of time.

Are there any countries that allow pre-filing for IPOs?

Yes, there are. Countries including the US and Canada permit a confidential “pre-filing” with regulators before a company decides to proceed with an IPO, SEBI said. Subsequently, in case the issuers decides to proceed with the offer, the document incorporating changes mandated by the regulator is made available to public.

So, by when Indian companies can hope to start making confidential pre-filing for IPOs?

At the moment, SEBI has only floated a proposal regarding pre-filing and it is seeking public comments by June 6. The regulator often floats proposals related to policy changes for public feedback, and there is no certainty that it would actually change the IPO filing process. So, for the moment, the existing filing process will continue.