SEBI Moves to Limit PE Funds' Control Over IPO Prices by Canceling Special Rights Early

According to sources, the market regulator is taking several measures to lessen the impact of private equity (PE) investors on the pricing of public issues for their portfolio companies. 

In a recent advisory, the Securities and Exchange Board of India (Sebi) instructed investment bankers to make sure that any special rights granted to any entity through the Articles of Association (AoA) and shareholders' agreement (SHA) are revoked before a company submits its updated draft red herring prospectus (UDRHP). 

Although there were concerns that this could disadvantage PE investors by removing their influence over the management of their portfolio companies before they exit through listing, sources indicated that the advisory was motivated by the regulator's worry about PE investors' sway over key IPO decisions. 

These decisions, such as the pricing of the issue, the selection of anchor investors, and the allocation to anchor investors, are made during the "sensitive period" between the filing of the UDRHP and the listing of the shares. Consequently, the recent advisory issued to the lead managers (LMs) removes any influence that PE investors might have—through their special rights—over this period. 

Market sources indicate that the regulator has been worried about PE investors' influence over the IPO process, particularly after some new-age tech companies witnessed their pre-IPO investors exiting with substantial profits, leaving public investors to contend with significant price drops. Consequently, the regulator has been implementing various measures to exclude these investors from IPO decisions, according to insiders. 

The regulator's primary concern, based on comments made on IPO offer documents, appears to be the influence that selling shareholders, such as PE investors, have over the pricing of the issue. These investors wield this power either by appointing their candidates as directors on the IPO Committee of the portfolio company or through special rights granted in shareholder agreements (SHAs). 

Sources indicate that the regulator has already discouraged the appointment of nominee directors on the IPO Committee. This new advisory to lead managers (LMs) now eliminates the special rights outlined in the shareholder agreements (SHAs). 

PE investors, along with other pre-IPO investors, have their rights documented in the Articles of Association (AoA) and shareholder agreements (SHAs). Initially, there was a regulatory push to eliminate these special rights from the AoA, which was enforced by underwriters of the issues insisting that these rights be removed before the filing of the DRHP. However, these rights were still preserved in the SHAs. 

To ensure that PE investors do not retain these special rights through the SHAs, the regulator has directed lead managers to ensure that all special rights, whether under the AoA or SHA, are cancelled before the filing of the UDRHP.