SEBI Mandates IPO Firms to Disclose Whistleblower Complaints

The Securities and Exchange Board of India (SEBI) has instructed several companies preparing for their public listings to disclose any complaints received from whistleblowers, company insiders, or anonymous sources after submitting their draft public issue documents. This move comes after SEBI made rare interventions in recent months, halting the initial public offerings (IPOs) of at least two companies following complaints about lapses in disclosures within their offer documents.

In recent reviews, SEBI has investigated allegations of fraud and incomplete disclosures involving two small and medium enterprises (SMEs) aiming to go public. One notable case involves Rosmerta Digital Services, which had scheduled a ₹206-crore IPO on November 16, anticipated to be the largest SME fundraising at the time. However, SEBI received several complaints against the company’s promoters, including allegations of securities market violations by their close associates and incomplete disclosures. As a result, the company decided to postpone its IPO.

In another significant instance, SEBI directed Trafiksol to refund the money it had raised from investors after its IPO had concluded. This action followed a whistleblower complaint alleging material misstatements in the company’s offer documents and possible collusion with a shell entity.

SEBI has also prompted other companies to disclose whistleblower complaints. For instance, Denta Water and Infra Solutions recently filed an addendum to its offer document, revealing an old case involving its promoter, C Mruthyunjaya Swamy, which had been investigated and closed by the Enforcement Directorate (ED) in June 2022. The company emphasized that the identity of the complainant was unknown and claimed the complaint was frivolous. Nevertheless, it complied with SEBI’s directive to disclose the information.

Similarly, Smartworks Coworking Space, another IPO-bound firm, filed detailed disclosures addressing several anonymous complaints against its promoters. These complaints, submitted to the market regulator and merchant bankers, alleged that the promoters were under investigation by agencies such as the ED and the Central Bureau of Investigation (CBI). In response, the company provided point-by-point explanations addressing the allegations.

An investment banker familiar with the matter noted that SEBI's cautious approach reflects its concern for investor protection, even in cases where there are no active investigations or confirmed liabilities. In some instances, companies have also taken a proactive approach by disclosing complaints once they surface to maintain transparency and mitigate risks.

Legal experts have shared their perspectives on this trend. Arka Mookerjee, a partner at law firm JSA, stated that while such disclosures foster transparency and help investors make informed decisions, they can also lead to information overload, particularly when complaints are unfounded or lodged after the public issue closes. According to Mookerjee, this timing makes it difficult to assess the impact of such complaints and provide quality disclosures.

Despite these challenges, SEBI’s focus on ensuring comprehensive disclosures highlights its commitment to safeguarding investor interests and maintaining market integrity. The regulator’s case-by-case approach aims to strike a balance between transparency and preventing undue influence from baseless complaints.