New IPO Disclosure Rules: Mind The Price Gap

Retail investors have been driving initial demand for the last few initial public offerings, including that of Life Insurance Corp. But they didn't end up with post-listing gains.

Now, retail investors can ask tough questions of issuers as the Securities and Exchange Board of India has enabled stricter information disclosures in an effort to bring down information asymmetry.

The SEBI board approved enhanced disclosures for all companies looking to raise funds from the stock markets. Along with pre-IPO filing, that will alter the way IPOs will be filed and information disclosed from now on.

The new rules will come info effect once notified by the regulator.

For the retail investor, the prospectus will come filled with information in either of the routes made available to them.

The proposed pre-IPO filing is optional. Companies in the tech or new economy sector are most likely to adopt this route as it keeps their key information confidential, in case they choose not to proceed with the IPO. But they have to disclose to the public their intent to go public and that they have made a pre-IPO filing.

That allows limited disclosures and a chance to gauge demand from investors.

There is one challenge with this system. The market regulator has not been able to control the degree of disclosures made during roadshows to institutional investors. It is not clear how it will do so in case of pre-IPO filings.

SEBI will have 30 days from the final response from the company to provide final observations to clear the IPO.

Once the IPO is cleared, the issuer has a year to go public. This is where the information asymmetry will be removed for the public. The SEBI-approved prospectus along with the regulator's observations will be kept in the public domain for 21 days.

That compares with the five-day period currently allowed after SEBI's observations have been incorporated by the issuer.

The public will also be able to scrutinise the observations of the market regulator in the updated draft red herring prospectus–I.

After public comments, the company will have to incorporate suggested changes and update financials in the updated draft red herring prospectus–II, which will be filed with the regulator before the issuer files the red herring prospectus.

The prospectus, which will be made available to the public either through the current IPO process or the pre-IPO filing process, will democratise information for all investors.

The IPO-bound companies will have to disclose all information related to key performance indicators. It will also require sharing all primary and secondary market share transaction prices per share, not only of the promoters but also among existing and new investors in the last 18 months.

That will bring out the valuation of the company at every level of transaction, allowing investors a comparison at the time of the IPO.

In addition, the committee of independent directors of the company will have to justify the price band to the investors. Though it has to be seen whether this will be just another 'tick on the box' approach or will evolve into greater engagement with investors.

The regulator has also allowed more access to retail investors in the offer for sale, giving them the right to bid for the unsubscribed portion of the non-retail segment.

The only setback for retail investors are the new guidelines for open offer for public sector units where the government wants to divest stake. The regulator has done away with the 60-day volume weighted average market price for the open offer for direct or indirect acquisition of PSUs, but missed out on measures to stop speculation in PSU share prices.

So, retail investors, beware! Trading in PSU divestment stock is at a remarkably high market risk because a strategic divestment of the PSU may not yield the return one is looking for.

This is where the market regulator along with stock exchanges should look at imposing restrictions against speculative trading, including identifying and tagging a security, to alert investors about ongoing strategic divestment by the government.

Sajeet Manghat is Executive Editor at BQ Prime.