A Red Herring Prospectus (“RHP”) is often viewed as the principal disclosure document in an initial public offering (“IPO”). It provides prospective investors with information relating to the issuer’s business, financial position, risk factors, management, industry landscape and the proposed IPO.

While potential investors frequently associate the launch of an IPO with regulatory approval from the Securities and Exchange Board of India (“SEBI”), the regulator’s role in relation to IPOs is more nuanced.

A common misconception is that SEBI “approves” IPOs. In reality, India’s primary market operates under a disclosure-based regulatory regime, where SEBI’s role is not to endorse an investment opportunity but to ensure that investors are provided with adequate, accurate and timely information to make informed decisions.

Contrary to popular perception, SEBI does not certify the merits of an IPO or endorse an investment decision. Instead, its focus is on ensuring that investors have access to adequate, accurate and timely disclosures to make informed decisions.

This article examines SEBI’s role in regulating offer documents, with particular emphasis on the framework prescribed under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”).

Disclosure-Based Regulation: The Foundation of India’s IPO Regime

India follows a disclosure-based regulatory framework for public issues. Under this approach, the responsibility for investment decisions rests with investors, while issuers and intermediaries are required to provide complete and accurate disclosures to enable well informed decisions.

The ICDR Regulations establish the disclosure standards applicable to public issues and prescribe the information that must be included in draft offer documents and the offer documents. The objective is not to assess the commercial viability of an issuer’s business model, but to ensure that material information relating to the issue and the issuer is available to investors before they invest.

Accordingly, SEBI’s review focuses on the adequacy, consistency and completeness of disclosures rather than the attractiveness of the investment opportunity itself.

Review of the Draft Red Herring Prospectus

As a preliminary step towards an IPO, the issuer is required to file a Draft Red Herring Prospectus (“DRHP”) with SEBI through the lead manager(s). This DRHP or a draft offer document is a preview of what the issuer will rely on to seek investor bids and is open for public comments.

Upon filing, SEBI reviews the draft document and may issue observations seeking clarifications, additional disclosures or modifications. Such observations may relate to (though are not limited to):

• risk factor disclosures;
• pending litigations and regulatory proceedings;
• financial information;
• related party transactions;
• promoter and promoter group disclosures;
• business operations and industry-related disclosures;
• utilisation of issue proceeds; and
• compliance with applicable securities laws.

The review process enables SEBI to assess whether material information has been adequately disclosed in accordance with the ICDR Regulations and provides members of the public an opportunity to review and provide comments on the DRHP as well.

The Role of Merchant Bankers

The ICDR framework places significant responsibility on SEBI registered intermediaries, particularly the book-running lead managers (“BRLMs”).

BRLMs are required to undertake extensive due diligence and certify to SEBI that the disclosures contained in the offer document are true and adequate to enable investors to make an informed investment decision.

SEBI relies heavily on this due diligence architecture. Accordingly, the regulator’s role is supplemented by a framework that places accountability on intermediaries involved in the issue process. In effect the BRLMs serve as an extension of SEBI’s departments in the conduct of diligence of issuers.

For merchant bankers, this means that regulatory compliance extends beyond document preparation and includes continuous verification of disclosures throughout the IPO process.

SEBI’s Observations Are Not an Approval

One of the most important aspects of the ICDR framework is that SEBI’s observations should not be interpreted as approval of the issue.

The offer document itself contains disclosures clarifying that SEBI does not take responsibility for the financial soundness of the issuer, the correctness of statements made in the offer document, or the merits of the securities proposed to be issued.

SEBI’s observations merely indicate that the regulator has completed its review of the draft document from a disclosure and regulatory compliance perspective.

This distinction is particularly relevant for investors, who remain solely responsible for evaluating the risks and merits of an investment opportunity.

Continuous Disclosure Obligations

The issuer and intermediaries remain responsible for ensuring that disclosures remain accurate and complete until the issue closes. Any material developments occurring after the filing of the DRHP may require updates to the offer documents.

The ICDR framework, therefore, operates as a continuous disclosure regime, requiring issuers and intermediaries to monitor developments that could influence investor decision-making.

Why the ICDR Regulations Matter

The ICDR Regulations form the backbone of India’s primary capital markets framework. They establish:

• eligibility conditions for public issues;
• disclosure requirements for offer documents;
• obligations of issuers and intermediaries;
• due diligence standards;
• timelines and procedural requirements; and
• investor protection safeguards.

In many respects, the effectiveness of the RHP as an investment tool depends on the disclosure standards prescribed under the ICDR Regulations and the oversight exercised by SEBI (directly and through the BRLMs) during the offer document review process.

Key Takeaways

• SEBI regulates the disclosure framework governing offer documents rather than evaluating the commercial merits of an IPO.
• The ICDR Regulations prescribe detailed disclosure requirements for issuers undertaking public issues.
• SEBI reviews draft offer documents and may issue observations requiring additional disclosures or clarifications.
• Merchant bankers / BRLMs play a critical role in conducting due diligence and ensuring the accuracy of disclosures.
• SEBI’s observations should not be construed as approval or endorsement of an issue.
• Investors remain responsible for assessing the risks and merits of an investment based on the disclosures contained in the RHP.

Conclusion

The role of SEBI in regulating IPOs is fundamentally rooted in the principle of informed investing. Through the ICDR Regulations, SEBI seeks to ensure that investors have access to comprehensive and reliable information before making investment decisions. While the regulator reviews offer documents and monitors compliance with disclosure requirements, the responsibility for the contents of the RHP ultimately rests with issuers and intermediaries, and the responsibility for investment decisions remains with investors.