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SEBI notifies confidential DRHP filing norms

The Fourth Amendment introduces the construct of:

  • Confidential filing of draft offer documents for Indian issuers looking to undertake an initial public offering (“IPO”);
  • Monitoring of issue proceeds for preferential issues and qualified institutions placements (“QIP”), amongst others.

 

Highlights of the Process of Confidential Filing:

  1. The issuer prepares and files a draft red herring prospectus with SEBI and the stock exchanges (“Confidential DRHP”), however, this Confidential DRHP will not be available for public review or comments.
  2. The issuer needs to issue a public advertisement that it has filed the Confidential DRHP with SEBI, but not mentioning any other details of the public issue, neither guaranteeing that it will complete the IPO nor inviting comments from the public.
  3. SEBI reviews the Confidential DRHP and provides comments on the Confidential DRHP. Usually this involves a few rounds of comments from the regulator on the Confidential DRHP, which process one can reasonably expect to continue.
  4. Stock exchanges may also provide comments on the Confidential DRHP.
  5. After incorporating the comments received from SEBI and the stock exchanges, the issuer will be required to file an updated Confidential DRHP (“UDRHP-I”) reflecting the changes made to the Confidential DRHP pursuant to regulatory comments and other factual changes.
  6. At this stage, the issuer will also have to issue a second advertisement, informing the public of the filing of this UDRHP-I and inviting comments on the same. The period for inviting comments shall be 21 days. The key difference from the public filing process is that the draft document made available for public comments, has already undergone regulatory scrutiny and therefore more likely to be a more complete document from a disclosure perspective.
  7. Between stages 2 and 3, the issuer can approach a selected list of qualified institutional buyers (“QIB”), for marketing the IPO. This is a formalisation of the current public filing process, wherein issuers do conduct marketing post the filing of a draft red herring prospectus.
  8. Taking cue from the listing regulations, while the issuer is supposed to maintain a record of the investors it meets for marketing, presently there is no need to file this data with the regulators. Information shared with these QIBs will need to be limited to the Confidential DRHP. Parties may have to consider entering into non-disclosure agreements with these QIBs to ensure that the content of the Confidential DRHP remains within select set of participants and is not disseminated.
    Comment: It is interesting to note that while SEBI has asked for a minimum time gap of 7 working days between the closure of these investor meetings and filing of the UDRHP-I. These meetings can be conducted only until any observations are issued by SEBI on the Confidential DRHP.
  9. Fourth, after incorporating comments received from the public, the issuer will be required to file a further updated version of UDRHP-I, which is termed as UDRHP-II, to show changes pursuant to public comments and any factual changes.
  10. This UDRHP-II, with the IPO launch dates and other finalised details of intermediaries such as bankers to the offer, will be the red herring prospectus (“RHP”).
  11. Once finalised, the RHP will be filed with the registrar of companies (“ROC”).
    Comment: The process of opening and closing of the IPO remains the same as per the SEBI ICDR Regulations.

 

Other Key Considerations

Eligibility for OFS

  1. The holding period of 1 year for shares to be offered in an IPO is to be calculated from the date of filing of UDRHP-I.
  2. The Confidential DRHP will have to be redone in case there is any change in the size of the offer for sale by more than 50%.
    Comment: Practically, parties may have to decide on the indicative sellers in the IPO at the time of the Confidential DRHP itself, so that there are no substantial alterations, for various reasons, including the outcome of investor meetings.

 

Publicity

  1. Publicity activities for the period prior to UDRHP-I will require to be kept in line with past practices.
  2. Post filing of the UDRHP-I, the existing publicity restrictions and disclaimers will have to be followed.

 

Convertibles

  1. The issuer is entitled to retain outstanding convertible securities and rights available to shareholders to receive equity shares till SEBI issues observations.
  2. The public filing process contemplates that all such convertibles should be converted or be terminated or extinguished before the RHP is filed with the ROC.
  3. The Fourth Amendment has proposed that all such convertible securities and rights should be converted prior to the issuance of SEBI observations on the DRHP.
  4. The exceptions to this conversion requirement are options granted under employee stock option schemes and fully paid-up convertible securities, which are required to be converted on or prior to the RHP filing.
    Comment: While the wording has remained similar to the existing eligibility conditions under Regulation 5(2) of the SEBI ICDR Regulations, in future, SEBI may consider clarifying conversion of convertibles at the RHP filing with ROC stage for the confidential filing process.

 

Timelines

  1. In case of IPOs via the Confidential DRHP, the time period for opening of an IPO has been extended to 18 months from the date of final observations by SEBI, up from 12 months as per the public filing process.
  2. However, an issuer is required to file UDRHP-I by 16 months from the date of the observations.

 

Monitoring use of proceeds: Private placements not so private anymore?

  1. One of the key changes introduced through the Fourth Amendment is the requirement to have monitoring of use of proceeds of preferential allotments and QIPs above Rs. 100 crores.
  2. This requirement to have a credit rating agency monitor the use of funds raised (by other than by a public financial institution, insurance company or a bank) through preferential issues and QIPs aligns monitoring requirements with current IPOs and rights issues.
  3. Oversight of utilisation of money raised through public processes would always lead to greater compliance and is a move in the right direction. Having said that, SEBI may need to examine the existing disclosure regime for objects of QIPs and preferential issues in order to enable the credit rating agency to appropriately confirm the end-use.

 

Submission of offer documents

  1. In a reversal of the previous decentralisation of the IPO offer document review process, SEBI has not directed that offer documents be submitted to the head office.
    Comment: This has implications:
    a) a standardised approach to review of offer documents;
    b) while potential bottlenecking and increased review times due to increased number of offer documents, remains a potential area of concern.

Simplifying disclosures

As a follow up to ongoing directions issued by SEBI through observations and through the Association of Investment Bankers of India, certain amendments have been carried out to disclosure requirements in IPO offer documents under Part A of Schedule VI. The key changes can be summarised as follows:

 

Key Performance Indicators

  1. In order to simplify the use of performance indicators by issuers to showcase their growth and potential, SEBI has directed that all such ‘Key Performance Indicators’ or ‘KPIs’ will now need to be provided to all investors and defined in simple terms.
  2. If defined using technical terms, such technical terms must in turn be defined. KPIs must be certified by auditors/peer reviewed independent chartered accountant or cost accountant and such certificate will become a material document for inspection.
  3. The KPIs in turn must be approved by the audit committee of the issuer and explanation must be provided as to how the disclosed KPIs have been used historically by the management to track or monitor the operational or financial performance of the issuer.
  4. Importantly, KPIs disclosed to investors prior to the IPO must be disclosed in the offer document and those disclosed in the IPO offer document will require to continue to be disclosed post listing, for a one year period or till the IPO proceeds are utilised, whichever is later.

 

IPO price justification

Another amendment which is in line with recent SEBI directives, is the requirement to set out the justification of the IPO price.

  1. Issuers will now have to provide details of the price at which significant number of shares (exceeding 5% of the fully diluted pre-transaction share capital) have been issued in the last 18 months (whether in a single tranche or on a rolling basis over a 30 day period).
  2. Similarly prices at which significant number of shares (exceeding 5% of the fully diluted pre-transaction share capital) have been acquired by promoters, selling shareholders, members of the promoter group or shareholders with the right to nominate directors to the board have been transacted in the last 18 months (whether in a single tranche or on a rolling basis over a 30 day period) have to be disclosed.
  3. Moreover, SEBI has also now formalized the requirement of the price band advertisement specifically including a mention of the recommendation from a committee of independent directors of the issuer re the price band being justified based on quantitative factors / KPIs disclosed in ‘Basis for Issue Price‘ section vis-à-vis the weighted average cost of acquisition of primary issuance / secondary transaction(s) disclosed in ‘Basis for Issue Price‘ section.

 

This blog is authored by Capital Markets team.

 

Disclaimer for Updates / Client Alerts 

This update is not an advertisement or any form of solicitation and should not be construed as such. This update has been prepared for general information purposes only. Nothing in this update constitutes professional advice or a legal opinion. You should obtain appropriate professional advice before making any business, legal or other decisions. JSA and the authors of this update disclaim all and any liability to any person who takes any decision based on this publication.

Recent Key Reforms Enforced by SEBI

Pursuant to a board meeting of the Securities and Exchange Board of India (“SEBI”) held on September 30, 2022 (“Press Release”), a series of reforms and amendments were enforced by SEBI.

A summary of the key reforms and amendments are as follows:

  1. Introduction of pre-filing of offer document as an optional alternative mechanism for the purpose of initial public offer on the main board of stock exchanges

SEBI has approved the proposal of a pre-filing mechanism of offer documents as an alternative to the existing mechanism of filing offer documents, in relation to initial public offers on the main board of the stock exchanges.

SEBI pursuant to its “Consultation Paper on Pre-filing of Offer Document in case of Initial Public Offerings” (“Consultation Paper”), discussed the concerns of the issuer companies proposing to raise funds by an initial public offer (“IPO”), including disclosure of sensitive information in the draft red herring prospectus, which may be beneficial to competitors of such issuer companies, without the certainty that the IPO would be executed.

In terms of the Consultation Paper, issuer companies will have the option under the pre-filing mechanism to file the draft red herring prospectus with SEBI and stock exchanges, without making it available for public, for an initial scrutiny period only (“Confidential Filing”). SEBI will provide its observations on the Confidential Filing. In the event the issuer company proposes to undertake the IPO, an updated draft red herring prospectus after incorporating the comments received from SEBI on the Confidential Filing (“UDRHP I”) will be filed with the SEBI and stock exchanges and will also be made available for public comments for at least 21 days.

The issuer company will be required to file a further updated documents with the SEBI and stock exchanges incorporating (a) comments received from the public; and (b) any regulatory or factual updates in UDRHP I, as applicable (such document, “UDRHP 2”). Pursuant to SEBI taking note of changes in the UDRHP-II, the issuer company may file the Red Herring Prospectus (“
RHP”) with Registrar of Companies (“RoC”), stock exchange(s) and SEBI.

While SEBI pursuant to its Press Release has approved the proposal of pre-filing of offer document, the finalised framework for pre-filing mechanism of offer documents is yet to be notified by SEBI, based on comments received on the Consultation Paper. Further, while the consultation paper clearly specified that marketing of the IPO can only be undertaken post UDRHP-1 filing, a clarification on the same is pending from SEBI.

  1. Monitoring of utilization of issue proceeds raised through preferential issue and qualified institutions placement (QIP) issue, in terms of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“SEBI ICDR Regulations”)

SEBI has approved the proposal to introduce monitoring of utilization of issue proceeds raised through preferential issues and qualified institutions placement (QIP), with credit rating agencies as monitoring agencies, for issues of size above Rs. 100 crores. This will enable shareholders to stay abreast of and keep a track on the status of the utilization of funds raised by the company as against the disclosed objective of utilization of funds. Further, since monitoring of the utilization of proceeds is required for all pubic and rights issue with an issue size of above Rs 100 crores, this reform has now aligned the requirement of monitoring of utilization of proceeds with that of the public and rights issues, which we feel is a positive step towards attaining overall investor protection.

  1. Disclosure of key performance indicators (“KPIs”) and price per share of the issuer, in public issues, based on past transactions and past fund raising from the investors

Issuers proposing to raise funds by IPOs will now have to disclose the (i) KPIs, and (ii) price per share of the issuer company, based on past transactions and past fund raising done by it from investors prior to IPO (“Pre-IPO Fund Raising”), under the ‘Basis for Issue Price’ section of the offer document, as well as in the price band advertisement to be issued by the issuer company in terms of the SEBI ICDR Regulations.

In relation to the Pre-IPO Fund Raising, SEBI has specified that the price per share of the issuer company based on primary or new issue of shares and based on secondary sale / acquisition of shares, during the 18 months period prior to the IPO will have to be disclosed and in case there are no such transactions during the 18 months period prior to IPO, then information for price per share of the issuer company would have to disclosed based on last five primary or secondary transactions done within three years of the IPO. Further, the weighted average cost of acquisition (“WACA”) based on primary/ secondary transaction(s) and ratio of WACA vis-à-vis IPO floor price and cap price will have to be disclosed in the offer documents and in the price band advertisement.

A committee of the independent directors of the issuer company will also have to provide a justification on the price band based on quantitative factors/ KPIs vis-à-vis the WACA of primary issuance and secondary transaction(s).

While this amendment is a step in the right direction, there are certain points which may need clarity from SEBI. For instance, in relation to disclosure of price per share of the issuer company, SEBI in its consultation paper dated February 18, 2022, clearly specified that Pre-IPO Fund Raising of both equity shares and convertible shares would have to be considered for calculating the price per share of the issuer company. However, basis the Press Release, we are unable to ascertain whether the issuance of both convertible securities and equity shares would have to be considered for the calculation of the aforesaid parameter.

  1. Amendments to the Listing Regulations in re appointment and removal of independent directors

In terms of Regulation 25 (2A) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”), the appointment, re-appointment or removal of an independent director of a listed entity, shall be subject to the approval of shareholders by way of a special resolution. Further, in accordance with the Section 149 (10) of the Companies Act, 2013, no independent director shall hold office for more than two consecutive terms.

SEBI by way of its Press Release has provided flexibility in the approval process for appointment and / or removal of independent directors by approving an alternate method for the appointment and removal of independent directors appointed for the first term

If the special resolution for appointment of an independent director is unable to attain the requisite majority, under alternative method, such independent director will be deemed to be duly appointed if following thresholds are met:

  • Threshold for an ordinary resolution in terms of the Companies Act, 2013;
  • Threshold for majority of minority shareholders.

 

The aforesaid thresholds would similarly be applicable for the removal of an independent director appointed under this alternate mechanism.

Further, while SEBI in its “Consultation Paper on Review of Regulatory Provisions related to Independent Directors” dated March 1, 2021, has defined “minority shareholders” as shareholders, other than the promoter and promoter group, we await clarification on the exact scope and meaning of “minority shareholders”.

This blog is authored by Capital Markets team.

 

Disclaimer for Updates / Client Alerts 

This update is not an advertisement or any form of solicitation and should not be construed as such. This update has been prepared for general information purposes only. Nothing in this update constitutes professional advice or a legal opinion. You should obtain appropriate professional advice before making any business, legal or other decisions. JSA and the authors of this update disclaim all and any liability to any person who takes any decision based on this publication.

The Employee Moonlighting Dilemma

“Moonlighting” laws restrict an employer’s ability to take adverse employment decision against an employee who works for a different employer outside his regular work hours if the ancillary employment does not compete or interfere with such employee’s ability to adequately perform his primary job.

In India, certain statutory provisions provide for exclusive service and impose restrictions on double employment such as the Delhi Shops and Establishments Act, 1954, the Factories Act, 1948, and the Industrial Employment (Standing Orders) Central Rules, 1946. Further, restrictive covenants in employment contracts which are intended to operate during the subsistence of an employee’s employment are also enforceable under the Indian laws. Hence, the contractual provisions against moonlighting will be enforceable by employers against a defaulting employee.

In 2016, the Central Government enacted the Model Shops and Establishments Act, to revise the regulatory norms for operating offices and commercial establishments in India. Following this, several States amended their State-specific Shops and Establishments Act to modify the local law requirements in their respective jurisdictions. However, Maharashtra was the first State to repeal and reenact its State-specific Shops and Establishments Act. With this repeal and reenactment, the statutory restriction on double employment under the Bombay Shops and Establishment Act was omitted.

Amongst the labour law reforms that are in the pipeline, the Occupational Safety, Health and Working Conditions Code, 2020 imposes a restriction on double employment in a factory and mine. However, the draft Model Standing Orders for the Services Sector, 2020, which will be applicable to the IT sector too, while retaining the provision on “exclusive service” goes a step ahead by enabling workers to take up an additional job/assignment with their employer’s prior permission and subject to conditions, if any, imposed by their employer.

Job quality and pay issues may, over a period, lead to reduced levels of job satisfaction and loyalty in full-time employees. Such dissatisfied full-time employees become vulnerable and are more likely to fall for opportunist white-collar gig jobs. On the other hand, the entities offering white-collar gig jobs may be oblivious to the job status of their recruits, given that they are saved from having to hire and train freshers as these new recruits, who may be full-time employees of another entity, already have the expertise of quality and trained manpower.
The employer perspective on the issue of moonlighting remains divided. Whereas some regard it as cheating/deceitful and, therefore, unethical, others do not see much harm, provided that the freelance project, or second job, does not impact the full-time employee’s productivity or involve cross-leveraging of confidential data. Consequently, based on business requirements, including confidentiality and intellectual property rights (IPR) issues, an emergence of company policies that are either restricting moonlighting and dismissing defaulting employees from service, or allowing their employees to take up internal or external gigs, is being observed.

Authored by the Minu Dwivedi – Partner, JSA.

 

SEBI advisory on exemptions relating to Promoter Group

Securities and Exchange Board of India (“SEBI”) has issued an advisory dated April 26, 2022, to the Association of Investment Bankers of India mandating changes and clarifying processes in for exemptions with respect to classification and inclusion of details of members of promoter group of a company en route an initial public offering (“Advisory”).

Regulation 2 (1) (pp) (ii) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended (“SEBI ICDR Regulations”) includes an immediate relative of a promoter or its spouse in the definition of the promoter group. As per the Advisory, any exemption sought with respect to inclusion of such members in promoter group of the issuer shall have to be necessarily accompanied with either (a) a reference or affidavit from the relative stating in clear terms that the person does not want to be part of the promoter group or (b) a memorandum of understanding (“MoU”) duly signed between the promoter and the said relative. Accordingly, formal communication between the issuer or promoter and the concerned relative of the promoter will require to be placed before SEBI along with the exemption application. The communication may be supported by an affidavit issued by the relative declaring their intention to not be named as part of the promoter group. Alternatively, a formal family settlement agreement or MoU setting out estrangement will be required to be presented.

Further, an immediate relative in relation to whom an exemption is being sought, should not be holding any interest in the issuer including through equity or debt, or as a vendor, supplier, client or otherwise. Therefore the issuer or promoter will require to demonstrate complete separation of business interests of the immediate relative from the issuer. However, no clarification has been provided in respect of time frame or period within which such transactions or interests may have been held.

The Advisory also clarifies that any such exemption shall have to be obtained prior to filing of the draft red herring prospectus with SEBI.

Prior to this Advisory, issuers used to send applications to the relatives of the promoters and their spouses for obtaining their consent for inclusion of their name(s) in the offer documents, in the absence of obtention of which, it would seek an exemption from SEBI for removal of the name of such relative(s) from the promoter group and non-disclosure of confirmation required from promoter group in respect of such relative(s). The exemption applications were previously filed immediately prior to or co-terminus with the filing of the draft offer document with SEBI. Therefore, the Advisory has escalated concerns that this requirement to obtain positive confirmations or affidavits or additional documentation demonstrating estrangement, may potentially be a serious hurdle to IPO-bound companies.

While SEBI’s intention appears to be prevention of the abuse of exemption process to conceal disclosure of some promoter group members, the proposed solution may give rise to regulatory impediment in genuine cases where a member of the promoter group may mala fide withhold signing of necessary documents.

This blog is authored by the JSA Capital Markets Team.

SEBI’s views of accessibility and legibility

A summary of the Accessibility Guidelines are as follows:

Quick Response Code (“QR Code”)

For all draft red herring prospectuses (“DRHPs”) filed on or after April 1, 2022, the cover page of the DRHP, red herring prospectus or prospectus(“offer document”) should contain a QR Code which links to a separate page on the website of the lead merchant banker (colloquially known as the left lead), where the offer documents, abridged prospectus, any corrigenda or addenda, and price band advertisement is available.

The QR Code should lead through not more than one click through filter (for jurisdiction specific restrictions or disclaimers) to the offering material.

Non-left lead merchant bankers may continue to upload the document based on current practices.

 

Content of offer documents

Cover Page: To ensure legibility, the Accessibility Guidelines sets out that the cover page of offer documents (containing the QR Code), should be at least font size 10 with utilisation of margins to ensure space for the increased font size.

Financials: Financial statements should be included in a manner such that legibility is ensured, including through use of landscape formats and narrower page margins.

Capital Structure: Details of allottees should be included in the table itself to the extent possible, especially for allotments to promoters, members of the promoter group or institutional shareholders. Only disclosures on allotments to employees or a large number of allottees should be provided in paragraph form through footnotes.

Risk Factors: Language in risk factors should be simplified to avoid repetition within and across risk factors. Percentages, wherever are mentioned, should be accompanied with corresponding numerical amounts. Data, as much as possible, should be presented in a tabular format for better understanding and legibility.

 

SEBI Observation responses and UDRHP

SEBI Responses: SEBI response should be properly formatted and with font size of at least 10. Responses provided to SEBI observations should clearly indicate whether the information is proposed to be disclosed in the offer document or is for SEBI’s review only. If data is not proposed to be disclosed, the rationale for the same should be clearly mentioned.

UDRHP: Changes to offer document as a result of SEBI observations should be highlighted in a different colour, in the comparison submitted to SEBI, for easier review.

 

Main board listing

All advertisements relating to an issue, should clearly disclose that the securities will be listed on the main board or on SME platforms. Similar disclosures to be made in case of advertisements for rights issues.

 

This blog is written by Pracheta Bhattacharya and Harish Choudhary.

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