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The Securities and Exchange Board of India (SEBI) has mandated the removal of special rights granted to select investors before a company’s initial public offering (IPO). This directive applies to various pre-IPO agreements that offer preferential terms to certain shareholders.
Recently, SEBI instructed bankers to eliminate special rights such as buyback guarantees included in shareholder agreements. These rights often provide select investors with exit options if the IPO does not materialize. For example, Transrail Lighting had to submit an addendum after filing its draft red herring prospectus (DRHP) to declare that Asiana Alternative Investment Fund waived its buyback arrangement. Similarly, Akum Drugs and Pharmaceuticals saw Ruby QC Holdings Pte. Ltd relinquished a clause that mandated a buyback of shares if an exit was not provided.
Merchant bankers believe SEBI’s stance is to ensure a level playing field for all shareholders, eliminating discrimination between institutional investors and retail investors during an IPO. “Recent communications from SEBI aim to enhance disclosure levels in DRHPs while creating equal opportunities for all shareholders,” stated an official from a foreign merchant banking firm.
SEBI insists that any preferential treatment previously given must be documented and disclosed publicly to prevent information asymmetry. This is part of SEBI’s broader efforts to improve transparency and disclosure standards in the market.
Additionally, SEBI has been scrutinizing IPO draft documents rigorously, returning more than 10 DRHPs recently for inadequate due diligence or disclosures. Companies such as Garuda Construction, Jaykay Enterprises, and Gretex Share Broking have had their DRHPs returned. While companies can refile, this extends the overall IPO timeline.