A host of informal advisories pertaining to initial public offerings (IPO) has created a stir and added to the uncertainty for companies, investment bankers and law firms. The regulator recently sent a 31-point advisory to bankers, requiring enhanced disclosures and increased due diligence on companies tapping the market for an IPO. Over time, it has expanded the promoter definition for founders of IPO-bound companies.

The regulator has been issuing several informal advisories through the Association of Investment Bankers of India for over two years now.

While such advisories are not legally binding, section 11A and 11B of SEBI Act gives wide powers to SEBI to issue directions to intermediaries in respect of offer documents to protect investor interest. SEBI also has powers to issue specific observations and feedback on the draft offer documents under rule 26(4) of SEBI ICDR Regulations.

Market participants are generally expected to adhere to SEBI’s guidance, even if it is not explicitly provided in law, according to Sumit Agrawal, Partner, Regstreet Law Advisors.

Some of the informal guidelines stem from the regulator’s past learnings and are meant to help process the offer documents faster, said a banker. Advisories that are clarificatory in nature help interpret SEBI regulations and align companies to standard market practices. “The advisories may be a culmination of SEBI forming its position on common factors that apply across offer documents,” said Manendra Singh, Partner, Economic Laws Practice.

Lack of uniformity

Be that as it may, some of these directions may have no legal backing and are done through merchant bankers, who have a conflict of interest in pushing back as they may want the deals to go through. “Bankers have several documents filed with SEBI at a time and cannot afford to rub the regulator the wrong way. Even if the company may want to resist a particular diktat or advisory, the bankers would be keen to comply with the informal guidelines to ensure the deal goes through,” said a legal expert.

Agrawal believes that informal and non-public advisories, which are not codified in law, create uncertainty and non-uniformity for companies and merchant bankers, and can lead to potential mischief. “Such advisories often vary from transaction to transaction. Evidently, there is lack of uniformity in the directions and the merchant bankers at times find themselves in a grey zone concerning the applicability of disclosures required in the offer document,” said Harish Kumar, Partner, Luthra and Luthra Law Offices India.

An email sent to SEBI did not immediately get a response.

Undermining law?

While some of the advisories may have been driven by past missteps or lack of disclosures by companies, market watchers believe that these should be more carefully worded and less open-ended. The frequent use of such advisories may end up undermining the current ICDR Regulations, they said. “SEBI has the power to issue observations on the draft prospectus, which has to be on a case-to-case basis. If more generic rules are prescribed, it is better to bring them under ICDR regulations,” said the legal expert quoted above.

According to Agrawal, pursuing a consultative process for amending the ICDR regulations is essential to allow stakeholder input, promote transparency, reduce ambiguity and provide a more stable regulatory environment. “The issue is less about SEBI’s power to issue the advisories and more about the non-transparent and wide discretion exercised by it towards issuers and investment bankers,” he said.

Singh believes that formal amendments will ensure legal backing and help the industry at large to be informed of such changes, and not just the bankers.

Kumar, however, feels that making necessary amendments in law pursuant to public consultations might take considerable time which, in turn, may impact the industry interest.

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