Sebi advisories on IPOs stump market watchers
By Ashley Coutinho
The securities and exchange board of India (Sebi), earlier this year, issued guidelines for companies wanting to go public and seeking exemption from inclusion of certain relative/s in the promoter group.
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The above diktat was issued via an email to the Association of Investment Bankers of India, or AIBI, an industry body. It’s one of several diktats — largely in relation to IPOs — that has been sent in such manner over the past year or so. The flurry of advisories has surprised market watchers because, until recently, changes in guidelines pertaining to public share sales were mostly done through amendments in the issue of capital and disclosure requirements (ICDR) regulations.
“Sebi has been issuing these advisories to AIBI for over a year now. Advisories, which are clarificatory in nature, help interpret Sebi regulations and align companies to standard market practices,” said a senior lawyer.
A few months ago, for instance, Sebi had issued an advisory asking all issuer companies filing offer documents to provide consolidated financial statements prepared as per the Indian Accounting Standard (Ind AS) for all three years. Another one asks registrar & transfer agents to send SMS intimation to investors for allotment (debit) and non-allotment (unblocking) of shares in an IPO.
“The guidelines are for issues that may have industry-wide implications. It makes life easier for bankers as they do not need to hold one-on-one interactions with the regulator ahead of an IPO,” said an investment banker, on condition of anonymity.
Market observers, however, believe that the current practice goes against the tenet of a disclosure-based regime and should not be used to amend the existing disclosure requirements laid out under Sebi regulations.
“The unintended consequences of advisories, in the nature of amendments, are lack of public discourse and missing regulatory intent, which is otherwise available through the Board agenda,” said a legal expert.
He added that such advisories are more transaction-specific and should not be applied universally across all offer documents: “Sebi should steer clear of issuing policy matters through such advisories. The recent Sebi approach on promoter group exemption has created challenges for various issuers. The regulatory concerns could have been allayed through an effective public consultation followed by necessary regulatory amendments.”
“Such guidances bring discomfort to market participants given their sudden timing and immediate applicability. It is very unlikely for any objections to be raised against these guidances given the dynamics involved between the regulator and the AIBI. However, there can be an upfront constructive dialogue to bolster Sebi’s intent behind issuing these,” said another legal expert.
An email sent to Sebi and AIBI did not elicit a response.
Experts also suggest that the changes effected through such informal instructions can be challenged in a court of law. “What if I don’t comply with these instructions? What law am I violating? It’s a grey area and needs to be tested in a court of law,” said the first legal expert.
Notably, the reliability of the erstwhile Sebi (Disclosure and Investor Protection or DIP Guidelines, 2000) guidelines were called into question due to its dependence on the regulator’s informal guidance, which did not provide a binding interpretation. This is what prompted the regulator to junk the guidelines and notify the ICDR Regulations, 2009 that had a statutory backing.
“Strictly speaking, the advisories do not have a legal standing. But I don’t think there’s a need for that unless the regulator wants to change the regulation,” said the investment banker quoted above.
To be sure, section 11 and 11B of the Sebi Act gives the regulator wide-ranging powers to issue directions to market intermediaries for the orderly development of the securities market.
Earlier this year, for instance, the regulator gave several relaxations/exemptions to smoothen the IPO of state insurer LIC. This includes relaxing the lock-in period for anchor investors and allowing a new class of investors in the form of policyholders to subscribe to the IPO.
