Confidential IPO filing: How it will work and why it is being introduced

How is pre-filing/confidential filing different from regular filing and how does it work?

Market regulator Securities and Exchange Board of India (Sebi) has introduced confidential filing or pre-filing of the draft red herring prospectus (DRHP) by companies wanting to go public. Currently, any company planning an initial public offering (IPO) has to file its offer document with Sebi. This document, known as DRHP, contains vital information about the company’s business and financials and has to be made public compulsorily. Confidential filing, an optional mechanism, will help companies keep their DRHP private until they firm up their IPO plan. Their offer documents will be open to scrutiny from the regulator and exchanges, but won’t be open to the public. The company will then have to file an updated DRHP, which will be a public document, once Sebi issues its observations and the company decides to launch its IPO.

Why has the need been felt to introduce confidential filing?

The purpose is to give companies flexibility over information flow and withhold sensitive data from competitors. Many companies, despite obtaining the Sebi go-ahead for IPOs, have not been able to launch their issues. This new route will help companies explore listing options without unwarranted public scrutiny and opportunistic litigation.

It will facilitate disclosure of documents for investors to consume at an appropriate time when the issuer is ready to go for listing. It will protect issuers who want to call off their IPO plans, by not unnecessarily publishing business information much prior to making this decision.

Does confidential filing mean investors are kept in the dark? When will the DRHP come into the public domain?

Though the details of the offer documents will remain confidential, an issuer will have to disclose that it has pre-filed for an IPO. However, that does not make it binding on the issuer to go for the IPO. The idea is to give issuers time to explore the IPO route. The updated DRHP will be the first public document from the issuer, prior to which, the company will not showcase key performance indicators through any means to the public. Before this, research reports based on confidential filing will also not be permitted. A confidential filing doesn’t necessarily mean that investors will be kept in the dark. All the information currently disclosed in the DRHP will be made available to the regulator initially, so that the public at large can access it closer to the IPO date.

Do foreign jurisdictions have such a mechanism?

Globally, jurisdictions such as the UK, Canada and US permit pre-filing of the offer document for review by the regulatory authorities. Subsequently, in case the issuers decide to proceed with the offer, the document incorporating changes mandated by the regulator is made available to the public. Companies such as Snapchat, Robinhood SurveyMonkey and Line have taken the confidential filing route.

How will companies exploring IPO gauge interest from investors when filing is confidential?

A limited marketing may be allowed to institutional investors to gauge demand and arrive at fair pricing. The new regulations may include a ‘test the water’ (TTW) clause to help issuers gauge investor interest in advance. The limited purpose marketing will be aimed only at qualified institutional buyers (QIBs).

Will the new norms help new age tech companies and startups in their listing plans?

The confidential filing will allow companies the flexibility in freezing the size of the issue. Moreover, there may be relaxation on outstanding convertible securities till the time Sebi issues its observations. Currently, this is not allowed. There are also plans to permit change in promoters or directors and issuance of new shares to existing or new investors only till the time they have not received Sebi observations.

What will be the timelines for launching an IPO in case of pre-filing?

The validity of Sebi’s observations may be increased to 18 months, as against the current 12 months, to give sufficient time to issuers for marketing and advertisements. Issuers will have to file an updated DRHP within 16 months from the date of Sebi observation.

When will the new framework be available? Can all issuers avail this?

The new framework will be available once Sebi notifies the new regulations. Pre-filing will be available as an optional route to all issuers. Companies will be able to either continue with the present route of filing DRHP or choose the optional mechanism of confidential filing.