MC Exclusive| Sebi attempting to eliminate special rights in order to lessen PE firms' influence on IPO pricing: Sources

Following many cases of emerging IT businesses that had sharp declines in performance following their listing, the market regulator has been moving in this direction.

Insiders claim that the regulator has been requesting, among other things, that investors be excluded from decisions on initial public offerings (IPOs).

According to reports, the market regulator is attempting, via a variety of measures, to lessen the influence that private equity (PE) investors have on the price of public issues of the firms that make up their portfolio.

In a recent advisory, the Securities and Exchange Board of India (Sebi) requested that investment bankers make sure that, prior to a company filing its updated draft red herring prospectus (UDRHP), any special rights granted to any entity through the Articles of Association (AoA) and shareholders' agreement (SHA) are cancelled.

Sources claimed that the regulator's apprehension over PE investors' influence over significant IPO decisions was the driving force behind the advisory, despite worries that PE investors would be shortchanged by losing any control they had over the management of their portfolio companies prior to an exit through listing.

During this "sensitive period" that occurs between the filing of the UDRHP and the share listing, these choices are made about the issue price, the selection of anchor investors, and the allocation to anchor investors. As a result, PE investors' influence during this time is eliminated by the recent advice given to the LMs due to their specific privileges.

Why is this a concern?

Market sources claim that since a few new generation IT businesses saw their pre-IPO investors leave at huge gains while the public investors were forced to cope with a sharp decline in price, the regulator has been worried about PE investors' influence over the IPO process. Insiders claim that as a result, the regulator has been requesting that investors be excluded from the IPO choices using a variety of measures.

Based on their remarks in the IPO offer papers, the regulator seems to have been particularly concerned about the power selling shareholders, like PE investors, have on the issue's price. Investors may use this authority via specific rights granted in shareholder agreements (SHAs) or by nominating their candidates for directorships on the IPO Committee of the portfolio firm.

Sources claim that the regulator has previously dissuaded nominated directors of this kind from serving on the IPO Committee. Now, the unique rights included in the SHAs are removed by this advice to LMs.

Why do SHAs exist?

Similar to other pre-IPO investors, PE investors' rights are outlined in SHAs and articles of association (AoA). Issues' underwriters insisted that these rights be deleted before to the filing of the DRHP, which resulted in the first regulatory push to remove these unique rights from AoA. Nonetheless, the SHA continued to have these rights.

The regulator has urged the lead managers to make sure that any special rights, whether under the AoA or the SHA, be revoked before the filing of the UDRHP in order to guarantee that PE investors do not have these rights even via the SHA.