Sebi likely to increase scrutiny of IPO documents: Report

"The regulator has returned at least six public offer documents, as SEBI observed companies are misleading in their reasons for fundraise," said the first of the four sources mentioned in the report.

The surge in India's stock market activity has led to nearly 50 companies launching public offerings in 2023 alone. So far this year, eight IPOs have been completed, with an additional 40 awaiting clearance from SEBI.

Reason for regulatory scrutiny

Sources mentioned in the Reuters report said that SEBI has returned at least six public offer documents, citing concerns over potential misleading information provided by companies regarding their reasons for fundraising.

SEBI is particularly focusing on scrutinising how companies plan to utilise the funds raised from IPOs.

According to SEBI regulations, funds raised through IPOs can be allocated for various purposes including capital expenditure, debt reduction, general corporate needs, and acquisitions.

Notably, if funds are earmarked for debt reduction, the promoters and major shareholders with influential roles in the company would have their shares locked in for a period of 18 months.

However, if the funds are intended for capital expenditure, the lock-in period extends to three years.

"By saying the company is using funds to retire debt, they (promoters) are circumventing the law and reducing the share lock-in period from three years to 18 months," the first person said.

Compliance challenges for companies

An investment banker, speaking on condition of anonymity due to the confidentiality of discussions with the regulator, noted that SEBI is now demanding a detailed breakdown of how IPO proceeds will be used to retire debt incurred for capital expenditure.

"This is making disclosures fairly cumbersome," said the people mentioned in the report.

Earlier this month, SEBI announced it was investigating three IPOs over allegations of inflating subscription numbers.

SEBI Chairperson, Madhabi Puri Buch, mentioned that measures are being devised to address such malpractices.

SEBI's heightened scrutiny of IPO documents underscores its commitment to maintaining transparency and integrity in the Indian capital markets.

However, the increased regulatory scrutiny may pose challenges for companies seeking to go public amid the current IPO boom.