SEBI request to companies planning for IPO to disclose any whistleblower complaints they have received
SEBI – The recent development involves the regulator’s rare intervention to halt initial public offerings (IPOs) of at least two companies due to whistleblower complaints regarding lapses in disclosures made by the companies in their offer documents.
Over the past few months, Sebi has investigated whistleblower allegations of fraud and incomplete disclosure against two small and medium enterprises planning to go public.
Rosmerta Digital Services had planned to launch its Rs 206-crore IPO on November 16, which was set to be the largest SME fundraising. However, Sebi received multiple complaints against the promoters, including allegations of security market violations by their close associates and incomplete disclosures. As a result, the company decided to postpone its offering.
In a separate case, Sebi instructed another SME issuer, Trafiksol, to refund money to investors after the company had completed its IPO. This action was taken following a whistleblower complaint received by Sebi regarding material misstatements in the company’s offer documents and suspected collusion with a shell entity.
Sebi typically does not interfere in capital market offerings by approving or rejecting offer documents but may provide observations. The regulator usually communicates any reservations to investment bankers.
Recent examples of Sebi requiring companies to disclose such complaints include Denta Water and Infra Solutions, which recently submitted an addendum to their offer document.
Sebi typically refrains from intervening in capital market offerings. It does not have the authority to approve or reject any offer documents, but it does provide feedback and observations. In cases where Sebi has reservations, it communicates with investment bankers.
Recent incidents have highlighted Sebi’s request for companies to disclose complaints. For example, Denta Water and Infra Solutions recently updated its offer document to include information about an old case involving one of its promoters, C Mruthyunjaya Swamy, which was investigated by the enforcement directorate (ED). The company stated that it was unable to identify the complainant and the case was closed by the ED in June 2022.
Despite considering the complaints frivolous and the complainant’s identity as bogus, Denta Water and Infra Solutions complied with Sebi’s directives by making the necessary disclosures.
Similarly, Smartworks Coworking Space, another company preparing for an IPO, disclosed anonymous complaints against its promoters in a detailed addendum to its offer document. The complaints alleged investigations by various agencies, including the ED and the CBI. Smartworks provided detailed responses to address the allegations.
Sebi is taking a cautious approach to such complaints due to their potential impact on investors. While there may not be active investigations or liabilities resulting from the complaints, Sebi is evaluating each case individually and requesting companies to disclose information based on the seriousness of the complaints. Some companies are also voluntarily disclosing such information when complaints surface.
Arka Mookerjee, a partner at the law firm JSA, emphasized the importance of disclosures as a valuable tool for both the issuer company and investors. He noted that while disclosures are crucial for creating an informed decision-making environment, there have been instances of complaints that may not be relevant to the issuer or the issue at hand. Mookerjee cautioned that such complaints can potentially overwhelm investors with unnecessary information, leading to information overload.
Furthermore, Mookerjee highlighted the challenge of analyzing complaints made after the closure of an issue, as this can hinder a detailed impact assessment and quality disclosure process.
For more market insights, follow our blog.
Stay tuned for more updates and insights on the stock market! For more insights on investing in the Indian stock market, check out resource like ET, NSE India.
Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Investors should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.