The Securities and Exchange Board of India (‘SEBI’) issued a circular on February 6, 2024 (‘Circular’), introducing certain guidelines for the return and resubmission of draft offer documents and draft letters of offer filed for public issuances and rights issues, respectively, (together, ‘Draft Offer Documents’).
The Circular comes into effect from the date of its publication, i.e., February 6, 2024, and is intended at ensuring completeness of Draft Offer Documents, providing greater clarity and consistency in disclosures and timely processing of Draft Offer Documents.
Previously, SEBI had issued the SEBI (Framework for Rejection of Draft Offer Documents) Order, 2012 (‘General Order’), pursuant to which SEBI has the power to reject the Draft Offer Documents submitted with it and possibly impose a restriction on such issuers from accessing the capital markets for a period of up to one year, while also taking the requisite action against such issuers and/or the relevant merchant bankers.
However, over the course of the last couple of years, SEBI had initiated the practice of returning Draft Offer Documents, instead of taking the more stringent action of rejection of a Draft Offer Document, as prescribed under the General Order. Such returned Draft Offer Document could then be resubmitted, at the option of the issuer, and subject to compliance with SEBI’s specific directions.
While the Circular does not in any manner supersede the General Order or rescind it, it fructifies the recent practice adopted by SEBI to enhance the ‘ease of doing business’ in India.
Following is an analysis of the key provisions of the Circular and certain comparative scenarios with the General Order:
1. Requirements for Presentation of Information in Draft Offer Documents
The Circular identifies certain subjective criteria based on which a Draft Offer Document shall be returned. Specifically, it requires:
a. the usage of short sentences, definitive, unambiguous, and conventional words, sentences in active voice, usage of lists and tables for presentation, the non-usage of multiple negatives and the usage of simple language accompanied with visual representation of data to further ease the understanding of the data;
b. language to be presented in a clear and concise manner across sections, paragraphs, and sentences with the usage of descriptive headings and subheadings. The language should not be very legal and technical in nature and wherever such technical or complex language is to be used, it should be accompanied by relevant clarifications and explanations; and
c. that Draft Offer Documents should avoid complex presentations that could lead to incomprehensible disclosures, vague and imprecise explanations offering more than one interpretation, legally complex information sourced from legal documents without precise explanations, repetition of disclosures across sections which do not lead to improvement in the effectiveness or quality of information; and inconsistent data or facts across a Draft Offer Document.
Lastly, the Circular also emphasizes the importance of clarity in the risk factors included in the Draft Offer Documents.
The General Order laid out similar requirements wherein Draft Offer Documents could lead to rejection due to vague, incomplete, or non-satisfactory information included in such Draft Offer Documents. The requirements under the Circular further enunciate the manner in which a Draft Offer Document is to be drafted, thereby clarifying the expectations of SEBI while filing a Draft Offer Document.
2. Cost and Time Factors
The Circular also states that in the event a Draft Offer Document is to be returned, there will be no additional fee payable solely for the resubmission of such Draft Offer Document with SEBI. However, the applicable fees pertaining to any updation of the Draft Offer Documents will continue to apply as per the provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (‘ICDR’). The Circular also clarifies that failure to resubmit a Draft Offer Document post its return, will not result in any refund of fees paid for the original submission of a Draft Offer Document.
3. Additional Guidelines
The Circular identifies the following additional criteria based on which a Draft Offer Document is liable to be returned:
a. in the event of substantial revisions or additions to a Draft Offer Document pursuant to observations and clarifications sought by the SEBI; and
b. corrective measures on account of any regulatory interpretation.
The Circular further mentions that information to be disclosed in a Draft Offer Document should be understandable, without the necessity of referring to general rules and regulations. Further, if any regulatory authority or enforcement agency has expressed any material concern in relation to a Draft Offer Document, the issuer will have to (i) ensure to seek / undertake remedial measures with such regulator prior to resubmission of such Draft Offer Document; and (ii) intimate such regulatory authority or enforcement agency, upon the return of such Draft Offer Document as well as prior to the resubmission of the Draft Offer Document, as the case may be.
Lastly, the Circular states that a Draft Offer Document shall be returned in the event of any pending litigation in any court / tribunal that could impact an issuer’s eligibility to undertake the offering, as prescribed under the ICDR.
An issuer is required to make a public announcement, as per the requirements of the ICDR, upon the resubmission of the Draft Offer Document, while stating that the document it is a resubmitted Draft Offer Document.
Given the subjectivity and lack of clarity around the return of Draft Offer Documents and their resubmission over the course of the last couple of years, this Circular was much awaited by issuers and merchant bankers. While the prescribed criteria for return of Draft Offer Documents may be largely subjective, the Circular does: (i) call out the relevant points and positions to be borne in mind by issuers and merchant bankers while drafting a Draft Offer Document, and (ii) clarifies the process to be followed in the event that a Draft Offer Document is returned and for its resubmission.
The Circular enunciates the principle that adequate disclosures in Draft Offer Documents and timely processing of Draft Offer Documents go hand-in-hand, and are both critical for the vibrancy of the primary market.