SEBI Raises Around 100 Observations On DRHPs, Nearly Half Related To Risk Disclosures: Study

The Securities and Exchange Board of India (SEBI) makes, on average, about 100 observations while reviewing the draft red herring prospectuses (DRHPs) filed by companies that intend to float initial public offers (IPOs). Out of these, about half the observations pertain to the disclosures required in the risk factors section, as per the study carried out by Uniqus and the Indian Venture and Alternate Capital Association (IVCA).

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It has been found that about 46% of the observations made by SEBI during the IPO document review pertain to the risk factors section.

According to the report, the observations made by SEBI on the IPO document are intended to ensure that the company makes adequate disclosures about the risks that investors may face when they invest in the IPOs.

Risk Factor Disclosures Receive Highest Attention

The study highlighted that SEBI places significant emphasis on the quality and clarity of risk disclosures included in DRHP filings.

The regulator requires companies to present risk factors in order of importance and materiality so that investors can easily identify the most critical risks.

Companies are also expected to clearly disclose key operational, financial and governance risks that may affect their future performance.

According to the report, SEBI frequently seeks additional clarification on areas such as supplier or customer concentration, geographic concentration of revenue sources and the absence of long-term vendor agreements.

The regulator also reviews disclosures related to potential financial risks, including negative operating cash flows, increasing working capital requirements and lack of profitability.

Additional Areas Of Regulatory Review

Apart from risk factor disclosures, the report noted that SEBI also focuses on regulatory compliance and corporate governance aspects during its review process.

About 13% of the regulator’s observations relate to compliance and regulatory requirements, according to the study.

These include disclosures related to transactions with promoters or related entities, experience levels of directors and governance practices followed by the company.

The regulator also requires companies to explain the commercial rationale behind material transactions involving promoters or promoter group entities.

Disclosure Requirements In the Offer Structure

The report also highlighted that SEBI reviews the structure of the public issue while examining DRHP filings.

For eg, when an IPO consists entirely of an Offer for Sale (OFS), issuers must clearly disclose that the company itself will not receive any proceeds from the share sale.

SEBI also asks companies to provide detailed explanations if their manufacturing facilities face risks of technological obsolescence or if operations are exposed to tariff-related risks in export markets.

According to the study, the large share of observations related to risk factors and compliance disclosures highlights the regulator’s focus on ensuring that investors receive detailed and transparent information before participating in public offerings in the primary market.