MC Exclusive | Sebi attempts to reduce influence of private equity funds on IPO prices by removing special rights: sources

The market regulator is trying to reduce the influence of private equity (PE) investors on the pricing of public issues of their portfolio companies through various measures, according to sources.

A recent advisory issued by the Securities and Exchange Board of India (Sebi) to investment bankers has asked them to ensure that all special rights granted to any entity through the Articles of Association (AoA) and shareholders’ agreement (SHA) are canceled before filing a business file. its updated draft red herring prospectus (UDRHP).

Also read: Private equity investors will have to give up their special rights in an IPO without certainty of exit.

Although some feared it could harm private equity investors by taking away any say in the management of their portfolio companies before securing an exit via listing, sources said the notice was driven by the regulator’s concern about the influence of private equity investors on crucial issues. IPO decisions.

These decisions, including the price of the issue, the choice of anchor investors and the allocation to anchor investors, are made in this “sensitive period” between the filing of the UDRHP and the listing of the shares. The recent notice addressed to LMs therefore eliminates any influence that PE investors have – thanks to their special rights – over this period.

Why this concern?

According to market sources, the regulator has become concerned about the influence of private equity investors on the IPO process after a few recent technology companies saw their pre-IPO investors exit with exorbitant profits while public investors faced a dramatic fall in prices. Therefore, the regulator has asked that investors be kept out of IPO decisions through various stages, according to insiders.

The regulator’s main concern, judging from comments it made on IPO offer documents, appears to have been the influence that selling shareholders, such as private equity investors, have , on the price of the issue. Investors exercise this power either by nominating their nominees as directors on the portfolio company’s IPO committee or through special rights granted in shareholders’ agreements (SHAs).

According to sources, the regulator has already discouraged the appointment of such nominated directors in the IPO committee. From now on, this notice addressed to LMs removes the special rights listed in the SHAs.

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Why SHAs?

PE investors, like other pre-IPO investors, have their rights enshrined in the articles of incorporation (AoA) and SHAs. First there was a regulatory push to remove these special rights from the AoA; this was implemented thanks to the underwriters of the issues who insisted that these rights be removed before the filing of the DRHP. But these rights were still preserved in the SHA.

To ensure that private equity investors do not benefit from these special rights, even through the SHA, the regulator has asked lead managers to ensure that any special rights, whether under the AoA or of the SHA, are canceled before filing the UDRHP.