SEBI returns over 10 IPO draft papers due to lack of due diligence

The Securities and Exchange Board of India (SEBI) has recently returned more than 10 draft red herring prospectuses (DRHPs) to merchant bankers, citing a lack of due diligence and necessary disclosures. This move sends a strong message to the investment banking community regarding the importance of thorough and accurate documentation, according to sources quoted by Moneycontrol.

Among the companies whose IPO papers were returned are Garuda Construction, Jaykay Enterprises, KRN Heat Exchange, Diffusion Engineers, Shree Tirupati Balaji Agro Trading, Gretex Broking, and Stallion Fluorochemicals. Additionally, Vishal Mega Mart and Avanse Financial Services had their IPO draft documents returned on technical grounds earlier in July.

The capital market regulator's actions, while citing "technical grounds," often address minor omissions or oversights that can be rectified through communication between the regulator and investment bankers. An anonymous source mentioned that even issues like improper sentence framing or the use of passive voice instead of active voice could lead to the return of a prospectus.

Merchant bankers can refile their DRHPs after addressing the deficiencies, but this will extend the timeline for the completion of the IPO. Despite the increased scrutiny and the return of DRHPs for minor reasons, SEBI's goal is to ensure that all submitted documents meet the required criteria and disclosures to expedite the overall process.

In February, SEBI issued a circular outlining clear and straightforward guidelines for DRHP submissions, aimed at mitigating disclosure risks. While some merchant bankers view the regulator's stringent scrutiny as an obstacle, others believe it will ultimately speed up the process by ensuring only fully compliant DRHPs are submitted.