Recent news reports suggest that the Indian arm of a global private equity firm, recently hosted a two-day investor conference to bring together public market investors and portfolio companies looking to go public. This is a first of its kind and poses several interesting questions on publicity aspects and marketing of potential deals, of which the public investors have no information.
The investor conference was reportedly attended by 20 selected portfolio companies, of which some are listed and some looking to list. Ostensibly, this conference was to “take the lead in accelerating this learning curve for leadership teams of private companies, as well as, for public market funds who need to know more about the founder-led class of innovative companies before encountering them in the short-fuse decision making cycle of an IPO”.
On the face of it, a conference of this sort would sit well among various kinds of industry conferences where companies and investors can meet and exchange notes about governance standards and be educated about innovative models aimed at disrupting the delivery of products and services. However, a closer analysis reveals that this sort of a conference may be skating on thin ice considering publicity regulations applicable to companies looking to list in the near future.
As per SEBI ICDR Regulations, companies on the road to an IPO (the benchmark being those who have filed a draft offer document or DRHP with SEBI) should avoid releasing information during a conference which is extraneous to the filed draft offer document. While this is a clear instruction, the SEBI PFUTP Regulations prohibits, “disseminating information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading in a reckless or careless manner and which is designed to, or likely to influence the decision of investors dealing in securities”; or “knowingly planting false or misleading news which may induce sale or purchase of securities”. These guidelines are fairly broad and whether investor conferences of this nature fall afoul of these broad guidelines, remains a question that deserves more analysis.
The questions that arise from these investor conferences can be broadly categorised as follows:
Information access: By providing early access to the leadership teams of potential IPO aspirants, there is a possibility of creation of an uneven access to information regarding these companies.
Early access to information may pose a problem in itself as the IPO process is correctly identified as a “short fuse” time. Having access to information regarding a company or simply knowing that it is IPO bound, would allow major investors to have a significant lead time compared to lay investors or even their competitors.
Information sharing: Information shared by companies with potential investors at these conferences may include detailed financial models or projections which may not ultimately make their way to the public through draft offer documents.
As highlighted above, information extraneous to an offer document, being made available to a select few individuals may cause information asymmetry, which is problematic in the investment space, which trades in information, to form the basis of a transaction.
Market creation: By exposing potential IPO bound companies to investors, the conference can create a buzz or impression around the potential deal.
Creation of a buzz around a potential transaction is not illegal or problematic, but it could create an impression that a company will tap the public markets soon, much before it is actually ready for the process or even before securing necessary approvals to undertake the process. This conditioning of the market for a potential deal, thus acts as a Pavlovian stimulus which in turn can lead to potentially larger subscription numbers.
In an ideal world of perfect information symmetry, much of these problems would not exist, but sadly we live in a world of imperfections and therefore investor meet and greets of this nature represent a grey area which may best be avoided in future.
( The article is authored by Arka Mookerjee and Pracheta Bhattacharya, Partners at JSA’s Capital Markets practice)
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