Ever since we moved, in 1992, from a merit-based to a disclosure-based regime in the capital market, Sebi, the regulator, has been constantly on the job to improve both the quantity and quality of disclosures.
Specifically for IPOs, the Issue of Capital and Disclosure Requirements (ICDR) regulations of Sebi which govern disclosures in prospectus have been amended umpteen times. In fact, each IPO leads to some new learnings as also new sectors, new investors, emerging market conditions, practices/malpractices and international best practices lead to review of the disclosure requirements. While this has meant newer and more detailed disclosures, the overall quantity has gone up dramatically, more so after lawyers took charge of disclosures. In the 1970s and 1980s, a typical prospectus was 10-12 pages, of course with the quality of disclosures being pathetic. A typical IPO prospectus now runs into 500-plus pages.
Why has this happened? Information disclosure is essentially a function of what the regulator mandates in its guidelines through simple line items, what the issuer then decides to give under each of these line items, and finally what the regulator is able to extract from the issuer after the draft prospectus has been filed. Thus, while regulations have increasingly prescribed more line items, the issuers have gone overboard with disclosures.
Let us take the example of risk factors. This disclosure started with the premise that instead of issue highlights that each prospectus used to present on the cover page, key risk factors should be listed on the cover page. Soon enough, since any business would have multiple risks and also to protect oneself from litigation against lack of disclosures, the number of risk factors increased and had to be pushed from the cover page to the initial pages. Worse, irrelevant, generic risk factors started crowding the space. One definite purpose of putting in a very large number of risk factors by the issuers was to hide the real ones, by placing the most critical ones much down the list. Sebi then had to specify that these should be classified into internal and external risk factors.
Did this help?
Sample a couple of Internal Risk Factors: “We depend on our key personnel for the continued success of our business” or “Following the listing of our equity shares, we will continue to be controlled by our promoters.”
Now sample a couple of External Risk Factors: “Political, economic and social developments in India could adversely affect our business” or “Changing laws, rules and regulations and legal uncertainties may adversely affect our business, financial condition, result of operations and prospects.”
Gradually but surely, the number has continued to rise, and we have reached a stage where a typical prospectus would carry 100-odd risk factors, running into several pages, in fine print.
Or take the example of disclosure about promoters. Sebi’s line item requires “a complete profile of promoters, including educational qualifications, experience in the business, positions held in the past, other ventures and special achievements.” While one issuer may give very brief details in just about a paragraph, another may provide this information running into pages.
As another example, for disclosure of business and industry scenario, scores of pages could be devoured by providing both micro and macro economy and industry scenario, generously copied from industry reports, market surveys, newspaper articles and other such documents. On the other hand, if a company has several subsidiaries, detailed description of each one of these, however immaterial many of these could be, would take up several pages.
The truth behind over-disclosures is that though these emanate from regulations, the broad instructions are converted into over-disclosures to hide the negatives and to make the job of discerning relevant information much more difficult.
For the benefit of retail investors, there is a provision in law for an abridged prospectus, which needs to accompany each application form. It may be mentioned here that the main prospectus is printed only in a few hundred copies which goes to the institutional investors—who have the wherewithal to wade through the document—while millions of copies are printed of the abridged prospectus meant for the retail investors.
Since the abridged prospectus is an extract of the main prospectus, the size of the abridged prospectus has also grown hugely with passing times. Voluminous paragraphs on almost every item are being reproduced in the abridged prospectus. As such, the abridged prospectus has started running into 80-plus pages, and in very fine print, defeating its very purpose. It is ironic that though the regulator wants investors to take informed decisions, the document made available to the investor is the one which would take her away even from reading.
While Sebi is currently working on rationalising the quantity and quality of disclosures in the main prospectus, it has now taken a major initiative in prescribing very minutely the contents of an abridged prospectus.
Most significantly, Sebi has mandated that an abridged prospectus including the application form shall not exceed 5 sheets (printed both sides), which means 10 pages or just 8 pages of disclosures minus the application form.
The reduction in the size has been achieved by reviewing each piece of disclosure carefully and then either dropping it for its lack of importance or modifying it to make it more readable. For many sections, word limits have been prescribed to ensure that essays are not written under any heading. For example, details of the promoters should not exceed 1,000 words. The business overview has to be described within 500 words. Only internal risk factors are to be stated, and that too a minimum of 5 and a maximum of 10, with a total limit of 500 words. Only the top 5 outstanding litigations in a tabular format are to be provided.
Regulatory actions, if any by Sebi or stock exchanges against the promoters/group companies in the last 5 financial years, have to be described in a maximum of 300 words. Details of outstanding criminal proceedings against the promoters have been limited to 300 words.
With regard to the board, the experience of each director has to be limited to 40 words. The shareholding pattern will now show only the total holding of the promoters and public while only key data shall be provided for financial performance.
Many sections have been done away with. Since the issue price is declared only after the printing of the abridged prospectus, the entire section on Basis for Issue Price has been dropped. Sections on Key Industrial Regulations and Policies, Government and Other Approvals, Management Discussions of Financial Statements, Related Party Transactions, Capital Structure, Issue Expenses, etc, have been scrapped.
To remove the clutter, information which is of generic nature and not specific to the issuer shall be brought out in the form of a General Information Document. This, for example, includes the Issue Process.
To make the abridged prospectus investor-friendly, Sebi has indeed gone to lengths. To ensure the objective is fully realised, it has set out micro instructions. It has not only specified the order in which the items shall appear in the abridged prospectus, but that it shall be printed in a booklet form of A4 size paper and in a font size which shall not be visually smaller than Times New Roman size 11 (or equivalent) with one line spacing. The notification specifies that information required to be given in a tabular format shall not appear in running text format. It also specifies that the application form shall be so positioned that on the tearing-off of the form, no part of the information given in the abridged prospectus is mutilated.
Just to ensure that the law is followed both in letter and spirit, Sebi has mandated that one copy of the abridged prospectus shall be filed by the issuer with Sebi.
This is surely the most genuine effort of Sebi to make retail investors take informed decisions. Starting December 1, 2015, investors can expect a very friendly document, which would not only capture only and all essential information that she needs, but also be highly readable. A retail investor—who has all along been influenced by other factors—will now at least have an easy opportunity to read for herself before deciding to invest. At least on this front, she can’t complain any more. Of course, for a more probing investor, she can always get the complete prospectus on the websites of investment bankers, stock exchanges and Sebi, or even request the relevant market intermediaries for a hard copy of the document.
On another hand, this move by Sebi is an important green initiative. Hundreds of tonnes of paper would be saved each year; in the case of the Power Grid issue, it is reported that over 1 crore abridged prospectuses were printed while Bharti Infratel printed 76 lakh of these. The new abridged prospectus would also result in significant savings in costs for the issuers.
The author is the chairman of PRIME Database and a member of the Sebi Committee which designed the revised abridged prospectus