What is Confidential IPO Filing & Why Do Some Companies Do It?

Why do Companies do Confidential IPO Filing?

Did you know Tata Play was the first Indian company to file a confidential IPO in India? That sounds interesting, right? But what exactly is confidential IPO filing? In this article, we will learn everything you need to know about confidential IPO filing.

What is Confidential IPO Filing?

Let us first understand what is IPO filing. An Initial Public Offering (IPO) filing is the formal document that companies submit to the Securities and Exchange Board of India (SEBI) before they can go public and sell their shares to the general public for the first time. The process is crucial for ensuring transparency and protecting investors. The vital words are transparency and protecting. Confidential IPO filing takes out these two terms from the IPO filing process.

Confidential IPO is an optional mechanism where companies opting for this file their IPO confidentially. The SEBI enabled this in December 2022. A company files DRHP, but it is not made public - it is made public only when a company decides to go live with its IPO. 

IPO filing Practices in India

Before understanding the reasons behind confidential filing, let us find the IPO filing process in India:

Whenever a company decides to launch its IPO, it appoints merchant bankers who evaluate the company, and then DRHP is filed with SEBI. DRHP contains all company details - financials, competition, risks, competitive edge, etc. SEBI reviews the DRHP. If there are any concerns or clarification needs, it is sent back to the company for updates. If no updates are required, the SEBI gives a green signal to the company.

When a company wants to launch its IPO, it refiles the details, known as a red herring prospectus or RHP. It also has updated details (as a lot of time may have passed between the DRHP filing and the IPO launch). Both DRHP and RHP are in the public domain.

The confidential filing will make the IPO details public only after a company files RHP after SEBI has issued its remarks on DRHP and the company is ready to go live with its IPO.

Why do Companies do Confidential IPO Filing?

The short answer to why companies do confidential IPO filing is because it benefits them in some cases. Here are the details of those benefits:

Sensitive Data Protection:

As mentioned earlier, DRHP has all the data related to a company, including sensitive and proprietary information like market strategies. The company may not want to make that information available to competitors.

Safeguarding Interest:

Do you know that only 55% of the companies that file DRHP go public - the remaining 45% drop their IPO plans for one or more reasons. Confidential IPO filing safeguards the company's interest if they cancel their IPO later.

Enhanced due diligence:

As mentioned earlier, in the pre-IPO phases, companies get feedback from the regulatory bodies. The Pre-filing of confidential IPO papers allows them to engage with authorities before any information is made public. It helps address any regulatory concerns or requirements, ensuring a smoother and more compliant IPO process.

Compliance preparation:

Confidential filing provides organizations additional time to help them become 100% compliant with regulatory requirements before the DRHP is released. It includes meeting criteria such as the minimum promoter’s contribution of 20% of the post-issue paid-up capital, allowing companies to make necessary arrangements and adjustments.

Disadvantages of Confidential IPO Filing: Companies and Investors

Are there any disadvantages of this option for both companies and investors? Let us look at them one by one separately.

For companies:

• The companies filing confidential DRHP are likely to not go live with their IPO.
• The confidential IPO filing process can be more time-consuming compared to the traditional process.
• As the time taken is higher, it comes with higher advisory and legal fees.

For Investors:

• An investor interested in the company does not get all the essential details about the company well in advance. When RHP is released, the investor may not have enough time to go through all the further information before applying for an IPO.
• Possessing material non-public information by some individuals during the confidential filing period increases the risk of insider trading.

Before you go

In India, only a handful of companies have opted for confidential IPO filing. Other than Tata Play, Oravel Stays (or OYO) and Swiggy have filed for confidential IPO. The concept is relatively new in India as it makes more sense for startups to opt for it, and startups going public in India is a recent phenomenon. However, the practice has been common in countries like the UK, US, and Canada for a while now.

Yes, there are advantages and disadvantages to the practice. Overall, it is an essential option to have for companies that feel the need to opt for this option.