What is a Confidential IPO Filing?

Financial Data of a company plays a key role for an investor willing to invest in a company. And in case a company is going public for the first time, DHRP plays a key role for them to analyse the company. However, with the recent introduction of Confidential Pre-filing DHRP, the general public does not get insight into the company’s key financial data.

In today’s blog, we will introduce a concept called “Confidential IPO Filing” by a company, along with its key benefits and risks.

Meaning of Confidential IPO Filing

A confidential IPO Filing is a process in which a company submits its IPO document, known as the Draft Red Herring Prospectus, to the Securities and Exchange Board of India. But this filing is not made public. This process allows the company to evaluate the feedback from the regulating authorities. This is a part of the pre-IPO process.

How Does the Confidential IPO Process Work?

The working of the Confidential IPO is mentioned below:

1. Appointing Merchant Banker: Appointment of a merchant banker or lead manager is the first step towards the IPO filing process. They help in preparing the draft red hearing prospectus (DRHP). 
2. Submission of DRHP: Once the merchant banker prepares the DRHP then it must be filed with the SEBI without disclosing the details to the public. This document carries key parameters of the company’s financial ratios, business model, etc.
3. Review by SEBI: After the documents are submitted to SEBI, they will be reviewed by SEBI. And if there are any observations, they will be made to the merchant banker and the company.
4. Revised DRHP: In case of any observation by the SEBI, it will be rectified on an immediate basis, and the revised DRHP will be filed with SEBI.
5. Public Issue: Once the DRHP is approved by the SEBI, then the company is ready to go ahead with its public issue and can make a public announcement of its issue.
6. Listing: As soon as the IPO allotment process is completed, the company can get its shares listed on the exchanges.

Read Also: From Private to Public: Decoding the IPO Journey

Difference Between Confidential and Traditional IPO Filing

The key differences between confidential and traditional IPO filings are as follows:

Particular	Confidential IPO Filing	Traditional IPO Filing
Filing	The IPO filing is done privately.The company files a public version later, after addressing SEBI’s comments.	The IPO is filed publicly, and every investor gets to know about the details. All details are visible to investors from day one.
Flexible	It offers great flexibility. The company can delay or modify the IPO.	Any withdrawal of the IPO by the company comes to the knowledge of the public and can impact the company’s reputation significantly.
Speculation	This can avoid speculation by the public, as early details are not available.	Because of the availability of early IPO details, the chances of speculation related to the grey market premium will increase.
Suitability	The confidential IPO filing is suitable for micro, small, and medium-scale companies.	These types of IPOs are generally opted for by large companies.
Information	The chances of getting the details are very low, since the filings are not disclosed publicly.	All financial, operational, and risk disclosures are public from the start, open to competitors and the media.

Benefits of Confidential IPO Filing

The key benefits of confidential IPO filing are as follows:

1. Privacy: Through a confidential IPO filing, the companies can keep their important data private at the early stage of the IPO process. This can help them avoid getting unwanted attention from the competitors.
2. Improve Final Draft: Confidential IPO filing helps in making necessary corrections before making the issue public.
3. Less Media Coverage: Companies can easily prepare for their public issue without worrying about the media coverage, market speculations, etc.

Read Also: What is an IPO Subscription & How Does it Work?

Risk of Confidential IPO Filing

There are significant risks related to Confidential IPO filing for the companies, a few of which are mentioned below:

1. Lack of Investors’ Feedback: Due to the limited availability of information, the investors’ feedback is not available to the company.
2. Risk of Insider Trading: Although SEBI mandates strict confidentiality, sensitive details shared with intermediaries like merchant bankers or auditors could still be at minor risk of misuse.
3. Trust: Because of secrecy, it can sometimes lead to the creation of a perception among the investors that the company is hiding something.

Is a Confidential IPO Filing Allowed in India?

Yes, the Confidential IPO filing is allowed in India according to the regulations specified by the Securities and Exchange Board of India (SEBI) in November 2022. The regulations are defined under “Pre-Filling of Offer Document”. According to this regulation, a company can submit their draft document to SEBI without making it public. 

Read Also: Why Does a Company Go Public & Launch IPO?

Conclusion

On a concluding note, through Confidential IPO Filing, companies can smartly go public. They can file their IPO documents with SEBI without letting the public be aware of it. It allows the company’s management to fine-tune the errors in the IPO document without having any impact on its reputation. This mechanism was introduced by SEBI in November 2022. However, this IPO filing benefits the company directly; along with this, it also carries certain disadvantages for them. Hence, an investor should consult their investment advisor before making any investment in an IPO and go through their prospectus. 

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