In this article, Milind Talegaonkar who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses Abridged Prospectus: Change in Law related to Disclosures.

Background

It will be useful to understand the basic concept of an abridged prospectus before we begin to analyse the recent changes in the law pertaining to the disclosure requirements. Section 2(1) of the Companies Act, 2013 (“Companies Act”) defines an abridged prospectus as a memorandum containing such salient features of a prospectus as may be specified by the Securities and Exchange Board by making regulations in this behalf. The Companies Act stipulates, by way of section 33(1), that No form of application for the purchase of any of the securities of a company shall be dispensed unless such form is accompanied by an abridged prospectus. Two notable exceptions have been provided to the aforementioned stipulations with a view to (a) enabling the issue of bonafide invitation to any person to enter into an underwriting agreement in respect of purchase of securities and (b) enabling the issuance of application form(s) in respect of securities that are not offered to the public. The present definition of an abridged prospectus has been brought into force w.e.f. 12^th September 2013 and, as can be seen from the definition, leaves the specifics pertaining to its contents on the Securities and Exchange Board (“SEBI”).  The SEBI had issued the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDRs“). The ICDRs lay down the requirements for disclosures that are to be made in relation to an abridged prospectus. Notably, Regulation 58(1), when read with the Schedule VIII of the ICDRs, identify the disclosure related requirements for an abridged prospectus.

Necessity for Change in Law

SEBI had come to form a view, based on the practical filings of abridged prospectuses by the issuers of securities, that the abridged prospectuses have themselves become bulky. The underlying intent behind stipulation of this requirement, of providing a concise document that captures in outline the most important details pertaining to any issue, was getting defeated. Therefore, with a view to making abridged prospectus less voluminous and more reader friendly, SEBI issued a notification dated 27 October 2015 issued the SEBI (Issue of Capital and Disclosure Requirements) (Seventh Amendment) Regulations, 2015 (“Amendment Regulations“) to amend the disclosures mandated from an abridged prospectus. The requirements were contained in Regulation 58(1) read with Schedule VIII of the said ICDRs[1].

A structure/format has been mandated by SEBI requiring the disclosure of ‘information’ which is material and appropriate to enable the investors to make informed decisions. Further, pursuant to the Amendment Regulations, SEBI also issued a circular dated 30 October 2015 providing the revised format of abridged prospectus to make the abridged prospectus less bulky and to contain only relevant information for the investors to make well-informed investment decisions. A copy of the abridged prospectus confirming to the newly prescribed norms would need to be filed with SEBI. This revised requirement applies to all issues opening for subscription on or after 1^st December, 2015.

The presently valid format of the abridged prospectus now includes

1. Brief details related to the top 5 material outstanding litigations against the company and the amount involved;
2. Any disciplinary action taken by SEBI or stock exchanges against the promoters/group companies in the last 5 years (including any outstanding action); and
3. Details of outstanding criminal proceedings against promoters.

What is more striking is that besides the disclosures there are general instructions which prescribe, inter-alia, the format (like suggested font type, the font size, line spacing and paper size) and a restriction on the number of pages which now cannot exceed 5 sheets (to be printed on both the sides). The format may be amended by SEBI from time to time.

It is also pertinent to note that any information which is of generic nature and not specific to the issuer would only require mention in the form of a General Information Document (GID) as specified by SEBI.

How did the amendment come about?

The SEBI gathered that there is a perception that the information contained in the abridged Prospectus has become rather voluminous and unstructured. It was also felt that the potentially material disclosures/risk factors were not getting the required priority. The same was also true in respect of the Application Form which too was considered to be unwieldy and non-investor friendly.  Therefore, SEBI decided to set up a committee for reviewing the Disclosures and Application form in Public Issues.

The committee had the following terms of reference:

1. Revisiting the adequacy and quality of disclosures made together with the application form (covering the Prospectus and Abridged Prospectus).
2. Revisiting the structure, design, format, contents and order of information. This was to be done with the intent of ensuring that materially important information is provided in a structured and user-friendly manner for aiding the investor in making his investment decision.
3. Consider the introduction of application forms in other languages and suggest an implementation strategy and schedule.
4. Identifying the legal and other constraints in improving the said disclosures and their formats and devising ways to address the same in a time-bound manner.

The said committee comprised of representatives of investor associations, merchant banking/stock broking community, legal fraternity, market professionals, industry chambers and SEBI itself. The committee gave its interim report in June 2011.

While the other suggestions are out of the scope of the present analysis, the recommendations pertaining to abridged prospectus[2] are discussed hereunder,

1. The strict relevance of information is the basic test to which all contents must be subjected before they find a place in the Abridged Prospectus. Information of generic nature can be moved out of Abridged Prospectus and into a General Information Document.
2. Times New Roman 10 (or equivalent) font was recommended as the font to be used. Exceptions to be made only for information which is in a tabular form and hence cannot fit on the table.
3. The sequence of information groups was recommended thus: (a) section on history, promoters and management, (b) details of business, financial information, (c) basis of the issue price, (d) regulatory and statutory disclosures and (e) details of bidding centres. All other information such as bidding procedure, basis of allotment procedure, payment instructions, Do’s and Don’ts, etc. that are presently contained in the Abridged Prospectus should be shifted to ‘General Information Document’ for the applicants in public issue and these will have to be printed in English and in Hindi or Regional Language of the state. This has been done considering the readers perspective in mind and intends to impart logical presentation.
4. The section on risk factors to be placed after the financial information of the company and not in the beginning of the document (as a departure from the current practices).
5. The Association of Merchant Bankers of India (AMBI)/SEBI were called upon to issue Guidance notes regarding what should be included in the Risk Factors, Litigations & Related Party Transactions in the Abridged Prospectus.

Some of the noteworthy points appearing in the Interim report of the committee are being mentioned hereunder which will throw more light on the intent and purpose of the recommendations made by it[3]:

1. Disclosures made during public issuance of capital play a critical role in enabling the investors to take well-informed investment decisions;
2. Most new retail investors in India enter the securities market through the IPO/FPO route;
3. Presentment of information in an appropriate manner is imperative to draw a larger number of investors and also for enabling better decision making by the existing investors;
4. SEBI ICDR Regulations mandate that the Offer Document must contain all material disclosures which are true and adequate for enabling all potential investors to take an informed investment decision;
5. In attempting to exercise abundant caution, the issuer companies often adopt an approach of providing extensive and exhaustive disclosures, disregarding their materiality or relevance. This results in an oversupply of information for the investors;
6. Committee went on to observe that over the years, the Prospectus, as well as the Abridged Prospectus, have become very cumbersome and the potentially material disclosures and the risk factors are not being suitably prioritised;
7. Disclosures made in the abridged prospectus often appear to be unstructured and cluttered for investors to read and understand. This document was especially found to contain a lot of general information about SEBI guidelines, policies, and processes which were not strictly specific to an issue and could, therefore, be removed therefrom and incorporated in a new General Information Document;
8. The committees guiding factor during the redesign exercise was not just to make the offer document and the bid‐cum‐application form easy‐to‐read, look better but that it must contain only information of relevance (without compromising on the disclosure requirements) and ensure a flow of information in a desirable format as also in a logical order with a view to making it investor‐friendly;
9. The Committee decided to recommend the shifting of all issue related information, instructions, confirmations for the investor and any issuer related information from the Application form to the Abridged Prospectus.
10. It is notable that the portion of the report reviewing the abridged prospectus describes it in parenthesis as “Company‐Specific Information Document” which itself throws much light on the expectations from the contents of this document;
11. The committee rightly focussed on developing a new model Abridged Prospectus which must be devoid of immaterial and routine information that is not pertinent to take an investment decision, as also to provide for rightly placed focus on the important information; to add certain critical information, make changes to the order of information, and its structure such that the entire document acquires an investor‐friendly look;
12. The Committee decided to rework on the existing tables and rationalised the information items. It also recommended the introduction of some new tables that would facilitate the capture of information appropriately. This was done based on its observation that some pieces of information make an impact only when presented in a tabular form;
13. With the objective of improving the adequacy and quality of disclosures, the committee focused on providing relevant financial information and a meaningful analysis of the peer group companies.
14. The committee members agreed that an investor would be in a position to better appreciate the risk factors after having gained some knowledge about the Issuer Company and its business. It, therefore, proposed to shift the risk factors to a more appropriate place in the document while bearing the international securities’ laws practices in mind so that Indian security issuing entities are not put to any disadvantage;

Discussion on the key changes recommended

1. The committee recommended the inclusion of a cover page to the abridged prospectus which, inter-alia, provides:
2. for statutory details, general risks;
3. for disclosing that the issue is 100% Book building Issue or otherwise;
4. for disclosing the number of pages in the booklet;
5. including company logo, company name, incorporation details and the changes therein, Corporate Identity Number (CIN), the Registered Office Address, Phone Numbers, Fax Numbers, Website, for any pre‐Issue or post‐Issue related problems, contact details of the Compliance Officer (Name, Phone Number, Fax Number, Email, IPO Grade and disclaimer of IPO grading agencies;
6. bid/issue opening and closing dates;
7. The committee further recommended the following deletions in the inside cover:
   1. Addresses of BRLM, SEBI Registration Number;
   2. Addresses of Co‐BRLM, Email ID, Investor Grievance ID, Contact Person, SEBI Registration Number;
   3. Syndicate members’ Head Office Address, Phone Number, Fax Number, Email ID and SEBI Registration Number;
   4. IPO Grading Agencies address, phone number, fax number, email address and contact person of IPO Grading Agencies;
8. The committee recommended the inclusion/deletion(as the case may be) of the following matters:
   1. Inclusion of the History of the company and details of any demergers, mergers and acquisitions;
   2. Where promoter is individual some additional details e.g. name, experience in the business or employment and in the line of business proposed in the RHP, positions/posts held in the past, their business and financial performance to be provided and where promoter is a company, details of history of company and promoters of such company should be included;
   3. Board of Directors: Name, Designation, Date of Appointment, Occupation, Age and a Brief Profile of each Director (one paragraph on each Director), a note to draw attention of the investors to the RHP for more details, resignation of Directors in past 3 years, A confirmation with regard to compliance with provisions of Corporate Governance, (New) Shareholding Pattern – in consonance with the categories in the form prescribed in Clause 35 of the Listing Agreement in the prescribed format;  Details of Top 10 Shareholders as on the date of filing of RHP in the prescribed format; Non‐promoter Shareholders holding more than 1% of capital as on date of filing of RHP in the recommended format; Sale or Purchase/Subscription of Company’s securities by promoters/ directors which in aggregate is equal to or greater than 1% of pre‐issue capital of company, in preceding 3 years from date of RHP in the prescribed format; Top 5 Group Companies in the prescribed format; Subsidiaries/Joint Ventures” Total number of subsidiaries and joint ventures to be indicated and the details of Subsidiaries/Joint Ventures (which contribute more than 5% of revenue/profits/assets of the issuer company on the basis of consolidation in the previous financial year or the last period of audited financial statements included in offer document) in the prescribed format; Penal Actions/ Litigations, Material Related Party Transactions; Details and reasons for non‐deployment or delay in deployment of proceeds or changes in deployment of issue proceeds of past public issues/rights issues, if any, of the Company in the preceding 10 years;
9. The committee recommended the reproduction of the entire “Our Business section” as per Red Herring Prospectus considering its importance. Significant Government approvals pending have also been recommended for inclusion.
10. The committee recommended the elaboration of “Our Financial Information” section. Summary Statement of Assets and Liabilities was recommended to be re-positioned. For IPOs, details of bonus issues were recommended to be included. For FPOs, details of dividends and bonus issues were recommended to be included. Management’s Discussion and Analysis of Revenues and Profits/Losses (previously Management’s Discussion and Analysis of Financial Condition and Results of Operations) was recommended. This change of nomenclature apparently brings the focus back to the key material and relevant issues i.e. revenues and profit or loss from the more abstract and subjective concepts like financial conditions and results of operations. Material Developments since the Last Balance Sheet Date has also been recommended since it is significant. For the same reasons Capitalization of Reserves or Profits in the last 5 years and Revaluation of Assets in the last 5 years has been recommended. Changes in Auditors and capital structure has been recommended for disclosure in prescribed format. Notes to the capital structure have been recommended for deletion.
11. The committee has made recommendations in respect of “Risk Factors” which ­­are discussed in this paragraph. A classification of risks into three heads viz. (a) Risks arising out of Offences/Litigations/Losses Etc. (b) Company/Group Specific Risks and Project/Objects specific risks (c) Industry Specific Risks. It has also been recommended that materiality policy must be determined for which a Guidance Note shall be issued by BRLMs. The committee took note of existing practices wherein the risk factors are disclosed in the RHP in an attempt to limit the liabilities of the issuer and the merchant bankers/underwriters.  It was also noted that a very large number of generic risk factors have started finding a place in the disclosures, which typically relate to the geo‐political situation, government policies and the capital market. In the process, not only a large space is occupied by the risk factors in the Abridged Prospectus, the critical risk factors especially those specific to the issuer, get lost.  The para preceding the Risk Factors has been recommended for deletion as the abridged prospectus is any way required to be read together with the offer document.
12. The committee has made some recommendation in respect of the “Issue Section” which are discussed here in this paragraph. Important portions namely “Cost of Project”, “Means of Financing”, and “Schedule of Deployment of Issue Proceeds” has been recommended to be disclosed in full due to its significance to the investors.
13. The committee has made some recommendation in respect of the section that discloses “BASIS OF ISSUE PRICE” which are discussed here in this paragraph. Quantitative factors like Earnings per share on a consolidated basis, Return on Adjusted Net Worth (“RONW”) ‐on consolidated basis and Comparison with Industry Peers‐on consolidated basis have been recommended for inclusion in a prescribed format. Moreover, in order to save space and improve readability, some Quantitative Factors which are related to the Issue Price have been recommended to be dropped from disclosures since the critical data is still not available at the time of printing of the AP namely Price/Earning (P/E) ratio in relation to the Price Band, Minimum Return on Total Net worth after Issue needed to maintain Pre‐issue EPS for the year ended, and Net Asset Value per Equity Share. Further, the first para under the Basis for the Issue Price has also been recommended for deletion in view of its redundancy. IPO grading in a prescribed format summarising the rationale of grading has been recommended for disclosure. Special Tax Benefits, (if any) available to the Company/project and only the Section Numbers need to be cited. Disclosure of general tax benefits is not required.
14. The committee has made some recommendation in respect of the section that discloses “OTHER REGULATORY AND STATUTORY” which are discussed in this paragraph. It has been recommended that the Expert Opinion, if any, except those of Auditors and IPO Grading Agencies should be disclosed. The reason for exclusion of opinion of Auditors and IPO grading agency is that their opinion is already captured elsewhere.
15. The committee has also suggested the deletion of some details from the abridged prospectus which essentially captures the company specific information. The specific deletions (and their rationale) is discussed hereunder:
    1. Deletions for lack of relevance:

• Underwriting Commission, brokerage and selling commission on Previous issues;
• Previous Issues of Equity Shares otherwise than for Cash;
• Names and Addresses of Domestic Legal Counsel to the Issuer;
• Names and Addresses of Domestic Legal Counsel to the Underwriters;
• Names and Addresses of International Legal Counsel to the Underwriters;
• Names and Addresses of Advisors to the Company;
• Names and Addresses of Bankers to the Issue;
• Names and Addresses of Refund Bankers;
• Names and Addresses of IPO Grading Agencies;
• Underwriting Agreement, underwriting Commission, brokerage and selling commission on Previous issues;
• Previous Issues of Equity Shares otherwise than for Cash;
• Names and Addresses of Domestic Legal Counsel to the Issuer;
• Names and Addresses of Domestic Legal Counsel to the Underwriters;
• Names and Addresses of International Legal Counsel to the Underwriters;
• Names and Addresses of Advisors to the Company;
• Names and Addresses of Bankers to the Issue;
• Names and Addresses of Refund Bankers;
• Names and Addresses of IPO Grading Agencies;
• Underwriting Agreement.
  1. Items to be moved to General Information Document:
• Mechanism for Redressal of Investor Grievances;
• Disposal of Investor Grievances by our Company.
  1. Items not being practically disclosed and, in any case, irrelevant:
• Issue Related Expenses
• Fees, Brokerage, and selling Commissions Payable to the Book Running Lead Managers, Co‐Book Running Lead Managers and Syndicate Members
• Fees payable to the Registrar to the Issue

Conclusion

An internet search conducted in respect of issues opening after 1^st December 2015 reveals that compliances in respect of new laws are only gradually catching up. The abridged prospectus documents confirming to the new requirements were found to be lot more readable when compared with those confirming to the erstwhile requirements. The comfortable font size and font type further encourages readers to go through the details available in the abridged prospectus and thereby base their decisions based on their assessment of the information provided therein. IPO subscribers, especially the retail investors, who had begun considering the issue related documents to be full of bulky legal disclosures and hence unhelpful, were turning to other sources of information (of dubious repute or reliability) for making their investment decisions.  It is expected that with the passage of time the abridged prospectus will not just regain its deserved importance but will start gaining lot more attention from the perspective of all stakeholders involved in the securities offer exercise considering its improved readership.

References:

[1] Retrieved on February 25, 2017, from http://www.mondaq.com/india/x/504328/Securities/Abridged+Prospectus+Change+In+Law+Related+To+Disclosures

[2] Retrieved on February 25, 2017 from http://www.sebi.gov.in/boardmeetings/138/issuecapital.pdf

[3] Retrieved on February 25, 2017, from http://www.sebi.gov.in/boardmeetings/138/interimannexure.pdf