In November 2018, the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 (New ICDR Regulations) came into force, replacing the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 (Old ICDR Regulations). The overhaul of the regulations followed a robust public consultative process, aimed at getting views from stakeholders and at bringing the Indian regulations closer to global best practices.
The New ICDR Regulations particularly emphasise streamlining disclosure requirements with respect to financial statements in offer documents for initial public offerings, by reducing the volume of disclosures and focusing on what is considered material and relevant to an investor in making an investment decision.
There have not yet been a significant number of offer documents filed under the New ICDR Regulations. But certain key changes from the Old ICDR Regulations have already caught the eye and it will be interesting to see how market practice evolves in this regard.
Reduction in Time Period of Financial Statements
The Old ICDR Regulations required an issuer to provide five years of restated consolidated and standalone financial statements in the offer document. This has been rationalised under the New ICDR Regulations and an issuer is now required to provide only restated consolidated financial statements. Further, the period of disclosure of such information has also been brought in line with global practices and an issuer is only required to provide financial information for the last three financial years (and any stub period).
In addition, however, the New ICDR Regulations require an issuer to make available its audited standalone financial statements for the past three full financial years on its website and include a web link to such financial statements in the offer document. This is a significant departure from the erstwhile disclosure regime, and gives rise to two concerns:
- The consolidated financial statements included in the offer document are restated to ensure consistency of presentation, disclosures and accounting policies for all the periods presented in line with those applicable for the latest financial year or stub period. Further, significant errors, non-provisions, regrouping or any other adjustments must be reflected in the corresponding period and such changes are required to be disclosed in accordance with the relevant accounting standards.The audited standalone financial statements, however, will not give effect to restatement adjustments, and it may therefore be difficult for a reader to comprehend and compare such audited standalone financial statements to the restated consolidated financial statements included in the offer document. Further, in the event there are any errors in such standalone financial statements, these would not be subject to any rectification and would need to be presented as is.
- The audited standalone financial statements are not incorporated into the offer document by reference (a concept recognised in other jurisdictions but not contemplated under the Companies Act, 2013 or the New ICDR Regulations). As such, it is debatable to what extent investors can rely on such financial information and what liability the issuer and other transaction participants have in relation to such financial information.
It is also important to note that the issuer is not required to provide standalone financial statements for any stub period for which restated consolidated financial statements are included in the offer document.
Disclosure of Financial Statements of Material Subsidiaries
In terms of the New ICDR Regulations, an issuer is also required to make available on its website the audited standalone financial statements of each of its material subsidiaries (a subsidiary is considered material if it contributes 10% or more to the turnover or net-worth or profits before tax in the annual consolidated financial statements of the respective year of the issuer) for the past three full financial years, or a link to such financial information. The availability of such financial information gives rise to similar questions as set out above.
The New ICDR Regulations include certain additional requirements with respect to such financial statements of material subsidiaries. For instance, the New ICDR Regulations state that in the event a material subsidiary presents its financial statements in a currency other than the Indian Rupee, the issuer is required to ensure that such financial statements are currency translated into Indian Rupees. This requirement is likely to give rise to some confusion, as currency translated financials (translated in accordance with Ind AS 21) would likely not be audited but only certified by an auditor (and typically by a chartered accountant, which is not the statutory auditor of the relevant subsidiary).
In order to comply with the New ICDR Regulations, an issuer may need to upload both the audited and the certified translated standalone financial statements of such material subsidiary on its website. The availability of multiple versions of the same financial information is counter-intuitive and may confuse investors.
Proforma Financial Information
The Old ICDR Regulations required disclosure of an issuer’s proforma financial statements in the event of any material acquisition or divestment after the end of the latest disclosed annual financial statements in the offer document. This is broadly in line with global practice.
The New ICDR Regulations, however, require disclosure of proforma financial statements of all the subsidiaries or businesses material to the consolidated financial statements where the issuer or its subsidiaries have made an acquisition or divestment (including any deemed disposal) only if any such event occurs after the latest period for which financial information has been disclosed in the offer document. As such, in the event that a material acquisition or disposal occurs in the stub period for which financial information is presented in the offer document, an issuer would not need to provide proforma financial information under the New ICDR Regulations, which is a significant departure from international requirements.
As an illustration, if an issuer includes financial information for the fiscal periods 2017, 2018 and 2019 and June 30, 2019 in its offer document, and makes a material acquisition on June 29, 2019 (the financial information of such material acquired entity being consolidated with the financials of the issuer for the stub period), the issuer would not be required to provide any proforma financial statements. In such a situation, the financial disclosure in the offer document about the material acquisition will be inadequate. Issuers are, in fact, likely to want to include additional information about such acquired entity to give potential investors a complete picture of the impact of such an event.
In the context of the above, while flexibility has been built-in to enable issuers to include voluntary proforma financial information in the offer document, a plain reading of the New ICDR Regulations seems to suggest that a report by the statutory auditors on such voluntary proforma financial information is not mandated. Further, the Guidance Note on Reports in Company Prospectuses (Revised 2019) issued by The Institute of Chartered Accountants of India also indicates that statutory auditors will not be required to issue a report on such voluntary proforma financial information.
this is likely to raise concerns for lead managers, who would have to rely on a lower level of comfort in relation to such voluntary proforma financial information, where a report of the statutory auditors is not available. In any event, in practice, SEBI is unlikely to permit inclusion of financial information which is reviewed by the management of the issuer and not certified by the statutory auditors.
The New ICDR Regulations are an attempt by SEBI to rationalise financial disclosure in offer documents and bring these in line with global standards. However, as set out above, there remain some grey areas and inconsistences in the requirements. We hope that these will be ironed out in the near future as market practice develops and market participants better understand the implications of certain nuances in the New ICDR Regulations.