Why SEBI Closely Reviews Risk Disclosures In IPO Filings?

The Securities and Exchange Board of India (SEBI) issues around 100 comments when reviewing draft red herring prospectuses (DRHPs) submitted by companies planning initial public offerings (IPOs).

A study conducted by a consulting firm found that half of these comments relate to how companies disclose potential risks in their offer documents.

This indicates that the regulator places strong emphasis on ensuring investors understand the possible risks before subscribing to an issue.

Why Does Risk Disclosure Get Special Attention?

The report noted that roughly 46% of SEBI’s comments relate to risk disclosures. Companies preparing for an IPO are expected to clearly explain the uncertainties or challenges that could affect their business, financial position, or future performance.

According to the experts involved in the study, SEBI's review procedure at times reflects not only the grievances of a particular company but also broader regulatory expectations in the capital markets.

By focusing on risk disclosure, the regulator intends to give investors a real view of the operating environment of the company prior to the investment decision.

What Are The Areas Where SEBI Asks For Clarifications?

SEBI’s changing focus mainly targets how risks are narrated and laid out in the prospectus.

• Priority of risks: Arrange risk factors based on their importance and materiality so that investors can easily identify the most significant concerns. SEBI often asks issuers to clearly highlight the top 5, 10, or 25 risks.

• Tariff exposure: Disclosure of risks linked to possible reciprocal tariffs imposed by the United States.

• Concentration risk: Details of dependence on key suppliers, customers, or specific geographic markets.

• Quantitative headings: Risk titles should include specific numerical and qualitative details instead of general wording.

• Lack of long-term contracts: Companies must disclose the absence of long-term agreements with suppliers or vendors as a potential operational risk.

• Director experience: Any risk linked to directors with limited industry or managerial experience should be clearly stated.

• Promoter transactions: Clear explanation and commercial rationale for material dealings with promoters, promoter group entities, or related parties.

• Financial risks: Disclosure of issues such as negative operating cash flow, rising working capital needs, or weak profitability.

• Manufacturing facility: Risk that production facilities may become outdated over time.

• OFS impact: If the IPO is entirely an Offer for Sale (OFS), issuers must state that the company will not receive any proceeds.

Apart from risk-related comments, the study found that about 13% of SEBI’s observations relate to regulatory compliance and governance issues.

Risk disclosures and regulatory compliance lower investment risks and help investors understand the offer.

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What Market Participants Should Watch?

Regulator feedback is often considered when companies make their risk disclosures. That is why it is crucial to follow how they change their risk disclosure after they receive the regulator's comments.

Usually, the alterations made before the publication of the final prospectus pinpoint the areas where more thorough justification or additional information were needed.

Source:

Moneycontrol