Under wraps

There’s something contradictory about trying to keep the details of an initial public offering private for as long as possible.

In 2012, the US allowed confidential filing for IPOs of growth companies under the Jumpstart Our Business Startups act, and India introduced something similar last year. After food delivery app Swiggy was the first to use India’s confidential filing process for its IPO last year, more companies like online education provider Physics Wallah and consumer electronics maker Imagine Marketing are now doing the same.

There is a price to pay for making use of the confidential filing process: regulatory approval is valid for 12 months, compared with 18 months under the conventional route, and screening takes about two months longer than usual.

The advantages, though, are that companies can wait to formally launch their deals until they have answered regulators’ questions and market conditions are supportive.

The Indian equity market has started the year weakly, with the Sensex index dropping 4.8% year to date after jumping 28% in the past two years.

It’s understandable that some companies might not want to put a draft IPO prospectus in the shop window for months while investors and journalists speculate about their likely listing valuation as the stock market declines. Any indication that a deal has been delayed from its planned timeline could dampen investor enthusiasm for the trade when it does launch. And money-losing companies like technology start-ups might not want their rivals to know exactly how much cash they are burning – and by implication how much runway they have left – while they wait for listing approval.

But keeping the initial filing confidential risks the perception that a company is trying to rush its offering through the marketing period before people see the shortcomings of its business. Fund managers have teams of analysts to trawl through hundreds of pages of documents and find red flags. Retail investors don’t have that luxury.

In India, where around 50% of shares in an IPO have to be offered to retail investors, it seems important that they be given as much time as possible to understand the companies they are buying into.

Making an IPO document public for just 21 days might give companies the flexibility and privacy they want, but it looks more like speed-dating than trying to form a long-term relationship with retail investors.