What is a Confidential IPO Filing? 

A confidential IPO filing is a process where companies submit their official IPO document, i.e., the draft red herring prospectus (DRHP), to the Securities and Exchange Board of India (SEBI) and relevant stock exchanges without immediately making them public. There are several reasons a company takes the confidential filing approach, as explained below. 

What is a Confidential IPO Filing? 

A confidential IPO filing is the process where companies privately submit their DRHP to the securities regulator, SEBI, without making it accessible to the public immediately. 

This confidential filing route allows companies to obtain necessary feedback from the regulators and evaluate market conditions before publicly disclosing vital and sensitive information. 

The filing method is also considered a pre-IPO regulatory step where the DRHP is being reviewed by the regulators, but not under public scrutiny.

How Does the Confidential IPO Process Work? 

Here’s how the confidential IPO process works in India -

Step 1:  Appointment of Lead Manager

A merchant banker, also referred to as the lead manager, along with other intermediaries such as auditors and legal advisors, is commissioned by the company to assist with the IPO documentation. They help with the preparation of the Draft Red Herring Prospectus (DRHP).

Step 2: Confidential Submission of DRHP

The merchant banker confidentially submits the DRHP to SEBI without disclosing the same to the public. The preliminary DRHP document contains company financials, information on the promoters, and business models.

Step 3: Regulatory Review

After carefully examining the DRHP, SEBI provides its observations and feedback. At times, the stock exchanges may also offer their inputs and feedback on the same.

Step 4: Revision of DRHP Based on Feedback Resolution

The company will address all the observations and feedback provided by the regulator, making revisions to the DRHP accordingly. This period also gives the company time to evaluate market conditions, refine the IPO blueprint, and decide strategically on the IPO timing and pricing strategy. 

Step 5: Public Filing

Once the company is ready to go ahead with the IPO, it files an updated DRHP (UDRHP) with the SEBI and stock exchanges.

Step 6: Public Announcement

Once the UDRHP is filed, a public announcement on the filing is made. This phase involves investor roadshows.

Step 7: Filing of Red Herring Prospectus

The company will finally file the red herring prospectus (RHP), which includes the updated financials, timelines, and pricing details for the IPO.

Once the RHP is filed, the opening and closing of the issue is announced, after which the traditional IPO processes such as subscription, allotment and listing on the respective exchanges follow. 

Difference Between Confidential IPO Filing and Traditional IPO Filing 

The primary difference between a confidential and traditional IPO filing lies in the public disclosure timing. In the latter, the DRHP is immediately made public upon filing with SEBI. However, in the case of the former, the DRHP is initially kept confidential and only becomes public after reviews and potential adjustments/amendments. 

So, the traditional IPO process enables higher public security and feedback before the launch of the IPO. While this is more transparent, it may also expose the company to criticism and intense scrutiny early on in the process.

In the confidential IPO process, the company can work with regulators and exchanges to refine its DRHPs without publicly revealing sensitive data. Companies get ample scope in this system to address concerns, make necessary updates, and then make the DRHP public. 

Why Companies Choose Confidential Filing

Companies opt for confidential IPO filing to maintain the privacy of their sensitive financial and strategic data during the initial stages of the process. Companies also do this to obtain valuable regulatory feedback and observations from SEBI and the exchanges on their DRHPs. This gives them more time to make necessary changes before going public. 

They can also use the time to evaluate the market response and adjust their IPO strategies likewise. At the same time, this also helps them keep rivals from accessing sensitive data before the launch. Another reason to opt for this system is the flexibility to decide on the right timing for the IPO after getting regulatory feedback. 

Is a Confidential IPO Filing Allowed in India?

A confidential IPO filing is allowed in India. The SEBI introduced it in November 2022 and enables companies to file their DRHPS with the regulator without immediate public disclosure. Various Indian startups have taken this route in recent times, and it has contributed towards a system that puts higher value on strategic planning and agility. 

Benefits of Confidential IPOs

Here are some of the benefits of confidential IPOs: 

• Lower Risks - Companies can utilise the time to understand regulatory feedback and market conditions before launching their IPOs. This could help them minimise adverse reactions in the market. 
• Strategic Adaptability - They can adjust IPO strategies and blueprints based on market conditions and feedback, thereby increasing the chances of successful offerings. 
• Efficient Regulatory Assessment - At the pre-IPO stage itself, companies may efficiently address concerns raised by SEBI and exchanges before publicly revealing information. This may streamline the overall process considerably. 
• Safeguarding Sensitive Data - Companies can easily protect their confidential business data from rivals and public scrutiny in the initial stages. 
• Strategic Timing - Companies can decide on the best time to launch their IPOs after addressing regulatory concerns and market sentiments. It may give them a strategic advantage. 
• Lower Reputational Risks - This system enables companies to refine their IPO approach and address compliance issues without the pressure of immediate public disclosure. 

Risks of Confidential IPOs

The risks of confidential IPO filing include the following: 

• Limited early feedback from the market - The absence of instant public filing often results in missing valuable market feedback from institutional investors and market analysts. 
• Misjudgment risks - A lack of broader early feedback may lead to misjudgment in strategic decision-making or pricing. 
• Delayed understanding of investors - Confidential filing often results in limited time for investors to analyse the company’s details before launch. It may affect their investment decisions at times.
• Uncertainty and information gaps - Delayed release of information may lead to uncertainty and sudden market surprises when the filing goes public. 
• Scepticism of investors - Any oversights or discrepancies found after the public release may lead to investor scepticism and a negative impact on the IPO. 
• Lower accountability - The absence of immediate accountability and transparency may lead to public concerns about trust. 
• Higher insider trading risks - Certain parties may be able to access material non-public data in the confidential filing period, increasing insider trading risks. 
• Limited marketing - Companies often face restrictions on marketing their IPOs in the confidential filing period, thereby lowering investor interest considerably. 

Other risks may include a lengthy process with higher costs, as well as the possibility that companies may decide not to proceed with the IPO afterwards. It could hinder the expectations of investors.