Under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (“SEBI Listing Regulations”), listed companies are required to submit their financial results within 45 days of end of each quarter, other than the last quarter of a financial year where they have 60 days.
Due to such requirement, newly-listed companies now face an interesting challenge immediately post listing. These companies are being guided by the stock exchanges to release their latest quarterly results within 45 days of the end of such quarter (or 60 days when it is the last quarter of the financial year), if they get listed on the bourses anytime within this period. For example, if a company lists on February 10, it will be guided by the stock exchanges to announce its first set of quarterly results (for the nine months ended December 31) by February 15. This is a change from the previous position where companies could choose not to announce their financial results immediately after listing as they were not a listed company during the prior period. That is, a company listing on February 10, was not a listed company on December 31.
This guidance from the stock exchanges is quite challenging given that, in the above example, the newly-listed company’s prospectus would be dated just a few days prior to the listing date and exclude the financial statements for the nine months ended December 31; but these results would be made public without any cooling-off period soon after the listing. The prospectus would include declarations from the Board of Directors that all information in it were true and correct, in spite of the exclusion of the latest quarter numbers.. Such companies would also be providing robust and detailed set of representations and warranties to the underwriters in the Underwriting Agreement.
We believe this raises serious concerns for a variety of reasons. From the perspective of the overall markets, new information coming out so soon after listing could lead to volatility. From a securities law perspective, one could raise questions including whether the prospectus includes all relevant information necessary for an investor to make an informed investment decision, whether senior management of the newly-listed company are aware of the financial position of the company for that quarter and consequently, whether there is any omission or misstatement in the prospectus.
The golden rule is that at no point should there be any compromise on the quality of disclosures in a prospectus. Whilst in certain jurisdictions, regulators would permit the inclusion of limited reviewed financials in the offer document, the SEBI ICDR Regulations do not permit that in case of an Indian IPO. To address this conundrum and to ensure complete disclosures, we believe that depending on the timing of the listing the board of directors of the ‘to be listed’ company may consider providing (i) qualitative disclosures of trends for the last quarter; and (ii) providing a cooling-off period between the date of listing and the date of release of the quarterly results.
Thus, we need to examine the problem statement here — should Indian companies be forced to disclose their quarterly results to the stock exchanges shortly after issuing their prospectus? Globally, the expectation from investors is that there should be at least a two to three week gap. Regulation 33 of the SEBI Listing Regulations which regulates disclosure of financial statements of listed companies does not provide any such flexibility, including to a newly listed company. Interestingly, taking the above example, if the newly-listed company were to list on February 16 (i.e. issue the prospectus on or around February 14) – neither would it be required to comply with Regulation 33 nor found foul of certain applicable US securities laws’ requirements (since most Indian issues are marketed to investors in the US). As the company has not listed prior to February 15, the guidance from the exchanges then is that it need not disclose any financial results for the previous quarter and directly disclose the financial statements for the fiscal ended March 31 within the time prescribed under the SEBI Listing Regulations.
The above leads to another complex situation. Companies listing on or around February 15 would have only disclosed financials for the six months ended September of the previous year in their prospectus. Thus, there would be a substantial time gap if say a company published its annual results on May 31! This is also not a good solution. The drawback pertains to the companies possessing unpublished price sensitive information (in terms of their financial position) for many months, which would likely impact the ability of employees to sell their , pre-IPO shares, arising from ESOPs, after listing and to have adequate information available post listing.
The question that follows is:- What would be the best solution for newly-listed companies on our stock exchanges and for our markets?
In our view, the most logical would be that immediately post listing, companies provide financial results of the previous period, within the time provided under Regulation 33, or, thirty days from listing, whichever is later.
Accordingly, if a company lists on February 10, it would have up to March 12 to publish its financial statements for the nine-month period ended December 31.
If, however, a company undertakes an IPO and lists on March 15, there are two possible scenarios:
- The company has already included audited and restated financial statements for the nine-month period ended December 31 in the prospectus, it then does not have any obligation to publish its results immediately after listing; or
- In some cases (and this is not very common because of certain auditor related challenges), if the company has included audited and restated financial statements for the six month period ended September 30 in the prospectus, then it has 30 days from March 15 to issue results for the nine month period ended December 31.
An amendment to the SEBI Listing Regulations or specific guidance from the stock exchanges, meant for newly-listed companies, would mostly resolve this problem and address volatility and disclosure issues for our issuers and markets.
Another long-term solution, which may require amending SEBI ICDR Regulations, is to allow such companies to include limited review financials for the stub period (period post audited and restated financial statements). This would address several of the above concerns.