Founders getting steep discounts before IPOs? SEBI may tighten rules if issue 'systemic'

The Securities and Exchange Board of India (SEBI) may consider tightening rules around founders receiving steeply discounted shares shortly before an initial public offering (IPO) if such transactions are found to be “systemic”, chairman Tuhin Kanta Pandey has said.

Speaking to The Economic Times, Pandey said preferential allotments to promoters ahead of an IPO are legally permissible and fully disclosed, but added that the regulator is examining whether guardrails are needed to avoid unintended consequences for public investors.

“If we view this as a systemic issue, we will deliberate whether there needs to be a defined period within which these types of transactions should be avoided prior to the filing of the offer document,” SEBI chief said.

“While legally permissible from their perspective, we have to see the unintended consequences of such actions. Any regulatory response must therefore be thoughtful,” he added.

The comments come amid concerns over instances where founders received shares through preferential issues just months before listing at prices far lower than the eventual IPO offer price.

Pandey said SEBI operates in a disclosure-based regime, where investors are expected to evaluate risks and pricing based on publicly available information.

“Some stakeholders questioned it, while others provided explanations — and that is how a disclosure-driven market is meant to function,” he said.

The SEBI chief reiterated that valuations are a market function and investors always have the option to reject, skip or criticise an IPO if they believe the pricing lacks comfort.

“A company’s fundamentals do not change ten times a day, but its stock price may move ten times a day,” Pandey said, adding that disclosures must help investors make informed judgments.

Pandey said that SEBI is preparing further disclosure reforms, including a concise summary of key points in offer documents, to help investors better understand company data.

Pandey reiterated that private equity investors partially exiting through offer-for-sale (OFS) components in IPOs is consistent with the market’s purpose, especially in high-risk, new-age ventures. “There is no contradiction between a private equity investor exiting and the broader purpose of the primary market,” he said.