PE investors in IPO-bound cos have to forgo special rights

Mumbai: Private equity investors in IPO-bound companies will have to cancel their special rights when the latter file their updated IPO documents with Sebi, says an advisory note from the capital market regulator to merchant bankers. This requirement exposes private equity investors to risks if IPOs of their investee companies fail to materialise, securities lawyers said.

Most of the IPO-bound companies have PE investors as significant stakeholders and they are also prolific selling shareholders in the IPOs.

"Sebi has been insisting on dropping all special rights at the time of filing the updated draft red herring prospectus with it. This means that investors will have no special rights much prior to listing, without the certainty of the listing happening," says IndusLaw partner Manshoor Nazki.

Private equity investors secure special rights depending on their shareholding and quantum of investment in companies. These special rights form part of the shareholding agreements executed between the investors and the investees. Some of the special rights are nomination rights, veto rights, information rights, anti- dilution rights, rights of first refusal, tag along rights, and divestment rights.

"It is quite common for strategic or private equity investors to have certain special rights and the Sebi perspective that there should be no special rights at the time of filing of the UDRHP appears too wide for a variety of reasons, including that it may be the basis of that investment," says Katalyst Advisors MD Ketan Dalal.