[Advait Arunav is a 4th year B.A., LL.B. (Hons.) student at National Law University, Delhi and Myra Khanna is a 5thyear B.A., LL.B. (Hons.) student at Maharashtra National Law University, Mumbai]
In November 2022, the Securities and Exchange Board of India (SEBI) introduced an optional confidential pre-filing mechanism by amending the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, and inserting Chapter IIA (Regulations 59A-59E). Under this, an issuer may file a non-public pre-filed draft offer document with SEBI and the stock exchanges for review, without making any public disclosure of the offer document in its preliminary form.
This, unlike the standard initial public offering (IPO) route, allows the issuer to obtain regulatory feedback before deciding whether to go ahead with the IPO or not. The rationale for this, as flagged by SEBI’s Primary Market Advisory Committee (PMAC), is that premature public disclosure exposed the issuer to the risk of competitors exploiting commercially sensitive information. The confidential pre-filing route was introduced to address this.
But this mechanism has a catch. This route also allows issuers to optionally and selectively interact with Qualified Institutional Buyers (QIBs) before any document is made public, meaning QIBs may develop investment views on the basis of information not yet accessible to retail investors. This post, thus, focuses on this information asymmetry between QIBs and retail investors, first, by briefly describing how this interaction is structured; second, by analysing why this asymmetry may prejudice retail investors; and finally, by suggesting two targeted reforms drawn from the very framework that inspired this mechanism.
Procedure Under Regulation 59C
The information asymmetry concern arises from the design of the confidential pre-filing process under Regulations 59C and 59D. Under Regulation 59C, the issuer and the Book Running Lead Manager (BRLM) submit a Pre-filed Draft Red Herring Prospectus (PDRHP) with SEBI. Within two days of such filing, the issuer makes a public announcement of the pre-filing, but without disclosing any more details. The PDRHP itself remains inaccessible to the public. SEBI then reviews the submission and returns comments within 30 working days.
After incorporating SEBI’s comments, the issuer submits the First Updated Draft Red Herring Prospectus (UDRHP-I). This is the first point at which retail investors may access any document relating to the issue. A public notice inviting comments is issued within two business days. The issuer then incorporates the public feedback and resubmits the document as UDRHP-II before finally filing the Red Herring Prospectus with the Registrar of Companies.
Regulation 59D and Interaction with QIBs
The PDRHP and its contents remain confidential until the public filing of UDRHP-I. But this confidentiality does not extend to QIBs. Under Regulation 59D, the issuer may undertake limited marketing of the proposed issue to QIBs after the submission of the PDRHP but before receipt of comments from SEBI on the document (within 30 days). This mechanism, called “Testing the Waters” (TTW), allows issuers to gauge institutional investor interest. The PMAC suggested TTW, recognising that an outright prohibition on all marketing during the confidential phase would needlessly lengthen the timeline to IPO launch. But TTW clearly creates a period where institutional investors have information about the issuer that is not available to the rest of the market.
Regulation 59D does, however, offer certain safeguards. TTW interactions are restricted to the information included in the PDRHP; any other information should not be shared. To that extent, the regulations themselves limit the concerns surrounding the publication of sensitive financial information. A list of participating investors must be maintained by the issuer and BRLMs, and the lead manager must confirm the closure of TTW prior to SEBI issuing its observations. In order to prevent TTW from being utilised for premature full-fledged marketing, a minimum seven-day cooling-off time must also pass between the last TTW interaction and the submission of UDRHP-I.
But these safeguards are more procedural than substantive. Regulation 59D does not require issuers to disclose the substance of TTW interactions, leaving retail investors uninformed of what was shared with QIBs before any offer document enters the public domain. This may raise some issues.
Issues Arising from Information Asymmetry
The authors identify at least two reasons to believe that the mechanism, as designed, can operate as a source of prejudice to retail investors.
First, the confidential pre-filing process creates an asymmetry of available information by providing early access to QIBs. Even as prior commentary has taken the position that the subsequent seven-day cooling off period mandated by SEBI levels the playing field between the QIBs and the remaining investors, we disagree owing to the information asymmetry that nevertheless arises. By the time the UDRHP-I is filed, the QIBs would have already formed their investment views based on information which is not available to the retail investors.
This is better understood by referencing certain economic theories. For instance, in his research on quality uncertainty, economist George Akerlof described how an asymmetry in available information forces uninformed buyers to rely on averages rather than individual quality, which prevents prices from accurately reflecting value and puts uninformed participants at a systematic disadvantage. In a similar vein, economist Kevin Rock’s “Winner’s Curse” model shows how this manifests in IPO markets specifically: informed investors bid on underpriced offerings and avoid overpriced ones, whereas uninformed retail investors, lacking this evaluation, bid indiscriminately. As a result, retail investors receive a smaller share of desirable IPOs and a larger share of undesirable ones. Moreover, retail investors who enter the process last and with the least information may end up disproportionately exposed to overvalued IPOs and under-allocated in undervalued ones. Though the information accessible to QIBs under TTW is limited to the contents of the PDRHP, it is a relevant caveat, but it does not eliminate the asymmetry; it only circumscribes its scope.
Second, this disadvantage is potentially exacerbated by the disparity in capacity between QIBs and retail investors. A retail investor in India is someone who bids on shares up to two lakh rupees. These investors usually lack the institutional infrastructure, algorithms and research teams that allow QIBs to rapidly process complicated offer documents. In addition to placing retail investors at an absolute disadvantage in comparison to QIBs, this absence intensifies the relative disadvantage brought about by the previously mentioned information asymmetry.
It bears noting that the empirical record of this probable prejudice remains limited; as of 2025, only 29 companies have utilised the confidential route, which is an insufficient sample for definitive conclusions. It is acknowledged that the concerns elucidated above may be more theoretical than real, and the safeguards under Regulation 59D may well prove sufficient in practice. The solution to even this theoretical concern, however, is straightforward and is found in the very framework that inspired this mechanism.
Solution in the Origins: the US JOBS Act
India’s adoption of the confidential pre-filing mechanism was broadly inspired by the US’s Jumpstart Our Business Startups Act, 2012 (JOBS Act). Under the JOBS Act, “Emerging Growth Companies” are permitted to file draft registration statements confidentially with the Securities Exchange Commission (SEC) before any public disclosure.
However, the JOBS Act includes a safeguard that Regulation 59C omits. Under Section 106 of the JOBS Act, companies in a PDRHP parallel route are mandated to make the “initial confidential submission and all amendments thereto” public. Essentially, this allows the investors to track the offer document’s whole history and understand changes made during regulatory scrutiny, helping them make more informed decisions. There is no comparable requirement in India. The PDRHP is never made public; the public record begins only at the UDRHP-I stage.
The uneven implementation of TTW itself worsens this disparity. Prior to UDRHP-I, TTW communication with retail investors was prohibited; however, issuers may communicate with QIBs. The regulator portrays this as a safeguard, but in practice it keeps retail investors out of the pre-issue interaction that QIBs profit from.
Possible Reforms and Conclusion
Two targeted reforms would meaningfully address this theoretical asymmetry without dismantling the mechanism.
First, like the JOBS Act, mandatory retrospective disclosure of the PDRHP can be mandated under Regulation 59D. Similar to the US’s SEC, SEBI may mandate that the issuer disclose the PDRHP, along with details of any amendments and modifications to the same, when submitting the UDRHP-I. This would allow all investors to review the offer document’s history and gain a better understanding of its development.
Second, there might be some respite even if the window for public comments is extended. Extending the current 21-day window for public comments on the UDRHP-I under Regulation 59C(9) may give independent analysts, financial media, and others more time to review the document and give their opinions before retail investors have to decide whether to subscribe to the issue.
Neither of these reforms disrupts the core principle of the confidential pre-filing mechanism. Section 11 of the SEBI Act, 1992 statutorily obliges SEBI to protect investor interests and promote the securities market simultaneously, which are co-equal obligations. The popularity of the confidential route (29 filings in 2025 alone) shows that it is meeting the real needs of issuers. Both the suggested reforms can help bring the framework closer to the standard SEBI is statutorily required to meet without imposing any significant cost on the issuers choosing this route or the investors, be it QIBs or retail.
– Advait Arunav & Myra Khanna