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Material Misstatements in DRHP: SEBI’s Enforcement Actions - MMJC
Introduction
In recent years, India has seen a wave of IPOs, making it more important than ever for regulators to keep a close watch on company disclosures. For businesses looking to go public, this means they need to be completely transparent and provide accurate information. At the same time, merchant bankers must dive deeper into due diligence to catch any mistakes or misstatements in the Draft Red Herring Prospectus (DRHP). Any slip-ups can lead to delays, regulatory action, or even rejection of the IPO. In this article, we shall see areas where mis-statement in prospectus could be seen and some Securities and Exchange Board of India (SEBI)’s enforcements in this regard.
What is a material Misstatement?
A material misstatement in a DRHP can be seen as any false, misleading, or incomplete information that has the potential to impact an investor’s decision-making process.
Regulation 185 (1) of SEBI (ICDR) states that “The offer document shall contain all material disclosures which are true, correct and adequate to enable the applicants to take an informed investment decision.” It makes one thing clear that transparency is non-negotiable when it comes to IPOs. Companies must provide disclosures that are true, accurate, and detailed enough for investors to make informed decisions. At the same time, lead managers have a crucial role to play, they must conduct thorough due diligence and ensure that every detail in the draft and final offer documents is genuine and complete.[1]
Key Areas in DRHP Where Misstatements Occurred:
Misstatements in Objects of the Issue:
- False Representation of Fund Utilization: In the adjudication order passed by SEBI in the matter of Trafiksol ITS Technologies limited[1] :SEBI found that, The company stated in its prospectus that IPO proceeds would be used to acquire software from a third-party vendor (TPV). SEBI’s investigation revealed that the TPV was a shell entity with no technical expertise, indicating that the transaction was not genuine and claim regarding the utilization of the IPO proceeds was misleading. SEBI held that,
“Having concluded that the TPV is a ‘shell entity’, the next question to consider is the broader implications of this finding. The Company, as stated earlier, offered multiple, and at times conflicting, explanations for its engagement with the TPV. It vehemently claimed that it merely obtained a quote from the TPV, that the TPV was selected after adhering to the rigorous procedures outlined in its procurement policy, and that the TPV was just an intermediate entity which would sub-contract the software development. However, what the Company has conspicuously failed to provide is a single credible justification for engaging such an entity in the first place.
…This, however, does not take away the fact that the Company relied on a sham entity and participated in a cover-up when the credentials of the TPV were being examined…”
SEBI directed company to refund the amount to investors.
- General Corporate Purposes (GCP): In the adjudication order passed by SEBI in the matter of IPO of Onelife Capital Advisors limited (2018)[1] SEBI observed that a false statement was made in the prospectus. SEBI held that,
“At page 32 of the Prospectus dated October 10, 2011 under the head ‘General Corporate Purposes’ (GCP) it is stated that, the funds under General Corporate Purposes were supposed to be used for strategic initiatives or unforeseen circumstances and also that as on date of prospectus, the Company has not entered into any letter of intent or any other commitment for any such acquisition/investments or definitive commitment for any such strategic initiatives. In the Board Meeting of OCAL dated September 30, 2011, it was decided to avail of short-term borrowing from prudential group to pay finder fees to Fincare and Precise and the short-term loan was to be repaid using IPO proceeds. The payment of finder fee was to be done with the IPO proceeds designated as ‘General Corporate Purposes’. However, the same was not disclosed in the Prospectus dated October 10, 2011. Hence, it was observed that a false statement was made in the Prospectus.”
Hence, non-disclosure of specific allocations under GCP, leading to fund misutilization counted as material misstatement in the offer document.
- Use of Bridge Loans: It means non-disclosure of short-term borrowings taken before the IPO. In the adjudication order passed by SEBI in the matter of IPO of Onelife Capital Advisors limited (2018)[1] , SEBI found that false statement were made in the prospectus regarding pre-IPO borrowings (or bridge loans).
SEBI held that,
“In the Prospectus dated October 10, 2011 it is stated at point no 17 at page no. 28 that “Our Company has not raised any bridge loans against the Issue Proceeds”. However, it was observed that OCAL raised a loan of Rs.11.5 crore from Prudential Group vide loan agreements dated October 03, 2011 when the public issue was in progress and before the date of Prospectus. Thus, the above is a false statement in the Prospectus.”
SEBI imposed penalty the merchant banker for the issue Artherstone Capital Markets.
- Promoter and Group Company Details: This includes concealment of related-party transactions or promoter linkages with undisclosed entities. This was observed in the prospectus of DLF. DLF’s IPO prospectus in 2007 contained misstatements and omissions regarding related party transactions and material disclosures. Initially, three companies, Sudipti Estates, Shalika Estate Developers, and Felicite Builders were disclosed as associates, but later omitted from the revised DRHP. SEBI found that the share transfers were sham transactions, and DLF continued to control these entities, despite claiming otherwise.
Additionally, related party transactions and financial details of subsidiaries were not disclosed, violating SEBI’s disclosure norms. DLF also failed to report an FIR against Sudipti, which was a key litigation matter. SEBI ruled that DLF misled investors, leading to a three-year market ban on the company and its executives.
SEBI held that,“…Resorting to sham transaction of share transfer with a view to camouflage association of DLF with Felicite, Shalika and Sudipti as dissociation and thereby misleading the investors by not disclosing material information relating to Felicite, Shalika and Sudipti in the offer documents is no doubt highly objectionable. Such a dubious method adopted by DLF is highly detrimental to the investors/general public in the securities market. Therefore, with a view to send stern message to DLF and to other listed companies that such dubious methods are not adopted again, it was necessary for SEBI to take remedial action under Section 11/11B of SEBI Act…”[1]
- Litigation and Regulatory Proceedings: Omission of material legal cases or pending investigations affecting the company.
- Risk Factors: Downplaying or failing to disclose significant business, financial, or regulatory risks.
- Financial Statements & Projections: Inflated revenue, understated liabilities, or misleading future growth estimates.
The areas mentioned above are some of the most common risk zones where misstatements in a DRHP have occurred and can occur. While they don’t cover every possible issue, they highlight why accuracy and transparency are absolutely essential when preparing an IPO document.
To avoid these pitfalls, thorough due diligence is a must. This isn’t just the company’s responsibility Book Running Lead Managers (BRLMs) play a crucial role too. Under Schedule V of SEBI (ICDR) Regulations, 2018, BRLMs must submit a due diligence certificate, confirming that all disclosures in the DRHP are true, complete, and sufficient for investors to make informed decisions. That’s why every detail financials, legal matters, risk disclosures, and fund utilization needs to be carefully verified. A single misstatement can lead to regulatory scrutiny, investor distrust, and legal trouble. Taking the time to get it right not only ensures
Conclusion
Misstatements in a DRHP are more than just compliance lapses, they can lead to regulatory penalties, legal consequences, and a loss of investor trust. SEBI has consistently taken strict action against companies that fail to provide accurate disclosures, reinforcing the importance of transparency and due diligence in the IPO process.
For companies and Book Running Lead Managers (BRLMs), the message is clear: every detail in the DRHP must be verified, accurate, and complete. A single misleading statement can derail an IPO, invite regulatory scrutiny, and damage long-term credibility. On the other hand, a well-prepared DRHP not only ensures compliance but also builds investor confidence and market reputation. As IPO activity in India continues to grow, so will SEBI’s vigilance. The key to navigating this evolving landscape is simple; full and fair disclosure, backed by rigorous due diligence.
[1] Regulation 185 (3) of SEBI ICDR Regulations 2018: The lead manager(s) shall exercise due diligence and satisfy themselves about all aspects of the issue including the veracity and adequacy of disclosure in the draft offer document and the offer documents.
[2] https://www.sebi.gov.in/sebi_data/attachdocs/dec-2024/1733225149153.pdf
[3] SEBI Adjudication Order NO. EAD/BJD/BKM/ 169 /2017-18 in the matter of IPO of Onelife Capital Advisors Limited
[4] SEBI Adjudication Order NO. EAD/BJD/BKM/ 169 /2017-18 in the matter of IPO of Onelife Capital Advisors Limited
[5] Order of Hon’ble SAT in the matter of DLF Ltd. Vs. SEBI (13 March, 2015)
This article has been published on Taxmann. The link for the same