2025 (12) TMI 377 - HC - SEBI

Writs against SEBI approval of IPO dismissed; Regulation 6(2) ICDR compliance, disclosures and SEBI oversight upheld

Hemant Kulshrestha and Vinay Bansal Versus Securities and Exchange Board of India (SEBI) and Ors.

HC dismissed the writ petitions challenging SEBI's approval of the respondent company's IPO. It held that the IPO, conducted through the book-building ... Lack of proper disclosure in the Draft Red Herring Prospectus (DRHP) and Red Herring Prospectus (RHP) for the Initial Public Offering (IPO) - contents of General Order issued by SEBI u/s 11A - directory and not mandatory - non-disclosures/misleading disclosures - compliance with the Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2018, the Companies Act, 2013 and all other applicable laws - seek interim reliefs that the proposed public issue and/or listing of securities of Respondent No. 2 on any recognized Stock Exchange in India be kept in abeyance - Delay or laches - HELD THAT:- In the present case, the Offer Documents clearly reveal that the WeWork India IPO is being made through the book-building process. This position is clearly disclosed in the RHP which states that: “The Offer is being made through the Book Building Process, in compliance with Regulation 6(2) and Regulation 31 of the SEBI ICDR Regulations”. The other requirement of the Issuer undertaking to allot at least seventy-five percent of the net offer to QIBs is also satisfied from the statements made in the RHP. Hence, it is evident that the WeWork India IPO is in compliance with Regulation 6(2) of ICDR Regulations and is therefore permissible. There is no infirmity on the part of SEBI in permitting WeWork India in making this IPO, contrary to what has contended by Mr. Seervai. Accordingly, we are not inclined to accept the arguments of Mr. Seervai that WeWork India, on account of making losses in F.Y. 2022, 2023 and 2024 and having a negative net worth as on 31st March 2024, is disentitled from coming out with the said IPO. There is also no merit in the submission made by Mr. Seervai that SEBI ought to apply the ‘fit and proper’ criteria prescribed under Schedule II of the SEBI (Intermediaries) Regulations, 2008 since no such requirements are prescribed in the ICDR Regulations which exhaustively deal with the requirements to be complied with by an issuer coming out with an IPO. The disclosures in the DRHP and RHP being incomplete and/or misleading and, as a result thereof, inadequate for the public to make an informed decision on whether to invest in the IPO. In this regard, the Petitioner’s grievances are two-fold: firstly, that there is no complete disclosure of all the sections of the relevant statutes under which chargesheets have been filed against the Promoters of WeWork India, and secondly, that the effect and consequence of any conviction pursuant to such chargesheets on the ‘WeWork’ brand held by WeWork India has not been adequately disclosed. Upon a detailed perusal of all the disclosures, we find that the same clearly reveal the chargesheets filed against the Promoter/s of WeWork India, both by CBI as well as, the ED. Moreover, we also note that even though one charge sheet was filed under Section 120B, 420, 409, 477A of the IPC and Section 13(2) read with Section 13(1)(d) of the Prevention of Corruption Act, 1988, there is reference to only Sections 120B and 420 in the RHP whilst the other sections are not mentioned. Thus, upon going through the RHP and reading about the chargesheet(s) filed against the promoter(s) of WeWork India, to an investor, who is otherwise not familiar with the provisions of the IPC, the mere filing of chargesheet against the Promoter (of the Issuer) would be enough to deter him from investing in the IPO. On the other hand, where an investor is familiar with the provisions of the IPC, he will be put to notice that in addition to Sections 120B and 420 (that are disclosed in the RHP), charges have also been framed under other provisions of the IPC – in which case, such investor could make further inquiries in that regard, if he so desires. In our view, there is no need or requirement for the Offer Document to specifically disclose all or any of the grounds under which such license could be terminated by WeWork International, one of which includes disqualification of the promoters as Key Managerial Personnel (KMP) in the event of facing conviction in any criminal proceedings preferred against them. We are of the considered view that the (contents of the) RHP is in compliance with the ICDR Regulations and the allegations to the contrary, made by both the Petitioners have no merit and are accordingly, not accepted by this Court. Role of SEBI, as prescribed under the ICDR Regulations - Upon careful perusal of the ICDR Regulations and in particular those referred to above, it is clear that the primary obligation to ensure that the Offer Documents contain all material disclosures that are true and adequate so as to enable the public/investor to make an informed investment decision of whether to subscribe to the proposed issue, rests on the Lead Manager/(s). In the present case, admittedly, WeWork India has appointed Respondent Nos. 3 to 7 as the BRLMs of the IPO and therefore, the primary responsibility in that regard would rest with them. Hence, the BRLMs are required to exercise due diligence and satisfy themselves about all the aspects of the WeWork India IPO, including the veracity and adequacy of the disclosures in the DRHP and RHP. The role of SEBI in this regard would only be supervisory in nature. In the circumstances, we are satisfied that SEBI has indeed exercised due care and caution and complied with the legal requirements, including those prescribed under the ICDR Regulations, in connection with the WeWork India IPO and the submissions to the contrary made by the Petitioners have no merit. Our finding is also fortified by the decision of the Delhi High Court in Ashok Kumar Saxena [2021 (10) TMI 1482 - DELHI HIGH COURT] which holds that the RHP is required to contain only a summary of the allegations (and not each and every allegation) so as to enable a potential investor to be aware of the material risks which the issuer/company faces. Delay or laches - Admittedly, the RHP was published only on 27th September 2025 and filed before SEBI before the very next day, whilst the issue opened for Anchor Investors on 1st October 2025 and subsequently, to RIIs, on 3rd October 2025. Both the Petitioners have approached this Court and filed their respective Writ Petitions on 30th September 2025 and hence it cannot be said that they are guilty of inordinate delay in approaching the Court. However, a perusal of the grievances made by them would reveal that the cause of action to make these grievances to WeWork India, BRLMs and/or SEBI would arise, immediately on the issuance of the DRHP viz. on/about 31st January 2025. Whilst we accept that the DRHP was in fact kept in abeyance during the period from February till July 2025, there is no justifiable reason disclosed in both Writ Petitions as to why, after the DRHP was removed from the abeyance list in July 2025, Hemant Kulkshetra addressed his first complaint only on 25th September 2025, whilst Vinay Bansal addressed his first complaint only on 25th August 2025. Notwithstanding the same, we have proceeded to decide both Writ Petitions on merits. Locus of the Petitioners in maintaining the present Writ Petition - Neither Petitioner has disclosed the exact nature of inquiry undertaken by him and/or the source of such other assertions and allegations. This casts some doubt on the bona fides of the Petitioners. Writ Petition is hereby dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the impugned initial public offer was impermissible under the applicable securities and company law framework, including SEBI's 2012 General Order, the ICDR Regulations 2018 and Section 28 of the Companies Act, 2013, in view of the issuer's losses, negative net worth and the nature of the offer for sale. 1.2 Whether SEBI was required to apply the 'fit and proper' criteria under the SEBI (Intermediaries) Regulations, 2008 to the promoters/directors of the issuer seeking to raise funds by an IPO, and whether pending criminal proceedings and chargesheets against them barred or should have barred the IPO. 1.3 Whether the disclosures in the Draft Red Herring Prospectus and Red Herring Prospectus regarding criminal and regulatory proceedings against the promoters and the risks to the licensed 'WeWork' brand and related intellectual property were materially incomplete, misleading or inadequate so as to warrant judicial direction to amend the offer documents. 1.4 What is the respective role and responsibility of the Lead Managers/Book Running Lead Managers and SEBI under the ICDR Regulations in relation to the preparation, vetting and adequacy of disclosures in offer documents, and whether SEBI properly discharged its regulatory functions in relation to the impugned IPO. 1.5 Whether the writ petitions were vitiated by delay/laches and lack of bona fides, including suppression of material facts by one of the petitioners, so as to disentitle them to relief under Article 226. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Permissibility of the IPO under General Order 2012, ICDR Regulations and Companies Act Legal framework discussed 2.1 The Court examined SEBI's General Order No. 01 of 2012 (Framework for Rejection of Draft Offer Documents), Regulation 6 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, and Section 28 of the Companies Act, 2013, together with Rule 19(2)(b)(i) of the Securities Contracts (Regulation) Rules, 1957. 2.2 Regulation 6(1) of the ICDR Regulations sets out financial eligibility norms for an issuer to make an IPO. Regulation 6(2) permits an issuer not satisfying Regulation 6(1) to make an IPO through the book-building process if it undertakes to allot at least 75% of the net offer to Qualified Institutional Buyers and to refund full subscription if this is not achieved. 2.3 Section 28 of the Companies Act, 2013 expressly permits members to offer their shares for sale to the public, in consultation with the Board, with the offer document being deemed a prospectus, subject to statutory and regulatory disclosure requirements. Interpretation and reasoning 2.4 The Court held that the 2012 General Order merely lays down broad, illustrative and indicative criteria on which SEBI may exercise discretion to reject draft offer documents on the ground of inadequate or poor-quality disclosure. It does not regulate the merits of an issue or mandate automatic rejection upon triggering any criterion. The General Order is directory, not mandatory. 2.5 The Court further held that the subsequent notification of the ICDR Regulations, 2018, which comprehensively govern eligibility and disclosure requirements for IPOs, impliedly supersedes the earlier General Order to the extent of overlap. Hence, challenges to the IPO had to be tested against the ICDR Regulations, not the General Order. 2.6 On facts, the Red Herring Prospectus expressly stated that the offer was being made through the book-building process in compliance with Regulation 6(2) and Regulation 31 of the ICDR Regulations, with at least 75% of the net offer to be allotted to QIBs. The Court found these conditions satisfied. 2.7 The contention that the issuer's losses and negative net worth precluded SEBI from permitting the IPO was rejected on the basis that Regulation 6(2) specifically allows issuers not meeting the financial criteria in Regulation 6(1) to access the market through the mandated QIB-heavy book-building route. 2.8 As regards the fact that the entire offer was an offer for sale, with no proceeds accruing to the company, the Court held that Section 28 of the Companies Act, 2013 permits shareholders to offer part of their shareholding to the public and that the offer documents clearly disclosed that the proceeds would go to the selling shareholders. The promoters were reducing, not fully exiting, their shareholding to achieve the 25% minimum public shareholding required under Rule 19(2)(b)(i) of the SCRR. Conclusions 2.9 The General Order of 2012 does not bar the impugned IPO; it is directory and in any case stands superseded by the ICDR Regulations 2018 on the relevant aspects. 2.10 The IPO complies with Regulation 6(2) of the ICDR Regulations; the issuer is lawfully eligible to make an IPO despite losses and negative net worth. 2.11 An offer for sale in which no proceeds go to the company is legally permissible under Section 28 of the Companies Act, 2013, and is transparently disclosed; there is no legal infirmity in SEBI having permitted such an IPO. Issue 2 - Applicability of 'fit and proper' criteria to promoters/directors in an IPO Legal framework discussed 2.12 The Court considered Schedule II of the SEBI (Intermediaries) Regulations, 2008, particularly clause 3(ii), which deems a person against whom a chargesheet for economic offences is pending not to be 'fit and proper' for directorship of registered intermediaries. 2.13 The Court contrasted this with the ICDR Regulations, which comprehensively prescribe requirements for issuers accessing the primary market but do not incorporate or cross-apply the 'fit and proper' test for promoters or directors in the context of an IPO. Interpretation and reasoning 2.14 The argument that SEBI should apply the same 'fit and proper' standards to promoters/directors of an issuer making an IPO as it does to directors of intermediaries was rejected. The Court noted that the Intermediaries Regulations operate in a distinct regulatory field. 2.15 The ICDR Regulations do not mandate a 'fit and proper' filter of the kind applicable to intermediaries for permitting an IPO. The Court declined to judicially import such a standard into the IPO eligibility regime. Conclusions 2.16 SEBI is not required under the ICDR Regulations to apply the 'fit and proper' test under the Intermediaries Regulations to promoters/directors of an issuer seeking to raise funds by IPO. 2.17 Pending criminal proceedings and chargesheets against promoters, though required to be disclosed as material risk and litigation, do not, by themselves, bar an IPO in the absence of any such statutory or regulatory prohibition. Issue 3 - Adequacy and correctness of disclosures in DRHP/RHP regarding criminal proceedings and brand/IP risks Legal framework discussed 2.18 The Court relied on Regulation 24 of the ICDR Regulations, which mandates that draft offer documents and offer documents must contain all material disclosures that are true and adequate to enable an applicant to take an informed investment decision, and imposes on lead managers a due diligence obligation regarding veracity and adequacy of disclosures. 2.19 Regulation 26 of the ICDR Regulations, requiring public availability of the draft offer document for at least 21 days, public announcements inviting comments, and submission to SEBI of public comments and consequential changes, was also examined. 2.20 The Court considered the RHP's Sections I (Forward-Looking Statement), II (Risk Factors), VI (Legal and Other Information), and IX (Material Contracts and Documents for Inspection), including the 'Summary of Outstanding Litigation' and specific 'Internal Risks' entries, as well as the disclosure table of complaints and responses. Interpretation and reasoning - criminal proceedings and chargesheets 2.21 The grievance was that the RHP mentioned only Sections 120B and 420 of the IPC from a chargesheet that also included Sections 409, 477A IPC and provisions of the Prevention of Corruption Act, and that it allegedly failed to disclose that a PMLA chargesheet had been filed by the Enforcement Directorate, and that there was no stay on criminal proceedings. 2.22 The Court noted multiple, specific disclosures in the RHP: * A summary of outstanding litigation involving the company, its promoters and others. * 'Internal Risks' describing proceedings initiated by the ED under PMLA and the potential adverse impact of any adverse outcome on the business, reputation, financial condition and operations. * Detailed litigation under Section VI regarding criminal proceedings against the promoters. * Forward-Looking Statements identifying any adverse outcome in ED proceedings against the promoter as a material risk factor. 2.23 The Court accepted that the RHP expressly referred to chargesheets filed by CBI and ED against the promoters. While only Sections 120B and 420 IPC were specifically cited from the CBI chargesheet, the RHP indicated that the chargesheet was under several provisions. The Court found that, in substance, the fact of serious criminal proceedings and multiple charges was adequately conveyed. 2.24 The Court reasoned that an ordinary investor is unlikely to know the precise import of individual statutory sections; the critical disclosure is that chargesheets for criminal offences have been filed against promoters. For sophisticated investors who do know statutory provisions, the RHP disclosure of some sections and the fact of chargesheets would prompt further inquiry if desired. 2.25 The Court also noted that the RHP includes a dedicated 'Internal Risks' item summarising legal proceedings against the company and its promoters, and that the details of the petitioners' complaints and the responses are collated in a table and cross-referenced to the 'Material Contracts and Documents for Inspection', thereby facilitating deeper scrutiny by investors. Interpretation and reasoning - risk to 'WeWork' brand and intellectual property 2.26 The petitioners alleged inadequate disclosure of the consequences under the Operations and Management Agreement (OMA) with WeWork International if promoters were convicted, including termination of the brand licence. 2.27 The Court referred to specific 'Risk Factors' and 'Internal Risks' entries which: * Expressly identify the OMA dated 30 December 2024, under which the 'WeWork' brand is licensed to the issuer. * Describe the adverse impact on business, operations and financial condition if the OMA is terminated. * Discuss risks relating to the issuer's intellectual property and substantial harm to its business if it is unable to protect such rights or if the OMA is terminated. 2.28 The Court held that there is no regulatory requirement to reproduce all contractual grounds for termination of the OMA in the RHP, including that a conviction of promoters as KMP could trigger termination. What is required is a clear articulation of the material commercial risk that the brand licence may terminate and the consequences thereof, which the Court found the RHP had adequately done. Interpretation and reasoning - complaints disclosure 2.29 The RHP contains, under an 'Internal Risks' item, a comprehensive table of complaints made against the issuer and its promoters (including the complaints of both petitioners), along with the responses given by the issuer and the BRLMs. 2.30 The RHP further states that all such complaints and responses form part of the 'Material Contracts and Documents for Inspection', available for public inspection. This arrangement was viewed by the Court as providing a transparent mechanism for investors to assess the objections and replies in full. Conclusions 2.31 The disclosures in the RHP adequately inform investors of: (a) the fact and seriousness of criminal and PMLA proceedings and chargesheets against the promoters; (b) the risk that adverse outcomes could affect the issuer's business and reputation; and (c) the material risk of loss or termination of the 'WeWork' brand licence and its potential impact on the issuer. 2.32 The omission of a verbatim list of all statutory sections in the chargesheets or all contractual termination grounds in the OMA does not render the disclosures false, misleading or materially inadequate under the ICDR regime. 2.33 The inclusion of the petitioners' complaints and detailed responses as part of the risk factors and 'Material Contracts and Documents for Inspection' negates any allegation of suppression; investors are able to access and evaluate these materials. 2.34 The Court, therefore, rejected the contention that the DRHP/RHP contained gross mis-statements, deliberate suppression or material non-disclosures warranting judicial direction to amend the offer documents. Issue 4 - Role and responsibility of BRLMs and SEBI; adequacy of SEBI's regulatory action; judicial deference to expert regulator Legal framework discussed 2.35 The Court analysed Parts V and VI of the ICDR Regulations, particularly Regulations 24, 26 and 52, which collectively: * Place primary responsibility for truth, completeness and adequacy of disclosures on the lead manager(s). * Require public dissemination of the draft offer document and processing of public comments. * Require lead managers to exercise due diligence, monitor issue-related matters and address investor grievances. 2.36 The Court also took into account SEBI's detailed letter dated 8 July 2025 to one of the BRLMs, which contained extensive observations on the DRHP and required specific modifications and enhanced disclosures. 2.37 The Court relied on judicial precedents emphasising that courts should show restraint and deference in reviewing actions of specialised financial regulators, particularly SEBI, and should not substitute their own policy preferences for those of the regulator absent arbitrariness or violation of constitutional or statutory mandates. Interpretation and reasoning 2.38 The Court held that under the ICDR framework, the primary obligation to ensure that the DRHP and RHP contain all material, true and adequate disclosures enabling informed investment decisions rests squarely on the lead managers/BRLMs. SEBI's role is supervisory and regulatory, not that of primary drafter or verifier of every line of the offer document. 2.39 The detailed 8 July 2025 SEBI letter demonstrated that SEBI had, in fact, applied its mind to the DRHP, scrutinised its contents and directed multiple changes, including: * Repositioning the ED/PMLA proceedings against the promoter from litigation disclosures to the very first 'Internal Risk' item, thereby enhancing prominence. * Requiring other specific risk disclosures and negative qualifiers in identified risk factors. 2.40 The Court found that SEBI had discharged its obligations by engaging substantively with the DRHP, requiring modifications and ensuring that the RHP reflected these directions, thereby satisfying the regulatory requirement of ensuring adequate and prominent disclosure of material risks. 2.41 Relying on precedents, the Court reiterated that in matters involving complex financial and economic assessment, particularly where an expert regulator like SEBI acts within its statutory mandate and after consulting domain experts, courts should not function as appellate bodies re-evaluating policy or disclosure judgments except where there is clear arbitrariness or illegality. 2.42 The Securities Appellate Tribunal's view that the disclosure process under the ICDR Regulations is overseen in the first instance by the lead manager(s) was noted and found consistent with the scheme of the Regulations. Conclusions 2.43 The primary responsibility for the veracity and adequacy of the offer document disclosures lies with the BRLMs, who are mandated to exercise due diligence and handle investor complaints and issue-related matters. 2.44 SEBI has acted within its statutory remit, has scrutinised the DRHP, and has secured appropriate enhancements to the risk disclosures in the RHP; there is no basis to hold that SEBI failed in its regulatory duties. 2.45 Given SEBI's expertise, the comprehensive ICDR framework and the steps taken in this case, judicial interference with SEBI's regulatory assessment or with the RHP's structure and content is unwarranted. Issue 5 - Delay, locus and suppression of material facts; entitlement to relief under Article 226 Delay and laches 2.46 The Court recognised the general principle that delay and laches are relevant in the exercise of discretionary writ jurisdiction and that a petitioner who approaches the Court without reasonable explanation for delay may be disentitled to relief. 2.47 The RHP was published on 27 September 2025; the issue opened for anchor investors on 1 October 2025 and for retail investors on 3 October 2025. Both writ petitions were filed on 30 September 2025 and thus were not delayed in relation to the RHP itself. 2.48 However, the cause of action regarding alleged deficiencies in disclosures arose when the DRHP was first filed on or about 31 January 2025. Although the DRHP was in abeyance from February to July 2025, the petitioners offered no satisfactory explanation for not raising their grievances promptly after the DRHP was removed from the abeyance list in July 2025, particularly since one petitioner complained only on 25 August 2025 and the other only on 25 September 2025. 2.49 Notwithstanding these concerns, the Court elected to examine the petitions on merits and did not reject them solely on the ground of delay. Locus and bona fides 2.50 Both petitioners described themselves as active retail investors regularly participating in IPOs and claimed to be acting to protect public interest and the integrity of disclosures in the securities market. 2.51 Both relied on the same article/news report as the trigger for their complaints. However, the pleadings contained assertions and allegations not found in that report, and neither petitioner disclosed the additional sources or inquiries underlying those further allegations, which the Court found to cast some doubt on their bona fides. Suppression by one petitioner 2.52 One petitioner's central contention was that his complaint to SEBI had not been addressed, and on this basis he sought directions similar to those issued in earlier precedents where SEBI had failed to decide on complaints before a public issue. 2.53 During the hearing, it emerged that this petitioner had in fact received detailed responses: a letter from the issuer dated 11 September 2025 and a further letter from the five BRLMs dated 16 September 2025, addressing his allegations point by point. These were not disclosed in his writ petition, nor were the BRLMs impleaded as parties. 2.54 Counsel for that petitioner acknowledged in Court, on instructions, that the letters had been received but not disclosed to him or to the instructing attorney and offered an apology, which the Court accepted as to counsel but not as to the client. 2.55 The Court held that the suppression of these material responses, in a petition premised on alleged inaction by SEBI and the issuer, amounted to approaching the Court with unclean hands. A litigant who withholds material documents and information is not entitled to equitable relief under Article 226. Conclusions 2.56 While some delay was evident between the removal of the DRHP from the abeyance list and the filing of complaints, the Court nevertheless decided the petitions on merits rather than dismissing them solely on laches. 2.57 The undisclosed responses from the issuer and BRLMs rendered the allegation of regulatory inaction untenable and demonstrated deliberate suppression by one petitioner. 2.58 On the ground of suppression and lack of candour alone, that petitioner's writ petition was dismissed with costs of Rs. 1 lakh payable to the Maharashtra State Legal Services Authority. 2.59 Independently of suppression, in light of the Court's findings on legality of the IPO, adequacy of disclosures, and SEBI's compliance with the ICDR framework, both writ petitions were found to be devoid of merit and were dismissed.