Indirect Promotion and IPO Regulation: Legal Analysis of SEBI’s approach in the Indira IVF IPO

By Sakshi Tiwari

Introduction

The recent postponement of Indira IVF’s IPO following the Securities and Exchange Board of India’s (SEBI) intervention serves as a compelling case study in the evolving relationship between corporate market strategies and regulatory compliance in India’s capital markets. Even though the company claimed “commercial considerations” to be the reason for shelving its IPO, headlines over the timing of the release of the film had sparked a debate. 

Indira IVF, a leading healthcare provider, was all set to make a public debut of ₹ 3,500 when SEBI raised concerns about the timing of a biographical film on its founder, Dr. Ajay Murdia. SEBI’s apprehension was primarily based on the potential for the film’s release to act as an indirect promotional tool, thereby influencing investor sentiment and potentially violating established norms of fair market conduct by creating artificial demand or a surge for the company’s shares, eventually affecting the IPO’s success in the market. 

This incident brings to the forefront critical questions about the boundaries of permissible promotional activity during the IPO process. It specifically highlights the regulatory challenges posed by indirect or narrative-driven marketing, such as documentaries or influencer-led campaigns, that fall in the grey area within the existing legal definitions of advertising. It also highlights the subjective nature of regulatory interpretation, as SEBI intervention lacked explicit statutory violation and was based merely on the perceived risk of “preconditioning” the market. 

This regulatory response is particularly significant in the context of India’s rapidly maturing capital market, where companies are increasingly leveraging innovative marketing strategies to stand out and attract investor interest. This blog examines the incident and explores broader implications for companies navigating advertising and regulatory challenges during their public listing process.

SEBI’s Regulatory Approach

SEBI has laid down guidelines for the issuers under schedules IX and X of the Issue of Capital and Disclosure Requirements (ICDR) regulations, according to which certain advertisements that can influence the investor's decision shall be prohibited. This includes a ban on selective disclosures under the second explanation to Schedule IX (11), according to which any advertisement issued by the issuer shall be considered to be misleading if it contains either statements made about the performance or activities of the issuer without necessary explanatory or qualifying statements, which may give an exaggerated picture of such performance or serves as an inaccurate portrayal of past performance or its portrayal in a manner which implies that past gains or income will be repeated in the future.

While these measures aim to protect investors from misleading claims and ensure market fairness, they often hinder creativity and restrict the companies’ ability to stand out in this competitive market. Such regulatory actions reflect an overcautious approach and pose significant compliance challenges for enterprises because of two main reasons – Firstly it raises questions about its consistency with the principles of the Efficient Market Hypothesis (EMH) and secondly because there is only subjective interpretation of the phrase “indirect promotion”.

The EHM suggests that markets are most efficient when all types of information, whether factual, narrative, or even emotionally driven, are freely available to the investors. This broad flow of information helps investors make better decisions and supports more accurate price discovery. Thus, stringent restrictions on pre-IPO communications create an inherent risk of curtailing the diversity of information accessible to the participants, thereby, paradoxically, impeding the market’s capacity to reflect a broad range of insights about the issuing company. This potentially undermines the very objective of market efficiency that SEBI seeks to achieve. 

Further, SEBI’s broad and subjective scrutiny of IPOs for perceived preconditioning of investor sentiment, as previously observed in cases of Paytm and Nykaa, compounds the challenges. In these instances, while SEBI raised concerns over optimistic projections by Paytm, there was no scrutiny over the use of influencer marketing by Nykaa, respectively. However, the extension of this subjective regulatory interpretation to healthcare companies raises particular concerns as this domain is uniquely characterized by its reliance on trust, with companies often needing to employ narrative-driven communication and emphasize founder credibility to establish legitimacy and reassure potential investors. By subjecting healthcare firms to the same regulatory standards as those applied to other industries, SEBI’s approach overlooks the distinct communication imperatives of the sector. This not only introduces significant uncertainty for healthcare companies seeking to adopt innovative, trust-building marketing strategies but also risks impeding their ability to effectively convey credibility that is fundamental to investor confidence in such a highly regulated and sensitive field.

Global Perspectives on IPO Promotion

This approach of SEBI, when compared with its global counterparts, reveals notable differences in the regulatory approaches. For instance, in the United States, the Securities Exchange Commission (SEC) allows for a degree of flexibility regarding media tie-ins during IPO periods, as when Facebook went public, there was extensive media coverage, including documentaries and news features that could have influenced investor sentiment.

The SEC addressed these scenarios through the concept of the Media Free Writing Prospectus (Media FWP). It essentially means that if company representatives participate in interviews with unaffiliated and uncompensated media, and the content aligns with the information disclosed in the registration statement, no additional filing is typically required. However, if new information is introduced, the issuer must file the media FWP with the SEC and amend the registration statement accordingly. Importantly, the SEC distinguishes between paid promotional content, which is subject to stricter regulation, and independent media coverage, which is generally permitted provided it does not contain material misstatements or omissions. Similarly, the UK’s Financial Conduct Authority (FCA) takes a risk-based approach to indirect promotional activities, focusing on whether communications are fair, clear, and not misleading rather than imposing blanket prohibitions. 

While the objectives of investor protection and market stability are shared across jurisdictions, regulators in the US and UK have sought to balance these aims with the need for efficient information flow and market access. SEBI’s increasingly stringent and subjective rules, therefore, appear disproportionate when viewed against international standards. This raises questions about whether India’s regulatory environment may unnecessarily stifle innovation and competition in its capital markets, rather than simply aligning with global practices. 

The way ahead: Balancing Promotion and Regulation

The need for clearer guidelines from SEBI regarding indirect promotion and preconditioning investors is crucial for reducing compliance uncertainty for companies preparing for IPOs. Providing clear definitions for both terms, along with specific examples of what constitutes each, can be very helpful. For instance, SEBI could clarify whether or not activities like hosting exclusive investor events or partnering with influential figures around the time of an IPO filing will be considered as indirect promotions.

Similarly, examples of marketing strategies that will be construed as indirect promotions can be listed out for the companies. By offering these clear definitions and examples, SEBI can help companies understand the boundaries of permissible promotional activities without having any fear of regulatory setbacks, reducing the risk of non-compliance. This clarity will enable them to develop more effective marketing strategies while staying within regulatory limits, ultimately fostering a more transparent and efficient IPO process.

Additionally, in order to balance investor protection with business innovation, SEBI requires a more nuanced approach to regulate these marketing strategies. It can shift towards goal-oriented regulations rather than rigid methods of enforcement. For example, instead of broadly prohibiting indirect promotion, SEBI could define specific criteria for permissible marketing campaigns such as timing, content neutrality, and explicit disclaimers. Encouraging collaboration between companies and regulatory agencies by way of pre-approval mechanisms for promotional materials can also be undertaken. This would allow businesses to innovate within established boundaries while ensuring compliance.

Furthermore, SEBI could explore the possibility of creating a regulatory sandbox for IPO marketing innovation, where companies can test new strategies under controlled conditions without immediate penalties. This can encourage experimentation while maintaining investor protection. Ultimately, these measures would strike a balance between safeguarding market integrity and allowing businesses to stand out in this already diluted market space, fostering a more dynamic and equitable IPO ecosystem.

Conclusion

Therefore, the regulatory trajectory adopted by SEBI in relation to indirect promotion and IPO advertising, as evidenced in the current case, highlights the complexities inherent in balancing investor protection with the imperatives of market efficiency and innovation. While its interventions are aimed at safeguarding market integrity, the prevailing framework is marked by broad, subjective interpretations and stringent restrictions that often result in unnecessary regulation. Further, comparatively, the current approach appears to be disproportionate to the global standards. The resultant uncertainty not only complicates compliance for issuers but also risks stifling legitimate promotional innovation and limiting the diversity of information available to the market. 

Disclaimer

The views expressed in this article are solely those of the author(s). This article is intended for educational/information purposes only. The source of this article is publicly available information and under no circumstances should the contents of the article be construed to be professional advice by the authors.