Timing of Competition Law Review in an IPO Process: A Critical Legal Imperative

Posted On - 6 July, 2025 • By - Aniket Ghosh

Introduction

In the evolving Indian capital markets landscape, the regulatory rigour around public offerings has intensified. Initial Public Offerings (IPOs) are not merely capital-raising events; they are corporate milestones that subject companies to heightened scrutiny—both from regulators and investors. Among the various facets of due diligence that come into play, competition law compliance has emerged as a critical focus area. Given the broad investigatory powers of the Competition Commission of India (CCI), past or ongoing anti-competitive conduct can significantly impact investor confidence and valuation.

One frequently asked question by promoters and merchant bankers alike is: When should a competition law review be undertaken during an IPO process—before or after the filing of the Draft Red Herring Prospectus (DRHP)? This article delves into the legal, regulatory, and practical considerations surrounding this issue and provides guidance for issuers and stakeholders.

The Competition Act, 2002 regulates anti-competitive agreements, abuse of dominant position, and combinations (M&A scrutiny). While IPOs themselves do not fall under the “combination” scrutiny, a company going public must ensure that its business practices do not contravene the substantive provisions of the Act.

Key areas of competition law concern in IPOs include:

  1. Ongoing or past investigations under Section 26 by the CCI.
  2. Orders or penalties under Sections 27 and 48.
  3. Director liability, including vicarious liability under Section 48.
  4. Conduct amounting to cartelisation, bid rigging, or abuse of dominance.

Failure to disclose material antitrust issues can lead to serious consequences:

  1. Regulatory pushback by SEBI.
  2. Delay or withdrawal of the issue.
  3. Legal liability for misstatement under the SEBI (ICDR) Regulations, 2018 and Companies Act, 2013.
  4. Erosion of investor confidence.

IPO Timeline and DRHP Disclosures

A typical IPO process in India includes the following broad steps:

  1. Appointment of merchant bankers and legal advisors.
  2. Legal and financial due diligence.
  3. Drafting and filing of the DRHP with SEBI.
  4. SEBI review and comments.
  5. Filing of the Red Herring Prospectus (RHP).
  6. Public issue opening and listing.

The DRHP is the foundational disclosure document, and the SEBI (ICDR) Regulations, 2018 mandate that the DRHP disclose:

  1. All material legal proceedings.
  2. All material liabilities, contingent liabilities and risks.
  3. All regulatory actions that may impact the business, operations, or reputation of the issuer.
    Thus, any ongoing or concluded CCI matter—whether resulting in a penalty, order, or show cause notice—must be disclosed in the DRHP.

When Should the Competition Law Review Be Conducted?

Before Filing the DRHP

This is the legally prudent and industry-preferred approach.

Reasons:

  1. Comprehensive Disclosure: If there are any adverse findings, notices, or risks under the Competition Act, they must be captured in the DRHP to avoid misleading investors.
  2. SEBI Review: SEBI scrutinises disclosures in the DRHP for completeness and accuracy. Inadequate or non-disclosure of competition law issues could result in SEBI issuing queries, leading to delays.
  3. Risk Factor Identification: Legal advisors and merchant bankers must flag “material risks” in the DRHP. Without a proper review, such risks may be under-reported or omitted.
  4. Investor Expectation: Institutional investors expect transparency around regulatory risks. Discovery of competition law exposure post-DRHP could spook investors or lead to a repricing of the issue.
  5. Reputational Risk: A company that fails to disclose a known or foreseeable CCI risk may face reputational damage post-listing, which could also give rise to class actions or SEBI enforcement.

Scope of Pre-DRHP Competition Law Review May Include:

  1. Review of all CCI orders, investigations, and filings.
  2. Interviews with senior management to unearth undocumented conduct.
  3. Review of commercial practices that may raise red flags (exclusive agreements, pricing practices, market sharing, etc.).
  4. Review of past business combinations (for compliance with merger thresholds, where applicable).
  5. Analysis of director and officer liability exposure.

Can the Review Be Conducted After Filing the DRHP?

Technically yes, but this is legally risky and operationally inefficient.

A post-DRHP competition law review is only justifiable under the following limited conditions:

  1. The issuer company has undergone a preliminary legal audit suggesting no competition law risks.
  2. The company has included provisional disclosures in the DRHP indicating that a competition law review is ongoing and final findings will be incorporated in the RHP.
  3. There is no known investigation, show cause notice, or adverse order from the CCI or any pending combination notification.

However, even in such cases, any significant finding from a later review will necessitate a revised DRHP or supplemental disclosure in the RHP, both of which delay the timeline and may reduce investor confidence.

Practical Implications and Case Law Illustrations

While there are no published Indian judicial decisions specifically on the failure to conduct antitrust due diligence in IPOs, international precedents show that inadequate disclosure of regulatory liabilities can trigger enforcement.

In India, SEBI has issued cautionary guidance on the need for full disclosure of material litigations including regulatory proceedings. Moreover, SEBI’s powers under Section 11B and 15HB of the SEBI Act can be invoked against issuers for misleading or incomplete DRHPs.

From a merchant banker’s liability perspective, the SEBI (Merchant Bankers) Regulations, 1992 impose an obligation to exercise due diligence in verifying the disclosures made in the offer document. Failure to conduct proper competition law due diligence could expose merchant bankers to SEBI penalties and reputational harm.

Suggested Best Practices

King Stubb & Kasiva recommends the following approach for issuers:

  1. Conduct competition law due diligence at the same time as general legal diligence—prior to DRHP drafting.
  2. Prepare a standalone legal memo on antitrust risks to aid in disclosure drafting and risk factor formulation.
  3. In case of any identified risk, evaluate:
    • Whether the conduct has ceased.
    • Whether remedial action was taken.
    • Whether any CCI order exists and if appealed.
  4. Disclose not just regulatory actions, but also any material exposure or practices that could give rise to enforcement under Sections 3 or 4 of the Act.
  5. If post-DRHP competition law review is unavoidable, add a cautionary note in the DRHP and ensure full disclosure in the RHP.

Conclusion

Competition law compliance is a cornerstone of corporate governance, especially for companies seeking to access capital markets. Given the regulatory emphasis on transparency, companies should view competition law review not as a perfunctory legal checklist item but as a strategic disclosure imperative.

Conducting a robust and early competition law review before filing the DRHP not only aligns with SEBI’s expectations but also fortifies investor trust, ensures smooth regulatory review, and enhances long-term market credibility.

At King Stubb & Kasiva, we routinely advise issuers, merchant bankers, and investors on the full spectrum of IPO legal diligence—including regulatory risk mapping and disclosures. Our experience suggests that early integration of competition law review into the IPO process substantially mitigates both legal and reputational risks.