Misleading advertisement

An issue advertisement has one job. It tells people an issue is open and where to read about it. It is not a sales pitch.

SEBI therefore defines when an advertisement becomes misleading, and the definition is short. An advertisement issued by the issuer is misleading if it does either of two things.

First, if it makes statements about the issuer's performance or activities without the necessary explanatory or qualifying statements, so that the picture looks better than it is.

Second, if it portrays past performance inaccurately, or portrays it in a way that implies past gains or income will be repeated in the future.

That is the whole test. Notice what it does not require. Nobody has to prove the advertisement was false. An exaggerated but literally true claim, stripped of its qualifications, is enough.

The rule reaches the merchant banker because the merchant banker approves the advertising. Every issue advertisement needs the lead manager's sign-off, so a misleading advertisement is the lead manager's problem too.

The definition (Chapter 6, footnote to section 6.1). Any advertisement issued by the issuer shall be considered to be misleading if it contains:

(a) 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 activities; or (b) 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.

What counts as a public communication. The same footnote defines public communication or publicity material as including corporate and issue advertisements of the issuer, interviews by its promoters, directors, duly authorised employees or representatives, documentaries about the issuer or its promoters, periodical reports and press releases. An interview is an advertisement for this purpose.

The positive rules (Schedule IX of the ICDR Regulations). Any public communication by the issuer, its associate company, the lead manager(s), their associates or any other intermediary connected with the issue or their associates shall contain only such information as is contained in the offer document, and shall:

• be truthful and fair, not manipulative, deceptive or distorted, and contain no statement, promise or forecast that is untrue or misleading;
• reproduce information from the offer document in full, disclosing all relevant facts and not restricted to select extracts;
• be set forth in clear, concise and understandable language, without technical, legal or complex language or excessive details that may distract the investor;
• where any financial data is presented, include data for the past three years along with revenue, net profit, share capital, reserves or other equity, earnings per share, dividends and book values, to the extent applicable;
• carry no issue slogans or brand names beyond the issuer's normal commercial name or commercial brand names of products already in use or disclosed in the offer document, and no slogans, expletives or non-factual and unsubstantiated titles;
• contain no statement promising or guaranteeing a rapid increase in revenue or profits;
• display no models, celebrities, fictional characters, landmarks or caricatures;
• not appear on television as crawlers — advertisements running alongside a programme in a narrow strip at the bottom of the screen;
• on television, advise viewers to refer to the offer document for the risk factors, and not scroll the risk factors on screen; and
• where highlights are given, prominently advise readers to refer to the risk factors and other disclosures, in print of not less than point seven size. A billboard or banner advertisement carries only the information specified, and must prominently advise viewers to refer to the offer document for details and risk factors.

The timing rules. From the date of the board meeting approving the public issue until the draft offer document is filed with SEBI, public communications must be consistent with the issuer's past practices — or must prominently display or announce that the issuer proposes a public issue in the near future and is filing a draft offer document. From filing until allotment, they must prominently disclose that the issue is proposed, that the document has been filed, and that it is available on the websites of SEBI, the lead manager(s) and the stock exchanges. Product and service advertisements are exempt from that particular disclosure — but from the board resolution until allotment no product or service advertisement may refer, directly or indirectly, to the issuer's performance.

The lead manager's own obligations. The issuer must obtain the lead manager's approval for all issue advertisements and public communications, and give copies of all issue-related material to every lead manager. The lead manager(s) submit a compliance certificate for the period between filing the draft offer document and the closure of the issue, covering news reports in the newspapers mentioned in the regulations and in print and electronic media controlled by a media group that has a private treaty or shareholders' agreement with the issuer or its promoters. No information extraneous to the offer document may be given by the issuer or any member of the issue management team or syndicate to any particular section of investors or to any research analyst — including at road shows, presentations, research or sales reports, or bidding centres. The issuer must also make a prompt, true and fair disclosure of material developments between filing the offer document and allotment, by public notices in all the newspapers that carried the pre-issue advertisement.

The same standard elsewhere in the paper. The merchant banker's code of conduct in Chapter 3 requires it to endeavour to ensure investors are provided with true and adequate information without making any misleading or exaggerated claims or any misrepresentation. In an open offer, the manager must ensure the public announcement, detailed public statement, letter of offer and post-offer advertisement are true, fair and adequate in all material respects and not misleading in any material particular — and the SAST documents must not omit any relevant information or contain any misleading information. In a public issue of debt securities, the merchant banker verifies and confirms that there is no misleading or untrue statement or mis-statement in the offer document.

Illustrative figures. Tungabhadra Solar Ltd is filing a Rs 900 crore IPO. Its marketing team drafts a full-page newspaper advertisement. The lead manager, Kalinga Capital Ltd, has to approve it and strikes out four elements.

What replaces the revenue line is three years of data, as Schedule IX requires:

The reader can now see the same 68% growth — 1,485 ÷ 884 − 1 — and also that share capital rose from Rs 120 crore to Rs 150 crore over the period. The 68% is still true. It is simply no longer exaggerated by standing alone.

The risk-factor pointer at the foot of the advertisement is set in point seven size. Small, but the regulation fixes a floor, so it cannot be set smaller.

A television version was planned as a crawler under the evening news. That is barred outright, and Kalinga sends the team back with a full-screen spot that advises viewers to refer to the offer document for the risk factors.

Separately, the promoter gives a magazine interview and says the order book is close to Rs 3,000 crore — a figure that appears nowhere in the offer document. That interview is a public communication under the footnote definition, and the number is extraneous information given outside the offer document. It goes into Kalinga's compliance certificate as an incident, and the issuer has to put out a correction.

Chapter 6 (Issue Management – General Obligations of Merchant Bankers and Due Diligence) is 15% of the paper, and public communications and research reports are item 2 of the eight general obligations it lists. The definition of misleading sits in the chapter's own footnote, which is exactly the sort of line examiners lift.

Expect a "which of the following makes an advertisement misleading" question with the two limbs as options, and a "which of the following is not permitted in an issue advertisement" question — celebrities, models, crawlers, slogans and guarantees of rapid profit growth are all on the prohibited list. The three years of financial data and the point seven size for risk factors are the two numbers worth memorising. Chapter 3 carries the same standard inside the code of conduct, and Chapter 7 carries it for open offer documents.

• Misleading does not mean false. An accurate figure presented without its qualifying statements is misleading under limb (a).
• The two limbs are exaggeration and past performance. Limb (b) is specifically about portraying past performance inaccurately, or implying past gains will be repeated.
• An interview is a public communication. So are documentaries, periodical reports and press releases. The definition is not limited to paid advertising.
• Three years of financial data, but only where financial data is presented. The rule is conditional; it does not force every advertisement to carry financials.
• Point seven is a minimum size, not a maximum. Risk factor pointers may be larger.
• Crawlers are barred; a full-screen television advertisement is not. And on television the risk factors must not be scrolled — the viewer is pointed to the offer document instead.
• Product advertisements are exempt from the disclosure requirement but not from the performance bar. Between the board resolution and allotment they may not refer to the issuer's performance, directly or indirectly.
• The lead manager's compliance certificate covers news reports, not only advertisements — including media controlled by a group that has a private treaty or shareholders' agreement with the issuer or its promoters.
• The workbook prints the Schedule IX list twice, at sub-regulation (1) and again at sub-regulation (7), with small differences in wording. One says revenue and reserves or other equity, the other says sales, gross profit and reserves; one caps billboard content by reference to the regulations, the other to Part D of Schedule X. It is the same rule stated twice, not two separate obligations.