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Sebi becomes stern grammarian: Companies asked to use simple language

Mumbai, February 8, 2024

A five-page circular issued on February 6 reads more like a style guide for editors and reporters at a newspaper than the usual, turgid pronouncements from the market regulator

The securities market regulator has morphed into a stern grammarian.

The Securities and Exchange Board of India (Sebi) has started to parse the draft offer documents submitted by companies planning to float public issues — and has threatened to hurl the voluminous tomes back if these entities can’t couch their claims and assertions in simple language.

A five-page circular issued on February 6 reads more like a style guide for editors and reporters at a newspaper than the usual, turgid pronouncements from the market regulator.

It exhorts companies to stop churning out poorly written, esoteric bilge in fat documents that leave investors befuddled by all the gobbledygook.

So, here is what the regulator prescribes: Use short sentences; prefer the active voice; use definite, unambiguous and conventional words; avoid multiple negatives (in a sentence); and use tabular presentation or bullet lists wherever required.

The draft document must be “clear, concise and intelligible”, says the circular which comes into force with immediate effect.

The school-marmish instructions on the preparation of draft public issue documents are lumped under the so-called “Guidelines for returning of draft offer document and its re-submission”.

It has also directed the stock exchanges to disseminate the provisions of the circular to the listed entities through their websites.

The circular goes on to say that the documents should have “clear and concise sections, paragraphs and sentences”. They should carry descriptive headings and sub-headings wherever necessary.

As far as possible, they should avoid the use of legal and technical terminology. If they must be used, these terms should be clarified “to explain the business of issuer/ other matters in simple terms”.

The people drafting the document have been asked to avoid “vague, ambiguous and imprecise explanations which may lead to more than one interpretation”.

It also frowns on the current practice of repeating disclosures which “increase the size of the document but do not improve the quality... of the information”.

A senior investment banker, who did not wish to be named, said Sebi was trying to protect retail investors who have been scrambling to subscribe to a spate of recent IPOs.

“It’s been done with a view to giving retail investors greater clarity, which is welcome. But how many of them read these offer documents, understand the company’s business model or compare them with listed peers?” the investment banker asked. According to primedatabase.com, 57 Indian companies raised Rs 49,434 crore through main board IPOs in 2023, 17 per cent lower than the Rs 59,302 crore mobilised by 40 IPOs in 2022.

Red pencil

This is probably the first time that the regulator has decided to use the red pencil against poorly drafted documents. Usually, the regulator has raised queries about the quality of disclosures, fairness of assumption and concealment of material information.

The circular shines a spotlight on long-winded sentences that often double back on themselves and can tie the reader in knots.

On Wednesday, a draft red herring prospectus put out by a housing finance entity illustrated just the sort of sinuous drivel that Sebi wants to stamp out.

The document read: “Our company, having made all reasonable enquiries, accepts responsibility for and confirms this Draft Red Herring Prospectus contains all information with regard to our Company and the Offer, which is material in the context of the Offer, that the information contained in this Draft Red Herring Prospectus is true and correct in all material aspects and is not misleading in any material respect, that the opinions expressed herein are honestly held and that there are no other facts, the omission of which makes this Draft Red Herring Prospectus as a whole or any of such information or the expression of any such opinions or intentions misleading in any respect.

Further, the Promoter Selling Shareholder accepts responsibility for and confirms the statements expressly made by it in this Draft Red Herring Prospectus to the extent of information specifically pertaining to them and the Offered Shares and assumes responsibility that such statements are true and correct in all material respects and not misleading in any material respect.”

That is a 165-word spiel to merely state that the company takes responsibility for all the information provided in the document and it has no intention to mislead anyone with dishonest or unfair opinions.

Investors shudder whenever they have to grapple with such prolixity.

But long-winded sentences aren’t confined to legal and commercial documents alone. The Plain English Campaign in the UK — which began in 1979 after its founder shredded hundreds of official documents in London’s Parliament Square — says the longest sentence in English Literature is Jonathan Coe’s novel, The Rotters’ Club, which contains a sentence of 13,955 words. It adds that “one of Molly Bloom’s soliloquies in James Joyce’s epic novel Ulysses features a sentence of 4,491 words.”

Sebi isn’t the only regulator that is asking companies to spruce up their act. Back in 2015, the UK market regulator, Financial Conduct Authority (FCA), floated a paper titled “Smarter consumer communications” that advised companies to write for the consumer first and “then ensure communications were compliant (with regulations), rather than the other way round”.

The Malaysian regulator also put out a 10-page document advising the companies to use clear and concise sentences. Like Sebi, it also advised them to prefer the active voice, avoid double negatives and discard superfluous words.

The paper also advised Malaysian companies to read the documents put out on the US regulator Securities and Exchange website and learn how to filter out the verbiage.

[The Telegraph]

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