The initial public offer (IPO) plan of Thyrocare Technologies Ltd, which runs a diagnostic laboratory chain across the country, has hit a roadblock. According to two people with knowledge of the development, the Securities and Exchange Board of India (Sebi) is yet to respond to Thyrocare’s application seeking approval to file its share sale prospectus.

The bone of contention is the issuance of shares to employees and relatives by A. Velumani, founder and chief executive officer of Navi Mumbai-based Thyrocare. In 2005, he issued shares to about 51 people in contravention of the provisions of the Companies Act, 1956.

Realizing its error, the management wrote to Sebi seeking clarification on the issue and its go-ahead to file a so-called draft red herring prospectus, a preliminary document filed by companies prior to a share sale. Eight months on, the capital markets regulator is yet to respond to Thyrocare’s request, said one of the persons cited above. Both requested anonymity.

On 26 February, Reuters reported that Thyrocare was planning a stock market listing by the end of June to raise around $85-100 million. Around 25% of Thyrocare shares are expected to be sold in the IPO, which would lead to the partial exits of some of its stakeholders.

Edelweiss Financial Services Ltd, ICICI Securities Ltd and JM Financial Ltd were hired to manage the IPO, Reuters reported.

CX Partners holds about 27% of Thyrocare and Norwest Venture Partners 10%. In the backdrop of the IPO being delayed, CX Partners has initiated talks with various private equity investors to sell its five-year-old investment in the company, said the second person.

“We have written several mails to Sebi seeking clarification over the issue, but have not received any response from Sebi yet," A Thyrocare spokesperson said. “Though we are not in a hurry to raise funds, we need to facilitate exits for our investors."

Mails sent to Sebi on Tuesday and CX Partners on Monday went unanswered. Norwest Venture Partners declined to comment.

The Companies Act of 1956 states that any offer made to more than 49 people would be deemed a public issue, but the new Act of 2013 has increased that limit to 200 people. All such deemed public offers require the approval of the capital markets regulator.

“There can be two possibilities, with Sebi either imposing a monetary penalty or directing the company to make a public offer. Since the company is believed to be keen to list, the regulator could use the penalty route," said Sandeep Parekh, founder of Finsec Law Advisors, a legal firm, and a former executive director in the legal department of Sebi.

Given that Sebi is aware of the matter, it would take some action against the company before approving the IPO document, said R.S. Loona, managing partner at Alliance Corporate Lawyers.

“Sebi can issue a show-cause notice to the company, after which it can even direct the company to not deal in securities or access the securities market. From that angle, if Sebi is seized of the matter based on any complaint, then it would not clear the offer document till it either drops or disposes of the contemplated action for directions," Loona said.

“However, if Sebi initiates adjudication proceedings for imposing a monetary penalty, the same may not come in the way of an IPO. The company will only be required to make necessary disclosures in the offer document," added Loona.

CX Partners acquired a 30% stake in Thyrocare in 2010 for about $42 million. In 2013, it sold close to 3% to ICICI Bank for about 40 crore. Norwest bought a 10% stake in Thyrocare in 2012 for 120 crore. It has no immediate plans to exit the company, the second person cited earlier said.

According to consulting firm PricewaterhouseCoopers, the diagnostic industry in India is expected to grow to $17 billion by 2021 from $3.4 billion in 2011. With about 40,000 laboratories across the country, the industry is one of the fastest growing areas of India’s $74 billion healthcare industry.

Thyrocare competes with diagnostic chains such as Dr Lal PathLabs Pvt. Ltd, Metropolis Healthcare Ltd, SRL Diagnostics and The Apollo Clinic. On 6 May, Mint reported that Dr Lal PathLabs had initiated the process of raising nearly 700 crore through an IPO. SRL Diagnostics withdrew its IPO prospectus in 2011.

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