BackSebi makes monitoring agency compulsory for all IPO funds
The move assumes significance in the backdrop of instances of misuse of IPO funds discovered by the market regulator two years back
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Mumbai: The Securities and Exchange Board of India (Sebi) on Tuesday proposed in a discussion paper that appointment of an agency to monitor the utilization of funds raised through an initial public offering (IPO) should be made mandatory. Currently, such an appointment is compulsory only if the public issue size exceeds ₹ 500 crore.
Sebi said the move is aimed at strengthening the monitoring of utilization of all the equity capital raised by selling shares to the public.
Sebi’s move assumes significance in the backdrop of instances of misuse of initial public offering (IPO) funds discovered by the capital market regulator two years back.
In December 2011, following a probe into IPOs, the regulator had barred seven companies from raising money from the public for suspected misuse of proceeds from IPOs, pricing irregularities and inadequate disclosure of information.
The regulator also barred six investment bankers from managing any more share sales for alleged failure of due diligence in overseeing the IPOs.
The seven companies were PG Electroplast Ltd, RDB Rasayans Ltd, Taksheel Solutions Ltd, Brooks Laboratories Ltd, Bharatiya Global Infomedia Ltd, Tijaria Polypipes Ltd and Onelife Capital Advisors Ltd, the regulator had said on its website. The merchant bankers were Almondz Global Securities Pvt. Ltd, D&A Financial Services Pvt. Ltd, PNB Investment Services Ltd, Atherstone Capital Markets Ltd, Hem Securities Ltd and Chartered Capital and Investments Ltd.
Sebi had announced the regulatory action after investigating wild fluctuations in the share prices of newly listed firms.
In its latest discussion paper, Sebi proposed that the appointed agency will be required to submit its report to the issuer every quarter till the full utilization of the public issue proceeds, as compared to the requirement of submission of such reports on a half-yearly basis at present. Also, such reports will be required to be put out on the stock exchanges’ website to keep investors informed.
To curb misuse of money raised through a public issue, Sebi proposed to make it mandatory for the monitoring agency to assign grades to the issuer.
At present, there is no such rule for categorizing the reports in case funds are used for things other than those stated in the offer document. Sebi proposed that the monitoring agency has to grade the deviation on a two-digit scale, whereby the first digit will indicate deviation from the objects stated in offer document and the second digit will indicate the range of deviation from the specified objects in the offer documents.
While a 0 as the first digit will indicate there is no deviation from the objectives, the digit 2 will mean the utilization has neither been in line with objects nor approved by shareholders’ resolution. On the other hand, as the second digit a 0 will indicate up to 10% deviation, while a 5 will mean deviation beyond ascertainable limits.
In order to ensure that the monitoring process is carried out effectively, Sebi proposed that a committee of board of directors of the company has to be constituted to oversee the monitoring of utilization of issue proceeds before opening of the public issue. This sub-committee will facilitate monitoring of issue proceeds by monitoring agency. A majority of the members of such a sub-committee will have to be independent directors, Sebi suggested.
Sebi has sought public comments on the proposals till 25 March.
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