Mumbai: The Securities and Exchange Board of India (Sebi) is looking to tighten listing norms to prevent fly-by-night operators from getting listed on stock exchanges, said four people aware of the development.
The capital market regulator’s move follows the government’s ongoing crackdown on shell companies to curb black money. In August, Sebi had imposed a partial trading ban on 331 firms termed as shell firms by the ministry of corporate affairs.
“The plan is to increase the minimum net worth requirement, the proportion of assets held in tangible form, the number of years of profitability and the minimum number of public investors to whom shares are allotted," said one of the four people cited earlier, all of whom spoke on condition of anonymity.
By doing so, Sebi wants to ensure that companies with stronger businesses and a potential to maintain profitability during the initial years of listing are allowed to go public, this person said.
Sebi norms now specify that a company wishing to get listed needs to have a track record of generating profits and distributing dividends for at least three of the five years preceding the time it goes public, have a minimum net worth of Rs1 crore in each of the preceding three years and have net tangible assets of at least Rs3 crore in each of the three preceding years.
Further, a company cannot make a share allotment in a public issue if the number of prospective allottees is less than 1,000.
“Sebi plans to increase the minimum net worth requirement to at least Rs3 crore; the minimum amount of tangible assets has to be at least Rs5-10 crore; the number of years of profitability and the required percentage of tangible assets to be utilized for businesses and projects are also set to be increased," said the second of the four people cited earlier.
Further, Sebi wants a company to remain profitable for at least a few years following its listing, subject to market conditions, this person said.
These norms could be introduced as early as this month, said the first person.
Some of these ideas were discussed with members of Sebi’s secondary market advisory committee in the last week of September, said K. Suresh, president of the Association of National Exchanges Members of India (ANMI). He is a member of Sebi’s secondary markets advisory committee and was present at that meeting.
“Sebi’s plan may prevent many small genuine businesses from getting listed and raising capital from the public to grow. It will definitely help to a large extent to ensure that only strong, mid-sized or larger companies are able to get listed," said Suresh.
He added that ANMI has proposed a grading/rating system for initial public offerings so that investors have a basic idea of the quality of the company they are investing in.
“This rating can be given either by a credit rating agency or any external expert or by Sebi itself. And then, Sebi should closely scrutinize the books of accounts and the details disclosed in the DRHP (draft red herring prospectus) and should continue this exercise on a regular basis after listing to ensure that the conduct of the company and its board is honest and transparent," added Suresh.
An email sent to Sebi on 17 September remained unanswered.
There are more than 4,000 listed firms in the country. Of this, around 2,000 do not have enough liquidity and are suspected to be involved in dubious transactions or manipulations to show business only on paper, according to two of the four people cited earlier.
“We should first take action against companies that have defaulted and do not have enough liquidity," said Sudhir Bassi, executive director at law firm Khaitan and Co. “Sebi should not abruptly put unnecessary regulatory burdens on genuine businesses."