Companies to Face one-year Ban, Penalty for Rejected IPO Papers

Companies will not be able to access the capital market for at least a year if their IPO documents are rejected by the Securities and Exchange Board of India (Sebi), while managers of such public issues would also face penal action.

Sebi has also decided to make public the details of such companies and their issue managers, along with the reasons of rejection. After the regulator’s last board meeting on August 16, its chairman, UK Sinha, had announced that Sebi has decided to put in place a detailed set of criteria for rejection of initial public offer documents to safeguard the interests of investors.

According to the details finalised by Sebi, in consultation with its Primary Market Advisory Committee (PMAC), the companies and the book-running lead managers (BRLMs) should be penalised for filing offer documents that are not in conformity with the pre-defined eligibility criteria.

Consequently, the companies whose offer documents are rejected would not not be allowed to access capital markets for at least a year and the same may be increased, depending on the materiality of the omissions and commissions.

The BRLMs of such issues would be liable for penal action and the list of such offer documents rejected by Sebi, along with the details of issuers and lead managers and the reasons for rejection, would be disseminated in public domain.

The offer document will be rejected if the ultimate promoters are unidentifiable and their contribution is not in compliance with the regulations ‘in letter and in spirit’.

If a company is vague about utilisation of a major portion of the issue proceeds, then also it will lead to rejection of the documents.

The documents will not be accepted if the IPO proceeds are used for something that doesn’t create any tangible asset for the company. The proceeds cannot be used for expenses like brand building, advertisement and payment to consultants. Also, companies will not get Sebi clearance for their IPOs if they intend to set up a plant without receiving clearance, licences, permissions or approval from the competent authorities.

Sebi bars companies from buying shares through staff trusts

Capital market regulator Sebi has barred employee welfare schemes and trusts of listed entities from purchasing their own shares from the secondary market, fearing stock manipulation. Sebi will also ask listed companies to disclose all their existing employee benefit schemes involving stock purchase and align them in accordance with its ESOS and ESPS guidelines within a given timeframe.

Sebi's Employee Stock Option Scheme (ESOS) and Employee Stock Purchase Scheme (ESPS) guidelines allow listed companies to reward their employees through stock option schemes and stock purchase schemes.

Sebi's crackdown against unregulated staff welfare schemes and trusts has comes amid concerns that some companies may be funding these schemes to deal in their own securities with an aim to manipulate the share price by engaging into fraudulent and unfair trade practices.

Financial Express, New Delhi, 25-08-2012