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Sebi tightens disclosures for promoters

BS Markets Bureau in Mumbai

The Securities and Exchange Board of India has decided to make promoters of companies more accountable for the information disclosed in offer documents and has made it mandatory for the board of directors to approve and sign the draft offer document.

In order to strengthen disclosure requirements for promoters and directors, the Malegham Committee has recommended that in addition to disclosures regarding name, address and shareholding of the promoters and directors in the offer document, in order to make tracking down of the promoters and directors more effective, the photographs of the promoters and proofs of their identities such as PAN numbers, passport numbers, bank account numbers, and driving license should be disclosed in the offer document.

Under the existing depositor and investor protection guidelines, the means of finance of the project of a particular issue are to be disclosed in the offer document.

The committee recommended that companies should not be allowed to come out with a public or rights issue unless 75 per cent of the stated means of finance are tied up.

A disclosure has to be made in the offer document in this regard. The balance non tied-up portion of the means of finance should be mentioned as such without specification.

The committee felt that a company should tie up all other sources of funds prior to raising money from public because achieving financial closure makes a project more certain and thus takes care of the investors taking part in the issue.

With regard to long-term capital expense and working capital expense, the committee felt the need to differentiate between the two to ensure better disclosure and clarity about proposed deployment of funds, the committee recommended that a differentiation should be made in funds being raised for a final purpose like fixed assets and funds proposed to be utilised for rotation such as working capital. The requirement of funds, in the former case, should particularly be stated very clearly and specifically.

At present there is no differentiation between long-term fund requirement and working capital requirements.

The existing DIP guidelines do not prescribe any financial commitment from qualified institutional buyers participating in book-building issues.

In order to aid genuine price discovery the committee has recommended that that there should be provisions for some financial commitment from the QIBs.

Withdrawal of bids made by the QIBs should not be allowed. Further the identity of QIBs bidding in the issues should not be made public as this may influence the bidding sentiment of retail investors.

At present a company is required to make an issue through book building route if the issue size of the company exceeds five times the pre issue net worth or in case, the company does not have a track record of distributable profits and net worth for at least three out of the immediately preceding five years.

The committee recommended that the existing guidelines may be modified to reckon networth as on the previous year. The guidelines should provide that cumulative of the issued amount raised in a financial year be used as a reference for calculating the post issue net worth.

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