Investors to soon have an option to exit companies if funds raised via IPO not properly utilised says SEBI

Securities & Exchange Board of India (SEBI) is under plans to discuss options for investors to exit companies if the promoters fail to use money raised through initial public offerings (IPOs) for the stated purposes. This step is in line with Section 13 (8) of the Companies Act, 2013, which says that a company left with unutilised funds after raising money from the public cannot change the objects stated in the prospectus; this can happen only when a special resolution is passed and the promoters offer dissenting shareholders a way out.

This would be the first meeting of the board, after merging with Forward Markets Commission, the former commodities market regulator. The board now has new members - Shaktikanta Das, secretary in the department of economic affairs, Tapan Ray, secretary in the Ministry of Corporate Affairs, and part-time member Arun Sathe.

Under the topic of discussion, the board would also have a discussion on tweaking of rules related to forfeiture of partly paid shares, meanwhile introducing an electronic platform for the issue of debt securities and providing a framework for green bonds.

"It's a change from investing in the promoter alone to investing in the business. Scrupulous promoters may not have a problem, but unscrupulous promoters will certainly have," Suhail Nathani, a partner at Economic Laws Practice, told ET.

Investment bankers are of the opinion that this change could have an impact on IPOs, leading to problems in meeting the minimum 25% public holding norm. "If there are onerous restrictions on alteration of end-use of funds, it would discourage potential high-growth companies to go for an IPO," said Mehul Savla, director of RippleWave Equity Advisors. "Companies may prefer to raise funds through private equity now and do an IPO later for providing exit to them. This could preclude investors from participating in the growth stage of company."

The board would also discuss introducing entities called electronic book providers, which could be merchant bankers and will have to take prior approval from the regulator before they provide a platform for electronic services.

India is going to be among the few countries that would move online for all debt issues. Presently, only equity sales and government bond auctions see electronic platforms. However, in future, this could be made mandatory for all issuances, leading to symmetry of information and an improvement in the transparency in sales.

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