For the first time, stock market regulator SEBI has come out with rejection criteria for draft offer documents. Earlier the regulator used to issue observations for every offer document and when issuers fulfilled the conditions, they were allowed to go ahead and issue securities.

Companies that have circular transactions to build up capital (issue of warrants with a buyback clause upon conversion to equity), unidentifiable ultimate promoters and non-compliance with regulations on promoter contribution would be rejected, said SEBI.

Vague, misleading

Issue details that are vague, do not disclose the purpose of deployment of proceeds, create no tangible asset, entail set up of fixed assets pending requisite approvals and where the time lag between fund-raising and deployment is unreasonably long are reasons enough to reject an offer document.

Exaggerated, complex and misleading business models hindering risk assessment of the business, questionable financial statements with sudden spurt in income, receivables, payables, intangible assets, qualified audit reports on the company’s business lines, change in accounting policy and majority of the business being transacted with related parties are also reasons for rejection, said SEBI. Litigation, including regulatory action on which the issuer’s survival is dependent, if wilfully concealed, would lead to rejection of an offer proposal, said SEBI.

On Web site

Other conditions for refusal of permission are failure to provide complete documentation, furnish requisite information and resolve conflict of interest with the merchant banker.

This order is applicable to all draft offer documents filed with SEBI. The regulator has given issuers one month from the date of this circular to withdraw pending draft offer documents.

If SEBI finds an offer document unfit, it would issue a show-cause notice to the issuer, followed by a hearing. The issuer, meanwhile, has the option of withdrawing the offer document. If he chooses not to, SEBI will pass an order rejecting it. The issuer then has the option of appealing to the Securities Apellate Tribunal.

Issuers whose documents are rejected face a minimum one-year ban from accessing the capital market. This may be increased based on the materiality of omissions and commissions.

SEBI will put a list of rejected documents on its Website, along with details of the issuers, merchant bankers and reasons for rejection. The order comes into effect immediately.

>raghavendrarao.k@thehindu.co.in