Companies will not be able to access the capital market for at least one year if their IPO documents are rejected by market regulator Sebi, while managers of such public issues would also face penal action.
Besides, Sebi (Securities and Exchange Board of India) has also decided to make public the details of such companies and their issue managers, along with the reasons of rejection. After Sebi’s last board meeting on August 16, Sebi Chairman U K Sinha had announced that the regulator has decided to put in place a detailed set of criteria for rejection of IPO (Initial Public Offer) documents to safeguard the interest of investors.
As per 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 in this regard.
Consequently, the companies whose offer documents are rejected would not not be allowed to access capital markets for at least one year and the same may be increased depending upon the materiality of the omissions and commissions.
The BRLMs of such issues would also 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 criteria for rejection of offer documents include any circular transactions for building up the capital or net worth of the company, the ultimate promoters being unidentifiable and promoters’ contribution not being in compliance to regulations “in letter and in spirit”.
The offer documents would be rejected also in case of the companies being vague about utilisation of a major portion of the issue proceeds, and the object being loan repayment without disclosing the ultimate purpose of the loan.
The rejection criteria also includes the IPO proceeds being used for a purpose not creating any tangible asset for the company, or being utilised for expenses like brand building, advertisement, payment to consultants etc.
The companies would not get Sebi clearance for their IPOs also in case of their main object being setting up of a plant, while it has not received clearance, licences, permissions, or approval from the competent authority.
Sebi would also reject the IPO documents if the company has an “exaggerated, complex or misleading business model where the investors may not be in a position to assess the risk associated with such business models.”
Any sudden spurt in the business, income, debtors/creditors, assets etc just before filing the offer
document and reply to clarifications not being satisfactory would also lead to rejection.