New Delhi: 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.

Sebi will also reject the IPO papers of the companies, in whose financial statements auditors have raised doubt over the truth and fairness of the books of accounts or raise doubt on the different accounting policies followed by the company.

This would also be applicable for the subsidiaries or associate companies which significantly contributes the business of the issuer company or where the issue proceedings are proposed to be utilised.

Any change in accounting policy, majority of business being with related parties or circular transactions with connected/group entities to show that the company has better prospects would also lead to rejection.

The IPO applications would also be rejected if the companies conceal material litigation or regulatory actions.

The other criteria for rejection include incomplete documentation in terms of Sebi requirements, incorrect/vague/misleading disclosures, direct or indirect conflict of interest of the BRLM with the issuer beyond certain limit.

Sebi feels that indirect conflict of interest at times may not be quantifiable and in such cases the concerned department would take a call on materiality.

The document may also be liable for rejection if the reply of lead managers to the queries raised by Sebi is not provided in time-bound manner or is not satisfactory.

The rejection criteria would be applicable to all the offer documents filed with Sebi and the regulator might consider additional criteria for rejection where it feels that investors will not be in a position to assess the risks associated with such public offers.

However, in all such cases a final view on rejection would be taken by Sebi only after considering the materiality of the observations and merely triggering the criteria would also not be considered as an automatic case for rejection.

These decisions have been taken by Sebi in the wake of the regulator coming across many IPO documents off-late being filed with inadequate and sketchy disclosures, raising concerns about the credentials of such issuers.

There have been instances wherein transactions involving the issuer have been carried out typically prior to filing of the documents, merely for a technical compliance with the regulatory requirements rather than a compliance with the spirit of the law.

Such cases have often been supplemented by vague and circuitous responses from bankers to the queries raised, raising doubts on the permissibility of such issuers to the public offer market.

Therefore, Sebi felt there is a need to protect the interest of the investors where the investor may not be in a position to assess the risks associated with a business model due to complexities involved therein.


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