IPO filings: New companies law clause proves irritant

The clause mandates promoters to furnish proof of initial investments

A requirement in the new Companies Act for promoters to furnish details of initial investments at the company's inception is proving an irritant for Initial Public Offering (IPO) plans. Investment bankers involved in readying the IPO documents or a draft prospectus of companies wanting to go for one said providing the proof was a problem.

“For the promoter of a company set up a decade or two ago, proof of the initial investment could be hard to provide. Promoters are taking time to collect these documents, which is causing some delay in filing the prospectus,” said Dara J Kalyaniwala, vice-president (investment banking), Prabhudas Lilladher.

Such a requirement was absent in the Companies Act, 1956. It had recommendations on the structure of a prospectus but did not detail the promoter disclosure requirement.

PROMOTER DISCLOSURE

• Companies Act 2013 mandates disclosure of initial investment made by promoters in the IPO prospectus
• Companies Act 1956 detailed structure of prospectus, not disclosures needed
• Promoters cite difficulty over declaration
• IPO prospectus filing process getting delayed, say i-bankers

The new Act becomes mandatory only from April 2015 but certain sections of the revamped governance norms have been notified by the ministry of corporate affairs. Under Chapter III of the new Act, Rule 3, on the information to be stated in a prospectus, is: “...the details of all utilised and unutilised monies out of the monies collected in the previous issue made by way of public offer shall be disclosed... indicating the purpose for which such monies have been utilised...”

The clause further requires disclosures of the securities or other forms of financial assets in which the unutilised proceeds of such an issue have been invested. This ruling was notified earlier in the year and has been effective since April.

Despite the stock market surging more than 25 per cent, very few companies have launched IPOs in 2014. Observers say a slew is expected early next year. The market regulator, investment bankers said, was seeking greater due-diligence and disclosures from companies, which is extending the IPO timeline.

“Since it could be difficult for the company to provide details of the initial investment, the prospectus could carry information about but need not provide a detailed history. The genuineness of the capital build-up is to be provided, which can always be proven in the form of capital appreciation of the assets involved,” said B Madhuprasad, vice-chairman, Keynote Corporate Services.

Others said a paper-trail of bank documents would be proof enough. “Proof of any sort of capital, be it in the form of equity or preference shares issued or even pawning of jewellery or other physical assets ploughed in will be available in the form of a bank statement. While promoters are not hesitant in sharing the information, it is causing a bit of delay,” said a banker with an investment banking arm.