End-use of IPO funds under lens

Ministry of Corporate Affairs directs Registrar of Companies to conduct quarterly scrutiny

The Ministry of Corporate Affairs (MCA) has decided to conduct a quarterly scrutiny of the end-use of funds raised through initial public offers (IPO).

To this end, the ministry has directed all Registrar of Companies (RoC) to coordinate with the stock exchanges to access the quarterly balance sheets of all companies that have come out with IPOs in the recent past.

Official sources close to the development said the MCA will assess whether the utilisation of IPO money matches the description in the prospectus the company files.

This exercise forms part of a technical scrutiny mechanism that the ministry has worked out to detect non-compliance and non-disclosure by companies.

"This quarterly examination will be a sort of early warning system for shareholders," said sources. The logic for this exercise is that shareholders are often the worst sufferers when a company goes bankrupt. This is because holders of debt instruments have the first right over the assets of the company concerned followed preferential shareholders. Ordinary shareholders come last in the pecking order.

Currently, responsibility for monitoring the end-use of IPO proceeds is unclear since MCA and the Securities and Exchange Board of India (Sebi) share or conduct inspections individually depending on which regulator finds anomalies in company performance.

Now, the decision to conduct quarterly scrutiny establishes MCA as the sole regulatory authority for scrutiny of end-use of IPO proceeds, sources said.

They added that Sebi will, thus, be responsible for IPO formalities. After the IPO, the MCA will be not be responsible for checking end-use details, he said.

At present, the RoC scrutinises IPO proceeds during the routine annual inspection of companies' audited balance sheets and not as a separate exercise.

Investigations into the end-use of IPO proceeds, however, have been conducted on a case-to-case basis since 2001 for those companies in which irregularities have been detected or based on information from other regulators, a practice that has seen a significant reduction in the number of companies that vanish after raising IPO funds.