Sebi lays down strict rules to reject offer documents

Securities and Exchange Board of India (Sebi) today issued framework for rejection of draft offer documents, which are filled with it before issue of securities.

Going forward, Sebi will reject offer documents, where it believes investor safety is compromised or the quality of disclosures are inadequate or risk associated with the issue are high.

UK Sinha, chairman, Sebi issued a general order in this regard, which comes will be applicable with immediate effect. This is the first time that the regulator has issued such a framework.

Sebi has set strict rejection criteria based on the issuer's capital structure, objective for fund raising, business model or financial performance.

The regulator has said issues where ultimate promoters are unidentifiable or where there are instances of circular transactions for building up the capital or net worth of the issuer will be straightway rejected.

Sebi has also said offer documents would be rejected if the issue proceeds are used towards repayment of loan or inter-corporate deposits or major portion is proposed to be utilised for the purpose which does not create any tangible asset. It has further said if the time gap between raising the funds and proposed utilization of the same is unreasonably long, the offer document will be rejected.

If the business model of companies is “exaggerated, complex or misleading and the investors may not be able to assess the risks associated with such business models” draft documents of such issuers will also be rejected.

If there is a sudden spurt in financial performance of a company ahead of filing a draft offer document there is likelihood that company's offer document would be rejected.

Sebi has said the offer documents of issuers would be rejected where there are pending litigation which are so major that the issuer’s survival is dependent on the outcome of the pending litigation.

Those entities whose draft offer documents are rejected will not be allowed to access capital markets for at least one year from the date of such rejection, Sebi has said.

The regulator has given a one month time horizon for issuers to withdraw there offer documents that are pending with the board.

Sebi has said that the list of offer documents that are rejected would be made public by hosting it on its website.