Sebi may further tighten preferential issue norms

Regulator has considered further disclosure on source of funds used to subscribe to such issues

 

The Securities and Exchange Board of India (Sebi) could look at further tightening preferential issue norms to curb the misuse of the route, which allows selective allotment of securities.

The regulator has considered further disclosure on the source of funds used for subscribing to such issues, according to the agenda for the regulator’s previous board meeting. Concerns over the use of front entities by promoters to enhance their stake in preferential issues are at the root of Sebi’s moves in the matter, it said.

The regulator had taken up the matter of the use of front entities with the Sebi Committee on Disclosures and Accounting Standards (SCODA), and acted on its recommendations on the issue in an initial round of tightening, which were announced in June.

The agenda reveals Sebi’s concern that the (issue of capital and disclosure requirements) regulations ‘are silent on the source of funds’ for such issues. Sebi wished to curb the use of front entities and mulled a disclosure on the source of funds used in such issues.

“SCODA took note of the concerns raised by Sebi that preferential issue, as a mode of raising capital, could be misused by promoters through front entities who could be used to subscribe to these issuances, thereby helping promoters in increasing their stake in the companies,” said the agenda papers for the board meeting.

However, it was felt that it would be too onerous a provision to begin with, though it did not explicitly rule out a later implementation.

“If a mere disclosure of own/borrowed funds does not suffice and a disclosure of the names of the second or third level of funding entities is sought, it was felt that the same could be construed as a breach of privacy and may be considered too harsh to start with,” it said.

The committee suggested using the allottee’s own bank account for such issues as an initial step. The regulator has so far decided to tighten norms to ensure that payments for a preferential issue can only be made through the allottee’s own bank account and that allotments only be made in a dematerialised format, according to a press statement on the decisions taken in the board meeting.
SEBI WANTS DEEPER DATA ON FUNDING FOR PREFERENTIAL ISSUES:

• ICDR Regulations silent on source of funds for subscribing to preferential issues
• Regulator afraid promoters could misuse it to increase stake through front entities
• Board meeting agenda reveals Sebi took it up with committee on disclosures
• Committee felt asking for revelation of second, third level of funding might be too harsh to start with, could result in breach of privacy
• Suggested use of subscriber's own bank account as an initial step