Sebi wants stricter monitoring of IPO proceeds by small firms

To check any misuse of funds raised through IPOs, regulator Sebi plans to make it mandatory for all companies to appoint a monitoring agency to keep a tab on use of the capital raised through share sale.
Under the present norms, such a monitoring agency -- which could be a bank or public financial institution -- is required to be appointed only by the companies raising more than Rs 500 crore in the public offer.
Suspecting misuse of funds raised through smaller share sales of up to Rs 500 crore, the regulator is now mulling making it mandatory for all the companies to get the use of their IPO proceeds monitored, irrespective of the offer size, sources said.

The same would apply to raising of funds from new investors through an initial public offer (IPO), as well as from existing investors through rights issue.
There are certain exempted categories of the companies, such as banks and public financial institutions from this clause as there are further stricter regulatory compliances required from such class of entities.
The proposed widening of the requirement for having a monitoring agency, expected to be placed for consideration by Sebi's board in its next meeting on April 26, follows complaints that some smaller companies could have diverted their IPO funds for purposes other than those mentioned in the offer document while garnering money from the investors.

Sources said that such complaints are related to IPOs worth less than Rs 500 crore as the rules are already stricter for the companies going public with bigger share sales.

Even in the case of IPOs worth over Rs 500 crore, the regulator wants to ensure stricter compliance to this rule and would hold the company's board and their audit committees strictly responsible for any lapses.
The Securities and Exchange Board of India (Sebi) had floated a discussion paper way back in February 2014 to make it mandatory for all companies to appoint a monitoring agency post-IPO to monitor the use of funds and disclose the same, irrespective of the size of the share sale.

However, most inputs that Sebi received at that time were in favour of retaining Rs 500 crore limit to lessen the compliance burden on smaller companies and to give a boost to the IPO market.
With significant buoyancy in the markets since then, Sebi now feels that a monitoring agency must be there for all IPOs, including those below Rs 500 crore, as there have been instances of diversion of funds for objectives other than those stated at the time of raising funds.
The agency will have to submit a report to the company and the audit committee of its board on a regular basis, mentioning whether there has been any deviation and to what extend the deviation has been in percentage terms.

The report will also need to mention whether the shareholders' approval has been obtained for any such deviation, besides other details.
It will also need to give positive or negative developments affecting the project of the business area for which the funds were raised from the investors.
The required details, already applicable for bigger IPOs, also include the status of the fund utilisation in percentage and absolute terms.
The monitoring report required details like original cost of project as well as any revision to that along with reasons, while the company would also need to provide a proposal for financing the cost overruns, if any.

If the total cumulative amount raised is more than the expenditure incurred on the project, the company would need to explain how the surplus funds are utilised or proposed to be utilised. They would need to give details on investment like instruments, maturity, earnings and other conditions related to such investments, while separate data would be required for investment in group companies.