Sebi goes for time-bound offer document review

WITHOUT CONTEMPT

The Securities and Exchange Board of India (Sebi) has passed a general order to govern the observations and comments on offer documents filed by persons who have regulatory problems.

This is the first time Sebi has issued such public guidance for its own team as well as for the market at large.

The order provides a framework for Sebi officials when faced with draft red herring prospectuses where investigations or regulatory proceedings are pending against the issuer or its promoters.

It is often found that when an offer document is filed, the review system is in a bind over whether to let the offering proceed with suitable disclosures about the pending regulatory action, or whether the public offering should be allowed at all.

One concern the regulator often expresses is that if the ultimate outcome of the regulatory action could be to bar the issuer from accessing the capital market, it would be inappropriate to permit the offering to proceed.

However, such a stance would be legally unsound because it would amount to pre-judging matters.

For instance, if the promoters of a listed company are accused of violating some compliance requirement under the takeover regulations, or are facing investigations relating to say, price manipulation, it is often seen that the draft prospectus filed with Sebi goes into a spin. There have been cases where offer documents of companies that are already listed have been held up because showcause notices have not been issued to their promoters.

At times, after an offer document is filed, on scrutiny, the potential for regulatory action is discovered. This too leads to confusion.

In the process, the companies themselves get starved of funds, injuring the public shareholders. This gets starker if the proceedings pending are those against the promoters for alleged violations unconnected with the issuer company.

The general order provides an outline of solution. "No person is presumed to be guilty unless proved so," it states, adding that "it is in the interest of the investors and the securities market that some reasonable restrictions be imposed when any form of investigation, enquiry, adjudication or prosecution has been initiated".

Noting that Sebi only mandates true and fair disclosures including the possibility of a sanction, the general order lays down general terms on which observations on draft offer documents may be issued in such situations.

If a probable cause for enquiry, adjudication, prosecution or other regulatory action is found, the general order requires the observations on the draft offer documents filed with Sebi to be kept in abeyance for 45 days from the date of filing, or from the discovery of a probable cause of violation, whichever is later.

Hopefully, this 45-day period would be used to ascertain the materiality of the matter at hand, and proceed with processing the offer document.

Where a notice has been issued, the observations on draft offer documents filed with Sebi would be kept in abeyance for 90 days instead.

Within this period, excluding the time taken by the persons concerned to respond to the notices, an appropriate interim or final order is required to be passed, after hearing the persons affected.

Significantly, within 90 days of this general order, all cases where pending notices are holding up clearance of draft offer documents, such interim or orders on the showcause notices are required to be passed.

Should such interim or final order not be passed within 90 days, Sebi would process the draft offer document and issue observations subject to relevant disclosures being made in the offer document about receipt of the show cause notice and the possible adverse impact of any order pursuant to the showcause notice.

One would have to wait and see how the order is put to practice. However, this is a significant move as some offer documents have been pending with Sebi for years.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)

somasekhar@jsalaw.com