The government is considering restricting the scope of private placements especially by financial institutions (FIs).
The issue has already been flagged by the market regulator Securities and Exchange Board of India (Sebi) as one for which it has no regulations in place.
Sebi has told the joint parliamentary committee (JPC) in response to members queries about several such deals that it does not regulate such private placements including if any by foreign institutional investors.
While the issue has been discussed between the finance ministry and Sebi, a decision on how to go about regulating the phenomena is proving difficult. Currently there are no norms for private placement by a bank or FI in the debt or equity of a company. Besides it is difficult to monitor.
Interestingly, the subject of private placement has become the most-asked query by JPC members to SEBI in the latest round of answers that have been provided by the market regulator.
Some of the ruling party leaders also said that there should a bar on private placements from especially the public financial institutions. They said there is certainly a cause for concern especially if the placements have been at a premium to existing market prices.
According to analysts private placements for many companies are increasingly taking the role of public issues, especially in case of NBFCs which often takes the shape of quasi public placements.
They said the companies often use mailers and open letters to offer people not at all connected with the companies a chance to invest in these companies, defeating the very purpose of private placement. A private placement is supposed to be involved only among close associates and is "an honourable route" for raising especially debt as Tier-II capital for companies which do not want to access the market.
But since there is often no reference to any merchant banker before the issue the equity or dividend can be pegged arbitrarily high. The government is concerned that the current expose in the capital markets is more and more throwing up evidences of misuse especially using the close nexus between the chiefs of some of the banks and FI s and some of the corporate promoters.
While the RBI has already sent two sets of guidelines to banks on their exposure to capital markets, those contain no reference to private placements. This is because private placements are not strictly a capital market issue. Yet as analyst say they have the potential to defeat its very purpose if misused.
