A listed company is legally bound to abide by the commitments made in its public offer documents, even if they do not fall under mandatory requirements, and post Initial Public Offer (IPO) are claimed to have been made inadvertently, Sebi has said.
Noting that disclosures made in the IPO prospectus are significant from the point of view of investor protection, Sebi has said “a company would be legally bound to comply with the matters stated in the prospectus, based on which it has raised money from the public.”
“A prospectus is a document with legal validity and the company is legally bound to abide by the disclosures made therein,” the capital markets regulator has said.
The views have been expressed by Sebi in an “interpretive letter” sought by a company, which had demanded exemption from certain disclosure made in its IPO document and had said the same was made “inadvertently”, and was not a mandatory requirement under the Sebi regulations.
The company, Rushil Decor Ltd, had sought the interpretive letter under Sebi's informal guidance scheme with regard to a disclosure made in its IPO document about the lock-in of shares.
In its IPO prospectus, the company had made a disclosure that its entire pre-issue equity share capital other than the minimum promoters’ contribution, which is locked in for a period of three years, shall be locked in for a period of one year from the date of commencement of commercial production or date of allotment in the public issue, whichever is later.
In its application to Sebi, it said this disclosure linked the lock-in period with commencement of commercial production and “the same was done inadvertently and is not in line with Sebi (Issue of Capital and Disclosure Requirements) Regulations, 2009 and intends to rectify the same”.
The company had sought Sebi’s “Opinion/interpretation on whether shares, other than minimum promoters' contribution of 20 per cent, can be released for transfer on the expiry of one year from the date of allotment”. Pursuant to the IPO process, the company had allotted shares on July 2, previous year.
Sebi, however, said that “the matter pertains to lock-in of pre-issue share capital, which is considered significant from the point of view of investor protection.
"Considering the above, a relaxation from additional lock-in requirements prescribed by the company through disclosures in prospectus will not be in compliance with the law."
As per Sebi norms, the promoters' minimum contribution needs to locked-in for three years from start of commercial production or the date of allotment, whichever is later.
The pre-issue shares held by non-promoters also need to be locked in for a one-year period from the IPO allotment date but need not be linked to commercial production.
"In the given case, the company has specified in the prospectus that the entire pre-issue share capital of the company, other than minimum promoters' contribution, shall be locked-in for a period of one year from the date of commencement of commercial production or date of allotment, whichever is later, akin to the lock-in clause applicable to minimum promoters' contribution," Sebi said.
"The said disclosure does not prima-facie violate any of the requirement of Sebi (Issue of Capital and Disclosure Requirements) Regulations and prescribes a stricter requirement than that provided under the said regulations.
"The said disclosure in the prospectus, on allotment of shares, has enforceability as in case of a contract. A Prospectus is a document with legal validity and the company is legally bound to abide by the disclosures made therein. Here, the matter pertains to lock-in of pre-issue share capital, which is considered significant from the point of view of investor protection," the regulator observed.
"Accordingly, any relaxation from lock-in requirements as stated in the prospectus shall not be permissible considering the fact that the company is legally bound to comply with the statements/disclosures made in the prospectus.
"Hence, the company shall ensure compliance with the disclosures made in the prospectus," Sebi said in its interpretive letter, while adding that the position is based on the representation in the matter under reference.
