SEBI issues framework for rejection of draft offer proposals
MDT/PTI 12 October 2012

SEBI said draft document of companies would not be entertained in case major portion of the issue proceeds are utilised for expenses towards brand building, advertisement and payment to consultants

New Delhi: Companies will not be able to access the capital market if the utilisation plan is too long or if they intend to use the proceeds for brand building and advertisements, reports PTI.
Market regulator Securities and Exchange Board of India (SEBI) in the 'Framework For Rejection Of Draft Offer Documents Order, 2012' has listed various factors that could lead to disapproval of draft offer papers for fund-raising by companies.
SEBI in its order dated 9th October has said that an offer document could be rejected if the purpose of utilising the proceeds is vague.
It said draft document would not be entertained in case a major portion of the issue proceeds are proposed to be utilised for the purpose which does not create any tangible asset, like expenses towards brand building, advertisement, payment to consultants.
The draft document would be rejected if there is not enough justification for creation of such assets in terms of past performance, experience and concrete business plan of the issue. 
The draft papers could also be rejected if the proposed issue proceeds are intended to be utilised for plants which have no "crucial clearances/licenses/ permissions/ approvals from the required competent authority" at time of filing of papers.
Another criteria for rejection, SEBI said, would be on the basis of audit reports doubts or concerns have been raised over the accounting policies of the company.
"This would also be applicable for the subsidiaries, joint ventures and associate companies of the issuer which significantly contributes to the business of the issuer. This would also be applicable for the entities where the issue proceeds are proposed to be utilised," SEBI said.
SEBI said the list of draft offer documents rejected on the basis of the framework, along with the details of issuers or merchant bankers and the reasons for rejection, would be made public on the market regulator's website.
Among others, the market regulator would not entertain proposals where the issuer is unable to provide satisfactory replies and clarifications in case there is sudden spurt in the business just before filing the draft offer document.
"This will include spurt in line items such as income, debtors/creditors, intangible assets, etc," the order said.
Further, change in accounting policy with a view to show enhanced prospects for the issuer in contradiction with accounting norms is another criteria under the framework.
SEBI said draft offers will be rejected if majority of the business is with related parties or where circular transactions with connected or group entities exist with a view to show enhanced prospects of the issuer.
Another reason for not approving the draft offer document would be if the issuer's survival is dependent on the outcome of the pending litigation or such a thing is wilfully concealed or covered.
Existence of circular transactions for boosting the issuer's capital/net worth apart from premises that ultimate promoters are unidentifiable would also invite rejection, SEBI said.
Other factors that could lead to rejection of offer documents include failure to provide complete documentation, furnishing of incorrect information and "failure to resolve conflict of interest, whether direct or indirect, between the issuer and merchant banker appointed by the issuer to undertake the book building process".
SEBI said that quantification of conflict of interest may not always be possible but it would largely depend upon the board's assessment on whether such conflict of interest may affect the judgement and ability of the merchant banker in conducting due diligence activity of issuer.
The norms are aimed at protecting the interest of investors besides ensuring the adequacy and quality of disclosures in the offer documents.
The norms are part of SEBI (Framework For Rejection Of Draft Offer Documents) Order, 2012. Issued on October 9, the general order has come into immediate effect.
The market regulator said it would provide one-time opportunity to issuers for withdrawal of draft offer documents pending with the board.
The offer documents can be withdrawn within one month from the issue date of this general order, it added.
Meanwhile, entities whose draft offer documents are rejected would not be allowed to access capital markets for "at least one year from the date of such rejection".
The period might be increased depending upon the materiality of the omissions and commissions, SEBI said.
"In cases where the board rejects a draft offer document or where an issuer or a merchant banker to an issue chooses to withdraw the draft offer document, there shall be no refund of filing fees with the board," SEBI said.
According to the regulator, mere triggering of any criteria in the general order would not be considered as an automatic case for rejection and a final view would be taken after due consideration on a case-to-case basis.
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