Mumbai, Oct 8: In an effort to prevent finance companies from raising money from the public in the garb of a software company, the Sebi has imposed entry barriers for such companies. A company which changes its name with a software tag can come out with a public issue only if it has a three-year track record of distributable profits from its IT business.This virtually seals the aspirations of over 25 listed finance companies who have changed their names to suggest that they are IT companies from tapping the market. Sebi decided to impose this restriction as it is being flooded with applications for IPOs from a large number of IT companies. It would be difficult to separate the men from the boys in a crowded market driven by investor chase for such paper.
The Sebi rule requires that companies in the IT sector going in for an IPO or offer for sale, should have a track record of distributable profits in three out of five years in the IT business coming from IT activities alone. To ensure that the genuine companies do not miss out an opportunity to tap the market Sebi has made an alternative rule. It has said that a company can take the alternative route of appraisal and financing by a bank or a financial institution in case they do not fulfill the earlier criterion.
Sebi has said that this rule will extend to listed companies which have changed their name to reflect activities in the IT sector. The modus operandi of a listed company, especially those in the finance sector, is to change the name first. This is followed by a sustained rise in the share price of the company, which in turn enables the promoters to charge a high premium.
In the last couple of weeks two companies have changed their names with a software tag and another one which changed its name last year has entered the market with a Rs 5 crore issue at a premium of Rs 80.
IPOs through SEs: Sebi also announced its decision to permit marketing of IPOs through the stock exchanges using the existing infrastructure of the exchanges. Under this system the broker would place orders on behalf of his clients to an issue. After the basis of allocation is finalised, the brokers will advise the successful allottees to submit application forms and the amount. The broker would be required to open an escrow account for the primary market issue. The clearing house of the exchange will debit the issue account of the broker and credit the issuer's account. Subsequently, the certificates would be delivered to the investors.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.