MCA to crack down on companies misusing private placement route

Written by Ronojoy Banerjee | Ronojoy Banerjee | New Delhi | Updated: Nov 15 2011, 09:11am hrs
The corporate affairs ministry is considering a co-ordinated crack down on a score of unlisted companies that have misused the private placement route to raise funds. The move comes close on the heels of the market regulator Securities and Exchange Board of India directing Lucknow-based Sahara Group to refund up to R24,000 crore to investors following its series of private placement issuances.

We are trying to ascertain how many unlisted companies have not followed the basic rules at the time of going for a private issue, an MCA official told FE. He said that the ministry would ask its network of registrar offices to scrutinise the books of companies for this purpose. MCA's move forms a part of the government's attempts to bring clarity and transparency in the working of the private placements.

In fact over the last few months MCA has sought to put in place several processes to make the issue of private placement more transparent.

For instance, earlier this year it issued a set of guidelines of 'dos and don'ts' to every RoC office in the country as far as governing private placements were concerned. We want to create various layers of checks for private placements issues, MCA source said.

Apart from that the ministry has also decided to increase the private placement threshold limit from 50 persons to 1,000 personsin line with the extant public issue norms governing IPOsin the new Companies Bill that is slated to be tabled before the Cabinet shortly. At present, the minimum issue size for such public issues or IPOs is 1,000 persons. This is expected to remove all uncertainties especially in case of those issues that are above the current cap of 50-persons but below 1,000 persons.

Sources privy to the change in the Companies Bill also said that the government would set an upper limit on the number of private placement issues a company can undertake in a given period of time. The alignment between private placement requirements and public issue norms is necessary. But companies cannot misuse this route because we are going to clearly mention the number of private placements a company can undertake during a period, a source said. It is not just Sahara that may have used the private placement route but many other unlisted companies as well. Let's hope the probe throws up those firms that have manipulated the route, an MCA official said.