Private placements?the twilight zone between unlisted and listed companies?would soon see greater regulatory supervision. The idea is to curb misuse of the private placements route by scores of unlisted public companies, in the absence of any effective control on end use of the funds raised. Also, there is insufficient protection of investors interest in these companies.
Although the issue has been hanging fire for long, the immediate trigger for the government to look at re-formulating the regulatory policies is the fate of Subroto Roy-led Sahara Group whose plans to raise funds through the private placement was obstructed by the market regulator Sebi. The Sahara matter is now before the Supreme Court which has to decide if Sebi has the locus standi to intervene in the fund raising plans of an unlisted company.
According to sources, the government is looking at increasing the 50-persons cap on private placements at a time by a public company to 99, but possibly with a new clause that within a specified time period it would not make fresh allotments. Also being mulled over is end use curbs and an additional set of measures to protect the investors. The corporate affairs ministry is awaiting the Supreme Court verdict on the Sahara case, before it an finalise the new regime.
The Supreme Court is currently hearing Sebi’s plea for removing the stay put by the Allahabad High court on the market regulator’s order barring Sahara firms?Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC)?from raising funds through the issuance of optionally fully convertible debentures.
The government’s move has been prompted by the big jump in the issuance of private placements in the recent past. For instance according to Prime Database, private placements have increased nearly four-times in the last five years. In 2004-05 total private placements stood at Rs 55,409 crore, which jumped to Rs 1.9 lakh crore in 2009-10. Companies adopt the private placement route when they reckon that the monetary and others costs of compliance with the Sebi norms for listed firms outweighs the benefits of getting listed.
Public limited companies are subject to a wider set of accountability norms implemented by the registrars of companies when compared with the private limited companies. The Sebi norms for listed companies are far greater.
Welcoming the government’s move to create transparency, corporate law experts argued that unlike IPOs which are strictly governed by Sebi, it becomes nearly impossible for private placements to be treated with the same level of vigilance.
Corporate lawyer Rajiv Luthra said, ?Certainly the government has to bring in more transparency in the operations of private placements. Companies need to disclose more when it wants to issue such placements which is not the case right now,? he said. Delhi-based corporate lawyer Shadaab Anwar said, ?There has to be an eligibility criteria for unlisted companies which want to raise funds. The company concerned should not be involved in any insider trading or should not have any pending complaints against it.?
