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The people’s newsroom

EconomyMarkets regulation

SEBI proposes fines and promoter account freezes to police use of IPO money

Every issue would need a monitoring agency reporting straight to the exchanges, and companies that stonewall it could face ₹50,000 fines and frozen promoter holdings.

From the editorial desk · MumbaiPublished
A street in Mumbai's Bandra Kurla Complex
A street in Mumbai's Bandra Kurla ComplexRakesh from Bangalore / Wikimedia

Key points

  1. SEBI wants a monitoring agency for every share issue, whatever its size, excluding the offer-for-sale portion.
  2. Exchanges could fine a company ₹50,000 per instance of non-cooperation with its monitoring agency.
  3. Continued default could lead to promoters' demat accounts being frozen.

The Securities and Exchange Board of India (SEBI) has proposed a stricter regime for tracking how listed companies spend the money they raise from the public, including fines and, as a last resort, freezing promoters’ shareholdings when a company refuses to cooperate.

Under a consultation paper released on Tuesday, every issue of shares would need a monitoring agency, whatever its size. Money raised through an offer for sale, which goes to selling shareholders rather than the company, would be excluded. The agencies would report directly to the stock exchanges, which would display their reports prominently on their websites.

What happens if a company stonewalls

If a company does not cooperate, the agency would file a report on the best information it has, along with a “statement of non-cooperation”. The company could not then sack its agency or hire a new one until it fixed the default and allowed a complete report for that quarter.

Exchanges could fine the company ₹50,000 for each instance of non-cooperation, issuing notices within 30 days of the report’s due date. If the report or the fine is still outstanding 15 days later, the exchanges would turn to the promoters. Ten days after that, they would ask depositories to begin freezing the promoters’ demat accounts.

Unpaid fees would not count as non-cooperation. Instead, agencies could collect their full fee in advance and refund a share if the agreement ends early.

The proposals come from a working group chaired by V S Sundaresan, a former SEBI executive director, which is reviewing the listing rules of 2015. Reporting timelines would move from the issue rules into the listing rules so that one set of regulations governs them.

The paper arrives during a busy run of share sales, with Zetwerk and Tonbo Imaging among the companies that have set price bands for issues opening this week.