Govt tightens preferential allotment rules

Hybrid instruments convertible into shares now under pref allotment ambit

In an attempt to plug loopholes that led to unlisted companies raising funds through preferential allotment of exotic instruments,the government has decided to widen the scope of scrutiny by including hybrid instruments that are convertible into shares under the ambit of preferential allotment. The ministry of corporate affairs has also made it mandatory for the promoter to close preferential offers within a certain time limit.

According to rules for unlisted public companies (preferential allotment) 2011,notified recently,apart from shares and other convertible instruments,hybrid instruments such as the controversial-ridden Optionally Fully Convertible Debentures (OFCD) issued by two Sahara group companies to raise around Rs 40,000 crore,will also fall under the preferential allotment ambit.

Preferential allotment would mean allotment of shares or any other instrument convertible into shares including hybrid instruments convertible into shares on preferential basis, the new rules say. Further,promoters will have to complete allotment of previous private placement before making a fresh offer.

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Many companies issue warrants,OFCDs and claim these are not equity shares. The new circular ends the scope for this malpractice. Further,offers which run lifelong will also come to an end as the rules call for a specific issue period. It can no longer be open-ended. Promoters will not be able to keep the money raised through private placement,but will have to make allotments within a time limit, Prithvi Haldea,Managing Director,Prime Database,said.

Former president of the Institute of Chartered Accountants of India,Amarjit Chopra,said the move will usher in transparency,fetch better price for the company and protect investors interest. Doing away with cash payments for such allotments will remove the threat of bogus investors.

Such hybrid instruments attracted the attention of the government and multiple regulators when the the Securities and Exchange Board of India barred two Sahara group firms Sahara India Real Estate Corporation (now known as Sahara Commodity Services Corporation Ltd) and Sahara Housing Investment Corporation for alleged violation of norms of private placement.

Sebi found in November last year that the two firms were raising funds from the public through OFCDs without conforming to prudent disclosure and other investor protection norms. In an order contested by the Sahara Group,Sebi had ordered the two entities to return the money collected from investors within three weeks with 15 per cent interest.

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Clarifying the legal position of the government on such allotments,the rules say,Any allotment of securities shall be completed within 60 days from the receipt of application money…in case it fails to do so,it shall repay the application money within 15 days thereafter,failing which it will have to repay the amount with 12 per cent interest.