The Hindu Business Line : CLA: Regulations versus Guidelines

THE Securities and Exchange Board of India has set the stage for the Central Listing Authority (CLA). The objective behind the CLA Regulations has been to bring about uniformity in the conduct of due diligence in scrutinising the listing applications of the prospective issuers.

However, they suffer from ambiguities and are in conflict with other SEBI regulations as is clear from the following:

Alter ego of SEBI

While it was expected of the CLA to be an independent regulatory body dealing exclusively with the pre-issue scrutiny of listing applications and overseeing compliance with the Listing Agreement by listed companies/corporates, the Regulations have made the CLA an "alter ego" of SEBI.

It appears just another functional department of SEBI. Considering the time wasted — the CLA Regulations were first issued in February and then repealed and overruled by the new regulations in August — in creating the CLA and making it fully operational, it would have been easier to create a special functional group within SEBI itself.

The CLA is required to seek SEBI approval for everything it does, including appointment of the CEO, appointment of and the fixation of the terms and conditions of the members, opening regional offices, and fixation of fees to be levied. Considering the success of independent regulatory bodies such as the NSE, National Securities Depository Limited and Central Depository Services (India) Limited, it would have been better to create the CLA on such a pattern.

Duplication of efforts still remain

The Regulations have not created the CLA as a single nodal point for clearing the applications for listing of securities.

The applicant is still required to approach the stock exchanges concerned to seek approval for listing their securities under the Securities Contracts (Regulation) Act 1956 and its Rules and Regulations.

The CLA should have been delegated these powers of the stock exchanges.

Conflict with the SEBI (Disclosure and Investor Protection) Guidelines, 2003

The SEBI (DIP) Guidelines of 2003 nowhere refer to the CLA or its powers.

CLA Regulation 10 provides that "notwithstanding anything contained in any other guidelines or regulations issued by SEBI, an applicant shall file only with the CLA the draft offer documents in respect of the public/rights offerings, and then SEBI may offer its observations, if any, to the CLA".

The DIP Guidelines, on the other hand, provide that "no company shall make a public offering unless a draft prospectus has been filed with SEBI through the lead merchant banker at least 21 days prior to filing of the prospectus with the Registrar of Companies."

This conflict is bound to confuse an applicant issuer on how to proceed and which authority to approach first for filing the offer documents.

While the CLA Regulations provide that "no issuer shall issue any securities unless it has obtained the in-principle approval of the stock exchanges where the securities are proposed to be listed", the DIP Guidelines provide that "no company shall make an public offering unless it has made an application for listing to the stock exchanges where it proposes to get its securities listed". This is bound to confuse an issuer about the exact procedure to be followed in the above referred conflicting provisions.

While the CLA Regulations stipulate obtention on an in-principle approval of the stock exchanges before issuing securities, the DIP Guidelines stipulate that the in-principle approval of the stock exchanges shall be obtained after filing the draft offer documents with the stock exchanges.

Considering the principle of interpretation to the effect that the Regulations are superior to Guidelines since the former have a stronger legal force, it is clear that the CLA Regulations will prevail over the DIP Guidelines.

It is, therefore, imperative for SEBI to immediately act and rectify the DIP Guidelines to ensure that they are not in conflict with the CLA Regulations.

(The author is a senior company secretary.)

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