The Hindu Business Line : A feel-good free for all

THE Securities and Exchange Board of India (SEBI) unexpectedly contend that "sale" document did not come under its regulatory purview . But the aftermath of `unregulated' sale document resulted in considerable loss to retail investors, forcing SEBI to step in.

The brouhaha in the so-called "allotment" of ONGC shares to individual investors has again brought to surface the issue of "who is responsible for protecting the investors interest." It is a well-known and well-accepted concept in the capital market that primary market transactions are distinctly different from secondary market trading.

Even a naive investor will understand that when a share is offered by a company by way of fresh issue of shares to augment its paid-up capital such offer is known as an IPO, a primary market transaction. When an investor buys from another investor in the capital market such transactions come under the umbrella of secondary market transaction. There is a fairly well knit regulatory mechanism to regulate IPO's and the "allotment" of shares by companies for fresh issue of shares.

In the case of secondary market transaction there is no allotment but a transfer of interest in the holdings which is implemented through the instrument of transfer, or, where the shares are under demat, by intimating the depository of change in beneficial ownership. Either way there is no procedure as such for allotment.

Similarly, where a promoter wants to dilute his holding, he makes an offer which is covered by SEBI (Substantial Acquisition of shares and takeover Regulations) 1997, popularly known as the takeover code. Where a promoter wants to increase his holding by acquiring shares from the market, these transactions come under secondary market regulations and takeover code norms have to be complied. Disinvestments made by PSUs of their holdings so as to dilute their interest and acquire more funds to the government are an offer made by the government undertaking. This is no different from the transaction under the takeover code. It is pertinent to note that under the disinvestment plan and takeover code, no fresh certificates are issued or no fresh beneficial interest created by issue of further shares. Why is so much noise being made about "allotment" without knowing the legal implications of allotment? In a primary market transaction, where an allotment is made and an allotment letter issued to the entitled investor setting out the number of shares allotted, such allotment letter is also tradable. This is not the case in disinvestment. Right from day one, the so-called "sale" document was a hotchpotch.

In the case of allotment, Section 69 of the Companies Act, 1956 provides that no allotment shall be made of any share offered to the public for subscription unless the amount stated in the prospectus as the minimum amount, which in the opinion of the board of directors must be raised by the issue of share capital in order to provide for matters specified in clause 5 of schedule II, has been subscribed and the sum payable on application for the amount so stated has been paid to and received by the company whether in cash or by a cheque or otherwise. In the sale document there was no provision for minimum subscription. In other words, it is open to the offerer to sell the security even if the offer is not fully subscribed. Section 70 of Companies Act prohibits allotment unless statement in lieu of prospectus is delivered to the Registrar.

This is never the case under the PSU disinvestment scheme. Section 71 regulates irregular allotment by a company. Section 72 deals with the application and allotment procedure.

None of these sections will come into play for the reason that there was no issue of shares. Even under the disinvestment scheme, the existing holder of shares will have to transfer his rights and interest in the property to the buyer (transferee). No new shares are created, therefore the transaction through the media of a sale document can only be brought under the purview of the regulatory mechanism under the takeover code which may, if need, be adapted suitably. The terminology of allotment is a misnomer and creates confusion. The entire sale document was never vetted by any regulatory body and did not follow any set standards.

The role of merchant bankers and registrars is purely a matter of contractual obligation of each of them. It is time that the market regulator brought out suitable guidelines to regulate the sale of PSU shares.