D. Murali

Chennai, May 24

Losers are many in the recent falls that the stock market experienced. Among the worst hit are those companies that came with IPO (initial public offering). Because, driven by the dismal mood that has been prevailing in the bourses, takers have been far fewer than expected. As a result, there are huge gaps between what was on offer and what got subscribed for, leading to massive under-subscription.

What are the legal consequences? Check SEBI's DIP Guidelines, says Rajkumar S. Adukia, Mumbai-based CA, and a past chairman of the Corporate and Allied Laws Committee of the Institute of Chartered Accountants of India. The reference is to `Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000.' It speaks of two situations, viz. the non-underwritten public issues, and the underwritten ones.

In the former case, if the company does not receive the minimum subscription of 90 per cent of the issued amount on the date of closure of the issue, or if the subscription level falls below 90 per cent after the closure of issue on account of cheques having being returned unpaid or withdrawal of applications, the company shall forthwith refund the entire subscription amount received. "If there is a delay beyond eight days after the company becomes liable to pay the amount, the company shall pay interest as per Section 73 of the Companies Act 1956," points out SEBI. Dr S. Kannan, a company law expert, draws attention to Section 69, which prohibits allotment unless minimum subscription is received.

What happens if the issue has been underwritten? "If the company does not receive the minimum subscription of 90 per cent of the net offer to public including devolvement of underwriters within 60 days from the date of closure of the issue, the company shall forthwith refund the entire subscription amount received." Here too, there is the stipulation about interest as per Section 73.

Underwriters, as you may be aware, commit to shoulder the liability and subscribe to the shortfall in case the issue is under-subscribed; and, for this, they charge commission, which can be a maximum of 2.5 per cent of the amount underwritten.

In case the issue is not fully subscribed to, then the liability for the subscription falls on the underwriters who have to subscribe to the shortfall. Devolvement, though, is not too pleasant a word on the IPO circuit because it is an indication of the absence of popular public support for the issue.

(This article was published in the Business Line print edition dated May 25, 2006)
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