Market regulator SEBI is examining whether the promoters of Sterling & Wilson Solar (SWL) side-stepped regulatory norms and diverted funds raised in the initial public offer (IPO).

SEBI is investigating if SWSL promoters have violated the Issue of Capital and Disclosure Requirements (ICDR) regulations and also Companies Act, 2013 with regard to misstatement in prospectus. Regulations require that the money raised in the IPO should be utilised only in the way as stated in the prospectus. It is on this basis the public institutions had valued the company and invested in the IPO. In this case, promoters of SWSL are also directors of the company.

“The primary object of the IPO was to raise funds for re-payment of promoter loans. This has been violated and a mere amount of Rs 250 crore repaid against ₹ 2,850 crore and interest. It is a serious violation and SEBI needs to look into the detail of around ₹ 3,000 crore worth of fund diversion. Currently, only minority shareholders are suffering,” said Arun Kejriwal, founder, KRIS Capital.

Role of merchant bankers to the issue

Apart from SWSL management and promoters, SEBI is also probing the role of merchant bankers to the issue as it is their legal obligation to ensure that a company, which had raised money from public, does not divert it for other purposes, sources in the know told Business Line. SEBI in the past has taken severe action against several companies and merchant bankers for misstatement in the IPO prospectus pretaining to mis-utilisation of proceeds raised from public.

When contacted, SWSL said in a statement, "We have not received any communication from SEBI pertaining to the queries stated in your email. We are therefore surprised with the nature and language of these queries and as a matter of company policy will not comment on market speculation."

SEBI did not respond to a query from Business Line.

“If the promoters had given undertaking in the IPO prospectus that they will repay the loan within given time and if they fail to do so, it is a violation of SEBI law," said J N Gupta, founder promoter, SES, a proxy advisory firm.

Share price crash

Large investors were rushing out of the counter as it came to light that the company promoters had not used the money they raised in the IPO for the purpose as stated in the prospectus. The share price of SWSL crashed by 65 per cent within just three months after listing in August this year to touch a low of ₹260 on November 20 from a high of ₹755 on August 20. The IPO price was ₹780, which has never come on the bourses since listing.

SWSL promoters had stated in the IPO prospectus that they would repay the company the loan they had taken from it, through the proceeds of the IPO that they raised by selling theirs. The promise was to repay the loan within 90 days from the listing of shares, which would have made the company debt free post. It was this promise that swayed investors to put money in SWSL and the IPO just managed to crawl through.

But the promoters have now sought an extension to repay the loan. SWSL instead of witnessing a net decrease in outstanding loans has seen a slight increase in outstanding loans at the end of September to ₹2,085 crore (₹2,341 crore with interest). The promoter group has also requested for a revised repayment schedule to clear dues and added that they “will endeavour to reduce the loans outstanding by ₹750 crore by the end of the year.”

Anticipating poor response to the IPO the company had to cut the size of the issue by about 30 per cent mid-way and even then the curtailed book was subscribed only by 92 per cent. Still, the promoters managed to raise ₹2,850 crore (before expenses) keeping enough money in the hands of promoters to clear outstanding dues to SWSL.

Now SEBI is probing if SWSL promoters and its merchant bankers have side-stepped rules to use IPO funds for other purposes and will decide on action to be taken. SEBI is also inspecting the role of merchant bankers to to determine whether they undertook adequate steps were taken to ensure that IPO money not diverted. Legal experts say that it was the bankers duty to ensure that money raised from the IPO was set aside by proper mechanicism like putting in an escrow account till it is used for the purpose for which it was raised.

The sources say that the alleged violation by SWSL promoters pertains to SEBI Regulations like Issue of Capital and Disclosure Requirements (ICDR) and Prohibition of Fraudulent and Manipulative Trade Practices (PFUTP) and merchant banking regulations.

"However, the regulator will examine the genuineness of the problem faced by the promoters in meeting their obligation. If the regulator is satisfied with the genuineness of the problem there is no intent related issue and the regulator can take a lenient view. However, if the regulator finds that the promotes could have easily complied with the condition by liquidating any of their liquid investment, regulator will look into the intent related issue as well,” Gupta said.

According to Regulation 24(4) of ICDR Regulations, the lead manager(s) shall call upon the issuer, its promoters and its directors or in case of an offer for sale, also the selling shareholders, to fulfil their obligations as disclosed by them in the draft offer document and the offer document and as required in terms of these regulations.

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