Page 286 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Indian Economic Policy

Notes In recent years, private placement market has become popular with issuers because of stringent
entry and disclosure norms for public issues. Low cost of issuance, ease of structuring investments
and saving of time lag in issuance has led to the rapid growth of private placement market. Total
resource mobilisation through private placement market had increased sharply from ` 13,360 crores
during 1995-96 to nearly ` 50,000 crores during 1998-99.
To reduce the cost of issue, SEBI has made underwriting of issue optional, subject to the condition
that if an issue was not underwritten and was not able to collect 90% of the amount offered to the
public, the entire amount collected would be refunded to the investors. The lead managers have to
issue due diligence certificate which has now been made part of the offer document.
SEBI has raised the minimum application size and also the proportion of each issue allowed for firm
allotment to institutions such as mutual funds. SEBI has also introduced regulations governing
substantial acquisition of shares and take-overs and lays down the conditions under which disclosures
and mandatory public offers have to be made to the shareholders.
Merchant banking has been statutorily brought under the regulatory framework of SEBI. The merchant
bankers are now to be authorised by SEBI. They have to adopt the stipulated capital adequacy norms,
abide by a code of conduct which specifies a high degree of responsibility towards investors in respect
of pricing and premium fixation of issues and disclosures in the prospectus or offer letters for issues.
Merchant bankers have now a greater degree of accountability in the offer document and issue process.
In order to induce companies to exercise greater care and diligence for timely action in matters relating
to the public issues of capital, SEBI has advised stock exchanges to collect from companies making
public issues, a deposit of one per cent of the issue amount which could be forfeited in case of non-
compliance of the provisions of the listing agreement and, non-despatch of refund orders and share
certificates by registered post within the prescribed time.
SEBI has advised stock exchanges to amend the listing agreement to ensure that a listed company
furnishes annual statement to the stock exchanges showing the variations between financial projections
and projected utilisation of funds in the offer documents and the actual utilisation. This would enable
the share-holders to make comparisons between promises and performance.
The Government has now permitted the setting up of private mutual funds and a few have already
been set up. UTI has now been brought under the regulatory jurisdiction of SEBI. All mutual funds
are allowed to apply for firm allotments in public issues. To improve the scope of investments by
mutual funds, the latter are permitted to underwrite public issues. Further, SEBI has relaxed the
guidelines for investment in money market instruments. Finally, SEBI has issued fresh guidelines for
advertising by mutual funds.
SEBI vets offer documents to ensure that all disclosures have been made by the company in the offer
document. All the guidelines and regulatory measures of capital issues are meant to promote healthy
and efficient functioning of the issue market (or the primary market). Despite all these steps, there
are flagrant breaches of issue procedures through collusion between unscrupulous promoters and
corrupt officials in the lead banks and even of the top officials of SEBI, as was the case of the now
famous or infamous M.S. Shoes East Ltd. whose megaissue was literally aborted by SEBI in February-
March 1995, soon after the issue was made public and subscribed.
Global Depository Receipts (GDRs) : Since 1992, the Government of India allowed Indian companies
to access international capital markets through dollar and Euro equity shares. Up to January 1995,
Indian companies had raised US $3.6 billion through launching GDR issues, and US $1.1 billion
through launching Euro Convertible Bonds (ECBs). Initially, the Euro-issue proceeds were to be
utilised for approved end uses within a period of one year from the date of issue. Since there was
continued accumulation of foreign exchange reserves with RBI and there were long gestation periods
of new investment, the Government required the issuing companies to retain the Euro-issue proceeds
abroad and repatriate only as and when expenditure for the approved end uses were incurred.
The Government of India has also liberalised investment norms for NRIs so that NRIs and Overseas
corporate bodies can buy shares and debentures without prior permission of RBI subject to an upper
limit of 10 per cent by any one FII in an Indian entity.

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