SEBI had passed an order dated May 26, 2011 (link) stalling the listing of the shares of Vaswani Industries Limited after the completion of the IPO. The order was passed because on receipt of investor complaints and on the basis of a preliminary examination SEBI had found that the order book, while the IPO was open for subscription, may have been manipulated by artificially inflating it, thereby inducing innocent investors to subscribe to the issue. As a result, SEBI ordered a detailed investigation.
After the completion of the preliminary investigation, SEBI came to the conclusion that there was more than reasonable possibility that the investors were beguiled by the artificial trends in the subscription. A major part of the subscription was subsequently found to be bogus and untrue. Consequently, SEBI, through its order dated July 11, 2011 (link) directed the company and the book running lead manager to, inter alia, do the following.
1. Give withdrawal option to all the investors who had been allotted shares in the non-institutional investors category and the retail individual investors category for such number of shares by which the allotment ratio was impacted due to withdrawals/rejections.
2. On the closure of the withdrawal option, if the subscription level after such withdrawals falls below the minimum level of subscription as required by law, the sole syndicate member cum book running lead manager, Ashika Capital Limited, would underwrite and may purchase or arrange purchase through any investor(s) identified by it of such number of shares so as to ensure that the subscription does not fall below the minimum level of subscription. Non-compliance of such condition shall result in refund of entire subscription money to the investors and cancellation of all the shares so allotted by the Company.
3. The company shall cancel those shares, which have not been underwritten or taken by other investors identified by the lead manager.
These directions of SEBI raise interesting legal issues and may be in complete heedlessness to the legal provisions:
1. As per SEBI’s order, upon exercise of withdrawal option, if the percentage of allotment falls below the minimum subscription level, the sole syndicate member has to underwrite. It’s unclear as to the legal basis for such an underwriting since underwriting (soft or hard) as a process, both under the underwriting agreement and in accordance with SEBI (Underwriters) Regulations, 1993, happens prior to allotment when the requisite subscription has not been achieved. In Vaswani’s case, subscription and allotment for the entire issue is complete and the sole syndicate has not been found guilty of any wrongdoing.
2. As per SEBI’s order, if minimum level of subscription is achieved, the company has to cancel the allotted shares which have been rejected by the investors. It’s unclear what sort of corporate action will be followed by the company for cancelling such allotments. As per companies act, allotments are voidable or void under sections 71 and 73 respectively, which do not apply to this case. The other method of cancelling allotted shares would be through buy back, the conditions of which Vaswani Industries may not be able to meet.
3. SEBI’s order seems to have ignored the applicability of section 73 (1A) of the companies act. The IPO closed on May 3, 2011. By the time Vaswani Industries completes complying with SEBI’s directions, the ten week period would be over without Vaswani Industries having received the listing permission. So as per section 73 (1A), the entire allotment made pursuant to the IPO would become void.
After the completion of the preliminary investigation, SEBI came to the conclusion that there was more than reasonable possibility that the investors were beguiled by the artificial trends in the subscription. A major part of the subscription was subsequently found to be bogus and untrue. Consequently, SEBI, through its order dated July 11, 2011 (link) directed the company and the book running lead manager to, inter alia, do the following.
1. Give withdrawal option to all the investors who had been allotted shares in the non-institutional investors category and the retail individual investors category for such number of shares by which the allotment ratio was impacted due to withdrawals/rejections.
2. On the closure of the withdrawal option, if the subscription level after such withdrawals falls below the minimum level of subscription as required by law, the sole syndicate member cum book running lead manager, Ashika Capital Limited, would underwrite and may purchase or arrange purchase through any investor(s) identified by it of such number of shares so as to ensure that the subscription does not fall below the minimum level of subscription. Non-compliance of such condition shall result in refund of entire subscription money to the investors and cancellation of all the shares so allotted by the Company.
3. The company shall cancel those shares, which have not been underwritten or taken by other investors identified by the lead manager.
These directions of SEBI raise interesting legal issues and may be in complete heedlessness to the legal provisions:
1. As per SEBI’s order, upon exercise of withdrawal option, if the percentage of allotment falls below the minimum subscription level, the sole syndicate member has to underwrite. It’s unclear as to the legal basis for such an underwriting since underwriting (soft or hard) as a process, both under the underwriting agreement and in accordance with SEBI (Underwriters) Regulations, 1993, happens prior to allotment when the requisite subscription has not been achieved. In Vaswani’s case, subscription and allotment for the entire issue is complete and the sole syndicate has not been found guilty of any wrongdoing.
2. As per SEBI’s order, if minimum level of subscription is achieved, the company has to cancel the allotted shares which have been rejected by the investors. It’s unclear what sort of corporate action will be followed by the company for cancelling such allotments. As per companies act, allotments are voidable or void under sections 71 and 73 respectively, which do not apply to this case. The other method of cancelling allotted shares would be through buy back, the conditions of which Vaswani Industries may not be able to meet.
3. SEBI’s order seems to have ignored the applicability of section 73 (1A) of the companies act. The IPO closed on May 3, 2011. By the time Vaswani Industries completes complying with SEBI’s directions, the ten week period would be over without Vaswani Industries having received the listing permission. So as per section 73 (1A), the entire allotment made pursuant to the IPO would become void.
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