Companies Bill Set to Plug Gaps, Prevent Misuse

The government is set to tweak legislation pertaining to private issue of shares to prevent companies from exploiting loopholes arising out of regulatory overlaps between the market regulator and the ministry of corporate affairs. The soon to be introduced Companies Bill,2011,lists several provisions that seek to erase hiccups in the functioning of the Securities Exchange Board of India (Sebi ),the market regulator, and the ministry with regard to this market instrument. Overlapping jurisdiction and the resulting confusion only helped companies to manipulate the loopholes and use it to their advantage, a senior official said, adding, Misuse of the private issue has been an impending problem and the Companies Bill curbs many of the prevalent malpractices. Private issues are investment offers made to small group of investors. Although both Companies Act,1956 and Sebi mention such offers, there are jurisdictional variations between the two and both largely ignore any specific provisions for private placements. Further, Sebi's rules mention preferential allotments and are restricted to listed companies. Once the Bill is passed in parliament, the provisions under Sebi and Securities Contract Regulation Act,1956 would apply in cases of non-compliance, thereby streamlining regulatory overlaps between the two agencies. Besides, the existing Act covers only sale of shares, whereas Sebi defines it through securities. Authorities have raised fresh concerns over this lacuna after the Sahara group, earlier this year, raised Rs 19,400 crore from over 20 million investors terming it a private placement through optionally fully convertible debentures, which is not covered under the securities definition of Sebi. Companies could easily escape the regulatory framework by just changing the nomenclature of instrument while its nature remained the same. This has been plugged by covering all types of securities, said Arun Gupta, partner at Corporate Professionals, a Delhi-based law firm. Further, the new Bill defines an offer as a private placement only if it is made through individual offer letters. It will also set a limit on the number of investors a company can make an offer to in one year. The market regulator, on the other hand, prescribes a limit of 50 investors. Sebi's regulation, however, covers only listed companies, a loophole that the Sahara group has used to defend its offer to the 20 million investors. The new Bill also includes provision to review the channel of funds and limit the investment size, a step experts say will help monitor the flow of funds in the country. With the insertion of such provision, and ensuring that funds operate through normal banking channel, or through cheque and demand draft, a major step would be taken to prevent money laundering, Gupta said. Authorities allege that some firms use the private placement channel to route ambiguous funds. Moreover, the new bill will also make it necessary for companies to make allotments within 60 days of receiving share application money and comply with the same provisions as those regulating deposits. In case of non-allotment, the money will have to be refunded, failing which there will be a penalty. This is a crucial step and will help regulate cash transaction routes as crores of application money were being misused by companies, a senior MCA official further added.

Economic Times, New Delhi, 30-11-2012