SEBI (Framework for Rejection of Draft Offer Documents) Order, 2012

In exercise of powers conferred under Section 11A(1)(b) read with Section 4(3) of Securities and Exchange Board of India Act, 1992, the SEBI has issued General Order No. 1 of 2012 dated 09/10/2012 named “SEBI (Framework for Rejection of Draft Offer Documents) Order, 2012” to lay down general criteria for rejection of offer documents filed for the purpose of raising funds from the public, where SEBI feels that the interest of the investors is prejudiced or inadequate disclosures are made in the offer document or quality of the disclosures are not reasonable or where the risk associated with the issue is high.

The said order has come into effect already from date of its publication.

Accordingly, some of the major criteria for rejection of offer document for issue are as follows:

1. Existence of circular transactions for building up the capital / net worth of the issuer.
2. Ultimate promoters of the Issuer are not identifiable.
3. Promoter’s contribution is not in compliance with SEBI ICDR Regulations in letter or in spirit.
4. The object of the issue is Vague for which major portion of issue needs to be utilized.
5. The actual object of issue is repayment of loan or other borrowing and the reason for taking loan is not properly disclosed.
6. If the major portion of the issue proceeds is to be utilized for any purpose which does not create any tangible asset for the issuer such as for brand building, advertisement, payment to consultants etc. and there is not enough justification for the same keeping in view past performance of issuer.
7. Where the object is to set up a plant and the issuer has not received clearances/licences/approvals, etc. from the competent authority and due to such non-receipt, the issue proceeds might not be ultimately utilized for the stated objects.
8. The time gap between raising of the funds and proposed utilization of the same is unreasonably long.
9. If the business model of the issuer is exaggerated, complex or misleading and the investors may not be able to the risk associated with the same.
10. If there is sudden spurt in the business just before filing the draft offer document and reply to clarifications sought is not satisfactory.
11. The auditors have raised doubts over accounting policies of the issuer including its subsidiaries, joint ventures and associate business which significantly contributes to issuer business.
12. Majority of the business of the proposed issuer is with related parties or where circular transactions with connected / group entities exist with a view to show enhanced prospects of the issuer.
13. In case of pending litigations which are so major that the issuer’s survival is dependent on the outcome of the pending litigation or litigations and the same are willfully concealed.

Consequences of Rejection of Draft Offer Documents:

1. Entities whose draft offer documents are rejected will not be allowed to access capital markets for at least one year from the date of such rejection and the same may be increased depending upon the materiality of the omissions and commissions.
2. In cases where the SEBI rejects a draft offer document or where an issuer or a Merchant Banker to an issue chooses to withdraw the draft offer document, there shall be no refund of filing fees.
3. The rejection of draft offer document under this General Order shall be without prejudice to the right of the SEBI to initiate any action which may be undertaken against issuer or Merchant Banker, in accordance with law.
4. The list of such draft offer documents rejected by the Board, along with the details of issuers / Merchant Bankers and the reasons for rejection, shall be disseminated by the SEBI in public domain by hosting on its website.