Capital markets regulator Securities and Exchange Board of India (Sebi) on Thursday issued a framework for the rejection of draft offer documents filed with it before issue of securities.

In the future, Sebi will reject offer documents if it believes investor safety is compromised or the quality of disclosures are inadequate or risk associated with the issue are high. Sebi Chairman U K Sinha issued a general order in this regard, which comes into effect immediately. This is the first time the regulator has issued such a framework. 

Sebi has set the strict rejection criteria based on the issuer's capital structure, objective for fund raising, business model or financial performance. The regulator has said issues where ultimate promoters are unidentifiable or where there are instances of circular transactions for building up the capital or net worth of the issuer will be straightway rejected

Sebi has also said offer documents would be rejected if the issue proceeds are used towards repayment of loan or inter-corporate deposits or major portion is proposed to be utilised for the purpose, which does not create any tangible asset. It has further said if the time gap between raising the funds and proposed utilisation of the same is unreasonably long, the offer document will be rejected.

If the business model of companies is “exaggerated, complex or misleading and the investors may not be able to assess the risks associated with such business models”, draft documents of such issuers will also be rejected.

If there is a sudden spurt in the financial performance of a company ahead of filing a draft offer document, there is a likelihood that the company's offer document would be rejected.

Sebi has said the documents of issuers would be rejected if there are pending litigations and the issuer’s survival is dependent on the outcome of such litigations.

The 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, Sebi has said.

The regulator has given a one-month time for issuers to withdraw their offer documents that are pending with the board. Sebi has said the list of offer documents that are rejected would be made public by hosting it on its website. (Business Standard)