Market regulator Sebi has made it mandatory for companies to disclose the source of funds coming through preferential allotment of shares, a move aimed at discouraging the use of front entities by promoters to increase their stake. 

The directive seeks to plug the loophole in Sebi's rules on issue of capital and disclosure requirements, which are silent on the source of funds remitted for the purposeZ of subscription in preferential issue. 

Sebi had last month also made it compulsory to allot preference shares in dematerialised form to ensure adequate audit trail and apply lock-in provisions. 

"Shares allotted in the preferential issue shall not be transferred till trading approval is granted for such shares by the stock exchanges. Further, the lock-in period shall commence on the date of such trading approval," Sebi said in a press statement on June 25 after its board meeting. 

Sebi had discussed this proposal with one of its committee on disclosures and accounting standards, which had pointed out the need for clarity on the level up to which such source of funds would be sought. 

"If a mere disclosure of own/borrowed funds does not suffice and a disclosure of the names of the second or third level of funding entities is sought, it was felt that the same could be construed as a breach of privacy and may be considered too harsh to start with. After deliberations, the committee suggested that, to start with, a requirement, that preferential issues shall be subscribed only out of funds in the allottee's own bank account which would also help establish an audit trail," said an internal note to the Sebi board. 

However, Sebi felt this would have limited efficacy despite ensuring greater transparency because the money trail is quickly lost due to fungibility. "It will be useful if this requirement is supplemented by disclosure of the natural persons who ultimately own or control the investing entity," the regulator said. 

Investors subscribing to preferential issues will now have to do so from their own bank accounts. Besides, the issuing company will have to disclose the natural persons who ultimately own or control the allottee. (Economic Times)