The Telegraph
Since 1st March, 1999
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Net asset norm set for public offers

Mumbai, March 25: The Primary Market Advisory Committee set up by the Securities and Exchange Board of India (Sebi) has fixed net tangible assets (NTA), not profits, as the yardstick to gauge the fitness of firms making their debut on bourses.

The group has argued that the importance attached to track record/profitability in the existing rules is misplaced. “Profitability as an eligibility criterion induces fraudulent companies to resort to creative accounting in order to show profits while many do not show the impact of the notes to accounts on their profitability,” the group said in its report.

The panel felt companies do not guarantee profitability after listing, while investors are lulled into believing that the share-issue is above a certain threshold. Many firms, some of them funded by venture capital, are wallowing in the red or do not have three years of profitability, but hold out good prospects.

“The tangible existence of a company, for a reasonable period, is a good eligibility norm, because it will also help eliminate fly-by-night operators.” Interestingly, the group said NTAs would cover all assets, except those defined as “intangible” under the Indian accounting standards.

A company, the group suggested, should have net tangible assets of at least Rs 3 crore in the preceding 24 months on the day it files the draft offer document with Sebi. Of this, 50 per cent should be held in monetary assets. This will help investors and regulators verify the existence of a firm. A net worth of at least Rs 1 crore in each of the past 24 months has also been recommended as a norm.

If the company launching an initial public offering (IPO) changes its name within the last one year, at least 50 per cent of the revenues for the preceding year should be accounted for under the new name. This will ensure that companies do not change names to exploit the advantages of being seen as a “sunrise sector” without actually being a part of it.

The issue size shall not exceed five times the pre-issue net worth. The norm was primarily to prevent companies from raising unmanageably large amounts.

On the issue of debt public offers, the group has mandated that it should receive at least an “investment grade” rating and two credit ratings, irrespective of the issue size.

Also, a company should not be on the Reserve Bank’s list of wilful defaulters when files with Sebi for the IPO.

Accountants balk

The discussion paper on the fresh norms suggested to revive the dormant primary market has run into a wall of opposition from auditors.

The Institute of Chartered Accountants of India (ICAI) has come out with a dissent note on some of the proposals. It has argued that merchant bankers to an IPO should not be allowed to undertake research, due diligence, filing or sponsoring a public issue. “Even the Securities and Exchange Commission in the US is examining functions of merchant bankers that create a conflict of interest,” it said.

ICAI has said that due diligence for issues not to be handled by the merchant banker lead managing the issue on the ground the merchant banker may not be able to do an impartial job in view of the fact that his remuneration depends on the company.

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