Irregular IPOs: Lessons from Vaswani Industries IPO

Market players in the Indian equity capital markets have been exposed by the Securities and Exchange Board of India (SEBI) of following a cartelized approach with respect to subscription and allotment of securities in an initial public offering (IPO) in a recent order dated 11 July, 2011 in the matter of issuance of shares by Vaswani Industries Limited (Vaswani Industries).

Various complaints were filed before the SEBI regarding deliberate huge withdrawals/ rejections after the closure of the Vaswani Industries IPO.  The issue was subscribed to the extent of 4.16 times and after the withdrawals/ rejections the issue subscription dropped to 1.28 times. During the investigation, SEBI found that there was collusion amongst the BRLM/ syndicate-sub syndicate members to the issue in artificially raising the demand of Vaswani Industries shares during the bidding period.

Contentions of Vaswani Industries and the BRLM/sole syndicate member

In brief, the contentions were (Vaswani Industries):

·         Company should not be penalized for unlawful acts of others;

·         In terms of section 71 of the Companies Act, 1956 (Companies Act), an allotment made by a company to an applicant could be voidable at the instance of the applicant only under two circumstances i.e. (i) an allotment made without ensuring the minimum subscription under section 69 of the Companies Act and (ii) an allotment is made without issue of prospectus under section 70 of the Companies Act.

In brief, the contentions were (BRLM/sole syndicate member (SSM)):

·         SSM is under no obligation to underwrite the Company’s IPO post-allotment;

·         If option of withdrawal of shares is ordered then requirements of regulation 26 (4) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 may not be satisfies;

·         SEBI has no power under section 73 of the Companies Act to declare the allotment null and void.

SEBI order

This order is not as impeccable as any other order passed by Dr. K.M. Abraham, Whole Time Member, SEBI.  The order appears to be a compromise between the SEBI and the Company under which, the Company would be allowed to list and trade and at the same time the Company give a withdrawal option to all the investors who have been allotted shares (in retail and non-institutional category) for such number of shares by which allotment ratio was impacted.

Takeaways for transactional lawyers

·         During the refund/withdrawals process, separate escrow demat account for crediting the shares that are offered to be put in place.

·         In case the is under-written, then the underwriters under the agreement may purchase or arrange purchases post-IPO of such number of shares so as to ensure that the subscription does not fall below the minimum level of subscription.

·         In case the issue is not under-written/ there is non-compliance of above the entire subscription money to be refunded to the investors and all shares so allotted shall be cancelled.

·         Section 71 of the Companies Act shall not be literally applied and the irregularly allotted shares shall be cancelled and the money refunded in the interest of the securities market.