SAT Asks SEBI To Bring Clarity In Underwriting Rule In Public Issue

The Securities Appellate Tribunal has asked market regulator SEBI to bring clarity in its rule for underwriting of a public issue, the model agreement for which was framed back in 1993 and has since been in operation.

Under the underwriting process, an investment banker agrees to underwrite and/or procure subscription for the public issue of shares in case the issue is undersubscribed.

"We deem it proper to bring to the notice of SEBI that there is no clarity between the ICDR Regulations and the model underwriting agreement prescribed by SEBI in the year 1993 (which is still in operation) in relation to the obligations to be discharged by the underwriters.

"Therefore, it would be just and proper that SEBI addresses itself on the above issue expeditiously and ensure that there is clarity in relation to the obligations to be discharged by the underwriters," SAT said in an order dated April 17.

SAT has made this observation in the case of Penta Gold, which came out with its IPO in March this year.

Inventure Merchant Banker Services was the investment banker for Penta Gold, whose IPO was subscribed only 55.42 percent on the last day of its closing. It was noted that unsubscribed portion comes to 16.14 lakh shares and that the underwriters had subscribed to those shares by procuring applications from eight investors.

However, the National Stock Exchange has rejected the basis of of allotment because undersubscribed shares have been subscribed by eight investors and not by the underwriters themselves.

Following the NSE's rejection, Penta Gold approached SAT against and said that in the past, the BSE had allowed such procurement of subscription by the investors in the case of Powerhouse Fitness & Realty.

The tribunal noted that ICDR Regulations require the merchant banker to underwrite at least 15 percent of the issue size on his own account and further regulation provides that if the other underwriters or the nominated investors fail to fulfill their obligation then the merchant banker shall fulfill their underwriting obligations.

On the other hand, the model underwriting agreement prescribed by Sebi in the year 1993 which continues to be in force till date permits the underwriters to procure applications from the investors to subscribe to the unsubscribed shares if the issue is undersubscribed, it added.

Accordingly, the tribunal said that NSE is not justified in rejecting the basis of allotment on ground that the underwriters have failed to subscribe to the unsubscribed shares and has set aside the exchange's rejection.