SEBI Chief Flags 'Risk To Market' From Shell Companies, Plans Third-Party Monitoring Of IPO Proceeds

Some listed companies with no economic activity function like shell companies and "add risk to the market", Securities and Exchange Board of India Chairman Tuhin Kanta Pandey said on Wednesday.

Pandey also said the regulator is working on a system under which "third-party monitoring agencies" will check whether money raised through initial public offerings is used for the purpose stated in the offer document.

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He made the remarks during a panel discussion at NDTV Profit Ignite: Diwali Edition in Mumbai.

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Tighter Watch On IPO funds

Pandey's comments follow proposals SEBI floated earlier this month. A consultation paper issued on Oct. 13 drew on recommendations from a working group led by former SEBI executive director V S Sundaresan. The group proposed making monitoring agencies mandatory for all issuances, regardless of size, excluding the offer-for-sale portion.

Under those proposals, stock exchanges could fine a company Rs 50,000 for each reported instance of non-cooperation with its monitoring agency. If the default continues, exchanges would direct depositories to freeze promoters' demat accounts. Companies reported for non-cooperation would not be allowed to terminate the agency's agreement or appoint a replacement until the default is cleared. The proposals are still open for consultation and are not yet final rules.

Under current rules, IPO proceeds must be monitored by a SEBI-registered credit rating agency if the fresh issue exceeds Rs 100 crore.

ALSO READ: SEBI Chief: Direct MF Plans Default From Nov 1; IPO Rules, SME Framework Under Review

Part Of A Wider Governance Push

Earlier, in his keynote address, Pandey said “public capital brings public responsibility” and that companies must be accountable for how they use investors' money. He said SEBI has proposed stronger monitoring of issue proceeds to improve transparency and accountability. It is also reviewing the framework for debenture trustees, with a focus on stronger oversight.

The regulator will also revisit the framework for main-board IPOs and follow-on public offers, alongside a review of listing and disclosure obligations. Separately, it is reviewing the SME IPO framework and the Innovators Growth Platform, particularly for new-age companies, to improve access to public capital for growing businesses.

SEBI is also piloting an AI-based tool to monitor disclosures by debenture trustees, stock exchanges, depositories and credit rating agencies. The tool is meant to flag early signs of corporate debt defaults, Pandey said.

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