While it may be obvious, it is the duty of the promoters of a company that is raising money from the public to utilize the funds as per plans. However, this has not been the case in many instances,e it seems.
Nevertheless, all this is about to change; as the Securities and Exchange Board of India (SEBI) is looking to appoint an agency to monitor utilisation of issue proceeds of all companies. Earlier, the same was required to be done only for companies having issue sizes in excess of Rs 5 bn. But now, it may soon be applicable to all companies.
This is a proposal made by market watchdog in its discussion paper. "It is pertinent to extend the requirement of monitoring of utilisation of issue proceeds to all the companies to ensure that such instances are identified and addressed in accordance with extant legal framework. It will also strengthen the monitoring of utilization of all the equity capital raised through issuance of equity shares to public." reads a line from the proposal.
As reported by the Mint, towards the end of 2011, SEBI had barred seven companies from raising money from the public for suspected misuse of issue proceeds, pricing irregularities and inadequate disclosure of information.
Further, the SEBI has recommended that the respective monitoring agency submit its report to the issuer every quarter till the time the funds are utilized, as opposed to current gap of six months. Also, to keep investors informed, the company will be required to file the updates with the stock exchanges.
The monitoring agency will also have the power to grade such updates, which we believe will be a positive step to help investors identify good managements from the rest.
These are just some of the steps that SEBI has proposed. It has sought public comments till the end of the current fiscal year.
These measures seem to be the result of a slew of poor performance of newly listed stocks that hit the markets during the post crisis era. With investors' reported losses in such investments, it seems to have impacted overall sentiments; especially of the retail participants who have been staying away from the Indian markets altogether.
In our view, such a development only reemphasizes the importance of management quality and integrity. At the end of the day, the way companies utilize their funds or the money that is re-invested back into the business is something that is of key importance, which will drive growth and earnings of companies whose shares investors purchase. As such, this measure by the SEBI is a right step as it would improve the overall disclosures of companies, especially the smaller ones; the companies in which investors tend to burn their fingers in anticipation of making quick bucks in the short term.