Companies are 'legally bound' to abide by disclosures: SEBI
MDT/PTI 19 October 2012

Responding to a query regarding lock-in requirements for allotted shares, the market regulator said a prospectus is a document with legal validity and the company is legally bound to abide by the disclosures made therein

New Delhi: Market regulator Securities and Exchange Board of India (SEBI) has said that a company is 'legally bound' to abide by the disclosures made in its prospectus for allotment of shares to investors.

 

"A prospectus is a document with legal validity and the company is legally bound to abide by the disclosures made therein," SEBI said.

 

This was in response to a query that sought regulator's opinion regarding lock-in requirements for alloted shares as stated in the company's prospectus.

 

According to SEBI, the disclosure in the prospectus on allotment of shares, has enforceability as in case of a contract.

 

The opinion was sought by Rushil Decor Ltd, which pursuant to an initial public offering allotted shares in July 2011.

 

The company had specified in the prospectus that the entire pre-issue share capital of the company, other than minimum promoter's contribution would be locked-in for a period of one year from the date of commencement of commercial production or date of allotment, whichever is later.

 

However, the company stated that it "inadvertently" linked the lock-in period with commencement of commercial production and wanted to rectify the same.

 

As per SEBI, while the disclosures made by the entity did not violate any requirement under the norms but that the relaxation from lock-in requirements as stated in the firm's prospectus would not be permissible as the company is legally bound to comply with the statements.

 

"...the company would be legally bound to comply with the matters stated in the prospectus, based on which it has raised money from the public," the regulator said.

 

The regulator noted that the lock-in of pre-issue share capital is significant from the point of view of investor protection.

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