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Govt set to scrutinise end use of public issue funds
October, 25th 2006
About 100 corporates who raised money from the public in the recent past will soon have to explain to the government how they have used the funds.

Company affairs minister Prem Chand Gupta has asked the registrar of companies (RoCs) to scrutinise all public issues of more than Rs 50 crore to ensure that the funds raised have been used for their stated purpose. The scrutiny will apply to all companies that raised money since January 2005.

A large number of companies, including Jet Airways, GMR, Deccan Aviation, Suzlon Energy and Reliance Communication, have raised money from the public during this period, and the issue size in most cases is above Rs 50 crore. The ministrys intention is to prevent fly-by-night companies taking investors for a ride when the economy is booming, as has happened in the vanishing companies episode earlier.

The idea is not to pose any hardship to the corporate sector, but to ensure a fair and transparent compliance regime under which corporates can grow without any hassle. Protecting the interests of investors, particularly the small investors, is essential to strengthen their faith in the equity market, said Mr Gupta.

The Companies Act as well as Sebis Disclosure and Investor Protection Guidelines of 2000 prescribe the disclosure requirements for raising funds from the market.

Officials said not using the funds for their stated purpose will attract company law provisions dealing with mis-statement, diversion of funds and inducement. The violations impose civil as well as criminal liabilities on the promoters and directors of the company.

Mr Gupta said the regulatory regime is moving towards greater transparency and self-regulation. The new company law would emphasise on these two aspects, he said. This is in line with the JJ Irani committee on company law, which advised the government that the onus of ensuring the legitimate end-use of funds should be on shareholders.

Corporates have to put in place a mechanism for shareholders, lenders and government agencies to access financial information in a non-intrusive manner.
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