Small firms in India to face tougher listing norms

Question: Recently a few small and medium enterprises offered their shares as Initial Public Offering. Many investors were enthused to participate in the IPO. However, after the listing, the prices of these shares have fallen. Are there any safeguards to protect the interests of the investing public?

Answer: It is true that some investors have burnt their fingers in SME IPOs. In order to enable investors to take an informed decision before making an investment in SME IPOs, it is proposed that the offer document will be available at least 21 days before the date of issue.

Currently, such offer documents are submitted to the stock exchange where the shares are to be listed and the document is made available to the public just a few days before the opening date of the IPO. This has been found to be detrimental to the interest of the investors.

It is also to be provided that the enterprise offering the IPO should have a minimum Rs30 million operating profit in two out of three years before the IPO documents are filed. At present there is no such requirement.

Hereafter, an IPO by a SME will not be permitted if the main objective of the offering is that the enterprise pays off loans of the promoter group from IPO funds. Further, the listed SMEs are now required to disclose their operating results on a quarterly basis and give details of the shareholding pattern. These measures are meant to protect the interest of retail investors as it has been found that SME IPOs bear a higher element of risk.

Question: I am working for a multinational insurance company which would like to penetrate the Indian market. However, there are certain restrictions on the amount of shareholding which a foreign company can have in an Indian outfit. I am told that some changes are on the anvil. Can you throw some light?

Answer: There are, at present, only 12 life insurance companies, 26 general insurers, and 6 standalone health insurance companies in India. General Insurance Corporation of India is the sole re-insurer. Currently, the foreign direct investment limit in an insurance company is 74 per cent of the total share capital. The Government is now considering increasing this limit to 100 per cent of the paid up share capital. This is being considered on the ground that large multinational insurance companies can set up business in India and operate on their own terms without an Indian partner.

This will definitely improve insurance penetration in India which is currently at a low level of four per cent of the population. To achieve this purpose, an Insurance Amendment Bill is likely to be introduced in the winter session of Parliament. Under this bill, conditions for appointment of directors are also to be relaxed which will permit foreign individuals to be appointed as key managerial personnel. The proposed legislation will also allow insurance companies to issue both life and non-life covers. The law will ease solvency requirements which will free up capital for insurance companies. Under the proposed legislation, individual insurance agents will be permitted to sell policies of multiple companies. Currently, there is a limit of being an agent of only one life and one general insurance company which is found to be unreasonable. These amendments have been accepted and approved by the Insurance Regulatory and Development Authority of India.

• Will uncontrolled gold and personal loans affect India’s financial stability?