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Prohibition on capital raising by suspended companies

Finsec Law Advisors

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SEBI issued the SEBI (Prohibition on Raising Further Capital From Public and Transfer of Securities of Suspended Companies) Order, 2015, on July 20, 2015, to be made effective immediately. The General Order defines “suspended company” to mean a listed company in whose shares trading is suspended by the recognized stock exchange due to non-compliance with listing requirements. Firstly, the General Order prohibits a suspended company, its holding and/or subsidiary, its promoters and directors from issuing prospectus, offer document or advertisement soliciting money from the public for issuing securities. This is not a blanket ban, but a restriction which would remain till the concerned exchange revokes the suspension, or securities of the company are delisted, whichever is earlier. Further, SEBI may grant relaxations from strict enforcement of this restriction if the stock exchange so recommends, for companies other than the suspended company, its holding and/or subsidiary, wherein such promoters are also promoters/directors. Secondly, pursuant to the General Order, the suspended company and the depositories cannot effect transfer, through sale, pledge and so on, of shares of a suspended company held by promoters/promoter group and directors, till three months after revocation of suspension by the concerned exchange or till securities of such company are delisted, whichever is earlier. The stock exchange may remove this restriction if such promoter/director files objection and provides satisfactory reasons.

Mere suspension of listed companies harmed minority shareholders more than promoters since it closed the exit route. Accordingly, SEBI had, on September 30, 2013 prescribed a Standard Operating Procedure whereby stock exchanges were directed to take action against promoters of non-compliant companies (such as imposition of fines, freezing of shares of promoter group) before suspending their share trading. The General Order is a step further towards enhancing the compliance environment, and creating necessary deterrence for companies that fail to comply with the listing agreement and treat money raised through public offers as free money. Further, it would disable promoters/directors, who are responsible for such defaults from using undisclosed information about the company and disposing of their shareholding. While the General Order may affect capital raising initiatives of suspended companies, it does not close the possibility of revival of such companies. The General Order would help check market manipulation pertaining to such suspended stocks and thereby prevent losses to the public shareholders of these suspended companies.26