SEBI asks exchanges to invoke bank guarantees

06 Dec 2008

1

Mumbai: The Indian stock market regulator, the Securities and Exchange Board of India (SEBI) has asked stock exchanges in India to immediately recover any shortfall in the once per cent security deposit that listed companies maintain with the markets.

According to regulations, each company that proposes issue new securities, has to deposit one per cent of the total value of such securities with the exchange. Half this amount is usually deposited in cash, and the other half in bank guarantees.

In a circular, SEBI said that in a number of cases, bank guarantees have expired without the exchanges making any endeavour to prevent lapse or revive the guarantee. The market regulator has said that exchanges should move to ensure that such bank guarantees are invoked before they expire, or should demand fresh bank guarantees from the companies whose previous guarantees have lapsed.

In its communication to the heads of the various stock exchanges, SEBI said that the are ''hereby directed to invoke such bank guarantees before it expires, if any issuer company fails to satisfy the shortfall in the deposit amount either by cash or by fresh/renewed bank guarantees, within the given time frame." It said that by allowing the guarantees to expire, stock exchanges have compromised an important mechanism available for the redressal of investor grievances.

Market sources were reported as saying that the fresh guideline would put additional pressure on companies that have come out with their initial public offerings (IPO) and have not complied with the clause 42 of the listing agreement.

SEBI said that stock exchanges should have a system in place to track bank guarantees and "should generate alerts at least one month prior to the expiry of such bank guarantee." It also rejected the proposal of stock exchanges of adjusting the security deposit against dues payable by companies.

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