Many companies opt for the public fundraising route for financing their operations. While it is often seen as an easy or lucrative source of funds, it can also present the business with a lot of risks. The publication of a prospectus and the marketing activities (such as roadshows) during the book-building phase can give rise to several kinds of liabilities and pave the way for lawsuits against the company or its directors. These might be due to incorrect representation, omissions, incomplete information sharing or any other alleged or actual misstatement. For instance, overstatement of performance numbers such as revenue, inadequate information about risk factors or future prospects, etc may be cited.
There are two major regulations concerning the issue of the prospectus, that companies need to adhere to:
- The Securities and Exchange Board of India (SEBI) regulations
- SEBI (Disclosure and Investor Protection) Guidelines 2000
As per the Companies Act, organizations can be held liable for untrue or misleading statements or misstatements. The following sections are applicable:
- Liability for misstatements – Section 62 (Civil liabilities) and Section 63 (Criminal Liabilities)
In cases concerning the issue of securities or their transfer, SEBI is the final deciding authority and has adjudication powers for these provisions.
However, it is possible to shift the burden of these potential lawsuits with the help of a Public Offerings of Securities Insurance (POSI) policy.
Who should opt for POSI?
Any entity that wants to raise capital through a public offering or the publication of a prospectus can buy a POSI policy. It is beneficial for:
- Initial Public Offerings (IPOs)
- Debt Offerings
- Secondary Offerings such as Rights Issue
- Private Placements
Organizations can choose a coverage limit as per their requirements. The value of coverage sought depends on a host of factors such as IPO size, asset size, company’s scale of operations, any special risks that need to be included, financial history or performance of the organization, etc.
What does the IPO insurance policy cover?
POSI offers coverage for:
- Securities issue or offer related claims
- Liabilities that arise during negotiations or discussions related to such offerings
- Punitive damages
Wouldn’t a D&O liability cover suffice?
Usually, the scope of D&O contracts excludes public offerings. Even if the cover is extended by paying an additional premium, there are many benefits of having a stand-alone POSI cover to ring-fence IPO related risks specifically. These are:
- Broader Cover
A POSI offers coverage to a broader set of beneficiaries – the organization, its directors, officers, and controlling/selling shareholders as well as the offering underwriter. Some policies also offer global coverage.
- Extended Cover
Unlike D&O contracts that need to be renewed annually, POSI are multi-year policies. They can be customized to offer protection for up to a period of six years.
- Wider non IPO coverage
A separate IPO insurance ensures that the D&O indemnity limit does not get depleted. It remains fully available for non-IPO related coverages.
The insurance premium may be capitalized as a part of the process of fundraising. It can be claimed as an IPO expense as per the Income Tax Act.
Exclusions from the Public Offerings of Securities Insurance
Each insurance provider may have its own set of exclusions. However, some of the common ones are:
- Premeditated or deliberate infringement of regulations or law
- Prior claims or known issues
- Environmental damages including pollution
- Bodily injuries or property damages sustained by a third party
- Uninsurable expenses
- Major shareholder exclusion
Prevention is always better than cure. POSI should be a pre-requisite for every organization planning to raise capital from the public. It can provide multiple benefits and successfully help to cover the large range of risks that many organizations face at this stage in their growth.