Sunday, June 19, 2011

SAT UPHELD ORAL UNDERSTANDING TO ISSUE RIGHT SHARES AGAINST UNSECURED LOANS BY PROMOTERS

The SAT (Securities Appellate Tribunal) upheld  that unsecured loans advanced by a promoter group could be adjusted against allotment of shares to them in the rights issue. 

The SAT tribunal thus annulled the restriction placed on SRM Energy Ltd by SEBI (Securities and Exchange Board of India) .The company wanted to mobilize funds for a power project and therefore came out with a rights issue. According to the company, there was an oral understanding between it and the promoter, Spice Energy (SEPL), at the time of providing funds that if and when it came out with a rights issue, the unsecured loans would be adjusted against the share price. “Such payment by adjustment in the books of account is a well recognized mode by all accounting standards and we find no fault with this mode being adopted,” the judgment said. 

“All that SEPL has done is that it received shares in the rights issue and made payment by adjustment of the unsecured loans which were payable on demand. In the strict sense of the term, it is not a conversion of a loan into equity.” 

The tribunal therefore set aside SEBI’s order demanding SRM not to adjust the unsecured loans advanced by the promoter towards the price of the shares allotted in the rights issue. 

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