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Disclosure for utilization of issue proceeds for Listed Entities on NSE EMERGE - MMJC
Introduction
National Stock Exchange of India (‘NSE’), vide its circular dtd September 5, 2024 (‘Present Circular’) has come up with an additional disclosure requirement which has been addressed specifically to all listed entities on NSE EMERGE platform (‘Listed Entities’) listed w.e.f. April 1, 2023, onwards. The Present Circular has mentioned that every Listed Entity must submit to Stock Exchange a certificate along with financial results that verifies the utilization of the issue proceeds. This certificate must be certified by the Statutory Auditor and approved by the Audit Committee of the Listed Entity. The certificate should provide object-wise details as disclosed in the Offer Document(s), comparing them with the actual utilization of funds along with any variations if any must be reported. The aforesaid certificate shall be submitted until the issue proceeds have been fully utilised or the purpose for which the proceeds were raised has been fulfilled.
Further, the Present Circular mentions that it shall not apply to the Listed Entity wherein the monitoring agency has been appointed.
The Present Circular further mentions that if the proceeds are invested in a subsidiary, the utilization details must be certified by the Statutory Auditor of the respective subsidiary.
Analysis
Regulation 32 (5) of SEBI Listing Obligation and Disclosure Requirement 2015 (‘SEBI LODR’ )[i] mentions that, ‘The Listed Entity shall prepare an annual statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice, certified by the statutory auditors of the listed entity, and place it before the audit committee till such time the full money raised through the issue has been fully utilized.’ The above regulation clearly indicates that, prior to the Present Circular, Listed Entities were not required to submit a Statutory Auditor’s certificate to the Stock Exchange. A Statutory Auditor’s certificate would only be necessary when funds were utilized for purposes other than those stated in the offer document/prospectus/notice.
Additionally, the role of the Audit Committee under the SEBI LODR regulations 32(5) was limited to noting the annual statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice, as certified by the Statutory Auditors of the Listed Entity. However, following the Present Circular, the Audit Committee will now need to establish specific parameters for the process of approval of utilisation of such funds and deviation if any. With respect to roles and responsibilities of the Audit Committee members, it was seen in one of the final order passed by SEBI in the matter of Birla Pacific Medspa ltd[ii] dt: October 23,2020, SEBI had penalised Audit Committee members because they had failed to raise specific remarks with regards to mis-utilization of funds raised through public issue by the company. Further in the adjudication order in respect of Alps Motor Finance Ltd[iii] (‘company’) dtd May 23,2023 , it was observed that the Company was obligated to place the statement of deviation of proceeds of preferential issue before its Audit Committee, and the statement along with the comments of Audit Committee should had been disclosed to the Stock Exchange.
The above precedents give us an insight into SEBI’s role and stringent actions taken against Listed Entities and Audit Committee members in case of failure to monitor utilisation of proceeds from issue. Audit committee members can be held accountable for failing to address misutilization of funds, even if they were not directly involved in the mismanagement. Their role is not just procedural but requires active oversight and diligence in ensuring that funds raised (e.g., through public issues) are used as disclosed. Audit Committee must carefully scrutinize the Company’s financial transactions, ensuring that any discrepancies or misuse of funds are reported and rectified in a timely manner. Ignorance or inaction can lead to penalties.
Now that the Present Circular has been mandated for NSE Emerge Listed Entities, it would be obligated on them to ensure that the Audit Committee reviews any discrepancies or deviations in fund usage and communicates this information transparently to stakeholders.
The effective date of this circular was September 5, 2024. This means that from the half year ended September 2024 onwards this compliance will start i.e. along with financial results the Listed Entities will need to submit to the stock exchange a certificate , certified by the Statutory Auditor that verifies the utilization of the issue proceeds ( post approval of Audit Committee ) and same has to be submitted to the Stock Exchange.
Listed Entities will need to communicate with their respective Statutory Auditors, also they need to add this agenda in their Audit Committee meeting, and going forward ensure that Statutory Auditors certificate is submitted to the Stock Exchange.
Link to the circular :
[i] https://www.sebi.gov.in/legal/regulations/jul-2024/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015-last-amended-on-july-10-2024-_84817.html
[ii] https://www.sebi.gov.in/sebi_data/attachdocs/oct-2020/1603461007609_3.pdf
[iii] https://www.sebi.gov.in/enforcement/orders/may-2023/adjudication-order-in-respect-of-three-entities-in-the-matter-of-alps-motor-finance-ltd_71533.html