In the past few weeks, Sebi has communicated this to merchant bankers, securities lawyers and even company executives involved with the IPO process. They told ET that the matter appears to stem from the possibility that the government may ban cryptocurrency that’s not state issued. Sebi didn’t respond to queries. “There could be a direction from the government in this regard. The market regulator seems to think that this could become a risk for investors if a promoter holds an asset that is illegal in the country,” a top securities lawyer currently working on some of the largest IPOs told ET.
‘No Written Directions’
The government is looking to shortly introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.
The market regulator has not issued written directions or an order in this regard but has been communicating this message informally, said the people cited above.
In cases where companies are yet to file a draft red herring prospectus (DRHP) or promoters want to hold on to such assets, legal experts are said to have come up with a temporary solution — an affidavit stating they will sell any cryptocurrency they hold within 24 hours if the government bans it. Sebi’s concern is that funds raised through IPOs should not be used for buying or selling illegal assets.
“In most situations currently, the money raised through IPO or even through other routes would come in the hands of promoters and investors, giving substantial liquidity in their hands and there is a fear that this could be used for speculation,” said Mahesh Singhi, managing director of investment banking firm, Singhi Advisors. “The regulator had been giving indirect messages on this and in certain cases even other investors are cautious when it comes to promoters holding crypto assets, as these could be banned in India.”
Promoters are being advised to clear all pending legal issues including property disputes as these will have to be mentioned in the DRHP, said a consultant working with a technology company planning to file an IPO. “Holding cryptocurrency in the current scenario is a red flag which lawyers will have to mention in the prospectus,” he said.
Some legal experts argue that the regulator’s stand may not be justified.
“If a promoter holds any cryptocurrency, it may not necessarily expose the company to any risk — the same way as holding any other financial assets doesn’t pose a risk to the operations of a listed entity,” said Vatsal Gaur, partner, Pier Counsel, a law firm. “Further, it’s always possible to migrate the holding of a crypto asset overseas, or to be transferred to an affiliate. Either way, it seems that the regulator is being over cautious here and it appears like a case of overreach.”
There’s no clarity as there is no regulation, said Monark Modi, founder and CEO, Bitex Technologies Pvt. Ltd, a cryptocurrency exchange.
“Cryptocurrency is not a concept regulated by a single entity. It is a globally operating decentralised concept,” he said. “We are moving towards a digital world and sooner than we think and there is no risk.”