The Hindu Business Line : IPO issuers can have liability cover

Select insurers — both private players and government-owned companies, offer a cover to protect Indian companies from enhanced risk exposures when they make a capital market debut. Normally, the cover is inclusive of claims by underwriters to the issue.

This `public-offering-of-securities cover' has just caught on in India. "With more and more companies going in for IPOs in the last year or so, there is a greater awareness for seeking this cover, since they appreciate the risks involved'', says Ms Oorjita Lath, National Head (Liability), India Insure Risk Management Services (Pvt) Ltd.

Liability

When asked how a liability would arise on such issues, she explained that when a company raised capital through publication of a prospectus/sale of unlisted securities, the directors and officers of that entity, shareholders and other advisors could face potential liabilities arising from the public act of issuing shares. "As long as it is a privately held company, it is not obliged to disclose financial information to the public.''

"But some legislation governs the possible liabilities of those persons responsible for the prospectus to anyone who purchases those securities and suffers a loss as a result of some false or misleading information,'' she said and added that the liability could be significant given the considerable amount of money involved in capital raising transactions.

While India Insure Risk Management Services is not aware of any claim made on such issues so far, Mr Lath said that only IPOs fell within the ambit of this cover.

"The policy covers the wrongful acts of a company and its directors from the issue of a prospectus. It would cover legal costs incurred in defending civil and criminal proceedings relating to prospectus liability. It would also include claims made by the underwriter or sponsor of the issue, which could arise due to warranties and indemnities given by the company.''

Maximum cover

To a query on the maximum cover allowed under this policy and the validity of the policy itself, Ms Lath said the cover depended on the IPO issue size and the exchange in which it would be listed among others.

"There is no maximum limit as such. The policy can be taken for 1-3 years again depending upon the underwriting factors and the underwriter's discretion,'' she told Business Line.

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