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Market Regulator Wants Promoters to sell Cryptocurrency before Raising Funds via IPO: Reports

With the government actively looking at introducing the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, the market regulator Sebi is keen that company promoters should sell all their cryptocurrency before attempting to raise funds via the IPO route

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As per news reports, SEBI (Securities and Exchange Board of India), the market regulator is said to have informally directed merchant bankers and company officials that going forward the company-promoters holding cryptocurrency, should sell them before raising funds for the companies via public issues. Market buzz is that SEBI is actively looking to ban holdings of illegal currencies (cryptocurrency expected to be labelled as an illegal currency). In effect, this may mean that all promoters of companies looking to raise funds via the IPO route will first have to sell-off all their holdings in cryptocurrency. 

SEBI’s concern is that the promoters of the company shouldn’t utilize the raised public funds in trading or dealing with currencies that aren’t legal. The regulator might also ban the currencies which are not issued by the state, said a person with direct knowledge of the matter. 

Recently, the information was conveyed to prominent bankers and lawyers dealing with securities. Some of the executives of the companies were also informed about the same as to prevent further issues at the time of public issue of their company. 

However, the regulator hasn’t released any written direction in this matter at the time of filing this story.  

A top securities lawyer involved in a big IPO process mentioned that, “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”. 

In cases where promoters are holding such assets before the filing of DRHP (Draft Red Herring Prospectus) of the company, the legal advisors should seek a solution by filing an affidavit stating that the promoters will square off their cryptocurrency holdings in 24 hours if the government bans it, said people with direct knowledge of the matter. 

The promoters of the company have to clear all their pending legal or property disputes before filing the DRHP as it needs to be mentioned in the filing.  

"Holding cryptocurrency in the current scenario is a red flag which lawyers will have to mention in the prospectus," a consultant for a technology firm who is likely to file an IPO said.

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