Public Offering of Securities Insurance Policy - Coverage, Benefits and Exclusions

A POSI Insurance Policy provides cover for Defence Costs and Compensatory Damages for lawsuits arising out of Prospectus Claim in the Insured Company’s Security Offering Prospectus

Prospectus Claim in a POSI Insurance Policy means any actual or alleged act or omission, error, misstatement, misleading statement, misrepresentation, negligence or breach of duty which is committed or made by an Insured on or before the date of the filing or issuance of the Security Offering’s Prospectus or any directly related representations or presentations prior to, or within, the 7 days immediately following the filing or issuance of the prospectus or admission of the Securities for listing on an approved exchange, whichever is the later and claimed against an Insured or Underwriter solely by reason of their capacity and which relates to the Securities Offering, and which, if proved, would amount to a violation or infringement of any statute, regulation or rule of law applicable to the Securities Offering or the Offering Documents.

Following People can be Insured under a POSI Insurance Policy:

1. Insured Person (Director or Officer of the Compay)
2. Company
3. Underwriter
4. Selling Shareholder
5. Controlling Shareholder

India is a fast-growing economy with many companies growing rapidly. Today an increasing number of companies are tapping the capital markets by way of security offerings in order to raise capital.
Prior to a company’s security offering, it must file a detailed prospectus in compliance with the Securities and Exchange Board of India (SEBI) guidelines.
However, if due diligence is not exercised in drafting the prospectus, there might be errors and misstatements in the prospectus. The Directors and Officers of the Company can be held liable for such misstatements under the Companies Act 2013 and penalties may be imposed.

To protect oneself from such risks, companies usually opt for Public Offering of Securities Insurance Policy (POSI Insurance Policy) as it safeguards the company, its directors, and officers against potential financial and reputational risks arising from shareholder litigation and regulatory scrutiny specifically from an IPO process.

An Initial Public Offering is the process through which companies sell their shares to the common public in order to raise equity capital. To go public, a company must first file an IPO prospectus with the Securities and Exchange Board of India (SEBI), which outlines the details of the offering. The SEBI then reviews the prospectus and decides whether the offering can proceed or not.

The Risks of an IPO

Exposure to a company's liabilities typically begins with the company’s IPO roadshow, or even as a business makes legal, tax, and operational decisions leading up to it. Investors rely heavily on statements made during roadshow presentations and on the information presented in a company’s prospectus. Misleading statements made during this time can lead to IPO claims.

The process of going public with an Initial Public Offering (IPO) involves significant risks to the directors, officers and the company itself. Let us look at the major risks in an IPO process.

Misleading Prospectus Information

Directors, Officers, and selling shareholders can be liable for misleading or false information in the prospectus under listing regulations. A Liability arises if the prospectus lacks material information or has incorrect details about the company's financials, operations, etc.

Breach of Warranties in Underwriting Agreements

An underwriting agreement contains warranties from directors, company, shareholders regarding the accuracy of prospectus content. Breach of warranties in the underwriting agreement also results in personal liability for directors/shareholders. Liability risk starts from the beginning of roadshows and lasts beyond IPO completion.

Hence, there is a need for a Public Offering of Securities Insurance (POSI) as it specifically covers liabilities arising from incorrect or inadequate disclosures in security documents.

POSI and Companies Act 2013

The Directors and Officers of a Company can be held liable based on the following section of the Companies Act 2013:

• Section 34: Criminal liability for misstatements in prospectus.
• Section 35: Civil Liability for Misstatements in Prospectus
• Section 36: Punishment for fraudulently inducing persons to invest money.
• Section 37: Action by affected persons
• Section 245: Class Action

Any company which wants to raise equity or debt capital by way of a Security Offering, should purchase a POSI Insurance Policy. Any company which is raising money through an IPO, FPO, Rights Issue, Debt Securities should purchase a Public Offering of Securities Insurance Policy. A Public Offering of Securities Insurance Policy should typically be purchased before the company begins its roadshows for its security offering.

• POSI (Public Offering of Securities Insurance) provides specialized coverage against liabilities stemming from misstatements or omissions in IPO prospectus documents.
• It insures the company, directors, officers involved in the IPO against lawsuits or claims alleging misleading or inadequate disclosures made during the securities offering.
• It is tailored transaction-specific insurance that extends for several years (typically 3-6 years) when the Post-IPO liability risks are highest
• A POSI Insurance Policy ring fences the Prospectus Liability Exposure and allows the D&O Insurance Policy to respond to other common claims.
• A POSI Insurance Policy includes coverage for selling shareholders, controlling shareholders and issue underwriters as well.
• A POSI Insurance Policy also provides add-on covers for Force majeure event, regulatory crisis response costs, Emergency Costs etc.

It is true that a D&O Insurance Policy can be extended to cover liabilities arising specifically for securities violations during the IPO Process under its Entity Securities add-on cover.
This includes cover for Wrongful Acts committed during pre-offer roadshows, the offering itself, and any misleading statements in prospectus/filing documents. The D&O policy can provide coverage to both the individual directors and officers as well as the corporate entity for claims related to the IPO disclosures and filings.

However, there are important points to consider:

1. A POSI Insurance Policy is a multi-year policy with the period of policy ranging from 3 years to 6 years. Thus, the coverage for an Insured Company under the D&O Policy is contingent the Policy being renewed every year, which depends on the company’s claims experience and ongoing litigations.
2. An important point is that if the Company is covered for Prospectus Claims under a D&O Insurance Policy, then any Prospectus related claim will erode the Limits of Liability of a D&O Insurance Policy leaving the directors exposed to other claims which they might face.
3. Additionally, a POSI Insurance Policy offers broader cover for Insured Person by providing cover to Selling Shareholders, Controlling Shareholders and Issue Underwriters as well. This cover is not provided under D&O Insurance.

Therefore, in order to protect the company and its directors and other officers from the securities risk, you can either avail an extended cover under D&O policy or avail a stand-alone Public Offering of Securities Insurance Policy which is a one-off non-renewable policy typically purchased for a period of 3-6 years.