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

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Contents
  1. What is a Public Offering of Securities Insurance Policy?
  2. What does a Public Offering of Securities Insurance Policy Cover?
  3. Who can be Insured under an IPO Insurance Policy?
  4. What is the need for POSI Insurance Policy?
  5. What are IPO Requirements in India?
  6. Who should purchase a Public Offering of Securities Insurance Policy?
  7. What are the features and benefits of Public Offering of Securities Insurance Policy?
  8. D&O Insurance Policy Considerations Ahead of an IPO
  9. What is not covered under a Public Offering of Securities Insurance Policy?
  10. Real Life Examples of IPO-Related Claims in India
  11. Get Best Quotes for Public Offering of Securities Insurance Policy with QIAN!
  12. Testimonials

What is a Public Offering of Securities Insurance Policy?

A Public Offering of Securities of Insurance Policy is a type of Insurance Policy which reimburses the Insured Party for the defence costs and compensatory damages arising out of Prospectus Claim in the Company's Security Offering Prospectus.

A Public Offering of Securities Insurance Policy is applicable to all types of Securities Offerings such as IPOs, FPOs, Rights Issues, ADR/GDR issues, Debt Offerings etc. Basically, a POSI Insurance Policy offers cover against any liability arising from a misleading statement in the company's security offering prospectus.

A Public Offering of Securities Insurance is also known as IPO Insurance Policy.

What is a Public Offering of Securities Insurance Policy?

What does a Public Offering of Securities Insurance Policy Cover?

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.

Who can be Insured under an IPO Insurance Policy?

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

What is the need for POSI Insurance Policy?

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.

What are IPO Requirements in India?

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

What is the need for POSI Insurance Policy?

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.

What are IPO Requirements in India?

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

Who should purchase a Public Offering of Securities Insurance Policy?

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.

Key Components of a Commercial General Liability Insurance Policy

  • 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.

D&O Insurance Policy Considerations Ahead of an IPO

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.

What is not covered under a Public Offering of Securities Insurance Policy?

The major exclusions under a POSI Insurance Policy are as follows:

Exclusions under a Public Offering of Securities Insurance Policy
Any Claim due to Dishonest or Fraudulent Act of the Insured is excluded
Any Claim due to an Act committed prior to start of the Policy is excluded
Any Claim brought by or on behalf of the Insured are not covered

Here are some real-life examples of IPO-related claims faced by companies in India:

Infosys (2018)

Retail investors filed a class action suit alleging misleading statements in IPO prospectus regarding revenues. Claimed founders engaged in wrongful acts to inflate financials during the 1999 IPO. Case highlights long-tail liabilities even decades after IPO completion.

SREI Infrastructure Finance (2018)

Multiple lawsuits were filed against the company and directors for overstating financials in IPO documents. Investors suffered losses due to subsequent share price declines once issues came to light. SEBI banned the company from the securities market for IPO irregularities.

These examples demonstrate how corporate entities and leadership can face legal claims years after IPOs if disclosures in offering documents are found to be misleading or inaccurate, even if unintentional.

Real Life Examples of IPO-Related Claims in India
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Retroactive Date Cover

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Cover for Bodily Injury and Property Damage

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CCover for Personal Injury and Advertising Injury

Cover for Personal Injury and Advertising Injury

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Cover for Act of God Perils

Get Best Quotes for Public Offering of Securities Insurance Policy with QIAN!

Qian is an IRDA Licensed Liability Insurance Broker in India with experience of serving clients across multiple industries.

Qian's team will assist you with a comprehensive Public Offering of Securities Insurance (POSI) Policy for companies undertaking an IPO. At Qian Insurance Broking, we understand the Indian regulatory landscape and the unique risks companies face during an IPO process. Our POSI Insurance Policy is designed accordingly to provide you comprehensive protection while ensuring seamless claims support.

To learn more about getting a tailored Public Offering of Securities  insurance solution for your business, email us at support@qian.co.in or call ๐Ÿ“ž 022-35134695 ๐Ÿ“ž 022-35134695.

Get Best Quotes for Public Offering of Securities Insurance Policy with QIAN!

Testimonials

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