Public Offering Of Insurance(POSI)

    HomePublic Offering Of Insurance(POSI)

Get in touch

What is a public offering of securities insurance ?

Public offering of securities insurance protects a company and its directors against liabilities arising from offering the company’s securities for sale and listing on the public stock exchange.

Who is covered / insured

  • Directors and officers, spouses and legal heirs
  • Issuers and underwriters
  • The company/ Entity
  • Controlling and selling shareholders

What is the need for POSI

  • Civil and criminal exposure for the accuracy of the content of the prospectus as per the Companies Act/ SEBI regulation and other applicable laws.
  • Increased shareholding litigation when the company makes a public offering of its securities
  • Proper cover for the issuer of the securities for suitable protection for the company and its directors and officers.
  • Responsibilities incumbent on the directors and officers of the company for the public offering.

What is the uniqueness of this cover

  • Additional cover for non-executive director.
  • It can complement the annual D&O insurance
  • Bail bond and civil bond expenses can be covered.
  • Counseling service extension can be availed.

Key feature of POSI insurance

  • Prospectus liability: covers the liability that may be incurred if the prospectus contains errors or omissions which are relied on by investors in making their decision to purchase the company’s securities.
  • Underwriter exposure: Covers the underwriter’s exposure from the actual or alleged untrue or misleading statements or information from the prospectors
  • Defense cost: covers cost incurred by the insured to defend themselves against securities claims arising from an offering of a company’s securities. .
  • Shareholder liability: covers controlling and selling shareholders’ liability from the actual alleged untrue or misleading statements or information from the prospectus

Why have POSI when already D&O Insurance is in place?

It is a nonrenewal policy that ring-fences against specific risk exposure. It provides coverage over and above D&O policies that do not have cover for securities offer and listing on the stock exchange.

POSI D&O
Multiyear policy Policy for one year
Single payment of premium for the multiyear policy Premium paid on an annual basis
Prospectus liability included Prospectus liability excluded
Provide coverage for selling shareholders, controlling shareholders, and underwriters Does not provide cover for the selling shareholder, controlling shareholder, and underwriters.

Coverages under POSI policy

Section 1: Standard Cover

  • Individual: Insurer will pay Loss incurred by You (director, officer, manager, trustee, shadow director, employee, legal representative in case of death, insolvency, or bankruptcy) in respect of any Claim first made against You during the Certificate Period.
  • Company Reimbursement: If the Company pays Loss on your behalf in respect of any Claim first made against You during the Certificate Period, then Insurer will reimburse such Loss to the Company. This also applies to any of the Additional Covers.
  • Entity Coverage: The insurer will pay the Loss incurred by the Company arising from any Claim first made during the Certificate Period.
  • Underwriter Reimbursement: If the Company and/or You pay Loss on behalf of the Underwriter in respect of any Claim first made during the Certificate Period pursuant to the Company or Your obligations assumed within the Underwriting Agreement then the Insurer will reimburse such Loss to the Company and/or You.
  • Controlling Shareholder: The insurer will pay the Loss incurred by a Controlling Shareholder arising from any Claim first made against that Controlling Shareholder during the Certificate Period.
  • Selling Shareholder: The insurer will pay the Loss incurred by a Selling Shareholder arising from any Claim first made against that Selling Shareholder during the Certificate Period.Additional Cover /Extension
  • Emergency Costs: If Insurer’s written consent cannot be obtained within a reasonable time before Costs (except for the Costs of a public relations consultancy referred to below) are incurred then the Insurer will give retrospective consent to such Costs up to the amount specified.
  • Public Relations Cover: In the event, that You or the Company reasonably consider that the services of a public relations consultancy are required urgently to prevent or minimize the risk of a Claim, then the insurer will reimburse reasonable fees and costs.
  • Non-executive director’s additional limit of liability: In the event that the limit of liability under the policy/certificate becomes exhausted, then the insurer agrees that they will provide an additional limit.
  • Mitigation Costs: In the event, that You or the Company reasonably consider that the services of a lawyer are required in relation to any circumstance notified in accordance with this policy/ Certificate as to Your legal position in relation to the same and in relation to any steps that might be taken or be appropriate to avert or minimize the risk of a Claim arising from such circumstance, the insurer agrees to pay the cost of obtaining such advice.
  • Witness Cover: The insurer will pay reasonable travel costs and living expenses incurred by You when giving evidence to defend a Claim provided that the insurer has consented in writing before such costs are incurred and up to the amount specified.
  • Other extensions : Personal Liberty and Property Costs. (Bail bond premium or civil bond premium)
    Interpretive counsel Official investigation cost.

what is not covered / exclusions

  • Dishonest and fraudulent act.
  • Prior claims and circumstances
  • US security claims
  • Personal profit to which not legally entitled.

Who can use ?

  • Investors may bring an action against for alleged misrepresentation, error, or omission in the prospectus on which they had relied to make their investment.
  • Regulatory bodies have the authority to initiate proceedings against the parties to an offering in the event of allegations of wrongdoing or a breach of the listing rules.

MAJOR REGULATIONS CONCERNING THE ISSUE OF PROSPECTUS THAT COMPANIES NEED TO ADHERE. 

  1. The securities and exchange board of India Regulations
  2. SEBI ( disclosure and investor protection) Guidelines 2000
  3. Companies Act pertinent provisions.
    1. Criminal liability for misstatement in the prospectus (sec. 34)
    2. Civil liability for misstatement in the prospectus (sec. 35)
    3. Punishments for fraudulently inducing persons to invest money ( sec.36)
    4. Actions by the affected person (sec. 37)
    5. Additional disclosures requirement ( sec.26)
  4. What is expected from Directors and officers?
    1. Diligent execution of duties
    2. Strict compliance
    3. Effective disclosures
    4. Prudent risk management

CLAIMS SCENARIO EXAMPLES.

  1. Non-disclosure of material information in the IPO document. SEBI imposes a fine on leading property developers, its chairman, and top management for not disclosing certain material information in the IPO document. 
  2. Misleading investors about financial prospectus and internal controls.  A District judge alleged that the accused, a global e-commerce company used improper refund accounting to boost revenue and reduce operating losses in IPO materials and subsequent regulatory filings.
  3. Class action litigation. accusing the company of hiding worries about growth prior to IPO. Shareholders class accused a social media company of concealing internal concerns that might lead to lesser growth. 
  4. Poor quality assets A manufacturing company initiates a public right offering, but its prospectus fails to adequately report the poor quality of its assets. Shareholders who purchase rights based on this information are disappointed when the share price falls following listing. Shareholders take legal action against the company claiming that it failed to ensure that the prospectus information was not misleading and that it failed to ensure that the prospectus did not omit any information reasonably required for a shareholder to make an informed assessment of the company’s financial position.
  5. Frozen proceeds.  A services company is alleged to have materially overstated its financial position in the issue of its initial public offer prospectus. The regulator obtains an interim court order to freeze the funds raised in the offering. During this time the regulator conducts investigations and concludes that investors in the company should be compensated for the financial losses they sustained for purchasing shares on the basis of the misleading information. 
  6. Redundancy Program.  Shortly after its initial public offering of securities, a manufacturing company announces a major redundancy program. The company’s share price falls straight after the announcement, resulting in an immediate loss of value to many of the investors in the IPO. Investors sued the company alleging non-disclosure of this material information in the prospectus. 
  7. Missed profit targets.  A construction company issues a prospectus for an IPO which includes financial forecasts for the forthcoming year. Following the float the company falls well short of its forecasts, issuing several profit warnings and the share price falls dramatically. Investors who purchased shares on the basis of the prospectus pursue legal action to recover their losses, citing, amongst other things, the company and its directors’ misleading and deceptive conduct.
  8. Regulators tipped off. A far eastern company withdraws its public rights offer shortly before it is due to close after regulators receive a complaint that the company had failed to disclose that it was in substantial legal disputes over terminated contracts. Its directors and other individuals involved in preparing the prospectus face investigation, legal action, and possible civil and criminal liabilities for any false and misleading statements made in its prospectus.