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Cooling-Off Rule

Reviewed by Annapoorna | Updated on Oct 05, 2020

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What is the Cooling-off Rule?

The term "cooling-off" has been used in several contexts across the world. It implies to be inactive for any communication, benefits, powers, or responsibilities or allows a recess for negotiation between parties for a specified period.

The application of this term has been found across the field of commerce where auditors need to follow a cooling-off period before resuming audit of a particular company in India. Banks provide cooling-off periods similar to the moratorium to its borrowers.

In trading, there is a rule formulated by the Securities and Exchange Commission (SEC) of U.S.A. The regulation M mentions critical points in the method of floating stock shares or for the issue of bond offerings.

It stipulates an activity and communication restriction during the period just before these issues are offered for sale to the public. The time between the filing of a prospectus and the sale of new stock or bond offers is a cooling-off phase in which contact between underwriter and issuing company must be reduced or fully silenced.

Implications of Cooling-off Rule

When someone refers to the cooling-off rule on issuing new securities, they may refer loosely to Regulation M of the SEC, so-called because it refers to a 'cooling-off period'. The restriction is not formally known as the cooling-off rule; it is known as Regulation M of the SEC of U.S.A.

The SEC's rule applies to the time between the day the preliminary prospectus is filed with the SEC and the day that the new security is legally available for sale or trade. It is often recognised as a quiet period since the underwriter, and the issuing company are not permitted to discuss the issue with investors during this time.

Indian SEBI rules for Cooling-off

The Securities and Exchange Board of India (SEBI) imposes a 12-month cooling-off period that companies must follow between buybacks and equity fundraising. Under SEBI's buyback regulations, Section 24(i)(f) states that for one year from the expiry of the buyback period, a company is barred from raising additional capital.

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