Professional Documents
Culture Documents
This paper aims to provide a clear picture upon understanding various concepts involved
in the process of issue of shares and how SEBI plays its Regulatory role in the process,
rather than remaining merely as a watch dog in the Securities Market.
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CONTENTS
ABBREVIATIONS
INTRODUCTION
OBJECT OF RESEARCH
TYPES OF ISSUE OF SHARES
OFFER DOCUMENTS
ISSUE REQUIREMENTS
SEBIS ROLE IN AN ISSUE
DIP GUIDELINES
SUBATRA ROY SAHARA V UOI (ANALYSIS)
LOCK IN REQUIREMENTS
PRICING IN THE ISSUE
BOOK BUILDING
FIRM ALLOTTMENT
RETAIL INDIVIDUAL INVESTOR
NON INSTITUTIONAL INVESTOR
QUALIFIED INSTITUTIONAL BUYERS
RESEARCH METHODOLOGY
CONCLUSION
BIBLIOGRAPHY
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LIST OF ABBREVIATIONS
AIBI
AIF
BRLM
CRA
DIP
EPS
ETF
FPO
FVCI
IDFC
IL&FS
IPO
IRDA
NIIs
Non-Institutional Investors
NRI
OCB
OFCD
PE
Private Equity
PMAC
QIB
QIP
RIIs
ROC
Registrar of Companies
RSE
SAT
SEBI
SEC
SHIC
SIRECL
VCF
Securities Market. The paper also highlights upon the SEBI (Disclosure and
Investor Protection) Guidelines, 2000 on aspects relating to the issue of shares
and other forms of securities. Finally, an emphasis upon the leading decision of
Sahara v/s SEBI on various issues pertaining to the role played by SEBI in
Practical cases and circumstances is highlighted upon.
Different kinds of Issues:
Primarily, issues made by an Indian company can be classified as Public,
Rights, Bonus and Private Placement. While right issues by a listed company
and public issues involve a detailed procedure, bonus issues and private
placements are relatively simpler.
1. Public issue:
When an issue or offer of securities is made to new investors for
becoming part of shareholders family of the company it is called a public issue.
Public issue can be further classified into Initial public offer (IPO) and Further
public offer (FPO).
a. Initial public offer (IPO):
When an unlisted company makes either a fresh issue of securities or
offers its existing securities for sale or both for the first time to the public, it
is called an IPO. This paves way for listing and trading of the issuers
securities in the Stock Exchanges.
b. Further public offer (FPO) or Follow on offer:
2. Rights issue:
When an issue of securities is made by an issuer to its shareholders
existing as on a particular date fixed by the issuer (i.e. record date), it is called a
rights issue. The rights are offered in a particular ratio to the number of
securities held as on the record date.
3. Bonus issue:
When an issuer makes an issue of securities to its existing shareholders as
on a record date, without any consideration from them, it is called a bonus issue.
The shares are issued out of the Companys free reserve or share premium
account in a particular ratio to the number of securities held on a record date.
4. Private placement:
When an issuer makes an issue of securities to a select group of persons
not exceeding 49, and which is neither a rights issue nor a public issue, it is
called a private placement. Private placement of shares or convertible securities
by listed company can be of two types:
a)
Preferential allotment:
2 Securities Exchange Board of India (Disclosure and investor protection) guidelines 2000.
3 Ibid
raising the money, terms of issue etc. and is used for inviting subscription to the
issue made by the company.
There are different kinds of offer documents such as, Draft offer
document, Red-herring prospectus, Prospectus, Letter of offer, Abridged
prospectus, Abridged letter of offer, Shelf prospectus and Placement document.
Terms used for offer documents vary depending upon the stage or type of
the issue where the document is used. The terms used for offer documents are
defined below:
1. Draft offer document:
Draft Offer document means the offer document in draft stage. The draft
offer documents are filed with SEBI, at least 21 days prior to the filing of the
Offer Document with Registrar of Companies. SEBI may specify changes, if
any, in the draft Offer Document and the issuer or the lead merchant banker
shall carry out such changes in the draft offer document before filing the Offer
Document with ROC/SEs. The Draft Offer Document is available on the SEBI
website for public comments for a period of 21 days from the filing of the Draft
Offer Document with SEBI.
shares being offered. It is filed with Registrar of Companies before the issue
opens.
3. Prospectus:
It is an offer document in case of a public issue, which has all relevant
details including price and number of shares being offered. This document is
registered with Registrar of Companies before the issue opens in case of a fixed
price issue and after the closure of the issue in case of a book built issue.
4. Letter of offer:
It is an offer document in case of a Rights issue and is filed with Stock
exchanges before the issue opens.
5. Abridged prospectus:
It is an abridged version of offer document in public issue and is issued
along with the application form of a public issue. It contains all the salient
features of a prospectus.
6. Abridged letter of offer:
It is an abridged version of the letter of offer. It is sent to all the shareholders
along with the application form.
7. Shelf prospectus:
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In addition to satisfying the aforesaid entry norms, the Issuer Company shall
also satisfy the criteria of having at least 1000 prospective allotees in its issue.
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earlier a PFI and not less than 5% of the project cost is financed by
any of these institutions.
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IPO Grading:
According to SEBI IPO grading is the grade assigned by a Credit Rating
Agency (CRAs) registered with Sebi, to the initial public offering (IPO) of
equity shares or any other security which may be converted into or exchanged
with equity shares at a later date. The grade represents a relative assessment of
the fundamentals of that issue in relation to the other listed equity securities in
India. Such grading is generally assigned on a five-point point scale with a
higher score indicating stronger fundamentals and vice versa as below.6
IPO grade 1 - Poor fundamentals
IPO grade 2 - Below-average fundamentals
IPO grade 3 - Average fundamentals
IPO grade 4 - Above-average fundamentals
IPO grade 5 - Strong fundamentals
Grading of an initial public offer or IPO, had earlier been made mandatory, is
now optional. SEBI recently came up with new guidelines upon the request of
Investor Associations and Association of Investment Bankers of India (AIBI).
The decision came after much debate on the grading system as it was argued
that these ratings cannot be a basis for investment. Ratings only talk about the
6 https://www.valueresearchonline.com/story/h2_storyView.asp?str=24703
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fundamentals of the listing company and have nothing to do with the valuations.
At present, IPO grading is not mandatory and is now optional.
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(b) The primary issuances are governed by SEBI in terms of SEBI (Disclosures
and Investor protection) guidelines. SEBI framed its DIP guidelines in 1992.
The SEBI (DIP) Guidelines over the years have gone through many
amendments in keeping pace with the dynamic market scenario. It provides a
comprehensive framework for issuing of securities by the companies.
(c) Before a company approaches the primary market to raise money by the
fresh issuance of securities it has to make sure that it is in compliance with all
the requirements of SEBI (DIP) Guidelines, 2000. The Merchant Banker are
those specialised intermediaries registered with SEBI, who perform the due
diligence and ensures compliance with DIP Guidelines before the document is
filed with SEBI.
(d) Officials of SEBI at various levels examine the compliance with DIP
guidelines and ensure that all necessary material information is disclosed in the
draft offer documents.
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8 Rule 2.1, Securities Exchange Board of India (Disclosure and investor protection) guidelines
2000
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the Lead Merchant banker shall carry out such changes before filing the draft
letter of offer with RSE.
2. Companies barred not to issue security9:
A company shall not make any issue of securities if the company has been
prohibited from accessing the capital market under any order or direction passed
by the Board.
3. Issue of securities in dematerialised form10:
A company shall make public or rights issue or an offer for sale of securities,
unless
The company enters into an agreement with a depository for
dematerialization of securities already issued or proposed to be issued
to the public or existing shareholders; and
The company gives an option to subscribers/shareholders/investors to
receive the security certificates or hold securities in dematerialized
form with a depository.
A 'depository' shall mean a depository registered with the Board under the
Securities and Exchange Board of India (Depositories and Participants)
Regulations, 1996.
9 Rule 2.1.3, Securities Exchange Board of India (Disclosure and investor protection) guidelines
2000
10 Rule 2.1.5, ibid
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An infrastructure company
iv)
Major Issue:
How does SEBI ensure compliance with DIP Guidelines, 2000 ?
The Merchant Banker are the specialized intermediaries who are required to
do due diligence and ensure that all the requirements of DIP are complied with
11 Rule 2.4, Securities Exchange Board of India (Disclosure and investor protection) guidelines 2000
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Sahara collected Rs. 30 million under the guise of private placement. The
requirements of public offer were not complied with. Later, Sahara prime city
ltd intended to raise funds through listing of its shares and filed prospectus to
SEBI. While processing the prospectus, SEBI received complaint from one of
the investor and professional group of Investors protections on 25.12.09 and
4.01.10
ORDER OF SEBI:
SEBI directed the two companies to refund the money so collected to the
investors and restrained the promoters of the companies from accessing
Securities market.
APPEAL :
Sahara preferred an appeal before Securities Appellate Tribunal against the
order of Whole Time member of SEBI. SAT confirmed and maintained the
order of whole time member by an order dated 18/10/11. Subsequently Sahara
filed an appeal before the Supreme Court against the order of SAT.
ISSUES:
1.WHETHER THE ISSUE OF OFCDS TO MILLIONS OF PERSONS IS A
PRIVATE PLACEMENT?
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2.
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the promoters, who control the company, shall continue to hold some
minimum percentage in the company after the public issue.
LOCK-IN REQURIMENTS:
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The proposal has been approved by the SEBI board and would be soon
incorporated into the relevant guidelines.
SEBI is of the view that such a step would encourage the professional and
first-generation entrepreneurs to tap the capital market to raise funds.
The decision was taken after a recommendation in this regard by SEBI's
Primary Market Advisory Committee (PMAC).
The PMAC was of the view that in the companies founded by
professionals or first-generation entrepreneurs, where the post-IPO equity held
by promoters is less than 20%, AIFs could be permitted to provide the balance
equity, subject to a minimum 10% being contributed by the promoters.
The PMAC also suggested that the capital contributed by AIFs for this
purpose shall be locked in for two years.
SEBI, however, decided that the requirement of lock-in of three years should
uniformly apply to both Promoters and AIFs.
Further, SEBI has decided to review the lock-in tenure at periodic
intervals, as per the international practice.
The promoters are allowed to pledge their locked-in shares as collateral
security for any loans granted for financing one or more of the objects of the
issue, provided pledge of shares are one of the terms of sanction of the loan.
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The DIP Guidelines specify the minimum lock-in period and lay down the
other requirements relating to the lock-in period.
The minimum promoters contribution, i.e., twenty percent (20%) of the
post-issue capital, is required to be locked-in for a period of three (3)
years, starting from the date of allotment in the proposed issue and ending
three (3) years from the date of commencement of commercial production
or the date of allotment in the public issue, whichever is later. (Clause
4.11.1 r/w Clause 4.11.2 of the DIP Guidelines)
Promoters contribution in excess of the required minimum percentage
must be locked in for a period of one (1) year. The securities forming part
of the promoters contribution and issued last to the promoters must be
locked-in first, except in the case of financial institutions appearing as
promoters. (Clause 4.12.1 r/w Clause 4.13.1 of the DIP Guidelines)
The entire pre-issue capital, other than the promoters contribution, must
be locked in for a period of one (1) year from the date of commencement
of commercial production or the date of allotment in the public issue,
whichever is later. This provision is not applicable to the pre-issue share
capital:
1. held by VCFs and FVCIs, which must be locked-in according to the
SEBI (VCF) Regulations, 1999 and the SEBI (FVCI) Regulations,
2000; and
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2. Held for a period of at least one (1) year at the time of filing of the
draft offer document with the SEBI and being offered to the public
through an offer for sale, i.e., an offer by existing shareholders of a
company to the public. (Clause 4.14.1 r/w Clause 4.14.2 of the DIP
Guidelines)
Locked-in securities forming part of the promoters contribution may be
pledged only with banks or financial institutions as collateral for loans, if the
pledge of shares is one of the terms of the loan. (Clause 4.15.1 of the DIP
Guidelines)
Further, the transfer of securities, inter se, amongst promoters is also
subject to the lock-in applicable to transferees for the remaining lock-in period.
(Clause 4.16.1 of the DIP Guidelines) The face of the security certificate of
locked-in securities must contain the inscription non-transferable and specify
the period for which it is not transferable. (Clause 4.17.1 of the DIP Guidelines)
Pricing in issue
a) Fixing of the price of securities in an issue
Indian primary market ushered in an era of free pricing in 1992. SEBI does
not play any role in price fixation. The issuer in consultation with the merchant
banker on the basis of market demand decides the price. The offer document
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Price band:
The price band is a band of price within which investors can bid. The
spread between the floor and the cap of the price band shall not be more than
20%. The price band can be revised. If revised, the bidding period shall be
extended for a further period of three days, subject to the total bidding period
not exceeding thirteen days.
(a) Working of Book Building
Book building is a process of price discovery. A floor price or price band
within which the bids can move is disclosed at least two working days before
opening of the issue in case of an IPO and atleast one day before opening of the
issue in case of an FPO. The applicants bid for the shares quoting the price and
the quantity that they would like to bid at.
complete, the cutoff price is arrived at based on the demand of securities. The
basis of Allotment is then finalized and allotment/refund is undertaken. The
final prospectus with all the details including the final issue price and the issue
size is filed with ROC, thus completing the issue process. Only the retail
investors have the option of bidding at cutoff.
c) cutoff option for investors
Cutoff option is available for only retail individual investors i.e. investors
who are applying for securities worth up to rupees 1, 00,000/ only. Such
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investors are required to tick the cutoff option which indicates their willingness
to subscribe to shares at any price discovered within the price band. Unlike
price bids (where a specific price is indicated) which can be invalid, if price
indicated by applicant is lower than the price discovered, the cutoff bids always
remain valid for the purpose of allotment
d) change/revising the bid
We can change or revise the quantity or price in the bid using the form for
changing/revising the bid that is available along with the application form.
However, the entire process of changing or revising the bids shall be completed
within the date of closure of the issue.
e) Cancelling Bid:
We can cancel your bid any time before the finalization of the basis of
allotment by approaching/ writing/ making an application to the registrar to the
issue.
f) proof required from a trading member or a syndicate member for
entering bids:
The syndicate member returns the counterfoil with the signature, date and
stamp of the syndicate member. You can retain this as a sufficient proof that the
bids have been accepted by the trading / syndicate member for uploading on the
terminal.
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FIRM ALLOTMENT:
A company making an issue to public can reserve some shares on "allotment
on firm basis" for some categories as specified in DIP guidelines. Allotment on
firm basis indicates that allotment to the investor is on firm basis. DIP
guidelines provide for maximum % of shares, which can be reserved on firm
basis. The shares to be allotted on "firm allotment category" can be issued at a
price different from the price at which the net offer to the public is made
provided that the price at which the security is being offered to the applicants in
firm allotment category is higher than the price at which securities are offered to
public
SEBI (DIP) guidelines provide that an issuer making an issue to public can
allot shares on firm basis to some categories as specified below:
(i) Indian and Multilateral Development Financial Institutions,
(ii) Indian Mutual Funds,
(iii) Foreign Institutional Investors including NonResident Indians and
Overseas Corporate Bodies and
(iv) Permanent/Regular employees of the issuer company.
(v) Scheduled Banks
It may be noted that OCBs are prohibited by RBI to make investment.
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Individual investors, NRI's, companies, trusts etc. who bid for more than
Rs 1 lakhs are known as Non-institutional bidders. They need not to register
with SEBI like RII's. Non-institutional bidders have an allocation of 15% of
shares of the total issue size in Book Build IPO.
The difference between retail individual investor and Institutional
investors:
There are two categories of investors in the financial markets: retail
investors and institutional investors. The differences between the two dictate
not only the size of the trades they make, but also the types of companies and
financial instruments in which they invest their monies.
The term "retail investors" is synonymous with "individual investors."
The majority of retail investors buys and sells stocks in round lots, where a
round lot refers to 100 shares. This is not to say an individual can't place an
order to buy or sell 50, 25, or even just a single share of a company's stock, but
it often isn't cost effective to do so because of the commissions that must be
paid. It would be foolhardy to buy one share of a stock that was selling for $10
a share if the fee to do so is almost that amount, for example.
Institutional investors are just what the name implies: large institutions,
such as banks, insurance companies, pension funds, mutual funds, and
exchange-traded funds (ETFs), that buy and sell securities for their investment
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(c) Not more than 50% of the net offer to the public shall be available for
allocation to Qualified Institutional Buyers:
2. In case of compulsory BookBuilt Issues at least 50% of net offer to
public being allotted to the Qualified Institutional Buyers (QIBs), failing which
the full subscription monies shall be refunded.
3. In case the book built issues are made pursuant to the requirement of
mandatory allocation of 60% to QIBs in terms of Rule 19(2)(b) of Securities
Contract (Regulation) Rules, 1957, the respective figures are 30% for RIIs and
10% for NIIs.
In case of fixed price issue
The proportionate allotment of securities to the different investor
categories in a fixed price issue is as described below:
1. A minimum 50% of the net offer of securities to the public shall
initially be made available for allotment to retail individual investors, as the
case may be.
2. The balance net offer of securities to the public shall be made available
for allotment to:
a. Individual applicants other than retail individual investors, and
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BIBLIOGRAPHY
1. http://thefinanceconcept.com/2011/12/what-is-prospectus-and-abridgedprospectus.html
2. https://www.valueresearchonline.com/story/h2_storyView.asp?str=24703
3. SECURITIES AND EXCHANGE BOARD OF INDIA (DISCLOSURE
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WID=4802
9. http://www.mca.gov.in/Ministry/pdf/ProvisionsTable_CompAct.pdf