SAVEETHA UNIVERSITY
SUBJECT: FINANCIAL MARKETING AND
SEBI’S ROLE IN ISSUE OF SHARES M. AMUDHA
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.
1
S.NO
. 2. 3. 4. 5. 6. 7. 8. #. 1&. 11. 12. 13. 14. 15. 16. 17. 18. 1#.
CONTENTS ABBREVIATIONS INTRODUCTION OBJECT OF RESEARCH TYPES OF ISSUE OF SHARES OFFER DOCUMENTS ISSUE REQUIREMENTS SEBIS RO!E IN AN ISSUE "DIP GUIDE!INES SUBATRA ROY SAHARA V UOI $ANA!YSIS% !OC' IN REQUIREMENTS PRICING IN THE ISSUE BOO' BUI!DING FIRM A!!OTTMENT RETAI! INDIVIDUA! INVESTOR NON INSTITUTIONA! INVESTOR QUA!IFIED INSTITUTIONA! BUYERS RESEARCH METHODO!OGY CONC!USION BIB!IOGRAPHY
PAGE 3 5 5 6 8 11 16 17 21 24 27 28 31 32 34 33 3# 3# 4&
2
!IST OF ABBREVIATIONS ABBREVIATIONS
!IBI
"
!ssociation of Investment Bankers of India
!I#
"
!lternative Investment #unds
BR$M
"
Book Running $ead Manager
%R!
"
%redit Rating !gency
&I'
"
&isclosure and Investor 'rotection
E'S
"
Earnings 'er Share
ET#
"
E(change Traded #unds
#')
"
#urther 'u*lic )ffer
#+%I
"
#oreign +enture %apital Investors
I&#%
"
Infrastructure &evelopment #inance %ompany
I$ I$#S
"
Infr Infras astr truc uctu ture re $eas $easin ing g and and #inan inanci cial al Serv Servic ices es $td $td
I')
"
Initial 'u*lic )ffer
IR&!
"
Insurance Regulatory and &evelopment !uthority
-IIs
"
-onInstitutional -onInstitutional Investors Investors
-RI
"
-on Resident Resident Indian
)%B
"
)verseas %orporate Body
)#%&
"
)ptionally #ully %onverti*le &e*entures
'E
"
'rivate E/uity
'M!%
"
'rimary ary Market !dvisory %ommittee
0IB
"
0ualified Institutional Buyers
0I'
"
0ualified Institutional 'lacement
RIIs
"
Retail Individual Investors
R)%
"
Registrar of %ompanies
RSE
"
Regional Stock E(change
S!T
"
Securities !ppellate Tri*unal
3
SEBI
"
Securities E(change Board of India
SE%
"
Securities E(change %ommission
S1I%
"
Sahara 1ousing Investment %orporation $td
SIRE%$
"
Sahara India Real Estate %orporation $td
+%#
"
+enture +enture %apital #unds
4
RO!E OF SEBI IN ISSUE OF SHARES I()*+,-)/+(0
SEBI which is an a**reviation for Securities and E(change Board of India has functions similar to the SE% or Securities E(change %ommission in the 2S!. In other words, the SEBI regulates the working of the financial markets in India, visavis investor protection and laying down of ethical standards for the working of the financial markets in India. This is why SEBI is also called as the watchdog of the Indian Markets. T S-*/)/ (, E( B+*, + I(,/ $SEBI% is the regulatory authority in India
esta*lished under Section 3 of SEBI !ct, 445 which provides for esta*lishment of Securities and E(change Board of India 6SEBI7 with statutory powers for protecting the interests of investors in securities, promoting the development of the securities market and regulating the securities market. Its regulatory 8urisdiction e(tends over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. O9) + ) R*0
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 1 Act -o.9 of 445. :;th!pril ,445.<
5
Securities Market. The paper also highlights upon the SEBI 6&isclosure and Investor 'rotection7 =uidelines, 5>>> on aspects relating to the issue of shares and other forms of securities. #inally, an emphasis upon the leading decision of Sahara v?s SEBI on various issues pertaining to the role played *y SEBI in 'ractical cases and circumstances is highlighted upon. D/*() :/(, + I-0
'rimarily, issues made *y an Indian company can *e classified as 'u*lic, Rights, Bonus and 'rivate 'lacement. @hile right issues *y a listed company and pu*lic issues involve a detailed procedure, *onus issues and private placements are relatively simpler. 1. P-;/ /-0
@hen an issue or offer of securities is made to new investors for *ecoming part of shareholders family of the company it is called a pu*lic issue. 'u*lic issue can *e further classified into Initial pu*lic offer 6I')7 and #urther pu*lic offer 6#')7. . I(/)/; <-;/ +* $IPO%0
@hen an unlisted company makes either a fresh issue of securities or offers its e(isting securities for sale or *oth for the first time to the pu*lic, it is called an I'). This paves way for listing and trading of the issuerAs securities in the Stock E(changes.
. F-*)* <-;/ +* $FPO% +* F+;;+= +( +*0
6
@hen an already listed company makes either a fresh issue of securities to the pu*lic or an offer for sale to the pu*lic, it is called a #').
2. R/) /-0
@hen an issue of securities is made *y an issuer to its shareholders e(isting as on a particular date fi(ed *y the issuer 6i.e. record date7, it is called a rights issue. The rights are offered in a particular ratio to the num*er of securities held as on the record date.
3. B+(- /-0
@hen an issuer makes an issue of securities to its e(isting shareholders as on a record date, without any consideration from them, it is called a *onus issue. The shares are issued out of the %ompanyAs free reserve or share premium account in a particular ratio to the num*er of securities held on a record date.
4. P*/>) <;?()0
@hen an issuer makes an issue of securities to a select group of persons not e(ceeding ;4, and which is neither a rights issue nor a pu*lic issue, it is called a private placement. 'rivate placement of shares or converti*le securities *y listed company can *e of two types
%
P**()/; ;;+)?()0
7
@hen a listed company issues shares or converti*le securities, to a select group of persons in terms of provisions of %hapter CIII of SEBI 6&I'7 guidelines 5, it is called a preferential allotment. The issuer is re/uired to comply with various provisions which inter ‐alia include pricing, disclosures in the notice, lock ‐in etc, in addition to the re/uirements specified in the %ompanies !ct, 5>3. %Q-;//, /()/)-)/+(; <;?() $QIP%0
@hen a listed issuer issues e/uity shares or securities converti*le in to e/uity shares to 0ualified Institutions Buyers only in terms of provisions of %hapter CIII! of SEBI 6&I'7 guidelines 3, it is called a 0I'.
T@< + O* D+-?()0
The issue of shares *y a company shall *e made only after filing the offer documents with the Registrar of %ompanies. )ffer document is nothing *ut a DprospectusA in case of pu*lic issue or Doffer of saleA and Dletter of offerA in case of rights issue. )ffer document is a document which contains all the relevant information a*out the company, promoters, pro8ects, financial details, o*8ects of
2 Securities E(change Board of India 6&isclosure and investor protection7 guidelines 5>>>. 3 Ibid
raising the money, terms of issue etc. and is used for inviting su*scription to the issue made *y the company. There are different kinds of offer documents such as, &raft offer document, Redherring prospectus, 'rospectus, $etter of offer, !*ridged prospectus, !*ridged letter of offer, Shelf prospectus and 'lacement 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 *elow 1. D*) +* ,+-?()0
&raft )ffer document means the offer document in draft stage. The draft offer documents are filed with SEBI, at least 5 days prior to the filing of the )ffer &ocument with Registrar of %ompanies. SEBI may specify changes, if any, in the draft )ffer &ocument and the issuer or the lead merchant *anker shall carry out such changes in the draft offer document *efore filing the )ffer &ocument with R)%?SEs. The &raft )ffer &ocument is availa*le on the SEBI we*site for pu*lic comments for a period of 5 days from the filing of the &raft )ffer &ocument with SEBI.
2. R, **/( <*+<)-0
Red herring prospectus is an offer document used in case of a *ook *uilt pu*lic issue. It contains all the relevant details e(cept that of price or num*er of
!
shares *eing offered. It is filed with Registrar of %ompanies *efore the issue opens. 3. P*+<)-0
It is an offer document in case of a pu*lic issue, which has all relevant details including price and num*er of shares *eing offered. This document is registered with Registrar of %ompanies *efore the issue opens in case of a fi(ed price issue and after the closure of the issue in case of a *ook *uilt issue. 4. !))* + +*0
It is an offer document in case of a Rights issue and is filed with Stock e(changes *efore the issue opens . 5. A*/,, <*+<)-0
It is an a*ridged version of offer document in pu*lic issue and is issued along with the application form of a pu*lic issue. It contains all the salient features of a prospectus. 6. A*/,, ;))* + +*0
It is an a*ridged version of the letter of offer. It is sent to all the shareholders along with the application form. 7. S; <*+<)-0
1"
It is a prospectus which ena*les an issuer to make a series of issues within a period of year without the need of filing a fresh prospectus every time. This facility is availa*le to pu*lic sector *anks or 'u*lic #inancial Institutions. 8. P;?() ,+-?()0
It is an offer document prepared *y Merchant Banker for the purpose of 0ualified Institutions placement and contains all the relevant and material disclosures to ena*le 0IBs to make an informed decision.
R-/*?() /( /- + S*0 E()*@ *-/*?() +* ( /-* )+ ?: ( /- +* +* )+ <-;/0
SEBI has laid down entry norms for entities making a pu*lic issue? offer. The same are detailed *elow E()*@ N+*?0
Entry norms are different routes availa*le to an issuer for accessing the capital market. 1. A( -(;/), /-* ?:/( <-;/ /- /. $?:/( ( IPO% / *-/*, )+ )/@ ) +;;+=/( <*+>//+(0 . E()*@ N+*? I $+??+(;@ :(+=( P*+/)/;/)@ R+-)%
The Issuer %ompany shall meet the following re/uirements
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i. -et Tangi*le !ssets of at least Rs. 3 crores in each of the preceding three full years. ii. &istri*uta*le profits in atleast three of the immediately preceding five years. iii. -et worth of at least Rs. crore in each of the preceding three full years. iv. If the company has changed its name within the last one year, atleast 9> revenue for the preceding year should *e from the activity suggested *y the new name. v. The issue siFe does not e(ceed 9 times the pre ‐ issue net worth as per the audited *alance sheet of the last financial year To provide sufficient fle(i*ility and also to ensure that genuine companies do not suffer on account of rigidity of the parameters, SEBI has provided two other alternative routes to the companies not satisfying any of the a*ove conditions, for accessing the primary Market, as under . E()*@ N+*? II $C+??+(;@ :(+=( QIB R+-)%
i. Issue shall *e through *ook *uilding route, with at least 9> to *e mandatory allotted to the 0ualified Institutional Buyers 60IBs7. ii. The minimum post ‐issue face value capital shall *e Rs. > crores or there shall *e a compulsory market ‐making for at least 5 years . E()*@ N+*? III $+??+(;@ :(+=( A<<*/; R+-)%
i. The Gpro8ectH is appraised and participated to the e(tent of 9 *y #inancial Institutions or Scheduled %ommercial Banks of which at least > comes from the appraiser. ii. The minimum post ‐issue face value capital shall *e Rs. > crores or there shall *e a compulsory market ‐making for at least 5 years.
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In addition to satisfying the aforesaid entry norms, the Issuer %ompany shall also satisfy the criteria of having at least >>> prospective allotees in its issue.
2. A ;/), /-* ?:/( <-;/ /- $FPO% / *-/*, )+ )/@ ) +;;+=/( *-/*?() 0
a. If the company has changed its name within the last one year, atleast 9> revenue for the preceding year should *e from the activity suggested *y the new name. *. The issue siFe does not e(ceed 9 times the pre ‐ issue net worth as per the audited *alance sheet of the last financial year !ny listed company not fulfilling these conditions shall *e eligi*le to make a pu*lic issue *y complying with 0IB Route or !ppraisal Route as specified for I')s.
3. C*)/( )+*@ + ()/)/ =/ * ?<), *+? ) +*/, ()*@ (+*?0
The e(empted entities are as follows a. 'rivate Sector Banks *. 'u*lic sector *anks c. !n infrastructure company whose pro8ect has *een appraised *y a 'u*lic #inancial Institution or I&#% ; or I$#S 9 or a *ank which was
4 I#$%&'t%(ct(%) d)*)+,-.)#t Fi#&#c) /,.-� IF/ 5 I#$%&'t%(ct(%) +)&'i# &#d Fi#&#ci&+ S)%*ic)' Ltd IFLS
13
earlier a '#I and not less than 9 of the pro8ect cost is financed *y any of these institutions.
A ;/), +?<(@ ?:/( */) /- / (+) *-/*, )+ )/@ (@ + ) ()*@ (+*?.
O)* ?(,)+*@ <*+>//+( =/ ( /-* $/. C+?<(@% / <), )+ +?<;@ +* ?:/( ( /-0
!n issuer making a pu*lic issue is re/uired to comply with the following provisions mentioned in the guidelines
M/(/?-? P*+?+)* +()*/-)/+( (, ;+: ‐/(
In a pu*lic issue *y an unlisted issuer, the promoters shall contri*ute not less than 5> of the post issue capital which should *e locked in for a period of 3 years. G$ock ‐inH indicates a freeFe on the shares. The remaining pre issue capital should also *e locked in for a period of year from the date of listing. In case of pu*lic issue *y a listed issuer :i.e. #')<, the promoters shall contri*ute not less than 5> of the post issue capital or 5> of the issue siFe. This provision ensures that promoters of the company have some minimum stake in the company for a minimum period after the issue or after the pro8ect for which funds have *een raised from the pu*lic is commenced.
14
IPO G*,/(0
!ccording to SEBI GI') grading is the grade assigned *y a %redit Rating !gency 6%R!s7 registered with Se*i, to the initial pu*lic offering 6I')7 of e/uity shares or any other security which may *e converted into or e(changed with e/uity shares at a later date. The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed e/uity securities in India. Such grading is generally assigned on a fivepoint point scale with a higher score indicating stronger fundamentals and vice versa as *elow.H I') grade 'oor fundamentals I') grade 5 Belowaverage fundamentals I') grade 3 !verage fundamentals I') grade ; !*oveaverage fundamentals I') grade 9 Strong fundamentals
=rading of an initial pu*lic offer or I'), had earlier *een made mandatory, is now optional. SEBI recently came up with new guidelines upon the re/uest of Investor !ssociations and !ssociation of Investment Bankers of India 6!IBI7. The decision came after much de*ate on the grading system as it was argued that these ratings cannot *e a *asis for investment. Ratings only talk a*out the 6 https??www.valueresearchonline.com?story?h5Jstory+iew.aspKstrL5;>3
15
fundamentals of the listing company and have nothing to do with the valuations. !t present, I') grading is not mandatory and is now optional.
SEBI R+; /( ( /-0
!ny company making a pu*lic issue or a rights issue of securities of value more than Rs 9> lakhs is re/uired to file a draft offer document with SEBI for its o*servations. The validity period of SEBIAs o*servation letter is twelve months only i.e the company has to open its issue within the period of twelve months starting from the date of issuing the o*servation letter. There is no re/uirement of filing any offer document ? notice to SEBI in case of preferential allotment and 0ualified Institution 'lacement 60I'7. In 0I', Merchant Banker handling the issue has to file the placement document with Stock E(changes for making the same availa*le on their we*sites.
T *+; <;@, @ SEBI0 $% Till the early nineties, %ontroller of %apital Issues used to decide a*out entry
of company in the market and also a*out the price at which securities should *e offered to pu*lic. 1owever, following the introduction of disclosure *ased regime under the aegis of SEBI, companies can now determine issue price of securities freely without any regulatory interference, with the fle(i*ility to take advantage of market forces.
16
$% The primary issuances are governed *y SEBI in terms of SEBI 6&isclosures
and Investor protection7 guidelines. SEBI framed its &I' guidelines in 445. The SEBI 6&I'7 =uidelines 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 *y the companies. $% Before a company approaches the primary market to raise money *y the
fresh issuance of securities it has to make sure that it is in compliance with all the re/uirements of SEBI 6&I'7 =uidelines, 5>>>. The Merchant Banker are those specialised intermediaries registered with SEBI, who perform the due diligence and ensures compliance with &I' =uidelines *efore the document is filed with SEBI. $,% )fficials of SEBI at various levels e(amine the compliance with &I'
guidelines and ensure that all necessary material information is disclosed in the draft offer documents.
S-*/)/ E( B+*, + I(,/ $D/;+-* (, /(>)+* <*+))/+(% -/,;/( 2&&&70
Securities E(change Board of India 6&isclosure and investor protection7 guidelines 5>>> are in short called &I' guidelines. It provides a comprehensive framework for issuances *y the companies. The &I' guidelines prescri*e *asic eligi*ility norms for issuing securities under chapter II. 7 vide circular dated 24th February 2009
17
C+(,/)/+( +* /- + -*/)/0 1. F/;/( + +* ,+-?()80
'u*lic issue of securities shall *e made *y a company only after filing a draft prospectus with the Board, through an eligi*le Merchant Banker, at least 5 days prior to the filing of 'rospectus with the Registrar of %ompanies 6R)%s7. If the Board specifies changes within 5 days from the date of su*mission of draft 'rospectus, the issuer or the $ead Merchant *anker shall carry out such changes in the draft prospectus *efore filing the prospectus with R)%s. -o listed company shall make any issue of security through a rights issue where the aggregate value of securities, including premium, if any, e(ceeds Rs.9> lacs, unless the letter of offer is filed with the Board, through an eligi*le Merchant Banker, at least 5 days prior to the filing of the $etter of )ffer with Regional Stock E(change 6RSE7. 'rovided that if, within 5 days from the date of filing of draft letter of offer, the Board specifies changes, if any, in the draft letter of offer, the issuer or
R(+) 21 Securities E(change Board of India 6&isclosure and investor protection7 guidelines 5>>>
1
the $ead Merchant *anker shall carry out such changes *efore filing the draft letter of offer with RSE. 2. C+?<(/ **, (+) )+ /- -*/)@#0
! company shall not make any issue of securities if the company has *een prohi*ited from accessing the capital market under any order or direction passed *y the Board.
3. I- + -*/)/ /( ,?)*/;/, +*?1&0
! company shall make pu*lic or rights issue or an offer for sale of securities, unless " •
The company enters into an agreement with a depository for dematerialiFation of securities already issued or proposed to *e issued
•
to the pu*lic or e(isting shareholdersN and The company gives an option to su*scri*ers?shareholders?investors to receive the security certificates or hold securities in dematerialiFed form with a depository.
! OdepositoryO shall mean a depository registered with the Board under the Securities and E(change Board of India 6&epositories and 'articipants7 Regulations, 44. ! R(+) 213 Securities E(change Board of India 6&isclosure and investor protection7 guidelines 5>>> 1" R(+) 215 ibid
1!
4. E?<)/+( *+? ) ;///;/)@ (+*? 110
The following categories need not satisfy the criteria under chapter II of &I' guidelines regarding the issuing of securities i7! *anking company including a $ocal !rea Bank 6referred to as 'rivate Sector Banks7 set up under su*section 6c7 of Section 9 of the Banking Regulation !ct, 4;4 and which has received license from the Reserve Bank of India, or ii7
! corresponding new *ank set up under the Banking %ompanies
6!c/uisition and Transfer of 2ndertaking7 !ct, 4> Banking %ompanies 6!c/uisition and Transfer of 2ndertaking7 !ct, 4P>, State Bank of India !ct 499 and State Bank of India 6Su*sidiary Banks7 !ct, 494 6hereinafter referred to as Qpu*lic sector *anksQ7. iii7
!n infrastructure company
iv7
Rights issue *y a listed company
M9+* I-0
H+= ,+ SEBI (-* +?<;/( =/) DIP G-/,;/( 2&&&
The Merchant Banker are the specialiFed intermediaries who are re/uired to do due diligence and ensure that all the re/uirements of &I' are complied with
11 R(+) 24 Securities E(change Board of India 6&isclosure and investor protection7 guidelines 5>>>
2"
while su*mitting the draft offer document to SEBI. !ny noncompliance on their part, attract penal action from SEBI, in terms of SEBI 6Merchant Bankers7 Regulations. The draft offer document filed *y Merchant Banker is also placed on the we*site for pu*lic comments. )fficials of SEBI at various levels e(amine the compliance with &I' guidelines and ensure that all necessary material information is disclosed in the draft offer documents. S-*) R+@ S* V. U(/+( + I(,/ (, +)* 12 C A(;@/0
FACTS0
Sahara India Real Estate %orporation $td 6SIRE%$7 and Sahara 1ousing Investment %orporation $imited 6S1I%7 issued )ptionally #ully %onverti*le &e*entures 6)#%&s7 through su*scriptions from investors with effect from 59 th !pril 5>>P upto 3th !pril 5>. It raised around Rs.5>,>>> crores from investors. The purpose of issue was to carry out infrastructural activities namely constructing the *ridges, moderniFing or setting up of airports, rail system or any other pro8ects which may *e allotted to the company. They filed Red 1erring 'rospectus to the concerned Registrar of %ompanies and specified intention of company not wanting to list the shares in the stock e(changes. !s per Sahara %ompany, the issue of )#%&s was private placement.
12 [Writ Petition (Criminal) No. 57 of 2014]
21
Sahara collected Rs. 3> million under the guise of private placement. The re/uirements of pu*lic offer were not complied with. $ater, Sahara prime city ltd intended to raise funds through listing of its shares and filed prospectus to SEBI. @hile processing the prospectus, SEBI received complaint from one of the investor and Gprofessional group of Investors protectionsH on 59.5.>4 and ;.>.>
ORDER OF SEBI0
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.
APPEA! 0
Sahara preferred an appeal *efore Securities !ppellate Tri*unal against the order of @hole Time mem*er of SEBI. S!T confirmed and maintained the order of whole time mem*er *y an order dated P?>?. Su*se/uently Sahara filed an appeal *efore the Supreme %ourt against the order of S!T.
ISSUES0
.@1ET1ER T1E ISS2E )# )#%&S T) MI$$I)-S )# 'ERS)-S IS ! 'RI+!TE '$!%EME-TK
22
5.
@1ET1ER $ISTI-= 'R)+ISI)-S 2-&ER SE%TI)- ;> 6Section 3
of 49 act7 IS M!-&!T)R #)R !$$ '2B$I% ISS2ES )R &E'E-&S )- DI-TE-TI)- )# T1E %)M'!-AK
OBSERVATIONS MADE BY THE COURT0
ISSUE 10
The issue of )#%&s is not a private placement since it was made to more than 9> persons as under section ;5 of companies act, 5>3 :section 637 of 49 !ct< The actions of *oth the companies clearly depicts that they wanted to issue securities to the pu*lic in the guise of private placement to *ypass various laws and regulations.
ISSUE 20
$aw is clear and unam*iguous as to any issue made to more than 9> persons is mandatory to list. Every company intending to offer securities to pu*lic must list its securities and intention cannot override the act.
!+:/(
$ockin indicates a freeFe on the shares. SEBI 6&I'7 =uidelines have stipulated $ockin re/uirements on shares of promoters mainly to ensure that
23
the promoters, who control the company, shall continue to hold some minimum percentage in the company after the pu*lic issue. !OC'IN REQURIMENTS
!s per regulations of SEBI, promoters are re/uired to lockin at least 5>
stake in the company for at least three years after allotment of shares in initial pu*lic offering 6I')7.
Besides, any holding in e(cess of this minimum 5> promoter stake is re/uired to *e locked in for one year.
To encourage professionals and technically /ualified entrepreneurs who are una*le to meet the re/uisite 5> contri*ution *y themselves as promoters, the regulator has now decided to allow such startup promoters to meet this re/uirement with help of SEBIregistered registered !I#s.
!I#s or alternative investment funds are a newly approved class of investors which include private e/uity 6'E7, SME, infrastructure, venture capital funds, among others.
1owever, the contri*ution of these !I#s would *e capped at > to meet the promoter share lockin guidelines.
24
The proposal has *een approved *y the SEBI *oard and would *e soon incorporated into the relevant guidelines.
SEBI is of the view that such a step would encourage the professional and firstgeneration entrepreneurs to tap the capital market to raise funds. The decision was taken after a recommendation in this regard *y SEBIOs 'rimary Market !dvisory %ommittee 6'M!%7. The 'M!% was of the view that in the companies founded *y professionals or firstgeneration entrepreneurs, where the postI') e/uity held *y promoters is less than 5>, !I#s could *e permitted to provide the *alance e/uity, su*8ect to a minimum > *eing contri*uted *y the promoters. The 'M!% also suggested that the capital contri*uted *y !I#s for this purpose shall *e locked in for two years. SEBI, however, decided that the re/uirement of lockin of three years should uniformly apply to *oth 'romoters and !I#s. #urther, SEBI has decided to review the lockin tenure at periodic intervals, as per the international practice. The promoters are allowed to pledge their lockedin shares as collateral security for any loans granted for financing one or more of the o*8ects of the issue, provided pledge of shares are one of the terms of sanction of the loan.
25
T DIP G-/,;/( </@ ) ?/(/?-? ;+:/( <*/+, (, ;@ ,+=( ) +)* *-/*?() *;)/( )+ ) ;+:/( <*/+, .
The minimum promotersA contri*ution, i.e., twenty percent 65>7 of the postissue capital, is re/uired to *e lockedin for a period of three 637 years, starting from the date of allotment in the proposed issue and ending three 637 years from the date of commencement of commercial production or the date of allotment in the pu*lic issue, whichever is later. 6%lause ;.. r?w %lause ;..5 of the &I' =uidelines7
'romotersA contri*ution in e(cess of the re/uired minimum percentage must *e locked in for a period of one 67 year. The securities forming part of the promotersA contri*ution and issued last to the promoters must *e lockedin first, e(cept in the case of financial institutions appearing as promoters. 6%lause ;.5. r?w %lause ;.3. of the &I' =uidelines7
The entire preissue capital, other than the promotersA contri*ution, must *e locked in for a period of one 67 year from the date of commencement of commercial production or the date of allotment in the pu*lic issue, whichever is later. This provision is not applica*le to the preissue share capital . held *y +%#s and #+%Is, which must *e lockedin according to the SEBI 6+%#7 Regulations, 444 and the SEBI 6#+%I7 Regulations, 5>>>N and
26
5. 1eld for a period of at least one 67 year at the time of filing of the draft offer document with the SEBI and *eing offered to the pu*lic through an offer for sale, i.e., an offer *y e(isting shareholders of a company to the pu*lic. 6%lause ;.;. r?w %lause ;.;.5 of the &I' =uidelines7
$ockedin securities forming part of the promotersA contri*ution may *e pledged only with *anks or financial institutions as collateral for loans, if the pledge of shares is one of the terms of the loan. 6%lause ;.9. of the &I' =uidelines7 #urther, the transfer of securities, inter se, amongst promoters is also
su*8ect to the lockin applica*le to transferees for the remaining lockin period. 6%lause ;.. of the &I' =uidelines7 The face of the security certificate of lockedin securities must contain the inscription Gnontransfera*leH and specify the period for which it is not transfera*le. 6%lause ;.. of the &I' =uidelines7
P*//( /( /- % F//( + ) <*/ + -*/)/ /( ( /-
Indian primary market ushered in an era of free pricing in 445. SEBI does not play any role in price fi(ation. The issuer in consultation with the merchant *anker on the *asis of market demand decides the price. The offer document
27
contains full disclosures of the parameters which are taken in to account *y merchant Banker and the issuer for deciding the price. The 'arameters include E'S, 'E multiple, return on net worth and comparison of these parameters with peer group companies. % T ,/*( )=( F/, <*/ /- (, B++: B-/;) /-
)n the *asis of 'ricing, an issue can *e further classified into #i(ed 'rice issue or Book Built issue. #i(ed 'rice Issue @hen the issuer at the outset decides the issue price and mentions it in the )ffer &ocument, it is commonly known as G#i(ed price issueH. Book *uilt Issue @hen the price of an issue is discovered on the *asis of demand received from the prospective investors at various price levels, it is called GBook Built issueH. #or more e(planation on Book Built Issues please refer to the section titled G2nderstanding Book BuildingH B++: B-/;,/(0
Book *uilding is a process of price discovery. The issuer discloses a price *and or floor price *efore opening of the issue of the securities offered. )n the *asis of the demands received at various price levels within the price *and specified *y the issuer, Book Running $ead Manager 6BR$M7 in close consultation with the issuer arrives at a price at which the security offered *y the issuer, can *e issued.
2
P*/ (,0
The price *and is a *and of price within which investors can *id. The spread *etween the floor and the cap of the price *and shall not *e more than 5>. The price *and can *e revised. If revised, the *idding period shall *e e(tended for a further period of three days, su*8ect to the total *idding period not e(ceeding thirteen days. $% +*:/( + B++: B-/;,/(
Book *uilding is a process of price discovery. ! floor price or price *and within which the *ids can move is disclosed at least two working days *efore opening of the issue in case of an I') and atleast one day *efore opening of the issue in case of an #'). The applicants *id for the shares /uoting the price and the /uantity that they would like to *id at.
!fter the *idding process is
complete, the Dcut ‐offA price is arrived at *ased on the demand of securities. The *asis of !llotment is then finaliFed and allotment?refund is undertaken. The final prospectus with all the details including the final issue price and the issue siFe is filed with R)%, thus completing the issue process. )nly the retail investors have the option of *idding at Dcut ‐offA. c7 G - ) ‐ + +<)/+( +* /(>)+* G%ut‐offH option is availa*le for only retail individual investors i.e. investors who are applying for securities worth up to rupees , >>,>>>? ‐ only. Such
2!
investors are re/uired to tick the cut ‐off option which indicates their willingness to su*scri*e to shares at any price discovered within the price *and. 2nlike price *ids 6where a specific price is indicated7 which can *e invalid, if price indicated *y applicant is lower than the price discovered, the cut ‐off *ids always remain valid for the purpose of allotment ,% (*>//( ) /,
@e can change or revise the /uantity or price in the *id using the form for changing?revising the *id that is availa*le along with the application form. 1owever, the entire process of changing or revising the *ids shall *e completed within the date of closure of the issue. % C(;;/( B/,0
@e can cancel your *id any time *efore the finaliFation of the *asis of allotment *y approaching? writing? making an application to the registrar to the issue. f7 <*++ *-/*,
*+? )*,/( ??* +* @(,/) ??* +*
()*/( /,0
The syndicate mem*er returns the counterfoil with the signature, date and stamp of the syndicate mem*er. ou can retain this as a sufficient proof that the *ids have *een accepted *y the trading ? syndicate mem*er for uploading on the terminal.
3"
FIRM A!!OTMENT0
! company making an issue to pu*lic can reserve some shares on Qallotment on firm *asisQ for some categories as specified in &I' guidelines. !llotment on firm *asis indicates that allotment to the investor is on firm *asis. &I' guidelines provide for ma(imum of shares, which can *e reserved on firm *asis. The shares to *e allotted on Qfirm allotment categoryQ can *e issued at a price different from the price at which the net offer to the pu*lic is made provided that the price at which the security is *eing offered to the applicants in firm allotment category is higher than the price at which securities are offered to pu*lic SEBI $DIP% -/,;/( <*+>/, )) ( /-* ?:/( ( /- )+ <-;/ ( ;;+) * +( /*? / )+ +? )+*/ <//, ;+=0
6i7 Indian and Multilateral &evelopment #inancial Institutions, 6ii7 Indian Mutual #unds, 6iii7 #oreign Institutional Investors including -on ‐Resident Indians and )verseas %orporate Bodies and 6iv7 'ermanent?Regular employees of the issuer company. 6v7 Scheduled Banks It may *e noted that )%Bs are prohi*ited *y RBI to make investment.
31
I(>)+* * *+,;@ ;//, -(,* +;;+=/( )+*/ ‐0
6i7 Retail individual Investor 6RIIs7 6ii7 -on‐Institutional Investors 6-IIs7 6iii7 0ualified Institutional Buyers 60IBs7 R)/; /(,/>/,-; /(>)+*H means an investor who applies or *ids for
securities for a value of not more than Rs. ,>>,>>>. ! *)/; /(>)+* is an individual who purchases securities for his or her own personal account rather than for an organiFation. Retail investors typically trade in much smaller amounts than institutional investors such as mutual funds, pensions, or university endowments. H+= /) =+*:E?<;0
Retail investing generally occurs through four channels individual investors, retail *rokers 6who act at the direction of these individuals7, managed accounts 6where*y the account manager makes the *uy and sell decisions for the individual7, and investment clu*s 6groups of people who pool their money to make investment7. !ccording to the Investment %ompany Institute and the Securities Industry !ssociation, over 9> million 2.S. households engage in some type of retail investing. @ /) M))*0
32
Retail investing activity pales in the shadow of institutional investing activity. -ot only do retail investors make smaller trades, they also tend to trade less fre/uently than institutional investors, which account for most of the marketOs trading volume. 1owever, the widening use of online trading and *etter access to financial information has increased the num*er of retail investors in recent years. Retail investors typically e(ert less influence over corporate decisions
than larger, institutional shareholders. !lthough there is some controversy over whether a high level of ownership improves a companyOs management, there is no disputing the fact that an institutional shareholder with >,>>> votes usually wields more influence than an average retail shareholder with 8ust >> votes. !s opposed to institutional owners, small investors seldom have access to corporate *oardrooms or discussions and rarely have the opportunity to meet personally with a companyOs e(ecutives. #or this reason, many retail investors tend to regard institutional ownership of a security as a sign of approval and are easily influenced *y institutional trading activity. GQ-;//, I()/)-)/+(; B-@* H shall mean a7 ! pu*lic financial institution as defined in section ;! of the %ompanies !ct, 49N *7 ! scheduled commercial *ankN
33
c7 ! mutual fund registered with the BoardN d7 ! foreign institutional investor and su* ‐account registered with SEBI, other than a su*account which is a foreign corporate or foreign individualN e7 ! multilateral and *ilateral development financial institutionN f7 ! venture capital fund registered with SEBIN g7 ! foreign venture capital investor registered with SEBIN h7 ! state industrial development corporationN i7 !n insurance company registered with the Insurance Regulator and &evelopment !uthority 6IR&!7N 87 ! provident fund with minimum corpus of rupees. 59 croresN k7 ! pension fund with minimum corpus of Rs. 59 crores7N l7 -ational Investment #und set up *y resolution no. #. -o. 5?3?5>>9 ‐&&II dated -ovem*er 53, 5>>9 of =overnment of India pu*lished in the =aFette of India.H N+(‐I()/)-)/+(; I(>)+*0
Investors who do not fall within the definition of the a*ove two categories are categoriFed as G N+(‐I()/)-)/+(; I(>)+*H
34
Individual investors, -RIOs, companies, trusts etc. who *id for more than Rs lakhs are known as -oninstitutional *idders. They need not to register with SEBI like RIIOs. -oninstitutional *idders have an allocation of 9 of shares of the total issue siFe in Book Build I'). T ,/*( )=( *)/; /(,/>/,-; /(>)+* (, I()/)-)/+(; /(>)+*0
There are two categories of investors in the financial markets retail investors and institutional investors. The differences *etween the two dictate not only the siFe of the trades they make, *ut also the types of companies and financial instruments in which they invest their monies. The term Qretail investorsQ is synonymous with Qindividual investors.Q The ma8ority of retail investors *uys and sells stocks in round lots, where a round lot refers to >> shares. This is not to say an individual canOt place an order to *uy or sell 9>, 59, or even 8ust a single share of a companyOs stock, *ut it often isnOt cost effective to do so *ecause of the commissions that must *e paid. It would *e foolhardy to *uy one share of a stock that was selling for > a share if the fee to do so is almost that amount, for e(ample. Institutional investors are 8ust what the name implies large institutions, such as *anks, insurance companies, pension funds, mutual funds, and e(changetraded funds 6ET#s7, that *uy and sell securities for their investment
35
portfolios. In contrast to retail investors, institutional investors engage in *lock trades, which is an order to *uy or sell >,>>> or more shares at a time. !s might *e e(pected, a large trade *y an institutional investor can significantly affect the price of the security *eing *ought or sold. This *eing said, most institutional investors are not *ig players in the market for the stocks of the smallest companiesN that market is largely left to retail investors, who are often attracted to invest in smaller firms *ecause of their lower prices. !n individual may *e a*le to afford to invest in a diversified portfolio of > to 5> stocks in the 9 to 5> price range, while he might have trou*le affording even one round lot of a stock with a 3digit price tag. Institutional investors, who trade >,>>> or more shares at a time, tend to avoid investing in companies that are selling for less than > a share. #or one thing, these megainvestors are investing large sums of money when they opt to purchase shares of a firm, and a significant num*er of investment dollars directed to a smaller firm could result in the institutional investorOs ac/uiring a high percentage ownership of the company, which is not what most institutional investors want. #or one thing, this adversely affects the li/uidity of the investment i.e., the institutionOs a*ility to sell the shares on the market place for little or no loss in value when and if it chooses to do so. !nd, for some institutional investors, itOs a violation of securities laws to do so. #or e(ample, mutual funds, closedend funds, and e(changetraded funds that
36
choose to register as diversified funds must meet the diversification re/uirements outlined in the Investment %ompany !ct of 4;>, which restricts the percentage of a single companyOs voting securities that these funds can own. Both retail investors and institutional investors invest in *onds, options, and futures contracts as well as in stocks, *ut some markets, such as the swaps and forward markets, are primarily institutional investor arenas, largely *ecause of the nature of the instruments and?or the manner in which transactions take place. A;;+)?() )+ >*/+- /(>)+* )+*/ / <*+>/,, /( ) -/,;/( (, / ,)/;, ;+= I( + B++: B-/;) /-
. In case an issuer company makes an issue of >> of the net offer to pu*lic through >> *ook *uilding process 6a7 -ot less than 39 of the net offer to the pu*lic shall *e availa*le for allocation to retail individual investorsN 6*7 -ot less than 9 of the net offer to the pu*lic shall *e availa*le for allocation to non ‐institutional investors i.e. investors other than retail individual investors and 0ualified Institutional BuyersN
37
6c7 -ot more than 9> of the net offer to the pu*lic shall *e availa*le for allocation to 0ualified Institutional Buyers 5. In case of compulsory Book ‐Built Issues at least 9> of net offer to pu*lic *eing allotted to the 0ualified Institutional Buyers 60IBs7, failing which the full su*scription monies shall *e refunded. 3. In case the *ook *uilt issues are made pursuant to the re/uirement of mandatory allocation of > to 0IBs in terms of Rule 46576*7 of Securities %ontract 6Regulation7 Rules, 49, the respective figures are 3> for RIIs and > for -IIs. I( + /, <*/ /-
The proportionate allotment of securities to the different investor categories in a fi(ed price issue is as descri*ed *elow . ! minimum 9> of the net offer of securities to the pu*lic shall initially *e made availa*le for allotment to retail individual investors, as the case may *e. 5. The *alance net offer of securities to the pu*lic shall *e made availa*le for allotment to a. Individual applicants other than retail individual investors, and
3
*. )ther investors including corporate *odies? institutions irrespective of the num*er of securities applied for. RESEARCH METHODO!OGY0
The research methodology is doctrinal. I have used secondary sources for this pro8ect. I have referred *are acts and other sources mentioned in the *i*liography given at the end of the pro8ect. These sources have *een used for esta*lishing the concepts involved in the issue of shares and to provide a clear picture upon the role played *y SEBI in the issue of shares *y the company.
CONC!USION0
The Security E(change Board of India 6SEBI7 since its inception is regarded as the Regulator of Security markets. But, more often it was criticiFed that it is a watch dog to o*serve the activities and is ineffective in regulating and controlling the capital markets. This criticism has *een changed in recent times and the o*servations made *y the 1onA*le Supreme %ourt in SaharaAs %ase proves that SEBI is *estowed with special powers to investigate and ad8udicate as a part of its regulatory function in order to ensure protection of the interests of the investors. Thus, SEBI plays an important role as a regulator and a protector of investors while the companies issue shares and other forms of securities in the real market situations.
