DETAILED NOTE ON INITIAL
PUBLIC OFFER
Initial Public Offering (IPO) is when an
unlisted company makes either a fresh issue of securities or an offer for sale
of its existing securities or both for the first time to the public. This paves
way for listing and trading of the issuer’s securities.
1.0 Book
Building - About Book Building
Book Building is basically a
capital issuance process used in Initial Public Offer (IPO) which aids price
and demand discovery. It is a process used for marketing a public offer of
equity shares of a company. It is a mechanism where, during the period for
which the book for the IPO is open, bids are collected from investors at
various prices, which are above or equal to the floor price. The process aims
at tapping both wholesale and retail investors. The offer/issue price is then
determined after the bid closing date based on certain evaluation criteria.
1.1 The Process:
- The
Issuer who is planning an IPO nominates a lead merchant banker as a 'book
runner'.
- The
Issuer specifies the number of securities to be issued and the price band
for orders.
- The
Issuer also appoints syndicate members with whom orders can be placed by
the investors.
- Investors
place their order with a syndicate member who inputs the orders into the
'electronic book'. This process is called 'bidding' and is similar to open
auction.
- A
Book should remain open for a minimum of 5 days.
- Bids
cannot be entered less than the floor price.
- Bids
can be revised by the bidder before the issue closes.
- On
the close of the book building period the 'book runner evaluates the bids
on the basis of the evaluation criteria which may include -
- Price
Aggression
- Investor
quality
- Earliness
of bids, etc.
- The
book runner and the company conclude the final price at which it is
willing to issue the stock and allocation of securities.
- Generally,
the number of shares is fixed; the issue size gets frozen based on the
price per share discovered through the book building process.
- Allocation
of securities is made to the successful bidders.
- Book
Building
is a good concept and represents a capital market which is in the process
of maturing.
1.2 Guidelines for Book Building
Rules governing book building is covered in Chapter XI of the Securities and
Exchange Board of India (Disclosure and Investor Protection) Guidelines 2000.
1.3 BSE’s Book Building
System
- BSE
offers the book building services through the Book Building
software that runs on the BSE Private network.
- This
system is one of the largest electronic book building networks anywhere
spanning over 350 Indian cities through over 7000 Trader Work Stations via
eased lines, VSATs and Campus LANS
- The
software is operated through book-runners of the issue and by the
syndicate member brokers. Through this book, the syndicate member brokers
on behalf of themselves or their clients' place orders.
- Bids
are placed electronically through syndicate members and the information is
collected on line real-time until the bid date ends.
- In
order to maintain transparency, the software gives visual graphs
displaying price v/s quantity on the terminals.
1.4 Initial Public
Offerings
Corporates may raise capital in the primary market by way of an initial public
offer, rights issue or private placement. An Initial Public Offer (IPO) is the
selling of securities to the public in the primary market. This Initial Public
Offering can be made through the fixed price method, book building method or a
combination of both.
In case the issuer chooses to issue securities through the book building route
then as per SEBI guidelines, an issuer company can issue securities in the
following manner:
- 100%
of the net offer to the public through the book building route.
- 75%
of the net offer to the public through the book building process and 25%
through the fixed price portion.
1.5 Difference
between shares offered through book building and offer of shares through normal
public issue:
Features
|
Fixed Price process
|
Book Building
process
|
Pricing
|
Price at which the
securities are offered/ allotted is known in advance to the investor.
|
Price at which securities
will be offered/ allotted is not known in advance to the investor. Only an
indicative price range is known.
|
Demand
|
Demand for the securities
offered is known only after the closure of the issue
|
Demand for the securities
offered can be known everyday as the book is built.
|
Payment
|
Payment if made at the
time of subscription wherein refund is given after allocation.
|
Payment only after
allocation.
|
1.6 Book Building
- Glossary
Bid
A
bid is the demand for a security that can be entered by the
syndicate/sub-syndicate members in the system. The two main components of a bid
are the price and the quantity.
Bidder
The person who has placed a bid in the Book Building
process
Book
Running Lead Manager
A Lead Merchant Banker who has been appointed by the Issuer Company as the Book
Runner Lead Manager. The name of the Book Runner Lead Manager is mentioned in
the offer document of the Issuer Company.
Floor Price
The minimum offer price below which bids cannot be entered. The Issuer Company
in consultation with the Book Running Lead Manager fixes the floor price.
Merchant Banker
An entity registered under the Securities and Exchange Board of India (Merchant
Bankers) Regulations, 1999.
Syndicate Members
Syndicate Members are the intermediaries registered with the Board and
permitted to carry on activity as underwriters. The Book Running Lead Managers
to the issue appoints the Syndicate Members.
Order Book
It is an 'electronic book' that shows the demand for the shares of the company
at various prices.
Reverse
Delisting
Exchange
Delisting Exchange means the exchange from which the securities of the company
are proposed to be delisted in accordance with these Guidelines.
Exchange
Exchange means any stock exchange, which has been granted recognition under
section 4 of the Securities Contracts (Regulation) Act, 1956.
Promoter
Promoter means a promoter as defined in clause (h) of sub-regulation (1) of
Regulation 2 of the Securities and Exchange Board of India (Substantial
Acquisition of shares and Takeovers) Regulation, 1997 and includes a person who
is desirous of getting the securities of the company delisted under these
Guidelines.
Public Shareholding
Public Shareholding means the shareholding in a company held by persons other
than the promoter, the acquirer or the persons acting in concert with him as
defined in regulation 2(1)(j) of the Securities and Exchange Board of India
(Substantial Acquisition of shares and Takeovers) Regulation, 1997 and the term
'public holders of securities' shall be construed accordingly;
Voluntary Delisting
It means delisting of securities of a body corporate voluntarily by a promoter
or an acquirer or any other person other than the stock exchange(s).
2.0 LISTING
OF SECURITIES
Listing means admission of the securities to
dealings on a recognized stock exchange. The securities may be of any public
limited company, Central or State Government, quasi governmental and other
financial institutions/corporations, municipalities, etc.
The objectives of listing are mainly to:
- provide
liquidity to securities;
- mobilize
savings for economic development;
- Protect
interest of investors by ensuring full disclosures.
The Exchange has a separate Listing
Department to grant approval for listing of securities of companies in
accordance with the provisions of the Securities Contracts (Regulation) Act,
1956, Securities Contracts (Regulation) Rules, 1957, Companies Act, 1956,
Guidelines issued by SEBI and Rules, Bye-laws and Regulations of the Exchange.
2.1 A
company intending to have its securities listed on the Exchange has to comply
with the listing requirements prescribed by the Exchange. Some of the
requirements are as under:-
|
|
Minimum
Listing Requirements for new companies
|
II
|
Minimum
Listing Requirements for companies listed on other stock exchanges
|
III
|
Minimum
Requirements for companies delisted by this Exchange seeking relisting of
this Exchange
|
IV
|
Permission
to use the name of the Exchange in an Issuer Company's prospectus
|
V
|
Submission
of Letter of Application
|
VI
|
Allotment
of Securities
|
VII
|
Trading
Permission
|
VIII
|
Requirement
of 1% Security
|
IX
|
Payment
of Listing Fees
|
X
|
Compliance
with Listing Agreement
|
XI
|
Cash
Management Services (CMS) - Collection of Listing Fees
|
[I]
Minimum Listing Requirements for new companies
The following revised eligibility criteria
for listing of companies on the Exchange, through Initial Public Offerings
(IPOs) & Follow-on Public Offerings (FPOs), effective August 1, 2006.
ELIGIBILITY CRITERIA FOR IPOs/FPOs
- Companies
have been classified as large cap companies and small cap companies. A
large cap company is a company with a minimum issue size of Rs. 10 crores
and market capitalization of not less than Rs. 25 crores. A small cap
company is a company other than a large cap company.
- In
respect of Large Cap Companies
- The
minimum post-issue paid-up capital of the applicant company (hereinafter
referred to as "the Company") shall be Rs. 3 crores; and
- The
minimum issue size shall be Rs. 10 crores; and
- The
minimum market capitalization of the Company shall be Rs. 25 crores
(market capitalization shall be calculated by multiplying the post-issue
paid-up number of equity shares with the issue price).
- In
respect of Small Cap Companies
- The
minimum post-issue paid-up capital of the Company shall be Rs. 3 crores;
and
- The
minimum issue size shall be Rs. 3 crores; and
- The
minimum market capitalization of the Company shall be Rs. 5 crores
(market capitalization shall be calculated by multiplying the post-issue
paid-up number of equity shares with the issue price); and
- The
minimum income/turnover of the Company should be Rs. 3 crores in each of
the preceding three 12-months period; and
- The
minimum number of public shareholders after the issue shall be 1000.
- A
due diligence study may be conducted by an independent team of Chartered
Accountants or Merchant Bankers appointed by the Exchange, the cost of
which will be borne by the company. The requirement of a due diligence
study may be waived if a financial institution or a scheduled commercial
bank has appraised the project in the preceding 12 months.
- For
all companies :
- In respect of
the requirement of paid-up capital and market capitalisation, the issuers
shall be required to include in the disclaimer clause forming a part of
the offer document that in the event of the market capitalisation
(product of issue price and the post issue number of shares) requirement
of the Exchange not being met, the securities of the issuer would not be
listed on the Exchange.
- The applicant,
promoters and/or group companies, should not be in default in compliance
of the listing agreement.
- The above
eligibility criteria would be in addition to the conditions prescribed
under SEBI (Disclosure and Investor Protection) Guidelines, 2000.
[II] Minimum Listing Requirements for
companies listed on other stock exchanges
The Governing Board of the Exchange at its
meeting held on 6th August, 2002 amended the direct listing norms for companies
listed on other Stock Exchange(s) and seeking listing at BSE. These norms are
applicable with immediate effect.
- The
company should have minimum issued and paid up equity capital of Rs. 3
crores.
- The
Company should have profit making track record for last three years. The
revenues/profits arising out of extra ordinary items or income from any
source of non-recurring nature should be excluded while calculating
distributable profits.
- Minimum
networth of Rs. 20 crores (networth includes Equity capital and free
reserves excluding revaluation reserves).
- Minimum
market capitalisation of the listed capital should be at least two times
of the paid up capital.
- The
company should have a dividend paying track record for the last 3
consecutive years and the minimum dividend should be at least 10%.
- Minimum
25% of the company's issued capital should be with Non-Promoters
shareholders as per Clause 35 of the Listing Agreement. Out of above Non
Promoter holding no single shareholder should hold more than 0.5% of the
paid-up capital of the company individually or jointly with others except
in case of Banks/Financial Institutions/Foreign Institutional
Investors/Overseas Corporate Bodies and Non-Resident Indians.
- The
company should have at least two years listing record with any of the
Regional Stock Exchange.
- The
company should sign an agreement with CDSL & NSDL for demat trading.
[III] Minimum Requirements for companies
delisted by this Exchange seeking relisting of this Exchange
The companies delisted by this Exchange and
seeking relisting are required to make a fresh public offer and comply with the
prevailing SEBI's and BSE's guidelines regarding initial public offerings.
[IV] Permission to use the name of the
Exchange in an Issuer Company's prospectus
The Exchange follows a procedure in terms of
which companies desiring to list their securities offered through public issues
are required to obtain its prior permission to use the name of the Exchange in
their prospectus or offer for sale documents before filing the same with the
concerned office of the Registrar of Companies. The Exchange has since last
three years formed a "Listing Committee" to analyse draft
prospectus/offer documents of the companies in respect of their forthcoming
public issues of securities and decide upon the matter of granting them permission
to use the name of "Bombay Stock Exchange Limited" in their
prospectus/offer documents. The committee evaluates the promoters, company,
project and several other factors before taking decision in this regard.
[V] Submission of Letter of Application
As per Section 73 of the Companies Act, 1956,
a company seeking listing of its securities on the Exchange is required to
submit a Letter of Application to all the Stock Exchanges where it proposes to
have its securities listed before filing the prospectus with the Registrar of
Companies.
[VI] Allotment of Securities
As per Listing Agreement, a company is
required to complete allotment of securities offered to the public within 30
days of the date of closure of the subscription list and approach the Regional
Stock Exchange, i.e. Stock Exchange nearest to its Registered Office for
approval of the basis of allotment.
In case of Book Building
issue, Allotment shall be made not later than 15 days from the closure of the
issue failing which interest at the rate of 15% shall be paid to the investors.
As per Securities and Exchange Board of India
Guidelines, the issuer company should complete the formalities for trading at
all the Stock Exchanges where the securities are to be listed within 7 working
days of finalisation of Basis of Allotment.
A company should scrupulously adhere to the
time limit for allotment of all securities and dispatch of Allotment
Letters/Share Certificates and Refund Orders and for obtaining the listing
permissions of all the Exchanges whose names are stated in its prospectus or
offer documents. In the event of listing permission to a company being denied
by any Stock Exchange where it had applied for listing of its securities, it
cannot proceed with the allotment of shares. However, the company may file an
appeal before the Securities and Exchange Board of India under Section 22 of
the Securities Contracts (Regulation) Act, 1956.
[VIII] Requirement of 1% Security
The companies making public/rights issues are
required to deposit 1% of issue amount with the Regional Stock Exchange before
the issue opens. This amount is liable to be forfeited in the event of the
company not resolving the complaints of investors regarding delay in sending
refund orders/share certificates, non-payment of commission to underwriters,
brokers, etc.
[IX] Payment of Listing Fees
All companies listed on the Exchange have to
pay Annual Listing Fees by the 30th April of every financial year to the
Exchange as per the Schedule of Listing Fees prescribed from time to time.
The schedule of listing fees for the year
2006-2007, prescribed by the Governing Board of the Exchange is given hereunder
:
SCHEDULE
OF LISTING FEES FOR THE YEAR 2006-2007
|
Sr. No.
|
Particulars
|
Amount (Rs.)
|
1
|
Initial Listing Fees
|
20,000
|
2
|
Annual Listing Fees
(i) Companies with paid-up capital* upto Rs. 5 crores
(ii) AboveRs. 5 crores and upto Rs. 10 crores
(iii) Above Rs. 10 crores and upto Rs. 20 crores
|
10,000
15,000
30,000
|
3
|
Companies which have a
paid-up capital* of more than Rs. 20 crores will pay additional fee of Rs.
750/- for every increase of Rs. 1 crores or part thereof.
|
|
4
|
In case of debenture
capital (not convertible into equity shares) of companies, the fees will be
charged @ 25% of the fees payable as per the above mentioned scales.
|
|
*includes equity shares,
preference shares, fully convertible debentures, partly convertible debenture
capital and any other security which will be converted into equity shares.
|
Kindly Note the last date
for payment of listing fee for the year 2006-2007 is April 30, 2006. Failure
to pay the listing fee(for the equity and/or debt segment) before the due
date i.e. April 30, 2006 will attract imposition of interest @ 12% per annum
w.e.f. May 1, 2006.
|
[X]
Compliance with Listing Agreement
The companies desirous of getting their
securities listed are required to enter into an agreement with the Exchange
called the Listing Agreement and they are required to make certain disclosures
and perform certain acts. As such, the agreement is of great importance and is
executed under the common seal of a company. Under the Listing Agreement, a
company undertakes, amongst other things, to provide facilities for prompt
transfer, registration, sub-division and consolidation of securities; to give
proper notice of closure of transfer books and record dates, to forward copies
of unabridged Annual Reports and Balance Sheets to the shareholders, to file
Distribution Schedule with the Exchange annually; to furnish financial results
on a quarterly basis; intimate promptly to the Exchange the happenings which
are likely to materially affect the financial performance of the Company and
its stock prices, to comply with the conditions of Corporate Governance, etc.
The Listing Department of the Exchange
monitors the compliance of the companies with the provisions of the Listing
Agreement, especially with regard to timely payment of annual listing fees,
submission of quarterly results, requirement of minimum number of shareholders,
etc. and takes penal action against the defaulting companies.
[XI] Cash Management Services (CMS) -
Collection of Listing Fees
As a further step towards simplifying the
system of payment of listing fees, the Exchange has entered into an arrangement
with HDFC Bank for collection of listing fees, from 141 locations, situated all
over India.Details of the HDFC Bank branches, are available on our website site
www.bseindia.com as well as on the HDFC Bank website www.hdfcbank.com The above
facility is being provided free of cost to the Companies.
Companies intending to utilise the above facility for payment of listing fee
would be required to furnish the information, (mentioned below) in the Cash
Management Cash Deposit Slip. These slips would be available at all the
HDFC Bank centres.
S.No
|
HEAD
|
INFORMATION TO BE PROVIDED
|
1.
|
Client Name
|
Bombay Stock Exchange
Limited
|
2.
|
Client Code
|
BSELIST
|
3.
|
Cheque No.
|
mention the cheque No
& date
|
4.
|
Date
|
date on which payment is
being deposited with the bank.
|
5.
|
Drawer
|
state the name of the
company and the company code No.The last digits mentioned in the Ref. No. on
the Bill is the company code No.e.g If the Ref. No in the Bill is
mentioned as : Listing/Alf-Bill/2004-2005/4488, then the code No of that
company is 4488
|
6.
|
Drawee Bank
|
state the bank on which
cheque is drawn
|
7.
|
Drawn on Location
|
Mention the location of
the drawee bank.
|
8.
|
Pickup Location
|
Not applicable
|
9.
|
No. of Insts
|
Not applicable
|
The Cheque should be drawn in favour of Bombay Stock Exchange Limited , and
should be payable, locally.Companies are requested to mention in the deposit
slip, the financial year(s) for which listing fee is being paid. Payment made
through any other slips would not be considered. The above slips will have to
be filled in quadruplicate. One acknowledged copy would be provided to the
depositor by the HDFC Bank.
In case Companies require any further clarifications please contact Shri Sydney
Miranda on 022-22723158 or Shri Rajesh Ghadi on Tel No 022- 22721233 ext. No
8158.
3.0
IPO – Frequently asked Questions
3.1
What is a Follow on Public Offering?
A follow on public offering
(FPO) is when an already listed company makes either a fresh issue of
securities to the public or an offer for sale to the public, through an offer
document. An offer for sale in such scenario is allowed only if it is made to
satisfy listing or continuous listing obligations.
3.2
What is a Rights Issue?
Rights Issue (RI) is when a
listed company which proposes to issue fresh securities to its existing
shareholders as on a record date. The rights are normally offered in a
particular ratio to the number of securities held prior to the issue. This
route is best suited for companies who would like to raise capital without
diluting stake of its existing shareholders unless they do not intend to
subscribe to their entitlements.
3.3
What is a Preferential Issue?
A preferential issue is an
issue of shares or of convertible securities by listed companies to a select
group of persons under Section 81 of the Companies Act, 1956 which is neither a
rights issue nor a public issue. This is a faster way for a company to raise
equity capital. The issuer company has to comply with the Companies Act and the
requirements contained in Chapter pertaining to preferential allotment in SEBI
(DIP) guidelines which inter-alia include pricing, disclosures in notice etc.
3.4
What is SEBI’s Role in an Issue?
Any company making a public
issue or a listed company making a rights issue of value of more than Rs.50
lakhs is required to file a draft offer document with SEBI for its
observations. The company can proceed further on the issue only after getting
observations from SEBI. The validity period of SEBI’s observation letter is
three months only ie. the company has to open its issue within three months
period.
3.5
Does it mean that SEBI recommends an issue?
SEBI does not recommend any
issue nor does take any responsibility either for the financial soundness of
any scheme or the project for which the issue is proposed to be made or for the
correctness of the statements made or opinions expressed in the offer document.
3.6
Does SEBI approve the contents of the issue?
It is to be distinctly
understood that submission of offer document to SEBI should not in any way be
deemed or construed that the same has been cleared or approved by SEBI. The
Lead manager certifies that the disclosures made in the offer document are
generally adequate and are in conformity with SEBI guidelines for disclosures
and investor protection in force for the time being. This requirement is to
facilitate investors to take an informed decision for making investment in the
proposed issue.
3.7
Does SEBI tag make my money safe?
The investors should make an
informed decision purely by themselves based on the contents disclosed in the
offer documents. SEBI does not associate itself with any issue/issuer and
should in no way be construed as a guarantee for the funds that the investor
proposes to invest through the issue. However, the investors are generally
advised to study all the material facts pertaining to the issue including the
risk factors before considering any investment. They are strongly warned
against any ‘tips’ or news through unofficial means.
3.8
What are Disclosures and Investor protection guidelines?
The primary issuances are
governed by SEBI in terms of SEBI (Disclosures and Investor protection)
guidelines. SEBI framed its DIP guidelines in 1992. Many amendments have been
carried out in the same in line with the market dynamics and requirements. In
2000, SEBI issued “Securities and Exchange Board of India (Disclosure and
Investor Protection) Guidelines, 2000” which is compilation of all circulars
organized in chapter forms. These guidelines and amendments thereon are issued
by SEBI India under section 11 of the Securities and Exchange Board of India
Act, 1992. SEBI (Disclosure and investor protection) guidelines 2000 are in
short called DIP guidelines. It provides a comprehensive framework for
issuances buy the companies.
3.9
How does SEBI ensure compliance with Disclosures and Investor protection?
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 while submitting the draft offer
document to SEBI. Any non compliance on their part, attract penal action from
SEBI, in terms of SEBI (Merchant Bankers) Regulations. The draft offer document
filed by Merchant Banker is also placed on the website for public comments.
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.
3.10
With the presence of the Central Listing Authority, what would be the role of
SEBI in the processing of Offer documents for an issue?
The Central Listing
Authority’s , CLA, functions have been detailed under Regulation 8 of SEBI
(Central Listing Authority) Regulations, 2003 (CLA Regulations) issued on
August 21, 2003 and amended up to October 14, 2003. In brief, it covers
processing applications for letter precedent to listing fromapplicants; to make
recommendations to the Board on issues pertaining to the protection of the
interest of the investors in securities and development and regulation of the
securities market, including the listing agreements, listing conditions and
disclosures to be made in offer documents; and; to undertake any other
functions as may be delegated to it by the Board from time to time. SEBI as the
regulator of the securities market examines all the policy matters pertaining
to issues and will continue to do so even during the existence of the CLA.
Since the CLA is not yet operational, the reply to this question would be
updated thereafter.
3.11
What is the difference between an offer document, Red Herring Prospectus, a
prospectus and an abridged prospectus? What does it mean when someone says
“draft offer doc”?
“Offer document” means
Prospectus in case of a public issue or offer for sale and Letter of Offer in
case of a rights issue, which is filed Registrar of Companies (ROC) and Stock
Exchanges. An offer document covers all the relevant information to help an
investor to make his/her investment decision. “Draft Offer document” means the
offer document in draft stage. The draft offer documents are filed with SEBI,
atleast 21 days prior to the filing of the Offer Document with ROC/ SEs. SEBI
may specifies 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.
3.12
What is a Red Herring Prospectus?
Red Herring Prospectus is a
prospectus, which does not have details of either price or number of shares
being offered, or the amount of issue. This means that in case price is not
disclosed, the number of shares and the upper and lower price bands are
disclosed. On the other hand, an issuer can state the issue size and the number
of shares are determined later. An RHP for and FPO can be filed with the RoC
without the price band and the issuer, in such a case will notify the floor
price or a price band by way of an advertisement one day prior to the opening
of the issue. In the case of book-built issues, it is a process of price
discovery and the price cannot be determined until the bidding process is
completed. Hence, such details are not shown in the Red Herring prospectus
filed with ROC in terms of the provisions of the Companies Act. Only on
completion of the bidding process, the details of the final price are included
in the offer document. The offer document filed thereafter with ROC is called a
prospectus.
3.13
What is an Abridged Prospectus?
Abridged Prospectus means
the memorandum as prescribed in Form 2A under sub-section (3) of section 56 of
the Companies Act, 1956. It contains all the salient features of a prospectus.
It accompanies the application form of public issues.
3.14
What does one mean by Lock-in?
Lock-in indicates a freeze
on the shares. SEBI (DIP) Guidelines have stipulated lock-in requirements on
shares of promoters mainly to ensure that the promoters or main persons who are
controlling the company, shall continue to hold some minimum percentage in the
company after the public issue.
3.15
How the word Promoter has been defined?
The promoter has been
defined as a person or persons who are in over-all control of the company, who
are instrumental in the formulation of a plan or programme pursuant to which
the securities are offered to the public and those named in the prospectus as
promoters(s). It may be noted that a director / officer of the issuer company
or person, if they are acting as such merely in their professional capacity are
not be included in the definition of a promoter.
'Promoter Group' includes the promoter, an
immediate relative of the promoter (i.e. any spouse of that person, or any parent,
brother, sister or child of theperson or of the spouse). In case promoter is a
company, a subsidiary or holding company of that company; any company in which
the promoter holds 10% or more of the equity capital or which holds 10% or more
of the equity capital of the Promoter; any company in which a group of
individuals or companies or combinations thereof who holds 20% or more of the
equity capital in that company also holds 20% or more of the equity capital of
the issuer company.
In case the promoter is an
individual, any company in which 10% or more of the share capital is held by
the promoter or an immediate relative of the promoter' or a firm or HUF in
which the 'Promoter' or any one or more of his immediate relative is a member;
any company in which a company specified in (i) above, holds 10% or more, of
the share capital; any HUF or firm in which the aggregate share of the promoter
and his immediate relatives is equal to or more than 10% of the total, and all
persons whose shareholding is aggregated for the purpose of disclosing in the
prospectus "shareholding of the promoter group".
3.16
Who decides the price of an issue?
Indian primary market
ushered in an era of free pricing in 1992. Following this, the guidelines have
provided that the issuer in consultation with Merchant Banker shall decide the
price. There is no price formula stipulated by SEBI. SEBI does not play any
role in price fixation. The company and merchant banker are however required to
give full disclosures of the parameters which they had considered while
deciding the issue price. There are two types of issues one where company and
LM fix a price (called fixed price) and other, where the company and LM
stipulate a floor price or a price band and leave it to market forces to determine
the final price (price discovery through book building process).
3.17
What are Fixed Price offers?
An issuer company is allowed
to freely price the issue. The basis of issue price is disclosed in the offer
document where the issuer discloses in detail about the qualitative and
quantitative factors justifying the issue price. The Issuer company can mention
a price band of 20% (cap in the price band should not be more than 20% of the
floor price) in the Draft offer documents filed with SEBI and actual price can
be determined at a later date before filing of the final offer document with
SEBI / ROCs.
3.18
What does “price discovery through book building process” mean?
“Book Building”
means a process undertaken by which a demand for the securities proposed to be
issued by a body corporate is elicited and built up and the price for the
securities is assessed on the basis of the bids obtained for the quantum of
securities offered for subscription by the issuer. This method provides an
opportunity to the market to discover price for securities.
3.19
How does Book Building work?
Book building is a process
of price discovery. Hence, the Red Herring prospectus does not contain a price.
Instead, the red herring prospectus contains either the floor price of the securities
offered through it or a price band along with the range within which the bids
can move. The applicants bid for the shares quoting the price and the quantity
that they would like to bid at. Only the retail investors have the option of
bidding at ‘cut-off’. After the bidding process is complete, the ‘cut-off’
price is arrived at on the lines of Dutch auction. The basis of Allotment
(Refer Q. 15.j) is then finalized and letters 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.
3.20
What is a price band?
The red herring prospectus
may contain either the floor price for the securities or a price band within
which the investors can bid. The spread between the floor and the cap of the
price band shall not be more than 20%. In other words, it means that the cap
should not be more than 120% of the floor price. The price band can have a
revision and such a revision in the price band shall be widely disseminated by
informing the stock exchanges, by issuing press release and also indicating the
change on the relevant website and the terminals of the syndicate members. In
case the price band is revised, the bidding period shall be extended for a
further period of three days, subject to the total bidding period not exceeding
thirteen days.
3.21
Who decides the price band?
It may be understood that
the regulatory mechanism does not play a role in setting the price for issues.
It is up to the company to decide on the price or the price band, in
consultation with Merchant Bankers. The basis of issue price is disclosed in
the offer document. The issuer is required to disclose in detail about the
qualitative and quantitative factors justifying the issue price.
3.22
What is 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.
3.23
What is reservation on competitive basis?
Reservation on Competitive
Basis is when allotment of shares is made in proportion to the shares applied
for by the concerned reserved categories. Reservation on competitive basis can
be made in a public issue to the Employees of the company, Shareholders of the
promoting companies in the case of a new company and shareholders of group
companies in the case of an existing company, Indian Mutual Funds, Foreign
Institutional Investors (including non resident Indians and overseas corporate
bodies), Indian and Multilateral development Institutions and Scheduled Banks.
3.24
Is there any preference while doing the allotment?
The allotment to the
Qualified Institutional Buyers (QIBs) is on a discretionary basis. The
discretion is left to the Merchant Bankers who first disclose the parameters of
judgment in the Red Herring Prospectus. There are no objective conditions
stipulated as per the DIP Guidelines. The Merchant Bankers are free to set
their criteria and mention the same in the Red Herring Prospectus.
3.25
Who is eligible for reservation and how much? (QIBs, NIIs, etc.,)
In a book built issue
allocation to Retail Individual Investors (RIIs), Non Institutional Investors
(NIIs) and Qualified Institutional Buyers (QIBs) is in the ratio of 35: 15: 50
respectively. 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
SCRR, the respective figures are 30% for RIIs and 10% for NIIs. This is a
transitory provision pending harmonization of the QIB allocation in terms of
the aforesaid Rule with that specified in the guidelines.
3.26
How is the Retail Investor defined as?
‘Retail individual investor’
means an investor who applies or bids for securities of or for a value of not
more than Rs.1, 00,000.
3.27
Can a retail investor also bid in a book-built issue?
Yes. He can bid in a
book-built issue for a value not more than Rs.1,00,000. Any bid made in excess
of this will be considered in the HNI category.
3.28
Where can I get a form for applying/ bidding for the shares?
The form for
applying/bidding of shares is available with all syndicate members, collection
centers, the brokers to the issue and the bankers to the issue.
3.29
What is the amount of faith that I can lay on the contents of the documents?
And whom should I approach if there are any lacunae?
The document is prepared by
an independent specialized agency called Merchant Banker, which is registered
with SEBI. They are required to do through due diligence while preparing an
offer document. The draft offer document submitted to SEBI is put on website
for public comments. In case, you have any information about the issuer or its
directors or any other aspect of the issue, which in your view is not factually
reflected, you may send your complaint to Lead Manager to the issue or to SEBI,
Division of Issues and Listing.
3.30
Is it compulsory for me to have a Demat Account?
As per the requirement, all
the public issues of size in excess of Rs.10 crore, are to made compulsorily in
the demat more. Thus, if an investor chooses to apply for an issue that is
being made in a compulsory demat mode, he has to have a demat account and has
the responsibility to put the correct DP ID and Client ID details in the
bid/application forms.
3.31 What is the procedure for getting a demat
account?
The FAQs relating to demat
have been covered in the Investor Education section of the SEBI website in a
separate head. They are available on the
http://investor.sebi.gov.in/faq/dematfaq.html.
3.32
What are the dos and don’ts for bidding / applying in the issue?
The investors are generally
advised to study all the material facts pertaining to the issue including the
risk factors before considering any investment. They are strongly warned
against any ‘tips’ or relying on news obtained through unofficial means.
3.33
How many days is the issue open?
As per Clause 8.8.1,
Subscription list for public issues shall be kept open for at least 3 working
days and not more than 10 working days. In case of Book built issues, the
minimum and maximum period for which bidding will be open is 3–7 working days
extendable by 3 days in case of a revision in the price band. The public issue
made by an infrastructure company, satisfying the requirements in Clause 2.4.1
(iii) of Chapter II may be kept open for a maximum period of 21 working days.
As per clause 8.8.2., Rights issues shall be kept open for at least 30 days and
not more than 60 days.
3.34
Can I change/revise my bid?
Yes. The investor 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 of revising the bids shall be completed within the date of
closure of the issue.
3.35
What proof can bidder request 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. The
investor can retain this as a sufficient proof that the bids have been taken
into account.
3.36
Can I know the number of shares that would be allotted to me?
In case of fixed price
issues, the investor is intimated about the CAN/Refund order within 30 days of
the closure of the issue. In case of book built issues, the basis of allotment
is finalized by the Book Running lead Managers within 2 weeks from the date of
closure of the issue. The registrar then ensures that the demat credit or
refund as applicable is completed within 15 days of the closure of the issue.
The listing on the stock exchanges is done within 7 days from the finalization
of the issue.
3.37
Which are the reliable sources for me to get information about response to
issues?
In the case of book-built
issues, the exchanges (BSE/NSE) display the data regarding the bids obtained
(on a consolidated basis between both these exchanges). The data regarding the
bids is also available category wise. After the price has been determined on
the basis of bidding, the statutory public advertisement containing, inter
alia, the price as well as a table showing the number of securities and the
amount payable by an investor, based on the price determined, is issued.
3.38
How do I know if I am allotted the shares? And by what timeframe will I get a
refund if I am not allotted?
The investor is entitled to
receive a Confirmatory Allotment Note (CAN) in case he has been allotted shares
within 15 days from the date of closure of a book Built issue. The registrar
has to ensure that the demat credit or refund as applicable is completed within
15 days of the closure of the book built issue.
3.39
How long will it take after the issue for the shares to get listed?
The listing on the stock
exchanges is done within 7 days from the finalization of the issue. Ideally, it
would be around 3 weeks after the closure of the book built issue. In case of
fixed price issue, it would be around 37 days after closure of the issue.
3.40
How does one come to know about the issues on offer? And from where can I get
copies of the draft offer document?
SEBI issues press releases
every week regarding the draft offer documents received and observations issued
during the period. The draft offer documents are put up on the website under
Reports/Documents section. The final offer documents that are filed with
SEBI/ROC are also put up for information under the same section. Copies of the
draft offer documents in hard copy form may be obtained from the office of
SEBI, Mittal Court, ‘A’ wing, Ground Floor, 224, Nariman Point, Mumbai – 400021
on a payment of Rs.100 or from SES, LMs etc. The soft copies can be downloaded
from the SEBI website under Reports/Documents section. Some LMs also make it
available on their web sites for download. The final offer documents that are
filed with SEBI/ROC can also be downloaded from the same section of the
website.
3.41
Who are the intermediaries in an issue?
Merchant Bankers to the
issue or Book Running Lead Managers (BRLM), syndicate members, Registrars to
the issue, Bankers to the issue, Auditors of the company, Underwriters to the
issue, Solicitors, etc. are the intermediaries to an issue. The issuer
discloses the addresses, telephone/fax numbers and email addresses of these
intermediaries. In addition to this, the issuer also discloses the details of
the compliance officer appointed by the company for the purpose of the issue.
3.42
Who is eligible to be a BRLM?
A Merchant banker possessing
a valid SEBI registration in accordance with the SEBI (Merchant Bankers)
Regulations, 1992 is eligible to act as a Book Running Lead Manager to an
issue.
3.43
What is the role of a Lead Manager? (Pre and post issue)
In the pre-issue process,
the Lead Manager (LM) takes up the due diligence of company’s operations/
management/ business plans/ legal etc. Other activities of the LM include
drafting and design of Offer documents, Prospectus, statutory advertisements
and memorandum containing salient features of the Prospectus. The BRLMs shall
ensure compliance with stipulated requirements and completion of prescribed
formalities with the Stock Exchanges, RoC and SEBI including finalisation of
Prospectus and RoC filing. Appointment of other intermediaries viz.,
Registrar(s), Printers, Advertising Agency and Bankers to the Offer is also
included in the pre-issue processes.
The LM also draws up the various marketing
strategies for the issue. The post issue activities including management of
escrow accounts, coordinate non-institutional allocation, intimation of
allocation and dispatch of refunds to bidders etc are performed by the LM. The
post Offer activities for the Offer will involve essential follow-up steps,
which include the finalization of trading and dealing of instruments and
dispatch of certificates and demat of delivery of shares, with the various
agencies connected with the work such as the Registrar(s) to the Offer and
Bankers to the Offer and the bank handling refund business. The merchant banker
shall be responsible for ensuring that these agencies fulfill their functions
and enable it to discharge this responsibility through suitable agreements with
the Company.
3.44
What is the role of a registrar?
The Registrar finalizes the
list of eligible allottees after deleting the invalid applications and ensures
that the corporate action for crediting of shares to the demat accounts of the
applicants is done and the dispatch of refund orders to those applicable are
sent. The Lead manager coordinates with the Registrar to ensure follow up so
that that the flow of applications from collecting bank branches, processing of
the applications and other matters till the basis of allotment is finalized,
dispatch security certificates and refund orders completed and securities
listed.
3.45
What is the role of bankers to the issue?
Bankers to the issue, as the
name suggests, carries out all the activities of ensuring that the funds are
collected and transferred to the Escrow accounts. The Lead Merchant Banker
shall ensure that Bankers to the Issue are appointed in all the mandatory
collection centers as specified in DIP Guidelines. The LM also ensures
follow-up with bankers to the issue to get quick estimates of collection and
advising the issuer about closure of the issue, based on the correct figures.
3.46
What is the recourse available to the investor in case of issue complaints?
Most of the issue complaints
pertain to non-receipt of refund or allotment, or delay in receipt of refund or
allotment and payment of interest thereon. These complaints shall be made to
the post issue Lead Manager, who in turn will take up the matter with registrar
to redress the complaints. In case the investor does not receive any reply
within a reasonable time, investor may complain to SEBI, Office of investors
Assistance
3.47
Where do I get data on primary issues? (Issuer, total issues, issue size, the
intermediaries, etc., during a given period)
SEBI brings out a monthly
bulletin that is available off the shelf at bookstores. A digital version of
the same is available on the SEBI website under the “News/Publications”
section. The Bulletin contains all the relevant historical figures of intermediary
issue and intermediary particulars during the given period placed against
historical figures.
3.48
What are the relevant regulations and where do I find them?
The SEBI Manual is SEBI
authorized publication that is a comprehensive databank of all relevant Acts,
Rules, Regulations and Guidelines that are related to the functioning of the
Board. The details pertaining to the Acts, Rules, Regulations, Guidelines and
Circulars are placed on the SEBI website under the “Legal Framework” section. The
periodic updates are uploaded onto the SEBI website regularly.
3.49
What are Risk Factors?
Here, the issuer’s
management gives its view on the Internal and external risks faced by the
company. Here, the company also makes a note on the forward-looking statements.
This information is disclosed in the initial pages of the document and it is
also clearly disclosed in the abridged prospectus. It is generally advised that
the investors should go through all the risk factors of the company before
making an investment decision.
3.50
What is an Introduction?
The introduction covers a
summary of the industry and business of the issuer company, the offering
details in brief, summary of consolidated financial, operating and other data.
General Information about the company, the merchant bankers and their
responsibilities, the details of brokers/syndicate members to the Issue, credit
rating (in case of debt issue), debenture trustees (in case of debt issue),
monitoring agency, book building process in brief and details of underwriting
Agreements are given here. Important details of capital structure, objects of
the offering, funds requirement, funding plan, schedule of implementation,
funds deployed, sources of financing of funds already deployed, sources of financing
for the balance fund requirement, interim use of funds, basic terms of issue,
basis for issue price, tax benefits are covered.
3.51
What is About us?
This presents a review of on
the details of the business of the company, business strategy, competitive
strengths, insurance, industry-regulation (if applicable), history and
corporate structure, main objects, subsidiary details, management and board of
directors, compensation, corporate governance, related party transactions,
exchange rates, currency of presentation dividend policy and management's
discussion and analysis of financial condition and results of operations are
given.
3.52
What is a Financial Statement?
Financial statement, changes
in accounting policies in the last three years and differences between the
accounting policies and the Indian Accounting Policies (if the Company has
presented its Financial Statements also as per Either US GAAP/IAS are
presented.
3.53
What are Legal and other information?
Outstanding litigations and
material developments, litigations involving the company and its subsidiaries,
promoters and group companies are disclosed. Also material developments since
the last balance sheet date, government approvals/licensing arrangements,
investment approvals (FIPB/RBI etc.), all government and other approvals,
technical approvals, indebtedness, etc. are disclosed.
3.54
What is a Green-shoe Option?
Green Shoe option means an
option of allocating shares in excess of the shares included in the public
issue and operating a post-listing price stabilizing mechanism for a period not
exceeding 30 days in accordance with the provisions of Chapter VIIIA of DIP
Guidelines, which is granted to a company to be exercised through a Stabilizing
Agent. This is an arrangement wherein the issue would be over allotted to the
extent of a maximum of 15% of the issue size. From an investor’s perspective,
an issue with green shoe option provides more probability of getting shares and
also that post listing price may show relatively more stability as compared to
market.
3.55 What is an e-IPO?
A company proposing to issue
capital to public through the on-line system of the stock exchange for offer of
securities can do so if it complies with the requirements under Chapter 11A of
DIP Guidelines. The appointment of various intermediaries by the issuer
includes a prerequisite that such members/registrars have the required
facilities to accommodate such an online issue process.
3.56
What is Safety Net?
Any safety net scheme or
buy-back arrangements of the shares proposed in any public issue shall be
finalized by an issuer company with the lead merchant banker in advance and
disclosed in the prospectus. Such buy back or safety net arrangements shall be
made available only to all original resident individual allottees limited up to
a maximum of 1000 shares per allottee and the offer is kept open for a period
of 6 months from the last date of dispatch of securities. The details regarding
Safety Net are covered under Clause 8.18 of DIP Guidelines.
3.57 Who is a Syndicate Member?
The Book Runner(s) may
appoint those intermediaries who are registered with the Board and who are
permitted to carry on activity as an ‘Underwriter’ as syndicate members. The
syndicate members are mainly appointed to collect and entire the bid forms in a
book built issue.
3.58
What is Open book/closed book?
Presently, in issues made
through book building, Issuers and merchant bankers are required to ensure
online display of the demand and bids during the bidding period. This is the
Open book system of book building. Here, the investor can be guided by the
movements of the bids during the period in which the bid is kept open. Under
closed book building, the book is not made public and the bidders will have to
take a call on the price at which they intend to make a bid without having any
information on the bids submitted by other bidders.
3.59
What is hard underwriting?
Hard underwriting is when an
underwriter agrees to buy his commitment at its earliest stage. The underwriter
guarantees a fixed amount to the issuer from the issue. Thus, in case the
shares are not subscribed by investors, the issue is devolved on underwriters
and they have to bring in the amount by subscribing to the shares. The
underwriter bears a risk which is much higher in soft underwriting.
3.60
What is soft underwriting?
Soft underwriting is when an
underwriter agrees to buy the shares at later stages as soon as the pricing
process is complete. He then, immediately places those shares with
institutional players. The risk faced by the underwriter as such is reduced to
a small window of time. Also, the soft underwriter has the option to invoke a
force Majeure (acts of God) clause in case there are certain factors beyond the
control that can affect the underwriter’s ability to place the shares with the
buyers.
3.61
What is a Cut off Price?
In Book building issue, the
issuer is required to indicate either the price band or a floor price in the
red herring prospectus. The actual discovered issue price can be any price in
the price band or any price above the floor price. This issue price is called
“Cut off price”. This is decided by the issuer and LM after considering the
book and investors’ appetite for the stock. SEBI (DIP) guidelines permit only
retail individual investors to have an option of applying at cut off price.
3.62
What is Differential pricing?
Pricing of an issue where
one category is offered shares at a price different from the other category is
called differential pricing. In DIP Guidelines differential pricing is allowed
only if the security to applicants in the firm allotment category is at a price
higher than the price at which the net offer to the public is made. The net
offer to the public means the offer made to the Indian public and does not
include firm allotments or reservations or promoters’ contributions.
3.63 What is Basis of Allocation/Basis of
Allotment?
After the closure of the
issue, the bids received are aggregated under different categories i.e., firm
allotment, Qualified Institutional Buyers (QIBs), Non-Institutional Buyers
(NIBs), Retail, etc. The oversubscription ratios are then calculated for each
of the categories as against the shares reserved for each of the categories in
the offer document. Within each of these categories, the bids are then
segregated into different buckets based on the number of shares applied for.
The oversubscription ratio is then applied to the number of shares applied for
and the number of shares to be allotted for applicants in each of the buckets is
determined. Then, the number of successful allottees is determined. This
process is followed in case of proportionate allotment. In case of allotment
for QIBs, it is subject to the discretion of the post issue lead manager.
3.64 Who is Qualified Institutional Buyer (QIBs)?
Qualified Institutional
Buyers are those institutional investors who are generally perceived to possess
expertise and the financial muscle to evaluate and invest in the capital
markets. In terms of clause 2.2.2B (v) of DIP Guidelines, a ‘Qualified
Institutional Buyer’ shall mean:
a. Public financial
institution as defined in section 4A of theCompanies Act, 1956;
b. Scheduled commercial
banks;
c. Mutual funds;
d. Foreign institutional
investor registered with SEBI;
e. Multilateral and
bilateral development financial institutions;
f. Venture capital funds
registered with SEBI.
g. Foreign Venture capital
investors registered with SEBI.
h. State Industrial
Development Corporations.
i. Insurance Companies
registered with the Insurance Regulatoryand Development Authority (IRDA).
j. Provident Funds with
minimum corpus of Rs.25 crores
k. Pension Funds with
minimum corpus of Rs. 25 crores)
These entities are not
required to be registered with SEBI as QIBs. Any entities falling under the
categories specified above are considered as QIBs for the purpose of
participating in primary issuance process.
4.0
Useful Links
1) Securities
and Exchange Board of India-
http://www.sebi.gov.in/
- National Stock Exchange of India
Limited- http://www.nse-india.com/
- Ahmedabad Stock Exchange- http://www.aseindia.org/
- Bombay
Stock Exchange Limited- http://www.bseindia.com/
- Calcutta
Stock Exchange – http://cse-india.com/
- Cochin
Stock Exchange Limited- http://www.cochinstockexchange.com/
- Coimbatore
Stock Exchange Limited- http://www.coimbatore.com/csx/csx.htm
- Inter-connected Stock Exchange of India Ltd.-
http://www.iseindia.com/
- Saurashtra Kutch Stock Exchange Limited -
http://www.sksesl.com/sksesl.htm
