Saturday, 17 December 2011

Important Changes in Security Law and Compliance for CS Executive Programme December 2011


 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.  

A further 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.  

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.  

Bonus  issue  :  When  an  issuer  makes  an  issue  of  securities  to  its  existing shareholders as on a record date, without any consideration from them, it is called a bonus issue. The shares are issued out of the Company’s free reserve or share premium account in a particular ratio to the number of securities held on a record date.  

A private placement is an issue of shares or of convertible securities by a company 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.  

A private placement of shares or of convertible securities by a listed company is generally known by name of preferential allotment. A listed company going for preferential allotment has to comply with the requirements contained in Chapter VII  of SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009  . 

 “Qualified Institutions Placement” means allotment of eligible securities by a listed issuer to qualified institutional buyers on private placement basis in terms of SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009  

Regulatory Framework 
Public issue is mainly governed by the following legislations/regulations/rules:  
1.   The Companies Act, 1956 
2.   Securities Contracts (Regulation) Act, 1956  
3.   Foreign Exchange Management Act, 1999  
4.   Securities Contracts Regulation (Rules) 1957  
5.   SEBI (ICDR) Regulations 2009 
6.   Listing Agreement    


   This replaces the older SEBI (Disclosure and Investor Protection) Guidelines, 2000   

Applicability of ICDR Regulations   

These regulations shall apply to the following:  

(a)        a public issue;  (b)      a rights issue, where the aggregate value of specified securities offered is fifty lakh rupees or more;  (c)            a preferential issue;  (d)         an issue of bonus shares by a listed issuer;  (e)a qualified institutions placement by a listed issuer;  (f)     an issue of Indian Depository Receipts.  

Major Changes from earlier SEBI (Disclosure and Investor Protection) Guidelines, 2000   
·     75% book building method discontinued. Now book building can only be 100%
·     Reservation on competitive basis discontinued for Indian and Multilateral development financial Institutions, Indian Mutual funds, Foreign Institutional Investors, Scheduled Banks and promoters of companies
·     Allotment/refund period is now 15 days for book building and fixed price issues
·     Disclosure of price no more required in draft prospectus of fixed price issues also
·     Transfer of money in surplus of Green Shoe Option bank account now to be made to Investor Protection and Education Fund of SEBI instead of funds maintained by respective stock exchanges earlier
·     Monitoring of bigger issues can be made by Public Financial Institutions or Scheduled Commercial Banks
·     Maximum issue period of 10 days made applicable for all companies
·     Advertisement to contain risk factors only if the advertisement is not according to prescribed format
·     Compulsory conversion of all outstanding convertible instruments before a public issue
·     Promoters’ contribution can only be brought in by promoters whose identity, photograph etc. are disclosed in offer document
·     Pre-issue advertisement to be issued only after filing of prospectus with ROC

Refer ICSI Study material for
Eligibility Requirements For IPO

The following are the conditions for making initial public offer  

(a)  The issuer has net tangible assets of at least three crore rupees in each of the preceding three full years (of twelve months each), of which not more than fifty per cent are held in monetary assets  and  if more than fifty per cent of the net tangible  assets  are  held  in  monetary  assets,  the  issuer  has  made  firm commitments to utilise such excess monetary assets in its business or project;   

(b)  it  has  a  track  record  of  distributable  profits  in  terms  of  section  205  of  the Companies Act, 1956, for at least three out of the immediately preceding five years, excluding extraordinary items   

(c)  it has a net worth of at least one crore rupees in each of the preceding three full years (of twelve months each);   

d)  the aggregate of the proposed issue and all previous issues made in the same financial year in terms of issue size does not exceed five times its pre-issue net worth as per the audited balance sheet of the preceding financial year;  

(e)  if it has changed its name within the last one year, at least fifty per cent of the revenue for the preceding one full year has been earned by it from the activity indicated by the new name.  

 If the above conditions are not satisfied, the issuer may make public offer, if   

(a)  (i)the  issue  is  made  through  the  book  building  process  and  the  issuer undertakes to allot at least fifty per cent of the net offer to public to qualified institutional buyers and to refund full subscription monies if it fails to make allotment to the qualified institutional buyers;
(ii)at least fifteen per cent. of the cost of the project is contributed by scheduled commercial banks or public financial institutions, of which not less than ten per cent. shall come from the appraisers and the issuer undertakes to allot at least ten per cent. of the net offer to public to qualified institutional buyers and to refund full subscription monies if it fails to make the allotment to the qualified institutional buyers;                                                                      

(b)  (i)   the minimum post-issue face value capital of the issuer is ten crorerupees; or  
(ii)   the issuer undertakes to provide market-making for at least two years from the date of listing of the specified securities, subject to the following: 
(A)  the market makers offer buy and sell quotes for a minimum depth of three hundred specified securities and ensure that the bid-ask spread for their quotes does not, at any time, exceed ten per cent;  
(B)  the inventory of the market makers, as on the date of allotment of the specified securities, shall be at least five per cent  of the proposed issue.   

Who are not Eligible ?   

(a)  if the issuer, any of its promoters, promoter group or directors or persons in control of the issuer are debarred from accessing the capital market by the Board;   

(b)  if any of the promoters, directors or persons in control of the issuer was or also is a promoter, director or person in control of any other company which is debarred from accessing the capital market under any order or directions made by the Board;   

(c)  if the issuer of convertible debt instruments is in the list of wilful defaulters published by the Reserve Bank of India or it is in default of payment of interest or repayment of principal amount in respect of debt instruments issued by it to the public, if any, for a period of more than six months;  

(d)  unless it has made an application to one or more recognised stock exchanges for listing of specified securities on such stock exchanges and has chosen one of them as the designated stock exchange: Provided that in case of an initial public offer, the issuer shall make an application for listing of the specified securities in at least one recognised stock exchange having nationwide trading terminals;  

 (e)  unless it has entered into an agreement with a depository for dematerialisation of specified securities already issued or proposed to be issued;  

 (f)   unless all existing partly paid-up equity shares of the issuer have either been fully paid up or forfeited;   
(g)  unless firm arrangements of finance through verifiable means towards seventy five percent of the stated means of finance, excluding the amount to be raised through the proposed public issue or rights issue or through existing identifiable internal accruals, have been made.   

Major IPO Compliances under SEBI(ICDR) Regulations 2009  

1.   Appointments of Intermediaries 
—   Appoint  one/more merchant bankers to carry out the obligations relating the issue
—   Appoint SEBI registered intermediaries in consultation with lead merchant banker
 —   Appoint syndicate member in respect of issue through book building
—   Appoint registrars who has connectivity with both depositories.(ie NSDL/CDSL). 
—  Ensure that the lead merchant banker is not acting as registrar to the issue in which it is also handling post issue obligations. 
— Ensure that in case of book built issue lead merchant banker and lead book runner are not different persons.  

2.   Filings/approvals/submissions  
—   Draft offer document to be filed with SEBI at least thirty days  prior  to  registering  a  prospectus,  red  herring  prospectus  or  shelf prospectus with ROC
—   Draft offer document to be made available to the public for at least 21 days from the date of such filing with SEBI. 

—   Statement on the comments received from public on draft offer document should be filed with SEBI. 

—   Observations/suggestions  of  SEBI  on  draft  offer documents should be carried out while registering of prospectus with ROC. 

—   Copy of letter of offer to be filed with SEBI and with stock exchanges where the securities are proposed to be listed, simultaneously while registering the prospectus with ROC /before opening of the issue. 

—   The company should obtain in-principle approval in respect of IPO/FPO from all the exchanges where the securities are proposed to be listed.

The information contained in the offer document and particulars as per audited financial statements in the offer document should not be more than six months old  from the opening of the issue. 

3.   Pre issue-Due Diligence Certificates  

The  lead merchant bankers should submit die diligence certificate with SEBI at the time of 

(a)  filing of draft offer document with SEBI 
(b)  At the time of Registering prospectus with ROC 
(c)  Immediately before opening of the issue 
(d)  After the opening of the issue and before its closure before it closes for subscription.  

4.   Time limiton opening of issue  

Ensure that subject to compliance of Section 60(4) of the Companies Act, 1956, public/rights issue is opened within -

(i)                Twelve months from the date of issuance of observations from the SEBI on draft offer document or  
(ii)              Within three months from the later of the following dates if there are no observations.  (a)  Draft of Receipt of draft offer document by SEBI (b)  Date of receipt of satisfactory reply from the lead merchant bankers, where the SEBI has sought for any clarification (c)  Date  of  receipt  of  clarification  or  information  from  any  regulator  or agency, where the SEBI has sought for any such clarification/information (d)  Date of receipt of a copy of in-principle approval letter issued by the recognized stock exchanges.  
(iii)            In case of Fast Track issues the issue shall be opened within 90 days from the registration of prospectus with ROC.  
(iv)             In case of Shelf prospectus, the first issue may be opened within 3 months from the date of observation of SEBI.  

5.   Dispatch of offer documents and other materials  

The  offer  document  and  other  issue  related  instruments  to be dispatched to Bankers, Syndicate Members, underwriters etc in advance.  

6.   Underwriting for issue through book building  
The issue through book building route to be underwritten 

7.   Minimum Subscription  
The company should receive minimum subscription of 90% of the offer.  

8.   Minimum allottees  
Thenumber of prospective allotteesshould be at least one thousand.   

9.   Monitoring agency  
The issue size of more than 500 croresto be monitored by a Pubic Financial Institution or by one of the scheduled commercial banks named in the offer document as bankers of the issuer.  

10.   Time limitation for receiving the call money  
If made in calls, the outstanding subscription money should becalled within 12 months from the date of allotment.  

11.   Time limit for allotment or refund of Subscription money  
The securities to be allotted and the excess amounts to be refunded within 15 days from the closure of the offer.  

12.   Pricing
 —   Norms relating to price/price band, cap on price banks to be complied with. 
—   The pricing norms to be complied with respect to differential pricing 
—   In book building, the maximum price should not be more than 120% of the floor price  
Promoters Contribution & restriction on transferability of their securities 
 —   Minimum promoters’ contribution should be
(a)  in case of an initial public offer, not less than twenty per cent of the post issue capital;  
(b)  in case of a further public offer, either to the extent of twenty per cent of the proposed issue size or to the extent of twenty per cent of the post-issue capital;  
(c)  in case of a composite issue, either to the extent of twenty per cent of the proposed issue size or to the extent of twenty per cent of the post- issue capital excluding the rights issue component.  
—   Ensure that the promoters contribution is kept in an escrow account with a scheduled banks and shall be released  to the issuer along with the release of issue proceeds.  
—   Thesecurities ineligible for promoters contribution should not be included while calculating the above limits.  
—   Minimum promoters contribution and excess promoters contribution to be locked in for 3 years and one year respectively.  

For the computation of minimum promoters’ contribution, the following specified securities(Equity Shares and Convertible Securities)shall not be eligible:  

(a)  specified securities acquired during the preceding three years, if they are: 

(i)                 acquired for consideration other than cash and revaluation of assets or capitalisation of intangible assets is involved in such transaction; or 
(ii)               resulting from a bonus issue by utilisation of revaluation reserves or unrealized profits of the issuer or from bonus issue against equity shares which are ineligible for minimum promoters’ contribution;  

(b)  Specified securities acquired by promoters during the preceding one year at a price lower than the price at which specified securities are being offered to public in the initial public offer subject to certain exemptions specified.  

(c)  Specified securities allotted to promoters during the preceding one year at a price less than the issue price, against funds brought in by them during that period, in case of an issuer formed by conversion of one or more partnership firms, where the partners of the erstwhile partnership firms are the promoters of the issuer and there is no change in the management:  

(d)  Specified securities pledged with any creditor.  

14.   Other lock in requirements  

—   Ensure that the pre-issue capital held by personsother than promoters is subject  to  lockin  for  the  period  of  one  year  from  the  date  of  allotment, subject to specified exemptions.  

—   Transferability of lock in shares  may be transferred to another promoter

15.   Minimum offer to the Public  

Subject to the provisions of sub-clause (b) of clause (2) of rule 19 of Securities Contracts (Regulations) Rules, 1957, check the net offer to public: 

(a)  in case of an initial public offer, is  at least ten per cent or twenty five per cent of the post-issue capital, as the case may be; and  

(b)  in case of a further public offer, is  at least ten per cent or twenty five per cent of the issue size, as the case may be.  

However Government companies and infrastructure Companies are exempted from these provisions subject to exceptions.  

16.   Reservation on Competitive Basis  

—   For issue made through the book building process 

(1)  In case of an issue made through the book building process, the issuer may make reservation on competitive basis out of the issue size excluding promoters’ contribution and net offer to public in favour of the following categories of persons: 

(a)  employees  of  the  issuer  including  employees  of  the  promoting companies in case of a new issuer; 
(b)  shareholders (other than promoters) of: 
(i)   listed promoting companies, in case of a new issuer; and 
(ii)   listed group companies, in case of an existing issuer: 
(c)  persons who, as on the date of filing the draft offer document with the Board, are associated with the issuer as depositors, bondholders or subscribers to services of the issuer making an initial public offer: 

—   For issue made other than through the book building process in favour of thefollowing categories of persons: 

(a)  employees of the issuer including employees of the promoting companies in case of a new issuer; 
(b)  shareholders (other than promoters) of: 
(i)   listed promoting companies, in the case of a new issuer; and 
(ii)   listed group companies, in the case of an existing issuer:  

The following persons  arenot eligible for reservations as above. 

(a)  In case of promoting companies being financial institutions or state and central  financial institutions, the shareholders of such promoting companies 
(b)  In case of issue made through book building process, the issue management team, syndicate members, their promoters, directors and employees and for the group or associate companies of the issue management team and syndicate members and their promoters, directors and employees;  

16.   Allocation of net offer to public  

In case of issue through book building :  

(i)                 Not less than 35% to Retail individual investors 
(ii)               Not less than 15% to non-institutional investors 
(iii)             Not more than 50% to qualified institutional buyers and 5% of which shall be allocated to mutual funds(up to 35% of the portion available for allocation of qualified institutional buyers may be allocated to anchor investor)  However at least 50% of net offer is to be allocated to qualified institutional buyers if an issuer has not satisfied the basic eligibility criteria and undertakes to allot so.

In case of issue other than book building :  

(i)                 Minimum 50% to retail individual investors and 
(ii)               Remaining to individual applicants other than retail individual investors and Other investors including corporate bodies or institutions, irrespective of the number of securities applied for.  

17.   Period of subscription  

Ensure that the public issue is kept open at least for three working days but nor mote than ten working days including the days for which the issue is kept open in case of revision in price band.  

18.   Advertisements  

—   Pre issue  

After registering the red herring prospectus (in case of a book built issue) or prospectus (in case of fixed price issue) with the Registrar of Companies Company shall make a pre-issue advertisement in the prescribed format and with required disclosures, in one English national daily newspaper with wide circulation, Hindi national daily newspaper with wide circulation and one regional language newspaper with wide circulation at the place where the registered office of the issuer is situated. 

 —   Issue opening and closing 

The advertisement on issue opening and closing to be made in the specified format.  

—   Post issue advertisement 

Company to make advertisement giving details relating to oversubscription, basis of allotment, number, value and percentage of all applications including ASBA,  number,  value  and  percentage  of  successful  allottees  for  all applications including ASBA, date of completion of dispatch of refund orders or instructions to Self Certified Syndicate Banks by the Registrar, date of dispatch of certificates and date of filing of listing application, etc. is released within ten days from the date of completion of the various activities

 19.   Minimum Application Value  
Ensure that Minimum application Value is kept between Rs.5000 to Rs. 7000.  

20.   Allotment procedure and basis of allotment  

The allotment of specified securities to applicants other than anchor investors shall be on proportionate basis within the specified investor categories and the number of securities allotted shall be rounded off to the nearest integer, subject to minimum allotment being equal to the minimum application size as determined and disclosed by the issuer  

21.   Appointment of Compliance officer 
The  issuer  shall  appoint  a  compliance  officer  who  shall  be  responsible  for monitoring the compliance of the securities laws and for redressal of investors’ grievances.  

22.   Redressal of investor grievances  

The post-issue lead merchant bankers shall actively associate himself withpost-issue activities such as allotment, refund, despatch and giving instructionsto syndicate members, Self Certified Syndicate Banks and other intermediariesand shall regularly monitor redressal of investor grievances arising therefrom.  

23.   Post issue diligence  

(1)  The lead merchant bankers shall exercise due diligence and satisfy himself about all the aspects of the issue including the veracity and adequacy of disclosure in the offer documents.  

(2)  The lead merchant bankers shall call upon the issuer, its promoters or directors or in case of an offer for sale, the selling shareholders, to fulfil their obligations as disclosed by them in the offer document and as required in terms of these Regulations.  

(3)  The post-issue merchant banker shall continue to be responsible for post- issue activities till the subscribers have received the securities certificates, credit to their demat account or refund of application moneys and the listing agreement is entered into by the issuer with the stock exchange and listing/ trading permission is obtained.  

(4)  The responsibility of the lead merchant banker shall continue even after the completion of issue process.  

24.   Post issue Reports  

The lead merchant banker shall submit post-issue reports as follows:  

(a)  initial post issue report in specified form within three days of closure of the Issue  
(b)  final post issue report in specified format within fifteen days of the date of finalisation of basis of allotment or within fifteen days of refund of money in case of failure of issue. The lead merchant banker shall also submit a due diligence certificate in the specified format along with the final post issue report.  

SEBI (Delisting of Equity Shares) regulations, 2009
The market regulator securities and exchange board of India (Sebi) has notified the Sebi (Delisting of Equity Shares) regulations, 2009, which would govern the normal guidelines to be followed by a company for delisting its shares from a stock exchange.
The delisting should be by reverse book building and minimum offer price for delisting shall be higher of the following 2 –
1.      The average of the weekly high and low of the closing prices during the last twenty six weeks
2.      Average of high and low of two weeks
Major Highlights of The SEBI (Delisting of Equity Shares) regulations, 2009 are as follows:-
Non permissibility of delisting: The companies cannot delist their securities from the Exchanges pursuant to buyback and preferential allotment. Any instruments pending conversion into equity shares cannot be delisted.

No shareholders approval, in case the company continues to remain listed at any of the exchanges having nationwide trading terminal i.e. BSE and/ or NSE or any other Exchange specified in this behalf.

The Stock Exchanges have also been held liable for speedy and timely disposal of applications. The exchanges have to dispose off the application seeking delisting/ in principal approval within 30 working days from the date of receipt of application complete in all respect.

In Principle Approval: In cases where an Exit Opportunity is required to be given to the Public, the Company will have to now take the in principal approval from the concerned Exchange(s).

Specified Date: The concept of Specified Date has been introduced, which shall not be later than 30 working days from the date of the Public Announcement.

Validity of the Special Resolution: The special resolution passed for the delisting giving exit option to the shareholders will be valid for a period of 1 year

Special Resolution by way of Postal Ballot: The shareholders approval should be sought from the shareholders via postal ballot in case  the exit opportunity be given to the shareholders. The votes cast by the  public shareholders in favour of the delisting proposal should be atleast  2 times of numbers cast against it.

Offer Document & Offer Period: The Opening Date of the Offer  should not be later than 55 working days from the Public Announcement. The  Offer should remain open for a minimum period of 3 working days and a  maximum of 5 working days.

Promoters/ PAC not allowed to participation in bidding

Promoters’ option of not accepting the Offer Price: Under the  Regulations, the Promoters are not bound to accept the Offer Price, as may  be determined by the Book Building Process.

Successful Exit Offer: Under the Regulations, to get delisted,  post offer, the Promoter holding should reach the higher of the following:90% of total issued shares of that class; or  (pre offer promoter holding +50% of the Offer Size), otherwise the offer  shall be deemed to have failed.

Validity period of the Exit Price: Under the Regulations, the  final exit price to remain open for a period of 1 year from the date of  delisting, for the remaining shareholders who have not exercised the option at the time the offer is open.

Repercussions of Compulsory Delisting: The promoters, the whole  time directors, and the companies which are promoted by any of them shall  not directly or indirectly access the securities market or seek listing  for 10 years.

Special Exemptions for Small Companies: Small companies having a  paid up capital of uptoRs. 1 crore or having less than equal to 300  shareholders and holding not more than Rs. 1 crore, they need not to follow  Reverse book building process.

Cooling period for Relisting: In case of voluntary delisting: 5 years; and In case of Compulsory Delisting: 10 years


ECB guidelines are rationalized and liberalized as under: -
(i)     Enhancement of ECB limit under the automatic route:

(a) Eligible borrowers in real sector-industrial sector-infrastructure sector can avail of ECB up to USD 750 million or equivalent per financial year under the automatic route as against the present limit of USD 500 million or equivalent per financial year.
(b) Corporate in specified service sectors viz. hotel, hospital and software, can avail of ECB up to USD 200 million or equivalent during a financial year as against the present limit of USD 100 million or equivalent per financial year subject to the condition that the proceeds of the ECBs should not be used for acquisition of land.

(ii) ECBs designated in INR:

(a) 'All eligible borrowers' can avail of ECBs designated in INR from foreign equity holders under the automatic/ approval route, as the case may be, as per the extant ECB guidelines.

(b) NGOs engaged in micro finance activities will, however, be permitted to avail of ECBs designated in INR, as hitherto, under the automatic route from overseas organizations and individuals as per the extant guidelines.


·        Open offer to be triggered only on acquirer crossing 25% shareholding
·        Minimum open offer size increased to 26%
·        Non compete fees to promoter no longer allowed


SEBI introduced SEBI Complaints Redress System (SCORES). Now investors or other aggrieved parties can log on to to log in all SEBI related complaints.


·        SME Rating Agency of India Ltd. (SMERA)

Curtsey:- CS Jackson David, Thrissur