Saturday, 31 March 2012

Institutional placement programme


Institutional placement programme

Foreword
The article intends to study the provisions of Institutional Placement Programme (IPP) - a recently introduced mode of raising additional capital, in order to comply with minimum public shareholding requirements. (Readers are recommended to refer authors’ previous article on QIP, before reading this)
Background
The Ministry of finance had issued guidelines in 2009, which required the listed companies to raise their public shareholding to 25% and SEBI had asked them to reduce the promoter shareholding to a maximum level of 75% (excluding PSU) by June 2013. Later on, Securities and Exchange Board of India, through its press release provided the following alternative methods to comply with the above stipulations –
                               i.      IPP: IPP can only be used to raise minimum public shareholding requirements to 25%.
                            ii.      Offer for sale through SE: this is available to promoters of  top 100
                         iii.      Average market capitalization companies. But, not restricted to just those companies which need to meet the minimum public shareholding norms laid down by ministry and SEBI.
IPP   Vs   QIP

1.      IPP is of recent origin: IPP is governed by newly inserted chapter VIIIA where as QIP is dealt under chapter VIII of ICDR regulations.

2.      Pricing of issue: No restriction on price under the IPP route. Price band be declared atleast one day prior to the opening of the issue. The eligible seller (issuer/promoter/ promoter group as the case may be) shall announce a floor price or price band at least 1 day prior to the opening of institutional placement programme. QIP provisions lays down price calculation method (see article on QIP).
3.      Public shareholding: IIP is opted by listed companies that have not complied with minimum public holding requirements. QIP is meant for listed companies who are in compliance with minimum public holding requirements.
4.      Type of Offer: IPP is a Public offer. QIP is a private placement offer.
5.      Offer Size:  Under IPP, no single allottee shall be allotted more than  25 %  of the offer size. But in QIP its 50%.
6.      Minimum number of allottees : The number of QIBs to whom shares are allotted under QIP route shall not be less than:
                 (a) Two, where the issue size is <= Rs.250 crores
                 (b) Five, where the issue size is >= Rs.250 crores
But, the minimum number of allottees under IPP shall not be less than 10.
7.      Allotment to mutual funds/ insurance companies:  under IPP, minimum of 25% of eligible securities shall be allotted to mutual funds and insurance companies. Under QIP minimum 10% shall be allotted to mutual funds. If the mutual funds and/or insurance companies do not subscribe to said minimum percentage or any part thereof, such minimum portion or part thereof may be allotted to other qualified institutional buyers.
8.            Disclosures in placement document: The disclosures which are    required to be made in the IPP placement document include-

Ø  Disclosures under Schedule II of the Companies Act (disclosures relating to public offer) +
Ø  Disclosure under QIP as given below -
                                           i.      Disclaimer that no offer is being made to the public or any other class of investors.
                                         ii.      Details of Financial statements ie. Consolidated balance sheet & profit and loss account, CFS, Related party transactions etc.
                                      iii.      Merchant bankers to the placement and other advisors
                                        iv.      Details of securities to be issued eg. Convertible securities, equity shares etc.
                                          v.      Risk factors that is likely to affect our business eg. Increase in price of raw material would affect the business etc.
                                        vi.      Market price information ie. stock price high & close of previous FY ending March 31.
                                     vii.      Use of proceeds after deduction of  (estimated) mgt fees, offer fee, commissions etc.
                                   viii.      Capitalization & Indebtedness Statement
                                       ix.      The audited consolidated or unconsolidated financial statements prepared in accordance with Indian    GAAP.
                                         x.      Report of Independent Auditors on the Financial Statements.
                                       xi.      Management Discussion and Analysis of financial condition and results of operations
                                    xii.      Industry & Business description
                                  xiii.      Organizational structure and major shareholders
                                   xiv.      Board of directors and senior management
                                      xv.      Taxation aspects relating to the eligible securities
                                   xvi.      Legal proceedings against company and directors both as plaintiff & defendant – under Income tax, excise, customs, Cr. pc etc. which would materially affect the assets/revenue or financial position of the company.
                                 xvii.      Proceedings against promoters.
                              xviii.      Accountants
                                  xix.      General information eg.name of company, SE details, date of issue, details of shareholder approval, principal objects of company, consolidated financial position etc.
                                     xx.      Any material information that would enable the investors to take an informed decision.
Thus IPP requires extra disclosure under Schedule II of the Companies Act 1956.
Secretarial Compliances & striking provisions.
ü      The Company secretary shall ensure the following-
ü      Special Resolution (Sec 81(1A)) is passed at General Meeting
ü      In-principle approval from SE necessary is sought
ü      No allotment is made, either directly or indirectly, to any qualified institutional buyer who is a promoter or any person related to promoters of the issuer.
ü      The offer document is registered with ROC & a copy is filed with SEBI and SE through the lead merchant banker.
ü      Soft copy of the offer document is filed with the Board along with fee.
ü      The offer document is placed on the website of the concerned SE and of the issuer clearly stating that it is in connection with institutional placement programme and that the offer is being made only to the qualified institutional buyers.
ü      The merchant banker shall submit to the Board a due diligence
ü      Certificate as per Form A of Schedule VI of ICDR regulations.

The important provisions are given below-

Ø      No Partly paid shares shall be issued.
Ø      Bids are to be accepted through ASBA facility only.
Ø      The eligible seller may be promoter/issuer company/promoter group. The promoter or promoter group who are offering their eligible securities should not have purchased and/ or sold the eligible securities of the company in the twelve weeks period prior to the offer and they should undertake not to purchase and / or sell eligible securities of the company in the twelve weeks period after the offer.

Ø      The issue shall be kept open for 1 to 2 days. The aggregate demand schedule shall be displayed by stock exchange(s) without disclosing the price.

Ø      A qualified institutional buyer who does not hold any shares in the issuer company and who has acquired the rights in the capacity of a lender shall not be deemed to be a person related to promoters.

Ø      For the purpose of  IPP,  a qualified institutional buyer who has any of the following rights shall be deemed to be a person related to the promoters of the issuer:-
(a) rights under a shareholders’ agreement or voting agreement entered into with promoters or persons related to the promoters;
(b) veto rights; or
(c) right to appoint any nominee director on the board of the issuer.

Ø      Allotment under IPP may be through any of the following methods –
(a) proportionate basis;
(b) price priority basis; or
(c) criteria as mentioned in the offer document.

Ø      Where the issue has been oversubscribed, an allotment of not more than ten per cent. of the offer size shall be made by the eligible seller.
Ø      Withdrawal of offer: The eligible seller shall have the right to withdraw the offer in case it is not fully subscribed.

{Authors’ note: Where a company has no minimum public shareholding (ie. 25%), then it can increase the same through IPP, provided the public shareholding shall not increase at more than 10%. That means, the company would have to resort to other methods of reducing promoters holding, where public shareholding fails to touch 25% even after IPP}.

  Conclusion
The IPP route appears to be a good attempt from the part of Govt. to increase retail shareholders ‘participation and to reduce the possibilities for price manipulations. As the public shareholding rise, the control of promoters over the company would reduce and that would secure an active market for shareholders of the company, where the market value of shares of the company would be decided by free play of demand and supply. IPP could also be viewed as an intelligent move from the part of Government to achieve its divestment strategy. Although, IPP could be adopted by companies to touch the minimum public shareholding stipulated by the ministry, the limited threshold of 10% would turnout to be a hurdle. For eg. the companies which have present public shareholding of only 12 %  would have to resort to other methods of reducing promoters holding, as the public shareholding wont touch 25% even after IPP.  Some company law experts disagree with IPP, arguing that it has nothing which benefits the common retail shareholder (ie. individuals), as the buyers of shares under IPP are QIB’s. As future professionals we shall view IPP first and foremost as a policy of the government to strip promoters’ holdings in shares so that interests of the retail investors would be protected to some extent.

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Source: ICDR Regulations, amendments, sample placement docs.

The views expressed are personal.
Disclaimer:  The persons reading &/ downloading this article are recommended to refer bare act, rules and regulations on the subject for more clarity. The author &/publisher could not be held liable for any loss/damage on account of any omissions/errors in the article.  


Prepared by Victor  J. Uruvath,  CS Professional programme Kerala, Thrissur.
Collected by. Santhosh Thomas Thaikkadan, CS Professional Programme, Kerala, Thrissur

Thursday, 29 March 2012

QUALIFIED INSTITUTIONAL PLACEMENT


QUALIFIED INSTITUTIONAL PLACEMENT

Foreword

This article tries to elaborate important provisions with an aim to enlighten CS aspirants with concise knowledge on QIP procedure.

A. What is QIP? How it differs from Preferential allotment?

QIP means allotment of equity shares, non-convertible debt instruments and convertible securities by a listed company to Qualified Institutional Buyers (QIBs) on private placement basis as provided under Chapter VIII of SEBI (ICDR) Regulation, 2009.  We may be familiar with preferential allotment, where securities are allotted to some selected people by a company which has its shares already listed in a stock exchange. The main difference between both which we could see at first instance is that QIP allotment can be made only to QIBs and that Preferential allotment can be made to selected persons/organizations including QIBs. Another difference is that, QIP comes under Chapter VIII of SEBI (ICDR) Regulations 2009 while preferential allotment comes under Chapter VII of SEBI (ICDR) Regulations 2009.

B.    How QIP scores over other capital raising modes ?

QIP is a convenient & speedy method of private placement whereby a listed company can issue shares or convertible securities to selected QIBs. The Securities and Exchange Board of India (SEBI) introduced QIP through a circular issued on May 8, 2006 to encourage Indian companies to raise funds from within our country without moving to overseas market. QIP is advantageous when compared to other capital raising methods as the issuing company does not have to undergo time consuming procedural requirements to raise capital. Raising of capital through ADR/GDR is time consuming and expensive.

C.    Who is a Qualified Institutional Buyer (QIB)?

The question who all are considered as QIB are clearly met with under the provisions of ICDR regulations. QIB includes the following persons-
  1. a mutual fund, venture capital fund and foreign venture capital investor registered  with the Board;
  2. a foreign institutional investor and sub-account (other than a sub-account which is  a foreign corporate or foreign individual), registered with the Board;
  3. a public financial institution as defined in section 4A of the Companies Act, 1956;
  4. a scheduled commercial bank;
  5. a multilateral and bilateral development financial institution;
  6. a state industrial development corporation;
  7. an insurance company registered with the Insurance Regulatory and Development Authority;
  8. a provident fund with minimum corpus of twenty five crore rupees;
  9. a pension fund with minimum corpus of twenty five crore rupees;
10.      National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated November 23, 2005 of the Government of India published in the Gazette of India; (xi) 2[insurance funds set up and managed by army, navy or air force of the Union of India;]
D.    What is the role of  Merchant Banker in QIP ?
Merchant Banker is an organisation that acts as an intermediary between the issuing company and proposed allottees/applicants in the fresh-securities market. Merchant Banker usually engages itself in the business of issue management and acts as manager, consultant, advisor or renders corporate advisory service in relation to such issue management.
A QIP shall be managed by merchant banker(s) registered with SEBI who shall exercise due diligence. The merchant banker would help the company allot securities under a QIP. The merchant banker shall, while seeking in-principle approval for listing of the eligible securities issued under qualified institutional placement, furnish to stock exchange a due diligence certificate stating that the eligible securities are being issued under qualified institutional placement and that the issuer complies with requirements of Chapter VIII.

E.    What do you mean by relevant date?

Relevant date* means date of the meeting in which the board of directors of the issuer or the committee of directors of the issuer decides to open the proposed issue of equity shares.
In case of allotment of convertible securities, relevant date means -
1.     the date of the meeting in which the board of directors decides to open the issue of such convertible securities              
                                                  or
2.     the date on which the holders of such convertible securities become entitled to apply for the equity shares.
The definition of relevant date under DIP guidelines was different from this definition.
F.    What are important compliances under QIP?

The ICDR regulations has laid down certain conditions and restrictions for QIP which are to be complied by the company with out fail. The company shall adhere to the following-

I. Approval of shareholders & validity of S R: The company shall pass a Special resolution approving the qualified institutional placement. Allotment of securities pursuant to the special resolution referred to in clause (a) of ICDR regulation 82 shall be completed within a period of 12 months from the date of passing of the resolution. The provisions of Section 81(1A) of The Companies Act 1956 also would apply to the QIP issue.

II. Listed securities: That same class of eligible securities should have been listed in the stock exchange having nation wide trading terminal for a period of at least one year prior to the date of issuance of AGM notice to its shareholders.
    
III.  Allotment of securities under QIP : Ensure that the following are complied-
                               i.      Compliance with listing agreement.
                             ii.      Compliance with FDI norms in case allotment to NRIs
                        iii.      Minimum number of allottees : The number of QIBs to whom shares are allotted
(a)   shall not be less than:
(b)  two, where the issue size is <= Rs.250 crores
(c)   five, where the issue size is >= Rs.250 crores

                            iv.      Issue Size: No single allottee shall be allotted more than 50 % of the issue size.
                              v.      Mutual Funds: Minimum of 10% of eligible securities shall be allotted to mutual funds:
(a)   Provided that if the mutual funds do not subscribe to said minimum percentage or any part thereof, such minimum portion or part thereof may be allotted to other qualified institutional buyers;
                            vi.      Promoter shall not be allotted shares: No allotment shall be made, either directly or indirectly, to any  qualified institutional buyer who is a promoter or any person related to promoters of the issuing company.
“Promoter” means the person(s) who are in control of the issuer or  the person(s) who are instrumental in the formulation of a plan or programme pursuant to which specified securities are offered to public or person(s) named in the offer document as promoters. A financial institution, scheduled bank and foreign institutional investor  who approaches the issuer company which is its subsidiary company or mutual fund/ company promoted by it shall be treated as ‘promoter’.
The following persons are not promoters/ promoter group -
·        a person/ director / officer of the issuer  acting merely in his professional capacity promoter:
·        a financial institution, scheduled bank, foreign institutional investor and mutual fund who merely holds 10% or more of the equity share capital of the issuer.
·        Also the QIB s belonging to the same group or who are under same control shall not be considered as separate allottees but shall be deemed to be a single allottee.
                         vii.      Partly paid up securities: The issuer shall not allot partly paid up securities, Provided that in case of allotment of non convertible debt instruments along with warrants, the allottees may pay   the full consideration or part thereof payable with respect to warrants, at the time of allotment of such warrants:
Provided further that on allotment of equity shares on exercise of options attached to warrants, such equity shares shall be fully paid up.
                       viii.      Bid: The applicants in qualified institutional placement shall not withdraw their bids after the closure of the issue.
                           ix.      Quantum of issue: The aggregate of the proposed qualified institutional placement and all previous qualified institutional placements made by the issuer in the same financial year shall not exceed 5 times the net worth of the issuer as per the audited balance sheet of the previous financial year.
                             x.      Pricing:- Issue of shares under QIP shall be made at a price not less than the average of the weekly high and low of the closing prices of the equity shares of the same class quoted on the stock exchange during the two weeks preceding the *relevant date. Where eligible securities are convertible into or exchangeable with equity shares of the issuer, the issuer shall determine the price of such equity shares allotted pursuant to such conversion or exchange taking the relevant date as decided and disclosed by it while passing the special resolution.    
                          xi.      Prior Approval from stock exchange to be obtained by submitting the following-
v                 Certified true copy of the resolution passed by the Board of Directors approving the placement of securities with Qualified Institutional Buyers (QIBs)
v                 Copy of the AGM notice sent to the shareholders of the Company.
v                 Certified true copy of the AGM resolution passed
v                 Draft placement document for issue of specified securities to QIBs.
v                 Latest shareholding pattern of the Company(LA - Clause 35).
v                 Net worth Certificate by the Statutory Auditors of the Company based on
the  audited figures of the previous  FY.
v         Confirmation from the lead Merchant Banker that the issue is being made in compliance with Chapter VIII of SEBI (Issue of Capital & Disclosure Requirement) Regulations,2009.
v                 The Managing Director/ Company Secretary of the Company shall confirm that the company has complied with minimum public shareholding under clause 40A & 35 and that issue shall be floated as per chapter VIII of ICDR Regulations.
      xii. Tenure of convertible securities: The tenure of the convertible or exchangeable securities issued through qualified institutions placement shall not exceed 60 months from the date of allotment.
     xiii. Previous QIP:  atleast 6 months should have elapsed from the previous QIP.     However, special resolution is mandatory.
IV. QIP Placement document
The company shall submit the Preliminary Placement Document for being uploaded on the website of stock exchange before the same is circulated to the QIBs or displayed on the website of the Company.
The following shall be submitted to Stock exchange-
1.           Hard copy of the preliminary Placement document
2.           Soft copy of the Preliminary Placement Document
3.           Due diligence Certificate of the lead Merchant Banker in compliance with ICDR regulations.
There is no pre-issue filing of the placement document with SEBI. The (final) placement document shall be serially numbered and copies shall be circulated only to QIBs. The placement document shall contain a disclaimer to the effect that it is in connection with a qualified institutions placement and that no offer is being made to the public or to any other category of investors.
However, a copy of the placement document shall be filed with the Board for its record within 30 days of the allotment of eligible securities.
Disclosures in placement document
The disclosures which are required to be made in the placement document include-
·              Disclaimer that no offer is being made to the public or any other class of investors.
·              Details of Financial statements ie. Consolidated balancesheet & profit and loss account, CFS, Related party transactions etc.
·              Merchant bankers to the placement and other advisors
·              Details of securities to be issued eg. Convertible securities, equity shares etc.
·              Risk factors that is likely to affect our business eg. Increase in price of raw material would affect the business etc.
·              Market price information ie. stock price high & close of previous FY ending March 31.
·              Use of proceeds after deduction of  (estimated) mgt fees, offer fee, commissions etc.
·              Capitalization & Indebtedness Statement
·              The audited consolidated or unconsolidated financial statements prepared in accordance with Indian GAAP.
·              Report of Independent Auditors on the Financial Statements.
·              Managements Discussion and Analysis of financial condition and results of operations
·              Industry & Business description
·              Organizational structure and major shareholders
·              Board of directors and senior management
·              Taxation aspects relating to the eligible securities
·              Legal proceedings against company and directors both as plaintiff & defendant – under Income tax, excise, customs, Cr. pc etc. which would materially affect the assets/revenue or financial position of the company.
·              Proceedings against promoters.
·              Accountants
·              General information eg. details of shareholder approval, principal objects of company, consolidated financial position etc.
·              Any material information inorder to enable the investors to take an informed decision.
The various penal provisions relating to misstatement in prospectus would apply here also where the director/promoters is found to have made untrue statements in the placement document.
V. Certificates to be issued by CS
     The company secretary shall issue the following certificates to the merchant banker for necessary filings with SE-
 a. Certificate that the issue will be in compliance with the prescribed requirements of Clause 40A and 35 and that the minimum public shareholding is maintained.
b.  Certificate that the aggregate of the proposed QIP made by the issuer in the same financial year shall not exceed 5 times the net worth of the issuer as per the audited balance sheet of the previous year.
c.   Certificate that the issue will be in compliance with the Chapter VIII of SEBI (ICDR)   Regulations, 2009
d. Certificate that the new shares to be issued will rank pari-passu with existing equity shares in every respect including dividend
VI. Non-transferability of securities allotted under QIP
The securities allotted under qualified institutions placement shall not be sold by the allottee for a period of 1 year from the date of allotment, except on a recognised stock exchange.
VII. Listing of securities under QIP
The Merchant banker shall submit the following for listing of securities-
1.     Certified true copy of  BoD resolution.
2.     Certified true copy of AGM/GM notice.
3.     Certified true copy of AGM/GM resolution.
4.     Final Placement document copy.
5.     Certificates from CS as given in (V) above.
6.     Certificate that the issue will be in compliance with the chapter VIII of SEBI(ICDR) Regulations, 2009.
7.     Statutory auditors/PCA/PCS on calculation of floor price.
8.     Certificate of confirmation from CS that/on.
a.     complied with cl.40 A of Listing agreement.
b.     Issue size is 5 times of net worth.
c.      Relevant date.
9.     Details of issue- opening date & closing date .
10.      List of allottees.
11.      In-principle approval from SE.
12.      Listing fee & processing fee .
13.      Shareholding pattern- certified true copy.
14.      Certified true copy of amended MOA +AOA.
15.      Confirmation that ‘III (6)’ given above is complied (marked as ##).
16.      Copy of forms filed with ROC.
17.      Relevant documents asked for by the SE.
Though there are many benefits for QIP, the success of QIP depends upon the potential of the company, perception of investors about the company, managerial efficiency and general economic conditions.
G.Can Transferee Company under sec 391 to 394 of companies act 1956 resort to QIP?
Transferee company in a scheme of merger, de-merger, amalgamation or arrangement sanctioned by a High Court under sections 391 to 394 of the Companies Act, 1956, may make QIP, where the equity shares of the same class of the transferor company were listed for a period of 1 year as mentioned above.
H.   Who is an anchor investor ?
“Anchor investor" means a qualified institutional buyer that applies for a value of ten crore rupees or more in a public issue  (QIP is allotment of securities on private placement basis) made through the book building process in accordance with ICDR regulations.

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Source: Bare Act, ICDR Regulations, sample placement docs.

Disclaimer:  The persons reading &/ downloading this article are recommended to refer bare act, rules and regulations on the subject for more clarity. The author &/publisher could not be held liable for any loss/damage on account of any omissions/errors in the article.  

Written by: Victor J Uruvath, CS Professional Student, Thrissur
Collected by: Santhosh Thomas Thaikkadan, CS Professional Student, Thrissur