SEBI ICDR Regulations, 2009

What are they

The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 govern the public issues, rights issues, preferential allotments, etc. made by companies. These Guidelines were notified on 26th August, 2009.

When do they apply

• Public Issues and Offers for Sale by any company
• Rights issue, in excess of ₹ 50 lakhs by a listed company
• Preferential Allotments; Bonus Issue; QIPs by listed companies
• An issue of Indian Depository Receipts

PUBLIC ISSUES

What Is It

• A “public issue” means an initial public offer or further public offer;
• An “initial public offer” means offer of specified securities by an unlisted company and includes offer for sale of specified securities by the existing share holders of an unlisted company;
• A “further public offer” means offer of specified securities by a listed company and includes offer for sale of specified securities by the existing share holders of a listed company to the public;

When can a Public Issue be made

• The issuer has appointed one or more merchant bankers (one merchant banker should act as a lead merchant banker), to carry out the obligations relating to the issue.
• After filing of a Draft Prospectus/Letter of Offer/Red Herring Prospectus/ Shelf Prospectus with SEBI (along with necessary documents) by the Merchant Banker at least 30 days prior to the filing of the same with the ROC or the designated stock exchange, a soft copy of the offer document shall also be furnished to SEBI.
• SEBI’s corrections, if any, have been incorporated in the Prospectus
• Company has made an application for listing to the Exchanges
• It has entered into an Agreement for demat of shares with a Depository
• All existing partly paid-up equity shares have either been made fully paid-up or forfeited

What are the requirements for an IPO

• An issuer can make IPO of convertible debt instruments without a prior IPO of shares
• Minimum prospective allottees must be 1,000
• There can be no outstanding warrants or other convertible instruments (other than those relating to ESOPs granted in accordance with the SEBI Guidelines) at the time of IPO.
• An issuer may obtain grading for IPO from a credit rating agency. However, it is not mandatory.

What are the requirements for a Public Issue by a Listed Company

• Issue size < 5 times pre-issue networth as per the audited balance sheet of the preceding year
• If it has changed its name within the last one year, at least 50% of the revenue for the preceding one full year has been earned by it from the activity indicated by the new name
• If it does not satisfy this condition, then it can make an issue subject to compliance with the conditions applicable for an ineligible unlisted company for making an IPO

What are the requirements for an Offer for Sale

• An Offer for Sale means a sale of securities by existing share holders to the public by way of an Offer Document.
• The conditions specified above for making an IPO must be satisfied.

Pricing

• All companies are permitted to price their issues in consultation with the lead merchant banker or through the book building process.
• Face Value of shares can be determined by the companies – cannot be a decimal of a rupee. Further, in case of an IPO the following additional conditions apply:
  • if the issue price is ₹ 500 or more then the Company may fix the face Value below ₹ 10 per share but not lower than ₹ 1 per share
  • if the issue price is less than ₹ 500 then the Company must have a face Value of ₹ 10 per share

What is the minimum offer to the Public

• 25% of the issue size if the post issue capital of the company calculated at the offer price is less than or equal to ₹ 1,600 crores.
• Such percentage of each class of the equity shares equivalent to a value of ₹ 400 crores., if the post issue capital of the company calculated at the offer price is more than ₹ 1,600 crores but less than ₹ 4,000 crores.
• 10% of the issue size if the post issue capital of the company calculated at the offer price is above ₹ 4,000 crores.

What is the Promoters Contribution (PC)

• In case of IPO, if post issue promoter holding is less than 20%, then Alternative Investment Funds may contribute the shortfall to the extent of 10% of the post issue capital
• In case of further public offer or composite issue, where the promoters contribute more than the stipulated minimum promoters’ contribution, the allotment with respect to excess contribution shall be made at a price determined in terms of the provisions of regulation 76 or the issue price, whichever is higher.
• PC requirements are not applicable in case of:
  • Issues by 3 years listed companies which have a 3 years dividend track record; or
  • Rights issues
  • Companies where no identifiable promoter group exists

What are the Lock-in requirements

• Minimum PC is locked-in for 3 years from commencement of production or date of allotment, whichever is later
• Excess PC is locked-in for 1 year from allotment subject to some exceptions.
• In case of an IPO, the entire pre-issue capital of an Unlisted Company subject to certain exceptions is locked in for 1 year from date of allotment in the IPO
• Locked-in shares can be pledged or transferred inter-se between promoters

What is Book Building

Book building means a process undertaken to elicit demand and to assess the price for determination of the quantum or value of specified securities or Indian Depository Receipts, as the case may be, in accordance with these regulations. Its features are as under :

• Book Building could be only for 100% of the net offer to the Public.
• Draft Red Herring Prospectus cannot mention the issue price and the number of securities to be offered.
• Companies can mention the Floor Price, i.e., minimum price below which bids are not accepted or a Price Band. However in case of a Price Band, the cap (i.e., the ceiling price) cannot be more than 20% of the floor price. In case of a follow-on public issue by a listed company, the floor price or price band need not be mentioned in the prospectus.
• The Bids can remain open for 3 and not more than 10 working days, including the days for which the issue is kept open in case of revision in price band.

RIGHTS ISSUES

What are the regulations

• Means an issue of capital u/s. 81(1) of the Companies Act to existing share holders through a Letter of Offer
• Merchant Banker if issue exceeds ₹ 50 lakhs
• Free Pricing
• Minimum Promoters’ Contribution is not required
• Rights Issue of Debt instruments requires a Credit Rating

BONUS ISSUES

What can be capitalised

• Bonus shares can be issued out of free reserves or share premium collected in cash
• Revaluation Reserves cannot be used – however they can be used in the case of unlisted companies
• Bonus Issue in lieu of dividend is not permitted
• Bonus can be issued pending conversion of FCDs/PCDs provided appropriate reservation is made for the convertible portion of these instruments
• In case of any partly-paid shares outstanding on the date of allotment, the same shall be made fully paid up

What are the requirements

PREFERENTIAL ALLOTMENTS

What Is It

It is an issue by a listed company of equity shares / securities convertible into equity pursuant to a resolution u/s. 81(1A) of the Companies Act, to any select group by way of private placement. FCDs/Warrants/PCDs/Convertible Preference Shares are covered.

What are the Pricing Guidelines

What are the Lock-in requirements

What are the other conditions /requirements

• Notice u/s. 81(1A) must contain the prescribed particulars
• Auditors must certify the Issue Price
• Share holders’ Resolution must be implemented within 15 days except in case of pending regulatory approvals
• Conversion of warrants, FCD, etc., must be within 18 months of allotment
• Guidelines do not apply to securities issued under a Court approved merger/demerger
• In case of warrants, minimum 25% must be paid upfront on allotment
• If the warrants are not exercised the 25% would be forfeited
• A preferential issue cannot be made unless the issue is in compliance with the conditions for Continuous Listing, such as Clause 40A of the Listing Agreement
• In case the issue is to promoters, relatives, related parties and associates for consideration other than cash, then a valuation report from an independent valuer must be submitted to the Exchanges for the assets against which the shares are issued.
• In case the proposed preferential issue allottees have sold any shares in the listed company within 6 months prior to the allotment then they are not eligible for the allotment
• Now even companies which are listed for less than 6 months can make a preferential issue.
• Certain relaxations are given for an allotment pursuant to a scheme of Corporate Debt Restructuring
• The issuer has obtained the Permanent Account Number of the proposed allottees.
• Check the requirements of making an Open Offer to the Public in case of Preferential Issues which cross the threshold limits under the SEBI Takeover Regulations

QUALIFIED INSTITUTIONAL PLACEMENT

What is it

SEBI has introduced the concept of Qualified Institutional Placements which is quite similar to preferential issue. Equity shares/ fully convertible debentures (FCDs)/ partly convertible debentures (PCDs) or any securities other than warrants, which are convertible into or exchangeable with equity shares, can be issued to Qualified Institutional Buyers (QIBs) by a listed company which fulfils the following conditions:

1. Its equity shares of the same class are listed on a stock exchange having nation-wide trading terminals for at least one year as on the date on which it issues the Notice for General Meeting ; and
2. It complies with the minimum public shareholding requirements of Cl. 40A the listing agreement.

At least 10% of the issue shall be to mutual funds. If however, they do not agree, then it can be allotted to QIBs. QIBs who are promoters or related to promoter/s cannot be issued securities.

What are the Pricing Guidelines

The Issue Price shall not be 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 2 weeks preceding the relevant date.

Issuer may offer discount up to 5% on the price so calculated for the QIP, provided share holders approve the same.

Relevant Date = 30 days prior to the EGM date where a resolution u/s. 81(1A) is passed

What is the Currency of the Security

Each convertible instrument issued has a maximum tenure of 60 months from the date of allotment.

Number of allottees

The minimum number of allottees for each placement of specified securities made shall not be less than:

1. 2 where the issue size is less than or equal to ₹ 250 crores;
2. 5 where the issue size is greater than ₹ 250 crores.

Provided that no single allottee shall be allotted more than 50% of the issue size.

Provided further that QIBs belonging to same group or under common control shall be deemed to be a single allottee

Is there a restrictions on amount raised

The aggregate of the proposed QIPs and all previous QIPs made 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.

What is the Lock-in

There is a lock-in of 1 year from the date of allotment, except for sale on a recognised stock exchange.

INFORMAL GUIDANCE SCHEME OF SEBI

SEBI provides informal guidance on matters pertaining to the SEBI Act, Rules, Guidelines and Regulations. The guidance is provided on an application made by an intermediary, a listed company, a company proposing to get listed, a mutual fund or an acquirer of shares under the Takeover Regulations. The fee for the same is ₹ 25,000.

SEBI provides guidance in the form of No-Action Letters, which indicate that if the proposed action is done in the manner laid down in the application, then no action would be taken by SEBI or Interpretative Letters, wherein SEBI provides interpretation on any legal provision in connection with the proposed transaction.

SEBI may or may not grant a personal hearing and would dispose of the case within 60 days. It does not respond to applications which:

1. Are general in nature and do not describe the facts clearly
2. Are hypothetical in nature
3. Do not cite the applicable legal provisions
4. Are similar to a guidance issued by the SEBI on a substantially similar question involving substantially similar facts
5. Pertains to a case where investigation, enquiry or any action is already launched
6. Involve issues pending before any Tribunal or Court and are sub-judice.
7. Cases where investigation, enquiry or other enforcement action has already been initiated.
8. Where the policy concerns require department to not to respond

It is important to note the guidance is not binding on the SEBI, although it may generally act in accordance with the same. It is not an appealable order of SEBI.

DEMATERIALISATION (DEMAT) OF SECURITIES

1. Issue and allotment of securities in a Public / Rights / Offer for Sale must be only in a dematerialised format. However, an option must be given to the subscribers to receive the securities in a physical format, i.e., via a certificate.
2. Even shares of an unlisted company or a private limited company can be dematerialised.
3. Currently there are two Depositories, NSDL (National Securities Depository Ltd.) and CSDL ( Central Securities Depository Ltd.) and several Depository Participants or DPs associated with one or both of these Depositories.
4. The Company whose securities are to be dematerialised must execute an agreement with the depository.
5. A share holder needs to open a new demat account with a DP for every separate combination of shareholding, e.g. Mr. X / Mrs. X and Mrs. X / Mr. X would be two separate accounts.
6. All listed shares are compulsorily traded only in dematerialised format.
7. Transfer of securities in a dematerialised format is exempt from stamp duty as applicable to a transfer of shares under the Indian Stamp Act which is leviable @ 0.25%. The transfer would however, attract demat charges.
8. A demat account cannot be opened in the name of a Trust. The account would be opened only in the names of the Trustees. However, it would be linked / mapped with the PAN of the Trust.