Capital Market / SEBI Regulations

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 26^th August, 2009, further amended vide Notification No. SEBI/LAD-NRO/GN/2015-16/18 dated 10th September, 2015.

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 shareholders 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 shareholders 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

If it satisfies the Conditions	If it does not satisfy the conditions
Net tangible Assets ≥ ₹ 3 crores in 3 preceding full years of 12 months each with maximum 50% held as monetary assets. The condition of monetary assets is not applicable in case of an offer for sale. (In case of more than 50%, firm Commitment from the issuer is required to utilize such excess monetary assets in its business or project)	Issue can be made through book building wherein allotment of at least 75% of net offer to public is made to QIBs
Minimum networth ≥ ₹ 1 crore in 3 preceding full years of 12 months each
Minimum average pre-tax operating profit of ₹15 crores on restated & consolidated basis during 3 most profitable years out of 5 immediately preceding years
Issue size (aggregate of proposed issue and previous issues made in the same financial year) ≤ 5 times pre-issue networth
In case of a name change in the last one year, at least 50% of the revenue of the last one full year is from the activity suggested by the name
Offer can be by Book Building or Fixed Price Offer

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

What is the Promoters Contribution (PC)

Issue Type	Minimum PC
Initial Public Offer	≥ 20% of Post-issue Capital
Further Public Issue	≥ 20% of proposed issue or shareholding of 20% of Post-issue Capital
Composite Issue	≥ 20% of proposed issue or 20% of Post-issue Capital (excluding the Rights Issue)
Offer for Sale	≥ 20% of Post-issue Capital

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 shareholders 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

Security	Minimum Price
Frequently traded shares listed for 26 weeks or more	Higher of the average of weekly high/low of volume weighted average prices during: 26 weeks prior to 2 weeks prior to Relevant Date = 30 days prior to EGM date where resolution u/s. 81(1A) is passed*
Shares listed for less than 26 weeks	Higher of the: Average of weekly high/low of volume weighted average prices during prices during the period prior to the relevant date IPO Price or value arrived at under Scheme of Arrangement Average of weekly high/low of volume weighted average prices during the 2 weeks prior to the relevant date Relevant Date = 30 days prior to EGM date where resolution u/s. 81(1A) is passed*
Preferential Allotment to QIBs not exceeding 5 in number	Average of weekly high/low of volume weighted average prices during 2 weeks prior to the: Relevant Date = 30 days prior to EGM date where resolution u/s. 81(1A) is passed*
Shares arising out of Warrants/ FCD/PCD	Same as above. Relevant Date = as above or as at Company’s option a date 30 days prior to date of exercise of warrants/FCD*
Infrequently traded shares	Other valuation parameters, such as, book value, comparable trading multiples, etc., may be considered. A Certificate from a CA / Merchant Banker should be obtained for the same.

* If Relevant Date falls on a Weekend or a Holiday, then the Day before such Weekend / Holiday

What are the Lock-in requirements

Situation	Lock-in Period
Allotment to promoters up to 20% of the total capital (including the preferential issue)	3 years from allotment
Additional issue to promoters or any issue to any person	1 year from allotment
Shares acquired on conversion of warrants /FCD	Reduced by lock-in period of warrants/FCD
The entire pre-preferential capital held by the allottees	6 months from the preferential allotment

What are the other conditions /requirements

Notice u/s. 81(1A) must contain the prescribed particulars
Auditors must certify the Issue Price
Shareholders’ 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 fulfills the following conditions:

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
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 shareholders 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:

2 where the issue size is less than or equal to ₹ 250 crores;
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 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:

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

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.
Even shares of an unlisted company or a private limited company can be dematerialised.
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.
The Company whose securities are to be dematerialised must execute an agreement with the depository.
A shareholder 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.
All listed shares are compulsorily traded only in dematerialised format.
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.
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.