An Overview of the SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2018 – Securities Laws and Capital Markets Important Questions

An Overview of the SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2018 – Securities Laws and Capital Markets Important Questions

Question 1.
Explain the procedure for approval of ‘basis of allotment’ by the stock exchange. [Dec. 2008 (5 Marks)]
Answer:
The person responsible for the basis of allotment: In a public issue of securities, the Executive or Managing Director of the Designated Stock Exchange along with the post issue Lead Merchant Banker and the Registrars to the Issue shall be responsible to ensure that the basis of allotment is finalized in a fair and proper manner in accordance with the SEBI (ICDR) Regulations, 2018.

Allotment procedure and basis of allotment [Regulation 49 of the SEBI (ICDR) Regulations, 2018]:
1. The issuer shall not make an allotment pursuant to a public issue if the number of prospective allottees is less than 1,000.

2. The issuer shall not make any allotment in excess of the specified securities offered through the offer document except in case of oversubscription for the purpose of rounding off to make allotment, in consultation with the designated stock exchange. However, in case of oversubscription, an allotment of not more than 1% of the net offer to the public may be made for the purpose of making allotments in minimum lots.

3. The allotment of specified securities to applicants other than to the retail individual investors and anchor investors shall be on a proportionate basis within the respective 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 in the offer document. The value of specified securities allotted to any person, except in the case of employees, shall not exceed ₹ 2 lakhs for retail investors or up to ₹ 5 lakhs for eligible employees.

4. The allotment of specified securities to each retail individual investor shall not be less than the minimum bid lot, subject to the availability of shares in the retail individual investor category, and the remaining available shares, if any, shall be allotted on a proportionate basis.

5. The authorized employees of the designated stock exchange, along with the lead manager and registrars to the issue, shall ensure that the basis of allotment is finalized in a fair and proper manner in accordance with the procedure as specified in Part A of Schedule XIV.

Question 2.
What is meant by the following in a public issue:
(i) Period of subscription
Answer:
Period of subscription [Regulation 46 of the SEBI (ICDR) Regulations, 2018]:

  • An initial public offer shall be kept open for at least 3 working days and not more than 10 working days.
  • In case of a revision in the price band, the issuer shall extend the bidding (issue) period disclosed in the red herring prospectus, for a minimum period of 3 working days.
  • In case of force majeure, banking strike, or similar circumstances, the issuer may, for reasons to be recorded in writing, extend the bidding (issue) period disclosed in the red herring prospectus (in case of a book built issue) or the issue period disclosed in the prospectus (in case of a fixed price issue), for a minimum period of 3 working days.

(ii) Issue opening date
Answer:
Opening of the issue: Subject to compliance with the provisions of the Companies Act, 2013, a public issue may be opened within 12 months from the date of issuance of the observations by the SEBI. An issue shall be opened after at least 3 working days from the date of registering, the red herring prospectus, in case of a book built issue, and the prospectus, in case of a fixed price issue, with the ROC.

(iii) Mandatory collection centre [Dec. 2008 (3 × 3 = 9 Marks)]
Answer:
Mandatory Collection Centres: Minimum number of collection centers for issues is to be at the four metropolitan centers viz. Mumbai, Delhi, Kolkata, and Chennai and at all such centers where the stock exchanges are located in the region in which the registered office of the company is situated. In addition, all designated branches of self-certified syndicate banks shall be deemed to be mandatory collection centers. However, the issuer company is free to appoint as many collection centers as it may deem fit in addition to the above minimum requirement.

Question 3.
What is due diligence in the process of public issue of securities? [June 2009 (5 Marks)]
Answer:
Due diligence means the diligence reasonably expected from, and ordinarily exercised by, a person who seeks to satisfy a legal requirement or to discharge an obligation.

Thus, in relation to public issues, due diligence means to confirm that required procedural activities are duly complied with and obligations imposed by the Regulations are duly fulfilled by the issuer company and other persons engaged in the issue process such as Merchant Bankers, Registrar to Issue, Debenture Trustees, etc.

Other important points relating to due diligence is as follows:

  • The Lead Merchant Bankers shall exercise due diligence and satisfy himself that all the aspects of the issue including the veracity and adequacy of disclosure in the offer documents are duly complied with.
  • The lead merchant bankers shall call upon the issuer, its promoters, or directors to fulfill their obligations as disclosed in the offer document.
  • The merchant banker shall continue to be responsible for post-issue activities till the subscribers receive their securities or refund of application money and the listing agreement is entered with the stock exchange and listing/trading permission is obtained.

The Merchant Bankers and the company are also required to file various certificates or documents as prescribed in SEBI (ICDR) Regulations, 2018. These certificates are also called due diligence certificates by which Merchant Bankers and Company confirms to the SEBI that required provisions and formalities have duly complied in relation to public issues.

Question 4.
Explain the procedure of bidding in the book building issue. [June 2009 (5 Marks)]
Answer:
The process of bidding should be in compliance with the following requirements:

  1. The bidding process shall be carried out only through recognized stock exchanges having electronically linked transparent bidding facilities.
  2. The Lead Book Runner shall ensure the availability of adequate infrastructure with syndicate members for data entry of the bids in a timely manner.
  3. The syndicate members shall be present at the bidding centers and at least one computer terminal is available for the purpose of bidding at all the bidding centers.
  4. During the period for which the issue is open for bidding, the applicants may approach the stockbrokers to place an order for bidding.
  5. Every stockbroker shall accept orders from all clients who place orders through him and every Self Certified Syndicate Bank shall accept ASBA from investors.
  6. Applicants who are QIBs shall place their bids only through stockbrokers who shall have the right to vet the bids.
  7. The bidding terminals shall contain an online graphical display of demand | and bid prices updated at periodic intervals, not exceeding 30 minutes.
  8. At the end of each day during the bidding period, the demand including allocation made to anchor investors shall be shown graphically on the | bidding terminals for information of the public.
  9. The retail individual investors may either withdraw or revise their bids until the finalization of allotment.

The issuer may decide to close the bidding by QIBs one day prior to the closure of the issue subject to the following conditions:

  • Bidding shall be kept open for a minimum of 3 days for all categories of applicants.
  • Disclosures are made in the red herring prospectus regarding the issuer’s decision to close the bidding by QIBs one day prior to the closure of the issue.

11. The QIBs and the Non-Institutional Investors (Nil) shall neither withdraw nor lower the size of their bids at any stage.

12. The identity of QIBs making the bidding shall not be made public.

13. The stock exchanges shall continue to display data pertaining to book-built issues in a uniform format on their website giving category-wise details of bids received, for a period of at least 3 days after closure of bids.

Question 5.
What is due diligence in the process of public issue of securities? Explain its scope and significance. [June 2010 (4 Marks)]
Answer:
Due diligence means the diligence reasonably expected from, and ordinarily exercised by, a person who seeks to satisfy a legal requirement or to discharge an obligation.

Thus, in relation to public issues, due diligence means to confirm that required procedural activities are duly complied with and obligations imposed by the Regulations are duly fulfilled by the issuer company and other persons engaged in the issue process such as Merchant Bankers, Registrar to Issue, Debenture Trustees, etc.

Other important points relating to due diligence is as follows:

  • The Lead Merchant Bankers shall exercise due diligence and satisfy himself that all the aspects of the issue including the veracity and adequacy of disclosure in the offer documents are duly complied with.
  • The lead merchant bankers shall call upon the issuer, its promoters, or directors to fulfill their obligations as disclosed in the offer document.
  • The merchant banker shall continue to be responsible for post-issue activities till the subscribers receive their securities or refund of application money and the listing agreement is entered with the stock exchange and listing/trading permission is obtained.

The Merchant Bankers and the company are also required to file various certificates or documents as prescribed in SEBI (ICDR) Regulations, 2018. These certificates are also called due diligence certificates by which Merchant Bankers and Company confirms to the SEBI that required provisions and formalities duly comply in relation public issues.

Question 6.
What is book building? What is the difference between the ‘fixed price process’ & ‘book building process? [June 2010 (5 Marks)]
Answer:
Book building means a process undertaken to elicit demand and to assess price for determination of the quantum or value of specified securities or Indian Depository Receipts (IDR). Book Building is basically a process used in IPO for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.

Following are the main points of difference between fixed price process & book building process:

Points Fixed Price Process Book Building Process
Meaning In the fixed-price process the issue price known in advance to the investors. In the book building process the issue price is not known in advance to the investors. The only price band is offered.
Demand Demand for the securities offered is known only after the closure of the issue. Demand for the securities offered can be known every day as the book is built.
Payment Payment is made at the time of subscription wherein a refund is given after allocation. Payment is made only after allocation.
Document In the fixed-price process the company issue prospectus. In book building, the company has to issue a red herring prospectus.
Concept This is an old and traditional concept. This concept is comparatively new to Indian Security Market.

Question 7.
Write a short note on Self Certified Syndicate Bank (SCSB) [June 2011 (4 Marks)]
Answer:
Self Certified Syndicate Bank (SCSB) is a bank that offers the facility of applying through the ASBA process.
A bank desirous of offering ASBA facility shall submit a certificate to SEBI in prescribed format for inclusion of its name in SEBI’s list of SCSBs.

  • An SCSB shall identify its Designated Branches (DBs) at which an ASBA investor shall submit ASBA.
  • An SCSB shall identify also identify the Controlling Branch (CB) which shall act as a coordinating branch for the Registrar of the issue, Stock Exchanges, and Merchant Bankers.

The SCSB shall communicate the following details to \ Stock Exchanges:

  • Name and address of SCSB.
  • Addresses of Designated and Controlling Branches and other details such as telephone number, fax number, and email ids.
  • Name and contact details of a nodal officer at a senior level from the Controlling Branch.

Question 8.
Briefly explain the following terms related to the public issue:
(i) Pre-issue advertisement
(ii) Anchor investor
(iii) Book building [June 2011 (3 × 2 = 6 Marks)]
Answer:
(i) Pre-issue advertisement: Pre-issue advertisement can be issued by the j company after registering the red herring prospectus (in case of book built issue) and prospectus (in case of fixed price issue) with ROC. Pre-issue advertisement can be issued in an English National daily with wide circulation, one Hindi National newspaper, and a regional language newspaper with wide circulation at the place where the registered office of the issuer is situated

Advertisement has to be given in prescribed format and is subject to provisions of section 30 of the Companies Act, 2013.

(ii) Anchor investor: Anchor investor means a Qualified Institutional Buyer (QIB) who makes an application for a value of ₹ 10 Crore or more in a public issue made through the book-building process.

(iii) 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 (IDR).

Question 9.
Explain briefly the SEBI Regulations for book building. [Dec. 2011 (5 Marks)]
Answer:
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 (IDR).

Book Building is basically a process used in IPO for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.

The concept of Book Building is relatively new in India. However, it is a common practice in most developed countries.

Question 10.
Discuss briefly the following methods of raising funds from the primary capital market.
(i) Public issue
(ii) Right issue
(iii) Preferential Allotment
(iv) Private placement
(v) Qualified institutional placement (QIP) [June 2012 (5 × 3 = 15 Marks)]
Answer:
1. Public issue: When a company issues securities to new investors for becoming part of shareholders’ family of the issuer it is called a public issue.

The public issue can be further classified into the following two categories:
(a) Initial Public Offer (IPO): When an unlisted company makes either a fresh issue of securities or offers its existing securities for sale or both for the first time to the public, it is called an IPO.
(b) Further public offer (FPO) or Follow on offer: When an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, it is called an FPO.

2. Right Issue: When an issue of securities is made by an issuer to its existing shareholders it is called a rights issue.

3. Preferential Allotment: When a listed issuer issues shares or convertible securities, to a select group of persons it is called a preferential allotment. It is a sub-category of the private placement.

4. Private placement: When an issuer makes an issue of securities to a select group of persons it is called private placement. However, the issue of securities by way of private placement cannot be made to more than 49 persons.

5. Qualified Institutions Placement (QIP): When a listed issuer issues equity shares or securities convertible into equity shares to selected Qualified Institutions Buyers (QIBs) it is called a QIP.

Question 11.
The preferential issue is not for retail investors. Comment. [Dec. 2012 (4 Marks)]
Answer:
Preferential issue means the issuance of equity shares to promoter group or selected investors. It covers the allotment of convertible debentures or any other financial instruments that could be converted into equity shares at a later date. The investors could be institutional investors, private equity investors, high j net-worth individuals, or companies.

The preferential issue is one of the key sources of funding for companies. One of the biggest advantages of a preferential issue is that the company can raise money quickly and cheaply compared with other means of raising money, says IPO or issue of shares on a rights basis.

Preferential issues and private placement is only for the selected class of investors and not for the retail investors. It is like a wholesale market, where institutions with financial clout are allowed to participate.

Question 12.
“Market making is compulsory for the public issue”. Comment. [Dec. 2012 (5 Marks)]
Answer:
There are three types of norms specified by the SEBI for public issues. If a company is not able to follow Norm I then it can follow Norm II or Norm IH. As per Norm II, only market making is compulsory.

Entry Norm II is as follows:

  • The issue shall be through the book building route, with at least 50% to be mandatory allotted to the Qualified Institutional Buyers (QIBs).
  • Minimum post-issue face value capital shall be ₹ 10 crores or there shall be a compulsory market-making for at least 2 years

Thus, it is not correct to say that market making is compulsory for all types of public issues.

Question 13.
Write a short note on Compliance officer [June 2013 (3 Marks)]
Answer:
Every company making a public issue is required to appoint a compliance officer and intimate the name of the compliance officer to SEBI. Compliance Officer shall directly liaise with SEBI with regard to compliance with various laws, rules, regulations, and other directives issued by SEBI and investor complaints related matters. He is also required to coordinate with regulatory authorities in various matters and provides necessary guidance so as to ensure compliance internally and ensure that observations/deficiency pointed out by SEBI does not recur.

In terms of Regulation 6 of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015, Compliance Officer shall be Company Secretary, who shall be responsible for ensuring the correctness, authenticity, and comprehensiveness of the information, statements, reports, etc. filled under corporate filing and dissemination system as specified in the listing agreement.

Question 14.
Explain the following terms associated with the public offering of equity shares. Attempt any five:
(i) Period of subscription
(ii) Issue opening date
(iii) Differential pricing
(iv) Lock-in-period
(v) Price band
(vi) Red-herring prospectus [June 2013 (5 × 4 = 20 Marks)]
Answer:
(i) Period of subscription:
Period of subscription [Regulation 46 of the SEBI (ICDR) Regulations, 2018]:

  • An initial public offer shall be kept open for at least 3 working days and not more than 10 working days.
  • In case of a revision in the price band, the issuer shall extend the bidding (issue) period disclosed in the red herring prospectus, for a minimum period of 3 working days.
  • In case of force majeure, banking strike, or similar circumstances, the issuer may, for reasons to be recorded in writing, extend the bidding (issue) period disclosed in the red herring prospectus (in case of a book built issue) or the issue period disclosed in the prospectus (in case of a fixed price issue), for a minimum period of 3 working days.

(ii) Issue opening date:
Opening of the issue: Subject to compliance with the provisions of the Companies Act, 2013, a public issue may be opened within 12 months from the date of issuance of the observations by the SEBI. An issue shall be opened after at least 3 working days from the date of registering, the red herring prospectus, in case of a book built issue, and the prospectus, in case of a fixed price issue, with the ROC.

(iii) Differential pricing:
The issuer may of its specified securities at different prices, subject to the following:
(a) Retail individual investors or retail individual shareholders or employees entitled for reservation may be offered specified securities at a price not lower than by more than 10% of the price at which net offer is made to other categories of applicants, excluding anchor investors.

(b) In the case of a book-built issue, the price of the specified securities offered to the anchor investors shall not be lower than the price offered to other applicants.

(c) In case the issuer opts for the alternate method of book building in terms of Part D of Schedule XIII, the issuer may offer the specified securities to its employees at a price not lower than by more than I 0% of the Iloor price.

Discount, if any, shall be expressed in rupee terms in the offer document.

(iv) Lock-in-period:
Lock-in means promoters or other specified persons can not sell the shares o others during the prescribed period. The idea Lc that promoters hold has a stake in the company. Moreover, they are not expected to make a profit by selling the shares which earlier they had.

The SEBI (QDR) Regulations, 2018 makes the following provisions /or lock-in of securities.

Lock-in of specified securities held by the promoters [Regulation 16]:
1. The specified securities held by the promoters shall not be transferable for the stipulated periods.
(a) Minimum promoters contribution including the contribution made Alternative Investment Funds or Foreign Venture Capital Investors oi Scheduled Commercial Banks or Public Financial Institutions or Insurance Companies registered with IR DA, shall be locked-in for a period of 3 years from the date of commencement of commercial production oi date of allotment in IPO, which ever is kite

(b Promoters’ holding in excess of minimum promoters’ contribution shall be locked in for a period of 1 year from the date of allotment in the initial public offer.

2. The SR equity shares shall be under lock-in until conversion into equity shares having voting rights same as that of ordinary shares or shall be locked in for a period specified above, whichever is later.

(v) Price band: ‘Price Band’ is a value-setting method in which a seller indicates an upper and lower cost range, between which buyers are able to place bids. The price band’s floor and cap provide guidance to the buyers. This type of auction pricing technique is often used with IPOs.

(vi) Red-herring prospectus: Red-herring prospectus means a prospectus that does not include complete particulars of the quantum or price of the securities offered.

Question 15.
Write a note on: Various methods of raising funds by a company from the primary market [Dec. 2013 (4 Marks)]
Answer:
Public Issue of shares means the selling or marketing of shares for subscription by the public by issue of prospectus. For raising capital from the public by the issue of shares, a public company has to comply with the provisions of j the Companies Act, 2013, the SCR Act, 1956 including the Rules & Regulations; made thereunder and the guidelines and instructions issued by the concerned ‘ Government Authorities, Stock Exchanges and SEBI, etc.

A company can raise funds from the primary market through different meth- [ ods as given below:
1. Public Issue: When a company issues securities to new investors for becoming part of the shareholders’ family of the issuer it is called a public issue.

The public issue can be further classified into the following two categories:
(a) Initial Public Offer (IPO): When an unlisted company makes either a fresh issue of securities or offers its existing securities for sale or both for the first time to the public, it is called an IPO.
(b) Further public offer (FPO) or Follow on offer: When an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, it is called an FPO.

2. Right Issue: When an issue of securities is made by an issuer to its existing shareholders it is called a rights issue.

3. Bonus Issue: When the company issues securities to its existing shareholders without any consideration it is called a bonus issue. Such shares are issued generally by capitalizing the company’s profit & loss account, free reserve, or securities premium account.

4. Private Placement: When an issuer makes an issue of securities to a select group of persons it is called private placement. However, the issue of securities by way of private placement cannot be made to more than 49 persons.

Private placement of securities can be of the following three types:
(a) Preferential Allotment: When a listed issuer issues shares or convertible securities, to a select group of persons it is called a preferential allotment.

(b) Qualified Institutions Placement (QIP): When a listed issuer issues equity shares or securities convertible into equity shares to selected Qualified Institutions Buyers (QIBs) it is called a QIP.

(c) Institutional Placement Programme (IPP): When a listed issuer makes a further public offer of equity shares, or offer for sale of shares by the promoter to QIBs. IPP can only be used to raise minimum public shareholding requirements to 25%.

Question 16.
Write a note on Draft Offer document [Dec. 2013 (4 Marks)]
Answer:
Draft Offer document means the offer document in the draft stage.

  • The draft offer documents are filed with SEBI, at least 30 days prior to the filing of the Offer Document with ROC or designated stock exchange.
  • SEBI may specify changes 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 or designated stock exchange.
  • The Draft Offer document is available on the SEBI website for public comments for a period of 21 days from the filing of it with SEBI.

Draft Offer Document to be made public: The draft offer document filed with SEBI shall be made public for comments for a period of 21 days from the date of filing with SEBI by hosting it on the websites of the SEBI, recognized stock
exchanges and merchant bankers associated with the issue.

After a period of 21 days, the Lead Merchant Bankers shall file with SEBI a statement giving information of the comments received during that period and the consequential changes to be made in the draft offer document.

Question 17.
The book-building process of determining the price of a public issue is preferred in the case of an initial public offer (IPO) while the fixed-price process is used for a further public offer (FPO). Comment. [Dec. 2013 (4 Marks)]
Answer:
The given statement is false.

In the fixed-price process, the issue price known in advance to the investors while in | book building process the issue price is not known in advance to the investor as only the price band is offered.

‘Fixed price process’ and ‘book-building process’ are pricing mechanisms in the issue of shares in public issues.

A company, whether issues shares through IPO or FPO has the option to choose the pricing mechanism under the ‘Fixed price process’ or ‘book-building process’ subject to conditions specified in SEBI (ICDR) Regulations, 2018.

Question 18.
The book-building process of determining the price of a public issue is preferred in case of an initial public offer (IPO) while the fixed-price process is used for a further public offer (FPO). Comment. [Dec. 2015 (4 Marks)]
Answer:
The given statement is false.

In the fixed-price process, the issue price is known in advance to the investors while in | book building process the issue price is not known in advance to the investors as only the price band is offered.

‘Fixed price process’ and ‘book-building process’ are pricing mechanisms in the issue of shares in public issues.

A company, whether issues shares through IPO or FPO has the option to choose the pricing mechanism under the ‘Fixed price process’ or ‘book-building process’ subject to conditions specified in SEBI (ICDR) Regulations, 2018.

Question 19.
Write a short note on Price and Price Band [June 2017 (4 Marks)]
Answer:
Price: There is no restriction on the price at which shares can be issued. The pricing can be decided by the issuer and the Lead Merchant Banker. They can charge any price which they feel the market can bear, but the justification for the price is required to be given in the offer document.

Price band: ‘Price Band’ is a value-setting method in which a seller indicates an upper and lower cost range, between which buyers are able to place bids. The price band’s floor and cap provide guidance to the buyers. This type of auction pricing technique is often used with IPOs.

Question 20.
Explain briefly: Indenture [June 2017 (2 Marks)]
Answer:
Indenture: It is an agreement between lender and borrower that details specific terms of the bond issuance. It specifies the legal obligations of the bond issuer and the rights of the bondholder. In other words, an indenture is a document that spells out the specific terms of a bond as well as the rights and responsibilities of both the issuer of the security and the holder.

Question 21.
“A company can raise funds from the primary market through different methods, different types of issues and by means of the offer document and red herring prospectus.” Enumerate. [June 2018 (6 Marks)]
Answer:
A company can raise funds from the primary market through different methods as given below:
1. Public Issue: When a company issues securities to new’ investors for becoming part of the shareholders’ family of the issuer it is called a public issue. The public issue can be further classified into the following two categories:
(a) Initial Public Offer (IPO): When an unlisted company makes either a fresh issue of securities or offers its existing securities for sale or both for the first time to the public, it is called an IPO.
(b) Further public offer (FPO) or Follow on offer: When an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, it is called an FPO.

2. Right Issue: When an issue of securities is made by an issuer to its existing shareholders it is called a rights issue.

3. Bonus Issue: When the company issues securities to its existing shareholders without any consideration it is called a bonus issue. Such shares are issued generally by capitalizing the company’s profit & loss account, free reserve, or securities premium account.

4. Private Placement: When an issuer makes an issue of securities to a select group of persons it is called private placement. However, the issue of securities by way of private placement cannot be made to more than 49 persons.

Private placement of securities can be of the following three types:
(a) Preferential Allotment: When a listed issuer issues shares or convertible securities, to a select group of persons it is called a preferential allotment.
(b) Qualified Institutions Placement (QIP): When a listed issuer issues equity shares or securities convertible into equity shares to selected Qualified Institutions Buyers (QIBs) it is called a QIP.
(c) Institutional Placement Programme (IPP): When a listed issuer makes a further public offer of equity shares, or offer for sale of shares by the promoter to QIBs. IPP can only be used to raise minimum j public shareholding requirements to 25%.

Offer Document: Offer document means a prospectus, red-herring prospectus or shelf prospectus, and information memorandum in terms of Section 31 of the Companies Act, 2013 in case of a public issue. In case of a rights issue, a ‘letter of offer’ is an offer document.

An offer document covers all the relevant information to help an investor to make his investment decision.

Red-herring Prospectus: The term ‘red-herring prospectus’ is not defined in the SEBI (ICDR) Regulations, 2018.

As per Explanation to Section 32 of the Companies Act, 2013, “red-herring prospectus” means a prospectus that does not include complete particulars of the quantum or price of the securities included therein.

Provisions of the red-herring prospectus are applicable to all companies except those are covered under the shelf prospectus. The provision is mainly applicable for book building.

A company proposing to issue a red-herring prospectus shall file it with the ROC at least 3 days prior to the opening of the subscription list and the offer.

A red-herring prospectus shall carry the same obligations as are applicable to a prospectus and any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.

Question 22.
What do you understand by ‘Fast Track Issue’? Explain in brief the provisions related to the fast track issue? [Dec. 2008 (6 Marks)]
Answer:
Making public issues is a very time-consuming and costly affair. The company has to make a lot of compliance under the SEBI Regulations. To overcome this difficulty, SEBI has provided a Fast Track Route to already listed companies who are coming with public issues and rights issues. The fast-track route is an alternative to access public funds by way of further capital offerings. The facility of Fast Track Route is available to well-established and compliant listed companies.

Eligibility conditions for ‘Fast Track Further Public Offer’ [Regulation 155 of the SEBI (ICDR) Regulations, 2018]: Sub-regulations (1), (2), (3), (4), (5) and (9) of Regulation 123 fie. provisions relating to filing of the draft offer document and offer documents]shall not apply if the issuer satisfies the following conditions for making a further public offer through the fast track route:
(1) Minimum listing period: Equity shares of the issuer have been listed on any stock exchange for a period of at least three years immediately preceding the reference date.

(2) Shareholding of promoter group is in the dematerialized form: Entire shareholding of the promoter group of the issuer is held in dematerialized form on the reference date.

(3) Market Capitalization: Average market capitalization of public share-holding of the issuer is at least ₹ 1,000 Crore in case of public issue.

(4) Annualized trading turnover: Annualized trading turnover of the equity shares of the issuer during 6 calendar months immediately preceding the month of the reference date has been at least 296 of the weighted average number of equity shares listed during such 6 months period. However, for issuers, whose public shareholding is less than 1596 of its issued equity capital, the annualized trading turnover of its equity shares has been at least 296 of the weighted average number of equity shares available as a free float during such 6 months period. [Free float shares are not defined in the SEBI (ICDR) Regulations, 2018. Generally, it means the portion of shares of a company that are held by public investors]

(5) Annualized delivery-based trading turnover: Annualized delivery-based trading turnover of the equity shares during 6 calendar months immediately preceding the month of the reference date has been at least 1096 of the annualized trading turnover of the equity shares during such 6 months period.

(6) Compliance with listing agreement: The Issuer has been in compliance with the equity listing agreement or the SEBI (LODR) Regulations, 2015, as applicable, for a period of at least 3 years immediately preceding the reference date. However, if the issuer has not complied with the provisions of the listing agreement or the SEBI (LODR) Regulations, 2015, relating to the composition of Board of directors, for any quarter during the last 3 years immediately preceding the reference date, but is compliant with such provisions at the time of filing of letter of offer, and adequate disclosures are made in the letter of offer about such non-compliances during the 3 years immediately preceding the reference date, it shall be deemed as compliance with the condition. Imposition of only monetary fines by stock exchanges on the issuer shall not be a ground for ineligibility for undertaking issuances under this regulation.

(7) Grievances Redressed: Issuer has redressed at least 95% of the complaints received from the investors till the end of the quarter immediately preceding the month of the reference date.

(8) No pending prosecution: No show-cause notices have been issued or prosecution proceedings have been initiated by the SEBI and pending against the issuer or its promoters or whole-time directors as on the reference date.

(9) Violation of securities laws: Issuer or promoter or promoter group or director of the issuer has not settled any alleged violation of securities laws through the consent or settlement mechanism with the SEBI during 3 years immediately preceding the reference date.

(10) No suspension of trading of equity shares: Equity shares of the issuer have not been suspended from trading as a disciplinary measure during the last 3 years immediately preceding the reference date.

(11) No conflict of interest: There shall be no conflict of interest between the lead manager and the issuer or its group companies in accordance with the applicable regulations.

(12) Impact of audit qualifications: Impact of audit qualifications, if any and where quantifiable, on the audited accounts of the issuer in respect of those financial years for which such accounts are disclosed in the letter of offer does not exceed 5% of the net profit or loss after tax of the issuer for the respective years.

Question 23.
What is the lock-in period for the promoter’s contribution? [Dec. 2009 (5 Marks)]
Answer:
Lock-in means promoters or other specified persons cannot sell the shares to others during the prescribed period. The idea is that promoters should have a stake in the company. Moreover, they are not expected to make a profit by selling the shares which earlier they had.

The SEBI (ICDR) Regulations, 2018 makes the following provisions for lock-in of securities.
Lock-in of specified securities held by the promoters [Regulation 16]:
1. The specified securities held by the promoters shall not be transferable for the stipulated periods.
(a) Minimum promoter’s contribution including the contribution made by Alternative Investment Funds or Foreign Venture Capital Investors or Scheduled Commercial Banks or Public Financial Institutions or Insurance Companies registered with IRDA, shall be locked-in for a period of 3 years from the date of commencement of commercial production or date of allotment in IPO, whichever is later.

(b) Promoters’ holding in excess of minimum promoters’ contribution shall be locked in for a period of 1 year from the date of allotment in the initial public offer.

2. The SR equity shares shall be under lock-in until conversion into equity shares having voting rights same as that of ordinary shares or shall be locked-in for a period specified above, whichever is later.

Question 24.
Write a short note on Anchor Investor [Dec. 2010 (4 Marks)]
Answer:
Anchor Investor [Regulation 2(c)]: Anchor investor means a Qualified Institutional Buyer who makes an application for a value of at least 10 Crore in a public issue on the mainboard made through the book-building process in accordance with these regulations or makes an application for a value of at least 2 Crore for an issue made in accordance with Chapter IX of these regulations. /Chapter IX deals with IPO by Small & Medium Enterprises (SME,)]

As per schedule XIII, an issuer proposing to issue specified securities through the book-building process shall comply with the following provisions relating to allocation to Anchor Investor.
(a) An anchor investor shall make an application of a value of at least 10 Crore in a public issue on the mainboard made through the book-building process or an application for a value of at least 2 Crore in case of a public issue on the SME exchange.

(b) Up to 60% of the portion available for allocation to QIBs shall be available for allocation/allotment (“anchor investor portion”) to the anchor investors.

(c) Allocation to the anchor investors shall be on a discretionary basis, subject to the following:

(I) In case of the public issue on the mainboard, through the book-building process:

  • A maximum of 2 such investors shall be permitted for allocation up to 10 Crore.
  • Minimum of 2 and maximum of 15 such investors shall be permitted for allocation above 10 Crore and up to 250 Crore, subject to minimum allotment of 5 Crore per such investor.
  • In case of allocation above 250 Crore; a minimum of 5 such investors and a maximum of 15 such investors for allocation up to ₹ 250 Crore and an additional 10 such investors for every additional ₹ 2500 Crore or part thereof, shall be permitted, subject to a minimum allotment of ₹ 5 Crore per such investor.

(II) In case of the public issue on the SME exchange, through the book-building process:

  • A maximum of 2 such investors shall be permitted for allocation up to ₹ 2 Crore.
  • Minimum of 2 and maximum of 15 such investors shall be permitted for allocation above ₹ 2 Crore and up to ₹ 25 Crore, subject to a minimum allotment of ₹ 1 Crore per such investor.
  • In case of allocation above ₹ 25 Crore; a minimum of 5 such investors and a maximum of 15 such investors for allocation up to ₹ 25 Crore and an additional 10 such investors for every additional ₹ 25 Crore or part thereof, shall be permitted, subject to a minimum allotment of ₹ 1 Crore per such investor.

(d) One-third of the anchor investor portion shall be reserved for domestic mutual funds.

(e) The bidding for anchor investors shall open one day before the issue opening date.

(f) The anchor investors shall pay on the application the same margin which is payable by other categories of investors and the balance, if any, shall be paid within two days of the date of closure of the issue.

(g) The allocation to anchor investors shall be completed on the day of the bidding by the anchor investors.

(h) If the price fixed as a result of book building is higher than the price at which the allocation is made to the anchor investors, the anchor investors shall pay the additional amount. However, if the price fixed as a result of book building is lower than the price at which the allocation is made to the anchor investors, the excess amount shall not be refunded to the anchor investors and the anchor investor shall be allotted the securities at the same price at which the allocation was made to it.

(i) The number of shares allocated to the anchor investors and the price at which the allocation is made, shall be made available to the stock ex-change(s) by the lead manager(s) for dissemination on the website of the stock exchange(s) before the opening of the issue.

(j) There shall be a lock-in of 30 days on the shares allotted to the anchor investors from the date of allotment.

(k) Neither the
1. lead manager or any associate of the lead managers (other than mutual funds sponsored by entities which are associate of the lead managers or insurance companies promoted by entities that are associate of the lead managers or Alternate Investment Funds (AIFs) sponsored by the entities which are associate of the lead manager or FPIs other than Category III sponsored by the entities which are associate of the lead manager) nor

2. any person related to the promoter/promoter group shall apply under the Anchor Investors category.

Question 25.
Define ‘fast track issue’. List out conditions to make fast track issue. [June 2010 (4 Marks)]
Answer:
Making public issues is a very time-consuming and costly affair. The company has to make a lot of compliance under the SEBI Regulations. To overcome this difficulty, SEBI has provided a Fast Track Route to already listed companies who are coming with public issues and rights issues. The fast-track route is an alternative to access public funds by way of further capital offerings. The facility of Fast Track Route is available to well-established and compliant listed companies.

Eligibility conditions for ‘Fast Track Further Public Offer’ [Regulation 155 of the SEBI (ICDR) Regulations, 2018]: Sub-regulations (1), (2), (3), (4), (5) and (9) of Regulation 123 fie. provisions relating to filing of the draft offer document and offer documents]shall not apply if the issuer satisfies the following conditions for making a further public offer through the fast track route:
1. Minimum listing period: Equity shares of the issuer have been listed on any stock exchange for a period of at least three years immediately preceding the reference date.

2. Shareholding of promoter group is in the dematerialized form: Entire shareholding of the promoter group of the issuer is held in dematerialized form on the reference date.

3. Market Capitalization: Average market capitalization of public share-holding of the issuer is at least ₹ 1,000 Crore in case of public issue.

4. Annualized trading turnover: Annualized trading turnover of the equity shares of the issuer during 6 calendar months immediately preceding the month of the reference date has been at least 296 of the weighted average number of equity shares listed during such 6 months period. However, for issuers, whose public shareholding is less than 1596 of its issued equity capital, the annualized trading turnover of its equity shares has been at least 296 of the weighted average number of equity shares available as a free float during such 6 months period. [Free float shares are not defined in the SEBI (ICDR) Regulations, 2018. Generally, it means the portion of shares of a company that are held by public investors]

5. Annualized delivery-based trading turnover: Annualized delivery-based trading turnover of the equity shares during 6 calendar months immediately preceding the month of the reference date has been at least 1096 of the annualized trading turnover of the equity shares during such 6 months period.

6. Compliance with listing agreement: The Issuer has been in compliance with the equity listing agreement or the SEBI (LODR) Regulations, 2015, as applicable, for a period of at least 3 years immediately preceding the reference date. However, if the issuer has not complied with the provisions of the listing agreement or the SEBI (LODR) Regulations, 2015, relating to the composition of Board of directors, for any quarter during the last 3 years immediately preceding the reference date, but is compliant with such provisions at the time of filing of letter of offer, and adequate disclosures are made in the letter of offer about such non-compliances during the 3 years immediately preceding the reference date, it shall be deemed as compliance with the condition. Imposition of only monetary fines by stock exchanges on the issuer shall not be a ground for ineligibility for undertaking issuances under this regulation.

7. Grievances Redressed: Issuer has redressed at least 95% of the complaints received from the investors till the end of the quarter immediately preceding the month of the reference date.

8. No pending prosecution: No show-cause notices have been issued or prosecution proceedings have been initiated by the SEBI and pending against the issuer or its promoters or whole-time directors as on the reference date.

9. Violation of securities laws: Issuer or promoter or promoter group or director of the issuer has not settled any alleged violation of securities laws through the consent or settlement mechanism with the SEBI during 3 years immediately preceding the reference date.

10. No suspension of trading of equity shares: Equity shares of the issuer have not been suspended from trading as a disciplinary measure during the last 3 years immediately preceding the reference date.

11. No conflict of interest: There shall be no conflict of interest between the lead manager and the issuer or its group companies in accordance with the applicable regulations.

12. Impact of audit qualifications: Impact of audit qualifications, if any and where quantifiable, on the audited accounts of the issuer in respect of those financial years for which such accounts are disclosed in the letter of offer does not exceed 5% of the net profit or loss after tax of the issuer for the respective years.

Question 26.
What are the eligibility norms for public issues by an unlisted company? [June 2010 (4 Marks)]
Answer:
Following norms are specified in the SEBI(ICDR) Regulations, 2018 for IPO:
Eligibility requirements for an initial public offer: [Regulation 6(1)]: An issuer shall be eligible to make an Initial Public Offer (IPO) only if it meets all the following conditions:
1. Assets Criteria: The issuer has net tangible assets of at least ₹ 3 Crore, calculated on a restated and consolidated basis, in each of the preceding three full years (of 12 months each), of which not more than 50% are held in monetary assets.

However, if more than 50% of the net tangible assets are held in monetary assets, the issuer has utilized or made firm commitments to utilize such excess monetary assets in its business or project. The limit of 50% on monetary assets shall not be applicable in case the IPO is made entirely through an Offer for Sale (OFS).

2. Profit Criteria: The issuer has an average operating profit of at least ₹ 15 Crore, calculated on a restated and consolidated basis, during the preceding 3 years (of 12 months each), with operating profit in each of these preceding 3 years.

3. Net-worth Criteria: The issuer has a net worth of at least t 1 Crore in each of the preceding 3 full years (of twelve months each), calculated on a restated and consolidated basis.

4. Name Criteria: If the issuer has changed its name within the last 1 year, at least 50% of the revenue, calculated on a restated and consolidated basis, for the preceding one full year, has been earned by it from the activity indicated by its new name.

Alternative Norms [Regulation 6(2)]: An issuer not satisfying the above conditions shall be eligible to make IPO only if the issue is made through the book-building process and the issuer undertakes to allot at least 75% of the net offer to Qualified Institutional Buyers (QIB) and to refund the full subscription money if it fails to do so.

Norms for SR Equity shares [Regulation 6(3)]:
“SR equity shares ” means the equity shares of an issuer having superior voting rights compared to all other equity shares issued by that issuer.

If an issuer has issued SR equity shares to its promoters/founders, the said issuer shall be allowed to do an initial public offer of only ordinary shares for listing on the Main Board subject to compliance with the following:
1. The issuer shall be intensive in the use of technology, information technology, intellectual property, data analytics, biotechnology, or nano-technology to provide products, services, or business platforms with substantial value addition.

2. The SR shareholder shall not be part of the promoter group whose collective net worth is more than ₹ 500 Crore.

3. The SR shares were issued only to the promoters/founders who hold an executive position in the issuer company.

4. The issue of SR equity shares had been authorized by a special resolution passed at a general meeting of the shareholders of the issuer, where the notice calling for such general meeting specifically provided for

  • the size of the issue of SR equity shares,
  • the ratio of voting rights of SR equity shares vis-a-vis the ordinary shares,
  • rights as to differential dividends, if any
  • sunset provisions, which provide for a time frame for the validity of such SR equity shares,
  • matters in respect of which the SR equity shares would have the same voting right as that of the ordinary shares,

5. The SR equity shares have been held for a period of at least 6 months prior to the filing of the red herring prospectus.

6. The SR equity shares shall have voting rights in the ratio of a minimum of 2:1 up to a maximum of 10:1 compared to ordinary shares and such ratio shall be in whole numbers only.

7. The SR equity shares shall have the same face value as the ordinary shares.

8. The issuer shall only have one class of SR equity shares.

9. The SR equity shares shall be equivalent to ordinary equity shares in all respects, except for having superior voting rights.

Question 27.
Can the issuer companies offer specified securities at different prices? What are the conditions laid down under the SEBI investor protection regulations with regard to differential pricing of securities? [June 2010 (5 Marks)]
Answer:
Issue Price: There is no restriction on the price at which shares can be issued. The pricing can be decided by the issuer and the Lead Merchant Banker. They can charge any price which they feel the market can bear, but the justification for the price is required to be given in the offer document.

Differential Pricing [Regulation 30 of the SEBI (ICDR) Regulations, 2018]:
The issuer may offer its specified securities at different prices, subject to the following:
(a) Retail individual investors or retail individual shareholders or employees entitled for reservation may be offered specified securities at a price not lower than by more than 10% of the price at which net offer is made to other categories of applicants, excluding anchor investors.

(b) In the case of a book-built issue, the price of the specified securities offered to the anchor investors shall not be lower than the price offered to other applicants.

(c) In case the issuer opts for the alternate method of book building in terms of Part D of Schedule XIII, the issuer may offer the specified securities to its employees at a price not lower than by more than 10% of the floor price.

Discount, if any, shall be expressed in rupee terms in the offer document.
Part D of Schedule XIII deals with the “alternate method of book building process”.

Question 28.
Write a short note on Fast Track Issue [June 2011 (4 Marks)]
Answer:
Making public issues is a very time-consuming and costly affair. The company has to make a lot of compliance under the SEBI Regulations. To overcome this difficulty, SEBI has provided a Fast Track Route to already listed companies who are coming with public issues and rights issues. The fast-track route is an alternative to access public funds by way of further capital offerings. The facility of Fast Track Route is available to well-established and compliant listed companies.

Eligibility conditions for ‘Fast Track Further Public Offer’ [Regulation 155 of the SEBI (ICDR) Regulations, 2018]: Sub-regulations (1), (2), (3), (4), (5) and (9) of Regulation 123 fie. provisions relating to filing of the draft offer document and offer documents]shall not apply if the issuer satisfies the following conditions for making a further public offer through the fast track route:
1. Minimum listing period: Equity shares of the issuer have been listed on any stock exchange for a period of at least three years immediately preceding the reference date.

2. Shareholding of promoter group is in the dematerialized form: Entire shareholding of the promoter group of the issuer is held in dematerialized form on the reference date.

3. Market Capitalization: Average market capitalization of public share-holding of the issuer is at least ₹ 1,000 Crore in case of public issue.

4. Annualized trading turnover: Annualized trading turnover of the equity shares of the issuer during 6 calendar months immediately preceding the month of the reference date has been at least 296 of the weighted average number of equity shares listed during such 6 months period. However, for issuers, whose public shareholding is less than 1596 of its issued equity capital, the annualized trading turnover of its equity shares has been at least 296 of the weighted average number of equity shares available as a free float during such 6 months period. [Free float shares are not defined in the SEBI (ICDR) Regulations, 2018. Generally, it means the portion of shares of a company that are held by public investors]

5. Annualized delivery-based trading turnover: Annualized delivery-based trading turnover of the equity shares during 6 calendar months immediately preceding the month of the reference date has been at least 1096 of the annualized trading turnover of the equity shares during such 6 months period.

6. Compliance with listing agreement: The Issuer has been in compliance with the equity listing agreement or the SEBI (LODR) Regulations, 2015, as applicable, for a period of at least 3 years immediately preceding the reference date. However, if the issuer has not complied with the provisions of the listing agreement or the SEBI (LODR) Regulations, 2015, relating to the composition of Board of directors, for any quarter during the last 3 years immediately preceding the reference date, but is compliant with such provisions at the time of filing of letter of offer, and adequate disclosures are made in the letter of offer about such non-compliances during the 3 years immediately preceding the reference date, it shall be deemed as compliance with the condition. Imposition of only monetary fines by stock exchanges on the issuer shall not be a ground for ineligibility for undertaking issuances under this regulation.

7. Grievances Redressed: Issuer has redressed at least 95% of the complaints received from the investors till the end of the quarter immediately preceding the month of the reference date.

8. No pending prosecution: No show-cause notices have been issued or prosecution proceedings have been initiated by the SEBI and pending against the issuer or its promoters or whole-time directors as on the reference date.

9. Violation of securities laws: Issuer or promoter or promoter group or director of the issuer has not settled any alleged violation of securities laws through the consent or settlement mechanism with the SEBI during 3 years immediately preceding the reference date.

10. No suspension of trading of equity shares: Equity shares of the issuer have not been suspended from trading as a disciplinary measure during the last 3 years immediately preceding the reference date.

11. No conflict of interest: There shall be no conflict of interest between the lead manager and the issuer or its group companies in accordance with the applicable regulations.

12. Impact of audit qualifications: Impact of audit qualifications, if any and where quantifiable, on the audited accounts of the issuer in respect of those financial years for which such accounts are disclosed in the letter of offer does not exceed 5% of the net profit or loss after tax of the issuer for the respective years.

Question 29.
Write a short note on Lock-in-period [Dec. 2011 (4 Marks)]
Answer:
Lock-in means promoters or other specified persons cannot sell the shares to others during the prescribed period. The idea is that promoters should have a stake; in the company. Moreover, they are not expected to make a profit by selling the shares which earlier they had.

The SEBI (ICDR) Regulations, 2018 makes the following provisions for lock-in of securities.

Lock-in of specified securities held by the promoters [Regulation 16]:
1. The specified securities held by the promoters shall not be transferable (hereinafter referred to as “lock-in ”) for the stipulated periods.
(a) Minimum promoter’s contribution including the contribution made by Alternative Investment Funds or Foreign Venture Capital Investors or Scheduled Commercial Banks or Public Financial Institutions or Insurance Companies registered with IRDA, shall be locked-in for a period of 3 years from the date of commencement of commercial production or date of allotment in IPO, whichever is later.

(b) Promoters’ holding in excess of minimum promoters’ contribution shall be locked in for a period of 1 year from the date of allotment in the initial public offer.

2. The SR equity shares shall be under lock-in until conversion into equity shares having voting rights same as that of ordinary shares or shall be locked-in for a period specified above, whichever is later.

Lock-in of specified securities held by persons other than the promoters [Regulation 17]: The entire pre-issue capital held by persons other than the promoters shall be locked in for a period of 1 year from the date of allotment 1 in the initial public offer. This provision shall not apply to:

(a) Equity shares allotted to employees, whether currently an employee or not, under an employee stock option or employee stock purchase scheme of the issuer prior to the initial public offer, if the issuer has made full disclosures with respect to such options or scheme in accordance with Part A of Schedule VI.

(b) Equity shares held by an employee stock option trust or transferred to the employees by an employee stock option trust pursuant to exercise of options by the employees, whether current employees or not, in accordance with the employee stock option plan or employee stock purchase scheme. However, equity shares allotted to the employees shall be subject to the provisions of lock-in as specified under the SEBI (Share Based Employee Benefits) Regulations, 2014.

(c) Equity shares held by a Venture Capital Fund or Alternative Investment Fund of Category-I or Category-II or a Foreign Venture Capital Investor. Such equity shares shall be locked in for a period of at least 1 year from the date of purchase by the venture capital fund or alternative investment fund or foreign venture capital investor.

Lock-in of specified securities lent to the stabilizing agent under the Green Shoe Option (GSO) [Regulation 18]: The lock-in provisions shall not apply with respect to the specified securities lent to stabilizing agent for the purpose of greenshoe option, during the period starting from the date of lending of such specified securities and ending on the date on which they are returned to the lender. However, the specified securities shall be locked in for the remaining period from the date on which they are returned to the lender.

Lock-in of party-paid securities [Regulation 19]: If the specified securities which are subject to lock-in are partly paid up and the amount called up on such specified securities is less than the amount called up on the specified securities issued to the public, the lock-in shall end only on the expiry of 3 years after such specified securities have become pari passu with the specified securities issued to the public.

Inscription or recording of non-transferability [Regulation 20]: The certificates of specified securities which are subject to lock-in shall contain the inscription “non-transferable” and specify the lock-in period and in case such specified securities are dematerialized, the issuer shall ensure that the lock-in is recorded by the depository.

Question 30.
Write a short note on the Period of subscription [Dec. 2011 (4 Marks)]
Answer:
Period of subscription:
Period of subscription [Regulation 46 of the SEBI (ICDR) Regulations, 2018]:

  • An initial public offer shall be kept open for at least 3 working days and not more than 10 working days.
  • In case of a revision in the price band, the issuer shall extend the bidding (issue) period disclosed in the red herring prospectus, for a minimum period of 3 working days.
  • In case of force majeure, banking strike, or similar circumstances, the issuer may, for reasons to be recorded in writing, extend the bidding (issue) period disclosed in the red herring prospectus (in case of a book built issue) or the issue period disclosed in the prospectus (in case of a fixed price issue), for a minimum period of 3 working days.

Question 31.
Discuss the rules for the preferential issue of shares by existing listed companies. [Dec. 2011 (5 Marks)]
Answer:
Preferential Issue [Regulation 2(l)(11)]: Preferential issue means an issue of specified securities by a listed issuer to any select person or group of persons on a private placement basis and does not include an offer of specified securities made through employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or depository receipts issued in a country outside India or foreign securities.

To whom preferential issue cannot be made [Regulation 159]: Preferential issue of specified securities shall not be made to any person who has sold or transferred any equity shares of the issuer during the six months preceding the relevant date:

Conditions for preferential issue [Regulation 160]: A listed issuer making a preferential issue of specified securities shall ensure that:
(a) All equity shares allotted by way of preferential issue shall be made fully- paid up at the time of the allotment.
(b) A special resolution has been passed by its shareholders.
(c) All equity shares held by the proposed allottees in the issuer are in dematerialized form.
(d) The issuer is in compliance with the conditions for continuous listing of equity shares as specified in the listing agreement with the stock exchange where the equity shares of the issuer are listed and the SEBI (LODR) Regulations, 2015, and any circular or notification issued by the SEBI thereunder.
(e) The issuer has obtained the Permanent Account Numbers of the proposed allottees, except those allottees which may be exempt from specifying their Permanent Account Number for transacting in the securities market by the Board.

Question 32.
Write a short note on Promoters Contribution [June 2012 (4 Marks)]
Answer:
Promoters must have some reasonable contribution to the company. If they have no stake in the company, they are less likely to be careful. Following norms have been prescribed for promoter’s contributions under the SEBI (ICDR) Regulations, 2018:
Minimum promoters’ contribution [Regulation 14]: The promoters of the issuer shall hold at least 20% of the post-issue capital.

However, in case the post-issue shareholding of the promoters is less than 20%, Alternative Investment Funds or Foreign Venture Capital Investors or Scheduled Commercial Banks or Public Financial Institutions or Insurance Companies registered with IRDA may contribute to meet the shortfall in minimum contribution as specified for the promoters, subject to a maximum of 10% of the post-issue capital without being identified as promoters.

The requirement of minimum promoters’ contribution shall not apply in case an issuer does not have any identifiable promoter.

The minimum promoters’ contribution shall be as follows:
(a) The promoters shall contribute 20% of the post-issue capital either by way of equity shares including SR equity shares, if any, or by way of subscription to convertible securities. If the price of the equity shares allotted pursuant to conversion is not pre-determined and not disclosed in the offer document, the promoters shall contribute only by way of subscription to the convertible securities being issued in the public issue and shall undertake in writing to subscribe to the equity shares pursuant to the conversion of such securities.

(b) In case of any issue of convertible securities which are convertible or exchangeable on different dates and if the promoters’ contribution is by way of equity shares (conversion price being pre-determined), such contribution shall not be at a price lower than the weighted average price of the equity share capital arising out of the conversion of such securities.

(c) Subject to the above conditions, in case of an initial public offer of convertible debt instruments without a prior public issue of equity shares, the promoters shall bring in a contribution of at least 25% of the project cost in the form of equity shares, subject to contributing at least 2596 of the issue size from their own funds in the form of equity shares. However, if the project is to be implemented in stages, the promoters’ contribution shall be with respect to total equity participation till the respective stage vis-a-vis the debt raised or proposed to be raised through the public issue.

The promoters shall satisfy the requirements of this regulation at least one day prior to the date of opening of the issue.

In case the promoters have to subscribe to equity shares or convertible securities towards minimum promoters’ contribution, the amount of promoters’ contribution shall be kept in an escrow account with a scheduled commercial bank, which shall be released to the issuer along with the release of the issue proceeds.

Where the promoters’ contribution has already been brought in and utilized, the issuer shall give the cash flow statement disclosing the use of such funds in the offer document.

Where the minimum promoters’ contribution is more than ^100 Crore and the initial public offer is for partly paid shares, the promoters shall bring in at least ₹ 100 Crore before the date of opening of the issue and the remaining amount may be brought on a pro-rata basis before the calls are made to the public.

Securities ineligible for minimum promoters’ contribution [Regulation 15]: For the computation of minimum promoter’s contribution, the following specified securities shall not be eligible:
(a) Specified securities acquired during the preceding 3 years if these are:
1. acquired for consideration other than cash and revaluation of assets or capitalization of intangible assets is involved in such transaction; or

2. resulting from a bonus issue by utilization 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 the Promoters and Alternative Investment Funds or Foreign Venture Capital Investors or Scheduled Commercial Banks or Public Financial Institutions or Insurance Companies registered with IRDA, during the preceding 1 year at a price lower than the price at which specified securities are being offered to the public in the initial public offer.

However, nothing contained in this clause shall apply:
1. if the promoters and alternative investment funds, as applicable, pay to the issuer the difference between the price at which the specified securities are offered in the initial public offer and the price at which the specified securities had been acquired;

2. if such specified securities are acquired in terms of the scheme under sections 230 to 234 of the Companies Act, 2013, as approved by High Court/Tribunal/Central Government, by the promoters in lieu of business and invested capital that had been in existence for a period of more than 1 year prior to such approval;

3. to an initial public offer by a government company, statutory authority or corporation, or any special purpose vehicle set up by any of them, which is engaged in the infrastructure sector.

(c) Specified securities allotted to the Promoters and Alternative Investment Funds during the preceding 1 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 or LLPs, where the partners of the erstwhile partnership firms or LLPs are the promoters of the issuer and there is no change in the management. However, specified securities, allotted to the promoters against the capital existing in such firms for a period of more than 1 year on a continuous basis, shall be eligible.

(d) Specified securities pledged with any creditor. Specified securities shall be eligible for the computation of promoters’ contribution if such securities are acquired pursuant to a scheme that has been approved by a tribunal or the Central Government under sections 230 to 234 of the Companies Act, 2013.

Question 33.
Write a short note on Basis of Allotment [June 2012 (4 Marks)]
Answer:
The person responsible for the basis of allotment: In a public issue of securities, the Executive or Managing Director of the Designated Stock Exchange along with the post issue Lead Merchant Banker and the Registrars to the Issue shall be responsible to ensure that the basis of allotment is finalized in a fair and proper manner in accordance with the SEBI (ICDR) Regulations, 2018.

Allotment procedure and basis of allotment [Regulation 49 of the SEBI (ICDR) Regulations, 2018]:

  1. The issuer shall not make an allotment pursuant to a public issue if the number of prospective allottees is less than 1,000.
  2. The issuer shall not make any allotment in excess of the specified securities offered through the offer document except in case of oversubscription for the purpose of rounding off to make allotment, in consultation with the designated stock exchange. However, in case of oversubscription, an allotment of not more than 1% of the net offer to the public may be made for the purpose of making allotments in minimum lots.
  3. The allotment of specified securities to applicants other than to the retail individual investors and anchor investors shall be on a proportionate basis within the respective 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 in the offer document. The value of specified securities allotted to any person, except in the case of employees, shall not exceed t 2 lakhs for retail investors or up to ? 5 lakhs for eligible employees.
  4. The allotment of specified securities to each retail individual investor shall not be less than the minimum bid lot, subject to the availability of shares in the retail individual investor category, and the remaining available shares, if any, shall be allotted on a proportionate basis.
  5. The authorized employees of the designated stock exchange, along with the lead manager and registrars to the issue, shall ensure that the basis of allotment is finalized in a fair and proper manner in accordance with the procedure as specified in Part A of Schedule XIV.

Question 34.
“An issuer can offer specified securities at different prices.” Comment. [Dec. 2012 (4 Marks)]
Answer:
Issue Price: There is no restriction on the price at which shares can be issued. The pricing can be decided by the issuer and the Lead Merchant Banker. They can charge any price which they feel the market can bear, but the justification for the price is required to be given in the offer document.

Differential Pricing [Regulation 30 of the SEBI (ICDR) Regulations, 2018]:
The issuer may offer its specified securities at different prices, subject to the following:
(a) Retail individual investors or retail individual shareholders or employees entitled for reservation may be offered specified securities at a price not lower than by more than 10% of the price at which net offer is made to other categories of applicants, excluding anchor investors.

(b) In the case of a book-built issue, the price of the specified securities offered to the anchor investors shall not be lower than the price offered to other applicants.

(c) In case the issuer opts for the alternate method of book building in terms of Part D of Schedule XIII, the issuer may offer the specified securities to its employees at a price not lower than by more than 10% of the floor price.

Discount, if any, shall be expressed in rupee terms in the offer document.
Part D of Schedule XIII deals with the “alternate method of book building process”.

Question 35.
Write a short note on Promoters Contribution [Dec. 2012 (4 Marks)]
Answer:
Lock-in means promoters or other specified persons cannot sell the shares to others during the prescribed period. The idea is that promoters should have a stake in the company. Moreover, they are not expected to make a profit by selling the shares which earlier they had.

The SEBI (ICDR) Regulations, 2018 makes the following provisions for lock-in of securities.
Lock-in of specified securities held by the promoters [Regulation 16]:
1. The specified securities held by the promoters shall not be transferable for the stipulated periods.
(a) Minimum promoter’s contribution including the contribution made by Alternative Investment Funds or Foreign Venture Capital Investors or Scheduled Commercial Banks or Public Financial Institutions or Insurance Companies registered with IRDA, shall be locked-in for a period of 3 years from the date of commencement of commercial production or date of allotment in IPO, whichever is later.

(b) Promoters’ holding in excess of minimum promoters’ contribution shall be locked in for a period of 1 year from the date of allotment in the initial public offer.

2. The SR equity shares shall be under lock-in until conversion into equity shares having voting rights same as that of ordinary shares or shall be locked-in for a period specified above, whichever is later.

Lock-in of specified securities held by persons other than the promoters [Regulation 17]: The entire pre-issue capital held by persons other than the promoters shall be locked in for a period of 1 year from the date of allotment 1 in the initial public offer. This provision shall not apply to:

(a) Equity shares allotted to employees, whether currently an employee or not, under an employee stock option or employee stock purchase scheme of the issuer prior to the initial public offer, if the issuer has made full disclosures with respect to such options or scheme in accordance with Part A of Schedule VI.

(b) Equity shares held by an employee stock option trust or transferred to the employees by an employee stock option trust pursuant to exercise of options by the employees, whether current employees or not, in accordance with the employee stock option plan or employee stock purchase scheme. However, equity shares allotted to the employees shall be subject to the provisions of lock-in as specified under the SEBI (Share Based Employee Benefits) Regulations, 2014.

(c) Equity shares held by a Venture Capital Fund or Alternative Investment Fund of Category-I or Category-II or a Foreign Venture Capital Investor. Such equity shares shall be locked in for a period of at least 1 year from the date of purchase by the venture capital fund or alternative investment fund or foreign venture capital investor.

Lock-in of specified securities lent to the stabilizing agent under the Green Shoe Option (GSO) [Regulation 18]: The lock-in provisions shall not apply with respect to the specified securities lent to stabilizing agent for the purpose of greenshoe option, during the period starting from the date of lending of such specified securities and ending on the date on which they are returned to the lender. However, the specified securities shall be locked in for the remaining period from the date on which they are returned to the lender.

Lock-in of party-paid securities [Regulation 19]: If the specified securities which are subject to lock-in are partly paid up and the amount called-upon such specified securities are less than the amount called-up on the specified securities issued to the public, the lock-in shall end only on the expiry of 3 years after such specified securities have become pari passu with the specified securities issued to the public.

Inscription or recording of non-transferability [Regulation 20]: The certificates of specified securities which are subject to lock-in shall contain the inscription “non-transferable” and specify the lock-in period and in case such specified securities are dematerialized, the issuer shall ensure that the lock-in is recorded by the depository.

Question 36.
Write a short note on Qualified Institutional Buyer [Dec. 2012 (4 Marks)]
Answer:
Qualified Institutional Buyer means:

  • A Mutual Fund, Venture Capital Fund, Alternative Investment Fund & Foreign Venture Capital Investor registered with the SEBI
  • A Category I & II Foreign Portfolio Investor registered with the SEBI
  • A Public Financial Institution
  • A Scheduled Commercial Bank
  • A multilateral and bilateral development financial institution
  • A state industrial development corporation
  • An Insurance Company registered with the IRDA
  • A Provident Fund with a minimum corpus of ₹ 25 Crore
  • A Pension Fund with a minimum corpus of ₹ 25 Crore
  • National Investment Fund
  • Insurance Funds set up and managed by the army, navy, or air force of the Union of India
  • Insurance Funds set up and managed by the Department of Posts, India.
  • Systematically important non-banking financial companies.

Thus, only above stated institutional buyers are QIB and not other institutional if buyers.

Question 37.
Discuss briefly the SEBI Regulations for preferential issue of shares by listed companies. [Dec. 2012 (5 Marks)]
Answer:
Preferential issue means the issuance of equity shares to promoter group or selected investors. It covers the allotment of convertible debentures or any other financial instruments that could be converted into equity shares at a later date. The investors could be institutional investors, private equity investors, high j net-worth individuals, or companies.

The preferential issue is one of the key sources of funding for companies. One of the biggest advantages of a preferential issue is that the company can raise money quickly and cheaply compared with other means of raising money, says IPO or issue of shares on a rights basis.

Preferential issues and private placement is only for the selected class of investors and not for the retail investors. It is like a wholesale market, where institutions with financial clout are allowed to participate.

Preferential Issue [Regulation 2(l)(11)]: Preferential issue means an issue of specified securities by a listed issuer to any select person or group of persons on a private placement basis and does not include an offer of specified securities made through employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or depository receipts issued in a country outside India or foreign securities.

To whom preferential issue cannot be made [Regulation 159]: Preferential issue of specified securities shall not be made to any person who has sold or transferred any equity shares of the issuer during the six months preceding the relevant date:

Conditions for preferential issue [Regulation 160]: A listed issuer making a preferential issue of specified securities shall ensure that:
(a) All equity shares allotted by way of preferential issue shall be made fully- paid up at the time of the allotment.
(b) A special resolution has been passed by its shareholders.
(c) All equity shares held by the proposed allottees in the issuer are in dematerialized form.
(d) The issuer is in compliance with the conditions for continuous listing of equity shares as specified in the listing agreement with the stock exchange where the equity shares of the issuer are listed and the SEBI (LODR) Regulations, 2015, and any circular or notification issued by the SEBI thereunder.
(e) The issuer has obtained the Permanent Account Numbers of the proposed allottees, except those allottees which may be exempt from specifying their Permanent Account Number for transacting in the securities market by the Board.

Question 38.
What are the eligible conditions for making a fast track issue (FTI)? [June 2013 (5 Marks)]
Answer:
Making public issues is a very time-consuming and costly affair. The company has to make a lot of compliance under the SEBI Regulations. To overcome this difficulty, SEBI has provided a Fast Track Route to already listed companies who are coming with public issues and rights issues. The fast-track route is an alternative to access public funds by way of further capital offerings. The facility of Fast Track Route is available to well-established and compliant listed companies.

Eligibility conditions for ‘Fast Track Further Public Offer’ [Regulation 155 of the SEBI (ICDR) Regulations, 2018]: Sub-regulations (1), (2), (3), (4), (5) and (9) of Regulation 123 fie. provisions relating to filing of the draft offer document and offer documents]shall not apply if the issuer satisfies the following conditions for making a further public offer through the fast track route:
1. Minimum listing period: Equity shares of the issuer have been listed on any stock exchange for a period of at least three years immediately preceding the reference date.

2. Shareholding of promoter group is in the dematerialized form: Entire shareholding of the promoter group of the issuer is held in dematerialized form on the reference date.

3. Market Capitalization: Average market capitalization of public share-holding of the issuer is at least ₹? 1,000 Crore in case of public issue.

4. Annualized trading turnover: Annualized trading turnover of the equity shares of the issuer during 6 calendar months immediately preceding the month of the reference date has been at least 296 of the weighted average number of equity shares listed during such 6 months period. However, for issuers, whose public shareholding is less than 1596 of its issued equity capital, the annualized trading turnover of its equity shares has been at least 296 of the weighted average number of equity shares available as a free float during such 6 months period. [Free float shares are not defined in the SEBI (ICDR) Regulations, 2018. Generally, it means the portion of shares of a company that are held by public investors]

5. Annualized delivery-based trading turnover: Annualized delivery-based trading turnover of the equity shares during 6 calendar months immediately preceding the month of the reference date has been at least 1096 of the annualized trading turnover of the equity shares during such 6 months period.

6. Compliance with listing agreement: The Issuer has been in compliance with the equity listing agreement or the SEBI (LODR) Regulations, 2015, as applicable, for a period of at least 3 years immediately preceding the reference date. However, if the issuer has not complied with the provisions of the listing agreement or the SEBI (LODR) Regulations, 2015, relating to the composition of Board of directors, for any quarter during the last 3 years immediately preceding the reference date, but is compliant with such provisions at the time of filing of letter of offer, and adequate disclosures are made in the letter of offer about such non-compliances during the 3 years immediately preceding the reference date, it shall be deemed as compliance with the condition. Imposition of only monetary fines by stock exchanges on the issuer shall not be a ground for ineligibility for undertaking issuances under this regulation.

7. Grievances Redressed: Issuer has redressed at least 95% of the complaints received from the investors till the end of the quarter immediately preceding the month of the reference date.

8. No pending prosecution: No show-cause notices have been issued or prosecution proceedings have been initiated by the SEBI and pending against the issuer or its promoters or whole-time directors as on the reference date.

9. Violation of securities laws: Issuer or promoter or promoter group or director of the issuer has not settled any alleged violation of securities laws through the consent or settlement mechanism with the SEBI during 3 years immediately preceding the reference date.

10. No suspension of trading of equity shares: Equity shares of the issuer have not been suspended from trading as a disciplinary measure during the last 3 years immediately preceding the reference date.

11. No conflict of interest: There shall be no conflict of interest between the lead manager and the issuer or its group companies in accordance with the applicable regulations.

12. Impact of audit qualifications: Impact of audit qualifications, if any and where quantifiable, on the audited accounts of the issuer in respect of those financial years for which such accounts are disclosed in the letter of offer does not exceed 5% of the net profit or loss after tax of the issuer for the respective years.

Question 39.
What do you understand by Qualified Institutions Placement (QIP)? [June 2013 (5 Marks)]
Answer:
A company can raise funds from the primary market through different methods as given below:
1. Public Issue: When a company issues securities to new’ investors for becoming part of the shareholders family of the issuer it is called a public issue. The public issue can be further classified into the following two categories:
(a) Initial Public Offer (IPO): When an unlisted company makes either a fresh issue of securities or offers its existing securities for sale or both for the first time to the public, it is called an IPO.

(b) Further public offer (FPO) or Follow on offer: When an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, it is called an FPO.

2. Right Issue: When an issue of securities is made by an issuer to its existing shareholders it is called a rights issue.

3. Bonus Issue: When the company issues securities to its existing shareholders without any consideration it is called a bonus issue. Such shares are issued generally by capitalizing the company’s profit & loss account, free reserve or securities premium account.

4. Private Placement: When an issuer makes an issue of securities to a select group of persons it is called private placement. However, the issue of securities by way of private placement cannot be made to more than 49 persons.

Private placement of securities can be of the following three types:
(a) Preferential Allotment: When a listed issuer issues shares or convertible securities, to a select group of persons it is called a preferential allotment.
(b) Qualified Institutions Placement (QIP): When a listed issuer issues equity shares or securities convertible into equity shares to selected Qualified Institutions Buyers (QIBs) it is called a QIP.
(c) Institutional Placement Programme (IPP): When a listed issuer makes a further public offer of equity shares, or offer for sale of shares by the promoter to QIBs. IPP can only be used to raise minimum j public shareholding requirements to 25%.

Offer Document: Offer document means a prospectus, red-herring prospectus or shelf prospectus, and information memorandum in terms of Section 31 of the Companies Act, 2013 in case of a public issue. In case of a rights issue, a ‘letter of offer’ is an offer document.

An offer document covers all the relevant information to help an investor to make his investment decision.

Red-herring Prospectus: The term ‘red-herring prospectus’ is not defined in the SEBI (ICDR) Regulations, 2018.

As per Explanation to Section 32 of the Companies Act, 2013, “red-herring prospectus” means a prospectus that does not include complete particulars of the quantum or price of the securities included therein.

Provisions of the red-herring prospectus are applicable to all companies except those are covered under the shelf prospectus. The provision is mainly applicable for book building.

A company proposing to issue a red-herring prospectus shall file it with the ROC at least 3 days prior to the opening of the subscription list and the offer.

A red-herring prospectus shall carry the same obligations as are applicable to a prospectus and any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.

Question 40.
Aishwarya Ltd. proposes to make a preferential issue of 10,00,000 shares to eligible investors under the SEBI (ICDR) Regulations. From the following share price data, identify the price at which share warrants should be issued and the amount payable by the promoters at the time of allotment:
(i) Closing price in the market on the relevant date: ₹ 340
(ii) The average of the weekly high and low of the volume-weighted average price of the related equity shares quoted on the recognized stock exchange during the 26 weeks preceding the relevant date: ₹ 354
(iii) The average of the weekly high and low of the volume-weighted average prices of the related equity shares quoted on a recognized stock exchange during the 2 weeks preceding the relevant date: ₹ 350. [Dec. 2013(5 Marks)]
Answer:
As per the SEBI (ICDR) Regulations, 2018 the price of equity shares that have been listed on a stock exchange for 26 weeks or more on the relevant date will be higher of the following two:

  1. The average of the weekly high and low of the volume-weighted average price of the related equity shares quoted on the recognized stock exchange during the 26 weeks preceding the relevant date:₹ 354
  2. The average of the weekly high and low of the volume-weighted average prices of the related equity shares quoted on a recognized stock exchange during the 2 weeks preceding the relevant date: ₹ 350.

Thus, the price should bet 354.

Question 41.
A company cannot offer shares at different prices to different sets of people in a particular public issue. Comment. [Dec. 2013 (4 Marks)]
Answer:
Issue Price: There is no restriction on the price at which shares can be issued. The pricing can be decided by the issuer and the Lead Merchant Banker. They can charge any price which they feel the market can bear, but the justification for the price is required to be given in the offer document.

Differential Pricing [Regulation 30 of the SEBI (ICDR) Regulations, 2018]:
The issuer may offer its specified securities at different prices, subject to the following:
(a) Retail individual investors or retail individual shareholders or employees entitled for reservation may be offered specified securities at a price not lower than by more than 10% of the price at which net offer is made to other categories of applicants, excluding anchor investors.

(b) In case of a book-built issue, the price of the specified securities offered to the anchor investors shall not be lower than the price offered to other applicants.

(c) In case the issuer opts for the alternate method of book building in terms of Part D of Schedule XIII, the issuer may offer the specified securities to its employees at a price not lower than by more than 10% of the floor price.

Discount, if any, shall be expressed in rupee terms in the offer document.
Part D of Schedule XIII deals with the “alternate method of book building process”.

Question 42.
Every institutional buyer is a qualified institutional investor. Comment. [Dec. 2013 (4 Marks)]
Answer:
Qualified Institutional Buyer means:

  • A Mutual Fund, Venture Capital Fund, Alternative Investment Fund & Foreign Venture Capital Investor registered with the SEBI
  • A Category I & II Foreign Portfolio Investor registered with the SEBI
  • A Public Financial Institution
  • A Scheduled Commercial Bank
  • A multilateral and bilateral development financial institution
  • A state industrial development corporation
  • An Insurance Company registered with the IRDA
  • A Provident Fund with a minimum corpus of ₹ 25 Crore
  • A Pension Fund with a minimum corpus of ₹ 25 Crore
  • National Investment Fund
  • Insurance Funds set up and managed by the army, navy, or air force of the Union of India
  • Insurance Funds set up and managed by the Department of Posts, India.
  • Systematically important non-banking financial companies.

Thus, only above stated institutional buyers are QIB and not other institutional if buyers.

Question 43.
Write a short note on Anchor Investor [June 2014 (4 Marks)]
Answer:
Anchor Investor [Regulation 2(c)]: Anchor investor means a Qualified Institutional Buyer who makes an application for a value of at least 10 Crore in a public issue on the mainboard made through the book-building process in accordance with these regulations or makes an application for a value of at least 2 Crore for an issue made in accordance with Chapter IX of these regulations. /Chapter IX deals with IPO by Small & Medium Enterprises (SME,)]

As per schedule XIII, an issuer proposing to issue specified securities through the book-building process shall comply with the following provisions relating to allocation to Anchor Investor.
(a) An anchor investor shall make an application of a value of at least 10 Crore in a public issue on the mainboard made through the book-building process or an application for a value of at least 2 Crore in case of a public issue on the SME exchange.

(b) Up to 60% of the portion available for allocation to QIBs shall be available for allocation/allotment (“anchor investor portion”) to the anchor investors.

(c) Allocation to the anchor investors shall be on a discretionary basis, subject to the following:

(I) In case of the public issue on the mainboard, through the book-building process:

  • A maximum of 2 such investors shall be permitted for allocation up to 10 Crore.
  • Minimum of 2 and maximum of 15 such investors shall be permitted for allocation above 10 Crore and up to 250 Crore, subject to minimum allotment of 5 Crore per such investor.
  • In case of allocation above 250 Crore; a minimum of 5 such investors and a maximum of 15 such investors for allocation up to ₹ 250 Crore and an additional 10 such investors for every additional ₹ 2500 Crore or part thereof, shall be permitted, subject to a minimum allotment of ₹ 5 Crore per such investor.

(II) In case of the public issue on the SME exchange, through the book-building process:

  • A maximum of 2 such investors shall be permitted for allocation up to ₹ 2 Crore.
  • Minimum of 2 and maximum of 15 such investors shall be permitted for allocation above ₹ 2 Crore and up to ₹ 25 Crore, subject to a minimum allotment of ₹ 1 Crore per such investor.
  • In case of allocation above ₹ 25 Crore; a minimum of 5 such investors and a maximum of 15 such investors for allocation up to ₹ 25 Crore and an additional 10 such investors for every additional ₹ 25 Crore or part thereof, shall be permitted, subject to a minimum allotment of ₹ 1 Crore per such investor.

(d) One-third of the anchor investor portion shall be reserved for domestic mutual funds.
(e) The bidding for anchor investors shall open one day before the issue opening date.
(f) The anchor investors shall pay on the application the same margin which is payable by other categories of investors and the balance, if any, shall be paid within two days of the date of closure of the issue.
(g) The allocation to anchor investors shall be completed on the day of the bidding by the anchor investors.

(h) If the price fixed as a result of book building is higher than the price at which the allocation is made to the anchor investors, the anchor investors shall pay the additional amount. However, if the price fixed as a result of book building is lower than the price at which the allocation is made to the anchor investors, the excess amount shall not be refunded to the anchor investors and the anchor investor shall be allotted the securities at the same price at which the allocation was made to it.

(i) The number of shares allocated to the anchor investors and the price at which the allocation is made, shall be made available to the stock exchange(s) by the lead manager(s) for dissemination on the website of the stock exchange(s) before the opening of the issue.

(j) There shall be a lock-in of 30 days on the shares allotted to the anchor investors from the date of allotment.

(k) Neither the
1. lead manager or any associate of the lead managers (other than mutual funds sponsored by entities which are associate of the lead managers or insurance companies promoted by entities which are associate of the lead managers or Alternate Investment Funds (AIFs) sponsored by the entities which are associate of the lead manager or FPIs other than Category III sponsored by the entities which are associate of the lead manager) nor

2. any person related to the promoter/promoter group shall apply under the Anchor Investors category.

Question 44.
Explain the mechanism of an offer for sale (OFS) through secondary market settlement. [Dec. 2014 (4 Marks)]
Answer:
Offer for Sale (OFS) is another form of the share sale, very much similar to Follow-On Public Offer (FPO). OFS mechanism facilitates the promoters of an already listed company to sell or dilute their existing shareholdings through an exchange-based bidding platform.

Except for the promoters of the company, all market participants like individuals, mutual funds, Fils, insurance companies, corporates, QIBs, HUFs, etc. can bid/ participate in the OFS process or buy the shares. The promoters of the company can only participate as the sellers in the process.

What differentiates the Offer for Sale process from IPOs/FPOs?
Physical Application: Unlike IPOs/FPOs, no physical application forms are issued to apply for shares in the OFS process. OFS process is completely platform-based.

Time Period: While IPOs/FPOs remain open for 3-4 days, OFS gets over in a single trading day as the markets get closed for trading at 3:30 p.m.

Question 45.
Whether a fast track issue can proceed just like an IPO or, are there any other conditions to fast track issue? Explain. [Dec. 2015 (8 Marks)]
Answer:
Making public issues is a very time-consuming and costly affair. The company has to make a lot of compliance under the SEBI Regulations. To overcome this difficulty, SEBI has provided a Fast Track Route to already listed companies who are coming with public issues and rights issues. The fast-track route is an alternative to access public funds by way of further capital offerings. The facility of Fast Track Route is available to well-established and compliant listed companies.

Eligibility conditions for ‘Fast Track Further Public Offer’ [Regulation 155 of the SEBI (ICDR) Regulations, 2018]: Sub-regulations (1), (2), (3), (4), (5) and (9) of Regulation 123 fie. provisions relating to filing of the draft offer document and offer documents]shall not apply if the issuer satisfies the following conditions for making a further public offer through the fast track route:
1. Minimum listing period: Equity shares of the issuer have been listed on any stock exchange for a period of at least three years immediately preceding the reference date.

2. Shareholding of promoter group is in the dematerialized form: Entire shareholding of the promoter group of the issuer is held in dematerialized form on the reference date.

3. Market Capitalization: Average market capitalization of public share-holding of the issuer is at least ₹ 1,000 Crore in case of public issue.

4. Annualized trading turnover: Annualized trading turnover of the equity shares of the issuer during 6 calendar months immediately preceding the month of the reference date has been at least 296 of the weighted average number of equity shares listed during such 6 months period. However, for issuers, whose public shareholding is less than 1596 of its issued equity capital, the annualized trading turnover of its equity shares has been at least 296 of the weighted average number of equity shares available as a free float during such 6 months period. [Free float shares are not defined in the SEBI (ICDR) Regulations, 2018. Generally, it means the portion of shares of a company that are held by public investors]

5. Annualized delivery-based trading turnover: Annualized delivery-based trading turnover of the equity shares during 6 calendar months immediately preceding the month of the reference date has been at least 1096 of the annualized trading turnover of the equity shares during such 6 months period.

6. Compliance with listing agreement: The Issuer has been in compliance with the equity listing agreement or the SEBI (LODR) Regulations, 2015, as applicable, for a period of at least 3 years immediately preceding the reference date. However, if the issuer has not complied with the provisions of the listing agreement or the SEBI (LODR) Regulations, 2015, relating to the composition of Board of directors, for any quarter during the last 3 years immediately preceding the reference date, but is compliant with such provisions at the time of filing of letter of offer, and adequate disclosures are made in the letter of offer about such non-compliances during the 3 years immediately preceding the reference date, it shall be deemed as compliance with the condition. Imposition of only monetary fines by stock exchanges on the issuer shall not be a ground for ineligibility for undertaking issuances under this regulation.

7. Grievances Redressed: Issuer has redressed at least 95% of the complaints received from the investors till the end of the quarter immediately preceding the month of the reference date.

8. No pending prosecution: No show-cause notices have been issued or prosecution proceedings have been initiated by the SEBI and pending against the issuer or its promoters or whole-time directors as on the reference date.

9. Violation of securities laws: Issuer or promoter or promoter group or director of the issuer has not settled any alleged violation of securities laws through the consent or settlement mechanism with the SEBI during 3 years immediately preceding the reference date.

10. No suspension of trading of equity shares: Equity shares of the issuer have not been suspended from trading as a disciplinary measure during the last 3 years immediately preceding the reference date.

11. No conflict of interest: There shall be no conflict of interest between the lead manager and the issuer or its group companies in accordance with the applicable regulations.

12. Impact of audit qualifications: Impact of audit qualifications, if any and where quantifiable, on the audited accounts of the issuer in respect of those financial years for which such accounts are disclosed in the letter of offer does not exceed 5% of the net profit or loss after tax of the issuer for the respective years.

Question 46.
A company cannot offer its shares to different sets of people in a particular public issue. Comment. [Dec. 2015 (5 Marks)]
Answer:
Issue Price: There is no restriction on the price at which shares can be issued. The pricing can be decided by the issuer and the Lead Merchant Banker. They can charge any price which they feel the market can bear, but the justification for the price is required to be given in the offer document.

Differential Pricing [Regulation 30 of the SEBI (ICDR) Regulations, 2018]:
The issuer may offer its specified securities at different prices, subject to the following:
(a) Retail individual investors or retail individual shareholders or employees entitled for reservation may be offered specified securities at a price not lower than by more than 10% of the price at which net offer is made to other categories of applicants, excluding anchor investors.

(b) In the case of a book-built issue, the price of the specified securities offered to the anchor investors shall not be lower than the price offered to other applicants.

(c) In case the issuer opts for the alternate method of book building in terms of Part D of Schedule XIII, the issuer may offer the specified securities to its employees at a price not lower than by more than 10% of the floor price.

Discount, if any, shall be expressed in rupee terms in the offer document.
Part D of Schedule XIII deals with the “alternate method of book building process”.

Question 47.
“Every Institutional Buyer is the qualified institutional buyer.” Comment. [June 2017 (4 Marks)]
Answer:
Qualified Institutional Buyer means:

  • A Mutual Fund, Venture Capital Fund, Alternative Investment Fund & Foreign Venture Capital Investor registered with the SEBI
  • A Category I & II Foreign Portfolio Investor registered with the SEBI
  • A Public Financial Institution
  • A Scheduled Commercial Bank
  • A multilateral and bilateral development financial institution
  • A state industrial development corporation
  • An Insurance Company registered with the IRDA
  • A Provident Fund with a minimum corpus of ₹ 25 Crore
  • A Pension Fund with a minimum corpus of ₹ 25 Crore
  • National Investment Fund
  • Insurance Funds set up and managed by the army, navy, or air force of the Union of India
  • Insurance Funds set up and managed by the Department of Posts, India.
  • Systematically important non-banking financial companies.

Thus, only above stated institutional buyers are QIB and not other institutional if buyers.

Question 48.
The warrant cannot be issued along with public issues or right issues of specified securities. Comment. [Dec. 2017 (5 Marks)]
Answer:
Warrants are securities that give the holder the right, but not the obligation, to buy a certain number of securities (usually the issuer’s common stock ie. equity shares) at a certain price before a certain time.

Occasionally, companies offer warrants for direct sale or give them to employees as an incentive, but the vast majority of warrants are “attached” to newly issued bonds or stock.

Issue of warrants [Regulation 13]: An issuer shall be eligible to issue warrants in an initial public offer subject to the following:
(a) Tenure of such warrants: The tenure of such warrants shall not exceed 18 months from the date of their allotment in the initial public offer.
(b) No. of warrants: A specified security may have one or more warrants attached to it;
(c) Price & Consideration: The price or formula for determination of exercise price of the warrants shall be determined upfront and disclosed in the offer document and at least 25% of the consideration amount based on the exercise price shall also be received upfront.

However, in case the exercise price of warrants is based on a formula, 25% consideration amount based on the cap price of the price band determined for the linked equity shares or convertible securities shall be received upfront.

(d) Forfeiture of warrant: In case the warrant holder does not exercise the option to take equity shares against any of the warrants held by the warrant holder, within three months from the date of payment of consideration, such consideration made in respect of such warrants shall be forfeited by the issuer.

Similar provisions are also applicable for the issue of warrants in the right issue. [Regulation 67]

Question 49.
XYZ Ltd. is proposing to make a public issue of 400 Crore equity shares through the book building mechanism where 50% of the issue size is required j to be allotted to Qualified Institutional Buyers. Determine the following:
(i) The quantum available for allocation to anchor investors.
(ii) The quantum reserved for domestic mutual funds in the anchor investor portion, if any.
(iii) The amount, if any, required to be brought in by the anchor investors given:
(a) The price at which allocation is made to anchor investors is ₹ 855 per share, and
(b) The price fixed as a result of book building is ₹ 858 per share. [Dec. 2017 (5 Marks)]
Answer:
As per Regulation 32(1 )(c) of the SEBI (ICDR) Regulations, 2018, if an issue is made through the book-building process under regulation 6(1), the allocation in the net offer category shall be as follows:
(a) Not less than 35% to retail individual investors;
(b) Not less than 15% to non-institutional investors;
(c) Not more than 50% to Qualified Institutional Buyers, 5% of which shall be allocated to mutual funds.

In addition to 5% allocation available in terms of clause (c), mutual funds shall be eligible for allocation under the balance available for Qualified Institutional Buyers.

Provisions of the Schedule XIII:

  • Up to 60% of the portion available for allocation to qualified institutional buyers shall be available for allocation/allotment (‘‘anchor investor portion”) to the anchor investors.
  • One-third of the anchor investor portion shall be reserved for domestic mutual funds.
  • The anchor investors shall pay on the application the same margin which is payable by other categories of investors and the balance, if any, shall be paid within two days of the date of closure of the issue.
  • If the price fixed as a result of book building is higher than the price at which the allocation is made to the anchor investors, the anchor investors shall pay the additional amount. However, if the price fixed as a result of book building is lower than the price at which the allocation is made to the anchor investors, the excess amount shall not be refunded to the anchor investors and the anchor investor shall be allotted the securities at the same price at which the allocation was made to it.
  • Margin Money: The entire application money shall be payable as margin money by all the applicants. Payment accompanied with any revision of bid shall be adjusted against the payment made at the time of the original bid or the previously revised bid.

Keeping in view the above provisions, the answer to the given problem is as follows:
It assumed that an issue is made through the book-building process under Regulation 6(1).

  • Quantum of equity shares available for allocation to QIBs = 400 Crore × 50% = 200 Crore
  • Quantum of equity shares available for allocation to anchor investors = 200 Crore × 60% =120 Crore
  • Quantum of equity shares available for allocation to domestic mutual funds = 120 Crore × 1/3 = 40 Crore

Amount to required to be brought in by the anchor investor (assuming the full amount is payable and allocation is made as stated above) = 120 Crore × 855 = ₹ 1,02,600 Crore.

Additional amount to required to be brought in by the anchor investor if price fixed as a result of book building is ₹ 858 = 120 Crore × (858 – 855) = ₹ 360 Crore.

Question 50.
XYZ Ltd. made a public issue of equity shares in September 2014 and sought listing of BSE and NSE. Soon, thereafter, the promoters of the company started contemplating a change in the objects clause mentioned in the prospectus. To give effect to the same the company convened an extraordinary general meeting of shareholders in November 2015. Though the resolution was passed by the company there were nevertheless, dissenting shareholders too. The promoters decided to provide an exit opportunity to the dissenting shareholders. In the light of the above, answer the following questions:
(i) Is this act of the promoters justified? Highlight the relevant regulatory legal framework for the same?
(ii) Who are the dissenting shareholders?
(iii) Enumerate the conditions required to be complied with to give effect to this recourse which was availed by the promoters. [Dec. 2017 (6 Marks)]
Answer:
As per Section 13(8) of the Companies Act, 2013, a company that has raised money from the public through prospectus and still has any unutilized amount out of the money so raised, shall not change its objects for which it raised the money through prospectus unless a special resolution is passed by the company and:
1. The details in respect of such resolution shall also be published in the newspapers (one in English and one in vernacular language) which is in circulation at the place where the registered office of the company is situated and shall also be placed on the website of the company, indicating the justification for such change.

2. The dissenting shareholders shall be given an opportunity to exit by the promoters and shareholders having control in accordance with regulations to be specified by the SEBI.

As per Section 27 of the Companies Act, 2013 a company shall not, at any time, vary the terms of a contract referred to in the prospectus or objects for which the prospectus was issued, except subject to the approval of, or except subject to an authority given by the company in general meeting by way of special resolution.

The details, as may be prescribed, of the notice in respect of such resolution to shareholders, shall also be published in the newspapers (one in English and one in vernacular language) in the city where the registered office of the company is situated indicating clearly the justification for such variation. Such a company shall not use any amount raised by it through prospectus for buying, trading, or otherwise dealing in equity shares of any other listed company.

The dissenting shareholders being those shareholders who have not agreed to the proposal to vary the terms of contracts or objects referred to in the prospectus, shall be given an exit offer by promoters or controlling shareholders at such exit price, and in such manner and conditions as may be specified by the SEBI by making regulations in this behalf.

Post-listing exit opportunity for dissenting shareholders [Regulation 59]: The promoters, or shareholders in control of an issuer, shall provide an exit offer to dissenting shareholders as provided for in the Companies Act, 2013, in case of change in objects or variation in the terms of contract related to objects referred to in the offer document as per conditions and manner is provided in Schedule XX. However, the exit offer shall not apply where there are neither any identifiable promoters nor any shareholders in control of the issuer.

Provisions of Schedule XX of the SEBI (ICDR) Regulations, 2018 are discussed below:
“Dissenting Shareholders” means those shareholders who have voted against the resolution for change in objects or variation in terms of a contract relating to objects, referred to in the offer document of the issuer.

“Frequently traded shares” shall have the same meaning as assigned to it in the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011.

Conditions for exit offer: The promoter or the shareholders in control, as the case may be, shall make an exit offer to the dissenting shareholders if:
(a) the proposal for change in objects or variation in terms of a contract, referred to in the offer document is dissented by at least ten percent of the shareholders who voted in the general meeting; and

(b) the amount to be utilized for the objects for which the offer document was issued is less than 75% of the amount raised (including the amount earmarked for general corporate purposes as disclosed in the offer document).

Eligibility of shareholders for availing of the exit offer: Only those dissenting shareholders of the issuer who are holding shares as of the relevant date shall be eligible to avail of the exit offer.

Exit Price: The ‘exit price’ payable to the dissenting shareholders shall be the highest of the following:
(a) The volume-weighted average price paid or payable for acquisitions, whether by the promoters or by any person acting in concert with them, during the fifty-two weeks immediately preceding the relevant date;

(b) The highest price paid or payable for any acquisition, whether by the promoter or by any person acting in concert with them, during the twenty-six weeks immediately preceding the relevant date.

(c) The volume-weighted average market price of such shares for a period of 60 trading days immediately preceding the relevant date as traded on the stock exchange where the maximum volume of trading in the shares of the issuer are recorded during such period, provided such shares are frequently traded.

(d) Where the shares are not frequently traded, the price determined by the promoter or shareholders having control and the lead manager taking into account valuation parameters including book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such issuers.

Manner of providing exit to dissenting shareholders:
1. Notice proposing the passing of a special resolution for changing the objects of the issue and varying the terms of the contract relating to objects, referred to in the offer document, shall also contain information about the provision for an exit offer to the dissenting shareholders.

2. A statement to the effect that the promoter/shareholders in control shall provide an exit opportunity to the dissenting shareholders shall be included in the explanatory statement to the notice for passing a special resolution.

3. After passing of the special resolution, the issuer shall submit the voting results to the stock exchange, in terms of the provisions of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015.

4. The issuer shall also submit the list of dissenting shareholders, as certified by its compliance officer, to the stock exchanges.

5. The promoter/shareholders in control, as the case may be, shall appoint a merchant banker and finalize the exit offer price in accordance with these regulations.

6. The issuer shall intimate the stock exchange about the exit offer to dissenting shareholders and the price at which such offer is being given.

7. The stock exchange shall, on receipt of such intimation, disseminate the same to the public within 1 working day.

8. To ensure security for the performance of their obligations, the promoter or shareholders in control, as the case may be, shall create an escrow account that may be interest-bearing and deposit the aggregate consideration in the escrow account at least 2 working days prior to the opening of the tendering period.

9. The tendering period shall start not later than 7 working days from the passing of the special resolution and shall remain open for 10 working days.

10. The dissenting shareholders who have tendered their shares in acceptance of the exit offer shall have the option to withdraw such acceptance till the date of closure of the tendering period.

11. The promoter/shareholders in control, as the case may be, shall facilitate tendering of shares by the shareholders and settlement of the same through the stock exchange mechanism as specified by SEBI for the purpose of the takeover, buy-back, and delisting.

12. The promoter/shareholders in control, as the case may be, shall, within a period of 10 working days from the last date of the tendering period, make payment of the consideration to the dissenting shareholders who have accepted the exit offer.

13. Within a period of 2 working days from the payment of the consideration, the issuer shall furnish to the stock exchange, disclosures giving details of an aggregate number of shares tendered, accepted, payment of the consideration, and the post-offer shareholding pattern of the issuer and a report by the lead manager that the payment has been duly made to all J the dissenting shareholders whose shares have been accepted in the exit offer.

Offer not to exceed maximum permissible non-public shareholding [Regulation 5 69G]: In the event, the shares accepted in the exit offer were such that the 1 shareholding of the promoters or shareholders in control, taken together with persons acting in concert with them pursuant to completion of the exit offer, results in their shareholding exceeding the maximum permissible non-public shareholding, the promoters or shareholders in control, as applicable, shall be required to bring down the non-public shareholding to the level specified and within the time permitted under the Securities Contracts (Regulation) Rules, 1957.

Question 51.
Define “Dissenting shareholders”. What are the conditions for applicability of Exit offers by dissenting shareholders according to SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2018? [Dec. 2018 (4 Marks)]
Answer:
Please refer to the answer to Question No. 51.

Question 52.
Technopoly Ltd., an unlisted public company, having a paid-up equity share capital of ₹ 3.00 Crore consisting of 30,00,000 equity shares of ₹ 10 each fully paid-up proposes to reduce the denomination of equity shares to less than ₹ 10 per share and make the initial public offer of equity shares at a premium. Whether it is possible for the company to issue shares at a denomination of less than ₹ 10? Based on the above facts, you are required to state the minimum issue price, with reference to the provisions of SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2018. [Dec. 2018 (4 Marks)]
Answer:
Par value means the face value of shares. It is the value per unit of shares disclosed in the memorandum of the company.
Norms relating to ‘face value’ as per ICDR Regulation are as follows:

  • Face value can be below ₹ 10. However, face value should be in multiple of Rupee i.e. ₹ 2, ₹ 3, ₹ 5, etc. Face value should not be in decimal of a; rupee.
  • The face value and a statement about the issue price being “X” time of the j face value should be included in the offer document and application form j in identical size as that of the issue or price band.
    Thus, Technopoly Ltd. can reduce the denomination of equity shares to less than ₹ 10 per share.

Question 53.
Startup companies have now come up with an Initial Public offer with the relaxation of many conditions applicable for an Initial Public Offer. In this context, briefly, explain the “Institutional Trading Platform (ITP)” and eligibility for listing. [Dec. 2018 (4 Marks)]
Answer:
Innovator’s growth platform’ means the trading platform for listing and trading of specified securities of issuers that comply with the eligibility criteria specified in regulation 283.

1. Substituted by the SEBI (Issue of Capital & Disclosure Requirements) (Second Amendment) Regulations, 2019. Prior to its substitution, it read as iusiìutional trading platform means the trading platform for listing and trading of specified securities of issuers that comply with the eligibility criteria specified in regulation 288.

Eligibility [Regulation 283]: Following entities are eligible for listing on Innovators growth platform:
1. An issuer that is intensive in the use of technology, information technology, intellectual property, data analytics, biotechnology, or nano-technology to provide products, services, or business platforms with substantial value addition shall be eligible for listing on the innovator’s growth platform, provided that as on the date of filing of draft information document or draft offer document with the Board, as the case may be, 25% of the pre-issue capital of the Issuer Company for at least a period of two years, should have been held by:

I. Qualified Institutional Buyers;
II. Family trust with net-worth of more than 500 Crore, as per the last audited financial statements;
III. Accredited Investors for the purpose of Innovators Growth Platform;
IV. Following regulated entities:
(a) Category III Foreign Portfolio Investor;
(b An entity meets all the following criteria:
1. It is a pooled investment fund with minimum assets under management of $150 million;

2. It is registered with a financial sector regulator in the jurisdiction of which it is a resident;

3. It is resident of a country whose securities market regulator is a signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with the Board;

4. It is not resident in a country identified in the public statement of Financial Action Task Force as:

  • a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
  • a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.

Explanation:
(a) Following entities shall be eligible to be considered as accredited investors for the purpose of innovators growth platform:

  1. any individual with a total gross income of ₹ 50 lakh annually and who has a minimum liquid net worth of ₹ 5 Crore; or
  2. anybody corporate with a net worth of ₹ 25 Crore.

(b) Not more than 10% of the pre-issue capital may be held by Accredited Investors.

(c) For the purpose of accreditation: The persons/corporate bodies who wish to get accreditation for the purpose of innovators growth platform, shall approach the stock exchanges or depositories and follow the procedures prescribed by the Board and/or such stock exchange or depository for the purpose of accreditation as an Accredited Investor, from time to time.

2. An issuer shall be eligible for listing on the institutional trading platform if none of the promoters or directors of the issuer company is a fugitive economic offender.

Question 54.
What is meant by Anchor Investor? What are the limitations of allocation to anchor investors in the Book building process? [Dec. 2018 (5 Marks)]
Answer:
Anchor Investor [Regulation 2(c)]: Anchor investor means a Qualified Institutional Buyer who makes an application for a value of at least 10 Crore in a public issue on the mainboard made through the book-building process in accordance with these regulations or makes an application for a value of at least 2 Crore for an issue made in accordance with Chapter IX of these regulations. /Chapter IX deals with IPO by Small & Medium Enterprises (SME,)]

As per schedule XIII, an issuer proposing to issue specified securities through the book-building process shall comply with the following provisions relating to allocation to Anchor Investor.
(a) An anchor investor shall make an application of a value of at least 10 Crore in a public issue on the mainboard made through the book-building process or an application for a value of at least 2 Crore in case of a public issue on the SME exchange.

(b) Up to 60% of the portion available for allocation to QIBs shall be available for allocation/allotment (“anchor investor portion”) to the anchor investors.

(c) Allocation to the anchor investors shall be on a discretionary basis, subject to the following:

(I) In case of the public issue on the mainboard, through the book-building process:

  • A maximum of 2 such investors shall be permitted for allocation up to 10 Crore.
  • Minimum of 2 and maximum of 15 such investors shall be permitted for allocation above 10 Crore and up to 250 Crore, subject to minimum allotment of 5 Crore per such investor.
  • In case of allocation above 250 Crore; a minimum of 5 such investors and a maximum of 15 such investors for allocation up to ₹ 250 Crore and an additional 10 such investors for every additional ₹ 2500 Crore or part thereof, shall be permitted, subject to a minimum allotment of ₹ 5 Crore per such investor.

(II) In case of the public issue on the SME exchange, through the book-building process:

  • A maximum of 2 such investors shall be permitted for allocation up to ₹ 2 Crore.
  • Minimum of 2 and maximum of 15 such investors shall be permitted for allocation above ₹ 2 Crore and up to ₹ 25 Crore, subject to a minimum allotment of ₹ 1 Crore per such investor.
  • In case of allocation above ₹ 25 Crore; a minimum of 5 such investors and a maximum of 15 such investors for allocation up to ₹ 25 Crore and an additional 10 such investors for every additional ₹ 25 Crore or part thereof, shall be permitted, subject to a minimum allotment of ₹ 1 Crore per such investor.

(d) One-third of the anchor investor portion shall be reserved for domestic mutual funds.

(e) The bidding for anchor investors shall open one day before the issue opening date.

(f) The anchor investors shall pay on the application the same margin which is payable by other categories of investors and the balance, if any, shall be paid within two days of the date of closure of the issue.

(g) The allocation to anchor investors shall be completed on the day of the bidding by the anchor investors.

(h) If the price fixed as a result of book building is higher than the price at which the allocation is made to the anchor investors, the anchor investors shall pay the additional amount. However, if the price fixed as a result of book building is lower than the price at which the allocation is made to the anchor investors, the excess amount shall not be refunded to the anchor investors and the anchor investor shall be allotted the securities at the same price at which the allocation was made to it.

(i) The number of shares allocated to the anchor investors and the price at which the allocation is made, shall be made available to the stock exchange(s) by the lead manager(s) for dissemination on the website of the stock exchange(s) before the opening of the issue.

(j) There shall be a lock-in of 30 days on the shares allotted to the anchor investors from the date of allotment.

(k) Neither the
1. lead manager or any associate of the lead managers (other than mutual funds sponsored by entities which are associate of the lead managers or insurance companies promoted by entities that are associate of the lead managers or Alternate Investment Funds (AIFs) sponsored by the entities which are associate of the lead manager or FPIs other than Category III sponsored by the entities which are associate of the lead manager) nor

2. any person related to the promoter/promoter group shall apply under the Anchor Investors category.

Question 55.
MIs Highspeed Ltd. manufacturing car components for leading car manufacturer. Its public Issue of 500 Crore was fully subscribed. The public Issue money ought to be utilized to set up an assembly line for the existing business. Out of 500 Crore, the company spent400 Crore for assembly-line.
The management consultant, hired for Business Process re-engineering has suggested investing a balanced amount to set up bike components manufacturing unit. You, being company secretary of the company, advise on the opinion of the management consultant by referring to provisions of SEBI Guidelines. [June 2019 (4 Marks)]
Answer:
As per Section 13(8) of the Companies Act, 2013, a company that has raised money from the public through prospectus and still has any unutilized amount out of the money so raised, shall not change its objects for which it raised the money through prospectus unless a special resolution is passed by the company and:
1. The details in respect of such resolution shall also be published in the newspapers (one in English and one in vernacular language) which is in circulation at the place where the registered office of the company is situated and shall also be placed on the website of the company, indicating the justification for such change.

2. The dissenting shareholders shall be given an opportunity to exit by the ‘ promoters and shareholders having control in accordance with regulations to be specified by the SEBI.

The dissenting shareholders being those shareholders who have not agreed to the proposal to vary the terms of contracts or objects referred to in the pro; pectus, shall be given an exit offer by promoters or controlling shareholders at such exit price, and in such manner and conditions as may be specified by the SEBI by making regulations in this behalf.

Conditions for Exit Offer: As per the SEBI (ICDR) Regulations, 2018, the promoter or the shareholders in control, shall make an exit offer to the dissenting shareholders if :
(a) the proposal for change in objects or variation in terms of a contract, referred to in the offer document is dissented by at least 10% of the shareholders who voted in the general meeting; and
(b) the amount to be utilized for the objects for which the offer document was issued is less than 75% of the amount raised (including the amount earmarked for general corporate purposes as disclosed in the offer document).

As per facts given in the case, Highspeed Ltd. made a public issue of ₹ 500 Crore. Out of ₹ 500 Crore, ₹ 400 Crore (80% of the issue amount) was utilized by the company for the set-up of an assembly line for the existing business. The company intends to use the remaining money for investing in the setup of a ‘bike components manufacturing unit’.

Thus, if the object clause of the company does not cover ‘investment in the setup of bike components manufacturing unit’, the company must pass the special resolution as required by Section 13(8) of the Companies Act, 2013. However, no exit opportunity is required to be given as per the SEBI (ICDR) Regulations, 2018 because the amount to be utilized for the objects for which the offer document was issued is more than 75% of the amount raised,

Question 56.
Financial data of Natural Energy Ltd. as of 31st March 2018 are as under:
(i) Authorised Share Capital: ₹ 700 Crore
(ii) Paid-up Capital: ₹ 300 Crore
(iii) Free Reserves: ₹ 800 Crore
Does the company have a pending convertible debenture of ₹ 150 Crore, due for conversion in the financial year 2018-2019? The company proposes to issue bonus shares in the ratio of 1:1 after conversion of the debenture. You being a company secretary, advise on the procedure to be followed by referring to SEBI regulations. [June 2019(7 Marks)]
Answer:
As per Regulation 293 of the SEBI (ICDR) Regulations, 2018, subject to the provisions of the Companies Act, 2013 or any other applicable law, a listed issuer shall be eligible to issue bonus shares to its members if:
(a) It is authorized by its articles of association for the issue of bonus shares, capitalization of reserves, etc. However, if there is no such provision in the articles of association, the issuer shall pass a resolution at its general body meeting making provisions in the articles of associations for capitalization of the reserve.

(b) It has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it.

(c) It has not defaulted in respect of the payment of statutory dues of the employees such as contribution to provident fund, gratuity, and bonus.

(d) Any outstanding partly paid shares on the date of the allotment of the bonus shares, are made fully paid-up.

(e) Any of its promoters or directors is not a fugitive economic offender. Calculation of post bonus issue paid-up capital:

Paid-up Capital ₹ 300 Crore
Addition in share capital due to conversion of debentures ₹ 150 Crore
Addition in share capital due to bonus (Ratio of 1:1) ₹ 450 Crore

₹ 450 Crore

Paid-up capital after bonus issue ₹ 900 Crore

Paid-up capital after bonus issue will be ₹ 900 Crore, which is more than the present authorized capital of ₹ 900 Crores and hence authorized capital will have to be increased by ₹ 200 Crores.

Question 57.
What is a price stabilization fund? [June 2009 (5 Marks)]
Answer:
The fund created for stabilization of the share price after the public issue is known as the price stabilization fund. The aim of the fund is to protect the share price from falling below the issue price. For the purpose of operating a price stabilization fund, the issuer company appoints a Stabilization Agent (SA).

The stabilization mechanism shall be available for the company for the period disclosed in the prospectus which shall not exceed 30 days from the date of listing of shares.

Question 58.
Write a short note on Green Shoe Option [June 2013 (3 Marks)], [June 2017 (4 Marks)]
Answer:
“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 in accordance with the provisions of the SEBI (ICDR) Regulations, 2018.

Green Shoe Option is also legally referred to as an over-allotment option.

The Green Shoe Company (now called Stride Rite Corp.) was the first issuer to allow the over-allotment option to its underwriters, hence the name Green j Shoe Option.

GSO was recognized by SEBI in the year 2003. ICICI Bank has used the Green Shoe Option first time in its public issue through a book building mechanism in India.

Green Shoe Option system is available only in IPO and not for subsequent issues,

Thus, the basic purpose of ‘Green Shoe Option’ is no to make available additional g share capital to the company, but to as stabilizing force for its share price, if the issue is oversubscribed.

Question 59.
A listed company, Nishan Hitech Ltd. issued 10 lakh equity shares at a price of ₹ 150 per share. The company provided Greenshoe option for stabilizing the post listing price of the shares. On the day of the listing of shares, the news of a trade war between the two developed countries flashes, and the price of shares of the company fall to ₹ 110. Decide how many shares can be purchased by the stabilizing agent to control the price? State the provisions for balance money lying in the special account for the greenshoe option. [Dec. 2018 (5 Marks)]
Answer:
As per the Green Shoe concept, as contained in SEBI (ICDR) Regulations, | 2018, the stabilizing agent has to enter an agreement with the promoters or pre-issue shareholders or both for borrowing specified securities from them, j specifying therein the maximum number of specified securities that may be I borrowed for the purpose of allotment or allocation of specified securities in excess of the issue size, which shall not be in excess of 15% of the issue size.

As per facts given in the case, Nishan Hitech Ltd. issued 10 lakh shares. The stabilizing agent will borrow 15% of issued shares i.e. 1.5 lakh shares.

In public issue total of 11.5 shares will be allotted to the public.
Total proceeds received in IPO = ₹ 1,725 lakh (11.5 lakh shares × 150)
Out of total proceeds of ₹ 1,725 lakh
(a) Amount of ₹ 1,500 lakh (10 lakh shares × 150) will be remitted to Nishan Hitech Ltd.
(b) Amount received from the Green Shoe Shares ₹ 225 lakh (1.5 lakh shares × 150) will be parked in a special escrow bank account Le. Green Shoe Escrow Account.

Price has been fallen to ₹ 110. Thus, out of the money in the Escrow Account, the stabilizing agent will start to buy shares at ₹ 110 or above so that the price increases or stabilizes.

(Here simple principle of economics will apply as Stabilizing Agent starts to buy shares demand increases and thus it will lead to increase the price or at least it will stop falling share price)

From the promoters stabilizing agent has borrowed 1.5 lakh shares and hence stabilizing agent can buy up 1.5 lakh shares only.

Any monies left in the special bank account after remittance of monies to the issuer and deduction of expenses incurred by the stabilizing agent for the stabilization process shall be transferred to the ‘Investor Protection & Education Fund’ established by the SEBI and the special bank account shall be closed soon thereafter.

Question 60.
Discuss the eligibility criteria and conditions for the issue of India Depository Receipts (IDRs). [Dec. 2010 (5 Marks)]
Answer:
Eligibility conditions to make an issue of IDRs [Regulation 183]:
1. An issuer shall be eligible to make an issue of IDRs only if:
(a) The issuing company is listed in its home country for at least 3 immediately preceding years.
(b) The issuer is not prohibited to issue securities by any regulatory body.
(c) The issuer has a track record of compliance with the securities market regulations in its home country.
(d) Any of its promoters or directors is not a fugitive economic offender.

2. The issue shall be subject to the following conditions:
(a) Issue size shall not be less than ₹ 50 Crore.
(b) At any given time, there shall be only one denomination of IDRs of the issuer.
(c) Issuer shall ensure that the underlying equity shares against which IDRs are issued have been or will be listed in its home country before listing of IDRs in the stock exchange(s).
(d) Issuer shall ensure that the underlying shares of IDRs shall rank pari passu with the existing shares of the same class.

3. The issuer shall ensure that:
(a) It has made an application to one or more stock exchanges to seek an in-principle approval for listing of the IDRs on such stock exchanges and has chosen one of them as the designated stock exchange, in terms of Schedule XIX.
(b) It has entered into an agreement with a depository for dematerialization of the IDRs proposed to be issued.
(c) It has made firm arrangements of finance through verifiable means towards 75% of the stated means of finance for the project proposed to be funded from issue proceeds, excluding the amount to be raised through the proposed issue of IDRs or through existing identifiable internal accruals, have been made.

4. The amount for general corporate purposes, as mentioned in objects of the issue in the draft offer document and the offer document, shall not exceed 25% of the amount being raised by the issuer.

Issuance conditions [Regulation 191]: The procedure to be followed by each class of applicant shall be mentioned in the offer document. The minimum application amount shall be ₹ 20,000.

Question 61.
What are the conditions for the issue of India Depository Receipts (IDRs)? [June 2011 (5 Marks)]
Answer:
Eligibility conditions to make an issue of IDRs [Regulation 183]:
1. An issuer shall be eligible to make an issue of IDRs only if:
(a) The issuing company is listed in its home country for at least 3 immediately preceding years.
(b) The issuer is not prohibited to issue securities by any regulatory body.
(c) The issuer has a track record of compliance with the securities market regulations in its home country.
(d) Any of its promoters or directors is not a fugitive economic offender.

2. The issue shall be subject to the following conditions:
(a) Issue size shall not be less than ₹ 50 Crore.
(b) At any given time, there shall be only one denomination of IDRs of the issuer.
(c) Issuer shall ensure that the underlying equity shares against which IDRs are issued have been or will be listed in its home country before listing of IDRs in the stock exchange(s).
(d) Issuer shall ensure that the underlying shares of IDRs shall rank pari passu with the existing shares of the same class.

3. The issuer shall ensure that:
(a) It has made an application to one or more stock exchanges to seek an in-principle approval for listing of the IDRs on such stock exchanges and has chosen one of them as the designated stock exchange, in terms of Schedule XIX.
(b) It has entered into an agreement with a depository for dematerialization of the IDRs proposed to be issued.
(c) It has made firm arrangements of finance through verifiable means towards 75% of the stated means of finance for the project proposed to be funded from issue proceeds, excluding the amount to be raised through the proposed issue of IDRs or through existing identifiable internal accruals, have been made.

4. The amount for general corporate purposes, as mentioned in objects of the issue in the draft offer document and the offer document, shall not exceed 25% of the amount being raised by the issuer.

Issuance conditions [Regulation 191]: The procedure to be followed by each class of applicant shall be mentioned in the offer document. The minimum application amount shall be ₹ 20,000.

Question 62.
Girdhar (Retail Individual Investor) had applied for Initial Public Offer of Six Sigma Ltd. through the Applications Supported By Block Amount (ASBA) process. The Self Certified Syndicate Banks (SCSBs) failed to make bids in the Stock Exchange system even after the amount has been blocked. The issue was oversubscribed. Based on the SEBI guidelines/circulars, answer the following:
(i) What are the factors that have been taken into account by SEBI for the finalization of a uniform policy for calculation of the minimum fair compensation?
(ii) Calculate the minimum fair compensation payable to Girdhar based on the following information:
Listing Price: ₹ 350, Issue Price: ₹ 300, Minimum Bid lot-20 shares, probability of allotment of shares on the basis of allotment (ratio 7:8). [Dec. 2018 (4 Marks)]
Answer:
As per SEBI Circular dated 15-2-2018 [SEBI/HO/CFD/DIL2/ CIR/P/2018/22], while the process of Applications Supported by Block Amount (ASBA) has resulted in almost complete elimination of complaints pertaining j to refunds, there have been instances where the applicants in an Initial Public Offering have failed to get an allotment of specified securities and in the process may have suffered an opportunity loss due to the following factors:

  • Failure on part of the Self Certified Syndicate Banks (SCSBs) to make bids in the concerned Exchange system even after the amount has been blocked in the investors’ bank account with such SCSB.
  • Failure on part of the SCSB to process the ASBA applications even when they have been submitted within time.
  • Any other failures on part of an SCSB which has resulted in the rejection of the application form.

A need has been felt to have a uniform policy for the calculation of minimum compensation payable to investors. While doing so, the following factors have been taken into account:

  • The opportunity loss suffered by the investor due to the non-allotment of shares.
  • The number of times the issue was oversubscribed in the relevant category.
  • The probability of allotment.
  • The listing gains if any on the day of listing.

The proposed formula for calculation of minimum fair compensation is as follows:
Compensation = (Listing price – Issue Price) × No. of shares that would have been allowed if bid was successful × Probability of allotment of shares determined on the basis of allotment

The listing price shall be taken as the highest of the opening prices on the day of listing across the recognized stock exchanges.
Compensation = (350- 300) × 20 × 7/8 = 875

Securities Laws and Capital Markets Questions and Answers

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