mb session -9 pre-issue management

8/3/2019 Mb Session -9 Pre-Issue Management

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Pre-issue Management

Preparation of prospectus, selection of

bankers, issue pricing , advertising,

consultants etc.

SESSION - 10



Preparation of prospectus

section 55 to 68 Aof the Companies Act deal with the issue of prospectus.

Section 2 (36) defines a prospectus as any documentdescribed or issued as prospectus and includes any notice.circular, advertisement or other document inviting depositsfrom the public or inviting offers from the public for thesubscription of purchase of any shares in or debentures of acompany.

In July 1995 Malegam committee recommended stricterregulations to curb irregularities affecting the primarymarket.




Based on the recommendations SEBI issued guidelines to

cover enhanced transparency in the draft prospectus filed

with SEBI .

The draft prospectus filed with SEBI was made a publicdocument to enhance transparency.

The lead merchant banker shall simultaneously file copies of

draft document with Ses where the issue is proposed to be

issued.

Every prospectus submitted for vetting shall ,in addition to the

requirements of schedule II of Companies ACT contain, specify

the following.




a) Details of actual expenditure incurred on the project.

b) Means and source of financing and year wise break up of

proposed project expenditure.

c) The turnover in the P&L statement should be bifurcated intomanufactured products and traded products.

d) The companies undertaking major expansion must give

details of technology, market, competition,managerial

competence and capacity build up.

e) Projection of future profits allowed by a new

company/existing company.




f) details of aggregate shareholding of the promoter group and

their directors

g)Aggregate of securities purchased/sold by the promoter group

6 months preceding filing of prospectus.h) The maximum /minimum price sales/purchases mentioned

i) If not possible to get information a statement to that effect

should be made in the prospectus.

j) Management perception of internal and external risk factorsand management analysis of financial condition and results

of operations as reflected in the financial statements.




a) SEBI notified (15.5.1995) that Rights issues not accompanied

by public issues three months prior to subsequent to date of

rights issue were not required to be vetted by SEBI.

b) SEBI removed ( 1.3.1996) the vetting requirement forexclusive NCD issue with certain conditions.

c) A prospectus is to be dated and it will be the date of

publication. It has to be signed by directors or their

authorised agents.

d) Registration of prospectus ( sec.60).The prospectus has to be

registered with ROC by delivering a copy before issue.




The copy of the registration must be accompanied by

I. Consent of the experts to the issue

II. Copy of the contract fixing compensation of MD or manager.

III. A copy of every material contract except those entered intoordinary course of business

IV. Consents of auditor. legal advisor ,attorney, solicitor,bankers

broker of the company to act in that capacity



Contents of prospectus

Prospectus should disclose all material and essential factors

about the company to the intending purchasers of shares.

1. Main objects of the company and particulars about

signatories to the memorandum and no.of shares owned bythem.

2. No.of classes of share.

3. No.of redeemable preference shares

4. Qualification shares of a director and their remuneration.5. Particulra about directors and managing directors

6. Minimum subscription for shares




7. The timing and opening of subscription list.

8. The amount payable on application and allotment of share.

9. Particulars of any option to subscription for shares.

10. Shares issued for consideration other than cash.

11. Premium on shares issued within 2 years preceding the date

of prospectus.

12.Name of underwriter

13.Underwriting commission

14.Particulars of vendors of property purchased or proposed to

be purchased by the company.




15.Preliminary expenses and issue expenses and to whom payable.

16.Any benefit given to promoters within last two years or proposed tobe given and the consideration for giving the benefit.

17.Particulars of contract other than those into the ordinary course of

business.18.Particulars of auditors.

19.Nature of interest of every director or promoter

20.Voting or dividend rights.

21.Length of time of business.

22.Capitalisation of profits and surplus from revaluation of assets.

23.Specification of time and place for inspection of balance sheet andP&L Account.



Audit Report and accounts

The prospectus has to set out audit report by auditors and a

report by the accountants on the profit and loss in the

business for the past 5 years. If the proceeds of the issue are to be utilised for purchase of

shares of another company a similar report on accounts of the

subsidiary company has to be set out in the prospectus.



Preliminary expenses

If the company is less than five years old accounts have to be

given only for the number of years the company has been in

commercial operation.

If prospectus issued is more than 2 years after thecommencement of business, particulars of signatories to the

memorandum and the shares subscribed for by them and

details of preliminary expenses need not be given.



Consent of experts

Sections 57 and 58 stipulate that experts ( an engineer, valuer

or accountant)whose statements are included in the

prospectus should be unconnected with the formation andmanagement of company and his consent should be obtained

to issue of prospectus containing a statement by him.

An investor is protected by making expert a party to the issue

of prospectus and making him liable for any untrue statement



Offer for sale by issue house

Section 64 of Companies Act provides that offer for sale of

shares to publics deemed prospectus.

The document deemed to be prospectus has to state the net

amount received by the company to which offer relates andindicate where the contract for allotment to issuing house

may be inspected,

For the purpose of registration the issue house is the deemed

director and should sign the prospectus.



Transparency of the prospectus

A prospectus should make full frank and honest disclosure of

all material facts with accuracy.

The prospectus should not omit any relevant information.

The companies Act makes directors, promoters and expertsliable for any misstatement of a material fact in a prospectus

or if any material fact is omitted.

Liability for misstatements in a prospectus may be civil or

criminal liability



Civil liability (sec.62) for misstatements

in prospectus

Any omission from the prospectus of a matter required to beincluded by section 56 may give rise to an action for damageat the instance of a subscriber for shares who has sufferedloss.

Under the general law the subscriber to shares or debenturescan hold all signatories to a prospectus liable in fraud whenthey make a statement to be acted upon by others which isfalse and is made knowingly without belief in its truth orrecklessly not caring whether it was true or false.

The resort to general law can be made where the right againstthe company is lost either through lapses or negligence orwhere the company goes into liquidation.



Criminal liability for misstatements in

prospectus.

For any untrue statement in the prospectus every person whoauthorised the issue of prospectus is punishable withimprisonment of two years or with fine of Rs.5000.

Issuing application for shares or debentures without a

prospectus attracts a fine of Rs.5000.

Section 68 provides that persons who induce fraudulentlyothers to invest or underwrite shares are punishable withimprisonment for five years or fine of Rs.10,000/.

Application in fictitious names for allotment or registration of shares is punishable with imprisonment for five years.

Prospectus and application for shares should contain theprohibition against application in fictitious name.



Shelf prospectus

Shelf prospectus valid for 365 days subject to updates on

material facts, material litigation and changes in financial

position between previous offerings and next one.

The facility is limited to PSBS and Fis and those companies

specialising in infrastructure finance.

This allows the issuer to strike quickly when a window opensin the market by immediately offering the pre-registered

securities to any investment banker.



Fast track mechanism

Fast track issue mechanism allowed by SEBI enables listed

companies to proceed with follow on public offering/rightissue by filing a copy of Red Herring prospectus/prospectus

with RoCs or letter of offer filed with designated stock

exchange.



Offers for sale

These are offers through the intermediary of

issue house/merchant banker.

The company sells entire issue of shares ordebentures to the issue house at an agreed

price which is generally below the par value

and the shares are resold by the issue house

to the public.



Bought out deals

Bought out deal is a mutual agreement between the

merchant banker, sponsor and the company and no party can

take unilateral action.

It involves a deal where entire equity or related security isbought in full or in lots with the intention of off-loading it later

in the market.

The shares are held by sponsor till they are ready for public

participation.

BoDs eliminate retailing thereby saving time and cost.

These are the cheapest and quickest source of finance for

small and medium companies.



Bought out deals

BoDs convert a fee based activity into a fund

based activity of merchant bankers.

BoDs also help entrepreneurs not confident

enough to tap the capital market directly.



Private Placement

The direct sale of securities by a company to institutional investors

is called private placement.

In private placement no prospectus is issued. It is assumed that

investors have sufficient knowledge and experience to be capable

of evaluating the merits and risks of the investment.

The issuers could be public limited companies or private limited

companies.

Investors include UTI,LIC,GIC,SFC and pension and insurance funds.

The intermediaries are credit rating agencies and trustees and

financial advisors such as merchant banks. These play a vital role



Private placement

Private placement has advantages of speed, low cost and

confidentiality.

The confidentiality helps pvt.ltd companies and closely heldcompanies which do not want to make public issues for fear of

take over ,wealth tax hassles and institutional interference.

Some companies are too small for public issue as the public

issues are costly.

The most widely used instrument in private placement is NCD

They are preferred by investors as they are stable and give

assured yield.



Private placement.

Private placement market is highly informal

market.

It is not regulated by SEBI



Private equity funding

Companies started looking for private equity funding

opportunities as raising capital through primary market is

expensive.

Private equity can be in the form of equity, bonds, debenturesand preference shares.

In mid eighties institutions like UTI,GIC,provided term loans as

well as equity for grass root projects and expansion purposes.

Subsequently Mutual Funds came to be an important source

of equity funding. After liberalisation the entry of private

sector MFs gave a further boost to private equity funding.




NRIs also provide private equity and generally tend to prefer

unlisted companies.

Entry of FIIs constituted a further breakthrough in sourcing of

private equity. Private equity is to companies taking into and account their

trading volumes, level of floating stock , purpose for which

additional are being raised.

Private equity funds look for capital gains through project

growth and a clear exit strategy between 3-7 years from

original investment.




The value of shares to be acquired by private equity funds is

calculated on the basis of average price earnings multiples

during the past 3 years on a post tax basis .This is in

accordance with international practice.

The rate of return expected by private equity fund is about

25%p.a.

Private equity funding has the potential of becoming the first

stage funding of a project followed by a public issue after the

project is implemented.



Grey market

Shares of several companies are sold by promoters six to eight

months before the actual public issue.

Such sales are illegal as they are not sold through prospectus.

They are not private placement business.This is popularlyknown as grey market wherein trading of security takes place

before it is officially listed.

The grey market cannot exist without the active connivance of

and promoters. They sell shares out of their quota and profit

from any premium collected.



Any questions please?

mb session -9 pre-issue management

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