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CHAPTER 4

REGULATORY FRAMEWORK GOVERNING INITIAL PUBLIC OFFERINGS IN INDIA

This chapter presents the regulatory framework governing the

issuance of IPOs through public offer, book building and online

route. The market design for primary market has been provided in

the provisions of: (a) the SEBI Act, 1992 which establishes SEBI to

protect investors and develop and regulate securities market; (b) the

Companies Act, 1956, which sets out the code of conduct for the

corporate sector in relation to issue, allotment and transfer of

securities, and disclosures to be made in public issues; (c) the

Securities Contracts (Regulation) Act, 1956, which provides for

regulation of transactions in securities through control over stock

exchanges; and (d) the Depositories Act, 1996 which provides for

electronic maintenance and transfer of ownership of demat

securities. etc.

Laws relating to Securities Market

S.No Name of the Act Brief About Act

A The Securities

Contracts (Regulation)

Act, 1956 Securities

Contracts (Regulation)

Rules, 1957

It Provides regulation and rules relating to

transactions in securities through control over

Stock Exchanges.

B The Companies Act

1956

It sets out the code of conduct for the corporate

sector in relation to issue, allotment and transfer

of securities, and disclosures to be made in

initial public issues, companies‟ management

including its Board of Director, Shareholding.

C The Securities

Exchange Board of

India, Act, 1992 and

Rules, Regulations,

Guidelines made there

under

The act was formed mainly to protect investors

and develop and regulate the Indian securities

market. SEBI can issue guidelines, directions for

the orderly development of securities market.

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D The Securities

Exchange Board of

India(Issue of Capital

and disclosure

Requirements)

Regulations, 2009.

The act means the Securities and Exchange

board of India Act, 1992(Third Amendment).

E The Depository Act,

1996

It provides for electronic maintenance and

transfer of ownership of dematerialized

securities, i.e. conversion of maintenance

transfer of securities in electronic mode. It is also

responsible for settlement of trades in demat

mode.

F SEBI (Stock Broker and

Sub-brokers) Rules,

1992

These rules deal with capital adequacy norms for

brokers/ sub-brokers, fees by stock brokers/

sub- brokers code of conduct for brokers/ sub-

brokers, etc.

G SEBI (Stock Broker and

Sub-brokers)

Regulations, 1992

These regulations provide for registration of

brokers/ sub-brokers, code of conduct for

brokers/ sub- brokers, etc.

H SEBI (Insider Trading)

Regulations, 1992

These regulations provide an insider (any person,

who is or was connected with company and who

is reasonably expected to have access connection

to unpublished price sensitive information in

respect of a securities of a company) from

dealing in securities on the basis of unpublished

price sensitive information and committing any

other person to deal in any company on the

basis of such information.

I SEBI (Prohibition of

Fraudulent and unfair

trade practices relating

to securities Market)

Regulations, 1999

These regulations specifically prohibit market

manipulation, misleading statements to induce

sale or purchase of securities, unfair trade

practices relating to securities. It enables SEBI to

investigate into case of market manipulation,

fraudulent and unfair trade practices.

J SEBI (Merchant

Bankers) Rules and

Regulations, 1992

These Rules and Regulations control, supervise

and monitor the merchant Banking activities in

India.

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K SEBI (Depositories and

Participants)

Regulations, 1996

These Regulation control, supervise and monitor

the depository Participants activities in India.

L SEBI (Mutual Fund)

Regulations, 1996

These Regulations control, supervise and

monitor the Mutual Fund activities in India.

M SEBI (Substantial

Acquisition of shares

and Takeovers)

Regulation

These Regulations control the takeover activities

of a company, promoter entities and specifies

various disclosures to be made during

acquisition and before the acquisition.

N SEBI (Buyback of

Securities) Regulation,

1998

These regulation deals with Buy back of

securities by th companies/ Promoters.

An elaborate system built under the Capital Issues (Control)

Act, was introduced in India for the first time in May 1943, by a rule

framed under the defence of India Act 1939. After cessation of the

war, it was continued from time to time by an act of Parliament viz,

the capital issue (continuous of control) Act 1947, established firm

control of the Central government over IPOs and other capital Issues

in the post independence era since 1947 until the abolition of the

Act, in 1992. This abolition paved the way for free access to the

capital markets and for free pricing of IPOs and other capital issues.

SEBI has become the focal point for regulating issues of capital by

the corporate sector. It has been entrusted with the responsibility to

look after the interest of investors in this regard by providing them

with adequate and full disclosures in the offer documents and by

regulating the various intermediaries connected with the issue of

capital. In this context, SEBI issued guidelines in June, 1992 known

as Disclosure and Investor Protection Guidelines (DIP), which govern

the issue of capital to public. SEBI has been issuing clarifications to

these guidelines from time to time aiming at streamlining the public

issue process. In order to provide a comprehensive coverage of the

DIP guidelines, SEBI has issued a compendium series in January,

2000, known as SEBI (DIP) Guidelines, 2000. These guidelines apply

to all public issues, offers for sale and right issues of listed and

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unlisted companies, all offer for sale and rights issues by listed

companies, whose equity share capital is listed except in case of right

issues where aggregate value of securities offered does not exceed Rs.

50 lacs. Broadly, there are three methods for issuing securities to the

public. As per SEBI (Issue of Capital and Disclosure Requirements)

Regulations, 2009, the following are some of the requirements that

need to be fulfilled in respect of an IPO in India. In Nutshell (SEBI

(DIP)) Guidelines apply to the following types of companies.

(a) Public issue by listed Companies.

(b) Public issue by unlisted Companies.

(c) Offer for sale by listed and unlisted companies.

(d) Right issues by listed companies of value exceeding 50 lacs.

(e) Preferential issue.

(f) An issue of bonus shares by listed issuer.

(g) A qualified institutions placement.

(h) An issue of Indian depository receipts.

1. ELIGIBILITY REQUIREMENTS

First of all, the merchant banker of Issues Company should file

a draft prospects with SEBI by atleast 30 days prior to the filing of

the prospectus with the registrar of companies (RoCs). The company

is further required to provide any information or clarification as

desired by SEBI, the issuer or the lead merchant banker shall carry

out such changes in the draft prospectus before filling the

prospectus with RoCs. The company must make an application for

listing of its securities in the stock exchange(s) and enter into an

agreement with a depository for dematerialization of securities

proposed to be issued.

1.1 Conditions for Initial Public Offer

1.1.1 Initial public offering by unlisted companies: An unlisted

company shall make an IPO, only if it meets all the following

conditions:-

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(a) The company has net tangible assets of at least Rs 3 crore in

each of the preceding 3 full years, of which not more than 50

per cent are held in monetary assets.

(b) The company has a track record of distributable profits in

terms of Sec 205 of the companies Act, 1956, for at least three

out of immediately preceding five years.

(c) The company has a net worth of at least Rs 1 Crore in each of

the preceding 3 full years.

(d) In case the company has changed its name, within the last one

year, at least 50 per cent of the revenue for the preceding 1

full year is earned by the company for the activity suggested by

the new name, and

(e) The aggregate of the proposed issue and all previous issues

made in the same financial year in terms of issue size (i.e offer

through offer document + firm allotment + promoter‟s

contribution through the offer document ), does not exceed five

times its pre – issue net worth as per the audited balance sheet

of the proceeding financial year.

1.1.2 An issuer not satisfying any of the conditions stipulated in

sub-regulations (1.1.1) may make an Initial Public Offer if.

1.1.2.1(a) The issue is made through the book building process

and the issuer undertakes to allot atleast 50 per cent of

the net offer to public to qualified instituitional buyers

and to refund full subscription monies if it fails to make

allotment to the qualified institutional buyers.

1.1.2.1(b) At least 15 per cent of the cost of the project is

contributed by scheduled commercial banks or public

financial institutions, of which not less than 10 per cent

shall come from the appraisers and the issuer

undertakes to allot at least 10 per cent of the net offer to

public to qualified institutional buyers, otherwise he has

to refund.

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1.1.2.2(a) The minimum post-issue face value capital of the issuer

is Rs 10 crore.

1.1.2.2(b) The issuer undertakes to provide market making for at

least two years from the date of listing of the specified

securities subject to the following:-

(i) The market makers offer buy and sell quotes for a minimum

depth of three hundred specified securities and ensure that the

bid ask spread for their quotes does not, at any time, exceed

10 per cent.

(ii) The inventory of market makers, as on the date of allotment of

the specified securities shall be at least 5 per cent of the

proposed issue.

1.2 IPO Grading:-

No unlisted company shall make an IPO, unless the following

conditions are satisfied as on the date of filing of prospectus ( in case

of fixed price issue ) or Red Herring Prospectus( in case of book built

issue ) with ROC.

(a) The unlisted company has obtained grading for the IPO from at

least one credit rating agency.

(b) Disclosures of all the grades obtained, along with the

rationale/ description furnished by the credit rating agency for

each of the grades obtained have been made in the prospectus

(in case of fixed price issue) or Red Herring Prospectus (in case

of book built issue) with ROC

(c) The expenses incurred for grading IPO have been borne by the

unlisted company obtaining grading for IPO.

2. PRICING BY COMPANIES ISSUING SECURITIES

2.1 An issuer may determine the price of specified securities in

consultation with lead merchant banker or through the book

building process.

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2.2 Price and Price Band

2.2.1 The issuer may mention a price or price band in the draft

prospectus(in case of a fixed price issue) and floor price or

price band in a red hearing prospectus(in case of a book built

issue) and determine the price at a later date before registering

the prospectus with the Registrar of Companies.

2.2.2 If the floor price or price band is not mentioned in the red

hearing prospectus, the issuer shall announce the floor price

or price band at least two working days before the opening of

the bid and at least one working day before the opening of the

bid, in all the newspapers in which the pre- issue

advertisement was released.

3. PROMOTER’S CONTRIBUTION AND LOCK IN REQUIREMENTS

3.1 Promoters Contribution

In a public issue by unlisted company, the promoters shall

contribute not less than 20 per cent of the post issue capital.

Promoters shall bring in the full amount of the promoters

contribution including premium atleast one day prior to the issue

opening date.

3.2 Lock in Requirement

In case of any issue of capital to the public the minimum

promoter‟s contribution shall be locked in for a period of three years

from the date of commencement of commercial production or the

date of allotment in the public issue; whichever is later. In case of an

initial public offer, the entire pre-issue capital held by persons other

than promoters shall be locked in for a period of one year. Promoter

Contribution shall be locked in for a period of one year.

4. PRE ISSUE OBLIGATIONS

4.1 The lead merchant banker shall exercise due diligence. The

standard of due diligence shall be such that the merchant

banker shall satisfy himself about all the aspects of offering,

veracity and adequacy of disclosure in the offer documents as

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his liability shall continue even after the completion of issue

process.

4.2 The lead merchant banker shall pay requisite fee in accordance

with regulations 24A of Securities and Exchange Board of

India (Merchant Bankers) Rules and Regulations, 1992 along

with draft offer document filed with the Board.

4.3 Along with the offer document, the lead manager is required to

submit the following:-

(i) A Memorandum of Understanding (which has been entered

into between a lead merchant banker and the issuer company

specifying their mutual rights, liabilities and obligations

relating to the issue),

(ii) Inter-se Allocation of Responsibilities (where the issue is

managed by more than one Merchant Banker the rights,

obligations and responsibilities of each merchant banker shall

be demarcated).

(iii) Due Diligence Certificate (The lead merchant banker, shall

furnish to the Board a due diligence certificate),

(iv) An Undertaking (that transactions in securities by the

„promoter‟ the „promoter group‟ and the immediate relatives of

the „promoters during the period between the date of filing the

offer documents with the Registrar of Companies or Stock

Exchange as the case may be and the date of closure of the

issue shall be reported to the Stock exchanges concerned with

in 24 hours of the transaction(s)) and

(v) A list of Promoters‟ Group and other Details (list of the persons

who constitute the Promoters‟ Group and their individual

shareholding).

4.4 Appointment of Intermediaries: (i) Merchant Bankers A

Merchant Banker(s) will be appointed for the issue. However, a

Merchant Bankers shall not manage the issue if he is a

promoter or a director or associate of the issuer company

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though it may be appointed as a merchant banker for the

issue, if it is involved only in the marketing of the issue.

(ii) Other Intermediaries: Lead Merchant Banker shall ensure that

the other intermediaries are duly registered with the Board,

wherever applicable. Before advising the issuer on the

appointment of other intermediaries, the Lead Merchant

Banker shall independently assess the capability and the

capacity of the various intermediaries to carry out assignment.

The Lead Merchant Banker shall ensure that issuer companies

enter into a Memorandum of Understanding with the

intermediary (ies) concerned whenever required. The Lead

Merchant Banker shall ensure that Bankers to the Issue are

appointed in all the mandatory collection centres as specified

in clause. The Lead Merchant Banker shall not act as a

Registrar to an issue in which it is also handling the post issue

responsibilities. The Lead Merchant Bankers shall ensure

that:-

(a) The Registrars to Issue registered with the Board are appointed

in all public issues and rights issues.

(b) In case where the issuer company is a registered Registrar to

an Issue, the issuer shall appoint an independent outside

Registrar to process its issue.

(c) Registrar to an issue which is associated with the issuer

company as promoter or a director shall not act as Registrar

for the issuer company.

(d) Where the number of applications in a public issue is expected

to be large, the issuer company in consultation with the lead

merchant banker may associate one or more Registrars

registered with the Board for the limited purpose of collecting

the application forms at different centers and forward the same

to the designated Registrar to the Issue as mentioned in the

offer document. The designated Registrar to the Issue shall be

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primarily and solely responsible for all the activities as

assigned to them for the issue management.

4.5 Underwriting: The lead merchant banker shall satisfy

themselves about the ability of the underwriters to discharge

their underwriting obligations. The lead merchant banker shall

incorporate a statement in the offer document to the effect that

in the opinion of the lead merchant banker, the underwriters‟

assets are adequate to meet their underwriting obligations and

obtain Underwriters‟ written consent before including their

names as underwriters in the final offer document. Moreover,

in respect of an issue, the lead merchant banker shall ensure

that the relevant details of underwriters are included in the

offer document.

In respect of every underwritten issue, the lead merchant

banker(s) shall undertake a minimum underwriting obligation of 5

per cent of the total underwriting commitments or Rs. 25 lacs

whichever is less. The outstanding underwriting commitments of a

merchant banker shall not exceed 20 times its net worth at any point

of time.

4.6 Offer Document to be Made Public

(i) The draft offer document is filled with SEBI atleast 30 days

prior to registering a prospectus, red herring prospectus with

RoC or filling the letter of offer with RoC.

(ii) The draft offer document made available to public for atleast

21 days from the date of filing the offer document with the

Board.

(iii) The lead merchant banker shall also file the draft offer

document with the stock exchanges where the securities are

proposed to be listed.

(iv) Pre-issue Advertisement The issuer company shall soon after

receiving final observation, if any, on the draft prospectus or

draft Red Herring Prospectus from the Board, make an

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advertisement 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. In addition, every

unlisted company obtaining grading for IPO shall disclose all

the grades obtained, along with the rationale/ description

furnished by the credit rating agenc(ies) for each of the grades

obtained, in the prospectus, Abridged Prospectus, issue

advertisements and at all other places where the issuer

company is advertising for the IPO.

4.7 Dispatch of Issue Material: The lead merchant banker shall

ensure that for public issues offer documents and other issue

materials are dispatched to the various stock exchanges,

brokers, underwriters, bankers to the issue, investors

associations, etc. in advance as agreed upon.

4.8 No Complaints Certificate: After a period of 21 days from the

date, the draft offer document was made public, the Lead

Merchant Banker shall file a statement with the Board giving a

list of complaints received by it, a statement by it whether it is

proposed to amend the draft offer document or not, and

highlight those amendments.

4.9 Mandatory Collection Centers: The minimum number of

collection centres for an issue of capital shall be:

(i) The four metropolitan centres situated at Mumbai, Delhi,

Calcutta and Chennai.

(ii) All such centers where the stock exchanges are located in the

region in which the registered office of the company is situated.

(iii) The regional division of collection centres is indicated in

Schedule V11.

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4.10 Authorised Collection Agents: The issuer company can also

appoint authorised collection agents in consultation with the

Lead Merchant Banker subject to necessary disclosures

including the names and addresses of such agents made in the

offer document. The lead Merchant banker shall ensure that

the collection agents so selected are properly equipped for the

purpose, both in terms of infrastructure and, manpower

requirements. The collection agents may collect such

applications as are accompanied by payment of application

moneys paid by cheques, drafts and stock invests which shall

be deposited in the special share application account with

designated scheduled bank either on the same date or latest by

the next working day.

4.11 Appointment of Compliance Officer: An issuer company shall

appoint a compliance officer who shall directly liaise with the

board with regard to compliance with various laws, rules,

regulations and other directives issued by the board and

investor‟s complaints related matter. The name of the

compliance officer so appointed shall be intimated to the

Board.

4.12 Abridged Prospectus: The Lead Merchant Banker shall ensure

that every application form distributed by the issuer company

or anyone else is accompanied by a copy of the Abridged

Prospectus. The Abridged Prospectus shall not contain matters

which are extraneous to the contents of the prospectus.

4.13 Agreement with Depositories: The lead manager shall ensure

that the issuer company has entered into agreements with all

the depositories for dematerialisation of securities. He shall

also ensure that an option be given to the investors to receive

allotment of securities in dematerialized from through any of

the depositories.

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4.14 Branding of Securities: Securities may be branded describing

their nature but not the quality.

5. CONTENTS OF OFFER DOCUMENT

The prospectus shall contain all material information which

shall be true and adequate so as to enable the investors to make

informed decision on the investments in the issue. It shall include

the information and statements as far as possible in the following

order:

(a) Cover Pages

(b) Table of Contents

(c) Definition and abbreviations

(d) Risk Factors

(e) Introduction

(f) About the issuer company

(g) Financial Statements

(h) Legal and Other information

(i) Other Regulatory and Statutory Disclosure

(j) Offering Information

(k) Description of Equity Shares and Terms of the Article of

Association

(l) Other Information

6. POST-ISSUE OBLIGATION

The Post-issue obligation shall be as follows:

6.1 Post – Issue Monitoring Reports

The post-issue Lead Merchant Banker shall ensure the

submission of the post-issue monitoring reports as per formats

specified in Schedule XVI. These reports shall be submitted within 3

working days from the due dates. The post issue lead merchant

banker shall file a due diligence certificate in the format given in

schedule XVI-A along with the final post-issue monitoring report.

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6.2 Redressal of investor grievances

The post issue lead merchant banker shall actively associate

himself with post-issue activities, allotment, refund, dispatch and

giving instructions to self certified Syndicate banks and shall

regularly monitor redressal of investor grievances arising there from.

6.3 Co-ordination with intermediaries

The post-issue lead merchant banker shall maintain close

coordination with the registrars to the issue and arrange to depute

its officers to the offices of various intermediaries at regular intervals

after the closure of the issue to monitor the flow of applications from

collecting bank branches processing of the applications till the basis

of allotment is finalized, dispatch security certificates and refund

orders completed and securities listed. Any act of omission or

commission on the part of the intermediaries noticed during such

visits shall be duly reported to the board.

If the issue is proposed to be closed at the earliest closing

date, the lead merchant banker shall satisfy himself that the issue is

fully subscribed before announcing closure of the issue. In case there

is no definite information about subscription figures, the issue shall

be kept open for the required number of days to take care of the

underwriters‟ interests and to avoid any dispute, at a later date, by

the underwriters in respect of their liability. In case there is a

development on underwriters, the lead merchant banker shall ensure

that the underwriters honour their commitment within 60 days from

the date of the issue. In case of unsubscribed issues, the lead

merchant banker shall furnish information in respect of underwriters

who failed to meet their underwriting developments to the board.

The post-issue Lead Merchant banker shall ensure that

moneys received pursuant to the issue and kept in a separate bank

(i.e. Bankers to an issue), as per the provision of section 73(3) of the

companies Act 1956 and is released by the said bank only after the

listing permission under the said Section has been obtained from all

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the stock exchanges where the securities was proposed to be listed

as per the offer document.

6.4 Post-issue Advertisement

Post-issue Lead Merchant Banker shall ensure that in all

advertisements giving details relating to oversubscription, basis of

allotment, number, value and percentage of all applications number,

value and percentage of successful allottees for all applications, date

of completion of dispatch of refund orders/instructions to Self

Certified Syndicate Banks by the Registrar, date of Dispatch of

certificates and date of filing of listing application is released within

10 days from the date of completion of the various activities at least

in an English National Daily circulated at the place where registered

office of the issuer company is situated.

6.5 Basis of Allotment

6.5.1 In a public issue of securities, the Executive Director/

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 following

guidelines.

6.5.1.1 Proportionate Allotment Procedure

Allotment shall be on proportionate basis within the specified

categories, rounded off to the nearest integer subject to a minimum

allotment being equal to the minimum application size as fixed and

disclosed by the issuer.

6.5.1.2 Reservation for Retail Individual Investor

The proportionate allotments of securities in an issue that is

oversubscribed shall be subject to the reservation for Retail

individual investors as described below:

(a) A minimum 50 per cent of the net offer of securities to the

public shall initially be made available for allotment to retail

individual investors, as the case may be.

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(b) The balance net offer of securities to the public shall be made

available for allotment to.

(i) Individual applicants other that retail individual investors,

and;

(ii) Other investors including Corporate bodies / institutions

irrespective of the number of shares, debentures, etc.

applied for.

6.5.1.3 The unsubscribed portion of the net offer to any one of the

categories specified in (a) or (b) shall / may be made available for

allotment to applicants in other category, if so required.

6.5.2 The drawal of lots (where required) to finalise the basis of

allotment, shall be done in the presence of a public representative on

the governing board of the designated stock exchange.

6.5.3 The basis of allotment shall be signed as correct by the

executive director/managing director of the designated stock

exchange and the public representative(where applicable) in addition

to the lead merchant banker responsible for post issue activities and

the registrar to the issue. The designated stock exchange shall invite

the public representative on a rotation basis from out of the various

public representatives on its governing board.

6.5.4 Other responsibilities

(a) The lead merchant banker shall ensure that the dispatch of

share certificates/ refund orders/ and demat credit is

completed and the allotment and listing documents submitted

to the stock exchanges within 2 working days of the date of

allotment.

(b) The post issue lead manager shall ensure that all steps for

completion of the necessary formalities for listing and

commencement of trading at all stock exchanges where the

securities are to be listed are to be listed within 7 working days

of finalization of basis of allotment.

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(c) Lead merchant banker shall ensure payment of interest to the

applicants for delayed dispatch of allotment letters, refund

orders, etc. as prescribed in the offer document.

(d) The post-issue lead merchant banker shall ensure that the

dispatch of refund orders/ allotment letters/ share certificates

is done by way of registered post/ certificate of posting as may

be applicable.

(e) In case of all issues, advertisement giving details relating to

oversubscription, basis of allotment, number, value and

percentage of all applications received including applications

supported by blocked amount, number, value and percentage

of successful allottees for all applications including

applications supported by blocked amount 2500, date of

completion of refund orders/ instructions to self certified

syndicate banks by the registrar, date of dispatch of

certificates and date of filing of listing application.

(f) Such advertisement shall be released within 10 days from the

date of completion of the various activities.

(g) Post-issue lead merchant banker shall continue to be

responsible for post issue activities till the subscriber have

received the shares certificates or refund of application moneys

and the listing agreement is entered into by the issuer

company with the stock exchange and listing/ trading

permission is obtained.

7. OTHER ISSUE REQUIREMENTS

7.1 In case of a public issue by an unlisted company, the net offer to

public shall be at least 10 per cent as the case may be, of the post-

issue capital. However, in case of a public issue by a listed company,

the net offer to public shall be at least 10 per cent or 15 per cent,as

the case may be, of the issue size. These provisions are not

applicable to an infrastructure company, a government company,

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statutory authority or corporation or special purpose vehicle set up

by any of them, which is engaged in infrastructure sector.

The issuer company is free to make reservations and/or firm

allotments to various categories of persons for the remaining of the

issue size subject to other relevant provisions of these guidelines.

Category of persons include employees of the company, shareholders

of the promoting companies in the case of a new company, Indian

mutual funds, foreign institutional investors(including non resident

Indians and overseas corporate bodies), Indian and multilateral

development institutions and scheduled banks. Specified categories

for “firm allotment” in public issue can be made to Indian and

multilateral development institutions, Indian mutual funds, foreign

institutional investors (including non resident Indians and overseas

corporate bodies, permanent/ regular employees of the issuer

company and scheduled banks. It is further stated that the lead

merchant banker(s) can be included in the category of persons

entitled to firm allotments subjects, to an aggregate maximum ceiling

of 5 per cent of the proposed issue of securities. The aggregate of

reservations and firm allotments of employees in an issue shall not

exceed 10 per cent of total proposed issue amount. For shareholders,

the reservation shall not exceed 10 per cent of the total proposed

issue amount. In case the promoting companies are designated

financial institutions/ state and central financial institutions, the

employees and the shareholders of such promoting companies, shall

not be eligible for the said reservations. The allotment of securities of

to the specified categories for firm allotment/ reservation shall be

subject to such conditions as may be specified by Government and

regulatory authorities.

7.2 Capital Structure: For the purposes of presentation of the

capital structure in the specified format, the lead merchant banker

shall take into account the following:

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(a) Proposed issue amount= (Promoter‟s contribution in the

proposed issue) + (firm allotment) + (offer through the offer

document).

(b) Offer through the offer document shall include net offer to the

public and reservations to the permitted reserved categories

and shall not include the promoter‟s contribution in the

proposed issue and firm allotment.

(c) Net offer to the public shall mean the offer made to Indian

public and does not include reservations/firm allotment/

promoters contribution.

7.3 Firm Allotments and Reservations

(a) (i) If any firm allotment has been made to any person(s) in the

specified categories, no further application for subscription to

the public issue from such person(s) [excepting application

from employee‟s category] shall be entertained.

(ii) Where reservation has been made to specified category(ies),

person(s) belonging to category(ies) [except employees and

shareholders categories] shall not make an application in the

„net public offer‟ category.

(b) (i) An applicant in the net public category cannot make an

application for that number of securities exceeding the number

of securities offer to the public.

(ii) In the case of reserved categories, a single applicant in the

reserved category can make an application for a number of

securities which exceeds the reservation.

(c) (i) Any unsubscribed portion in any reserved category may be

added to any other reserved category.

(ii) The unsubscribed portion, if any, after such inter se

adjustments amongst the reserved categories shall be added

back to the net offer to the public.

(d) In case of under subscription in the net offer to the public

portion, spillover to the extent of under subscription shall be

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permitted from the reserved category to the net public offer

portion.

(e) If any person to whom firm allotment is proposed to be made

withdraws partially or fully from the offer made to him after

filing of the prospectus with the registrar of companies, the

extent of shares proposed to be allotted to such person, shall

be taken up by the promoters and the subscription amount

shall be brought in at least one day prior to the issue opening

date.

(f) The shares so acquired by promoters under sub clause (e)

above shall also be subject to a lock –in for a period of 3 years.

(g) No buy back or stand by or similar arrangements shall be

allowed with the persons for whom securities are reserved for

allotment on a firm basis.

(h) No payment in the nature of discount, commission, allowance

or otherwise shall be made by the issuer or promoters, directly

or indirectly, to any person who receives securities by way of

firm allotment in an issue.

7.4 Terms of the Issue

(a) Minimum Application Value

The minimum application value shall be within the range of

Rs. 5,000 to Rs. 7,000. The issuer company, in consultation with the

merchant banker, shall stipulate the minimum application size (in

terms of number of shares) falling within the aforesaid range of

minimum application value and make upfront disclosures in this

regard, in the offer document.

(b) Securities Issued to be made fully paid up

(i) If the subscription money is proposed to be received in calls,

the calls shall be structured in such a manner that the entire

subscription money is called within 12 months from the date

of allotment.

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(ii) If the investor fails to pay call money within 12 months the

subscription money already paid may be forfeited.

(iii) If the issue size is above Rs. 500 crores and is subject to

monitoring requirements as per Clause 8.17.1 of this chapter,

it shall not be necessary to call the entire subscription money

within 12 months.

7.5. Restriction on further capital issues

No company shall make any further issue of capital in any

manner whether by way of issue of bonus shares, preferential

allotment, rights issue or public issue or otherwise, during the period

commencing from the submission of offer document to the Board on

behalf of company for public or right issues, till the securities

referred to in the said offer document have been listed or application

moneys refunded on account of non-listing or under subscription,

etc.

7.6 Period of Subscription

Subscription list for public issues shall be kept open for at

least 3 working days and not more than 10 working days.

7.7 Price Band

If in a draft offer document submitted to the Board, a price

Band is mentioned, suitable explanatory notes indicating the

financial implications, if the price were to be fixed at different ranges

within the price band approved by the company Board / General

Body shall be disclosed in the offer document.

7.8 Retention of Oversubscription

The Quantum of issue shall not exceed the amount specified in

the prospectus/ letter of offer.

7.9 Underwriting

The issuers have the option to have a public issue

underwritten by the underwriter. In respect of every underwritten

issue, the lead merchant banker(s) shall accept a minimum

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underwriting obligation of 5 per cent of the total underwriting

commitment or Rs.25 lacs whichever is less.

7.10 Updation of Offer Document

The lead Merchant Banker shall ensure that the particulars as

per audited statements contained in the offer documents are not

more than 6 months old from issue opening date. In respect of a

Government company making a public issue, the auditor‟s report in

the prospectus shall not be more than six months old as on the date

of filing of the prospectus with the Registrar of Companies or the

Stock Exchange as the case may be.

7.11 Compliance Officer to be appointed by Lead Merchant Banker

The merchant bankers shall appoint a senior officer as

Compliance Officer to ensure that all Rules, Regulations, Guidelines,

Notification etc. issued by the Board, the Government of India, and

other regulatory organizations are complied with. He shall co-

ordinate with regulatory authorities in various matters and provide

necessary guidance as also ensure compliance internally. He shall

also ensure that observation made/ deficiencies pointed out by the

Board do not recur.

7.12 Incentives to Prospective Shareholders

The issuer shall not offer any incentives to the prospective

investors by way of medical insurance scheme, lucky draw, prizes, etc.

7.13 New Financial Instruments

The lead manager shall ensure adequate disclosures in the

offer document, more particularly relating to the terms and

conditions, redemption, security, conversation and any other

relevant features of any new financial instruments such as Deep

Discount Bonds, Debentures with Warrants, Secured Premium Notes

etc.

7.14 Requirement of Monitoring Agency

In case of issues exceeding Rs. 500 crores, the issuer shall

make arrangements for the use of proceeds of the issue to be

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monitored by one of the financial institutions. A monitoring report

shall be filed by the monitoring agency with the issuer company, on a

half yearly basis, till the proceeds of the issue have been entirely

utilized.

7.15 Safety Net or Buy Back Arrangement

Any safety net scheme or buy-back arrangements of the shares

proposed in any public issue shall be finalized by Issuer company

with the lead merchant banker in advance and disclosed in the

prospectus.

7.16 Option to Receive Securities in Dematerialized Form

The Lead Merchant Banker shall incorporate a statement in

the offer document and in the application form to the effect that the

investors have an option to either receive securities in the form of

physical certificates or hold them in a dematerialized form.

7.17 Issue Opening Date

An issue shall open within 3 months from the date of issuance

of the observation letter by the Board, if any or within 3 months from

the 31st day from the day of filing of the draft offer document with the

Board, if no observation letter is issued.

7.18 Presentation of financials in case of change of denomination

In case of change in standard denomination of equity shares,

the compliance with the following shall be ensured while making

disclosure in the offer document.

(a) All the financial data affected by the change in Denomination

of shares shall be clearly and unambiguously presented in the

offer document.

(b) Comparison of financial ratios representing value per share

and comparison of stock market data in respect of price and

volume of securities shall be clearly and unambiguously

presented in the offer document.

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(c) The capital structure incorporated in the offer document shall

be clearly presented giving all the relevant details pertaining to

the change in denomination of the shares.

ROLE OF COMPANY SECRETARY IN AN IPO

The Securities Exchange Board of India Act, 1992 (SEBI Act)

was formed, inter alia, to provide for the establishment of a Board

(SEBI) to protect the interest of investors in securities and to promote

the development of and to regulate the securities market. SEBI

regulates the securities market by prescribing measures to register

and regulate the working of Capital Market Intermediaries associated

with Securities market. Such intermediaries undertake following

major activities relating to securities in addition to other activities:

Management of an Issue of Capital

Manager of Co-manager

Advisor to issue

Corporate Advisory Services

Underwriting

Registrar to an Issue and Share Transfer Agent

Private Placement

Public announcement and offer documents for acquisition of

shares under takeover code

Portfolio Manager

Brokers, Sub-brokers.

The main role of these Capital Market Intermediaries is to

provide maximum information to the investors by means of

disclosures carrying vital information. The intermediaries are

necessarily compelled to associate with other professionals to advise

the compliance of the Act, rules and regulations, notifications,

guidelines, instructions, etc., directly by the Board or the Central

Government to point out the non-compliance and ensure the

complete compliance. In a capital market issue, the major role in

synchronizing these activities of intermediaries lies with a qualified

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Company Secretary. Section 2(2) of the Company Secretaries Act,

1980 indicates the various areas of practice which are open to a

Company Secretary holding certificate of practice issued by the

Institute. The objective of authorizing members to practice is to make

available professional services of a Company Secretary to the

corporate sector. The educational background, knowledge, training

and exposure that a company secretary acquires makes him a

versatile professional capable of rendering a wide range of services to

companies of all sizes, other commercial and industrial

organizations; including small and medium sized companies which

are not required by law, to employ compulsorily a Whole-Time

Company Secretary.

The plethora of services, which a Practising Company

Secretary can render in IPOs can be listed as under:

1. Planning Stage

(a) Deciding the time line

(b) Compliance related issues

(c) Importance of Corporate Governance

(d) Structure of Board

(e) Promoters consent

(f) Method of issuance of shares (Demat/Physical/Both) -

Compliance

2. Due diligence

(a) Company Contract and Leases

(b) Legal and Tax Issues

(c) Corporate issues

(d) Financial Assets

(e) Financial Statement

(f) Creditors and Debtors

(g) Legal Cases against the company

3. Appointing Advisors and other intermediaries such as:

(a) Investment Bankers

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(b) Book Running Lead Managers

(c) Issues with Depository

(d) Legal Advisor

(e) Bankers

4. Offer Document

(a) Drafting the offer document

(b) Filing with SEBI

(c) In-principle approval of Stock Exchange

(d) Filing with Designated Stock Exchanges

(e) Complying with Comments received from SEBI

(f) Filing with ROC

5. Issue Period

(a) Adhering to Issue Opening/Closing Date

(b) Compiling Field Reports on subscription status

(c) Coordinating with Registrar/Bankers to the issue

6. Allotment of shares

(a) Basis of allotment

(b) Board meeting for allotment

(c) Crediting shares in beneficiary account/dispatch of

share certificates

(d) Despatch of refund orders

(e) Payment of stamp duty

7. Listing

(a) Filing for Listing with Designated Stock Exchange

(b) Finalisation of Listing Process

8. Post issue compliances

(a) To ensure proper compliance with Listing Agreement

(b) Redressal of shareholder complaints

(c) Timely filing of required reports with ROC/SEBI/Stock

Exchange

As can be seen from the above, a Company Secretary is a key

member in an IPO team. Apart from checking the applicability and

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eligibility norms or exemption from eligibility norms and the pre-

listing requirements of Stock Exchange, he is responsible for

ensuring that the company has complied with the pre-issue, issue

and post-issue obligations of the company and corporate governance

requirements including disclosures with respect to, inter alia,

material contracts, statutory approvals, subsidiaries and promoter

holding and litigations. Compliance of SEBI (ICDR) Regulation 2009

and other applicable Acts and guidelines is a primary responsibility

of the Company Secretary in case the company proposes to list its

securities abroad; he is also required to comply with conditions for

listing abroad.

The discussion in this chapter on Indian IPO market take us to

the conclusion that, the SEBI through its DIP guidelines has laid

down the guidelines with respect to the eligibility norms for the

companies, pricing of securities, promoters ownership and lock-in

requirements and other pre-and post-issue obligation so as to ensure

that all the concerned entities observes high standards of integrity

and fair dealing.