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Other Merchant Banking Activities - Disinvestment, Buyback of Equity Shares

Other Merchant Banking Activities - Disinvestment, Buyback of Equity Shares

Other Merchant Banking Activities - Disinvestment, Buyback of Equity Shares (Part 1)

  • Disinvestment: Disinvestment means the direct or indirect sale by the Central Government or any State Government or by a government company, as the case may be, of shares or voting rights in, or control over, a target company, which is a public sector undertaking.
  • Types of Disinvestment Transactions:
    • An offer for sale by the selling shareholder (in this case the Government of India) through the prospectus
    • Offer for Sale through the Stock Exchange Mechanism
    • Strategic sale directly to a successful bidder
  • Role of Merchant Banker in Disinvestment Transactions: The role of a Merchant Banker in Disinvestment transactions is similar to the transactions of any IPO / FPO / OFS (SE) or a strategic sale in the private sector. Merchant bankers may be required to provide their services in disinvestment decisions of the government.
  • Department of Investment and Public Asset Management (DIPAM): The concerned department for this activity in the Central Government is the Department of Investment and Public Asset Management (DIPAM) within the Ministry of Finance.
  • DPE Guidelines: If a Merchant Banker has been mandated to provide advisory services to any Government entity then DPE guidelines issued by the Department of Public Enterprises, have to be kept in mind.
  • Performance Indicators: In order to review the performance of the PSU, a composite score based on its performance for the last three years would be calculated. The 6 identified performance indicators are:
    • Net Profit to Net Worth
    • Manpower Cost to total Cost of Production or Cost of Services
    • PBDIT to Capital employed
    • PBIT to Turnover
    • Earnings Per Share
    • Inter Sectoral Performance
  • Buyback of Equity Shares: SEBI (Buy-back of Securities) Regulations is applicable to buy-back of shares or other specified securities of a company listed on a stock exchange.
  • Methods of Buyback: A company shall buy-back its shares or other specified securities using any of the following methods:
    • From the existing shareholders or other specified securities holders on a proportionate basis through the tender offer
    • From the open market through book-building process, or stock exchange
  • Obligations of Merchant Banker in Buyback: The merchant banker shall ensure that the company is able to implement the offer, the provision relating to escrow account has been made, firm arrangements for monies for payment to fulfil the obligations under the offer are in place, and the public announcement of buy-back is made in terms of the regulations.
  • Contents of the Public Announcement: The public announcement shall contain the following information as specified in the Schedule II of the SEBI (Buyback of Securities) Regulations, 2018.
  • Schedule I: Contents of the Explanatory Statement: The explanatory statement shall include the date of the Board meeting at which the proposal for buy back was approved, necessity for the buy back, maximum amount required under the buy back, and the basis of arriving at the buyback price.

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Other Merchant Banking Activities - Disinvestment, Buyback of Equity Shares (Part 2)

  • Buyback of Equity Shares: The process involves the company purchasing its own shares from the market, and it is regulated by the SEBI (Buy-back of Securities) Regulations, 2018.
  • Disclosure Requirements: The company is required to make certain disclosures, including:
    • Financial Information: Audited financial statements for the last three years, and financial ratios as specified by SEBI.
    • Shareholding Pattern: Details of the company's shareholding pattern, including the number of fully paid and partly paid securities.
    • Escrow Account: Details of the escrow account opened and the amount deposited therein.
    • Listing Details: Listing details and stock market data, including high, low, and average market prices of the securities.
  • Letter of Offer: The company is required to file a letter of offer with SEBI, containing disclosures, within two working days from the record date.
  • Role of Merchant Banker: The merchant banker plays a crucial role in the buyback process, including:
    • Due Diligence: Conducting due diligence on the company and its financials.
    • Disclosure Requirements: Ensuring that the company complies with the disclosure requirements.
    • Filing of Letter of Offer: Filing the letter of offer with SEBI.
  • Delisting of Shares: The SEBI (Delisting of Equity Shares) Regulations, 2021 apply to the delisting of equity shares from all or any of the recognized stock exchanges.
  • Role of Merchant Banker in Delisting: The merchant banker is responsible for ensuring compliance with the provisions of the SEBI (Delisting of Equity Shares) Regulations, 2021.
  • Issue and Listing of Debt Securities: The issue and listing of debt securities are regulated by the SEBI (Issue and Listing of Debt Securities) Regulations, 2008.
  • Role of Merchant Bankers in Issue and Listing of Debt Securities: The merchant banker plays a crucial role in the issue and listing of debt securities, including:
    • Due Diligence: Conducting due diligence on the company and its financials.
    • Disclosure Requirements: Ensuring that the company complies with the disclosure requirements.
    • Filing of Prospectus: Filing the prospectus with SEBI.

Other Merchant Banking Activities - Disinvestment, Buyback of Equity Shares (Part 3)

  • Debt Securities Issuance: The issuer may decide the amount of minimum subscription which it seeks to raise by issue of debt securities and disclose the same in the offer document. The minimum subscription as stipulated by SEBI is 75% of the base issue size for both NBFCs and Non-NBFCs issuers.
  • Security Creation: Security has to be created within a specified time limit for debt securities which are secured.
  • Debenture Redemption Reserve: Debenture redemption reserve needs to be created, but there are exemptions for certain categories of issuers, such as All India Financial Institutions and banks regulated by the RBI.
  • Base Issue Size: In case of public issue of debt securities, the base issue size should be a minimum of Rs.100 crore.
  • Over-Subscription: Issuers are allowed to retain over-subscription money up to a maximum of 100% of the base issue size.
  • Offer Document: The offer document should contain all material disclosures, including:
    • Disclosures specified in Section 26 of the Companies Act, 2013
    • Disclosures as mentioned in the SEBI (Issue and listing of debt securities) Regulations, 2008
    • Additional disclosures as may be specified by SEBI
  • Public Issue of Debt Securities: Online applications are permitted, and ASBA facility can be availed by investors.
  • Private Placement of Debt Securities: There is a limit on the number of potential investors who can be approached, and if this limit is breached, it shall be deemed to be a public issue.
  • Role of Merchant Banker: The merchant banker shall ensure that all comments received on the draft offer document are suitably addressed prior to the filing of the offer document with the Registrar of Companies.
  • Due Diligence Certificate: The lead merchant banker shall furnish to SEBI a due diligence certificate as per specifications of the regulations.
  • Abridged Prospectus: The abridged prospectus shall not contain matters which are extraneous to the contents of the prospectus.
  • Application Form: Adequate space shall be provided in the application form to enable the investors to fill in various details like name, address, etc.
  • Price Determination: The issuer may determine the price of debt securities in consultation with the lead merchant banker, and the issue may be at fixed price or the price may be determined through book building process.
  • Important Documents: The following are the important documents relating to debt issues:
    • Draft Prospectus / Draft Shelf Prospectus
    • Prospectus / Shelf Prospectus
    • Tranche Prospectus
    • Issue Agreement
    • Escrow Agreement
    • Debenture Trustee Agreement
    • Agreement with the Registrars to the Issue
    • Application Form
    • Debenture Certificate (in case of allotment in physical mode)
    • Refund Warrants / stationery
    • Debenture Trust Deed
  • Steps for Public Issue of Debt Securities: The following are the major steps required in case of a public issue of debt securities:
    1. Approval of the shareholders and the Board of Directors of the issuer company.
    2. Appointment of the SEBI Registered intermediaries such as Merchant Banker(s), Registrars, Debenture Trustee, Bankers to the Issue and Brokers to the Issue.
    3. Preparation and filing of the Draft Prospectus or the Draft Shelf Prospectus.
    4. Preparation and filing of the Prospectus or the Shelf Prospectus after incorporating comments received from the public.
    5. Opening and closing of the issue.
    6. Processing of applications and identification of technical rejections.
    7. Preparation of the basis of allotment and submission to the designated stock exchange.
    8. Allotment of debt securities by the company's Board.
    9. Crediting of debt securities in demat mode, despatch of physical certificates, and refund of application money.
  • Obligations of Merchant Banker: The merchant banker has the following obligations:
    • To verify and confirm that the disclosures made in the offer documents are true, fair, and adequate.
    • To ensure that the issuer is in compliance with the regulations.
    • To treat the applicants in a public issue of debt securities in a fair and equitable manner.
    • To be responsible for the due diligence in respect of assignments undertaken by them.
    • To ensure that the security created to secure the debt securities is adequate to ensure 100% asset cover for the debt securities.
  • Role of Merchant Banker in Share Based Employee Benefits: The merchant banker plays a crucial role in Share Based Employee Benefits by providing expert advice, managing the administrative process, ensuring compliance with regulatory requirements, and facilitating the overall smooth execution of the SBEB program.
  • Role of Merchant Banker in cases where exit opportunity is required to be given to dissenting shareholders: The merchant banker is appointed by the promoters or shareholders in control to finalize the exit offer price in accordance with the regulations.

Other Merchant Banking Activities - Disinvestment, Buyback of Equity Shares (Part 4)

  • Role of Merchant Banker in Issue of Securities by Small and Medium Enterprises (SME): The merchant banker plays a crucial role in the issue of securities by SMEs, including ensuring that the offer document contains all material disclosures, exercising due diligence, and satisfying themselves about all aspects of the issue.
  • Disclosures in the Draft Offer Document and Offer Document: The offer document shall contain all material disclosures, including those specified in the Companies Act, 2013, and Part A of Schedule VI.
  • Filing of the Offer Document: The issuer shall file a copy of the offer document with SEBI through the lead manager, and the lead manager shall submit a due-diligence certificate along with the offer document.
  • Offer Document to be Made Available to Public: The issuer and the lead manager shall ensure that the offer documents are hosted on the websites and provided to the public as and when requested.

Underwriting by Merchant Bankers and Underwriters

  • Underwriting Requirements: The initial public offer shall be underwritten for hundred percent of the offer, and the lead manager shall underwrite at least 15% of the issue size on their own account.
  • Appointment of Underwriters: The issuer, in consultation with the lead manager, shall appoint merchant bankers or stock brokers to act as underwriters.
  • Filing of Undertaking: The lead manager shall file an undertaking to SEBI that the issue has been 100% underwritten along with the list of underwriters.

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Minimum Application Value and Minimum Number of Allottees

  • Minimum Application Value: A person shall not make an application in the net offer category for a number of specified securities that exceeds the total number of specified securities offered to the public.
  • Minimum Application Size: The minimum application size shall be one lakh rupees per application.
  • Minimum Number of Allottees: No allotment shall be made pursuant to any initial public offer if the number of prospective allottees is less than fifty.

Market Making

  • Compulsory Market Making: The lead manager shall ensure compulsory market making through the stock brokers of the SME exchange for a minimum period of three years from the date of listing.
  • Market Making Arrangements: The issuer shall disclose the details of the market making arrangement in the offer document.

Role of Merchant Banker in Alternative Investment Funds

  • Definition of Alternative Investment Fund (AIF): An AIF means any fund established or incorporated in India that is a privately pooled investment vehicle.
  • Due Diligence and Disclosures: The merchant banker shall independently exercise due diligence of all the disclosures in the placement memorandum and satisfy itself with respect to the veracity and adequacy of the disclosures.
  • Placement Memorandum: All AIFs shall launch scheme(s) subject to filing of placement memorandum with SEBI through a SEBI-registered merchant banker.
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