PROCESSES RELATED TO PUBLIC OFFERING OF SHARES

PROCESSES RELATED TO PUBLIC OFFERING OF SHARES (Part 1)

Key Concepts

Pre-issue Work: The lead manager undertakes several steps, including appointing R&T agents, bankers, syndicate brokers, brokers, and underwriters, obtaining in-principle approval from recognized stock exchanges, and filing the Draft Red Herring Prospectus (DRHP) with SEBI.
Post-Issue Work: The lead manager's functions include ensuring the issue is kept open for the required number of days, collecting bid data, finalizing the basis of allotment, and seeking listing of shares on stock exchanges.
Basis of Allotment: The process of deciding the number of shares each investor is entitled to, based on the over-subscription ratio and investor categories.
Categories of Investors:
- Retail Individual Investors: Invest not more than Rs. 2 lakh in an issue.
- Non-Institutional Investors: Invest Rs. 2 lakh or above in an issue.
- Qualified Institutional Buyers (QIBs): Include mutual funds, financial institutions, and scheduled commercial banks.
- Anchor Investors: QIBs who make an application for a value of Rs. 10 crore or more in a public issue.
Prospectus and Red Herring Prospectus:
- Prospectus: A document containing all relevant information for an investor to make an investment in a public issue of shares.
- Red Herring Prospectus (RHP): Contains all disclosures except the price, filed with SEBI and the Registrar of Companies.
- Draft Red Herring Prospectus (DRHP): A draft prospectus used in book-built issues, filed with SEBI for observations/comments.

Important Terms

Lead Manager: Responsible for ensuring regulatory requirements are complied with and managing the issue process.
Designated Stock Exchange: The recognized stock exchange where the basis of allotment is approved and chosen by the issuer.
Book Building Issue: A type of public issue where the price is determined based on bids received.
ASBA (Application Supported by Blocked Amount): A facility where application money is blocked in the investor's bank account until the allotment is made.

Key Concepts Related to Public Offering of Shares

Audio Visual (AV) Format: SEBI has introduced a requirement for companies to provide salient disclosures in AV format for public issues, making it easier for investors to understand the features of the issue.
Underwriting: A process where lead managers or syndicate members agree to subscribe to shares if they remain unsubscribed by investors, protecting the company from the risk of undersubscription.
Green Shoe Option (GSO): An option that allows companies to allot additional shares to stabilize the price of the share in the secondary market, with the objective of providing stability to the price of the share.

Underwriting

Definition: Underwriting is a commitment by lead managers or syndicate members to subscribe to shares if they remain unsubscribed by investors.
Types: Underwriting can be either hard or soft, with hard underwriting requiring the underwriter to subscribe to the extent of commitment if the issue is undersubscribed.
Commission: Underwriters are paid a commission for undertaking this commitment.

Green Shoe Option

Objective: The objective of GSO is to provide stability to the price of the share in the secondary market immediately on listing.
Allotment: The company can allot additional shares not exceeding 15 percent of the issue size to the general public who have subscribed in the issue.
Stabilization: The stabilization process involves the Stabilizing Agent (SA) buying shares from the secondary market to stabilize the price, with the entire process available only for a period of 30 days from the date on which the shares are listed and traded.

Methods of Making a Public Issue of Shares

Fixed Price Issue: In a fixed price issue, the company decides on the price at which the shares will be issued, with the price justified by the company on the basis of quantitative and qualitative factors.
Book Built Issue: In a book built issue, the company and its lead managers specify a floor price or a price band within which investors can bid, with the objective of identifying the price that the market is willing to pay for the shares being issued.

Book Built Issue

Price Band: The price band is specified by the company and its lead managers, with the cap of the price band not being higher than 20 percent of the floor price.
Revision: The price band can be revised during the offer period within the 20 percent band between floor and cap price, with the revision being advertised and the issue period extended by 3 days.
Reservations: Not less than 35 percent of the net offer to the public will be reserved for retail individual investors, not less than 15 percent for non-institutional investors, and not more than 50% for qualified institutional buyers.

Initial Public Offer (IPO) by Small and Medium Enterprises (SME)

SME Exchange: An SME exchange is a trading platform of a recognized stock exchange having nationwide trading terminals permitted by SEBI to list the specified securities issued in accordance with SEBI (ICDR) Regulations.
Difference between Main Board IPOs and SME IPOs: The difference between Main Board IPOs and SME IPOs includes post-issue paid-up capital, minimum number of allottees, IPO application size, observation on DRHP, track record, IPO underwriting, and market making.

Processes Related to Public Offering of Shares (Part 3)

Reporting Requirements

Annual Reports: Specific and complex annual report with strict governing regulations
Half Yearly Reports: Abridged version of annual report and simple regulations in relation thereto
Quarterly Reports: Specific and complex quarterly report with strict governing regulations

Regulatory Requirements for SME IPOs

Incorporation: The company shall be incorporated under the Companies Act
Tangible Assets: The net tangible assets should be Rs. 3 crores in the last preceding 2 full financial years
Track Record:
- The company or the partnership/proprietorship/LLP Firm or the firm which have been converted into the company should have a combined track record of at least 3 years
- Alternatively, the company/partnership/proprietorship/LLP should have been funded by NABARD or SIDBI or Banks or financial institutions and should have a track record of operations for 1 full financial year and audited financial result for 1 full financial year
Disclosures: A certificate from the applicant company / promoting companies stating that:
- The company has not been referred to the Board for Industrial and Financial Reconstruction (BIFR)
- There is no winding up petition against the company, which has been admitted by the court or a liquidator has not been appointed
Trading Lot Size:
- The minimum application and trading lot size shall not be less than Rs. 1,00,000
- The minimum depth shall be Rs 1,00,000 and at any point of time it shall not be less than Rs 1,00,000
Participants: The existing members of the stock exchange shall be eligible to participate in SME Platform
Other Requirements:
- It is mandatory for a company to have a website
- It is mandatory for the company to facilitate trading in demat securities and enter into an agreement with both the depositories
- There should not be any change in the promoters of the company in the preceding 1 year from the date of filing the application to the stock exchange for listing under SME segment

Sample Questions

The due diligence certificate in the issue process is signed by Lead Managers
A company must make a minimum public issue of 25 percent of the post issue capital
All public issue of shares have to get a credit rating done: FALSE
A company has to refund the monies collected in a public issue if the issue does not garner 90 percent subscription in the issue
In a fixed price issue, the price of the shares is decided according to the formula defined by SEBI: FALSE