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Regulatory Frameworkfor companies to Raise
CapitalS & S Session - 14
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Raising capitalIssue of shares
Issue of Debentures
Loans from Financial institutions like ICICI, IFCIetc upto a max period of 25 years (long term)against some security.
Medium term Loans from commercial Banksfor renovation & modernisation.
Public deposits
Reinvestment of profits
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Public DepositsCompanies often raise funds by inviting
their shareholders, employees and thegeneral public to deposit their savings
with the company. The Companies Act permitssuch deposits to be received for a period upto 3 years at a time. Public deposits can beraised by companies to meet their medium-
term as well as short-term financialneeds. The increasing popularity of publicdeposits is due to :-
The rate of interest the companies have topay on them is lower than the interest on
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Raising Capital thru
sharesPublic Issue IPO / FPO /DPO
Private Placement
Rights issue
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IPOInitial Public Offering (IPO) is when an
unlisted company makes either a fresh issueof securities or an offer for sale of its existing
securities or both for the first time to thepublic. This paves way for listing and tradingof the issuers securities.
A Further public offering (FPO) is when analready listed company makes either a freshissue of securities to the public or an offer forsale to the public, through an offer document.An offer for sale in such scenario is
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Private PlacementA private placement is an issue of shares to aselect group of persons under Section 81 of theCompanies Act, 1956. This is a faster way for acompany to raise equity capital.
A private placement of shares by a listed companyis generally known by name of preferentialallotment. Where company has to comply with therequirements contained in Chapter XIII of SEBI (DIP)
Guidelines which interalia include pricing,disclosures in notice etc,
A Qualified Institutions Placement is a privateplacement of equity shares by a listed company to
Qualified Institutions Buyers as per Chapter XIIIA
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Rights IssueRights Issue (RI) is when a listed company
which proposes to issue fresh securities to itsexisting shareholders as on a record date.
The rights are normally offered in a particularratio to the number of securities held prior tothe issue.
This route is best suited for companies whowould like to raise capital without dilutingstake of its existing shareholders unless theydo not intend to subscribe to their
entitlements.
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Eligibility norms for
IssuesPublic issue Norms are Many
Rights Issue No eligibility norms
Private Placement
Preferential Allotment No eligibility norms
QIP - only those companies whose shares are
listed in NSE or BSE and those who are having aminimum public float as required in terms of theListing agreement, are eligible.
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Public Issue IPO or FPOEntry Norm I (EN I): The company shall meet the
following
requirements:
(a) Net Tangible Assets of at least Rs. 3 crores for3 full years.
(b) Distributable profits in atleast three years
(c) Net worth of at least Rs. 1 crore in three years
(d) If change in name, atleast 50% revenue forpreceding 1 year should be from the newactivity.
-
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Public Issue entry
normsTo provide sufficient flexibility and also toensure that genuine companies do notsuffer on account of rigidity of theparameters, SEBI has provided two otheralternative routes to company notsatisfying any of the above conditions, for
accessing the primary Market, as under:Entry Norm II (EN II):
(a) Issue shall be through book building route,with at least 50% to be mandatory allotted tothe Qualified Institutional Buyers (QIBs).
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Public Issue Entry
NormsEntry Norm III (EN III):
(a) The project is appraised and
participated to the extent of 15% byFIs/Scheduled Commercial Banks of which atleast 10% comes from the appraiser(s).
(b) The minimum post-issue face value capital
shall be Rs. 10 crore or there shall be acompulsory market-making for at least 2years.
In addition to satisfying the aforesaid
eligibility norms, the company shall also satisfy
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What is a Prospectus?A prospectus is essentially an invitation or
offer to the public to subscribe for or buy thesecurities of a company.
A prospectus must contain all relevantinformation about the company making theIPO, and must be filed with the relevant
authorities.Therefore the information that is disclosed in
the prospectus relates to the terms on whichthe invitation or offer is made.
It is important for an investor to read and
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Prospectus Contains -
Company InformationThe prospectus will contain informationabout thecompany,
the address of its office and any otherlocations.
the names, addresses and occupation of
the company's directors and managingdirectors;
the names and addresses of thecompany's auditors, bankers and
solicitors;
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Prospectus contains -Purpose of IssuanceThis section will contain information specificto the offer being made,
including the amount of the shares beingissued,
expenses associated with the issuance and
plans for capital raised.
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Prospectus Contains -
Financial DisclosureThis section contains information about
the financial health of the underlying company,
including the number of shares and debenturesthat are issued and outstanding;
and the time and place where copies of thecompany balance sheets, profit and loss
statements and the auditor's report can beinspected.
If an auditor's report has been submitted it mustaddress the profit or loss for the company for
each for previous five years prior to new
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Process for IPO
There are three steps involved for the issue,circulation or distribution of the IPOprospectus.
Firstly, the company seeking listing on a stockexchange(s) must have its prospectus cleared bythe exchange(s) concerned;
secondly, the prospectus (draft offerdocument)must be submitted to the SEBI forvetting and clearance;
and thirdly, the prospectus must be sent to the
Registrar of Companies (ROC) for lodgment andre istration.
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Draft offer Document
It means the offer document in draft stage.
The draft offer documents are filed with SEBI,
atleast 21 days prior to the filing of the OfferDocument with ROC.
SEBI may specifies changes, if any, in thedraft Offer Document and the issuer or the
Lead Merchant banker shall carry out suchchanges in the draft offer document beforefiling the Offer Document with ROC.
The Draft Offer document is available on the
SEBI website for public comments for a period
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Issue, circulation,distribution of IPOProspectusCOMPANY
NSE BSE
SEBI
ROC
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Red Herring Prospectus
A '''red herring prospectus''' is a documentsubmitted by a company (issuer) who intendson having a public offering of stocks/Bonds.
"Red-herring prospectus" means a prospectus,which does not have complete particulars onthe price of the securities offered andquantum of securities offered.
Only the price band may be mentioned.
Issue size might be mentioned & number ofshares can be determined later.
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Issues in Companies
In an environment in which ownership andmanagement have become widely separated,the owners are unable to exercise effective
control over the management or the Board.
The management becomes self perpetuatingand the composition of the Board itself islargely influenced by the likes and dislikes ofthe Chief Executive Officer (CEO).
This kind of problem is known as AgencyProblem.
But its more of a conflict between
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Dominant shareholders
in IndiaFirst are the public sector units (PSUs) where
the government is the dominant shareholderand the general public holds a minority stake
(often as little as 20%).
Second are the multi national companies(MNCs) where the foreign parent is thedominant shareholder.
Third are the Indian business groups wherethe promoters (together with their friends andrelatives) are the dominant shareholders with
large minority stakes, government owned
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Regulatory Response
Company LawProtection of Minority shareholder
Approaching to the court for his share
Or to Company Law tribunal
Information disclosure & Audit
Special majority
Certain decisions are to be passed by 75% or90% of the shareholders
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Regulatory Response -
SEBIInformation disclosure thru prospectus &
accounts
Promoters contribution & lock inin most public issues, the promoters (typically
the dominant shareholders) are required to takea minimum stake of about 20% in the capital of
the company and to retain these shares for aminimum lock-in period of about three years.
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Regulatory Response -
SEBIPricing of Preferential allotment
Company law itself provides that new issue ofshares must be rights issues to existingshareholders unless the shareholders in generalmeeting allow the company to issue shares tothe general public or to other parties.
Many dominant shareholders (both Indian andforeign) responded to the liberalization of theIndian economy by making preferentialallotments to themselves at a small fraction ofthe market price.
In 1994, SEBI issued new guidelines on
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Regulatory Response -
SEBIInsider Trading
Insider trading is the trading of a corporation'sstock or other securities (e.g. bonds or stockoptions) by individuals with potential access tonon-public information about the company.
promoters have merged small companies inwhich they have a large stake into a larger more
widely held company at a swap ratio whichis highly unfavourable to the widely heldcompany.
These allegations have been difficult to prove
Prohibition of manipulative and
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Prohibition of manipulative anddeceptive devices, insidertrading and substantial
acquisition of securities orcontrol.12A. No person shall directly or indirectly
(a) use or employ, in connection with the
issue, purchase or sale of any securities listedor proposed to be listed on a recognized stockexchange, any manipulative or deceptive
device in contravention of the provisions ofthis Act or the rules or the regulations madethere under;
(b) employ any device, scheme or artifice todefraud in connection with issue or dealing in
securities which are listed or proposed to be
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Contd(c) engage in any act, practice, course of business which
operates or would operate as fraud or deceit upon anyperson, in connection with the issue, dealing in securitieswhich are listed or proposed to be listed on a recognised stock
exchange, in contravention of the provisions of this Act orthe rules or the regulations made thereunder;
(d) engage in insider trading;
(e) deal in securities while in possession of material or non-public information or communicate such material or non-public information to any other person, in a manner which is
in contravention of the provisions of this Act or the rules orthe regulations made there under;
(f) acquire control of any company or securities more than thepercentage of equity share capital of a company whose
securities are listed or proposed to be listed on a recognised
stock exchange in contravention of the regulations madeunder this Act.]
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Penalities
A penalty of one lakh rupees for each dayduring which such failure continues or onecrore rupees, whichever is less
Penalty for failure to furnish information,return,
Penalty for failure by any person to enter
into agreement with clients.Penalty for failure to redress investors'
grievances
Penalty for certain defaults in case of
mutual funds
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Penalties
Penalty for insider trading - of twenty-fivecrore rupees or three times the amount ofprofits made out of insider trading, whichever
is higher.
Penalty for non-disclosure of acquisitionof shares and take-overs - twenty-fivecrore rupees or three times the amount ofprofits made out of such failure, whichever ishigher.
Penalty for fraudulent and unfair trade
practices - he shall be liable to a penalty of