Public offering of securitiesPublic offering of securitiesPublic offering of securitiesPublic offering of securities

–– IndiaIndia

Synopsis

� Introduction

� IPO – Unlisted Companies

� General conditions for doing an IPO in India

� IPO Process – Issues

� PIPEs & QIPs – Listed Companies

� Overview of Investments & Acquisitions in Listed Companies

� Key Legislations – Issues

� Issues - Insider Trading and Takeover Regulations

� Conclusion

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Introduction

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Introduction

Introduction

Present Market Condition

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Key Regulations

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Key Regulations

Overview of Key Regulations

� Companies Act, 1956.

� Central enactment to regulate the formation, financing, functioning and winding up of companies

(private as well as public)

� SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

� To govern all public issues by listed and unlisted companies, offers for sale, rights issues, preferential

allotment, qualified institutions placement by listed companies

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� Securities Contracts (Regulation) Act, 1956

� To prevent undesirable transactions in securities by regulating the business of dealing therein

� Securities Contracts (Regulation) Rules, 1957

� Rules promulgated under the Securities Contracts (Regulation) Act, 1956 which provide for detailed

compliances

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IPO – Unlisted Companies: SEBI (ICDR) Regulations

Types of offers

Types of offers

Preferential IssueRights QIPsPublic

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Initial public offering

Offer for saleFresh issue

Further public offering

Initial Public Offering

� When an unlisted company makes:

� a fresh issue of securities; or

� an offer for sale of its existing securities; or

� both

for the first time to the public

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for the first time to the public

� This is the trigger point for listing and trading of the issuer’s securities

Regulatory Considerations

Companies seeking a listing must adhere to the SEBI (ICDR) Regulations, SCR Rules

and the listing requirements/policies of the stock exchange they wish to list on

SEBI (ICDR)

Regulations/SCR

FDI/FII

policyListing

Regulatory Considerations

Rules

Exchange

Requirements/

Policies

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Eligibility criteria

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Eligibility criteria

Eligibility for Unlisted Companies

Criteria

Net Tangible

Assets (NTA) of

at least INR 30

million in each of

the preceding 3

years of which

Distributable

profits on both

stand-alone and

consolidated

basis (under

section 205 of

Net Worth of at

least INR 10

million in each of

the preceding 3

years.

In case of change

in name within the

last 1 year, then at

least 50% of the

revenue for

preceding year

Issue size does

not exceed 5

times the pre

issue net

worth

years of which

not more than

50% is held in

monetary assets.

(50% Limit not

apply if Public

Offer is made

entirely through

an offer for sale.)

section 205 of

the Act) in at

least 3 out of

immediately

preceding 5 years.

preceding year

should be earned

under the new

name

12© Nishith Desai Associates

Contd…

Alternative Criteria

Issue shall be

through Book

Building Route,

with at least

50% to be

The Project has at

least 15%

participation by

Financial

Institutions

Minimum post

issue face value

capital of the

company shall be

INR 100 million

There shall be a

compulsory market

making for at least

2 years from the

date of listing the

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50% to be

mandatorily

allotted to the

Qualified

Institutional

Buyers (QIBs)

OR

Institutions

(FIs)/Scheduled

Commercial Banks

(SBs) of which at

least 10% comes

from the

appraisers of the

Project. In

addition, at least

10% of the issue

shall be allotted to

QIBs.

AND

INR 100 million

OR

date of listing the

shares subject to

certain conditions.

Additional Requirements

� All existing partly paid up shares should have been fully paid or forfeited beforethe issue

� No outstanding financial instruments with option to convert into equity shares ata later date

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� Firm arrangements of finance through verifiable means towards 75% of thestated means of finance excluding the amount to be raised through proposedissue has to be made

� Company should have at least 1,000 prospective allottees in its Issue

Minimum offer to public

� The Department of Economic Affairs, Ministry of Finance has amended the Securities

Contracts (Regulation) Rules 1956 to increase the minimum non-promoter holdings

in Indian companies from 10% to 25% on June 4, 2010.

� The minimum threshold level of public holding to 25% for all listed companies and

atleast 10% of post issue capital of the public sector undertaking.

� Unlisted firms that go public with a post-issue market capitalization of more than Rs.� Unlisted firms that go public with a post-issue market capitalization of more than Rs.

40 billion, may go public with a 10% float initially, but will have to have a public float

of 25% by increasing its public float by at least 5% a year.

� A llocation in the net offer to public category shall be made as follows:

(a) not less than 35% to retail individual investors;

(b) not less than 15% to non-institutional investors;

(c) not more than 55% to QIBs, 5%of which shall be allocated to mutual funds:

Provided that in case of an issue made in terms of 26 (2)(a) (i), at least 50% of the net offer

to public shall be allotted to QIBs.

Pricing

� Fixed Price Offers

� Allowed to freely price the issue. Price is disclosed in the Offer document alongwith the detailed qualitative and quantitative factors justifying the price

� Book Building Price

� Red Herring Prospectus is filed which contains either the floor price or a price band

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� Red Herring Prospectus is filed which contains either the floor price or a price bandalong with the range within which the bids can move. Institutional Buyers andUnderwriters then quote the price and quality at which they bid. Allotment is thenfinalized. The final prospectus with all the details including the final issue price isfiled with ROC, completing the issue process

Promoter and Promoter Group

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Promoter and Promoter Group

Promoters

“Promoter” means

� a person or persons who are in over all control of the company

� who are instrumental in the formulation of a plan or programme pursuantto which securities are offered to the public;

� persons who are named in the prospectus as “promoter”.

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� persons who are named in the prospectus as “promoter”.

But does not include

� a director or officer of the issuer or a person, if acting as such merely in his/her professional capacity:

� a financial institution, scheduled bank, FII and MF merely by virtue of the fact that it holds ten per cent or more of the equity share capital of the issuer;

Promoter Group

� “Promoter group” includes

� Promoter and his/her immediate relative,

� In case promoter is a company

� any company in which promoter holds 10% or more or which holds 10% or

more in promoter or any company in which 20% of equity capital is held by

group of individuals or companies who holds 20% or more of the equity capital

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group of individuals or companies who holds 20% or more of the equity capital

of the Issuer

� In case promoter is an individual

� any company in which 10% or more is held by promoter or an immediate relativeof promoter or a firm or HUF in which promoter or immediate relative is amember and any company in which the above company holds 10% or more.

� Any HUF or firm in which the aggregate share of the promoter and hisimmediate relatives is equal to or more than 10%

� All persons whose shareholding is aggregated for the purpose of disclosing inthe prospectus

Promoters Contribution and Lock-in

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Promoters Contribution and Lock-in

Minimum Promoter’s Requirement

� In case of an unlisted company, the promoter shall contribute not less than 20% inthe post-issue capital

� In case of listed company, the promoter shall participate either to the extent of 20%of the proposed issue or ensure post issue shareholding to the extent of 20% of thepost issue share capital

�

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� Promoters Contribution is required to be brought in before the issue opens

Exemption from Promoters’ Contribution

� In case of further issue of securities by a company which has been listed on astock exchange for at least 3 years and has a track record of dividend paymentfor at least 3 immediately preceding years

� In case of company where no identifiable promoter or promoter group exists

�

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� In case of right issues

What is not eligible as

Promoters’ Contribution?

� The equity acquired during preceding 3 years before the offer documents arefiled with the Board if it is:

� acquired for consideration than cash and revaluation of assets orcapitalization of intangible assets is involved or

� resulting from a bonus issue, out of revaluation reserves or reservescreated without accrual of cash resources

� Pledged securities held by Promoters

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� Pledged securities held by Promoters

� Securities issued to the promoter during preceding 1 year, at a price lowerthan the price at which the equity is offered to the public shall not be eligiblefor computation of promoters contribution*

*not applicable for unlisted government company/corporation/ SPV set up by any of them engaged in the infrastructure sector

Lock in

� Lock-in essentially means a freeze on the shares

� Necessary to ensure that Promoters have some interest in the Company afterthe issue of securities to the public

� Minimum Promoter Contribution is locked for a period of 3 years

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� Excess Promoter’s Contribution shall be locked-in for a period of 1 year

Lock in

� Entire pre issue capital other than promoter’s contribution shall be lockedin for a period of 1 year. Except:

Held by VCFs or FVCI only if:

� Shares have been held by them for at least 1 year as on the date of filingthe draft prospectus

Held for a period of at least 1 year at the time of filing draft offer document

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Held for a period of at least 1 year at the time of filing draft offer documentwith SEBI and being offered to the public though offer for sale*

c) Pre-IPO shares held by employees other than promoters, which wereissued under employee stock option or stock purchase scheme of the issuercompany before the IPO

* not applicable for unlisted govt. company/corporation engagedin the infrastructure sector

What is the process of an IPO?

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What is the process of an IPO?

Intermediaries to the Issue

� Book Running Lead Manager (s)/Merchant Banker

� Registrar to the Issue

� Auditors

� Underwriters

� Legal counsels

� Syndicate members

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� Syndicate members

� Escrow Bankers

� Bankers to the Issue

� IPO grading agency

� Monitoring Agency

� Printers

� Advertisement Agency

IPO Process

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What kind of disclosures are made in the offer document?

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What kind of disclosures are made in the offer document?

Disclosure Requirements

� Definitions and Abbreviations� Summary� Risk Factors (internal and

external) � Capital structure of the Issuer� Objects of the Issue

� Outstanding Litigations� Regulations and Policies� Financial Statements of the

Issuer (restated)� Management Discussion and

Analysis

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� Objects of the Issue � Basis for Issue Price� Business details of the Issuer � Corporate structure and History

of the Issuer� Directors and Key Managerial

Personnel� Promoter and Promoter Group

details

Analysis� Terms of the Issue � Issue procedure� Terms of Articles of Association

of the Issuer� Material contracts and documents

of the Issuer� Declaration

Changes from DIP to ICDR

Key changes from the DIP Guidelines to the ICDR Regulations:

� Removal of the concept of Firm Allotments

� Preconditions to the Issue

� Amendment to the Eligibility Requirements

� Amendment of provisions regarding Promoters Contribution

� Restriction on transferability (lock-in) of promoters’ contribution

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� Restriction on transferability (lock-in) of promoters’ contribution

� Amendment to the provisions regarding the Disclosures to be made by the Issuer.

� Amendment of the provisions regarding Advertisement of the Issues

� Amendment of the provisions regarding Preferential Allotment

� Amendment to the provisions regarding QIPs

� Amendment to the provisions regarding Bonus Issues

Amendments to ICDR

� Amendment to add a new chapter that provides for separate and reduced thresholds for

listing of securities of small and medium enterprises, notably provisions in relation to paid-

up capital threshold, filing of the offer document, underwriting, application size migration

to and from a SME Exchange and Market-making.

� Reduction in the timeline between closure of an issue and subsequent listing of shares for

public issues from 22 days to 12 days.

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� Amendment requires a mandatory allotment of 30% of the total IDR issue, to the retail

individual investors.

PIPEs and QIPs - Listed Companies

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PIPEs and QIPs - Listed Companies

Overview of Key Legislations

� Companies Act, 1956.

� Central enactment to regulate the formation, financing, functioning and winding up of companies

(private as well as public)

� SEBI (Issue of Capital and Disclosure Requirements) Regulation, 2009

� To govern all public issues by listed and unlisted companies, offers for sale and rights issues by listed

companies.

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� SEBI (Prohibition of Insider Trading) Regulations, 1992

� To prohibit persons from dealing in securities while in possession of unpublished price sensitive

information

� SEBI (Substantial Acquisition and Takeover) Regulations, 2011

� To ensure that the incumbent management of the target company is aware of the substantial

acquisition,

� To ensure that in the process of substantial acquisition the security market is not distorted, and

� To ensure that the small investors are offered a choice to either sell their shares at a price generally

higher than the prevailing market price or to continue as shareholders under the new dispensation.

� Types of Instruments - equity shares, fully or partly convertible debentures, fully orpartly convertible preference shares, warrants or any other financial instrumentconvertible into or exchangeable for equity shares at a later date

� Eligibility

� Issuer is in compliance with the conditions for continuous listing of equity shares as

ICDR Regulation – Preferential Issues

� Issuer is in compliance with the conditions for continuous listing of equity shares as

specified in the listing agreement;

� Issuer shall not make preferential issue of specified securities to any person who has sold

any equity shares of the issuer during the six months preceding the relevant date

� Person belonging to promoter(s) or the promoter group has previously subscribed to

warrants of an issuer but failed to exercise the warrants, ineligible for one year from date

of expiry of the tenure of the warrants or date of cancellation of warrants.

� A special resolution has been passed by its shareholders.

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Preferential Allotment (Cont…)

� Pricing of the Issue - higher of the average of the weekly high and low of the closing pricesof the related shares quoted on the stock exchange during the (a) six months or (b) two weekspreceding the relevant date. Relevant date would mean:

� Equity shares, the date 30 days prior to the date on which the meeting of shareholders isheld to consider the proposed preferential issue: .

� Convertible securities, either the relevant date referred to in above or a date 30 days priorto the date on which the holders of the convertible securities become entitled to apply forthe equity shares.

� Term of financial instruments - financial instruments that are convertible or exchangeable� Term of financial instruments - financial instruments that are convertible or exchangeablefor equity shares at a future date can be converted at any time within 18 months from the dateof issue of the relevant instrument

� Lock in of instruments

� Specified securities allotted to promoter or promoter group shall be locked-in for a periodof 3 years from the date of allotment. Not more than 20% of the total capital of the

issuer shall be locked-in for 3 years from the date of allotment.

� Any other person (including promoters/ promoters group) – instruments allotted locked infor a period of 1 year from the date of allotment.

� The entire pre-preferential allotment shareholding of the allottees, if any, shall be locked-infrom the relevant date upto a period of 6 months from the date of preferential allotment

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SEBI ICDR Regulations – Qualified Institutional Placement

� Types of Instruments - equity shares, fully or partly convertible debentures, fully orpartly convertible preference shares, NCDs attached to warrants or any other financialinstrument that are convertible into or exchangeable for equity shares at a later date

� Eligibility -

� a special resolution approving the qualified institutions placement and specifically stating

that he allotment is proposed to be made through qualified institutions placement on the

specified date.

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specified date.

� the equity shares of the same class, proposed to be allotted through qualified institutions

placement have been listed on a recognised stock exchange having nation wide trading

terminal for a period of at least one year prior to the date of issuance of notice to its

shareholders for meeting to pass the special resolution.

� in compliance with the requirement of minimum public shareholding.

� no allotment shall be made, either directly or indirectly, to any qualified institutional buyer

who is a promoter or any person related to promoters of the issue.

QIB (Cont….)

� Pricing of the Issue - higher of the average of the weekly high and low of the closingprices of the related shares quoted on the stock exchange during the two weeks precedingthe relevant date.

� Term of financial instruments - financial instruments that are convertible orexchangeable for equity shares at a future date can be converted at any time within 60months from the date of issue of the relevant instrument.

� Lock in - securities allotted under a QIP cannot be sold for 1 year from the date ofallotment, except on the stock exchange.

� Minimum Number of Allottees:

� 2 where the issue size is < Rs. 250 crores

� 5 where the issue size is > Rs. 250 crores

� No single allottee shall be allotted more than fifty per cent. of the issue size.

� Minimum of 10% of eligible securities shall be allotted to mutual funds:

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Insider Trading Regulations

Insider Trading Regulations

Prohibit insiders / companies from dealing in securities while in possession of unpublished price sensitive information.

“insider” - any person who (i) is or was connected with the co or is deemed to have been connected with the co, & who is reasonably expected to have access to unpublished price sensitive information in respect of securities of a co or (b) who has received or has had access to such unpublished price sensitive information;

“dealing in securities” - an act of subscribing, buying, selling or agreeing to subscribe, to buy, sell or deal in any securities by any person either as principal or agent;

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“price sensitive information” - any information which relates directly or indirectly to a co and which if published is likely to materially affect the price of securities of co.

“Unpublished” - information which is not published by the co or its agents and is not specific in nature.

“person deemed to be a connected person" (i) a co under same mgmt or group or any subsidiary; (ii) an intermediary, (iii) merchant banker, STA, registrar to an issue, debenture trustee, broker, portfolio manager, Investment Advisor, sub- broker, Investment Company etc or an employee thereof who has a fiduciary relationship with the co;(iv) a member of BoD, or an employee, of a PFI; (v) an official or employee of a SRO recognised or authorised by Board of a regulatory body; (vi) a relative of any of the above; (vii) banker of co; (viii) relatives of the connected person; (ix) a concern, firm, etc in which certain connected persons have more than 10% of the holding or interest.

Insider Trading : Due Diligence

� On the one hand, Insider Trading Regulations prohibit persons from dealing insecurities while in possession of unpublished price sensitive information.

� On the other hand, investments are seldom made without the satisfactorycompletion of a legal, business and financial due diligence on investeecompanies. Pursuant to such diligence exercises, it is likely for a potentialinvestor to discover material non-public information.

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� Safeguards to avoid triggering the Insider Trading Regulations for investments inlisted companies:

� Hiring a third party law firm to conduct necessary due diligence. This arrangement would limitthe investor or its advisor/agent/ affiliate/representative receiving or having access to anyunpublished price sensitive information.

� Providing a cooling off period between the due diligence and actual dealing in securities (on theassumption that any unpublished price sensitive information would be made public by theinvestee company during such cooling off period).

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Takeover Code

Applicability of the Takeover Code

“ control” shall include:

a. the right to appoint majority of the directors

or

b. to control the management or policy

decisions exercisable by a person or persons

acting individually or in concert, directly or

Person (Acquirer) Persons Acting in Concert (PAC)+

Shares, Voting Rights, Control

XYZ“Shares” means shares carrying voting

rights, and includes any security which

entitles the holder to exercise voting

rights.

Will include all depository receipts indirectly including by virtue of their

shareholding or management rights ,

shareholders agreement or voting agreement

or in any other manner.

Target Company

An “acquirer” means any person who directly or indirectly

acquires or agrees to acquire:

a. shares

b. voting rights

c. control

in a company either by himself or with Persons acting in concert

(“PAC”)

“ Target Company ” means a company

and includes –

1. Company established under legislation

- central, state or provincial and

2. Whose shares are listed on a stock

exchange.

Will include all depository receipts

carrying entitlement to exercise voting

rights.

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� Who are PACs?

� Trigger Events for Disclosures and Public Announcements

� Change in Control

Takeover Code – Key Issues

� Indirect Acquisitions & Conditional Offers

� Exempted Transactions

� Minimum Public Shareholding

� Non-Compete Fees

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PACs & Deemed PACs

� "person acting in concert " (PAC)

� persons who, for a common objective or purpose of substantial acquisition of shares or voting rights, or , for gaining control over the target company,

� pursuant to an agreement or understanding (formal or informal),

� directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company.

� Deemed PACs

� company + its holding company + its subsidiary or company under the same management

� directors of aforesaid companies and their associates

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� company + its directors, or any person entrusted with the management of the funds of the company

� Promoters, members of promoter group and immediate relatives.

� mutual fund with sponsor or trustee or asset management company

� FII + sub accounts

� Merchant bankers with their clients who are acquirers

� portfolio managers with their clients as acquirers

� VCFs + sponsors

� banks, financial advisors, stock brokers of acquirers

o Banks, financial advisors, stock brokers of a company which is a subsidiary or holding of the acquirer or relative of the acquirer

(bank providing normal commercial banking services are excluded)

� Investment company with a person (as a director, fund manager, trustee or shareholder) having > 2% of the paid up capital of that company

The acquirer should make necessary disclosures to the target company AND to each of the stock exchanges

on which the target company’s shares are listed wwithin 2 days of: (a) receipt of allotment intimation; or (b)

acquisition of shares / voting rights, when such acquisition exceeds the following thresholds:

Disclosures – Trigger Events

74%75%

Every purchase or sale of 5% or more of the target company’s share capital by

5%

an acquirer holding between 25% and the “maximum permissible non-public

Shareholding” requires disclosure.25%

Any ‘creeping’ acquisition entitling the acquirer to more than 25%

or 75% shares or voting rights in the target company requires

disclosure.

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Public Announcement – Trigger Events

Creeping Acquisition: can acquire upto 5% every

FY without making a PAAny acquisition of 5% or more of the voting rights in a company

Public Announcement to purchase shares = minimum 26% of the voting capital of the company

Any acquisition entitling the acquirer to 25% or more of the voting

rights in a company

FY without making a PAAny acquisition of 5% or more of the voting rights in a company

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Questions?

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Disclaimer

The information provided in this presentation is for informational purposes only, andshould not be construed as legal advice on any subject matter. No recipients of thispresentation, clients or otherwise, should act or refrain from acting on the basis of anycontent included in this presentation without seeking the appropriate legal or otherprofessional advice on the particular facts and circumstances at issue from an attorneylicensed in the recipient's state. The content of this presentation contains generalinformation and may not be accurate or reflect current legal developments, verdicts orsettlements. Nishith Desai Associates expressly disclaims all liability in respect to actionssettlements. Nishith Desai Associates expressly disclaims all liability in respect to actionstaken or not taken based on any or all the contents of this presentation.

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Thank You

50© Nishith Desai Associates