Regulatory Framework for companies to Raise Capital - 14 subtitle style S & S edit Master Click to Session

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Raising capital
Issue of shares Issue of Debentures Loans from Financial institutions like ICICI, IFCI

etc upto a max period of 25 years (long term) against some security. for renovation & modernisation.

Medium term Loans from commercial Banks Public deposits Reinvestment of profits
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Public Deposits
Companies often raise funds by inviting

their shareholders, employees and the general public to deposit their savings with the company. The Companies Act permits such deposits to be received for a period up to 3 years at a time. Public deposits can be raised by companies to meet their mediumterm as well as short-term financial needs. The increasing popularity of public deposits is due to :on them is lower than the interest on

The rate of interest the companies have to

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Raising Capital thru shares

Private Placement Rights issue

Public Issue IPO / FPO /DPO

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IPO
Initial Public Offering (IPO) is when an

unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuers securities.

A Further public offering (FPO) is when an

already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is

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Private Placement
A private placement is an issue of shares

to a select group of persons under Section 81 of the Companies Act, 1956. This is a faster way for a company to raise equity capital. is generally known by name of preferential allotment. Where company has to comply with the requirements contained in Chapter XIII of SEBI (DIP) Guidelines which interalia include pricing, disclosures in notice etc,

A private placement of shares by a listed company

A Qualified Institutions Placement is a private

placement of equity shares by a listed company to Qualified Institutions Buyers as per Chapter XIIIA 9/4/12

Rights Issue
Rights Issue (RI) is when a listed company

which proposes to issue fresh securities to its existing shareholders as on a record date.

The rights are normally offered in a particular

ratio to the number of securities held prior to the issue.

This route is best suited for companies who

would like to raise capital without diluting stake of its existing shareholders unless they do not intend to subscribe to their entitlements. 9/4/12

Eligibility norms for Issues

Public issue Norms are Many Private Placement
Preferential Allotment No eligibility norms QIP - only those companies whose shares are

Rights Issue No eligibility norms

listed in NSE or BSE and those who are having a minimum public float as required in terms of the Listing agreement, are eligible.

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Public Issue IPO or FPO

Entry Norm I (EN I): The company shall meet the

following requirements: (a) Net Tangible Assets of at least Rs. 3 crores for 3 full years. (b) (c) Distributable profits in atleast three years Net worth of at least Rs. 1 crore in three years

(d) If change in name, atleast 50% revenue for preceding 1 year should be from the new activity.
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Public Issue entry norms

To provide sufficient flexibility and also to

ensure that genuine companies do not suffer on account of rigidity of the parameters, SEBI has provided two other alternative routes to company not satisfying 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 to 9/4/12 the Qualified Institutional Buyers (QIBs).

Public Issue Entry Norms

Entry Norm III (EN III):

(a) The project is appraised and participated to the extent of 15% by FIs/Scheduled Commercial Banks of which at least 10% comes from the appraiser(s). (b) The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a compulsory market-making for at least 2 years. In addition to satisfying the aforesaid 9/4/12 eligibility norms, the company shall also satisfy

What is a Prospectus?
A prospectus is essentially an invitation or

offer to the public to subscribe for or buy the securities of a company.

prospectus must contain all relevant information about the company making the IPO, and must be filed with the relevant authorities. the prospectus relates to the terms on which the invitation or offer is made.

Therefore the information that is disclosed in

9/4/12 It is important for an investor to read and

Prospectus Contains Company Information The prospectus will contain information

about the
company, the address of its office and any other

locations.
the names, addresses and occupation of

the company's directors and managing directors; company's auditors, bankers and 9/4/12 solicitors;
the names and addresses of the

Prospectus contains This section will contain information specific Purpose of Issuance
to the offer being made, including the amount of the shares being

issued,

expenses associated with the issuance and plans for capital raised.

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Prospectus Contains Financial Disclosure

This section contains information about
the financial health of the underlying company, including the number of shares and debentures

that are issued and outstanding;

and the time and place where copies of the

company balance sheets, profit and loss statements and the auditor's report can be inspected.

If an auditor's report has been submitted it must

address the profit or loss for the company for each for previous five years prior to new 9/4/12

Process for IPO

There are three steps involved for the issue,

circulation or distribution of the IPO prospectus.

Firstly, the company seeking listing on a stock

exchange(s) must have its prospectus cleared by the exchange(s) concerned; document)must be submitted to the SEBI for vetting and clearance;

secondly, the prospectus (draft offer

Registrar of Companies (ROC) for lodgment and 9/4/12 registration.

and thirdly, the prospectus must be sent to the

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 Offer Document with ROC. draft Offer Document and the issuer or the Lead Merchant banker shall carry out such changes in the draft offer document before filing the Offer Document with ROC.

SEBI may specifies changes, if any, in the

The Draft Offer document is available on the

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website for public comments for a period

Issue, circulation, distribution of IPO COMPANY Prospectus

NSE BSE

SEBI

ROC
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Red Herring Prospectus

A '''red herring prospectus''' is a document

submitted by a company (issuer) who intends on having a public offering of stocks/Bonds.

"Red-herring prospectus" means a prospectus,

which does not have complete particulars on the price of the securities offered and quantum of securities offered.

Only the price band may be mentioned. Issue size might be mentioned & number of

shares can be determined later.

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Issues in Companies
In an environment in which ownership and

management have become widely separated, the owners are unable to exercise effective control over the management or the Board.

The management becomes self perpetuating

and the composition of the Board itself is largely influenced by the likes and dislikes of the Chief Executive Officer (CEO).
This kind of problem is known as Agency

Problem.

9/4/12 But

its

more

of

conflict

between

Dominant shareholders in India

First are the public sector units (PSUs) where

the government is the dominant shareholder and the general public holds a minority stake (often as little as 20%). (MNCs) where the foreign parent is the dominant shareholder.

Second are the multi national companies

Third are the Indian business groups where

the promoters (together with their friends and relatives) are the dominant shareholders with large minority stakes, government owned 9/4/12

Regulatory Response Company Law

Protection of Minority shareholder
Or to Company Law tribunal Approaching to the court for his share

Information disclosure & Audit Special majority

Certain decisions are to be passed by 75% or

90% of the shareholders

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Regulatory Response SEBI

accounts
Promoters contribution & lock in

Information disclosure thru prospectus &

in most public issues, the promoters (typically

the dominant shareholders) are required to take a minimum stake of about 20% in the capital of the company and to retain these shares for a minimum lock-in period of about three years.

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Regulatory Response SEBI

Pricing of Preferential allotment
Company law itself provides that new issue of

shares must be rights issues to existing shareholders unless the shareholders in general meeting allow the company to issue shares to the general public or to other parties. foreign) responded to the liberalization of the Indian economy by making preferential allotments to themselves at a small fraction of the market price. In 1994, SEBI issued new guidelines on

Many dominant shareholders (both Indian and

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Regulatory Response SEBI

Insider Trading
Insider trading is the trading of a corporation's

stock or other securities (e.g. bonds or stock options) by individuals with potential access to non-public information about the company. which they have a large stake into a larger more

promoters have merged small companies in

widely held company at a swap ratio which is highly unfavourable to the widely held company.
These allegations have been difficult to prove 9/4/12

Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or 12A. No person shall directly or indirectly control.

(a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device in contravention of the provisions of this Act or the rules or the regulations made there under; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be 9/4/12

Contd
(c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder; (d) engage in insider trading; (e) deal in securities while in possession of material or nonpublic information or communicate such material or nonpublic information to any other person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made there under; (f) acquire control of any company or securities more than the percentage 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 made 9/4/12 under this Act.]

Penalities
A penalty of one lakh rupees for each day

during which such failure continues or one crore 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

for certain defaults in case of 9/4/12 mutual funds

Penalty

Penalties
Penalty for insider trading - of twenty-five

crore rupees or three times the amount of profits made out of insider trading, whichever is higher.

Penalty for non-disclosure of acquisition

of shares and take-overs - twenty-five crore rupees or three times the amount of profits made out of such failure, whichever is higher.
Penalty for fraudulent and unfair trade
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practices - he shall be liable to a penalty of