Regulatory Framework of Initial Public Offer in India

 

Abhinav Gupta

Assistant Professor of Law at Renaissance Law College, Indore and Renaissance University, Indore.

 

ABSTRACT:

The present paper initially begins with explaining what is Initial Public Offer (IPO) and what is the regulatory framework of the IPO in India. The paper also discusses the reason for a company to opt for IPO. The paper deliberates in great detail the whole process of an IPO for an Indian Company and also the prerequisites which a Company must fulfil before going public. The paper also examines the SEBI guidelines for Companies before opting for the IPO and also canvass all the players of an IPO in India. The paper will also explain the procedure and stages of an IPO with an indicative timeline for an IPO in India. The paper will elaborate on the pre- and post-public issue regulatory obligations and compliance for a Company in India.

 

 

 

INTRODUCTION:

Issue of shares to public is the most common and popular method of raising funds by the company for the purpose of raising funds for diversification, modernisation and expansion of the company. Public issue of shares is governed by the provisions of the Companies Act, 2013, the Securities Contracts (Regulation) Act, 1956, the Securities Exchange Board of India Act, 1992, the SEBI (Disclosure and Investor Protection) Guidelines, 2000, the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, the Companies (Prospectus and Allotment of Securities) Rules, 2014, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and the listing requirements of a stock exchange.

 

Initial Public Offer (IPO):

Initial Public Offer has been defined under Regulation 2(p) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. The objective of IPO is to raise capital for company which helps in tapping wide range of investors who would provide capital to company for future growth and development. Thus, the main purpose of an IPO are as follows:

·      To establish a new business;

·      For expansion of an existing business;

·      Opportunity to raise equity capital from broader range of investors;

·      Providing an exit for existing shareholders;

·      Increased flexibility and value attached to the shares in a publicly traded company;

·      Corporate governance improvement;

·      Reputational benefits and prestige of the company;

·      Diversification of the risk;

·      Increased liquidity of the shares, etc.

 

 

The flow-charts below provides a birds eye view and the process flow of Initial Public Offer in India:

 

 

 

Flow Chart 1: Initial Public Offer at Glance¹

 

 

Figure 1: IPO Process Flow²

 

Check list prior to making of Initial Public Offer³:

A Company in India has to fulfil following Statutory and Regulatory compliances before it could go public and be listed on any of the Stock Exchanges.

 

The Companies Act requirements:

The Companies Act, 2013, requires a Company in India to fulfil following criterion before going Public:

 

·      Object Clause:

To check whether the proposed project or activity is covered by the “object clause” of the memorandum of association of the company.

·      Authorised Capital:

To check whether the present authorised capital of the company is sufficient to cover the number of shares proposed to be issued.

·      Shareholder’s Approval:

To get the approval of the shareholders under Section 62 of the Companies Act, 2013, to issue Initial Public Offer (IPO).

 

 

Stock Exchange requirement:

The Stock Exchanges in India like NSE, BSE, etc. require Companies in India to comply with the following condition:

·      Articles of Association: To check the articles of associations of the company with the requirement laid down but the designated stock exchanges.

 

The Securities Contracts (Regulation) Act, 1956 requirements:

The Securities Contracts Act, 1956, requires a Company in India to fulfil following requisites before going Public:

·      Minimum public offer as per Rule 19(2)(b) of Securities Contracts (Regulation) Rules, 1957: An applicant company apart from complying with such other terms and conditions as may be laid down by a recognised stock exchange, shall also satisfy the stock exchange the requirements of minimum public offer as stated in Rule 19(2)(b) of the Securities Contracts (Regulation) Rules, 1957.

 

SEBI Guidelines requirements:

The SEBI, who is the regulator of Capital Market in India, has laid down following ground rules before a Company in India shall apply to SEBI for issuing of its shares to the Public:

·      Prohibition: A company which has been prohibited from accessing the capital market under any order or direction of SEBI shall not make any public issue of shares.

·      Eligibility norms: A company wishing to come out with public issue, shall first satisfy the eligibility norms prescribed by SEBI before planning a public issue.

·      Pricing of shares: A company going for a public issue may adopt for either fixed price method or book building method for pricing of the shares, subject to the eligibility criterion under Regulation 26 of SEBI (ICDR), 2009.

·      Price band: In the offer document to be submitted to SEBI the company can mention a price band of 20% of the floor price. Actual price can be determined at a later date before filing of the offer document with the ROC.

·      Promoter’s contribution: The promoter’s contribution in case of a public issue of an unlisted company shall not be less than 20% of the post-issue capital. In addition to that, there shall be a lock-in period of 3 years for the promoters from the date of allotment or from the date of commencement of commercial production, whichever is later.

 

·      Requirement of monitoring agency: In case of issues exceeding Rs. 500 Crores, the issuer shall make arrangement for the use of proceeds of the issue to be monitored by one of the financial institution called monitoring agency.

·      Minimum application value: The minimum application value shall be within the range of Rs. 5000 to Rs. 7000. The minimum application value shall be with reference to the issue price of the shares and not with reference to the amount payable on application.

·      Securities to be made fully paid-up: If the subscription money is proposed to be received in calls, the call shall be structured in such a manner that the entire subscription money is called within 12 months from the date of allotment except for the situations in which the size of issue is above Rs. 500 Crores.

·      Safety net or buy-back arrangement: A company may contemplate ‘Safety Net’ or ‘Buy-back arrangement’ in connection with its public issue.

 

The table below summarise the key activities along with its scope at various stages of an Initial Public Offer in India:

 

Figure 2: Stages of IPO and various activities involved

 

Various players in an Initial Public Offer:

The table below provides a detailed account of all major players in an Initial Public Offer by a Company in India along with their major responsibilities and also at what stage of the Initial Public Offer, such a player shall be appointed.

 

Figure 3: Various players in IPO and their Role⁴.

 

 

Procedure for Initial Public Offer:

The flow-chart below provides a very simple and lucid flow of process of an Initial Public Offer by a Company in India.

 

Flow Chart 2: Life Cycle of an IPO

 

For an Initial Public Offer, a Company in India has to also comply with following Statutory and Regulatory Compliances at various stages of Initial Public Offer, which could be seen in the following figure:

 

 

Figure 4: Various requirements at different stages of IPO⁵

The following figure reflects on the time-line and time requirement for every stage of an Initial Public Offer in India :

 

Figure 5: Indicative IPO Timeline⁶

 

Other Compliances:

In addition to above discussed Statutory and Regulatory compliance, a Company shall also comply with following pre-issue and post-issue obligations:

 

Compliances to be made prior to opening of Subscription List:

·      Statutory announcement should be made or prospectus shall be advertised in the newspaper at least 10 days before the opening of subscription.

·      Deposit of 1% security of the public issue with the stock exchange, which is refundable upon the company showing that it had complied with all the requirements with respect to issue of share, when it produces a NOC Certificate from SEBI.

·      Certificate to be furnished to SEBI as regards promoter’s contribution brought in advance before the public issue opens.

·      The subscription list shall be open for at least 3 days but not more than 10 days.

·      During the issue, it shall be duty of the Registrar of the issue to closely monitor the subscription figures for the issue.

·      Based upon the reported figures of collection of application money, the company in consultation with its lead manager decides the closing of subscription list.

 

Post Issue Obligations:

·      After the closure of the issue, the Registrar to the issue shall collect collection of figures to determine whether the issuer-company has received the minimum subscription of 90% of the total issue.

·      Bank to give final certificate to the registrar of the issue, the lead manager and the company with respect to the applications, details regarding application and the application monies received from the investors investing in the issue of the issuer-company.

·      Over subscription to the extent of 10% of the net offer made in the prospectus to the public is permissible.

·      In the case of devolvement on the underwriter, the lead merchant banker shall ensure that the underwriter honours their commitment within 60 days from the date of closure of the issue.

·      The lead manager shall send three day report to SEBI confirming whether the issuer-company has received the minimum subscription of 90%, within 3 working days from the date of closure of subscription of the issue.

·      Public Issue proceeds to be released, subject to the listing permission is obtained from all the stock exchanges where the listing is proposed as per the offer document.

·      Basis of allotment shall be finalised in fair and proper manner.

·      Generation of list of allottee and non-allottee. And, in case of rejected application a refund register is prepared.

·      The Registrar has to ensure that all the allotment made to applicants in dematerialised mode.

·      A Board meeting shall be convened for passing of resolution with respect to the allotment of shares and appointment of refund banker.

·      A copy of basis of allotment shall be intimation to stock exchanges where listing is sought by the issuer-company.

·      The issuer company shall advertise basis of allotment in at least 2 all India newspaper within 10 days from the date of completion of such activity.

·      Open account with refund banker and the requisite funds shall be transferred to the refund bank account.

·      Submission of final listing application together with distribution schedule and shareholding pattern to stock exchange within 7 working days of the finalisation of the basis of allotment.

·      Upon fulfilment of commitments by the underwriter of their commitments, the issuer-company shall make payment of underwriting commission within 15 days from the date of finalisation of allotment of shares.

·      All requisite documents shall be filed with ROC within 30 days of allotment.

·      The lead merchant banker shall submit the post-issue monitoring report within 3 working days from the due dates.

·      The company shall apply for the release of 1% security deposit deposited with the designated stock exchange, after having received NOC from SEBI.

·      The lead merchant banker shall set up proper grievances monitoring and redressal system to resolve the investor grievances quickly.

 

Time-line of IPO:

The whole IPO process ideally may take 23-26 week time from preparation phase to post-issue requirements. The following figure reflects the time which is required for various stages of an IPO.

 

Figure 6: Time-line for an IPO⁷

 

 

But even before a formal process for IPO begins, a company need planning which itself may take more than a year and post-issue compliances continue till eternity till a company exist and is listed on a stock exchange. Thus, the IPO process which begins with inception of idea to go public and till actually shares are being allotted and all formal regulatory requirements are completed may take ideally anywhere between 18 month to 27 months, taking into consideration that the public issue does not fail.

 

REFERENCE:

1.     Anil Choudhary and Rajneesh Deka, “Securities Regulation: Primary Market Offerings in India” (2015).

2.     Rajesh A., “Practical and Regulatory aspects of IPO”, available at http://www.icsi.edu/Portals/42/Practical%20and%20Regulatory%20aspect%20of%20IPO%20-%20India.pdf, accessed on 20^th May, 2019

3.     Besant C. Raj, “Corporate Financial Management: An Introduction”, 2^nd Edition (1988).

4.     Neha Soni, “Initial Public Offerings (IPOs): Regulations and Process”, available at http://www.icsi.edu/docs/portals/25/IPO.pdf, accessed on 20^th May, 2019.

5.     Neha Soni, “Initial Public Offerings (IPOs): Regulations and Process”, available at http://www.icsi.edu/docs/portals/25/IPO.pdf, accessed on 20^th May, 2019.

6.     Rajesh A., “Practical and Regulatory aspects of IPO”, available at http://www.icsi.edu/Portals/42/Practical%20and%20Regulatory%20aspect%20of%20IPO%20-%20India.pdf, accessed on 20^th May, 2019.

7.     Neha Soni, “Initial Public Offerings (IPOs): Regulations and Process”, available at http://www.icsi.edu/docs/portals/25/IPO.pdf, accessed on 20^th May, 2019.

 

 

 

Received on 14.06.2019        Modified on 27.07.2019

Accepted on 19.08.2019      ©AandV Publications All right reserved