SEBI( DIP) Guidelines

Major amendments have been made by SEBI on 14-8-2003, in the Disclosure and Investor Protection Guidelines 2000. These have been made based on recommendation of various committees set up by SEBI. The purpose of amendments, as stated in SEBI circular dated 14-8-2003 are – (a) to enhance the level of investors’ protection (b) to increase the transparency and efficiency of the primary market (c) to strengthen the disclosure and eligibility norms for issuer companies and (d) to rationalize and simplify various operational procedures in the primary market so as to facilitate raising of resources by the issuer companies.

Effective date - The amendments of the Guidelines shall come into force with effect from 14-8-2003. These shall be applicable to all Public Issue/Rights Issue/Offer for Sale for which observations have not been issued by SEBI till date.

The highlights of amendments are stated below. These amendments are discussed in following chapters.

Eligibility Norms of the issuer

Objective of the amendments are – (a) to strengthen the existing norms (b) to facilitate entry of mid-cap, small-cap new entrepreneurs to the primary market without exposing the public to undue risk and (c) to maintain quality of issuer companies and also to keep fly by night issuers at bay. The amendments include introduction of Net Tangible Assets and minimum number of allottees as additional criterion and appraisal route as an alternative to the mandatory book building route. The changes are as follows -

Eligibility norms should be satisfied both at the time of filing draft offer document and final document [clause 2.0]
A company with net tangible assets of at least three crores can make IPO (Initial Public Offer) through public issue [Others have to follow either book building process or project appraisal route]. The company should have track record of profitability is three out of previous years. The issue size should not be more that five times the pre-issue net worth [clause 2.1.1]
Companies which do not fulfil the requirements of net worth, profitability, issue size etc. can make IPO either through book building process or project appraisal method. [clause 2.2.2(a)]. The company must have post issue capital of Rs ten crores or should have arrangement of ‘market maker’ for at least two years [clause 2.2.2(b)] - - The ‘project appraisal’ route has been newly added.
If a company has changed name in last 12 months, at least 50% of the revenue for the preceding 1 full year is earned by the company from the activity suggested by the new name. [condition applicable to existing listed companies as well as new companies making IPO]
An unlisted public company shall not make an allotment pursuant to a public issue or offer for sale of equity shares or any security convertible into equity shares unless in addition to satisfying the conditions mentioned in Clause 2.2.1 or 2.2.2 as the case may be, the prospective allottees are not less than one thousand in number [clause 2.2.2A]. - - Since the words used are ‘shall not make’, the requirement is mandatory.
Following are included in definition of QIB - (i) insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA) (ii) provident Funds with minimum corpus of Rs. 25 crores (ii) pension Funds with minimum corpus of Rs. 25 crores. - - However, in view of restrictions in investment of provident funds and pension funds, it is doubtful if they can participate in IPOs of shares.
The conditions as above in case of IPO are applicable to ‘offer for sale’ also.
A company shall not make a public or rights issue of securities unless firm arrangements of finance through verifiable means towards 75% of the stated means of finance have been made. This is of course, excluding the amount to be raised through proposed Public/Rights issue. [clause 2.8]
An existing listed company can make a public issue of equity shares or any other security which may be converted into or exchanged with equity shares at a later date, only if its issue size does exceed 5 times its pre-issue net-worth [clause 2.3.1]. Otherwise it has to follow book building or project appraisal route. [clause 2.3.2]
In case of the rights issue where the aggregate value of the securities offered is less than Rs.50 Lakhs, the company shall prepare the letter of offer in accordance with the disclosure requirements specified in these guidelines and file the same with the Board for its information and for being put on the SEBI website. [proviso to clause 1.4(i) inserted] - - Intimation to SEBI is required if issue is less than Rs 50 lakhs, but permission is not required.
No research report shall be circulated by the issuer or any member of the issue management team/ syndicate or their associates, commencing from a date 45 days immediately preceding the filing of draft offer document with SEBI and till 45 days after commencement of trading in the relevant securities [clause 9.3.1(iii)].
A listed company shall not make any preferential issue of equity shares, Fully Convertible Debentures, Partly Convertible Debentures or any other instrument which may be converted into or exchanged with equity shares at a latter date if the same is not in compliance with the conditions for continuous listing [clause 13.1A] - - This will act as restraint on preferential issue to promoters.

Book Building Process

Book building is a facility given to issuer companies and merchant bankers to ascertain the demand and indicative price before the actual opening of the issue. The companies have now been given a flexibility of indicating a movable price band or a fixed floor price in Red Herring prospectus. Definition of QIBs has been enlarged to include Insurance companies, Provident and Pension funds with minimum corpus of Rs. 25 crores. Gap between the closure of books and listing/ trading of securities is reduced to 6 days.

The book building process is being integrated with stock exchange procedures. Transactions will be routed through brokers. Brokers will be responsible for defaults in payment of their clients.
The issuer company shall enter into an agreement with one or more of the Stock Exchange(s) which have the requisite system of on-line offer of securities [clause 11.3.1(iv)(a)]. - - Company does not have much choice. It will have to go to NSE or BSE.
The Book Runner(s)/syndicate members shall appoint brokers of the exchange, who are registered with SEBI, for the purpose of accepting bids, applications and placing orders with the company. They will ensure that the brokers so appointed are financially capable of honouring their commitments arising out of defaults of their clients/investors, if any. [clause 11.2.1(vii)(a)]. The brokers, appointed for accepting applications and application monies, shall be considered as ‘bidding/collection centres’ for purpose of book building process. [clause 11.2.1(vii)(b)]
The broker may collect an amount to the extent of 100% of the application money as margin money from the clients/investors before he places an order on their behalf. The margin collected from categories other than Qualified Institutional Buyers shall be uniform across the book runner(s)/syndicate members, for each such category [clause 11.3-1(xvii)(a)]
Broker can ask for 100% deposit from their clients, before accepting bid/offer from them. However, even if they don’t do so, they will be liable for defaults. Clause 11.3.1(vii)(c)states that the broker/s so appointed, shall collect the money from his/their client for every order placed by him/them. In case the client/investors fails to pay for shares allocated as per the guidelines, the broker shall pay such amount.
The red herring prospectus shall disclose, either the floor price of the securities offered through it or a price band along with the range within which the price can move, if any. [clause 11.3.1(viii)(a)]. If price band is indicated, required conditions should be fulfilled.
Prescribed accounting ratios shall be given under the basis for issue price for each of the accounting periods for which the financial information is given: * EPS, pre-issue, for the last three years (as adjusted for changes in capital) * P/E pre-issue * Average return on net-worth in the last three years * Net-Asset value per share based on last balance sheet.
The investors shall have the right to revise their bids provided that Qualified Institutional Buyers shall not be allowed to withdraw their bids after the closure of the bidding. [clause 11.3.4.1(vii)].
Trading shall commence within 6 days from the closure of the issue failing which interest at the rate of 15% p.a. shall be paid to the investors [clause 11.3.5(xx)]. Model time frame for listing of security after book closed is specified in Schedule XXI (revised).

Green Shoe Option

Green Shoe option means an option of allocating shares in excess of the shares included in the public issue. Its main purpose is to stabilize post listing price of the newly issued shares. It is being introduced in the Indian Capital Market in the initial public offerings using book building method. It is expected to arrest the speculative forces.

The basic purpose of ‘green shoe option’ is not to make available additional share capital to company, but to act as stabilizing force, if issue is over subscribed. The shares held by promoters are lent to Stabilising Agent (SA) and returned by SA to them after the purpose is over. Promoters do not get any profit in this transaction.
The green shoe option is available only in case of IPO and not for subsequent issues.
"Green Shoe option" means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism, which is granted to a company to be exercised through a Stabilising Agent [clause 1.2.1(xiii-a)].
A company desirous of availing the option granted by this Chapter, shall in the resolution of the general meeting authorizing the public issue, seek authorization also for the possibility of allotment of further shares to the ‘stabilizing agent’ (SA) at the end of the stabilization period in terms of clause 8A.15. [clause 8A.1]
The company shall appoint one of the Lead book runners as the "stabilizing agent" (SA), who will be responsible for the price stabilization process, if required. The SA shall enter into an agreement with the issuer company [clause 8A.2]
The SA shall also enter into an agreement with the promoters who will lend their shares Maximum number of shares that may be borrowed from the promoters shall not be in excess of 15% of the total issue size. [clause 8A.3].
The details of the agreements mentioned in clause 8A.2 (between Company and SA) and 8A.3 (between SA and promoters) shall be disclosed in the draft Red Herring prospectus, Red Herring prospectus and the final prospectus.
The SA shall borrow shares from the promoters of the company to the extent of the proposed over-allotment. These shares shall be in dematerialized form only [Clause 8A.7]. The allocation of these shares shall be pro-rata to all the applicants [clause 8A.8].
The stabilization mechanism shall be available for the period disclosed by the company in the prospectus, which shall not exceed 30 days from the date when trading permission was given by the exchanges [clause 8A.9].
The prime responsibility of the SA shall be to stabilize post listing price of the shares. To this end, the SA shall determine the timing of buying the shares, the quantity to be bought, the price at which the shares are to be bought etc. [clause 8A.14].
The idea is that due to excess supply of shares (permitted upto 15%), market price will not shoot up at abnormally high level. However, if price of shares goes below issue price, SA will buy share from the market, so that price rises. If despite excess supply of shares, price continues to be higher than the issue price, there is no question of buying the shares from market, as that will further aggravate the market price.
On expiry of the stabilization period, in case the SA does not buy shares to the extent of shares over-allotted by the company from the market, the issuer company shall allot shares to the extent of the shortfall in dematerialized form. [clause 8A.15].
The SA shall remit an amount equal to (further shares allotted by the issuer company) * (issue price) to the issuer company from the GSO Bank Account. The amount left in this account, if any, after this remittance and deduction of expenses incurred by the SA for the stabilization mechanism, shall be transferred to the investor protection fund(s) of the stock exchange(s). [clause 8A.17] - - Thus, promoters/company do not benefit from this transaction.

Changes in Disclosures requirements in the offer documents

The amendments include * full disclosure about the promoters including their photograph, PAN number * classification of risk factors * use of standard financial units * Additional information in US GAAP etc.

The Risk factors shall be classified as those which are specific to the project and internal to the issuer company and those which are external and beyond the control of the issuer company. The Risk factor shall be determined on the basis of their materiality. The Risk factors shall appear in the Offer Document in the following manner: * Risks envisaged by Management * Proposals, if any, to address the risks. [clause 6.2.3.2]
Whether the company proposes to raise funds for a purpose like fixed asset creation and/or for rotation such as working capital etc shall be disclosed clearly in the offer document [clause 6.6.1.2] The requirement of funds for fixed assets shall also be disclosed clearly [clause 6.6.1.3]
An undertaking shall be given in the offer document by the issuer company confirming firm arrangements of finance through verifiable means towards 75% of the stated means of finance, excluding the amount to be raised through proposed Public/Rights issue, have been made. [clause 6.6.3]
Details of promoters like photograph, Voter ID Number, Driving License Number shall be disclosed. [clause 7.7.3(a)]. - - This requirement has been added as during investigation of the security scam, it was found that many companies and even promoters are not even traceable.
One standard financial unit shall be used in the offer document. [clause 6.8.4] [e.g. thousands, lakhs, millions or crore]
The Issuer Company may include in the offer document, the financial statements prepared on the basis of more than one accounting standards (e.g. US GAAP in addition to Indian AS]. - - However, ‘Management Discussion and Analysis (MDA)’ and ‘Accounting and other Ratios’ shall be based on the Financial Statements prepared on the basis of Indian Accounting Standards. [clause 6.18.8].

Amendments pertaining to issue of Debt Instruments

The role of debenture trustees and also the provisions pertaining to issue of debt instruments have been revised. The amendments include prohibition on a willful defaulter to make a debt issue, requirement of investment grade credit rating for making a debt issue, relaxation in the existing provisions of promoters contribution in IPO of debt issue etc. The major changes are as follows -

In case of a debenture issue, the lead merchant banker shall also furnish to the Board a due diligence certificate given by the debenture trustee in the format specified in Schedule IIIA along with the draft offer document. [clause 5.3.3.1A].
In case of a debenture issue, the company shall give prescribed undertakings in the offer document [clause 6.5.6.2]
A contribution of at least 20% of the project cost (i.e., objects proposed to be financed through the issue), shall be brought in the form of equity. Such equity participation may be brought by the promoter from his own funds or from other sources, subject to the condition that at least 20% of the issue size is brought by way of equity by the promoter from his own funds. [clause 8.2.1(b)]
No company shall make a public issue or rights issue of debt instruments (whether convertible or not), unless credit rating of not less than investment grade is obtained from not less than two registered credit rating agencies and disclosed in the offer document [clause 10.1.1].
No company shall issue a prospectus or a letter of offer to the public for subscription of its debentures, unless the company has appointed one or more debenture trustees for such debentures in accordance with the provisions of the Companies Act, 1956 [clause 10.2.1]
The merchant banker shall, along with the draft offer document, file with SEBI, certificates from the bankers of the Company that the security is adequate [clause 10.2.5]
Roll over of PCD/NCD is at the option of investor and subject to prescribed conditions.
The company issuing debt instrument should not be in the list of willful defaulters of RBI Moreover, the company should not be in default of payment of interest or repayment of principal in respect of debentures issued to the public, if any, for a period of more than 6 months [clause 2.5.1A] [Can such a company get a ‘investment grade’ credit rating ?]
An issuer company shall not make an allotment of non-convertible debt instrument pursuant to a public issue if the proposed allottees are less than fifty (50) in number. [clause 2.5.1B]
In case of the rights issue where the aggregate value of the securities offered is less than Rs.50 Lakhs, the company shall prepare the letter of offer in accordance with the disclosure requirements specified in these guidelines and file the same with the Board for its information and for being put on the SEBI website. [proviso to clause 1.4(i) inserted] - - Intimation to SEBI is required if issue is less than Rs 50 lakhs, but permission is not required.

Miscellaneous Amendments

Other significant amendments are as follows -

Provisions of lock-in of pre-issue share capital of unlisted company shall not be applicable to pre-IPO shares held by employees other than promoters, which were issued under employee stock Option or employee stock purchase scheme of the issuer company before the IPO [clause 4.14.2(iii) (inserted)]
Concept of ‘Designated Stock Exchange’ has been incorporated in place of ‘Regional Stock Exchange’. Company can choose any one stock exchange as ‘designated stock exchange’ for its security. In case of shares listed on BSE/NSE, any one of them can be chosen as ‘Designated Stock Exchange’ [clause 1.2.1(xvii-a)]
Securities may be branded describing their nature but not the quality [clause 5.15.1] e.g. name ‘ICICI Savings Bond’ is permissible but ‘ICICI Safety Bond’ will not be permissible.
As per modified clause 7.6.1.2.1(a), in case of over-subscription, a minimum 50% of the net offer of securities to the public shall initially be made available for allotment to retail individual investors. ‘Retail individual investor’ means an investor who applies or bids for securities of or for a value of not more than Rs.50,000/- [clause 1.2.1(xxiv-a)]
An issue shall open within 3 months from the date of issuance of the observation letter by the SEBI [clause 8.21.1].