ipo and pe funds
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IPO
Conditions for initial public oer.
26. (1) An issuer may make an initial public oer, if:
(a) it has net tanible assets of at least three crore rupees in each of theprecedin three full years (of t!el"e months each), of !hich not more than #fty
per cent are held in monetary assets: $ro"ided that if more than #fty per cent.
of the net tanible assets are held in monetary assets, the issuer has made #rm
commitments to utilise such e%cess monetary assets in its business or pro&ect'
(b) it has a minimum a"erae preta% operatin pro#t of rupees #fteen crore,
calculated on a restated and consolidated basis, durin the three most pro#table
years out of the immediately precedin #"e years.
(c) it has a net !orth of at least one crore rupees in each of the precedin three
full years (of t!el"e months each)'
(d) the areate of the proposed issue and all pre"ious issues made in the same
#nancial year in terms of issue sie does not e%ceed #"e times its preissue net
!orth as per the audited balance sheet of the precedin #nancial year'
(e) if it has chaned its name !ithin the last one year, at least #fty per cent. of
the re"enue for the precedin one full year has been earned by it from the
acti"ity indicated by the ne! name.
26. (2) An issuer not satisfyin the condition stipulated in subreulation (1) may
make an initial public oer if the issue is made throuh the bookbuildin process
and the issuer undertakes to allot, at least se"enty #"e percent of the net oer to
public, to *uali#ed institutional buyers and to refund full subscription money if itfails to make the said minimum allotment to *uali#ed institutional buyers.
26. (+) An issuer may make an initial public oer of con"ertible debt instruments
!ithout makin a prior public issue of its e*uity shares and listin thereof.
26. () An issuer shall not make an allotment pursuant to a public issue if the
number of prospecti"e allottees is less than one thousand.
26. (-) o issuer shall make an initial public oer if there are any outstandin
con"ertible securities or any other riht !hich !ould entitle any person !ith any
option to recei"e e*uity shares:
$ro"ided that the pro"isions of this subreulation shall not apply to: (a) a publicissue made durin the currency of con"ertible debt instruments !hich !ere
issued throuh an earlier initial public oer, if the con"ersion price of such
con"ertible debt instruments !as determined and disclosed in the prospectus of
the earlier issue of con"ertible debt instruments' (b) outstandin options ranted
to employees pursuant to an employee stock option scheme framed in
accordance !ith the rele"ant /uidance ote or Accountin 0tandards, if any,
issued by the nstitute of Chartered Accountants of ndia in this reard. -3(c)
fully paidup outstandin con"ertible securities !hich are re*uired to be
con"erted on or before the date of #lin of the red herrin prospectus (in case of
bookbuilt issues) or the prospectus (in case of #%ed price issues), as the case
may be.4
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26. (6) 0ub&ect to pro"isions of the Companies Act, 15-6 and these reulations,
e*uity shares may be oered for sale to public if such e*uity shares ha"e been
held by the sellers for a period of at least one year prior to the #lin of draft oer
document !ith the oard in accordance !ith subreulation (1) of reulation 6:
$ro"ided that in case e*uity shares recei"ed on con"ersion or e%chane of fully
paidup compulsorily con"ertible securities includin depository receipts arebein oered for sale, the holdin period of such con"ertible securities as !ell as
that of resultant e*uity shares toether shall be considered for the purpose of
calculation of one year period referred in this subreulation: $ro"ided further
that the re*uirement of holdin e*uity shares for a period of one year shall not
apply: (a) in case of an oer for sale of speci#ed securities of a o"ernment
company or statutory authority or corporation or any special purpose "ehicle set
up and controlled by any one or more of them, !hich is enaed in infrastructure
sector' (b) if the speci#ed securities oered for sale !ere ac*uired pursuant to
any scheme appro"ed by a 7ih Court under sections +51+5 of the Companies
Act, 15-6, in lieu of business and in"ested capital !hich had been in e%istence
for a period of more than one year prior to such appro"al-13'4 -23(c) if thespeci#ed securities oered for sale !ere issued under a bonus issue on securities
held for a period of at least one year prior to the #lin of draft oer document
!ith the oard and further sub&ect to the follo!in, (i) such speci#ed securities
bein issued out of free reser"es and share premium e%istin in the books of
account as at the end of the #nancial year precedin the #nancial year in !hich
the draft oer document is #led !ith the oard ' and (ii) such speci#ed securities
not bein issued by utiliation of re"aluation reser"es or unrealied pro#ts of the
issuer.4 -+3(8) An issuer makin an initial public oer may obtain radin for
such oer from one or more credit ratin aencies reistered !ith the oard.4
FPO
Conditions for further public oer. 28. An issuer may make a further public oer
if it satis#es the conditions speci#ed in clauses (d) and (e) of subreulation (1)
of reulation 26
(d) the areate of the proposed issue and all pre"ious issues made in the same
#nancial year in terms of issue sie does not e%ceed #"e times its preissue net
!orth as per the audited balance sheet of the precedin #nancial year'
(e) if it has chaned its name !ithin the last one year, at least #fty per cent. of
the re"enue for the precedin one full year has been earned by it from theacti"ity indicated by the ne! name.
and if it does not satisfy those conditions, it may make a further public oer if it
satis#es the conditions speci#ed in subreulation (2) of reulation 26.
An issuer not satisfyin the condition stipulated in subreulation (1) may make
an initial public oer if the issue is made throuh the bookbuildin process and
the issuer undertakes to allot, at least se"enty #"e percent of the net oer to
public, to *uali#ed institutional buyers and to refund full subscription money if it
fails to make the said minimum allotment to *uali#ed institutional buyers.
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In order to enable more number of listed companies to raise further capital using the fast-track route,
the Sebi Board has reduced the minimum public holding requirement to Rs 1000 crore in case of
FP!
Layering
196. (1) ithout pre&udice to the pro"isions contained in this Act, a companyshall unless other!ise prescribed, make in"estment throuh not more than t!o
layers of in"estment companies: $ro"ided that the pro"isions of this subsection
shall not aect,; (i) a company from ac*uirin any other company incorporated
in a country outside ndia if such other company has in"estment subsidiaries
beyond t!o layers as per the la!s of such country' (ii) a subsidiary company
from ha"in any in"estment subsidiary for the purposes of meetin the
re*uirements under any la! or under any rule or reulation framed under any
la! for the time bein in force.
n"estment made throuh layers
A company shall make in"estment throuh not more than t!o layers ofin"estment companies. <here !as no such pro"ision in 0ection +82A of
Companies Act, 15-6. n relation to a holdin company, =layer> means its
subsidiary or subsidiaries.
onApplicability
7o!e"er, the abo"e pro"isions shall not aect:
(i) a company from ac*uirin any other company incorporated in a country
outside ndia if such other company has in"estment subsidiaries beyond t!o
layers as per the la!s of such country'
(ii) a subsidiary company from ha"in any in"estment subsidiary for the
purposes of meetin the re*uirements under any la! or under any rule or
reulation framed under any la! for the time bein in force.
IPO Exit Restrictions
+.2.2 ?estrictions on e%it throuh public oerin ndia=s comple% set of
reulations also limit a $@ #rm=s e%it opportunities. efore a $@ #rm can list an
ndian company on a forein e%chane, the 0@ uidelines re*uire that it list the
company on a domestic e%chane (ain and Banna, 25). <his dual listin
re*uirement makes it dicult for $@ #rms that are e%ecutin an DE to e%it
throuh a forein listin. Further, if the company is restricted from listin on anndian stock e%chane, the $@ #rm !ill be precluded from an e%it "ia a public
oerin on a forein e%chane.
Barket factors as !ell as the leal limitations discussed play an important role in
e%itin an DE. f the company=s operations are located solely in ndia, an $E in
ndian markets !ould be most lucrati"e. 7o!e"er, if the company operates
predominantly o"erseas or has a ma&or e%port aspect to its business, an oerin
in forein capital markets is likely to be more pro#table.
A number of 0@ reulations add comple%ity to a public market e%it and make it
clear that $@ in"estors enaed in an DE of an ndian company cannot e%it
cleanly throuh an $E. Accordin to the 0@=s listin re*uirements, ndiancompanies must identify the promoters of the listin company for purposes of
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minimum contributions and the promoter lockin. n an $E, the promoters must
o!n at least 2G of the postoerin stock. All other public oerins re*uire the
promoters to purchase 2G of the proposed issuance or ensure that they o!n
2G of the shares postoerin. Boreo"er, the 0@=s uidelines stipulate lockin
re*uirements on promoters= shares to ensure that the control and manaement
of the company is consistent after the public oerin. <he minimum contributionof 2G that promoters make !ill be locked in for three years. f the promoters=
contribution is o"er 2G, the additional contribution is locked in for one year. n
addition, there is a one year lockin period for the preoerin share capital and
the shares issued on a #rm allotment basis.
Bodes of e%its $E <his is the traditionally preferred route. An $E is not an e%it in
itself. $ri"ate e*uity in"estors !ill ha"e a riht to oer their shares for sale under
an $E and then e%it. <o ensure that the in"estor can eecti"ely achie"e this,
in"estment documents typically specify the follo!in: #rst, the manaement
must e%ercise "otin rihts to pass $Erelated resolutions' second, the in"estor
must ha"e an enforceable riht to oer and enforce the Hoer for saleI' andthird, the in"estor must not be a promoter, in order to make certain that
pro"isions on promoter lockin post $E do not apply. 0e"eral pri"ate e*uity
in"estors in"est as 0@ reistered forein "enture capital in"estors (FJC) or
"enture capital funds (JCFs) for "arious reasons: one, the lockin re*uirement
post $E for nonpromoter in"estors does not apply to FJCsKJCFs so lon as they
!ere holdin e*uity shares for at least 1 year pre$E, second, the pricin
reulations do not apply both at entry and e%it and third, that FJCs and JCFs
*ualify as H*uali#ed institutional buyersI (Ls). L bene#ts include the fact
that the price of shares issued to Ls on preferential basis are calculated on the
a"erae of the !eekly hih and lo! of the closin prices of the related shares
*uoted on a stock e%chane durin the 2 !eeks precedin the rele"ant date asaainst a 6 month period that apply to others' hence the odds aainst the pricin
of L shares bein ad"ersely aected by any radical chane in prices o"er a
period of time are lesser.
Issues
Pri"ate equit# pla#ers, $hich comprise the largest group of foreign direct in"estors, $ill be forced to
don the promoter%s hat in man# companies & a condition that is not going do$n $ell $ith them!
P' in"estors $ill be identified as promoters not onl# $hen the# ha"e a ma(orit# stake but also in
companies $here their holdings are higher than the original promoters! )his $ill require P' in"estors
*$ho are identified as promoters+ to come out $ith a string of disclosures and postpone their eit once
the companies go public! s promoters, P' funds could be tied to a three #ear lock-in after the listingof the compan#!
ccepting the role of a promoter as the# $ould ha"e had to re"eal their fund structure, limited partners
*the in"estors in a fund+, and information on companies $here the# o$n more than 10.!
For Start-ups
Some of the relaed requirements include reducing the lock-in period for in"estors in
start-ups to si months, compared $ith three #ears for regular initial public offerings
*IPs+! /isclosure norms for start-ups listing in the alternati"e trading platform $ill also
be diluted!