PRIMARY MARKETSI SSUE OF CAPITAL AND DISCLOSURE

REQUIREMENTS REGULATIONS

Ritesh Nandwani

Faculty, NISM

DISCLAIMER

This presentation constitutes an academic effort for a general understanding of Primary Markets

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AGENDA

Primary Market Overview

IPO Process

Key Parties Involved

Conditions for Public Issues

PRIMARY MARKET

Market in which shares, debentures and other securities are sold for the first time for collecting long-term capital

Usually known as “Initial Public Offer” (IPO) Market

Flow of funds is from savers to users/ borrowers

Helps in capital formation

REGULATORY FRAMEWORK

• Companies Act, 2013 provides framework for public limitedcompanies to raise capital from public

Ministry of Corporate Affairs

• SEBI (ICDR) Regulations, 2009 – initial disclosures

• SEBI (LODR) Regulations, 2015 – continuous disclosures

Securities and Exchange Board of

India

• SCRA, 1956 and SC(R)R, 1957 prescribe requirements for listingand minimum dilutionMinistry of Finance

• Approvals under FEMA,1999 for transfer of shares from non-residents to residents.

Reserve Bank of India

• Sector specific regulatory approvals may be required –insurance, telecom, media, etc.

Other SectoralRegulators

OBLIG

ATIO

NS T

O B

E F

ULF

ILLED

BY

TH

E IS

SU

ER

CO

MPA

NY

FACTS AND FIGURES: ISSUES

Type of Issuance

2015-2016 2016-2017 April-Jan 2018

No. of

issues

Amount

(INR cr)

No. of

issues

Amount

(INR cr)

No. of

issues

Amount

(INR cr)

Equity

Public 74 14,815 106 29,104 151 66,399

Rights 13 9,239 12 3,416 15 4,540

Total 87 24,054 118 32,520 166 70,939

QIP 24 14,588 21 13,371 41 58,520

Pref. 333 49,916 401 44,103 349 41,581

Total 357 64,504 422 57,474 390 1,00,101

Grand Total Equity 444 88,558 540 89,994 556 1,71,040

Source: SEBI

FUND RAISING AT VARIOUS LIFECYCLE STAGES

Seed

Capital

Shares

Own funds, Family,

Friends, Angel Investors

IPO: Initial Public Offer

QIP: Qualified Institutions Placement

GDR: Global Depository Receipts

FCCB: Foreign Currency Convertible Bond

ADR: American Depository Receipts

Venture

Capital

Warrants /

Shares

Venture Capitalist

Private

Equity

Shares

PE Funds

IPO

Shares

FPIs, FI, Banks, Insurance Cos,

MF, HNI, Individuals

including NR

Private

Placement

Shares /

Warrants /

FCD / PCD

Promoters, Fis, Strategic

Investor

Follow-on

Public Issue

Shares

FPIs, FI, Banks, Insurance Cos, MF,

HNI, Individuals including NR

Rights

Issue

Shares /

PCD / FCD

Existing Shareholders

QIP

Shares

QIBs

GDR

DRs with

underlying

being

Shares

FPIs

FCCB

Foreign

Currency

Bond

convertible

into Shares

Hedge Funds, FPIs

ADR

Depository

Receipts with

the underlying

being Shares

US QIB

Strategic

Investment

Shares

Customer,

Supplier,

Competitor

Investors and Instruments issued depend on the option and stage of lifecycle

OPTIONS FOR RAISING FUNDS

Various types of instruments

HybridDebt Equity

In India

Outside India

From Banks & FIs

Public issue of

Bonds/Debentures

ECBs ADR/GDRs

IPOs

FPOs

Rights Issue

Pref. Issue

Various forms of

Convertibles

FCCBs & FCEBs

ECB: External Commercial Borrowing

ADR/ GDR: American/ Global Depository Receipts

FCCB: Foreign Currency Convertible Bonds

FCEB: Foreign Currency Exchangeable Bonds

WHY IPO?

For Funding Needs

Capital Requirements for Organic Growth, expansion, diversification

Inorganic Growth through Acquisitions, participate in JV, Collaboration

Infrastructure Requirements, Marketing Initiatives and Distribution Channels

Working Capital Requirements, General Corporate Purposes

Repaying debt to strengthen the Balance Sheet

Meeting Issue Expenses

For Non-funding Needs

Enhancing Corporate Stature and visibility

Retention and incentive for Employees through stock options

Providing exit options to Investors

Providing liquidity to the shareholders

IPO PROCESS – BOOK BUILT ISSUE

Due diligence

Appoint BRLM, legal

counsel, other entities

Drafting of the

Draft Red Herring

Filing with SEBI &

Stock Exchanges

SEBI Observations

& ROC FilingPre-Marketing

Decision to go for

IPO

Road shows Book building

RoC filing of final

Prospectus

Pricing &

Allocation

Listing

Funds transferred to

issuer

Preparation / Approvals Marketing and Estimation of Price Range Launch & Completion

Issuer

KEY PARTIES & RESPONSIBILITIES IN AN IPO

Intermediary Structure

BRLMBook Runners’ Legal

CounselBroker / Syndicate

Legal CounselsAdvertising

AgencyPrinters

IPO Grading

AgencyRegistrars

ASBA &

Escrow

Bankers

Issuer Company /

Selling ShareholderArrangement

Coordination

CONDITIONS - PUBLIC ISSUES

General Conditions Promoter/ Group/ Directors not debarred from accessing capital markets

Promoter or Director not to be on the wilful defaulters list

Promoter/ Director not to be Promoter/ Director of a debarred entity

Existing partly paid-up shares to be fully paid-up or forfeited

Issue related requirements Appointment of intermediaries

Submission of DRHP and other documents

DRHP to be made public for 21 days

Min subscription of 90% through OD

Monitoring agency, if issue size >= INR 100 cr

Allotments/Refunds/ Trading in T+6 working days

CONDITIONS SPECIFIC TO PUBLIC ISSUES

Eligibility norms

Pricing norms

Promoters’ contribution

Lock-in requirements

Reservations

Allocation in Net Offer to Public

Provisions in respect of FPOs and OFS

Option I

Net tangible

assets,

profitability and

net worth track

record

(1) Net tangible assets of at

least INR 3 cr in the

preceding 3 full years, not

more than 50% to be

monetary assets

+

(2) Average pre-tax operating

profit of INR 15 cr on a

restated & consolidated basis,

during the 3 most profitable

years out of immediately

preceding 5 years

+

(3) Net worth of at least INR 1 cr in

each of the preceding 3 full years

(4) Issue size not to exceed 5 X NW

(5) Name change & 50% revenue

from business as per new name

Option II

No net tangible

assets or

profitability or

net worth track

record

Issue through book building

route with at least 75%

allotted to QIBs

ELIGIBILITY CRITERIA FOR UNLISTED ENTITIES

Allocation in Net Offer to Public

Allotment for all, except Anchor investors, on proportionate basis

Anchor Investors, if allotted, to be discretionary; to be done 1 day prior to issue opening. Excess paid

will not be refunded. Any amount paid less than other investors needs to be paid up

Under subscription in any category can be met by spill over from any other category, with the

exception of mandatory limits where a minimum for a category has been specified

ALLOCATION IN NET OFFER TO PUBLIC

Option I

Book Building route Other than Book Building

Option II

Book Building route

NIIs >=15%

QIBs=35%

NIIs

=75%

5% to MFs

RIIs =50%

MINIMUM OFFER TO PUBLIC

Post capitalization of INR 1600 Cr but less than 4000 Cr

• At least such % of each class or kind of equity shares or debentures convertible into equity shares so that the offer size is at least INR 400 Cr

Post capitalization of > INR 4000 Cr

• At least 10% of post issue capital (to be fully diluted to 25% in 3 years)

To ensure adequate liquidity in the stock

LOCK-IN OF PROMOTERS’ CONTRIBUTION

Capital Lock-in

(a) Min promoters’

contribution = 20% of post-

issue capital

3 years from date of allotment / commencement of

commercial production, whichever is later.

(AIF can contribute up to 10%)

(b) Promoters’ holding in

excess of (a)

1 year from date of allotment

Entire pre-issue capital held

by persons other than

promoters

1 year from date of allotment (not applicable to

shares allotted under ESOP/ESPS prior to issue, shares

held by VCF/FVCI for atleast 1 year prior to issue)

Locked-in securities at (a) and (b) above may be pledged only as collateral for loan

granted by any SCB/PFI

To ensure the Promoters of the Company remain stakeholders

PRICING OF ISSUES

Free pricing of equity shares in an IPO

Differential pricing permissible in public issues to retail individual investors/shareholders – maximum discount of 10%

Price Band: Cap price can be 20% more than the floor price. Price band can be revised by 20% from floor price.

DISCLOSURES IN OFFER DOCUMENTS

• Internal: arising out of litigations, specific aspects of business, technology, patents, etc

• External: general business environment, global and domestic economy, etc

Risk Factors

• Shareholding (pre & post), build-up of promoter/ group holding

Capital Structure

• Disclose of each head for application of funds; interim use of funds

• GCP not to exceed 25% of issue size; means of finance 75% tied-up

Objects of the issue

• Description of Industry, Business, products/ services of the entity

Business

• Board of directors, committees, details of key managerial personnel

Management

DISCLOSURES IN OFFER DOCUMENTS

• Shareholder agreements – special rights if any such as tag-along, drag along, appointment of directors, affirmative rights (vote only positive), etc

History & Other Corporate Matters

• Auditors Report restated financials (stand-alone and consolidated basis) for 5 years, Not older than 6 months; Must be in Indian GAAP; Detailed MD&A on past performance; Documents filed after April 01, 2017 to have disclosures as per IND-AS

Financial Statements

• Pending litigations involving Company/ Promoters / Group / Directors / Group companies: Criminal Proceedings; Actions by Regulatory authorities; Other material litigations (as per disclosed materiality threshold); Outstanding dues to creditors

Outstanding Litigations

• Procedural details on how to apply; detailed instructions on filling up the application form; description of the book building process, Do’s and Don’ts, flow chart of timelines;

Terms of Issue

OTHER AVENUES OF CAPITAL OFFERINGS

Preferential allotment by listed entities

Qualified Institutional Placements

Bonus issuances by listed entities

Public issues by SMEs

Institutional Placement Programme

Indian Depository Receipts

CONTINUOUS DISCLOSURES

Disclosures under Listing Regulations (LODR) Disclosure of material price sensitive information

Financial Results to exchanges and in newspapers

Quarterly Disclosure of Share holding pattern

Norms related to Name change, promoter reclassification, etc

Compliance Certificate on Corporate Governance by Listed Companies

Disclosures under Takeover code Acquisitions, sale of holdings, offers (price, offeror, restructuring etc)

Disclosures under Insider Trading Regulations Acquisition/ sale/ pledge of shares by promoters

MAJOR PRIMARY MARKET REFORMS1992-95 1996-99 2000-03 2004-07 2008-10 2010-15

Repeal of CCI Revised Eligibility DIP Guidelines,

RPTs,

Consolidated

Financials, etc

IPO Grading ICDR

Regulations

Call Auction,

Trade to Trade

Disclosure

based regime

Rationalisation of

disclosure

Revised

eligibility

(Tangible

Assets)

Validity of

Observn.

Revised

Eligibility

Free pricing Demat trading Corporate

Governance Introduction of

ASBA

Disc. of past

performance of

issue by LMs

Introduction of

Book Building

Exemptions to

Infrastructure

companies

Continuous

Disclosure

Corporate

Governance

provisions

T+12 days

Listing

Rejection

Framework

Disclosure of

price band

instead of

price in RHP

No fund based

Activity by MBs

Broadening of

QIBs – VC

Green Shoe

Option

Price –band

disclosure – 2

days prior

E-IPO - T+6

days Listing –

Mandatory

ASBA

Proportionate

allotment

No withdrawal

by QIBs

Disclosure of

MDA, Ratios

Listing

Regulations

THANK YOU