Introduction Public Issues
Section 23 of Companies Act 2013 prescribes the provisions for the Public Companies & Private Companies for issuing of shares. It prescribes that a:
- Public Company can issue the securities:
- To public through issue of prospectus generally termed as a public offer
- Through private placement
- Through the right issue or bonus issue.
- Private Companies can issue securities:
- Through private placement
- Through the right issue or bonus issue.
Statutory provisions for regulating public issue
Public offer is governed by the following provisions:
The public issue is governed under Chapter 3, Part I of Companies Act 2013.
- SECURITIES & EXCHANGE BOARD OF INDIA (SEBI)
Rules & regulations of SEBI (ICDR) regulation 2009 and SEBI (Listing Obligations & Disclosure requirement), regulation 2015 which is also termed as The Listing Regulations are the two most important provisions governing the public issue of Listed Companies.
Types of public issue
SEBI governs the entry norms of the public issue through its rules & regulation under SEBI (Disclosure for Investor & Protection) Guidelines, 2000. SEBI from time to time keep amending and updating these provisions to bring more transparency & for protecting the investors from insider trading or such other practices for the further development of the capital market. The public issue can be done in the following three ways:
- Initial Public Offering (IPOs) for unlisted Companies
- Further Public Offering (FPOs) for listed entities
- Offer for Sale
Public companies that are not listed on any stock exchange and their shares are not traded in any stock exchange can enter the public market by making Initial Public Offering (IPOs). IPOs are riskier than Further Public Offering as the company enters the market for the first time by giving offers to the Public. IPOs are the turning point for any company as they just started to collect the capital for their entity through public investments.
- CONDITIONS FOR MAKING IPOs:
- The company must have net tangible assets at least of INR 3 Crore in the preceding three years. Out of which not more than 50% is held in monetary assets.
- Company has incurred a minimum pre-tax operating profit of INR 15 Crore for at least 3 years out of immediately preceding 5 years.
- Company has incurred net worth of INR 1 Crore in each preceding three years.
- If the company has changed its name in the preceding year, then at least 50% of its income should be from the activity suggested by the new name.
- The aggregate of the proposed issue & previous issues made by the Company shall not exceed five times its pre-issue net worth.
- The issue shall be made through the book-building route.
- Minimum 75% of the public offer shall be compulsorily allotted to Qualified Institutional Buyers.
- PROMOTER’S CONTRIBUTION:
The promoter shall contribute to at least 20% of post-issue capital.
A contribution made by the promoter; i.e. post-issue capital of the promoter shall be locked-in for 3 years. The remaining pre-issue capital of the promoter shall be locked in for 1 year. Such locked shares can be pledged by the company with the banks for a loan, provided that pledging the shares is one of the conditions of the banks for sanctioning of loans. The date of the lock-in period shall be the later of:
- the date of commencement of commercial production or
- the date of allotment of public issue.
STEP BY STEP PROCEDURE FOR IPO
- STEP 1: SELECT AN INVESTMENT BANK: The company hires the investment banks for seeking their advice and guidance for public offer. An underwriting agreement is signed between the parties which had all the details of a number of securities to be issued, price of the securities, etc.
- STEP 2: REGISTER WITH SEC: The Company files the registration statement with the SEC that contains the complete details of the business plan of the Company. It also has to give the declaration about the utilization of the fund it raised from an IPO.
- STEP 3: RED HERRING PROSPECTUS: The initial prospectus that contains the details of the price estimate of shares. It is known as red herring prospectus because it contains the warning that states it's not the final prospectus.
- STEP 4: PRICING OF IPO : SEBI does not play any role in the pricing of shares. It's the issuer company in consultation with investment banks fix the price for issue based on the prevailing rate in the market. A number of parameters are used for pricing the issue such as EPS, PE multiple, return on net worth, etc. The issue can be made through a fixed price issue or book-built issue. As the name suggests fixed price method issues the share on fix price and bookbuild will have the price band within which an investor can bid.
- STEP 5: OPEN OFFER : Application form & prospectus are made available to the public online & offline. Investors can get the form from any designated bank. Form can be submitted along with the cheque to the designated bank.
- STEP 6: COMPLETION OF IPO : After the decision on price, a company decides about the number of shares an investor gets. The company makes sure its issue is fully subscribed. The shares are credited to the Demat account of investors. Once the securities are allotted, the company is ready to trade over the stock market.
- DURATION OF THE ISSUE: An offer remains open for:
- Three to Ten working days: Fixed Price Issue
- Three to Seven working days: Book Built Issue
- Fifteen to Thirty days: Right issue.
Companies that trade on the market of the stock exchange are called a listed company. Listed companies enter the market by issuing through “Further Public Offer”. FPO is the issuance of the shares of the company that is already listed has complied with all the procedures & conditions of IPO. Investors are aware of the performance of the company they are investing in, thus making it less risky as compares to Initial Public Offer.
Shareholders of the company after consulting with the board of directors, can sale whole or any part of their holding to the public. The offer document is deemed to be the prospectus for such kind of an issue and thus it shall comply with requirements of a prospectus.
Following are the intermediaries those can be registered with SEBI for the valid certificate of intermediaries:
- Merchant Banker: they are the most important type of intermediaries. They assist throughout the process from preparation of prospectus to the listing of securities on the stock exchange.
- Underwriters: their role starts in case there is under subscription of shares in the public issue. They subscribe to the unsubscribed number of shares.
- Registrar & Transfer Agents: they handle the dispatch of share certificates to the investors or they handle the matters of refund in cases of over-subscription.
- Banker to the issue: they accept all the applications received from the investors and transfer the same to the registrar for further processing.
- Stockbroker: they act as middlemen who invite the public to subscribe for the shares of the company.
- Depositories: they hold the shares of the investors in the form of dematerialized form.
Frequently Asked Questions (FAQs)
Grey market is an unofficial market where traders bid & offer shares in upcoming IPOs. Since it is the unofficial market, trades are carried on through telephonic conversation. Before the company gets a list on the stock exchange, grey market traders start bidding based on the factors such as institutional appetite, retail appetite, etc.
Pricing of IPO is decided based on the supply & demand of the trade market. Usually, they are priced at the value customers want. The reason is if they are overpriced the company won't get sufficient gain and in case, they have underpriced the chance of pocketing the profit after the listing is for a long period.
The lead manager declares that all the disclosure made in the offer documents are duly complied with as per the guidelines of SEBI and are in conformity for the disclosure and investor protection purposes.
Following are the types of documents issued:
- Draft offer documents
- Red herring prospectus
- Offer document
- Abridged prospectus