Ib-Ps Ch. 5 IPOs

Important Regulatory Provisions for an IPO

The minimum post nominal value of equity capital of the company shall be Rs. 10 crore.
OR
Compulsory market making for at least 2 years from date of listing of of share subject to following condition
Market Makers should offer to buy or sell quotes for a minimum of 300 shares.
Market maker to ensure bid-ask spread for their quotes shall not exceed 10% any time.
Inventory of market makers on each of stock exchange as on the date of allotment of securities, shall be atleast 5% of the proposed issue of the company.

Additional Conditions

IPOs shall not be deemed successful and company shall not make allotment pursuant to IPO unless prospective allottees under the IPO are not less than 1000 in number.
No unlisted company shall make a public issue or equity shares or convertibles if there are any outstanding financial instruments or rights that would entitle existing shareholders to additional equity shares after IPO. Similarly no partly paid shares shall be subsisting as on the date of IPO.

IPOs shall not be deemed successful and company shall not make allotment pursuant to IPO unless prospective allottees under the IPO are not less than 1000 in number.
No unlisted company shall make a public issue or equity shares or convertibles if there are any outstanding financial instruments or rights that would entitle existing shareholders to additional equity shares after IPO. Similarly no partly paid shares shall be subsisting as on the date of IPO.
An infrastructure company may go public even if it does not satisfy the above criteria if it has been appraised and / or funded by one or more of a public financial institution or IDFC or IL&FS or a bank which was formerly a public financial institution to the extent of at least 5% of the project cost either as a loan or equity or both.
NO company shall make an IPO unless firm arrangements of finance through verifiable means towards 75% of stated means of finance excluding the amount to be raised through proposed issue, have been made.

There is a cap on companies making retail issue with high premia. Under free pricing regime, there is a tendency on the part of the issuers to make high priced issue. If such issue are allowed to go through 100% retail route, there wouldn’t be any price validation. Share price of such issue will come down after listing due to lack of buyer support.

Additional Conditions for Issue of Convertibles

An unlisted company may make an IPO through a convertible instrument even without having to make a pure equity offer and getting shares listed initially. Other than satisfying above criteria, it has to comply with additional conditions.

Promoters Contribution

SEBI has also introduced the concept of minimum promoters’ contribution to be present in the companies going public so that they become interested parties in preserving the interest of the shareholders. In terms of DIP Guidelines, the following are the main provisions that apply to promoters’ contribution in case of IPOs.

Firm Allotments and Reservations

Allotment and Reservation are tools for pre-marketing a sizable part of issue thereby bringing down the risk of the issue.
Allotment – Investor or category of investor are approached by lead manager or the issuer company to subscribe the issue on a firm basis. ‘FIRM’ - ability to get same quantity as subscribed for in full. Investors have to make commitment to bring in their firm subscription even before issue is floated. This indicates the offer document showing certain amount of share being set aside for such investors, balance available for public subscription.
Reservation - It’s a modification of allotment, where allotment is done on competitive basis among certain category of investors. Reservation is without any prior commitments. If there is an over-subscription, then allotment happens on pro-rata basis.

Permanent Employees (not exceeding 10% of issue size), shareholders of group companies (not exceeding 10%, no firm allotments), mutual funds, Foreign Institutional Investors, Banks and Financial Institution and Multilateral Institution are category of person which are eligible for allotment or reservation.
Provisions of allotment and reservation for public issue Refer Page 233

Lock-in of Shares

Concept of Lock-in of promoters’ share and other share capital is for purpose of preventing such shareholders in making an unfair gains or exits from company and also for providing stabilization period for company’s post-script issue.
Provisions of lock-in of promoters’ share and other share capital are provided in

Differential Pricing and Price Band

Any unlisted company making an IPO of equity shares or convertibles may issue such securities to applicants in the firm allotment category at a price different from price at which net offer to the public is made provided that the price at which the security is being offered to the applicants in firm allotment category is higher than the price at which net offer is being made to Indian Public.
A justification has to be furnished in offer document on the price differential for the firm allotment category
The issuer company can mention a price band of 20% (the cap should not be more than the floor by 20%) in the offer documents filed by SEBI and the actual price can be determined at a later date before filing of offer document with ROC (Registrar of Companies)

Other Important Issue Requirements

All new issues shall be in dematerialized form and can also be made through online interface following the necessary guidelines.
The minimum application size shall be worth Rs. 2000 and maximum can be equal to the net public offer. Minimum tradable lot of shares priced up to Rs. 100 for Rs. 100 shares and minimum application money shall be 2.5% of the total amount.
In offer for sale, entire subscription amount shall be bought in at the time of application.
If there are calls on shares , they should be complicated within 12 months of the issue.
Over-subscription of a max number of 10% of the net offer to the public can be retained
Underwriting is optional. Lead Manager makes of 5% or Rs. 25 lakhs, whichever less. Underwriting commission and brokerage on shares should not be exceeded 2.5% and 1.5% respectively as per the guidelines issued by Ministry of Finance.
Safety Net or buy back arrangements can be made with a minimum period of 6 months and for maximum of 1000 shares per allottee.
Issue should be opened within 365 days from the date of SEBI approval or after 21 days of filing with SEBI if no observations are made

Additional Requirements under the Companies Act

Under the provision of Companies Act, no public issue shall be made without the issue of a prospectus or offer document. Section 56 specifies the prospectus contain matter specified in Parts I and II of Schedule II of the Act.
Other section which are applicable are Section 60, 73, 69, 72 to name a few. Every application form inviting subscription from prospective investors shall be accompanied by a Memorandum in Form 2A of the Companies (Central Government’s) General Rules and Forms, 1956. This has been discussed in detail in Page 235, 236
5.5.8 Statutory Requirements under Other Laws
Besides DIP guidelines and Companies Act 1956, the other important statutes that govern public issues are:
SCRA (Securities Contract and Regulation Act)
FEMA (Foreign Exchange Management Act)
Stock Exchange Listing Agreement (BSE, NSE and other Regional Stock Exchanges)





Role of Merchant Banker in issue management

Accepting appointment, MoU and Inter- se allocation of Responsibilities
Issue structuring and pricing
Due Diligence
Preparation of Offer Document
Pre-Issue Compliance
Liaison with SEBI and Stock Exchange
Co-ordination with other functionaries
Issue Marketing
Functions during the Issue
Post Issue Compliance