In this article, Rishika Raghuwanshi, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on public offering in India.

Introduction

Companies needs funds to sustain in a business. These funds can be required for  long term or short-term purposes. To suffice their long-term needs, companies issue shares.  Issue of shares can be done in three ways which are

(1) private placement of shares,

(2) public issue

(3) Issuing the share to existing shareholders

Section 23 of the Companies Act, 2013 mentions Public issue as a way of raising funds through public. It means the selling or marketing of share for subscription by the public by issue of prospectus. The importance of public issue is by issuing share to public and getting listed to a recognized stock exchanges in India.

ADVANTAGES

• Repayment of capital

No question of repayment of capital except when the company is in liquidation, therefore low risk.

• Rate of Interest

There is no rate of interest to be payed resulting in less financial burden.

• Enhancing shareholders, promoters and company’s product/ service value

Companies good performance results in enhancing shareholders, promoters and company’s products/ services value.

• Transferability

Transferability to a greater extent.

• Securities

Trading & Listing of securities at stock exchanges.

• Liquidation of securities

Securities can be liquidated better.

DISADVANTAGES

• Procedure is quite lengthy and requires a lot of time!

It consumes a lot of time.

• Expensive

It’s expensive as there is a higher dividend expectation which are not tax-deductible.

• Complexity

There are many complex legal rules and procedure.

• Dilution of control

There is dilution of control since capital base might be expanded and new shareholders/ public are involved.

• Less Privacy

Less privacy due to transparency requirement

• Scrutiny of performance

Constant scrutiny of performance by investors.

• Takeover of the company

May lead to takeover of the company

• Effect of speculative attacks

Securities of the Company may be made subjective to speculative attacks.

LAWS REGULATING PUBLIC OFFER

• Provisions of the Companies Act, 2013

Chapter 3, Part I is dedicated to public offer. Amid the new amendments of 2018 there has been drastic changes in Section 26. Matters related to prospectus will now be dealt with SEBI in consultation with the central government. Till the SEBI notifies matters related to prospectus the companies can refer to  the information and reports on financial information under the regulations made by the Securities and Exchange Board under the Securities and Exchange Board of India Act, 1992.

• SEBI rules & regulations

SEBI rules & regulations like The SEBI (Issue of Capitals and Disclosure Requirements) regulation 2009 and SEBI (Listing obligations and Disclosure Requirements), Regulations 2015 ( The Listing Regulations) are the two most important regulations when it comes to public issues.

• Other Regulations  

Compliance of Listing Agreement with the concerned stock exchanges after the listing of securities. Securities Contracts (Regulations) Act, 1956, RBI regulations in case of foreign/NRI equity participation.

TYPES OF PUBLIC OFFERS AND ENTRY NORMS

SEBI is responsible for the entry norms of a Public Issue, which it does through SEBI (Disclosure for Investor and Protection) Guidelines, 2000. SEBI, has to amend these norms to suffice the present requirement of time by upholding the principles of transparency and investors protection for the development of capital market.

For better understanding of entry norms, the following categorization is done:

1. Unlisted Companies: Initial Public Offerings (IPOs)
2. Listed Companies. Further Public Offerings (FPOs)
3. Offer of Sale

• UNLISTED COMPANIES: INITIAL PUBLIC OFFERING (IPOs)

These are public limited companies which are not present or listed in any stock exchanges and thus their shares are not traded in any stock exchanges. They can enter the public market by initial public offerings (IPOs).

It is the first time that a company offers its shares to public and goes public. Generally, an unlisted company offers IPO which is a but riskier than Further Public Offerings (FPOs). This is because an IPO is a turning point in a company’s life who just started to collects capital from public investment. Therefore, the investor is not aware of the future of this company.

There are two options which these companies can avail for public issues of shares:

• 1ST OPTION

• At least Rs. 3 crores of net tangible assets should be present in all the preceding 3 years individually, out of which monetary assets should amount to not more than fifty percent.

• There should be a record which shows that out of immediately 5 years at least 3 of them have profit which can be distributed.

• In all the previous 3 years there should be a pre-issue net worth of at least Rs. 1.00 crore.

The company should keep their issue size not more than 5 times its pre-issue net worth.

• 2nd OPTION

An unlisted Company not complying with any of the conditions specified above may make initial public offer if it meets both the following conditions:

• The book-building process should be utilized while issuing shares and at least fifty percent should be allotted to Qualified Institutional buyers, failing which the full subscription monies shall be refunded.

                                                                   OR

• The Financial Institutions participation of at least fifteen presents should be present in a project out of which at least 10% comes from appraiser. Also, QIBs should be allotted at least 10% of the issue size, failing to comply which will result in refunding the full subscription monies.

                                                                 AND

• Rs. 10 crores should be the minimum face value capital of the Company after issue.

                                                                 OR

• A compulsory market-making for at least 2 years.

• LISTED COMPANIES: FURTHER PUBLIC OFFER (FPO)

Listed companies are companies listed in stock exchange. They issue to public by further public offering (FPOs).

FPO is the issuance of shares to the public by a company that is already listed and has complied with the procedures of Initial Public offer. It is done for subsequent public investment. This is not as risky as an IPO as the investors are aware of the performance of this company and has a fair idea about its growth prospects.

• OFFER OF SALE

After consulting board of directors some members can offer whole or a part of their share holdings to the public. The offer document for this purpose should comply with the prospectus requirements as this document is deemed to be a prospectus.

Any expenditure incurred will be reimbursed to the company by the member. Further the dividends incurred on these offered shares shall be payable to the transferees.

ROLE OF SEBI-REGULATORY BODY

On 30th January 1992 the SEBI Act came into existence to govern all the public issues by its rules and regulation. The formation of SEBI was with the aim to protect the interests of both the investors and the issuers by ensuring fair dealings and proper functioning of capital market. This was done by promoting transparency.

Transparency helps in ensuring that the investors are not tricked and their rights are safeguarded so that the funds can be raised at a low cost by the promoters, thus, keeping the steady flow in the market. This steady flow, companies need to be professional and competitive. For this there should be a proper code of conduct and fair practice by intermediaries.

SEBI has become a watchdog because even though the issuing company can fix premiums provided proper disclosure is made in the offer documents, there is more focus on investor protection.

INTERMEDIARIES

Following are the intermediaries who are required to be registered with a valid certificate from SEBI.

• Merchant Bankers

They are the most vital intermediaries among all. From preparing prospectus to listing at the stock exchange, they assist all along. Merchant bankers check all the information provided in the prospectus. This is important as they are required to carry due diligence for all the information that the prospectus provide, after which they issue a certificate to SEBI.

• Underwriters

They come into play when there is undersubscription by subscribing to the unsubscribed amount to make the issue a success.

• Registrar & Transfer Agent

Allotting basis of share is analyzed by them on the basis of application received from the public. They handle dispatching of share certificates/refund orders.

• Bankers to the Issue

They accept all the applications on behalf of the company which are then given to the registrar and transfer agent to further process.

• Stock Brokers & Sub-brokers

They invite public to subscribe shares for which they receive commission.

• Depositories

They hold securities in dematerialized form for the shareholders.

PROSPECTUS

Prospectus is any document described to be one, which includes advertisement, circular or notice inviting offers from public to purchase or subscribe to shares or debenture of the company.

Prospectus is a document through which investors get to know about the company. This information helps the investors to decide whether to invest or not. It contains detailed information about the company, its directors, promoters, capital structure, details of the project, terms and particulars of the issues.

Therefore, any mis-statements in the prospectus can result in criminal or civil liability. If criminal, it will be a non-compoundable offence and who ever authorizes it will be liable under section 447 of Companies Act 2013. Under civil if it is proved that there was an intent to defraud then authorised persons can be held personally liable.

• Vetting by SEBI and Stock Exchanges

• • Filing prospectus with the SEBI is a must for a company to com out with public issue.
  • To file the prospectus, a company needs merchant banker who along with the due diligence certificate submits the prospectus to SEBI.
  • After receiving it SEBI scrutinizes it and suggest changes under 21 days of receiving it.
  • The company can go public within 365 days from the date of the letter from SEBI or in absence, within 365 days from the date of expiry of 21 days of submission of prospectus with SEBI.
  • If up to Rs. 20.00 crores are the size of issue, then merchant bankers file prospectus to the regional office of SEBI which falls under the jurisdiction where the registered office of the Company is situated. If it’s more than Rs. 20 crores then prospectus is filled at the Mumbai office.

• Prospectus is also required to be filed with the concerned stock exchanges along with the application for listing its securities.

• Date of Prospectus and ROC Card

The final Prospectus must be signed by all the Directors and filed with the Registrar of Companies (ROC). ROC may suggest change and reporte the same to SEBI. The date of the prospectus is when ROC Card is obtained.

PROMOTER’S CONTRIBUTION & LOCK-IN REQUIREMENT

After issue capital there should be a minimum of twenty percent contribution by the promoters. To calculate this twenty percent following share allotment to promoters from last three years shall not be included while filing prospectus with SEBI:

• Consideration base acquisition of shares which are not for cash and revaluation or capitalization of assets.
• Allotment of shares on the basis of bonus issue, out of revaluation of reserves.
• Shares allotted during the preceding one year at a lower price.
• Applications received for less than Rs. 25000 per applicant in case of each individual and Rs. 1 lakh from firms and companies.

• Promoters Contribution to be brought in before the issue

The contribution from the promoter should be brought at least one day before the opening public issue and should be kept in an escrow account with a scheduled bank. The amount contributed should be released after the finalization of the basis of allotment with the proceeds of public issue.

However, if the contribution brought by the promoters which came before the public issue is utilized by the Company, then it should disclose the same by a cash flow statement in the prospectus.

If promoter’s minimum contribution is more than Rs.100 crores, then they can bring Rs. 100 crores before the opening and the balance can be bought in advance on pro rata.

• Lock in Requirements

• The eligible contribution is for 3 years.
• All the capital collected before issue of shares shall be locked-in-for a one-year period.
• All the securities that are issued shall be locked-in for a period of one year.
• The lock-in date should be calculated from initiation of commercial production date or the public issue allotment date, whichever comes later.
• Shares with the promoters or locked-in can be pledged with financial institutions provided it is mentioned as a term while the loan is sanctioned.
• Locked-in shares being held by the promoters can be transferred among them provided its shown as promoters in the prospectus with the period of lock-in being the same.

PROCEDURE FOR THE PUBLIC ISSUE

In brevity the companies approached the merchant banker with whom they executed the Memorandum of understanding (MOU). They will carry due diligence and submit the reports to SEBI which shall also include other information provided in the prospectus. The obligations are divided into pre-issue and post-issue which are as follows:-

• Pre-Issue Obligations

• Approval of draft prospectus from the Board Resolution
• Passing of special resolution for issuing shares by filing form 23 with ROC.
• Entering in MOUs with the intermediaries
• Merchant bankers performing due diligence
• Merchant bankers being submitted with all the documents they need
• Draft prospectus with merchant banker’s consultations and submitting it to SEBI and stock exchanges as per guidelines.
• Making changes if any required by the SEBI and stock exchange in prospectus.
• Notify SEBI and Stock exchanges with the changes.
• Obtaining approval.
• File final prospectus with SEBI/Stock Exchanges/ ROC
• Statutory Advertisements
• 1% security deposit to be submitted to the Regional Stock Exchanges.
• Promoters contribution to be deposited in the bank.

• Post-Issue Obligations

• Collecting and processing Application forms with Merchant Bankers consultation
• Separate Account be opened for the applications received from Public.
• Merchant Bankers submitting to SEBI a post issue third day monitoring report.
• Consultation with stock exchange for the basis of allotment.
• Post issue advertisement
• Refund orders and share certificate being dispatched
• File form 2 with ROC for returning allotment.
• Entering into a listing agreement.
• Obtaining approval for listing securities.
• Commence trade of securities.
• Merchant Bankers submitting to SEBI the seventy eight post issue monitoring report.
• Grievances of investors to be redressed.
• Application to be submitted for refund of security deposit from SEBI and stock exchanges.

CONCLUSION

Public Offering is one of the most acceptable ways the companies consider to raise funds. This is because of the low risks it comes with compared to borrowing money from financial institution. SEBI plays a major role in this whole process. It ensures equal balance between the interests of investors and the company offering. This research has discussed the basic fundamentals of public offerings. It analysis the advantages and disadvantages of public offer and highlights the important aspects which regulations require a company to do for opting this option.

                                                                                                                         By: Rishika Raghuwanshi