72
CA Final Corporate & Allied Laws, Paper 4, Chapter 16 Part 3 of 3 CA. Siddharth Agarwal
CA Final Corporate & Allied Laws, Paper 4, Chapter 16 Part 3 of 3
CA. Siddharth Agarwal
To learn SEBI (ICDR) Regulations regarding the following:-
(1) Preferential Issue
(2) Qualified Institutions Placement
(3) Issue of Indian Depository Receipts
(4) Book Building
(5) Green Shoe Option
These regulations shall apply to the following:
(4) a preferential issue; (5) a qualified institutions
placement by a listed issuer;
(6) an issue of Indian Depository Receipts
These regulations shall apply to the following:
(1) a public issue; (2) a rights issue, where the
aggregate value of specified securities offered is 50 lakh rupees or more;
(3) an issue of bonus shares by a listed issuer;
The Preferential Issue
• Meaning of Preferential Issue Meaning
• Non-applicability in few cases Exemptions
• Conditions for Preferential Issue Conditions & Approvals
• Pricing of Equity Shares Pricing
• Lock-in of Specified Securities Lock-in
Preferential Issue means an issue of specified securities by a listed issuer to any select person or group of persons on a private placement basis and does not include an offer of specified securities made through a public issue, rights issue, bonus issue, employee stock option scheme, employee stock purchase scheme or qualified institutions placement or an issue of sweat equity shares or depository receipts issued in a country outside India or foreign securities;
The provisions of this Chapter shall not apply where the preferential issue of equity shares is made:
(1) Pursuant to conversion of loan or option attached to convertible debt instruments in terms of sub-sections (3) and (4) of sections 81 of the Companies Act, 1956;
(2) Pursuant to a scheme approved by a High Court under section 391 to 394 of the Companies Act, 1956;
(3) In terms of the rehabilitation scheme approved by the BIFR {Board of Industrial and Financial Reconstruction} under the Sick Industrial Companies (Special Provisions) Act, 1985.
A listed issuer may make a preferential issue of specified securities, if:
• a special resolution has been passed by its shareholders; Special Resolution
• all the equity shares, if any, held by the proposed allottees in the issuer are in dematerialised form; Dematerialization
• the issuer is in compliance with the conditions for continuous listing as specified in the listing agreement with the recognised stock exchange;
Continuous Listing
• the issuer has obtained the Permanent Account Number of the proposed allottees. PAN
The issuer shall not make preferential issue of specified securities to any person (promoters, etc) who has sold any equity shares of the issuer during the 6 months preceding the relevant date. Relevant date.—For the purpose of this Chapter, "relevant date" means - the date 30 days prior to the date on which the meeting of shareholders is held to consider the proposed preferential issue.
Allotment Pursuant to Special Resolution
Allotment pursuant to the special resolution shall be completed within a period of 15 days from the date of passing of such resolution, else a fresh resolution shall have to be passed again.
Case 1: If the equity shares of the issuer have been listed on a recognised stock exchange for a period of 26 weeks or more as on the relevant date
The equity shares shall be allotted at a price not less than higher of the following:
(1) The average of the weekly high and low of the closing prices of the related equity shares quoted on the recognised stock exchange during the 26 weeks preceding the relevant date; or
(2) The average of the weekly high and low of the closing prices of the related equity shares quoted on a recognised stock exchange during the 2 weeks preceding the relevant date.
Case 2: If the equity shares of the issuer have been listed on a recognised stock exchange for a period of less than 26 weeks as on the relevant date
The equity shares shall be allotted at a price not less than higher of the following:
(1) The price at which equity shares were issued by the issuer in its initial public offer
(2) The average of the weekly high and low of the closing prices of the related equity shares quoted on the recognised stock exchange during the period shares have been listed preceding the relevant date;
(3) The average of the weekly high and low of the closing prices of the related equity shares quoted on a recognised stock exchange during the 2 weeks preceding the relevant date.
Case 2: If the equity shares of the issuer have been listed on a recognised stock exchange for a period of less than 26 weeks as on the relevant date
Note: Such price shall be recomputed by the issuer on completion of six months from the date of listing on a recognised stock exchange with reference to the average of the weekly high and low of the closing prices of the related equity shares quoted on the recognised stock exchange during these six months and if such recomputed price is higher than the price paid on allotment, the difference shall be paid by the allottees to the issuer.
Payment of consideration. Full consideration of specified securities issued under this Chapter shall be paid by the allottees at the time of allotment of such specified securities.
The specified securities allotted on preferential basis to promoter or promoter group and the equity shares allotted pursuant to exercise of options attached to warrants issued on preferential basis to promoter or promoter group, shall be locked-in for a period of 3 years from the date of allotment of the specified securities or equity shares allotted pursuant to exercise of the option attached to warrant, as the case may be:
Provided that not more than 20% of the total capital of the issuer shall be locked-in for 3 years from the date of allotment:
Provided further that equity shares allotted in excess of the 20% shall be locked-in for 1 year from the date of their allotment pursuant to exercise of options or otherwise, as the case may be.
MGR Ltd. wants to issue certain shares on preferential basis and has sought your advice in respect of pricing the shares for such issue. You are required to state the guidelines issued by the Securities and Exchange Board of India in respect of pricing of the issue of shares on a preferential basis. (May, 2008)
Qualified Institutions Placement
• Meaning of Qualified Institutions Placement Meaning
• Conditions for Qualified Institutions Placement
Conditions & Approvals
• Pricing of Equity Shares Pricing
• Restrictions on Allotment • Restrictions on Amount Raised Restrictions
• Transferability of Securities Transferability
Qualified Institutions Placement means allotment of eligible securities by a listed issuer to qualified institutional buyers on private placement basis in terms of these regulations.
Relevant Date means the date of the meeting in which the board of directors of the issuer or the committee of directors duly authorised by the board of directors of the issuer decides to open the proposed issue.
A listed issuer may make qualified institutions placement if it satisfies the following conditions:
• A special resolution approving the qualified institutions placement has been passed by its shareholders.
Special Resolution
• The equity shares have been listed on a recognised stock exchange for a period of at least 1 year prior to the date of issuance of notice to its shareholders for convening the meeting to pass the special resolution.
Listing for 1 year
• It is in compliance with the requirement of minimum public shareholding specified in the Securities Contracts (Regulation) Rules, 1957.
Minimum Public Shareholding of
25%
The qualified institutions placement shall be made at a price not less than the average of the weekly high and low of the closing prices of the equity shares of the same class quoted on the stock exchange during the 2 weeks preceding the relevant date.
Provided that the issuer may offer a discount of not more than 5% on the price so calculated for the qualified institutions placement, subject to approval of shareholders.
Allotment under the qualified institutions placement shall be made subject to the following conditions:
(1) Minimum of 10% of eligible securities shall be allotted to mutual funds. Provided that if the mutual funds do not subscribe to said minimum percentage or any part thereof, such minimum portion or part thereof may be allotted to other qualified institutional buyers;
(2) No allotment shall be made, either directly or indirectly, to any qualified institutional buyer who is a promoter or any person related to
promoters of the issuer.
The aggregate of the proposed qualified institutions placement and all previous qualified institutions placements made by the issuer in the same financial year shall not exceed 5 times the net worth of the issuer as per the audited balance sheet of the previous financial year.
The eligible securities allotted under qualified institutions placement shall not be sold by the allottee for a period of one year from the date of allotment, except on a recognised stock exchange.
Shyamgarh Chemicals Limited, a listed company, having a paid-up equity share capital of Rs.80 crore and net worth of Rs.120 crores as on 31st March, 2012 proposes to raise funds to finance its expansion programme by issue of equity shares under the "Qualified Institutions Placement Scheme."
Answer the following with reference to the provisions of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009:
(i) What are the conditions to be satisfied by the company so that it can make Qualified Institutions Placement?
(ii) What is the maximum amount that can be raised by the company under the proposed issue of shares?
(iii) What are the restrictions, if any, with regard to pricing of issue and transferability of shares by qualified institution buyers? (8 Marks)
Issue of Indian Depository Receipts
• Meaning of IDR Meaning
• Workings of an IDR Workings
• Advantages & Disadvantages of an IDR Pros & Cons
• Regulation 97 – Eligibility for IDR • Regulation 98 – Conditions for IDR
Eligibility & Conditions for IDR
• The Indian Phenomenon - Standard Chartered IDR
The Indian Phenomenon
IDR is defined as “an instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the SEBI) against the underlying equity of issuing company to enable foreign companies to raise funds from Indian securities markets”.
In a sense IDRs are a kind of derivatives which derive their values from the underlying assets in this case the foreign companies’ shares.
Shares
Issuer (Outside India)
Domestic depository (In India)
Custodian (Outside India)
Holds shares for Domestic depository
Issuer of IDRs to Invest in India
IDR holders‐ FIIs, NRIs, FIs, retail,
Non‐institutional investors
Demat IDRs listed On NSE/BSE
Integration of Indian capital market with the world market
Opportunity before Indian investors to buy a foreign stock without attracting restrictive provisions of FEMA.
Exposure of Indian stock exchanges to the best practices being followed worldwide
Increased chances of Indian corporate sector being more efficient due to global competition in the primary market
Foreign companies will become more regulated and monitored due to attracting several legal provisions pursuant to the issue and listing of an IDR
Indian domestic companies will have to compete with the overseas players for the funds in the primary market
There is an apprehension of negative capital flow
An issuing company making an issue of IDR shall also satisfy the following:
(1) The issuing company is listed in its home country;
(2) The issuing company is not prohibited to issue securities by any regulatory body;
(3) The issuing company has track record of compliance with securities market regulations in its home country.
Explanation: For the purpose of this regulation, the term “home country” means the country where the issuing company is incorporated and listed.
An issue of IDR shall be subject to the following conditions:
(a) issue size shall not be less than 50 crore rupees;
(b) procedure to be followed by each class of applicant for applying shall be mentioned in the prospectus;
(c) minimum application amount shall be 20,000 rupees;
(d) at least 50% of the IDR issued shall be allotted to QIB;
(e) the balance 50% may be allocated among the categories of NII and RII (non-institutional investors and retail individual investors) including employees at the discretion of the issuer and the manner of allocation shall be disclosed in the prospectus. Provided that at least 30% of the IDRs being offered in the public issue shall be available for allocation to RII (retail individual investors) and in case of under subscription in retail individual investor category, spill over to other categories to the extent of under subscription may be permitted.
Explanation: For the purpose of this regulation, “employee” shall mean a person who, (i) is a resident of India, and (ii) is a permanent and full-time employee or a director, whether whole time or part time, of the issuer or of the holding company or subsidiary company or of the material associate(s) of the issuer, whose financial statements are consolidated with the issuer’s financial statements, working in India and does not include promoters.
(f) At any given time, there shall be only one denomination of IDR of the issuing company.
What is a Standard Chartered IDR?
A Standard Chartered IDR is a depository receipt denominated in Indian Rupees issued by Standard Chartered Bank, Mumbai (the “Domestic Depository”) representing the underlying Equity Shares of Standard Chartered.
10 IDRs represent an ownership interest in one Equity Share (known as the “Deposited Shares”).
IDRs give the holder the opportunity to have an interest in the Equity Shares of Standard Chartered.
The principal participants in the IDR Facility are Standard Chartered, the Overseas Custodian, the Domestic Depository and the Registrar &
Transfer Agent (the “R&T Agent”).
• Standard Chartered Plc – the IDR issuer – is incorporated in England and its ordinary shares are listed primarily in London and Hong Kong. Standard Chartered
• The Domestic Depository, Standard Chartered Bank, Mumbai has issued IDRs representing the underlying Equity Shares of Standard Chartered to investors.
• The Domestic Depository is registered as a custodian of securities with SEBI.
• The Domestic Depository acts as a bare trustee on behalf of the IDR Holders and its rights and obligations are specified in the deposit agreement dated 8 May 2010 signed between Standard Chartered and the Domestic Depository, as amended (the “Deposit Agreement”).
Domestic Depository
• Standard Chartered has issued Equity Shares to the Overseas Custodian, Bank of New York Mellon, who holds them on behalf of the Domestic Depository and on basis of which the Domestic Depository has issued IDRs.
• It is a foreign entity appointed by the Domestic Depository pursuant to the custody agreement dated 8 May 2010, as amended (the “Custody Agreement”).
Overseas Custodian
• The R&T Agent, Karvy Computershare Private Limited, appointed pursuant to the transfer agent agreement dated 21 May 2010 between Standard Chartered, the Domestic Depository and R&T Agent (the “Transfer Agent Agreement”) which was renewed pursuant to a memorandum of understanding dated July 17, 2012. Pursuant to this agreement, R&T Agent provides services to Standard Chartered, the Domestic Depository and the IDR Holders in India. These services include registration and transfer of IDRs in India, record keeping, coordinating corporate actions and handling investor grievances.
Registrar & Transfer
Agent
An IDR Holder is entitled to rights on an equitable basis vis-à-vis the rights of all other shareholders holding Equity Shares (“Equity Shareholders”) of Standard Chartered.
Some of the rights of the IDR Holders include: • Voting. • Entitlement to bonus issues. • Entitlement to dividends. • Participation in rights issues. • Participation in sub-divisions and consolidations of underlying Equity
Shares. • Participation in other distributions and corporate actions.
Ownership and Trading of IDRs
IDRs have been allotted to investors in dematerialised form.
IDRs are listed on the BSE Limited (“BSE”) and the National Stock Exchange of India Limited (“NSE” together with BSE referred to as the “Indian Stock Exchanges”).
IDRs are traded in dematerialised form but the IDR Holders have the option to hold the IDRs in certificate form.
The trading and settlement process of IDRs is like the trading and settlement of Equity Shares of Indian companies. The tax treatment may, however, be different.
The Deposit Agreement is an agreement between Standard Chartered and the Domestic Depository.
It contains the rights and obligations of the Domestic Depository, the IDR Holders and Standard Chartered regarding the IDR Facility.
The Deposit Agreement is available for inspection, on request, at the office of the Domestic Depository at Standard Chartered Bank, Securities Services.
Two-Way Fungibility of IDRs
Two-way fungibility of IDRs refers to redemption of IDRs into underlying Equity Shares and conversion of Equity Shares into IDRs. Fungibility – SEBI (ICDR) (Amendment ) Regulations 2013 The Indian Depository Receipts shall be fungible into underlying equity shares of the issuing company in the manner specified by the Board and Reserve Bank of India, from time to time.
Price Discovery Mechanism
• Meaning of Book Building Meaning
• Pricing Method • Revision of Price Band Pricing
• Procedure for Book Building Procedure
• Build up of the Book and Revision of Bids Revision of Bids
• Refund within 15 days of the Bid/ Issue Closing Date
Allotment of Equity Shares
Book building is a method by which a public issue is made as opposed to a fixed price offer method.
Under a fixed price offer method, the company specifies a particular price at which the public issue is made. However, the book built method involves a process by which the demand for the proposed issue is elicited and built up and the price of such securities is assessed. Thus, the issue price is discovered by the investors as opposed to the company fixing the price.
The company in consultation with the merchant banker specifies a price band within which the proposed investors can place their bids. The process is similar to that of an auction wherein bids are placed. Ultimately the company selects that price within the price band at which the bids for the maximum number of shares are placed. All those investors who have bid at or above the selected price are treated as eligible investors whereas the rest of them are not eligible. Book building was introduced in India in the late nineties and since then it has been a roaring success.
The prospectus (red herring prospectus) may either mention a floor price (i.e., the minimum price below which bids would not be accepted) or a price band consisting of a ceiling/ cap and a floor. In case of a band, the cap cannot exceed 20% of the floor. The actual pricing would then depend upon on the bids received.
For instance, a price band has been fixed of Rs. 20 to Rs. 24 per equity share. The issue size is of 3,000 equity shares and five bids are received as shown in the table below. A graphical representation of consolidated demand and price would be made available at the bidding centers during the bidding period. The illustrative book given below shows the demand for the shares of the Company at various prices and is collated from bids from various investors.
Bid Quantity Bid price Cumulative Quantity
Subscription %
500 24 500 16.67% 1500 23 2000 50.00% 1000 22 3000 100.00% 2500 21 5500 166.67% 2000 20 7500 250.00%
The price discovery is a function of demand at various prices. The highest price at which the Issuer is able to allot the desired number of equity shares is the price at which the book cuts off i.e. Rs. 22 in the above example. The Issuer, in consultation with the BRLMs, will finalize the Issue price at or below such cut off price, i.e. at or below Rs. 22. All bids at or above the Issue Price and cut off bids are valid bids and are considered for allocation in the respective categories.
The price band can be revised during the bidding period in which case the maximum revision on either side shall not exceed 20% i.e floor of price band can move up or down to the extent of 20% of floor of the price band disclosed in the red herring prospectus and the cap of the revised price band will be fixed in accordingly.
The key steps involved in a book built issue are enumerated below:
(a) The Company must file the Red Herring Prospectus with the ROC at least 3 days before the Bid/ Issue Opening Date.
(b) The Company and the Book Running Lead Managers must declare the Bid/ Issue Opening Date, Bid/ Issue Closing Date and Price Band at the time of filing the Red Herring Prospectus with ROC.
(c) The Bidding Period shall be open for at least 3 working days and not more than 7 working days. In case the price band is revised, the revised price band will be published in two widely circulated newspapers and the Bidding period will be extended for a further period of three days, subject to the total Bidding period not exceeding 10 working days.
(d) The Bidder can revise the Bid through the Revision Form.
(e) The Bidder can bid at any price within the Price Band. The Bidder has to bid for the desired number of Equity Shares at a specific price. Retail Individual Bidders and Bidders in the Reserved Categories applying for a maximum bid in any of the Bidding Options not exceeding Rs 2,00,000 may bid at “Cut-off”. However, bidding at “Cut-off” is prohibited for QIB or Non Institutional Bidders and such Bids from QIBs and Non Institutional Bidders would be rejected.
The process for building up the book is briefly explained below:
(1) Bids registered by various Bidders are electronically transmitted to the NSE or BSE on an online basis.
(2) The book gets built up at various price levels. This information will be available with the BRLMs on a regular basis.
(3) During the Bidding Period, any bidder who has registered his interest in the Equity Shares at a particular price level is free to revise his Bid within the price band.
(4) Revisions can be made in both the desired numbers of Equity Shares and the bid price. The Bidder can make this revision any number of times during the Bidding Period.
The Company reserves, at its absolute and uncontrolled discretion and without assigning any reason therefor, the right to accept or reject any Bid in whole or in part.
In case a Bid is rejected in full, the whole of the Bid Amount is refunded to the Bidder within 15 days of the Bid/ Issue Closing Date.
In case a Bid is rejected in part, the excess Bid Amount is refunded to the Bidder within 15 days of the Bid/ Issue Closing Date.
Allotment of the Equity Shares is to be done within 15 days from the Bid/Issue Closing Date or else it has to pay interest @ 15% per annum (for any delay beyond the periods as mentioned above), if allotment is not made, refund orders are not despatched and/ or dematerialized credits are not made to investors within two working days from the date of allotment.
XYZ Automobiles Ltd. intends to make a public issue of 2,00,00,000 equity shares of Rs. 10 each through the 100% book building process indicating a price band. You are required to answer the following with reference to the SEBI (ICDR) Regulations:
(i) What is the price band that can be indicated in the red herring prospectus, if the floor price is proposed to be fixed at Rs. 300 per equity share?
(ii) What are the restrictions, if the company wants to revise the price band during the bidding period?
Price Stabilization Mechanism
• Introduction to GSO Meaning
• Green Shoe Option Process GSO Process
• Success/Failure of GSO in India
The Indian Phenomenon
One of the problems in an IPO has been the post-issue price decline as compared to the issue price. This often has left retail investors feeling high and dry. A solution to this problem is the introduction of the Green Shoe Option in the issue. Green Shoe Option, as a concept, has been around for several years in international markets. Even in India it was popular amongst the Bonds issued by ICICI, IDBI, e.g., Flexibonds, Safetybonds, etc. However, it was introduced in the Indian equity markets only recently. To describe it in layman terms, a Green Shoe Option (“GSO”) is an option to retain (up to a certain limit) excess subscription to an issue of shares and to stabilise the post-issue price of the shares. Retail investors are given protection by the GSO since many times the post-issue listing price is at a substantial discount to the offer price. The first company to use this innovative structure was the Green Shoe Company and hence, the unique name. The SEBI ICDR Regulations define it to mean an option of allocating shares in excess of the shares included in the public issue and to operate a post-listing price stabilisation mechanism.
The Regulations lay down an elaborate procedure and mechanism. Companies which have opted for this option, include, Maruti Suzuki, Tata Consultancy Services, etc. ICICI Bank was the first company to use the GSO under the book building route. DSP Merrill Lynch was appointed as the Stabilising Agent to maintain the post-issue price and for this the GSO was up to 15% of the issue size. Life Insurance Corporation which was one of the major shareholders entered into an agreement with the Stabilising Agent to lend a stake equal to 7.85%.
• The issuer has been authorized, by a resolution passed in the general meeting of shareholders approving the public issue, to allot specified securities to the stabilising agent, if required, on the expiry of the stabilisation period;
Resolution in GM
• The issuer has appointed a merchant banker or book runner, as the case may be, from amongst the merchant bankers appointed by the issuer as a stabilising agent, who shall be responsible for the price stabilisation process;
Appointment of Stabilising Agent
• Prior to filing the offer document with the Board, the stabilising agent has entered into an agreement with the promoters for borrowing specified securities from them which shall not be in excess of 15% of the issue size;
Issue 15% Excess Securities in the
IPO/FPO
• Promoters or shareholders who own more than 5% of the pre-issue capital are entitled to lend to the Stabilizing Agent.
Eligibility for Lending
• Stabilisation process shall be available for a period not exceeding 30 days from the date on which trading permission is given by the recognised stock exchanges in respect of the specified securities allotted in the public issue.
Stabilisation Period
• The stabilising agent shall open a special account, distinct from the issue account, with a bank for crediting the monies received from the applicants against the over-allotment
GSO Bank Account
• The stabilising agent shall open a special account with a depository participant for crediting specified securities to be bought from the market during the stabilisation period out of the monies credited in the special bank account.
GSO Demat Account
• The specified securities bought from the market and credited in the special account with the depository participant shall be returned to the promoters or pre-issue shareholders immediately, in any case not later than 2 working days after the end of the stabilization period.
Returning securities back to
promoters
• On expiry of the stabilisation period, if the stabilising agent has not been able to buy specified securities from the market to the extent of such securities over-allotted, the issuer shall allot specified securities at issue price to the extent of the shortfall to the GSO Demat A/c within 5 days of the closure of the stabilisation period and it shall be returned to the promoters.
Issue of fresh securities to the promoters by Company if required
• The stabilising agent shall remit the monies with respect to the fresh securities allotted above to the promoters to the issuer from the special bank account.
SA to pay money out of GSO Bank A/c to the
Company for the shares allotted to promoters
above
• Any monies left in the special bank account after remittance of monies to the issuer as above and deduction of expenses incurred by the stabilising agent for the stabilisation process shall be transferred to the Investor Protection and Education Fund established by the Board and the special bank account shall be closed soon thereafter.
Surplus money lying in GSO Bank A/c to be transferred to IEPF
• The stabilising agent shall submit a report to the stock exchange on a daily basis during the stabilisation period and a final report to the Board
Report to Stock Exchange and
Board
• The stabilising agent shall maintain a register for a period of at least 3 years from the date of the end of the stabilisation period and such register shall contain the following particulars:
• The names of the promoters or pre-issue shareholders from whom the specified securities were borrowed and the number of specified securities borrowed from each of them;
• The price, date and time in respect of each transaction effected in the course of the stabilisation process; and
• The details of allotment made by the issuer on expiry of the stabilisation process.
Maintain Register
Explain clearly the meaning of the term “Green shoe option” in relation to a public company going for public offer of equity shares. What disclosures is such a company required to make in the draft red herring prospectus in accordance with SEBI (ICDR) Regulations? (November, 2008)
GREEN SHOE OPTION: Green shoe option in relation to a public company going for public issue of equity shares means an option of allocating shares in excess of the shares included in the public issue and operating a post–listing price stabilizing mechanism in accordance with the provisions of Chapter VIII-A of SEBI (Guidelines), which is granted to a company to be exercised through a stabilizing Agent.
DISCLOSURES TO BE MADE IN THE RED HERRING PROSPECUS:
An issuer company going for a public offer of equity shares is required to make the following disclosures in the Red Herring Prospectus:
(1) Details of agreement between the company and the stabilizing agent stating all the terms and conditions relating to the Green Shoe Option.
(2) Details of agreement with the promoter(s) or pre-issue shareholders who will lend their shares, which shall not be in excess of 15% of the total issue size.
(3) Maximum number of shares proposed to be over- allotted by the company.
(4) The period for which the company proposed to avail of the stabilization mechanism.
(5) The maximum increase in the capital of the company and the shareholding pattern post issue in case the company is required to allot further shares to the extent of overallotment in the issue.
(6) The maximum amount of funds to be received by the company in case of further allotment and the use of these additional funds in final document to be filed with the ROC.
(7) Details of the agreement/ arrangement entered in to by Stabilizing Agent with the promoters to borrow shares from the latter which inter-alia shall include name of the promoters, their existing shareholding, number & percentage of shares to be lent by them and other important terms and conditions including the rights and obligations of each party.
(8) The final prospectus shall additionally disclose the exact number of shares to be allotted pursuant to the public issue, stating separately therein the number of shares to be borrowed from the promoters and over allotted by the SA and the percentage of such shares in relation to the total issue size.
The Indian Phenomenon
Year Number of IPOs Number of Companies
Opting for GSO
Percentage of Companies
Opting for GSO 2003 3 0 0.00% 2004 21 2 9.52% 2005 43 3 6.98% 2006 60 6 10.00% 2007 86 5 5.81% 2008 30 0 0.00% 2009 17 1 5.88% 2010 66 1 1.52% 2011 39 0 0.00%
365 18
No. Issuer Company Opening Date Listing Date 1 Tata Consultancy Services Ltd. 29-Jul-04 25-Aug-04 2 Deccan Chronicle Holdings Ltd. 25-Nov-04 22-Dec-04 3 3I Infotech Ltd. 30-Mar-05 22-Apr-05 4 HT Media Ltd. 04-Aug-05 01-Sep-05 5 Shree Renuka Sugars Ltd. 07-Oct-05 01-Nov-05 6 Entertainment Network (India) Ltd. 23-Jan-06 15-Feb-06 7 Jagran Prakashan Ltd. 25-Jan-06 22-Feb-06 8 B. L. Kashyap & Sons Ltd. 20-Feb-06 17-Mar-06 9 Prime Focus Ltd. 25-May-06 20-Jun-06
10 Parsvnath Developers Ltd. 06-Nov-06 30-Nov-06 11 Cairn India Ltd. 11-Dec-06 09-Jan-07 12 House of Pearl Fashions Ltd. 16-Jan-07 19-Feb-07 13 Idea Cellular Ltd. 12-Feb-07 09-Mar-07 14 Housing Development & Infrastructure Ltd. 28-Jun-07 24-Jul-07 15 Omaxe Ltd. 17-Jul-07 09-Aug-07 16 Brigade Enterprises Ltd. 10-Dec-07 31-Dec-07 17 Indiabulls Power Ltd. 12-Oct-09 30-Oct-09 18 Electrosteel Steels Ltd. 21-Sep-10 08-Oct-10
No. Issuer Company Listing Date Issue Price
Days when Closing Price Was below
Issue Price during GSO Window Period
Trading days during GSO
Window Period
Percentage of Days when
Closing Price Was below Issue
Price during GSO Window
Period
1 Tata Consultancy Services Ltd. 25-Aug-04 850 0 23 0.00%
2 Deccan Chronicle Holdings Ltd. 22-Dec-04 162 17 22 77.27%
3 3I Infotech Ltd. 22-Apr-05 100 20 21 95.24%
4 HT Media Ltd. 01-Sep-05 530 19 21 90.48%
5 Shree Renuka Sugars Ltd. 01-Nov-05 285 0 21 0.00%
6 Entertainment Network (India) Ltd. 15-Feb-06 162 0 20 0.00%
7 Jagran Prakashan Ltd. 22-Feb-06 320 19 19 100.00%
8 B. L. Kashyap & Sons Ltd. 17-Mar-06 685 0 18 0.00%
9 Prime Focus Ltd. 20-Jun-06 417 23 23 100.00%
10 Parsvnath Developers Ltd. 30-Nov-06 300 0 21 0.00%
11 Cairn India Ltd. 09-Jan-07 160 21 21 100.00%
12 House of Pearl Fashions Ltd. 19-Feb-07 550 20 20 100.00%
13 Idea Cellular Ltd. 09-Mar-07 75 0 19 0.00%
14 Housing Development & Infrastructure Ltd. 24-Jul-07 500 4 22 18.18%
15 Omaxe Ltd. 09-Aug-07 310 4 21 19.05%
16 Brigade Enterprises Ltd. 31-Dec-07 390 21 23 91.30%
17 Indiabulls Power Ltd. 30-Oct-09 45 20 20 100.00%
18 Electrosteel Steels Ltd. 08-Oct-10 11 18 21 85.71%
The preceding table shows the GSO window period (i.e., 30 days from the listing date) performance of the companies that included GSOs in their IPO programmes. Of the 18 companies that did included GSOs, the aftermarket closing price of six companies never went below the issue price during the GSO window period. As such, the SAs of these companies did not buy any shares from the market.
At the close of the GSO window period, the SAs handed over the amount received by them on over-allotment of shares to the issuer company; the issuer company then made a further issue of shares at the cut-off price to the pre-issue shareholders who had lent their shares to the SA; finally, the SA closed the GSO bank account and the GSO, without any profit or loss.
No. Issuer Company Shares borrowed under GSO
Shares purchased by SA
% of shares purchased to shares
borrowed
1 Tata Consultancy Services Ltd. 83,17,880 - 0.00%
2 Deccan Chronicle Holdings Ltd. 12,01,960 - 0.00%
3 3I Infotech Ltd. 30,00,000 - 0.00%
4 HT Media Ltd. 6,96,000 2,44,059 35.07%
5 Shree Renuka Sugars Ltd. 3,50,880 - 0.00%
6 Entertainment Network (India) Ltd. 12,00,000 - 0.00%
7 Jagran Prakashan Ltd. 15,05,853 - 0.00%
8 B. L. Kashyap & Sons Ltd. 2,50,000 - 0.00%
9 Prime Focus Ltd. 3,59,711 - 0.00%
10 Parsvnath Developers Ltd. 30,87,800 - 0.00%
11 Cairn India Ltd. 3,30,00,000 1,99,14,959 60.35%
12 House of Pearl Fashions Ltd. 6,12,060 1,08,064 17.66%
13 Idea Cellular Ltd. 4,25,00,000 - 0.00%
14 Housing Development & Infrastructure Ltd. 44,55,000 1,29,000 2.90%
15 Omaxe Ltd. 17,50,000 9,33,000 53.31%
16 Brigade Enterprises Ltd. 24,93,708 24,93,708 100.00%
17 Indiabulls Power Ltd. 5,09,00,000 2,98,47,654 58.64%
18 Electrosteel Steels Ltd. 3,36,27,428 3,36,27,428 100.00%
As was discussed earlier, the aftermarket price of six of these companies never fell below the issue price during the GSO window period, and therefore, the SAs of these companies were inactive during the GSO window period.
Surprisingly, the SAs of four companies remained inactive even though the aftermarket shares of their respective companies fell below the issue price during the GSO window period. This highlights the fact that the SEBI Regulations do not compel the SAs to intervene in the aftermarket even when the market price falls below the issue price. The SAs are granted complete discretion in deciding when and to what extent to intervene in the aftermarket.
The market price of the remaining eight companies fell below the issue price, and their SAs did intervene in the aftermarket. However, only two of these companies purchased the full extent of the shares that had been over-allotted.
•Any profits arising from the price stabilisation activity need to be transferred to the Investor Protection and Education Fund (IPEF) established by the SEBI. In this scenario, issuer companies, promoters and pre-listing shareholders, and merchant banks did not see any incentive to opt for GSOs.
Lack of incentives
•Many issuer companies and quite a few merchant banks were unsure of the effects of GSOs. There was a feeling that the GSOs facility was highly constrained by the limit of 15% over-allotment and the 30-day stabilisation period.
Uncertainty about impact of GSOs
•It was suggested that starting from the pre-SEBI days, RIIs were led to believe that investing in an IPO would guarantee them positive initial returns. The GSO would merely reinforce these attitudes.
Interference with free play of market forces
•Merchant banks that are designated as stabilising agents get high fees for availing of the GSOs. Such high fees for merchant banks were felt to be unjust as they face limited risk in implementing GSOs
Unfair advantage for merchant banks
•The issuer companies and merchant banks felt that the legal and regulatory compliances were cumbersome, and that the consequent risks had increased manifold. In this scenario, they are not prepared to take any additional responsibility for a facility that was optional to begin with.
Unwillingness of merchant banks to accept additional
responsibility
• Currently, GSOs are not mandatory in any country. However, given the SEBI’s objective of increasing the participation of RIIs, and the peculiar nature of the capital markets in India, the suggestion to make GSOs mandatory is reasonable.
Make green shoe options
mandatory
• When an issuer company is unable to satisfy the eligibility criteria related to past track records, they are allowed to make an IPO if they are able to get qualified institutional buyers (QIBs) to make a significant investment. The implicit assumption is that the QIBs are sophisticated investors who would take a long-term investment view of the investment.
Control QIB flips
• In order to facilitate market discipline, the regulator may need to mandate an additional disclosures requirement regarding the aftermarket returns for each merchant bank.
Disclose track record of
merchant banks
We have learnt the following topics so far in SEBI (ICDR) Regulations:-
(1) Preferential Issue
(2) Qualified Institutions Placement
(3) Issue of Indian Depository Receipts
(4) Book Building
(5) Green Shoe Option
