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BUSINESS ENVIRONMENT AND LAW
RAISING FUND FOR THE COMPANY
SUBMITTED BY:-
GEET KIRAN(B-34)
ANSHUL DUBEY(B-53)
KUSH MANOCHA(B-
GAURAV MOTWANI(B-15)
SAURABH MALOO(B-29)
ABHINAV SOOD(B-
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RAISING MONEY FOR BUSINESS
Whether you've been in business one week or five years, an infusion of funds is
always welcome. But what type of financing is best for your business? There are so
many factors to consider--from the stage of your business to how much it'll cost
getting the money--that just choosing a path to follow can be overwhelming.
Some of the funding sources are:-
1.Startup Financing
Get your business off the ground with cash from several startup sources.
2.Equipment Leasing
Short on cash, but need new equipment to grow? Lease what you need.
3.Community Development Financial Institutions (CDFIs)
So you're not "bankable" according to traditional rules--your community may still
have resources to help fund your business.
4.Microloans
When you need only a little cash to grow, it's time to check into microloans.
5.Asset-Based Loans
Use your assets--like accounts receivable and inventory---to help you land
funding.
6.Bank-Term Loans
Go with old reliable and get a business loan from the bank.
7.SBA-Guaranteed Loans
The SBA's got your back. With an SBA-guaranteed loan, they'll guarantee as much
as 80 percent of the principle.
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8.Private Loan Guarantees
Your business is in early stage, the bank is ignoring your pleas--what do you do?
Find an investor to guarantee your loan.
9.504 LoansIf you're buying a fixed-asset like land, buildings or long-term equipment, look
into a 504 loan.
10.Royalty Financing
Got a product that will bring in the bucks? Use it to get a loan based on your future
sales.
11.Federal Government Venture CapitalSBA-licensed one-stop funding shops SBICs and SSBICs are looking for
businesses to fund. Could your business be next?
12.Angel Investors
These individual VC investors seem like they're from heaven, but be prepared to
give up a chunk of your company for funding.
13.Business Incubators
Nest in one of these entrepreneurial hotbeds, and you may just be on your way to
financing.
14.401(k) Financing
Fund your new company with your retirement account from your previous job--but
watch out for the tax man
15.Direct Public Offerings
Take your business--and your quest for funding--directly to the public by selling
shares in your company.
16.Reverse Merger
Take your private company public the easy way by purchasing a dormant, public
company.
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17.Initial Public Offerings
Ready for a whirlwind ride? Take the ultimate funding trip by going public. This
guide will help you prepare.
18.Institutional Venture Capital
VC funding isn't always easy to obtain and and you'll have to give up equity, but
when you're a high-growth company with high-financing needs, it can be your best
bet.
Debt vs. Equity
First, nearly all types of funding one can raise fall under one of two categories --
debt or equity. The basic difference is that debt has to be paid back (it is a loan)
whereas equity funding does not. In exchange for equity funding, the funds
provider (investor) receives a percentage ownership (shares) in your company that
grows proportionally to the overall value of your company. At a liquidity-
producing event such as a sale of the company or an Initial Public Offering (IPO)
to the stock markets, the equity holder could cash out their stock, ideally receiving
a large return for taking the risk early on.
In his article, "Financing Instruments," attorney Michael T. Redmond explains the
difference with "Although there are certain exceptions, debt instruments generally
represent fixed obligations to repay a specific amount at a specified date in the
future, together with interest. In contrast, equity instruments generally represent
ownership interests entitled to dividend payments, when declared, but with no
specific right to a return on capital."
Debt Financing
Standard types of debt include personal loans from family members and friends,
bank loans, issued notes, and corporate bonds. These financing loans are provided
at an agreed upon interest rate and time period. Some debts, called convertible
debts, can be converted to common stock later on, but most are paid back with cash
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on a set schedule or set date. Whether the receiver of the loan pays only the interest
during the term of the loan and the entire principle (the initial amount of the loan)
back at the end, or pays part of both the interest and the principle at each payment
period, is determined in the terms of the loan. Debt instruments can be secured by
assets of the corporation or unsecured (backed by a pledge of credit).
The advantages of providing debt capital to a business include a reduction in risk,
as upon bankruptcy debts must be paid back before any assets can be distributed to
stockholders, and a near certainty of receiving the initial principle with interest
back within a set period of time. Disadvantages for the issuing institution or person
include not being able to participate in the value growth of the company.
Equity Financing
Equity financing, on the other hand, provides stock to the investor in exchange for
funds. This is usually the form of investment that venture capital funds, angel
investors, or other private equity funds make. In exchange for the investment, the
investor can benefit from the growth of the company and receive either common or
preferred stock.
Common Stock
Common stock is the most basic form of equity instrument. It represents an
ownership in the corporation and includes an interest in earnings. Holders are also
entitled to receive dividends (periodic disbursements to shareholders based on
earnings and the decisions of the Board).
Holders of common stock have the best opportunity to share in the companys
growth, but also must take into account the increased risk of coming after holders
of debt and preferred stock in the case of company failure and bankruptcy.
In the view of the business owner, there is one important advantage to issuing
common stock in exchange for financing. There is no obligation to repay the
amount invested. The investors prime reward for taking the risk is participating in
the value growth of the company and cashing out upon a liquidity event. Another
advantage for the investor is the ability to vote for directors.
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Preferred Stock
Preferred stock is a second form of equity instrument. While it is equity, it can
have certain features that resemble debt that can make it attractive.
Most important to the investor, it has rights over common stock, reducing the risk
of loss of investment. When issued, investors can also negotiate with the company
whether it will be voting or non-voting stock and how dividends will be
distributed. In short, it offers greater flexibility and reduced risk, and hence is
preferred to common stock.
Preferred stock is usually the type of stock issued to venture capital funds uponinvestment in a company.
Increasing Your Chances of Receiving Debt Funding
While obtaining funding can be a difficult process, there are a few things you can
do to increase your chances. Here are some tips.
If you are only looking for a few hundred or a few thousand dollars, you should
first look to friends and family and then to the banks. If you have assets to back itup (such as cash in your bank account, a house, or a car) you should be able to
obtain a loan with relative ease. If you are under 18, you will generally have to
have a parent or guardian co-sign the loan. And if you do not have adequate assets
to back up the loan, the bank may ask for you to find someone (such as a parent or
friend who does have adequate assets) to co-sign the loan. Remember, the less risk
the bank feels it has, the greater chance you have of being approved.
If you have an existing account, a good credit history, and relationship at a local
bank the process may not be any more complicated than meeting with a loan
officer, discussing your plans, filling out a short form, and waiting a week for
approval. However, if you have not established these relationships and history,
now is a good time to start.
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If your are serious about raising funding, youll need at least some form of
business plan. The more funding you are trying to raise, the most professional and
complete this plan will need to be. At its core, youll need to explain what you will
be providing, what need/gap it fills in the marketplace, who you will be working
with and who is on your team, your plan for making sales and marketing, and yourfinancial projections including the time to break even. You may want to read some
of the articles on developing a business plan on www.zeromillion.com for
additional guidance or obtain a book on how to craft your plan.
In general, you will be more successful obtaining financing if you have formed an
entity (LLC or corporation) for your business. While it may still be possible to
obtain a loan for your sole proprietorship, you will be taken more seriously and
have many more avenues open to you as a corporation or other type of limited-
liability company.
If you are under 18, (and therefore unable to form a corporation), you should still
be able to obtain a personal loan provided you have a well thought out plan, an
established relationship, and assets to back it up, or parents, relatives, or friends
who are willing to cosign and secure the loan with assets of their own. It can surely
be difficult to obtain the financing you need. If you can learn the language, talk in
terms on the banks interest, reduce risk where possible, and show you have a
grasp of accounting and general business knowledge, you very well may be able toobtain the loan you need.
In the United States, another way to increase your chances of having your loan
approved is to go to the Small Business Administration (SBA). If you can have
your loan backed by the SBA, and hence by the Federal Government, you will
have a much easier time.
When applying for a loan, especially those for larger amounts or to finance large
investments or expansions, be prepared to meet with the loan officers and
underwriters for your bank. In short, expect to be drilled from every angle by these
persons and have your answers ready. It is the underwriters jobs to reduce risk, so
expect hard questions.
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In general if you are looking for RS1000-Rs50,000 in debt funding, a bank should
be able to help you. With the right relationships and assurances you may be able to
raise more and at better terms. If you are looking to raise more than RS25,000,
however, you may wish to look into equity financing.
Increasing Your Chances of Receiving Equity Funding
Equity funding tends to be a totally different ballgame than debt financing, and
generally requires a greater level of sophistication to make it work. If you are
looking for between RS25,000 and RS1,000,000 of equity funding, you should
start by looking at individual angel investors or networks of angel investors. Angel
investors are high net worth individuals and accredited investors (as defined by the
Securities and Exchange Commission) who are able to risk relatively large
amounts of money in risky ventures with a potential for a high return.
To attract these types of investors, you will need to have the right advisors
(lawyers and accountants with the proper experience and contacts) and truly have
an idea or business which has a potential for a high-return (Rs5M and up,
depending on the amount of funding needed).
To increase your chances of being funded, be sure you have a solid business plan,
experienced adviser, and a team with market knowledge that has proven they canexecute.
If you are looking to raise Rs500,000 and up and you have a business with a
potential return greater than Rs50M over five years, you may want to look into
venture capital firms. At the seed stage (very early stage funding), you may be able
to raise between RS500,000 and Rs10M (or potentially more if it is the right plan
with the right people) in a Series A offering of your companys stock. To raise this
amount of money and still maintain a good portion of ownership in your company,
youll need to have a high valuation before your accept the funding (your pre-
money value).
For example, if based on your intellectual property, first mover advantage, unique
idea, and experienced management team your business was given a pre-money
valuation of RS5 million and provided with RS5 million in Series A venture
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refundand underwriting obligations, ifany, of each merchant banker shall be
predetermined and disclosed in the offer document asspecified in Schedule I.
(4) The lead merchant banker shall, only after independently assessing the
capability of otherintermediaries to carry out their obligations, advise the issuer on
their appointment.(5) The issuer shall enter into an agreement with the lead merchant banker in the
format specifiedin Schedule II and with other intermediaries as required under the
respective regulations applicableto the intermediary concerned:
Provided that such agreements may include such other clauses as the issuer and the
intermediarymay deem fit without diminishing or limiting in any way the liabilities
and obligations of themerchant bankers, other intermediaries and the issuer under
the Act, the Companies Act, 1956, theSecurities Contracts (Regulation) Act, 1956,
the Depositories Act, 1996 and the rules andregulations made thereunder or any
statutory modification or statutory enactment thereof:Provided further that in case
of ASBA process, the issuer shall take cognisance of the deemedagreement of the
issuer with Self Certified Syndicate Banks.
(6) An issuer shall, in case of an issue made through the book building process,
appoint syndicatemembers and in the case of any other issue, appoint bankers to
issue, at all mandatory collectioncentres as specified in Schedule III and such other
collection centres as it may deem fit.(7) The issuer shall appoint a registrar which has connectivity with all the
depositories:Provided that if issuer itself is a registrar to an issue registered with
the Board, then anotherregistrar to an issue shall be appointed as registrar to the
issue:Provided further that the lead merchant banker shall not act as a registrar to
the issue in which it isalso handling the post issue responsibilities.
Explanation: For the purpose of this regulation, in case of a book built issue, the
lead merchantbanker appointed by the issuer shall act as the lead book runner
Filing of offer document.
6. (1) No issuer shall make,
(a) a public issue; or
(b) a rights issue, where the aggregate value of the specified securities offered is
fifty lakhrupees or more,unless a draft offer document, along with fees as specified
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in Schedule IV, has been filedwith the Board through the lead merchant banker, at
least thirty days prior to registering the prospectus, red herring prospectus or shelf
prospectus with the Registrar of Companies orfiling the letter of offer with the
designated stock exchange, as the case may be.
(2) The Board may specify changes or issue observations, if any, on the draft offerdocumentwithin thirty days from the later of the following dates:
(a) the date of receipt of the draft offer document under sub-regulation (1); or
(b) the date of receipt of satisfactory reply from the lead merchant bankers, where
the Boardhas sought any clarification or additional information from them; or
(c) the date of receipt of clarification or information from any regulator or agency,
where theBoard has sought any clarification or information from such regulator or
agency; or
(d) the date of receipt of a copy of in-principle approval letter issued by therecognised stockexchanges.
(3) If the Board specifies changes or issues observations on the draft offer
document, the issuer andlead merchant banker shall carry out such changes in the
draft offer document and comply with theobservations issued by the Board before
registering the prospectus, red-herring prospectus or shelfprospectus, as the case
may be, with the Registrar of Companies or filing the letter of offer with the
designated stock exchange.
(4) The issuer shall, simultaneously while registering the prospectus, red herring
prospectus orshelf prospectus with the Registrar of Companies or filing the letter
of offer with the designatedstock exchange or before the opening of the issue, file a
copy thereof with the Board through thelead merchant banker.
(5) The lead merchant banker shall, while filing the offer document with the Board
in terms of subregulation
(1) and sub-regulation (4), file a copy of such document with the recognised stock
exchanges where the specified securities are proposed to be listed.
In-principle approval from recognised stock exchanges.
7. The issuer shall obtain in-principle approval from recognised stock exchanges as
follows:
(a) in case of an initial public offer, from all the recognised stock exchanges in
which theissuer proposes to get its specified securities listed; and
(b) in case of a further public offer and rights issue:
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(i) where the specified securities are listed only on recognised stock exchanges
havingnationwide trading terminals, from all such stock exchanges;
(ii) where the specified securities are not listed on any recognised stock exchange
havingnationwide trading terminals, from all the stock exchanges in which the
specifiedsecurities of the issuer are proposed to be listed;(iii) where the specified securities are listed on recognised stock exchanges having
nationwide trading terminals as well as on the recognised stock exchanges not
havingnationwide trading terminals, from all recognised stock exchanges having
nationwidetrading terminals.
PROMOTERS CONTRIBUTION
Minimum promoters contribution.32. (1) The promoters of the issuer shall contribute in the public issue as follows:
(a) in case of an initial public offer, not less than twenty per cent. of the post issue
capital;
(b) in case of a further public offer, either to the extent of twenty per cent. of the
proposedissue size or to the extent of twenty per cent. of the post-issue capital;
(c) in case of a composite issue, either to the extent of twenty per cent. of the
proposedissue size or to the extent of twenty per cent. of the post-issue capital
excluding therights issue component.
(2) In case of a public issue or composite issue of convertible securities, minimum
promoterscontribution shall be as follows:
(a) the promoters shall contribute twenty per cent. as stipulated in clauses (a), (b)
or (c) ofsub-regulation (1), as the case may be, either by way of equity shares or by
way ofsubscription to the convertible securities:Provided that if the price of the
equity shares allotted pursuant to conversion is not predeterminedand not disclosed
in the offer document, the promoters shall contribute only byway of subscription to
the convertible securities being issued in the public issue and shall
undertake in writing to subscribe to the equity shares pursuant to conversion of
suchsecurities.
(b) in case of any issue of convertible securities which are convertible or
exchangeable ondifferent dates and if the promoters contribution is by way of
equity shares (conversionprice being pre-determined), such contribution shall not
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be at a price lower than theweighted average price of the equity share capital
arising out of conversion of suchsecurities.
(c) subject to the provisions of clause (a) and (b) above, in case of an initial public
offer ofconvertible debt instruments without a prior public issue of equity shares,
the promotersshall bring in a contribution of at least twenty per cent. of the projectcost in the form ofequity shares, subject to contributing at least twenty per cent. of
the issue size from theirown funds in the form of equity shares:Provided that if the
project is to be implemented in stages, the promoters contributionshall be with
respect to total equity participation till the respective stage vis--vis the debt
raised or proposed to be raised through the public issue.
(3) In case of a further public offer or composite issue where the promoters
contribute more thanthe stipulated minimum promoters contribution, the allotment
with respect to excess contributionshall be made at a price determined in terms ofthe provisions of regulation 76 or the issue price,whichever is higher.
(4) The promoters shall satisfy the requirements of this regulation at least one day
prior to the dateof opening of the issue and the amount of promoters contribution
shall be kept in an escrowaccount with a scheduled commercial bank and shall be
released to the issuer along with the release
of the issue proceeds:Provided that where the promoters contribution has already
been brought in and utilised, theissuer shall give the cash flow statement disclosing
the use of such funds in the offer document;Provided further that where the
minimum promoters contribution is more than one hundred crorerupees, the
promoters shall bring in at least one hundred crore rupees before the date of
opening ofthe issue and the remaining amount may be brought on pro-rata basis
before the calls are made topublic.
Explanation: For the purpose of this regulation:
(I) Promoters contribution shall be computed on the basis of the post-issue
expanded capital:
(a) assuming full proposed conversion of convertible securities into equity shares;
(b) assuming exercise of all vested options, where any employee stock options are
outstanding at the time of initial public offer in terms of proviso (b) to sub-
regulation (5)of regulation 26.(II) For computation of weighted average price:
(a) weights means the number of equity shares arising out of conversion of such
specifiedsecurities into equity shares at various stages;
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(b) price means the price of equity shares on conversion arrived at after taking
intoaccount predetermined conversion price at various stages.
Securities ineligible for minimum promoters contribution.
33. (1) For the computation of minimum promoters contribution, the following
specified securitiesshall not be eligible:(a) specified securities acquired during the preceding three years, if they are:
(i) acquired for consideration other than cash and revaluation of assets
orcapitalisation of intangible assets is involved in such transaction; or
(ii) resulting from a bonus issue by utilisation of revaluation reserves or unrealised
profits of the issuer or from bonus issue against equity shares which are ineligible
for minimum promoters contribution;
(b) specified securities acquired by promoters during the preceding one year at a
pricelower than the price at which specified securities are being offered to public intheinitial public offer:
Provided that nothing contained in this clause shall apply:
(i) if promoters pay to the issuer, the difference between the price at which
specifiedsecurities are offered in the initial public offer and the price at which the
specified securities had been acquired;
(ii) if such specified securities are acquired in terms of the scheme under sections
391-394 of the Companies Act, 1956, as approved by a High Court, by promoters
in lieu of business and invested capital that had been in existence for a period of
more than one year prior to such approval;
(iii) to an initial public offer by a government company, statutory authority or
corporation or any special purpose vehicle set up by any of them, which is
engaged in infrastructure sector;(c) specified securities allotted to promoters during
the preceding one year at a price lessthan the issue price, against funds brought in
by them during that period, in case of anissuer formed by conversion of one or
more partnership firms, where the partners ofthe erstwhile partnership firms are the
promoters of the issuer and there is no change inthe management:Provided that
specified securities, allotted to promoters against capital existing in suchfirms for a
period of more than one year on a continuous basis, shall be eligible;(d) specified
securities pledged with any creditor.
(2) Specified securities referred to in clauses (a) and (c) of sub-regulation (1) shall
be eligible forthe computation of promoters contribution, if such securities are
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acquired pursuant to a schemewhich has been approved under sections 391-394 of
the Companies Act, 1956.
Explanation: For the purposes of clause (b) of sub-regulation (1), the term
infrastructure sectorincludes the facilities or services as specified in Schedule X.
PROVISIONS AS TO PUBLIC ISSUE
Conditions for initial public offer.
26. (1) An issuer may make an initial public offer, if:
(a) it has net tangible assets of at least three crore rupees in each of the preceding
threefull years (of twelve months each), of which not more than fifty per cent. areheld inmonetary assets:Provided that if more than fifty per cent. of the net tangible
assets are held inmonetary assets, the issuer has made firm commitments to utilise
such excessmonetary assets in its business or project;
(b) it has a track record of distributable profits in terms of section 205 of the
CompaniesAct, 1956, for at least three out of the immediately preceding five
years:Provided that extraordinary items shall not be considered for calculating
distributableprofits;
(c) it has a net worth of at least one crore rupees in each of the preceding three full
years(of twelve months each);
(d) the aggregate of the proposed issue and all previous issues made in the same
financialyear in terms of issue size does not exceed five times its pre-issue net
worth as per theaudited balance sheet of the preceding financial year;
(e) if it has changed its name within the last one year, at least fifty per cent. of the
revenuefor the preceding one full year has been earned by it from the activity
indicated by thenew name.
(2) An issuer not satisfying any of the conditions stipulated in sub-regulation (1)
may make aninitial public offer if:
(a) (i) the issue is made through the book building process and the issuer
undertakes to allotat least fifty per cent. of the net offer to public to qualified
institutional buyers and torefund full subscription monies if it fails to make
allotment to the qualifiedinstitutional buyers ;
or
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(ii) at least fifteen per cent. of the cost of the project is contributed by scheduled
commercial banks or public financial institutions, of which not less than ten
percent.shall come from the appraisers and the issuer undertakes to allot at least ten
percent.of the net offer to public to qualified institutional buyers and to refund
fullsubscription monies if it fails to make the allotment to the qualifiedinstitutionalbuyers;
(b) (i) the minimum post-issue face value capital of the issuer is ten crore rupees;
or
(ii) the issuer undertakes to provide market-making for at least two years from the
dateof listing of the specified securities, subject to the following:
(A) the market makers offer buy and sell quotes for a minimum depth of three
hundredspecified securities and ensure that the bid-ask spread for their quotes does
not, atany time, exceed ten per cent.;(B) the inventory of the market makers, as on the date of allotment of the specified
securities, shall be at least five per cent. of the proposed issue.
(3) An issuer may make an initial public offer of convertible debt instruments
without making aprior public issue of its equity shares and listing thereof.
(4) An issuer shall not make an allotment pursuant to a public issue if the number
of prospectiveallottees is less than one thousand.
(5) No issuer shall make an initial public offer if there are any outstanding
convertible securities orany other right which would entitle any person any option
to receive equity shares after the initialpublic offer:
Provided that the provisions of this sub-regulation shall not apply to:
(a) a public issue made during the currency of convertible debt instruments which
were issuedthrough an earlier initial public offer, if the conversion price of such
convertible debtinstruments was determined and disclosed in the prospectus of the
earlier issue of convertibledebt instruments;
(b) outstanding options granted to employees pursuant to an employee stock option
schemeframed in accordance with the relevant Guidance Note or Accounting
Standards, if any, issuedby the Institute of Chartered Accountants of India in this
regard.
(6) Subject to provisions of the Companies Act, 1956 and these regulations, equity
shares may beoffered for sale to public if such equity shares have been held by the
sellers for a period of at leastone year prior to the filing of draft offer document
with the Board in accordance with subregulation
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(1) of regulation 6:Provided that in case equity shares received on conversion or
exchange of fully paid-upcompulsorily convertible securities including depository
receipts are being offered for sale, theholding period of such convertible securities
as well as that of resultant equity shares together shallbe considered for the purpose
of calculation of one year period referred in this sub-regulation:Provided further that the requirement of holding equity shares for a period of one
year shall notapply:
(a) in case of an offer for sale of specified securities of a government company or
statutoryauthority or corporation or any special purpose vehicle set up and
controlled by any one ormore of them, which is engaged in infrastructure sector;
(b) if the specified securities offered for sale were acquired pursuant to any scheme
approved by aHigh Court under sections 391-394 of the Companies Act, 1956, in
lieu of business andinvested capital which had been in existence for a period ofmore than one year prior to suchapproval.
(7) No issuer shall make an initial public offer, unless as on the date of registering
prospectus or redherring prospectus with the Registrar of Companies, the issuer
has obtained grading for the initialpublic offer from at least one credit rating
agency registered with the Board.
Explanation: For the purposes of this regulation:
(I) net tangible assets mean the sum of all net assets of the issuer, excluding
intangible assets asdefined in Accounting Standard 26 (AS 26) issued by the
Institute of Chartered Accountantsof India;
(II) project means the object for which monies are proposed to be raised to cover
the objects ofthe issue;
(III) In case of an issuer which had been a partnership firm, the track record of
distributable profitsof the partnership firm shall be considered only if the financial
statements of the partnershipbusiness for the period during which the issuer was a
partnership firm, conform to and arerevised in the format prescribed for companies
under the Companies Act, 1956 and alsocomply with the following:
(a) adequate disclosures are made in the financial statements as required to be
made by theissuer as per Schedule VI of the Companies Act, 1956;
(b) the financial statements are duly certified by a Chartered Accountant stating
that:
(i) the accounts and the disclosures made are in accordance with the provisions of
Schedule VI of the Companies Act, 1956;
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(ii) the accounting standards of the Institute of Chartered Accountants of India
havebeen followed;
(iii) the financial statements present a true and fair view of the firms accounts;
(IV) In case of an issuer formed out of a division of an existing company, the track
record ofdistributable profits of the division spun-off shall be considered only ifthe requirementsregarding financial statements as provided for partnership firms in
Explanation III arecomplied with;
(V) bid-ask spread means the difference between quotations for sale and
purchase;
PRICING IN PUBLIC ISSUE
Pricing.
28. (1) An issuer may determine the price of specified securities in consultation
with the lead merchantbanker or through the book building process.
(2) An issuer may determine the coupon rate and conversion price of convertible
debt instruments inconsultation with the lead merchant banker or through the book
building process.
(3) The issuer shall undertake the book building process in a manner specified in
Schedule XI.
Differential pricing.
29. An issuer may offer specified securities at different prices, subject to the
following:
(a) retail individual investors or retail individual shareholders 6[or employees of
the issuerentitled for reservation made under regulation 42 making an application
for specifiedsecurities of value not more than one lakh rupees,] may be offered
specified securities at aprice lower than the price at which net offer is made to
other categories of applicants:
Provided that such difference shall not be more than ten per cent.of the price at
whichspecified securities are offered to other categories of applicants;
(b) in case of a book built issue, the price of the specified securities offered to an
anchor investorshall not be lower than the price offered to other applicants;
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(c) in case of a composite issue, the price of the specified securities offered in the
public issuemay be different from the price offered in rights issue and justification
for such price difference shallbe given in the offer document.
Price and price band.
30. (1) The issuer may mention a price or price band in the draft prospectus (incase of a fixed priceissue) and floor price or price band in the red herring
prospectus (in case of a book built issue) anddetermine the price at a later date
before registering the prospectus with the Registrar of Companies:Provided that
the prospectus registered with the Registrar of Companies shall contain only one
priceor the specific coupon rate, as the case may be.
(2) If the floor price or price band is not mentioned in the red herring prospectus,
the issuer shallannounce the floor price or price band at least two working days
before the opening of the bid (incase of an initial public offer) and at least oneworking day before the opening of the bid (in case ofa further public offer), in all
the newspapers in which the pre issue advertisement was released.
(3) The announcement referred to in sub-regulation (2) shall contain relevant
financial ratioscomputed for both upper and lower end of the price band and also a
statement drawing attention ofthe investors to the section titled basis of issue
price in the prospectus.
(4) The cap on the price band shall be less than or equal to one hundred and twenty
per cent. of thefloor price.
(5) The floor price or the final price shall not be less than the face value of the
specified securities.
Explanation: For the purposes of sub-regulation (4), the cap on the price band
includes cap on thecoupon rate in case of convertible debt instruments.
Face value of equity shares.
31. (1) Subject to the provisions of the Companies Act, 1956, the Act and these
regulations, anissuer making an initial public offer may determine the face value of
the equity shares in thefollowing manner:
(a) if the issue price per equity share is five hundred rupees or more, the issuer
shall havethe option to determine the face value at less than ten rupees per equity
share:
Provided that the face value shall not be less than one rupee per equity share;
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(b) if the issue price per equity share is less than five hundred rupees, the face
value of theequity shares shall be ten rupees per equity share:
Provided that nothing contained in this sub-regulation shall apply to initial public
offermade by any government company, statutory authority or corporation or any
specialpurpose vehicle set up by any of them, which is engaged in infrastructuresector.
(2) The disclosure about the face value of equity shares (including the statement
about the issueprice being X times of the face value) shall be made in the
advertisements, offer documents andapplication forms in identical font size as that
of issue price or price band.
PREFERENTIAL ISSUE
Conditions for preferential issue.
72. (1) A listed issuer may make a preferential issue of specified securities, if:
(a) a special resolution has been passed by its shareholders;
(b) all the equity shares, if any, held by the proposed allottees in the issuer are in
dematerialised form;
(c) the issuer is in compliance with the conditions for continuous listing of equity
shares asspecified in the listing agreement with the recognised stock exchange
where the equityshares of the issuer are listed;
(d) the issuer has obtained the Permanent Account Number of the proposed
allottees.
(2) The issuer shall not make preferential issue of specified securities to any person
who has sold anyequity shares of the issuer during the six months preceding the
relevant date:Provided that in respect of the preferential issue of equity shares and
compulsorily convertible debtinstruments, whether fully or partly, the Board may
grant relaxation from the requirements of this sub-regulation, if the Board has
granted relaxation in terms of regulation 29A of the Securities andExchange Board
of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 to
such preferential allotment
Disclosures.
73. (1) The issuer shall, in addition to the disclosures required under section 173 of
the CompaniesAct, 1956 or any other applicable law, disclose the following in the
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74. (1) Allotment pursuant to the special resolution shall be completed within a
period of fifteen daysfrom the date of passing of such resolution:
Provided that where any application for exemption from the applicability of the
Securities andExchange Board of India (Substantial Acquisition of Shares andTakeovers) Regulations, 1997 or anyapproval or permission by any regulatory
authority or the Central Government for allotment ispending, the period of fifteen
days shall be counted from the date of order on such application or thedate of
approval or permission, as the case may be:Provided further that where the Board
has granted relaxation to the issuer in terms of regulation 29Aof SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997, the preferential issue of
equity shares and compulsorily convertible debt instruments, whether fully or
partly, shall be madeby it within such time as may be specified by the Board in itsorder granting the relaxation:Provided further that requirement of allotment within
fifteen days shall not apply to allotment ofspecified securities on preferential basis
pursuant to a scheme of corporate debt restructuring as per thecorporate debt
restructuring framework specified by the Reserve Bank of India.
(2) If the allotment of specified securities is not completed within fifteen days from
the date of specialresolution, a fresh special resolution shall be passed and the
relevant date for determining the price ofspecified securities under this Chapter
will be taken with reference to the date of latter specialresolution.
Tenure of convertible securities.
75. The tenure of the convertible securities of the issuer shall not exceed eighteen
months from thedate of their allotment.
Pricing of equity shares.
76. (1) If the equity shares of the issuer have been listed on a recognised stock
exchange for a periodof six months or more as on the relevant date, the equity
shares shall be allotted at a price not less thanhigher of the following:
(a) The average of the weekly high and low of the closing prices of the related
equity sharesquoted on the recognised stock exchange during the six months
preceding the relevantdate; or
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(b) The average of the weekly high and low of the closing prices of the related
equity sharesquoted on a recognised stock exchange during the two weeks
preceding the relevant date.
(2) If the equity shares of the issuer have been listed on a recognised stock
exchange for a period ofless than six months as on the relevant date, the equityshares shall be allotted at a price not less thanthe higher of the following:
(a) the price at which equity shares were issued by the issuer in its initial public
offer or the valueper share arrived at in a scheme of arrangement under sections
391 to 394 of the CompaniesAct, 1956, pursuant to which the equity shares of the
issuer were listed, as the case may be;or
(b) the average of the weekly high and low of the closing prices of the related
equity sharesquoted on the recognised stock exchange during the period shares
have been listed precedingthe relevant date; or(c) the average of the weekly high and low of the closing prices of the related
equity sharesquoted on a recognised stock exchange during the two weeks
preceding the relevant date.
(3) Where the price of the equity shares is determined in terms of sub-regulation
(2), such price shallbe recomputed by the issuer on completion of six months from
the date of listing on a recognised stockexchange with reference to the average of
the weekly high and low of the closing prices of the relatedequity shares quoted on
the recognised stock exchange during these six months and if suchrecomputed
price is higher than the price paid on allotment, the difference shall be paid by the
allotteesto the issuer.
(4) Any preferential issue of specified securities, to qualified institutional buyers
not exceeding five innumber, shall be made at a price not less than the average of
the weekly high and low of the closingprices of the related equity shares quoted on
a recognised stock exchange during the two weekspreceding the relevant date.
Payment of consideration
77. (1) Full consideration of specified securities other than warrants issued under
this Chapter shall bepaid by the allottees at the time of allotment of such specified
securities:Provided that in case of a preferential issue of specified securities
pursuant to a scheme of corporatedebt restructuring as per the corporate debt
restructuring framework specified by the Reserve Bank ofIndia, the allottee may
pay the consideration in terms of such scheme.
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(2) An amount equivalent to at least twenty five per cent. of the consideration
determined in terms ofregulation 76 shall be paid against each warrant on the date
of allotment of warrants.
(3) The balance seventy five per cent. of the consideration shall be paid at the time
of allotment ofequity shares pursuant to exercise of option against each suchwarrant by the warrant holder.
(4) In case the warrant holder does not exercise the option to take equity shares
against any of thewarrants held by him, the consideration paid in respect of such
warrant in terms of sub-regulation (2)shall be forfeited by the issuer.
Lock-in of specified securities
78. (1) The specified securities allotted on preferential basis to promoter orpromoter group and theequity shares allotted pursuant to exercise of options
attached to warrants issued on preferential basisto promoter or promoter group,
shall be locked-in for a period of three years from the date of allotment
of the specified securities or equity shares allotted pursuant to exercise of the
option attached towarrant, as the case may be:Provided that not more than twenty
per cent. of the total capital of the issuer shall be locked-in forthree years from the
date of allotment:Provided further that equity shares allotted in excess of the
twenty per cent. shall be locked-in for oneyear from the date of their allotment
pursuant to exercise of options or otherwise, as the case may be.
(2) The specified securities allotted on preferential basis to persons other than
promoter and promotergroup and the equity shares allotted pursuant to exercise of
options attached to warrants issued onpreferential basis to such persons shall be
locked in for a period of one year from the date of theirallotment.
(3) The lock-in of equity shares allotted pursuant to conversion of convertible
securities other thanwarrants, issued on preferential basis shall be reduced to the
extent the convertible securities havealready been locked-in.
(4) The equity shares issued on preferential basis pursuant to a scheme of corporate
debt restructuringas per the Corporate Debt Restructuring framework specified by
the Reserve Bank of India shall belocked-in for a period of one year from the date
of allotment:Provided that partly paid up equity shares, if any, shall be locked-in
from the date of allotment and thelock-in shall end on the expiry of one year from
the date when such equity shares become fully paidup.
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(5) If the amount payable by the allottee, in case of re-calculation of price under
sub-regulation (3) ofregulation 76 is not paid till the expiry of lock-in period, the
equity shares shall continue to be lockedin till such amount is paid by the allottee.
(6) The entire pre-preferential allotment shareholding of the allottees, if any, shall
be locked-in fromthe relevant date upto a period of six months from the date ofpreferential allotment.
ISSUE OF INDIAN DEPOSITORY RECEIPTS
Eligibility.97. An issuing company making an issue of IDR shall also satisfy the following:
(a) the issuing company is listed in its home country;
(b) the issuing company is not prohibited to issue securities by any regulatory
body;
(c) the issuing company has track record of compliance with securities market
regulations in itshome country.
Conditions for issue of IDR.
98. An issue of IDR shall be subject to the following conditions:
(a) issue size shall not be less than fifty crore rupees;
(b) procedure to be followed by each class of applicant for applying shall be
mentioned in theprospectus;
(c) minimum application amount shall be twenty thousand rupees;
(d) at least fifty per cent. of the IDR issued shall be allotted to qualified
institutional buyers onproportionate basis as per illustration given in Part C of
Schedule XI;
(e) the balance fifty per cent. may be allocated among the categories of non-
institutional investorsand retail individual investors including employees at the
discretion of the issuer and themanner of allocation shall be disclosed in the
prospectus. Allotment to investors within acategory shall be on proportionate basis:
13[Provided that atleast thirty per cent. of the said fifty per cent. IDR issued shall
be allocatedto retail individual investors and in case of under-subscription in retail
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individual investorcategory, spill over to the extent of under-subscription shall be
permitted to other categories.]
(f) At any given time, there shall be only one denomination of IDR of the issuing
company.
Minimum subscription.
99. (1) For non-underwritten issues:
(a) If the issuing company does not receive the minimum subscription of ninety per
centof the offer through offer document on the date of closure of the issue, or if
thesubscription level falls below ninety per cent. after the closure of issue on
account ofcheques having being returned unpaid or withdrawal of applications, the
issuingcompany shall forthwith refund the entire subscription amount received.
(b) If the issuing company fails to refund the entire subscription amount withinfifteendays from the date of the closure of the issue, it is liable to pay the amount
withinterest to the subscribers at the rate of fifteen per cent. per annum for the
period ofdelay.
(2) For underwritten issues: If the issuing company does not receive the minimum
subscription ofninety per cent. of the offer through offer document including
devolvement of underwriters withinsixty days from the date of closure of the issue,
the issuing company shall forthwith refund theentire subscription amount received
with interest to the subscribers at the rate of fifteen per cent.
per annum for the period of delay beyond sixty days.