Issue Management

Activities and Procedures

Introduction
- In order to remove inadequacies and systematic deficiencies, and to protect the interests of investors SEBI has decided some guideline. - One of the objective of SEBI is the orderly growth and development of the securities market also. - The SEBI has put in place guidelines [Disclosure and Investor Protection (DIP) Guidelines] as ground rules relating to new issue procedures/activities. - These are in addition to the company law requirements in relation to issues of capital/securities.

Eligibility Criteria
Filing of offer document: -If the issue is exceed 50 lakhs than a draft prospect should be filed with SEBI through eligible registered merchant banker before 21 days to filing it with registrar of companies. -In case of less than 50 lakhs company should prepare the letter of offer which disclose the requirement of SEBI guidelines.

Initial Public offerings (IPOs)

Conditions:
- It should have net tangible assets of at least 3 crore in each of the preceding 3 full year and that of more than 50% should be in monetary terms - It has to give track record of distributable profits in terms of sec 205 of companies act for at least 3 out of 5 years - It should have a net worth of at least 1 crore in each year preceding 3 years . - If there is change in the name of co in last one year than the 50% of revenue should be earned by the new name .

Public issue by listed company

The size in terms of aggregate of the proposed issue and all other issues made in the same financial year and it should not exceed 5 times of its net worth.
 Credit rating for debt instrument  Out standing warrants / financial instruments  Partly paid up shares  Ways and reasons of finance.

PRICING OF ISSUES
Differential pricing: securities issued to finance institutions, mutual funds, Foreign institutional investors etc on different price than general public. Price band Payment of discount/commissions Denomination of shares

Cost associated to Issue

Underwriting Commission (typically 6%-10% of offeringlower for debt offerings than equity offerings) Reimbursement of Underwriter expenses The Companys Attorneys Fees Printing Costs Accountants Fees (vary significantly as result of number of audits required) Filing Fees

Time to issue
Is the Company the right size? As per the rule, companies must have revenue of $20 million or earnings of $1 million. Internet companies were an exception to the rule. In such instances, a particularly innovative product may suffice. Is the management team qualified and ready to manage a public company? Must deal effectively with outside financial and credit analysts, the financial press, and shareholders. Must command creditability in the community Must live up privacy

Contd.
Does the Company have adequate growth potential? Underwriters typically demand an expected growth rate of 15%-25% annually before they will consider taking a company public. Exceptions are made for companies with continuous steady performance (I.e. low risk to investor). Are the Companys information systems sufficiently sophisticated? - Is the market ready? - Are internal controls sufficient? - Is your business plan sound? - Any changes necessary in capital structure, shares authorized, contracts, employment agreements, etc.?

Promoters Contribution and Lock-In Requirements

Promoters contribution -public issue by unlisted companies: promoters should contribute 20% pre issue capital. -offer for sale by unlisted companies: promoters stake should be 20% after offer to sale the securities. -public issue by listed companies: promoters contribution should be either 20% of proposed issue or 20% pre issue capital. -composite issue by listed companies: promoters contribution should be either 20% of proposed issue or 20% pre issue capital excluding rights issue.

Contd.
Promoters participation in excess of required minimum  Promoters contribution before public issue  Exemption from requirement of promoters contribution  Lock in requirements of promoters contribution -lock-in of minimum period of three years -lock-in of excess promoters contribution for one year -security issued last to be locked-in first -lock in of pre issue share capital of unlisted company for one year from the date of commencement of he business.

Issue Advertisement
- Include notice, brochures, pamphlets, circulars, catalogues, etc. - Truthful, fair and clear -Reproduce information contained in an offer document in full and disclose all relevant facts, and not to be restricted to selected extras relating to that item. -Be set forth in a clear, concise and understandable language.

Contd.
-Extensive use of technical, legal terminology and the inclusion of excessive details, which may distract the investor , should avoided. -Not appear in the form of slogans or brand name except normal name of company. -No models, celebrities, land marks should be displayed -No corporate advertisement of the issuer company should be issued after 21 days of the filing the offer document with the SEBI till the closure of the issue.

Issue of convertible debt instrument

 Requirement in respect of debenture trustees.  Creation of Debenture redemption reserve.  Distribution of dividends.  Disclosure & creation of charge.  Requirement of letter of option.

Contents of offer Document 1 Contents of Prospectus:

1.1 General Information 1.2 Capital Structure or the Company 1.3 Terms of present issue 1.4 Particulars of the Issue 1.5 Company, Management and Project 1.6 Management Discussion and Analysis of the Financial Condition and Results of the Operations as Reflected in the Financial Statements.

Contd.
1.7 Financial Information of Group Companies 1.8 Other particulars, i.e. 1.8.1 Name of the Company 1.8.2 Year of Issue 1.8.3 Type of Issue 1.8.4 Amount of Issue 1.8.5 Date of closure of issue 1.8.6 Date of completion of delivery of share/debenture certificates 1.8.7 Date of completion of the project, where object of the issue was financing the project 1.8.8 Rate of dividend paid. 1.9 Projections

Contd.
1.10 Outstanding Liabilities or Defaults 1.11 Risk factors and management perceptions of the same 1.12 Disclosure on Investor Grievances and Redressal System

Book Building
Book-building means a process by which a demand for the securities proposed to be issued by a body corporate is elicited and built up. The price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice/circular/document or information memoranda or offer document. The option of book building is available to all body corporate that are otherwise eligible to make an issue of capital to the public as an alternative to and to the extent of, the percentage of the issue, which can be reserve for firm allotment. 75% Book Building Process - 100% Book Building Process

1) 2)

Benefits
 Discovery of Realistic price.  Determination of a price at a date close to the date of opening of public offer.  Proper allocation : Main benefit from book building is to determine the realistic price for shares and demand level from syndicate members in order to adjust pricing and allocation decision.  Ascertainment of level of subscription : One need not wait till the issue is close to know whether the minimum level of subscription is achieved.  Overall Adjustment over Fixed Price IPO : Unlike in the fixed-price IPOs, securities. if routed through book building, can be issued at realistic price that is fixed according to demand.  Other Advantages Book Building also has other advantages like fast completion of issue process, faster collection of payment etc.

Key concepts
Red Herring prospectus : Prospectus without issue prize and size of the issue. Price Band: The investors are informed of the price band for bidding(floor price and cap price). The cap price should not be more than 20% of the floor price. Price band can be revised by +/- 20% of floor. The investors can bid at any price in multiples of Re. within the price band. Margin Amount: The money collected along with the application is referred to as margin amount.

Green shoe Option

- Companies that want to venture out and start selling their shares to the public have ways to stabilize their initial share prices. - One of these ways is through a legal mechanism called the Green Shoe Option. - A green shoe is a clause contained in the underwriting agreement of an initial public offering (IPO) that allows underwriters to buy up to an additional 15% of company shares at the offering price. - The investment banks and brokerage agencies (the underwriters) that take part in the green shoe process have the ability to exercise this option if public demand for the shares exceeds expectations and the stock trades above the offering price.

Price Stabilization
This is how a green shoe option works:  The underwriter works as a liaison (like a dealer), finding buyers for the shares that their client is offering.  A price for the shares is determined by the sellers (company owners and directors) and the buyers (underwriters and clients).  When the price is determined, the shares are ready to publicly trade. The underwriter has to ensure that these shares do not trade below the offering price.  If the underwriter finds there is a possibility of the shares trading below the offering price, they can exercise the green shoe option.

Full, Partial and Reverse Green shoes

The number of shares the underwriter buys back determines if they will exercise a partial green shoe or a full green shoe. A partial green shoe is when underwriters are only able to buy back some shares before the price of the shares increases. A full green shoe occurs when they are unable to buy back any shares before the price goes higher. At this point, the underwriter needs to exercise the full option and buy at the offering price. The option can be exercised any time throughout the first 30 days of IPO trading.

Contd.
There is also the reverse green shoe option. This option has the same effect on the price of the shares as the regular green shoe option, but instead of buying the shares, the underwriter is allowed to sell shares back to the issuer. If the share price falls below the offering price, the underwriter can buy shares in the open market and sell them back to the issuer.