The Indian Companies Act, 2013 read with Securities and Exchange

Board of India (Issue of Capital and Disclosure Requirements)

Regulations, 2009 (hereinafter SEBI (ICDR) Regulations) provides
systematic approach of raising funds from Public in India.

Section 62(1) of the Companies Act, 2013 provides that a company

having a share capital can increase its subscribed capital by the issue of
further shares and such shares shall be offered—

(a) to the existing equity shareholders of the company in proportion of

the shares held by them to the paid-up share capital;

(b) to employees under scheme of employees’ stock option scheme

subject to passing of special resolution

(c) to any other person other than those mentioned above in case special
resolution authorises so

Section 63 of the Companies Act, 2013 provides that a Company may

issue fully paid-up bonus shares to its members in any manner out of
free reserve, securities premium account and capital redemption reserve
account. This section prohibits issue of bonus shares from revaluation
reserves (assets). Bonus shares are not the fund raising instrument and
are issued free of cost from the earning of the Company but can’t be
considered as dividend.

Thus Section 62 with other applicable provisions of the Act along with
guidelines and regulations of the Securities and Exchange Board of India
regulates the raising of funds from Public in India. Funds can be raised
under the following broad categories –

I. Public Issue

1. Initial Public Offer (IPO) (By unlisted company)

2. Institutional Trading Platform Mechanism (By unlisted Company)
3. Further Public Issue (FPO) (By listed Company)

II. Rights Issue

III. Private Placement (For Listed Companies)

1. Preferential Placement/Preferential Issue (PI)

2. Qualified Institutions Placement (QIP)
3. Institutional Placement Program (IPP)

Before discussing the above broad categories of raising funds, some

basic terms are explained here in below -

(i) Anchor Investor – A qualified institutional buyer making an

application for a value of Rs. ten crore or more in a public issue made
through book building process in accordance with SEBI (ICDR)
Regulations.

(ii) Book Building – It means a process undertaken to elicit demand and

to assess the price for determination of the quantum or value of specified
securities or Indian Depository Receipts, as the case may be, in
accordance with these regulations; (Definition as given in SEBI (ICDR)
Regulations))
Under Book Building process, floor price may or may not be fixed. The
demand is ascertained at different prices level with in the band. Price
band should be of 20% spread i.e. spread between floor and cap (upper)
of the price band should not be more than 20%. One of the lead
merchant bank to the issue is appointed as book runner. Book runner
circulates the draft copy of prospectus to the institutions and brokers etc.
Based on applicants bid on price and quantity of securities, price is
discovered under this process.

(iii) Green Shoe Option – It means an option of allotting equity shares

in excess of the equity shares offered in the public issue as a post-listing
price stabilizing mechanism; (Definition as given in SEBI (ICDR)
Regulations)

One of the merchant banker is required to be appointed as Stabilising

Agent under this mechanism. In simple terms, Green Shoe option is
price stabilizing mechanism of the securities allotted to public. Over
allotment is made under the process. In case the price of the securities
fall below the issue price, the shares are purchased from the market to
the extent of over allotment.

(iv) Qualified Institutional buyers means

1. a mutual fund, venture capital fund, alternative investment Fund

and foreign venture capital investor registered with the Board;
2. a foreign portfolio investor other than Category III foreign
portfolio investor registered with the Board;
3. a public financial institution as defined in the Companies Act
 4. a scheduled commercial bank;
5. a multilateral and bilateral development financial institution;
6. a state industrial development corporation;
7. an insurance company registered with the Insurance Regulatory
and Development Authority;
8. a provident fund with minimum corpus of twenty five crore rupees;
9. a pension fund with minimum corpus of twenty five crore rupees;
10. National Investment Fund set up by resolution no. F. No.
2/3/2005-DDII dated November 23, 2005 of the Government of
India published in the Gazette of India;
11. insurance funds set up and managed by army, navy or air
force of the Union of India;
12. insurance funds set up and managed by the Department of
Posts, India;

(v) Red Herring Prospectus: Red herring prospectus does not contain
information on price and number of shares being offered. Except price
and number, it contains all the material information, disclosures etc as
are required under the Companies Act and SEBI guidelines.

(vi) Promoters’ Contribution and lock-in: For unlisted companies,

promoters’ contribution should not be less than 20% of post issue capital
and lock-in period on such contribution should be of 3 years.

In case of listed companies, promoters’ contribution shall not be less

than 20% of issue size or 20% of post issue capital.
In case promoters’ contribution exceeds 20%, then such excess shall also
be subject to lock-in for a period of 1 years.

(vii) Credit Rating: IPO grading is mandatory for Initial Public offer of
securities. It is also mandatory for debt instruments of the already listed
companies on further issue or on right issue. It is carried out by the
credit agency registered with SEBI.

(viii) Pricing of the Issue: An unlisted or listed company can price its
securities freely. They can do it in consultation with merchant banker
and based on demand of the securities

I. PUBLIC ISSUE

1(a) Initial Public offer (By Unlisted Companies)

An unlisted company can, under section 62(1)(c) of the Companies Act,

2013, come up with fresh issue or sale of existing securities known as
Initial Public Offer provided following conditions are complied under
different options as provided in SEBI guidelines -

Option1

1. The Company has net tangible assets of at least Rs. 3 crore in each
of the preceding three full years
2. Net tangible assets mentioned above should not include monetary
assets more than 50%. In case monetary assets exceed 50%, then
firm commitment is required to put these excess monetary assets in
the business. In case offer is made through offer for sale, then limit
of 50% in monetary assets does not apply.
 3. There is track record of distributable profits (Dividend Payment) as
per the provisions of the Companies Act for at least three out of
immediately preceding five years
4. The Company has a minimum average pre-tax operating profit of
rupees fifteen crore, calculated on a restated and consolidated
basis, during the three most profitable years out of the immediately
preceding five years.
5. The Company has net worth of at least Rs. 1 crore in each of the
preceding three full years
6. In case of change of name by company within the last one year, at
least 50% revenue for the preceding full year is earned from that
particular activity suggested by the new name
7. The size of the proposed issue (including all previous issues made
in the same financial year) shall not exceed five times the pre-issue
networth as per the audited balance sheet of the last financial year.

In case above conditions are not complied, SEBI (ICDR) Regulations

provide following alternatives for unlisted Company to raise money –

Option 2

Under this option, issue will be made through compulsory book building
route where at least 75% of net offer to public is mandatorily required to
be allotted to Qualified Institutional Buyers. (QIBs)

Option 3

In addition to above two options, SEBI(ICDR) Regulations also

provides for issue of specified securities by small and medium
enterprises (SME) whose post issue capital does not exceed Rs. 10 crore.
These securities shall be listed on SME exchange. SME exchange means
trading platform of a recognised stock exchange having nationwide
trading terminals permitted by the Board to list the specified securities
issued in accordance with the provisions of SME route and includes a
stock exchange granted recognition for this purpose but does not include
the Main Board. The SME whose post issue capital is more than Rs. 10
crore and less than Rs. 25 crore may have the option to list securities as
per this route. The issue under this route shall be 100% underwritten.
Merchant bankers shall underwrite 15% of the issue in their account.
There should be more than 50 allottees. Compulsory market making of
three years from the date of listing is required for SME issue.

1(b) Institutional Trading Platform (ITP)

SEBI, in order to facilitate easy capital raising for start up companies

from the informed investors e.g. anchor investors, Private Equity fund,
Venture Capital funds, individuals etc, has allowed listing of their
specified securities without IPO on Institutional Trading Platform (ITP)
on SME exchange. The minimum trading lot on ITP shall be of Rs. 10
lacs. The Companies listed on ITP shall not make a public issue of its
securities.

For listing on ITP, the SME Company has not completed a period of
more than 10 years from the date of its incorporation and its revenue and
paid up capital have not exceeded Rs. 100 crore and Rs. 25 crore
respectively in any of the previous financial years and has at least one
full year audited financial statements for immediately preceding
financial year. The company, its promoters, group company, director
should not be in willful defaulter list of RBI. The company, group
companies or subsidiaries have not been referred to BIFR and no
regulatory action has been taken against the company, its promoters or
directors by RBI, IRDA, MCA in the last five years from the date of
making application of listing on ITP. Further no winding up petition
against the Company is ever admitted.

In addition to above, the SME shall also comply with any one of the
following criteria –

1. At least one alternative investment fund, venture capital fund or

other category of Investors /lenders approved by the Board has
invested a minimum amount of fifty lakh rupees in equity shares of
the company, or
2. At least one angel investor who is a member of an
association/group of angel investors which fulfils the criteria laid
down by the recognised stock exchange, has invested a minimum
amount of fifty lakh rupees in the equity shares of the company
through such association/group, or
3. The company has received finance from a scheduled bank for its
project financing or working capital requirements and a period of
three years has elapsed from the date of such financing and the
funds so received have been fully utilized, or
4. A registered merchant banker has exercised due diligence and has
invested not less than fifty lakh rupees in equity shares of the
 company which shall be locked in for a period of three years from
the date of listing, or
5. A qualified institutional buyer has invested not less than fifty lakh
rupees in the equity shares of the company which shall be locked
in for a period of three years from the date of listing, or
6. A specialized international multilateral agency or domestic agency
or a public financial institution as defined in Companies Act has
invested in the equity capital of the company.

SMEs listed on ITP may raise further capital through private placement
or right issue with no option for renunciation of rights. They can’t come
with IPO while listing on ITP.

SMEs may take voluntary exit from this platform by passing special
resolution through postal ballot where 90% of total votes and majority of
promoters’ votes have been cast in favour of this exit.

1(c) Further Public Offer

A listed company can, under section 62(1)(c) of the Companies Act,

2013, come up with further issue or offer for sale to public known as
Further Public Issue provided following conditions are complied under
different options as provided in SEBI guidelines -

Option1

A Listed Company can go for further public issue under section 62(1)(c)
of the Companies Act, 2013 provided following conditions as provided
in the SEBI (ICDR) Regulations are complied with -
  The size of the proposed issue (including all previous issues made
in the same financial year) shall not exceed five times the pre-issue
networth as per the audited balance sheet of the last financial year.
 In case of change of name by company within the last one year, at
least 50% revenue for the preceding full year is earned from that
particular activity suggested by the new name

In case above conditions are not complied, SEBI (ICDR) Regulations

provide following alternative to raise money –

Option 2

Under this option, issue will be made through compulsory book building
route where at least 75% of net offer to public is mandatorily required to
be allotted to Qualified Institutional Buyers. (QIBs)

SEBI (ICDR) Regulations also provides for Fast Track Issue . The
listed Companies which comply with following conditions as mentioned
under regulation 10(1) of the SEBI (ICDR) Regulations are exempted
from filing draft offer document to SEBI and Stock Exchanges.

1. The shares of the Company are listed on stock exchange having

nation wide terminals for a period of at least three years
immediately preceding the date of filing the offer document with
Registrar of Companies/Stock Exchanges.
2. The “average market capitalisation of public shareholding” of the
company is at least Rs. 3000 crores
3. The annualized trading turnover of the shares of the company
during six calendar months immediately preceding the month of
 the reference date has been at least two percent of the weighted
average number of shares listed during the said six months period.
4. The company has redressed at least 95% of the total shareholder
/investor grievances or complaints received till the end of the
quarter immediately preceding date of filing the offer document
with Registrar of Companies/Stock Exchanges.
5. Compliance of listing agreement for a period of at least three years
from the date of filing the offer document with Registrar of
Companies/Stock Exchanges.
6. The impact of auditors’ qualifications, if any, on the audited
accounts of the company in respect of the financial years for which
such accounts are disclosed in the offer document does not exceed
5% of the net profit/ loss after tax of the company for the
respective years.
7. No prosecution proceedings or show cause notices issued by the
Board are pending against the company or its promoters or whole
time directors as on the reference date; and
8. The entire shareholding of the promoter group is held in
dematerialized form as on the reference date.

II.RIGHT ISSUE
When a Company issues securities to the existing shareholders as exist
on particular record date as per provision of section 62(1)(a) of the
Companies Act, 2013, it is called Right Issue. In right issue securities
are offered to the existing shareholders of the Company in certain
proportion of the shares held by them to the paid-up share capital.
Right issue gives the right to the shareholders to purchase the shares of
the issuer at a price less than market price i.e. at discount. This is the
easiest way of raising funds where companies are not doing well and are
in need of funds for expansion etc to increase its profitability.

The eligibility norms as mentioned above in this article as options under

Initial Public Offer and Further Public Issues are not applicable in right
issue. The requirement of promoters contribution as provided under
SEBI (ICDR) Regulations is not applicable in Right Issue. The filing
requirements as mentioned under SEBI (ICDR) Regulations is
applicable on the right issue of more than Rs. 50 lacs

III.PRIVATE PLACEMENT (FOR ALREADY

LISTED COMPANY)
Private Placement means any invitation or offer (not by way of Public
Offer) to a select group of persons (there is limit on this number) to
subscribe to securities. Preferential Issue (PI), Qualified Institutions
Placement (QIP) and Institutional Placement Programme (IPP) come
under Private Placement category and are made under Section 62(1)(c)
of the Companies Act, 2013.

Conditions

PI and QIP issues should be made in compliance with the provisions of

continuous listing. However Qualified Institutions Placement can be
made of those equity shares which were listed on stock exchange having
nation wide trading terminals for a period of at least one year.
Only qualified institutions buyers (QIB) are eligible for allotment of
shares under QIP and QIB should not be in any way related (directly or
indirectly) to Promoters or Promoters’ Group. Minimum 10% of
securities should be allotted to Mutual Fund under QIP. In case no
mutual fund agrees then these can be allotted to other QIBs

IPP provisions apply to issuance of fresh issue or offer for sale of shares
in a listed company only for the purpose of achieving minimum public
shareholding. Shares are allotted only to Qualified Institutional Buyers
and these buyers should not be promoters or in any way related to
promoters. Eligible Securities under IPP are equity shares of same class
listed and traded and eligible sellers are the listed company, its promoter
and/or promoter group.

QIP & IPP are mandatorily required to be managed by Merchant Banker

while under PI there is no such requirement.

QIP and IPP are made on basis of Placement/Offer document containing

all material information and in compliance with Schedule XVIII of the
SEBI (ICDR) Regulations.

Lock-in Period and Promoters’ contribution & other restrictions

Where the securities are issued on PI basis, entire shareholding before

the allotment of Preferential Issue shall be subject to lock-in for a period
of six months from the date of preferential allotment. The shareholders
who have sold their shares six months prior to relevant date are not
eligible for allotment
The instrument allotted under PI to any person other than promoters or
their group shall be subject to lock-in for a period of one year from the
date of allotment. Securities allotted to promoters are subject to lock-in
for 3 years from the date of allotment provided such securities shall not
exceed 20% of total post issue capital.

The securities allotted under QIP shall not be sold by QIBs for a period
of one year from the date of allotment, except on a recognised stock
exchange.

Under IPP, the Promoters or Promoters’ group shall not make IPP in
case they have sold or purchased the securities 12 weeks before the date
of programme and also shall not sell or purchase the securities 12 weeks
after the date of programme except for selling on further IPP or stock
exchange mechanism provided the gap between two successive IPPs
should be of minimum 2 weeks. Minimum 25% of shares shall be
allotted to mutual fund and insurance companies and in case they don’t
agree, then it should be allotted to other qualified institutional buyers.
The securities allotted under IPP shall not be sold by allottees with in
period of one year from the date of allotment except on recognised stock
exchange.

Pricing

The pricing of the PI shall be kept as follows –

In case shares are listed on stock exchange for a period of 26 weeks or

more from the relevant date, then the price of the issue shall not be less
than the higher of the following -
  The average of the weekly high and low of the closing prices of the
related shares quoted on the stock exchange during the 26 weeks
preceding the relevant date;

OR

 The average of the weekly high and low of the closing prices of the
related shares quoted on a stock exchange during the two weeks
preceding the relevant date.

In case shares are listed on stock exchange for a period less than 26
weeks from the relevant date, then the price of the issue shall not be less
than the higher of the following –

 The price at which shares were issued by the company in its IPO or
value as per scheme of reconstruction, merger & amalgamation as
defined under the Companies Act.

OR

 The average of the weekly high and low of the closing prices of the
related shares quoted on the stock exchange during the period
shares have been listed preceding the relevant date;

OR

 The average of the weekly high and low of the closing prices of the
related shares quoted on a stock exchange during the two weeks
preceding the relevant date.
In such cases, on completion of 6 months period, price of the shares are
recomputed based on 26 weeks pricing guidelines as mentioned above
and in case allottees are allotted shares at price less than the recomputed
price, then they are required to pay the difference.

An issue of shares on PI basis to Qualified Institutional Buyers not

exceeding five in numbers shall be made at a price not less than the
average of the weekly high and low of the closing prices of the related
shares quoted on a stock exchange during the two weeks preceding the
relevant date.

An issue of securities on QIP basis shall be made at a price not less than
the average of the weekly high and low of the closing prices of the
related shares quoted on a stock exchange during the two weeks
preceding the relevant date. This price is subject to adjustment in price
as mentioned SEBI (ICDR) Regulations.

Under IPP there is no restriction on pricing of the issue. The seller will
announce the price or price band at least one day prior to the opening of
the programme.

Relevant Date

Relevant date under PI means the date which is 30 days prior to the date
on which shareholders’ meeting is held or date of approval of package
under Corporate Debt Restructuring mechanism. In case of convertible
securities, the relevant date may be either 30 days prior to the date on
which shareholders’ meeting is held or a date 30 days prior to date on
which holders of securities become entitled to apply for equity shares.
However relevant date under QIP means the date of meeting of Borad of
Directors or Committee of Directors decides to open the proposed issue.
In case of convertible securities, the date on which holders of securities
become entitled to apply for equity shares.

Pricing on Conversion

In case the issuer company allots warrants or convertible instruments

under PI, then the Company may have any of the following option to
determine the price of shares allotted in lieu of instruments –

 At prices as mentioned under Pricing Para above based on relevant

date i.e. 30 days prior to date on which shareholders’ meeting is
held or
 Relevant date can be 30 days prior to date on which such
instruments are ready for conversion

However in QIP, the prices will be as defined under Pricing Para above
i.e. the date of meeting of Board of Directors/committee of directors
decide to open the issue or the date on which holders of securities
become entitled to apply for equity shares.

Currency of the Securities

The currency of warrants or convertible securities under PI shall not

exceed 18 months from the date of issue.

However under QIP, this duration should not exceed 60 months.

Shareholders’ Resolution
Shareholders’ resolution granting consent of PI shall be complied for
allotment of securities within period of 15 days from the date of such
passing or in case some approval from some authority is pending, then it
can be completed within 15 days from the date of such approval.

However under QIP, the allotment should be completed within 12

months from the date of such approval.

Number of Allottees

The minimum number of allottees under QIP shall be as follow –

1. Not less than two where the issue size is less than or equal to Rs.
250 crore.
2. Not less than five where the issue size is more than Rs. 250 crore.

However no single allottee shall be allotted more than 50% of issue size.

Under IPP, the minimum number of allottees for each offer of eligible
securities should not be less than ten and each allottee should not be
allotted more than 25% of the offer size.

Amount that can be raised

The aggregate of amount that can be raised in a financial year under QIP
can not exceed five times the net worth of the issuer of the previous
year.

Under IPP route, promoters can not dilute more than 10% of total share
capital or can dilute such less percentage to reach to minimum public
shareholding criteria.