Issue of Securities 22/10/2020 11:15-12:30 The apex body regulating the Indian securities market and the companies raising finance from it is the Securities and Exchange Board of India (SEBI). Since the Capital Issues Control Act, 1947, was repealed in May, 1992, SEBI was given the statutory power to regulate the Securities Market. * Primarily, issues made by an Indian company can be classified as Public, Rights, Bonus and Private Placement. While right issues by a listed company and public issues involve a detailed procedure, bonus issues and private placements are relatively simpler. A firm can raise capital from the primary market by issuing securities in the following ways. a) Public issue (i) Initial Public offer (IPO) (ii) Further Public offer (FPO) b) Rights issue c) Composite issue d) Bonus issue e) Private placement (i) Preferential issue (ii) Qualified institutional placement (iii) Institutional Placement Program = When an issue/offer of shares or convertible securities is made to new investors for becoming part of shareholders’ family of the issuer (Entity making an issue is referred as “Issuer”) it is called a public issue. = Public issue can be further classified into Initial public offer (IPO) and Further public offer (FPO). The significant features of each type of public issue are illustrated below:(i) Initial public offer (IPO): = When an unlisted company makes either a fresh issue of shares or convertible securities or offers its existing shares or convertible securities for sale or both for the first time to the public, it is called an IPO. = This paves way for listing and trading of the issuer’s shares or convertible securities on the Stock Exchanges. (ii) Further public offer (FPO) or Follow on offer: = When an already listed company makes either a fresh issue of shares or convertible securities to the public or an offer for sale to the public, it is called a FPO. = When an issue of shares or convertible securities is made by an issuer to its existing shareholders as on a particular date fixed by the issuer (i.e. record date), it is called a rights issue. = The rights are offered in a particular ratio to the number of shares or convertible securities held as on the record date. Ex-rights Value of a Share: The value of a share, after the rights issue, is y= MaPot Nas N,+No Where, V = ex-rights price per share N, = number of outstanding/existing shares Po = cum-rights price per share Nz = number of right shares bought S = subscription price at which rights shares are issued If a company issues one share for every 3 shares held at a price of Rs.25 per share, and the existing price is Rs.30 per share, the ex-rights price of the share would be_ (3+30)+(4425) _ _ 341 ~ Vv (90+25)/4=28.75 Ex-rights value of right share = Rs.28.75 per share. Theoretical value of a right = P) — V = 30 — 28.75 = Rs.1.25 Alternatively, NoPy—N2S _ Na(Po—S) _ 1*@0-25)_5_ 40. “M+N, M+N,. #4341 #4 Consider the following data of ABC Limited. No. of shares outstanding (N,) = 10,00,000 Current market price (Pp) = Rs.40 Capital requirement by company = 40,00,000 Rights issue price (S) = Rs.20 Additional shares to be issued = 4000000/20=200000 shares As each ordinary share has 1 right, there shall be 10,00,000 rights. Existing shares _ 1000000 _ The number of rights required to buy 1 share = New shares Zo0000 = This implies that an existing shareholder should have 5 rights and Rs.20 to buy a new share. Ve NyPot+N2S N,+N2 vy ={20400.000e40) +(2,00,000220) __ 400,00,000440.00.000 _ 36 cece (o7)36,67 (20,00,000+2,00,000) 12,00,000 Theoretical value of a right = Pp) — V = 40 — 36.67 = Rs.3.33Alternatively, N2Po—N2S _ N2(Po—S) _ 2,00,000* (40-20) 10 = => = 3.33 N, + Np N; + Nz 10,00,000 + 2,00,000 3 So, share price will decrease by Rs.3.33 after rights issue. Cum-rights price = 40 Ex-rights price = 36.67 Decrease in price = 3.33 Consider a shareholder is holding 100 shares of ABC Limited and the company has decided to issue rights shares on 5:1 basis. In this context, the shareholder has three options: 1. Exercise the rights 2. Sell the rights 3. Do not exercise or sell the rights i.e., allows the rights to expire The decision taken by the shareholder is going to have an impact on his/her wealth. Case-1: Exercise the rights Present market value of 100 shares (@ Rs.40) = 4000 Additional price paid for 20 right shares on 5:1 basis (@ Rs.20) = 400 Total investment made by the shareholder = 4400 No. of shares he/she holds after rights issue = 120 Ex-rights value of a share = 36.67 Market value of his/her shares after rights issue (36.67*120) = 4400 Hence, there is no change in the wealth of shareholder post-rights issue. Case-2: Sell the rights Present market value of 100 shares (@ Rs.40) = 4000 Value realized by sale of 100 rights (@ Rs.3.33) = 333 Net investment value after rights issue = 3667 Market value of his/her shares after rights issue (36.67*100) = 3667 Hence, there is no change in the wealth of shareholder post-rights issue.Case-3: Allows the rights to expire Present market value of 100 shares (@ Rs.40) = 4000 Market value of his/her shares after rights issue (36.67*100) = 3667 Change in wealth of shareholder post-rights issue = (333) = When the issue of shares or convertible securities by a listed issuer on public cum-rights basis, wherein the allotment in both public issue and rights issue is proposed to be made simultaneously, it is called composite issue. = When an issuer makes an issue of shares to its existing shareholders without any consideration based on the number of shares already held by them as ona record date it is called a bonus issue. = The shares are issued out of the company’s free reserve or share premium account in a particular ratio to the number of securities held on a record date. When an issuer makes an issue of shares or convertible securities to a select group of persons not exceeding 49, and which is neither a rights issue nor a public issue, it is called a private placement. The private placement method of financing involves direct selling of securities to a limited number of institutional or high net worth investors. This avoids the delay involved in going public and also reduces the expenses involved in a public issue. The company appoints a merchant banker to network with the institutional investors and negotiate the price of the issue. The major advantage of privately placing the securities are: - Easy access to any company - Fewer procedural formalities - Lower issue cost - Access to funds is faster* Private placement of shares or convertible securities by listed issuer can be of three types: (i) Preferential allotment: = When a listed issuer issues shares or convertible securities, to a select group of persons in terms of provisions of Chapter VII of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, it is called a preferential allotment. = The issuer is required to comply with various provisions which inter-alia include pricing, disclosures in the notice, lock-in period etc, in addition to the requirements specified in the Companies Act. Conditions for preferential issue: 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 as specified in the listing agreement with the recognised stock exchange where the equity shares of the issuer are listed; (d) the issuer has obtained the Permanent Account Number of the proposed allottees. - The issuer shall not make preferential issue of specified securities to any person who has sold any equity shares of the issuer during the six months preceding the relevant date. Pricing of equity shares: If the equity shares of the issuer have been listed on a recognised stock exchange for a period of six months or more as on the relevant date, the equity shares shall be allotted at a price not less than higher of the following: (a) 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 six months preceding the relevant date; or (b) 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 two weeks preceding the relevant date. = Disclosures:- The issuer shall, in addition to the disclosures required under section 173 of the Companies Act, 1956 or any other applicable law, disclose the following in the explanatory statement to the notice for the general meeting proposed for passing special resolution: (a) the objects of the preferential issue; (b) the proposal of the promoters, directors or key management personnel of the issuer to subscribe to the offer; (c) the shareholding pattern of the issuer before and after the preferential issue; (d) the time within which the preferential issue shall be completed; (e) the identity of the proposed allottees, the percentage of post preferential issue capital that may be held by them and change in control, if any, in the issuer consequent to the preferential issue; (f) an undertaking that the issuer shall re-compute the price of the specified securities in terms of the provision of these regulations where it is required to do so; (g) an undertaking that if the amount payable on account of the re- computation of price is not paid within the time stipulated in these regulations, the specified securities shall continue to be locked-in till the time such amount is paid by the allottees. Lock-in of 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 three 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: o Provided that not more than twenty percent of the total capital of the issuer shall be locked-in for three years from the date of allotment: o Provided further that equity shares allotted in excess of the twenty per cent shall be locked-in for one year from the date of their allotment pursuant to exercise of options or otherwise, as the case may be. - The specified securities allotted on preferential basis to persons other than promoter and promoter group and the equity shares allotted pursuant toexercise of options attached to warrants issued on preferential basis to such persons shall be locked in for a period of one year from the date of their allotment. (ii) Qualified institutions placement (QIP): When a listed issuer issues equity shares or non-convertible debt instruments along with warrants and convertible securities other than warrants to Qualified Institutions Buyers only, in terms of provisions of Chapter VIII of SEBI (ICDR) Regulations, 2009, it is called a QIP. Conditions for qualified institutions placement. A listed issuer may make qualified institutions placement if it satisfies the following conditions: (a) a special resolution approving the qualified institutions placement has been passed by its shareholders; (b) the equity shares of the same class, which are proposed to be allotted through qualified institutions placement or pursuant to conversion or exchange of eligible securities offered through qualified institutions placement, have been listed on a recognised stock exchange having nation wide trading terminal for a period of at least one year prior to the date of issuance of notice to its shareholders for convening the meeting to pass the special resolution: (c) it is in compliance with the requirement of minimum public shareholding specified in the listing agreement with the stock exchange; (d) In the special resolution, it shall be, among other relevant matters, specified that the allotment is proposed to be made through qualified institutions placement and the relevant date (either 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 issue of such convertible securities or the date on which the holders of such convertible securities become entitled to apply for the equity shares). Pricing: Where eligible securities are convertible into or exchangeable with equity shares of the issuer, the issuer shall determine the price of such equity shares allotted pursuant to such conversion or exchange taking therelevant date as decided and disclosed by it while passing the special resolution. - The issuer shall not allot partly paid up eligible securities: © Provided that in case of allotment of non convertible debt instruments along with warrants, the allottees may pay the full consideration or part thereof payable with respect to warrants, at the time of allotment of such warrants. (iii) Institutional Placement Program (IPP): = When a listed issuer makes a further public offer of equity shares, or offer for sale of shares by promoter/promoter group of listed issuer in which the offer, allocation and allotment of such shares is made only to qualified institutional buyers in terms Chapter VIII A of SEBI (ICDR) Regulations, 2009 for the purpose of achieving minimum public shareholding, it is called an IPP. Conditions for qualified institutions placement. A listed issuer may make qualified institutions placement if it satisfies the following conditions: (a) a special resolution approving the qualified institutions placement has been passed by its shareholders; (b) the equity shares of the same class, which are proposed to be allotted through qualified institutions placement or pursuant to conversion or exchange of eligible securities offered through qualified institutions placement, have been listed on a recognised stock exchange having nation wide trading terminal for a period of at least one year prior to the date of issuance of notice to its shareholders for convening the meeting to pass the special resolution: (c) it is in compliance with the requirement of minimum public shareholding specified in the listing agreement with the stock exchange; (d) In the special resolution, it shall be, among other relevant matters, specified that the allotment is proposed to be made through qualified institutions placement and the relevant date (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).Pricing: 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 two weeks preceding the relevant date. The issuer shall not allot partly paid up eligible securities: o Provided further that on allotment of equity shares on exercise of options attached to warrants, such equity shares shall be fully paid up. The prices determined for qualified institutions placement shall be subject to appropriate adjustments if the issuer: (a) makes an issue of equity shares by way of capitalization of profits or reserves, other than by way of a dividend on shares; (b) makes a rights issue of equity shares; (c) consolidates its outstanding equity shares into a smaller number of shares; (d) divides its outstanding equity shares including by way of stock split; (e) re-classifies any of its equity shares into other securities of the issuer; (f) is involved in such other similar events or circumstances, which in the opinion of the concerned stock exchange, requires adjustments. Common regulation(s) for both QIP and IPP: Restrictions on allotment: Allotment under the qualified institutions placement shall be made subject to the following conditions: (a) Minimum of ten per cent 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; (b) 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. Restrictions on amount raised: The aggregate of the proposed qualified institutions placement and all previous qualified institutions placements made by the issuer in the same