REGULATION OF IPOS: CHANGES OVER THE YEARS

SUBMITTED BY AJIT KUMAR SHARMA (1303), [B.A.L.L.B. (HONS.)]

SUBMITTED TO MR. SHANTANU BRAJ CHOUBEY, Teacher Associate

AUGUST 2018

SESSION 2015-2020

CHANAKYA NATIONAL LAW UNIVERSITY

NYAYA NAGAR, MITHAPUR

PATNA
 ACKNOWLEDGEMENT
Writing a project is one of the most difficult academic challenges I have ever faced. Though this
project has been presented by me but there are many people who remained in veil, who gave
their support and helped me to complete this project.

First of all I am very grateful to my subject teacher Mr. Shantanu Braj Choubey without the kind
support of whom and help the completion of the project would have been a herculean task for
me. He took out time from his busy schedule to help me to complete this project and suggested
me from where and how to collect data.

I acknowledge my friends who gave their valuable and meticulous advice which was very useful
and could not be ignored in writing the project. I want to convey most sincere thanks to my
faculties for helping me throughout the project.

Thereafter, I would also like to express my gratitude towards our seniors who played a vital role
in the compilation of this research work.

I would also like to express my gratitude towards the library staff of my college which assisted
me in acquiring the sources necessary for the compilation of my project.

Last, but not the least, I would like to thank the Almighty for obvious reasons.

AJIT KUMAR SHARMA

Roll No. -1303

 DECLARATION
I hereby declare that the work reported in the BA LL.B (Hons.) Project Report entitled
“Regulation Of Ipos: Changes Over The Years” submitted at Chanakya National Law
University, Patna is an authentic record of my work carried out under the supervision of Mr.
Shantanu Braj Choubey. I have not submitted this work elsewhere for any other degree or
diploma. I am fully responsible for the contents of my Project Report.

AJIT KUMAR SHARMA Signature of the student

Roll No. -1303 ……………………….

CONTENTS
ACKNOWLEDGEMENT.................................................................................................................2

DECLARATION..............................................................................................................................3

INTRODUCTION............................................................................................................................5

AIMS & OBJECTIVES...............................................................................................................7

HYPOTHESIS.............................................................................................................................7

RESEARCH METHODOLOGY.................................................................................................7

SOURCES OF DATA.................................................................................................................7

LIMITATIONS OF STUDY.......................................................................................................7

INITIAL PUBLIC OFFER: PRE AND POST SEBI REGULATION...............................................8

BENEFITS FOR PRIVATE COMPANIES IN ISSUING IPO:...................................................12

DISADVANTAGES OF ISSUING IPO......................................................................................12

CONCLUSION..............................................................................................................................14

BIBLIOGRAPHY...........................................................................................................................16
 INTRODUCTION
In the primary market a corporate company may raise its capital by way of issuing an initial
public offer, rights issue or private placement. An Initial Public Offer (IPO) is the process of
selling of securities in the primary market to the public. It is the largest source of funds with long
or indefinite maturity for the company. Requirement of funds in order to finance the business
activities motivates small entrepreneurs to approach the new issue market. Initial Public Offer is
a process by which company raise its capital from investors to meet the expenses for its projects
and to get a global exposure by listed in the Stock Exchange. It is the selling of securities to the
public in the primary stock market. Money raises by company through IPO is also called as
company ‘going public'.

IPO gives a chance to investor to buy shares of a company, directly from the company at the
price of their choice. Sometime there may be a situation where there is a difference between the
price at which companies decides for their shares and the price on which investor are willing to
buy shares and that gives good listing gain for shares allocated to the investor in IPO. IPO’s
helps company to identify their real value which is decided by millions of investors once their
shares are listed on stock exchanges. IPO's is also beneficial for future growth or for paying their
previous debt.

“An initial public offering, referred to simply as an "offering" or "flotation", is when a company
(called the issuer) issues common stock or shares to the public for the first time.”

This is the tool for the younger company to expand their capital by issuing the IPO but it can also
be done by private company who are looking for publicly traded.

When a company lists its securities on a public exchange, the money paid by investors for the
newly-issued shares goes directly to the company. An IPO, therefore, allows a company to tap a
wide pool of investors to provide it with capital for future growth, repayment of debt or working
capital. IPO can be used as both a financing strategy and an exit strategy. In a financing strategy
the main purpose of the IPO is to raise funds for the company. In an exit strategy for existing
investors, IPOs may be used to offload equity holdings to the public through a public issue. A
company selling common shares is never required to repay the capital to investors. Once a
company is listed, it is able to issue additional common shares via a secondary offering, thereby
again providing itself with capital for expansion without incurring any debt. This ability to
quickly raise large amounts of capital from the market is a key reason many companies seek to
go public.
 AIMS & OBJECTIVES
The researcher has done the research:

 To study the regulation of IPO (pre and post of SEBI regulation).

 To study the advantage and disadvantage of IPOs.

HYPOTHESIS
The researcher comes with a hypothesis that the IPOs is a process which plays a important role
for a country in their economic growth.

RESEARCH METHODOLOGY
 The researcher has emphasized and used the doctrinal method to do this project.

SOURCES OF DATA
Primary sources Secondary sources

Legislative provisions Books

Case laws Websites

LIMITATIONS OF STUDY
The researcher had following limitations:

 The researcher was bound by the time (1 month) to do the research.

 The researcher was confined to the doctrinal mode of research.

 INITIAL PUBLIC OFFER: PRE AND POST SEBI REGULATION
SEBI was established on April 12, 1992 in accordance with the provisions of the Securities and
Exchange Board of India Act, 1992. But, before this act came into the existence the market is
govern and regulated by the Controller of Capital issues was established via Capital Issues
Control act in 1947. The Government appointed the A. D. Gorwala Committee in 1951 to
formulate legislation for the regulation of the stock exchanges and of contracts in securities.
Following the recommendations of the Committee, the SCRA was enacted in 1956 to provide for
direct and indirect control of virtually all aspects of securities market trading and the day to day
operation of stock exchanges and to prevent undesirable transactions in securities. It had
undergone several modifications since its enactment and given the Central Government
regulatory jurisdiction over (a) stock exchanges through a process of recognition and continued
supervision, (b) contracts in securities, and (c) listing of securities on stock exchanges. CCI was
governed by bureaucrats who did not have much knowledge, experience and understanding
about the stock market and they even did not have much idea about how the stock markets
should be run. They didn’t have the experience or expertise of businessmen, financiers or even
economists.

That time like all other civil servants, they did not get a good paid from the government which
opens the scope to corruption. This thing was hampering the growth of capital markets and
business in general and the GOI was worried about this situation and that leads to the re-establish
a new institution which will help India Inc. and the capital markets to grow substantially. There
were need a permission of government for any activity that also hinder the market. As
liberalization, globalization takes place then this act did compete with market and that’s leads to
the formation of SEBI.

In the year of 1991 new economic policy was introduce in the market. The mandate was to
protect the interest of the cross-section of investors by ensuring compliance to rules and
regulation in order to systematically develop the capital market. The legal reforms began with
the enactment of the Securities and Exchange Board of India Act, 1992, which established the
Securities and Exchange Board of India (SEBI) with statutory responsibilities to (i) protect the
interest of investors in securities especially the vulnerable small retail investors, (ii) promote the
systematic development of the securities market, and (iii) regulate the securities market so that
the menace of malpractices and scam could be handled properly and can easily be diagnosed
before having any spiraling effect.

Since then the issuers of securities could raise the capital from the market without requiring any
consent from any authority either for making the issue or for pricing it. Restrictions on rights and
bonus issues have also been removed. New as well as established companies are now able to
price their issues according to their assessment of market conditions.

However, issuers of capital are required to meet the guidelines of SEBI on disclosure and
investor protection. Companies issuing capital are required to make sufficient disclosures,
including justification of the issue price and also material disclosure about the ‘risk factors’ in
their offering prospectus. The formation of SEBI was with the aim to protect the interests of both
the investors and the issuers by ensuring fair dealings and proper functioning of capital market.
This was done by promoting transparency.

Shares can be acquired through the primary market or secondary market In the primary market,
as seen earlier, shares are acquired directly from the company.1

This can be through:

i. Private placement when shares are privately offered to promoters, related parties or
investment institutions at a price negotiated between the parties.
ii. Initial Public Of when shares are offered to the public for the first time. Securities and
Exchange Board of India (SEBI) has set detailed guidelines for issue of shares to the
public. This includes mandatory disclosures. When shares are offered to the public, it is
referred to as a float. Pricing of IPO is generally decided by investment bankers in
consultation with the company. The offer can also be made on book building basis, where
a price range is pre-specified, but final pricing is decided based on investors' response to
the issue. In a book-built issue, the investors indicate how many shares they are willing to
acquire at what price.
iii. Public issue is when shares are offered to the public post-IPO. Pricing is similar to IPO
pricing.

1
Indian Institute Of Banking & Finance,” securities market and product” New Delhi: Taxman, 2nd edition 2007.
 iv. Rights issue where existing investors are entitled to buy additional shares on a pro rata
basis for a price.
v. Bonus/stock split where existing investors get additional shares free of cost.

When the shares are acquired through a transaction in the stock market, it is a secondary market
activity. When a company's shares can be traded in the stock exchange, it is said to be a listed
company.

Public Issue

SEBI's Guidelines for disclosure and investor protection are applicable to issues of capital to the
public. In a two-pronged approach, SEBI seeks to ensure that:

♦ Only credible companies with a track record are permitted to mobilize money from the public.

♦ Investors have all the information that is required to take a balanced view on whether or not to
invest in the company.

The price at which the shares would be offered to the public is left to be decided between the
company and the investment banker it appoints for the issue. Justification for the pricing would
be given in the Offer Document/Letter of Offer.

When an offer document is submitted to SEBI, it is put up on their website. This becomes a
public document that anyone can download and comment on. SEBI has a 21 working day
window to review the Offer Document. This process is called "vetting", based on which SEBI
would give its 'observations". The observations would need to be incorporated in the Offer
Document that is issued to the public. SEBI however does not approve Offer Documents.
Therefore, the Offer Documents have a mandatory "Disclaimer Certificate that mentions that
SEBI has neither approved nor disapproved the Offer Document.

SEBI is responsible for the entry norms of a Public Issue, which it does through SEBI
(Disclosure for Investor and Protection) Guidelines, 2000. SEBI, has to amend these norms to
suffice the present requirement of time by upholding the principles of transparency and investors
protection for the development of capital market.
 Some of the restrictions imposed by SEBI for IPO that is issue by unlisted company are2:

i. Pre-issue net worth of the company needs to be at least Rs. 1 crore. This condition has to
be fulfilled in the immediately preceding two years. Further, the net worth condition has
to be met in at least 3 out of the 5 years preceding the issue. This keeps out of the market,
companies that are too small.
ii. The company should have distributable profits in at least three out of the preceding five
years. The requirement is distributable profits i.e. the company should have been in a
position to declare a dividend, though it may not have declared one. Thus, the companies
tapping the public would have a track record of profits.
iii. The issue size viz. the amount proposed to be mobilized through the Offer Document
should not exceed 5 times the company's pre-issue net worth. For this purpose, the issue
size would include amount proposed to be mobilized from the public, as well as firm
allotments in favour of specific investors as part of the issue and contribution to the issue
from the promoters. This ensures that issues are not disproportionate to the existing size
of operations of the companies.

If these conditions are not fulfilled, the company can still make an IPO. However, it would need
to be made through a book-building process. Where pricing is determined based on market
response to the issue, and the company would compulsorily allot 60% of the issue to qualified
institutional buyers.

Some other IPO pre-conditions are:3

i. At least 20% of the post-issue capital would have to be offered to the public. This is to
ensure reasonable liquidity in the company's shares when it goes public.
ii. The minimum contribution of promoters would be locked in i.e. the promoters cannot
dispose of that portion of their holding, for 3 years. Further, promoters' share holding in
excess of the minimum contribution, would be locked in for 1 year.
iii. The entire pre-issue share capital and shares issued on firm allotment basis along with the
issue would need to be locked in for 1 year.

2
Securities And Exchange Board Of India (Disclosure And Investor Protection) Guidelines, 2000.
3
id
Section 81 of the Companies Act gives a pre-emptive right to existing shareholders.
Accordingly, a company can issue shares to investors other than existing investors, only if the
existing shareholders pass a special resolution authorizing such issue. Special resolution means
that the number of shareholders (shares) that support the resolution is more than thrice the
number of shareholders (shares) that oppose the resolution.

BENEFITS FOR PRIVATE COMPANIES IN ISSUING IPO :

i. Capital Raising - One of the most beneficial aspects of IPO is raising fund through
issuing of more stocks. The very purpose of raising capital may vary from the expansion
of the company to paying off the existing debts.
ii. Getting listed on the stock exchange create a sense of trust in the company as a private
company has to comply with various disclosure agreements and are answerable to their
shareholders thus it helps them to attract various investors like the hedge funds which
further helps them in attracting more capital.
iii. Exit Strategy for venture capitalist- Many a time venture capitalist invest in a private
company, which may turn out to be million or billion dollars worth company in future,
but it’s not easy to sell shares when a company remains private as compared to a public
company. Thus, IPO becomes an exit strategy for such venture capitalist to have access to
their wealth.
iv. Enables better valuation of the company.
v. Increasing the visibility and reputation of the company, which is essential in today‟s
business environment. It is easy to spot the listed company thanks to the bandwagon
effect of various agencies tracking the capital market.
vi. It gives the company ample choices to utilise the funds. For example, the company can
offer its share as purchase consideration or as an exchange for the shares of another
company.

DISADVANTAGES OF ISSUING IPO

i. Disclosures are most important aspects in issuing IPO because it helps the investor to
make informed investment decisions. But many a times the information or disclosures
provided in the IPO prospectus may not be adequate and may be selective disclosure
 which can be used by the insiders of the company to make money, jeopardizing the
public investment.
ii. The burden of extra cost for the company to look into the accounting, auditing, preparing
of Draft Red Herring Prospectus, Also, the burden to keep in account assuring that all the
information so provided in the prospectus are true, as strict penalties may be charged by
SEBI.
iii. Loss of privacy is also there- The registration and subsequent reporting requires
disclosure of many facets of companies‟ business operations and finances that may have
never been published before. Some sensitive areas of disclosure that will be available to
competitors, customers and employees are compensation given to managers and directors
including stock option plan and cash compensation, the shareholding of the directors,
managers etc. And the extensive financial reporting such as sales, net profit, major
customers, cash flow etc.
 CONCLUSION
It is well recognized that a developed capital market helps in generating more economic benefits
including higher productivity, greater employment opportunities, and improved macroeconomic
stability. The major driver of economic growth and development of a nation is its capital market.
It impacts the economy by providing financial resources through its intermediation process for
financing of long-term capital. Without an efficient vibrant capital market, it is widely believed,
the economy may be starved of the required long-term capital fund for sustainable growth. The
capital market acts as an intermediary in promoting growth with efficiency through the
mobilization and incentivisation of savings and capital formation.

The lack of depth in our domestic capital markets was one of the major impediments that have
hindered India’s drive to increase the level and efficient usage of domestic savings and
investments to achieve economic growth. During the last decade, it is observed that a large
number of companies have raised huge sums of money as capital by issuing equity shares
through IPO (Initial Public Offering) process.

An IPO is the first public offer of securities by a company since its inception, with the
expectation that gradually a liquid market would develop. Although an IPO can be issued both
for debt or equity. An IPO is referred to the selling of securities to the public through the primary
market. It is regarded as the largest source of funds for the companies with long or indefinite
maturity period. It is seen that most of the companies have started out to raise the corpus of
equity funds from a close group of people. Therefore, the company’s need for additional capital
can only be met by issuing shares to a large number of diversified investors through the IPO
process.

As in India IPOs process is passed through different governing bodies. Earlier it was govern by
the capital issue control act and after that this act was repealed and abolished because as the time
passes this act is not capable to compete with the new market regime. SEBI was introduced in
the year 1992 with a purpose to the increase the economic and capital market of India. As
economy is the base of every country for their development. So like other developed national
India government also very much concern with the economic development of the country. So
from this researcher came to a conclusion that the hypothesis of the researcher is prove right that
IPOs plays the important role in the country development as IPOs is a process through which
company increase their capital and their business expands and if the corporate sector of a any
country will get strong then it is obvious that economic of that country will also increase and will
moves towards the development.
 BIBLIOGRAPHY

PRIMARY SOURCES

STATUTES

 The Companies Act, 2013.

 The Companies Rules, 2013.
 The Securities And Exchange Board Of India Act, 1992.
 Capital Issues Control Act In 1947.
 Securities contracts (regulation) rules 1957.

SECONDARY SOURCES

BOOK

 Kapoor, Dr. G. K. & Dhamija, Dr. Sanjay. Company Law, New Delhi: Taxman, 21 st ed., 2018.

 Singh, Avtar. Company Law, Lucknow: Eastern Book Company, 2nd ed., 2016.

 Indian Institute of Banking & Finance,” securities market and product” New Delhi: Taxman, 2nd
edition 2007.

WEBSITES
 https://www.sebi.gov.in/sebi_data/attachdocs/1290060398656.pdf
 https://www.bseindia.com/downloads/ipo/20158510342IM%20Concrete.pdf
 https://www.sebi.gov.in/acts/act02c.pdf
 https://www.legalcrystal.com/act/133210/capital-issues-control-act-1947-complete-act