CORPORATE FUNDRAISING

(PUBLIC)
HOW DOES A COMPANY RAISE MONEY?

Shares

Fundraising Debt

Asset Sale
HOW DOES A COMPANY RAISE MONEY? (II)

Equity
Equity Issue of shares
Preference
Institutional
Fundraising Finance
Debt Convertible
Debt Securities
Asset Sale Non Convertible
FUNDRAISING BY ISSUING SHARES/
CONVERTIBLES

Equity Shares

Convertible
Shares
Preference Shares

Convertible Debt
BROAD CLASSIFICATION OF FUNDRAISING
• Pvt Co; Pvt • Public Co;
Placement Pvt
Placement

Section
PIPE
42

IPO FPO

• Pvt Co; Public • Public Co;

Offer Public
Offer
 LIFE CYCLE OF A COMPANY (PRIVATE)

Initial Public
Offering
3rd party late/ mature
stage investment -
Round 3/ Series C
3rd party (hedge fund/ private
intermediate/ growth equity/ investment
stage investment - bank)
3rd party early stage Round 2 / Series B
investment - Round (angel investor/ VC)
1/ Series A (venture
Private Company capital)
(closely held)
 LIFE CYCLE OF A COMPANY (PUBLIC)

Delisting

Takeover

Further Offerrings
• Public investment Round
2 (FPO)
Public investment • Private Investment in
Round 1 (IPO) Public Equity (PIPE)
• Overseas investment
(ADR/ GDR/ FCCB)
 ALLOTMENT OF SHARES

• Section 62 – Company may make a further offer of securities to

• Existing shareholders (Rights Issue)
• Employees - Special resolution required
• Third parties - Special resolution required
• Irrespective of Private Placement or Public Offer
 PRIVATE PLACEMENT TO MORE THAN 50
PERSONS – THE SAHARA SAGA
• Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing
Investment Corporation Limited (SHICL) raised Rs. 176.56 billion, from about 30
million investors
• Securities offered were called Optionally Fully Convertible Debentures (OFCDs) on a
private placement basis
• SEBI investigated and passed an order to refund the money to investors and prohibited
Sahara from raising any further capital
• Sahara appealed to SAT
 SAHARA’S CONTENTIONS

• The raising of funds through issue of OFCDs was by way of private placement to
persons who were associated with Sahara Group and those issues were not public
issues
• Private placement to friends, associates, group companies, workers/employees and other
individuals associated/affiliated with Sahara Group, without giving any advertisement to the
public

• The OFCDs issued were in the nature of “hybrid” as defined under the
Companies Act and SEBI did not have jurisdiction to administer those securities
 SEBI’S CONTENTIONS

• Issuance of OFCD was made to more than 50 investors and therefore

securities were liable to be listed on a recognized stock exchange under
Section 73 of Companies Act
• SEBI had powers under Section 55A to administer issue of securities to
public
• SEBI analysed and concluded that OFCDs are indeed securities
• Transferable hence marketable
 SAT AND SUPREME COURT

• When the above securities are offered to more than 50 persons it is to be considered as a
public issue
• Accordingly, SEBI has jurisdiction as per Section 55A (Companies Act, 1956) in the
matter of unlisted public companies
• Supreme Court concluded that Sahara knowingly issued securities by way of private
placement in order to diminish various laws and regulation
• Asked SEBI to probe into the matter and find out the actual investors who had
subscribed to the OFCDs
 POST SUPREME COURT JUDGMENT

• Sahara must now refund the monies to the investors through SEBI
• Sahara says that it will do the refund itself and show proof of such
refund
• Violation of Supreme Court order
• Subroto Roy and other directors held in contempt and imprisoned

• Section 42
 STATUTORY REQUIREMENTS
(SECTION 42 AKA THE SAHARA CLAUSE)

• Deems any issue of shares/ offer of shares/ invitation to offer shares

in excess of 50 persons in a financial year to be a public issue
• Later increased to 200 under Rule 14 of the Companies (Prospectus
and Allotment of Securities) Rules 2014
• Does not include qualified institutional buyers, or to employees of
the company under a scheme of employees’ stock option 
 DEFINING THE SECURITIES MARKET

Companies

Selling
Merchant Banks Brokers Issuers
Shareholders
Intermediaries
Financial
Auditors Clearing Houses
Institutions (MFs)
SEBI
Qualified Inst
Buyers

Buyers HNIs

Retail Investors
 REGULATORY MECHANISMS

• Eligibility Criteria
• Negative controls
• Disclosures
• Pre-issue (Offer Document)
• Post-issue continuous
• Process
 DUE DILIGENCE V DISCLOSURES

• Who should be responsible for disclosure of information?

• Issuer?
• Investor?
• Role of Disclosures
• Reduce information asymmetry
• Arrive at a fair price for shares
• Allow investors to decide whether or not to invest in a company
• Disclosures are contained in the offer document
• Red Herring Prospectus/ Letter of Offer/ Placement Document
 KEY CONCEPTS

• Minimum Offer to Public • Allocations

• Eligibility Criteria • Promoters Contribution
• Underwriting • Pricing
• Minimum Subscription
 MINIMUM OFFER TO PUBLIC
Shareholding
• Securities Contract Regulation Rules 1957
• Based on post issue paid up share capital Public
25%
• Less than 1600 cr - 25% of the post issue paid up share
capital
• Between 1600 cr and 4000 cr - Such number of shares
that amount to 400 cr
• More than 4000 cr – 10%
• More than 100,000 cr – 5% (LIC)
• But, increase to 25% within three years of listing (five Pro-
moter/
non-pub-
years for LIC) lic
75%
• Continuous Listing requirement of 25%
 ELIGIBILITY CRITERIA

Performance Route Market (QIB) Route

Net tangible assets of at least 3 Cr

Average operating profit of at Atleast 75% of the Net Offer to

least 15 Cr  Public must be sold to QIBs

Net worth of at least 1 Cr 

 MINIMUM SUBSCRIPTION

• Minimum offer to public – 10% to 25% of the post issue paid up

share capital (Securities Contract Regulation Rules 1957)
• A public offer is said to have failed when-
• If public subscription is less than 90%; OR
• In case of issue under the market route, if QIBs subscribe to less than 75%
 UNDERWRITING

• Process by which financial institutions take on the risk of the public offer
• Underwriters guarantee that the shares offered to the public will be sold at a
minimum price
• If not, underwriters are required to purchase the shares in their own name
 RESERVATIONS AND ALLOCATIONS

• Reservations available to Offer to Public = Reservations

+ Net Offer
• Employees (upto 5%)
• Shareholders of listed subs and
promoter companies (upto 10%)

• Net offer to public

• Remaining shares after reservations Net Offer to Public
 SUB ALLOCATIONS IN NET OFFER TO
PUBLIC
Performance Route Market (QIB) Route
RIs
HNIs
10%
15%
HNIs
15%

QIBs
- not more
than 50%

RIs
35% QIBs - atleast
75%

QIBs HNIs RIs QIBs HNIs RIs

SUB-ALLOCATION FOR QIBS

Offer to Public Others

35%

Net Offer to Public

QIBs
Anchor
60%
Mutual funds
5%
Anchor
Investors
Anchor Mutual funds Others
 PROMOTERS’ LOCK IN

Public
25%
Promoter (6 month Lock In)
31%

Inst Inv (6 month lock in

Promoter (1.5 yr lock in)
24%
20%
 PRICING
Cap Price (greater than 5% of
the Floor Price but less than
1.2 x the Floor Price)
Price Band

Floor Price

Employee/ RI discount (upto 10%)