6680769 New Issues SEBI Guideline

8/4/2019 6680769 New Issues SEBI Guideline

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SEBI (Disclosure and InvestorProtection){ DIP} Guidelines,2000

updated till June10, 2007

Kumar [email protected]

09810452266
mailto:[email protected]:[email protected]


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Section AReview of Eligibility Norms

The amendments inter-alia include:

introduction of Net Tangible Assets and

minimum number of allottees asadditional criterion,

appraisal route as an alternative to themandatory book building route etc.


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Section BReview of Book Building guidelines

The companies have now been given aflexibility of indicating a movable priceband or a fixed floor price in Red Herring

prospectus, Definition of QIBs has been enlarged to

include Insurance companies, Providentand Pension funds with minimum corpus ofRs. 25 crores.

Further operational guidelines are amendedthus shortening the interregnum betweenthe closure of issue and listing/ trading ofsecurities to T+6 (T stands for date of

closure of issue)


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Section CIntroduction of Green Shoe Option

Green Shoe option means an option of allocatingshares in excess of the shares included in thepublic issue. It is extensively used ininternational IPOs as stabilization tool for postlisting price of the newly issued shares.

It is being introduced in the Indian CapitalMarket in the initial public offerings using bookbuilding method.

It is expected to boost investors confidence byarresting the speculative forces which workimmediately after the listing and thus results inshort-term volatility in post listing price.


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Section DReview of disclosure requirements

in the offer documents

The amendments under this sectioninteralia include full disclosure about

the promoters including theirphotograph, PAN number etc,classification of risk factors, use ofstandard financial units etc.


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Section EReview of requirements pertaining to issueof Debt Instruments

The amendments under this section inter-alia include prohibition on a willful defaulterto make a debt issue, requirement of

investment grade credit rating for making adebt issue, relaxation in the existingprovisions of promoters contribution in IPOof debt issue etc. The amendments have

been carried out at relevant places in SEBI(DIP) Guidelines, 2000,


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Section FModifications pursuant to amendments carried out on30/06/2003, in SEBI (Employee Stock Option andEmployee Stock Purchase Scheme) Guidelines, 1999

The amendments are mainly aboutrelaxation in the provisions of lock-in forthe pre-IPO shares held by employees,which were issued under employee stockOption or employee stock purchase scheme

of the issuer company before the IPO,inclusion of provision of existing clauses ofSEBI (ESOP & ESPS) guidelines in SEBI(DIP) guidelines 2000


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Section GAmendments pursuant to withdrawal of the concept ofRegional Stock Exchange by Ministry of Finance (MOF),

Govt. of India, vide its circular dated 23/4/2003.

On April 23, 2003, Ministry of Finance

(MOF) issued a circular therebywithdrawing the concept of regionalstock exchange. Pursuant to theaforesaid circular, amendments havebeen carried out in SEBI (DIP)guidelines 2000 at the relevant places


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Section HReview of Operational/Procedural Requirements

The amendments under this sectioninteralia include reducing the validityperiod of SEBIs observation letter to6 months from 365 days, demarkingthe responsibilities of lead managers,defining associate etc.


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Section IMiscellaneous Amendments

This section contains amendments tovarious other provisions of SEBI (DIP)Guidelines, 2000.


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Section A Review of Eligibility Norms

An unlisted companymay make an initial publicoffering (IPO) of equity shares or any other securitywhich may be converted into or exchanged with equityshares at a later date, only if it meets all the followingconditions:

(a)The company has net tangible assets of at least Rs. 3

crore in each of the preceding 3 full years (of 12 monthseach), of which not more than 50% is held in monetaryassets:Provided that if more than 50% of the net tangible assetsare held in monetary assets, the company has made firmcommitments to deploy such excess monetary assets in itsbusiness/project;

(b)The company has a track record of distributable profitsin terms of section 205 of the Companies Act, 1956, for atleast three (3) out of immediately preceding five (5)years; Provided further that extra ordinary items shall notbe considered for calculating distributable profits in termsof Section 205 of Companies Act, 1956.


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c) The company has a net worth of at least Rs. 1crore in each of the preceding 3 full years (of 12months each);

(d) In case the company has changed its namewithin the last one year, at least 50% of therevenue for the preceding 1 full year is earned bythe company from the activity suggested by thenew name; and

(e) The aggregate of the proposed issue and allprevious issues made in the same financial year interms of size (i.e. offer through offer document +

firm allotment + promoters contribution throughthe offer document), does not exceed five (5)times its pre-issue net worth as per the auditedbalance sheet of the last financial year.

A li t d


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An unlisted company not complying with any of theconditions specified above may make an initial publicoffering (IPO) of equity shares or any other security whichmay be converted into or exchanged with equity shares ata later date, only if it meets both the conditions (a) and (b)

given below: (a) (i)The issue is made through the book-buildingprocess, with at least 50% of the issue size beingallotted to the Qualified Institutional Buyers (QIBs),failing which the full subscription monies shall berefunded.

OR

(a)(ii)The project has at least 15% participationby Financial Institutions/ Scheduled CommercialBanks, of which at least 10% comes from the

appraiser(s). In addition to this, at least 10% of theissue size shall be allotted to QIBs, failing whichthe full subscription monies shall be refunded


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AND (b) (i) The minimum post-issue face value capital

of the company shall be Rs. 10 crore

OR (b) (ii) There shall be a compulsory market-

making for at least 2 years from the date of listingof the shares subject to the followings.

Market makers undertake to offer buy andsell quotes for a minimum depth of 300

shares; Market makers undertake to ensure that the

bid-ask spread (difference betweenquotations for sale and purchase) for theirquotes shall not at any time exceed 10%:

The inventory of the market makers on eachof such stock exchanges, as on the date ofallotment of securities, shall be at least 5%of the proposed issue of the company


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An unlisted public company shall notmake an allotment pursuant to a public

issue or offer for sale of equity sharesor any security convertible into equityshares unless in addition to satisfyingthe conditions mentioned above (both)

the prospective allottees are not lessthan one thousand (1000) in number.


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A listed company shall be eligible to make apublic issue of equity shares or any other security whichmay be converted into or exchanged with equity sharesat a later date.

Provided that the aggregate of the proposed issue andall previous issues made in the same financial year interms of size (i.e. offer through offer document + firmallotment + promoters contribution through the offerdocument), issue size does not exceed 5 times its pre-

issue networth as per the audited balance sheet of thelast financial year.

Provided that in case there is a change in the name ofthe issuer company within the last 1 year (reckonedfrom the date of filing of the offer document), therevenue accounted for by the activity suggested by thenew name is not less than 50% of its total revenue inthe preceding 1 full-year period


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A listed company which does not fulfillthe conditions given in the provisosabove, shall be eligible to make a

public issue subject to complying withthe conditions the prospective allotteesare not less than one thousand (1000)

in number.


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IPO Grading

The grade assigned by a Credit RatingAgency registered with SEBI, to the initialpublic offering (IPO) of equity shares or anyother security which may be converted intoor exchanged with equity shares at a laterdate.

The grade represents a relative assessmentof the fundamentals of that issue in relation

to the other listed equity securities in India. Such grading is generally assigned on a

five-point point scale


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IPO grade 1: Poor fundamentals

IPO grade 2: Below-average

fundamentals IPO grade 3:Average fundamentals

IPO grade 4:Above-averagefundamentals

IPO grade 5: Strong fundamentals


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IPO grading has been introduced as an endeavor tomake additional information available for the investorsin order to facilitate their assessment of equity issuesoffered through an IPO.

IPO grading can be done either before filing the draftoffer documents with SEBI or thereafter. However,the Prospectus/Red Herring Prospectus, as the casemay be, must contain the grade/s given to the IPO byall CRAs approached by the company for grading suchIPO.

IPO grading is not optional. A company which hasfiled the draft offer document for its IPO with SEBI, onor after 1st May, 2007, is required to obtain a gradefor the IPO from at least one CRA.


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IPO grade/s cannot be rejected.Irrespective of whether the issuer finds thegrade given by the rating agencyacceptable or not, the grade has to bedisclosed as required under the DIPGuidelines. However the issuer has theoption of opting for another grading by adifferent agency. In such an event all

grades obtained for the IPO will have to bedisclosed in the offer documents,advertisements etc.


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the factors - evaluated to assess the fundamentals

of the issue while arriving at the IPO grade

Business Prospects and Competitive Position

Industry Prospects

Company Prospects

Financial Position

Management Quality Corporate Governance Practices

Compliance and Litigation History

New ProjectsRisks and Prospects

It may be noted that the above is only indicative ofsome of the factors considered in the IPO gradingprocess and may vary on a case to case basis.


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IPO grading is done without taking intoaccount the price at which the security isoffered in the IPO. Since IPO grading doesnot consider the issue price, the investor

needs to make an independent judgmentregarding the price at which to bidfor/subscribe to the shares offered throughthe IPO.

SEBI does not play any role in the

assessment made by the grading agency.The grading is intended to be anindependent and unbiased opinion of thatagency.


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Book Building Process

This is a process of discovering the price

The bidder can make three bids in theprescribed application form and can also reviseor withdraw his bid before the close of the offer

Individual in single or joint names, HUFs, bodycorporate, banks and financial institutions, MFs,NRIs, Insurance Cos, VCF etc can apply for theissues

T0 helps the retail individual investors SEBI

has made a provision of reservation for them.Retail individual investor means an investorwho apples of bids for securities of or for a valueof not more than Rs. 1 L


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Issues remain open for at least 3working days and not move than 10working days.

Right issues are kept open for at least30 days and not more than 60 days

The retail investors get on a certain

discount (5%) the cut-off price


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In case of 100% book buildingprocess-

not less than 35% of the net offer to thepublic shall be available for allocation toretail individual investors.

Not less than 15%of the net offer to thepublic shall be available for allocation tonon institutional investors i.e. investorsother than retail individual investors andqualified institutional buyers.

Not more than 50% of the net offer to thepublic shall be available for allocation toqualified institutional buyers.

In case an issuer company make an issue of 75%


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In case an issuer company make an issue of 75%of the net offer to public through Book buildingprocess and 25% at the price determinationthrough Book building.

The option of book-building shall be available to all bodycorporate which are otherwise eligible to make an issue ofcapital to the public.

The book-building facility shall be available as analternative to, and to the extent of the percentage of the

issue which can be reserved for firm allotment, as perthese Guidelines.

The issuer company shall have an option of either reservingthe securities for firm allotment or issuing the securitiesthrough book building process.

The issue of securities through book-building process shall

be separately identified / indicated as 'placement portioncategory', in the prospectus.

The securities available to the public shall be separatelyidentified as 'net offer to the public'.


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In the book built portion, not less than 25% of thenet offer to the public, shall be available forallocation to non Qualified Institutional Buyers andnot more than 50% of the net offer to the publicshall be available for allocation to QualifiedInstitutional Buyers.

The balance 25% of the net offer to the publicoffered at a price determined through bookbuilding, shall be available only to retail individualinvestors who have either not participated or havenot received any allocation, in the book builtportion.

Even if a person has bid at higher price than thediscovered price (cut off price) The allotment tothat person will take place at discovered price.


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Some facts

In case of fixed price issues, the investor isinformed about the allotment refund within30 days of the closure of the issue.

In case of book built issues, the basis of

allotment is finalized by the book runninglead managers within 2 weeks from thedate of the closure of the issue.

The registrar then ensures that dematcredit or refund as applicable is completedwithin 15 days of the closure of the issue.

The listing on the stock exchanges is donewithin 7 days from the finalization of theissue.


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Reverse Book Building(Delisting of shares)

The Reverse Book Building is a mechanism provided forcapturing the sell orders on online basis from the shareholders through respective Book Running Lead Managers(BRLMs) which can be used by companies intending todelist its shares through buy back process.

In the Reverse Book Building scenario, the Acquirer /Company offers to buy back shares from the shareholders.

The Reverse Book Building is basically a process used forefficient price discovery.

It is a mechanism where, during the period for which theReverse Book Building is open, offers are collected from

the share holders at various prices, which are above orequal to the floor price. The buy back price is determined after the offer closing

date


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NSE Reverse Book Building System

NSE uses the reverse book building system; a fullyautomated screen based bidding system that allowsoffers to run in several issues concurrently.

The system has the facility of defining a hierarchy

amongst the users of the system. The Book Running Lead Manager can define who

will be the Syndicate member and who will be theother members participating in the issue.

The Syndicate Member and other Members alsohave a facility of defining a hierarchy among theusers of the system as Corporate Manager, BranchManager and Dealer.


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Greenshoe Option

A greenshoe option is a clause containedin the underwriting agreement of an initialpublic offering (IPO). The green shoe option,which is also often referred to as an over-

allotment provision, allows the underwritingsyndicate to buy up to an additional 15% ofthe shares at the offering price if publicdemand for the shares exceeds expectationsand the stock trades above its offering price.

The GreenShoe Company was the firstissuer to allow the over-allotment option toits underwriters, hence the name.
http://www.streetauthority.com/terms/glossary.asphttp://www.streetauthority.com/terms/glossary.asphttp://www.streetauthority.com/terms/glossary.asphttp://www.streetauthority.com/terms/glossary.asphttp://www.streetauthority.com/terms/glossary.asp


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The greenshoe option provides extraincentive for the underwriters of a newstock offering. In addition, these

investment banks, brokerages and otherfinancing parties also often exercise thegreenshoe option to cover some of theshort position they may have created in an

effort to maintain a stable market after anew stock begins to trade, as well as tomeet aftermarket demand.

GREENSHOE OPTION


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GREENSHOE OPTION

An issuer company making a public offer ofequity shares can avail of the GreenShoeOption (GSO) for stabilizing the post listingprice of its shares

A company desirous of availing the option shallin the resolution of the general meetingauthorizing the public issue, seek authorization

also for the possibility of allotment of furthershares to the stabilizing agent (SA) at the endof the stabilization period


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The company shall appoint one of the(merchant bankers or Book Runners, as thecase may be, from amongst) the issuemanagement team, as the stabilizing

agent (SA), who will be responsible for theprice stabilization process, if required. The SA shall enter into an agreement with

the issuer company, prior to filing of offerdocument with SEBI, clearly stating all the

terms and conditions relating to this optionincluding fees charged / expenses to beincurred by SA for this purpose.


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The SA shall also enter into an agreement withthe promoter(s) or pre-issue shareholders whowill lend their shares specifying the maximumnumber of shares that may be borrowed fromthe promoters or the shareholders, which shallnot be in excess of 15% of the total issue size.)

Lead merchant banker or the Lead Book Runner,in consultation with the SA, shall determine the

amount of shares to be over-allotted with thepublic issue, subject to the maximum numberspecified


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In case of an initial public offer by a unlistedcompany, the promoters and pre-issueshareholders and in case of public issue by alisted company, the promoters and pre- issue

shareholders holding more than 5% shares,may lend the shares The SA shall borrow shares from the promoters

or the pre-issue shareholders of the issuercompany or both, to the extent of the proposed

over-allotment Provided that the sharesreferred to in this clause shall be indematerialized form only.)


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The allocation of these shares shall be pro-rata to all theapplicants.

The stabilization mechanism shall be available for theperiod disclosed by the company in the prospectus, whichshall not exceed 30 days from the date when tradingpermission was given by the exchange(s).

The SA shall open a special account with a bank to be calledthe Special Account for GSO proceeds of _____ company

(hereinafter referred to as the GSO Bank account) and aspecial account for securities with a depository participantto be called the Special Account for GSO shares ofcompany (hereinafter referred to as the GSO DematAccount).

The money received from the applicants against the overallotment in the green shoe option shall be kept in the GSOBank Account, distinct from the issue account and shall beused for the purpose of buying shares from the market,during the stabilization period.


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The shares bought from the market by the SA, ifany during the stabilization period, shall becredited to the GSO Demat Account.

The shares bought from the market and lying in

the GSO Demat Account shall be returned to thepromoters immediately. In any case not later than2 working days after the close of the stabilizationperiod.

On expiry of the stabilization period, in case the SA

does not buy shares to the extent of shares over-allotted by the company from the market, theissuer company shall allot shares to the extent ofthe shortfall in dematerialized form to the GSODemat Account, within five days of the closure of

the stabilization period


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These shares shall be returned to thepromoters by the SA in lieu of theshares borrowed from them and the

GSO Demat Account shall be closedthereafter.


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How it works: the example A company intends to sell 1 million shares of their

stock in a public offering through an investmentbanking firm (or group of firms which are known asthe syndicate) whom the company has chosen to bethe offering's underwriter(s)

When a public offering trades below its offeringprice, the offering is said to have "broke issue" or"broke syndicate bid".

This creates the perception of an unstable orundesirable offering, which can lead to further

selling and hesitant buying of the shares. To manage this possible situation, the underwriter

initially oversells ("shorts") to their clients theoffering by an additional 15% of the offering size.
http://en.wikipedia.org/wiki/Short_%28finance%29http://en.wikipedia.org/wiki/Short_%28finance%29


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the underwriter would sell 1.15 million sharesof stock to their clients.

Now when the offering is priced and those 1.15million shares are "effective" (become eligible

for public trading), the underwriter is able tosupport and stabilize the offering price bid(which is also known as the "syndicate bid") bybuying back the extra 15% of shares (150,000shares in this example) at the offering price.

They are able to do this without having toassume the market risk of being long this extra15% of shares in their own account, as theyare simply "covering" (closing out) their 15%oversell short.


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The circumstance of utilizing the"GreenShoe" is as follows

If the offering is successful and is in strongdemand such that the price of the stockimmediately goes up and stays above theoffering price, then the underwriter is left in

the circumstance of having oversold theoffering by 15% and is now technicallyshort those shares.

If they were to go into the open market tobuy back that 15% of shares, the company

would be buying back those shares at ahigher price than it sold them at, and wouldincur a loss on the transaction.


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the over-allotment (Green Shoe)option comes into play:

the company grants the underwriters the option topurchase from the company up to 15% of additionalshares than the original offering size at the offeringprice.

Now, if the underwriters were able to buy back all of

its oversold shares at the offering price in support ofthe deal, they would not need to exercise any of theGreen Shoe.

But if they were only able to buy back some of theshares before the stock went higher, then they wouldexercise a partial Green Shoe for the rest of the

shares. And, if they were not able to buy back any of the

oversold 15% of shares at the offering price("syndicate bid") because the stock immediately wentand stayed up, then they would be able to completelycover their 15% short position by exercising the full

Green Shoe.


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The green shoe buoy for public issues

April 02, 2004 (Business Standard)

S Ramachandra lost heavily in IBP'sdivestment issue. Allotted 300 shares at Rs620, Ramachandra decided to cut his losses

as price of the scrip started to plummet. He sold his shares at Rs 565, making a loss

of about nine per cent. His elder sonreacted much slower, and sold his 200

shares at a price of Rs 529, ending up witha loss of over 14 per cent against theallotment price.


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He had little option but to sell the shares sincehe had availed of a bank loan in order tosubscribe to the issue. Banks today lendingagainst shares charge an interest of about 10-

12 per cent. Sonia Singh, another retail investor also lostout in the recent government's divestmentprogramme when she invested in 500 sharesof CMC at an offer price of Rs 485 per share.

The price of this scrip is today trading wellbelow the issue price at Rs 474, though it hadbeen listed higher and was ruling at about Rs494 in mid-March. While Singh continues tohold on to her investment, she feels let down.


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For the first time in the Indian stock market,an issuer has decided to protect investorinterest.

ICICI Bank is the first entity to offer "comfort

to investors since the Securities and ExchangeBoard of India (Sebi) regulations have allowedfor the greenshoe option," said the bank'sdeputy managing director Kalpana Morparia.

ICICI Bank's Rs 3,050 crore (Rs 30.50 billion)

public issue which opened on Friday in a priceband of Rs 255-295, is seen to be aggressivelypriced -- when one considers the current shareof Rs 295.9 hovering near the book-buildingprice band.


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However, the management has decided tobe more proactive in the interest ofinvestors by offering the greenshoe option

of Rs 450 crore (Rs 4.50 billion) in ICICIBank's public issue, which will be used tostabilise the share price if warranted.

"If the Sensex falls the price of the scrip

will equally fall. The greenshoe option thusacts as a safety net for investors and is astandard global practice," said Morparia.


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Given the size of the issue, price volatility inICICI Bank scrip is expected.

DSP Merrill Lynch Ltd will act as thestabilising agent to buy the bank's shares

whenever the price falls below the issue levelfor a period of one month post-allotment ortill the shares up to the value of Rs 450 croreunder the greenshoe option are exhausted.

Greenshoe is a provision that enables the

underwriting syndicate to purchase additionalshares at the original price, which will beused by them in the event of the marketprice falling below the allotment price.


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So how does the mechanism operate in theinterest of investors? The Life Insurance Corporation of India,

currently holding 7.98 per cent stake in the

private sector bank, will lend shares worth Rs450 crore to DSP Merrill Lynch.

The funds will be kept in an escrow account tobe used by the stabilising agent for buyingshares in the secondary market.

This secondary market intervention will continuefor a period of one month after listing orwhenever the amount of Rs 450 crore isexhausted, said DSP Merrill Lynch head ofcorporate finance Sanjay Sharma.


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So where does that leave retail investors?

The green shoe "safety net" is likely to give"comfort" to retail investors and encourage theirresponse as there is an assurance that the offerprice will be maintained for a period of onemonth.

Globally investment banks win business not onlyon the strength of the banking team or trackrecord, but also on their willingness to committhe firm's capital in the aftermath of the issue.

Their role then is to provide support by buyingunwanted shares. Hence the key behindeffective underwriting is to ensure heavydemand among those investors who failed to getallotment.


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Reverse Greenshoe

A Reverse Greenshoe is a special provision in anIPOprospectus, which allows underwriters to sellshares back to the issuer.

If a 'regular' greenshoe option is, in fact, a calloption written by the issuer for the underwriters, a

reverse green shoe is a put option. Reverse greenshoe has exactly the same effect on

the share price as a traditional option but isstructured differently.

It is used to support the share price in the event

that the share price falls in the post-IPOaftermarket.

In this case, the underwriter buys shares in theopen market and then sells them back to theissuer, stabilizing the share price.
http://en.wikipedia.org/wiki/Provisionhttp://en.wikipedia.org/wiki/IPOhttp://en.wikipedia.org/wiki/Prospectushttp://en.wikipedia.org/wiki/Greenshoe_optionhttp://en.wikipedia.org/wiki/Call_optionhttp://en.wikipedia.org/wiki/Call_optionhttp://en.wikipedia.org/wiki/Put_optionhttp://en.wikipedia.org/wiki/Put_optionhttp://en.wikipedia.org/wiki/Call_optionhttp://en.wikipedia.org/wiki/Call_optionhttp://en.wikipedia.org/wiki/Greenshoe_optionhttp://en.wikipedia.org/wiki/Prospectushttp://en.wikipedia.org/wiki/IPOhttp://en.wikipedia.org/wiki/Provision


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Anil has shot three birdsin a single shot,

killed the primary market,killed the secondary marketand

sucked liquidity out of the system,

which the RBI Governor is not ableto do.


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Any Question

Thank you

6680769 New Issues SEBI Guideline

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Transcript of 6680769 New Issues SEBI Guideline