Important Steps in a Public Issue:
The main steps of shares to the public through a prospectus involve the following steps:
1. Board Meeting: A meeting of the board of directors is called to discuss the public offer of shares.
2. Lead Manager(s): A merchant banker is appointed as the lead manager(s) who orchestrates the issue in consultation with the counseling purpose.
3. Co-managers: In case of requirement the lead manager may appoint co-managers to share the work.
4. Advisors: Also the lead manager may appoint advisors for counseling purpose.
5. Underwriters: Underwriting can be defined as, “an agreement between the capital issuing company and the underwriter(s), whereby the underwriters guarantee to subscribe the whole or part of the issued capital that would remain unsubscribed by the public, in consideration for a commission.”
Purpose of Underwriting:
The company may not be in the position to get full subscription for its capital issue. To protect its interest the company appoints underwriters. The underwriters guarantee minimum subscription or even entire share capital. If the amount of share capital remains unsubscribed, then it is the obligation of the underwriters to subscribe for the same.
At present the government rule is that the company has to get minimum 90% subscription, including the devolvement of underwriters and it must be received within 60 days from the close of public issue. If the minimum subscription is not obtained, the money received on application must be refunded to applicants, and not allotment can be made. The underwriting commission is fixed at 5 percent of the nominal value (including premium, if any) of the equity capital issued to the public.
6. Bankers: As per SEBI guidelines the bankers to the issue must collect the money, alongwith duly completed application form, on behalf of the company from the applicants.
7. Brokers and Principal Brokers: Members of recognized stock exchanges are appointed as brokers who inturn facilitate the subscription of the issue. Depending on the size of the issue a principal broker may be appointed to co-ordinate the work of brokers. In all types of public issues of industrial securities the applicable brokerage is 1.5 per cent whether the issue is underwritten or not. In case of managing brokers they can be paid a maximum remuneration of 0.5 percent of the nominal value of the capital issued to public.
8. Registers to the Issue: Appointment of Registrars to the issue is done in order to facilitate various post-issue tasks from the time the subscription is closed till the time allotment is made. They perform functions such as collection of application forms from the branches of the bankers, scrutiny of application forms, classifying and tabulation of data, financialisation of the basis of allotment, issue and dispatch of allotment letters, letter of regret, share certificates and refund orders. The compensation to the registrars is based on a piece-rate system and it depends on the number of applications received, number of unsuccessful applicants and the number of allottees.
9. Prospectus: Prospectus is an invitation to the public to subscribe to its shares/debentures. Once the draft prospectus is prepared it is sent to SEBI for vetting. Once SEBI has vetted it, then the draft prospectus and application form together with Articles and Memorandum of Association is forwarded to the stock exchange, for approval, where the issue is proposal to be listed.
10. Application to Stock Exchange to list shares: Before filing prospectus with the Registrar of Companies, the company should submit an application to the Stock Exchange(s) for enlistment of securities offered to the public by the said issue. The fact that an application has/have been made to the stock exchange must be stated in prospectus.
11. Registrar of Companies (ROC): On approval from the concerned stock exchanges and consent obtained from legal advisors, underwriters, bankers, auditors, registrars and others a copy of the prospectus duly signed by the directors, alongwith other required documents as listed out in the Companies Act, 1956 must be filed with the ROC.
12. Prospectus and Application Form: The company should print the prospectus and application form in the required quantities which will be sufficient to meet the requirements of brokers, bankers and underwriters. Also the company may print a publicity brochure which is a short attractive pamphlet highlighting the outstanding features of the issue. All these should be sent to the brokers and stock exchanges so that they receive them atleast 21 days before the first announcement in the newspapers. The brokers incur expenses in mailing to the potential investor’s prospectus, application form and brochure. The company may share this mailing cost on some suitable basis.
13. Initial Listing Application: The Company has to file the initial listing application alongwith the initial listing fees to the concerned stock exchanges, within 10 days of filing of the prospectus.
14. Promotional Campaign: Generally promotion of the issue begins with the filing of the prospectus with the ROC and ends with the release of the statutory announcement of the issue. In order to promote the issue conferences for investors, brokers and press is held by the company. Also in order to attract the potential investor’s advertisements are made in newspapers, televisions and periodicals.
15. Statutory Announcement: Atleast 10 days before the opening of the subscription list the statutory announcement of the issue has to be made after obtaining the approval of the lead stock exchange. The opening date and the closing date and the bank branches where the applications can be submitted by the potential investors are mentioned in this announcement as well as in the prospectus.
16. Subscription List: As stipulated by SEBI guidelines the subscription list for public issue is to be kept open for atleast 3 working days and for a total period of not exceeding 10 working days, which is to be disclosed in prospectus as well.
17. Collection of Applications: The bankers to the issue collect application money alongwith duly completed application forms on behalf of the company during the period when the subscription is kept open. The lead managers alongwith the registrars to the issue monitor the entire situation. When the information about the applications received in various categories suggests that the issue is over-subscribed, the company in consultation with the registrars and managers to the issue decides about closing the subscription. But this cannot be done before the minimum period for which the issue has to be kept open as prescribed by the stock exchanges.
18. Separate Bank Account: A SEPARATE Bank account is opened for the purpose of collecting the proceeds of the issue. Further, the date of opening and closing of the subscription list should be intimated to all the collecting and controlling branches of the bank with whom the company has entered into an agreement for the collection of application forms.
19. Processing of Application: After the receipt of the application forms from the bankers the registers to the issue scrutinize the applications. In this stage incomplete applications are rejected and the completed ones are sorted out, serially numbered and coding done for items like name of the applicant, broker, underwriter, occupation, etc. Then a list of applicants is prepared with all relevant details.
20. Minimum Subscription: As per the SEBI guidelines if the company does not receive a minimum of 90% of the issue amount from the public subscription including devolvement from underwriters within 120 days from the date of the issue, the amount of subscription received is required to be refunded to the applicants. In case of disputed devolvement also, subscription is required to be refunded 90% of the issued amount plus accepted devolvement from underwriters, if any is not received within 120 days of the issue of prospectus. All money received from the applicants for shares is required to be repaid forthwith without interest and if any such money is not so repaid forthwith without interest and if any such money is not so repaid in the next 10 days (after the expiry of 120 days), the directors of the company are jointly and severally liable to repay that money, with interest from the expiry of the 130 days.
The company should refund the amount within 10 weeks of the closing of the subscription list and pay interest, if refunds are delayed by more than 8 days after this periods.
21. Underwriters Liability: The liability of the underwriters has to be established in case the issue is undersubscribed. The following procedure is followed for that purpose:
a. First, segregate the applications which bear the stamp of an underwriter and the applications which do not bear the stamp of any underwriter. Find out the number of shares produced by each underwriter and carry the shares which do not bear the stamp of any underwriter to a general pool.
b. Compare the number of shares procured by each underwriter with his underwriting commitment. In case of excess than his underwriting commitment, carry the excess to the general pool. In case an underwriter has procured less shares than his underwriting commitment, determine his shortfall.
c. Finally, credit the total number of shares in the general pool to the underwriters with shortfall in proportion to their underwriting commitments and then find out the net shortfall of each underwriter who could not procure enough shares. This indicates the underwriter’s liability.
22. Allotment of Shares: The allotment has to be done as per SEBI guidelines.
Proportion of the Net Public Offer Reserved for Applications
One-half : upto 1,000 shares
Balance one-half : larger applications
The “proportionate” system of allotment has to be followed for each of these segments and the allotment formalities should be completed within 30 days after the subscription list is closed or such extended period as permitted by the lead stock exchange.
A return of allotment in Form no. 2 of the Companies (Central Government’s) General Rules and Form, 1956 should be filed with Registrar of Companies within 30 days of the date of allotment alongwith the fees payable, as prescribed in Schedule X of the Act.
In case, the issue is over-subscribed, the basis of allotment has to be decided in consultation with the stock exchange authorities as per the guidelines laid down by the stock exchanges.
23. Over Subscription: The over-subscribed amount should after the finalization of allotment, refunded to the applicants within 10 weeks of the closure of subscription list. If the money is not so refunded, the company is liable to refund the money with interest as specified from the expiry of the 8 days after 10 weeks of the closure of subscription list.
24. Compliance Report: As stipulated by SEBI guidelines within 45 days of the closure of issue, a report in the prescribed form alongwith a compliance certificate from statutory auditor/practicing chartered accountant or by a company secretary in practice is to be forwarded to SEBI by the lead managers.
25. Listing: A detailed listing application alongwith the listing agreement and the listing fees has to be submitted to the concerned stock exchanges for listing of the issue. The listing fees consists of two components i.e. initial listing fees and annual listing fees.
26. Issuance of share certificates: As per Section 113, the company should deliver the share certificate within 3 months after the allotment of shares.
Procedure for the Initial Public Offer (IPO) – A Birds Eye View:
A company proposing to raise resources by a public issue should first select the type of securities, i.e. share and/or debentures to be issued by it. The decision regarding the issue of shares to be made at par or premium should be decided keeping in view the SEBI guidelines.
The whole process of issue of shares can be divided into two parts:
1. Pre-issue activities, and
2. Post issue activities
All activities beginning with the planning of capital issues, till the opening of the subsequent to the opening of the subscription list may be called post-issued activities, while all activities subsequent to the opening of the subscription list may be called post-issue activities.
In short, if the company has satisfied the entry norms it should approach a merchant banker with whom Memorandum of Understanding (MOU) has to be executed. The merchant banker shall carry due diligence for all the information provided in the prospectus. The obligations are divided into pre-issue and post-issue which are as follows:
Pre-Issue Obligations (i.e. before the opening of issue):
1. Board Resolution for approving the draft prospectus and related resolutions.
2. Shareholder’s Resolution pursuant to Section 81(1A) of the Companies Act, 1956.
3. Filing of form 23 with ROC for passing special resolution for issuing shares as above.
4. Appointment of intermediaries and entering into MOU with them.
5. Due diligence by a merchant banker.
6. Submission of all required papers/documents with merchant bankers.
7. Preparation of draft prospectus in consultation with the merchant banker and submitting the same with SEBI alongwith the fees and other requirements and submitting the same with stock exchanges as per guidelines.
8. Receipt of queries from SEBI/stock exchanges, if any and make changes in prospectus, if required.
9. Reply to SEBI/stock exchanges in connection with changes in prospectus.
10. Obtaining in-principle approval from stock exchanges.
11. File final prospectus with SEBI/stock exchanges/ROC.
12. Statutory advertisements.
13. Submission of 1% Security Deposit with the Regional Stock Exchange.
14. Depositing Promoter’s Contribution in the issue in a separate bank account.
Post-issue Obligations (i.e. after the closure of issue):
15. Collection of application forms and processing the same at the Registrar and Share Transfer Agents office in consultation with the merchant banker.
16. Separate account to be opened for the applications received from public.
17. Submitting 3-day post-issue monitoring report with SEBI by merchant banker.
18. Basis of allotment in consultation with the regional stock exchange.
19. Post-Issue Advertisement.
20. Dispatch of share certificates/refund orders.
21. File Form No. 2 for Return of Allotment with ROC.
22. Entering into an listing agreement.
23. Obtaining permission from Stock Exchanges for listing and trading of securities.
24. Commencement of trading of securities.
25. 78-day post-issue monitoring report to be submitted by merchant banker with SEBI.
26. Redressal of Investors Grievances.
27. Application to SEBI/Stock Exchange for refund of security deposit.
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