Lesson 17

Issue Of Securities

Part II
 Procedure for Issue of Securities
• Applicable Law: SCRA 1956 and SEBI 1992
• Issue of shares to the public:
The primary things that are to be decided by the Company
before issuing securities are as follows:

– Type of security
– If any financial assistance if required
– If the securities are being issued at par or at premium.
Procedure of issue of securities:
• Compliance with SEBI regulations
• Holding of General meeting: Amending the AOA &
MOA if necessary for the authorised capital.
• Intimation to stock exchange: For approval to list
the securities
• Appointment of managers to the issue: Merchant
bankers.
• Appointment of various other agencies: Registrars
to the issue, collecting bankers, advisors, brokers,
underwriters, printers, advertising agents, etc..
• Drafting of the Prospectus: disclosures as required
by SEBI regulations
• Approval of Prospectus: by the solicitors/ legal
advisors, registrar SEBI. It sh. Have adhered to all the
applicable rules, regulations, notifications, etc..
– The MB to file an offer doc, along with the due diligence
certificate to SEBI in the form specified within 6 weeks
before the issue is scheduled to open for subscription.
– To ensure that MB holds a valid certificate of registration.
– Entered into a Memorandum of Understanding with the Co.
– To file the offer doc, MoU, Due Diligence report, in
accordance with SEBI (Merchant Bankers) Rules and
Regulation, 1992 to be filed with SEBI, 30 days prior to the
filing of prospectus with ROC.
– In principal approval from the stock exchanges to be
obtained and filed with SEBI within 30 days of filing of draft
offer doc with stock exchanges.
• Specified no of copies to be filed with the
regulators, and with their officers
• Draft offer doc to be made public for a period of 21
days from the date of filing with SEBI
• Public observations if any and to alter the
prospectus if necessary.
• SEBI shall specify changes within a period of 30 days
from the date of filing the draft prospectus.
• Once approved the respective offer doc to be filed
with the ROC, SEBI, Stock Exchanges.
• Approval of Board of Directors to prospectus and
other documents: appointment of underwriters,
approval of auditor’s report, date of opening of
subscription, and approval of the format for making
on the statutory announcements.
• Making application to St. Ex for permission to list
• Printing and distributing the prospectus and
application forms: The company to take steps to
issue prospectus within 90 days from the date of
registering it with the ROC, and Form 2 A (Salient
features of the prospectus) to be issued along with
the offer doc.
• Pricing
• Promoters contribution and lock in period
• Underwriting
• Collecting centers
• Certificate relating to promoter’s contribution
• Co-ordination with the bankers to the issue
• Minimum Subscription
• Allotment of shares
• Filing of forms with the ROC : Form 2, Form 3 (issue of
shares other than cash), form 4 (details of commission
payable on shares)
• Refund order
• Issue of share certificates: within 3 months from the
date of allotment.
 Reservation on Competitive Basis
• It means a reservation. Specified number Specified securities
are reserved for a particular category of persons and they are
issued on that basis.
• The foll. conditions are to be fulfilled:
– Total reservation for the employees shall be < 5% of issue size
– Reservation for shareholders shall be < 10%
– Persons in business relation to the company < 5% (depositors,
bondholders, etc..)
– Public appl. For subscription shall not be entertained. However an
employee and retail individual shareholder can.
– Any unsubscribed portion of one category can be added to an
other category. Therefore the inter-se adjustment is permitted.
– If the net offer to the public category is under-subscribed then the
spill over to the extent of under-subscription shall be permitted
from the reserved category to the net public offer category.
– Value of allotment to the employee shall not exceed Rs. 2 Lac.
 Issue of Securities by Small and
Medium Enterprises
• Provisions for listing of securities issued under
the SME platform have been made in
accordance with the Chapter XB of the Issue
of Capital and Disclosure Requirements
(ICDR).
• Applicability:
An issuer whose post-issue face value capital
does not exceed 25 crore rupees
• Min application value and number of
allottees:
– Min No of Specified securities - Rs.1 Lac per
application. (Application value)
– Min No of Prospective allottees - 50 (no of
allottees)
 Listing
• The company has to file an offer document with
SEBI through the Merchant Banker simultaneously
when he files the prospectus/ offer doc. with the
SME Exchange and ROC.
• The offer doc shall be available on the website of
SEBI, merchant banker, SME Exchange where the
securities would be listed.
• The securities are listed on the SME Exchange in
accordance with the provisions of SEBI ICDR Reg.
• In case of a listed co. the securities can be migrated
from the recognized st. ex where the securities are
listed to the SME Exchange.
• Migration to SME Exchange
• Criteria:
– The post issue face value capital < Rs. 25Crores
- The shareholders have passed a special resolution through
postal ballot
- The issuer to fulfill the eligibility criteria for listing.
- Votes For the proposal (2 times) : Votes Against the
proposal (1 times) 2:1

• Migration to Main Board

• Criteria:
– Securities to be listed on SME Exchange
– Post issue face value is > Rs. 10 Cr and < Rs. 25 Cr
–
 Migration to Main Board
• When the post issue face value capital is likely to
increase beyond Rs. 25 Crs due to further issue of
securities (Rights issue, Bonus issue, Preferential
issue, etc…. ) then the issuer shall migrate its
securities to Main Board.
• To migrate in the above said case the following has to
be fulfilled.
• Votes For the proposal (2 times) : Votes Against the
proposal (1 times) 2:1
• The issuers to have obtained in principal approval from the
Main Board for listing its securities.
 Underwriting obligation
• The issue shall be 100% underwritten
•The MB shall underwrite atleast 15% of
Appoints the issue size
Merchant
Banker (MB) •The MB shall fulfill the underwriting
obligation if the underwriters fail to do so
•MB to file an undertaking with SEBI that
Issuer 100% of the issue has been underwritten
Issuer + along with the list of underwriters +
MB nominated investors indicating the extent
of their commitment on day before the
appoint
opening of the issue.

•Underwriter’s shall underwrite incase of

under subscription only.
Underwriters
•All the underwriting and subscription
arrangements entered between the MB +
Issuers + Underwriters shall be disclosed in
the offer document.
 Market Making
• The MB shall ensure that there is compulsory market for a period of
3 yrs from the date of listing the specified securities.
• He shall enter into an agreement with the nominated investors for
receiving or delivering the securities in the market with prior
approval by SME exchange.
• As on the date of allotment the Market Maker (MM) shall have
atleast 5% of the securities proposed to be listed.
• When the contract size is lesser than the size that is permitted to be
traded on the SME Exchange then the MM shall buy the entire
securities in one lot. He shall further sell it in lots above the contract
size permitted for trading on the SME Exchange.
• He shall not buy the lots from the promoter or promoter group
during the compulsory market making period and if the securities are
in lock in period.
• As per the agreement between the issuer and MB, the MB who is
responsible for market making shall be represented on the Board of
the issuer.
 Employee Stock Option

• It is a benefit or a right to purchase or

subscribe the securities offered by the co at a
per determined price at a future date.
• SEBI (employee Stock Option Scheme and
Employee Stock Purchase Scheme) Guidelines
1999.
 Eligibility to Participate
• An employee is eligible to participate.
• If an employee is a director nominated by an
institution as its representative on the Board
– As per the agreement between the director and the
institution
– If the director is granted the option then, it shall not be
renounced in the favour of the institution.
– Only the director can accept the incentives,
commissions, etc..
• A Director is not eligible to participate if he directly
or indirectly holds more than 10% of the
outstanding eq. sh of the Company.
 ROUTES OF ESOP

Trust Route Direct Route

 TRUST ROUTE

SEBI (Prohibition of Fraudulent and Unfair Trade

Practices relating to the Securities Market)
Regulations, 2003 and SEBI (Prohibition of Insider
Trading) Regulations, 1992.

(“SEBI”) issued a circular on January 17, 20131

(“Circular”) to amend the SEBI (Employee Stock Option
Scheme and Employee Stock Purchase Scheme)
Guidelines, 1999 (“ESOP Guidelines”) and the Equity
Listing Agreement
DIRECT ROUTE
 Compensation Committee
• The disclosure as specified in schedule IV are
required to be given to the prospective option
guarantees.
• Constitution of the Compensation Committee by
the Board.
• The committee shall consist of a majority of
independent directors.
• The committee shall formulate the scheme
containing the following:
– Quantum of the option to be granted
– Conditions on termination
 – The period within which the employees are to exercise
the option
– The right of an employee to exercise all the options
– The procedure for making a fair and reasonable
adjustment to the number of options .
• The number and price of the ESOPS shall be adjusted in such a
manner that the total value of the ESOPS shall remain the
same.
• To follow the best global practices.
• Option to be exercised by employees who are on
long leave.
• Procedure for cashless options
• Suitable policies to be framed to adher to the
applicable laws.
• Shareholder’s Approval
• Special Resolution
• Explanatory Statement
• Separate resolution is required if:
– The option is to the employees of the holding/ subsidiary
company
– Grant of option to identified employees, during any one yr is
equal to or exceeds 1% of the issued capital.
• Variation of terms of ESOPS
• There can be no variations in terms of ESOPS that are
detrimental to the interests of the employees.
• However, if such variations is not prejudicial then it can
be done on passing a Sp. Resl. In the general meeting.
• Pricing:
– To be done as per the accounting policies.
– Can be either face value method or intrinsic value of the
securities. These details shall be disclosed in the
Directors’ Report
• Lock in period and rights of the option holder
– Min 1 yr
– In case of merger, amalgamation or arrangement.
• Consequence of failure to exercise option
– The company can forfeit the option
– Refund to the employees
• Non Transferability of option:
– Can not be pledged,hypothecated, mortgaged and so on.
– In case of death the legal heirs shall hold it till such date.
• Disclosures in the Directors’ Report
– Pricing formulae
– Options vested and exercised.
– Total no of shares issued
– Variation in terms of the option
– Money realised by exercise of option.
– Employee wise details of the options granted.
– EPS
• Accounting Policies.
• Certificate from Auditors
– To be presented at the AGM confirming that the
guidelines and the applicable rules, and laws have been
adhered to by the Company.
Employee Stock Purchase Scheme
• Eligible:
– Permanent employee of the company. ( including
holding & subsidiary co)
– Director of the Co
– Employee should neither be an employee nor to
belong to the promoter group.
– Director who either by himself or thru his relatives
hold more than 10% of the outstanding eq share
can not participate.
• Shareholder’s approval.
– To pass a special resolution
– Explanatory statement
– No of shares to be offered to different categories of
employees
– A Separate resolution is to be obtained if:
• The option is to the employees of the holding/ subsidiary company
• Grant of option to identified employees, during any one yr is equal
to or exceeds 1% of the issued capital.
• Pricing and lock in period:
– Pricing to be done as per the accounting policies
– Lock in period is for a Min of 1 yr
– If shares are issued to the employees at the same price as in
the public issue then they are not subject to any lock in
period.
• Disclosures and accounting policies:
– Directors’ Report to contain the following:
• Details of the no of shares issued in the scheme
• Price at which such shares are issued
• Employee wise details of the shares issued
• EPS details
• Consideration received.
• Listing:
– To obtain in principal approval from st.ex to notify the
issue of ESOPS/ ESPS to the st. ex
– The shares issued after the ESOPS/ ESPS/ IPO to be listed
– No listed co shall make ESOS prior to its IPO and prior to
the listing of its equity shares unless the pre- IPO
scheme is in conformity with the guidelines
– No change shall be made in terms of options issued
under such pre- IPO scheme.
– Notes to accounts to contain the details of the cost
involved in issuing this scheme.
– MB to be appointed for framing the ESOP/ ESPS.
 Qualified Institutions Placement
• Eligibility:
– Eligible securities include equity shares, non-
convertible debt instruments along with warrants
and convertible securities other than warrants.
– Eg. MF, venture capital fund, Foreign Institutional
Investors, Public Financial Investors, etc..
Conditions for making QIP
• Special resolution. The equity shares of the same
class of shares that are being issued to be listed for
a minimum period of 1 yr.
• Incase of merger/ amalgamation, the transferor
company to have been listed for the said period.
• To maintain the min public shareholding as required
under the listing agreement
• The resolution to specify the relevant date and the
other information as are required for the QIP.
Intermediaries involved
MB to file a due diligence certificate regarding
Placement Documents:
• It is a doc prepared by the MB.
• It contains all the relevant information relating to
the QIP.
• It is to be issued to the QIB
• In principal approval from the stock exchanges is to
be obtained to furnish the same to the QIB
• It would be available on the website of the issuer
and the concerned stock exchanges
The time period for filing the placement doc with the
SEBI: 30 days from the date of allotment.
• Pricing:
– To be not less than the average weekly high and low closing
price of the equity shares of the same class listed on the st ex
during the 2 weeks preceding the relevant date.
Issue of partly paid up securities:
• The partly paid up securities can not be alloted.
• However the non convertible debt instrument can be
alloted on payment of full consideration or part
consideration.
Restriction on allotment:
• Min 10% to be alloted to MF.
• Can not be alloted to promoter or relative of a
promoter
• Minimum Number of allottees:
– If the size of the issue if less than Rs. 250 Crs then min 2
allottees.
– If the size of the issue if more than 250 Crs then Min 5
allottees.
• Validity of the special resolution:
– The resolution passed for the QIP is 12 months. There
should be a gap of min 6 months between 2 QIP.
• Tenure:
– The tenure of the convertible or exchangeable securities
issued through QIP shall not be more than 60 months.
• Transferability of securities:
– Restricted for a period of 1 yr.
 Qualified Placement Programme
• It means a further public offer of eligible
securities by an eligible seller in which the
offer, allocation and allotment of such
securities is made only to qualified
institutional buyers.
• Conditions:
– Special resolution
– Partly paid up securities can not be offered.
– In principle approval to be obtained from st.ex
• Appointment of MB
– Offer doc
• Material information
• Offer doc to be filed with the ROC
• To be issued to the SEBI
• To be available on the website of Stock exchanges
• Due diligence certificate to be filed.
– Pricing and allocation / allotment
– Floor price/ price brand to be issued alteast 1 day prior
to the opening of the QPP.
– Allotment to be made on proportionate basis, price
priority basis, or on basis as mentioned in the offer doc.
• Restrictions
– Promoters/ promoter group offering their securities
should not have dealt with his securities 12 weeks prior
to the issue and 12 weeks after the QPP.
– Min 25% to have been allotted to MF and Insurance
companies
– To accept bids using the ASBA facility only. (Application
Supported by Blocked Amount)
• Restriction on size of the offer:
– The public shareholding to be a min of 10%
• Period of subscription:
– The issue shall be kept open for a period of 1 day and a
max of 2 days.
– Aggregate demand shall be displayed in the St. ex before
disclosing the price.
• Withdrawal of Offer:
– If it is not fully subscribed.
• Transferability of eligible securities
– Not permitted for a period of 1 yr.
Thank You

Questions?