LAB Project

Legal Aspects of IPO

(Synopsis)

Section B Group 1

Group Members:
11DM-030 Chandana Mandal 11FN-131 Anjali Agrawal 11FN-050 Kapil Jain 11IT-016 Kashish Sethi 11DM-056 Kaustav Chattopadhyay 11DM-061 Lanka Anirudh

Abstract
The need of financial capital grows with a growth in business and at a certain stage it becomes necessary to raise a large amount of financial capital to expand. The most popular method of raising money from the general public and investors is IPO (Initial Public Offer). It is the first instance of the company offering its common stocks to the general public for subscription. A company may procure the support of the countersigned enterprise, which assists in establishing what kind of security to issue, competitive offering cost and the period in which it should be launched in market. An IPO is not always successful and can be an unsafe venture for it is tough for an investor to predict how the stock or share will perform on its first trading day and afterwards. In addition to IPO, an already listed and publicly traded company may issue FPO Follow on Public Offer to raise further capital for the company. There are many legal controls on the initial public offering (IPO) process. The governing body in India for IPO is SEBI (Securities and Exchange Board of India). Company has to comply with the legal obligations to shareholders before and after the initial public offering has been made, which is governed by SEBI. The issuance of IPO is a process involving various stages and a complete study will be done of the whole process.

Methodology
The project would be the study of the concepts, legal obligations, entities involved and various issues related to IPO. This will be done in parallel of understanding the IPO of Indias largest coal producing company which was a huge success and had seen subscriptions of over 15 times the original issue. We may also touch upon the scams that hit the IPO procedures such as YES Bank IPO. Broad topics that will be discussed are: Initialization of IPO which has involvement of investment banks also known as underwriters Pre-issue activities which is preparation of draft offer prospectus which need approval of SEBI Role Stock Exchanges where price bands and date of issue is decided and later on incorporated in prospectus How the public issue is made and the decision of final issue price is taken The clerical stage where the shares are allotted and finally the listing in Stock Exchanges are made Glimpse of the YES Bank IPO scam Difference between IPO and FPO The explanation of various financial terms involved throughout the study

LEGAL ASPECTS OF IPO

Introduction Primarily, issues made by an Indian company can be classified as Public, Rights, Bonus and Private Placement. While right issues by a listed company and public issues involve a detailed procedure, bonus issues and private placements are relatively simpler. The classification of issues is as illustrated below:

Public issue: When an issue / offer of securities is made to new investors for becoming part of shareholders family of the issuer3 it is called a public issue. Public issue can be further classified into Initial public offer (IPO) and Further public offer (FPO).
(i) Initial public offer (IPO): When an unlisted company makes either a fresh issue of securities or offers its existing securities for sale or both for the first time to the Public, it is called an IPO. This paves way for listing and trading of the issuers Securities in the Stock Exchanges. (ii) Further public offer (FPO) or Follow on offer: When an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, it is called a FPO.

Legal Aspects of IPO involve four Important Acts

1. 2. 3. 4. Company Act 1956 Securities (Regulation)Act 1957 ICDR(Issue of capital and disclosure regulations) SEBI Act

SEBI GUIDELINES
SEBI has laid down entry norms for entities making a fresh public issue/ offer. The same are

detailed below:

Entry Norms: Entry norms are different routes available to an issuer for accessing the capital market.
(i) An unlisted issuer making a public issue i.e (making an IPO) is required to satisfy the following provisions:

a) Entry Norm I (commonly known as Profitability Route)

The Issuer Company shall meet the following requirements: (a) Net Tangible Assets of at least Rs. 3 crores in each of the preceding three full years. (b) Distributable profits in at least three of the immediately preceding five years. (c) Net worth of at least Rs. 1 crore in each of the preceding three full years. (d) If the company has changed its name within the last one year, atleast 50% revenue for the preceding 1 year should be from the activity suggested by the new name. (e) The issue size does not exceed 5 times the pre issue net worth as per the audited balance sheet of the last financial year

SEBI has provided two other alternative routes to the companies not satisfying any of the above conditions, for accessing the primary Market, as under:

b) Entry Norm II (Commonly known as QIB Route)

a) Issue shall be through book building route, with at least 50% to be mandatory allotted to the Qualified Institutional Buyers (QIBs).(Retail-35%,NII-15%) b) The minimum post issue face value capital shall be Rs. 10 crores or there shall be a compulsory market making for at least 2 years

c) Entry Norm III (commonly known as Appraisal Route)

(a) The project is appraised and participated to the extent of 15% by Financial Institutions / Scheduled Commercial Banks of which at least 10% comes from the Appraiser. (b) The minimum post issue face value capital shall be Rs. 10 crores or there shall be a compulsory market making for at least 2 years. In addition to satisfying the aforesaid entry norms, the Issuer Company shall also satisfy the criteria of having at least 1000 prospective allotees in its issue

Minimum Promoters contribution and lockin: In a public issue by an unlisted issuer, the
promoters shall contribute not less than 20% of the post issue capital which should be locked in for a period of 3 years. Lock in indicates a freeze on the shares. The remaining pre issue capital should also be locked in for a period of 1 year from the date of listing. In case of public issue by a listed issuer [i.e. FPO], the promoters shall contribute not less than 20% of the post issue capital or 20% of the issue size. This provision ensures that promoters of the company have some minimum stake in the company for a minimum period after the issue or after the project for which funds have been raised from the public is commenced.

ICDR regulations
Before a company decides to make an IPO, it must take into account certain legal requirements that will influence the structure of the IPO. few of such considerations are. 1. The ICDR Regulations permit a company to make a public offer by way of a fresh issue of new shares or by way of an offer for sale of existing shares, or a combination of a fresh issue and an offer for sale. 2. In any case, the minimum size of the offer must be equal to at least 25 per cent of the post-offer equity share capital of the company. 3. Only public sector companies and companies with a post offer capital of at least Rupees four thousand crores are allowed to make a public offer of less than 25 per cent of the post offer capital, subject to a minimum offer size of 10 per cent of the post offer capital. 4. It may be noted that this minimum offer size is independent on the minimum public float requirements even if any existing shareholder of the company falls within the category of public shareholders after the IPO, such existing shareholding will not act to reduce the minimum offer size.

Procedure For IPO

A. Appointment of expert agencies: B. Entering into underwriting contract, Brokerage contracts C. Making arrangements for the listing of shares on stock Exchanges D. Drafting a prospectus for the purpose of issue to the public E. Other Legal obligations and procedures Pre and Post Issue

A) Appointment of expert agencies:

. Merchant Bankers: Merchant bankers assist Companies in raising capital. They assist in issue of Shares, syndicating loans, public issue of debentures . The commercial or investment bank which has primary responsibility for organizing a given credit or bond issuance is called a lead manager. Lead Managers are also known as Book Running Lead Manager and Co-Book Running Lead Managers. Issuer Company can appoint more then one lead manager to manage big IPO's i.e. Reliance Power IPO came in Jan 2008 had 10 Book Running Lead Managers. Responsibilities of lead Managers are Issuer Company with the help of lead manager appoints underwriters or syndicate members for the IPO. Lead managers are responsible for examining the worth of underwriters and there capabilities to buy the shares and assure the same to SEBI. Lead Managers responsibilities include, initiate the IPO processing, write draft herring prospectus and get it approve by SEBI, help company in selling the IPO Shares and road shows, help company in finalize the issue price, issue opening & closing dates, listing date etc. Sometimes they Also act as underwriter as is in case of CIL IPO.

*Some of the popular lead managers in India Financial Market are: DSP Merrill Lynch Ltd, ICICI Securities Ltd, Almondz Global Securities Ltd, IL & FS Investmart Securities Ltd, SBI Capital Markets Ltd, ABN AMRO Securities (India) Pvt Ltd, Deutsche Equities India Pvt Ltd, Enam Securities Pvt ltd, J P Morgan India Pvt Ltd, JM Financial Consultants Pvt Ltd, Kotak Mahindra Capital Company Ltd, Macquarie India Advisory Services Pvt Ltd, SBI Capital Markets Ltd, UBS Securities India Pvt Ltd etc.

Auditors: Necessary before the issue of prospectus Company secretary: Obligatory in case of Companies having Prescribed Paid up capital (Qualified from Institute of Company secretary)

B)Entering into underwriting contract, Brokerage contracts

Underwriting A large IPO is usually underwritten by a "syndicate" of investment banks (underwriters) led by one or more major investment banks (lead underwriter). The company offering its shares, called the "issuer", enters a contract with a lead underwriter to sell its shares to the public. Syndicate members are usually registered with SEBI or registered as brokers with BSE / NSE Stock Exchanges. The sale (allocation and pricing) of shares in an IPO may take several forms. Common methods include:

Stand-by underwriting( strict underwriting or old-fashioned underwriting) is a form of stock insurance: the issuer contracts the underwriter for the latter to purchase the shares the issuer failed to sell under stockholders' subscription and applications Best efforts contract: the underwriter agrees to sell as many shares as possible at the agreed-upon price. Firm commitment contract: the underwriter guarantees the sale of the issued stock at the agreed-upon price. For the issuer, it is the safest but the most expensive type of the contracts, since the underwriter takes the risk of sale All-or-none contract: The underwriter agrees either to sell the entire offering or to cancel the deal Bought deal: when an underwriter, such as an investment bank or a syndicate, purchases securities from an issuer before a preliminary prospectus is filed. The bank negotiates a price with the issuer (usually at a discount to the current market price, if applicable).

The underwriter then approaches investors with offers to sell these shares. Upon selling the shares, the underwriters keep a commission based on a percentage of the value of the shares sold (called the gross spread). Usually, the lead underwriters, i.e. the underwriters selling the largest proportions of the IPO, take the highest commissionsup to 8% in some cases.

Underwriting in its simplest form, consists of an undertaking by some person or persons that if the public fails to take up the issue, he or they will do so. In return for this undertaking, the company agrees to pay the underwriter a omission on all shares or debentures, Whether taken by the public or the underwriters. Section 76 of Company Act 1956 prescribes certain conditions subject to which underwriting commission may be paid: Commission payable cannot be more than 5 percent of the issued price of shares and 2.5 percent of the price of debentures. The payment must be strictly by way of commission and not merely a device to issue shares at discount The rate of commission and the number of shares and debentures which the underwriters have agreed to subscribe for a commission should be disclosed in the prospectus Names of underwriters and the opinion of the directors that the resources of the underwriters are sufficient to discharge their obligations must be disclosed in the prospectus. Underwriting helps avoid conditions for issuer where it may have to refund the application money in case it fails to fulfil the minimum subscription clause(90%) Overriding Commission: Difference between the commission received by the Underwriters and the sub-underwriters.

Brokerage Contracts: In addition to underwriters, a company may also enter into brokerage contracts with brokers. Brokers find people who will buy shares. However, if he is unable to place any of the shares, he is not liable to take the shares nor is he entitled to get brokerage with respect to the shares not placed.

C) Listing of the shares on a stock exchange:

Shares of a public company may be sold or purchased on stock Exchange. But for this purpose the company has to get permission from stock exchange. Section 73 provides that it is necessary for every public company, before issuing shares or debentures for public subscription by issue of prospectus ,to make an application for listing of securities in one or more recognised Stock exchanges. This is known as listing of share. Information permission has been granted or application for getting permission has been made should be mentioned in the prospectus. The eligibility Criteria for listing of securities of a company is:
1. 2. Minimum issued equity capital of a company should be 3 Crs Minimum Public offer of equity capital shall be not less than 25%

For listing of its shares ,A company must comply with all the requirements of the securities Contracts(Regulation )Rules 1957 A public company as defined under the Companies Act, 1956, desirous of getting

its securities listed on a recognised stock exchange, shall apply for the purpose to the stock exchange and forward along with its application the many documents few major of them enlisted below:
1. Rule 19 (1) MOA &AOA, Copies of all prospectuses , Copies of offers for sale and circulars or advertisements , Copies of balance-sheets and audited accounts for the last five years, or in the case of new companies, for such shorter period for which accounts have been made up, Certified copies of agreements with vendors, underwriters and sub-underwriters, brokers and sub-brokers, A brief history of the company since its incorporation giving details of its activities including any reorganisation, reconstruction or amalgamation, changes in its capital structure, (authorised, issued and subscribed) and debenture borrowings.etc Rule 19(2)b requires that at least 10% of each class or kind of securities issued by the company shall be offered for public subscription through newspaper advertisement for a period not less than 2 days.

2.

D) Filing of prospectus
Time of Issue of prospectus is then decided by the board of directors. Prospectus: A document described and issued as prospectus and includes any notice, circular, advertisements which
1. 2. Invites subscription to share or debentures or invites deposits. The aforesaid invitation is made to the public

*Even one person can be called a public under certain conditions

An invitation shall not become public in the following conditions: 1. 2. 3. If the subscription cannot become available to the persons other than receiving the invitation. Offering of shares to the kith and kin of a director Offering to less than 50 persons RED herring Prospectus

RED HERRING PROSPECTUS: "Red-herring prospectus" means a prospectus, which does not have complete particulars on the price of the securities offered and quantum of securities offered

LIABILITY FOR UNTRUE STATEMENTS IN PROSPECTUS

1.Civil Liability(Section 62) Persons Liable: Director at the time of issue, Promoter, Person who has authorised the Prospectus(However, Expert is liable only in respect to his contribution) Remedies: Against the company,against directorsor promoters,damages for fraudulent misrepresentation,Compensation for untrue statement,Remedies against expert 2.Criminal Liability(Section 63)

Liability: Imprisonment for a term upto 2 years,Fine upto 50,000,Imprisonment & fine Persons Liable: Same as above except Expert

Other Legal obligations and procedures Pre and Post Issue

1. Draft Prospectus is filed with SEBI 30 days prior to filing with Registrar and lead managers simultaneously file a copies of draft document with the stock Exchanges. After Review Draft Prospectus becomes Offer prospectus 2. A copy of Prospectus duly signed by every director and relevant attached documents is delivered to registrar before registration. 3. Printing Of Forms, Appointment of Brokers, Marketing & Advertising , Brokers Meeting in a company, Road Shows or meetings, IPO starts 3-7 days opened, IPO closed

Post IPO
1. Collection of Forms 2. Oversubscription or Under subscription 3. Allotment Of shares a) Pro data allotment b) lottery system 4. Issue of share certificate a) Letter of allotment b) regret Letter 5. Refund cheque 6. Listing Of shares in NSE or BSE

Issue Types
1. Fixed Price Process: Price fixed by the Issuer in consultation with merchant bankers etc. Demand is unknown till the closing of issue. 2. Book Building Process Book Building Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery. It is a process used for marketing a public offer of equity shares of a company. It is a mechanism where, during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The process aims at tapping both wholesale and retail investors. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria.

In case the issuer chooses to issue securities through the book building route then as per SEBI guidelines, an issuer company can issue securities in the following manner: 100% of the net offer to the public through the book building route. 75% of the net offer to the public through the book building process and 25% through the fixed price portion. Under the 90% scheme, this percentage would be 90 and 10 respectively. 1. The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'. >>The Issuer specifies the number of securities to be issued and the price band for orders. >>The Issuer also appoints syndicate members with whom orders can be placed by the investors. >>Investors place their order with a syndicate member who inputs the orders into the 'electronic book'. This process is called 'bidding' and is similar to open auction. 2. The Process: >>A Book should remain open for a minimum of 5 days. >>Bids cannot be entered less than the floor price. >>Bids can be revised by the bidder before the issue closes. 3. On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation criteria which may include -Price Aggression -Investor quality -Earliness of bids, etc. 4. The book runner and the company conclude the final price at which it is willing to issue the stock and allocation of securities. >>Generally, the number of shares are fixed, the issue size gets frozen based on the price per share discovered through the book building process. >>Allocation of securities is made to the successful bidders.

COAL INDIA LIMITED (INITIAL PUBLIC OFFER-Offer For Sale)

Coal India Limited (CIL) is an Indian state-controlled coal mining company headquartered in Kolkata, West Bengal, India and the world's largest coal miner with revenue exceeding 60,245 Crore (FY2010-11).It was formerly owned entirely by the Union Government of India, under the administrative control of the Ministry of Coal. It is involved in coal mining and production industry. In April 2011, CIL was conferred the Maharatna status by the Union Government of India and ranked as one of India's most valuable company by market value. Central Government Owned 100% shares of CIL(holding Company) before 2010 IPO. It aimed at divesting 631,636,440 Equity Shares(10% of Government Holding) by the Selling Shareholder to achieve the benefits of listing the Equity Shares on the Stock Exchanges within three years of acquiring Navratna Status as directed by the government of India in 2008. In 2010, CIL's initial public offering (IPO) got subscribed 15.28 times, collecting a record over Rs 2,40,000 crore (Rs 2,400 billion) the highest IPO subscription so far. On the first day of its listing on the Sensex, its stock closed 40% higher than IPO price. It is India's largest ever public offer from Coal India Ltd. to raise up to 15,000 crore (US$3.3 billion). It

is currently 90% owned by the Government of India with the remaining 10% owned by the public. Coal India's shares got listed in the Stock Exchanges(NSE,BSE) on Nov 04, 2010.

Coal India IPO Lead Manager(s) and Underwriters

1. Citigroup Global Markets India Private Limited 2. Deutsche Equities India Private Limited 3. DSP Merrill Lynch Limited 4. Enam Securities Private Limited 5. Kotak Mahindra Capital Company Limited 6. Morgan Stanley India Company Pvt Ltd

THE AUDITORS
1. Deoki Bijay & Co., Chartered Accountants.

LEGAL ADVISORS
Domestic Legal Counsel to the Underwriters 1. Amarchand & Mangaldas & Suresh A. Shroff & Co. International Legal Counsel to the Company and the Selling Shareholder 1. DLA Piper Singapore Pte. Ltd. International Legal Counsel to the Underwriters 1. Ashurst Hong Kong

REGISTRAR
1. Link Intime India Private Limited Issue Detail:

As on Date & Time Shares Offered / Reserved Day 1 - Oct 18, 2010 17:00 IST Day 2 - Oct 19, 2010 17:00 IST Day 3 - Oct 20, 2010 20:00 IST Day 4 - Oct 21, 2010 22:30 IST

Number of Times Issue is Subscribed (BSE + NSE) Qualified Non Retail Institutional Institutional Individual Employee Total Buyers Investors Investors Reservations (QIBs) (NIIs) (RIIs) 284,236,398 85,270,919 198,965,479 63,163,644 631,636,440 0.6300 0.1800 0.1000 0.0000 0.3400 3.3900 0.5400 0.3500 0.0100 1.7100 24.7000 2.8900 1.1000 0.0400 11.8500 24.7000 25.4000 2.3100 0.1000 15.2800

Issue Open: Oct 18, 2010 - Oct 21, 2010 Issue Type: 100% Book Built Issue IPO Issue Size: 631,636,440 Equity Shares of Rs. 10 Issue Size: Rs. 15,199.44 Crore Face Value: Rs. 10 Per Equity Share Issue Price: Rs. 225 - Rs. 245 Per Equity Share Market Lot: 25 Shares Minimum Order Quantity: 25 Shares

One percent (1%) of this public offering was reserved for the employees of CIL and its 8 subsidiaries
Red Herring Prospectus: Snap shot

WITHDRAWAL OPTION WAS GIVEN TO THE SUBSCRIBERS OF THE ISSUE AS EVIDENT FROM THE ANNOUNCEMENT BELOW:

Coal India investors withdrawal Option, till 25 October, 2010

Those who have invested in Coal India Ltds Rs15,000 crore public float will get a five-day window if they wish to withdraw their applications in Indias biggest ever initial public offer (IPO). Investors can withdraw their bids because there has been a mistatement in Coal Indias financials. Investors will be able to withdraw their bids till the end of Monday, 25 October.

Allotment:
The allotment was done at a ratio of 1:2 , investors who applied for the full 400 shares will got 200 shares credited to their demat account and the refunds were being handled by ICICI ,HDFC and SBI. The refund money was available in the investors banks account before the listing date of Coal India which is the 4th November 2010.

DEMAT SCAM

Conclusion:
IPO process involve various legal controls regulated by SEBI,NSE, BSE, ROC, Company Law Board etc. To comply with the all legal requirement completely, hiring Legal consultants to assist the process becomes indispensible. To facilitate the process further Government Makes it mandatory to select Lead Manager who are registered with SEBI. Taking into consideration the length and breadth of the Topic , This report only intends to give a bird eyes view of the key features of Legal Aspects of IPO in India.

References Internet Sources

http://www.sebi.gov.in http://www.sebi.gov.in/acts/act02c.pdf-Securities act 1957 http://www.sebi.gov.in/acts/icdrreg09.pdf Draft Red herring Prospectus-CIL http://en.wikipedia.org/wiki/Coal_India_Limited http://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf http://www.sebi.gov.in/cms/sebi_data/commondocs/subsection1_p.pdf http://www.chittorgarh.com/ipo/ipo_detail.asp?a=258 http://www.firstchoiceipoanalysis.com/2010/09/ipo-analysis-coal-india-limited-rock.html http://www.indiainfoline.com/Markets/ipo/synopsis/Coal-India/12019 http://www.finance-trading-times.com/2010/10/2161-coal-india-ipo-review-analysis.html http://barandbench.com/brief/1/1902/the-viewpoint-indian-companies-options-for-raising-equitycapital-part-i-initial-public-offeringsBOOKS and other Sources BUSINESS LAW-Gulshan S.S INDIAN FINANCIAL SYSTEM BUSINESS LEGISLATION FOR MANAGEMENT-MC Kuchhal, Deepa Prakash IPO AND LEGAL ASPECTS(Power point presentation) Rashmi Kumar Agarwal