UNIT IV
LESSON 34: FEE-BASED FINANCIAL SERVICES
ISSUE MANAGEMENT: ISSUE RELATED
ACTIVITIES AND SEBI GUIDELINES
Lesson Objectives
MANAGEMENT OF FINANCIAL SERVICES
• To understand the process of issue management and SEBI
guidelines related to issue management activity.
Introduction
Issue management, now days, is one of the very important fee
based services provided by the financial institutions. In recent
past various companies have entered into issue management
activities. Still there are very few large scale and specialized issue
management agencies in the country. With the growth of stock
market and opening up of economy, the scope for issue
management activity is widening day by day. To protect the
investors’ interest and for orderly growth and development of
market, SEBI has put in place guidelines as ground rules
relating to new issue management activities. These guidelines
are in addition to the company law requirements in relation to
issues of capital / securities.
Financial instruments can be classified into two main groups –
share capital and debt capital. There are various other classifica-
tions in each of the two categories. Also, there are various types
of company’s i.e. listed, unlisted, public, private etc. For each of
them SEBI has issued comprehensive guidelines, related to
issue of financial instruments.
Let us discuss all these issue management activities in detail, one
by one.
Eligibility Norms
To make an issue, the company must fulfill the eligibility norms
specified by SEBI and Companies Act. The companies issuing
securities through an offer document, that is (a) prospectus in
case of public issue or offer for sale and (b) letter of offer in case
of right issue, should satisfy the eligibility norms as specified by
SEBI, below:
Filing of Offer Document: In the case of a public issue of
securities, as well as any issue of security, by a listed company
through rights issue in excess of Rs. 50 lakh, a draft prospectus
should be filed with SEBI through an eligible registered
merchant banker at least 21 days prior to filing it with ROC.
Companies prohibited by SEBI, under any order/direction,
from accessing the capital market cannot issue any security.
The companies intending to issue securities to public should
apply for listing them in recognized stock exchange(s). Also, all
the issuing companies must (a) enter into an agreement with a
depository registered with SEBI for dematerialization of
securities already issued / proposed to be issued and (b) give an
option to subscribers / shareholder / investors to receive
security certificates or hold securities in a dematerialized form
with a depository.
Public issue / Offer for sale by Unlisted Companies: An
unlisted company can make a public issue / offer for sale of
equity shares / security convertible into equity shares on a late
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date if it has in three out of preceding five years (a) a pre issue
net worth of Rs. 1 crore (b) a track record of distributable profit
in terms of Sec. 205 of the Companies Act. The size of the
issue should not exceed five times of the pre-issue net worth as
per last available audited accounts either at the time of filing of
offer or at the time of opening of issue.
There are separate norms for companies in the information
technology sector and partnership firms converted into
companies or companies formed out of a division on an
existing company.
If the unlisted company does not comply with the aforesaid
requirement of minimum pre-issue net worth and track record
of distributable profits or its proposed size exceeds five times
its pre-issue net worth, it can issue shares / convertible security
only through book building process on the condition that 60%
of the issue size would be allotted to qualified institutional
buyers (QIB) failing which the full subscription should be
refunded.
Public issue by listed companies: All listed companies are
eligible to make a public issue of equity shares/ convertible
securities if the issue size does not exceed five times its pre-
issue net worth as per the last available audited accounts at the
time of either filing of documents with SEBI or opening of
the issue. A listed company which does not satisfy this condi-
tion would be eligible to make issue only through book
building process on the condition that 60% of the issue size
would be allotted to QIBs, failing which full subscription
money would be refunded.
Exemption: The eligibility norms specified above are not
applicable in the following cases:
• Private sector banks
• Infrastructure companies, wholly engaged in the business
of developing, maintaining and operating infrastructure
facility within the meaning of Sec. 10(23-G) of the Income
Tax Act (a) whose project has been appraised by a public
financial institution / IDFC/ILFS and (b) not less than 5%
of the project cost has been financed by any of the
appraising institutions jointly / severally by way of loan /
subscription to equity or combination of both and
• Rights issue by a listed company.
Credit Rating for Debt Instruments: A debt instrument
means an instrument / security which creates / acknowledges
indebtedness and includes debentures, bonds and such other
securities of a company whether constituting charge on its
assets or not. For issue, both public and rights, of a debt
instrument, including convertibles, credit rating – irrespective of
the maturity or conversion period – is mandatory and should
be disclosed. The disclosure should also include the unaccepted
credit rating. Two ratings from two different credit rating
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agencies registered with SEBI should be obtained in case of
public/rights issue of Rs.100 crore and more. All credit ratings
obtained during the three years preceding the public/rights
issue for any listed security of the issuing company should also
be disclosed in the offer document.
Outstanding Warrants / Financial Instruments: An unlisted
company is prohibited from making a public issue of shares /
convertible securities in case there are any outstanding financial
instruments / any other rights entitling the existing promoters
/ shareholders any option to receive equity share capital after the
initial public offering.
Partly Paid-up Shares: Before making a public / rights issued
of equity shares / convertible securities, all the existing partly
paid up shares should be made fully paid up or forfeited if the
investor fails to pay call money within 12 months.
Pricing of Issues
A listed company can freely price shares/convertible securities
through a public/ rights issue. An unlisted company eligible to
make a public issue and desirous of getting its securities listed
on a recognized stock exchange can also freely price shares and
convertible securities. The free pricing of equity shares by an
infrastructure company is subject to the compliance with
disclosure norms as specified by SEBI from time to time. While
freely pricing their initial public issue of shares/ convertible, all
banks require approval by the RBI.
Differential Pricing: Listed/unlisted companies may issue
shares/convertible securities to applicants in the firm allotment
category at a price different from the price at which the net offer
to the public is made, provided the price at which the securities
are offered to public.
A listed company making a composite issue of capital may issue
securities at differential prices in its public and rights issue. In
the public issue, which is a part of a composite issue, differen-
tial pricing in firm allotment category vis-à-vis the net offer to
the public is also permissible. However, justification for the
price differential should be given in the offer document in case
of firm allotment category as well as in all composite issues.
Price Band: The issuer / issuing company can mention a price
band of 20% (cap in the price band should not exceed 20% of
the floor price) in the offer document filed with SEBI and the
actual price can be determined at a later date before filing it with
the ROC. If the BOD of the issuing company has been
authorized to determine the offer price within a specified price
band, a resolution would have to be passed by them to
determine such a price. The lead merchant banker should ensure
that in case of listed companies, a 48 hours notice of the
meeting of BOD for passing the resolution for determination
of price is given to the regional stock exchange. The final offer
document should contain only one price and one set of
financial projections, if applicable.
Payment of Discount / Commissions: Any direct or indirect
payment in the nature of discount / commission / allowance
or otherwise cannot be made by the issuer company / promoter
to any firm allottee in a public issue.
Denomination of Shares: Public / rights issue of equity
shares can be made in any denomination in accordance with Sec.
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11.671.3
13(4) of the Companies Act and in compliance with norms
MANAGEMENT OF FINANCIAL SERVICES
specified by SEBI from time to time. The companies which
have already issued shares in the denominations of Rs. 10 or
Rs. 100 may change their standard denomination by splitting /
consolidating them.
Promoters’ Contribution and Lock-in
Requirements
Regulations regarding promoters’ contribution are discussed as
under:
Public issue by unlisted companies: The promoters should
contribute at least 20% and 50% of the post issue capital in
public issue at par and premium respectively. In case the issue
size exceeds Rs. 100 crores, their contribution would be
computed on the basis of total equity to be issued, including
premium at present and in the future, upon conversion of
optionally convertible instruments, including warrants. Such
contribution may be computed by applying the slab rated
mentioned below:
Size of Capital Issue Percentage of contribution
(including premium)
On first Rs. 100 crores 50
On next Rs. 200 crores 40
On next Rs. 300 crores 30
On balance 15
While computing the extent of contribution, the amount
against the last slab should be so adjusted that on an average
the promoters’ contribution is not less than 20% of post issue
capital after conversion.
Offer for sale by unlisted companies: The promoters’
shareholding, after offer for sale, should at least 20% of the
post issue capital.
Public issue by listed companies: The participation of the
promoters should either be (i) to the extent of 20% of the
proposed issue or (ii) to ensure shareholding to the extent of
20% of the post-issue capital.
Composite issue by Listed Companies: At the option of the
promoters, the contribution would be either 20% of the
proposed public issue or 20% of the post-issue capital,
excluding rights issue component of the composite issue.
Public Issue by unlisted infrastructure companies at
premium: The promoters contribution, including contribution
by equipment suppliers and other strategic investors, should be
at least 50% of the post-issue capital at the same or a price
higher than the one at which the securities are being offered to
public.
Securities Ineligible for computation of promoters
contribution: The securities specified below acquired by /
allotted to promoters would not be considered for computa-
tion of promoters’ contribution:
• Where before filing the offer document with SEBI, equity
shares were acquired during the preceding three years (a) for
consideration other than cash and revaluation of assets /
capitalization of intangible assets is involved in such
transactions and (b) from a bonus issue out of revaluation
reserves or reserves without accrual of cash revenues;
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 • In the case of a public issue by unlisted companies,
MANAGEMENT OF FINANCIAL SERVICES
securities issued to promoters during the preceding one year
at a price lower than the price at which equity is offered to
the public.
• The shares allotted to promoters during the previous year
out of funds brought in during that period in respect of
companies formed by conversion of partnership firms
where the partners of the firm and the promoters of the
converted company are the same and there is no change in
management unless such shares have been issued at the
same price at which the public offer is made. However, if
partners’ capital existed in the firm for a period exceeding
one year on a continuous basis, the shares allotted to
promoters against such capital would be eligible.
The ineligible shares specified in the above three categories
would, be eligible for computation of promoters
contribution if they are acquired in pursuance of a scheme
of merger/ amalgamation approved by a high court.
• Securities of any private placement made by solicitation of
subscription from unrelated persons either directly or
through an intermediary; and
• Securities for which a specific written consent has not been
obtained from the respective shareholders for inclusion of
their subscription in the minimum promoters contribution.
Issue of convertible security: In the case of issue of convert-
ible security, promoters have an option to bring in their
subscription by way of equity or subscription to the convertible
security being offered so that their total contribution would not
be less than the required minimum in cases of (a) par/
premium issue by unlisted companies (b) offer for sale, (c)
issues/ composite issue by listed companies and (d) public
issue at premium by infrastructure companies.
Promoters Participation in Excess of Required Minimum:
In a listed company participation by promoters in excess of the
required minimum percentage in public/ composite issues
would be subject to pricing of preferential allotment, if the
issue price is lower than the price as determined on the basis of
preferential allotment pricing.
Promoters’ contribution before public issue: Promoters
should bring in the full amount of their contribution, includ-
ing premium, at least one day before the public issue opens/
issue opening date which would be kept in an escrow account
with a bank and would be released to the company along with
the public issue proceed.
Exemption from Requirement of Promoters’ Contribu-
tion: The requirement of promoters contribution is not
applicable in the following three cases, although in all the cases,
the shareholders should disclose in the offer document their
existing shareholding and the extent to which they are partici-
pating in the proposed issue:
a. Public issue by a company listed on a stock exchange for at
least three years and having a track record of dividend
payment for at least three immediately preceding years.
However, if the promoters’ participate in the proposed
issue to the extent greater than higher of the two options
available, namely, 20% of the issue or 20% of the post-
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issue capital, the excess contribution would attract pricing
guidelines on preferential issues if the issue price is lower
than the price as determined on the basis of the guidelines
on preferential issue.
b. Where no identifiable promoter / promoter group exists.
c. Rights issue.
Lock-in requirements of Promoters’ contribution: Promot-
ers’ contribution is subject to a lock-in period as detailed below:
Lock-n of Minimum Required Contribution: In case of any
(all) issues of capital to the public, the minimum promoters’
contribution would be locked in for a period of three years. The
lock-in period would start from the date of allotment in the
proposed issue and the last date of the lock-in period would be
reckoned as three years from the date of commencement of
commercial production or the date of allotment in the public
issue, or whichever is later.
Lock-in excess promoters contribution: In the case of public
issue by an unlisted company, excess promoters’ contribution
would be locked in for a period of one year. The excess
contribution in a public issue by a listed company would also be
locked in for a period of one year as per the lock-in provisions.
Securities issued last to be locked in first: The securities,
forming part of the promoters’ contribution issued last to
them, would be locked in first for the specified period. How-
ever, if securities were issued last to financial institutions as
promoters, these would not be locked in before the shares
allotted to other promoters.
Lock-in of Pre-issue share capital of an unlisted company:
The entire pre-issue share capital, other than locked in as
promoters’ contribution, would be locked-in for one year from
the date of commencement of commercial production or the
date of allotment in the public offer whichever is later.
Lock-in of securities issued on firm allotment basis:
Securities issued on firm allotment basis would be locked in for
one year from the date of commencement of commercial
production, or date of allotment in public issue, whichever is
later.
Other requirements in respect of Lock-in: The other
requirements relating to the lock-in of promoters’ contribution
is discussed hereunder:
Pledge of securities: Locked-in securities held by the promot-
ers may be pledged only with banks/financial institutions, as
collateral security for loans granted by them provided the pledge
of shares is one the terms of the sanction of the loan.
Inter-se transfer of Securities: Transfer of locked in securities
amongst promoters as named in the offer document can be
made subject to lock-in being applicable to the transferees for
the remaining lock-in period.
Inscription of Non-transferability: The securities, which are
subject to a lock-in period, should carry inscription ‘non-
transferable’, along with duration of specified non-transferable
period mentioned in the face of the security certificate.
Issue Advertisement
The term advertisement is defined to include notices, brochures,
pamphlets, circulars, show cards, catalogues, placards, posters,
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insertions in newspapers, pictures, films, cover pages of offer
documents or any other print medium, radio, television
programs through any electronic media.
The lead merchant banker should ensure compliance with the
guidelines on issue advertisement by the issuing companies.
Issue of Debt Instruments
A company offering convertible/non-convertible debt instru-
ments through an offer document should, in addition to the
other relevant provisions of these guidelines, complies with the
following provisions:
Requirement of credit rating: A public or rights issue of debt
instruments (including convertible instruments) in respect of
their maturity or conversion period can be made only if the
credit rating has been obtained and disclosed in the offer
document. For all issues greater than or equal to Rs.100 crore,
two ratings from two different credit rating agencies should be
obtained.
Requirements in Respect of Debenture Trustees: In the case
of issue of debentures with maturity of more than 18 months,
the issuer should appoint debenture trustees whose name must
be stated in the offer document. The issuer company in favor
of the debenture trustees should execute a trust deed within six
months of the closure of the issue.
Creation of Debenture Redemption Reserves (DRR): A
company has to create DRR in the case of the issue of deben-
tures with maturity of more than 18 months.
Distribution of Dividends: In the case of new companies,
distribution of dividends would require the approval of the
trustees to the issue and the lead institution, if any. In case of
existing companies, prior permission of the lead institution for
declaring dividend, exceeding 20% as per the loan covenants, is
necessary if the company does not comply with institutional
condition regarding interest and debt service coverage ratio.
Redemption: The issuer company should redeem the deben-
tures as per the offer documents.
Disclosure and Creation of Charge: The offer document
should specifically state the assets on which the security would
be created as also the ranking of the charge(s). In the case of
second/residual charge or subordinated obligation, the risks
associated with should clearly be stated.
Filing of Letter of Option: A letter of option containing
disclosures with regards to credit rating, debentures holders
resolution, option for conversion, justification for conversion
price and such other terms which SEBI may prescribe from time
to time should be filed with SEBI through an eligible merchant
banker, in case of a roll over of non-convertible portions of
PCD/NCDs, etc.
Book Building
Book-building means a process by which a demand for the
securities proposed to be issued by a body corporate is elicited
and built up and the price for such securities is assessed for the
determination of the quantum of such securities to be issued
by means of notice/ circular / advertisement/ document or
information memoranda or offer document. A company
proposing to issue capital through book-building has to
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comply with the requirements of SEBI in this regard. These are
MANAGEMENT OF FINANCIAL SERVICES
discussed here.
75% Book Building Process: The option of book-building is
available to all body corporate which are eligible to make an
issue of capital to the public as an alternative to and to the
extent of the percentage of the issue, which can be reserved for
firm allotment. The issuer company can either reserve the
securities for firm allotment or issue them through book-
building process. The issue of securities though book-building
route should be separately identified/indicated as ‘placement
portion category’ in the prospectus. The securities available to
the public should be separately identified as ‘net offer to the
public’. The requirement of minimum 25% of the securities to
be offered to the public is also applicable. Underwriting is
mandatory to the extent of the net offer to the public. The draft
prospectus containing all the details except the price at which the
securities are offered should be filed with SEBI. The issuer
company should nominate one of the lead merchant bankers to
the issue as book runner, and his name should be mentioned
in the prospectus. The copy of the draft prospectus, filed with
SEBI, should be circulated by the book runner to the institu-
tional buyers, who are eligible for firm allotment, and to the
intermediaries, eligible to act as underwriters inviting offers for
subscription to the securities.
100% Book Building Process: In an issue of securities to the
public through a prospectus, the option for 100% book
building is available to any issuer company. The issue of capital
should be Rs. 25 crore and above. Reservation for firm
allotment to the extent of the percentage specified in the
relevant SEBI guidelines can be made only to promoters,
‘permanent employees of the issuer company and in the case of
new company to the permanent employees of the promoting
company’. It can also be made to shareholders of the promot-
ing companies, in the case of new company and shareholders
of group companies in the case of existing company either on a
competitive basis or on a firm allotment basis. The issuer
company should appoint eligible merchant bankers as book
runner(s) and their names should be mentioned in the draft
prospectus. The lead merchant banker should act as the lead
book runner and the other eligible merchant bankers are termed
as co-book runner. The issuer company should compulsorily
offer an additional 10% of the issue size offered to the public
through the prospectus.
IPO Through Stock Exchange On-line
System (E-IPO)
In addition to other requirements for public issue as given in
SEBI guidelines wherever applicable, a company proposing to
issue capital to public through the on-line system of the stock
exchange for offer of securities has to comply with the addi-
tional requirements in this regard. They are applicable to the
fixed price issue as well as for the fixed price portion of the
book-built issues. The issuing company would have the option
to issue securities to public either through the on-line system of
the stock-exchange or through the existing banking channel. For
E-IPO the company should enter into agreement with the
stock-exchange(s) and the stock-exchange would appoint SEBI
registered stockbrokers of the stock exchange to accept applica-
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 tions. The brokers and other intermediaries are required to
MANAGEMENT OF FINANCIAL SERVICES
maintain records of (a) orders received, (b) applications received,
(c) details of allocation and allotment, (d) details of margin
collected and refunded and (e) details of refund of application
money.
Issue of Capital by Designated Financial
Institutions
Designated financial institutions (DFI), approaching the capital
market for fund though an offer document, have to follow
following guidelines.
Promoters’ contributions: There is no requirement of
minimum promoters’ contribution in the case of any issue by
DFIs. If any DFI proposes to make a reservation for promot-
ers, such contribution should come only from actual promoters
and not from directors, friends, relatives and associates, etc.
Reservation for employees: The DFIs may reserve out of the
proposed issues for allotment only to their permanent employ-
ees, including their MD or any fulltime director. Such
reservations should be restricted to Rs. 2000 per employee,
subject to five percent of the issue size. The shares allotted
under the reserved category are subject to a lock-in for a period
of three years.
Pricing of the issue: The DFIs, may freely price the issues in
consultation with the lead managers, if the DFIs have a three
years track record of consistent profitability out of immediately
preceding five years, with profit during last two years prior to
the issue.
Preferential Issue
The preferential issue of equity shares/ fully convertible
debentures (FCD)/ partly convertible debentures (PCDs) or any
other financial instruments, which would be converted into or
exchanged with equity shares at a later date by listed companies
to any select group of persons under section 81(1A) of the
Companies Act, 1956 on a private placement basis, are governed
by the following guidelines:
Pricing of issue: The issue of shares on a preferential basis can
be made at a price not less than the higher of the following: (i)
The average of the weekly high and low of the closing prices of
the related shares quoted on the stock exchange and (ii) The
average of the weekly high and low of the closing prices of the
related shares quoted on a stock exchange during the two weeks
preceding the relevant date.
Pricing of Shares arising out of warrants: Where warrants
are issued on a preferential basis with an option to apply for
and be allotted shares, the issuer company should determine
the price of the resultant shares in accordance with the provi-
sions discussed in the above point.
Pricing of shares on Conversion: Where PCDs/FCDs/ other
convertible instruments are issued on a preferential basis,
providing for the issuer to allot shares at a future date, the
issuer should determine the price at which the shares could be
allotted in the same manner as specified for pricing of shares
allotted in lieu of warrants.
Currency of Financial Instruments: In the case of warrants /
PCDs / FCDs / or any other financial instruments with a
provision for the allotment of equity shares at a future date,
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either through conversion or otherwise, the currency of the
instruments cannot exceed beyond 18 months from the date of
issue of the relevant instruments.
Non-transferability of Financial Instruments: The instru-
ments allotted on a preferential basis to the promoters /
promoter groups are subject to a lock-in period of three years
from the date of allotment. In any case, not more than 20% of
the total capital of the company, including the one brought in
by way of preferential issue would be subject to a lock-in period
of three years from the date of allotment.
Currency of Shareholders’ Resolutions: Any allotment
pursuant to any resolution passed at a meeting of shareholders
of a company granting consent for preferential issues of any
financial instrument, should be completed within a period of
three months from the date of passing of the resolution.
Certificate from Auditors: In case every issue of shares/
FCDs/PCDs/ or other financial instruments has the conver-
sion option, the statutory auditors of the issuer company
should certify that the issue of said instruments is being made
in accordance with the requirements contained in these guide-
lines.
OTCEI Issues
A company making an initial public offer of equity shares /
convertible securities and proposing to list them on the Over
The Counter Exchange of India (OTCEI) has to comply with
following requirements:
Eligibility Norms: Such a company is exempted from the
eligibility norms applicable to unlisted companies, provided (i)
it is sponsored by a member of the OTCEI and (ii) has
appointed at least two market makers. Any offer of sale of
equity shares / convertible securities resulting from a bought
out deal registered with OTCEI is also exempted from the
eligibility norms subject to the fulfillment of the listing criteria
laid down by the OTCEI.
Pricing norms: Any offer for sale of equity shares or any other
convertible security resulting from a bought out deal registered
with OTCEI is exempted from the pricing norms specified for
unlisted companies, subject to following conditions: (a) The
promoters after such issue would retain at least 20% of the
total issued capital with a lock-in of three years from the date of
the allotment of securities in the proposed issue and (b) at least
two market makers are appointed in accordance with the market
making guidelines stipulated by the OTCEI.
Projection: In case of securities proposed to be listed on the
OTCEI, projections based on the appraisal done by the
sponsor who undertakes to do market-making activity can be
included in the offer document subject to compliance with the
other conditions relating to the contents of offer documents.
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