SEBI GUIDELINES ON PROCEDURES RELATING TO VENTURE CAPITAL, IPO, SECURITIES SALES BY PUBLIC COMPANIES, RIGHTS ISSUES , PRIVATE PLACEMENT

AND PUBLIC ISSUES

VENTURE CAPITAL Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc. The typical venture capital investment occurs after the seed funding round as growth funding round (also referred as Series A round) in the interest of generating a return through an eventual realization event, such as an IPO or trade sale of the company. It is important to note that venture capital is a subset of private equity. Therefore all venture capital is private equity, but not all private equity is venture capital. Venture Capital is a form of "risk capital". In other words, capital that is invested in a project where there is a substantial element of risk relating to the future creation of profits and cash flows. Risk capital is invested as shares (equity) rather than as a loan and the investor requires a higher rate of return to compensate him for his risk. Venture capital provides long-term, committed share capital, to help unquoted companies grow and succeed. If an entrepreneur is looking to startup, expand, buy-into a business, buy-out a business in which he works, turnaround or revitalize a company, venture capital could help do this. Obtaining venture capital is substantially different from raising debt or a loan from a lender. Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of the success or failure of a business. Venture capital is invested in exchange for an equity stake in the business. As a shareholder, the venture capitalists return is dependent on the growth and profitability of the business. This return is generally

earned when the venture capitalist "exits" by selling its shareholding when the business is sold to another owner. Venture capitalist prefers to invest in "entrepreneurial businesses". This does not necessarily mean small or new businesses. Rather, it is more about the investment's aspirations and potential for growth, rather than by current size. Such businesses are aiming to grow rapidly to a significant size.

SEBI GUIDELINES 1. At present, the Venture Capital activity in India comes under the purview of different sets of regulations namely : i. The SEBI (Venture Capital Funds) Regulation, 1996[Regulations] lays down the overall regulatory framework for registration and operations of venture capital funds in India. Overseas venture capital investments are subject to the Government of India Guidelines for Overseas Venture Capital Investment in India dated September 20, 1995. For tax exemptions purposes venture capital funds also needs to comply with the Income Tax Rules made under Section 10(23FA) of the Income Tax Act.

ii.

iii.

2. In addition to the above, offshore funds also require FIPB/RBI approval for investment in domestic funds as well as in Venture Capital Undertakings(VCU). Domestic funds with offshore contributions also require RBI approval for the pricing of securities to be purchased in VCU likewise, at the time of disinvestment, RBI approval is required for the pricing of the securities. 3. The multiple set of Guidelines and other requirements have created inconsistencies and detract from the overall objectives of development of Venture Capital industry in India. All the three set of regulations prescribe different investment criteria for VCFs as under :
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SEBI regulations permit investment by venture capital funds in equity or equity related instruments of unlisted companies and also in financially

weak and sick industries whose shares are listed or unlisted. The Government of India Guidelines and the Income Tax Rules restrict the investment by venture capital funds only in the equity of unlisted companies. SEBI Regulations provide that at least 80% of the funds should be invested in venture capital companies and no other limits are prescribed. The Income Tax Rule until now provided that VCF shall invest only up to 40% of the paid-up capital of VCU and also not beyond 20% of the corpus of the VCF. The Government of India guidelines also prescribe similar restriction. Now the Income Tax Rules have been amended and provides that VCF shall invest only up to 25% of the corpus of the venture capital fund in a single company. SEBI Regulations do not provide for any sectoral restrictions for investment except investment in companies engaged in financial services. The Government of India Guidelines also do not provide for any sectoral restriction, however, there are sectoral restrictions under the Income Tax Guidelines which provide that a VCF can make investment only in companies engaged in the business of software, information technology, production of basic drugs in pharmaceutical sector, bio-technology, agriculture and allied sector and such other sectors as notified by the Central Government in India and for production or manufacture of articles or substance for which patent has been granted by National Research Laboratory or any other scientific research institution approved by the Department of Science and Technology, if the VCF intends to claim Income Tax exemption. In fact, erstwhile Section 10(23F) of Income Tax Act was much wider in its scope and permitted VCFs to invest in VCUs engaged in various manufacture and production activities also. It was only after SEBI recommended to CBDT that at least in certain sectors as specified in SEBIs recommendations, the need for dual registration / approval of VCF should be dispensed with, CBDT instead of dispensing with the dual requirement, restricted investment to these sectors only. This has further curtailed the investment flexibility.

4. The Income Tax Act provides tax exemptions to the VCFs under Section 10(23FA) subject to compliance with Income Tax Rules. The Income Tax Rules inter alia provide that to avail the exemption under Section 10(23FA), VCFs need

to make an application to the Director of Income Tax (Exemptions) for approval. One of the conditions of approval is that the fund should be registered with SEBI. Rule 2D also lays down conditions for investments and section 10(23FA) lays down sectors in which VCF can make investment in order to avail tax exemptions. Once a VCF is registered with SEBI, there should be no separate requirement of approval under the Income Tax Act for availing tax exemptions. This is already in practice in the case of mutual funds. 5. The concurrent prevalence of multiple sets of guidelines / requirements of different organizations has created inconsistencies and also the negative perception about the regulatory environment in India. Since SEBI is responsible for overall regulation and registration of venture capital funds, the need is to harmonies and consolidate within the framework of SEBI Regulation to provide for uniform, hassle free, one window clearance. A functional and successful pattern is already available in this regard in the case of mutual funds which are regulated through one set of regulations under SEBI Mutual Fund Regulations. Once a mutual fund is registered with SEBI, it automatically enjoys tax exemption entitlement. Similarly, in the case of FIIs tax benefits and foreign inflow/ outflow are automatically available once these entities are registered with SEBI. 6. It is therefore necessary that there is a single regulatory framework under SEBI Act for registration and regulation of VCFs in India. It may be mentioned that Government of India Guidelines were framed on September 20, 1995 and SEBI regulations were framed in 1996 pursuant to the amendment in the SEBI Act in 1995 giving SEBI the mandate to frame regulations for venture capital funds. After the notification of SEBI regulations, separate GOI Guidelines for venture investments should have been repealed. Further, once a VCF including the fund having contribution from off shore investors, is registered with SEBI, the inflows and outflows of funds should be under transparent automatic route and there should be no need for separate FIPB / RBI approvals in the matters of investments, entry / exit pricing. Likewise, VCF once registered with SEBI should be entitled for automatic tax exemptions as in the case of mutual funds. Such single regulatory requirement would provide much needed investment and operational flexibility, make the perception of foreign investors positive and create the required environment for increased flow of funds and growth of the venture capital industry

in India. 7. SEBI regulations provides flexibility in selection of investment to the VCF, however, in the event of subscription to the fund by an overseas investor or the fund choosing to seek income tax exemptions, the investment flexibility is curtailed to a great extent. It is worth mentioning that one of the condition for grant of approval under the Income Tax Rules for seeking exemption under the Income Tax Act is that the fund should be registered with SEBI which make it obligatory on the venture capital fund not only to follow Income Tax Rules but also the SEBI Regulations. Further, a VCF has to seek separate registration under the SEBI Act and approval under the Rules of Income Tax apart from seeking approval from FIPB / RBI in the event of subscription to the fund by an overseas investor. 8. RECOMMENDATIONS

In the above background, following recommendations are proposed: a. Since SEBI is responsible for registration and regulation of venture capital funds, the need is to harmonize and consolidate multiple regulatory requirements within the framework of SEBI regulations to provide for uniform, hassle free, single window clearance with SEBI as a nodal regulator. b. In view of the (a) above, Government of India may consider repealing the Government of India MoF(DEA) Guidelines for Overseas Venture Capital Investment in India dated September 20, 1995 c. The Foreign Venture Capital Investor (FVCI) should register under the SEBI Regulations under the pattern of FIIs. d. For SEBI registered VCF, requirement of separate rules under the Income Tax Act should be dispensed with on the pattern of mutual funds.

9.1 As in the case of FIIs, SEBIs primary role in the venture capital fund is envisaged as of a facilitator for growth rather than that of a regulator. SEBI Regulations should encourage more venture capital investments in a hassle free manner. The multiplicity of regulations, as far as possible, should be avoided and one set of regulatory guidelines may be issued under the aegis of one nodal

agency for interface with the venture capital investors which could be SEBI. SEBI Regulations should focus more on adequate disclosure as investors in venture capital activities are institutions or high net worth individuals who are expected to have the capability of taking an informed decision based on the disclosures. The regulatory requirement of seeking approval of the placement memorandum from SEBI may be dispensed with by strengthening the disclosure requirements. The SEBI Regulations also provide in the case of a VCF incorporated as a trust for compulsory registration of instrument of trust under the Indian Registration Act. As per the provisions of Indian Registration Act, the registration of trust document is optional. There are operational problems in the case of existing VCFs (in existence before SEBI Regulations were notified) to register the document of trust after lapse of four months period. It should be left to the choice of the applicant whether to register the trust document and there should not be any compulsion for registration of documents under the Indian Registration Act under the SEBI Regulation. The venture capital activity is in nascent stage in India as of today and many dimensions of it are still to be unfolded. SEBI Regulations therefore should not curtail the flexibility of investment by a VCF. 9.2 The present regulatory framework permits the investment by VCF in sick industrial undertaking needs a review. There are various agencies who are engaged in restructuring, financing to sick industries and there is no acute necessity for venture capital funds to invest mainly in sick industrial undertakings. The VCF should focus on investment in green shoe high technology oriented, knowledge based, research oriented industries, however, VCFs may also be provided flexibility to participate in the restructuring process of sick industries as and when required. 9.3 Recommendations

The following amendments are recommended under the existing SEBI Venture Capital Regulations : a. The definition of VCF should be amended to include any other structures and also the funds set up, scheme floated by a trust, company, body

b. c.

d.

e. f.

g.

corporate or other legal entities. The Regulation should make provisions for registration of Foreign Venture Capital Investors (FVCI). The investment criteria needs to be redefined to permit investment by VCF primarily in equity or equity related instruments or securities convertible into equity of VCUs and also by way of subscription to IPO and preferential offer in case of companies to be listed or already listed. The limit of at least 80% of the funds raised by the VCF may be dispensed with and new investment criteria as dealt under the heading Investment related issues may be incorporated. The relaxations for venture capital undertaking/funds under SEBI Takeover Code and SEBI (Initial Public Offer) guidelines as dealt under the heading of Exit related issues may also be incorporated. The provision for investment in sick companies and financial assistance in any other manner may be dispensed with. The existing provisions for approval of placement memorandum by SEBI may be dispensed with but the content of placement memorandum may be strengthened to include all the significant information necessary for an investor to arrive at a fair decision. SEBI regulations should be amended to dispense with the requirement of registration of the instrument of trust under the Indian Registration Act.

IPO An initial public offering (IPO), referred to simply as an "offering" or "flotation", is when a company (called the issuer) issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately owned companies looking to become publicly traded.

In an IPO the issuer obtains the assistance of an underwriting firm, which helps determine what type of security to issue (common or preferred), best offering price and time to bring it to market. When a company lists its securities on a public exchange, the money paid by investors for the newly-issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO, therefore, allows a company to tap a wide pool of investors to provide it with capital for future growth, repayment of debt or working capital. A company selling common shares is never required to repay the capital to investors. Once a company is listed, it is able to issue additional common shares via a secondary offering, thereby again providing itself with capital for expansion without incurring any debt. This ability to quickly raise large amounts of capital from the market is a key reason many companies seek to go public.

Disadvantages of an IPO There are several disadvantages to completing an initial public offering, namely:
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Significant legal, accounting and marketing costs Ongoing requirement to disclose financial and business information Meaningful time, effort and attention required of senior management Risk that required funding will not be raised Public dissemination of information which may be useful to competitors, suppliers and customers

Procedure IPOs generally involve one or more investment banks known as "underwriters". The company offering its shares, called the "issuer", enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares.

The sale (allocation and pricing) of shares in an IPO may take several forms. Common methods include:
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Best efforts contract Firm commitment contract All-or-none contract Bought deal Dutch auction

A large IPO is usually underwritten by a "syndicate" of investment banks led by one or more major investment banks (lead underwriter). 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. Multinational IPOs may have many syndicates to deal with differing legal requirements in both the issuer's domestic market and other regions. For example, an issuer based in the E.U. may be represented by the main selling syndicate in its domestic market, Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in the main selling group is also the lead bank in the other selling groups. Because of the wide array of legal requirements and because it is an expensive process, IPOs typically involve one or more law firms with major practices in securities law, such as the Magic Circle firms of London and the white shoe firms of New York City. Public offerings are sold to both institutional investors and retail clients of underwriters. A licensed securities salesperson ( Registered Representative in the USA and Canada ) selling shares of a public offering to his clients is paid a commission from their dealer rather than their client. In cases where the salesperson is the client's advisor it is notable that the financial incentives of the advisor and client are not aligned. In the US sales can only be made through a final Prospectus cleared by the

Securities and Exchange Commission. Investment Dealers will often initiate research coverage on companies so their Corporate Finance departments and retail divisions can attract and market new issues. The issuer usually allows the underwriters an option to increase the size of the offering by up to 15% under certain circumstance known as the greenshoe or overallotment option.

SEBI Guidelines for IPOs 1. IPOs of small companies Public issue of less than five crores has to be through OTCEI and separate guidelines apply for floating and listing of these issues. 2. Size of the Public Issue Issue of shares to general public cannot be less than 25% of the total issue, in case of information technology, media and telecommunication sectors this stipulation is reduced subject to the conditions that:

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Offer to the public is not less than 10% of the securities issued. A minimum number of 20 lakh securities is offered to the public and Size of the net offer to the public is not less than Rs. 30 crores.

3. Promoter Contribution
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Promoters should bring in their contribution including premium fully before the issue Minimum Promoters contribution is 20-25% of the public issue. Minimum Lock in period for promoters contribution is five years Minimum lock in period for firm allotments is three years.

4. Collection centers for receiving applications

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There should be at least 30 mandatory collection centers, which should include invariably the places where stock exchanges have been established. For issues not exceeding Rs.10 crores (including premium, if any), the collection centers shall be situated at:-

o the four metropolitan centres viz. Bombay, Delhi, Calcutta, Madras; and o at all such centres where stock exchanges are located in the region in which the registered office of the company is situated. 5. Regarding allotment of shares
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Net Offer to the General Public has to be at least 25% of the Total Issue Size for listing on a Stock exchange. It is mandatory for a company to get its shares listed at the regional stock exchange where the registered office of the issuer is located. In an Issue of more than Rs. 25 crores the issuer is allowed to place the whole issue by book-building Minimum of 50% of the Net offer to the Public has to be reserved for Investors applying for less than 1000 shares. There should be atleast 5 investors for every 1 lakh of equity offered (not applicable to infrastructure companies). Quoting of Permanent Account Number or GIR No. in application for allotment of securities is compulsory where monetary value of Investment is Rs.50,000/- or above. Indian development financial institutions and Mutual Fund can be allotted securities upto 75% of the Issue Amount. A Venture Capital Fund shall not be entitled to get its securities listed on any stock exchange till the expiry of 3 years from the date of issuance of securities. Allotment to categories of FIIs and NRIs/OCBs is upto a maximum of 24%, which can be further extended to 30% by an application to the RBI supported by a resolution passed in the General Meeting.

6. Timeframes for the Issue and Post- Issue formalities

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The minimum period for which a public issue has to be kept open is 3 working days and the maximum for which it can be kept open is 10 working days. The minimum period for a rights issue is 15 working days and the maximum is 60 working days. A public issue is effected if the issue is able to procure 90% of the Total issue size within 60 days from the date of earliest closure of the Public Issue. In case of over-subscription the company may have the right to retain the excess application money and allot shares more than the proposed issue, which is referred to as the green-shoe option. A rights issue has to procure 90% subscription in 60 days of the opening of the issue. Allotment has to be made within 30 days of the closure of the Public Issue and 42 days in case of a Rights issue. All the listing formalities for a public Issue has to be completed within 70 days from the date of closure of the subscription list.

7. Dispatch of Refund Orders

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Refund orders have to be dispatched within 30 days of the closure of the Public Issue. Refunds of excess application money i.e. for un-allotted shares have to be made within 30 days of the closure of the Public Issue.

8. Other regulations pertaining to IPO

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Underwriting is not mandatory but 90% subscription is mandatory for each issue of capital to public unless it is disinvestment in which case it is not applicable. If the issue is undersubscribed then the collected amount should be returned back (not valid for disinvestment issues). If the issue size is more than Rs. 500 crores voluntary disclosures should be made regarding the deployment of the funds and an adequate monitoring mechanism to be put in place to ensure compliance. There should not be any outstanding warrants or financial instruments of any

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other nature, at the time of initial public offer. In the event of the initial public offer being at a premium, and if the rights under warrants or other instruments have been exercised within the twelve months prior to such offer, the resultant shares will not be taken into account for reckoning the minimum promoter's contribution and further, the same will also be subject to lock-in. Code of advertisement specified by SEBI should be adhered to. Draft prospectus submitted to SEBI should also be submitted simultaneously to all stock exchanges where it is proposed to be listed.

9. Restrictions on other allotments

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Firm allotments to mutual funds, FIIs and employees not subject to any lockin period. Within twelve months of the public/rights issue no bonus issue should be made. Maximum percentage of shares, which can be distributed to employees cannot be more than 5% and maximum shares to be allotted to each employee cannot be more than 200.

10. Relaxations to public issues by infrastructure companies. These relaxations would be applicable to Infrastructure Companies as defined under Section 10(23G) of the Income Tax Act, 1961, provided their projects are appraised by any Developmental Financial Institution (DFI) or IDFC or IL&FS. The projects must also have a participation of at least 5% of the project cost (in debt and/or equity) by the appraising institution.

The infrastructure companies will be exempted from the requirement of making a minimum public offer of 25 per cent of its securities. The requirement of 5 shareholders per Rs. 1 lakh of offer is also waived in case of offerings by infrastructure companies. For public issues by infrastructure companies, minimum subscription of 90% would no longer be mandatory provided disclosure is made about the

alternate source of funding which the company has considered, in the event of under subscription in the public issue. Infrastructure companies are permitted to freely price the offerings in the domestic market provided that the promoter companies along with Equipment Suppliers and other strategic investors subscribe to 50% of the equity at the same or a higher price than what is being offered to the public. Adequate disclosures about the justification for the pricing will be required to be made in the offer documents. The Infrastructure Companies would be allowed to keep their issues open for 21 days. The relaxation would give infrastructure companies sufficient time to mobilise funds for their issues. Infrastructure Companies would not be required to create and maintain a Debenture Redemption Reserve (DRR) in case of Debenture Issues.

SECURITIES SALES BY PUBLIC COMPANIES

A public company or publicly traded company is a company that offers its securities (stock, bonds, etc.) for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets. This is not to be confused with a Government-owned corporation which might be mis-described as a publicly-owned company. Securities of a public company Usually, the securities of a publicly traded company are owned by many investors while the shares of a privately held company are owned by relatively few shareholders. A company with many shareholders is not necessarily a publicly traded company. In the United States, in some instances, companies with over 500 shareholders may be required to report under the Securities Exchange Act of 1934; companies that report under the 1934 Act are generally deemed public companies. The first company to issue shares is thought to be the Dutch East India Company in

1601. Advantages Publicly traded companies are able to raise funds and capital through the sale of its securities. This is the reason publicly traded corporations are important: prior to their existence, it was very difficult to obtain large amounts of capital for private enterprises. The financial media and city analysts will be able to access additional information about the business. Disadvantages Privately held companies have several advantages over publicly traded companies. A privately held company has no requirement to publicly disclose much, if any financial information; such information could be useful to competitors. For example, publicly traded companies in the United States are required by the SEC to submit an annual Form 10-K containing a comprehensive detail of a company's performance. Privately held companies do not file form 10Ks; they leak less information to competitors, and they tend to be under less pressure to meet quarterly projections for sales and profits. Publicly traded companies are also required to spend more for certified public accountants and other bureaucratic paperwork required of all publicly traded companies under government regulations. For example, the Sarbanes-Oxley Act in the United States does not apply to privately held companies. The money and income of the owners remains relatively unknown by the public. Stockholders In the United States, the Securities and Exchange Commission requires that firms whose stock is traded publicly report their major stockholders each year. The reports identify all institutional shareholders (primarily, firms owning stock in other companies), all company officials who own shares in their firm, and any individual or institution owning more than 5% of the firms stock.

General Trend The norm is for new companies, which are typically small, to be privately held. After a number of years, if a company has grown significantly and is profitable, or has promising prospects, there is often an initial public offering which converts the privately held company into a publicly traded company or an acquisition of a company by publicly traded company. However, some companies choose to remain privately held for a long period of time after maturity into a profitable company. Investment banking firm Goldman Sachs and shipping services provider United Parcel Service (UPS) are examples of companies which remained privately held for many years after maturing into profitable companies. Privatization Less common, but not unknown, is for a public company to buy out its shareholders and become private. This is typically done through a leveraged buyout and occurs when the buyers believe the securities have been undervalued by investors. Publicly held companies can also become privately held by having all of their shares purchased by an individual or small group of investors, or by another company that is privately held. In addition, one publicly traded company may be purchased by one or more publicly traded company(ies), with the bought-out company either becoming a subsidiary or joint venture of the purchaser(s) or ceasing to exist as a separate entity, its former shareholders receiving either cash, shares in the purchasing company or a combination of both. When the compensation in question is primarily shares then the deal is often considered a merger. Subsidiaries and joint ventures can also be created de novo - this often happens in the financial sector. Subsidiaries and joint ventures of publicly traded companies are not generally considered to be privately held companies (even though they themselves are not publicly traded) and are generally subject to the same reporting requirements as publicly traded companies. Finally, shares in subsidiaries and joint ventures can be (re)-offered to the public at any time - firms that are sold in this manner are called spin-outs.

Most industrialized jurisdictions have enacted laws and regulations that detail the steps that prospective owners (public or private) must undertake if they wish to take over a publicly traded corporation. This often entails the wouldbe buyer(s) making a formal offer for each share of the company to shareholders. Normally some form of supermajority is required for this sort of the offer to be approved, but once it happens then usually all shareholders are compelled to sell at the agreed-upon price and the company becomes a subsidiary, ceases to exist or becomes privately held. Trading and valuation The shares of a publicly traded company are often traded on a stock exchange. The value or "size" of a publicly traded company is called its market capitalization, a term which is often shortened to "market cap". This is calculated as the number of shares outstanding (as opposed to authorized but not necessarily issued) times the price per share. For example, a company with two million shares outstanding and a price per share of US$40 would have a market capitalization of US$80 million. However, a company's market capitalization should not be confused with the fair market value of the company as a whole since the price per share are influenced by other factors such as the volume of shares traded. Low trading volume can cause artificially low prices for securities, due to investors being apprehensive of investing in a company they perceive as possibly lacking liquidity. For example, if all shareholders were to simultaneously try to sell their shares in the open market, this would immediately create downward pressure on the price for which the share is traded unless there were an equal number of buyers willing to purchase the security at the price the sellers demand. So, sellers would have to either reduce their price or choose not to sell. Thus, the number of trades in a given period of time, commonly referred to as the "volume" is important when determining how well a company's market capitalization reflects true fair market value of the company as a whole. The higher the volume, the more the fair market value of the company is likely to be reflected by its market capitalization. Another example of the impact of volume on the accuracy of market capitalization is when a company has little or no trading activity and the market

price is simply the price at which the most recent trade took place, which could be days or weeks ago. This occurs when there are no buyers willing to purchase the securities at the price being offered by the sellers and there are no sellers willing to sell at the price the buyers are willing to pay. While this is rare when the company is traded on a major stock exchange, it is not uncommon when shares are traded over-the-counter (OTC). Since individual buyers and sellers need to incorporate news about the company into their purchasing decisions, a security with an imbalance of buyers or sellers may not feel the full effects of recent news.

RIGHTS ISSUE

A rights issue is an issue of additional shares by a company to raise capital under a seasoned equity offering. The rights issue is a special form of shelf offering or shelf registration. With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time. A rights issue is in contrast to an initial public offering, where shares are issued to the general public through market exchanges. Closedend companies cannot retain earnings, because they distribute essentially all of their realized income, and capital gains each year. They raise additional capital by rights offerings. Companies usually opt for a rights issue either when having problems raising capital through traditional means or to avoid interest charges on loans. A rights issue is directly offered to all shareholders of record or through broker dealers of record and may be exercised in full or partially. Subscription rights may either be transferable, allowing the subscription-rights holder to sell them privately, on the open market or not at all. A right issuance to shareholders is generally issued as a tax-free dividend on a ratio basis (e.g. a dividend of one subscription right for one share of Common stock issued and outstanding). Because the company receives shareholders' money in exchange for shares, a rights issue is a source of capital in an organization.

Underwriting Rights issues may be underwritten. The role of the underwriter is to guarantee that the funds sought by the company will be raised. The agreement between the underwriter and the company is set out in a formal underwriting agreement. Typical terms of an underwriting require the underwriter to subscribe for any shares offered but not taken up by shareholders. The underwriting agreement will normally enable the underwriter to terminate its obligations in defined circumstances. A sub-underwriter in turn sub-underwrites some or all of the obligations of the main underwriter; the underwriter passes its risk to the subunderwriter by requiring the sub-underwriter to subscribe for or purchase a portion of the shares for which the underwriter is obliged to subscribe in the event of a shortfall. Underwriters and sub-underwriters may be financial institutions, stockbrokers, major shareholders of the company or other related or unrelated parties. A rights issue is a way in which a company can sell new shares in order to raise capital. Shares are offered to existing shareholders in proportion to their current shareholding, respecting their pre-emption rights. The price at which the shares are offered is usually at a discount to the current share price, which gives investors an incentive to buy the new shares if they do not, the value of their holding is diluted.

SEBI GUIDELINES SEBI Guidelines regarding Rights issue. Companies can now issue Bights Shares subject to the provisions of Section 81 of the Companies Act and the Guidelines for Disclosure and investor Protection issued by the SEBI. The SEBI Guidelines issued in June, 1992 cover New Issue of shares, as well as issue of Rights Shares The SEBI Guidelines relating to issue of Rights shares have been given later in Chapter 19 (Alternation of Capital).

Duties of the Secretary rev: issue of Rights Shares. The duties of the compare secretary may be summarized as follows:

(i) See that the rights issue is within file limits of the authority capital of the company and sanctioned by the provisions of the Articles of the company (ii) See that the Guidelines issued by the SBBI in this respect are followed and the draft prospectus or letter of offer is vetted by the SEBI before it is issued. However after 1.7.95 right issues which are not accompanied by public issues 3 months prior or subsequent to the date of rights issue will not be required lo be vetted by SEBI The lead managers are required to file the letter of offer for a rights issue with SEBI 6 weeks prior to the date on which the offer is proposed or commenced. If SEBI does not ask for any clarifications within 21 days from such filing, the Issuer and Lead manager can go ahead with the proposed offer. (iii) Ensure that the gap between tile closure dates of right issue and public issue does not exceed 30 days. (iv) Where the issue size -exceeds Rs. 50 lakes, steps to be taken for the appointment of a merchant banker. As per SEBI Guidelines, appointment of a Merchant banker is mandatory m case of rights issue of listed companies exceeding Rs. 50 lakhs. (v) Ensure that the issue is not kept open beyond 60 days. (vi) Open a specific bank account for keeping subscription received against rights issue. (vi) Convene a Board meeting, in consultation with the directors, to consider the proposal for rights issue and the proportion in winch the same should be issued. And Fix up the date. time and place and agenda of the general

meeting if permission of general meeting is required under the Articles for increase of capital. If the rights shares are to be issued to the members registered on a particular state. a special resolution has to be passed at the general meeting. (vii) Prepare the explanatory statement, if necessary, and issue notices of the meeting. Detailed as to how the additional capital is to be proposed, utilized and broad ideas about future earnings, required by the Guidelines, should be included in the explanatory statement or in a separate letter addressed to shareholders. (viii) If a special resolution is paired at the general meeting. File the resolution to the Registrar allotment. (xvii) Forward a report in the prescribed form together with the compliance certificate to the closure of the issue.

PRIVATE PLACEMENT

Private placement (or non-public offering) is a funding round of securities which are sold without an initial public offering, usually to a small number of chosen private investors.[1] In the United States, although these placements are subject to the Securities Act of 1933, the securities offered do not have to be registered with the Securities and Exchange Commission if the issuance of the securities conforms to an exemption from registrations as set forth in the Securities Act of 1933 and SEC rules promulgated there under. Most private placements are offered under the Rules known as Regulation D. Private placements may typically consist of stocks, shares of common stock or preferred stock or other forms of membership interests, warrants or promissory notes (including convertible promissory notes), and purchasers are often

institutional investors such as banks, insurance companies or pension funds. Private placement occurs when a company makes an offering of securities not to the public, but directly to an individual or a small group of investors. Such offerings do not need to be registered with the Securities and Exchange Commission (SEC) and are exempt from the usual reporting requirements. Private placements are generally considered a cost-effective way for small businesses to raise capital without "going public" through an initial public offering (IPO).

Since a private placement is offered to a few, select individuals, the placement does not have to be registered with the Securities and Exchange Commission. In many cases, detailed financial information is not disclosed and a the need for a prospectus is waived. Finally, since the placements are private rather than public, the average investor is only made aware of the placement after it has occurred.

ADVANTAGES AND DISADVANTAGES Private placements offer small businesses a number of advantages over IPOs. Since private placements do not require the assistance of brokers or underwriters, they are considerably less expensive and time consuming. In addition, private placements may be the only source of capital available to risky ventures or start-up firms. "With loan criteria for commercial bankers and investment criteria for venture capitalists both tightening, the private placement offering remains one of the most viable alternatives for capital formation available to companies," Andrew J. Sherman wrote in his book The Complete Guide to Running and Growing Your Business. A private placement may also enable a small business owner to

hand-pick investors with compatible goals and interests. Since the investors are likely to be sophisticated business people, it may be possible for the company to structure more complex and confidential transactions. If the investors are themselves entrepreneurs, they may be able to offer valuable assistance to the company's management. Finally, unlike public stock offerings, private placements enable small businesses to maintain their private status. Of course, there are also a few disadvantages associated with private placements of securities. Suitable investors may be difficult to locate, for example, and may have limited funds to invest. In addition, privately placed securities are often sold at a deep discount below their market value. Companies that undertake a private placement may also have to relinquish more equity, because investors want compensation for taking a greater risk and assuming an illiquid position. Finally, it can be difficult to arrange private placement offerings in multiple states.

SEBI GUIDELINES 1. In order to make Indian markets more competitive and efficient, it has been decided to introduce an additional mode for listed companies to raise funds from domestic market in the form of Qualified Institutions Placement (QIP). Key features of the same are as under: Issuer: A company whose equity shares are listed on a stock exchange having nationwide trading terminals and which is complying with the prescribed requirements of minimum public shareholding of the listing agreement will be eligible to raise funds in domestic market by placing securities with Qualified Institutional Buyers (QIBs). Securities: Securities which can be issued through QIP are equity shares or any securities other than warrants, which are convertible into or exchangeable with equity shares (hereinafter referred to as specified

securities). A security which is convertible into or exchangeable with equity shares at a later date, may be converted or exchanged into equity shares at any time after allotment of security but not later than sixty months from the date of allotment. The specified securities shall be made fully paid up at the time of allotment. Investors / Allottees: The specified securities can be issued only to Qualified Institutional Buyers (QIBs), as defined under sub-clause (v) of clause 2.2.2B of the SEBI (DIP) Guidelines. Such QIBs shall not be promoters or related to promoters of the issuer, either directly or indirectly. Each placement of the specified securities issued through QIP shall be on private placement basis, in compliance with the requirements of first proviso to clause (a) of sub-section (3) of Section 67 of the Companies Act, 1956. A minimum of 10% of the securities in each placement shall be allotted to Mutual Funds. For each placement, there shall be at least two allottees for an issue of size up to Rs.250 crores and at least five allottees for an issue size in excess of Rs.250 crores. Further, no single allottee shall be allotted in excess of 50 per cent of the issue size. Investors shall not be allowed to withdraw their bids / applications after closure of the issue. Issue Size: The aggregate funds that can be raised through QIPs in one financial year shall not exceed five times of the net worth of the issuer at the end of its previous financial year. Placement Document: Issuer shall prepare a placement document containing all the relevant and material disclosures. There will be no pre-issue filing of the placement document with SEBI. The placement document will be placed on the websites of the Stock Exchanges and the issuer, with appropriate disclaimer to the effect that the placement is meant only for QIBs on private placement basis and is not an offer to the public. Pricing: The floor price of the specified securities shall be determined

on a basis similar to that for GDR / FCCB issues and shall be subject to adjustment in case of corporate actions such as stock splits, rights issue, bonus issue etc. Other procedural requirements: The resolution approving QIP, passed under sub-section (1A) of Section 81 of the Companies Act, 1956 or any other applicable provision will remain valid for a period of twelve months from the date of passing of the resolution. There shall be a gap of at least six months between each placement in case of multiple placements of specified securities pursuant to authority of the same shareholders resolution. Issuer and Merchant Banker shall submit documents / undertakings, if any, specified in this regard in the listing agreement, for the purpose of seeking in-principle approval and final permission from Stock Exchanges for listing of the specified securities. Involvement of Merchant Banker: QIP shall be managed by a SEBI registered merchant banker who shall exercise due diligence and furnish a due diligence certificate to Stock Exchanges stating that the issue complies with all the relevant requirements. The merchant banker shall file a copy of the placement document and post issue details with SEBI within thirty days of the allotment, for record purpose. 2. The above policy decisions have been given effect to by introducing Chapter XIIIA in the SEBI (DIP) Guidelines, 2000. A copy of Chapter XIIIA is enclosed herewith at Annexure I. The amendments made vide this circular shall come into force with immediate effect. This circular is being issued in exercise of the powers conferred under sub-section (1) of Section 11 of the Securities and Exchange Board of India Act, 1992.

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5. This circular is available on SEBI website at www.sebi.gov.in under the category Legal Framework. The entire text of the SEBI (DIP)

Guidelines, 2000, including the amendments issued vide this circular, is available on SEBI website under the categories Legal Framework and Issues and Listing.

PUBLIC ISSUE Offering a new issue of stock for sale to the public. An issue of this type is often advertised in the press. Any company or a listed company making a public issue or a rights issue of value of more than Rs 50 lakhs is required to file a draft offer document with SEBI for its observations. The company can proceed further only after getting observations from SEBI. The company has to open its issue within three months from the date of SEBIs observation letter. Through public issues, SEBI has laid down eligibility norms for entities accessing the primary market. The entry forms are only for companies making a public issue (IPO or FPO) and not for listed company making a rightsissue.

There are several benefits to being a public company, namely:

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Bolstering and diversifying equity base Enabling cheaper access to capital Exposure, prestige and public image Attracting and retaining better management and employees through liquid equity participation Facilitating acquisitions Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc. Increased liquidity for equity holder.

Public Issue Requirements Entry Norms: Entry forms are different routes available to an issuer for accessing the capital market. I) An unlisted issuer making a public issue of equity shares or any security convertible at a later date into equity i.e (making an IPO) is required to satisfy the following provisions: 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(12 months each)of which not more than 50% are held in monetary assets. If more than 50% of net tangible assets are held in monetary assets, the company should have made firm commitments to deploy such excess monetary assets in its business/ projects. (b) Company has track record of Distributable profits (in terms of Section 205 of the Companies Act, extraordinary items should, be excluded) in at least three of the immediately preceding five years. (c) Net worth of at least Rs. 1 crores in each of the preceding three full years (12 months each). (d) If the company has changed its name within the last one year, at least 50% revenue for the preceding 1 year should be from the activity suggested by the new name. (the last 1 year should be reckoned from the date of filling of the offer document. (e) The issue size should not exceed 5 times the pre-issue net worth as per the audited balance sheet of the last financial year. (Issue for this purpose includes

offer through offer document and firm allotment and promoters contribution through offer document) To provide sufficient flexibility and also to ensure that genuine companies do not suffer on account of rigidity of the parameters, SEBI has provided two other alternative routes to the companies not satisfying any of the above conditions, for accessing the primary Market, as under: Entry Norm II Alternative 1. (Commonly known as QIB Route) An unlisted company which does not satisfy the requirements specified above can make an offer to the public, of equity or any other security convertible at a later date into equity only through book building process. The Issuer Company shall meet the following requirements: (a) Issue shall be through book building route, with at least 50% of the issue to be mandatory allotted to the Qualified Institutional Buyers (QIBs) otherwise full subscription money is to be refunded. Alternative 2. (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(s). (b) In addition to this, at least 10% of the issue size shall be allotted to QIBs* otherwise full subscription money received should be refunded. In addition to satisfying the aforesaid both the alternatives above (entry

norm 2), the Issuer Company shall also satisfy the following criteria, 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 subject to the following, --- Market makers undertake to offer buy and sell quotes for a minimum depth of 300 shares. --- Market makers undertake to ensure that the bid-ask spread for their quotes shall not at any time exceed 10%. --- The inventory of the market makers on each of such stock exchanges, as on the date of allotment of securities, shall be at least 5% of the proposed issue of the company. II)A listed issuer making a public issue (FPO) is required to satisfy the following requirements : (a) 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. (b) The aggregate of the proposed issue size and all previous issues made in the same financial year, in terms of issue size does not exceed 5 times the preissue net worth as per the audited balance sheet of the last financial year. If the net worth after the proposed issue of equity shares or any security convertible at a later date into equity becomes more than 5 times the net worth prior to the issue, it is required to satisfy the criteria of book building process and allot 50% of the issue size to QIBs failing which the subscription money is required to be refunded. (iii) Certain category of entities which are exempted from the aforesaid entry norms,

are as under : (a) Private Sector Banks (b) Public sector banks (c) An infrastructure company whose project has been appraised by a Public Financial Institution or IDFC or IL&FS or a bank which was earlier a PFI and not less than 5% of the project cost is financed by any of these institutions. Besides entry norms, there are some mandatory provisions mentioned in the guidelines, which an issuer is expected to comply before making an issue. Minimum Promoters contribution and lock-in: 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. IPO Grading: Eligibility norms require credit rating from a credit rating agency registered with Board and its disclosure in the offer document. Where credit ratings are obtained from more than one credit rating agency, all the ratings including the unaccepted credit ratings shall be disclosed. It also requires disclosure regarding all the credit ratings obtained during three year preceding the public issue.

ASSIGNMENT ON SEBI GUIDELINES

SUBMITTED BY MARIA ANN JOSEPH 10/PCMA/520