ISSUE OF SHARES

UNIT II
 • By private placement
• By Allotting entire shares to an
Issue House which in turn will
offer the shares to the public.
Companies limited • By inviting the public to
by shares may subscribe for shares in the
issue shares company through a prospectus
• What is private placement?
• If a company listed or unlisted makes an offer to allot or
invite subscription to more than 200 persons in a
financial year , the same will be deemed to be an offer to
the public.
• In counting the 200, the following are excluded:
• Qualified Institutional buyers
• Employees who are offered securities under a scheme of
employee stock option (ESOP).
• Public Issue: When the issue is for the general public and anyone
interested in to invest in the company can buy the shares. It can be further
of two types as follows:
• Initial Public Offer (IPO): When an unlisted company wants to go public
for the first time, it can be done through Initial Public Offer. IPO helps the
company to get listed and generate funds from public. Sometimes, IPO is
riskier than other stocks investment as the small investors are not able to
evaluate the correct bid rate. So, the stock price decline (may also
appreciate) just after the final issue.
• Further Public Offer (FPO): Here the already listed company generate the
funds from the public (anyone interested) for few projects, expansion etc.
• Rights Issue: The listed company issues the securities only to the existing
shareholders of its company. It is based on the ratio in which the
shareholders are holding number of shares on any fixed date. Generally,
the rights issue are on the discounted rate and are beneficial for the
shareholders, So, they prefer to invest.
 THERE ARE SEVERAL BENEFITS FOR
BEING A PUBLIC COMPANY

Access to risk capital

Increased public image
stock options
Attracting and retaining better management and employees
through liquid equity participation
Facilitating mergers and acquisitions
Creating multiple financing opportunities: equity, convertible
debt, cheaper bank loans, etc.
Managing Shareholder Value:
Increased liquidity for equity holder
Sharing Strategic Information through Periodic Reporting:
REGULATORY FRAMEWORK FOR
PUBLIC ISSUE OF SHARES
ICDRR lists down following information in 20 regulations:

Eligibility criteria

Provisions and pricing for Public issue

Contribution of Promoters

Minimum offer that can be issued, offer document, reservation

Issue opening and closing of the Issue

INTERMEDIERIES INVOLVED IN THE
ISSUE PROCESS
 BOOK BUILDING

• Book Building is a process undertaken 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 a notice, circular,
advertisement, document or information memoranda or offer
document".
• Book Building is basically a process used in Initial Public Offer
(IPO) for efficient price discovery. It is a mechanism where,
during the period for which the IPO is open, bids are collected
from investors at various prices, which are above or equal to
the floor price. The offer price is determined after the bid
closing date.
Advantages of book building

• Price of instrument is determined in a more realistic way

• Book building is a process of fixing price for an issue on feedback from
potential investors on how they are willing to bid to pick up issues and
instruments.
• As the issue is pre-sold, there would be no uncertainties relating to the fate
of the issue involved.
• The Issuer company saves advertising and brokerage commissions.
• Flexibility to increase/decrease price and/or size of offering the issues is
possible.
• Transparency of allocations is made.
• Book-building process inspires investors confidence leading to a larger
investor universe.
• Book-building process creates a liquid and buoyant after market.
• As the syndicate members will get firm allocation, the investors to that
extent are assured of allotment.
• Immediate allotment and listing of placement portion of securities.
SEBI Regulations for Issue of shares to the public

1. No Issuer shall make an Initial Public offering if specified

securities:
a) If the issuer / promoters or the promoter group are debarred from
accessing the capital market.
b) Unless an application for listing of the securities in a recognized
stock exchange with a nation wide trading terminals.
c) Unless it has entered into an agreement with a depository for
dematerialization.
d) Unless all existing partly paid up equity shares of the issuer have
either been fully paid up or partly paid up.
e) Unless firm arrangement of finance through verifiable means
towards 75% of the stated means of finance have been made.
• The issuer company shall appoint one or more merchant
bankers at least one of whom shall be a lead merchant
banker and other intermediaries in consultation with the
lead merchant banker.
Eligibility conditions for an IPO

Net tangible assests of at least three crore rupees in each of the preceding three years of
which not more than 50% of the assets are held in monetary assests.

Minimum pretax operating profit of 15 crores during any three out of the preceding 5
years.

Net worth of at least one crore rupees in each of the previous three years.

The aggregate of the proposed issue and all other issues made in the same FY does not
exceed 5 times its pre issue net worth

If it has changed the name within the last one year at least fifty percent of the revenue in
the preceding one year must be earned by it from the activity indicated by the new name.
DIFFERENT CATEGORIES OF INVESTORS
PARTICIPATING IN AN IPO

Institutio • QIB’s
nal
investors
:
Non
Instituti
onal
Investor
s–
HNI’s
Retail
individual
investors
 TYPE OF OFFER DOCUMENTS

• Offer Document
• ‘Offer document’ is a document which contains all
the relevant information about the company,
promoters, projects, financial details, objects of
raising the money, forms of the issue etc. and is
using for inviting subscription to the issue being
made by the issuer. Offer document is called
‘Prospectus’ in case of a public issue and letter of
offer in case of rights issue.
• Draft Offer Document refers to the first document filed by
companies with SEBI and stock exchanges for approval, who
after reviewing, communicate their observations to the
Company, which the company has to incorporate in the offer
document. SEBI typically requires a period of 30 days for
processing a draft offer document. The draft offer document is
placed by SEBI on its website. It is also placed on the websites of
recognized stock exchanges where specified securities are
proposed to be listed and merchant bankers associated with the
issue for public comments for a period of at least 21 days.
Furthermore, the issuer either on the date of filing the draft offer
document with SEBI or on the next day has to make a public
announcement in one English national daily newspaper, one
Hindi national daily newspaper and one regional language
newspaper at the place where its registered office is situated,
disclosing to the public the fact of filing of draft offer document
and inviting the public to give their comments to SEBI.
• Red herring prospectus A red herring prospectus (RHP) is a
preliminary registration document that is filed with SEBI in the
case of book building issue which does not have details of
either price or number of shares being offered or the amount
of issue. This means that in case price is not disclosed, the
number of shares and the upper and lower price bands are
disclosed. On the other hand, an issuer can state the issue size
and the number of shares are determined later. In the case of
book-built issues, it is a process of price discovery as the price
cannot be determined until the bidding process is completed.
Hence, such details are not shown in the Red Herring
prospectus filed with ROC in terms of the provisions of the
Companies Act. Only on completion of the bidding process,
the details of the final price are included in the offer
document. The offer document filed thereafter with ROC is
called a prospectus.
• Abridged Prospectus is an abridged version of offer
document in public issue and is issued along with
the application form of a public issue. It contains all
the salient features of the prospectus.
• Prospectus is an offer document in case of a public issue which has all
relevant details including price and number of shares or convertible
securities being offered. This document is registered with ROC before the
issue opens in case of a fixed price issue and alter the closure of the issue
in case of a book built issue.
• Shelf prospectus is a prospectus which enables an issuer to make a series
of issues with in a period of 1 year without the need of filing a fresh
prospectus every time. This facility is available to public sector banks,
schedule banks and public financial institutions.
• Letter of offer is an offer document in case of a Right issue of shares or
convertible securities and is filed with stock exchanges before the issue
opens.
• Abridged letter of offer is an abridged version of the letter of offer. It is
sent to all the shareholders along with the application form.
• Placement document is an offer document for the purpose of Qualified
Institutional Placement and contains all the relevant and material
disclosures.