Public offering of equity shares and convertible securities
In India, pursuant to a public offering, equity shares and convertible securities may be listed on any of following three market platforms:
- The main board: listing requires issuers to meet certain eligibility criteria and to fully comply with the disclosure regime mandated primarily under the Companies Act and the ICDR Regulations.
- The ITP: the regulatory requirements for listing permit a relaxation of eligibility and issuer disclosure requirements for certain entities meeting the stipulated minimum qualified institutional buyers (QIB) investment thresholds or those engaged in businesses involving intensive use of technology.
- The SME exchange: for listing of SMEs whose face value of post-IPO (initial public offering) capital is up to 250 million rupees. The regime for disclosures and eligibility of issuers on this platform has also been set out and is distinct from those for the main board of the stock exchange.
This chapter largely deals with listing on the main board of the stock exchange and the ITP.
In the case of a book-built issue, both primary and secondary public offerings of equity shares and convertible securities on the stock exchange require filing of a draft offer document (the draft red herring prospectus) with the SEBI, for its observations, and with the stock exchanges; filing of an updated offer document (the red herring prospectus), incorporating the SEBI observations, with the Registrar of Companies, before inviting subscriptions; and, thereafter, filing of an offer document updated for pricing details (the prospectus) with the Registrar of Companies. In the case of a fixed-price issue, both primary and secondary public offerings of equity shares and convertible securities require filing of a draft offer document (draft prospectus) with the SEBI for its observations. Upon receiving observations from the SEBI, the offer document with pricing details (prospectus) is registered with the Registrar of Companies, before inviting subscriptions.
For an ITP listing, an issuer may elect to list its securities on the stock exchange, either pursuant to an initial public offering, or without making a public offer. Accordingly, the issuer may file a draft offer document or a draft information document with the SEBI, with each carrying the specified disclosures, and subsequently, the red herring prospectus and final information document, respectively. The ITP is currently accessible only to institutional investors and non-institutional investors, and not to retail individual investors.
An issuer seeking to list its equity shares or convertible securities on the main board is also required to fulfil certain eligibility conditions prescribed by the stock exchanges. For instance, BSE Limited and National Stock Exchange of India Limited (NSE), for listing of equity shares pursuant to an IPO, prescribe a minimum post-IPO paid-up equity capital of 100 million rupees and a market capitalisation of 250 million rupees. Alternatively, an issuer listing its equity shares and convertible securities on the ITP is not required to fulfil any minimum capitalisation requirements. The NSE for listing on the main board also prescribes that there should not have been any material regulatory or disciplinary action initiated by stock exchanges or any regulatory authority against the applicant company in the three years before the date of application for listing and in the past year against the promoters, promoting companies, group companies, companies promoted by the promoters and promoting companies of the applicant company. In addition, at various stages of the offering process, certain approvals must be obtained from the stock exchanges where equity shares are proposed to be listed: an in-principle approval at the time of filing of the draft offer document, and a listing and trading approval upon the issuance or transfer of equity shares and prior to the commencement of trading of the equity shares on the stock exchanges. Further, if any of its promoters or directors is declared as a ‘fugitive economic offender’ by a designated court of law in India, such issuers are not eligible to make a public offering of equity shares on both the main board and the ITP of the stock exchange. Additionally, if an issuer or any of its promoters or directors is declared to be a wilful defaulter, or is in default of payment of interest or repayment of the principal amount in respect of debt securities issued by it to the public for a period of more than six months, such issuers are also not eligible to make a public offering of its equity shares or other convertible debt instruments.
For a public offering and listing on the main board, Schedule VI of the ICDR Regulations sets out detailed requirements in relation to the disclosures to be made in an offer document. These include detailed disclosures relating to capital structure, history and business of the issuer, risks relating to the issuer and the offering, objects of the offering, legal proceedings relating to the issuer, financial statements, management’s discussion and analysis on the financial condition of the issuer, and any other information material for investors to make an investment decision. Further, India has decided to adopt the convergence of its existing standards with International Financial Reporting Standards, referred to as the Indian Accounting Standards (Ind AS), and based on the net worth of the issuer; Ind AS shall be applicable to the issuers in a phased manner. In this regard, the SEBI has also clarified the manner of disclosure of financial statements in the offer document for companies intending to list their securities.
If it is a rights offering by a listed issuer, subject to compliance with the periodic disclosure requirements of stock exchanges and certain other conditions, the ICDR Regulations provide for limited disclosures in the offer document.
ICDR Regulations regards the ITP as a trading platform, distinct from the main board of the stock exchange. The ITP has been made available to issuers with non-traditional business models, including those involving intensive application of technologies with at least 25 per cent of the pre-issue capital held by QIBs, or those other companies in which the shareholding of QIBs is at least 50 per cent. Certain categories of institutional investors are identified by the SEBI as being QIBs, which includes institutions such as scheduled commercial banks, insurance companies, systemically important non-banking financial companies. The intent of the ITP is to ease the public capital-raising process for companies meeting alternative criteria that would otherwise find it onerous to fulfil eligibility conditions of listing on the main board of stock exchanges. In terms of disclosure requirements, a company seeking to list on this platform will need to disclose broad objects for utilisation of the issue proceeds and the basis of issue price may include disclosures, except projections, as deemed fit by the issuer. The SEBI has made available to companies listed on the ITP the option to migrate to the main boards of stock exchanges three years after the expiry of the date of listing on the ITP, subject to fulfilment of certain conditions. In October 2018, the SEBI floated a revised consultation paper on the review of the framework for the ITP wherein it proposed to rename the ITP as the ‘Innovators Growth Platform’. The consultation papers also proposes to relax the requirement for companies using inter alia technology, information-technology, or intellectual-property to provide products or services to have at least 25 per cent of their pre-issue capital held by QIBs for them to list on the ITP. Under the proposed amendments, in addition to QIBs, this 25 per cent pre-issue capital can also be held by (i) family trusts; (ii) category III foreign portfolio investors; (iii) pooled investment funds; and (iv) accredited investors; each meeting certain prescribed requirements. By widening the investor base, the proposed amendments will enable a larger number of companies to be eligible to list on the ITP. The other key proposals, inter alia, included removing the restriction on any person holding 25 per cent or more of the post-issue capital of the company intending to list on ITP, decreasing the minimum application size from one million rupees to two hundred thousand rupees, reducing the minimum number of allottees to 50, and diluting the conditions for allocation for any specific category of investors. While SEBI has approved such key proposals in a recent board meeting, the corresponding amendments to the ICDR Regulations are yet to be notified by the SEBI.
Under the Securities Contracts Act, at least 25 per cent of the equity shares of a listed company should be held by members of the ‘public’, namely, by shareholders other than promoters and affiliates. An unlisted company undertaking an IPO is also required to comply with this condition by offering an appropriate number of shares to the public in the IPO. In this regard, the relevant rules provide for certain exceptions to this condition:
- in the case of public offers where the post-issue capital calculated at the offer price is more than 16 billion rupees and up to 40 billion rupees, the minimum public shareholding immediately upon listing can be a percentage pursuant to a public offer equivalent to the value of 4 billion rupees; and
- if the post-issue capital of the company calculated at the offer price is more than 40 billion rupees, the rules provide for an unlisted company to offer at least 10 per cent of its equity shares to public in the IPO.
In both cases, however, such a company will be required to increase its public shareholding to 25 per cent within three years from the listing, in a manner specified by the SEBI. In this regard, the SEBI has also recently recognised, among others, qualified institutional placements (QIP) offer for sale through stock exchange mechanism and open market sale as permitted routes, subject to applicable restrictions, for complying with the minimum public shareholding requirement. Until recently, Institutional Placement Programme (IPP) was also recognised as a permitted route for complying with the minimum public shareholding norms. The new ICDR Regulations has, however, done away with the IPP. Failure to meet minimum public shareholding requirements within the prescribed time could lead to action against the non-compliant entity by the stock exchanges, including imposition of a fine, freezing of the shareholding of the promoter or promoter group and also compulsory delisting, in accordance with applicable law.
Public offering of debt securities
In terms of the Debt Regulations, a public offering of debt securities requires filing of a draft offer document with a stock exchange for seeking public comments. Thereafter, upon suitably addressing the comments received from the public, an offer document (prospectus) is filed with the Registrar of Companies. Certain classes of issuers, such as public financial institutions, specified government companies, non-banking financial companies (including housing finance companies) and listed companies satisfying the prescribed eligibility criteria under the Debt Regulations may also undertake successive public offerings of debt securities through a shelf prospectus. A shelf prospectus is valid for a period of one year, and up to four offerings of debt securities can be made under such a shelf prospectus. Prior to each offering, an issuer is required to file an information memorandum with the Registrar of Companies, which sets out the principal terms and conditions of the securities offered, and any material developments that may have occurred after filing of the shelf prospectus. In terms of the Debt Regulations, an offer document (including a shelf prospectus) is required to set out all material disclosures necessary for the subscribers to make an informed investment decision, including certain matters specified in the Debt Regulations and the Companies Act. While certain disclosure requirements under the Companies Act and the Rules are no longer applicable to public equity issuances, they continue to apply to public offerings of debt securities, till new norms are issued by the SEBI. For purposes of listing of debt securities, an in-principle approval from the stock exchanges where the debt securities are proposed to be listed is to be obtained before launching the transaction; a listing approval upon allotment and a trading approval is required to be obtained from the stock exchanges before listing and commencement of trading. The Debt Regulations also provide that if an issuer or any of its promoters or directors is declared as a wilful defaulter by a bank or financial institution, or it is in default of payment of interest or repayment of principal amount in respect of debt securities issued by it to the public for a period of more than six months, such issuer will not be eligible to make a public offering of debt securities.
The SEBI has also prescribed additional norms governing public issue and listing of green debt securities (green bonds); including listing of privately placed green bonds. Debt securities shall be considered ‘green bonds’ if the funds raised through issuance of such debt securities are to be utilised for projects or assets falling under certain prescribed categories, including:
- renewable and sustainable energy;
- clean transportation;
- sustainable water management;
- climate change adaptation; and
- biodiversity conservation.
The SEBI requires all issuers of green bonds to make certain disclosures in their respective offer or disclosure documents, including a statement on the environmental objectives of the issue, details of the projects or assets in which proceeds of the green bonds are proposed to be allocated or invested and the criteria or decision-making process employed to identify such projects or assets. Further, in addition to the disclosures prescribed in the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (Listing Regulations), an issuer who has listed its green bonds is required to disclose along with its annual report, among others, a list and brief description of projects or assets to which proceeds of the green bonds have been allocated or invested, details of amount disbursed, qualitative performance indicators and quantitative performance measures of the environmental impact of the projects or assets, and methods and key underlying assumptions used in the preparation of such performance indicators and metrics.
Public offering of non-convertible redeemable preference shares
Similar to the Debt Regulations, under the RPS Regulations, prior to making a public offering of non-convertible redeemable preference shares, a draft offer document has to be filed with a stock exchange to invite comments from the public. Subsequently, upon suitably addressing the comments received, an offer document (prospectus) is filed with the Registrar of Companies. The offer document is required to set out all material disclosures necessary for the subscribers to make an informed investment decision, including certain matters specified in the RPS Regulations and the Companies Act. It may be noted that certain disclosure requirements under the Companies Act and the Rules are no longer applicable to public issuances, pursuant to the Companies Amendment Act 2017 (the 2017 Amendment). However, until new norms are issued by the SEBI, such disclosure requirements will continue to apply to issuance of non-convertible redeemable preference shares.
Listing of non-convertible redeemable preference shares requires certain eligibility conditions to be satisfied by an issuer. For instance, the issuer or the promoter should not have been restrained, prohibited or debarred by the SEBI from accessing the securities market or dealing in securities as on the date of filing of the draft offer document or offer document. Additional requirements under the RPS Regulations include obtaining an in-principle approval from the stock exchanges where the non-convertible redeemable preference shares are proposed to be listed and obtaining at least one credit rating by a credit rating agency registered with the SEBI. Pursuant to an amendment to the RPS Regulations in May 2016, if an issuer or any of its promoters or directors is declared as a wilful defaulter by a bank or financial institution or it is in default of payment of interest or repayment of principal amount in respect of non-convertible redeemable preference shares issued by it to the public for a period of more than six months, such issuer will not be eligible to make a public offering of non-convertible redeemable preference shares.
In a departure from the erstwhile position of requiring an issuer to enter into separate listing agreements for each kind of security proposed to be listed, the SEBI has prescribed a uniform listing agreement for issuers to enter into with stock exchanges. The substantive provisions of the erstwhile listing agreements have been provided for in the Listing Regulations. The Listing Regulations encapsulate standards to be adhered to by listed companies, including those relating to corporate governance and ongoing disclosures. A shorter uniform listing agreement, however, is still required to be entered into by listed issuers with the stock exchanges.
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