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Role Of Sebi In Issue And Allotment Of Shares

Securities And Exchange Board Of India

About:
By an Administrative Resolution of the Government on April 12, 1988, the Securities and Exchange Board of India was established as a non-statutory body to deal with all matters related to the growth and regulation of the securities market, as well as the protection of investors, and to advise the Government on all of these matters. SEBI was given legislative authority and powers by an Ordinance passed on January 30, 1992. SEBI was established as a statutory organization on February 21, 1992. The Ordinance was superseded by an Act of Parliament on April 4, 1992.[1]

The SEBI functions within the legal framework established by the SEBI Act of 1992.
The SEBI Act establishes four legislative goals for the SEBI:
  1. Protection of investors' securities interests
  2. Encouragement of the growth of the securities market
  3. Securities market regulation and
  4. Matters related to and incidental to it.[2]

SEBI, as a regulator, has been making continual attempts to satisfy changing requirements and accomplish statutory objectives in response to India's increasing securities industry. SEBI has established transparency and accountability norms as a result of ongoing efforts.[3]

Need Of SEBI

  • We need laws to remedy known market imperfections that create sub-optimal results and to avert market failures. In the absence of specialized agency regulation, each market player would conduct its due diligence before engaging in any market transaction. This has a significant social cost. Furthermore, rules signal minimal quality standards, which boosts market trust. Risk-averse investors may abandon the market entirely if such minimal norms are not conveyed, owing to a recognized asymmetric information problem. In its most severe version, the market collapses totally.[4]
     
  • Liberalization also triggered the need for a regulatory body. The abolition of the Capital Issues (Control) Act of 1947 in May 1992 was a significant deregulation move. With this, the government relinquished control over the issuance of capital, the pricing of the issues, the establishment of premia and rates of interest on debentures, and so on, and the market was free to allocate resources to competing uses.[5]
     
  • A major regulatory initiative was the establishment of a statutory autonomous agency called SEBI to assure that it is safe to conduct securities transactions. SEBI created Disclosure and Investor Protection (DIP) guidelines for the benefit of investors. The rules allow issuers that meet the qualifying conditions to issue securities at market-determined rates. The market shifted from merit-based regulation to disclosure-based regulation.[6]

Regulations By Sebi:

SEBI had laid down the entry norms for the entities which are making a public issue.[7]
  • Entry Norms For Public Issue:

    (generally recognized as Profitability Route) The Issuer Company shall meet the following requirements:
    1. Net Tangible Assets of at least Rs. 3 crores in every of the previous 3 complete years of which now no longer extra than 50% are held in financial assets. However, the restriction of 50 percent on financial assets shall now no longer be relevant in case the general public provide is made totally via providing for sale.
    2. Minimum of Rs. 15 crores as average pre-tax working earnings in at least 3 of the straight away previous 5 years.
    3. Net well worth of at least Rs. 1 crore in every of the previous 3 complete years.
    4. If the company has modified its call withinside the remaining 12 months, at least 50% revenue for the previous 1 12 months ought to be from the interest cautioned with the aid of using the brand new name.
    5. The aggregate of the proposed problem and all preceding issues made withinside the identical economic 12 months in phrases of problem length does now no longer exceed 5 instances. the audited balance sheet of the previous financial 12 months.[8]
    To give adequate flexibility and to guarantee that genuine companies are not restricted from raising funds due to rigid constraints, SEBI has created an alternate path for companies that do not meet any of the above qualifications to join the primary market, as follows:
     
  • Entry Norm Ii (Also Known As The Qib Route)

    The issue shall be made using the book building route, with at least 75% of the net offer to the public required to be allocated to Qualified Institutional Buyers (QIBs). If the minimum subscription of QIBs is not met, the company will refund the subscription money.

    A listed issuer making a Public Offering (I.E. FPO) must meet the following requirements.

    Requirements:
    1. If the company's name has been changed during the prior year, at least 50% of income for the preceding year must come from the activity suggested by the new name.
    2. The aggregate issue size of the proposed issue and all previous issues made in the same fiscal year does not exceed five times its pre-issue net worth as per the preceding fiscal year's audited balance sheet.[9]
       
  • There is No Entry Norm for a listed company making a Right Issue.[10]

Entities Ineligible For Further Public Offer

  1. If the Board forbids the company, any of its promoters, promoter group, or directors from gaining access to the capital marketplace;
  2. If any of the company's promoters or directors is a promoter or every other firm this is barred from gaining access to the capital market through the Board;
  3. If the issuer or any of its promoters or directors is a willful defaulter; d) if the company or any of its promoters The restrictions in (a) and (b) above shall no longer apply to individuals or organizations who were previously debarred by the Board during the period of debarment.[11]

General Conditions

  1. General Conditions For IPO:
    An issuer making an initial public offering must ensure that:
    1. It has applied to one or more stock exchanges for in-principle approval to list its specified securities on such stock exchanges and has designated one among them as the designated stock exchange;
    2. It has entered into a contract with a depository for dematerialization of the specified securities already issued and proposed to be issued,
    3. All of the promoters' specified securities are dematerialized.
    4. Each of the promoters' existing partially paid-up equity shares has been fully paid up or were paid up before the filing of the offer document;
    5. Unless full disclosures regarding the total number of identified securities or the amount suggested to be raised from the further issue are made in such proposal offer document or offer document, as the case may be, it has made firm plans for finance through provable means for 75% of the stated means of finance for a particular project document or a refund of application monies.[12]
       
  2. The amount for general corporate purposes, as specified in the draft offer document and the offer document, should not exceed 25% of the total amount raised by the issuer.

Regulations In Respect Of Green Shoe Option

A 'green shoe option' is a business option that may be exercised through a Stabilizing Agent. It entails allocating shares in excess of those included in the public offering. Thus, the primary goal of the 'green shoe option is not to provide additional share capital to the firm, but to act as a stabilizing force if the issuance is oversubscribed. The promoters' shares are loaned to the Stabilizing Agent (SA). Such a loan is permitted up to 15% of the issue amount. After the purpose is completed, these are returned to the promoters. Promoters make no money from the purchase.

The theory is that because there is an excess supply of shares (up to 15%), the market price will not skyrocket to unnaturally high levels. If the price of shares drops below the issue price, SA will acquire shares from the market, so that the price increases to the appropriate level. If, despite an excess supply of shares, the price remains higher than the issue price, buying the shares from the market is out of the question since it will exacerbate the market price. SEBI Regulations, 2018 in relation to the Green Shoe Option (as modified up to and including:
  1. An issuer may provide a green shoe option for stabilizing the post-listing price of its specified securities if the following conditions are met:
    1. The issuer has been allowed, by resolution, to do so
    2. The issuer has designated a lead manager as a stabilizing agent in charge of the price stability procedure;
    3. The issuer and the stabilizing agency have signed into an agreement specifying all of the terms and conditions of the green shoe option, including fees and costs spent by the stabilizing agent in carrying out its tasks, before submitting the draft offer document.
    4. Before filing the offer document, the stabilizing agent has entered into an agreement with the promoters or pre-issue shareholders, or both, for borrowing specified securities from them by clause (g) of this sub-regulation, specifying the maximum number of specified securities that may be borrowed for the purpose of allotment or allocation of specified securities in excess of the issue size (hereinafter referred to as the "over-allotment"), which agreement specifies the maximum number of specified securities that may be borrowed.[13]
    5. Subject to subsection (d), the lead manager shall decide the amount of specified securities to be over-allocated in the public issuance in collaboration with the stabilizing agent.
    6. All mal disclosures concerning the green shoe option stated in Schedule VI must be included in the draught offer document and offer document.

Other Mandatory Provisions

  • Minimum Promoter's 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 18 months[14]. Lock‐in indicates a freeze on the shares. The remaining pre-issue capital of the promoters should also be locked in for a period of 6 months[15] from the date of listing. In case of public issue by a listed issuer [i.e. FPO], the promoters shall contribute not less than 20% of the post issue capital or 20% of the issue size.
  • IPO Grading:
    An IPO grade is the grade assigned to an initial public offering (IPO) of equity shares or other convertible securities by a Credit Rating Agency registered with SEBI. The grade represents a relative assessment of the IPO's fundamentals in comparison to other listed equity securities. Disclosure of "IPO Grades" earned is required for firms planning an IPO.
  • Unless there are at least 1000 prospective allottees in the public issue, the corporation cannot issue any shares or convertible instruments.
  • Even though the company's shares are not listed, it can apply for a public issue of convertible securities.
  • Post-2022 Amendment:
    Limitations for Object of the Issue- If the issuing firm identifies an object for future inorganic expansion in its offer document but has not identified an acquisition or investment target, the amount for such objects and the amount for general corporate purposes shall not exceed 35% of the total amount offered.

If the proposed acquisition or strategic investment object has been specified and declared in the offer documents, these constraints will not apply.

Conditions for Offer for Sale by Selling Shareholders- Existing shareholders who own more than 20% of the pre-issue ownership are not permitted to sell more than 50% of their pre-issue shareholding in an initial public offering ('IPO').

Furthermore, those with less than 20% of the issuer's pre-issue holdings cannot offer more than 10% of the issuer's share capital.
  • Lock-in for Anchor Investors:
    Anchor investors must be locked in for a period of 90 days from the date of allotment for 50% of the shares issued to them. It must continue to be 30 days from the date of allotment for the remaining 50%.
  • Lock-in Provisions for Preferential Issue:
    The lock-in period for allotment of up to 20% of post-issue paid-up capital to Promoters or Promoter Group has been reduced to 18 months.
  • The lock:
    in period for allotments exceeding 20% of post-issue paid-up capital has been lowered to six months.
  • Persons who are not Promoters or members of the Promoter Group:
    The lock-in period for allotments has been lowered to six months.[16]
End-Notes:
  1. Glossary of Capital Market ,Securities and Exchange Board of India Available at: https://www.sebi.gov.in/sebi_data/attachdocs/1292926861775.pdf , last seen on 8/9/2022
  2. PART I Policies And Programmes, Securities and Exchange Board of India, Available at: https://www.sebi.gov.in/sebi_data/commondocs/ar01021_p.pdf .last seen on 8/9/2022.
  3. Preamble And Introduction, Securities and Exchange Board of India, Available at: https://www.sebi.gov.in/sebi_data/commondocs/eoi_p.pdf, last seen on 9/9/2022.
  4. A Historical perspective of the securities market, Securities and Exchange Board of India(March 23, 2004), Available at: https://www.sebi.gov.in/media/speeches/mar-2004/a-historical-perspective-of-the-securities-market-reforms_2882.html, , last seen on 9/9/2022.
  5. Ibid.
  6. Ibid.
  7. Supra 8.
  8. Supra 21.
  9. Ibid.
  10. Ibid.
  11. S. 5, Securities and Exchange Board Of India (Issue of Capital And Disclosure Requirements) Regulations, 2018.
  12. S.7, Securities And Exchange Board Of India (Issue of Capital And Disclosure Requirements) Regulations, 2018.
  13. Supra 1.
  14. SEBI cuts lock-in period for promoters to 18 months post-IPO, The Hindu (17/8/2021), available at Sebi cuts lock-in period for promoters to 18 months post-IPO - Times of India (indiatimes.com), last seen on 9/9/2022.
  15. Ibid
  16. S.16, Securities And Exchange Board Of India (Issue of Capital And Disclosure Requirements) Regulations, 2018.

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