Further Public Offer by listed companies

1.0 Objective

1.1 This Memorandum seeks to place the following proposals before the Board
with respect to listed companies -
• Relaxation from strict compliance of requirements under Fast Track
Route
• Relaxation from strict disclosure of Financial Statements
• QIBs/ HNIs to bid at any price above floor price and allotment on price
priority in Further Public Offers (FPOs)

2.0 Background

2.1 In 2004, Government of India had taken steps to disinvest its ownership in
few Public Sector Companies adopting the ‘offer for sale’ mode for the
same. At that time, SEBI (DIP) Guidelines did not have specific provisions
enabling ‘offer for sale’ by a listed company. The Board in its meeting held
on February 10, 2004 had approved the adoption of a framework for
disinvestment which exempted application of DIP Guidelines to offer for
sale by listed PSUs. This was done in public interest to facilitate the
disinvestment process of Government that would lead to larger investor/
public participation in Government owned companies.

2.2 In the ICDR Regulations notified recently, Regulation 2(n) specifies that
ICDR regulations are applicable for offer for sale by listed companies.
Consequent to this change, Department of Disinvestment (DOD),
Government of India has expressed certain difficulties in completing the
disinvestment program of Government as per schedule by February 2010
and have sought certain exemptions. DOD is also proposing pure auction
for QIB portion to maximize proceeds via disinvestment and have sought
SEBI’s concurrence thereon.

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2.3 Merchant bankers have also often indicated that the procedure and
timeline for making a further public offering in India is rather tedious with
the result that the companies choose to bypass FPOs /Rights issue and
opt to raise money through GDRs or QIP. This memorandum has been
formulated keeping in mind the request for relaxation received from DOD
for Government Companies, as well as suggestions on issues received
from the industry/ merchant bankers in various fora. Accordingly, the
proposals in the memorandum are intended to apply to Further Public
Offerings including Offer for Sale (OFS) by listed companies.

3. Matter under consideration

3.1 Relaxation from strict compliance of requirements under Fast Track

Route

3.1.1 Regulation 10 of SEBI (ICDR) Regulations, 2009 has laid down the
conditions for fast track issue. The same are given below:
a) the equity shares of the issuer have been listed on any recognized
stock exchange having nationwide trading terminals for a period of at
least three years immediately preceding the reference date;
b) the average market capitalization of public shareholding of the issuer is
at least ten thousand crore rupees;
c) the annualized trading turnover of the equity shares of the issuer during
six calendar months immediately preceding the month of the reference
date has been at least two per cent. of the weighted average number of
equity shares listed during such six months’ period;
d) the issuer has redressed at least ninety five percent. of the complaints
received from the investors till the end of the quarter immediately
preceding the month of the reference date;

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 e) the issuer has been in compliance with the equity listing agreement for
a period of at least three years immediately preceding the reference
date;
f) the impact of auditors’ qualifications, if any, on the audited accounts of
the issuer in respect of those financial years for which such accounts
are disclosed in the offer document does not exceed five per cent. of
the net profit or loss after tax of the issuer for the respective years;
g) no show-cause notices have been issued or prosecution proceedings
initiated or pending against the issuer or its promoters or whole time
directors as on the reference date;
h) the entire shareholding of the promoter group of the issuer is held in
dematerialized form on the reference date.

3.1.2 A reading of the stipulated conditions for fast track issue would show that
compliance with conditions at points (b), (c) and (e) of para 3.1.1 in
particular might be the most cumbersome. The following changes are
proposed in this regard for all companies making Fast Track Issues of
FPOs:
a) The average market capitalization of public shareholding of the issuer
may be reduced to five thousand crore rupees from ten thousand crore
rupees.
b) The annualized trading turnover of the equity shares of the issuer
during six calendar months immediately preceding the month of the
reference may be set as at least two percent of the weighted average
number of equity shares available as free float for the companies
whose public shareholding is less than 15 percent of the issued capital.
c) One of the requirements of fast track issuance is compliance with the
equity listing agreement for a period of at least three years immediately
preceding the reference date. It is proposed that we may not deem it
as non compliance incase the clause relating to composition of Board
of Directors has not been complied with in one or more quarters,

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 subject to the condition that at the time of filing the offer document, the
company is in compliance in this regard and adequate disclosures are
made in the offer document in this respect.

3.2 Relaxation from the requirement of disclosure of restated Financial

Statements

3.2.1 Another area that is considered difficult in terms of compliance in further

public offering is the requirement of disclosures of restated financial
statements. As per Regulation 57 read with Part A of Schedule VIII of the
ICDR Regulation, the issuer is required to disclose:
a) Audited Restated Standalone Financial Statements for last 5 years.
b) Audited Restated Consolidated Financial Statements for last 5 years
c) Audited Restated Standalone Financial Statements for the stub period
d) Audited Restated Consolidated Financial Statements for the stub
period.
Since the restatement of accounts for 5 years take time, the benefit of fast
track issuance is sometimes lost and even the companies that fulfil the
stringent criteria of fast track issuances are not able to take advantage of it
in view of this requirement.

3.2.2 It may be stated here that the earlier DIP Guidelines have not only ipso
facto incorporated the requirement of Companies Act, Schedule II (which
sets out the matters to be set out in a prospectus) for FPOs/ Rights
Issues, but has also gone on to include additional requirement of restated
financial statements for such issues which the Companies Act, 1956 does
not mandate. In fact Section 56 of Companies Act which sets out the
matters to be stated in a prospectus specifically mentions under sub-
section 5 (b) that:
“56 (5) This section shall not apply –
(a)………(rights issues)
(b) to the issue of a prospectus or form of application relating to

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 shares or debentures which are, or are to be, in all respects
uniform with shares or debentures previously issued and for the
time being dealt in or quoted on a recognised stock exchange;
but subject as aforesaid, this section shall apply to a prospectus or a form
of application, whether issued on or with reference to the formation of a
company or subsequently. Full text of Section 56 is given in Annexure A.

3.2.3 Where more than one year financials are stated in an offer document, it is
relevant to give investors financial information which is comparable after
adjusting for audit qualifications, change in accounting policies etc. It is in
this context that restated financials were mandated in erstwhile DIP
guidelines which required disclosure of financial information for 5 years
and the stub period. As brought out in para 3.2.2 above, Schedule II
requirements are not applicable to FPOs of identical instruments quoted
on a stock exchange. SEBI may therefore specify the nature of
disclosures required in a prospectus issued by a listed company for
offering shares which are, or are to be, in all respects uniform with shares
previously issued and for the time being dealt in or quoted on a
recognised stock exchange.

3.2.4 For rights issue, SEBI, with the approval of the Board, has already
rationalised the disclosure requirements including disclosure of financials
as much of the information a listed company is available in public domain.
For rights issues, the requirement of restated financial statements has
been done away with. The issuer is now required to give only the audited
accounts of last financial year and audited or unaudited with limited review
results for the stub period instead of 5 years restated financials required
earlier.

3.2.5 It is therefore proposed that the requirement for disclosure of financials in

FPOs of identical instruments quoted on a stock exchange may be
brought on par with rights issues, to start with for companies that are

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 eligible to make an issue under fast track, provided the financial reports of
the company are available on the website of any recognised stock
exchange with nationwide trading terminals or on a common e-filing
platform specified by the Board. However, this relaxation would not apply
to those companies where there has been change in management
pursuant to takeovers or where the company has been listed pursuant to
an exemption granted from Rule 19 (2) (b) of SCR Act.

3.3 QIBs/ HNIs to bid at any price above floor price and allotment on
price priority in Further Public Offers (FPOs)

3.3.1 It has been suggested by the DOD that in the PSU offerings to public,
QIBs may be allowed to bid at any price above a floor price.

3.3.2 In the proposed method, the bidders are free to bid at any price above the
floor price. The highest bidder is allotted the securities he has bid for and
then the second highest bidder and so on, until all the securities on offer
are exhausted. In this process, allotment is on price priority basis and can
be at varying prices. Where, however the number of securities bid for at a
price is more than available quantity, then allotment can be done on:
i) Time priority of bids OR
ii) Proportionate allotment within that price category.
From among the two methods mentioned above, adoption of time priority
method may lead to complaints. In view of this, the second method of
proportionate allotment within that price category may be more
appropriate.

3.3.3 It may be stated here that the erstwhile DIP guidelines or extant ICDR
regulations do not require the offer document to specify a price band. It
permits an issuer/offeror to open the issue with only a floor price. The
Regulations however do not elaborate the method to be followed for
allotment if an issuer were to go with only a floor price. In such a scenario,

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 if one is required to follow the proportionate allotment basis, there would
be no incentive for an investor to bid at a price higher than others. Some
of the institutional investors may be willing to pay/ bid at higher prices, if
they were to be assured of allotment of the desired quantity which is not
possible under proportionate allotment process.

3.3.4 It may further be stated that till date no issuer has gone for an issue with
only floor price. Therefore, how allotment is to be done in such cases has
never been tested. However, the proposal may be approved as it can
potentially maximize the proceeds from the offering.

3.3.5 In view of the above, it is proposed that the procedure stated at para 3.3.2

may be provided for as an additional method of book building, to start with,

for FPOs, subject to the following:

a) Retail individual investors in such cases may be allotted shares at the

floor price.
b) In order that a single bidder does not garner all shares on offer by
outbidding others and to have a wider base of institutional investors, a
cap either in terms of number of shares or percentage to issued capital
of the company may be placed.

4.0 Proposal

4.1 The Board is requested to consider and approve the proposals contained
in paragraphs 3.1.2, 3.2.5, and 3.3.5 above and authorize the Chairman to
take necessary consequent steps to give effect to the decisions.

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 Annexure A

The full text of Section 56 of the Companies Act, 1956:

56 Matters to be stated and reports to be set out in prospectus

(1) Every prospectus issued-
(a) by or on behalf of a company, or
(b) by or on behalf of any person who is or has been engaged or
interested in the formation of a company, shall state the matters
specified in Part I of Schedule II and set out the reports specified in
Part II of that Schedule; and the said Parts I and II shall have effect
subject to the provisions contained in Part III of that Schedule.
(2) A condition requiring or binding an applicant for shares in or debentures of a
company to waive compliance with any of the requirements of this section, or
purporting to affect him with notice of any contract, document or matter not
specifically referred to in the prospectus, shall be void.
(3) No one shall issue any form of application for shares in or debentures of a
company, unless the form is accompanied 1[by a memorandum containing such
salient features of a prospectus as may be prescribed] which complies with the
requirements of this section:
Provided that a copy of the prospectus shall, on a request being made by any
person before the closing of the subscription list, be furnished to him:
Provided further that] this sub-section shall not apply if it is shown that the form of
application was issued either-
(a) in connection with a bona fade invitation to a person to enter into an
underwriting agreement with respect to the shares or debentures; or
(b) in relation to shares or debentures which were not offered to the public.
If any person acts in contravention of the provisions of this sub-section, he
shall be punishable with fine which may extend to fifty thousand rupees.

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(4) A director or other person responsible for the prospectus shall not incur any
liability by reason of any non-compliance with, or contravention of, any of the
requirements of this section, if-
(a) as regards any matter not disclosed, he proves that he had no
knowledge thereof; or
(b) he proves that the non-compliance or contravention arose from an
honest mistake of fact on his part; or
(c) the non-compliance or contravention was in respect of matters which,
in the opinion of the Court dealing with the case, 4[were immaterial], or was
otherwise such as ought, in the opinion of that Court, having regard to all the
circumstances of the case, reasonably to be excused:
Provided that no director or other person shall incur any liability in respect of the
failure to include in a prospectus a statement with respect to the matters
specified in clause 18 of Schedule II, unless it is proved that he had knowledge of
the matters not disclosed.
(5) This section shall not apply-
(a) to the issue to existing members or debenture holders of a company of
a prospectus or form of application relating to shares in or debentures of the
company, whether an applicant for shares or debentures will or will not have the
right to renounce in favour of other persons; or
(b) to the issue of a prospectus or form of application relating to shares or
debentures which are, or are to be, in all respects uniform with shares or
debentures previously issued and for the time being dealt in or quoted on
a recognised stock exchange;
but subject as aforesaid, this section shall apply to a prospectus or a form
of application, whether issued on or with reference to the formation of a
company or subsequently.
(6) Nothing in this section shall limit or diminish any liability which any person
may incur under the general law or under this Act apart from this section.

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