2.Ipo,Rights,Bonus

3-1April 11, 2023

SESSION - 2ISSUING OF EQUITY & TYPES

Prof. A.K. Mishra

IIM Lucknow

April 11, 2023

3-2April 11, 2023

Options for Raising FundsOptions for Raising Funds

Fund Raising Options

Hybrid

DebtIn India

Outside

India

From Banks & FIs

Bonds /Deb

ECB

ADR/GDR

Various forms of Convertibles

FCCB & FCEB

Equity IPO/FPO/Rights/Bonus SESSION 2

SESSION 3

Equity

Debt

Hybrid

SESSION 4

3-3April 11, 2023

KINDS OF ISSUESKINDS OF ISSUES

Public Issue Right Issue Bonus Issue

IPO FPO

Fresh Issue

Offer for Sale Offer for Sale

Fresh Issue

QIPs

Preferential Issue

Private Placement

Issues

Composite Issue

Sponsored Issue

Public Issue

Deposit Receipt

INCLUDING RIGHTS

GOVERNED BY DISCLOSURE & INVESTOR PROTECTION SEBI GUIDELINES

3-4April 11, 2023

ISSUE MANAGEMENTISSUE MANAGEMENTPROSPECTUS ISSUE

INITIAL ISSUE /PUBLIC ISSUE/ IPO

– NEW ISSUE OF UNLISTED COMPANY (SHARES OR DEBENTURES)

– ANY FINANCIAL INSTRUMENT WITH DUE DISCLOSURE

– NO MARKET PLACE FOR ISSUE OF NEW SECTS

– WIDE PUBLICITY THROUGH MEDIA, DIRECT MAILING

– OFFERED THROUGH PROSPECTUS OR OFFER DOCUMENT

WHICH GIVES IMPORTANT DETAILS ABOUT THE ISSUE

• OFFERING PRICE DETERMINED IN CONSULTATION WITH

LEAD MANGER & UNDERWRITER

• ISSUE FORM WHICH IS TO BE FILLED BY SUBSCRIBER

• PERIOD OF SUBSCRIPTION: MIN 3 WORKING DAYS & NOT

MORE THAN 10 WORKING DAYS

3-5April 11, 2023

Eligibility Criteria for Unlisted Eligibility Criteria for Unlisted Companies - SEBICompanies - SEBIExemptions

• Bank or banking company set up under the Banking Regulation Act, 1949 Or Banking Companies Act, 1970

• An infrastructure company:

–Whose project has been appraised by a public financial institution (PFI)

–Not less then 5% of the project cost is financed by any of the PFI

• Rights issue by a listed company

Companies with track record

Companies without track record

• Track record of 3 yr distributable profits

• Pre-issue net worth of not less than Rs. 1 Cr

• Net tangible assets of min Rs. 3 Crores

• Prospective allottees in the IPO should not be less than 1000 in number

Primary Criteria

Choice of Route: Fixed Price or Book Building

Choice of Route: Book Building

• In case of project funding, 15% participation by FIs/ SCBs–10% of this from appraiser–10% of issue size to be

allotted to QIBs

• 50% of the net offer to public being allotted to QIBs

• Min post-issue face value capital must be 10 Cr

OR• Compulsory mkt

making for min 2 years from the date of listing of shares

+

+

Choice of Route: Fixed Price or Book Building

• Min post-issue face value capital must be 10 Cr

OR• Compulsory mkt making for

min 2 years from the date of listing of shares

3-6April 11, 2023

Eligibility Criteria For IPO – Eligibility Criteria For IPO – StockStock Exchange (BSE) Exchange (BSE)

Large Companies Small Companies

•Minimum post-issue paid-up capital shall be Rs. 3 crore; and

•Minimum issue size shall be Rs. 10 crore; and

•Minimum market capitalization shall be Rs. 25 crore

BSE Eligibility Criteria

•Minimum post-issue paid-up capital shall be Rs. 3 crore; and

•Minimum issue size shall be Rs. 3 crore; and

•Minimum market capitalization shall be Rs. 5 crore

•Minimum number of public shareholders after the issue shall be 1000

•A due diligence study may be conducted by an independent team of CAs or Merchant Bankers appointed by BSE.

3-7April 11, 2023

Why IPO??Why IPO??For Funding Needs

•Funding Expansion & Diversification

•Funding Acquisitions

•Funding Global Requirements

•Funding Joint Venture

•Funding Infrastructure Requirements,

•Financing Working Capital

•Funding General Corporate Purposes

•Investing in businesses through other companies

•Repaying debt to strengthen the Balance Sheet

•Meeting Issue Expenses

For Non-funding Needs

•Enhancing Corporate Stature

•Retention and incentive for Employees through stock options

•Providing Investors exit options

•Provide liquidity to the shareholders

3-8April 11, 2023

IPO Process – Fixed Price IssueIPO Process – Fixed Price Issue

Due diligence

Appointment of IB and legal counsel

Drafting of Draft Prospectus

Filing with SEBI & Stock Exchanges

SEBI Clearance & ROC Filing of the Prospectus

Pre-Marketing

Decision to go for IPO

Roadshows

Issuer

Issue Open

Allotment

Issue Closure

Listing

Funds transferred to issuer

Preparation / Approvals Filing the Prospectus and Marketing Launch & Completion

Management gets the approval of BOD

SEBI GIVEN UP VETTING OF PROSPECTUS

3-9April 11, 2023

IPO Process – Book Built IssueIPO Process – Book Built Issue

Due diligence

Appointment of BRLM and legal

counsel

Drafting of Draft Red Herring

Filing with SEBI & Stock Exchanges

SEBI Clearance & ROC Filing Pre-Marketing

Decision to go for IPO

Roadshows

Issuer

Book building

RoC filing of final Prospectus

Pricing & Allocation

Listing

Funds transferred to issuer

Preparation / Approvals Marketing and Estimation of Price Range Launch & Completion

Management gets the approval of BOD

SEBI GIVEN UP VETTING OF PROSPECTUS

3-10April 11, 2023

Execution Process TimelineExecution Process TimelineActivity

Preparation Phase

Due Diligence

Filing of Draft Document1

week

Sebi Observation

Finalization & filing of offer Document

Issue PeriodMin. 3 Days

Post Issue Activities 2 - 3 weeks

IPO Process - 23 weeks

2 weeks

4 - 5 weeks

4 - 8 weeks

2 - 3 weeks

COMPLEX PROCEDURE, EXPERTS ADVISE NEEDED

3-11April 11, 2023

Intermediaries InvolvedIntermediaries Involved

Lead Managers CATEGORY 1

• Overall Pre & Post issue Management

• Conduct due diligence and finalize disclosure drafting Offer Document

• Ensure compliance protocol with SEBI / NSE / BSE

Domestic & International Legal Counsels

• Legal Due Diligence, Drafting the offer document

• Assistance in complying with requirement for selling in international geographies

Bankers • Acting as collecting agents, Escrow Account & Refund account

• Coordination with Issuer & Bankers for collections, reconciliation, refunds

• Securing allocation approval from Stock Exchanges

• Post issue co-ordination collation and reconciliation of information

• Auditing & preparing financials for inclusion in the Offer Document

• Verify/audit various financial and other data used in the Offer document and provide Comfort Letter• Bulk printing of Red Herring Prospectus Bid Forms, final Prospectus etc.

• Ensure timely dispatch and distribution of stationery to all centers

Registrars

Auditors

Printers

Creating advertisement materials and getting published all statutory notices as per norms

Advertisers

Self Certified Syndicate Bank (SCSB)

• Acting as collecting agents for ASBA (Application Supported by Block Amount) process

3-12April 11, 2023

Minimum Public ShareholdingMinimum Public Shareholding•Min 25% of the post issue paid up capital with the public (ie. other than promoter and promoter group)

•However, at least 10% can be offered if

–Minimum offer size – Rs. 100 crores

–Issuance through book building with 60% QIB allocation

•Continuous public shareholding needs to be maintained

•Not applicable to government companies, infrastructure companies and companies referred to the Board for Industrial and Financial Reconstruction.

3-13April 11, 2023

Minimum Promoters Contribution and Lock-inMinimum Promoters Contribution and Lock-in

Promoter’s Contribution

• Minimum 20% of the post issue capital of the Company for unlisted companies;

• for listed companies, either to extent of 20% in issue or to ensure post issue holding of 20%

Lock-in period

• For Promoters: Lock-in for a period of 3 years from the date of allotment

• Balance pre-issue capital,

– Must be locked-in for a period of 1 year from the date of allotment

– Shares issued last will be locked-in first

Exemption

• In case of public issue of securities by a company which has been listed on a stock exchange for at least 3 years and has a track record of dividend payment for at least 3 immediately preceding years.

• In case of companies where no identifiable promoter or promoter group exists.

• In case of rights issues.

3-14April 11, 2023

Issue PricingIssue Pricing• SEBI allows free pricing of IPO (Equity & Rights)

– Approval of RBI might be required for public issues by banks

• Differential pricing is permissible in a public issue to retail individual investors and retail individual shareholders

– Retail investors can be offered shares at a discount to the price offered to other investor categories (Max discount can be 10%)

• Price Band: The cap price can be 20% more than the floor price. Price band can be revised by 20% from the floor price.

• No Par Value Restriction: If the issue price is above Rs.500 then the issuer can fix the FV of shares below Rs.10 but a minimum of Rs.1.

3-15April 11, 2023

Disclosures in the Offer DocumentDisclosures in the Offer Document

Capital Structure

• Shareholding Pattern (pre-issue and post-issue)

• Securities Premium Account (pre-issue and post-issue)

• Holding of the promoter and promoter group

• Disclosure about ESOPs if any

Objects of the Issue

• Total requirements of funds

• Means of Financing

– Undertaking by the issuer company confirming firm arrangements of finance through verifiable means towards 75% of the stated means of finance (excluding proposed IPO)

• Details about the appraisal of the project

• Interim use of funds

Business• Description about the Industry in which the Company operates

• Detailed description about the business of the Company

• Risks related to the Company

• External Risk Factors

• Details about the Board of Directors and various committees

• Details about key management persons

Risk Factors

Company

Management

3-16April 11, 2023

Disclosures in the Offer Document (Cont’d)Disclosures in the Offer Document (Cont’d)

Financial Disclosures

• Auditors Report to have five year restated financials for Issuer Company, and All Subsidiaries

• Audited financials presented should not be more than six months old at the time of filing DRHP with SEBI and must be updated to be not more than six months old on the date of filing the prospectus with the ROC

• All financials should be presented based on Indian GAAP

MD&A

• Detailed discussion on performance for the past 3 years• Capital Expenditure• Cash Flow and Liquidity

Litigations and Defaults

• All pending litigations in which the Company/Promoters / Promoter Group / Directors / Group companies are involved.– Both, litigations filed by or against the Company/Promoters / Promoter

Group / Directors / Group companies• Outstanding litigations, defaults, etc., pertaining to matters likely to affect

operations and finances of the company.• The pending proceedings initiated for economic offences against the

directors, the promoters, companies and firms promoted by the promoters indicating their present status.

3-17April 11, 2023

• NSE, BSE, OTCEI and 20 other regional SEsNSE, BSE, OTCEI and 20 other regional SEs

• Listing and trading of shares governed by Securities Listing and trading of shares governed by Securities Contracts Regulation Act (SCRA) and listing guidelines of Contracts Regulation Act (SCRA) and listing guidelines of SEs.SEs.

• IPOs have to be listed in order to be traded. IPOs have to be listed in order to be traded. – Minimum paid up capital of Rs 10 crore for listing on Minimum paid up capital of Rs 10 crore for listing on

BSE BSE – Min paid up capital Rs 100 cr + networth of Rs 25 crores Min paid up capital Rs 100 cr + networth of Rs 25 crores

on NSEon NSE– Min paid up capital of Rs 5 crores on regional Stock Min paid up capital of Rs 5 crores on regional Stock

ExchangesExchanges

• ALL NEW IPOs COMPULSORILY TRADED IN DEMAT ALL NEW IPOs COMPULSORILY TRADED IN DEMAT FORMFORM

Issue ListingIssue Listing

3-18April 11, 2023

ISSUE MANAGEMENTISSUE MANAGEMENT

PROSPECTUS ISSUEPROSPECTUS ISSUE

FURTHER ISSUE/COMPOSITE ISSUEFURTHER ISSUE/COMPOSITE ISSUE

– Issue of securities by a listed company on a public cum rights basis offered through a single offer document wherein the allotment for both public and rights components of the issue is proposed to be made simultaneously;

3-19April 11, 2023

ISSUE MANAGEMENTISSUE MANAGEMENTPROSPECTUS ISSUEPROSPECTUS ISSUE

RIGHT ISSUE/OFFERRIGHT ISSUE/OFFER

– ISSUE OF NEW SHARES TO EXISTING SHARE HOLDERSISSUE OF NEW SHARES TO EXISTING SHARE HOLDERS

• TO BE OFFERED IN FIRST INSTANCE ON PRO RATA BASIS (SEC

81, COMPYS ACT, 1956)

– GIVEN PRE EMPTIVE RIGHTS TO SUBSCRIBE TO NEW ISSUESGIVEN PRE EMPTIVE RIGHTS TO SUBSCRIBE TO NEW ISSUES

– ISSUED AT ISSUED AT PAR OR REMIUM PAR OR REMIUM TO EXISTING SHARE PRICESTO EXISTING SHARE PRICES

– OPEN FOR MIN 30 OPEN FOR MIN 30 DAYS & NOT MORE THAN 60 AYS & NOT MORE THAN 60 DAYSAYS

– Standby underwriting – Underwriter agrees to buy any shares that are not Standby underwriting – Underwriter agrees to buy any shares that are not

purchased through the rights offeringpurchased through the rights offering

– IF ISSUE NOT UNIF ISSUE NOT UNDDERWRITTTEN & UNERWRITTTEN & UNDDERSUSCRIBEERSUSCRIBED, MONEYD, MONEY TO TO

BE REFUNEBE REFUNEDD WITHIN 42 WITHIN 42 DDAYS FORM AYS FORM DDATE OF CLOSUREATE OF CLOSURE

3-20April 11, 2023

RIGHT SHARESRIGHT SHARES• NON SHAREHOLDER CAN ALSO SUBSCRIBE IF EXISTING

HOLDER RENOUNCES RIGHTS IN HIS FAVOR

– HOLDERS WITH SPECIAL RESOLUTION MAY FOREFEIT THIS

RIGHT PARTIALLY OR FULLY

– PROCEDURES :• OFFER LETTER WITH FOUR APPLICATION FORMS SENT• FORM A - ACCEPTANCE OF RIGHTS & APP FOR ADDTL SHRS• FORM B - TO RENOUNCE RIGHTS IN FAVOUR OF OTHERS• FORM C - FOR APPLICANT IN WHOSE FAVOUR

RENOUNCEMENT HAS BEEN DONE• FORM D - TO MAKE A REQUEST FOR SPLIT FORMS• ALL THE FORMS TO BE MAILED WITHIN 30 DAYS

ISSUE MANAGEMENTISSUE MANAGEMENT

3-21April 11, 2023

ISSUE MANAGEMENTISSUE MANAGEMENTCONSEQUENCE OF RIGHT ISSUE - ABC CO.CONSEQUENCE OF RIGHT ISSUE - ABC CO.

PAID UP EQUITY CAPITALPAID UP EQUITY CAPITAL(10,00,000 SHARES OF RS 10 EACH)(10,00,000 SHARES OF RS 10 EACH) 100,00,000100,00,000RETAINED EARNINGSRETAINED EARNINGS 200,00,000200,00,000EBITEBIT 120,00,000120,00,000INTERESTINTEREST 20,00,000 20,00,000PBTPBT 100,00,000100,00,000TAX (50%)TAX (50%) 50,00,000 50,00,000PATPAT 50,00,000 50,00,000EPSEPS RS 5 RS 5M.P PER SHARE (ASUME P/E AS 8)M.P PER SHARE (ASUME P/E AS 8) RS 40 RS 40PROPOSED RIGHT SHARESPROPOSED RIGHT SHARES 2,00,000 2,00,000PROPOSED SUBSCRIPTION PRICEPROPOSED SUBSCRIPTION PRICE RS 20 RS 20NO. OF EXISTING SHARES REQD FOR A RIGHT SHARENO. OF EXISTING SHARES REQD FOR A RIGHT SHARE(10,00,000 / 2,00,000)(10,00,000 / 2,00,000) 5 share 5 sharePERSON HOLDING 100 SHARE GETS 20 RIGHT SHARESPERSON HOLDING 100 SHARE GETS 20 RIGHT SHARES

3-22April 11, 2023

ISSUE MANAGEMENTISSUE MANAGEMENTVALUE OF A SHARE AFTER RIGHT ISSUE, EXPECTED TO VALUE OF A SHARE AFTER RIGHT ISSUE, EXPECTED TO

VR = VR = NPNP0 0 + S+ S = = 5 X 40 + 20 5 X 40 + 20 = RS 36.67= RS 36.67

N + 1N + 1 5 + 1 5 + 1

WERE N = NO. OF EXISTING SHARES REQD FOR RIGHT ISSUEWERE N = NO. OF EXISTING SHARES REQD FOR RIGHT ISSUE

PP0 0 = CUM RIGHT MARKET PRICE PER SHARE= CUM RIGHT MARKET PRICE PER SHARE

S = SUBS PRICE AT WHICH RIGHT SHARES ARE ISSUEDS = SUBS PRICE AT WHICH RIGHT SHARES ARE ISSUED

RATIONALRATIONAL• FOR EVERY N SHARES BEFORE RIGHT ISSUE, THERE WOULD BE FOR EVERY N SHARES BEFORE RIGHT ISSUE, THERE WOULD BE

N+1 SHARES AFTER THE RIGHT ISSUEN+1 SHARES AFTER THE RIGHT ISSUE• MKT VALUE OF THESE MKT VALUE OF THESE N + 1N + 1 SHRS EXPECTED TO BE MKT VALUE SHRS EXPECTED TO BE MKT VALUE

OF OF N CUM RIGHTN CUM RIGHT SHARES SHARES PLUS SPLUS S THE SUBSCRIPTION PRICE THE SUBSCRIPTION PRICE

• RIGHTS & SHAREHOLDER’S WEALTHRIGHTS & SHAREHOLDER’S WEALTH• NOT AFFECTED IF RIGHTS EXERCISED IN FULL BY SH HOLDERSNOT AFFECTED IF RIGHTS EXERCISED IN FULL BY SH HOLDERS

3-23April 11, 2023

ISSUE MANAGEMENTISSUE MANAGEMENT RIGHTS & SHAREHOLDER’S WEALTH

A HAS 100 EQ SH IN ABC CO.WITH MKT VALUE OF RS 40 EACHWILL BE GIVEN RIGHTS OF 20 SHARES @ RS 20 EACH

HE EXERCISES HIS RIGHTS

•MV OF ORIGINAL SHARES (100 X 40) 4,000

•ADDTL SUBS PRICE PAID (20 SH X RS 20) 400

•TOTAL INVESTMET 4,400

•MV OF 120 SH @ 36.67 PER SHARE (PREV.SLIDE) AFTER RIGHTS SUBSCRIPTION (120x36.67) 4,400

CHANGE IN WEALTH (4400 - 4400) 0

3-24April 11, 2023


HE SELLS HIS RIGHTS


•ADDTL SUBS PRICE PAID (20 SH X RS 20) 400

•VALUE REALISED BY SELLING 20 RIGHTS @ RS 36.67 PER SHARE 733•NET VALUE REALISED 333 333

•MV OF 100 SH HELD AFTER RIGHT ISSUE @ 36.67 PER SHARE 3,667

CHANGE IN WEALTH (3667 + 333 - 4000) 0

3-25April 11, 2023


HE ALLOWS RIGHTS TO EXPIRE


•MV OF 100 SH HELD AFTER RIGHT ISSUE @ 36.67 PER SHARE 3,667

CHANGE IN WEALTH (3667 - 4000) (333)

3-26April 11, 2023

ISSUE MANAGEMENTISSUE MANAGEMENTVALUE OF RIGHTS WITHIN SPECIFIED DATEVALUE OF RIGHTS WITHIN SPECIFIED DATE

• VALUE OF RIGHT WHEN STOCK IS TRADING VALUE OF RIGHT WHEN STOCK IS TRADING RIGHTS ONRIGHTS ON – R = VALUE OF RIGHTSR = VALUE OF RIGHTS– PPR R = MARKET VELUE OF SHARE TRADING RIGHTS ON= MARKET VELUE OF SHARE TRADING RIGHTS ON– S = STRIKE PRICES = STRIKE PRICE– N = NUMBER OF RIGHTS TO PURCHASE ONE SHAREN = NUMBER OF RIGHTS TO PURCHASE ONE SHARE

• CO X MAKES RIGHT OFFER WITH STRIKE PRICE OF RS 15 WITH 5 CO X MAKES RIGHT OFFER WITH STRIKE PRICE OF RS 15 WITH 5 RIGHTS FOR 1 NEW SHARE. CURRENTLY SHARES HAVE MKT RIGHTS FOR 1 NEW SHARE. CURRENTLY SHARES HAVE MKT PRICE OF CUM RIGHTS OF RS 16.50. PRICE OF CUM RIGHTS OF RS 16.50.

• INITIAL VALUE OF EACH RIGHT WILL BE INITIAL VALUE OF EACH RIGHT WILL BE = 16.50 - 15/ 5 + 1 = 0.25= 16.50 - 15/ 5 + 1 = 0.25• AFTER SPECIFIED DATE SHARE IS AFTER SPECIFIED DATE SHARE IS EX-RIGHTSEX-RIGHTS• SHARE PRICE DECREASES BY INITIAL VALUE OF RIGHTS SHARE PRICE DECREASES BY INITIAL VALUE OF RIGHTS • THUS SHARE PRICE EX RIGHTS THUS SHARE PRICE EX RIGHTS (P(Pee = P = Pr r - R)- R) = 16.50 - 0.25 = 16.25= 16.50 - 0.25 = 16.25

R = R = Pr - SPr - S N+1N+1

3-27April 11, 2023

Rights Offering versus Public Rights Offering versus Public OfferingOffering

Advantages of Rights Offering

With a low enough subscription price, the cost of

IPO, underwriting can be eliminated.

Firm can tap a market that already exists.

Current shareholders can retain their present

ownership proportion, no wealth transferDisadvantages of Rights Offering

More costly to complete than a public offering

Does not broaden the shareholder base

3-28April 11, 2023

ISSUE MANAGEMENTISSUE MANAGEMENTPROSPECTUS ISSUEPROSPECTUS ISSUE

BONUS SHARESBONUS SHARES

• TO EXISTING SHARE HOLDERS AS A RESULT OF TO EXISTING SHARE HOLDERS AS A RESULT OF

CAPITALISATION OF RESERVESCAPITALISATION OF RESERVES

• DOES NOT RESULT INTO RAISING NEW FUNDSDOES NOT RESULT INTO RAISING NEW FUNDS

• PROFITS & RESERVES CONVERTED INTO ADDITIONAL SH CAPPROFITS & RESERVES CONVERTED INTO ADDITIONAL SH CAP

• NO ADDITION IN LIABILITY IN B/S TAKES PLACENO ADDITION IN LIABILITY IN B/S TAKES PLACE

• DISTRIBUTION DETERMIND IN PROPORTION TO EXISTING DISTRIBUTION DETERMIND IN PROPORTION TO EXISTING

HOLDERSHOLDERS

– Holder holding 100 shares when 10% (1:10) bonus issue madeHolder holding 100 shares when 10% (1:10) bonus issue made

– Receives 10 additional sharesReceives 10 additional shares

3-29April 11, 2023

BONUS SHARES

A.Equity Portion Before Bonus Issue

Paid up share capital

10,00,000 shares of Rs 10 each fully paid up 10,000,000

Reserves & surplus 30,000,000

B.Equity Portion After Bonus Issue in Ratio of 1:1

Paid up share capital

20,00,000 shares of Rs 10 each fully paid up 20,000,000

Reserves & surplus 20,000,000

In the wake of a bonus issue

The shareholders proportional ownership remains unchanged

The book value, market price, E.P.S decreases.

3-30April 11, 2023

BONUS SHARES - REASONS

•Tends to bring market price within more popular range

•O/S shares increases helping in more active trading helping company to achieve reputation in eyes of investors

•Nominal rate of dividend tends to decline. This may dispel the impression of profiteering.

•Shareholders regard a bonus issue as a firm indication that the prospects for the company are good & dividends may increase

•Improves prospects of raising additional funds

3-31April 11, 2023

• ISSUED IN ADDITION TO & NOT IN LIEU OF CASH DIVIDENDISSUED IN ADDITION TO & NOT IN LIEU OF CASH DIVIDEND

• AOA TO ALLOW FOR CAPITALIZATION OF RESERVES AOA TO ALLOW FOR CAPITALIZATION OF RESERVES

• CO NOT A DEFAULTER IN PAYMENT OF STATUTORY DUESCO NOT A DEFAULTER IN PAYMENT OF STATUTORY DUES

• MADE OUT OF CAPITALISATION OF FREE RESERVE BUILT BY GENUINE MADE OUT OF CAPITALISATION OF FREE RESERVE BUILT BY GENUINE

PROFIT OR SH PREM COLLECTED IN CASHPROFIT OR SH PREM COLLECTED IN CASH

– Includes investment allowance reserve, Excludes capital reserve on account of Includes investment allowance reserve, Excludes capital reserve on account of

asset revaluationasset revaluation

• PARTLY MADE SHARES CONVERTED INTO FULLY PAID UP SHARESPARTLY MADE SHARES CONVERTED INTO FULLY PAID UP SHARES

• MADE WITH 6 MONTHS FROM DATE OF APPROVAL MADE WITH 6 MONTHS FROM DATE OF APPROVAL

• BONUS SAHRES ALSO TO BE GIVEN TO DEBENTURE HOLDERS IF THERE BONUS SAHRES ALSO TO BE GIVEN TO DEBENTURE HOLDERS IF THERE

IS AN IMPENDING CONVERSIONIS AN IMPENDING CONVERSION

• AFTER ISSUE IF SUBSCRBD & PAID UP CAPTL EXCEEDS AUTHORISED AFTER ISSUE IF SUBSCRBD & PAID UP CAPTL EXCEEDS AUTHORISED

CAPITAL, RESOLUTION TO BE PASSED TO INCREASE AUTHORISED CAPITAL, RESOLUTION TO BE PASSED TO INCREASE AUTHORISED

CAPITALCAPITAL

BONUS SHARES - REGULATIONS

3-32April 11, 2023

DETERMINING MAX BONUS RATIODETERMINING MAX BONUS RATIO

• Residual Reserve Test– Residual reserves (excluding revaluation reserves that cannot be

capitalized) after proposed capitalization should be at least 40% of the post bonus share capital.

• Yield Test– 30% of the average amount of pre-tax profits of the company in the

previous three years should yield a return of at least 10% on the increased capital.

• RPT RPT = = (R-SB) > = 0.4 (1 + B) S(R-SB) > = 0.4 (1 + B) S

• YIELD TEST YIELD TEST = = 0.3 (PBT) > = 0.1 S (1 + B)0.3 (PBT) > = 0.1 S (1 + B)

• were R were R = Reserves before bonus issue= Reserves before bonus issue

• SS = Paid up Share capital before bonus issue= Paid up Share capital before bonus issue

• B B = Bonus Ratio= Bonus Ratio

• PBT PBT = Average PBT for last 3 years= Average PBT for last 3 years

3-33April 11, 2023

An Illustration: Consider a company for which the following data is available:An Illustration: Consider a company for which the following data is available:

Paid up share capital (S)Paid up share capital (S) Rs. 100mRs. 100m

Reserves (R)Reserves (R) Rs. 150mRs. 150m

Average PBT in the previous three yearsAverage PBT in the previous three years Rs. 80mRs. 80m

Using the equations:Using the equations:

(R-SB) > = 0.4 (1 + B) S(R-SB) > = 0.4 (1 + B) S

150 – 100b>= 0.4 * 100 (1+b)150 – 100b>= 0.4 * 100 (1+b)

0.3 (PBT) > = 0.1 S (1 + B)0.3 (PBT) > = 0.1 S (1 + B)

0.3 * 80 >= 0.1 * 100 (1+b)0.3 * 80 >= 0.1 * 100 (1+b)

The above is reduced to The above is reduced to

11/14 >= b and 14/10 >= b11/14 >= b and 14/10 >= b

Since 11/14 >= b is more restrictive than 14/10 >= b we find that the maximum Since 11/14 >= b is more restrictive than 14/10 >= b we find that the maximum bonus share ratio is 11/14bonus share ratio is 11/14

DETERMINING MAX BONUS RATIO

3-34April 11, 2023

ISSUE MANAGEMENTISSUE MANAGEMENTBONUS ISSUE - COMPUTING MAX BONUS RATIOBONUS ISSUE - COMPUTING MAX BONUS RATIO

•12,00,000 EQ SHARES HAVE ALREADY BEEN ALLOTTED

THUS ENDING THE FINAL PAYMENT OF PLANT

•INCLUDED IN 90,00,000 SHARES

•PLANT WORTH 4 CR SHOWN ON ASSETS SIDE OF B/S

3-35April 11, 2023


•OPPOSITE EFFECT ON LIABILITIES SIDE

•12,00,000 SHARES ISSUED = 12,00,000 X 10 = 120,00,000 SHOWN IN PAID UP CAPITAL

•PREMIUM WHICH IS NOT COLLECTED IN CASH IS • = COST OF PLANT – FACE VALUE OF SHARES ISSUED TO VENDOR• = 4 CR - 120,00,000 = 2,80,00,000

•ACCRUES TO SH PREM A/C ON ACCOUNT OF THE NOTIONAL PREMIUM CHARGED TO SELLER OF BUILDING

•TOTAL ON LIABILITIES SIDE =4,00,00,000

3-36April 11, 2023


•COST OF PLANT LESS FACE VALUE OF SHARES ISSUED TO VENOR

= 4 CR - (12,00,000 X 10) = RS 2,80,00,000

THE ABOVE IS SHARE PREMIUM NOT COLLECTED IN CASH BUT SHOWN IN SH PREM A/C & THEREFORE EXCLUDED FROM BONUS ISSUE WHILE COMPUTING ELIGIBLE RESERVE

WE USE RESERVES COLLECTED IN CASH ONLY

•THUS SH PREM RESERVE AFTER ADJUSTMENT = 7,00,00,000 - 2,80,00,00 = 4,20,00,000

•4,20,00,000 IS ONLY ELIGIBLE SH PREMIUM RESEVE TO BE INCLUDED IN CAPITALISATION

3-37April 11, 2023


•PART B OF FCDs TO BE CONVERTED INTO EQUITY WITHIN 1 YEAR OF BONUS ISSUE

•HENCE ANY DECISION WILL AFFECT FCD HOLDERS

•CONVERSION OF PART B WILL RESULT IN ADDITIONAL SHARES OF 45,00,000 (I.E. 15 LAKH FCDs EACH CONVERTED INTO 3 EQUITY SHARES) WHICH ARE TO BE CONSIDERED

3-38April 11, 2023


RESERVES ELIGIBLE FOR CAPITALIZATION (RS CR)•GENERAL RESERVES 17,00,00,000•SHARE PREMIUM 4,20,00,000•TOTAL RESERVES 21,20,00,000

SHARES ELIGIBLE FOR BONUSEQUITY SHARES 90,00,000SHARES ARISING FROM CONVERSION 45,00,000TOTAL 1,35,00,000

HENCE MAX PERMISSIBLE BONUS RATIO IS 21.20/13.5= 1.570

Assuming 100% Reserves Utilised

3-39April 11, 2023


TOTAL PAID UP CAPITALEARLIER PAID UP CAPITAL 9 CRGENERAL RESERVE CONVERTED 17 CRSHARE PREMIUM CONVERTED 4.2 CRPCD CONVERTED 4.5 CRTOTAL 34.7 CR

•AFTER BONUS & CONVERSION THE INCREASED CAPITAL IS 34.70 CR WHICH IS MORE THAN AUTHORISED CAPITAL OF 20 CR.

•RESOLUTION TO BE PASSED TO INCREASE THE AUTHORISED CAPITAL

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ISSUE MANAGEMENTISSUE MANAGEMENTTHROUGH OFFER FOR SALETHROUGH OFFER FOR SALE

– A STATEMENT IN LIEU OF PROSPECTUS

– SHOULD BE FILED IN 3 DAYS BEFORE ALLOTMT

– Co SELLS ENTIRE ISSUE TO ISSUE HOUSE AT AN AGREED PRICE (GENERALLY BELOW PAR VALUE)

– SHARES RESOLD BY ISSUE HOUSE TO PUBLIC

– BODs AN EMERGING MECHANISM• CONVERT A FEE BASE ACTIVITY INTO FUND BASEDCONVERT A FEE BASE ACTIVITY INTO FUND BASED

• ISSUE BOUGHT IN FULL OR IN LOTSISSUE BOUGHT IN FULL OR IN LOTS

• MUTUAL AGREEMENT BETWEEN MERCHANT BANKER & CO.MUTUAL AGREEMENT BETWEEN MERCHANT BANKER & CO.

• SHARES HELD UNTIL READY FOR PUBLIC PARTICIPATIONSHARES HELD UNTIL READY FOR PUBLIC PARTICIPATION

• OFF LOADED LATER IN MARKET BY RESELLING TO PUBLICOFF LOADED LATER IN MARKET BY RESELLING TO PUBLIC

• ELIMINATEST RETAILING, SAVES TIME & COSTELIMINATEST RETAILING, SAVES TIME & COST

• CHEAPEST & QUICKEST SOURCE OF FINANCE FOR CosCHEAPEST & QUICKEST SOURCE OF FINANCE FOR Cos

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Private PlacementsPrivate Placements• Direct sale of securities to a limited number of institutional

investors (Banks, FIs, Mutual Funds, High Networth Ind)

• Exempt from SEBI registration,

• Dominated by institutions

• Very active market for debt securities than equity

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Private PlacementsPrivate Placements

• Private investors typically require tighter and more restrictive loan covenants.

• Investors typically demand higher yields.

• Avoids lengthy and costly registration process

• Speed of placement

• Minimizes disclosure of strategically sensitive information

• Can be tailored to meet the needs of borrowers and lenders

• Easier to negotiate terms relative to a public offering

Private Placement Public Issues

1. Issues are offered to mature and sophisticated institutional investors.

2. No discloser requirements.

3. Issues are not screened and this increases the risk.

1. Issues are primarily offered to retail investors.

2. Discloser requirement is there.

3. All issues are screened.

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The Securities IndustryThe Securities IndustryInvestment

Banking

Issuing Securities= Primary Market

THE SECONDARY MARKET

Sales &Trading

Equity /Fixed Income

Research

Investment/Private WealthManagement

RatingAgencies

InstitutionalInvestor

The merchant banking activity in India is governed by SEBI (Merchant Bankers) Regulations, 1992.

All merchants bankers have to be registered with SEBI.

It provides all kinds of required services to the issuers for new issues.

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ISSUE MANAGEMENTISSUE MANAGEMENT• MIN APPLICATION (Rs 5000-7000)MIN APPLICATION (Rs 5000-7000)

• MIN SUBSCRIPTION (90%) MIN SUBSCRIPTION (90%)

• OPTIONAL UNDERWRITINGOPTIONAL UNDERWRITING

• COMPLIANCE REPORT (WITHIN 45 Days of closure)COMPLIANCE REPORT (WITHIN 45 Days of closure)

• PROPORTIONATE ALLOTMENT (WITHIN 10 weeks of closure)PROPORTIONATE ALLOTMENT (WITHIN 10 weeks of closure)

Documents

2.Ipo,Rights,Bonus