CAPITAL MARKET ISSUANCES LEGAL DUE … · · 2011-04-01NATURE OF CAPITAL MARKET ... • Articles of Association –SCRR, stock exchange ... –Reviewing the Charter Documents –AOA,

CAPITAL MARKET ISSUANCES ‐ LEGAL DUE DILIGENCE

ISSUES

Rajat Mukherjee

Khaitan & Co LLP

Copyright © Khaitan & Co. 2010. All Rights Reserved.

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Privileged & Confidential 2

NATURE OF CAPITAL MARKET TRANSACTIONS

• Capital market transactions are generically of the following nature:

– Domestic Issuances by Indian Companies (listed on a domestic exchange)

• IPO (Initial Public Offerings) – Fresh issue / offer for sale• FPO (Follow On Public Offering) ‐ Fresh issue / offer for sale• Rights Issues• Debt / Convertible Debt Issues• Qualified Institutions Placement• Regulation S and Rule 144A ‐ implications

– International Issuances by Indian Companies (listed on an international exchange)

• Depository Receipts• Debt Issues • Convertible Debt

Privileged & Confidential

• Statutory compliance – eligibility and other issues

• Disclosure

• Regulatory compliance

• Risk management

• Comfort to merchant bankers

DUE DILIGENCE – IMPORTANCE

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Lawyers may act as advisors to the Issuer Company or the Merchant Bankers or both in certain cases


Domestic:• Eligibility for the issue ‐ IPO, Rights, NCDs, convertible instruments

• Memorandum and Articles of Association

• Promoters’ contribution

• Outstanding convertible instruments

• Paid‐up capital

• Foreign investment issues – particularly other than equity

• Lenders consent, other consents

• Legal restrictions – sector specific

International:

• Compliance with ECB Guidelines / FEMA 120/ FDI Guidelines

EVALUATING STATUTORY COMPLIANCE

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• STATUTORY DISCLOSURES ‐– CAPITAL STRUCTURE – Capital build‐up, promoter holding, contribution &

lock‐in– GOVERNMENT APPROVALS – Diligence & disclosure– LITIGATION ‐ Diligence & disclosure– PROMOTER / PROMOTER GROUP – Determination– OBJECTS – 75% tie‐up, back‐ups

– HISTORY AND CORPORATE MATTERS – Diligence & disclosure.

• BUSINESS – Back‐ups

• IMPACT OF IMPORTANT BUSINESS ARRANGEMENTS

• OTHER MATERIAL ISSUES

• DISCLOSURE

• SEBI OBSERVATIONS

NECESSITY OF DISCLOSURES

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• CORPORATE GOVERNANCE

• BOARD COMPOSITION – Independent directors, Committees, Committee Composition

• Insider Trading

• Articles of Association – SCRR, stock exchange compliance

REGULATORY COMPLIANCE

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• Risk Identification – business and finance related

• Materiality Determination

• Legal Risks ‐materiality

• Standard Risks

• Industry Risks

• External Risks

RISK MANAGEMENT

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• Business focus/ commercial objective for the transaction.

• Comprehensiveness/depth of due diligence to be defined.

• Timing of the due diligence – Early understanding and evaluation of the major issues.

• Materiality threshold for risk assessment – Linked to size of transaction. Materiality Thresholds is significantly lower for domestic issuances.

• Insider trading issues – where target company is listed

• Segregation of responsibilities between the lawyers and the financial advisors

DUE DILIGENCE – FACTORS TO BE BORNE IN MIND

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• Manner of conducting diligence – nature of the proposed issue, prior offer document, opinion ‐Materiality.

• Capital Market Diligence Formats.

• Verification of information to the extent possible & necessary – Capital Structure, History, Government Approvals, Management, Financial Indebtedness.

• Data room should be in substantially ready state.• Determine the strength of the due diligence team given

the depth, size and mandate of the due diligence.

EFFECTIVE DILIGENCE

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• Background on the Company• Corporate Structure• Financing• Real Estate• Approvals, Licenses & Consents• Material Agreements• Human Resources• Intellectual Property• Insurance• Litigation• Any additional section that maybe relevant for the specific

industry

EFFECTIVE DILIGENCE: “STAY AWAKE”LEGAL ISSUES

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Issues to be examined remain the same both in case of legal due diligence for a M&A transaction and an IPO


• Background on the Company:

– Brief overview of the business / operations of the Company;– Brief details of its incorporation;– Brief details of its subsidiaries, if any;– Any other information which explains the operations of the

Company.

• Corporate Structure:

– Reviewing the minutes of the meetings of the Board of Directors & the Shareholders; statutory registers, list of Directors etc.

– Reviewing the Annual Report – gives you a heads up on the Company;

– Reviewing the Charter Documents – AOA, MOA


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• Financing:

– Reviewing the facilities sanctioned to the Company – working capital; cash credit; term loan etc. and checking the loan amounts and the security created;

– Reviewing provisions which restricts the Company to change shareholding, amend charter documents etc.;

– Requirement of Lender consents?

• Real Estate:

– Reviewing the title to properties and validity of registrations etc.


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• Approvals, Licenses & Consents:

– Examining business related approvals and general approvals required for operating the business;

– Examining validity of the approvals, change of control provisions and additional compliances if required

• Material Agreements:

– Reviewing the nature of contracts, Company’s liability under the contracts including key restrictive covenants, termination and change of control issues

– Shareholders’ Agreements/Amendment of Articles to remove existing shareholder rights (more relevant in the case of IPOs)


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• Human Resources:

– Type of employees and nature of contractual arrangements and Compliance with labour legislations

• Intellectual Property:

– Registrations under patents, trademarks, designs etc. – Examining compliance with data protection issues etc

• Litigation:

– Examining the financial liability and the status of all pending claims / arbitrations

– Typically no materiality threshold for domestic issues– Promoter / Promoter Group / Subsidiary / Director disclosures for

domestic issues


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• Offering Document – Prospectus / Offering Circular– Domestic Issuances – More Disclosure as per ICDR

• MoU between Managers and the Issuer Company• Sale Agreements:

– Subscription / Underwriting Agreement– Syndicate Agreement (Domestic)– Escrow Agreement (Domestic)

• Agreements with Intermediaries:– MoU with Registrar– Custodian and Depository Agreement (ADRs / GDRs)– Trust Deed (FCCBs / Bonds)– Agency Agreements (FCCBs / Bonds)

Impact of Pre‐Flotation Legal Due Diligence

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• Khaitan & Co. is one of India's oldest and most recognised full service law firms and was founded in 1911 by the Late Debi Prasad Khaitan, a member of the Constituent Assembly.

• The Firm is adequately equipped to respond with the speed and creative solutions that are demanded in today's highly competitive and rapidly changing environment.

• The Firm's enviable domestic and multinational client base includes commercial banks, financial institutions, equity funds, government and public authorities and industrial and commercial companies in a variety of business sectors ranging from market leaders and large corporate to fledgling operations and start‐up ventures

• We are dedicated to providing high quality legal services to all our clients. We customize teams from various practice areas to address specific issues and needs of clients, which enables us to advise on a wide range of transactions.

• Our Team offers wide‐ranging transactional and advisory capability to major corporations and financial institutions.

ABOUT KHAITAN & CO

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• Acted for the Underwriters in the USD 4.43 billion Concurrent ADR and domestic share issue by ICICI

• Acted for Reliance Communication Ventures Limited in issue of FCCBs for USD 1 billion

• Acted for the Underwriters in the IPO of Adani Power Limited for USD 670 million approximately

• Acted for the Underwriters in the IPO of Idea Cellular for USD 545 million

• Acted for the Underwriters in the IPO of JSW Energy Limited for USD 584 million approximately

• Acted for KSK Energy Ventures Limited in its IPO of USD 194 million

• Acted for the Underwriters in the QIP Placement by Bank of India for USD 350 million approximately

SIGNIFICANT TRANSACTIONS

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THANKYOU

BANGALORE KOLKATA MUMBAI● ●● NEW DELHI

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