The Hindu Business Line : Calm thinking about public issue

THE Annual Accounts of Calm Ltd, a listed company, for the year ended March 31, 2003, were finalised on May 31, 2004. The company had a paid-up capital of Rs 50 lakh and free reserves of Rs 100 lakh. The company did not have any accumulated losses. The board of directors of the company wishes to make a public issue of equity shares amounting to Rs 10 crore comprising offer to public through offer document, firm allotment and promoters' contribution. State how this can be done under SEBI Guidelines.

What would be your answer in the following cases:

a) If Calm Ltd were a private sector bank known as Calm Bank Ltd.

b) If the aforesaid Rs 10-crore issue were a rights issue.

In the given case, Calm has a pre-issue net worth of Rs 150 lakh. It proposes to issue equity shares amounting to Rs 10 crore which is more than five times its pre-issue net worth. SEBI guidelines with respect to public issues by listed companies provide as follows:

A listed company shall be eligible to make a public issue of equity shares or any other security which may be converted into or exchanged with equity shares at a later date.

Provided that the aggregate of the proposed issue and all previous issues made in the financial year in terms of size (that is, offer through offer document + firm allotment + promoters' contribution through the offer document), issue size does not exceed five times its pre-issue net worth as per the audited balance sheet of the last financial year.

A listed company which does not fulfil the aforesaid conditions, shall have to comply with the requirements of unlisted companies, before it can make a public issue of equity shares or securities convertible at a later date into equity shares.

Calm Ltd will have to follow guidelines with respect to unlisted companies. The guidelines with respect to unlisted companies (other than banking companies) stipulate as follows:

When the issue size is more than five times its pre-issue net worth, an unlisted company shall be allowed to make a public issue of equity shares only in either of the following two ways:

i) Through book-building process subject to at least 50 per cent of the issue size being allotted to qualified institutional buyers (QIBs), failing which, full subscription monies must be refunded.

QIB means a) public financial institution as defined in Section 4A of the Companies Act, 1956; b) scheduled commercial banks; c) mutual funds;

d) foreign institutional investors registered with SEBI; e) multilateral and bilateral development financial institutions; f) venture capital funds registered with SEBI; g) foreign venture capital investors registered with SEBI; h) State industrial development corporations; i) insurance companies registered with the Insurance Regulatory and Development Authority (IDRA); j) provident funds with minimum corpus of Rs 25 crore; and k) pension funds with minimum corpus of Rs 25 crore,

ii) Alternatively, the "project" should have at least 15 per cent participation by financial institutions/scheduled commercial banks, of which, at least 10 per cent must come from the appraiser(s). In addition to this, at least 10 per cent of the issue size shall be allotted to QIBs, failing which the full subscription monies shall be refunded.

Further, no allotment pursuant to a public issue shall be made unless, in addition to satisfying the conditions as aforesaid, the prospective allottees are at least one thousand in number.

Again, the company shall enter into agreements with all the depositories for demateralisation of securities. However, the investors shall have an option to receive allotment of securities through any of the depositories.

Besides, the following requirements should also be satisfied:

The appointment of merchant banker registered with SEBI to manage an issue shall be compulsory.

Registrar to the issue must be appointed.

Partly-paid shares must either be made fully paid or forfeited.

No company shall make a public or rights issue of securities unless firm arrangements of finance through verifiable means towards 75 per cent of the stated means of finance, excluding the amount to be raised through proposed public/rights issue, have been made.

The company shall not make public issue where it has been prohibited by SEBI.

Draft offer document (prospectus) shall be filed with SEBI at least 21 days before filing of the prospectus with the Registrar of Companies.

The draft offer document filed with SEBI shall be made public for a period of 21 days from the date of filing the offer document with SEBI.

The lead merchant banker shall:

* while filing the draft document with SEBI, also file the draft offer document with the stock exchange(s) where the securities are proposed to be listed;

* make copies of draft offer document available to the public; host the draft and final offer documents on the Web sites of all the lead managers/syndicate members associated with the issue and also ensure that the contents of documents hosted on the websites are the same as that of their printed versions.

* obtain and furnish to SEBI, an in-principle approval of the stock exchange(s) for listing of the securities within 15 days of filing of the draft offer document with the stock exchange(s).

* lead merchant bankers or stock exchanges may charge an appropriate sum to the person requesting for a copy of offer document.

* the company shall carry out the changes suggested by SEBI before filing of prospectus with the RoC.

* the issue shall open within 365 days from the date of issuance of observation letter by SEBI, if any, or 365 days from the 22nd day from the date of filing of the draft offer document with SEBI, if no observation letter is issued.

In case Calm was a private sector bank, it would be exempt from the aforesaid requirements and be subject only to the Reserve Bank of India guidelines.

Again, the aforesaid guidelines are relevant to public issues and not rights issues except where expressly so stated.

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