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Even after listing, listed companies may access public capital markets or a section of such market, to meet their capital requirements. A listed company may offer its securities to its existing equity shareholders only, through a rights issue; to identified institutional investors, through a qualified institutions placement; or to public investors at large through a follow on public offer. These modes of raising capital are discussed below. Additionally, listed companies may also offer securities to select persons through a preferential issue. Such private placements are outside the scope of this article.
The equity shareholders of a public company, after two years of its commencement of business, have a pre-emptive right to be offered any new shares being issued by the company in proportion to their existing shareholding in the company. The offer of shares to persons other than the shareholders needs to be approved by a special resolution of the shareholders. In order to identify the shareholders of a company who would be entitled to receive a proportionate share of the new shares (the “Rights Entitlement”), the company is required to fix a date known as the record date. Based on the ratio of the number of new shares offered to the number of existing shares of the company, some shareholders receive ‘fractional entitlements’. The treatment of such fractional entitlements is at the discretion of the board of directors of the company.
A shareholder receiving an invitation to offer to subscribe to shares in a rights issue may ignore the invitation, subscribe to its Rights Entitlement in full or in part or renounce the Rights Entitlement in favour of another person (whether or not such person is a shareholder of the company) in full or in part. A renouncee must be eligible to hold shares of the company and is not permitted to further renounce the Rights Entitlements. A renouncement of the Rights Entitlement is not a transfer of shares, but merely a transfer of the right to subscribe to the shares. However, where the renunciation is from a person resident in India to a person resident outside India or vice versa, the Reserve Bank of India requires that such renunciation meet pricing guidelines prescribed for transfer of shares. This leads to the incongruous result of the renouncee having to pay twice for the same shares, once to acquire the Rights Entitlements from the original shareholder and again to subscribe to the shares from the company.
The company may, at its discretion, permit shareholders (and in some instances, even renouncees) to subscribe to additional shares over and above their Rights Entitlements. Such additional shares are allocated to subscribers from the unsubscribed portion i.e. that portion of the Rights Entitlements against which no subscriptions are received either from shareholders or from the renouncees. In respect of the portion of the issue, if any, that remains unsubscribed even after the allocation of such additional shares, the company may make arrangements for underwriting by an entity registered with the Securities and Exchange Board of India (“SEBI”) as an underwriter. In the alternative, the promoter of the company may agree to subscribe to any unsubscribed shares. The company benefits from such an arrangement, in as much as it receives full subscription to meet its fund requirements. On the other hand, the promoters benefit by being able to shore up their shareholding at a price that is typically at a discount to the market price. In addition, such additional subscription of unsubscribed shares by the promoter is exempt from open offer obligations under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers), Regulations, 2011 (the “Takeover Code”), subject to compliance of certain conditions specified in the Takeover Code.
A company making a rights issue is not required to prepare, or register with the Registrar of Companies, a prospectus. However, the company must prepare a letter of offer containing all material disclosures which are true and adequate to enable investors to make an informed investment decision. In addition to this general requirement, the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 (the “ICDR Regulations”) also specifies detailed disclosure requirements for the letter of offer. A draft of the letter of offer must be filed with SEBI. Similar to a draft prospectus (or red herring prospectus), SEBI reviews the draft letter of offer and provides its observations. Given that listed companies have disclosure obligations under the listing agreement and the Securities and Exchange Board of India (Prevention of Insider Trading) Regulations, 1992, information about the company is expected to be available to the investing public to a reasonable extent. Accordingly, companies which comply with the listing agreement for preceding three years, make available online all filings made to the stock exchanges, have a grievance handling mechanism, have not changed its management and its securities not having been listed pursuant to relaxation from the provisions of the Securities Contracts (Regulation) Rules, 1957, may provide reduced disclosures in the draft letter of offer and letter of offer.
Qualified Institutions Placement
Historically, listed companies preferred to raise further capital through the route of issues of foreign securities, namely, foreign currency convertible bonds and American or Global Depository Receipts owing to the ease and convenience with which such issues could be made, compared with the Indian public offering process. This led to an eventual ‘export’ of the Indian capital markets. To address this situation, SEBI introduced the route of qualified institutions placements for listed companies to raise capital in India in a time and cost effective manner.
Qualified institutions placements or QIPs are private placements made by listed companies to certain institutional investors who are ‘qualified institutional buyers’ or ‘QIBs’ as defined under the ICDR Regulations. Being private placements, the disclosure requirements for such qualified institutions placements are significantly relaxed and closer in form and substance to disclosure requirements expected in international offerings. Companies may determine the issue price of shares offered in a QIP on a book built basis, however, such price is subject to a minimum price (referred to as the ‘floor price’). The floor price is equal to the average of the weekly high and low closing price of the shares of the company for a period of two weeks preceding the date on which the board of directors of the company decides to open the offer (referred to as the ‘relevant date’). Further, unlike in the case of public offers, the ‘book’ is not transparent and does not have to be publicly disclosed. In order to ensure that the QIP route is not misused to make preferential issues, the ICDR regulations prohibit any allotment under this route to promoters of the company or persons connected to the promoter (which include persons who have shareholders agreements in respect of their shareholding in the company). Further, being a private placement, the total number of QIBs receiving or accepting the invitation to offer or offer cannot exceed 49.
QIPs also need to be lead managed by a SEBI registered merchant banker, who has to conduct its due diligence on the company and submit a due diligence certificate to the stock exchanges.
Follow on Public Offerings
A follow on public offering (‘FPO’) is a public offer of securities by a listed issuer, including an offer for sale of securities to the public by an existing shareholder. All the conditions prescribed for a company while making an initial public offering (‘IPO’), other than the track record requirements, are also applicable to a company proposing a FPO. Compliance with these conditions influences the allocation of securities in an FPO, as is the case in an IPO (as detailed in Indian Companies: Options for Raising Equity Capital, Part I: Initial Public Offerings). The disclosure requirements and process of a FPO are similar to those of an IPO in accordance with the provisions of the Companies Act and the ICDR Regulations. Additionally, the company has the option to undertake the FPO through the alternate book building method, in addition to the book-building method in accordance with the ICDR Regulations.
Fast Track Issues
The ICDR Regulations facilitate capital raising for listed companies which have been listed on a recognized stock exchange for at least three years and have market capitalization of at least Rs. 5,000 crore, through a faster and more cost efficient mode of fast track public or rights issues, subject to certain conditions. The primary benefit of undertaking a fast track issue is that an issuer is not required to file a draft offer document with the SEBI for its review, which reduces the timeline considerably. However, few fast track issues have been completed due to onerous eligibility requirements, especially those relating to market capitalization and turnover.
Sweta Gabhawala and Kranti Mohan are Senior Associates with Amarchand Mangaldas.