Bonds and Treasuries

The important aspects of SEBI Guidelines, with reference to issue of equity shares are as under:

Eligibility Norms for Public Issues

As per the guidelines, an unlisted company can make an initial public offering (IPO) of equity shares or any security convertible at a later date into equity only if it has net tangible assets of atleast Rs. 3 crore in each of the preceeding 3 full years (of 12 months each), of which not more than 50% is held in monetary assets. If more than 50% of net tangible assets are held in monetary assets, the company should have made firm commitments to deploy such excess monetary assets in its business/ projects. The company has a track record of distributable profits in terms of Section 205 of the Companies Act, 1956 for atleast three out of immediately preceeding five years. Extraordinary items should, however not be considered for calculating distributable profits in terms of Section 205 of the Act. The guidelines also require that the company should have a net worth of atleast Rs. 1 crore in each of the preceding 3 full years (of 12 months each) and if the company has changed its name within the last one year, atleast 50% of the revenue for the preceding 1 full year is earned by the company from the activity suggested by the new name. Also, the aggregate of the proposed issue and all previous issues made in the same financial year in terms of size (i.e. offer through offer document and firm allotment and promoters contribution through the offer document) should not exceed five times its pre-issue net worth as per the audited balance sheet of the last financial year.

An unlisted company which does not satisfy the requirements specified above can make a offer to the public of equity or any security convertible at a later date into equity only through book building process. The company must allot 50% of the issue size to the Qualified Institutional Buyers (QIBs) otherwise full subscription money is to be refunded. Alternatively, the project should have atleast 15% participation by Financial Institutions/Scheduled Commercial Banks, of which atleast 10% comes from the appraiser(s). In addition to this, atleast 10% of the issue size shall be allotted to QIBs otherwise full subscription monies should be refunded. QIBs here mean public financial institutions, as defined in Section 4A of the Companies Act, 1956, scheduled commercial banks, mutual funds, foreign institutional investors registered with SEBI, multilateral and development financial institutions or venture capital funds registered with SEBI, foreign venture capital investors registered with SEBI, State Industrial Development Corporations, insurance companies registered with IRDA, provident funds with minimum corpus of Rs. 25 crores, pension fund with a minimum corpus of Rs. 25 crores and 'Project' as aforesaid means the object for which the monies proposed to be raised to cover the objects of the issue.

Further, either the minimum post-issue face value capital of the company should be Rs. 10 crore or there should be a compulsory market-making for at least 2 years from the date of listing of the shares subject to the following:

- Market makers undertake to offer buy and sell quotes for a minimum depth of 300 shares;

- Market makers undertake to ensure that the bid-ask spread (difference between quotations for sale and purchase) for their quotes shall not at any time exceed 10%;

- The inventory of the market makers on each of such stock exchanges, as on the date of allotment of securities, shall be at least 5% of the proposed issue of the company.

Further, it is stipulated that an unlisted public company shall not make an allotment pursuant to a public issue or offer for sale of equity shares or any security convertible into equity shares unless in addition to satisfying the aforesaid conditions, the prospective allottees are not less than one thousand (1000) in number.

The guidelines require that a public issue of equity shares or any other security which may be converted into/exchanged with equity shares at a later date, in case of a listed company, may be made provided that the aggregate of the proposed issue and all previous issues made in the same financial year, in terms of issue size, does not exceed five times its pre-issue net worth as per the audited balance sheet of the last financial year. The issue for this purpose includes offer through offer document, firm allotment and promoters' contribution through the offer document.

Also, if there is a change in the name of the issuer company within the last one year, the revenue accounted for by the activity suggested by the new name should not be less than 50% of its total revenue in the preceding one full year period. The last one year should be reckoned from the date of filing of the offer document.

If the net worth after the proposed issue of equity shares or any security convertible at a later date into equity becomes more than five times the networth prior to the issue, it is also required to satisfy the criteria of Book-building process and allot 50% of the issue size to QIBs failing which subscription money is required to be refunded.

Eligibility norms require credit rating from a credit rating agency registered with Board and its disclosure in the offer document. Where credit ratings are obtained from more than one credit rating agencies, all the credit rating/s, including the unaccepted credit ratings, should be disclosed. It also requires disclosure regarding all the credit ratings obtained during three years preceding the public or rights issue or issue of debt instrument in the offer document. It is also required that the company should not in the list of wilful defaulters of RBI and the company should not be in default of payment of interest or repayment of principal in respect of debentures issued to the public, if any, for a period of more than 6 months.

Further, an issuer company can not make an allotment of non-convertible debt instrument pursuant to a public issue if the proposed allottees are less than fifty (50) in number. In such a case the company shall forthwith refund the entire subscription amount received. If there is a delay beyond 8 days after the company becomes liable to pay the amount, the company shall pay interest @15% p.a. to the investors.

Eligibility criteria also require the company to file a draft prospectus through eligible Merchant Banker with SEBI at least 30 days prior to the filing of prospectus with the Registrar of Companies as prescribed in the guidelines. If the Board specifies changes or issues observations on the draft Prospectus, the issuer company or the Lead Manager to the Issue is required to carry out such changes in the draft Prospectus or comply with the observations issued by the Board before filing the Prospectus with ROC. Further the period within which the Board may specify changes or issue observations, if any, on the draft Prospectus is 30 days from the date of receipt of the draft Prospectus by the Board. Where the Board has sought any clarification or additional information from the Lead Manager/s to the Issue, the period within which the Board may specify changes or issue observations, if any, on the draft Prospectus is 15 days from the date of receipt of satisfactory reply from the Lead Manager/s to the Issue. If the Board has made any reference to or sought any clarification or additional information from any regulator or such other agencies, the Board may specify changes or issue observations, if any, on the draft Prospectus after receipt of comments or reply from such regulator or other agencies. The Board may specify changes or issue observations, if any, on the draft Prospectus only after receipt of copy of in-principle approval from all the stock exchanges on which the issuer company intends to list the securities proposed to be offered through the Prospectus.

It also requires the company to make a statement to the effect that the company has made an application for listing of those securities in the Stock Exchanges and should not have been prohibited from accessing the capital market under any order or directions passed by SEBI. A listed company can not make an issue of security through a rights issue, where the aggregate value of securities, including premium if any, exceeds Rs. 50 lacs, unless the letter of offer is filed with the Board, through an eligible Merchant Banker in the prescribed manner at least 30 days prior to the filing of letter of offer with Designated Stock Exchange.

The company is also required to enter into an agreement with a depository for dematerialisation of securities already issued or proposed to be issued to the public or existing shareholders and give an option to subscribers/shareholders/investors to receive the security certificates or hold securities in the dematerialised form with a depository.

There should not be outstanding warrants or financial instruments or any other right which would entitle the existing promoters or shareholders any option to receive equity share capital after the initial public offering in case of unlisted company making a public issue of equity share or any security convertible at later date into equity shares. The guidelines also require that all the existing partly paid-up shares must be made fully paid or the subscription money be forfeited if the investor fails to pay call money within 12 months. A company can not make a public or rights issue of securities unless firm arrangements of finance through verifiable means towards 75% of the stated means of finance, excluding the amount to be raised through proposed Public/Rights issue, have been made.

The aforesaid norms of eligibility are not applicable in the case of -

i. a banking company including a local area bank set up under Section 5(c) of the Banking Regulation Act, 1949 and which has received license from the Reserve Bank of India, or

ii. a corresponding new bank set up under the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970; Banking Companies (Acquisition and Transfer of Undertaking) Act, 1980; State Bank of India Act, 1955; State Bank of India (Subsidiaries Banks) Act, 1959.

iii. an infrastructure company -

a. whose project has been appraised by a Public Financial Institution (PFIs) or Infrastructure Development Finance Corporation (IDFC) or Infrastructure Leasing and Financing Service Ltd. (IL&FS), or a bank which was earlier a PFI, and

b. not less than 5% of the project cost is financed by any of the institutions jointly or severally irrespective of the fact whether they appraise the project or not, by way of loan or subscription to equity or a combination of both.

iv. rights issues by a listed company.

There are several advantages for companies to issue Eurobonds:

• Obtaining financing by issuing Eurobonds is often cheaper than obtaining a foreign currency bank loan.
• It is a way for companies to obtain financing in an economy where financing is hard to obtain. Issuing Eurobonds gives companies wider access to the international market which they may normally not be able to access.
• It gives companies the ability to raise funds without having to issue shares.
• Since Eurobonds are normally aimed at institutional investors and not the public, there are no advertisement costs involved and this therefore means lower costs for the issuing firm.
• Allows companies to obtain funds in a foreign currency to create a foreign currency liability to match against a foreign currency asset.

Against these advantages, there are some disadvantages to consider:

• there are issue costs to take into account
• if the debt is not matched against a foreign currency asset, the Eurobond issuing firm may be open to foreign exchange risk.

There are several benefits to an investor who does put its money into Eurobonds":

• The bonds give an investor a possibility of achieving a higher yield on investments as compare to investing in most shares, bank and building society accounts, money market placements, etc.
• It is a "safe" investment in the sense that the full value of the bond will be replayed when the bond matures.

As for disadvantages to the investor:

• Investing in a Eurobond is not a good idea for investors who may need a repayment of the investment at short notice.
• There is always the risk of the issuing company going under and the maturity value of the Eurobond not being paid.