Background
Chapter IV of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 regulates preferential issues by listed entities, which involve the issuance of specified securities to a select group of persons on a private placement basis. It lays down conditions relating to eligibility, pricing, disclosures, lock-in, and procedural requirements to ensure that such issuances are conducted in a fair and transparent manner. The Chapter is intended to prevent misuse of preferential allotments, protect the interests of existing and minority shareholders, and ensure objective valuation of securities. Overall, it facilitates capital raising by companies while safeguarding market integrity and investor confidence.
Applicability
These Regulations shall be applicable to:
Compliance Requirements under the Regulation
An issuer making a Further Public Offer of specified securities shall satisfy the conditions of Chapter IV of ICDR as on the date of filing of the draft offer document with the Board and also as on the date of [filing] the offer document with the Registrar of Companies.
Issuer is ineligible for FPO if:
a) SEBI bans Issuer/promoter/promoter group, directors, selling shareholders
b) Promoter/director is also promoter/director of another co. banned by SEBI
c) Issuer/promoter/director is wilful defaulter/fraudulent borrower
d) Promoter/director is fugitive economic offender
a) The restrictions under (a) and (b) above will not apply to the persons or entities mentioned therein who were debarred in the past by the Board and the period of debarment is already over as on the date of filing of the draft letter of offer with the Board
b) FPO here means Further Public Offer
c) Banned by SEBI here means barred from accessing the capital market by the Board
3. Eligibility requirements for further public offer (Regulation 103)
An Issuer can make an FPO, if it has not changed its name in last one year period immediately preceding date of filing offer document. If the name was changed, the issuer may proceed if at least 50% of the previous year’s revenue comes from the activity reflected by the new name.
An issuer not satisfying the aforesaid condition shall make a further public offer only if the issue is made through the book building process and the issuer undertakes to allot at least seventy five per cent. of the net offer, to qualified institutional buyers and to refund full subscription money if it fails to make the said minimum allotment to qualified institutional buyers.
Issuer making FPO to:
a) Amount for general corporate purposes, as mentioned in objects of issue in draft Offer Document (OD) and OD, shall not exceed 25% of amount raised by issuer.
b) Amount raised for general corporate purposes, and unspecified acquisitions/investments, shall not exceed 35% of total raised amount. For unspecified acquisitions, it’s capped at 25%, Where the acquisition or investment is identified, with proper disclosures, in the offer documents, such limits shall not apply
5. Additional conditions for an offer for sale (Regulation 105)
i) When equity shares from conversion/exchange of fully paid-up compulsorily convertible securities (incl. depository receipts) are offered for sale, holding period of both convertible securities & resultant equity shares will be considered for one-year period, which must be met at time of filing draft offer document
ii) The one-year holding requirement does not apply:
a) To offers for sale by a government company, statutory authority, corporation, or SPV in the infrastructure sector
b) To Equity shares (incl. from conversion of fully paid compulsorily convertible sec) offered for sale & acquired via scheme approved u/s 230–234 of Cos. Act, 2013, in lieu for business & capital held more than 1 year before approval
c) To equity shares issued under a bonus issue on securities held for at least one year before filing the draft offer document, provided they were issued from free reserves and share premium as of the previous financial year-end and not from revaluation reserves or unrealized profits
6. FPO of convertible debt instruments and warrants (Regulation 106)
An issuer can make a further public offer of convertible debt instruments if its equity shares are already listed. Provided that it is not in default in payment of interest or repayment of principal amount in respect of debt instruments issued by it to the public for a period of more than six months
Besides compliance of Regulation 106, an issuer making a public issue of convertible debt instruments shall also comply with foll conditions:
a) obtain credit rating from at least credit rating agency
b) appoint at least debenture trustee as per Companies Act 2013 & SEBI(Debenture Trustees) Reg,1993
Further conditions to be complied are:
a) create debenture redemption reserve as per Companies Act, 2013 and rules made thereunder
b) if the issuer proposes to create a charge or security on its assets in respect of secured convertible debt instruments, it shall ensure that:
i) such assets are sufficient to discharge the principal amount at all times;
ii) such assets are free from any encumbrance
iii) If security exists on assets in favor of a Public financial institution/sch commercial banks/issue is secured by creating security on leasehold land, consent for a second or pari passu charge must be obtained and submitted to the debenture trustee before the issue opens.
iv) The security or asset cover will be calculated after deducting liabilities with a first or prior charge, if the convertible debt is secured by a second or subsequent charge.
c) The issuer shall redeem the convertible debt instruments in terms of Offer Document
8. Rolling over of non-convertible portion of partly convertible debt instruments in case of FPO (Regulation 108)
The non-convertible portion of partly convertible debt instruments exceeding ₹10 crore may be rolled over if:
a) Credit rating is obtained within a month before redemption and communicated to holders
b) Creating fresh security or a trust deed is not mandatory if the existing documents allow for continuance until redemption, as decided by the debenture trustee.
9. Conditions for conversion of optionally convertible debt instruments into equity shares in FPO (Regulation 109)
An issuer cannot convert optionally convertible debt instruments into equity unless holders provide explicit consent. Non-receipt of a response to any notice is not considered consent for conversion.
a) If the convertible portion of listed convertible debt instruments exceeds ₹10 crore and the conversion price is not determined at issuance, holders must be given the option not to convert. However, if the upper limit of the conversion price is disclosed, the option to not convert is not required.
b) If holders are given the option to convert convertible debt instruments and choose not to, the issuer must redeem the unconverted portion within one month at no less than face value. This does not apply if the redemption terms were disclosed in the offer document.
10. Convertible debt instruments not to be issued for financing, providing loans, etc Regulation 110)
An issuer shall not issue convertible debt instruments for financing or for providing loans to or for acquiring shares of any person who is part of the promoter group or group companies
An issuer shall be eligible to issue fully convertible debt instruments for these purposes if the period of conversion of such debt instruments is less than eighteen months from the date of issue of such debt instruments.
An issuer shall be eligible to issue warrants subject to the following:
(a) the tenure of such warrants shall not exceed eighteen months from their date of allotment in the public issue
(b) a specified security may have one or more warrants attached to it
(c) The exercise price or formula for warrants must be determined upfront with 25% of the consideration received upfront. If based on a formula, twenty-five per cent consideration amount based on the cap price of the price band determined for the linked equity shares or convertible securities shall be received upfront.
(d) If the warrant holder doesn’t exercise the option within three months, the consideration for those warrants will be forfeited.
i) In public/composite issue of convertible securities, min. promoters’ contribution to be:
ii) If issue involves convertible securities with pre-determined conversion prices, promoters must contribute at no lower than weighted average price of converted equity shares
iii) If promoters contribute more than minimum, excess must be allotted at higher of issue price or price as per Reg.164
iv) Promoters must meet contribution requirements at least 1 day before issue opens & contribution amount must be held in escrow a/c until issue proceeds are released
v) If min. contribution exceeds 100 crore, promoters must deposit at least 100 crore before issue opens with remainder paid as calls are made
vi) Promoters’ SR equity shares can be counted towards min. contribution
13. Securities ineligible for computation of minimum promoters’ contribution (SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 – Chapter 4: FPO, Regulation 114)
i) Min.promoter’s contribution to exclude specified securities:
a) Acquired in last 3 years for non-cash consideration/reval.of assets/capitalization of intangible assets or bonus issues using reval. reserves/unrealized profits/bonus issues of ineligible equity shares
b) Pledged with creditors other than those for borrowings by issuer/subsidiaries
ii) Specified securities referred to in clauses (a) of i) above shall be eligible for computation of promoters’ contribution, if such securities are acquired pursuant to a scheme which has been approved by the High Court or approved by a tribunal or the Central Government under section 230 to 234 of the Companies Act, 2013
14. Lock-in-period for securities held by promoters (Regulation 115)
Specified securities held by promoters shall locked-in for periods as hereunder:
a) minimum promoters’ contribution including contribution made by AIFs, or foreign venture capital investors, as applicable, shall be locked-in for a period of 18 months from date of allotment of FPO In case majority of issue proceeds excluding portion of offer for sale is proposed to be utilized for capital expenditure, then lock-in period shall be 3 years from the date of allotment in IPO
b) promoters’ holding in excess of minimum promoters’ contribution shall be locked-in for a period of 6 months In case majority of the issue proceeds excluding portion of offer for sale is proposed to be utilized for capital expenditure, then the lock-in period shall be one year from the date of allotment in IPO
c) SR equity shares shall be under lock-in until their conversion to equity shares having voting rights same as that of ordinary shares, provided they are in compliance with other provisions of these regulations
Lock-in provisions shall not apply with respect to specified securities lent to stabilising agent for green shoe option, during the period starting from the date of lending of such specified securities and ending on the date on which they are returned to the lender in terms of Regulation 153(5),(6)
The specified securities shall be locked-in for the remaining period from the date on which they are returned to the lender.
Where specified securities which are subject to lockin are partly paid and amount called-up on them is less than amount called-up on specified securities issued to public, lock-in shall end on expiry of 18 months after such securities have become pari passu with specified securities issued to public
The certificates of specified securities which are subject to lock-in shall contain the inscription “non- transferable” and specify the lock-in period and in case such specified securities are dematerialised, the issuer shall ensure that the lock-in is recorded by the depository.
Specified securities except SR equity shares held by promoters and locked in may be pledged as collateral security for a loan granted by a scheduled commercial bank or a public financial institution or a systemically important NBFC/HFC subject to certain conditions
Conditions are:
a) if the specified securities are locked-in in terms of clause (a) of regulation 115, the loan has been granted to the issuer company or its subsidiary/subsidiaries for the purpose of financing one or more of the objects of the issue and pledge of specified securities is one of the terms of sanction of the loan
b) if the specified securities are locked-in in terms of clause (b) of regulation 115 and the pledge of specified securities is one of the terms of sanction of the loan.
19. Transferability of locked-in specified securities (Regulation 120)
The specified securities except SR equity shares held by the promoters and locked-in as per regulation 115 may be transferred to another promoter or any person of the promoter group or a new promoter or a person in control of the issuer subject to the provisions of the SEBI (SAST) Regulations, 2011
The lock-in on such specified securities shall continue for the remaining period with the transferee and such transferee shall not be eligible to transfer them till the lock-in period stipulated in these regulations has expired.
The issuer shall appoint one or more merchant bankers, which are registered with the Board, as lead manager(s) to the issue. Where issue is made through Book Building process, appoint Syndicate Member(s) else appoint Bankers to issue at centres specified in Schedule XII
a) Where the issue is managed by more than one lead manager, the rights, obligations and responsibilities, relating inter alia to disclosures, allotment, refund and underwriting obligations, if any, of each lead manager shall be predetermined and disclosed in draft Offer Document and Offer Document as specified in Sch I to ICDR
b) At least one lead manager to the issue shall not be an associate (as defined under the SEBI (Merchant Bankers) Regulations, 1992) of issuer. If any lead manager is an associate of the issuer, it shall disclose itself as such and its role shall be limited to marketing of the issue.
c) Other intermediaries to be appointed in consultation with Lead Manager
d) Issuer to enter into Agreement with Lead Manager in format specified in Sch II and also with other intermediaries. In ASBA process, issuer shall take cognisance of deemed agreement of issuer with self-certified syndicate banks.
21. Appointment of Registrar to the Issue in case of FPO (Regulation 121(7))
The issuer shall appoint a registrar to the issue registered with the Board, which has connectivity with all the depositories
If the issuer itself is a registrar, it shall not appoint itself as a registrar to the issue. A lead manager shall not act as a registrar to the issue in which it is also handling the post-issue responsibilities.
The issuer shall appoint a person qualified to be a company secretary as the compliance officer who shall be responsible for monitoring the compliance of the securities laws and for redressal of investors’ grievances.
Draft offer document/offer document shall contain all material disclosures which are true and adequate to enable applicants to take informed investment decision. RHP, Shelf Prospectus and Prospectus shall contain disclosures as specified in Companies Act 2013 & Part A of Sch VI,subject to Part C,D
(a) The lead manager(s) shall call upon the issuer, its promoters and its directors or in case of an offer for sale, the selling shareholders, to fulfil their obligations as disclosed by them in the draft offer document and the offer document and as required in terms of these Regulations.
(b) The lead manager(s) shall ensure that the information contained in the offer document and the particulars as per audited financial statements in the offer document are not more than six months old from the issue opening date.
Prior to making a FPO, the issuer shall file three copies of the draft offer document with SEBI, in accordance with Schedule IV, along with fees as specified in Schedule III, through the lead manager(s).
i) Lead manager(s) shall submit following to SEBI along with Draft Offer Document:
a) a certificate, confirming that an agreement has been entered into between issuer and lead manager(s)
b) a due diligence certificate as per Form A of Schedule V;
c) in case of an issue of convertible debt instruments, a due diligence certificate from debenture trustee as per Form B of Schedule V;
d) A certificate confirming compliance of the conditions specified in Part C of Schedule VI
ii) Issuer while filing Draft Offer Document with S.E. shall submit to such stock exchange(s), the Permanent Account Number, bank account number and passport number of its promoters where they are individuals, and Permanent Account Number, bank account number, company registration number or equivalent and the address of the Registrar of Companies with which the promoter is registered, where the promoter is a body corporate.
iii) Draft Offer Document and Offer Document shall also be furnished to the Board in a soft copy.
Issuer & lead manager(s) to make changes in Draft Offer Document, if required and then submit to SEBI an updated draft offer document complying with observations issued by it and highlighting all changes made in the draft offer document before filing offer documents with ROC/app. authority
i) Updated Offer Document(OD)/fresh Draft OD to be filed with SEBI if there are any changes in Draft OD in relation to matters stated in Sch XVI
ii) Lead Manager to submit foll. to SEBI after issuance of observations by latter or after expiry of period in Reg.123(4) if Board has not issued observations:
a) statement certifying that all changes, suggestions & observations of SEBI have been incorporated in OD;
b) Due Diligence Certificate (DDC) as per Form C of Schedule V,while filing OD
c) Board Resolution for allotting specified securities to promoters towards amount received against their contribution, before opening of issue
d) CA Cert.before opening of issue confirming receipt of promoters’ contribution, along with names, addresses & amounts paid by each promoter to issuer’s bank a/c
e) DDC (Form D-Sch V), in event issuer has made a disclosure of any material development by issuing public notice iii) OD to be filed with SEBI & S.E through lead manager simultaneously with filing at ROC
Penalty & Punishment
(a) imposition of fines;
(b) suspension of trading;
(c) freezing of promoter/promoter group holding of designated securities, as may be applicable in coordination with depositories;
(d) any other action as may be specified by the Board from time to time.
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