ICDR Regulations

With more promoters looking out to raise money by divesting equities, regulations standard are becoming increasingly stringent. SEBI has come up with ICDR Regulations, 2009 to promote the development of a healthy capital market and to protect investors’ interest while they deal with securities. SEBI monitors all the dealings of companies who are planning to raise money on the stock exchanges and is quite careful about attempts which try to create artificial demands about upcoming issues.

SEBI ICDR (Issue of Capital and Disclosure Requirements) Regulations 2009 lay down guidelines relating to conditions for various kinds of issues including public and rights issue. These regulations provide detailed provisions relating to public issue such as conditions relating to an IPO and Further Public Offer (FPO), conditions relating to pricing in public offerings, conditions governing promoter’s contribution, restriction on transferability of promoter’s contribution, minimum offer to public, reservations, manner of disclosures in offer documents, etc.

Regulation 60 of the ICDR Regulations deals with public communications, publicity materials, advertisements, and research reports and it lists out what an issuer of securities can go ahead with and it can not advertise about.

These ICDR Regulations have repealed DIP (Disclosure and Investor Protection) Guidelines, 2009.

Public Offer Requirements

When an issue/offer of shares/convertible securities is made to new investors to be a part of shareholders’ family (of the issuer), it is called a public offer. There can be two kinds of public offer:

1. Initial Public Offer

An unlisted company making a fresh issue of shares/convertible securities or offering its existing shares/convertible securities for sale or both for the first time to the public, is called an IPO. After an IPO, listing, and trading of the issuer’s shares/convertible debentures can be done on stock exchanges.

2. Further/Follow on Public Offer

When an already listed company makes either a fresh issue of shares/convertible securities or an offer for sale to the public, it’s called an FPO.

Offer Documents

An Offer document contains all the relevant info about the company, promoters, projects, financial details, objects of raising the money, terms of the issue, etc and is used to invite subscription to the issue. It is called “Prospectus” in the case of a public issue and “Letter of Offer” in the case of a rights issue. There are several terms used when it comes to offering documents depending upon the stage or the type of issue. Let’s have a look at them:

1. Draft offer document

It is an offer document filed with SEBI to specify changes, if any, in it, before it is filed with the Registrar of Companies (ROCs). Draft offer document is made available in the public domain including websites of SEBI, concerned stock exchanges, or concerned Merchant Banker for enabling the public to give comments, if any, on it.

2. Red herring prospectus

It is an offer document used in case of a book built public issue. It contains all the relevant details except that of the price or number of shares being offered. It is filed with RoC before the issue opens.

3. Prospectus

It is an offer document in case of a public issue, which has all relevant details including price and number of shares or convertible securities being offered. This document is registered with RoC before the issue opens in case of a fixed price issue and after the closure of the issue in case of a book built issue.

4. Letter of offer

A Letter of Offer is an offer document in case of a rights issue of shares or convertible securities and is filed with stock exchanges before the issue opens.

5. Abridged prospectus

It’s an abridged version of offer document in public issue and is issued along with the application form of a public issue. It contains all the salient features from the prospectus.

6. Abridged letter of offer

It is an abridged version of the letter of offer. It is sent to all the shareholders along with the application form.

7. Shelf prospectus

It is a prospectus which enables an issuer to make a series of issues within a period of 1 year without the need of filing a fresh prospectus every time. This facility is available to public sector banks, scheduled banks, and public financial institutions.

8. Placement document

A placement document is an offer document for the purpose of qualified institutional placement and contains all the relevant and material disclosures.

Requirements of a Public Offer

Entry norms are nothing but different routes available to issuers for accessing the capital market through public issues.

An unlisted issuer making an IPO should satisfy the public provisions:

Entry Norm I (Also known as Profitability Route)

The issuer company should meet the following requirements:

  1. Net Tangible Assets of at least Rs. 3 crores in each of the preceding three full years of which not more than 50% are held in monetary assets. However, the limit of fifty percent on monetary assets shall not be applicable in case the public offer is made entirely through offer for sale.
  2. Minimum of Rs. 15 crores as average pre-tax operating profit in at least three of the immediately preceding five years.
  3. A net worth of at least Rs. 1 crore in each of the preceding three full years.
  4. If the company has changed its name within the last one year, at least 50% revenue for the preceding 1 year should be from the activity suggested by the new name.
  5. 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 preceding financial year.

However, to ensure that genuine companies ain’t limited from fund-raising, SEBI has arranged two alternative routes to the companies to access the primary market which doesn’t satisfy any of the above conditions.

Entry Norm II (Also known as Profitability/qib Route)

  1. Through the profitability route, the issue shall be through book building route, with at least 50% of net offer to the public to be mandatorily alloted to the QIBs. The company shall refund the subscription money if the minimum subscription of QIBs isn’t attained.
  2. The minimum post-issue face value capital shall be Rs. 10 crores or there shall be compulsory market making for at least 2 years.

Entry Norm III (Also known as Appraisal Route)

  1. The project is appraised and participated to the extent of 15% by FIs/scheduled commercial banks of which at least 10% comes from the appraisers. In addition, at least 10% of the issue size shall be alloted to QIBs, failing which the full subscription monies shall be refunded.
  2. The minimum post-issue face value capital shall be Rs. 10 crores or there shall be a compulsory market making for at least 2 years.

In addition to satisfying the aforesaid eligibility norms, the company shall also satisfy the criteria of having at least 1,000 prospective allottees in its issue.

A listed issuer making an FPO is required to satisfy the following requirements:

  1. If the company has changed its name within the last one year, at least 50% revenue for the preceding 1 year should be from the activity suggested by the new name.
  2. 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 preceding financial year.

Any listed company not fulfilling these conditions shall be eligible to make a public issue (i.e. FPO) by complying with QIB Route as specified for IPOs i.e. issue shall be through book building route, with at least 75% to be mandatorily allotted to the QIBs.

So, we covered an Overview of ICDR Regulations & Public Offer Requirements. Let us know in the comments section if you want any specific topic to be covered. Wishing you all the best for your SEBI Grade A preparation!

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