Public Issue. | All you need to know.

 

All primary market issues need not be public issues. The securities can be issued either

through public issues or through private placement (which involves issuance of securities to a relatively small number of select investors).

Issuance of capital in the primary market can be classified under following broad heads:

Public issue

Private placement

Preferential issue

Qualified Institutional Placement

Rights and Bonus issues

In this post we are going to discuss about Public Issue.

What is public issue?

Securities are issued to the members of the public, and anyone eligible to invest can

participate in the issue, called public issue. This is primarily retail issue of securities.

Types of Public Issue of Equity Shares 

Public issue of equity shares can be categorized as follows:

Initial Public Offer (IPO)

The first public offer of shares made by a company is called an Initial Public Offer (IPO).

When a company makes an IPO, the shares of the company become widely held and there is a change in the shareholding pattern. The shares which were privately held by

promoters are now held by retail investors, institutions, promoters etc. An IPO can either be a fresh issue of shares by the company or it can be an offer for sale to the public by any of the existing shareholders, such as the promoters or financial institutions, or a combination of the two.

• Fresh Issue of Shares: New shares are issued by the company to public investors. The issued share capital of the company increases. The percentage holding of existing shareholders will come down due to the issuance of new shares.
• Offer for Sale: Existing shareholders such as promoters or financial institutions offer a part of their holding to the public investors. The share capital of the company does not change since the company is not making a new issue of shares. The proceeds from the IPO go to the existing shareholders who are selling the shares and not to the company. The holding of the existing shareholders in the share capital of the company will reduce.

Example

A company has issued 1000 shares of a face value of Rs. 10 each. The shares are equally

held by the two promoters P and Q.

A. The company decides to make a fresh issue of 500 shares.

B. The company decides to offer 250 shares of each promoter to the public.

The fresh issue of shares in the IPO (A) will result in the following post-IPO situation:

• The issued capital of the company will now be 1500 shares with a face value of Rs. 10 each.
• Promoters A and B continue to hold 500 shares each. The percentage holding of each of the promoters in the share capital of the company will change from 50% (500 shares out of 1000 shares issued by the company) to 33.33% (500 shares out of 1500 shares issued by the company).

The offer for sale in the IPO (B) will result in the following post-IPO situation:

• The capital of the company will remain at 1000 shares with a face value of Rs.10 each.
• The holding of the promoters will decrease to 250 shares each from 500 shares each preissue. They now hold 25% each of the share capital; 50% is held by the public.
• The money raised in the IPO will go to the promoters who have sold the shares and not to the company. 

The disinvestment of shares by the government in PSUs is an example of an offer for sale. The government offers a portion of its shares to the public in an IPO. The proceeds

collected go the government which is selling the shares and not to the company. There

will be no change in the share capital of the company. However, there will be a change in the list of shareholders as new investors buy the shares and a reduction in the

government’s holding in the company. 

An IPO may also be a combination of an offer for sale and a fresh issue of shares by the issuing company.

Follow-on Public Offer

A follow-on public offer is made by an issuer that has already made an IPO in the past and now makes a further issue of securities to the public. When a company wants additional capital for growth or to redo its capital structure by retiring debt, it raises equity capital through a fresh issue of capital in a follow-on public offer. A follow-on public offer may also be through an offer for sale. This usually happens when it is necessary to increase the public shareholding to meet the requirements laid down in the listing agreement between the company and the stock exchange. Or promoters may dilute their holdings in the company after the lock-in imposed at the time of the IPO is over.

Pricing a Public Issue of Shares

SEBI’s Regulations allow an issuer to decide the price at which the shares will be allotted to investors in a public issue. This can either be fixed by the issuer in consultation with the managers of the issue or it can be determined by a process of bidding by investors. Based on the method used to determine the price, a public issue can be categorized as:

Fixed Price Issue

In a fixed price issue of shares to the public, the company in consultation with the lead

manager (who is the merchant banker in-charge of the issue) would decide on the price at which the shares will be issued. The company justifies the price based on the expected performance of the company and the price of shares of comparable companies in the market. This information is made available to the investors when the issue is announced so that investors know the price at which the shares will be allotted to them at the time of making the application.

Book Built Issue

The objective of a book building process is to identify the price that the market is willing to pay for the securities being issued by the company. The company and its issue managers will specify either a floor price or a price band within which investors can bid. When the issue opens, investors will put in bid applications specifying the price and the number of securities (or total amount) bid at that price. The price bid should be above the floor price or within the price band, as applicable. Retail investors can revise the bids in the period when the issue is open. The issuer, in consultation with the book running lead manager will decide on the cut-off price which is the price at which the issue gets subscribed. All allottees who bid at or above the cut-off price are successful bidders and are eligible for allotment in the respective categories.

For example, a company wants to issue 5000 shares through a book built offer within a price band of Rs 120 to Rs 144. Bids are received as follows:

The offer of 5000 shares is filled up at the cut-off price of Rs.135. All investors who bid at

this price and higher are eligible for allotment in their respective categories. The company may decide the cut-off price at a price lower than the price at which the issue is subscribed for the benefit of the investors. Book built issues may also have a clause which allows allotment to retail investors at a price that is at a discount to the cut off price which cannot however be at a price not lower than by more than ten percent of the price at which shares are allotted to the other category of investors.

In a book built offer, not more than 50% shall be offered to the QIBs of which 5% shall be reserved for mutual funds, not less than 15% to non-institutional investors and not less than 35% to the retail investors.

For fixed price offers, a minimum of 50% of the net offer of securities to the public shall be initially made for allotment to retail individual investors and the balance to HNIs and other investors.

Regulatory Norms for Public Issue of Shares

A public issue will be open for a minimum of three working days and a maximum of 10

working days. An initial public offer shall be kept open for at least three working days and not more than ten working days. Investors can make applications during this period. In a book built issue investors can also revise bids in this period. SEBI’s regulations requires a company making a public issue of shares to enter into an agreement with all the depositories to dematerialize its shares so that investors can be given the option of holding the shares in dematerialized form. If the issue size is equal to ten crores or more, then the securities will be issued only in dematerialized form.

Companies making a public offer of shares may get the IPO graded by a credit rating

agency registered with SEBI. The grading is done based on the prospects of the industry,

the competitive strength of the company and risks in the business. It is not mandatory for companies to do so. The grade assigned based on the evaluation is an assessment of the fundamentals of the issuer and is not a commentary on the issue price or a recommendation to subscribe to the issue. The grade ranges from 1 to 5, with 5 indicating strong fundamentals and 1 poor fundamentals.

Applying to a Public Issue

The prospectus or offer document lays down the process of applying to a public issue of

securities. Information of a forthcoming public issue is typically available from the

mandatory advertisements that the company will have to issue and from the coverage

that IPOs get in the press. The soft copies of the offer document are available on SEBI's website and on the websites of the lead manager to the issue. 

A public issue is open for subscription during a limited period as notified by the company. The date on which the issue will open for subscription and the earliest closing date are mentioned in the announcements about the issue. Investors have to make their application during this period. 

The NSE, BSE and MSEI feature an online bidding network that enables conducting online bidding for IPOs offered using the book building route. It is a screen based system in which investors through the trading terminals of broker-members can enter bids. This is a lower cost option to reaching a large number of investors electronically. This segment is called the e-IPO market and is operated from 10 am to 5pm during the IPO period. The lead manager can seek an extension of bidding time on the closing date.

In a book built offer investors must place bids for the minimum bid lot specified by the

issuer so that the minimum application value adheres to the SEBI prescribed range of

Rs.10,000 to Rs. 15,000. Investors can either specify the bidding price or they may choose to bid at the cut-off. Bidding at the cut-off implies that the price they would accept is the price determined by the bidding process. 

With effect from January 1, 2016 payment for applications made in a public issue must be made only using the ASBA (application supported by blocked amount) facility. ASBA is an application for subscription to an issue containing an authorization to the investors’ bank to block the application money in the bank account and release funds only on allotment. 

Once the issue closes, the cut-off price is determined based on the bids received. All investors who bid at the cut-off price or higher are successful bidders and receive allotment at the cut-off price. Investors who bid lower than the cut-off price will receive the refund of their application amount. Bidding at the cut-off ensures that the investor’s application is always accepted. 

The issue may be over-subscribed, which means that the bids made at the cut-off price and higher were for a higher number of shares than what was offered. In an oversubscribed issue, the shares will be allotted to an investor on a proportionate basis. There will be a refund made to the extent that the shares allotted are lower than the shares applied for. If subscriptions are lower than the offered number of shares, it is undersubscribed and all applying investors, at or above the cut-off price will receive allotments. The issuer credits the shares to the beneficiary demat account of the successful applicants, and refunds for partial or non-allotment.

Public Issue of Debt Securities

A company can make a public issue of debt securities, such as, debentures by making an offer through a prospectus. The issue of debt securities is regulated by the provisions of the Companies Act, 2013 and Rules framed thereunder and SEBI (Issue and Listing of Debt Securities) Regulations, 2008, various circulars issued by SEBI in this regard, Listing Regulations, RBI Rules and Regulations and SCRA and SCRR. 

The company will appoint a lead manager who will ensure compliance with all the regulatory requirements for the issue. 

A public issue of debt securities is possible by a company registered as a public limited company under the Companies Act, 2013. The company files an offer document with SEBI and the Registrar of Companies which gives all the material information of the issue. The final document will be available for download from the website of the stock exchange where the instrument is proposed to be listed prior to the issue opening. If there is a request for a physical copy of the offer document, the lead manager or issuer is required to make the same available. The debentures issued under a public offer have to mandatorily be listed on a stock exchange. The company has to obtain credit rating from at least one credit rating agency and the rating has to be disclosed in the offer document. If the rating has been obtained from more than one rating agency, all the ratings have to be disclosed.

Dematerialization

The issuer has to enter into an agreement with a depository for dematerialization of the securities proposed to be issued.

Coupon Rate

The issuer in consultation with the lead manager may fix the coupon payable on the debenture. The coupon may be determined through a book building process also.

Debenture Trustees

Debenture trustees have to be appointed to oversee the interests of the investors. Trustees are banks and financial institutions who are registered with SEBI to act as debenture trustees. If the debentures are secured, they ensure that the property charged as security is adequate to meet the obligations to the debenture holders at all times.

Debenture Redemption Reserve

The company will create Debenture Redemption Reserve and transfer a portion of profits into it each year till the redemption of the debentures.

Creation of Security

The Companies Act requires the creation of security in a public issue of debentures. A charge against the assets of the issuer will have to be created. The issue of an unsecured

debenture will be treated as deposits raised by the company and will require adherence to the Companies (Acceptance of Deposits) Rules.

Issuance and Listing of Green Debt Security

The public issue and private placement of Green Debt Securities have to comply with some additional requirements apart from the regulations prescribed for the issue and listing of debt securities under the SEBI (Issue and Listing of Debt Securities). Green Debt Securities are those where the funds raised from the issue are used for defined projects or assets such as renewable and sustainable energy, clean transportation, sustainable water management, waste management etc. The offer document will contain information on the process used to determine that the said project was eligible under the definition and the procedure to track the usage of funds so raised. The issuer will be required to disclose the details of the usage on a continuous basis along with the half-yearly and annual financial results.

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