SEBI (Disclosure and Investor Protection){ DIP} Guidelines,2000 updated till June10, 2007

Kumar Bijoy kumarcfa@yahoo.com 09810452266

Section A Review of Eligibility Norms

The amendments inter-alia include:
introduction of Net Tangible Assets and minimum number of allottees as additional criterion, appraisal route as an alternative to the mandatory book building route etc.

Section B
Review of Book Building guidelines

The companies have now been given a flexibility of indicating a movable price band or a fixed floor price in Red Herring prospectus, Definition of QIBs has been enlarged to include Insurance companies, Provident and Pension funds with minimum corpus of Rs. 25 crores. Further operational guidelines are amended thus shortening the interregnum between the closure of issue and listing/ trading of securities to T+6 (T stands for date of closure of issue)

Section C

Introduction of Green Shoe Option

Green Shoe option means an option of allocating shares in excess of the shares included in the public issue. It is extensively used in international IPOs as stabilization tool for post listing price of the newly issued shares. It is being introduced in the Indian Capital Market in the initial public offerings using book building method. It is expected to boost investors confidence by arresting the speculative forces which work immediately after the listing and thus results in short-term volatility in post listing price.

Section D

Review of disclosure requirements in the offer documents

The amendments under this section interalia include full disclosure about the promoters including their photograph, PAN number etc, classification of risk factors, use of standard financial units etc.

Section E

Review of requirements pertaining to issue of Debt Instruments

The amendments under this section interalia include prohibition on a willful defaulter to make a debt issue, requirement of investment grade credit rating for making a debt issue, relaxation in the existing provisions of promoters contribution in IPO of debt issue etc. The amendments have been carried out at relevant places in SEBI (DIP) Guidelines, 2000,

Section F Modifications pursuant to amendments carried out on 30/06/2003, in SEBI (Employee Stock Option and Employee Stock Purchase Scheme) Guidelines, 1999

The amendments are mainly about relaxation in the provisions of lock-in for the pre-IPO shares held by employees, which were issued under employee stock Option or employee stock purchase scheme of the issuer company before the IPO, inclusion of provision of existing clauses of SEBI (ESOP & ESPS) guidelines in SEBI (DIP) guidelines 2000

Section G Amendments pursuant to withdrawal of the concept of Regional Stock Exchange by Ministry of Finance (MOF),
Govt. of India, vide its circular dated 23/4/2003.

On April 23, 2003, Ministry of Finance (MOF) issued a circular thereby withdrawing the concept of regional stock exchange. Pursuant to the aforesaid circular, amendments have been carried out in SEBI (DIP) guidelines 2000 at the relevant places

Section H Review of Operational/Procedural Requirements

The amendments under this section interalia include reducing the validity period of SEBIs observation letter to 6 months from 365 days, demarking the responsibilities of lead managers, defining associate etc.

Section I Miscellaneous Amendments

This section contains amendments to various other provisions of SEBI (DIP) Guidelines, 2000.

Section A Review of Eligibility Norms

An unlisted company may make an initial public

offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date, only if it meets all the following conditions:

(a)The company has net tangible assets of at least Rs. 3 crore in each of the preceding 3 full years (of 12 months each), of which not more than 50% is held in monetary assets: Provided that if more than 50% of the net tangible assets are held in monetary assets, the company has made firm commitments to deploy such excess monetary assets in its business/project; (b)The company has a track record of distributable profits in terms of section 205 of the Companies Act, 1956, for at least three (3) out of immediately preceding five (5) years; Provided further that extra ordinary items shall not be considered for calculating distributable profits in terms of Section 205 of Companies Act, 1956.

 c) The company has a net worth of at least Rs. 1 crore in each of the preceding 3 full years (of 12 months each); (d) In case the company has changed its name within the last one year, at least 50% of the revenue for the preceding 1 full year is earned by the company from the activity suggested by the new name; and (e) 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 + firm allotment + promoters contribution through the offer document), does not exceed five (5) times its pre-issue net worth as per the audited balance sheet of the last financial year.

 An unlisted company not complying with any of the

conditions specified above may make an initial public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date, only if it meets both the conditions (a) and (b) given below: (a) (i)The issue is made through the book-building process, with at least 50% of the issue size being allotted to the Qualified Institutional Buyers (QIBs), failing which the full subscription monies shall be refunded.
OR (a)(ii)The project has at least 15% participation by Financial Institutions/ Scheduled Commercial Banks, of which at least 10% comes from the appraiser(s). In addition to this, at least 10% of the issue size shall be allotted to QIBs, failing which the full subscription monies shall be refunded

 AND OR

(b) (i) The minimum post-issue face value capital of the company shall be Rs. 10 crore
(b) (ii) There shall be a compulsory marketmaking for at least 2 years from the date of listing of the shares subject to the followings. 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

 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 conditions mentioned above (both) the prospective allottees are not less than one thousand (1000) in number.

Qualified Institutional Buyer

public financial institution as defined in section 4A of the Companies Act, 1956; scheduled commercial banks; mutual funds; foreign institutional investor registered with SEBI; multilateral and bilateral development financial institutions; venture capital funds registered with SEBI. foreign Venture capital investors registered with SEBI. state Industrial Development Corporations. insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA). provident Funds with minimum corpus of Rs. 25 crores pension Funds with minimum corpus of Rs. 25 crores

 A listed company shall be eligible to make a

public issue of equity shares or any other security which may be converted into or exchanged with equity shares at a later date. Provided that 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 + firm allotment + promoters contribution through the offer document), issue size does not exceed 5 times its preissue networth as per the audited balance sheet of the last financial year. Provided that in case there is a change in the name of the issuer company within the last 1 year (reckoned from the date of filing of the offer document), the revenue accounted for by the activity suggested by the new name is not less than 50% of its total revenue in the preceding 1 full-year period

 A listed company which does not fulfill

the conditions given in the provisos above, shall be eligible to make a public issue subject to complying with the conditions the prospective allottees are not less than one thousand (1000) in number.

IPO Grading
The grade assigned by a Credit Rating Agency registered with SEBI, to the initial public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date. The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India. Such grading is generally assigned on a five-point point scale

 IPO grade 1: Poor fundamentals IPO grade 2: Below-average fundamentals IPO grade 3: Average fundamentals IPO grade 4: Above-average fundamentals IPO grade 5: Strong fundamentals

 IPO grading has been introduced as an endeavor to make additional information available for the investors in order to facilitate their assessment of equity issues offered through an IPO. IPO grading can be done either before filing the draft offer documents with SEBI or thereafter. However, the Prospectus/Red Herring Prospectus, as the case may be, must contain the grade/s given to the IPO by all CRAs approached by the company for grading such IPO. IPO grading is not optional. A company which has filed the draft offer document for its IPO with SEBI, on or after 1st May, 2007, is required to obtain a grade for the IPO from at least one CRA.

 IPO grade/s cannot be rejected. Irrespective of whether the issuer finds the grade given by the rating agency acceptable or not, the grade has to be disclosed as required under the DIP Guidelines. However the issuer has the option of opting for another grading by a different agency. In such an event all grades obtained for the IPO will have to be disclosed in the offer documents, advertisements etc.

the factors - evaluated to assess the fundamentals of the issue while arriving at the IPO grade
Business Prospects and Competitive Position
Industry Prospects Company Prospects

Financial Position Management Quality Corporate Governance Practices Compliance and Litigation History New ProjectsRisks and Prospects

It may be noted that the above is only indicative of some of the factors considered in the IPO grading process and may vary on a case to case basis.

 IPO grading is done without taking into account the price at which the security is offered in the IPO. Since IPO grading does not consider the issue price, the investor needs to make an independent judgment regarding the price at which to bid for/subscribe to the shares offered through the IPO. SEBI does not play any role in the assessment made by the grading agency. The grading is intended to be an independent and unbiased opinion of that agency.

Book Building Process

This is a process of discovering the price The bidder can make three bids in the prescribed application form and can also revise or withdraw his bid before the close of the offer Individual in single or joint names, HUFs, body corporate, banks and financial institutions, MFs, NRIs, Insurance Cos, VCF etc can apply for the issues T0 helps the retail individual investors SEBI has made a provision of reservation for them. Retail individual investor means an investor who apples of bids for securities of or for a value of not more than Rs. 1 L

 Issues remain open for at least 3 working days and not move than 10 working days. Right issues are kept open for at least 30 days and not more than 60 days The retail investors get on a certain discount (5%) the cut-off price

In case of 100% book building process not less than 35% of the net offer to the public shall be available for allocation to retail individual investors. Not less than 15%of the net offer to the public shall be available for allocation to non institutional investors i.e. investors other than retail individual investors and qualified institutional buyers. Not more than 50% of the net offer to the public shall be available for allocation to qualified institutional buyers.

In case an issuer company make an issue of 75% of the net offer to public through Book building process and 25% at the price determination through Book building.
The option of book-building shall be available to all body corporate which are otherwise eligible to make an issue of capital to the public. The book-building facility shall be available as an alternative to, and to the extent of the percentage of the issue which can be reserved for firm allotment, as per these Guidelines. The issuer company shall have an option of either reserving the securities for firm allotment or issuing the securities through book building process. The issue of securities through book-building process shall be separately identified / indicated as 'placement portion category', in the prospectus. The securities available to the public shall be separately identified as 'net offer to the public'.

 In the book built portion, not less than 25% of the net offer to the public, shall be available for allocation to non Qualified Institutional Buyers and not more than 50% of the net offer to the public shall be available for allocation to Qualified Institutional Buyers. The balance 25% of the net offer to the public offered at a price determined through book building, shall be available only to retail individual investors who have either not participated or have not received any allocation, in the book built portion. Even if a person has bid at higher price than the discovered price (cut off price) The allotment to that person will take place at discovered price.

Some facts
In case of fixed price issues, the investor is informed about the allotment refund within 30 days of the closure of the issue. In case of book built issues, the basis of allotment is finalized by the book running lead managers within 2 weeks from the date of the closure of the issue. The registrar then ensures that demat credit or refund as applicable is completed within 15 days of the closure of the issue. The listing on the stock exchanges is done within 7 days from the finalization of the issue.

Reverse Book Building (Delisting of shares)

The Reverse Book Building is a mechanism provided for capturing the sell orders on online basis from the share holders through respective Book Running Lead Managers (BRLMs) which can be used by companies intending to delist its shares through buy back process. In the Reverse Book Building scenario, the Acquirer / Company offers to buy back shares from the share holders. The Reverse Book Building is basically a process used for efficient price discovery. It is a mechanism where, during the period for which the Reverse Book Building is open, offers are collected from the share holders at various prices, which are above or equal to the floor price. The buy back price is determined after the offer closing date

NSE Reverse Book Building System

NSE uses the reverse book building system; a fully automated screen based bidding system that allows offers to run in several issues concurrently. The system has the facility of defining a hierarchy amongst the users of the system. The Book Running Lead Manager can define who will be the Syndicate member and who will be the other members participating in the issue. The Syndicate Member and other Members also have a facility of defining a hierarchy among the users of the system as Corporate Manager, Branch Manager and Dealer.

Greenshoe Option
A greenshoe option is a clause contained in the underwriting agreement of an initial public offering (IPO). The green shoe option, which is also often referred to as an overallotment provision, allows the underwriting syndicate to buy up to an additional 15% of the shares at the offering price if public demand for the shares exceeds expectations and the stock trades above its offering price. The GreenShoe Company was the first issuer to allow the over-allotment option to its underwriters, hence the name.

 The greenshoe option provides extra incentive for the underwriters of a new stock offering. In addition, these investment banks, brokerages and other financing parties also often exercise the greenshoe option to cover some of the short position they may have created in an effort to maintain a stable market after a new stock begins to trade, as well as to meet aftermarket demand.

GREENSHOE OPTION
An issuer company making a public offer of equity shares can avail of the GreenShoe Option (GSO) for stabilizing the post listing price of its shares

A company desirous of availing the option shall in the resolution of the general meeting authorizing the public issue, seek authorization also for the possibility of allotment of further shares to the stabilizing agent (SA) at the end of the stabilization period

 The company shall appoint one of the (merchant bankers or Book Runners, as the case may be, from amongst) the issue management team, as the stabilizing agent (SA), who will be responsible for the price stabilization process, if required. The SA shall enter into an agreement with the issuer company, prior to filing of offer document with SEBI, clearly stating all the terms and conditions relating to this option including fees charged / expenses to be incurred by SA for this purpose.

 The SA shall also enter into an agreement with the promoter(s) or pre-issue shareholders who will lend their shares specifying the maximum number of shares that may be borrowed from the promoters or the shareholders, which shall not be in excess of 15% of the total issue size.) Lead merchant banker or the Lead Book Runner, in consultation with the SA, shall determine the amount of shares to be over-allotted with the public issue, subject to the maximum number specified

 In case of an initial public offer by a unlisted company, the promoters and pre-issue shareholders and in case of public issue by a listed company, the promoters and pre- issue shareholders holding more than 5% shares, may lend the shares The SA shall borrow shares from the promoters or the pre-issue shareholders of the issuer company or both, to the extent of the proposed over-allotment Provided that the shares referred to in this clause shall be in dematerialized form only.)

The allocation of these shares shall be pro-rata to all the applicants. The stabilization mechanism shall be available for the period disclosed by the company in the prospectus, which shall not exceed 30 days from the date when trading permission was given by the exchange(s). The SA shall open a special account with a bank to be called the Special Account for GSO proceeds of _____ company (hereinafter referred to as the GSO Bank account) and a special account for securities with a depository participant to be called the Special Account for GSO shares of company (hereinafter referred to as the GSO Demat Account). The money received from the applicants against the over allotment in the green shoe option shall be kept in the GSO Bank Account, distinct from the issue account and shall be used for the purpose of buying shares from the market, during the stabilization period.

 The shares bought from the market by the SA, if any during the stabilization period, shall be credited to the GSO Demat Account. The shares bought from the market and lying in the GSO Demat Account shall be returned to the promoters immediately. In any case not later than 2 working days after the close of the stabilization period. On expiry of the stabilization period, in case the SA does not buy shares to the extent of shares overallotted by the company from the market, the issuer company shall allot shares to the extent of the shortfall in dematerialized form to the GSO Demat Account, within five days of the closure of the stabilization period

 These shares shall be returned to the promoters by the SA in lieu of the shares borrowed from them and the GSO Demat Account shall be closed thereafter.

How it works: the example

A company intends to sell 1 million shares of their stock in a public offering through an investment banking firm (or group of firms which are known as the syndicate) whom the company has chosen to be the offering's underwriter(s) When a public offering trades below its offering price, the offering is said to have "broke issue" or "broke syndicate bid". This creates the perception of an unstable or undesirable offering, which can lead to further selling and hesitant buying of the shares. To manage this possible situation, the underwriter initially oversells ("shorts") to their clients the offering by an additional 15% of the offering size.

 the underwriter would sell 1.15 million shares of stock to their clients. Now when the offering is priced and those 1.15 million shares are "effective" (become eligible for public trading), the underwriter is able to support and stabilize the offering price bid (which is also known as the "syndicate bid") by buying back the extra 15% of shares (150,000 shares in this example) at the offering price. They are able to do this without having to assume the market risk of being long this extra 15% of shares in their own account, as they are simply "covering" (closing out) their 15% oversell short.

The circumstance of utilizing the "GreenShoe" is as follows

If the offering is successful and is in strong demand such that the price of the stock immediately goes up and stays above the offering price, then the underwriter is left in the circumstance of having oversold the offering by 15% and is now technically short those shares. If they were to go into the open market to buy back that 15% of shares, the company would be buying back those shares at a higher price than it sold them at, and would incur a loss on the transaction.

the over-allotment (Green Shoe) option comes into play:

the company grants the underwriters the option to purchase from the company up to 15% of additional shares than the original offering size at the offering price. Now, if the underwriters were able to buy back all of its oversold shares at the offering price in support of the deal, they would not need to exercise any of the Green Shoe. But if they were only able to buy back some of the shares before the stock went higher, then they would exercise a partial Green Shoe for the rest of the shares. And, if they were not able to buy back any of the oversold 15% of shares at the offering price ("syndicate bid") because the stock immediately went and stayed up, then they would be able to completely cover their 15% short position by exercising the full Green Shoe.

The green shoe buoy for public issues

April 02, 2004 (Business Standard)

S Ramachandra lost heavily in IBP's divestment issue. Allotted 300 shares at Rs 620, Ramachandra decided to cut his losses as price of the scrip started to plummet. He sold his shares at Rs 565, making a loss of about nine per cent. His elder son reacted much slower, and sold his 200 shares at a price of Rs 529, ending up with a loss of over 14 per cent against the allotment price.

 He had little option but to sell the shares since he had availed of a bank loan in order to subscribe to the issue. Banks today lending against shares charge an interest of about 1012 per cent. Sonia Singh, another retail investor also lost out in the recent government's divestment programme when she invested in 500 shares of CMC at an offer price of Rs 485 per share. The price of this scrip is today trading well below the issue price at Rs 474, though it had been listed higher and was ruling at about Rs 494 in mid-March. While Singh continues to hold on to her investment, she feels let down.

 For the first time in the Indian stock market, an issuer has decided to protect investor interest. ICICI Bank is the first entity to offer "comfort to investors since the Securities and Exchange Board of India (Sebi) regulations have allowed for the greenshoe option," said the bank's deputy managing director Kalpana Morparia. ICICI Bank's Rs 3,050 crore (Rs 30.50 billion) public issue which opened on Friday in a price band of Rs 255-295, is seen to be aggressively priced -- when one considers the current share of Rs 295.9 hovering near the book-building price band.

 However, the management has decided to be more proactive in the interest of investors by offering the greenshoe option of Rs 450 crore (Rs 4.50 billion) in ICICI Bank's public issue, which will be used to stabilise the share price if warranted. "If the Sensex falls the price of the scrip will equally fall. The greenshoe option thus acts as a safety net for investors and is a standard global practice," said Morparia.

 Given the size of the issue, price volatility in ICICI Bank scrip is expected. DSP Merrill Lynch Ltd will act as the stabilising agent to buy the bank's shares whenever the price falls below the issue level for a period of one month post-allotment or till the shares up to the value of Rs 450 crore under the greenshoe option are exhausted. Greenshoe is a provision that enables the underwriting syndicate to purchase additional shares at the original price, which will be used by them in the event of the market price falling below the allotment price.

 So how does the mechanism operate in the interest of investors?

The Life Insurance Corporation of India, currently holding 7.98 per cent stake in the private sector bank, will lend shares worth Rs 450 crore to DSP Merrill Lynch. The funds will be kept in an escrow account to be used by the stabilising agent for buying shares in the secondary market. This secondary market intervention will continue for a period of one month after listing or whenever the amount of Rs 450 crore is exhausted, said DSP Merrill Lynch head of corporate finance Sanjay Sharma.

So where does that leave retail investors?

The green shoe "safety net" is likely to give "comfort" to retail investors and encourage their response as there is an assurance that the offer price will be maintained for a period of one month. Globally investment banks win business not only on the strength of the banking team or track record, but also on their willingness to commit the firm's capital in the aftermath of the issue. Their role then is to provide support by buying unwanted shares. Hence the key behind effective underwriting is to ensure heavy demand among those investors who failed to get allotment.

Reverse Greenshoe
A Reverse Greenshoe is a special provision in an IPO prospectus, which allows underwriters to sell shares back to the issuer. If a 'regular' greenshoe option is, in fact, a call option written by the issuer for the underwriters, a reverse green shoe is a put option. Reverse greenshoe has exactly the same effect on the share price as a traditional option but is structured differently. It is used to support the share price in the event that the share price falls in the post-IPO aftermarket. In this case, the underwriter buys shares in the open market and then sells them back to the issuer, stabilizing the share price.

Anil has shot three birds in a single shot, killed the primary market, killed the secondary market
and

sucked liquidity out of the system, which the RBI Governor is not able to do.

Any Question

Thank you