The Disclosure and Investor Protection (DIP) Guidelines of SEBI, 2000, govern the issues of capital to the public by Indian companies. The guidelines provide norms relating to eligibility for companies issuing securities, pricing of issues, listing requirements, disclosure norms, the lock-in period for promoters’ contribution, contents of offer documents, pre-and post-issue obligations, etc.
SEBI Rules
The following table highlights the rules promulgated by SEBI since its inception. These rules range from securities definition in Securities Contracts (Regulations) Rules, 1957 to norms of issuing share capital in Companies (Share Capital and debentures) Rules, 2014. In this chapter, we have covered some of the important rules/regulations/ guidelines of SEBI:
| Issued Year | Rules |
| 1992 | SEBI (Terms and Conditions of Service of Chairman and Members) Rules, 1992 |
| 1993 | SEBI (Appeal to Central Government) Rules, 1993 |
| 1994 | SEBI (Annual Report) Rules, 1994 |
| 1994 | SEBI (Form of Annual Statement of Accounts and Records) Rules, 1994 |
| 1995 | SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995 |
| 1997 | Securities Appellate Tribunal Rules, 1997 |
| 1998 | Depositories (Appeal to Central Government) Rules, 1998 |
| 2000 | Securities Appellate Tribunal (Procedure) Rules, 2000 |
| 2000 | Securities Contracts (Regulations) (Appeal to Securities Appellate Tribunal) Rules, 2000 |
| 2003 | Securities Appellate Tribunal Rules, 2003 |
| 2004 | Securities Transaction Tax Rules, 2004 |
| 2005 | Depositories (Procedure for Holding Inquiry and Imposing Penalties) Rules, 2005 |
| 2005 | Securities Contracts (Regulations) (Procedure for Holding Inquiry and Imposing Penalties) Rules, 2005 |
| 2014 | Companies (Issue of Global Depositories Receipts) Rules, 2014 |
| 2014 | Companies (Prospectus and Allotment of Securities) Rules, 2014 |
| 2014 | Companies (Share Capital and debentures) Rules, 2014 |
SEBI DIP Guidelines 2000
The guidelines apply to all public issues, offers for sale and rights issues by listed and unlisted companies:
- Eligibility Norms
- Pricing of Issues
- Contribution of Promoters and lock-in
- Issue of Sweat Equity
- Issue Obligations
- Book Building
- Online Initial Public Offers (IPO)
- Book Building through On-line IPO System
Eligibility Norms
Eligibility Norms any company issuing securities through the offer document has to satisfy the following conditions:
A company making a public issue of securities has to file a draft prospectus with SEBI, through an eligible merchant banker, at least 30days prior to the filing of the prospectus with the Registrar of Companies (ROCs).
The filing of an offer document is mandatory for a listed company issuing security through a rights issue where the aggregate value of securities, including premium if any, exceeds Rs.50 lakh. A company cannot make a public issue unless it has made an application for listing of those securities with stock exchange(s).
The company must also have entered into an agreement with the depository for dematerialisation of its securities and the company should have given an option to subscribers/shareholders/investors to receive the security certificates or securities in dematerialised form with the depository. A company cannot make an issue if the company has been prohibited from accessing the capital market under any order or discretion passed by SEBI.
Pricing of Issues
The companies eligible to make public issue can freely price their equity shares or any security convertible into equity at a later date in cases of public/rights issues by listed companies and public issues by unlisted companies. In addition, eligible infrastructure companies can freely price their equity shares subject to compliance with disclosure norms as specified by SEBI from time to time.
The public and private sector banks can also freely price their shares subject to approval by RBI. A company may issue shares to applicants in the firm allotment category at a higher price than the price at which securities are offered to the public.
A listed company making a composite issue of capital may issue securities at differential prices in its public and rights issues. Further, an eligible company is free to make public/rights issues in any denomination determined by it in accordance with the Companies Act, 1956 and SEBI norms.
Contribution of Promoters and lock-in
The promoters’ contribution in case of public issues by unlisted companies and promoters’ shareholding in case of ‘offers for sale’ should not be less than 20 percentage of the post-issue capital. In case of public issues by listed companies, promoters should contribute to the extent of 20% of the proposed issue or should ensure post-issue holding to the extent of 20% of the post-issue capital.
For composite issues, the promoters’ contribution should either be20% of the proposed public issue or 20% of the post-issue capital. The promoters should bring in the full amount of the promoters contribution including premium at least one day prior to the issue opening date (which shall be kept in an escrow account with a Scheduled Commercial Bank and the said contribution/amount should be released by the company along with the public issue proceeds).
Issue of Sweat Equity
The SEBI (Issue of Sweat Equity) Regulations, 2002 have been framed and the main provisions laid down therein for the issue of sweat equity are:
- Under the new guidelines, the Sweat Equity shares can be issued by a company to its employees and directors as well as promoters.
- The pricing of the sweat equity shares should be as per the formula prescribed for that of preferential43allotment.
- The sweat equity shares should be locked in for a period of 3years from the date of Allotment. In case of a subsequent public issue being made, lock-in shall be as per the SEBI (DIP) Guidelines, 2000.
Issue Obligations
The lead merchant banker plays an important role in the pre-issue obligations of the company. He exercises due diligence and satisfies himself about all aspects of the offering, veracity and adequacy of disclosures in the offer document.
Each company issuing securities has to enter into a Memorandum of Understanding with the lead merchant banker, which specifies their mutual rights, liabilities and obligations relating to the issue. In case of under-subscription of an issue, the lead merchant banker responsible for underwriting arrangements has to invoke underwriting obligations and ensure that the underwriters pay the amount of involvement.
It should ensure the minimum number of collection centres. It should also ensure that the issuer company has entered into an agreement with all the depositories for the dematerialization of securities. All the other formalities related to post-issue obligations like an allotment, refund and despatch of certificates are also taken care of by the lead merchant banker.
Book Building
Book Building means a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offers document.
Book building is a process of offering securities in which bids at various prices from investors through syndicate members are collected. Based on bids, demand for the security is assessed and its price discovered.
In the case of a normal public issue, the price is known in advance to the investor and the demand is known at the close of the issue. In the case of the public issue through book building, demand can be known at the end of every day but the price is known at the close of the issue.
In case of an issuer company makes an issue of 100% of the net offer to the public through 100% book building process) No less than 35 % of the net offer to the public shall be available for allocation to retail individual investors.
Online Initial Public Offers (IPO)
A company proposing to issue capital to the public through the online system of the stock exchange has to comply with Section 55 to 68A of the Companies Act, 1956 and SEBI (DIP) Guidelines, 2000. The company is required to enter into an agreement with the stock exchange(s), which have the requisite system for an online offer of securities.
The agreement should cover rights, duties, responsibilities and obligations of the company and the stock exchanges intense, with provision for a dispute resolution mechanism between the company and the stock exchange. The issuer company appoints a Registrar to the Issue having electronic connectivity with the stock exchanges.
The issuer company can apply for listing of its securities at any exchange through which it offers its securities to the public through the online system, apart from the requirement of listing on the regional stock exchange. The stock exchange appoints brokers for the purpose of accepting applications and placing orders with the company.
The lead manager would coordinate all the activities amongst various intermediaries connected in the system. In addition to the above, the DIP guidelines also provide details of the contents of the offer document and advertisement, other requirements for issues of securities, like those under Rule 19(2) (b) of SC(R) Rules, 1957. The guidelines also lay down detailed norms for the issue of debt instruments, issue of capital by designated financial institutions and preferential/bonus issues.
Book Building through On-line IPO System
Book building is a process used in IPO for efficient price discovery, wherein during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.
In its strive to continuously improve the Indian securities market; NSE offers its infrastructure for conducting online IPOs through book building. It helps to discover price as well as demand for a security to be issued through a process of bidding by investors.
The advantages of this new system are: a) the investor parts with money only after allotment, b) it eliminates refunds except in the case of direct applications and c) it reduces the time taken for the issue process. Though the guidelines for book-building were issued in 1995, it is being used for IPOs from 1999.
What are the functions of Securities and Exchange Board of India?
It is established to protect the interests of investors in securities, to promote the development of to regulate the securities market.
What is SEBI dip?
Disclosure and Investor Protection (DIP) Guidelines of SEBI, 2000: The guidelines provide norms relating to eligibility for companies issuing securities, pricing of issues, listing requirements, disclosure norms, the lock-in period for promoters’ contribution, contents of offer documents, pre-and post-issue obligations, etc.
What is the purpose of an initial public offering IPO?
Initial public offering (IPO): When an unlisted company makes either a fresh issue of securities or offers its existing securities for sale or both for the first time to the public, it is called an IPO.
What is book building and its advantages?
Book building is a process of offering securities in which bids at various prices from investors through syndicate members are collected. Based on bids, demand for the security is assessed and its price is discover.
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