PROJECT WORK

CENTRAL UNIVERSITY OF SOUTH BIHAR

SCHOOL OF LAW AND GOVERNANCE

INVESTMENT LAW
‘SEBI (Disclosure & Investor Protection)
Guidelines’

ANKIT KUMAR
CUSB1613125005
 ACKNOWLEDGEMENT

I owe a sincere thanks to many people who helped me and guided me in writing of this
project on ‘SEBI (Disclosure & Investor) Guidelines’ which was given to me by the Faculty
Coordinator of the subject Investment Law (LAW400) Mr. Mani Pratap Sir.

I would like to thank my teacher to give me the project as, it would help me to understand the
intricacies related to the topic. Also, I would like to thank him, for guiding and helping me at
every stage of the completion of my project.

Again, I would like to thank all mighty and my friends for supporting me in whole process of
this project completion. At last, my deep sense of gratitude also goes to my friends,
institution and every single person who are related with this project in any way and without
whom this project would have been a distant reality.

ANKIT KUMAR

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 LIST OF ABBREVIATIONS

Securities and Exchange Board of SEBI

India
Registrar of Company ROC

SEBI (Disclosure & Investors DIP

Protection) Guidelines
Initial Public Offering IPO

Qualified Institutional Buyers QIBS

Green Shoe Option GSO

Stabilizing Agent SA

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 TABLE OF CONTENTS

INTRODUCTION ................................................................................................................................... 4

OFFER DOCUMENTS ............................................................................................................................ 5

CONTENTS OF PROSPECTUS ..................................................................................................... 6

CONTENTS OF ABRIDGED PROSPECTUS .............................................................................. 7

CONTENTS OF LETTER OF OFFER .......................................................................................... 7

ELIGIBIILTY NORMS............................................................................................................................ 9

PROFITABILITY ROUTE ............................................................................................................. 9

BOOK BUILDING ROUTE ............................................................................................................ 9

EXCEPTIONS TO ELIGIBILITY NORMS ............................................................................... 10

FAST TRACK ISSUE ............................................................................................................................ 10

PRICE OF AN ISSUE ............................................................................................................................ 11

GREEN SHOE OPTION........................................................................................................................ 12

SHELF PROSPECTUS .......................................................................................................................... 13

INITIAL PUBLIC OFFERS THROUGH THE STOCK EXCHANGE ON-LINE SYSTEM (e-IPO) ...... 14

CONCLUSION....................................................................................................................................... 15

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INTRODUCTION

SEBI has wide powers to regulate the securities market and to protect the interest of investors
in primary market as well as secondary market. The board has powers to regulate the
functioning of stock broker, sub brokers or other intermediaries, so that investor’s money
cannot be lost by malpractices or in other way. The investment through primary market by
investors deemed to the first step in this most technical securities market. Therefore, it is
primary duty of the SEBI to protect their rights and interest at the first stage.

Investors are the backbone of the securities market. An investor is a person who is an individual
or a corporate legal entity investing his capital in another venture or business but does not do
the business himself or itself. The investor has no role to play in the day-to-day management
of the business or its control except as permitted by the law. They not only determine the level
of activity in the securities market but also the level of activity in the economy. The corporate
systems and processes need to be credible and transparent, so that the interests of the investors
may be safeguarded in a manner that enables them to exercise their choice in an informed
manner while making investment decisions, and also providing them with a fair exit option.1

Securities and Exchange Board of India Act, 1992 provides for the establishment of a board to
protect the interests of investors in securities and to promote the development of, and to
regulate, the securities market and for matters connected therewith or incidental thereto.
Section 11, SEBI Act, 1992 provides for functions the Board. As according to s. 11(1), it shall
be the duty of the board to protect the interests of investors in securities and to promote the
development securities market by measures, it thinks fit. Therefore, SEBI (Disclosure and
Protection) Guidelines, have been issued by the Securities and Exchange Board of India
exercising the powers under s.11 of the Act. In short, the SEBI (Disclosure & Investors
Protection) Guideline are called DIP Guidelines. SEBI framed its first DIP guidelines in 1992,
after that many amendments have been carried out in the same line with the market dynamics
and requirements. In 2000, SEBI issued ‘Securities and Exchange Board of India
(Disclosure & Investors Protection) Guidelines, 2000’.

1
.Protection of the Interest of the Investors available at
http://www.legalservicesindia.com/article/1560/Protection-of-the-interest-of-the-investor.html (Last visited 25-
11-19)
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OFFER DOCUMENTS

Chapter-II of the SEBI (Disclosure & Investors Protection) Guidelines, 2000 provides that the
companies issuing securities offered through an offer document shall satisfy the following at
the time of filing the draft offer document with SEBI.2 Offer Document means, the final
prospectus in the case of a public issue/offer for sale which is filed and registered with the
Registrar of Companies (ROC) and the stock exchanges. An offer document covers all the
relevant information required to be disclosed under various regulations and incorporates the
observations of the Registrar of Companies and SEBI. It is also provided that, ‘A company
may issue securities after filling a draft prospectus at least 30 days prior to the filling of the
Prospectus with the ROC.’ The Board may specify changes or issue observations, if any, on
the draft Prospectus only after receipt of copy of in-principle approval from all the stock
exchanges on which the issuer company intends to list the securities proposed to be offered
through the Prospectus.3 The draft offer document filed with the Board shall be made public
for a period of (21 days) from the date of filing the offer document with the Board.4 In case,
where there is an change in the prospectus, 15 days are provided for clarification.

The offer documents refer to-

• the Prospectus
• the Abridged Prospectus, and
• the Letter of Offer

The offer document provides the investor, the only interface he can have, in respect of new
Companies, or recently formed companies. It still forms the main source even in respect of
established corporates with a known history of past performance and business reputation of
their promoters.

For making his investment decision, the offer documents should convey the investor in the first
place the objective facts about the project and about the background/history of the promoters.
It should also disclose comprehensive information, i.e. all relevant and connected facts

2
. Clause 2.0, SEBI (Disclosure & Investors Protection) Guidelines, 2000:
3
. Clause 2.1.1, SEBI (Disclosure & Investors Protection) Guidelines, 2000:
4
. Clause 5.6, SEBI (Disclosure & Investors Protection) Guidelines, 2000
5
concerning the public issue and how the funds raised will be utilised along with a fair
assessment of the risks involved.5

CONTENTS OF PROSPECTUS

Content description of the Prospectus is conveyed in two Sections. The first Section deals with
compulsory disclosures to be communicated to the Investor. This part is nearly common in
respect of other offer documents also, i.e., abridged prospectus and Letter of Offer. The second
Section has two parts and both deal with general Information, i.e. about the promoters, the
project, the issuing company etc.

SEBI has approached the subject so minutely that it has provided directions to standardise the
format, colour and design of the Prospectus to be issued by the Company inviting the public
for subscribing to its Issues. The offer document shall contain all material information which
shall be true and adequate so as to enable the investors to make informed decision on the
investments in the issue. The offer document shall also contain the information and statements
specified in this chapter (Chapter VI of the Guidelines). The draft offer document and final
offer document shall be approved by the Board of Directors of the issuer company and signed
by all the Directors (including the Managing Director), Chief Executive Officer and Chief
Financial Officer of the issuer company. They shall also certify that all the disclosures made in
the offer document are true and correct.

The general requirements of prospectus are been provided in Clause 6.3, of the SEBI
(Disclosure & Investor Protection) Guidelines, 2000, as described below: -

• Name and address of registered office of the issuer company.

• Letter of intent / industrial license and declaration of the Central Govt./RBI about non-
responsibility for financial soundness or correctness of statements.
• Disclaimer Clause
• Disclaimer Statement from the Issuer
• Filing of Offer Document with the Board and ROC.
• Minimum Subscription Clause
• Offer for Sale

5
. https://www.oocities.org/kstability/content/stock2/dip1/dip5.html
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 • Public Issues by Infrastructure Companies.
• Issue Schedule.
• Intermediaries and Auditors.
• Credit Rating
• Underwriting of the issue
• Compliance Officer

CONTENTS OF ABRIDGED PROSPECTUS

It means the memorandum as prescribed in Form 2A under sub-section (3) of section 56 of the
Companies Act, 1956. It contains all the salient features of a prospectus. It accompanies the
application form of public issues.

CONTENTS OF LETTER OF OFFER

The letter of offer shall fulfil the requirements and shall contain the disclosures as specified
under the contents of prospectus. The general requirements6 of letter of offer is described
below: -

• Name and address of registered office of the company.

• Issue listed at: [Name (s) of the Stock Exchanges]
• Opening, closing dates of the issue.
• Name and address of Lead Merchant Bankers.
• Name and address of Trustees under Debenture Trust Deeds (in case of debenture/
issue).
• Rating for the Debenture/ Preference Shares, if any, obtained from any Credit Rating
Agency.
• Provisions of sub-section (1) of Section 68A of the Companies Act, 1956 relating to
punishment for fictitious applications.
• Declaration about the issue of allotment letters/refunds within a period of 218(15 days)
and interest in case of delay in refund at the prescribed rate under Section 73(2)/ (2A).

6
. Clause 6.41, SEBI (Disclosure & Investor Protection) Guidelines, 2000
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 • Declaration by the Board of Directors stating that all moneys received out of issue of
shares or debentures through an offer document shall be transferred to a separate bank
account other than the bank account referred to in sub-section (3) of section 73;
• Minimum Subscription Clause: The minimum subscription clause shall be incorporated
as under: -
a) For Non-underwritten Rights Issue: If the Company does not receive the
minimum subscription of 90% of the issue, the entire subscription shall be
refunded to the applicants within (fifteen days) from the date of closure of the
issue. And If there is delay in the refund of subscription by more than 8 days
after the company becomes liable to pay the subscription amount (i.e. (fifteen
days) after closure of the issue), the company will pay interest for the delayed
period, at rates prescribed under sub-sections (2) and (2A) of Section 73 of the
Companies Act, 1956.
b) For Underwritten Rights Issue: If the Company does not receive minimum
subscription of 90% of the issue including devolvement of underwriters, the
entire subscription shall be refunded to the applicants within (fifteen days) from
the date of closure of the issue. And if there is delay in the refund of subscription
by more than 8 days after the company becomes liable to pay the subscription
amount (i.e., (fifteen days) after closure of the issue), the company will pay
interest for the delayed period, at prescribed rates in sub-sections (2) and (2A)
of Section 73 of the Companies Act, 1956.

The letter of offer shall also contain, the capital structure of the company7, the terms of issue8,
particulars of issue9, details about company10, management and project11, financial
performance of the company for the last 5years12, some statutory and other information13 and
it shall also contain the undertaking by the directors.14

7
. Clause 6.42 of the SEBI (Disclosure & Investors Protection) Guidelines, 2000
8
. Clause 6.43 of the SEBI (Disclosure & Investors Protection) Guidelines, 2000
9
. Clause 6.44 of the SEBI (Disclosure & Investors Protection) Guidelines, 2000
10
. Clause 6.45 of the SEBI (Disclosure & Investors Protection) Guidelines, 2000
11
. Clause 6.46 of the SEBI (Disclosure & Investors Protection) Guidelines, 2000
12
. Clause 6.47 of the SEBI (Disclosure & Investors Protection) Guidelines, 2000
13
. Clause 6.49 of the SEBI (Disclosure & Investors Protection) Guidelines, 2000
14
. Clause 6.50 of the SEBI (Disclosure & Investors Protection) Guidelines, 2000
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ELIGIBIILTY NORMS

SEBI has stipulated the eligibility norms for companies planning to issue an IPO, which may
be categorised into two types, i.e. profitability route and book building route.

PROFITABILITY ROUTE

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) 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 50% on
monetary assets shall not be applicable in case the public offer is made entirely through
offer for sale.
b) Distributable pre-tax operating profit in at least three years of the immediately
preceding five years.
c) Net worth of at least Rs. 1 crore in each of the preceding three full years.
d) If there has been a change in the company's name, at least 50% of the revenue for
preceding one year should be from the new activity denoted by the new name
e) The issue size should not exceed 5 times the pre-issue net worth.15

BOOK BUILDING ROUTE

To provide sufficient flexibility and also to ensure that genuine companies do not suffer on
account of rigidity of the parameters, SEBI has provided two other alternative routes to
company not satisfying any of the above conditions, for accessing the primary Market, as
under:

a) Issue shall be through book building route, with at least 50% to be mandatory allotted
to the Qualified Institutional Buyers (QIBS) or the “project” has at least 15%
participation by Financial Institutions/ Scheduled Commercial Banks, of which at least

15
. Clause 2.2.1, SEBI (Disclosure & Investors Protection) Guidelines, 2000
9
 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.
b) The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a
compulsory market-making for at least 2 year or there shall be a compulsory market-
making for at least 2 years from the date of listing of the shares.16

EXCEPTIONS TO ELIGIBILITY NORMS

SEBI (Disclosure & Investors Protection) Guidelines, 2000 have provided certain exemptions
from the eligibility norms under Clause 2.4. The following are eligible for exemption from
entry norms: -

1. Private Sector Banks

2. Public sector banks
3. An infrastructure company whose project has been appraised by a PFI or IDFC or
IL&FS or a bank which was earlier a PFI and not less than 5% of the project cost is
financed by any of these institutions.
4. Rights issue by a listed company.

FAST TRACK ISSUE

Fast Track issue is a faster and cost-effective method of raising capital by listed companies.
Means the listed companies can access the Indian Primary market for raising the capital through
public issue without complying anything contained in the standard regulations i.e., regulation
6, 7, 8 related to filing of documents and forms specified in the SEBI (Issue of Capital and
Disclosure Requirements) Regulations 2009.17 If the following conditions are satisfied:-

a) The shares of the company have been listed on any stock exchange having nationwide
terminals for a period of at least three years immediately preceding the reference date;

16
. Clause 2.2.2, SEBI (Disclosure & Investors Protection) Guidelines, 2000
17
. https://www.caclubindia.com/articles/fast-track-issue-22196.asp
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 b) The “average market capitalisation of public shareholding” of the company is at least
Rs. 10,000 crores for a period of one year up to the end of the quarter preceding the
month in which the proposed issue is approved by the Board of Directors / shareholders
of the issuer;
c) The annualized trading turnover of the shares of the company during six calendar
months immediately preceding the month of the reference date has been at least two
percent of the weighted average number of shares listed during the said six months
period;
d) The company has redressed at least 95% of the total shareholder / investor grievances
or complaints received till the end of the quarter immediately preceding the month of
the reference date;
e) The company has complied with the listing agreement for a period of at least three years
immediately preceding the reference date;
f) The impact of auditors’ qualifications, if any, on the audited accounts of the company
in respect of the financial years for which such accounts.18

PRICE OF AN ISSUE

There is no price formula stipulated by SEBI, it does not play any role in determination of price
of an issue. The company and merchant banker are however, required to make full disclosures
of parameters through which they have determined the price. It is however, provided that the
Company shall decide the price by consultation of Merchant Banker. There are two types of
issues: -

1. Fixed Price Issue

2. Book Building Issue19

18
. Clause 2.1.2A, SEBI (Disclosure & Investors Protection) Guidelines, 2000
19
. https://www.slideshare.net/PiyushaRustagi1/investor-protection-guideline-by-sebi-2000
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GREEN SHOE OPTION

An issuer company making a public offer of equity shares can avail of the Green Shoe Option
(GSO) for stabilizing the post listing price of its shares, subject to the provisions of the Chapter
VIII-A, DIP guidelines. A company desirous of availing the option granted by this Chapter,
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. These following provisions are to be followed to avail the GSO: -

1. 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.
2. 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.
3. The draft prospectus, draft Red Herring prospectus, the Red Herring prospectus and the
final prospectus shall contain the following additional disclosures: -
3.1. Name of the SA.
3.2. The maximum number of shares (as also the percentage vis a vis the proposed issue
size) proposed to be over-allotted by the company.
3.3. The period, for which the company proposes to avail of the stabilization mechanism,
3.4. The maximum increase in the capital of the company and the shareholding pattern post
issue, in case the company is required to allot further shares to the extent of over-
allotment in the issue.
3.5. The maximum amount of funds to be received by the company in case of further
allotment and the use of these additional funds, in final document to be filed with ROC
3.6. Details of the agreement/ arrangement entered in to by SA with the promoters to
borrow shares from the latter which inter-alia shall include name of the promoters,

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 their existing shareholding, number & percentage of shares to be lent by them and
other important terms and conditions including the rights and obligations of each party.
3.7. The final prospectus shall additionally disclose the exact number of shares to be
allotted pursuant to the public issue, stating separately therein the number of shares to
be borrowed from the promoters and over allotted by the SA, and the percentage of
such shares in relation to the total issue size.20

SHELF PROSPECTUS

A public sector bank, scheduled commercial bank or public financial institution proposing to
issue a shelf prospectus shall file a draft shelf prospectus with the Board. A public sector bank,
scheduled commercial bank or public financial institution shall file the shelf prospectus after
incorporating the updating in terms of information memorandum in respect of the second or
any subsequent offer of securities with the Board. The shelf prospectus as updated shall be
uploaded on the website of SEBI and on the website of the lead manager. The public sector
bank, scheduled commercial bank or public financial institution shall open the particular stage
of offer of securities after filing the information memorandum/shelf prospectus as updated with
the Registrar of Companies and with the Board.

The shelf prospectus shall, in addition to other requisite disclosures as per these Guidelines,
also disclose the aggregate amount proposed to be raised through all the stages of offers of
securities made under the shelf prospectus. The observation letter issued by the Board shall be
valid for a period of 365 days from the date of issuance.21

20
. Clause 8.A., SEBI (Disclosure & Investors Protection) Guidelines, 2000
21
. Clause 12.A., SEBI (Disclosure & Investors Protection) Guidelines, 2000
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INITIAL PUBLIC OFFERS THROUGH THE STOCK EXCHANGE ON-LINE
SYSTEM (e-IPO)

A company proposing to issue capital to public through the on-line system of the stock
exchange for offer of securities shall comply with the requirements as contained in Chapter XI-
A, SEBI (DIP) Guidelines, 2000 in addition to other requirements for public issues as given in
these Guidelines, wherever applicable.

• The company shall enter into an agreement with the Stock Exchange(s) which have the
requisite system of on-line offer of securities. It shall specify inter-alia, the rights,
duties, responsibilities and obligations of the company and stock exchange (s) inter se.
The agreement may also provide for a dispute resolution mechanism between the
company and the stock exchange.
• The stock exchange, shall appoint brokers of the exchange, who are registered with
SEBI, for the purpose of accepting applications and placing orders with the company.
• The company shall appoint a Registrar to the Issue having electronic connectivity with
the Stock Exchange/s through which the securities are offered under the system.
• The company may apply for listing of its securities on an exchange other than the
exchange through which it offers its securities to public through the on-line system.
• The Lead Manger shall be responsible for co-ordination of all the activities amongst
various intermediaries connected in the issue / system.
• The company shall, after filing the offer document with ROC and before opening of the
issue, make an issue advertisement in one English and one Hindi daily with nationwide
circulation, and one regional daily with wide circulation at the place where the
registered office of the issuer company is situated.
• SEBI shall have the right to carry out an inspection of the records, books and documents
relating to the above, of any intermediary connected with this system and every
intermediary in the system shall at all times co-operate with the inspection by SEBI. In
addition, the stock exchanges have the right of supervision and inspection of the
activities of its member brokers connected with the system.22

22
. Clause 11.A., SEBI (Disclosure & Investors Protection) Guidelines, 2000
14
CONCLUSION

The SEBI has made various regulations to regulate the primary and secondary securities market
and placed check upon intermediaries & companies so that investors and shareholders interest
should not be prejudiced by reason of lack of knowledge and non-disclosures of essential
information. The most important thing, while investing through IPO, to keep in mind by
investors is company’s performance, its promoters, capital and other things, so that he can
decide whether to invest or not. Therefore, looking to the need of investor SEBI has made
certain information mandatory to disclose publicly e.g. offer documents, Red herring
documents etc. These documents contain various information about the working of company
and discloses various parameters of company’s performance.

In case of non-observance of SEBI guidelines by companies, as per section 1 IB it can issue

the following directions: -

1. Direct the persons concerned to refund any money collected under an issue to the
investor with or without requisite interest, as the case may be or
2. Direct the persons concerned not to access the capital market for a particular period
3. Direct the stock exchange concerned not to fist or permit trading in securities
4. Direct the stock exchange concerned to forfeit the security deposit deposited by the
issuer company, any other direction which the Board may deem fit and proper in the
circumstances of the case.

However, much more needs to be done to bring order to the system. There are plenty of rules
and regulations in India, but much deficiency exists in the sphere of their implantation. Proper
attention should be paid to successful implementation of the applicable rules and regulations.

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