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2012-2017
ROLE OF SEBI IN ISSUE AND ALLOTMENT OF SHARES
CORPORATE LAW- I

Submitted to:
Mrs. Nandita Jha
(Faculty, Corporate Law I)

Submitted by:
SAGAR SOURABH
790, 7th semester

ACKNOWLEDGEMENT

I am highly elated to work on my project topic ROLE OF SEBI IN ISSUE AND

ALLOTMENT OF SHARES under the guidelines of my teacher Mrs. Nandita Jha. I am
very grateful to her for her proper guidance. I would like to enlighten my readers with my
efforts and just hope that I have tried my best for bringing luminosity to this topic.
I would also like to thank all my friends and my seniors and apart from all these I would like
to give special regard to the librarian of my university who made a relevant effort regarding
to provide the materials to my topic and also assisting me.
And finally and most importantly I would like to thank my parents for providing me financial
and mental support and providing me necessary and important tips whenever need so. I
would like to thank my room-mate for every little help of her.

THANKING YOU,
SAGAR SOURABH

HYPOTHESIS:

After the enactment and formation of SEBI, allotment and issue of

shares in different market has become much transparent.

INTRODUCTION
New Shareholders can be introduced to a company in 2 main ways, the allotment of shares
and the transfer of shares. In their basic form, allotment and transfers are a simple procedure,
however it is important to understand the basic requirements as these are the important part of
more complex transactions like Share for Share Exchanges and Share for Undertaking.

What is a Share?
A share can be described as an intangible accumulation of rights, interests and obligations.
The reason companies issue shares is to allow the company raise funds to carry out its
activities and make a return for its members. It also allows the ownership to change in a
company.

Different share classes may have different rights so it is very important to review the articles
of association to understand the rights attached to the shares. Ordinary shares usually (but
never assume!!) have the following rights:

A right to attend and vote at general meetings

A right to a proportion of the profits of a company dividend
A right to the capital surplus on winding up
A right to notice & information from Company
Allotment of Shares

The allotment of shares is the issuing of new shares to the existing shareholders or to third
parties. The Directors of a Company may allot shares in the capital of the Company, if they
have the authority to do so. Some examples where allotment of shares may be used are as
follows:

To raise money for the Company

To introduce new investors such as BES investors
To allow Enterprise Ireland or Enterprise Board Investors
To convert loans to share capital
To introduce a golden share
To put in place a group structure
To fund a redemption of shares
To implement a bonus issue of shares
Directors may not allot shares unless they have the power to do so. The Directors power to
allot shares expires 5 years from the date of incorporation or 5 years from the last renewal of
the power to allot. If the authority to allot shares has not been renewed in the last 5 years then
it should be renewed prior to any proposed allotment. This can be renewed by the Members
passing an Ordinary Resolution prior to the allotment.

A company must have sufficient unissued authorised share capital before new shares may be
allotted by the Directors. If the Company does not have sufficient unissued share capital or is
setting up a new share class this must be approved by the members passing a special
resolution.

The Memorandum and Articles of Association and any shareholder agreements should be
reviewed for regulations on pre-emption rights, unissued share capital and other provisions

that may affect the allotment of shares. The shares may be allotted for cash, non-cash and
may be allotted at a premium.
The new shareholders must apply for shares to be allotted to them, the Directors must
approve the allotment of shares, write up the Register of Allotments and Register of Members
and file the form B5 with the CRO. New share certificates should be issued to the new
shareholders.

Transfer of Shares
Shareholders have the ability to transfer their shares to existing shareholders or third parties.
This allows shareholders to sell their shares or for companies to be bought and sold. Some
examples where we have used transfer of shares are as follows:

Shareholder wants to transfer shares to existing shareholders

Shareholder wants to exit company by transferring to existing or third parties
Succession Planning (transferring shares to spouse or siblings)
Share for Share Exchange
Company Takeover
Company Restructuring or putting a group in place
In a Private Limited Company, Directors have right to refuse any transfer of shares once the
reasons are in the best interests of the company and are not oppressing any shareholder rights.
The Memorandum and Articles of Association and any Shareholders Agreements should be
reviewed prior to any transfer for any restrictions on the transfer of shares.
A transfer of shares must be approved by the Directors and the appropriate stamp duty paid to
the Revenue Commissioners. Stamp duty is calculated at 1% of the total consideration paid or
the market value for the shares. If the value of the consideration or the market value of the
shares is less than 1,000, the stock transfer form does not have to be stamped.

Stamp duty must be calculated and paid using Revenues ROS system. Once the appropriate
stamp duty is paid, the Revenue will issue a stamping certificate which must be provided to
the Company as proof that the appropriate stamp duty has been paid. The Company should
then write up the Register of Members and Register of Transfers and issue a new share
certificate.

The Securities and Exchange Board of India (SEBI) is the regulator for the securities market
in India. It was established in the year 1988 and given statutory powers on 12 April 1992
through the SEBI Act, 1992.1
It was established by The Government of India on 12 April 1988 and given statutory powers
in 1992 with SEBI Act 1992 being passed by the Indian Parliament. SEBI has its
headquarters at the business district of Bandra Kurla Complex in Mumbai, and has Northern,
Eastern, Southern and Western Regional Offices in New Delhi, Kolkata, Chennai and
Ahmedabad respectively. It has opened local offices at Jaipur and Bangalore and is planning
to open offices at Guwahati, Bhubaneshwar, Patna, Kochi and Chandigarh in Financial Year
2013 - 2014.
Controller of Capital Issues was the regulatory authority before SEBI came into existence; it
derived authority from the Capital Issues (Control) Act, 1947.
Initially SEBI was a non statutory body without any statutory power. However in 1995, the
SEBI was given additional statutory power by the Government of India through an
amendment to the Securities and Exchange Board of India Act, 1992. In April 1988 the SEBI
was constituted as the regulator of capital markets in India under a resolution of the
Government of India.
The SEBI is managed by its members, which consists of following: The chairman who is
nominated by Union Government of India. Two members, i.e., Officers from Union Finance
Ministry. One member from the Reserve Bank of India.
The remaining five members are nominated by Union Government of India, out of them at
least three shall be whole-time members.

"About SEBI". SEBI. Archived from the original on 3 October 2010. Retrieved 26 September 2012.

Private Placement vis-a-vis Preferential Allotment

Section 42 of the new Companies Act, 2013 deals with private placement. Any offer of
securities or invitation to subscribe to securities to 200 persons or less (excluding qualified
institutional buyers and employees) in a financial year will be a private placement under
Section 42(2) of the Companies Act, 2013. Reading the Rule 13 of the of Companies (Share
Capital and Debentures) Rules, 2014 makes it is very clear that any preferential allotment by
rights issue has to comply with private placement.

As per the amended definition of 2011, preferential allotment means allotment of shares or
any other instrument convertible into shares including hybrid instruments convertible into
shares on preferential basis made pursuant to the provisions of sub section(1A) of section 81
of the Companies Act, 1956. Earlier, preferential allotment envisaged a situation when a
listed issuer issues shares or convertible securities, to a select group of persons in terms of
provisions of Chapter XIII of SEBI (DIP) Guidelines.

Time Limit for allotment of securities:

Unlisted Public Companies (Preferential Allotment) Amendment Rules, 2011 amended the
erstwhile Rules of 2003. The 2011 Rules provided that allotment of securities should be
completed within 60 days from the receipt of application money. If not so allotted, the
company should repay application money within 15 days thereafter, failing which it should
be repaid along with an interest at 12% p.a. However, please note that these Rules applied
only to unlisted public companies, and no such conditions were prescribed for private
companies back then.

Time Limit for allotment of securities under the new Companies Act, 2013:

Under the new Companies Act, Sections 62 & 42 and Rule 13 of Companies (Share Capital
and Debentures) Rules, 2014 deals with issue of shares on preferential basis. Rule 13
prescribes that any such issue on preferential basis has to comply with conditions laid down
in section 42 of the Companies Act, 2013. Section 42(6) further provides that-

(6) A company making an offer or invitation under this section shall allot its securities
within sixty days from the date of receipt of the application money for such securities and if
the company is not able to allot the securities within that period, it shall repay the application
money to the subscribers within fifteen days from the date of completion of sixty days and if
the company fails to repay the application money within the aforesaid period, it shall be liable
to repay that money with interest at the rate of twelve per cent. per annum from the expiry of
the sixtieth day:

Provided that monies received on application under this section shall be kept in a separate
bank account in a scheduled bank and shall not be utilised for any purpose other than

(a) for adjustment against allotment of securities; or

(b) for the repayment of monies where the company is unable to allot securities.

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ROLE OF SEBI AND FUNCTIONS

Powers:For the discharge of its functions efficiently, SEBI has been vested with the following
powers: to approve bylaws of stock exchanges. sebi to require the stock exchange to amend
their bylaws. inspect the books of accounts and call for periodical returns from recognized
stock exchanges. inspect the books of accounts of a financial intermediaries. compel certain
companies to list their shares in one or more stock exchanges. registration brokers.
There are two types of brokers:
circuit broker
merchant broker
Purpose of SEBI:
SEBI was set up with the main purpose of keeping a check on malpractices and protect the
interest of investors. It was set up to meet the needs of three groups.
1. Issuers:
For issuers it provides a market place in which they can raise finance fairly and easily.
2. Investors:
For investors it provides protection and supply of accurate and correct information.
3. Intermediaries:
For intermediaries it provides a competitive professional market2.

http://www.yourarticlelibrary.com/education/sebi-the-purpose-objective-and-functions-of-sebi/8762/

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Objectives of SEBI:

The overall objectives of SEBI are to protect the interest of investors and to promote the
development of stock exchange and to regulate the activities of stock market. The objectives
of SEBI are:

1. To regulate the activities of stock exchange.

2. To protect the rights of investors and ensuring safety to their investment.
3. To prevent fraudulent and malpractices by having balance between self regulation of
business and its statutory regulations.
4. To regulate and develop a code of conduct for intermediaries such as brokers,
underwriters, etc.
Functions of SEBI:

The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three
important functions. These are:

i. Protective functions

ii. Developmental functions

iii. Regulatory functions.

1. Protective Functions:

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These functions are performed by SEBI to protect the interest of investor and provide safety
of investment.

As protective functions SEBI performs following functions:

(i) It Checks Price Rigging:

Price rigging refers to manipulating the prices of securities with the main objective of
inflating or depressing the market price of securities. SEBI prohibits such practice because
this can defraud and cheat the investors.

(ii) It Prohibits Insider trading:

Insider is any person connected with the company such as directors, promoters etc. These
insiders have sensitive information which affects the prices of the securities. This information
is not available to people at large but the insiders get this privileged information by working
inside the company and if they use this information to make profit, then it is known as insider
trading, e.g., the directors of a company may know that company will issue Bonus shares to
its shareholders at the end of year and they purchase shares from market to make profit with
bonus issue. This is known as insider trading. SEBI keeps a strict check when insiders are
buying securities of the company and takes strict action on insider trading.

(iii) SEBI prohibits fraudulent and Unfair Trade Practices:

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SEBI does not allow the companies to make misleading statements which are likely to induce
the sale or purchase of securities by any other person.

(iv) SEBI undertakes steps to educate investors so that they are able to evaluate the securities
of various companies and select the most profitable securities.

(v) SEBI promotes fair practices and code of conduct in security market by taking following
steps:

(a) SEBI has issued guidelines to protect the interest of debenture-holders wherein companies
cannot change terms in midterm.

(b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine
and imprisonment.

(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to
market prices.

2. Developmental Functions:

These functions are performed by the SEBI to promote and develop activities in stock
exchange and increase the business in stock exchange. Under developmental categories
following functions are performed by SEBI3:

Govt appoints JP Devadhar as new Presiding Officer of Securities Appellate Tribunal - Economic Times.
Articles.economictimes.indiatimes.com (2013-07-15). Retrieved on 2013-12-06.

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(i) SEBI promotes training of intermediaries of the securities market.

(ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable
approach in following way:

(a) SEBI has permitted internet trading through registered stock brokers.

(b) SEBI has made underwriting optional to reduce the cost of issue.

(c) Even initial public offer of primary market is permitted through stock exchange.

3. Regulatory Functions:

These functions are performed by SEBI to regulate the business in stock exchange. To
regulate the activities of stock exchange following functions are performed:
(i) SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries
such as merchant bankers, brokers, underwriters, etc.
(ii) These intermediaries have been brought under the regulatory purview and private
placement has been made more restrictive.
(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer
agents, trustees, merchant bankers and all those who are associated with stock exchange in
any manner.
(iv) SEBI registers and regulates the working of mutual funds etc.
(v) SEBI regulates takeover of the companies.

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(vi) SEBI conducts inquiries and audit of stock exchanges.4

ROLE OF SEBI IN ISSUING AND ALLOTMENT OF SHARES

IN DIFFERENT MARKETS:
Private market:
The term "Private Placement" of securities has been defined distinctively for the very first
time in Indian legal and corporate history by the new Companies Act of 2013. The earlier
Indian Companies Act of 1956 dealt scarcely with the practices of this under its Sections
67(3) and 73(1), and was concerned mainly with shares and debentures, and the public
limited companies. However, SEBI (Issue of Capital and Disclosure Requirements)
Regulations of 2009 did stipulate the term Preferential Allotment, which is the private
placement of shares or of convertible securities by a listed company to a select group of
investors, who are not its existing shareholders. The new Companies Act of 2013 not only
defined and described fully the private placements of securities, but also laid down certain
intelligent provisions for the private placements by both the private and public companies.
Moreover, the new provisions for private placements have widened the scope through
replacing the term 'Shares' by the wording 'Securities', and thus cover a rather broad range of
money and capital market instruments, such as equity shares, bonds, debentures, preference
shares, convertible instruments, and other marketable securities.
The Private Placement (non-public offering) of securities is a popular way of raising capital
by small businesses or corporations, through making offer for subscribing to their securities
by some select investors forming a small number. The funds thus raised through making
private placements of securities, can then be used for expansion or growth of their businesses.
4

"Pranab-Chidu feud may be revived over Sebi chief PIL". 12 November 2011. Retrieved 11 April 2012.

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Such private placements are opposite to the public offerings, in which securities are made
available for sale to the public at large on the open market. Generally, the customers of
privately places securities are banks, insurance companies, mutual funds, pension funds, etc.
And the types of securities offered and sold are equity shares, bonds, debentures, preference
shares, convertible instruments, redeemable instruments, and other marketable securities. The
private placements are commonly regarded as being quite cost-effective and time-saving
[because of requiring no brokers or underwriters] for small corporations for raising funds,
without going public and making initial public offerings [IPOs]. Again, these private
placements could be the only source of gathering capital by start-up firms or for risky
business ventures. Moreover, private placements enable the issuer corporations to hand-pick
well-experienced and sophisticated investors possessing compatible goals and interests.
However, there are also some disadvantages associated with private placements of securities,
such as scarcity of and difficulty in finding suitable and congenial investors; low buying
prices of privately placed securities as compared to the market value of those; offering
companies may need to relinquish more equity to compensate the risks and illiquid positions
of the prospective investors.
Private Placements of Securities by Indian companies are to be governed and regulated by the
provisions, regulations, and compliances given in the Chapter III, Part II of the new Indian
Companies Act of 2013. The Section 42 of this magnificent CA-2013 defines the private
placement as being an offer of securities or an invitation to subscribe for securities made ever
by a company to a chosen group of persons or investors, in a way other than the way of
public offer, and through issue of proper private placement offer letter, and satisfying all
other conditions and provisions given in the paragraphs below.

Some of the most significant and key provisions provided in the Indian Companies Act of
2013, for making private placement of securities in India, are the following. Here, it must be
noted that the following provisions and guidelines are applicable, when the offer for
subscribing to securities is being made to a person or investor who is currently not an equity
shareholder in the issuer company. In case, when the offer is to be made to persons/investors
who are already the equity holders of the issuer company, then another set of provisions and
guidelines are applicable.

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At present, the provisions and instructions given in the Section 42 of the Companies Act of
2013 [CA-2013] regarding the private placements of securities, are common for all classes of
companies, be it private limited companies, public limited companies, or the listed companies
on stock exchanges. In addition to these provisions of Section 42, provisions given in the
Rule-14 under the Companies (Prospectus and Allotment of Securities) Rules of 2014, are
also applicable. Again, besides the SEBI Act of 1992, the Securities Contract Regulation Act
of 1956 [SCRA], and the SEBI (Issue of Capital and Disclosure Requirements) Regulations
of 2009, the Securities and Exchange Board of India [SEBI] has the power to prescribe
additional provisions, processes, or disclosure requirements for making private placements of
securities.
Though these provisions, requirements, and procedural compliances are common to all
above-mentioned classes of securities, there exist some additional requirements and
compliances in the cases of the equity shares or the securities convertible into equity shares
on preferential basis. These specific requirements and compliances are presented in the
Section 62 of the CA-2013, read with the Rule 13 of the Companies (Share Capital and
Debentures) Rules, 2014.
The proposed offer of securities or invitation to subscribe securities to a select group of
persons/investors by a company, must be duly and previously approved by its shareholders,
by way of a special resolution, for each of the offers/invitations. The offer prices and
justifications for these, must be disclosed to the shareholders of the issuer company.
An offer or invitation for private placement shall be made to not more than two hundred
persons/investors in the aggregate in any financial year, individually for each type of
securities. This limit of 200, does not include the Qualified Institutional Buyers [QIBs] and
employees of the issuer company, who are receiving securities under ESOP. These provisions
are in compliance to the Section 62(1)(b) of the CA-2013, and the PAS Rule 14(2).
An offer of securities or invitation to subscribe for securities shall be made through issue of a
Private Placement Offer Letter [PPOL] in Form PAS-4. The PPOL shall be accompanied by
an application form serially numbered and addressed specifically to the person/investor to
whom the offer is being made, and must be sent to him either in writing or in electronic
mode, within thirty days of recording names of such persons, in accordance with Section
42(7) of the CA-2013.

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In the cases a company makes offers for non-convertible debentures, it must pass a special
resolution, at least once in a year, in respect of all such offers during the entire year.
According to the Rule 14(2) of the Companies (Prospectus and Allotment of Securities)
Rules of 2014 [PAS Rules 2014], the value of the offer or invitation per person/investor shall
not be less than INR-20,000/- of the Face Value of the securities. The payment for
subscription shall be made through the bank account of the concerned person/investor; no
cash transaction being permitted.
Again, the application money shall be kept in a separate bank account by the company, which
shall be utilized only for the purpose of adjustment against allotment of securities, or for
repayment of the money, in case the company fails to allot securities.

The complete and flawless record of private placement offers and acceptances shall be wellmaintained by the issuer company in Form PAS-5. A copy of such record, along with the
private placement offer letter in Form PAS-4, shall be filed with the concerned Registrar of
Companies [RoC], together with the prescribed fee given in the Companies (Registration
Offices and Fees) Rules of 2014; and with the SEBI if the company is a listed one; within a
period of thirty days from the date of circulation of the private placement offer letter [same as
the date of issue of the offer letter].
Any advertisement or any other media-related activities, intended to inform the public at
large about the placement offer, is strictly prohibited.
The (punctual) allotment of securities must be completed within a period of 60 days, counted
from the date of receipt of the application money. Somehow, if the company is not able to
complete allotment within this period, then it shall refund the money well within 15 days of
the expiry of 60-day period; or else, the company shall repay the received money along with
the interest @12% per annum, reckoned from the sixtieth day.
No any fresh offer of securities or invitation for subscribing to securities shall be raised
unless all allotments related with previous offers have been completed.
A return of allotment of securities shall be filed by the company with the Registrar within
thirty days from the completion of the allotments, in Form PAS-3, along with the requisite
fee as provided in the Companies (Registration Offices and Fees) Rules of 2014, and

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including the complete list of all security holders, and their details [email IDs, addresses, date
of allotment, etc.].
The provisions related to a maximum of 200 persons and the minimal investment size of not
less than twenty thousand rupees, shall not be applicable to
Non-banking Financial Companies [NBFCs], which are registered with RBI, under the RBI
Act of 1934.
Housing Finance Companies, which are registered with the National Housing Board [NHB],
under the NHB Act of 1987.
However, if RBI or NHB has no specific provisions regarding the private placements of
securities, then these companies also need to follow these provisions and processes for
private placements.
PENALTY FOR CONTRAVENTION

The Section 42(10) of the Companies Act of 2013 contains harsh and fast provisions for
preventing breach of the above-mentioned provisions and statutory compliances regarding the
private placements of securities, and also for apt punishment to the culprits. The company, or
its directors or promoters at fault, shall be liable for an onerous monetary penalty which
extends to the amount involved in the offer of private placement, or INR-2 Crore, whichever
is higher. Prompt refund of the money involved in such private placements to the subscribers
is also mandated, within thirty days counted from the date of the order imposing penalty.

Primary market:
The primary market plays an important role in the securities market by forming a link
between the savings and investments. It is through this market that the borrowers viz., the
Government and the corporates issue securities in which the investors deploy their savings.
The primary market comprises, the public issues and the private placement market. A public
issue consists of a company entering the market to raise funds from all types of investors; its
debut is known as the initial public offer (IPO). In case of private placement, there are only a

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few select subscribers to the issue. The securities can be issued at a face value, or at a
discount/premium; they may take a variety of forms such as equity, debt or some hybrid
instrument. Apart from raising funds in domestic markets, resources are mobilized in
international markets through the issuance of American Depository Receipts (ADRs)/Global
Depository Receipts (GDRs) and External Commercial Borrowing (ECB) route. This chapter
presents developments in primary market for corporate securities in India, both equity and
debt, while the primary market for government securities is discussed separately .
After a long period of subdued activity, there were signs of revival in the public issues in
2003-04. this was due to the offers made by quality issuers evoking buoyant investors
interest. In the private placement market, the SEBI, for the first time, imposed stringent
disclosure norms in September 2003. As a result, the resources mobilised by non-government
entities fell from 88% in 2002-03 to 85% in 2003-04. The public issues mobilised Rs. 71,900
million during this year. Further, the resources raised by Indian corporates from the
international capital market through the issuance of FCCBs, GDRs and ADRs have declined
marginally during 2003-04. With a view to integrate the Indian capital market, the foreign
companies have been allowed to access the Indian capital market through Indian Depository
Receipts (IDR).
Policy Developments In order to refine the primary market design and boost the waning
investors confidence, various measures have been taken by the Government, RBI and SEBI.
This section throws light on the policy measures initiated during the financial year 2003-04
and till June 2004.
I. DIP Guidelines
Given the SEBIs commitment to protect the investors interests and to increase the
transparency and efficiency of the primary market, stringent disclosure and eligibility norms
have been issued. Further, various operational procedures for the issuers have been simplified
to facilitate smooth mobilization of resources. In this regard, SEBI has set up various
committees, which constantly review the guidelines; subsequently, SEBI has amended the
SEBI (Disclosure and
Investor Protection) Guidelines, 2000 as enumerated below:
Eligibility Norms

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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.
Provided, it has a track record of profitability, and meets the conditions of net worth, net
tangible assets etc. as specified in the guidelines.
An unlisted company not complying with any of the above conditions may still make an
IPO, if it meets the conditions: (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 money have to 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, at least 10% of the issue size is to be
allotted to QIBs, otherwise, the full subscription monies is to be refunded AND (b)(i) The
minimum post-issue face value capital of the company has to be Rs. 10 crore OR (b)(ii)
There should be a compulsory market-making for at least 2 years from the date of listing of
the shares subject to certain conditions as specified in the guidelines.
A listed company is eligible to make a public offer of equity shares or any other security
which is convertible into equity shares. But, the aggregate issue size of the proposed issue
along with all the previous issues made during the same financial year should not exceed 5
times its pre-issue net worth as per the audited balance sheet of the last financial year. If the
name of the company has been changed in the last one year, then the revenue accounted for
by the activity suggested by the new name should not be less than 50% of its total revenue in
the preceding one full-year period.
No company can make a public or rights issue of debt instruments (whether convertible or
not), unless the following conditions are satisfied: (i) Credit rating of not less than investment
grade is obtained from not less than two SEBI registered credit rating agencies.
Promoters Contribution and Lock-in
Prior to an IPO, the shares held by the persons other than the promoters, which are locked in
may be transferred to any other person holding shares. This should be subjected to
continuation of lock-in in the hands of transferees for the remaining period and compliance
with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
1997.

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Shares held by promoter(s), which are locked-in, may be transferred to and amongst
promoter/promoter group or to a new promoter or persons in control of the company.
Provided the lock-in of shares in the hands of transferees for the remaining period remains.
They should also comply with the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997.
Preferential Issues
As in case of equity shares, the transfer of the locked in preference shares/instruments is
subject to the same norms and comply with SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997.
The lock-in period in respect of the shares issued on preferential basis pursuant to a scheme
approved under Corporate Debt Restructuring framework should commence from the date of
allotment. The lock-in period should continue for a period of one year. In case of partly paid
up shares the lock-in period should commence from the date of allotment and continue for a
period of one year from the date when shares become fully paid up.
Unless the entire shareholding is held in dematerialized form, no listed company is
permitted to make preferential issue of equity shares, warrants, Partly Convertible
Debentures (PCDs), Fully Convertible Debentures (FCDs) or any other financial instruments
convertible into or exchanged with equity shares at a later date.
In case of the shares, warrants, PCDs, FCDs or any other financial instruments convertible
into equity shares, which are issued on preferential basis, the entire pre-preferential allotment
shareholding should be under lock-in. The lock-in period shall start from the relevant date up
to a period of six months from the date of preferential allotment. In addition, the
shareholders, who have sold their shares during the six months period prior to the relevant
date, would not be eligible for allotment of shares on preferential basis.
Book Building Guidelines
The issuer company should enter into an agreement with one or more stock exchange(s),
which have the requisite system to offer on-line securities. The agreement should specify the
rights, duties, responsibilities and obligations of the company and the stock exchange(s). The
agreement should also provide for a dispute resolution mechanism between them.

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The freedom is given to the issuer company to list the securities on any other exchange and
not necessarily on the exchange through which the company has offered the securities.
The book runner(s)/syndicate members should appoint SEBI registered brokers to accept
bids, applications and placing orders with the company5. The appointed brokers should be
financially capable of honouring their commitments arising out of defaults of their clients
investors, if any.
The company should pay the broker/s a commission/fee for the services rendered.
The brokers are not allowed to levy a service fee on his clients/investors for his services.
If the offer is through 100% book building process, then the following rules apply:
(a) not less than 25% of the net offer should be made to retail individual investors;
(b) not less than 25% of the net offer to non-institutional investors i.e. other than retail
individual investors and QIBs; (c) not more than 50% of the net offer for QIBs.
If 75% of the net offer is through book building process and 25% at the price determined
through book building, then (a) in the book built portion, not less than 25% and not more
than 50% of the net offer should be available for allocation to non QIBs; (b) the balance 25%,
offered at a price determined through book building, should be available only to retail
individual investors. They will be either those who have not participated or have not received
any allocation, in the book built portion. It is mandatory that 50% of the issue size is allotted
to the QIBs.
Green Shoe Option
An issuer company making a public offer of equity shares can avail of the Green Shoe Option
(GSO) for stabilising post listing of its shares, subject to certain provisions in the guidelines
such as:
A company desirous of availing the option should seek authorization in the general meeting
for allotment of the additional shares to the stabilising agent (SA) at the end of the
stabilisation period.
The company should appoint one of the merchant bankers or book runners, as the SA.
5

"Former Chairmen of SEBI" (PDF). SEBI. Retrieved 19 February 2011.

24

They will be responsible for the price stabilisation process, if required. Prior to filing of offer
document with SEBI, the SA should enter into an agreement with the issuer company clearly
stating all the terms and conditions relating to this option including fees charged/expenses to
be incurred.
The SA should also enter into an agreement with the promoter(s) or pre-issue shareholders
who will lend their shares. The agreement should specify the maximum number of shares that
may be borrowed from the promoters or the shareholders which should not be in excess of
15% of the total issue size.
The allocation of these shares should be on pro-rata basis to all the applicants. The
stabilisation mechanism should be available for not more than 30 days from the date when
trading is permitted on the exchange(s).
The promoters and pre-issue shareholders, of both unlisted and listed company, holding
more than 5% shares should lend the shares for the purpose of GSO.6

"SEBI makes it mandatory for companies to disclose promoters' shares". Economic Times. 6 October 2011.
Retrieved 26 October 201

25

CONCLUSION
Thus, the Indian Companies Act of 2013 has made significant changes in the provisions
related with the private placements of securities, and promises better protection of the
legitimate rights of the shareholders, greater corporate accountability and transparency, and
brighter future of the investors/shareholders/companies engaged in diverse economic sectors.
Elegant and admirable provisions have been made for curbing malpractices in connection
with private placements of securities, including rigorous penal provisions under its Section
42(10). However, as the private companies and small companies are now required to follow
the same strenuous and strict provisions for carrying out private placements, these are
naturally subject to heavier compliance burden and lesser operational flexibility, than those
offered by the earlier Companies Act of 1956. Supreme Court of India heard a Public Interest
Litigation (PIL) filed by India Rejuvenation Initiative that had challenged the procedure for
key appointments adopted by Govt of India. The petition alleged that, "The constitution of
the search-cum-selection committee for recommending the name of chairman and every
whole-time members of SEBI for appointment has been altered, which directly impacted its
balance and could compromise the role of the SEBI as a watchdog." 7 On 21 November 2011,
the court allowed petitioners to withdraw the petition and file a fresh petition pointing out
constitutional issues regarding appointments of regulators and their independence. The Chief
Justice of India refused the finance ministrys request to dismiss the PIL and said that the
court was well aware of what was going on in SEBI.[13][15] Hearing a similar petition filed
by Bangaluru-based advocate Anil Kumar Agarwal, a two judge Supreme Court bench of
Justice SS Nijjar and Justice HL Gokhale issued a notice to the Govt of India, SEBI chief UK
Sinha and Omita Paul, Secretary to the President of India.8 Further, it came into light that Dr
KM Abraham (the then whole time member of SEBI Board) had written to the Prime
7

"Is Sebis Autonomy Under Threat?". 15 November 2011. Retrieved 10 April 2012.
"Notice to Centre on quo warranto against SEBI chief". The Hindu. 26 September 2012. Retrieved 26
September 2012.
8

26

Minister about malaise in SEBI. He said, "The regulatory institution is under duress and
under severe attack from powerful corporate interests operating concertedly to undermine
SEBI". He specifically said that Finance Minister's office, and especially his advisor Omita
Paul, were trying to influence many cases before SEBI, including those relating to Sahara
Group, Reliance, Bank of Rajasthan and MCX.

BIBLIOGRAPHY
Primary Sources

1.Companies Act, 2013 [Act No. 18 OF 2013]

2.Companies (Corporate Social Responsibility Policy) Rules, 2014

3.No. 11 /RN/Ref./2013, Parliament Library And Reference, Research,

Documentation And Information Service [unpublished]
4.Manual of SEBI (2 Volume Set) Acts, Rules, Regulations, Guidelines,
Circulars, etc.
Author(s): Ravi Puliani, Mahesh Puliani
5.SEBI Manual (2 Volume Set) : Taxmann (2015 Edition)