Pre-issue Management Preparation of prospectus, selection of bankers, issue pricing , advertising, consultants etc.

SESSION - 10

Preparation of prospectus
 section 55 to 68 Aof the Companies Act deal with the issue of prospectus.  Section 2 (36) defines a prospectus as any document described or issued as prospectus and includes any notice. circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription of purchase of any shares in or debentures of a company.  In July 1995 Malegam committee recommended stricter regulations to curb irregularities affecting the primary market.

Preparation of prospectus
 Based on the recommendations SEBI issued guidelines to cover enhanced transparency in the draft prospectus filed with SEBI .  The draft prospectus filed with SEBI was made a public document to enhance transparency.  The lead merchant banker shall simultaneously file copies of draft document with Ses where the issue is proposed to be issued.  Every prospectus submitted for vetting shall ,in addition to the requirements of schedule II of Companies ACT contain, specify the following.

Preparation of prospectus
a) Details of actual expenditure incurred on the project. b) Means and source of financing and year wise break up of proposed project expenditure. c) The turnover in the P&L statement should be bifurcated into manufactured products and traded products. d) The companies undertaking major expansion must give details of technology, market, competition,managerial competence and capacity build up. e) Projection of future profits allowed by a new company/existing company.

Preparation of prospectus
f) details of aggregate shareholding of the promoter group and their directors g)Aggregate of securities purchased/sold by the promoter group 6 months preceding filing of prospectus. h) The maximum /minimum price sales/purchases mentioned i) If not possible to get information a statement to that effect should be made in the prospectus. j) Management perception of internal and external risk factors and management analysis of financial condition and results of operations as reflected in the financial statements.

Preparation of prospectus
a) SEBI notified (15.5.1995) that Rights issues not accompanied by public issues three months prior to subsequent to date of rights issue were not required to be vetted by SEBI. b) SEBI removed ( 1.3.1996) the vetting requirement for exclusive NCD issue with certain conditions. c) A prospectus is to be dated and it will be the date of publication. It has to be signed by directors or their authorised agents. d) Registration of prospectus ( sec.60).The prospectus has to be registered with ROC by delivering a copy before issue.

Preparation of prospectus
The copy of the registration must be accompanied by I. Consent of the experts to the issue II. Copy of the contract fixing compensation of MD or manager. III. A copy of every material contract except those entered into ordinary course of business IV. Consents of auditor. legal advisor ,attorney, solicitor,bankers broker of the company to act in that capacity

Contents of prospectus
Prospectus should disclose all material and essential factors about the company to the intending purchasers of shares. 1. Main objects of the company and particulars about signatories to the memorandum and no.of shares owned by them. 2. No.of classes of share. 3. No.of redeemable preference shares 4. Qualification shares of a director and their remuneration. 5. Particulra about directors and managing directors 6. Minimum subscription for shares

Contents of prospectus
7. The timing and opening of subscription list. 8. The amount payable on application and allotment of share. 9. Particulars of any option to subscription for shares. 10. Shares issued for consideration other than cash. 11. Premium on shares issued within 2 years preceding the date of prospectus. 12.Name of underwriter 13.Underwriting commission 14.Particulars of vendors of property purchased or proposed to be purchased by the company.

Contents of prospectus
15.Preliminary expenses and issue expenses and to whom payable. 16.Any benefit given to promoters within last two years or proposed to be given and the consideration for giving the benefit. 17.Particulars of contract other than those into the ordinary course of business. 18.Particulars of auditors. 19.Nature of interest of every director or promoter 20.Voting or dividend rights. 21.Length of time of business. 22.Capitalisation of profits and surplus from revaluation of assets. 23.Specification of time and place for inspection of balance sheet and P&L Account.

Audit Report and accounts

The prospectus has to set out audit report by auditors and a report by the accountants on the profit and loss in the business for the past 5 years. If the proceeds of the issue are to be utilised for purchase of shares of another company a similar report on accounts of the subsidiary company has to be set out in the prospectus.

Preliminary expenses
If the company is less than five years old accounts have to be given only for the number of years the company has been in commercial operation. If prospectus issued is more than 2 years after the commencement of business, particulars of signatories to the memorandum and the shares subscribed for by them and details of preliminary expenses need not be given.

Consent of experts
Sections 57 and 58 stipulate that experts ( an engineer, valuer or accountant)whose statements are included in the prospectus should be unconnected with the formation and management of company and his consent should be obtained to issue of prospectus containing a statement by him. An investor is protected by making expert a party to the issue of prospectus and making him liable for any untrue statement

Offer for sale by issue house

Section 64 of Companies Act provides that offer for sale of shares to publics deemed prospectus. The document deemed to be prospectus has to state the net amount received by the company to which offer relates and indicate where the contract for allotment to issuing house may be inspected, For the purpose of registration the issue house is the deemed director and should sign the prospectus.

Transparency of the prospectus

A prospectus should make full frank and honest disclosure of all material facts with accuracy. The prospectus should not omit any relevant information. The companies Act makes directors, promoters and experts liable for any misstatement of a material fact in a prospectus or if any material fact is omitted. Liability for misstatements in a prospectus may be civil or criminal liability

Civil liability (sec.62) for misstatements in prospectus

Any omission from the prospectus of a matter required to be included by section 56 may give rise to an action for damage at the instance of a subscriber for shares who has suffered loss. Under the general law the subscriber to shares or debentures can hold all signatories to a prospectus liable in fraud when they make a statement to be acted upon by others which is false and is made knowingly without belief in its truth or recklessly not caring whether it was true or false. The resort to general law can be made where the right against the company is lost either through lapses or negligence or where the company goes into liquidation.

Criminal liability for misstatements in prospectus.

For any untrue statement in the prospectus every person who authorised the issue of prospectus is punishable with imprisonment of two years or with fine of Rs.5000. Issuing application for shares or debentures without a prospectus attracts a fine of Rs.5000. Section 68 provides that persons who induce fraudulently others to invest or underwrite shares are punishable with imprisonment for five years or fine of Rs.10,000/. Application in fictitious names for allotment or registration of shares is punishable with imprisonment for five years. Prospectus and application for shares should contain the prohibition against application in fictitious name.

Shelf prospectus
Shelf prospectus valid for 365 days subject to updates on material facts, material litigation and changes in financial position between previous offerings and next one. The facility is limited to PSBS and Fis and those companies specialising in infrastructure finance. This allows the issuer to strike quickly when a window opens in the market by immediately offering the pre-registered securities to any investment banker.

Fast track mechanism

Fast track issue mechanism allowed by SEBI enables listed companies to proceed with follow on public offering/right issue by filing a copy of Red Herring prospectus/prospectus with RoCs or letter of offer filed with designated stock exchange.

Offers for sale

These are offers through the intermediary of issue house/merchant banker. The company sells entire issue of shares or debentures to the issue house at an agreed price which is generally below the par value and the shares are resold by the issue house to the public.

Bought out deals

Bought out deal is a mutual agreement between the merchant banker, sponsor and the company and no party can take unilateral action. It involves a deal where entire equity or related security is bought in full or in lots with the intention of off-loading it later in the market. The shares are held by sponsor till they are ready for public participation. BoDs eliminate retailing thereby saving time and cost. These are the cheapest and quickest source of finance for small and medium companies.

Bought out deals

BoDs convert a fee based activity into a fund based activity of merchant bankers. BoDs also help entrepreneurs not confident enough to tap the capital market directly.

Private Placement
The direct sale of securities by a company to institutional investors is called private placement. In private placement no prospectus is issued. It is assumed that investors have sufficient knowledge and experience to be capable of evaluating the merits and risks of the investment. The issuers could be public limited companies or private limited companies. Investors include UTI,LIC,GIC,SFC and pension and insurance funds. The intermediaries are credit rating agencies and trustees and financial advisors such as merchant banks. These play a vital role

Private placement
Private placement has advantages of speed, low cost and confidentiality. The confidentiality helps pvt.ltd companies and closely held companies which do not want to make public issues for fear of take over ,wealth tax hassles and institutional interference. Some companies are too small for public issue as the public issues are costly. The most widely used instrument in private placement is NCD They are preferred by investors as they are stable and give assured yield.

Private placement.
Private placement market is highly informal market. It is not regulated by SEBI

Private equity funding

Companies started looking for private equity funding opportunities as raising capital through primary market is expensive. Private equity can be in the form of equity, bonds, debentures and preference shares. In mid eighties institutions like UTI,GIC,provided term loans as well as equity for grass root projects and expansion purposes. Subsequently Mutual Funds came to be an important source of equity funding. After liberalisation the entry of private sector MFs gave a further boost to private equity funding.

Private equity funding

NRIs also provide private equity and generally tend to prefer unlisted companies. Entry of FIIs constituted a further breakthrough in sourcing of private equity. Private equity is to companies taking into and account their trading volumes, level of floating stock , purpose for which additional are being raised. Private equity funds look for capital gains through project growth and a clear exit strategy between 3-7 years from original investment.

Private equity funding

The value of shares to be acquired by private equity funds is calculated on the basis of average price earnings multiples during the past 3 years on a post tax basis .This is in accordance with international practice. The rate of return expected by private equity fund is about 25%p.a. Private equity funding has the potential of becoming the first stage funding of a project followed by a public issue after the project is implemented.

Grey market
Shares of several companies are sold by promoters six to eight months before the actual public issue. Such sales are illegal as they are not sold through prospectus. They are not private placement business.This is popularly known as grey market wherein trading of security takes place before it is officially listed. The grey market cannot exist without the active connivance of and promoters. They sell shares out of their quota and profit from any premium collected.

Any questions please?