Equity Market – Pre-Issuance Activities

Introduction

We shall discuss in detail the preliminary stages of initiating the IPO process. The development of the prospectus is preceded by activities such as due diligence, analyzing the structural, legal and organizational issues. The prospectus contains critical information on the company and its activities, as well as the project for which funds are being raised. The pre-issuance process culminates with the filing of the prospectus with the regulator SEBI. After formal review by SEBI and approval from the regulator is in place, the issuing company needs to prepare for the process of marketing the IPO. It may be noted that SEBI may suggest specific changes to be incorporated in the prospectus, in which case, the issuing company is expected to duly comply. we shall analyze the steps leading to the actual issuance of equity shares in the market.

Public issuance market comprises of public issue of shares, debentures and other related securities like warrants etc. These securities are issued through prospectus, offer for sale or private placement. Media, periodicals and online portals are the communication medium for wide publicity. Merchant Banker organizes the entire communication efforts to create awareness among the institutions and individual investors.

When a company wants to explore different options of raising capital, it follows a process referred to as “Origination”. The process of “Origination” refers to the work of investigation, analysis and processing of new proposals of issuing companies by merchant bankers or external consultants. Preliminary investigation refers to a careful study of technical, economic, financial and legal aspects of the issuer. The issue house / merchant banker (also known as the Lead Manager) provides the issuer with the stamp of respectability.

In the process of origination, the sponsoring organization renders the following services:

• Determination of class of security to be issued (Equity/Debt) and the price of the issues in the light of market conditions (at Premium/Discount to Face value, Partly or fully paid-up shares).
• Timing and magnitude of issues.
• Methods of floatation (Public Issue, Private Placement).
• Techniques of selling (Fixed Price/Book building).

The Pre-issue obligations of Merchant Bankers are as follows:

1- Due Diligence: The merchant banker should exercise due diligence of high standards that satisfy all aspects of offer including disclosures adhering to regulatory compliance.

2- Fee: The merchant banker also needs to arrange for the payment of the fee at the time of filing the draft documents on behalf of the issuing company.

3- Documents: The documents to be submitted include the Memorandum of Understanding (MoU) between the merchant banker (lead manager) and the issuing company. The MoU specifies the mutual rights, liabilities and obligations relating to the new equity issue. This document should be submitted to SEBI. In case the issue is managed by more than one merchant banker, the rights / obligations/ responsibilities of each of them should be demarcated.

4- Underwriting: In the case of under-subscription of the issue, the merchant banker responsible for the underwriting arrangements should invoke underwriting obligations – and ensure that the underwriters pay the devolved amount. The same needs to be provided in the “Inter-se allocation of responsibilities” accompanying the “due diligence certificate” submitted by the merchant banker to SEBI.

5- Due Diligence Certificate: The lead merchant banker should furnish to SEBI, a due diligence certificate along with the draft prospectus. The lead merchant banker should also furnish the following as part of due diligence:

• Certify that all amendments/suggestions/observations made by the SEBI have been incorporated into the offer document.
• Furnish a fresh due diligence certificate at the time of filing the prospectus, before opening and closing of the issue with the Registrar of Companies (RoC).

6- In case the issuing company is undertaking a follow-on public issue or has already made any equity issue in the past, then a disclosure certificate needs to be made stating that all previous refund orders as well as security certificates/credit of shares into demat account of share applicants and allottees has been made within the prescribed time adhering to the regulatory compliance norms as specified by SEBI.

7- The lead merchant banker also needs to provide an undertaking that if any of the promoters of the issuing company undertake(s) any share transaction of the company between the date of filing the prospectus with the RoC/stock exchanges and the date of closure of the issue, the same would be communicated to the stock exchange concerned within 24 hours of the transaction(s).

8- Also, details regarding the list of promoter(s) and/or promoter groups and their individual shareholding need to be submitted to SEBI. Also, the issuing company should submit to the stock exchange, the specific securities are associated with the Promoter/Promoter group and its/their PAN, Bank account number, passport number, etc. at the time of filing the prospectus.

 

Pre-Issuance Process

An “Offer Document” is a document which contains all the relevant information about the company, promoters, projects, financial details, objects of raising the money, terms of the issue, etc. and is used for inviting subscription to the issue being made by the issuer. “Offer Document” is also called “Prospectus” in case of a public issue or offer for sale and “Letter of Offer” in the case of a rights issue.

Draft offer document is an offer document filed with SEBI for specifying changes, if any, in it, before it is filed with the Registrar of Companies (RoC). Draft offer document is made available in public domain including SEBI website, for enabling public to give comments, if any, on the draft offer document. Red herring prospectus is an offer document used in case of a book built public issue. It contains all the relevant details except that of price or number of shares being offered. It is filed with RoC before the issue opens.

Prospectus is an offer document in case of a public issue, which has all relevant details including price and number of shares being offered. This document is registered with RoC before the issue opens in case of a fixed price issue and after the closure of the issue in case of a book-built issue. Letter of offer is an offer document in case of a Rights issue and is filed with Stock exchanges before the issue opens. Abridged prospectus is an abridged version of offer document in public issue and is issued along with the application form of a public issue. It contains all the salient features of a prospectus. Abridged letter of offer is an abridged version of the letter of offer. It is sent to all the shareholders along with the application form. Shelf prospectus is a prospectus which enables an issuer to make a series of issues within a period of 1 year without the need of filing a fresh prospectus every time. This facility is available to public sector banks! Public Financial Institutions. Placement document is an offer document for the purpose of Qualified Institutional Placement and contains all the relevant and material disclosures.

Let us analyze the documents classified based on the type of issue as follows:

Fixed Price Issue

• Draft Offer document means offer document are filed with SEBI, at least 21 days prior to the filing of (he Offer Document with Registrar of Companies (ROC)! Stock Exchange (SE). SEBI may specify changes, if any, in the draft Offer Document and the issuer or the Lead Merchant banker shall carry out such changes in the draft offer document. The Draft Offer document is available on the SEBI web site for public comments for a period of 21 days from the filing of the Draft Offer Document with SEBI.
• Offer document (at this stage known as Prospectus) which is filed (ROC) and Stock Exchanges. An offer document covers all the relevant information to help an investor to make his/her investment decision.

Book Building Issue

Red Herring Prospectus (RHP) is a document which will not state the details of either price or number of shares being offered or the amount of issue. There are two options available to the issue. If price is not disclosed, the number of shares and the upper and lower price bands are disclosed and if an issuer states the issue size, then the number of shares is determined later. An RHP can be filed with the RoC without the price band and the issuer, in such a case will notify the floor price or a price band by way of an advertisement one day prior to the opening of the issue. In the case of book-built issues, it is a process of price discovery, and the price cannot be determined until the bidding process is completed. Only on completion of the bidding process, the detail of the final price is included in the offer document, then offer document is called a prospectus.

Follow-on Public Offering (FPO)

FPO is also referred as Secondary Offering where in an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document.

Rights Issue (RI)

It is the issue of new shares in which the existing shareholders are given preemptive rights to subscribe to the new issue on a pro-rata basis within a specified time. Rights are often transferable, allowing the holder to sell them on the open market. The offer is supported by Offer document (known as Letter of Offer) which is filed Registrar of Companies (RoC) mid Stock Exchanges. Abridged letter of offer with the application form comprises of salient features of the right offer.

Example of a Rights Issue: An investor had purchased 1000 shares of company ABC Ltd @ Rs 40 per share. His total investment stands at Rs 40,000. Assuming a 1:1 rights issue at an offer price of Rs 20, the investor will have the option to subscribe to additional 1000 shares of the company at the offer price. Now, if he exercises his option, he will have to pay an additional Rs 20,000 in order to acquire the shares, thus effectively bringing his average cost of acquisition for the 2000 shares to Rs 30 per share ((40,000+20,000)12000=30)

Private Placement

When an issuer makes an issue of securities to a select group of persons not exceeding 49, and which is neither a rights issue nor a public issue, it is called a private placement. Private placement of shares or convertible securities by listed issuer can be of three types.

Preferential Allotment

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, it is called a preferential allotment. The issuer is required to comply with various provisions which inter-alia include pricing, disclosures in the notice, lock-in etc., in addition to the requirements specified in the Companies Act.

Qualified Institutional Placement (QIP)

When a listed issuer issues equity shares or securities convertible into equity shares to Qualified Institutional Buyers (QIB) only, it is called a Qualified Institutions Placement. The document prepared by the Merchant Banker for the purpose of QIP which contains all the relevant information and material disclosures to enable QIB to make an informed decision. The document is commonly referred to as a “Placement Document”.

Obtaining Appraisal Note: An appraisal note should be prepared by an external institution highlighting the proposed capital outlay on the project and the sources of funding it.

Appointment of Intermediaries: The requisite intermediaries should be registered with SEBI. The Lead Manager shall independently assess the capability and the capacity of the various intermediaries to handle the issue. It may also be noted that a merchant banker which is associated with the issuing company as a promoter/director/associate should not lead manage the issue. But a merchant banker holding shares in the issuing company is allowed to lead manage the issue only if the listing is on OTCEI or a market maker is proposed to be appointed as part of the offer document. The definition of an associate company is that if the merchant banker and/or issuing company hold(s) at least 15% of the voting power in the other entity; or either the merchant banker or issuing company has direct or indirect control in combination with other persons, over the other entity; or if there is a common director excluding a nominee director amongst the issuing company and the merchant banker. It is the responsibility of the lead merchant banker to ensure that the other intermediaries which are appointed by the issuing company are registered with SEBI. The other intermediaries include underwriters, registrar to the issue, etc. The issuing company needs to enter into MoU with all intermediaries concerned. Also, the issuing company and merchant banker need to ensure that bankers to the issue are appointed in all collection centers. The lead merchant bankers cannot act as registrar to the issue in which they are also handling the post-issue responsibilities. They need to verify that SEBI-registered Registrars are only appointed in all public/rights issues. Also, if the registrar to an issue is itself raising funds through issue of equity, then a third independent entity registered with SEBI as the registrar needs to be appointed to process the issue.

Also, the registrar of an issue should not be connected in any way to the issuing company – similar to that of the merchant banker discussed above. For example, the registrar to an issue and the issuing company should not have a common director, other than the nominee director. The designated registrar to an issue would be primarily responsible for all the issue management activities. In case of anticipation of a large number of applications, then the issuing company in consultation with the lead manager (merchant banker), may appoint more than 1 SEBI-registered registrar for collecting the application forms. Such collected application forms need to be forwarded to the sole designated registrar of the issue, as mentioned in the offer document.

The lead merchant banker also needs to ascertain the capacity and background of the underwriters to discharge their underwriting obligations before their appointment – i.e., after written consent is obtained from the underwriters. The lead manager also needs to provide an undertaking that the underwriter’s net worth is adequate enough for the underwriter to meet the underwriting obligations. The details of the underwriter need to be included in the offer document.

Where an issue is managed by more than one lead manager, the responsibility of each lead manager shall be clearly delineated. The lead manager should ensure proper disclosures to the investors, compliance with the Guidelines for Disclosure and Investor Protection issued by SEBI.

Prospectus: The document covering the details of the company is known as Prospectus. The prospectus is a legal document that has to disclose all material and essential factors about the company. The regulations issued by Securities and Exchange Board of India (SEBI), popularly known as Disclosure and Investor Protection (DIP) guidelines has laid down guidelines for raising funds from the public. By disclosing information in the prospectus, investors can take informed decision while investing in a company.

Prospectus is also a document inviting applications for shares from the public. As prospectus is a statuary document and investors can sue the company for furnishing wrong information.

The prospectus contains information on the credibility and track record of the promoter. It also has information on the past performance of the company, products and business of the company, shareholding structure, reason for raising funds, risk factors, reputation of the collaborators (in case of joint venture) and / or major stakeholders, annual compensation of the top management executives and also the credit rating given by the Credit Rating Agency.

Cover page of the prospectus has details of the Issuer Company, lead managers and registrars; the nature, number, price and number of instruments offered and issue size, and the particulars regarding listing. Other details such as Credit Rating, IPO Grading, risks in relation to the first issue, etc. are also disclosed if applicable. The management of the issuer company also provides its views on the internal and external risks envisaged by the company and the proposals, if any, to address such risks. It is generally advised that the investors should go through all the risk factors of the company before making an investment decision. A summary of the industry in which the issuer company operates; the business of the issuer Company, summary of consolidated financial statements, the merchant bankers and their responsibilities, the details of brokers/syndicate members to the Issue, credit rating (in case of debt issue), debenture trustees (in case of debt issue), monitoring agency, IPO Grading in case of First Issue of Equity capital and details of underwriting Agreements are given. Important details of capital structure, objects of the offering, funds requirement, funding plan, schedule of implementation, funds deployed, sources of financing of funds already deployed, sources of financing for the balance fund requirement, interim use of funds, basic terms of issue, basis for issue price, tax benefits are also covered.

Litigations involving the company, the promoters of the company, its subsidiaries, and group companies are disclosed. Also, material developments since the last balance sheet date, government approvals/licensing arrangements, investment approvals (FIPBIRBI etc.), technical approvals, and indebtedness, etc. are disclosed.

Ranking of equity shares, mode of payment of dividend, face value and issue price, rights of the equity shareholder, market lot, nomination facility to investor, issue procedure, book building procedure in details along with the process of making an application, signing of underwriting agreement and filing of prospectus with SEBIIROC, announcement of statutory advertisement, issuance of confirmation of allocation note(“can”) and allotment in the issue, designated date, general instructions, instructions for completing the bid form, payment instructions, submission of “bid form, other instructions, disposal of application and application moneys, , interest on refund of excess bid amount, basis of allotment or allocation, method of proportionate allotment, dispatch of refund orders, communications, undertaking by the company, utilization of issue proceeds, restrictions on foreign ownership of Indian securities, are disclosed.

Grading of Issues: IPO grading is the grade assigned by a Credit Rating Agency (CRAs) registered with SEBI, to the initial public offering (IPO) of equity shares or any other security converted into equity shares at a later date. The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India. Such grading is mandatory and generally assigned on a five-point scale with a higher score indicating stronger fundamentals and vice versa as below.

Following are the grades provided by rating agencies for IPO:

• IPO grade 1 – Poor fundamentals
• IPO grade 2 – Below Average fundamentals
• IPO grade 3 – Average fundamentals
• IPO grade 4 – Above average fundamentals
• IPO grade 5 – Strong fundamentals

There are several factors that can affect the grading of an issue. The Prospectus/Red Herring Prospectus must contain the grade(s) given to the IPO by all CRAs approached by the company for grading such IPO.

The areas listed below are generally looked into by the rating agencies, while arriving at an IPO grade.

• Business Prospects and Competitive Position: 1- Industry Prospects. 2- Company Prospects.
• Financial Position.
• Management Quality.
• Corporate Governance Practices.
• Compliance and Litigation History.
• New Projects – Risks and Prospects.

It may be noted that the grading of IPO is not based on the issue price.

Submission of Draft Offer Documents: The Lead Manager shall hand over the draft offer document to SEBI and also to the Stock Exchange(s) where the issue is proposed to be listed. The offer document should also be made public for a period of 21 days from the date of filing the draft offer document with SEBI. The lead merchant banker should take care to file the offer document with the concerned stock exchange also. It is the lead merchant banker’s responsibility to ensure public access of the draft offer document by hosting it on websites of all the lead managers / syndicate members who are associated with the public issue. Printed versions should also be made available. An in-principal approval obtained from the stock exchange for listing is required to.be forwarded to SEBI.

Agreement with Depositories: It is also mandatory for the lead merchant banker to ensure that an agreement is made with the depository and the issuing company for the facility to dematerialize the shares. This is mandatory, since the allotted shares are credited into the demat account of the applicant.

Pre-Issue Advertisement: After obtaining the final comments from SEBI and making the necessary amendments, the issuing company needs to publish advertisements in at least one English national daily with wide circulation, one Hindi daily and a regional newspaper with a wide circulation in the place where the issuing company has its registered office. The advertisement should be in the specified format – based on whether the issue is based on fixed price or book building method.

Dispatch of Issue Material: The lead merchant banker should ensure that the offer documents and other related material including the application form format for the public issue are dispatched to the various stock exchanges/brokers/underwriters/bankers to the issue/investor associations and other intermediaries. This should be done in advance, to avoid any possible delay. The letters of offer to shareholders for the rights issue should be dispatched at least 1 week before the opening date of the issue. After filing the prospectus / letter of offer with the RoC/stock exchange(s), the regulator SEBI should be informed at least 10 days prior to the issue opening date.

No Complaints Certificate: After 21 days from the date of draft offer document is made public, the lead merchant banker should file a statement with SEBI. The statement should contain the list of complaints received by the issuing company and should also state whether it proposes to amend the draft or not, subsequent to the receipt of the complaints. If amendments are made, then the specific amendments to the offer letter needs to be highlighted.

Mandatory Collection Centers: The issuing companies may appoint as many collection centers as possible. More the number of collection centers, greater is the probability of larger subscription to the issue. SEBI has specified a minimum number of mandatory collection centers. These include at least 4 metropolitan centers situated at Mumbai, Delhi, Kolkata and Chennai. This also includes regions where the registered offices of the specific stock exchanges are located, which are part of the issuing process. The issuing company may also appoint authorized collection agents, in consultation with the lead merchant banker. But these are subject to adequate disclosures – including their names, address, etc. The modalities of selection and appointment of the collection agents can be done at the discretion of the lead merchant banker. Usually, a due diligence is performed by the lead merchant banker to ensure that the collection agents are equipped with adequate infrastructure and manpower, for the issue process. It may be noted that the collection agents may collect the application forms along with the payment made in the form of demand draft or cheque. But the collection agents are prohibited from collecting payment in the form of cash.

The application amount collected by the collection agents should be deposited into a special share application account with a designated scheduled commercial bank, either on the same date or latest by the subsequent business day. The application forms should be forwarded to the registrar to the issue, after realization of the cheques. Any cheque which fails to be realized (bounced cheques or cheques returned) should be separated. This is to be done within two weeks of the issue closure date. The acknowledgement receipt part of the application form is legally binding on the issuing company, lead merchant banker collection agent and the registrar of the issue.

Investors also have the option of sending their application forms along with the prescribed amounts to the registrar by registered post. These would be vetted by the registrar to the issue.

Abridged Prospectus and Application Form: The lead merchant banker needs to ensure that every application form i.e., distributed by the issuing company and its set of collection agents, underwriters, registrar to the issue and other intermediaries should necessarily- have an abridged version of the prospectus. The application form may be stapled to the abridged prospectus. The lead merchant banker needs to ensure that the abridged prospectus should not contain information that is not a part of the actual prospectus. Also, the content needs to be printed in the font size 7m with adequate spacing. The application form should also have sufficient space for filling in the details of applicant – such as the name, address, contact details, etc.

 

Underwriting

When a company is making a public issue or rights issue, desires to have the issue “underwritten”, it shall appoint underwriters. The concept of “underwriting” refers to contractually guaranteeing subscription to issued securities. An underwriting agreement acts as a back-up in case of inadequate subscription by investors / public. The adequate institutional arrangement for underwriting is of crucial importance both to the issuing companies as well as investing public.

In India, merchant bankers, stockbrokers, banks and financial institutions offer underwriting commitments and receive commission on the amount underwritten. In some western countries, underwriting means purchase of securities from a company by investment bankers, who subsequently sell it to investors. Global IPOs generally involve one or more investment banks as underwriters. The company (issuer) enters into a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares.

In accordance with Securities and Exchange Board of India (Underwriters) Regulations (1993), the public issue through the book building process should be mandatorily underwritten by book runners or syndicate members, if fifty per cent of the net offer is proposed to be compulsorily allotted to qualified institutional buyers. The issuer shall enter into underwriting agreement with the book runner, who in turn shall enter into underwriting agreement with syndicate members, indicating therein the number of specified securities which they shall subscribe to at the predetermined price in the event of under subscription in the issue.

If syndicate members fail to fulfill their underwriting obligations, the lead book runner shall fulfill the underwriting obligations. It may be noted that the book runners to the issue and syndicate members shall not subscribe to the issue in any manner except for fulfilling their underwriting obligations.

A copy of the syndicate agreement needs to be filed with the SEBI before the opening of bids. In case of every underwritten issue, the lead merchant banker or the lead book runner shall undertake minimum underwriting obligations as specified in the Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992. Where hundred per cent of the offer is underwritten, the underwriting obligations shall be for the entire hundred per cent of the offer. The underwriting obligation will not be capped by the minimum subscription level. The minimum subscription to be received in an issue shall not be less than ninety per cent of the offer. In the event of non-receipt of minimum subscription, the entire amount received towards subscription shall be refunded to the applicants not later than fifteen days of the closure of the issue, in case of a non-underwritten issue; and seventy days of the closure of the issue, in the case of an underwritten issue where minimum subscription including devolvement obligations paid by the underwriters is not received within sixty days of the closure of the issue.

The offer document shall contain adequate disclosures regarding minimum subscription and details of the underwriters. In case of oversubscription, no allotment shall be made by the issuer in excess of the specified securities offered through the offer document.

The sale of shares in an IPO may take several forms. Common Methods include:

1. Best efforts contract: The underwriter agrees to sell as many shares as possible at the agreed upon price.
2. Firm commitment contract: The underwriter guarantees the sale of the issued stock at the agreed-upon price. For the issuer, it is the safest but the most expensive type of the contracts, since the underwriter takes the risk of sale.
3. All-or-none contract: The underwriter agrees either to sell the entire offering or to cancel the deal.
4. Bought deal: When an underwriter (investment bank/syndicate) purchases securities from an issuer before a preliminary prospectus is filed. The investment bank (or underwriter) acts as principal rather than agent and thus actually “goes long” in the security. The bank negotiates a price with the issuer (usually at a discount to the current market price, if applicable).

The concept of appointment of underwriters ensures that the issuers do not have a financing risk.

The deals bought by underwriters are usually priced at a larger discount to market than fully marketed deals. This ensures that the issue is easier to sell by the underwriter. If the underwriter cannot sell the securities, it must hold them.

The underwriters are appointed by means of a Dutch auction. The auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneer’s price, or a predetermined reserve price (the seller’s minimum acceptable price) is reached. The Dutch auction is named for its best-known example; the Dutch flower auctions. There is an alternative method known as stand-by underwriting. This is also known as strict underwriting and is an old-fashioned underwriting in the form of stock insurance. The issuer contracts the underwriter for the latter to purchase the shares if the issuer failed to sell the IPO.

Regulations on Underwriting

An issuer making a public issue (other than through the book building process) or rights issue, desires to have the issue underwritten, it shall appoint the underwriters in accordance with Securities and Exchange Board of India (Underwriters) Regulations, 1993. If the issuer is making a public issue through the book building process, such issue shall be underwritten by book runners or syndicate members. For this, the following conditions need to be satisfied:

1. Minimum of 50% of the net public offer which is proposed to be compulsorily allotted to qualified institutional buyers for the purpose of compliance of the eligibility conditions cannot be underwritten. This becomes 60%, if public issue is made with at least ten per cent public offer.
2. The issuer shall enter into underwriting agreement with the book runner, who in turn shall enter into underwriting agreement with syndicate members, indicating therein the number of specified securities which they shall subscribe to at the predetermined price in the event of under subscription in the issue.
3. If syndicate members fail to fulfill their underwriting obligations, the lead book runner shall fulfill the underwriting obligations.
4. The book runners and syndicate members shall not subscribe to the issue in any manner except for fulfilling their underwriting obligations.
5. A copy of the syndicate agreement shall be filed with the SEBI before the opening of bids.
6. In case of every underwritten issue, the lead merchant banker or the lead book runner shall undertake minimum underwriting obligations as specified in the Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992.
7. Where 100% of the offer through the offer document is underwritten, the underwriting obligations shall be for the entire 100% of the offer and shall not be restricted up to the minimum subscription level.

 

Application Supported by Blocked Amount (ASBA) Process

Application Supported by Blocked Amount (popularly referred to as ASBA) is an application containing an authorization to block the application money in the bank account, for subscribing to an issue. If an investor is applying through ASBA, his/her application money shall be debited from the bank account only if his/her application is selected for allotment after the basis of allotment is finalized, or the issue is withdraw n/failed, In case of rights issue his application money shall be debited from the bank account after the receipt of instruction from the registrars.

An individual investor can apply through ASBA process in a public issue through book building route provided he/she:

1. is a “Resident Retail Individual Investor” i.e., applying for shares/ securities up to Rs.1,00,000.
2. is bidding at cut-off, with single option as to the number of shares bid for.
3. is applying through blocking of funds in a bank account with the SCSB.
4. has agreed not to revise his/her bid.
5. is not bidding under any of the reserved categories.

SEBI has permitted ASBA process in rights issue on pilot basis. All shareholders of the company as on record date are permitted to use ASBA for making applications in rights issue provided he/she:

1. is holding shares in dematerialized form and has applied for entitlements or additional shares in the issue in dematerialized form.
2. has not renounced its entitlements in full or in part.
3. is not a renounce to the Issue.
4. applies through a bank account maintained with SCSBs.

Applying through ASBA process has the following advantages:

1. The investor need not pay the application money by cheque. He/she submits ASBA which accompanies an authorization to block the bank account to the extent of the application money.
2. The investor does not have to bother about refunds, as in ASBA only that much money which is required for allotment of securities, is taken from the bank account only when his application is selected for allotment after the basis of allotment is finalized.
3. The investor continues to earn interest on the application money as the same remains in the bank account.
4. The application form is simpler.
5. The investor deals with the known intermediary i.e. its own bank.

It may be noted that it is not mandatory for the investor to apply through ASBA. An investor, who is eligible for ASBA, has the option of making application through ASBA or through the existing process of applying with cheque. As of now, investors cannot make application through ASBA process in all issues. ASBA is applicable to only book built public issues which provide for a uniform payment option to the retail individual investors. On, Pilot basis, SEBI has enabled ASBA in few selected rights issues.

The ASBA application needs to be made at select banks and their branches. These banks are referred as Self Certified Syndicate Banks (SCSBs). Specific branches of such banks are designated where ASBA application form may be submitted. This list is available in website of BSE, NSE and SEBI. The same would also be given in the ASBA application form. SCSB is a bank which is recognized as a bank capable of providing ASBA services to investors. It may also be noted that the ASBA can be submitted only to the SCSB with whom the bank account authorized to be blocked, is maintained.

The ASBA application may be made on hardcopy (physical ASBA form) and same may be forwarded to the SCSB. Alternatively, investors may apply electronically through the internet banking facility (if provided by the respective SCSB).

Investors need to verify the form carefully. In case of public issue, the application form for ASBA will be different from the existing application form for public issues. The application forms will be available with designated branches of SCSB. In case of rights issue, there will not be a separate form for ASBA. The investor has to apply by selecting ASBA option in Part A of the Composite Application Form.

Investors can withdraw ASBA bids. During the bidding period, the investor can approach the same bank to which the bid was submitted and request for withdrawal through a duly signed letter citing the application number, TRS number, if any.

Even after the bid closure period, the investor can send his/her withdrawal request to the Registrars, who will cancel the bid and instruct SCSB to unblock the application money in the bank account after the finalization of basis of allotment.

The investor can approach the concerned SCSB for any complaints regarding your ASBA applications. The SCSB is required to give reply against any complaints within 15 days. In case, the investor is not satisfied, he/she may write to SEBI’s Investor Grievance Cell.

When an investor applies for an issue through ASBA, only the amount applicable for the issue is blocked in the ASBA denominated account. The balance amount may be used for other purpose, as deemed fit by the investor. If the withdrawal is made during the bidding period, the SCSB deletes the bid and unblocks the application money in the bank account. If the withdrawal is made after the bid closure date, the SCSB will unblock the application money only after getting appropriate instruction from the Registrar, which is after the finalization of basis of allotment in the issue.

Investors need not necessarily have their depository account with the SCSB, where they are submitting the ASBA form. An investor can apply either through ASBA or through existing system of payment through cheque. If an applicant applies through both ASBA as well as non ASBA then both the applications having the same PAN, will be treated as multiple application and hence rejected. The Self Certified Syndicate Bank (SCSB) is required to give the acknowledgement for submission of ASBA application form.

The bids received through ASBA mode will also be reflected in the demand graphs displayed on the website of stock exchanges. In case, there is an error by the investor in entering the data in the application form, the investor shall be responsible for the same. In case, there is an error by SCSB in entering the data in the electronic bidding system of the stock exchanges, the SCSB shall be bearing the responsibility. The SCSB shall give a counterfoil as an acknowledgement at the time of submission of ASBA and also the order number, generated at the time of uploading the application details, if sought by the investors in case of need. ASBA forms will be treated similar to the non-ASBA forms while finalizing the basis of allotment. In case the issue is withdrawn by the issuing company due to under subscription, the SCSB shall unblock the application money from the bank accounts upon receiving instructions from the Registrar.

In case of any complaints about non-receipt of refund, the investor shall approach the bank, where the application form was submitted or the Registrars to the issue.

Issuer is deemed to have entered into an agreement with one or more SCSBs who have been recognized as such by SEBI. As such, issuer has no discretion in choosing SCSBs. It is the primary responsibility of the Issuer to ensure the following:

• Registrar to issue appointed by the issuer has capability to comply with the procedures laid down by SEBI for ASBA and shall treat ASBA and Non-ASBA application at par.
• Sufficient number of physical ASBA application forms are printed and made available to all SCSBs, in case SCSB intends to provide physical ASBAs.

Role of SCSB: A bank which is registered with SEBI as a Banker to issue in terms of SEBI (Bankers to an Issue) Regulations can become SCSB subject to the following requirements:

• Submit a certification to SEBI confirming that it is capable of discharging the responsibilities of an SCSB.
• SEBI to include name of the bank in the list of SCSBs displayed in SEBI’s website.
• The bank shall act as SCSB w.e.f. 1st or 15th of the month whichever is later from date of inclusion in the list.

The bank can register with the stock Exchange offering electronic bidding system for the issue process. Presently this is being offered by Bombay Stock Exchange and National Stock Exchange. The SCSB needs to ensure that connectivity is established. Systems need to be in place to get the connectivity for secure transfer of data from banks to Stock Exchanges.

Any bank which is registered as bankers to an issue registered with SEBI in terms of SEBI (Bankers to an Issue) Regulations can become SCSB subject to satisfying other conditions specified by SEBI. SCSBs can provide a facility of submitting ASBA through the internet banking facility to the investors electronically where the provision to block the account is provided.

After receipt of ASBA, SCSB is expected to ensure the following:

• Blocking of funds in the bank accounts mentioned in ASBA.
• Uploading the details given in ASBA received physically or electronically, in the electronic bidding system of Stock Exchange(s).

SCSB is not required to validate the details given in ASBA application. SCSB is however required to follow the normal diligence required in banking transactions, such as KYC norms for opening the bank account, etc. SCSB is wholly responsible for any omission and commission done during the process and the bids which are uploaded in the electronic bidding system of Stock Exchanges has to be done through SCSB code.

SCSB can also transfer the blocked account into a separate account if it serves the purpose of blocking till allotment is finalized. The interest, if any, earned by investor till the amount is transferred to the issuer account, is payable by SCSB to the investor.

In case of public issues, SCSB may approach the Stock Exchange offering electronic bidding system for obtaining the file formats to upload bids. The stock exchanges will inform SCSB about the file formats. It may be noted that only after the mock trial run done with Stock Exchanges and Registrar, the bank will be in position to submit a certification to SEBI.

In case of Rights Issues, SCSBs may approach the Registrars for the file formats till the Rights Issues application data are also routed through the electronic web enabled interface of the stock exchanges. SCSB is required to upload details like Application number, DP ID, Client ID, Bid Quantity, PAN from the ASBA form.

In case of an Electronic ASBA, the ASBA investor himself/ herself shall fill in all the above-mentioned details in the online application system of the bank, except the application number which shall be system generated. The SCSB shall thereafter upload all the above-mentioned details in the electronic bidding system provided by the Stock Exchange(s).

Further, if there is any withdrawal during the bidding period, SCSB shall delete the same for each record individually or through batch upload. SCSB is also required to send the following details to Registrar after closure of the bidding period:

• Total number of ASBAs uploaded by the SCSB.
• Total number of shares and total amount blocked against the uploaded ASBAs.

It is not mandatory that only the designated branch (DB) which accepts the ASBA to upload the bids into the electronic bidding system. Depending upon the internal comfort and system of each bank, it is possible for DBs to collect applications, block the amount and then transfer to Controlling Branch (CB) for centralized uploading or DBs to only collect applications and upload directly. It may be noted that as far as investors are concerned, they would be informed about addresses of DBs where they can submit ASBA. Thereafter, the procedure to be followed is totally internal to SCSB and it is possible that DBs which accept ASBA, only upload the bids or the DB will transfer the applications to the CB for uploading the bids, subject to timelines specified by SEBl being followed.

Stock Exchange electronic bidding system will provide for generation of order number, which confirms the uploading of bids. These order numbers as well as application numbers, will help SCSB as well as the investors in tracking their application. However, in the case of Rights issues, for the time being, the application data is flowing directly from the SCSB to the Registrar and not routed through the stock exchange electronic web enabled interface. Hence, the application data is sent directly to the concerned registrars, who confirm the receipt of application to SCSBs.

ASBA physical forms may be retained for a period of 6 months with SCSB for redressing complaints if any, of ASBA investors. Thereafter, the same may be sent to the issuer. As regards electronic ASBA, SCSB need not take print out or submit such print out to issuer or registrar.

In case the investor withdraws his ASBA bid during the bidding period or after the bid closure in case of public issues, the investor needs to approach the SCSB and request for deletion of the bids. SCSB will do the necessary to delete the bids from electronic bidding system and unblock the bank account. However, once the bidding period is over, ASBA investor will write to the Registrar giving all the relevant details like ASBA No, order no, if available, DP ID, Client ID and PAN etc. based on which Registrar will remove the bid from the electronic bid file. However, the bank account will be unblocked by SCSB only after the receipt of appropriate instruction from the Registrar after finalization of basis of allotment in the issue.

Role of the Controlling Branch (CB) is expected to act as a central point of co-ordination for various intermediaries with SCSB i.e., Stock Exchanges, Registrar and Merchant Bankers. Once a bank is included in the list of SCSBs maintained by SEBI, it shall act as SCSB for all issues to come where ASBA is applicable.

Registrar do the reconciliation based on data received from Stock Exchanges and the aggregate data received from SCSBs after closure of the issue regarding total number of bids uploaded, the total number of shares applied for in such uploaded bids and total amount blocked for such uploaded bids.