Capital Issue Guidelines

Following the abolition of the office of Controller of Capital Issues and the consequent removal of administrative control over the pricing of new issues, the capital markets now enjoy a considerable degree of freedom. New companies, being set up by existing companies; with a five year track record of profitability, are free to price issues, provided the participation of the promoters is not less than 25% of the equity of the new company and the pricing is made applicable to all new investors symmetrically.

Where a new company is set up by existing private sector companies along with a state level agency, or a government company, or a foreign collaborator, it will be sufficient if the private sector companies alone satisfy the requirements of five year track record of profitability.

Existing profitable companies issuing capital for augmenting their own capital base are free to price their issue. At the same time, the practice of making preferentil allotment of shares, unrelated to the prevailing market prices was stopped by SEBI.

In any capital issue to the public, there is a specified minimum capital contribution to be made by the promoters.

To reduce the cost of the issue, underwriting by issues has been made optional, subject to the condition that if an issue is not underwritten, and is not able to collect 90% of the amount offered to the public,the entire amount collected would be refunded to the investors.

Where fully convertible debentures (FCDs) are to be issued, the interest rate can be freely determined by the issuer.

Companies are required to create a Debenture Redemption Reserve (DRR) equivalent to 50% of the amount of debenture issue before debenture redemption commences.

The cost of issuing capital, as of December 1992, was estimated at approximately 9-19% of the issue. This included fees for issue management, underwriting fees, stationary costs, advertisement and publicity costs, mailing costs, brokerage, etc. Companies have a variety of options which entail lower issue costs, such as GDR issues, private placement, and bought-out deals.

SEBI's intention of passing on some part of its responsibilty to the lead managers is reflected in the the new guidelines announced in May 1995. The major decisions were :

• SEBI has decided to stop vetting of rights issues all together. The onus of this responsibilty will now rest with th lead managers. The procedure for clearence would be that the merchant banker would have to file the offer document with SEBI six weeks prior to the proposed date of offer of rights issue. If SEBI does not ask for clarifications within 21 days from the date of filing, the company and the lead manager can proceed with the issue.
• SEBI revised the guidelines for reservation in public issues. As per the new guidelines which will take effect from 1 June 1995, half of the net public offer should be reserved for small applicants, i.e. those applying for less than 1,000 shares/securities. The other half would be reserved for the corporate applicants.
• A committee comprising chiefs of senior executive directors of the five divisions of SEBI has been formed which will clear all public issues which are more than Rs. 100 crore. Formerly, all the issues were cleared by the primary markets division. Issues less than Rs. 20 crore would be cleared by the division chiefs, those between Rs. 20 crore and Rs. 50 crore by the executive directors and those between Rs. 50 crore and Rs. 100 crore by the the senior executive director.

Centre for Monitoring Indian Economy, Bombay
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Last updated: August 1995.