Issue of Capital and Disclosure Requirements: formula sheet

Key formulas

Regulation power

Section 11A(1)(a): SEBI specifies by regulations (i) issue of capital, transfer of securities and incidental matters, and (ii) the manner of disclosure by companies

Purpose is the protection of investors. It works without prejudice to the Companies Act, 1956 as the section is worded.

Prohibition power

Section 11A(1)(b)(i): by general or special orders, prohibit any company from issuing a prospectus, offer document or advertisement soliciting money from the public for issue of securities

Done by order, not by regulation. The order may be general or special.

Conditions power

Section 11A(1)(b)(ii): specify conditions subject to which the prospectus, offer document or advertisement, if not prohibited, may be issued

This is the alternative to a full prohibition.

Listing power

Section 11A(2): SEBI may specify requirements for listing and transfer of securities and incidental matters

Without prejudice to section 21 of the Securities Contracts (Regulation) Act, 1956.

Link with Companies Act, 2013

Section 24(2) of the Companies Act, 2013: SEBI exercises powers under sections 11A, 11B and 11D (and parts of section 11) of the SEBI Act for matters under section 24(1)

Section 24(1) covers issue and transfer of securities and non-payment of dividend by listed companies or those intending to list.

Routes for a public company (section 23(1))

Public offer through prospectus | Private placement | Rights issue or bonus issue

For a listed company, or one intending to list, rights and bonus issues must also follow SEBI law and its regulations.

Routes for a private company (section 23(2))

Rights issue or bonus issue | Private placement

No public offer is open to a private company.

Private placement: number of persons (section 42(2))

Identified persons ≤ 50 (or higher number prescribed) in a financial year, excluding QIBs and employees under an ESOP scheme

If the limit is breached, the issue is deemed a public offer (section 42(11)) and Part I of the Chapter applies.

Private placement: allotment and refund (section 42(6))

Allot within 60 days of receiving application money; else refund within 15 days after the 60 days; later, interest at 12% p.a. from the 60th day

Money must sit in a separate bank account in a scheduled bank until allotment.

Private placement: return of allotment (section 42(8))

File return with Registrar within 15 days of allotment

Delay attracts a penalty of ₹1,000 per day of default, subject to a maximum of ₹25 lakh (section 42(9)).

Private placement: restrictions

No public advertisement; no right of renunciation; payment by cheque, demand draft or other banking channel, not cash

Contravention penalty can extend to the amount raised or ₹2 crore, whichever is lower (section 42(10)).

Shelf prospectus (section 31)

Validity up to 1 year from the opening of the first offer; information memorandum before each later offer

No fresh prospectus is needed for second or later offers within the validity period.

Demat rule (section 29)

Every company making a public offer must issue securities only in dematerialised form

Other classes may be prescribed.

Main board IPO: net tangible assets

Net tangible assets ≥ ₹3 crore in each of the preceding 3 full years (12 months each)

Not more than 50% of net tangible assets may be held in monetary assets. The cap does not apply if the issue proceeds are used to acquire a business or project.

Main board IPO: operating profit

Average operating profit over the preceding 3 years ≥ ₹15 crore, with operating profit in each of the 3 years

Calculated on a restated, consolidated basis, using years of 12 months each. Two limbs apply: the three-year average must be at least ₹15 crore, and operating profit must be earned in every one of the three years. A single year below ₹15 crore does not by itself fail the test if the average is met and the year still shows operating profit. A loss year or nil operating profit in any year fails it.

Main board IPO: net worth

Net worth ≥ ₹1 crore in each of the preceding 3 full years

Test every year separately. An average does not satisfy it.

Change of name

If name changed within the last 1 year: at least 50% of revenue for the preceding 1 full year must come from the activity suggested by the new name

Applies to the track record route. It checks that the new name is not misleading.

Alternative route for issuers failing the track record test

Book-built issue with at least 75% of the net offer to QIBs; otherwise refund

Allotment to QIBs is mandatory. Retail and non-institutional investors share the balance.

Bar conditions

Issuer, promoters, promoter group, directors: not debarred by SEBI. Promoters or directors of the issuer: not promoters or directors of another company debarred by SEBI. Not wilful defaulters or fraudulent borrowers; promoters not fugitive economic offenders

These apply even if the financial tests are met. The link bar is about a person being a promoter or director of the issuer and also a promoter or director of a debarred company.

SME platform eligibility

Set by the criteria in Chapter IX of the ICDR Regulations. Post-issue paid-up capital of ₹25 crore is the threshold used in the Regulations.

The criteria, including profit, net worth and listing conditions, are revised from time to time. Do not treat ₹25 crore as a fixed limit. Check the current ICSI study material.

Red herring prospectus: filing time (Section 32(2))

File with Registrar at least 3 days before the opening of the subscription list and the offer

It carries the same obligations as a prospectus. Variations in the final prospectus must be highlighted.

Red herring prospectus: meaning (Section 32 Explanation)

Prospectus that does not include complete particulars of the quantum or price of the securities

On closing of the offer, the prospectus stating total capital raised, closing price and other missing details is filed with the Registrar and SEBI (Section 32(4)).

Shelf prospectus: validity (Section 31(1))

Validity period not exceeding 1 year, starting from the opening date of the first offer under it

No further prospectus is needed for second or later offers within the validity period. Only classes of companies provided by SEBI regulations may file it.

Shelf prospectus: information memorandum (Section 31(2) and (3))

Information memorandum filed with Registrar before a second or subsequent offer; memorandum + shelf prospectus = prospectus

It covers new charges and changes in financial position. Applicants who paid before a change must be told, and if they withdraw, the money is refunded within 15 days.

Offer for sale document (Sections 25 and 28)

Document making an offer for sale to the public is deemed a prospectus issued by the company

Under Section 25(2), it is evidence of a sale-linked allotment if the offer is made within 6 months of allotment, or full consideration had not been received when the offer was made.

Advertisement of prospectus (Section 30)

Advertisement must state the objects, liability of members, share capital, signatories with shares subscribed, and capital structure

Section 30 covers the contents of the memorandum to be specified. SEBI may also regulate or prohibit advertisements under Section 11A.

Price band limit

Cap price ≤ 120% of floor price

Maximum cap for a given floor. Example: floor ₹200 means cap up to ₹240. The final issue price is discovered within the band. A bid at the cut-off price means the bidder accepts that final price.

Minimum promoters' contribution (IPO)

MPC = 20% × post-issue capital

Post-issue capital includes the fresh issue. In a further public offer, the rule is 20% of post-issue capital or 20% of issue size, as the regulations provide.

Lock-in of MPC

MPC is locked in from allotment for the period prescribed by the ICDR

The period can depend on the objects of the issue, for example whether proceeds fund capital expenditure. Excess promoter holding and pre-issue shares held by non-promoters carry a shorter lock-in, generally six months. Verify the latest ICDR text, as SEBI amends these periods.

Anchor investor basics

Only in book-built issues; only QIBs; minimum bid size as set in the current ICDR; up to 60% of the QIB portion; allocation one working day before issue opens

A part of the anchor portion is reserved for mutual funds. The lock-in is in two stages: 50% of the allotted shares for 30 days and the remaining 50% for 90 days from allotment. Verify these periods and the minimum bid in the latest ICDR.

Red herring prospectus filing

File with Registrar at least 3 days before opening of the subscription list (section 32, Companies Act, 2013)

A red herring prospectus is a prospectus without complete particulars of the quantum or price of the securities. It is the document used in book building. Variations between the RHP and the final prospectus must be highlighted. The final prospectus is filed with the Registrar and SEBI after closing.

Listing timeline

Listing = T + 3 working days (T = issue closing date)

Current SEBI timeline for public issues of equity shares. Confirm against the latest circular.

Proportionate allotment

Shares allotted to an applicant = Shares applied for × (Shares available in category ÷ Shares applied for in category)

Used when a category is oversubscribed. Allotment is then rounded to the minimum lot, and the remaining shares are settled by draw of lots.

Subscription ratio

Times subscribed = Total shares applied for ÷ Shares offered

A value above 1 means oversubscription, so a basis of allotment is needed.

ASBA amount unblocked

Amount unblocked = Amount blocked − (Shares allotted × Issue price)

Money is debited only for allotted shares. No refund cheque is needed.

Private placement allotment timing (Companies Act, s. 42(6))

Allot within 60 days of receiving application money; if not, repay within 15 days after those 60 days

If repayment is delayed, interest at 12% per annum runs from the expiry of the sixtieth day. Money is kept in a separate bank account.

Bonus issue: sources (section 63(1))

Free reserves, securities premium account or capital redemption reserve account

Reserves created by revaluation of assets cannot be capitalised. Bonus shares must be fully paid-up.

Bonus issue: conditions (section 63(2))

Authorised by articles + Board recommendation and general meeting authorisation + no default on fixed deposits or debt securities + no default on employee statutory dues + partly paid shares made fully paid + prescribed conditions complied with

All conditions must be met together. Employee dues include provident fund, gratuity and bonus.

Bonus shares and dividend

Bonus shares shall not be issued in lieu of dividend (section 63(3))

A company cannot pay a dividend by way of bonus shares in place of dividend.

Pending transfer (section 126)

Rights shares and bonus shares are kept in abeyance where a transfer instrument is delivered but transfer is not registered

Dividend goes to the Unpaid Dividend Account unless the registered holder authorises payment to the transferee in writing.

Bonus ratio

Bonus shares to be issued = Existing shares × Bonus ratio

For 1:2 bonus, ratio is 1 new share for every 2 held, so multiply by 1/2.

Rights entitlement

Rights shares = Existing shares × Rights ratio

Total money raised = Rights shares × Issue price.

Preferential issue: approval

Special resolution of members, with the preferential allottees and pricing details in the explanatory statement

Pricing is by the ICDR formula (floor price linked to market prices of the shares). Check the exact formula and lock-in in your study material.

Quick revision

• Section 11A of the SEBI Act lets SEBI specify by regulations the matters on issue of capital and how companies disclose them.
• Under section 11A, SEBI may by orders prohibit a prospectus, offer document or advertisement soliciting money, or set conditions for it.
• Section 23: a public company may issue securities by public offer, private placement, rights issue or bonus issue.
• Section 23: a private company may use only rights issue, bonus issue or private placement.
• Section 24: for listed or to-be-listed companies, SEBI administers issue and transfer of securities by regulations.
• Section 25: a document offering securities for sale to the public is deemed a prospectus of the company.
• Under section 25, an offer within six months of allotment is evidence, unless the contrary is proved, that allotment was made with a view to sale to the public.
• Section 42: private placement only to identified persons, not exceeding fifty or the higher prescribed number, excluding QIBs and ESOP employees, in a financial year.
• Private placement offer carries no right of renunciation, and payment must not be in cash.
• Allot within sixty days of receiving application money, or refund within fifteen days after that, failing which interest at twelve per cent per annum applies.
• File the return of allotment with the Registrar within fifteen days of allotment.
• A private placement that breaches the person limit in section 42(2) is deemed a public offer.

Common mistakes

• Saying SEBI can prohibit issue of securities by regulations. Fix: Remember: regulations under clause (a) specify matters and disclosure; prohibition and conditions come by general or special orders under clause (b).
• Stating that SEBI can only prohibit and cannot allow with conditions. Fix: Add section 11A(1)(b)(ii): SEBI can specify conditions under which the document or advertisement may be issued if not prohibited.
• Saying a private company can make an IPO or a public offer. Fix: Always state company type first. Section 23(2) allows a private company only rights or bonus issue and private placement.
• Treating an offer for sale as raising fresh capital for the company. Fix: Write that in an offer for sale existing shareholders sell their shares, so the proceeds go to them, not to the company. It still counts as a public offer under the Explanation to section 23.
• Applying one rule to all three financial tests, for example averaging net tangible assets or net worth, or demanding ₹15 crore of operating profit in every year. Fix: Net tangible assets and net worth are tested for each year separately. Operating profit needs a three-year average of at least ₹15 crore and operating profit in each of the three years.
• Treating a company that fails the track record as barred from an IPO. Fix: Always mention the alternative route with at least 75% of the net offer to QIBs and refund if that is not achieved.
• Saying a red herring prospectus is filed after the issue closes. Fix: Remember two filings: the red herring at least 3 days before the offer opens, and the final prospectus after the offer closes.
• Saying a red herring prospectus has no legal force because it lacks price. Fix: Section 32(3) says it carries the same obligations as a prospectus.
• Saying the cap price can be up to 20% above the floor but computing it as 120% plus 20%. Fix: Write the formula as cap ≤ 1.20 × floor. For floor ₹100, cap is at most ₹120.
• Calculating MPC as 20% of the issue size in an IPO. Fix: For an IPO, take 20% of post-issue capital, which includes existing and new shares.

Exam tips

• Write the section number and the purpose, protection of investors, in the first line of every answer.
• Use the structure 'regulations, orders, listing' so that no limb is missed.
• Keep the words 'prospectus, offer document or advertisement' together as examiners expect the full phrase.
• In case questions, add the link to section 24 of the Companies Act, 2013 and end with a clear conclusion.
• Do not quote regulation numbers unless you are sure; the section itself is enough for a full answer.
• For 'distinguish' questions, use rows such as: persons offered, document used, number limit, advertising allowed, and governing provision. Write them as short parallel points.
• Always cite section 23 for the routes and section 42 for private placement. Examiners reward the provision before the analysis.
• In problem questions, count the persons and the days carefully and compare them with the limits in section 42 before concluding.