Historically, there were several regional stock exchanges in India. Currently, most of the trading in the Indian stock markets occurs through India’s two primary stock exchanges, namely, BSE Limited (earlier known as the Bombay Stock Exchange) (“BSE”), which was established in 1875, and the National Stock Exchange of India Limited (“NSE”), which was established in 1992.
BSE and NSE have three distinct market segments, namely:
Additionally, the above-mentioned market segments are required to comply with certain continual reporting as well as disclosure obligations prescribed under the SEBI (Listing and Disclosure Requirements) Regulations, 2015 (the “Listing Regulations”) as well as the provisions of SEBI (Prohibition of Insider Trading) Regulations, 2015, which prescribes regulations to be complied with by insiders of an issuer who may hold any unpublished price-sensitive information of the issuer. The issuers are also required to comply with various rules and bylaws issued by the stock exchanges on which their shares are listed.
Further, companies undertaking any issuances under such segments are required to comply with various other applicable laws including provisions of Companies Act, 2013 (the “Companies Act”) and foreign exchange regulations as applicable.
The two major benchmark indices for the equity markets in India are the BSE Sensex (which tracks the stocks of 30 well-established and financially sound companies listed on BSE) and the NSE Nifty (which tracks the stocks of 50 companies across 12 sectors of the Indian economy listed on the NSE).
The BSE Sensex has both qualitative and quantitative inclusion criteria. Quantitatively, for a security to feature in the BSE Sensex, it must figure in the top 100 companies listed by full market capitalisation as well as the top 150 companies listed by average number of trades per day and average value of shares traded per day for the last year. Further, the security should have been traded on every trading day of the last year (with exceptions being made for extreme reasons like security suspension, etc) and must have a listing history of one year on the BSE. Qualitatively, the company must have an acceptable track record in the opinion of the BSE Index Committee.
For a company to feature in the NSE Nifty, the company must be ranked within the top 800 companies based on both average daily turnover and average daily full market capitalisation based on data pertaining to the previous six months, must have been traded for at least 90% of the days in the previous six months and must have completed a trading period of at least three calendar months after the stock has traded on the exchange.
The Securities and Exchange Board of India (“SEBI”) is the primary capital markets regulatory body, and has quasi-legislative and quasi-judicial powers to monitor and regulate the securities market in India.
SEBI’s powers include granting recognition to a stock exchange, regulating businesses of stock exchanges, stockbrokers, merchant bankers and other intermediaries involved in the securities market, and regulating primary as well as secondary securities transactions.
The SEBI ICDR Regulations lay down the procedure for primary listing of shares on a stock exchange in India. Any company wishing to undertake an IPO must file a draft offer document (called the draft red herring prospectus (“DRHP”)) with SEBI and the stock exchanges where the securities are proposed to be listed. The DRHP must contain disclosures prescribed in the SEBI ICDR Regulations and the Companies Act.
Once the DRHP has been filed, the issuer must apply for an in-principle approval for listing from the stock exchanges and must choose one exchange as a designated stock exchange prior to the filing of the red herring prospectus (“RHP”) with the jurisdictional Registrar of Companies (RoC), SEBI and the stock exchanges at least three days prior to the opening of the equity offering.
Upon successful subscription to the issue, the issuer must file a final prospectus (“Prospectus”) with the RoC, SEBI and the stock exchanges containing details of the pricing and securities subscribed.
In India, the key legislation and regulations governing equity listings are the Companies Act and the rules framed thereunder, the SEBI ICDR Regulations, the SEBI Listing Regulations, the SCRA and the Depositories Act, 1996 (the “Depository Act”) and the applicable foreign exchange regulations.
In India, the key legislation and regulations governing equity listings are the Companies Act and the rules framed thereunder, the SEBI ICDR Regulations, the SEBI Listing Regulations, the SCRA and the Depositories Act, 1996 (the “Depository Act”) and the applicable foreign exchange regulations.
Any issuer making an equity offering must be incorporated in India.
Under the SEBI ICDR Regulations, there is no minimum market value for companies listing on the exchanges in India. However, SEBI has laid down certain financial thresholds to determine the type of investors and extent of shares that can be offered to each category of such investors through an initial public offering (“IPO”).
The following is the eligibility criteria for undertaking, an IPO in India:
An issuer would be ineligible to make an IPO if:
In addition, there are certain general conditions that a company undertaking an offering must fulfil, such as ensuring that all shares issued and proposed to be issued are dematerialised, ensuring that no convertible instruments (other than employees stock options) are outstanding and ensuring that all existing partly paid-up equity shares have either been fully paid up or forfeited.
The price of each share offered to the public cannot be lower than the face value of the share. The minimum free float depends on the post issue share capital of the issuer (calculated at offer price) (“PISC”). If the PISC is less than or equal to INR16 billion, at least 25% of the equity share capital must be held by the public. If PISC is more than INR16 billion but less than or equal to INR40 billion, the equity shares held by the public must be equivalent to INR0.4 billion. If the PISC is more than INR40 billion, at least 10% of the equity share capital must be held by the public.
In the event that less than 25% of the share capital are issued to the public, public shareholdings must be increased to at least 25% within three years of the date of listing of securities, in the manner specified by SEBI.
It is mandatory for the issuer to provide financial information for a period of the past three financial years on a restated and consolidated basis in accordance with applicable accounting standards. Further, the audited financial statements contained in the offer document cannot be more than six months old.
There is no specific period of time for which an issuer should have been operating its current business prior to listing of its securities.
An issuer undertaking a public offering of its shares is required to comply with various corporate approvals, including approval of the board and shareholders for undertaking the IPO, increase in the authorised share capital of the issuer to create head room for the issue of shares pursuant to the IPO, and, if required, convert the company identity from a private limited to a public limited company. In addition, if the issuer also intends to undertake a secondary transaction, it will be required to offer an opportunity to all its existing shareholders to participate in the IPO.
Further, under the SEBI ICDR Regulations, the issuer is required to identify a promoter in the offer document (which means a person or entity who has direct or indirect control over the affairs of the company). Such promoter is required to lock in 20% of its post-issue share capital for a period of three years from the IPO (Minimum Promoter Contribution). In addition, all other shares of existing pre-IPO shareholders are locked in for a period of one year post completion of the IPO.
The articles of association of the issuer may also require revisions, particularly with respect to the special rights of the pre-IPO investors.
All book-built IPOs are required to be underwritten compulsorily, and typically such obligations are structured as default-based ‘soft underwriting.’
Other than the eligibility requirements prescribed under the SEBI ICDR Regulations, companies undertaking business in certain sectors are required to comply with the regulatory requirements of specific sectoral regulators, such as insurance companies that require specific approval from the Insurance Regulatory Development Authority of India.
In India, it is common for companies undertaking an IPO to list on both of India’s main stock exchanges, ie, the BSE and NSE, at the time of the IPO. Listed Indian companies may list on exchanges outside India subject to applicable foreign exchange regulations through the depository receipt mechanism. Direct listing of Indian equity shares on overseas exchanges cannot be undertaken.
The SEBI ICDR Regulations lay down the procedure for primary listing of shares on a stock exchange in India. Any company wishing to undertake an IPO must file a draft offer document, ie, DRHP with SEBI and the stock exchanges where the securities are proposed to be listed. The DRHP must contain disclosures prescribed in the SEBI ICDR Regulations and the Companies Act.
Once the DRHP has been filed, the issuer must apply for an in-principle approval for listing from the stock exchanges and must choose one exchange as a designated stock exchange prior to the filing of the draft of the RHP with SEBI. In the event that the company’s securities are not in dematerialised form, the company must enter into an agreement with a depository for dematerialisation of the securities that are already issued and the securities proposed to be issued.
On filing of the DRHP with SEBI, it provides observations on the DRHP which the issuer is required to incorporate to the satisfaction of SEBI. SEBI also invites comments from the general public on the DRHP. For this purpose, the DRHP is uploaded on the website of the issuer, the lead managers and SEBI.
The RHP is the updated offer document incorporating additional disclosures in accordance with the observations provided by SEBI (and the stock exchanges). The RHP is required to be filed with the RoC, SEBI and the stock exchanges at least three days prior to the opening of the offering.
Once the RHP is filed, the equity offering may be opened. Once open, the offering is kept open for a period between three and ten working days. The SEBI ICDR Regulations prescribe separate allocation buckets for retail (up to 35% of the IPO size), institutional (up to 75% of the IPO size) and other non-institutional investors (up to 15% of the IPO size). In certain cases where the issuer does not meet the financial track record requirements, at least 75% of the IPO size is required to be allocated to institutional investors.
Once the offering is closed, shares are allotted in accordance with the prescribed procedure under the SEBI ICDR Regulations. Upon successful subscription to the issue, the issuer must file a final prospectus (Prospectus) with the RoC, SEBI and the stock exchanges containing details of the pricing and securities subscribed. Once the prospectus is filed, the issuer should apply to the stock exchanges for a listing approval. Once this is obtained, trading may begin.
Currently, a company incorporated in a foreign jurisdiction cannot directly list equity shares on an Indian stock exchange. However, foreign companies can access Indian stock exchanges through the Indian Depository Receipts (“IDRs”) route. An IDR, similar to the depositary structure available in other markets, is a rupee-denominated instrument which is capable of being listed and publicly traded on an Indian stock exchange. It represents the underlying equity shares of a foreign listed company.
The procedure for issuing IDRs is similar to an IPO by a domestic issuer. However, certain additional eligibility requirements are prescribed in the SEBI ICDR Regulations in relation to the issue of IDR. Thus, in order to issue IDRs, the issuing foreign company must have been listed in its home country for at least three immediately preceding years and must ensure that the underlying equity shares for the IDRs are listed and rank pari passu with the existing shares of same class. The issue size for an offer of IDRs must not be less than INR500 million.
Foreign companies are permitted to list only the IDRs issued by them in the stock exchanges in India.
An issuer may undertake an IPO by issuing fresh securities to new public shareholders (Fresh Issue) or through an offer for sale (OFS) by existing shareholders of the company or a combination of both.
Existing shareholders of a company proposing for an IPO can participate to sell certain or all of their shareholding as part of the IPO process subject to certain eligibility and other related requirements under the provisions of SEBI ICDR Regulations, the Companies Act and other applicable law.
Most equity offerings in India are typically done through the book-building process. In case of a book-building offering, the price band within which the offer price per share is determined is disclosed in the RHP and the prospective investors are required to submit their application within this price band. The cap price on the price band should not be more than 120% of the floor price. Further, the floor price or offer price per share cannot be less than the face value of the shares. Price protections or differential pricing is not permitted.
For an IPO being conducted through the book-building process, shares must be allotted to different groups of investors in a particular proportion, namely, at least 35% to retail individual investors (“RIIs”), at least 15% to non-institutional investors (“NIIs”) (apart from RIIs) and not more than 50% to qualified institutional buyers (institutional investors such as scheduled commercial banks, mutual funds, provident funds, foreign venture capital investors and foreign portfolio investors, etc, which have the expertise and financial resources to evaluate and invest in capital markets) (“QIBs”) (of which 5% must be allocated to mutual funds). Further, 60% of the portion to be allocated to QIBs may be reserved for anchor investors (QIBs who bid for at least INR100 million worth of shares in the public issue), who may apply for shares one day prior to other investors and are required to lock in their allocated portion for a period of 30 days after the IPO. Unsubscribed shares in the RII and NII categories may be allotted to applicants in any other categories. Except for the portion reserved for an anchor investor (which may be allocated on a discretionary basis), allocation of equity shares in the IPO is required to be made on a proportionate basis (based on applications received).
Subsequent equity offerings in India can be done by way of a further public offering, preferential issue or a qualified institutions placement.
For details on the procedures of subsequent equity offerings, please see below:
Further Public Offer (“FPO”)
An FPO allows a company whose equity shares are already listed on a stock exchange to raise additional equity share capital from the public in the same manner as an IPO. An FPO has similar eligibility criteria, lock-in requirements, regulatory review and disclosure requirements as an IPO (save for issuers meeting certain financial and track-record thresholds, which results in condensed disclosure and quicker regulatory review period).
A preferential issue is an issue of equity shares by a listed company to a select group of investors on a private placement basis and without issuance of an offer document. In a preferential issue, securities can be allotted to all types of investors, including the promoter and promoter group of an issuer and is subject to specific market-linked pricing requirements and lock-in requirements for the incoming investors.
Qualified Institutions Placement (“QIP”)
A QIP is an issue of equity shares by a listed company to QIBs. Unlike in a preferential issue where securities can be issued to all types of investors, in a QIP, shares may only be allotted to QIBs and involves issuance of an offering document which is required to be filed with the regulator (though it need not be approved in advance as is the case with an IPO). QIP is a public market deal and does not have any lock-in requirements and the offering price is subject to a floor linked to the market price for two weeks immediately prior to the launch of the offering.
Please see below for the procedure involved in the case of an offering being made to existing shareholders:
Rights Issue/Composite Issue
A rights issue involves issuance of shares to existing shareholders in the same proportion as their existing shareholding. It is used to raise additional equity share capital with dilution of the existing shareholders’ stake in the issuer being limited to certain instances. Existing shareholders have the right to renounce their rights-issue entitlement in favour of third parties, including other shareholders. A rights issue has similar eligibility criteria, regulatory review and disclosure requirements as an IPO (save for issuers meeting certain financial and track-record thresholds), which results in condensed disclosure and quicker regulatory review period.
An equity offering typically involves several entities as advisers, including merchant bankers, legal counsel, auditors and the registrar and transfer agent. The SEBI ICDR Regulations mandate that any public issuance should have at least one SEBI-registered merchant banker. Merchant bankers are responsible for ensuring true, complete and adequate disclosures in offer documents and they conduct due diligence, manage procedural and logistical issues, recommend other intermediaries and advisers, interface with SEBI and the stock exchanges, lead the marketing of the issue, advise the issuer on pricing and timing of the issue and act as underwriters to the issue until the completion of the equity offering.
Apart from merchant bankers, legal counsel are appointed to assist with the diligence and drafting of documentation involved with an equity offering (including the DRHP, RHP, Prospectus and various other transaction agreements) as well as advice on various issues including research and publicity guidelines and comfort letters from auditors. The issuer and the merchant bankers appoint their respective Indian legal counsel. Additionally, where the offering is marketed to investors outside India, the bankers typically appoint one or more international legal counsel to advise on matters such as applicable disclosure requirements, selling restrictions, transfer restrictions and taxation in such jurisdictions.
The SEBI ICDR Regulations requires that the financial statements of the issuer to be restated in accordance with a prescribed format and presented in the DRHP, RHP and Prospectus (collectively “the Offer Documents”). The issuer’s statutory auditors (auditors appointed in accordance with provisions under the Companies Act) prepare and review the financial statements and provide comfort letters addressed to, and for the benefit of, the merchant bankers. Whenever necessary, third-party chartered accountants/valuers can also be engaged by the issuer to provide independent certifications on operational matrixes included in the Offer Documents.
The registrar and transfer agent is involved in a range of pre-issue and post-issue matters including the collection of bid-related information from investors who apply for shares in the public issue. The registrar and transfer agent process these applications and assists in the allotment of securities.
The role of key advisers involved in an IPO has been appropriately included above.
The Offer Documents are required in order to invite offers from the public for the subscription or purchase of any securities of a company that wishes to be or is already listed on an Indian stock exchange. With respect to the process of listing of securities in case of an IPO, please see item 3. Primary Listings above.
In accordance with the SEBI ICDR Regulations the prospectus must contain disclosures which are true, complete and adequate for an investor to make an informed investment decision. The disclosures are required to be prepared in compliance with the SEBI ICDR Regulations and the Companies Act and rules framed thereunder.
These disclosures comprise information regarding the history and corporate structure of the issuer (including any subsidiaries and group companies), disclosures regarding the objects of the issue including requirement of funds, funding plans, deployment, expenses and basis for issue price, information about the offer and issue procedure, risk factors related to the business of the issuer, detailed description of the business of the issuer including its strengths and strategies, capital structure of the issuer, material outstanding litigation regarding the issuer, promoters, directors, subsidiaries and group companies, financial statements of the issuer and a discussion of the financial conditions and results of operations for the period covered in the financial statements and regulatory approvals.
While these disclosures are fairly standard across all sectors, certain specific disclosures may be required in accordance with the regulations framed by sectoral regulators in the event that the company’s business falls under the ambit of these regulations.
Under Indian regulations, the promoters, directors and any other person who has authorised the issue of the prospectus is responsible and/or liable for the contents of the prospectus. Further, the merchant bankers must also certify that the IPO has been undertaken in accordance with the SEBI ICDR Regulations and all other applicable laws have been complied with and that disclosures are true, correct and complete. In the event that any material disclosure in a prospectus is proved to be incorrect, SEBI may take penal action against the merchant bankers concerned, including fines and cancellation of the SEBI registration.
Companies undertaking business in certain sectors are required to comply with the regulatory requirements of separate sectoral regulators, such as insurance companies that are required to comply with regulations issued by the Insurance Regulatory Development Authority of India in relation to listing of their securities in India or banking companies that are required to comply with additional requirements specified by RBI from time to time.
With respect to the publication and filing requirements of a prospectus in the case of an IPO, please see 6.3 Content Requirements Differ in the Case of Specialist Companies above.
The Offer Documents once filed with the relevant regulatory body can be publicly viewed and any information that is published in such document can be produced as required. However, any information being relied on should not be extraneous to the disclosures in the Offer Documents.
The SEBI ICDR Regulations lay down guidelines on public communications including advertisements, publicity material issued or made by the issuer, or by the lead manager(s) or any other intermediary connected with an IPO offering.
Information contained in advertisements disseminated to the general public must only contain information as provided in the Offer Documents and must be true and complete and must not be manipulative or deceptive or distorted, and it must not contain any statement, promise or forecast which is untrue or misleading. In addition, there are certain legends that are required to be included in all public communications depending on the transaction status.
Typically, research reports are prepared by research analysts of the merchant bankers involved in the offering.
In India, research reports with respect to equity offerings are regulated under the SEBI (Research Analysts) Regulations, 2014 (the “Research Analysts Regulations”). Research analysts of the merchant bankers are required to issue reliable material and unbiased research reports which do not contain any information which is extraneous to the offer documents. In order to ensure the correctness of information being included in the research reports, merchant bankers should ensure that they do not receive any information which is extraneous to the Offer Documents and that they are carefully vetted and drafted after due diligence.
Entities are required to implement specific internal policies to address any actual or potential conflict of interest arising from dealing or trading of securities of the issuer and preventing use of research reports to manipulate the securities market.
Merchant bankers are restricted from publishing or distributing research reports or making any public appearance regarding an issuer for which it has acted as a manager or co-manager during the period of 45 days following the date on which the securities were priced in the case of an IPO, or ten days following the day on which the securities are priced in the case of an FPO, subject to specific approval of the legal and compliance personnel as specified in the internal policies and procedures. Further, an entity participating as an underwriter to the issuer’s initial public offering should not publish a research report for the publisher before completion of 25 days since the date of the offering. Entities that have acted as managers of a public offering of an issuer shall not publish or distribute a research report within 15 days after the expiration/waiver/termination of a lock-up agreement that the research entity or analyst has entered into with the issuer that restricts or prohibits the sale of securities after completion of IPO which is subject to specific approval of the legal and compliance personnel as specified in the internal policies and procedures. In addition, merchant bankers are required to establish appropriate mechanisms to ensure independence of the research activities from other business activities.
Most equity offerings in India are typically done through the book-building process. In the case of a book-building offering, the price band within which the offer price per share is determined is disclosed in the RHP and the prospective investors are required to submit their application within this price band. The cap price on the price band should not be more than 120% of the floor price. Further, the floor price or offer price per share cannot be less than the face value of the shares. Price protections or differential pricing is not permitted.
All book-built IPOs are required to be compulsorily underwritten and typically such obligations are structured as default based “soft underwriting”.
Typically, the underwriting agreements in India cover clauses such as the underwriting obligation under the provisions of regulations issued by SEBI and other applicable laws, procedures for discharging such obligations, various conditions dependent for fulfilling such underwriting obligation and fees involved.
As the underwriting obligation is typically default–based soft underwriting, the underwriting commission is generally a part of the overall IPO transaction fees.
The SEBI ICDR Regulations prescribe stabilisation mechanisms by way of an over-allotment (‘green shoe’) option, which allows the stabilising agent to make market purchases in the event that the market price falls below the IPO price.
In the case of an IPO, shares are offered for sale by existing shareholders that are held by them for a period of one year since the IPO. In addition, the shareholders selling their securities are required to comply with certain provisions under the SEBI ICDR Regulations and the Companies Act.
Equity offerings out of India are typically marketed to investors outside the United States under Regulation S of the United States Securities Act, 1934 (the “Securities Act”) and, in certain cases, to US qualified institutional buyers under Rule 144A of the Securities Act. However, the issuance of equity shares and all underlying corporate actions, as well as transaction agreements, are typically governed by the laws of India.
The underwriting agreement is governed by the laws of India.
SEBI does not permit choice of a foreign governing law and/or jurisdiction for equity issuances in India.
India is not a party to any international treaty in relation to the recognition or enforcement of foreign judgments. However, recognition and enforcement of foreign judgments is provided for under ss 13, 14 and 44A of the Code of Civil Procedure, 1908, on a statutory basis.
Under the provisions of the Civil Procedure Code, where a foreign judgment has been rendered by a superior court in any country or territory outside India, which the Government of India (“GoI”) has by notification declared to be a reciprocating territory, it may be enforced in India by execution proceedings as if the judgment had been rendered by an appropriate court in India. However, it is applicable only to monetary decrees not being in the nature of any amounts payable in respect of taxes or other charges of a like nature or in respect of a fine or other penalty, and does not apply to arbitration awards. The suit must be brought in India within three years from the date of the judgment in the same manner as any other suit filed to enforce a civil liability in India. Further, in this regard, a party may be required to obtain specific approval from regulators in India. It is unlikely that a court in India would award damages on the same basis as a foreign court if an action is brought in India. It is unlikely that an Indian court would enforce foreign judgments if it considered the amount of damages awarded as excessive or inconsistent with public policy or if the judgments are in breach of or contrary to Indian law. The United Kingdom, Singapore, Hong Kong, New Zealand and Malaysia (amongst others) have been declared reciprocating territories within the meaning of Section 44A of the Civil Procedure Code by the GoI. The United States has not been declared by the GoI to be a reciprocating territory for the purposes of Section 44A of the Civil Procedure Code.
The enforceability of any of the transaction documents related to an issuance of equity securities shall not be affected by a shareholder being domiciled in a foreign jurisdiction.
The regulations in India do not specifically restrict Indian nationals to participate in an equity offering made by foreign companies. However, foreign companies cannot issue their securities in India other than by way of issue of IDRs on the Indian stock exchanges under the provisions of SEBI ICDR Regulations.
Below is a typical timeline and actions in case of an IPO in India:
Prior to filing the DRHP
The SEBI ICDR Regulations lay down the procedure for listing of shares on a stock exchange. The preliminary step in this process is for the issuer to pass board and shareholder resolutions approving the proposal to issue and list securities on the stock exchanges. Subsequently, the issuer must appoint merchant banker(s) who will act as the book runners for the IPO and will be responsible for conducting due diligence in relation to statutory compliances, appointing legal counsel and other intermediaries, marketing the issue and advising on pricing and valuation among other things. The merchant banker and legal counsel should advise and assist the issuer with drafting all the offer documents. The issuer should also appoint a registrar and enter into an agreement with the registrar laying down the registrar’s duties in relation to pre-issue and post-issue matters.
Timeline: The process of conducting due diligence and preparing the DRHP takes approximately two to four months from the date of the first meeting between the issuer and the merchant bankers, legal counsel and auditors, etc, in relation to the IPO.
Post-filing the DRHP and prior to filing the RHP
Post-filing the DRHP with SEBI, the issuer must simultaneously make an application for in-principal approval for listing to the stock exchanges. Within two days of filing the DRHP with SEBI, the issuer must make public announcements regarding the filing of the DRHP through advertisements in major newspapers, as prescribed in the SEBI ICDR Regulations.
Once the DRHP has been filed, SEBI has 30 days to provide its observations. The DRHP will also be uploaded on the website of the issuer, the merchant bankers and SEBI in order to invite comments from the public. These comments from the public must be provided within 21 days of the date of filing.
Further, after the filing of the DRHP, the merchant bankers arrange for roadshows and investor presentations with institutional investors and analysts in order to market the issue. This enables prospective investors to understand the business of the issuer and undertake valuations. Any marketing or public announcements or any research documents have to be in accordance with the regulations prescribed.
Prior to the filing of the RHP, the issuer is required to enter into certain agreements with the merchant bankers and other intermediaries as applicable. These include the syndicate agreement, underwriting agreement, cash escrow agreement and share escrow agreement.
Timeline: Typically this process is completed within a period of one or two months.
Filing of RHP and opening of issue
On receipt of the final observations from SEBI by the issuer, the RHP (with updated disclosures as prescribed in the SEBI observations) should be filed with SEBI and subsequently with the RoC and the stock exchanges. The RHP must be filed at least three days before the opening of the issue. The issue is opened for anchor investors one day prior to the date on which the offering is opened to the general public. Once the offering is opened (three days post the filing of the RHP), it must be kept open between three to ten working days.
In order to subscribe to the issue, other than anchor investors, applicants must submit an application form (known as the Application Supported by Blocked Account (ASBA) Form) to certain designated intermediaries (including the syndicate banks and the registrar). The ASBA Form allows for the specified bid amount to be blocked in the investor’s bank account. The process of blocking of funds is carried out by the syndicate banks. Recently, it has been notified by SEBI that, from 1 January 2019, a new mechanism for RIIs for making payments in relation to shares allotted in an IPO has been introduced which requires utilising the electronically enabled, Universal Payment Interface (UPI) system. The intermediaries are responsible for uploading the bid data on the stock exchange platform.
Timeline: This process takes up to a period of ten working days.
Post closure of the offering – allocation of shares
Once the offering is closed, the stock exchanges have two days to compile and compare bid data from the stock exchanges and payment details from the syndicate banks. Within a period of three days of the closure of the offering, the basis of allotment is approved by the stock exchange. Within four days of the closure of the offering, allotment of the shares is carried out, funds are transferred from investor bank accounts to the issuer’s public issue account by the syndicate banks and shares are credited to the accounts of successful applicants by the depositories. Refunds to unsuccessful bidders are also processed simultaneously. Within five days of the closure of the offering, the issuer is required to make a listing application to the stock exchanges. Upon receipt of commencement of a trading notice from the stock exchanges, trading of the issuer’s shares can begin (six days post the closure of the offering).
Timeline: This process takes a period of six days from the date of closure of the offering.
Total Timeline: The total time for an IPO in India could be approximately six to nine months.
Recently in India, long-term capital gains tax (LTCG Tax) has been made applicable to the sale of shares by existing shareholders pursuant to an IPO. This LTCG Tax will be applicable in cases of selling of shares by existing shareholders held by them for a period of 12 months or more. Fresh issue of shares for equity offerings do not attract any tax obligations in India. Where specified conditions are met, such LTCG are only taxed to the extent they exceed INR100,000. Further, any gain realised on the sale of listed equity shares held for a period of 12 months or less will be subject to short-term capital gains tax in India.
Companies in India declaring dividends are required to pay a dividend distribution tax of 15% on the dividend paid to its shareholders, subject to any additional charges as detailed in the Income Tax Act, 1961 (the IT Act) from time to time. Dividends received by various entities are subject to tax slabs as per the provisions of the IT Act, which is amended from time to time. In the event that the aggregate dividends received by individuals and Hindu undivided families is more than INR10 million, they are subject to tax of 10% on the additional dividend amount received. Further, dividends earned by mutual funds are exempt from taxation under the IT Act.
Capital gains tax is applicable in cases of transfer of shares in India. For details, please see 12.1 Main Tax Issues when Issuing and Listing Equity Securities.
Capital gains arising from the sale of the shares will be exempt from taxation in India in cases where the exemption from taxation in India is provided under a treaty between India and the country of which the seller is resident. Generally, Indian tax treaties do not limit India’s ability to impose tax on capital gains. As a result, residents of other countries may be liable for tax in India as well as in their own jurisdiction on a gain upon the sale of the shares.
Publicly listed companies in India are required to comply under various regulations issued by SEBI as well as the provisions of the Companies Act with respect to certain continuing obligations, such as periodic filings, reports, statements, documents and information reports which will enable investors to track the performance of such companies over regular intervals of time and provide sufficient information to enable investors to assess the current status of a listed company.
Under Listing Regulations, listed companies are required to make various continual disclosures, such as disclosure of quarterly, half yearly and annual financial results, quarterly disclosure of shareholding patterns of the companies and issue of annual reports, etc. Further, it requires disclosure with respect to various corporate actions, such as in cases of further issue of capital, buyback of securities, and declaration of dividends, bonus and all other material events.
There are exhaustive corporate governance requirements that publicly listed companies are required to comply with under the provisions of the Companies Act and the Listing Regulations. These companies are required to comply with requirements of the constitution of its board of directors in accordance with applicable law, which requires the companies to appoint independent directors and adhere to regulations including the appointment of managing directors and chief executive officers. Unless chaired by an independent director, at least half of the board of listed companies are required to comprise of independent directors. Further, they are required to establish various committees, such as the audit committee, nomination and remuneration committee, stakeholders’ relationship committee and a corporate social responsibility committee with prescribed number of independent directors.
Related-party transactions of listed companies in India are required to be complied with under the Listing Regulations. Companies are required to formulate a policy on materiality of related-party transactions and all related-party transactions are required to be approved by the audit committee. All material related-party transactions are required to be approved by the shareholders of the listed company and related parties cannot vote on such resolutions. The materiality of a related-party transaction is determined on the basis of the nature of the transaction and the size of the transaction relative to certain thresholds prescribed under the Companies Act and the Listing Regulations.
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations (the “Takeover Regulations”) are applicable to direct and indirect acquisition of shares or voting rights in and control over target companies where one party is a publicly listed company in India.
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations (the “Takeover Regulations”) are applicable to direct and indirect acquisition of shares or voting rights in and control over target companies where one party is a publicly listed company in India.
In the case where a listed company contravenes any of the provisions of the Listing Regulations, the company will be liable for action, such as imposition of fines, suspension of trading, freezing of promoter/promoter group holding of designated securities (as may be applicable) in co-ordination with depositories and any other actions as specified by SEBI. If a listed company fails to pay a fine within the stated period by the stock exchange, the stock exchange may initiate action against the company after serving a notice on the company.
Equity capital markets in India have seen a significant increase in traditional equity issuances and development of new products, such as infrastructure investment trusts and real estate investment trusts, during the last few years. Initial public offers, rights issues and qualified institutions placements (QIPs), which are private placements to institutional investors, have all increased substantially, both in terms of number of offerings and the amount raised. Fiscal 2018 (1 April 2017 to 31 March 2018) was also the highest ever resource mobilisation through public and rights issues, according to India’s securities market regulator, the Securities and Exchange Board of India (the SEBI).
There were more than 200 initial public offerings and 21 rights issues in Fiscal 2018 raising approximately USD16 billion, an increase of 77.5% from the previous year. Further, 53 QIPs raised approximately USD10 billion, nearly eight times higher than the previous year. (Source: SEBI Annual Report 2017-18. All USD conversions at Rs. 65.04 which is the conversion rate as on 28 March 2018)
Companies in the financial services industry have been particularly active in capital raising, such as the first initial public offer by a reinsurance company and initial public offerings by insurance companies (including the first by a general insurance company), asset management companies (for mutual funds), commercial banks and non-banking financial companies.
In addition to traditional equity offerings, 2018 marked the filing of India’s first real estate investment trust and the listing of the first privately placed infrastructure investment trust. This followed the listing of two public infrastructure investment trusts creating a new asset class with a focus on yield.
Whilst capital raising has slowed in the latter half of Fiscal 2019 due to, among others, global headwinds and uncertainty around elections in India, SEBI has been actively undertaking modifications to securities law. These include streamlining the regulations applicable to securities for initial public offerings and follow-on offerings by listed companies, prescribing more robust corporate governance requirements for listed companies and reducing the timeline from issue closure to listing.
The Financial Sector Assessment Program (October 2017) of the International Monetary Fund and the World Bank examined the changes in the securities market in India and stated that the SEBI has “developed, adopted and implemented regulatory policy in virtually every area of responsibility.” Over the last few years, the SEBI has continued to revamp its approach on a number of issues and improved regulatory standards. This is reflected in the various committees constituted to discuss a range of matters, including systemic issues such as corporate governance, fair market conduct and moving towards a more principle-based approach on settlement of contraventions, as well as issues in relation to foreign investment in Indian markets. The process involved extensive public consultation and demonstrated SEBI's willingness to evolve a more effective and practical approach to regulation.
SEBI has also tried to deal with contraventions efficiently, including through the settlement mechanism for proceedings. However, the main challenge continues to be the volume of proceedings.
Initial Public Offerings
Consistent with the trend since 2014, a majority of initial public offerings have been exits by private equity investors from investments made by them over the last five to eight years. In the last few years, monetisation of investments by private equity investors through public offers has become an attractive option due to the growth of the Indian capital markets, including due to the growth in domestic savings by - user eing invested in stock markets and a significant growth in investible AUMs of MFs.
The facilitative approach of the regulator has also helped in this regard. For example, historically, Indian issuers were required to identify a sponsor and such sponsor was required to hold 20% of the shares of the issuer for a period of three years after listing. This requirement created challenges for companies set up by first generation entrepreneurs who had diluted their stake over the course of the growth of their companies (including due to investment by private equity investors in such companies). Over the last few years, the SEBI has permitted multiple companies with broad-based shareholding and no identified sponsor – being professionally run companies – to list their shares.
Historically, offer documents for initial public offerings were required to include detailed disclosures on group companies (companies that are related parties of the issuer), litigation, government approvals, standalone financials of the issuer, among others. Recently, SEBI notified the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (the “ICDR Regulations”) effective from 10 November 2018, to replace the regulations issued in 2009, reflecting changes in market practices and the regulatory environment in India and globally. In line with global best practices, SEBI has rationalised disclosure requirements and has adopted a materiality-based approach for disclosure, such as disclosures in relation to government approvals and litigation for concise and meaningful disclosure for investors. Further, in line with disclosure requirements globally, disclosure of consolidated financial statements of the issuer has been restricted to a period of three years and the stub period (if applicable), as opposed to the earlier requirement of five years. Additionally, accounting standards in India have also evolved with the recent phased implementation of Indian Accounting Standards, which are converged towards the International Financial Reporting Standards.
With the evolution of the domestic IPO market, SEBI has also simplified the overall issue process and timeline and rationalised certain eligibility conditions. For instance, the ICDR Regulations have clarified that existing shareholders proposing to offer shares through the initial public offer may continue to hold convertible securities even after filing the draft offer document (earlier, they were required to convert before the draft offer document), and convert to equity shares prior to filing the red herring prospectus. This enables shareholders (including private equity investors holding such securities) to convert closer to the launch of the initial public offering.
While the changes are a step in the right direction, some of the provisions remain untested and SEBI will have to work with market participants to continually evaluate and streamline the IPO process to ease the capital raising process without compromising investor protection.
Rights issues in India have seen a strong resurgence in Fiscal 2018. Since this product offers a relatively easy method for issuers to raise capital without diluting the promoters, many Indian companies have chosen this method to meet their funding requirements. While the new regulations have eased the litigation disclosure requirements similar to QIPs discussed below, there is further scope to improve the framework for rights issues. For example, listed companies could be allowed to incorporate information by reference and this would substantially reduce time involved in preparing the offer document. In this regard, the SEBI regulations provide for an annual information memorandum (the equivalent of a 10-K filing in the US) to be submitted by listed companies, and once this provision is made effective, it will help in reducing the timelines for a rights issue. Further, reducing the minimum time for which the issue is required to remain open (currently 15 days) could also help issuers protect against pricing risk.
Qualified Institutions Placement
Fiscal 2018 has seen healthy growth in the number of QIPs and the amounts raised. New changes to the securities regulation could provide a fillip to this product next year. Under the new regulations, Indian companies are now permitted to use QIPs as a method to meet minimum public float requirements. Given the increase in the number of listings over the past few years, many Indian companies will be required to meet minimum public float requirements soon and may choose QIPs for this purpose. The new regulations have also aligned litigation disclosure requirements for the QIP offer document with the continuous disclosure requirements applicable to listed companies. This is likely to improve disclosure by listed companies on an ongoing basis.
One concern that often arises in situations involving QIPs is the manner in which intermediaries can engage in market sounding. While market realities and practice requires intermediaries to interact with potential counterparties, such interaction should be in line with the applicable securities market laws, in particular, the SEBI regulations on prevention of insider trading. Given the involvement of different persons and departments of each intermediary, it is necessary that intermediaries maintain strict controls. Maintenance of Chinese Walls, codifying wall-crossing procedures, implementing restrictions on sharing of information on a “need to know” basis and adhering to communication policies and procedures and avoiding conflicts of interest are some of the ways in which intermediaries can carry out their activities in compliance with the global best practices.
Listed company compliance and corporate governance
Listing conditions in India have seen significant changes over the last decade. Prior to 2015, listing conditions formed a part of the listing agreement entered into between a listed company and the relevant stock exchange. SEBI had also instituted several committees to review the corporate governance requirements for listed companies and had also initiated a public consultation process for comments on such provisions. Subsequently, in 2015, SEBI notified the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“the Listing Regulations”), which provided a comprehensive framework for listing conditions, continuous disclosure requirements and corporate governance. Recently, SEBI had set up a committee to review the Listing Regulations, which recommended changes to the corporate governance framework for listed companies, in line with global practices and developments in this regard. The Listing Regulations have been amended to include some of these recommendations and these become effective in a phased manner.
REITs and InvITs
The SEBI implemented the legal framework for establishing infrastructure investment trusts (“InvITs”) and real estate investment trusts (“REITs”) through notification of the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 (“the InvIT Regulations”) and the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 (“the REIT Regulations”). This was a timely and much appreciated initiative as it introduced innovative financial instruments that would provide the much needed impetus to infrastructure and real estate financing. Whilst the government and SEBI have played a monumental role in making InvITs a reality in India, it is important to note that the regulatory regime pertaining to InvITs and REITs is nascent and continues to evolve. The Ministry of Finance, Government of India, has also played an important role in facilitating the establishment and growth of InvITs and REITs including permitting the swap of shares of the SPVs for units of an InvIT or REIT by non-residents under the automatic route, which was previously not permitted. The Central Board of Direct Taxes has provided a largely favourable tax regime and liberalised the ability of investors to invest in the units of InvITs and REITs. The Pension Fund Regulatory and Development Authority, the Insurance Regulatory and Development Authority of India and SEBI have played an integral role in permitting various domestic institutional investors, such as pension funds, insurance companies and mutual funds, to invest in the units of InvITs and REITs.
SEBI has continuously aimed at ensuring growth of the products by issuing regulations for further issuances by InvITs and taking adequate steps to ensure ease of investments, by both domestic and foreign investors in the products. Additionally, SEBI has been cognisant of the lack of regulatory clarity regarding the InvIT and REIT regime, and has been forthcoming in addressing concerns raised by market participants, including increasing the cap on investments in under construction assets from 10% to 20% by REITs, and permitting two-tier holding structures below an InvIT or REIT.
Recently, at its meeting on 1 March 2019, SEBI has provided more flexibility to the InvIT and REIT regime, by (i) reducing the bidding lot and trading lot for publicly issued InvITs and REITs; (ii) increasing the leverage limit for InvITs to 70% of the InvIT assets, subject to certain conditions; and (iii) establishing a separate framework for privately placed unlisted InvITs.
We understand that currently six InvITs and one REIT have already been registered with SEBI. Out of the six InvITs, three have already listed and the REIT has filed its draft offer document to undertake its proposed initial public offering. While there have been active pursuits by various regulatory authorities and ministries for the development and growth of InvITs and REITs, certain changes including permitting InvITs and REITs to avail external commercial borrowing, to allow any such investment vehicles to borrow from a wider spectrum of lenders and issuance of operational guidelines for further issue of units through bonus issues, rights issues, delisting and winding-up, could facilitate the growth of the products and enhance the ability of investors to invest in the units of InvITs and REITs.
Depository receipts, direct listing of Indian companies overseas and of foreign companies in India
In 2014, the legal regime governing issue of depository receipts (“DRs”) by Indian companies was liberalised permitting, among others, unlisted Indian companies to issue and list their DRs outside India. While this was a step forward, there remained certain uncertainties including in relation to obligation of various intermediaries, such as domestic custodians and depositories, the role and jurisdiction of Indian regulators over foreign depositories and the requirement of disclosing ultimate beneficial ownership of DRs and taxation implications. Operational guidelines expected to be issued by the regulators are likely to resolve some of the uncertainties.
Recently, SEBI constituted an expert committee for listing the equity shares of Indian companies on stock exchanges outside India and of foreign companies on Indian stock exchanges, neither of which are currently permitted. The committee issued its report on 4 December 2018 recommending various proposals to allow direct access to foreign capital markets for Indian companies, to develop finance as an export for India and increase diversification of the portfolio for Indian investors.
The committee has recommended the framework for permitting the listing of Indian companies in certain permissible jurisdictions outside India. The committee report also sets out the principles to identify the permissible jurisdictions from which companies may be allowed to list on Indian stock exchanges. The committee has also recommended certain changes to the Indian Companies Act and foreign exchange regulations. For foreign companies listing in India, it has been proposed that corporate laws and corporate governance rules of the home jurisdiction will continue to apply.
This is an important first step and various regulators including relevant ministries of the Government of India, the Reserve Bank of India and tax authorities will have to work together to implement the framework recommended by the committee. This will also pave the way for dual listings in the future.
The SEBI aims to apply new technologies in capital markets to improve efficiencies and handle challenges in the market. For example, presently, listing of equity shares in an initial public offering is required to be completed within six days from the date of issue closure. With a view to streamline the process further and eventually to achieve a reduced listing timeline of three days, and due to the level of retail participation in Indian IPOs, SEBI has recently introduced certain initiatives which further enhance the use of technology and electronic-based platforms for bidding and collection of applications. SEBI has introduced the use of instant real-time payment as a payment mechanism for applications in public issues by retail individual investors through intermediaries, thereby removing the requirement for physical movement of forms between intermediaries for blocking of funds. To achieve this, SEBI has also introduced new entities and mechanisms, set up with the guidance and support of the Reserve Bank of India and Indian Banks Association, which enables an instant payment system merging several banking features, seamless fund routing and merchant payments. These measures will likely result in the listing timeline being reduced to three days by the end of the next year.