SEBI (Disclosure and Investor

Protection){ DIP} Guidelines,2000

updated till June10, 2007

Kumar Bijoy
[email protected]
09810452266
Section A
Review of Eligibility Norms
 The amendments inter-alia include:
 introduction of Net Tangible Assets and
 minimum number of allottees as
additional criterion,
 appraisal route as an alternative to the
mandatory book building route etc.
Section B
Review of Book Building guidelines
 The companies have now been given a
flexibility of indicating a movable price
band or a fixed floor price in Red Herring
prospectus,
 Definition of QIBs has been enlarged to
include Insurance companies, Provident
and Pension funds with minimum corpus of
Rs. 25 crores.
 Further operational guidelines are amended
thus shortening the interregnum between
the closure of issue and listing/ trading of
securities to T+6 (T stands for date of
closure of issue)
Section C
Introduction of Green Shoe Option
 Green Shoe option means an option of allocating
shares in excess of the shares included in the
public issue. It is extensively used in
international IPOs as stabilization tool for post
listing price of the newly issued shares.

 It is being introduced in the Indian Capital

Market in the initial public offerings using book
building method.

 It is expected to boost investors’ confidence by

arresting the speculative forces which work
immediately after the listing and thus results in
short-term volatility in post listing price.
Section D
Review of disclosure requirements
in the offer documents

 The amendments under this section

interalia include full disclosure about
the promoters including their
photograph, PAN number etc,
classification of risk factors, use of
standard financial units etc.
Section E
Review of requirements pertaining to issue
of Debt Instruments

 The amendments under this section inter-

alia include prohibition on a willful defaulter
to make a debt issue, requirement of
investment grade credit rating for making a
debt issue, relaxation in the existing
provisions of promoters contribution in IPO
of debt issue etc. The amendments have
been carried out at relevant places in SEBI
(DIP) Guidelines, 2000,
Section F
Modifications pursuant to amendments carried out on
30/06/2003, in SEBI (Employee Stock Option and
Employee Stock Purchase Scheme) Guidelines, 1999

 The amendments are mainly about

relaxation in the provisions of lock-in for
the pre-IPO shares held by employees,
which were issued under employee stock
Option or employee stock purchase scheme
of the issuer company before the IPO,
inclusion of provision of existing clauses of
SEBI (ESOP & ESPS) guidelines in SEBI
(DIP) guidelines 2000
Section G
Amendments pursuant to withdrawal of the concept of
Regional Stock Exchange by Ministry of Finance (MOF),
Govt. of India, vide its circular dated 23/4/2003.

 On April 23, 2003, Ministry of Finance

(MOF) issued a circular thereby
withdrawing the concept of regional
stock exchange. Pursuant to the
aforesaid circular, amendments have
been carried out in SEBI (DIP)
guidelines 2000 at the relevant places
Section H
Review of Operational/Procedural Requirements

 The amendments under this section

interalia include reducing the validity
period of SEBI’s observation letter to
6 months from 365 days, demarking
the responsibilities of lead managers,
defining associate etc.
Section I
Miscellaneous Amendments
 This section contains amendments to
various other provisions of SEBI (DIP)
Guidelines, 2000.
Section A –Review of Eligibility Norms

 An unlisted company may make an initial public

offering (IPO) of equity shares or any other security
which may be converted into or exchanged with equity
shares at a later date, only if it meets all the following
conditions:

 (a)The company has net tangible assets of at least Rs. 3

crore in each of the preceding 3 full years (of 12 months
each), of which not more than 50% is held in monetary
assets:
Provided that if more than 50% of the net tangible assets
are held in monetary assets, the company has made firm
commitments to deploy such excess monetary assets in
its business/project;

 (b)The company has a track record of distributable profits

in terms of section 205 of the Companies Act, 1956, for at
least three (3) out of immediately preceding five (5)
years; Provided further that extra ordinary items shall not
be considered for calculating distributable profits in terms
of Section 205 of Companies Act, 1956.”
 c) The company has a net worth of at least Rs. 1
crore in each of the preceding 3 full years (of 12
months each);

 (d) In case the company has changed its name

within the last one year, at least 50% of the
revenue for the preceding 1 full year is earned by
the company from the activity suggested by the
new name; and
 (e) The aggregate of the proposed issue and all
previous issues made in the same financial year in
terms of size (i.e. offer through offer document +
firm allotment + promoters’ contribution through
the offer document), does not exceed five (5)
times its pre-issue net worth as per the audited
balance sheet of the last financial year.”
 An unlisted company not complying with any of the
conditions specified above may make an initial public
offering (IPO) of equity shares or any other security which
may be converted into or exchanged with equity shares at
a later date, only if it meets both the conditions (a) and (b)
given below:
 (a) (i)The issue is made through the book-building
process, with at least 50% of the issue size being
allotted to the Qualified Institutional Buyers (QIBs),
failing which the full subscription monies shall be
refunded.

OR

 (a)(ii)The “project” has at least 15% participation

by Financial Institutions/ Scheduled Commercial
Banks, of which at least 10% comes from the
appraiser(s). In addition to this, at least 10% of the
issue size shall be allotted to QIBs, failing which
the full subscription monies shall be refunded
 AND
 (b) (i) The minimum post-issue face value capital
of the company shall be Rs. 10 crore
 OR
 (b) (ii) There shall be a compulsory market-
making for at least 2 years from the date of listing
of the shares subject to the followings.
 Market makers undertake to offer buy and
sell quotes for a minimum depth of 300
shares;
 Market makers undertake to ensure that the
bid-ask spread (difference between
quotations for sale and purchase) for their
quotes shall not at any time exceed 10%:
 The inventory of the market makers on each
of such stock exchanges, as on the date of
allotment of securities, shall be at least 5%
of the proposed issue of the company
 An unlisted public company shall not
make an allotment pursuant to a public
issue or offer for sale of equity shares
or any security convertible into equity
shares unless in addition to satisfying
the conditions mentioned above (both)
the prospective allottees are not less
than one thousand (1000) in number.”
‘Qualified Institutional Buyer’
 public financial institution as defined in section 4A of
the Companies Act, 1956;
 scheduled commercial banks;
 mutual funds;
 foreign institutional investor registered with SEBI;
 multilateral and bilateral development financial
institutions;
 venture capital funds registered with SEBI.
 foreign Venture capital investors registered with SEBI.
 state Industrial Development Corporations.
 insurance Companies registered with the Insurance
Regulatory and Development Authority (IRDA).
 provident Funds with minimum corpus of Rs. 25 crores
 pension Funds with minimum corpus of Rs. 25 crores
 A listed company shall be eligible to make a
public issue of equity shares or any other security which
may be converted into or exchanged with equity shares
at a later date.
 Provided that the aggregate of the proposed issue and
all previous issues made in the same financial year in
terms of size (i.e. offer through offer document + firm
allotment + promoters’ contribution through the offer
document), issue size does not exceed 5 times its pre-
issue networth as per the audited balance sheet of the
last financial year.
 Provided that in case there is a change in the name of
the issuer company within the last 1 year (reckoned
from the date of filing of the offer document), the
revenue accounted for by the activity suggested by the
new name is not less than 50% of its total revenue in
the preceding 1 full-year period
 A listed company which does not fulfill
the conditions given in the provisos
above, shall be eligible to make a
public issue subject to complying with
the conditions the prospective allottees
are not less than one thousand (1000)
in number.
IPO Grading…
 The grade assigned by a Credit Rating
Agency registered with SEBI, to the initial
public offering (IPO) of equity shares or any
other security which may be converted into
or exchanged with 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 generally assigned on a
five-point point scale
 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
 IPO grading has been introduced as an endeavor to
make additional information available for the
investors in order to facilitate their assessment of
equity issues offered through an IPO.
 IPO grading can be done either before filing the draft
offer documents with SEBI or thereafter. However,
the Prospectus/Red Herring Prospectus, as the case
may be, must contain the grade/s given to the IPO by
all CRAs approached by the company for grading such
IPO.
 IPO grading is not optional. A company which has
filed the draft offer document for its IPO with SEBI, on
or after 1st May, 2007, is required to obtain a grade
for the IPO from at least one CRA.
 IPO grade/s cannot be rejected.
Irrespective of whether the issuer finds the
grade given by the rating agency
acceptable or not, the grade has to be
disclosed as required under the DIP
Guidelines. However the issuer has the
option of opting for another grading by a
different agency. In such an event all
grades obtained for the IPO will have to be
disclosed in the offer documents,
advertisements etc.
the factors - evaluated to assess the fundamentals
of the issue while arriving at the IPO grade
 Business Prospects and Competitive Position
 Industry Prospects
 Company Prospects
 Financial Position
 Management Quality
 Corporate Governance Practices
 Compliance and Litigation History
 New Projects—Risks and Prospects

 It may be noted that the above is only indicative of

some of the factors considered in the IPO grading
process and may vary on a case to case basis.
 IPO grading is done without taking into
account the price at which the security is
offered in the IPO. Since IPO grading does
not consider the issue price, the investor
needs to make an independent judgment
regarding the price at which to bid
for/subscribe to the shares offered through
the IPO.
 SEBI does not play any role in the
assessment made by the grading agency.
The grading is intended to be an
independent and unbiased opinion of that
agency.
Book Building Process…
 This is a process of discovering the price
 The bidder can make three bids in the
prescribed application form and can also revise
or withdraw his bid before the close of the offer
 Individual in single or joint names, HUFs, body
corporate, banks and financial institutions, MFs,
NRIs, Insurance Cos, VCF etc can apply for the
issues
 T0 helps the “retail individual investors” SEBI
has made a provision of reservation for them.
“Retail individual investor” means an investor
who apples of bids for securities of or for a
value of not more than Rs. 1 L
 Issues remain open for at least 3
working days and not move than 10
working days.
 Right issues are kept open for at least
30 days and not more than 60 days
 The retail investors get on a certain
discount (5%) the cut-off price
In case of 100% book building
process-
 not less than 35% of the net offer to the
public shall be available for allocation to
retail individual investors.
 Not less than 15%of the net offer to the
public shall be available for allocation to
non institutional investors i.e. investors
other than retail individual investors and
qualified institutional buyers.
 Not more than 50% of the net offer to the
public shall be available for allocation to
qualified institutional buyers.
 In case an issuer company make an issue of 75%
of the net offer to public through Book building
process and 25% at the price determination
through Book building.
 The option of book-building shall be available to all body
corporate which are otherwise eligible to make an issue of
capital to the public.
 The book-building facility shall be available as an
alternative to, and to the extent of the percentage of the
issue which can be reserved for firm allotment, as per these
Guidelines.
 The issuer company shall have an option of either reserving
the securities for firm allotment or issuing the securities
through book building process.
 The issue of securities through book-building process shall
be separately identified / indicated as 'placement portion
category', in the prospectus.
 The securities available to the public shall be separately
identified as 'net offer to the public'.
 In the book built portion, not less than 25% of the
net offer to the public, shall be available for
allocation to non Qualified Institutional Buyers and
not more than 50% of the net offer to the public
shall be available for allocation to Qualified
Institutional Buyers.
 The balance 25% of the net offer to the public
offered at a price determined through book
building, shall be available only to retail individual
investors who have either not participated or have
not received any allocation, in the book built
portion.
 Even if a person has bid at higher price than the
discovered price (cut off price) The allotment to
that person will take place at discovered price.
Some facts…
 In case of fixed price issues, the investor is
informed about the allotment refund within
30 days of the closure of the issue.
 In case of book built issues, the basis of
allotment is finalized by the book running
lead managers within 2 weeks from the
date of the closure of the issue.
 The registrar then ensures that demat
credit or refund as applicable is completed
within 15 days of the closure of the issue.
 The listing on the stock exchanges is done
within 7 days from the finalization of the
issue.
 Reverse Book Building
(Delisting of shares)
 The Reverse Book Building is a mechanism provided for
capturing the sell orders on online basis from the share
holders through respective Book Running Lead Managers
(BRLMs) which can be used by companies intending to
delist its shares through buy back process.
 In the Reverse Book Building scenario, the Acquirer /
Company offers to buy back shares from the share
holders.
 The Reverse Book Building is basically a process used for
efficient price discovery.
 It is a mechanism where, during the period for which the
Reverse Book Building is open, offers are collected from
the share holders at various prices, which are above or
equal to the floor price.
 The buy back price is determined after the offer closing
date
 NSE Reverse Book Building System

 NSE uses the reverse book building system; a fully

automated screen based bidding system that allows
offers to run in several issues concurrently.
 The system has the facility of defining a hierarchy
amongst the users of the system.
 The Book Running Lead Manager can define who
will be the Syndicate member and who will be the
other members participating in the issue.
 The Syndicate Member and other Members also
have a facility of defining a hierarchy among the
users of the system as Corporate Manager, Branch
Manager and Dealer.
 Greenshoe Option
 A greenshoe option is a clause contained
in the underwriting agreement of an initial
public offering (IPO). The green shoe option,
which is also often referred to as an over-
allotment provision, allows the underwriting
syndicate to buy up to an additional 15% of
the shares at the offering price if public
demand for the shares exceeds expectations
and the stock trades above its offering price.
 The GreenShoe Company was the first
issuer to allow the over-allotment option to
its underwriters, hence the name.
 The greenshoe option provides extra
incentive for the underwriters of a new
stock offering. In addition, these
investment banks, brokerages and other
financing parties also often exercise the
greenshoe option to cover some of the
short position they may have created in an
effort to maintain a stable market after a
new stock begins to trade, as well as to
meet aftermarket demand.
 GREENSHOE OPTION

 An issuer company making a public offer of

equity shares can avail of the GreenShoe
Option (GSO) for stabilizing the post listing
price of its shares

 A company desirous of availing the option shall

in the resolution of the general meeting
authorizing the public issue, seek authorization
also for the possibility of allotment of further
shares to the ‘stabilizing agent’ (SA) at the end
of the stabilization period
 The company shall appoint one of the
(merchant bankers or Book Runners, as the
case may be, from amongst) the issue
management team, as the “stabilizing
agent” (SA), who will be responsible for the
price stabilization process, if required.
 The SA shall enter into an agreement with
the issuer company, prior to filing of offer
document with SEBI, clearly stating all the
terms and conditions relating to this option
including fees charged / expenses to be
incurred by SA for this purpose.
 The SA shall also enter into an agreement with
the promoter(s) or pre-issue shareholders who
will lend their shares specifying the maximum
number of shares that may be borrowed from
the promoters or the shareholders, which shall
not be in excess of 15% of the total issue size.)
 Lead merchant banker or the Lead Book Runner,
in consultation with the SA, shall determine the
amount of shares to be over-allotted with the
public issue, subject to the maximum number
specified
 In case of an initial public offer by a unlisted
company, the promoters and pre-issue
shareholders and in case of public issue by a
listed company, the promoters and pre- issue
shareholders holding more than 5% shares,
may lend the shares
 The SA shall borrow shares from the promoters
or the pre-issue shareholders of the issuer
company or both, to the extent of the proposed
over-allotment Provided that the shares
referred to in this clause shall be in
dematerialized form only.)
 The allocation of these shares shall be pro-rata to all the
applicants.
 The stabilization mechanism shall be available for the
period disclosed by the company in the prospectus, which
shall not exceed 30 days from the date when trading
permission was given by the exchange(s).
 The SA shall open a special account with a bank to be called
the
 “Special Account for GSO proceeds of _____ company”
(hereinafter referred to as the GSO Bank account) and a
special account for securities with a depository participant
to be called the “Special Account for GSO shares of
company” (hereinafter referred to as the GSO Demat
Account).
 The money received from the applicants against the over
allotment in the green shoe option shall be kept in the GSO
Bank Account, distinct from the issue account and shall be
used for the purpose of buying shares from the market,
during the stabilization period.
 The shares bought from the market by the SA, if
any during the stabilization period, shall be
credited to the GSO Demat Account.
 The shares bought from the market and lying in
the GSO Demat Account shall be returned to the
promoters immediately. In any case not later than
2 working days after the close of the stabilization
period.
 On expiry of the stabilization period, in case the SA
does not buy shares to the extent of shares over-
allotted by the company from the market, the
issuer company shall allot shares to the extent of
the shortfall in dematerialized form to the GSO
Demat Account, within five days of the closure of
the stabilization period
 These shares shall be returned to the
promoters by the SA in lieu of the
shares borrowed from them and the
GSO Demat Account shall be closed
thereafter.
 How it works: the example
 A company intends to sell 1 million shares of their
stock in a public offering through an investment
banking firm (or group of firms which are known as
the syndicate) whom the company has chosen to be
the offering's underwriter(s)
 When a public offering trades below its offering
price, the offering is said to have "broke issue" or
"broke syndicate bid".
 This creates the perception of an unstable or
undesirable offering, which can lead to further
selling and hesitant buying of the shares.
 To manage this possible situation, the underwriter
initially oversells ("shorts") to their clients the
offering by an additional 15% of the offering size.
 the underwriter would sell 1.15 million shares
of stock to their clients.
 Now when the offering is priced and those 1.15
million shares are "effective" (become eligible
for public trading), the underwriter is able to
support and stabilize the offering price bid
(which is also known as the "syndicate bid") by
buying back the extra 15% of shares (150,000
shares in this example) at the offering price.
 They are able to do this without having to
assume the market risk of being long this extra
15% of shares in their own account, as they
are simply "covering" (closing out) their 15%
oversell short.
The circumstance of utilizing the
"GreenShoe" is as follows
 If the offering is successful and is in strong
demand such that the price of the stock
immediately goes up and stays above the
offering price, then the underwriter is left in
the circumstance of having oversold the
offering by 15% and is now technically
short those shares.
 If they were to go into the open market to
buy back that 15% of shares, the company
would be buying back those shares at a
higher price than it sold them at, and would
incur a loss on the transaction.
 the over-allotment (Green Shoe)
option comes into play:
 the company grants the underwriters the option to
purchase from the company up to 15% of additional
shares than the original offering size at the offering
price.
 Now, if the underwriters were able to buy back all of
its oversold shares at the offering price in support of
the deal, they would not need to exercise any of the
Green Shoe.
 But if they were only able to buy back some of the
shares before the stock went higher, then they would
exercise a partial Green Shoe for the rest of the
shares.
 And, if they were not able to buy back any of the
oversold 15% of shares at the offering price
("syndicate bid") because the stock immediately went
and stayed up, then they would be able to completely
cover their 15% short position by exercising the full
Green Shoe.
The green shoe buoy for public issues

April 02, 2004 (Business Standard)

 S Ramachandra lost heavily in IBP's

divestment issue. Allotted 300 shares at Rs
620, Ramachandra decided to cut his losses
as price of the scrip started to plummet.
 He sold his shares at Rs 565, making a loss
of about nine per cent. His elder son
reacted much slower, and sold his 200
shares at a price of Rs 529, ending up with
a loss of over 14 per cent against the
allotment price.
 He had little option but to sell the shares since
he had availed of a bank loan in order to
subscribe to the issue. Banks today lending
against shares charge an interest of about 10-
12 per cent.
 Sonia Singh, another retail investor also lost
out in the recent government's divestment
programme when she invested in 500 shares
of CMC at an offer price of Rs 485 per share.
 The price of this scrip is today trading well
below the issue price at Rs 474, though it had
been listed higher and was ruling at about Rs
494 in mid-March. While Singh continues to
hold on to her investment, she feels let down.
 For the first time in the Indian stock market,
an issuer has decided to protect investor
interest.
 ICICI Bank is the first entity to offer "comfort
to investors since the Securities and Exchange
Board of India (Sebi) regulations have allowed
for the greenshoe option," said the bank's
deputy managing director Kalpana Morparia.
 ICICI Bank's Rs 3,050 crore (Rs 30.50 billion)
public issue which opened on Friday in a price
band of Rs 255-295, is seen to be aggressively
priced -- when one considers the current share
of Rs 295.9 hovering near the book-building
price band.
 However, the management has decided to
be more proactive in the interest of
investors by offering the greenshoe option
of Rs 450 crore (Rs 4.50 billion) in ICICI
Bank's public issue, which will be used to
stabilise the share price if warranted.
 "If the Sensex falls the price of the scrip
will equally fall. The greenshoe option thus
acts as a safety net for investors and is a
standard global practice," said Morparia.
 Given the size of the issue, price volatility in
ICICI Bank scrip is expected.
 DSP Merrill Lynch Ltd will act as the
stabilising agent to buy the bank's shares
whenever the price falls below the issue level
for a period of one month post-allotment or
till the shares up to the value of Rs 450 crore
under the greenshoe option are exhausted.
 Greenshoe is a provision that enables the
underwriting syndicate to purchase additional
shares at the original price, which will be
used by them in the event of the market
price falling below the allotment price.
 So how does the mechanism operate in the
interest of investors?
 The Life Insurance Corporation of India,
currently holding 7.98 per cent stake in the
private sector bank, will lend shares worth Rs
450 crore to DSP Merrill Lynch.
 The funds will be kept in an escrow account to
be used by the stabilising agent for buying
shares in the secondary market.
 This secondary market intervention will continue
for a period of one month after listing or
whenever the amount of Rs 450 crore is
exhausted, said DSP Merrill Lynch head of
corporate finance Sanjay Sharma.
So where does that leave retail investors?

 The green shoe "safety net" is likely to give

"comfort" to retail investors and encourage their
response as there is an assurance that the offer
price will be maintained for a period of one
month.
 Globally investment banks win business not only
on the strength of the banking team or track
record, but also on their willingness to commit
the firm's capital in the aftermath of the issue.
 Their role then is to provide support by buying
unwanted shares. Hence the key behind
effective underwriting is to ensure heavy
demand among those investors who failed to get
allotment.
 Reverse Greenshoe

 A Reverse Greenshoe is a special provision in an

IPO prospectus, which allows underwriters to sell
shares back to the issuer.
 If a 'regular' greenshoe option is, in fact, a
call option written by the issuer for the
underwriters, a reverse green shoe is a put option.
 Reverse greenshoe has exactly the same effect on
the share price as a traditional option but is
structured differently.
 It is used to support the share price in the event
that the share price falls in the post-IPO
aftermarket.
 In this case, the underwriter buys shares in the
open market and then sells them back to the
issuer, stabilizing the share price.
Anil has shot three birds
in a single shot,
killed the primary market,
killed the secondary market
and
sucked liquidity out of the system,
which the RBI Governor is not able
to do.
Any Question…

Thank you