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August 5, 2013

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With a view to foster the fund raising options for Corporates and Banks and at the same time ensuring transparency and interest of investors, the Capital Market Regulator, Securities Exchange Board of India (SEBI), has notified a new set of Regulations to govern the issuance and listing of Non-Convertible Redeemable Preference Shares(NCRPS), to be called SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 (‘Regulations’) vide Notification No. LAD-NRO/GN/2013-14/11/6063 dated 12.06.2013.

Previously SEBI has issued the following regulations for issue and listing of securities

  1. SEBI (Issue and Listing of Debt Securities) Regulations, 2008 which is applicable to non-convertible debt securities i.e. debentures, bonds and such other securities of a body corporate or any statutory body constituted by virtue of a legislation;

  2. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 which is applicable to equity shares and convertible securities only.

Thus, there were no regulations to govern the issue and listing of Non-Convertible Redeemable Preference Shares (“Preference Shares”) and with these regulations SEBI has tried to fill the gap. Applicability These regulations shall apply to -
  • Public issue of Non-Convertible Redeemable Preference Shares.

  • Listing of non-Convertible redeemable preference shares on a recognized stock exchange which are issued by the public company through public issue or on private placement basis.

  • Issuance and listing of Perpetual Non-Cumulative Preference Shares and Perpetual Debt Instruments by banks on private placement basis in compliance of guidelines issued by Reserve Bank of India(RBI).

Key definitions

“Book Building” means a process undertaken prior to filing of prospectus with the Registrar of Companies by means of circulation of a notice, circular, advertisement, or other document by which the demand for the non-convertible redeemable shares proposed to be issued by an issuer is elicited and the price and quantity of such securities is assessed.

“issuer” means any public company in terms of section 3 of Companies Act, 1956, Public Sector Undertaking or Statutory Corporation which makes or proposes to make an issue of non-convertible redeemable preference shares in accordance with these regulations or which has its securities listed on a recognized stock exchange or which seeks to list its non-convertible redeemable preference shares on a recognized stock exchange.

“Private Placement” means an offer or invitation to subscribe to the non-convertible preference shares in terms of sub-section (3) of section 67 of Companies Act, 1956.

“Public Issue” means an offer or invitation by an issuer to public to subscribe to the non-convertible redeemable preference shares which is not in the nature of private placement.

“Offer Document” means prospectus and includes any such document or advertisement whereby subscription to non-convertible redeemable preference shares are invited by the issuer from the public.

What are Non-Convertible Redeemable Preference Shares?

Regulations defines “Non-Convertible Redeemable Preference Shares” means a preference share which is redeemable in accordance with the provisions of the Companies Act, 1956 and does not include a preference share which is convertible into or exchangeable with equity shares of the issuer at a later date, with or without the option of the holder.”

Requirements for Public Issue

The Regulations has listed down the following general conditions for making public issue:

  1. No issuer shall make any public issue of non-convertible redeemable preference shares if as on date of filing of draft offer document or final offer document the issuer or promoter of the issuer has been restrained or debarred or prohibited by the board from accessing the securities market or dealing in securities and such direction or order is in force.

  2. No issuer shall make public issue of non-convertible redeemable preference shares unless the following conditions are satisfied as on date of filing of draft offer document or final offer document -

    • The issuer has to make an application to one or more recognised stock exchanges for listing of such securities and choose one of them as its designated stock exchange which has a nationwide trading terminals.

    • The issuer has to obtain in-principle approval for listing of non-convertible redeemable preference shares on a recognized stock exchange where application for listing has been made.

    • It has obtained a credit rating from at least one credit rating agency registered with SEBI and which should not have a rating of less than “AA-”. Such ratings shall be disclosed in the offer document.

    • The issuer has to enter into an arrangemnt with a depository registered with SEBI for dematerialization of the proposed issue of non- convertible reedeemable preference shares.

    • The minimum tenure of preference shares shall not be less than three years.

  3. The Company shall create Capital Redemption Reserve in accordance with the provisions of the Companies Act, 1956(“Act”).

  4. The issuer shall not issue Preference Shares for providing loan to or acquisition of shares of any person who is part of the same group or who is under the same management, other than to subsidiaries of the issuer.

  5. Appoint one or more merchant bankers registered with SEBI, atleast one of whom shall be a lead merchant banker.

Disclosures in the offer document
  • The offer document shall contain all the material disclosures which are necessary for the subscribers to make an informed investment decision

  • The issuer and the lead merchant banker shall ensure that the offer documents shall contain disclosures as per the Schedule II of the Companies Act, 1956 and Schedule I of these regulations and such other additional disclosures as may be specified by the board form time to time.

Filing of draft offer document

  • The issuer shall not make the public issue of the preference shares unless they file the draft offer document with the designated stock exchange through a lead merchant banker.

  • The draft offer document shall be made public by posting the same on the website of the designated stock exchange for a period of 7 working days from the date of filing the same with such exchange and same shall also be displayed on the website of issuer, merchant bankers and stock exchanges where it is proposed to be listed. for seeking the public comments

  • The draft offer document should clearly specify the name and contact particulars of the compliance officer of the lead merchant banker and the issuer including the postal and email address, telephone and fax numbers.

  • The lead merchant banker shall ensure that all the comments received from the public be addressed before filing the same with Registrar of Companies.

  • Draft and final offer document shall also be forwarded to the SEBI for its records and simultaneously to be filed with designated stock exchange.

  • Prior to filing of offer document with Registrar of Companies the lead merchants banker shall furnish to the SEBI a due diligence certificate as per Schedule II of these regulations.

Mode of disclosure of offer document

The draft and final offer document shall be displayed on websites of Stock exchanges and shall be available for download in pdf/html formats. Where any person makes a request for the hard copy of the offer document the same shall be provided to him by the issuer or the lead merchant banker.

Advertisements for public issues
  • Issuer to make advertisement in one English national daily newspaper and one Hindi national daily newspaper with wide circulation at the place where the registered office of the issuer is situated, on or before the issue opening date and shall contain all the disclosures as per the Schedule I.

  • The advertisement shall be truthful, fair and clear and shall not contain any statement, promise or forecast which is untrue or misleading. Advertisement shall urge the investors to invest only on the basis of information contained in the offer document.

  • Any corporate or product advertisement issued by the issuer during the subscription period shall not make any reference to the issue of non-convertible redeemable preference shares or be used for solicitation.

  • The credit rating shall be prominently displayed in the advertisement.

Abridged prospectus and application forms

It shall be the duty of the issuer and lead merchant banker to ensure that:

  • Every application form issued by the issuer is accompanied by a copy of the abridged prospectus;

  • The abridged prospectus shall not contain matters which are extraneous to the contents of the prospectus;

  • Adequate space shall be provided in the application form to enable the investors to fill in various details like name, address, etc

  • The Regulations, allow issuers to provide the facility for subscription of application in electronic mode.

Price Discovery through Book Building

  • The issuer may determine the price of the non-convertible redeemable preference shares in consultation with lead merchant bankers and the issue may be at fixed price or the price as determined through book building process as may be specified by SEBI.

  • The issuer shall redeem non-convertible redeemable preference shares as per the terms of the offer document.

Minimum Subscription
  • Issuer may decide the amount of minimum subscription which it seeks to raise by public issue of preference shares and disclose the same in the offer document. On non-receipt ofminimum subscription, all application money shall be refunded. In case amount is refunded beyond 8 days from the last day of the offer interest shall be levied which shall be not less than 15% p. a.

  • The issue may also be underwritten by an underwriter registered with the SEBI and in such case adequate disclosures regarding underwriting arrangements shall be made in the offer document.

Key requirements for listing of preference shares

  1. Mandatory Listing

    • The non-convertible redeemable preference shares proposed to be listed are in dematerialised form.

    • The minimum application size for each investor is not less than Rs. 10.00 Lacs for issue of preference shares on private placement basis.

    • In case issuer has intention to seek listing of non convertible redeemable preference shares issued on private placement basis, the issuer shall forward the listing application along with disclosures specified in schedule I to recognized stock exchange within 15 days from the date of allotment of such preference shares accompanied by the latest annual report of the issuer.

  2. Continuous Listing

    • Incase of continuous listing each rating obtained by the issuer shall be reviewed by the credit rating agency once in a year and any revision shall be informed by the issuer to the stock exchange where it is listed and also to the investors in such manner as determined by the stock exchange where it is listed.

    • The issuer and stock exchange shall also disseminate all the information and the compliance reports filed by the issuer to the investors and general public by placing them on their websites.

Issuance and listing of non-equity regulatory capital instruments by banks

  • The provisions of these regulations shall also apply to the issuance and listing of perpetual non-cumulative preference shares and innovative perpetual debt instruments issued by banks. A bank may issue such instrument subject to prior approval and in compliance with guidelines of RBI.

  • The bank shall comply with the terms and conditions as may be specified by the SEBI from time to time and shall make adequate disclosures in the offer document regarding the features of the instrument and relevant risk factors and if such instruments are listed shall comply with the listing agreement.

Powers of SEBI

SEBI has been empowered to -

  • To appoint one or more persons to undertake the inspection of the books of account, records and documents of the issuer or merchant banker for purpose such as:

  • Verify compliance with provisions of Act, Securities Contracts (Regulation) Act, 1956, Depositories Act, 1996, provisions specified in the specified regulations and allied rules if any.

  • To inquire into affairs of the issuer in the interest of investor protection, whether any direction issued by the board has been complied with, into the complaints received from the investors, other market participants or any other persons on any matter of issue and transfer of securities as governed under these regulations.

  • Issue directions like directing issuer to refund the application monies, prohibiting issuer from dealing in securities, retraining issuer or its promoter or directors from making further issue of securities, direction to sell or divest securities, directing the issuer or the depository not to give effect transfer or directing further freeze of transfer of securities.

  • To issue clarifications or grant relaxations from application requirement.

In case of any default schedule I of the regulations provides following penal provisions -

Default in payment of dividend: in case there is default in payment of dividend on due dates the additional dividend of atleast 2% p.a. over the dividend rate will be payable by the company for the defaulting period and

Delay in Listing: In case there is delay in listing of preference shares beyond 20 days from the date of deemed allotment the company will pay penal amount of atleast 1% p. a. over the dividend rate from the expiry of 30 days from the deemed date of allotment till the listing of such preference shares.

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