INDIA Law and Practice Contributed by: Lalit Kumar, JSA Advocates and Solicitors
7. Regulation 7.1 Securities Offerings
tion and post issue activities. At pre-issue, due diligence, drafting and the filing of a draft red herring prospectus with SEBI happens through a merchant banker. SEBI provides its comments. Thereafter, during the launch preparations, the following take place: • pre-marketing investor meetings; • filing of updated draft red herring prospectus with SEBI; • filing of red herring prospectus with the Reg - istrar of Companies; • road shows; and • announcement of a price band of the IPO price. At post issue: • the issue opens and closes; • the final IPO price is fixed; • allotment is made; and then • securities are listed on the BSE and NSE. 6.3 Pre-IPO Liquidity Secondary market trading transactions do hap - pen prior to an IPO but they are not prevalent. This is because most exits happen through the IPOs. In fact, instead of secondary sale, a pre- IPO allotment is seen to increase the share - holding of some existing investors or to bring in new investors. Having said that, there could be situations where certain investors or employ - ees would like to exit prior to the IPO. In that case, the founders and company can facilitate this secondary sale, but there is no obligation to do this. Typically, such pre-IPO transfers are not provided for in the shareholders’ agreement but can be facilitated if there is mutual agreement between the parties.
Broadly, the offering of a company’s equity secu - rities in a venture capital transaction entails the following. • Approval of the board of directors of the investee company. Generally, securities are issued by way of private placement, which means issuance of shares to an identified person to the exclusion of the other share - holders of the company (Private Placement). Shares can also be issued on a rights basis on a pro-rata basis to all existing sharehold - ers of a company (Rights Issue). In a venture capital transaction, securities are issued to an identified investor(s) (and not to all the shareholders), so they are issued on a Private Placement basis. • Once the board approves the Private Place - ment, approval by way of special resolution (ie, three quarters) of shareholders is required. It may be noted that no shareholders’ approv - al is required for a Rights Issue. • Issuance of shares on a Private Placement basis requires valuation from a registered valuer. This condition is applicable irrespec - tive of whether it is a domestic investment or a foreign investment. If equity shares are issued, then valuation must be carried out at the time of their issuance. If convertible securities are issued, then the price of the resultant equity shares that will be issued upon conversion of the convertible securities is determined as either: (a) upfront at the time when the offer of convertible securities is made, based on the valuation report of a registered valuer given at the stage of such offer; or (b) at a later time, which shall not be earlier than 30 days from the date when the
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