Related Story Primary Market Companies Act Amendment Ordinance: A mixed bag of goodies for investors The recently promulgated ordinance which amends certain provisions of the Companies Act, 1956, is of importance to investors. It is necessary for them to be familiar with the changes effected by the ordinance, particularly the ones having a direct bearing on their interests. Buyback of shares: The most awaited change has been in respect of buyback of shares which hitherto was not permitted under the Companies Act. Buyback of shares is reverse of raising capital from the public/members. In a buyback, the company pays a pre-determined price for its own shares which it may acquire either from the market or from its own shareholders. When a company decides to buy back its own shares, there is going to be a reduction in its capital after such a buyback, resulting in value addition for the remaining shareholders. Generally, when a company decides to buy back its own shares from the existing shareholders, it will have to offer a premium over the prevailing market price, otherwise there would be no incentive for shareholders to sell their shares to the company and they may prefer to sell directly in the market instead. Similarly, if a company announces to buy its shares from the stock market, there is every possibility of a rise in the share price, giving a better realisation to shareholders who intend to sell their shares. The amendment permitting companies to buy back shares is a good capital market tool, but it is certainly not a panacea for all ills of the capital market. Investors should realise that not every company will be able to buy back its shares even if it desires to do so. The concerned company should have disposable funds which it is unable to utilise profitably in its operations and should also be able to maintain the debt equity ratio of 2:1 after the buyback. Moreover, the extent of buyback permitted is restricted to 25% of the aggregate of the company's paid-up capital and free reserves. In addition, the company will have to adhere to the SEBI (Buyback of Securities) Regulations,1998. However, even if a company meets all these conditions, the prevailing price of the scrip should be such that it is lucrative enough for the company to utilise its funds for buying its shares. Investors should remember that the shares bought back will have to be cancelled by the company and its cash resources will be depleted. Therefore, only a handful of companies will be able to take advantage of this provision. Sweat equity: Sweat equity refers to shares issued, at a discount or for consideration other than cash, to persons like directors and employees of the company. So far as investors are concerned, there is no direct benefit for them, but issuing of sweat equity would enable a company to retain highly talented personnel by rewarding them with the company's equity. The concept of sweat equity is very popular amongst leading corporations in the western countries. At present, in India, IT companies have taken the lead in issuing sweat equity. Inter-corporate loans and investments: The ordinance has introduced a new provision in Sec. 372A in place of Secs.370 and 372 relating to transactions of inter-corporate loans, investments, guarantees, etc. Investors should be happy to know that the ultimate authority to approve the grant of loans and investments beyond certain limits, which was earlier vested in the central government, has now been given to the shareholders of the company. According to the new provision, a company can grant loans to or make investments in any other corporate body or give guarantee for any other corporate by passing a board resolution, provided the total amount involved in all these transactions does not exceed the following: 60% of the total of the company's paid-up capital and free reserves; or 100% of the company's free reserves, whichever is higher. Loans/investments/guarantees exceeding these limits would have to be authorised by a special resolution passed by members in a general meeting. In other words, if the board of directors of any public or private company which is a subsidiary of a public company intends to provide loans or make investments and wants to give guarantees beyond the stipulated limit of 60%, it has to obtain necessary approval from its own members instead of the central government. Hence, investors can now exercise greater control over the board of the company in which they hold shares, provided they are alert and active in asserting their rights. Nomination facility: One of the problems an investor, particularly an individual investor, faced was the lack of nomination facility in respect of shares and debentures. Investors are very well aware that such a nomination facility is available so far as bank accounts and post office accounts are concerned. In respect of shares and debentures, the legal position before the amendment was that, in the event of death of the first- named holder, the shares/debentures would automatically stand transferred to the name/s of the surviving holder/s. However, the problem always arose in the case of death of the sole holder as the company had no power to transfer the shares/debentures in favour of the legal heirs without compliance of the legal process. Such a procedure would normally entail obtaining letters of administration/succession certificate or probate, as the case may be, from a court with competent jurisdiction. It not only costs money but also involves time-consuming cumbersome court procedures. To alleviate the sufferings of investors, the working group on Company Law had recommended that the law should provide for nomination facility for shareholders. Accordingly, the Companies Bill,1997, now pending before parliament, contains such a provision. The government has now given effect to this provision in the ordinance. A new Sec. 109A has been added to the Act. The main features of the new provision are: Every shareholder/debentureholder of a company is entitled to nominate a person on his/her behalf. In case of joint holding of shares/debentures, all the jointholders can nominate a person on their behalf together. Once the nomination is made in the prescribed manner, it will override any other disposition that might have been made in that regard. In case the proposed nominee is a minor, the shareholder/debentureholder making such a nomination is permitted to appoint another person who shall become entitled to shares/debentures of the company in the event of death of the minor. Investor Education and Protection Fund: Another important provision of interest to investors is the insertion of a new section, ie, 205A(5). Before this amendment, all dividends which remained unpaid/unclaimed for a period of three years had to be transferred to the central government's general reserve account. The scope of this provision has been widened and its objective has also been changed. According to the amended provision, now any money remaining unpaid/unclaimed in the dividend account, share application monies account and matured deposits and debentures account for a period of five years will have to be transferred by the concerned company to the Investor Education and Protection Fund which has been specifically created for the purpose by the government. It should be noted that even interest accrued on any of the aforesaid amounts will also have to be deposited in the fund after the expiry of the specified period of five years. The proceeds of the fund will be utilised for the promotion of investor awareness and protection of investors' interests. According to the new section, the central government will specify an authority or a committee to administer the fund. One only hopes that the amounts so collected in the Fund will be actually utilised for the purposes for which they are intended in an efficient and accountable manner. The government should ensure that the fund's money is not misused or siphoned off by vested interests, otherwise the very purpose of creating a special fund will be defeated. The writer is a member, central council, Institute of Company Secretaries of India. The views expressed by the author are his own and not those of the ICSI. Top Primary Market On-line issues NSE's proposed screen-based automated trading system for new issues will save cost and time for issuers and applicants The Securities markets in India have witnessed a series of reforms in recent years. One significant milestone was the advent of the National Stock Exchange (NSE) in 1994. It has successfully instituted the automated screen-based trading system, adopting the principles of an order-driven market. NSE is now proposing to provide a facility for conducting primary issues for various types of public offers such as initial public offers (IPOs), subsequent issues by companies, private placements, book-building processes, perpetual offerings of securities, etc. Present limitations The prevalent procedure followed for public issues in India suffers from a number of limitations. The time gap between the date on which the final pricing of the issue is done and the issue open date is about 30 days. Considering the dynamic market conditions, this pricing may be unrealistic. Also, the above feature requires the issuer to determine the market conditions that will be prevalent after 30 days. This involves a lot of uncertainty. In many cases, the project suffers due to non-availability of funds at the time of issue. Further, when a large amount is to be raised from the public, corporates try to raise the whole of the amount in one go so as to by-pass the long procedure involved for public issues. This leads to unrealistic pricing and the subsequent withdrawal of the issue. The banking sector in India is an integral part of the IPO process. The infrastructure constraints in this sector make it difficult to expedite the IPO process. Banks act as collection centres for collecting application forms and money. It takes a long time for information on the status of an issue to reach the issuer. Thus, it becomes very difficult to ascertain the correct status of the issue on a real-time basis, leave alone on daily basis. The problem is compounded further because the application forms need to be collected from each collecting bank and forwarded to the issuer/registrar. The entire exercise involves massive effort and time. Application forms and cheques need to be attached before the final allotments are made. This involves lot of paper work, to be handled by the banks as well as registrars. Since cheques are enclosed at the time of application, the problem of refunds in case the application remains unallotted arises. Funds are released to the issuer only after the approval for listing is received from all stock exchanges where the scrips are planned to be listed. These approvals are always delayed and this results in a delay in trading. The cost for an issue is very large. This is because, under the present practice, application forms are to be issued to a large number of retail investors. Further, costs are compounded as all these applications have to be collected and processed by the banks and the registrar to the issue. Scope of the IPO system Considering the lacunae in the primary issue market for all types of securities, NSE has worked out an unique facility for achieving a quantum improvement in the process of primary issues. This facility can be used for all types of primary issues which are designed to meet the specific requirements of the issuer. It can be used for issues made through the book-building process and also for the traditional issues which are made at pre-determined fixed prices. The system can also be used for issues which have various combinations or components of book-building and fixed price issues. Alternatively, the system can also be used for issuance of securities on a continuous basis or what is known as perpetual IPO. The proposed system provides flexibility for making issues of any security, whether it is an equity instrument or a debt instrument, or any other hybrid instrument. The main objectives of handling primary issues through the screen-based automated trading system are: n To provide facility for on-line issue of securities to the issuers n To provide an efficient and retail distribution network n To reduce the cost of issue of securities The advantages of on-line issues can be broadly classified into cost advantages and non-cost advantages. Cost advantages The table gives a cost comparison between the present and proposed systems. The cost is much less if the proposed system is followed. The comparison focuses on those costs which will be reduced. Other expenses like printing of certificates, stamp duty, listing fees, press conferences, etc. are not considered here, as these will have to be incurred under both the systems. Non-cost advantages Early listing of securities: Under the proposed system, securities will be listed much before the closure of subscription. Hence, investors will be able to liquidate their funds in a shorter span of time, when compared to the current procedure. Early access to funds for the issuer: The proposed system will take a maximum of 33 days from the close of the subscription to complete the allotment and listing procedure. This will enable the issuers to utilise the issue proceeds early, instead of waiting for about 70 days under the existing system. This will also help issuers to reduce the interest burden on the short-term finance (if any) availed by them to part-finance the project/expansion/modernisation. Geographical advantage: The 1,026 members of the exchange are operating from more than 200 cities spread across the country. This will benefit issuers as they will have access to a large network of retail investors. Issue response: The issuer will be able to view the order depth on- line and the demand will be updated on real-time basis. The price/quantity discovery under the book-building process will be faster and accurate. More efficient and transparent: As the proposed system is an on-line electronic system, the chances of any manipulation are minimised. Investors will be able to view orders put in by other investors and they can evaluate their own orders in comparison to other orders.

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    Beneficial to issuers, investors, registrars and trading members 
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Benefits                                              I     R     N     T
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On-line screen-based automated primary issue system                  
Real-time market response for the issue               *           *     *

Operational in 203 cities having no
stock exchange facility                               *           *     

More than 215 cities spread across the country
(Large retail network)                                *           *

More than 1000 trading members                        *           *

Around 850 are members of other stock exchanges       *           *

Transparent and fair means of issue of securities     *           *

Reduction in the cost of issue                        *           *

Reduction in the allotment process time period        *     *

Reduction in the load on the banking sector           *     *     *

The applications to be processed are reduced as
only successful applicants fill the form              *           *

The allotment is made only to the extent orders
have been entered into the trading system             *     *           *

Reduction in paper work                               *     *

Allotments are directly made
in the investor's account                             *     *

Approval to charge brokerage from the
successful applicants                                                   *

Approval to modify or cancel orders                   *     *

Money to be deposited only after intimation
from the exchange and for the quantity allotted       *                 *

The issue may be allotted to other investors if the
original investor does not approach the trading 
member for confirmation of allotment                  *                 *

Early trading in issues                               *            *    *
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Benefits to issuers(I), registrars(R), investors(N) and trading members (T)
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Registrar to the issue :	Allottees: Rs 4.50 Non-allottees: Rs 3.50	Allottees: Rs 4.50* Non-allottees: NA
Stockinvest :	Rs 3.50 per stockinvest instrument	Rs 3.50 per stockinvest instrument
Postage :	Despatch of certificates: Rs 12 (Regd. Post) Despatch of refund order: Rs 12 (Regd. Post)	Despatch of certificates: Rs 12 (Regd. Post) Despatch of refund order: NA
Bankers of the issue :	Application form handling charges: Rs 2.50-3 per application form. Refund order: Rs 3-3.50 per order	Application form handling charges: NA Refund order: NA
Printing and distribution of application forms :	60-75 paise per application form, Rs 15 per copy of prospectus and around 15-20% of the total printing bill will be towards distribution charges	NA as the forms will be printed by software provided to each TM (trading member) only after the allocation process and the client has paid the application money to the TM. The issuer need not print many prospectuses as the same will be put up on the web site of the exchange and also on its Bulletin Board Service (BBS). Any TM who wants to have a copy of the prospectus can pick one through this service.
Printing and despatch of refund orders :	Rs 1-1.25 for printing of refund orders.	NA because refund orders are not printed by the issuer as investors will pay the funds only after the basis of allocation is finalised by the issuer.
Lead managers to the issue :	Fee charges of merchant bankers is 0.25-0.50% of the total amount collected by the issue.	Fee charges of merchant bankers is 0.25-0.50% of the total amount collected by the issue.
Underwriters to the issue (optional) :	1-1.5% of the issue size.	1-1.5% of the issue size
Brokers to the issue :	1.5% of the issue size	1.5% of the issue size.
Advertisement agencies :	Statutory advertisement: 10 days before the issue opens, issue open date, issue close date, finalisation of basis of allotment and despatch of certificates, refund orders, listing date, etc.	Statutory advertisement: 10 days before the issue opens, issue open date, issue close date, finalisation of basis of allotment and despatch of certificates, refund orders, listing date, etc.
This will be reduced further as the registrat to the issue will not be doing manual data entry for the forms as the relevant data pertaining to each application form will be downloaded after collecting the same from the TMs.

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