Editor’s note: This is general educational information about how Indian public issues are regulated. It is not investment advice, it does not describe any particular company, security or offering, and it draws on the official sources listed at the end.
Analysis: what the rulebook says about the difference
Read side by side, the two chapters describe the same transaction resting on different evidence. For an initial public offer, SEBI substitutes accounting history for a market price: three years of net tangible assets, operating profit and net worth, tested before anyone can bid. For a further public offer it substitutes the market price for the accounting history, and spends its rules on conduct, on the use of proceeds and on the mechanics of pricing. The regulatory question changes from whether this business is substantial enough to be sold to the public into whether this issuer has behaved and whether the money has a defined destination.
The price band rules are where the practical difference bites. A band capped at one hundred and twenty per cent of the floor and required to be at least one hundred and five per cent of it is a narrow instrument, and for a listed issuer the floor is being set with an observable market price sitting next to it. That is why the announcement requirement in regulation 127, two working days ahead of bidding with financial ratios at both ends of the band, does more work in a further public offer than in a debut: the reader can compare the ratios implied by the band against the ratios implied by the last traded price, which is a comparison no initial public offer allows.
The minimum promoters’ contribution is the provision that most often decides the shape of an offer. Because it is computed on post-issue expanded capital including conversions and vested options, the arithmetic sets a floor under how much promoters must put in to keep an offer legal, and it is money that goes into escrow before bidding rather than after. A reader working through a further public offer document would look first at the objects of the issue against the caps in regulation 104, then at the promoters’ contribution and where it is coming from, then at the allocation route being used, since the ten per cent retail ceiling under the book building undertaking is a very different offer from the ordinary retail allocation. None of that requires a view on the price. It is what the documents are required to say.
What the documents say
A company whose shares already trade on an Indian exchange can sell new shares to the public and file a prospectus to do it, without any of that being an initial public offer. The Securities and Exchange Board of India keeps the two events in separate chapters of the same rulebook. A further public offer, the formal name for what the market calls an FPO, is defined in the ICDR Regulations as an offer of specified securities by a listed issuer to the public for subscription, including an offer for sale by existing holders. The definition turns on one word: listed. Everything that follows in the regulations flows from the fact that a price for the shares already exists.
Different gates at the entrance
The eligibility test for a first-time issuer is financial. Regulation 6 requires net tangible assets of at least three crore rupees in each of the preceding three full years of twelve months each, with no more than fifty per cent of those assets held in monetary form unless the excess is committed to the business, an average operating profit of at least fifteen crore rupees over the preceding three years with an operating profit in each of them, and a net worth of at least one crore rupees in each of those years, all calculated on a restated and consolidated basis. A company that fails those tests can still go public, but only through the book building route and only by undertaking to allot at least seventy five per cent of the net offer to qualified institutional buyers, refunding everything if it cannot.
Regulation 103 asks a listed issuer almost none of that. The eligibility condition for a further public offer is that the issuer has not changed its name in the one year immediately preceding the filing of the offer document, and if it has, that at least fifty per cent of the revenue for the preceding full year came from the activity indicated by the new name. Fail that, and the same seventy five per cent institutional allotment undertaking applies. There is no profit test and no net worth test, because the company has been filing quarterly results and its shares have been carrying a price the whole time.
That continuous flow of disclosure is itself a regulatory obligation: under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, a listed entity must submit its quarterly financial results to the stock exchange within forty five days of the end of each quarter, approved by its board of directors. A reader who wants to check the record a further public offer is trading on, rather than take the offer document’s word for it, would still be well served by SEBI’s own investor guidance to examine a company’s cash flow statement, income statement and balance sheet for at least the past two years before deciding anything.
What the regulations screen for instead is conduct. Regulation 102 bars a further public offer where the issuer, its promoters, promoter group, directors or selling shareholders are debarred from the capital market by the Board, where a promoter or director is a promoter or director of another debarred company, where any of them is a wilful defaulter or a fraudulent borrower, or where a promoter or director is a fugitive economic offender under the Fugitive Economic Offenders Act, 2018.
Where the money is allowed to go
Regulation 104 puts limits on the purpose of the raise that apply whatever the issuer’s history. Firm arrangements through verifiable means must cover seventy five per cent of the stated means of finance for any specific project funded from the proceeds, excluding the money being raised and identifiable internal accruals, and for this purpose a project means capital expenditure only. The amount earmarked for general corporate purposes cannot exceed twenty five per cent of the amount raised. General corporate purposes taken together with objects where the issuer has not identified an acquisition or investment target cannot exceed thirty five per cent, and the unidentified acquisition component on its own cannot exceed twenty five per cent, unless the target is named and specifically disclosed in the offer documents.
Promoters are not spectators in a further public offer. Regulation 113 requires them to contribute either twenty per cent of the proposed issue size or twenty per cent of the post-issue capital, computed on the post-issue expanded capital, assuming full conversion of convertible securities and exercise of all vested employee stock options. The contribution must be in place at least one day before the issue opens and sits in an escrow account with a scheduled commercial bank until the proceeds are released. Where the minimum contribution exceeds one hundred crore rupees and the offer is of partly paid shares, at least one hundred crore rupees must be brought in before the issue opens.
Pricing against a price that already exists
The pricing machinery is common to both kinds of public issue and is set out in regulations 126 and 127. The issuer fixes the price in consultation with the lead managers or through the book building process. In a book built issue the red herring prospectus carries a floor price or a price band, and the price is settled before the prospectus is filed with the Registrar of Companies, which must contain only one price. The cap of the band cannot exceed one hundred and twenty per cent of the floor price and cannot be less than one hundred and five per cent of it, so the band has both a maximum and a minimum width. Neither the floor nor the final price may fall below the face value of the security. The floor price or band must be announced at least two working days before bidding opens, in the same newspapers as the public announcement, with the relevant financial ratios computed at both ends of the band.
Allocation follows the route. Where a listed issuer relies on the book building undertaking in regulation 103(2), not more than ten per cent of the net offer goes to retail individual investors, not more than fifteen per cent to non-institutional investors and not less than seventy five per cent to qualified institutional buyers, five per cent of that reserved for mutual funds. Up to sixty per cent of the institutional portion can be allocated to anchor investors. The non-institutional category itself is split, one third for applications above two lakh rupees and up to ten lakh rupees, two thirds for applications above ten lakh rupees. Under regulation 141 the issue must receive at least ninety per cent of the offer through the offer document, except in an offer for sale, and if it does not, every rupee of application money goes back within four days of the issue closing.
