Preparing a Company for an IPO and Governance Requirements – Corporate Funding and Listings in Stock Exchanges Important Questions

Question 1.
Write a note on: “Documents to be checked in due diligence pro-cess.” [(Dec. 2012) (4 Marks)]
Answer:
Following are information or documents to be checked during the process of due diligence:

  • Basic Information.
  • Important Business Agreements.
  • Financial Data.
  • Marketing Information.
  • Litigation Aspects.
  • IPR Details.
  • Taxation Aspects.
  • Internal Control System.
  • Human Resource Aspects.
  • Insurance Coverage.
  • Cultural Aspects.
  • Environmental Impact.

Question 2.
Write a note on: “Data room in due diligence.”
Answer:
→ Companies set up specific location where all the documents and the copies of the same are made available for examination and verification. Such specific location can be termed as “Data Room”.

→ Data Room provides all important business documents/information which cover financial, regulatory, IPR, Marketing, Press Report or any important material aspect pertaining to a business transaction.

→ Data Room create the common platform/place where all records of important business information are kept for the review by a potential buyer after signing of Non-Disclosure Agreement (NDA) as it discloses confidential data which is not available for public relating to business process, trade secret, technology information etc.

→ Some principles adhered for copying documents to state clearly the nature of documents which could be copied in the data room for such purpose photocopies and scanning machines are kept. Also, electronic data also monitored for which copies are required to be made.

→ Some provisions are made to mitigate the risks of data destruction/ data stealing for which the restrictive provisions are made for entry, study, noting and exit from the data room including physical checking of persons conducting such study in the data room.

Question 3.
Critically examine and comment on the following: “The concept of data room and its need in due diligence.”
Answer:
Concept of Data Room:
→ Companies set up specific location where all the documents and the copies of the same are made available for examination and verification. Such specific location can be termed as “Data Room”.

→ Data Room provides all important business documents/information which cover financial, regulatory, IPR, Marketing, Press Report or any important material aspect pertaining to a business transaction.

→ Data Room create the common platform /place where all records of important business information are kept for the review by a potential buyer after signing of Non Disclosure Agreement (NDA) as it discloses confidential data which is not available for public relating to business process, trade secret, technology information etc.

Need for Data Room:

  • Removes ambiguity in the minds of buyer about the profitability, growth prospectus and sustainability of business.
  • Give material information for the purpose of SWOT Analysis of the entity.
  • Provide better bargaining to buyer through analysis of the data.
  • Expose the weakness of the seller which is not directly provided to the buyer.
  • Provide data useful for better business valuation for both parties ie. buyers and seller.

Question 4.
Critically examine and comment on the following: “Types of information ‘ that can be provided under a data room.”
Answer:
Following are Types of Information that can be provided under a “Data Room”:

  • Financial Documents such as Annual Reports, Financial Statements filed with regulatory authorities, Cash Flow Statements, documentation with bankers etc.
  • Human Resource Information.
  • Basic corporate documents; such as Memorandum and Articles of Association.
  • Certificate of Incorporation (COI), Shareholders’ agreement, documents on General and Board Meetings, insurance contracts etc.
  • Equipment and information on operational aspects.
  • Information relating to sales, marketing etc.
  • Compliance related information.
  • Information published in media.
  • IPR details.
  • Information on litigation.

Question 5.
Weak Industries Ltd. is contemplating to sell its business to Expen-sive Enterprises Ltd. (EEL). As a Practising Company Secretary, EEL has engaged you to create a ‘data room’ and take further steps. Explain to the management of EEL:
i. What is data room;
ii. What benefits it will provide and
iii. In what circumstances creation of data room will be required?
Answer:
i. Data Room:
Companies set up specific location where all the documents and the copies of the same are made available for examination and verification. Such specific location can be termed as “Data Room”.

Data Room provides all important business documents/information which cover financial, regulatory, IPR, Marketing, Press Report or any important material aspect pertaining to a business transaction.

Data Room create the common platform /place where all records of important business information are kept for the review by a potential buyer after signing of Non-Disclosure Agreement (NDA) as it discloses confidential data which is not available for public relating to business process, trade secret, technology information etc.

ii. Benefits of Data Room:

  • Removes ambiguity in the minds of buyer about the profitability, growth prospectus and sustainability of business.
  • Give material information for the purpose of SWOT Analysis of the entity.
  • Provide better bargaining to buyer through analysis of the data.
  • Expose the weakness of the seller which is not directly provided to the buyer.
  • Provide data useful for better business valuation for both parties i.e. buyers and seller.

iii. Circumstances for creation of Data Room:

  • Mergers, Amalgamations and Acquisitions.
  • Strategic Alliances.
  • Partnering agreement.
  • Business Coalitions.
  • Outsourcing agreement.
  • Technology or Product Licensing.
  • Joint Ventures through technical or financial collaboration.
  • Venture Capital investment.
  • Public Issue.

Question 6.
Write a note on: “Provisions relating to Communication or procurement of unpublished price sensitive information as per SEBI (Prohibition of Insider Trading) Regulations, 2015.”
Answer:
Regulation 3 of SEBI (Prohibition of Insider Trading) Regulations, 2015 provides for prohibition on communication or procurement of unpublished price sensitive information with some exceptions.

Important points as follows:
Prohibition [Reg. 3(1) & 3(2)]: No Person shall:

  • communicate, provide, or allow access to any unpublished price sensitive information or
  • procure from or cause the communication by any insider of

unpublished price sensitive information, relating to a company or securities listed or proposed to be listed or proposed to be listed except in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.

Exception to Restrictions: However, above provisions shall not applicable to any unpublished price sensitive information which may be communicated, provided, allowed access to or procured, in connection with a transaction that would:

  • entail an obligation to make an open offer under the takeover regulation’s or
  • not attract the obligation to make an open offer under the takeover regulations.
  • board of Directors of the company is of informed opinion that the proposed transaction is in the best interests of the company and
  • the information that constitute unpublished price sensitive information is disseminated to be made generally available at least two trading days prior to the proposed transaction being effected in such form as the board of directors may determine.

Question 7.
Soha Ltd. wants to go for initial public offer. Ms. Pia, the Company Secretary of the Company, has to advise to the management of the company about the conditions for making initial public offer. What should be Ms. Pia’s advice?
Answer:
To
The Board of Directors
Soha Ltd.
Note: Conditions for making Initial Public Offer.

A company may make an initial public offer provided it fulfils all the following five conditions laid down under Regulation 26(1) and (2) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009:

1. It should have net tangible assets of at least three crore rupees in each of the preceding three full years (of twelve months each), of which not more than fifty per cent are held in monetary assets. However, if more than fifty per cent of the net tangible assets are held in monetary assets, the issuer should have made firm commitments to utilise such excess monetary assets in its business or project:

Provided further that the limit of fifty per cent on monetary assets shall not be applicable in case the public offer is made entirely through an offer for sale.

2. It should have a minimum average pre-tax operating profit of rupees fifteen crore, calculated on a restated and consolidated basis, during the three most profitable years out of the immediately preceding five years.

3. It should have a net worth of at least one crore rupees in each of the preceding three full years (of twelve months each);

4. The aggregate of the proposed issue and all previous issues made in the same financial year in terms of issue size does not exceed five times its pre-issue net worth as per the audited balance sheet of the preceding financial year;

5. If it has changed its name within the last one year, at least fifty per cent of the revenue for the preceding one full year has been earned by it from the activity indicated by the new name.

Also, an issuer not satisfying any of the above conditions stipulated in sub-regulation (1) may make an initial public offer if the issue is made through the book-building process and the issuer undertakes to allot, at least seventy five per cent of the net offer to public, to qualified institutional buyers and to refund full subscription money if it fails to make the said minimum allotment to qualified institutional buyers.

Ms. Pia
Company Secretary
Soha Ltd.

Question 8.
“Information dissemination through website assumes significance particularly in respect of listed companies.” Discuss and explain the statutory disclosures on company’s website.
Answer:
Information dissemination through website assumes significance particularly in respect of listed companies:

As per regulation 46 of the SEBI Listing Regulations, 2015, every website of a listed Company must contain statutory disclosures in terms of the SEBI Listing Regulations under a separate section on its website which are enumerated as follows:
(a) details of its business;

(b) terms and conditions of appointment of independent directors;

(c) composition of various committees of board of directors;

(d) code of conduct of board of directors and senior management personnel;

(e) details of establishment of vigil mechanism/Whistle Blower policy;

(f) criteria of making payments to non-executive directors, if the same has not been disclosed in annual report;

(g) policy on dealing with related party transactions;

(h) policy for determining ‘material’ subsidiaries;

(i) details of familiarization programmes imparted to independent directors including the following details:

  • number of programmes attended by independent directors (dining the year and on a cumulative basis till date),
  • number of hours spent by independent directors in such programmes (during the year and on cumulative basis till date), and
  • other relevant details.

(j) the email address for grievance redressal and other relevant details;

(k) contact information of the designated officials of the listed entity who are responsible for assisting and handling investor grievances;

(l) financial information including:

  • notice of meeting of the board of directors where financial results shall be discussed;
  • financial results, on conclusion of the meeting of the board of directors where the financial results were approved;
  • complete copy of the annual report including balance sheet, profit and loss account, directors report, corporate governance report etc.;

(m) shareholding pattern;

(n) details of agreements entered into with the media companies and/or their associates, etc.;

(o) schedule of analyst or institutional investor meet and presentations made by the listed entity to analysts or institutional investors simultaneously with submission to stock exchange;

(p) new name and the old name of the listed entity for a continuous period of one year, from the date of the last name change;

(q) items in sub-regulation (1) of regulation 47;

Question 9.
IPO being “once a life lime event, mis-calculation of any nature can create a hurdle for company’s future growth.” Keeping this in mind list out the important aspects that key Managerial Personnel shall consider while prepare for an IPO.
Answer:
Company Secretary being Key Managerial Person under the Companies Act, 2013 is important personnel as far as compliance of various legislation is concerned. Company Secretary assumes a significant importance when he/she is required to be a part of the Company which proposes to attain ‘listed’ status. Besides complying with provisions of the Companies Act, a Company Secretary of an IPO bound Company is required to be aware and well versed with at least fundamental requirements as far as preparation for IPO as well as continuation of being listed is concerned.

The Key Managerial Personnel shall consider the following important aspects while preparing for an IPO issue:

  • Due Diligence
  • Setting up of Relevant Teams.
  • Management Structure.
  • Data Room.
  • Financial Information & Reporting Process.
  • Other Regulatory Compliances.
  • Industry data.
  • Management Discussion & Analysis.
  • Publicity & Advertising.
  • Road shows.
  • Material Contracts & Documents

Question 10.
Explain the Regulatory Framework for an IPO and scope of Due Diligence. [(Dec. 2019) (5 Marks)]
Answer:
Regulatory framework for an IPO and scope of due diligence:
Regulatory Framework for an IPO:

  • Companies Act, 2013 and Rules made thereunder.
  • SCRA, 1956.
  • SCRR, 1957 specially Rule 19(2)(h) which deals with minimum number of shares to be offered to the public in an IPO.
  • SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
  • Circulars issued by SEBI from time to time governing IPO process such as timeframe within which an IPO should be completed, modes of making payments in an IPO, roles and responsibilities of various intermediaries involved in an IPO etc.

Scope of due diligence in this context:
→ In terms of the ICDR Regulations, the Merchant Bankers are re-quired to submit due diligence certificate to SEBI and the formats for such certificate have been provided in the ICDR Regulations.

→ SEBI Regulations requires a Merchant Banker to:

  • exercise due diligence,
  • ensure proper care and exercise independent professional judgment.

→ The SEBI Regulations requires Merchant Banker to maintain records and documents pertaining to due diligence exercised in pre-issue and post-issue matters. The ICDR Regulations require that Offer Documents should contain all material disclosures, which are true and adequate to enable prospective investors to take an informed decision. Furthermore, the SEBI ICDR Regulations, 2018 require due diligence certificate to be issued by the Merchant Banker.

→ The Merchant Bankers are required to demonstrate that all reasonable steps were taken to exercise due diligence and ensure adequate disclosures were made to potential investors, they

Question 11.
“If going public is a complex process, being public is all the more complex as it assumes tremendous responsibilities on the managements and promoters of the company once listed”- Comment on the statement and the responsibilities it imposes on the management in terms of proce-dures and compliances.
Answer:
If going public is a complex process, being public is all the more com-plex as it assumes tremendous responsibilities on the managements and promoters of the Company once listed. The reason being, that the new set of shareholders would have acquired the ownership in the Company and the management has more responsibility towards outside shareholders as well as Regulators. Further, being publicly listed ownership of shareholding can change any time without the knowledge of the promoters & Company. The responsibility of the management of Listed Company towards the shareholders enhance manifold and managements shall continue to strive for maintaining good governance standards, implementing ethical business practices and continue to comply with applicable Regulations in a sustained manner.

Some of the important functions in the organization after listing can be enumerated as follows:
Board Procedure: On listing, Companies will have additional responsibility of complying with various disclosure requirements of the stock exchanges besides those required under Companies Act, 2013. The stock exchanges will have a standard list of compliances to be followed by Listed Companies at pre-determined schedules like:

Notice of every proposed Board meeting which is likely to consider any decision which is considered as “price sensitive”, must be given in advance as prescribed. The outcome of the Board Meeting must be intimated to the stock exchanges within 30 minutes of conclusion of the Board Meeting.

Every listed Company must have a qualified Company Secretary holding a certificate from ICSI who besides being Key Managerial Personnel as defined under Companies Act is also a designated ‘Compliance Officer’.

The Board process should be such streamlined that the calendar of proposed dates of Board Meeting in the financial year is required to be prepared in advance and intimated.

The exchanges have developed robust disclosure systems wherein even the time of dissemination of information is mentioned on the stock exchanges.

Compliance Requirements: The listed Companies are required to comply with continuous listing norms and have to adhere to periodic disclosures to the stock exchanges. The listed Companies basically will have to comply (besides provisions of Companies Act, 2013) with applicable requirements of :

  • SEBI (Listing Obligation & Disclosure Requirements) Regulations, 2015 (Listing Regulations).
  • SEBI (SAST) Regulations, 2011 (Takeover Regulations).
  • SEBI (Prohibition of Insider Trading) Regulations, 2015 (Insider Trading Regulations).

Question 12.
What are the advantages of going public and attaining listing?
Answer:
Following are advantages of going public and attaining listing are as follows:
Raising Capital: Companies require funds to finance its needs for expansion/growth, acquisitions & present business operations.

Currency for Mergers & Acquisitions: The established publicly traded Companies can use the equity shares as currency to acquire other business. The equity shares of listed company can be utilized to swap & do a stock deal as a consideration.

Leveraging: Equity shares listed on Stock Exchanges command a price and liquidity which leads to enhanced market capitalization.

Enhancing Brand Image: Listing a Company definitely enhances Company’s image & its profile. Listed stocks get attention of large pool of investors and other stakeholders/market participants which is helpful in creating and enhancing brand awareness.

Talent Acquisition & Management: Listed Companies can offer attractive Employee Stock Option (ESOP) or Employee Share Purchase Schemes (ESPS) to attract required talent pool and also to retain them. These initiatives encourage commitment and long term motivation amongst the talent pool.

Question 13.
Write Short Note on: “Road Shows”.
Answer:

  • Management needs to prepare for proposed Road shows and Investor Meets in advance.
  • Adequate representation of Promoters & Key Managerial Persons (KMPs) should be available for various meets, Road shows etc.

“Road Shows” generally comprises of:

  • ‘Press Conference’: Aims at giving information to the press for publication in their papers/newspapers for dissemination of information to the investors.
  • ‘Brokers, Investors/Analysts Meet’: Aims at giving detailed information to the market participants about the Company enabling them to understand the details and take it further to the ultimate investors.

Question 14.
Prepare list of policies disclosures are required on Website of Listed Companies?
Answer:
Policies required for disclosure on Website of Listed Companies:

  • Code of conduct for Board of Directors & Senior Management.
  • Code of conduct in terms of Insider Trading Regulations.
  • Code of practices & procedures for fair disclosures of unpublished price sensitive information.
  • Appointment letters to Independent Directors.
  • Familiarization programme for Independent Directors.
  • Whistle Blower Policy.
  • Policy of Related Party Transaction.
  • Material subsidiary policy.
  • Risk Management Policy.
  • Archival Policy.
  • Policy for disclosure of material information.
  • Dividend Distribution Policy.
  • Policy against sexual harassment

Question 15.
Write Short Note On: “Investor Grievances Redressal Mechanism”.
Answer:

  • Every listed Company must have in place Investor Grievance Redressal Mechanism to address grievances of any shareholders.
  • All listed Companies must register themselves on SEBI Complaints Redressal System (SCORES) platform.
  • Company must have Shareholders Relationship Committee to look after grievances of any nature against the listed Company.
  • Any shareholder (aggrieved party) can upload its complaint against the listed Company on this platform and listed Company is under obligation to address/redress the same within time bound programme prescribed by Securities and Exchange Board of India.

Corporate Funding and Listings in Stock Exchanges Notes