Tag: Corporate Ethics

Section 110 of the Act mandates the transacting of certain business items by means of postal ballot. Postal Ballot means casting of vote by a shareholder by postal or electronic mode instead of voting personally by being present for transacting business in general meeting of the company.

As per Companies Act 2013, the provisions of postal ballot are applicable to all companies except the following companies which are not required to transact any business through postal ballot:

1. One Person Company
2. Other Companies having members up to 200.

If a resolution is assented to by the requisite majority of the shareholders by means of postal ballot, it shall be deemed to have been duly passed at a general meeting convened in that behalf.

For all equity listed companies, it is mandatory for companies to also provide an option of remote e-voting to its shareholders along with postal ballot. However, the same is not mandatory for unlisted companies.

Applicability

The system of voting is applicable for all public that consists of more than 200 members and private limited companies. One Person Company (OPC) or any other entity with membership strength of 200 or less cannot make use of this system.

Transaction of Business through Postal Ballot

Rule 22 of the Companies (Management and Administration) Rules, 2014 specifies the following items of business to be transacted by means of voting through postal ballot:

• Alteration of Object clause of Memorandum.
• Conversion of private company into a public company and vice versa.
• Change of location of the registered office outside the limits of any city, town or village.
• Change in Objects owing to which a company has gathered funds from the public through a prospectus, and the existence of any unutilized amount out of the money so raised.
• Issue of shares through differential voting rights.
• Variation of rights of shareholders, debenture holders or other security holders.
• Buy-back of a company’s shares.
• Sale of the whole or bulk of an undertaking of the company.
• Providing loans, guarantee or security in excess of the specified limit.

Postal Ballot Facilities for Absentee Voters

The Election Commission of India has made efforts to ensure that the electors those who are unable to come and vote in polling booth or absentee voters are facilitated with the process of a postal ballot paper. This facility ensures wider participation in the electoral process.

The absentee voters under clause (c) of section 60 of the Act, are as follows:

• Persons with Disabilities (PwD)
• Senior citizens of more than 80 years
• People who are employed under the essential services such as railways, state transport and aviation etc.

These provisions will include the process of identification of such voters, the manner of outreach, the processes of the collection as well as voting in the designated centres in each constituency.

Application

In case of an absentee voter, the application would be made in the form 12D along with the particulars as specified therein. The application to be duly verified by the nodal officer for the absentee voter, except the senior citizen or person with a disability, which would reach the returning officer within 5 working days from the date of election notification. In such case, the postal ballot paper will be returned to the centre provided for recording of the vote under the rule 27F, subject to any direction that would be issued by the Election Commission in this behalf.

These two categories of a senior citizen voters of more than 80 years of age and PwD electors will be marked in the electoral roll having a choice of voting either as an absentee voter or as a regular voter on the poll day. In the case, any of the electors belonging to these categories intends to vote early, then as per the amended Rule 27C of the Conduct of Election Rules, 1961, the applicant can make an application in a new Form 12D, that would reach the Returning Officer within 5 days from following the date of notification of election. After the receipt of such application, the voter will be issued with a postal ballot paper, which would be deposited in the specified centre after the recording of the vote.

Postal Ballot Paper

As per the election commission, the voting facility through the postal ballot is accessible only to those doing election duties, army personnel, disabled people and senior citizens above 80 years of age. The ballot is sent through the postal service to the employees and military officers who do not have an electronic facility. If the electors do not use it or do not receive it then it returns to the sender’s address.

Resolutions that Cannot be Passed through Postal Ballot

The following resolutions cannot be passed through postal ballot:

• Ordinary Business.
• Businesses where directors or auditors are entitled to be heard at any meeting.

Procedure for Postal Ballot

As we now understand the fundamental aspects of the postal ballot, let us examine its procedures.

Personnel to Scrutinize

The Board shall appoint a scrutinizer who is not being employed by the company, so as to ensure fairness and efficiency in the voting process.

Board Resolution

The company must pass the requisite Board resolution for postal ballot. Also, the Board must plan and fix the recommended date and time schedule for various activities, and finalize the schedule of events.

Issue of Notice

The company is required to send a notice of postal ballot to all the shareholders, along with a draft resolution that describes the reason for the event. The shareholders must respond to the notice conveying their assent or dissent on the postal ballot, within a period of 30 days from the date of dispatch of the notice. The notice should also be published on the website of the company if any.

Notices can be sent through the following means:

• Registered post or speed post
• Any electronic means
• Courier service

Advertising in Newspaper

An advertisement pertaining to the dispatch of the postal ballot should be published in an English and vernacular newspaper. The advertisement must specify the following:

• A statement concerning the transacting of business through postal ballot.
• The date of completion of dispatch of notices.
• The date of commencement of voting through postal ballot.
• The concluding date of voting through postal ballot.
• A statement declaring that postal ballots received after the end of the voting period will be invalid.
• A statement declaring that the members, who have not received postal ballot forms may apply to the company and obtain a duplicate postal ballot.
• The contact details of the concerned person, in case of any grievances with postal ballot voting.

Safe Custody of Postal Ballot

Postal ballot and other relevant papers returned by the shareholders should be safely maintained by the scrutinizer, until the Chairman signs minutes. Scrutinizer should maintain a register to record assent or dissent received along with other details.

Declaration of Result

The result of postal ballot along with the scrutinizer’s report pertaining to the details of the ballot should be deemed to be passed on the date of a general meeting.

Companies Act, 2013, brought significant changes to Corporate Governance practices in India, one of which was the mandatory requirement for certain companies to appoint a Women Director on their board. This move aimed at enhancing diversity in corporate decision-making, promoting gender equality, and ensuring that women play a vital role in the management of large and listed companies.

Appointment of a Women Director:

Under Section 149(1) of the Companies Act, 2013, along with Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014, specific classes of companies are mandated to appoint at least one woman director on their board. The companies required to have a woman director are:

• Listed Companies: Every listed company must have at least one woman director.
• Public Companies: A public company having a paid-up share capital of Rs. 100 crore or more, or a turnover of Rs. 300 crore or more, must appoint at least one woman director.

Securities and Exchange Board of India (SEBI), through its Listing Obligations and Disclosure Requirements (LODR) regulations, also mandates the appointment of a woman director in listed companies, thereby reinforcing this provision.

1. Timeline for Appointment

Newly incorporated companies that fall within the categories mentioned above must appoint a woman director within six months from the date of incorporation. If there is any vacancy in the position of the woman director, it should be filled within three months from the date of such vacancy or by the next board meeting, whichever is later.

Qualifications of a Women Director:

The Companies Act, 2013, does not prescribe any specific qualifications for a woman director. However, the general qualifications required for any director as per the Companies Act apply, which are:

• Eligibility under Section 164: The woman must not be disqualified from being appointed as a director. This includes not being an undischarged insolvent, having no conviction for a crime involving moral turpitude, and being mentally sound.
• Expertise and Experience: Ideally, the woman director should have relevant expertise, skills, or experience in areas that contribute to the company’s growth, such as finance, law, management, or industry-specific knowledge.
• Integrity: The individual must be a person of high integrity and ethical standards to contribute positively to the board’s functioning.

While no specific academic or professional qualifications are mandated for the role of a woman director, companies often prefer individuals with significant experience in governance, leadership roles, or corporate management.

Duties of a Women Director:

The duties of a woman director are largely similar to those of any other director on the company’s board. The Companies Act, 2013, outlines several key responsibilities for directors under Section 166. These duties are aimed at ensuring that directors act in the best interests of the company, its shareholders, and other stakeholders.

1. Fiduciary Duty

A woman director, like any other director, must act in good faith and in the best interest of the company. This involves:

• Acting in Good Faith: The woman director must exercise her powers honestly and sincerely, prioritizing the company’s success and welfare.
• Avoiding Conflicts of Interest: The woman director should avoid situations where her personal interests conflict with the company’s interests. She should not use her position to gain undue advantages for herself or her associates.

2. Duty of Care

The woman director is expected to take reasonable care, skill, and diligence in the execution of her duties. She must ensure that:

• Active Participation: She participates actively in the company’s board meetings and contributes to discussions on key decisions.
• Informed Decisions: She makes informed decisions by staying updated on the company’s financial position, regulatory environment, and market trends.
• Risk Management: She must consider the risks associated with business operations and contribute to implementing appropriate risk mitigation strategies.

3. Compliance with Laws

As a director, a woman director has a duty to ensure that the company complies with all applicable laws, including corporate laws, taxation laws, labor laws, and environmental regulations. Some specific compliance duties:

• Corporate Governance: Ensuring that the company follows the corporate governance norms prescribed under the Companies Act and SEBI’s regulations.
• Financial Reporting: Ensuring that accurate financial statements are prepared and filed with the Registrar of Companies (RoC), along with other necessary documents.
• Statutory Filings: Ensuring timely filing of all necessary reports and disclosures with regulatory authorities, such as SEBI or the Ministry of Corporate Affairs (MCA).

4. Protecting the Interests of Stakeholders

A woman director has a duty to act in the best interests of all stakeholders, including:

• Shareholders: She must ensure that shareholder interests are protected, and the company acts in a transparent and accountable manner.
• Employees: She should also safeguard the interests of employees and ensure that the company follows labor laws and ethical practices.
• Environment and Society: Under the principles of corporate social responsibility (CSR), the woman director may play a key role in steering the company’s initiatives towards environmental sustainability and social welfare.

5. Ensuring Transparency

The woman director is responsible for ensuring that the company’s decision-making processes are transparent. This includes ensuring the disclosure of all material information to shareholders and regulatory authorities. She should actively participate in the approval of company reports, financial statements, and policy disclosures.

6. Code of Conduct

If the company has adopted a specific code of conduct for directors, the woman director must abide by the same. SEBI’s LODR guidelines require companies to have a code of conduct that applies to directors, including the woman director, which sets out ethical standards, conflict-of-interest policies, and responsibilities.

7. Additional Role in Committees

Women directors may also be appointed to various board committees, such as:

• Audit Committee: Oversight of financial reporting and ensuring that financial statements present a true and fair view.

• Nomination and Remuneration Committee: Evaluating the remuneration of executives and key managerial personnel.
• Corporate Social Responsibility Committee: Involved in the planning and execution of CSR activities under Section 135 of the Companies Act.

Prospectus is a vital document that provides potential investors with essential information about a company and its offerings. The accuracy and completeness of the information contained in a prospectus are paramount, as investors rely on this information to make informed decisions. Misstatements in a prospectus can occur due to errors, omissions, or misleading information, and they can have serious legal and financial implications for the company and its promoters.

Types of Misstatements in Prospectus:

1. Factual Misstatements:

These involve incorrect or false information presented in the prospectus. For example, a company might misrepresent its financial performance by inflating revenue figures or underreporting liabilities. Such misstatements can lead investors to believe that the company is more profitable or financially stable than it actually is.

2. Omissions:

This type of misstatement occurs when the prospectus fails to disclose material information that could influence an investor’s decision. For instance, if a company has pending litigation or regulatory investigations but does not mention these in the prospectus, it can mislead investors about the company’s risk profile.

3. Misleading Statements:

These involve statements that, while factually correct, can mislead investors regarding the overall picture of the company. For example, highlighting a recent successful product launch without mentioning significant operational issues or competition can create a distorted view of the company’s future prospects.

4. Unverified Information:

Sometimes, companies may include projections or forecasts in their prospectus that are not backed by credible data. If these projections are overly optimistic or based on flawed assumptions, they can mislead investors regarding the potential for growth.

Legal Consequences of Misstatements:

Misstatements in a prospectus can lead to various legal consequences for the company and its directors, including:

1. Liability Under the Companies Act:

In India, the Companies Act, 2013, imposes strict liabilities on companies and their promoters for misstatements in a prospectus. Section 35 of the Act states that if a prospectus contains a misstatement, any person who authorized the issue of the prospectus, including directors, can be held liable for damages.

2. Civil Liability:

Affected investors may file civil suits against the company and its promoters for losses incurred due to reliance on the misleading information. They can seek to recover damages for financial losses suffered as a result of the misstatement.

3. Criminal Liability:

In more severe cases, misstatements may lead to criminal charges against the company’s directors or promoters. If it is found that the misstatements were made knowingly or with the intention to deceive investors, the responsible parties can face imprisonment or fines as per provisions under the Companies Act.

4. Regulatory Actions:

Regulatory authorities, such as the Securities and Exchange Board of India (SEBI), may take action against companies for violations related to misstatements in a prospectus. This can include penalties, sanctions, and restrictions on future capital-raising activities.

5. Loss of Reputation:

Misstatements can significantly harm a company’s reputation and credibility in the market. This loss of trust can lead to a decline in share prices, affecting existing shareholders and making it challenging for the company to raise funds in the future.

Consequences for Investors:

The consequences of misstatements in a prospectus primarily affect investors who rely on the information provided. Some of the impacts are:

1. Financial Losses:

Investors may incur substantial financial losses if they make investment decisions based on inaccurate or misleading information. If the company’s actual performance fails to meet the expectations set by the prospectus, investors could lose their entire investment.

2. Informed Decision-Making:

Misstatements can undermine the ability of investors to make informed decisions. When critical information is omitted or misrepresented, investors may not be able to assess the risks and rewards associated with the investment adequately.

3. Diminished Investor Confidence:

Repeated incidents of misstatements in prospectuses can lead to a general decline in investor confidence in the market. This erosion of trust can discourage investment in not just the company in question but also in the broader market.

Recourse Available to Affected Parties:

Investors who suffer losses due to misstatements in a prospectus have several options for recourse:

1. Legal Action:

Affected investors can file civil suits against the company and its promoters for damages. They must demonstrate that they relied on the misstatements in the prospectus when making their investment decisions.

2. Regulatory Complaints:

Investors can lodge complaints with regulatory authorities such as SEBI, which may investigate the matter and take action against the company or its promoters.

3. Class Action Suits:

In cases where a significant number of investors are affected, they may band together to file a class action lawsuit against the company. This collective approach can increase the chances of recovery and provide a stronger legal standing.

4. Mediation and Settlement:

In some cases, companies may opt for mediation or settlement discussions to resolve disputes with affected investors, especially if they acknowledge the misstatements.

It means a formal document that a Public Company issues to invite offers from public for subscribing its shares. It includes all the material information related to shares that a Company offers to the public. Furthermore, it usually help the investors to take investment decisions.

The company provides prospectus with capital raising intention. Prospectus helps the investors to make a well-informed decision because of the prospectus all the required information of the securities which are offered to the public for sale.

Whenever the company issues the prospectus, the company must file it with the regulator. The prospectus includes the details of the company’s business, financial statements.

• To notify the public of the issue.
• To put the company on record with regards to the terms of the issue and allotment process.
• To establish accountability on the part of the directors and promoters of the company.

Types of prospectus

According to Companies Act 2013, there are four types of prospectus.

Deemed Prospectus: Deemed prospectus has mentioned under Companies Act, 2013 Section 25 (1). When a company allows or agrees to allot any securities of the company, the document is considered as a deemed prospectus via which the offer is made to investors. Any document which offers the sale of securities to the public is deemed to be a prospectus by implication of law.

Shelf prospectus: Shelf prospectus is stated under section 31 of the Companies Act, 2013. Shelf prospectus is issued when a company or any public financial institution offers one or more securities to the public. A company shall provide a validity period of the prospectus, which should not be more than one year. The validity period starts with the commencement of the first offer. There is no need for a prospectus on further offers. The organization must provide an information memorandum when filing the shelf prospectus.

Red Herring Prospectus: Red herring prospectus does not contain all information about the prices of securities offered and the number of securities to be issued. According to the act, the firm should issue this prospectus to the registrar at least three before the opening of the offer and subscription list.

Abridged Prospectus: Abridged prospectus is a memorandum, containing all salient features of the prospectus as specified by SEBI. This type of prospectus includes all the information in brief, which gives a summary to the investor to make further decisions. A company cannot issue an application form for the purchase of securities unless an abridged prospectus accompanies such a form.

Registration of Prospectus

(1) No prospectus shall be issued by or on behalf of a company or in relation to an intended company unless, on or before the date of its publication, there has been delivered to the Registrar for registration a copy thereof signed by every person who is named therein as a director or proposed director of the company or by his agent authorized in writing, and having endorsed thereon or attached thereto:

(a) Any consent to the issue of the prospectus required by section 58 from any person as an expert; and

(b) In the case of a prospectus issued generally, also:

(i) a copy of every contract required by clause 16 of Schedule II to be specified in the prospectus, or, in the case of a contract not reduced into writing, a memorandum giving full particulars thereof ; and

(ii) Where the persons making any report required by Part II of that Schedule have made therein, or have, without giving the reasons, indicated therein, any such adjustments as are mentioned in clause 32 of that Schedule, a written statement signed by those persons setting out the adjustments and giving the reasons therefor.

(2) Every prospectus to which sub-section (1) applies shall, on the face of it,

(a) State that a copy has been delivered for registration as required by this section ; and

(b) Specify any documents required by this section to be endorsed on or attached to the copy so delivered, or refer to statements included in the prospectus which specify those documents.

(3) The Registrar shall not register a prospectus unless the requirements of sections 55, 56, 57 and 58 and sub-sections (1) and (2) of this section have been complied with and the prospectus is accompanied by the consent in writing of the person, if any, named therein as the auditor, legal adviser, attorney, solicitor, banker or broker of the company or intended company, to act in that capacity.

(4) No prospectus shall be issued more than ninety days after the date on which a copy thereof is delivered for registration, and if a prospectus is so issued, it shall be deemed to be a prospectus a copy of which has not been delivered under this section to the Registrar.

(5) If a prospectus is issued without a copy thereof being delivered under this section to the Registrar or without the copy so delivered having endorsed thereon or attached thereto the required consent or documents, the company, and every person who is knowingly a party to the issue of the prospectus, shall be punishable with fine which may extend to fifty thousand rupees.

The Doctrine of Lifting the Corporate Veil is a significant concept in corporate law. It refers to a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders or directors. Normally, a company is regarded as a separate legal entity, distinct from its shareholders, directors, or promoters, as established in the landmark case of Salomon v. Salomon & Co. Ltd. (1897). However, in certain situations, courts may “lift” or “pierce” the corporate veil to look beyond the company’s independent existence and examine the real individuals behind it.

This doctrine is applied when the corporate form is used to perpetrate fraud, evade tax, defeat law, or engage in dishonest practices. Indian courts have also accepted this principle to ensure justice and equity prevail over rigid legal formalities.

Purpose of the Doctrine:

The doctrine aims to:

• Prevent misuse of corporate personality.

• Hold the real persons accountable in case of fraud or illegal acts.

• Maintain fairness in the application of corporate law.

• Discourage unethical use of limited liability protections.

In essence, it is used to safeguard the public interest and ensure that the concept of limited liability is not abused.

Legal Basis in India:

In India, although there is no specific statute defining this doctrine, courts have developed it through judicial precedents under the Companies Act, 2013 and earlier company laws. Section 2(20) of the Companies Act defines a company as a separate legal person. However, Indian courts have exercised their inherent powers to disregard this separateness under specific circumstances.

Instances Where the Veil is Lifted

• To Prevent Fraud or Improper Conduct

If a company is formed or used to commit fraud, cheat creditors, or deceive the public, courts can lift the veil. In Delhi Development Authority v. Skipper Constructions (1996), the Supreme Court held that the veil could be lifted if a company was used as a facade for fraud.

• Evasion of Tax

Companies cannot be used as tools to avoid taxes. In Commissioner of Income Tax v. Meenakshi Mills (1967), the court lifted the veil to investigate tax evasion and found that the company was used to divert income.

• Avoidance of Welfare Laws

If a company is set up to escape compliance with labour or social welfare laws (like PF, ESI), courts may disregard the corporate entity. This ensures that employers do not hide behind the veil to deny workers their rightful dues.

• Agency or Sham Companies

Where a company is a mere agent of another person or company, and does not function independently, the veil may be lifted. Courts will then attribute actions or liabilities of the company to the real controller.

• Protection of Public Interest

Courts lift the corporate veil when it is necessary to protect national interest, prevent illegal trade, or uphold security and law. For example, in LIC v. Escorts Ltd. (1986), the court analyzed the shareholding of foreign companies to determine control and ownership, for the sake of public policy.

Statutory Provisions Under the Companies Act, 2013:

While the Companies Act does not directly mention “lifting the veil,” certain provisions indirectly support the doctrine:

• Section 7(7): If the company is incorporated by furnishing false or incorrect information, the liability can be imposed personally on the persons responsible.

• Section 34 and 35: Penalties for misstatements in the prospectus can make directors and promoters personally liable.

• Section 339: In case of fraud during winding up, the Tribunal may hold the persons who were knowingly parties to the fraud personally liable for company debts.

Judicial Interpretation and Landmark Cases in India:

1. Salomon v. Salomon & Co. Ltd. (UK case, 1897)
   Established the principle of separate legal entity.

2. Life Insurance Corporation of India v. Escorts Ltd. (1986)
   Explained that lifting the veil depends on the facts and must be applied cautiously.

3. Gilford Motor Co. v. Horne (UK case)
   The veil was lifted to prevent an ex-employee from using a company to breach a contract.

4. Union Carbide Case (Bhopal Gas Tragedy)
   The Indian government tried to lift the veil of Union Carbide Corporation to hold it responsible for the actions of its Indian subsidiary.

Limitations of the Doctrine:

While the doctrine is important, courts use it sparingly and cautiously. It is not meant to disregard the corporate structure in every dispute. Courts generally uphold the sanctity of the corporate form unless there is strong evidence of misuse, fraud, or illegal conduct. The doctrine cannot be used merely to satisfy debts or liabilities when no wrongdoing is involved.

Book building is a price discovery mechanism that is used in the stock markets while pricing securities for the first time. When shares are being offered for sale in an IPO, it can either be done at a fixed price. However, if the company is not sure about the exact price at which to market its shares, it can decide a price range instead of an exact figure. This process of discovering the price by providing the investors with a price range and then asking them to bid on it is called the book building process. It is considered to be one of the most efficient mechanisms of pricing securities in the primary market. This is the preferred method which is recommended by all major stock exchanges and as a result is followed in all major developed countries in the world.

Book Building Process:

• Appointment of Investment Banker:

The first step starts with appointing the lead investment banker. The lead investment banker conducts due diligence. They propose the size of the capital issue that must be conducted by the company. Then they also propose a price band for the shares to be sold. If the management agrees with the propositions of the investment banker, the prospectus is issued with the price range as suggested by the investment banker. The lower end of the price range is known as the floor price whereas the higher end is known as the ceiling price. The final price at which securities are indeed offered for sale after the entire book building process is called the cut-off price.

• Collecting Bids:

Investors in the market are requested to bid to buy the shares. They are requested to bid the number of shares that they are willing to buy at varying price levels. These bids along with the application money are supposed to be submitted to the investment bankers. It must be noted that it is not a single investment banker who is engaged in the collection of bids. Rather, the lead investment banker can appoint sub-agents to tap into their network especially for receiving the bids from a larger group of individuals.

• Price Discovery:

Once all the bids have been aggregated by the lead investment banker, they begin the process of price discovery. The final price chosen in simply the weighted average of all the bids that have been received by the investment banker. This price is declared as the cut-off price. For any issue which has received substantial publicity and which is being anticipated by the public, the ceiling price is usually the cut-off price.

• Publicizing:

In the interest of transparency, stock exchanges all over the world require that companies make public the details of the bids that were received by them. It is the lead investment banker’s duty to run advertisements containing the details of the bids received for the purchase of shares for a given period of time (let’s say a week). The regulators in many markets are also entitled to physically verify the bid applications if they wish to.

• Settlement:

The application amount received from the various bidders has to be adjusted and shares have to be allotted. For instance, if a bidder has bid a lower price than the cut-off price then a call letter has to be sent asking for the balance money to be paid. On the other hand, if a bidder has bid a higher price than the cut-off, a refund cheque needs to be processed for them. The settlement process ensures that only the cut-off amount is collected from the investors in lieu of the shares sold to them.

Partial Book Building

Partial book building is another variation of the book building process. In this process, instead of inviting bids from the general population, investment bankers invite bids from certain leading institutions. Based on their bids, a weighted average of the prices is created and cut-off price is decided. This cut-off price is then offered to the retail investors as a fixed price. Therefore, the bidding only happens at an institutional level and not at a retail level.

This is also an efficient mechanism to discover prices. Also the cost and complications involved in conducting a partial book building are substantially low.

First of all, the book building process brings flexibility to the pricing of IPO’s. Prior to the introduction of book building, a lot of IPO’s were either underpriced or overpriced. This created problems because if the issue was underpriced, the company was losing possible capital. On the other hand, if the issue was overpriced it would not be fully subscribed. In fact, if it was subscribed below a given percentage, the issue of securities had to be cancelled and the substantial costs incurred over the issue would simply have to be written off. With the introduction of book building process, such events no longer happen and the primary market functions more efficiently.

Other Subtypes of Book Building

The following are subtypes of book building:

• Accelerated Book Building

The companies can use an accelerated book-building process to acquire quick capital market. That can be the case when a company cannot finance its short-term project via debt financing. So, the issuing company contacts several investment banks that can act as underwriters the evening before the intended placement. Under this process, the offer period is open only for a day or two days, and you have no time for marketing for an issue. So, instead, the underwriter overnight contacts their networks and details the current topic to institutional investors. If this investor finds this issue interesting, then allotment happens overnight.

• Partial Book Building

As the partial book building says, that issue book is built partially, where the investment banker only invites bids from the selected investors. Based on their bids, they take the weighted average of the prices to finalize the cut-off price. Then other investors, such as retail investors, take this cut-off price as a fixed price. So, the bidding happens with a selected group of investors under the partial book-building process.

Advantages of Book Building

• The most efficient way to price the share in the IPO market.
• The share price is finalized by investors’ aggregate demand, not by the fixed price set by the company management.

Disadvantages of Book Building

• High costs are involved in the book-building process compared to the fixed-price mechanism.
• The period is also more in the book booking process than the fixed-price mechanism.

Subscription of shares refers to the process where investors apply for shares issued by a company. When a company offers shares to the public through an Initial Public Offering (IPO) or other methods, investors submit applications to purchase them. Based on demand, the company may receive full, over, or under-subscription. Full subscription means the exact number of shares offered is applied for, over-subscription occurs when demand exceeds supply, and under-subscription happens when applications are fewer than the issued shares. Companies allocate shares based on predefined criteria, ensuring fair distribution among investors while adhering to regulatory guidelines.

Minimum Subscription of Shares:

The minimum subscription of shares refers to the minimum number of shares that a company must sell to raise a certain amount of capital to proceed with an issue, whether through an Initial Public Offering (IPO), Follow-on Public Offering (FPO), or any other public offering. This minimum subscription amount is typically defined in the prospectus and is a regulatory requirement, ensuring that the company has sufficient investor interest to justify proceeding with the issue.

In India, for instance, the minimum subscription requirement for public offerings is usually 90% of the total issue size. If the company fails to achieve this minimum subscription level, the issue is considered unsuccessful, and the funds collected (if any) must be refunded to the investors. This safeguard protects investors from getting involved in companies that may lack sufficient investor confidence or face difficulties in raising the required capital.

The concept of minimum subscription ensures that the company has a strong foundation of capital to fund its operations or expansion. It also prevents situations where the company might not have enough funds to cover operational or project expenses, thus providing a level of financial security.

Moreover, achieving minimum subscription enhances the credibility of the company in the eyes of investors and regulators, as it demonstrates market confidence in its business model and financial stability.

Over-Subscription of Shares:

Over-subscription occurs when the demand for shares in an initial public offering (IPO) or any other public share issue exceeds the number of shares offered by the company. This situation indicates high investor interest in the company’s shares, often due to favorable market conditions, strong company performance, or investor confidence in the business’s future prospects.

When an issue is over-subscribed, investors apply for more shares than what is available. For example, if a company issues 1,00,000 shares, and investors apply for 2,00,000 shares, the issue is considered over-subscribed by 100%. This scenario usually results in the company having to make decisions on how to allocate shares fairly among investors.

In cases of over-subscription, companies may use various methods to allocate shares, such as:

1. Pro-rata Basis: Shares are allocated in proportion to the number of shares applied for by each investor. If an investor applied for 100 shares and the issue was over-subscribed by 2:1, they would receive only 50 shares.

2. Lottery System: In some cases, especially when demand far exceeds supply, a lottery system is used to randomly allocate shares to applicants.

3. First-Come, First-Served: Shares may be allotted based on the order in which applications are received, with early applications being given priority.

Under Subscription of Shares:

Under subscription occurs when a company issues shares to the public, but the total number of shares applied for is less than the number offered. This indicates low investor demand, possibly due to high pricing, poor market conditions, or weak company reputation. Unlike oversubscription (excess demand), under subscription means the company fails to raise the intended capital.

To resolve this, companies may extend the subscription period, revise the offer price, or rely on underwriters (if any) to purchase the remaining shares. If the minimum subscription (as per regulatory requirements) is not met, the issue may be canceled, and application money refunded. Under subscription can negatively impact the company’s market perception and future fundraising prospects.

Features of Under Subscription:

• Lower Capital Raised

Under subscription means the company cannot collect the full projected capital, forcing it to seek alternative funding (e.g., loans, private placements). This may delay expansion plans or increase financial risk due to reliance on debt.

• Underwriter’s Role Becomes Critical

If shares are underwritten, the underwriter must purchase the unsubscribed shares, ensuring the company receives the intended funds. This safety net comes at a cost (underwriting commission).

• Regulatory Compliance Issues

Companies must meet minimum subscription requirements (e.g., 90% in some jurisdictions). Failure may force refunds and cancellation, requiring re-filing with regulatory bodies (e.g., SEBI, SEC).

• Negative Market Sentiment

Low subscription signals weak investor confidence, potentially lowering share prices in secondary markets. It may also affect future IPO prospects and credit ratings.

• Extended or Revised Offer

Companies may reprice shares or extend the subscription period to attract investors. However, this delays capital availability and increases administrative costs.

• Impact on Share Allotment

Since demand is below supply, all applicants receive full allotment (no proportional distribution). This contrasts with oversubscription, where allotment is partial.