Procedure for a Public Issue of Shares

Making a public issue of shares is a multi-stage process precisely because it invites money from the general public rather than a known, identified set of investors, and the law correspondingly demands a higher level of internal approval, disclosure, and regulatory oversight at every stage.

Internal corporate approvals. The process begins inside the company. The Board of Directors must first decide, and recommend, that fresh capital be raised through a public issue, generally after the company's Memorandum and Articles of Association are checked to confirm the proposed issue is within the company's authorised share capital (or after the authorised capital is itself increased). Because a public issue is a significant capital-raising decision affecting all existing shareholders, it typically requires the sanction of the shareholders by an ordinary or special resolution passed at a general meeting, in addition to the Board's own resolution approving the specific terms — issue size, price band, and objects of the issue.

Appointment of intermediaries and SEBI compliance. Once internal approval is secured, the company appoints the various market intermediaries a public issue statutorily requires — merchant bankers to manage the issue, registrars to the issue to handle applications and allotment, bankers to the issue to collect application money, and underwriters where the issue is underwritten. Because SEBI is the statutory regulator of the securities market, every public issue must comply with SEBI's Issue of Capital and Disclosure Requirements regulations, which prescribe eligibility conditions for the issuer, disclosure standards, pricing norms, and the due-diligence certification the merchant banker must give before the issue can proceed.

The prospectus. The company then prepares and files a prospectus — a document inviting the public to subscribe to its securities. Section 26 of the Companies Act, 2013 specifies the extensive information a prospectus must contain: particulars of the company's capital structure, its objects, the terms of the present issue, the company's financial position over preceding years, details of directors and their remuneration, risk factors, and the manner in which subscription money will be dealt with, among other matters, so that a prospective investor has the material facts needed to make an informed decision. A prospectus containing any untrue or misleading statement exposes the company and the persons responsible for its issue — including directors who authorised it — to civil and criminal liability under Sections 34 and 35. For a company issuing an offer document to the public for the first time and seeking listing, a Draft Red Herring Prospectus is first filed with SEBI for observations before the final prospectus is issued.

Opening of the issue and receipt of applications. Once the prospectus is issued and the issue opens, prospective investors submit applications, along with the application money, through the bankers to the issue, within the period the prospectus states the issue will remain open. Section 40 requires that a company making a public offer apply to a recognised stock exchange for permission for its securities to be dealt in on that exchange, and application money received from the public must be kept in a separate bank account with a scheduled bank and used only for the purposes permitted under the Act until the allotment process is complete or the money is refunded. …