Q.Describe the procedure a public company follows to make a public issue of shares.
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Start your 14-day free trial to unlock the full solution →Making a public issue of shares is deliberately more elaborate than any of the other methods of raising share capital, because it invites subscription from the general, unidentified public rather than from a known and limited set of investors, and the law compensates for that lack of a prior relationship with heavier disclosure and procedural safeguards at every stage.
The process begins with internal corporate approval. The Board of Directors first decides that the company should raise fresh capital through a public issue, checks that the proposed issue is within the company's authorised share capital (or arranges to increase it), and works out the size, pricing approach, and objects of the issue. Because this is a major capital decision, the Board's proposal typically also needs the sanction of shareholders by resolution at a general meeting, in addition to the Board's own resolution settling the detailed terms.
Next comes the appointment of the various market intermediaries a public issue requires and compliance with SEBI's regulatory framework. The company appoints merchant bankers to manage and structure the issue, registrars to the issue to process applications and coordinate allotment, bankers to the issue to collect application money, and, where the issue is underwritten, underwriters who commit to subscribe to any shortfall. Because SEBI is the statutory regulator of the securities market, the entire issue must additionally satisfy the eligibility, disclosure, and pricing conditions laid down in SEBI's Issue of Capital and Disclosure Requirements regulations, and, for a first-time public issue seeking listing, a draft prospectus is first filed with SEBI for its observations before the final prospectus is issued.
The company then prepares and files the prospectus, the document inviting subscription from the public. Section 26 of the Companies Act, 2013 prescribes in detail the disclosures a prospectus must contain — the company's capital structure and objects, the terms of the specific issue, financial statements for preceding years, particulars of directors, and the risk factors relevant to an investment decision — and Sections 34 and 35 impose civil and criminal liability on the company and the persons responsible (including directors who authorised the prospectus) for any untrue or misleading statement in it.
Once the prospectus is issued, the issue opens for a stated period, during which prospective investors submit applications along with application money through the bankers to the issue. Section 40 requires the company to apply to a recognised stock exchange for permission for its securities to be dealt in there, and all application money must be kept in a separate bank account with a scheduled bank, to be used only for the purposes the Act permits until allotment is complete or the money is refunded. …
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