Public Offering and Corporate Actions — record dates, credits and the temporary ISIN

Where this chapter sits

Chapter 10 carries 7% of the paper. It sits at the junction of two things a DP does constantly — passing corporate benefits through to clients, and handling public issue applications.

The recurring idea to hold on to is the temporary ISIN frozen for debit. It appears in rights issues, mergers, capital reductions and bonus issues, always for the same reason.

10.1 What a corporate action is

Corporate actions are events, which affect the rights, obligations and/or interests of the beneficial owners of the securities held in a depository.

The most common examples are payment of interest, dividend, bonus shares, rights, splits, merger, redemption, payment of call money, liquidation etc.

For securities held in demat mode, the depository facilitates the execution of corporate actions.

The Bye-Laws definition: the depository Bye-Laws define corporate benefits to mean and include any action taken by the issuer relating to prescribing the dates for book closures, record dates, dates for redemption or maturity of security, dates of conversion of debentures, warrants, call-money dates and such other action from time to time.

The two categories

Cash corporate actions involve distribution of monetary benefits, e.g., dividend and interest etc. In case of cash corporate actions, depository merely provides information to the Issuer about the persons entitled to receive corporate benefits as on a cut-off date.

Non-cash corporate actions involve distribution of benefits other than cash such as bonus issues, offer of shares on right basis, conversion of securities, etc. In case of non-cash corporate actions, depository may facilitate the distribution of corporate benefits. Presently the depositories in India facilitate the distribution of non-cash corporate benefits.

The difference in the depository's role is the examinable point. For cash, it merely provides information. For non-cash, it may facilitate the distribution — and in India it does.

The reason is simple. Money moves through the banking system; securities move through the depository. So the depository can deliver bonus shares directly into your account but cannot pay you a dividend.

10.2 Record date and book closure

Since corporate actions affect the beneficial owners of the securities, it is important to determine the actual beneficial owner of the securities on the cut-off date announced by the issuer for a specific corporate action. Such cut-off date is called record date/book closure.

Record Date. Whenever any corporate action takes place it is necessary to determine the eligible BOs as of a particular date who are entitled to the corporate benefits. The issuer thus announces a cut-off date to determine the BOs of the securities as of that date. This date is referred to as the 'Record Date'.

The mechanics: the issuer/RTA set up a corporate action specifying the record date in depository system. Depository system provides holding report i.e. list of BOs having holdings in the ISIN of the issuer as of end of the day of record date.

Book Closure Start Date / End Date. In certain cases, issuer may setup a corporate action specifying book closure start date and book closure end date. In such cases, the depository system generates holding report i.e. list of BOs having holdings in the ISIN of the issuer as of end of the day of one day prior to book closure start date.

The two are one day apart. A record date takes the holding at end of the day of the record date; a book closure takes it at end of the day of one day prior to book closure start date.

And note who fixes it — the issuer, not the exchange, the depository or the shareholders.

10.3 The procedure

Whenever a corporate action is announced, the Issuer/its R&T Agent, informs the depository about the proposed corporate action. The information of the corporate actions is made available to the DPs through the depository system.

On receiving such information, DPs take the following steps to ensure that:

• The changes in tax status, bank details, change of address etc. in the beneficial owners' accounts are updated well in advance of the book closure/record date
• All positions in the transit accounts, e.g., settlement accounts and intermediary accounts, are cleared and the balances lying therein are transferred to the relevant beneficiary accounts well in advance of the book closure/record date as per the instructions received from account holders

Note: CDSL does not have the concept of transit account.

On the relevant cut-off date announced for the corporate action, the depository provides the details of the holdings of the beneficial owners to the issuer or its R&T Agent. The details provided by the depository include the particulars of tax-status, if any of the beneficial owner and his bank account details.

Balances in intermediary accounts still get the benefit: securities balances lying in the accounts of the Clearing Members/Clearing Corporations/Intermediaries will be eligible to receive corporate benefits. In such cases, the Issuer or its RTAs will distribute the corporate benefits to the Clearing Members/Clearing Corporations/Intermediaries for onward distribution to the beneficial owners.

And the safeguard: the corporate benefits availed by Clearing Members/Clearing Corporations and intermediaries shall be held in trust on behalf of the beneficial owners.

10.3.1 Monetary benefits

On the basis of the particulars of the holdings of beneficial owners received from the depositories on the cut-off date, the Issuer/its R&T Agent distribute dividend, interest and other monetary benefits directly to the beneficial owners.

Directly — the depository is not in the payment chain.

The electronic payment framework:

(i) For making cash payments to the investors, companies whose securities are listed on the stock exchanges shall use, either directly or through their RTA & STA, any RBI (Reserve Bank of India) approved electronic mode of payment such as ECS [LECS (Local ECS)/RECS (Regional ECS)/NECS (National ECS)], NEFT, etc.

(ii) In order to enable usage of electronic payment instruments, companies... shall maintain requisite bank details of their investors:

• For investors that hold securities in demat mode, companies or their RTA & STA shall seek relevant bank details from the depositories. Depositories have been advised to ensure that correct account particulars of investors are available in the database of depositories
• For investors that hold physical share/debenture certificates, companies or their RTA & STA shall take necessary steps to maintain updated bank details of the investors at its end
• In cases where either the bank details such as MICR (Magnetic Ink Character Recognition), IFSC (Indian Financial System Code), etc. that are required for making electronic payment are not available or the electronic payment instructions have failed or have been rejected by the bank, companies or their RTA & STA may use physical payment instruments for making cash payments. Companies shall mandatorily print the bank account details of the investors on such payment instruments

That last requirement is a fraud control — a printed warrant carrying the investor's own bank details is much harder to divert.

This also explains why the DP must update bank details "well in advance of the book closure/record date". Wrong bank details mean a failed credit and a paper warrant.

10.3.2 Non-monetary benefits

On the basis of the particulars of the holdings of beneficial owners received from the depository as of the cut-off date, the Issuer/its R&T Agent informs the eligible beneficial owners about the corporate action/benefit.

Then: on receipt of these details, the depository makes the credit entries in the accounts of the beneficial owners on a date requested by the Issuer/its R&T Agent (the execution date).

Where the records do not match: in cases where the details of accounts to which the Issuer/its R&T Agent has made allotment, do not match with those maintained with the depository, such records will be rejected. The depository then requires the Issuer/its R&T Agent to rectify the records.

And if it cannot: in case the Issuer/its R&T Agent is unable to rectify the records within the stipulated period, the allotment of the rejected records will have to be kept in abeyance and allotted as and when the demat accounts of the allottees are confirmed.

A further mandate: in case of listed companies shares allotted on preferential basis and pursuant to conversion of warrants/debts have to be mandatorily be allotted in demat form.

Rule 9A — unlisted public companies

As per the Companies (Prospectus and Allotment of Securities) Rules, 2014, Rule 9A mandates the Issue of securities in dematerialised form by unlisted public companies.

(1) Every unlisted public company shall — (a) issue the securities only in dematerialised form; and (b) facilitate dematerialisation of all its existing securities in accordance with provisions of the Depositories Act, 1996.

(2) Every unlisted public company making any offer for issue of any securities or buyback of securities or issue of bonus shares or rights offer shall ensure that before making such offer, entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised.

(3) Every holder of securities of an unlisted public company, (a) who intends to transfer such securities on or after 2nd October, 2018, shall get such securities dematerialised before the transfer; or (b) who subscribes to any securities of an unlisted public company (whether by way of private placement or bonus shares or rights offer) on or after 2nd October, 2018 shall ensure that all his existing securities are held in dematerialized form before such subscription.

The date to remember is 2nd October, 2018.

10.3.3 Rights issue — dematerialised Rights Entitlements

SEBI has... issued guidelines for the purpose of Rights Issue whereby the concept of dematerialised Rights Entitlements (REs) has been introduced:

• REs shall be credited to the demat account of eligible shareholders in dematerialized form
• In REs process, the REs with a separate ISIN shall be credited to the demat account of the shareholders before the date of opening of the issue, against the shares held by them as on the record date
• Physical shareholders shall be required to provide their demat account details to the Issuer/Registrar to the Issue for credit of REs not later than two working days prior to the issue closing date, such that credit of REs in their demat account takes place at least one day before the issue closing date

Note the RE gets its own separate ISIN, distinct from the share.

Trading in REs

REs shall be traded on secondary market platform of Stock exchanges, with T+1 rolling settlement, similar to the equity shares.

Trading in REs on the secondary market platform of stock exchanges shall commence along with the opening of the issue and shall be closed at least four days prior to the closure of the rights issue.

The four-day gap exists so that a buyer of REs still has time to apply — an entitlement bought on the last day of the issue would be worthless.

Investors holding REs in dematerialized mode shall be able to renounce their entitlements by trading on stock exchange platform or off-market transfer. Such trades will be settled by transferring dematerialized REs through depository mechanism, in the same manner as done for all other types of securities.

The temporary ISIN

On closure of the Rights issue the Rights shares shall be credited to the demat accounts of the allottees by way of corporate action mandatorily in demat form in a new (temporary) ISIN of the company which is frozen for debit. This is so that securities cannot be transferred till such time the shares are available for trading.

Read that reason carefully, because it recurs four times in this chapter. A share that has been allotted but not yet listed cannot be allowed to trade — so it is credited to a temporary ISIN frozen for debit, and only moves to the normal ISIN once trading is permitted.

10.3.4 Mergers, capital reduction, sub-division and bonus

Merger/amalgamation. In case of merger/amalgamation, corporate actions of the securities under the ISIN of the transferor company shall be debited and credit will be given in the ISIN of the transferee company as per the applicable ratio. In case of listed companies credit is given in the temporary ISIN of the transferee company which is frozen for debit.

Capital reduction. A new ISIN will be created (may be with new face value or same face value) and the securities shall be debited under the old ISIN i.e. the existing ISIN and credit is given in the new ISIN as per the applicable ratio. In case of listed companies, credit is given in the new (temporary) ISIN of the company which is frozen for debit.

Sub-division/consolidation. In case of sub-division/consolidation, the face value of the securities undergoes a change. Thus a new ISIN with the new face value will be obtained. Corporate action will be processed on the record date as per the applicable ratio with credit being effected in the start of the next business day. Securities will be debited in existing ISIN and credited in new ISIN.

Because face value changes, a new ISIN is unavoidable — the ISIN identifies a specific security with specific terms.

Bonus issue. In respect of bonus issues the eligible holders as on the record date fixed by the Company shall be entitled to receive the bonus entitlement.

The bonus shares in case of listed companies would be credited as per the applicable ratio in the temporary ISIN of the company which is frozen for debit. In case of unlisted companies, the same is credited to the normal ISIN.

Listed goes to the temporary ISIN; unlisted goes straight to the normal one — because an unlisted share is not going to be traded anyway.

SLB and pool balances. In case security balances are held in the Securities Lending and Borrowing/Pool Account of Clearing Member, the securities will get debited/credited as per the appropriate predefined ratio.

10.3.5 Rights of the pledgor

Ownership of the pledged/hypothecated securities remains with the pledgor (borrower) until the pledge is invoked. Hence, all corporate benefits — cash and non-cash — like dividends, bonus, rights etc., will accrue to the borrower.

Dividends will be given to the borrower in the usual manner.

And securities follow the pledge: the securities arising out of corporate actions like bonus, share splits or consolidation or exchange under a merger/acquisition scheme are credited to the account of the pledgor, with pledge marked in favour of the pledgee, provided that on the execution date of the corporate action, pledge exists for atleast one share.

Two points to hold. The benefit belongs to the pledgor, because he still owns the shares. But new securities arrive with pledge marked in favour of the pledgee — the lender's security automatically extends to them, provided pledge exists for atleast one share on the execution date.

10.3.6 Interest on debt securities

Eligible investors in debt securities will receive interest from the Issuers/its R&T Agents.

In respect of government securities, however, the depository distributes the interest to eligible clients, after RBI has credited interest amount to the depositories account.

Government securities are the exception to the rule that cash never flows through the depository.

10.4 Public issue

The primary market provides the channel for raising funds from investors through issue of new securities or sale of existing securities in case of offer for sale.

The issue of securities in the primary market can be made by a new company, a new company promoted by an existing company, an existing public listed company, or an existing public unlisted company. They do so either through public issues (initial public offer or follow on public offer) or private placement.

The statutory threshold: according to the Companies Act, 2013 every listed public company, making an initial offer of any security of Rs. 10 crore and above has to issue it only in dematerialised form in accordance with Depositories Act, 1996.

The three SEBI guidelines for public issues in electronic mode:

• Issuer shall be required to enter into an agreement with all the depositories
• In case of Public issues for Equity allotment is mandatory in demat form. In case of debt securities, Issuer shall give an option to subscriber/investor to receive the physical certificates or hold the securities in electronic mode with the depository
• In order to eliminate the risks to investors on account of fake/forged certificates, bad deliveries, delays in transfer, etc., trading in securities of company making an IPO shall be in demat form only

Equity allotment is compulsorily demat; debt gives the investor a choice. That distinction is examinable.

10.4.1 The procedure

Allotment in public issues in respect of Equity is mandatory in demat form. To receive the securities in electronic form, investor must open a demat account through any DP with any depository before making an application.

The application form should have provision for investors to furnish their demat account number along with the following information:

• Depository Name
• DP's Name
• DP-ID
• Beneficiary Account Number (BO ID)

The SEBI guidelines require that all public issues of the size of Rupees ten crores and above be compulsorily made in demat form.

Matching and charges: allotment in electronic form is given only when the client name and the beneficiary account are matched with details filled in the application form. There are no charges for the allotment process. All the applications, whether with demat option or not, are treated alike for allotment purposes.

The credit sequence: on allotment, the Issuer/its R&T agent provides the details of successful allottees who have opted for receiving securities in demat form, to the depository and the execution date when the securities should be credited to the beneficial owner's accounts. The depository will credit the securities to the allottee accounts on the execution date and the Issuer/its R&T agent inform the investors of the credit of securities in the electronic form by sending the allotment advice.

And the record: the statement of accounts provided by the Depository will indicate balances created in the respective beneficiary owner's account.

The DP's role in a public issue

Investor intending to subscribe to a public issue can submit a completed Bid-cum-Application form to a depository participant (whose name is mentioned on the website of the stock exchange as eligible for this activity).

The DP will at the time of receipt of application give an acknowledgement to investor, by giving the counterfoil or specifying the application number to the investor, as a proof of having accepted the application form, in physical or electronic mode respectively.

After accepting the application form, respective DP shall capture and upload the relevant bid details, in the electronic bidding system of stock exchanges.

10.4.2 Streamlining

The time duration from issue closure to listing in case of equity IPO has been reduced to 3 working days.

And Application Supported by Blocked Amount (ASBA) mechanism is the sole payment mechanism in public issues.

T+3 and ASBA-only. Both are recent and both are examinable.

10.4.3 Tender offers

SEBI had issued circular... on Mechanism for acquisition of shares through stock exchange mechanism pursuant to tender-offers for the purpose of takeovers, buy back and delisting of securities.

Three uses: takeovers, buy back and delisting.

The six details a client must give when submitting a delivery instruction slip or electronic instruction:

• Execution Date
• Tender Offer Type (i.e. Market Type)
• Event Number (i.e., Settlement Number)
• CM BP ID
• ISIN
• Quantity

What happens next: upon submission of the delivery instruction in respect of tender offer in eDPM system, if sufficient balance is available in the demat account of the client, requisite quantity will be blocked in the demat account of the client in favour of respective Clearing Corporation based on the market type and settlement number of tender offer.

The shares are blocked, not moved. The target account of 'Clearing Member' which is specified in the DIS and entered in the eDPM system will be used to track that the transaction is pertaining to the respective Clearing Member whose CM-BP-ID is specified.

Inter-depository: upon receipt of inter-depository instruction in respect of tender offer where the target account in NSDL system is a Clearing Member Pool Account, the shares will be automatically transferred to the Clearing Corporation.

The simplification for clearing members: as per the new process, Clearing Members will not be required to submit any instructions i.e. neither physical DIS or electronic instructions to the Participants for executing Irreversible Delivery Out (i.e. early Pay-in) instructions in favour of Clearing Corporation, as was done previously.

The broker's part: in order to submit the request of Client for participating in the tender offer, brokers are required to place the order at the exchange system during the tendering period.

And the finality rules:

The aforesaid tender offer instruction executed from demat account of the client will be the irreversible nature instructions.

Participant will not be able to cancel the tender offer instructions executed in the depository system and that are in the status "Instruction Ready for Settlement". However, tender offer instruction which is in the status "Overdue" or "Future Dated" can be cancelled by the Participant.

Two cancellable statuses — "Overdue" and "Future Dated". One that is not — "Instruction Ready for Settlement".