Expert Advisory Committee

3.1 Query:

Classification of share issue expenses.

1. A company has raised Rs. 75,00,000/- capital from the public by issue of 7,50,000 equity shares of Rs. 10/- each for cash at par and has incurred a sum of Rs. 11,55,500.63 in connection with the aforesaid issue.

The details of the expenditure are as under: -

A. MANDATORY COSTS

		Rs.
a.	Managers’ Fees	37,500.00
b.	Underwriting Commission	1,87,500.00
c.	Brokerage	1,12,500.00
d.	Listing Fees	24,000.00
e.	Press Announcements	2,70,172.00 __________
	Total A	6,31,672.00 __________

B. OTHER COSTS

1	Printing charges of	Rs.
	- Refund Orders	9,897.50
	- Allotment Advice	3,745.00
	- Share Certificates	8,903.50
	- Members’ Register	5,778.00
	- Specimen Sign. Cards	1,177.00
	- Share Application Forms	1,52,000.00
	- Prospectus	16,000.00
	-Brochures	36,000.00	2,33,501.00

2.	Registrar’s Processing Charges	Rs.
	a. Allottees	31,662.50
	b. Non-Allotees	14,493.00
	c. Share Certificates	2,250.00
	d. Allotment Notice	336.20
	e. Brokerage Cheques	738.00
	f. Promoter’s Quota	832.00	50,311.70

3.	Corporate publicity	87,920.00
4.	Fees to legal adviser for opinion on final prospectus.	5,525.00
5.	Expenses on distribution of application forms, prospectus, brouchers etc.	30,000.00
6.	Expenses on postage, telegrams including despatch of share certificates, allotment advices, refund orders.	65,086.28
7.	Travelling expenses of staff, directors, consultants etc.	6,510.00
8.	Expense on brokers and press conferences	13,415.70
9.	Reimbursement of out of pocket expenses incurred by collection banks in collection of application money including their collection charges.	26,440.00
10.	Cost of Computer Paper	2,768.95
11.	Cost of duplicate common seal	1,050.00
12.	Cyclostyling, Stencil, Conveyance	1,300.00
	Total B	__________ 5,23,828.63 __________
	Total A+B	11,55,500.63

2. In terms of Circular No. F.14\1\SE\85 of Government of India, Ministry of Finance, Department of Economic Affairs, Stock Exchange Division, New Delhi dated 7^th May, 1985, the overall ceiling on the amount of expenditure on public issues of capital has been fixed at mandatory cost plus other costs subject to 5 % of the size of the issue up to Rs. 5 crores. Mandatory cost has been defined to include underwriting commission, brokerage, fees of managers to the issue, press announcements and listing fees.

3. Accordingly, the company in the instant case could only incur Rs. 3, 75,000/- (5% of 75, 00,000/-) in addition to the mandatory cost on the aforesaid issue as against which the expenditure incurred is Rs. 5, 23,828.63. However, the company has debited a sum of Rs. 3,37,300.70 as ‘Other Expenditure on Public Issue’, detailed here under: -

		Rs.
1.	Printing of Share Applications	1,52,000.00
	- Prospectus	16,000.00
	Brochures	36,000.00
2.	Corporate Publicity	87,920.00
3.	Fees to Legal Adviser	5,525.00
4.	Bank Collection Charges	26,440.00
5.	Expenses on brokers/press conference	13,415.70 =========
		3,37,300.70 =========

4. The company has classified the processing charges of Rs.50,311.70 paid to Registrars to the issue as mandatory cost. The company has charged the following expenses to revenue: -

a.	Printing of Share Certificates, Members Register, refund orders’, allotment advices, etc.	29,501.00
b.	Expenses on distribution of application forms, prospectus, brouchers etc.	30,000.00
c.	Expenses on Postage, Telegrams etc., including postage of shares certificate allotment advices, refund orders, etc.	65,086.28
d.	Travelling Expenses	6,510.00
e.	Cost of Computer Paper	2,768.95
f.	Cost of duplicate common seal	1,050.00
g.	Cost of Cyclostyling etc.	1,300.00 _________ 1,36,216.23 __________

5. The querist has sought the opinion of the Expert Advisory Committee on the following issues arising from the above:

a. What expenditure should generally be classified as public issue expenses?

b. Whether aforesaid classification of expenses made by the company is proper?

c. What should be included in other costs of 5%?

Opinion November 22, 1990

1. From the facts of the query, the Committee notes that the company in question has classified the costs incurred in connection with the public issues in following categories:

(i) Mandatory Costs: Covering five types of costs mentioned in the aforesaid Guidelines as per para 2 above. Apart from the said costs, Registrar’s Processing Charges [Para 1.B.2 of the query] have also been included in the mandatory costs.

(ii) Other Costs: Amounting to Rs. 3,37,300.70, debited to ‘Other expenditure on Public Issue’.

(iii) Other costs related to public issue amounting to Rs. 1,36,216.23, which have been charged to revenue.

2. The Committee notes that the guidelines issued by the Ministry of Finance, Department of Economic Affairs, Stock Exchange Division [vide their No. F.14/1/SE/85, dated 7^th May, 1985], inter alia, direct as under:

“Fixation of overall ceiling on the cost of public issue- The following overall ceiling on the amount of expenditure on public issues of capital should be adhered to by the companies:

Particular/size of the issue	Limit of the cost
(a) Equity & Convertible Debentures:
- Up to Rs. 5 crores	Mandatory cost+5 %
- In excess of Rs. 5 crores	Mandatory cost +5 %
(b) Non-Convertible debentures:
- Up to Rs. 5 crores	Mandatory cost+2 %
- In excess of Rs. 5 crores	Mandatory cost + 1%

Mandatory cost includes underwriting commission, brokerage, fees of managers to the issue, press announcements and listing fees.

The auditors of the companies concerned should be required to qualify the reports suitably if the cost of public issues of the concerned companies exceeds the overall limits as mentioned above. When the consent for capital issues is given (where such consent is necessary) a standard condition prescribing the maximum limit for expenditure for raising capital would be incorporated. Violation of this condition will attract penal provisions of the Capital Issues (Control) Act.

Adherence to the ceiling on expenditure indicated above will be a condition precedent for the grant of listing of securities on Stock Exchanges for new companies and for continued listing in the case of listed companies.

The decisions given above will apply only prospectively, i.e., to companies which are yet to receive consent of the CCI or new/existing companies which are yet to make applications to Stock Exchanges for listing of their securities.”

3. The Committee is of the view that, in general, all expenses incurred directly in relation to a public issue should be considered as public issue expenses. In other words, public issue expenses are those expenses which would not have been incurred had the public issue not been made, e.g., Registrar’s Processing Charges, expenses on printing and distributing of a application forms, prospectus, etc. Further, in the view of the Committee, public issue expenses would be those which are incurred between the decision to make the public issue and completion of all necessary formalities with regard to the issue.

4. On the basis of the above, the opinion of the Committee on the issues raised by the querist in para 4 of the query are as follows:

(a) The general bases of classification are explained in para 3 above.

(b) The classification of public issue expenses made by the querist is not proper since:

(i) Registrar’s Processing Charges cannot be included in ‘mandatory costs’ as the definition of the latter given in the Guideline does not include such charges.

(ii) There should be only two classes of public issue expenses- mandatory costs as per the Guideline and costs other than mandatory costs.

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