Indira Gandhi National Open University

School of Management Studies FINANCIAL TECHNOLOGIES KNOWLEDGE MANAGEMENT CO.

MFP-1 EQUITY MARKETS

Primary Markets 2
 ]

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"Education is a liberating force, and in our

age it is also a democratising force, cutting
across the barriers of caste and class,
smoothing out inequalities imposed by birth
and other circumstances."
- Indira Gandhi
1

Indira Gandhi .
National Open University
MFP-l
~ School of Management Studies Equity Markets

Block

2
PRIMARY MARKETS
UnitS
Sources and Methods of Raising Capital S

Unit 6
Pre-lssuance Activities 28
Unit 7
Issuance and Post-issuance Activities 44
Unit 8
Regulatory Framework 68
 COURSE DESIGN AND DEVELOPMENT
COMMITTEE
Prof. M.S. Narasimhan Mr. Shrikant Koundinya
Indian Institute of Management Asstt. Vice President, FI'KMC
Bangalore Mumbai
Prof. G. Balasubramanian Ms. Shilpa Rasquinha
Institute for Financial Management Domain Expert and Asstt. Manager
and Research FI'KMC, Mumbai
Chennai
Mr. Vinit Singh Kaler
Mr.. Raghu Iyer Domain Expert and Senior Executive
Derivatives Consultant FrKMC, Mumbai
Mumbai
Prof. G. Subbayamma
Mr. AmitabhChakraborty Director
Managing Director and School •.of Management Studies
Chief Investment Officer IGNOU, New Delhi
Kitara Capital Private Limited
Mumbai Prof. S. Narayan
School of Management Studies
Dr. Bandi Ram Prasad IGNOU, New Delhi
President, FI'KMC
Prof. K. Ravi· Sankar
Mumbai
School of Management Studies
Dr. Jinesh Panchali IGNOU, New Delhi
Sr. Vice President, FI'KMC
Mumbai . Dr. Kamal Vagrecha
School of Management Studies
Mr. Abhinav Chopra IGNOU, New Delhi
Asstt. Vice President, FI'KMC
Mumbai
Mr. Venkat Giridhar
Team Leader
Asstt. Vice President, FI'KMC
Mumbai

Print Production
B.Natrajan S.Burman. Sudhir Kumar
Dy.Registrar (P) Asstt.Registrar (P) Sec. Officer (P)
MPDD (IGNOU) MPDD (IGNOU) MPDD (IGNOU)

June 2011 (Reprint)

© Indira Gandhi National Open University, 2010 &
Financial Technology Knowledge Management Company

ISBN:978-81-266-4506-0
All rights reserved. No part of this work may be reprcxfuced in ~ny form. by mimeograpt» or any
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Printed and Published on behalf of the Indira Gandhi National Open University, New Delhi By Registrar, MPDD .
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.. " .
"v
 I

BLOCK 2· PRIMARY MARKETS

Primary Markets constitute an important segment of financial markets. It involves issue
of new securities (financial claims). It effectively bridges the gap between those entities
seeking funds and investors, who have surplus funds. Due to the importance of this
activity, it is essential to ensure implementation of a robust framework and structure,
and to provide an environment conducive for investors to obtain confidence in the system:
Empirical evidence suggests that primary markets provide the vital impetus for the growth
and development of any country's economy.
Unit 5 discusses the characteristics of primary markets, factors affecting primary
markets, time line for issuance of new equity, different sources and methods of raising
capital. The unit also covers the major aspects related to advantages and disadvantages
of raising capital using different methods. Brief overview of global primary markets is
also analysed.
Unit 6 analyzes the activities in the pre-issuance process of raising equity capital such
as offer documents and prospectus for Initial Public Offering, Rights issue, Follow-on
Public Offering, appointment of intermediaries such as merchant bankers and grading
of issues. The concept and process of underwriting and application supported by blocked
amount (AS13A) is also discussed in detail.
Unit 7 focuses on issuance and post-issuance activities of an IPO leading to secondary
markets listing. The methods involved in pricing of new issues, book building process,
distribution, allocation and finally listing of the shares is also analyzed. Greenshoe option
and the concept of market maker is elaborated in this unit.
Unit 8 highlights the regulatory framework based on SEBI Issue of Capital and
Disclosure Requirements (2009) covering regulations on pre-issuance, issuance and
post-issuance, rights issue, obligations for issuer and intermediary, preferential issues,
qualified institutional placement, bonus issue, Indian Depository Receipt, convertible
debt instruments, promoter's contribution and restriction of transferability of shares.
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UNIT 5 SOURCES AND METHODS OF
RAISING CAPITAL
Objectives
After studying this unit, you should be able to:
• describe the different products and instruments issued in primary markets;
• differentiate between different types of equity share capital;
• analyse the different methods of raising capital; and
• identify the different ways by which resources can be mobilized by Indian companies
in International markets.

Structure
5.1 Introduction

5.2 Characteristics of Primary Markets

5.3 Sources of Raising Capital
5.4 Methods of Raising Equity Capital
5.5 Size of Global Primary Markets
5.6. Summary
5.7 Self Assessment Questions
5.8 Further Readings

5.1 INTRODUCTION
Primary market is a market for issue of new instruments or financial claims. This is the
reason for Primary Markets to also be known as the "New Issues Market". The market
facilitates generation of fresh capital by issuing securities such as equity shares,
. preference shares, debentures, Government Securities, Corporate Bonds, etc.
Funds are mobilized in the primary markets by the Central and State Governments and
Public Sector Enterprises, Banks, Financial Institutions and non-Government Public
Limited Companies (Private Sector). These entities issue new securities periodically, to
raise funds in order to meet their financial requirements. These new issues are floated
through a Prospectus, Rights, and Private Placement'-: Qualified Institutional Placement
(QIP). We shall discuss the meaning and significance of these terminology with specific
reference to the sources and methods of raising capital in Unit 5.
Primarily, issues made by an Indian company can be classified as Public, Rights, Bonus
and Private Placement. While right issues by a listed company and public issues involve
a detailed procedure, bonus issues and private placements are relatively simpler.
a) Public issue
i) Initial Public Offer (IPa)
ii) Further Public Offer (FPO)
b) Rights issue
c) Bonus issue
d) Private placement
5
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Primary Markets i) Preferential issue
ii) Qualified Institutional Placement

Issues

I
I I

Private
Public Issue Rights Issue Bonus Issue
Placement
I
I I

Initial Public Follow-on Public Preferential

Offering Offering
~ Issue

Qualified
"""'i Fresh Issue ~ Fresh Issue ....• Institutionai
Placement

•
- Offer for Sale ....• Offer for Sale

.
Types. of Issue in Primary. Markets: Equity

When an issue r offer of securities is made to new investors for becoming part of
shareholders' family of the issuer, it is called a public issue. Public issue can be further
classified into Initial Public Offer (IPO) and Further Public Offer (FPO). When an
unlisted company makes either a fresh issue of securities or offers its existing securities
for sale or both for the first time to the public, it is called an Initial Public Offering or an
IPO. This enables listing and trading of the issuer's securities in the Stock Exchanges.
When an already listed company makes either a fresh issue of securities to the public or
an offer for sale to the public, it is called a Further Public Offer (FPO) or Follow on
offer. When an issue of securities is made by an issuer to its shareholders existing as on
a particular date fixed by the issuer (i.e., record date), it is called a rights issue. The
rights are offered in a particular ratio to the number of securities held as on the record
date. When an issuer makes an issue of securities to its existing shareholders as on a
record date, without any consideration from them, it is called a bonus issue. The shares
are issued out of the Company's free reserve or share premium account in a particular
ratio to the number of securities held on a record date. When an issuer makes an issue
of securities to a select group of persons not exceeding 49, and which is neither a rights
issue nor a pu~'issue, it is called a private placement. Private placement of shares or
convertible securities by listed issuer can be of two types, namely, Preferential allotment
. and Qualified Institutional Placement (QIP). When a listed issuer issues shares or
convertible securities, to a select group of persons, it is called a preferential allotment.
The issuer is required to comply with various SEBI guidelines which inter alia include
pricing, disclosures in the notice, lock in, etc. in addition to the requirements specified in
the Companies Act. Alternatively, when a listed issuer issues equity shares or securities
convertible in to equity shares to Qualified Institutional Buyers, it is called a QIP.
SEBI has laid down the general conditions for entities to undertake public and rights
issues. This is available in the SEBI Issue of Capital and Disclosure Requirements
(Regulations) 2009. No issuer shall make a public issue or rights issue of specified
securities:
i) If the issuer, any of its promoters, promoter group or directors or persons in control
of the issuer are debarred from accessing the capital market by the Board;
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ii) If any of the promoters, directors or persons in control of the issuer was or also is Sources and Methods
4\ promoter, director or person in control of any other company which is debarred of Raising Capital
/ from accessing the capital market under any order or directions made by the Board;
iii) If the issuer of convertible debt instruments is in the list of wilful defaulters published
by the Reserve Bank of India or it is in default of payment of interest or repayment
of principal amount in respect of debt instruments issued by it to the public, if any,
for a period of more than six months;
iv) Unless it has made an application to one or more recognised stock exchanges for
listing of specified securities on such stock exchanges and has chosen one of them
as the designated stock exchange: P.rovided that in case of an initial public offer,
the issuer shall make an application for listing of the specified securities in at least
one recognised stock exchange having nationwide trading terminals;
v) Unless it has entered into an agreement with a depository for dematerialisation of
specified securities already issued or proposed to be issued;
vi) Unless all existing partly paid-up equity shares of the issuer have either been fully
paid up or forfeited;
vii) Unless firm arrangements of finance through verifiable means towards 75% ofthe
stated means of finance, excluding the amount to be raised through the proposed
public issue or rights issue or through existing identifiable internal accruals have
been made.
Raising capital in Primary Markets itself can be broadly classified into 3 stages, namely,
Pre-Issuance, Issuance and Post Issuance stage. We shall analyze each of these stages
in Units 6 and 7. A brief overview of these stages is given below. This would provide the
larger picture as to the activities leading to the Primary Markets Issue.

Pre-Issuance
The Memorandum of Association (MoU) and Articles of Association (AoA) of the
company are filed with the Stock Exchanges for their comment / feedback / suggestions.
Draft offer document is filed with the SEBI for its comments / feedback / suggestions.
Draft offer document is also filed with the Stock Exchanges requesting permission from
the Exchange to use the Exchange's name in its offer document. Detailed report on the
company is prepared on the basis of the draft offer document and material documents/
information filed with the Exchange and placed before the Listing Committee of the
Exchange which then decides whether the request of the company is to be accepted or
rejected.
If the request is accepted, the company is issued the in-principle approval granting
permission to use the Exchange's name in its offer document. The SEBI gives its
comments on the draft offer document. The changes, if any, as suggested by the SEBI
in its offer document are incorporated. The company then fixes the period for which its
public issue would remain open to investors for subscription.

Issuance and Post Issuance

In the case of a book-building issue the company receives bids for subscription at different
prices falling within the price band. In the case of a fixed price issue, subscription is
received at the issue price fixed by the company.
After the issue closes, in the case of a book-building issue, the company fixes the issue
price in consultation with the lead manager to the issue. In the case of a fixed price
issue, the allotment of securities should be made within 30 days from the date of closure
of the issue, whereas in the case of a book-building issue/ rights issue, the allotment is to
be made within 15 days from the date of closure of the issue. In case there is over-
subscription, the basi-, of allotment is finalized by the company in consultation with the
7
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Primary Markets Designated Stock Exchange. The company, lead ~anager and the registrars to the issue
are responsible for ensuring that the basis of allotment is in accordance with the prescribed
rules andregulations. Thereafter, the company must ensure that all steps for completion
of the necessary formalities for listing and commencement of trading on all the Stock
, Exchanges are taken within 7 working days from the finalization of the basis.
Issues are offered to the public through a prospectus and the public can subscribe
directly to the offer made by any of the prior mentioned entities. Section 67 of the
Companies (Amendment) Act (2000), specifies that when the offer or invitation to
subscribe for shares or debentures is made to 50 or more persons, then such an offer or
invitation shall be deemed to be a public offering and shall have to comply with all the
provisions of the Act as well as the SEBI guidelines applicable to public offerings.
Public issues are open to the general public and media publicity is provided by the issuer
of securities, to attract the attention of the investors. The issuer entitles a registered
Merchant Banker to oversee the development of the Prospectus and ensure that all
regulatory guidelines have been adhered to, in the pre-issue, issue and post-issue phases.
Alternatively, if the issuer provides an offer only for specific select individuals or entities,
e.g., institutions, hedge funds, foreign institutional investors, etc., then such an offer is
usually referred to as a private placement.

TIME LINE FORIPO WEEK

ACTIVITY 1 2 3 4 5 6 7 8 9 10 11 12 13 14
PRE-ISSUANCEACI1VITIES
"
Due diligence, Prospectus Drafting, Resolve
Structural, Legal and Organizational Issues
Develop Positioning, Research Briefing,
Presentation, Research Report Development
File with SEBI and Stock Exchanges
SEBI Review period and stock exchange 1nl'{
approval
Review and Circulate Research Reports
Receive and comply with SEBI comments
Filing wi th Registrar of Companies (RoC)
Pre-Marketing Activities, Print Red Herring
Prospectus
Institutional and Retail Roadshows;
Pre-Issue Advertisement
"J
•
ISSUANCE ACI1VITIES
Advertisement at"opening of Issue,
Bidding in case of Book Built issues
Finalizing Cap and Floor Price, Opening
]If
and Closing of IPO for retail investors and
other participants, Advertisement at Closing
Final Pricing and Institutional Allocation

. '
Non-Institutional Allocation cz;!

POST ISSUANCE ACTIVITIES

illll
Listing and Trading Approvals ·." .•• ·.w
j
Submission of Reports to Regulator ",!l!
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Need for Capital Sources and Methods
of Raising Capital
The-capital sourced from the primary markets may be used by the issuers for development
oi'existing or new businesses=- modernization, expansion or diversification.
Expansion: Investment in fixed assets resulting in increase in the installed capacity of
its existing products.
Diversification: Creation of production capacity of items not being now manufactured
by the unit, without reducing the installed capacity of existing items.
Modernization: Technological up-gradation of the production process of the unit.

INVESTORS

COMPANIES INSTITUTIONS

5.2 CHARACTERISTICS OF PRIMARY MARKETS

Primary Markets enable efficient allocation of resources between companies seeking
funds and investors having surplus funds. The existence of regulatory mechanism ensures
that all participants in the primary markets are on a level platform, to ensure fairness
and integrity. This increases confidence in the entire market. Primary market participants
such as issuing company, merchant bankers, underwriters, brokers and investors need
to adhere to regulatory compliance requirements. This also avoids manipulation in the
market. The pricing of shares is also transparent, due to the processes such as book
building method followedin the markets.
Following is a brief discussion on each of these features of the Primary Markets in
India:

1) Allocation of resources between companies and investors

The flow of funds moves investors (lenders) to corporate (borrowers) directly or indirectly
(through financial institutions). Thus, Primary markets play a significant role in the
allocation of the economy's savings in efficient production of goods and services.
Economic development and growth of an economy can be achieved through savings
and investment. The pace of economic development depends upon the rate of long term
investment and capital formation in a country. Primary market also enables savings of
funds (by investors) to transmit into long term investments by d~ficit units (by corporate).

2) Existence of regulatory mechanism

Primary markets should be governed by a strong regulatory mechanism to protect the
investors, to stabilize the internal management of financial institutions, and to create /
strengthen the structure of the financial markets. Investors should be protected from
malpractices and fraud in the primary markets. The regulations also ensure institutions,
the freedom of operation to improve the efficiency and provide innovative financial
instruments and processes that benefit the investors and other participants. The
regulations must aim to ensure the soundness and safety of financial institutions and
9

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Primary Markets market. Thus, existence of regulations enhances credibility and confidence among market
participants.

3) Existence of price for the securities issued

Companies need to price the shares based on their interactions with the investor
community. The existence of competition in the market force companies to price the
shares, based on the expected returns ofthe investors. This is known as a price discovery
process. This price discovery mechanism helps allocation of funds to the most productive
uses at a lowest cost. While considering investors' expectations, companies consider
their future growth prospects as well.

4) Existence of investors and companies

This feature is the most important for the existence of primary markets. Historically, it
has been noticed that the number of companies raising funds increases during bull phases.
Bull phases are accompanied by economic development. Hence, a company's fund
requirements increase during periods of economic growth development - as could be
witnessed in the last 5 years. Another advantage of raising funds during bull phases is
availability of liquidity. Liquidity is governed by the surplus funds available with financial
institutions, corporate and public as large. Primary Market has tremendous scope and
potential in a growing economy. Primary market is also governed by the volume of
trading in secondary markets. A liquid secondary market can ensure that investors can
sell the shares for meeting capital requirements. Liquidity in the market is a function of
the number of buyers and sellers eager to trade the equity shares. During the bear
market, reverse is usually observed. There is less liquidity in the secondary markets,
less economic development, lower requirement for investments and lack of surplus funds
available in the market. Hence, primary market is usually not active in bear phases. The
number of primary market (new) issues increased between the calendar years 2003
and 2007 (during the bull phase), but there was a sudden decrease in new issues from
the beginning of 2008 - bear market phase started from Jan. 2008.

Factors Affecting Primary Markets

There are various factors that affect the growth and performance ofthe Primary markets.

1) Impact of Secondary Markets

Historically, it has been observed that the secondary market fuels growth in the primary
markets. Growth in Primary markets is measured in terms of the number of companies
raising funds as well as the quantum of funds raised. As secondary markets developed
and attracted new investors from India and abroad (FH), the liquidity in the secondary
market has improved. As secondary market provide exit opportunities to primary market
investors, a liquid secondary market usually assists the growth and development of
primary markets.
But if a company's stock price in secondary market decreases below the Issue Price,
the investors' confidence in the primary market is affected and demand for new issues
decreases. The calendar year 2008 witnessed these factors. In fact, as many as 50 new
companies have either cancelled or postponed their new issues in 2008-09. This is in
anticipation of vibrant economic growth in the country, which would in turn result in
demand for such securities.
Issue price is defined as the price at which shares are allotted to investors in the primary
. markets. Listed Price is the price at which the stock starts trading in the secondary
markets

10

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2) Economic Requirements for funds Sources and Methods
of Raising Capital
Mobilization of funds in the primary market is a reflection of requirement of funds by
various companies. Requirement of funds depends upon the business opportunity in
terms of modernization, expansion and diversification. Thus, Primary Markets affect
the economy of the country and economic development affects the growth of Primary
Markets. This is a cyclical effect.

3) Investors Risk-Return Appetite

Investors have two options for investments namely, Primary and Secondary markets. In
the Primary markets, the returns generated by investor depend upon the issue price and
the listed price. Upon listing on the stock exchange, if the stock commences trading
below the issue price, then it generates negative returns.
For example, let us consider the case of a company, 20 Microns Limited, whose shares
were issued in the primary market at Rs. 55 per share. On 15th May 2009, it was trading
at Rs. 20.05. Thus, if an investor purchased these shares in the primary market at the
issue price, and sells the share on 15th May 2009, he incurs a negative return. If most of
the stocks are traded below the issue price, it creates a barrier for new investors to
invest in new companies in the primary market.
Let us consider another company, Alkali Metals Limited which issued its equity shares
in the primary market at Rs. 103 per share. On 15th May 2009, the shares were trading
at Rs 267.10. Thus, if an investor purchases these shares in the primary markets and
sells it, he generates positive returns.
If most of the stocks are traded below the issue price, it may attract new investors to
invest in new companies in the primary market but at the same time, may not instill
confidence among companies which are planning primary market issues - due to possibility
of failure of the new issues and increase in underwriting expenses.
To summarize, the ultimate success of the IPO is broadly based on the following factors:
• Reasonable first day performance in terms of subscriptions after the launch of the
IPO is critical for the success of the IPO. There have nevertheless been instances
when the IPO subscription increases as the IPO closing date approaches.
• Distribution to Institutions: corporate bodies, retail investors: The success of the
IPO is also proportional to the market reach. Greater is the number of participants
targeted inthe market activities, greater is the probability of the subscription.
• Stable Core holding: Investors are also concerned about the stability of the company
after equity issue.
• The cancellation of the subscriptions should be minimal. This will ensure minimal
flow-back of funds, in case of cancelled applications.
• Strong market performance after listing is dependent on the economic conditions
in general and the overall market performance in particular. Trading volume / investor
confidence in secondary market is critical for IPO's success.

4) Performance of New Issues

Equity Analysts periodically report the performance of newly listed companies on regular
basis. It has been observed that except for few, almost all issues are trading much •,
below the issue price (as on 15th May 2009). Hence, investors may not be keen in
investing in the primary markets, due to possibility of the listing price being lower than
the issue price. But as the situation improves, i.e., stocks start trading above the issue
price, investor risk - return appetite will improve - they may tend to take risk to generate
positive returns.
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Primary Markets Issue Price and Market Price
Name of The Issue Market Price (Rs.) on Issue Price (Rs.)
15th May 2009

Alkali Metals Limited 267.10 103.00

20 Microns Limited 20.05 55.00
Resurgere Mines & Minerals India Limited 72.00 270.00
Austral Coke & Projects Limited 291.20 196.00
Nu Tek India Limited 41.80 192.00
Vishal Information Technologies Limited 44.W 150.00
Birla Cotsyn India Limited 3.95 14.00
Ksk Energy Ventures Limited 169.50 240.00
Lotus Eye Care Hospital Limited 36.W 38.00
First Winner Industries Limited 20.75 125.00
Archidply Industries Limited 20.35 74.00
Sejal Architectural Glass Limited 30.50 115.00
Gokul Refoils And Solvent Limited 238.90 195.00
Kiri Dyes And Chemicals Limited 159.50 150.00
Titagarh Wagons Limited 249.70 540.00
Sita Shree Food Products Limited 8.05 30.00
Gammon Infrastructure Projects Limited 74.25 167.00
Rural Electrification Corporation Limited 117.35 105.00
V-guard Industries Limited 49.75 82.00
Gss America Infotech Limited 170.W 400.00
Tulsi Extrusions Limited 16.35 85.00
Irb Infrastructure Developers Limited 1W.85 185.00
Shrirarn Epc Limited 126.45 300.00
Bang Overseas Limited 110.00 207.00
Onmobile Global Limited 321.W 440.00
Knr Construction Limited 45.05 170.00
Cords Cable Industries Limited 36.30 135.00
J. Kumar Infraprojects Limited W.90 110.00
Reliance Power Limited 128.30 450.00
Future Capital Holdings Limited 149.55 765.00

Activity 1
1) What is the meaning of Primary Markets?

••••••• 0 •••••••••••• 0 _0 ••• 0 •••••••• 0 ••••••••••• 0 •••••••••••••• 0 •••••••••••••••••••••••• 0 ••••••••••••••••••••••••• t ••••

2) List down the major characteristics of Primary Markets.

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3) Why are Primary Markets required for a nation's economy? Sources and Methods
of Raising Capital

5.3 SOURCES FOR RAISING CAPITAL

There are different sources for raising capital. As discussed in Block 1, equity capital
represents ownership capital as equity holders represent as owners of the company and
enjoy the rewards (dividends) and bear the risk (decrease in the market price of the
shares) of ownership. From the corporate perspective, there is no fixed obligation of
funds to be paid to the equity shareholders. It is perpetual in nature. If the shareholders
require funds, they can sell the shares in the secondary markets. Exception: a company
may buy back the shares. A company may buy back its shares without shareholders'
resolution, to the extent of 10% of its paid up equity capital and reserves. However, if a
company intends to buy back its shares to the extent of 25% of its paid up capital and
reserves, then the same has to be approved by Shareholders Resolution as specified in
Section 77A of Companies Act, 1956.

• Authorized: Amount of capital a company can potentially issue.

• Issued: Amt of capital offered to the investor.
• Subscribed: Capital actually subscribed by the investor.
• Paid-up: Actual Amount paid up by the investor to the issuing company.
The obligations of companies towards their shareholders are as follows:
• Income Distribution: The income left after paying the claims of all other investor
(e.g. debt) belongs to the equity shareholders. Dividends once declared, should be
distributed among the shareholders.
• Indirect Control: Shareholders elect Board of Directors who in turn selects the
management of the company.
• Liquidation: Shareholders have residual claim on the assets of the company in
case of liquidation.
13
Primary Markets • Need to maximize shareholder wealth.
Preference shares as was discussed in Block 1, are called quasi equity (having
characteristic of both equity and debt). They behave partly like shares and partly like
debt instruments. Preference share holders get Dividend, which is fixed and paid before
anything is paid to equity holders & Capital appreciation, if any. But they do not have
voting rights. In case a company fails to pay the stated dividends, they may acquire the
voting rights in certain circumstances. The investors can claim stake over the residual
assets, at the time of liquidation of the company, before the equity holders and after the
debt holders. They behave like debt instruments because they carry fixed dividend rates.
They behave like equity instruments because they offer the dividend to the share holders
without any obligation on the company.

\ \,
Obligations of companies towards preference share holders
• Income Distribution: Most of the preference shares carry a cumulative feature
with respect to dividend where unpaid dividends are carried forward and paid in
the future.
• Liquidation: Shareholders have claim on the assets of the company, prior to the
claim of equity shareholders, in caseof liquidation.
Debentures as was discussed in BI~ck 1, are instruments for raising debt finance.
Debentures holders are the creditors of the company. Debt provides the capital to a
company with fixed cost liability (Interest to be paid either annually / semiannually).
Debenture holders get Interest paid as the Payment of interest is an obligation on the
company. But they do not have voting rights which equity shareholders have. They can
claim over the assets of the company before the equity holders.
Obligations of the company issuing debentures includes establishing a Trustee through a
trust deed. The trustee, usually a bank or financial institution is supposed to ensure that
the company fulfils its contractual obligations. Secondly, as Debentures are backed by
mortgages / charges on the immovable properties of the companies. Debentures are '
redeemable in nature. With maturity greater than 18 months, company has to create
Debenture Redemption Reserve (with a reserve of 50% of the amount of issue before
the redemption begins). Company has to pay the pre-decided fixed or floating interest
rate to the debenture holders.
A company can also sources long-term and medium-term loans from financial institutions
like the Industrial Finance Corporation of India (IFCI), State level Industrial Development
Corporations, etc. These financial institutions can grant loans for a maximum period of
25 years against approved schemes or projects. Loans agreed to be sanctioned must be
covered by securities by way of mortgage of the company's property or assignment of
stocks, shares, gold, etc. The corporate also has option of sourcing medium-term loans
from commercial banks against the security of properties and assets. Funds required for
modernisation and renovation of assets can be borrowed from banks. This method of
financing does not require any legal formality except that of creating a mortgage on the
assets.
Alternatively, companies can source funds by inviting the general public to deposit their
savings with the company. Public deposits can be raised by companies to meet their
medium-term as well as short-term financial needs. The increasing popularity of public
deposits is due to: '
• The rate of interest the companies have to pay on them is higher than the interest
from bank fixed deposits, but lower than interest charged by banks and financial
institutions lending to the corporate.
• These are an easier method of mobilising funds than banks, especially during periods
of credit squeeze.
14
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• They are unsecured. Sources and Methods
of Raising Capital
• Unlike commercial banks, the company does not need to satisfy credit-worthiness
for securing loans.
Example: Tata Motors has tapped the market to grab nearly a quarter of the public
deposit space. The firm that launched its scheme announced. that it had collected Rs 175
crore (Rs 1.75 billion) within a month. There was tremendous response once the scheme
opened. Some investors who would have invested in other companies opted for Tata
Motors. But Tata Motors had a statutory limit of Rs 2,700 crore (Rs 27 billion) for
raising deposits from the public. The company did not disclose the exact amount that it
plans to raise or the date till which it will offer the scheme. The automobile manufacturer
turned to public deposits after facing difficulties in raising finance for its acquisition of
Jaguar and Land Rover, the two marquee brands of Ford Motors, in theUK for $2.3
billion. (Source: Business Standard, fan 06, 2009)
Reinvestment of Profits involving transfer of surplus to reserves instead of distributing
the surplus to the shareholders in form of the dividends is another method of sourcing
capital. This may be regarded as reinvestment of profits, Retention of profits is a sort of
self financing of business.
When the corporate is facing a dilemma on the method to raise. capital, it has to analyze
the advantages and disadvantages of raising capital using different methods. The corporate
also usually calculates its total debt to equity ratio. It may also try to analyze the weighted
average cost of capital while exploring different options to raise capital. Following is a
snapshot of the advantages and disadvantages in raising capital by different means.

Constraints in Equity Financing

Raising adequate equity finance tends to be the most challenging aspect of as equity
typically shoulders the greatest level of operational, financial and market risk.
Factor considered as constraints:
• Market Scenario: During bearish scenario, the market risk idcreases. So raising
funds becomes challenging.
.• Investor Sentiments: Investor sentiments are affected due to market crash. So
investor may not commit funds to new issues.
• Regulatory constraints in terms of eligibility: As there are specific eligibility
criteria, some companies become ineligible to raise funds though public IPOs.
• Company Past History and Future Projections: Financial Risk increases based
on negative future projections.
• Exit Options in case of Private Placement: Operational risk increases in case
of private placements

Constraints in Debt Financing

• Firm-specific factors such as leverage, growth opportunities and cash holdings are
related with the convertibility, maturity and security structure of issued bonds.
• Economy-wide factors, in particular the state of the macro economy, affect the
quality distribution of securities offered; in particular, during recessions, firms issue
fewer poor quality bonds than in good times but similar numbers of high-quality
bonds.
• Controlling for firm characteristics and economy-wide Iactors, project specific
factors appear to influence the types of securities that are issued.

15
 1
Primary Markets Advantages and Disadvantages ofSourcing Capital through different means for
shareholders I lenders

·Capital Advantages Disadvantages

• Shares are easily transferable ( • Ownership equity is the last or

via trading on Exchanges ). residual claim against assets,
paid only after all other
creditor~ are paid.
• Limited liability to the extent of • Dividends are paid depending
Equity Capital the face value of the share on the profits available/
discretion of directors. Hence a
company may decide to retain
the earnings.
• Share in the profits of the • Sale of equity to outsiders
company ( Dividends) dilutes the existing shareholders
control

• Prior claim on the assets and • No legal obligation on the

earning of the company as company to preferential dividend
Preference shares compared to the equity • No voting rights
holders
• The company is liable to pay • No voting rights
Debentures interest even if there are no
profits.
Loans from • The company is liable to pay • No voting rights
Financial interest / principal amount.
Institutions
Loans from • The company is liable to pay • No voting rights
Commercial Banks interest / principal amount.
Public Deposits • The company is liable to pay • No voting rights
interest / principal amount.
Reinvestment of Not Applicable Not Applicable
Profits

For IssuerslBorrowers .

Capital Advantages Disadvantages

Equity Capital • Equity Capital has no maturity • Cost of issuing equity shares is
date, hence the firm has no generally higher than the cost
obligation to redeem of issuing other securities. Cost
• Larger the equity base, greater involves underwriting
the creditworthiness of the commision, issue expenses,
. company brokerage cost

Preference Shares • It is regarded as part of net • Though there is no legal

worth hence enhances the obligation to pay preference
creditworthiness of the firm dividends, skipping them effect
the image of the company
• No voting rights, hence no
dilution of control
Debentures • More flexible as compared to • Need to followstrict regulations
loans in term of maturity, like appointemetn of debenture
interest rate, repayment trustee, creating a reverse for
redemption ( Debenture
Redemption Reverse)

16
 1
Sources and Methods
Loans from • Loans can be customised • Financial institutions impose of Raising Capital
Fin;>~ial intenns of repayments,. r~strictive conditions on the
/
Institutions maturity borrowers

Loans from • Loans can be customised • Banks impose restrictive

Commercial Banks interms of repayments and conditions on the borrowers
maturity i

Public Deposits • These are an easier method of • Restrictive conditions on the

mobilizing funds than banks, borrowers intenns of max
especially during periods of amount and period of
credit squeeze. borrowing

Reinvestment of • It reduces the dependence on • Shareholders may demand

Profits external sources of finance. dividends. Hence board of
director need to justify the
• It increases the credit
rationale behind investing the
worthiness of the company.
Profits into the company
• It enables the company to
withstand difficult situations.

• It enables the company to

adopt a stable dividend policy.

Activity 2
1) What are the different sources for raising capital available for a corporate?

.................................................................................................. .: .

5.4 METHODS OF RAISING EQUITY CAPITAL

The primary market serves the purpose of raising funds in the form of new securities.
The Primary Market brings investors and users together resulting in transfer of funds
from one to the other. Transfer of investible funds into industrial enterprises serves the
three functions: namely, Origination, Underwriting and Distribution. A company planning
to source funds has several options. IPO is just one of them. Other forms of equity
financing include secondary offerings, rights issue, private placement, offer for sale and
warrants.
All these forms are discussed in the following sections.

Initial Public Offering

The first sale of stock by a private company to the public, i.e., if the company has never
issued equity to the public, is known as an IPO. This is the most common method of
raising funds from public by issuing shares. The actual IPO process itself starts with the
company proposing to raise capital from the markets. Two options are available for the
issuing company: (i) the fixed price route where the issue price'is fixed or (ii) the book-
building route where the price band is fixed and the issue price is finalized after the issue
closes. But before we proceed ahead, we need to understand which companies are
eligible to undertake an IPO.

Eligibility Criteria
1) As per SEBI regulations provided in the "Issue of Capital and Disclosure
l
Requirements (Regulations), 2009, an issuer may make an initial public offer, if the
following conditions are satisfied:
17
Primary Markets a) it has net tangible assets of at least three crore rupees in each ofthe preceding
three full years (of twelve months each), of which not more than fifty per
cent. are held in monetary assets: Provided that if more than fifty per cent. of
the net tangible assets are held in monetary assets, the issuer has made firm
commitments to utilise such excess monetary assets in its business or project;
b) it has a track record of distributable profits in terms of section 205 of the
Companies Act, 1956, for at least three out of the immediately preceding five
years: Provided that extraordinary items shall not b6- considered for calculating
distributable profits;
. c) it has a net worth of at least one crore rupees in each of the preceding three
full years (of twelve months each);
d) the aggregate of the proposed issue and all previous issues made in the same
financial year in terms of issue size does 'not exceed five times its pre-issue
net worth as per the audited balance sheet of the preceding' financial year;
e) if it has changed its name within the last one year, at least fifty per cent. of the
revenue for the preceding one full year has been earned by it from the activity
indicated by the new name.
2) An issuer not satisfying any of the conditions stipulated above may make an initial
public offer if:
a) i) The issue is made through the book building process and the issuer
undertakes to allot at least fifty per cent. of the net offer to public to
qualified institutional buyers and to refund full subscription monies if it
fails to make allotment to the qualified institutional buyers;
or
ii) At least fifteen per cent of the cost of the project is contributed by
scheduled commercial banks or public financial institutions, of which not
less than ten per cent. shall come from the appraisers and the issuer
undertakes to allot at least ten per cent of the net offer to public to qualified
institutional buyers and to refund full subscription monies if it fails to make
the allotment to the qualified institutional buyers;
b) i) The minimum post-issue face value capital of the issuer is ten crore rupees;
or
ii) The issuer undertakes to provide market-making for at least two years
from the date of listing of the specified securities, subject to the following:
a) The market makers offer buy and sell quotes for a minimum depth of three
hundred specified securities and ensure that the bid-ask spread for their quotes
does not, at any time, exceed ten per cent.
b) The inventory of the market makers, as on the date of allotment of the specified
securities, shall be at least five per cent of the proposed issue.
3) An issuer may make an initial public offer of convertible debt instruments without
making a prior public issue of its equity shares and listing thereof.
4) An issuer shall not make an allotment pursuant to a public issue if the number of
prospective allottees is less than one thousand.
5) No issuer shall make an initial public offer if there are any outstanding convertible
securities or any other right which would entitle any person any option to receive
equity shares after the initial public offer:
Provided that the provisions of this sub-regulation shall not apply to:
a) A public issue made during the currency of convertible debt instruments which
were issued through an earlier initial public offer, if the conversion price of
18
 1
\

such convertible debt instruments was determined and disclosed in the Sources and Methods
prospectus of the earlier issue of convertible debt instruments; of Raising Capital

b) Outstanding options granted to employees pursuant to an employee stock option

scheme framed in accordance with the relevant Guidance Note or Accounting
Standards, if any, issued by the Institute of Chartered Accountants of India in
this regard.
6) Subject to provisions of the Companies Act, 1956 and these regulations, equity
shares may be offered for sale to public if such equity shares have been held by
the sellers for a period of at least one year prior to the filing of draft offer document
with the Board in accordance with sub-regulation (1) of regulation 6 of the ICDR
(2009); Provided that in case equity shares received on conversion or exchange of
fully paid-up compulsorily convertible securities including depository receipts are
being offered for sale, the holding period of such convertible securities as well as
that of resultant equity shares together shall be considered for the purpose of
calculation of one year period referred in this sub-regulation; Provided further that
the requirement of holding equity shares for a period of one year shall not apply:
a) In case of an offer for sale of specified securities of a government company
or statutory authority or corporation or any special purpose vehicle set up and
controlled by anyone or more of them, which is engaged in infrastructure
sector;
b) If the specified securities offered for sale were acquired pursuant to any
scheme approved by a High Court under sections 391-394 of the Companies
Act, 1956, in lieu of business and invested capital which had been in existence
for a period of more than one year prior to such' approval.
7) No issuer shall make an initial public offer, unless as on the date of registering
prospectus or red herring prospectus with the Registrar of Companies, the issuer
has obtained grading for the initial public offer from at least one credit rating agency
registered with the Board.
The following may be noted:
1) "Net Tangible Assets" mean the sum of all net assets of the issuer, excluding
intangible assets as defined in Accounting Standard 26 (AS 26) issued by the
Institute of Chartered Accountants of India;
2) "Project" means the object for which monies are proposed to be raised to cover
the objects of the issue;
3) In case of an issuer which had been a partnership firm, the track record of
distributable profits of the partnership firm shall be considered only if the financial
statements of the partnership business for the period during which the. issuer was
a partnership firm, conform to and are revised in the format prescribed for companies
under the Companies Act, 1956 and also comply with the following:
a) Adequate disclosures are made in the financial statements as required to be
made by the issuer as per Schedule VI of the Companies Act, 1956;
b) The fmancial statements are duly certified by a Chartered Accountant stating
that:
i) The accounts and the disclosures made are in accordance with the
provisions of Schedule VI of the Companies Act, 1956;
ii) The accounting standards of the Institute of Chartered Accountants of
India have been followed;
iii) The financial statements present a true and fair view of the firm's accounts;
4) In case of an issuer formed out of a division of an existing company, the track
record of distributable profits of the division spun-off shall be considered only if the
19
 J
I
Primary Markets requirements regarding financial statements as provided for partnership firms in
Explanation III are complied with;
5)· "Bid-Ask spread" means the difference between quotations for sale and purchase;
6) The term "infrastructure sector" includes the facilities or services as specified in
Schedule X of the SEBI ICDR (Regulations), 2009. The details ofthis are covered
in Unit 8 of this block.

Secondary Public Offering or Follow-on Public Offering

A secondary public offering or Follow-on Public Offering (FPO) is the issue of additional
shares, subsequent to the company's initial public offering. A Secondary offering can be
dilutive in nature. The Company sells new shares, thereby, increasing the number of
outstanding shares, which may dilute the existing shareholder stake. But the FPO can
be used to generate additional long term capital for the company .
. The eligibility norms for a company to make a FPO are that the company needs to
satisfy the foUowing:
i) The aggregate of the proposed issue and all previous issues made in the same
financial year in terms of issue size does not exceed five times its pre-issue net
worth as per the audited balance sheet of the preceding financial year;
ii) If it has changed its name within the last one year, at least fifty per cent of the
revenue for the preceding one full year has been earned by it from the activity
indicated by the new name.
An issuer not satisfying any of the conditions stipulated above may make a FPO if the
following is satisfied:
a) i) The issue is made through the book building process and the issuer undertakes
to allot at least fifty per cent. of the net offer to public to qualified institutional
buyers and to refund full subscription monies if it fails to make allotment to the .
qualified institutional buyers;
or
ii) At least fifteen per cent or the cost of the project is contributed by scheduled
commercial banks or public financial institutions, of which not less than ten
per cent shall come fromthe appraisers and the issuer undertakes to allot at
least ten per cent of the net offer to public to qualified institutional buyers and
to refund full subscription monies if it fails to make the allotment to the qualified
institutional buyers;
b) i) The minimum post-issue face value capital of the issuer is ten crore rupees;
or
ii) The issuer undertakes to provide market-making for at least two years from
the date of listing of the specified securities, subject to the following:
a) The market makers offer buy and sell quotes for a minimum depth of
three hundred specified securities and ensure that the bid-ask spread
for their quotes does not, at any time, exceed ten per cent;
b) The inventory of the market makers, as on the date of allotment of the
specified securities, shall be at least five per cent of the proposed issue.

Rights Issue
It is the issue of new shares in which the existing shareholders are given preemptive
rights to subscribe to the new issue on a pro-rata basis within a specified time. Rights
are often transferable, allowing the holder to sell them on the open market.
20
 1
Private Placement Sources and Methods
of Raising Capital
It is a process of placing shares/ debentures directly with a group of market participants
and assumes market participants have sufficient knowledge and expertise of evaluating
the merits and risks of the investment (as no formal prospectus is issued). The investment
banker plays a vital role in preparing an offer memorandum, and negotiating with potential
investors.

Private Placement by Unlisted Company

A private placement is an issue of shares or of convertible securities by a company to a
select group of persons under Section 81 of the Companies Act, 1956 which is neither, a
rights issue nor a public issue. This is a faster way for a company to raise equity capital.
Companies opt for private placement due the speed of raising capital (normally it takes
2-3 months), confidentiality (as information related to company's business operations to
be accessed by few investors), and is less expensive.

Offer for Sale

An Offer for Sale is also known as Disinvestment. It is the process of issuing existing
shares of promoters to investors. This is a non-dilutive type of offering where shares
are offered for sale by company directors or other privately held shares (by venture
capitalist) who may be looking to diversify their holdings. The offering is not dilutive to
existing shareholders as' no new shares are created.

Raising Equity Capital in International Markets

Following are the different avenues for resource mobilization from international markets:
• Global Depository Receipts (GDR)
• American Depository Receipts (ADR)

t
~
Primarv
Market
I
"

In this section, we shall discuss about the GDR, ADR and IDR. There is also one other
method of raising capital. This is external commercial borrowing. But we would not be
discussing this method under this course, since it pertains to debt capital. Also, foreign
currency convertible bonds are also an important method of raising capital, whereby, on
a later date, the debt issued may be converted into equity capital.
Let us understand the mechanics of raising capital through GDR, ADR and IDR.

Global Depository Receipts (GDR)

Global Depository Receipts (GDR) are equity instruments issued by authorized Overseas
Corporate Bodies (OCB) against shares / bonds of Indian Companies that are deposited
with designated domestic custodian banks. The issue of GDR is in lieu of the shares
deposited. The GDR cam be listed in international stock exchanges and are tradeable.
21
Primary .Markets A GDR may represent one or more shares of the company, based on a fixed ratio. A
holder of the GDR can convert the receipt into equity shares it represents, at any time.
A GDR by itself does not carry voting rights. But after conversion, the shares allotted
have all characteristics of common / ordinary equity shares issued by the company and
are tradeable on the domestic (Indian) exchange. Most of the listings of the GDR issued
by Indian companies are in Luxembourg Stock Exchange and London Stock Exchange.
Indian GDR are primarily sold to institutional investors. GDR are tradeable on the over-
the-counter markets also, where market makers provide liquidity for the instrument.
e-
In May 1992, Reliance became the first Indian company to raise equity in international
capital markets through the mechanism of Global Depository Receipts (GDR).
I
American Depository Receipts (ADR) , !

American Depository Receipt (ADR) is a negotiable instrument that is denominated in

US Dollars (USD). When a non-US based company - that seeks to list in USA -
deposits its shares with a designated bank, the company receives a receipt, which enables
it to issue American Depository Shares (ADS). These ADS are share certificates and
are used interchangeably with ADR, which represent ownership of the deposited shares.
ADR represents a fraction of a share; a single share, or multiple shares of company's
deposited stock. These receipts pay dividends in USD (through a trustee) and is traded
on a US-based stock exchange - such as New York Stock Exchange (NYSE) or the
NASDAQ. The price of an ADR is based on the price of the issuing company's stock
in its home market.
Thus, Investors attempting to enter the emerging markets or other foreign stock exchanges
have to go through expensive commissions and currency exchange before successfully
investing in a foreign market. With ADR, investors can take advantage of foreign markets
while trading in US stock markets.
Following are some of the types of ADR issues:
• Level 1: These are issued in the Over-the-counter (OTC) markets and have the
lowest regulatory requirements from Securities and Exchange Commission. The
Company is not required to issue quarterly or annual reports in compliance with
US Generally Accepted Accounting Principles (GAAP).
• Level 2: These are listed on New York Stock Exchange (NYSE), NASDAQ, and
the American Stock Exchange (AMEX). They have slightly more requirements j
from the SEC, but they have greater visibility and trading volume.
• Level 3: The issuer floats a public offering of ADR on a U.S. exchange and raises .
capital. Setting up a Level 3 program means that the foreign company is not only
taking some of its shares from its home market and depositing them to be traded in
the U.S.; it is actually issuing shares to raise capital.

Difference between ADR and GDR

Following are the major differences between ADR and GDR:
• ADR issues offer access to not only the institutional investors, but also retail investors
based in USA. On the other hand, GDR offers access only to the US-based
institutional investors.
• If the depository receipt is traded in a country other than USA, it is called a Global
Depository Receipt. GDR can be converted into ADR. This is based on Securities
Exchange Commission (SEC) guidelines. SEC is the regulator in US.
• The investors in Europe are not actively participating in the GDR issuance process.
This is due to the lack of confidence among investors, in the Indian company's
22
,
performance. Thus, more companies are converting their existing GDR into ADR, Sources and Methods
as well as issue ADS to enable greater market reach, liquidity and participation by of Raising Capital
/ US-based investors.

Indian Depository Receipts (lDR)

Similar to the mechanism by which Indian companies can issue GDR and ADR in the
international markets, the foreign companies can source capital by issuing Indian
Depository Receipts (IDR) in the Indian markets. IDR enables Indian investors to
diversify their portfolio risk. It also serves to integrate the Indian capital markets with
international markets.
A foreign company can access Indian securities market for raising funds through issue
of Indian Depository Receipts (IDRs). An IDR is an instrument denominated in Indian
Rupees in the form of a depository receipt created by a Domestic Depository (custodian
of securities registered with the Securities and Exchange Board of India) against the
underlying equity of issuing company to enable foreign companies to raise funds from
the Indian securities Markets. Central Government notified the Companies (Issue of
Indian Depository Receipts) Rules, 2004 (IDR Rules) pursuant to the section 605 A of
the companies Act. SEBI issued guidelines for disclosure with respect to IDRs and
notified the model listing agreement to be entered between exchange and the foreign
issuer specifying continuous listing requirements. The eligibility criteria given under IDR
Rules and Guidelines are as under:
The eligibility guidelines for issue of IDR are based on the Companies (Issue of Indian
Depository Receipts) Rules, 2004 and are as follows:
• Company should be registered overseas and should have pre-issue paid up capital
and free reserves of at least USD 100 million, and average turnover of USD 500
million during the 3 financial years immediately preceding the public issue.
• Issuing company should have made profits for at least 5 years prior to the issue
and dividend record of not less than 10%in those years. Also, the issuing company
should ensure that it has a pre- issue debt equity ratio of not more than 2: 1.
• Application should be made at least 90 days before opening of the issue, with a
refundable fee of USD 10,000. Upon receiving the approval, an issue fee of 0.50%
subject to a minimum of Rs. 1,000,000 (Rs. 10 lakhs) needs to be made for issues
up to Rs. 1,000,000,000 (Rs. 100 Crores). If the issue size is greater than Rs. 100
Crores, then an incremental fee of 0.25% is charged of the extent to which the
issue size of greater than Rs. 100 Crores.
• Repatriation of proceeds would be depending on the laws in force for export of
foreign exchange.
• IDR shall not be redeemable into equity shares for a period of 1 year from the date \
of issue.

• IDR issued in a financial year cannot exceed 15% of the issuing company's paid
up capital and free reserves.
,\
\

• IDR will be denominated in Indian Rupees and listed on an Indian stock exchange(s).

• The company's equity shares should be deposited with a designated overseas

custodian bank. One of the Indian depositories would authorize the company to
issue IDR.
• Then the company needs to appoint a merchant banker for overseeing the issue
process.
• Indian investors are subject to FEMA, 1999 guidelines at the time of investing in
IDR.
23
 1

Primary Markets • The issuing company should be listed in its home country
• The company should not be prohibited to issue securities by any Regulatory Body.
• .. It has good track record with respect to compliance with securities market
regulations.
• The size of an IDR issue shall not be less than Rs.50 Crores.
• Foreigners resident or employed in India, subsidiaries of global corporations, and
foreign funds registered in India - Foreign Institutional Investors based in India are
also eligible to invest in IDR
As with public issues, there are a set of intermediaries which are involved in issue of
IDR.
• Overseas Custodian Bank is a banking company which is established in a country
outside India and has a place of business in India and acts as custodian for the
equity shares of issuing company against which IDRs are.proposed to be issued in
the underlying equity shares of the issuer is deposited.
• Domestic Depository which is a custodian of securities registered with SEBI and
authorised by the issuing company to issue Indian Depository Receipts
• Merchant Banker registered with SEBI is responsible for due diligence and through
,whom the draft prospectus for issuance of he IDR is filed with SEBI by the issuer
company.
The Foreign issuer is required to file the draft prospectus with SEBI. Any changes
specified by SEBI shall be incorporated in the final prospectus to be filed with Registrar
of Companies.
IDRs can be converted into the underlying equity shares only after the expiry of one
year from the date of the issue of the IDR, subject to the compliance of the related
provisions of Foreign Exchange Management Act and Regulations issued thereunder
by RBI in this regard. On the receipt of dividend or other corporate action on the IDRs,
the Domestic Depository shall distribute them to the IDR holders in proportion to their
holdings of IDRs.
IDRs can be purchased by.any person who is resident in India as defined under FEMA.
Minimum application amount in an IDR issue shall be Rs. 20,000. Investments by Indian
companies in IDRs shall not exceed the investment limits, if any, prescribed for them
under applicable laws. In every issue of IDR, at least 50% of the IDRs issued shall be
subscribed to by QIBs and the balance 50% shall be available for subscription by non-
institutional investors.

Activity 3
1) What is the difference between IPO, rights issue and FPO?

....., .
2) Differentiate between ADR and GDR. •

24

I
 1
,
3) What is the meaning and significance of IDR? Sources and Methods
, of RaiSing Capital
......................................................................................................................
:
........................................................................................... , .

5.5 SIZE OF GLOBAL PRIMARY MARKETS

In 2008, the New York Stock Exchange (NYSE) raised USD 26 billion in IPO proceeds,
representing 21 % of IPO capital raised on a global basis. Although both US and global
IPO activity fell sharply from the previous year due to challenging market conditions,
NYSE Eoronext raised the most IPO proceeds worldwide for the fifth consecutive
year. In 2008, NYSE Euronext raised approximately USD 45 billion, followed by Hong
Kong which raised $12 billion.
NYSE Euronext listed some of the largest, most recognized companies in 2008. This
included the largest US IPO in history, Visa, which raised USD 17.86 billion I EURO
11.5 billion, and the second largest European IPO for the year, EDP Renovaveis,
which raised US 2.42 billion I EURO 1.566 billion. Other significant IPO's in 2008
included American Water Works, which raised USD 1.40 billion and Intrepid Potash,
which raised USD 1.10 billion. Both listed on the NYSE.
. .

9,000 .Euronext DBAG LSE O!iOOOiI&G ••

8,000 1300 Chemicals

1700_~

7,000 2300 Conslndion & Materials

6,000 2700InMtnalGoods&s.r-.

33OO~&P.rts

5,000 3!iOOFood&~

4,000 3700f.........u& HouiohoId Goods

4!iOOHea!th c...
3,000 5300 Ro

5!iOOMedia
2,000
5700 T,.\IOI & l.o6<ft

1,000 C5OIlT_~

7!iOOUlirlbK
O~-T~~~L-~~--~~~~~~~~~--~~~
9!iOOTecIn>IDgy

IPO volumes (in million Euros) by industry 0\'1.'1' the period 01/01/2005 to 03/3112008

Ernst & Young's first quarter Global IPO update: A snapshot

• Global IPO activity: A total of 50 IPOs worldwide raised just USD 1.40 billion in
capital between 1 January and 31 March 2009 - two deals raised over USD 100
million.
• 78 IPO's worth USD 2.60 billion raised in the previous quarter of Sep 2008 to Dec
2008.
• In Quarter 1 of 2008 (i.e., Jan to Mar 2008), 251 IPOs raised USD 41.20 billion in
capital- this included the VISA IPO USD 19.70 billion, which was the largest US
IPO in history.
• The top three IPOs by capital raised were US consumer staples company Mead
Johnson Nutrition which raised USD 828 million on the New York Stock
Exchange; Chinese company Real Gold Mining Limited (USD 133.01 million,
Hong Kong Stock Exchange); and Saudi Company Etihad Atheeb
25
 1
j

Primary Markets Telecommunication Company (USD 79.95 million, Riyadh Stock Exchange).
Together these accounted for 75% of capital raised during Ql , 2008.
• Emerging markets accounted for 34 of the 50 global IPOs.
• 37 IPOs have been postponed or withdrawn QI2009, this follows 85 in the previous
quarter, Q4 of 2008.
• Gil Forer, Global Director of IPO initiatives at Emst & Young, comments: "The
first quarter results show that the global financial crisis has had a deep impact
on the IPO market and the timeframe for recovery will be much longer than
people initially thought a year ago. There are, however, many quality
companies from both developed and emerging markets, which have delayed
or deferred their public listings. These companies continue to ready themselves
to go public while waiting for market conditions to stabilize."
• The leading sectors by number of IPO's were Industrials (9); High Technology (7)
and Materials (7). Due to the low value of funds raised, the top three sectors by
capital raised mirror the top three IPOs. Consumer Staples (USD 843.1 million),
Metals, Mining and Paper (USD 162.2 million), and Telecoms (USD 144.7 million)
accounted for 83% of total capital raised.
• By funds raised, the top three exchanges in Ql,2009 were the New York Stock
Exchange which despite only 2 IPOs (Mead Johnson and a USD 1.90 million
Chinese listing) accounted for 59.76C!r of capital raised (USD 829.9 million); Hong
Kong Stock Exchange (14.51 %,6 11'(. raised USD 201.4 million); and the Tokyo
Stock Exchange (3.14%, 2 IPOs raised USD 43.6 million).

Capital raised (US$b) C Number of deals

585 591
120 567 o 600
o
Cl
110
100 455 454 458 500
440
90 o C C
403 o
1) 386 381
o
~ 80 337 339 0 337 347 344 342 Cl
333
1 70 Cl D 0 n C C 0

e 60
226
251 267
o C
! 50
! 40
111
C 130
D
164
o
30
o
78
20 100
50 o
10 C
54 S7 513526 $27 $33 $27 $37 $29 $37 533 $68 534562 545$105536590 $59$102541 $38 $13 $3 $1.4
o o

Source: Deatogic, Thomson financial, Emst It Young

India topped the table globally with mobilization of $3.12 billion from four issues, Saudi
Arabia (with $1.23 billion for a solo issue), China ($706 million), the U.S. ($690 million)
and the UK ($170 million) ranked second, third, four and fifth, respectively. India's
share of the global primary market was 49.5 percent, followed by Saudi Arabia (19.5
percent), China (11.2 percent), the U.S. 10.9 percent and the UK (2.7 percent).
Following are some of the largest IPO's till date:
• Industrial & Commercial Bank of China - USD 21.6B in 2006
• NTT Mobile Communications - USD 18.4B in 1998
• Visa Inc. - USD 17.9B in 2008
26

•
 1
• AT&T Wireless - USD 1O.6B in 2000 Sources and Methods
of Raising Capital
• Rosneft USD - 10.4B in 2006

5.6 SUMMARY
Primary market deals with the issue of new instruments (equity shares, preference
shares and debentures etc) by the corporate sectors. Companies, governments or public
sector institutions issue securities from time to time to raise funds in order to meet their
financial requirements. Financial requirement covers modernization, expansion and
diversification.
Primary Market can be classified based on Underlying Instruments, Issue Mechanism,
Issue Process; Type of Investors and Location of Issue.

5.7 SELF ASSESSMENT QUESTIONS

1) What is the meaning of primary markets? What are its characteristics?
2) What are the important functions of primary markets?
3) Who are the participants in primary markets?
4) What is the basis of classification of primary markets?
5) Define GDR, ADR and IDR. What is the difference between these terms?
6) Who can participate in primary markets issue?
7) What is the meaning of book building of an issue?

5.8 FURTHER READINGS

• Khan, M.Y. (2007) Indian Financial System, Tata McGraw-Hill
• Pathak, Bharati V. (2008) The Indian Financial System, Markets Institutions
and Services, Pearson Education, Second Edition
• Websites: www.sebi.gov.in <http://www.sebi.gov.in> for the latest regulations on
primary markets issues

27
 1

UNIT 6 PRE-ISSUANCE ACTIVITIES

Objectives
""""-

After studying this unit, you should be able to:

• identify the activities involving Pre-Issuance of Equity;
• explain the significance of Underwriting of an Issue; and
• identify the compliance requirements in equity pre-issuance phase.

Structure
6.1 Introduction
6.2 Pre-issuance Process
6.3 Underwriting
6.4 Application Supported by Blocked Amount (ASBA Process)
6.5 Summary
6.6 Self Assessment Questions
6.7 Further Readings

6.1 INTRODUCTION
In unit 5, we have discussed the different sources' and methods for raising capitaL In
unit 6, we shall discuss in detail the preliminary stages of initiating the IPO process. The
development of the prospectus is preceded by activities such as due diligence, analyzing
the structural, legal and organizational issues. The prospectus contains critical information
on the company and its activities, as well as the project for which funds are being raised.
The pre-issuance process culminates with the filing of the prospectus with the regulator
SEBI. After formal review by SEBI and approval from the regulator is in place, the
issuing company needs to prepare for the process of marketing the IPO. It may be
noted that SEBI may suggest specific changes to be incorporated in the prospectus, in
which case, the issuing company is expected to duly comply. In Unit 6, we shall analyze
the steps leading to the actual issuance of equity shares ill"the market.
Public issuance market comprises of public issue of shares, debentures and other related
securities like warrants etc. These securities are issued through prospectus, offer for
sale or private placement. Media, periodicals and online portals are the communication
medium for wide publicity. Merchant Banker organizes the entire communication efforts
to create awareness among the institutions and individuals investors.
When a company wants to explore different options of raising capital, as was discussed
in the previous section, it follows a process referred to as "Origination". The process of
"Origination" refers to the work of investigation, analysis and processing of new proposals
of issuing companies by merchant bankers or external consultants. Preliminary
investigation refers to a careful study of technical, economical, fmancial and legal aspects
of the issuer. The issue house / merchant banker (also known as the Lead Manager)
provides the issuer with the stamp of respectability.
In the process of origination, the sponsoring organization renders the following services:
• Determination of class of security to be issued (Equity/Debt) and the price of the
issues in the light of market conditions (at PremiumlDiscount to Face value, Partly
or fully paid up shares).
28

I
 1
• Timing and magnitude of issues. Pre-Issuance Activities
• Methods of floatation (Public Issue, Private Placement).
• Techniques of selling (Fixed PricelBook building).
The Pre-issue obligations of Merchant Bankers are as follows:
1) Due Diligence: The merchant banker should exercise due diligence of high
standards that satisfy all aspects of offer including disclosures adhering to regulatory
compliance.
2) Fee: The merchant banker also needs to arrange for the payment opf the fee at
the time of filing the draft documents on behalf of the issuing company.
3) Documents: The documents to be submitted include the Memorandum of
Understanding (MoU) between the merchant banker (lead manager) and the issuing
company. The MoU specifies the mutual rights, liabilities and obligations relating to
the new equity issue. This document should be submitted to SEBI. In case the
issue is managed by more than one merchant banker, the rights / obligations/
responsibilities of each of them should be demarcated.
4) Underwriting: In the case of under-subscription of the issue, the merchant banker
responsible for the underwriting arrangements should invoke underwriting obligations
- and ensure that the underwriters pay the devolved amount. The same needs to be
provided in the "Inter-se allocation of responsibilities" accompanying the "due
diligence certificate" submitted by the merchant banker to SEBI.
5) Due Diligence Certificate: The lead merchant banker should furnish to SEBI, a
due diligence certificate along with the draft prospectus. The lead merchant banker
should also furnish the following as part of due diligence:
i) Certify that all amendments/suggestions/observations made by the SEBI have
been incorporated into the offer document
ii) Furnish a fresh due diligence certificate at the time of filing the prospectus,
before opening and closing of the issue with the Registrar of Companies (RoC)
6) In case the issuing company is undertaking a follow-on public issue or has already
made any equity issue in the past, then a disclosure certificate needs to be made
stating that all previous refund orders as well as security certificates/credit of
shares into demat account of share applicants and allottees has been made within
the prescribed time adhering to the regulatory compliance norms as specified by
SEBI.
7) The lead merchant banker also needs to provide an undertaking that if any of the
promoters of the issuing company undertake(s) any share transaction of the
company between the date of filing the prospectus with the RoC/stock exchanges
and the date Ofclosure of the issue, the same would be communicated to the stock
exchange concerned within 24 hours of the transaction(s).
8) Also, details regarding the list of promoter(s) and/or promoter groups and their
individual shareholding need to be submitted to SEBI. Also, the issuing company
should submit to the stock exchange, the specific securities are associated with the
Promoter/Promoter group and its/their PAN, Bank account number, passport
number, etc. at the time of filing the prospectus.

6.2 PRE-ISSUANCE PROCESS

An "Offer Document" is a document which contains all the relevant information about
the company, promoters, projects, financial details, objects of raising the money, terms
of the issue, etc and is used for inviting subscription to the issue being made by the.
issuer. "Offer Document" is also called "Prospectus" in case of a public issue or offer
for sale and "Letter of Offer" in the case of a rights issue.
29
Primary Markets Draft offer document: is an offer document filed with SEBI for specifying changes, if
any, in it, before it is filed with the Registrar of Companies (RoC). Draft offer document
is made available in public domain including SEBI website, for enabling public to give
comments, if any, on the draft offer document. Red herring prospectus is an offer
document used in case of a book built public issue. It contains all the relevant details
except 'that of price or number Of shares being offered. It is filed with RoC before the
issue opens.
Prospectus is an offer document in case of a public issue, which has all relevant details
including price and number of shares being offered. This document is registered with
RoC before the issue opens in case of a fixed price issue and after the closure of the
issue in case of a book built issue. Letter of offer is an offer document in case of a
Rights issue and is filed with Stock exchanges before the issue opens. Abridged prospectus
is an abridged version of offer document in public issue and is issued along with the
application form of a public issue. It contains all the salient features of a prospectus.
Abridged letter of offer is an abridged version of the letter of offer. It is sent to all the
shareholders along with the application form. Shelf prospectus is a prospectus which
enables an issuer to make a series of issues within a period of 1 year without the need
of filing a fresh prospectus every time. This facility is available to public sector banks!
Public Financial Institutions. Placement document is an offer document for the purpose
of Qualified Institutional Placement and contains all the relevant and material disclosures .
.Let us analyze the documents classified based on the type of issue as follows:

1) Fixed Price Issue

Draft Offer document means offer document are filed with SEBI, at least 21 days
prior to the filing of (he Offer Document with Registrar of Companies (ROC) ! Stock
Exchange (SE). SEBI may specifies changes, if any, in the draft Offer Document and
the issuer or the Lead Merchant banker shall carry out such changes in the draft offer
document. The Draft Offer document is available on the SEBI web site for public
comments for a period of 21 days from the filing of the Draft Offer Document with
SEBI.

Offer document (at this stage known as Prospectus) which is filed (ROC) and Stock
Exchanges. An offer document covers all the relevant information to help an investor to
make hislher investment decision.

2) Book Building Issue

Red Herring Prospectus (RHP) is a document whi~h will not state the details of
either price or number of shares being offered or the amount of issue. There are two
options available to the issue. If price is not disclosed, the number of shares and the
upper and lower price bands are disclosed and if an issuer states the issue size, then the
number of shares is determined later. An RHP can be filed with the RoC without the
price band and the issuer, in such a case will notify the floor price or a price band by way
of an advertisement one day prior to the opening of the issue. In the case of book-built
issues, it is a process of price discovery and the price cannot be determined until the
bidding process is completed. Only on completion of the bidding process, the details of
the final price are included in the offer document, then offer document is called a
prospectus.

3) Follow-on Public Offering (FPO)

FPO is also referred as Secondary Offering where in an already listed company
makes either a fresh issue of securities to the public or an offer for sale to the public,
through an offer document.
30
 1
4) Rights Issue (RI) Pre-Issuance Activities

It is t' issue of new shares in which the existing shareholders are given preemptive
I'~

righ,s to subscribe to the new issue on a pro-rata basis within a specified time. Rights
are often transferable, allowing the holder to sell them on the open market. The offer is
supported by Offer document (known as Letter of Offer) which is filed Registrar of
Companies (RaC) mid Stock Exchanges. Abridged letter of offer with the application
form comprises of salient features of the right offer.
Example of a Rights Issue: An investor had purchased 1000 shares of company ABC
Ltd @ Rs 40 per share. His total investment stands at Rs 40,000. Assuming a 1:1 rights
issue at an offer price ofRs 20, the investor will have the option to subscribe to additional
1000 shares ofthe company at the offer price. Now, if he exercises his option, he would
have to pay an additional Rs 20,000 in order to acquire the shares, thus effectively
bringing his average cost of acquisition for the 2000 shares to Rs 30 per share
«40,000+20,000)12000=30)

5) Private Placement
When an issuer makes an issue of securities to a select group of persons not exceeding
49, and which is neither a rights issue nor a public issue, it is called a private placement.
, Private placement of shares or convertible securities by listed issuer can be of three
types:

6) Preferential Allotment
When a listed issuer issues shares or convertible securities, to a select group of persons
in terms of provisions of Chapter XIII of SEBI (DIP) guidelines, it is called a preferential
. allotment. The issuer is required to comply with various provisions which inter-alia include
pricing, disclosures in the notice, lock-in etc, in addition to the requirements specified in
the Companies Act. 1

7) Qualified Institutional Placement (QIP)

When a listed issuer issues equity shares or securities convertible in to equity shares to
Qualified Institutional Buyers (QIB) only, it is called a Qualified Institutions Placement.
The document prepared by the Merchant Banker for the purpose of QIP which contains
all the relevant information and material disclosures to enable QIB to make an informed
decision. The document is commonly referred to as a "Placement Document".

Obtaining Appraisal Note

An appraisal note should be prepared by an external institution highlighting the proposed
capital outlay on the project and the sources of funding it.

Appointment of Intermediaries
The list of different intermediaries in the primary markets has already been discussed in
unit 4. The requisite intermediaries should be registered with SEBI. The Lead Manager
shall independently assess the capability and the capacity of the various intermediaries
to handle the issue. It may also be noted that a merchant banker which is associated
with the issuing company as a promoter/director/associate should not lead manage the
issue. But a merchant banker holding shares in the issuing company is allowed to lead
manage the issue only if the listing is on OTCEI or a market maker is proposed to be
appointed as part of the offer document. The definition of an associate company is that
if the merchant banker and/or issuing company hold(s) at least 15% ofthe voting power
in the other entity; or either the merchant banker or issuing company has direct or
indirect control in combination with other persons, over the other entity; or if there is a
31
Primary Markets common director excluding a nominee director amongst the issuing company and the
merchant banker. It is the responsibility of the lead merchant banker to ensure that the
other intermediaries which are appointed by the issuing company are registered with
SEBI. The other intermediaries include underwriters, registrar to the issue, etc. The
issuing company needs to enter into MoU with all intermediaries concerned. Also the
issuing company and merchant banker need to ensure that bankers to the issue are
appointed in all collection centres. The lead merchant bankers cannot act as registrar to
the issue in which they are also handling the post-issue responsibilities. They need to
verify that SEBI-registered Registrars are only appointed in all public/rights issues. Also,
if the registrar to an issue is itself raising funds through issue of equity, then a third
independent entity registered with SEBI as the registrar needs to be appointed to process
the issue.
Also, the registrar of an issue should not be connected in any way to the issuing company
- similar to that of the merchant banker discussed above. For example, the registrar to
an issue and the issuing company should not have a common director, other than the
nominee director. The designated registrar to an issue would be primarily responsible
for all the issue management activities. In case of anticipation of a large number of
applications, then the issuing company in consultation with the lead manager (merchant
banker), may appoint more than 1 SEBI-registered registrar for collecting the application
forms. Such collected application forms needs to be forwarded to the sole designated
registrar of the issue, as mentioned in the offer document.
The lead merchant banker also needs to ascertain the capacity and background of the
underwriters to discharge their underwriting obligations before their appointment - i.e.,
after written consent is obtained from the underwriters. The lead manager also needs to
provide an undertaking that the underwriter's net worth is adequate enough for the
underwriter to meet the underwriting obligations. The details of the underwriter need to
be included in the offer document.
Where an issue is managed by more than one lead manager, the responsibility of each
lead manager shall be clearly delineated. The lead manager should ensure proper
disclosures to the investors, compliance with the Guidelines for Disclosure and Investor
Protection issued by SEBI.
In the next few sections of this unit, let us analyse the characteristics and significance of
a Prospectus, which is critical for initiating the fund raising process ..

Prospectus
The document covering the details of the company is known as Prospectus. The
prospectus is a legal document that has to disclose all material and essential factors
about the company. The regulations issued by Securities and Exchange Board of India
(SEBI), popularly known as Disclosure and Investor Protection (DIP) guidelines has
laid down guidelines for raising funds from the public. By disclosing information in the
prospectus, investors can take informed decision while investing in a company.
Prospectus is also a document inviting applications for shares from the public. As
prospectus is a statuary document and investors can sue the company for furnishing
wrong information. Investor are supposed to evaluate the company based in the various
factor highlighted in the figure.
The prospectus contains information on the credibility and track record of the promoter.
It also has information on the past performance of the company, products and business
of the company, shareholding structure, reason for raising funds, risk factors, reputation
of the collaborators (in case of joint venture) and / or major stakeholders, annual
compensation of the the top management executives and also the credit rating given by
. the Credit Rating Agency.
32
 1
Pre-Issuance Activities

,d

Prospectus

Information to be contained in Prospectus

Cover page of the prospectus has details of the Issuer Company, lead managers and
registrars; the nature, number, price and amount of instruments offered and issue size,
and the particulars regarding listing. Other details such as Credit Rating, IPO Grading,
risks in relation to the first issue, etc are also disclosed if applicable. The management of
the issuer company also provides its views on the internal and external risks envisaged
by the company and the proposals, if any, to address such risks. It is generally advised
that the investors should go through all the risk factors of the company before making an
investment decision. A summary of the industry in which the issuer company operates;
the business of the issuer Company, summary of consolidated financial statements, the
merchant bankers and their responsibilities, the details of brokers/syndicate members to
the Issue, credit rating (in case of debt issue), debenture trustees (in case of debt issue),
monitoring agency, IPO Grading in case of First Issue of Equity capital and details of
underwriting Agreements are given. Important details of capital structure, objects of the
offering, funds requirement, funding plan, schedule of implementation, funds deployed,
sources of financing of funds already deployed, sources of financing for the balance
fund requirement, interim use of funds, basic terms of issue, basis for issue price, tax
benefits are also covered.
Litigations involving the company, the promoters of the company, its subsidiaries, and
group companies are disclosed. Also material developments since the last balance sheet-
date,government approvalsllicensing arrangements, investment approvals (FIPBIRBI
etc.), technical approvals, and indebtedness, etc. are disclosed.

33
Primary Markets Ranking of equity shares, mode of payment of dividend, face value and issue price,
rights of the equity shareholder, market lot, nomination facility to investor, issue procedure,
book building procedure in details along with the process of making an application, signing
. of underwriting agreement and filing of prospectus with SEBIIROC, announcement of
statutory advertisement, issuance of confirmation of allocation note("can") and allotment
in the issue, designated date, general instructions, instructions for completing the bid
form, payment instructions, submission of"bid form, other instructions, disposal of
application and application moneys, , interest on refund of excess bid amount, basis of
allotinent or allocation, method of proportionate allotment, dispatch of refund orders,
communications, undertaking by the company, utilization of issue proceeds, restrictions
on foreign ownership of Indian securities, are disclosed.

Grading of Issues
IPO grading is the grade assigned by a Credit Rating Agency (CRAs) registered with
SEBI, to the initial public offering (IPO) of equity shares or any other security converted
into equity shares at a later date. The grade represents a relative assessment of the
fundamentals of that issue in relation to the other listed equity securities in India. Such
grading is mandatory and generally assigned on a five point point scale with a higher
score indicating stronger fundamentals and vice versa as below.
Following are the grades provided by rating agencies for IPO:
• IPO grade 1 - Poor fundamentals
• IPO grade 2 - Below Average fundamentals
• IPO grade 3 - Average fundamentals
• IPO grade 4 - Above average fundamentals
• IPO grade 5 - Strong fundamentals
There are several factors that can affect the grading of an issue. The ProspectuslRed
Herring Prospectus must contain the grade(s) given to the IPO by all CRAs approached
by the company for grading such IPO.
The areas listed below are generally looked into by the rating agencies, while arriving at
an IPO grade.

• Business Prospects and Competitive Position

• Industry Prospects
• Company Prospects
• Financial Position
• Management Quality
• Corporate Governance Practices
• Compliance and Litigation History
• New Projects-Risks and Prospects
It may be noted that the grading of IPO is not based on the issue price.

Submission of Draft Offer Documents

The Lead Manager shall hand over the draft offer document to SEBI and also to the
Stock Exchange(s) where the issue is proposed to be listed. The offer document should
also be made public for a period of 21 days from the date of filing the draft offer
document with SEBI. The lead merchant banker should take care to file the offer document
with the concerned stock exchange also. It is the lead merchant banker's responsibility
tq ensure public access of the draft offer document by hosting it on websites of all the
lead managers / syndicate members who are associated with the public issue. Printed
34
 1
versions should also be made available. An in-principle approval obtained from the stock Pre-Issuance Activities
exchange for listing is required to.be forwarded to SEBI.

Agreement with Depositories

It is also mandatory for the lead merchant banker to ensure that an agreement is made
with the depository and the issuing company for the facility to dematerialize the shares.
This is mandatory, since the allotted shares are credited into the demat account of the
applicant.

Pre-Issue Advertisement
After obtaining the final comments from SEBI and making the necessary amendments,
the issuing company needs to publish advertisements in at least one English national
daily with wide circulation, one Hindi daily and a regional newspaper with a wide circulation
in the place where the issuing company has its registered office. The advertisement
should be in the specified format - based on whether the issue is based on fixed price or
book building method.

Despatch of Issue Material

The lead merchant banker should ensure that the offer documents and other related
material including the application form format for the public issue are despatched to the
various stock exchanges/brokers/underwriters/bankers to the issue/investor associations
and other intermediaries. This should be done in advance, to avoid any possible delay.
The letters of offer to shareholders for the rights issue should be despatched at least 1
week before the opening date of the issue. After filing the prospectus / letter of offer
with the RoC/stock exchange(s), the regulator SEBI should be informed at least 10
days prior to the issue opening date.

No Complaints Certificate
After 21 days from the date of draft offer document is made public, the lead merchant
banker should file a statement with SEBI. The statement should contain the list of
complaints received by the issuing company and should also state whether it proposes to
amend the draft or not, subsequent to the receipt of the complaints. If amendments are
made, then the specific amendments to the offer letter needs to be highlighted.

Mandatory Collection Centres

The issuing companies may appoint as many collection centres as possible. More the
number of collection centres, greater is the probability of larger subscription to the issue.
SEBI has specified a minimum number of mandatory collection centres. These include
at least 4 metropolitan centres situated at Mumbai, Delhi, Kolkota and Chennai. This
also includes regions where the registered offices of the specific stock exchanges are
located, which are part of the issuing process. The issuing company may also appoint
authorised collection agents, in consultation with the lead merchant banker. But these
are subject to adequate disclosures - including their names, address, etc. The modalities
of selection and appointment of the collection agents can be done at the discretion of the
lead merchant banker. Usually, a due diligence is performed by the lead merchant banker
to ensure that the collection agents are equipped with adequate infrastructure and
manpower, for the issue process. It may be noted that the collection agents may collect
the application forms along with the payment made in the form of demand draft or
cheque. But the collection agents are prohibited from collecting payment in the form of
cash.
,
The application amount collected by the collection agents should be deposited into a
special share application account with a designated scheduled commercial bank, either
35
Primary Markets on the same date or latest by the subsequent business day. The application forms should
be forwarded to the registrar to the issue, after realization of the cheques. Any cheque
which fails to be realised (bounced cheques or cheques returned) should be separated .
.This is to be done within two weeks of the issue closure date. The acknowledgement
receipt part of the application form is legally binding on the issuing company, lead merchant
banker collection agent and the registrar of the issue.
Investors also have the option of sending their application forms along with the prescribed
amounts to the registrar by registered post. These would be vetted by the registrar to
the issue.

Abridged Prospectus and Application Form

The lead merchant banker needs to ensure that every application form i.e., distributed
by the issuing company and its set of collection agents, underwriters, registrar to the
issue and other intermediaries should necessarily- have an abridged version of the
-prospectus. The application form may be stapled to the abridged prospectus. The lead
merchant banker needs to ensure that the abridged prospectus should not contain
information that is not a part of the actual prospectus. Also, the content needs to be
printed in the font size 7m with adequate spacing. The application form should also have
sufficient space for filling in the details of applicant - such as the name, address, contact
details, etc.

Activity 1

1) What are the different types of offer documents prepared for various modes of
raising capital?

......................................................................................................................
•

2) What is the significance of Grading new issues? What are the different types of
grades?

3) What is the minimum number of mandatory collection centres to be appointed for

an IPO?

6.3 UNDERWRITING
When a company is making a public issue or rights issue, desires to have the issue
"underwritten", it shall appoint underwriters. The concept of "underwriting" refers to
contractually guaranteeing subscription to issued securities. An underwriting agreement
acts as a back-up in case of inadequate subscription by investors / public. The adequate
institutional arrangement for underwriting is of crucial importance both to the issuing
companies as well as investing public.
36
 1
In India, merchant bankers, stockbrokers, banks and financial institutions offer Pre-Issuance Activities
underwriting commitments and receive commission on the amount underwritten. In some
western countries, underwriting means purchase of securities from a company by
investment bankers, who subsequently sell it to investors. Global IPOs generally involve
one or more investment banks as underwriters. The company (issuer), enters into a
contract with a lead underwriter to sell its shares to the public. The underwriter then
approaches investors with offers to sell these shares.
In accordance with Securities and Exchange Board of India (Underwriters) Regulations
(1993), the public issue through the book building process should be mandatorily
underwritten by book runners or syndicate members, if fifty per cent of the net offer is
proposed to be compulsorily allotted to qualified institutional buyers. The issuer shall
enter into underwriting agreement with the book runner, who in turn shall enter into
underwriting agreement with syndicate members, indicating therein the number of
specified securities which they shall subscribe to at the predetermined price in the event
of under-subscription in the issue.
If syndicate members fail to fulfill their underwriting obligations, the lead book runner
shall fulfill the underwriting obligations. It may be noted that the book runners to the
issue and syndicate members shall not subscribe to the issue in any manner except for
fulfilling their underwriting obligations.
A copy of the syndicate agreement needs to be filed with the SEBI before the opening
of bids. In case of every underwritten issue, the lead merchant banker or the lead book
runner shall undertake minimum underwriting obligations as specified in the Securities
and Exchange Board of India (Merchant Bankers) Regulations, 1992. Where hundred
per cent of the offer is underwritten, the underwriting obligations shall be for the entire
hundred per cent of the offer. Tlie underwriting obligation will not be capped by the
minimum subscription level. The minimum subscription to be received in an issue shall
not be less than ninety per cent of the offer. In the event of non-receipt of minimum
subscription, the entire amount received towards subscription shall be refunded to the
applicants not later than fifteen days of the closure of the issue, in case of a non-
underwritten issue; and seventy days of the closure of the issue, in the case of an
underwritten issue where minimum subscription including devolvement obligations paid
by the underwriters is not received within sixty days of the closure of the issue.
The offer document shall contain adequate disclosures regarding minimum subscription
and details of the underwriters. In case of oversubscription, no allotment shall be made
by the issuer in excess of the specified securities offered through the offer document.
The sale of shares in an IPO may take several forms. Common Methods include:
1) Best efforts contract: The underwriter agrees to sell as many shares as possible
at the agreed-upon price.
2) Firm commitment contract: The underwriter guc,rrantees the sale of the issued
stock at the agreed-upon price. For the issuer, it is the safest but the most expensive
type of the contracts, since the underwriter takes the risk of sale.
3) All-or-none contract: The underwriter agrees either to sell the entire offering or
to cancel the deal.
\
-, 4) Bought deal: When an underwriter (investment bank/syndicate) purchases
securities from an issuer before a preliminary prospectus is filed. The investment
bank (or underwriter) acts as principal rather than agent and thus actually "goes
long" in the security. The bank negotiates a price with the issuer (usually at a
discount to the current market price, if applicable),
The concept of appointment of underwriters ensures that the issuers do not have a
financing risk.
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•
Primary Markets The deals bought by underwriters are usually priced at a larger discount to market than
fully marketed deals. This ensures that the issue is easier to sell by the underwriter. If
the underwriter cannot sell the securities, it must hold them.
The underwriters are appointed by means of a Dutch auction. The auctioneer begins
with a high asking price which is lowered until some participant is willing to accept the
auctioneer's price, or a predetermined reserve price (the seller's minimum acceptable
price) is reached. The Dutch auction is named for its best known example, the Dutch
flower auctions. There is an alternative method known as stand-by underwriting. This is
also known as strict underwriting and is an old-fashioned underwriting in the form of
stock insurance. The issuer contracts the underwriter for the latter to purchase the
shares if the issuer failed to sell the IPO.

Regulations on Underwriting
An issuer making a public issue (other than through the book building process) or rights
issue, desires to have the issue underwritten, it shall appoint the underwriters in
accordance with Securities and Exchange Board of India (Underwriters) Regulations,
1993. If the issuer is making a public issue through the book building process, such issue
shall be underwritten by book runners or syndicate members. For this, the following
conditions need to be satisfied:
1) Minimum of 50% of the net public offer which is proposed to be compulsorily
allotted to qualified institutional buyers for the purpose of compliance of the eligibility
conditions cannot be underwritten. This becomes 60%, if public issue is made with
at least ten per cent public offer.
2) The issuer shall enter into underwriting agreement with the book runner, who in
turn shall enter into underwriting agreement with syndicate members, indicating
therein the number of specified securities which they shall subscribe to at the
predetermined price in the event of under-subscription in the issue.
3) If syndicate members fail to fulfill their underwriting obligations, the lead book
runner shall fulfill the underwriting obligations.
4) The book runners and syndicate members shall not subscribe to the issue in any
manner except for fulfilling their underwriting obligations.
5) A copy of the syndicate agreement shall be filed with the SEBI before the opening
of bids.
6) In case of every underwritten issue, the lead merchant banker or the lead book
runner shall undertake minimum underwriting obligations as specified in the Securities
and Exchange Board of India (Merchant Bankers) Regulations, 1992.
7) Where 100% of the offer through the offer document is underwritten, the
underwriting obligations shall be for the entire 100% of the offer and shall not be
restricted up to the minimum subscription level.

Activity 2
1) What is the meaning of underwriting?

2) What is the significance of underwriting of issues?

38
3) List down the major activities in the pre-issuance phase of an IPO? Pre- Issuance Activities

",I .

6.4 APPLICATION SUPPORTED BY BLOCKED

AMOUNT (ASBA) PROCESS
Application Supported by Blocked Amount (popularly referred to as ASBA) is an
application containing an authorization to block the application money in the bank account,
for subscribing to an issue. If an investor is applying through ASBA, hislher application
money shall be debited from the bank account only if hislher application i.., selected for
allotment after the basis of allotment is finalized, or the issue is withdraw n/failed, In
case of rights issue his application money shall be debited from the bank account after
the receipt of instruction from the registrars.
An individual investor can apply through ASBA process in a public issue through book
building route provided he/ she:
i) is a "Resident Retail Individual Investor" i.e., applying for shares/ securities up to
Rs.1,00,000;
ii) is bidding at cut-off, with single option as to the number of shares bid for;
iii) is applying through blocking of funds in a bank account with the SCSB;
iv) has agreed not to revise hislher bid; and
v) is not bidding under any of the reserved categories.
SEBI hasperrnitted ASBA process in rights issue on pilot basis. All shareholders of the
company as on record date are permitted to use ASBA for making applications in rights
issue provided he/she:
i) is holding shares in dematerialised form and has applied for entitlements or additional
shares in the issue in dematerialised form;
ii) has not renounced its entitlements in full or in part;
iii) is not a renouncee to the Issue; and
iv) applies through a bank account maintained with SCSBs.
Applying through ASBA process has the following advantages:
a) The investor need not pay the application money by cheque. He/she submits ASBA
which accompanies an authorization to block the bank account to the extent of the
application money.
b) The investor does not have to bother about refunds, as in ASBA only that much
money which is required for allotment of securities, is taken from the bank account
only when his application is selected for allotment after the basis of allotment is
finalized.
c) The investor continues to earn interest on the application money as the same remains
in the bank account.
d) The application form is simpler.
e) The investor deals with the known intermediary i.e its own bank.
It may be noted that it is not mandatory for the investor to apply through ASBA. An
investor, who is eligible for ASBA, has the option of making application through ASBA
39
Primary Markets or through the existing process of applying with cheque. As of now, investors cannot
make application through ASBA process in all issues. ASBA is applicable to only book-
built public issues which provide for a uniform payment option to the retail individual
investors. On ,Pilot basis, SEBI has enabled ASBA in few selected rights issues.
The ASBA application needs to be made at select banks and their branches. These
banks are referred as Self Certified Syndicate Banks (SCSBs). Specific branches of
such banks are designated where ASBA application form may be submitted. This list is
available in website of BSE, NSE and SEBI. The same would also be given in the
ASBA application form. SCSB is a bank which is recognized as a bank capable of
providing ASBA services to investors. It may also be noted that the ASBA can be
submitted only to the SCSB with whom the bank account authorised to be blocked, is
maintained.
The ASBA application may be made on hardcopy (physical ASBA form) and same
may be forwarded to the SCSB. Alternatively, investors may apply electronically through
the internet banking facility (if provided by the respective SCSB).
Investors need to verify the form carefully. In case of public issue, the application form
for ASBA will be different from the existing application form for public issues. The
application forms will be available with designated branches of SCSB. In case of rights
issue, there will not be a separate form for ASBA. The investor has to apply by selecting
ASBA option in Part A of the Composite Application Form.
Investors can withdraw ASBA bids. During the bidding period, the investor can approach
the same bank to which the bid was submitted and request for withdrawal through a
duly signed letter citing the application number, TRS number, if any.
Even after the bid closure period, the investor can send his/her withdrawal request to
the Registrars, who will cancel the bid and instruct SCSB to unblock the application
money in the bank account after the finalization of basis of allotment.
The investor can approach the concerned SCSB for any complaints regarding your
ASBA applications. The SCSB is required to give reply against any complaints within
15 days. In case, the investor is not satisfied, he/she may write to SEBI's Investor
Grievance Cell.
When an investor applies for an issue through ASBA, only the amount applicable for the
issue is blocked in the ASBA denominated account. The balance amount may be used
for other purpose, as deemed fit by the investor. If the withdrawal is made during the
bidding period, the SCSB deletes the bid and unblocks the application money in the bank
account. If the withdrawal is made after the bid closure date, the SCSB will unblock the
application money only after getting appropriate instruction from the Registrar, which is
after the finalization of basis of allotment in the issue.
Investors need not necessarily have their depository account with the SCSB, where
they are submitting the ASBA form. An investor can apply either through ASBA or
through existing system of payment through cheque. If an applicant applies through both
ASBA as well as non ASBA then both the applications having the same PAN, will be
treated as multiple application and hence rejected. The Self Certified Syndicate Bank
(SCSB) is required to give the acknowledgement for submission of ASBA application
form. .

The bids received through ASBA mode will also be reflected in the demand graphs
displayed in the website of stock exchanges. In case, there is an error by the investor in
entering the data in the application form, the investor shall be responsible for the same.
In case, there is an error by SCSB in entering the data in the electronic bidding system
of the stock exchanges, the SCSB shall be bearing the responsibility. The SCSB shall
give a counterfoil as an acknowledgement at the time of submission of ASBA and also
40
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the order number, generated at the time of uploading the application details, if sought by Pre-Issuance Activities
the investors in case of need. ASBA forms will be treated similar to the non-ASBA
forms .while finalizing the basis of allotment. In case the issue is withdrawn by the
issumg company due to under-subscription, the SCSB shall unblock the application money
from the bank accounts upon receiving instructions from the Registrar.
In case of any complaints about non-receipt of refund, the investor shall approach the
bank, where the application form was submitted or the Registrars to the issue.
Issuer is deemed to have entered into an agreement with one or more SCSBs who have
been recognized as such by SEBI. As such, issuer has no discretion in choosing SCSBs.
It is the primary responsibility of the Issuer to ensure the following:
• Registrar to issue appointed by the issuer has capability to comply with the
procedures laid down by SEBI for ASBA and shall treat ASBA and Non-ASBA
application at par.
• Sufficient number of physical ASBA application forms are printed and made
available to all SCSBs, in case SCSB intends to provide physical ASBAs.

Role of SCSB
A bank which is registered with SEBI as a Banker to issue in terms of SEBI (Bankers
to an Issue) Regulations can become SCSB subject to the following requirements:
• Submit a certification to SEBI confirming that it is capable of discharging the
responsibilities of an SCSB.
• SEBI to include name of the bank in the list of SCSBs displayed in SEBI's website.
• The bank shall act as SCSB w.e.f, 1st or 15th of the month whichever is later from
date of inclusion in the list.
The bank can register with the the stock Exchange offering electronic bidding system
for the issue process. Presently this is being offered by Bombay Stock Exchange and
National Stock Exchange. The SCSB needs to ensure that connectivity is established.
Systems need to be in place to get the connectivity for secure transfer of data from
. banks to Stock Exchanges.
Any bank which is registered as bankers to an issue registered with SEBI in terms of
SEBI (Bankers to an Issue) Regulations can become SCSB subject to satisfying other
conditions specified by SEBI. SCSBs can provide a facility of submitting ASBA through
the internet banking facility to the investors electronically where the provision to block
the account is provided.
After receipt of ASBA, SCSB is expected to ensure the following:
• Blocking of funds in the bank accounts mentioned in ASBA
• Uploading the details given in ASBA received physically or electronically, in the
electronic bidding system of Stock Exchange(s).
SCSB is not required to validate the details given in ASBA application. SCSB is however
required to follow the normal diligence required in banking transactions, such as KYC
norms for opening the bank account, etc. SCSB is wholly responsible for any omission
and commission done during the process and the bids which are uploaded in the electronic
bidding system of Stock Exchanges has to be done through SCSB code.
SCSB can also transfer the blocked account into a separate account if it serves the
purpose of blocking till allotment is finalized. The interest, if any, earned by investor till
the amount is transferred to the issuer account, is payable by SCSB to the investor.
In case of public issues, SCSB may approach the Stock Exchange offering electronic
bidding system for obtaining the file formats to upload bids. The stock exchanges will
41

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Primary Markets inform SCSB about the file formats. It may be noted that only after the mock trial run
done with Stock Exchanges and Registrar, the bank will be in position to submit a
certification to SEBI.
In case of Rights Issues, SCSBs may approach the Registrars for the file formats till the
Rights Issues application data are also routed through the electronic web enabled interface
of the stock exchanges. SCSB is required to upload details like Application number, DP
ID, Client ID, Bid Quantity, PAN from the ASBA form.
In case of an Electronic ASBA, the ASBA investor himself/ herself shall fill in all the
above mentioned details in the online application system of the bank, except the application
number which shall be system generated. The SCSB shall thereafter upload all the
above mentioned details in the electronic bidding system provided ~y the Stock
Exchange(s).
Further, if there is any withdrawal during the bidding period, SCSB shall ddete the same
for each record individually or through batch upload. SCSB is also required to send the
following details to Registrar after closure of the bidding period:
• Total number of ASBAs uploaded by the SCSB
• Total number of shares and total amount blocked against the uploaded ASBAs.
It is not mandatory that only the designated branch (DB) which accepts the ASBA to
upload the bids into the electronic bidding system. Depending upon the internal comfort
and system of each bank, it is possible for DBs to collect applications, block the amount
and then transfer to Controlling Branch (CB) for centralized uploading or DBs to only
collect applications and upload directly. It may be noted that as far as investors are
concerned, they would be informed about addresses of DBs where they can submit
ASBA. Thereafter, the procedure to be followed is totally internal to SCSB and it is
possible that DBs which accept ASBA, only upload the bids or the DB will transfer the
applications to the CB for uploading the bids, subject to timelines specified by SEBl
being followed.
Stock Exchange electronic bidding system will provide for generation of order number,
which confirms the uploading of bids. These order numbers as well as application numbers,
will help SCSB as well as the investors in tracking their application. However, in the
case of Rights issues, for the time being, the application data is flowing directly from the
SCSB to the Registrar and not routed through the stock exchange electronic web enabled
interface. Hence, the application data is sent directly to the concerned registrars, who
confirm the receipt of application to SCSBs.
ASBA physical forms may be ret.u fled for a period of 6 months with SCSB for redressing
complaints if any, of ASBA investors. Thereafter, the same may be sent to the issuer.
As regards electronic ASBA, SCSB need not take print out or submit such print out to
issuer or registrar.
In case the investor withdraws his ASBA bid during the bidding period or after the bid
closure in case of public issues, th.e investor needs to approach the SCSB and request
for deletion of the bids. SCSB will do the necessary to delete the bids from electronic
bidding system and unblock the bank account. However, once the bidding period is over,
ASBA investor will write to the Registrar giving all the relevant details like ASBA No,
order no, if available, DP ID, Client ID and PAN etc based on which Registrar will
remove the bid from the electronic bid file. Howex c r. the bank account will be unblocked
by SCSB only after the receipt of appropriate instruction from the Registrar after
finalization of basis of allotment in the issue.
Role of the Controlling Branch (CB) is expected to act as a central point of co-ordination
for various intermediaries with SCSB i.e., Stock Exchanges, Registrar and Merchant

42
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Bankers. Once a bank is included in the list of SCSBs maintained by SEBI, it shall act as Pre-Issuance Activities
SCSB for all issues to come where ASBA is applicable.
Registrar do the reconciliation based on data received from Stock Exchanges and the
aggregate data received from SCSBs after closure of the issue regarding total number
of bids uploaded, the totalnumber of shares applied for in such uploaded bids and total
amount blocked for such uploaded bids.

6.5 SUMMARY
The different methods of raising capital in primary markets include IPa, Rights Issue,
Follow-on (or further) Public Offering and Private Placement. The sourcing of financing
may be long term or short term. Long term sources include issue of shares, debentures
and different types of debt. Short term financing includes trade credit, factoring, bills of
exchange, bank overdraft and cash credit. Process of IPa includes pre-issue and post
issue activities.

6.6 SELF ASSESSMENT QUESTIONS

1) What are the different methods of raising capital?
2) What is the meaning of an IPa? How is it different from an FPO?
3) What is the definition of a Rights Issue?
4) How can an investor hope to raise funds by using the private placement route?
5) What are the different types of private placement?
I

6) What are the pre-issue activities involved in an IPa? Explain with a diagram.
7) What is the meaning and significance of underwriting?
8) What are the benefits of ASBA process?
9) What is a SCSB?

6.7 FURTHER READINGS

1) Khan, M.Y. (2007) Indian Financial System, Tata McGraw-Hill.
2) Pathak, Bharati V. (2008) The Indian Financial System, Markets, Institutions
and Services, Pearson Education, Second Edition.
3) Websites: www.sebi.gov.in

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UNIT7' ISSUANCE AND POST-ISSUANCE
ACTIVITIES
Objectives

After studying this unit, you should be able to:

• discuss the mechanism of pricing an equity issuance;
• analyze the steps leading to a book building;
• analyze the major activities in distribution, allocation and listing at time of public
issue; and
• identify the benefits of greenshoe option and know the functioning of a market
maker.

Structure

7.1 Introduction
7.2 Pricing of Equity Issuance and Book Building Process
7.3 Distribution, Allocation and Listing
7.4 Green Shoe Option and Concept of Market Maker
7.5 Summary
7.6 Self Assessment Questions
7.7 Further Readings
Annexure

7.1 INTRODUCTION
In the period prior to 1990's, when the Controller of Capital Issues (CCI) was the
authority for approving the IPO, a fixed price mechanism was in place for sourcing
funds. In the era of free pricing, when the companies were allowed to price their issues
based on investor sentiments, there had been many occasions when investors suffered
due to over pricing. After the issue was completed, there were instances when the
share price of the issuing company traded even below par value (or face value). This
resulted in huge losses for investors. Due to this inefficient functioning of the primary
markets system, an alternative method generally called the "book building" method was
introduced in the Indian capital markets. Book building is a mechanism whereby, the
offer price is determined based on investor demand. It is a transparent process where
investors can access the actual demand for shares being built by the market. The final
offer price is determined by the demand for shares at various price points. International
markets use book building method for price determination at the time of new equity
issuance.
After the submission of the required documents (as discussed in Units 5 and 6), SEBI
provides the final ratification for either going ahead with the IPO or rejection of the
issue. The SEBI gives its comments on thedraft offer document. The changes, if any,
as suggested by the SEBI in its offer document are to be incorporated and resubmitted
to SEBI for approval. After obtaining the final approval, the company then fixes the
period for which its public issue would remain open to investors for subscription. In the
case of a book-building issue, the company receives bids for subscription at different
prices falling within the price band. In the case of a fixed price issue, subscription is
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received at the issue price fixed by the company. After the issue closes, in the case of Issuance and
a book-building issue, the company fixes the issue price in consultation with the lead Post-Issuance Activities
manager to the issue. In the case of a fixed price issue, the allotment of securities should
be made within 30 days from the date of closure of the issue, whereas in the case of a
book-building issue/rights issue, the allotment is to be made within 15 days from the date
of closure of the issue. In case there is over-subscription, the basis of allotment is
finalized by the company in consultation with the Designated Stock Exchange. The
company, lead manager and the registrars to the issue are responsible for ensuring that
the basis of allotment is in accordance with the prescribed rules and regulations.
Thereafter, the company must ensure that all steps for completion of the necessary
formalities for listing and commencement of trading on all the Stock Exchanges are
taken within 7 working days from the finalization of the basis.
The issuing company needs to appoint a lead manager for managing the book building
issue. This lead manager is also known as the "Book Running Lead Manager" (BRLM).
The details of the lead-managers to the issue need to be included in the draft prospectus.
We have already discussed in Unit 5 that the issuing company needs to obtain permission
from the stock exchange, which has capability to accept online offer for shares issued.
The exchange system should also have the features to communicate effectively, the
rights, duties, responsibilities and obligations pertaining to the issuing company and its
merchant banker, lead managers, registrar and transfer agents and other agencies involved
in the issue process. A dispute resolution mechanism also needs to be in place. The lead
book runner(s) is (are) required to submit the due diligence certificate(s) to SEBI. The
primary responsibility for building the book is that of the lead manager. The issuing
company may appoint more than one BRLM.
The book runners may appoint SEBI registered intermediaries as "underwriters" to the
issue. The book runners also appoint SEBI registered broker-members of the stock
exchange who are financially capable of honoring commitment arising out of obligations
made by their clients. This is ensured by the brokers collecting payment for every order
placed by their clients. Such brokers are paid a commission for their distribution services.
In Unit 5, we have discussed the lead manager to the issue which is a merchant banker
needs to submit the finalized draft prospectus of the issue top SEBI. In this prospectus,
the total size of the issue needs to be mentioned. The lead manager mayor may not
disclose the fixed price (in case of fixed price issue) or the floor and cap price (in case
of book built issue) at which the new equity issuance is made. In case of non-disclosure
of floor and cap price, adequate undertaking needs to be given in the form of a statement
that the floor/cap price would be disclosed l-day before the opening of the IPO. Also,
the names and editions of-the newspapers/websites where the IPO advertisement would
be published needs to be provided.

Book
Building

Common
Shares

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Primary Markets The Lead Manager has to arrange for distribution of public issue stationery to various
collecting banks, brokers, investors, etc.
The issuance process can also be classified based on the approach or mechanism of the
share issue. Approach of issuing spares is defined in terms of pricing the issue.
Regulations do not play any role in price fixation. Pricing of issues is in coordination with
the merchant bankers.

7.2 PRICING OF EQUITY ISSUANCE AND BOOK

BUILDING PROCESS
Section 7.2 discusses in detail, the mechanism and steps leading to book building method,
final pricing of the issue, marketing as well as final price fixation and allotment of shares.

Pricing
An issuer may determine the price of specified securities in consultation with the lead
merchant banker or through the book building process. An issuer may determine the
coupon rate and conversion price of convertible debt instruments in consultation with
the lead merchant banker or through the book building process. The issuer shall undertake
the book building process in a manner specified in Unit 7.

Differential pricing
An issuer may offer specified securities at different prices, subject to the following:
a) Retail individual investors or retail individual shareholders may be offered specified
securities at a price lower than the price at which net offer is made to other
categories of applicants: Provided that such difference shall not be more than ten
per cent of the price at which specified securities are offered to other categories
of applicants;
b) In case of a book built issue, the price of the specified securities offered to an
anchor investor shall not be lower than the price offered to other applicants;
c) In case of a composite issue, the price of the specified securities offered in the
public issue may be different from the price offered in rights issue and justification
for such price difference shall be given in the offer document.

Price and price band

The issuer may mention a price or price band in the draft prospectus (in case of a fixed
price issue) and floor price or price band in the red herring prospectus (in case of a book
built issue) and determine the price at a later date before registering the prospectus with
the Registrar of Companies: Provided that the prospectus registered with the Registrar
of Companies shall contain only one price or the specific coupon rate, as the case may
be. If the floor price or price band is not mentioned in the red herring prospectus, the
issuer shall announce the floor price or price band at least two working days before the
opening of the bid (in case of an initial public offer) and at least one working day before
the opening of the bid (in case of a further public offer), in all the newspapers in which
the pre issue advertisement was released. The announcement shall also contain relevant
financial ratios computed for both upper and lower end of the price band and also a
statement drawing attention of the investors to the section titled "basis of issue price" in
the prospectus. The cap on the price band shall be less than or equal to one hundred and
twenty per cent of the floor price. The floor price or the final price shall not be less than
the face value of the specified securities. The "cap on the price band" includes cap on
the coupon rate in case of convertible debt instruments.
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Face value of equity shares Issuance and
Post-Issuance Activities
Subjr ::t to the provisions of the Companies Act, 1956, the Act and these regulations, an
issuer making an initial public offer may determine the face value of the equity shares in
the following manner:
a) If the issue price per equity share is five hundred rupees or more, the issuer shall
have the option to determine the face value at less than ten rupees per equity
share; Provided that the face value shall not be less than one rupee per equity
share;
b) If the issue price per equity share is less than five hundred rupees, the face value
of the equity shares shall be ten rupees per equity share: Provided that nothing
contained in this sub-regulation shall apply to initial public offer made by any
government company, statutory authority or corporation or any special purpose
vehicle set up by any of them, which is engaged in infrastructure sector.
The disclosure about the face value of equity shares (including the statement about the
issue price being "X" times of the face value) shall be made in the advertisements, offer
documents and application forms in identical font size as that of issue price or price
band.

Book Building Process

SEBI defines "Book Building" as a process undertaken by which, a demand for the
securities proposed to be-issued by a corporate is elicited, "built-up" and the price for
such securities is assessed for the determination of the quantum of such securities to be
issued by means of a notice, circular, advertisement, document or information, memoranda
or offer document.
Book building is a process used for making a public offer for issue of equity shares of a
company, by collecting bids from investors. This provides an indicative price range,
popularly known as price band. The issue price is fixed after the analysing the bids.
The issuer company appoints a lead merchant banker to act as a book runner to the
issue. A syndicate comprising of capital market intermediaries (eligible brokers, merchant
.bankers or even mutual funds) is appointed to underwrite issue. The book runner builds
an order book comprising of bids from various investors which shows the demand for
the shares of the company at various prices. Based on this feedback, the issue price is
fixed. Corporate Issuers can issue equity shares, bonds and money market instruments
by the book building process.
The steps leading to an issue of equity shares using the booking building process is
enumerated as follows:
1) The issuing company appoints a lead manager which is also the book runner. This
entity is a SEBI registered merchant banker.
2) The book running lead manager prepares and submits the draft documents (as
discussed in Unit 5 such as prospectus, due diligence certificate, board resolution,
shareholder approval for raising capital, etc.) to SEBI and obtains acknowledgement
for the same.
3) The issuer and book runner may decide to offer shares within a specified price
band (range). If the range is not specified along with the prospectus,then sufficient
undertaking may be provided to disclose the same at least 0I?-eday before the IPO
opening date.
4) Quotes for the shares are invited from different "syndicate members" - consisting
of eligible brokers, merchant bankers, underwriters, financial institutions, mutual
funds and others. This is the actual book building process, to identify the price floor
and cap, depending on demand of shares from investors.
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1
Primary Markets 5) The IPa advertisement needs to be published in leading publications. The opening
and closing date of the book building process is disseminated. The book building
bods are usually accepted (open) for five business days. After the floor and cap
(price range) is determined by the book building method, the final IPa advertisement
for the public issue portion may carry the price range that has been determined by
the syndicate members.
6) Based on the bids received, the issuer finalizes the cut-off rate and the final allocation
of shares in consultation with the book runner and lead manager
7) The issuer and the book runner may impose restrictions on the number of shares
allotted to any particular investor - to prevent a possible take over threat.
8) The final prospectus is filed by the company through the book runner, to the Registrar
of Companies (RoC), along with the procurement agreement.
9) The placement portion opens for subscription only after the prospectus is filed with
the RoC.
10) The placement portion closes a day before the opening of the public issue portion.
11) Finally, the public portion opens and the allotment and listing of this portion is done.
The price determined in the book building process is also applicable to the public
portion. If the public portion is oversubscribed, then allotment is made on proportional
basis. If the public portion remains undersubscribed, the shortfall is distributed
amongst those who have opted for placement, as well as the underwriters.
The actual process of book building may be analysed in a flow diagram as depicted in
Annexure 1 of this unit.
In a book building process, a red herring prospectus which does not have details of
either the price or number of shares being offered or the amount of issue, is filed with
the Registrar of Companies. The underwriter of the issue collects information from
potential buyers and attempts to build interest in the issue. Road shows are conducted,
whereby the underwriter visits prospective investors in most major cities, regarding the
company and the issue. Such road shows involve press release, broker-analyst meet or
an investor meet.

Book Building Options

There are two types of book building involved:
1) Open Book: Online display of demand for the issued securities is available.
2) Closed Book: The bids are not made public.
SEBI allows issuing companies to follow a 100% book building, whereby, the entire
process is completed in the first phase, without a mandatory fixed price offer after the
completion of the book building issue. This requires a minimum issue size of Rs.
25 crores. In case an issuer company makes a 100% book building, then the following
criteria for proportional allotment needs to be adhered:
• At least 35% of the net offer to the public shall be available for allocation to Retail
Individual Investors (Rll);
• At least 15% of the net offer to the public shall be available for allocation to Non-
Institutional Investors (Nll); and
• Not more than 50% of the net offer to the public shall be available for allocation
Qualified Institutional Buyers (QIB).
A 75% book building issue is a two stage process, with a partial offer of 75% of the
issue through book building whereby, a price is discovered by the usual bidding process
and the balance 25% is offered to the public through a fixed price offer - which is
determined based on the initial book building process.
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 1
In case of companies that are unlisted and do not satisfy the profitability criteria laid Issuance and
down by SEBI, at least 50% of the offer to public should be allotted to Qualified Post-Issuance Activities
Ir s'itutional Buyers (QIB), failing which the full subscription amount should be refunded.
In the special case of the companies not adhering to the Section 19(2)(b) guidelines of
the Securities Contract Regulation Rules (SCRR), 1957, then the issuing company needs
to allocate at least (mandatory) 60% of the public issue to QIB, not exceeding 30% to
Retail Individual Investors and balance 10% to NIL

Disclosure of Pricing
As discussed in the earlier section, the issuing company may mention a price or price
band in the draft prospectus (in case of a fixed price issue) and floor price or price band
in the red herring prospectus (in case of a book built issue) and determine the price at a
later date before registering the prospectus with the Registrar of Companies. If the
floor price or price band is not mentioned in the red herring prospectus, the issuer shall
announce the floor price or price band at least two working days before the opening of
the bid (in case of an initial public offer) and at least one working day before the opening
of the bid (in case of a further public offer), in all the newspapers in which the pre issue
advertisement was released. The announcement should also contain relevant financial
ratios computed for both upper and lower end of the price band and also a statement
drawing attention of the investors to the section titled "basis of issue price" in the
prospectus. The cap on the price band shall be less than or equal to one hundred and
twenty per cent of the floor price. The floor price or the final price shall not be less than
the face value of the specified securities.

Benefits of Book Building Method

Book building method enables issuers to reap benefits arising from discovery of the
share price based on actual demand from investors. This is a much better method than
arbitrarily fixing a price by either the issuer or the regulator. The chances of full
subscription is much better with a book built offer, because of the transparency involved.
The main objective fo the book building process is to ensure low chances of under-
subscription and avoiding devolvement of the issue. The process is also simplified. The
investors also have a reliable pricing benchmark, because the syndicate members have
subscribed to the issue during the book building process.

Limitations of book building issue

In developed markets such as in the US, the book building process takes place in a few
hours time. In this period, the lead manager provides a 2 way quote to ensure that
market-making is done. This system is not available in India. The Indian model is different
and is adapted version of the international book building process. Because of this, in the
book building process in India, reputation and peer pressure have a larger role to play, in
order to avoid default. The number of syndicate members is also limited. This also has
a cascading effect in that, the price suitable for the institutional investors comprising of
the syndicate - who have long-term investment aspirations "-may not be in conjunction
with the retail investors. Hence, sometimes the price in the placement portion may not
be attracting participation in the public issue.
The share price of a new equity issue may also be decided by the fixed price method.

Fixed Price Issue

Issuing companies themselves offer directly to the general public, a fixed number of
shares at a stated price. The price is fixed by the merchant banker in consultation with
the company. The price may be at the premium or discount to the face value of the
share. Corporate Issuers can issue equity shares by fixed price.
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Primary Markets In case of Fixed Price Issue
• Minimum 50% of the net offer of securities to the public shall initially be mane to
,RII. ~
.• The balance allotment to Individual applicants other than RI!, and Other investors
including corporate bodies/ institutions irrespective of the number of securities applied
for.

Face Value of Equity Shares

An issuer making an initial public offer may determine the face value of the equity
shares in the following manner:
1) If the issue price per equity share is five hundred rupees or more, the issuer shall
have the option to determine the face value at less than ten rupees per equity
share, provided that the face value shall not be less than one rupee per equity
share.
2) If the issue price per equity share is less than five hundred rupees, the face value
of the equity shares shall be ten rupees per equity share, provided that nothing
contained in this sub-regulation shall apply to initial public offer made by any
government company, statutory authority or corporation or any special purpose
vehicle set up by any of them, which is engaged in infrastructure sector.
The disclosure about the face value of equity shares (including the statement about the
issue price being "X" times ofthe face value) shall be made in the advertisements, offer
documents and application forms in identical font size as that of issue price or price
band.

Differential Pricing
An issuing company may offer specified securities at different prices. It may offer
shares to retail individual investors or retail individual shareholders at a price lower than
the price at which net offer is made to other categories of applicants such as non-
institutional investors or qualified institutional buyers. But this difference should not be
more than ten per cent of the price at which the specified securities are offered to other
categories of applicants. In the case of a book built issue, the price of the specified
securities offered to an anchor investor shall not be lower than the price offered to other
applicants. In the context of a composite issue, the price of the specified securities
offered in the public issue may be different from the price offered in rights issue and
justification for such price difference shall be given in the offer document.

Role and Responsibilities In Book Building Process

The intermediaries involved in the book building issue shall comply with the requirements
as follows:
• The issuer shall appoint one or more merchant banker(s) as book runner(s) and
their name(s) shall be disclosed in the draft red herring prospectus.
• The lead merchant banker shall act as the lead book runner and shall be primarily
responsible for the book building.
• There shall be only one lead book runner and other merchant bankers appointed, if
any, shall either be eo-book runners or syndicate members.
• Other terms such as joint lead merchant bankers etc. shall not be used.
• In case of appointment of more than one lead merchant banker or book runner, the
rights, obligations and responsibilities of each shall be delineated in the inter-se
allocation of responsibility.
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• The book runner(s) may appoint syndicate members. Issuance and
Post-Issuance Activities
• The lead book runner and eo-book runners shall compulsorily underwrite the issue
and the syndicate members shall sub-underwrite with the lead book runner/
eo-book runners'. •
• The lead book runners/ syndicate members shall enter in to underwriting/ sub
underwriting agreement on the date of allocation and furnish details forthwith to
the Board.
• The details of final underwriting arrangement indicating actual numbers of shares
underwritten shall be disclosed and printed in the Prospectus before it is registered
with the Registrar of Companies.
• In case of an under subscription in an issue, the shortfall shall have to be made
good by the book runner(s) to the issue and the same shall be incorporated in the
inter-se allocation of responsibility as specified in Schedule lI.
• The issuer shall enter into an agreement with one or more of the stock exchange(s)
which have the system of on-line offer of securities. The agreement shall specify
inter-alia, the rights, duties, responsibilities and obligations of the issuer and recognised
stock exchange(s) inter se.
• The agreement may also provide for a dispute resolution mechanism between the
issuer and the stock exchange.
• The book runner(s)/syndicate members shall appoint stock brokers who are members
of the recognised stock exchange and registered with the Board, for the purpose
of accepting bids, applications and placing orders with the issuer and ensure that
the stock brokers so appointed are financially capable of honouring their
commitments arisi ng out of defaults of their clients/investors, if any; Provided that
in case of Application Supported by Blocked Amount, Self Certified Syndicate
Banks shall also accept and upload the details of such applications in electronic
bidding system of the stock exchange(s). The stock brokers and Self Certified
Syndicate Bank accepting applications and application monies shall be deemed as
"bidding/collection centres".
• The issuer shall pay to the book runners/syndicate members/stock brokers/ Self
Certified Syndicate Banks a commission/fee for the services rendered by them.
• The stock exchange shall ensure that any stock broker does not levy a service fee
on his clients/investors in lieu of his services in this regard.
• Where the issue size is specified the red herring prospectus may not contain the
price and the number of specified securities.
• The draft red herring prospectus containing all the disclosures including total issue
size, if applicable, as specified in Schedule VIII, except that of price and the number
of specified securities to be offered through it shall be filed with the Board by the
lead merchant banker;
• Provided that in case of a fast track issue the draft red herring prospectus shall not
be filed with the Board.
• Subject to the provisions of regulation 30 and the provisions of this clause, the
issuer may mention the floor price or price band in the red herring prospectus.
where the issuer opts not to make the disclosure of the price band or floor price in
the red-herring prospectus, the following shall also be disclosed in the red-herring
prospectus:
i) A statement that the floor price or price band, as the case may be, shall be
disclosed at least two working days (in case of an initial public offer) and at
least one working day (in case of a further public offer) before the opening of
the bid;
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Primary Markets ii) A statement that the investors may be guided in the meantime by the secondary
market prices (in case of a further public offer); names and editions of the
newspapers where the announcement of the floor price or price band would
be. made;
iii) Names of websites (with address), journals or other media in which the said
announcement will be made.
• Where the issuer decides to opt for price band instead of floor price, the issuer
shall also ensure compliance with the following conditions:
i) The cap of the price band should not be more than 20% of the floor of the
band; i.e., cap of the price band shall be less than or equal to 120% of the floor
of the price band;
ii) The price band can be revised during the bidding period in which case the
maximum revision on either side shall not exceed 20% i.e., floor of price band
can move up or down to the extent of 20% of floor of the price band disclosed
in the red herring prospectus and the cap of the revised price band will be
fixed in accordance with clause (i) above;
iii) Any revision in the price band shall be widely disseminated by informing the
stock exchanges, by issuing press release and also indicating the change on
the relevant website and the terminals of the syndicate members.
iv) In case the price band is revised, the bidding period shall be extended as per
provisions of sub-regulation (2) of regulation 46.
v) The manner in which the shortfall, if any, in the project financing, arising on
account of lowering of price band to the extent of 20% will be met shall be
disclosed in the red herring prospectus. It shall also be disclosed that the
allotment shall not be made unless the financing is tied up.
• The issuer shall provide the application-cum-bidding forms to the syndicate members
and Self Certified Syndicate Banks.
• The issuer shall make arrangement for collection of the applications-cum-bidding
from mandatory collection centres as provided in sub-regulation (6) of regulation 5.
• For the purpose of 'bidding' the document should be printed and circulated as
"Red Herring Prospectus'" The same nomenclature shall be used throughout the
document.
• Under "Red Herring Prospectus", add "Please read Section 60B of the Companies
Act, 1956".
• 'Bid' should be defined as 'indication to make an offer and not as 'an offer'.
• State the manner of bidding by corporate bodies and submission/deposit of supporting
documents at the time of bidding. In the case of bids/ applications by HUF, state
the manner of making application and that HUF would be considered as 'individual'.
• Ensure that the application-cum-bidding form meant for Applications Supported by
Blocked Amount or otherwise, provides for all the relevant information including
the one specified in this regard in the relevant Acts/ Regulations.
• The application-cum-bidding form, other than the form meant for Applications
Supported by Blocked Amount, shall satisfy the following conditions:
i) The bidding form shall be standard to ensure uniformity in bidding and accuracy;
ii) The bidding form shall contain information about the investor, the price and
the number of securities that the investor wishes to bid;
iii) Before being issued to the investors the bidding form shall be serially numbered
and date and time stamped at the bidding centres;
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iv) The serial number may be system generated or stamped with an automatic Issuance and
Post-Issuance Activities
numbering machine;
v) The bidding form shall be issued in duplicate signed by the investor and
countersigned by the syndicate member, with one form for the investor and
the other for the syndicate member(s)lbook runner(s);
The application-cum-bidding form for Applications Supported by Blocked Amount shall
contain all the relevant details and shall be uniform for all ASBA investors.

Anchor Investor
An Anchor Investor shall make an application of a value of at least Rs. 10 crore in the
public issue. Allocation to Anchor Investors shall be on a discretionary basis and subject
to a minimum number of 2 such investors for allocation of upto Rs. 250 crore and 5 such
investors for allocation of more than Rs. 250 crore. Upto thirty per cent of the portion
available for allocation to qualified institutional buyers shall be available to anchor
investor(s) for allocation/allotment ("anchor investor portion"). One-third of the anchor
investor portion shall be reserved for domestic mutual funds. The bidding for Anchor
Investors shall open one day before the issue opening date. Anchor Investors shall pay
a margin of at least 25% on application with the balance to be paid within two days of
the date of closure of the issue. Allocation to Anchor Investors shall be completed on
the day of bidding by Anchor Investors. If the price fixed as a result of book building is
higher than the price at which the allocation is made to Anchor Investor, the Anchor
Investor shall bring in the additional amount. However, if the price fixed as a result of
book building is lower than the price at which the allocation is made to Anchor Investor,
the excess amount shall not be refunded to the Anchor Investor and the Anchor Investor
shall take allotment at the price at which allocation was made to it.
The number of shares allocated to Anchor Investors and' the price at which the allocation
is made, shall be made available in public domain by the merchant banker before opening
of the issue. There shall be a lock-in of 30 days on the shares allotted to the Anchor
Investor from the date of allotment in the public issue. Neither the merchant bankers
nor any person related to the promoter/promoter group/merchant bankers in the
concerned public issue can apply under Anchor Investor category. The parameters for
selection of Anchor Investor shall be clearly identified by the merchant banker and shall
be available as part of records of the merchant banker for inspection by the Board ..
The applications made by qualified institutional buyers under the Anchor Investor category
and under the Non-anchor Investor category may not be considered as multiple
applications.

Margin Money
The margin collected from categories other than Qualified Institutional Buyers shall be
uniform across the book runner(s)/syndicate members /Self Certified Syndicate Banks
for each such investor category. An amount of not less than ten per cent of the application
money in respect of bids placed by qualified institutional buyers and not less than twenty
five percent of the application money from the Anchor investors shall be taken as margin
money. An amount to the extent of entire application money as margin money may be
collected from the applicants before they place an order on their behalf. Amount of
margin charged from an investor shall be entered and printed in the TRS. The payment
accompanied with any revision of Bid, shall be adjusted against the payment made at
the time of the original bid or the previously revised bid. Bids for specified securities
beyond the investment limit prescribed under relevant laws shall not be accepted by the
syndicate members/stock brokers from any category of clients/ investors. The stock
brokers shall collect the money from their client for every order placed by them and in
case the clients/investors fails to pay for specified securities allocated as per these
53
Primary Markets regulations, the stock brokers shall pay such amount; Provided that in case of Applications
Supported by Blocked Amount, the Self Certified Syndicate Banks shall follow the
procedure specified in this regard by the Board.

Bidding Process
Bidding process shall be only through an electronically linked transparent bidding facility
provided by recognised stock exchange (s). The lead book runner shall ensure the
availability of adequate infrastructure with syndicate members for data entry of the bids
in a timely manner. The syndicate members shall be present at the bidding centres so
that at least one electronically linked computer terminal at all the bidding centres is
available for the purpose of bidding. During the period the issue is open to the public for
bidding, the applicants may approach the stock brokers of the stock exchange/s through
which the securities are offered under on-line system or Self Certified Syndicate Banks,
as the case may be, to place an order for bidding for the specified securities. Every
stock broker shall accept orders from all clients/investors who place orders through him
and every Self Certified Syndicate Bank shall accept Applications Supported by Blocked
Amount from ASBA investors. Applicants who are qualified institutional buyers shall
place their bids only through the stock brokers who shall have the right to vet the bids.
The bidding terminals shall contain an on line graphical display of demand and bid prices
updated at periodic intervals, not exceeding thirty minutes. At the end of each day of the
bidding period, the demand including allocation made to anchor investors, shall be shown
graphically on the bidding terminals of syndicate members and websites of recognised
stock exchanges offering electronically linked transparent bidding facility, for information
of public. The investors (except ASBA investors) may revise their bids. The qualified
institutional buyers shall not withdraw their bids after closure of bidding. The identity of
qualified institutional buyers making the bidding shall not be made public. The stock
exchanges shall continue to display on their website, the data pertaining to book built
issues in a uniform format, inter alia giving category-wise details of bids received, for
a period of atleast three days after closure of bids.

Determination of Price
a) The issuer shall, in consultation with lead book runner, determine the issue price
based on the bids received.
b) On determination of the price, the number of specified securities to be offered
shall be determined (i.e., issue size divided by the price to be determined).
c) Once the final price (cut-off price) is determined, all those bidders whose bids
have been found to be successful (i.e., at and above the final price or cut-off price)
shall be entitled for allotment of specified securities.
d) Retail individual investors may bid at "cut off' price instead of their writing the
specific bid price in the bid forms.
e) The lead book runner may reject a bid placed by a qualified institutional buyer for
reasons to be recorded in writing provided that such rejection shall be made at the
time of acceptance of the bid and the reasons therefore shall be disclosed to the
bidders.
Necessary disclosures in this regard shall also be made in the red herring prospectus.
The final prospectus containing all disclosures in accordance with the provisions of
these regulations including the price and the number of specified securities proposed to
be issued shall be registered with the Registrar of Companies.

Allotment of Book Built Issues

a) Allotment to retail individual investors, non-institutional investors and qualified
institutional buyers other than anchor investors shall be made proportionately.
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b) In case of under subscription in any category, the undersubscribed portion in that Issuance and
category shall be allocated to the bidders as per disclosures made in the red herring Post-Issuance Activities
prospectus, provided: that the unsubscribed portion in qualified institutional buyer
category shall not be available for subscription to other categories, in case the book
building process is undertaken for the purpose of compliance of eligibility conditions
for public issue.
c) On receipt of the sum payable on application for the amount towards minimum
subscription, the issuer shall allot the specified securities to the applicants as per
these regulations.

Application for listing

Subject to the provisions of these regulations, the issuer may apply for listing of specified
securities on a stock exchange other than the stock exchange through which it offers its
specified securities to public through the on-line system.

Maintenance of Books and Records

a) A final book of demand showing the result of the allocation process shall be
maintained by the lead book runner.
b) The book runnerls and other intermediaries associated in the book building process
shall maintain records of the book building prices.
c) The Board shall have the right to inspect the records, books and documents relating
to the book building process and such person shall extend full co-
operation.

Reverse Book Building

Reverse book building process is exactly the opposite of the book building process. If a
company wants to delist its shares or expresses its desire to buy back its own shares,
then a reverse auction is conducted, whereby, investors are asked to quote the price at
which they want to exit the scrip. This is no longer applicable in Indian markets, due to
regulatory concerns for possible price manipulation.

7.3 DISTRIBUTION, ALLOCATION AND LISTING

In this section, the process of Distribution, Allocation and Listing of Securities is discussed.

Minimum offer to public

Subject to the provisions of sub-clause (b) of clause (2) of rule 19 of Securities Contracts
(Regulations) Rules, 1957, the net offer to public:
a) In case of an initial public offer, shall be at least ten per cent or twenty five per cent
of the post-issue capital, as the case may be; and
b) In case of a further public offer, shall be at least ten per cent or twenty five per
cent of the issue size, as the case may be.
This shall not apply if the issuer is:
a) a government company or statutory authority or corporation or any special purpose
vehicle set up and controlled by anyone or more of them, which is engaged in
infrastructure sector;
b) an infrastructure company fulfilling the following conditions:
i) Its project has been appraised by one or more public financial institutions;
55
Primary Markets ii) Not less than fifty per cent. of the project cost is financed by one or more
such institutions, jointly or severally, by way of loan or subscription to equity
shares or a combination of both, irrespective of whether they appraise the
project or not.
The term "infrastructure company" means, an enterprise wholly engaged in the business
of (i) developing or (ii) operating and maintaining or (iii) developing, operating and
maintaining any infrastructure facility.

Monitoring Agency
If the issue size exceeds Rupees 500 Crores, then the issuer shall make arrangements
for the use of proceeds of the issue to be monitored by a public financial institution or by
one of the scheduled commercial banks named in the offer document as bankers of the
issuer. The monitoring agency shall submit its report to the issuer in the format specified
in Schedule IX on a half yearly basis, till the proceeds of the issue have been fully
utilised.

Allotment, Refund and Payment of Interest

The issuer and merchant bankers shall ensure that specified securities are allotted and/
or application moneys are refunded within fifteen days from the date of closure of the
issue.
If specified securities are not allotted. and/or application amount is not refunded within
the period stipulated in sub-regulation, the issuer shall undertake to pay interest at such
rate and within such time as disclosed in the offer document.

Distribution
Success of an issue depends on the issues being distributed to the investing public. The
sale of securities to ultimate investors is called as distribution. It is a specialist job which
can be performed by brokers and dealers in securities, who maintain regular and direct
contact with the ultimate investor. In IPQ distribution, the marketing / networking effort
is the key, which enables Distributor to carry out the vigorous exercise of:
• Putting the banners of the IPO on its website all across the branches.
• Sending SMS to all its potential customers/ investors.
• Making available the IPO application forms, in all branches.
• Sending the e-mails to all investors about the impending IPOs and the product
note.

Reservation on competitive basis

In case of an issue made through the book building process, the issuer may make
reservation on competitive basis out of the issue size excluding promoters' contribution
and net offer to public in favour of the following categories of persons:
a) Employees of the issuer including employees of the promoting companies in case
of a new issuer;
b) Shareholders (other than promoters) of:
i) Listed promoting companies, in case of a new issuer; and
ii) Listed group companies, in case of an existing issuer:
Provided that if the promoting companies are designated financial institutions or
state and central financial institutions, the shareholders of such promoting companies
shall not be eligible for the reservation on competitive basis;

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c) Persons who, as on the date of filing the draft offer document with the Board, are Issuance and
associated with the issuer as depositors, bondholders or subscribers to services of Post-Issuance Activities
the issuer making an initial public offer: Provided that the issuer shall not make the
reservation to the issue management team, syndicate members, their promoters,
directors and employees and for the group or associate companies of the issue
management team and syndicate 'members and their promoters, directors and
employees.
In case of an issue made other than through the book building process, the issuer may
make reservation on competitive basis out of the issue size excluding promoters'
contribution and net offer to public in favour of the following categories of persons:
a) Employees of the issuer including employees of the promoting companies in case
of a new issuer;
b) Shareholders (other than promoters) of:
i) listed promoting companies, in the case of a new issuer; and
ii) listed group companies, in the case of an existing issuer:
Provided that if the promoting companies are designated financial institutions or state
and central financial institutions, the shareholders of such promoting companies shall not
be eligible for the reservation on competitive basis.
In case of a further public offer (not being a composite issue), the issuer may make
reservation on competitive basis out of the issue size excluding promoters' contribution
.and net offer to public in favour of retail individual shareholders of the issuer.
The reservation on competitive basis shall be subject to foll~wing conditions:
a) The aggregate of reservations for employees shall not exceed ten per cent of the
issue size;
b) Reservation for shareholders shall not exceed ten per cent. of the issue size;
c) Reservation for persons who as on the date of filing the draft offer document with
the Board, have business association as depositors, bondholders and subscribers to
services with the issuer making an initial public offer shall not exceed five per cent
of the issue size;
d) no further application for subscription in the net offer to public category shall be
entertained from any person (except an employee and retail individual shareholder)
in favour of whom reservation on competitive basis is made;
e) any 'un subscribed portion in any reserved category may be added to any other
reserved category and the unsubscribed portion, if any, after such inter-se
adjustments among the reserved categories shall be added to the net offer to the
public category;
f) in case of under-subscription in the net offer to the public category, spill-over to the
extent of under-subscription shall be permitted from the reserved category to the
net public offer category.
In the case of reserved categories, a single applicant in the reserved category may
make an application for a number of specified securities which exceeds the reservation.
The term "reservation on competitive basis" means reservation wherein specified
securities are allotted in proportion of the number of specified securities applied for in
respect of a particular reserved category to the number of specified securities
reserved for that category. The term "new issuer" means an issuer which has not
completed twelve months of commercial operation and its audited operative results are
not available.
Primary Markets Allocation in net offer to public
No person shall make an application in the net offer to public category for that number
of specified securities which exceeds the number of specified securities offered to
public. In an issue made through the book building process, the allocation in the net offer
to public category shall be made as follows:
a) not less than thirty five per cent to retail individual investors;
b) not less than fifteen per cent to non-institutional investors;
c) not more than fifty per cent 11) qualified institutional buyers, five per cent. of which
shall be allocated to mutual funds.
In an issue made through the hook building process, the issuer may allocate up to thirty
per cent of the portion available for allocation to qualified institutional buyers to an
anchor investor in accordance with the conditions specified in this regard in the Book
Building Process (refer Unit 7).
In an issue made other than through the book building process, allocation in the net offer
to public category shall be made as follows: minimum fifty per cent. to retail individual
investors; and remaining to:
i) Individual applicants other than retail individual investors; and
ii) Other investors including corporate bodies or institutions, irrespective of the number
of specified securities applied for; the unsubscribed portion in either of the categories
specified above may be allocated to applicants in the other category.
If the retail individual investor category is entitled to more than fifty per cent on
proportionate basis, the retail individual investors shall be allocated that higher percentage.

Safety-net arrangement
An issuer may provide for a safety-net arrangement for the specified securities offered
in any public issue in consultation with the merchant banker after ascertaining the financial
capacity of the person offering the safety-net arrangement, subject to disclosures
specified in this regard. Provided that any such arrangement shall provide for an offer to
purchase up to a maximum of one thousand specified securities per original resident
retail individual allottee at the issue price within a period of six months from the last date
of despatch of security certificates or credit of demat account. The term "safety net
arrangement" means an arrangement provided by the issuer under which a person
offers to purchase specified securities from the original resident retail individual allottees
at the issue price.

Listing Process
The listing formalities to be completed in this regard are as under:
• The Exchange should be advised as soon as the subscription list is closed. In the
event of under-subscription, it should be confirmed that the underwriters or their
nominees have taken up the balance of the issue remaining unsubscribed. Copies
of the Basis of Allotment of the equity shares including allotment to QIB's should
be filed. The company should submit a certified true copy of its board resolution
for allotment of company's shares as per the basis of allotment approved by the
Designated Stock Exchange. The date of allotment of the shares should also be
intimated to the Exchange. The company must submit the copy of advertisement
of Basis of Allotment. If not published, the draft copy of the advertisement;
• It should be confirmed that the allotment of securities offered to the public has
been made within 15 days (30 days for fixed price issue) from the date of closure
of the public issue;
58
• if the allotment has not been made and/or the refund orders have not been dispatched Issuance and
to the investors within 15 days (30 days for fixed price issue) from the date of the Post-Issuance Activities
closure of the issue, specified interest per annum is being paid.
• The Auditor of the Company/practicing Company Secretary should-certify that:
• In the event of. over-subscription, the allotment of shares has been made as
agreed upon with the Stock Exchange concerned;
• For shares under lock-in, the share certificates have been properly enfaced
with respect to their non-transferability and the necessary corporate action
has been executed to have the shares marked as non-transferable in the
depository's record;
• Allotment of shares from the employees' quota has been made to permanent/
regular employees of the company and of the promoter companies, as on the
date of the opening of the public issue and who are entitled to such allotment;
• The allotment of shares from the promoters' quota has been made correctly
to those entitled to and nobody else.
The Initial Listing fee and Annual Listing Fee as per the Exchange regulations for the
year should be paid. The company should submit certificate/s from its bankerls to the
issue stating that the application monies collected are lying in the separate account and
that the said amount has not been utilized by the company so far. A Listing Agreement
should be executed; Detailed Letter of Application & Listing Application should be
submitted; Distribution Schedule of the equity shares (pre-issue, issue and post issue
separately) should be filed. The company should send the share-holding pattern (pre-
issue, issue and post-issue) form duly filled in.
Category wise (Physical & Demat) distinctive numbers of the shares should be submitted.
A certificate from the Registrars.to the issue should be submitted confirming the exact
. date of credit of shares allotted in demat form in both the depositories i.e. NSDL and
CDSL. In case there is any delay in giving credit to any of the depository, the reason for
the same should also be mentioned. Letter of credit from both the depositories i.e.,
NSDL & CDSL indicating the quantity and date of credit must be submitted. The same
should also indicate the quantity of demat shares under lock-in with the date up to which
the same is under lock-in. A statement signed bythe Chief Executive Officer of the
company should be submitted stating the date of completion of posting of letters of
allotment/share certificates (including NRI's) and refund orders. A copy of the Registrars
certificate in this respect should also be filed. An undertaking should be filed with the
Exchange to the effect that the company will be returning the share certificates issued
for the entire holding, duly split within a week's time as and when such requests are
received from the shareholders. The date(s) of book closure of the register of members
or record date fixed in the current year and reasonls for it should be intimated. A copy
of the SEBI Acknowledgement card should be submitted. Due diligence certificate
from the Lead Manager to the issue together with a statement showing inter-se allocation
of responsibility amongst Lead Managers should be filed with the Exchange.
Other submissions include:
• A declaration to the exchange that the company has not entered into any buy-back
agreement or arrangement with any of the applicants/allottees of the shares in its
public issue.
• An auditor certificate regarding compliance of conditions of Corporate Governance
as stipulated in clause 49 of the listing agreement.
• The company should also give the composition of various committees as required
under the said clause.

59
Primary Markets The company should also file the Electronic Data Information Filing and Retrieval
(EDIFAR) registration with the Exchange.
1
7.4 GREEN SHOE OPTION AND CONCEPT OF
.MARKET MAKER
A Green Shoe option is an option of allocating shares in excess of the shares included in
the public issue and operating a post-listing price stabilizing mechanism for a period not
exceeding 30 days. This is granted to a company to be exercised through a Market
Maker or a Market Maker. Limit for the Greenshoe option is maximum of 15% of the
issue size. This option requires shareholder authorisation.
In legal parlance, a green-shoe option is also known as an "over-allotment option". In a
public offering, the issuing company sells its shares to investors, which gets listed on a
stock exchange for subsequent trading. When the issuing company opts for a Greenshoe
option, it gives the issuer company a right to sell more shares to investors than originally
planned in their public offering. This is possible only if the demand situation requires
such an action after the listing.
The green-shoe option can greatly help in stabilizing the prices after listing. For public
offerings in the Indian stock market, a company interested in using the greenshoe option
has to follow the guidelines prescribed by SEBI. The size of excess allotment or the
green-shoe option should not exceed 15% of the total issue size.
A company wanting to use a greenshoe option has to first and foremost appoint a
"stabilizing agent" or a "market maker" by entering into an agreement with one of its
merchant bankers managing the public offering. The market maker plays a crucial role
in the working of a greenshoe option during the stabilization period. For its services, the
market maker earns a fee from the company. According to SEBI guidelines, the
stabilization period shall not exceed 30 days from the date when trading permission was
given by the stock exchanges.
As discussed, the process of a greenshoe option works on over-allotment of shares. For
example, if a company is planning to issue only 1,000,000 shares, but in order to utilize
the greenshoe option, it actually issues 1,150,000 shares, in which case the over-allotment
would be 150,000 shares. The company does not issue any new shares for the over-
allotment.

The 150,000 shares used for the over-allotment are actually borrowed from the pre-
issue existing shareholders and promoters with whom the stabilizing agent enters into a
separate agreement. For the subscribers of a public issue, it makes no difference whether
the company is allotting shares out of the freshly issued 1,000,000 shares or from the
150,000 shares borrowed from the promoters. Once allotted, a share is just a share for
an investor.
For the company, however, the situation is totally different. The money received from
the over -allotment is required to be kept in a separate bank account. The main job ofthe
market maker begins only after trading in the share starts at the stock exchanges. In
case the shares are trading at a price lower than the offer price, the market maker
commences buying the shares by using the funds lying in the separate bank account. In
this manner, by buying the shares when others are selling, the market maker tries to
keep the share prices from decreasing below the issue price. The shares so bought from
the market are handed over to the promoters from whom they were borrowed. In case
the newly listed shares start trading at a price higher than the offer price, the market
maker does not buy any shares. Instead, at the end of the stabilization period of 30 days,
the company exercises its greenshoe option and issues new shares to the market maker.
60
These are in turn handed over to the promoters from whom the shares were borrowed. Issuance and
Post-Issuance Activities
Thus, the green shoe option is a win-win situation both for the company as well as
investors. The company gets to source funds in excess of its original plan, if the market
price is sustained above the listing price. Investors are also benefitted because if the
company's share price if above the issue price, then they make a profit. If the company
share price is decreasing, then their downside is completely protected, because the
market maker keeps buying shares, to protect against the share price decreasing below
the issue price.
It may be noted that the market maker has the discretion to buy shares at its discretion.
It may also decide the actual timing of the purchase, quantity and price to ensure
stabilization. The market maker may purchase directly from institutional shareholders,
or from the market itself. The market maker cannot purchase more than 15% of the
issue size - which is also the limit for the green shoe option. The stabilizing measure
cushions the impact due to adverse market volatility.
The green shoe option is a post listing measure to ensure price stabilization. This protects
the small investors. The underwriters make larger profits in when the issuing company
opts for Greenshoe option. This is because, usually the listing price is greater than the
issue price - due to the positive impact of the market maker who is expected to stabilize
the prices. In a bullish market scenario, underwriters will opt for additional allotment of
15% due to index moving upwards. The post-listing price is usually higher in a bull
market. In a bearish market, the underwriting option may not be exercised due to the
market maker's presence, or underwriters may purchase the shares at a price lower
than the issue price.

Procedure for Over Allotment and Stabilisation

• The allotment of the Over Allotment Shares shall be done pro rata with respect to
the proportion of Allotment in the Issue to various categories.
• The monies received from the Bidders for Equity Shares in the Issue against the
over allotment shall be kept in the green-shoe option Bank Account distinct and
separate from the Issue Account and shall be used only for the purpose of buying
shares from the market during the Stabilisation Period for the stabilization of the
post listing price of the Equity Shares.
• Upon such allotment, the Market Maker shall transfer the Over Allotment Shares
from the green-shoe option Demat Account to the respective depository accounts
of the successful Bidders.
• For the purpose of purchasing the Equity Shares, the Market Maker shall use the
funds lying to the credit of green-shoe option Bank Account.
• The Market Maker shall determine the timing of buying the Equity Shares, the
quantity to be bought and the price at which the Equity Shares are to be bought
from the market for the purposes of stabilisation of the post listing price of the
Equity Shares.
• The Equity Shares purchased from the market by the Market Maker, if any, shall
be credited to the green-shoe option Demat Account and shall be returned to the
Green Shoe Lender within two working days from the expiry of the Stabilisation
Period.
• On the expiry date of the stabilisation period, if the number of equity shares in the
green-shoe option Demat Account is less than the additional shares (due to the
green shoe option), then new Equity Shares will be issued for the number equal to
such shortfall. This will be credited into the green-shoe option Demat Account
within five days of the expiry of the stabilization period. The newly issued equity
61

I
Primary Markets shares shall be returned by the Market Maker to the Green Shoe Lender in lieu of
the over allotment shares. This needs to be completed within two business days of
the shares being credited into the green-shoe option Demat Account.
• Upon the return of Equity Shares to the Green Shoe Lender, the Market Maker
shall close the green-shoe option Demat Account.
.• The Equity Shares returned to the Green Shoe Lender shall be subject to remaining
lock-in-period, if any, as provided in the SEBI Guidelines.
The Market Maker shall remit to the issuer from the green-shoe option Bank Account,
an amount, in Rupees, equal to the number of Equity Shares allotted by the issuer to the
green-shoe option Demat Account at the Issue Price. The amount left in this account, if
any, after this remittance and deduction of expenses and net of taxes, if any, shall be
transferred to the investor protection fund of the Stock Exchanges in equal parts. Upon
transfer of monies as above, the green-shoe option Bank Account shall be closed by the
Market Maker.

SEBI on Market Making

An issuer making a public issue of specified securities may provide green shoe option
for stabilising the post listing price of its specified securities, subject to the following:
a) The issuer has been authorized, by a resolution passed in the general meeting of
shareholders approving the public issue, to allot specified securities to the stabilising
agent, if required, on the expiry of the stabilisation period;
b) The issuer has appointed a merchant banker or book runner, as the case may be,
from amongst the merchant bankers appointed by the issuer as a stabilising agent,
who shall be responsible for the price stabilisation process;
c) Prior to filing the draft offer document with the Board, the issuer and the stabilising
agent have entered into an agreement, stating all the terms and conditions relating
to the green shoe option including fees charged and expenses to be incurred by the
stabilising agent for discharging his responsibilities;
d) Prior to filing the offer document with the Board, the stabilising agent has entered
into an agreement with the promoters or pre-issue shareholders or both for
borrowing specified securities from them in accordance with clause (g) of this
sub-regulation, specifying therein the maximum number of specified securities that
may be borrowed for the purpose of allotment or allocation of specified securities
in excess of the issue size (hereinafter referred to as the "over- allotment"), which
shall not be in excess of fifteen per cent of the issue size;
e) Subject to above clause (d), the lead merchant banker or lead book runner, in
consultation with the stabilising agent, shall determine the amount of specified
securities to be over-allotted in the public issue;
f) The draft and final offer documents shall contain all material disclosures about the
green shoe option specified in this regard;
g) In case of an initial public offer pre-issue shareholders and promoters and in case
of a further public offer pre-issue shareholders holding more than five per cent
specified securities and promoters, may lend specified securities to the extent of
the proposed overallotment;
h) The specified securities borrowed shall be in dematerialised form and allocation of
these securities shall be made pro-rata to all successful applicants.
For the purpose of stabilisation of post-listing price of the specified securities, the stabilising
agent shall determine the relevant aspects including the timing of buying such securities,
quantity to be bought and the price at which such securities are to be bought from the
market. The stabilisation process shall be available for a period not exceeding thirty
62
days from the date on which trading permission IS given by the recognised stock exchanges • Issuance and
in respect of the specified securities allotted in the public issue. The stabilising agent Post-Issuance Activities
shall open a special account, distinct from the issue account, with a bank for crediting .
the monies received from the applicants against the over-allotment and a special account
with a depository participant for crediting specified securities to be bought from the
market during the stabilisation period out of the monies credited in the special bank
account.
The specified securities bought from the market and credited in the special account with
the depository participant shall be returned to the promoters or pre-issue shareholders
immediately, in any case not later than two working days after the end of the stabilization
period. On expiry of the stabilisation period, if the stabilising agent has not been able to
buy specified securities from the market to the extent of such securities over-allotted,
the issuer shall allot specified securities at issue price in dematerialised form to the
extent of the shortfall to the special account with the depository participant, within five
days of the closure of the stabilisation period and such specified securities shall be
returned to the promoters or pre-issue shareholders by the stabilising agent in lieu of the
specified securities borrowed from them and the account with the depository participant
shall be closed thereafter.
The issuer shall make a listing application in respect of the further specified securities
allotted, to all the recognised stock exchanges where the specified securities allotted in
the public issue are listed. The market maker shall remit the monies with respect to the
specified securities allotted, to the issuer from the special bank account.
Any monies left in the special bank account after remittance of monies to the issuer
under sub-regulation and deduction of expenses incurred by the stabilising agent for the
stabilisation process shall be transferred to the Investor Protection and Education Fund
established by the Board and the special bank account shall be closed soon thereafter.
The market maker shall submit a report to the stock exchange on a daily basis during
and after the stabilisation period.
The stabilising agent shall maintain a register for a period of at least three years from
the date of the end of the stabilisation period and such register shall contain the following
particulars:
a) The names of the promoters or pre-issue shareholders from whom the specified
securities were borrowed and the number of specified securities borrowed from
each of them;
b) The price, date and time in respect of each transaction effected in the course of
the stabilisation process; and
c) The details of allotment made by the issuer on expiry of the stabilisation process.

7.5 SUMMARY
In unit 7, we have analyzed the major activities relating to issuance and post-issuance,
including the importance of pricing during equity issuance, mechanisms for pricing such
as book building process, the major activities related to distribution, allocation and listing.
We have also discussed the benefits of the greenshoe option and the role and functioning
of the market maker.

7.6 SELF ASSESSMENT QUESTIONS

1) Explain in detail, the mechanism of the book building process.
2) What are the advantages of the book building process?
63
Primary Markets 3) Who is an anchor investor? What is the need for an anchor investor?
4) What is the meaning of a greenshoe option? What are the different steps leading to
such an issue?
5) What is the role of a market maker who is appointed for a greens hoe option?
6) What are the activities in distribution, allocation and listing of public issues?
7) Explain in detail, the listing process after completion of the public issue.

7.7 FURTHER READINGS

1) Khan, M.Y. (2007) Indian Financial System, Tata McGraw-Hill.
2) Endo, Tadashi (1998) Indian Securities Market, Vision Books.
3) Pathak, Bharati V. (2008) The Indian Financial System, Markets Institutions
and Services, Pearson Education.

64
 Issuance and
ANNEXURE
Post-Issuance Activities

I .-\nntX11l"f 1 - Book Building hsuts Process flow Chan I

In - principle SE Full page
- ---- ---- --I
,, advertisement
Approval ,, for 5 days
before issue
!, opens
DRAFT

RHP
I BRL'I
J • Applicanon to SE
I
• BlDDI:IIG tres finalised
BRlH • Floor Pnce aDd Price Band finahse4 b}'
• Appoin~ - Syndicate ~fembers
Issuer Company
(SM). Registrars. Unden mters. Issue ~ table finalised
Pnnters, Bankers to the Issue, Ad
• Arrangements \\lth BSt:.- NSE for book
AgeJ:lCies. Escrow Accounts.
building process (Ullage of softWlm! for the
• SublDits -Prepares and files due -
diligence and draft RHP wnh SEB1: biddlm! process
Submits 5hng fees 10 SEBI:
Obtains in-priDCip e appronl from
SE md files Wlth SEBI. enters 1Ill0
:ripamte agreemeDl with Registrars
. and Depcsircries.

Source: ww.sebi.gov.in

Abbreviations Used
SM- Syndicate Members
SE- Stock Exchanges
BRLM - Book Running Lead Managers
RHP - Red Herring Prospectus
ROC - Registrar of Companies
Sub-SM - Sub-syndicate Manager
QIB - Qualified Institutional Buyers
HNI - High Net-worth Individuals
CAN - Confirmation of Allocation Notes
PR - Public Representative
BO - Beneficiary Owners

.65

I
Primary Markets

Ar-----~~----~--------------~ t-uden'Titing
agreement signed with
BRL\Iand SM

Price dererminadon b)-

BRL\ll ISSUER

BRL\I submits Alloeation to

BA..""KIRS TO A..~ISSl:I final prospt't1us QIB~on
toQIBs and Discretionary
• collects physical forms from OfItr document portion •
S\1 toSEBI/ROC
• schedule of Bid - fonn~
prepared
e ' sends cheques I drafts for
clearance
informs registrar about Strike Order
cheque / clearance details ofCA...•.•, and
• sends physical forms to Refund
registrar Warrants
REGISTRAR
giWD to rh.
• Data enrry _ Printer
• Reconciliation of data received
fromBRLll
• Reconciliatton of Bank
statements
• Reconciles phySIcal forms

Source: ww.sebi.gov.in

Abbreviations Used
SM - Syndicate Members
SE - Stock Exchanges
BRLM - Book Running Lead Managers
RHP - Red Herring Prospectus
ROC - Registrar of Companies
Sub-SM - Sub-syndicate Manager
QIB - Qualified Institutional Buyers
HNI - High Net-worth Individuals
CAN - Confirmation of Allocation Notes
PR - Public Representative
BO - Beneficiary Owners

66
 ANNEXURE (Contd.) Issuance and
Post-Issuance Activities

Aflccanon approved by SE~ Issuer approves

allotment
(Board Resolution)

Basis of Allocation
B finalised hv Issuer, eonfirmanon of despatch ISSl."ER
Registrar: BRU1. of refund orders CO. I
ImigJl:tted SE and PR • Electromc data file BRLM
sent to Deposuories
TR.-t: 'SFER OF for crediting accounts
rrxns • Despatch refund
frem Escrow orders to non-
account to allottees wnhm 2 confumation
Public Issue working days of credit to BO
account • Confinuation of accounts
despatch of refund
orders
• Provide likSUers with
rennsite deeumeats

• Data for
recouciharion ofQm
• BaSIS of allocation DEPOSITORIES
finali~ for Read
and Hhl Crediting of shares into
• Subnussion of Basis indiridual BO accounts
of allocation to SEs

Source: ww.sebi.gov.in

Abbreviations Used
SM - Syndicate Members
SE - Stock Exchanges
BRLM - Book Running Lead Managers
RHP - Red Herring Prospectus
RaC - Registrar of Companies
Sub-SM - Sub-syndicate Manager
QIB - Qualified Institutional Buyers
HNI - High Net-worth Individuals
CAN - Confirmation of Allocation Notes
PR - Public Representative
BO -Beneficiary Owners

67
 UNITS REGULATORY FRAMEWORK
Objectives
. ,

After studying this unit, you should be able to:

• . identify the regulatory issues involved in primary markets;
• identify the obligations of the issuing company and the intermediaries and the
different documentation for public issuance of equity;
• analyze the regulatory framework and processes involved in different types of
equity issuance; and
• appreciate the importance of regulatory mechanism in the equity issuance and
post-issuance process.

Structure
8.1 Introduction
8.2 Regulation for Pre-issuance Phase
8.3 Regulation for Issuance and Post-issuance Phase
8.4 Regulation for Rights Issue
8.5 General Obligations for Issuer and Intermediaries
8.6 Regulation for Preferential Issue
8.7 Regulation for Qualified Institutional Placement
8.8 Regulation for Bonus Issue
8.9 Regulation for Indian Depository Receipts
8.10 Regulation for Issue of Convertible Debt Instruments
8.11 . Regulation On Promoter's Contribution, Restriction of Transferability and
Lock-in of Securities
8.12 Summary
8.13 Self Assessment Questions
8.14 Further Readings
Annexures

8.1 INTRODUCTION
Prior to the recent economic reforms (1991 ), a government agency named the Controller
of Capital Issues, CCI (established under the CCI Act, 1947) had regulatory control
over all capital issues. Before any public issue could take place, the offer price had to be
cleared by the CCL The "CCI-formula" was used to calculate "fair price" of equity in
the light of accounting information. This often led to extreme underpricing, and heavy
oversubscription. Investors often applied for ten times as many shares as were put up
for sale. This extent of underpricing deterred firms from going public. Relatively few
issues took place and debt played a major role in financing projects. From October 1991
to May 1992, the BSE was embroiled in a speculative bubble engineered by an illegal
diversion of funds from the banking system. It had two kinds of consequences for the
primary market: issues priced just before the scam often produced enormous returns
68
from issue date to listing date, and issues priced during the seam often produced very Regulatory Framework
poor returns from issue date to listing date.
Shortly after the seam, on 29 May 1992, the CCI was abolished, and firms were free to
price equity at whatever price they chose. There was a transitional phase after the
abolition of the CCI in which extremely few issues took place. The newly created
regulatory agency governing financial markets, the Securities and Exchanges Board of
India (SEBI), then took up the role of vetting prospectus for public offerings with an eye
to ensuring truthful information disclosure in the prospectus.
SEBI was functional in this role from late 1992 onwards. With the abolition of the CCI,
firms were now free to price issues as they pleased, subject to several caveats. However,
the post CCI period is also characterised by extremely high levels of under- pricing by
world standards.
The most common method of raising funds from public is IPQ Issues. Indian IPQ market
comprises of two board issue process:

• Book Building Process

• Fixed Price Process
The IPQ process starts with the company proposing to raise capital from the markets.
Two options available for the company: (i) the fixed price route where the issue price is
fixed or (ii) the book-building route where the price band is fixed and the issue price is
fmalized after the issue closes.
The Exchange should be advised as soon as the subscription list is closed. In the event
of under-subscription, it should be confirmed that the underwriters or their nominees
have taken up the balance of the issue remaining un subscribed. Copies of the Basis of
Allotment of the equity shares including allotment to QIB' s should be filed. The company
should submit a certified true copy of its board resolution for allotment of company's
shares as per the basis of allotment approved by the Designated Stock Exchange. The
date of allotment of the shares should also be intimated to the Exchange. The company
must submit the copy of advertisement of Basis of Allotment. If not published, the draft
copy of the advertisement.
It should be confirmed that the allotment of securities offered' to the public has been
made within 15 days (30 days for fixed price issue) from the date of closure of the
public issue;
• If the allotment has not been made and/or the refund orders have not been dispatched
to the investors within 15 days (30 days for fixed price issue) from the date of the
closure of the issue, specified interest per annum is being paid.
• The Auditor of the Company/practicing Company Secretary should certify that:
• In the event of over-subscription, the allotment of shares has been made as
agreed upon with the Stock Exchange concerned;
• For shares under lock-in, the share certificates have been properly enfaced
with respect to their non-transferability and the necessary corporate action
has been executed to have the shares marked as non-transferable in the
depository's record;
• Allotment of shares from the employees' quota has been made to permanent! .
regular employees of the company and of the promoter companies, as on the
date of the opening of the public issue and who are entitled to such allotment;
• The allotment of shares from the promoters' quota has been made correctly
to those entitled to and nobody else.

69
Primary Markets The Initial Listing fee and Annual Listing Fee as per the Exchange regulations for the
year should be paid. The company should submit certificate/s from its bankerls to the
issue stating that the application monies collected are lying in the separate account and
that the said amount has not been utilized by the company so far. A Listing Agreement
should be executed; Detailed Letter of Application & Listing Application should be
submitted; Distribution Schedule of the equity shares (pre-issue, issue and post issue
separately) should be filed. The company should send the share-holding pattern (pre-
issue, issue and post-issue) form duly filled in.
Category-wise (Physical & Demat) distinctive numbers of the shares should be submitted.
A certificate from the Registrar to the issue should be submitted confmning the exact
date of credit of shares allotted in demat form in both the depositories i.e., NSDL and
CDSL. In case there is any delay in giving credit to any of the depository, the reason for
the same should also be mentioned. Letter of credit from both the depositories i.e.,
NSDL & CDSL indicating the quantity and date of credit must be submitted. The same
should also indicate the quantity of demat shares under lock-in with the date up to which
the same is under lock-in. A statement signed by the Chief Executive Officer of the
company should be submitted stating the date of completion of posting of letters of
allotment/share certificates (including NRI's) and refund orders. Acopy of the Registrars
certificate in this respect should also be filed. An undertaking should be filed with the
Exchange to the effect that the company will be returning the share certificates issued
for the entire holding, duly split within a week's time as and when such requests are
received from the shareholders. The date(s) of book closure of the register of members.
or record date fixed in the current year and reason/s for it should be intimated. A copy
of the SEBI Acknowledgement card should be submitted. Due diligence certificate
from the Lead Manager to the issue together with a statement showing inter-se allocation
of responsibility amongst Lead Managers should be filed with the Exchange.
The lead merchant banker on behalf of the issuing company should also ensure the
following:
• Submission of a declaration to the exchange that the company has not entered into
any buy-back agre.ement or arrangement with any of the applicants/allottees of the
shares in its public issue.
• Submission of an auditor certificate regarding compliance of conditions of Corporate
Governance as stipulated in clause 49 of the listing agreement.
• Submission of the composition of various committees as required under the said
clause.
• The company should register for "Electronic Data Information Filing and Retrieval
System" (EDIFAR) with the Exchange, where the listing is to be done.

8.2 REGULATION FOR PRE-ISSUANCE PHASE

The issuing company shall appoint one or more merchant bankers, at least one of whom
shall be a lead merchant banker and shall also appoint other intermediaries, in consultation
with the lead merchant banker, to carry out the obligations relating to the issue. The
issuer shall, in consultation with the lead merchant banker, appoint only those intermediaries
which are registered with SEBI. Where the issue is managed by more than one merchant
banker, the rights, obligations and responsibilities, relating inter alia to disclosures, allotment,
refund and underwriting obligations, if any, of each merchant banker shall be
predetermined and disclosed in the offer document. The lead merchant banker shall,
only after independently assessing the capability of other intermediaries to carry out
their obligations, advise the issuer on their appointment. The issuer shall enter into an
agreement with the lead merchant banker in a specified format Agreement with other
70
intermediaries as required under the respective regulations applicable to the intermediary Regulatory Framework
concerned may be undertaken by the issuing company. Such agreements may include-
such other clauses as the issuer and the intermediary may deem fit without diminishing
or limiting in any way the liabilities and obligations of the merchant bankers, other
intermediaries and the issuer under the Act, the Companies Act, 1956, the Securities
Contracts (Regulation) Act, 1956~the Depositories Act, 1996 and the rules and regulations
made thereunder or any statutory modification or statutory enactment thereof: Provided
further that in case of ASBA process, the issuer shall take cognisance of the deemed
agreement of the issuer with Self Certified Syndicate Banks. An issuer shall, in case of
an issue made through the book building process, appoint syndicate members and in the
case of any other issue, appoint bankers to issue, at all mandatory collection centres as
specified and such other collection centres as it may deem fit. The issuer shall appoint a
registrar which has connectivity with all the depositories: Provided that if j ssuer itself is
a registrar to an issue registered with the Board, then another registrar to an issue shall
be appointed as registrar to the issue: Provided further that the lead merchant banker
shall not act as a registrar to the issue in which it is also handling the post issue
responsibilities. In case of a book built issue, the lead merchant banker appointed by the
issuer shall act as the lead book runner.

Filing of Offer Document

Any issuer of making a a public issue, rights issue, where the aggregate value of the
specified securities offered is fifty lakh rupees or more needs to file a draft offer document,
along with fees with SEBI. This should be done through the lead merchant banker, at
least thirty days prior to registering the prospectus, red herring prospectus or shelf
prospectus with the Registrar of Companies or filing the letter of offer with the designated
stock exchange, as the case may be. SEBI may specify changes or issue observations,
if any, on the draft offer document within thirty days from the later of the following
dates:
• The date of receipt of the draft offer document under sub-regulation; or
• The date of receipt of satisfactory reply from the lead merchant bankers, where
the Board has sought any clarification or additional information from them; or
• The date of receipt of clarification or information from any regulator or agency,
where the Board has sought any clarification or information from such regulator or
agency; or
• The date of receipt of a copy of in-principle approval letter issued by the recognised
stock exchanges.
If SEBI specifies changes or issues observations on the draft offer document, the issuer
and lead merchant banker shall carry out such changes in the draft offer document and
comply with the observations issued by the Board before registering the prospectus,
red-herring prospectus or shelf prospectus, as the case may be, with the Registrar of
Companies or filing the letter of offer with the designated stock exchange. The issuer
shall, simultaneously while registering the prospectus, red herring prospectus or shelf
prospectus with the Registrar of Companies or filing the letter of offer with the designated
stock exchange or before the opening of the issue, file a copy thereof with the Board
through the lead merchant banker. The lead merchant banker shall also file a copy of
offer document with the recognised stock exchanges where the specified securities are
proposed to be listed. The offer document filed with SEBI shall also be furnished in a
soft copy.

In-principle approval from recognised stock exchanges

The issuer needs to obtain in-principle approval from recognised stock exchanges in all
the following cases:
71
Primary Markets a) In case of an initial public offer, from all the recognised stock exchanges in which
the
b) Issuer proposes to get its specified securities listed; and in case of a further public
offer and rights issue:
i) Where the specified securities are listed only on recognised stock exchanges
having nationwide trading terminals, from all such stock exchanges;
ii) Where the specified securities are not listed on any recognised stock exchange
having nationwide trading terminals, from all the stock exchanges in which the
specified securities of the issuer are proposed to be listed;
iii) Where the specified securities are listed on recognised stock exchanges having
nationwide trading terminals as well as on the recognised stock exchanges not
having nationwide trading terminals, from all recognised stock exchanges
having nationwide trading terminals.

Documents to be submitted before opening of the issue

The lead merchant bankers shall submit the following to the Board along with the draft
offer document:
a) A copy of the agreement entered into between the issuer and the lead merchant
bankers;
b) A copy of inter-se allocation of responsibilities of each merchant banker, in case
the issue is managed by more than one merchant banker;
c) A due diligence certificate.
The lead merchant banker shall also submit the following documents to SEBI after
issuance of observations by the regulator:
a) A statement certifying that all changes, suggestions and observations made by the
Board have been incorporated in the offer document;
b) A due diligence certificate at the time of registering the prospectus with the Registrar
of Companies;
c) A copy of the resolution passed by the board of directors of the issuer for allotting
specified securities to promoters towards amount received against promoters'
contribution, before opening of the issue;
d) A certificate from a Chartered Accountant, before opening of the issue, certifying
that promoters' contribution has been received in accordance with these regulations,
accompanying therewith the names and addresses of the promoters who have
contributed to the promoters' contribution and the amount paid by each of them
towards such contribution;
e) A due diligence certificate immediately before the opening of the issue, certifying
that necessary corrective action, if any, has been taken;
f) A due diligence certificate after the issue has opened but before it closes for
subscription.
The issuer shall, at the time of filing draft offer document with the recognised stock
exchange where the specified securities are proposed to be listed, submit the Permanent
Account Number, bank account number and passport number of its promoters to such
stock exchange.

Draft offer document to be made public

The draft offer document filed with SEBI shall be made public, for comments, if any, for
a period of at least 21 days from the date of such filing, by hosting it on the websites of

72
the Board, recognised stock exchanges where specified securities are proposed to be Regulatory Framework
listed and merchant bankers associated with the issue. The lead merchant bankers shall,
after expiry of the stipulated period, file with SEBI a statement giving information of the
comments received by them or the issuer on the draft offer document during that period
and the consequential changes, if any, to be made in the draft offer document.

Fast Track Issues

The issuer should satisfy the following conditions for being eligible to make a fast-track
issue:
a) The equity shares of the issuer have been listed on any recognised stock exchange
having nationwide trading terminals for a period of at least three years immediately
preceding the reference date;
b) The average market capitalisation of public shareholding of the issuer is at least
ten thousand crore rupees;
c) The annualised trading turnover of the equity shares of the issuer during six calendar
months immediately preceding the month of the reference date has been at least
two per cent of the weighted average number of equity shares listed during such
six months' period;
d) The issuer has redressed at least ninety five per cent. of the complaints received
from the investors till the end of the quarter immediately preceding the month of
the reference date;
e) The issuer has been in compliance with the equity listing agreement for a period of
at least three years immediately preceding the reference date;
f) The impact of auditors' qualifications, if any, on the audited accounts of the issuer
in respect of those financial years for which such accounts are disclosed in the
offer document does not exceed five per cent. of the net profit or loss after tax of
the issuer for the respective years;
g) No show-cause notices have been issued or prosecution proceedings initiated or
pending against the issuer or its promoters or whole time directors as on the
reference date;
h) The entire shareholding of the promoter group of the issuer is held in dematerialized
form on the reference date.
The issuer shall file the offer document with the Board and the recognised stock
exchanges. Following may be noted with reference to the terminology used in the
regulations:
1) "Reference date" means:
a) In case of a public issue by a listed issuer, the date of registering the red
herring prospectus (in case of a book built issue) or prospectus (in case of a
fixed price issue) with the Registrar of Companies; and
b) In case of a rights issue by a listed issuer, the date of filing the letter of offer
with the designated stock exchange.
2) "Average Market Capitalisation of public shareholding" means the sum of daily
market capitalisation of public shareholding for a period of one year up to the end
of the quarter preceding the month in which the proposed issue was approved by
the shareholders or the board of the issuer, as the case may be, divided by the
number of trading days in the period.

73
Primary Markets
8.3 REGULATION FOR ISSUANCE AND
POST-ISSUANCE PHASE
Subject to the compliance with sub-section (4) of section 60 of the Companies Act,
1956, a public issue or rights issue may be opened within twelve months from the date of
issuance of the observations by SEBI; or in case of no observations issued by SEBI,
then within 3 months from the date on which observations are provided by SEBI.
The issuer shall, before registering the red herring prospectus (in case of a book built
issue) or prospectus (in case of a fixed price issue) with the Registrar of Companies or
filing the letter of offer with the designated stock exchange, as the case may be, file
with the Board through the lead merchant bankers, an updated offer document highlighting
all changes made in the offer document. Notwithstanding, anything contained in this
regulation, if there are changes in the offer document provided by the issuing company
through its lead merchant banker, then the updated offer document or new draft offer
document, as the case may be, shall be filed with the Board along with fees specified.

Dispatch of Issue Material

The lead merchant bankers shall dispatch the offer document and other issue material
including forms for ASBA to the designated stock exchange, syndicate members,
underwriters, bankers to the issue, investors' associations and Self Certified Syndicate
Banks in advance.

Minimum Subscription
The minimum subscription to be received in an issue shall not be less than ninety per
cent of the offer through offer document. In the event of non-receipt of rriinimum
subscription, all application moneys received shall be refunded to the applicants forthwith,
but not later than:
• Fifteen days of the closure of the issue, in case of a non-underwritten issue; and
• Seventy days of the closure of the issue, in the case of an underwritten issue
where minimum subscription including devolvement obligations paid by the
underwriters is not received within sixty days of the closure of the issue.
The offer document shall contain adequate disclosures regarding minimum subscription
as specified in Prospectus. This regulation shall not apply to:
• Offer for sale of specified securities;
• Public issue by infrastructure companies if the disclosures regarding the alternate
source of funding of the objects of the issue have been made in the offer document.
The term "infrastructure company" means, an enterprise wholly engaged in the business
of:
a) developing, or
b) operating and maintaining, or
.'
c) developing, operating and maintaining any infrastructure facility.

Oversubscription
No allotment shall be made by the issuer in excess of the specified securities offered
through the offer document: Provided that in case of oversubscription, an allotment of
not more than ten per cent of the net offer to public may be made for the purpose of
making allotment in minimum lots.

74
Monitoring Agency Regulatory Framework

If the issue size exceeds Rs. 500 Crores, the issuer shall make arrangements for the use
of proceeds of the issue to be monitored by a public financial institution or by one of the
scheduled commercial banks named in the offer document as bankers of the issuer.
This is provided that nothing contained in this clause shall apply to an offer for sale or an
issue of specified securities made by a bank or public financial institution. The monitoring
agency shall submit its report to the issuer in the format specified on a half yearly basis,
till the proceeds of the issue has been fully utilized.

Payment of Subscription Amount in Calls

If the issuer proposes to receive subscription monies in calls (in installments, when the
issuing company calls for the subscription amount), it shall ensure that the outstanding
subscription money is called within twelve months from the date of allotment in the
issue. If any applicant fails to pay the call money within the said twelve months, the
equity shares on which there are calls in arrear along with the subscription money
already paid on such shares shall be forfeited. This is subject that it shall not be necessary
to call the outstanding subscription money within twelve months, if the issuer has appointed
a monitoring agency.

Allotment, Refund and Payment of Interest

The issuer and merchant bankers shall ensure that specified securities are allotted and/
or application moneys are refunded within fifteen days from the date of closure of the
issue. Where specified securities are not allotted and/or application moneys are not
refunded within the stipulated period, then the issuer shall undertake to pay interest at
such rate and within such time as disclosed in the offer document.

Restriction on further capital issues

No issuer shall make any further issue of specified securities in any manner whether by
way of public issue, rights issue, preferential issue, qualified institutions placement, issue
of bonus shares or otherwise:
a) In case of a fast track issue, during the period between the date of registering the
red herring prospectus (in case of a book built issue) or prospectus (in case of a
fixed price issue) with the Registrar of Companies or filing the letter of offer with
the designated stock exchange and the listing of the specified securities offered
through the offer document or refund of application moneys;
or
b) In case of other issues, during the period between the date of filing the draft offer
document with the Board and the listing of the specified securities offered through
the offer document or refund of application moneys; unless full disclosures regarding
the total number of specified securities and amount proposed to be raised from
such further issue are made in such draft offer document or offer document, as the
case may be.

Alteration of rights of holders of specified securities

No issuer shall alter the terms (including the terms of issue) of specified securities
which may adversely affect the interests of the holders of that specified securities,
except with the consent in writing of the holders of not less than three-fourths of the
specified securities of that class or with the sanction of a special resolution passed at a
meeting of the holders of the specified securities of that class.

75
Primary Markets Period of subscription
A public issue shall be kept open for at least three working days but not more than ten
working days including the days for which the issue is kept open in case of revision in
price band. In case the price band in a public issue made through the book building
process is revised, the bidding (issue) period disclosed in the red herring prospectus shall
be extended for a minimum period of three working days: Provided that the total bidding
period shall not exceed ten working days.

Advertisement for public issue

Subject to the provisions of section 66 of the Companies Act, 1956, the issuer shall, after
registering the red herring prospectus (in case of a book built issue) or prospectus (in
case of fixed price issue) with the Registrar of Companies, make a pre- issue advertisement
in one English national daily newspaper with wide circulation, Hindi national daily
newspaper with wide circulation and one regional language newspaper with wide
circulation at the place where the registered office of the issuer is situated. The pre-
issue advertisement shall be in the format specified and shall contain the disclosures
specified. An issuer may issue advertisements for issue opening and issue closing
advertisements, which shall be in the formats specified.

Minimum application value

The issuer shall stipulate in the offer document, the minimum application size in terms of
number of specified securities which shall fall within the range of minimum application
value of five thousand rupees to seven thousand rupees. The issuer shall invite applications
in multiples of the minimum application value, an illustration given.
The minimum sum payable on application shall not be less than twenty five per cent of
the issue price: Provided that in case of an offer for sale, the issue price payable for
each specified security shall be brought in at the time of application.
"Minimum application value" shall be with reference to the issue price of the specified
securities and not with reference to the amount payable on application.

Allotment procedure and basis of allotment

The allotment of specified securities to applicants other than anchor investors shall be
on proportionate basis within the specified investor categories and the number of securities
allotted shall be rounded off to the nearest integer, subject to minimum allotment being
equal to the minimum application size as determined and disclosed by the issuer.
The executive director or managing director of the designated stock exchange along
with the post issue lead merchant bankers and registrars to the issue shall ensure that
the basis of allotment is finalised in a fair and proper manner in accordance with the
allotment procedure as specified .

Utilisation of subscription money

The post-issue lead merchant banker shall ensure that moneys received in respect of
the issue are released to the issuer in compliance with the provisions of section 73 of the
Companies Act, 1956.

8.4 REGULATION FOR RIGHTS ISSUE

Record Date
A listed issuer making a rights issue shall announce a record date for the purpose of
determining the shareholders eligible to apply for specified securities in the proposed
76
rights issue. The issuer shall not withdraw rights issue after announcement of the record Regulatory Framework
date. If the issuer withdraws the rights issue after announcing the record date, it shall
not make an application for listing of any of its specified securities on any recognised
stock exchange for a period of twelve months from the record date announced: Provided
that the issuer may seek listing of its equity shares allotted pursuant to conversion or
exchange of convertible securities issued prior to the announcement of the record date,
on the recognised stock exchange where its securities are listed.

Restriction on rights issue

No issuer shall make a rights issue of equity shares if it has outstanding fully or partly
convertible debt instruments at the time of making rights issue, unless it has made
reservation of equity shares of the same class in favour of the holders of such outstanding
convertible debt instruments in proportion to the convertible part thereof. The equity
shares reserved for the holders of fully or partially convertible debt instruments shall be
issued at the time of conversion of such convertible debt instruments on the same terms
on which the equity shares offered.in the rights issue were issued.

Letter of offer, abridged letter of offer, pricing and period of subscription

. The abridged letter of offer, along with application form, shall be dispatched through
registered post or speed post to all the existing shareholders at least three days before
the date of opening of the issue: Provided that the letter of offer shall be given by the
issuer or lead merchant banker to any existing shareholder who has made a request in
this regard. The shareholders who have not received the application form may apply in
writing on a plain paper, along with the requisite application money. The shareholders
making application otherwise than on the application form shall not renounce their rights
and shall not utilise the application form for any purpose including renunciation even if it
is received subsequently. Where any shareholder makes an application on application
form as well as on plain paper, the application is liable to be rejected. The issue price
shall be decided before determining the record date which shall be determined in
consultation with the designated stock exchange. A rights issue shall be open for
subscription for a minimum period of fifteen days and for a maximum period of thirty
days.

Pre-issue Advertisement for rights issue

The issuer shall issue an advertisement for rights issue disclosing the following:
a) The date of completion of despatch of abridged letter of offer and the application
form;
b) The centres other than registered office of the issuer where the shareholders or
the persons entitled to receive the rights entitlements may obtain duplicate copies
of the application forms in case they do not receive the application form within a
reasonable time after opening of the rights issue;
c) A statement that if the shareholders entitled to receive the rights entitlements have
neither received the original application forms nor they are in a position to obtain
the duplicate forms, they may make application in writing on a plain paper to
subscribe to the rights issue;
d) A format to enable the shareholders entitled to apply against their rights entitlements,
to make the application on a plain paper specifying therein necessary particulars
such as name, address, ratio of rights issue, issue price, number of equity shares
held, ledger folio numbers, depository participant ID, client ID, number of equity
shares entitled and applied for, additional shares if any, amount to be paid along
with application, and particulars of cheque, etc. to be drawn in favour of the issuer's
account; 77
Primary Markets e) i\ statement that the applications can be directly sent by the shareholders entitled
to apply against rights entitlements through registered post together with the
application moneys to the issuer's designated official at the address given in the
advertisement;
f) A statement to the effect that if the shareholder makes an application on plain
paper and also on application form both his applications shall be liable to be rejected
at the option of the issuer.
The advertisement shall be made in at least one English national daily newspaper with
wide circulation, one Hindi national daily newspaper with wide circulation and one
regional language daily newspaper with wide circulation at the place where registered
office of the issuer is situated, at least three days before the date of opening of the issue.

Utilisation of funds raised in rights issue

The issuer shall utilise funds collected in rights issues after the finalisation of the basis of
allotment.

8.5 GENERAL OBLIGATIONS OF ISSUER AND

INTERMEDIARIES

Some of the general obligations of Issuer and Intermediaries are discussed below:

Prohibition on payment of incentives

No person connected with the issue shall offer any incentive, whether direct or indirect,
in any manner, whether in cash or kind or services or otherwise to any person for
making an application for allotment of specified securities: Provided that nothing contained
in this regulation shall apply to fees or commission for services rendered in relation to
the issue. The expression "person connected with the issue" includes a person connected
with the distribution of the issue.

Public communications, publicity materials, advertisements and research

reports
Any public communication including advertisement and publicity material issued by the
issuer or research report made by the issuer or any intermediary concerned with the
issue or their associates shall contain only factual information and shall not contain
projections, estimates, conjectures, etc. or any matter extraneous to the contents of the
offer document. All public communications and publicity material issued or published in
any media during the period commencing from the date of the meeting of the board of
directors of the issuer in which the public issue or rights issue is approved till the date of
filing draft offer document with the Board shall be consistent with its past practices:
Provided that where such public communication or publicity material is not consistent
with the past practices of the issuer, it shall be prominently displayed or announced in
such public communication or publicity material that the issuer is proposing to make a
public or rights issue of specified securities in the near future and is in the process of
filing a draft offer document with the Board. All public communications and publicity
material issued or published in any media during the period commencing from the date
of filing draft offer document with the Board till the date of allotment of securities
offered in the issue, shall prominently disclose that:
a) The issuer is proposing to make a public issue or rights issue of the specified
securities and has filed a draft offer document with the Board or has filed the red
herring prospectus or prospectus with the Registrar of Companies or the letter of
offer with the designated stock exchange, as the case may be.
78
'.

b) The draft offer document, red herring prospectus or final offer document, as the Regulatory Framework
case may be, is available on the website of the Board, lead merchant bankers or
lead book runners.
The issuer shall make prompt, true and fair disclosure of all material developments
which take place during the following period mentioned in this sub-regulation, relating to
its business and securities and also relating to the business and securities of its subsidiaries,
group companies, etc., which may have a material effect on the issuer, by issuing public
notices in all the newspapers in which the issuer had issued pre-issue advertisement, as
the case may be:
a) In case of public issue, between the date of registering fmal prospectus or the red
herring prospectus, as the case may be, with the Registrar of Companies, and the
date of allotment of specified securities;
b) In case of a rights issue, between the date of filing the letter of offer with the
designated stock exchange and the date of allotment of the specified securities.
The issuershall not, directly or indirectly, release, during any conference or at any other
time, any material or information which is not contained in the offer document. In respect
of all public communications, issue advertisements and publicity materials, the issuer
shall obtain approval from the lead merchant bankers responsible for marketing the
issue and shall also make copies of all issue related materials available with the lead
merchant bankers at least till the allotment is completed. Any advertisement or research
report issued or caused to be issued by an issuer, any intermediary concerned with the
issue or their associates shall comply with the following:
a) It shall be truthful, fair and shall not be manipulative or deceptive or distorted and
it shall not contain any statement, promise or forecast which is untrue or misleading;
b) If it reproduces or purports to reproduce any information contained in an offer
document, it shall reproduce such information in full and disclose all relevant facts
and not be restricted to select extracts relating to that information;
c) It shall be set forth in a clear, concise and understandable language;
d) It shall not include any issue slogans or brand names for the issue except the
normal commercial name of the issuer or commercial brand names of its products
already in use;
e) If it presents any financial data, data for the past three years shall also be included
alongwith particulars relating to sales, gross profit, net profit, share capital, reserves,
earnings per share, dividends and the book values;
f) No advertisement shall use extensive technical, legal terminology or complex
language and excessive details which may distract the investor;
g) No issue advertisement shall contain statements which promise or guarantee rapid
increase in profits;
h) No issue advertisement shall display models, celebrities, fictional characters,
landmarks or caricatures or the likes;
i) No issue advertisement shall appear in the form of crawlers (the advertisements
which run simultaneously with the programme in a narrow strip at the bottom of
the television screen) on television;
j) In any issue advertisement on television screen, the risk factors shall not be scrolled
. on the television screen and the advertisement shall advise the viewers to refer to
the red herring prospectus or other offer document for details;
k) No issue advertisement shall contain slogans, expletives or non-factual and
unsubstantiated titles;

79

I
Primary Markets 1) If an advertisement or research report contains highlights, it shall also contain risk
factors with equal importance in all respects including print size of not less than
point seven size;
m) An issue advertisement displayed on a billboard shall not contain information other
than that specified in Parts A, Band C of Schedule XIII, as applicable;
n) All' issue advertisement which contains highlights or information other than the
details contained shall contain risk factors.
No advertisement shall be issued giving any impression that the issue has been fully
subscribed or oversubscribed during the period the issue is open for subscription. An
announcement regarding closure of issue shall be made only after the lead merchant
banker(s) is satisfied that at least ninety per cent. of the offer through offer document
has been subscribed and a certificate has been obtained to that effect from the registrar
to the issue: Provided that such announcement shall not be made before the date on
which the issue is to be closed. No advertisement or distribution material with respect to
the issue shall contain any offer of incentives, whether direct or indirect, in any manner,
whether in cash or kind or services or otherwise. No product advertisement shall contain
any reference, directly or indirectly, to the performance of the issuer during the period
commencing from the date of the resolution of the board of directors of the issuer
approving the public issue or rights issue till the date of allotment of specified securities
offered in such issue. A research report may be prepared only on the basis of information,
disclosed to the public by the issuer by updating the offer document or otherwise. No
selective or additional information or information which is extraneous to the information
disclosed to the public through the offer document or otherwise, shall be given by the
issuer or any member of the issue management team or syndicate to any particular
section of the investors or to any research analyst in any manner whatsoever, including
at road shows, presentations, in research or sales reports or at bidding centres. "Public
communication or publicity material" includes corporate, product and issue advertisements
of the issuer, interviews by its promoters, directors, duly authorized employees or
representatives of the issuer, documentaries about the issuer or its promoters, periodical
reports and press releases.
An issue advertisement shall be considered to be misleading, if it contains:
a) Statements made about the performance or activities of the issuer without necessary
explanatory or qualifying statements, which may give an exaggerated picture of
such performance or activities.
b) An inaccurate portrayal of past performance or its portrayal in a manner which
implies that past gains or income will be repeated in the future.

Copies of offer documents to be available to public

The issuer and lead merchant bankers shall ensure that the contents of offer documents
hosted on the websites as required in these regulations are the same as that of their
printed versions as filed with the Registrar of Companies, Board and the stock exchanges.
The lead merchant bankers and the recognised stock exchange shall provide copies of
the draft offer document and final offer document to the public as and when requested.
The lead merchant bankers or the recognised stock exchange may charge a reasonable
sum for providing the copy of the offer document.

Redressal of investor grievances

The post-issue lead merchant bankers shall actively associate himself with post-issue
activities such as allotment, refund, despatch and giving instructions to syndicate members,
Self Certified Syndicate Banks and other intermediaries and shall regularly monitor
redressal of investor grievances' arising therefrom.
80
Appointment of Compliance Officer Regulatory Framework

The issuer shall appoint a compliance, officer who shall be responsible for monitoring the
compliance of the securities laws and for redressal of investors' grievances. The term .
"securities laws" means the Companies Act, 1956, the Act, the Securities Contracts
(Regulation) Act, 1956, the Depositories Act, 1996 and the rules and regulations made
thereunder and the regulations, general or special orders, guidelines or circulars made or
issued by the Board.

Due diligence
The lead merchant bankers shall exercise due diligence and satisfy himself about all the
aspects of the issue including the veracity and adequacy of disclosure in the offer
documents. The lead merchant bankers shall call upon the issuer, its promoters or directors
or in case of an offer for sale, the selling shareholders, to fulfill their obligations as
disclosed by them in the offer document and as required in terms of these Regulations.
The post-issue merchant banker shall continue to be responsible for post-issue activities
till the subscribers have received the securities certificates, credit to their demat account
or refund of application moneys and the listing agreement is entered into by the issuer
with the stock exchange and listing/ trading permission is obtained. The responsibility of
the lead merchant banker shall continue even after the completion of issue process.

Post-issue. reports
The lead merchant banker shall submit post-issue reports to the Board in accordance
with sub-regulation. The post-issue reports shall be submitted as follows:
..
a) Initial post issue report within three days of closure of the issue;
b) Final post issue report within fifteen days of the date of finalisation of basis of
allotment or within fifteen days of refund of money in case of failure of issue.
The lead merchant banker shall submit due diligence certificates.

Post-Issue Advertisements
The post-issue merchant banker shall ensure that advertisement giving details relating
to oversubscription, basis of allotment, number, value and percentage of all applications
including ASBA, number, value and percentage of successful allottees for all applications
including ASBA, date of completion of despatch of refund orders or instructions to Self
Certified Syndicate Banks by the Registrar, date of despatch of certificates and date of
filing of listing application, etc. is released within ten days from the date of completion of
the various activities in at least one English national daily newspaper with wide circulation,
one Hindi national daily newspaper with wide circulation and one regional language·
daily newspaper with wide circulation at the place where registered office of the issuer
is situated. The post-issue merchant banker shall ensure that issuer, advisors, brokers or
any other entity connected with the issue do not publish any advertisement stating that
issue has been oversubscribed or indicating investors' response to the issue, during the
period when the public issue is still open for subscription by the public.

Co-ordination with Intermediaries

The post-issue merchant banker shall maintain close co-ordination with the registrars to
the issue and arrange to depute its officers to the offices of various intermediaries at
regular intervals after the closure of the issue to monitor the flow of applications from
collecting bank branches and/or Self Certified Syndicate Banks, processing of the
applications including application form for ASBA and other matters till the basis of
allotment is finalised, despatch of security certificates and refund orders are completed
and securities are listed. Any act of omission or commission on the part of any of the 81
I'dl11ary Markets intermediaries noticed during such visits shall be duly reported to the Board. In case
there is a devolvement on underwriters, the merchant banker shall ensure that the notice
for devolvement containing the obligation of the underwriters is issued within a period of
ten days from the date of closure of the issue. In case of undersubscribed issues, the
merchant banker shall furnish information in respect of underwriters who have failed to
meet their underwriting devolvement to the Board in the format specified. The post-
issue merchant banker shall confirm to the bankers to the issue by way of copies of
listing and trading approvals that all formalities in connection with the issue have been
completed and that the banker is free to release the money to the issuer or release the
money for refund in case of failure of the issue.

Audited financial statements in the offer document

The merchant banker shall ensure that the information contained in the offer document
and the particulars as per audited financial statements in the offer document are not
more than six months old from the issue opening date.

Other responsibilities
The post-issue merchant banker shall ensure that the despatch of refund orders, allotment
letters and share certificates is done by way of registered post or certificate of posting,
as may be applicable. The post-issue merchant banker shall ensure payment of interest
to the applicants for delayed dispatch of allotment letters, refund orders, etc. as per the
disclosure made in the offer document. In case of absence of definite information about
subscription figures, the issue shall be kept open for the required number of days to
avoid any dispute, at a later date, by the underwriters in respect of their liability. The
issuer shall ensure that transactions in securities by the promoter and promoter group
during the period between the date of registering the offer document with the Registrar
of Companies or filing the letter of offer with the designated stock exchange, as the
case may be and the date of closure of the issue shall be reported to the recognised
stock exchanges where the specified securities of the issuer are listed, within twenty
four hours of the transactions.

8.6 REGULATION FOR PREFERENTIAL ISSUE

A listed issuer may make a preferential issue of specified securities, if:
a) A special resolution has been passed by its shareholders;
b) All the equity shares, if any, held by the proposed allottees in the issuer are in
dematerialised form;
c) The issuer is in compliance with the conditions for continuous listing of equity
shares as specified in the listing agreement with the recognised stock exchange
where the equity shares of the issuer are listed;
d) The issuer has obtained the Permanent Account Number of the proposed allottees.
The issuer shall not make preferential issue of specified securities to any person who
has sold any equity shares of the issuer during the six months preceding the relevant
date: Provided that in respect of the preferential issue of equity shares and compulsorily
convertible debt instruments, whether fully or partly, the Board may grant relaxation
from the requirements of this sub-regulation, if the Board has granted relaxation in
terms of regulation 29A of the Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997 to such preferential allotment.
The issuer shall, in addition to the disclosures required under section 173 of the Companies
Act, 1956 or any other applicable law, disclose the following in the explanatory statement
to the notice for the general meeting proposed for passing special resolution:
82
 a) The objects of the preferential issue; Regulatory Framework

b) The proposal of the promoters, directors or key management personnel of the

issuer to subscribe to the offer;
c) The shareholding pattern of the issuer before and after the preferential issue;
d) The time within which the preferential issue shall be completed;
e) The identity of the' proposed allottees, the percentage of post preferential issue
capital that may be held by them and change in control, if any, in the issuer
consequent to the preferential issue;
f) An undertaking that the issuer shall re-compute the price of the specified securities
in terms of the provision of these regulations where it is required to do so;
g) An undertaking that if the amount payable on account of the re-computation of
price is not paid within the time stipulated in these regulations, the specified securities
shall continue to be locked- in till the time such amount is paid by the allottees.
The issuer. shall place a copy of the certificate of its statutory auditor before the general
meeting of the shareholders, considering the proposed preferential issue, certifying that
the issue is being made in accordance with the requirements of these regulations.
Where specified securities are issued on a preferential basis to promoters, their relatives,
associates and related entities for consideration other than cash, the valuation of the
assets in consideration.for which the equity shares are issued shall be done by an
independent qualified valuer, which shall be submitted to the recognised stock exchanges
where the equity shares of the issuer are listed: Provided that if the recognised stock
exchange is not satisfied with the appropriateness of the valuation, it may get the valuation
"-.
done by any other valuer and for this purpose it may obtain any information, as deemed
necessary, from the issuer.
, The special resolution shall specify the relevant date on the basis of which price of the
equity shares to be allotted on conversion or exchange of convertible securities shall be
calculated.

Allotment pursuant to special resolution

Allotment pursuant to the special resolution shall be completed within a period of fifteen
days from the date of passing of such resolution: Provided that where any application
for exemption from the applicability of the Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997 or any approval or
permission by any regulatory authority or the CentralGovernment for allotment is pending,
the period of fifteen days shall be counted from the date of order on such application or
the date of approval or permission, as the case may be: Provided further that where the
Board has granted relaxation to the issuer in terms of regulation 29A of SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997, the preferential issue of equity
shares and compulsorily convertible debt instruments, whether fully or partly, shall be
made by it within such time as may be specified by the Board in its order granting the
relaxation: Provided further that requirement of allotment within fifteen days shall not
apply to allotment of specified securities on preferential basis pursuant to a scheme of
corporate debt restructuring as per the corporate debt restructuring framework specified
by the Reserve Bank of India. If the allotment of specified securities is not completed
within fifteen days from the date of special resolution, a fresh special resolution shall be
passed and the relevant date for determining the price of specified securities under this
Chapter will be taken with reference to the date of latter special resolution.

Tenure of convertible securities

The tenure of the convertible securities of the issuer shall not exceed eighteen months
from the date of their allotment.
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Primary Markets Pricing of equity shares
If the equity shares of the issuer have been listed on a recognised stock exchange for a
period of six months or more as on the relevant date, the equity shares shall be allotted
at a price not less than higher of the following:
a) The average of the weekly high and low of the closing prices of the related equity
. shares quoted on the recognised stock exchange during the six months preceding
the relevant date; or
b) The average of the weekly high and low of the closing prices of the related equity
shares quoted on a recognised stock exchange during the two weeks preceding
the relevant date.
If the equity shares of the issuer have been listed on a recognised stock exchange for a
period of less than six months as on the relevant date, the equity shares shall be allotted
at a price not less than the higher of the following:
a) The price at which equity shares were issued by the issuer in its initial public offer
or the value per share arrived at in a scheme of arrangement under sections 391 to
394 of the Companies Act, 1956, pursuant to which the equity shares ofthe issuer
were listed, as the case may be;
or
b) The average of the weekly high and low of the closing prices of the related equity
shares quoted on the recognised stock exchange during the period shares have
been listed preceding the relevant date;
or
c) The average of the weekly high and low of the closing prices of the related equity
shares quoted on a recognised stock exchange during the two weeks preceding
the relevant. date.
The price shall be recomputed by the issuer on completion of six months from the date
of listing on a recognised stock exchange with reference to the average of the weekly
high and low of the closing prices of the related equity shares quoted on the recognised
stock exchange during these six months and if such recomputed price is higher than the
price paid on allotment, the difference shall be paid by the allottees to the issuer.
Any preferential issue of specified securities, to qualified institutional buyers not exceeding
five in number, shall be made at a price not less than the average of the weekly high and
low of the closing prices of the related equity shares quoted on a recognised stock
exchange during the two weeks preceding the relevant date.
For the purpose of this regulation, 'stock exchange' means any of the recognised stock
exchanges in which the equity shares are listed and in which the highest trading volume
in respect of the equity shares of the issuer has been recorded during the preceding six
months prior to the relevant date.

Payment of consideration
Full consideration of specified securities other than warrants issued shall be paid by the
allottees at the time of allotment of such specified securities: Provided that in case of a
preferential issue of specified securities pursuant to a scheme of corporate debt
restructuring as per the corporate debt restructuring framework specified by the Reserve
Bank of India, the allottee may pay the consideration in terms of such scheme. An
amount equivalent to at least twenty five per cent of the consideration determined shall
be paid against each warrant on the date of allotment of warrants. The balance seventy
five per cent of the consideration shall be paid at the time of allotment of equity shares
pursuant to exercise of option against each such warrant by the warrant holder. In case
84
the warrant holder does not exercise the option to take equity shares against any of the Regulatory Framework
warrants held by him, the consideration paid in respect of such warrant shall be forfeited
by the issuer.

Lock-in of specified securities

The specified securities allotted 011 preferential basis to promoter or promoter group and
the equity shares allotted pursuant to exercise of options attached to warrants issued on
preferential basis to promoter or promoter group, shall be locked-in for a period of three
years from the date of allotment of the specified securities or equity shares allotted
pursuant to exercise of the option attached to warrant, as the case may be: Provided
that not more than twenty per cent of the total capital of the issuer shall be locked-in for
three years from the date of allotment: Provided further that equity shares allotted in
excess of the twenty per cent shall be locked-in for one year from the date of their
allotment pursuant to exercise of options or otherwise, as the case may be. The specified
securities allotted on preferential basis to persons other than promoter and promoter
group and the equity shares allotted pursuant to exercise of options attached to warrants
issued on preferential basis to such persons shall be locked in for a period of one year
from the date of their allotment. The lock-in of equity shares allotted pursuant to conversion
of convertible securities other than warrants, issued on preferential basis shall be reduced
to the extent the convertible securities have already been locked-in. The equity shares
issued on preferential basis pursuant to a scheme of corporate debt restructuring as per
the Corporate Debt Restructuring framework specified by the Reserve Bank of India
shall be locked-in for a period of one year from the date of allotment: Provided that
partly paid up equity shares, if any, shall be locked-in from the date of allotment and the
lock-in shall end on the expiry of one year from the date when such equity shares
become fully paid up. If the amount payable by the allottee, in case of re-calculation of
price, is not paid till the expiry of lock-in period, the equity shares shall continue to be
locked in till such amount is paid by the allottee. The entire pre-preferential allotment
shareholding of the allottees, if any, shall be locked-in from the relevant date up to a
period of six months from the date of preferential allotment.
The expression "total capital of the issuer" means:
a) equity share capital issued by way of public issue or rights issue including equity
shares issued pursuant to conversion of specified securities which are convertible;
and
b) specified securities issued on a preferential basis to promoter or promoter group.
For the computation of twenty per cent of the total capital of the issuer, the amount of
minimum promoters' contribution held and locked-in, in the past in terms of Securities
and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 or
these regulations shall be taken into account. The minimum promoters' contribution
shall not again be put under fresh lock-in, even though it is considered for computing the
requirement of twenty per cent of the total capital of the issuer, in case the said minimum
promoters' contribution is free of lock-in at the time of the preferential issue.

8.7 REGULATION FOR QUALIFIED INSTITUTIONAL

PLACEMENT
The provisions of this section shall apply to a qualified institutions placement made by a
listed issuer. For the purpose of this section:
a) "Eligible securities" include equity shares, non-convertible debt instruments along
with warrants and convertible securities other than warrants;

85
Primary Markets b) "Qualified institutions placement" means allotment of eligible securities by a listed
issuer to qualified institutional buyers on private placement basis in terms of these
regulations;
c) "Relevant date" means:
i) In case of allotment of equity shares, the date of the meeting in which the
board of directors of the issuer or the committee of directors duly authorised
by the board of directors of the issuer decides to open the proposed issue;
ii) In case of allotment of eligible convertible securities, either the date of the
meeting in which the board of directors of the issuer or the committee of
directors duly authorised by the board of directors of the issuer decides to
open the issue of such convertible securities or the date on which the holders
of such convertible securities become entitled to apply for the equity shares.

Conditions for qualified institutions placement

A listed issuer may make qualified institutions placement if it satisfies the following
conditions:
a) A special resolution approving the qualified institutions placement has been passed
by its shareholders;
b) The equity shares of the same class, which are proposed to be allotted through
qualified institutions placement or pursuant to conversion or exchange of eligible
securities offered through qualified institutions placement, have been listed on a
recognised stock exchange having nation wide trading terminal for a period of at
least one year prior to the date of issuance of notice to its shareholders for convening
the meeting to pass the special resolution: Provided that where an issuer, being a
transferee company in a scheme of merger, de-merger, amalgamation or arrangement
sanctioned by a High Court under sections 391 to 394 of the Companies Act, 1956,
makes qualified institutions placement, the period for which the equity shares of
the same class of the transferor company were listed on a stock exchange having
nation wide trading terminals shall also be considered for the purpose of computation
of the period of one year.
c) It is in compliance with the requirement of minimum public shareholding specified
in the listing agreement with the stock exchange;
d) In the special resolution, it shall be, among other relevant matters, specified that
the allotment is proposed to be made through qualified institutions placement.

Appointment of Merchant Banker

A qualified institutions placement shall be inanaged by merchant banker(s) registered
with the Board who shall exercise due diligence. The merchant banker shall, while
seeking in-principle approval for listing of the eligible securities issued under qualified
institutions placement, furnish to each stock exchange on which the same class of equity
shares of the issuer are listed, a due diligence certificate stating that the eligible securities
are being issued under qualified institutions placement and that the issuer complies with
requirements of this section.

Placement Document
The qualified institutions placement shall be made on the basis of a placement document
which shall contain all material information. The placement document shall be serially
numbered and copies shall be circulated only to select investors. The issuer shall, while
seeking in-principle approval from the recognised stock exchange, furnish a copy of the
placement document, a certificate confirming compliance with the provisions of this
section along with any other documents required by the stock exchange. The placement
86
document shall also be placed on the website of the concerned stock exchange and of Regulatory Framework
the issuer with a disclaimer to the effect that it is in connection with a qualified institutions
placement and that no offer is being made to the public or to any other category of
investors. A copy of the placement document shall be filed with the Board for its record
within thirty days of the allotment of eligible securities.

Pricing
The qualified institutions placement shall be made at a price not less than the average of
the weekly high and low of the closing prices of the equity shares of the same class
quoted on the stock exchange during the two weeks preceding the relevant date. Where
eligible securities are convertible into or exchangeable with equity shares of the issuer,
_the issuer shall determine the price of such equity shares allotted pursuant to. such
conversion or exchange taking the relevant date as decided and disclosed by it while
passing the special resolution. The issuer shall not allot partly paid up eligible securities:
Provided that in case of allotment of non convertible debt instruments along with warrants,
the allottees may pay the full consideration or part thereof payable with respect to
warrants, at the time of allotment of such warrants: Provided further that on allotment
of equity shares on exercise of options attached to warrants, such equity shares shall be
fully paid up. The prices determined for qualified institutions placement shall be subject
to appropriate adjustments if the issuer:
a) Makes an issue of equity shares by way of capitalization of profits or reserves,
other than by way of a dividend on shares;
b) Makes a rights issue of equity shares;
c) Consolidates its outstanding equity shares into a smaller number of shares;
d) Divides its outstanding equity shares including by way of stock split;
e) Re-classifies any of its equity shares into other securities of the issuer;
f) Involved in such other similar events or circumstances, which in the opinion of the
concerned stock exchange, requires adjustments.

Restrictions on Allotment
Allotment under the qualified institutions placement shall be made subject to the following
conditions:
a) Minimum of ten per cent of eligible securities shall be allotted to mutual funds:
Provided that if the mutual funds do not subscribe to said minimum percentageor
any part thereof, such minimum portion or part thereof may be allotted to other
qualified institutional buyers;
b) No allotment shall be made, either directly or indirectly, to any qualified institutional
buyer who is a promoter or any person related to promoters of the issuer: Provided
that a qualified institutional buyer who does not hold any shares in the issuer and
who has acquired the said rights in the capacity of a lender shall not be deemed to
be a person related to promoters.
In a qualified institutions placement of non-convertible debt instrument along with
warrants, an investor can subscribe to the combined offering of non-convertible debt
instruments with warrants or to the individual securities, that is, either non- convertible
debt instruments or warrants. The applicants in qualified institutions placement shall not
withdraw their bids after the closure of the issue.
A qualified institutional buyer who has any of the following rights shall be deemed to be
a person related to the promoters of the issuer:
a) Rights under a shareholders' agreement or voting agreement entered into with
promoters or persons related to the promoters;
87
Primary Markets b) Veto rights; or
c) Right to appoint any nominee director on the board of the issuer.

Minimum number of allottees

The minimum number of allottees for each placement of eligible securities made under
qualified institutions placement shall not be less than:
a) Two, where the issue size is less than or equal to two hundred and fifty crore
rupees;
b) Five, where the issue size is greater than two hundred and fifty crore rupees:
Provided that no single allottee shall be allotted more than fifty per cent of the issue
size.
The qualified institutional buyers belonging to the same group or who are under same
control shall be deemed to be a single allottee.

Validity of the special resolution

Allotment pursuant to the special resolution shall be completed within a period of twelve
months from the date of passing of the resolution. The issuer shall not make subsequent
qualified institutions placement until expiry of six months from the date of the prior
qualified institutions placement made pursuant to one or more special resolutions.

Restrictions on amount raised

The aggregate of the proposed qualified institutions placement and all previous qualified
institutions placements made by the issuer in the same financial year shall not exceed
five times the net worth of the issuer as per the audited balance sheet of the previous
financial year.

Tenure
The tenure of the convertible or exchangeable eligible securities issued through qualified
institutions placement shall not exceed sixty months from the date of allotment.

Transferability of eligible' securities

The eligible securities allotted under qualified institutions placement shall not be sold by
the allottee for a period of one year from the date of allotment, except on a recognised
stock exchange.

8.8 REGULATION FOR BONUS ISSUE

Following are the conditions for a company making a bonus issue:
Subject to the provisions of the Companies Act, 1956 or any other applicable law for the
time being in force, a listed issuer may issue bonus shares to its members if:
a) It is authorised by its articles of association for issue of bonus shares, capitalisation
of reserves, etc.: Provided that if there is no such provision in the articles of
association, the issuer shall pass a resolution at its general body meeting making
provisions in the articles of associations for capitalisation of reserve;
b) It has not defaulted in payment of interest or principal in respect of fixed deposits
or debt securities issued by it;
c) It has sufficient reason to believe that it has not defaulted in respect of the payment
of statutory dues of the employees such as contribution to provident fund, gratuity
and bonus;
88
d) The partly paid shares, if any outstanding on the date of allotment, are made fully Regulatory Framework
paid up Restriction on bonus issue.
No issuer shall make a bonus issue of equity shares if it has outstanding fully or partly
convertible debt instruments at the, time of making the bonus issue, unless it has made
reservation of equity shares of the same class in favour of the holders of such outstanding
convertible debt instruments in proportion to the 'convertible part thereof. The equity
shares reserved for the holders of fully or partly convertible debt instruments shall be
issued at the time of conversion of such convertible debt instruments on the same terms
or same proportion on which the bonus shares were issued. Bonus shares only against
reserves, etc. if capitalised in cash. The bonus issue shall be made out of free reserves
built out of the genuine' profits or securities premium collected in cash only and reserves
created by revaluation of fixed assets shall not be capitalised for the purpose of issuing
bonus shares. Without prejudice to the provisions mentioned above, the bonus share
shall not be issued in lieu of dividend.

Completion of bonus issue

An issuer, announcing a bonus issue after the approval of its board of directors and not
requiring shareholders' approval for capitalisation of profits or reserves for making the
bonus issue, shall implement the bonus issue within fifteen days from the date of approval
of the issue by its board of directors: Provided that where the issuer is required to seek
shareholders' approval for capitalisation of profits or reserves for making the bonus
issue, the bonus issue shall be implemented within two months from the date of the
meeting of its board of directors wherein the decision to announce the bonus issue was
taken subject to shareholders' approval. Once the decision to make a bonus issue is
announced, the issue can not be withdrawn.

8.9 REGULATION FOR INDIAN DEPOSITORY

RECEIPTS
Indian Depository Receipts (IDR) should be offered in terms of section 605A of the
Companies Act, 1956 and Companies (Issue of Indian Depository Receipts) Rules,
2004.
An issuing company making an issue of IDR shall satisfy the following:
a) The issuing company is listed in its home country;
b) The issuing company is not prohibited to issue securities by any regulatory body;
c) The issuing company has track record of compliance with securities market
regulations in its home country.
The term "home country" means the country where the issuing company is incorporated
and listed.

Conditions for issue of IDR

An issue of IDR shall be subject to the following conditions:
a) Issue size shall not be less than fifty crore rupees;
b) Procedure to be followed by each class of applicant for applying shall be mentioned
in the prospectus;
c) Minimum application amount shall be twenty thousand rupees;
d) At least fifty per cent. of the IDR issued shall be allotted to qualified institutional
buyers on proportionate basis as per illustration given in Part C of Schedule XI;

89

I
 Primary Markets e) The balance fifty per cent may be allocated among the categories of non-institutional'
investors and retail individual investors including employees at the discretion of the
issuer and the
f) Manner of allocation shall be disclosed in the prospectus. Allotment to investors
within a category shall be on proportionate basis;
g) At any given time, there shall be only one denomination of IDR of the issuing
company.

Minimum subscription
For non-underwritten issues:
a) If the issuing company does not receive the minimum subscription of ninety per
cent of the offer through offer document on the date of closure of the issue, or if
the subscription level falls below ninety per cent after the closure of issue on
account of cheques having being returned unpaid or withdrawal of applications,
the issuing company shall forthwith refund the entire subscription amount received.
b) If the issuing company fails to refund the entire subscription amount within fifteen
days from the date of the closure of the issue, it is liable to pay the amount with
# "
interest to the subscribers at the rate of fifteen per cent. per annum for the period
of delay.
c) For underwritten issues, if the issuing company does not receive the minimum'
subscription of ninety per cent. of the offer through offer document including
devolvement of underwriters within sixty days from the date of closure of the
issue, the issuing company shall forthwith refund the entire subscription amount
received with interest to the subscribers at the rate of fifteen per cent per annum
for the period of delay beyond sixty days.

Fungibility
The Indian depository Receipts shall not be automatically fungible into underlying equity
shares of issuing company.
Filing of draft prospectus, due diligence certificates, payment of fees and issue
advertisement for IDR.
The issuing company making an issue of IDR shall enter into an agreement with a
merchant banker on the lines of format of agreement specified in Annexure 1. If the
issue is managed by more than one merchant banker, then the rights, obligations and
responsibilities, relating inter-alia to disclosures, allotment, refund and underwriting
obligations, if any, of each merchant banker shall be predetermined and disclosed in the
prospectus.
The issuing company shall file a draft prospectus with the Board through a merchant
banker along with the requisite fee, as prescribed in Companies (Issue of Indian Depository
Receipts) Rules, 2004.
The prospectus filed with SEBI under this regulation shall also be furnished to SEBI in
a soft copy. The lead merchant bankers shall:
a) Submit a due diligence certificate.
b) Certify that all amendments, suggestions or observations made by the Board have
been incorporated in the prospectus.
c) Submit a fresh due diligence certificate at the time of filing the prospectus with the
Registrar of the Companies.
d) Furnish a certificate immediately before the opening of the issue, certifying that no
corrective action is required on its part.
90
e) Furnish a certificate after the issue has opened but before it closes for s~bscription. Regulatory Framework

The issuing company shall make arrangements for mandatory collection centres.The
issuing company shall issue an advertisement in one English national daily newspaper
with wide circulation and one Hindi national daily newspaper with wide circulation, soon
after receiving final observations, if any, on the publicly filed draft prospectus with the
Board.

Display of bid data

The stock exchanges offering online bidding system for the book building process shall
display on their website, the data pertaining to book built IDR issue from the date of
opening of the bids till at least three days after closure of bids.

Disclosures in prospectus and abridged prospectus

The prospectus shall contain all material disclosures which are true, correct and adequate
so as to enable the applicants to take an informed investment decision. The prospectus
shall contain: .
a) The disclosures specified in Schedule to Companies (Issue of Indian Depository
Receipts) Rules, 2004; and
b) The disclosures in the manner as specified in ICDR Regulations (2009).

Post-issue reports
The merchant banker shall submit post-issue reports to SEB!. The post-issue reports
shall be submitted as follows:
a) Initial post issue report within three days of closure of the issue;
b) Final post issue report within fifteen days of the date of finalisation of basis of
allotment or within fifteen days of refund of money in case of failure of issue.

Undersubscribed issue
In case of undersubscribed issue of ID R, the merchant banker shall furnish information
in respect of underwriters who have failed to meet their underwriting devolvement to
the SEB!.

Finalisation of basis of 'allotment

The executive director or managing director of the stock exchange, where the IDR are
proposed to be listed, along with the post issue lead merchant bankers and registrars to
the issue shall ensure that the basis of allotment is finalised in a fair and proper manner
in accordance with the allotment procedure.

8.10 REGULATION FOR ISSUE OF CONVERTIBLE

DEBT INSTRUMENTS
In addition to other requirements laid down in the regulations for issue of equity securities,
an issuer making a public issue or rights issue of convertible debt instruments shall
comply with the following conditions:
a) It has obtained credit rating from one or more credit rating agencies;
b) It has appointed one or more debenture trustees in accordance with the provisions
of section 117B of the Companies Act, 1956 and Securities and Exchange Board
of India (Debenture Trustees) Regulations, 1993;

91
Primary Markets c) It has created debenture redemption reserve in accordance with the provisions of
section 117C of the Companies Act, 1956;
d) If the issuer proposes to create a charge or security on its assets in respect of
secured convertible debt instruments, it shall ensure that:
i) Such assets are sufficient to discharge the principal amount at all times;
ii) Such assets are free from any encumbrance;
ill) Where security is already created on such assets in favour of financial
institutions or banks or the issue of convertible debt instruments is proposed to
be secured by creation of security on a leasehold land, the consent of such
financial institution, bank or lessor for a second or pari passu charge has been
obtained and submitted to the debenture trustee before the opening of the
issue;
iv) The security/asset cover shall be arrived at after reduction of the liabilities
having a first/prior charge, in case the convertible debt instruments are secured
by a second or subsequent charge.
The issuer shall redeem the convertible debt instruments as per the terms of the offer
document.

Roll over of non convertible portion of partly convertible debt instruments

The non-convertible portion of partly convertible debt instruments issued by a listed
issuer, the value of which exceeds fifty lakh rupees, may be rolled over without change
in the interest rate, subject to compliance with the provisions of section 121 of the
Companies Act, 1956 and the following conditions:
a) Seventy five per cent of the holders of the convertible debt instruments of the
issuer have, through a resolution, approved the rollover through postal ballot;
b) The issuer has, along with the notice for passing the resolution, sent to all holders
of the convertible debt instruments, an auditors' certificate on the cash flow of the
issuer and with comments on the liquidity-position of the issuer;
c) The issuer has undertaken to redeem the non-convertible portion of the partly
convertible debt instruments of all the holders of the convertible debt instruments
who have not agreed to the resolution;
d) Credit rating has been obtained from at least one credit rating agency registered
with the Board within a period of six months prior to the due date of redemption
and has been communicated to the holders of the convertible debt instruments,
before the roll over;
The creation of fresh security and execution of fresh trust deed shall not be mandatory
if the existing trust deed or the security documents provide for continuance of the security
till redemption of secured convertible debt instruments: Provided that whether the issuer
is required to create fresh security and to execute fresh trust deed or not shall be
decided by the debenture trustee,

Conversion of optionally convertible debt instruments into equity share capital

An issuer shall not convert its optionally convertible debt instruments into equity shares
unless the holders of such convertible debt instruments have sent their positive consent
to the issuer and non-receipt of reply to any notice sent by the issuer for this purpose
shall not be construed as consent for conversion of any convertible debt instruments.
Where the value of the convertible portion of any convertible debt instruments issued by
a listed issuer exceeds fifty lakh rupees and the issuer has not determined the conversion
price of such convertible debt instruments at the time of making the issue, the holders of
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such convertible debt instruments shall be given the option of not converting the convertible Regulatory Framework
portion into equity shares: Provided that where the upper limit on the price of such
convertible debt instruments and justification thereon is determined and disclosed to the
investors at the time of making the issue, it shall not be necessary to give such option to
the holders of the convertible debt instruments for converting the convertible portion
into equity share capital within the said upper limit.
Where an option is to be given to the holders of the convertible debt instruments, if one
or more of such holders do not exercise the option to convert the instruments into equity
share capital at a price determined in the general meeting of the shareholders, the issuer
shall redeem that part of the instruments within one month from the last date by which
option is to be exercised, at a price which shall not be less than its face value.

Issue of convertible debt instruments for financing

No issuer shall issue convertible debt instruments for financing replenishment of funds
or for providing loan to or for acquiring shares of any person who is part of the same
group or who is under the same management: Provided that an issuer may issue fully
convertible debt instruments for these purposes if the period of conversion of such debt
instruments is less than eighteen months from the date of issue of such debt instruments.

8.11 REGULATION ON PROMOTER'S

CONTRIBUTION, RESTRICTION OF
TRANSFERABILITY AND LOCK-IN OF
SECURITIES
The promoters of the issuer shall contribute in the public issue as follows:
a) In case of an initial public offer, not less than twenty per cent. of the post issue
capital;
b) In case of a further public offer, either to the extent of twenty per cent. of the
proposed issue size or to the extent of twenty per cent of the post-issue capital;
c) In case of a composite issue, either to the extent of twenty per cent. of the proposed
issue size or to the extent of twenty per cent of the post-issue capital excluding the
rights issue component.
In case of a public issue or composite issue of convertible securities, minimum promoters'
contribution shall be as follows:
a) The promoters shall contribute twenty per cent. as stipulated above as the case
may be, either by way of-equity shares or by way of subscription to the convertible
securities: Provided that if the price of the equity shares allotted pursuant to
conversion is not predetermined and not disclosed in the offer document, the
promoters shall contribute only by way of subscription to the convertible securities
being issued in the public issue and shall undertake in writing to subscribe to the
equity shares pursuant to conversion of such securities.
b) In case of any issue of convertible securities which are convertible or exchangeable
on different dates and if the promoters' contribution is by way of equity shares
(conversion price being pre-determined), such contribution shall not be at a price
lower than the weighted average price of the equity share capital arising out of
conversion of such securities.
c) Subject to the provisions of clause (a) and (b) above, in case of an initial public
offer of convertible debt instruments without a prior public issue of equity shares,
the promoters shall bring in a contribution of at least twenty per cent. of the project
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Primary Markets cost in the form of equity shares, subject to contributing at least twenty per cent. of
the issue size from their own funds in the form of equity shares: Provided that if the
project is to be implemented in stages, the promoters' contribution shall be with
respect to total equity participation till the respective stage vis-a- vis the debt raised
or proposed to be raised through the public issue.
In case of a further public offer or composite issue where the promoters contribute
more than the stipulated minimum promoters' contribution, the allotment with respect to
excess contribution shall be made at a price determined in terms of the provisions of
SEBI regulations on Pricing of Equity Shares or the Issue Price, whichever is higher.
The promoters shall satisfy the requirements of this regulation at least one day prior to
the date of opening of the issue and the amount of promoters' contribution shall be kept
in an escrow account with a scheduled commercial bank and shall be released to the
issuer along with the release of the issue proceeds: Provided that where the promoters'
contribution has already been brought in and utilised, the issuer shall give the cash flow
statement disclosing the use of such funds in the offer document; Provided further that
where the minimum promoters' contribution is more than one hundred crore rupees, the
promoters shall bring in at least one hundred crore rupees before the date of opening of
the issue and the remaining amount may be brought on pro-rata basis before the calls
are made to public.
Promoters' contribution shall be computed on the basis of the post-issue expanded capital:
a) Assuming full proposed conversion of convertible securities into equity shares;
b) Assuming exercise of all vested options, where any employee stock options are
outstanding at the time of initial public offer
For computation of "weighted average price":
a) "Weights" means the number of equity shares arising out of conversion of such
specified securities into equity shares at various stages;
b) "Price" means the price of equity shares on conversion arrived at after taking into
account predetermined conversion price at various stages.

Securities ineligible for minimum promoters' contribution

For the computation of minimum promoters' contribution, the following specified securities
shall not be eligible:
a) Specified securities acquired during the preceding three years, if they are:
i) Acquired for consideration other than cash and revaluation of assets or
capitalisation of intangible assets is involved in such transaction; or
ii) Resulting from a bonus issue by utilisation of revaluation reserves or unrealized
profits of the issuer or from bonus issue against equity shares which are ineligible
for minimum promoters' contribution;
b) Specified securities acquired by promoters during the preceding one year at a
price lower than the price at which specified securities are being offered to public
in the initial public offer: Provided that nothing contained in this clause shall apply:
i) If promoters pay to the issuer, the difference between the price at which
specified securities are offered in the initial public offer and the price at which
the specified securities had been acquired;
ii) If such specified securities are acquired in terms of the scheme under sections
391-394 of the Companies Act, 1956, as approved by a High Court, by
promoters in lieu of business and invested capital that had been in existence
for a period of more than one year prior to such approval;

94
 iii) To an initial public offer by a government company, statutory authority or Regulatory Framework
corporation or any special purpose vehicle set up by any of them, which is
engaged in infrastructure sector;
c) Specified securities allotted to promoters during the preceding one year at a price
less than the issue price, against funds brought in by them during that period, in
case of an issuer formed ·by conversion of one or more partnership firms, where
the partners of the erstwhile partnership firms are the promoters of the issuer and
there is no change in the management: Provided that specified securities, allotted
to promoters against capital existing in such firms for a period of more than one
year on a continuous basis, shall be eligible;
d) Specified securities pledged with any creditor. Specified securities shall be eligible
for the computation of promoters' contribution, if such securities are acquired
pursuant to a scheme which has been approved under sections 391-394 of the
Companies Act, 1956.

Requirement of minimum promoters' contribution not applicable in certain cases

The requirements of minimum promoters' contribution shall not apply in case of:
a) An issuer which does not have any identifiable promoter;
b) A further public offer, where the equity shares ofthe same class which are proposed
to be allotted pursuant to conversion or exchange of convertible securities offered
through the offer or are proposed to be allotted in the offer have been listed and
are not infrequently traded in a recognised stock exchange for a period of at least
three years and the issuer has a track record of dividend payment for at least
immediately preceding three years: Provided that where promoters propose to
subscribe to the specified securities offered to the extent greater than higher of the
two options available in clause (b) of sub-regulation (l) of regulation 32, the
subscription in excess of such percentage shall be made at a price determined in
terms of the provisions of regulation 76 or the issue price, whichever is higher.
c) Rights issues.
Restriction On Transferability (Lock-In) Of Promoters' Contribution, etc.
Specified securities held by promoters and persons other than promoters shall not be
transferable (hereinafter referred to as "lock-in') from the date of allotment of the
specified securities in the proposed public issue for the period stipulated.
The certificate of specified securities which are subject to lock-in shall contain the
inscription "non transferable" and the lock-in period and in case such specified securities
are dematerialised, the issuer shall ensure that lock-in is recorded by the depository.
Where the specified securities which are subject to lock-in are partly paid-up and the'
amount called-up on such specified securities is less than the amount called-up on the
specified securities issued to the public, the "lock-in" shall end only on the expiry of
three years after such specified securities have become pari-passu with the specified
securities issued to the public.

Lock-in of specified securities held by promoters

In a public issue, the specified securities held by promoters shall be locked-in for the
period stipulated hereunder:
a) Minimum promoters' contribution shall be locked-in for a period of three years
from the date of commencement of commercial production or date of allotment in
the public issue, whichever is later;
b) Promoters' holding in excess of minimum promoters' contribution shall be locked-
in for a period of one year.
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Primary Markets For the purposes of this clause, the expression "date of commencement of commercial
production" means the last date of the month in which commercial production in a
manufacturing company is expected to commence as stated in the offer document.

Lock-in of specified securities held by persons other than promoters

In case of an initial public offer, the entire pre-issue capital held by persons other than
promoters shall be locked-in for a period of one year: Provided that nothing contained in
this regulation shall apply to:
a) Equity shares allotted to employees under ari employee stock option or employee
stock purchase scheme of the issuer prior to the initial public offer, if the issuer has
made full disclosures with respect to such options or scheme in accordance with
the Disclosures in the Red Herring Prospectus;
b) Equity shares held by a venture capital fund or a foreign venture capital investor
for a period of at least one year prior to the date of filing the draft prospectus with
the Board: In case such equity shares have resulted pursuant to conversion of fully
paid-up compulsorily convertible securities, the holding period of such convertible
securities as well as that of resultant equity shares together shall be considered for
the purpose of calculation of one year period and convertible securities shall be
deemed to be fully paid-up, if the entire consideration payable thereon has been
paid and no further consideration is payable at the time of their conversion.

Lock-in of specified securities lent to market maker under green shoe option
•
The lock-in provisions shall not apply with respect to the specified securities lent to
market maker for the purpose of green shoe option, during the period starting from the
date of lending of such specified securities and ending on the date on which they are
returned to the lender: Provided that the specified securities shall be locked-in for the
remaining period from the date on which they are returned to the lender.

Pledge of locked-in specified securities

Specified securities held by promoters' and locked-in may be pledged with any scheduled
commercial bank or public financial institution as collateral security for loan granted by
such bank or institution, subject to the following:
a) If the specified securities are locked-in in terms of clause (a) of regulation 36, the
loan has been granted by such bank or institution for the purpose of financing one
or more of the objects of the issue and pledge of specified securities is one of the
terms of sanction of the loan;
b) If the specified securities are locked-in in terms of clause (b) of regulation 36 and
the pledge of specified securities is one of the-terms of sanction of the loan.

Transferability of locked-in specified securities

Subject to the provisions of Securities and Exchange Board of India (Substantial
Acquisition of shares and Takeovers) Regulations, 1997, the specified securities held by
promoters and locked-in may be transferred to another promoter or any person of the
promoter group or a new promoter or a person in control of the issuer and the specified
securities held by persons other than promoters and locked-in may be transferred to any
other person holding the specified securities which are locked-in along with the securities
proposed to be transferred: Provided that lock-in on such specified securities shall continue
for the remaining period with the transferee and such transferee shall not be eligible to
transfer them till the lock-in period stipulated in these regulations has expired.

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 Regulatory Framework
8.12 SUMMARY
In unit 8, we have analyzed the regulatory framework in primary markets and analyzed
the process for filing documents at time of the issuance of equity. The rights and obligations
of the issuing company and the intermediaries have been discussed. The different
regulatory aspects related to IPa, rights issue, preferential issue, Qualified Institutional
Placement, Bonus Issue, IDR,"convertible debt instruments, and promoters' contribution
and restriction of transferability and lock-in of securities has been explained.

8.13 SELF ASSESSMENT QUESTIONS

1) What is the regulatory framework for pre-issuance phase of an IPa?
2) What are the important regulatory guidelines to be adhered to, during a rights
issue?
3) How is the regulatory framework for a rights issue different from the regulatory
framework for an IPa?
4) .What are the general obligations for an issuer and the intermediaries involved in
the primary markets issue process?
5) What are the important regulatory aspects relating to the following:
a) Preferential issue
b) . QIP
c) Bonus Issue
d) IDR
6) What are the regulatory issues involved with promoter's contribution and restriction
of transferability and lock-in of securities?

8.14 FURTHER READINGS

1) Khan, M.Y. (2007) Indian Financial System, Tata McGraw-Hill.
2) Endo, Tadashi (1998) Indian Securities Market, Vision Books.
3) Pathak, Bharati V. (2008) The Indian Financial System, Markets Institutions
and Services, Pearson Education.
4) www.sebi.gov.in

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I
Primary Markets Annexure 1
ILLUSTRATION REGARDING ALLOTMENT TO QUALIFIED
INSTITUTIONAL BUYERS OTHER THAN ANCHOR INVESTORS

1) Issue Details

SI. Particulars Issue details

No.

1 Issue size 200 crores equity shares

2 Portion available to QIBs* 100 crore equity shares
3 Anchor Investor POltion 30 crores
4 Podion available to QIBs*' other than anchor investors 70 crores equity shares
[(2) - (3) 1
Of which
a, Reservation to MF (5%) 3.5 crores equity shares
b. Balance for all OIBs including MFs 66.5 crores equity shares
5 No. of QIB applicants 10
6 No. of shares applied for 500 crores equity shares

* Where 50% of the issue size is required to be allotted to QIBs.

2) Details Of QIB Bids

SI. Type of Qm bidders No. of shares bid for (in crores)

No.

1 AI 50
2 A2 ~
3 A3 130
4 A4 50
5 AS 50
6 MFI 40
7 MF2 40
8 MF3 00
9 MF4 ~
10 MF5 ~
TOTAL 500
AI-AS (QIB bidders other than MFs)
MF1-MF5 (QIB bidders which are MFs)

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3) Details of Allotment to QIB Bidders/Applicants Regulatory Framework

(No. of equity shares in crores)

'fYpe Equity Allocation of 3.5 crores Allocation of balance 66.5 Aggregate

ofQm shares equity shares to MYs crores equity shares to allocation to
bidders
•••
for
propo~onately
(See Note 1)
Qms proportionately
(See Note 4)
MYs

Al ~ 0 6.65 0
A2 :.n 0 2.66 0
A3 130 0 17.29 0
A4 ~ 0 6.65 0
A5 so 0 6.65 0
MFI 40 0.7 5.32 6.02
MF2 40 0.7 5.32 6.02
MF3 III 1.4 10.64 12.04
MP4 :.n 0.35 2.66 3.01
MPS :.n 0.35 2.66 3.01
500 35 66.50 30.10

Notes:
(1) The illustration presumes compliance with the provisions of regulation 51 (1)
pertaining to minimum allotment.
(2) Out of 70 crore equity shares allocated toQIBs, 3.5 crores (L~. 5%) will. be
allocated on proportionate basis among 5 mutual flUId applicants who applied for
'200 shares in QIB category. .
(3) The balance 66.5 crore equity shares [Le. 70 - 3.5 (available for MFs)] will be
allocated on proportionate basis among 10 QIB applicants who applied for 500
shares (including 5 MF applicants who applied for 200 shares). .
(4) The figures atCol. No. IV are arrived as under:
(a) For QIBs other than mutual funds (AI to A5) = No. of shares bid for
(i.e. Col. 11)X 66.5 1496.5.
(b) For nmhlal funds (MFI to MF5) ={(No. of shares bid for (Le Col 11) less
shares allotted (i.e., col. Ill)} X 66.5 1496.5.
(c) The numerator and denominator for arriving at allocation of 66.5 crore shares
to the 10 QIBs are reduced by 3.5 crore shares, which has already been
allotted to mutual funds at CoL No. (Ill).

99

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 •

MPDD/IGNOU/P.O.5H/June.2011 (Reprint)

'/

ISBN-978-81-266-4506-0