As Of

By

Julia Dennis, XMBA-16, Vile Parle, VP110316XA18

 INDEX
1. Introduction

2. Book Building & Fixed Price Issues

3. Concepts and Process of Book Building

4. Advantages and Disadvantages of IPO (Initial Public Offer)/ Going Public

5. Significance and Risk Factors in investing in IPO

6. Book Building Process in India

7. Bidding Process

8. Registering of Prospectus with Registrar of Companies

9. Anchor Investor

10. Auction Based Book Building

11. Reverse Book Building

12. Green-shoe Option

13. Conclusion
 Introduction
With continuous economical growth and diversification, several financial challenges
emerge that increase the need for quick and flexible financial solutions to cater to
the available opportunities. This creates the need for credit facilities to provide
liquidity for forms to finance their operational and capital current and future
obligations. Such credit facilities provide financing that is characterized by being of
the highest level of liquidity with different risk profiles.

Project Finance is a method of funding in which the lender looks primarily to the
revenues generated by a single project, both as the source of repayment and as
security for the exposure. Project Finance transactions play an important role in
financing development throughout the world. This type of financing is usually for
large, complex and expensive installations that might include, for example, power
plants, chemical processing plants, mines, transportation infrastructure,
environment, and telecommunications infrastructure.

The following is the definition of project finance from the Basel Committee on
Banking Supervision, International Convergence of Capital Measurement and
Capital Standards ("Basel II"), November 2005.

Project finance may take the form of financing of the construction of a new capital
installation, or refinancing of an existing installation, with or without improvements.
In such transactions, the lender is usually paid solely or almost exclusively out of
the money generated by the contracts for the facilitys32output, such as the
electricity sold by a power plant. The borrower is usually an SPE (Special Purpose
Entity) that is not permitted to perform any function other than developing, owning,
and operating the installation. The consequence is that repayment depends
primarily on the projects cash flow and on the collateral value of the projects
assets.

Initial Public Offering (IPO) is about offering part of the firm's capital for public
subscription, and listing the company shares in the stock market (Exchange) in the
country where the firm operates or in other international stock markets. IPO is a
tool to meet the firm's need for financial resources and distribute risks over more
investors. Offering shares to the public is an excellent source for strong and stable
funding of the firm to finance its projects and expansions. IPO process is always
associated with a qualitative shift in the firm's organizational, financial and
managerial structures and enhancement of its internal controls.
 Book Building & Fixed Price
Issues
Corporates may raise capital in the primary market by way of an initial public offer,
rights issue or private placement. An Initial Public Offer (IPO) is the selling of
securities to the public in the primary market. This Initial Public Offering can be
made through the fixed price method, book building method or a combination of
both.

There are two types of Public Issues:

Offer Pric Demand Payment Reservations

50 % of the
Price at which Demand for 100 % advance shares offered
the securities the securities payment is are reserved for
Fixed are offered and offered is required to be applications
Price would be allotted known only made by the below Rs. 1 lakh
Issues is made known after the investors at the and the balance
in advance to closure of the time of for higher
the investors issue application. amount
applications.
10 % advance
A 20 % price Demand for
payment is
band is offered the securities
required to be
by the issuer offered , and 50 % of shares
made by the
within which at various offered are
QIBs along with
investors are prices, is reserved for
Book the application,
allowed to bid available on a QIBS, 35 % for
Building while other
and the final real time small investors
Issues categories of
price is basis on the and the balance
investors have to
determined by BSE website for all other
pay 100 %
the issuer only during the investors
advance along
after closure of bidding
with the
the bidding. period..
application.

More About Book Building

Book Building is essentially a process used by companies raising capital through

Public Offerings-both Initial Public Offers (IPOs) or Follow-on Public Offers ( FPOs)
to aid price and demand discovery. It is a mechanism where, during the period for
which the book for the offer is open, the bids are collected from investors at various
prices, which are within the price band specified by the issuer. The process is
directed towards both the institutional as well as the retail investors. The issue
price is determined after the bid closure based on the demand generated in the
process.

The Process:

The Issuer who is planning an offer nominates lead merchant banker(s) as 'book
runners'.

The Issuer specifies the number of securities to be issued and the price band for the
bids.

The Issuer also appoints syndicate members with whom orders are to be placed by
the investors.

The syndicate members input the orders into an 'electronic book'. This process is
called 'bidding' and is similar to open auction.

The book normally remains open for a period of 5 days.

Bids have to be entered within the specified price band.

Bids can be revised by the bidders before the book closes.

On the close of the book building period, the book runners evaluate the bids on the
basis of the demand at various price levels.

The book runners and the Issuer decide the final price at which the securities shall
be issued.

Generally, the number of shares are fixed, the issue size gets frozen based on the
final price per share.

Allocation of securities is made to the successful bidders. The rest get refund
orders.
 Concepts and Process of
Book Building
Concept:

Book Building is a process by which corporates determine the demand and the price
of a proposed issue of securities through public bidding. The objective is to
determine the quantum of the issue on the basis of the price book built. Once the
price and the quantum of issue has been determined by the issuer, the issue may
either be offered under the private placement of the public offer category, or both,
as per the requirement of the SEBI regulations.

Characteristics:

Tendering Process

Book building involves inviting subscriptions to a public offer of securities,

essentially through a tendering process. Eligible investors are required to place
their bids for the number of shares to be issued and the price at which they are
willing to invest, with the lead manager running the book. At the end of the cut off
period, the lead manager determines the response to the issue in terms of the
quantum of shares and the highest price at which demand is sufficient to match the
size of the issue.

Floor Price:

Floor price is the minimum price set by the lead manager in consultation with the
issuer. This is the price at which the issue is open for subscription. Investors are
free to place a bid at any price higher than the floor price.

Price Band:

The range of price (the highest and the lowest price) at which offer for the
subscription of securities is made is known as price band. Investors are free to bid
any price within in the price band.

Bid:

The investor can place a bid with the authorized lead manager merchant banker. In
the case of equity shares, usually several brokers in the stock exchange are also
authorized by the lead manager. The investor fills up a bid-cum-application form,
which gives a choice to bid for up to three optional prices. The price and demand
options submitted by the bidder are treated as optional demands and are not
cumulated.

Allotment:

The lead manager, in consultation with the issuer, decides the price at which the
issue will be subscribed and proceeds to allot shares to investors who have bid at or
above the fixed price. All investors are allotted shares at the same fixed price. For
any allottee, therefore the price would be equal to or less than the price bid.

Participants:

Generally, all investors, including individuals, eligible to invest in a particular issue

of securities can participate in the book building process. However, if the issue is
restricted to qualified institutional, as in the case of government securities, then,
only those eligible can participate.
The Process:

The procedures relating to the book building process depend on the level at which it
is to be taken up by a corporate entity. According to the SEBI, there are two
options available to a company either 75 percent or 100 percent book building
process. Each of these methods is discussed briefly below:

75 percent Book Building:

The 75 percent book building option of securities is offered on a firm basis where a
minimum of 25 percent of the securities is offered to the public.

The following steps are involved in this process:

1) Eligibility: All corporates eligible for public shares are also eligible for raising
capital through the book building process.

2) Earmarking securities: Where a decision is taken by a corporate to issue shares

through the book building process, the securities to be used should be separately
earmarked as the placement portion category in the prospectus. The balance
securities must be stated as net offer to the public category.

3) Draft prospectus: A draft prospectus containing
of the issue must be filed wit the SEBI. Although
price band indicating the price range within which
subscription should be indicated. The prospectus is
two days of the issue price being finalized.
all the information except price
no precise mention is made, a
securities are being offered for
to be filed with the ROC within

4) Appointment of book runner: The issuing company appoints a merchant banker

as the book runner, which mentioned in the prospectus. The book runner circulates
a copy of the draft prospectus among the institutional buyers who are eligible for
firm allotment and to the intermediaries who are eligible to act as underwriters,
inviting them to subscribe to the issue of securities. The book runner maintains a
record of the names and number of securities ordered by intermediary buyers and
the price at which they are willing to subscribe the issue under the placement
portion. The book runner collects information about the subscriptions received from
underwriters and other intermediaries. After a stipulated time period, the book
runner aggregates the subscription so received. The underwriters are required to
make a payment of the total amount for the subscription of issues.

100 Percent Book Building

It is an option book building process where by 100 percent of the securities is

offered on a firm basis or is reserved for promoters, permanent employees of the
issuer company. It may also be offered to shareholders either on a competitive
basis or on a firm allotment basis. The required minimum issue of capital is Rs 25
crores.

Following are the procedures connected with the 100 percent book building
process:

Conditions: It is possible for an issuer to make a public issue through the 100
percent book building process by fulfilling the following conditions:

1) The minimum capital to be raised must be Rs 25 crores

2) Reservation or firm allotment to promoters can be made only according to the

guidelines of the SEBI i.e. to permanent employees of the issuer company, and in
the case of new companies, to the permanent employees of the promoting
company.

3) Allotment can also be made either on a competitive basis or on firm allotment

basis to the shareholders of the promoting companies in the case of a new
company, or to the shareholders of group companies in the case of existing
companies.

4) Eligible merchant bankers shall be appointed as the lead book runners and their
names shall be mentioned in the draft prospectus to be filed with the SEBI.

Lead book runner: An essential requirement for a 100 percent book building
process is the appointment of a lead book runner by the issuer. The book runner is
primarily responsible for book building in order to determine the appropriate price
and quantum of issue. For this purpose, a syndicate is formed. SEBI registered
underwriters and other eligible merchant bankers are appointed by the book runner
as members of the syndicate. In the event of any under subscription of issue, the
lead merchant bankers have to fill the shortfall. The book runners are responsible
for incorporating any changes in the draft prospectus that might be suggested by
SEBI.

In addition, they are also responsible for maintenance of records relating to the
book building process, which may be inspected by SEBI to examine the modalities
of book building adopted by the company.

Draft prospectus: The lead book runner files a draft prospectus with SEBI. This
document contains all the required disclosures, such as the total size of the issue
etc in accordance with SEBI norms. The information about the issue price and the
quantum issue need not be mentioned. Any modifications are intimated to the
company by SEBI within a period of 21 days after the receipt of the draft
prospectus.
Essential disclosures: The following information should be disclosed in the draft
prospectus before being filed with SEBI:

1) Details of the members of the syndicate formed by the lead book runner for the
purpose of bidding for the issue.

2) Details of registrars and bankers to the issue.

3) Details of basis of ascertainment of issue price by the issuer and the book
runner

4) Details of a accounting ratios, such as pre-issue EPS, P/E, an average return on

net worth etc for three years including a comparison with industry average. The
ratios have to be computed after computed after giving due effect to the
consequent increase of capital on account of compulsory outstanding conversions

5) Details of NAV per share based on the last balance sheet.

Advertisement: The issuer, after obtaining the revised prospectus from SEBI,
advertises in leading newspaper. The advertisement contains all the requisite
features of the final offer document as specified under the provisions (Section 2A)
of the Companies Act. IT is incumbent on the part of the issuing company to offer
at least 10 percent of the total issue to the public.

Stock brokers: SEBI registered stock brokers are appointed for placing orders with
the company by the stock exchange that would act as collection centers for the
applications. These brokers must be capable of taking up the issue in the event of
failure on the part of their clients to honor their commitment. The issuer pays
commission for their services.
 Advantages and
Disadvantages of IPO (Initial
Public Offer)/ Going Public

IPO: An IPO is the first public offer of securities by a company since its inception.
The decision to go public is critical as it results in dilution of ownership stake and
diffusion of corporate control. An IPO can be used both as a financing strategy and
exit strategy. In financing strategy, main purpose of IPO is to raise funds for the
company. An IPO can be used as exit strategy when existing investors offload their
equity holdings to public.

Advantages of an IPO/Going Public:

More Capital: A company can raise huge amount of funds to finance its capex
programs like expansion, modernization, diversification, etc. as well as working
capital requirements.

Zero Cost of Capital: Company is not required to pay interest on capital raised from
the public. There is no need of repayment of capital as well except on winding up of
company where it has to pay the residual amount after it pays all other creditors
like bank loans, debentures, preferential shares etc.

Easy to raise new capital: It is difficult for private companies to raise capital. By
going public, raising capital becomes comparatively easier task.

Pricing and Valuations: Commands better pricing than placement with private
investors. Enables correct valuation for the company because share price is a true
reflection of the financial soundness of a company and it would aid in case company
wants to opt for mergers and acquisitions.

Owner Diversification: Most of the funds of the founders are blocked in the firm till
the firm grows and becomes more valuable. By means of IPO, they can sell some
stake to diversify their holdings and can reduce the risk of their personal portfolios.

Brand Image: It increases the visibility and reputation of the company and thereby
enhances the brand image of the company.

Increased Liquidity: The shares when get listed on the stock exchange, can be
easily traded, providing more liquidity.
Employee Prestige and Retention: Employee pride and confidence in the company
may increase. Company can attract as well as retain employees by offering them
equity incentives like stock options/stock purchase plans.

Disadvantages of IPO/Going Public:

Dilution of control: Dilution of ownership stake makes company vulnerable for

future takeovers.

Time consuming and expensive: Takes substantial amount of management time

and efforts. It involves very high expenses like that of underwriter, lead manager,
investment banker, etc.

Regulations: Increased regulatory monitoring to ensure that firm is making filings

along with relevant disclosures.

Accountability: It is accountable to investors and cost of maintaining investor

relations are high.

Disclosures: The Company is subject to disclosure of information from time to time

and maintaining secrecy over expansion plans/market strategies becomes difficult.
Significance and Risk Factors
in investing in IPO
When you choose to invest in IPO, you must remember that it has certain merits as
well as demerits. On one hand, it involves a great degree of risk but if it successful,
it might result into handsome returns for the investor. After all the golden rule of
investment is: Higher the risk, higher the return!

The firm comes out with an IPO in accordance with its set of objectives while you as
an investor might invest having your own set of objectives. So, we can study
importance from the angle of both: the company and investors.

Importance to the Company:

A firm, that is need of additional capital, either can borrow cash or sell shares in
order to raise funds. Else, it has the option of Going Public. Most of the times this
is believed to be the best option since:

1.Costs involved with IPO are much lesser than the high costs of borrowing.

2.One does not have to worry about repayment, as the capital raised is not
required to be repaid.

3.When stocks are sold to public, more often than not could lead to share price
being appreciated because of certain market factors which arent directly linked to
the firm.

4.It provides the firm an opportunity to tap a large pool of investors who give their
money to the company for future growth.

Importance for shareholders:

It is common for investors to consider IPO as an easy way to churn money. The
most appealing characteristic of an IPO is that generally shares are priced pretty
low, and that there is possibility of the firms stock price rising on the day of shares
being offered. Speculative investors, who look after making short term profit,
consider this as a good opportunity. Such investors seek to get immediate returns
and are less keen on long term gains.

By and large, people consider that to invest in an IPO is pretty simple and free of
hassles, yet it involves risk and quite many investment advisers shall suggest you
to not invest in it until you have sufficient knowledge and experience. The possible
risk factors could be due to:
1. Unpredictable

Unpredictability of IPOs is one of the key reasons as to why investment advisers

ask investors to stay away from IPOs. Shares are usually offered at lower prices,
but we see significant changes during the day they will be offered. There are
possibilities that they may rise sharply during that day and then fall steeply the
next day.

2. Potential of the Stock Market

Stock Markets, being subject to high volatility, investments in an IPO do not

guarantee returns. The fluctuations in the markets affect not only households and
individuals but the entire economy. Due to this volatility it is not easy to predict
how the share will perform over a period of time as profit as well as the risk
potential of the IPO is dependent on the condition of the markets at that particular
time.

3. No Past Track Record Of the Company

Shareholders dilemma increases as to whether or not to invest in that IPO as the

companys track record is not available. There is no basis for making decision for
investment in the absence of track record.

Risk Assessment:

The probability of buying shares in a capable new firm and finding the subsequent
success story has captivated quite many investors. But prior to taking the big step,
it is very important to understand some of the challenges, key risks and likely
rewards associated with investing in an IPO. This has made RISK ASSESSMENT an
imperative task in Investment Analysis. Higher the desired returns, higher shall be
the degree of risk involved. Hence, a meticulous study of risk attached with the
investment must be done prior to taking any consideration.

To invest in an IPO, it is vital not only to have knowledge about the functioning of
an IPO, but we also need to know about the company in which we intend to invest.
Therefore, it is essential to know:

1. The fundamentals of the firm

2. The policies and the goals of the company

3. The products and services offered by the business

4. Their key competitors

5. Their share in the current market

6. The probabilities of their issue being successful

It can be very risky to invest without having this basic knowledge about the
company.

Let us consider 3 types of risks concerned in investing in IPO:

BUSINESS RISK:

It is essential to note if the firm has sound business and management policies that
are in line with the standard norms. Researching business risk involves probing into
the business model of the company.

FINANCIAL RISK:

Is the firm solvent and has enough funds to bear short-term business setbacks?
The liquidity position of the company has to be considered. Researching financial
risk calls for analyzing the companys financial statements, capital structure, and
such financial information.

MARKET RISK:

It is advisable to check out the demand for the IPO in the market, i.e., the appeal
of the IPO to other investors in the market. Hence, researching market risk involves
examining the appeal of the corporation to current and future market conditions.
 Book Building Process in
India
The main parties who are directly associated with book building process are the
issuer company, the Book Runner Lead Manager (BRLM) and the syndicate
members. The Book Runner Lead Manager (i.e. merchant banker) and the
syndicate members who are the intermediaries are both eligible to act as
underwriters. The steps which are usually followed in the book building process can
be summarized below:

1. The issuer company proposing an IPO appoints a lead merchant banker as a

BRLM.

2. Initially, the issuer company consults with the BRLM in drawing up a draft
prospectus (i.e. offer document) which does not mention the price of the issues,
but includes other details about the size of the issue, past history of the company,
and a price band. The securities available to the public are separately identified as
net offer to the public.

3. The draft prospectus is filed with SEBI which gives it a legal standing.

4. A definite period is fixed as the bid period and BRLM conducts awareness
campaigns like advertisement, road shows etc.

5. The BRLM appoints a syndicate member, a SEBI registered intermediary to

underwrite the issues to the extent of net offer to the public.

6. The BRLM is entitled to remuneration for conducting the Book Building process.

7. The copy of the draft prospectus may be circulated by the BRLM to the
institutional investors as well as to the syndicate members.

8. The syndicate members create demand and ask each investor for the number of
shares and the offer price.

9. The BRLM receives the feedback about the investors bids through syndicate
members.
10. The prospective investors may revise their bids at any time during the bid
period.

11. The BRLM on receipts of the feedback from the syndicate members about the
bid price and the quantity of shares applied has to build up an order book showing
the demand for the shares of the company at various prices. The syndicate
members must also maintain a record book for orders received from institutional
investors for subscribing to the issue out of the placement portion.
12. On receipts of the above information, the BRLM and the issuer company
determine the issue price. This is known as the market-clearing price.

13. The BRLM then closes the book in consultation with the issuer company and
determine the issue size of (a) placement portion and (b) public offer portion.

14. Once the final price is determined, the allocation of securities should be made
byte BRLM based on prior commitment, investors quality, price aggression,
earliness of bids etc. The bid of an institutional bidder, even if he has paid full
amount may be rejected without being assigned any reason as the Book Building
portion of institutional investors is left entirely at the discretion of the issuer
company and the BRLM.

15. The Final prospectus is filed with the registrar of companies within 2 days of
determination of issue price and receipts of acknowledgement card from SEBI.

16. Two different accounts for collection of application money, one for the private
placement portion and the other for the public subscription should be opened byte
Issuer Company.

17. The placement portion is closed a day before the opening of the public issue
through fixed price method. The BRLM is required to have the application forms
along with the application money from the institutional buyers and the underwriters
to the private placement portion.

18. The allotment for the private placement portion shall be made on the 2nd day
from the closure of the issue and the private placement portion is ready to be
listed.

19. The allotment and listing of issues under the public portion (i.e. fixed price
portion) must be as per the existing statutory requirements.

20. Finally, the SEBI has the right to inspect such records and books which are
maintained by the BRLM and other intermediaries involved in the Book Building
process.
 Bidding Process
Bidding process shall be only through an electronically linked transparent bidding
facility provided by recognized 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 centers 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 periodical intervals ,not exceeding 30 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 web -sites of recognized 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 an uniform format, inter alia giving category -wise details of
bids received ,for a period of at least three days after closure of bids.
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 10 percent of the application money in respect of bids
placed by qualified institutional buyers and not less than 25 percent of the
application money from the anchor investors was taken as margin money till April
30, 2010. In order to avoid inflated demand in public issues and provide level
playing field to all investors subscribing for securities, all types of investors are
required to bring in 100 percent of the application money as margin money along
with the application for securities in public issues.

DETERMINATION OF PRICE.

1. The issuer shall ,in consultation with lead book runner, determine the issue
price based on the bids received.
2. 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.)
3. 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.
4. Retail individual investors may bid at cut off price instead of their writing the
specific bid price in the bid forms.
5. 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 reason therefore shall
be disclosed to the bidders.

Necessary disclosure in this regard shall also be made in the red herring
prospectus.
 Registering of Prospectus
with Registrar of Companies
The final prospectus containing all disclosure 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 /Allocation in book built issue

In case an issuer company makes an issue of 100 percent of the net offer to
public through 100 percent book building process;

1. Not less than 35 percent of the net offer to the public shall be available for
allocation to retail individual investors.
2. Not less than 15 percent of the net offer to the public shall be available for
allocation to non institutional investors i.e investors other than retail
individual investors and qualified institutional buyers.
3. Not more than 50 percent of the net offer to the public shall be available for
allocation to qualified institutional buyers.

Provided that, in respect of issue made under rule 19 (2)(b) of securities contracts
(regulation)rules 1957 (issue for less than 25 percent of the post -issue capital of
the company)with 60 percent mandatory allocation to qualified institutional buyers,
the percentage allocation to retail individual investors and non- institutional
investors shall be 30 percent and 10 percent ,respectively.

In an issue made through the book building process, the issuer may allocate
upto 30 percent of the portion available for allocation to qualified institutional
buyers to an anchor investor.

Out of the portion available for allocation to qualified institutional buyers, 5

percent shall be allocated proportionately to mutual funds. Mutual fund applicants
shall also be eligible for proportionate allocation under the balance available for
qualified institutional buyers.

Let us understand the allotment of shares to QIBs with the help of an

illustration. Suppose the issue size is 100 crore shares, then 50 crore shares will be
allocated to all QIBs including anchor investors, if any, and mutual funds. Out of 50
crore shares, anchor investors will be allocated 15 crore (30 percent of 50
crore)shares and remaining 35 crore shares will be allocated to the rest of the
QIBs. Of the 35 crore shares, mutual funds will be allocated 1.75 crore( 5 percent
of 35 crore) equity shares and the balance (33.5 equity shares for all QIBs including
mutual funds.

Allotment shall be made not later than 15 days from the closure of the issue
failing which, interest at the rate of 15 percent shall be paid to the investors.

According to clause 2.1 (ZD) of the SEBI (issue of capital and disclosure
requirements) regulations 2009 ,a QIB shall mean

A public financial institutions as defined in section 4A of the companies act

,1956 ;

Scheduled commercial banks ;

Mutual funds

Foreign institutional investors and sub -account (other than a sub -account
which, is a foreign corporate of foreign individual)registered with the SEBI.

Multilateral and bilateral development financial institutions,

Venture capital funds registered with the SEBI.

Foreign venture capital investors registered with the SEBI;

State industrial development corporations;

Insurance companies registered with the insurance regulatory and

development authority (IRDA).

Provident funds with the minimum corpus of Rs. 25 crores and pension
funds with the minimum corpus of Rs. 25 crores.

National investment fund set up by resolution no. F.N. 2/3/2005 -DD 11

dated November 23, 2005 of the government of India.

A retail individual investor is one whose shareholding was of value of not exceeding
Rs. 1,00,000 as on the day immediately preceding the record date to be
determined by the issuer, and (2) who applies or bids for securities of for a value
of not more than Rs. 1,00,000. He can bid in a book built issue for a value not more
than Rs. 1,00,000. If he bids in excess ,the bid will be segregated under the high
net worth individual (HNI) category or non -institution investor (NII) category.
 Merchant bankers were earlier allowed some discretion while making
allotments to institutional investors. Allocation to qualified institutional buyers was
determined by the book running lead manager (BRLM)based on issues like prior
commitment, investor quality ,price aggression, and earliness of bids .SEBI banned
discretionary allotments and introduced proportionate allotments in the QIB portion.

In case of book built issues, the basis of allotment is finalized by the BRLM
within two weeks from the date of closure of the issue. The allotment of shares is
done on a proportionate basis within the specified categories ,rounded off to the
nearest integer ,with predetermined minimum allotment being equal to the
minimum application size. Under the earlier guidelines, if an issue was
oversubscribed, applicants were chosen by drawing lots and allotted a minimum of
100 shares per minimum tradable lot.

The registrar then ensures that the demat credit or refund as applicable is
completed within 15 days of the closure of the issue. The listing on the stock
exchanges is done within seven days from the finalization of the issue..
 Anchor Investor
With a view to create a significant impact on pricing of initial public offers,
Securities and Exchange Board of India introduced the concept of anchor investor
in public issues vide its circular dated July 9, 2009. The SEBI (Issue of Capital and
Disclosure Requirements) Regulations, 2009 notified in August 2009 also contains a
similar provision of anchor investor. In view of the choppiness of the stock market,
it is believed that the companies going for initial public offering would benefit from
anchor investor.

Anchor investor means a qualified institutional buyer making an application for a

value of ten crore rupees or more in a public issue made through the book building
process in accordance with ICDR Regulations;

Clause 10 of Schedule XI of ICDR Regulation lays down the conditions for

investment by Anchor Investor.

a. An Anchor Investor is required to make an application of a value of at least Rs.

10 crore in the public issue.
b. Upto thirty per cent of the portion available for allocation to qualified
institutional buyers is required to be made available to anchor investor(s) for
allocation/allotment. Which implies that out of the overall quota of 50 per cent
(60 per cent if issue made under Regulation 19(2)(b) of SCRA), the anchors
quota cannot exceed 15 per cent (20 per cent if issue made under Regulation
19(2)(b) of SCRA).
c. An allocation to the Anchor Investors is made 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. Company
has a right to reject the Anchor Investor.
d. One-third of the anchor investor portion is reserved for domestic mutual funds.
e. The bidding for Anchor Investors opens one day before the issue opening date
and allocation to Anchor Investors is completed on the day of bidding by Anchor
Investors
f. Anchor Investors is required to 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.
g. 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 is required to
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 is not refunded to the Anchor Investor and the
Anchor Investor takes allotment at the price at which allocation was made to it.
h. The number of shares allocated to Anchor Investors and the price at which the
allocation is made, is made available in public domain by the merchant banker
before opening of the issue
i. There is a lock-in of 30 days on the shares allotted to the Anchor Investor from
the date of allotment in the public issue.
j. 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 are required
to be clearly identified by the merchant banker and are made available as part
of records of the merchant banker for inspection by the Board.
k. 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.

Few years back, SEBI DIP guidelines allowed companies and merchant bankers to
make discretionary allotment to the QIBs wherein company could pick and choose
the institutions to whom they wanted to make allotment. However, subsequently,
SEBI had replaced this discretionary allotment with the proportionate allotment.
The introduction of anchor investor concept has to a certain extent reintroduced
discretionary allotment.

Reason for introducing Anchor Investor concept

a. Sets a rough benchmark / guideline for issue pricing and interest from QIBs
b. Attracting investors to public offers before they hit the market to infuse a
measure of confidence.
c. Volume and value of anchor subscriptions may serve as an indicator of the
company's reputation and soundness of the offer.

Anchor Investor vs. Angel Investor

Anchor Investor is different than the Angel Investor.

An angel investor is a person with deep pockets and capacity to play the role of a
venture capitalist. An angel investor or angel (also known as a business angel or
informal investor) is an affluent individual who provides capital for a business start-
up, usually in exchange for convertible debt or ownership equity. A small but
increasing number of angel investors organize themselves into angel groups or
angel networks to share research and pool their investment capital.

The anchor investor, on the other hand, is a bridge between the company and the
public in the run up to an Initial Public Offer. Roping the anchor investor would
ensure greater certainty and better price discovery in the issue process. If some
investor is ready to come in with prior commitment, it enhances the issuer
companys ability to sell the issue and generate more confidence in the minds of
other investors.
Anchor Investor vs. Pre-IPO placement

With introduction of Anchor Investor as a concept, pre-IPO placement will take a

back seat. Pre-IPO investment comes with one year lock-in, restrictive clauses and
uncertainty in term of timing of the issue opening as well as pricing. Investors
prefer certainty, both for timing and pricing of the issue, which Anchor Investor
provides more than what pre-IPO placement provides. Given this, it is not
surprising to see preference towards Anchor Investor as against pre-IPO placement.

Only QIB can be the Anchor Investor

In terms of the SEBI ICDR Regulations, QIBs are required to be allotted atleast
60% (or 50%) of the Net Offer to the Issue. Further QIB are required to pay only
10% of the application money while bidding. Hence the issuer company is always at
the risk of not getting required subscription from QIB and also the risk of
withdrawing the bids by QIBs.

With the condition that Anchor Investor should be the QIB, SEBI has brought
improvements upon the book building process. The regulations require that an
anchor investor can be allotted not more than 30 per cent of the shares reserved
for QIBs. Further unlike other QIBs who can contribute only 10 per cent as margin
money, an Anchor Investor has to make an investment of upto 25 per cent with the
application and follows it up with the remaining 75 per cent within two days of the
closure of the public issue.

The introduction of anchor investor concept is welcome step for the companies
going for initial public offering which will allow a company to give a firm allotment
to a particular investor prior to the IPO.
 Auction Based Book
Building
The SEBI announced an additional method of auction -based book building
known as pure auction for follow on public issue in November 2009. In the
regular book built issue, investors have to bid within the price band quoted by
the merchant banker. This price band may not always represent the fair value.
Hence, many issues have quoted at a discount in the post -listing trading
sessions. Pure auction makes book building more market oriented and improves
the price discovery process by allowing investors, rather than companies, to
decide on the pricing of the issue. In pure auction, institutional bidders are free
to bid at any price above the floor price mentioned by the company and
allotment of shares will be done on a top down basis, starting from the highest
bidder. Hence, each institutional investor could have a different allotment price.
However, retail individual investors and non -institutional investors in such cases
would be allotted shares at the floor price. The SEBI has permitted the issuer to
place a cap in terms of the number of shares allotted to a single bidder and
percentage to issued capital of the company in order that in single bidder does
not garner all shares on offer and there is wider distribution. The biggest
advantage of this is that it will bring down the institutional investors
oversubscription as the institutional investors will bid for the quantity they
intend to purchase and at a price which they are willing to purchase which will
be above the floor price. They may quote a higher price to get a big block of
shares at a single price. SEBI has not made it mandatory for companies coming
out with follow on public issues and it has given a choice to the companies -they
can either opt for the book building or go for the pure auction or a combination
of both.
 Reverse Book Building
The process by which the exit price of the shares of a corporate entity is
determined, is called reverse book building. This happens where a firm exits from
the stock market through the delisting process.

Reverse book building allows shareholders to tender their shares at a price of their
choice and the acquirer the freedom to accept or reject the offer.

Recently there was a move by the Hewlett Packard (HP) to get Indian subsidiary
DigitalGlobalsoft de-listed through reverse book building.

Features / Benefits

1) Offer from shareholders: Reverse book building essentially involves generating

offers from the seller (shareholders) who have no indication of the buyers intention
on the price that the buyer is willing to pay for the strategic value of the company.

2) Exit price: Reverse book building is used as a method of arriving at the exit
price for delisting of shares. The exit price will be determined on the basis of the
average of weekly highs and lows of either 26 weeks or 52 weeks. Such a price will
be the minimum offer price.

3) Fair price: Reverse book building process is expected to provide a transparent,

fair, and reasonable mechanism for pricing of shares and ensure investor
participation in the whole process of de-listing.

4) Reasonable pricing: Reverse book building process is expected to provide a

transparent, fair, and reasonable mechanism for pricing of shares and ensure
investor participation in the whole process of delisting.

5) Viable solutions: It focuses on viable solutions for determining fair price to the
shareholders in the case of outright acquisition of 100 percent equity stake by
multinational or domestic promoters/ persons in control of the company to gain full
control the Indian companies.

Mechanism:

The reverse book building process as required under the SEBI guidelines will utilize
the trading system network of the stock exchanges now being used in the Initial
Public offering (IPOs). The acquirer determines the floor price of the offer based on
the average prices for 26 weeks proceeding the date of public announcement.
Shareholders are then allowed to tender their shares at or above the floor price.
Once the reverse book building process is completed the final price will be
determined as the price at which the maximum shares are tendered. While this
provides the shareholder an opportunity to determine the price, the acquirer has
the right to accept or reject the price so discovered. In case, the acquirer accepts
the price, all shareholders who bid at to below the discovered price, will receive the
discovered price for their holdings.

Criticisms:

Despite many advantages claimed by the reverse book building process, it is

criticized on the following grounds:

1) Manipulations: The process of reverse book building is prone to manipulation, as

it would operate on a restricted audience, as against an IPO, which is open to the
general public. The possibility of getting a fair price for shareholders in the reverse
book building process is limited, as this process is subject to manipulation in the
hands of more experienced and savvy shareholders.

2) Low participation: Moreover, the participation of the small shareholders (or the
public) will be extremely low as their understanding of the process is imperfect.

3) Price Indication: Any open offer de-listing should indicate the price that the
buyer is willing to pay.

4) No fair price:

Under the rising market conditions, the floor exit price which is based on the 26
week average may not be truly reflective of the current market price. Hence, such a
price will not serve as a useful benchmark for the investor.

5) Non-acceptance: Although the shareholders command the flexibility of tendering

their shares at any price, they also run the risk of their shares not getting accepted
if the acquirer finds the price unattractive.

6) False price: There is a bigger risk of speculators spreading false information in

the market and thereby increasing the share price to unrealistic levels and selling
the stock back to small investors.
 Green-shoe Option
Green Shoe option means 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 in accordance with the provisions of Chapter
VIIIA of DIP Guidelines, which is granted to a company to be exercised through a
Stabilizing Agent. This is an arrangement wherein the issue would be over allotted
to the extent of a maximum of 15% of the issue size. From an investor's
perspective, an issue with green shoe option provides more probability of getting
shares and also that post listing price may show relatively more stability as
compared to market.

1. Overview

Introduced in 2003, Green Shoe Option is an overallotment mechanism permitted

by the Securities and Exchange Board of India (SEBI) for stabilizing the prices of
newly-listed shares of companies immediately after listing. A commonly used tool in
international capital market transactions, Green Shoe Option is used by investment
bankers, acting as stabilizing agents, to provide share price support to companies
for a certain small period after their public offering. Simply put, it is a price
stabilization mechanism whereby a company over-allots shares to investors
participating in the issue, with a view to have the merchant banker buy them back
from the open market after listing, in order to arrest any fall in the share prices
below the issue price. This term has been derived from the name of a company that
first implemented this mechanism in its public offering in 1960 the Green Shoe
Manufacturing Company (now Collective Brands Performance + Lifestyle Group, a
subsidiary of Collective Brands Inc.,USA). SEBI introduced the Green Shoe
mechanism in Indian capital markets in 2003 vide a circular SEBI/CFD/DIL/
DIP/Circular No. 11 dated 14th August, 2003.

Since then, a number of companies have implemented the Green Shoe Option in
their initial public offerings, e.g. Electrosteel Integrated Ltd., India bulls Power Ltd.,
Housing Development & Infrastructure Ltd., etc.

2. How Does It Work?

Regulation 45 of the SEBI (Issue of Capital and Disclosure Requirements)

Regulations 2009 (ICDR Regulations) lays down the provisions regarding
implementation of Green Shoe Option in public offerings.

There are three key parties involved in implementing this mechanism:

Issuer company, being the company proposing to undertake the public offering;
 Stabilizing agent, being one of the merchant bankers, who would be in charge of
the stabilization process; and

Lender-shareholder, being one of the pre-issue share-holders holding a significant

portion of shares of the issuer company.

A pictorial depiction of its operation is:

During the Pre-Issue Period

Issuer Company obtains approval from shareholders for over allotment

* through the Green Shoe Option

Issuer Company appoints one of its investment bankers to act as the

* Stabilising Agent

Stabilising Agent enters into agreements with the Issuer Company and
* Lender - Shareholder

Special accounts are opened with escrow banks and depository

*

StabilisingAgent borrows shares from Lender Shareholder for over

* allotment in the issue

During the Issue Period

Company over allots shares to investors (the base IPO shares

plus the shares borrowed by the StabilisingAgent)
*
Funds received from investors are parked in special escrow
account
*

Allotment procedure is completed and shares commence trading on

exchanges
*
During the Post Issue Period / Price Stabilzation Period

Stabilising Agent begins procuring of shares from the

open market
Shares procured by the Stabilising Agent are credited
to the special depository account
Where there
Shares bought back are returned to the Lender
is drop in
Shareholders
share prices
Any excess amount in the escrow account is then
transferred to SEBI's Investor Protection and Education
Fund

No action needed by Stabilising Agent

At the end of the Stabilization Period, Issuer Company
allots shares to the extent borrowed from the Lender
Shareholder to the special depository account,
Where there consideration being the amount in the escrow account
is no drop in
The shares are then returned by the Stabilising Agent
share prices
to the Lender Shareholder, and a separate listing
application made to exchanges for listing these shares

During Pre-Issue Period: After obtaining shareholder approval for use of the
Green Shoe mechanism in its proposed public offering, an issuer company needs to
appoint one of its investment bankers as the stabilizing agent. It shall be the key
responsibility of the stabilizing agent to conduct price stabilization activities and
provide share price support during the stabilization period being a period of up to
30 days after the issuer company receives trading permission from the stock
exchanges for its shares.

The issuer company enters into a contract with the stabilizing agent detailing the
terms and conditions relating to the Green Shoe Option, including fees to be
charged by the stabilizing agent, expenses to be incurred towards discharging
responsibilities, etc. The stabilizing agent also enters into a contract with the
lender-shareholder - being any of the pre-issue shareholders in case of an initial
public offering (IPO), and in case of a follow-on public offering (FPO), being any of
the pre-issue shareholders holding more than five per cent of the share capital
detailing key terms, inter alia, the maximum number of shares that may be
borrowed for over-allotment. The stabilizing agent would borrow from the lender-
shareholders such quantity of the equity shares proposed to be over allotted in the
issue, subject to a maximum of 15% of issue size.

A special escrow account would be opened with one of the banks, where funds from
the over-allotment would be credited. These funds would later form the war chest
which would be used to procure shares from the market during the price
stabilization period. A special depository account also would be opened with the
depository in order to credit any shares that may be bought back during the
stabilization period.

During Issue Period: The issuer company would allot the total shares in the base
case IPO to the investing public, along with the over-allotment component.
Proceeds received from the shares forming part of the base case IPO are credited to
the public issue account, while the proceeds from the over-allotment component is
parked in the special escrow account mentioned above. The issuer company
completes its allotment procedure and the equity shares are listed on the stock
exchanges within the T+12 days timeline as prescribed by SEBI.

During Post-Issue/Price Stabilization Period: The price stabilization period can

last up to a maximum of 30 days after the issuer company receives listing and
trading permission from the stock exchanges for its shares. The role of the
stabilizing agent commences when the share prices of the issuer company begin to
fall.

In such an event, the stabilizing agent (using funds lying in the special escrow
account) procures the equity shares at the prevalent market prices and credits
them to the special depository account. All shares lying in the special depository
account are then returned to the lender-shareholders, thereby closing the loop. The
stabilizing agent is required to return all shares to the lender-shareholders within a
maximum period of two working days from the end of the stabilization period. In an
event where the stabilizing agent is able to procure only a part of the over-allotted
shares, these shares are returned to the lender-shareholders within the specified
time. Towards bridging the gap between the total shares borrowed by the
stabilizing agent and the shares that have been bought back, the issuer company
would issue such number of shares constituting the shortfall to the special
depository account at issue price, which would then be returned by the stabilizing
agent to the lender-shareholders. Consideration for such issuance shall be met by
the stabilizing agent using funds lying in the special escrow account.

In an event where the share prices do not fall, there would be no need for the
stabilizing agent to conduct any share purchases. In this case, the issuer company
would issue such number of shares to the special depository account at the issue
price on consideration being met from the funds lying in the special escrow account,
and these shares are returned by the stabilizing agent to the lender-shareholders.

The issuer company would need to make a separate application with the exchanges
to list all shares issued as a result of exercise of Green Shoe Option. Any amount
remaining in the special escrow account after remittance of proceeds shall be
transferred to the Investor Protection and Education Fund established by SEBI.

An illustration would probably explain the working of the Green Shoe mechanism
better.

Illustration

Consider a company planning an IPO of say, 100,000 shares (the Base Case IPO),
at a book-built price of R100/-, resulting in an IPO size of R100,00,000. As per the
ICDR Regulations, the over-allotment component under the Green Shoe mechanism
could be up to 15% of the Base Case IPO, i.e. up to 15,000 shares, i.e. Green Shoe
shares. Prior to the IPO, the stabilizing agent would borrow such number of shares
to the extent of the proposed Green Shoe shares from the pre-issue shareholders.
These shares are then allotted to investors along with the Base Case IPO shares.
The total shares issued in the IPO therefore stands at 115,000 shares. IPO
proceeds received from the investors for the Base Case IPO shares, i.e.
R100,00,000100,000 shares at the rate of R100 each, are remitted to the Issuer
Company, while the proceeds from the Green Shoe Shares (R15,00,000/-, being
15,000 shares xR100/-) are parked in a special escrow bank account, i.e. Green
Shoe Escrow Account.

During the price stabilization period, if the share price drops below R100, the
stabilizing agent would utilise the funds lying in the Green Shoe Escrow Account to
buy these back shares from the open market. This gives rise to the following three
situations:

a) Situation #1 - where the stabilizing agent manages to buyback all of the Green
Shoe Shares, i.e.,15,000 shares;

b) Situation #2 - where the stabilizing agent manages to buyback none of the

Green Shoe Shares;
c) Situation #3 - where the stabilizing agent manages to buyback some of the
Green Shoe Shares, say 10,000 shares.

Let us examine each of these situations separately.

Situation #1 where all Green Shoe Shares are bought back: In this situation,
funds in the Green Shoe Escrow Account (R15,00,000, in our case) would be
deployed by the stabilizing agent towards buying up shares from the open market.
Given that the prices prevalent in the market would be less than the issue price of
R100, the stabilizing agent would have sufficient funds lying at his disposal to
complete this operation.

Having bought back all of the 15,000 shares, these shares would be temporarily
held in a special depository account with the depository participant (Green Shoe
Demat Account), and would then be returned back to the lender shareholders,
within a maximum period of two days after the stabilization period.

Situation #2 where none of the Green Shoe Shares are bought back: This
situation would arise in the (very unlikely) event that the share prices have fallen
below the Issue Price, but the stabilizing agent is unable to find any sellers in the
open market, or in an event where the share prices continue to trade above the
listing price, and therefore there is no need for the stabilizing agent to indulge in
price stabilization activities. In either of the above-said situations, the stabilizing
agent is under a contractual obligation to return the 15,000 shares that had initially
been borrowed from the lending shareholder(s). Towards meeting this obligation,
the issuer company would allot 15,000 shares to the stabilizing agent into the
Green Shoe Demat Account (the consideration being the funds lying the Green
Shoe Escrow Account), and these shares would then be returned by the stabilizing
agent to the lending shareholder(s), thereby squaring off his responsibilities.

Situation #3 where some of the Green Shoe Shares are bought back, say 10,000
shares: This situation could arise in an event where the share prices witness a drop
in the initial stages of the price stabilization period, but recover towards the latter
stages. In this situation, the stabilizing agent has a responsibility to return 15,000
shares to the lending shareholder(s), whereas the stabilizing activities have yielded
only 10,000 shares.

Similar to the instance mentioned in Situation #2 above, the issuer company would
allot the differential 5,000 shares into the Green Shoe Demat Account to cover up
the shortfall, and the Stabilizing Agent would discharge his obligation to the lending
shareholder(s) by returning the 15,000 shares that had been borrowed from them.
Both in Situation #2 and #3, the issuer company would need to apply to the
exchanges for obtaining listing/ trading permissions for the incremental shares
allotted by them, pursuant to the Green Shoe mechanism.

Any surplus lying in the Green Shoe Escrow Account would then be transferred to
the Investor Protection and Education Fund established by SEBI, as required under
Regulation 45(9) of the ICDR Regulations and the account shall be closed hereafter.

3. DIP Guidelines vs. ICDR Regulations - Impact on Green Shoe Option

Until September 2009, the regulatory framework governing capital market

issuances in India was the SEBI (Disclosure and Investor Protection) Guidelines,
2000 (DIP Guidelines). With the notification of the ICDR Regulations on 3rd
September, 2009, several clauses of the DIP Guidelines were amended to reflect
current market dynamics. While some of the provisions underwent a complete
overhaul, some other provisions were only modified to provide greater clarity,
removing redundancies, etc.

Chapter 8A of the DIP Guidelines which dealt with Green Shoe Option was adopted
almost in its entirety, except for a minor operational modification any surplus
fund remaining in the escrow account would need to be transferred to the Investor
Protection and Education Fund, as against the Investor Protection Fund of the stock
exchanges.

4. Criticism

Green Shoe mechanism, despite its wide usage, is not without its share of criticism.
To begin with, the Green Shoe mechanism is certainly not a cure-all antidote for
falling share prices. While the stabilizing agent acts as a ready buyer for the shares
in the postlisting period, for a company with weak fundamentals or for a badly
priced IPO, sustained buying alone would not be enough to send the share prices
sky rocketing upwards to match the initial IPO price.

Secondly, the prescribed period for price support is rather limited at 30 days. For a
savvy cartel of market operators determined to push down the share price, the
stabilization period would be a minor time pocket to weather out before making
some serious play in the market. Thirdly, the ICDR Regulations already prescribe a
more robust mechanism for protection of the small investor the safety net
arrangement mechanism covered in Regulation 44. Under the safety net
arrangement mechanism, an issuer company can appoint a third party who would
offer to purchase equity shares from original resident retail individual investors up
to one thousand equity shares for a maximum period of six months from date of
issue. The longer time frame covered under this mechanism, and the re-purchase
guarantee given to the small investors definitely provide a greater sense of comfort
to the investing public. However, the key impediment in adopting this option is
finding a suitable third party who would be willing to offer the commitment to
shareholders.

Despite the above shortcomings, the Green Shoe mechanism has been widely used
by issuer companies to provide share price support to investors in their initial public
offerings.

5. Reverse Green Shoe Option

A variant of the Green Shoe Option practiced in international capital markets is the
Reverse Green Shoe Option. Though the end result of both Green Shoe and Reverse
Green Shoe Options is to achieve the price stabilization, both mechanisms function
differently. Under the Reverse Option, in the event that there is a fall in the share
prices during the stabilization period, the stabilizing agent would procure shares
from the open market at the depressed prices, and sell them back to the issuer at
the (higher) issue price.

Procurement of large blocks of shares from the open market while exercising
Reverse Green Shoe would assist in stabilizing the falling share prices. However, in
light of the Company Law provisions in India that prohibit a company from owning
its own shares, applicability of Reverse Green Shoe mechanism in an Indian context
is somewhat curtailed.
 Conclusion
Over the last three years, Indian initial public offerings (IPOs) have started giving
off a bad odour: if you had bought into an IPO in those years, your money would
have shrunk by 18.7%. Just buying and holding the Sensex stocks would have
made around 5%. The last year has also been terrible, with returns on IPOs down
by 18.6%. In the US, retail investors who jumped onto the Facebook IPO have
been burned nearly 25%, as the stock has slumped after listing.

It is tempting, though incorrect, to predict the death IPOs. Globally, most markets,
including equities are going through a very choppy phase and there is no reason
why India should remain insulated from the turbulence. That said, there are several
systemic changes that market regulator SEBI needs to implement to make India's
equity markets more viable and give every IPO a higher chance of success.

The real aim of an IPO is to attract capital from a broad market to the company
issuing its shares. That has to be kept firmly in mind while pricing the IPO. Leaving
money on the table for investors will mean a post-listing jump but will mean that
the company has under-priced itself. Investors who buy stocks for listing gains will
be happy, but it is a bad idea to price stocks to keep punters smiling.

In order to price stocks efficiently, SEBI must discontinue the opaque process of
book-building that allows the issuer and an investment bank to evaluate demand
for stocks at different prices before it hits the market.

This is a closed process: only the issuer and banker have access to the data. That
leaves scope for gaming. Instead, prices should be discovered at online auctions in
the market with transparent bid-ask quotes and volume information displayed in
real time. Other information, including company financials, business plan and
management quality should be revealed well ahead.

There should be no quotas for institutional and retail investors, ensuring that only
those people who feel confident that they know enough about the issuer take part
in the auction. As many shares should be allotted to a bidder at the bid price,
starting at the highest price bid received and going down the prices bid till all the
shares get allotted.