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Primary Market

Module II

Primary Market /New Issue


Market
Every company needs funds. Funds may be
required for short term or long term.
Short term requirements of funds can be met
through banks, lenders, institutions etc.
When a company wishes to raise long term
capital, it goes to the primary market.
Primary market is an important constituent
of a capital market.
In the primary market the security is
purchased directly from the issuer.

Meaning of Primary
Market

The primary market is a market for new issues. It is also called


new issue market. It is a market for fresh capital. It deals with the
new securities which were not previously available to the
investing public. Corporate enterprises and Govt. raises long term
funds from the primary market by issuing financial securities.
Both the new companies and the existing companies can issue
new securities on the primary market. It also covers raising of
fresh capital by government or its agencies.
The primary market comprises of all institutions dealing in fresh
securities. These securities may be in the form of equity shares,
preference shares, debentures, right issues, deposits etc.

Functions of Primary
Market
Origination : Origination refers to the work of investigation, analysis and
processing of new project proposals. Origination begins before an issue is
actually floated in the market. The function of origination is done by merchant
bankers who may be commercial banks, all India financial institutions or private
firms.
Underwriting: When a company issues shares to the public it is not sure that the
whole shares will be subscribed by the public. Therefore, in order to ensure the full
subscription of shares (or at least 90%) the company may underwrite its shares or
debentures.
The act of ensuring the sale of shares or debentures of a company even before
offering to the public is called underwriting. It is a contract between a company
and an underwriter (individual or firm of individuals) by which he agrees to
undertake that part of shares or debentures which has not been subscribed by the
public. The firms or persons who are engaged in underwriting are called
underwriters.
Distribution
This is the function of sale of securities to ultimate investors. This service is
performed by brokers and agents. They maintain a direct and regular contact with
the ultimate investors.

Methods of Raising Fund in the


Primary Market
A company can raise capital from the
primary market through various
methods. The methods include public
issues, offer for sale, private
placement, right issue, and tender
method.

Methods of Raising fund


A. Public Issues
Types of Public Issues:
Initial Public Offering (IPO):
This is an offering of either a fresh issue of securities or an
offer for sale of existing securities or both by an unlisted
company for the first time in its life to the public. In short, it
is a method of raising securities in which a company sells
shares or stock to the general public for the first time.
Follow-on Public Offering (FPO):
This is an offer of sale of securities by a listed company. This
is an offering of either a fresh issue of securities or an offer
for sale to the public by an already listed company through
an offer document.

Methods of Determination of
Prices of New Shares
Equity offerings by companies are
offered to the investors in two forms

(a)Fixed price offer method


(b)Book building method

Fixed Price Offer Method


In this case, the company fixes the issue price and then
advertises the number of shares to be issued. If the
price is very high, the investors will apply for fewer
numbers of shares. On the other hand, if the issue is
under-priced, the investors will apply for more number
of shares. This will lead to huge over subscription.
The main steps involved in issue of shares under fixed
price offer method are as follows:
1. Selection of merchant banker
2. Issue of a prospectus
3. Application for shares
4. Allotment of shares to applicants
5. Issue of Share Certificate

Book-building Method
Under this method, the company does not price the
securities in advance. Instead, it offers the investors an
opportunity to bid collectively. It then uses the bids to arrive
at a consensus price.
All the applications received are arranged and a final offer
price (known as cut off price) is arrived at. Usually the cut off
price is the weighted average price at which the majority of
investors are willing to buy the securities.
In short, book building means selling securities to investors
at an acceptable price with the help of intermediaries called
Book-runners. It involves sale of securities to the public and
institutional bidders on the basis of predetermined price
range or price band. The price band cannot exceed 20% of
the floor price.
The floor price is the minimum price at which bids can be
made by the investors. It is fixed by the merchant banker in
consultation with the issuing company. Thus, book building
refers to the process under which pricing of the issue is left

B. Offer for Sale Method


Under this method, instead of offering shares
directly to the public by the company itself, it offers
through the intermediary such as issue houses
/merchant banks / investment banks or firms of
stock brokers.
Under this method, the sale of securities takes
place in two stages. In the first stage, the issuing
company sells the shares to the intermediaries such
as issue houses and brokers at an agreed price. In
the second stage, the intermediaries resell the
securities to the ultimate investors at a market
related price.
This price will be higher. The difference between the
purchase price and the issue price represents profit
for the intermediaries. The intermediaries are

C. Private Placement of
Private placement isSecurities
the issue of securities of a company

direct to one investor or a small group of investors.


Generally the investors are the financial institutions or
other existing companies or selected private persons
such as friends and relatives of promoters.
A private company cannot issue a prospectus. Hence it
usually raises its capital by private placement. A public
limited company can also raise its capital by placing the
shares privately and without inviting the public for
subscription of its shares. Company law defines a
privately placed issue to be the one seeking subscription
from 50 members.
In a private placement, no prospectus is issued. In this
case the elaborate procedure required in the case of
public issue is avoided. Therefore, the cost of issue is
minimal. The process of raising funds is also very simple.
But the number of shares that can be issued in a private

D. Rights Issue
Right issue is a method of raising funds in the market by an
existing company. Under this method, the existing company
issues shares to its existing shareholders in proportion to the
number of shares already held by them. Thus a right issue is the
issue of new shares in which existing shareholders are given preemptive rights to subscribe to the new issue on a pro-rata basis.
According to Section 81 (1) of the Companies Act, when the
company wants to increase the subscribed capital by issue of
further shares, such shares must be issued first of all to existing
shareholders in proportion of their existing shareholding. The
existing shareholders may accept or reject the right. Shareholders
who do not wish to take up the right shares can sell their rights to
another person. If the shareholders neither subscribe the shares
nor transfer their rights, then the company can offer the shares to
public.

Rights Issue
A company making right issue is required to send a
circular to all existing shareholders. The circular should
provide information on how additional funds would be
used and their effect on the earning capacity of the
company. The company should normally give a time limit
of at least one month to two months to shareholders to
exercise their rights before it is offered to the public. No
new company can make right issue.
Promoters offer right issue at attractive price often at a
discount to the market price due to a variety of reasons.
The reasons are:
(a) they want to get their issues fully subscribed to,
(b) to reward their shareholders,
(c) it is possible that the market price does not reflect a
shares true worth or that it is overpriced,
(d) to increase their stake in the companies so as to avoid
preferential allotment.

E. Other Methods of Issuing


Securities

1. Tender method: Under tender method, the issue


price is not predetermined. The company announces
the public issue without indicating the issue price. It
invites bids from various interested parties. The
parties participating in the tender submit their
maximum offers indicating the maximum price they
are willing to pay. They should also specify the number
of shares they are interested to buy. The company,
after receiving various offers, may decide about the
price in such a manner that the entire issue is fairly
subscribed or sold to the parties participating in the
tender.
2. Issue of bonus shares: Where the accumulated
reserves and surplus of profits of a company are

Other Methods
3. Offer to the employees: Now a days companies
issue shares on a preferential basis to their
employees (including whole time directors). This
attracts, retains and motivates the employees by
creating a sense of belonging and loyalty. Generally
shares are issued at a discount. A company can
issue shares to their employees under the following
two schemes:
(a) Employee stock option scheme and
(b) Employee stock purchase scheme.
4. Offer to the creditors: At the time of
reorganization of capital, creditors may be issued
shares in full settlement of their loans.
5. Offer to the customers: Public utility

Primary Market Players

Merchant Bankers
Depository
Brokers
Bankers
Underwriter

Primary Market
Players..
Merchant Bankers
When a company approaches the public for funds,
merchant bankers manage the process of public
issue. They perform in the capacity of issue
managers, lead managers and co-managers.
Underwriters
Underwriters subscribe to a certain amount of
capital in the issue. They have to fill the gap, if
any, due to the failure of subscription as
planned.

Primary Market
Players..
Brokers
They act as intermediaries in purchase and sale of
securities in the primary and secondary markets.
They have a network of sub brokers spread
throughout the length and breadth of the country.
Bankers:
Some commercial banks act as collecting agents
and some act as co-ordinating bankers. Some
bankers act as merchant bankers and some are
brokers. They play an important role in transfer,
transmission and safe custody of funds.

Primary Market
Players..
Depositories
A bank or company which holds securities deposited by others,
and where exchanges of these securities take place is defined as a
depository. It can also be defined as an organization where the
securities of an investor are held in electronic form, at the request
of the investor through the medium of a Depository Participant.
A depository can be compared to a bank for shares. Just as a bank
holds cash in your account and provides all services related to the
transaction of cash, a depository holds securities in electronic
form and provides all services related to transaction of shares /
debt instruments.
A depository interacts with clients through a Depository
Participant (DP) with whom he client has to maintain a Demat
Account.

SEBI GUIDELINES
IPO & Primary Market
Company
Merchant bankers
Underwriters
Stock Broker & Sub-broker to the issue
Banker to the issue
Registrar to the issue & Share transfer agent
Investors protection & Education
Venture Capital
Foreign Institutional Investors (FII)

Initial Public Offering & Primary Market- SEBI (Disclosure & Investors
Protection) Rules and Regulation, 24th Feb., 2009.

1.

2.

3.
4.
5.
6.

Minimum offering of 25% of post issue capital to the public.


This requirement was relaxed to 10% first for IT sector, later it
was relaxed to all the sectors.
IPO of issue size up to 5 times of pre-issue , shall be allowed
only to those companies having consistent track record of
making profit at least for 5 years.
For issue above Rs. 100 crores book building route has been
made compulsory for comp. making IPO.
Time for finalizing the allotment of shares and refund has been
reduced from 30 to 15 days.
Issue shall open within 12 months from the date of issue of
observation letter by SEBI.
Should disclose price band at least 2 working days before
opening of bid by announcement in all newspapers in which
pre-issue advt. was released.

SEBI Guidelines regarding Companies Act


Free pricing of issues. A new issue can be priced freely provided
it is backed by promoters with good track record of at least 5
years.
Underwriting made mandatory. The new guidelines issued by
SEBI have directed full underwriting of public issue.
Issue of shares at par. A new company with no previous track
record will be permitted to issue capital only at par.
Promoters contribution is fixed at 25% of total issue of less than
Rs. 100 crores size and 20% of the issues above Rs. 100 crores
For public issue of existing listed companies, the issuer will have
to disclose the high and low prices of the shares for the last 2
years.
No bonus issue shall be made within 12 months of any public issue
or right issue.

1.

SEBI GUIDELINES FOR MERCHANT


BANKING
The merchant banking
activity in India is governed

by SEBI (merchant bankers) regulations, 1992.


Registration with SEBI is mandatory to carry out the
business of merchant banking in India.
An applicant should comply with the following norms:
I) the applicant should be a corporate body.
Ii) the applicant should not carry on any business other
than those connected with the securities market.
Iii) the applicant should have necessary infrastructure
like office space, equipment, manpower, etc.
Iv) the applicant must have at least two employees with
prior experience in merchant banking.
V) any associate company, group company, subsidiary
or interconnected company of the applicant should not
have been a registered merchant banker.
Vi) the applicant should not have been involved in any
securities scam or proved guilt for any offence.

SEBI (MERCHANT BANKERS) REGULATIONS,


1992.
A merchant banker will require authorization by SEBI to carry
out the business. SEBI has classified the merchant bankers into
four categories based on the nature and range of the activities
and the responsibilities.
CATEGORY I THEY ARE ALLOWED TO CARRY ON THE ACTIVITY OF
ISSUE MANAGEMENT AND TO ACT AS ADVISER, CONSULTANT, MANAGER,
UNDERWRITER, PORTFOLIO MANAGER.
CATEGORY II THEY ARE ALLOWED TO ACT AS ADVISER, CONSULTANT,
CO-MANAGER, UNDERWRITER, PORTFOLIO MANAGER.
CATEGORY III THEY ARE PERMITTED TO ACT AS UNDERWRITER,
ADVISER OR CONSULTANT TO AN ISSUE.
CATEGORY IV THEY CAN ACT ONLY AS ADVISER OR CONSULTANT TO
AN ISSUE.
CAPITAL ADEQUACY NORMS:
CATEGORY I

: RS. 1 CRORES

CATEGORY II : RS.50 LAKHS


CATEGORY III : RS.20 LAKHS

From 9 December 1997, however, all other


categories were abolished, and merchant bankers
can now only be registered under category- I by
SEBI.
1 Capital adequacy norms
The securities exchange board of India (SEBI) has
prescribed capital adequacy norms for merchant
bankers to register under the various categories.
The minimum net worth set by SEBI for category- I
of merchant bankers was initially fixed at the value
of Rs. 1 crore and later raised to the value of Rs. 5
crores through an amendment of the regulations in
the year 1995.

2.Every merchant banker should maintain


copies of balance sheet, Profit and loss
account, statement of financial position
3.Half-yearly unaudited result should be
submitted to SEBI
4.Merchant bankers are prohibited from
buying securities based on the unpublished
price sensitive information of their clients
5.SEBI has been vested with the power to
suspend or cancel the authorization in case
of violation of the guidelines
6.Every merchant banker shall appoint a
Compliance Officer to monitor compliance
of the Act
7.SEBI has the right to send inspecting

8. Inspections will be conducted by SEBI to


ensure that provisions of the
regulations are properly complied
9. SEBI will give authorization for a
merchant banker to operate for 3 years
only. Without SEBIs authorization
,merchant bankers cannot operate
10.An initial authorization fee, an annual
fee and renewal fee may be collected by
SEBI
11.A lead manager holding a certificate
under category I shall accept a minimum
underwriting obligation of 5% of size of

It is mandatory under SEBI rules that


every issuing company must appoint one
or more SEBI registered merchant bankers
as lead manager(s) for the management of
issue
Issue amount
No of lead managers

12.

Up to 50 crores

not more than Two

50 to 100 crores

Three

100 to 200 crores

four

200 to 400 crores

five

Above 400

Five or more as may be


agreed by the
SEBI

However, the limit to the maximum


number of lead managers to be
appointed in a single issue was omitted
through amendment in this regulations on

Exemption from RBI


RBI exempted merchant banking companies
Regulations
from compulsory registration (section 45 IA),
maintenance of liquid assets (section 45 IB),
creation of reserve fund (section 45 IC) and
all the provisions of the recent directions
relating
to
deposit
acceptance
and
prudential norms.
Conditions:
Such companies are registered with SEBI
under section 12 of the SEBI Act, 1992 and
are carrying on the business of merchant
banker in accordance with rules/regulations
framed by SEBI;
They require securities only as part of their
merchant banking business
They do not accept/ hold public deposits.

SEBI ( Underwriters) Rules and Regulation


Act,1993
Underwriters are intermediaries who undertake to
subscribe the unsubscribed portion of issued capital.
Condition for grant or renewal of certificate
In case of any change in the constitution,
underwriter shall obtain prior permission of the Board
to continue to act as underwriter.
the underwriter should enter into valid agreement
with body corporate on whose behalf he is acting as
underwriter.
He shall pay the amount of fees of registration in
the manner
An underwriter may, if so desired makes an
application in FORM A for renewal of certificate before

Has the necessary infrastructure like adequate office


space, equipment
manpower to effectively discharge his
activities.
Has any past experience in underwriting or has in his
employment minimum 2 persons who had the experience in
underwriting.
Not to Act as underwriter without certificate:- No person shall act underwriter unless he holds a
certificate granted by the Board under the regulation.
Notwithstanding anything contained in sub-rule(1), every
stock- broker or merchant banker holding a valid certificate of
registration under Section 12 of the Act, shall be entitled to
act as an underwriter without obtaining a separate certificate
for underwriting activities which shall be governed by the
rules and regulations.
CAPITAL ADEQUACY NORMS
The capital adequacy requirement referred to insub-

SEBI ( Stock Broker and Sub-brokers)


Rules,1992
Stock broker means a member of stock exchange
Sub-broker means any person not being a member of stock
exchange who acts on behalf of a stock broker as an agent or
otherwise for assisting the investors in buying, selling or dealing
in securities through stock broker.
No stock broker or sub broker shall buy,sell or deal in securities
unless he holds a certificate granted by board under the
regulation, provided that such person may continue to buy, sell or
deal in securities if he has made an application for such
registration.
CONDITION
FOR
REGISTRATION:-

GRANT

OF

CERTIFICATE

OF

He holds the membership of any stock exchange


He shall abide by rules, regulation and bye-laws of stock
exchange of which he is a member.
He shall pay the fees for registration in the manner provided in

CONDITION FOR THE GRANT OF CERTIFICATE TO SUB-BROKER


He shall pay the fees in the manner provided in the regulations
Every stock broker shall subject to pay registration fees in the manner set out
below :
(a) Where the annual turnover does not exceed rupees Rs. 1 crore during any
Financial year, a sum of Rs. 5,000 for each financial year;
(b) Where the annual turnover of the stock-broker exceeds Rs 1 crore during
Any financial year, a sum of Rs. 5,000 plus 1 % of the turnover in excess of Rs.
1 crore for each financial year
He shall take adequate steps in redressal of grievances of the investors
within one month of the date of complaints.
In case of any change in constitution , the sub-broker shall obtain prior
permission of the board to continue to buy , sell or deal in securities in any
stock exchange.
He is authorized in writing by a stock- broker being a member of stock
exchange for affiliating himself in buying, selling or dealing in securities.

SEBI (banker to the issue) rules and regulation act,1992


Banker to the issue helps in functioning in primary market by engaging in

activities of acceptance of application for shares/debentures along with


application money from investors.

A bank can operate as banker to the issue only after obtaining a certificate of
registration from SEBI. It considers past experience, nature, size of bank.
Certificate of registration is granted if it satisfies :- The applicant has necessary infrastructure, office space, equipment, data
processing and manpower.
Applicant is scheduled bank.
Application fees is paid i.e. Rs 2.5 lakh for 1-2 years from date of initial
registration and Rs. 1 lakh for 3rd year.

Renewal is made 3 months before expiry by paying renewal fees of rs 1 lakh


annually for 1-2 years and Rs 20,000 for 3rd year.

Banker to the issue should record in the statement the agreement with issuing
company, submission of daily statements, furnishing the information to sebi i.E.
Details of issue, no. Of applicants and details of application money, refund to the
investors. Inspection by RBI.

SEBI GUIDELINES FOR FIIS


All foreign institutional investors including pension funds, mutual
funds, asset management companies and portfolio managers were
Permitted to invest in Indian capital market fulfilling the following
Conditions: The FIIs are required to obtain certificate of registration from the SEBI. For grant
of certificate SEBI checks the applicant's track record, professional competence,
financial soundness, experience, general reputation of fairness and integrity
They have to obtain approval from RBI under foreign exchange regulation act
(FERA), 1973.
Certificate of registration is granted for period of 3 years and after it can be
renewed.
Fiis are permitted to invest in securities in the primary and secondary markets
including shares, debentures listed or to be listed on a recognized stock exchange
in India; and Units of schemes floated by domestic mutual funds including Unit
Trust of India, whether listed on a recognized stock exchange or not.

A registered foreign institutional investor shall pay a


fee of US $ 10,000 for every block of three years after
grant of registration during which the registration
subsist.
The fee mentioned in shall be paid at least one
month before expiry of the period of three years.

IPO
APPROVAL OF BOD
APPOINTMENT OF LEAD MANAGERS
APPOINTMENT OF OTHER INTERMEDIARIES :
- CO-MANAGERS AND ADVISORS
- UNDERWRITERS
- BANKERS
- BROKERS AND PRINCIPAL BROKERS
- REGISTRARS

FILING THE PROSPECTUS WITH SEBI :


The prospectus or the offer document communicates information about the
company and the proposed security issue to the investing public. All the
companies seeking to make a public issue have to file their offer document
with SEBI. If SEBI or public does not communicate its observations within 21
days from the filing of the offer document, the company can proceed with its
public issue.
FILING OF THE PROSPECTUS WITH THE REGISTRAR OF THE COMPANIES
: ONCE THE
Prospectus have been approved by the concerned stock exchanges and the
consent obtained from the bankers, auditors, registrar, underwriters and
others, the prospectus signed by the directors, must be filed with the registrar
of companies, with the required documents as per the Companies Act 1956.

PRINTING AND DISPATCH OF PROSPECTUS : AFTER


THE PROSPECTUS IS FILED WITH
The registrar of companies, the company should print the
prospectus. The quantity in which prospectus is printed
should be sufficient to meet requirements. They should be
send to the stock exchanges and brokers so they receive
them atleast 21 days before the first announcement is
made in the news papers.
FILING OF INITIAL LISTING APPLICATION : WITHIN 10
DAYS OF FILING THE
Prospectus, the initial listing application must be made to the
concerned stock exchanges with the listing fees.

PROMOTION OF THE ISSUE :


The promotional campaign typically commences with the
filing of the prospectus with the registrar of the companies
and ends with the release of the statutory announcement
of the issue.
STATUTORY ANNOUNCEMENT :
The issue must be made after seeking approval Of the
stock exchange. This must be published atleast 10 days
before the Opening of the subscription list.

COLLECTIONS OF APPLICATIONS :
The statutory announcement specifies when the
subscription would open, when it would close, and the
banks where the applications can be made. During the
period the subscription is kept open, the bankers will
collect the applications on behalf of the company.
PROCESSING OF APPLICATIONS : Scrutinizing of the
applications is done.

ESTABLISHING THE LIABILITY OF THE


UNDERWRITERS :
If the issue is undersubscribed, the liability of the
underwriters has to be established.
ALLOTMENT OF SHARES :
Proportionate system of allotment is to be followed.
LISTING OF THE ISSUE :
The detail listing application should be submitted to the
concerned stock exchange along with the listing agreement
and the listing fee. The allotment formalities should be
completed within 30 days.

SOME IMPORTANT TERMS


DRAFT OFFER DOCUMENTS
Draft offer document means the offer document in draft stage. The draft offer
documents are filed with SEBI, atleast 30 days prior to the filing of the offer
document with ROC/SEs.
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 before filing the offer document with ROC/SEs.
The draft offer document is available on the SEBI website for public comments
for a period of 21 days from the filing of the draft offer document with SEBI.
OFFER DOCUMENT
Offer document means prospectus in case of a public issue or offer for sale
and letter of offer in case of a right issue, which is filed with registrar of
companies (ROC) and stock exchanges. An offer document covers all the
relevant information to help an investor to make his/ her investment decision.

RHP (RED HERRING PROSPECTUS)


Red herring prospectus is a prospectus, which does not have details of
either price or number of shares being offered, or the amount of issue.
This means that in case price is not disclosed, the number of shares and
the upper and lower price bands are disclosed. On the other hand, an
issuer can state the issue size and the number of shares are determined
later.
An RHP for an FPO 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. Hence,
such details are not shown in the red herring prospectus filed with ROC
in terms of the provisions of the companies act.
Only on completion of the bidding process, the details of the final price are
included in the offer document. The offer document filed thereafter with
ROC is called a prospectus.

Greenshoe option is a special provision in an IPO prospectus, which


allows underwriters to sell investors more shares than originally
planned by the issuer. This would normally be done if the demand for a
security issue proves higher than expected. Legally referred to as an
over-allotment option.

BOOK BUILDING
Book building means a process undertaken to elicit demand
and to assess the price for determination of the quantum or
value of specified securities or Indian depository receipts,
as the case may be.
The book building process in India is very transparent. All
investors including small investors can see on an hourly
basis where the book is being built before applying.
According to this method, share prices are determines on
the basis of real demand for the shares at various price
levels in the market.

DIFFERENCE BETWEEN FIXED PRICE


PROCESS AND BOOK BUILDING PROCESS
Features

Fixed Price process

Book Building process

Pricing

Price at which the securities


are offered /allotted is known
in advance to the investor.

Price at which securities will be


offered/allotted is not known in
advance to the investor. Only an
indicative price range is known.

Demand

Demand for the securities


Demand for the securities offered
offered is known only after the can be known everyday as the
closure of the issue.
book is built.

Payment

Payment if made at the time of Payment only after allocation


subscription wherein refund is
given after allocation.

OFFER TO PUBLIC THROUGH BOOK BUILDING PROCESS

1. An issuer company may, subject to the requirements specified make an


issue of securities to the public through a prospectus through 100% of the
net offer to the public through book building process.
2. Reservation to the extent of percentage specified in these regulations can
be made only to the following categories employees and in case of a new
issuer, persons who are in permanent and full time employment of the
promoting companies excluding the promoter and the relative of promoter
of such companies.
(B) shareholders of the listed promoting companies in the case of a new
company and shareholders of listed group companies in the case of an
existing company on a competitive basis or on a firm allotment basis
excluding promoters. However, if the promoting companies are designated
financial institutions or state or central financial institutions, the
shareholder of such promoting companies shall be excluded for this
purpose.
(C) persons who, on the date of filing of the draft offer document with sebi,
have business association, as depositors, bondholders and subscribers to
services, with the issuer making an initial public offering.
However, no reservation can be made for the issue management team,
syndicate members, their promoters, directors and employees and for the
group/associate companies of issue management team and syndicate
members and their promoters, directors and employees.

3. The issuer company is required to enter into an agreement with one or more of
the stock exchange(s) which have the requisite system of on-line offer of
securities. The agreement would cover inter-alia, the rights, duties,
responsibilities and obligations of the company and stock exchange (s) inter se.
The agreement may also provide for a dispute resolution mechanism between
the company and the stock exchange.
The company may also apply for listing of its securities on an exchange other than
the exchange through which it offers its securities to public through the on-line
system.
4. The lead merchant banker shall act as the lead book runner. In case the issuer
company appoints more than one merchant banker,the names of all such
merchant bankers who have submitted the due diligence certificate to SEBI,
may be mentioned on the front cover page of the prospectus. A disclosure to the
effect that the investors may contact any of such merchant bankers, for any
complaint pertaining to the issue is required to be made in the prospectus, after
the risk factors.

5. The lead book runner/issuer may designate, in any manner, the other merchant bankers if
the inter-se allocation of responsibilities amongst the merchant bankers is disclosed in the
prospectus on the page giving the details of the issue management team and a coordinator has been appointed amongst the lead book runners, for the purpose of coordination with SEBI. However the names of only those merchant bankers who have
signed the inter-se allocation of responsibilities would be mentioned in the offer
document on the page where the details of the issue management team is given.
6. The primary responsibility of building the book is of the lead book
runner. The book runner(s) may appoint those intermediaries who are
registered with SEBI and who are permitted to carry on activity as an
underwriter as syndicate members. The book runner(s)/syndicate
members shall appoint brokers of the exchange, who are registered
with SEBI, for the purpose of accepting bids, applications and placing
orders with the company and ensure that the brokers so appointed are
financially capable of honouring their commitments arising out of
defaults of their clients/investors, if any. However, in case of application
supported by blocked amount, self certified banks shall accept and
upload the details of such application in electronic bidding system of
the stock exchange.

7. The brokers, and self certified syndicate banks accepting applications and
application monies, are considered as bidding/collection centres. The broker/s
so appointed, shall collect the money from his/their client for every order
placed by him/them and in case the client/investors fails to pay for shares
allocated as per the guidelines, the broker shall pay such amount.
8. In case of applications supported by blocked amount, the self certified
syndicate banks shall follow the procedure specified by SEBI in this regard.
The company shall pay to the broker/s/self certified syndicate banks a
commission/fee for the services rendered by him/them. The exchange shall
ensure that the broker does not levy a service fee on his clients/investors in lieu
of his services.
The draft prospectus containing all the disclosures except that of price and the
number of securities to be offered to the public shall be filed by the lead
merchant banker with sebi. The total size of the issue shall be mentioned in the
draft prospectus.

9. The red herring prospectus shall disclose, either the floor price of the securities offered
through it or a price band along with the range within which the price can move, if any.
However, the issuer may not disclose the floor price or price band in the red herring
prospectus if the same is disclosed in case of an initial public offer, at least two working
days before the opening of the bid and in case of a further public offer, at least one
working day before the opening of the bid, by way of an announcement in all the
newspapers in which the pre-issue advertisement was released by the issuer or the
merchant banker; further, the announcement shall contain the 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 offer
document.
Where the issuer opts not to make the disclosure of the price band or floor price in the redherring prospectus in terms of the foregoing proviso, the following shall be additionally
disclosed in the red-herring prospectus:
a) A statement that the floor price or price band, as the case may be, shall be disclosed
atleast two working days (in case of an initial public offer) and atleast one working day
(in case of a further public offer) before the opening of the bid;
b) A statement that the investors may be guided in the meantime by the secondary
market prices in case of public offer;
c) Names and editions of the newspapers where the announcement of the floor price or
price band would be made;
d) Names of websites (with address), journals or other media in which the said
announcement will be made. Where the issuer decides to opts for price band instead of
floor price, the lead book runner shall ensure compliance with the following conditions:

(A) 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.
(B) 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 (a) above;
(C) 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.
(D) in case the price band is revised, the bidding period shall be
extended for a further period of three days, subject to the total
bidding period not exceeding ten working days.
(E) 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.

10. In case of appointment of more than one lead merchant banker or book
runner for book building, the rights, obligations and responsibilities of each
should be delineated. 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 provided in the regulations.
11. The issuer company shall circulate the application forms to the brokers.
12. The pre-issue obligations and disclosure requirements shall be applicable
to issue of securities through book building unless stated otherwise in
these regulations.
13. The book runner(s) and the issuer company shall determine the issue
price based on the bids received through the syndicate members and
self certified syndicate banks.
14. Retail individual investors may bid at cut off price instead of their
writing the specific bid prices in the bid forms.
15. On determination of the price, the number of securities to be offered
shall be determined i.E. Issue size divided by the price which has been
determined.
16. Once the final price (cut-off price) is determined all those bidders whose
bids have been found to be successful shall become entitle for allotment of
securities.
17. No incentive, whether in cash or kind, shall be paid to the investors who
have become entitled for allotment of securities.

18. The broker may collect an amount to the extent of 100% of the application
money as margin money from the clients/investors before he places an order on
their behalf. The margin collected shall be uniform across all categories of
investors.
19. Bids for securities beyond the investment limit prescribed under relevant laws
shall not be accepted by the syndicate members/brokers from any category of
clients/investors.
20. 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 therefor shall be disclosed to
the bidders. Necessary disclosures in this regard shall also be made in the offer
document.
21. On determination of the entitlement, the information regarding the same i.E.
The number of securities which the investor becomes entitled shall be intimated
immediately to the investors.

22. The final prospectus containing all disclosures as per these guidelines
including the price and the number of securities proposed to be issued shall
be filed with the registrar of companies.
23. Arrangement shall be made by the issuer for collection of the applications
by appointing mandatory collection centres as per these regulations.
24. The bidding terminals shall contain a online graphical display of demand
and bid prices updated at periodic intervals not exceeding 30 minutes. The
book running lead manager shall ensure the availability of adequate
infrastructure with syndicate members for data entry of the bids in a timely
manner.
25. The investors who had not participated in the bidding process or have not
received intimation of entitlement of securities may also make an application.

BOOK BUILDING PROCESS THROUGH A


FLOWCHART

PROCEDURE FOR BIDDING

The process of bidding should be in compliance of the following requirements:


(A) Bidding process shall be only through an electronically linked transparent
bidding facility provided by recognised stock exchange(s).
(B) The lead book runner shall ensure the availability of adequate
infrastructure with syndicate members for data entry of the bids in a timely
manner.
(C) 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.
(D) 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.
(E) 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.
(F) Applicants who are qualified institutional buyers shall place their bids only
through the stock brokers who shall have the right to vet the bids;

(G) the bidding terminals shall contain an online graphical display of demand and bid prices
updated at periodic intervals, not exceeding thirty minutes.
(H) 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.
(I) the retail individual investors may either withdraw or revise their bids until finalization
of allotment.
(J) the issuer may decide to close the bidding by qualified institutional buyers one day prior
to the closure of the issue subject to the following conditions:
(I) bidding shall be kept open for a minimum of three days for all categories of applicants;
(Ii) disclosures are made in the red herring prospectus regarding the issuers decision to
close the bidding by qualified institutional buyers one day prior to closure of issue.
(K) the qualified institutional buyers and the non-institutional investors shall neither
withdraw nor lower the size of their bids at any stage .
(l) the identity of qualified institutional buyers making the bidding shall not be made public.
(M) 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.

MAINTENANCE OF BOOKS AND RECORDS


A final book of demand showing the result of the allocation process shall be
maintained by the book runner/s. The book runner/s and other intermediaries
in the book building process associated shall maintain records of the book
building prices.
SEBI has the right to inspect the records, books and documents relating to the
book building process and such person shall extend full cooperation.
All references mentioned above with respect to draft prospectus shall be
construed as having been made to red herring prospectus in application to
fast track issues.

ALLOCATION/ALLOTMENT
100% OF THE NET OFFER TOPROCEDURE
THE PUBLIC THROUGH 100% BOOK BUILDING PROCESS

ANCHOR INVESTORS
Anchor investor means a qualified institutional buyer who
makes an application for a value of ten crores rupees or more
in a public issue made through the book building process in
accordance with these regulations:
APPLICATION SUPPORTED BY BLOCK AMOUNT
(ASBA)
ASBA is a process developed by the india's stock market
regulator SEBI for applying to IPO. In ASBA, an IPO
applicant's account doesn't get debited until shares are allotted
to them.

FPO
FOLLOW ON PUBLIC OFFER OR FURTHER PUBLIC
OFFER
A follow-on public offer (FPO) is an issuing of shares to
investors by a public company that is already listed on an
exchange. An FPO is essentially a stock issue of
supplementary shares made by a company that is already
publicly listed and has gone through the IPO process. FPOs are
popular methods for companies to raise additional equity
capital in the capital markets through a stock issue.

PRIVATE PLACEMENT
A private placement is the sale of securities to a relatively small number of select
investors as a way of raising capital.
Investors involved in private placements are usually large banks, mutual funds,
insurance companies and pension funds.
A private placement is different from a public issue, in which securities are made
available for sale on the open market to any type of investor.
Private placement of shares or convertible securities by listed issuer can be of two
types:
(I) Preferential allotment: When a listed issuer issues shares or convertible
securities, to a select Group of persons in terms of provisions of chapter VII of
SEBI (ICDR) regulations, 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.
(II) Qualified Institutions Placement (QIP): when a listed issuer issues equity shares
or securities Convertible in to equity shares to qualified institutions buyers only in
terms of provisions of chapter VIII of SEBI (ICDR) regulations, it is called a QIP.

RIGHTS ISSUE
A rights issue is an issue of rights to a company's existing
shareholders that entitles them to buy additional shares
directly from the company in proportion to their existing
holdings, within a fixed time period.

PROCEDURE OF RIGHT ISSUE OF SHARES


A. Call a board meeting by issue notice of meeting.
B. Approve right issue including letter of offer, which shall include right of
renunciation also.
C. Send offer letter to all existing members as on the date of offer. (Through
registered post or speed post or through electronic mode to all the existing share
-holders at least three days before the opening of the issue.)
D. Receive acceptance/ renunciations/rejection of rights from members to whom
offer has been sent & also from persons in whose favour right renounced.
E. Call a board meeting by issue of notice.
F. Approve allotment by passing of board resolution.
G. Issue of share certificates.
H. Authorize two directors and one more person for signature on share certificates.
H. Authorize two directors and one more person for signature on share certificates.
I. Issue share certificate.
J. Make allotment within 60 days of receiving of application money; otherwise it
will treat as deposits as per deposits rules.