K.E.S. SHROFF COLLEGE Page 1
SR. NO. TOPIC PAGE. NO.
1 History of IPO‘s 1
2 Financial Markets and the IPO 2
3 Features of an IPO 4
4 Growth of IPO‘s in India 5
5 Reasons of going public 7
6 Advantages of going public 7
7 Disadvantages of going public 8
8 Kinds of Issues 9
9 IPO Grading 13
10 Arranging an IPO 15
11 Procedure for sale for IPO 17
12 Pricing an IPO 19
13 Book Building Process 22
14 Guidelines on Book Building 25
15 Procedure for Bidding 27
16 Guidelines on IPO through the stock exchange 28
17 Role of Intermediaries 30
18 The Underwriting Process 36
19 Cost of Public Issue 38
20 SEBI and IPO 41
21 SEBI and IPO norms for listed and unlisted
22 SEBI Guidelines 45
23 Marketing of an IPO 51
24 General Procedure of marketing of an
25 Recommendations 53
26 Primary market reforms 1997-98 54
27 Conclusion 58
28 Webliography 59
K.E.S. SHROFF COLLEGE Page 2
The term Initial Public Offering (IPO) slipped into everyday speech during the tech bull market
of the late 1990‘s. Back then, it seemed you couldn't go a day without hearing about a dozen new
dotcom millionaires in Silicon Valley who were cashing in on their latest IPO. The phenomenon
spawned the term silicon ire, which described the dotcom entrepreneurs in their early 20s and
30s who suddenly found themselves living large on the proceeds from their internet companies'
INVESTORS are still wary of equities in the 1990s, to blame are the excesses in the primary
market in the 1990s. Of the thousands of IPOs (Initial Public Offerings) and offers for sale made
between 1994 and 1996, less than a hundred were from companies with track record. Even in this
shortlist, only a few managed to complete planned projects and deliver value to investors. The
rest just frittered the money away. The primary market of the mid-1990s was merely used as a
channel to move public funds into private hands. The Securities and Exchange Board of India
(SEBI) was late to wake up to the excesses, but when it did, it improved the disclosure
framework, tightened the prerequisites for an IPO, and towards the end of the decade, introduced
book-building. ( This route brought to market quality, wealth-creating IPOs such as Hughes
Software, i-flex solutions, Maruti, Bharti Tele-Ventures, TV Today and Divi's Labs, to name a
few. Yet the corporate sector has still not fully lived down the consequences of the excesses of
the mid- 1990s.)
K.E.S. SHROFF COLLEGE Page 3
FINANCIAL MARKETS AND THE IPO
The Financial Market is an amorphous set of players who come together to trade in financial
Financial Markets in any economic system that acts as a conduit between the organizations who
need funds and the investors who wish to invest their money into profitable opportunity. Thus, it
helps institutions and organizations that need money to have an access to it and on the other
hand, it helps the public in general to earn savings.
In modern economic systems Stock Exchanges are the epicenter of the financial activities in any
economy as this is the place where actual trading in securities takes place. Modern day Stock
Exchanges are most of the centers to trade in the existing financial assets. In this respect, they
have come a long way in the sense that these days, they act as a platform to launch new securities
as well as act as most authentic and real time indicator of the general economic sentiment.
The zone of activities in the capital market is dependent partly on the savings and investments in
the economy and partly on the performance of the industry and economy in general. In other
words capital market constitutes the channel through which the capital resources generated in the
society and made available for economic development of the nation.
As such, Financial Markets are functionally classified as having two parts,
1. The Primary Market
2. The Secondary Market
Primary Market comprises of the new securities which are offered to the public by new
companies. It is the mechanism through which the resources of the community are mobilized and
invested in various types of industrial securities. Whenever a new company wants to enter the
market it has to first enter the primary market.
Secondary Market comprises of further issues which are floated by the existing companies to
enhance their liquidity position. Once the new issues are floated and subscribed by the public
then these are traded in the secondary market. It provides easy liquidity, transferability and
continuous price formation of securities to enable investors to buy and sell them with ease. The
volume of activity in the Secondary Market is much higher compared to the Primary Market.
K.E.S. SHROFF COLLEGE Page 4
• An initial public offering (IPO) is the first sale of stock by a company to the public.
• An initial public offering (IPO) occurs when a company first sells common shares to
investors in the public. Generally, the company offers primary shares this way, although
sometimes secondary shares are also sold as IPOs.
• Broadly speaking, companies are either private or public. Going public means a
Company is switching from private ownership to public ownership.
GROWTH OF IPO’s IN INDIA
HISTORY OF PRIMARY MARKET
Indian capital market was initiated with establishing the Bombay stock exchange in the year
1875. At that time the main function of stock exchange was to provide place for trading in the
stocks. Now the exchange has completed more than 125 years. It has undergone several changes.
Initially the IPO was called ‗New Issue‘ and the issues in the Primary Market were controlled by
CCI (Controller of capital issue). It was working as a department of the MOF (Ministry of
Finance). There were very few issues every year. CCI was highly conservative and hardly
allowed any premium issues. Also, the regulatory framework was inadequate to control several
issues relating to Primary Market. Therefore, in the year 1992 it was abolished.
There was no awareness of new issues among the investing public. In fact, during 1950s-1960s,
the investment in stock market was considered to be gambling. It was prerogative to highly elite
business community to participate in new issues. More than 99% of Indian population never
participated in any issue during CCI regime.
Around this period, there was tremendous growth in capital market in U.S.A. and Western
Europe. In these markets they had established Security Exchange Commission (SEC). It is most
powerful autonomous body. The Government of India realized the importance of a similar body
in India for healthy and fast growth of Capital Market. Thus Security Exchange Board of India
(SEBI) was established with headquarters in Mumbai in 1992. SEBI is the most powerful
securities body in India.
K.E.S. SHROFF COLLEGE Page 5
POPULARISING THE NEW ISSUE
Late Shri, Dhirubhai Ambani can be considered as ‗Bhishmapita‘ of new issues, though
initially he also had to struggle to get subscribers but he always used innovative ideas for
marketing IPOs. It is said that investor never lost money in his pricing methods. There are
several incidences of the common man participated in his issues, got allotment, sold shares
and created fabulous wealth for themselves. As on 31-12-2003, Reliance Group has more than
3.5 million shareholders.
IPO dilutes the ownership stake and diffuses corporate control as it provides ownership to
investors in the form of equity shares.
K.E.S. SHROFF COLLEGE Page 6
REASONS FOR GOING PUBLIC
• To raise funds for financing capital expenditure needs like expansion diversification
• To finance increased working capital requirement.
• As an exit route for existing investors.
• For debt financing.
ADVANTAGES OF GOING PUBLIC
• Stock holder Diversification: As a company grows and becomes more valuable, its
founders often have most of its wealth tied up in the company. By selling some of their
stock in a public offer, the founders can diversify their holdings and thereby reduce
somewhat the risk of their personal portfolios.
• Easier to raise new capital: If a privately held company wants to raise capital a sale
of a new stock, it must either go to its existing shareholders or shop around for other
investors. This can often be a difficult and sometimes impossible process. By going
public it becomes easier to find new investors for the business.
• Enhances liquidity: The stock of a closely held firm is not liquid. If one of the
holders wants to sell some of his shares, it is hard to find potential buyers - especially
if the sum involved is large. Even if a buyer is located there is no establishes price at
which to complete the transaction. These problems are easily overcome in a publicly
Image: The reputation and visibility of the company increases. It helps to increase
company and personal prestige.
• Other advantages: Additional incentive for employees in the form of the companies
stocks. This also helps to attract potential employees. It commands better valuation of
the company better situated for making acquisitions.
K.E.S. SHROFF COLLEGE Page 7
DISADVANTAGES OF GOING PUBLIC
• Cost of Reporting: A publicly owned company must file quarterly reports with
the Securities and exchange Board of India. These reports can be costly especially
for small firms.
• Disclosure: Management may not like the idea or reporting operating data,
because such data will then be available to competitors.
• Inactive market low price: If a firm is very small and its shares are not traded
frequently, then its stock will not really be liquid and the market price may not be
truly representative of the stock‘s value.
• Control: Owning less than 50% of the shares could lead to a loss of control in the
• Other disadvantages: The profit earned by the company should be shared with
its investors in the form of dividend. An IPO is a costly affair. Around 15-20% of
the amount realized is spent on raising the same. A substantial amount of time and
effort has to be invested.
K.E.S. SHROFF COLLEGE Page 8
KINDS OF ISSUES
Primarily, issues can be classified as a Public, Rights or preferential issues (also known as
private placements). While public and rights issues involve a detailed procedure, private
placements or preferential issues are relatively simpler. The classification of issues is illustrated
(A) Public Issues
Public issues can be further classified into Initial Public offerings and Further Public
Offerings. In a public offering, the issuer makes an offer for new investors to enter its
shareholding family. The issuer company makes detailed disclosures as per the DIP
guidelines in its offer document and offers it for subscription. The significant features are
• Initial Public Offering (IPO): It is when an unlisted company makes either a fresh issue
of securities or an offer for sale of its existing securities or both for the first time to the
public. This paves way for listing and trading of the issuer‘s securities.
• Further public offering (FPO): It is when an already listed company makes either a
fresh issue of securities to the public or an offer for sale to the public, through an offer
document. An offer for sale in such scenario is allowed only if it is made to satisfy listing
or continuous listing obligations.
(B) Rights Issue (RI)
It is when a listed company which proposes to issue fresh securities to its existing
Shareholders as on a record date. The rights are normally offered in a particular ratio to
the number of securities held prior to the issue. This route is best suited for companies
who would like to raise capital without diluting stake of its existing shareholders unless
they do not intend to subscribe to their entitlements.
(C) Private placement
It is an issue of shares or of convertible securities by a company to a select group of
persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a
public issue. This is a faster way for a company to raise equity capital. A private
placement of shares or of convertible securities by a listed company is generally known
by name of preferential allotment. A listed company going for preferential allotment has
to comply with the requirements contained in Chapter XIII of SEBI (DIP) Guidelines
pertaining to preferential allotment in SEBI (DIP) guidelines include pricing, disclosures
in notice etc, in addition to the requirements specified in the Companies Act.
K.E.S. SHROFF COLLEGE Page 9
(D) Qualified Institutions Placement
It is a private placement of equity shares or securities convertible in to equity shares by a
listed company to Qualified Institutions Buyers only in terms of provisions of Chapter
XIIIA of SEBI (DIP) guidelines. The Chapter contains provisions relating to pricing,
disclosures, currency of instruments etc.
K.E.S. SHROFF COLLEGE Page 10
IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI, to the initial
public offering (IPO) of equity shares or any other security which may be converted into or
exchanged with equity shares at a later date. The grade represents a relative assessment of the
fundamentals of that issue in relation to the other listed equity securities in India. Such grading is
generally assigned on a five-point point scale with a higher score indicating stronger
fundamentals and vice versa as below.
IPO grade 1: Poor fundamentals
IPO grade 2: Below-average fundamentals
IPO grade 3: Average fundamentals
IPO grade 4: Above-average fundamentals
IPO grade 5: Strong fundamentals
IPO grading has been introduced as an endeavor to make additional information available for the
investors in order to facilitate their assessment of equity issues offered through an IPO.
- IPO grading can be done either before filing the draft offer documents with SEBI or
thereafter. However, the Prospectus/Red Herring Prospectus, as the case may be, must
contain the grade/s given to the IPO by all CRAs approached by the company for
grading such IPO.
- Further information regarding the grading process may be obtained from the Credit
- A company which has filed the draft offer document for its IPO with SEBI, on or after
May, 2007, is required to obtain a grade for the IPO from at least one CRA.
- IPO grade/s cannot be rejected. Irrespective of whether the issuer finds the grade given
by the rating agency acceptable or not, the grade has to be disclosed as required under
the DIP Guidelines.
- However the issuer has the option of opting for another grading by a different agency.
In such an event all grades obtained for the IPO will have to be disclosed in the offer
documents, advertisements etc.
- IPO grading is intended to run parallel to the filing of offer document with SEBI and
the consequent issuance of observations. Since issuance of observation by SEBI and
the grading process, function independently, IPO grading is not expected to delay the
- The IPO grading process is expected to take into account the prospects of the industry
in which the company operates, the competitive strengths of the company that would
allow it to address the risks inherent in the business (es) and capitalize on the
opportunities available, as well as the company‘s financial position.
K.E.S. SHROFF COLLEGE Page 11
- While the actual factors considered for grading may not be identical or limited to the
following, the areas listed below are generally looked into by the rating agencies,
while arriving at an IPO grade :
1. Business Prospects and Competitive Position
i. Industry Prospects
ii. Company Prospects
2. Financial Position
3. Management Quality
4. Corporate Governance Practices
5. Compliance and Litigation History
6. New Projects—Risks and Prospects
It may be noted that the above is only indicative of some of the factors considered in the IPO
grading process and may vary on a case to case basis.
- IPO grading is done without taking into account the price at which the security is
offered in the IPO. Since IPO grading does not consider the issue price, the investor
needs to make an independent judgment regarding the price at which to bid
for/subscribe to the shares offered through the IPO.
- All grades obtained for the IPO along with a description of the grades can be found in
the Prospectus. Abridged Prospectus, issue advertisement or any other place where
the issuer company is making advertisement for its issue. Further the Grading letter of
the Credit Rating Agency which contains the detailed rationale for assigning the
particular grade will be included among the Material Documents available for
- An IPO grade is NOT a suggestion or recommendation as to whether one should
subscribe to the IPO or not. IPO grade needs to be read together with the disclosures
made in the prospectus including the risk factors as well as the price at which the
shares are offered in the issue.
- The grades are allocated on a 5-point scale, the lowest being Grade 1 and highest
- IPO Grading is intended to provide the investor with an informed and objective
opinion expressed by a professional rating agency after analyzing factors like
business and financial prospects, management quality and corporate governance
practices etc. However, irrespective of the grade obtained by the issuer, the investor
needs to make his/her own independent decision regarding investing in any issue after
studying the contents of the prospectus including risk factors carefully.
K.E.S. SHROFF COLLEGE Page 12
- SEBI does not play any role in the assessment made by the grading agency. The
grading is intended to be an independent and unbiased opinion of that agency.
- The grading is intended to be an independent and unbiased opinion of a rating
agency. SEBI does not pass any judgment on the quality of the issuer company.
SEBI‘s observations on the IPO document are entirely independent of the IPO
grading process or the grades received by the company. IPO
K.E.S. SHROFF COLLEGE Page 13
ARRANGING AN IPO
1. Select Underwriter
- Provides procedural, financial advice
- Ultimately buys issue from company (at ―issue price‖)
- Ultimately sells it to public (at ―offer price‖)
2. Prepare Registration Statement – for approval of SEC (in accord with Securities Act of
1933). Formal summary that provides information on an issue of securities.
3. Prepare Prospectus – Streamlined version of registration statement, for consideration by
4. Set price
• Road show – Talks organized to introduce company to potential investors, before the
• Book building – ―Book Building‖ means a process undertaken by which a demand for
the securities proposed to be issued by a body corporate is elicited and built up and the
price for such securities is assessed for the determination of the quantum of such
securities to be issued by means of a notice, circular, advertisement, document or
information memoranda or offer document.
5. Selling the shares
• Best efforts offering: IPO method in which underwriter promises to sell as much as
possible, give best effort, not commit to selling all of issue.
• Firm commitment offering: Method in which underwriter buys the whole issue, bears
• Syndicate : Group of underwriters formed to sell a particular issue
• Spread: Difference between public ―offer price‖ and price paid by underwriter (―issue
price‖). Biggest part of underwriter compensation.
K.E.S. SHROFF COLLEGE Page 14
PROCEDURE OF SALE OF IPO’S
PROCEDURE OF SPALE OF IPO‘S
IPOs generally involve one or more investment banks as "underwriters." The company offering
its shares, called the "issuer," enters a contract with a lead underwriter to sell its shares to the
public. The underwriter then approaches investors with offers to sell these shares.
The sale (that is, the allocation and pricing) of shares in an IPO may take several forms.
Common methods include:
• Dutch auction
• Firm commitment
• Best efforts
• Bought deal
• Self Distribution of Stock
A large IPO is usually underwritten by a "syndicate" of investment banks led by one or more
major investment banks (lead underwriter). Upon selling the shares, the underwriters keep a
commission based on a percentage of the value of the shares sold. Usually, the lead underwriters,
i.e. the underwriters selling the largest proportions of the IPO, take the highest commissions—up
to 8% in some cases.
Multinational IPOs may have as many as three syndicates to deal with differing legal
requirements in both the issuer's domestic market and other regions. For example, an issuer
based in the E.U. may be represented by the main selling syndicate in its domestic market,
Europe, in addition to separate syndicates or selling groups for US/Canada and for
Asia. Usually, the lead underwriter in the main selling group is also the lead bank in the other
Because of the wide array of legal requirements, IPOs typically involve one or more law firms
with major practices in securities law, such as the Magic Circle firms of London and the white
shoe firms of New York City.
Usually, the offering will include the issuance of new shares, intended to raise new capital, as
well the secondary sale of existing shares. However, certain regulatory restrictions and
restrictions imposed by the lead underwriter are often placed on the sale of existing shares.
Public offerings are primarily sold to institutional investors, but some shares are also allocated to
the underwriters' retail investors. A broker selling shares of a public offering to his clients is paid
through a sales credit instead of a commission. The client pays no commission to purchase the
shares of a public offering; the purchase price simply includes the built-in sales credit.
The issuer usually allows the underwriters an option to increase the size of the offering by up to
15% under certain circumstance known as the green shoe or overallotment option.
K.E.S. SHROFF COLLEGE Page 15
PRICING OF IPO
Historically, IPOs both globally and in the US have been underpriced. The effect of
initial under pricing an IPO is to generate additional interest in the stock when it first
becomes publicly traded. This can lead to significant gains for investors who have been
allocated shares of the IPO at the offering price. However, under pricing an IPO results in
"money left on the table"—lost capital that could have been raised for the company had
the stock been offered at a higher price.
The danger of overpricing is also an important consideration. If a stock is offered to the
public at a higher price than the market will pay, the underwriters may have trouble
meeting their commitments to sell shares. Even if they sell all of the issued shares, if the
stock falls in value on the first day of trading, it may lose its marketability and hence
even more of its value.
Investment banks, therefore, take many factors into consideration when pricing an IPO,
and attempt to reach an offering price that is low enough to stimulate interest in the stock,
but high enough to raise an adequate amount of capital for the company. The process of
determining an optimal price usually involves the underwriters ("syndicate") arranging
share purchase commitments from lead institutional investors.
A company that is planning an IPO appoints lead managers to help it decide on an
appropriate price at which the shares should be issued. There are two ways in which the
price of an IPO can be determined:
• Either the company, with the help of its lead managers, fixes a price or
• The price is arrived at through the process of book building.
Note: Not all IPOs are eligible for delivery settlement through the DTC system, which would
then either require the physical delivery of the stock certificates to the clearing agent bank's
custodian, or a delivery versus payment ("DVP") arrangement with the selling group brokerage
firm. This information is not sufficient.
Who decides the price of an issue?
Indian primary market ushered in an era of free pricing in 1992. Following this, the Guidelines
have provided that the issuer in consultation with Merchant Banker shall decide the price. There
is no price formula stipulated by SEBI. SEBI does not play any role in price fixation. The
company and merchant banker are however required to give full disclosures of the parameters
which they had considered while deciding the issue price. There are two types of issues one
where company and LM fix a price (called fixed price) and other, where the company and LM
stipulate a floor price or a price band and leave it to market forces to determine the final price
(price discovery through book building process).
K.E.S. SHROFF COLLEGE Page 16
a. What are Fixed Price offers?
An issuer company is allowed to freely price the issue. The basis of issue price is disclosed in the
offer document where the issuer discloses in detail about the qualitative and quantitative factors
justifying the issue price. The Issuer company can mention a price band of 20% (cap in the price
band should not be more than 20% of the floor price) in the Draft offer documents filed with
SEBI and actual price can be determined at a later date before filing of the final offer document
b. What does “price discovery through book building process” mean?
―Book Building‖ means a process undertaken by which a demand for the securities proposed to
be issued by a body corporate is elicited and built up and the price for the securities is assessed
on the basis of the bids obtained for the quantum of securities offered for subscription by the
issuer. This method provides an opportunity to the market to discover price for securities.
K.E.S. SHROFF COLLEGE Page 17
BOOK BUILDING IN DETAIL
How does Book Building work?
Book building is a process of price discovery. Hence, the Red Herring prospectus does not
contain a price. Instead, the red herring prospectus contains either the floor price of the securities
offered through it or a price band along with the range within which the bids can move. The
applicants bid for the shares quoting the price and the quantity that they would like to bid at.
Only the retail investors have the option of bidding at ‗cut-off‘. After the bidding process is
complete, the ‗cut-off‘ price is arrived at on the lines of Dutch auction. The basis of Allotment
(Refer Q. 15.j) is then finalized and letters allotment/refund is undertaken. The final prospectus
with all the details including the final issue price and the issue size is filed with ROC, thus
completing the issue process.
What is a price band?
The red herring prospectus may contain either the floor price for the securities or a price band
within which the investors can bid. The spread between the floor and the cap of the price band
shall not be more than 20%. In other words, it means that the cap should not be more than 120%
of the floor price. The price band can have a revision and such a 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. 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 thirteen days.
Who decides the price band?
It may be understood that the regulatory mechanism does not play a role in setting the price for
issues. It is up to the company to decide on the price or the price band, in consultation with
Merchant Bankers. The basis of issue price is disclosed in the offer document. The issuer is
required to disclose in detail about the qualitative and quantitative factors justifying the issue
What is firm allotment?
A company making an issue to public can reserve some shares on ―allotment on firm basis‖ for
some categories as specified in DIP guidelines. Allotment on firm basis indicates that allotment
to the investor is on firm basis. DIP guidelines provide for maximum % of shares which can be
reserved on firm basis. The shares to be allotted on ―firm allotment category‖ can be issued at a
price different from the price at which the net offer to the public is made provided that the price
at which the security is being offered to the applicants in firm allotment category is higher than
the price at which securities are offered to public.
K.E.S. SHROFF COLLEGE Page 18
What is reservation on competitive basis?
Reservation on Competitive Basis is when allotment of shares is made in proportion to the shares
applied for by the concerned reserved categories. Reservation on competitive basis can be made
in a public issue to the Employees of the company, Shareholders of the promoting companies in
the case of a new company and shareholders of group companies in the case of an existing
company, Indian Mutual Funds, Foreign Institutional Investors (including non resident Indians
and overseas corporate bodies), Indian and Multilateral development Institutions and Scheduled
Preference while doing the allotment
There cannot be any discretion in the allotment process. Prior to the SEBI Circular on DIP
Guidelines dated September 19, 2005, the allotment to the Qualified Institutional Buyers (QIBs)
was on a discretionary basis. This however has been amended and all allottees are allotted shares
on a proportionate basis within their respective categories.
Who is eligible for reservation and how much?
In a book built issue allocation to Retail Individual Investors (RIIs), Non Institutional Investors
(NIIs) and Qualified Institutional Buyers (QIBs) is in the ratio of 35:15: 50 respectively. In case
the book built issues are made pursuant to the requirement of mandatory allocation of 60% to
QIBs in terms of Rule 19(2)(b) of SCRR, the respective figures are 30% for RIIs and 10% for
NIIs. This is a transitory provision pending harmonization of the QIB allocation in terms of the
aforesaid Rule with that specified in the guidelines.
How is the Retail Investor defined as?
‗Retail individual investor‘ means an investor who applies or bids for securities of or for a value
of not more than Rs.1, 00,000.
K.E.S. SHROFF COLLEGE Page 19
GUIDELINES ON BOOK BUILDING
An issuer company proposing to issue capital through book building
Shall comply with the following:
75% Book Building Process
In an issue of securities to the public through a prospectus the option for 75% book building shall
be available to the issuer company subject to the following:
The option of book-building shall be available to all body corporate which are eligible to make
an issue of capital to the public.
The book-building facility shall be available as an alternative the company to the extent of the
percentage of the issue which can be reserved for firm allotment.
The copy of the draft prospectus filed with the Board may be circulated by the Book Runner to
the institutional buyers who are eligible for firm allotment and to the intermediaries eligible to
act as underwriters inviting offers for subscribing to the securities.
The draft prospectus to be circulated shall indicate the price band within which the securities are
being offered for subscription.
The Book Runner on receipt of the offers shall maintain a record of the names and number of
securities ordered and the price at which the institutional buyer or underwriter is willing to
subscribe to securities under the placement portion.
The underwriters shall maintain a record of the orders received by him for subscribing to the
issue out of the placement portion. Securities as well as the price at which the underwriter shall
subscribe to the securities. Provided that the Book Runner shall have an option of requiring the
underwriters to the net offer to the public to pay in advance all monies required to be paid in
respect of their underwriting commitment.
• On determination of the issue price within two day, thereafter the prospectus shall be
filed with the Registrar of Company.
• The issuer company shall open two different accounts for collection of application
moneys, one f or the private placement portion and the other for the public subscription
The Book Runner and other intermediaries associated with the book building process shall
maintain records of the book building process.
The Board shall have the right to inspect such records.
Offer to Public through Book Building Process
An issuer company may, subject to the requirements make an issue of securities to the public
through a prospectus in the following manner
a. 100% of the net offer to the public through book building process, ors
b. 75% of the net offer to the public through book building process and 25% at the price
determined through book building.
K.E.S. SHROFF COLLEGE Page 20
PROCEDURE FOR BIDDING
The method and process of bidding shall be subject to the following:
Bid shall be open for at least three working days and not more than seven working days which
may be extended to a maximum of ten working days in case the price band is revised. Bidding
shall be permitted only if an electronically linked transparent facility is used.
Bidding Form: There shall be a standard bidding form to ensure uniformity in bidding
and accuracy. The bidding form shall contain information about the investor, the price
and the number of securities that the investor wishes to bid. The bidding form before
being issued to the bidder shall be serially numbered at the bidding centers and date and
Allocation / Allotment Procedure: In case an issuer company makes an issue of 100%
of the net offer to public through 100% book building process.
a) Not less than 35% of the net offer to the public shall be available for allocation to retail
b) Not less than 15% 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
c) Not more than 50% of the net offer to the public shall be available for allocation to
Qualified Institutional Buyers. Provided that 50% of net offer to public shall be
mandatorily allotted to the Qualified Institutional Buyers, in case the issuer company is
making a public issue.
Maintenance of Books and Records:
(i) A final book of demand showing the result of the allocation process shall be
maintained by the book runner/s.
(ii) The Book Runner/s and other intermediaries in the book building process associated
shall maintain records of the book building prices.
(iii) The Board shall have the right to inspect the records, books and documents relating to
the Book building process and such person shall extend full co-operation.
K.E.S. SHROFF COLLEGE Page 21
GUIDELINES ON INITIAL PUBLIC OFFERS THROUGH THE
ON-LINE SYSTEM (e-IPO)
A company proposing to issue capital to public through the on-line system of the stock exchange
for offer of securities shall comply with the requirements as contained in this Chapter in addition
to other requirements for public issues as given in these Guidelines, wherever applicable.
1. Agreement with the Stock exchange: The Company shall enter into an agreement
with the Stock Exchange(s) which have the requisite system of on-line offer of
securities. The agreement mentioned in the above clause shall specify inter-alia, the
rights, duties, responsibilities and obligations of the company and stock exchange (s)
inter. The agreement may also provide for a dispute resolution mechanism between
the company and the stock exchange.
2. Appointment of Brokers: The stock exchange, shall appoint brokers of the
exchange, who are registered with SEBI, for the purpose of accepting applications
and placing orders with the company. For the purposes of this Chapter, the brokers,
so appointed accepting applications and application monies, shall be considered as
‗collection centers‘. 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 fails to pay for shares
allocated as per the Guidelines, the broker shall pay such amount.
3. Appointment of Registrar to the Issue: The Company shall appoint a Registrar to
the Issue having electronic connectivity with the Stock Exchange/s through which
the securities are offered under the system.
4. Listing: The Company may 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
5. Responsibility of the Lead Manager: The Lead Manger shall be responsible for co-
ordination of all the activities amongst various intermediaries connected in the issue /
System. The names of brokers appointed for the issue along with the names of the
other intermediaries, namely, Lead managers to the issue and Registrars to the Issue
shall be disclosed in the prospectus and application form.
K.E.S. SHROFF COLLEGE Page 22
6. Mode of operation: The company shall, after filing the offer document with ROC
and before opening of the issue, make an issue advertisement in one English and one
Hindi daily with nationwide circulation, and one regional daily with wide circulation
at the place where the registered office of the issuer company is situated.
7. Shelf prospectus: Shelf prospectus shall apply to the issues of securities to be made
by public sector banks, scheduled commercial banks and public financial institutions.
The provisions of these guidelines relating to public issues shall apply in respect of
K.E.S. SHROFF COLLEGE Page 23
ROLE OF INTERMEDIARIES
a. Who are the intermediaries in an issue?
Merchant Bankers to the issue or Book Running Lead Managers (BRLM), syndicate members,
Registrars to the issue, Bankers to the issue, Auditors of the company, Underwriters to the issue,
Solicitors, etc. are the intermediaries to an issue. The issuer discloses the addresses,
telephone/fax numbers and email addresses of these intermediaries. In addition to this, the issuer
also discloses the details of the compliance officer appointed by the company for the purpose of
b. Who is eligible to be a BRLM?
A Merchant banker possessing a valid SEBI registration in accordance with the SEBI (Merchant
Bankers) Regulations, 1992 is eligible to act as a Book Running Lead Manager to an issue.
c. What is the role of a Lead Manager? (Pre and post issue)
In the pre-issue process, the Lead Manager (LM) takes up the due diligence of company‘s
operations/ management/ business plans/ legal etc. Other activities of the LM include drafting
and design of Offer documents, Prospectus, statutory advertisements and memorandum
containing salient features of the Prospectus. The BRLMs shall ensure compliance with
stipulated requirements and completion of prescribed formalities with the Stock Exchanges,
ROC and SEBI including finalization of Prospectus and ROC filing. Appointment of other
intermediaries viz., Registrar(s), Printers, Advertising Agency and Bankers to the Offer is also
included in the pre-issue processes. The LM also draws up the various marketing strategies for
the issue. The post issue activities including management of escrow accounts, coordinate non-
institutional allocation, intimation of allocation and dispatch of refunds to bidders etc are
performed by the LM. The post Offer activities for the Offer will involve essential follow-up
steps, which include the finalization of trading and dealing of instruments and dispatch of
certificates and demat of delivery of shares, with the various agencies connected with the work
such as the Registrar(s) to the Offer and Bankers to the Offer and the bank handling refund
business. The merchant banker shall be responsible for ensuring that these agencies fulfill their
functions and enable it to discharge this responsibility through suitable agreements with the
A merchant banker is required to do the necessary due diligence in case of QIP mechanism.
d. What is the role of a registrar?
The Registrar finalizes the list of eligible allottees after deleting the invalid applications and
ensures that the corporate action for crediting of shares to the demat accounts of the applicants is
done and the dispatch of refund orders to those applicable are sent. The Lead manager
coordinates with the Registrar to ensure follow up so that that the flow of applications from
collecting bank branches, processing of the applications and other matters till the basis of
allotment is finalized, dispatch security certificates and refund orders completed and securities
K.E.S. SHROFF COLLEGE Page 24
e. What is the role of bankers to the issue?
Bankers to the issue, as the name suggests, carries out all the activities of ensuring that the funds
are collected and transferred to the Escrow accounts. The Lead Merchant Banker shall ensure
that Bankers to the Issue are appointed in all the mandatory collection centers as specified in DIP
Guidelines. The LM also ensures follow-up with bankers to the issue to get quick estimates of
collection and advising the issuer about closure of the issue, based on the correct figures.
f. Question on Due diligence
The Lead Managers state that they have examined various documents including those relating to
litigation like commercial disputes, patent disputes, disputes with collaborators etc. and other
materials in connection with the finalization of the offer document pertaining to the said issue;
and on the basis of such examination and the discussions with the Company, its Directors and
other officers, other agencies, independent verification of the statements concerning the objects
of the issue, projected profitability, price justification, etc., they state that they have sensured that
they are in compliance with SEBI, the Government and any other competent authority in this
g. What is the role of merchant banker?
Eligibility criteria-SEBI issues an authorization letter to the finance companies, which are
eligible to work as merchant bankers. The eligibility criteria depend on network and
infrastructure of the company. The company should not be engaged in activities that are banned
for merchant bankers by SEBI. SEBI issues authorization letter valid for 3 years and the
company has to pay necessary fees. Such merchant banker can be appointed as lead manager for
Functions-Merchant banker can work as lead manager co lead manager investment banker
Responsibility-lead managers are fully responsible for the content and correctness of the
prospectus. They must ensure the commencement to the completion of the IPO. Certain
guidelines are laid down in section 30 of the SEBI act 1992 on the maximum limits of the
intermediaries associated with the issue.
Size of the Issue No of Lead Managers
50 cr. 2
50-100 cr. 3
100-200 cr. 4
200-400 cr. 5
Above 400 cr. 1 or more as agreed by the board
The number of co managers should not exceed the number of lead managers. There can be only 1
adviser to the issue. There is no limit on the number of underwriters.
K.E.S. SHROFF COLLEGE Page 25
Informational Asymmetry-in general merchant bankers know the market better than the issuing
company. They would exploit the superior knowledge to under price issues. This makes their job
easier and helps them earn the goodwill of investors.
h. What is the role of broker?
All the recognized stock exchange members are called brokers and thus any member of a
recognized stock exchange can become a broker to the issue. The brokers can work as broker and
underwriter or both. In India usually a broker not only does his normal broking business buying
and selling securities for brokerage but also works as an underwriter. They can give underwriting
commitment in accordance with their net worth. A broker offer marketing support, underwriting
support, disseminates information to investors about the issue and distributes issues stationary at
retail investor level. The brokers are governed by rules of SEBI and the respective stock
exchange. The brokers are key to the success of the issue. The brokers appoint sub brokers who
are in direct contact with the investors.
K.E.S. SHROFF COLLEGE Page 26
THE UNDERWRITING PROCESS
Getting a piece of a hot IPO is very difficult, if not impossible. To understand why, we need to
know how an IPO is done, a process known as underwriting.
When a company wants to go public, the first thing it does is hire an investment bank.
A company could theoretically sell its shares on its own, but realistically, an investment
bank is required - it's just the way Wall Street works. Underwriting is the process of
raising money by either debt or equity (in this case we are referring to equity). We can
think of underwriters as middlemen between companies and the investing public. The
biggest underwriters are Goldman Sachs, Merrill Lynch, Credit Suisse First Boston,
Lehman Brothers and Morgan Stanley.
The company and the investment bank will first meet to negotiate the deal. Items usually
discussed include the amount of money a company will raise, the type of securities to be
issued and all the details in the underwriting agreement. The deal can be structured in a
variety of ways. For example, in a firm commitment, the underwriter guarantees that a
certain amount will be raised by buying the entire offer and then reselling to the public.
In a best efforts agreement, however, the underwriter sells securities for the company but
doesn't guarantee the amount raised. Also, investment banks are hesitant to shoulder all
the risk of an offering. Instead, they form a syndicate of underwriters.One underwriter
leads the syndicate and the others sell a part of the issue.
Once all sides agree to a deal, the investment bank puts together a registration statement
to be filed with the SEC. This document contains information about the offering as well
as company info such as financial statements, management background, any legal
problems, where the money is to be used and insider holdings.
The SEC then requires a cooling off period, in which they investigate and make sure all
material information has been disclosed.
Once the SEC approves the offering, a date (the effective date) is set when the stock will
be offered to the public. During the cooling off period the underwriter puts together what
is known as the red herring. This is an initial prospectus containing all the information
about the company except for the offer price and the effective date, which aren't known
at that time. With the red herring in hand, the underwriter and company attempt to hype
and build up interest for the issue. They go on a road show - also known as the "dog and
pony show" - where the big institutional investors are courted. As the effective date
approaches, the underwriter and company sit down and decide on the price. This isn't an
easy decision: it depends on the company, the success of the road show and, most
importantly, current market conditions. Of course, it's in both parties' interest to get as
much as possible. Finally, the securities are sold on the stock market and the money is
collected from investors.
K.E.S. SHROFF COLLEGE Page 27
Is the process followed in India different from abroad?
Unlike international markets, India has a large number of retail investors who actively participate
in IPO‘s. Internationally, the most active investors are the Mutual Funds and Other Institutional
Investors. So the entire issue is book built. But in India, 25 per cent of the issue has to be offered
to the general public. Here there are two options to the company. According to the first option,
25 per cent of the issue has to be sold at a fixed price and 75 per cent is through Book Building.
The other option is to split the 25 per cent on offer to the public (small investors) into a fixed
price portion of 10 per cent and a reservation in the book built portion amounting to 15 per cent
of the issue size. The rest of the book built portion is open to any investor.
K.E.S. SHROFF COLLEGE Page 28
COST OF PUBLIC ISSUE
The cost of public issue is normally between 8 and 12 percent depending on the size of
the issue and on the level of marketing efforts. The important expenses incurred for a
public issue are as follows:
• Underwriting expenses: The underwriting commission is fixed at 2.5 % of the nominal
value (including premium, if any) of the equity capital being issued to public.
• Brokerage: Brokerages applicable to all types of public issues of industrial securities
are fixed at 1.5% whether the issue is underwritten or not. The managing brokers (if any)
can be paid a maximum remuneration of 0.5% of the nominal value of the capital being
issued to public.
• Fees to the Managers to the Issues: The aggregate amount payable as fees to the
managers to the issue was previously subject to certain limits. Presently, however, there
is no restriction on the fee payable to the managers of the issue.
• Fees for Regist
Rars to the Issue: The compensation to the registrars, typically based on a piece rate
system, depends on the number of applications received, number of allotters, and the
number of unsuccessful applicants.
• Printing Expenses: These relate to the printing of the prospectus, application forms,
brouchers, share certificate, allotment/refund letters, envelopes, etc.
• Postage Expenses: These pertain to the mailing of application forms, brochures, and
prospectus to investors by ordinary post and the mailing of the allotment/refund letters
and share certificates by register posts.
• Advertising and Publicity Expenses: These are incurred primarily towards statutory
announcements, other advertisements, press conferences, and investor‘s conferences.
• Listing Fees: This is the concerned fee payable to concerned stock exchange where the
securities are listed. It consists of two components: initial listing fees and annual listing
• Stamp Duty: This is the duty payable on share certificates issued by the company. As
this is the state subject, it tends to vary from state to state.
K.E.S. SHROFF COLLEGE Page 29
SEBI AND IPO
INTRODUCTION ON REGULARITY FRAMEWORK OF IPOS
(WITH SPECIAL REFERENCE TO SEBI GUIDELINES )
This chapter presents the regularity framework governing the issuance of IPOs through Public
offer , Book building and Online route . The market design for primary market has been provided
in the provisions of :
(a) The SEBI Act ,1992 , which establishes SEBI to protect investors and develop and
regulate securities market ;
(b) The Companies Act , 1956 , which sets out the code of conduct for the corporate
sector in relation to issue , allotment and transfer of securities , and disclosures to be
made in public issue ;
(c) The Securities Contracts (Regulation) Act , 1956 , which provides for regulation of
transactions in securities through control over stock exchanges ; and
(d) The Depositories Act , 1996 , which provides for electronic maintenance and
ownership of de-mat securities .
SEBI AND IPO ELIGIBILITY NORMS FOR UNLISTED COMPANIES
It should have a pre issue network of a minimum amount of Rs1 crore in 3 out of the
preceding 5 financial years. In addition the company should compulsorily need the
minimum network level during the two immediately preceding years.
It should have a track record distributable profits as given in section 205 of companies
act 1956 for at least 3 years in the preceding 5 years period.
The issue size (i.e. Offer + Form allotment + Promoters contribution through the offer
document) should not exceed an amount equal to 5 times its pre issue worth.
FOR LISTED COMPANIES
It should have a track record distributable profits as given in section 205 of companies
act 1956 for at least 3 years in the preceding 5 years period.
It should have a pre issue network of a minimum amount of Rs1 crore in 3 out of the
preceding 5 financial years with the minimum net worth to be met during the
immediately preceding 2 years.
K.E.S. SHROFF COLLEGE Page 30
SEBI has come up with Investor Protection and Disclosure Norms for raising funds
through IPO. These rules are amended from time to time to meet with the requirement of
changing market conditions.
• Risk Factor-The Company/Merchant Banker must specify the major risk factor in the
front page of the offer document.
• General Risk-Attention of the investor must be drawn on these risk factors.
• Issuers Responsibility-It is the absolute responsibility of the issuer company about the
true and correct information in the prospectus. Merchant Banker is also responsible for
giving true and correct information regarding all the documents such as material
contracts, capital structure, appointment of intermediaries and other matters.
• Listing Arrangement- It must clearly state that once the issue is subscribed where the
shares will be listed for trading.
• Disclosure Clause- It is compulsory to mention this clause to distinctly inform the
investors that though the prospectus is submitted and approved by SEBI it is not
responsible for the financial soundness of the IPO.
• Merchant Bankers Responsibility-Disclaimer Clause the Lead Manager has to certify that
disclosures made in the prospectus are generally adequate and are in conformity with the SEBI
• Capital Structure- the Company must give complete information about the Authorized
capital, Subscribed Capital with top ten shareholders holding pattern, Promoters interest
and their subscription pattern etc. Also about the reservation in the present issue for
Promoters, FII`s, Collaborators, NRI`s etc. Then the net public offer must be stated very
• Auditors Report- The Auditors have to clearly mention about the past performances,
Cost of Project, Means of Finance, Receipt of Funds and its usage prior to the IPO.
Auditor must also give the tax-benefit note for the company and investors.
K.E.S. SHROFF COLLEGE Page 31
INVESTOR PROTECTION NORMS.
• Pricing of Issue-The pricing of all the allocations for the present issue must follow the
bid system. The reservation must be disclosed for different categories of investors and
their pricing must be specified clearly.
• Minimum Subscription- If the company does not receive minimum subscription of
90% of subscription in each category of offer and if the issue is not underwritten or the
underwriters are unable to meet their obligation, then fund so collected must be refunded
back to all applicants.
Basis of Allotment- In case of full subscription of the issue, the allotment must be made with the
full consultation of the concerned stock exchange and the company must be impartial in allotting
• Allotment/Refund- Once the allotment is finalized, the refund of the excess money must
be made within the specified time limits otherwise the company must pay interest on
delayed refund orders.
• Dematerialization of Shares-As per the provisions of the Depositories Act, 1996, And
SEBI Rules, now all IPO will be in Demat form only.
• Listing of Shares- It is mandatory on the part of the promoters that once the IPO is fully
subscribed, and then the underlying shares must be listed on the stock exchange. This
provides market and exit routes to the investors.
K.E.S. SHROFF COLLEGE Page 32
IPO of Small Companies
Public issue of less than five crores has to be through OTCEI (Over the Counter
Exchange of India) and separate guidelines apply for floating and listing of these issues.
Public Offer of Small Unlisted Companies (Post-Issue Paid-Up Capital up to Rs.5 crores)
Public issues of small ventures which are in operation for not more than two years and
whose paid up capital after the issue is greater than 3 crores but less than 5 crores the
following guidelines apply.
1. Securities can be listed where listing of securities is screen based.
2. If the paid up capital is less than 3 crores then they can be listed on the Over the
Counter Exchange of India (OTCEI)
3. Appointment of market makers mandatory on all the stock exchanges where securities
are proposed to be listed.
Size of the Public Issue
Issue of shares to general public cannot be less than 25%of the total issue. In case of IT,
Media and Telecommunication sectors, this stipulation is reduced subject to the
1. Offer to the public is not less than 10% of the securities issued.
2. A minimum number of 20 lakh securities is offered to the public
3. Size of the net offer to the public is not less than Rs.30 crores.
1. Promoters should bring in their contribution including premium fully before the issue
2. Minimum promoter‘s contribution is 20-25% of the public issue.
3. Minimum lock in period for promoter‘s contribution is five years.
4. Minimum lock in period for firm allotment is three years.
K.E.S. SHROFF COLLEGE Page 33
Collection Centers for Receiving Applications
1. There should be at least 30 mandatory collection centers, which should include
invariably the places where stock exchanges have been established.
2. For issues not exceeding Rs.10 crores the collection centers shall be situated at:-
• The 4 metropolitan centers viz. Mumbai Delhi Calcutta Chennai
• All such centers where stock exchanges are located in the region in which the registered
office of the company is situated.
Regarding allotments of shares
1. Net Offer the general public has to be at least 25% of the total issue size for listing on a stock
2. It is mandatory for a company to get its shares listed at the regional stock exchange where the
registered office of the issuer is located.
3. In an issue of more than 25 crores the issuer is allowed to place the whole issue by book-
4. Minimum of 50% of the Net Offer to the public has to be reserved for the investors applying
for less than 1000 shares.
5. There should be at least 5 investors for every 1 lakh equity offered.
6. Quoting of PAN or GIR No. in application for the allotment of securities is compulsory where
monetary value of investment is Rs.50000/- or above.
7. Indian development financial institutions and Mutual Fund can be allotted securities up to
75% of the issue amount.
8. A venture capital fund shall not be entitled to get its securities listed on any stock exchange till
the expiry of 3 years from the date of issuance of securities.
9. Allotment to categories of FIIs and NRIs/OCBs is upto maximum of 24%, which can be
further extended to 30% by an application to the RBI-supported by a resolution passed in the
Timeframes for Issue and Post-Issue Formalities
1. The minimum period for which the public issue is to be kept open is 3 working days and the
maximum for which it can be kept open is 10 working days. The minimum period for right issue
is 15 working days and the maximum is 60 working days.
2. A public issue is affected if the issue is able to procure 90% of the total issue size within 60
days from the date of the earliest closure of the public issue.
K.E.S. SHROFF COLLEGE Page 34
3. In case of oversubscription the company may have he right to retain the excess application
money and allot shares more than the proposed issue, which is referred to as ―green-shoe‖ option
4. Allotment has to be made within 30 days of the closure of the Public issue and 42 days in case
of Rights issue
5. All the listing formalities of a Public Issue have to be completed within 70 days from the date
of closure of the subscription list.
Dispatch of Refund Orders.
1. Refund orders have to be dispatched within 30 days of the closure of the issue.
2. Refunds of excess application money i.e. non-allotted shares have to be made within 30 days
of the closure of the issue.
1. Underwriting is not mandatory but 90% subscription is mandatory for each issue of capital to
public unless it is disinvestment where it is not applicable.
2. If the issue is undersubscribed then the collected amount should be returned back
3. If the issue size is more than Rs500 crores, voluntary disclosures should be made regarding the
deployment of funds and an adequate monitoring mechanism put in place to ensure compliance.
4. There should not be any outstanding warrants for financial instruments of any other nature, at
the time of the IPO.
5. In the event of the initial public offer being at a premium and if the rights under warrants or
other instruments have been exercised within 12 months prior to such offer, the resultant shares
will be not taken into account for reckoning the minimum promoters contribution further, the
same will also be subject to lock-in.
6. Code of advertisement as specified by SEBI should be adhered to
7. Draft prospectus submitted to SEBI should also be submitted simultaneously to all stock
exchanges where it is proposed to be listed.
Restrictions on Allotments
1. Firm allotments to mutual funds, FII and employees are not subject to any lock-in period.
2. Within 12 months of the public issue no bonus issue should be made.
3. Maximum percentage of shares, which can be distributes to employees cannot be more than
5% and maximum shares to be allotted to each employee cannot be more than 200.
K.E.S. SHROFF COLLEGE Page 35
MARKETING OF IPO
The role of marketing, and particularly promotion, in the pricing and trading of securities
is fairly limited.
Preliminary Requirements: The Company has to complete all legal requirements,
appoint all intermediaries and once they get SEBI card (approval), the process of
marketing of IPO can commence. Timing of IPO: This the most important factor for the
success of IPO. If, secondary market is depressed, if there is political unrest, if serious
international problems are prevailing then it is considered to be negative factors for
timing of IPO‘s. If these factors are favorable then the Company must find out about the
timing of other prestigious IPO‘s. Normally in good times many companies are crowding
at the same time .This year more than 29 companies are coming with IPO‘s. Around
Rs.25, 000-30,000crore of capital is going to be raise this year.
Marketing initial public offers (IPO’s) through the secondary market
SEBI approved a proposal of marketing IPO‘s through the secondary market. It proposes
to use the existing infrastructure of stock exchanges (terminals, brokers and systems),
presently being used for secondary market transactions, for marketing IPO‘s with a view
to get rid of certain inherent disadvantages faced by issuers and investors like tremendous
load on banking and postal system and huge costs in terms of money and time associated
with the issue process. This system would confirm to all extant statutory requirements.
The investor would approach broker for placing an order for buying shares of primary
The registrar in consultation with merchant banker and the regional stock exchange of the
issuer will finalize the basis of allotment and intimate the same to the exchanges who in
turn shall inform the brokers.
The brokers will advise the successful allottees to submit the application form and the
amount payable towards the shares. The broker will deposit the amount received in a
separate escrow account for the primary market issue.
The clearing house of the exchange will debit the primary issue account of the broker and
credit the issuer‘s account. Subsequently, the certificates would be delivered to the
investors or the depository account of the investor would be credited.
The securities can be listed on the stock exchange from the 15th day from the closure of
the issue as against 45-60days at present. As investors will have to part with their funds
only on successful allotment, their funds are not unnecessarily blocked. This would also
ensure that refunds are done away with. The system seeks to reduce the time taken
presently for completion of the issue process, as well as the cost of the issue.
K.E.S. SHROFF COLLEGE Page 36
GENERAL PROCEDURE FOR MARKETING OF IPO
(i) PRESS CONFERENCE: Promoters and Lead Managers call for press conference in
each major investment center. Reporters are briefed about the issue. They carry it as
news-item in their papers.
(ii) INVESTORS CONFERENCE: The prospective investors are called by invitation.
The Promoters and Lead Managers give presentations. They reply to the questions of
the investors to boost their confidence.
(iii) ROAD-SHOW: This is like the investors conference but normally is done abroad for
marketing ADR/GDR issues. It is an expensive process and requires a lot of legal
compliances. The company has to observe the rules of the concerned country.
However, road shows are becoming more and more popular in India.
(iv) NEWSPAPER ADVERTISEMENT: The Company releases statutory
advertisements in leading newspapers. The company has to publish abridges
prospectus in leading newspapers. It is the responsibility of the promoters to ensure
that the issuing company and their group companies should not release any
commercial advertisement, which may influence the investor‘s decision for
(v) PRINTING STATIONERY-PROSPECTUS: The company has to print approved
prospectus and provide enough copies to all intermediaries. If any investor asks for a
copy of prospectus it must be provided to him without any fees. Sufficient quantities
should be maintained at the registered office of the company and with the Lead
(vi) PRINTING APPLICATION FORMS: Sufficient number of application forms must
be printed much before the opening of the issue. Each form must contain abridged
prospectus in SEBI approved format. Sometimes different colored forms are issued to
FDI, FII, NRI and general public. It is compulsory to provide stationery to all
underwriters and brokers. They will arrange distribution to their sub-brokers and
other clients. Sometimes, company makes direct dispatch of forms to prospective
K.E.S. SHROFF COLLEGE Page 37
Since the primary market has continued to remain dormant, SEBI considered on priority basis
the recommendations made by the ―Informal Group on Primary Market‖, and accepted most of
the recommendations, including the following, which were accepted for immediate
(i) Primary issues to be compulsorily made through the depository mode after a specified date.
(ii) 100 per cent book building in respect of issues of Rs. 25 crore and above.
(iii) Reduction in the minimum number of mandatory collection centers in respect of issues
above Rs. 10 crore to 4 metropolitan cities plus the place having the regional stock exchange.
In order to facilitate flow of funds to the infrastructure sector, the SEBI Board decided to
grant specific relaxations to public issues by infrastructure companies. These relaxations
would be applicable to infrastructure companies as defined under Section 10 (23G) of the
Income Tax Act, 1961 subject to the condition that their projects are appraised by any
Development Financial Institution (DFI) or Infrastructure Development Finance
Company (IDFC) or Infrastructure Leasing and Financial Services (IL&FS). Further, the
projects must also have a participation of at least 5 per cent of the project cost in debt
and/or equity by the appraising institution. Subject to these conditions, the infrastructure
company can avail of specified relaxations/exemptions from the existing requirements as
per SEBI's Disclosure and Investor Protection Guidelines.
K.E.S. SHROFF COLLEGE Page 38
PRIMARY MARKET REFORMS 1997-98
Entry barrier for unlisted companies modified as dividend payment in immediately
preceding 3 years.
A listed company required to meet the entry norm only if the post-issue net worth
becomes more than five times the pre-issue net worth.
Companies required making their partly paid-up shares fully paid up or forfeiting the
same, before making a public/rights issue.
Unlisted company allowed to freely price its securities provided it has shown net profit in
the immediately preceding 3 years subject to its fulfilling the existing disclosure
The Promoters‘ contribution for public issues made uniform at 20% irrespective of the
Written consent from share holders in regard to lock-in made compulsory for securities to
be offered for promoter‘s contribution.
Appointment of Registrar to an issue for rights issues made mandatory.
A provision made regarding disclosure of the share holding of the promoters whose
names figure in the paragraph on ―Promoters and their background‖ in the offer
The SEBI (Registrars to an Issue and Share Transfer Agents) Rules and Regulations 1993
have been amended to provide for an arm‘s length relationship between the Issuer and the
Registrar to the Issue. It has now been stipulated that no Registrar to an Issue can act as
such for any issue of securities made by anybody corporate, if the Registrar to the issue
and the Issuer Company are associates. With a view to facilitating rising of funds by
infrastructure projects, SEBI has allowed debt instruments to be listed on the Stock
Exchanges without prior listing of equity. Corporates with infrastructure projects and
Municipal Corporations to be exempted from the requirements of Rule 19(2b) of
Securities (Contract) Regulation Rules to facilitate public offer and listing of its pure debt
instruments as well as debt instruments fully or partly convertible into equity without the
requirement of prior listing of equity but subject to conditions like investment grade
Only body Corporates to be allowed to function as Merchant Bankers.
K.E.S. SHROFF COLLEGE Page 39
Multiple categories of merchant bankers to be abolished and there shall be only one entity
viz., Merchant Banker. Presently, the Merchant Banker allowed to perform underwriting
activity but required to seek separate registration to function as a Portfolio Manager
under the SEBI (Portfolio Manager) Rules and Regulations, 1993.
Merchant Bankers to be prohibited from carrying on fund based activities other than
those related exclusively to the capital market; the activities undertaken by NBFCs such
as accepting deposits, leasing, bill discounting, etc. not to be allowed to be undertaken by
a merchant banker; the existing NBFCs performing merchant banking activities to be
given suitable time to restructure their activities.
K.E.S. SHROFF COLLEGE Page 40
Nevertheless, there is no denying the enormous interest retail and other investors have
shown in the primary market, perhaps even more so than in the secondary one. This
interest has been sustained despite the lack of bounce in the secondary market and is not
confined to the big issues; even smaller issues have sailed through with large
If investor are gung-ho about IPO‘s, there are several reasons for it. Unlike earlier IPO
booms, this one is being driven by a much better quality of offering. Missing in action so
far are the fly-by-night operators of the 1990s who made public offers only to collect the
money and vanish.
Next, most recent IPO‘s have resulted in gains on listing for the investor. The listing
gains have probably initiated a kind of virtuous cycle, tempting investors who have
already made money to return to the primary market.
Companies have been quick to take advantage of the investor interest in IPO‘s, and
banks, broking houses, retail outfits, media houses and government companies are lining
up issues. Even mutual funds have got into the act, and are tailoring their offerings to
match current market fancies—mid-cap funds, dividend yield funds, and what-have-you.
If the government wants to get some money into its kitty through disinvestment
programmes, this is the time to make a dash for it.
K.E.S. SHROFF COLLEGE Page 41