The money one earns is partly spent and the rest saved for meeting future expenses. Instead of
keeping the saving idle one may like to use saving in order to get return on it in the future. This is
Investing is not about putting all your money into the "Next big thing," hoping to make a killing.
Investing isn't gambling or speculation; it's about taking reasonable risks to reap steady rewards.
Why should you invest?
Simply put, you should invest so that your money grows and shields you against rising inflation.
The rate of return on investments should be greater than the rate of inflation, leaving you with a
nice surplus over a period of time. Whether your money is invested in stocks, bonds, mutual
funds or certificates of deposit (CD), the end result is to create wealth for retirement, marriage,
college fees, vacations, better standard of living or to just pass on the money to the next
generation or maybe have some fun in your life and do things you had always dreamed of doing
with a little extra cash in your pocket. Also, it's exciting to review your investment returns and to
see how they are accumulating at a faster rate than your salary.
When to Invest?
The sooner one start investing the better. By investing into the market right away you allow your
investments more time to grow, whereby the concept of compounding interest swells your
income by accumulating your earnings and dividends. Considering the unpredictability of the
markets, research and history indicates these three golden rules for all investors
1. Invest early
2. Invest regularly
3. Invest for long term and not short term
Types of Investment
1) Financial Instruments
Equities are a type of security that represents the ownership in a company. Equities are traded
(bought and sold) in stock markets. Alternatively, they can be purchased via the Initial Public
Offering (IPO) route, i.e. directly from the company. Investing in equities is a good long-term
investment option as the returns on equities over a long time horizon are generally higher than
most other investment avenues. However, along with the possibility of greater returns comes
Mutual funds are financial intermidiaries which collect the savings of investors and invest them
in a large and well diversified portfolio of securities such as money market instruments, corporate
and government bonds and equity shares of joint stock companies. Mutual funds are conceived as
institution for providing small investors with avenues of investment in capital market.since small
investors generally do not have adequte time knowledge experience and resources for directly
accessing the capital market, they have to rely on an intermidiary which undertakes informed
investment decisions and provides the consequential benefits of professional expertise. A mutual
fund allows a group of people to pool their money together and have it professionally managed,
in keeping with a predetermined investment objective. This investment avenue is popular because
of its cost-efficiency, risk-diversification, professional management and sound regulation. You
can invest as little as Rs. 1,000 per month in a mutual fund. There are various mutual funds to
choose from and the risk and return possibilities vary accordingly.
Debt instruments represents a contract whereby one party lends money to another on
predetermined terms with regards to rate and periodicity of interest, repayment of principal
amount by the borrower to the lender.
Bonds: Bonds are fixed income instruments which are issued for the purpose of raising
capital. The Central or State government and public sector organizations sell bonds. The bond
is generally a promise to repay the principal amount with a fixed rate of interest on a
specified date, called the maturity period.
Debentures: The term ‘debenture’is used for instruments issued by private corporate sector.
Both private entities, such as companies, financial institutions, and the central or state
government and other government institutions use this instrument as a means of garnering
funds. Bonds issued by the Government carry the lowest level of risk but could deliver fair
Investing in bank or post-office deposits is a very common way of securing surplus funds. These
instruments are at the low end of the risk-return spectrum.
These are relatively safe and highly liquid investment options. Treasury bills and money market
funds are cash equivalents.
3) Non-financial Instruments
With the ever-increasing cost of land, real estate has come up as a profitable investment
The 'yellow metal' is a preferred investment option, particularly when markets are volatile.
Today, beyond physical gold, a number of products which derive their value from the price of
gold are available for investment. These include gold futures and gold exchange traded funds.
Other than gold other commodities are also traded. Some of them are silver, crude oil,
agricultural commodities and other base metals
In economics, typically, the term market means the aggregate of possible buyers and sellers of a
thing and the transactions between them. Financial markets are an important component of a
financial system in an economy. Financial system aims at establishing regular, smooth, efficient
and cost effective link between savers and investors so it helps encouraging both saving and
investment. Financial systems facilitate expansion of financial market over space and time and
promote efficient allocation of financial resources for socially desirable and economically
The term "market" is sometimes used for what are more strictly exchanges,
organizations that facilitate the trade in financial securities, e.g., a stock exchange or commodity
exchange. Much trading of stocks takes place on an exchange; still, corporate actions (merger,
spin-off) are outside an exchange, while any two companies or people, for whatever reason, may
agree to sell stock from the one to the other without using an exchange.
Types of Financial Market:-
The financial markets can be divided into three parts
FINANCIAL MARKETFINANCIAL MARKET
MONEY MARKETMONEY MARKET FOREX MARKETFOREX MARKET
CAPITAL MARKETCAPITAL MARKET
Money market is the market for short term financial assets which are near substitutes for money.
Money markt instruments are liquid and can be turned over quickly at low transaction cost and
without loss.The money market is a wholesale market. The volumes are very large and generally
transactions are settled on daily bases. Trading in the money market is conducted over the
telephone followed by written confirmation from both the borrowers and lenders.
There are large numbers of participants in the money market : commercial banks, mutual
funds, investment institutions, financial instutions and finally RBI.
Money market performs the crucial role of providing an equilibrating mechanism to
evenout short term liquidity and in the process, facilitating the conduct of monetary policy. Short
term surpluses and deficits are evenedout. The money market is the major mechanism through
which the reserve bank of india influences liquidity and the general level of interest rates.
Eevey sovereign nation has its own currency. Theoretically the monetary unit of a country can be
exchnged with any other currency of any other country. Most of the international financial
transactions involve an exchange of one currency for another. The ratio in which they are
exchanged, or prices in terms of each other are known as ‘exchange rate’.
Countries when they trade with each other require money flows. Foreign exchange markets
provides the mechanism for exchanging different monetary units for each other. Sometimes,
nationals of one country may prefer to hold financial assets in a foregin or dominated in a foregin
Domestic currency may be subject to variable and high inflation, rendering it a poor store of
Foreign currency balance may reduce risks;
Foreign currency assets help hedge anticipated foreign currency liabilities.
The efficiency of the internation financial system and its degree of integration with individual
sovereign financial system depends to a large extent on how cheaply and quickly, foregin
exchange transaction can be effected.
The capital markets consist of primary markets and secondary markets. Newly formed (issued)
securities are bought or sold in primary markets. Secondary markets allow investors to sell
securities that they hold or buy existing securities.
The primary is that part of the capital markets that deals with the issuance of new securities.
Companies, governments or public sector institutions can obtain funding through the sale of a
new stock or bond issue to meet their requirements of investment and/or discharge some
obligation. This is the market for new long term capital. The primary market is the market where
the securities are sold for the first time. Therefore it is also called New Issue Market (NIM). It
facilitates direct conversion of savings into corporate investment or diversion of resources from
the rest of the system to the corporate sector. Primary market deals in only new securities which
acquire for the first time i.e. which were not available previously. They are offered to the
investors for the first time.
Features of primary market
In a primary issue, the securities are issued by the company directly to investors.
The company receives the money and issues new security certificates to the investors.
Primary issues are used by companies for the purpose of setting up new business or for
expanding or modernizing the existing business.
The primary market performs the crucial function of facilitating capital formation in the
The new issue market does not include certain other sources of new long term external
finance, such as loans from financial institutions. Borrowers in the new issue market may
CAPITAL MARKETCAPITAL MARKET
PRIMARY MARKETPRIMARY MARKET
be raising capital for converting private capital into public capital; this is known as ‘going
The capital market apart from the primary market also includes the secondary market where
“existing issues are traded”. These secondary market also referred to as stock markets
predominantly deal in the stock or equity shares. They enable shareholders to sell their holdings
readly thereby ensuring liquidity. Any trading of a share subsequent to its primary offering, is the
secondry transection. The initial buyer (in the primary market) may reoffer the securities to an
intrested buyer at a price which is mutually satisfectory. An active secondary market in fact
promotes the growth of the primary market and aids capital formation. For the general investors,
the secondary market provides an efficient platform for trading of a securities
The indian security market, in the last decade, witnessed a significant transformation in the
market design, to a paperless market characterised by a transparent screen-based trading system
with complete restructuring of the trading, clearing and settelement infrastructure. The indian
securities market has developed and grown voluminously on several counts such as the number of
stock exchanges, intermediaries and institutional investors, the number of listed stock, market
captilisation, trading volumes and turnover on stock exchanges. The two major stock exchange in
india are BSE (Bombay Stock Exchange) and NSE (National Stock Exchange).
Difference Between Primary Market And Secondary Market
S.NO PRIMARY MARKET SECONDARY MARKET
1. Market for new securities. Market for existing securities.
2. No fixed geographical location. Located at a fixed place.
3. Results in raising fresh resources for the
Facilitate transfer of securities from one corporate
investor to another.
4. All companies enter primary market. Securities of only listed companies can be traded
at stock exchanges.
5. No tangible form or administrative setup.
Recognised only by the service it renders.
Has a definite administrative setup and a tangible
6. Subjected to outside control by SEBI,
stock exchange and the companies act.
Subjected to control both from within and outside.
Relationship between Primary market and Secondary market
Securities traded at stock exchanges are those which have first been issued by the companies
i.e. securities first pass through primary market and only thereafter enter the secondary
While issuing prospectus for fresh issue of capital, the companies stipulate in the prospectus
that application has been made or will be made in due course for listing of shares with the
Stock exchanges exercise significant control over the organisation of new issues to their
regulatory framework as a precondition for listing of shares.
Stock exchanges provide liqudity to the securities which has pass through primary market.
A period of rising activity in stock exchanges is accompanied with higher activity in primary
market resulting in large numder of seccessful issues a vice versa.
In a period of rising prices in stock exchanges premiums are high in primary market and
oversubscription becomes a common phenomenon.
INITIAL PUBLIC OFFER
An initial public offer is the selling of securities to the public in the primary market. 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. They are often issued by smaller, younger
companies seeking capital to expand, but can also be done by large privately-owned companies
looking to become publicly traded. A prospectus is issued to read about its risk before investing.
IPO is a company's first sale of stock to the public. Investors purchasing stock in IPO’s generally
must be prepared to accept very large risks for the possibility of large gains. Sometimes, just
before the IPO is launched, existing shareholders get very liberal bonus issues as a reward for
their faith in risking money when the project was new. Only those companies that have net worth
of Rs25 crore can only issue IPO.
Why does a company offer an IPO?
One of the most common reasons companies offers IPO is to raise capital for the company. The
main reason is because companies plan to use the money gathered from IPO to further expand
their business or to increase their business operations. In general companies offer IPOs in order to
raise money that they need for business expansion and new business opportunities. By offering
shares to investors, a company stands to bring in a lot of money. They can use this money to grow
their business. The more their business grows, in turn, the higher the share prices grow and the
more money is generated by the investors purchasing shares. Unlike business loans, which need
to be repaid with interest, IPOs do not have this disadvantage. It is investor who take the risk
(although also a potential gain) buying shares. If the company looses money and they will not
have to repay their investors, although investors, in general demand high accountability from a
company they are buying stocks from.
Advantages of IPO
The advantages of IPO are numerous. The companies are launching more and more IPOs to raise
funds which are utilized for undertakings various projects including expansion plans. All types of
companies with the idea of enhancing growth launch IPOs to generate funds to cater the
requirements of capital for expansion, acquiring of capital instruments, undertaking new projects.
IPO helps the company to create a public awareness about the company as these public offerings
generate publicity by inducing their products to various investors.
The increase in the capital: - An IPO allows a company to raise funds for utilizing in
various corporate operational purposes like acquisitions, mergers, working capital,
research and development, expanding plant and equipment and marketing.
Liquidity: - The shares once traded have an assigned market value and can be resold.
This is extremely helpful as the company provides the employees with stock incentive
packages and the investors are provided with the option of trading their shares for a price.
Valuation: - The public trading of the shares determines a value for the company and
sets a standard. This works in favor of the company as it is helpful in case the company is
looking for acquisition or merger. It also provides the share holders of the company with
the present value of the shares.
Increased wealth: - The founders of the companies have an affinity towards IPO as it
can increase the wealth of the company, without dividing the authority as in case of
Low price: - Public issues provide an opportunity for picking up share at relatively low
price. Newly formed companies usually offer their share for subscription at par value,
whereas existing companies price their new issues at level which are sometimes as much
as 20 to 30 % lower than the market price of their existing shares.
Intermediaries in Primary Market
Lead Manager/ Merchant Banker
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 (book running lead managers) 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 Company.
Maximum number of lead manager
The maximum number of lead manager to an issue depends on the size of the issue as detailed
Size Of Issue Maximum Number Of Lead Managers
1 Below Rs50 crore Two
2 From Rs50 crore to below Rs100 crore Three
3 From Rs100 crore to below Rs200 crore Four
4 From Rs200 crore to below Rs400 crore Five
5 Rs400 crore and above More than five with SEBI approval
Responsibilities/ Obligations of Lead Manager/ Merchant Banker
The LM has following responsibilities towards the issuing company, SEBI and his own
Enter into a contract with the issuing company clearing specifying their mutual rights,
obligation and liabilities relating to the issue.
Submit a copy of the above contract to SEBI at least one month before the opening of the
issue for subscription. In case of more than one LM simultaneously submit a statement
detailing their respective responsibilities.
Refuse acceptance of appointment as LM, if the issuing company is its associate.
Not to associate with a merchant banker who does not hold SEBI registration certificate.
Submit a Due Diligence Certificate to SEBI at least 2 weeks before the opening of the issue
for subscription after verification of the contents of the prospectus.
Submit to SEBI various documents such as particulars of the issue, draft prospectus/ letter of
offer and other literature to be circulated to the investors/ shareholders etc. at least 2 weeks
before the date of filling them with the registrar of the companies and regional stock
Ensure the modification and suggestion made by SEBI regarding above documents.
Submit complete particulars with SEBI within 15 days of the acquisition of securities of the
company whose issue the merchant banker is managing.
Disclose to SEBI the following:
a. Its responsibilities regarding the management of the issue.
b. Any change in the information previously furnished with SEBI having bearing on
certificate of registration granted to it.
c. Names and addresses of the company whose issue it has managed or has been associated
d. Information regarding its activities as manager, underwriter, consultant or advisor to an
Sound origination services represent the first essential step, but, by it self, do not guarantee that
issue will be successful, i.e., will get fully subscribe. In case the issue is not well received in the
market, the plan of the company/ promoters receive a set back and all expenses incurred in
origination get wasted. To insure success of an issue the company/ promoters get the issue
underwritten. Underwriter guarantees that he would buy the portion of issue not subscribe by the
public. Such service is called underwriting and is always rendered for a commission.
Underwriting guarantees success of the issue and benefits of the issuing company. An
underwriter to the issue could be a banker, broker, merchant or a financial institution.
Suppose there is an issue is for Rs. 100crore and subscription are received only for Rs80 crore. It
is then left to the underwriters to pick up the balance Rs20 crore. If underwriters don’t pay up,
SEBI will cancel their licenses.
Agreement between Underwriter and Client Company
There has to be an agreement between underwriter and the issuing company. Among other
relevant matters, the agreement specifically includes the following:
The period during which the agreement will remain in force
The amount of underwriting obligation
The maximum period within which the underwriter will have to subscribe to the offer after
being intimated by or on behalf of the issuing company
The rate and amount of commission/ brokerage chargeable by the underwriter, within the
limits imposed by the Companies Act.
Any other details regarding the arrangements made by the underwriters for fulfilling the
Bankers to an Issue
Bankers to an issue help functioning in primary market by engaging in activities of acceptance of
applications for shares/ debentures along with application money from investors in respect of
issue of securities and also refund of application money to the applicants whom securities could
not be allotted. They perform this function for and on behalf of the company.
Responsibilities/ Obligation of Bankers to an Issue
Following are the major obligation of a banker to an issue:
An agreement with issuing company: Each banker to an issue has to enter into an agreement
with the issuing company detailing the number and address of collection centers at which
applications and application money are to be received, the fee for the services and other terms
and conditions of the appointment.
Submission of daily Statement: Banker to an issue has to submit to the issuing company/
registrar to an issue a daily statement giving the details regarding the number of applications
and the amount of money received from the investors.
Furnish information to SEBI: Bankers to an issue has to submit the following information
to the SEBI:
a. The detail of issues for which he has been engaged as a banker to an issue.
b. The number of application and the details of application money received.
c. The date wise detail when applications from investors were forwarded to the issuing
company/ registrar to an issue.
d. The date wise details of the amount of refund to the investors.
Inform SEBI about Disciplinary action by RBI: Banker to an issue is duty bound to inform
SEBI about any RBI action taken against him regarding issue payment.
Maintain books and records: A banker to an issue has to maintain books of accounts, records
and documents pertaining to all matters regarding which he may be required details to SEBI
including name and addresses of the investors.
Follow the prescribed code of conduct:
a. Do not keep blank application forms bearing brokers stamp at the bank premises or at the
entrance of the bank.
b. Do not accept application after office hours or on bank holiday or after the date of the
closure of issue.
c. Do not act at any time in collusion with other agents in a manner detrimental to the
interest of small investors.
d. Abide by all acts, rules, regulations, notifications, directions, circular, instruction and
guidelines issued by the government, RBI, Indian Bank Association and SEBI which are
relevant to his operations as banker to an issue.
Broker to the Issue
Brokers arrange procurement of subscription to the issue from the prospective investor. They
keep regular contact with the investing public and render great help in broad basing the issue. The
appointment of the broker is not compulsory. There is also no restriction on the number of
brokers to be appointed by a company.
Members of stock exchanges cannot act as managers or brokers to an issue nor can they make any
preliminary arrangements for floatation of an issue unless:
Stock exchange of which they are members gives its approval
The issuing company abides by the prescribed listing requirements and also undertakes to get
its securities listed on a recognized stock exchange.
Registrar to an issue and share transfer agents:
Registrar to an issue:
Registrar to an issue is also an intermediary market and performs the following
a. Collect application from investors and keep a proper record of applications and
moneys received from investors.
b. Assist issuing companies in determining the basis of allotment of securities as per
stock exchange guidelines and in consultation with stock exchange.
c. Assist in finalizing allotment of securities and processing and dispatching
d. Assist in processing and dispatching refund order, share and debenture certificate
and other documents related to the capital issue
e. They can also function as Depository Participants.
Share Transfer Agent:
Share transfer agent performs the following functions:
a. Maintain records of holder of securities of the company for and on behalf of the company
b. Handle all matters related to transfer and redemption of securities of the company.
c. They also function as Depository Participants.
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
STOCK OPTIONSTOCK OPTION
RIGHT ISSUERIGHT ISSUE
FIXED PRICEFIXED PRICE
SEBI and actual price can be determined at a later date before filing of the final offer document
with SEBI/ ROCs.
In fixed price method the offer price of share is decided by the company in consultation with the
lead manager much before the issue actually opens. The price at which securities will be allotted
is known in advance to investors.
Offer for Sale
Under this method the company does not directly offer its shares to the public, but through
intermediaries, such as, issuing houses or firms of stock brokers. A prospectus with prescribed
minimum contents is distributed to applicants on a non discriminatory basis. The issue is also
underwritten to avoid the possibility of the issue largely remaining with the issue houses.
Sale of securities, in this case is done in two stages. In the first stage, the issuing company makes
an en bloc sale of securities to the issue house or stock brokers at an agreed fixed price. The
second stage involves re-sale of these securities by issue houses or stock brokers to ultimate
investors at a higher price.
Placement of Securities
Under this method the securities are acquired by the issuing houses directly from the issuing
company at an agreed price, and than these are placed only with their investor-clients, both
individual and institutional investors at a higher price. The difference represents their
remuneration out of which they bear various expenses relating to placement. And this case no
underwriting is required as issue houses guarantee cent percent placement. However, sometimes,
though rarely, issue houses may agree to arrange placement of shares for a fee. In this case they
act only as an agent of the issuing company.
Placing of unquoted securities is called private placing, an of newly quoted securities is
called stock exchange placing.
A fresh issue of shares by an existing company to which existing shareholders in proportion to
the number of share already held by them is called right issue. Rules regarding right issue are:
Only a company whose shares are already listed can make right issue.
The right issue is made by issuing circular to all existing shareholders.
Right issue is offered on pro rata basis.
Each existing shareholder has an option either to subscribe to it or renounce it in favour
of his/ her nominee, or surrender the right.
If a company has to increase its subscribe capital after two years of its formation or after
one year of its first issue of its shares, whichever is earlier, it has to raise it through a
right issue, unless this requirement is dispensed with by a special resolution.
Stock option or Employees Stock Option Scheme (ESOP) is a voluntary scheme of the part of the
company to encourage employees’ participation in the company. The scheme also offers an
incentive to employee to stay in the company. The scheme is particularly useful in case of
companies whose business activity is dominantly based on the talent of the employees.
Book Building Method
Book building is a method of issuing/offering shares to investors in which the price at which the
shares are issued is discovered through a bidding process. In book built IPO the bidders (i.e.,
potential investors) have the flexibility to bid for shares at the price they are willingly to pay.
Book building is a method of issue of shares based on float price/price band which is indicated
before the opening of the bidding process. The issue price is fixed after the bid close date. Under
book building scheme the issuer company does not directly issue shares to the public but invites
bids from the merchant bankers to take a full responsibility for the issue. One of the lead
merchant bankers to the issue is nominated by the issuer company as book runner at an agreed
Under the book building method, share prices are determined on the basis of real demand for the
shares at various price levels in the market. For discovering the price at which issue should be
made, bids are invited from prospective investors from which level of demand at various price
level are noted. These bids could be quoted at a difference of Rs1
In case the issuer chooses to issue securities through the book building route then as per SEBI
guidelines, an issuer company can issue securities in the following manner:
a. 100% of the net offer to the public through the book building route.
b. 75% of the net offer to the public through the book building process and 25% through the fixed
c. Under the 90% scheme, this percentage would be 90 and 10 respectively.
Book Building Process
The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'. The
bank or financial institution which takes overall control of structuring, pricing and inviting
other underwriters into a dept or equity issue.
Appointment of other intermediaries with consultation with book runner
♦ Registrar to an issue
♦ Bankers to an issue
♦ Advertising agency
The Issuer specifies the number of securities to be issued and the price band for orders.
The Issuer also appoints syndicate members Syndicate member should be member of NSE or
Over The Counter Exchange Of India (OTCEI)
Issues the Draft Prospectus with consultation of book runner (containing all mandatory
disclosure other than price)
Draft Prospectus is filled with SEBI 21 days prior filling it with ROC and stock exchanges.
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 filling the
Offer Document with ROC/ stock exchanges.
“Red Herring Prospectus” is issued which does not have details of either price or number of
shares being offered or amount of sale.
The investors approach syndicate members to get their demand registered indicating the
number of shares demanded and the prices offered.
Investors have to submit the bid-cum-application form, containing the investors’ price and
volume options, to syndicate member, who have an electronically linked platform across the
country. The electronic system of BSE and NSE are used for the purpose.
Syndicate member inputs the bid into the 'electronic book', then it is uploaded on BSE and
NSE system. This process is called 'bidding' and is similar to open auction.
Transfer of funds to Escrow accounts – a third party account which holds money safely while
a sale is in progress.
A Book should remain open for a minimum of 5 days.
Bids cannot be entered less than the floor price.
Bids can be revised by the bidder before the issue closes.
On the close of the book building period the 'book runner evaluates the bids on the basis of
the evaluation criteria which may include -
o Price Aggression
o Investor quality
o Earliness of bids, etc.
The book runner and the company conclude the final price (cutoff price) at which it is willing
to issue the stock and allocation of securities.
Generally, the numbers of shares are fixed; the issue size gets frozen based on the price per
share discovered through the book building process.
Allocation of securities is made to the successful bidders. After the closure of the issue, the
bids received are aggregated under different categories i.e., firm allotment, Qualified
Institutional Buyers (QIBs), Non Institutional Buyers (NIBs), Retail Investors.
Crediting Demat account
Refund to refuse applicant by BRLM.
The listing on stock exchanges is done within 7 days from the finalization of the issue.
Ideally, it would be around 3 weeks after the closure of the book built issue. In case of fixed
price issue, it would be around 37 days after closure of the issue.
Book Building is a good concept and represents a capital market which is in the process of
Open and Close book building
In book-built issues, it is mandatory to have an online display of the demand and bids during the
bidding period. This is known as open book system. Under closed book building, the book is not
made public and the bidders have to take a call on the price at which they intend to make a bid
without having any information on the bids submitted by other bidders.
Red Herring Prospectus:-
The most important and time-consuming task facing the IPO team is the development of the
prospectus, a business document that basically serves as a brochure for the company. The
prospectus includes all financial data for a company for the past five years, information on the
management team, and a description of a company's target market, competitors, and growth
strategy. There is a lot of important information in the prospectus, and the underwriting team
must make sure it is accurate. Every company intending to bring an IPO necessarily submits a
document with SEBI. This is known as Red Herring Prospectus. It contains all the information
and the factors which can influence the decision of an investor.
Prospectus contains information relating to
Company’s name and address of its registered office
Names and address of the company’s promoters, managing director, directors, company
secretary, legal advisers, auditors, bankers, brokers etc.
The date of opening and closing subscription list
The name and address of underwriters, the amount underwritten and underwriting
Material details regarding the project, i.e., location, plant and machinery, technology,
collaboration, infrastructure facilities etc.
Nature of product, marketing set-up, export potentials and obligations
Past performance and future prospects
Credit rating obtained from CRISIL or any other recognize rating agency
A statement that the company will make an application to specified stock exchange(s) for
listing of securities; and soon
The director, promoters and experts can be held liable, both under civil law and under criminal
law, for any misrepresentation in the prospectus or any material omission.
The offer document may have a 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 can not be more
than 20%. In other words, it means that the cap should not be more than 120% of the floor price.
The company decides the price band in consultation with the investment bankers, and typically
after undertaking a pre-marketing exercise with some leading QIBs.
The price band can have a revision. SEBI requires that any revision in the price band has to 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. When
the price band is revised, the bidding period has to be extended for a further period of three days,
subject to the total bidding period not exceeding thirteen days.
Floor price is the minimum price at which bids can be made.
In Book building issue, the issuer is required to indicate either the price band or a floor price in
the red herring prospectus. The actual discovered issue price can be any price in the price band or
any price above the floor price. This issue price is called “Cut off price”. This is decided by the
issuer and LM after considering the book and investors’ appetite for the stock. SEBI (DIP)
guidelines permit only retail individual investors to have an option of applying at cut off price.
Categories of Investors
In any IPO there are three categories of investor to whom shares are offered for subscription.
QIB (Qualified institutional buyers): Institutions like banks, mutual funds, FII. At least 50% of
the shares are reserved for this category.
NIB (Non institutional bidders): individual investors who apply for more than one lac rupees.
Retail Investors: Individual investors who apply for less than one lac rupees. At least 25% is
reserved for this category.
The bids are first allotted to the different categories and the over-subscription (more shares
applied for than the shares available) in each category is determined. Retail investors and high net
worth individuals get allotments on a proportional basis.
Assuming you are a retail investor and have applied for 200 shares in the issue, and the issue is
over-subscribed five times in the retail category, you qualify to get 40 shares (200 shares/5).
Sometimes, the over-subscription is huge or the issue is priced so high that you can't really bid for
too many shares before the Rs50,000 limit is reached. In such cases, allotments are made on the
basis of a lottery.
Say a retail investor has applied for 5 shares in an issue, and the retail category has been over-
subscribed 10 times, the investor is entitled to half a share. Since that isn't possible, it may then be
decided that every 1 in 2 retail investors will get allotment. The investors are then selected by
lottery and the issue allotted on a proportional basis among. That is why there is no way you can
be sure of getting an allotment.
In its recent amendments, SEBI has reduced the allocation of equity to Qualified Institutional
Buyers (QIBs), which includes financial Institutions, banks and the newly added insurance
companies, and increased the share of retail investors. Prior to the amendments, QIB's could be
allotted 'upto 60%' shares, which now stands reduced to 'upto 50%'. Also, another change was the
definition of retail investors, which previously meant those investors who bid for less than 1,000
shares. However, the definition now stands changed to an investor who bids for shares less than
worth Rs 50,000.
SHAPE * MERGEFORMAT
A situation in which the demand for an initial public offering of securities is less than the number
of shares issued. Also known as an "underbooking".
A situation in which the demand for an initial public offering of securities exceeds the number of
A situation in which an underwriting firm has successfully sold to investors all of its available
issues of a public offering of securities. When the issue is fully subscribed, the underwriter's risk
of being undersubscribed (being unable to sell its allotment of the issue) is completely removed.
Also referred to in slang terms as "pot is clean".
Newly issued securities that have not seen much interest, or subscriptions, from investors ahead
of the issue date or have not been offered by brokerages. If you wanted to own the newly issued
shares, you'd only be able to purchase them as you would any other stock - through the secondary
SEBI’s Guidelines for IPO
1. IPOs of small companies
Public issue of less than five crores has to be through OTCEI and separate guidelines apply
for floating and listing of these issues.
2. Size of the Public Issue
Issue of shares to general public cannot be less than 25% of the total issue, incase of information
technology, media and telecommunication sectors this stipulation is reduced subject to the
Offer to the public is not less than 10% of the securities issued.
A minimum number of 20 lakh securities is offered to the public and
Size of the net offer to the public is not less than Rs. 30 crores.
3. Promoter Contribution
Promoters should bring in their contribution including premium fully before the issue
Minimum Promoters contribution is 20-25% of the public issue.
Minimum Lock in period for promoters contribution is five years
Minimum lock in period for firm allotments is three years.
4. Collection centers for receiving applications
There should be at least 30 mandatory collection centers, which should include invariably the
places where stock exchanges have been established.
For issues not exceeding Rs.10 crores (including premium, if any), the collection centers shall
be situated at:-
The four metropolitan centers viz. Mumbai, Delhi, Calcutta, Chennai; and at all such centers
where stock exchanges are located in the region in which the registered office of the company is
5. Regarding allotment of shares
Net Offer to the General Public has to be at least 25% of the Total Issue Size for listing on a
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.
In an Issue of more than Rs. 25 crores the issuer is allowed to place the whole issue by book-
Minimum of 50% of the Net offer to the Public has to be reserved for Investors applying for
less than 1000 shares.
There should be at least 5 investors for every 1 lakh of equity offered (not applicable to
Quoting of Permanent Account Number or GIR No. in application for allotment of securities
is compulsory where monetary value of Investment is Rs.50,000/- or above.
Indian development financial institutions and Mutual Fund can be allotted securities upto
75% of the Issue Amount.
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.
Allotment to categories of FIIs and NRIs/OCBs is upto a maximum of 24%, which can be
further extended to 30% by an application to the RBI - supported by a resolution passed in
the General Meeting.
6. Timeframes for the Issue and Post- Issue formalities
The minimum period for which a public issue has 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 a rights
issue is 15 working days and the maximum is 60 working days.
A public issue is effected if the issue is able to procure 90% of the Total issue size within 60
days from the date of earliest closure of the Public Issue. In case of over-subscription the
company may have the right to retain the excess application money and allot shares more
than the proposed issue, which is referred to as the ‘green-shoe’ option.
A rights issue has to procure 90% subscription in 60 days of the opening of the issue.
Allotment has to be made within 30 days of the closure of the Public Issue and 42 days in
case of a Rights issue.
All the listing formalities for a public Issue has to be completed within 70 days from the date
of closure of the subscription list.
7. Dispatch of Refund Orders
Refund orders have to be dispatched within 30 days of the closure of the Public Issue.
Refunds of excess application money i.e. for un-allotted shares have to be made within 30
days of the closure of the Public Issue.
8. Other regulations pertaining to IPO
Underwriting is not mandatory but 90% subscription is mandatory for each issue of capital to
public unless it is disinvestment in which case it is not applicable.
If the issue is undersubscribed then the collected amount should be returned back (not valid
for disinvestment issues).
If the issue size is more than Rs. 500 crores voluntary disclosures should be made regarding
the deployment of the funds and an adequate monitoring mechanism to be put in place to
There should not be any outstanding warrants or financial instruments of any other nature, at
the time of initial public offer.
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 the twelve months prior to such offer, the
resultant shares will not be taken into account for reckoning the minimum promoter's
contribution and further, the same will also be subject to lock-in.
Code of advertisement specified by SEBI should be adhered to.
Draft prospectus submitted to SEBI should also be submitted simultaneously to all stock
exchanges where it is proposed to be listed.
9. Restrictions on other allotments
Firm allotments to mutual funds, FIIs and employees not subject to any lock-in period.
Within twelve months of the public/rights issue no bonus issue should be made.
Maximum percentage of shares, which can be distributed to employees cannot be more than
5% and maximum shares to be allotted to each employee cannot be more than 200.
10. Relaxations to public issues by infrastructure companies.
These relaxations would be applicable to Infrastructure Companies as defined under
Section10(23G) of the Income Tax Act, 1961, provided their projects are appraised by any
Developmental Financial Institution (DFI) or IDFC or IL&FS. The projects must also have a
participation of at least 5% of the project cost (in debt and/or equity) by the appraising institution.
The infrastructure companies will be exempted from the requirement of making a minimum
public offer of 25 per cent of its securities.
The requirement of 5 shareholders per Rs. 1 lakh of offer is also waived in case of offerings
by infrastructure companies.
For public issues by infrastructure companies, minimum subscription of 90% would no
longer be mandatory provided disclosure is made about the alternate source of funding which
the company has considered, in the event of under subscription in the public issue.
Infrastructure companies are permitted to freely price the offerings in the domestic market
provided that the promoter companies along with Equipment Suppliers and other strategic
investors subscribe to 50% of the equity at the same or a higher price than what is being
offered to the public. Adequate disclosures about the justification for the pricing will be
required to be made in the offer documents.
The Infrastructure Companies would be allowed to keep their issues open for 21 days. The
relaxation would give infrastructure companies sufficient time to mobilise funds for their
Infrastructure Companies would not be required to create and maintain a Debenture
Redemption Reserve (DRR) in case of Debenture Issues.
Largest IPO in India
The Largest IPO in India, as per records till January 2008, is the Reliance Power IPO. It was
issued by the Reliance Power Limited Company. Reliance Power IPO was issued on 15th
January, 2008 and closed on 18th January, 2008. The issue comprised of 26 crores of equity
shares which were worth around US $3 billion. The company Reliance Power Limited had fixed
the price band of Reliance Power IPO between Rs. 405 and Rs. 450 for each share. Majority of
the bids for the Initial Public Offering (IPO) of Reliance Power came at the higher end of the
price band that is Rs. 450 and this helped to make it the Largest IPO in India.
The response to Reliance Power IPO by the investors was excellent for the issue got subscribed
fully within a minute of its opening on 15th January, 2008. By the time bidding closed for
Reliance Power IPO on 18th January, 2008, it had been subscribed 52 times and had received a
commitment of around Rs. 145,080 crores. This huge response to the issue of Reliance Power
IPO made it the Largest IPO in India till then. The total proceeds from Reliance Power IPO are
estimated to be around Rs. 11,700 crores.
JM Financial, JP Morgan, Deutsche Equities, Enam Securities, Kotak Mahindra Capital, ABN
AMRO, ICICI Securities and UBS are the lead managers of Reliance Power IPO. The company
Reliance Power Limited plans to use the proceeds from the IPO to set up power plants all over
Disadvantages of IPO
It is true that IPO raises huge capital for the issuing company. But, in order to launch an Initial
Public Offering (IPO), it is also necessary to make certain investments. Setting up an IPO does
not always lead to an improvement in the economic performance of the company. A continuing
expenditure has to be incurred after the setting up of an IPO by the parent company. A lot of
expenses have to be incurred in the form of legal fees, printing costs and accounting fees, which
are connected to the registering of an IPO. Apart from such enormous costs, there are other
factors as well that should be taken into consideration by the company while introducing an IPO.
Such factors include the rules and regulations involved to set up public offerings and this entire
process on the other hand involve a number of complexities which sometime require the services
of experts in relevant fields. Some companies hire experts to do the needful to ensure a hassle-
free execution of the task. After the IPO is introduced, the expenses become a routine in every
activity involved. Besides, the CEO of the company would have to spend a lot of time in handling
it or sometimes he hires experts to do the same. All these aspects, if not handled with efficiency,
prove to be some major drawbacks related to the launch of IPOs.
The launch of IPO also brings about shareholders of the company. Shareholders have ownership
in the company. The primary owners of the company or the people holding maximum authority in
the company cannot take decisions all by themselves once an IPO has been launched and
shareholders have been formed. The shareholders have an active participation in every decision
that is being taken even if they do not hold 50 percent share of the company. They have their
individual demands to be met as they own a certain percentage of stakes in the company.
A major risk with shareholders is that, they can sell off their stocks any time they want, in case
they see the price band of the stakes of that company is going down. This will lead to a further
drop of the value of shares in the market which in turn will decrease the overall value of the
7 Steps for companies for success of its IPO
With IPO being the buzzword in the industry sector, following the seven steps would ensure a
smooth climb up the IPO ladder when an Initial Public Offering (IPO) comes in for funding
ambitious, gigantic projects. .
However, going for an IPO is definitely not easy. An industry expert cautions, "The right recipe is
to go step by step with each step dependent on the other. If you miss out one step the whole
structure will crumble."
Making an IPO involves immense research, planning and strategizing. One must bear in mind
that here the ownership and management of the organization is not just focused on a particular
person(s), but instead distributed and diluted on a larger scale and hence the stakes are
automatically higher. So, an error even on a miniscule level can have drastic repercussions.
1. Choosing the Perfect Time
Before even plunging into the intricacies of the pre-IPO arrangements, choosing the ideal time to
go public is of core importance. The timing of going public is very crucial in the pre-IPO process.
One should look into many aspects before the plunge—like looking into the prevailing market
In the 1980's and early 1990's when branding and marketing were non-existent, liquidity in the
market, behavior of the secondary market and merchant bankers' advice were instrumental in
deciding the right time for the IPO.
2. Choosing the Right Team
Forming the right team is essential before going for an IPO. Apart from the Chief Executive
Officer (CEO) or the Chairman, the main members are the Chief Financial Officer (CFO), Chief
Operating Officer (COO), the Company Secretary, the auditors, professional merchant bankers,
and the Chief Information Officer (CIO) in the current age of information and legal advisors.
It is very important for the board of directors involved in the venture to have a progressive
outlook. Only an intelligent team can contribute to the success of the venture. Team building and
the professional team that you bring in is very important. You should be very careful not only
about land and equipment but also while deploying money and manpower.
Apart from the CFO and the Company Secretary, choosing appropriate auditors makes a world of
difference. Unlike other members of the team, the auditor has the additional job of assessing
whether the entire accounting system is in order, is transparent and analyzing whether the
numbers and projections as shown in the Excel sheet are realistic and practical. If you have a
good auditor, half your battle is won. In fact, one should employ auditors at least one or two years
before the IPO is launched.
When the company goes public, it must make a note of disclosures about the company operations
and past records. It can't afford to make any observations which are incorrect or not backed by
strong evidence. You should have a team who can strategies and can plan the inflow and outflow
of resources and money.
3. Definite Goals and Purposes
A company should be focused and clear about the purpose of the IPO. Usually, the purpose
behind making an IPO is to accumulate funds and finances for expansion and investments and
above all woo the investors and consolidate as a brand. This requires a purely corporate structure.
Currently, there are stringent SEBI guidelines to be followed before any company goes public.
Keeping this in mind, the valuations which the company wishes to command will depend on the
future goals and projects of the company, and the management team. Unless the management is
fully sure of the ultimate goals, the company will not be able to come up with a high valuation for
the proposed issue of shares.
4. Choosing the Right Merchant Bankers
The primary role of a merchant banker should be to act as a bridge between the organization and
the investors. Firstly, the merchant banker should have a brand image in the market. A merchant
banker should have the capability and the experience to handle a large-scale IPO. And they
should be able to reach a larger mass of people because investors today are just not located in the
metros but also in tier-II and tier-III cities."
Simultaneously, they also chalk out the risk management strategies for the company since risks
and ventures are two sides of the same coin. Hence a company should choose such a merchant
banker who is just not professional but who understands the logistics and mechanics of the
industry. Apart from being a link between the organization and the investors, a banker also has to
generate interest and build up the confidence of the investors.
5. Capital Restructuring
Companies should decide on the ways to deploy their capital, namely capital restructuring.
Companies should be clear about the debt and equity ratio. This boils down to setting the ideal
Debt-Equity Ratio (DER), which can vary from 1:1 to 2:2. "You have to work out your ratio
according to the cash and the growth rate, so that they can accordingly structure their profits.
In capital restructuring, you have to be sure of the DER maintained, what are the facilities you are
planning to set up and what is the land value you are going to purchase. The way you are going to
deploy your capital is also very important. You have to be very careful while deploying the
resources and forecast the profit you will incur in three-four years' time."
6. Creating Investor Interest
Confidence building and generating investor interest should be on the priority list for a company.
A Company must project an image of transparency and good governance to the investors. Infosys
should be the role model for all companies going in for an IPO. Many of the experts agree that IT
giant Infosys is a role model because their balance sheet is very clear, they value their managers
as assets and year after year they expand rapidly. A company is accountable to its investors,
which is why when they go public they have to disclose company projections—past, present and
This is where the team of advisors, consultants and legal experts comes into the picture. IPO is all
about building investors' confidence so we over perform to hike up investor confidence. If you
raise the expectations and do not meet them, then investors will not excuse you for the next two-
three years. Infosys, for instance, follows this strategy and gets higher multiples because they
understate their plans.The projections given to the public should be realistic. The excel sheet
might project rosy details of growth, but if they do not live up to the expectations then public
confidence is sure to plummet to the lowest level.
7. Media Campaigns
A few years ago, marketing and media campaigns were considered a luxury, but today they are
absolutely necessary. They contribute to the relative success of an IPO venture. The campaigns
can be in the form of road shows and extensive investor meetings. They are required because the
investors need to be made aware of the company and its past performances and any important
projects undertaken/completed. During the campaigns, various facets related to company
performance, the need to raise money and future plans are disclosed, information that investors
seek. A successful media campaign ensures complete participation in the IPO by one and all.
In fact, recently when a bigwig real estate company went public, a few crores went in media
campaigns alone. However, there is no short cut to success. A step-by-step approach always pays
in the end.
IPOs of 2008
LIMITED IPO Sep 9,
20 MICRONS LIMITED
Rs 50/- to
Oct 6, 2008
RESURGERE MINES &
AUSTRAL COKE &
PROJECTS LTD IPO
NU TEK INDIA
8 BIRLA COTSYN
(INDIA) LIMITED IPO
60 Rs 12/- to
14/- (.) No of
to Rs. 10,753
of Rs 3665
Rs 35/- BSE
LOTUS EYE CARE
Jul 4, 2008
INDUSTRIES LTD IPO
Jul 8, 2008
GLASS LTD IPO
Jul 1, 2008
SYSTEMS LTD IPO
Rs 10/- BSE
Rs 40/- BSE
190/- 32.5 BSE
210/- 38.2 BSE
GOKUL REFOILS AND
Jun 4, 2008
Rs 32/- to
KIRI DYES AND
CHEMICALS LTD IPO
SITA SHREE FOOD
PRODUCTS LTD IPO Mar 11,
Rs 27/- to
PROJECTS LTD IPO
Rs 90/- to
Rs 80/- to
INFOTECH LTD IPO
Rs 80/- to
EMAAR MGF LAND
on 8th Feb
Rs 80/- to
31 WOCKHARDT Jan 31, Feb 69 Rs 225/- 250.87097 NSE, Issue
Rs 45/- BSE
HOLDINGS LTD IPO
IPO Rating / IPO Grading
IPO ratings and grading are among the few popular inputs investor's uses before applying in
initial public offerings IPO.
IPO Ratings are provided by various financial institutions & independent brokers. Few popular
IPO Rating providers in India are Capital Market, Money Control, S P Tulsian's IPO
IPO Grading is provided by SEBI approved rating agencies including CRISIL, CARE and ICRA.
IPO Grading is designed to provide investors an independent, reliable and consistent assessment
of the fundamentals of new initial public offering. As IPO Grading is decided much earlier then
the issue price or issue dates are finalize (usually on the IPO filing) and they just tell about the
fundamentals of the company, investors should not consider them as 'Buy IPO' or 'Skip IPO'
CRISIL / CARE / ICRA / FITCH IPO GRADING
ALKALI METALS LIMITED
CHEMCEL BIOTECH LIMITED
20 MICRONS LIMITED
RESURGERE MINES & MINERALS
INDIA LIMITED 1
AUSTRAL COKE & PROJECTS
NU TEK INDIA LIMITED
TECHNOLOGIES LTD 3
BIRLA COTSYN (INDIA) LIMITED
KSK ENERGY VENTURES LIMITED
10 SOMI CONVEYOR BELTINGS 2