The document discusses the key intermediaries involved in the primary market for securities. It identifies 6 main intermediaries - 1) Merchant Bankers who assist companies with origination and issue management activities, 2) Underwriters who guarantee to purchase unsold shares, 3) Brokers who market and distribute the issue, 4) Registrars who handle application processing and allotment, 5) Bankers who collect funds and distribute forms, and 6) Depositories like NSDL and CDSL who provide electronic holding of shares. Together these intermediaries facilitate the process of public issuance and trading of new securities.

1. .........

2. Market where the securities are
sold for the first time.
 Issued by the company directly to
investors.
 Performs the crucial function of
facilitating capital formation in the
economy.
 Borrowers may be raising capital for
converting private capital into public
capital; this is known as “Going Public

4. I. Origination: An idea for a new investment
proposal is evaluated from different dimensions.
A careful study of the technical, economic and
financial viability is done to develop a concrete
investment proposal and ensure the soundness of
the project.
Done by Merchant Bankers
Includes advisory services like
 Type of Issue
 Timing of Issue
 Pricing of Issue

5.  II. Underwriting: An agreement whereby the underwriter
promises to subscribe to a specific number of securities
in the event of public not subscribing to the issue.
A guarantee for the marketability of shares.
Different types of underwriting agreements:
 Standing Behind the Issue / Full Underwriting:
Agreement to take up all securities not absorbed by the
market or a certain portion
 Outright Underwriting: Underwriters buy all the
securities and make payment. Then make arrangement
to sell them to public.
 Joint Underwriting: Two or more underwriters join
together without any agreement among themselves

6.  Syndicate Underwriting / Consortium Method:
A number of underwriters enter into an agreement
among themselves to under write. Two types of
Agreements exists:
- agreement between issuer and underwriters
- agreement among underwriters
 Firm Underwriting: Underwriter commits to
purchase a fixed number of securities irrespective of
subscription from public.
LIC , UTI, ICICI, IDBI etc are some of the institutional
underwriters
IV. Distribution: Sale of securities to ultimate
investors. Performed by Merchant bankers, Brokers
and agents

7. • enable companies to raise capital through the sale of financial assets.
Capital Generation
• primary market investors are able to easily trade their investments in the
secondary market
Liquidity
• Risk of failed investment is shared by financial intermediaries and the
risk of not finding an investor is also reduced.
Diversification
• Reduces “information costs”-the cost incurred in assessing the
investment merit of the asset and“search costs”-the cost associated
with time and money spent in locating potential investors and
counterparty for trade.
Cost Reduction

8. NEW ISSUE
PUBLIC
ISSUE
PRIVATE
PLACEMENT
RIGHT
ISSUE
BONUS ISSUE
ESOP

9. 1. Public Issue
An issue or offer of securities made to the public
Issue made to 50 or more persons.
The company required to follow the norms laid down in:
 SEBI rules and regulations
 Companies Act
 Securities Contract Regulation Act 1956
 RBI regulations in case of foreign or NRI participation
in the issue.
 Provisions in the listing agreement with the stock
exchange.

10. • When an unlisted company makes either first issue of securities or
offers its existing securities for sale for the first time to the public.
• SEBI now allows IPO through online system of Stock Exchanges- E-
IPO or Online IPO
• Biggest IPO: IPO of Coal India Ltd.- Rs. 15,000 Cr.
Initial Public Offer (IPO)
• When a listed company makes either a fresh issue of securities to
public or an offer for sale to the public. Also known as seasoned or
subsequent public offer.
Follow on Public Offer /Further Public Offer (FPO)
• Sale of securities to the financial intermediaries for the purpose of re-
sale to the public.
Offer for Sale

11. 2. Rights Issue
The issue of new equity shares to the shareholders of a
company in proportion to their existing shareholding.
Offered through letters or circulars. The offer is given as
on a particular date called record date.
Open for a period of 15 to 30 days.
Right to receive right shares is called Pre-emptive
right.
3. Private Placement
An issue of shares or convertible securities by a
company to a select group of investors not exceeding 49
which is neither a rights issue nor a public issue. It is
generally known as preferential allotment.
Private placement of shares or convertible securities
by a listed company can be of two types:

12. • Issues made to a selected group of persons.
• A resolution must be passed by the shareholders
• The allotment on the basis of average price on the stock
exchange for the previous six month or two weeks, whichever is
higher.
• Lock- in- period of one year
Preferential Allotment-
• Issues made to Qualified Institutional Buyers(QIB) like
Financial Institutions, Mutual Funds, Scheduled & Commercial
Banks, etc.
• To be eligible the company listed at least, one year before the
notice for QIP.
• Minimum number of allottees: issue size less than Rs. 250
crores- 2 and Rs. 250 crores or more - 5.
• The issue price not lower than the average price for the two
preceding weeks.
Qualified Institutional Placement (QIP)-

13. 4. Bonus Issue
Shares issued to existing shareholders instead of
cash dividend. To capitalize on the reserves and
surplus of the company without charging the
shareholders.
5. Employees Stock Option Plan (ESOP)
Employees the right to purchase a certain number
of shares in the company at a predetermined price ,
at a future date. Shares offered are called Sweat
Equity shares.
ESOP should not exceed 5% of post issue capital of
the company.

14. Three types of ESOP:
• Option to acquire shares at a predetermined price, less
than current market price, at a future date.
Employee Stock Option Scheme(ESOS):
• Right to acquire shares directly from the company as part
of public issue. Immediate option, at a price less than
market price.
Employee Stock Purchase Plan(ESPP):
• Employees get appreciation in the share price from the
date of grant to the date of exercise.
• Also called Phantom Shares
Share Appreciation Rights (SARs):

15. Appointment of Merchant
Bankers to the issue
Preparation of Draft Prospectus
Appointment of underwriters, Bankers,
Registrars & Brokers & Agents
Filing of Prospectus with the
Registrar
Printing and despatching of
application form

16. Filing of initial listing application with
recognised Stock Exchange
Promotion of issue & Statutory announcements:-
investor meeting, press conferences
Collection of Application
Processing of Applications & Allotment of
Securities
Listing of Issue in Stock Exchange

17. Offer documents
An invitation to subscribe the securities of a company.
Contains all the relevant information about the proposed issue.
•Any notice, circular, advertisement or
other document inviting deposits from
the public for the subscription or
purchase of any shares or debentures
of any body corporate.
•Used in the case of public issue and
contains all relevant details about the
company and the issue.
Prospectus

18. •Name of the Company and its Promoter
•Address of registered office of the company
•Activities of the company- existing and proposed
•Names of Directors
•Minimum Subscription: 90% of issue amount ; if
company fails to get minimum subscription, it shall
refund money received within 120 days from the
date of opening the issue
•Date of Commencement and closing of issue
•Name and address of underwriters and amount
underwritten
•Statement regarding application for listing in stock
exchange
•Risk factors and management perceptions about risk
Contents of a Prospectus

19. •Used in public issue made under book building. Contains all relevant
details related to issue and company, except price or number of shares
offered. Filed with Registrar before issue opens.
Red Herring Prospectus
• Shortened version of the prospectus issued along with the application
form. Contains all the relevant features of a prospectus in a
summarised form.
Abridged Prospectus
•Sec 70 of Companies Act; Company having a share capital which does
not issue a prospectus is required to submit it to the ROC
Statement –in-lieu of Prospectus
•Used in case of right issue. Shows proportion of allotment and
number of shares allotted to a particular shareholder and its price.
Filed with stock exchange before the issue opens.
Letter of Offer

20. • Enables the public sector banks as well as
public financial institutions to make a series
of issues within a period of one year
without filing a fresh prospectus every time
Shelf Prospectus:
• For the purpose of QIP and contains all the
material disclosures
Placement Document

22. Methods of Pricing the Issue
Fixed
Price
Issue
•Issuer decides the price in
consultation with the merchant
banker and mentions it in the
offer document.
Book
Building
Issue
•Issue price is not fixed in advance.
•Potential investors are asked to bid for the
securities at different prices within an indicative
Price Band decided by the issuer.
•The price is determined by demand and supply
forces in the capital market.
•SEBI announced guidelines on 12th October,
1995

23. Book Building Process
Issuer appoints a Lead Merchant Banker as Book Runner / Book Running
Lead manger/ Syndicate Member
Book Runner assist the company in book building process
Book Runner fixes the Price band and files RHP with ROC
A Price Band is a range of lower level and the upper level within which the
investors can bid. The lower level is called “Floor Price” and the upper level is
called “Cap Price”. Eg: Rs. 450 – Rs 480
Investors can bid at different prices within the price band, at which they are
willing to purchase a particular number of shares

24. Book Building Process
Book runner will open a book in which the number of shares applied for as
well as the price quoted are recorded.
Mr. X – 1000 shares @ Rs. 460; Mr. Y – 2000 Shares @ Rs. 472
On the closure of the issue, the Cut- Off Price or Issue Price is determined.
Price is determined by demand and supply forces in the capital market.
Price = Weighted average at which the majority of investors are willing to
buy the security.
All bids below the cut- off price will be rejected

25. Book Building Process
After the closure of the issue period, bids are classified into different categories
for allotment: QIBs, non- institutional buyers and retail investors.
An application can revise the quantity or price in bid before the closure of the
issue. One can also cancel the bid at any time before the finalisation of the basis
of the allotment
Once the basis of the allotment is finalised, either allotment or refund is made.
Final prospectus with all details including the final issue price and the
size of issue filed with the ROC to complete the issue process.

26. Book Building Process
After the closure of the issue period, bids are classified into different categories
for allotment: QIBs, non- institutional buyers and retail investors.
An application can revise the quantity or price in bid before the closure of the
issue. One can also cancel the bid at any time before the finalisation of the basis
of the allotment
Once the basis of the allotment is finalised, either allotment or refund is made.
Final prospectus with all details including the final issue price and the
size of issue filed with the ROC to complete the issue process.

27. SEBI introduced the moving price band concept
in book building. Price band can be moved by
50% either way- upwards or downwards-
depending on the demand for the issue
Cut- off Option: Special option given to retail
investors in book building to indicate their
willingness to subscribe

28. General Conditions
Issuer or promoters or directors not debarred from accessing capital market by SEBI
Made application for listing in recognised stock exchange
Entered into an agreement with a depository for dematerialization
Appointment of merchant banker and other intermediaries
Filing of Offer document along with specified fee with SEBI and it should be
filed with stock exchange
Underwriting:
Book building issue by Book runners ;
non- book building by SEBI registered underwriters

29. Promoters Contribution & Lock-in- Period
In case of IPO- 20% of post-issue capital; 3 years Lock-in- period
FPO- 20% of Proposed issue size or post- issue capital; 1 year Lock-in- period
Approval from stock exchange where securities are to be listed;
Listing of shares within 3 weeks after closure of the issue
Issue Opening & Closing Period
Fixed Price Issue: 3-10 working days
Book- building Issue: 3- 7 working days; extendable by 3 days if price band
revised
Minimum Application Value for applying the issue range from Rs. 5,000 to Rs.
7,500
Minimum Subscription: 90% of the issue

31. • Application money of investors remain
blocked in the Investors bank account till the
finalisation of allotment in the issue. The
amount will carry interest up to the date of
allotment. At the time of allotment of shares
the amount due to the company is transferred
from the blocked amount.
• SEBI introduced this new mode of payment
for avoiding the unnecessary blocking of
investors amount for a long term from the
Date of application for shares to final
allotment

35. •Financial institution that provides capital to
companies in the form of share ownership
instead of Loan.
•Any person or institution which is engaged in
the business of issue management either as
manager, consultant, advisor or by rendering
corporate advisory service in relation to such
issue management.
• Assist the company right from preparing the
prospectus till the completion of listing of the
securities at the stock exchange.
•Merchant banker coordinating a public issue
is also called Lead Manager.
•Started in India in 1969 with the setting up of
a merchant banking division by ANZ
Grindlays Bank.
1.
Merchant
Banker

36. • Association in Origination function
• Assisting appointment of other intermediaries
• Coordinating other intermediaries
• Drafting of Prospectus
• Pricing of the issue
• Marketing of issue
• Organising publicity campaign
Pre- issue management activities
• Supervising the collection of application
• Screening and sorting the applications
• Allotments and Refunds
• Arranging for dematerialisation
• Arranging for listing
Post Issue Management Activities

37. • Those who agree to subscribe the unsubscribed securities in
case of under-subscription by the public.
• They charge a commission for their service which is known as
underwriting commission.
• Must be registered with SEBI
• Financial Institutions, Bankers, Members of Stock Exchange,
Investment Companies, Trust etc.
• E.g.: SBI, Citicorp Capital Markets Ltd.
2. Underwriters to the Issue
• Members of Stock Exchange who are authorized to market the
issues
• Brokers must be registered with SEBI
• They may engage sub- brokers to assist them
• They are not compulsory for public issue
• Remuneration & terms & conditions of brokerage fixed by SEBI
• E.g.: Geojit BNP Paribas Financial Services Ltd., Karvy Stock
Broking Ltd,
3. Brokers to the Issue

38. • Persons appointed in consultation with lead managers to
assist the issue management functions
• E.g.: Karvy Computershare Pvt. Ltd., CANBANK Computer
Services Ltd.
4.Registrar to the Issue
(Registrar & Share Transfer (R&T)Agent)
• Designing and drafting the format of application form
• Identifying collection centers for application forms
• Opening Collection accounts with bank
• Collecting application forms from banks & scrutinising
forms
• Preparing allotment register
• Finalizing allotment as per basis approved by Stock
Exchange
• Printing refund orders and letters of allotment
• Printing register of members
Major Functions:

39. • Collecting bankers to the issue receive the share
applications along with the required amounts through an
Escrow Account (temporary account opened for the
purpose)
• Co-ordinating Bankers collect information on subscription
and co-ordinate the collection work. They monitor the work
and inform it to the registrars and merchant banker.
5. Bankers to the Issue
• Distribution & Acceptance of application forms
• Collection of application & allotment monies
• Refund of application monies
• Payment of dividend or interest warrants
• Updates on the collection figures to the managers of the
issue.
• Transfer all applications received to registrar.
Activities in connection with the public issue

40. • A market intermediary which is like a bank
who offers the service of holding the
securities of the investors in electronic or
dematerialised form.
• The services of a depository are made
available to the shareholders who open an
account with depository through Depository
Participant (DP).
• Presently Share brokers are normally acting
as DPs.
• Main depositories in India are National
Securities Depositories Limited (NSDL) and
Central Depositories Services Ltd (CDSL).
6.Depository

41. Damu Chandran C
Assistant Professor
P.G. & Research Dept. of Commerce
S. D. College