MODULE 3

PRIMARY MARKET

Introduction

The primary market or

new issue market is the
market where the companies
issue their shares for the first
time and the public can
subscribe to it. It is not a
specific place but extends to all
places where the share or
debentures or other securities of
a company can be subscribed for
the first time. This market is
one major segment of capital
market atm includes all institutions
dealing in the new issues. Thus,
the underwriters, merchant banks,
brokers, investors etc. are
participants in the new issue
market. The new issue market
also includes a bonus issue or
right issue to the existing
shareholders of a company.

3.2 Funct i ons of new i ssue

m ar ket

The new issue market

mainly facilitates the transfer
of resources from savers to
users. Individuals, companies,
banks, etc. have surplus funds
with them. Companies and
governments need funds for
setting up new projects,
modernization,
diversification, etc. The new
issue market mobilizes the
funds from the savers and
transfers them to borrowers for
production purposes. A new issue
market performs this function
through three main services,
viz., origination,
underwriting, and
distribution.
1) Origination: This is a
preliminary investigation
undertaken by the sponsors
of the issue of new shares.
This relates to a careful
analysis and processing of
proposed new projects of
the company. Usually
Merchant bankers take up this work. They also advise the company
on the type of securities to be issued, the number of shares to be
issued, the right time of issue, the methods of issue, pricing of
shares etc . These are part of origination. function.

2) underwriting: Underwriting is an agreement whereby the

underwriter agrees to subscribe to a specified number of
securities if the public does not subscribe to it. If the public
fully subscribes to t h e i s s u e , t h e n t h e u n d e r w r i t e r w i l l h a v e
n o l i a b i l i t y . T h u s , underwriting is a guarantee that the shares
of a company will be marketed and the proposed project will be
financed. Standing behind the issue, outr ight purchase and
consort ium method are t he t hree methods of underwriting'. LIC,
UTI, ICIC1, IDBI are some of the institutional underwriters.
Brokers are non - institutional underwriters.

a. Standing behind the Issue- underwriter guarantees the sale of a

specified number of shares
b.Outright purchase- underwriters purchases the entire issucs at an agreed
price and sell them to investors.
c..Consortium Method: Several underwriter:s join together to do
underwrite. They form a consortium/syndicate for this purpose. It is also
called syndicate underwriting.

3) Distribution: Sale of securities to the investors is the distribution

function. Merchant banks, brokers, agents and other
intermediaries per form this function for the company. A new share can be
distributed
to the investors through public issue, offer for sale, placement, right issue
or bonus issue.
3.3 Methods of floating New Issues

i) Public Issue

(a) Initial Public Offer (IPO)

(b)Further Public Offer (FPO)

(ii) Private Placement

(a) Preferential Issue

(b) Qualified Institutional Placement

(c) Institutional Placement Programme (IPP)

(iii) Rights Issue

(iv) Bonus Issue

(v) Employee Stock Option Plan (ESOP)

3.3. 1. Public Issue

A public issue is an issue where anybody and everybody can

subscribe to the securities. When an issue or offer of securities is made to new
investors for becoming part of the shareholders' family of the issuer, it is called a public
issue. The public issue can be further classified into (a) Initial Public Offer (IPO) and (b)
Further Public Offer (FPO). Both IPO and FPO can be either a fresh issue or an offer
for sale.

Initial Public Offer (IP0): IPO means an offer of securities by an

listed issuer to the public for a subscription (including an offer of sale of its
existing securities) for the first time. It is the first sale of shares of a company
to the public. The Initial Public Offering can be made through the fixed price
method or book building method. IPO -enables listing and trading of the issuer’s
securities in the securities market. The ipo of Coal India Ltd is considered as the
biggest IPO (for Z15,000 Cr.) ever seen in corporate India's history
(
.

Eligibility Norms for IPO: SEBI has laid down eligibility nouns for en tities
accessing the primary market through public issues. The mmain entry norms for
companies making an IPO are as under:

Entry Norm I (EN I-Profitability Route): The company shall meet the following
requirements:

(a) Net Tangible Assets of at least 3 crores for each of the preceding
three full years.

(b) It has a minimum average pre-tax operating profit of 15 crores during the
three Most profitable years out of the immediately preceding five years.

(c) Net worth of at least 1 crore in the preceding three full years.

(d) If the issuing company has changed its name within the last year, at least
50% of revenue for the preceding 1 year should be from the activity
suggested by the new name.

(e) The issue size does not exceed 5 times the pre-issue net worth.

If an issuer does not satisfy any of the above-mentioned conditions, it can make a
public issue if it satisfies the following norm;

2
All net assets excluding intangible assets
- .-
3
Net worth means the aggregate of the paid up share capita l, share premium account, and reserves
and surplus (excluding revaluation reserve) as reduced by the aggregate of miscellaneous expenditure (to the
extent not adjusted or written off) and the debit balance of the profit and loss account.
Entry Norm II (EN II-QIB Route)

The issue shall be through the book building route, with at least75% of the shares to be mandatory,
allotted to the Qualified Institutional Buyers (QIBs).
An IPO cannot be made, if there are outstanding convertib le securities entitling
any person to receive equity shares after the Ip o Every issuer must get IPO
grading from at least one SEBI registe r. credit rating agency.

What is e-IPO?

SEBI now allows Indian companies to make a public offering (fF0) through the online
system of stock exchanges. It is called e-IPO or Online IPO. This will provide for online
submission of bids by investors’ front terminals of stockbrokers. E- IPOs will reduce
the time taken between the share sale and the listing, enhance the reach of retail investors
in the share sale, and reduce costs.

(b) Further Public Offer (FPO): When a listed company makes either an afresh issue of
securities to the public or an offer for sale to the public, it is called an FPO. It is also
called Follow on Public Offer.

It is the subsequent public offer of securities of a listed company. FPO is also known
as Seasoned or Subsequent Public offer.

Eligibility norms for making an FPO: The main entry norms for companies
making an FPO are as under:

(a) If the issuing company has changed its name within the lone year, at least 50%
of revenue for the preceding year should be from the activity suggested by the
new name.

(b) The issue size does not exceed 5 times the pre-issue net worth.
4
The grade represents a relative assessment of the fundamentals of the IPO issue.
 Any listed company not fulfilling these conditions shall be eligible to
make an FPO by complying with Entry Norm 11 as specified for IPOs.

Methods of Public Issue

The methods of offering a public issue (IPOIFPO) can be of two types: (I)
Offer through Prospectus (Fresh Issue) (II) Offer for Sale.

1.Offer through Prospectus

public issue through prospectus is the most popular method of distribution of
shares of a company. The prospectus is an offer document containing the details of the
company. The name of the company, address, location of the industry, authorized, paid
up and subscribed capital, date of opening and closing of subscription list, names
of lead merchant banker, brokers, and underwriters, name of the board of
directors, activities of the company and other important data must be included in the
prospectus. After going through these details, the public can decide either to subscribe
or not to subscribe to the shares. The draft of the prospectus must be approved by
the board of directors, financial institutions, designated stock exchange, etc. An
abridged prospectus is being annexed to every share application form.

Any company making a public issue (or a listed company making a rights issue)
of the value of more than 50 lakhs is required to file a draft prospectus along with the
specified fee with the SEBI.

Pricing of Issues

The issuer can determine the price of shares. The justification for the same
should be given in the offer document. There are two methods of pricing an issue
viz., fixed Price Issue and Book Built Issue.

(a) In a fixed price issue, the issuing company, in consultation with the lead
merchant banker, decides the price of the issue and discloses the same in the
prospectus. The issue will be subscribed by the public on the basis of the issue
price fixed, and shares are allotted accordingly.
 (b) In bookbuilt issue, the issuer stipulates only a price band ,
prospectus (namely Red Herring Prospectus) consisting of a floor
price and a cap price, and the final price will be decided on the basis
of demand for the issue. On the basis of the final pric e . market
demand the bids arc evaluated and successful bidder allotment.
The final prospectus with all the details including the final
issue price and issue size should be filed with ROC
RegistrarofCompanies).

Forms of Offer Document

Offer document means Prospectus in case of a public issue or

for sale and Letter of Offer in case of a rights issue. It contains all the
relevant information about the company and is used for inviting
s u b s c r i p t i o n s t o t h e i s s u e b e i n g m a d e b y t h e i s s u e r • The different
forms of offer documents are explained.
 The prospectus is an offer document in case of a public issue, which
all relevant details including price and number of shares
being offered.

 Abridged Prospectus contains all the salient features

Of prospectus. It accompanies the application form of the public issue.
 Red Herring Prospectus (RHP) is a prospectus, which does
have details of either price or number of shares being offered,or
amount of issue.In case the price is not disclosed the number of shares & the upper
&the lower price bands are disclosed. On the other hand an issuer can state the issue
 size, and the number of shares are determined later. REP is used normally in
case of a book built public issue.

 Statement-in-lieu of Prospectus: Sec.70 of the Companies Act 1956

provides that a company, having a share capital, which does not issue a prospectus is
required to submit to the Registrar of Companies statement in lieu of prospectus.
 .
 Letter of offer means the offer document prepared by the
company for the right issue.
 Placement Document means a document prepared
b y a M e r c h a n t b a n k e r f o r t h e p u r p o s e s o f Qualified
institutIons placement.
 shelf prospectus is a prospectus that enables an issuer to
make a series of issues within a period of one 1year without
the need of filing a fresh prospectus every . time.

Advantages of an issue through the prospectus

 A large number of investors could be contacted through a
prospectus.
 Services of intermediaries are not necessary for this.
 Concentration of shares in a few hands is avoided. As the
shares dispersed over a number of people.
Demerits
 It is suitable only for large issues.
 The company has to incur additional expenses on an advertisement,
b a n k ' s c o m m i s s i o n , u n d e r w r i t i n g , l e g a l charges etc.
II. Offer for Sale (OFS)
Offer for sale is an indirect offer of securities to the sponsoring intermediary.
This is out the right sale of shares through intermediaries. Issue houses, merchant
bankers, brokers etc. Shares are not offered to the public directly. The intermediaries,
after buying the entire shares, resell them to the investing public. In this case, the issue houses (or
other intermediaries) act as agents of the company.OFS mechanism facilitates the promoters of an
already listed company to sell or dilute their existing shareholdings. Investors can buy
shares in OFS by bidding through their brokers.
 The advantage of this method is that the company need not be bothered about the
printing and advertisement of the prospectus, allotment of shares etc. Foreign
companies who want to participate in the share market and Indian investors and
promoters who want to sell their shares usually adopt this method.

Categories of Investors

There are three categories of investors who can participate in the public
issue;

1. Retail Individual Investors

2. Qualified Institutional Buyers (QIBs)

3. Non-Institutional Investors

As far as an IPO (initial public offer) is concerned, the total shares issued to
the public are divided into three major parts for 3 different categories of
investors.

1) Retail Individual Investor (RII) means an investor (individuals & HUFs)

who applies or bids for public issue of securities for a value of not more
than 2 lakhs. A minimum of 35% of the issue should be reserved for RIIs. Any
investor who applies or bids in excess of this will be considered in the Non
Institutional Investor (NII) category.

2) Qualified Institutional Buyer (QIB) : They are institutional investors

in the securities market. Financial institutions such as banks, mutual
funds, insurance companies, foreign portfolio investors, provident
funds, scheduled commercial banks, pension funds etc. come under
this category.

Amaximum of the issue can be kept reserved for investors falling under the QIB
categoryory.

A n c h o r i n v e s t o r : A n a n c h o r i n v e s t o r i s a Q I B w h o m a k e a n application
value of 10 crore or more in a public issue.
3) Non-Institutional Investor (NII) means an investor other than a retail
 individual investor and qualified institutional buyer. In other words, resident
Indians, HUFs, companies, NRIs, societies, and trusts whose application size
exceeds 2 lakhs are included under this category. T h e y are also called High
Networth Investors (HNIs). At least 15%of the total issue should be
reserved for this category-
SEBI Regulations for Public/Rights Issue

As of now, the regulations guiding the issues by an Indian company i s S E B I

(I ssue of Capi t al and Di scl osur e Requi r em ent s [I CDR- ]r egu lations, 2009.
Highlights of the same are given below.

I. General Conditions
The issuer can make a public issue or rights issue of securities only if:

(i) The issuer or its promoters or directors are neither debarred by SEBI
from accessing the capital market nor included in the list of defaulters
published by RBI.

(ii) The issuer has made an application for listing to one or more recognized
stock exchanges.

(iii) The issuer has entered into an agreement with a depository dematerialization.

(iv) All existing partly paid-up equity shares of the issuer have either been
fully paid up or forfeited.

I I . E l i g i b i l i t y N o r m s f o r I P O / F P O D i s c u s s e d e a r l i e r u n d e r t h e headings
"Initial Public Qffer" and "Further Public Offer".

Public sector banks, Private sector banks and infrastructure companies

subject to conditions, and listed companies making rights issue are
exempted from the entry norms.
 III.Appointment of merchant banker and other intermediaries

a.The issuer shall appoint one or more merchant bankers, at least one of whom
shall be a lead merchant banker.
b.The issuer appoints other intermediaries (underwriters, brokers, b an ke r s t o
i ss ue , s yn di ca t e m e m b er s e t c ) t o t he i s su e i n consultation with the
lead merchant banker.

c.The issuer should appoint syndicate members in case of book built issue
and in the case of any other issue, bankers to an issu e at all mandatory
collection centers.

IV. Filing of Offer document

1) The issuer should file a draft offer document along with the specified
fee with the SEBI (for observation) through the lead merchant banker.

2) The offer document should also be filed with stock exchange where
the securities are proposed to be listed (Designated Stock Exchange).

V.Approval from Stock Exchange

a - The issuer shall obtain in-principle approval from recognized stock

exchange (RSE) where the securities are proposed to be listed.

VI.Publication of Draft Offer Document: The offer document should be

made public for 21 days by hosting on the websites of SEBI/ merchant
banker.
VII. underwriting: While a non-book built public or rights issue can
through the book building mechanism should be underwritten by
bookm runners/syndicate members.

VIII.pricing of Issues: An issuer may determine a fixed price for

the specified securities in consultation with the lead merchant
banker or through the book-building process.
IX.Promoters Contribution & Lock-in-Period :
T h e m i n i m u m c ontribution from the promoters of the issuer shalt
be:

 In case of an IPO — at least 20% of the post-issue capital

(with a lock-in period of 3 years)
 In case of an FPO — 20% of the proposed issue size/post-issue
capital (with 1-year lock--in-period)
X. issue Opening and Closing Period : The period for which a
public issue kept open is;

 Fixed Price Issue: 3- 10 working days

 Book Built Issue: 3- 7 working days (extendable - by 3 days
in case of a revision i n pri ce band)

XI .A d v er t i se m e n t s : T h e i ss ue r af t er r e gi st er i n g t he RH P
wi t h ROCshould make pre-issue advertisements (at least one working
day prior to bid opening date) with necessary disclosures. The
price band, retail discount, employee discount, minimum bid lot
size etc should be published in two national daily news papers (in
English & Hindi) with wide circulation. There should be
advertisement on the issue opening and closing dates.
XII. Mi n im u m App l i cat i on Val ue : The m i ni m um appl i cat i on
val ue for applying the issue should be in the range of Rs.
10,000 to Rs. 15,000. Appli cati ons should be i nvit ed in
multi pl e of t he mi nim um application value (minimum lot
size).

X111. Mi n im u m Su b scri pt i on: The m i ni m um subscr i pt i on to

receive in an issue shall not be less than 90% of the offer. In
t event of a non-receipt of minimum subscription, all the application
amounts of money received shall be refunded to the applicants
within days (if the issue is not underwritten) or 7 days if the
issue underwritten.

XIV. O versu b scri p t i on: It si t uat i on i n whi ch t he dem and

for publ i c issue of securi ti es exceeds t he num ber of
shar es off er ed i n case of oversubscription, an allotment
of not more than 10% of the net offer to the public may
be made for the purpose of making allotment in
minimum lots.

XV. Allotment to Investors: The allotment of securities to

applicants s h a l l b e o n a pr o p o r t i o n a t e b a s i s w i t h i n
t h e s p e c i f i e d i n v e s t o r categories as follows;
a) In Fixed price issue:
Retail individual investors — at least 50% of the
securities offered. Remaining, to another
individual
applicants and investors. (ii) In a book built issue:
 Retail Individual Investors — not less than 35% of the
securities offered
 Non-Institutional Investors — not less than 15%
 Qualified Institutional Buyers — not more than 50%.

XVI. Allotment & Refunds: Securities are allotted and/or

application money are refunded within the specified time period
as given below;

 Fixed price issue: 30 days of the closure of the issue.

n Book built issue: 15 days of the closure of the issue.

Failure of this will lead to payment of interest at a rate specified

in the offer document.

XVI. Listing of Securities : In Book built issue, the listing of shares

will be done within 3 weeks after the closure of the issue. For IPOs, the
issuer has to list the shares within 12 days of the closure of the subscription. In
case of a Fixed price issue, the listing of shares has to be done within 37 days
after the closure of the issue. SEBI has further reduced the listing period from 12
days to 6 days (of the last date of IPO) which will come into effect on 1 January
2016.

3.3.2 Private Placement

Shares can be distributed through outright sale by companies to a select
group of persons (u/s 80 of the Companies Act 1956). This is known as
displacement or private placement. In other words, when an issuer makes an
issue of securities to a select group of persons not exceeding 49, it is called a
private placement.

In this case, the issue houses or brokers can buy the securities from the
company and sell them to their own clients. In private placement, the promoters
may sell a portion of the issue to the friends and well-wishers. Financial
institutions, mutual funds, investment banks etc. subscribe to placement orders.

•GREEN SHOE OPTION (GSO)

Green Shoe Option means an option of allotting equity shares in excess of the
equity shares offered in the public issue as a post-listing price stabilizing
mechanism. It is also referred to as the overallotment option. The operation of
the post-listing price stabilization mechanism should not exceed 30 days from
the date of allotment and 15% of the issue size. The term is coined from the
name of the company which first used this option in U.S., Green Shoe
Co.Company appoints merchant banker/book-runner as Stabilising Agent (SA),
who is responsible for price stabilization process. The SA, to ensure post-
listing price, buys shares from the market when t he shar e pri c es fal l . SA i s
al so r esponsible fo r me eting exc ess demand. For this purpose, he lends
shares from promoters and pre-issue shareholders,

Types of private placement

Private placement of securities by listed issuer can be of three types:

(a) P r ef e r e n t i a l l s s u e / A l l o t m e n t
(b) Qualified Institutions Placement (QIP)
(c ) Institutional Placement Programme (IPP)
 (a) Preferential Issue/allotment: Preferential Issue means a l l i s su e of
specified securities by a listed issuer to any select person or group
of
persons on a private placement basis.

An issuer can make preferential issue of securities only if, a special

resolution by the shareholders has been passed.
The price of issue should be the price higher of the average of th e
weekly high and low of the closing priCe of the related shares quoted o n
the stock exchange during the (a) 6 months and (b) 2 weeks preceding
the relevant clate 9 .

( b) Q u a l i f i e d i n s t i t u t i o n s P l a c e m e n t ( QI P ) : W h e n a l i s t e d i s s u e r
issues/allots securities to Qualified Institutional Buyers
(QIBs) o n private placement basis, it is called a QIP.

Conditions of QIP
a. An issuer can make a QIP only if a special resolution 'approving
the
alified institutions placement has been passed by its shareholders.

b. The QIP should be managed by a merchant banker. The qualified

institutions placement shall be made on the basis of a placement
docum ent whi ch shal l cont ai n al l m at er i al i nf or m at i on.
 relevant date. in case of preferential issue of equity shares means, the date
30 days prior to the date on which the shareholders meeting to consider the
issue is held. In QIP, the relevant date means the date of BoD meeting
authorizing the issue through QIP route.
placement method is useful, when the market is depressed.The issue cost is very law.
Small companies may also find it useful as they cannot spend huge
money on prospectus and advertisement. The disadvantage of this
method is that the shares may be concentrated in a few hands who way
take control of the company.

c)Institutional Placement Programme( IPP): When a listed company

makes a further public offer (or offer for sale) of equity shares, in which the
allocation and allotment is made only to qualified institutional buyers, it is
called an IPP. This route is available only companies which are currently not in
compliance with the Minimum_public shareholding requirements". Any offer,
allocation and allotment of securities under the IPP route shall be made only to
qualified institutional buyers (QIBs).
Since the IPP route is available only by way of a public offer, the
minimum number of offerees under the IPP route would be more than 49 in
number. An offer of securities under the IPP' route is required to be backed
by a special resolution of the shareholders of the issuer company.
3.33 Rights Issue
Shares offered to the existing shareholders of a company arc called rights
issues. The right of shareholders to receive the right shares is called 'Pre-
emptive right'. The shares are offered in a particular proportion to the
existing share ownership. The rights issue is made to the
shareholders existing as on a particular date called record date. The
proportion may be decided on the basis of capital requirement of the
company. Such shares are marketable in the market by the owners.
Successful companies adopt this method for fundraising.
 As per market regulator SEBI's minimum public shareholding norms, all
private sector listed companies need to have at least 25percent public
shareholding and promoters have been asked to lower their stake to 75 percent
or below June 2013. For the public sector companies, the minimum public
shareholding has been fixed at 10 percent and the deadline is till August
2013.

The prospectus prepared by the company for rights issue is called letter of offer.

The important provisions relating to rights issue are as follows;

1. According to section 81 of the Companies Act, a company can make a rights

issue

 after the expiry of two years from the date of formation, or

at any time after the expiry of one year from the date of allotment of shares for
the first time after its formation, whichever is earlier.
2. No company shall make a rights issue of equity shares if it
has outstanding fully or partly convertible debt instruments at
the time of making rights issue.

3. The company should send a circular to all existing shareholders

stating the fact of the rights issue.
4. The company should give a time limit of at least 15 days to one
month to shareholders, to raise their right before it is offered to
the public.
If the rights are not fully taken up; the balance is to be
equitably distributed among the applicants for additional shares.

The issue price of rights shares can be decided by the

company . Rights shares are usually offered at a rate lower than the
prevailing market price.
Rights issue is advantageous to the company as the cost of issue is
minimum. Underwriting, advertising and brokerage expenses could be
 avoided in this case. The control of the company is undisturbed as the
shareholders get shares according to their holdings of shares .

C o m p o s i t e I s s u e
It is a mixture of rights and public issue. When the issue of shares by a
listed company on public cum-rights basis, wherein the allotment in both
public issue and rights issue is proposed to be made simultaneously, it is
called composite issue.

3.3.4 BONUS ISSUE

A bonus issue is the issue of shares to the existing shareholders out of the free
reserves of the company.The existing shareholders get this as a bonus without
payment of money.As the free reserves are capitalized there will be an increase
of equity capital.Share issued as bonus are called bonus shares.

Conditions of Bonus Issue

A listed company can issue bonus shares if :
a)It is authorised by its articles of association for the issue of bonus shares.

b) It has not defaulted the payment of interest/principal in respect of fixed

deposits/debt securities issued by it.

c)It has not defaulted in respect of the payment of statutory dues of t h e

employees.
d) It has made partly paid up shares fully paid up.
 Bonus issue should be made out of free reserves built out of genuine
profits/securities premium collected in cash only. Reserves created by
revaluation of fixed assets are not capitalized.

The declaration of a bonus issue, in lieu of a dividend, is not to be made. The

bonus issue should be implemented within 15 days from the date of its approval
by the Board of Directors (BoD) of the issuer.

33.5 Employee Stock Option Plans (ESOPs)

An Employee Stock Option Plan (ESOP) means a plan under which the
company offers an option to their employees to own the share of the company
they are working. There are different ways in which employees can receive
stocks and shares of their company. Employees can receive them as a bonus,
buy them directly from the company or receive them through an ESOP. The
main purpose of an ESOP is to retain, reward, and motivate employees.

Employee Stock Option is an option given to the whole time directors, officers or
employees of a company to purchase the securities offered by the company
at a pre-determined price, at a future date.
The option granted to an employee should not be transferable to an y
person; the option can only be exercised by the employee to whom
th e option is granted. Shares can be issued under employee stock option
only wi t h t he appr oval of shar ehol der s by way of speci al r esol ut i on.

TYPES OF ESOPs

There are three types of ESOPs viz.

1. Employee Stock Option Scheme (ESOS):- It is a scheme in whi c h the
company grants an option to its employees to acquire share s at a
pr ed et er m i ne d pr i c e at a f ut u r e da t e . O pt i o n i s gi ve n at price
 called exercise price, which is normally lower
than th e cur r ent
m ar ket pr i ce of t he shar es.

2. Employee Stock Purchase Scheme (ESPP):- It is a plan in whi c h t h e

company gives right to its employees to acquire share s
d i r e c t l y f r o m t h e c o m p a n y a s p a r t of p u b l i c i s s u e . H e r e t h e
employees of a company are given right to acquire share s
immediately, not at a future date as in ESOS, at a price lowe r
than the current market price.
3. Share Appreciation Rights (SARs):- Under this scheme , no shares are
issued; employees get the appreciation in the share pri c e f r o m
t h e d a t e of t h e g r a n t t o t h e d a t e o f t h e e x e r c i s e a s a n
incentive for performance. SARs are also called Phantom
Shares.

Exercise price means the price payable by the employee for

exercising the option granted to him. The companies will have the
freedom to determine the exercise price subject to conforming to the
policies- ESOP has been included in the purview of perquisites
under sections 17(2) (vi)of the Income Tax Act.
As per the SEBI Guidelines ESOP should not exceed 5% of the
postissuecapital.

3.4 Methods of Pricing an Issue

On the basis of methods of determining the price of an issue, the issue can
be;
(i) Fixed Price Issue, or
(ii) Book Built Issue

3.4.1 Fixed Price Issue

 When the issuer decides the price in consultation with the merchant
b a nker and mentions it in the prospectus, it is known as a fixed price issue.

3.4.2 Book Building

Book building is a pricing mechanism whereby new securities are

priced on the basis of the assessment of market demand. In simple terms, it
is a mechanism by which the issue price is discovered on the basis of bids
received from investors through syndicate members or brokers. The syndicate
members or brokers collect feedback from prospective investors. On the
basis of this information, the company fixes the issue price of shares.

This is considered the most practical mechanism for quick and efficient
management of mega issues.
 Fixed price vs Book Built
Price at which securities will be allotted is not known (in advance) in case of offer of
shares through book building, while in case of fixed price issue, price is known in
advance to investor. In case of Book Building, the demand can be known every day as •
■■

the book is built. But in case of fixed price issue the demand is known only at the close
of the issue.

SEBI (Disclosure And Investor Protection) Guidelines 2000

Defines the term book building as "a process undertaken by which 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 determinati on of the quantum of such
securities to be issued by means of a notice circular, advertisement, document or
information, memorandum or Offer document."
Thus, book building can be understood as an international practic e
that refers to collecting orders from Qualified Institutional Buyers (QIBs), Non-
Institutional Investors and Retail Investors, based on an indicative price range or
price band. The price band consists of a floor price and a cap price. The floor price
is the minimum price and the Cap price is the maximum price in which a bid can
be made. For Instance, In Coal India's (CIL) IPO the price band was 225 - 245.
Investors can bid at any price between 225 (floor price) and 245 (cap price). After the
bidding process is complete, the issue price has arrived on the basis of the demand
for securities. The issue price for CIL after the close of the bid was 245.

"Price for Qualified institutional Buyers & Non-Institutional Investors. Retail

investors will get 5 percent discount on the issue price.
 ye.
• •-

The facility provides the issuer lead merchant

banker with the flexibility of price and demand discovery. The system is more suited
existing companies as past financial data are available for analysis.

Book Runners
Book Runners or Book Running Lead Managers (BRLMs) and syndicate
, members are the two important intermediaries in the Book buiding process. The lead
merchant bankers appointed by the Issuer company are referred to as the Book Running
Lead Managers or Book runners. They assist the company in the book-building process.
The Book runners appoint the Syndicate Members, who enter the bids of investors in the
book building system and also act as underwriters.
In Book building the Book Runner (Book Running Lead Manager) builds up the book
based on bid offers from the syndicate members.
Types of Book Building System
In book building, the book can be of two types; (i) Open Book and (ii) Closed
Book. In the open book building system, there is an online display off the demand and
bids during the bidding period in the terminals of both the NSE and BSE (IPO Live).
This helps the investor to know the movement and quantum of the bids during the
bid period. Under closed book building system, the book is not made public and the
investors make a bid without having any information on the bids submitted by
other bidders.

Larsen & Toubro, ICICI, Tisco, etc. had the earliest mega issues through the book
building route. Recently Coal India Ltd, GRAVIT A. India Ltd and Power Grid Corporation of
India Ltd (FPO) made issues through 100 percent book building route.

Book Building - The process

The book-building process can be summarized as follows

1) The Issuer, who is planning an offer, appoints a lead merchant banker(s) as 'Book runner' or
'Book Running Lead Manager'.

2) Book runner prepares the draft red herring prospectus (RHP) and other documents to be filed
with SEBI and ROC.

3) The Issuer specifies the number of securities/issue s i z e s t o b e issued, the price

band for the bids and the minimum bid size in the RHP,

4) The book runner circulates the draft prospectus filed with SEBI to different
categories of investors.
5)The Issuer also appoints syndicate members, stockbrokers & S C S B s f or t h e
p ur p o s e o f a c c e p t i n g b i d s , a p p l i c a t i o n s , and placing orders with the issuer.

6)The book-built issue normally remains open for a period of 3 TO 7 w o r k i n g

days.
7)During the period, when the issue is open to the public for bidding t h e a p p l i c a n t s
m a y a p p r o a c h t h e s t o c k b r o k e r s o f t h e s t o c k exchange/s through which the
securities are offered under an on line system or Self Certified Syndicate Banks, as
the case may be, to place an order forbidding for the securities.

8)The syndicate members/brokers/Self Certified Syndicate Banks (SCSBs) input the

orders into an 'electronic book'. This process is called 'bidding'.

9)The syndicate members/brokers intimate the book runner about the orders
received by them. On receipt of an offer, the book r u n n e r e n t e r s t h e n a m e a n d
n u m b e r o f s h a r e s o r d e r e d b y investors and the price at which they are willing
to subscribe. I n f act , he bui l ds up a book of or der s fr om t he m em ber s of
syndicate.

Reverse Book Building

 Rever se Book Bui l di ng i s a pr i ce di scover y m echani sm f or companies who
want to delist or buy back their shares from the shareholders It is a mechanism where,
during the period for which the reverse book building is open, offers are collected from
the shareholders at various prices, which are above or equal to the floor price. The buyback
price is determined after the offer closing date…

INTERMEDIARIES IN THE NEW ISSUE MARKET

1. Merchant bankers
2. Underwriters
3. Registrar & share transfer agents
4. Brokers to the issue
5. Banker to the issue
6. Syndicate members
7. Depositories

These intermediaries arc appointed by the issuing company for

facilitating the issue process in the primary market. Their roles are
explained below;

1. Merch an t Ban k ers (Managers t o the Issue)

Merchant banker means any person/institution who is engaged in
the business of issue management either by making arrangements fo r selling,
buying, or subscribing to securities as manager, consultant, advis or or rendering
corporate advisory services in relation to such issu e management.

T hi s i s t he m ost i m por t ant i nt er m edi ar y i n t he pr i m ar y m ar ket .

Management of public issues is the most important function of a merchant
 banker. SEBI Regulations 1992 prescribe that all public issues should be managed
by at least one merchant banker functioning as a Lead manager or Manager to the
Issue. If the issue is through the book-building process.
the lead merchant banker appointed by the issuing company is referred
to as the Book Running Lead Manager (BRLM) or Book Runner.

Depending on the size of the issue there can be more than one manager to
the issue. If the size exceeds 400 crores there can be five or more managers as
agreed by SEBI.
The Managers to the issue assist the promoters in designing th e capital structure, drafting
the prospectus and application forms, the listing of shares, the appointment of registrars and other
operators in the new issue, arrangement of long-term loans, marketing of public issues, etc. The lead
manager prepares Draft Red Herring Prospectus (RHP) and is responsible for any irregularities in the same.
The company should enter into memorandum of understanding with the managers to the issue in
the form prescribed by SEBI.
I Pre-Issue management Functions of Merchant Banker

1 ) Co-ordinate the activities relating to issue with different Govt and

public bodies, professionals, and private agencies.
2)Ensure that the information required by the Companies Act & SEBI i s
f u r n i s h e d i n t h e p r o s p e c t u s . A r r a n g e m e n t s f o r dematerialization of
shares.
3) Compliance of formalities for listing in stock exchanges and other
approvals.

4) Appointment of various intermediaries like Bankers to issue, underwriters,

Registrars to issue etc.
5)Finalise arrangements relating to the date of opening and closing issue,
registration of prospectus, launching publicity campaigns & fixing the date of Board
meeting, approve and sign prospectus and pass the necessary resolutions.

6)Help the company in finalizing the price band.

I I . P o s t - I s s u e M a n a g e m e n t A c t i v i t i e s — R e g i s t r a r t o t h e i s s u e performs major
role here.

1) Supervising the collection of filled-in application form' statement of

accounts from bankers.

2) Screening applications, deciding allotment procedure, mailing of

allotment/regret letters, re-fund orders etc.

3) Finalising the issue price.

4) S u b m i t t i n g t h e b a s i s o f a l l o t m e n t a n d o t h e r c o m p l i a n c e certificates
to SEBI, Registrar of Companie s and the st o c k exchange.
 5 ) M a n a g e m e n t of c s c r o w / A S B A 1 5 a c c o u n t s

6 ) Listing of the shares in the stock exchange.

7 ) E n s u r i n g t h e p r o p e r f u n c t i o n i n g o f o t h er i n t e r m e d i a r i c
appointed.

Merchant bankers assist the issuing company right from the

preparation of prospectus till the listing of the securities at sto c
exchange. As of now there are 185 merchant bankers registered \ v i,
SEBI. DSP Merril Lynch Ltd., ICICI Securities, SBI Capital Mark Ltd.,
JP Morgan India Pvt. Ltd. etc., are few known names.

2. Underwriters to the Issue

A public issue is said to be a success only if it has achieved ti

minimum subscription of 90%. In the event of non-receipt of nni rn i i

subscription the issuing company has to terminate the public issue pro ce and
refund the application money. The services of underwriters are u s by
issuing companies to overcome the risk of under subscription.

Underwriters are financial institutions who make a firm cornmit ui( that
they will take up the shares up to a certain amount if the public d c not
subscribe to it. This is an agreement with one or more institutic and a
guarantee of the marketability of shares. Underwriting is mand ate for the
public Issue 1 6 . Underwriters are appointed by the company consultation
with the managers to the issue. Financial institutio bankers, members
of stock exchanges, investment companies, trusts

can act as under writers.

Underwriters charge a commission for their service which is known as

underwriting commission .The underwriters must be registered with
SEBI.
 a Eg; Citicorp capital Markets Ltd., State Bank of India etc.

Earlier, if you applied to an Initial Public Offer (IPO), you would need to pay
the full application amo the Escrow Account specified in the form. After the 2-3
weeks of processing time, the allotment would be I and any excess amount would
be credited back to your Bank account. In Applications Supported by Bi Amounts
(ASBA). you only authorize blocking the application amount in your own Bank
account while appliying. When allotment is done, only the money corresponding
to the allotted shares gets debited from your ac You continue to earn interest on
your money in the interim till allotment is done.

A public issue through book building mechanism should be underwritten by book

runners/syndicate members.

3.Brokers to the Issue

They are the persons authorised to market the issues. Companies
Can engage any number of brokers to market the new issue. The brokers engage
sub-brokers and they send their own circulars and applications to the
clients and follow up the work for canvassing the 511scription. Brokers to the
issue are not compulsory for public issues, but their expertise and contacts with
investors could be used for marketing the issue. Remuneration to the broker and
terms and conditions of the brokerage is fixed by SEBI, There are 1021 brokers—
and more than 96,000 sub brokers registered with SEBI. Geojith BNP Paribas
Financial services Ltd., JRG Securities Ltd., Karvy Stock Broking Ltd., UTI
Securities Ltd., UAE Exchange & Finance Ltd., Sharekhan Ltd. etc are one of few
brokers.
4.Registrars to the Issue (Registrar and Share Transfer (R&T) Agents.)
The agent plays a significant role in a public issue along with the lead mana gers.
Registrars are persons appointed in consultation with lead m anagers to assist the issue
management functions. Their work relates to pre-issue management, management
during the currency of issue, pre-allotment work, allotment work and post allotment work.
It is their duty to collect the application forms from bankers to the issue, process them
for allotment and issue a certificate of allotment.
Functions of Registrars
1) Designing and drafting the format of the application form for the merchant
banker or lead manager.
2) Identifying collection centers of application forms.
3) Openi ng col l ect i on account s wi t h banks.
4) Col l ect i ng appl i cat i on f orm s fr om banks.
5) S c r u t i n i z i n g a p p l i c a t i o n f o r m s .
6) Informing the merchant bankers and the company of the total subscription.
7) P r e p a r i n g a l l o t m e n t r e g i s t e r .
8) Finalizing the allotment as per the basis approved by the sto c k exchange.
9) Ensuring that the corporate action for crediting of shares to the Dem at
account s of t he appl i cant s i s done.
10) P r i n t i n g r ef u n d o r d e r s a n d l e t t e r s o f a l l o t m e n t .
11) Submitting all statements to the company for their final approval.
12) P r i n t i n g R e g i s t e r o f m e m b e r s .
13) H e l p i n g t h e c o m p a n y i n g e t t i n g t h e s h a r e s l i s t e d .

The Lead manager co-ordinates with the Registrar to ensure follow

up so t hat the flow of appli cati ons from coll ecti ng bank br anches
 processing of the applications and other matters till the basis of allotment is
finalized, dispatch security certificates and refund orders completed securities
listed, within the stipulated time. 66 SEBI registered R&T agents are now
functioning. E.g., Karvy Computershare Pvt. Ltd., Ankh Consultancy Pvt. Ltd.,
CAN BANK Computer Services Ltd., Deutsche investor Services Pvt. Ltd. etc.
5. Bankers to the Issue
Bankers to the issue collect the application forms and the money in cash, cheque, or
ASBA . Depending on the size of the issue there may collection centers and many
bankers. They are appointed in be Isolation with the lead manager. Infrastructure
facilities available, manpower, past experience, location of branches, efficiency
and cost-effectiveness etc are parameters for the selection of bankers to the issue.
The Lead Merchant banker shall ensure that Bankers to the Issue are appointed in
all the mandatory collection centers as specified in SEBI
ICDR Regulations. The Lead manager also ensures follow-up with bankers to the
issue to get quick estimates of collection and advise the issuer about closure of the issue,
based on the actual figures.

The banker to the issue will transfer all the applications received to the registrar to
the issue on the closure of issue subscription. They also
help the issuer in marketing the issue by distributing the application forms and publication
materials.

The banker to the issue will transfer all the applications received to the registrar to
the issue on the closure of issue subscription. They also
help the issuer in marketing the issue by distributing the application forms and publication
materials. As of now there are 57 banks registered with SEBI as Bank an Issue under the
 SEBI (Bankers to an Issue) Regulation s, 1994.Al these banks are eligible to act as Self
Certified Syndicate Bank for the purpose ofASBA.

6 . S yn d i c a t e M e m b e r s
Syndicate Members are commercial or investment banks registered with SEBI who also
carry oil the activity of underwriting in IPO(in case of book built issue). This
intermediary plays important role in a book built issue along with book-running lead
manager. The Book Runner Lead Managers to the issue appoint the Syndicate Members,
who the bids of investors in the book building system.

Syndicate members work as intermediaries for issuer company, and the buyers of the IPO
stocks. Investors submit their bids for IPO share through Syndicate Members appointed
by the Issuer Company. They are also known as 'the Members of the Syndicate.
The Members of Syndicate circulate copies of the Red Herring Prospectus along with
the bid cum application form to potential investors. After receiving the bid for IPO
Shares from an investor, Syndicate Member enters bidding d etail i n t o t h e e l e c t r o n i c
b i d d i n g syst em and gener at es a Tr ansact i o n Registration Slip (TRS) for each price
and demand option and gives the same to the bidder.

7. Depositories

A depository is an organization that holds securities (like shares, debentures, bonds,

government securities, mutual fund units, etc.)of investors in electronic form at the
request of the investors through a registered Depository Participant. It also provides
services related to transactions in securities. Since the securities are issued in Demat
form.The issuing company will have to appoint a depository & the applicant of shar es
have t o quot e t hei r dem at account num ber i n t he shar e share application form.