2 .

1 Re gula t or

W hy does Securit ies M ark et need Regulat ors?

The absence of condit ions of per fect com pet it ion in t he secur it ies m ar ket
m ak es t he r ole of t h e Regulat or ex t r em ely im por t ant . The r egulat or ensur es
t hat t he m ar k et par t icipant s behav e in a desir ed m anner so t hat secur it ies
m ar k et cont inues t o be a m aj or sour ce of finance for cor por at e and
gov er nm ent and t he int er est of inv est or s ar e pr ot ect ed.

W ho regulat es t he Securit ies M ark et ?

The r esponsibilit y for r egulat ing t he secur it ies m ar ket is shar ed by

Depar t m en t of Econ om ic Affair s ( DEA) , Depar t ment of Com pany Affair s
( DCA) , Reser v e Bank of I ndia ( RBI ) and Secur it ies and Ex change Boar d of
I ndia ( SEBI ) .

W hat is SEBI and w hat is its role?

The Securit ies and Exchange Board of I ndia ( SEBI ) is t he regulat ory
aut hor it y in I ndia est ablished under Sect ion 3 of SEBI Act , 1992. SEBI Act ,
1992 pr ov ides for est ablishm ent of Secur it ies and Ex change Boar d of I ndia
( SEBI ) w it h st at ut or y pow er s for ( a) pr ot ect ing t he int er est s of inv est or s in
secur it ies ( b) pr om ot ing t he dev elopm ent of t he secur it ies m ar k et and ( c)
r egulat ing t he secur it ies m ar k et . I t s r egulat or y j ur isdict ion ex t ends ov er
cor por at es in t he issuance of capit al and t r ansfer of secur it ies, in addit ion t o
all int er m ediar ies and per sons associat ed w it h secur it ies m ar ket . SEBI has
been obligat ed t o per for m t he afor esaid funct ions by such m easur es as it
t hinks fit . I n part icular, it has powers for:

§ Regulat ing t he business in st ock ex changes and any ot her secur it ies
m ar k et s
§ Regist er ing and r egulat ing t he w or k ing of st ock br ok er s, sub–br ok er s
et c.
§ Prom ot ing and regulat ing self - r egulat or y or ganizat ions
§ Pr ohibit ing fr audulent and unfair t r ade pr act ices
§ Calling for infor m at ion fr om , under t ak ing inspect ion, conduct ing
inquir ies and audit s of t he st ock ex changes, int erm ediaries, self –
r egulat or y or ganizat ions, m ut ual funds and ot her per sons associat ed
w it h t he secur it ies m ar k et .

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2 .2 Pa r t icipa nt s

W ho are t he part icipant s in t he Securit ies M ark et ?

The secur it ies m ar k et essent ially has t hr ee cat egor ies of par t icipant s,
nam ely , t he issuer s of secur it ies, inv est or s in secur it ies and t he
int er m ediar ies, such as m er chant bank er s, br ok er s et c. While t he cor por at es
and gov er nm ent r aise r esour ces fr om t he secur it ies m ar k et t o m eet t heir
obligat ions, it is households t hat inv est t heir sav ings in t he secur it ies
m ar k et .

I s it necessary t o t ransact t hrough an int erm ediary?

I t is adv isable t o conduct t r ansact ions t hr ough an int er m ediar y . For ex am ple
y ou need t o t r ansact t hr ough a t r ading m em ber of a st ock ex change if y ou
int end t o buy or sell any secur it y on st ock ex changes. You need t o m aint ain
an account w it h a deposit or y if you int end t o hold secur it ies in dem at for m .
You need t o deposit m oney w it h a banker t o an issue if you are subscribing
t o public issues. You get guidance if y ou ar e t r ansact ing t hr ough an
int erm ed iar y . Chose a SEBI r egist er ed int er m ediar y , as he is account able for
it s act iv it ies. The list of r egist er ed int er m ediar ies is av ailable w it h
exchanges, indust ry associat ions et c.

W hat are t he segm ent s of Securit ies M ark et ?

The secur it ies m ar k et has t w o int er dependent segm ent s: t he pr im ar y ( new

issues) m ar k et and t he secondar y m ar k et . The pr im ar y m ar k et pr ov ides t he
channel for sale of new secur it ies w hile t he secondar y m ar k et deals in
secur it ies pr ev iously issued.

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3. PRI M ARY M ARKET

W hat is t he role of t he ‘Prim ary M ark et ’?

The pr im ar y m ar k et pr ov ides t he channel for sale of new secur it ies. Pr im ar y

m ar ket pr ovides oppor t unit y t o issuer s of secur it ies; Gover nm ent as w ell as
cor por at es, t o r aise r esour ces t o m eet t heir r equir em ent s of invest m ent
and/ or dischar ge som e obligat ion.

They m ay issue t he secur it ies at face v alue, or at a discount / pr em ium and

t hese secur it ies m ay t ak e a v ar iet y of for m s such as equit y , debt et c. They
m ay issue t he secur it ies in dom est ic m ar ket and/ or int er nat ional m ar k et .

W hat is m eant by Face Value of a share/ debent ure?

The nom inal or st at ed am ount ( in Rs.) assigned t o a secur it y by t he issuer .

For shar es, it is t he or iginal cost of t he st ock show n on t he cer t ificat e; for
bonds, it is t he am ount paid t o t he holder at m at urit y. Also know n as par
v alue or sim ply par . For an equit y shar e, t he face v alue is usually a v er y
sm all am ount ( Rs. 5, Rs. 10) and does not have m uch bearing on t he price
of t he share , w hich m ay quot e higher in t he m ar k et , at Rs. 100 or Rs. 1000
or any ot her pr ice. For a debt secur it y , face v alue is t he am ount r epaid t o
t he invest or w hen t he bond m at ur es ( usually, Gover nm ent secur it ies and
cor por at e bonds hav e a face v alue of Rs. 100) . The pr ice at w hich t he
secur it y t r ades depends on t he fluct uat ions in t he int er est r at es in t he
econom y .

W hat do you m ean by t he t erm Prem ium and Discount in a

Securit y M a rk et ?

Securit ies are generally issued in denom inat ions of 5, 10 or 100. This is
k now n as t he Face Value or Par Value of t he secur it y as discussed ear lier .
When a secur it y is sold abov e it s face v alue, it is said t o be issued at a
Pr em ium and if it is sold at less t han it s face v alue, t hen it is said t o be
issued at a Discount .

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3 .1 I ssu e of Sh a r e s

W hy do com panies need t o issue shares t o the public?

Most com panies ar e usually st ar t ed pr iv at ely by t heir pr om ot er ( s) . How ev er ,

t he pr om ot er s’ capit al and t he bor r ow ings fr om bank s and financial
inst it ut ions m ay not be sufficient for set t ing up or r unning t he business ov er
a long t er m . So com pa nies inv it e t he public t o cont r ibut e t ow ar ds t he equit y
and issue shar es t o indiv idual inv est or s. The w ay t o inv it e shar e capit al fr om
t he public is t hr ough a ‘Public I ssue’. Sim ply st at ed, a public issue is an offer
t o t he public t o subscr ibe t o t he shar e capit al of a com pany . Once t his is
done, t he com pany allot s shar es t o t he applicant s as per t he pr escr ibed
rules and regulat ions laid down by SEBI .

W hat are t he different kinds of issues?

Pr im ar ily , issues can be classified as a Public, Right s or Pref erent ial issues
( also k now n as pr iv at e placem ent s) . While public and r ight s issues inv olv e a
det ailed pr ocedur e, pr iv at e placem ent s or pr efer ent ial issues ar e r elat iv ely
sim pler . The classificat ion of issues is illust r at ed below :

I n it ia l Pu blic Offe r in g ( I P O) is w hen an unlist ed com pany m ak es eit her a

fr esh issue of secur it ies or an offer for sale of it s exist ing secur it ies or bot h
for t he fir st t im e t o t he public. This paves w ay for list ing and t r ading of t he
issuer ’s secur it ies.

A f ollow on p u b lic of f e r ing ( Fu r t h e r I ssu e ) is w hen an alr eady list ed

com pany m ak es eit her a fr esh issue of secur it ies t o t he public or an offer for
sale t o t he public, t hr ough an offer docum ent .

Righ t s I ssu e is w hen a list ed com pany w hich pr oposes t o issue fr esh
secur it ies t o it s ex ist ing shar eholder s as on a r ecor d dat e. The r ight s ar e
nor m ally offer ed in a par t icular r at io t o t he num ber of secur it ies held pr ior t o
t he issue. This r out e is best suit ed for com panies w ho w ould lik e t o r aise
capit al w it hout dilut ing st ak e of it s exist ing shar eholder s.

A P r e fe r e n t ia l issu e is an issue of shar es or of conv er t ible secur it ies by

list ed com panies t o a select gr oup of per sons under Sect ion 81 of t he
Com panies Act , 1956 w hich is neit her a r ight s issue nor a public issue. This
is a fast er w ay for a com pany t o r aise equit y capit al. The issuer com pany
has t o com ply w it h t he Com panies Act and t he r equir em ent s cont ained in

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t h e Chapt er per t aining t o pr efer ent ial allot m ent in SEBI guidelines w hich
int er- alia include pr icing, disclosur es in not ice et c.

Cla ssif ica t ion of I ssu e s

I ssue s

Public Right s Preferent ial

I nit ial Public Offering Furt her Public Offering

Fresh I ssue Offer for Sale Fresh I ssue Offer for Sale

W hat is m eant by I ssue price?

The pr ice at w hich a com pany 's shar es ar e offer ed init ially in t he pr im ar y
m ar k et is called as t he Issue pr ice. When t hey begin t o be t r aded, t he
m arket price m ay be above or below t he is sue pr ice.

W hat is m eant by M ark et Capit alisat ion?

The m ar k et v alue of a quot ed com pany , w hich is calculat ed by m ult iply ing
it s cur r ent shar e pr ice ( m ar k et pr ice) by t he num ber of shar es in issue is
called as m ar k et capit alizat ion. E.g. Com pany A has 120 m illion shar es in
issue. The cur r ent m ar k et pr ice is Rs. 100. The m ar k et capit alisat ion of
com pany A is Rs. 12000 m illion.

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W hat is t he difference bet w een public issue and privat e
placem ent ?

When an issue is not m ade t o only a select set of people b u t is open t o t he

gener al public and any ot her inv est or at lar ge, it is a public issue. But if t he
issue is m ade t o a select set of people, it is called pr iv at e placem ent . As per
Com panies Act , 1956, an issue becom es public if it r esult s in allot m ent t o 50
persons or m ore . This m eans an issue can be pr ivat ely placed w her e an
allot m ent is m ade t o less t han 50 persons.

W hat is an I nit ial Public Offer ( I PO) ?

An I nit ial Public Offer ( I PO) is t he selling of secur it ies t o t he public in t he

pr im ar y m ar k et . I t is w hen an unlist ed com pany m akes eit her a fresh issue
of secur it ies or an offer for sale of it s ex ist ing secur it ies or bot h for t he fir st
t im e t o t he public. This pav es w ay for list ing and t r ading of t he issuer ’s
secur it ies. The sale of secur it ies can be eit her t hr ough book building or
t hr ough nor m al public issue.

W ho decides t he price of an issue?

I ndian pr im ar y m ar k et usher ed in an er a of fr ee pr icing in 1992. Follow ing

t his, t he guidelines hav e pr ov ided t hat t he issuer in consult at ion w it h
Mer chant Bank er shall decide t he pr ice. Ther e is no pr ice for m ula st ipulat ed
by SEBI . SEBI does not play any r ole in pr ice fix at ion. The com pany and
m er chant bank er ar e how ev er r equir ed t o giv e full disclosur es of t he
par am et er s w hich t hey had consider ed w hile deciding t he issue price. There
ar e t w o t y pes of issues, one w her e com pany and Lead Mer chant Bank er fix a
pr ice ( called fix ed pr ice) and ot her , w her e t he com pany and t he Lead
Manager ( LM) st ipulat e a floor pr ice or a pr ice band and leav e it t o m ar k et
for ces t o det er m i ne t he final pr ice ( pr ice discov er y t hr ough book building
pr ocess) .

W hat does ‘price discovery t hrough Book Building Process’

m ea n?

Book Building is basically a pr ocess used in I POs for efficient pr ice discov er y .
I t is a m echanism w here, during t he perio d for w hich t he I PO is open, bids
ar e collect ed fr om inv est or s at v ar ious pr ices, w hich ar e abov e or equal t o
t he floor pr ice. The offer pr ice is det er m ined aft er t he bid closing dat e.

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W hat is t he m ain difference bet w een offer of shares t hrough
book building and offer of shares t hrough norm al public issue?

Price at w hich secur it ies w ill be allot t ed is not k now n in case of offer of
shar es t hr ough Book Building w hile in case of offer of shar es t hr ough nor m al
public issue, pr ice is k now n in adv ance t o inv est or . Under Book Building,
inv est or s bid for shar es at t he floor pr ice or abov e and aft er t he closur e of
t he book building pr ocess t he pr ice is det er m ined for allot m ent of shar es.

I n case of Book Building, t he de m a n d can be k now n ev er y day as t he book

is being built . But in case of t he public issue t he dem and is know n at t he
close of t he issue.

W hat is Cut - Off Price?

I n a Book building issue, t he issuer is required t o indicat e eit her t he price

band or a floor pr ice in t he pr ospect us. The act ual discov er ed issue pr ice can
be any pr ice in t he pr ice band or any pr ice above t he floor pr ice. This issue
price is called “ Cut - Off Pr ice” . The issuer and lead m anager decides t his aft er
consider ing t he book and t he inv est or s’ appet it e for t he st ock.

W hat is t he floor price in case of book building?

Floor pr ice is t he m inim um pr ice at w hich bids can be m ade.

W hat is a Price Band in a book built I PO?

The pr ospect us m ay cont ain eit her t he floor pr ice for t he secur it ies or a pr ice
band w it hin w hich t he inv est or s can bid. The spr ead bet w een t he floor and
t he cap of t he pr ice band shall not be m or e t han 20% . I n ot her w or ds, it
m eans t hat t he cap should not be m or e t han 120% of t he floor pr ice. The
pr ice band can hav e a r ev ision and such a r ev ision in t he pr ice band shall be
w idely dissem inat ed by infor m ing t he st ock ex changes, by issuing a pr ess
r elease and also indicat ing t he change on t he r elev ant w ebsit e and t he
t er m inals of t he t r ading m em ber s par t icipat ing in t he book building pr ocess.
I n case t he pr ice band is r evis ed, t he bidding per iod shall be ex t ended for a
fur t her per iod of t hr ee day s, subj ect t o t he t ot al bidding per iod not
exceeding t en day s.

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W ho decides t he Price Band?

I t m ay be under st ood t hat t he r egulat or y m echanism does not play a r ole in

set t ing t he pr ice for issues. I t is up t o t he com pany t o decide on t he pr ice or
t he pr ice band, in consult at ion w it h Mer chant Bank er s.

W hat is m inim um num ber of days for w hich a bid should

rem ain open during book building?

Th e Book should rem ain open for a m inim um of 3 days.

Can open out cry syst em be used for book building?

No. As per SEBI , only elect r onically link ed t r anspar ent facilit y is allow ed t o
be used in case of book building.

Can t he individual invest or use t he book building facilit y t o

m ake an applicat ion?

Yes.

How does one know if sha res a re allot t ed in an I PO/ offer for
sale ? W hat is t he t im efram e for get t ing refund if sha res not
allot t ed?

As per SEBI guidelines, t he Basis of Allot m ent should be com plet ed w it h 15

day s fr om t he issue close dat e. As soon as t he basis of allot m ent is
com plet ed, w it hin 2 w or king days t he det ails of cr edit t o dem at account /
allot m ent adv ice and despat ch of r efund or der needs t o be com plet ed. So an
inv est or should k now in about 15 day s t im e fr om t he closur e of issue,
w het her shar es ar e allot t ed t o him or not .

How long does it t a k e t o ge t t he shares list ed aft er issue ?

I t w ould t ake ar ound 3 w eeks aft er t he closur e of t he book built issue.

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W hat is t he role of a ‘Regist rar’ t o an issue?

The Regist r ar finalizes t he list of eligible allot t ees aft er delet ing t he inv alid
applicat ions and ensur es t hat t he cor por at e act ion for cr edit ing of shar es t o
t he dem at account s of t he applicant s is done and t he dispat ch of r efund
or der s t o t hose applicable ar e sent . The Lead Manager coor dinat es w it h t he
Regist r ar t o ensur e follow up so t hat t hat t he flow of applicat ions fr om
collect ing bank br anches, pr ocessing of t he applicat ions and ot her m at t er s
t ill t he basis of allot m ent is finalized, dispat ch secur it y cer t ificat es and
r efund or der s com plet ed and secur it ies list ed.

Does N SE provide a ny fa cilit y for I PO?

Yes. NSE’s elect r onic t r ading net w or k spans acr oss t he count r y pr ov iding
access t o inv est or s in r em ot e ar eas. NSE decided t o offer t his infr ast r uct ur e
for conduct ing online I POs t hr oug h t he Book Building pr ocess. NSE oper at es
a fully aut om at ed scr een based bidding sy st em called NEAT I PO t hat enables
t r ading m em ber s t o ent er bids dir ect ly fr om t heir offices t hr ough a
sophist icat ed t elecom m unicat ion net w or k .

Book Building t hrough t he NSE sy st em offer s sev er al adv ant ages:

§ The NSE syst em offer s a nat ion w ide bidding facilit y in secur it ies

§ I t pr ov ide a fair , efficient & t r anspar ent m et hod for collect ing bids
using t he lat est elect ronic t rading syst em s

§ Cost s involved in t he issue are far less t han t hose in a nor m al I PO

§ The sy st em r educes t he t im e t ak en for com plet ion of t he issue

pr ocess

The I PO m ar k et t im ings ar e fr om 10.00 a.m . t o 3.00 p.m . On t he last day of

t he I PO, t he session t im ings can be fur t her ex t ended on specific r equest by
t he Book Running Lead Manager.

W hat is a Prospect us?

A lar ge num ber of new com panies float public issues. While a lar ge num ber
of t hese com panies ar e genuine, quit e a few m ay w ant t o ex ploit t he
inv est or s. Ther efor e, it is v er y im por t ant t hat an inv est or befor e apply ing for
any issue ident ifies fut ur e pot ent ial of a com pany . A par t of t he guidelines
issued by SEBI ( Secur it ies and Ex change Boar d of I ndia) is t he disclosur e of

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infor m at ion t o t he public. This disclosur e includes infor m at ion lik e t he r eason
for r aising t he m oney , t he w ay m oney is pr oposed t o be spent , t he r et ur n
ex pect ed on t he m oney et c. This infor m at ion is in t he for m of ‘Pr ospe ct u s ’
w hich also includes infor m at ion r egar ding t he size of t he issue, t he cur r ent
st at us of t he com pany , it s equit y capit al, it s cur r ent and past per for m ance,
t he pr om ot er s, t he pr oj ect , cost of t he pr oj ect , m eans of financing, pr oduct
and capacit y et c. I t also cont ains lot of m andat ory inform at ion r egar ding
under w r it ing and st at ut or y com pliances. This helps inv est or s t o ev aluat e
shor t t er m and long t er m pr ospect s of t he com pany .

W hat does ‘Draft Offer docum ent ’ m ean?

‘Offer docum ent ’ m eans Pr ospect us in case of a public issue or offer for sale
and Let t er of Offer in case of a right s issue which is filed w it h t he Reg ist r ar
of Com panies ( ROC) and St ock Ex changes ( SEs) . An offer docum ent cov er s
all t he r elev ant infor m at ion t o help an inv est or t o m ak e his/ her inv est m ent
decision.

‘Dr aft Offer docum ent ’ m eans t he offer docum ent in dr aft st age. The dr aft
offer docum ent s a r e filed w it h SEBI , at least 21 day s pr ior t o t he filing of t he
Offer Docum ent wit h ROC/ SEs. SEBI m ay specify changes, if any , in t he
dr aft Offer Docum ent and t he issuer or t he lead m er chant bank er shall car r y
out such changes in t he dr aft offer docum ent befor e filing t he Offer
Docum ent w it h ROC/ SEs. The Dr aft Offer Docum ent is av ailable on t he SEBI
w ebsit e for public com m ent s for a per iod of 2 1 day s fr om t he filing of t he
Draft Offer Docum ent w it h SEBI .

W hat is an ‘Abridged Prospect us’?

‘Abr idged Pr ospect us’ is a short er version of t he Prospect us and cont ains all
t he salient feat ur es of a Pr ospect us. I t accom panies t he applicat ion for m of
public issues.

W ho prepares t he ‘Prospect us’/ ‘Offer Docum ent s’?

Gener ally , t he public issues of com panies ar e handled by ‘Mer chant Bank er s’
w ho ar e r esponsible for get t ing t he pr oj ect appr aised, finalizing t he cost of
t he pr oj ect , pr ofit abilit y est im at es and for pr epar ing of ‘Pr ospect us’. The
‘Pr ospect us’ is subm it t ed t o SEBI for it s approval.

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W ha t does one m ea n by ‘Lock - in’?

‘Lock- in’ indicat es a fr eeze on t he sale of shares for a cer t ain per iod of t im e .
SEBI guidelines hav e st ipulat ed lock- in r equir em ent s on shar es of pr om ot er s
m ainly t o ensur e t hat t he pr om ot er s or m ain per sons, w ho ar e cont r olling
t h e com pan y , sh all cont inue t o hold som e m inim um per cent age in t he
com pany aft er t he public issue.

W hat is m eant by ‘List ing of Securit ies’?

List ing m eans adm ission of secur it ies of an issuer t o t r ading pr iv ileges
( dealings) on a st ock ex change t hr ough a for m al agr eem ent . The pr im e
obj ect iv e of adm ission t o dealings on t he ex change is t o pr ov ide liquidit y
and m ar k et abilit y t o secur it ies, as also t o pr ov ide a m echanism for effect iv e
cont r ol and super vision of t r ading.

W hat is a ‘List ing Agreem ent ’?

At t he t im e of list ing secur it ies of a com pany on a st ock ex change, t he

com pany is r equir ed t o ent er int o a list ing agr eem ent w it h t he ex change.
The list ing agr eem ent specifies t he t er m s and condit ions of list ing and t he
disclosur es t hat shall be m ade by a com pany on a cont inuous basis t o t he
exchange.

W hat does ‘Delist ing of securit ies’ m ean?

The t er m ‘Delist ing of secur it ies’ m eans per m anent r em oval of secur it ies of a
list ed com pany fr om a st ock ex change. As a consequence of delist ing, t he
secur it ies of t hat com pany w ould no longer be t r aded at t hat st ock
exchange.

W hat is SEBI ’s Role in an I ssue?

Any com pany m ak ing a public issue or a list ed com pany m ak ing a r ight s
issue of v alue of m or e t han Rs 50 lak h is r equir ed t o file a dr aft offer
docum ent w it h SEBI for it s obser v at ions. The com pany can pr oceed fur t her
on t he issue only aft er get t ing obser v at ions fr om SEBI . The v alidit y per iod of
SEBI ’s obser v at ion let t er is t hr ee m ont hs only i. e. t he com pany has t o open
it s issue w it hin t hree m ont hs period.

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