Capital Markets

Module 2 - Section 1 - Primary Markets

1
 Objective
Understand the following:
• Basic concepts related to companies
• IPO
• Process of an IPO
• Pricing of an Issue
• Categories of Investors in an IPO
• Regulatory Requirements
• FPO

2
 Basic concepts
• Company
o A Company is a legal entity formed and registered in India under the Indian Companies
Act, 2013 to undertake business
o The Companies Act, 2013 together with its amendments is a comprehensive piece of
legislation regulating the functioning of Companies in India.
o Companies Act, 2013 has provisions covering matters such as:
• Types of Share Capital
• Rights of shareholders
• Issue of Share Capital
• Payments of dividends etc.
• Sources of long-term capital for a company
o Share Capital
• Equity capital (including profits not distributed but used in business)
• Preference capital
o Debentures / Loans

3
 Basic concepts
• Equity Share Capital - Rights of equity shareholders:
o Right to income
• dividend distribution (if company makes profit)
o Not necessary dividends are paid, reinvestment of profits by company
leads to capital appreciation of share value
• Residual claim on company’s assets and income after repayment of creditors,
lenders and payment of interest and other expenses
o Right to control
• Every share generally carries one vote
o A shareholder holding substantial proportion of shares OR many
shareholders together can exercise control over the company
• While shareholders have a right to control, day to day decisions taken by board
of directors appointed by shareholders
o Pre-emptive right
• In case of issue of new shares, company has to first offer shares to existing
shareholders
• This is to allow them an opportunity to maintain their shareholding which would
otherwise get diluted
o Right on liquidation
• Equity is long-term capital, not returned during lifetime of a company
• But in case of winding up of a company, equity shareholders have right to
receive money / assets after payment to all other stakeholders (creditors for
goods and expenses, lenders, preference shareholders etc)

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 Basic concepts
• Primary market
o A market for issue of new shares or fresh capital raised by a company
o On fresh issue of shares, money is received into bank account of company
• Except in bonus issue where money is not received, only shares are issued and accounting
entry is passed for transferring profits from reserves to share capital account
o During its lifetime, a company may raise capital from different kinds of investors
• A company may directly sell its shares privately to some select identified people / institutional
investors for raising capital
o This is known as “Private Placement”
o Private placement is quicker and inexpensive method
• But after reaching a certain scale and value in business, companies can raise capital by
issue of shares to public at large
o This is known as “Public Issue” or “public offer”
o Public Issue cannot be made unless an offer document is issued
• “offer document” means a red herring prospectus, prospectus or abridged
prospectus depending on the stage
• Since in a public issue many small investors are involved, SEBI regulates it
• In India, any company which plans to undertake a Public Issue has to comply with the SEBI
(Issue of Capital and Disclosure Requirements) Regulations 2018 as amended from time to
time

5
 What is IPO?
Initial Public offering (IPO): When an unlisted company makes either a fresh issue of
shares or convertible securities or offers its existing shares or convertible securities for sale
or both for the first time to the public, it is called an IPO. This paves way for listing and
trading of the issuer’s shares or convertible securities on the Stock Exchanges.

• Every company that goes for IPO needs to follow SEBI norms and meet guidelines
laid down by SEBI.
• Any company that has significant size and growth prospects and credentials can go
for IPO. Equity issuances of such company would be attractive to institutional as well
as non-institutional investors.
• 50 or more prospective investors are needed for an IPO.
• It is an invitation by company to the public to subscribe to the securities offered
through a “prospectus”
• “Fresh issue” of shares or “Offer for Sale” of existing shares or both
• First time public issue by the company
• IPO helps company “list” its shares on stock exchanges and enables trading in
company’s shares
• SEBI has laid down detailed guidelines (called Issue of Capital and Disclosure
Requirements or ICDR)
o At the pre-IPO stage, adequate company information is not available in the
public domain.
o Investors should be able to make informed decisions for investing into IPOs.
https://www.youtube.com/watch?v=R-dorvdzH1o 6
 Objective for IPO
• The idea is to raise funds and have more liquidity or cash
on hand by selling shares publicly.
• The money can be used in various ways, such as re-
investing in the company's infrastructure or expanding
the business. At times the existing shareholders want to
exit and therefore the need for IPO
• An added benefit from issuing shares is that they can be
used to attract top management candidates through the
offer of perks like stock option plans.
• Another plus from going public benefit is that stocks can
be used in merger and acquisition deals as part of the
payment.

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 Need for an IPO
• To fund upgradation or expansion of current business operations
o New line of business, new product, new geography or increase of production capacity.
o set up of plant, factory, office space or to buy machinery, equipment etc.
• Repayment of debts
o Interest on debt is a regular fixed charge on profits and requires regular cash outflow.
o No interest is payable on share capital, therefore company can replace debt with equity
• Provides higher value and liquidity to shareholders
o After IPO and listing, shares value can increase since it’s a larger market and quantum of
demand / trading can be higher, thus leading to a faster increase in price when traded
o Before IPO, company is privately owned by promoters, certain private investors, employees
o Existing shareholders may want to realise such higher value and enjoy the profits on sale
o Since the company is listed, it make it easier to sell shares and earn profits
• Increases exposure, prestige, and public image
o Once publicly traded, the company is known to more investors and has a reputation
• Easier to raise further capital
o Once a company is listed, it is able to issue additional shares in a number of different ways,
one of which is the FPO. This method provides capital for various corporate purposes without
incurring any debt sine the company is already known to investors in the market. This ability to
quickly raise potentially large amounts of capital from the market is a key reason why
companies go public
• Attracting and retaining better management and employees through liquid equity participation
o Issue of Employee stock options to employees at mid management and senior management
level is becoming popular as an incentive paid to employees to motivate them to work
towards better performance of the company.
o Once listed, it becomes easy for the employees to sell their shares if the market value of the
shares increases,
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 Key entities involved in IPO
Intermediaries which are registered with SEBI are;
• Investment Bankers to the issue (known as Book Running Lead Managers (BRLM)
in case of book built public issues)

• Legal counsel

• Auditors

• Registrars to the issue, and Bankers to the issue

• Syndicate Members

Their addresses, telephone/fax numbers, registration number, and contact person

and email addresses are disclosed in the offer documents.
http://www.sebi.gov.in/filings/public-issues/jun-2017/au-small-finance-bank-
limited_35139.html
https://www.sebi.gov.in/filings/public-issues/mar-2018/hdfc-asset-management-
company-limited_38250.html

9
 Entities involved in IPO
Merchant Bankers are required to be registered with SEBI and they do the due diligence to prepare
the offer document which contains all the details about the company. They are also responsible for
ensuring compliance with the legal formalities in the entire issue process and for marketing of the
issue. They perform most of the Pre-issue and Post –issue activities such as;

Pre-Issue Activities:
• “Due diligence” of company’s operations, legal contracts, business plans and management
• Drafting and designing of the prospectus (called “Draft Red Herring Prospectus”, Prospectus
without the final price of the offer)
• Finalizing the prospectus after SEBI’s comments and filing it with the RoC
• Completion of listing agreement with the stock exchanges
• Marketing and promotion of the IPO
• Underwrite the issue
• Ensure compliance with all SEBI guidelines and other legal and statutory requirements

Post-Issue Activities:
• Management of escrow account for the collection of the subscription money
• Coordinating allocation and refunds
• Coordinating dematerlization, listing and commencement of trading of the securities
• Coordinating work of other intermediaries
BRLM is the lead merchant banker appointed by company whose name is written in the offer
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document
 Entities involved in IPO
Registrars to the Issue: They are involved to
• Finalize the list of eligible allottees
• Credit shares to the demat account of the allottees
• Dispatch of refund orders

Bankers to the Issue: The bankers to the issue enable the movement of funds in the issue
process and therefore enable the registrars to finalize the basis of allotment by making clear
funds status available to the Registrars.
• Collection of the application amounts
• Transfer of application amounts to the escrow account
• Refunds of excess application money

Syndicate Members:
• They are typically stock exchange brokers, collect and enter the application forms on
the stock exchange system in case of the book build issue.
• They also share underwriting with the BRLM

Legal counsel
Legal due diligence of the company for any legal suits, disputes, unclear title in documents of
ownership etc.

Auditors
Assist the company in preparing financial statements of the issuer company in the manner11
and format required to be presented in the Prospectus.
 Concept of “Escrow”
Escrow is a legal concept in which a financial instrument or an asset is held by a
third party on behalf of two other parties that are in the process of completing a
transaction. The funds or assets are held by the escrow agent until it receives the
appropriate instructions or until predetermined contractual obligations have
been fulfilled. Money, securities, funds, and other assets can all be held in escrow

For example, a company selling goods internationally wants to be certain that it

will get paid when the goods reach their destination. Conversely, the buyer
wants to pay for the goods only if they arrive in good condition. The buyer can
place the funds in escrow with an agent and give irrevocable instructions to
disburse them to the seller once the goods arrive. This way, both parties are safe,
and the transaction can proceed.

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 IPO Process
• Company appoints “merchant banker(s)”
• Draft prospectus is prepared and filed with SEBI
• SEBI reverts with clarifications and suggestions for modifications
• IPO grading obtained from a credit rating agency
• Final prospectus is filed with “Registrar of Companies” (RoC)
• Listing agreement is signed with stock exchanges
• Banker, solicitor, registrar, depository, syndicate members are appointed
• Statutory advertisements are issued and pricing is announced
• “Anchor” investor is finalized and announced
• Issue opens for public subscription
• Investors apply – both online and offline options are usually available
• Allotment done based on applications received, final price determined
• “Demat” accounts of applicants are credited with shares and balance
application amounts are refunded
• Shares get listed on the stock exchanges and secondary market trading on
those shares begins 13
 Process of Initial Public Offer
• A company undertaking an IPO is required to comply with public issue requirements under the
Companies Act 2013 and SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009
• Also a listing application needs to be made with the stock exchanges
• IPO Process
1. Merchant banker and legal counsel appointed
• Merchant Bankers hold detailed discussions with the company and undertake complete
due diligence of the company operations and financial and operational numbers
before using such information for the draft red herring prospectus (DRHP)
• Legal counsel undertake legal due diligence of the company to make sure that all legal
suits, disputes, unclear title in documents of ownership etc. are reviewed and
appropriately disclosed in DRHP
• The legal cousel drafts the DRHP with inputs from Merchant Banker
• The DRHP is to be prepared in line with format provided by SEBI
2. DRHP filed with SEBI and stock exchanges
• SEBI reviews the DRHP and other supporting documents to ensure that disclosures therein
are clear and adequate for taking an informed decision
• During this stage, SEBI ask questions and seeks clarifications from the Merchant Bankers
on different aspects of the DRHP.
• SEBI send notices seeking information or requesting company to add additional
disclosures if required
• If SEBI is satisfied with the DRHP content it provides in-principle approval to conduct IPO.
• The final document referred to as Red Herring Prospectus (RHP)
• Company can open the issue anytime within 1 year of SEBI approval

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 Process of Initial Public Offer
3. Marketing and Road Shows by Issuer company and merchant bankers
• Merchant bankers simultaneously meet investors to get an idea of the price the investors are
willing to pay
• Merchant bankers go from city to city and sometimes outside the country making presentations
about the company and the offering at conferences, broker-analyst meets, investors meets.
• IPO advertising and marketing is undertaken at this stage
4. Methods for Pricing of IPO (See Fixed Price Vs. Book Building on slide 19)
• The company is free to choose any of these two methods for determining its Issue Price for
shares
o Fixed Price Method:
• Investors’ demand is not taken into account
• Issue price is one single price without flexibility to change it
o Book- building method:
• Explicitly uses investors’ demand for shares at various prices
• Initially only a price band is announced by the Issuer about 5 days before the Issue
opening date and bids are collected from investors at various prices, which are
within the price band.
• Book-building is an auction of shares and the investors can watch the book being
built – a chart shown indicates the bid price and the number of shares being bid for,
written against it.
• This method of price and demand discovery is used to arrive at Issue Price.

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 Process of Initial Public Offer
5. Book Building Process
o Appointment of book running lead manager (BRLM)
• One of the merchant bankers working on the IPO is appointed as BRLM who will run the book-
building process
o Underwriting agreement
• Agreement between Issuer and BRLM that if issue is under-subscribed shortfall shall be made
good by the BRLM
o Agreement with the stock exchanges
• Issuer to enter into agreement with stock exchange(s) having facility of book building through
electronic bidding system.
o Appointment of stock brokers and others as bidding/collection centres
• appoint stock brokers for accepting bids and placing orders with Issuer
• In case of ASBA, Self certified syndicate banks (‘SCSB’), registrar and share transfer agents,
depository participants shall also be authorised to accept and upload the requisite details in
the electronic bidding system of the stock exchange(s).
o Issue details to be disclosed in Red Herring Prospectus (RHP)
• RHP to contain details of number of shares to be issued and component of fresh issue or offer
for sale.
o Floor price and price band to be announced before issue opens
• Price band to be announced 2 - 5 working days before issue opens
• During bidding, price band can be revised upto 20% upwards or 20% downwards
• Change in price band to be disclosed on stock exchange website and popular media
• Issue period should be extended by 3 – 10 days if price band changed

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 Process of Initial Public Offer
Book Building Process (continued)
o Anchor Investor makes application
• SEBI issued the concept of anchor investor in order to:
o enhance issuers ability to sell the issue,
o generate more confidence in the minds of retail investors
o better price discovery
• “anchor investor" means QIB who makes application for at least Rs.10 crores in a public issue
• Bidding for anchor investors opens 1 day before the issue opens.
• allocation details of anchor investors to be disclosed on stock exchange website
• Anchor investor is required to hold the shares for atleast 30 days from the date of allotment
• Anchor investors cannot be related to promoter / promoter group or lead managers to the
public issue
o Issue opens and book building begins (Bidding process)
• Bidding through electronically linked transparent facility provided by stock exchanges
• Applicants can approach stock brokers, self-certified syndicate banks, registrar and share
transfer agents or depository participants, as the case may be, to place their bids.
• Applications accepted as ‘Applications supported by blocked Amount’ only (refer slide 20)
• At end of each day, demand at every price, category wise, can be seen graphically on the
bidding terminals and websites of stock exchanges for information of the public.
• retail individual investors may withdraw or revise bids until closure of the issue.
• QIBs and non-institutional investors not permitted to withdraw or lower their bids
• Issue will be successful if atleast 90% of the issue is subscribed.

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 Process of Initial Public Offer
Book Building Process (continued)
o Determination of price (valuation)
• After going through the book that is build under the bidding process, the company can see the
price at which the issue size is being subscribed cumulatively. This is called the cut off price.
• Issuer in consultation BRLM, determines the final issue price based on the bids received
• Issue price to be justified based on following financial aspects of business :
o Earnings Per Share (EPS) before the issue, for last 3 years
o Price earnings ratio ( P/E ratio) before the issue
o Average return on net worth in the last 3 years
o Net Asset Value per share based on last balance sheet
o Net Asset Value per share after issue and comparison thereof with the issue price
o Comparison of all accounting ratios of issuing company as mentioned above with:
• the industry average
• the peer group (competition)
• Once the final issue price is determined, all bidders whose bids have been at and above that
price shall be considered for allotment.
o Registration of Prospectus with Registrar of Companies:
• Final number of shares issued and the issue price to be stated in the Prospectus which is then
filed with Registrar of Companies
o Manner of allotment / allocation:
• Allotment is done on a proportionate basis subject to quantity of shares reserved for each of
the category of investors

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 Process of Initial Public Offer

6. Allotment of shares
o Allotment process and basis of allotment
• No allotment to be done if number of prospective allottees is less than one thousand.
• allotment in excess of shares offered under IPO through the offer document is not
permitted
• allotment to applicants shall be on a proportionate basis within the respective investor
categories
• The authorised employees of designated stock exchange, along with the lead
manager(s) and registrars to the issue, shall ensure that the basis of allotment is
finalised in a fair and proper manner
o Once basis is finalised, money is transferred from account of investor to an escrow account
opened by the company with a bank (refer concept of ASBA)
o Allotment is completed, shares are transferred to demat account of investors
7. Final version of Prospectus filed with Registrar of Companies
8. Listing of shares on stock exchange
o Once allotment is completed, stock exchanges will give approvals for listing of shares
o All the shares (existing before the IPO and those issued under the IPO) are to be listed
9. Transfer of IPO proceeds to Company account
o All the shares (existing before the IPO and those issued under the IPO) are to be listed

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 IPO Valuation
What is Fixed price?
Under Fixed price, shares are offered at a fixed or a pre determined price. The
issues get fully subscribed in case the investors find the issue price attractive. In
case the issue is not fully subscribed by the investors than underwriters make the
under subscription good.

What is Book Building?

• Book Building is essentially a process used by companies raising capital
through Public Offerings-both Initial Public Offers (IPOs) or Follow-on Public
Offers (FPOs) to aid price and demand discovery. It is a mechanism where,
during the period for which the book for the offer is open, the bids are
collected from investors at various prices, which are within the price band
specified by the issuer. The process is directed towards both the institutional as
well as the retail investors. The issue price is determined after the bid closure
based on the demand generated in the process.
• Usually a price band (floor and cap) or a floor price is announced initially.
• Investors bid for the quantity and the price.
• Demand in terms of quantity vs. price gets built across various investors.
• Starting from the top price; the “cut-off” price is arrived at where the issue
quantity gets exhausted
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Have you ever thought who decides this price band and what can you interpret from the price
band? How’s it decided?

An IPO price band is the offer price of a company’s shares. The lead managers of the issue
decide the price band for any IPO. There is no specific or standardized calculation for it and is
decided by looking at the company’s valuation and future prospects. The managers actually
gauge the willingness of investors by announcing a price band and then investors make their bid.
When the company receives bids, then it decides on a particular price for listing of the shares.
When is price band altered?
Since the price band can be decided weeks before the actual issue, there is a chance to
change it if new information emerges. A price band is altered when the lead managers think that
they did not accurately price the IPO initially. Say, if the IPO price is revised upwards, it usually
means that the lead managers are now more bullish on the prospects of the company. It can be
because of various reasons: The bids for shares received during the period when the issue was
open was too high, some fundamental or general business environment of the business may have
improved during the same time. Alternatively, managers may decrease IPO price band if they do
not get enough bids on the price band announced. This may be because investors may deem
the offer price band to be very high. Also, during the time the issue is open the business
environment may change and business prospects may not remain strong.
In some cases, when there are few bids, companies withdraw the IPO.

Cues for investors

In case of an upward movement, either the company is trying to exploit a short sharp movement
in the market to their advantage or are being too bullish on the growth prospects of the
company. Alternatively, if the company has revised prices downwards it may be trying to push
through the IPO to raise money anyway. IPOs are high risk stock investments and need a
thorough analysis.

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 Book Building Process
• The Issuer who is planning an offer nominates lead merchant banker(s) as 'book runners'.
• The Issuer specifies the number of securities to be issued and the price band for the bids.
• The Issuer also appoints syndicate members with whom orders are to be placed by the
investors.
• The syndicate members input the orders into an 'electronic book'. This process is called
'bidding' and is similar to open auction.
• The book normally remains open for a period of 3 to 7 days.
• Bids have to be entered within the specified price band.
• Bids can be revised by the bidders before the book closes.
• On the close of the book building period, the book runners evaluate the bids on the basis
of the demand at various price levels.
• The book runners and the Issuer decide the final price at which the securities shall be
issued.
• Generally, the number of shares are fixed, the issue size gets frozen based on the final
price per share.
• Allocation of securities is made to the successful bidders. The rest get refund orders.

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 Book Building - Example
Suppose you own a company that sells iPods and want to do an IPO for your company. You
decide to offer 3,000 shares at a price band of Rs. 20 – 24.
Since everyone wants a portable way to listen music, love the fact that they can listen and
store their favourite songs in a portable device – you receive bids from 5 bidders in the
following manner:
Bid Quantity Bid Price Cumulative Quantity Subscription
500 24 500 16.67%
1,000 23 1,500 50.00%
1,500 22 3,000 100.00%
2,000 21 5,000 166.67%
2,500 20 7,500 250.00%

You obviously want to sell at the highest price of Rs. 24, but at that price you will be able to
sell only 500 shares. So, you come down a rupee, but see that there are only a 1,000 bids at
Rs. 23, so you will be able to sell 1,500 shares at that price only.
So, you come down a rupee again, and see that there are 1,500 bids at Rs. 22, which means
that you’ve received 3,000 bids from people interested in buying your IPO stock at Rs. 22 or
lower.
Rs. 22 then becomes your cut – off price, and all bids above this price level are considered
legal bids.
You will price your IPO at 22 or lower, but not at a higher price since you didn’t receive
enough bids to be able to get your offering fully subscribed. This is known as the price
discovery mechanism of the book building process.
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 Book building
• Book building – an example
• 100 shares are to be issued within band of Rs 10 and Rs 20
• Bids are received as –
o 40 shares @ Rs 20,
o 20 shares@Rs19,
o 20 shares@Rs18,
o 10 shares@Rs17,
o 10 shares@Rs16,
o 10 shares @ Rs15,
o 5 shares @ Rs 14,
o 5 shares @ Rs 13,
o 10 shares @ Rs 12
o ----- >the cutoff price would be Rs 16

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25
 Book Building V/s Fixed
Issue Type
Price Offer Price Demand Payment Reservations

50 % of the shares
Price at which the
Demand for the offered are reserved
securities are
securities offered is 100 % Applications for applications
offered and would
Fixed Price Issues known only after Supported by below Rs. 2 lakh
be allotted is made
the closure of the Blocked Amount and the balance for
known in advance
issue higher amount
to the investors
applications.

A 20 % price band
is offered by the Demand for the
issuer within securities offered , 50 % of shares
which investors are and at various offered are reserved
100 % Applications
allowed to bid and prices, is available for QIBS, 35 % for
Book BuildingIssues Supported by
the final price is on a real time basis Retail and 15% for
Blocked Amount.
determined by the on the BSE website Non Institutional
issuer only after during the bidding Investors
closure of the period..
bidding.

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 Advantages of Book
Building
• Speeds up public offering and allotment process as they
take place through network of the stock exchange
• Leads to price discovery – role of Institutional investors
(Anchor investors)
• Procedures simplified reducing time and cost
• Investor can also bid at price higher than the cut off
price, in that case allotment is done at the cut-off price.
• In international markets, price band is announced a few
hours before issue opens.
• Option to revise the price band (downward) if price
discovered is inappropriate leading to under
subscription.

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 Investor Categories
Investors are broadly classified under following
categories‐:
• Retail individual Investor (RIIs):
• Non‐Institutional Investors (NIIs)
• Qualified Institutional Buyers (QIBs)

• Retail individual Investor (RIIs): means an investor

who applies or bids for securities for a value of not
more than Rs. 2,00,000 (not less than 35% of the
issue). RIIs may be given price up to 10% lower than
the cut-off price.
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 Investor Categories
Qualified Institutional Buyers (QIBs) shall mean -

• Foreign Portfolio Investors (FPIs)

• Multilateral and bilateral Institutions
• Foreign Venture Capital Institutions (FVCIs)
• Mutual Funds
• Scheduled Commercial banks
• Public Financial Institutions , defined u/s 4A of the Companies Act
• Venture Capital Funds
• Alternate Investment Funds
• Insurance companies
• State Industrial development corporations
• Provident and Pension Funds with minimum corpus of Rs 25 cr
• National Investment Fund

Not more than 50% of the issue is reserved for QIBs.

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 Investor Categories
Investors who do not fall within the definition of the above two categories
are categorized as “Non‐Institutional Investors”

o Not less than 15% of the Offer is reserved for NII category.
o High Net-worth Individual (HNI) who applies for over Rs 2 Lakhs in
an IPO falls under this category.

In case of over-subscription, pro-rata allocation in QIB and NII category

http://www.chittorgarh.com/faq/difference_between_retail_nii_and_qib_inv
estor/13/

https://www.thehindubusinessline.com/markets/ipo-non-allottees-sebi-puts-
in-place-new-regulation-for-retail-segment/article22764551.ece

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 Anchor Investor
Anchor Investors are qualified institutional buyers that buy a large chunk of shares a
day before an IPO opens. They help arriving at an approximate benchmark price for
share sales and generate confidence in retail investors.
• One or more QIBs act as Anchor Investors
• Anchor investors subscribe prior to the opening of the IPO, their quantities and
prices are disclosed to the public
• Objective is to generate more confidence among retail investors
• 25% of the subscription amount paid upfront, balance within 2 days of closure of
the issue
• Lock-in period of 1 month - Required to hold their allotted shares for at least one
month from the date of allotment
• Cannot be related to the promoters/ merchant bankers
• Minimum application value – Rs. 10 cr
• Minimum no. of anchor investors - 2 investors for issues up to Rs. 250 cr, 5 investors
for issues greater than Rs. 250 cr
• Up to 60% of the QIB portion of the issue can be offered to the Anchor investors
• 1/3rd of the Anchor investors’ portion to be reserved for Domestic MFs
• Anchor investors can also apply as regular QIB
• In case their price is lower than the final cut-off price; they need to pay the
difference
• In case their price is higher than the cut-off price, they do not get back the
difference amount
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 IPO Allotment Process
A. In case of Book Built issue
1. In case an issuer company makes an issue of 100% of the net offer to public through
voluntary book building process under profitability route:
• not less than 35% to RIIs;
• not less than 15% to NIIs;
• not more than 50% to QIBs
o issuer may allocate up to 60% the portion available for allocation to QIBs to an
Anchor Investor
• of which 1/3rd portion (i.e., 10%) will be reserved for domestic MFs
• in addition to the above 10% allocation available, MFs shall be eligible for
allocation under the balance available for QIBs
o Anchor investors can also apply as regular QIBs
2. In an issue made through the book building process under alternative entry norms
the allocation in the net offer to public category shall be as follows:
• not more than 10% to RIIs;
• not more than 15% to NIIs;
• not less than 75% to QIBs, failing which the full subscription monies shall be
refunded.
o 10% of which shall be allocated to MFs. in addition to 10 per cent allocation
available, MFs shall be eligible for allocation under the balance available for32
QIBs
 Allotment
In case an issuer company makes an issue of 100% of
the net offer to public through voluntary book building
process under profitability route:

• Suppose the issue size is 100 crore shares.

o 35% is allotted to retail investors i.e., 35 crore shares
o 15% to Non Institutional investors i.e., 15 crore shares
o 50% to QIBs i.e., 50 crore shares

Allotment of shares is done within 15 days after the closure of an IPO.

SEBI has shortened the period from finalization of basis of allotment to
listing of securities to 7 days from the previous timeline of 12 days.

33
 IPO Allotment Process
B. The proportionate allotment of securities to the different
investor categories in a fixed price issue is as described below:

• A minimum 50% of the net offer of securities to the public shall

initially be made available for allotment to retail individual
investors.

• The balance net offer of securities to the public shall be made

available for allotment to:

o Individual applicants other than retail individual investors,

and
o Other investors including corporate bodies/ institutions
irrespective of the number of securities applied for.

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 ASBA
• Concept of ASBA
o ASBA stands for “Applications Supported by Blocked Amount”
o ASBA exempts investors from making full advance payment while making an application
for subscribing to shares under a public issue. Instead lets the amount to be retained in
bank accounts till the completion of allotment.
o This system does away with the refund process if shares are not allotted
o The ASBA investor shall submit an ASBA physically or electronically through internet banking
facility to the bank with whom the bank account to be blocked is maintained
o Application money will remain blocked in the bank account till finalisation of the basis of
allotment in the issue or till withdrawal of issue, after which the requisite amount will be
either transferred from investor’s account to the issuer’s escrow account or shall be
unblocked in case the allotment is not to be done
o A Self certified Syndicate Bank (SCSB) means a banker to an issue registered with SEBI
which offers the facility of ASBA.
• Lock-in requirements
o Shares held by the promoters before IPO, shall not be transferable (referred to as “lock-in”)
for the periods specified below:
• a) 20% of promoter holding will be locked-in for a period of 3 years from the date of
allotment of shares in the initial public offer,
• (b) After meeting the above lock-in requirement, the number of shares in excess of
20% shall be locked-in for a period of 1 year from the date of allotment in the initial
public offer.
o Shares held by other existing shareholders will be locked-in for 1 year

35
 Regulatory Requirements
(SEBI)
Disclosure Norms (Contents of the Prospectus)
• Cover page:
o Contact details of company, merchant banker and registrar
o Number of shares offered, issue size, dates, listing exchanges
o IPO grading, credit rating and key risks

• Risk factors:
o Management view on internal and external risks

• Introduction:
o Brief intro about company business/ industry/ financial structure, size and
use of funds for the proposed issue
o Basic information about company, merchant bankers, syndicate
members and registrars

• “About us”:
o Detailed information about the company’s business
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 Regulatory Requirements
(SEBI)
• Financial statements:
o Last 3 years accounting statements
o Any significant changes in the accounting policies in the last 3 years

• Legal and other information:

o Outstanding litigations
o Any other material information

• Other regulatory and statutory disclosures:

o As applicable to the company and the proposed issue

• Offering information:
o Terms of and other details about the issue

• Other information:
o Relevant information from the articles of the company, any material
contract, any declaration, definitions and abbreviations etc.
37
 Entry Norms for IPO
The main entry norms for companies making a public issue (IPO or FPO) are
summarized as under:

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

o Net Tangible Assets of at least Rs. 3 crores in each of the preceding 3 full
years of which not more than 50% are held in monetary assets. However,
the limit of 50% on monetary assets shall not be applicable in case the
public offer is made entirely through offer for sale.

o Minimum of Rs. 15 crores as average pre-tax operating profit in at least 3

of the immediately preceding 5 years.

o Net worth of at least Rs. 1 crore in each of preceding 3 full years

o If the company has changed its name within the last one year, at least
50% revenue for the preceding 1 year should be from the activity
suggested by the new name.

38
 Entry Norms for IPO
o The aggregate of the proposed issue and all previous issues made in the
same financial year in terms of issue size does not exceed 5 times its pre-
issue net worth as per the audited balance sheet of the preceding
financial year

Minimum 1000 allottees in the issue

All shares are fully paid up, no debentures are pending for conversions

To provide sufficient flexibility and also to ensure that genuine companies do not
suffer on account of rigidity of the parameters, SEBI has provided an alternative
route to company not satisfying any of the above conditions, for accessing the
primary market, as under:

QIB Route:
• Issue shall be through book building route, with at least 75% to be mandatory
allotted to the Qualified Institutional Buyers (QIBs).
• The company shall refund the subscription money if the minimum subscription
of QIBs is not attained.
Understanding Market Makers -
https://www.youtube.com/watch?v=dWY3od6oY24
39
 Marketing & Promotion
Process
• Advertisements, as per the prescribed format.
• Road shows -
o Prospective investors
o Analysts
• Syndicate members/ brokers follow up with their
clients
• Initial response from the institutional as well as non-
institutional investors during the investor meets
would typically influence the pricing decision and
also the decision on the distribution reach and
marketing spend

40
 Marketing & Promotion
Process
• Marketing of the issue, shall cover:
o formulating marketing strategies,
o preparation of publicity budget,
o arrangements for selection of (i) media, (ii) centres for holding conferences of media, stock
brokers, investors, etc., (iii) brokers to the issue, and (iv) underwriters and underwriting
arrangement,
o quantum and distribution of publicity and issue material including offer documents,
application form and abridged prospectus.
• For all issue advertisements and public communications, issuer shall obtain the approval from
lead manager(s) responsible for marketing the issue and shall also provide copies of all issue
related materials to all lead manager(s)
o Any public communication or publicity material shall contain only such information as
contained in the draft offer document/offer document
o All information therein shall be truthful, fair and shall not be manipulative or deceptive or
distorted and it shall not contain any statement, promise or forecast which is untrue or
misleading;
o issue advertisements shall not display models, celebrities, fictional characters, landmarks,
caricatures or the likes;
o No public information with respect to the issue shall contain any offer of incentives, to the
investors whether direct or indirect, in any manner, whether in cash or kind or services or
otherwise.
 Green Shoe Option
Green Shoe option means an option of allocating shares in excess of the shares included in
the public issue and operating a post-listing price stabilizing mechanism for a period not
exceeding 30 days which is granted to a company to be exercised through a Stabilizing
Agent. This is an arrangement wherein the issue would be over allotted to the extent of a
maximum of 15% of the original issue size. From an investor's perspective, an issue with green
shoe option provides more probability of getting shares and also that post listing price may
show relatively more stability as compared to market.

• 15% of the issue size can be over allotted

• For that
o All pre-issue share holders (promoters) with holding more than 5% are required to
lend shares pro-rata (the maximum upper limit for lending being 15% of the total
number of shares being issued through IPO) to the stabilising agent
o “Stabilizing Agent” appointed (a merchant banker)
o Funds received from allotment of these additional shares re kept in an escrow
account and are used to buy shares from the market after listing should they be
below the issue price
o This would support the market price post issue
o Price Stabilization Period - 30 days
o Once the green shoe period is over, if the market price is higher than the issue price ;
company issues additional shares as required
https://www.youtube.com/watch?v=9j5h0WtkL8Q
42
Green Shoe Option - Example
• For instance, a company is planning to issue only 1,00,000 shares, but
in order to utilize the green shoe option, it actually issues 115,000
shares, in which case the over-allotment would be 15,000 shares.
• However the point that the company does not issue any new shares
for the over-allotment should be noted.
• The 15,000 shares used for the over-allotment are actually borrowed
from the promoters with whom the stabilizing agent enters into a
separate agreement.
• For the subscribers of a public issue, it makes no difference whether
the company is allotting shares out of the freshly issued 100,000 shares
or from the 15,000 shares borrowed from the promoters. Once
allotted, a share is just a share for an investor.
• For the company, however, the situation is totally different. The
money received from the over-allotment is required to be kept in a
separate escrow bank account.
• The main job of the stabilizing agent begins only after trading in the
share starts at the stock exchanges. In case the shares are trading at
a price lower than the offer price, the stabilizing agent starts buying
the shares by using the money lying in the escrow bank account.
43
Green Shoe Option - Example
• In this manner, by buying the shares when others are selling, the
stabilizing agent tries to put a brake on falling prices.
• The shares so bought from the market are handed over to the
promoters from whom they were borrowed.
• In case the newly listed shares start trading at a price higher than the
offer price, the stabilizing agent does not buy any shares.
• Then how would he return the shares? - At this point, the company by
exercising the green shoe option issues new shares to the stabilizing
agent, which are in turn handed over to the promoters from whom
the shares were borrowed.

44
 Fund raising Post IPO
Company is listed and now wishes scale up further for
which it requires fresh equity capital.
The options are -
• Rights
• Further Public Offering (FPO)
• Preferential allotment
• Qualified Institutional Placement (QIP)
• Global fund raising
o GDR/ADR/FCCB/AIM

Issue of BONUS SHARES by a company is also called as a primary (first) issue

of such shares. But it is not Fund raising activity for the company as it is issue
of new shares to existing shareholders for FREE

45
 FPO
A Follow-on Public Offer (FPO) is also called further
public offer. When a listed company comes out with a
fresh issue of shares or makes an offer for sale to the
public to raise funds it is known as FPO.

In other words, FPO is the consequent issue to the

public after IPO. The word FPO came into news after
the YES Bank announcement to raise Rs 2,000 crore
through FPO and debt.

46
 FPO V/s IPO
As the name suggests, Initial Public Offering (IPO) is the first offer for purchase to public.
This is a process when an unlisted company raises funds by offering its shares to the
public and consequently gets listed on a stock exchange.
A company can either issue fresh securities or offer its existing securities to public.
However, if the same company comes out with another issue to the public, the second
issue would be called an FPO.

• Fast track issues, Prospectus to be filed with RoC before the issue. No need for filing
draft prospectus with SEBI
• Company should meet the following requirements :
o listed for at least 3 years
o average market capitalization of Rs 1,000 cr up to the end of the quarter
preceding the issue
o minimum 2% of the listed shares should be the annualized trading turnover
during the past 6 calendar months
o At least 95% of the shareholder grievances should be redressed for the
complaints received till the end of the quarter immediately preceding the issue
o Compliance with the listing agreement
o Impact of the auditor’s comments on the accounts should be less than 5% of
the PAT and should be disclosed in the offer document
o No pending prosecutions/ SEBI notices against the company, promoters and
the whole time directors
o Entire shareholding of the promoters in the demat form 47
 Rights Issue of Shares
A rights issue is when a company issues its existing shareholders a right to buy
additional shares in the company. The company will offer the shareholder a
specific number of shares at a specific price. The company will also set a time
limit for the shareholder to buy the shares. The shares are often offered at a price
less than the listing price to encourage existing shareholders to take the
company up on their offer.
If a shareholder does not accept the company’s offer of rights issue then he/she
shall have the option to sell their rights entitlement on the stock market just as they
would sell ordinary shares, however their shareholding (%) in the company will
reduce.

• New issue of shares to the existing share holders

• Predetermined price
• Proportionate allotment
• Letter of Offer to be filed with the stock exchanges 30 days before the issue
opening date. Issue terms to be mentioned in the letter. Company
background not necessary as the company is already listed and hence its
information is available on the public domain
• Funds are raised without diluting the stakes of the subscribing share holders
• Shareholders can sell their rights entitlement in the market in case they do not
wish to subscribe 48
WHAT ARE RIGHTS ISSUE SHARES?
If you’re an investor, it’s important that you understand how rights issuing of shares work.
In simple terms, when a company taps into the existing shareholders for additional capital and issue shares at a discount particularly for
these existing shareholders, we call it rights issue shares. The idea is to get the additional capital from the existing shareholders without trying
any external methods.
This is particularly useful for the companies that are deeply in debt.

Rights Issue Example

We will take a simple rights issue example to illustrate this. Mr. John is an existing shareholder of TMC Company. He owns 20 shares of $200
each of the company.

TMC Company issues right shares to John and offers a discount of 30% on the market price of the share. And the rights issues shares are on 1
for every 2 existing shares.
As a result, John is able to buy 10 right issue shares at a price of $140 each.
In this scenario, it may seem that Mr. John is benefiting from the rights issue shares. And yes, if he sells off all his right issue shares at a market
price to another investor before the expiration date, he would enjoy a little profit.
But if we look closely, we would see that there’s a dilution in the share price.

If add the number of shares and find an average, we would see –

[(20 * $200) + (10 *140)] / 30 = ($4000 + $1400) / 30 = $5400 / 30 = $180 per share.
So you can see that even if it seems that Mr. John is getting a discount of 30%, i.e. $60 off from each share of the rights issue, he actually
gets $20 off per share.

Why right issue shares?

This is a big question because if companies go to the bank or the financial institution, they can get a loan. Why go for the rights issue shares
then? It turns out that there are a couple of valid reasons for which a company goes for the rights issue and not for external debt.

Here are the following reasons for which a company goes for rights issue shares-

When companies are cash-strapped: When companies don’t have cash or they’re already in debt, they don’t want to go to another bank
or financial institution to raise money. Rather they go to the existing shareholders and ask them whether they are interested in some extra
shares at a discounted rate. Not all existing shareholders are interested, but some like the idea and right shares are issued.
When companies want to grow: To issue right shares, not all companies need to be financially unhealthy. Many companies that have clean
balance sheets also go for the rights By approaching the existing shareholders they raise the capital they need for their growth and
expansion.
How do rights issue work?
In this section, we will understand how rights issue shares work from a company’s point of view. We will take another example to illustrate
this. 49
Let’s say that Grand Power Ltd. is strapped for cash. They’re in debt and they can’t go out and get another debt as of now. So they thought
that the best way to remain afloat is to issue right shares. They decided that they will issue right shares to the existing shareholders at $35 per
share when the market price of their shares is $50 per share. Every right issue share will be issued for 3 existing shares.

At this juncture, existing shareholders have three options –

They can choose to buy the right shares: This is what the company expects from the existing shareholders. If more existing shareholders buy
the right shares, they will raise more capital.
They can choose to ignore the right issue shares: Many existing shareholders ignore the idea of buying any more shares if particularly the
company isn’t doing well financially. Why buy from a company that is deeply in debt?
They can choose to buy the shares and sell them off: Many shareholders can buy the right issue shares and can sell off the shares to other
investors. As a result, they can make profits on the right shares and the company will also be able to raise the required capital.
So what Grand Power Ltd. should do? Should they go about issuing right shares? Would it be beneficial?

The answer is they should definitely go for issuing right shares. But before they ever decide to issue right shares, they need to be clear on how
they will utilize the capital raised. Would they pay off the debt? Would they invest in a new project to generate more cash-flow? Or would it
be a good idea to buy a new company/expand?

Once they’re clear about what they want to do with the money, they can set a goal and issue right shares accordingly.

Market price after right issue

There are many factors that are responsible for market price. For example, we can talk about the general outlook for the industry the
particular company is in, or the outlook of the company, the market trends, the market price of the competitors etc.

Thus, it’s difficult to say what would happen to the market price after the rights issue. But it can be easily said that the existing shareholders
may always not get the benefit as mentioned post rights issue.

What is the ex-rights price?

The ex-rights price is the average of the market price per share after the rights issue.

Let’s say that Ramesh owns 100 shares of $10 each. He has bought 50 right issue shares at $7 each.
Now after the rights issue, the average market price per share would be = ($10 * 100) + ($7 * 50) / 150 = $1000 + $350 / 150 = $9.
$9 is the ex-rights price.
Why knowing the ex-rights price is important? Because it tells us what the shareholders actually get instead of what the company promised.
In the above example, the company offers 30% discount on the rights issue, but actually, the shareholder has got a 10% discount overall.

As mentioned many factors determine whether the shareholders will get the mentioned benefit or not. Sometimes, the shareholders don’t
get any benefit if the market price drops post rights issue.

50
 Bonus Issue of Shares
A bonus issue, is an offer of free additional shares to existing shareholders. A
company may decide to distribute further shares as an alternative to increasing
the dividend payout. For example, a company may give one bonus share for
every five shares held. (Ratio 5:1)
• New issue of shares to the existing share holders for free
• Bonus issues are given to shareholders when companies are short of cash and
shareholders expect a regular income. Shareholders may sell the bonus shares
and meet their liquidity needs.
• Issuing bonus shares does not involve cash flow. It increases the company’s
share capital but not its net assets (Cash does not increase as in case of other
primary issues).

51