Professional Documents
Culture Documents
Financial Markets
Financial Markets
SYSTEM
A financial system is a set of institutional arrangements through which
financial surpluses are mobilised from the units generating surplus
income and transferring them to the others in need of them.
SECONDA
PRIMARY
RY
MARKET MARKKET
Capital market plays a vital role in transferring the financial
resources from surplus and wasteful areas to deficit and productive
areas, thus increasing the productivity and prosperity of the country
and promotes the process of economic growth in the country.
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(h) The eligible securities allotted under qualified institutional placement shall not be
sold by the allottee for a period of one year from the date of allotment, except on a
recognized stock exchange.
Institutional When a listed issuer makes a further public offer of
Placement equity shares, or offer for sale of shares by
Programme promoter/promoter group of listed issuer in which the
(IPP) 26
offer, allocation and allotment of such shares is made
only to qualified institutional buyers in terms of Chapter
VIII A of SEBI (ICDR) Regulations, 2009 for the purpose
of achieving minimum public shareholding, it is called
an IPP
1. Board Meeting and Passing a Board Resolution for Public
Steps involved Issue
in public issue 2. Holding of General Meeting
3. Appointment of Merchant Banker and other
intermediaries and entering into MOU with them
4. Preparation of Draft Prospectus and its approval by Board
5. Filing of prospectus with the SEBI/Registrar of
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Companies
6. Intimation to Stock Exchange
7. Finalization of collection centers
8. Printing and Distribution of Prospectus and
Application Forms
9. Announcement and Advertisement
Steps involved 10. Subscription List
in public issue 11. Separate Bank Account
12. Minimum Subscription
13. Promoters’ contribution
14. Allotment of Shares
15. Compliance Report 28
SEBI Guidelines defines Book Building as a process undertaken by which a demand for
the securities proposed to be issued by a corporate body is elicited and built up and the
price for such securities is assessed for the determination of the quantum of such
securities to be issued by means of a notice, circular, advertisement, document or
information memoranda or offer document.
Main difference between offer of shares through book building and offer
of shares through normal public issue
Price at which securities will be allotted is not known in case of offer of shares
through book building while in case of offer of shares through normal public issue,
price is known in advance to investor. In case of Book Building, the demand can be
known everyday as the book is built. But in case of the public issue the demand is
known at the close of the issue.
Book building is a method of price discovery. In this method, offer price of securities is
determined on the basis of real demand for the shares at various price levels in the
market. In book building method, the final issue price is not known in advance. Only a
price band is determined and made public before opening of the bidding process. The
spread of price between floor price and cap in the price band should not be more than
20%. It means that the cap should not be more than 120% of the floor price. Issuing
Company appoints a merchant banker as Book Runner Lead Manager (BRLM), who may
be assisted by other co- managers and by a team of syndicate members acting as
underwriters to the issue.
The BRLM sends copies of Red Herring Prospectus to the Qualified Institutional Buyers
(QIBs), large Investors, SEBI registered Foreign Institutional Investors (FIIs) and to the
syndicate members. BRLM also appoints brokers of the stock exchanges, called bidding
centres. They accept the bids and application forms from the investors. These bidding
centres place the order of bidders with the Company through BRLM. They are liable for any
default, if any, made by their clients, who have applied through them. Brokers/ Syndicate
members collect money from clients/investors.
Money received by them at the time of accepting bids is called margin money. Bids can be made
through on-line and transparent system of National Stock Exchange and Bombay Stock
Exchange depending on the agreement of the issuer with the stock exchange(s).
A public issue shall be kept open for three working days but not more than ten working days.
An issue through book building system remains open for three to seven working days. In case
of revision of price band, the issue period disclosed in the red herring prospectus shall be
extended for a minimum period of three working days. However, the total bidding period
shall not exceed ten working days. In other words, in case of a book built issue, bid is open for
a minimum period of three working days and maximum period of seven working days, which
may be extended to a maximum of ten working days, in case the price band is revised.
Green Shoe Option
1. If a company is issuing 100000 shares, the company will enter into an agreement regarding
overallotment option (green shoe option) with one of the stabilizing agents (mostly underwriters)
to the extent of 15000 shares (maximum of 15% of the issue size).
2. According to the agreement, the promoters would lend 15000 shares to the stabilizing agents for
a limited period of 30 days from the date of listing.
3. Allotment would be made to the extent of 1,15,000 shares (100000 shares issued by the
company and 15000 shares borrowed from the promoters.
4. On listing, if the market price falls below the issue price, the stabilizing agent may buy shares
from the market to the extent of 15000 shares. This may help to increase the market price of
shares by reducing the selling pressure. The shares purchased by the stabilizing agent are then
returned to the promoters. So, only 100000 shares remain listed on the stock exchange after 30
days.
5. However, on listing, if the share prices rises, and the stabilizing agent doesn’t buy
shares from the market, then at the end of 30 days period, the over allotment option is
exercised. The company allots 15000 more shares which are then returned to the
promoters. Thus, 1,15,000 shares remain listed on the exchange.
Thus, Green Shoe Option acts as a price stabilizing mechanism. Further, over-allotment
options are known as green shoe options because, in 1919, Green Shoe Manufacturing
Company (now part of Wolverine World Wide Inc.), was the first to issue this type of
option. A green shoe option can provide additional price stability to a security issue
because the underwriter has the ability to increase supply and smooth out price
fluctuations. It is the only type of price stabilization measure permitted by the
Securities and Exchange Commission (SEC) in USA.
Simply put, it is a price stabilization mechanism whereby a company over-allots shares to
investors participating in the issue, with a view to have the merchant banker buy them
back from the open market after listing, in order to arrest any fall in the share prices below
the issue price. SEBI introduced the Green Shoe mechanism in Indian capital markets in
2003 vide a circular SEBI/ CFD/DIL/ DIP/Circular No. 11 dated 14th August, 2003. Since
then, a number of companies have implemented the Green Shoe Option in their initial
public offerings.
Anchor Investors
Anchor investors are Qualified Institutional Buyers (QIB) who purchases shares one day
before the IPO opens. They help in arriving at a fair price and instil confidence in the
minds of the investors. As the name suggests, they are supposed to ‘anchor’ the issue by
agreeing to subscribe to shares at a fixed price so that other investors may know that there
is demand for the shares offered. SEBI introduced the concept of anchor investors in June,
2009 to enhance issuing company’s ability to sell the issue. The Adani Power IPO in July
2009 was the first issue in the country to attract investors under the anchor investor
scheme.
Intermediaries to the Capital Market
A debenture trust deed is a document created by the company where debenture trustees
are appointed to protect the interest of the debenture holders.
To act as debenture trustee, the entity should either be a scheduled bank carrying on
commercial activity, a public financial institution, an insurance company, or a body
corporate.
The entity should be registered with SEBI to act as a debenture trustee.
The contract deed entered into with a debenture trustee must specify the interest rate
and date of interest and principal repayments.
Duties of the Debenture Trustee include:
Call for periodical reports from the body corporate, i.e., issuer of debentures.
Ensure on a continuous basis that the property charged to the debenture is available
and adequate at all times to discharge the interest and principal amount payable in
respect of the debentures and that such property is free from any other
encumbrances except those which are specifically agreed with the debenture trustee.
Exercise due diligence to ensure compliance by the body corporate with the
provisions of the Companies Act, the listing agreement of the stock exchange or
the trust deed.
To take appropriate measures for protecting the interest of the debenture holders
as soon as any breach of the trust deed or law comes to his notice.
To ascertain that the debentures have been converted or redeemed in accordance
with the provisions and conditions under which they are offered to the debenture
holders.
Inform the Board immediately of any breach of trust deed or provision of any law.
6. Registrars to an Issue & Share Transfer Agents
"Registrar to an Issue" means the person appointed by a body corporate or any person or
group of persons to carry on the following :
Stock broker is a person who buys and sells stocks and other securities for its
clients through a stock exchange. Stock brokers should be registered with SEBI
and are governed by SEBI Act and Securities Contract Regulation Act.
A sub broker is a person who is not a trading Member of a Stock Exchange but
who acts on behalf of a trading member as an agent. His task is to help investors
in dealing in securities through such trading members(brokers).
According to Section 2 (44) of the Companies Act, 2013 “Global Depository
Receipt” means any instrument in the form of a depository receipt, by whatever
name called, created by a foreign depository outside India and authorised by a
company making an issue of such depository receipts;
Section 41 of the Companies Act, 2013 authorizes a company to issue Global
Depository Receipts after following the conditions as prescribed in Companies
(Issue of Global Depository Receipts) Rules, 2014.
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It is a form of depository receipt or certificate created by the Overseas Depository
Bank outside India denominated in dollar and issued to non-resident investors
against the issue of ordinary shares or foreign currency convertible bonds of issuing
company. In simple words, it is basically a negotiable instrument denominated in US
dollars. It is traded in Europe or the US or both. After getting approval from the
Ministry of Finance and completing other formalities, a company issues rupee
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denominated shares in the name of depository which delivers these shares to its
local custodian bank, the holder on records, thus depository. The depository then
issues dollar denominated depository receipts (or GDR) against the shares
registered with it. Generally one GDR is equivalent to one or more (rupee
denominated) shares. It is traded like any other dollar denominated security in the
foreign markets,
in addition to equity financing (as GDR represents equity) over debt financing. GDR
issue also possesses merits like less issue formalities, less administrative works as
regards dividend payment, information dissemination, annual general meeting etc. as
the issuer deal only with a single shareholder, the depository; easy availability of
foreign exchange and no foreign exchange risk. Besides issuing companies, foreign
investors especially FIIs also get advantage of investing in the Indian companies 54
without getting registration with SEBI, relief from cumbersome settlement and
delivery procedures, adequate liquidity (as GDR is as liquid as the shares of the
company in its home market) and generally higher returns. In fact, GDR holders enjoy
all economic benefits of the underlying shares but have none of the corporate rights
like right to vote.
According to Section 2(48) of the Companies Act, 2013 “Indian Depository Receipt”
means any instrument in the form of a depository receipt created by a domestic
depository in India and authorised by a company incorporated outside India making an
issue of such depository receipts;
Section 390 of the Companies Act, 2013 and rule 13 of Companies (Registration of
Foreign Companies) Rules, 2014 lays down the procedure for issue of Indian Depository
Receipts. 55
Apart from this a company has to comply with Chapter X and XA of SEBI (ICDR)
Regulations, 2009 to issue IDRs or a rights issue of IDRs.
An IDR is an instrument denominated in Indian Rupee in the form of a depository receipt
created by a domestic depository (Custodian of securities registered with SEBI) against
the underlying equity of issuing company to enable foreign companies to raise funds from
Indian Securities Markets.
In an IDR, foreign companies would issue shares, to a domestic (Indian)
depository, which would in turn issue depository receipts to investors in
India. The actual shares underlying the IDRs would be held by an Overseas
Custodian, which shall authorize the Indian depository to issue the IDRs. To
that extent, IDRs are derivative instruments because they derive their value 56
from the underlying shares. Standard Chartered PLC is only company to offer
IDR in the Indian market.
Benefits to the stakeholders
Issuing Companies: Any foreign company listed in its home country and satisfying the
eligibility criteria can issue IDRs. A company which has significant businesses in
India can increase its value through IDRs by breaking down market segmentations,
reaching trapped pools of liquidity, achieving international shareholder base and 57
IPO grading (Initial Public Offering Grading) is a service aimed at facilitating the
assessment of equity issues offered to public. The grade assigned to any individual issue
represents a relative assessment of the ‘fundamentals’ of that issue in relation to the
universe of other listed equity securities in India. Such grading is assigned on a five-point
scale with a higher score indicating stronger fundamentals.
IPO Grade 1 – Poor Fundamentals
IPO Grade 2 – Below - Average Fundamentals 58
would read as: "Rating Agency name" IPO Grade 1 viz. CARE IPO Grade 1, CRISIL IPO Grade
1 etc.
The assigned grade would be a one time assessment done at the time of the IPO and
meant to aid investors who are interested in investing in the IPO. The grade will not
have any ongoing validity.
The company needs to first contact one of the grading agencies and mandate it for the
grading exercise. The agency would then follow the process outlined below. 62
IPO grading is optional as per SEBI (ICDR) Regulations, 2009 w.e.f. February 04, 2014
Draft Offer ◎ “Draft Offer document” means the offer document in
Documents draft stage. The draft offer documents are filed with
SEBI, atleast 30 days prior to the filing of the Offer
Document with ROC/SEs. SEBI may specifies changes, if
any, in the Draft Offer Document and the Issuer or the
Lead Merchant banker shall carry out such changes in 64
The issuer can mention a price or price band in the draft prospectus (in case of a
fixed price issue) and floor price or price band in the red herring prospectus (in
case of a book built issue) and determine the price at a later date before
registering the prospectus with the Registrar of Companies.
However, the prospectus registered with the Registrar of Companies should
contain only one price or the specific coupon rate, as the case may be. 71
(2) The issuer should announce the floor price or price band at least 5 working
days before the opening of the bid (in case of an initial public offer) and at least 1
working day before the opening of the bid (in case of a further public offer), in all
the newspapers in which the pre issue advertisement was released.
(3) The announcement should contain relevant financial ratios computed for
both upper and lower end of the price band and also a statement drawing
attention of the investors to the section titled “basis of issue price” in the
prospectus.
The announcement and the relevant financial ratios shall be disclosed on the
websites of those stock exchanges where the securities are proposed to be
listed and shall also be pre-filled in the application forms available on the
websites of the stock exchanges.
(4) The cap on the price band shall be less than or equal to one hundred and
twenty per cent of the floor price. 72
(5) The floor price or the final price should not be less than the face value of
the specified securities. “Cap on the price band” includes cap on the coupon
rate in case of convertible debt instruments.
Offer Document to be Made Public
The draft offer document filed with SEBI shall be made public for comments, if any,
for a period of 21 days from the date of filing the offer document with SEBI by
hosting it on the websites of the SEBI, recognized stock exchanges where specified
securities are proposed to be listed and merchant bankers associated with the issue.
After a period of 21 days from the date the draft offer document was made public,
the Lead Merchant Bankers shall file with SEBI a statement giving information of the
comments received by them or issuer during that period and the consequential 73
In its continuing endeavour to make the existing public issue process more efficient,
SEBI has introduced a supplementary process of applying in public issues, viz., the
“Applications Supported by Blocked Amount (ASBA)” process.
The ASBA process is available in all public issues made through the book building
route. It shall co-exist with the current process, wherein cheque is used as a mode of
payment.
ASBA is an application for subscribing to an issue, containing an authorization to 74
block the application money in a bank account. The main features of ASBA process
are as follows:
Self Certified Syndicate Bank
Self Certified Syndicate Bank (SCSB) is a bank which offers the facility of applying
through the ASBA process. A bank desirous of offering ASBA facility shall submit a
certificate to SEBI as per the prescribed format for inclusion of its name in SEBI’s
list of SCSBs
A SCSB shall identify its Designated Branches (DBs) at which an ASBA investor
shall submit ASBA and shall also identify the Controlling Branch (CB) which
shall act as a coordinating branch for the Registrar of the issue, Stock
Exchanges and Merchant Bankers. The SCSB, its DBs and CB shall continue to
act as such, for all issues to which ASBA process is applicable. The SCSB may
identify new DBs for the purpose of ASBA process and intimate details of the
same to SEBI, after which SEBI will add the DB to the list of SCSBs maintained
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by it.
The SCSB shall communicate the following details to Stock Exchanges for
making it available on their respective websites; these details shall also be
made available by the SCSB on its website:
(i) Name and address of all the SCSB.
(ii) Addresses of DBs and CB and other details such as telephone number, fax
number and email ids. (iii) Name and contacts details of a nodal officer at a
senior level from the CB.
Eligibility of Investors
withdrawal/rejection of the application, as the case may be. The application data shall
thereafter be uploaded by the SCSB in the electronic bidding system through a web
enabled interface provided by the Stock Exchanges. Once the basis of allotment of
finalized, the Registrar to the Issue sends an appropriate request to the SCSB for
unblocking the relevant bank accounts and for transferring the requisite amount to the
issuer’s account. In case of withdrawal/failure of the issue, the amount shall be
unblocked by the SCSB on receipt of information from the pre-issue merchant bankers.
Obligations of the Issuer
The issuer shall ensure that adequate arrangements are made by the Registrar
to the Issue to obtain information about all ASBAs and to treat these
applications similar to non-ASBA applications while finalizing the basis of
allotment, as per the procedure specified in the Guidelines.
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