Listing and Issue of Security, India

FOCUS INDIA GROUP | Deepak Pareek

INDIA LISTING AND ISSUE OF SECURITY

- 1 - www.focusindiagroup.in

CONTENTS

MERCHANT BANKING ................................................................ - 2 -

An Introduction ........................................................................ - 2 -

Categories Of Merchant Bankers ................................................. - 7 -

Different Kinds Of Issues ........................................................... - 8 -

Initial Public OFFERING (IPO) ................................................ - 10 -

An Introduction ....................................................................... - 10 -

Trends In IPO‟s ....................................................................... - 13 -

Eligibility Norms For An IPO ...................................................... - 17 -

SEBI Guidelines ....................................................................... - 20 -

Principal Steps In An IPO .......................................................... - 25 -

Intermediaries Involved And Their Roles ..................................... - 27 -

Cost Of An Issue ...................................................................... - 31 -

Pricing Of An Issue................................................................... - 32 -

The Process Of Book Building .................................................... - 36 -

Marketing And Promotion Of An IPO ........................................... - 39 -

Pre Issue Obligations ................................................................ - 43 -

Post Issue Obligations .............................................................. - 44 -

Other Issues Related To IPO‟s ................................................... - 45 -

RIGHTS ISSUE ........................................................................ - 47 -

What Is A Rights Issue? ............................................................ - 47 -

Legal Aspects .......................................................................... - 47 -

Regulatory Framework For Rights Issues .................................... - 48 -

Advantages And Disadvantages Of A Rights Issue ........................ - 50 -

INEFFICIENCIES ..................................................................... - 52 -

Inefficiencies/Bottlenecks In The IPO Process .............................. - 52 -

Improving Efficiency In The IPO Process ..................................... - 57 -

Appendix 1 ............................................................................. - 61 -


MERCHANT BANKING

AN INTRODUCTION

Organizations raise capital to fund their expansion plans, working capital

requirements etc. by issuing securities in the primary market. Merchant

Bankers act as intermediaries between the issuers of capital and the

ultimate investor, who purchases these securities. Merchant Banking can

be broadly defined as financial intermediation that matches the entities

that need capital and those that have capital. Merchant bankers facilitate

the flow of capital in the market.

Merchant banking activities, especially those covering issue and

underwriting of shares and debentures are regulated by the Merchant

Bankers Regulations given by the Securities and Exchange Board of

India (SEBI).The Securities and Exchange Board of India (Merchant

Banker) Rules 1992 defines a Merchant Banker as:

“A person who is engaged in the business of issue management

either by making arrangements regarding selling, buying, or

subscribing to securities as Manager, Consultant, Advisor or

rendering corporate advisory services in relation to such issue

management.”

The merchant banker plays a vital role in channelizing the financial

surplus of the society into productive investment avenues. The merchant

banker has a fiduciary role in relation to the investors. He plays the lead

role in the issue of a security. He is the leader among the intermediaries

associated with the issue. He is required to guide and co-ordinate the

activities of the Registrar to the issue, Bankers to the issue, Advertising

Agency, Printers, Underwriters, Brokers, etc.

The merchant banker has to ensure the compliance of all the laws and

regulations governing the securities market from time to time by RBI,


SEBI, Companies Act, Stock Exchanges Listing requirements etc. He may

also be called upon to assist the statutory authorities in developing a

regulatory framework for orderly growth of capital markets.

Management of Debt and Equity Offerings: This is the

traditional operation for most of the merchant bankers in India. The

role of the merchant banker is dynamic as he has to capitalize on the

opportunities available in the market. He has to assist his corporate

clients in raising funds from the market. He may also be required to

counsel them on various issues that affect their finances. The main

area of this role includes:

Instrument designing

Pricing of the issue

Registration of offer document

Underwriting support

Capital

Market

Information

Regulatory Framework

ISSUER INVESTOR

SEBI

INTERMEDIARIES

Guidance Co-ordination

Compliance

Returns

Protection

RELATIONSHIPS OF THE MERCHANT BANKER

INVESTMENT

BANKER


Marketing of the issue

Allotment and refund

Listing on stock exchanges

Placement and Distribution: The distribution network of the

merchant banker can be classified as institutional and retail. The

network of institutional investors consists of Mutual Funds, Foreign

Institutional Investors, Banks, Domestic and Multinational Financial

Institutions, Private Equity Funds, Pension Funds etc. The size of this

network represents the wholesale reach of the merchant banker. The

retail distribution reach depends upon the networking with the

investors. Many merchant bankers have associate firms which are

brokers on the stock exchange. These brokers appoint sub-brokers at

various geographical locations to service both the primary market and

secondary market needs of the local investors. The distribution

network can be used to distribute various financial products like equity

shares, debt instruments, mutual fund products, fixed deposits,

insurance products, commercial paper etc.

Rights Issues of Shares: If a public company wants to increase

its subscribed capital by allotment of further shares, such further

shares should be first offered to the existing shareholders, in

proportion to the capital paid up on the shares held by them at the

date of such offer. The shareholders to whom such an offer is made

are not under any legal obligation to accept the offer. On the other

hand, they have a right to renounce the offer in favour of any person.

Shares so offered by a public company to its existing shareholders are

called rights shares. For rights issue by listed companies exceeding Rs.

50 lakhs, the issue should be managed by a SEBI – registered

merchant banker.

Corporate Advisory Services: Merchant banker‟s offer customized

solutions to the financial problems of their clients. One of the key areas

for the advisory role is financial structuring. The process includes

determining the appropriate level of gearing and advising the company


whether to leverage, de-leverage or maintain its current debt-equity

levels. The company‟s working capital practices are studied and

alternative working capital policies suggested. The merchant banker

may also explore the possibility of refinancing high cost funds with

alternative cheaper funds. Another area of advice is rehabilitation and

turnaround management. In case of sick units, they may design a

revival package in co-ordination with the banks and financial

institutions.

Project Advisory: Merchant bankers are sometimes associated

with their clients from the early stage of their project. They assist

companies in conceptualizing the project idea when it is in a nebulous

stage. Once the project is conceptualized, they carry out the initial

feasibility studies to examine its viability. They also help in the

preparation of the detailed project report and offer project appraisal

services to the clients.

Loan Syndication: Merchant bankers arrange to tie up loans for

their clients. The first step involves analyzing the client‟s cash flow

patterns so that terms of borrowings can be defined to suit the cash

flow requirements. The merchant banker then prepares the loan

memorandum. The loan memorandum is then circulated to various

banks and financial institutions and they are invited to participate in

the syndicate. The banks then indicate the amount of exposure they

are willing to take and the interest rates thereon. The terms are

further negotiated and fine-tuned to match the requirements of both

the parties. The final allocation is done to the various members of the

syndicate. The merchant banker also helps the clients in loan

documentation procedures.

Venture Capital and Mezzanine Financing: The venture capital

business has emerged from a fragmented industry dominated by

wealthy individuals/families to an increasing institutionalized sector.

The size of the deals has increased and it is possible for even start –

up companies to raise huge capital from venture firms. The number of


Venture Capital firms has significantly rise and several industry specific

venture funds have been set up. The association of a merchant banker

to handle the entire deal flow is becoming increasingly imperative.

Merchant bankers play several roles such as preliminary screening of

the company, assistance to venture investors in conducting their due

diligence exercise, valuation of the company, etc.

Mezzanine Financing refers to the late stage financing. At this stage a

company is usually profitable and has a business track record. The

company needs fresh induction of capital to finance its growth plans.

However the conditions in the IPO market may not be favorable to

make an offering. The state of the IPO markets affects both, the

availability of capital and pricing. In such a scenario, mezzanine

financing acts as a viable funding alternative. This round of financing is

usually in lieu of going public. Some Venture funds and Private equity

funds offer mezzanine finance to potential IPO companies. These funds

act as warehouses for investments and later divest their stake through

public offering.

Mergers and Acquisitions: Mergers and Acquisitions are

becoming increasingly significant in terms of services offered by

merchant bankers in India. The industry is passing through a transition

phase of restructuring. Companies are engaged in efforts to

consolidate themselves in areas of their core competencies and to

divest those businesses where they do not have any competitive

advantage. Merchant bankers have been quick to capitalize on these

opportunities. The role of a merchant banker is that of a financial

engineer rather than that of a business consultant. Most merchant

bankers try to identify targets which will help their clients to achieve

specified objectives.

Takeover Defense: With the high level of hostile takeover activity

in recent years, takeover defense, both pre-emptive and defensive,

has become an important product for merchant bankers. It is difficult

to prevent a takeover by a determined, well financed bidder who is


prepared to make a cash tender offer for its shares. However,

measures can be taken to reduce the likelihood of unfair takeover bids,

to slowdown the takeover process (giving the target company more

time to negotiate or seek out alternatives).

CATEGORIES OF MERCHANT BANKERS

Initially Merchant Bankers were classified into 4 categories with regard to

their nature and range of activities and their responsibilities to SEBI,

investors and issuers of securities. Since September 1997 only a single

category exists. The requirements are as under:

Net Worth: minimum net worth of Rs. 5 crore.

Registration Fee: registration fees of Rs. 5 lakhs is to be paid at the

time of grant of certificate by the board and thereafter a renewal fee of

Rs.2.5 lakhs every three years from the fourth year from the date of

initial registration.

Public Issue/ Rights Issue SEBI Filling Fees:

For a period of one year from the commencement of the Securities

and Exchange Board of India (Merchant Bankers) (Second

Amendment, dated May 03, 2006) Regulations, 2006

A. Public Issues

Size of the Issue Fees

Less than or equal to Rs. 2 crores Rs. 10,000

Greater than Rs. 2 crores 0.05 % of the issue size

B. Rights Issues




Greater than Rs. 4 crores but less than

Rs.1000 crores

0.025 % of the issue

size

Greater than Rs. 1000 crores Rs. 25,00,000

After the expiry of one year from the commencement of the

Securities and Exchange Board of India (Merchant Bankers) (Second

Amendment dated May 03, 2006) Regulations, 2006

A. Public Issues


Less than or equal to Rs. 1 crore Rs. 10,000

Greater than Rs. 1 crore 0.10 % of the issue size

B. Rights Issues



Greater than Rs. 2 crores but less than

Rs. 500 crores

0.05 % of the issue size

Greater than Rs. 500 crores Rs. 25,00,000

DIFFERENT KINDS OF ISSUES

Primarily, issues can be classified as a Public, Rights or Preferential issue

(also known as Private Placements). While the public and rights issues

involve a detailed procedure, private placements are relatively simpler.

The classification of issues is illustrated below:


Initial Public Offering - the issuer makes an offer to new investors to

enter into its shareholding family.

Rights Issue - a listed company proposes to issue fresh securities to its

existing shareholders.

Further Public Offering - an already listed company makes either a

fresh issue of securities to the public or an offer of sale to the public

through an offer document.

Preferential Issue - an issue of shares or convertible securities by listed

companies to a select group of persons under Section 81 of the

Companies Act, 1956 which is neither a rights issue nor a public issue.

PREFERENTIAL RIGHTS PUBLIC

FURTHER PUBLIC OFFERING INITIAL PUBLIC OFFERING

ISSUES


INITIAL PUBLIC OFFERING (IPO)

AN INTRODUCTION

The first public offer of securities by a company after its inception is

known as Initial Public Offering (IPO). Going public (or participating in an

“Initial Public Offering” or IPO) is a process by which a business owned by

one or several individuals is converted in to a business owned by many. It

involves the offering of part ownership of the company to the public

through the sale of equity securities (stock).

IPO dilutes the ownership stake and diffuses corporate control as it

provides ownership to investors in the form of equity shares. It can be

used as exit strategy and finance strategy.

As a financing strategy, its main purpose is to raise funds for the

company. When used as an exit strategy, existing investors can offload

equity holdings to the public.

REASONS FOR GOING PUBLIC

To raise funds for financing capital expenditure needs like

expansion, diversification etc.

To finance increased working capital requirement.

As an exit route for existing investors.

For debt financing.

BENEFITS OF GOING PUBLIC

Access to Capital: The principal motivation for going public is to

have access to larger capital. A company that does not tap the public

financial market may find it difficult to grow beyond a certain point for

want of capital.

Stockholder Diversification: As a company grows and becomes

more valuable, its founders often have most of its wealth tied up in the


company. By selling some of their stock in a public offering, the

founders can diversify their holdings and thereby reduce somewhat the

risk of their personal portfolios.

Easier to raise new capital: If a privately held company wants to

raise capital, it must either go to its existing shareholders or look

around for other investors. This can often be a difficult and time

consuming process. By going public, it becomes easier to find new

investors for the business.

Enhances liquidity: The stock of a closely held firm is not liquid. If

one of the holders wants to sell some of his shares, it is hard to find

potential buyers, especially if the sum involved is large. Even if a buyer

is located there is no established price at which to complete the

transaction. These problems are easily overcome in a publicly owned

company.

Establishes value for the firm: This can be very useful in

attracting key employees with stock options because the underlying

stock have a market value and a market for them to be traded that

allows for liquidity for them.

Image: The reputation and visibility of the company increases. It

helps to increase company and personal prestige.

Signals from the Market: Stock prices represent useful

information to the managers. Every day, investors render judgment

about the prospects of the firm. Although the market may not be

perfect, it provides a useful reality check.

Other Advantages:

Additional incentive for employees in the form of the

companies‟ stocks. This also helps to attract potential employees.

Window of opportunity.

It commands better valuation of the company.

Better situated for making acquisitions.


DISADVANTAGES / COSTS OF GOING PUBLIC

A public company, of course is not an unmixed blessing. There are

several disadvantages of going public.

Disclosure: A public company is required to disclose information

to investors and others. Hence, it cannot maintain a strict veil of

secrecy over its expansion plans and product market strategies as its

non-public counterpart can do. Management may not like the idea

of reporting operating data, because such data will then be available

to competitors.

Dilution: When a company issues shares to public, existing

shareholders suffer dilution of their proportionate ownership in the

firm.

Loss of Flexibility: The affairs of a public company are subject to

fairly comprehensive regulation. Hence, when a non-public company is

transformed into a public company there is some loss of flexibility.

Accountability: Understandably, the degree of accountability of

a public company is higher. It has to explain a lot to its investors.

Self-dealings: The owner managers of closely held companies

have many opportunities for self-transactions. Although legal they may

not want to disclose these to the public.

Inactive market - low price: If a firm is very small and its shares

are not traded frequently, then its stock will not really be liquid and the

market price may not be truly representative of the stocks value.

Control: Owning less than 50% of the shares could lead to a loss of

control in the management.

Costs: Apart from the cost of issuing securities, a public

company has to incur recurring costs for providing investors with

periodical reports, holding shareholder meetings, communicating

with institutional investors and financial analysts, and fulfilling

various statutory obligations, like filing quarterly reports with the

Securities and Exchange Board of India. These reports can be costly


especially for small firms

Other Disadvantages:

The profit earned by the company should be shared with its

investors in the form of dividend.

An IPO is a costly affair. Around 15-20% of the amount

realized is spent on raising the same.

A substantial amount of time and effort has to be invested.

TRENDS IN IPO’S

Let us have a look at the general development of the primary markets

over the years. There have been many changes in the regulation of

primary market in order to save investors from fraudulent companies. The

most path breaking development in the primary market regulation has

been the abolition of CCI (Controller of Capital Issues). The aim was to

give the freedom to the companies to decide on the pricing of the issue

and this was supposed to bring about a self-managing culture in the

financial system. But the move was hopelessly misused in the years of

1994-1995 and many companies came up with issues at sky-high prices

and the investors lost heavily. That phase took a heavy toll on the

investor‟s sentiment and the result was the reduction in the amount of

money raised through IPO route.

1990-2000: With controls over pricing gone, companies rushed to

tap the primary market and they did so with remarkable ease, thanks

to overly optimistic merchant bankers and gullible investors. Around Rs

20,000 crores were raised during this period. Some of the prominent

money mobilizers were the so called „sunrise sectors’ - polyester,

textiles, finance, aquaculture. The euphoria spilled over to the

secondary market. But reality soon set in. Issuers soon failed to meet

projections, many disappeared or sank. Result: the small investor

deserted both markets-till the next boom.


As the great Indian software story played itself out, software stocks led

a bull charge on the bourses. The primary market caught up, and

issues from the software markets flooded the market. With big IPO‟s

from companies in the ICE (Information Technology, Communication

and Entertainment) sectors, the average issue size shot up from Rs.5

crore in 1994-96 to Rs.30 crore. But gradually, hype took over and

valuations reached absurd levels. Both markets tanked.

Beyond 2000: There were hardly any IPO‟s and those who

ventured got a lukewarm response. A depressed secondary market had

ensured that the doors for the primary market remained closed for the

entire FY 2001-2002.There were hardly any IPO‟s in FY 2001-2002.

In 2002 the primary market boom promised to be different. To start

with, the cream of corporate India was queuing up, which ensured

quality. In this fragile market, issue pricing remains conservative,

which potentially meant listing gains. This rekindled the interest of

small investors in stocks and drew them back into the capital market.

Even as the secondary market moved into top gear in 2003 the

primary market too scripted its own revival story, buoyed largely by

the Maruti IPO which was oversubscribed six and a half times. In 2003

almost all primary issues did well on domestic bourses after listing,

prompting retail investors to flock to IPO‟s. All IPO‟s, including

Indraprastha Gas and TV Today Network which was oversubscribed 51

times showed the growing appetite for primary issues. After the

phenomenal success of Maruti issue, a number of companies

approached the capital market and a lot more are waiting for SEBI

approval.

SEBI has taken enough care to force companies to make relevant

disclosures for the investor to judge the quality of new issues. Besides,

the companies themselves have been careful not to over-price the

shares. On the contrary, some of the companies have deliberately

under-priced them to let the issue get over-subscribed and to let the

investor share some of the capital gains after listing.


PERFORMANCE ANALYSIS OF RECENT IPO’S:

IPO‟s in India dried up all of a sudden. Adding to the woes of promoters is

poor Industrial Production numbers which led to a massive sell-off on the

exchanges. Out of the approximately 95 companies that raised money

from Retail Investors in India by IPO, 60% are quoting below their issue

price. Remember, these are the same issues where retailers flocked by

looking at FII subscription. However, FIIs have also turned speculators in

the primary market and have sold aggressively.

Edelweiss IPO subscribed 109 times: The initial public offer of

brokerage firm Edelweiss Capital got subscribed over 109 times on the

final day of its public issue. The issue received bids for 92.08 crore

shares as against 83.86 lakh shares on offer, according to the latest

data available with the bourses. The portion reserved for Qualified

Institutional Buyers (QIBs) was subscribed by over 20 times with bids

for 10.21 crore shares, majority of which came from FIIs, the data

reveals. The domestic financial institutions, such as banks, mutual

funds and insurance companies who also belong to the QIB category,

submitted bids for 1.51 lakh. The portion for retail investors has

received bids for about 1.43 times, while the shares reserved for

employees have been oversubscribed 5.5 times.

The other non-institutional investors, which includes corporates and

non-retail individual has also been oversubscribed with bids for 10.82

times of the total shares reserved for them. The price band for the

issue has been fixed between Rs 725-825 per share. The book building

process began on November 15. Kotak Mahindra Capital, Citigroup and

Lehman Brothers were the book running lead managers to the issue.

Rural Electrification Corporation (REC) IPO subscribed 1.62

times: The initial public offering (IPO) of Rural Electrification

Corporation (REC) of 156.12 million shares in the price band of Rs 90-

105 per share has been subscribed 1.62 times. According to data

available with NSE, as of 1200 hrs, the company has received bids for


253.16 million shares with the maximum bids - 162.22 million shares -

at the lower end of the price band at Rs 90 per share.

The company has received bids for 90.94 million shares at the upper

end of the price band at Rs 105 per share. The IPO of V-Guard

Industries of eight million shares in the price band of Rs 80-85 per

share has been subscribed 98% as of the second day of the issue. The

company has received bids for 7.87 million shares with the maximum

bids being made at Rs 85 per share.

Reliance Power IPO subscribed 72 times: Investors bid for as

many as 72 times the number of shares that Reliance Power offered

for subscription under its initial public offering (IPO). They have put in

bids for over 1,654.8 crore shares as against the 22.8 crore shares on

offer. The issue has already pulled in roughly Rs 60,000 crore by way

of application money. The IPO received maximum response on the last

day compared to the first three days, with the subscription count

racing from 24 times on day three to over 72 times by on last day.

In terms of number of applications Reliance Power IPO has set a new

record. It received ever nearly 31 lakh applications by the end of day

three, the highest ever, according to the sources in the merchant

banking industry handling the IPO. Among mega issues the Reliance

Power IPO has thus set a new benchmark in fund mobilization.

DLF IPO subscribed two times: The DLF IPO, raised Rs 9,188 crore

in 2007, received subscriptions only about three times the 17.5 crore

shares on offer and the retail portion of the issue barely managed to

get full subscription. Cairn India, which raised Rs 5,260 crore through

the IPO in 2006 by offering 32.88 crore shares, again barely managed

to get subscribed by 1.3 times under volatile market conditions.

Reliance Petroleum IPO received a similar response with the Rs 2,700-

crore issue getting subscribed 52 times for the 45 crore shares on offer

and received a commitment of Rs 1,45,080 crore.

The DLF initial public offer (IPO) received subscription of 1.96 times at

the close of the third day. It received total bids for 34.34 crore equity


shares against the offer of 17.5 crore shares. The realty giant hopes to

raise up to Rs 9,625 crore from the issue. According to the information

available with stock exchanges, the QIB portion was subscribed 3.17

times, mostly due to response from foreign institutional investors

(FIIs). FIIs have submitted bids for over 30 crore shares out of the

total bids for 33 crore shares received in this segment.

The bids from domestic financial institutions were for just 2.4 crore

shares, while those from mutual funds were for about 51 lakh shares.

The IPO has about 5.2 crore shares reserved for retail individuals.

Market experts believe that the retail bids usually pick up on the last

day of the book building process. The non-institutional investors

segment, which includes corporates and non-retail individual investors,

was subscribed 0.04 times.

ELIGIBILITY NORMS FOR AN IPO

SEBI has laid down eligibility norms for entities accessing the primary

market through public issues. The main entry norms for companies

making a public issue (IPO or FPO) are summarized as under:

Entry Norm I (EN I):

An unlisted company may make an initial public offering (IPO) of equity

shares or any other security which may be converted into or exchanged

with equity shares at a later date, only if it meets all the following

conditions:

a) Net Tangible Assets of at least Rs. 3 crores for 3 full years.

b) Distributable profits in at least three years

c) Net worth of at least Rs. 1 crore in three years

d) If change in name, at least 50% revenue for preceding 1 year

should be from the new activity

e) The aggregate of the proposed issue and all previous issues

made in the same financial year in terms of size (i.e., offer


through offer document + firm allotment + promoters‟

contribution through the offer document), does not exceed five

times its pre-issue net worth as per the audited balance sheet of

the last financial year.

A listed company shall be eligible to make a public issue of equity

shares or any other security which may be converted into or exchanged

with equity shares at a later date, only if it meets all the following

conditions:

a) If change in name, at least 50% revenue for preceding 1 year

should be from the new activity

b) The aggregate of the proposed issue and all previous issues

made in the same financial year in terms of size (i.e., offer

through offer document + firm allotment + promoters‟

contribution through the offer document), does not exceed five

times its pre-issue net worth as per the audited balance sheet of

the last financial year.

To provide sufficient flexibility and also to ensure that genuine companies

do not suffer on account of rigidity of the parameters, SEBI has provided

two other alternative routes to company not satisfying any of the above

conditions, for accessing the primary Market, as under:

Entry Norm II (EN II):

a) Issue shall be through book building route, with at least 50%

to be mandatory allotted to the Qualified Institutional Buyers

(QIBs).

b) The minimum post-issue face value capital shall be Rs.10

crore or there shall be a compulsory market-making for at least

2 years.

QIBs mean public financial institutions as defined under section 4A of the

Companies Act, scheduled commercial banks, mutual funds, foreign

institutional investors registered with SEBI, multilateral and bilateral

development financial institutions, venture capital funds and foreign


venture capital funds registered with SEBI, insurance companies

registered with the Insurance Regulatory and Development Authority,

provident funds and pension funds with a minimum amount of Rs 25

crore and State Industrial Development Corporations.

OR

Entry Norm III (EN III):

a) The “project” is appraised and participated to the extent of

15% by Financial Institutions/ Scheduled Commercial Banks of

which at least 10% comes from the appraisers.

b) The minimum post-issue face value capital shall be Rs. 10

crore or there shall be a compulsory market-making for at least

2 years.

In addition to satisfying the aforesaid eligibility norms, the company shall

also satisfy the criteria of having at least 1000 prospective allotees in its

issue.

Exemption from Eligibility Norms

The provisions shall not be applicable in case of:

a) A banking company including a Local Area Bank (set up under

sub-section (c) of Section 5 of the Banking Regulation Act, 1949

and which has received license from the Reserve Bank of India.

b) A corresponding new bank set up under the Banking

Companies (Acquisition and Transfer of Undertaking) Act, 1970

Banking Companies (Acquisition and Transfer of Undertaking)

Act, 1980, State Bank of India Act 1955 and State Bank of India

(Subsidiary Banks) Act.

c) An infrastructure company whose project has been appraised

by a Public Financial Institution (PFI) or Infrastructure

Development Finance Corporation (IDFC) or Infrastructure

Leasing and Financing Services Ltd. (IL&FS) or a bank which was

earlier a PFI not less than 5% of the project cost is financed by a


PFI / IDFC / IL&FS or severally, irrespective of whether they

appraise the project or not, by way of loan or subscription to

equity or a combination of both.

d) Rights issue by a listed company.

SEBI GUIDELINES

SEBI has come up with Investor Protection and Disclosure Norms for

companies raising funds through IPO. These rules are amended from time

to time to meet with the requirement of changing market conditions.

DISCLOSURE NORMS

Risk Factor: The Company/Merchant Banker must specify the

major risk factor in the front page of the offer document.

Issuers Responsibility: It is the absolute responsibility of the

issuer company about the true and correct information in the

prospectus. Merchant Banker is also responsible for giving true and

correct information regarding all the documents such as material

contracts, capital structure, appointment of intermediaries and other

matters.

Listing Arrangement: It must clearly state that once the issue is

subscribed where the shares will be listed for trading.

Disclosure Clause: It is compulsory to mention this clause to

distinctly inform the investors that though the prospectus is submitted

and approved by SEBI it is not responsible for the financial soundness

of the IPO.

Merchant Bankers Responsibility-Disclaimer Clause: The Lead

Manager has to certify that disclosures made in the prospectus are

generally adequate and are in conformity with the SEBI Guidelines.

Capital Structure: The Company must give complete information

about the Authorized capital, Subscribed Capital with top ten

shareholders holding pattern, Promoters interest and their subscription


pattern etc. Also about the reservation in the present issue for

Promoters, Foreign Institutional Investor‟s (FII‟s), Collaborators, NRI‟s

etc. Then the net public offer must be stated very clearly.

Auditors Report: The Auditors have to clearly mention about the

past performances, Cost of Project, Means of Finance, Receipt of Funds

and its usage prior to the IPO. Auditor must also give the tax-benefit

note for the company and investors.

INVESTOR PROTECTION NORMS

Pricing of Issue: The pricing of all the allocations for the present

issue must follow the bid system. The reservation must be disclosed

for different categories of investors and their pricing must be specified

clearly.

Minimum Subscription: If the company does not receive

minimum subscription of 90% of subscription in each category of offer

and if the issue is not underwritten or the underwriters are unable to

meet their obligation, then fund so collected must be refunded back to

all applicants.

Basis of Allotment: In case of full subscription of the issue, the

allotment must be made with the full consultation of the concerned

stock exchange and the company must be impartial in allotting the

shares.

Allotment/Refund: Once the allotment is finalized, the refund of

the excess money must be made within the specified time limits

otherwise the company must pay interest on delayed refund orders.

Dematerialization of Shares: As per the provisions of the

Depositories Act, 1996, and SEBI Rules, now all IPO will be in Demat

form only.

Listing of Shares: It is mandatory on the part of the promoters

that once the IPO is fully subscribed, and then the underlying shares

must be listed on the stock exchange. This provides market and exit

routes to the investors.


OTHER SEBI GUIDELINES

Promoters Contribution and Lock - in:

1. The promoters‟ contribution in case of public issues by

unlisted companies should not be less than 20 percent of the post-

issue capital.

2. In case of public issues by listed companies, promoters should

contribute to the extent of 20 percent of the proposed issue or

should ensure post issue holding to an extent of 20 percent of the

post issue capital.

3. In case of composite issues of a listed company, the promoters‟

contribution shall at the option of the promoter(s) be either 20% of the

proposed public issue or 20% of the post-issue capital. Rights issue

component of the composite issue shall be excluded while calculating

the post-issue capital.

4. For any issue of capital to the public the minimum promoter‟s

contribution is locked in for a period of 3 years. If the promoters

contribution exceeds the required minimum contribution, such

excess is locked in for a period of 1 year.

Securities Ineligible for Computation of Promoter’s

Contribution:

1. Where the promoters of any company making an issue of

securities have acquired equity during the preceding three years,

before filing the offer documents with SEBI, such equity shall not be

considered for computation of promoters contribution if it is;

a) acquired for consideration other than cash and

revaluation of assets or capitalization of intangible assets is

involved in such transactions; or

b) resulting from a bonus issue, out of revaluation

reserves or reserves without

accrual of cash resources.


2. In case of public issue by unlisted companies, securities

which have been issued to the promoters during the preceding one

year, at a price lower than the price at which equity is being offered

to public shall not be eligible for computation of promoters‟

contribution.

3. No securities forming part of promoters‟ contribution shall

consist of any private placement made by solicitation of subscription

from unrelated persons either directly or through any intermediary.

4. The securities for which a specific written consent has not

been obtained from the respective shareholders for inclusion of their

subscription in the minimum promoters‟ contribution subject to

lock-in shall not be eligible for promoters‟ contribution.

Collection Centers for Receiving Applications:

The minimum number of collection centers for an issue of capital shall be:

1. The four metropolitan centers situated at Mumbai, Delhi,

Calcutta and Chennai

2. All such centers where the stock exchanges are located in the

region in which the registered office of the company is situated.

The issuer company shall be free to appoint as many collection centres

as it may deem fit in addition to the above minimum requirement.

Underwriting:

The issuers have the option to have a public issue underwritten by

the underwriter.

1. In respect of every underwritten issue, the lead merchant

bankers shall accept a minimum underwriting obligation of 5% of

the total underwriting commitment or Rs.25 lakhs whichever is less.

2. The outstanding underwriting commitments of a merchant

banker shall not exceed 20 times its net worth at any point of time.

Timeframes for Issue and Post-Issue Formalities:


1. The minimum period for which the public issue is to be kept

open is 3 working days and the maximum for which it can be kept

open is 10 working days.

2. A public issue is affected if the issue is able to procure 90% of

the total issue size within 60 days from the date of the earliest

closure of the public issue.

3. In case of oversubscription the company may have the right

to retain the excess application money and allot shares more than

the proposed issue, which is referred to as “green-shoe option”.

4. Allotment has to be made within 30 days of the closure of the

Public issue and 42 days in case of Rights issue.

5. All the listing formalities of a Public Issue have to be

completed within 7 days from the date of finalization of the basis for

allotment.

Dispatch of Refund Order:

1. Refund orders have to be dispatched within 30 days of the

closure of the issue.

2. Refunds of excess application money i.e. non-allotted shares

have to be made within 30 days of the closure of the issue.

Other Regulations:

1. Underwriting is not mandatory but 90% subscription is

mandatory for each issue of capital to public unless it is

disinvestment where it is not applicable.

2. If the issue is undersubscribed then the collected amount

should be returned back.

3. If the issue size is more than Rs 500 crores, voluntary

disclosures should be made regarding the deployment of funds and

an adequate monitoring mechanism put in place to ensure

compliance.


4. There should not be any outstanding warrants for financial

instruments of any other nature, at the time of the IPO.

5. In the event of the initial public offer being at a premium and

if the rights under warrants or other instruments have been

exercised within 12 months prior to such offer, the resultant shares

will be not taken into account for reckoning the minimum promoters

contribution further, the same will also be subject to lock-in.

6. Code of advertisement as specified by SEBI should be adhered

to.

7. Draft prospectus submitted to SEBI should also be submitted

simultaneously to all stock exchanges where it is proposed to be

listed.

8. No company shall make any further issue of capital in any

manner whether by way of issue of bonus shares, preferential

allotment, rights issue or public issue or otherwise, during the

period commencing from the submission of offer document to the

Board on behalf of the company for public or rights issues, till the

securities referred to in the said offer document have been listed or

application moneys refunded on account of non-listing or under

subscription, etc. unless full disclosures regarding the total capital

to be raised from such further issues are made in the draft offer

document.

PRINCIPAL STEPS IN AN IPO

The issue of securities to members of the public through a prospectus

involves a fairly elaborate process, the principal steps of which are as follows.

The board of directors approves the proposal to raise capital from the

public and authorizes the managing director (or a board committee) to

do all the tasks relating to the public issue.


The company convenes a meeting to seek the approval of shareholders

and the shareholders pass a special resolution under section 81(1A) of

the Companies Act authorizing the company to make the public issue.

The company appoints a merchant banker as the lead manager (LM) to

the issue.

The LM carries out due diligence to check all relevant information,

documents, and certificates for the issue.

The company, advised by the LM, appoints various intermediaries such

as the registrar to the issue, the bankers to the issue, the printers, and

advertiser.

The LM draws up the issue budget, keeping in mind the guidelines

issued by the Ministry of Finance on issue expenses, and the company

approves the same (The main components of the issue expenses are

fees for LM, underwriters, registrar and bankers, brokerage, postage,

stationery, issue marketing expenses, etc.)

The LM prepares the Draft Red Herring Prospectus (DRHP) in

consultation with management and seeks the approval of the Board.

The LM files the DRHP approved by the board, with SEBI for its

observation along with a soft copy. SEBI places the same on its website

for comments from the public.

The company makes listing application to all the stock exchanges

where the shares are proposed to be listed along with copies of the

draft red herring prospectus. The DRHP is also hosted on the websites

of the LM and the underwriters.

The company enters into a tripartite agreement with the registrar and

all the depositories for providing the facility of offering the shares in a

dematerialized mode.

If the issue is proposed to be underwritten (it is optional in a retail issue

and mandatory in a book built issue to the extent of the net public

offer), the LM makes underwriting arrangements.


Within 21 days, SEBI makes its observations on the DRHP. The stock

exchanges also suggest changes, if any. The company carries out the

modifications to the satisfaction of these authorities.

The company files the prospectus with the Registrar of Companies

(ROC).

The LM and the company market the issue using a combination of

press meetings, brokers' meetings, investors' meeting and so on.

The company releases a mandatory advertisement, called the

'announcement advertisement' 10 days prior to the opening of the

issue. This has to conform to Form 2A, also called the abridged

prospectus.

The LM and the printer dispatch the application forms to all stock

exchanges, SEBI; collection centers brokers, underwriters, and investor

associations. Every application form is accompanied by the abridged

prospectus.

The issue is kept open for a minimum of 3 days and a maximum of 10

days.

After the issue is closed, the basis of allotment is finalized by the stock

exchange, LM, and the registrar, in conformity with certain SEBI-

prescribed rules.

The LM ensures that the demat credit or dispatch of share certificates

and refund orders to the allotees is completed within two working days

after the basis of allotment is finalized and the shares are listed within 7

days of the finalization of the basis of allotment.

INTERMEDIARIES INVOLVED AND THEIR ROLES

The process of IPO is highly complex and its success is extremely

important for the company. In this process it is important that all the

intermediaries should work cohesively and within a framework of law. Any

serious error by any intermediary can affect the IPO.


The following are the important intermediaries involved in the process:

MERCHANT BANKERS

Eligibility criteria: SEBI issues an authorization letter to the finance

companies, which are eligible to work as merchant bankers. The

eligibility criteria depend on network and infrastructure of the

company. The company should not be engaged in activities that are

banned for merchant bankers by SEBI. SEBI issues authorization letter

valid for 3 years and the company has to pay necessary fees. Such

merchant banker can be appointed as lead manager for IPO.

Functions: Merchant banker can work as lead manager, co-lead

manager, investment banker, underwriter etc.

Responsibility: Lead managers are fully responsible for the content

and correctness of the prospectus. They must ensure the

commencement to the completion of the IPO. Certain guidelines are

laid down in section 30 of the SEBI act 1992 on the maximum limits of

the intermediaries associated with the issue.

Size of the Issue No of Lead Managers

50 cr. 2

50-100 cr. 3

100-200 cr. 4

200-400 cr. 5

Above 400 cr. 5 or more as agreed by SEBI

The number of co-managers should not exceed the number of lead

managers. There can be only 1 adviser to the issue. There is no limit on

the number of underwriters.

BROKERS


All the recognized stock exchange members are called brokers and

thus any member of a recognized stock exchange can become a broker

to the issue.

The brokers can work as broker and underwriter or both. In India

usually a broker not only does his normal broking business buying and

selling securities for brokerage but also works as an underwriter. They

can give underwriting commitment in accordance with their net worth.

A broker offer marketing support, underwriting support, disseminates

information to investors about the issue and distributes issues

stationary at retail investor level. The brokers are governed by rules of

SEBI and the respective stock exchange.

The brokers are important for the success of the issue. The brokers

appoint sub brokers who are in direct contact with the investors.

UNDERWRITERS

The underwriter is the principle player in the IPO providing the firm

with-

Reputation: As the underwriter is legally liable and because he has on

going dealing with the customers to whom he sells shares. The

underwriter puts his reputation on the line.

Finding investors: The underwriter first puts together a syndicate of

other underwriters to distribute the shares. The syndicate finds

investors willing to put their money into the company. This has serious

implications.

Experience: The underwriter knows the detail of the process better

than any other participant since issuing shares is one of their primary

business functions. Underwriters are the ones who provide proper

guidance.

After market support: The underwriter protects investors and thus

makes the offering more attractive. It is important for the firm to have

a clear understanding with the underwriter exactly how much support


he plans to provide if the IPO is not fully subscribed and accordingly

his underwriting commission is fixed.

Future services: A good relationship with an underwriter can save

time and money in future dealings.

Pre offering assistance: The underwriter will conduct road shows

with the company‟s management distribute the prospectus and

marketing of the underwriters directly generates talk to potential

investors about appropriate pricing. Some part of the value that the

potential shareholders attach to shares. Underwriting involves a

commitment from the underwriter to subscribe to the shares of a

particular company to the extent it is under subscribed by the public or

existing shareholders of the corporate. The fees for underwriter and

broker are decided by the company within the maximum possible limit

as fixed by the SEBI.

BANKERS TO THE ISSUE

Any scheduled bank registered with SEBI can be appointed as the

banker to the issue. Several commercial banks are working as bankers

to the issue. They get fees on amount collected by them. There are no

restrictions on the number of bankers to the issue. The main function

of banker involves collection of duly filed application forms with money

(cheque/drafts) maintains a daily report, transferring the proceeds to

the share application money collected with the application forms to the

registrar. The bank provides application forms to the investors. They

accept duly filled forms with cheque/drafts. They prepare collection

reports and transfer funds and applications to the company/registrar.

REGISTRAR AND SHARE TRANSFER AGENTS

Registration with SEBI is mandatory to take on responsibilities as a

registrar or share transfer agent. The registrar provides administrative

support to the issue process. Each agent is registered with SEBI. Hey

have to maintain net worth and infrastructure criteria. They have to

renew their License periodically. He collects all application from the


bank and ensures reconciliation of funds and of application amount and

participates in process of basis of allotment. If the IPO is

oversubscribed they provide computerized program for allotment. They

manage refund orders and allotment letters. They provide the final list

of allotees to Lead Manager ROC and stock exchange. If the company

wants they also manage post issue IPO functions relating to

shareholders register for the company.

DEPOSITORIES

Since the year 2000, it has been made compulsory that all fresh issue

of shares must be made only in the dematerialized format (DEMAT).

The Depository institute issues unique number of every IPO or

company, when shares are allotted to the company/registrar provides

shareholders register to depository in electronic form. Thus

automatically all shareholders get allotment in their DEMAT account.

LEGAL ADVISOR

Normally the company for the purpose of IPO does this appointment.

He is responsible legal compliance of IPO process. There are other

intermediaries like Advertising Agents etc. but the company governs

their role.

COST OF AN ISSUE

The cost of public issue is normally between 8 and 12 percent depending

on the size of the issue and on the level of marketing efforts. The

important expenses incurred for a public issue are as follows:

Underwriting expenses: The underwriting commission is fixed at

2.5 % of the nominal value (including premium, if any) of the equity

capital being issued to public.

Brokerage: Brokerage applicable to all types of public issues of

industrial securities are fixed at 1.5% whether the issue is

underwritten or not. The managing brokers (if any) can be paid a


maximum remuneration of 0.5% of the nominal value of the capital

being issued to public.

Fees to the Managers to the Issues: The aggregate amount

payable as fees to the managers to the issue was previously subject to

certain limits. Presently, however, there is no restriction on the fee

payable to the managers of the issue.

Fees for Registrars to the Issue: The compensation to he

registrars, typically based on a piece rate system, depends on the

number of applications received, number of allotters, and the number

of unsuccessful applicants.

Printing Expenses: These relate to the printing of the prospectus,

application forms, brochures, share certificate, allotment/refund

letters, envelopes, etc.

Postage Expenses: These pertain to the mailing of application

forms, brochures, and prospectus to investors by ordinary post and the

mailing of the allotment/refund letters and share certificates by

register posts.

Advertising and Publicity Expenses: These are incurred

primarily towards statutory announcements, other advertisements,

press conferences, and investor‟s conferences.

Listing Fees: This is the concerned fee payable to concerned stock

exchange where the securities are listed. It consists of two

components: initial listing fees and annual listing fees.

Stamp Duty: This is the duty payable on share certificates issued

by the company. As this is the state subject, it tends to vary from

state to state.

PRICING OF AN ISSUE

Controller of Capital Issue: During the Controller of Capital Issue

(CCI) regime the issues were priced by the company and approved by


CCI. Generally the CCI was very conservative and hardly allowed

premium issues.

Arrival of SEBI: After the Arrival of SEBI free market policy is

followed for pricing of issue. Merchant Bankers are responsible for

justifying the premium. The company was allowed to give future profit

projections. A company can issue shares to applicants in the firm

allotment category at higher price than the price at which securities

are offered to public. Further, an eligible company is free to make

public/rights issue in any denomination determined by it in accordance

with the Companies Act, 1956 and SEBI norms.

An unlisted company eligible to make a public issue and desirous of

getting its securities listed on a recognized stock exchange pursuant to

a public issue, or listed company making a public issue may freely

price its equity shares or any securities convertible at a later date into

equity shares.

BASIS FOR ISSUE PRICE

1. The following information shall be disclosed:

a) Earnings per share (EPS) i.e. pre-issue for the last three

years(as adjusted for changes in capital);

b) P/E Ratio pre-issue and comparison thereof with the industry

P/E where available.

c) Average return on net worth (RONW) in the last three years.

d) Minimum return on increased net worth required for

maintaining pre-issue EPS.

e) Net Asset value per share on last Balance Sheet.

f) Net Asset Value per share after the issue and comparison

thereof with the issue price.

g) Comparison of all the accounting ratios of the issuer company

as mentioned above with the industry average and with the

accounting ratios of the peer group.


Projected earnings shall not be used as a justification for the issue

price in the offer document.

2. The issuer company and the lead merchant banker shall provide the

accounting ratios as mentioned above to justify the issue price.

3. In case of book built issues, the offer document shall state that the

final price has been determined on the basis of the demand from the

investors.

Pricing is the most important and difficult aspect of an IPO.

However in the present scenario most of the issues are priced

by the book building method. Accurate pricing is essential for

the success of an IPO.

The following are the two types of issues:

FIXED PRICE ISSUE

In the fixed price issue, an issuer company is allowed to freely price

the issue. The basis of issue price is disclosed in the offer document

where the issuer discloses in detail about the qualitative and

quantitative factors justifying the issue price.

Suppose a company would like to come up with a fixed price public

issue, the issuer company just needs to file the prospectus stating the

number of shares, the price per share and the total issue size. Then

the public bids at the price already determined by the issuer company

and gets the allocation according to the quantity of bids and the

availability of shares. Both the price of the shares and the number of

shares to be issued remains fixed.

BOOK BUILDING ISSUE

SEBI guidelines defines Book Building as “a process undertaken by

which a demand for the securities proposed to be issued by a body

corporate is elicited and built up and the price for such securities is

assessed for 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”.


Book building is basically a process used in IPO for efficient price

discovery. It is a mechanism where, during the period for which the

IPO is open, bids are collected from investors at various prices, which

are above or equal to the floor price. The offer price is determined

after the bid closing date.

As per SEBI guidelines, an issuer company can issue securities to the

public through prospectus in the following manner:

100 % of the net offer to the public through book building

process.

75 % of the net offer through the book building process and

25 % through the price determined by the book building process.

PRICE BAND

Issuer company can mention a price band of 20% (cap in the

price band should not be more than 20% of the floor price) in

the offer documents filed with SEBI and actual price can be

determined at a later date before filing of the offer document

with the Registrar of Companies(ROC).

If the Board of Directors of the issuer company has been

authorized to determine the offer price within a specified price

band such price shall be determined by a Resolution to be passed

by the Board of Directors.

The Lead Merchant Bankers shall ensure that in case of the

listed companies, a 48 hours notice of the meeting of the Board

of Directors for passing resolution for determination of price is

given to the designated stock exchange.

In case of public issue by listed company, issue price or price

band may not be disclosed in the draft prospectus filed with

SEBI.

In case of a rights issue, issue price or price band may not be

disclosed in the draft letter of offer filed with SEBI. The issue


price may be determined anytime before fixation of the record

date, in consultation with the designated stock exchange.

The final offer document shall contain only one price and one

set of financial projections, if applicable.

THE PROCESS OF BOOK BUILDING

The Issuer who is planning an IPO nominates a lead merchant

banker as a 'book runner'.

The Issuer specifies the number of securities to be issued and the

price band for orders.

The Issuer also appoints syndicate members with whom orders can

be placed by the investors.

Investors place their order with a syndicate member who inputs the

orders into the 'electronic book'. This process is called 'bidding' and is

similar to open auction.

A Book should remain open for a minimum of 5 days.

Bids cannot be entered less than the floor price.

Bids can be revised by the bidder before the issue closes.

On the close of the book building period the 'book runner evaluates

the bids on the basis of the evaluation criteria which may include –

Price Aggression

Investor quality

Earliness of bids, etc.

The book runner and the company conclude the final price at which

it is willing to issue the stock and allocation of securities.

Generally, the number of shares is fixed. The issue size gets frozen

based on the price per share discovered through the book building

process.


Allocation of securities is made to the successful bidders.

Book Building is a good concept and represents a capital market

which is in the process of maturing.

PERSONS INVOLVED IN THE BOOK-BUILDING PROCESS

The principal intermediaries involved in the Book Building process are the

company; Book Running Lead Managers (BRLM) and syndicate members

who are intermediaries registered with SEBI and are eligible to act as

underwriters. Syndicate members are appointed by the BRLM.

HOW IS THE BOOK BUILT?

A company that is planning an initial public offer appoints a Merchant

Banker as a book runner. Initially, the company issues a draft prospectus

which does not mention the price, but gives other details about the

company with regards to issue size, past history and future plans among

other mandatory disclosures. After the draft prospectus is filed with the

SEBI, a particular period is fixed as the bid period and the details of the

issue are advertised. The book runner builds an order book, that is,

collates the bids from various investors, which shows the demand for the

shares of the company at various prices. Prospective investors can revise

their bids at any time during the bid period that is, the quantity of shares

or the bid price or any of the bid options.

BASIS OF DECIDING THE FINAL PRICE

On closure of the book, the quantum of shares ordered and the respective

prices offered are known. The price discovery is a function of demand at

various prices, and involves negotiations between those involved in the

issue. The book runner and the company conclude the pricing and decide

the allocation to each syndicate member.

PAYMENT FOR THE SHARES

The bidder has to pay the maximum bid price at the time of bidding based

on the highest bidding option of the bidder. The bidder has the option to

make different bids like quoting a lower price for higher number of shares

or a higher price for lower number of shares. The syndicate member may


waive the payment of bid price at the time of bidding. In such cases, the

issue price may be paid later to the syndicate member within four days of

confirmation of allocation. Where a bidder has been allocated lesser

number of shares than he or she had bid for, the excess amount paid on

bidding, if any will be refunded to such bidder.

ADVANTAGE OF THE BOOK BUILDING PROCESS VERSUS THE

NORMAL IPO PROCESS

Unlike in Book Building, IPO‟s are usually marketed at a fixed price. Here

the demand cannot be anticipated by the merchant banker and only after

the issue is over the response is known. In book building, the demand for

the share is known before the issue closes. The issue may be deferred if

the demand is less. This process allows for price and demand discovery.

Also, the cost of the public issue is reduced and so is the time taken to

complete the entire process.

Book Building Process v/s Fixed Price Process

Features Fixed Price Process Book Building Process

Pricing Price at which the Security

is offered/ allotted is

known in advance to the

investor.

Price at which the

Security will be offered/

allotted is not known in

advance to the investor.

Only an indicative price

range is known.

Demand Demand for the

securities offered is

known only after the

closure of the issue.

Demand for the

securities offered can be

known everyday as the

book is built.

ALLOTMENT PROCEDURE IN CASE OF 100% BOOK BUILDING

In case an issuer company makes an issue of 100% of the net offer to

public through 100% book building process:


a) Not less than 35% of the net offer to the public shall be available

for allocation to retail individual investors;

b) Not less than 15% of the net offer to the public shall be available

for allocation to non-institutional investors i.e. investors other than

retail individual investors and Qualified Institutional Buyers;

c) Not more than 50% of the net offer to the public shall be available

for allocation to Qualified Institutional Buyers.

ALLOTMENT PROCEDURE IN CASE OF 75% BOOK BUILDING

In case an issuer company makes an issue of 75% of the net offer to

public through book building process and 25% at the price determined

through book building –

a) In the book built portion, not less than 25% of the net offer to the

public, shall be available for allocation to non-Qualified Institutional

Buyers and not more than 50% of the net offer to the public shall be

available for allocation to Qualified Institutional Buyers.

b) The balance 25% of the net offer to the public, offered at a price

determined through book building, shall be available only to retail

individual investors who have either not participated or have not

received any allocation, in the book built portion.

MARKETING AND PROMOTION OF AN IPO

The role of marketing, and particularly promotion, in the pricing and

trading of Securities is fairly limited.

PRELIMINARY REQUIREMENTS

The company has to complete all legal requirements, appoint all

intermediaries and once they get SEBI card (approval), the process of

marketing of IPO can commence.

TIMING OF IPO


This the most important factor for the success of IPO. If secondary

market is depressed, if there is political unrest, if serious international

problems are prevailing then it is considered to be negative factors for

timing of IPO‟s. If these factors are favorable then the Company must find

out about the timing of other prestigious IPO‟s. Normally in good times

many companies are crowding at the same time.

A Question of Timing: Timing the issue is critical as it determines

the success or failure of an issue to a great extent. During 1995-96,

Primary Market boom, there was a period during which there were two

to three issues in a day. This is a dangerous situation. The ideal time

for marketing an issue is a boom in the Secondary Market, peaceful

socio-political-economic environment and at least two days gap

between two issues.

The Effects of Marketing on IPO’s: A merchant banker‟s

marketing campaign for an IPO is critical. This campaign, as much as

anything that precedes or follows it, will determine the success or

failure of the IPO. The key is to stimulate investor demand for the

stock so that, the demand will exceed the supply. Through the

marketing effort, the underwriter attempts to create an imbalance in

the supply/demand equation for the issue, so that there are more

buyers than sellers when the stock is finally released for sale to the

public.

To understand the sense of these statements one must understand the

relationship between the marketing of an IPO and its initial returns,

and how different parties benefit from this relationship. A security‟s

value is an increasing function of the number of investors who know

about the security. Investor knowledge leads to greater value

consequently; the efforts taken by a merchant banker to promote

awareness in a firm can affect the valuation of its stock by expanding

the investor base.

The reputation of a merchant banker could expand a firm‟s investor

base at a lower cost than the firm can, since the promotional efforts of


a merchant banker on behalf of the firm would be more creditable. The

efforts of a merchant banker to promote an IPO through increased

media coverage will increase retail interest in that stock.

GENERAL PROCEDURE FOR MARKETING OF IPO

Press Conference

Promoters and Lead Managers call for press conference in each major

investment center. Reporters are briefed about the issue. They carry it

as news-item in their papers.

Investors Conference

The prospective investors are called by invitation. The Promoters and

Lead Managers give presentations. They reply to the questions of the

investors to boost their confidence.

Road Shows

This is like the investors conference but normally is done abroad for

marketing ADR/GDR issues. It is an expensive process and requires a

lot of legal compliances. The company has to observe the rules of the

concerned country. However, road shows are becoming more and

more popular in India.

Newspaper Advertisements

The company releases statutory advertisements in leading

newspapers. The company has to publish abridges prospectus in

leading newspapers. It is the responsibility of the promoters to ensure

that the issuing company and their group companies should not

release any commercial advertisement, which may influence the

investor‟s decision for investment.

Printing - Prospectus

The company has to print approved prospectus and provide enough

copies to all intermediaries. If any investor asks for a copy of

prospectus it must be provided to him without any fees. Sufficient


quantities should be maintained at the registered office of the company

and with the Lead Managers.

Printing Application Forms

Sufficient number of application forms must be printed much before

the opening of the issue. Each form must contain abridged prospectus

in SEBI approved format. Sometimes different coloured forms are

issued to FI, FII, NRI and general public. It is compulsory to provide

stationery to all underwriters and brokers. They will arrange

distribution to their sub-brokers and other clients. Sometimes,

company makes direct dispatch of forms to prospective investors

GUIDELINES FOR ADVERTISEMENT OF IPO’s

An issue advertisement shall be truthful, fair and clear and shall not

contain any statement which is untrue or misleading.

Any advertisement reproducing or purporting to reproduce any

information contained in an offer document shall reproduce such

information in full and disclose all relevant facts and not be restricted

to select extracts relating to that item.

An advertisement shall be set forth in a clear, concise and

understandable language. Extensive use of technical, legal terminology

or complex language and the inclusion of excessive details which may

distract the investor shall be avoided.

An issue advertisement shall not contain statements which promise

or guarantee rapid increase in profits.

An issue advertisement shall not contain any information that is not

contained in the offer document.

No models, celebrities, fictional characters, landmarks or caricatures

or the likes shall be displayed on or form part of the offer documents

or issue advertisements.


No advertisement shall include any issue slogans or brand names

for the issue except the normal commercial name of the company or

commercial brand names of its products already in use.

If any advertisement carries any financial data, it shall also contain

data for the past three years and shall include particulars relating to

sales, gross profit, net profit, share capital, reserves, earnings per

share, dividends and the book values.

No issue advertisement shall be released without giving “Risk

Factors” in respect of the concerned issue.

No corporate advertisement of Issuer Company shall be issued after

21 days of the filing of the offer document with the Board till the

closure of the issue unless the risk factors as are required to be

mentioned in the offer document, are mentioned in such

advertisement.

No advertisement shall be issued stating that the issue has been

fully subscribed or oversubscribed during the period the issue is open

for subscription, except to the effect that the issue is open or closed.

PRE ISSUE OBLIGATIONS

The following are the pre-issue obligations of the Merchant Bankers to an

issue:

Exercising of due diligence by Lead manager.

Payment of requisite fees

Documents to be submitted with the offer document by the lead

manager

Memorandum of Understanding(MOU)

Inter-se allocation of responsibilities(in case there is more

than one lead manager)

Due Diligence certificate


Certificate signed by the Chartered Accountant(CA)

Submit a list of promoters group and other details

Appointment of Intermediaries

Signing of Underwriting Agreement

Drafting of draft prospectus in consultation with the merchant

bankers and submitting the same to SEBI along with the requisite fees

and other requirements and submitting the same to the Stock

exchange as per guidelines.

File red herring prospectus with SEBI/stock exchanges/ROC after

receiving clearance from SEBI and stock exchanges.

Dispatch of issue material to the stock exchanges, brokers,

underwriters, bankers to the issue, investor associations etc.

No Complaints Certificate

Ensuring mandatory and other collection centers for the issue.

Appoint Authorized Collecting Agents

Appointment of Compliance officer by the issuer company

Distribution of Application forms and Abridged prospectus

Agreement with depositories for receiving issues in DEMAT form

Overseeing the bidding process

Maintaining the escrow account

Provisions for electronic registration of bids

POST ISSUE OBLIGATIONS

Post issue monitoring Reports to be submitted by Lead managers.

These reports shall be submitted within 3 working days from the due

dates.

Processing of Applications


Deciding the basis for allotment

Distribution of allotted shares to successful bidders

Refund of money to unsuccessful bidders

Establishment of Underwriters liability, if any

Post issue advertisements

File final prospectus with SEBI/ stock exchanges/ ROC after

incorporating the basis of allotment, price discovery etc.

Listing of the issue on the designated stock exchanges

Redress Investor Grievances

OTHER ISSUES RELATED TO IPO’S

REVISION OF PRICE BAND OR BIDDING/ISSUE PERIOD:

In case the price band of the issue is revised, the revised price band

and the bidding/issue period will be widely disseminated by informing

the stock exchanges by publishing the details in 2 national newspapers

(one each in English and Hindi) and in a regional newspaper; and also

by indicating the change on the website of the Book Running lead

Managers (BRLM‟s) and at the terminals of the members of the

Syndicate. In case the price band is revised, the bidding period shall be

extended for a further period of three days, subject to the total bidding

period not exceeding ten working days.

As per SEBI guidelines, the cap on the price band should not be more

than 120% of the floor of the price band. Therefore, in case of a

revision in the price band, the floor of the price band can move up or

down to the extent of 20% of the floor price band disclosed in the Red

Herring Prospectus.

PROSPECTUS IS APPROVED BY SEBI BUT THE COMPANY

DOES NOT COME OUT WITH THE PROPOSED ISSUE:


An issue shall open within 3 months from the date of issuance of the

observation letter by the Board, if any or within 3 months from the

22nd day from the date of filing of the draft offer document with the

Board, if no observation letter is issued. If the company fails to come

out with the issue within 3 months, then it is barred from making an

issue in the market for the next 6 months. Once the 6 months period

lapses the company has to file a new prospectus with SEBI if it wants

to come out with an issue.


RIGHTS ISSUE

WHAT IS A RIGHTS ISSUE?

According to Section 81 of the Companies Act, 1956, if a public company

wants to increase its subscribed capital by allotment of further shares

after two years from the date of its incorporation or from the date of first

allotment, whichever is earlier, such further shares should be first offered

to the existing equity shareholders, in proportion to the capital paid–up

on the shares held by them at the date of such offer. The shareholders to

whom the offer is made are not under any legal obligation to accept the

offer. On the other hand, they have a right to renounce the offer in favour

of any person.

Shares so offered by a public company to its existing equity shareholders,

are called right shares because they are offered to the shareholder as a

matter of legal right. Rights shares are usually offered on terms

advantageous to the shareholders. For example, shares of the face value

of Rs. 10 maybe offered at par value, while the market price of the shares

at the time of announcing the offer maybe more than Rs. 10 per share.

LEGAL ASPECTS

According to Section 81 of the Companies Act, the following conditions

have to be satisfied by a public company issuing rights shares:

1. Such shares must be offered to holders of equity shares in

proportion, as nearly as circumstances admit, to the capital paid up on

the share.

2. The offer must be made giving a notice specifying the number of

shares offered.

3. The offeree must be made to accept the shares within a period

specified in the notice which shall not be less than 15 days. A


renouncement form in favour of someone else is also given in the

application form.

4. Unless the articles of association of the company provide otherwise,

the notice must also state that the shareholders have a right to

renounce all or any of the shares offered to them in favour of one or

more of the nominees.

5. After the expiry of the time specified in the notice or on receipt of

intimation earlier from the shareholder declining to accept the shares

offered, the Board of Directors may dispose of the unsubscribed shares

in such manner as they think most beneficial to the company.

REGULATORY FRAMEWORK FOR RIGHTS ISSUES

1. The SEBI guidelines for Disclosure and Investor Protection apply

only to rights issue made by listed companies. These guidelines do not

apply to rights issue of any amount by existing private companies and

unlisted public companies.

2. Private companies or unlisted companies therefore, only need to

comply with the requirements laid down in the Companies Act, 1956.

3. Where any company has withdrawn the rights issue after

announcing the record date, such company is not permitted to make

application for listing of any of its securities for a minimum period of

12 months from the announced record date.

4. Underwriting of rights issues is not mandatory. However, stand-by

underwriting support can be extended to a rights issue.

5. These guidelines are not applicable to composite issues i.e. an issue

of securities on rights basis made either simultaneously or preceded by

or followed by an issue of securities to public, within a period of three

months before or after closure of rights issue as the case maybe.


6. The gap between the closure date of rights issue and public issue

should not exceed 30 days. No bonus issue should be made within 12

months from the date of issue.

7. Appointment of a Merchant Banker: Where issue of share by

way of rights by a listed company does not exceed Rs.50 lakhs,

appointment of merchant banker is not mandatory. For rights issues by

listed companies exceeding Rs. 50 lakhs, the issue should be managed

by a SEBI registered merchant banker.

8. Rights issues shall be kept open for at least 30 days and not more

than 60 days.

9. If the company does not receive at least 90 percent of the issued

amount including accepted devolvement from underwriters, if any,

within 42 days from the date of closing of the issue, the amount of

subscription received is required to be refunded.

10. If there is any delay in the refund amount collected by more

than 8 days, the company and the directors of the company shall be

jointly and severally liable to repay the amount due by way of refund

with interest as per section 73 of the companies act, 1956 from the

delayed period.

11. No part of over-subscription should be retained under any

circumstances i.e. quantum of rights issue should not exceed as

specified in the letter of offer.

12. No company shall make a public or rights issue of equity

share or any security

convertible at later date into equity share, unless all the existing partly

paid-up shares have been fully paid or forfeited.

13. No preferential allotment should be made along with the

rights issue. If any preferential allotment to the employees or any

identified persons has been proposed to be made, this should be done

independent of the rights issue by complying with the provision of the

Companies Act, 1956.


14. An advertisement should be prominently issued in not less

than two All India newspapers at least one week before the date of

opening of the subscription.

15. Promoters Contribution and Lock-in requirements: The

requirements in regards to promoter‟s contribution and lock in shall not

be applicable in case of a rights issue. Provided that, the promoters

shall disclose their existing shareholding and the extent to which they

are participating in the proposed issue, in the offer document.

16. Compliance Reports: The lead manager must ensure that

the letter of offer for rights contains all the information specified under

the Companies Act. He has to submit the draft letter of offer to SEBI

six weeks before the issue is scheduled to open for subscription. If

SEBI makes any modifications within three weeks of the submission of

letter of offer then such modifications have to be incorporated before

filing the letter of offer. The copy of the letter of offer shall be

submitted by the lead manager to SEBI two weeks before the issue

opens for subscription.

17. Post Issue Monitoring Reports: The lead manager shall

submit a 3 days monitoring report and a 50 days monitoring report

within 3 days and 50 days respectively of the date of closure of the

issue.

ADVANTAGES AND DISADVANTAGES OF A RIGHTS ISSUE

A rights offer provides the shareholders with the option of retaining their

proportionate ownership in a company when it sells additional shares. It is

probably beneficial only to the large shareholders because of the

separation of ownership and control. A rights offering can be more

beneficial to the company as it need not have a broad market appeal and

can be only concentrated on investors who already have shares in the

company. Also the cost of making rights offerings is less when compared

to public issues.


On the other hand, a rights offering generally takes a longer time to

complete and the offering eliminates the possible transaction cost savings

of selling large blocks of shares to institutions not currently holding the

stock.


INEFFICIENCIES

INEFFICIENCIES/BOTTLENECKS IN THE IPO PROCESS

Approval of the Draft Prospectus by SEBI: As per the SEBI

guidelines, it takes 3 weeks to approve a draft prospectus filed by the

issuer company, but in reality this procedure takes around 8 – 10

weeks. This increases the time line required to come out with an IPO.

Market Timing: The success of IPO‟s depends to some extent on

the health of the capital markets in the country. If a company comes

out with an IPO when the sentiment of the investors towards the stock

market is negative, it will get a very lukewarm response. Market

volatility is a concern for companies coming out with IPO‟s. Issuer

companies are sometimes forced to extend the bidding period or cut

the price at the lower end of the price band as seen recently in the

cases of Air Deccan and Prime Focus IPO. Some other companies

which were planning to come out with an IPO are waiting for the

sentiments to turn positive on the stock market before taking a final

call on public issues.

According to Prithvi Haldea of Prime Database, currently there are

three categories of IPO‟s in the market. They are as follows,

Firms where issue date for the IPO has been announced.

Firms which have filed draft prospectus with SEBI and

Firms planning for IPO‟s

It is estimated that there are around 4 - 6 firms where the issue date

has been announced, 8 – 10 firms whose prospectus has been cleared

by SEBI but the date of IPO has not been announced, around 48 firms

whose prospectus has not been cleared and around 350 firms planning

to come out with an IPO in the near future.


Market Manipulation: In some IPO‟s there are cases of market

manipulation i.e. prices of the shares of the company are rigged by

false information, false trading etc. within days of its listing and in

many such cases the shares are even delisted within years resulting in

huge losses to the investors. This erodes the investor‟s confidence in

the primary market.

Multiple Allotments of Shares to a Single Investor: As seen in

the recent IPO scams, multiple allotments of shares were made to a

single person in the retail investor category, resulting in a single

person cornering a huge proportion of the allotments reserved for

retail investors. This results in opportunity losses to genuine retail

investors who have applied for the shares under this category.

Opening of Multiple Demat Accounts (Benami Accounts) by a

Single Investor: In recent investigations by SEBI relating to the IPO

scams it was found that the Depository Participants(DP‟s) have not

followed the stringent Know Your Client (KYC) Norms prescribed by

SEBI for opening of DEMAT accounts. This resulted in opening of

multiple demat accounts (benami accounts) by single investors to

corner significant portions of IPO‟s reserved for retail investors. Some

of the discrepancies observed in following the KYC norms are as

followed:

No signature across the photographs of the account holders.

Same signature for multiple accounts but different addresses.

Same addresses for multiple demat accounts.

No proof of identification submitted to the DP‟s.

No proof of address provided by the account holders.

Photographs of the accountholders stapled and not affixed as

per SEBI guidelines.

The Depositories are aware of the possibility of the existence of

accounts being operated without following proper KYC norms, but they


have not put in place a system to detect such accounts and take

proper actions.

Inefficiency by Depositories: The depositories are required to

have adequate controls, systems and procedures for monitoring and

evaluating its compliances with the statutory requirements laid down

by SEBI and prevent any conduct by DP‟s which is detrimental to the

interest of the investors or the securities market. In this respect, the

depositories have failed to perform and supervise the operations of the

DP‟s and also failed to inform SEBI of the deficiencies. Some of the

deficiencies are as follows:

The penalties imposed on the DP‟s for account opening

deficiencies are as low as Rs. 500 – 1000.

NSDL system allows accounts to be stored in the databases

with no check on the addresses and other details.

NSDL has to inspect the records of the DP‟s on timely

intervals but the periodicity of inspection is not established as

per any document.

NSDL does not impose penalties for violations rectified

immediately after inspection, does not impose penalties harsher

than monetary penalties for the remaining violations and also

waives the penalties imposed if the DP reports rectification of

deficiencies. This system creates no disincentive or deterrent for

a DP to comply till NSDL inspects and finds the violation, since

rectification after inspection assures that no penalty of any kind

is imposed on DP.

Deficiencies on the part of Bidders to the Issue: There are

some technical reasons for rejection of the bids made by the bidders in

the retail and non-institutional categories. Some of the reasons are as

follows:

The amount paid does not tally with the amount payable for

the highest value of equity shares bid for.


Age of the first bidder not given.

Bids by minors or by person‟s incompetent to contract as per

the Indian Contracts Act.

PAN not stated if the bid is for Rs. 50,000 or more.

GIR no. stated instead of PAN.

Proof of PAN not attached to bid cum application form.

Bids for lower number of equity shares than specified for that

category of investors.

Bids at a price less than lower end of price band.

Bids at a price more than the higher end of price band.

Bids for number of equity shares which are not in the

multiples as specified in the Red Herring Prospectus.

Multiple Bids by a single person.

Signature of sole and/or joint bidders missing.

Bid cum application form does not have the stamp of the

BRLM or syndicate members.

Bid cum application form does not have the bidder‟s

depository account details.

Bids for amounts greater than maximum permissible amounts

prescribed by the regulations.

Bids are not accompanied by applicable margin amounts.

No requirement of PAN details for application below

Rs.50000: As per the current SEBI guidelines, investors are required

to submit PAN details for applications for shares in an IPO above Rs.

50000. This can be a loop-hole in the system as investors in the retail

allotment category can make multiple applications as benami's by

subscribing for less than Rs. 50000 as they need not submit their PAN

card details.


Oversubscription of Public Issues: Generally there are three

classes of investors in the market; those who invest only in the

primary market, then those who invest only in the secondary market

and those who invest in both. In the recent years the primary market

has witnessed a boom with many companies coming out with their

IPO‟s. This provides huge investment opportunities fro investors

interested in the primary markets. This has led to so many issues in

recent past being oversubscribed by as much a 20 – 60 times. Such

tremendous responses also results in huge amounts of paper work and

processing of applications. During such times there may be a

possibility of certain issues pertaining to the stringent SEBI guidelines

being overlooked as has been witnessed in the IPO scams in recent

years. The system currently in place may not be suited to efficiently

handle such enormous data and some lacunas may exist.

Quotas for IPO Allotments: The IPO subscription in India is a

quota based system where SEBI has prescribed the quotas for the

investors in the retail investor, non- retail investors and institutional

investor‟s category. The reservation for retail investors limits their

opportunity of investing in IPO‟s and earning the resulting gains. Such

a quota based system may have fuelled the practice of investors

putting in multiple applications in public offerings to corner the shares.

Thousands of fictitious applications were found to have been put in in a

spate of IPO‟s during the equity boom between 2003 and 2005 to cash

in the gains when the shares were listed.

Problems faced by the Merchant bankers in the Due Diligence

process: The merchant bankers appointed by the issuer company are

required to verify various documents, reports, financial information,

etc which requires some time. Many a times the issuer company tries

to show itself in positive light so that its issue gets a fairly positive

response in the market and to enable this they do not provide true and

fair data to the merchant bankers or they forge the documents etc. It

becomes then the duty of the appointed merchant bankers to uncover


the true information and only after carrying out the due diligence

procedure to the best of available resources proceed with the issue.

Delays in Refunds to Unsuccessful bidders in IPO’s: According

to the SEBI guidelines the refunds to unsuccessful bidders should be

done within 15 days and 30 days of deciding the allotment in case of

book building issue and fixed price issue respectively. But in reality

many a times the refunds get delayed resulting in blockage of funds of

the unsuccessful bidders who could have used those funds to invest in

some other IPO. This is an opportunity loss for the investors.

IMPROVING EFFICIENCY IN THE IPO PROCESS

PAN Cards Compulsory for opening DEMAT Accounts: From

April 1, 2006 demat accounts can be opened only if PAN card details

are furnished by the intending demat account holders to the DP

(Depository Participant). Also CDSL (Central Depository Services

(India) Limited has issued a notice regarding all the demat accounts

opened on or before 31st March 2006 saying that if the said demat

account holders want to continue the operation of their demat

accounts they should furnish the PAN card details to their respective

DP‟s on or before 30th September 2006. PAN card details in this case

imply original Pan Card for verification and photocopy for the DP‟s

record.

This step on the part of the DP‟s will help reduce the instances of

opening of multiple demat accounts in the same name or using the

same address.

Removal of Quota System in the IPO Allotment Process: The

Finance Ministry has given a suggestion to SEBI that the quota system

in the IPO allotment process should be done away with as it leads to

investors putting in multiple bids to corner portions of the public

offerings. The ministry is of the opinion that instead of the quota


system a non-discretionary price discovery process marked by an

auction based method could be adopted.

Restriction on Share Transfer before listing: Market regulator

SEBI is considering a proposal that seeks to restrict transfer of equity

shares of a company before it is listed, in a move aimed at reducing

large scale off market transactions. Large scale irregular transfer of

shares before their listing was seen in the recent IPO scams. Hence the

proposal by SEBI aims at reducing such scams and preventing the

individuals who deal in such transactions from making big gains when

the securities are listed on the stock exchanges.

Grading of Merchant Bankers: SEBI has also recently made a

proposal to grade the merchant bankers involved in the handling of a

public issue. As per this proposal, Merchant bankers will be graded on

their track record; the issues brought out in the past, the kind of

documents that were submitted and other such parameters. Also SEBI

will not certify the grading agency‟s assessment. The grading would be

merely aimed at assisting the investors particularly the small investors

in taking informed decisions.

Improvement in the Refund process: Currently the refund

process is a time consuming procedure in the IPO process, as the

unsuccessful bidders have to undergo a long wait to get back the

money they have paid for subscribing to an IPO. An ECS (Electronic

Clearing System) which is not mandatory as of now should be made

mandatory in case of all the refunds. This will ensure efficiency and will

help do away with the irregularities in the refund process.

IPO funding: Nowadays individuals who want to subscribe to a

public issue but do not have the resources can avail funding from

various banks at reasonable rates. Availability of easy funding will

boost up the investors responses to the public issues.

Some of the terms and conditions for an IPO funding by banks are as

follows:


The shares should be subscribed in demat form only

The customer exercising such an option should have a demat

account or open a demat account with the bank etc.

Let us have a look at all the requirements prescribed by UTI Bank for

IPO funding for individuals:

ELIGIBILITY: Finance would be provided to those subscribing for

shares in the public/rights issues of reputed companies who should be

listed with the listing requirements of NSE/ BSE.

TERMS AND CONDITIONS:

Minimum Application: 200 shares

Loan Amount: 80% of the application amount (subject to a

maximum of Rs. 10 lakhs)

Margin: 50% or as per the directives issues by RBI from time

to time.

Rate of Interest: 4% above the Prime Lending Rate (PLR) with

a minimum of 16%

Processing Charges: Rs. 250

OTHER REQUIREMENTS:

The shares should be in demat form only.

The customer exercising the option should either have or

open a DP account as also a non cheque Book/ ATM card

Savings/ Current account with the bank.

Processing charges, Interest amount and margin money to be

recovered up front by way of a pay order.

A letter from the applicant irrevocably that he will not change

the mandate in the application, and if he does the application

may be rejected by the Registrars/ Company. This letter will be

filed with the company along with the share application form.


The scheme will close one day before the close of the issue

when payment towards fees is made in cash/ draft/banker‟s

cheque or three days before the close of the issue when payment

is made through a clearing cheque.

The customer shall open a savings account without a cheque

book/ ATM card with the bank and shall irrevocably mandate

credit of refund if any to the account. The customer will

authorize the bank to recover the loan by debiting this account in

the event of non-allotment. No other debits would be allowed in

this account.

The requirement by other banks for IPO funding is more or less the

same as seen above in the UTI bank example.

Thus, IPO funding is a boon for investors especially for the investors

who prefer to invest in the primary market.


APPENDIX 1

List of Merchant Bankers Registered with SEBI

Sr.

No

Name Place State

1 A.K. CAPITAL SERVICES LTD New Delhi Delhi

2 ABN AMRO SECURITIES (INDIA) PRIVATE LTD Mumbai Maharashtra

3 ALLAHABAD BANK Calcutta West Bengal

4 ALLBANK FINANCE LTD. Calcutta West Bengal

5 ALLIANZ SECURITIES LTD New Delhi Delhi

6 AMBIT CORPORATE FINANCE PRIVATE LTD Mumbai Maharashtra

7 AMERICAN EXPRESS BANK LTD Mumbai Maharashtra

8 ANAND RATHI SECURITIES PVT LTD Mumbai Maharashtra

9 ANDHRA BANK Hyderabad Andhra Pradesh

10 ANZ CAPITAL PRIVATE LIMITED Mumbai Maharashtra

11 ARYAMAN FINANCIAL SERVICES LTD New Delhi Delhi

12 ASHIKA CAPITAL LTD Calcutta West Bengal

13 ASIT C. MEHTA INVESTMENT INTERRMEDIATES LTD Mumbai Maharashtra

14 ASK RAYMOND JAMES & ASSOCIATES LTD Mumbai Maharashtra

15 BAJAJ CAPITAL LTD New Delhi Delhi

16 BANK OF AMERICA, N.A Mumbai Maharashtra

17 BANK OF MAHARASHTRA Pune Maharashtra

18 BARCLAYS BANK PLC Mumbai Maharashtra

19 BATLIVALA & KARANI SECURITIES INDIA PVT LTD Calcutta West Bengal

20 BOB CAPITAL MARKETS LTD Mumbai Maharashtra

21 BRESCON CORPORATE ADVISORS LTD (BRESCON FINCL

SERVICES LTD)

Mumbai Maharashtra

22 BRICS SECURITIES LTD Mumbai Maharashtra

23 CALYON BANK (FORMERLY CREDIT AGRICOLE

INDOSUEZ)

Mumbai Maharashtra

24 CANARA BANK Bangalore Karnataka

25 CD EQUISEARCH PVT. LTD. (FORMERLY CD CAPITAL

MARKETS LTD)

Calcutta West Bengal

26 CENTRAL BANK OF INDIA Mumbai Maharashtra

27 CENTRUM CAPITAL LIMITED (FORMERLY CENTRUM

FINANCE LTD)

Mumbai Maharashtra

28 CHARTERED CAPITAL & INVESTMENT LTD Ahemedabad Gujarat

29 CIL SECURITIES LTD Hyderabad Andhra Pradesh

30 CITIBANK N A Mumbai Maharashtra

31 CITIGROUP GLOBAL MARKETS INDIA PVT. LTD Mumbai Maharashtra

32 CLSA INDIA LTD Mumbai Maharashtra

33 DARASHAW & COMPANY PRIVATE LTD (FORMERLY

BADAR FINANCE)

Mumbai Maharashtra

34 DEUTSCHE BANK Mumbai Maharashtra


35 DEUTSCHE EQUITIES INDIA PRIVATE LIMITED Mumbai Maharashtra

36 DEVELOPMENT CREDIT BANK LTD Mumbai Maharashtra

37 DSP MERRILL LYNCH LTD Mumbai Maharashtra

38 EDELWEISS CAPITAL LTD Mumbai Maharashtra

39 ENAM FINANCIAL CONSULTANTS PVT LTD Mumbai Maharashtra

40 ESCORTS SECURITIES LTD New Delhi Delhi

41 FEDERAL BANK LTD, THE Alwaye Kerala

42 FEDEX SECURITIES LTD Mumbai Maharashtra

43 FIRST GLOBAL FINANCE PVT LTD New Delhi Delhi

44 FORTUNE FINANCIAL SERVICES (INDIA) LTD Mumbai Maharashtra

45 GLOBAL TRUSTCAPITAL FINANCE PVT. LTD. Mumbai Maharashtra

46 GSFS CAPITAL & SECURITIES LTD Ahemedabad Gujarat

47 HEM FINANCIAL SERVICES LTD Jaipur Rajasthan

48 HONGKONG AND SHANGHAI BANKING CORPORATION Mumbai Maharashtra

49 HSBC SECURITIES AND CAPITAL MARKETS (INDIA) PVT

LTD

Mumbai Maharashtra

50 ICICI BANK LTD Vadodara Gujarat

51 ICICI SECURITIES LTD. (ICICI SECURITIES & FIN. CO

LTD)

Mumbai Maharashtra

52 IDBI CAPITAL MARKET SERVICES LTD Mumbai Maharashtra

53 IFCI FINANCIAL SERVICES LTD New Delhi Delhi

54 IL& FS INVESTSMART LTD Mumbai Maharashtra

55 IMPERIAL CORPORATE FINANCE & SERVICES PVT LTD Mumbai Maharashtra

56 IND GLOBAL CORPORATE FINANCE PVT LTD Mumbai Maharashtra

57 INDBANK MERCHANT BANKING SERVICES LTD Chennai Tamil Nadu

58 INDIA INFOLINE SECURITIES PVT LTD Mumbai Maharashtra

59 INDIABULLS SECURITIES LIMITED (FORMERLY ORBIS

SEC LTD)

New Delhi Delhi

60 INDIAN OVERSEAS BANK Chennai Tamil Nadu

61 INDUSIND BANK LTD Pune Maharashtra

62 INDUSTRIAL DEVELOPMENT BANK OF INDIA Mumbai Maharashtra

63 INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY Chennai Tamil Nadu

64 ING VYSYA BANK LTD. (ERSTWHILE THE VYSYA BANK

LTD.)

Bangalore Karnataka

65 INGA ADVISORS PVT. LTD. Mumbai Maharashtra

66 INTEGRATED ENTERPRISES (INDIA) LTD (INTEGRATED

ADVISORY SERVICES)

Chennai Tamil Nadu

67 INTER CORPORATE FINANCIERS & CONSULTANTS LTD. Calcutta West Bengal

68 J P MORGAN INDIA PVT. LIMITED Mumbai Maharashtra

69 J M MORGAN STANLEY PVT LTD Mumbai Maharashtra

70 KARUR VYSYA BANK LTD, THE Karur Tamil Nadu

71 KARVY INVESTOR SERVICES LTD Hyderabad Andhra Pradesh

72 KEYNOTE CORPORATE SERVICES LTD Mumbai Maharashtra

73 KHANDWALA SECURITIES LTD Mumbai Maharashtra

74 KJMC GLOBAL MARKET (INDIA) LTD Mumbai Maharashtra

75 KOTAK MAHINDRA CAPITAL COMPANY LTD Mumbai Maharashtra

76 L & T CAPITAL COMPANY LTD Mumbai Maharashtra


77 LAZARD INDIA PRIVATE LTD (LAZARD CREDIT CAPITAL

LTD.)

Mumbai Maharashtra

78 LEHMAN BROTHERS SECURITIES PVT LTD Mumbai Maharashtra

79 LKP SHARES AND SECURITIES LTD Mumbai Maharashtra

80 LODHA CAPITAL MARKETS LTD Calcutta West Bengal

81 MACQUARIE INDIA ADVISORY SERVICES PVT LTD Mumbai Maharashtra

82 MASTER CAPITAL SERVICES LTD Ludhiana Punjab

83 MATA SECURITIES INDIA PRIVATE LTD Mumbai Maharashtra

84 MEFCOM CAPITAL MARKETS LTD New Delhi Delhi

85 MEGHRAJ SP CORPORATE FINANCE (PVT) LTD Mumbai Maharashtra

86 MEHTA INTEGRATED FINANCE LTD Ahemedabad Gujarat

87 MICROSEC CAPITAL LTD(FORMERLY MICROSEC INDIA

LTD)

Calcutta West Bengal

88 MUNOTH FINANCIAL SERVICES LTD Chennai Tamil Nadu

89 N M ROTHSCHILD AND SONS (INDIA) PVT LTD Mumbai Maharashtra

90 NEXGEN CAPITALS LTD New Delhi Delhi

91 ORIENTAL BANK OF COMMERCE New Delhi Delhi

92 PIONEER INVESTCORP LTD Mumbai Maharashtra

93 PNB GILTS LIMITED New Delhi Delhi

94 PNR SECURITIES LTD New Delhi Delhi

95 PRIME SECURITIES LTD Mumbai Maharashtra

96 PUNEET ADVISORY SERVICES PVT LTD Mumbai Maharashtra

97 PUNJAB & SIND BANK New Delhi Delhi

98 PUNJAB NATIONAL BANK New Delhi Delhi

99 R R. FINANCIAL CONSULTANTS LTD New Delhi Delhi

100 RABO INDIA SECURITIES PRIVATE LIMITED Mumbai Maharashtra

101 ROLTA SHARES AND STOCKS PVT LTD Mumbai Maharashtra

102 S B & T FINANCE PRIVATE LTD Mumbai Maharashtra

103 SBI CAPITAL MARKETS LTD Mumbai Maharashtra

104 SHRIYAM BROKING INTERMEDIARY LTD Mumbai Maharashtra

105 SICOM LTD Mumbai Maharashtra

106 SMIFS CAPITAL MARKETS LTD Calcutta West Bengal

107 SOBHAGYA CAPITAL OPTIONS LTD. New Delhi Delhi

108 SOCIETE GENERALE Mumbai Maharashtra

109 SPA MERCHANT BANKERS LIMITED New Delhi Delhi

110 SREI CAPITAL MARKETS LTD Calcutta West Bengal

111 SSKI CORPORATE FINANCE PVT LTD Mumbai Maharashtra

112 STANDARD CHARTERED BANK Mumbai Maharashtra

113 STATE BANK OF BIKANER AND JAIPUR Jaipur Rajasthan

114 STATE BANK OF HYDERABAD Hyderabad Andhra Pradesh

115 STATE BANK OF INDORE Indore Madhya Pradesh

116 STATE BANK OF SAURASHTRA Bhavnagar Gujarat

117 STRATCAP SECURITIES (INDIA) PRIVATE LIMITED Mumbai Maharashtra

118 SUMEDHA FISCAL SERVICES LTD Calcutta West Bengal

119 SYNDICATE BANK Manipal Karnataka

120 SYSTEMATIX CORPORATE SERVICES LTD. Indore Madhya Pradesh

121 TAIB CAPITAL CORPORATION LTD Mumbai Maharashtra


122 TAMILNAD MERCANTILE BANK LTD Tuticorin Tamil Nadu

123 TATA SONS LIMITED Mumbai Maharashtra

124 THE CATHOLIC SYRIAN BANK LTD Thrissur Kerala

125 THE SANGLI BANK LTD Sangli Maharashtra

126 TRANSWARRANTY CAPITAL PVT LTD Mumbai Maharashtra

127 UBS SECURITIES INDIA PVT. LTD Mumbai Maharashtra

128 UNION BANK OF INDIA Mumbai Maharashtra

129 UNITED BANK OF INDIA Calcutta West Bengal

130 UNITED WESTERN BANK LTD, THE Satara Maharashtra

131 UTI BANK LTD Mumbai Maharashtra

132 UTI SECURITIES LTD(FORMERLY UTI SECURITIES

EXCHANGE LTD)

Mumbai Maharashtra

133 VCK CAPITAL MARKET SERVICES LTD Calcutta West Bengal

Listing and Issue of Security, India

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