CHAPTER NO 1 INTRODUCTION

1.1 Introduction: -
Financial system of a country depends to a great extent on the size and
type of capital market. Financial market, money market and capital market
grow in a capitalist system, where the funds are attracted by players in the
financial market.
The principle purpose and objective of capital market is to play role of
linkage between market players, investors, agencies etc. Investors need an
appropriate and timely information about investment products, rate of returns,
risk and other related information. Decisions regarding investment are the
result of carefully proceed systematic information, as such it is difficult for the
investor to select investment products without fair information.
The function of capital market is to bridge the gap between capital
market, investors and investible surplus. Company raises the funds by using
easy and simple methods. In order to raise funds through i.e. the company has
to rely on the direct call of fund or raise fund from investors. When a company
rises fund from investors it often goes for public issue of equity i.e. issue as
per prevailing capital market needs to be properly highlighted and given
publicity. Unless and until the procedure of share is appropriately completed a
company cannot raise fund from the securities market.
In case of first issue to the public through the primary market a company
has to issue prospectus providing information to the potential investors. For
this purpose, under normal circumstances company issues prospectus through
which the company brings the notice to the people as to the issue and its
necessary details.
The prospectus is the only way of detailed and necessary information
for investors to know about issue and company. Investors after going through
prospectus take a decision regarding investment and its implication. Analysis
of investment is done by reading about a company, its ventures, their
profitability and potentiality. How the information is presented in the
prospectus is very important. Issues related with the success of the companies
demand for funds are stated earlier, public issue is a source to raise funds.
Therefore, a detailed and fulfilled prospectus can generate confidence among

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the investors. The investors analyze information given in the prospectus to the
public offer.
Since liberalization many companies have been protected and they
have gone for public issue. The success of public issue depends on investor
response, economic climate, and perception of the investors, future prospectus
and other related issues. Every year large number of companies may issue
public issue to raise fund. However, the success rate is uneven.
It is necessary that to know what factors are responsible for failure &
success of public issues and what is states of public issue? For this purpose, a
researcher has undertaken ―Trend Analysis of Indian Stock Market with
Reference to Initial Public Offer‖.
1.2 Initial Public Offerings (IPOs)
A corporate may raise capital in the primary market by way of an
initial public offer, rights issue or private placement. An Initial Public Offer
(IPO) is the selling of securities to the public in the primary market. It is the
largest source of funds with long or indefinite maturity for the company.
Requirement of funds in order to finance the business activities motivates
small entrepreneurs to approach the new issue market. Initial Public Offer
(IPO) is a route for a company to raise capital from investors to meet the
expenses for its projects and to get a global exposure by listed in the Stock
Exchange. An Initial Public Offer (IPO) is the selling of securities to the
public in the primary stock market. Company raising money through IPO is
also called as company ‗going public'. From an investor‘s point of view, IPO
gives a chance to buy shares of a company, directly from the company at the
price of their choice (In book build IPO's). Many a times there is a big
difference between the price at which companies decides for their shares and
the price on which investor are willing to buy shares and that gives good
listing gain for shares allocated to the investor in IPO. From a company‘s
perspective, IPO‘s help them to identify their real value which is decided by
millions of investors once their shares are listed on stock exchanges. IPO's also
provide funds for their future growth or for paying their previous borrowings
(Natarajan, 2011).

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1.3 Definition:
―An initial public offering (IPO), referred to simply as an "offering" or
"flotation", is when a company (called the issuer) issues common stock or
shares to the public for the first time.‖
IPOs are often issued by smaller, younger companies seeking capital to
expand, but can also be done by large privately owned companies looking to
become publicly traded. When a company lists its securities on a public
exchange, the money paid by investors for the newly- issued shares goes
directly to the company (in contrast to a later trade of shares on the exchange,
where the money passes between investors). An IPO, therefore, allows a
company to tap a wide pool of investors to provide it with capital for future
growth, repayment of debt or working capital. IPO can be used as both a
financing strategy and an exit strategy. In a financing strategy the main
purpose of the IPO is to raise funds for the company. In an exit strategy for
existing investors, IPOs may be used to offload equity holdings to the public
through a public issue. A company selling common shares is never required to
repay the capital to investors. Once a company is listed, it is able to issue
additional common shares via a secondary offering, thereby again providing
itself with capital for expansion without incurring any debt. This ability to
quickly raise large amounts of capital from the market is a key reason many
companies seek to go public. There are several benefits for being a public
company, namely (Natarajan, 2011):
Bolstering and diversifying equity base
Enabling cheaper access to capital
Exposure, prestige and public image
Attracting and retaining better management and employees through liquid
equity participation
Facilitating acquisitions
Creating multiple financing opportunities: equity, convertible debt, cheaper
bank loans, etc.
Increased liquidity for equity holder

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1.4 Initial Public Offerings (IPO) Origin and Development
The capital market is an important constituent of the financial system.
Capital market is one of the significant aspects of every financial market. It is
a market for the long term funds- both debt and equity – and funds raised
within and outside the country. It provides long term debt and equity finance
for the government and the corporate sector. The capital market aids economic
growth by mobilizing the savings of the economic sectors and directing the
same towards channels of productive use. Capital market can be classified into
primary and secondary markets. The primary market is a market for new
shares, where as in the secondary market the existing securities are traded.
Capital market institutions provide rupee loans, foreign exchange loans,
consultancy services and underwriting. Capital Market plays an important role
in the economy of a country as it serves two functions all at once. First, Capital
Market serves as an alternative for a company's capital resources. The capital
gained from the public offering can be used for the company's business
development, expansion, and so on. Second, Capital Market serves as an
alternative for public investment. People could invest their money according to
their preferred returns and risk characteristics of each instrument. Hence the
development of an efficient capital market is necessary for creating a climate
conducive to investment and economic growth. Indian capital market started
its journey from the eighteenth century and has faced many problems, scams
during the journey. However, the Indian capital market at present is well
organized, fairly integrated, mature, more global and modernized. The Indian
equity market is one of the best in the world in terms of technology (Natarajan,
2011).

1.5 Primary market in India

A good capital market is an essential prerequisite for the industrial and
commercial development of a country. Capital market is a central coordinating
and directing mechanism for free and balanced flow of financial resources into
the economic system operating in a country. It helps the companies, who
require capital to expand, modernize or diversify their business. To get the
capital that is required by the company it usually goes for the issue of shares
and the process of issuing of shares is done in the primary market. The primary

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market in the simplest terms can be defined as a market where the securities
are sold in order to raise the funds or the capital required by the company. It is
a market for new issues i.e. a market for fresh capital. It provides the channel
for sale of new securities. The securities can be in many forms such as equity
shares, preference shares, debt instruments, bonds etc. The primary issue
market is that component of the capital markets that deals with the issuance of
new securities. Companies, governments or public sector institutions can
obtain funding through the sale of a new stock. In the case of a new stock
issue, this sale is an initial public offering (IPO).
Primary markets create long term instruments through which corporate
entities borrow from capital market. Primary market provides opportunity to
issuers of securities, government as well as corporate, to raise resources to
meet their requirements of investments and/or discharge some obligation.
Primary market also known as New Issue Market as it deals with new
securities which are not previously available and are offered for the investment
to the public for the first time. The primary market enjoys neither any tangible
form nor any administrative organizational set- up and is not subject to any
centralized control and administration for the execution of its business. It is
recognized by the services that it renders to the lenders and borrowers of
capital. As the new issue market directs the flow of savings into long term
investments, it is of paramount importance for the economic growth and
industrial development of a country. The availability of financial resources for
corporate enterprises, to a great extent, depends upon the status of new issue
market in the country (Natarajan, 2011).
The growing number of companies in the primary equity market
represents the growth of the economy of the country itself. The growth of the
primary equity market is remarkable in the developed countries. In the primary
market, securities are issued on an exchange basis. The underwriters, that is,
the investment banks, play an important role in this market: they set the initial
price range for a particular share and then supervise the selling of that share.
Investors can obtain news of upcoming shares only on the primary market. The
issuing firm collects money, which is then used to finance its operations or
expand business, by selling its shares. Before selling a security on the primary
market, the firm must fulfill all the requirements regarding the exchange. After

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trading in the primary market the security will then enter the secondary
market, where numerous trades happen every day. The primary market
accelerates the process of capital formation in a country‘s economy. The
primary market categorically excludes several other new long-term finance
sources, such as loans from financial institutions. Many companies have
entered the primary market to earn profit by converting its capital, which is
basically a private capital, into a public one, releasing securities to the public.
This phenomena is known as ―public issue‖ or ―going public.‖ When a
company lists its shares on a public exchange, it will almost invariably look to
issue additional new shares in order at the same time. The money paid by
investors for the newly- issued shares goes directly to the company (in contrast
to a later trade of shares on the exchange, where the money passes between
investors). An offer in primary market, therefore, allows a company to tap a
wide pool of stock market investors to provide it with large volumes of capital
for future growth. The company is never required to repay the capital, but
instead the new shareholders have a right to future profits distributed by the
company and the right to a capital distribution in case of dissolution (Benson
Kunju, 2012).
The existing shareholders see their shareholdings diluted as a
proportion of the company's shares. However, they hope that the capital
investment will make their shareholdings more valuable in absolute terms. In
addition, once a company is listed, it is able to issue further shares via a rights
issue, thereby again providing itself with capital for expansion without
incurring any debt. This regular ability to raise large amounts of capital from
the general market, rather than having to seek and negotiate with individual
investors, is a key incentive for many companies seeking to list. The
comparison between primary and secondary stock market lies in the process in
which funds are raised from the capital market. Securities are offered to the
public in the form of subscription with the intention of raising money in the
Primary stock market whereas secondary market refers to the market where
trading of already existing securities take place (Benson Kunju, 2012).

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 The secondary market is often referred to as dealer market or an
auction market. Examples of an auction market is the stock exchange whereas
an OTC or over the counter exemplifies a dealer market. In a primary market,
the securities, stocks or bonds are bought directly from the company issuing all
of the above. These are usually bought at a ―par value‖. In the secondary
market, the existing securities, bonds or stocks are traded again. For instance,
if an individual had purchased bonds or any other investment instruments from
the primary stock market a year back and the individual now wants to avail of
the principal amount the bonds may be sold off in secondary market (Benson
Kunju, 2012).
1.6 Different kinds of issues in primary market
Primarily, issues made by an Indian company in primary market can be
classified as public, rights, bonus and private placement. While right issues by
a listed company and public issues involve a detailed procedure, bonus issues
and private placements are relatively simpler. The classification of issues is as
illustrated below:
(a) Public issue
(i) Initial Public offer (IPO)
(ii) Further public offer (FPO)
(b) Rights issue
(c) Bonus issue
(d) Private placement
(i) Preferential issue
(ii) Qualified institutional placement
a) Public issue:
When an issue / offer of securities is made to new investors for
becoming part of shareholders‘ family of the issuer it is called a public issue.
Public issue can be further classified into Initial public offer (IPO) and Further
public offer (FPO). The significant features of each type of public issue are
illustrated below.

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 (i) Initial public offer (IPO):
When an unlisted company makes either a fresh issue of securities or
offers its existing securities for sale or both for the first time to the public, it is
called an IPO. This paves way for listing and trading of the issuer‘s securities
in the Stock Exchanges.

(ii) Further public offer (FPO) or Follow on offer:

When an already listed company makes either a fresh issue of securities
to the public or an offer for sale to the public, it is called a follow on offer
(FPO).

Figure 1.1 Types of Issues

Issues

Private
Public Issue Right Issue Bonus Issue
Placement

Prefrential Qulified Inst.

IPO FPO
Issue Buyers

Offer For Offer For

Fresh Issue Fresh Issue
Sale Sale

Source: As per the research study done by the researcher (Self Creation)

b) Rights issue (RI):

When an issue of securities is made by an issuer to its shareholders
existing as on a particular date fixed by the issuer (i.e. record date), it is called
a rights issue. The rights are offered in a particular ratio to the number of
securities held as on the record date.

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c) Bonus issue:
When an issuer makes an issue of securities to its existing shareholders
as on a record date, without any consideration from them, it is called a bonus
issue. The shares are issued out of the Company‘s free reserve or share
premium account in a particular ratio to the number of securities held on a
record date.

d) Private placement:
When an issuer makes an issue of securities to a selected group of
persons not exceeding 49, and which is neither a rights issue nor a public
issue, it is called a private placement. Private placement of shares or
convertible securities by listed issuer can be of two types:

i) Preferential allotment:
When a listed issuer issues shares or convertible securities, to a selected
group of persons in terms of provisions of Chapter XIII of SEBI (DIP)
guidelines, it is called a preferential allotment. The issuer is required to
comply with various provisions which inter-alia include pricing, disclosures in
the notice, lock-in etc., in addition to the requirements specified in the
Companies Act.

ii) Qualified Institutions Placement (QIP):

When a listed issuer issues equity shares or securities convertible in to
equity shares to qualified institutions buyers only in terms of provisions of
Chapter XIIIA of SEBI (DIP) guidelines, it is called a QIP.

1.7 Offer Documents (ODs)

‗Offer document‘ is a document which contains all the relevant
information about the company, the promoters, projects, financial details,
objects of raising the money, terms of the issue etc. and is used for inviting
subscription to the issue being made by the issuer. ‗Offer Document‘ is called
―Prospectus‖ in case of a public issue or offer for sale and ―Letter of Offer‖ in
case of a rights issue. Terms used for offer documents vary depending upon
the stage or type of the issue where the document is used. The terms used for
offer documents are defined below:

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1. Draft offer document:
It is an offer document filed with SEBI for specifying changes, if any, in
it, before it is filed with the Registrar of companies (ROCs). Draft offer
document is made available in public domain including SEBI website, for
enabling public to give comments, if any, on the draft offer document.

2. Red herring prospectus:

It is an offer document used in case of a book built public issue. It
contains all the relevant details except that of price or number of shares being
offered. It is filed with Registrar of Companies before the issue opens.

3. Prospectus:
It is an offer document in case of a public issue, which has all relevant
details including price and number of shares being offered. This document is
registered with Registrar of Companies before the issue opens in case of a fixed
price issue and after the closure of the issue in case of a book built issue.

4. Letter of offer:
It is an offer document in case of a Rights issue and is filed with Stock
exchanges before the issue opens.
5. Abridged prospectus:
It is an abridged version of offer document in public issue and is issued
along with the application form of a public issue. It contains all the salient
features of a prospectus. Abridged letter of offer is an abridged version of the
letter of offer. It is sent to all the shareholders along with the application form.
6. Shelf prospectus:
It is a prospectus which enables an issuer to make a series of issues
within a period of 1 year without the need of filing a fresh prospectus every
time. This facility is available to public sector banks /Public Financial
Institutions.

7. Placement document:
It is an offer document for the purpose of Qualified Institutional
Placement and contains all the relevant and material disclosures.

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1.8 Issue Requirements:
SEBI has laid down entry norms for entities making a public
issue/offer. The same are detailed below:
1. Entry Norms: Entry norms are different routes available to an issuer for
accessing the capital market.
(i) An unlisted issuer making a public issue i.e. (making an IPO) is required to
satisfy the following provisions:
2. Entry Norm I (Profitability Route): The Issuer Company shall meet the
following requirements:
(a) Net Tangible Assets of at least ` three cr. in each of the preceding three full
years.
(b) Distributable profits in at least three of the immediately preceding five
years.
(c) Net worth of at least one cr. in each of the preceding three full years.
(d) If the company has changed its name within the last one year, at least fifty
percent revenue for the preceding one year should be from the activity
suggested by the new name.
(e) The issue size does not exceed five times the 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 the companies not satisfying any of
the above conditions, for accessing the primary market, as under:
3. Entry Norm II (QIB Route)
(a) Issue shall be through book building route, with at least fifty percent to be
mandatory allotted to the Qualified Institutional Buyers (QIBs).
(b) The minimum post-issue face value capital shall be ten cr. or there shall be
a compulsory market-making for at least two years
4. Entry Norm III (Appraisal Route)
(a) The ―project‖ is appraised and participated to the extent of 15 percent by
Financial Institutions / Scheduled Commercial Banks of which at least 10
percent comes from the appraiser(s).

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 (b) The minimum post-issue face value capital shall be ` 10 cr. or there shall be
a compulsory market-making for at least 2 years.
In addition to satisfying the aforesaid entry norms, the Issuer Company
shall also satisfy the criteria of having at least 1000 prospective allottees in its
issue.
(ii) A listed issuer making a public issue (FPO) is required to satisfy the
following requirements:
(a) If the company has changed its name within the last one year, at least 50
percent revenue for the preceding one year should be from the activity
suggested by the new name.
(b) The issue size does not exceed five times the pre- issue net worth as per the
audited balance sheet of the last financial year.
Any listed company not fulfilling these conditions shall be eligible to
make a public issue by complying with QIB Route or Appraisal Route as
specified for IPOs.
(iii) Certain category of entities which are exempted from the aforesaid entry
norms, are as under:
(a) Private Sector Banks

(b) Public sector banks

(c) An infrastructure company whose project has been appraised by a Public
Financial Institution or IDFC or IL&FS or a bank which was earlier a PFI and
not less than five percent of the project cost is financed by any of these
institutions.
There is no entry norm for a listed company making a rights issue. An
issuer making a public issue is required to inter-alia comply with the following
provisions mentioned in the guidelines:

1.9 Minimum Promoter’s contribution and lock in:

In a public issue by an unlisted issuer, the promoters shall contribute not

less than 20 percent of the post issue capital which should be locked in for a
period of three years. ―Lock-in‖ indicates a freeze on the shares. The
remaining pre issue capital should also be locked in for a period of one year

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from the date of listing. In case of public issue by a listed issuer [i.e. FPO], the
promoters shall contribute not less than 20 percent of the post issue capital or
20 percent of the issue size. This provision ensures that promoters of the
company have some minimum stake in the company for a minimum period
after the issue or after the project for which funds have been raised from the
public is commenced (Natarajan, 2011).

1.10 Qualifications for listing Initial Public Offerings (IPO):

1.10.1 Paid up Capital:
The paid up equity capital of the applicant shall not be less than 10
cr. * and the capitalization of the applicant's equity shall not be less than 25
cr. **
Explanation 1
For this purpose, the post issue paid up equity capital for which listing is
sought shall be taken into account.
Explanation 2

For this purpose, capitalization will be the product of the issue price and
the post issue number of equity shares. In respect of the requirement of paid-
up capital and market capitalization, the issuers shall be required to include, in
the disclaimer clause of the Exchange required to put in the offer document,
that in the event of the market capitalization (Product of issue price and the
post issue number of shares) requirement of the Exchange not being met, the
securities would not be listed on the Exchange (Natarajan, 2011).
1.10.2 Conditions Precedent to Listing:
The Issuer shall have adhered to conditions precedent to listing as
emerging from inter-alia from Securities Contracts (Regulations) Act 1956,
Companies Act 1956, Securities and Exchange Board of India Act 1992, any
rules and/or regulations framed under foregoing statutes, as also any circular,
clarifications, guidelines issued by the appropriate authority under foregoing
statutes (Natarajan, 2011).

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 1.10.3 At least three years track record of either:
 the applicant seeking listing; or
 the promoters****/promoting company, incorporated in or outside India or
 Partnership firm and subsequently converted into a Company (not in existence
as a Company for three years) and approaches the Exchange for listing. The
Company subsequently formed would be considered for listing only on
fulfillment of conditions stipulated by SEBI in this regard.
For this purpose, the applicant or the promoting company shall submit
annual reports of three preceding financial years to NSE and also provide a
certificate to the Exchange in respect of the following:
 The company has not been referred to the Board for Industrial and Financial
Reconstruction (BIFR).
 The net worth of the company has not been wiped out by the accumulated
losses resulting in a negative net worth.
 The company has not received any winding up petition admitted by a court.
Promoters mean one or more persons with minimum 3 years of
experience of each of them in the same line of business and shall be holding at
least 20% of the post issue equity share capital individually or severally.
1.10.4 The applicant desirous of listing its securities should satisfy the
exchange on the following:
 No disciplinary action by other stock exchanges and regulatory
authorities in past three years
There shall be no material regulatory or disciplinary action by a stock
exchange or regulatory authority in the past three years against the applicant
company. In respect of promoters/promoting company (ies), group companies,
companies promoted by the promoters/promoting company (ies) of the
applicant company, there shall be no material regulatory or disciplinary action
by a stock exchange or regulatory authority in the past one year (Natarajan,
2011).

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 Redressal Mechanism of Investor grievance

The points of consideration are:

i. The applicant, promoters/promoting company (ies), group companies,
companies promoted by the promoters/promoting company (ies) track record
in redressal of investor grievances
ii. The applicant's arrangements envisaged are in place for servicing its investor.
iii. The applicant, promoters/promoting company (ies), group companies,
companies promoted by the promoters/promoting company (ies) general
approach and philosophy to the issue of investor service and protection
iv. Defaults in respect of payment of interest and/or principal to the
debenture/bond/fixed deposit holders by the applicant, promoters/promoting
company (ies), group companies, companies promoted by the
promoters/promoting company (ies) shall also be considered while evaluating
a company's application for listing. The auditor's certificate shall also be
obtained in this regard. In case of defaults in such payments the securities of
the applicant company may not be listed till such time it has cleared all
pending obligations relating to the payment of interest and/or principal
(Natarajan, 2011).
Distribution of shareholding

The applicant's/promoting company (ies) shareholding pattern on March 31 of

last three calendar years separately showing promoters and other groups'
shareholding pattern should be as per the regulatory requirements.
 Details of Litigation
The applicant, promoters/promoting company (ies), group companies,
companies promoted by the promoters/promoting company (ies) litigation
record, the nature of litigation, status of litigation during the preceding three
years period need to be clarified to the exchange.
 Track Record of Director(s) of the Company
In respect of the track record of the directors, relevant disclosures may be
insisted upon in the offer document regarding the status of criminal cases filed
or nature of the investigation being undertaken with regard to alleged
commission of any offence by any of its directors and its effect on the business
of the company, where all or any of the directors of issuer have or has been

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charge-sheeted with serious crimes like murder, rape, forgery, economic
offences etc. (Benson Kunju, 2012).
Note:
a) In case a company approaches the Exchange for listing within six months of
an IPO, the securities may be considered as eligible for listing if they were
otherwise eligible for listing at the time of the IPO. If the company approaches
the Exchange for listing after six months of an IPO, the norms for existing
listed companies may be applied and market capitalization is computed based
on the period from the IPO to the time of listing (Benson Kunju, 2012).

1.11 Pricing of an Issue (IPO)

Indian primary market ushered in an era of free pricing in 1992. SEBI
does not play any role in price fixation. The issuer in consultation with the
merchant banker on the basis of market demand decides the price. The offer
document contains full disclosures of the parameters which are taken in to
account by merchant Banker and the issuer for deciding the price. The
parameters include EPS, PE multiple, return on net worth and comparison of
these parameters with peer group companies. On the basis of pricing, an issue
can be further classified into fixed price issue or book building issue. In case
of a fixed price issue the issuer at the outset decides the issue price and
mentions it in the Offer Document, whereas in case on a book built issue the
price of an issue is discovered on the basis of demand received from the
prospective investors at various price levels. The book building method is
more efficient as it solves the "leakage" of value often seen with fixed priced
IPOs. Here the issuer sets a price range within which the investor is allowed to
bid for shares. The range is based on where comparable companies are trading
and an estimate of the value of the company that the market will bear. The
investors then bid to purchase an agreed number of shares for a price which
they feel reflects fair value. By compiling a book of investors, the issuer can
ascertain what price range the shares should be valued at, based on the demand
of the people who are going to buy them, the investors. In this process supply
and demand are matched (Benson Kunju, 2012).

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 Globally, the book building method is favored for its mutually
beneficial nature: investors get the shares at a fair price that typically has
potential upside, and the issuing company receives fair compensation.
However regionally it is likely to take some time to adapt to this method.
Issuers clearly have a vested interest in moving to an approach that is more
likely to lead to a better price for their companies. This upsets some investors
in the short term, who are used to making a lot of money from these fixed
price IPOs (Natarajan, 2011). In the longer-term, however, efficient pricing
should be seen as a sign of the growing maturity of the capital markets in the
region.
1.11.1 Difference between Book Building Issue and Fixed Price Issue

Features Fixed Book

Price Building
Process Process
Pricing Price at which the Price at which
securities are securities will be
offered/ allotted is offered/ allotted is
known in advance not known in
to the investor. advance to the
investor. Only an
indicative price
range is known.
Demand Demand for the Demand for the
securities offered is securities offered
known only after can be known
the closure of the everyday as the
issue. book is built.
Payment Payment if made at Payment only after
the time of allocation
subscription
wherein refund is
given after
allocation.
Source: www.chitorgarh.com Table No.1.1

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1.11.2 Categories of Investors
Investors are broadly classified under following categories-:
(i) Retail Individual Investor (RIIs)
(ii) Non-Institutional Investors (NIIs)
(iii) Qualified Institutional Buyers (QIBs)
In retail individual investor category, investors can not apply for more
than two lakh (₹2,00,000) in an IPO. Retail Individual investors have an
allocation of 35% of shares of the total issue size in Book Build IPO's.
A “Qualified Institutional Buyer” shall mean:
(a) A public financial institution as defined in section 4A of the Companies
Act, 1956;
(b) A scheduled commercial bank;
(c) A mutual fund registered with the Board;
(d) A foreign institutional investor and sub-account registered with SEBI,
other than a sub account which is a foreign corporate or foreign individual;
(e) A multilateral and bilateral development financial institution;
(f) A venture capital fund registered with SEBI;
(g) A foreign venture capital investor registered with SEBI;
(h) A state industrial development corporation;
(i) An insurance company registered with the Insurance Regulatory and
Development Authority (IRDA);
(j) A provident fund with minimum corpus of ` 25 cr.
(k) A pension fund with minimum corpus of ` 25 cr.
(l) National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII
dated November 23, 2005 of Government of India published in the Gazette of
India.‖
Investors who do not fall within the definition of the above two
categories are categorized as ―Non-Institutional Investors‖ Allotment to
various investor categories is provided in the guidelines and is detailed below:

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1.11.3 In case of Book Built issue
1. In case an issuer company makes an issue of 100 percent of the net offer to
public through 100 percent book building process—
(a) Not less than 35 percent of the net offer to the public shall be available for
allocation to retail individual investors;
(b) Not less than 15 percent 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 percent of the net offer to the public shall be available for
allocation to Qualified Institutional Buyers:
2. In case of compulsory Book-Built Issues at least 50 percent of net offer to
public being allotted to the Qualified Institutional Buyers (QIBs), failing
which the full subscription monies shall be refunded.
3. In case the book built issues are made pursuant to the requirement of
mandatory allocation of 60 percent to QIBs in terms of Rule 19 (2) (b) of
Securities Contract (Regulation) Rules, 1957, the respective figures are 30
percent for RIIs and 10 percent for NIIs.
In case of fixed price issue the proportionate allotment of securities to
the different investor categories in a fixed price issue is as described below:
1. A minimum 50 percent of the net offer of securities to the public shall
initially be made available for allotment to retail individual investors, as the
case may be.
2. The balance net offer of securities to the public shall be made available for
allotment to:
a. Individual applicants other than retail individual investors, and
b. Other investors including corporate bodies/ institutions irrespective of the
number of securities applied for.
SEBI (DIP) guidelines provide that an issuer making an issue to public
can allot shares on firm basis to some categories as specified below:
(i) Indian and Multilateral Development Financial Institutions,
(ii) Indian Mutual Funds,
(iii) Foreign Institutional Investors including Non-Resident Indians and
Overseas Corporate Bodies and
(iv) Permanent or regular employees of the issuer company.

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(v) Scheduled Banks
(vi) It may be noted that OCBs are prohibited by RBI to make investment.
Reservation on Competitive Basis is when allotment of shares is made
in proportion to the shares applied for by the concerned reserved categories.
Reservation on competitive basis can be made in a public issue to the
following categories:
(i) Employees of the company
(ii) Shareholders of the promoting companies in the case of a new company
and shareholders of group companies in the case of an existing company
(iii)Indian Mutual Funds
(iv) Foreign Institutional Investors (including non-resident Indians and
overseas corporate bodies)
(v) Indian and Multilateral development Institutions
(vi) Scheduled Banks
In a public issue by a listed company, the reservation on competitive
basis can be made for retail individual shareholders and in such cases the
allotment to such shareholders shall be on proportionate basis. There is no
discretion while doing the allotment amongst various investor categories as per
the permissible allocations in the allotment process. All allottees are allotted
shares on a proportionate basis within their respective investor categories.

1.12 Applications Supported By Blocked Amount (ASBA):

Application forms for applying/bidding for shares are available with all
syndicate members, collection centers, the brokers to the issue and the bankers
to the issue. In case applicant intend to apply through new process introduced
by SEBI i.e. Applications supported by blocked amount (ASBA), applicant
may get the ASBA application forms form the Self Certified Syndicate Banks.
The document is prepared by Merchant Banker(s), registered with SEBI. They
are required to do the due diligence while preparing an offer document. The
draft offer document submitted to SEBI is put on website for public comments.
As per the requirement, all the public issues of size in excess of ` 10 cr., are to
made compulsorily in demat mode. Thus, The investors are required to have a
demat account and also have the responsibility to put the correct DP ID and

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Client ID details in the bid/application forms if he intend to apply for an issue
that is being made in a compulsory demat mode (Natarajan, 2011).
It is compulsory for the investor to have Permanent Account Number
(PAN). Any investor who wants to invest in an issue should have a PAN
which is required to be mentioned in the application form. It is to be distinctly
understood that the photocopy of the PAN is not required to be attached along
with the application form at the time of making an application. The period for
which an issue is required to be kept open is (Benson Kunju, 2012):
· For Fixed price public issues: Three-Ten working days
· For Book built public issues: Three to seven working days extendable by
three days in case of a revision in the price band
· For Rights issues: Fifteen to thirty days.
The investor get the allotment / refund of shares within thirty days of
the closure of the issue in case of Fixed price public issues and within fifteen
days of the closure of the issue For Book built public issues.
The status of bidding in a book built issue is available on the website of
BSE/NSE on a consolidated basis. The data regarding bids is also available,
investor category wise. After the price has been determined on the basis of
bidding, the public advertisement containing, inter alia, the price as well as a
table showing the number of securities and the amount payable by an investor,
based on the price determined, is issued.
However, in case of a fixed price issue, information is available only
after the closure of the issue through a public advertisement, issued within ten
days of dispatch of the certificates of allotment/ refund orders. The investor
will get the refund in an issue through various+ modes viz. registered/ordinary
post, Direct Credit, RTGS (Real Time Gross Settlement), ECS (Electronic
Clearing Service) and NEFT (National Electronic Funds Transfer).
In book built public issue the listing of shares is done within three
weeks after the closure of the issue. In case of fixed price public issue, it is
done within thirty seven days after closure of the issue. The information about
the forthcoming issues may be obtained from the websites of Stock
Exchanges. Further the issuer coming with an issue is required to give issue
advertisements in an English national Daily with wide circulation, one Hindi

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national newspaper and a regional language newspaper with wide circulation
at the place where the registered office of the issuer is situated.
(www.nseindia.com/content/equities/eq_trdverify.htm.).

1.13 Intermediaries involved in the Issue Process

Intermediaries which are registered with SEBI are Merchant Bankers to
the issue (known as Book Running Lead Managers (BRLM) in case of book
built public issues), Registrars to the issue and Bankers to the issue and
Underwriters to the issue who are associated with the issue for different
activities. Their addresses, telephone/fax numbers, registration number, and
contact person and email addresses are disclosed in the offer documents.
(i) Merchant Banker:
The merchant banker are those financial intermediary involved with the
activity of transferring capital funds to those borrowers who are interested in
borrowing. Merchant banker does the due diligence to prepare the offer
document which contains all the details about the company. They are also
responsible for ensuring compliance with the legal formalities in the entire
issue process and for marketing of the issue.

The activities of the merchant banking in India are very vast in nature
of which includes the following:
a) The management of the customer‘s securities
b) The management of the portfolio,
c) The management of projects and counseling as well as appraisal
d) The management of underwriting of shares and debentures
e) The circumvention of the syndication of loans
f) Management of the interest and dividend etc.
(ii) Registrars to the Issue:
They are involved in finalizing the basis of allotment in an issue and for
sending refunds, allotment etc. The Registrar finalizes the list of eligible
allottees after deleting the invalid applications and ensures that the corporate
action for crediting of shares to the demat accounts of the applicants is done
and the dispatch of refund orders to those applicable are sent. The Lead
Manager coordinates with the Registrar to ensure follow up so that that the

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flow of applications from collecting bank branches, processing of the
applications and other matters till the basis of allotment is finalized, dispatch
security certificates and refund orders completed and securities listed.
(ii) Bankers to the Issue:
―Banker to an issue‖ means a scheduled bank carrying on all or any of
the following activities, namely acceptance of application and application
monies, acceptance of allotment or call monies, refund of application monies
and payment of dividend or interest warrants. The Bankers to the Issue enable
the movement of funds in the issue process and therefore enable the registrars
to finalize the basis of allotment by making clear funds status available to the
Registrars.

(iii) Underwriters:
An underwriter is a company or other entity that administers the public
issuance and distribution of securities from a corporation or other issuing
body. An underwriter works closely with the issuing body to determine the
offering price of the securities buys them from the issuer and sells them to
investors via the underwriter's distribution network. Underwriters are
intermediaries who undertake to subscribe to the securities offered by the
company in case these are not fully subscribed by the public, in case of an
underwritten issue. Underwriters generally receive underwriting fees from
their issuing clients, but they also usually earn profits when selling the
underwritten shares to investors. However, underwriters assume the
responsibility of distributing a securities issue to the public. If they can't sell
all of the securities at the specified offering price, they may be forced to sell
the securities for less than they paid for them, or retain the securities
themselves (Natarajan, 2011).

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1.14 The Offer Document
This sub-section attempts to inform the structure of presentation of the
content in an offer document. The basic objective is to help the reader to
navigate through the content of an offer document.
(a) Cover Page:
Under this head full contact details of the Issuer Company, lead
managers and registrars, the nature, number, price and amount of instruments
offered and issue size, and the particulars regarding listing are mentioned.
Other details such as Credit Rating, IPO Grading, risks in relation to the first
issue, etc. are also disclosed if applicable.

(b) Risk Factors:

Under this head the management of the issuer company gives its view on
the internal and external risks envisaged by the company and the proposals, if
any, to address such risks. The company also makes a note on the forward
looking statements. This information is disclosed in the initial pages of the
document and also in the abridged prospectus. It is generally advised that the
investors should go through all the risk factors of the company before making
an investment decision (Natarajan, 2011).

(c) Introduction:
Under this head a summary of the industry in which the issuer company
operates, the business of the Issuer Company, offering details in brief,
summary of consolidated financial statements and other data relating to
general information about the company, the merchant bankers and their
responsibilities, the details of brokers/syndicate members to the Issue, credit
rating (in case of debt issue), debenture trustees (in case of debt issue),
monitoring agency, book building process in brief, IPO grading in case of First
Issue of Equity capital and details of underwriting Agreements are given.
Important details of capital structure, objects of the offering, funds
requirement, funding plan, schedule of implementation, funds deployed,
sources of financing of funds already deployed, sources of financing for the
balance fund requirement, interim use of funds, basic terms of issue, basis for
issue price, tax benefits are also covered (Natarajan, 2011).

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(d) About us:
Under this head a review of the details of business of the company,
business strategy, competitive strengths, insurance, industry-regulation (if
applicable), history and corporate structure, main objects, subsidiary details,
management and board of directors, compensation, corporate governance,
related party transactions, exchange rates, currency of presentation and
dividend policy are given.

(e) Financial Statements:

Under this head financial statement and restatement as per the
requirement of the guidelines and differences between any other accounting
policies and the Indian Accounting Policies (if the Company has presented its
Financial Statements also as per either US GAAP/IFRS) are presented.

(f) Legal and other information:

Under this head outstanding litigations and material developments,
litigations involving the company, the promoters of the company, its
subsidiaries, and group companies are disclosed. Also material developments
since the last balance sheet date, government approvals/licensing
arrangements, investment approvals (FIPB/RBI etc.), technical approvals, and
indebtedness, etc. are disclosed.

(g) Other regulatory and statutory disclosures:

Under this head, authority for the Issue, prohibition by SEBI, eligibility
of the company to enter the capital market, disclaimer statement by the issuer
and the lead manager, disclaimer in respect of jurisdiction, distribution of
information to investors, disclaimer clause of the stock exchanges, listing,
impersonation, minimum subscription, letters of allotment or refund orders,
consents, expert opinion, changes in the auditors in the last three years,
expenses of the issue, fees payable to the intermediaries involved in the issue
process, details of all the previous issues, all outstanding instruments,
commission and brokerage on, previous issues, capitalization of reserves or
profits, option to subscribe in the issue, purchase of property, revaluation of
assets, classes of shares, stock market data for equity shares of the company,

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promise vis-à-vis performance in the past issues and mechanism for redressal
of investor grievances is disclosed (Natarajan, 2011).

(h) Offering information:

Under this head Terms of the Issue, ranking of equity shares, mode of
payment of dividend, face value and issue price, rights of the equity
shareholder, market lot, nomination facility to investor, issue procedure, book
building procedure in details along with the process of making an application,
signing of underwriting agreement and filing of prospectus with SEBI/ROC,
announcement of statutory advertisement, issuance of confirmation of
allocation note("can") and allotment in the issue, designated date, general
instructions, instructions for completing the bid form, payment instructions,
submission of bid form, other instructions, disposal of application and
application moneys, interest on refund of excess bid amount, basis of allotment
or allocation, method of proportionate allotment, dispatch of refund orders,
communications, undertaking by the company, utilization of issue proceeds,
restrictions on foreign ownership of Indian securities are disclosed (Natarajan,
2011).

(i) Other Information:

This covers description of equity shares and terms of the Articles of
Association, material contracts and documents for inspection, declaration,
definitions and abbreviations, etc.

1.15 SEBI’s Role in an Issue

Any company making a public issue or a rights issue of securities of

value more than fifty lakhs is required to file a draft offer document with SEBI
for its observations. The validity period of SEBI‘s observation letter is twelve
months only i.e. the company has to open its issue within the period of twelve
months starting from the date of issuing the observation letter. There is no
requirement of filing any offer document / notice to SEBI in case of
preferential allotment and Qualified Institution Placement (QIP). In QIP,
Merchant Banker handling the issue has to file the placement document with
Stock Exchanges for making the same available on their websites. Given

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below are few clarifications regarding the role played by SEBI (Natarajan,
2011):
(a) Till the early nineties, Controller of Capital Issues used to decide about
entry of company in the market and also about the price at which securities
should be offered to public.
However, following the introduction of disclosure based regime under
the aegis of SEBI, companies can now determine issue price of securities
freely without any regulatory interference, with the flexibility to take
advantage of market forces.
(b) The primary issuances are governed by SEBI in terms of SEBI
(Disclosures and Investor protection) guidelines. SEBI framed its DIP
guidelines in 1992. The SEBI DIP Guidelines over the years have gone
through many amendments in keeping pace with the dynamic market scenario.
It provides a comprehensive framework for issuing of securities by the
companies.
(c) Before a company approaches the primary market to raise money by the
fresh issuance of securities it has to make sure that it is in compliance with all
the requirements of SEBI (DIP) Guidelines, 2000. The Merchant Banker is
those specialized intermediaries registered with SEBI, who perform the due
diligence process and ensures compliance with DIP guidelines before the
document is filed with SEBI.
(d) Officials of SEBI at various levels examine the compliance with DIP
guidelines and ensure that all necessary material information is disclosed in the
draft offer documents. Still there are certain mis-conceptions prevailing in the
mind of investors about the role of SEBI which are clarified here in under
(Natarajan, 2011):
It should be distinctly understood that SEBI does not recommend any
issue nor does it take any responsibility either for the financial soundness of
any scheme or the project for which the issue is proposed to be made.
Submission of offer document to SEBI should not in any way be deemed or
construed that the same has been cleared or approved by SEBI. The Lead
manager certifies that the disclosures made in the offer document are generally
adequate and are in conformity with SEBI guidelines for disclosures and
investor protection in force for the time being. This requirement is to facilitate

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investors to take an informed decision for making investment in the proposed
issue. The investors should make an informed decision purely by themselves
based on the contents disclosed in the offer documents. SEBI does not
associate itself with any issue/issuer and should in no way be construed as a
guarantee for the funds that the investor proposes to invest through the issue.
However, the investors are generally advised to study all the material facts
pertaining to the issue including the risk factors before considering any
investment (Natarajan, 2011).

1.16 Life cycle of an IPO Table No. 1.2

1. Issuer Company - IPO Process Initialization
Appoint lead manager as book runner
Appoint registrar of the issue
Appoint syndicate members

2. Lead Manager's - Pre Issue Role - Part 1

Prepare draft offer prospectus document for IPO
File draft offer prospectus with SEBI
Road shows for the IPO

3. SEBI – Prospectus Review

SEBI review draft offer prospectus
Revert it back to Lead Manager if need clarification or
changes (Step 2)
EBI approve the draft offer prospectus, the draft offer
prospectus is now
become Offer Prospectus

4. Lead Manager - Pre Issue Role - Part 2

Submit the Offer Prospectus to Stock Exchanges, registrar
of the issue and
get it approved
Decide the issue date & issue price band with the help of
Issuer Company
Modify Offer Prospectus with date and price band.
Document is now called
Red Herring Prospectus
Red Herring Prospectus & IPO Application Forms are
printed and posted to
syndicate members; through which they are distributed to
investors

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 5. Investor – Bidding for the public issue
Public Issue Open for investors bidding
Investors fill the application forms and place orders to the
syndicate members (syndicate member list is published on
the application form)
Syndicate members provide the bidding information to
BSE/NSE
electronically and bidding status gets updated on BSE/NSE
websites
Syndicate members send all the physically filled forms and
cheques to the
registrar of the issue
Investor can revise the bidding by filling a form and
submitting it to
Syndicate member
Syndicate members keep updating stock exchange with the
latest data
Public Issue Closes for investors bidding

6. Lead Manager – Price Fixing

Based on the bids received, lead managers evaluate the
final issue price
Lead managers update the 'Red Herring Prospectus' with
the final issue price
and send it to SEBI and Stock Exchanges

7. Registrar - Processing IPO Applications

Registrar receives all application forms & cheques from
Syndicate members
They feed applicant data & additional bidding information
on computer
Systems
Send the cheques for clearance
Find all bogus application
Finalize the pattern for share allotment based on all valid
bid received
Prepare 'Basis of Allotment'
Transfer shares in the demat account of investors
Refund the remaining money though ECS or Cheques
8. Lead manager – Stock Listing
Once all allocated shares are transferred in investors dp
accounts, Lead
Manager with the help of Stock Exchange decides Issue
Listing Date
Finally share of the issuer company gets listed in Stock
Market
Source: (chittorgarh.com)

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1.17 IPO Grading in India
IPO grading is the grade assigned by a Credit Rating Agency registered
with SEBI, to the initial public offering (IPO) of equity shares or other
convertible securities. The grade represents a relative assessment of the
fundamentals of the IPO in relation to the other listed equity securities.
Disclosure of ―IPO Grades‖, so obtained is mandatory for companies coming
out with an IPO. The grade represents a relative assessment of the
fundamentals of that issue in relation to the other listed equity securities in
India. Such grading is generally assigned on a five-point point scale with a
higher score indicating stronger fundamentals and vice versa as below
(chittorgarh.com).

IPO grade 1: Poor fundamentals

IPO grade 2: Below-average fundamentals

IPO grade 3: Average fundamentals

IPO grade 4: Above-average fundamentals

IPO grade 5: Strong fundamentals

IPO grading has been introduced as an endeavor to make additional

information available for the investors in order to facilitate their assessment of
equity issues offered through an IPO. IPO grading can be done either before
filing the draft offer documents with SEBI or thereafter. However, the
Prospectus/Red Herring Prospectus, as the case may be, must contain the
grade/s given to the IPO by all CRAs approached by the company for grading
such IPO. The company desirous of making the IPO is required to bear the
expenses incurred for grading such IPO. A company which has filed the draft
offer document for its IPO with SEBI, on or after 1st May, 2007, is required to
obtain a grade for the IPO from at least one CRA. Irrespective of whether the
issuer finds the grade given by the rating agency acceptable or not, the grade
has to be disclosed as required under the DIP Guidelines. However the issuer
has the option of opting for another grading by a different agency. In such an
event all grades obtained for the IPO will have to be disclosed in the offer
documents, advertisements etc. IPO grading is intended to run parallel to the

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filing of offer document with SEBI and the consequent issuance of
observations. Since issuance of observation by SEBI and the grading process,
function independently, IPO grading is not expected to delay the issue process
(chittorgarh.com).
The IPO grading process is expected to take into account the prospects
of the industry in which the company operates, the competitive strengths of the
company that would allow it to address the risks inherent in the business and
capitalize on the opportunities available, as well as the company‘s financial
position.
While the actual factors considered for grading may not be identical or
limited to the following, the areas listed below are generally looked into by the
rating agencies, while arriving at an IPO grade
1. Business Prospects and Competitive Position
i. Industry Prospects
ii. Company Prospects
2. Financial Position
3. Management Quality
4. Corporate Governance Practices
5. Compliance and Litigation History
6. New Projects—Risks and Prospects
It may be noted that the above is only indicative of some of the factors
considered in the IPO grading process and may vary on a case to case basis.
IPO grading does not consider the price at which the shares are offered in the
issue. IPO grading is done without taking into account the price at which the
security is offered in the IPO. Since IPO grading does not consider the issue
price, the investor needs to make an independent judgment regarding the price
at which to bid for/subscribe to the shares offered through the IPO. All grades
obtained for the IPO along with a description of the grades can be found in the
Prospectus. Abridged Prospectus, issue advertisement or any other place where
the issuer company is making advertisement for its issue. Further the Grading
letter of the Credit Rating Agency which contains the detailed rationale for
assigning the particular grade will be included among the Material Documents
available for Inspection (chittorgarh.com).

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 An IPO grade is NOT a suggestion or recommendation as to whether
one should subscribe to the IPO or not. IPO grade needs to be read together
with the disclosures made in the prospectus including the risk factors as well
as the price at which the shares are offered in the issue.
IPO Grading is intended to provide the investor with an informed and
objective opinion expressed by a professional rating agency after analyzing
factors like business and financial prospects, management quality and
corporate governance practices etc.
However, irrespective of the grade obtained by the issuer, the investor
needs to make his/her own independent decision regarding investing in any
issue after studying the contents of the prospectus including risk factors
carefully.
SEBI does not play any role in the assessment made by the grading
agency. The grading is intended to be an independent and unbiased opinion of
that agency. The grading is intended to be an independent and unbiased
opinion of a rating agency.
SEBI does not pass any judgment on the quality of the issuer company.
SEBI‘s observations on the IPO document are entirely independent of the IPO
grading process or the grades received by the company.

1.18 New Provisions in Initial Public Offerings (IPO)

1.18.1 Green shoe Option:

Green Shoe Option is a price stabilizing mechanism in which shares are
issued in excess of the issue size, by a maximum of 15 percent. From an
investor‘s perspective, an issue with green shoe option provides more
probability of getting shares and also that post listing price may show
relatively more stability as compared to market volatility (Benson Kunju,
2012).
1.18.2 Safety Net:
In a safety net scheme or a buy back arrangement the issuer company in
consultation with the lead merchant banker discloses in the RHP that if the
price of the shares of the company post listing goes below a certain level the

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issuer will purchase back a limited number of shares at a pre specified price
from each allottee.
1.18.3 Open book/closed book:
In an open book building system the merchant banker along with the
issuer ensures that the demand for the securities is displayed online on the
website of the Stock Exchanges. Here, the investor can be guided by the
movements of the bids during the period in which the bid is kept open. Indian
Book building process provides for an open book system. In the closed book
building system, the book is not made public and the bidders will have to take
a call on the price at which they intend to make a bid without having any
information on the bids submitted by other bidders (chittorgarh.com).
1.18.4 Hard underwriting:
Hard underwriting is when an underwriter agrees to buy his commitment
before the issue opens. The underwriter guarantees a fixed amount to the issuer
from the issue. Thus, in case the shares are not subscribed by investors, the
issue is devolved on underwriters and they have to bring in the amount by
subscribing to the shares. The underwriter bears a risk which is much higher
than soft underwriting (Natarajan, 2011).
1.18.5 Soft underwriting:
Soft underwriting is when an underwriter agrees to buy the shares at
stage after the issue the issue is closed. The risk faced by the underwriter as
such is reduced to a small window of time.
1.18.6 Differential pricing:
When one category of investors is offered shares at a price different
from the other category it is called differential pricing. An issuer company can
allot the shares to retail individual investors at a discount of maximum 10
percent to the price at which the shares are offered to other categories of
public.

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