Primary Market

INDIAN SECURITIES MARKET

The securities market is a component of the wider financial market where securities can be
bought and sold between parties, based on demand and supply. Securities markets encompass
equity markets, bond markets, and derivatives markets where prices can be determined and
participants both professional and non-professionals can meet. Securities markets can be split
into two levels. Primary markets are where new securities are issued, and secondary markets
are where existing securities can be bought and sold. Secondary markets can further be split
into organized exchanges, such as stock exchanges and over-the-counter where individual
parties come together and buy or sell securities directly. Another classification of the
securities market is based on the tenure of the securities. Such a classification has two
markets- The capital market and the Money market. The capital market is the market for
long-term securities or funds while the money market is the market for short-term funds or
securities. Although the Stock market is a part of the Capital Market, in practice the terms
capital market, securities market, and stock market are used interchangeably.

Market Participants
The securities market has three categories of participants :
i. The issuer of securities
ii. The investors in the securities
iii. The intermediaries

The issuers are borrowers or deficit savers, who raise funds by issuing securities in the
market. The investors are the surplus savers, who deploy their saved money by subscribing to
the issued securities. The intermediaries are the agents who match the needs of savers and
borrowers and in return, they get a commission. There is a large pool of intermediaries
providing various services in the Indian securities market. The resource mobilization and
channelization is continuously supervised and monitored by the regulators. The regulators
ensure the adoption and compliance of fair market practices by every participant, particularly
the issuer and the intermediaries. They work towards ensuring high-quality of services are
provided by the intermediaries and protecting the interest of the investors.

Market Segments
The Securities Market has two inter-dependent and inseparable segments, the new issues
(primary) market and the stock (secondary) market. The primary market provides the channel
for creation and sale of new securities, while the secondary market deals in securities
previously issued.

a. Primary Market
The issuer of securities sells the securities in the primary market to raise funds for investment
and/or to discharge some obligation. In other words, the market wherein resources are
mobilized by public limited companies or government agencies through the issue of new
securities is called the primary market. It enables corporate entities, public sector institutions
and the government to raise resources through issuance of debt and equity-based instruments.
These resources may be required for new projects as well as for existing projects with a view
to expansion, modernisation, diversification and upgradation. These resources are mobilized
through either of the following two
routes:
i. Public issue where anyone and everyone from the public is eligible to subscribe
to the issue. IPO is the most common way for companies to raise capital in the
primary market.

ii. Private placement where only a selected group of people can subscribe to the
issue.

In addition, the primary market also provides an exit opportunity to private equity and
venture capitalists by allowing them to offload their stake to the public.

The Primary Market holds great significance to the economy of a country. It is through this
market that funds flow for productive purposes from investors to entrepreneurs. The latter use
the funds for creating new products and rendering services to customers. The primary market
creates and offers the merchandise for the secondary market.

What are the methods of floatation in Primary Market?

The following are the various methods through which floating of new issues can be done.
(i) Offer through Prospectus
The most used method for raising funds in primary market is offer through prospectus. It
involves inviting the subscriptions from public by issue of prospectus. A prospectus is
published as advertisements in newspapers, magazines, etc. It provides such information as
the purpose for which the fund is being raised, company’s background and future prospects,
its past financial performance, etc. Such information helps the public and the investors to
know about the company as well as the potential risk and the earnings involved. Such issues
need to be listed on one of the stock exchanges and should be in accordance with the
guidelines and rules listed under the Companies Act and SEBI disclosure.
(ii) Offer through Sale
As against offer through prospectus, under the offer through sale method, the company does
not issue securities directly to the public rather they are issued through intermediaries such as
brokers, issuing houses, etc. That is, under offer through sale, securities are issued in two
steps, first the company sells its securities to the intermediaries at the face value and later the
intermediaries resell the securities to the investing public at a higher price than the face value
to earn profit.
(iii) Private Placement
Under this method, the securities are sold only to some selected individuals and big
institutional investors rather than to the public. The companies either allot the securities
themselves or they sell the securities to intermediaries who in turn sell them to selected
clients. This method saves the company from various mandatory or non-mandatory expenses
such as cost of manager fees, commission, underwriter fees, etc. Thus, the companies which
cannot afford the huge expenses related to public issue often go for private placement.
(iv) Rights Issue
Under the Companies Act 1956, it is the right of the existing share holders of a company to
subscribe to the new shares issued by it. The existing share holders are offered subscription of
new shares of the company in proportion to the number of shares possessed by them.
(v) e-IPOs
It is system of issuing securities through online system. If a company decides to offer its
securities through an online system it is required to gets into an agreement with the stock
exchange. This is called Initial Public Offer (IPO). Company appoints brokers for accepting
applications and placing orders. A company can apply to get listed in any stock market except
from the one through which it has already offered securities. Herein, the lead manager looks
upon the various activities and coordinates them.

What is Book Building?

Initial public offerings (IPOs) are offered at prices as detailed by their underwriters. Book

building is the process through which an underwriter comes up with the price for

the IPO being publicly offered. The underwriter of the IPO is normally an investment bank

and this party determines the price by inviting institutional investors like fund managers to

submit their respective bids for the price they would be willing to pay for a certain number

of shares.

Hence book building is how an underwriter can determine the overall price at which a

company’s IPO will be publicly offered. To discover this price, the book-building process

involves generating and keeping a record of investor demand for these shares before the

underwriter arrives at their issuance price. Companies often price their IPOs via book

building meaning it is seen as a kind of de facto method. It is not only highly recommended

by all major stock exchanges, but it is also the most efficient way to price one’s securities.

Book-building process
The technique is simple. It consists of five major steps. Let’s have a look at each one of them
briefly.
Step 1: Appointing an underwriter
The first step includes hiring an underwriter for the firm (usually in the form of an investment
bank), as it will assist the company in the further stages of the process. The underwriter will
recognize the issue’s size(the number of shares to be issued) along with the pricing range for
the issue. The range includes a floor rate(below which the applicants can not submit their
bids) and a ceiling rate(the maximum price of the issue). The underwriter is also expected to
help with drafting the (DRHP) prospectus.
Step 2: Bidding by investors
The second step of the procedure is to invite investors to bid. Generally, high net worth
people, fund managers, etc., are invited to bid on the number of shares they are ready to
purchase and the amount they would pay.
Step 3: Building the book
Now, the underwriter is equipped with the bids from all the investors. It is expected that
different investors would have presented their proposals at different prices. The aggregated
demand of the issue is analyzed with the help of all the available data. Using the weighted
average technique, the underwriter arrives at the final rates for the issue, which may also be
called the “cut-off” prices.
Step 4: Publicize the information
The stock exchanges of various nations have made it mandatory for companies to publicize
the information related to the bids that the investors submitted. This is done for the sake of
transparency so that the general public can make rational decisions.
Step 5: Final allocation
Finally, the shares of the company's IPO issue are allotted to the investors whose applications
got accepted. As you understand, initially, the company gave only a pricing range to
investors, so it may be possible that a few investors would have bid at a rate lower than the
cut-off price while others might have bid higher than the cut-off price. So, for investors who
bid higher than the cut-off rates, the surplus money is paid back to them. At the same time,
the investors who bid less than the cut-off rates are asked to settle the difference amounts.

Are there any subtypes of the process?

The following are the two subtypes of it.
A. Accelerated book-building: This type is usually preferred when a company needs
funds, but debt financing is not an ideal option at that certain point in time. It is
usually conducted in the form of an auction rather than bidding. The process is
usually completed in a very short period, usually within one or two days.
B. Partial book-building process: It is also one of its variants. Here, bids from certain
lending institutions are invited and accepted instead of inviting bids from the public.
Then, based on their bids, the cut-off prices are decided, which becomes the final
price for retail investors. The costs of this process are low, and its efficiency is high.

IPO Pricing Risk: With any type of initial public offering, companies run the risk of
their stock being overpriced or under-priced when they set their IPO price. In case the
shares are overvalued, this might discourage potential investors from being interested in
case they aren’t certain that the company’s price and its actual value correspond. This
 discouraging reaction from the market can lead to a further price drop, lowering the value
of the securities that have already been purchased.

Difference Between Fixed-Pricing and Book-Building

Fixed pricing and book building IPO process are two methods used for determining the price

of an Initial Public Offering (IPO). In fixed pricing, the price of the IPO is determined and

disclosed before the offering is made available to the public. On the other hand, in book-

building, the price of the IPO is not fixed initially and is determined by analysing the demand

from potential investors during the IPO subscription period. The final price is then

determined based on the demand received from investors.

In contrast to fixed pricing, book-building allows investors to submit bids within a specific

pricing range for shares offered in an initial public offering. This method is considered more

efficient because it determines the price based on the demand for the shares as indicated by

the bids submitted by investors.

What are the advantages?

Though there are various advantages to the book-building process, some of them are listed
below.
1. It helps decide the prices of the securities and assists in finding the intrinsic value of
shares.
2. The issuing company gets to select quality investors, among others.
3. The process results in preserving money as funds are spent on marketing and
advertising activities.
4. The price for the shares can be decided rationally by looking at the demand for the
same in the market.
5. As it involves informing the public about the bidding information, there is a greater
sense of transparency.

 Qualifications for listing Initial Public Offerings (IPO) are as below:

1.Paid up Capital
The paid-up equity capital of the applicant shall not be less than 10 crores * and the
capitalization of the applicant's equity shall not be less than 25 crores**
* Explanation 1
For this purpose, the post issue paid up equity capital for which listing is sought shall be
considered.
** Explanation 2
For this purpose, capitalisation 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
capitalisation, 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 capitalisation
(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.
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 1956/2013, 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.
3.Atleast 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:
That the company has not referred to the Board of Industrial & Financial Reconstruction
(BIFR) &/OR No proceedings have been admitted under Insolvency and Bankruptcy Code
against the issuer and Promoting companies.
The company has not received any winding up petition admitted by a NCLT
The net worth of the company should be positive. (Provided this criteria shall not be
applicable to companies whose proposed issue size is more than Rs.500 crores)
[*Net Worth – as defined under SEBI (Issue of Capital and Disclosure Requirements)
Regulations , 2018.
****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.
4.The applicant desirous of listing its securities should satisfy the exchange on the
following:
Redressal Mechanism of Investor grievance
The points of consideration are:
Details of pending investor grievances against Issuer, listed subsidiaries and top 5 listed
group companies by Market Cap.
Arrangements or mechanism evolved for redressal of investor grievances including through
SEBI Complaints Redress System.
Defaults in payment
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, Subsidiary
Companies shall also be considered while evaluating a company's application for listing. 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.
5. Rejection cooling off Period
The application of the applicant company should not have been rejected by the exchange in
last 6 complete months.
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 capitalisation be
computed based on the period from the IPO to the time of listing.
  Eligibility criteria for listing on NSE Emerge Platform
The following criteria should be complied with as on the date of filing the Public Offer Document with
NSE as well as when the same is filed with RoC and SEBI.

PARAMETER LISTING CRITERION

The Issuer should be a company incorporated under the Companies Act 1956 / 2013 in
INCORPORATION
India.

POST ISSUE PAID UP The post issue paid up capital of the company (face value) shall not be more than Rs.
CAPITAL 25 crore.

 Track record of atleast three years of either

i. the applicant seeking listing; or

ii. the promoters****/promoting company, incorporated in or outside India or

iii.Proprietary / Partnership firm and subsequently converted into a Company

(not in existence as a Company for three years) and approaches the Exchange
TRACK RECORD for listing.

****Promoters mean one or more persons with minimum 3 years of

experience in the same line of business and shall be holding at least 20% of the
post issue equity share capital individually or severally

 The company/entity should have operating profit (earnings before interest,

depreciation and tax) from operations for atleast any 2 out of 3 financial years
preceding the application and its net-worth should be positive.

OTHER LISTING  The applicant company has not been referred to erstwhile Board for Industrial
CONDITIONS and Financial Reconstruction (BIFR) or No proceedings have been admitted
under Insolvency and Bankruptcy Code against the issuer and Promoting
companies
 The company has not received any winding up petition admitted by a NCLT /
Court.
 No material regulatory or disciplinary action by a stock exchange or regulatory
authority in the past three years against the applicant company.
 Issuer seeking listing shall ensure that none of the merchant bankers
involved in the IPO should have instances of any of their IPO draft offer
document filed with the Exchange being returned in the past 6 months from
the date of application. For this purpose, the left lead merchant banker and any
other merchant banker if applicable who shall be responsible for due
 PARAMETER LISTING CRITERION

diligence activity and drafting of the draft offer document / offer document
in terms of the Lead Managers' Inter-se Allocation of Responsibilities shall be
considered. (For details of Merchant Banker wise IPO draft offer document
approved/ withdrawn/returned during past 6 months,

The following matters should be disclosed in the offer document:

1. Any material regulatory or disciplinary action by a stock exchange or

regulatory authority in the past one year in respect of promoters/promoting
company(ies), group companies, companies promoted by the
promoters/promoting company(ies) of the applicant company.
2. Defaults in respect of payment of interest and/or principal to the
debenture/bond/fixed deposit holders, banks, FIs by the applicant,
promoters/promoting company(ies), group companies, companies promoted by
DISCLOSURES the promoters/promoting company(ies) during the past three years.
3. The applicant, promoters/promoting company(ies), group companies,
companies promoted by the promoters/promoting company(ies) litigation
record, the nature of litigation, and status of litigation.
4. In respect of the track record of the directors, 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
charge-sheeted with serious crimes like murder, rape, forgery, economic
offences.

REJECTION COOLING The application of the applicant company should not have been rejected by the
OFF PERIOD Exchange in last 6 complete months.

 Eligibility Criteria for Listing on the Debt Segment of

NSE


The security proposed for listing on the Debt segment of NSE should comply with the requirements as
indicated hereunder:

ISSUER ELIGIBILITY CRITERIA FOR LISTING

PUBLIC ISSUE / PRIVATE PLACEMENT

NON-STRUCTURED
PRODUCT/ NON-MARKET STRUCTURED PRODUCT /
LINKED MARKET LINKED
DEBENTURES/ COMMERC DEBENTURES
IAL PAPERS
  Paid-up capital of
Rs.10 crores;
 or
 Networth of 100 crores
 Credit Rating prefix of
CORPORATES
‘PP-MLD’ denoting
(PUBLIC LIMITED
Principal protected
COMPANIES AND  Market capitalisation
market linked debentures
PRIVATE LIMITED of Rs.25 crores (In
followed by the
COMPANIES) case of unlisted
standardized rating
companies Net worth
symbols
more than Rs.25
crores)
 Credit rating

PUBLIC SECTOR  Networth of 100 crores

UNDERTAKING,  Credit Rating prefix of
STATUTORY ‘PP-MLD’ denoting
CORPORATION  Credit rating Principal protected
ESTABLISHED/ market linked debentures
 Qualifies for listing
CONSTITUTED followed by the
under the respective
UNDER SPECIAL standardized rating
Acts, Rules or
ACT OF symbols
Regulations under
PARLIAMENT
which the securities  Qualifies for listing under
/STATE
are issued the respective Acts, Rules
LEGISLATURE,
LOCAL or Regulations under
BODIES/AUTHORIT which the securities are
IES issued

MUTUAL FUNDS:
UNITS OF ANY SEBI  Networth of 100 crores
REGISTERED  Credit Rating prefix of
MUTUAL ‘PP-MLD’ denoting
FUND/SCHEME: Principal protected
 Qualifies for listing
INVESTMENT market linked debentures
under the respective
OBJECTIVE TO followed by the
Acts, Rules or
INVEST standardized rating
Regulations under
PREDOMINANTLY symbols
which the securities
IN DEBT OR are issued  Qualifies for listing under
SCHEME IS the respective Acts, Rules
TRADED IN or Regulations under
SECONDARY which the securities are
MARKET AS DEBT issued
INSTRUMENT
  Networth of 100 crores
 Credit Rating prefix of
INFRASTRUCTUR ‘PP-MLD’ denoting
E COMPANIES :  Credit rating Principal protected
TAX EXEMPTION market linked debentures
 Qualifies for listing
AND RECOGNITION followed by the
under the respective
AS standardized rating
Acts, Rules or
INFRASTRUCTURE symbols
Regulations under
COMPANY UNDER
which the securities  Qualifies for listing under
RELATED
are issued the respective Acts, Rules
STATUTES/
REGULATIONS or Regulations under
which the securities are
issued

 Networth of 100 crores

Credit Rating prefix of
‘PP-MLD’ denoting
FINANCIAL  Qualifies for listing Principal protected
INSTITUTIONS AS under the respective market linked debentures
DEFINED UNDER Acts, Rules or followed by the
COMPANIES ACT Regulations under standardized rating
INCLUDING which the securities symbols
INDUSTRIAL are issued
DEVELOPMENT  Qualifies for listing under
 Credit rating
CORPORATIONS the respective Acts, Rules
or Regulations under
which the securities are
issued
  Networth of 100 crores
 Scheduled banks  Credit Rating prefix of
‘PP-MLD’ denoting
 Net worth of Rs.50
Principal protected
crores or above
market linked debentures
 Qualifies for listing followed by the
BANKS under the respective standardized rating
Acts, Rules or symbols
Regulations under
 Qualifies for listing under
which
the respective Acts, Rules
the securities are
or Regulations under
issued
which the securities are
issued

REAL ESTATE  Qualifies for listing

 Qualifies for listing under
INVESTMENT under the respective
the respective Acts, Rules
TRUST (REITS) OR Acts, Rules or
or Regulations under
INFRASTRUCTURE Regulations under
which the securities are
INVESTMENT which the securities
issued
TRUSTS (INVITS) are issued

SECURITISED DEBT INSTRUMENTS / SECURITY

RECEIPTS

SPECIAL PURPOSE
DISTINCT ENTITY
OR TRUST AS
DEFINED UNDER
SEBI (ISSUE AND
LISTING OF Qualifies for listing under the respective Acts, Rules or
SECURITISED DEBT Regulations under which the securities are issued
INSTRUMENTS
AND SECURITY
RECEIPTS)
REGULATIONS,
2008.

 Process for IPO

 1. Company files DRHP/DP with the Stock Exchange
2. Exchange uploads the DRHP/DP on the Website of the Exchange
3. The company must file an application on NEAPS and attach the relevant documents
as per the Checklist specified by the Exchange.
4. Exchange does a preliminary check & verifies the application and seeks replies to
queries (if any)
5. Exchange issues in-principal approval to the Company
6. Company has an intention to open the Issue, within 12 months, post the SEBI
approval in case of Main Board & post Exchange approval in case of SME Issue
7. One day prior to the issue open, the company has to submit the 1% security deposit to
Designated Stock Exchange (DSE)
8. One day prior to the issue open, the company allocates the shares to the Anchor
investor (if any)
9. Issue can be open for minimum of 3 days and maximum of 10 days.
10. Issue Close (T Day – Working day)
11. On T+1 working day the Company submits the documents as per the checklist of the
Exchange
12. On T+1 working day basis of allotment is carried out at DSE
13. On T+2 working day company submits the Listing Documents to the Exchange.
14. On T+2 working day company submit Credit Confirmation from the Depository i.e.
dematerialised shares to the allottee’s account & Exchange will issue a circular to the
Market for listing of shares with effect from T+3 working day
15. On T+3 working day Company gets listed on the Exchange

Allotment Of Shares Meaning

Allotment of shares refers to the process by which a company issues and
allocates its authorized shares of stock to individuals or entities, known as
shareholders or stockholders. By issuing new shares, a company can
secure funds that can be used for various purposes, such as expanding
operations, funding research and development, paying off debts, or
making acquisitions.
One of the primary aims of allotting shares is to raise capital for the
company. Allotting shares allows the company’s ownership to be available
for distribution among many shareholders. This leads to
increased liquidity in the company’s stock as more investors participate in
trading, potentially improving the stock‘s marketability. While dilution is not
necessarily an aim, it’s an outcome that needs management while allotting
new shares.

Key Takeaways
  Allotment of shares is the formal process through which a company
assigns and distributes authorized shares of stock to investors who
have subscribed or applied for shares during a specified offering
period.
 Allotting share is a primary method for companies to raise capital for
various purposes, such as expansion, research and development, debt
repayment, and acquisitions.
 Investors can apply for shares during the subscription period,
indicating the number of shares they wish to purchase and the price
they are willing to pay.
 The company’s board of directors reviews the applications and
determines the number of shares to allot to each investor, considering
factors like demand and regulatory guidelines.

Allotment Of Shares Explained

Allotment of shares is the formal process through which a corporation
assigns and apportions its authorized units of ownership, represented by
shares of stock, to individuals, institutions, or entities. This procedure
involves issuing new shares and facilitating capital infusion into the
company. Hence, it governs the distribution of ownership stakes and confers
rights and responsibilities upon the recipients, who become shareholders.

The allotment of shares traces back to the evolution of modern corporate

structures and the need for sustainable means of raising capital. In the early
days of capitalism, as commerce expanded, businesses required substantial
funds to fund operations, embark on new ventures, and withstand economic
challenges. Corporations began offering ownership shares to the public to
fulfill this need in exchange for investments. This practice was a departure
from traditional private partnerships and sole proprietorships, as it allowed a
diverse range of investors to contribute financially to the growth of
enterprises.

The formalized concept of allotment of shares gained prominence

as corporate laws and regulations govern stock issuance, trading, and
ownership. This evolution not only facilitated capital formation for
companies but also democratized investment opportunities, allowing
individuals from various backgrounds to participate in the ownership and
success of corporations.
Process
Allotting shares involves several steps to ensure the smooth issuance and
allocation of new shares to investors. Here’s a breakdown of the steps
involved:

1. Authorization and Resolution: The company’s board of directors

authorizes the issuance of new shares. This is often done through a
formal resolution, specifying the number of shares to be issued, the
type of shares (common or preferred), and the price at which they will
be offered.
2. Offer Document Preparation: If the shares are being offered to the
public through an initial public offering (IPO) or a secondary
offering, the company prepares an offer document (prospectus or
offering circular) that contains detailed information about the company,
its financials, management, and the terms of the offering.
3. Regulatory Approvals: The offer document goes to the regulatory
authority for approval. In many jurisdictions, regulatory bodies like the
Securities and Exchange Commission (SEC) in the United States must
ensure that the information provided is accurate and complete.
4. Marketing and Investor Outreach: If the shares are being offered
publicly, the company may use marketing efforts to attract potential
investors. This can involve roadshows, presentations, and meetings
with institutional investors.
5. Subscription and Application: Interested investors submit
applications to subscribe to the new shares. These applications include
the number of shares they wish to purchase and the selling price.
6. Allotment Decision: Once the subscription period closes, the
company’s board of directors reviews the applications and decides how
many shares will be allotted to each investor.
7. Allotment Letters and Share Certificates: Allotment letters are sent
to successful applicants, confirming the number of shares allotted to
them and the payment details. Depending on the jurisdiction and the
shareholding method, physical share certificates or electronic records
are issued to the shareholders.

Types
Some common types of share allotment:
 1. Public Offering (Initial Public Offering – IPO): In an IPO, a
company offers its shares to the general public for the first time. This is
when a private company publishes its shares on a stock exchange.
IPOs involve significant regulatory compliance and scrutiny.
2. Secondary Offering: A secondary offering occurs when a company
that is already publicly listed issues additional shares to raise more
capital. This is for fund expansion, repaying debt, or other corporate
purposes. Secondary offerings can dilute existing shareholders.
3. Rights Issue: In a rights issue, existing shareholders have the right to
purchase additional shares at a discounted price compared to the
current market price. This is a way for the company to raise capital
from its existing investor base. It is while allowing them to maintain
their proportional ownership.
4. Private Placement: Private placement involves offering shares to a
specific group of investors, often institutional investors, venture
capital firms, or accredited investors. This method is less public and
involves fewer regulatory requirements than a public offering.
5. Preferential Allotment: Preferential allotment involves issuing shares
to a specific group of investors, such as promoters, directors, or
strategic investors, at a predetermined price. Thus, this method is best
for bringing in strategic partners or rewarding critical stakeholders.

Importance
Key reasons why the allotment of shares is essential:

1. Capital Infusion: Allotment of shares allows companies to raise

capital by issuing new shares to investors. This capital is for funding
expansion, research and development, acquisitions, debt repayment,
and operational improvements.
2. Growth Opportunities: By raising capital through share allotment,
companies can pursue growth opportunities that might have otherwise
been financially out of reach. This can include entering new markets,
developing new products, and scaling their operations.
3. Diversification of Ownership: Allotting shares increases the number
of shareholders, leading to a diversified ownership structure. This can
enhance the company’s stability by reducing the risk associated with
concentrated ownership.
4. Liquidity Enhancement: Listing shares on a stock exchange due to
allotment provides shareholders a platform to trade their shares. This
 improves the liquidity of the claims and can attract more investors to
the company.
5. Strategic Partnerships: Allotting shares can be a way to establish
strategic partnerships with other companies or investors. This can lead
to collaboration, shared resources, and synergies that benefit both
parties.

Difference Between Allotment Of

Shares And Issue Of Shares
Here’s a comparison between the allotment of shares and the issue of shares:

Aspect Allotment of Shares Issue of Shares

The process of assigning and allocating The act of offering and distributing shares to
Definition
authorized shares of stock to investors. potential investors.

Typically occurs after shares have been It encompasses the broader process of offering
Timing
subscribed or applied for. shares for sale or subscription.

Follows the receipt of applications from It encompasses the entire process of making
Nature
investors during a subscription period. shares available for subscription or purchase.

Decision The company’s board of directors decides The company’s management decides on the terms
Making how many shares to allot to each investor. and conditions of the share offering.

Encompasses the entire process of making shares

Formalizes the allocation of shares based
Purpose available to the market for subscription or
on applications received.
purchase.

How are shares allotted in an IPO?

As businesses grow, so do their capital needs. Filing for an IPO is one way in which companies attempt to
infuse massive funds into their company. An IPO or Initial Public Offering is the process by which a
privately held company or a government entity raises money from the open market. The entity becomes a
public company open to scrutiny by the market watchdog, SEBI and its investors are awarded shares in
exchange for their money.
The IPO share allotment process can be slightly tricky to understand as retail investors are not often
allotted any shares or are allotted lesser shares. This blog explains the IPO share allotment process in
detail.

IPO allotment process

Before jumping to the actual IPO allotment process, it is imperative to understand a few terms of
definition.

 Minimum application

As per SEBI guidelines, every applicant needs to invest a minimum amount in the IPO of a
company. This minimum amount can range from INR 10,000 to 15,000. Based on the lot size,
people can invest only that amount or in multiples of it. For instance, if the lot size is 25 shares,
investors can apply for 25 shares, 50 shares, 75 shares and so on.

 Minimum subscription

This refers to the minimum number of shares that the public must be willing to take up, or else the
company’s IPO stands cancelled. At present, the limit is set at 90% of the issue size. For example,
if a company intends to allot shares of face value INR 10 lacs, it should attract applicants willing
to invest at least INR 9 lacs (i.e., 90% of the shares offered). If it fails, the underwriters may step
up to take the balance shares. However, if the company does not meet the minimum subscription
criterion, its IPO is deemed cancelled.

 Oversubscription

This is a situation in which a company attracts more applications than it can allot. E.g., If a
company has reserved 100 lots for RIIs or retail investors and gets a bid for 150 lots, the retail
category is said to be oversubscribed by 1.5 times.

 Categories of applicants

In an IPO allotment process, there are four categories of applicants:

1. Retail Individual Investors (RIIs)

Individuals who invest a maximum of INR 200,000 in an IPO.

2. Non-Institutional Investors (NIIs)

Applicants who invest more than INR 200,000 in an IPO. NIIs include Hindu Undivided Families
(HUFs), High Net Income individuals (HNIs), and corporate entities.

3. Qualified Institutional Buyers (QIBs)

QIBs include Foreign Institutional Investors (FIIs), venture capital funds, banks, mutual
fund houses, insurance companies, pension funds, and other similar entities. As QIBs invest a
massive sum of money, companies may give them a preferential allotment.
 4. Reserved category
Shares offered to RIIs, NIIs, and QIBs together form part of the ‘net offer’. Some shares may be
earmarked for the employees of the company and the existing shareholders of its parent company.
These shares are over and above the net offer and form a part of the reserved category.

There is also a minimum IPO share allotment quota reserved for the applicants:

Category Min. Allocation (%)

RIIs 35
NIIs 15
QIBs 50
How is IPO allotment done?
The following cases are possible:

1. Under subscription of shares by less than 90% -The IPO is cancelled, and the money received
from applicants is returned.
2. Subscription of more than 90% shares - Applicants get all the lots they applied for, provided
their application was valid.
3. Oversubscription of shares - In this case, shares can be allotted either on a proportionate basis or
a lottery basis.

What are the possible reasons for not getting an allotment?

The reasons for not getting an allotment can be:

 The offer was oversubscribed, and the applicant was not selected by the lucky draw.
 The applicants lodged incorrect details while applying for the IPO. These can be details like
invalid PAN, Demat account number, etc.

In most cases, applicants are not allotted shares due to the first reason.

Who decides the IPO price?

Investment banking firms value the issuer company based on various parameters including:

 The company’s financials

 Past performance
 Future performance
 Industry growth rate
 The performance of other companies in the same industry
 The potential demand for its shares

The company’s worth is calculated using the Intrinsic Valuation (IV) approach, Relative Valuation
approach or a mix of the two. These are complex methods in which the Investment Bankers are trained and
help companies put a price tag on their shares.

Another important point to note is that the IPO share price is not a fixed number but a price band. Say the
price band is between INR 800 to 1,000. The public can choose the price that they think is the worth of the
company. The company collects all the price points along with the respective quantities. This is called the
book-building process and helps the company in discovering the price of its shares. The price at which the
maximum number of bids is received is the price at which the issue is listed.
Private Placement – Section 42 of Companies Act
2013
Section 42 of the Companies Act, 2013 (‘Act’) provides that a company can make
a private placement to a select group of persons. Private placement by companies
means offering its securities or inviting to subscribe its securities for a select group
of persons other than by way of a public issue through a private placement offer
letter.
Private placement of securities can be made only to select persons or identified
persons (as identified by the board of the company). A company making a private
placement cannot offer its securities through any public advertisements or utilise
any marketing, media, or distribution agents or channels to inform the public about
such an offer. If the offer is advertised or marketed, it will be considered a public
offer and not a private placement by the company.

Private Placement Offer Letter

Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014
(‘Rules’) provides the regulations relating to the private placement by companies.
The Rules state that the company should offer or invite to subscribe its securities
through a private placement offer letter in Form PAS-4.
All private placement offers should be made only to those persons whose names
are recorded by the company before sending the invitation to subscribe. The
persons whose names are recorded will receive the offer, and the company should
maintain a complete record of the offers in Form PAS-5.
A company should send a private placement offer letter accompanied by an
application form serially numbered and addressed either in writing or electronic
mode, specifically to the person to whom such an offer is made. The company
should send the private placement offer letter to the specific person within thirty
days of recording the person’s name.
The person to whom the private placement offer letter is addressed in the
application form should accept the offer. The company should file the complete
information of the offer with the Registrar of Companies (‘ROC’) within thirty
days of circulating the private placement offer letter.

Special Resolution for Making Private

Placement
The company can make a private placement of its securities after approval of
shareholders of the company for the proposed offer or invitation to subscribe to
securities by passing a Special Resolution for every offer or invitation.

Maximum Limit of Private Placement

The select persons to whom the company can make a private placement should not
exceed fifty persons or such a higher number prescribed by the Rules in a financial
year. The limit of fifty persons excludes the qualified institutional buyers and
employees of the company who are offered securities in the financial year under a
scheme of employees stock option as per Section 62 of the Act.
The Rules state that the offer or invitation of private placement should not be more
than two hundred persons in the aggregate financial year. The limit of two hundred
persons will exclude the qualified institutional buyers and employees of the
company offered securities in the financial year under a scheme of employees
stock option as per Section 62 of the Act.
The value of the private placement offer or invitation for each person should be of
an investment size of Rs.20,000 of the face value of the securities. However, the
limit of the maximum number of select persons and value of private placement
does not apply to the following:
Non-banking financial companies registered under the Reserve Bank of India Act,
1934.
Housing finance companies registered with the National Housing Bank under
National Housing Bank Act, 1987.

Mode of Payment of Private Placement

Every identified person wanting to subscribe to the private placement issue should
apply through the private placement application given to such a person by the
company along with the subscription money paid by demand draft or cheque or
other banking channel and not by cash.
The subscribers should make the securities subscription payment from their bank
account to the securities. The company must keep a record of bank accounts from
where they receive the subscription payments.

Allotment of Private Placement

A company making an invitation or offer of private placement should allot its
securities within sixty days from the receipt of the application monies for the
securities. The company should repay the application money to the subscribers
within fifteen days from the completion date of sixty days if the company is unable
to allot securities within sixty days.
When the company fails to repay the application money within fifteen days after
completion of sixty days, it is liable to repay the subscription money with an
interest rate of 12% per annum from the expiry of the sixtieth day.
The company must keep the application money in a separate bank account in a
scheduled bank and should not utilise it for any purpose other than the following:
For adjustment against allotment of securities.
For repaying application monies where the company is unable to allot securities.

Record of Private Placement Offers

The company should maintain a complete record of private placement offers in
Form PAS-5. The copy of the record of offers and the private placement offer
letter in Form PAS-4 should be filed with the ROC with the fees as provided in the
Companies (Registration Offices and Fees) Rules, 2014 within thirty days of the
circulation of the private placement offer letter.
When the company is a listed company, it should file the record of private
placement offers along with the private placement offer letter with the Securities
and Exchange Board within thirty days of circulating the private placement offer
letter.

Return of Allotment of Private Placement

The company must file the return of allotment of securities with the ROC, after
allotting the securities, within thirty days of allotment in Form PAS-3 and the fees
as provided in the Companies (Registration Offices and Fees) Rules, 2014 having
the following information:
Complete list of all security holders.
Full name, address, PAN, and E-mail of such security holders.
Class of security held.
Date of allotment of security.
Number of securities held, the amount paid and nominal value on such securities.
Particulars of the consideration received if the securities were issued for
consideration other than cash.
The Form PAS-3 filed by the company, other than One Person Company and small
company, should be pre-certified by a practising CMA (Certified Management
Accountant), CA (Chartered Accountant) or CS (Company Secretary).

Penalty for Non-Compliance of Private

Placement
A company, its directors and promoters will be liable for a penalty if the company
accepts monies or makes an offer in contravention of the Act and Rules. The
penalty may extend to the amount involved in the invitation or offer or Rs.2 crore,
whichever is higher. The company should also refund all monies to the subscribers
within thirty days of the order imposing the penalty.