Christ University - MFS

TERMS TO LEARN PRIMARY MARKETS

Promoters Risk-free & Risk Capital / VC investing / PE investing /
Exits
Promoters / Risk-free & Risk Capital: Borrowing funds to run a business may not be a good idea for
most promoters since they will have to service the loan along with repayment of principal amount
on a specified date. Irrespective of the outcome of the business (profits or losses) they will have to
repay the borrowed funds; many times business ventures could take more time to settle down &
start seeing profits. Under the circumstance promoters seek risk-capital than risk-free capital
wherein they will issue shares by way of equity offering ownership to the investors (instead of
lending) to the extent of their investment thereby making them partners in the profits as well as
losses. Profits are distributed by way of dividends and/or by way of capital appreciation over time
along with business growth. These equity holders are eventually given exit routes by way of public
issue (IPO) allowing them to sell their shares at the market discovered price thru a secondary
market, stock exchange mechanism. It is assumed that the investors would be compensated
handsomely for their risk by way of infinite profit making possibilities as also governments taxation
support where dividends earned by investors from listed companies and the long term capital gains
too are fully exempt from any type of taxes (short term capital gains are taxed at 15% and short
term losses are allowed to carried forward for eight future financial years for setting-off).
Angel Investing: Smaller amounts of funding to start-ups usually funded by a group individuals
(termed as Angel Investors); funding range could be of Rs.10 lakhs to Rs.50 lakhs; mentoring and
handholding budding promoters and ready them for the next round of big funding
VC Investing: During the course of seeking funds to run their businesses promoters look for some
large amounts of money which are usually funded by Venture Capital companies which are set-up
for this specific purpose (to invest as seed capital in struggling but promising companies or even
ideas Disruptive Ideas). Venture capital companies look to invest in good businesses (identifying
the future growth potential & various other procedures) by offering financial assistance thereby
becoming equity stakeholders and grow along with the company. Eventually, after about 3 to 5 to 7
years of staying invested (they even time their exits to make good gains) they exit with good profits
(maybe not always) either selling their stake to the promoters themselves or to Private Equity
investors or to general public (IPO process). In a nutshell, VCs are those who invest at the initial
stages of a company where there may be no defined valuation (provides Seed Capital)
All types of businesses or ideas does not funded by Angel and/or VC investors. They look for what is
termed as Disruptive Innovation, an idea that is crazy and has potential to scale up to new levels
and disrupts prevailing business trends; the business should displace existing competition.
Businesses such as Facebook, Google, Whatsapp, Android Apps, Caf Coffee Day, Zoom Cars, Ola
Cabs, iPads, Zomato, Flipkart, Gillette blades are all such examples.
PE Investing: These investors invest during the growth stage or what is commonly known as
Flourishing Stage of businesses and come much later than the VC funding stage. They even buy out
stakes of existing investors and enter as new stakeholders. PE investors may not get to invest at the
face value like VC investors but invest after there is defined valuation. PE investors too could sell
their stake eventually to the promoters themselves or to a new set of PE investors or wait for the
IPO.

VC & PE are faces of the same coin, difference being that they are invested at different stages of
the company or business
Exits: All investments are done to make profits by selling at some future date. There are three
types of exits (1) promoters buying back the VC or PE investor stakes (2) another PE investor buying
the stake (3) IPO. However, the most profitable exits would have to be IPO exits wherein the price
discovery is much better with larger participation across various types of investors. Hence, IPOs are
considered to be mother of all exits. VC & PE investors, Government in PSU issues, a few times
even promoters (part stake sale) are sold thru IPOs (recent example is Just Dial IPO where the
entire issue was Offer for Sale, partial stakes sold by the VC, PE & promoters who made handsome
gains). Exits may happen as part of mergers, acquisitions and buy-outs.

Final Exit Stage (IPO)

PE entry stage (flourishing stage)
PE entry stage (flourishing stage)
Further round of funding (initial stages)
Further round of funding (initial stages)
Angel, VC Stage (Start-up stage)
Other reasons: Not to forget that equity market helps distribution of wealth and creates immense
opportunities of creating wealth, not only for the promoters but also for the investors. Promoters
get visibility, recognition and reputation being listed on recognised stock exchanges.

Why companies go public?

To raise fresh funds (equity) for business expansions or to off load existing stakes companies use the
IPO route. A few issues could be for both (fresh funds & off-loading existing stakes). Companies get
good public recognition as also better valuation for the promoters stake thru secondary market
price discovery possibilities. Companies can even access funds thru various sources at a future date
from banks, institutions and from existing shareholders (rights issue, NCD, FPO) for expansion
purposes which may not be possible for non-listed companies. Public issues are also for exit
opportunities to earlier investors in the company such as VCs, PEs and also in certain cases
promoters exit (full or partial or a percent).

Types of Issues Fresh Issue, Offer for Sale

(1) Fresh issue is to seek funds for expansion of business by issuing fresh equity to new investors or
general public and institutions (2) Offer for Sale or OFS is not to raise fresh equity but to
divest/dilute existing ownership to new owners thru a public issue process. Usually PSU (public
sector undertaking) issues that are originally owned by government are Offer for Sale issue where
the government sells its stake (partly) allowing for public subscription. Examples are ONGC, Maruti
Udyog (now Maruti Suzuki), Engineers India, NTPC, Coal India, MOIL among others where the
government divested. The route of divestment is also taken to bridge fiscal deficits. Other
companies too have started to offload their stakes such as Just Dial Ltd IPO that hit the market
during May/June 2013 which was a 100% offer for sale issue where the VC & PE investors and also
promoters (a percent of the stake) sold their stake thru a public issue. (3) an issue can be a mix of
both issue of fresh equity for expansion and offer for sale (for example, Power Grid Corp issue

which hit the market in Dec 2013 was an issue where the govt. sold its equity by way of OFS and
the company also raised fresh equity for raising funds to meet its expansion plans.

Eligibility Norms (ICDR Regulations, 2009)

Net tangible assets of at least Rs.3 cr for three full years / Rs.15 crore operating profits in at least
3 out of 5 preceding years / Net worth of Rs. 1 cr. in each of the preceding three years / If change
in the companys name, at least 50% of revenue for preceding one year should be from the newly
renamed co. / The issue size should not exceed 5 times the pre-issue net worth; (ALSO VISIT THE
WEB SITE ICDR REGULATIONS, 2009 FOR MORE DETAILS) http://www.bsepsu.com/sebidip.asp

Primary Market Intermediaries - Role of Merchant Bankers

Merchant Bankers are also called as Book Running Lead Managers (BRLM) or Lead Managers (LM);
these entities enter into an Underwriters Agreement with the company that is intending to go
public to raise funds; Merchant Bankers assist companies by readying them for public issue; they
also take responsibility of marketing the issue to investors thru the process of an IPO; Merchant
Bankers are classified as Category 1 to Category 4 and are mandated by SEBI (approval required) to
manage issues besides other activities such as advisors, managers, underwriters, portfolio managers
etc.; with respect to a public issue the merchant bankers first underwrite the entire issue which is
resold to public thru the public issue process; they conduct a complete due diligence of the
company which includes preparing financial statements based on past performances, current
situation of the company as also the future prospects; after arriving the valuations of the firm they
ready the company for tapping the market; this also includes pricing of the issue; first they prepare
a draft offer document (draft red herring prospectus) and submit it to SEBI for approval, upon
receiving necessary approvals the issue process begins; they conduct road shows taking the issue to
various investors (marketing & promotional activities such as meeting stockbrokers, financial
advisors, high net-worth individuals & institutions who eventually subscribe to the issue); there
could be more than one merchant banker which would be essential when the issue size would be
huge

Appointing
Intermediaries
(Underwriters/Syndicate
Members,
Registrars, Bankers/Escrow Acc, Compliance Officers, Stockbrokers &
Advisors)
Underwriters/Syndicate Members are those who take the responsibility of underwriting the issue in
case not being successful in receiving full subscription; these entities can only underwrite after the
company receives 90% subscription from the public; up to 10% of the issue only can be subscribed
by the underwriters; otherwise the issue would be forced to be devolved (Public issue of
Vigneshwara Exports Ltd in June 2006 was devolved when the company managed to receive only
89% subscription despite reducing the IPO price & extending the issue for a few more days; same
was the case with Bluplast Industries who pulled out of the issue at around the same time)
Recently during 2014 another IPO Loha Ispat Ltd issue was devolved and the monies collected was
refunded. The lead managers (merchant bankers), were unable to mobilize the funds despite the
issue was extended and the price was lowered. Unlike in the developed markets such as the USA &
Europe, India does not yet practice underwriting in the strictest sense hence if the issue is not
subscribed at least 90% the issue will have to be cancelled.

Actually Syndicate Members are appointed only for helping the merchant banker in higher
subscription of the issue since such members would have good networking and reach across the
country.
Registrars: Also called as RTA (registrar & Transfer Agents); these entities act as book-keepers for
an issue wherein they will take responsibility of finalising the allotment of shares of an IPO.
Different types of investors (retail, HNI & institutions) apply under respective categories and
allotting the shares on proportionate basis is essential, these registrars compile the entire
applications received during an IPO and allot the shares based on the eligibility and based on the
subscriptions received. Post IPO & listing the same registrars will work as a conduit between the
listing company and the investors (shareholders) for various communications that the company does
with the shareholders; it also includes managing the transfer of equity ownership wherein the
buyers ownership could change with every buy & sell transactions done on the stock
exchange/stockbroker platforms.
Bankers/Escrow A/c: Bankers receive the applications along with the payments (either by way of
cheques or ASBA) from interested investors who apply for an IPO. Their payments are processed
thru specially created ESCROW accounts which are used to park the IPO related mobilization.
Escrow a/cs were created not to give access to the funds to the promoters until the allotments are
not finalized; once the basis of allotments are finalized, refunds to unsuccessful investors are sent
(in case of oversubscription), the actual IPO funds will be transferred by these bankers to the
promoters account. Appointing bankers for all issues are mandatory.

Book Building Process / Price Band

The issue size is called as the book; book building process offers better price discovery;
receiving the applications thru a bidding process is termed as book building process where the
prospective allottees will apply seeking allotment of shares; having a Price Band is mandatory for a
book building issue; the price band allows bidding process; for example: a price band could be
Rs.100 to Rs.120 where Rs.100 is floor price and Rs.120 is the cap price (the difference
between the floor price & the cap price should not exceed 20%); investors are allowed to pick their
choice of price within the given price band of the issue; the price band also covers the premium
charged on the face value; depending upon the highest bids received for a particular price within
the given price band the merchant bank/issuing company finalizes the issue price post public issue
which is termed as the cut-off price

Types of Investors (RIB, NIB, QIB, NRIs) / SEBI mandated reservations

for investors
There are basically three types of investors in a book building issue viz. Retail Individual Bidders
(RIB), Non Institutional Bidders (NIB) and Qualified Institutional Bidders (QIB) who have to be
reserved 35%, 15% and 50% of the issue size respectively; those investors who invest less than
Rs.2.00 lac as application money would be RIB; those who invest above Rs.2.00 lac as application
money would be NIB and certain institutions as approved under the QIB category invest under the
last category; these entities are termed as QIBs Mutual Funds, Venture Capital Investors,
Alternative Investment Funds, Foreign Venture Capital Investors, FIIs, Commercial Banks, Public
Financial Institutions, State Indl. Development Corp., Insurance Cos. Pension Funds; QIBs are
allowed to bid for the entire issue size, wherein the basis of allotment is finalized based on prorata.
NRIs too are allowed to invest in the IPOs, both under Repatriable (allowed to take money out of
India) & Non-repatriable (not allowed to take money out of India) basis.

NRIs investing under repatriable basis will have to use a separate form that is earmarked for their
applications (usually green in colour). They can apply as Retail or NIB category.
Having a PAN card and Demat account is mandatory for applying for public issues

Role of Anchor Investors in a public issue:

A revolutionary concept introduced by SEBI to bring stability to IPO market. Subscriptions for any
IPO cannot be guaranteed which depends on market circumstances (bullish or bearish sentiments).
To bring buoyancy to an IPO subscription SEBI allowed strategic investors by way of Anchor Investors
to subscribe to an IPO. An anchor investor cannot be a promoter of the issuing company. He would
be eligible to be allotted up to 60% of the shares reserved for QIBs (which means if 50% is reserved
for QIBs in a particular issue 60% of this could be set aside for subscription to anchor investors) thru
a normal bidding process, bidding done one day before the issue opens for public subscription. Also
1/3rd of such allotments should be reserved for mutual funds. The minimum application size will
have to be Rs.10 crores. The allotments made to these anchor investors are locked for a period of
30 days from the date of allotment by not allowing them sell in the open market. Also the price at
which the shares offered to anchor investors should not be less than the price offered to other
applicants.
When Just Dial Ltd. came out with their maiden public issue during May 2013 to mop up Rs.950
crore, they mopped up to Rs.208 crore by way of allotting shares by way of Anchor Investor
participation to Goldman Sachs India Fund, HSBC Bank (Mauritius) Ltd., Birla Sunlife Trustee Co.,
DSP Blackrock Asset Management company (a mutual fund company subscribed for the DSP BR
Opportunities Fund) and Deutsche Securities Mauritius Ltd.
Similarly, anchor investors invested Rs.27 crore in the public issue of Wonderla that happened
during April 2014.

ASBA facility (SCSB self-certified syndicate banks)

Application Supported by Blocked Amount is ASBA; instead of cutting a cheque and investing in an
IPO, investors are now allowed to retain the funds in their bank accounts by allowing the SCSBs to
block the IPO related funds where the investors can continue to enjoy the savings bank interest
rate; the indicated amount, as indicated in the IPO application form, will be blocked in the account
and as and when the allotments are finalized and if successful such amounts will get debited from
the account and the rest will be available (unblocked) for the use of the customers/investors; for
example, if an investor is applying for Rs.75000 worth of shares in an IPO and has a bank balance of
Rs.90000, then Rs.75000 will get blocked which cannot be used for withdrawal until the allotment
is not finalized; eventually when the allotments are finalized by the issuing company if the investor
is successful is getting Rs.50000 worth of shares, the company will absorb this amount from the
account and the rest will be automatically unblocked in favour of the investor. In case of no
allotment at all, the blocked amount will get unblocked; this way the investor will continue to get
his savings bank interest rate which otherwise would have not been possible (in case of cheque
issue). Currently ASBA facility has been extended to all types of investors

P-Notes or Participatory Notes:

India has been a hot destination for investments, being considered as one of the fastest emerging
markets in the world. After the liberalization in 1991 many foreign investors, particularly
institutions, rushed to India with dollars to invest in Indian companies. But govt. made certain

regulations for them to invest here. First of the regulations was that a foreign individual cannot
invest directly in Indian stocks, only foreign institutional investors could do after getting necessary
approvals as a registered FII.
Since India as an investment destination could not be ignored by foreign individual investors as well
they sought a short-cut to invest in Indian equities. For example, Jackie Chan desires to buy some
bluechip stocks such as Infosys, TCS, Reliance, SBI among others, but he cannot buy these directly
by registering with an Indian stockbroker; if he has to buy into such opportunities he will have to
open an office in India, seek approvals, incur costs on setting up an office, spend additional money
etc. which could push up his investment cost of the securities and also all these processes are
cumbersome. So what does Jackie Chan do? He simply will register himself with a registered FII
such as JP Morgan, Goldman Sachs, Morgan Stanley or HSBC, will pay money to them and instructs
them to buy his chosen stocks.
Jackie Chan opens an account with JP Morgan, this FII will receive the funds from him and issue a
receipt which is called as Participatory Note (P-Note) and buy the securities and stores it in a
demat account with an acknowledgement given to Chan of having bought and kept the securities in
their account (JP Morgan will not transfer the securities into Jackie Chans account; it will be in
their demat account). This is also termed as Offshore Derivative Instrument.
Importantly, the P-Note owner does not own the shares, he just owns that position of the shares
which is with the FII and he will not be considered for any voting rights etc. Jackie Chan has just
taken position in his chosen stocks and eventually if the prices of those stocks raises he instructs
JP Morgan to sell it and will receive his investment back with profits (after accounting for necessary
commission & fee) and he returns the P-Note to JP Morgan. In case Jackie Chan does not want to
sell the underlying stocks he can sell his P-Note to another similar investor, say Tom Cruise, based
on the ruling price of the stocks by getting his money. Eventually, Tom Cruise may instruct JP
Morgan to sell the underlying stocks or like Jackie Chan he too can sell his P-Note to another
investor, say John Travolta and this changing hands may go on.
SEBI has made it mandatory for FIIs to disclose their P-Note issuances once in 3 months, but within
these given 3 months the P-Notes could have changed several hands and also may have got sold
which has been a problem to track since the original owners details is not disclosed.

Safety Net for retail investors:

As per a SEBIs report, out of 117 companies that were listed between 2008 and 2011 (after an IPO)
about 62% of the companies price were quoting below the issue price after 6 months of listing. It
was also found that 55 scrips price fall was more than 20% of the issue price. This trend was quite
alarming which SEBI suspected that if such anomalies continue it would drive away risk-averse
retail investors from the new issue market. To bring in confidence and also a sense of responsibility
for the issuing companies and their merchant bankers the market regulator has proposed a safety
net for retail individual bidders.
As per the proposal the safety net provision would trigger in cases where the price of the share
depreciates by more than 20% from the issue price (as per the price finalized during the IPO shares
allotment). The period allotted is 3 months from the date of listing for such fall (based on volumeweighted average market price). The 20% depreciation in share price shall be considered over and
above the general market fall (main index such as sensex or nifty or even broad based indices such
as BSE 500 or CNX 500). Such benchmarks should be mentioned in the offer document.
For example: The IPO issue price was Rs.100 and the chosen index on the listing day was 1000.
After 3 months, volume-weighted average market price of the share is Rs.79 which means the
depreciation has been 21% (Rs.100 Rs.79); at the same time if the chosen index has not changed

which remains to be 1000 itself at the end of 3 months the safety net provision will trigger because
the fall has been above 20% compared to the index performance
In another example, if the index has dropped to 900 from 1000 the fall would be 10% hence the
safety net option would not trigger because the drop would be 21% - 10% which is 11% depreciation;
fall has been lesser than the stipulated 20%
Further, if the stock price has fallen to Rs.69 from Rs.100 and the chosen index is at 900 against
1000 the safety net would trigger since the fall has been 31% - 10% which is 21%; fall has been
higher than the stipulated 20%
Though there have been several confusions and arguments in this regard by analysts and merchant
bankers, based on the above illustrations the final proposal is being drafted which should be in
place during 2014-15 financial year. It has to be noted that this safety net facility, as per the
proposal, would be extended to only those retail investors whose bid size has been Rs.50000 and
below
Check
for
the
new
discussion
paper
on
safety
net
(http://www.sebi.gov.in/cms/sebi_data/attachdocs/1348839319484.pdf)

on

this

website

QIP (qualified institutional placement)

To raise capital in the quickest possible manner; introduced in 2006; to surpass the laborious public
issue process; can issue equity or fully convertible or partly convertible debentures; introduced to
curb excessive dependence on foreign capital; at least 2 allottees for less than Rs.250 cr. & 5
allottees for over Rs.250 cr.; at least 10% of the allotment to MFs; managed by a merchant banker;
suitable those type of investors who possess market expertise (such as institutions who would
understand the intricacies of equity & the risk associated with it in comparison with retail investors
who may need more convincing)

Bid Revision
The bids are allowed to be revised; the last sheet of an IPO application form is given to use this
option; the Old Bid can be Revised, but the revision has to be done before the issue closes for
subscription; for example, if the issue is open for subscription from 20.05.2013 to 22.05.2013 and
originally it was bid at Rs.105 (assuming the price band was Rs.100 to Rs.120), before the issue
closing date the investor can revise the bid to a higher price by using the Bid Revision option. Once
revised the new price that is opted will be considered for allotment. Bids are usually revised when
the investor would have earlier bid at a lower price but realises (thru stock exchange websites the
subscription data can be viewed online when the issue is open) that other investors have been
bidding at a higher price compared to his price and fears he may not be considered for allotment,
hence he revises the bid in an effort to be considered for allotment.

American Depository Receipts (ADRs) & Global Depository Receipts

(GDRs):
Companies such as Infosys, Wipro, MTNL, Dr. Reddys Lab, Tata Motors, HDFC Bank and ICICI Bank
are all listed on the American stock exchanges (New York Stock Exchange). These companies are
considered to be bluechip and are globally recognized for quantitative and qualitative reasons;
obviously even a foreign investor would like to invest in such companies. To facilitate such investors
to invest (a foreign national is not allowed to invest in Indian equities directly) companies are

allowed to issue shares in global markets and when such shares get issued in America they would be
termed as ADRs and when issued in other than America they would be termed as GDRs (Global
Depository Receipts). These companies that are listing in American stock exchanges do not issue
fresh shares, but the domestic shareholders shares are bought and make it available for American
investors thru a tie-up with a Depository/Custodian.
An Indian company will deposit the shares with the foreign designated depository and allow these
shares to be traded after some agreements and arrangements. The prices are determined based on
various parameters. The underlying one ADR or GDR may not be equivalent to one share of Indian
denomination; it may differ hence the price or value of the shares compared to Indian per share
price may differ.
These receipts are also called as International Depository Receipts wherein a certificate is issued by
a depository bank which is authorised to purchase shares of a foreign company and hold it with
itself. Such deposits are used as underlying by allowing investors of a foreign country to
trade/invest.

Indian Depository Receipts (IDRs):

Standard Chartered Bank (Standard Chartered Plc) became the first company to float an IDR on the
Indian stock exchanges. IDRs are opposite to ADR and GDR where a foreign company would list their
shares on Indian stock exchanges thru similar arrangements. A foreign company would deposit
shares with an Indian depository company and that depository would issue receipts to Indian
investors against the deposited/issued shares. The process of issue of IDRs will happen similar to
issue of normal equity shares (filing DRHP with SEBI, merchant bankers, issue of shares etc.)

Open Offer:
For buying shares of a listed company by a single investor or as a group, up to 24.99% of the shares
of the company can be acquired provided the acquirer does not take control over the companys
management. If such acquisition results into entitlement of 25% or more voting rights in the
company (the target company), the acquirer has to make an open offer of at least 26% more
shares from the existing public stakeholders of the target company. This is prescribed under
takeover code by SEBI.
For example, when Diegeo Plc wanted to acquire United Spirits Ltd. they had to make an Open
Offer since it was planning to acquire a controlling stake in the company to an extent of 55%.
Once the announcement of acquisition is made the company fixes the price based on the prevailing
market price, which usually will be at a premium to attract stakeholders to tender their shares.
Company also fixes a time for tendering the shares.
An open offer will also trigger when a promoter of the firm with at least 25% stake or voting rights
intends to increase his stake by over 5% in a single financial year. This is also termed as Creeping
Acquisition. The creeping acquisition limit is fixed as 5% per financial year and when it exceeds 5%
the open offer triggers. The acquirer holding 25% or more voting rights in the target company can
acquire additional shares (including voting rights) to the extent of 5% of the total voting rights in
any financial year which is permitted to the extent of 75% of non-public holding limit.
Further, when an entity enters into shareholder agreement with a listed company to acquire control
over the latters board & management an open offer is mandatory, irrespective of the amount of
stake or voting rights.

In an open offer number of total equity shares does not increase, it just changes hands (from public
shareholders to the new acquirer).
Tax implications are different under open offer compared to other types of transactions such as
buy-back of shares. Since open offers are done based on an off-market transaction no Securities
Transactions Tax are charged on the value of shares tendered hence the gains, if any, would not be
treated under normal equity taxation. The long term gain would be taxed at 10% without indexation
and 20% with indexation.
(Study about Open Offers from other sources for broader understanding)

Offer Document / Red Herring Prospectus:

This is a mandatory document that a company which is proposing a public issue has to prepare and
submit it to SEBI for approval. This document contains every detail about the company such as:

Information about the Promoters

Information about the Company
Purpose of raising money
General Information
Risk Factors
Capital Structure
Details of people involved in the company (management key personnel)
Financial Statements
Basic Terms of the Issue
Basis of Issue Price
Industry Overview
Business Overview
History & Corporate Structure
Auditors Report
Other company policies
Outstanding Litigations & Material Development
Government/Statutory & Business Approvals
Regulatory & Statutory Disclosures
Terms of the Issue & Issue Procedure
Provisions of Articles of Association
Material contracts & Documents for Inspection
Declaration
Other information/data as specified by SEBI

These are a few important information that a company has to prepare and submit to SEBI as
Draft Offer Document or Draft Red Herring Prospectus (DRHP) seeking approval for the
proposed public issue. Eventually SEBIs IPO evaluation team will study the same and if everything
is satisfactory then an official approval will be given which will be called as the final Offer
Document or Red Herring Prospectus which will be made available to investors for studying and take
informed decisions on investing. Until and unless this document is not fully approved by SEBI a
company cannot conduct their public issue.
As an investor it is recommended to take time in reading an offer document before investing in any
public issue (remember this statement Read the Offer Document carefully before investing).
Validity of an approved Offer Document:
From the date of submitting the Draft Offer Document by the Merchant Bankers (lead bankers) the
time taken for approving the same could take a few months; until and unless SEBIs Primary Market

department is not fully satisfied the approvals are not sanctioned. Upon receiving the final
approval the issuing company may delay the actual date of launching or inviting subscription from
the public. Such delays of launch of an IPO are quite common due to vagaries of market poor
market conditions, weak sentiments or low investor confidence may lead to delaying the IPO
launch. But the validity of SEBI approval is for a period of 12 months. If there happens to be a
further delay beyond 12 months then the company will have to resubmit the papers/documents and
obtain fresh approvals.

The public issue can open for subscription within 12 months from the date of receiving approval
from SEBI.

Abridged Prospectus:
A shorter or concise version of the offer document that can be attached along with the public issue
application form (an abridged version) and issued to prospective investors is called as Abridged
Prospectus. This type of prospectus contains most important features from the main prospectus
(RHP).

Shelf Prospectus:
Public sector banks, scheduled banks and public financial institutions are allowed to issue Shelf
Prospectus that enables the issuers to make a series of issues within a period of one year without
needing to file fresh prospectus every time. Since banks may have to keep raising funds on a
continuous basis, instead of filing the prospectus every time they can choose to file shelf
prospectus.

Letter of Offer:
It is an offer document issued during a Rights Issue of shares or convertible shares which is to be
filed with the stock exchanges before the issue is scheduled to open. The issuer of a rights issue can
attach an abridged version of letter of offer and send it all shareholders along with the
application form.

The Pros & Cons of Pricing of an Issue:

Many a times we wonder on the basis of pricing of issues. How do companies arrive at such
premiums on Rs.10 paid up share? For example Reliance Power Ltd. issue was priced at Rs.450 (at
the cap price) during January 2008 and recently in 2010 SKS Microfinance Ltd. was priced at Rs.900
(at the cap price) for their public issues. How did these companies arrive at these premiums? First
and foremost we have to understand that fundamentally the price of a stock reflects its earnings
(profitability); other than the earnings there are other factors too that gets factored-in while
pricing an issue (the price over and above the face value of Rs.10 is termed as Premium). We will
see a few reasons:
Besides the existing profitability as per the declared (audited) financials of a company, the
consideration will also be based on the kind of product or services they are offering (uniqueness),
promoters reputation/goodwill, clientele, the future expected sales & earnings and more
importantly the prevailing market sentiments influence the pricing of a stock. In case of Reliance
Power IPO which hit the market during January 2008, equity market was on fire with a 7000 points
surge in just under 7 months with tremendous bullish sentiments and more so that it was from the
Reliance group whose stocks command a great affinity by both investors (domestic & foreign) and
traders. Though fundamentally the stock did not deserve to be priced at Rs.450, the merchant

bankers and the promoters must have considered various positive factors which was working in
their favour such as the sector (power), coming from the famous group (Reliance) and market
sentiments (extremely bullish) which could have made them price it steeply which was grabbed by
millions of investors who did not want to miss the opportunity of being a shareholder of RPL. What
happened after that is something no investor wants to be reminded because it could be a wound
which might take years to heal, yet it showcases a classic example of pricing of an issue.
SKS Microfinances IPO too is a similar example of taking advantage of factors such as uniqueness of
the companys business (microfinance - a hot business prospect during 2010), first of its kind to tap
the primary market in that space, past performance and expected future growth possibilities (high
profit realization due to comparatively higher lending rates) and bullish market sentiments might
have made the merchant bankers and the promoters to price the offering at the highest possible
prices at Rs.900 per share at the upper end of the price band. Yes, the issue was a huge success
with a great response from across the investor fraternity, but the irony is that once problems
started brewing in the microfinance segment soon after its listing on the secondary market (the
stock had touched Rs.1400 during Sep 2010 after it got listed at Rs.1036 on 16 th Aug 2010) which
eventually fell to under Rs.60 during June 2012 erasing all the gains (listing & subsequent gains).
SEBI and other market experts have always criticized those companies which do not price their
shares in line with their earnings and inflate the prices taking advantage of various factors as
discussed above. They stress for a healthy pricing (fair / realistic pricing) of issues so that the
prices trade at reasonable levels for a longer period of time after listing on the exchanges which
also protects the common investor who may not be aware of the market dynamics in depth. In fact,
Mrs. Usha Narayanan who handles the primary market portfolio with SEBI had expressed her
concern in a forum during April 2011 by questioning the role of merchant bankers by asking them to
advise promoters on reasonable and realistic pricing of issues and they should refrain from being
self-regulatory bodies. Hope a fair pricing scenario will emerge sooner than later.
During May 2012 Mr. U K Sinha the Chairman of SEBI said, we have enough data to show that due
diligence has not been exercised by merchant bankers regarding IPOs. In future, due diligence done
by them must be made available to SEBI for inspection.
From the above quote by the SEBI chairman it can be interpreted that the quality of a company
that is going public as also the price at which it is being marketed is questionable. Hence, the onus
is on the merchant bankers to be ethical by valuing the hard-earned money of the investors.

SECURITIZATION:
In simple terms securitization is to sell the receivables of a loan to a company that offers upfront
cash for such future receivables. For example: You are running a company that is into vehicle
financing whereby you have financed cars to various entities (individuals & corporate borrowers on
hire purchase) ranging from one year to seven years (loan tenures). The lending could be 80% of the
vehicle cost. You could have received the future payments by way of PDCs (post-dated cheques) or
thru ECS (direct debit from the borrowers bank account; Electronic Clearing Services). Lets also
assume that your total receivables are Rs.500 crores over these seven years (based on the longest
loan tenure). For some reasons you are having financial problem wherein you are in need of
immediate cash-flows into your business. Instead of taking a fresh loan or trying other types of
credit you would approach a lender who would offer to bail you out by offering you to securitize
the loan receivables by paying you an upfront cash of lets say 80% of the receivables which
would be Rs.400 crores. Since you would be getting this money upfront which helps you in sailing
over the crisis you would agree to securitize the assets.
The receivables by way of future EMIs would be routed to the securitizer (the company that lent
you the funds). Both of you (borrower & the lender) would use PTC or Pass Thru Certificate to

ensure that the EMI money will be realized by the lender (the EMI credit hits your account and
simultaneously it gets transferred to the securitizers account). Ensuring the future monies reaching
the lender is your responsibility as also any defaults by way of non-payment would have to be met
by you.
Further, another advantage of securitizing receivables is that such funds are available at cheaper
cost compared to traditional methods of borrowing in many circumstances.
Securitization can also be part of financial restructuring of companies that get into financial
problems.
Case Study: The recent and successful example of securitization can be of SKS Microfinance Ltd. a
listed microfinance company that securitized its receivables and received close to Rs.1000 crore
during 2013-14 financial year. This company is into lending micro-credit to rural borrowers whose
receivables over a period of time (as per the lending arrangements) was securitized across several
banks who bought such receivables and paid cash to SKS which funds were further utilized by this
company to continue with its lending activity.
SKS had received funds thru securitization Rs.321 crore (Sep 2013), Rs.350.81 crore (three rounds
of funding received during Dec 2013) and the next in Jan 2014 (Rs.55.56 crore) and Rs.26.73 crore
during March 2014.

GREEN SHOE OPTION / STABILIZING AGENT:

A green-shoe option is also known as an over-allotment option. As we are aware, in a public
offering a company sells its shares to investors, which eventually gets listed on a stock exchange for
subsequent trading. This option gives the issuer company a right to sell more shares to investors
than originally planned in their public offering if the demand situation requires such an action after
the listing. The green-shoe option can greatly help in stabilizing the prices after listing. A company
that is interested in using the green-shoe option has to follow the guidelines prescribed by the SEBI
and as per SEBI guidelines the size of excess allotment or the green-shoe option shall not exceed
15% of the total issue size.
A company wanting to exercise a green-shoe option has to first appoint a stabilizing agent by
entering into an agreement with one of its merchant bankers who is managing the issue. A
stabilizing agent plays a very important role in the entire process of a green shoe option for which a
stabilizing agent earns a fee from the company. According to guidelines issued by the market
regulator, the stabilization period shall not exceed 30 days from the date when trading permission
was given by the stock exchanges.
The process of exercising green-shoe option is explained here:
Assuming a company is planning to issue only 100000 shares, but in order to utilize the green-shoe
option, it actually issues 115000 shares (15% more than originally allotted shares), in which case the
over-allotment would be 15,000 shares. The company does not issue any new shares for the overallotment.
The 15,000 shares used for the over-allotment are actually borrowed from the pre-issue existing
shareholders and promoters with whom the stabilizing agent enters into a separate agreement. For
the subscribers of a public issue, it makes no difference whether the company is allotting shares
out of the freshly issued 100,000 shares or from the 15,000 shares borrowed from the promoters.
Once allotted it will be just like any other shares for the investor.
But for the company the situation would be different. The money received from the over-allotment
is required to be kept in a separate bank account. The main job of the stabilizing agent begins only

after trading in the share starts at the stock exchanges. In case the shares are trading at a price
lower than the offer price, the stabilizing agent starts buying the shares by using the money lying in
the separate bank account. In this manner, by buying the shares when others are selling, the
stabilizing agent tries to put the brakes on falling prices. The shares so bought from the market are
handed over to the promoters from whom they were borrowed. In case the newly listed shares start
trading at a price higher than the offer price, the stabilizing agent does not buy any shares.
Then how would he return the shares? At this point, the company by exercising the green-shoe
option issues new shares to the stabilizing agent, which are in turn handed over to the promoters
from whom the shares were borrowed.
The green-shoe option is a useful tool for stabilizing the prices of shares immediately after listing

UNDERWRITING CONCEPTS:
As per the Issue of Capital & Disclosure Requirements, 2009 (ICDR Regulations) every equity public
issue has to be underwritten by authorized underwriters. The extent of such underwriting has to be
agreed upon by the issuer and the underwriter (merchant banker); usually in the Indian context
hard underwriting is yet to be explored while soft underwriting is in practice.
Provisions of an Underwriting Agreement:
As per the Underwriting Regulations, an underwriting agreement is required to provide:

Terms of the agreement

Allocation of responsibilities between Underwriter & the Issuer
Amount of Underwriting obligation
Period within which Underwriter has to subscribe to the unsubscribed portion after being
intimated of it (devolvement extent)
Commission payable
Arrangements made by the Underwriter to fulfil its obligation of underwriting

Earlier in this chapter we have learnt that Lead Managers/Merchant Bankers enter into an
agreement with the issuing company assuring them of selling the shares to target investors (retail,
NIB & institutions under QIB category), but in certain circumstances (market sentiments) it may not
be possible for the issues to sail through as expected. Under such situations the merchant bankers
will undertake the UNDERWRITING responsibility; the same can be of two types:
Soft Underwriting
Hard Underwriting
Soft Underwriting:
Under Soft Underwriting the underwriting happens at a later stage, after the issue has opened for
subscription but before the basis of allotment is finalized. In case any large application/investment
gets withdrawn by the investor (chances are that a few QIB investors decide to withdraw their
applications after subscribing) the merchant banker would pitch in and underwrites to the extent of
withdrawals to meet the full subscription requirements. The percent of such subscriptions
(underwriting) could be very small wherein the Merchant Bankers themselves or the Syndicate
Members would underwrite.
Hard Underwriting:
In this case the underwriter agrees to buy his commitment at the earlier stage of the issue hitting
the market. The underwriter guarantees a fixed amount to the issuer from the issue (based on the

issue size). Under the circumstances that the shares are not subscribed by investors, the issue will
get devolved (the responsibility) on the underwriters and they will have to bring in the amount by
subscribing to the shares. In hard underwriting the risk on underwriters is more than that compared
to soft underwriting.
Underwriting can be done by registered underwriters, lead manager themselves or syndicate
members (engaged separately). In India Hard Underwriting happens only when the issuing company
has been successful to receive only 90% of the subscription and the balance remains unsubscribed.
If the company fails to get even the required 90% then the issue would be called-off by returning
the money to already subscribed investors. So it can be noted that the risk to the underwriters is
clearly defined in the present context (market practice).
In case of under-subscription in the QIB category the same cannot be allotted to any other category
of investors (to neither retail nor to NIB).
The issuer shall enter into underwriting agreement with the book runner (merchant banker), who in
turn shall enter into underwriting agreement with syndicate members, indicating there-in the
number of specified securities which they shall subscribe to at the predetermined price in the
event of under-subscription in the issue. If syndicate members fail to fulfil their underwriting
obligations, the lead book runner shall fulfil the underwriting obligations. The book runners and
syndicate members shall not subscribe to the issue in any manner except for fulfilling their
underwriting obligations.

FAST TRACK ISSUES:

To facilitate well-established companies to go thru the fund raising process without having to go
thru the laborious process of public issue SEBI introduced Fast Track Issues which was aimed at
cutting down the turnaround time of submitting the required documents and get approvals.
This facility is applicable to only listed companies that propose a rights issue or follow-on public
offer. Such companies are exempted from filing Draft Offer Documents either with SEBI or the stock
exchanges; SEBI decides considering certain factors as to which type of listed companies can be
awarded such a facility.

REVERSE BOOK BUILDING / BUYBACK OF SHARES:

When a listed company decides to buy back shares from the market (shares issued to public) they
are to follow a process which is termed as Reverse Book Building. The shareholders will tender their
shares thru this process to the acquirer (company) at a price to be decided by the process.
The price setting procedure is quite interesting; since the company which is doing the buy-back is
already listed the ruling price in the market is already known hence to make the process
transparent and acceptable (by the offering shareholders) SEBI has put in a procedure wherein the
offer price has to be arrived based on the last 26 weeks average price which would be the floor
price; for example, if the current market price (CMP) in the stock exchanges is quoting at Rs.245
and the last 26 weeks average price (the date should be 26 weeks preceding the date of public
announcement of such buy back) comes to Rs.270 then this price would be the floor price.
Now the shareholders can tender their shares at Rs.270 or even at a price higher than this floor
price. Unlike in normal book building where the bidders are not allowed to bid below or above the
price band, here there would be no maximum price as such and the shareholders are free to bid at
any price. However, the final price will be decided as the price at which maximum bids were
received; this method allows the shareholders to determine their choice of price. Once the price is
arrived at, the company has the power to either accept the offer or reject it. If the price is feasible

then the bids would be accepted at the arrived price and if the same is not feasible the company
could reject it.
The advantage here for those who have bid below the accepted price would also be considered for
the buyback.
Reasons for buyback: Most companies do hold cash reserves which would be part of their profits
set aside for future uncertainties, acquisitions or expansion purposes. In case companies do find
lack of opportunities for such investments or they feel that they are in healthy space then they
would like to utilize the cash by buying back the earlier issued equity from its shareholders thereby
decreasing the free float or outstanding shares in the open market and in turn increasing their
holding. Also it may not be a good or productive idea to keep cash for indefinite period which may
lead to other complications. It further helps the promoters to increase their hold on the company.
Real time example: During Nov 2013 oil exploration major Cairn India Ltd. (a listed large cap
company) decided that it would spend up to Rs. 5725 crores to buy-back shares from the market
which was aimed at giving more promoter control over the business & its operations. After the
buyback formalities the owner of Cairn India, Vedanta Groups shareholding in the company would
go up from 58.76% to 64.53%. This a good example to understand how excess cash gets utilized and
also the promoters would increase their hold in the company.
Nitin Fire Protection Inds. Ltd., VLS Finance, Claris Lifesciences, Mastek are a few other examples
that successfully conducted their buybacks during 2013-14.
Real-time Buyback Announcement Snippet: Nitin Fire Protection Industries Ltd. a listed company
announced thru a public announcement that it intended to buy back shares on 22.08.2013 and it
had appointed Prabhudas Liladhar PL Capital Markets as its Merchant Banker as its lead manager to
conduct the reverse book building/buyback formalities. The total amount that it intended to
buyback was Rs.14.90 crores.
The company quoted reason for the buyback as the buyback is expected to reduce outstanding
number of shares and consequently increase earning per share (EPS) over a period of time;
effectively utilize surplus cash; make the balance sheet more leaner and more efficient to
improve key return ratios like Return on Networth, Return on Assets etc.
The buyback price was fixed at Rs.66.60 per share against the prevailing price of Rs.56.50 (as on
the date of the companys board meeting). The price was fixed taking into account the average
price performance on both NSE & BSE over the last six months as on the date of public
announcement.