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The term initial public offering (IPO) slipped into everyday speech during the tech bull
market of the late 1990s. Back then, it seemed you couldn't go a day without hearing about a
dozen new dotcom millionaires in Silicon Valley who were cashing in on their latest IPO. The
phenomenon spawned the term siliconaire, which described the dotcom entrepreneurs in
their early 20s and 30s who suddenly found themselves living large on the proceeds from
their internet companies' IPOs.

INVESTORS are still wary of equities in the 1990s, to blame are the excesses in the primary
market in the 1990s. Of the thousands of IPOs (initial public offerings) and offers for sale
made between 1994 and 1996, less than a hundred were from companies with track record.
Even in this shortlist, only a few managed to complete planned projects and deliver value to
investors. The rest just frittered the money away.

The primary market of the mid-1990s was merely used as a channel to move public funds into
private hands. The Securities and Exchange Board of India (SEBI) was late to wake up to the
excesses, but when it did, it improved the disclosure framework, tightened the prerequisites
for an IPO, and towards the end of the decade, introduced book-building.

( This route brought to market quality, wealth-creating IPOs such as Hughes Software, i-flex
solutions, Maruti, Bharti Tele-Ventures, TV Today and Divi's Labs, to name a few. Yet the
corporate sector has still not fully lived down the consequences of the excesses of the mid-

• India is being lauded as the savior of the ailing global IPO market with $3.3 billion
worth of proceeds from eight deals. This makes India the largest IPO market in the
world so far this year.
• According to Thomson Financial, the bulk of the volumes came from the biggest IPO
deal so far this year — Reliance Power's $3 billion IPO on January 21, 2008.

• On January 15, 2008, Reliance Power attracted $27.5 billion of bids on the first day
of its IPO, equivalent to 10.5 times the stock on offer, thereby, creating India's IPO
record. Its upper cut off price was Rs. 450. The proposed IPO was to fund the
development of its six power projects across the country.

• Emaar MGF’s IPO, at $1.6 billion is estimated to be the second largest IPO in the
world so far this year, behind Reliance Power's $3 billion IPO.

• Thomson Financial data reveals that India accounts for 49.1% of global IPO
proceeds at the moment, compared to just 3.7% same time last year. Significant, given
that global IPOs declined 36.1% over the last one year.

• The Indian capital market has performed quite well in 2007. It raised US$8.3 billion
through 95 Initial Public Offers (IPOs). According to the Ernst & Young report,
"Globalisation - Global IPO Trend Report 2007" India was the fifth largest market in
the world in terms of the number of IPOs and the seventh largest in terms of the
proceeds for the year
• It was the real estate sector which took the maximum advantage of the bullish stock
market trends in 2007. According to the industry body Assocham, real estate players
raised the maximum amount of funds from the capital market through IPOs last year.
Realty firms picked up around 42.7% of the total funds generated through IPOs. Of
the Rs.34,119 crore raised in the primary market in the period starting from January
1, 2007 to mid-December, about Rs.14,591 crore was raised by the realty firms.


2002-03 Rs 1039 crore
2003-04 Rs 17807 crore
2004-05 Rs 21432 crore
2005-06 Rs 23,676 crore
2006-07 Rs 24,994 crore
2007-08 Rs 52,253 crore

• An initial public offering (IPO) is the first sale of stock by a company to the public
• An initial public offering (IPO) occurs when a company first sells common shares to
investors in the public. Generally, the company offers primary shares this way,
although sometimes secondary shares are also sold as IPOs.
• Broadly speaking, companies are either private or public. Going public means a
company is switching from private ownership to public ownership.
• Going public raises cash and provides many benefits for a company.



When shares are bought in an IPO it is termed primary market. The primary market does not
involve the stock exchanges. A company that plans an IPO contacts an investment banker
who will in turn called on securities dealers to help sell the new stock issue.

This process of selling the new stock issues to prospective investors in the primary market is
called underwriting.

When an investor buys shares from another investor at an agreed prevailing market price, it
is called as buying from the secondary market.

The secondary market involves the stock exchanges and it is regulated by a regulatory
authority. In India, the secondary and primary markets are governed by the Security and
Exchange Board of India (SEBI).

Kinds of public offerings

Primary offering – new shares are sold to raise cash for the company
Secondary offering – existing shares (owned by VCs or firm founders) are sold, no new cash
goes to company.A single offering may include both of these initial public offering.

Some benefits/motivations:

- Additional source of capital

- Increase debt capacity (give “breathing room” for debt)

- Stock prices give measure of performance

- Allows managers to be compensated with options, or have incentives otherwise

directly tied to shareholder value

- Potentially more information about firm (analyst following), makes borrowing


Understanding “Issues”

This portion tries to cover the basic concepts and questions related to issues (issues in the
meaning of issuance of securities). The aim is towards understanding the various types of
issues, eligibility norms, exemptions from the same. The disclosure requirements regarding
the issuance of securities are covered in detail in the SEBI (Disclosure and Investor
Protection) Guidelines, 2000.
Primarily, issues can be classified as a Public, Rights or preferential issues (also known as
private placements). While public and rights issues involve a detailed procedure, private
placements or preferential issues are relatively simpler. The classification of issues is
illustrated below:
Public issues can be further classified into Initial Public offerings and further public
offerings. In a public offering, the issuer makes an offer for new investors to enter its
shareholding family. The issuer company makes detailed disclosures as per the DIP
guidelines in its offer document and offers it for subscription. The significant features are
illustrated below:

Initial Public Offering (IPO)

It is when an unlisted company makes either a fresh issue of securities or an offer for sale of
its existing securities or both for the first time to the public. This paves way for listing and
trading of the issuer’s securities.

Further public offering (FPO)

It is when an already listed company makes either a fresh issue of securities to the public or
an offer for sale to the public, through an offer document. An offer for sale in such scenario
is allowed only if it is made to satisfy listing or continuous listing obligations.

Rights Issue (RI)

It is when a listed company which proposes to issue fresh securities to its existing
shareholders as on a record date. The rights are normally offered in a particular ratio to the
number of securities held prior to the issue. This route is best suited for companies who
would like to raise capital without diluting stake of its existing shareholders unless they do
not intend to subscribe to their entitlements.

Private placement
It is an issue of shares or of convertible securities by a company to a select group of persons
under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public
issue. This is a faster way for a company to raise equity capital. A private placement of
shares or of convertible securities by a listed company is generally known by name of
preferential allotment. A listed company going for preferential allotment has to comply with
the requirements contained in Chapter XIII of SEBI (DIP) Guidelines pertaining to
preferential allotment in SEBI (DIP) guidelines include pricing, disclosures in notice etc, in
addition to the requirements specified in the Companies Act.

Free-pricing abused

As controls over pricing of equity were abolished in 1992, prudence took a backseat as
companies set about raising funds at fancy prices; the pricing was justified with helpful
projections of profitability dished out even by ICICI, IDBI, IFCI, Kotak Mahindra and Enam
Securities, leave alone the plethora of lesser-known investment banking outfits. The earnings
projections were vastly out of tune with reality. There was no element of the risk of business
cycle built into them; in many cases, it appeared as if the price had been fixed, and the
revenue and earnings numbers generated to justify it.

That the IDBI's stock traded at the offer price for just a couple of days over an eight-year
period and, subsequently, well below that price, tells the tale of abuse of free-pricing. Not
surprisingly, this put investors off; they had patronised such IPOs in a big way as the first
few offers in the free-pricing mode — of IFCI, Bank of Baroda, Infosys and Satyam Computer
— delivered value. Corporate greed was penalised, as investor apathy ensured that between
1998 and 2001, the number of IPOs/offers for sale could be counted on the fingers of one

A colossal misconception

This period was also witness to a popular notion that equity was the cheapest source of the
funding, as the premium element was perceived as carrying no cost. What companies failed
to recognise in this process — they were also encouraged by investment banks seeking more
IPO opportunities — was that their capital cost could only be the same as the investor's
expected rate return.

By assuming and assigning a zero-cost to the premium element, companies converted what is,
inarguably, the most expensive source of finance to the cheapest one. This led to an overhang
on equity across Corporate India, with funds being mobilised in the domestic and global
markets through the issuance of global depository receipts. As this understanding of the cost
was not clued to reality, it soon fell apart.

Capacity overhang

The primary market boom of the mid-1990s also ensured excess of a different kind: A fad for
capacity creation across a range of commodities, with the possible exception of aluminium
and copper. Cement and steel were good examples. Buoyed by high cement and steel prices,
and expectations of consistent double-digit growth in demand that was attributed to
liberalisation of the economy, several firms set up cement and steel capacities.

Binani Zinc, Sanghi Polesyter and the Rajan Raheja group and the DLF group (both cited
backward integration to construction as the reason for their cement foray) set up large-sized
cement units. Jindal Vijayanagar, Essar Steel, Bhushan Steel, Ispat Industries and Lloyds
Steel completed the steel story. The effect of the overcapacity still exerts pressure on
profitability. For instance, in cement, a better balance between demand and supply is
expected only two years from now.

This binge effectively ensured that even in the small number of companies where projects
were implemented — without exception marked by time and cost-overrun — investors have
had nothing to show by way of wealth accretion. Only the IPOs of the past two-and-half
years have changed that. If the ongoing bullish phase is used to perpetrate excesses, the
consequences would not be any different. Corporate India needs to walk a different path now,
both for its sake as well as in the interest of investors.
Qualified Institutions Placement

It is a private placement of equity shares or securities convertible in to equity shares by a

listed company to Qualified Institutions Buyers only in terms of provisions of Chapter XIIIA
of SEBI (DIP) guidelines. The Chapter contains provisions relating to pricing, disclosures,
currency of instruments etc.

IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI, to the
initial public offering (IPO) of equity shares or any other security which may be converted
into or exchanged with equity shares at a later date. The grade represents a relative
assessment of the fundamentals of that issue in relation to the other listed equity securities in
India. Such grading is generally assigned on a five-point point scale with a higher score
indicating stronger fundamentals and vice versa as below.

IPO grade 1: Poor fundamentals

IPO grade 2: Below-average fundamentals

IPO grade 3: Average fundamentals

IPO grade 4: Above-average fundamentals

IPO grade 5: Strong fundamentals

IPO grading has been introduced as an endeavor to make additional information available
for the investors in order to facilitate their assessment of equity issues offered through an
- IPO grading can be done either before filing the draft offer documents with SEBI or
thereafter. However, the Prospectus/Red Herring Prospectus, as the case may be, must
contain the grade/s given to the IPO by all CRAs approached by the company for grading
such IPO.
- Further information regarding the grading process may be obtained from the Credit Rating
- The company desirous of making the IPO is required to bear the expenses incurred for
grading such IPO.
- A company which has filed the draft offer document for its IPO with SEBI, on or after 1st
May, 2007, is required to obtain a grade for the IPO from at least one CRA.
- IPO grade/s cannot be rejected. Irrespective of whether the issuer finds the grade given by
the rating agency acceptable or not, the grade has to be disclosed as required under the
DIP Guidelines.
- However the issuer has the option of opting for another grading by a different agency. In
such an event all grades obtained for the IPO will have to be disclosed in the offer
documents, advertisements etc.
- IPO grading is intended to run parallel to the filing of offer document with SEBI and the
consequent issuance of observations. Since issuance of observation by SEBI and the
grading process, function independently, IPO grading is not expected to delay the issue
- The IPO grading process is expected to take into account the prospects of the industry in
which the company operates, the competitive strengths of the company that would allow it
to address the risks inherent in the business(es) and capitalise on the opportunities
available, as well as the company’s financial position.
- While the actual factors considered for grading may not be identical or limited to the
following, the areas listed below are generally looked into by the rating agencies, while
arriving at an IPO grad

Business Prospects and Competitive Position

i. Industry Prospects

ii. Company Prospects

Financial Position
Management Quality

Corporate Governance Practices

Compliance and Litigation History

New Projects—Risks and Prospects

It may be noted that the above is only indicative of some of the factors considered in the IPO
grading process and may vary on a case to case basis.

- IPO grading is done without taking into account the price at which the security is offered
in the IPO. Since IPO grading does not consider the issue price, the investor needs to
make an independent judgment regarding the price at which to bid for/subscribe to the
shares offered through the IPO.
- All grades obtained for the IPO along with a description of the grades can be found in
the Prospectus. Abridged Prospectus, issue advertisement or any other place where the
issuer company is making advertisement for its issue. Further the Grading letter of the
Credit Rating Agency which contains the detailed rationale for assigning the particular
grade will be included among the Material Documents available for Inspection.
- An IPO grade is NOT a suggestion or recommendation as to whether one should

subscribe to the IPO or not. IPO grade needs to be read together with the disclosures

made in the prospectus including the risk factors as well as the price at which the shares

are offered in the issue.

- The grades are allocated on a 5-point scale, the lowest being Grade 1 and highest Grade

- IPO Grading is intended to provide the investor with an informed and objective opinion

expressed by a professional rating agency after analyzing factors like business and

financial prospects, management quality and corporate governance practices etc.

However, irrespective of the grade obtained by the issuer, the investor needs to make
his/her own independent decision regarding investing in any issue after studying the

contents of the prospectus including risk factors carefully.

- SEBI does not play any role in the assessment made by the grading agency. The grading

is intended to be an independent and unbiased opinion of that agency.

- The grading is intended to be an independent and unbiased opinion of a rating agency.

SEBI does not pass any judgment on the quality of the issuer company. SEBI’s

observations on the IPO document are entirely independent of the IPO grading process

or the grades received by the company.

Rating IPO


SEBI's proposal to make the IPO assessment available to investors is a step in the right

Though the move to make IPO assessment mandatory has drawn some critical comments, the
need for a tool to help investors make better-informed decisions and judge the quality of
issues hitting the market is undisputed.

An IPO assessment brings four major pluses.

 Firstly, it improves information content through a professional and independent

 Secondly, it is relief for individual investors from information overload.
 Thirdly, it provides disincentives for weak companies to come to the market in the
hope of raising easy capital.
 And fourthly, it brings about greater level of investor sophistication.

1. Select Underwriter

- Provides procedural, financial advice

- Ultimately buys issue from company (at “issue price”)

- Ultimately sells it to public (at “offer price”)

2. Prepare Registration Statement – for approval of SEC (in accord with Securities Act
of 1933). Formal summary that provides information on an issue of securities.

3. Prepare Prospectus – Streamlined version of registration statement, for consideration

by potential investors.

4. Set price

• Road show – Talks organized to introduce company to potential investors, before the

• Bookbuilding –
“Book Building” means a process undertaken by which a demand for the securities
proposed to be issued by a body corporate is elicited and built up and the price for
such securities is assessed for the determination of the quantum of such securities to
be issued by means of a notice, circular, advertisement, document or information
memoranda or offer document.

5. Selling the shares

• Best efforts offering

IPO method in which underwriter promises to sell as much as possible, give best
effort, not commit to selling all of issue.

• Firm commitment offering: Method in which underwriter buys the whole issue, bears
all risk.

• Syndicate: Group of underwriters formed to sell a particular issue

• Spread - Difference between public “offer price” and price paid by underwriter
(“issue price”). Biggest part of underwriter compensation.


IPOs generally involve one or more investment banks as "underwriters." The company
offering its shares, called the "issuer," enters a contract with a lead underwriter to sell its
shares to the public. The underwriter then approaches investors with offers to sell these

The sale (that is, the allocation and pricing) of shares in an IPO may take several forms.
Common methods include:

• Dutch auction
• Firm commitment
• Best efforts
• Bought deal
• Self Distribution of Stock

A large IPO is usually underwritten by a "syndicate" of investment banks led by one or more
major investment banks (lead underwriter). Upon selling the shares, the underwriters keep a
commission based on a percentage of the value of the shares sold. Usually, the lead
underwriters, i.e. the underwriters selling the largest proportions of the IPO, take the highest
commissions—up to 8% in some cases.

Multinational IPOs may have as many as three syndicates to deal with differing legal
requirements in both the issuer's domestic market and other regions. For example, an issuer
based in the E.U. may be represented by the main selling syndicate in its domestic market,
Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia.
Usually, the lead underwriter in the main selling group is also the lead bank in the other
selling groups.

Because of the wide array of legal requirements, IPOs typically involve one or more law
firms with major practices in securities law, such as the Magic Circle firms of London and
the white shoe firms of New York City.

Usually, the offering will include the issuance of new shares, intended to raise new capital,
as well the secondary sale of existing shares. However, certain regulatory restrictions and
restrictions imposed by the lead underwriter are often placed on the sale of existing shares.
Public offerings are primarily sold to institutional investors, but some shares are also
allocated to the underwriters' retail investors. A broker selling shares of a public offering to
his clients is paid through a sales credit instead of a commission. The client pays no
commission to purchase the shares of a public offering; the purchase price simply includes
the built-in sales credit.

The issuer usually allows the underwriters an option to increase the size of the offering by up
to 15% under certain circumstance known as the greenshoe or overallotment option.

Three basic IPO costs

1. Administrative costs: for preparing registration, legal counsel, preparing and
printing prospectus, etc.

2. Spread: Difference between public “offer price” and price paid by underwriter
(“issue price”).

3. Underpricing: Difference between what stock is offered at and what it’s really worth

 Can be measured, roughly, as end-of-first-trading-day price minus offer price

 A hidden cost, but usually the biggest cost!

Public issues after the IPO

Seasoned Offering (SEO) – An equity issue by a firm after its IPO

General Cash Offer - Sale of securities open to all investors by an already public company.

Used for virtually all U.S. equity and debt issues

Shelf Registration – A procedure created by SEC “Rule 415” that allows firms to file one
registration statement for several issues of the same security.

- Covers financing plans up to 2 years ahead

- Speeds up issue process; don’t have to issue all at once

- Usually used for relatively “garden variety” issues, not complex issues where
underwriter’s “stamp of approval” may have value.

Deepak Parekh to head SEBI panel on

primary market
- THE Securities and Exchange Board of India (SEBI) has reconstituted its Primary
Market Advisory Committee (PMAC), which advises the regulator on policy matters
pertaining to the development of the primary market. With investor protection high on
its agenda, SEBI has asked its reconstituted PMAC to advise it on the matters relating
to regulation of intermediaries for ensuring investor protection in the primary market.
The terms of reference of the reconstituted 18-member committee include advising
SEBI on issues related to regulation and development of primary market. It would
also advise SEBI on changes in legal framework to introduce simplification and
transparency in systems and procedures in the primary market.
- The committee will be chaired by Mr Deepak S Parekh, Chairman, HDFC.

Case study


Issuer PKO Bank Polski

Seller The State Treasury of Poland, retain 52%

Pricing Date 3 November 2004

First Trading Date 10 November 2004

Shares Offered 377 million shares, all secondary

Reverse Greenshoe Reverse Greenshoe option covering 6.5% of Offering

(all secondary)

Price Range PLN 17.5-20.5 per share

Offer Price PLN 20.5 per share

Offer Size PLN 7.6 billion (US$ 2.3


Pre Offer Post Offer

Shareholders Polish Treasury 100.0% 52%

Employees 0.0 10%

Free Float 0.0 38%

Tranche Sizes Polish retail: 42%

Polish institutions: 35%

International institutions: 23%

Listing Warsaw Stock Exchange (No GDRs)

Future Capital Holdings- case


The price band for Future Capital Holdings' (FCH) IPO was fixed at Rs.700-765. The IPO
launched in mid-January. The Future Capital IPO is expected to mop up nearly Rs.490
crore from the market. The subscription for the issue began on January 11 and closed on
January 16. The Future Capital Holdings offered 10.16% of its equity through the IPO.
FCH had filed the red herring prospect with the Securities and Exchange Board of India
(SEBI) in September 2007, and had received the regulator's approval in January 2008.
Currently the promoters' holding in the company is around 83 %. After the issue the
promoters' stake in the company is expected to come down to 74.5 %. In fact, Pantaloon
Retail's 61 per cent holding in Future Capital will come down to 55 per cent

DLF launches India's biggest IPO

Real estate developer DLF Ltd. which is relaunching, June 11, an initial public share offer to
raise up to Rs. 9625 crore (approx. $2.4 billion), has fixed a price band of Rs. 500-550 per

During the issue that will remain open for public subscription from June 11 to June 14, DLF
will offer 175 million equity shares of Rs. 2 each through 100 percent book-build route. The
post-issue dilution would be over 10.27 percent. At Rs. 550 per share, its market cap would
rise to Rs. 93,720 crore (approx. $23 billion), making it among the top ten listed firms in the
country above India's top private bank ICICI Bank, valued at $20.6 billion; Wipro Ltd., $19.5
billion; and top lender State Bank of India, $17.1 billion.

DLF's public issue would be the largest IPO. The ONGC issue, in which government had
raised around Rs. 10,500 crore (approx. $2.6 billion) was an offer for sale. DLF, according
to AC Nelson report, is the largest real estate development company in India in terms of
residential, commercial and retail area developed. It has persence in all verticals of real
estate including Special Economic Zones (SEZs). It has currently 46 million sq ft under
development in various projects and a massive land bank of over 10,200 acre.

Advanta India IPO

Announcement / Companies & Industry April 03, 2007

MUMBAI, April 3, 2007: Advanta India Limited (the “Company”), an international
agronomic seed company with principal operations in India, Australia, Thailand and
Argentina, and a subsidiary of United Phosphorus Limited, has fixed the Issue Price for its
initial public offering of 3,380,000 Equity Shares of Rs 10 for cash at a premium that was
decided through the 100% Book-Building Process at Rs 640 per equity share (the “Issue”).
The Price Band for the Issue was fixed between Rs 600 and Rs 650 per equity share.

The subscription to the Issue closed on March 30, 2007, and the Issue was subscribed 3.98
times. The Issue received good response from Qualified Institutional Buyers (“QIB”) and the
QIB portion was subscribed 6.47 times withover 1.31 crore shares bid against reserve
portion of 20.28 lakh shares.

The shares are proposed to be listed on the National Stock Exchange and the Bombay Stock
Exchange Limited.

Headquartered in Bangalore, Advanta India Limited is a subsidiary of United Phosphorus

Ltd., one of the leading generic agrochemical companies in the world with operations in the
United States, Australia, China, Latin America and Europe. The Company, including its
operating subsidiaries, is engaged in the research, production and sales of a range of hybrid
seeds for cereals and oilseed crops. It is a global leader in technical plant breeding and in
the application of biotechnology to develop new hybrids and varieties of field crops and
broad acre vegetable seed products.

The Book Running Lead Managers to the Issue are YES Bank Limited, UBS Securities India
Private Limited and SSKI Corporate Finance Private Limited.

Avon Weighing Systems IPO

June 16th, 2008 — IPO, IPO Subscription

Avon Weighing Systems IPO received an overwhelming response from the investors as the
issue was subscribed by over 45 times. This is after a long time that a fixed price Public
issue has hit the markets and people have shown good interest by oversubscribing the issue
by 44 times. Avon Weighing IPO subscription started on 9th June, 2007 with a public issue
over 1.37 crore equity shares priced at Rs. 10 each closed today for subscription.

Avon Weighing IPO is proposed to be listed on the BSE and the Book Running Lead Manager
to the issue is Keynote Corporate Services. Datamatics Financial Services Limited is the
Registrar to the issue.

Reliance Power Limited

Type Public company

Founded 2007
Headquarters Mumbai, India
Key people Anil Ambani, Founder and Chairman
Industry Electricity generation
Website http://www.reliancepower.co.in/

Reliance Power Limited, a part of the Reliance Anil Dhirubhai Ambani Group, was
established to develop, construct and operate power projects in the domestic and
international markets. Reliance Energy Limited, an Indian private sector power utility
company along with the Anil Dhirubhai Ambani Group promotes Reliance Power.

Along with its subsidiaries, it is presently developing 13 medium and large-sized power
projects with a combined planned installed capacity of 28,200

Initial public offering and controversies

On January 15, 2008, the company attracted $27.5 billion of bids on the first day of its
initial public offering (IPO), equivalent to 10.5 times the stock on offer, thereby, creating
India's IPO record. The upper cut off price for the bid was Rs. 450. The proposed IPO was to
fund the development of its six power projects across the country whose completion dates
are scheduled from December 2009 to March 2014.

A media report suggested that, if the company’s stock price were to cross Rs. 650-700, Anil
Ambani would go past L. N. Mittal to become the richest Indian. "It is a reflection of world
community in the future of India... Investors seem to be confident in the future of Indian
economy," Indian Finance Minister, P. Chidambaram told the media about the IPO.

The Securities and Exchange Board of India, which is an organization that regulates the
activity in the Indian stock market, placed some restrictions based on a complaint about the
formulation of the IPO. The complaint also resulted in a public interest litigation being filed
against the company. However, the Supreme Court of India passed a ruling that the IPO
would go ahead even if any order is passed by any Indian court against the venture.

Reliance Power debuted on the stock markets on February 11, 2008. However, the markets
were still reeling after the January 2008 stock market volatility, and concerns over
speculation that the issue was overpriced sent the stock plummeting soon after its listing. At

markets. Reliance Energy Limited, an Indian private sector power utility company along with
the Anil Dhirubhai Ambani Group promotes Reliance Power.

Along with its subsidiaries, it is presently developing 13 medium and large-sized power
projects with a combined planned installed capacity of 28,200.


Offer document

Means Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a
rights issue which is filed Registrar of Companies (ROC) and Stock Exchanges. An offer
document covers all the relevant information to help an investor to make his/her investment

Draft Offer document

Means the offer document in draft stage. The draft offer documents are filed with SEBI,
atleast 21 days prior to the filing of the Offer Document with ROC/ SEs. SEBI may specifies
changes, if any, in the draft Offer Document and the issuer or the Lead Merchant banker
shall carry out such changes in the draft offer document before filing the Offer Document
with ROC/SEs. The Draft Offer document is available on the SEBI website for public
comments for a period of 21 days from the filing of the Draft Offer Document with

Red Herring Prospectus

It is a prospectus which does not have details of either price or number of shares being
offered or the amount of issue. This means that in case price is not disclosed, the number of
shares and the upper and lower price bands are disclosed. On the other hand, an issuer can
state the issue size and the number of shares are determined later. An RHP for and FPO can
be filed with the ROC without the price band and the issuer, in such a case will notify the
floor price or a price band by way of an advertisement one day prior to the opening of the
issue. In the case of book-built issues, it is a process of price discovery and the price cannot
be determined until the bidding process is completed. Hence, such details are not shown in
the Red Herring prospectus filed with ROC in terms of the provisions of the Companies Act.
Only on completion of the bidding process, the details of the final price are included in the
offer document. The offer document filed thereafter with ROC is called a prospectus.

Abridged Prospectus

Means the memorandum as prescribed in Form 2A under sub-section (3) of section 56 of the
Companies Act, 1956. It contains all the salient features of a prospectus. It accompanies the
application form of public issues.

Letter of offer

Means the offer document prepared by company for its rights issue and which is filed with
the Stock Exchanges. The letter of offer contains all the disclosures as required in term of
SEBI(DIP) guidelines and enable shareholder in making an informed decision.
Abridged letter of offer

Means the abridged version of the letter of offer. Listed company is required to send the
abridged letter of offer to each and every shareholder who is eligible for participating in the
rights issue along with the application form. A company is also required to send detailed
letter of offer upon request by any Shareholder.

Placement Document

Means document prepared by Merchant Banker for the purpose of Qualified Institutions
placement and contains all the relevant and material disclosures to enable QIBs to make an
informed decision


“Lock-in” indicates a freeze on the shares. SEBI (DIP) Guidelines have stipulated lock-in
requirements on shares of promoters mainly to ensure that the promoters or main persons
who are controlling the company, shall continue to hold some minimum percentage in the
company after the public issue. The requirements are detailed in Chapter IV of DIP
guidelines. There is lock-in on the shares held before IPO and also on shares acquired
through preferential allotment route. However there is no lock- in on shares/ securities
allotted through QIP route. The requirements are detailed in Chapter IV, Chapter XIII and
Chapter XIIIA of DIP guidelines.


The promoter has been defined as a person or persons who are in over-all control of the
company, who are instrumental in the formulation of a plan or programme pursuant to which
the securities are offered to the public and those named in the prospectus as promoters(s). It
may be noted that a director / officer of the issuer company or person, if they are acting as
such merely in their professional capacity are not be included in the definition of a promoter.
'Promoter Group' includes the promoter, an immediate relative of the promoter (i.e. any
spouse of that person, or any parent, brother, sister or child of the person or of the spouse).
In case promoter is a company, a subsidiary or holding company of that company; any
company in which the promoter holds 10% or more of the equity capital or which holds 10%
or more of the equity capital of the Promoter; any company in which a group of individuals
or companies or combinations thereof who holds 20% or more of the equity capital in that
company also holds 20% or more of the equity capital of the issuer company. In case the
promoter is an individual, any company in which 10% or more of the share capital is held by
the promoter or an immediate relative of the promoter' or a firm or HUF in which the
'Promoter' or any one or more of his immediate relative is a member; any company in which
a company specified in, holds 10% or more, of the share capital; any HUF or firm in which
the aggregate share of the promoter and his immediate relatives is equal to or more than
10% of the total, and all persons whose shareholding is aggregated for the purpose of
disclosing in the prospectus "shareholding of the promoter group".

Green-shoe Option

A Green Shoe option means an option of allocating shares in excess of the shares included in
the public issue and operating a post-listing price stabilizing mechanism for a period not
exceeding 30 days in accordance with the provisions of Chapter VIIIA of DIP Guidelines,
which is granted to a company to be exercised through a Stabilizing Agent. This is an
arrangement wherein the issue would be over allotted to the extent of a maximum of 15% of
the issue size. From an investor’s perspective, an issue with green shoe option provides more
probability of getting shares and also that post listing price may show relatively more
stability as compared to market.


A company proposing to issue capital to public through the on-line system of the stock
exchange for offer of securities can do so if it complies with the requirements under Chapter
11A of DIP Guidelines. The appointment of various intermediaries by the issuer includes a
prerequisite that such members/registrars have the required facilities to accommodate such
an online issue process.

Safety Net

Any safety net scheme or buy-back arrangements of the shares proposed in any public issue
shall be finalized by an issuer company with the lead merchant banker in advance and
disclosed in the prospectus. Such buy back or safety net arrangements shall be made
available only to all original resident individual allottees limited up to a maximum of 1000
shares per allottee and the offer is kept open for a period of 6 months from the last date of
dispatch of securities. The details regarding Safety Net are covered under Clause 8.18 of DIP

Syndicate Member

The Book Runner(s) may appoint those intermediaries who are registered with the Board and
who are permitted to carry on activity as an ‘Underwriter’ as syndicate members. The
syndicate members are mainly appointed to collect and entre the bid forms in a book built


Flipping is reselling a hot IPO stock in the first few days to earn a quick profit. This isn't
easy to do, and you'll be strongly discouraged by your brokerage. The reason behind this is
that companies want long-term investors who hold their stock, not traders. There are no laws
that prevent flipping, but your broker may blacklist you from future offerings

Institutional investors flip stocks all the time and make big money. The double standard exists
and there is nothing we can do about it because they have the buying power. Because of
flipping, it's a good rule not to buy shares of an IPO if you don't get in on the initial offering.
Many IPOs that have big gains on the first day will come back to earth as the institutions
take their profits.

Open book/closed book

Presently, in issues made through book building, Issuers and merchant bankers are required
to ensure online display of the demand and bids during the bidding period. This is the Open
book system of book building. Here, the investor can be guided by the movements of the bids
during the period in which the bid is kept open. Under closed book building, the book is not
made public and the bidders will have to take a call on the price at which they intend to make
a bid without having any information on the bids submitted by other bidders.

Hard underwriting

Hard underwriting is when an underwriter agrees to buy his commitment at its earliest stage.
The underwriter guarantees a fixed amount to the issuer from the issue. Thus, in case the
shares are not subscribed by investors, the issue is devolved on underwriters and they have to
bring in the amount by subscribing to the shares. The underwriter bears a risk which is much
higher in soft underwriting.

Soft underwriting

Soft underwriting is when an underwriter agrees to buy the shares at later stages as soon as
the pricing process is complete. He then, immediately places those shares with institutional
players. The risk faced by the underwriter as such is reduced to a small window of time. Also,
the soft underwriter has the option to invoke a force Majeure (acts of God) clause in case
there are certain factors beyond the control that can affect the underwriter’s ability to place
the shares with the buyers.
Cut Off Price

In Book building issue, the issuer is required to indicate either the price band or a floor price
in the red herring prospectus. The actual discovered issue price can be any price in the price
band or any price above the floor price. This issue price is called “Cut off price”. This is
decided by the issuer and LM after considering the book and investors’ appetite for the stock.
SEBI (DIP) guidelines permit only retail individual investors to have an option of applying at
cut off price.

Differential pricing

Pricing of an issue where one category is offered shares at a price different from the other
category is called differential pricing. In DIP Guidelines differential pricing is allowed only
if the securities to applicants in the firm allotment category is at a price higher than the price
at which the net offer to the public is made. The net offer to the public means the offer made
to the Indian public and does not include firm allotments or reservations or promoters’

Basis of Allocation/Basis of Allotment

After the closure of the issue, the bids received are aggregated under different categories i.e.,
firm allotment, Qualified Institutional Buyers (QIBs), Non-Institutional Buyers (NIBs),
Retail, etc. The oversubscription ratios are then calculated for each of the categories as
against the shares reserved for each of the categories in the offer document. Within each of
these categories, the bids are then segregated into different buckets based on the number of
shares applied for. The oversubscription ratio is then applied to the number of shares applied
for and the number of shares to be allotted for applicants in each of the buckets is
determined. Then, the number of successful allottees is determined. This process is followed
in case of proportionate allotment. In case of allotment for QIBs, it is subject to the
discretion of the post issue lead manager.
Qualified Institutional Buyer (QIBs)

Qualified Institutional Buyers are those institutional investors who are generally perceived to
possess expertise and the financial muscle to evaluate and invest in the capital markets.
In terms of clause 2.2.2B (v) of DIP Guidelines, a ‘Qualified Institutional

Buyer’ shall mean:

A . public financial institution as defined in section 4A of the Companies Act, 1956;
B . scheduled commercial banks;
C . mutual funds;
D . foreign institutional investor registered with SEBI;
E . multilateral and bilateral development financial institutions;
F . venture capital funds registered with SEBI.
G . foreign Venture capital investors registered with SEBI.
H . state Industrial Development Corporations.
I . insurance Companies registered with the Insurance Regulator and Development Authority
J . provident Funds with minimum corpus of Rs. 25 crores
K . pension Funds with minimum corpus of Rs. 25 crores)
These entities are not required to be registered with SEBI as QIBs. Any entities falling under
the categories specified above are considered as QIBs for the purpose of participating in
primary issuance process.

Application Supported by Blocked

Amount (ASBA)

Means an application for subscribing to an issue containing an authorization to block the

application money in a bank account.

ASBA Investor

Means an Investor who intends to apply through ASBA process and

a. is a “Resident Retail Individual Investor”
b. is bidding at cut-off, with single option as to the number of shares bid for;
c. is applying through blocking of funds in a bank account with the SCSB;
d. has agreed not to revise his/her bid;
e. is not bidding under any of the reserved categories.

Self Certified Syndicate Bank


It is a Banker to an Issue registered under SEBI (Bankers to an Issue) Regulations, 1994

which offers the service of making an Applications Supported by Blocked
Amount and recognized as such by the Board)

Minority IPO

An initial public offering in which a parent company spins off one of its subsidiaries or
divisions, but retains a majority stake in the company after issuance. This means that after the
public offering, the parent company will still have a controlling stake of the new public

The parent company may retain this majority stake forever or may slowly dissolve their
ownership over time. This type of IPO allows the company to raise funds, accessing the value of
the subsidiary, to fund its own operation or return value to shareholders.

Public Offering Price - POP

The price at which new issues are offered to the public by an underwriter.

When underwriters determine the public offering price, they look at a number of factors.
Some of these include the company's financial statements (how profitable it is), public trends,
growth rates and even investor confidence.

The pricing of an initial public offering (IPO) below its market value. When the offer price is
lower than the price of the first trade, the stock is considered to be underpriced. A stock is
usually only underpriced temporarily because the laws of supply and demand will eventually
drive it toward its intrinsic value.

It is believed that IPOs are often underpriced because of concerns relating to liquidity and
uncertainty about the level at which the stock will trade. The less liquid and less predictable
the shares are, the more underpriced they will have to be in order to compensate investors
for the risk they are taking. Because an IPO's issuer tends to know more about the value of
the shares than the investor, a company must underprice its stock to encourage investors to
participate in the IPO.

Direct Public Offering - DPO

When a company raises capital by marketing its shares directly to its own customers,
employees, suppliers, distributors and friends in the community. DPOs are an alternative to
underwritten public offerings by securities broker-dealer firms where a company's shares are
sold to the broker's customers and prospects.

Direct public offerings are considerably less expensive than traditional underwritten
offerings. Additionally, they don't have the restrictions that are usually associated with bank
and venture capital financing. On the other hand, a DPO will typically raise much less than
a traditional offering.

Quiet Period
In terms of an IPO, the period where an issuer is subject to a SEC ban on promotional
publicity. The quiet period usually lasts either 40 or 90 days from the IPO. In other words, If
you take your company public, you can't talk about your stock to anybody for 3 months.

There are two time windows commonly referred to as "quiet periods" during an IPO's
history. The first and the one linked above is the period of time following the filing of the
company's registration statement, but before SEC staff declare the registration statement
effective. During this time, issuers, company insiders, analysts, and other parties are legally
restricted in their ability to discuss or promote the upcoming IPO.

The other "quiet period" refers to a period of 40 calendar days following an IPO's first day
of public trading. During this time, insiders and any underwriters involved in the IPO, are
restricted from issuing any earnings forecasts or research reports for the company.
Regulatory changes enacted by the SEC as part of the Global Settlement, enlarged the "quiet
period" from 25 days to 40 days on July 9, 2002. When the quiet period is over, generally the
lead underwriters will initiate research coverage on the firm.

Further to this, the NASD and NYSE have approved a rule mandating a 10-day quiet period
after a secondary offering and a 15-day quiet period both before and after expiration of a
"lock-up agreement" for a securities offering.


Historically, IPOs both globally and in the US have been underpriced. The effect of initial
underpricing an IPO is to generate additional interest in the stock when it first becomes
publicly traded. This can lead to significant gains for investors who have been allocated
shares of the IPO at the offering price. However, underpricing an IPO results in "money left
on the table"—lost capital that could have been raised for the company had the stock been
offered at a higher price.

The danger of overpricing is also an important consideration. If a stock is offered to the

public at a higher price than the market will pay, the underwriters may have trouble meeting
their commitments to sell shares. Even if they sell all of the issued shares, if the stock falls in
value on the first day of trading, it may lose its marketability and hence even more of its

Investment banks, therefore, take many factors into consideration when pricing an IPO, and
attempt to reach an offering price that is low enough to stimulate interest in the stock, but
high enough to raise an adequate amount of capital for the company. The process of
determining an optimal price usually involves the underwriters ("syndicate") arranging
share purchase commitments from lead institutional investors.

Issue price

A company that is planning an IPO appoints lead managers to help it decide on an

appropriate price at which the shares should be issued. There are two ways in which the
price of an IPO can be determined:

• Either the company, with the help of its lead managers, fixes a price or
• The price is arrived at through the process of book building.

Note: Not all IPOs are eligible for delivery settlement through the DTC system, which would
then either require the physical delivery of the stock certificates to the clearing agent bank's
custodian, or a delivery versus payment ("DVP") arrangement with the selling group
brokerage firm. This information is not sufficient.

Who decides the price of an issue?

Indian primary market ushered in an era of free pricing in 1992. Following this, the
guidelines have provided that the issuer in consultation with Merchant Banker shall decide
the price. There is no price formula stipulated by SEBI. SEBI does not play any role in price
fixation. The company and merchant banker are however required to give full disclosures of
the parameters which they had considered while deciding the issue price. There are two types
of issues one where company and LM fix a price (called fixed price) and other, where the
company and LM stipulate a floor price or a price band and leave it to market forces to
determine the final price (price discovery through book building process).

a. What are Fixed Price offers?

An issuer company is allowed to freely price the issue. The basis of issue price is disclosed in
the offer document where the issuer discloses in detail about the qualitative and quantitative
factors justifying the issue price. The Issuer company can mention a price band of 20% (cap
in the price band should not be more than 20% of the floor price) in the Draft
offer documents filed with SEBI and actual price can be determined at a later date before
filing of the final offer document with SEBI/ROCs.

b. What does “price discovery through book building process”


“Book Building” means a process undertaken by which a demand for the securities proposed
to be issued by a body corporate is elicited and built up and the price for the securities is
assessed on the basis of the bids obtained for the quantum of securities offered for
subscription by the issuer. This method provides an opportunity to the market to discover
price for securities.

Book Building in Detail

How does Book Building work?

Book building is a process of price discovery. Hence, the Red Herring prospectus does not
contain a price. Instead, the red herring prospectus contains either the floor price of the
securities offered through it or a price band along with the range within which the bids can
move. The applicants bid for the shares quoting the price and the quantity that they would
like to bid at. Only the retail investors have the option of bidding at ‘cut-off’. After the
bidding process is complete, the ‘cut-off’ price is arrived at on the lines of Dutch auction.
The basis of Allotment (Refer Q. 15.j) is then finalized and letters allotment/refund is
undertaken. The final prospectus with all the details including the final issue price and the
issue size is filed with ROC, thus completing the issue process.

What is a price band?

The red herring prospectus may contain either the floor price for the securities or a price
band within which the investors can bid. The spread between the floor and the cap of the
price band shall not be more than 20%. In other words, it means that the cap should not be
more than 120% of the floor price. The price band can have a revision and such a revision in
the price band shall be widely disseminated by informing the stock exchanges, by issuing
press release and also indicating the change on the relevant website and the terminals of the
syndicate members. In case the price band is revised, the bidding period shall be extended
for a further period of three days, subject to the total bidding period not exceeding thirteen

Who decides the price band?

It may be understood that the regulatory mechanism does not play a role in setting the price
for issues. It is up to the company to decide on the price or the price band, in consultation
with Merchant Bankers. The basis of issue price is disclosed in the offer document. The
issuer is required to disclose in detail about the qualitative and quantitative factors justifying
the issue price.

What is firm allotment?

A company making an issue to public can reserve some shares on “allotment on firm basis”
for some categories as specified in DIP guidelines. Allotment on firm basis indicates that
allotment to the investor is on firm basis. DIP guidelines provide for maximum % of shares
which can be reserved on firm basis. The shares to be allotted on “firm allotment category”
can be issued at a price different from the price at which the net offer to the public is made
provided that the price at which the security is being offered to the applicants in firm
allotment category is higher than the price at which securities are offered to public.

What is reservation on competitive basis?

Reservation on Competitive Basis is when allotment of shares is made in proportion to the

shares applied for by the concerned reserved categories. Reservation on competitive basis
can be made in a public issue to the Employees of the company, Shareholders of the
promoting companies in the case of a new company and shareholders of group companies in
the case of an existing company, Indian Mutual Funds, Foreign Institutional Investors
(including non resident Indians and overseas corporate bodies), Indian and Multilateral
development Institutions and Scheduled Banks.

Preference while doing the allotment

There cannot be any discretion in the allotment process. Prior to the SEBI Circular on DIP
Guidelines dated September 19, 2005, the allotment to the Qualified Institutional Buyers
(QIBs) was on a discretionary basis. This however has been amended and all allottees are
allotted shares on a proportionate basis within their respective categories.

Who is eligible for reservation and how much?

In a book built issue allocation to Retail Individual Investors (RIIs), Non Institutional
Investors (NIIs) and Qualified Institutional Buyers (QIBs) is in the ratio of 35:15: 50
respectively. In case the book built issues are made pursuant to the requirement of mandatory
allocation of 60% to QIBs in terms of Rule 19(2)(b) of SCRR, the respective figures are 30%
for RIIs and 10% for NIIs. This is a transitory provision pending harmonization of the QIB
allocation in terms of the aforesaid Rule with that specified in the guidelines.

How is the Retail Investor defined as?

‘Retail individual investor’ means an investor who applies or bids for securities of or for a
value of not more than Rs.1,00,000.


An issuer company proposing to issue capital through book building
shall comply with the following:

75% Book Building Process

In an issue of securities to the public through a prospectus the option for 75% book building
shall be available to the issuer company subject to the following:

The option of book-building shall be available to all body corporate which are eligible to
make an issue of capital to the public.

The book-building facility shall be available as an alternative the company to the extent of
the percentage of the issue which can be reserved for firm allotment.

The copy of the draft prospectus filed with the Board may be circulated by the Book Runner
to the institutional buyers who are eligible for firm allotment and to the intermediaries
eligible to act as underwriters inviting offers for subscribing to the securities.

The draft prospectus to be circulated shall indicate the price band within which the securities
are being offered for subscription.

The Book Runner on receipt of the offers shall maintain a record of the names and number of
securities ordered and the price at which the institutional buyer or underwriter is willing to
subscribe to securities under the placement portion.

The underwriters shall maintain a record of the orders received by him for subscribing to the
issue out of the placement portion. Securities as well as the price at which the underwriter
shall subscribe to the securities. Provided that the Book Runner shall have an option of
requiring the
underwriters to the net offer to the public to pay in advance all monies required to be paid in
respect of their underwriting commitment.

(xv) On determination of the issue price within two day, thereafter the prospectus shall be
filed with the Registrar of Company.

(xvi) The issuer company shall open two different accounts for collection of application
moneys, one f or the private placement portion and the other for the public subscription

The Book Runner and other intermediaries associated with the book building process shall
maintain records of the book building process.

The Board shall have the right to inspect such records.

Offer to Public Through Book Building Process

An issuer company may, subject to the requirements make an issue of securities to the public
through a prospectus in the following manner

a. 100% of the net offer to the public through book building process, or

b. 75% of the net offer to the public through book building process and
25% at the price determined through book building.

Procedure for bidding:

The method and process of bidding shall be subject to the following:

Bid shall be open for at least three working days and not more than seven working days
which may be extended to a maximum of ten working days in case the price band is revised.

Bidding shall be permitted only if an electronically linked transparent facility is used.

Bidding Form
There shall be a standard bidding form to ensure uniformity in bidding and accuracy.

The bidding form shall contain information about the investor, the price and the number of
securities that the investor wishes to bid.
The bidding form before being issued to the bidder shall be serially
numbered at the bidding centres and date and time stamped.

Allocation / Allotment Procedure

In case an issuer company makes an issue of 100% of the net offer to public through 100%
book building process.
a) not less than 35% of the net offer to the public shall be available for allocation to retail
individual investors;
b) not less than 15% of the net offer to the public shall be available for allocation to non
institutional investors i.e. investors other than retail individual investors and Qualified
Institutional Buyers;

c) not more than 50% of the net offer to the public shall be available for allocation to
Qualified Institutional Buyers. Provided that 50% of net offer to public shall be mandatorily
allotted to the Qualified Institutional Buyers, in case the issuer company is making a public

Maintenance of Books and Records

(i) A final book of demand showing the result of the allocation process shall be maintained by
the book runner/s.

(ii) The Book Runner/s and other intermediaries in the book building process associated
shall maintain records of the book building prices.

(iii) The Board shall have the right to inspect the records, books and documents relating to
the Book building process and such person shall extend full co-operation.


A company proposing to issue capital to public through the on-line system of the stock
exchange for offer of securities shall comply with the requirements as contained in this
Chapter in addition to other requirements for public issues as given in these Guidelines,
wherever applicable.

Agreement with the Stock exchange.

The company shall enter into an agreement with the Stock Exchange(s) which have the
requisite system of on-line offer of securities.

The agreement mentioned in the above clause shall specify inter-alia, the rights, duties,
responsibilities and obligations of the company and stock exchange (s) inter se.
The agreement may also provide for a dispute resolution mechanism between the company
and the stock exchange.

Appointment of Brokers

The stock exchange, shall appoint brokers of the exchange, who are registered with
SEBI, for the purpose of accepting applications and placing orders with the company.

For the purposes of this Chapter, the brokers, so appointed accepting applications and
application monies, shall be considered as ‘collection centres’.

The broker/s so appointed, shall collect the money from his/their client
for every order placed by him/them and in case the client fails to pay
for shares allocated as per the Guidelines, the broker shall pay such

Appointment of Registrar to the Issue

The company shall appoint a Registrar to the Issue having electronic

connectivity with the Stock Exchange/s through which the securities
are offered under the system.

The company may apply for listing of its securities on an exchange
other than the exchange through which it offers its securities to public
through the on-line system.

Responsibility of the Lead Manager

The Lead Manger shall be responsible for co-ordination of all the
activities amongst various intermediaries connected in the issue /

The names of brokers appointed for the issue alongwith the names of
the other intermediaries, namely, Lead managers to the issue and
Registrars to the Issue shall be disclosed in the prospectus and
application form.

Mode of operation
The company shall, after filing the offer document with ROC and before
opening of the issue, make an issue advertisement in one English and
one Hindi daily with nation wide circulation, and one regional daily with
wide circulation at the place where the registered office of the issuer
company is situated.

Shelf prospectus shall apply to the issues of securities to be made
by public sector banks, scheduled commercial banks and public
financial institutions.

The provisions of these guidelines relating to public issues shall apply in respect of such

Role of intermediaries

a. Who are the intermediaries in an issue?

Merchant Bankers to the issue or Book Running Lead Managers (BRLM), syndicate
members, Registrars to the issue, Bankers to the issue, Auditors of the company,
Underwriters to the issue, Solicitors, etc. are the intermediaries to an issue. The issuer
discloses the addresses, telephone/fax numbers and email addresses of these intermediaries.
In addition to this, the issuer also discloses the details of the compliance officer appointed by
the company for the purpose of the issue.

b. Who is eligible to be a BRLM?

A Merchant banker possessing a valid SEBI registration in accordance with the SEBI
(Merchant Bankers) Regulations, 1992 is eligible to act as a Book Running Lead Manager to
an issue.

c. What is the role of a Lead Manager? (pre and post issue)

In the pre-issue process, the Lead Manager (LM) takes up the due diligence of company’s
operations/ management/ business plans/ legal etc. Other activities of the LM include
drafting and design of Offer documents, Prospectus, statutory advertisements and
memorandum containing salient features of the Prospectus. The BRLMs shall ensure
compliance with stipulated requirements and completion of prescribed formalities with the
Stock Exchanges, ROC and SEBI including finalisation of Prospectus and ROC filing.
Appointment of other intermediaries viz., Registrar(s), Printers, Advertising Agency and
Bankers to the Offer is also included in the pre-issue processes. The LM also draws up the
various marketing strategies for the issue. The post issue activities including management of
escrow accounts, coordinate non-institutional allocation, intimation of allocation and
dispatch of refunds to bidders etc are performed by the LM. The post Offer activities for the
Offer will involve essential follow-up steps, which include the finalization of trading and
dealing of instruments and dispatch of certificates and demat of delivery of shares, with the
various agencies connected with the work such as the Registrar(s) to the Offer and Bankers
to the Offer and the bank handling refund business. The merchant banker shall be
responsible for ensuring that these agencies fulfill their functions and enable it to discharge
this responsibility through suitable agreements with the Company. A merchant banker is
required to do the necessary due diligence in case of QIP mechanism.

d. What is the role of a registrar?

The Registrar finalizes the list of eligible allottees after deleting the invalid applications and
ensures that the corporate action for crediting of shares to the demat accounts of the
applicants is done and the dispatch of refund orders to those applicable are sent. The Lead
manager coordinates with the Registrar to ensure follow up so that that the flow of
applications from collecting bank branches, processing of the applications and other matters
till the basis of allotment is finalized, dispatch security certificates and refund orders
completed and securities listed.

e. What is the role of bankers to the issue?

Bankers to the issue, as the name suggests, carries out all the activities of ensuring that the
funds are collected and transferred to the Escrow accounts. The Lead Merchant Banker shall
ensure that Bankers to the Issue are appointed in all the mandatory collection centers as
specified in DIP Guidelines. The LM also ensures follow-up with bankers to the issue
to get quick estimates of collection and advising the issuer about closure of the issue, based
on the correct figures.

f. Question on Due diligence

The Lead Managers state that they have examined various documents including those
relating to litigation like commercial disputes, patent disputes, disputes with collaborators
etc. and other materials in connection with the finalization of the offer document pertaining
to the said issue; and on the basis of such examination and the discussions with the
Company, its Directors and other officers, other agencies, independent verification of the
statements concerning the objects of the issue, projected profitability, price justification, etc.,
they state that they have ensured that they are in compliance with SEBI, the Government and
any other competent authority in this behalf.

The Underwriting Process

Getting a piece of a hot IPO is very difficult, if not impossible. To understand why, we need to
know how an IPO is done, a process known as underwriting.

 When a company wants to go public, the first thing it does is hire an investment bank. A
company could theoretically sell its shares on its own, but realistically, an investment
bank is required - it's just the way Wall Street works. Underwriting is the process of
raising money by either debt or equity (in this case we are referring to equity). You can
think of underwriters as middlemen between companies and the investing public. The
biggest underwriters are Goldman Sachs, Merrill Lynch, Credit Suisse First Boston,
Lehman Brothers and Morgan Stanley.

 The company and the investment bank will first meet to negotiate the deal. Items usually
discussed include the amount of money a company will raise, the type of securities to be
issued and all the details in the underwriting agreement. The deal can be structured in a
variety of ways.
For example, in a firm commitment, the underwriter guarantees that a certain amount will
be raised by buying the entire offer and then reselling to the public. In a best efforts
agreement, however, the underwriter sells securities for the company but doesn't guarantee
the amount raised. Also, investment banks are hesitant to shoulder all the risk of an offering.
Instead, they form a syndicate of underwriters. One underwriter leads the syndicate and the
others sell a part of the issue.

 Once all sides agree to a deal, the investment bank puts together a registration statement
to be filed with the SEC. This document contains information about the offering as well
as company info such as financial statements, management background, any legal
problems, where the money is to be used and insider holdings.

 The SEC then requires a cooling off period, in which they investigate and make sure all
material information has been disclosed.

 Once the SEC approves the offering, a date (the effective date) is set when the stock will
be offered to the public. During the cooling off period the underwriter puts together what
is known as the red herring. This is an initial prospectus containing all the information
about the company except for the offer price and the effective date, which aren't known at
that time. With the red herring in hand, the underwriter and company attempt to hype and
build up interest for the issue. They go on a road show - also known as the "dog and pony
show" - where the big institutional investors are courted. As the effective date
approaches, the underwriter and company sit down and decide on the price. This isn't an
easy decision: it depends on the company, the success of the road show and, most
importantly, current market conditions. Of course, it's in both parties' interest to get as
much as possible. Finally, the securities are sold on the stock market and the money is
collected from investors
Guide to understand an Offer

This section basically tries to tell the reader about the structure of presentation of the content
in the Offer Document. This is with a view to help the reader navigate through the content of
an offer document.

A. Cover Page

The Cover Page of the offer document covers full contact details of the issuer company, lead
managers and registrars, the nature, number, price and amount of instruments offered and
issue size, and the particulars regarding listing. Other details such as Credit Rating, IPO
Grading, if opted for, risks in relation to the first issue, etc are disclosed if applicable.

B. Risk Factors

Here, the issuer’s management gives its view on the Internal and external risks faced by the
company. Here, the company also makes a note on the forward looking statements. This
information is disclosed in the initial pages of the document and it is also clearly disclosed in
the abridged prospectus. It is generally advised that the investors should go through all the
risk factors of the company before making an investment decision.

C. Introduction

The introduction covers a summary of the industry and business of the issuer company, the
offering details in brief, summary of consolidated financial, operating and other data.
General Information about the company, the merchant bankers and their responsibilities, the
details of brokers/syndicate members to the Issue, credit rating (in case of debt issue),
debenture trustees (in case of debt issue), monitoring agency, book building process in brief
and details of underwriting Agreements are given here. Important details of capital structure,
objects of the offering, funds requirement, funding plan, schedule of implementation, funds
deployed, sources of financing of funds already deployed, sources of financing for the
balance fund requirement, interim use of funds, basic terms of issue, basis for issue price, tax
benefits are covered.

D. About us

This presents a review of on the details of the business of the company, business strategy,
competitive strengths, insurance, industry-regulation (if applicable), history and corporate
structure, main objects, subsidiary details, management and board of directors,
compensation, corporate governance, related party transactions, exchange rates, currency of
presentation dividend policy and management's discussion and analysis of financial
condition and results of operations are given.

E. Financial Statements

Financial statement, changes in accounting policies in the last three years and differences
between the accounting policies and the Indian Accounting Policies (if the Company has
presented its Financial Statements also as per Either US GAAP/IAS are presented.

F. Legal and other information

Outstanding litigations and material developments, litigations involving the company and its
subsidiaries, promoters and group companies are disclosed. Also material developments
since the last balance sheet date, government approvals/licensing arrangements, investment
approvals (FIPB/RBI etc.), all government and other approvals, technical approvals,
indebtedness, etc. are disclosed.
G. Other regulatory and statutory disclosures

Under this head, the following information is covered: authority for the Issue, prohibition by
SEBI, eligibility of the company to enter the capital market, disclaimer clause, disclaimer in
respect of jurisdiction, distribution of information to investors, disclaimer clause of the stock
exchanges, listing, impersonation, minimum subscription, letters of allotment or refund
orders, consents, expert opinion, changes in the auditors in the last 3 years, expenses of the
issue, fees payable to the lead managers, fees payable to the issue management team, fees
payable to the registrars, underwriting commission, brokerage and selling commission,
previous rights and public issues, previous issues for cash, issues otherwise than for cash,
outstanding debentures or bonds, outstanding preference shares, commission and brokerage
on, previous issues, capitalization of reserves or profits, option to subscribe in the issue,
purchase of property, revaluation of assets, classes of shares, stock market data for equity,
shares of the company, promise vis-à-vis performance in the past issues and mechanism for
redressal of investor grievances.

H. Offering information

Under this head, the following information is covered: Terms of the Issue, ranking of equity
shares, mode of payment of dividend, face value and issue price, rights of the equity
shareholder, market lot, nomination facility to investor, issue procedure, book building
procedure if applicable, bid form, who can bid, maximum and minimum bid size, bidding
process, bidding bids at different price levels, escrow mechanism, terms of payment and
payment into the escrow collection account, electronic registration of bids, build up of the
book and revision of bids, price discovery and allocation, signing of underwriting agreement
and filing of prospectus with SEBI/ROC, announcement of statutory advertisement, issuance
of confirmation of allocation note("can") and allotment in the issue, designated date, general
instructions, instructions for completing the bid form, payment instructions, submission of
bid form, other instructions, disposal of application and application moneys, , interest on
refund of excess bid amount, basis of allotment or allocation, method of proportionate
allotment, dispatch of refund orders, communications, undertaking by the company,
utilization of issue proceeds, restrictions on foreign ownership of Indian securities, etc.,

I. Other Information

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

Resource mobilization in primary

Resource mobilization in private placement market
Any company making an initial public offer of equity share or any other security convertible
at a later date into equity shares and proposing to list them on the Over The Counter
Exchange of India (OTCEI) shall comply with all the requirements specified in these
- Eligibility norms
- Any company making an initial public offer of equity share or any other security
convertible at a later date into equity shares and proposing to list them on the OTCEI, is
exempted from the eligibility norms specified in Clause 2.2 of Chapter II of these guidelines
subject to its fulfilling the following besides the listing criteria laid down by the

i. it is sponsored by a member of the OTCEI and;
ii. has appointed at least two market makers (one compulsory and one additional market
Any offer for sale of equity share or any other security convertible at a later date into equity
shares resulting out of a Bought out Deal (BOD) registered with the OTCEI is exempted from
the eligibility norms specified in Clause 2.2 of Chapter II of these guidelines subject to the
fulfillment of the listing criteria laid down by the OTCEI.
Provided that the issuer company which has made issue of capital under Clause above, shall
not delist its securities from OTCEI for a minimum period of three years from the date of
admission to dealing of such securities on OTCEI..

Pricing Norms

- Any offer for sale of equity share or any other security convertible at a later date into equity
shares resulting out of a Bought out Deal (BOD) registered with OTCEI is exempted from the
pricing norms specified in Clause 3.2 of Chapter III of these guidelines subject to the
following conditions:
i) The promoters after such issue shall retain at least 20% of the total issued capital with the
lock-in of three years from the date of the allotment of securities in the proposed issue; and
ii) At least two market makers (One Compulsory and one additional market maker) are
appointed in accordance with the Market Making guidelines stipulated by the OTCEI.


In case of securities proposed to be listed on OTCEI, for the purpose of Clause (6.12.1) of
Chapter VI of these guidelines, projections based on the appraisal done by the sponsor who
undertakes to do market making activity in the securities offered in the proposed issue can be
included in the offer document subject to compliance with other
conditions contained in the said clause.
A listed company proposing to issue bonus shares shall comply with the following:
(a) No company shall, pending conversion of FCDs/PCDs, issue any shares by way of bonus
unless similar benefit is extended to the holders of such FCDs/PCDs, through reservation of
shares in proportion to such convertible part of FCDs or PCDs.
(b) The shares so reserved may be issued at the time of conversion(s) of such debentures on
the same terms on which the bonus issues were made. The bonus issue shall be made out of
free reserves built out of the genuine profits or share premium collected in cash only.

The Company

(a) has not defaulted in payment of interest or principal in respect of fixed deposits and
interest on existing debentures or principal on redemption thereof and
(b) has sufficient reason to believe that it has not defaulted in respect of the payment of
statutory dues of the employees such as contribution to provident fund, gratuity, bonus etc.
Board of Directors must implement the proposal within a period of six months from the date
of such approval and shall not have the option of changing the decision.

(i) The Articles of Association of the company shall contain a provision for capitalisation of
reserves, etc.
(ii) If there is no such provision in the Articles the company shall pass a Resolution at its
general body meeting making provisions in the Articles of Associations for capitalisation.


Consequent to the issue of Bonus shares if the subscribed and paid-up capital exceed the
authorised share capital, a Resolution shall be passed by the company at its general body
meeting for increasing the authorised Capital.

A certificate duly signed by the issuer company and counter signed by statutory auditor or by
Company Secretary in practice to the effect that the provision of clause.












Since the primary market has continued to remain dormant, SEBI considered on priority
basis the recommendations made by the “Informal Group on Primary Market”, and accepted
most of the recommendations, including the following, which were accepted for immediate
(i) Primary issues to be compulsorily made through the depository mode after a specified
(ii) 100 per cent book building in respect of issues of Rs. 25 crore and above.
(iii) Reduction in the minimum number of mandatory collection centres in respect
of issues above Rs. 10 crore to 4 metropolitan cities plus the place having the regional stock

• In order to facilitate flow of funds to the infrastructure sector, the SEBI Board decided
to grant specific relaxations to public issues by infrastructure companies. These
relaxations would be applicable to infrastructure companies as defined under Section
10 (23G) of the Income Tax Act, 1961 subject to the condition that their projects are
appraised by any Development Financial Institution (DFI) or Infrastructure
Development Finance Company (IDFC) or Infrastructure Leasing and Financial
Services (IL&FS). Further, the projects must also have a participation of at least 5
per cent of the project cost in debt and/or equity by the appraising institution. Subject
to these conditions, the infrastructure company can avail of specified
relaxations/exemptions from the existing requirements as per SEBI's Disclosure and
Investor Protection Guidelines

Relaxations to Public Issues

Infrastructure Companies
• Exemption from the requirement of making a minimum public offer of 25 per cent of
securities and also from the requirement stipulating 5 shareholders per Rs. 1 lakh of
• Exemption from the minimum subscription of 90 per cent provided disclosure is made
about the alternate source of funding considered by the company, in the event of
under-subscription in the public issue.

• Permission to freely price the offerings in the domestic market provided the promotor
companies along with equipment suppliers and other strategic investors subscribe to
50 per cent of the equity at the same/higher price as/than the price offered to the
public. However, adequate disclosures on justification for the pricing need to be made
in the offer documents.

• Permission to keep the isues open for 21 days to enable the companies to mobilise

• Exemption from the requirement to create and maintain a debenture redemption

reserve (DRR) in case of debenture issues.

Primary Markets Reforms 1997-98

• Entry barrier for unlisted companies modified as dividend payment in immediately
preceding 3 years.
• A listed company required to meet the entry norm only if the post-issue net worth
becomes more than five times the pre-issue net worth.

• Companies required to make their partly paid-up shares fully paid up or forfeit the
same, before making a public/rights issue.
• Unlisted company allowed to freely price its securities provided it has shown net
profit in the immediately preceding 3 years subject to its fulfilling the existing
disclosure requirements.

• The Promoters’ contribution for public issues made uniform at 20% irrespective of
the issue size.

• Written consent from share holders in regard to lock-in made compulsory for
securities to be offered for promoter’s contribution.

• Appointment of Registrar to an issue for rights issues made mandatory.

• A provision made regarding disclosure of the share holding of the promoters whose
names figure in the paragraph on “Promoters and their background” in the offer
• The SEBI (Registrars to an Issue and Share Transfer Agents) Rules and Regulations
1993 have been amended to provide for an arm’s length relationship between the
Issuer and the Registrar to the Issue. It has now been stipulated that no Registrar to
an Issue can act as such for any issue of securities made by any body corporate, if the
Registrar to the issue and the Issuer company are associates. With a view to
facilitating raising of funds by infrastructure projects, SEBI has allowed debt
instruments to be listed on the Stock Exchanges without prior listing of equity.
Corporates with infrastructure projects and Municipal Corporations to be exempted
from the requirements of Rule 19(2b) of Securities (Contract) Regulation Rules to
facilitate public offer and listing of its pure debt instruments as well as debt
instruments fully or partly convertible into equity without the requirement of prior
listing of equity but subject to conditions like investment grade rating.

• Only body corporates to be allowed to function as Merchant Bankers.

• Multiple categories of merchant bankers to be abolished and there shall be only one
entity viz., Merchant Banker. Presently, the Merchant Banker allowed to perform
underwriting activity but required to seek separate registration to function as a
Portfolio Manager under the SEBI (Portfolio Manager) Rules and Regulations, 1993.

• Merchant Bankers to be prohibited from carrying on fund based activities other than
those related exclusively to the capital market; the activities undertaken by NBFCs
such as accepting deposits, leasing, bill discounting, etc. not to be allowed to be
undertaken by a merchant banker; the existing NBFCs performing merchant banking
activities to be given suitable time to restructure their activities.