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Merchant Banking MERCHANT BANKING AN INTRODUCTION Organizations raise

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Merchant Banking MERCHANT BANKING AN INTRODUCTION Organizations raise Powered By Docstoc
					                              MERCHANT BANKING


AN INTRODUCTION


       Organizations raise capital to fund their expansion plans, working capital requirements
etc. by issuing securities in the primary market. Merchant Bankers act as intermediaries between
the issuers of capital and the ultimate investor, who purchases these securities. Merchant
Banking can be broadly defined as financial intermediation that matches the entities that need
capital and those that have capital. Merchant bankers facilitate the flow of capital in the market.


       Merchant banking activities, especially those covering issue and underwriting of shares
and debentures are regulated by the Merchant Bankers Regulations given by the Securities and
Exchange Board of India (SEBI).The Securities and Exchange Board of India (Merchant
Banker) Rules 1992 defines a Merchant Banker as:


       “A person who is engaged in the business of issue management either by making
arrangements regarding selling, buying, or subscribing to securities as Manager, Consultant,
Advisor or rendering corporate advisory services in relation to such issue management.”


       The merchant banker plays a vital role in channelizing the financial surplus of the society
into productive investment avenues. The merchant banker has a fiduciary role in relation to the
investors. He plays the lead role in the issue of a security. He is the leader among the
intermediaries associated with the issue. He is required to guide and co-ordinate the activities of
the Registrar to the issue, Bankers to the issue, Advertising Agency, Printers, Underwriters,
Brokers, etc.


       The merchant banker has to ensure the compliance of all the laws and regulations
governing the securities market from time to time by RBI, SEBI, Companies Act, Stock
Exchanges Listing requirements etc. He may also be called upon to assist the statutory
authorities in developing a regulatory framework for orderly growth of capital markets.



                                            -1-
                                        SEBI

                Regulatory Framework           Compliance

                  Capital                                   Returns
    ISSUER                                                               INVESTOR
                                   INVESTMENT
                                     BANKER
                  Market                                    Protection
                  Information

                            Guidance           Co-ordination

                                  INTERMEDIARIES

               RELATIONSHIPS OF THE MERCHANT BANKER




 Management of Debt and Equity Offerings: This is the traditional operation for most of
   the merchant bankers in India. The role of the merchant banker is dynamic as he has to
   capitalize on the opportunities available in the market. He has to assist his corporate clients in
   raising funds from the market. He may also be required to counsel them on various issues
   that affect their finances. The main area of this role includes:
      Instrument designing
      Pricing of the issue
      Registration of offer document
      Underwriting support
      Marketing of the issue
      Allotment and refund
      Listing on stock exchanges


 Placement and Distribution: The distribution network of the merchant banker can be
   classified as institutional and retail. The network of institutional investors consists of Mutual
   Funds, Foreign Institutional Investors, Banks, Domestic and Multinational Financial
   Institutions, Private Equity Funds, Pension Funds etc. The size of this network represents the


                                            -2-
   wholesale reach of the merchant banker. The retail distribution reach depends upon the
   networking with the investors. Many merchant bankers have associate firms which are
   brokers on the stock exchange. These brokers appoint sub-brokers at various geographical
   locations to service both the primary market and secondary market needs of the local
   investors. The distribution network can be used to distribute various financial products like
   equity shares, debt instruments, mutual fund products, fixed deposits, insurance products,
   commercial paper etc.


 Rights Issues of Shares: If a public company wants to increase its subscribed capital by
   allotment of further shares, such further shares should be first offered to the existing
   shareholders, in proportion to the capital paid up on the shares held by them at the date of
   such offer. The shareholders to whom such an offer is made are not under any legal
   obligation to accept the offer. On the other hand, they have a right to renounce the offer in
   favour of any person. Shares so offered by a public company to its existing shareholders are
   called rights shares. For rights issue by listed companies exceeding Rs. 50 lakhs, the issue
   should be managed by a SEBI – registered merchant banker.


 Corporate Advisory Services: Merchant banker‟s offer customized solutions to the
   financial problems of their clients. One of the key areas for the advisory role is financial
   structuring. The process includes determining the appropriate level of gearing and advising
   the company whether to leverage, de-leverage or maintain its current debt-equity levels. The
   company‟s working capital practices are studied and alternative working capital policies
   suggested. The merchant banker may also explore the possibility of refinancing high cost
   funds with alternative cheaper funds. Another area of advice is rehabilitation and turnaround
   management. In case of sick units, they may design a revival package in co-ordination with
   the banks and financial institutions.


 Project Advisory: Merchant bankers are sometimes associated with their clients from the
   early stage of their project. They assist companies in conceptualizing the project idea when it
   is in a nebulous stage. Once the project is conceptualized, they carry out the initial feasibility
   studies to examine its viability. They also help in the preparation of the detailed project
   report and offer project appraisal services to the clients.


                                            -3-
 Loan Syndication: Merchant bankers arrange to tie up loans for their clients. The first step
   involves analyzing the client‟s cash flow patterns so that terms of borrowings can be defined
   to suit the cash flow requirements. The merchant banker then prepares the loan
   memorandum. The loan memorandum is then circulated to various banks and financial
   institutions and they are invited to participate in the syndicate. The banks then indicate the
   amount of exposure they are willing to take and the interest rates thereon. The terms are
   further negotiated and fine-tuned to match the requirements of both the parties. The final
   allocation is done to the various members of the syndicate. The merchant banker also helps
   the clients in loan documentation procedures.


 Venture Capital and Mezzanine Financing: The venture capital business has emerged
   from a fragmented industry dominated by wealthy individuals/families to an increasing
   institutionalized sector. The size of the deals has increased and it is possible for even start –
   up companies to raise huge capital from venture firms. The number of Venture Capital firms
   has significantly rise and several industry specific venture funds have been set up. The
   association of a merchant banker to handle the entire deal flow is becoming increasingly
   imperative. Merchant bankers play several roles such as preliminary screening of the
   company, assistance to venture investors in conducting their due diligence exercise, valuation
   of the company, etc.
       Mezzanine Financing refers to the late stage financing. At this stage a company is usually
   profitable and has a business track record. The company needs fresh induction of capital to
   finance its growth plans. However the conditions in the IPO market may not be favorable to
   make an offering. The state of the IPO markets affects both, the availability of capital and
   pricing. In such a scenario, mezzanine financing acts as a viable funding alternative. This
   round of financing is usually in lieu of going public. Some Venture funds and Private equity
   funds offer mezzanine finance to potential IPO companies. These funds act as warehouses for
   investments and later divest their stake through public offering.


 Mergers and Acquisitions: Mergers and Acquisitions are becoming increasingly significant
   in terms of services offered by merchant bankers in India. The industry is passing through a
   transitionary phase of restructuring. Companies are engaged in efforts to consolidate
   themselves in areas of their core competencies and to divest those businesses where they do
   not have any competitive advantage. Merchant bankers have been quick to capitalize on these
                                           -4-
   opportunities. The role of a merchant banker is that of a financial engineer rather than that of
   a business consultant. Most merchant bankers try to identify targets which will help their
   clients to achieve specified objectives.


 Takeover Defense: With the high level of hostile takeover activity in recent years, takeover
   defense, both pre-emptive and defensive, has become an important product for merchant
   bankers. It is difficult to prevent a takeover by a determined, well financed bidder who is
   prepared to make a cash tender offer for its shares. However, measures can be taken to
   reduce the likelihood of unfair takeover bids, to slowdown the takeover process (giving the
   target company more time to negotiate or seek out alternatives).




                                              -5-
CATEGORIES OF MERCHANT BANKERS


        Initially Merchant Bankers were classified into 4 categories with regard to their nature
and range of activities and their responsibilities to SEBI, investors and issuers of securities. Since
September 1997 only a single category exists. The requirements are as under:
Net Worth: minimum net worth of Rs. 5 crore.
Registration Fee: registration fees of Rs. 5 lakhs is to be paid at the time of grant of certificate
by the board and thereafter a renewal fee of Rs.2.5 lakhs every three years from the fourth year
from the date of initial registration.


Public Issue/ Rights Issue SEBI Filling Fees:
 For a period of one year from the commencement of the Securities and Exchange Board of
    India (Merchant Bankers) (Second Amendment, dated May 03, 2006) Regulations, 2006
    A. Public Issues
                       Size of the Issue                               Fees
     Less than or equal to Rs. 2 crores                                       Rs. 10,000
     Greater than Rs. 2 crores                                  0.05 % of the issue size


    B. Rights Issues
                       Size of the Issue                               Fees
     Less than or equal to Rs. 4 crores                                       Rs. 10,000
     Greater than Rs. 4 crores but less than Rs.1000           0.025 % of the issue size
     crores
     Greater than Rs. 1000 crores                                         Rs. 25,00,000


 After the expiry of one year from the commencement of the Securities and Exchange Board
    of India (Merchant Bankers) (Second Amendment dated May 03, 2006) Regulations, 2006
    A: Public Issues
                       Size of the Issue                               Fees
     Less than or equal to Rs. 1 crore                                        Rs. 10,000
     Greater than Rs. 1 crore                                   0.10 % of the issue size


                                            -6-
B: Rights Issues
                   Size of the Issue                       Fees
   Less than or equal to Rs. 2 crores                             Rs. 10,000
   Greater than Rs. 2 crores but less than Rs. 500   0.05 % of the issue size
   crores
   Greater than Rs. 500 crores                                Rs. 25,00,000




                                        -7-
DIFFERENT KINDS OF ISSUES

          Primarily, issues can be classified as a Public, Rights or Preferential issue (also known as
Private Placements). While the public and rights issues involve a detailed procedure, private
placements are relatively simpler. The classification of issues is illustrated below:




                                                ISSUES



                  PUBLIC                       RIGHTS                    PREFERENTIAL




     INITIAL PUBLIC OFFERING                    FURTHER PUBLIC OFFERING




Initial Public Offering - the issuer makes an offer to new investors to enter into its shareholding
family.


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


Further Public Offering - an already listed company makes either a fresh issue of securities to
the public or an offer of sale to the public through an offer document.


Preferential Issue - an issue of shares or convertible securities by listed companies to a select
group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor
a public issue.




                                              -8-
                    INITIAL PUBLIC OFFERING (IPO)
AN INTRODUCTION


        The first public offer of securities by a company after its inception is known as Initial
Public Offering (IPO). Going public (or participating in an “Initial Public Offering” or IPO) is a
process by which a business owned by one or several individuals is converted in to a business
owned by many. It involves the offering of part ownership of the company to the public through
the sale of equity securities (stock).
        IPO dilutes the ownership stake and diffuses corporate control as it provides ownership to
investors in the form of equity shares. It can be used as exit strategy and finance strategy.
        As a financing strategy, its main purpose is to raise funds for the company. When used as
an exit strategy, existing investors can offload equity holdings to the public.


REASONS FOR GOING PUBLIC
 To raise funds for financing capital expenditure needs like expansion, diversification etc.
 To finance increased working capital requirement.
 As an exit route for existing investors.
 For debt financing.


BENEFITS OF GOING PUBLIC
 Access to Capital: The principal motivation for going public is to have access to larger
    capital. A company that does not tap the public financial market may find it difficult to grow
    beyond a certain point for want of capital.
 Stockholder Diversification: As a company grows and becomes more valuable, its founders
    often have most of its wealth tied up in the company. By selling some of their stock in a
    public offering, the founders can diversify their holdings and thereby reduce somewhat the
    risk of their personal portfolios.
 Easier to raise new capital: If a privately held company wants to raise capital, it must either
    go to its existing shareholders or look around for other investors. This can often be a difficult
    and time consuming process. By going public, it becomes easier to find new investors for the
    business.

                                             -9-
 Enhances liquidity: The stock of a closely held firm is not liquid. If one of the holders wants
   to sell some of his shares, it is hard to find potential buyers, especially if the sum involved is
   large. Even if a buyer is located there is no established price at which to complete the
   transaction. These problems are easily overcome in a publicly owned company.
 Establishes value for the firm: This can be very useful in attracting key employees with
   stock options because the underlying stock have a market value and a market for them to be
   traded that allows for liquidity for them.
 Image: The reputation and visibility of the company increases. It helps to increase company
   and personal prestige.
 Signals from the Market: Stock prices represent useful information to the managers.
   Everyday, investors render judgment about the prospects of the firm. Although the market
   may not be perfect, it provides a useful reality check.
 Other Advantages:
      Additional incentive for employees in the form of the companies stocks. This also helps
       to attract potential employees.
      Window of opportunity.
      It commands better valuation of the company.
      Better situated for making acquisitions.


DISADVANTAGES / COSTS OF GOING PUBLIC
A public company, of course is not an unmixed blessing. There are several disadvantages of
going public.
 Disclosure: A public company is required to disclose information to investors and others.
   Hence, it cannot maintain a strict veil of secrecy over its expansion plans and product
   market strategies as its non-public counterpart can do. Management may not like the idea
   of reporting operating data, because such data will then be available to competitors.
 Dilution: When a company issues shares to public, existing shareholders suffer dilution of
   their proportionate ownership in the firm.
 Loss of Flexibility: The affairs of a public company are subject to fairly comprehensive
   regulation. Hence, when a non-public company is transformed into a public company there is
   some loss of flexibility.
 Accountability: Understandably, the degree of accountability of a public company is
                                           - 10 -
   higher. It has to explain a lot to its investors.
 Self dealings: The owner managers of closely held companies have many opportunities for
   self-transactions. Although legal they may not want to disclose these to the public.
 Inactive market - low price: If a firm is very small and its shares are not traded frequently,
   then its stock will not really be liquid and the market price may not be truly representative of
   the stocks value.
 Control: Owning less than 50% of the shares could lead to a loss of control in the
   management.
 Costs: Apart from the cost of issuing securities, a public company has to incur recurring
   costs for providing investors with periodical reports, holding shareholder meetings,
   communicating with institutional investors and financial analysts, and fulfilling various
   statutory obligations, like filing quarterly reports with the Securities and Exchange Board of
   India. These reports can be costly especially for small firms
 Other Disadvantages:
      The profit earned by the company should be shared with its investors in the form of
       dividend.
      An IPO is a costly affair. Around 15-20% of the amount realized is spent on raising the
       same.
      A substantial amount of time and effort has to be invested.




                                            - 11 -
TRENDS IN IPO’S


   Let us have a look at the general development of the primary markets over the years. There
have been many changes in the regulation of primary market in order to save investors from
fraudulent companies. The most path breaking development in the primary market regulation has
been the abolition of CCI (Controller of Capital Issues). The aim was to give the freedom to the
companies to decide on the pricing of the issue and this was supposed to bring about a self-
managing culture in the financial system. But the move was hopelessly misused in the years of
1994-1995 and many companies came up with issues at sky-high prices and the investors lost
heavily. That phase took a heavy toll on the investor‟s sentiment and the result was the reduction
in the amount of money raised through IPO route.


 1993-96: With controls over pricing gone, companies rushed to tap the primary market and
   they did so with remarkable ease, thanks to overly optimistic merchant bankers and gullible
   investors. Around Rs 20,000 crores were raised during this period. Some of the prominent
   money mobilizers were the so called „sunrise sectors’ - polyester, textiles, finance,
   aquaculture. The euphoria spilled over to the secondary market. But reality soon set in.
   Issuers soon failed to meet projections, many disappeared or sank. Result: the small investor
   deserted both markets-till the next boom.


 1998-2000: As the great Indian software story played itself out, software stocks led a bull
   charge on the bourses. The primary market caught up, and issues from the software markets
   flooded the market. With big IPO‟s from companies in the ICE (Information Technology,
   Communication and Entertainment) sectors, the average issue size shot up from Rs.5 crore in
   1994-96 to Rs.30 crore. But gradually, hype took over and valuations reached absurd levels.
   Both markets tanked.


 2001-2002: There were hardly any IPO‟s and those who ventured got a lukewarm response.
   A depressed secondary market had ensured that the doors for the primary market remained
   closed for the entire FY 2001-2002.There were hardly any IPO‟s in FY 2001-2002.



                                          - 12 -
 2002: This time the primary market boom promised to be different. To start with, the cream
   of corporate India was queuing up, which ensured quality. In this fragile market, issue
   pricing remains conservative, which potentially meant listing gains. This rekindled the
   interest of small investors in stocks and drew them back into the capital market.


 2003: Even as the secondary market moved into top gear in 2003 the primary market too
   scripted its own revival story, buoyed largely by the Maruti IPO which was oversubscribed
   six and a half times. In 2003 almost all primary issues did well on domestic bourses after
   listing, prompting retail investors to flock to IPO‟s. All IPO‟s, including Indraprastha Gas
   and TV Today Network which was oversubscribed 51 times showed the growing appetite for
   primary issues.
       After the phenomenal success of Maruti issue, a number of companies approached the
   capital market and a lot more are waiting for SEBI approval.
       SEBI has taken enough care to force companies to make relevant disclosures for the
   investor to judge the quality of new issues. Besides, the companies themselves have been
   careful not to over-price the shares. On the contrary, some of the companies have deliberately
   under-priced them to let the issue get over-subscribed and to let the investor share some of
   the capital gains after listing.


PERFORMANCE ANALYSIS OF RECENT IPO’S:
IPO‟s in India dried up all of a sudden. Adding to the woes of promoters is poor Industrial
Production numbers which led to a massive sell-off on the exchanges. Out of the approximately
95 companies that raised money from Retail Investors in India by IPO, 60% are quoting below
their issue price. Remember, these are the same issues where retailers flocked by looking at FII
subscription. However, FIIs have also turned speculators in the primary market and have sold
aggressively.


 Edelweiss IPO subscribed 109 times: The initial public offer of brokerage firm Edelweiss
   Capital got subscribed over 109 times on the final day of its public issue. The issue received
   bids for 92.08 crore shares as against 83.86 lakh shares on offer, according to the latest data
   available with the bourses. The portion reserved for Qualified Institutional Buyers (QIBs)
   was subscribed by over 20 times with bids for 10.21 crore shares, majority of which came

                                          - 13 -
   from FIIs, the data reveals. The domestic financial institutions, such as banks, mutual funds
   and insurance companies who also belong to the QIB category, submitted bids for 1.51 lakh.
   The portion for retail investors has received bids for about 1.43 times, while the shares
   reserved for employees have been oversubscribed 5.5 times.


   The other non-institutional investors, which includes corporates and non-retail individual.
   Investors, segment has also been oversubscribed with bids for 10.82 times of the total shares
   reserved for them. The price band for the issue has been fixed between Rs 725-825 per share.
   The book building process began on November 15. Kotak Mahindra Capital, Citigroup and
   Lehman Brothers were the book running lead managers to the issue.


 Rural Electrification Corporation (REC) IPO subscribed 1.62 times: The initial public
   offering (IPO) of Rural Electrification Corporation (REC) of 156.12 million shares in the
   price band of Rs 90-105 per share has been subscribed 1.62 times. According to data
   available with NSE, as of 1200 hrs, the company has received bids for 253.16 million shares
   with the maximum bids - 162.22 million shares - at the lower end of the price band at Rs 90
   per share.


   The company has received bids for 90.94 million shares at the upper end of the price band at
   Rs 105 per share. The IPO of V-Guard Industries of eight million shares in the price band of
   Rs 80-85 per share has been subscribed 98% as of the second day of the issue. The company
   has received bids for 7.87 million shares with the maximum bids being made at Rs 85 per
   share.


 Reliance Power IPO subscribed 72 times: Investors bid for as many as 72 times the
   number of shares that Reliance Power offered for subscription under its initial public offering
   (IPO). They have put in bids for over 1,654.8 crore shares as against the 22.8 crore shares on
   offer. The issue has already pulled in roughly Rs 60,000 crore by way of application money.
   The IPO received maximum response on the last day compared to the first three days, with
   the subscription count racing from 24 times on day three to over 72 times by on last day.




                                          - 14 -
  In terms of number of applications Reliance Power IPO has set a new record. It received ever
   nearly 31 lakh applications by the end of day three, the highest ever, according to the sources
   in the merchant banking industry handling the IPO. Among mega issues the Reliance Power
   IPO has thus set a new benchmark in fund mobilisation.


   The DLF IPO, which raised Rs 9,188 crore in 2007, received subscriptions only about three
   times the 17.5 crore shares on offer and the retail portion of the issue barely managed to get
   full subscription. Cairn India, which raised Rs 5,260 crore through the IPO in 2006 by
   offering 32.88 crore shares, again barely managed to get subscribed by 1.3 times under
   volatile market conditions. Reliance Petroleum IPO received a similar response with the Rs
   2,700-crore issue getting subscribed 52 times for the 45 crore shares on offer and received a
   commitment of Rs 1,45,080 crore.


 DLF IPO subscribed two times: The DLF initial public offer (IPO) received subscription of
   1.96 times at the close of the third day. It received total bids for 34.34 crore equity shares
   against the offer of 17.5 crore shares. The realty giant hopes to raise up to Rs 9,625 crore
   from the issue. According to the information available with stock exchanges, the QIB portion
   was subscribed 3.17 times, mostly due to response from foreign institutional investors (FIIs).
   FIIs have submitted bids for over 30 crore shares out of the total bids for 33 crore shares
   received in this segment.


  The bids from domestic financial institutions were for just 2.4 crore shares, while those from
   mutual funds were for about 51 lakh shares. The IPO has about 5.2 crore shares reserved for
   retail individuals. Market experts believe that the retail bids usually pick up on the last day of
   the book building process. The non-institutional investors segment, which includes
   corporates and non-retail individual investors, was subscribed 0.04 times.




                                           - 15 -
ELIGIBILITY NORMS FOR AN IPO


       SEBI has laid down eligibility norms for entities accessing the primary market through
public issues. The main entry norms for companies making a public issue (IPO or FPO) are
summarized as under:


 Entry Norm I (EN I):
An unlisted company may make an initial public offering (IPO) of equity shares or any other
security which may be converted into or exchanged with equity shares at a later date, only if it
meets all the following conditions:
       a) Net Tangible Assets of at least Rs. 3 crores for 3 full years.
       b) Distributable profits in at least three years
       c) Net worth of at least Rs. 1 crore in three years
       d) If change in name, at least 50% revenue for preceding 1 year should be from the new
           activity
       e) The aggregate of the proposed issue and all previous issues made in the same
           financial year in terms of size (i.e., offer through offer document + firm allotment +
           promoters‟ contribution through the offer document), does not exceed five times its
           pre-issue net worth as per the audited balance sheet of the last financial year.


A listed company shall be eligible to make a public issue of equity shares or any other security
which may be converted into or exchanged with equity shares at a later date, only if it meets all
the following conditions:
       a) If change in name, at least 50% revenue for preceding 1 year should be from the new
           activity
       b) The aggregate of the proposed issue and all previous issues made in the same
           financial year in terms of size (i.e., offer through offer document + firm allotment +
           promoters‟ contribution through the offer document), does not exceed five times its
           pre-issue net worth as per the audited balance sheet of the last financial year.




                                           - 16 -
To provide sufficient flexibility and also to ensure that genuine companies do not suffer on
account of rigidity of the parameters, SEBI has provided two other alternative routes to company
not satisfying any of the above conditions, for accessing the primary Market, as under:


 Entry Norm II (EN II):
       a) Issue shall be through book building route, with at least 50% to be mandatory allotted
           to the Qualified Institutional Buyers (QIBs).
       b) The minimum post-issue face value capital shall be Rs.10 crore or there shall be a
           compulsory market-making for at least 2 years.

QIBs mean public financial institutions as defined under section 4A of the Companies Act,
scheduled commercial banks, mutual funds, foreign institutional investors registered with
SEBI, multilateral and bilateral development financial institutions, venture capital funds and
foreign venture capital funds registered with SEBI, insurance companies registered with the
Insurance Regulatory and Development Authority, provident funds and pension funds with a
minimum amount of Rs 25 crore and State Industrial Development Corporations.


OR


 Entry Norm III (EN III):
       a) The “project” is appraised and participated to the extent of 15% by Financial
           Institutions/ Scheduled Commercial Banks of which at least 10% comes from the
           appraisers.
       b) The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a
           compulsory market-making for at least 2 years.

In addition to satisfying the aforesaid eligibility norms, the company shall also satisfy the criteria
of having at least 1000 prospective allotees in its issue.


 Exemption from Eligibility Norms
The provisions shall not be applicable in case of:




                                            - 17 -
a) A banking company including a Local Area Bank (set up under sub-section (c) of
   Section 5 of the Banking Regulation Act, 1949 and which has received license from
   the Reserve Bank of India.
b) A corresponding new bank set up under the Banking Companies (Acquisition and
   Transfer of Undertaking) Act, 1970 Banking Companies (Acquisition and Transfer of
   Undertaking) Act, 1980, State Bank of India Act 1955 and State Bank of India
   (Subsidiary Banks) Act.
c) An infrastructure company whose project has been appraised by a Public Financial
   Institution (PFI) or Infrastructure Development Finance Corporation (IDFC) or
   Infrastructure Leasing and Financing Services Ltd. (IL&FS) or a bank which was
   earlier a PFI not less than 5% of the project cost is financed by a PFI / IDFC / IL&FS
   or severally, irrespective of whether they appraise the project or not, by way of loan
   or subscription to equity or a combination of both.
d) Rights issue by a listed company.




                                  - 18 -
SEBI GUIDELINES


       SEBI has come up with Investor Protection and Disclosure Norms for companies raising
funds through IPO. These rules are amended from time to time to meet with the requirement of
changing market conditions.

DISCLOSURE NORMS
 Risk Factor: The Company/Merchant Banker must specify the major risk factor in the front
   page of the offer document.


 Issuers Responsibility: It is the absolute responsibility of the issuer company about the true
   and correct information in the prospectus. Merchant Banker is also responsible for giving
   true and correct information regarding all the documents such as material contracts, capital
   structure, appointment of intermediaries and other matters.


 Listing Arrangement: It must clearly state that once the issue is subscribed where the shares
   will be listed for trading.


 Disclosure Clause: It is compulsory to mention this clause to distinctly inform the investors
   that though the prospectus is submitted and approved by SEBI it is not responsible for the
   financial soundness of the IPO.


 Merchant Bankers Responsibility-Disclaimer Clause: The Lead Manager has to certify
   that disclosures made in the prospectus are generally adequate and are in conformity with the
   SEBI Guidelines.


 Capital Structure: The Company must give complete information about the Authorized
   capital, Subscribed Capital with top ten shareholders holding pattern, Promoters interest and
   their subscription pattern etc. Also about the reservation in the present issue for Promoters,
   Foreign Institutional Investor‟s (FII‟s), Collaborators, NRI‟s etc. Then the net public offer
   must be stated very clearly.


                                         - 19 -
 Auditors Report: The Auditors have to clearly mention about the past performances, Cost of
   Project, Means of Finance, Receipt of Funds and its usage prior to the IPO. Auditor must also
   give the tax-benefit note for the company and investors.


INVESTOR PROTECTION NORMS
 Pricing of Issue: The pricing of all the allocations for the present issue must follow the bid
   system. The reservation must be disclosed for different categories of investors and their
   pricing must be specified clearly.

 Minimum Subscription: If the company does not receive minimum subscription of 90% of
   subscription in each category of offer and if the issue is not underwritten or the underwriters
   are unable to meet their obligation, then fund so collected must be refunded back to all
   applicants.

 Basis of Allotment: In case of full subscription of the issue, the allotment must be made with
   the full consultation of the concerned stock exchange and the company must be impartial in
   allotting the shares.

 Allotment/Refund: Once the allotment is finalized, the refund of the excess money must be
   made within the specified time limits otherwise the company must pay interest on delayed
   refund orders.

 Dematerialization of Shares: As per the provisions of the Depositories Act, 1996, and
   SEBI Rules, now all IPO will be in Demat form only.

 Listing of Shares: It is mandatory on the part of the promoters that once the IPO is fully
   subscribed, and then the underlying shares must be listed on the stock exchange. This
   provides market and exit routes to the investors.


OTHER SEBI GUIDELINES
 Promoters Contribution and Lock - in:
   1. The promoters‟ contribution in case of public issues by unlisted companies should not be
       less than 20 percent of the post-issue capital.




                                           - 20 -
   2. In case of public issues by listed companies, promoters should contribute to the extent of
      20 percent of the proposed issue or should ensure post issue holding to an extent of 20
      percent of the post issue capital.
   3. In case of composite issues of a listed company, the promoters‟ contribution shall at the
      option of the promoter(s) be either 20% of the proposed public issue or 20% of the post-issue
      capital. Rights issue component of the composite issue shall be excluded while calculating
      the post-issue capital.
   4. For any issue of capital to the public the minimum promoter‟s contribution is locked in
      for a period of 3 years. If the promoters contribution exceeds the required minimum
      contribution, such excess is locked in for a period of 1 year.


 Securities Ineligible for Computation of Promoter’s Contribution:
   1. Where the promoters of any company making an issue of securities have acquired equity
      during the preceding three years, before filing the offer documents with SEBI, such
      equity shall not be considered for computation of promoters contribution if it is;
          a) acquired for consideration other than cash and revaluation of assets or
              capitalisation of intangible assets is involved in such transactions; or
          b) resulting from a bonus issue, out of revaluation reserves or reserves without
              accrual of cash resources.
   2. In case of public issue by unlisted companies, securities which have been issued to the
      promoters during the preceding one year, at a price lower than the price at which equity is
      being offered to public shall not be eligible for computation of promoters‟ contribution.
   3. No securities forming part of promoters‟ contribution shall consist of any private
      placement made by solicitation of subscription from unrelated persons either directly or
      through any intermediary.
   4. The securities for which a specific written consent has not been obtained from the
      respective shareholders for inclusion of their subscription in the minimum promoters‟
      contribution subject to lock-in shall not be eligible for promoters‟ contribution.


 Collection Centers for Receiving Applications:
   The minimum number of collection centres for an issue of capital shall be:
   1. The four metropolitan centres situated at Mumbai, Delhi, Calcutta and Chennai

                                           - 21 -
   2. All such centres where the stock exchanges are located in the region in which the
      registered office of the company is situated.
   The issuer company shall be free to appoint as many collection centres as it may deem fit in
   addition to the above minimum requirement.


 Underwriting:
   The issuers have the option to have a public issue underwritten by the underwriter.
   1. In respect of every underwritten issue, the lead merchant bankers shall accept a minimum
      underwriting obligation of 5% of the total underwriting commitment or Rs.25 lakhs
      whichever is less.
   2. The outstanding underwriting commitments of a merchant banker shall not exceed 20
      times its net worth at any point of time.


 Timeframes for Issue and Post-Issue Formalities:
   1. The minimum period for which the public issue is to be kept open is 3 working days and
      the maximum for which it can be kept open is 10 working days.
   2. A public issue is affected if the issue is able to procure 90% of the total issue size within
      60 days from the date of the earliest closure of the public issue.
   3. In case of oversubscription the company may have he right to retain the excess
      application money and allot shares more than the proposed issue, which is referred to as
      “green-shoe option”.
   4. Allotment has to be made within 30 days of the closure of the Public issue and 42 days in
      case of Rights issue.
   5. All the listing formalities of a Public Issue have to be completed within 7 days from the
      date of finalization of the basis for allotment.


 Dispatch of Refund Order:
   1. Refund orders have to be dispatched within 30 days of the closure of the issue.
   2. Refunds of excess application money i.e. non-allotted shares have to be made within 30
      days of the closure of the issue.




                                           - 22 -
 Other Regulations:
   1. Underwriting is not mandatory but 90% subscription is mandatory for each issue of
      capital to public unless it is disinvestment where it is not applicable.
   2. If the issue is undersubscribed then the collected amount should be returned back.
   3. If the issue size is more than Rs 500 crores, voluntary disclosures should be made
      regarding the deployment of funds and an adequate monitoring mechanism put in place to
      ensure compliance.
   4. There should not be any outstanding warrants for financial instruments of any other
      nature, at the time of the IPO.
   5. In the event of the initial public offer being at a premium and if the rights under warrants
      or other instruments have been exercised within 12 months prior to such offer, the
      resultant shares will be not taken into account for reckoning the minimum promoters
      contribution further, the same will also be subject to lock-in.
   6. Code of advertisement as specified by SEBI should be adhered to.
   7. Draft prospectus submitted to SEBI should also be submitted simultaneously to all stock
      exchanges where it is proposed to be listed.
   8. No company shall make any further issue of capital in any manner whether by way of
      issue of bonus shares, preferential allotment, rights issue or public issue or otherwise,
      during the period commencing from the submission of offer document to the Board on
      behalf of the company for public or rights issues, till the securities referred to in the said
      offer document have been listed or application moneys refunded on account of non-
      listing or under subscription, etc. unless full disclosures regarding the total capital to be
      raised from such further issues are made in the draft offer document.




                                          - 23 -
PRINCIPAL STEPS IN AN IPO


           The issue of securities to members of the public through a prospectus involves a fairly
elaborate process, the principal steps of which are as follows.

1. The board of directors approves the proposal to raise capital from the public and authorizes the
  managing director (or a board committee) to do all the tasks relating to the public issue.

2. The company convenes a meeting to seek the approval of shareholders and the share holders pass a
  special resolution under section 81(1A) of the Companies Act authorizing the company to make the
  public issue.

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

4. The LM carries out due diligence to check all relevant information, documents, and certificates for the
  issue.

5. The company, advised by the LM, appoints various intermediaries such as the registrar to the issue,
  the bankers to the issue, the printers, and advertiser.

6. The LM draws up the issue budget, keeping in mind the guidelines issued by the Ministry of Finance
  on issue expenses, and the company approves the same (The main components of the issue expenses
  are fees for LM, underwriters, registrar and bankers, brokerage, postage, stationery, issue marketing
  expenses, etc.)

7. The LM prepares the Draft Red Herring Prospectus (DRHP) in consultation with management and
  seeks the approval of the Board.

8. The LM files the DRHP approved by the board, with SEBI for its observation along with a soft copy.
  SEBI places the same on its website for comments from the public.

9. The company makes listing application to all the stock exchanges where the shares are proposed to be
  listed along with copies of the draft red herring prospectus. The DRHP is also hosted on the websites
  of the LM and the underwriters.

10. The company enters into a tripartite agreement with the registrar and all the depositories for
  providing the facility of offering the shares in a dematerialized mode.
                                                 - 24 -
11. If the issue is proposed to be underwritten (it is optional in a retail issue and mandatory
 in a book built issue to the extent of the net public offer), the LM makes underwriting
 arrangements.
12. Within 21 days, SEBI makes its observations on the DRHP. The stock exchanges also suggest
 changes, if any. The company carries out the modifications to the satisfaction of these authorities.

13. The company files the prospectus with the Registrar of Companies (ROC).

14. The LM and the company market the issue using a combination of press meetings, brokers'
 meetings, investors' meeting and so on.

15. The company releases a mandatory advertisement, called the 'announcement advertisement' 10 days
prior to the opening of the issue. This has to conform to Form 2A, also called the abridged prospectus.

16. The LM and the printer dispatch the application forms to all stock exchanges, SEBI; collection
 centres brokers, underwriters, and investor associations. Every application form is accompanied by the
 abridged prospectus.

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

18. After the issue is closed, the basis of allotment is finalized by the stock exchange, LM, and the
 registrar, in conformity with certain SEBI- prescribed rules.

19. The LM ensures that the demat credit or dispatch of share certificates and refund orders to the
 allotees is completed within two working days after the basis of allotment is finalized and the shares
 are listed within 7 days of the finalization of the basis of allotment.




                                               - 25 -
INTERMEDIARIES INVOLVED AND THEIR ROLES


       The process of IPO is highly complex and its success is extremely important for the
company. In this process it is important that all the intermediaries should work cohesively and
within a framework of law. Any serious error by any intermediary can affect the IPO.
The following are the important intermediaries involved in the process:


 MERCHANT BANKERS
   Eligibility criteria: SEBI issues an authorization letter to the finance companies, which are
   eligible to work as merchant bankers. The eligibility criteria depend on network and
   infrastructure of the company. The company should not be engaged in activities that are
   banned for merchant bankers by SEBI. SEBI issues authorization letter valid for 3 years and
   the company has to pay necessary fees. Such merchant banker can be appointed as lead
   manager for IPO.
   Functions: Merchant banker can work as lead manager, co-lead manager, investment banker,
   underwriter etc.
   Responsibility: Lead managers are fully responsible for the content and correctness of the
   prospectus. They must ensure the commencement to the completion of the IPO. Certain
   guidelines are laid down in section 30 of the SEBI act 1992 on the maximum limits of the
   intermediaries associated with the issue.


         Size of the Issue                     No of Lead Managers
          50 cr.                               2
         50-100 cr.                            3
         100-200 cr.                           4
         200-400 cr.                           5
         Above 400 cr.                         5 or more as agreed by SEBI


The number of co managers should not exceed the number of lead managers. There can be only 1
adviser to the issue. There is no limit on the number of underwriters.



                                           - 26 -
 BROKERS
  All the recognized stock exchange members are called brokers and thus any member of a
  recognized stock exchange can become a broker to the issue.
  The brokers can work as broker and underwriter or both. In India usually a broker not only
  does his normal broking business buying and selling securities for brokerage but also works
  as an underwriter. They can give underwriting commitment in accordance with their net
  worth. A broker offer marketing support, underwriting support, disseminates information to
  investors about the issue and distributes issues stationary at retail investor level. The brokers
  are governed by rules of SEBI and the respective stock exchange.
  The brokers are important for the success of the issue. The brokers appoint sub brokers who
  are in direct contact with the investors.


 UNDERWRITERS
  The underwriter is the principle player in the IPO providing the firm with-
  Reputation: As the underwriter is legally liable and because he has on going dealing with
  the customers to whom he sells shares. The underwriter puts his reputation on the line.
  Finding investors: The underwriter first puts together a syndicate of other underwriters to
  distribute the shares. The syndicate finds investors willing to put their money into the
  company. This has serious implications.
  Experience: The underwriter knows the detail of the process better than any other participant
  since issuing shares is one of their primary business functions. Underwriters are the ones who
  provide proper guidance.
  After market support: The underwriter protects investors and thus makes the offering more
  attractive. It is important for the firm to have a clear understanding with the underwriter
  exactly how much support he plans to provide if the IPO is not fully subscribed and
  accordingly his underwriting commission is fixed.
  Future services: A good relationship with an underwriter can save time and money in future
  dealings.
  Pre offering assistance: The underwriter will conduct road shows with the company‟s
  management distribute the prospectus and marketing of the underwriters directly generates
  talk to potential investors about appropriate pricing. Some part of the value that the potential

                                          - 27 -
  shareholders attach to shares. Underwriting involves a commitment from the underwriter to
  subscribe to the shares of a particular company to the extent it is under subscribed by the
  public or existing shareholders of the corporate. The fees for underwriter and broker are
  decided by the company within the maximum possible limit as fixed by the SEBI.


 BANKERS TO THE ISSUE
  Any scheduled bank registered with SEBI can be appointed as the banker to the issue.
  Several commercial banks are working as bankers to the issue. They get fees on amount
  collected by them. There are no restrictions on the number of bankers to the issue. The main
  function of banker involves collection of duly filed application forms with money
  (cheque/drafts) maintains a daily report, transferring the proceeds to the share application
  money collected with the application forms to the registrar. The bank provides application
  forms to the investors. They accept duly filled forms with cheque/drafts. They prepare
  collection reports and transfer funds and applications to the company/registrar.


 REGISTRAR AND SHARE TRANSFER AGENTS
  Registration with SEBI is mandatory to take on responsibilities as a registrar or share transfer
  agent. The registrar provides administrative support to the issue process. Each agent is
  registered with SEBI. Hey have to maintain net worth and infrastructure criteria. They have
  to renew their License periodically. He collects all application from the bank and ensures
  reconciliation of funds and of application amount and participates in process of basis of
  allotment. If the IPO is oversubscribed they provide computerized program for allotment.
  They manage refund orders and allotment letters. They provide the final list of allotees to
  Lead Manager ROC and stock exchange. If the company wants they also manage post issue
  IPO functions relating to shareholders register for the company.


 DEPOSITORIES
  Since the year 2000, it has been made compulsory that all fresh issue of shares must be made
  only in the dematerialized format (DEMAT). The Depository institute issues unique number
  of every IPO or company, when shares are allotted to the company/registrar provides
  shareholders register to depository in electronic form. Thus automatically all shareholders get
  allotment in their DEMAT account.

                                         - 28 -
 LEGAL ADVISOR
   Normally the company for the purpose of IPO does this appointment. He is responsible legal
   compliance of IPO process. There are other intermediaries like Advertising Agents etc. but
   the company governs their role.



COST OF AN ISSUE
   The cost of public issue is normally between 8 and 12 percent depending on the size of the
issue and on the level of marketing efforts. The important expenses incurred for a public issue
are as follows:
 Underwriting expenses: The underwriting commission is fixed at 2.5 % of the nominal
   value (including premium, if any) of the equity capital being issued to public.
 Brokerage: Brokerage applicable to all types of public issues of industrial securities are
   fixed at 1.5% whether the issue is underwritten or not. The managing brokers (if any) can be
   paid a maximum remuneration of 0.5% of the nominal value of the capital being issued to
   public.
 Fees to the Managers to the Issues: The aggregate amount payable as fees to the managers
   to the issue was previously subject to certain limits. Presently, however, there is no
   restriction on the fee payable to the managers of the issue.
 Fees for Registrars to the Issue: The compensation to he registrars, typically based on a
   piece rate system, depends on the number of applications received, number of allotters, and
   the number of unsuccessful applicants.
 Printing Expenses: These relate to the printing of the prospectus, application forms,
   brochures, share certificate, allotment/refund letters, envelopes, etc.
 Postage Expenses: These pertain to the mailing of application forms, brochures, and
   prospectus to investors by ordinary post and the mailing of the allotment/refund letters and
   share certificates by register posts.
 Advertising and Publicity Expenses: These are incurred primarily towards statutory
   announcements, other advertisements, press conferences, and investor‟s conferences.

                                           - 29 -
 Listing Fees: This is the concerned fee payable to concerned stock exchange where the
   securities are listed. It consists of two components: initial listing fees and annual listing fees.
 Stamp Duty: This is the duty payable on share certificates issued by the company. As this is
   the state subject, it tends to vary from state to state.




                                             - 30 -
PRICING OF AN ISSUE


 Controller of Capital Issue: During the Controller of Capital Issue (CCI) regime the issues
   were priced by the company and approved by CCI. Generally the CCI was very conservative
   and hardly allowed premium issues.
 Arrival of SEBI: After the Arrival of SEBI free market policy is followed for pricing of
   issue. Merchant Bankers are responsible for justifying the premium. The company was
   allowed to give future profit projections. A company can issue shares to applicants in the
   firm allotment category at higher price than the price at which securities are offered to public.
   Further, an eligible company is free to make public/rights issue in any denomination
   determined by it in accordance with the Companies Act, 1956 and SEBI norms.
        An unlisted company eligible to make a public issue and desirous of getting its securities
   listed on a recognized stock exchange pursuant to a public issue, or listed company making a
   public issue may freely price its equity shares or any securities convertible at a later date into
   equity shares.


BASIS FOR ISSUE PRICE
1. The following information shall be disclosed:
   a) Earnings per share (EPS) i.e. pre-issue for the last three years(as adjusted for changes in
        capital);
   b) P/E Ratio pre-issue and comparison thereof with the industry P/E where available.
   c) Average return on net worth (RONW) in the last three years.
   d) Minimum return on increased net worth required for maintaining pre-issue EPS.
   e) Net Asset value per share on last Balance Sheet.
   f)   Net Asset Value per share after the issue and comparison thereof with the issue price.
   g) Comparison of all the accounting ratios of the issuer company as mentioned above with
        the industry average and with the accounting ratios of the peer group.
        Projected earnings shall not be used as a justification for the issue price in the offer
        document.
2. The issuer company and the lead merchant banker shall provide the accounting ratios as
   mentioned above to justify the issue price.

                                           - 31 -
3. In case of book built issues, the offer document shall state that the final price has been
   determined on the basis of the demand from the investors.


   Pricing is the most important and difficult aspect of an IPO. However in the present
   scenario most of the issues are priced by the book building method. Accurate pricing is
   essential for the success of an IPO.


   The following are the two types of issues:


 FIXED PRICE ISSUE
   In the fixed price issue, an issuer company is allowed to freely price the issue. The basis of
   issue price is disclosed in the offer document where the issuer discloses in detail about the
   qualitative and quantitative factors justifying the issue price.
   Suppose a company would like to come up with a fixed price public issue, the issuer
   company just needs to file the prospectus stating the number of shares, the price per share
   and the total issue size. Then the public bids at the price already determined by the issuer
   company and gets the allocation according to the quantity of bids and the availability of
   shares. Both the price of the shares and the number of shares to be issued remains fixed.


 BOOK BUILDING ISSUE
   SEBI guidelines defines Book Building as “a process undertaken by which a demand for the
   securities proposed to be issued by a body corporate is elicited and built up and the price for
   such securities is assessed for the determination of the quantum of such securities to be
   issued by means of a notice, circular, advertisement, document or information memoranda or
   offer document”.
   Book building is basically a process used in IPO for efficient price discovery. It is a
   mechanism where, during the period for which the IPO is open, bids are collected from
   investors at various prices, which are above or equal to the floor price. The offer price is
   determined after the bid closing date.
   As per SEBI guidelines, an issuer company can issue securities to the public through
   prospectus in the following manner:
          100 % of the net offer to the public through book building process.

                                            - 32 -
       75 % of the net offer through the book building process and 25 % through the price
        determined by the book building process.


PRICE BAND
       Issuer company can mention a price band of 20% (cap in the price band should not be
        more than 20% of the floor price) in the offer documents filed with SEBI and actual
        price can be determined at a later date before filing of the offer document with the
        Registrar of Companies(ROC).
       If the Board of Directors of the issuer company has been authorized to determine the
        offer price within a specified price band such price shall be determined by a
        Resolution to be passed by the Board of Directors.
       The Lead Merchant Bankers shall ensure that in case of the listed companies, a 48
        hours notice of the meeting of the Board of Directors for passing resolution for
        determination of price is given to the designated stock exchange.
       In case of public issue by listed company, issue price or price band may not be
        disclosed in the draft prospectus filed with SEBI.
       In case of a rights issue, issue price or price band may not be disclosed in the draft
        letter of offer filed with SEBI. The issue price may be determined anytime before
        fixation of the record date, in consultation with the designated stock exchange.
       The final offer document shall contain only one price and one set of financial
        projections, if applicable.




                                       - 33 -
THE PROCESS OF BOOK BUILDING
 The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'.
 The Issuer specifies the number of securities to be issued and the price band for orders.
 The Issuer also appoints syndicate members with whom orders can be placed by the
   investors.
 Investors place their order with a syndicate member who inputs the orders into the 'electronic
   book'. This process is called 'bidding' and is similar to open auction.
 A Book should remain open for a minimum of 5 days.
 Bids cannot be entered less than the floor price.
 Bids can be revised by the bidder before the issue closes.
 On the close of the book building period the 'book runner evaluates the bids on the basis of
   the evaluation criteria which may include –
          Price Aggression
          Investor quality
          Earliness of bids, etc.
 The book runner and the company conclude the final price at which it is willing to issue the
   stock and allocation of securities.
 Generally, the number of shares is fixed. The issue size gets frozen based on the price per
   share discovered through the book building process.
 Allocation of securities is made to the successful bidders.
 Book Building is a good concept and represents a capital market which is in the process of
   maturing.


PERSONS INVOLVED IN THE BOOK-BUILDING PROCESS
The principal intermediaries involved in the Book Building process are the company; Book
Running Lead Managers (BRLM) and syndicate members who are intermediaries registered with
SEBI and are eligible to act as underwriters. Syndicate members are appointed by the BRLM.




                                           - 34 -
HOW IS THE BOOK BUILT?
A company that is planning an initial public offer appoints a Merchant Banker as a book runner.
Initially, the company issues a draft prospectus which does not mention the price, but gives other
details about the company with regards to issue size, past history and future plans among other
mandatory disclosures. After the draft prospectus is filed with the SEBI, a particular period is
fixed as the bid period and the details of the issue are advertised. The book runner builds an
order book, that is, collates the bids from various investors, which shows the demand for the
shares of the company at various prices. Prospective investors can revise their bids at anytime
during the bid period that is, the quantity of shares or the bid price or any of the bid options.


BASIS OF DECIDING THE FINAL PRICE
On closure of the book, the quantum of shares ordered and the respective prices offered are
known. The price discovery is a function of demand at various prices, and involves negotiations
between those involved in the issue. The book runner and the company conclude the pricing and
decide the allocation to each syndicate member.


PAYMENT FOR THE SHARES
The bidder has to pay the maximum bid price at the time of bidding based on the highest bidding
option of the bidder. The bidder has the option to make different bids like quoting a lower price
for higher number of shares or a higher price for lower number of shares. The syndicate member
may waive the payment of bid price at the time of bidding. In such cases, the issue price may be
paid later to the syndicate member within four days of confirmation of allocation. Where a
bidder has been allocated lesser number of shares than he or she had bid for, the excess amount
paid on bidding, if any will be refunded to such bidder.


ADVANTAGE OF THE BOOK BUILDING PROCESS VERSUS THE NORMAL IPO
PROCESS
Unlike in Book Building, IPO‟s are usually marketed at a fixed price. Here the demand cannot be
anticipated by the merchant banker and only after the issue is over the response is known. In
book building, the demand for the share is known before the issue closes. The issue may be
deferred if the demand is less. This process allows for price and demand discovery. Also, the
cost of the public issue is reduced and so is the time taken to complete the entire process.

                                            - 35 -
Book Building Process v/s Fixed Price Process


    Features               Fixed Price Process                 Book Building Process
    Pricing         Price at which the Security is Price at which the Security will be
                    offered/ allotted is known in offered/ allotted is not known in
                    advance to the investor.              advance to the investor. Only an
                                                          indicative price range is known.
    Demand          Demand      for   the      securities Demand for the securities offered
                    offered is known only after the can be known everyday as the
                    closure of the issue.                 book is built.


ALLOTMENT PROCEDURE IN CASE OF 100% BOOK BUILDING
In case an issuer company makes an issue of 100% of the net offer to public through 100% book
building process:
a) Not less than 35% of the net offer to the public shall be available for allocation to retail
   individual investors;
b) Not less than 15% of the net offer to the public shall be available for allocation to non
   institutional investors i.e. investors other than retail individual investors and Qualified
   Institutional Buyers;
c) Not more than 50% of the net offer to the public shall be available for allocation to Qualified
   Institutional Buyers.


ALLOTMENT PROCEDURE IN CASE OF 75% BOOK BUILDING
In case an issuer company makes an issue of 75% of the net offer to public through book
building process and 25% at the price determined through book building –
a) In the book built portion, not less than 25% of the net offer to the public, shall be available
   for allocation to non Qualified Institutional Buyers and not more than 50% of the net offer to
   the public shall be available for allocation to Qualified Institutional Buyers.
b) The balance 25% of the net offer to the public, offered at a price determined through book
   building, shall be available only to retail individual investors who have either not participated
   or have not received any allocation, in the book built portion.


                                            - 36 -
MARKETING AND PROMOTION OF AN IPO

        The role of marketing, and particularly promotion, in the pricing and trading of Securities
is fairly limited.


PRELIMINARY REQUIREMENTS
The company has to complete all legal requirements, appoint all intermediaries and once they get
SEBI card (approval), the process of marketing of IPO can commence.


TIMING OF IPO
This the most important factor for the success of IPO. If secondary market is depressed, if there
is political unrest, if serious international problems are prevailing then it is considered to be
negative factors for timing of IPO‟s. If these factors are favorable then the Company must find
out about the timing of other prestigious IPO‟s. Normally in good times many companies are
crowding at the same time.


 A Question of Timing: Timing the issue is critical as it determines the success or failure of
    an issue to a great extent. During 1995-96, Primary Market boom, there was a period during
    which there were two to three issues in a day. This is a dangerous situation. The ideal time
    for marketing an issue is a boom in the Secondary Market, peaceful socio-political-economic
    environment and at least two days gap between two issues.


 The Effects of Marketing on IPO’s: A merchant banker‟s marketing campaign for an IPO
    is critical. This campaign, as much as anything that precedes or follows it, will determine the
    success or failure of the IPO. The key is to stimulate investor demand for the stock so that,
    the demand will exceed the supply. Through the marketing effort, the underwriter attempts to
    create an imbalance in the supply/demand equation for the issue, so that there are more
    buyers than sellers when the stock is finally released for sale to the public.
        To understand the sense of these statements one must understand the relationship
    between the marketing of an IPO and its initial returns, and how different parties benefit from
    this relationship. A security‟s value is an increasing function of the number of investors who
    know about the security. Investor knowledge leads to greater value consequently; the efforts
                                            - 37 -
   taken by a merchant banker to promote awareness in a firm can affect the valuation of its
   stock by expanding the investor base.
      The reputation of a merchant banker could expand a firm‟s investor base at a lower cost
   than the firm can, since the promotional efforts of a merchant banker on behalf of the firm
   would be more creditable. The efforts of a merchant banker to promote an IPO through
   increased media coverage will increase retail interest in that stock.


GENERAL PROCEDURE FOR MARKETING OF IPO
 Press Conference
   Promoters and Lead Managers call for press conference in each major investment center.
   Reporters are briefed about the issue. They carry it as news-item in their papers.


 Investors Conference
   The prospective investors are called by invitation. The Promoters and Lead Managers give
   presentations. They reply to the questions of the investors to boost their confidence.


 Road Shows
   This is like the investors conference but normally is done abroad for marketing ADR/GDR
   issues. It is an expensive process and requires a lot of legal compliances. The company has to
   observe the rules of the concerned country. However, road shows are becoming more and
   more popular in India.


 Newspaper Advertisements
   The company releases statutory advertisements in leading newspapers. The company has to
   publish abridges prospectus in leading newspapers. It is the responsibility of the promoters to
   ensure that the issuing company and their group companies should not release any
   commercial advertisement, which may influence the investor‟s decision for investment.


 Printing - Prospectus
   The company has to print approved prospectus and provide enough copies to all
   intermediaries. If any investor asks for a copy of prospectus it must be provided to him



                                           - 38 -
   without any fees. Sufficient quantities should be maintained at the registered office of the
   company and with the Lead Managers.
 Printing Application Forms
   Sufficient number of application forms must be printed much before the opening of the issue.
   Each form must contain abridged prospectus in SEBI approved format. Sometimes different
   coloured forms are issued to FI, FII, NRI and general public. It is compulsory to provide
   stationery to all underwriters and brokers. They will arrange distribution to their sub-brokers
   and other clients. Sometimes, company makes direct dispatch of forms to prospective
   investors


GUIDELINES FOR ADVERTISEMENT OF IPO’s
 An issue advertisement shall be truthful, fair and clear and shall not contain any statement
   which is untrue or misleading.
 Any advertisement reproducing or purporting to reproduce any information contained in an
   offer document shall reproduce such information in full and disclose all relevant facts and not
   be restricted to select extracts relating to that item.
 An advertisement shall be set forth in a clear, concise and understandable language.
   Extensive use of technical, legal terminology or complex language and the inclusion of
   excessive details which may distract the investor shall be avoided.
 An issue advertisement shall not contain statements which promise or guarantee rapid
   increase in profits.
 An issue advertisement shall not contain any information that is not contained in the offer
   document.
 No models, celebrities, fictional characters, landmarks or caricatures or the likes shall be
   displayed on or form part of the offer documents or issue advertisements.
 No advertisement shall include any issue slogans or brand names for the issue except the
   normal commercial name of the company or commercial brand names of its products already
   in use.
 If any advertisement carries any financial data, it shall also contain data for the past three
   years and shall include particulars relating to sales, gross profit, net profit, share capital,
   reserves, earnings per share, dividends and the book values.



                                             - 39 -
 No issue advertisement shall be released without giving “Risk Factors” in respect of the
   concerned issue.
 No corporate advertisement of Issuer Company shall be issued after 21 days of the filing of
   the offer document with the Board till the closure of the issue unless the risk factors as are
   required to be mentioned in the offer document, are mentioned in such advertisement.
 No advertisement shall be issued stating that the issue has been fully subscribed or
   oversubscribed during the period the issue is open for subscription, except to the effect that
   the issue is open or closed.




                                         - 40 -
PRE ISSUE OBLIGATIONS


   The following are the pre-issue obligations of the Merchant Bankers to an issue:
 Exercising of due diligence by Lead manager.
 Payment of requisite fees
 Documents to be submitted with the offer document by the lead manager
          Memorandum of Understanding(MOU)
          Inter-se allocation of responsibilities(in case there is more than one lead manager)
          Due Diligence certificate
          Certificate signed by the Chartered Accountant(CA)
 Submit a list of promoters group and other details
 Appointment of Intermediaries
 Signing of Underwriting Agreement
 Drafting of draft prospectus in consultation with the merchant bankers and submitting the
   same to SEBI along with the requisite fees and other requirements and submitting the same
   to the Stock exchange as per guidelines.
 File red herring prospectus with SEBI/stock exchanges/ROC after receiving clearance from
   SEBI and stock exchanges.
 Dispatch of issue material to the stock exchanges, brokers, underwriters, bankers to the issue,
   investor associations etc.
 No Complaints Certificate
 Ensuring mandatory and other collection centers for the issue.
 Appoint Authorized Collecting Agents
 Appointment of Compliance officer by the issuer company
 Distribution of Application forms and Abridged prospectus
 Agreement with depositories for receiving issues in DEMAT form
 Overseeing the bidding process
 Maintaining the escrow account
 Provisions for electronic registration of bids




                                          - 41 -
POST ISSUE OBLIGATIONS


 Post issue monitoring Reports to be submitted by Lead managers. These reports shall be
   submitted within 3 working days from the due dates.
 Processing of Applications
 Deciding the basis for allotment
 Distribution of allotted shares to successful bidders
 Refund of money to unsuccessful bidders
 Establishment of Underwriters liability, if any
 Post issue advertisements
 File final prospectus with SEBI/ stock exchanges/ ROC after incorporating the basis of
   allotment, price discovery etc.
 Listing of the issue on the designated stock exchanges
 Redressal of Investor Grievances




                                          - 42 -
OTHER ISSUES RELATED TO IPO’S


 REVISION OF PRICE BAND OR BIDDING/ISSUE PERIOD:
   In case the price band of the issue is revised, the revised price band and the bidding/issue
   period will be widely disseminated by informing the stock exchanges by publishing the
   details in 2 national newspapers (one each in English and Hindi) and in a regional
   newspaper; and also by indicating the change on the website of the Book Running lead
   Managers (BRLM‟s) and at the terminals of the members of the Syndicate. In case the price
   band is revised, the bidding period shall be extended for a further period of three days,
   subject to the total bidding period not exceeding ten working days.
   As per SEBI guidelines, the cap on the price band should not be more than 120% of the floor
   of the price band. Therefore, in case of a revision in the price band, the floor of the price
   band can move up or down to the extent of 20% of the floor price band disclosed in the Red
   Herring Prospectus.


 PROSPECTUS IS APPROVED BY SEBI BUT THE COMPANY DOES NOT COME
   OUT WITH THE PROPOSED ISSUE:
   An issue shall open within 3 months from the date of issuance of the observation letter by the
   Board, if any or within 3 months from the 22nd day from the date of filing of the draft offer
   document with the Board, if no observation letter is issued. If the company fails to come out
   with the issue within 3 months, then it is barred from making an issue in the market for the
   next 6 months. Once the 6 months period lapses the company has to file a new prospectus
   with SEBI if it wants to come out with an issue. The detail of the IPO where the issue was
   withdrawn is as follows:


      Company                 Lead Manager         Date of Withdrawal           Type of Issue
Gayatri Projects Ltd.    Allianz Securities Ltd    June 1, 2006           IPO




                                          - 43 -
                                     RIGHTS ISSUE
WHAT IS A RIGHTS ISSUE?


       According to Section 81 of the Companies Act, 1956, if a public company wants to
increase its subscribed capital by allotment of further shares after two years from the date of its
incorporation or from the date of first allotment, whichever is earlier, such further shares should
be first offered to the existing equity shareholders, in proportion to the capital paid–up on the
shares held by them at the date of such offer. The shareholders to whom the offer is made are not
under any legal obligation to accept the offer. On the other hand, they have a right to renounce
the offer in favour of any person.


       Shares so offered by a public company to its existing equity shareholders, are called right
shares because they are offered to the shareholder as a matter of legal right. Rights shares are
usually offered on terms advantageous to the shareholders. For example, shares of the face value
of Rs. 10 maybe offered at par value, while the market price of the shares at the time of
announcing the offer maybe more than Rs. 10 per share.




                                          - 44 -
LEGAL ASPECTS


   According to Section 81 of the Companies Act, the following conditions have to be satisfied
by a public company issuing rights shares:
1. Such shares must be offered to holders of equity shares in proportion, as nearly as
   circumstances admit, to the capital paid up on the share.
2. The offer must be made giving a notice specifying the number of shares offered.
3. The offeree must be made to accept the shares within a period specified in the notice which
   shall not be less than 15 days. A renouncement form in favour of someone else is also given
   in the application form.
4. Unless the articles of association of the company provide otherwise, the notice must also
   state that the shareholders have a right to renounce all or any of the shares offered to them in
   favour of one or more of the nominees.
5. After the expiry of the time specified in the notice or on receipt of intimation earlier from the
   shareholder declining to accept the shares offered, the Board of Directors may dispose of the
   unsubscribed shares in such manner as they think most beneficial to the company.




                                           - 45 -
REGULATORY FRAMEWORK FOR RIGHTS ISSUES


1. The SEBI guidelines for Disclosure and Investor Protection apply only to rights issue made
   by listed companies. These guidelines do not apply to rights issue of any amount by existing
   private companies and unlisted public companies.
2. Private companies or unlisted companies therefore, only need to comply with the
   requirements laid down in the Companies Act, 1956.
3. Where any company has withdrawn the rights issue after announcing the record date, such
   company is not permitted to make application for listing of any of its securities for a
   minimum period of 12 months from the announced record date.
4. Underwriting of rights issues is not mandatory. However, stand-by underwriting support can
   be extended to a rights issue.
5. These guidelines are not applicable to composite issues i.e. an issue of securities on rights
   basis made either simultaneously or preceded by or followed by an issue of securities to
   public, within a period of three months before or after closure of rights issue as the case
   maybe.
6. The gap between the closure date of rights issue and public issue should not exceed 30 days.
   No bonus issue should be made within 12 months from the date of issue.
7. Appointment of a Merchant Banker: Where issue of share by way of rights by a listed
   company does not exceed Rs.50 lakhs, appointment of merchant banker is not mandatory.
   For rights issues by listed companies exceeding Rs. 50 lakhs, the issue should be managed by
   a SEBI registered merchant banker.
8. Rights issues shall be kept open for at least 30 days and not more than 60 days.
9. If the company does not receive at least 90 percent of the issued amount including accepted
   devolvement from underwriters, if any, within 42 days from the date of closing of the issue,
   the amount of subscription received is required to be refunded.
10. If there is any delay in the refund amount collected by more than 8 days, the company and
   the directors of the company shall be jointly and severally liable to repay the amount due by
   way of refund with interest as per section 73 of the companies act, 1956 from the delayed
   period.
11. No part of over-subscription should be retained under any circumstances i.e. quantum of
   rights issue should not exceed as specified in the letter of offer.
                                          - 46 -
12. No company shall make a public or rights issue of equity share or any security
   convertible at later date into equity share, unless all the existing partly paid-up shares have
   been fully paid or forfeited.
13. No preferential allotment should be made along with the rights issue. If any preferential
   allotment to the employees or any identified persons has been proposed to be made, this
   should be done independent of the rights issue by complying with the provision of the
   Companies Act, 1956.
14. An advertisement should be prominently issued in not less than two All India newspapers at
   least one week before the date of opening of the subscription.
15. Promoters Contribution and Lock-in requirements: The requirements in regards to
   promoter‟s contribution and lock in shall not be applicable in case of a rights issue. Provided
   that, the promoters shall disclose their existing shareholding and the extent to which they are
   participating in the proposed issue, in the offer document.
16. Compliance Reports: The lead manager must ensure that the letter of offer for rights
   contains all the information specified under the Companies Act. He has to submit the draft
   letter of offer to SEBI six weeks before the issue is scheduled to open for subscription. If
   SEBI makes any modifications within three weeks of the submission of letter of offer then
   such modifications have to be incorporated before filing the letter of offer. The copy of the
   letter of offer shall be submitted by the lead manager to SEBI two weeks before the issue
   opens for subscription.
17. Post Issue Monitoring Reports: The lead manager shall submit a 3 days monitoring report
   and a 50 days monitoring report within 3 days and 50 days respectively of the date of closure
   of the issue.




                                          - 47 -
ADVANTAGES AND DISADVANTAGES OF A RIGHTS ISSUE


       A rights offer provides the shareholders with the option of retaining their proportionate
ownership in a company when it sells additional shares. It is probably beneficial only to the large
shareholders because of the separation of ownership and control. A rights offering can be more
beneficial to the company as it need not have a broad market appeal and can be only
concentrated on investors who already have shares in the company. Also the cost of making
rights offerings is less when compared to public issues.


        On the other hand, a rights offering generally takes a longer time to complete and the
offering eliminates the possible transaction cost savings of selling large blocks of shares to
institutions not currently holding the stock.




                                            - 48 -
                                 INEFFICIENCIES
INEFFICIENCIES/BOTTLENECKS IN THE IPO PROCESS


 Approval of the Draft Prospectus by SEBI: As per the SEBI guidelines, it takes 3 weeks
   to approve a draft prospectus filed by the issuer company, but in reality this procedure takes
   around 8 – 10 weeks. This increases the time line required to come out with an IPO.


 Market Timing: The success of IPO‟s depends to some extent on the health of the capital
   markets in the country. If a company comes out with an IPO when the sentiment of the
   investors towards the stock market is negative, it will get a very lukewarm response. Market
   volatility is a concern for companies coming out with IPO‟s. Issuer companies are sometimes
   forced to extend the bidding period or cut the price at the lower end of the price band as seen
   recently in the cases of Air Deccan and Prime Focus IPO. Some other companies which were
   planning to come out with an IPO are waiting for the sentiments to turn positive on the stock
   market before taking a final call on public issues.
   According to Prithvi Haldea of Prime Database, currently there are three categories of IPO‟s
   in the market. They are as follows,
         Firms where issue date for the IPO has been announced.
         Firms which have filed draft prospectus with SEBI and
         Firms planning for IPO‟s
   It is estimated that there are around 4 - 6 firms where the issue date has been announced, 8 –
   10 firms whose prospectus has been cleared by SEBI but the date of IPO has not been
   announced, around 48 firms whose prospectus has not been cleared and around 350 firms
   planning to come out with an IPO in the near future.


 Market Manipulation: In some IPO‟s there are cases of market manipulation i.e. prices of
   the shares of the company are rigged by false information, false trading etc. within days of its
   listing and in many such cases the shares are even delisted within years resulting in huge
   losses to the investors. This erodes the investor‟s confidence in the primary market.




                                          - 49 -
 Multiple Allotments of Shares to a Single Investor: As seen in the recent IPO scams,
    multiple allotments of shares were made to a single person in the retail investor category,
    resulting in a single person cornering a huge proportion of the allotments reserved for retail
    investors. This results in opportunity losses to genuine retail investors who have applied for
    the shares under this category.


   Opening of Multiple Demat Accounts (Benami Accounts) by a Single Investor: In recent
    investigations by SEBI relating to the IPO scams it was found that the Depository
    Participants(DP‟s) have not followed the stringent Know Your Client (KYC) Norms
    prescribed by SEBI for opening of DEMAT accounts. This resulted in opening of multiple
    demat accounts (benami accounts) by single investors to corner significant portions of IPO‟s
    reserved for retail investors. Some of the discrepancies observed in following the KYC
    norms are as followed:
          No signature across the photographs of the account holders.
          Same signature for multiple accounts but different addresses.
          Same addresses for multiple demat accounts.
          No proof of identification submitted to the DP‟s.
          No proof of address provided by the account holders.
          Photographs of the accountholders stapled and not affixed as per SEBI guidelines.
    The Depositories are aware of the possibility of the existence of accounts being operated
    without following proper KYC norms, but they have not put in place a system to detect such
    accounts and take proper actions.


 Inefficiency by Depositories: The depositories are required to have adequate controls,
    systems and procedures for monitoring and evaluating its compliances with the statutory
    requirements laid down by SEBI and prevent any conduct by DP‟s which is detrimental to
    the interest of the investors or the securities market. In this respect, the depositories have
    failed to perform and supervise the operations of the DP‟s and also failed to inform SEBI of
    the deficiencies. Some of the deficiencies are as follows:
          The penalties imposed on the DP‟s for account opening deficiencies are as low as Rs.
           500 – 1000.


                                           - 50 -
         NSDL system allows accounts to be stored in the databases with no check on the
          addresses and other details.
         NSDL has to inspect the records of the DP‟s on timely intervals but the periodicity of
          inspection is not established as per any document.
         NSDL does not impose penalties for violations rectified immediately after inspection,
          does not impose penalties harsher than monetary penalties for the remaining
          violations and also waives the penalties imposed if the DP reports rectification of
          deficiencies. This system creates no disincentive or deterrent for a DP to comply till
          NSDL inspects and finds the violation, since rectification after inspection assures that
          no penalty of any kind is imposed on DP.


 Deficiencies on the part of Bidders to the Issue: There are some technical reasons for
   rejection of the bids made by the bidders in the retail and non-institutional categories. Some
   of the reasons are as follows:
         The amount paid does not tally with the amount payable for the highest value of
          equity shares bid for.
         Age of the first bidder not given.
         Bids by minors or by person‟s incompetent to contract as per the Indian Contracts
          Act.
         PAN not stated if the bid is for Rs. 50,000 or more.
         GIR no. stated instead of PAN.
         Proof of PAN not attached to bid cum application form.
         Bids for lower number of equity shares than specified for that category of investors.
         Bids at a price less than lower end of price band.
         Bids at a price more than the higher end of price band.
         Bids for number of equity shares which are not in the multiples as specified in the
          Red Herring Prospectus.
         Multiple Bids by a single person.
         Signature of sole and/or joint bidders missing.
         Bid cum application form does not have the stamp of the BRLM or syndicate
          members.
         Bid cum application form does not have the bidder‟s depository account details.
                                       - 51 -
         Bids for amounts greater than maximum permissible amounts prescribed by the
          regulations.
         Bids are not accompanied by applicable margin amounts.


 No requirement of PAN details for application below Rs.50000: As per the current SEBI
   guidelines, investors are required to submit PAN details for applications for shares in an IPO
   above Rs. 50000. This can be a loop-hole in the system as investors in the retail allotment
   category can make multiple applications as benami's by subscribing for less than Rs. 50000
   as they need not submit their PAN card details.


 Oversubscription of Public Issues: Generally there are three classes of investors in the
   market; those who invest only in the primary market, then those who invest only in the
   secondary market and those who invest in both. In the recent years the primary market has
   witnessed a boom with many companies coming out with their IPO‟s. This provides huge
   investment opportunities fro investors interested in the primary markets. This has led to so
   many issues in recent past being oversubscribed by as much a 20 – 60 times. Such
   tremendous responses also results in huge amounts of paper work and processing of
   applications. During such times there may be a possibility of certain issues pertaining to the
   stringent SEBI guidelines being overlooked as has been witnessed in the IPO scams in recent
   years. The system currently in place may not be suited to efficiently handle such enormous
   data and some lacunas may exist.


 Quotas for IPO Allotments: The IPO subscription in India is a quota based system where
   SEBI has prescribed the quotas for the investors in the retail investor, non- retail investors
   and institutional investor‟s category. The reservation for retail investors limits their
   opportunity of investing in IPO‟s and earning the resulting gains. Such a quota based system
   may have fuelled the practice of investors putting in multiple applications in public offerings
   to corner the shares. Thousands of fictitious applications were found to have been put in in a
   spate of IPO‟s during the equity boom between 2003 and 2005 to cash in the gains when the
   shares were listed.




                                          - 52 -
 Problems faced by the Merchant bankers in the Due Diligence process: The merchant
    bankers appointed by the issuer company are required to verify various documents, reports,
    financial information, etc which requires some time. Many a times the issuer company tries
    to show itself in positive light so that its issue gets a fairly positive response in the market
    and to enable this they do not provide true and fair data to the merchant bankers or they forge
    the documents etc. It becomes then the duty of the appointed merchant bankers to uncover
    the true information and only after carrying out the due diligence procedure to the best of
    available resources proceed with the issue.


   Delays in Refunds to Unsuccessful bidders in IPO’s: According to the SEBI guidelines the
    refunds to unsuccessful bidders should be done within 15 days and 30 days of deciding the
    allotment in case of book building issue and fixed price issue respectively. But in reality
    many a times the refunds get delayed resulting in blockage of funds of the unsuccessful
    bidders who could have used those funds to invest in some other IPO. This is an opportunity
    loss for the investors.




IMPROVING EFFICIENCY IN THE IPO PROCESS


 PAN Cards Compulsory for opening DEMAT Accounts: From April 1, 2006 demat
    accounts can be opened only if PAN card details are furnished by the intending demat
    account holders to the DP (Depository Participant). Also CDSL (Central Depository Services
    (India) Limited has issued a notice regarding all the demat accounts opened on or before 31 st
    March 2006 saying that if the said demat account holders want to continue the operation of
    their demat accounts they should furnish the PAN card details to their respective DP‟s on or
    before 30th September 2006. PAN card details in this case imply original Pan Card for
    verification and photocopy for the DP‟s record.
    This step on the part of the DP‟s will help reduce the instances of opening of multiple demat
    accounts in the same name or using the same address.




                                           - 53 -
 Removal of Quota System in the IPO Allotment Process: The Finance Ministry has given
   a suggestion to SEBI that the quota system in the IPO allotment process should be done away
   with as it leads to investors putting in multiple bids to corner portions of the public offerings.
   The ministry is of the opinion that instead of the quota system a non-discretionary price
   discovery process marked by an auction based method could be adopted.


 Restriction on Share Transfer before listing: Market regulator SEBI is considering a
   proposal that seeks to restrict transfer of equity shares of a company before it is listed, in a
   move aimed at reducing large scale off market transactions. Large scale irregular transfer of
   shares before their listing was seen in the recent IPO scams. Hence the proposal by SEBI
   aims at reducing such scams and preventing the individuals who deal in such transactions
   from making big gains when the securities are listed on the stock exchanges.


 Grading of Merchant Bankers: SEBI has also recently made a proposal to grade the
   merchant bankers involved in the handling of a public issue. As per this proposal, Merchant
   bankers will be graded on their track record; the issues brought out in the past, the kind of
   documents that were submitted and other such parameters. Also SEBI will not certify the
   grading agency‟s assessment. The grading would be merely aimed at assisting the investors
   particularly the small investors in taking informed decisions.


 Improvement in the Refund process: Currently the refund process is a time consuming
   procedure in the IPO process, as the unsuccessful bidders have to undergo a long wait to get
   back the money they have paid for subscribing to an IPO. An ECS (Electronic Clearing
   System) which is not mandatory as of now should be made mandatory in case of all the
   refunds. This will ensure efficiency and will help do away with the irregularities in the refund
   process.


 IPO funding: Nowadays individuals who want to subscribe to a public issue but do not have
   the resources can avail funding from various banks at reasonable rates. Availability of easy
   funding will boost up the investors responses to the public issues.
   Some of the terms and conditions for an IPO funding by banks are as follows:
          The shares should be subscribed in demat form only

                                           - 54 -
      The customer exercising such an option should have a demat account or open a demat
       account with the bank etc.
Let us have a look at all the requirements prescribed by UTI Bank for IPO funding for
individuals:
ELIGIBILITY: Finance would be provided to those subscribing for shares in the
public/rights issues of reputed companies who should be listed with the listing requirements
of NSE/ BSE.


TERMS AND CONDITIONS:
      Minimum Application: 200 shares
      Loan Amount: 80% of the application amount (subject to a maximum of Rs. 10 lakhs)
      Margin: 50% or as per the directives issues by RBI from time to time.
      Rate of Interest: 4% above the Prime Lending Rate (PLR) with a minimum of 16%
      Processing Charges: Rs. 250


OTHER REQUIREMENTS:
      The shares should be in demat form only.
      The customer exercising the option should either have or open a DP account as also a
       non cheque Book/ ATM card Savings/ Current account with the bank.
      Processing charges, Interest amount and margin money to be recovered up front by
       way of a pay order.
      A letter from the applicant irrevocably that he will not change the mandate in the
       application, and if he does the application may be rejected by the Registrars/
       Company. This letter will be filed with the company along with the share application
       form.
      The scheme will close one day before the close of the issue when payment towards
       fees is made in cash/ draft/banker‟s cheque or three days before the close of the issue
       when payment is made through a clearing cheque.
      The customer shall open a savings account without a cheque book/ ATM card with
       the bank and shall irrevocably mandate credit of refund if any to the account. The
       customer will authorize the bank to recover the loan by debiting this account in the
       event of non-allotment. No other debits would be allowed in this account.
                                      - 55 -
The requirement by other banks for IPO funding is more or less the same as seen above in
the UTI bank example.
Thus, IPO funding is a boon for investors especially for the investors who prefer to invest in
the primary market.




                                      - 56 -
APPENDIX 1
List of Merchant Bankers Registered with SEBI

Sr. no                            Name                           Place         State
      1   A.K. CAPITAL SERVICES LTD                       New Delhi      Delhi
      2   ABN AMRO SECURITIES (INDIA) PRIVATE LTD         Mumbai         Maharashtra
      3   ALLAHABAD BANK                                  Calcutta       West Bengal
      4   ALLBANK FINANCE LTD.                            Calcutta       West Bengal
      5   ALLIANZ SECURITIES LTD                          New Delhi      Delhi
      6   AMBIT CORPORATE FINANCE PRIVATE LTD             Mumbai         Maharashtra
      7   AMERICAN EXPRESS BANK LTD                       Mumbai         Maharashtra
      8   ANAND RATHI SECURITIES PVT LTD                  Mumbai         Maharashtra
      9   ANDHRA BANK                                     Hyderabad      Andhra Pradesh
     10   ANZ CAPITAL PRIVATE LIMITED                     Mumbai         Maharashtra
     11   ARYAMAN FINANCIAL SERVICES LTD                  New Delhi      Delhi
     12   ASHIKA CAPITAL LTD                              Calcutta       West Bengal
     13   ASIT C. MEHTA INVESTMENT INTERRMEDIATES LTD     Mumbai         Maharashtra
     14   ASK RAYMOND JAMES & ASSOCIATES LTD              Mumbai         Maharashtra
     15   BAJAJ CAPITAL LTD                               New Delhi      Delhi
     16   BANK OF AMERICA, N.A                            Mumbai         Maharashtra
     17   BANK OF MAHARASHTRA                             Pune           Maharashtra
     18   BARCLAYS BANK PLC                               Mumbai         Maharashtra
     19   BATLIVALA & KARANI SECURITIES INDIA PVT LTD     Calcutta       West Bengal
     20   BOB CAPITAL MARKETS LTD                         Mumbai         Maharashtra
          BRESCON CORPORATE ADVISORS LTD (BRESCON FINCL
     21   SERVICES LTD)
                                                          Mumbai         Maharashtra
     22   BRICS SECURITIES LTD                            Mumbai         Maharashtra
          CALYON BANK (FORMERLY CREDIT AGRICOLE
     23   INDOSUEZ)
                                                          Mumbai         Maharashtra
     24   CANARA BANK                                     Bangalore      Karnataka
          CD EQUISEARCH PVT. LTD. (FORMERLY CD CAPITAL
     25   MARKETS LTD)
                                                          Calcutta       West Bengal
     26   CENTRAL BANK OF INDIA                           Mumbai         Maharashtra
          CENTRUM CAPITAL LIMITED (FORMERLY CENTRUM
     27   FINANCE LTD)
                                                          Mumbai         Maharashtra
     28   CHARTERED CAPITAL & INVESTMENT LTD              Ahemedabad     Gujarat
     29   CIL SECURITIES LTD                              Hyderabad      Andhra Pradesh
     30   CITIBANK N A                                    Mumbai         Maharashtra
     31   CITIGROUP GLOBAL MARKETS INDIA PVT. LTD         Mumbai         Maharashtra
     32   CLSA INDIA LTD                                  Mumbai         Maharashtra
          DARASHAW & COMPANY PRIVATE LTD (FORMERLY
     33   BADAR FINANCE)
                                                          Mumbai         Maharashtra
     34   DEUTSCHE BANK                                   Mumbai         Maharashtra
     35   DEUTSCHE EQUITIES INDIA PRIVATE LIMITED         Mumbai         Maharashtra
     36   DEVELOPMENT CREDIT BANK LTD                     Mumbai         Maharashtra
     37   DSP MERRILL LYNCH LTD                           Mumbai         Maharashtra
     38   EDELWEISS CAPITAL LTD                           Mumbai         Maharashtra
     39   ENAM FINANCIAL CONSULTANTS PVT LTD              Mumbai         Maharashtra
     40   ESCORTS SECURITIES LTD                          New Delhi      Delhi

                                         - 57 -
41   FEDERAL BANK LTD, THE                                    Alwaye,Ernakulam   Kerala
42   FEDEX SECURITIES LTD                                     Mumbai             Maharashtra
43   FIRST GLOBAL FINANCE PVT LTD                             New Delhi          Delhi
44   FORTUNE FINANCIAL SERVICES (INDIA) LTD                   Mumbai             Maharashtra
45   GLOBAL TRUSTCAPITAL FINANCE PVT. LTD.                    Mumbai             Maharashtra
46   GSFS CAPITAL & SECURITIES LTD                            Ahemedabad         Gujarat
47   HEM FINANCIAL SERVICES LTD                               Jaipur             Rajasthan
48   HONGKONG AND SHANGHAI BANKING CORPORATION                Mumbai             Maharashtra
     HSBC SECURITIES AND CAPITAL MARKETS (INDIA) PVT
49   LTD
                                                              Mumbai             Maharashtra
50   ICICI BANK LTD                                           Vadodara           Gujarat
51   ICICI SECURITIES LTD. (ICICI SECURITIES & FIN. CO LTD)   Mumbai             Maharashtra
52   IDBI CAPITAL MARKET SERVICES LTD                         Mumbai             Maharashtra
53   IFCI FINANCIAL SERVICES LTD                              New Delhi          Delhi
54   IL& FS INVESTSMART LTD                                   Mumbai             Maharashtra
55   IMPERIAL CORPORATE FINANCE & SERVICES PVT LTD            Mumbai             Maharashtra
56   IND GLOBAL CORPORATE FINANCE PVT LTD                     Mumbai             Maharashtra
57   INDBANK MERCHANT BANKING SERVICES LTD                    Chennai            Tamil Nadu
58   INDIA INFOLINE SECURITIES PVT LTD                        Mumbai             Maharashtra
     INDIABULLS SECURITIES LIMITED (FORMERLY ORBIS SEC
59   LTD)
                                                              New Delhi          Delhi
60   INDIAN OVERSEAS BANK                                     Chennai            Tamil Nadu
61   INDUSIND BANK LTD                                        Pune               Maharashtra
62   INDUSTRIAL DEVELOPMENT BANK OF INDIA                     Mumbai             Maharashtra
63   INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY               Chennai            Tamil Nadu
     ING VYSYA BANK LTD. (ERSTWHILE THE VYSYA BANK
64   LTD.)
                                                              Bangalore          Karnataka
65   INGA ADVISORS PVT. LTD.                                  Mumbai             Maharashtra
     INTEGRATED ENTERPRISES (INDIA) LTD (INTEGRATED
66   ADVISORY SERVICES)
                                                              Chennai            Tamil Nadu
67   INTER CORPORATE FINANCIERS & CONSULTANTS LTD.            Calcutta           West Bengal
68   J P MORGAN INDIA PVT. LIMITED                            Mumbai             Maharashtra
69   J M MORGAN STANLEY PVT LTD                               Mumbai             Maharashtra
70   KARUR VYSYA BANK LTD, THE                                Karur              Tamil Nadu
71   KARVY INVESTOR SERVICES LTD                              Hyderabad          Andhra Pradesh
72   KEYNOTE CORPORATE SERVICES LTD                           Mumbai             Maharashtra
73   KHANDWALA SECURITIES LTD                                 Mumbai             Maharashtra
74   KJMC GLOBAL MARKET (INDIA) LTD                           Mumbai             Maharashtra
75   KOTAK MAHINDRA CAPITAL COMPANY LTD                       Mumbai             Maharashtra
76   L & T CAPITAL COMPANY LTD                                Mumbai             Maharashtra
     LAZARD INDIA PRIVATE LTD (LAZARD CREDIT CAPITAL
77   LTD.)
                                                              Mumbai             Maharashtra
78   LEHMAN BROTHERS SECURITIES PVT LTD                       Mumbai             Maharashtra
79   LKP SHARES AND SECURITIES LTD                            Mumbai             Maharashtra
80   LODHA CAPITAL MARKETS LTD                                Calcutta           West Bengal
81   MACQUARIE INDIA ADVISORY SERVICES PVT LTD                Mumbai             Maharashtra
82   MASTER CAPITAL SERVICES LTD                              Ludhiana           Punjab
83   MATA SECURITIES INDIA PRIVATE LTD                        Mumbai             Maharashtra
84   MEFCOM CAPITAL MARKETS LTD                               New Delhi          Delhi
85   MEGHRAJ SP CORPORATE FINANCE (PVT) LTD                   Mumbai             Maharashtra
86   MEHTA INTEGRATED FINANCE LTD                             Ahemedabad         Gujarat

                                       - 58 -
      MICROSEC CAPITAL LTD(FORMERLY MICROSEC INDIA
 87   LTD)
                                                     Calcutta    West Bengal

 88   MUNOTH FINANCIAL SERVICES LTD                  Chennai     Tamil Nadu
 89   N M ROTHSCHILD AND SONS (INDIA) PVT LTD        Mumbai      Maharashtra
 90   NEXGEN CAPITALS LTD                            New Delhi   Delhi
 91   ORIENTAL BANK OF COMMERCE                      New Delhi   Delhi
 92   PIONEER INVESTCORP LTD                         Mumbai      Maharashtra
 93   PNB GILTS LIMITED                              New Delhi   Delhi
 94   PNR SECURITIES LTD                             New Delhi   Delhi
 95   PRIME SECURITIES LTD                           Mumbai      Maharashtra
 96   PUNEET ADVISORY SERVICES PVT LTD               Mumbai      Maharashtra
 97   PUNJAB & SIND BANK                             New Delhi   Delhi
 98   PUNJAB NATIONAL BANK                           New Delhi   Delhi
 99   R R. FINANCIAL CONSULTANTS LTD                 New Delhi   Delhi
100   RABO INDIA SECURITIES PRIVATE LIMITED          Mumbai      Maharashtra
101   ROLTA SHARES AND STOCKS PVT LTD                Mumbai      Maharashtra
102   S B & T FINANCE PRIVATE LTD                    Mumbai      Maharashtra
103   SBI CAPITAL MARKETS LTD                        Mumbai      Maharashtra
104   SHRIYAM BROKING INTERMEDIARY LTD               Mumbai      Maharashtra
105   SICOM LTD                                      Mumbai      Maharashtra
106   SMIFS CAPITAL MARKETS LTD                      Calcutta    West Bengal
107   SOBHAGYA CAPITAL OPTIONS LTD.                  New Delhi   Delhi
108   SOCIETE GENERALE                               Mumbai      Maharashtra
109   SPA MERCHANT BANKERS LIMITED                   New Delhi   Delhi
110   SREI CAPITAL MARKETS LTD                       Calcutta    West Bengal
111   SSKI CORPORATE FINANCE PVT LTD                 Mumbai      Maharashtra
112   STANDARD CHARTERED BANK                        Mumbai      Maharashtra
113   STATE BANK OF BIKANER AND JAIPUR               Jaipur      Rajasthan
114   STATE BANK OF HYDERABAD                        Hyderabad   Andhra Pradesh
                                                                 Madhya
115   STATE BANK OF INDORE                           Indore
                                                                 Pradesh
116   STATE BANK OF SAURASHTRA                       Bhavnagar   Gujarat
117   STRATCAP SECURITIES (INDIA) PRIVATE LIMITED    Mumbai      Maharashtra
118   SUMEDHA FISCAL SERVICES LTD                    Calcutta    West Bengal
119   SYNDICATE BANK                                 Manipal     Karnataka
                                                                 Madhya
120   SYSTEMATIX CORPORATE SERVICES LTD.             Indore
                                                                 Pradesh
121   TAIB CAPITAL CORPORATION LTD                   Mumbai      Maharashtra
122   TAMILNAD MERCANTILE BANK LTD                   Tuticorin   Tamil Nadu
123   TATA SONS LIMITED                              Mumbai      Maharashtra
124   THE CATHOLIC SYRIAN BANK LTD                   Thrissur    Kerala
125   THE SANGLI BANK LTD                            Sangli      Maharashtra
126   TRANSWARRANTY CAPITAL PVT LTD                  Mumbai      Maharashtra
127   UBS SECURITIES INDIA PVT. LTD                  Mumbai      Maharashtra
128   UNION BANK OF INDIA                            Mumbai      Maharashtra
129   UNITED BANK OF INDIA                           Calcutta    West Bengal
130   UNITED WESTERN BANK LTD, THE                   Satara      Maharashtra
131   UTI BANK LTD                                   Mumbai      Maharashtra
      UTI SECURITIES LTD(FORMERLY UTI SECURITIES
132   EXCHANGE LTD)
                                                     Mumbai      Maharashtra
133   VCK CAPITAL MARKET SERVICES LTD                Calcutta    West Bengal
                                     - 59 -
                               BIBLIOGRAPHY
BOOKS
 Merchant Banking – Principles and Practice – H.R.Machiraju
 Managing IPO‟s – The role of Investment Bankers – ICFAI University
 Financial Management – Prasanna Chandra
 NCFM Securities Market (Basic) Module – NSE


NEWSPAPERS
 The Economic Times
 DNA Money


WEBSITES
 www.sebi.gov.in
 www.nse-india.com
 www.bseindia.com
 www.indiainfoline.com
 www.moneycontrol.com
 www.dnaindia.com




                                      - 60 -

				
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