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Sebi Guidelines for Merchant Bankers

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

A corporate may raise capital in the primary market by way of an
initial public offer, rights issue or private placement.
An Initial Public offer (IPO) is the selling of securities to the public
in the primary market. It is the largest source of funds
with long or indefinite maturity for the company.

The company has to comply with the provisions of the
Companies Act , Securities Contracts (Regulation) Act,1956,
the Stock Exchanges and the SEBI Act.

Management of the public issue involves coordination
of activities and cooperation of a number of agencies such
as managers to the issue ,Underwriters , Brokers ,Registrars
to the issue, Solicitors/Legal Advisors, Printers Publicity and
Advertising agents, Financial institutions ,Auditors and other
Government /Statutory agencies such as Registrar of
Companies ,Reserve Bank of India, Stock exchanges ,SEBI etc.


Many intermediaries are involved in connection with the public issue.
Following are the intermediaries who have to be registered with SEBI and
must have valid certificate from SEBI to act
as an intermediaries: -
Merchant Bankers
Registrar and Share Transfer Agents
Bankers to the Issue
Stock Brokers and Sub Brokers

Merchant Bankers play the most vital role amongst all
intermediaries. They assist the company right from preparing
prospectus to the listing of securities at the stock
exchanges.Merchant Bankers have to satisfy themselves about the
correctness and propriety of all the information provided in the
prospectus. It is mandatory for them to carry due diligence for all
the information provided in the prospectus and they must issue a
certificate to this effect to SEBI.A Company may appoint more
than one Merchant Banker provided Inter-Se Allocation of
Responsibilities between the Merchant Bankers are properly
structured.                                                           6
Underwriters are those intermediaries who underwrite the securities
offered to the public. In case there is under subscription (in short,
the company does not receive good response from public and
amount received from is less than the issue size), underwriters
subscribe to the unsubscribed amount so that the issue is successful.

Registrar & Share Transfer Agents processes all applications
received from the public and prepare the basis of allotment.
The dispatch of share certificates / refund orders are handled by

Bankers to the Issue are banks which accept application from the
public on behalf of the company. These applications are then
forwarded to Registrar & Share Transfer Agent for further

Stock Brokers & Sub-Brokers are those intermediaries who
through their contacts / sources invite the public for subscribing
shares for which they get commission.

Depositories are the intermediaries who holds securities in
dematerialized form on behalf of the shareholders.

What are the eligibility norms for making these issues ?
SEBI has laid down eligibility norms for entities accessing
the primary market through public issues.

There is no eligibility norm for the listed company making a
right issue as it is an offer made to existing shareholders who
are expected to know their company.

The main entry norms for the companies making a public
issue (IPO or FPO) are summarized as under :
 Entry norm I(EN I) :
The company shall meet the following requirements:
 Net Tangible assets of as least Rs 3 crores for full 3 yrs.
 Distributable profits in at least three yrs.
 Net worth of at least three yrs.
 IF change in name , at least 50% revenue for preceding
 1 yr should be from the new activity.
 The issue size does not exceed 5 times the pre-issue net worth

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

 Entry Norm III (ENIII):
 The project is appraised & participated to the extent of 15% by FIs
  Scheduled Commercial Banks of which at least 10% comes from the

 The minimum post-issue value capital shall be Rs10 crore or there shall be
  a compulsory market-making for at least 2 yrs.

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

For the companies which has not completed 12 months of its
commercial operations.

The 1st issue is to be at par
A special resolution is to be passed
Draft prospectus should be submitted to SEBI
Minimum Public offer for listing is 25% of total paid up
capital. Up to max of 75%.


1. What is SEBI’s Role in an Issue?

Any company making a public issue or a listed company making a
rights issue of value of more than Rs 50 lakhs is required to file a
draft offer document with SEBI for its observations. The company
can proceed further on the issue only after getting observations from
SEBI. The validity period of SEBI’s observation letter is three
months only i.e the company has to open its issue within three
months period.
2. Does it mean that SEBI recommends an issue?
SEBI does not recommend any issue nor does take any responsibility
either for the financial soundness of any scheme or the project for
which the issue is proposed to be made or for the correctness of
the statements made or opinions expressed in the offer document.

3. How is the Retail Investor defined as?
‘Retail individual investor’ means an investor who applies
or bids for securities of or for a value of not more than

4. Who decides the price of an issue?
Indian primary market ushered in an era of free pricing in 1992.
 Following this, the guidelines have provided that the issuer in
consultation with Merchant Banker shall decide the price.
There is no price formula stipulated by SEBI. SEBI does not
play any role in price fixation. The company and merchant
banker are however required to give full disclosures of the
parameters which they had considered while deciding the issue

5. Where can I get a form for applying/ bidding for the
The form for applying/bidding of shares is available with all
Syndicate members, collection centers, , the brokers to the issue
and the bankers to the issue.

6. How long will it take after the issue for the shares to get
The listing on the stock exchanges is done within 7 days from
the finalization of the issue. Ideally, it would be around 3 weeks
after the closure of the issue.

7. What is the amount of faith that I can lay on the contents
of the documents? And whom should I approach if there are
any lacunae?
The document is prepared by an independent specialized agency
called Merchant Banker, which is registered with SEBI. They are
required to do through due diligence while preparing an offer
document. The draft offer document submitted to SEBI is put on
website for public comments. In case, you have any information
about the issuer or its directors or any other aspect of the issue,
which in your view is not factually reflected, you may send your
complaint to Lead Manager to the issue or to SEBI, Division
of Issues and Listing.

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