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By- Rahul Bansal

Taureq Walizada
Ayush Singhal
Vasvi Aren
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V When an issue/offer of securities is made to new
investors for becoming part of shareholders¶
family of the issuer it is called a public issue.
V ublic issue can be further classified into Initial
public offer (I
 and Further public offer
(F
.
V Y



 YWhen an unlisted
company makes either a fresh issue of securities
or offers its existing securities for sale or both for
the first time to the public, it is called an I
.
This paves way for listing and trading of the
issuer¶s securities in the Stock Exchanges.
V   

 





 When an already listed company makes
either a fresh issue of securities to the public or
an offer for sale to the public, it is called a F
.
°   ° 
V ompanies have been classified as large cap
companies and small cap companies. A large cap
company is a company with a minimum issue
size of Rs. 10 crore and market capitalization of
not less than Rs. 25 crore. A small cap company
is a company other than a large cap company.
Ä    
1. Filing of
ffer Document
For a co. issuing securities of more than Rs. 50lakhs, a
draft prospectus is submitted to SEBI via registered
merchant bankers 21 days prior to it being submitted to
R
. If any changes suggested by SEBI, those to be
incorporated before the filing to R
.
For a co. issuing securities less than Rs. 50lakhs, it should
prepare a letter of offer according to SEBI guidelines and
submit it to SEBi to be put on its website.
ompanies should also enter into agreements with
registered depositories to have the shares to be issued
dematirialized.

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V First, it should have net tangible assets of at least Rs. 3 crore in each
of preceding 3 6

years of which not more than 50% in monetary
assets
V Second, it has distributable profits in terms with Sec. 205 of the
ompanies Act for at least 3 out of last 5 years through the ordinary
course of business (i.e. not through extraordinary items
V Third, networth ( paid-up equity capital + reserves- accumulated
losses- deferred expenditure of minimum Rs. 1 crore in each of
preceding 3 full years
V Fourth, the issue size does not exceed 5 times the prer issue net
worth as per the audited balance sheet of the last financial year
V astly, if name of co. changed within the last one year, at least 50%
of the total revenue for preceding full year is earned by co. from the
activity said under the new name
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1. Ä  
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Issue made through book building process with
minimum 50% of net offer to public going to QIBs

R..
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" At least 15% participation by banks/ financial
institutions + minimum 10% issue size allotted to QIBs.
2. Minimum post- issue face value of capital of the co.
would be Rs. 10 crore or a compulsory market making
for at least 2 years from the date of listing of the shares
subject to conditions.

  
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 ° 
1. The issue size (i.e. offer through offer document +
firm allotment + promoters¶ contribution through
the offer document shall not exceed five times its
pre-issue networth. 
2. If name of co. changed within the last one year, at
least 50% of the total revenue for preceding full year
is earned by co. from the activity said under the new
name.
R«
Issue made through book building process with same
conditions as applicable to unlisted companies.
(Also, after May 2006, another mode to raise funds
from domestic markets is through QI s.
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V The price at which a company's shares are offered initially in the primary
market is called as the Issue price. When they begin to be traded, the
market price may be above or below the issue price.
V Who decides the price for the issue?
V Indian primary market ushered in an era of free pricing in 1992. Following
this, the guidelines have provided that the issuer in consultation with
Merchant Banker shall decide the price. There is no price formula
stipulated by SEBI. SEBI does not play any role in price fixation. The
company and merchant banker are however required to give full disclosures
of the parameters which they had considered while deciding the issue price.
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V There are two types of issues, one where company and ead Merchant
Banker fix a price (called fixed price and other, where the company and the
ead Manager (M stipulate a floor price or a price band and leave it to
market forces to determine the final price (price discovery through 


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V In a public issue by an unlisted issuer, the promoters shall
contribute not less than 20% of the post issue capital which
should be locked in for a period of 3 years. ³ockrin´ indicates
a freeze on the shares. The remaining pre issue capital should
also be locked in for a period of 1 year from the date of listing.
V In case of public issue by a listed issuer [i.e. F
, the
promoters shall contribute not less than 20% of the post issue
capital or 20% of the issue size.
V In composite issues by isted companies, at the option of the
promoters, it should be 20% of the issue size or 20% of the
post issue capital, excluding the rights issue component.

V In cases above, minimum promoter¶s contribution is Rs.

25000 per application from each individual and Rs. 1 lakh
from firms and companies.

 

V A large number of new companies float public issues. While a large
number of these companies are genuine, quite a few may want to
exploit the investors. Therefore, it is very important that an investor
before applying for any issue identifies future potential of a
company. A part of the guidelines issued is the disclosure of
information to the public. This disclosure includes information like
the reason for raising the money, the way money is proposed to be
spent, the return expected on the money etc. This information is in
the form of (
 ( which also includes information
regarding the size of the issue, the current status of the company, its
equity capital, its current and past performance, the promoters, the
project, cost of the project, means of financing, product and capacity
etc. It also contains lot of mandatory information regarding
underwriting and statutory compliances. This helps investors to
evaluate short term and long term prospects of the company.
V 'Abridged rospectus' is a shorter version of the rospectus and
contains all the salient features of a rospectus. It accompanies the
application form of public issues.
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V Book Building is basically a process used in I
s
for efficient price discovery. The issuer discloses
a price band or floor price before opening of the
issue of the securities offered.
n the basis of the
demands received at various price levels within
the price band specified by the issuer, Book
Running ead Manager (BRM in close
consultation with the issuer arrives at a price at
which the security offered by the issuer, can be
issued.
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V The prospectus may contain either the floor price for the securities
or a price band within which the investors can bid. The price band is
a band of price within which investors can bid. The spread between
the floor and the cap of the price band shall not be more than 20%.
In other words, it means that the cap should not be more than 120%
of the floor price. The price band can be revised. If revised, the
bidding period shall be extended for a further period of three days,
subject to the total bidding period not exceeding thirteen days.
V —
"
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V In a Book building issue, the issuer is required to indicate either the
price band or a floor price in the prospectus. The actual discovered
issue price can be any price in the price band or any price above the
floor price. This issue price is called "ut-
ff rice". The issuer and
lead manager decides this after considering the book and the
investors' appetite for the stock.
  
 —
V Book building is a process of price discovery. A floor
price or price band within which the bids can move is
disclosed at least two working days before opening of the
issue in case of an I
and atleast one day before
opening of the issue in case of an F
. The applicants
bid for the shares quoting the price and the quantity that
they would like to bid at. After the bidding process is
complete, the µcutroff¶ price is arrived at based on the
demand of securities. The basis of Allotment is then
finalized and allotment/refund is undertaken. The final
prospectus with all the details including the final issue
price and the issue size is filed with R
, thus
completing the issue process.
nly the retail investors
have the option of bidding at µcutroff¶.
  


 
V ³utroff´ option is available for only retail
individual investors i.e. investors who are
applying for securities worth up to Rs 1,00,000/r
only. Such investors are required to tick the
cutroff option which indicates their willingness
to subscribe to shares at any price discovered
within the price band. Unlike price bids (where a
specific price is indicated which can be invalid,
if price indicated by applicant is lower than the
price discovered, the cutroff bids always remain
valid for the purpose of allotment
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V es, you can change or revise the quantity or
price in the bid using the form for
changing/revising the bid that is available along
with the application form. However, the entire
process of changing or revising the bids shall be
completed within the date of closure of the issue.
V  Y  
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V es, you can cancel your bid anytime before the
finalization of the basis of allotment by
approaching/ writing/ making an application to
the registrar to the issue.
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V 
 at which securities will be allotted is not
known in case of offer of shares through Book
Building while in case of offer of shares through
normal public issue, price is known in advance to
investor. Under Book Building, investors bid for
shares at the floor price or above and after the
closure of the book building process the price is
determined for allotment of shares.
In case of Book Building, the ' ' can be
known everyday as the book is being built. But in
case of the public issue the demand is known at the
close of the issue.
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V 1. In case an issuer company makes an issue of 100% of the
net offer to public through 100% book building process²

V (a Not less than 35% of the net offer to the public shall be
available for allocation to retail individual investors;
V (b Not less than 15% of the net offer to the public shall be
available for allocation to nonrinstitutional investors i.e.
investors other than retail individual investors and Qualified
Institutional Buyers;
V (c Not more than 50% of the net offer to the public shall be
available for allocation to Qualified Institutional Buyers:
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V The proportionate allotment of securities to the different
investor categories in an fixed price issue is as described
below:
V 1. A minimum 50% of the net offer of securities to the public
shall initially be made available for allotment to retail
individual investors, as the case may be.
V 2. The balance net offer of securities to the public shall be
made available for allotment to:
V a. Individual applicants other than retail individual investors,
and
V b.
ther investors including corporate bodies/ institutions
irrespective of the number of securities applied for.

  
V To any select group of individuals is guided by Sec.
81(IA of the ompanies Act, 1956.
V The issue of shares on a preferential basis cannot be
done at a price less than the higher of the following two-
Average of the weekly high and low of the closing prices
of shares quoted on the stock exchange during-
(1 six months prior to the cut-off date of 30 days before
the meeting of shareholders to discuss the proposed
issue.

R
(2 Two weeks prior to the cut-off date

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V It is the sale of securities to a relatively small number of
select investors as a way of raising capital. Investors
involved in private placements are usually large banks,
mutual funds, insurance companies and pension funds.
rivate placement is the opposite of a public issue, in
which securities are made available for sale on the open
market.
V Since a private placement is offered to a few, select
individuals, the placement does not have to be registered
with SEBI. In many cases, detailed financial information
is not disclosed and a the need for a prospectus is
waived. Finally, since the placements are private rather
than public, the average investor is only made aware of
the placement after it has occurred.

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V A designation of a securities issue given by the SEBI that
allows an Indian-listed company to raise capital from its
domestic markets, introduced on May 8, 2006.
V Apart from preferential allotment, this is the only other
speedy method of private placement for companies to raise
money. It scores over other methods, as it does not involve
many of the common procedural requirements, such as the
submission of pre-issue filings to the market regulator.
V The Why?- This was also done to prevent listed companies in
India from developing an excessive dependence on foreign
capital. rior to introduction of QI s, the complications
associated with raising capital in the domestic markets had
led many companies to look at tapping overseas markets via
foreign currency convertible bonds (FB and global
depository receipts (GDR.
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V QIBs are those institutional investors who are generally perceived to
possess expertise and the financial muscle to evaluate and invest in the
capital markets. In terms of guidelines, a µQualified Institutional Buyer¶
shall mean:
a ublic financial institution as defined in section 4A of the ompanies Act,
1956;
b Scheduled commercial banks;
c Mutual Funds;
d Foreign institutional investor registered with SEBI;
e Multilateral and bilateral development financial institutions;
f Venture apital funds registered with SEBI.
g Foreign Venture apital investors registered with SEBI.
h State Industrial Development orporations.
i Insurance ompanies registered with the Insurance Regulatory and
Development Authority (IRDA.
j rovident Funds with minimum corpus of Rs.25 crores
k ension Funds with minimum corpus of Rs. 25 crores

"These entities are not required to be registered with SEBI as QIBs. Any
entities falling under the categories specified above are considered as
QIBs for the purpose of participating in primary issuance process."
"  
V A greenshoe is a clause contained in the underwriting
agreement of an initial public offering (I
 that
allows underwriters to sell or buy up to an additional 15% of
company shares at the offering price. This would normally be
done if the demand for a security issue proves higher than
expected. egally referred to as an over-allotment option.
A greenshoe option can provide additional price stability to a
security issue because the underwriter has the ability to
increase supply and smooth out price fluctuations if demand
surges.
V For example, if a company decides to publicly sell 1 million
shares, the underwriters (or "stabilizers" can exercise their
greenshoe option and sell 1.15 million shares. When the
shares are priced and can be publicly traded, the underwriters
can buy back 15% of the shares. This enables underwriters to
stabilize fluctuating share prices by increasing or decreasing
the supply of shares according to initial public demand.