5.

0 Processes related to equity capital Equity capital is the capital infused in any organization which is owned by the promoters. It is also known as industrial security. Section 2(h) of SCRA, 1956 defines the securities. 5.1 Investor's perspective Investing in equity In broadest sense, an investment is a sacrifice of current money or other resources for future benefits. Numerous avenues of investment are available today. An investor can put the money in a bank and can take the benefits that are available to banking products. An investor can invest in the equity shares of a company or to contribute to a provident fund account or buy a stock option or acquire a plot of land or may purchase gold. The above paragraph highlights several possible investment opportunities that are available in the hands of any prospective investor. However, an investor has to select any or all such investment tools based upon the risk appetite and the corresponding return expectations. To understand it in a better manner, we will take a look at the table given below:
Investment Option Equity Debentures MF - Equity MF - Debt Return (Short term) Low High Low Moderate Return (Long term) High Moderate High Moderate Moderate Moderate Moderate Risk Liquidity Tax Benefits No No Partial Partial Partial Yes Yes Convenience of investment Moderate Moderate High High Very High High High

High Avg. High Low Low Low Low

Moderate Low High High Very High Low Low

Bank Deposits Moderate PPF Insurance Policies Real Estate NA NA

High

High

Avg.

Low

Partial

Low

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Bullion

NA

High

Low

Low

No

High

Theoretically speaking, any investor may select one or all of the above mentioned investment tools, however, in reality, an investor selects few of them thereby creating a portfolio. While creating a portfolio, the points that needs to be kept in mind are the objective of investment, the horizon of investment, the age of the investor, the risk appetite and the return expectations. The famous Italian researcher Modigliani has coined a formula which acts a guiding principle for equity investment. According to this formula, an investor can investment into equity as the following formula: Equity Investment = 100 (age of the investor)

Equity Investment in the above formula means the total amount investment money that is available to an investor. This is taken as 100 percent. Out of this money, an investor has invest in equity governed by the above formula. For example, an investor who is 30 years of age (say) and has Rs 50000 /- of investment money. He can invest up to 70 percent (100 30 = 70) of investment money in equities. The amount worked out comes to be Rs 35000 /- (Rs 50000 x .70 = Rs 35000/-). 5.2 Company's Perspective Issuance of equity

Issue of securities of legal entities such a corporations and any other concern to the general public for their subscription is called as issuance of equity. Issuance of equity is of following types: Primarily issue of securities can be broadly classified as public, rights, preferential issues (also known as private placements). While public and rights issues involve a detailed procedure, private placements or preferential issues are relatively simpler. The salient features of some of the public issue of securities are:

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Initial public offering (IPO)

Initial public offering is a kind of public issue of securities, where an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both, for the first time to the public. Follow on Public Offering (FPO) refer section : 4.1 (f) Rights Issue (RI) refer section : 3.3 (c) and 4.1 (c) Preferential Issue refer section : 3.3 (a) 5.3 IPOs : Fixed Price Method and Book Building Method Initial Public Offering is an offering of either a fresh issue of securities or an offer for sale of existing securities, or both by a company for the first time to the public. IPO enables further trading of securities in the secondary market. Currently two types of methods are used for offering the fresh equity viz the Fixed Price method and the Book Building method. 5.3.1 Fixed Price IPOs The public issue made by a corporate entity for the first time in its life is called 'Initial Public Offer (IPO). Under this method of marketing, securities are issued to successful applicants on the basis of the orders placed by them. When a company whose shares are not publicly traded wishes to offer the shares to public at large, it follows the process of IPO. The intermediaries working in the security market acts a mediator and manages the entire issue on behalf of the company with certain monetary considerations in return. This market intermediary at times also acts like a underwriter. An underwriter is generally an investment banker. In the event of any

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shortfall in the subscription amount, the underwriter agrees to fill in the gap in lieu of the shares of the issuing company. 5.3.1.1 Steps to be followed in issue of equity through fixed price IPO The essential steps involved in this method of marketing of securities are given below: a. Order : Brokers receives order from the client and places orders on behalf of e client with the issuer. b. Share Allocation : The issuer finalizes share allocation and informs the brokers regarding the same. c. The client : The broker advises the successful clients of the share allocation. Clients then submit the application forms for shares and make payment to the issuer through the broker. d. Primary issue account : The issuer opens a separate escrow account (primary issue account) for the primary issue. The clearing house of the exchange debits the primary account of the broker and credits the issuer's account. e. Certificates : Certificates are then delivered to investors. Otherwise depository account may be credited. 5.3.2 Book Building IPO Book building process of issuance of equity is an alternative way of fresh issue of equity by any corporate. Under this method, rather than company asking the prospective investors to apply for the equity at the rate determined by the company, the investors are free to quote their own rate. However, the company gives an indicative price band where the maximum value is known as ceiling price and the lowest value is known as floor price. The investors in the book building process submit their bids, ie., the price at which they have an interest in buying the shares of the company. Thus, under this method of IPO, rather than the company deciding upon the price at which shares can be allotted, it goes ahead with the price discovery mechanism.

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Book Building was first introduced in 1999 with the concept of a moving price band. However, in April 2000, the SEBI moved to the concept of fixed floor price. Price band

The book building is basically an auction of shares. Book building essentially means that the 'book is being built'. During the process the following steps are followed: a. The company (issuer) first of all appoints a book runner ie., a merchant banker. b. The book runner prepares and submits the draft document to the SEBI and obtains an acknowledgment card. c. The issuer and the book runner decide to offer shares at a price within a specified price band (range) d. Offers regarding the demand for securities at different price levels are invited from syndicate members consisting of eligible brokers, merchant bankers, underwriters, financial institutions, mutual funds etc. e. The press release (request for investment) by the company has to clearly mention the opening and the closing dates of the issue. The gap between the opening and closing date should not be less than 5 working days. f. Based upon the price quoted by the bidders the company decides about the cut off rate or the the final allotment price in consultation with the book runner and the lead manager. g. The issuer and the book runner may impose restriction on the number of shares that can be allotted to each client so as to avoid any future takeover threat. h. The final prospectus is filed with the RoC along with the procurement agreement. i. The placement portion opens for subscription only after the prospectus is filed with the RoC 5.3.3 Other pertinent points of Book Building Process

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a. In book building process, a Red Herring prospectus which has all the details of the prospective issue except for the price of the offer and consequently the amount of the issue. The Red Herring prospectus is submitted to the RoC and SEBI for approval.

b. The underwriter collects information from the prospective buyers and attempts to build interest in the IPO. The interest in the prospective issue is measured by road shows. The word road show relates to conducting meetings with brokers, analysts, investors and other parties and then meeting with the press or press releases. c. Price band includes the floor price and the cap price (ceiling price). The spread between the floor and he cap price should not be more than 20 percent. In other words, the cap should not be more than 120 percent of the floor price. The price band denotes the range of bidding. Investors can bid any price between these price band. d. The price band can be revised and this revision has to be informed to the stock exchanges and to the public through press release, website and terminals of the syndicate members. In case the price band is revised, the bidding period shall be extended for a further period of three days, subject to the total bidding period not exceeding thirteen days.
Features Pricing Fixed Price Process Price at which the securities are offered / allotted is well known in advance to the investor. Book Building process Price at which securities will be offered / allotted is not known in advance to the investor. Only a guiding price band is known.

Demand

Demand for the securities is known after the Demand of the securities is known on daily basis during the book building closure of the offer period. process. Payments is made at the time of application Payment is made only once the shares itself, refund if any is made after the are alloted. completion of the allotment period.

Payment

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5.4 Listing Process The term listing refers to a process or steps or exercise involved in listing something with some one. Listing means permission to quote shares and debentures officially on the trading floor of the stock exchange. The listed shares appear on the official list of securities for the purpose of trading. 5.4.1 Listing Characteristics a. Agreement : Listing of securities with the stock exchanges is made possible by means of a 'Listing Agreement' between the respective Stock Exchanges where the securities are to be listed with the corporate entity which wants their shares to be listed. b. Purpose : The purposes that are served by listing with a stock exchange are ensuring free transferability of securities so as to facilitate clear transparency and open disclosure of information relating to the affairs of the company whose securities are listed. Unless and until a company's shares are listed on a stock exchange, trading is not possible. c. Restriction : Listing of a company can be done in as many stock exchanges as the promoters are desirous of. However, it is compulsion that the company has to be listed at nearest regional stock exchange where the registered corporate office is located. d. Investors Protection: Listing is a barometer of performance and continued good performance of the company. This offers a measure of protection to the investors. 5.4.2 Listing Legal Provisions The legal provisions relating to the listing of securities are enshrined in the Securities Contracts (Regulation) Act, 1956 read with the rules made under, SEBI Act 1992 and the Companies Act, 1956. The following provisions have been put forth to:

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a. Section 21, of SCRA : This section prescribes necessary conditions that are required to be satisfied by the public companies for the purpose of having their securities listed in the stock exchanges.

b. Section 11 B of SEBI Act : This section empowers SEBI to formulate regulations governing the working of the listing mechanism. It aims at protecting the interest of investors in securities, thereby contributing to the development and the regulation of the securities market. This act further empowers SEBI to issue directions to intermediaries who are associated with securities market. This may include stock exchanges as a regulatory organization for the purpose of protection of investors. This act also empowers SEBI towards the formulation of effective listing related regulations. c. Section 73 of Companies Act. : this section requires corporations to make applications for getting the shares listed in any stock exchange. 5.4.3 Benefits of Listing a. Easy marketability of securities b. High Collateral value for bank loans for the investors as the equity shares of corporations can be pledged or mortgaged with banks c. Easy evaluation of the real worth of securities d. safeguarding of the interests of the investors, as the investors can quit at point of time or in the event of non performance of the company. e. tax benefits to corporations, as only listed corporations are entitled for tax benefits. f. Higher status and reputation g. existence of good faith h. Information dissemination 5.4.4 Steps in the Listing process
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5.4.4.1 Initial Listing : It involves making a simple application by the payment of listing fees. This is done prior to the offer of securities to the public and registration of prospectus with the RoC as per the section 60 of Companies Act, 1956.

5.4.4.2 Final Listing : This involves getting the approval of the recognized stock exchange for the listing by means of an agreement with the stock exchange. 5.4.4.3 Registration and Recording : This involves registering and placing on record the corporate securities openly. This is done for the purpose of trading by the registered members of the stock exchange and for the official quotation/ announcement of the security price, for the benefit of the public who intend dealing with such securities. 5.4.4.4 Continued listing : This step involves making efforts by the corporate enterprise to make an application to one or more recognized stock exchanges seeking permission for dealing with the securities offered to the public before issue of prospectus.

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