UNIT II

ISSUE MANAGEMENT
Role of Merchant Banking in Appraisal of projects, Designing Capital Structures and
Instruments – Issue Pricing- Preparation of prospectus selection of bankers, Advertising
Consultants etc. – Role of Registrars –Underwriting Arrangements. Dealing with Bankers to
the Issue, Underwriters, Registrars, and Brokers. –Offer for sale – Book- Building – Green
Shoe Option –E –IPO Private Placement- Bought out Deals –Placement with FIs, MFs, FIIs,
etc. off- Shore Issues. – Issue Marketing – Advertising Strategies-NRI Marketing- Post Issue
Activities.

PART-A
1. What is offer for sale? (Nov/Dec 2016)
A company sells the securities through the intermediaries such as issue houses, and
stock brokers. This is known as an offer for sale method.

2. What is book building? (May/June 2013), (Nov/Dec 2013), (NOV/DEC 2010),
(APR/MAY 2015),(Apr/May 2017)
 Book building is a systematic process of generating, capturing, and recording
investor demand for shares during an initial public offering (IPO), or other
securities during their issuance process, in order to support efficient price discovery.
 Under this method, share prices are determined on the basis of real demand for the
shares at various price levels in the market.

3. Define underwriting. (APR/MAY 2015)
 "Underwriting" is an agreement entered by a company with financial agency in
order to ensure that the public will subscribe the entire issue of shares made by
the company.
 The financial agency is known as ‘underwriter’ and it agrees to buy the part of
companies issues which are not subscribed by public for specifies underwriting
commission.

A.Anitha, Asst.Prof/DOMS/MEC Page 1

4. Define IPO.

An initial public offering (IPO) refers to the first time a private company publicly
sells shares of its stock on the open market. It is also known as "going public."

5. Who is a broker?
A broker is a intermediate person who arranges transactions between a buyer
and a seller, and he will be paid commission when the deal is executed.

6. What is issue price?
 The issue price of shares is the price at which they are offered for sale when
they first become available to the public.
 The price at which a new security will be distributed to the public prior to the new
issue trading on the secondary market. It is also called as offering price.

7. What is bought out deal? (May/June 2014)
 A bought out deal is a method of offering securities to the public through a
sponsor (a bank, financial institution, or an individual).
 An offering in which the underwriter (or syndicate) buys all the shares and resell
them.
 The securities are listed in one or more stock exchanges within a time frame mutually
agreed upon by the company and the sponsor.

8. Define private placement. (Nov/Dec 2012)
A method of marketing of securities whereby the issuer makes the offer of sale to
individuals and institutions privately without the issue of a prospectus is known as
Private Placement Method.

9. Define green shoe option. (May/June 2013), (Nov/Dec 2013), (NOV/DEC 2014),
(MAY/JUNE 2012), (NOV/DEC 2011), (NOV/DEC 2010), (NOV/DEC 2013)
A green shoe option is otherwise called an “over-allotment option”. In this
underwriter has right to sell additional shares in a registered securities offering at the offering
price in IPO.

A.Anitha, Asst.Prof/DOMS/MEC Page 2

10. What are the types of brokers?
 Aircraft broker
 Broker-dealer
 Business broker
 Commodity broker
 Customs broker
 Leasing broker
 Mortgage broker
 Real estate broker
 Joint venture broker

11. Who is stock broker?
A stock broker is a regulated professional broker who buys and sells shares.

12. Define the term “prospectus”. (Nov/Dec 2012),(Nov/Dec 2016)

 Prospectus is defined a document through which public are offered to
subscribe or buy the shares of a company.
 Its purpose is inviting the public for the subscription/purchase of any securities of
a company.

13. Write a note on credit syndication. (Nov/Dec 2012) (May/June 2013), (Nov/Dec 2013)
Activities connected with joint credit procurement and project financing, aimed at
raising Indian and foreign currency loans from banks and financial institutions are called
credit syndication.

14. What are the various methods of issuing securities?

 Public Issue or Initial Public Offer (IPO)
 Private Placement
 Offer for Sale
 Sale through Intermediaries
 Sale through Managing Brokers
 Privileged Subscriptions

A.Anitha, Asst.Prof/DOMS/MEC Page 3

15. What is management buyout?(May/June 2012)

A management buyout (MBO) is a form of acquisition where a company's existing
managers acquire a large part or all of the company shares from either the parent
company or from the private owners.

16. What is issue management?
 The management of issues for raising funds through various types of instruments by
companies is known as issue management.
 The function of capital issues management in India is carried out by merchant
bankers.

17. What is Public issue?
 When capital funds are raised through the issue of a prospectus, it is called ‘public
issue of securities‘. It is the most common method of raising funds in the capital
market.
 A security issue may take place either at part, or at a premium or at a discount.

18. Define Rights issue.
 When shares are issued to the existing shareholders of a company on a privileged
basis, it is called as Rights Issue.
 The existing shareholders have a pre-emptive right to subscribe to the new issue of
shares.

19. What are the codes of conduct for bankers to issue? (NOV/DEC 2014)

 Make all efforts to protect the interest of investors.
 Observe high standards of integrity and fairness in the conduct of its business.
 Fulfill its obligations in a prompt, ethical and professional manner.
 At all times exercise due diligence, ensure proper care and exercise independent
professional judgment.

A.Anitha, Asst.Prof/DOMS/MEC Page 4

20. Explain designing capital structure and instruments. it is imperative that the number of securities is limited to debt and equity. and maximizes the market value of shares of a firm is known as Optimal capital structure. An optimal capital structure should possess the following characteristics: a. Capital structure is the permanent financing of the firm. For simplicity. but excluding all short-term credit. capital surplus and accumulated retained earnings.Simplicity: An optimal capital structure must be simple to formulate and implement by the financial executives.Prof/DOMS/MEC Page 5 .Anitha. preferred stock and common equity. Who is a book running lead manager? (NOV/DEC 2011)  Lead managers are independent financial institution appointed by the company going public. (AP R / MAY 2 015) Designing capital structure decisions: Introduction: The term capital structure refers to the proportionate claims of debt and equity in the total long-term capitalization of a company.  Their main responsibilities are to initiate the IPO processing. Asst. Common equity includes common stock. Definition: According to Weston and Brigham. Optimal capital structure: An ideal mix of various sources of long-term funds that aims at minimizing the overall cost of capital of the firm.  Companies appoint more than one lead manager to manage big IPO's. creating draft offer document and get it approve by SEBI and stock exchanges and helping company to list shares at stock market PART-B 1. A. represented primarily by long-term-debt. help company in road shows. They are known as Book Running Lead Manager and Co Book Running Lead Managers.

all such debts that threaten the company‘s solvency must be avoided. Capitalization must be based purely on the financial needs of the enterprise. Accordingly. Maximum Return and Minimum Risks: An ideal capital structure must have a combination of debt and equity in such a manner as to maximize the firm‘s profits. h. it is important that the various components help provide the firm greater solvency through higher liquidity. The issue of securities should be based on the pattern of voting rights. financial executives must pay attention to keep the expenses of issue and fixed annual payments at a minimum. c. To attain a high order of liquidity. the firm must be able to either raise a new level of capital.b. g. It must affect favorably the voting structure of the existing shareholders. e.Anitha. the firm must be guarded against risks such as taxes. Similarly. or reduce the existing level of capital.Prof/DOMS/MEC Page 6 . costs. interest rates. Maximum Control: The capital structure must aim at retaining maximum control with the existing shareholders. Flexibility: The capital structure should be so constructed that it is possible for the company to carry out any required change in the capitalization in tune with the changing conditions. Optimum Leverage: A. This would help maximize the shareholders’ value. Asst. f. An equitable capitalization would help make full utilization of the available capital at minimum cost. etc. Liquidity: In order to have a sound capital structure. with the aim of either reducing them or removing them. Equitable Capitalization: An ideal capital structure must be neither over capitalized nor under-capitalized. d. For this purpose. Low Cost: A sound capital structure must aim at obtaining the capital required for the firm at the lowest possible cost. and increase their control on the company‘s affairs.

Prof/DOMS/MEC Page 7 . Return Principle According to this principle. Decisions on capital structure: The decisions regarding the use of different types of capital funds in the overall long- term capitalization of a firm are known as capital structure decisions. It also implies that the kind of capital source chosen must be secure. Accordingly. there must be adequate flexibility in the capitalization. It is best for the firm to issue debt when the rate of interest is low. the patterns of capital structure must be devised to allow for enhanced returns to the shareholders. a. Flexibility Principle For capital structure decisions to be efficient. Besides. The firm must attempt to secure a balanced leverage by issuing both debt and equity at certain ideal proportions. while making a fresh issue of capital funds. d. should ensure that the control of the existing shareholders remain unaffected. b. The addition of a capital fund must be such that it should be possible for a firm to redeem or add capital to the existing capital structure.Anitha. and thus help maximize returns to A. the principal amount having to be returned immediately after the expiry of the stipulated time period the bonds require obligated debt servicing by way of fixed periodic interest. Conversely. e. The cost of capital of a firm is greatly influenced by the amount of interest to be paid to its debenture holders in a particular period. equity is suitable where the rate of capitalization is high. Control Principle The amount of control to be exercised by the shareholders over the management is an important principle underlining capital structure decisions. the finance manager. Asst. c. The returns must be maximized and cost minimized. Timing Principle: The quality of decisions depends on the time at which the capital funds are either raised or returned. Any decisions on Capital Structure are based on different principles.Cost Principle An ideal pattern of capital structure is one that costs the least. This would help minimize the cost of capital.

In order words. which in turn depends on the general state of the economy. would adversely affect the ability of firms to raise equity capital. the firm must have several alternatives to source the required capital in order to undertake profitable investment activities. if any. A study of the capital market trends would greatly help a firms decision on the quantum and cost of issue. Similarly. of the capital market greatly influences capital structure decisions. the way the economy of a country is managed determines the way the capital structure of a firm will be determined. the interest rates will go up and debt will become costlier. Factors that are active in the economy are: 1. Under these circumstances.Prof/DOMS/MEC Page 8 . Accordingly. Under conditions of expanding business activities. the taxes on dividend income. or otherwise.Regulations : A. For instance. Timing greatly affects the preferences and choices of investors. What are the various Factors affecting capital structure decisions? Introduction: The following factors significantly influence the capital structure decision of a firm: Economy Characteristics The major developments taking place in the economy affect the capital structure of firms. it is advisable for a firm to undertake equity funding rather than debt funding. Asst. 4.Taxation : The rates and rules of taxation prevalent in an economy also affect capital structure decisions.Stock market : The buoyancy. 2. higher rates of taxation will be advantageous due to the tax deductibility benefit of debt funding. 2. shareholders.Business activity : The quality of business activity prevailing in the economy determines the capital structure pattern of a firm. 3. if the stock market is expected to witness bullish trends.Anitha.

3. the interest rate liberalization announced by RBI has been dominating the lending policies of financial institutions.Prof/DOMS/MEC Page 9 . globalization.  There is a lot of change in capital market due to liberalization. For instance. may encourage firms to obtain a higher quantum of loans. For instance.  The competition has become very intense and real in both industrial sector and financial services industry. Capital market instruments:  Financial instruments that are used for raising capital resources in the capital market are known as Capital Market Instruments. Financial institutions : The credit policy followed by financial institutions determines the capital structure decisions of firms. restrictive lending terms by financial institutions may deter firms from raising long-term funds at reasonable rates of interest. Licensing policy. affects the way capital is raised in the market. What is capital market? Explain various capital market instruments. 5. A finance manager should take this factor into consideration while designing the capital structure. The regulations imposed by the state on the quantum. Types of capital market instruments: A.Anitha. such as the RBI. Credit policy : The credit policy pronouncements made by the central monetary authority. and privatization that have been initiated by the Government. restrictions have been imposed by SEBI on the issue and allotment of shares and bonds to different type of investors. etc. 6.  As a result of these changes. This affects the ability of finance managers to raise the required funds. Easy terms. of capital funds to be raised also influences the capital raised by a firm. financial services industry. pricing etc.  Changes have occurred in the realm of industrial policy. Asst. interest rates. on the other hand. For instance. the financial services industry has come to introduce a number of instruments with a view to facilitate borrowing and lending of money in the capital market by the participants.

Company fixed deposits 6. Equity shares 3. A. 4.Participating preference shares : Shares that enjoy the right to participate in surplus profits or surplus assets on the liquidation of a company or in both. Debentures and Bonds I. Asst.Cumulative preference shares : Shares where the arrears of dividends in times of no and/or lean profits can be accumulated and paid in the year in which the company earns good profits. if the Articles of Association provides for it. the maximum period of a redemption being 20 years with effect from 1. The preferential rights are the rights regarding payment of dividend and the distribution of the assets of the company in the event of its winding up.Anitha. The various capital market instruments used by corporate entities for raising resources are as follows: 1. Non-voting equity shares 4. PREFERENCE SHARFES: Shares that carry preferential rights in comparison with ordinary shares are called ‘Preference Shares‘. Preference shares 2. 3.3. 2.Non-cumulative preference shares : Shares where the carry forward of the arrears of dividends is not possible.Prof/DOMS/MEC Page 10 .1997 under the Companies amendment Act 1996. Warrants 7. Cumulative convertible preference shares 5. Types of preference shares: 1. Redeemable preference shares:  Shares that are to be repaid at the end of the term of issue. in preference to equity shares.

 Directors declare no dividends in case there are no profits . It is treated as paid-up share capital of the company.  Part B will be redeemed at par/converted into equity shares after a lock-in period at the option of the investor. declaration of dividend. Preference shares with warrants attached  The attached warrants entitle the holder to apply for equity shares for cash. they are given larger share in profits through higher dividends than preference shareholders. at a price.  The holders of warrants would be entitled to all rights/bonus shares that may be issued by the company.Anitha.  Equity shareholders has the rights to approve the company‘s annual accounts.  Part A is convertible into equity shares automatically and compulsorily on the date of allotment. 5. Where redemption is made out of profits. EQUITY SHARES  Equity shares. at a premium‘. at any time.  Equity shareholders also enjoy the benefit of ploughing back of undistributed profits kept as reserves and surplus for the purposes of business expansion. Part A and B. II.  The preference shares with warrants attached would not be transferred sold for a period of 3 years from the date of allotment. Fully convertible cumulative preference shares Shares comprise two parts viz. which would be 30 percent lower than the average market price. Asst.  As equity shareholders face greater risks and have no specified preferential rights.. enhancement of managerial remuneration in excess of A. in one or more stages between the third and fifth year from the date of allotment. a Capital Redemption Reserve Account is opened to which a sum equal to the nominal value of the shares redeemed is transferred. conversion into equity shares taking place after the lock-in period.  Only fully paid shares are redeemed.Prof/DOMS/MEC Page 11 . also known as „ordinary shares‟ are the shares held by the owners of a corporate entity. 6.

Asst. Non-voting equity shares:  Based on the recommendations of the Abid Hussain Committee and to the amendment to the Companies Act.  This class of shares has been included by an amendment to the Companies Act as a third category of shares. The shares have to be listed on one or more stock exchanges in the country.100 each. amendments to the Articles and Memorandum of Association. Convertible Cumulative Preference Shares (CCPS):  These are the shares that have the twin advantage of accumulation of arrears of dividends and the conversion into equity shares. proposals for mergers and reconstruction and any other important proposal on which member‘s approval is required under the Companies Act.  Such shares will be entitled to all the benefits except the right to vote in general meetings. Following are some of the terms and conditions of the issue of CCP shares :  For the purpose of calculation of debt-equity ratio as may be applicable CCPS is be deemed to be an equity issue. If a company fails to pay dividend. corporate managements are permitted to raise additional capital without diluting the interest of existing shareholders with the help of a new instrument called non-voting equity shares‘.  Such shares would have to be the face value of Rs. specified limits and fixing the terms of appointment and election of directors. iv . appointment of auditors and fixing of their remuneration. III. A. increase of share capital and issue of further shares or debentures.  Voting rights are granted under the Companies Act (Sections 87 to 89) wherein each shareholder is eligible for votes proportionate to the number of shares held or the amount of stock owned.  As this shares has no voting rights they carry higher dividend rate than voting shares. non-voting shareholders will automatically be entitled to voting rights on a prorate basis until the company resumes paying dividend.  Non-voting equity shares will be entitled to rights and bonus issues and preferential offer of shares on the same lines as that of ordinary shares.Prof/DOMS/MEC Page 12 .Anitha.

 Warrants have a secondary market. vi. Asst. v.  Private company would become a deemed public company where such a private company. Company Fixed Deposits:  Fixed deposits are the attractive source of short-term capital both for the companies and investors as well. along with the stated/exercise price.  Warrants may be issued with either debentures or equity shares. at a specified price.Anitha.  Disclosure in the newspaper advertisement of deposits remaining unpaid after maturity.  Some of the important regulations are:  Issue of an advertisement as approved by the Board of Directors in dailies circulating in the state of incorporation. 1956. after inviting public deposits through a statutory advertisement. A.  CCP has the right to receive arrears of dividend up to the date of conversion. the expiration date.  Conversion of the CCP into equity shares would be compulsory at the end of five years and the preference shares would not be redeemable at any stage.  CCPS would have voting rights as applicable to preference shares under the companies Act. directors or their relatives. granting its holder the right to purchase a specified number of shares. WARRANTS:  A security issued by a company. accepts or renews deposits from the public other than its members. any time prior to an expirable date is known as a warrant. They clearly specify the number of shares entitled.Prof/DOMS/MEC Page 13 .  Fixed deposits as an ideal form of working capital mobilization without going through the process of mortgaging assets. The exchange value between the share of its current price and the shares to be purchased at the exercise price represents the minimum value of warrant.  The guideline ratio of 1:3 as between preference shares and equity shares would not be applicable to these shares.  The rate of preference dividend payable on CCP shares would be 10 percent.

vii. Debentures can be issued at a discount when particulars are to be filed with the Registrar of Companies. Following are the features of a debenture:  Section 117 of the Companies Act prohibits issue of debentures with voting rights. which could be redeemed after a certain period of time are called Redeemable Debentures.  In Bearer debentures the terminal value is payable to its bearer. Asst.Anitha.  A document that shows on the face of it that a company has borrowed a sum of money from the holder thereof upon certain terms and conditions is called a debenture. Such debentures are called Irredeemable Debentures. Such instruments are negotiable and are transferable by delivery.  Debentures may be secured by way of fixed or floating charges on the assets of the company.  Debentures.Prof/DOMS/MEC Page 14 . issued under the common seal of the company. usually takes the form of a certificate that acknowledges indebtedness of the company.  Warrants are issued by new/growing firms and venture capitalists. Such a charge may be either fixed or floating. A. They are also issued during mergers and acquisitions.  Secured debentures create a charge on the assets of the company.  Debentures that are issued without any charge on assets of the company are called unsecured or marked debentures.  A debenture.  Warrants in the Indian context are called sweeteners ‘and were issued by a few Indian companies since 1993.  These are the instruments that are generally used for raising long-term debt capital. DEBENTURES AND BONDS:  A document that either creates a debt or acknowledges it is known as a debenture.  Registered debentures are not negotiable instruments as they contain a commitment to pay the principal and interest.  Debentures that are not to be returned except at the time of winding up of the company.

issued.. A. amount of issue. I. b. Terms of the issue like mode of payment . location of the project etc. Abridged prospectus 3.. Asst. means of financing etc. subscribed and paid up capital etc. do not have such an exchange facility.Anitha. Name and address of the registered office consent of the Central Government for the issue and names of regional stock exchanges etc. Particulars of the issue like project cost .Prof/DOMS/MEC Page 15 . Capital Structure such as authorized. Prospectus for rights issue 4... e. date of closure of issue. c. Non- convertible Debentures.g. Disclosures in abridged prospectus and letter of offer 1. g. selection of bankers.. PART I a. Disclosures in prospectus 5. d. REGULAR PROSPECTUS: The regular prospectus is presented in three parts. f. availability of raw materials etc.. giving information about type of issue. Introduction: Prospectus is defined a document through which public are invited to subscribe or buy share capital of a company. General Information about the company e. Perception of Risk factors like difficulty in marketing the products. Explain preparation of prospectus. rights of instruments holders etc. Management and project like promoters for the project. 4. Regular prospectus 2. advertising consultants. etc. such debentures are called Convertible Debentures.. Company. PROSPECTUS FOR PUBLIC OFFER: 1. Disclosures of public issues made by the Company. on the other hand.  Debenture issue gives the option of conversion into equity shares after the expiry of a certain period of time.

. prospectus. II. PART III: a. launching publicity campaign and fixing date of board meeting to approve and sign prospectus and pass the necessary resolutions. Because the commercial bankers are merely financiers and their activities are appropriately arrayed around credit proposals. b. radio.PART II: a. SELECTION OF BANKERS:  Merchant bankers assist in selecting the appropriate bankers based on the proposals or projects. takeover etc. investors conference etc. mergers.  Merchant banking include services like project counseling .e. registration. General Information. 2. advertisement in the press. A. TV.Prof/DOMS/MEC Page 16 . Advertising consultants:  Merchant bankers arrange a meeting with company representatives and advertising agents to finalize arrangements relating to date of opening and closing of issue.. credit appraisal and loan sanctions.Anitha. b. 1956 and guidelines issued by the Government have been complied with. corporate counseling in areas of capital restructuring amalgamations. discounting and rediscounting of short term paper in money markets.  Publicity campaign covers the preparation of all publicity material and brochures. c. Application with prospectus. Declaration i. III. underwriting and supporting public issues in new issue market and acting as brokers and advisers on portfolio management in stock exchange. announcement. of prospectus. Statutory and Other Information. Asst. ABRIDGED PROSPECTUS: The concept of abridged prospectus was introduced by the Companies (amendment) Act of 1988 to make the public issue of shares an inexpensive proposition. A memorandum containing the salient features of a prospectus as prescribed is called as Abridged Prospectus. managing. Chartered Accountant‘s Report etc... Financial Information like Auditor‘s Report. by the directors that all the relevant provisions of the companies Act.

 SEBI has made underwriting mandatory for issues to the public. 5.  The necessary infrastructure like adequate office space.20 lakhs. a certificate of registration must be obtained from the SEBI. determining the size and publications in which the advertisement should appear.Anitha.  The merchant bankers help choosing the media. Asst. and A. The underwriting arrangement should be filed with the stock exchange. Registration: To act as underwriter. branches of brokers to the issue and underwriter in time.  Particulars of underwriting arrangement should be mentions in the prospectus. equipment and manpower to effectively discharge the activities  Past experience in underwriting/employment of at least two persons with experience in underwriting  Any person directly/indirectly connected with the applicant is not registered with the SEBI as under or a previous application of any such person has been rejected or any disciplinary action has been taken against such person under the SEBI Act/ rules/regulations.Prof/DOMS/MEC Page 17 . In granting the certificate of registration. What are the activities connected with “Issue Management and Underwriting” of Merchant Bankers? Explain. (May/June 2014) Introduction:  Important intermediary in the new issue/primary market is the underwriters to issues of capital who agree to take up securities which are not fully subscribed.  Underwriters are appointed by the issuing companies in consultation with the lead managers/merchant bankers to the issues.  Merchant banker has to ensure that the material is delivered to the stock exchange at least 21 days before the issue opens and to brokers to the issue. the SEBI considers all matters relevant/relating to the underwriting and in particular. Issue Management and underwriting: 1.  Capital adequacy requirement of not less than net worth (capital + free reserves) of Rs.

should take reasonable steps to resolve the same in any equitable manner. Not discriminate amongst its clients.e. exercise due diligence.  The applicant/director/principal officer/partner has been convicted of offence involving moral turpitude or found gully of any economic offence. or has rendered to any other issuer company. 6. Ensure that any charge in registration status/any penal action taken by SEBI or any material change in financials which may adversely affect the interests of clients/ investors is promptly informed to the clients and any business remaining outstanding is transferred A. save and except on ethical and commercial considerations. Not divulge to other issuer. 11. Not make any statement. dignity and fairness in the conduct of its business. Endeavour to ensure all professional dealings are effected in a prompt. efficient and effective manner. 2. At all times render high standards of service. objective and unbiased services. ensure proper care and exercise independent professional judgment. press or any party any confidential information about its issuer company. 4. 12. 5.Anitha. Make appropriate disclosure to the client of its possible source or potential in areas of conflict of duties and interest while acting as underwriter which would impair its ability to render fair. 3. the issuer). which has come to its knowledge and deal in securities of any issuer company without making disclosure to the SEBI as required under these regulations and also to the Board directors of the issuer company. 9. 10. Asst. 7. Ensure that it and its personnel will act in an ethical manner in all its dealings with a body corporate making an issue of securities (i. Make all efforts to protect the interests of its clients. General obligations and responsibilities code of conduct for underwriters: An underwriter should: 1. Maintain high standards of integrity. Avoid conflict of interest and make adequate disclosure of his interest. Put in place a mechanism to resolve any conflict of interest situation that may arise in the conduct of its business or where any conflict of interest arises. which would misrepresent (a) the services that the underwriter is capable of performing for its client. (b) his underwriting commitment. either oral or written.Prof/DOMS/MEC Page 18 . 8.

Ensure that the SEBI is promptly informed about any action. the interest of his dependent family members and that of the employer including their long or short position in the security. while rendering such advice. relatives or friends indulges in any insider trading. (b) In case an employee or an underwriter is rendering such advice. initiated against it in respect of any material breach or non-compliance by it. Maintain an appropriate level of knowledge and competency and abide by the provisions of the SEBI Act. 15. fraud. while rendering such advice. provides for the period during which the agreement is in force. Asst. rules. reports. legal proceedings. Agreement with clients: Every underwriter has to enter into an agreement with the issuing company. of any law. 16. unless a disclosure of his interest including its long or short position in the security has been made. to another registered person in accordance with any instructions of the affected clients/investors. etc. among others. Have internal control procedures and financial and operational capabilities which can be reasonably expected to protect its operations. Not indulge in any unfair competition. directions of the SEBI or of any other regulatory body. 18. the A. the underwriter should ensure that he should disclose his interest. professional misconduct or commissions. Not render. or carrying out any assignment. Not make any untrue statement or suppress any material fact in any documents. circulars and guidelines issued by the SEBI. 20. 17. papers or information furnished to the SEBI. which is likely to be harmful to the interest of other underwriters carrying on the business of underwriting or likely to place such other underwriters in a disadvantageous position in relation to the underwriter while competing for. The agreement. 2003. and other dishonest acts. whether real-time or non-real-time. Provide adequate freedom and powers to its compliance officer for the effective discharge of his duties.Anitha. Not either through its account or their respective accounts or through their associates or family members. directly or indirectly any investment advice about any security in the publicly accessible media. regulations. 13. regulations. 14. 19.Prof/DOMS/MEC Page 19 . its clients and other registered entities from financial loss arising from theft. The underwriter should also comply with the award of the Ombudsman under the SEBI (Ombudsman) Regulations.

The maximum obligation under all underwriting agreements of an underwriter cannot exceed twenty times his net worth. if any. other records and documents of the underwriters. ii. non-compliance with any conditions subject to which registration was granted. made by the underwriter for fulfilling the underwriting obligations. Registration: A. the procedure for inspection and obligations of the underwriters is broadly on the same pattern as applicable to the lead managers. Asst. Inspection and disciplinary proceedings: The framework of the SEBI‘s right to undertake the inspection of the books of accounts.Anitha. Underwriters have to subscribe for securities under the agreement with 45 days of the receipt of intimation from the issuers. Action in case of default: The liability for action in case of default arising out of i. Discuss briefly about bankers to the Issue Management (Nov/Dec 2013) Bankers to an issue: The bankers to an issue are engaged in activities such as acceptance of applications along with application money from the investors in respect of issues of capital and refund of application money. General responsibilities: An underwriter cannot derive any direct or indirect benefit from underwriting the issue other than by the underwriting commission. 6.amount of underwriting obligations. the amount of commission/brokerage.Prof/DOMS/MEC Page 20 . the effect of suspension/ cancellation are on the lines followed by the SEBI in case of lead managers. and details of arrangements. by an underwriter involves the suspension/cancellation of registration. the period within which the underwriter has to be subscribe to the issue after being intimated by/on behalf of the issuer. contravention of any provision of the SEBI Act/rules/regulations.

5 lakhs for the first two years from the date of initial registration. a person must obtain a certificate of registration from the SEBI.Anitha.  Non-payment of the prescribed fee may lead to the suspension of the registration certificate.5 lakhs as initial registration fee and Rs. Books of account/record/documents: A banker to an issue is required to maintain books of accounts/records/documents for a minimum period of three years in respect of. a) The number of issues for which he was engaged as a banker to an issue. c) The dates on which applications from investors were forwarded to the issuing company registrar to an issue. d) The dates/amount of refund to the investors.000 for the third year.Prof/DOMS/MEC Page 21 .1 lakh and Rs. Asst.  The renewal fee to be paid by him annually for the first two years was Rs. the number of applications A.2. communication and data processing facilities and manpower to effectively discharge his activities.1 lakh for the third year to keep his registration in force. To carry on activity as a banker to issue. and Rs.  Every banker to an issue had to pay to the SEBI an annual fee of Rs. inter-alias.20.  The applicant/any of the directors of the applicant is not involved in any litigation connected with the securities market/has not been convicted of any economic offence The applicant is a scheduled bank and  Grant of a certificate is in the interest of the investors. General obligations and responsibilities furnish information: When required. a banker to an issue has to furnish to the SEBI the following information. Since 1999. The SEBI grants registration on the basis of all the activities relating to banker to an issue in particular with reference to the following requirements:  The applicant has the necessary infrastructure.  A banker to an issue can apply for the renewal of his registration three months before the expiry of the certificate. b) The number of application/details of the application money received. schedule of fee is Rs.5 lakhs renewal fee every three years from the fourth year from the date of initial registrations.2.

Prof/DOMS/MEC Page 22 . the names of the investors. Endeavour to ensure that a) inquiries from investors are adequately dealt with. ethical and professional manner. c) where a complaint is not remedied promptly. At all times exercise due diligence. Fulfill its obligations in a prompt.Anitha.received. Observe high standards of integrity and fairness in the conduct of its business. b) Accept applications after office hours or after the date of closure of the issue or on bank holidays. Not a) Allow blank applications forms bearing brokers stamp to be kept the bank premises or peddled anywhere near the entrance of the premises. the time within which the applications received were forwarded to the issuing company/registrar to the issue and dates and amounts of refund money to investors. A. the investor is advised of any further steps which may be available to the investor under the regulatory system. 3. 7. Not any time act in collusion with other intermediates over the issuer in a manner that is detrimental to the investor 6. b) grievances of investors are redressed in a timely and appropriate manner. ensure proper care and exercise independent professional judgment. If the banker is prohibited from carrying on his activities as a result of the disciplinary action. 5. the SEBI registration is automatically deemed as suspended/cancelled. Asst. Disciplinary action by the RBI: If the RBI takes any disciplinary action against a banker to an issue in relation to issue payment. Code of conduct for bankers to issue: A banker to an issue should: 1. 2. 4. c) After the closure of the public issue accept any instruments such as Cheques/ demand drafts/stock invests from any other source other than the designated registrar to the issue. the latter should immediately inform the SEBI. Make all efforts to protect the interest of investors.

13. should take reasonable steps to resolve the same in an equitable manner. Not make any exaggerated statement whether oral or written to the client. d) Part with the issue proceeds until listing permission is granted by the stock exchange to the body corporate.Prof/DOMS/MEC Page 23 . Maintain an appropriate level of knowledge and competency and abide by the provisions of the SEBI Act. 16. 8. 10. 15. save and except on ethical and commercial considerations. either about its qualification or capability to render certain services or its achievements in regard to services rendered to other client. 17. 11. without taking prior permission of its clients 12. any confidential information about its clients which has come to its knowledge. objective and unbiased services. Always Endeavour to render the best possible advice to the clients having regard to the clients‘ needs and the environments and his own professional skill. interests or any such accrual income received or collected by him on behalf of his clients 9. Asst. 14.Anitha. Be prompt in disbursing dividends. which is likely to harm the interests of other bankers to an issue or investors or is likely to place such other bankers to an issue in a disadvantageous position while competing for or executing any assignment. Put in place a mechanism to resolve any conflict of interest situation that may arise in the conduct of its business or where any conflict of interest arise. Not divulge to anybody either orally or in writing. regulations. The banker to an issue A. the lead manager and the body corporate and such figures should be submitted within seven working days from the issue closure date. Avoid conflict of interest and make adequate disclosure of his interest. Ensure that any change in registration status/any penal action taken by the SEBI or any material change in financials which may adversely affect the interests of clients/ investors is promptly informed to the clients and business remaining outstanding is transferred to another registered person in accordance with any instructions of the affected clients/investors. 18. e) Delay in issuing the final certificate pertaining to the collection figures to the registrar to the issue. Make appropriate disclosure to the client of its possible source or potential areas of conflict of duties and interest while acting as banker to an issue which would impair its ability to render fair. Not indulge in any unfair competition. circulars and guidelines of the SEBI. Not discriminate amongst its clients. directly or indirectly.

Asst. should also comply with the award of the Ombudsman passed under the SEBI (Ombudsman) Regulations. c) Fails to resolve investor complaints/to give satisfactory reply to SEBI. legal proceedings. 19. the SEBI is empowered to suspend/cancel their registration certificate. The deterioration in is financial position which likely to adversely affect the interest of the investors. and e) Fails to pay fees and carry out his obligations as specified in the regulations. d) Is guilty of misconduct/unprofessional conduct inconsistent with the prescribed code of conduct. Action in case of default: With a view to ensure effective regulation of the activities of the bankers to an issue. rules. regulations. On the basis of the inspection report. etc. 2003. Inspection: Such inspection is done by the RBI upon the request of the SEBI.Anitha. the SEBI can direct the banker to an issue to take such measures as it may deem fit in the interest of the securities market and for due compliance with the provision of the SEBI Act. of any law. Repeated defaults leading to suspension of a banker. b) Fails to/does not furnish the required information or furnishes wrong/false information. Not make any untrue statement of suppress any material fact in any documents. The SEBI can cancel registration in case of i. The grounds of suspension are: a) The banker violates the provisions of the SEBI Act. reports.. papers or information furnished to the SEBI. 20.Prof/DOMS/MEC Page 24 . The foregoing rules and regulations have brought the bankers to an issue under the regulatory framework of the SEBI with a view to ensuring greater investor protection. and A. initiated against it in respect of any material breach of non-compliance by it. ii. and directions of the SEBI or of any other regulatory body. Ensure that the SEBI is promptly informed about any action. The purpose of inspection is largely to ensure that the required books of accounts are maintained and to investigate into the complaints received from the investors against the bankers to an issue. rules/regulations.

Discuss about brokers to the issue. and so on.5 percent.  The mailing cost and other out-of pocket expenses for canvassing of public issues have to be borne by the stock brokers and no payment on that account is made by the companies. (Nov/Dec 2013) Brokers to the issue:  Brokers are the persons mainly concerned with the procurement of subscription to the issue from the prospective investors.Prof/DOMS/MEC Page 25 . the entry of experienced and unknown agencies in to the field of new issue activity as issue managers. underwriters. iii.5 percent. A.  Brokerage may be paid within the limits and according to other conditions prescribed. brokers.  The managers to the issue and the official brokers organize the preliminary distribution of securities and procure direct subscriptions from as large or as wide a circle of investors as possible. The brokerage rate applicable to all types of public issue of industrial securities is fixed at 1. Thereby.  The leading merchant bankers in India who act as managers to the issue have particulars of the performance of brokers in the country.  The appointment of brokers is not compulsory and the companies are free to appoint any number of brokers.  The listed companies are allowed to pay a brokerage on private placement of capital at a maximum rate of 0. is discouraged. 7. Asst.  A copy of the consent letter should be filed along with the prospectus to the ROC.Anitha. The names and addresses of the brokers to the issue are required to be disclosed in the prospectus. The being found guilty of fraud/convicted of a criminal offence.  The company in consultation with the stock exchange writes to all active brokers of all exchanges and obtains their consent to act as brokers to the issue.  A clause to this effect must be included in the agreement to be entered into between the broker and the company. whether the issue is underwritten or not.  Brokerage is not payable when the applications are made by the institutions/bankers against their underwriting commitments or on the amounts devolving on them as underwriters consequent to the under subscription of the issues.

T  he Cheques relating to brokerage on new issues and underwriting commission. on request. Exclusive subscription: Under this method.  The issuing company is expected to pay brokerage within two months from the date of allotment and furnish to the broker. The features of this method are a. It is the most popular method of making public issue of securities by corporate enterprises. is called Pure Prospectus Method. if any.Prof/DOMS/MEC Page 26 . Pure prospectus method: The method whereby a corporate enterprise mops up capital funds from the general public by means of an issue of a prospectus. Asst. Explain briefly about marketing of new issues (OR) Explain the various methods of marketing the securities adopted by the Indian Corporate entities. a minimum of 49 percent of the total issue at a time is to be offered to public. should be made payable at par at all centre where the recognized stock exchanges are situated. without any charge. A.Anitha. The rate of brokerage payable must be is enclosed in the prospectus.  Pure prospectus method  Offer for sale method  private placement method  Initial public officer(IPO) method  Rights issue method  bonus issue method  book building method  Stock Option Method and  Bought-out Deals Method 1. 8.( May/June 2013) Methods: Following are the various methods being adopted by corporate entities for marketing the securities in the new issues. the new issues of a company are offered for exclusive subscription of the general public. the particulars of allotments made against applications bearing their stamp. According to the SEBI norms.

Advantages:  Benefits to Investors  Benefits to Issuers Draw backs:  High issue costs  Time consuming 2. The securities may be issued either at par.  The biggest advantage of this method is that it saves the issuing company the hassles involved in selling the shares to the public directly through prospectus. Asst.b.  The issue is also underwritten to ensure total subscription of the issue.  Accordingly. c. This is to safeguard the interest of the issuer in the event of an unsatisfactory response from the public. stockholders and others. OFFER FOR SALE METHOD Meaning Where the marketing of securities takes place through intermediaries. Underwriting: Public issue through the ‗pure prospectus method‘ is usually underwritten. the securities are re-sold to ultimate investors at a market- related price. Issue price: Direct offer is made by the issuing company to the general public to subscribe to the securities at a staged price. in the first stage. such as issue houses. A. the sale of securities takes place in two stages. Features  Under this method.Anitha. the issuer company makes an en-block sale of securities to intermediaries such as the issue houses and share brokers of an agreed price.  Under the second stage. it is a case of ‘Offer for sale Method’.Prof/DOMS/MEC Page 27 . of at a discount or at a premium.

 The method is also resorted to when the stock market is dull and the public response to the issue is doubtful. securities are offered directly to large buyers with the help of shares brokers.  This is the most popular method gaining momentum in recent times among the corporate enterprises. 4.  Creating artificial scarcity for the securities thus jacking up the prices temporarily and misleading general public. Disadvantages:  Concentration of securities in a few hands. Advantages:  Less expensive as various types of costs associated with the issue are borne by the issue houses and other intermediaries.Anitha.Prof/DOMS/MEC Page 28 .3. thus affecting their confidence levels. Initial public offer (IPO) method:  The public issue made by a corporate entity for the first time in its life is called Initial Public Offer (IPO). it takes the form of Initial Public Offer.  Less troublesome for the issuer as there is not much of stock exchange requirements connecting contents of prospectus and its publicity etc. 5.  Under this method.  Depriving the common investors of an opportunity to subscribe to the issue.  Under this method of marketing.  When a company whose stock is not publicly traded wants to offer that stock to the general public. Asst. through their brokers. PRIVATE PLACEMENT METHOD:  A method of marketing of securities whereby the issuer makes the offer of sale to individuals and institutions privately without the issue of a prospectus is known as Private Placement Method. to be complied with. Rights issue method: A. securities are issued to successful applicants on the basis of the orders placed by them.  Placement of securities suits the requirements of small companies.

A minimum subscription of 90 percent of the issue shall be received 10. it takes the form of rights issue‘. such shares are governed by the guidelines issued by the SEBI (applicable to listed companies only) as follows: SEBI GUIDELINES: A.  The issue of bonus shares is subject to certain rules and regulations. Rights shares shall be issued only in respect of fully paid shares 6.Prof/DOMS/MEC Page 29 . Issue shall be kept open for a minimum period of 30 days and for a maximum period of 60 days 9. no security shall be eligible for listing up to 12 months 3. Agreement shall be entered into with the depository for materialization of securities to be issued 8. Issued under Section 205 (3) of the Companies Act. it takes the form of issue of bonus shares. shall not be withdrawn and where withdrawn. Asst. Announcement regarding rights issue once made. Underwriting as to rights issue is optional and appointment of Registrar is compulsory 4. The relevant guidelines issued by the SEBI in this regard are as follows. Shall be issued only by listed companies 2. Under this method. The issue does not in any way affect the resources base of the enterprise. 1. Bonus issues method:  Where the accumulated reserves and surplus of profits of a company are converted into paid up capital. the existing company issues shares to its existing shareholders in proportion to the number of shares already held by them. Where the shares of an existing company are offered to its existing shareholders. A no Complaints Certificate is to be filed by the Lead Merchant Banker with the SEBI after 21 days from the date of issue of offer document 12. Appointment of category I Merchant Bankers holding a certificate of registration issued by SEBI shall be compulsory 5. It saves the company enormously of the hassles of capital issue.Anitha. No reservation is allowed for rights issue as regards FCDs and PCDs 11. Letter of Offer shall contain disclosures as per SEBI requirements 7. whichever is earlier 6. Obligatory for a company where increase in subscribed capital is necessary after two years of its formation or after one year of its first issue of shares.

The articles: The articles of Association of the company shall contain a provision for capitalization of reserves. bonus shares must be reserved in proportion to such convertible part of FCDs and PCDs. The shares so reserved may be issued at the time of conversion(s) of such debentures on the same terms on which the bonus issues were made. gratuity. 3. 2. is not made 4. in lieu of dividend. Fully paid: The bonus issue is not made unless the partly paid shares.Anitha. A. 6. if any are made fully paid-up.Prof/DOMS/MEC Page 30 . Implementation: A company that announces its bonus issue after the approval of the Board of Directors must implement the proposal within a period of 6 months from the date of such approval and shall not have the option of changing the decision. 5. Reservation: In respect of FCDs and PCDs. bonus etc. Reserves created by revaluation of fixed assets are not capitalized. Dividend mode: The declaration of bonus issue. Following are the guidelines pertaining to the issue of bonus shares by a listed corporate enterprise: 1. the company shall pass a resolution at its general body meeting making provisions in the Articles of Associations for capitalization. 7. etc. If there is no such provision in the Articles. Asst. Reserves: The bonus issue shall be made out of free reserves built out of the genuine profits or share premium collected in cash only. No default: The company has not defaulted in payment of interest or principal in respect of fixed deposits and interest on existing debentures or principal on redemption thereof and has sufficient reason to believe that it has not defaulted in respect of the payment of statutory dues of the employees such as contribution to provident fund.

2.  The book-runner in turn forms a syndicate for the book-building.Anitha. who register the demands of investors. Drafting prospectus:  The draft prospectus containing all the information except the information regarding the price at which the securities are offered is to be filed with SEBI as per the prevailing SEBI guidelines. Asst. The name of the book-runner is to be mentioned in the draft prospectus submitted to SEBI. Resolution: Consequent to the issue of bonus shares if the subscribed and paid-up capital exceeds the authorized share capital. chosen from one of the lead merchant bankers.Prof/DOMS/MEC Page 31 .  Offers of ‗bids‘are to be made by investors to the syndicate members.  Book-building facility is available as an alternative to firm allotment.  Under the book-building method. A. A syndicate member should be a member of National Stock Exchange (NSE) or Over-the-Counter Exchange of India (OTCEI). Appointment of book-runners:  The first step in the book-building process is the appointment of book runners by the issuer company.  For discovering the price at which issue should be made. bids are invited from prospective investors from which the demand at various price levels is noted. BOOK BUILDING METHOD:  A method of marketing the shares of a company whereby the quantum and the price of the securities to be issued will be decided on the basis of the bids received from the prospective shareholders by the lead merchant bankers is known as book building method. 7. The book-building process involves the following steps: 1. the company at its general body meeting for increasing the authorized capital shall pass a resolution. share prices are determined on the basis of real demand for the shares at various price levels in the market.8.

Anitha. SEBI has the right to inspect such records. 3. 8. Mandatory underwriting: Where it has been decided to make offer of shares to public under the category of Net Offer to the Public‘. Intimation about aggregate orders: The underwriters and the institutional investors shall give intimation on the aggregate of the offers received to the book-runner. 5. Bid analysis:  The bid analysis is carried out by the book-runner immediately after the closure of the bid offer date. 6. it is incumbent that the entire portion offered to the public is fully underwritten. The final price is generally fixed reasonably lower than the possible offer price. 7. Asst. under the caption placement portion category‘. Details such as the name and the number of securities ordered together with the price at which each institutional buyer or underwriter is willing to sub scribe to securities under the placement portion must find place in the record. Maintaining offer records: The book-runner maintains a record of the offers received.Prof/DOMS/MEC Page 32 . Filling with ROC: A copy of the prospectus as certified by the SEBI shall be filed with the Registrar of Companies within two days of the receipt of the acknowledgement card from the SEBI.  An appropriate final price is arrived at after a careful evaluation of demands at various prices and the quantity. A. 4.  The offer of securities through this process must separately be disclosed in the prospectus. Circulating draft prospectus: A copy of the draft prospectus filed with SEBI is to be circulated by the book-runner to the prospective institutional buyers who are eligible for firm allotment and also to the intermediaries who are eligible to act as underwriters.

No price manipulation as the price is determined on the basis of the bids received 8. Advantages Of Book Building: Book-building process is of immense use in the following ways: 1. Stock option of employees stock option scheme (ESOP):  A method of marketing the securities of a company whereby its employees are encouraged to take up shares and subscribe to it is knows as stock option.Anitha. 10. The offer can be made subject to the conditions specified below: 1.  The scheme is particularly useful in the case of companies whose business activity is dominantly based on the talent of the employees. This is to be done one day before the opening of the issue to the public.  It is a voluntary scheme on the part of the company to encourage employees ‘participation in the company.Prof/DOMS/MEC Page 33 . Reduction in the duration between allotment and listing 2.9. SEBI Guidelines: Company whose securities are listed on any stock exchange can introduce the scheme of employees‘stock option. Reliable allotment procedure 3. Bank accounts: The issuer company has to open two separate accounts for collection of application money. Asst. as in the case of software industry. Collection of completed applications: The book-runner collects from the institutional buyers and the underwriters the application forms along with the application money to the extent of the securities proposed to be allotted to them or subscribed by them. Quick listing in stock exchanges possible 4. The scheme also offers an incentive to the employees to stay in the company. one for the private placement portion and the other for the public subscription. Issue at discount: A.

Eligibility: ESOP scheme is open to all permanent employees and to the directors of the company but not to promoters and large shareholders. the company would determine the period during which the option can be exercised. 2. Issue of stock option at a discount to the market price would be regarded as another form of employee compensation and would be treated as such in the financial statements of the company regardless the quantum of discount on the exercise price of the options. 5. The following are the characteristics of Bought out deals: 1. Parties : A. Asst. 4. in case of employees being offered more than 1 percent shares.Prof/DOMS/MEC Page 34 . 3. However. Superintendence: The operation of the ESOP Scheme would have to be under the superintendence and direction of a Compensation Committee of the Board of Directors in which there would be a majority of independent directors. Bought out deals: A method of marketing of securities of a body corporate whereby the promoters of an unlisted company make an outright sale of a chunk of equity shares to a single sponsor or the lead sponsor is known as bought-out deals.Anitha. a specific disclosure and approval would be necessary in the AGM. Maximum limit: There would be no restriction on the maximum number of shares to be issued to a single employee. 6. Minimum period: A minimum period of one year between grant of options and its vesting has been prescribed. 3. Approval: The issue of ESOPs is subject to the approval by the shareholders through a special resolution. After one year. The scheme would be applicable to the employees of the subsidiary or a holding company with the express approval of the shareholders.

the sale being influenced by such factors as project evaluation.Prof/DOMS/MEC Page 35 . Listing : The investor-sponsors make a profit. there is an outright sale of a chunk of equity shares to a single sponsor or the lead sponsor. Fund-based : Bought-out deals are in the nature of fund-based activity where the funds of the merchant bankers get locked in for at least the prescribed minimum period. 7. sponsors and investors: A. 6.There are three parties involved in the bought-out deals. current market sentiments. They are promoters of the company.Anitha. Limitations: Bought-out deals pose the following difficulties for the promoters. the time of listing these securities and off loading them simultaneously are being generally decided in advance. sponsors and co-sponsors who are generally merchant bankers and investors. etc. OTCEI : Sale of these shares at Over-the-Counter Exchange of India (OTCEI) or at a recognized stock exchanges. when at a future date. promoters image and reputation. 4. 3. Listing generally takes place at a time when the company is performing well in terms of higher profits and larger cash generations from projects. the shares get listed and higher prices prevail. Asst. Outright sale : Under this arrangement. prospects of off-loading these shares at a future date. 5. Sale price : The s ale price is finalized through negotiations between the issuing company and the purchaser. 2. Syndicate : Sponsor forms syndicate with other merchant bankers for meeting the resource requirements and for distributing the risk.

 Less troublesome for the issuer as there is not much of stock exchange requirements connecting contents of prospectus and its publicity etc.Prof/DOMS/MEC Page 36 . Wrong appraisal : Bought-out deals cause loss to sponsors on account of wrong appraisal of the project and overestimation of the potential price of the share. Asst. This results in locking up of investments and entailing losses to sponsors. 5. particularly of the private or the closely held companies that the sponsors may control the company as they own large chunk of the shares of the company. No accountability : Bought-out deals pose difficulty of penalizing the sponsor as there are no SEBI guidelines to regulate offerings by sponsors. Manipulation : Bought-out deals give great scope for manipulation at the hands of the sponsor through insider trading and rigging.  Placement of securities suits the requirements of small companies. What are the advantages and disadvantages of private placement? ADVANTAGES:  Less expensive as various types of costs associated with the issue are borne by the issue houses and other intermediaries. 2. Windfall profits : Bought-out deals offer the advantage of windfall profits by sponsors at the cost of small investors.1. 6. Loss of sales: Bought-out deals pose considerable difficulties in off-loading the shares in times of unfavorable market conditions. to be complied with. 3. A. Loss of control : The apprehensions in the minds of promoters.  The method is also resorted to when the stock market is dull and the public response to the issue is doubtful. 9.Anitha. 4.

(MAY/JUNE 2014) . (Nov/Dec2017) Activities involved in public issue management: There are several activities that have to be performed by the issue manager in order to raise money from the capital market. A project may be funded either by borrowing money from outside agencies or by injecting capital. DISADVANTAGES:  Concentration of securities in a few hands. Adequate planning needs to be done while chalking out an appropriate marketing.( Apr/May 2017). 3. This has to be done considering the nature and A. 2. Asst. The various activities involved in raising funds from the capital markets are described below: Pre-Issue Activities: 1. financial institutions/banks etc. Obtaining appraisal note: An appraisal note containing he details of the proposed capital outlay of the project and the sources of funding is either prepared in-house or is obtained from external appraising agencies viz..  Depriving the common investors of an opportunity to subscribe to the issue.Prof/DOMS/MEC Page 37 . (May/June 2008).Anitha. Optimum capital structure: The level of capital that would maximize the shareholders value and minimize the overall cost of capital has to be determined. 10.  Creating artificial scarcity for the securities thus jacking up the prices temporarily and misleading general public. The role and responsibility of the merchant banker as against the issuing company are clearly spelt out in the MoU. Signing of MoU: Signing of MoU between the client company and the merchant banker-issue management activities marks the award of the contract. Elaborate on the pre-issue activities involved in the management of public price. thus affecting their confidence levels.

Prof/DOMS/MEC Page 38 . An application to RBI.size of the project. This is followed by an EGM of its members. with advisors to the issue and co-managers to the issue. legal advisors and advertising agency. Equity funding is preferable especially when the project is capital intensive. will help in share allotment related work. where capital issue of shares is to be offered to NRIs/OCBs or FIIs. etc. Appointment financial Intermediary:  Financial intermediaries such as Underwriters. 4. MoU with the registrar. Submission of offer document: A.Anitha. 5. The purpose of these meetings is to decide the various aspects related to the issue of securities. 6. Convening meeting: A meeting of the board of directors of the issuing company is convened.  Necessary contracts need to be made with the underwriter to ensure due subscription to offer. Preparing documents: As part of the issue management procedure the documents to be prepared are initial applications of submission to those stock exchanges where the issuing company intends to get its securities listed.  Similar contracts when entered into with the Registrars to an issue. Asst. 8. This has to be sent for inclusion in the prospectus. 7. Due diligence certificate: he lead manager issue a due diligence certificate which certifies that the company has scrupulously followed all legal requirements has exercised utmost care while preparing the offer document and has made a true fair and adequate disclosures in the draft offer document. printers for bulk printing of Issue related stationery. seeking its permission is made. agreement for purchase of properties etc. have to be appointed. with bankers to the issue. Registrars. appointment of bankers to an issue for handling the collection of applications at various centers.

investors etc. 11. brokers’ meets. Finalization of collection centers: In order to collect the issue application forms from the prospective investors to lead manager finalizes the collection centers. Launching the issue:  The process of marketing the issue starts once legal formalities are completed and statutory permission for issue of capital is obtained. 12. (MAY/JUNE 2013).  The lead manager has to arrange for the distribution of public issue stationary to various collecting banks. 9. What are the main post-issue activity/activities relating to the issue(s) of capital through prospectus? (APR/MAY 2015). and duly filed with SEBI.Prof/DOMS/MEC Page 39 .  The announcement regarding opening of issue is also required to be made through advertising in newspapers. Issue closure: An announcement regarding the closure of the issue should be made in the newspaper. The SEBI in turn makes necessary corrections in the offer document and returns the same with relevant observations.  Conducting press conferences. 10. Asst. brokers. Filing with RoC: The offer document completed in all respects after incorporating SEBI observation is filed with Registrar of Companies (RoC) to obtain acknowledgement. 10.Anitha. The draft offer document along with the due diligence certificate is filed with SEBI. The issue is opened for public immediately after obtaining the observation letter from SEBI which is valid for a period of 365 days from the date of issue. 10 days before the opening of the public issue. has to be obtained from a Chartered Accountant. if any within 21 days from the receipt of the offer document. issuing advertisements in various newspapers and mobilizing brokers and sub-brokers marks the launching of a public issue. Promoters’ contribution: A certificate to the effect that the required contribution of the promoters has been raised before opening the issue. 11. (Apr/May 2017) A. (NOV/DEC 2011).

issue Monitoring Reports Irrespective of the level of subscription. Redressal of Investor Grievances The Post -issue Lead Merchant Banker shall actively associate himself with post-issue activities namely. allotment. refund and despatch and shall regularly monitor redressal of investor grievances arising there from. These reports shall be submitted within 3 working days from the due dates. Asst. despatch security certificates and refund orders completed and securities listed. (b) 78-Day Post Issue Monitoring Report The due date for this report shall be the 78th day from the date of closure of subscription of the issue. Public Issues (a) 3-Day Post Issue Monitoring Report The due date for this report shall be the 3rd day from the date of closure of subscription of the issue.Post.Anitha. Co-ordination with Intermediaries (i) The Post-issue lead merchant banker shall maintain close co-ordination with the Registrars to the Issue and arrange to depute its officers to the offices of various intermediaries at regular intervals after the closure of the issue to monitor the flow of applications from collecting bank branches. Rights Issues (a) 3-Day Post-Issue Monitoring Report The due date for this report shall be the 3rd day from the date of closure of subscription of the issue. the post-issue Lead Merchant Banker shall ensure the submission of the post-issue monitoring reports as per formats specified in Schedule XVI. (b) 50-Day Post-Issue Monitoring Report The due date for this report shall be the 50th day from the date of closure of subscription of the issue. processing of the applications including those accompanied by stock invest and other matters till the basis of allotment is finalised. A.Prof/DOMS/MEC Page 40 .

as per the provisions of section 73(3) of the Companies Act 1956. at a later date. number. date of despatch of certificates and date of filing of listing application is released within 10 days from the date of completion of the various A.(ii) Any act of omission or commission on the part of any of the intermediaries noticed during such visits shall be duly reported to the Board. b) In case there is a devolvement on underwriters.XVII. Bankers to an Issue). Stock Invest The lead merchant banker shall ensure compliance with the instructions issued by the RBI on handling of stock invest by any person including Registrars.Prof/DOMS/MEC Page 41 . there is no definite information about subscription figures. by the underwriters in respect of their liability. the issue shall be kept open for the required number of days to take care of the underwriters' interests and to avoid any dispute. basis of allotment. the lead Merchant Banker shall ensure that the underwriters honour their commitments within 60 days from the date of closure of the issue.Anitha. c) In case of undersubscribed issues. Bankers to an issue The post-issue Lead Merchant Banker shall ensure that moneys received pursuant to the issue and kept in a separate bank (i.e. number. the lead Merchant Banker shall satisfy himself that the issue is fully subscribed before announcing closure of the issue. ii) In case. value and percentage of successful allottees who have applied through stock invest. date of completion of despatch of refund orders. Underwriters a) i) If the issue is proposed to be closed at the earliest closing date. is released by the said bank only after the listing permission under the said Section has been obtained from all the stock exchanges where the securities was proposed to be listed as per the offer document. Post-issue Advertisements  Post-issue Lead Merchant Banker shall ensure that in all issues. the lead merchant banker shall furnish information in respect of underwriters who have failed to meet their underwriting devolvement’s to the Board in the format specified at Schedule . advertisement giving details relating to oversubscription. Asst. value and percentage of applications received along with stock invest.

number. basis of allotment. Post-issue Lead merchant banker shall continue to be responsible for post issue activities till the subscribers have received the shares/debenture certificates or refund of application moneys and the listing agreement is entered into by the issuer company with the stock exchange and listing/ trading permission is obtained. advertisement giving details relating to oversubscription.Anitha. Asst. a Certificate to the Board certifying that the stock invests on the basis of which allotment was finalised. as prescribed in the offer document. number.Prof/DOMS/MEC Page 42 . etc. Such advertisement shall be released within 10 days from the date of completion of the various activities. Post-issue Lead Merchant Banker shall ensure that issuer company / advisors / brokers or any other agencies connected with the issue do not publish any advertisement stating that issue has been oversubscribed or indicating investors’ response to the issue. during the period when the public issue is still open for subscription by the public. Advertisement stating that "the subscription to the issue has been closed" may be issued after the actual closure of the issue. value and percentage of applications received along with stock invest. have been realized. The Post-issue Lead Merchant Banker shall ensure that the despatch of refund orders / allotment letters /share certificates is done by way of registered post / certificate of posting as may be applicable. Other Responsibilities Lead Merchant Banker shall ensure payment of interest to the applicants for delayed dispatch of allotment letters. one Hindi National Paper and a Regional language daily circulated at the place where registered office of the issuer company is situated. date of completion of despatch of refund orders. A. In case of all issues. activities at least in an English National Daily with wide circulation. Certificate Regarding Realization of Stock invests The Post -Issue Lead Merchant Banker shall submit within two weeks from the date of allotment. refund orders. date of despatch of certificates and date of filing of listing application. value and percentage of successful allottees who have applied through stock invest.

Asst. consultant. The funds are raised by companies to finance new projects. expansion / modernization/ diversification of existing units etc. The Merchant Bankers have the requisite skill and competence to carry out capital issues management. The definition of merchant banker as contained in SEBI (Merchant Banker) Rules and Regulations. buying or subscribing to securities as manager.Anitha. 1992 clearly brings out the significance of Issue Management as. “Any person who is engaged in the business of issue management either by making arrangement regarding selling. advisor or rendering corporate advisory services in relation to such issue management”.13. Merchants of Public Issue Management Classification of Securities Issue  Public Issue  Right Issue  Private Placement Merchant Bankers Functions The different functions of merchant bankers towards the capital issues management are as follows: 1) Designing Capital Structure 2) Capital Market Instruments 3) Issue Pricing 4) Book Building 5) Preparation of Prospectus 6) Selection of Bankers 7) Advertising Consultants 8) Role of Registrar 9) Bankers to the Issue 10) Underwriters to the Issue 11) Brokers to the Issue ANNA UN IVER S IT Y QUES T IONS UNIT 2 A. The function of capital issues management in India is carried out by merchant bankers.Prof/DOMS/MEC Page 43 .Describe tha roles functions of merchant banking in project appraisal Issue Management The management of issues for raising funds through various types of instruments by companies is known as issue management.

What is the role of Merchant Banker in Appraisal of Projects?(MAY/JUNE 2014) 6. (NOV/DEC 2014). What is the role of a Banker to an Issue? (AP R / MAY 2011) 10. Explain the various methods of marketing the securities adopted by the Indian Corporate entities. (NOV/DEC 2013). What is private placement? (NOV/DEC 2012) 9. (MAY/JUNE 2012) 8. ( AP R / MAY 2015) . Discuss the post-issue management activities of merchant banker. (NOV/DEC 2013) 7. Discuss the factors that influence the capital structure decision of a firm. (MAY/JUNE 2013) 2. (NOV/DEC 2013) 6. Explain the role of merchant bankers in project counselling. What are the activities connected with "Issue Management and Underwriting" of Merchant bankers? Explain(MAY/JUNE 2014) 5. Explain the code of conduct prescribed by the SEBI for stock brokers. (AP R / MAY 2011) A. W hat you m ean b y b ook bui l di ng? (AP R/MAY 2015) . Asst. Discuss the role a: Merchant Banker in the Pre-Issue process. (MAY/JUNE 2012) 9. What are the codes of conduct for bankers to issue? (NOV/DEC 2014) 5. State and explain the guidelines on advertising consultants. (NOV/DEC 2012) 11. (AP R / MAY 2011) 12. Discuss the functions of registrar and transfer agents. (NOV/DEC 2014) 4. (NOV/DEC 2014).Prof/DOMS/MEC Page 44 .Anitha. (MAY/JUNE 2013). (MAY/JUNE 2013). designing capital structure. W h a t i s u n d e r w r i t i n g ? (AP R /MAY 2015) 3. (NOV/DEC 2012) 10. Narrate the regulatory frame work meant for issue management. (MAY/JUNE 2012) 4. (MAY/JUNE 2013) 3. Define green shoe option . Write a short note on "Bought out Deals". What is a mutual fund? (MAY/JUNE 2012) 8. (NOV/DEC 2013). 1. Discuss the process of IPO through Book building. Explain the IPO issue management activities performed by merchant bankers. Explain the role of merchant banker in appraisal of project.(MAY/JUNE 2014) 7. Who is a book running lead manager? (NOV/DEC 2011) PART B 1. (MAY/JUNE 2014) 2. (AP R / MAY 2015) .

Elaborate the various services rendered by merchant bankers. Asst. Elaborate the merchant bankers' activities connected with pre and post-issue management? (NOV/DEC 2011) 15. Discuss the guidelines for Merchant Bankers issued by SEBI. (NOV/DEC 2010) A. Explain the various methods of public issue? What is an IPO? Explain the IPO issue management activities performed by merchant banker. (NOV/DEC 2010) 16.13.Prof/DOMS/MEC Page 45 .Anitha. (NOV/DEC 2011) 14.