PRIMARY MARKET

PRIMARY ISSUE BY COMPANIES ARE GOVERNED BY

THE SEBI AS PER THE SEBI REGULATIONS 2009.

ALSO CALLED NEW ISSUE MARKET

 PRIMARY ISSUE

PUBLIC • IPO AND

ISSUE FPO

RIGHT
ISSUE

• PRIVATE
PRIVATE PLACEMENT
• PREFERENTIAL
PLACEMENT ISSUE
• QIP
 BONUS SHARE

⚫ Bonus share is also one of the way to raise the capital

but it does not bring any fresh capital.
⚫ Companies distribute profit to the existing
shareholders by way of fully paid bonus share
instead of Dividend.
⚫ Only enables the company to restructure its capital.
⚫ Does not include in Primary Issue.
 INITIAL PUBLIC OFFERING(IPO)

⚫ IPO is an offering of either a fresh issue of securities

or an offer for sale of existing securities, or both by
an unlisted company for the first time to the public.
⚫ In an IPO, the issuer obtains the assistance of
an underwriting firm, which helps determine what
type of security to issue, the best offering price, the
amount of shares to be issued and the time to bring it
to market.
 Eligibility norms for Entities raising funds

⚫ Entry Norm 1- Profitability Route

⚫ A company need to meet following requirements:
⚫ Net Tangible Assets of at least 3cr for three years
⚫ Minimum of Rs. 15 crore as average pre-tax operating profit in at least three
years of the immediately preceding five years.
⚫ Net worth of at least 1cr in in each of the preceding three full years.
⚫ If the name of the company changed in last year then the revenue should
not be less than 50% of its revenue in preceding one full year period.
⚫ The issue size should not exceed 5 times the pre-issue net worth.

⚫ Entry Norms 2- QIB Route

⚫ Issue shall be through book building route , at least 75% must be allotted to
Qualified Institutional Buyers.
⚫ The minimum post issue face value capital shall be 10cr.
⚫ Example- Zomato Ltd. offer for sale
⚫ For FPO’s
⚫ A listed issuer making a public issue (Further
Public Offer i.e. FPO) is required to satisfy the
following requirements:
⚫ (a) If the company has changed its name within the last
one year, at least 50% revenue for the preceding 1 year
should be from the activity suggested by the new name.
⚫
(b) The aggregate of the proposed issue and all previous
issues made in the same financial year in terms of issue
size does not exceed five times its pre-issue net worth as
per the audited balance sheet of the preceding financial
year
 Qualified Institutional Buyers

⚫ Qualified Institutional Buyers are those institutional investors who are generally perceived to
possess expertise and the financial muscle to evaluate and invest in the capital markets.

⚫ Any of the following entities can be QIB

⚫ A trust fund whose trustee is a bank
⚫ An investment company
⚫ Mutual funds
⚫ Scheduled commercial bank
⚫ Foreign institutional investor registered with SEBI;
⚫ Multilateral and bilateral development financial institutions;
⚫ Venture capital funds registered with SEBI.
⚫ Foreign Venture capital investors registered with SEBI.
⚫ State Industrial Development Corporations.
⚫ Insurance Companies registered with the Insurance Regulatory and Development Authority
(IRDA).
⚫ Provident Funds with minimum corpus of Rs.25 crores
⚫ Pension Funds with minimum corpus of Rs. 25 crores
 Exempted from Entry norms

⚫ SEBI has exempted the following entities from entry

norms:
⚫ Private sector banks
⚫ Public sector banks
⚫ Rights issue by a listed company
 FOLLOW ON PUBLIC OFFERING (FPO)

⚫ FPO is an offer of sale of securities by a listing company

to finance their growth plan.
⚫ Also known as seasoned or subsequent public offer.
⚫ A follow-on offering can be either of two types (or a
mixture of both): dilutive and non-dilutive.

⚫ In the case of the dilutive offering, the company's board

of directors agrees to increase the share float for the
purpose of selling more equity in the company.
⚫ the number of shares outstanding increases and this
causes dilution of earnings on a per share basis.
⚫ The non-dilutive type of follow-on offering is when privately
held shares are offered for sale by company directors or other
insiders (such as venture capitalists).
⚫ Because no new shares are created, the offering is not dilutive
to existing shareholders, but the proceeds from the sale do not
benefit the company in any way.

⚫ What are the regulatory requirements?

⚫ 1) The issue size should not exceed 5 times the pre-issue net
worth.
⚫ 2) If the name of the company changed in last year then the
revenue should not be less than 50% of its revenue in
preceding one full year period.
 Exempted from regulatory requirements

⚫ SEBI has exempted the following entities from entry

norms:
⚫ Private sector banks
⚫ Public sector banks
⚫ infrastructure companies whose projects have been
appraised and financed by any public financial
institution.
 RIGHT ISSUE

⚫ Right issue means an issue of new securities to be offered to the existing

shareholders of the company at a specified price within a subscription
period.
⚫ Right issue to the existing shareholders are generally at a discount to the
market price of the shares.
⚫ For example, 1:4 rights issue means an existing investor can buy one extra
share for every four shares already held by him/her.
⚫ MODE OF RIGHT ISSUE
⚫ Company can issue rights by sending a letter of offer to the shareholders.
⚫ In case of right , shareholders have following options
⚫ 1) Shareholders can exercise their right and buy new shares at offered price.
⚫ 2)Shareholders may renounce their rights and sell them in open market.
⚫ 3)the shareholders can choose to do nothing.
 Right Issue Numerical Questions

⚫ http://tempforum.neas-seminars.com/Topic10521.a
spx
⚫ https://corporatefinanceinstitute.com/resources/kn
owledge/finance/rights-issue/
 PRIVATE PLACEMENT

⚫ Private placement means direct sale of newly issued

securities by the issuer company to a small number
of investors through merchant bankers.
⚫ Investors involved in private placements can include
large banks, mutual funds, insurance companies ,
high net worth individuals and pension funds.
 PREFERENTIAL ISSUE

⚫ It is an issue of shares or convertible securities by

listed companies to a select group of persons.
⚫ Such allotments are generally made to the
promoters , foreign partners and private equity
funds.
⚫ A listed company is allowed to make a preferential
issue in terms of equity shares, partly /fully
convertible debentures or any other instruments
convertible into equity shares.
Preferential Issue of Shares
 CONDITIONS FOR PREFERENTIAL
ALLOTMENT OF SHARES

A. Approved by Special Resolution:

⚫ The proposed offer of shares or invitation to
subscribe shares has been approved by the
shareholders of the company, by a Special
Resolution, for each of the Offer of Invitation.
B. Authorization in Article of Association:
There should be authority in AOA of the Company to
issue shares/ securities. If such power is absent then
amend the clauses of AOA .
⚫ A preferential issue is an issue of shares or of
convertible securities by listed companies to a select
group of persons under Section 81 of the Companies
Act, 1956 which is neither a rights issue nor a public
issue.
C. Restrictions on Allotment:
⚫ A min. 10% of securities should be allotted to mutual
funds. Their unsubscribed portion may be allotted to
other QIBs.
D. Time period for completion of the
Allotment:
⚫ The allotment of securities on a preferential basis
shall be completed within a period of twelve months
from the date of passing of the special resolution.
⚫ If the allotment of securities is not completed within
twelve months from the date of passing of the special
resolution, another special resolution shall be passed
for the company to complete such allotment
thereafter.
⚫ E. Restrictions on Amount Raised:
In the same FY should not exceed 5 times the net worth of
the issuer as per its audited balance sheet of the previous
year

⚫ F. tenure: the max tenure of the convertible securities

would be 5 years from the date of allotment

⚫ G. Minimum no. of allotees: min. No. of for each

placement should be at least 2 and 5 for the issue up to
and more than 250 Cr. Respectively. Not more than 50%
allotted to single investor (including QIB)
⚫ H. Lock-in period for promoter(s):
⚫ The instruments allotted on a preferential basis to
the promoter / promoter group, shall be subject to
lock-in of 3 years from the date of their allotment
⚫ the instruments allotted on preferential basis to
any person shall be locked-in for a period of 1 year
from the date of their allotment
 Difference between preferential allotment and
private placement

⚫ Private Placement can be described as an offer or invitation to offer made to specified

investors by issuing securities, so as to raise funds. On the contrary, Preferential
Allotment is the issue of shares or debentures to a particular group of persons is made by
a listed company, to raise funds.
⚫ Private Placement is governed by section 42 of the Companies Act, 2013. Conversely, in
the case of Preferential Allotment section 62 (1) of the Companies Act, 2013 will apply.
⚫ In the case of private placement, ‘Private placement offer letter’ is sent to the investors for
inviting them to subscribe for shares. As against, in the case of preferential allotment, no
such offer document is issued to people.
⚫ In private placement, application money can be received through cheques, demand draft
or any other banking modes but not cash. Unlike, preferential allotment in which the
money is received in cash or kind.
⚫ In private placement, the application money is kept in the separate bank account of a
scheduled commercial bank. On the contrary, no such account is required in case of
preferential allotment.
 QUALIFIED INSTITUTIONS PLACEMENT(QIP)

⚫ It is a private placement of equity shares or convertible securities by

a listed company to Qualified Institutional Buyers.
⚫ SEBI GUIDELINES ON QIP
⚫ 1) A company whose shares are listed on a stock exchange for a
period of minimum 1 year will be eligible to raise funds in domestic
market by QIP.
⚫ 2) The securities issued under QIP shall be equity shares or any
securities which are convertible into equity shares with in 60
months from date of allotment.
⚫ 3) QIBs shall not be the promoters of issuing company.
⚫ 4) Minimum of 10 per cent of specified securities issued shall be
allotted to mutual funds.
⚫ 5) The aggregate of the proposed placement in the same financial
year shall not exceed 5 times the net worth of the issuer.
 INDIAN DEPOSITORY RECEIPTS(IDRs)

⚫ Just as Indian companies tap foreign capital market

to raise funds, similarly, foreign companies can now
issue their shares to Indian nationals.
⚫ IDR is an instrument denominated in Indian rupees
in the form of depository receipt against the
underlying equity of issuing company to enable
foreign companies to raise funds from Indian capital
market.
⚫ It enables Indian investors to diversify their risk.
⚫ First ever issue of IDRs was made by Standard
Chartered Bank in May 2010.
 ISSUE OF IDRs RULES, 2004

⚫ (a) Its pre-issue paid-up capital and free reserves are at least US$ 50
millions
⚫ And it has had an average turnover of US$ 100 million during the 3
financial years.
⚫ (b) It has been making profits for at least 5 years preceding the issue
⚫ and has been declaring dividend of not less than 10% each year.
⚫ (c) The issuing company should be listed in its home country.
⚫ (d) It must have prior permission from the SEBI.
⚫ (e) An application seeking permission shall be made to the SEBI at least 90
days prior to the opening date of the issue along with a refundable fee of
USD 10,000.
⚫ (f) IDRs issued by any issuing company in any financial year shall not
exceed 15 per cent of its paid-up capital and free reserves.
⚫ Size of an IDR issue shall not be <50 crore and application amount 20,000.
 Free Price Regime

⚫ Before 1992, the Controller of Capital Issues (CCI) used to regulate

the new issues market under the Capital Issues (Control) Act, 1947.
⚫ Companies had to obtain approval from the CCI for raising funds in
the primary market. The timing, quantum, and pricing of the issue
were decided by the controller.
⚫ In 1992, the Capital Issues (Control) Act, 1947 was repealed, now
The promoter and his merchant banker together decide the price of
the issue. Both new and established companies are free to decide the
price of their issue.
⚫ They brought out issues with rosy but unreal projections and sold
shares at very high premiums.
⚫ Of the 4,000 issues that hit the market in 1992–96, more than 3,000
quoted below their offer price on the very day they were listed. For
example, Saurashtra Cements hit the market in September 1993 at
Rs. 250 per share. It stood at Rs. 85 when it was listed on the stock
exchange.
 Book Building Process

⚫ Book Building is the process of determining the price

at which an Initial Public Offering will be offered.
⚫ “Book building” is 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.
⚫ A price range of the securities is known.
⚫ Types of Book-Building
⚫ The Companies are bound to adhere to the SEBI’s
guidelines for book building offers in the following
manner:
⚫ 1) 75% book building
⚫ 2)100% book building
⚫ 75% Book-Building Process
⚫ Under this process 25 per cent of the issue is to be sold at
a fixed price and the balance of 75 per cent through the
Book Building process.
⚫ 100% Book Building Process
⚫ also known as one stage book building
 Book Building Process

⚫ The company first of all appoints one or more than

one merchant banker as a lead book runner and their
names should be disclosed in draft red herring
prospectus.
⚫ The issuer shall enter into an agreement with one or
more of the stock exchange which have the system of
online offer of securities.
⚫ appoint a stock broker to accept the bids
⚫ The lead merchant banker shall file with SEBI a draft
red herring prospectus.
⚫ Book building was first introduced in 1999 with the
concept of a Price band.
⚫ Ex- PNB issue price band 350-390 rupees so 350 is
the floor price and 390 is the cap price.
⚫ The book normally remains open for a period of 3
days.
⚫ SEBI introduced the moving band concept in which
range can be moved upward and downward
depending on the demand.
⚫ The band can be moved 20% either way.
⚫ Where the issuer goes for price band , the issuer shall
also compliance with the following conditions:
⚫ The spread between floor and cap price should not
be more than 20%
⚫ The price band can be revised during the bidding
process on either side to the extent of 20%
⚫ Any revision in price band shall be informed to stock
exchange
⚫ In case of revision of price band, the bidding period
must be extended to max 10 days.
 Allotment norms in (profitability route)Book
building issue

⚫ 35% of the net offer to Retail investors (Individuals

or HUFs invest less than 2 lacs)
⚫ For retail investors – one application per PAN card.
⚫ 15% of the net offer to non institutional investors
other than Retail &QIB.
⚫ Example- High net worth individuals
⚫ 50% of the net offer to QIBs
 Allotment norms in (QIB route)Book building

⚫ 75% to QIBs
⚫ 15% of the net offer to non institutional investors
other than Retail &QIB.
⚫ Example- High net worth individuals
⚫ 10% to Retail Investors
⚫ Allotment: If IPO doesn't get
over-subscribed in RII Category, full allotment
to all applicants. If IPO is oversubscribed in RII
category. For small over-subscription, each
successful applicant would first be allotted 1 lot of
shares and the balance shares shall be allotted
proportionately the over-subscription is so
large that each successful applicant cannot even be
allotted 1 lot of shares, then 1 lot is allotted by lucky
draw using a computer.
 Under subscription of an IPO

⚫ MINIMUM SUBSCRIPTION OF 90%

⚫ According to SEBI (Securities and Exchange Board of India), every company
needs a minimum subscription of 90% of the issued amount on the date of
closure.
⚫ In the event of this not happening, the company refunds the entire
subscription amount it received. There is no loss to the investors as the
money they invested will be returned to them. The issuing company will not
receive any money though.
⚫ ALLOTMENT OF SHARES
⚫ Since demand for IPO shares is lesser than the shares supplied, every bidder
receives the full allotment. Say, an investor had bid for 10 lots of shares. If
the IPO is undersubscribed, she’d get all the lots she had applied for.
⚫ For instance, the ICICI IPO was undersubscribed recently as many investors
felt that the IPO valuation was far too high. ICICI fell short of more than Rs
50 crore — they had expected to raise more than Rs 4,000 crores.
⚫ https://www.kotaksecurities.com/ksweb/ipo/learn-what-is-undersubscribe
d-ipo
⚫ What happens when an IPO is oversubscribed in
one category but not in other categories? QIB-0,
NII-0.24 Times, RII-2.33 Times, Employee-27.41
Times, Total- 1.22 Times. Will the shares
reserved for QIB get alloted to investors in other
categories?
⚫ Yes, in this case, the shares from unsubscribed quota will
be given to the applicants from other quota. Let say A
retail investor have applied for 05 lots, he/she will be
given 05 lots.
⚫ Example- Vijaya Diagnostic Centre Limited IPO
⚫ https://www.nseindia.com/market-data/issue-informati
on?symbol=VIJAYA&series=EQ&type=Past
 APPLICATION SUPPORTED BY BLOCKED
AMOUNT (ASBA)

⚫ SEBI launched an alternate payment system for book

built public issue in August 2008)
⚫ ASBA exempts retail investors (now for all types of
investors) from making the full payment & instead
let the amount in bank accounts till the completion
of the allotment.
⚫ It contains authorization to block the application
money in a bank account.
⚫ After 2010 this facility extended to Right issue also.
 Procedures of application through ASBA

⚫ ASBA investor shall submit an ASBA amount physically

or electronically (internet banking ) to SCSB (Self
certified syndicate bank).
⚫ SCSB block the application money in the bank account
till finalization of allotment.
⚫ SCSB upload the details of electronic bidding of NSE and
BSE.
⚫ After finalization of allotment, SCSB transfer the amount
to the issuer’s account.
⚫ In case of failure of the issue, the amount shall be
unblocked by the SCSB.
 Working Notes

⚫ Before ASBA facility all the applicants have to submit

the full amount of investment in IPO to the company
and in case of failure of allotment, refunds have been
issued---which caused problem of delay in refunds.
⚫ For example- One invests 2 lakhs rupees in an IPO
and only amount of 20,000 of shares have been
issued to him/her. Rest amount will be refunded by
the company that usually delayed.
⚫ ASBA facility solved the above mentioned problem.
⚫ If an IPO is oversubscribed by multiple times then
allotment of shares will be done on lottery basis.
 ANCHOR INVESTOR

⚫ SEBI introduced the concept of anchor investors in IPOs in

2009
⚫ The anchor investor subscribe to the issue prior to the public
offering. The bidding for Anchor Investors shall open one day
before the issue opening date.
⚫ They can be QIB , mutual funds who buy large chunk of shares
a day before an IPO opens.
⚫ They pay 25% first and 75% within 2 days of closure of IPO.
⚫ Atleast 10 crore in public issue.
⚫ Companies can make allotement upto 30% to Anchor
investors.
⚫ Lock in period of 30 days
⚫ Anchor investors can bid for shares at anywhere
within the price band declared by the company. If
the price discovered through the book building
process is higher than the price at which shares were
allotted to anchor investors, then these investors
have to bring in additional funds to make good the
shortfall. But if the book built price is lower, the
excess amount is not refunded to them.
⚫ Guidelines link:
http://iepf.gov.in/IEPF/Anchor_Investors.html
 FAQ on IPO

⚫ https://groww.in/blog/frequently-asked-questions-o
n-ipo/
 EMPLOYEES STOCK OPTION(ESOP)

⚫ It’s a method of marketing the securities whereby

its employees are encouraged to take up shares.
⚫ Voluntary scheme
 SEBI GUIDELINES ON ESOP

⚫ A special resolution is required for ESOP.

⚫ ESOP operation is guided under the remuneration
committee of BOD.
⚫ Not for the promoters.
⚫ No restriction on maximum no of shares to be issued
to an individual employee.
 BOUGHT OUT DEALS

⚫ It is a method of marketing of securities in which

promoters of an unlisted company make an sale of equity
shares to a single sponsor or the lead sponsor.
⚫ The Securities and Exchange Board of India mandates
that only private companies can choose this method of
issuing securities.
⚫ Three participants in bought out deals
⚫ A) Promoters B) Sponsors(merchant bankers) C)
co-sponsors
⚫ Selling price is determined through negotiation between
issuing company and the purchaser.
⚫ the sponsor can offer the shares to the public at a
premium to earn profits
 Grey Market of IPO

⚫ Grey Market IPO is an unofficial market where

individuals buy/sell IPO shares or applications before
they are officially launched for trading on the stock
exchange.
⚫ As it is an unofficial over-the-counter market, there are
no regulations around it. All transactions are done in
cash on a personal basis.
⚫ Any 3rd party firms like SEBI, Stock Exchange or Brokers
are not involved or back this transaction.
⚫ Grey market premium (GPM) is a premium amount at
which grey market IPO shares are traded before they
get listed in the stock exchange.
⚫ Example- if the company introduces an IPO or Rs.100
and the grey market premium is around Rs.20 then we
can assume the IPO to list around 120 rupees on listing
day. There is no reliability but in most cases, the GMP
works properly and IPO list around the given price.
⚫ Companies provides platform for grey market:
⚫ https://unlistedzone.com/pre-ipo-shares-procedure-to-b
uy-sell-and-taxation/
⚫ http://unlistedarena.com/blog-detail/should-you-invest-
in-IPO-by-watching-grey-market-premium
⚫ https://www.rurashfin.com/
 Kostak Rate in IPO

⚫ Kostak Rate is the premium one gets by selling his/her

IPO application (in an off-market transaction) to someone
else even before allotment or listing of the issue.
⚫ The additional amount in rupees at which IPO applications
are sold in the IPO Grey Market is known as kostak (or price
of application).
⚫ One of the ways people sell their shares in grey market is by
selling the complete IPO Application to the buyer. For
example, an investor applied shares of Rs 2,00,000 in XYZ
Company’s IPO. He is not sure how many shares he will get
allocated and what listing gains he may get.
⚫ On another side, there is a buyer who says I am ready to take
the risk. Sell me your Rs 2L IPO application at Rs 5000. If the
seller agrees, he could make the deal and get Rs 5000 and exit
from this transaction. This Rs 5000 is the Kostak.
⚫ Note that tax liability remains with the application
seller. This could eat up your profits if the difference
is very high. Suppose you are a seller. If the profit
made on the listing day is Rs 30,000, you will have
to pay Rs 25,000 (Rs 30,000 – Rs 5000) to the
buyer. You are liable to pay taxes on Rs 30,000
which at the rate of 20% could be Rs 6000. This
could result into net loss of Rs 1000 in this
transaction.
 Kostak rate, Subject to Sauda

⚫ What is Subject to Sauda?

⚫ As per the Kostak rate, the Subject to Sauda on the application is
the amount decided when the investors get the firm allotment on
their IPO Application. If one buys or sells the IPO application on the
subject to sauda it means one can get the said amount if one will get
the allotment otherwise sauda will be canceled. In this one can not
fix their profit as it depends on the allotment. Again if one get an
allotment and he or she sold the application around ₹10000 and the
profit goes high on listing day around ₹15000 then one should pay
₹5000 to the guy who bought the application.
⚫ When selling an IPO application in the grey market, the buyer and
seller acknowledge that the sale will only be legal if the seller
receives the allocation. The agreement is null and void if the seller
does not get any stocks throughout the IPO application.
 PURE AUCTION BOOK BUILDING

⚫ In November 2009 SEBI introduced pure auction book

building for FPO only.
⚫ Another method of book building in which institutional
bidders are free to bid at any price above the floor price.
⚫ Allotment would be made on top down basis , starting from
the highest bidder and at differential price.
⚫ Retail investors and non institutional investors would be
allotted shares at floor price.
⚫ SEBI allowed companies to put a cap on no of shares allotted
to single bidder.
⚫ Biggest advantage – Bring down the institutional investor’s
oversubscription
 REVERSE BOOK BUILDING

⚫ Mechanism for the companies that wants to delist

their shares or buy back their shares.
⚫ Shareholders are asked to bid the price at which they
are willing to offer their shares.
⚫ For example- The stock of oil processing company
Essar Oil has gained over 30 per cent in the last three
weeks(2018). That’s not because of a new oil find,
but because of its decision to delist from the stock
exchanges.
 PROCEDURE OF REVERSE

⚫ Obtain board and shareholders approval, The Special resolution or the

Board of Directors Resolution
⚫ Appoint a BRLM (book running lead manager)
⚫ BRLM decide the floor price and no upward cap on biding price. offers are
collected from the share holders at various prices, which are above or equal
to the floor price.
⚫ The Promoter has the discretion either to accept or reject the final exit offer
price discovered pursuant to the reverse book building process
⚫ Company have to make public announcement in English and Hindi
newspaper.
⚫ The public announcement shall be made at least 7 days prior to the issue.
⚫ Date of opening of the offer should not be later than 55 working days from
the date of public announcement.
⚫ Offer shall remains open min 3 working day and max 5 days
⚫ Bidding will be done in electronic form through the stock exchanges.
⚫ Revision of upward bids is only possible.
⚫ 90% condition of subscription
 Calculation of Cutoff Price

⚫ The exit offer price or discovered price is one at which the shares tendered
take the holding of the promoter or acquirer to at least 90% of the paid-up
capital. In the case of Vedanta, about 900 million shares were tendered at
below Rs 160 apiece, another 150 million shares were tendered at between
Rs 160 and Rs 300 each, while about 320 million shares were offered at Rs
320. These 320 million shares took the total cumulative number of shares
to 1.34 billion, the quantity needed to meet the 90% threshold. So the
discovered price was Rs 320.
⚫ https://www.youtube.com/watch?v=1jf2bBV46ps
⚫ Eligible shareholders may tender the equity shares through their respective
stock brokers by indicating the details of the equity shares to be tendered
under the delisting offer during the normal trading hours of secondary
market.
⚫ Those investors(rest 10%) fail to participate in the reverse book-building
process have the option of selling their shares to the promoters. The
promoters are under an obligation to accept the shares at the same exit
price.
⚫ This facility is usually available for a period of at least one year from the
date of closure of the delisting process.
 NSE Emerge-ITP

⚫ EMERGE-ITP is a regulated market place which meets the

needs of the country’s contemporary business environment. It
allows start-ups to list with or without an initial public
offering (IPO). The platform connects growing businesses to a
pool of sophisticated investors while offering a wide variety of
exciting investment opportunities to the investors.
⚫ EMERGE’s Institutional Trading Platform is for
Start-Ups and Small and Medium Enterprises which
do not have their securities listed on any recognised
stock exchange and which seek listing of their
specified securities exclusively on the institutional
trading platform for informed investors.
⚫ https://www1.nseindia.com/emerge_itp/emerge_itp.htm
 GREEN SHOE OPTION(GSO)

⚫ The Green Shoe Option was started in 1919 by the Green Shoe
manufacturing company, and has since then been
implemented in many global markets of the world, including
India, by SEBI in 2003.
⚫ Its an option for over allotment of shares to underwriter in a
public offer.
⚫ To provide post listing price stability.
⚫ Green shoe company(now called Stride rite co.) was the first
company to exercised this option.
⚫ Also called over allotment option.
⚫ This option is the extent to 15% of the issue size.
⚫ The underwriter can exercise the option within 30 days from
the date of allotment of the shares.
Working of GSO
Working of GSO
 Guidelines relating to Green-shoe option

⚫ The company shall appoint one of the merchant bankers or

Book Runner, as the “stabilizing agent” (SA), who will be
responsible for the price stabilization process.
⚫ The SA shall also enter into an agreement with the
promoter(s) or pre issue shareholders who will lend their
shares, which shall not be in excess of 15% of the total issue
size.
⚫ The details of the agreements shall be disclosed in the draft
Red Herring prospectus and the final prospectus.
⚫ The SA shall open a special account with a bank to be called
the Special Account for GSO.
⚫ The money received from the applicants against the
overallotment in the green shoe option shall be kept in the
GSO Bank Account.
⚫ The shares bought from the market by the SA, if any during the
stabilization period, shall be credited to the GSO Demat Account.
⚫ The shares lying in the GSO Demat Account shall be returned to the
promoters immediately, in any case not later than 2 working days
after the close of the stabilization period.
⚫ On expiry of the stabilization period, in case the SA does not buy
shares , the issuer company shall allot shares in dematerialized form
to the GSO Demat Account, within five days of the closure of the
stabilization period. These shares shall be returned to the
promoters.
⚫ The SA shall remit an amount equal to further shares allotted by the
issuer company to the GSO Demat Account) * (issue price) to the
issuer company from the GSO Bank Account. The amount left in this
account, if any, after this remittance and deduction of expenses
incurred by the SA for the stabilization mechanism, shall be
transferred to the investor protection fund.
 Example

⚫ When Facebook held its IPO in 2012, it sold 421 million

Facebook shares at $38 to the underwriters, which included a
group of investment banks who were tasked with ensuring
that the stocks get sold and the capital raised sent to the
company. In return, they would get 1.1% of the transaction.
Morgan Stanley was the lead underwriter.
⚫ When Facebook stock started trading, the initial price was
$42.05, an increase of 11% above the IPO price. The stock
soon became volatile, and the stock price fell to $38. In total,
the underwriters sold 484 million Facebook shares at $38.
This means that the underwriters exercised an allotment
option by selling an additional 63 million shares. Press
statements indicated that the underwriters stepped in and
purchased additional shares as a way of stabilizing the prices.
 Working notes

⚫ GSO in USA
⚫ 1.Use of Green shoe option 2. Use of aftermarket short covering 3. Use of
penalty bid
⚫ In USA Green shoe option includes all three above mentioned instruments .
⚫ Use of Penalty bid- It is an arrangement that permits the managing
underwriter to reclaim a selling concession from a syndicate member in
connection with an offering when the securities originally sold by the
syndicate member are purchased in syndicate covering transactions. It is a
financial penalty imposed by the underwriter of a new securities issue
against a broker whose customer’s sold shares of the issue immediately after
purchase. Penalty bid stabilizes the price of a new issue in the after market.
⚫ The penalty bid is the obligation of the client's broker and is intended to
discourage them from making shares available to investors whose only
interest is to make a quick profit on the IPO.
⚫ aftermarket short covering (ASC) ---the underwriter initially short
sells a number of stocks above the offering amount. This short
position can be covered through 1) the purchase of stocks from the
issuer at the issue price (exercise of the green shoe option), purchase
of stocks in the secondary-market (aftermarket short covering) or a
combination of both. The aftermarket short covering (ASC) is an
activity that increases the stock demand and, consequently,
enhances initial liquidity.
⚫ When the aftermarket price remains above the offer price, the
underwriter normally prefers to cover the short position by
exercising the green shoe option (Muscarella et al., 1992) On the
contrary, the covering is made through ASC.
⚫ Losses occur only when the overallotment is larger than the green
shoe and the price rises in the aftermarket. the underwriter is not
bound to disclose information about the level of overallotment and
the ASC.
 RESOURCES MOBILISATION FROM
INTERNATIONAL MARKETS

⚫ Various options are available

⚫ GDRs , ADRs
⚫ Foreign currency convertible bonds (FCCBs) ,
Foreign currency exchangeable bonds
⚫ External commercial borrowings.
 GLOBAL DEPOSITORY RECEIPTS (GDRs)

⚫ Is an instrument denominated in foreign currency in the form of

depository receipt against the underlying equity of issuing
companies
⚫ A global depositary receipt (GDR) is a bank certificate issued in
more than one country for shares in a foreign company. The shares
are held by a foreign branch of an international bank.
⚫ The shares trade as domestic shares but are offered for sale globally
(A country that is a member of the Financial Action Task Force
(FATF) through the various bank branches.
⚫ For example, Infosys wants to issue its shares in Australia. Hence,
Infosys deposits a large number of its shares with a bank located in
Australia where it wants to list indirectly. The Australian bank issues
receipts(GDRs) against these shares , to the investors, each receipt
representing a fixed number of shares.
 Financial Action Task Force (FATF)

⚫ FATF - The objectives of the FATF are to set

standards and promote effective implementation of
legal, regulatory and operational measures for
combating money laundering, terrorist financing and
other related threats to the integrity of the
international financial system. The FATF is therefore
a “policy-making body” which works to generate the
necessary political will to bring about national
legislative and regulatory reforms in these areas.
 Trading of GDRs

⚫ These shares are traded as though they are domestic shares,

but they can be purchased in an international marketplace.
⚫ the actual shares that are allocated within the GDR are put in
the possession of a custodian bank as transactions are
processed, ensuring both parties a level of protection while
facilitating participation.
⚫ The purchase and sale of GDRs are managed through brokers
representing the buyer and seller within the foreign market
⚫ They can be sold as is on the proper exchanges, or they can be
converted into regular stock for the company. Additionally,
they can be canceled and returned to the issuing company.
 AMERICAN DEPOSITORY RECEIPTs (ADRs)

⚫ Is an instrument denominated in US Dollars in the form of

depository receipt against the underlying equity of issuing
companies.
⚫ No legal and technical difference between ADRs and GDRs.
⚫ To offer ADRs, U.S. banks simply purchase shares from the
international company and reissue them, typically on U.S.
exchanges. An ADR may represent the underlying shares on a
one-for-one basis, or it may represent a fraction of a share or
multiple shares.
⚫ ADRs are accessible to only good companies and good
governance practices.
⚫ ADRs represent same right and advantages as owners of share
in India like dividend.
⚫ https://www.londonstockexchange.com/stock/AXB/
axis-bank-limited/company-page
⚫ https://economictimes.indiatimes.com/markets/bo
nds/ril-raises-4-billion-in-indias-biggest-forex-bond
-issue/articleshow/88729771.cms?from=mdr
 Difference between ADR & GDR

⚫ American Depository Receipt (ADR) is a depository receipt which is issued

by a US depository bank against a certain number of shares of non-US
company stock. Whereas Global Depository Receipt (GDR) is a depository
receipt which is issued by the international depository bank, representing
foreign company’s stock.
⚫ Foreign companies can trade in US stock market, through various bank
branches with the help of ADR. Whereas GDR helps foreign companies to
trade in any country’s stock market other than the US stock market.
⚫ ADR is issued in America while GDR can be issued in both America and
Europe.
⚫ ADR is listed in American Stock Exchange i.e. New York Stock Exchange
(NYSE) whereas GDR is listed in non-US stock exchanges like London Stock
Exchange or Luxembourg Stock Exchange.
⚫ ADR can be traded in America only while GDR can be traded in all around
the world.
⚫ ADR Market is more liquid as compared to GDR market
⚫ Investor’s participation is more in ADR as compared to GDR
⚫ ADR market is a retail investor market whereas GDR’s market is
institutional one.
EXTERNAL COMMERCIAL BORROWING (ECB)

⚫ Are the borrowings raised from the international market by the

corporates.
⚫ ECBs include commercial bank loans, buyers' credit, suppliers'
credit, securitised instruments such as floating rate notes and fixed
rate bonds etc. with minimum average maturity of 3 years.
⚫ The new ECB policy has simply merged tracks into two categories:
Foreign Currency denominated ECB and INR denominated ECB
⚫ ECBs cannot be used for investment in stock market or speculation
in real estate.
⚫ During the 2012, contribution of ECBs was between 20 and 35
percent of the total capital flows into India. Large number of Indian
corporate and PSUs have used the ECBs as sources of investment.
⚫ ECBs can be accessed under two route
⚫ 1) Automatic route
⚫ 2) Approval route
 Eligible Entities

⚫ Foreign currency denominated ECB and Rupee

denominated ECB.
⚫ All entities eligible to receive FDI are eligible to raise ECB
.
⚫ Further, the following entities are also eligible to raise
ECB:  i. Port Trusts;  ii. Units in SEZ;  iii. SIDBI; and  iv.
EXIM Bank of India. 
⚫ Registered entities engaged in microfinance activities i.e.
registered Not for Profit companies, registered
societies/trusts/ cooperatives and Non-Government
Organizations.
⚫  https://rbi.org.in/Scripts/ECBView.aspx
⚫ The revised ECB framework has provided a single
limit of USD 750 million or equivalent per financial
year irrespective of the category of borrower.
⚫ The limit of Start-up remains constant at USD 3
million or equivalent per financial year either in INR
or any convertible foreign currency or a combination
of both.
 FOREIGN CUREENCY CONVERTIBLE
BONDS(FCCB)

⚫ Are bonds issued by Indian companies and subscribed by

a non resident in foreign currency.
⚫ They carry a fixed interest rate and convertible into a
certain no of a shares of the issuing company.
⚫ the principal repayment and periodic coupon payments
will be made in a foreign currency.
⚫ Since the principal has to be repaid at maturity, an
adverse movement in exchange rates in which the local
currency weakens, can cause cash outflows on repayment
to be higher than any savings in interest rates, resulting
in losses for the issuer.
 FOREIGN CURRENCY EXCHANGEABLE
BONDS (FCEB)

⚫ means a bond expressed in foreign currency, the

principal and interest in respect of which is payable
in foreign currency, issued by an Issuing Company
and subscribed to by a person who is a resident
outside India, in foreign currency and exchangeable
into equity share of another company, to be called
the Offered Company.
⚫ For example- Tata Sons, a promoter of all key Tata
group companies , issues exchangeable bonds to
raise funds for Tata Motors.
⚫ Eligible Issuer : The Issuing Company shall be part of the promoter group of the
Offered Company and shall hold the equity share/s being offered at the time of
issuance of FCEB.

⚫ Offered Company : The Offered Company shall be a listed company, which is

engaged in a sector eligible to receive Foreign Direct Investment and eligible to
issue or avail of Foreign Currency Convertible Bond (FCCB) or External
Commercial Borrowings (ECB).

⚫ Pricing of FCEB: At the time of issuance of FCEB the exchange price of the
offered listed equity shares shall not be less than the higher of the following two:
(i) The average of the weekly high and low of the closing prices of the shares of the
offered company quoted on the stock exchange during the six months preceding the
relevant date; and
(ii) The average of the weekly high and low of the closing prices of the shares of the
offered company quoted on a stock exchange during the two week preceding the
relevant date.
⚫ Average Maturity : Minimum maturity of FCEB
shall be five years. The exchange option can be
exercised at any time before redemption. While
exercising the exchange option, the holder of the
FCEB shall take delivery of the offered shares.