Merchant Banking and

Financial Services
UNIT II
 UNIT II
ISSUE MANAGEMENT
Role of Merchant Banker in Appraisal of Projects, Designing Capital
Structure and Instruments –Issue Pricing – Book Building –
Preparation of Prospectus Selection of Bankers, Advertising
Consultants, etc. - Role of Registrars –Bankers to the Issue,
Underwriters, and Brokers. – Offer for Sale – 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.
 UNIT II
ISSUE MANAGEMENT
 Issue Management
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. The Merchant Bankers have the requisite skill and competence to carry out
capital issues management. The funds are raised by companies to finance new
projects, expansion/ modernization/ diversification of existing units etc.

The definition of merchant banker as contained in SEBI (Merchant Banker) Rules and
Regulations, 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, buying or subscribing to securities as manager,
consultant, advisor or rendering corporate advisory services in relation to such issue
management”.
 Classification of Securities Issue
Classification of Securities Issue
1. Public Issue
2. Right Issue
3. Private Placement
1. Public Issue of Securities
When capital funds are raised through the issue of a prospectus, it is called as
“Public Issue of Securities”. It is the most common method of raising funds in the
capital market.
2. Rights Issue
When shares are issued to the existing shareholders of a company on a privileged
basis, it is called as “Rights Issue”.
3. Private Placement
When the issuing company sells securities directly to the investors, especially
institutional investors; it takes the form of “Private Placement”.
 Merchant Bankers Functions- Capital Issues
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
 Designing Capital Structure

The term capital structure refers to the proportionate claims of

debt and equity in the total long-term capitalization of a
company.

According to Weston and Brigham, Capital structure is the

permanent financing of the firm, represented primarily by long-
term-debt, preferred stock and common equity, but excluding
all short-term credit. Common equity includes common stock,
capital surplus and accumulated retained earnings.
 Designing Capital Structure
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, and maximizes the
market value of shares of a firm is known as “Optimal capital structure”.
Any decisions on Capital Structure are based on different principles.
a) Cost Principle
b) Control Principle
c) Return Principle
d) Flexibility Principle
e) Timing Principle
 Capital Market Instruments
Financial instruments that are used for raising capital resources in the capital
market are known as Capital Market Instruments.

Types of Capital Market Instruments

The various capital market instruments used by corporate entities for raising
resources are as follows
1. Equity Shares
2. Non-voting Equity shares
3. Preference Shares
4. Company Fixed Deposits
5. Warrants
6. Debentures and Bonds
 Capital Market Instruments
Equity Shares
Equity shares, also known as ordinary shares are the shares held by the owners of
a corporate entity. It represents fractional ownership of a business. Equity
shareholders are the owners of the corporate, in which they invest. Since equity
shareholders face greater risks and have no specified preferential rights, they are
given larger share in profits through higher dividends than those given to
preference shareholders, provided the company’s performance is excellent.

Part of undistributed profits kept as reserves and surplus for the purposes of
business expansion-distributed to them, as bonus shares
- Voting Rights
- Cash Dividends, Stock Dividends
 Capital Market Instruments
Non-voting Equity Shares
Consequent to the recommendations of the Abid Hussain Committee
and subsequent to the amendment to the Companies Act, corporate
managements are permitted to mobilize additional capital without
diluting the interest of existing shareholders with the help of a new
instrument called non-voting equity shares. Such shares will be entitled
to all the benefits except the right to vote in general meetings.
- will carry higher dividend rate than that of voting shares.
- If a company fails to pay dividend, non-voting shareholders will
automatically be entitled to voting rights until the company resumes
paying dividend.
 Capital Market Instruments
Preference Shares
Shares that carry preferential rights in comparison with ordinary shares are
called ‘Preference Shares’. 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, in preference to equity shares.
Company Fixed Deposits
Fixed deposits are the attractive source of short-term capital both for the
companies and investors as well. Corporate favour fixed deposits as an ideal
form of working capital mobilization without going through the process of
mortgaging assets.
Investors find fixed deposits a simple avenue for investment in popular
companies at attractively reasonable and safe interest rates.
 Capital Market Instruments
Warrants
An option issued by a company whereby the buyer is granted the right to
purchase a number of shares of its equity share capital at a given
exercise price during a given period is called a ‘warrant’. It gives the right,
but not the obligation, to buy or sell a security—most commonly an
equity—at a certain price before expiration. 
Warrants may be issued with either debentures or equity shares. They
clearly specify the number of shares entitled, the expiration date, along
with the stated/exercise price. Warrants have a secondary market. 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.
 Capital Market Instruments
Debentures and Bonds
A document that either creates a debt or acknowledges it, is known as
a debenture. Accordingly, any document that fulfils either of these
conditions is a debenture. A debenture, issued under the common seal
of the company, usually takes the form of a certificate that
acknowledges indebtedness of the company. 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. These are the instruments that are generally used for
raising long term debt capital.
 Capital Market Instruments
Kinds of Debentures
Innovative debt instruments that are issued by the public limited
companies are described below:
(a) Redeemable Debentures
(b) Irredeemable on Perpetual Debentures

(a) Redeemable Debentures

1. Participating Debentures
2. Convertible Debentures
3. Secured and unsecured debentures
4. Preferred and Ordinary Debentures
5. Debentures with Pari-Passu Clause
 Capital Market Instruments
1. Participating debentures
Debentures that are issued by a body corporate which entitle the holders to
participate in its profits are called “Participating Debentures”. These are the
unsecured corporate debt securities. They are popular among existing dividend
paying Corporates.
2.Convertible Debentures
Sometime debentures can be converted into preference shares or equity shares
at a fixed rate of exchange after a certain period. Such debentures are called
convertible debentures. These debentures are very popular in our country. After
conversion the holder become the owner and ceases to be a lender.
Non-convertible debentures are those which cannot be converted into equity
shares.
 Capital Market Instruments
• Fully Convertible Debentures: These shares can be converted to equity
shares at the option of the debenture holder. So, if he wishes then after a
specified time interval all his shares will be converted to equity shares and
he will become a shareholder.
• Partly Convertible Debentures: Here the holders of such debentures are
given the option to partially convert their debentures to shares. If he opts
for the conversion, he will be both a creditor and a shareholder of the
company.
• Non-Convertible Debentures: As the name suggests such debentures do not
have an option to be converted to shares or any kind of equity. These
debentures will remain so till their maturity, no conversion will take place.
These are the most common type of debentures.
 Capital Market Instruments
3. Secured and unsecured debentures
Secured debentures are those which create fixed or floating charge
on the company. This means a charge is created on such an asset in
case of default in repayment of such debentures. So in case, the
company does not have enough funds to repay such debentures, the
said asset will be sold to pay such a loan. Such debentures are also
known as the mortgage debentures.
On the other hand, debentures which do not create any charge or
security on the assets of the company are known as naked or unsecured
debentures. The holders of these debentures like ordinary unsecured
creditors may sue the company for the recovery of the debt.
 Capital Market Instruments
4. Preferred and Ordinary Debentures
The debentures which are paid first at the time of winding up are called
Preferred Debentures or First Debentures. Thus, they are just like
preference shares. Ordinary debentures - which are paid after the
preference debentures at the time of winding up are called ordinary
debentures.
5. Debentures with Pari-Passu Clause
Pari passu is a Latin term that means 'on equal footing' or 'ranking
equally'. The (secured) debentures which are discharged ratable though
issued on different dates, are called debentures with Pari Passu clause.
 Capital Market Instruments
Floating Rate Bonds (FRBs)
Bond whose interest amount fluctuates in step with the
market interest rates, or some other external measure. The
floating rate is quoted in terms of a margin above of below the
benchmark rate. Interest rates linked to the benchmark ensure
that neither the borrower nor the lender suffer from the
changes in interest rates.
ISSUE PRICING
 ISSUE PRICING
Pricing of public issues is the most contentious issue in the management of public issues. In
case of Initial Public Offerings (IPOs), the determination of offer price is more complicated.
The disclosures made in the offer documents are new to the investors and the
performance of the company is yet to be tested in the secondary market. The role of the
lead merchant banker acting as issue managers, thus, becomes more important with
respect to pricing of IPOs.

The issue price of securities is determined by the relevant provision of Companies Act, 1956
and Securities and Exchange Board of India (SEBI) Act, 1992.

Lead merchant bankers play a decisive role in the determination of issue price for public
issues. Issue price of securities is determined by the issuing companies in consultation with
the merchant bankers, called issue managers. It is determined in the light of legal and
regulatory framework of a country.
 ISSUE PRICING
• The issue price is based on certain parameters at the micro and
macro level. At the company level (Micro), issue price is determined
on the basis of quantitative factors like Financial Stability, capital
structure and track record of dividend payments by the company.
The qualitative factors at micro level which affect the determination
of issue price include the standing of the company, background of
the promoters, their business experience, market share of their
product etc.
• Besides this, the major determinants of issue price at macro level
include the present condition of secondary market, market interest
rate, national and global economic conditions, and the rate of
growth of GDP and industrial production.
 ISSUE PRICING
Pricing Methods of Equity Shares
There are two methods which have been followed by the issuer companies for
the determination of issue price of public issues of equity shares in India.
These are Fixed Price method and Book Building method.
(a) Fixed Price Method
Under this method, price at which equity shares are to be issued to the
public is pre determined by the issuer company in consultation with the lead
merchant banker. Issue price is determined before the issue opens for
subscription. The price at which the securities are offered/ allotted is known
in advance to the investors. The company also knows in advance about the
total funds which can be raised from the market. Response of public to the
issue is known by the company only after closure of the issue.
 ISSUE PRICING
(b) Book Building Method
• Book building is a method of price discovery. In this method, offer price of
securities is determined on the basis of real demand for the shares at
various price levels in the market.
• In book building method, the final issue price is not known in advance. Only
a price band is determined and made public before opening of the bidding
process. The spread of price between floor price and cap in the price band
should not be more than 20%. It means that the cap should not be more
than 120% of the floor price.
• On the completion of book building process, the final price is determined by
Issuer Company in consultation with the BRLM (Book Runner Lead
Manager). Then the BRLM files final offer document with the Registrar of
Companies before allotment of shares. The final offer document mentions
the issue size and the offer price discovered through book building process.
 ISSUE PRICING
Types of Book Building Process
(a) 75% Book Building, 25% Fixed Price Offer
(b) 90% Book Building, 10% Fixed Price Offer
(c) 100% Book Building Offer
Allocation/ Allotment Procedure in Book Building Issues
In case of 100% one stage book building, the allocation to Retail Individual
Investors (RIIs), Non Institutional Investors (NIIs) and Qualified Institutional
Buyers (QIBs) is made in the ratio of 35:15:50 respectively. Retail Individual
Investor (RII) means an individual who offers for securities up to the value
of Rs.2,00,000 and Non Institutional Investor means an individual, who
applies for securities for value exceeding Rs.2,00,000
 
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Chalet Hotels IPO review - attractive business, but high debt a cause of
concern
 Prospectus
Prospectus is defined a document through which public are solicited to subscribe to the share
capital of a corporate entity. Its purpose is inviting the public for the subscription/ purchase of any
securities of a company.
Regular Prospectus
The regular prospectus is presented in three parts
PART I
a. General Information about the company e.g. Name and address of the registered office consent of
the Central Government for the issue and names of regional stock exchanges etc.,
b. Capital Structure such as authorized, issued, subscribed and paid up capital etc.,
c. Terms of the issue like mode of payment, etc.,
d. Particulars of the issue like project cost, means of financing etc.,
e. Company, Management and project like promoters for the project, location of the project etc.,
f. Disclosures of public issues made by the Company, giving information about type of issue, amount
of issue, date of closure of issue, etc.,
g. Disclosure of Outstanding Litigation, Criminal Prosecution and Defaults
h. Perception of risk factors in marketing the products, of raw materials etc.,
 Preparation of Prospectus
PART II
a. Financial Information like Auditor’s Report, Chartered
Accountant’s Report etc.,
b. Statutory and Other Information
PART III
a. Declaration i.e., by the directors that all the relevant
provisions of the companies Act, 1956 and guidelines
issued by the Government have been complied with.
b. Application with prospectus
 Selection of Bankers
Selection of Bankers
Merchant bankers assist in selecting the appropriate bankers
based on the proposals or projects. Because the commercial
bankers are merely financiers and their activities are
appropriately arrayed around credit proposals, credit appraisal
and loan sanctions. But merchant banking include services like
project counseling , corporate counseling in areas of capital
restructuring, mergers, takeover etc., Managing, Underwriting
and Supporting Public Issues in new issue market and acting as
brokers and advisers on portfolio management in stock exchange.
 Role of Registrars
Role of Registrars to an Issue (and Share Transfer Agents)
The registrars to an issue, as an intermediary in the primary market, carry
on activities such as collecting application from the investors, keeping a
proper record of applications and money received from investors,
assisting companies in determining the basis of allotment of securities in
consultation with stock exchanges, finalizing the allotment of securities
and processing/dispatching allotment letters, refund orders, certificates
and other related documents in respect of issue of capital.
The share transfer agents maintain the records of holders of securities
on behalf of companies, and deal with all matters connected with the
transfer/redemption of its securities. To carry on their activities, they
must be registered with the SEBI which can also renew the certificate of
registration.
 Role of Registrars
They are divided into two categories:
• Category I – To carry on the activities as a registrar to an issue and share
transfer agent;
• Category II – To carry on the activity either as a registrar or as a share
transfer agent.
• The registration is granted by the SEBI on the basis of consideration of all
relevant matters and, in particular, the necessary infrastructure, past
experience and capital adequacy. It also takes into account the fact that
any connected person has not been granted registration and any
director/partner/principal officer has not been convicted for any offence
involving moral turpitude or has been found guilty of any economic
offence.
 Role of Registrars
Capital Adequacy
• Capital adequacy should not be less than the net worth of INR Fifty lacs in case
of category I whereas, in case of category 2 it shall not be less than INR
Twenty-Five lacs.
• Registration Fees
– Category I- Rs. Six lacs
– Category II- Rs. Two lacs
• A registrar to an issue and share transfer agent who has been granted a
certificate of registration, to keep its registration in force, shall pay registration
fees, every three years from the sixth year, from the date of grant of certificate
of registration.
• There are some General obligations and responsibilities, code of conduct for
register to an issue and share transfer agents.
 Role of Registrars
Maintenance of Records
The registrars and share transfer agents have to maintain records relating to all applications
received from investors in respect of an issue, all rejected applications together with
reasons, basis of allotment of securities in consultation with the stock exchanges, terms and
conditions of purchase of securities, allotment of securities, list of allottees and non-
allotees, refund orders, and so on.
Inspection
The SEBI is authorized to undertake the inspection of the books of accounts, other records,
and documents of the registrars and share transfer agents to ensure that they are being
maintained in a proper manner and the provisions of the SEBI Act, rules, regulations and the
provisions of the SCRA.
Action in Default
A registrar/share transfer agent who fails to comply with any condition subject to which
registration is granted, or contravenes any of the provisions of the SEBI Act/SCRA,
rules/regulations and stock exchange bye-laws, rules and regulations is liable to suspension
or cancellation of registration.
 Bankers to the 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.
Registration
To carry on activity as a banker to issue, a person must obtain a certificate of
registration from the SEBI. The SEBI grants registration on the basis of all the activities
relating to banker to an issue in particular with reference to the requirements:
• The applicant has the necessary infrastructure, communication and data processing
facilities and manpower to effectively discharge his activities,
• 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. A banker to an issue can apply for
the renewal of his registration three months before the expiry of the certificate.
 Bankers to the Issue
General Obligations and Responsibilities to furnish Information
When required, a banker to an issue has to furnish to the SEBI the following information
a. The number of issues for which he was engaged as a banker to an issue;
b. The number of application/details of the application money received,
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.
• Books of Account/Record/Documents (required to maintain books of
accounts/records/documents for a minimum period of three years)
• Disciplinary action by the RBI
• Inspection
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. On
the basis of the inspection report, 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.
 UNDERWRITERS
UNDERWRITERS
Another 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. They make a commitment to get the issue subscribed
either by others or by themselves.
Though underwriting is not mandatory after April 1995, its organization is an
important element of the primary market. Underwriters are appointed by the
issuing companies in consultation with the Lead Managers/ Merchant
Bankers to the issues. A statement to the effect that in the opinion of the lead
manager, the underwriters’ assets are adequate to meet their obligation should
be incorporated in the prospectus.
 UNDERWRITERS
Registration
To act as underwriter, a certificate of registration must be obtained from the SEBI. In granting the
certificate of registration, the SEBI considers all matters relevant/relating to the underwriting and in
particular.
Fee
• The amount of Non-refundable fees to be paid along with the Application for registration shall be
25000/-
• Every underwriter shall pay fees of thirteen lakh thirty-three thousand & three hundred rupees at
the time of grant of Certificate of initial registration. 
• If the underwriter wants to renew his term for permanent registration, fees of five lakh rupees
shall be paid. (every three years from the sixth year from the date of grant of certificate of initial
registration)
Agreement with Clients
Every underwriter has to enter into an agreement with the issuing company. The agreement,
among others, provides for the period during which the agreement is in force, the amount of
underwriting obligations, the period within which the underwriter has to be subscribe to the issue
after being intimated by/on behalf of the issuer, the amount of commission/brokerage, and details
of arrangements, if any, made by the underwriter for fulfilling the underwriting obligations.
 UNDERWRITERS
General Responsibilities
An underwriter cannot derive any direct or indirect benefit from underwriting the issue other
than by the underwriting commission. The maximum obligation under all underwriting
agreements of an underwriter cannot exceed twenty times his net worth. Underwriters have
to subscribe for securities under the agreement within 45 days of the receipt of intimation
from the issuers.
Inspection and Disciplinary Proceedings
The framework of the SEBI’s right to undertake the inspection of the books of accounts, other
records and documents of the underwriters, the procedure for inspection and obligations of
the underwriters is broadly on the same pattern as applicable to the lead managers.
Action in Case of Default:
The liability for action in case of default arising out of
i. Non-compliance with any conditions subject to which registration was granted.
ii. Contravention of any provision of the SEBI Act/rules/regulations, by an underwriter involves
the suspension/cancellation of registration, the effect of suspension/ cancellation are on the
lines followed by the SEBI in case of lead managers.
 Issue Marketing
Merchant Banking and Marketing of New Issues
Following are the steps involved in the marketing of the issue of securities to be undertaken
by the lead manager
• Target Market
• Target Concentration
• Pricing
• Mobilizing Intermediaries
• Information Contents
• Launching Advertisement Campaign
• Brokers and Investors Conferences
A critical factor that could make or break the proposed public issue is its timing. The market
conditions should be favourable. Otherwise, even issues from a company with an excellent
track record, and whose shares are highly priced, might flop. Similarly, the number and
frequency of issues should also be kept to a minimum to ensure success of the public issue.
 Advertising Consultants
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,
registration of prospectus, launching publicity campaign and fixing date of board
meeting to approve and sign prospectus and pass the necessary resolutions. Publicity
campaign covers the preparation of all publicity material and brochures, prospectus,
announcement, advertisement in the press, radio, TV, investors conference etc.

The merchant bankers help choosing the media, determining the size and
publications in which the advertisement should appear. The merchant Bankers role is
limited to deciding the number of copies to be printed, checking accuracy of
statements made and ensure that the size of the application form and prospectus
conform to the standard prescribed by the stock exchange.
 Advertising Strategies
SEBI issued Guidelines in 1993 to ensure that the advertisement are truthful fair
and clear and do not contain statements to mislead the investors to imitate
their judgment. All lead managers are expected to ensure that issuer companies
strictly observe the code of advertisement set-out in the guidelines.
For the purpose of these guidelines the expression advertisement means notices,
brochures, pamphlets, circulars show cards, catalogues, hoardings, posters,
insertions in newspapers, pictures, films, radio/television program or through any
electronic media and would also include the cover pages of the offer documents.
Disclosure and Investor Protection Guidelines issued by SEBI in 2000 as amended
from time to time provide guidelines regarding advertisement for public issues.
The lead merchant banker has been made responsible to ensure compliance
with the guidelines on advertisement by the issuing company.
 Statutory Advertisements
Statutory Advertisements
The following advertisements have to be statutorily released
(1) Issue announcement advertisement at least 10 days before
opening of the issue. This advertisement contains an abridged
version of the prospectus.
(2) Issue opening advertisement on the day of opening of the issue.
(3) Issue closing advertisement on the day of closing of the issue.
(4) The basis of allotment advertisement after finalization of
allotment.
 SEBI Guidelines on Issue Advertisement
As per SEBI guidelines, an issue advertisement should have the following features:
• It should be truthful, fair, and clear and should not contain any statement that is
untrue or misleading.
• It should reproduce information contained in an offer document in full and disclose
all relevant facts and not be restricted to select extracts relating to that item.
• It should be set forth in a clear, concise and understandable language.
• It should not contain statements which promise or guarantee rapid increase in
profits.
• It shall not contain any information that is not contained in the offer document.
• It should not appear in the form of crawlers i.e. the advertisement which runs
simultaneously with the programme in a narrow strip at the bottom of the television
screen.
• No slogans, expletives or non factual and unsubstantial titles should appear in the
issue advertisement of offer document
 SEBI Guidelines on Issue Advertisement
• In case of issue advertisement on television screen (a) the risk factors should not be
scrolled on the screen (b) the advertisement should advise viewer to refer to the red
herring prospectus/ offer document for detail.
• No issue advertisement should be released without giving ‘Risk Factors’ in respect of the
concerned issue, provided that an issue opening/ closing advertisement which does not
contain the highlights need not contain risk factors.
• If any advertisement carries any financial data, it should also contain data for the past
three years and include particulars relating to sales, gross profit, net profit, share capital,
reserves, earning per share, dividend and the book values.
• All issue advertisements in newspapers, magazines, brochures and pamphlets containing
highlights relating to any issue should also contain risk factors giving equal importance in
all respects including the print size.
• No advertisement shall include any issue slogans or brand name for the issue except the
normal commercial name of the company or commercial brand of the product already in
use.
 SEBI Guidelines on Issue Advertisement
• No product advertisement of the issuer should contain any direct or indirect reference to the
performance of the issuer during the period (a) commencing from the date of meeting of Board
of Directors in which the issue is approved till the filing of draft offer document with the SEBI,
and (b) the period commencing from the filing offer document with the SEBI till the date of
allotment of securities.
• An advertisement should not be issued stating that the issue has been fully subscribed or
oversubscribed during the period the issue is open for subscription, except to the effect that the
issue is open or closed, (a) announcement regarding closure of the issue should not be made
except on the last closing date, and (b) if the issue is fully subscribed before the last closing date
as stated in the offer document, the announcement should not be made after the issue is fully
subscribed and such announcement should also be made on the date on which the issue is to be
closed.
• No incentive, apart from the permissible underwriting commission and brokerage, shall be
offered through any advertisement to anyone associated with marketing the issue.
• In case there is a reservation for the NRIs, the issue advertisement should specify the same and
indicate the place in India from where the individual NRI applicant can procure application
forms.
 E-IPO
• A company proposing to issue capital to public through the on-line system
of the stock exchange for offer of securities can do so if it complies with the
requirements.
• This reduce the time taken between the share sale and the listing,
enhance the reach of retail investors in the share sale, and reduce costs.
• Exchanges motivate E-IPO format for the market. Here, allotment of the
IPO can be done within a day or two after the bidding process ends.
• E-IPO process saves time of listing and there is no need of keeping money
in banks.
• ASBA (Applications Supported by Blocked Amount)
• The moves are part of efforts to simplify the process of IPOs, lowering their
costs and helping companies reach more retail investors in small towns.
 Post Issue Activities
Post Issue Activities
The public issue closes on the stipulated closing date. Subsequently, the BRLM
(Book Running Lead Manager) and the issuing company finalize the price. The
prospectus will be updated with the mention of the final price of the shares. The
finalized prospectus will be issued to QIBs (Qualified Institutional Buyer). After
making allotment to the QIBs on the discretionary portion, basis of allotment for
the retail investors will be finalized by the issuer, Registrar, BRLM, stock exchange
and a public representative. The basis of allotment (BoA) is communicated to the
stock exchange.
After this, the refund orders are sent to the applicants. Arrangements for crediting
the allotted shares are done with the depositories. The merchant banker who acts
as the lead manager is responsible till this final stage of listing of shares.
 Post Issue Activities
• Finalization of Basis of Allotment: If the public issue is
oversubscribed to the extent of greater than five times, a SEBI
nominated public representative is required to participate in the
finalization of Basis of allotment (BoA).
• Dispatch of Share Certificates: Immediately after finalizing, share
certificates are dispatched to the eligible allottees, and refund
orders made to unsuccessful applications. Permission for listing of
securities is also obtained from the stock exchange.
• Advertisement: An announcement in the newspaper has to be
made regarding the basis of allotment, the number of applications
received and the date of dispatch of share certificates and refund
orders, etc.
 Offer For Sale
“Offer For Sale (OFS) mechanism has been introduced to facilitate promoters to dilute/
offload their holding in listed companies. A separate window is being provided by the
Exchange for the same.”
• The Securities and Exchange Board of India (SEBI) by circular dated 18th July 2012, has
permitted the Stock Exchanges to provide a separate window, i.e. apart from the existing
trading system for the normal market segment, to facilitate Promoters of listed companies
to dilute/offload their holding in listed companies in a transparent manner with wider
participation.
• Any non-promoter shareholder of eligible companies holding at least 10% of share
capital may also offer shares through the OFS mechanism.
• The size of the offer shall be a minimum of Rs. 25 Crores. However, size of offer can be
less than Rs. 25 Crores so as to achieve minimum public shareholding in a single tranche.

• (The Minimum Public Shareholding (MPS) rule requires all listed companies in India to ensure
that at least 25% of their equity shares are held by non-promoters (public)).
 GREENSHOE OPTION
Green Shoe Option
A provision contained in an underwriting agreement that gives the underwriter the right to sell
investors more shares than originally planned by the issuer. This would normally be done if the
demand for a security issue proves higher than expected. It is legally referred to as an over-
allotment option.
• A ‘Green shoe option’ can provide additional price stability to a security issue because the
underwriter has the ability to increase supply and smooth out price fluctuations if demand surges.
• Green shoe options typically allow underwriters to sell up to 15% more shares than the original
number set by the issuer, if demand conditions warrant such action.
• The offer document should mention a technical word called “Green shoe option” if the company
uses the option.
• The term "Green shoe" came from the Green Shoe Manufacturing Company (now called Stride Rite
Corporation), founded in 1919. It was the first company to implement the Green shoe clause into
their underwriting agreement.
• Green shoe options or over-allotment options were introduced by the Securities and Exchange
Board of India (SEBI) in 2003
 Private Placement
• A private placement is a capital raising event that involves the sale
of securities to a relatively small number of select investors. Investors
involved in private placements can include large banks, mutual funds,
insurance companies and pension funds.
• Private placements are generally considered a cost-effective way for small
businesses to raise capital without "going public" through an initial public
offering.
•  In a private placement, a company sells shares of stock in the company or
other interest in the company, such as warrants or bonds, in exchange for
cash. 
• Hold Board Meeting- has to be approved
 Private Placement
• A private placement has minimal regulatory requirements and standards that it
must abide by. While it is a capital raising event involving the sale of securities, it
is a method of capital raising that does not have to be registered with SEBI.
• It shall be made only to the selected group of persons who are identified by
board first and such number of persons must not exceed 200 in a financial year.
• The amount of Investment per applicant shall not be less than Rs. 20,000/- of
the face value of the securities. Amount towards the subscription of securities
should be received only by cheque / demand draft / other banking channels.
Amount should not be received in cash.
• All private placement offers should be made only to persons whose names are
recorded by the company prior to the invitation to subscribe. Company is
required to maintain a complete record of private placement offers.
 Private Placement
• A private placement has minimal regulatory requirements and standards that it must
abide by. While it is a capital raising event involving the sale of securities, it is a method
of capital raising that does not have to be registered with SEBI.
• It shall be made only to the selected group of persons who are identified by board first
and such number of persons must not exceed 200 in a financial year.
• The amount of Investment per applicant shall not be less than Rs. 20,000/- of the face
value of the securities. Amount towards the subscription of securities should be received
only by cheque / demand draft / other banking channels. Amount should not be
received in cash.
• All private placement offers should be made only to persons whose names are recorded
by the company prior to the invitation to subscribe. Company is required to maintain a
complete record of private placement offers
• Copy of such records along with private placement offer along with the names of the
offeree has to be filed with the Registrar of Companies within 30 days from the date of
circulation which includes the date of the offer letter.
 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’.
• A bought out deal is a method of offering securities to the public through a
sponsor or underwriter (a bank, financial institution, or an individual). The
securities are listed in one or more stock exchanges within a time frame
mutually agreed upon by the company and the sponsor. This option saves the
issuing company the costs and time involved in a public issue. The cost of
holding the shares can be reimbursed by the company, or the sponsor can
offer the shares to the public at a premium to earn profits. Terms are agreed
upon by the company and the sponsor.
 Bought out Deals
Features
• Parties – There are three parties involved in a bought out deal; the promoters of the
company, sponsors & co-sponsors who are generally merchant bankers and investors.
• Outright sale – There is an outright sale of a chunk of equity shares to a single sponsor
or a lead sponsor.
• Syndicate – The sponsor forms a syndicate for management of resources required &
distribution of risk.
• Sale Price – The sale price is finalized through negotiations between the issuing
company & the purchaser which is influenced by reputation of the promoters, project
evaluation, prevailing market sentiment, prospects of off-loading these shares at a
future date, etc.
• Fund base – The bought out deals are fund based activities where funds of merchant
bankers get locked in for at least the prescribed minimum period.
• Listing – The listing generally takes place at a time when company is performing well in
terms of profits & liquidity.
 Placement with FIs, MFs, FIIs
Placement with a Financial Institution
This term is used when a large institution such as a bank, via their funds management
division, buy a large tranche of a particular companies shares. The shares can be offered up
for sale by a majority holder to be sold in one tranche directly to avoid flooding the market
and affecting day to day prices.
Placement with FIIs
• Listed companies have been allowed by SEBI to make preferential allotment to registered
Foreign Institutional Investors (FFIs) subject to certain conditions. A company desiring to
make a preferential allotment should obtain the shareholders’ consent. The allotment
should be in accordance with ceilings of 10% of total issued capital for individual FII and
30% of all FIIs and non-resident Indian investors. The preferential allotment should be
made at a price not less than the highest price during the last 26 weeks on all stock
exchanges where the company securities are listed.
• To invest in the India capital market subject to the condition that they register with the
SEBI and obtain RBI approval under FERA.
 OFF-SHORE ISSUES
Off Shore Finance
• Merchant bankers help their clients in Long term foreign currency loan,
Joint venture abroad, Financing exports and imports, Foreign
collaboration arrangement.
• We identify offshore bonds as those issued in a primary market outside
the home country of the entity guaranteeing the bond. From the
perspective of the economies covered, the major offshore markets are
those of the European Union (Eurobonds) and the United States (Yankee
bonds).
(In just over a month in 2021, Indian firms have raised $3.3 billion by
issuing bonds to overseas investors- Monday, 19 April 2021)
 Non Resident Indian (NRI)
Resident
An individual will be treated as a Resident in India in any previous year if he/she is in
India for
• At least 182 days in that year OR
• At least 365 days during 4 years preceding that year AND at least 60 days in that
year.
NRI Definitions
• A Non Resident Indian (NRI) is an Indian Citizen who resides in India for less than
one hundred & eighty two days during the course of the preceding financial year, or
• Who has gone out of India or who stays outside India for the purpose of
employment, or for carrying on business or vocation outside India, or for any other
purpose indicating his intention to stay outside India for an uncertain period.
NRI Investments
 NRI Investments
Real Estate
-Allowed to invest only in Residential and Commercial Properties.
-Not in Agricultural properties (Exceptions-Gift or Inheritance).
Direct Equities
-Maximum limit 10% of the paid up capital of the company.
-Intra-day selling and short selling not allowed.
Mutual Fund
There are some limitations for NRIs residing in US and Canada.
Government Securities
Interest is taxable or tax free based on the type of account they maintain.
National Pension Scheme (NPS)
-If he retains his Indian Citizenship and planned to retire in India.
-Pension has to be received in India and cannot be repatriated.
Fixed Deposits/ Term Deposits
• NRI can repatriate original investment, profit and dividend provided they are held for a minimum period
of one year.
• If the investment is sold before one year the investment and all related receipts become non-
repatriable unless RBI permission is taken in advance with clearance from Income.
 Services to Non-Resident Indians
Services to Non-Resident Indians
In order to attract foreign capital resources for being invested in India, Union Government has offered
various incentives to Non-Resident Indians (NRIs) and Persons of Indian Origin Resident Abroad
(PIORA). Merchant banks provide special services on this account to encourage the NRIs to invest their
savings in Indian industry.
The services include:
(i) Advice on selection of investment.
(ii) Critical evaluation of investment portfolio.
(iii) Securing approval from RBI for the purchase/sale of securities.
(iv) Hold securities in safe custody.
(v) Maintaining investment records and complying with ceiling requirements.
(vi) Collecting and remitting interest and dividend on investment.
(vii) Providing tax counselling and filing tax returns.
(viii) Evaluation of investment portfolio periodically at the request of investors.
(ix) Circulation of investment news for the benefit of the investors.