FINANCIAL

SYSTEM
A financial system is a set of institutional arrangements through which
financial surpluses are mobilised from the units generating surplus
income and transferring them to the others in need of them.

The activities include production, distribution, exchange and holding of

financial assets/instruments of different kinds by financial institutions,
banks and other intermediaries of the market.

In a nutshell, financial market, financial assets, financial services and

financial institutions constitute the financial system.
  Regulation of currency
 Banking functions
FUNCTIONS  Performance of agency services and custody of cash
OF A GOOD reserves
FINANCIAL  Management of national reserves of international
SYSTEM currency
 Credit control
 Administering national, fiscal and monetary policy to
ensure stability of the economy
 Supply and deployment of funds for productive use
 Maintaining liquidity.
 Constituents

ORGANISATION  Financial Markets

AL STRUCTURE
OF FINANCIAL  Products
SYSTEM
 Market participants
FINANCIAL
MARKETS
 Financial markets provide channels for allocation of savings to
investment

 Efficient transfer of resources from those having idle resources to

others who have a pressing need for them is achieved through
financial markets
6
 Provide a variety of assets to savers as well as various forms in
which the investors can raise funds and thereby decouple the acts
of saving and investment.

 Contribute to economic development to the extent that the latter

depends on the rates of savings and investment.
  Financial Markets provide individuals, companies,
governments and quasi-government organizations access
to capital
Importance of  People with surplus funds for investment get channels for
Financial investment and are assured of fair treatment as there is a
7
Markets regulator
 Financial markets create jobs as there are many people
involved in direct and indirect activities. For instance, the
involvement of the brokers, underwriters, merchant
bankers, custodians, depositories etc. in the financial
markets.
  Puts savings into more productive use
Functions of  Determines the price of securities
Financial  Makes financial assets liquid
Markets  Lowers the cost of transactions 8
 For economic development, a country needs capital, and the
ROLE OF capital markets e.g. equities, bonds, etc. channelize those
resources. Through the financial market, funds flow from
FINANCIAL
those who have surplus funds to those who have a shortage
MARKET IN of funds, either by direct, market-based financing or by
ECONOMIC indirect, bank-based finance. Without a properly 9
DEVELOPME functioning stock market, price discovery of
NT OF A corporations would not happen and resource
COUNTRY mobilization through IPOs would be hampered
 FINANCIAL MARKETS

MONEY MARKET CAPITAL MARKET

SECURITIES OTHER FORMS OF 10

LENDING &
MARKET BORROWING

SECONDA
PRIMARY
RY
MARKET MARKKET
 Capital market plays a vital role in transferring the financial
resources from surplus and wasteful areas to deficit and productive
areas, thus increasing the productivity and prosperity of the country
and promotes the process of economic growth in the country.
11

Financial market regulators, such as the Securities Exchange Board of

India (SEBI) and The Securities and Exchange Commission (SEC) in US
oversee the capital markets in their jurisdictions to protect investors
against fraud, among other duties.
The Securities and Exchange Board of India (SEBI) was set up in 1988 and
acquired the statutory status in 1992. Since 1992, SEBI has emerged as an
autonomous and independent statutory body with definite mandate such as:
(a) to protect the interests of investors in securities,
(b) to promote the development of securities market, and
(c) to regulate the securities market. In order to achieve these objectives,

SEBI has been exercising power under: 12

(a) Securities and Exchange Board of India Act, 1992,
(b) Securities Contracts (Regulation) Act, 1956,
(c) Depositories Act, 1996 and delegated powers under the
(d) Companies Act, 2013.

Indian Capital Market has made commendable progress since the

inception of SEBI and has been transformed into one of the most dynamic
capital markets of the world.
 1. To mobilize resources for investments.
2. To facilitate buying and selling of securities.
Functions 3. To facilitate the process of efficient price
of the discovery.
13
capital 4. To facilitate settlement of transactions in
market accordance with the predetermined time
schedules.
SEGMENTS Primary Market
A market where new securities are
OF
bought and sold for the first time is
CAPITAL called the New Issues market or the
MARKET IPO market. In other words, the first
public offering of equity shares or
convertible securities by a company
which is followed by the listing of a
company’s shares on a stock
exchange is known as an initial
public offering (IPO). The Primary
market also includes issue of
further capital by companies whose
shares are already listed on the
stock exchange
Secondary Market
It is a market in which an
investor purchases a security
from another investor rather
than the issuer, subsequent to
the original issuance in the
primary market. So, it can be
stated that secondary 14
markets are the stock
exchanges and the over-the-
counter market. When the
securities are transferred
from the first holder to
another, the securities are
said to be traded in
secondary markets.
 1. The Primary market refers to the market where new securities are
issued by the company that wishes to obtain capital and is sold
directly to the investor while the secondary market refers to the
market where securities that have already been issued are traded.
Instruments that are usually traded on the secondary market
Primary include stocks, bonds, options and futures.
Market 2. In the primary market, the company is directly involved in the
transaction, whereas in the secondary market, the company has no
involvement since the transactions occur between investors.
vs. 15
3. The primary markets deal with new securities, that is, securities,
which were not previously available and are, therefore, offered to the
Secondary investing public for the first time while the secondary market is a
Market market for already issued securities.
4. Primary market provides additional funds to the issuing companies
either for starting a new enterprise or for the expansion or
diversification of the existing business. On the other hand, the
secondary market can in no circumstance supply additional funds
since the company is not involved in the transaction.
 Q I
NEW ISSUE MARKET u n
a s
CLASSIFICATION OF ISSUES li t
f i
i t
e u
P Private
d t
Public Rights Composit Bonus r Placemeni
Issue issue e Issue Issue e It o
f n n
16
e s a
r t l
e i P
n t l
IP FP
t u a
O O
i t c
a i e
l o m
I n e
s a n
s l t
u P P
e l r
a o
c g
 Public Issue: ◎ Initial Public Offer (IPO): ◎ Further Public Offer (FPO)
When an issue / When an unlisted company or Follow on Offer:
offer of shares or makes either a fresh issue of When an already listed
convertible shares or convertible company makes either a fresh
securities is made securities or offers its existing issue of shares or convertible
to new investors shares or convertible securities to the public or an
for securities for sale or both for offer for sale to the public, it is
becoming part of the first time to the public, it called a FPO 17
shareholders’ is called an IPO. This paves
family of the issuer way for listing and trading of
(Entity making an the issuer’s shares or
issue is referred as convertible securities on the
“Issuer”) it is
Stock Exchanges.
called a public
issue.
 When an issue of shares or convertible securities is made
by an issuer to its existing shareholders as on a particular
Right Issue date fixed by the issuer (i.e. record date), it is called a
(RI): right issue. The rights are offered in a particular ratio to 18
the number of shares or convertible securities held
as on the record date.
 When the issue of shares or convertible securities by a listed
Composite issuer on public cum-rights basis, wherein the allotment in both
Issue public issue and rights issue is proposed to be made 19
simultaneously, it is called composite issue.
 When an issuer makes an issue of shares to its existing
shareholders without any consideration based on the
Bonus Issue number of shares already held by them as on a record
20
date, it is called a bonus issue. The shares are issued out
of the Company’s free reserve or share premium
account in a particular ratio to the number of securities
held on a record date.
 Private When an issuer makes an issue of shares or convertible
Placement securities to a select group of persons not more than 50
but can extend upto 200, and which is neither a rights
21
issue nor a public issue, it is called a private placement
 ◎ When a listed issuer issues shares or convertible
securities, to a select group of persons in terms of
Preferential provisions of Chapter VII of SEBI (ICDR) Regulations,
Allotment 2009, it is called a preferential allotment. The issuer is 22
required to comply with various provisions which inter-
alia include pricing, disclosures in the notice, lock-in etc,
in addition to the requirements specified in
the Companies Act.
 When a listed issuer issues equity shares or non-
Qualified
convertible debt instruments along with warrants and
Institutions convertible securities other than warrants to Qualified
Placement Institutions Buyers only, in terms of provisions of Chapter 23
(QIP) VIII of SEBI (ICDR) Regulations, 2009, it is called a QIP.
A listed issuer may make qualified institutions placement if it satisfies the following conditions:
(a)A special resolution approving the qualified institutions placement has been passed by its
shareholders;
(b)The equity shares of the same class, which are proposed to be allotted through qualified
institutions placement or pursuant to conversion or exchange of eligible securities
offered through qualified institutions placement, have been listed on a recognized stock exchange
having
nationwide trading terminal for a period of at least one year prior to the date of issuance of notice
to its shareholders for convening the meeting to pass the special resolution.
(c)A qualified institutions placement shall be managed by merchant banker(s) registered with the
24
Board who shall exercise due diligence.
(d)The qualified institutions placement shall be made at a price not less than the average of the
weekly high and low of the closing prices of the equity shares of the same class quoted
on the
stock exchange during the two weeks preceding the relevant date.
(e)The minimum number of allottees for each placement of eligible securities made under
qualified institutions placement shall not be less than:
(i) two, where the issue size is less than or equal to two hundred and fifty crore rupees;
(ii) five, where the issue size is greater than two hundred and fifty crore rupees.
(f) The aggregate of the proposed qualified institutional placement and all previous
qualified institutional placements made by the issuer in the same financial year shall not
exceed five times the net worth of the issuer as per the audited balance sheet of the
previous financial year.

(g) The tenure of the convertible or exchangeable eligible securities issued

through qualified institutional placement shall not exceed sixty months from the 25
date of allotment.

(h) The eligible securities allotted under qualified institutional placement shall not be
sold by the allottee for a period of one year from the date of allotment, except on a
recognized stock exchange.
Institutional When a listed issuer makes a further public offer of
Placement equity shares, or offer for sale of shares by
Programme promoter/promoter group of listed issuer in which the
(IPP) 26
offer, allocation and allotment of such shares is made
only to qualified institutional buyers in terms of Chapter
VIII A of SEBI (ICDR) Regulations, 2009 for the purpose
of achieving minimum public shareholding, it is called
an IPP
 1. Board Meeting and Passing a Board Resolution for Public
Steps involved Issue
in public issue 2. Holding of General Meeting
3. Appointment of Merchant Banker and other
intermediaries and entering into MOU with them
4. Preparation of Draft Prospectus and its approval by Board
5. Filing of prospectus with the SEBI/Registrar of
27
Companies
6. Intimation to Stock Exchange
7. Finalization of collection centers
8. Printing and Distribution of Prospectus and
Application Forms
9. Announcement and Advertisement
Steps involved 10. Subscription List
in public issue 11. Separate Bank Account
12. Minimum Subscription
13. Promoters’ contribution
14. Allotment of Shares
15. Compliance Report 28

16. Issuance of Share Certificates

Book Building

SEBI Guidelines defines Book Building as a process undertaken by which a demand for
the securities proposed to be issued by a corporate body is elicited and built up and the
price for such securities is assessed for the determination of the quantum of such
securities to be issued by means of a notice, circular, advertisement, document or
information memoranda or offer document.
 Main difference between offer of shares through book building and offer
of shares through normal public issue

Price at which securities will be allotted is not known in case of offer of shares
through book building while in case of offer of shares through normal public issue,
price is known in advance to investor. In case of Book Building, the demand can be
known everyday as the book is built. But in case of the public issue the demand is
known at the close of the issue.
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. Issuing
Company appoints a merchant banker as Book Runner Lead Manager (BRLM), who may
be assisted by other co- managers and by a team of syndicate members acting as
underwriters to the issue.
The BRLM sends copies of Red Herring Prospectus to the Qualified Institutional Buyers
(QIBs), large Investors, SEBI registered Foreign Institutional Investors (FIIs) and to the
syndicate members. BRLM also appoints brokers of the stock exchanges, called bidding
centres. They accept the bids and application forms from the investors. These bidding
centres place the order of bidders with the Company through BRLM. They are liable for any
default, if any, made by their clients, who have applied through them. Brokers/ Syndicate
members collect money from clients/investors.
Money received by them at the time of accepting bids is called margin money. Bids can be made
through on-line and transparent system of National Stock Exchange and Bombay Stock
Exchange depending on the agreement of the issuer with the stock exchange(s).

A public issue shall be kept open for three working days but not more than ten working days.
An issue through book building system remains open for three to seven working days. In case
of revision of price band, the issue period disclosed in the red herring prospectus shall be
extended for a minimum period of three working days. However, the total bidding period
shall not exceed ten working days. In other words, in case of a book built issue, bid is open for
a minimum period of three working days and maximum period of seven working days, which
may be extended to a maximum of ten working days, in case the price band is revised.
Green Shoe Option

It is an overallotment mechanism. Green Shoe Option is an option to allocate shares in

excess of the shares which have already been issued to the public. It is a price stability
mechanism to provide post listing price stability to an initial public offering.
The process of Green Shoe Option can be explained with the help of following example:

1. If a company is issuing 100000 shares, the company will enter into an agreement regarding
overallotment option (green shoe option) with one of the stabilizing agents (mostly underwriters)
to the extent of 15000 shares (maximum of 15% of the issue size).

2. According to the agreement, the promoters would lend 15000 shares to the stabilizing agents for
a limited period of 30 days from the date of listing.

3. Allotment would be made to the extent of 1,15,000 shares (100000 shares issued by the
company and 15000 shares borrowed from the promoters.

4. On listing, if the market price falls below the issue price, the stabilizing agent may buy shares
from the market to the extent of 15000 shares. This may help to increase the market price of
shares by reducing the selling pressure. The shares purchased by the stabilizing agent are then
returned to the promoters. So, only 100000 shares remain listed on the stock exchange after 30
days.
5. However, on listing, if the share prices rises, and the stabilizing agent doesn’t buy
shares from the market, then at the end of 30 days period, the over allotment option is
exercised. The company allots 15000 more shares which are then returned to the
promoters. Thus, 1,15,000 shares remain listed on the exchange.

Thus, Green Shoe Option acts as a price stabilizing mechanism. Further, over-allotment
options are known as green shoe options because, in 1919, Green Shoe Manufacturing
Company (now part of Wolverine World Wide Inc.), was the first to issue this type of
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. It is the only type of price stabilization measure permitted by the
Securities and Exchange Commission (SEC) in USA.
Simply put, it is a price stabilization mechanism whereby a company over-allots shares to
investors participating in the issue, with a view to have the merchant banker buy them
back from the open market after listing, in order to arrest any fall in the share prices below
the issue price. SEBI introduced the Green Shoe mechanism in Indian capital markets in
2003 vide a circular SEBI/ CFD/DIL/ DIP/Circular No. 11 dated 14th August, 2003. Since
then, a number of companies have implemented the Green Shoe Option in their initial
public offerings.
 Anchor Investors

Anchor investors are Qualified Institutional Buyers (QIB) who purchases shares one day
before the IPO opens. They help in arriving at a fair price and instil confidence in the
minds of the investors. As the name suggests, they are supposed to ‘anchor’ the issue by
agreeing to subscribe to shares at a fixed price so that other investors may know that there
is demand for the shares offered. SEBI introduced the concept of anchor investors in June,
2009 to enhance issuing company’s ability to sell the issue. The Adani Power IPO in July
2009 was the first issue in the country to attract investors under the anchor investor
scheme.
Intermediaries to the Capital Market

1. Merchant Bankers/Lead Managers

A merchant banker is a person who is engaged in the business of issue management

by making arrangements regarding purchase and sale of securities and also
rendering corporate advisory service in relation to issue management. He also
conducts due diligence of pre issue and post issue activities of public issue.
In case of both the public issues and right issues, it is mandatory to appoint a
Merchant Banker
The task of Merchant Banker is basically that of a facilitator or coordinator. It
coordinates the process of issue management by helping the underwriters, registrars
and bankers, in pricing and marketing the issue and complying with the SEBI
guidelines
Underwriting is compulsory for a public issue. It is necessary for a public company which invites
public subscription for its securities to ensure that 90% of its public issue is fully subscribed
otherwise the whole issued amount has to be refunded. The company cannot fully rely on
advertisements to ensure full subscription. In case of any under subscription, it has to be made
good by the underwriters. And,
the underwriting agreement has to be made in advance of the opening of the public issue.
3. Bankers to an Issue

“banker to an issue” means a scheduled bank carrying on all or

any of the following issue related activities namely:-

i. Acceptance of application and application money;

ii. acceptance of allotment or call money

iii. refund of application money;

iv. payment of dividend or interest warrants.

4. Brokers to an issue

A broker is an individual or firm that charges a fee or commission for executing

buy and sell orders submitted by an investor. The role of a broker is that it acts as
an agent for a customer and charges the customer a commission for its services.
5. Debenture Trustees

 A debenture trust deed is a document created by the company where debenture trustees
are appointed to protect the interest of the debenture holders.
 To act as debenture trustee, the entity should either be a scheduled bank carrying on
commercial activity, a public financial institution, an insurance company, or a body
corporate.
 The entity should be registered with SEBI to act as a debenture trustee.
 The contract deed entered into with a debenture trustee must specify the interest rate
and date of interest and principal repayments.
Duties of the Debenture Trustee include:

 Call for periodical reports from the body corporate, i.e., issuer of debentures.

 Enforce security in the interest of the debenture holders.

 Ensure on a continuous basis that the property charged to the debenture is available
and adequate at all times to discharge the interest and principal amount payable in
respect of the debentures and that such property is free from any other
encumbrances except those which are specifically agreed with the debenture trustee.
 Exercise due diligence to ensure compliance by the body corporate with the
provisions of the Companies Act, the listing agreement of the stock exchange or
the trust deed.
 To take appropriate measures for protecting the interest of the debenture holders
as soon as any breach of the trust deed or law comes to his notice.
 To ascertain that the debentures have been converted or redeemed in accordance
with the provisions and conditions under which they are offered to the debenture
holders.
 Inform the Board immediately of any breach of trust deed or provision of any law.
6. Registrars to an Issue & Share Transfer Agents

"Registrar to an Issue" means the person appointed by a body corporate or any person or
group of persons to carry on the following :

i. collecting applications from investors in respect of an issue;

ii. keeping a proper record of applications and monies received from

investors or paid to the seller of the securities and

iii. assisting body corporate or person or group of persons in-

a. determining the basis of allotment of securities in consultation with the stock exchange;
b. finalising of the list of persons entitled to allotment of securities;
c. processing and despatching allotment letters, refund orders or certificates and other related
documents in respect of the issue.
‘Share Transfer Agent’ means a person who on behalf of the issuer company maintains
the records of holders of securities issued by such company
7. Portfolio Managers

A portfolio manager is a body corporate who, pursuant to a contract or arrangement with a

client, advises or directs or undertakes on behalf of the client, the management or
administration of a portfolio of securities or the funds of the client.
The portfolio manager provides to the client the Disclosure Document at least two days
prior to entering into an agreement with the client. The Disclosure Document contains the
quantum and manner of payment of fees payable by the client for each activity, portfolio
risks, complete disclosures in respect of transactions with related parties, the performance
of the portfolio manager and the audited financial statements of the portfolio manager for
the immediately preceding three years. Please note that the disclosure document is neither
approved nor disapproved by SEBI nor does SEBI certify the accuracy or adequacy of the
contents of the Documents.
Stock brokers and sub-broker

 Stock broker is a person who buys and sells stocks and other securities for its
clients through a stock exchange. Stock brokers should be registered with SEBI
and are governed by SEBI Act and Securities Contract Regulation Act.

 A sub broker is a person who is not a trading Member of a Stock Exchange but
who acts on behalf of a trading member as an agent. His task is to help investors
in dealing in securities through such trading members(brokers).
According to Section 2 (44) of the Companies Act, 2013 “Global Depository
Receipt” means any instrument in the form of a depository receipt, by whatever
name called, created by a foreign depository outside India and authorised by a
company making an issue of such depository receipts;
Section 41 of the Companies Act, 2013 authorizes a company to issue Global
Depository Receipts after following the conditions as prescribed in Companies
(Issue of Global Depository Receipts) Rules, 2014.

52
It is a form of depository receipt or certificate created by the Overseas Depository
Bank outside India denominated in dollar and issued to non-resident investors
against the issue of ordinary shares or foreign currency convertible bonds of issuing
company. In simple words, it is basically a negotiable instrument denominated in US
dollars. It is traded in Europe or the US or both. After getting approval from the
Ministry of Finance and completing other formalities, a company issues rupee
53
denominated shares in the name of depository which delivers these shares to its
local custodian bank, the holder on records, thus depository. The depository then
issues dollar denominated depository receipts (or GDR) against the shares
registered with it. Generally one GDR is equivalent to one or more (rupee
denominated) shares. It is traded like any other dollar denominated security in the
foreign markets,
in addition to equity financing (as GDR represents equity) over debt financing. GDR
issue also possesses merits like less issue formalities, less administrative works as
regards dividend payment, information dissemination, annual general meeting etc. as
the issuer deal only with a single shareholder, the depository; easy availability of
foreign exchange and no foreign exchange risk. Besides issuing companies, foreign
investors especially FIIs also get advantage of investing in the Indian companies 54

without getting registration with SEBI, relief from cumbersome settlement and
delivery procedures, adequate liquidity (as GDR is as liquid as the shares of the
company in its home market) and generally higher returns. In fact, GDR holders enjoy
all economic benefits of the underlying shares but have none of the corporate rights
like right to vote.
According to Section 2(48) of the Companies Act, 2013 “Indian Depository Receipt”
means any instrument in the form of a depository receipt created by a domestic
depository in India and authorised by a company incorporated outside India making an
issue of such depository receipts;
Section 390 of the Companies Act, 2013 and rule 13 of Companies (Registration of
Foreign Companies) Rules, 2014 lays down the procedure for issue of Indian Depository
Receipts. 55

Apart from this a company has to comply with Chapter X and XA of SEBI (ICDR)
Regulations, 2009 to issue IDRs or a rights issue of IDRs.
An IDR is an instrument denominated in Indian Rupee in the form of a depository receipt
created by a domestic depository (Custodian of securities registered with SEBI) against
the underlying equity of issuing company to enable foreign companies to raise funds from
Indian Securities Markets.
In an IDR, foreign companies would issue shares, to a domestic (Indian)
depository, which would in turn issue depository receipts to investors in
India. The actual shares underlying the IDRs would be held by an Overseas
Custodian, which shall authorize the Indian depository to issue the IDRs. To
that extent, IDRs are derivative instruments because they derive their value 56

from the underlying shares. Standard Chartered PLC is only company to offer
IDR in the Indian market.
Benefits to the stakeholders
Issuing Companies: Any foreign company listed in its home country and satisfying the
eligibility criteria can issue IDRs. A company which has significant businesses in
India can increase its value through IDRs by breaking down market segmentations,
reaching trapped pools of liquidity, achieving international shareholder base and 57

improving its brand’s presence through global visibility.

Investors: IDRs can lead to better portfolio management and diversification for
investor by giving them a chance to buy into the stocks of reputed companies abroad.
IPO GRADING

IPO grading (Initial Public Offering Grading) is a service aimed at facilitating the
assessment of equity issues offered to public. The grade assigned to any individual issue
represents a relative assessment of the ‘fundamentals’ of that issue in relation to the
universe of other listed equity securities in India. Such grading is assigned on a five-point
scale with a higher score indicating stronger fundamentals.
IPO Grade 1 – Poor Fundamentals
IPO Grade 2 – Below - Average Fundamentals 58

IPO Grade 3 – Average Fundamentals

IPO Grade 4 – Above-average fundamentals
IPO Grade 5 – Strong fundamentals
IPO grading is different from an investment recommendation. Investment
recommendations are expressed as ‘buy’, ‘hold’ or ‘sell’ and are based on a security specific
comparison of its assessed ‘fundamentals factors’ (business prospects, financial position
etc.) and ‘market factors’ (liquidity, demand supply etc.) to its price. On the other hand, IPO
grading is expressed on a five-point scale and is a relative comparison of the assessed
fundamentals of the graded issue to other listed equity securities in India.
As the IPO grading does not take cognizance of the price of the security, it is not an
investment recommendation. Rather, it is one of the inputs to the investor to aiding
in the decision making process.
As per SEBI (ICDR) Regulations, every unlisted company obtaining grading for IPO
shall disclose all the grades obtained, along with the rationale discretion furnished
by the credit rating agency(ies) for each of the grades obtained, in the prospectus,
abridged prospectus, issue advertisements and at all other places where the issuer
company is advertising for the IPO. 59

SEBI has been taking a pioneering role in investor protection by increasing

disclosure levels by entities seeking to access equity markets for funding. This has
caused India to be amongst one of the more transparent and efficient capital markets
in the world. However, these disclosures demand fairly high levels of analytical
sophistication of the reader in order to effectively achieve the goal of information
dissemination.
IPO grading is positioned as a service that provides ‘an independent assessment of
fundamentals’ to aid comparative assessment that would prove useful as an information
and investment tool for investors. Moreover, such a service would be particularly useful
for assessing the offerings of companies accessing the equity markets for the first time
where there is no track record of their market performance.
As mentioned above, the IPO grade assigned to any issue represents a relative assessment 60
of the ‘fundamentals’ of that issue in relation to the universe of other listed equity
securities in India. This grading can be used by the investor as tool to make investment
decision. The IPO grading will help the investor better appreciate the meaning of the
disclosures in the issue documents to the extent that they affect the issue’s fundamentals.
Thus, IPO grading is an additional investor information and investment guidance tool.
Procedure for IPO Grading
Credit Rating agencies (CRAs) registered with SEBI will carry out IPO grading.
SEBI does not play any role in the assessment made by the grading agency. The grading is
intended to be an independent and unbiased opinion of that agency.
It is intended that IPO fundamentals would be graded on a five point scale from grade 5
(indicating strong fundamentals) to grade 1 (indicating poor fundamentals). The grade 61

would read as: "Rating Agency name" IPO Grade 1 viz. CARE IPO Grade 1, CRISIL IPO Grade
1 etc.
The assigned grade would be a one time assessment done at the time of the IPO and
meant to aid investors who are interested in investing in the IPO. The grade will not
have any ongoing validity.
The company needs to first contact one of the grading agencies and mandate it for the
grading exercise. The agency would then follow the process outlined below. 62

– Seek information required for the grading from the company.

– On receipt of required information, have discussions with the company’s
management and visit the company’s operating locations, if required.
- Prepare an analytical assessment report.
– Present the analysis to a committee comprising senior executives of the
concerned grading agency.
This committee would discuss all relevant issues and assign a grade.
– Communicate the grade to the company along with an assessment report 63

outlining the rationale for the grade assigned.

Though this process will ideally require 2-3 weeks for completion, it may be a
good idea for companies to initiate the grading process about 6-8 weeks
before the targeted IPO date to provide sufficient time for any contingencies.

IPO grading is optional as per SEBI (ICDR) Regulations, 2009 w.e.f. February 04, 2014
Draft Offer ◎ “Draft Offer document” means the offer document in
Documents draft stage. The draft offer documents are filed with
SEBI, atleast 30 days prior to the filing of the Offer
Document with ROC/SEs. SEBI may specifies changes, if
any, in the Draft Offer Document and the Issuer or the
Lead Merchant banker shall carry out such changes in 64

the draft offer document before filing the Offer

Document with ROC/SEs. The Draft Offer document is
available on the SEBI website for public comments for a
period of 21 days from the filing of the Draft Offer
Document with SEBI
 Offer ◎ Offer document” means Prospectus in case of a public
Document issue or offer for sale and Letter of Offer in case of a
right issue, which is filed with Registrar of Companies
(ROC) and Stock Exchanges. An offer document covers
all the relevant information to help an investor to make
his/ her investment decision. 65
 RHP (Red ◎ Red Herring Prospectus” is a prospectus, which does not
Herring have details of either price or number of shares being
Prospectus) offered, or the amount of issue. This means that in case
price is not disclosed, the number of shares and the
upper and lower price bands are disclosed. On the other
hand, an issuer can state the issue size and the number 66

of shares are determined later. An RHP for an FPO can be

filed with the ROC without the price band and the issuer,
in such a case will notify the floor price or a price band
by way of an advertisement one day prior to the opening
of the issue.
◎ In the case of book-built issues, it is a process of price
discovery and the price cannot be determined until the
bidding process is completed. Hence, such details are
not shown in the Red Herring prospectus filed with ROC
in terms of the provisions of the Companies Act. Only on
completion of the bidding process, the details of the final 67

price are included in the offer document. The offer

document filed thereafter with ROC is called a
prospectus.
 Filing of ◎ An issuer company can not make any public issue of
Offer securities, unless a draft offer document has been filed
Document with SEBI through a Merchant Banker, at least 30 days
prior to registering the prospectus, red herring
prospectus or shelf prospectus with the Registrar of
Companies (ROC) or filing the letter of offer with the 68

designated stock exchange.

◎ However, if SEBI specifies changes or issues
observations on the draft Prospectus, such changes or
comply with observation shall be made by issuer
company of the lead manager within 30 days from the
date of receipt of the draft Prospectus by SEBI
◎ SEBI may specify changes or issue observations, if any,
on the draft prospectus within 30 days from the later of
the date of receipt of the draft offer document or the
date of receipt of satisfactory reply from the lead
merchant bankers, where SEBI has sought any
clarification or additional information from them or the 69

date of receipt of clarification or information from any

regulator or agency, where SEBI has sought any
clarification or information from such regulator or
agency or the date of receipt of a copy of in-principal
approval letter issued by the recognized stock
exchanges.
◎ The lead merchant banker should while filing the offer
document with SEBI, file a copy of such document with
the recognized stock exchanges where the specified
securities are proposed to be listed and a soft copy of
the offer document should also be furnished to SEBI.
70
Price and Price Band

The issuer can mention a price or price band in the draft prospectus (in case of a
fixed price issue) and floor price or price band in the red herring prospectus (in
case of a book built issue) and determine the price at a later date before
registering the prospectus with the Registrar of Companies.
However, the prospectus registered with the Registrar of Companies should
contain only one price or the specific coupon rate, as the case may be. 71
(2) The issuer should announce the floor price or price band at least 5 working
days before the opening of the bid (in case of an initial public offer) and at least 1
working day before the opening of the bid (in case of a further public offer), in all
the newspapers in which the pre issue advertisement was released.
(3) The announcement should contain relevant financial ratios computed for
both upper and lower end of the price band and also a statement drawing
attention of the investors to the section titled “basis of issue price” in the
prospectus.
The announcement and the relevant financial ratios shall be disclosed on the
websites of those stock exchanges where the securities are proposed to be
listed and shall also be pre-filled in the application forms available on the
websites of the stock exchanges.
(4) The cap on the price band shall be less than or equal to one hundred and
twenty per cent of the floor price. 72
(5) The floor price or the final price should not be less than the face value of
the specified securities. “Cap on the price band” includes cap on the coupon
rate in case of convertible debt instruments.
Offer Document to be Made Public

The draft offer document filed with SEBI shall be made public for comments, if any,
for a period of 21 days from the date of filing the offer document with SEBI by
hosting it on the websites of the SEBI, recognized stock exchanges where specified
securities are proposed to be listed and merchant bankers associated with the issue.
After a period of 21 days from the date the draft offer document was made public,
the Lead Merchant Bankers shall file with SEBI a statement giving information of the
comments received by them or issuer during that period and the consequential 73

changes, if any, to be made in the draft offer document

APPLICATION SUPPORTED BY BLOCK AMOUNT

In its continuing endeavour to make the existing public issue process more efficient,
SEBI has introduced a supplementary process of applying in public issues, viz., the
“Applications Supported by Blocked Amount (ASBA)” process.
The ASBA process is available in all public issues made through the book building
route. It shall co-exist with the current process, wherein cheque is used as a mode of
payment.
ASBA is an application for subscribing to an issue, containing an authorization to 74

block the application money in a bank account. The main features of ASBA process
are as follows:
Self Certified Syndicate Bank
Self Certified Syndicate Bank (SCSB) is a bank which offers the facility of applying
through the ASBA process. A bank desirous of offering ASBA facility shall submit a
certificate to SEBI as per the prescribed format for inclusion of its name in SEBI’s
list of SCSBs
A SCSB shall identify its Designated Branches (DBs) at which an ASBA investor
shall submit ASBA and shall also identify the Controlling Branch (CB) which
shall act as a coordinating branch for the Registrar of the issue, Stock
Exchanges and Merchant Bankers. The SCSB, its DBs and CB shall continue to
act as such, for all issues to which ASBA process is applicable. The SCSB may
identify new DBs for the purpose of ASBA process and intimate details of the
same to SEBI, after which SEBI will add the DB to the list of SCSBs maintained
75
by it.
The SCSB shall communicate the following details to Stock Exchanges for
making it available on their respective websites; these details shall also be
made available by the SCSB on its website:
(i) Name and address of all the SCSB.
(ii) Addresses of DBs and CB and other details such as telephone number, fax
number and email ids. (iii) Name and contacts details of a nodal officer at a
senior level from the CB.
Eligibility of Investors

An Investor is eligible to apply through ASBA process, if he/she:

(i) is a “Resident Retail Individual Investor”;
(ii) is bidding at cut-off, with single option as to the number of shares bid for;
(iii) is applying through blocking of funds in a bank account with the SCSB; (iv)
has agreed not to revise his/her bid;
(v) is not bidding under any of the reserved categories. 76
ASBA Process

An ASBA investor submits an ASBA physically or electronically through the internet

banking facility, to the SCSB with whom the bank account to be blocked is maintained,
then the SCSB blocks the application money in the bank account specified in the ASBA,
on the basis of an authorization to this effect given by the account holder in the ASBA.
The application money remains blocked in the bank account till finalisation of the basis
of allotment in the issue or till withdrawal/failure of the issue or till 77

withdrawal/rejection of the application, as the case may be. The application data shall
thereafter be uploaded by the SCSB in the electronic bidding system through a web
enabled interface provided by the Stock Exchanges. Once the basis of allotment of
finalized, the Registrar to the Issue sends an appropriate request to the SCSB for
unblocking the relevant bank accounts and for transferring the requisite amount to the
issuer’s account. In case of withdrawal/failure of the issue, the amount shall be
unblocked by the SCSB on receipt of information from the pre-issue merchant bankers.
Obligations of the Issuer
The issuer shall ensure that adequate arrangements are made by the Registrar
to the Issue to obtain information about all ASBAs and to treat these
applications similar to non-ASBA applications while finalizing the basis of
allotment, as per the procedure specified in the Guidelines.
78

Applicability of ASBA process

ASBA process is applicable to all book-built public issues which provide for not
more than one payment option to the retail individual investors.