Crack Grade B 1

Financial Market: Primary Market

FINANCIAL MARKETS: Financial markets are a marketplace that provides an avenue for
the sale and purchase of financial assets such as equity stocks, bonds, foreign exchange,
commodities, derivatives, etc.

Types of Financial Markets:

Money Market- The money market as a wholesale debt market for low-risk, highly-liquid,
short-term instrument. Funds are available in this market for periods ranging from a
single day up to a year. This market is dominated mostly by government, banks and
financial institutions.

Capital Market - The capital market is designed to finance the long-term investments.
The transactions taking place in this market will be for periods over a year.

Forex Market - The Forex market deals with the multicurrency requirements, which are
met by the exchange of currencies. Depending on the exchange rate that is applicable, the
transfer of funds takes place in this market. This is one of the most developed and
integrated market across the globe.

Credit Market- Credit market is a place where banks, FIs and NBFCs provide short,
medium and long-term loans to corporate and individuals

Importance of Financial Markets: There are many social benefits that financial markets
facilitate, including:
•They provide individuals, companies, governments and quasi-government organizations
with access to capital;

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•People with surplus funds for investment get channels for investment and are assured of
fair treatment as there is a regulator. If it is an unorganized place and not a proper market,
transactions may go in the wrong direction;

•Financial markets create jobs as there are many people involved in direct and indirect
activities.

Functions of Financial Markets:

 Puts savings into more productive use:
Money in savings account should be put to productive use. Financial institutions like
banks loan it out to individuals and companies that need it for say home loan, study loan,
business purposes, big projects, etc. savings as such does not have any meaning; it is
investment that puts it to productive use.

 Determines the price of securities:

Once a security is listed, buyers and sellers trade in it, and the traded price reflects the
prospects of the company whose instruments are being traded. This is called price
discovery. Prices of securities are determined in financial markets, which is an important
function.

 Makes financial assets liquid

Buyers and sellers can decide to trade their securities anytime, provided there is a
counterpart. Financial markets provide this avenue, and that creates liquidity in the
security. This imparts liquidity to investors and incentivizes them to invest.

 Lowers the cost of transactions

In financial markets, various types of information regarding securities can be acquired
without the need to spend. The Exchanges and market participant associations
disseminate relevant information. The companies also can disseminate information, but
they would put forth only what they want to propagate, not what is useful for investors.

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The five key functions of a financial system in a country are:
(i) information about possible investments and capital allocation;
(ii) monitoring investments and the exercise of corporate governance after providing
financing;
(iii) facilitation of the trading, diversification, and management of risk;
(iv) mobilization and pooling of savings; and
(v) promoting the exchange of goods and services.”

Meaning of a share or security or stock: Share means a portion of ownership of a

company. For example, you bought 100 shares of Rs. 200 each of company X, then you
become a shareholder of X. This allows you to sell share anytime you want.

The definition of ‘Securities’ as per the Securities Contracts Regulation Act (SCRA),
1956, includes instruments such as shares, bonds, scrips, stocks or other marketable
securities of similar nature in or of any incorporate company or body corporate,
Government securities, derivatives of securities, units of collective investment scheme,
interest and rights in securities, security receipt or any other instruments so declared by
the Central Government.

To understand concept of Share read this example:

A group of friends decides to start a business. They decide to open a shop of groceries.
They name their business as ‘ABC. For initial expenses, they borrowed some money from
the local bank and opens their shop in a small space. The business was
successful. However, they made little profit because; all the earnings were invested back
into business since the customers were increasing and they had to meet the growing
demand for groceries.

Five years later, the bank loan has been paid off. Profits are over Rs 10 lakhs per year.
It also has a book value of Rs 50 lakhs. (Book value is the net value of what the company
owns- machinery, furniture, building less any loans). Having made their business a
success, these people now wants to expand their business. Their idea is to open two more
branches at neighboring towns. After a detailed study, they find out that it’s going to cost
over Rs 52 Lakhs to open two outlets. To get 52 lakhs, they had two options- one, take out
a loan from the bank. Second, sell the part of their company. Since interest rates are high,
they decide to take the second route. But how? What would be the cost of a share in ABC?
Who will do the valuation? There were several questions to be answered.

To sell part of their company, the company has to be valued. The person who values a
company is called an ‘underwriter’. So they approach an underwriter who checks their
past records, future prospects, background of the promoters etc, The underwriter decides
that the company is worth 10 times its current profits.

The current profits is 10 lakhs. So 10 times 10 lakhs is 1 crore. This one crore is actually
an estimate based on various qualitative factors. Add book value to it, and you arrive at
Rs 1crore and 50 Lakhs. This means, “ABC” is worth Rs 150 lakhs.

40% of 150 is 60 lakhs. So, they decide to sell 40% of their company. As first time Company
was selling shares. They issued initial public offering (IPO) to public through SEBI.
Through this company managed to raise 60 lakhs. This group of friends still have control
over the operations of the company since they still have 60% share.

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Now, For the group of friends, 40% stake is lost but they get 60 lakhs in cash. They have
the money to expand their business. As planned, they opened two new outlets for Rs 52
lakhs. The balance 8 lakhs is used for day to day operations of the three shops.

Both the new stores hit a profit of 10 lakhs a year. That means the total profit of the
company ABC is now Rs 30 lakhs. (10 lakhs x 3 shops).

The value of the business is now Rs. 450 lakhs (3 shops x 10 lakhs x 10 times as per
Valuation done by underwriter + 50 lakhs (book value) x 3)

So, the group of friends 60% stake is worth Rs 270 lakhs. (450 x 60%)

Investors who bought 40% share, their total worth is 40% of 450 lakhs = 180 lakhs

Since the investors who bought 40% of the share for 60 lakhs, is now worth 180 lakhs,
the shares of ABC, is in great demand. Since the company increased the wealth of
shareholders 3 times. Now there are investors who are willing to purchase the shares even
for an amount higher than 180 lakhs.

Let’s assume that the total shares of the company were 50,000 shares. So, 40% were made
available to the public is 20,000 shares.

The issue price was Rs 300 (40% shares in 60 lakhs = 60 lakhs for 20000 shares) but,
now the share is worth Rs 900(180 lakhs for 20000 shares). Since a section of the public
feels that this winning streak of the company would continue, there is heavy demand for
the share and due to this, the price keeps moving up. So these investors who hold shares
of ABC can sell their shares at a place which is called Stock/share/securities Market
and other people can directly buy the shares from the shareholders.

Securities Markets is a place where buyers and sellers of securities can enter into
transactions to purchase and sell shares, bonds, debentures etc. Further, it performs an
important role of enabling corporates, entrepreneurs to raise resources for their
companies and business ventures through public issues. Transfer of resources from those
having idle resources (investors) to others who have a need for them (corporates) is most
efficiently achieved through the securities market.

SEGMENTS OF CAPITAL MARKET:

Primary Market: Primary market is a market where buying and selling of new securities
are taken place for the first time. In other words, the market, where the first public offering
of equity shares or convertible securities by a company take place which is followed by the
listing of a company’s shares on a stock exchange is called a primary market. It is also
known as ‘initial public offering’ (IPO). Issue of further capital by companies whose shares
are already listed on the stock exchange also comes within the ambit of Primary market.

There are different types of intermediaries operating in this segment of capital market by
providing a variety of services. For example, merchant bankers, brokers, bankers to
issues, debenture trustees, portfolio managers, registrars to issues and share transfer
agents, etc. They are also regulated by SEBI. Their contribution is immense in the
development of capital market.

Secondary Market: Secondary market is a market in which purchase and sale of

securities which are already issued to the public for the first time and listed on the stock
exchange takes place. Therefore, secondary markets are called stock exchanges and the
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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.

Share Capital: Share capital refers to the funds that a company raises in exchange for
issuing an ownership interest in the company in the form of shares. Or Share capital is
owned capital of the company, since it is the money of the shareholder and the shareholder
are the owners of the company. The total share capital is divided into small parts and each
part is called a share. Share is the smallest part of the total capital of a company.

Bonds: It is a fixed income (debt) instrument issued for a period with the purpose of raising
capital. The central or state government and similar institutions sell bonds. A bond is
generally a promise to repay the principal along with a fixed rate of interest on a specified
date, called the Maturity Date. The amount is paid on the maturity of the bond period.

Bonds are an instrument made by government. They issue such bonds when they need
funds you can by this bond at a price of let us say 100 so than they will decide an interest
rate which is called coupon rate. Let us say 10% and the bonds has certain amount of
time so to keep it simple let this one year so you will get 10 % every month that is you’ll
receive 10 per month and when the period is over you will get the bond money at that time
that is 100.

In case of the company goes bankrupt, bondholders are always paid first as liability
towards debenture holders is less.

Types of bond will be studied in a separate chapter.

Debenture: According to section 2(12) of the Companies Act, a “Debenture” includes

debenture stock, bonds and any other securities of a company, whether constituting a
charge on the assets of the company or not. From this definition it is not very clear what
is a debenture.
A debenture is similar to bond and is issued by corporates and it has been defined as
“acknowledgement of debt, given under the seal of the company and containing a contract
for the repayment of the principal sum at a specified date and for the payment of interest
at fixed rate per cent until the principal sum is repaid, and it may or may not give the
charge on the assets to the company as security of the loan”.
A debenture is a kind of document acknowledging the money borrowed containing the
terms and conditions of the loan, payment of interest, redemption of the loan and the
security offered (if any) by the company.

A debenture trustee is one that serves as the holder of debenture stock for the benefit of
another party. When a company is looking to raise capital, one method of accomplishing
this is by issuing stock as a form of debt with the obligation to repay the debt at a specific
interest rate.

Types of debentures:
Naked or unsecured debentures: Debentures of this kind do not carry any charge on the
assets of the company. The holders of such debentures do not therefore have the right to
attach particular property by way of security as to repayment of principal or interest.

Secured debentures: Debentures that are secured by a mortgage of the whole or part of
the assets of the company are called mortgage debentures or secured debentures. The
mortgage may be one duly registered in the formal way or one which is secured by the
deposit of title deeds in case of urgency.
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Redeemable debentures: Debentures that are redeemable on expiry of certain period are
called redeemable debentures. Such debentures after redemption can be reissued in
accordance with the provisions of the Companies Act, 2013.

Perpetual debentures: If the debentures are issued subject to redemption on the

happening of specified events which may not happen for an indefinite period, e.g. winding
up, they are called perpetual debentures.

Convertible debentures may be fully or partly convertible. In case it is fully convertible

the entire face value is converted into equity shares on expiry of the stipulated period. If
partly convertible, the convertible portion is converted into equity shares on expiry of the
specified period and the non-convertible portion is redeemed at the expiry of certain
period.

Non Convertible Debentures (NCDs): Which an not be converted into equity shares on
expiry of the stipulated period.

Intermediaries: Intermediaries are those entities which offer various services in relation
to the capital markets. There are various categories of intermediaries such as stock
brokers, merchant bankers, underwriters etc.

Merchant Bankers: SEBI (Merchant Banker) Regulations, 1992, define ‘merchant banker’
as any person who is engaged in the business of issue management, either by making
arrangements regarding selling, buying, or subscribing, or acting as a manager,
consultant, or advisor, or rendering corporate-advisory services in relation to such issue
management.
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.

Merchant Bankers are prohibited from carrying on certain activities such as acceptance
of deposits, leasing and bill discounting. They are not allowed to borrow any money from
the market. They are also debarred from engaging in the acquisition and sale of securities
on a commercial basis. Examples: ICICI Securities, SBI Capital Market, Goldman Sachs
etc.

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. Stock brokers may also call
themselves investment consultants and financial consultants. A stockbroker should have
good knowledge about the securities market. Further, he should be good with numbers,
have excellent interpersonal skills and should be attentive enough not to oversee any
important details.
On the other hand, 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). The leading
stock brokers in India are listed as below:
• India Infoline
• ICICI Direct
• Share Khan

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• India Bulls
• Geojit Securities
• HDFC
• Reliance Money
• Religare
• Angel Broking

Underwriters: An underwriter is a person who engages in the business of underwriting

the public issue of securities of a particular company. An underwriting is an arrangement
in which a SEBI registered underwriter gives an undertaking to the issuing company that
in case the company’s public issue is not fully subscribed, the underwriter will purchase
the unsubscribed portion of the public issue.

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.

Depositories: Depository is an institution which maintains investors account in electronic

form. One of the main functions of the Depository is to transfer the ownership of shares
from one investor to another whenever the trading of shares takes place. It helps in
reducing the paper work involved in trade, expedites the transfer and reduces the risk
associated with physical shares such as damage, theft, and subsequent misuse of the
certificates or fake securities.

There are two types of depositories in India which are known as NSDL (National Securities
Depository Limited) and CSDL (Central Depository Services (India) Limited). They interface
with the investors through their agents called Depository participants (DPs) the banks
(private, public and foreign), financial institutions or SEBI registered trading members.

 Depository Participant: DP is an agent of the depository and is authorised to offer

depository services to investors. According to SEBI guidelines, financial institutions,
banks, custodians, stockbrokers, etc. can become Depository Participants in a
depository.

Portfolio Managers:
As per SEBI, 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 (whether
as a discretionary portfolio manager or otherwise), the management or administration of
Simply stated, a portfolio manager is a person who is responsible for investing a fund's
assets, monitoring investment strategy and doing day-to-day trading. A portfolio manager
manages mutual funds and other investment funds, such as hedge or venture funds. He
may be an experienced investor, a broker, a fund manager, or a trader with good
knowledge of industry and a having a track record of producing good results.

CUSTODIANS
The custodians play a critical role in the secondary market. SEBI Custodian of Securities
Regulation, 1996 was framed for the proper conduct of their business. According to SEBI
regulations, custodial services in relation to securities of a client or gold/gold related
instrument held by a mutual fund or title deeds of real estate assets held by a real estate

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mutual fund mean safekeeping of such securities or gold/gold related instruments or title
deeds of real estate assets and providing related services.
The related services provided by them are as follows:
• Maintaining accounts of the securities of a client.
• Collecting the benefits /rights accruing to the client in respect of securities.
• Keeping the client informed of the actions taken by issuer of securities.
• Maintaining and reconciling records of the services as referred above.

Further, every custodian should appoint a compliance officer to monitor the compliance
of SEBI Act and its various rules, regulations and guidelines and also for redressal of
investor grievances. The compliance officer should immediately report any non-
compliance observed by him to the SEBI.

CLEARING HOUSES: Clearing house is an exchange-associated body charged with the

function of ensuring (guaranteeing) the financial integrity of each trade. Orders are cleared
by means of the clearinghouse acting as the buyer to all sellers and the seller to all buyers.
Clearing houses provide a range of services related to the guarantee of contracts, clearance
and settlement of trades, and management of risk for their members and associated
exchanges.

The clearing house acts as the medium of transaction between the buyer and the seller.
Every contract between a buyer and a seller is substituted by two contracts so that clearing
house becomes the buyer to every seller and the seller to every buyer. In a transaction
where P sells futures to R, R is replaced by the clearinghouse and the risk taken by P
becomes insignificant. Similarly, the credit risk of R is taken over by the clearing house;
thus, the credit risk is now assumed by the clearing house rather than by individuals. The
credit risk of the clearing house is then minimised by employing some deposits as
collaterals by both, buyers and sellers. These deposits, known as margins, are levied on
each transaction depending upon the volatility of the instrument and adjusted everyday
for price movements.

Registrars to an issue and Share Transfer Agents

‘Registrar to an Issue’ means a person who is involved with the following activities:
(a) Collecting applications on behalf of the investors and keep a proper record of monies
received and paid.
(b) Helping the company which has issued shares in determining the basis of allotment of
the securities in consultation with the stock exchange.
(c) Finalizing the list of person entitled to allotment of securities.
(d) Processing and dispatch of allotment letters, share certificates and refund orders.
‘Share Transfer Agent’ means a person who on behalf of the issuer company maintains
the records of holders of securities issued by such company.
The Registrars to an Issue and Share Transfer Agents are important intermediaries in the
primary market. They help in mobilizing new capital and ensure that proper records of the
details of the investors maintained, so that the decisions regarding basis for allotment and
the number of securities to be allotted can be smoothly implemented.

Bankers to an issue:
Banker to an Issue means a scheduled bank doing any one of the following tasks:
(i) Acceptance of application money;
(ii) Acceptance of allotment or call money;
(iii) Refund of application money;
(iv) Payment of dividend or interest warrants.

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Therefore, as the name indicates, Bankers to the issue carries out the important task of
ensuring that the funds are collected and transferred to the Escrow accounts. The Banks
do a great favour to the companies in mobilization of capital.

Debenture trustee: A debenture trustee is one that serves as the holder of debenture
stock for the benefit of another party. When a company is looking to raise capital, one
method of accomplishing this is by issuing stock as a form of debt with the obligation to
repay the debt at a specific interest rate.
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.

INSTITUTIONAL INVESTORS
An institutional investor is a large organization that has large cash reserves by which it
invests in securities and other investment assets. Institutional investors include
endowment funds, hedge funds, insurance companies, pension funds, mutual funds, etc.
An institutional investor is basically a non-bank organization that trades in large
quantities to qualify for preferential treatment. They are considered as specialized
investors and supply capital to organization that required funds or are in dire straits.
Moreover, they exert good influence in the management of the corporations exercising
voting rights.

An institutional investor is a large organization that has large cash reserves by which it
invests in securities and other investment assets. Institutional investors include
endowment funds, hedge funds, insurance companies, pension funds, mutual funds, etc.
An institutional investor is basically a non-bank organization that trades in large
quantities to qualify for preferential treatment.
So, basically, an institutional investor is an organization that invests on behalf of the
investors. Institutional investors have the required resources to do detailed research on
various investment avenues, and because of their extensive knowledge, they generally
have an edge over retail investors.

FOREIGN PORTFOLIO INVESTORS (FPIs)

FPIs are basically registered foreign funds, which put their money in the stock markets in
India. They invest through various methods in the capital market that is either in the debt
segment or in the equity segment. Therefore, a FPI is an investor or investment fund that
is registered in a countryoutside of the one in which it is currently investing. Institutional
investors include hedge funds, insurance companies, pension funds and mutual funds. If
we try to explain it in the Indian context, it refers to foreign companies investing in the
financial markets of India. The Institutional investors based internationally must register
with the Securities and Exchange Board of India (SEBI) to participate in the market.

FPI vs FDI: Any equity investment by non-residents which is less than or equal to 10% of
capital in a company is Foreign portfolio investment. While above this the investment will
be counted as Foreign Direct Investment (FDI).

Investment by a foreign portfolio investor cannot exceed 10 per cent of the paid-up capital
of the Indian company. All FPI taken together cannot acquire more than 24 per cent of the
paid up capital of an Indian Company. As per SEBI regulations, FPIs are not allowed

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to invest in unlisted shares and investment in unlisted entities will be treated as
FDI.

STAKEHOLDERS IN FINANCIAL MARKET: Various stakeholders in the financial market

can be categorized into following four segments:
(i) Primary stakeholders in financial market
 Shareholders
 Lenders
 Companies
 Mutual fund Organizations/holders/fund managers

(ii) Service providers in financial market

 Merchant Bankers
 Brokers
 Underwriters
 Depositories
 Custodians

(iii) Regulators in financial market

 Securities and Exchange Board of India (SEBI)
 Reserve Bank of India
 Insurance Regulatory and Development Authority of India (IRDAI)
 Pension Fund Regulatory and Development Authority (PFRDA)

(iv) Administrators to facilitate the financial market

 Association of Mutual funds of India (AMFI)
 Foreign Exchange Dealers Association of India (FEDAI)
 Fixed Income Money Market and Derivative Association of India (FIMMDA)
 Association of Investment Bankers of India (AIBI)
 Financial Benchmark India Pvt. Ltd (FBIL)

 Association of Mutual funds of India (AMFI): The Association of Mutual Funds in

India (AMFI) is dedicated to developing the Indian Mutual Fund Industry on
professional, healthy and ethical lines and to enhance and maintain standards in
all areas with a view to protecting and promoting the interests of mutual funds and
their unit holders.

 Foreign Exchange Dealers Association of India (FEDAI): Foreign Exchange

Dealers Association of India (FEDAI) was set up in 1958 as an Association of banks
dealing in foreign exchange in India (typically called Authorised Dealers - ADs) as a
self-regulatory
 body and is incorporated under Companies Act. It’s major activities include framing
of rules governing the conduct of inter-bank foreign exchange business among
banks vis-à-vis public and liaison with RBI for reforms and development of forex
market.

 Fixed Income Money Market and Derivative Association of India (FIMMDA):

The Fixed Income Money Market and Derivatives Association of India (FIMMDA), an
association of Scheduled Commercial Banks, Public Financial Institutions, Primary
Dealers and Insurance Companies was incorporated as a Company under
Companies Act. FIMMDA is a voluntary market body for the bond, money and
derivatives markets. FIMMDA has members representing all major institutional

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segments of the market. The membership includes Nationalized Banks such as
State Bank of India, its associate banks and other nationalized banks; Private sector
banks such as ICICI Bank, HDFC Bank, IDBI Bank; Foreign Banks such as Bank
of America, ABN Amro, Citibank, Financial institutions etc.

 Association of Investment Bankers of India (AIBI): AIBI was promoted to exercise

overall supervision over its members in the matters of compliance with statutory
rules and regulations pertaining to merchant banking and other activities. AIBI was
granted recognition by SEBI to set up professional standards, for providing efficient
services and to establish standard practices in merchant banking and financial
services. AIBI, in consultation with SEBI, is working towards improving the
compliance of statutory requirement in a systematic manner.

 Financial Benchmark India Pvt. Ltd (FBIL): The FBIL, jointly owned by FIMMDA,
FEDAI and IBA, was formed in December 2014 as a private limited company under
the Companies Act 2013. Its aim is to develop and administer benchmarks relating
to money market, government securities and foreign exchange in India. It is
responsible for all the aspects relating to the benchmarks to be issued by it, namely,
collection and submission of market data and information including polled data ,
formulation, adoption and periodic review of benchmark calculation methodologies,
calculation, publication and administration of benchmarks confirming to the
highest standards of integrity, transparency and precision. In India, Mumbai Inter-
Bank Offer Rate (MIBOR) and Mumbai Inter-Bank Bid Rate (MIBID) etc., are main
interest rate benchmarks.

Primary Market

Primary Market
Primary market is a market where buying and selling of new securities are taken place for
the first time.

In other words, the market, where the first public offering of equity shares or convertible
securities by a company take place which is followed by the listing of a company’s shares
on a stock exchange is called a primary market. It is also known as ‘initial public offering’
(IPO). Issue of further capital by companies whose shares are already listed on the stock
exchange also comes within the ambit of Primary market.

Different kinds of issue of securities

Primarily, issues made by an Indian company can be classified as Public, Rights, Bonus
and Private Placement. While right issues by a listed company and public issues involve a
detailed procedure, bonus issues and private placements are relatively simpler. The
classification of issues is illustrated as below:
a) Public Issue
(i) Initial Public Offer (IPO)
(ii) Further Public Offer (FPO)
b) Rights Issue
c) Composite Issue (Combination of public and right issue)
d) Bonus Issue
e) Private Placement:
(i) Preferential Issue
(ii) Qualified Institutional Placement

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(iii) Institutional Placement Programme

Types of issues in Primary Market: Public Issue of shares means the selling or marketing
of shares for subscription by the public by issue of prospectus. For raising capital from
the public by the issue of shares, a public company has to comply with the provisions of
the Companies Act, 2013 the Securities Contracts (Regulation) Act, 1956 including the
Rules made there under and the guidelines and instructions issued by the concerned
Government authorities, the Stock Exchanges and SEBI etc. A company can raise funds
from the primary market through following different method:
(a) Public Issue: When shares or convertible securities are issued to new investors, it is
called a public issue. Public issue can be further sub-divided into Initial Public Offer (IPO)
and Further Public Offer (FPO). The significant features of each type of public issue are
illustrated below:
(i) Initial Public Offer (IPO): When the shares and debentures of a company are
issued to the public for the first time, it is called an IPO. It then set the stage for
listing and trading of the issuer’s shares or convertible securities on the Stock
Exchanges.
(ii) Further Public Offer (FPO) or Follow on Offer: When an already listed company
makes either a fresh issue of shares or convertible securities to the public or an
offer for sale to the public, it is called a FPO.

(b) Right issue (RI): When an issue of securities is made by an issuer to its shareholders
existing as on a particular date fixed by the issuer (i.e. record date), it is called a Rights
Issue. The rights are offered in a particular ratio to the number of securities held as on
the record date. A rights issue is when a company issues its existing shareholders a right
to buy additional shares in the company. The company will offer the shareholder a specific
number of shares at a specific price. The company will also set a time limit for the
shareholder to buy the shares. The shares are often offered at a discounted price to
encourage existing shareholders to take the company up on their offer.

If a shareholder does not take the company up on their rights issue then they have the
option to sell their rights on the stock market just as they would sell ordinary shares,
however their shareholding in the company will weaken.
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Reasons for a rights issue of shares:
A company will offer more shares to its shareholders to raise extra money for the company.
Companies with a poor cash flow will often use a rights issue to increase cash flow and
pay off existing debts. Rights issues however are sometimes issued by companies with
healthy balance sheets in order to fund research and development projects or to purchase
new companies.

Discounted shares issued by a company can be tempting but it is important to find out
first the reason for the rights issue of shares. A company, for example, may be using the
rights issue as a quick cash fix to pay off debts masking the real reason for the company’s
cash flow failing such as bad leadership. Caution is advised when offered with a rights
issue.

Example of a rights issue of shares

 Company ‘ABC Mining’ has 10 million shares at a share price of Rs 8 (market

capitalization Rs 80million)
 Shyam owns 1,000 shares worth Rs 8,000
 ABC Mining needs to raisers 30 million to research new mining locations.
 ABC Mining issues 5 million new shares @ Rs. 6 each (to raise Rs.30 million, a 25%
discounted price)
 This is classed as a 2 to 1 rights issue (10 million old shares : 5 million new shares)
 Which means every 2 shares you own ABC mining will issue another 1 share.
 This means Shyam is being issued with the right to buy a further 500 shares at Rs.
6 (Rs.3,000)

Shyam can either;

 Buy the further 500 shares for Rs3,000.

 Ignore ABC Mining’s rights issue. This will result in Shyam’s share holding will be
decreased along with the value of his current share holding. This option is not
usually advised.
 Sell his rights on the stock market and make a profit.

(c) Composite Issue: When the issue of shares or convertible securities by a listed issuer
on public cum-rights basis, wherein the allotment in both public issue and rights issue is
proposed to be made simultaneously, it is called composite issue.
(d) Bonus Issue: When an issuer makes an issue of shares to its existing shareholders
without any consideration based on the number of shares already held by them as on a
record date, it is called a bonus issue. In Bonus Issue, the shares are issued out of the
Company’s free reserve or share premium account in a particular ratio.

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Companies issue bonus shares to encourage retail participation and increase their equity
base. When price per share of a company is high, it becomes difficult for new investors to
buy shares of that particular company. Increase in the number of shares reduces the price
per share. But the overall capital remains the same even if bonus shares are declared.

Bonus shares refer to capitalization of profits of the company by issuing fully paid shares
to the members of the company, free of cost.

o Such shares are given to members in proportion of their holding.

o Paid-up share capital of the company increases with the issue of bonus
shares.

It is taken as a sign of the good health of the company. It increases the share capital of
the company.

Now the earnings of the company will have to be divided by that many more shares. Since
the profits remain the same but the number of shares has increased, the EPS (Earnings
per Share = Net Profit/ Number of Shares) will decline.

Example: If a shareholder holds 100 shares out of a total 100,000 shares of the stock of
a company, and the company announces a 2:1 bonus issue, the shareholder will get 200
additional shares and his holding will become 300 shares. The company’s outstanding
shares will also increase by 200,000 making the total outstanding shares as 300,000. The
shareholder’s stake in the company before the bonus issue was 100 / 100,000 = 0.1%,
and after the bonus issue is 300 / 300,000 = 0.1%. So, the percentage holding of the
existing shareholders remains the same.

The date when bonus issue becomes effective is called record date.

Sometimes Companies issue bonus shares to encourage retail participation and increase
their equity base. When price per share of a company is high, it becomes difficult for new
investors to buy shares of that particular company. Increase in the number of shares
reduces the price per share. But the overall capital remains the same even if bonus shares
are declared.

For instance, if Investor A holds 100 shares having Price Rs 500/share of a company and
a company declares split of the share into share of Rs 100 means for every 1 share he will
get 5 shares total (4 bonus shares without cost)

Initial capital of A = Total share x share value

Total share = 100 Value of per Share Rs 500

= 100 x 500 = Rs. 50000

After share split

Total share = 500 Value of per Share Rs 100

Capital after share split: 500 x 100 = Rs. 50000

This shows that capital will remain same in share spit related bonus issue.

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(e) Private Placement: When an issuer makes an issue of shares or convertible securities
to a select group of persons but not more than 200 in a year, it is called a private
placement. It should not either be a right issue or a public issue.
Private placement of shares or convertible securities by listed issuer can be of following
types:
(i) Preferential allotment: When a listed issuer issues shares or convertible securities, to
a select group of persons, it is called a preferential allotment. The issuer is 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.

Preference Shares: Shares which enjoy preference as regards dividend payment and
capital repayment are called “Preference Shares”. They get dividend before equity holders.
They get back their capital before equity holders in the event of winding up of the company.
The owners of these shares have a preference for dividend and a first claim for return of
capital; when the company is closed down. But, their dividend rate is fixed.

(ii) Qualified institutions placement (QIP): When a listed issuer issues equity shares or
securities convertible in to equity shares to Qualified Institutions Buyers, it is called a
QIP.

(iii) Institutional placement programme (IPP): When a listed issuer makes a further
public offer of equity shares, or offer for sale of shares by promoter / promoter group of
listed issuer in which, the offer allocation and allotment of such shares is made only to
QIBs for the purpose of achieving minimum public shareholding it is called an IPP.

(e) International Securities Issue: Indian companies are permitted to raise foreign
currency resources through two main sources:

(a) issue of Foreign Currency Convertible Bonds (FCCBs) –more commonly known as ‘Euro
Issues’ and

(b) issue of ordinary equity shares through depository receipts, namely, Global Depository
Receipts (GDRs)/American Depository Receipts (ADRs) to foreign investors i.e.
institutional investors or individuals (including NRIs) residing abroad.

A depository receipt (DR) is any negotiable instrument in the form of a certificate

denominated in US dollars.

How do Depository Receipts Created?

When a foreign company wants to list its securities on another country’s stock exchange,
it can do so through Depository Receipts (DR) mode. To allow creation of DRs, the shares
of the foreign company, which the DRs represent, are first of all delivered and deposited
with the custodian bank of the depository through which they intend to create the DR. On
receipt of the delivery of shares, the custodial bank creates DRs and issues the same to
investors in the country where the DRs are intended to be listed. These DRs are then listed
and traded in the local stock exchanges of that country.

An American Depository Receipt (ADR) is a negotiable U.S. certificate representing

ownership of shares in a non-U.S. corporation. ADRs are quoted and traded in U.S. dollars
in the U.S. securities market. Also, the dividends are paid to investor in U.S. dollars.

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Global Depository Receipts (GDRs) may be defined as a global finance vehicle that allows
an issuer to raise capital simultaneously in two or more markets through a global offering.
GDRs may be used in either the public or private markets inside or outside the US. GDR,
a negotiable certificate usually represents a company’s publicly traded equity or debt.
ADRs and GDRs are identical from a legal, operational, technical and administrative
standpoint. The word ‘global’ denotes receipts issued are on a global basis that is to
investors not restricted to US.

ADRs are typically traded on a US national stock exchange, such as the New York
Stock Exchange (NYSE) or the American Stock Exchange, while GDRs are commonly
listed on European stock exchanges such as the London Stock Exchange.

Most of the Indian companies issuing GDRs prefer Luxembourg stock exchange as deals
can be closed very fast at Luxembourg. In 1992, Reliance Industries was the first ever
Indian company to raise $150 million in the GDR issue. Infosys was the first Indian
Company to have issued ADRs in the US and it got its shares listed in NASDQ in 1999.

What are Indian Depository Receipts (IDR) : An IDR is an instrument denominated in

Indian Rupees in the form of a depository receipt created by a Domestic Depository
(custodian of securities registered with the Securities and Exchange Board of India)
against the underlying equity shares of issuing company to enable foreign companies to
raise funds from the Indian securities markets.

Recently SEBI has issued guidelines for foreign companies who wish to raise capital in
India by issuing Indian Depository Receipts. Thus, IDRs will be transferable securities to
be listed on Indian stock exchanges in the form of depository receipts. Such IDRs will be
created by a Domestic Depositories in India against the underlying equity shares of the
issuing company which is incorporated outside India.

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Though IDRs will be freely priced. Each IDR will represent a certain number of shares of
the foreign company. The shares will not be listed in India, but have to be listed in the
home country.
The IDRs will allow the Indian investors to tap the opportunities in stocks of foreign
companies and thus, now Indian investors will have easy access to international capital
market.
SEBI has issued guidelines for issuance of IDRs in April, 2006, some of the major norms
for issuance of IDRs are as follows. SEBI has set Rs. 50 crores as the lower limit for the
IDRs to be issued by the companies. Moreover, the minimum investment required in the
IDR issue by the investors has been fixed at Rs. five lakh. Non-Resident Indians and
Foreign Institutional Investors (FIIs) have not been allowed to purchase or possess IDRs
without special permission from the Reserve Bank of India (RBI).
Standard Chartered plc was the first foreign company which issued an IDR in India.

SEBI Guidelines for IPO:

Entry Norm I (commonly known as “Profitability Route”)

 Net tangible assets of at least Rs. 3 crore in each of the preceding three full years of
which not more than 50% are held in monetary assets. However, the limit of 50%
on monetary assets shall not be applicable in case the public offer is made entirely
through offer for sale.
 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 Rs. 1 crore in each of the preceding three full years.
 The issue size should not exceed 5 times the pre-issue net worth.
 Minimum post-issue paid-up capital shall be ten crore rupees.

 Minimum contribution (20% post capital issue) of promoters shall be locked for 3
years.

 The minimum subscription to be received in the issue shall be at least ninety per
cent. of the offer through the offer document.
 An initial public offer shall be kept open for at least three working days and not
more than ten working days.
 The minimum issue size shall be Rs. 10 crore; and the minimum market
capitalization of the Company shall be Rs. 25 crore (market capitalization shall be
calculated by multiplying the post-issue paid-up number of equity shares with the
issue price).

 As per the Listing Agreement, a company is required to complete the allotment of

securities offered to the public within 30 days of the date of closure of the
subscription list and approach the Designated Stock Exchange for approval of the

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basis of allotment failing which interest at the rate of 15% shall be paid to the
investors.
 The minimum application amount by retail investor shall be between Rs 10,000-Rs
15,000.
 If the stated minimum amount has not been subscribed and the sum payable on
application is not received within the period specified therein, then the application
money shall be repaid within a period of fifteen days from the closure of the issue
failing which interest at the rate of 15% shall be paid to the investors.

 As stipulated by SEBI guidelines, within 45 days of the closure of issue, a report in

the prescribed form along with a compliance certificate from statutory auditor/
practicing chartered accountant or by a company secretary in practice has to be
forwarded to SEBI by the lead managers.

Entry Norm II (QIB Route): Issue shall be through book building route, with at least 75%
of net offer to the public to be mandatory allotted to the Qualified Institutional Buyers
(QIBs). The company shall refund the subscription money if the minimum subscription of
QIBs is not attained.
IPO Process:
Offer document’ is a document which contains all the relevant information about the
company, promoters, projects, financial details, objects of raising the money, forms of the
issue etc. and is using for inviting subscription to the issue being made by the
issuer. Offer document is called ‘Prospectus’ in case of a public issue and letter of offer in
case of rights issue.
Draft Offer Document refers to the first offer document in draft stage filed by lead
manager of company with SEBI and stock exchanges for approval, who after reviewing,
communicate their observations to the Company, which the company has to incorporate
in the offer document.
SEBI typically requires a period of 30 days for processing a draft offer document. The draft
offer document is placed by SEBI on its website. It is also placed on the websites of
recognized stock exchanges where specified securities are proposed to be listed and
merchant bankers associated with the issue for public comments for a period of at
least 21 days.

The lead merchant bankers, after expiry of the above period (of at least 21 days), file with
SEBI a statement giving information of the comments received by them or the issuer on
the draft offer document during that period and the consequential changes, if any, to be
made in the draft offer document.
“lead manager” means a merchant banker registered with the Board and appointed by
the issuer to manage the issue and in case of a book built issue, the lead manager(s)
appointed by the issuer shall act as the book running lead manager (BRLM) for the
purposes of book building;

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Red herring prospectus: A red herring prospectus (RHP) is a preliminary registration
document that is filed with SEBI in the case of book building issue which does not have
details of either price or number of shares being offered or the amount of issue.
This is the offering document printed by the issuer containing a description of the
business, discussion of strategy, presentation of historical financial statements,
explanation of recent financial results, management and their backgrounds and
ownership. 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 of shares are determined later.
Only on completion of the bidding process, the details of the final price are included in the
offer document. The offer document filed with price of IPO thereafter with ROC
(Registrars of Companies) is called a prospectus.
Abridged Prospectus is a shorter version of offer document in public issue and is issued
along with the application form of a public issue. It contains all the salient features of the
prospectus.
Prospectus is an offer document in case of a public issue which has all relevant details
including price and number of shares or convertible securities being offered. This
document is registered with ROC before the issue opens in case of a fixed price issue and
alter the closure of the issue in case of a book built issue.

Shelf prospectus is a prospectus which enables an issuer to make a series of issues with
in a period of 1 year without the need of filing a fresh prospectus every time. This facility
is available to public sector banks, schedule banks and public financial institutions.

Letter of offer is an offer document in case of a Right issue of shares or convertible

securities and is filed with stock exchanges before the issue opens.

Abridged letter of offer is an abridged version of the letter of offer. It is sent to all the
shareholders along with the application form.

Placement document is an offer document for the purpose of Qualified Institutional

Placement and contains all the relevant and material disclosures.

Differential Pricing: Where one category of investors is offered shares at a price different
from the other category, it is called differential pricing.

The following are the different categories of investors to whom shares can be issued at
different pricing:

1. Retail investors: An issuer can allot the shares to retail individual investors at a
discount of maximum 10% to the price at which the shares are offered to other
categories of public.
2. Employees: An issuer company can offer the shares to employees at a discount of
maximum 10 % of the floor price at which the shares are offered to other categories of
public.

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Types of IPO issues:
Fixed Price Issues: When the issuer at the outset decides the issue price and mentions
it in the offer document, it is in the offer document, it is commonly known as “Fixed price
issue”

Book built issue: When the price of an issue is discovered on the basis of demand raised
from the prospective investors at various investors at various price levels, it is called ‘Book
built issue’.

Price Discovery through Book building Process:

In book building process, the price at which securities will be issued to the public is not
known while in case of offer of shares through normal public issue, price is known in
advance to investor.

In case of the public issue, the demand is known at the close of the issue. The Book should
remain open for a minimum of 3 working days.

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(difference) 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) etc. 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 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 upon 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 can 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.

*In fixed price method, 100% advance payment is required to be made by the investors
at the time of application, while in book building method, 10 % advance payment is
required to be made by the QIBs along with the application, while other categories of
investors have to pay 100% advance along with the application.

Floor Price: Floor price is the minimum price at which bids can be made.

Cut-off Price: In Book building issue, the issuer is required to indicate either the price
band or a floor price in the red herring prospectus. The actual discovered issue price can
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be any price in the price band or any price above the floor price. This issue price is called
“Cut off price”. This is decided by the issuer and Lead Merchant after considering the book
and investors’ appetite for the stock. SEBI (Issue of Capital and Disclosure
Requirements) ICDR Regulations 2009 permit only retail individual investors to have an
option of applying at cut off price.

Final Issue Price: The demand at various price levels within the price band is made
available on the websites of the designated stock exchanges during the entire tenure of
the issue and once the issue closes, the final price is determined by the issuer and made
known to the investors.

Key disclosure requirements of offer document

Key disclosures required to be made in an offer document i.e. in a prospectus are given as
below:
(i) names and addresses of the registered office of the company, company secretary, Chief
Financial Officer, auditors, legal advisers, bankers, trustees, if any, underwriters etc;
(ii) dates of the opening and closing of the issue, and declaration about the issue of
allotment letters and refunds within the prescribed time;
(iii) a statement by the Board of Directors about the separate bank account where all
monies received out of the issue are to be transferred and disclosure of details of all monies
including utilized and unutilized monies out of the previous issue;
(iv) details about underwriting of the issue;
(v) the authority for the issue and the details of the resolution passed therefor;
(vi) procedure and time schedule for allotment and issue of securities;
(vii) capital structure of the company;

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(viii) main objects of public offer and terms of the present issue;
(ix) Main objects and present business of the company and its location, schedule of
implementation of the project;
(x) Particulars relating to management perception of risk factors specific to the project,
gestation period of the project, extent of progress made in the project and deadlines for
completion of the project;
(xi) minimum subscription, amount payable by way of premium, issue of shares otherwise
than on cash;
(xii) details of directors including their appointments and remuneration,
(xiii) sources of promoter‘s contribution.

Allocations in an IPO:

In case of Book Built issue:

a) Not less than 35% of the net offer to the public shall be available for allocation to retail
individual investors;

b) Not less than 15% of the net offer to the public shall be available for allocation to non‐
institutional investors i.e. investors other than retail individual investors and Qualified
Institutional Buyers;

c) Not more than 50% of the net offer to the public shall be available for allocation to
Qualified Institutional Buyers.

In case of fixed price issue:

The proportionate allotment of securities to the different investor categories in a fixed price
issue is as described below:

1. A minimum 50% of the net offer of securities to the public shall initially be made
available for allotment to retail individual investors.

2. The balance net offer of securities to the public shall be made available for allotment to:

a. Individual applicants other than retail individual investors, and

b. Other investors including corporate bodies/ institutions irrespective of the number of

securities applied for.

Categories of Investors:

Investors are broadly classified under following categories:

(i) Retail Individual Investors (RIIs)

‘Retail individual investor’ means an investor who applies or bids for securities of or for a
value of not more than Rs. 2,00,000.

(ii) Non Institutional Investors (NIIs)

All applicants, other than QIBs or individuals applying for more than Rs. 2,00,000 are
considered as NIIs. Typically, this category includes High Net Worth Individuals (HNIs)
and corporate bodies.

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(iii) Qualified Institutional Buyers (QIBs)

QIBs are those institutional investors who are perceived to possess expertise and the
financial strength to evaluate and invest in the capital markets. A QIB is defined by SEBI
as:
(i) a mutual fund, venture capital fund, Alternative Investment Fund and foreign venture
capital investor registered with SEBI;

(ii) a foreign institutional investor and sub-account (other than a sub-account which is a
foreign corporate or foreign individual), registered with SEBI;

(iii) a public financial institution as defined in section 4A of the Companies Act, 1956;

(iv) a scheduled commercial bank;

(v) a multilateral and bilateral development financial institution;

(vi) a state industrial development corporation;

(vii) an insurance company registered with the Insurance Regulatory and Development
Authority;

(viii)a provident fund with minimum corpus of twenty five crore rupees;

(ix) a pension fund with minimum corpus of twenty five crore rupees;

(x) National Investment Fund set up by of the Government of India;

(xi) insurance funds set up and managed by army, navy or air force of the Union of India;

(xii) insurance funds set up and managed by the Department of Posts, India;

These entities are not required to be registered with SEBI as QIBs. Any entities falling
under the categories specified above are considered as QIBs for the purpose of
participating in primary issuance process.

Features:
1. In any case, for all IPO/FPOs of any security of issue size of Rs. 10 crore or
more, issues have to be compulsorily be only in dematerialized form, while
QIBs and large investors (applying for more than Rs. 2,00,000), can apply only in
demat form.

2. ASBA Process in brief: In an endeavor to make the existing public issue process
more efficient, SEBI 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,
as well as for all rights issues An ASBA investor shall submit an ASBA physically or
electronically through the internet banking facility, to the Self Certified Syndicate
Bank (SCSB) with whom the bank account to be blocked is maintained. SCSBs shall
carry out further action for such ASBA forms such as signature verification,
blocking of funds etc. and forward these forms to the registrar to the issue).

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The application money shall remain blocked in the bank account till finalization of
the basis of allotment in the issue or till withdrawal/ failure of the issue or till
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 is finalized, the SCSB shall unblock the relevant bank accounts and shall
transfer 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.
3. The Issuer are required to allot and or application money to be refunded within 15
days from the date of closure of the issue. The issuer is required to pay interest at
the rate of fifteen percent per annum if the allotment or refund has not been made
to the applicants.
4. Listing of shares on stock exchange will be done within 6 days after the closure
of the issue.
Anchor Investors:

Anchor investors are institutional investors who are offered shares in an IPO a day before
the offer opens. 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. Each anchor investor has to put a minimum of INR 10
crore in the issue.

One-third of the anchor investor portion shall be reserved for domestic mutual funds.

There shall be a lock-in of 30 days on the shares allotted to the Anchor Investor from the
date of allotment in the public issue.

Neither the merchant bankers nor any person related to the promoter/promoter
group/merchant bankers in the concerned public issue can apply under Anchor Investor
category. The parameters for selection of Anchor Investor shall be clearly identified by the
merchant banker and shall be available as part of records of the merchant banker for
inspection by SEBI.

Promoter's Contribution and Lock-in

In case of an IPO/FPO, the promoters have to necessarily offer at least 20% of the
post issue capital. In case of public issues by listed companies, the promoters shall
participate either to the extent of 20% of the proposed issue or ensure post-issue
shareholding to the extent of 20% of the post-issue capital.
In case of any issue of capital to the public the minimum contribution of promoters
shall be locked in for a period of three years, both for an IPO/FPO and public issue by
listed companies.

In case of an IPO/FPO, if the promoters' contribution in the proposed issue exceeds the
required minimum contribution, such excess contribution shall also be locked in for a
period of one year.

Green shoe Option

A Green Shoe option means an option of allocating shares in excess of the equity shares
offered in the public issue as a post-listing price stabilizing mechanism for a period not

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exceeding 30 days in accordance with the provisions of SEBI ICDR Regulations 2009,
which is granted to a company to be exercised through a Stabilizing Agent. This is an
arrangement wherein the issue would be over allotted to the extent of a maximum of 15%
of the issue size.
Green shoe is an option that allows the underwriter of an initial public offer (IPO) to sell
additional shares to the public if the demand is high. This also involves purchase of equity
shares from the market by the underwriting in case the share price fall below issue price
or goes significantly above the issue price.
From an investor’s perspective, an issue with green shoe option provides more probability
of getting shares and also that post listing price may show relatively more stability as
compared to market.
Green Shoe Manufacturing Company (now known as Stride Rite Corporation) was the
first company to incorporate the green shoe clause in its underwriting agreement.
Henceforth, all underwriting agreements which have over-allotment option clause are said
to have the green shoe option.
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.
IPO Grading Agencies: IPO grading has been made mandatory by SEBI as an endeavor
to make additional information available for the investors in order to facilitate their
assessment of equity issues offered through an IPO. IPO grades are assigned by a Credit
Rating Agency registered with SEBI.

What is ‘IPO Grading’?: IPO grading is the grade assigned by a Credit Rating Agency
registered with SEBI, to the initial public offering/ follow on public offering (IPO) of equity
shares or any other security which may be converted into or exchanged with equity shares
at a later date. The grade represents a relative assessment of the fundamentals of that
issue in relation to the other listed equity securities in India. Such grading is generally
assigned on a five-point point scale with a higher score indicating stronger fundamentals
and vice versa as below.

IPO grade 1: Poor fundamentals

IPO grade 2: Below-average fundamentals
IPO grade 3: Average fundamentals
IPO grade 4: Above-average fundamentals
IPO grade 5: Strong fundamentals

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IPO grading has been introduced as an endeavor to make additional information available
for the investors in order to facilitate their assessment of equity issues offered through an
IPO.
Offer for Sale (OFS) is another form of share sale, very much similar to Further Public
Offer (FPO). OFS mechanism facilitates the promoters of an already listed company to sell
or dilute their existing shareholdings through an exchange based bidding platform. Except
the promoters of the company, all market participants like individuals, mutual funds,
foreign institutional investors (FIIs), insurance companies, corporates, other Qualified
Institutional Bidders (QIBs), HUFs etc. can bid/participate in the OFS process or buy the
shares. The promoters of the company can only participate as the sellers in the process.

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.

 Seller(s) shall announce the intention of sale of shares at least one clear trading day
prior (on T-2 day, T being the day of OFS issue) to the opening of offer latest by 5
pm with the all required details.

 The duration of the offer for sale shall be as per the trading hours of the secondary
market and shall not exceed one trading day. Orders shall be placed during trading
hours.

Investor protection fund: Investor Protection Fund (IPF) is set up by Inter-connected

Stock Exchange (ISE) in accordance with the guidelines issued by the Ministry of Finance
for investor protection, in order to compensate the claims of investors against the members
of exchanges (brokers) who have defaulted or failed to pay and also to promot investor
education, awareness and research

The investor can ask for the compensation if a member (broker) of the National Stock
Exchange (NSE) or Bombay Stock Exchange (BSE) or any other stock exchange fails to
pay the due money for the investments made.

The Stock Exchanges have put certain limits on the level of compensation paid to the
investors. This limitation has been put according to the discussions and guidance with
the IPF Trust.

The limit allows that the money to paid as a compensation for a single claim shall not be
less than INR 1 lakh – for the case major Stock Exchanges like BSE and NSE – and it
should not be less INR 50,000 in case of other Stock Exchanges.

Money in Investor Protection Fund (IPF) is collected by charging one percent turnover fee
by the stock exchanges from the brokers or INR 25 lakh, whichever is less in the fiscal
year.

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INVESTOR EDUCATION AND PROTECTION FUND (IEPF): The Government of India has
established a fund called Investor Education and Protection Fund (IEPF) for investors.
Under this fund, all the share applications money, dividends, matured deposits, interest,
debentures, etc. those are unclaimed for over seven years are pooled together. Investors
who failed to collect their dividends or interests etc. can now seek a refund from IEPF.

Terminology:
Dematerialization is the process by which physical certificates of an investor are
converted to an equivalent number of securities in electronic form and credited to the
investor’s account with his Depository Participant (DP).

Market Capitalization: The market value of a quoted company, which is calculated by

multiplying its current share price (market price) by the number of shares in issue, is
called as market capitalization. E.g. Company A has 120 million shares in issue. The
current market price is Rs. 100. The market capitalization of company A is Rs. 12000
million.

Delisting of securities’ means permanent removal of securities of a listed company from

a stock exchange. As a consequence of delisting, the securities of that company would no
longer be traded at that stock exchange.

Stock Exchange: The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘Stock
Exchange’ as anybody of individuals, whether incorporated or not, constituted for the
purpose of assisting, regulating or controlling the business of buying, selling or dealing in
securities.

Securities’ as per the Securities Contracts Regulation Act (SCRA), 1956, includes
instruments such as shares, bonds, stocks or other marketable securities of similar
nature in or of any incorporate company or body corporate, government securities,
derivatives of securities, units of collective investment scheme, interest and rights in
securities, security receipt or any other instruments so declared by the Central
Government.

Who regulates the Securities Market?

The responsibility for regulating the securities market is shared by Department of
Economic Affairs (DEA) of Ministry of Finance, Department of Company Affairs (DCA)
under Ministry of Corporate Affairs, Reserve Bank of India (RBI) and Securities and
Exchange Board of India (SEBI).

Various terms defined in Section 2 of Company Act used in relation to share capital:

1. Authorised capital: It is also known as nominal capital or registered capital.

It is the maximum amount of capital which a company can collect or raise by selling its
shares to the general public.

“Authorised capital” or “nominal capital” means such capital as is authorised by the

memorandum of a company to be the maximum amount of share capital of the company.

It is the sum stated in the memorandum as the capital of the company with which it has
been registered. Stamp duty is paid on this amount.

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This amount is fixed on the basis of amount that will be needed by the company as fixed
capital, working capital and reserve capital.

A company is not allowed to raise capital in excess of this amount. If it needs to raise more
capital, it has to first amend the capital clause of the memorandum.

Example – Suppose a company incorporated with Rs 100,000. So Authorised share capital

of M/s XYZ Ltd. is 10000 equity shares of ₹ 10 each. Thus, authorised capital is ₹
100000/-

*Memorandum of Association is the most important document of a company. It states

the objects for which the company is formed. It contains the rights, privileges and powers
of the company. Hence it is called a charter of the company. It is treated as the constitution
of the company.

2. Issued Capital: “Issued capital” means such capital as the company issues from time
to time for subscription. It is that part of the authorized capital which is actually issued
to the general public.

Such shares may be issued not only for cash, but may also be issued for consideration
other than cash.

Example: Out of the above 10000 authorised shares, the company issues 8000 shares
(face value ₹ 10) for subscription. Thus, issued capital is 80000.

3. Subscribed capital: It is that part of the issued capital which is actually subscribed by
the general public. The shares issued by the company may not be taken up entirely by the
public. Some portion of the issue may remain unsubscribed.

Example – Out of the above 8000 issued shares, 7000 shares are subscribed. Thus,
subscribed capital of the company is ₹ 70000/.

4. Called up capital: A company may not call for the entire amount of face value of shares
at one go.

Face value amount (say ₹ 10) of shares is generally called up in parts. Say ₹ 2 on
application, ₹ 3 on allotment.

Hence, called up capital is that portion of the subscribed capital, which has been called
up by the company for payment.

Example – out of above subscribed 7000 shares of ₹ 10 each, only ₹ 2 on application and
₹ 3 on allotment has been called up. Thus, called up capital will be ₹ 35000/-

5. Paid up Capital: It may happen that some of the members don’t pay the calls made by
company.

Paid up capital is that portion of called up capital, which has actually been paid by the
members to the company.

Example- Suppose, as given above out of subscribed 7000 shares of face value Rs 10, only
₹ 2 on application and ₹ 3 on allotment has been called up, only persons holding 6000
shares paid it. Thus, paid up capital is ₹ 30000/- (₹ 12000 received on application and ₹
18000 received on allotment).

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