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SAVEETHA UNIVERSITY

SUBJECT: FINANCIAL MARKETING AND


REGULATIONS

SEBIS ROLE IN ISSUE


OF SHARES
M. AMUDHA

This paper aims to provide a clear picture upon understanding various concepts involved
in the process of issue of shares and how SEBI plays its Regulatory role in the process,
rather than remaining merely as a watch dog in the Securities Market.

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CONTENTS
ABBREVIATIONS
INTRODUCTION
OBJECT OF RESEARCH
TYPES OF ISSUE OF SHARES
OFFER DOCUMENTS
ISSUE REQUIREMENTS
SEBIS ROLE IN AN ISSUE
DIP GUIDELINES
SUBATRA ROY SAHARA V UOI (ANALYSIS)
LOCK IN REQUIREMENTS
PRICING IN THE ISSUE
BOOK BUILDING
FIRM ALLOTTMENT
RETAIL INDIVIDUAL INVESTOR
NON INSTITUTIONAL INVESTOR
QUALIFIED INSTITUTIONAL BUYERS
RESEARCH METHODOLOGY
CONCLUSION
BIBLIOGRAPHY

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LIST OF ABBREVIATIONS
AIBI

Association of Investment Bankers of India

AIF

Alternative Investment Funds

BRLM

Book Running Lead Manager

CRA

Credit Rating Agency

DIP

Disclosure and Investor Protection

EPS

Earnings Per Share

ETF

Exchange Traded Funds

FPO

Further Public Offer

FVCI

Foreign Venture Capital Investors

IDFC

Infrastructure Development Finance Company

IL&FS

Infrastructure Leasing and Financial Services Ltd

IPO

Initial Public Offer

IRDA

Insurance Regulatory and Development Authority

NIIs

Non-Institutional Investors

NRI

Non Resident Indian

OCB

Overseas Corporate Body

OFCD

Optionally Fully Convertible Debentures

PE

Private Equity

PMAC

Primary Market Advisory Committee

QIB

Qualified Institutional Buyers

QIP

Qualified Institutional Placement

RIIs

Retail Individual Investors

ROC

Registrar of Companies

RSE

Regional Stock Exchange

SAT

Securities Appellate Tribunal

SEBI

Securities Exchange Board of India

SEC

Securities Exchange Commission

SHIC

Sahara Housing Investment Corporation Ltd

SIRECL

Sahara India Real Estate Corporation Ltd

VCF

Venture Capital Funds

ROLE OF SEBI IN ISSUE OF SHARES


Introduction:
SEBI which is an abbreviation for Securities and Exchange Board of
India has functions similar to the SEC or Securities Exchange Commission in
the USA. In other words, the SEBI regulates the working of the financial
markets in India, vis-a-vis investor protection and laying down of ethical
standards for the working of the financial markets in India. This is why SEBI is
also called as the watchdog of the Indian Markets. The Securities and
Exchange Board of India (SEBI) is the regulatory authority in India
established under Section 3 of SEBI Act, 19921 which provides for
establishment of Securities and Exchange Board of India (SEBI) with statutory
powers for protecting the interests of investors in securities, promoting the
development of the securities market and regulating the securities market. Its
regulatory jurisdiction extends over corporates in the issuance of capital and
transfer of securities, in addition to all intermediaries and persons associated
with securities market.
Object of the Research:
This paper aims to provide a clear picture upon understanding various concepts
involved in the process of issue of shares and how SEBI plays its Regulatory
role in the process, rather than remaining merely as a watch dog in the
1 Act No.15 of 1992. [4thApril ,1992.]

Securities Market. The paper also highlights upon the SEBI (Disclosure and
Investor Protection) Guidelines, 2000 on aspects relating to the issue of shares
and other forms of securities. Finally, an emphasis upon the leading decision of
Sahara v/s SEBI on various issues pertaining to the role played by SEBI in
Practical cases and circumstances is highlighted upon.
Different kinds of Issues:
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.
1. Public issue:
When an issue or offer of securities is made to new investors for
becoming part of shareholders family of the company it is called a public issue.
Public issue can be further classified into Initial public offer (IPO) and Further
public offer (FPO).
a. Initial public offer (IPO):
When an unlisted company makes either a fresh issue of securities or
offers its existing securities for sale or both for the first time to the public, it
is called an IPO. This paves way for listing and trading of the issuers
securities in the Stock Exchanges.
b. Further public offer (FPO) or Follow on offer:

When an already listed company makes either a fresh issue of


securities to the public or an offer for sale to the public, it is called a FPO.

2. Rights issue:
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.
3. Bonus issue:
When an issuer makes an issue of securities to its existing shareholders as
on a record date, without any consideration from them, it is called a bonus issue.
The shares are issued out of the Companys free reserve or share premium
account in a particular ratio to the number of securities held on a record date.
4. Private placement:
When an issuer makes an issue of securities to a select group of persons
not exceeding 49, and which is neither a rights issue nor a public issue, it is
called a private placement. Private placement of shares or convertible securities
by listed company can be of two types:

a)

Preferential allotment:

When a listed company issues shares or convertible securities, to a select


group of persons in terms of provisions of Chapter XIII of SEBI (DIP)
guidelines2, it is called a preferential allotment. The issuer is required to comply
with various provisions which interalia include pricing, disclosures in the
notice, lockin etc, in addition to the requirements specified in the Companies
Act, 2013.
b)Qualified institutional placement (QIP):
When a listed issuer issues equity shares or securities convertible in to
equity shares to Qualified Institutions Buyers only in terms of provisions of
Chapter XIIIA of SEBI (DIP) guidelines3, it is called a QIP.

Types of Offer Documents:


The issue of shares by a company shall be made only after filing the offer
documents with the Registrar of Companies. Offer document is nothing but a
prospectus in case of public issue or offer of sale and letter of offer in case
of rights issue. Offer document is a document which contains all the relevant
information about the company, promoters, projects, financial details, objects of

2 Securities Exchange Board of India (Disclosure and investor protection) guidelines 2000.
3 Ibid

raising the money, terms of issue etc. and is used for inviting subscription to the
issue made by the company.
There are different kinds of offer documents such as, Draft offer
document, Red-herring prospectus, Prospectus, Letter of offer, Abridged
prospectus, Abridged letter of offer, Shelf prospectus and Placement document.
Terms used for offer documents vary depending upon the stage or type of
the issue where the document is used. The terms used for offer documents are
defined below:
1. Draft offer document:
Draft Offer document means the offer document in draft stage. The draft
offer documents are filed with SEBI, at least 21 days prior to the filing of the
Offer Document with Registrar of Companies. SEBI may specify changes, if
any, in the draft Offer Document and the issuer or the lead merchant banker
shall carry out such changes in 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.

2. Red herring prospectus:


Red herring prospectus is an offer document used in case of a book built
public issue. It contains all the relevant details except that of price or number of

shares being offered. It is filed with Registrar of Companies before the issue
opens.
3. Prospectus:
It is an offer document in case of a public issue, which has all relevant
details including price and number of shares being offered. This document is
registered with Registrar of Companies before the issue opens in case of a fixed
price issue and after the closure of the issue in case of a book built issue.
4. Letter of offer:
It is an offer document in case of a Rights issue and is filed with Stock
exchanges before the issue opens.
5. Abridged prospectus:
It is an abridged 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 a prospectus.
6. Abridged letter of offer:
It is an abridged version of the letter of offer. It is sent to all the shareholders
along with the application form.
7. Shelf prospectus:

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It is a prospectus which enables an issuer to make a series of issues within a


period of 1 year without the need of filing a fresh prospectus every time. This
facility is available to public sector banks or Public Financial Institutions.
8. Placement document:
It is an offer document prepared by Merchant Banker for the purpose of
Qualified Institutions placement and contains all the relevant and material
disclosures to enable QIBs to make an informed decision.

Requirements in issue of Shares:


Entry requirements for an issuer to make an issue or offer to public:
SEBI has laid down entry norms for entities making a public issue/ offer.
The same are detailed below:
Entry Norms:
Entry norms are different routes available to an issuer for accessing the
capital market.
1. An unlisted issuer making a public issue i.e (making an IPO) is required
to satisfy the following provisions:
a. Entry Norm I (commonly known as Profitability Route)
The Issuer Company shall meet the following requirements:

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i. Net Tangible Assets of at least Rs. 3 crores in each of the preceding


three full years.
ii. Distributable profits in atleast three of the immediately preceding
five years.
iii. Net worth of at least Rs. 1 crore in each of the preceding three full
years.
iv. If the company has changed its name within the last one year,
atleast 50% revenue for the preceding 1 year should be from the
activity suggested by the new name.
v. The issue size does not exceed 5 times the pre issue net worth as
per the audited balance sheet of the last financial year
To provide sufficient flexibility and also to ensure that genuine companies do
not suffer on account of rigidity of the parameters, SEBI has provided two other
alternative routes to the companies not satisfying any of the above conditions,
for accessing the primary Market, as under:
b. Entry Norm II (Commonly known as QIB Route)
i. Issue shall be through book building route, with at least 50% to be
mandatory allotted to the Qualified Institutional Buyers (QIBs).
ii. The minimum postissue face value capital shall be Rs. 10 crores
or there shall be a compulsory marketmaking for at least 2 years
c. Entry Norm III (commonly known as Appraisal Route)
i. The project is appraised and participated to the extent of 15% by
Financial Institutions or Scheduled Commercial Banks of which at
least 10% comes from the appraiser.
ii. The minimum postissue face value capital shall be Rs. 10 crores
or there shall be a compulsory marketmaking for at least 2 years.

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In addition to satisfying the aforesaid entry norms, the Issuer Company shall
also satisfy the criteria of having at least 1000 prospective allotees in its issue.

2. A listed issuer making a public issue (FPO) is required to satisfy the


following requirements :
a. If the company has changed its name within the last one year, atleast
50% revenue for the preceding 1 year should be from the activity
suggested by the new name.
b. The issue size does not exceed 5 times the pre issue net worth as per
the audited balance sheet of the last financial year
Any listed company not fulfilling these conditions shall be eligible to make a
public issue by complying with QIB Route or Appraisal Route as specified for
IPOs.

3. Certain category of entities which are exempted from the aforesaid


entry norms:
The exempted entities are as follows:
a. Private Sector Banks
b. Public sector banks
c. An infrastructure company whose project has been appraised by a
Public Financial Institution or IDFC4 or IL&FS5 or a bank which was
4 Infrastructure development Finance Company (IDFC)
5 Infrastructure leasing and Financial Services Ltd. (IF&LS)

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earlier a PFI and not less than 5% of the project cost is financed by
any of these institutions.

A listed company making a rights issue is not required to satisfy any


of these entry norms.

Other mandatory provisions which an issuer (i.e Company) is expected to


comply before making an issue:
An issuer making a public issue is required to comply with the following
provisions mentioned in the guidelines:

Minimum Promoters contribution and lockin:


In a public issue by an unlisted issuer, the promoters shall contribute not
less than 20% of the post issue capital which should be locked in for a period of
3 years. Lockin indicates a freeze on the shares. The remaining pre issue
capital should also be locked in for a period of 1 year from the date of listing. In
case of public issue by a listed issuer [i.e. FPO], the promoters shall contribute
not less than 20% of the post issue capital or 20% of the issue size. This
provision ensures that promoters of the company have some minimum stake in
the company for a minimum period after the issue or after the project for which
funds have been raised from the public is commenced.

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IPO Grading:
According to SEBI IPO grading is the grade assigned by a Credit Rating
Agency (CRAs) registered with Sebi, to the initial 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.6
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

Grading of an initial public offer or IPO, had earlier been made mandatory, is
now optional. SEBI recently came up with new guidelines upon the request of
Investor Associations and Association of Investment Bankers of India (AIBI).
The decision came after much debate on the grading system as it was argued
that these ratings cannot be a basis for investment. Ratings only talk about the
6 https://www.valueresearchonline.com/story/h2_storyView.asp?str=24703

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fundamentals of the listing company and have nothing to do with the valuations.
At present, IPO grading is not mandatory and is now optional.

SEBIs Role in an issue:


Any company making a public issue or a rights issue of securities of
value more than Rs 50 lakhs is required to file a draft offer document with SEBI
for its observations. The validity period of SEBIs observation letter is twelve
months only i.e the company has to open its issue within the period of twelve
months starting from the date of issuing the observation letter.
There is no requirement of filing any offer document / notice to SEBI in
case of preferential allotment and Qualified Institution Placement (QIP). In QIP,
Merchant Banker handling the issue has to file the placement document with
Stock Exchanges for making the same available on their websites.

The role played by SEBI:


(a) Till the early nineties, Controller of Capital Issues used to decide about entry
of company in the market and also about the price at which securities should be
offered to public. However, following the introduction of disclosure based
regime under the aegis of SEBI, companies can now determine issue price of
securities freely without any regulatory interference, with the flexibility to take
advantage of market forces.

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(b) The primary issuances are governed by SEBI in terms of SEBI (Disclosures
and Investor protection) guidelines. SEBI framed its DIP guidelines in 1992.
The SEBI (DIP) Guidelines over the years have gone through many
amendments in keeping pace with the dynamic market scenario. It provides a
comprehensive framework for issuing of securities by the companies.
(c) Before a company approaches the primary market to raise money by the
fresh issuance of securities it has to make sure that it is in compliance with all
the requirements of SEBI (DIP) Guidelines, 2000. The Merchant Banker are
those specialised intermediaries registered with SEBI, who perform the due
diligence and ensures compliance with DIP Guidelines before the document is
filed with SEBI.
(d) Officials of SEBI at various levels examine the compliance with DIP
guidelines and ensure that all necessary material information is disclosed in the
draft offer documents.

Securities Exchange Board of India (Disclosure and investor protection)


guidelines 20007:
Securities Exchange Board of India (Disclosure and investor protection)
guidelines 2000 are in short called DIP guidelines. It provides a comprehensive
framework for issuances by the companies. The DIP guidelines prescribe basic
eligibility norms for issuing securities under chapter II.
7 vide circular dated 24th February 2009

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Conditions for issue of securities:


1. Filing of offer document8:
Public issue of securities shall be made by a company only after filing a
draft prospectus with the Board, through an eligible Merchant Banker, at least
21 days prior to the filing of Prospectus with the Registrar of Companies
(ROCs).
If the Board specifies changes within 21 days from the date of
submission of draft Prospectus, the issuer or the Lead Merchant banker shall
carry out such changes in the draft prospectus before filing the prospectus with
ROCs.
No listed company shall make any issue of security through a rights issue
where the aggregate value of securities, including premium, if any, exceeds
Rs.50 lacs, unless the letter of offer is filed with the Board, through an eligible
Merchant Banker, at least 21 days prior to the filing of the Letter of Offer with
Regional Stock Exchange (RSE).
Provided that if, within 21 days from the date of filing of draft letter of
offer, the Board specifies changes, if any, in the draft letter of offer, the issuer or

8 Rule 2.1, Securities Exchange Board of India (Disclosure and investor protection) guidelines
2000

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the Lead Merchant banker shall carry out such changes before filing the draft
letter of offer with RSE.
2. Companies barred not to issue security9:
A company shall not make any issue of securities if the company has been
prohibited from accessing the capital market under any order or direction passed
by the Board.
3. Issue of securities in dematerialised form10:
A company shall make public or rights issue or an offer for sale of securities,
unless
The company enters into an agreement with a depository for
dematerialization of securities already issued or proposed to be issued
to the public or existing shareholders; and
The company gives an option to subscribers/shareholders/investors to
receive the security certificates or hold securities in dematerialized
form with a depository.
A 'depository' shall mean a depository registered with the Board under the
Securities and Exchange Board of India (Depositories and Participants)
Regulations, 1996.
9 Rule 2.1.3, Securities Exchange Board of India (Disclosure and investor protection) guidelines
2000
10 Rule 2.1.5, ibid

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4. Exemption from the eligibility norms11:


The following categories need not satisfy the criteria under chapter II of DIP
guidelines regarding the issuing of securities:
i)A banking company including a Local Area Bank (referred to as Private Sector
Banks) set up under sub-section (c) of Section 5 of the Banking Regulation Act,
1949 and which has received license from the Reserve Bank of India, or
ii)

A corresponding new bank set up under the Banking Companies

(Acquisition and Transfer of Undertaking) Act, 1970 Banking Companies


(Acquisition and Transfer of Undertaking) Act, 1980, State Bank of India Act
1955 and State Bank of India (Subsidiary Banks) Act, 1959 (hereinafter referred
to as "public sector banks").
iii)

An infrastructure company

iv)

Rights issue by a listed company

Major Issue:
How does SEBI ensure compliance with DIP Guidelines, 2000 ?
The Merchant Banker are the specialized intermediaries who are required to
do due diligence and ensure that all the requirements of DIP are complied with
11 Rule 2.4, Securities Exchange Board of India (Disclosure and investor protection) guidelines 2000

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while submitting the draft offer document to SEBI. Any non-compliance on


their part, attract penal action from SEBI, in terms of SEBI (Merchant Bankers)
Regulations. The draft offer document filed by Merchant Banker is also placed
on the website for public comments. Officials of SEBI at various levels examine
the compliance with DIP guidelines and ensure that all necessary material
information is disclosed in the draft offer documents.
Subrata Roy Sahara Vs. Union of India and others12 - Case Analysis:
FACTS:
Sahara India Real Estate Corporation Ltd (SIRECL) and Sahara Housing
Investment Corporation Limited (SHIC) issued Optionally Fully Convertible
Debentures (OFCDs) through subscriptions from investors with effect from 25 th
April 2008 upto 13th April 2011. It raised around Rs.20,000 crores from
investors. The purpose of issue was to carry out infrastructural activities namely
constructing the bridges, modernizing or setting up of airports, rail system or
any other projects which may be allotted to the company. They filed Red
Herring Prospectus to the concerned Registrar of Companies and specified
intention of company not wanting to list the shares in the stock exchanges. As
per Sahara Company, the issue of OFCDs was private placement.

12 [Writ Petition (Criminal) No. 57 of 2014]

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Sahara collected Rs. 30 million under the guise of private placement. The
requirements of public offer were not complied with. Later, Sahara prime city
ltd intended to raise funds through listing of its shares and filed prospectus to
SEBI. While processing the prospectus, SEBI received complaint from one of
the investor and professional group of Investors protections on 25.12.09 and
4.01.10
ORDER OF SEBI:
SEBI directed the two companies to refund the money so collected to the
investors and restrained the promoters of the companies from accessing
Securities market.
APPEAL :
Sahara preferred an appeal before Securities Appellate Tribunal against the
order of Whole Time member of SEBI. SAT confirmed and maintained the
order of whole time member by an order dated 18/10/11. Subsequently Sahara
filed an appeal before the Supreme Court against the order of SAT.
ISSUES:
1.WHETHER THE ISSUE OF OFCDS TO MILLIONS OF PERSONS IS A
PRIVATE PLACEMENT?

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2.

WHETHER LISTING PROVISIONS UNDER SECTION 40 (Section 73

of 1956 act) IS MANDATORY FOR ALL PUBLIC ISSUES OR DEPENDS


ON INTENTION OF THE COMPANY?
OBSERVATIONS MADE BY THE COURT:
ISSUE 1:
The issue of OFCDs is not a private placement since it was made to more
than 50 persons as under section 42 of companies act, 2013 [section 67(3) of
1956 Act]
The actions of both the companies clearly depicts that they wanted to
issue securities to the public in the guise of private placement to bypass various
laws and regulations.
ISSUE 2:
Law is clear and unambiguous as to any issue made to more than 50
persons is mandatory to list. Every company intending to offer securities to
public must list its securities and intention cannot override the act.
Lock-in
Lock-in indicates a freeze on the shares. SEBI (DIP) Guidelines have
stipulated Lock-in requirements on shares of promoters mainly to ensure that

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the promoters, who control the company, shall continue to hold some
minimum percentage in the company after the public issue.
LOCK-IN REQURIMENTS:

As per regulations of SEBI, promoters are required to lock-in at least 20%


stake in the company for at least three years after allotment of shares in
initial public offering (IPO).
Besides, any holding in excess of this minimum 20% promoter stake is
required to be locked in for one year.
To encourage professionals and technically qualified entrepreneurs who
are unable to meet the requisite 20% contribution by themselves as
promoters, the regulator has now decided to allow such start-up
promoters to meet this requirement with help of SEBI-registered
registered AIFs.
AIFs or alternative investment funds are a newly approved class of
investors which include private equity (PE), SME, infrastructure, venture
capital funds, among others.
However, the contribution of these AIFs would be capped at 10% to meet
the promoter share lock-in guidelines.

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The proposal has been approved by the SEBI board and would be soon
incorporated into the relevant guidelines.
SEBI is of the view that such a step would encourage the professional and
first-generation entrepreneurs to tap the capital market to raise funds.
The decision was taken after a recommendation in this regard by SEBI's
Primary Market Advisory Committee (PMAC).
The PMAC was of the view that in the companies founded by
professionals or first-generation entrepreneurs, where the post-IPO equity held
by promoters is less than 20%, AIFs could be permitted to provide the balance
equity, subject to a minimum 10% being contributed by the promoters.
The PMAC also suggested that the capital contributed by AIFs for this
purpose shall be locked in for two years.
SEBI, however, decided that the requirement of lock-in of three years should
uniformly apply to both Promoters and AIFs.
Further, SEBI has decided to review the lock-in tenure at periodic
intervals, as per the international practice.
The promoters are allowed to pledge their locked-in shares as collateral
security for any loans granted for financing one or more of the objects of the
issue, provided pledge of shares are one of the terms of sanction of the loan.

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The DIP Guidelines specify the minimum lock-in period and lay down the
other requirements relating to the lock-in period.
The minimum promoters contribution, i.e., twenty percent (20%) of the
post-issue capital, is required to be locked-in for a period of three (3)
years, starting from the date of allotment in the proposed issue and ending
three (3) years from the date of commencement of commercial production
or the date of allotment in the public issue, whichever is later. (Clause
4.11.1 r/w Clause 4.11.2 of the DIP Guidelines)
Promoters contribution in excess of the required minimum percentage
must be locked in for a period of one (1) year. The securities forming part
of the promoters contribution and issued last to the promoters must be
locked-in first, except in the case of financial institutions appearing as
promoters. (Clause 4.12.1 r/w Clause 4.13.1 of the DIP Guidelines)
The entire pre-issue capital, other than the promoters contribution, must
be locked in for a period of one (1) year from the date of commencement
of commercial production or the date of allotment in the public issue,
whichever is later. This provision is not applicable to the pre-issue share
capital:
1. held by VCFs and FVCIs, which must be locked-in according to the
SEBI (VCF) Regulations, 1999 and the SEBI (FVCI) Regulations,
2000; and

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2. Held for a period of at least one (1) year at the time of filing of the
draft offer document with the SEBI and being offered to the public
through an offer for sale, i.e., an offer by existing shareholders of a
company to the public. (Clause 4.14.1 r/w Clause 4.14.2 of the DIP
Guidelines)
Locked-in securities forming part of the promoters contribution may be
pledged only with banks or financial institutions as collateral for loans, if the
pledge of shares is one of the terms of the loan. (Clause 4.15.1 of the DIP
Guidelines)
Further, the transfer of securities, inter se, amongst promoters is also
subject to the lock-in applicable to transferees for the remaining lock-in period.
(Clause 4.16.1 of the DIP Guidelines) The face of the security certificate of
locked-in securities must contain the inscription non-transferable and specify
the period for which it is not transferable. (Clause 4.17.1 of the DIP Guidelines)

Pricing in issue
a) Fixing of the price of securities in an issue
Indian primary market ushered in an era of free pricing in 1992. SEBI does
not play any role in price fixation. The issuer in consultation with the merchant
banker on the basis of market demand decides the price. The offer document

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contains full disclosures of the parameters which are taken in to account by


merchant Banker and the issuer for deciding the price. The Parameters include
EPS, PE multiple, return on net worth and comparison of these parameters with
peer group companies.
b) The difference between Fixed price issue and Book Built issue
On the basis of Pricing, an issue can be further classified into Fixed Price
issue or Book Built issue. Fixed Price Issue: When the issuer at the outset
decides the issue price and mentions it 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 received from the prospective investors at
various price levels, it is called Book Built issue. For more explanation on
Book Built Issues please refer to the section titled Understanding Book
Building
Book Building:
Book building is a process of price discovery. The issuer discloses a price
band or floor price before opening of the issue of the securities offered. On the
basis of the demands received at various price levels within the price band
specified by the issuer, Book Running Lead Manager (BRLM) in close
consultation with the issuer arrives at a price at which the security offered by
the issuer, can be issued.

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Price band:
The price band is a band of price within which investors can bid. The
spread between the floor and the cap of the price band shall not be more than
20%. The price band can be revised. If revised, the bidding period shall be
extended for a further period of three days, subject to the total bidding period
not exceeding thirteen days.
(a) Working of Book Building
Book building is a process of price discovery. A floor price or price band
within which the bids can move is disclosed at least two working days before
opening of the issue in case of an IPO and atleast one day before opening of the
issue in case of an FPO. The applicants bid for the shares quoting the price and
the quantity that they would like to bid at.

After the bidding process is

complete, the cutoff price is arrived at based on the demand of securities. The
basis of Allotment is then finalized and allotment/refund is undertaken. The
final prospectus with all the details including the final issue price and the issue
size is filed with ROC, thus completing the issue process. Only the retail
investors have the option of bidding at cutoff.
c) cutoff option for investors
Cutoff option is available for only retail individual investors i.e. investors
who are applying for securities worth up to rupees 1, 00,000/ only. Such

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investors are required to tick the cutoff option which indicates their willingness
to subscribe to shares at any price discovered within the price band. Unlike
price bids (where a specific price is indicated) which can be invalid, if price
indicated by applicant is lower than the price discovered, the cutoff bids always
remain valid for the purpose of allotment
d) change/revising the bid
We can change or revise the quantity or price in the bid using the form for
changing/revising the bid that is available along with the application form.
However, the entire process of changing or revising the bids shall be completed
within the date of closure of the issue.
e) Cancelling Bid:
We can cancel your bid any time before the finalization of the basis of
allotment by approaching/ writing/ making an application to the registrar to the
issue.
f) proof required from a trading member or a syndicate member for
entering bids:
The syndicate member returns the counterfoil with the signature, date and
stamp of the syndicate member. You can retain this as a sufficient proof that the
bids have been accepted by the trading / syndicate member for uploading on the
terminal.

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FIRM ALLOTMENT:
A company making an issue to public can reserve some shares on "allotment
on firm basis" for some categories as specified in DIP guidelines. Allotment on
firm basis indicates that allotment to the investor is on firm basis. DIP
guidelines provide for maximum % of shares, which can be reserved on firm
basis. The shares to be allotted on "firm allotment category" can be issued at a
price different from the price at which the net offer to the public is made
provided that the price at which the security is being offered to the applicants in
firm allotment category is higher than the price at which securities are offered to
public
SEBI (DIP) guidelines provide that an issuer making an issue to public can
allot shares on firm basis to some categories as specified below:
(i) Indian and Multilateral Development Financial Institutions,
(ii) Indian Mutual Funds,
(iii) Foreign Institutional Investors including NonResident Indians and
Overseas Corporate Bodies and
(iv) Permanent/Regular employees of the issuer company.
(v) Scheduled Banks
It may be noted that OCBs are prohibited by RBI to make investment.

31

Investors are broadly classified under following categories:


(i) Retail individual Investor (RIIs)
(ii) NonInstitutional Investors (NIIs)
(iii) Qualified Institutional Buyers (QIBs)
Retail individual investor means an investor who applies or bids for
securities for a value of not more than Rs. 1,00,000.
A retail investor is an individual who purchases securities for his or her own
personal account rather than for an organization. Retail investors typically trade
in much smaller amounts than institutional investors such as mutual funds,
pensions, or university endowments.
How it works/Example:
Retail investing generally occurs through four channels: individual
investors, retail brokers (who act at the direction of these individuals), managed
accounts (whereby the account manager makes the buy and sell decisions for
the individual), and investment clubs (groups of people who pool their money to
make investment). According to the Investment Company Institute and the
Securities Industry Association, over 50 million U.S. households engage in
some type of retail investing.
Why it Matters:

32

Retail investing activity pales in the shadow of institutional investing


activity. Not only do retail investors make smaller trades, they also tend to
trade less frequently than institutional investors, which account for most of
the market's trading volume. However, the widening use of online trading and
better access to financial information has increased the number of retail
investors in recent years.
Retail investors typically exert less influence over corporate decisions
than larger, institutional shareholders. Although there is some controversy over
whether a high level of ownership improves a company's management, there is
no disputing the fact that an institutional shareholder with 10,000 votes usually
wields more influence than an average retail shareholder with just 100 votes. As
opposed to institutional owners, small investors seldom have access to
corporate boardrooms or discussions and rarely have the opportunity to meet
personally with a company's executives. For this reason, many retail investors
tend to regard institutional ownership of a security as a sign of approval and are
easily influenced by institutional trading activity.
Qualified Institutional Buyer shall mean:
a) A public financial institution as defined in section 4A of the Companies Act,
1956;
b) A scheduled commercial bank;

33

c) A mutual fund registered with the Board;


d) A foreign institutional investor and subaccount registered with SEBI, other
than a sub-account which is a foreign corporate or foreign individual;
e) A multilateral and bilateral development financial institution;
f) A venture capital fund registered with SEBI;
g) A foreign venture capital investor registered with SEBI;
h) A state industrial development corporation;
i) An insurance company registered with the Insurance Regulator and
Development Authority (IRDA);
j) A provident fund with minimum corpus of rupees. 25 crores;
k) A pension fund with minimum corpus of Rs. 25 crores);
l) National Investment Fund set up by resolution no. F. No. 2/3/2005DDII
dated November 23, 2005 of Government of India published in the Gazette of
India.
NonInstitutional Investors:
Investors who do not fall within the definition of the above two
categories are categorized as NonInstitutional Investors

34

Individual investors, NRI's, companies, trusts etc. who bid for more than
Rs 1 lakhs are known as Non-institutional bidders. They need not to register
with SEBI like RII's. Non-institutional bidders have an allocation of 15% of
shares of the total issue size in Book Build IPO.
The difference between retail individual investor and Institutional
investors:
There are two categories of investors in the financial markets: retail
investors and institutional investors. The differences between the two dictate
not only the size of the trades they make, but also the types of companies and
financial instruments in which they invest their monies.
The term "retail investors" is synonymous with "individual investors."
The majority of retail investors buys and sells stocks in round lots, where a
round lot refers to 100 shares. This is not to say an individual can't place an
order to buy or sell 50, 25, or even just a single share of a company's stock, but
it often isn't cost effective to do so because of the commissions that must be
paid. It would be foolhardy to buy one share of a stock that was selling for $10
a share if the fee to do so is almost that amount, for example.
Institutional investors are just what the name implies: large institutions,
such as banks, insurance companies, pension funds, mutual funds, and
exchange-traded funds (ETFs), that buy and sell securities for their investment

35

portfolios. In contrast to retail investors, institutional investors engage in block


trades, which is an order to buy or sell 10,000 or more shares at a time. As
might be expected, a large trade by an institutional investor can significantly
affect the price of the security being bought or sold.
This being said, most institutional investors are not big players in the
market for the stocks of the smallest companies; that market is largely left to
retail investors, who are often attracted to invest in smaller firms because of
their lower prices. An individual may be able to afford to invest in a diversified
portfolio of 10 to 20 stocks in the $5 to $20 price range, while he might have
trouble affording even one round lot of a stock with a 3-digit price tag.
Institutional investors, who trade 10,000 or more shares at a time, tend to
avoid investing in companies that are selling for less than $10 a share. For one
thing, these mega-investors are investing large sums of money when they opt
to purchase shares of a firm, and a significant number of investment dollars
directed to a smaller firm could result in the institutional investor's acquiring a
high percentage ownership of the company, which is not what most
institutional investors want. For one thing, this adversely affects the liquidity
of the investment -- i.e., the institution's ability to sell the shares on the market
place for little or no loss in value when and if it chooses to do so. And, for
some institutional investors, it's a violation of securities laws to do so. For
example, mutual funds, closed-end funds, and exchange-traded funds that

36

choose to register as diversified funds must meet the diversification


requirements outlined in the Investment Company Act of 1940, which restricts
the percentage of a single company's voting securities that these funds can
own.
Both retail investors and institutional investors invest in bonds, options,
and futures contracts as well as in stocks, but some markets, such as the swaps
and forward markets, are primarily institutional investor arenas, largely
because of the nature of the instruments and/or the manner in which
transactions take place.
Allotment to various investor categories is provided in the guidelines and
is detailed below:
In case of Book Built issue
1. In case an issuer company makes an issue of 100% of the net offer to public
through 100% book building process
(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 noninstitutional investors i.e. investors other than retail individual
investors and Qualified Institutional Buyers;

37

(c) Not more than 50% of the net offer to the public shall be available for
allocation to Qualified Institutional Buyers:
2. In case of compulsory BookBuilt Issues at least 50% of net offer to
public being allotted to the Qualified Institutional Buyers (QIBs), failing which
the full subscription monies shall be refunded.
3. In case the book built issues are made pursuant to the requirement of
mandatory allocation of 60% to QIBs in terms of Rule 19(2)(b) of Securities
Contract (Regulation) Rules, 1957, the respective figures are 30% for RIIs and
10% for NIIs.
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, as the
case may be.
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

38

b. Other investors including corporate bodies/ institutions irrespective of


the number of securities applied for.
RESEARCH METHODOLOGY:
The research methodology is doctrinal. I have used secondary sources for
this project. I have referred bare acts and other sources mentioned in the
bibliography given at the end of the project. These sources have been used for
establishing the concepts involved in the issue of shares and to provide a clear
picture upon the role played by SEBI in the issue of shares by the company.
CONCLUSION:
The Security Exchange Board of India (SEBI) since its inception is
regarded as the Regulator of Security markets. But, more often it was criticized
that it is a watch dog to observe the activities and is ineffective in regulating and
controlling the capital markets. This criticism has been changed in recent times
and the observations made by the Honble Supreme Court in Saharas Case
proves that SEBI is bestowed with special powers to investigate and adjudicate
as a part of its regulatory function in order to ensure protection of the interests
of the investors. Thus, SEBI plays an important role as a regulator and a
protector of investors while the companies issue shares and other forms of
securities in the real market situations.

39

BIBLIOGRAPHY
1. http://thefinanceconcept.com/2011/12/what-is-prospectus-and-abridgedprospectus.html
2. https://www.valueresearchonline.com/story/h2_storyView.asp?str=24703
3. SECURITIES AND EXCHANGE BOARD OF INDIA (DISCLOSURE
4.
5.
6.
7.
8.

AND INVESTOR PROTECTION) GUIDELINES, 2000.


https://www.valueresearchonline.com/story/h2_storyView.asp?str=24703
The Companies Act, 2013, Bare Act, Universal law publishing Co. 2014 edn.
https://judis.nic.in/supremecourt/imgs1.aspx?filename=41567
https://www.sebi.gov.in/cms/sebi_data/attachdocs/1401877301203.pdf
http://www.advocatekhoj.com/library/judgments/announcement.php?

WID=4802
9. http://www.mca.gov.in/Ministry/pdf/ProvisionsTable_CompAct.pdf

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