Professional Documents
Culture Documents
ON
By
Sanjay Jhanwar
Anand Rathi Securities Ltd.
1
Contract:
A FINAL REPORT
ON
By
Sanjay Jhanwar
A report submitted in partial fulfillment of
the requirements of
MBA Program of
ICFAI Business School, Mumbai.
Distribution List:
2
As I present the SIP Project Report on
I take this opportunity to offer my sincere thanks to all those who have help me
and without whose guidance and help this project might have not been
possible. This project has proved to be an educational and rewarding
experience to me in the field of Finance.
I thank Mr. Anand Rathi (Chairman), Anand Rathi Securities Ltd. for giving
me an opportunity to work with Anand Rathi Securities Ltd. His extensive
experience and insight has been great source of inspiration to me.
I am immensely thankful to my guides Mr. Tarun Jain (Senior Manager –
IPO, Anand Rathi Securities Ltd.) and Prof. M.P. Deivikaran (Faculty- IBS
Mumbai) for guiding me with great insights about the technicalities and
mechanism involved in the Project. They were a great source of inspiration all
throughout the Project.
I would also wish to thank Mr. Ravi Mundra, Mr. Shekhar, Miss Bhakti, Miss
Mahima , Mr. Nayan , Mr. Kiran to help me successfully work on this Project
and all those who remained unmentioned here, but who nevertheless have
contributed to give me a sharp and rewarding insights as to how my project
would be carried out.
3
Introduction
In the coming years, people will increasingly rely on the development of its
capital markets to fuel its economic growth. Yet the extent to which India’s
emphasis on capital markets will translate into opportunities for investors and
financial services firms, particularly foreign firms, is a subject of much debate.
Most experts agree that foreign firms servicing India’s securities markets
currently have limited ways to make a profit, but while optimists believe that
India will represent a large and attractive market within next few years,
skeptics believe it could take decades for India to become a major international
market for banks, brokerages and fund managers. Regardless of the debate, it is
clear that domestic financial institutions, often in cooperation with foreign
partners, have already started transforming a system reliant on state-owned
banks into a system that will allow institutional investors to develop one of
Asia’s largest capital markets.
The primary market plays an important role in the securities market by forming
a link between the savings and investments. The function of the financial
market is to facilitate the transfer of funds from surplus sectors (lenders) to
deficit sectors (borrowers). Normally, households have invest able funds or
savings, which they lend to borrowers in the corporate and public sectors
whose requirement of funds far exceeds their savings it, is through this market
that the borrower’s viz., the Government and the corporate issue securities in
which the investors deploy their savings. From the early 1980s onwards, there
has been a shift in India’s economic policy regime, away from direct influences
upon resource allocation by the State, towards a greater role for markets. The
primary market comprises the public issues and the private placement market.
In India, the financial sector (and securities markets in particular) attracted
heightened attention from policy makers in the aftermath of the Scam of 1992.
In addition, the problems in East Asia in 1997 have led to a heightened
appreciation, worldwide, of the vital importance for a developing country of a
financial sector, which effectively processes information and wisely allocates
resources. A public issue consists of a company entering the market to raise
funds from all types of investors; its debut is known as the initial public offer
(IPO). In case of private placement, there are only a few select subscribers to
the issue. The securities can be issued at a face value, or at a
discount/premium; they may take a variety of forms such as equity, debt or
some hybrid instrument.
4
Table of Content
Acknowledgement
Introduction
Abbreviation and Definition.
Chapter1. Indian Capital Market 8
I. Indian Financial System
II. Function of The Capital Market
III. Instrument in The Capital Market
IV. Capital Market Processes
V. Capital Market Participant
References
5
List of Abbreviations & Definitions
Allotment - Unless the context otherwise requires, the issue and the allotment
of Equity Shares, pursuant to the Issue.
Allottees - The successful Bidder to whom the Equity Shares are/have been
allotted.
Bidder - Any prospective investor who makes a Bid pursuant to the terms of
the Draft Red Herring Prospectus and the Bid cum Application Form
Cut-off Price- Any price within the Price Band finalized by Company and the
BRLMs.
Prospectus - The prospectus to be filed with the ROC containing, among other
things the Issue Price that is determined at the end of the Book Building
Process, the size of the Issue and certain other information.
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Qualified Institutional Buyers or QIBs - Public financial
institutions as specified in Section 4A of the
Companies Act, FIIs, scheduled commercial banks,
Mutual Funds, multilateral and bilateral
development financial institutions, venture capital
funds registered with SEBI, foreign venture capital
investors registered with SEBI, state industrial
development corporations, insurance companies
registered with the Insurance Regulatory and
Development Authority, provident funds with
minimum corpus of Rs. 250 million and pension
funds with minimum corpus of Rs. 250 million.
SEBI = The Securities and Exchange Board of India constituted under the
SEBI Act, 1992
7
CHAPTER 1
From the early 1980s onwards, there has been a shift in India’s economic
policy regime, away from direct influences upon resource allocation by the
State, towards a greater role for markets. One major plank of these reforms has
been an attempt at developing financial markets as an alternative vehicle
determining the allocation of capital in the economy.
The function of the financial market is to facilitate the transfer of funds from
surplus sectors (lenders) to deficit sectors (borrowers). Normally, households
have investible funds or savings, which they lend to borrowers in the corporate
and public sectors whose requirement of funds far exceeds their savings. A
financial market consists of investors or buyers of securities, borrowers or
sellers of securities, intermediaries and regulatory bodies. Financial market
8
does not refer to a physical location. Formal trading rules, relationships and
communication networks for originating and trading financial securities link
the participants in the market.
Indian financial system consists of money market and capital Market. The
money market has two components - the organized and the unorganized.
Indian Financial
System
Unorganized Money
Organized Money Market
Market
Money Market
Organized money market: Indian financial system consists of money market
and capital Market. The money market has two components - the organized
and the unorganized. The Organized market is dominated by commercial
banks. The other major participants are The Reserve Bank of India, Life
Insurance Corporation, General Insurance Corporation, Unit Trust of India,
Securities Trading Corporation of India Ltd. and Discount and Finance House
of India, other primary dealers, commercial banks and mutual funds. The core
of the money market is the inter-bank call money market whereby short-term
money borrowing/lending is effected to manage temporary liquidity
mismatches. The Reserve Bank of India occupies a strategic position of
managing market liquidity through open market operations of government
securities, access to its accommodation, cost (interest rates), availability of
credit and other monetary management tools. Normally, monetary assets of
short-term nature, generally less than one year, are dealt in this market.
9
extended their reach even to the rural areas, there is still an active unorganized
market. It consists of indigenous bankers and moneylenders. In the
unorganized market, there is no clear demarcation between short-term and
long-term finance and even between the purposes of finance. The unorganized
sector continues to provide finance for trade as well as personal consumption.
The inability of the poor to meet the "creditworthiness" requirements of the
banking sector make them take recourse to the institutions that still remain
outside the regulatory framework of banking. But this market is shrinking.
It is also called the market for public issues. This market refers to the raising of
new capital (equity or debt i.e. equity shares, preference shares, debentures or
Rights Issues) by corporate. Newly floated companies or existing companies
may tap the equity market by offering public issues. When equity shares are
exclusively offered to the existing shareholders, it is called "Rights Issue".
When a Company after incorporation initially approaches the public for the
first time for subscription of its public issue it is called Initial Public Officer
(IPO). Successful floating of a new issue requires careful planning, timing of
the issue and comprehensive marketing efforts. The services of specialised
institutions, like underwriters, merchant bankers and registrars to the issue are
available for the corporate body to handle this specialized job. Underwriters
are financial institutions, which undertake to secure a committed quantum of
equity/debt subscribed by the public, failing which they accept these
shares/bonds as their own investment. It is referred to as the issue or that part
of getting devolved on the underwriters. The transactions relating to the
primary market i.e. public/rights issues are not carried out through stock
exchanges. However there is effective regulation of SEBI at every stage of a
public issue. This is done through merchant bankers, underwriters and
registrars to the issue each acting at different points. Subscriptions to the new
issue are collected at specific branches of one or more collecting banks within
a prescribed span of time, represented by the dates of opening of the issue and
closing of the issue.
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is carried out at the specific Stock Exchange(s), where the companies get their
public issues listed for trading. The main function of the secondary market is to
provide liquidity to the listed securities by enabling a holder to easily convert
the securities into cash through the stock exchanges. An individual or an
Institution can either hold a portfolio of securities as a permanent investment,
or he can hold a basket of securities for short-periods and engage in buying and
selling them to gain from market fluctuations. The secondary market also acts
as an important indicator of the investment climate in the economy. When
prices of existing securities are rising and there is large trading in the existing
shares, such a boom in the secondary market correspondingly signifies that
new issues if floated at that point of time would be successfully subscribed.
The Corporate Sector draws its capital needs from the following sources:
1. Promoters Contribution,
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2. Equity & Preference Capital raised from the shareholders (generally
referred to as equity capital),
3. Bonds/Debentures raised from the Public (generally referred to as Debt
Capital),
4. Term Loans from Banks & Financial Institutions,
5. Short-term Working Capital from Banks,
6. Unsecured Loans & Deposits, and
7. Internal generation of Funds (Profits/surpluses re-ploughed).
Of the sources enumerated above, item No.1 and 2 are held permanently and
form the risk capital. These are not repayable. Item No.3 is raised from the
market for duration of 10 to 15 years or more, but this has to be eventually
repaid. We call the source as Corporate Debt Market, and funds raised as II
Tier Capital. The debt market consists of such corporate debt and also public
debt (government securities & Treasury Bills) Managed by the RBI. The others
sources at item 4 to 6 are supplementary or stand-by sources and these are all
to be repaid as per contracted terms. Item No.4 is negotiated & raised for 3 to 7
years from Banks/FIs, but normally not exceeding 10 years. Short-term
working capital Loan is generally a revolving facility and held over the years
subject to satisfactory dealings and abiding by the terms & conditions
stipulated by the lending Institution. Unsecured Loans & Deposits are at best
supplementary sources, but these are not very dependable. Internal generation
of funds (profits & surpluses are used to eventually redeem the debt
borrowings mentioned at item No.3 to 6.
The basic capital edifice of a corporate body is built from item 1 to 3 above.
With the strength of this edifice it is possible to raise the remaining sources at
item No.4 to 6. This introduces us to the Capital Market (covering equity and
corporate debt capital). Promoters equity constitutes a comparatively a smaller
portion, and hence the primary source of capital for a large Corporate
Institutions is from the Capital Market (providing the equity capital & debt
capital to business, trade & industry)
The individual savers are not organized. They can invest if they could secure
the trust and confidence that the funds invested would be prudently employed
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and they could normally expect to get a fair return/reward on their hard-earned
savings. This is the function of organized capital market to regulate market
forces to ensure fair dealings, to motivate savings on the part of the investors
and to secure smooth flow of savings/capital from investors to capital seekers
for productive needs.
Stock market is also referred to as the Corporate Debt or Capital Market. While
the money market, which deals with short-term financial needs of business and
industry, is restricted to funds needed for a period of one year or less,
instruments of the debt/capital markets are raised for medium or long term
needs. Indian Stock Market consists of three distinct segments:
1. The Public Debt Market i.e. the market for Government securities (also
called Gilt-edged Market). These are interest bearing and dated
securities. This market is regulated by RBI, the Central Bank of the
country and banker to the Government.
2. PSU Bonds Market i.e. Bonds floated by public Sector units,
nationalized banks and financial Institutions for raising Tier-II capital
and also debentures floated by corporate. This is represented as the
Corporate Debt Market.
3. The Equity Market for rising of equity or preference share capital by all
corporate. Money invested in company shares is not refundable, but if
the shares are listed in a stock exchange these can be sold or purchased,
thus providing liquidity to such investments. Shares do not carry
interest, but shareholders can participate in sharing the profits of the
corporate body declared by way of dividends, bonus shares etc. While
the hope of receiving attractive dividends motivates the public to
subscribe to the share capital, declaring dividend is not a legal
obligation on the part of the companies, and hence not a right on the part
of the shareholders. But shareholders enjoy various other rights as
conferred by the Indian Companies Act, 1956. Indian Public companies
generally follow the objective of increasing shareholders wealth as the
prime goal of financial management.
The changes in the regulatory framework of the capital market and fiscal
policies have also resulted in newer kinds of financial instruments (securities)
being introduced in the market. Also, a lot of financial innovation by
companies who are now permitted to undertake treasury operations, has
resulted in newer kinds of instruments - all of which can be traded – being
introduced. The variations in all these instruments depend on the tenure, the
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nature of security, the interest rate, the collateral security offered and the
trading features, etc.
Debentures
These are issued by companies and regulated under the SEBI guidelines of
June 11, 1992. These are issued under a prospectus, which has to be approved
by SEBI like in the case of equity issues. The rights of investors as debenture
holders are governed by the Companies Act, which prohibits the issue of
debentures with voting rights. There are a large variety of debentures that is
available. This includes:
• Participating debentures
• Convertible debentures with options
• Third party convertible debentures
• Debt/equity swaps
• Zero coupon convertible notes
• Secured premium notes
• Zero interest fully convertible debentures
• Fully convertible debentures with interest
• Partly convertible debentures.
Bonds
Indian DFIs, like IDBI, ICICI, and IFCI, have been raising capital for their
operations by issuing of bonds. These too are available in a large variety. These
include:
• Income bonds
• Tax-free bonds
• Capital gains bonds
• Deep discount bonds
• Infrastructure bonds
• Retirement bonds
In addition to the interest rates and maturity profiles of these instruments, the
issuer institutions have been including a put/call option on especially the very
long-dated bonds like deep discount bonds. Since the tenures of some of these
instruments spanned some 20 or 25 years during which the interest rate
regimes may undergo a complete change, the issuers have kept the flexibility to
retire the costly debt. This they do by exercising their option to redeem the
securities at pre-determined periods like at the end of five or seven years. This
has been witnessed in number of instruments recently much to the chagrin of
investors who were looking for secure and hassle-free long-dated instruments.
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Preference Shares
As the name suggests, owners of preferential shares enjoy a preferential
treatment with regard to corporate actions like dividend. They also have a
higher right of repayment in case of winding up of a company. Preference
shares have different features and are accordingly available as:
Equity Shares
As the name indicates, these represent the proportionate ownership of the
company. This right is expressed in the form of participation in the profits of
the company. There has been some innovation in the way these instruments are
issued. Some hybrid securities like equity shares with detachable warrants are
also available.
Government securities
The Central Government or State Governments issue securities periodically for the
purpose of raising loans from the public. There are two types of Government
Securities – Dated Securities and Treasury Bills. Dated Securities have a maturity
period of more than one year. Treasury Bills have a maturity period of less than or up
to one year. The Public Debt Office (PDO) of the Reserve Bank of India performs all
functions with regard to the issue management, settlement of trade, distribution of
interest and redemption. Although only corporate and institutional investors subscribe
to government securities, individual investors are also permitted to subscribe to these
securities. An investor in government securities has the option to have securities
issued either in physical form or in book-entry form (commonly known as Subsidiary
General Ledger form). There are two types of SGL facilities, viz., SGL-1 and SGL-2.
In the SGL-1 facility, the account is opened with the RBI directly. There are several
restrictions on opening SGL-1 accounts and only entities, which fulfill all the
eligibility criteria, are permitted to open SGL-1 account. The RBI has permitted
banks, registered primary dealers and certain other entities like NSCCL, SHCIL, and
NSDL to provide SGL facilities to subscribers. A subscriber to government securities
who opts for SGL securities may open an SGL account with RBI or any other
approved entity. Investments made by such approved entity on its own account are
held in SGL-1 account, and investments held on account of other clients are held in
SGL-2 account.
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4.Capital Market Processes
There are various processes that Issuers of securities follow or utilize in order
to tap the savers for raising resources. Some of the commonly used processes
and methods are described below.
Private Placement
Many companies choose to raise capital for their operations through various
intermediaries by taking what in marketing terms would be known as the
wholesale route. The retail route - of approaching the public -is expensive as
well as time consuming. This is called in financial markets as private
placement. SEBI has prescribed the eligibility criteria for companies and
instruments as well as procedures for private placement. However, liquidity for
the initial investors in privately placed securities is ensured as they can be
traded in the secondary market. But such securities have different rules for
listing as well as for trading.
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Preferential Offer/Rights Issue
Companies can expand their capital by offering the new shares to their existing
shareholders. Such offers for sale can be made to the existing shareholders by
giving them a preferential treatment in allocation or the offer can be on a rights
basis, i.e., the existing holders can get by way of their right, allotment of new
shares in certain proportion to their earlier holding. All such offers have also to
be approved by SEBI which has laid out certain criteria for these routes of
tapping the public. These have to be complied with.
Internet Broking
With the Internet becoming ubiquitous, many institutions have set up securities
trading agencies that provide online trading facilities to their clients from their
homes. This has been possible since all the players in the securities market,
viz., stockbrokers, stock exchanges, clearing corporations, depositories, DPs,
clearing banks, etc., are linked electronically. Thus, information flows amongst
them on a real time basis. The trading platform, which was converted from the
trading hall to the computer terminals at the brokers' premises, has now shifted
to the homes of investors. This has introduced a higher degree of transparency
in transactions. The investor knows exactly when and at what rate his order
was processed. It also creates an end-to-end audit trail that makes market
manipulation difficult. The availability of securities in demat form has given a
further fillip to this process. However, the emergence of, what is known as,
"day-traders" has resulted in the business environment of brokers which has
changed. Investors, who can now trade directly, no longer require their
intermediation. Service charges have therefore been declining - all of which
has been in favour of investors.
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The financial market in India was highly segmented until the initiation of
reforms in 1992-93 on account of a variety of regulations and administered
prices including barriers to entry. The reform process was initiated with the
establishment of Securities and Exchange Board of India (SEBI).
The legislative framework before SEBI came into being consisted of three
major Acts governing the capital markets:
1. The Capital Issues Control Act 1947, which restricted access to the
securities market and controlled the pricing of issues.
2. The Companies Act, 1956, which sets out the code of conduct for the
corporate sector in relation to issue, allotment and transfer of securities, and
disclosures to be made in Public issues.
3. The Securities Contracts (Regulation) Act, 1956, which regulates
transactions in securities through control over stock exchanges. In addition, a
number of other Acts, e.g., the Public Debt Act, 1942, the Income Tax Act,
1961, the Banking Regulation Act, 1949, have substantial bearing on the
working of the securities market.
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Companies Act, 1956
Under the SC(R) Act, the secondary market was fragmented regionally, with
each stock exchange a self-regulating organization following its own policy of
listing, trading and settlement. The listing agreement did not have the force of
law, so that issuers could get away with violations.
The interests of the brokers, who were market players and dominated the
governing boards of stock exchanges, took priority over the interest of
investors. The market was narrow and investors did not have an opportunity to
have balanced portfolios. The settlement of trades took a long time, because it
required physical movement of securities, and the transfer of securities was
very cumbersome under the Companies Act and SC(R)Act, thus depriving the
investor of liquidity. Law expressly forbade options and futures. These
weaknesses were corrected by passing SEBI Act and giving overall regulatory
jurisdiction on capital market to SEBI. SEBI framed regulations and guidelines
to improve efficiency of the market, enhance transparency, check unfair trade
19
practices and ensure international standards in market practices necessitated by
the large entry of foreign financial institutions.
The National Stock Exchange was set up in 1995 as a first step in reforming
the securities market through improved technology and introduction of best
practices in management. It started with the concept of an independent
governing body without any broker representation thus ensuring that the
operators' interests were not allowed to dominate the governance of the
exchange. Before the NSE was set up, trading on the stock exchanges in India
used to take place through open outcry without use of information technology
for immediate matching or recording of trades. This was time consuming and
inefficient. The practice of physical trading imposed limits on trading volumes
and, hence, the speed with which new information was incorporated into
prices. To obviate this, the NSE introduced screen-based trading system
(SBTS) where a member can punch into the computer the quantities of shares
and the prices at which he wants to transact. The transaction is executed as
soon as the quote punched by a trading member finds a matching sale or buy
quote from counterparty. SBTS electronically matches the buyer and seller in
an order-driven system or finds the customer the best price available in a
quote-driven system, and, hence, cuts down on time, cost and risk of error, as
well as on the chances of fraud. SBTS enables distant participants to trade with
each other, improving the liquidity of the markets. The high speed with which
trades are executed and the large number of participants who can trade
simultaneously allows faster incorporation of price sensitive information into
prevailing prices. This increases the informational efficiency of markets. With
SBTS, it becomes possible for market participants to see the full market, which
helps to make the market more transparent, leading to increased investor
confidence. The NSE started nation-wide SBTS, which have provided a
completely transparent trading mechanism. Regional exchanges lost a lot of
business to NSE, forcing them to introduce SBTS. Today, India can boast that
almost 100% trading take place through electronic order matching.
Prior to the setting up of NSE, trading on stock exchanges in India took place
without the use of information technology for immediate matching or
recording of trades. The practice of physical trading imposed limits on trading
volumes as well as the speed with which the new information was incorporated
into prices. The unscrupulous operators used this information asymmetry to
manipulate the market. The information asymmetry helped brokers to
perpetrate a manipulative practice known as "gala". Gala is a practice of
extracting highest price of the day for "buy" transaction irrespective of the
actual price at which the purchase was actually done and give lowest price of
the day for "sell" transactions irrespective of the price at which sale was made.
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The clients did not have any method of verifying the actual price. The
electronic and now fully online trading introduced by the NSE has made such
manipulation difficult. It has also improved liquidity and made the entire
operation more transparent and efficient.
Depository System
The erstwhile settlement system on Indian stock exchanges was also inefficient
and increased risk, due to the time that elapsed before trades were settled. The
transfer was by physical movement of papers. There had to be a physical
delivery of securities -a process fraught with delays and resultant risks. The
second aspect of the settlement related to transfer of shares in favour of the
purchaser by the company. The system of transfer of ownership was grossly
inefficient as every transfer involves physical movement of paper securities to
the issuer for registration, with the change of ownership being evidenced by an
endorsement on the security certificate. In many cases the process of transfer
would take much longer than the two months stipulated in the Companies Act,
and a significant proportion of transactions would end up as bad delivery due
to faulty compliance of paper work. Theft, forgery, mutilation of certificates
and other irregularities were rampant. In addition, the issuer had the right to
refuse the transfer of a security. All this added to costs and delays in
settlement, restricted liquidity and made investor grievance redress time
consuming and, at times, intractable.
To obviate these problems, the Depositories Act, 1996 was passed. It provides
for the establishment of depositories in securities with the objective of ensuring
free transferability of securities with speed, accuracy and security. It does so by
(a) making securities of public limited companies freely transferable subject to
certain exceptions; (b) dematerializing the securities in the depository mode;
and (c) providing for maintenance of ownership records in a book entry form.
In order to streamline both the stages of settlement process, the Act envisages
transfer ownership of securities electronically by book entry without making
the securities move from person to person. The Act has made the securities of
21
all public limited companies freely transferable, restricting the company's right
to use discretion in effecting the transfer of securities, and the transfer deed and
other procedural requirements under the Companies Act have been dispensed
with. Two depositories, viz., NSDL and CDSL, have come up to provide
instantaneous electronic transfer of securities.
Merchant Bankers
Among the important financial intermediaries are the merchant bankers. The
services of merchant bankers have been identified in India with just issue
management. It is quite common to come across reference to merchant banking
and financial services as though they are distinct categories. The services
provided by merchant banks depend on their inclination and resources -
technical and financial. Merchant bankers (Category 1) are mandated by SEBI
to manage public issues (as lead managers) and open offers in take-overs.
These two activities have major implications for the integrity of the market.
They affect investors' interest and, therefore, transparency has to be ensured.
These are also areas where compliance can be monitored and enforced.
Merchant banks are rendering diverse services and functions. These include
organising and extending finance for investment in projects, assistance in
financial management, acceptance house business, raising Euro-dollar loans
and issue of foreign currency bonds. Different merchant bankers specialise in
different services. However, since they are one of the major intermediaries
between the issuers and the investors, their activities are regulated by:
(1) SEBI (Merchant Bankers) Regulations, 1992.
(2) Guidelines of SEBI and Ministry of Finance.
(3) Companies Act, 1956.
(4) Securities Contracts (Regulation) Act, 1956.
22
Merchant banking activities, especially those covering issue and underwriting
of shares and debentures, are regulated by the Merchant Bankers Regulations
of Securities and Exchange Board of India (SEBI). SEBI has made the quality
of manpower as one of the criteria for renewal of merchant banking
registration. These skills should not be concentrated in issue management and
underwriting alone. The criteria for authorisation take into account several
parameters. These include: (a) professional qualification in finance, law or
business management, (b) infrastructure like adequate office space, equipment
and manpower, (c) employment of two persons who have the experience to
conduct the business of merchant bankers, (d) capital adequacy and (e) past
track record, experience, general reputation and fairness in all their
transactions.
SEBI authorizes merchant bankers for an initial period of three years, if they
have a minimum net worth of Rs. 5 crore. An initial authorization fee, an
annual fee and renewal fee is collected by SEBI. According to SEBI, all issues
should be managed by at least one authorized merchant banker functioning as
the sole manager or lead manager. The lead manager should not agree to
manage any issue unless his responsibilities relating to the issue, mainly
disclosures, allotment and refund, are clearly defined. A statement specifying
such responsibilities has to be furnished to SEBI. SEBI prescribes the process
of due diligence that a merchant banker has to complete before a prospectus is
cleared. It also insists on submission of all the documents disclosing the details
of account and the clearances obtained from the ROC and other government
agencies for tapping peoples' savings. The responsibilities of lead manager,
underwriting obligations, capital adequacy, due diligence certification, etc., are
laid down in detail by SEBI. The objective is to facilitate the investors to take
an informed decision regarding their investments and not expose them to
unknown risks.
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an analysis of the expected cash flows of a company when viewed on the
industry parameters as well as company performance. Hence, the investor can
judge for himself whether he wants to place his savings in a "safe" instrument
and get a lower return or he wants to take a risk and get a higher return.
The 1990s saw an increase in activity in the primary debt market. Under the
SEBI guidelines all issuers of debt have to get the instruments rated. They also
have to prominently display the ratings in all that marketing literature and
advertisements. The rating agencies have thus become an important part of the
institutional framework of the Indian securities market.
Stock Brokers
Stockbrokers are the intermediaries who are allowed to trade in securities on
the exchange of which they are members. They buy and sell on their own
behalf as well as on behalf of their clients. Traditionally in India, individuals
owned firms providing brokerage services or they were partnership firms with
unlimited liabilities. There were, therefore, restrictions on the amount of funds
they could raise by way of debt. With increasing volumes in trading as well as
in the number of small investors, lack of adequate capitalization of these firms
exposed investors to the risks of these firms going bust and the investors would
have no recourse to recovering their dues.
With the legal changes being effected in the membership rules of stock
exchanges as well as in the capital gains structure for stock-broking firms, a
number of brokerage firms have converted themselves into corporate entities.
In fact, NSE encouraged the setting up of corporate broking members and has
today has only 10% of its members who are not corporate entities.
Custodians
In the earliest phase of capital market reforms, to get over the problems
associated with paper-based securities, large holding by institutions and banks
were sought to be immobilized. Immobilization of securities is done by storing
or lodging the physical security certificates with an organization that acts as a
custodian - a securities depository. All subsequent transactions in such
24
immobilized securities take place through book entries. The actual owners have
the right to withdraw the physical securities from the custodial agent whenever
required by them. In the case of IPO, a jumbo certificate is issued in the name
of the beneficiary owners based on which the depository gives credit to the
account of beneficiary owners. The Stock Holding Corporation of India was set
up to act as a custodian for securities of a large number of banks and
institutions who were mainly in the public sector. Some of the banks and
financial institutions also started providing "Custodial" services to smaller
investors for a fee. With the introduction of dematerialization of securities
there has been a shift in the role and business operations of Custodians. But
they still remain an important intermediary providing services to the investors
who still hold securities in a physical form.
Mutual Funds
Mutual funds are financial intermediaries, which collect the savings of small
investors and invest them in a diversified portfolio of securities to minimize
risk and maximize returns for their participants. Mutual funds have given a
major fillip to the capital market - both primary as well as secondary. The units
of mutual funds, in turn, are also tradable securities. Their price is determined
by their net asset value (NAV) which is declared periodically. The operations
of the private mutual funds are regulated by SEBI with regard to their
registration, operations, administration and issue as well as trading.
Depositories
The depositories are important intermediaries in the securities market that is
scrip-less or moving towards such a state. In India, the Depositories Act
defines a depository to mean "a company formed and registered under the
Companies Act, 1956 and which has been granted a certificate of registration
under sub-section (IA) of section 12 of the Securities and Exchange Board of
India Act, 1992." The principal function of a depository is to dematerialize
securities and enable their transactions in book-entry form.
Dematerialization of securities occurs when securities, issued in physical form,
are destroyed and an equivalent number of securities are credited into the
beneficiary owner's account. In a depository system, the investors stand to gain
by way of lower costs and lower risks of theft or forgery, etc. They also benefit
in terms of efficiency of the process. But the implementation of the system has
to be secure and well governed. All the players have to be conversant with the
rules and regulations as well as with the technology for processing. The
intermediaries in this system have to play strictly by the rules. A depository
established under the Depositories Act can provide any service connected with
recording of allotment of securities or transfer of ownership of securities in the
record of a depository. A depository cannot directly open accounts and provide
services to clients. Any person willing to avail of the services of the depository
25
can do so by entering into an agreement with the depository through any of its
Depository Participants. The services, functions, rights and obligations of
depositories, with special reference to the NSDL are provided in the second
section of this Workbook.
Depository Participants
A Depository Participant (DP) is described as an agent of the depository. They
are the intermediaries between the depository and the investors. The
relationship between the DPs and the depository is governed by an agreement
made between the two under the Depositories Act. In a strictly legal sense, a
DP is an entity who is registered as such with SEBI under the provisions of the
SEBI Act. As per the provisions of this Act, a DP can offer depository related
services only after obtaining a certificate of registration from SEBI. SEBI
(D&P) Regulations, 1996 prescribe a minimum net worth of Rs. 50 lakh for
stockbrokers, R&T agents and non-banking finance companies (NBFC), for
granting them a certificate of registration to act as DPs. If a stockbroker seeks
to act as a DP in more than one depository, he should comply with the
specified net worth criterion separately for each such depository. No minimum
net worth criterion has been prescribed for other categories of DPs. However,
depositories can fix a higher net worth criterion for their DPs. NSDL requires a
minimum net worth of Rs. 100 lakh to be eligible to become a DP as against
Rs. 50 lakh prescribed by SEBI (D&P) Regulations. The role, functions,
responsibilities and business operations of DPs are described in detail in the
second section of this book.
26
CHAPTER 2
27
to subscribe to the share capital of a company. Once this is done, the company
allots shares to the applicants as per the prescribed rules and regulations laid
down by SEBI.
After a long period of subdued activity, there were signs of revival in the
public issues in 2003-04. This was due to the offers made by quality issuers
evoking buoyant investors’ interest. In the private placement market, the SEBI,
for the first time, imposed stringent disclosure norms in September 2003. As a
result, the resources mobilized by non-government entities fell from 88% in
2002-03 to 85% in 2003-04. The public issues mobilized Rs 71,900
28
million during this year. Further, the resources raised by Indian corporate from
the international capital market through the issuance of FCCBs, GDRs and
ADRs have declined marginally during 2003-04. With a view to integrate the
Indian capital market, the foreign companies have been allowed to access the
Indian capital market through Indian Depository Receipts (IDR).
29
Report from RBI Annual Report 2006
Dominate the public issues market, mobilizing 78.5 per cent of the total
resource mobilization during 2005-06 as compared with 61.6 per cent during
2004-05. Banks were the major issuers during the year in view of their
requirements for capital adequacy purposes. Banks and financial institutions in
both public and private sectors mobilized 48.8 per cent of resources by public
issues in 2005-06. Six public sector banks raised equity worth Rs.5, 413 crore
through public issues, and accounting for about 20.1 per cent of the resources
raised during 2005-06. Almost one-half (46.7 per cent) of the amounts raised
during the year were through the initial public offerings (IPOs). Equity issues
constituted 99.1 per cent of the total resource mobilization through public
issues during 2005-06 as compared with 82.3 per cent during the previous year
30
Capital Raised during 2005-06
During 2005-06, 139 companies accessed the primary market through public
and rights issues and mobilized Rs.27,382 crore compared to 60 companies
raising Rs.28,256 crore in 2004-05. While the number of issues in 2005-06 was
more than twice of that in 2004-05, the amount mobilized was marginally
lower. Excluding the offer for sale, the amount raised during 2005- 06 stood at
Rs.27,104 crore, which was higher than that of Rs.25,056 crore mobilized in
the previous year. There were 103 public issues in 2005-06, of which 79 were
initial public offerings (IPOs) and 24 were further public offerings (FPOs). The
resources mobilized through IPOs and FPOs during 2005-06 were Rs.10,936
crore and Rs.12,358 crore, respectively. The average size of the public issues
was significantly lower at Rs.226 crore in 2005-06 compared to Rs.725 crore
in 2004-05. The number of rights issues during 2005-06 was higher at 36 than
that of 26 in 2004-05. The amount mobilised through rights issues was also
higher at Rs.4,088 crore in 2005-06 compared to Rs.3,616 crore in the previous
year.
31
Share of broad categories of issue in the Total
Amount of Capital issued
50
43.8 45.1
45 43.4
39.9
40
35
30
25
20
14.9
15 12.8
10
5
0
IPOs FPOs Rights
2004-05 2005-06
All the public issues through IPOs emanated from the private sector companies
in 2005-06, except one i.e., Gujarat State Petronet Ltd., which was a public
sector nonfinancial company. As the average size of IPOs was small, the share
of resources mobilized through IPOs in the total amount raised declined from
43.8 per cent in 2004-05 to 39.9 per cent in 2005-06 . However, the share of
the resources raised through FPOs by the listed companies in the total amount
mobilised rose from 43.4 per cent in 2004-05 to 45.1 per cent in 2005-06. The
share of resources mobilised through rights issues in the total amount
mobilised also rose from 12.8 per cent in 2004-05 to 14.9 per cent in 2005-06.
The largest rights issue during 2005-06 was that of Hindalco Industries Ltd.
(Rs.2,227 crore), followed by Nicholas Piramal Ltd. (Rs.333 crore). Barring
two composite issues, all other issues were equity issues. Month wise, the
highest amount was mobilised in December 2005 (Rs.8,984 crore), followed by
January 2006 (Rs.3,798 crore) and February 2006 (Rs.2,790 crore). However,
the number of issues was the highest at 21 during March 2006, followed by 17
each during December 2005 and February 2006.
32
rose significantly from 60.7 per cent in 2004-05 to 73.8 per cent in 2005-06 .
During 2005-06, there were 8 issues from the public sector which mobilized
Rs.7,183 crore compared to 5 issues which raised Rs.11,094 crore in 2004-05.
Out of 8 public sector issues, 6 were from the public sector banks and the
remaining two issues were from Gujarat State Petronet Corporation Ltd. and
Infrastructure Development Finance Company Ltd.
80 74
70
60.74
60
50
39.26 2004-05
40
2005-06
30 26
20
10
0
Private Public
33
crore compared to 8 such issues which raised Rs.23,431 crore in 2004-05 . As a
result, the share of above Rs.500 crore category in the total amount declined
from 82.9 per cent in 2004-05 to 56.6 per cent in 2005-06. The share of all
other size groups witnessed significant improvement except Rs.5 crore to
Rs.10 crore category which recorded marginal decline.There were 17 mega
issues in 2005-06. The largest issue during 2005-06 was that of ICICI Bank
Ltd. (Rs.5,101 crore), followed by Hindalco Industries Ltd. (Rs.2,227 crore)
and Bank of Baroda (Rs.1,633 crore) (Table 2.4). During 2005-06, the largest
IPO was issued by Suzlon Energy Ltd., which raised Rs.1,496 crore. The issue
of ICICI Bank Ltd. was the largest FPO in 2005-06. Of the 17 mega issues,
seven were by banks and one issue was by a financial institution. There were
two rights issues among the 17 mega issues during 2005-06. The remaining
mega issues were from diverse sectors like paper, power, entertainment,
finance etc.
percentage of total
2004-05 2005-06 amount
Issue Size No. Amount No Amount 2004-05 2005-06
1 2 3 4 5 6 7
Rs.5 crore 2 3 6 20 0.01 0.07
=> Rs.5 crore & < Rs.10 crore 5 44 4 32 0.16 0.12
=> Rs.10 crore & < Rs.50 crore 17 461 47 1,325 1.63 4.84
=> Rs.50 crore & < Rs.100 crore 11 723 33 2,189 2.56 7.99
=> Rs.100 crore & < Rs.500 crore 17 3,594 40 8,309 12.72 30.35
=> Rs.500 crore 8 23,431 9 15,506 82.92 56.63
Total 60 28256 139 27381 100.00 100.00
34
the biggest issue of the financial year. Banks/ financial institutions accessed the
capital Market on a larger scale to increase their capital adequacy ratio in
accordance with the Basel II norms.
2004-05 2005-06
% Share % share
in the in the
Total Total
Industry No. Amount Amount No. Amount Amount
1 2 3 4 5 6 7
Banks/FIIs 12 11,311 40.03 12 12,439 45.43
Cement and Construction 2 169 0.60 11 1,020 3.72
Chemical 4 128 0.45 2 128 0.47
Electronics 2 61 0.22 2 54 0.20
Engineering 3 133 0.47 6 1,124 4.10
Entertainment 3 154 0.54 7 710 2.59
Finance 3 116 0.41 7 824 3.01
Food processing 6 317 1.12 9 427 1.56
Healthcare 2 109 0.39 10 651 2.38
Information Technology 5 5095 18.03 15 902 3.29
Paper and Pulp 1 60 0.21 4 182 0.66
Power 2 5854 20.72 6 2,164 7.90
Printing 1 130 0.46 1 43 0.16
Telecom 2 25 0.09 0 0 0.00
Textile 0 0 0.00 13 771 2.82
Miscellaneous 12 4595 16.26 34 5,944 21.71
Total 60 28,257 100 139 27,383 100.00
DATABASE COVERAGE:
1989-90 to 2006-07 (18 years)
35
Amount No. of
Year
(Rs.crore) Issues
1989-90 2,793 187
1990-91 1,704 141
1991-92 1,898 196
1992-93 6,252 528
1993-94 13,443 770
1994-95 13,312 1,343
1995-96 11,822 1,428
1996-97 11,687 753
1997-98 3,061 62
1998-99 7,911 32
1999-00 7,673 65
2000-01 6,618 124
2001-02 6,423 19
2002-03 5,732 14
2003-04 22,145 35
2004-05 25,526 34
2005-06 (as on 31/01/06) 19,894 73
________ ________
1,67,893 5,804
+ Current year 2006-07
The calendar 2005, despite an extremely bullish secondary market and a high-
return primary market, has ended with a mobilization of only Rs. 22,754 crore
through public issues which is 25 per cent lower than the previous year which
had seen raisings of Rs. 30,511 crore, the highest-ever. According to Prithvi
Haldea of PRIME, the premier database on the primary capital market,
nevertheless, the year’s mobilization of Rs. 22,754 crore is still the second
highest-ever in the history of the Indian capital market
The good news in 2005 has been the very sharp rise in raising of fresh capital
(which typically goes into productive assets) with the amount increasing to an
impressive Rs. 20,380 crore, higher by nearly 2 times than Rs. 10,703 crore in
the previous year, as per PRIME
36
PSUs/ DIVESTMENTS
SUB TOTAL 0.00
BANKS
1 DENA BANK 24/01/2005 216.00 10.00 27.00
2 PUNJAB NATIONAL BANK 07/03/2005 3120.00 10.00 390.00
3 ALLAHABAD BANK 06/04/2005 820.00 10.00 82.00
4 ORIENTAL BANK OF25/04/2005 1450.00 10.00 250.00
COMMERCE
5 YES BANK LTD. 15/06/2005 315.00 10.00 45.00
6 SYNDICATE BANK 07/07/2005 250.00 10.00 50.00
7 ICICI BANK LTD.01/12/2005 3837.50 10.00 525.00
- INST.
01/12/2005 1912.50 10.00 498.75
- RETAIL
SUB TOTAL 11921.00
OTHERS
1 JET AIRWAYS (INDIA) LTD. 18/02/2005 1899.35 10.00 1100.00
2 UTV SOFTWARE21/02/2005 91.00 10.00 130.00
COMMUNICATIONS LTD.
3 EMAMI LTD. 04/03/2005 35.00 2.00 70.00
4 GATEWAY DISTRIPARKS LTD. 09/03/2005 151.20 10.00 72.00
5 IVRCL INFRASTRUCTURES &18/03/2005 144.90 10.00 395.00
PROJECTS LTD.
6 JAIPRAKASH HYDRO-POWER22/03/2005 576.00 10.00 32.00
LTD.
7 GOKALDAS EXPORTS LTD. 30/03/2005 132.81 10.00 425.00
8 3I INFOTECH LTD. 30/03/2005 230.00 10.00 100.00
9 SAKSOFT LTD. 30/03/2005 7.50 10.00 30.00
10 SHRINGAR CINEMAS LTD. 05/04/2005 43.20 10.00 53.00
11 ALLSEC TECHNOLOGIES LTD. 13/04/2005 42.41 10.00 135.00
12 MANGALAM DRUGS &19/04/2005 14.30 10.00 22.00
ORGANICS LTD.
13 INDIA INFOLINE LTD. 21/04/2005 90.27 10.00 76.00
14 SHOPPER`S STOP LTD. 28/04/2005 136.98 10.00 238.00
15 CYBER MEDIA (INDIA) LTD. 04/05/2005 16.93 10.00 60.00
16 NANDAN EXIM LTD. 12/05/2005 12.00 10.00 20.00
17 SHREE GANESH FORGINGS LTD. 18/05/2005 15.00 10.00 30.00
18 BEEYU OVERSEAS LTD. 26/05/2005 10.00 10.00 14.00
19 JINDAL POLY FILMS LTD. 09/06/2005 300.00 10.00 360.00
20 UNIPLY INDUSTRIES LTD. 09/06/2005 12.00 10.00 24.00
37
21 PROVOGUE (INDIA) LTD. 10/06/2005 60.74 10.00 150.00
22 MSP STEEL & POWER LTD. 20/06/2005 16.00 10.00 10.00
23 NECTAR LIFESCIENCES LTD. 22/06/2005 92.88 10.00 240.00
24 ERA CONSTRUCTIONS (INDIA)24/06/2005 41.04 10.00 72.00
LTD.
25 SPL INDUSTRIES LTD. 29/06/2005 63.00 10.00 70.00
26 YASH PAPERS LTD. 30/06/2005 18.82 10.00 14.00
27 IL&FS INVESTSMART LTD. 04/07/2005 142.50 10.00 125.00
28 SHRI RAMRUPAI BALAJI08/07/2005 44.00 10.00 22.00
STEELS LTD.
29 VIVIMED LABS LTD. 09/07/2005 17.50 10.00 70.00
38
49 BOMBAY RAYON FASHIONS11/11/2005 94.33 10.00 70.00
LTD.
50 AIA ENGINEERING LTD. 17/11/2005 148.05 10.00 315.00
51 TRIVENI ENGINEERING &18/11/2005 240.00 1.00 48.00
INDUSTRIES LTD.
52 ABG SHIPYARD LTD. 18/11/2005 157.25 10.00 185.00
53 EVEREST KANTO CYLINDER22/11/2005 90.00 10.00 160.00
LTD.
54 COMPULINK SYSTEMS LTD. 25/11/2005 27.23 10.00 60.00
55 KERNEX MICROSYSTEMS28/11/2005 99.01 10.00 250.00
(INDIA) LTD.
56 REPRO INDIA LTD. 28/11/2005 43.23 10.00 165.00
57 PVR LTD. 08/12/2005 166.50 10.00 225.00
58 TULIP IT SERVICES LTD. 09/12/2005 108.00 10.00 120.00
59 RADHA MADHAV CORP.LTD. 12/12/2005 20.00 10.00 20.00
60 RAMSARUP INDUSTRIES LTD. 13/12/2005 30.00 10.00 60.00
61 PUNJ LLOYD LTD. 13/12/2005 642.11 10.00 700.00
62 GINNI FILAMENTS LTD. 19/12/2005 48.00 10.00 22.00
63 EDUCOMP SOLUTIONS LTD. 19/12/2005 50.00 10.00 125.00
64 CELEBRITY FASHIONS LTD. 19/12/2005 81.90 10.00 180.00
65 BARTRONICS INDIA LTD. 20/12/2005 45.00 10.00 75.00
SUB TOTAL 10832.65
GRAND TOTAL 22753.65
39
CHAPTER 3
• Unlisted Companies
• Listed Companies
Unlisted Companies
Unlisted companies are those public limited companies, which are presently
not listed at any of the recognized stock exchanges in India. The shares of such
companies are therefore not traded at any of the Stock Exchanges in India.
Presently, there are two options available for the unlisted companies to come
out with public issue: -
1st Option
The issue size (includes offer to public, firm allotment, promoters’ contribution
through offer document) should not exceed 5 times its pre-issue net worth as
per the last available audited accounts
2nd Option
With the recent guidelines amended on August 04, 2000 SEBI has amended the
second option available for an unlisted companies. Earlier the guidelines stated
that if the company is not able to satisfy the 1st option as mentioned above, the
company can come out with the public issue provided the project is appraised
by any bank or public financial institution with at least 10% of the project cost
financed by such appraiser.
40
As per the recent guideline, if the company is unable to satisfy the 1st option or
if the issue size is more than 5 times its pre-issue net worth, then the second
option to come out with the issue is through the book building process only.
The issue can come out through book building process provided 60% of the
issue size is allotted to the Qualified Institutional Buyers (QIB). If the company
fails to allot 60% of the issue size to QIB the entire money so received shall be
refunded.
Listed Companies
Listed Companies are those which are presently listed on any one or more
recognized Stock Exchanges in India. The securities of such companies are
traded on such stock exchanges where they are listed.
All listed companies can come out with further public issue provided the net
worth of the company after the proposed issue is less than 5 times the net worth
prior to the issue. In case the net worth is more than 5 times the net worth prior
to the issue, the company should comply with any of the options as available
for unlisted companies.
Public Issues have disadvantages too. Some of the main ones are :-
41
• Transparency Requirements and public disclosure of information may
lead to lack of privacy
• Continuous Compliance of provisions of listing agreement and other
legal requirements
• Constant scrutiny of performance by investors
• May lead to takeover of the company
• Securities of the company may be made subjective to speculative
attacks.
Applicable Laws
42
Role of SEBI – Regulatory Body
The Controller of Capital Issue (CCI) formed under the Capital Issues Control
Act controlled Upto 1992, the capital primary market. During that period, the
pricing of capital issues was controlled by CCI. The premium on issue of
equity shares issued through the primary markets was done in accordance with
the Capital Issues Control Act.
The CCI guidelines were abolished with the introduction of Securities &
Exchange Board of India (SEBI) formed under the SEBI Act, 1992 with the
prime objective of protecting the interests of investors in securities, promoting
the development of, and regulating, the securities market and for matters
connected therewith or incidental thereto.’
The SEBI Act came into force on 30th January, 1992 and with its establishment,
all public issues are governed by the rules & regulations issued by SEBI.
SEBI was formed to promote fair dealing in issue of securities and to ensure
that the capital markets function efficiently, transparently and economically in
the better interests of both the issuers and the investors.
The promoters should be able to raise funds at a relatively low cost. At the
same time, investors must be protected from unethical practices and their rights
must be safeguarded so that there is a steady flow of savings into the market.
There must be proper regulation and code of conduct and fair practice by
intermediaries to make them competitive and professional.
Since, its formation, SEBI has been instrumental in bringing greater
transparency in capital issues. Under the umbrella of SEBI, companies issuing
shares are free to fix the premium provided adequate disclosure is made in the
offer documents.
Focus being the greater investor protection, SEBI has become a vigilant
watchdog.
Role of Intermediaries
Many intermediaries are involved in connection with the public issue.
Following are the intermediaries who have to be registered with SEBI and
must have valid certificate from SEBI to act as an intermediaries: -
• Merchant Bankers
• Registrar and Share Transfer Agents
• Bankers to the Issue
• Underwriters
• Stock Brokers and Sub Brokers
• Depositories
Merchant Bankers play the most vital role amongst all intermediaries.
They assist the company right from preparing prospectus to the listing of
securities at the stock exchanges. Merchant Bankers have to satisfy themselves
43
about the correctness and propriety of all the information provided in the
prospectus. It is mandatory for them to carry due diligence for all the
information provided in the prospectus and they must issue a certificate to this
effect to SEBI. A Company may appoint more than one Merchant Banker
provided Inter-Se Allocation of Responsibilities between the Merchant
Bankers are properly structured.
Underwriters are those intermediaries who underwrite the securities
offered to the public. In case there is under subscription (in short, the company
does not receive good response from public and amount received from is less
than the issue size), underwriters subscribe to the unsubscribed amount so that
the issue is successful.
Registrar & Share Transfer Agents processes all applications
received from the public and prepare the basis of allotment. The dispatch of
share certificates / refund orders are handled by them.
Bankers to the Issue are banks which accept application from the
public on behalf of the company. These applications are then forwarded to
Registrar & Share Transfer Agent for further processing.
Stock Brokers & Sub-Brokers are those intermediaries who through
their contacts / sources invite the public for subscribing shares for which they
get commission.
Depositories are the intermediaries who holds securities in dematerialized
form on behalf of the shareholders.
• Investment Bankers
• Syndicate Members (w.e.f.1.4.2001)
• Brokers
• Registrars
• Printers
• Advertising Agencies
• Collecting Bankers
• Underwriters
• Stock Exchanges
1. Period
2. Issue Type (IPOs/FPOs)
3. Type of Sale (Public Issues/Offers for Sale)
4. Pricing Method (Book building/Fixed Price)
5. Book building Option (%)
6. Instrument (Equity/FCD/NCD//PCD/Pref. /SPN)
44
7. Issue Amount
8. Industry
9. Product
10. Company Type(Private/Joint/PSU)
11. Foreign Financial Collaboration (Y/N)
12. Foreign Technical Collaboration
13. 100% EOU (Y/N)
14. Stock Exchange Listing
15. Primary Stock Exchange
16. Underwritten (Y/N)
17. Appraised (Y/N)
18. Preferential Offer to NRIs (Y/N)
19. Offer Price
20. Premium (on Face Value)
21. Application Amount (%)
22. Post Issue Capital
23. Lead Managers
45
CHAPTER 4
Companies, new as well as old can offer their shares to the investors in the
primary market. This kind of tapping the savings is called an IPO or Initial
Public Offering. SEBI regulates the way in which companies can make this
offering. New companies can make an IPO if they have a dividend-paying
(ability) record of three years. The size of the initial issue, the exchange on
which it can be listed, the merchant bankers' responsibilities, the nature and
content of the disclosures in the prospectus, procedures for all these are laid
down by SEBI and have to be strictly complied with. Exemption may be
granted by SEBI in certain cases for minimum public offer or minimum
subscription in the case of certain industry sectors like infrastructure or IT or
media & communications. Several changes have also been introduced in recent
years in the manner in which the IPOs can be marketed. For example they can
now take the book building route or they can even be marketed through the
secondary market by brokers or DPs. All these changes have been made with
the objective of making the process more investor friendly by reducing risk,
controlling cost, greater transparency in the pricing mechanism and protecting
liquidity in the hands of the investor. Some of the IPOs have been available for
subscription online - where the bids are made in real time and the information
is made available on an instantaneous basis on the screen. It is possible to
subscribe for IPO shares in demat form through DPs.
46
Offer document: means Prospectus in case of a public issue or offer for
sale and Letter of Offer in case of a rights issue
Issue price
The price at which a company's shares are offered initially in the primary
market is called as the Issue price. When they begin to be traded, the market
price may be above or below the issue price.
47
Face Value of a share/debenture
The nominal or stated amount (in Rs.) assigned to a security by the issuer. For
shares, it is the original cost of the stock shown on the certificate; for bonds, it
is the amount paid to the holder at maturity. Also known as par value or simply
par. For an equity share, the face value is usually a very small amount (Rs. 5,
Rs. 10) and does not have much bearing on the price of the share, which may
quote higher in the market, at Rs. 100 or Rs. 1000 or any other price. For a debt
security, face value is the amount repaid to the investor when the bond matures
(usually, Government securities and corporate bonds have a face value of Rs.
100). The price at which the security trades depends on the fluctuations in the
interest rates in the economy.
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 capitalisation of company A is Rs.
12000 million.
48
Banker shall decide the price. There is no price formula stipulated by SEBI.
SEBI does not play any role in price fixation. The company and merchant
banker are however required to give full disclosures of the parameters, which
they had considered while deciding the issue price. There are two types of
issues, one where company and Lead Merchant Banker fix a price (called fixed
price) and other, where the company and the Lead Manager (LM) stipulate a
floor price or a price band and leave it to market forces to determine new the
final price (price discovery through book building process).
49
The main difference between offer of shares through
book building and offer of shares through normal public
issue
Price at which securities will be allotted is not known in case of offer of shares
through Book Building while in case of offer of shares through normal public
issue, price is known in advance to investor. Under Book Building, investors
bid for shares at the floor price or above and after the closure of the book
building process the price is determined for allotment of shares. In case of
Book Building, the demand can be known everyday as the book is being built.
But in case of the public issue the demand is known at the close of the issue
Cut-Off Price
In a Book building issue, the issuer is required to indicate either the price band
or a floor price in the prospectus. The actual discovered issue price can be any
price in the price band or any price above the floor price. This issue price is
called “Cut-Off Price”. The issuer and lead manager decides this after
considering the book and the investors’ appetite for the stock.
The floor price in case of book building
Floor price is the minimum price at which bids can be made
Price Band in a book built IPO
The prospectus may contain either the floor price for the securities or a price
band within which the investors can bid. The spread between the floor and the
cap of the price band shall not be more than 20%. In other words, it means that
the cap should not be more than 120% of the floor price. The price band can
have a revision and such a revision in the price band shall be widely
disseminated by informing the stock exchanges, by issuing a press release and
also indicating the change on the relevant website and the terminals of the
trading members participating in the book building process. In case the price
band is revised, the bidding period shall be extended for a further period of
three days, subject to the total bidding period not exceeding ten days.
It may be understood that the regulatory mechanism does not play a role in
setting the price for issues. It is up to the company to decide on the price or the
price band, in consultation with Merchant Bankers.
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The role of a ‘Registrar’ to an issue
The Registrar finalizes the list of eligible allottees after deleting the invalid
applications and ensures that the corporate action for crediting of shares to the
demat accounts of the applicants is done and the dispatch of refund orders to
those applicable are sent. The Lead Manager coordinates with the Registrar to
ensure follow up so that that the flow of applications from collecting bank
branches, processing of the applications and other matters till the basis of
allotment is finalized, dispatch security certificates and refund orders
completed and securities listed.
Prospectus
A large number of new companies float public issues. While a large number of
these companies are genuine, quite a few may want to exploit the investors.
Therefore, it is very important that an investor before applying for any issue
identifies future potential of a company. A part of the guidelines issued by
SEBI (Securities and Exchange Board of India) is the disclosure of information
to the public. This disclosure includes information like the reason for raising
the money, the way money is proposed to be spent, the return expected on the
money etc. This information is in the form of ‘Prospectus’ which also includes
information regarding the size of the issue, the current status of the company,
its equity capital, its current and past performance, the promoters, the project,
cost of the project, means of financing, product and capacity etc. It also
contains lot of mandatory information regarding underwriting and statutory
compliances. This helps investors to evaluate short term and long-term
prospects of the company.
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Draft Offer document
‘Offer document’ means Prospectus in case of a public issue or offer for sale
and Letter of Offer in case of a rights issue which is filed with the Registrar of
Companies (ROC) and Stock Exchanges (SEs). An offer document covers all
the relevant information to help an investor to make his/her investment
decision. ‘Draft Offer document’ means the offer document in draft stage. The
draft offer documents are filed with SEBI, atleast 21 days prior to the filing of
the Offer Document with ROC/SEs. 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.
Abridged Prospectus
‘Abridged Prospectus’ is a shorter version of the Prospectus and contains all
the salient features of a Prospectus. It accompanies the application form of
public issues.
Prepares the Prospectus/Offer Documents
Generally, the public issues of companies are handled by ‘Merchant Bankers’
who are responsible for getting the project appraised, finalizing the cost of the
project, profitability estimates and for preparing of ‘Prospectus’. The
‘Prospectus’ is submitted to SEBI for its approval.
Lock-in
‘Lock-in’ indicates a freeze on the sale of shares for a certain period of time.
SEBI guidelines have stipulated lock-in requirements on shares of promoters
mainly to ensure that the promoters or main persons, who are controlling the
company, shall continue to hold some minimum percentage in the company
after the public issue.
Listing of Securities
Listing means admission of securities of an issuer to trading privileges
(dealings) on a stock exchange through a formal agreement. The prime
objective of admission to dealings on the exchange is to provide liquidity and
marketability to securities, as also to provide a mechanism for effective control
and supervision of trading.
Listing Agreement
At the time of listing securities of a company on a stock exchange, the
company is required to enter into a listing agreement with the exchange. The
listing agreement specifies the terms and conditions of listing and the
disclosures that shall be made by a company on a continuous basis to the
exchange.
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Delisting of securities
The term ‘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.
SEBI’s Role in an Issue
Any company making a public issue or a listed company making a rights issue
of value of more than Rs 50 Lakh is required to file a draft offer document with
SEBI for its observations. The company can proceed further on the issue only
after getting observations from SEBI. The validity period of SEBI’s
observation letter is three months only i.e. the company has to open its issue
within three months period.
SEBI recommends an issue
SEBI does not recommend any issue nor does take any responsibility either for
the financial soundness of any scheme or the project for which the issue is
proposed to be made or for the correctness of the statements made or opinions
expressed in the offer document. SEBI mainly scrutinizes the issue for seeing
that adequate disclosures are made by the issuing company in the prospectus or
offer document.
Foreign Capital Issuance
Indian companies are permitted to raise foreign currency resources through two
main sources: a) issue of foreign currency convertible bonds more commonly
known as ‘Euro’ issues and b) issue of ordinary shares through depository
receipts namely ‘Global Depository Receipts (GDRs)/American Depository
Receipts (ADRs)’ to foreign investors i.e. to the institutional investors or
individual investors.
American Depository Receipt
An American Depositary Receipt ("ADR") is a physical certificate evidencing
ownership of American Depositary Shares ("ADSs"). The term is often used to
refer to the ADSs themselves. An American Depositary Share ("ADS") is a
U.S. dollar denominated form of equity ownership in a non-U.S. company. It
represents the foreign shares of the company held on deposit by a custodian
bank in the company's home country and carries the corporate and economic
rights of the foreign shares, subject to the terms specified on the ADR
certificate. One or several ADSs can be represented by a physical ADR
certificate. The terms ADR and ADS are often used interchangeably. ADSs
provide U.S. investors with a convenient way to invest in overseas securities
and to trade non-U.S. securities in the U.S. ADSs are issued by a depository
bank, such as JPMorgan Chase Bank. They are traded in the same manner as
shares in U.S. companies, on the New York Stock Exchange (NYSE) and the
American Stock Exchange (AMEX) or quoted on NASDAQ and the over-the-
counter (OTC) market. Although ADSs are U.S. dollar denominated securities
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and pay dividends in U.S. dollars, they do not eliminate the currency risk
associated with an investment in a non-U.S. company.
Global Depository Receipts
Global Depository Receipts (GDRs) may be defined as a global finance vehicle
that allows an issuer to raise capital simultaneously in two or markets through a
global offering. GDRs may be used in public or private markets inside or
outside US. GDR, a negotiable certificate usually represents company’s traded
equity/debt. The underlying shares correspond to the GDRs in a fixed ratio say
1 GDR=10 shares.
Transparency has been the buzzword in the capital market since inception of
NSE and be it primary market, secondary market or other markets, various
measures have been initiated by the Government, Regulators, Stock Exchanges
and Self Regulating Organizations in this area. In a way, it is a continuous
process and is quite dynamic in as much as it has to match the changing needs
of various classes of participants in the market, with a view to make our
markets on one hand ‘model markets at global level’ and on the other hand
‘investors friendly’ so as to offer best of the protection through dissemination
of critical and vital information to make the informed decision and discourage
any kind of undesirable practice which may vitiate the confidence and faith in
the markets through strong surveillance and enforcement mechanisms. In this
regard, quite a good deal of work has been done whereby our markets have
become quite comparable to any of the markets in the international map, in the
areas of primary market, there is a scope of further transparency to make the
total process of post-issue absolutely transparent and thereby bringing in added
responsibility on the parts of the agencies involved in managing those
activities. The points required to be taken care of are brought as under:
1. In the application forms relating to the public issues, conditions for rejection
of applications are clearly spelt out and the application cannot be rejected for
reasons other than the specified ones. Of these reasons, there are a few reasons,
which are technical in its nature whereas a few others are substantive in its
nature.
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of rejection.
3. In the public issue managed through the book building process, there are
certain specific terms being used and which at times the investors leading to
the applications being found not eligible possibly interpret differently.
Therefore, it is * Director (O&S), NSE. The views expressed and the approach
suggested in this paper is of the author and not necessarily of NSE. Necessary
to cite an example to make the terms clear for understanding. There is a term
called ‘cut-off’ price and a term called ‘cap price’. These two terms have
different meaning for the purpose of treatment while carrying out the exercise
of weeding out the applications. The cut-off price relates to the price chosen by
the investor whereas the cap price relates to the price fixed by the issuer. The
cap price is the highest price for a range of price bands where the cut-off price
is the price chosen by the investor as the highest price up to which his
application can be considered. For example, if the price band is say Rs.80 to
Rs.95, the cap price is Rs.95, which is fixed by the issuer. However, in the
application form the investor may choose any price between Rs.80 and Rs.95
by going for cut-off price option. It means that though his application would
have been valid, it would be eligible for further process of allotment if the issue
price is Rs.95 or less. If the issuer decides any issue price, such applicant shall
be eligible for further process of allotment.
4. The present process only reveals whether the applicant is chosen for
allotment, either full or partial, and/or application is rejected but in fact every
application is clearly weeded out to be either valid or invalid. All valid
applications qualify for further process in allotment and all invalid applications
are treated as rejected. Neither the reason for non-allotment nor the reason for
rejection is made known under the present system of allotment.
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6. Once the above mechanism of codification is put in place for each of the
categories viz. (1) full allotment, (2) partial allotment, (3) no allotment though
application form found to be valid, (4) not eligible for further process of
allotment and (5) rejection on account of non-fulfillment of the prescribed
conditions, the registrar or the issuer should ensure to intimate to the applicants
the appropriate code as the status of the application while sending the refund
orders. This will ensure that where the applicant committed an error in filling
up the application form and thus the application form was treated as invalid,
such applicant would be able to know the exact reason of rejection and
consequently be able to exercise due care in future to avoid recurrence of such
error on his part. To facilitate the proposed process, an endeavor is made to
collate all the possible reasons, which get factored at the time of weeding out
the applications to bifurcate them into valid and invalid applications, and
codify them as per the list attached per Annexure-
9. Like in case of the trades/transactions done on the stock exchanges, the stock
exchanges are required to make available the details of the trades/transactions
on their respective websites for the purpose of facilitating the investing
public/investors to verify the details of the trades/transactions, in like manner,
it should be made mandatory for the respective registrars/lead managers/issuers
having their own websites to keep the data relating to the allotment so as to
facilitate the investing public/investors to verify the reasons for allotment/non-
allotment/rejection by punching in the application form number and name of
the first applicant. This will bring in desired level of transparency in the
process of allotment.
10. Many processes have been streamlined over a period of time with a view to
bring in efficiency in the management of post issue related work to ensure
expeditious process and reduction in cost. Like, in a book building issue, the
securities are getting directly credited to the beneficiary account of the
allottees, it is imperative to directly/electronically credit the refund amount to
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savings bank accounts specified by the applicants in their application forms
since most banks now offer a facility of ECS. Consequently only the
intimation/advice be sent to the applicants by courier/post. This will not only
reduce the cost to the issuer (of posting the refund orders through registered
post as is required mandatory) but also credit the savings bank accounts of the
applicants expeditiously and thus will make the total post public issue process
very efficient. However, wherever the banks do not offer ECS facility, the
present procedure of sending the refund orders by registered post by stating on
the refund order the account number and name of the bank be continued.
Considering phenomenal growth of technology in the banking industry, most
private sector banks offering anywhere banking and electronic facilities as well
as those public sector banks, which also offer like facilities would be able, to
offer this facility of directly crediting the refund amount to the savings bank
accounts specified in the application forms. Further, even RBI is contemplating
to put in place the RTGS (Real time gross settlement) initially for limited
number of locations and thereafter on a full-fledged basis nationwide.
Since most of the measures relating to transparency and reforms have been put
in place through regulatory requirements, it becomes necessary for the
regulator to review this aspect and consider making it mandatory to credit the
refund amount to the bank accounts of the applicants specified in the
application forms through ECS except where the banks (mostly co-operative)
do not have such facility or do not extend such facility at certain locations. In
such cases only the refund orders need to be allowed to be sent by registered
post as applicable now.
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Eligibility Criteria
In order to refine the primary market design and boost the waning investors’
confidence, Various measures have been taken by the Government, RBI and
SEBI. This section throws light on the policy measures initiated during the
financial year 2003-04 and till June 2004.
Eligibility Norms
Any company issuing securities has to satisfy the following conditions at the
time of filing the draft offer document and the final offer document with SEBI
and Registrar of Companies (ROCs)/Designated Stock Exchange respectively.
• A company making a public issue of securities has to file a draft prospectus
with SEBI, through an eligible merchant banker, at least 21 days prior to the
filing of prospectus with the ROCs. For a rights issue, filing of offer document
is mandatory where the aggregate value of securities, including premium, if
any, exceeds Rs. 50 lakh. An application for listing of those securities with
stock exchange(s) is also to be made. Further, the company must enter into an
agreement with the depository for dematerialization of its securities and should
give an option to subscribers/shareholders/ investors to receive the security
certificates either in physical or in dematerialized form. A company cannot
make an issue if the company has been prohibited from accessing the capital
market under any order or discretion passed by SEBI.
• An unlisted company can make an IPO of equity shares or any other security,
which may be converted into equity shares, only if it has a track record of
profitability and required net worth and net tangible assets. Some of the
conditions are specified hereunder: (i) it has net tangible assets of at least Rs. 3
crore in each of the preceding 3 full years, of which not more than 50% is held
in monetary assets; (ii) it has a net worth of at least Rs. 1 crore in each of the
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preceding 3 full years; (iii) it has a track record of distributable profits in terms
of section 205 of the Companies Act, 1956, for at least 3 out of the
immediately preceding 5 years; (iv) the aggregate of the proposed issue and all
previous issues made in the same financial year in terms of size (offer through
offer document plus firm allotment plus promoters contribution through the
offer document) does not exceed five times its pre-issue net worth and (v) in
case the company has changed its name within the last one year, at least 50%
of the revenue for the preceding one full year is earned by the company from
the activity suggested by the new name.
• Even if the above mentioned conditions are not satisfied, an unlisted
company can still make an IPO on compliance of the guidelines as specified:
(a)(i) issue should be made through the book building process with at least
50% of the issue size being allotted to the QIBs, if not, then the full
subscription monies has to be refunded, OR (a)(ii) the project should have at
least 15% participation by FIs/SCBs of which at least 10% should come from
the appraiser. In addition, at least 10% of the issue size should be allotted to
QIBs, otherwise, the full subscription monies would be refunded; AND (b)(i)
minimum post-issue face value capital of the company should be Rs. 10 crore,
OR (b)(ii) there should be compulsory market making for at least 2 years from
the date of listing subject to certain conditions as specified in the guidelines.
• For a listed company the aggregate of the proposed issue and all previous
issues made in the same financial year in terms of issue size should not exceed
5 times its pre-issue net worth. In case of the change in name of the issuer
company within the last 1 year, the revenue accounted for by the activity
suggested by the new name should not be less than 50% of its total revenue in
the preceding one full year period.
• Infrastructure companies are exempt from the requirement of eligibility
norms if their project has been appraised by a public financial institution (PFI)
or Infrastructure Development Finance Corporation (IDFC) or Infrastructure
Leasing and Financing Services Ltd. (ILFS) or a bank which was earlier a PFI
and not less than 5% of the project cost is financed by any of the institutions
referred above, jointly or individually, by way of loan and/or subscription to
equity or a combination of both.
• No public issue or rights issue of debt instruments (whether convertible or
not) can be made unless (a) it has a credit rating of not less than investment
grade from not less than two credit rating agencies registered with SEBI, all the
credit ratings, including the rejected ones, needs to be disclosed. All the credit
ratings obtained during the 3 years preceding the public or rights issue of debt
instrument for any listed security of the issuer company should also be
disclosed in the offer document. (b) the company should not feature in the list
of willful defaulters of RBI (c) company has not defaulted on payment of
interest or repayment of principal of debentures issued to the public, if any
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Contribution of Promoters and lock-in
The promoters’ contribution in case of public issues by unlisted companies
should not be less than 20% of the post issue capital. In case of public issues by
listed companies, promoters should contribute to the extent of 20% of the
proposed issue or should ensure post-issue share holding to the extent of 20%
of the post-issue capital. For a composite issue, the promoters’ contribution
should either be 20% of the proposed public issue or 20% of the post-issue
capital. At least one day prior to the opening of the issue, the promoters should
bring in the full amount of the promoters contribution including premium.
Except for (i) public issue of securities which have been listed for at least 3
years and has a track record of dividend payment for at least 3 immediate
preceding years, (ii) companies wherein no identifiable promoter or promoter
group exists, and (iii) rights issues. The minimum promoters’ contribution
should be locked in for a period of 3 years in case of all types of issues.
However, if the promoters’ contribution exceeds the required minimum, then
the excess is locked in for a period of one year. The lock-in period starts from
the date of allotment in the proposed public issue and the last date of the lock-
in is to be reckoned as three years from the date of commencement of
commercial production or the date of allotment in the public issue whichever is
later. In case of pre-issue share capital of unlisted company, the entire pre-issue
share capital, other than that locked in as promoters contribution, is locked for
a period of one year from the date of commencement of commercial
production or the date of allotment in the public issue, whichever is later.
Securities allotted in firm allotment basis are also locked in for a period of one
year. The locked-in securities held by promoters may be pledged only with
banks or FIs as collateral security for loans granted by such banks or F
Preferential Issues
• As in case of equity shares, the transfer of the locked in preference
shares/instruments is subject to the same norms and comply with SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
• The lock-in period in respect of the shares issued on preferential basis
pursuant to a scheme approved under Corporate Debt Restructuring framework
should commence from the date of allotment. The lock-in period should
continue for a period of one year. In case of partly paid up shares the lock-in
period should commence from the date of allotment and continue for a period
of one year from the date when shares become fully paid up.
• Unless the entire shareholding is held in dematerialized form, no listed
company is permitted to make preferential issue of equity shares, warrants,
Partly Convertible Debentures (PCDs), Fully Convertible Debentures (FCDs)
or any other financial instruments convertible into or exchanged with equity
shares at a later date.
• In case of the shares, warrants, PCDs, FCDs or any other financial
instruments convertible into equity shares, which are issued on preferential
basis, the entire pre-preferential allotment shareholding should be under lock-
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in. The lock-in period shall start from the relevant date up to a period of six
months from the date of preferential allotment. In addition, the shareholders,
who have sold their shares during the six months period prior to the relevant
date, would not be eligible for allotment of shares on preferential basis.
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Pricing of Issues
For an IPO by an unlisted company, if the issue price is Rs. 500 or more, the
issuer company has the discretion to fix the face value below Rs. 10 per share
subject to a lower limit of not less than Re. 1 per share. In case the issue price
is below Rs. 500 per share, the face value ought to be Rs. 10 per share. The
face value of shares should be disclosed in the advertisements and offer
documents.
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Contents of Offer Document
The draft offer document and the final offer document should be approved by
the Board of Directors and signed by all the Directors (including the managing
director), Chief Executive Officer and Chief Financial Officer. They should
also certify that all the disclosures made in the offer document are true and
correct.
Miscellaneous
• The Board should provide exemptions regarding any particular provision(s)
of these guidelines viz., (i) on an application made by any listed company or
intermediary connected with the issue, (ii) of a technical violation or a possible
violation, or (iii) on being satisfied that the violation was caused or may be
caused due to factors beyond the control of the applicant.
• The minimum application value should be within the range of Rs. 5,000 to
Rs. 7,000 and in multiples thereof. In a public issue by a listed company, the
reservations can be made for the shareholders, who hold shares worth up to Rs.
50,000 on the record date, for allotment on proportionate basis as in case of
allotment in public category.
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II. Debenture Trustees Regulations, 2003
SEBI amended the SEBI (Debenture Trustees) Regulations, 2003 to include the
following:
(a) The capital adequacy should not be less than the net worth of Rs. 1 crore,
provided that a debenture trustee, who already is registered, should fulfill the
net worth requirements within two years from that date.
(b) The net worth should be monitored by the debenture trustee on a
continuous basis and inform SEBI for any shortfall in it. In such a case, they
would not be entitled to undertake new assignments until they restore the net
worth to the required level within a specified time.
(c) Debenture trustee should not relinquish its assignments unless and until
another debenture trustee is appointed in its place.
(d) No debenture trustee should act as such for any issue of debentures in case
it has lent and the loan is not yet fully repaid or is proposing to lend money to
the body corporate. However, this requirement is not applicable in respect of
debentures issued prior to the commencement of the Companies (Amendment)
Act, 2000, where (i) recovery proceedings in respect of the assets charged
against security has been initiated, or (ii) the body corporate has been referred
to BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985,
prior to commencement of the SEBI (Debenture Trustees) (Amendment)
Regulations, 2003.
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Market Design
The primary market is governed by the provisions of the Companies Act, 1956,
which deals with issues, listing and allotment of securities. Additionally the
SEBI (Disclosure and Investor Protection) guidelines issued under the
securities law prescribes a series of eligibility and disclosure norms to be
complied by the issuer, promoter for accessing the market. However, in this
section we discuss the market design as stipulated in the SEBI (DIP)
guidelines.
Pricing of Issues
The companies, including the eligible infrastructure companies, have the
freedom to price their equity shares or any security convertible into equity in
public or rights issues as the case may be. The banks, however, can price their
shares subject to the approval by the RBI. A company (listed or unlisted)
should issue shares to applicants in the firm allotment category at a different
price from the one at which the net offer to the public is made. That is, at a
higher price than at which the securities are offered to the public. A listed
company making a composite issue of capital may issue securities at
differential prices in its public and rights issue. Further, an eligible company is
free to make public/rights issue of equity shares in any denomination
determined by it in accordance with sub-section (4) of section 13 of the
Companies Act, 1956 and norms as specified by SEBI from time to time.
Issue Obligations
Each company issuing securities has to enter into a Memorandum of
Understanding with the lead merchant banker, which specifies their mutual
rights, liabilities and obligations. The lead merchant banker has to exercise due
diligence and satisfies himself about all aspects of offering, veracity and
adequacy of disclosures in the offer document. All the other formalities like,
allotment, refund and dispatch of certificates are also taken care by the lead
merchant banker. The lead manager should also ensure that the issuer company
has entered into agreements with all the depositories for dematerialization of
securities. Also, the investors should be given an option to receive securities in
dematerialized form through any of the depositories. In case of under-
subscription of an issue, the lead merchant banker invokes underwriting
obligations and ensures that the underwriters pay the amount devolved. The
merchant banker has to appoint a compliance officer who will directly liaise
between the Board and the issuer company with regard to compliance of
various laws, rules, regulations and other directives issued by the Board.
Twenty-one days after the draft offer document has been made public, the lead
merchant banker should file a statement with the SEBI giving a list of
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complaints received, a statement as to whether it is proposed to amend the draft
offer document or not, and highlighting those amendments. Subsequent to the
post issue, the lead merchant banker should ensure that the post-issue
monitoring reports are submitted irrespective of the level of subscription. Also,
the merchant banker should be associated with allotment, refund and dispatch
and also monitor the redressal of investor grievances arising there from. In a
public-issue, the Managing Director of the Designated Stock Exchange along
with the post issue Lead Merchant Banker and the Registrars to the Issue
would be responsible for the finalization of allotment in a fair and proper
manner. Allotment should be on proportionate basis within the specified
categories rounded off to the nearest integer subject to the minimum allotment
being equal to the minimum application size as fixed and disclosed by the
issuer.
e-IPOs
A company proposing to issue capital to public through the on-line system of
the stock exchanges has to enter into an agreement with the stock exchange(s).
SEBI registered brokers should be appointed for the purpose of accepting
applications and placing orders with the company. The issuer company should
also appoint a Registrar to the Issue having electronic connectivity with the
Exchanges. The issuer company can apply for listing of its securities on any
Exchange other than the Exchange through which it has offered its securities.
The lead manager coordinates all the activities amongst various intermediaries
connected in the issue/system.
Credit Rating
Credit Rating Agencies (CRA) can be promoted by public financial
institutions, scheduled commercial banks, foreign banks operating in India, and
by any body corporate having continuous minimum net worth of Rs. 100 crore
for the previous five years. Further, foreign credit rating agencies having at
least five years experience in rating can also operate in the country. The SEBI
(Credit Rating Agencies) Regulations, 1999 cover the rating of the securities
listed and not fixed deposits, foreign exchange, country ratings and real estates.
The applicant/ promoters of a CRA should have professional competence,
financial soundness and general reputation of fairness and integrity in business
transaction; they should not be involved in any legal proceedings connected
with the securities market. The CRAs are required to have a minimum net
worth of Rs. 5 crore. A CRA can not rate (i) a security issued by its promoter,
(ii) securities issued by any borrower, subsidiary, an associate promoter of
CRA, if there are common Chairman, Directors and Employees between the
CRA or its rating committee and these entities (iii) a security issued by its
associate or subsidiary if the CRA or its rating committee share a common
Chairman, Director or Employee.
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For debt securities with issue size greater than or equal to Rs. 100 crore, two
ratings from different CRAs are required. The issuer should disclose in the
offer documents all the ratings it has got during the previous 3 years for any of
its listed securities, irrespective of whether it has been accepted or not. CRAs
should continuously monitor the securities rated by them and disseminate any
changes in its ratings, along with its history through websites, press releases
etc.
Merchant Banking
The merchant banking activity in India is governed by SEBI (Merchant
Bankers) Regulations, 1992. Consequently, all the merchant bankers have to be
registered with SEBI. The details about them are presented in the table below:
Demat issues
SEBI has mandated that all new IPOs compulsorily should be traded in
dematerialized form only. Further, the section 68B of the Companies Act,
1956, requires that every listed public company making IPO of any security for
Rs. 10 crore or more should issue the same only in dematerialized form. The
investors, however, would have the option of either subscribing to securities in
physical or dematerialized form.
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Private Placement
The private placement involves issue of securities, debt or equity, to selected
subscribers, such as banks, FIs, MFs and high net worth individuals. It is
arranged through a merchant/ investment banker, who acts as an agent of the
issuer and brings together the issuer and the investor(s). Since these securities
are allotted to a few sophisticated and experienced investors, the stringent
public disclosure regulations and registration requirements are relaxed. The
Companies Act, 1956, states that an offer of securities to more than 50 persons
is deemed to be public issue.
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CHAPTER 5
IPO TREND
This kind of response to an IPO raises a moot question, “Is IPO always a good
bet?” Therefore, the present research probes into the statistics of IPOs in the
last two years at the National Stock Exchange (NSE)—2005 and 2006.
Analysis of First-Day Returns
In the last two years, 123 IPOs were issued through NSE, out of which
78scrips gave positive returns while 29 showed negative return on the very first
day of the listing. If an investor had invested in all the IPOs and if he had sold
the shares on day one, his average returns on investment would be 25.7%. Of
course, simplistic assumptions have been made that the investor would be
lucky enough to be successfully allotted the shares in all the IPOs and coupled
to that he would also have received all the shares applied by him. Further, the
average is based on the assumption that the amount invested in each IPO was
Rs 50000.
Top Ten First- Day Returns (2005 and 2006)
Issue
Sr. Price
No. Name of the issue (Rs.) listing return%
1 Nissan Copper Limited 39 130.9 235.64
284.0
2 Educomp Solutions Limited 125 5 127.24
Infrastructure Development
3 Finance Company Limited 34 69.5 104.41
4 Amar Remedies Limited 28 56.2 100.71
640.8
5 Voltamp Transformers Limited 345 5 85.75
6 Development Credit Bank Limited 26 47.45 82.50
Sasken Communication
7 Technologies Limited 260 464.6 78.69
8 Parsvnath Developers Limited 300 526.4 75.47
320.6
9 Sadbhav Engineering Limited 185 5 73.32
1464.
10 Sun TV Limited 875 8 67.41
Among these 97 issues, some were star performers and some great
disappointers. For example, Nissan Copper Limited gave the best return on the
first day, i.e.235.64%. Similarly, Educomp Solution Limited and Infrastructure
70
Development Finance Company Limited, gave 127.24% and 104.41%
respectively. The worst performers were K Sera Sera Productions Limited,
Talbros Automotive Components Limited, and Deccan Aviation Limited with
a loss of 54.85%, 40.25% and 33.04% respectively.
Worst Ten First day Returns (2005 and 2006)
Worst ten First day Returns
Issue
Sr. Price
No. Name of the issue (Rs.) listing return%
1 K Sera Sera Productions Ltd 68 30.7 -54.85
Talbros Automotive
2 Components Limited 102 60.95 -40.25
3 Deccan Aviation Limited 148 99.1 -33.04
4 Unity Infraprojects Limited 675 470.9 -30.24
5 Raj Rayon Limited 65 50.65 -22.08
6 Prime Focus Limited 417 326.15 -21.79
7 Jagran Prakashan Limited 320 270.9 -15.34
8 Shringar Cinemas Limited 53 44.95 -15.19
9 Cairn India Limited 160 137.4 -14.13
10 Gitanjali Gems Limited 195 167.6 -14.05
All these statistics reveal a mixed picture, but the fact is that the investor may
or may not be get allotted in IPO. Even if they are, they may not get 100% of
the allotment. Thus, the Return on Investment (ROI) may be lesser than the
return on share price. Recently, ICRA Ltd IPO got overall oversubscribed by
72 times in a week. Naturally, one cannot expect all the subscribers to get the
shares they applied for.
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7 Ruchira Papers Limited 23 13.3 -42.17
8 Talbros Automotive Components Ltd 102 62.95 -38.28
9 Blue Bird (India) Limited 105 65.9 -37.24
10 Deccan Aviation Limited 148 93.4 -36.89
Issue
Sr. Price
No. Name of the issue (Rs.) 3 months return%
1 Atlanta Limited 150 1022.2 581.47
2 Development Credit Bank Limited 26 80.35 209.04
3 Tech Mahindra Limited 365 1116.3 205.84
4 Educomp Solutions Limited 125 359.05 187.24
5 Tulip IT Services Limited 120 341.45 184.54
6 Pyramid Saimira Theatre Limited 100 281 181.00
7 Shree Renuka Sugars Limited 285 799.5 180.53
8 Everest Kanto Cylinder Limited 160 420 162.50
9 Action Construction Equipment Ltd 130 308.85 137.58
10 Sadbhav Engineering Limited 185 387.65 109.54
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9 GVK Power & Infrastructure Ltd 310 187.4 -39.55
10 Blue Bird (India) Limited 105 66.9 -36.29
Issue
Sr. Price
No. Name of the issue (Rs.) 6 months return%
1 Shree Renuka Sugars Limited 285 1409.6 394.60
2 Tech Mahindra Limited 365 1435.5 293.29
3 Educomp Solutions Limited 125 412.15 229.72
4 Amar Remedies Limited 28 85.4 205.00
5 Gateway Distriparks Limited 72 215.45 199.24
6 Development Credit Bank Limited 26 71.85 176.35
7 Bombay Rayon Fashions Limited 70 186 165.71
8 Suzlon Energy Limited 510 1285.75 152.11
9 Tulip IT Services Limited 120 257 114.17
10 Sadbhav Engineering Limited 185 388.9 110.22
Issue
Sr. Price
No. Name of the issue (Rs.) 1 year % return
1 Educomp Solutions Limited 125 1011 708.80
2 Tulip IT Services Limited 120 550 358.33
3 AIA Engineering Limited 315 1330 322.22
4 Everest Kanto Cylinder Limited 160 651 306.88
5 Bombay Rayon Fashions Limited 70 252 260.00
6 Gateway Distriparks Limited 72 253.6 252.22
7 India Infoline Limited 76 203.7 168.03
8 Suzlon Energy Limited 510 1347.9 164.29
9 Shoppers Stop Limited 238 616.75 159.14
10 Sadbhav Engineering Limited 185 460.55 148.95
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Worst Ten Issues 1 Year (CY 2005 and 2006)
Issue
Sr. Price
No. Name of the issue (Rs.) 1 year % return
1 Uttam Sugar Mills Limited 340 131.4 -61.35
2 Visa Steel Limited 57 27.4 -51.93
3 Nectar Lifesciences Limited 240 123.45 -48.56
Emkay Share and Stock Brokers
4 Ltd 120 65.7 -45.25
5 SPL Industries Limited 70 38.5 -45.00
6 R Systems International Limited 250 140.9 -43.64
7 Shri Ramrupai Balaji Steels Ltd 22 12.7 -42.27
8 Solar Explosives Limited 190 110.1 -42.05
9 Repro India Limited 165 97 -41.21
10 Kernex Microsystems (I) Limited 250 155 -38.00
Issues to be addressed
There are many reasons which affect the return on an IPO like the
fundamentals of the company, management of the company, pricing of the
issue, FII investment and many other economic and market factors. Each of
these factors differ from company to company and so differ the returns.
However, on an average, strong evidence indicates that on the basis of the past
data, an IPO may be listed at a premium to the issue price. The present research
suggests that the investor may go for an IPO, but may not hold the share for a
very long period.
Though all the above statistics lure investors to invest via the IPO route, there
is no exhaustive and full proof evidence that investment in IPO will give good
returns every time. Basically, investment in IPO too needs careful thought and
proper revision of the sector and the company fundamentals.
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Out of Ten top Cities 6 are from Gujrat
Statistics shows the Gujrat state is leading investor in the intial public offer, in
the entire country because of the following reasons:
2) Risk appetite of the people: The Gujrat and the Maharashtra regional
belt known for its industries and companies, the people over here
know, about the companies much better and access to information of the
Gujrati communities among their circles is far much higher, also their
speculative motive over here far more higher than any other state.
Which contributes to the reason for the higher participation in the initial
public offering.
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investor, so they try to raise as much money from the primary markets to gain
on that confidence of the investors. Statistics shows us that number of public
offers and amount raised through it had gone on increasing on the bullish
capital markets period and the vice versa happening on the bearish phase of the
capital markets. So the reasons the IPO business cycle to be at nascent stage:
1) In India the small and medium fast growing business are still unlisted,
there are as much companies unlisted, as much listed ones. So they still
need to raise funds for their expansion.
2) As the economy grows by 8-8.5% CAGR, which translates the
corporate earnings to grow at around 17-20%, meaning the capital
markets to give an average return of around 20-25% CAGR, making the
room ahead for the companies to raise money from the primary capital
markets.
3) The business like Hutch, Haldia, Indian Railways, DLF etc are still
unlisted with such an beautiful and growing businesses give more room
ahead for the fund raising from the corporates.
4) Also with the strict norms and the guidelines from the regulatory of the
Indian capital market, with better management the IPO and also the
capital markets are on the right track to move forward.
5) Liberalization and Securitization, with the reformist moves from the
Indian government front have boosted the confidence for the Indian
corporates and the public sector units to come up and disinvest their
business models to the public for the growth and the expansion, which is
also signaling the better time IPO or the primary markets ahead.
MNC’s in India
The number MNC doing business are to more compared with any other
emerging markets, like brazil and Taiwan which are mainly driven by the
commodity and oil stocks, probably that’s why their price earning ratio is too
low as compared with Indian and china. Indian capital markets have always
seen an floury of MNC rushing to do business in India, to focus and deliver
results of this huge pool of consumption driven economy. We have always
seen very well diversified group of companies in both manufacturing and
services sectors like technology, in which with combinations of best of the
talent and lower labour cost as compared to other counter parts, have motivated
all MNC from around the world to come an do business in India.
• 2005 was a watershed year for IPO activity in the Middle East and
Africa: soaring liquidity from oil revenues contributed to many big
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ticket IPOs raising more than $500 million each in the United Arab
Emirates (UAE), Saudi Arabia, Oman, Lebanon and Egypt. The UAE
alone saw issues worth $1.9 billion compared to just $0.5 billion in
2004.
• In the next few years, assuming the necessary political stability, the
Middle East is likely to become an important source of IPO activity as
oil revenues are recycled into the local economy.
• One of the three biggest deals to date this year was Lotte, the South
Korean Department Store, which raised $3.5 billion when it dual-listed
in London and Seoul.
• India has evoked lively investor interest and will continue to do so.
While the amounts raised fell from $2.9 billion to $2.3 billion in 2005,
reflecting fewer privatizations, numbers of transactions surged from 21
to 53.
77
CHAPTER 6
The recent IPO scam reveal the fraudulent ways in which one can
manipulate the demat account. As in the past , retail investor have been the
losers . this is the right time for SEBI to become proactive in preventing
unhealthy practices in the market.
The Indian investor had much to cheer about in 2005. The stock markets have
seen a great run at the Sensex for the third successive year. The market has also
seen a huge level of FII inflows into the country. FII investment in India in
2005 stood at $10.67 bn and the cumulative amount went up to $41 bn. the
Indian stock market charged ahead, and the Sensex zoomed to a new high
touching above 9400 point. The primary market too witnessed a positive
response from investor .a total of 53 IPOs hit the market and about 46 received
positive returns from investors. About Rs 22,731 Crore was raised from the
primary market and about Rs 23,000 cr was raised through IPO and FPO.
During 2005, broking firms like IL&FS, India Infoline, and India bull tapped
the market through IPOs along with big issues like Shopper’s Stop, Provogue,
and Suzlon Energy. The year also saw FPOs from ICICI Bank, oriental bank of
Commerce and Punjab National Bank. The public issue market has been in full
swing for the last two and half year and a huge amount of Rs 55458 Cr was
raised.
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The art of manipulation.
The Modus operandi adopted in manipulation of yes bank and IDFC Bank IPO
issues involved the opening of ‘benami’ account or bogus demat account with
NSDL through depository participants (DPs). SEBI investigation revealed that
application and funds were canalized through these account for garnering large
shares from the IPO, which were normally reserved for retail investors.
79
category but later investigation revealed that after IPO was closed and before
the scrip was listed on the stock exchanges. She received 150 Shares each from
6315 ‘benami’ demat account within a day after the allotment adding up to
9, 47,250 shares. Yet her, name did not figure among top 100 individuals
allotters of the Yes bank IPO issue. Roopalben Panchal transferred the entire
equity shares in off-market transactions to six entities prior to the listing of
equity on the stock exchange, of which five sold their entire holding on the day
of the listing. Yes bank was listed on the Bombay Stock Exchange (BSE) and
NSE on July 12, 2005, According to SEBI, Panchal and others could have
booked profit to the tune of about Rs 1.35 Cr. Sugandh estate and investment
Pvt Ltd. too acting on similar lines garnered 1,97,250 shares. Receiving 150
shares from 1315 benami’ Demat account and sold the shares in off market
transaction. Sugandh Estates and Investment Pvt. Ltd, later in offline market
transaction sold the shares to three entities who sold the shares on the day of
listing making profit of more than Rs 32 lakhs. Yes bank shares were issued at
Rs 45 per shares and on the day of listing the scrip opened with a price of Rs
65.90 and intraday high was Rs 70 and closed at 60.85.
In the normal process both Roopalben Panchal and Sugandh Estates and
Investment Pvt Ltd, in order to get an allotment of 9, 31,600 shares would have
had to apply for Crores of shares which mean paying Crores of rupees as
application money. But both through ‘benami’ demat accounts applied for the
maximum possible number of shares per application under the retail investor
category by putting in large number of application and 150 shares per
application, shares which should have been allotted to genuine retail investors,
thus abusing the IPO allotment process.
The outcome in the detection of large scale ‘benami’ demats account gives
ample proof of loopholes in the protection of investors against fraudulent
transfer of shares from demats account. SEBI’s swift and decisive action set
the ball rolling to discover one more IPO scam larger than Yes Bank-IDFC
IPO, again involved Roopalben Panchal , Sugandh Estates and investment Pvt
ltd , Purshottam Budhwani , and Manojdev Seksaria, benefiting through
’benami’ demat account with accounts in Bharat overseas bank, HDFC bank,
Indian overseas bank, ING Vysya bank and Vijaya bank. While karvy
Computershare Pvt Ltd acted as the registrar for the IDFC IPO, Kotak
mahindra Capital Company acted as major BRLM and DSP Merrill Lynch
Limited, SBI capital market ltd. and JM Morgan Stanley Ltd as minor BRLM.
According to SEBI report, the four entities opened 42,000 Benami Demat
account and garnered 8.29% of the 14.12 Cr Shares meant for Retail investors.
Roopalben Panchal received 39, 43,184 shares from 14807 demat account in
CDSL and 32, 61,426 shares from 12,257 demat account in NSDL through off-
market transaction. Manojdev seksaria and Purshottam Budhwani , received
5.29 Lakh IDFC shares and 10.95 Lakh Shares respectively, from bogus demat
accounts. Like in the Yes bank case, the shares were later transferred to some
other entities before the listing of the shares on BSE and NSE on august 12
2005
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The modus operandi in both the IPO scams has been receiving the IPO
allotment through fictitious demat Account and off-market transferring of the
shares to the financiers prior to the listing and the financiered selling the shares
on the day of the listing , thus, booking profits as the scrip’s were listed by
50%-60% higher than the allotted price. SEBI’s intensified probe has revealed
that several entities have concerned IPO shares reserved for retail investors by
making application in the retail category through ‘benami’ IPO accounts. In
both IPO scams, SEBI investigation revealed that some investors have used
fictitious names to buy more shares than they are legally entitled to.
SEBI in action
G Ananthraman , whole time member, SEBI directed the market regulator to
conduct an inspection on karvy RTI and BRLMs associated with the issue of
IPOs with immediate effect and the reasons for systematic failure, and also to
determine the Qualification of karvy –RTI. The Market regulator has referred
several banks to the banking regulator-Reserve Bank of India (RBI)- and also
directed the depositories , NSDL and CSDL, to look into the functioning of
depository participants and asked NSDL to plug the loopholes in the
KYC( Know your customer ) guidelines,
SEBI’s investigation of malpractices in the IPO issues has revealed the misuse
of bank account and wider use of bogus demats account in IPO malpractice.
Market sources believe that ‘benami’ demat account are opened not only with
the intention of converting black money into white money, but also for
mopping up IPOs and creating artificial volumes, circular trading and price
manipulation. Market sources suspect the possible role of the issuer –lead
managers –registrar –merchant banker – broker- depositary Participants- Banks
nexus in abetting the IPO scam. SEBI investigation revealed that the demat
account were opened back in 2003 strengthening their role and putting all IPOs
issues offered to public between 2004 and 2005. SEBI, suspecting similar
modus operandi in the issue of suzlon Energy, SPL industries, Shopper’s stop,
Provogue India. Nectar Life sciences, IL&FS investment , gokuldas Exports
began probing the role of various players in the IPO issue.
SEBI’s investigations of the demat scam reveals the violation of KYC norms
by Depository Participants and the bank Anti Money laundering (AML).
SEBI’s investigation clearly shows the willful negligence of Banks and
surveillance failure of self-regulatory NSDL and CSDL over DPs. Speaking on
the NDSL failure to detect the multiple demat account SEBI said “it’s a matter
of concern that NSDL, which is a self-regulatory organization and within
whose regulatory domain Karvy-DP falls, could not detect in advance the
apparently systemic deficiencies in karvy DP.” However, when SEBI blamed
NDSL regarding the Yes bank IPO scam, NDSL said that the ‘important
regulation’ on market manipulation was entirely ‘within the jurisdictions of
SEBI’.
81
A detailed inspection of karvy in Yes bank IPO allotment by NSDL, on the
order of SEBI, revealed lapses in the processing account –opening applications
for demat account which did not adhere to the KYC norms. C Parthasarthy ,
chairman of karvy Computershare Pvt Ltd, registrar to Yes Bank IPO said “ we
have followed all the systematic norms and never carried out a check based on
common address and having common address for different demat accounts is a
widespread phenomenon and noted that the failure lies in the system itself
which does not bar an individual investor opening multiple demat account,
either with one more DPs.”
Motives
From 2004-05, the primary market has witnessed increased activity by Foreign
Institutional Investors (FII) and others. The Sensex moved up by leaps and
bounds. Earlier, the great primary market rally was witnessed during the
Harsad Mehta Scam in 1992 and later in 1996 when technology stocks were on
the rise. In the year 2005 many public offerings came and most of them are
now trading higher than their listing price. They opened with a considerable
premium at the time of listing. These huge profits in a very short span of time
had lured some investors to explore IPO investments. They started applying for
the public offerings with more than one demat accounts. Some unscrupulous
people started taking advantage of this situation by opening a number of
benami/fictitious demat accounts with the help of bankers and depository
participants. They had successfully hidden their identity till they were exposed.
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Reasons for using multiple and Benami Demat account
Various reasons can be cited for resorting to multiple demat accounts. First,
using more than one demat account for applications in a retail investor
category of a public offer will significantly swell up the possibility of getting
the allotment. Secondly, banks cannot lend more than Rs. 10 lakhs to a single
investor for a public issue. This prompts them to open multiple and benami
accounts. Thirdly, as per the banking norms and the government guidelines and
investment or deposit beyond Rs. 50000 has to be through a cheque or cash by
indicating the (PAN) permanent account number. It has also been revealed that
the benami account holders created duplicate PAN. And finally, the modus
operandi encouraged money laundering. Through benami accounts one can
refine one’s unaccounted money. This can be explained by the following
example.
Mr. X had applied for 5000 shares in a public offer with a price of Rs. 10. he
was able to make a contract with Mr. Y, who agreed to buy those shares at Rs.
12 on the date of listing. If on the listing date the share price opened with a
30% premium, then Mr. Y would earn Re. 1. At the same time, Mr. X also
fixed a profit of Rs. 2. In this situation, Mr X would get a cheque of Rs, 65,000
on the sale of 5000 shares at Rs 13 each. He would give Rs. 5000 in cash from
his unaccounted money. So, Mr. X was able to convert his unaccounted Rs.
5000 to account it.
The benami accounts scam came to light when SEBI discovered the tainted
allotment of shares in the IPO of Yes bank. Box I provides the entire story in a
nutshell.
83
shares. And she transferred the funds to these entities that made the application
on her behalf.
Now, the question that arises is who are those 6,315 demat holders? As per the
demat account date furnished by National Securities Depository Limited
(NSDL), out of these 6,315 entities, 6,221 have their address as 402-403
Shashwat, opposite Gujarat college, Ellis bridge, Ahemdabad- 380-006. This
address is the same address as that of Devangi Panchal, who is the sister of
Roopalben. Of the remaining entities, 50 and 44 of them have the address
Shahibaug, Ahemdabad and Paldi, Ahemdabad respectively, interestingly all
the 6,315 have their bank accounts with Bharat overseas Bank and demat
accounts with Karvy-DP. These facts raise doubts as to whether these 6,315
entities are the holders of multiple accounts of Roopalben or are
benami/fictitious entities.
Roopalben made off market transfer from the 6,315 demat account on july11,
2005 to entities mentioned in Table 1 and they in turn sold the shares in the
market.
In SEBI’s findings, it has been clarified that Sujal Leasing and Finance Pvt.
Ltd. Approached SEIPL and provided about Rs. 7 cr for making the application
for the issue. SEIPL, in turn, applied for 15 Lakh shares in the IPO through
1,500 friends and about 1, 97,000 shares were allotted to it. SEIPL then
transferred these shares to Rita Ben Thakkar, Veenaben Thakkar and Sujal
Leasing and Finance Pvt. Ltd. And the total profit earned by these three entities
was around Rs. 32.26 lakhs. Now, from the above a case we can observe that
the total reservation for retail investors was 1, 75, 00,000 shares out of that
Roopalben Panchal and SEIPL acquired approximately 1, 97,000 which
accounts for 6.54% of the total reservation made for retail investors.
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IPO Funding
Banks are allowed to fund an investment of up to Rs.10 lakhs as a loan. While
financing IPOs, banks make it mandatory for the customer to keep the shares
allotted to a special beneficiary account and also pledge those shares. Thus,
funding an IPO is a good business for banks as it is the source of good fee and
interest income. On the other hand, investors have to pay only a part of the
investment and this helps them apply more, thus, increasing the change of
receiving more shares. These benefits lure both parties to get involved and
make some money out of the IPO funding.
Registrar’s Role
The registrar provides administrative support to the issue process. It is
responsible for the verification and reconciliation of bank schedule and
application forms. It is also responsible for the data entry of the contents of all
the application forms after screening for invalid and multiple applications.
Thus, somewhere in this whole IPO scam, the involvement of the registrar
cannot be completely ruled out. The problem is not with the allotment
mechanism, but the way in which some banks and depository participants
associate with exploiters in opening of bogus accounts (demat and bank
accounts).
Identifications Crisis
For compliance of the key norms, a robust and powerful identification system
needs to be put in place. Many countries have their own identification
mechanism. In US, a Social Security Number (SSN) is commonly used as the
identification Mechanism. Those persons who are not qualified for SSN are
issued an Individual Taxpayer Identification Number (ITIN). This number is
given to foreign national and other who have tax reporting or filling
requirement and do not qualify for SSN. The UK is in process of having a
national identity card system Germany has an identity card system which is
85
compulsory for all citizens. Some other countries also have similar
arrangements for identifying their citizens.
In India we have various identification mechanisms like the birth certificate,
school leaving certificate, driving license, phone bill, electricity bill, passport,
voter’s ID , PAN and MAPIN. MAPIN was introduced to create a unique non-
duplicable ID for all investors in order to establish an audit trail SEBI had
initiated MAPIN, but later halted it, with a view that there will be a multiple
unique ID. However, instead of making a new identity base, the government
should make PAN compulsory for all capital market actions. On the basis of
the PAN card, a new Identity based on the Biometric system should be
introduced. Thus PAN will become the sole identity for all financial
transactions. All customer identification should be based on the PAN card.
This unique number will enable SEBI and the government to cover different
segments of the market, check fraud and manipulation and assist in building
other government database.
There is also a crucial need to continuously observe flow in demat account.
Both NSDL and CSDL should move toward better surveillance mechanism and
should take up greater responsibility in the interest of the investors.
86
negligence and violation of KYC norms, giving room to anti-money laundering
.bank should have notices when continuous serial numbers on particular
branches are submitted towards application money. They should have noticed
when a series of refund orders were addressed to one single account. It is
absolutely wrong to deny that they do not have the system for cross check of
addresses. As the Finance Minster. P Chidambaram , reiterated, banks and
depository participants should not have accepted a system that does not detect
multiple accounts from the same address.
The high level of fraud in the IPO issue has denied small investors an
opportunity for allotment. Though the market regulator has come down heavily
on the offenders by banning all the 13 entities –seer Finlease Pvt Ltd, Excell
Multitech Ltd, Zenet Software Ltd, Tauras Infosys Ltd, Sugandh estates and
Investment Pvt. Ltd , Sujal Leasing and Finance Pvt Ltd, Ritaben R Thakkar,
Veenaben Y Thakkar, Jayantilal Jitmal, Bhargav Panchal, Rajan Vasudev
Dapki, RoopalBen Nareshbhai Panchal and Devangi Dipakbhai Panchal
involved in the Yes bank IPO scam – And Has directed the depositories to take
action on the DPs and concerned BRLMs to the issue, alerted RBI to examine
the role of Bharat Overseas Bank, HDFC bank, Indian Overseas Bank, ING
Vysya Bank and Vijaya bank in opening ‘ benami’ accounts and funding their
IPO application, it is time for the market regulator to bring in stringent
regulation and protect the retail investor from fraudulent and unhealthy
practices in the market.
It is time for the regulator to consider a unique identification number for each
individual. Earlier UIN was suggested only for individual investing more than
Rs 5 lakhs. As the demat account were exploited to garner shares meant for
retail investors, the introduction of the UIN system will prevent those kinds of
malpractices. Moreover, UIN cannot be obtained unless a person is physically
present so the question of non existent persons having a UIN will not arise.
87
CHAPTER 7
The Primary Market mops up resources from the public (investors) and makes
available to meet the long term capital requirements of corporate business &
industry in the form of equity/debt capital, while the secondary market
provides liquidity to the investments made by the individual investors. It is
primary market that is in the center-stage of the capital market bringing
together the two principal segments of the market that of investors and the
seekers of capital. Regular growth of the economy of the country is possible
only through a robust and vibrant primary market. The secondary market
provides captive dealings amongst investors themselves, who trade/speculate in
the stock markets. Operations in the secondary market do not result in the
accretion of capital resources of the country, but it indirectly promotes savings
and investment, by providing the unique quality of liquidity to investment in
securities.
Primary Market is the medium for floating pubic issues. Public issue means an
invitation by a company to the public to subscribe to the securities offered
through a prospectus. Similarly the Primary market infuses new listed
securities in the market generated through new public issues floated regularly
and thus enlarges the security base traded in the secondary market. There is
thus inter-dependency between the two markets.
88
b. No committed payment of charge/interest. Payment of dividend is
optional and subject to availability of disposable profits, after meeting
all other overheads/obligations
c. A well managed and profitable company enhances shareholders' wealth.
In fact the company functions with this goal as its main corporate
objective.
d. The shareholders enjoy the benefit of liquidity of their investment, when
the shares are listed and traded in the stock-exchange.
e. Brisk trading of the securities of a well-managed and high profit earning
company serves as an index of the reputation of the company's
promoters, its products /services.
The investor faces limited risk in the secondary market, but he needs much
more protection and safeguards in the primary market. This is because in an
initial public issue, except for the offer documents/prospectus he has no other
source of information about the bonafides of the issue-raisers. Instances of
vanishing companies and fly-by-night promoters act as a deterrent to investor
confidence. Further secondary market deals are isolated transactions involving
sale/purchase of individual lots of shares/bonds, while in the primary market
news issues are for very large amounts sometimes even hundreds of crores of
rupees. Fraudulent promoters may try to dupe the entire community of
investors, who opt to invest in a new issue.
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of, and regulating, the securities market and for matters connected therewith or
incidental thereto.' All public issues since January, 1992 are governed by the
rules & regulations issued by SEBI.
SEBI was formed to promote fair dealing in issue of securities and to ensure
that the capital markets function efficiently, transparently and economically in
the better interests of both the issuers and the investors. The promoters should
be able to raise funds at a relatively low cost. At the same time, investors must
be protected from unethical practices and their rights must be safeguarded so
that there is a steady flow of savings into the market. There must be proper
regulation and code of conduct and fair practice by intermediaries to make
them competitive and professional.
The regulation of primary issues thus poses an acid test for SEBI. On the one
hand in view of the leading role of these issues in the development and
economic growth of the country, SEBI in view of its responsibility for
development of the market has to do every thing to promote new issues and
make it easier for bonafide promoters to raise funds for productive ventures,
and on the other hand SEBI has to ensure that the interests of the investors are
protected to the best possible extent.
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disclose all relevant information affecting investors' interest. Based on
experience gained these regulations were reviewed and revised in the year
2000 and presently "The Securities and Exchange Board of India (Disclosure
and Investor Protection) Guidelines, 2000" as amended subsequently from time
to time are operative and in force now.
SEBI constantly reviews its guidelines to make them more market/ investor
friendly. In this direction, SEBI has set up two committees to deliberate on the
issues pertaining to Primary Market. One under the chairmanship of Shri
Y.H.Malegam, Managing Partner, S B Billimoria & Co. (Referred as Malegam
Committee) and the other under the Chairmanship of Sh M S Varma,
Chairman, TRAI (referred as Primary Market Advisory Committee (PMAC).
These committees comprise of representatives of merchant bankers, investor
associations, ICAI, ICSI etc.
The strategy to deal with complexities in a given task is to analyze and break
the complex task into a number of simple one-step processes or jobs and
further group them as per sequential time-schedules. It is part of this strategy
that jobs needing specialised knowledge/job skills are out-sourced to
competent professionals or service-providers qualified and experienced in the
particular line. A public issue is kept open by the issuer and issue-managers
soliciting subscription by investors over a period between three days
(minimum) and ten days (maximum). This is the core or principal segment of
the whole task. Whatever steps to be complied with, prior to this are
preparatory steps/legal obligations to be complied with and whatever is to be
done subsequent to the closure of the issue are identified as 'post-issue
obligations' to complete the process and realize benefits thereof (capital to the
Issuer and tradable investment (equity shares) to the investor. We can therefore
identify three distinct stages in the successful completion of a public issue, as
under:
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• Drafting & Finalization of the Prospectus
• Selecting & entering into agreements with the Intermediaries
• Attending to preliminary formalities (getting approvals) from
SEBI/stock exchange.
Prospectus
This is the essential document that addresses all the data/information, which a
prospective investor would like to know to arrive at an informed decision to
subscribe to the issue of the company. It is thus a communication from the
issuer to the investors. The Companies Act 1956 defines a prospectus as - "any
document described or issued as a prospectus and includes any notice, circular,
advertisement or other document inviting deposits from the public or inviting
offers from the public for the subscription or purchase of any shares in, or
debentures of, a body corporate."
As earlier stated prospectus is a document by way of which the investor gets all
the information pertaining to the company in which they are going to invest. It
gives the detailed information about the Company, Promoter / Directors, group
companies, Capital Structure, Terms of the present issue, details of proposed
project, particulars of the issue etc. There are certain mandatory disclosures,
which have to be made in the prospectus. The mandatory disclosures to be
made in the prospectus includes in Schedule II of the Companies Act, 1956.
SEBI has issued guidelines, SEBI (Disclosure for Investor and Protection),
Guidelines, 2000 which gives details about the contents of prospectus.
(Chapter VI)
Appointment of Intermediaries
Pre-Issue Processes
To initiate the process the Company to pass a Board Resolution and proceed to
appoint a Merchant Banker, with whom an MOU may be entered into.
Subsequent sequential steps are as under:
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b. A Resolution at a meeting of Shareholder's in terms of Section 81(1A)
of the Companies Act, 1956. is also necessary
c. Form 23 to be filed with ROC for passing special resolution for issuing
shares as above
d. Appointment of intermediaries and entering into MOU with them
( underwriters, Bankers to the Issue, Registrars, brokers to the issue for
marketing the same
e. Filing of prospectus with the SEBI/Registrar of Companies: The draft
prospectus along with the copies of the agreements entered into with the
Lead Manager, Underwriters, Bankers, registrars and Brokers to the
issue is filed with SEBI and the Registrar of Companies of the state
where the registered office of the company is located along with the fees
& other prescribed requirements, (with due diligence by merchant
banker)
f. Vetting of prospectus by SEBI as per suggestions, if any, received from
SEBI
g. Obtaining in-principle approval from stock exchange
h. File final prospectus with SEBI / stock exchanges / ROC
i. Printing and dispatch of Application forms: The prospectus and
application forms are printed and dispatched to all the merchant
bankers, underwriters, brokers to the issue.
j. Filing of the initial listing application: A letter is sent to the Stock
exchanges where the issue is proposed to be listed giving the details and
stating the intent ;of getting the shares listed on the Exchange. The
initial listing application has to be sent with a fee of Rs. 7,500/-.
k. Statutory announcement: An abridged version of the prospectus and; the
Issue start and close dates are published in major English ;dailies and
vernacular newspapers.
l. Submission of 1% Security Deposit with the Regional Stock Exchange.
m. Depositing Promoter's Contribution in the issue in a separate bank
account.
Post-Issue Obligations
a. Processing of applications: After the close of the Public Issue all the
application forms are collected, at the Registrars to the issue and
scrutinized, tabulated in consultation with the merchant banker.
b. Establishing the liability of the underwriter: In case the Issue is not fully
subscribed to, then the liability for the subscription falls on the
underwriters who have to subscribe to the shortfall, incase they have not
procured the amount committed by them as per the Underwriting
agreement.
c. Allotment of shares: after the issue is subscribed to the minimum level.
Basis of allotment in consultation with the regional stock exchange.
Refer detailed allotment procedure as prescribed by SEBI.
d. Release Post Issue Advertisement
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e. Dispatch of share certificates / refund orders
f. Listing of the Issue: The shares after having been allotted have to be
listed compulsorily in the regional stock exchange and optionally at the
other stock exchanges. For this purpose enter into an listing agreement
with stock exchange(s). Also obtain permission from Stock Exchanges
for listing & trading of securities for Commencement of trading of
securities
g. File Form No. 2 for Return of Allotment with ROC
h. Attend to Redress of Investors Grievances received
i. 78-day post issue monitoring report to be submitted by merchant banker
with SEBI.
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financial institutions and Indian Mutual Funds are not subject to Lock-in
periods
14. The minimum period for which a public issue has to be kept open is 3
working days and maximum 10 days. The minimum period for a rights
issue is 15 working days and the maximum 60 working days.
15. A public issue is affected if the issue is able to procure 90% of the Total
issue size during the Public Issue. In case of over - subscription the
company may have the right to retain the excess application money and
allot shares more than the proposed issue which is referred to as the
'green-shoe' option.
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Rights Issue
Private Placement
A private placement results from the sale of securities by the company to one
or few investors. The distinctive features of private placement are that there is
no need for a formal prospectus as well as underwriting arrangement. The
terms of the issue are negotiated between the company and the investors. The
issuers are normally the listed public limited companies or closely held public
or private limited companies which cannot access the primary market. The
securities are placed normally with the Institutional investors, Mutual funds or
other Financial Institutional.
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CHAPTER 8
Regulatory Authorities.
To understand the regulatory and control systems in-built in the market, we
must study the structural framework of the capital market. The capital market
consists of the following elements.
1. On the one hand are the innumerable, but not organized savers, and
2. At the other end are those seeking capital from the capital market;
3. Regulatory Body:
There are 23 Stock Exchanges registered with SEBI and under its
regulation. They provide a transparent and safe (risk-free) forum of a
market for investors to transact and invest their funds
5. The Depositories:
The depositories are innovative institutions, which are able to render the
market paperless by holdings securities electronically, providing ease and
speed for those transacting in the market
So vast and well established is the market that the daily turn over in the main
Stock Exchange in the Country National Stock Exchange of India averages
Rs.2000 Crores presently and bound to multiply further in the coming future.
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CHAPTER 9
Chapter 5
Current Issues
1. IPO Rating – A Primer
SEBI, in its role as a regulator of the capital market and safeguarding the
investors, has announced the professional rating of IPOs and also the
registered brokers, a service that is not available on any bourse across the
world. The primary objective is to enhance governance issues. The article
speaks on related issues.
In late December 2005, the Securities and Exchange Board of India (SEBI’s)
after its board meeting announced its plans for introducing voluntary ratings of
Initial Public Offerings (IPOs), giving promoters and investors a possible topic
for debate. SEBI’s decision comes at the backdrop of the YES Bank and IDFC
IPO scams, where fictitious demat accounts kept the retail investor from
getting his share of the IPO allotment.
The recent multiple demat account episode brought into light a few high net
worth investors who resorted to corner shares from IPO issues through multiple
demat accounts posing as retail investors. The fraudulent parties sold the shares
on the day of listing and earned premium on the speculation price. SEBI’s in
order to address the problem of multiple demat accounts, and then took
measures to make IPOs more transparent. The announcement by SEBI’s will
provide investors, in the near future, with the benefit of having their issues
related by credit rating agencies approved by SEBI. By introducing IPO rating,
SEBI intends to enable more realistic pricing of shares and help investors by
providing more detailed information of the issue. According to SEBI, the fee
for rating IPOs will not be borne by the issuer and SEBI has requested the
Ministry of Company Affairs to fund the ratings of IPOs from its Investor
Education and Protection Fund (IEPF). The fund constitutes unpaid dividends,
application money, unpaid debentures and redemption fund. SEBI has listed
CRISIL, Fitch Rating, ICRA and CARE as the rating agencies.
It is to be noted here that the rating of IPOs has been made optional and is not
mandatory. The choice is left to the issuer. It is to be recalled that the plan to
introduce the rating of IPOs was mulled by SEBI some two years back. In May
2004, Sebi planned to introduce mandatory IPO rating covering promoters,
management record and past performance. But today, SEBI decided to make
IPO rating voluntary. It has raised debates and doubts among analysts and
markets.
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Rating of IPOS
An IPO rating is one time relative assessment of fundamentals of the IPO at the
time of issue and is meant to aid interested investors in their decision-making.
The grading is normally on a five-point scale; a high score indicates stronger
fundamentals. The general fundamental areas of rating are the issuer’s
management information, market conditions and potential growth factors. An
IPO assessment carried out by an independent credit rating agency gives
professional and independent assessment of the IPO. The assessment provides
vital information about the company and also creates awareness about the
fundamental strengths and weakness among the investors. The information
provided by the rating agencies will help the investor in allocating his
resources better and maintaining a good portfolio of stocks in his pocket.
According to Sebi, the IPO grading will be expressed on a five-point scale and
is a relative comparison of the assessed fundamentals of the graded issue to
other listed equity securities in the country.
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credible agencies, therefore, will be welcome, as they will help the investor in
making decisions against risky IPO issues.
The success of IPOs in the market in the past two years has encouraged several
companies to enter the market (see Table 1), and the opportunities to invest in
them are bound to be manifold. The grading of IPO on a five-point scale
reflecting the fundamentals of the IPO and the dissemination of information
will be a boon for the investor, as it will help investors to allocate their
resources better.
The IPO grading report, like a credit rating, which is very useful for a debt
investor, will also be of use to the retail investors. The grading of IPO will give
an improved quality of information which can result in stratification of the
market in the hope of raising easy capital. The grading of IPOs will also enable
an investment banker to market a high rated IPO issue, at the same time a
poorly rated IPO will come under the scanner when it is heavily
oversubscribed.
Market circles and analysts entrust that institutional investors collude with
brokers and company managements to organize a variant of the pump-and-
dump scheme by engineering over subscription of public offers at inflated
prices. They aim to dump these shares in the secondary market after
orchestrating a flare up in post-listing prices. Grading IPOs could prevent this
vicious circle.
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8. The South Indian Bank Ltd.
9. Union Bank of India.
1405.28
Source: www.primedatabase.com
The grading of IPOs will pave the way for providing an independent and
informed opinion on the fundamental analysis of the company towards making
a quality decision and at the same time taking steps towards establishing a
scientific manner of setting up procedures in the issue of IPOs.
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gain lucrative investment-banking fees. Sec’s scrutiny of credit rating agencies
found a lack of diligence in identifying credit problems. The cases of Enron
and WorldCom were well-know for fraudulent grading before they went
bankrupt. The well-know credit rating agencies like Standard & Poor’s (S&P)
and Moody’s did not reduce Enron’s credit ratings from investment grade to
junk level until four days before Enron’s doors were shut and WorldCom had
been rated investment grade only months before it went bankrupt.
In view of Sebi announcing its plan of voluntary grading of IPOs, it is to be
kept in mind that the regulator has to safeguard investors from the nexus
between credit rating agencies and investment bankers, as it is possible that the
regulator cleared companies with dubious background for raising public
money. It remains to be seen how Sebi’s ambitious plan succeeds in
safeguarding investors’ interest.
Investment decisions in IPOs are becoming increasingly difficult, given the
flurry of public offers that hit the market these days. Differentiating a good
offer from a bad one, assessing the company fundamentals and verifying the
credentials are becoming more complex. In this backdrop, the Securities and
Exchange Board of India's decision to make IPOs (initial public offers) grading
by credit rating agencies mandatory, is likely to provide some respite to retail
investors. However, the rating is unlikely to throw much light for short-term
investors or traders seeking to make a quick buck from the `listing gains’. We
take a look at what the grading system proposes to do and what changes, if any,
it is likely to bring in.
In a move, which does not appear to have any precedence elsewhere in the
world of capital markets, the SEBI has introduced compulsory grading of
initial public offers that will hit the market from now on. Credit rating agencies
such as the CRISIL and ICRA will grade the various forthcoming IPOs on a
five-point scale from grade 5 (indicating strong fundamentals) to grade 1
(indicating poor fundamentals).
This grading, which will be based on the agencies assessment of company
fundamentals, will consider the following five parameters — earnings per
share, financial risks, accounting quality, corporate governance and
management quality. Thus, the rating awarded to an IPO will mirror the
company's general health in terms of these qualitative and quantitative factors.
The IPO pricing, however, is not factored in for the purpose of rating. These
ratings, apart from being available in the respective offer documents of the
companies, can also be viewed on the respective rating agency's Web site.
Grade 1
For instance, a company X decides to tap the primary market for raising
capital. The rating agencies will now be required to grade the company. This
process will include market checks, plant visits and practice of due diligence
apart from studying the other already-specified macro factors. At the end of the
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process, say, X is awarded grade 1 (indicating poor fundamentals). This would
mean that the company is fundamentally weak and investments in that
company could be risky. However, the rating does not go on to say whether
such an offer is to be avoided or not.
In a similar manner, if X gets a grade 5 (the highest one possible), it does not
mean a blanket approval from the rating agency to invest in the public offer. It
only means that X is fundamentally sound on the basis of metrics used by the
rating agency.
Thus, in general, the grading process that has been introduced is meant to make
the retail investors aware of the health of the company's business. It cannot be
interpreted as a recommendation to invest or avoid any offer that is so rated.
Advantages
IPO grading, a hitherto optional exercise, has been made compulsory to
encourage only serious companies. Over the long-term, it is likely to help SEBI
regulate the IPO market by helping it protect the investors from cases of
vanishing companies. The rating will also facilitate the not-so-well known
companies in tapping the primary market for capital. Retail investors, on the
other hand, stand to benefit the most. The grading system that purports to give
a professional perspective of the company's fundamentals is likely to help
investors establish the credentials of the company they plan to invest in.
Neutral agencies can be more objective in their evaluation of a public offer
compared to other market participants. This apart, it is likely to help investors
weed out companies with poor fundamentals or those with a spurious
background at the preliminary stage itself.
Disadvantages
More often than not, the pricing of any IPO is what influences the decision of
any investor. The rating agencies, in this case, will not talk about ``what price''
and ``what time'' aspects of the offer. Given that the decision to invest or avoid
investments in any IPO is most often a function of the pricing, the lack of this
aspect in the present IPO grading system could make the whole process an
unfinished task. Also, rating agencies (experienced in debt rating) could face
trouble with rating the equities, which, unlike debt rating, is more dynamic and
cannot be standardized. Further, IPO grading mechanism is a globally-unique
initiative; it could increase the cost of raising capital in India and urge
companies to seek capital overseas. Markets, in the short term, can be price-
driven and not purely motivated by company fundamentals. That is to say that,
at times, even good companies at a higher price could be a bad investment
choice, while the not-as-good ones could be a steal at lower prices.
Despite having disclaimers, a higher graded IPO may well tempt small
investors into falsely believing that a high premium would come about on
listing. Similarly, investors may get deluded by a low-graded IPO, which
could become a `missed opportunity' in the future. The purpose of introducing
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grading, thus, might get defeated if it leads to a false sense of buoyancy or
alarm among investors.
Till such time the utility of the IPO grading system is unraveled, it is advisable
for investors to use the grades only as an additional input to make an informed
decision. Investors need to be convinced about the business potential, pricing
and valuations of an IPO, together with the grading, to make a final choice.
2. Circuit Limits
Few days back SEBI shows his intention to put circuit limit on listing of IPO.
Like Parsvanath Developers Ltd it issued share at 300 Rs and on listing date it
went up 650 Rs. Similarly in recent IPO of ICRA it was issued at 330 and it
went to 880 Rs 266% up on its listing day and close at 798 Rs 242%. SEBI for
investors benefit sooner or later will come with this Circuit limit to stop price
volatility.
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Recommendations:
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References
www.bseindia.com
www.nseindia.com
www.bloomberg.com
www.ey.com
www.moneycontrol.com
www.primedatabase.com
www.rbi.gov.in
www.ey.com
Google Search.
Prime Database Directory 2006.
Study Material BSE/NSE.
INDIA-An Investor’s Guide to the Next Economic Superpower.
By Aaron Chaze
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