-

Ms. Shradha

Preface
The financial services sector is an important constituent of the financial system and plays a significant role in the realm of economic development of a country. Merchant banking is a prominent component of the financial sector of our country. Merchant banking provides specialist services including portfolio management, project financing and counseling, issue management & underwriting, mergers, acquisitions, venture capital financing, leasing and so on. Merchant banks play a significant role in the financial services sector. Capital issue management is concerned with the management of issues for raising capital through various types of instruments by corporate. It has to conform to SEBI stipulations. The obligations of the lead merchant banker(s) fall into four groups: (i) pre-issue (ii) post-issue (iii) compliance with other requirements (iv) Operational guidelines prescribed by SEBI. The pre-issue obligations of the merchant banker(s) relate to due diligence, requisite fee, submission of documents, appointment of intermediaries, underwriting, making public the offer document, dispatch of issue material, no-complaints certificate, mandatory collection centers, authorized collection agents, advertisement for right post-issues, appointment of compliance officer and an abridge prospectus.

Syllabus
Module I: Introduction Financial System: An Overview; Merchant Banking: Meaning, importance and its growth in India; Range of Merchant banking services; Merchant banking organizations; Future challenges. Module II: Legal aspects involved in Issue of Securities Rules and regulation of merchant bankers; SEBI (Merchant Bankers) Rules, 1992; Compendium of circulars to merchant bankers. Module III: Pre issue Management Types and characteristics of corporate securities: Shares, Debentures, Other instruments; Procedure of issues of GDR; Selection of instruments; Assessment of going public; Different aspects of issue management, Role of various operations, in the success of Pre-Issue decision making, Pricing and timing of the issue, advertising right issue. Module IV: Post-issue management Naive analysis of collection; Closure of subscription list; Processing; SEBI guidelines regarding post-issue; Obligation of lead managers; Allotment of shares and debentures; Issue of refund orders; Listing and its regulations. Module V: Book-building Process for Public Issues SEBI guidelines; Salient features, procedures; Drafting for offer documents; Determination of pricing; Allocation of securities to members of syndicates; Underwriting agreements, Subscription agreements; Marketing of the issues; Allotment; Activity chart of bookbuilding process, Reverse Book-Building. Module VI: Loan Syndication: Domestic and External

Meaning and its scope; Steps involved in loan syndication; Syndication of working capital loans from banks; Syndication of euro currency loans; Merits and its limitations

Module VII: Performance Evaluation Public and Rights issue analysis; Activity performance; Operational and financial performance; Comparative operational performance, revising of funds through various financial markets instruments.

Text & References: Merchant Banking, Machiraju, H R (Tata McGraw-Hill Publications Ltd) Merchant Banking in India, Laxmana, B C; Naik, C N Krishna (Deep & Deep Publications) Manual of Merchant Banking, Verma, J C (Bharat Law House)

Index
Chapter no. Topic

Introduction of Financial Merchant Banking

system

&

2 3 4

Pre-issue & Post-issue Management Book-Building Mechanism Loan Syndication Evaluation & Performance

Chapter-I Introduction of Financial System

Contents: 1.1 Introduction

1.2 Merchant Banking: an overview

1.3 Function of Merchant bankers

1.4 Rules & regulations

1.5 Future challenges

1.6 Summary

1.7 End Chapter Quiz

Financial System
Introduction to Financial System
The economic development of any country depends upon the existence of a well organized financial system. It is the financial system which supplies the necessary financial inputs for the production of goods and services which in turn promote the well being and standard of living of the people of a country. Thus, the financial system is a broader term which brings under its fold the financial markets and the financial institutions which support the system. The major assets traded in the financial system are money and monetary assets. The responsibility of the financial system is to mobilize the savings in the form of money and monetary assets and invest them to productive ventures. An efficient functioning of the financial system facilitates the free flow of funds to more productive activities and thus promotes investment. Thus, the financial system provides the intermediation between savers & investors and promotes faster economic development.

A financial system plays a vital role in the economic growth of a country. It intermediates with the flow of funds between those who save a part of their income to those who invest in productive assets. It mobilizes and usefully allocates scarce resources of a country. A financial system is a complex well integrated set of sub systems of financial institutions, markets, instruments and services which facilitates the transfer and allocation of funds, efficiently and effectively. The financial system is possibly the most important institutional and functional Vehicle for economic transformation. Finance is a bridge

between the present and the future and whether it be the mobilization of savings or their efficient, effective and equitable allocation for investment, it is the success with which the financial system performs its functions that sets the pace for the achievement of broader national objectives.

The process of savings, finance and investment involves financial institutions, markets, instruments and services. Above all, supervision control and regulation are equally significant. Thus, financial management is an integral part of the financial system. On the basis of the empirical evidence, Goldsmith said that "...a case for the hypothesis that the separation of the functions of savings and investment which is made possible by the introduction of financial instruments as well as enlargement of the range of financial assets which follows from the creation of financial institutions increase the efficiency of investments and raise the ratio of capital formation to national production and financial activities and through these two channels increase the rate of growth" The inter-relationship between varied segments of the economy is illustrated below:

A financial system provides services that are essential in a modern economy. The use of a stable, widely accepted medium of exchange reduces the costs of transactions. It facilitates trade and, therefore, specialization in production. Financial assets with attractive yield, liquidity and risk characteristics encourage saving in financial form. By evaluating alternative investments and monitoring the activities of borrowers, financial intermediaries increase the efficiency of resource use. Access to a variety of financial instruments enables an economic agent to pool, price and exchange risks in the markets. Trade, the efficient use of resources, saving and risk taking are the cornerstones of a growing economy. In fact, the country could make this feasible with the active support of the financial system. The financial system has been identified as the most catalyzing agent for growth of the economy, making it one of the key inputs of development

The Organisation of the Financial System in India The Indian financial system is broadly classified into two broad groups: 1. Organised sector and 2. Unorganised sector. "The financial system is also divided into users of financial services and providers. Financial institutions sell their services to households, businesses and government. They are the users of the financial services. The boundaries between these sectors are not always clear cut. In the case of providers of financial services, although financial systems differ from country to country, there are many similarities. (i) Central bank (ii) Banks (iii) Financial institutions (iv) Money and capital markets and (v) Informal financial enterprises. i) Organised Indian Financial System The organised financial system comprises of an impressive network of banks, other financial and investment institutions and a range of financial instruments, which together function in fairly developed capital and money markets. Short term funds are mainly provided by the commercial and cooperative banking structure. Nine-tenth of such banking business is managed by twenty-eight leading banks which are in the public sector. In addition to commercial banks, there is the network of cooperative banks and land development banks at state, district and block levels. With around two-third share in the total assets in the financial system, banks play an important role. Of late, Indian banks have also diversified into areas such as merchant banking, mutual funds, leasing and factoring. The organised financial system comprises the following sub-systems: 1. Banking system 2. Cooperative system 3. Development Banking system

(i) Public sector (ii) Private sector 4. Money markets and 5. Financial companies/institutions. Over the years, the structure of financial institutions in India has developed and become broad based. The system has developed in three areas - state, cooperative and private. Rural and urban areas are well served by the cooperative sector as well as by corporate bodies with national status. There are more than 4, 58,782 institutions channellising credit into the various areas of the economy. ii) Unorganised Financial System On the other hand, the unorganised financial system comprises of relatively less controlled moneylenders, indigenous bankers, lending pawn brokers, landlords, traders etc. This part of the financial system is not directly amenable to control by the Reserve Bank of India (RBI). There are a host of financial companies, investment companies, chit funds etc., which are also not regulated by the RBI or the government in a systematic manner. However, they are also governed by rules and regulations and are, therefore within the orbit of the monetary authorities.

Formal and Informal Financial Systems The financial systems of most developing countries are characterized by co existence and co operation between formal and informal financial sectors. This co existence of two sectors is commonly referred to as financial dualism . The formal financial sector is characterized by the presence of an organized, institutional and regulated system which caters to the financial needs of the modern spheres of economy; the informal sector is an unorganized, non-institutional and non regulated system dealing with the traditional and rural spheres of the economy.

Components of formal financial system The formal financial system consists of four segments or components. These are: Financial Institutions, Financial markets, financial instruments and financial services. Financial Institutions: Financial Institutions are intermediaries that mobilize savings and facilitate the allocation of funds in an efficient manner. Financial institutions can be classified as banking and non banking financial institutions. Banking institutions are creators of credit while non-banking financial institutions are purveyors of credit. While the liabilities of banks are part of the money supply, this may not be true of non banking financial institutions. Financial institutions can also be classified as the term finance institutions such as IDBI (Industrial development bank of India) ICICI (Industrial credit and investment corporation of India) etc. Financial Markets: Financial markets are the mechanism enabling participants to deal in financial claims. The markets also provide a facility in which their demands and requirements interact to set a price for such claims. The main organized financial markets in a country are normally money market and capital market. The first is market for short term securities while the second is a market for long term securities, i.e. securities having maturity period of one year or more. Financial markets are also classified as primary, market and secondary market. While the primary market deals in new issues, the secondary market deals for trading in outstanding or existing securities. There are two components of the secondary market, OTC (over the counter) market and Exchange traded market. The government securities market is an OTC market, spot trades are negotiated or traded for immediate delivery and payment while in the exchange traded market, trading

takes place over a trading cycle in stock exchanges .Derivatives markets are OTC in some countries and exchange traded in some other countries. Financial Instrument: A financial instrument is a claim against a person or an institution for the payment at a future date a sum of money and/or a periodic payment in the form of interest or dividend. The term and/or implies that either of the payments will be sufficient but both of them may be promised. Financial securities may be primary or secondary securities. Primary securities are also termed as direct securities as they are directly issued by the ultimate borrowers of the funds to the ultimate savers. Examples of primary or direct securities include equity shares and debentures. Secondary securities are also referred to as indirect securities, as they are issued by financial intermediaries to the ultimate savers. Bank deposits, mutual fund units, and insurance policies are secondary securities. Financial instruments differ in terms of marketability, liquidity, reversibility, type of options, return, risk and transaction costs. Financial instruments help the financial markets and the financial intermediaries to perform the important role of channelizing funds from lenders to borrowers.

Financial Services: Financial intermediaries provide key financial services such as merchant banking, leasing, hire purchase, credit-rating, and so on. Financial services rendered by the financial intermediaries bridge the gap between lack of knowledge on the part of investors and increasing sophistication of financial instruments and markets. These financial services are vital for creation of firms, industrial expansion, and economic growth. Before investors lend money, they need to be reassured that it is safe to exchange securities for funds. This reassurance is provided by

the financial regulator who regulates the conduct of the market, and intermediaries to protect the investors interests. The Reserve Bank on India regulates the money market and Securities and Exchange Board of India (SEBI) regulates capital market.

Interaction Among the Components These four sub-systems do not function in isolation. They are interdependent and interact continuously with each other. Their interaction leads to the development of a smoothly functioning financial system. Financial institutions or intermediaries mobilize savings by issuing different types of financial instruments which are traded in financial markets. To facilitate the credit allocation process, they acquire specialization and render specialized financial services. Financial intermediaries have close links with the financial markets in the economy. Financial institutions acquire, hold, and trade financial securities which not only help in the credit-allocation process but also make the financial markets larger, more liquid, and stable and diversified. Financial intermediaries rely on financial markets to raise funds whenever they are in need of some. This increases the competition between financial markets and financial intermediaries for attracting investors and borrowers. The development of new sophisticated markets has led to the development of complex securities and complex portfolios. The evaluation of these complex securities, portfolios, and strategies requires financial expertise which financial intermediaries provide through financial services.

FUNCTIONS OF THE FINANCIAL SYSTEM Financial system is very important for the economic & all round development of any country, its major functions can be explained as following:

Promotion of liquidity The major function of the financial system is the provision of money & monetary assets for the production of goods and services. There should not be any shortage of money for productive ventures. In financial language, the money & monetary assets are referred to as liquidity. In other words, the liquidity refers to cash or money and other assets which can be converted into cash readily without loss. Hence, all activities in a financial system are related to liquidity either provision of liquidity or trading in liquidity. Mobilization of savings Another important activity of the financial system is to mobilize savings and channelise them into productive activities. The financial system should offer appropriate incentives to attract savings and make them available for more productive ventures. Thus, the financial system facilitates the transformation of savings into investment & consumption. The financial intermediaries have to play a dominant role in this activity. A good financial system serves in the following ways: One of the important functions of a financial system is to link the savers and investors and thereby help in mobilizing and allocating the savings efficiently and effectively. By acting as an efficient conduit for allocation of resources, it permits continuous up gradation of technologies for promoting growth on a sustained basis. A financial system not only helps in selecting projects to be funded but also inspires the operators to monitor the performance of the investment. It provides a payment mechanism for the exchange of goods and services and transfers economic resources through time and across geographic regions and industries. One of the most important functions of a financial system is to achieve optimum allocation of risk bearing. It limits, pools, and trades the risks involved in mobilizing savings and allocating credit. An efficient financial system aims at containing risk within acceptable

limits and reducing the cost of gathering and analyzing information to assist operators in taking decisions carefully. It makes available price-related information which is a valuable assistance to those who need to take economic and financial decisions. A financial system minimizes situations where the information is asymmetric and likely to affect motivations among operators or when one party has the information and the other party does not. It provides financial services such as insurance and pension and offers portfolio adjustment facilities. A financial system helps in the creation of a financial structure that lowers the cost of transactions. This has a beneficial influence on the rate of return to savers. It also reduces the cost of borrowing. Thus, the system generates an impulse among the people to save more. A well-functioning financial system helps in promoting the process of financial deepening and broadening. Financial deepening refers to an increase of financial assets as a percentage of Gross Domestic Product (GDP). Financial broadening refers to building an increasing number and a variety of participants and instruments.

FINANCIAL SYSTEM DESIGNS A financial system is a vertical arrangement of a well-integrated chain of financial markets and financial institutions for providing financial intermediation. Different designs of financial systems are found in different countries. The structure of the economy, its pattern of

evolution, and political, technical and cultural differences affect the design (type) of financial system. Two prominent polar designs can be identified among the varieties that exist. At one extreme is the bank-dominated system, such as in Germany, where a few large banks play a dominant role and the stock market is not important. At the other extreme is the marketdominated financial system, as in the US, where financial markets play an important role while the banking industry is much less concentrated. In bank-based financial systems, banks play a pivotal role in mobilizing savings, allocating capital, overseeing the investment decisions of corporate managers, and providing risk-management facilities. In market based financial systems, the securities markets share centre stage with banks in mobilizing the societys savings to firms, exerting corporate control, and easing risk management. The other major industrial countries fall in between these two extremes. In India, banks have traditionally been the dominant entities of financial intermediation. The nationalization of banks, an administered interest rate regime, and the government policy of favouring banks led to the predominance of a bank-based financial system in India. Financial Markets Financial markets are an important component of the financial system. A financial market is a mechanism for the exchange trading of financial products under a policy framework. The participants in the financial markets are the borrowers (issuers of securities), lender (buyers of securities), and financial intermediaries. Financial markets comprise two distinct types of markets: Money market Capital market Money market: A money market is a market for short-term debt instruments (maturity below one year). It is a highly liquid market wherein securities are bought and sold in large denominations to reduce transaction costs. Call money market, certificates of deposit,

commercial paper, and treasury bills are the major instruments/segments of the money market. The function of a money market is To serve as an equilibrating force that redistributes cash balances in accordance with the liquidity needs of the participants; To form a basis for the management of liquidity and money in the economy by monetary authorities; and To provide a reasonable access to the users of short-term money for meeting their requirements at realistic prices. As it facilitates the conduct of monetary policy, a money market constitutes a very important segment of the financial system.

Capital market: A capital market is a market for long-term securities (equity and debt). The purpose of capital market is to Mobilize long-term savings to finance long-term investments; Provide risk-capital in the form of equity or quasi-equity to entrepreneurs; Encourage broader ownership to productive assets; Provide liquidity with a mechanism enabling the investor to sell financial assets; Lower the costs of transactions and information; and Improve the efficiency of capital allocation through a competitive pricing mechanism. A capital market can be further classified into primary and secondary markets. The primary market is meant for new issues and the secondary market is a market where outstanding issues are traded. In other words, the primary market creates long-term instruments for borrowings, whereas the secondary market provides liquidity through the marketability of these instruments. The secondary market is also known as the stock market.

Money Market and Capital Market There is strong link between the money market and the capital market:

Often, financial institutions actively involved in the capital market are also involved in the money market. Funds raised in the money market are used to provide liquidity for longer-term investment and redemption of funds raised in the capital market. In the development process of financial markets, the development of money market typically precedes the development of the capital market.

Characteristics of Financial Markets Financial markets are characterized by a large volume of transactions and a speed with which financial resources move from one market to another. There are various segments of financial markets such as stock markets, bond markets primary and secondary segments, where savers themselves decide when and where they should invest money. There is scope of instant arbitrage among various markets and types of instruments. Financial markets are highly volatile and susceptible to panic and distress selling as the behavior of a limited group of operators can get generalized. Markets are dominated by financial intermediaries who take investment decisions as well as risks on behalf of their depositors. Negative externalities are associated with financial markets. A failure in any one segment of these markets may affect many other segments of the market, including the non financial markets. Domestic financial markets are getting integrated with worldwide financial markets. The failure and vulnerability in a particular domestic market can have international ramifications. Similarly, problems in external markets can affect the functioning of domestic markets. In view of the above characteristics, financial markets need to be closely monitored and supervised.

Functions of Financial Markets

The cost of acquiring information and making transactions creates incentives for the emergence of financial markets and institutions. Different types and combinations of information and transaction costs motivate distinct financial contracts, instruments, and institutions. Financial markets perform various functions such as Enabling economic units to exercise their time preference; Separation, distribution, diversification, and reduction of risk; Efficient payment mechanism; Providing information about companies. This spurs investors to make inquiries themselves and keep track of the companies activities with a view to trading in their stock efficiently; Transmutation or transformation of financial claims to suit the preferences of both savers and borrowers; Enhancing liquidity of financial claims through trading in securities; and Portfolio management. A variety of services is provided by financial markets as they can alter the rate of economic growth by altering the quality of these services.

FINANCIAL SYSTEM AND ECONOMIC DEVELOPMENT The role of financial system in economic development has been a much discussed topic among economists. Is it possible to influence the level of national income, employment, standard of living, and social welfare through variations in the supply of finance?

In what way financial development is affected by economic development? There is no unanimity of views on such questions. A recent literature survey concluded that the existing theory on this subject has not given any generally accepted model to describe the relationship between finance and economic development. The importance of finance in development depends upon the desired nature of development. In the environment-friendly, appropriate-technologybased, decentralized Alternative Development Model, finance is not a factor of crucial importance. But even in a conventional model of modem industrialism, the perceptions in this regard vary a great deal. One view holds that finance is not important at all. The opposite view regards it to be very important. The third school takes a cautionary view. It may be pointed out that there is a considerable weight of thinking and evidence in favour of the third view also. Let us briefly explain these viewpoints one by one. In his model of economic growth, Solow has argued that growth results predominantly from technical progress, which is exogenous, and not from the increase in labour and capital. Therefore, money and finance and the policies about them cannot contribute to the growth process.

Effects of Financial System on Saving and Investment It has been argued that men, materials, and money are crucial inputs in production activities. The human capital and physical capital can be bought and developed with money. In a sense, therefore, money, credit, and finance are the lifeblood of the economic system. Given the real resources and suitable attitudes, a well--developed financial system can contribute significantly to the acceleration of economic development through three routes. First, technical progress is endogenous; human and physical capital is its important sources and any increase in them requires higher saving and investment, which the financial system helps to achieve. Second, the financial system contributes to growth not only via technical progress but also in its own right. Economic development greatly depends on the rate of capital formation. The relationship between capital and output is strong, direct, and monotonic (the position which is sometimes referred to as capital fundamentalism).

Now, the capital formation depends on whether finance is made available in time, in adequate quantity, and on favorable terms-all of which a good financial system achieves. Third, it also enlarges markets over space and time; it enhances the efficiency of the function of medium of exchange and thereby helps in economic development. We can conclude from the above that in order to understand the importance of the financial system in economic development, we need to know its impact on the saving and investment processes. The following theories have analyzed this impact: (a) The Classical Prior Saving Theory, (b) Credit Creation or Forced Saving or Inflationary Financing Theory, (c) Financial Repression Theory, (d) Financial Liberalisation Theory. The Prior Saving Theory regards saving as a prerequisite of investment, and stresses the need for policies to mobilise saving voluntarily for investment and growth. The financial system has both the scale and structure effect on saving and investment. It increases the rate of growth (volume) of saving and investment, and makes their composition, allocation, and utilization more optimal and efficient. It activates saving or reduces idle saving; it also reduces unfructified investment and the cost of transferring saving to investment. How is this achieved? In any economy, in a given period of time, there are some people whose current expenditures is less than their current incomes, while there are others whose current expenditures exceed their current incomes. In well-known terminology, the former are called the ultimate savers or surplus--spending-units, and the latter are called the ultimate investors or the deficit-spending-units. Modern economies are characterized (a) by the ever-expanding nature of business organisations such as joint-stock companies or corporations, (b) by the ever-increasing scale of production, (c) by the separation of savers and investors, and (d) by the differences in the attitudes of savers (cautious, conservative, and usually averse to taking risks) and investors (dynamic and risktakers).

In these conditions, which Samuelson calls the dichotomy of saving and investment, it is necessary to connect the savers with the investors. Otherwise, savings would be wasted or hoarded for want of investment opportunities, and investment plans will have to be abandoned for want of savings. The function of a financial system is to establish a bridge between the savers and investors and thereby help the mobilisation of savings to enable the fructification of investment ideas into realities. Figure below reflects this role of the financial system in economic development.

Relationship Development

between

Financial

System

and

Economic

A financial system helps to increase output by moving the economic system towards the existing production frontier. This is done by transforming a given total amount of wealth into more productive forms. It induces people to hold less savings in the form of precious metals, real estate land, consumer durables, and currency, and to replace these assets by bonds, shares, units, etc. It also directly helps to increase the volume and rate of saving by supplying diversified portfolio of such financial instruments, and by offering an array of inducements and choices to woo the prospective saver. The growth of Banking habit helps to activise saving and undertake fresh saving. The saving is said to be institution-elastic i.e., easy access, nearness, better return, and other favourable features offered by a well-developed financial system lead to increased saving. A financial system helps to increase the volume of investment also. It becomes possible for the deficit spending units to undertake more investment because it would enable them to command more capital. As Schumpeter has said, without the transfer of purchasing power to an entrepreneur, he cannot become the entrepreneur. Further, it encourages investment activity by reducing the cost of finance and risk. This is done by providing insurance services and hedging opportunities, and by making financial services such as remittance, discounting, acceptance and guarantees available. Finally, it not only encourages greater investment but also raises the level of resource allocation efficiency among different investment channels. It helps to sort out and rank investment projects by sponsoring, encouraging, and selectively supporting business units or borrowers through more systematic and expert project appraisal, feasibility studies, monitoring, and by generally keeping a watch over the execution and management of projects. The contribution of a financial system to growth goes beyond increasing prior-saving-based investment. There are two strands of thought in this regard. According to the first one, as emphasized by Kalecki and Schumpeter, financial system plays a positive and catalytic role by creating and providing finance or credit in anticipation of savings. This, to a certain extent, ensures the independence of

investment from saving in a given period of time. The investment financed through created credit generates the appropriate level of income. This in turn leads to an amount of savings, which is equal to the investment already undertaken. The First Five Year Plan in India echoed this view when it stated that judicious credit creation in production and availability of genuine savings has also a part to play in the process of economic development. It is assumed here that the investment out of created credit results in prompt income generation. Otherwise, there will be sustained inflation rather than sustained growth. The second strand of thought propounded by Keynes and Tobin argues that investment, and not saving, is the constraint on growth, and that investment determines saving and not the other way round. The monetary expansion and the repressive policies result in a number of saving and growth promoting forces: (a) if resources are unemployed, they increase aggregate demand, output, and saving; (b) if resources are fully employed, they generate inflation which lowers the real rate of return on financial investments. This in turn, induces portfolio shifts in such a manner that wealth holders now invest more in real, physical capital, thereby increasing output and saving; (c) inflation changes income distribution in favour of profit earners (who have a high propensity to save) rather than wage earners (who have a low propensity to save), and thereby increases saving; and (d) inflation imposes tax on real money balances and thereby transfers resources to the government for financing investment. The extent of contribution of the financial sector to saving, investment, and growth is said to depend upon its being free or repressed (regulated). One school of thought argues that financial repression and the low/ negative real interest rates which go along with it encourage people (i) to hold their saving in unproductive real assets, (ii) to be rent -seekers because of non-market allocation of investible funds, (iii) to be indulgent which lowers the rate of saving, (iv) to misallocate resources and attain inefficient investment profile, and (v) to promote capital intensive industrial structure inconsistent with the factor-endowment of developing countries. Financial liberalisation or deregulation corrects

these ill effects and leads to financial as well as economic development. However, as indicated earlier, some economists believe that financial repression is beneficial.

Merchant Banking
Introduction
The new issue market/activity was regulated by the controller of capital (CCIs) under the provisions of the Capital Issues (control) Act, 1947 and the exemption orders & rules made under it. With the repeal of the Act & the consequent abolition of the office of the CCI in 1992, the protection of the interest of the investors in securities market & promotion of the development & regulation of the market/activity became the responsibility of the SEBI. MERCHANT BANKING Merchant banking may be defined as an institution which covers a wide range of activities such as underwriting of shares, portfolio management, project counseling, insurance etc. They render all these services for a fee ORIGIN : The term merchant banking originated from the London who started financing foreign trade through acceptance of bills Later they helped government of under developed countries to raise long term funds Later these merchants formed an association which is now called Merchant Banking and Securities House Association

Merchant Bankers The merchant bankers as sponsors of capital issues is reflected in their major services/ functions such as, determining the composition of the capital structure (type of securities to be issued), draft of prospectus(offer documents) and application forms, compliance with procedural formalities, appointment of registrars to deal with the share application & transfers, listing of securities, arrangement of underwriting/sub-underwriting, placing of issues, selection of brokers

& bankers to the issue, publicity & advertising agents, printers, and so on. Registration SEBI (Merchant Bankers) Regulation Act, 1992 defines a Merchant Banker as any person who is engaged in the business of issue management either by making agreements regarding selling, buying or subscribing to securities or acting as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management. At present no organization can act as a Merchant Banker without obtaining a certificate of registration from the SEBI. However, it must be noted that a person/organization has to get him registered under these regulations if he wants to carry on or undertake any of the authorized activities, i.e., issue management assignment as manager, consultant, advisor, underwriter or portfolio manger. To obtain the certificate of registration, one had to apply in the prescribed form and fulfill two sets of norms A. Operational capabilities B. Capital adequacy norms

Compulsory Registration Merchant bankers require compulsory registration with the SEBI to carry out their activities. Earlier they fell under four categories. Classification of Merchant Bankers Category I Merchant Bankers. These merchant bankers can act as issue manager, advisor, consultant, underwriter & portfolio manager. Category II merchant Bankers. Such merchant bankers can act as advisor, consultant, underwriter & portfolio manager. They cannot act as issue manager of their own but can act co-manager.

Category II Merchant Bankers. They are allowed to act as advisor, consultant & underwriter only. They can neither undertake issue management of their own nor do they act as co-manager. They can not undertake the activities of portfolio management also. Category IV Merchant Bankers. A category IV Merchant Banker can merely act as consultant or advisor to an issue of capital.

Capital Adequacy Norms

SEBI has prescribed capital adequacy norms for registration of the various categories of merchant bankers. The capital adequacy is expressed in terms of minimum net worth, i.e., capital contributed to the business plus free reserves. The following are the capital adequacy norms as laid down by SEBI.

Capital Adequacy Norms Category of Merchant Bankers Category I Category II Category III Category IV Minimum Net Worth Rs. 5 crore Rs. 50 Lakh Rs. 20 Lakh Nil

Fees
According to the SEBI (Merchant Bankers) Amendment Regulations, 1999, w.e.f. 30.09.1999, every merchant banker shall pay a sum of Rs. 5 lakhs as registration fees at the time of grant of certificate by the board. The fee shall be paid by the merchant banker within 15 days of receipt of intimation from the board. Further, a merchant banker to

keep registration in force shall pay renewal fee of Rs. 2.5 lakhs every three years from the forth year from the date of initial registration.

Functions of Merchant Banks

The basic function of merchant banker or investment banker is marketing corporate & other securities. In the process, he performs a number of services concerning various aspects of marketing, viz., origination, underwriting, and distribution, of securities. The activities or services performed by merchant banks, in India, today include: 1. Project promotion services 2. Project finance 3. Management & marketing of new issues 4. Underwriting of new issues 5. Syndication of credit 6. Leasing services 7. Corporate advisory services 8. Providing venture capital 9. Operating mutual fund 10. Investment management or portfolio management services 11. Bought out deals 12. Providing assistance for technical & financial collaborations & joint ventures 13. Management of & dealing in commercial paper. 14. Investment services for non-resident Indians 15. Servicing of issues, etc.

The large variety of functions performed by a merchant bank may be studied under the following heads: A. Promotional activities. A merchant bank functions as promoter of industrial enterprises in India. He helps the entrepreneur in conceiving an idea, identification of projects, preparing feasibility reports, obtaining Government approvals, & incentives, etc. some of the merchant banks also provide

assistance for technical & financial collaborations & joint ventures. B. Issue management. In the past, the function of a merchant banker had been mainly confined to the management of new public issues of corporate securities by the newly formed companies, existing companies (further issues) and the foreign companies in dilution of equity as required under FERA. Management of issues involves marketing of corporate securities ie equity shares, preference shares and debentures by offering them to public. Pre-issue activities: They prepare copies of prospectus and send it to SEBI and then file them to Registrar of Companies They conduct meetings with company representatives and advertising agencies to decide upon the date of opening issue, closing issue, launching publicity campaign etc. They help the companies in fixing up the prices for their issues Post-issue activities: It includes collection of application forms, screening of applications, deciding allotment procedure, mailing of allotment letters, share certificates and refund orders

C. Credit Syndication. Merchant banks provide specialized services in preparation of project, loan applications for raising short-term as well as long term credit from various banks & financial institutions, etc. They also manage Euro-issues & help in raising funds abroad. Assistance is rendered to raise loans for projects after determining promoters contribution. These loans can be obtained from a single institution or a consortium.

D. NRI INVESTMENT: NRIs has to follow lots of complicated rules for investing in the shares in India. Merchant bankers help them in choosing the shares and offer expert advice fulfilling government regulations thus mobilising more resources for corporate sector.

E. Portfolio Management. Merchant banks offer services not only to the companies issuing the securities but also to the investors. They advise their clients, mostly institutional investors, regarding investment decisions. Some merchant bankers are operating mutual funds & off shore funds also. Portfolio refers to investment in different kinds of securities such as shares, debenture issued by different companies. It is a combination of assets but a carefully blended asset combination. Portfolio management refers to maintaining proper combination of securities in a manner that they give maximum return Investors are interested in safety, liquidity and profitability of his investment but they cant choose the appropriate securities. So merchant bankers help their investors in choosing the shares. They conduct regular market and economic surveys.

F. Leasing & Finance. Many merchant bankers provide leasing & finance facilities to their customers. Some of them even maintain venture capital funds to assist the entrepreneurs. They also help companies in raising finance by way of public deposits. G. Servicing of Issues. Merchant banks have also started to act as paying agents for the service of debt-securities & to act as registrars & transfer agents. Thus, they maintain even the registers of shareholders & debenture holders & arrange to pay dividend or interest due to them. H. Other specialized services. In addition to the basic activities involving marketing of securities, merchant banks also provide corporate advisory services on issue like mergers & amalgamations, tax matters, recruitment of executives & cost & management audit, etc. Many merchant bankers have also started making of bought out deals of shares & debentures. The activities of the merchant bankers are increasing with the change in the money market.

I. ADVISORY SERVICE RELATING TO MERGERS AND TAKEOVERS: Merger is a combination of two or more companies into a singe company where one survives and other loses its existence Takeover is the purchase by one company acquiring controlling interest in the share capital of another company Merchant banker acts as middlemen between offeror and offeree, negotiates mode of payment and gets approval from government. J. PROJECT COUNSELLING: It includes preparation of project reports, deciding upon the financing pattern, appraising the project relating to its technical, commercial and financial viability. It includes filling up of application forms for obtaining funds from financial institutions. K. OFF SHORE FINANCE: Merchant bankers help their clients in: Long term foreign currency loan Joint venture abroad financing exports and imports Foreign collaboration arrangement. L. UNDERWRITING OF PUBLIC ISSUES: Underwriting is insurance to the company which makes public issues. Raising of external resources is easy for the issues backed by well known underwriters. M. MANAGERS, CONSULTANTS OR ADVISERS TO THE ISSUE: SEBI insist that all issues should be managed by atleast one authorised merchant banker but not more than two. For an issue of 100 crores, upto a maximum of four merchant bankers shall be appointed. They help in listing of shares in stock exchange, completion of formalities under Companies Act etc..

BANKS PROVIDING MERCHANT BANKING SERVICES IN INDIA Commercial banks Foreign banks like National Grindlays Bank, Citibank, HSBC bank etc.. Development banks like ICICI,IFCI,IDBI etc.. SFC , SIDCs Private firms like JM Financial and Investment service , DSP Financial Consultants, Ceat Financial Services,Kotak Mahindra, VMC Project Technologies, Morgan Stanley, Jardie Fleming, Klienwort Benson etc

GUIDELINES FOR MERCHANT BANKERS: SEBIs authorization is a must to act as merchant bankers. Authorisation criteria include Professional qualification in finance, law or business management Infrastructure like office space, equipment and man power Capital adequacy Past track of record, experience, general reputation and fairness in all transactions Every merchant banker should maintain copies of balance sheet, Profit and loss account, statement of financial position Half-yearly unaudited result should be submitted to SEBI Merchant bankers are prohibited from buying securities based on the unpublished price sensitive information of their clients SEBI has been vested with the power to suspend or cancel the authorisation in case of violation of the guidelines Every merchant banker shall appoint a Compliance Officer to monitor compliance of the Act SEBI has the right to send inspecting authority to inspect books of accounts, records etc of merchant bankers Inspections will be conducted by SEBI to ensure that provisions of the regulations are properly complied An initial authorisation fee, an annual fee and renewal fee may be collected by SEBI A lead manager holding a certificate under category I shall accept a minimum underwriting obligation of 5% of size of issue or Rs.25 lakhs whichever is less

SOME PROBLEMS OF MERCHANT BANKERS SEBI stipulates high capital adequacy norms for authorization which prevents young, specialized professionals into merchant banking business Non co-operation of the issuing companies in timely allotment

of securities and refund of application of money etc. is another problem Yet merchant banking is vast but should develop adequate expertise to provide a full range of merchant banking services.

CODE OF CONDUCT FOR MERCHANT BANKERS 1. A Merchant Banker shall make all efforts to protect the interests of investors. 2. A Merchant Banker shall maintain high standards of integrity, dignity and fairness in the conduct of its business. 3. A Merchant Banker shall fulfill its obligations in a prompt, ethical, and professional manner. 4. A Merchant Banker shall at all times exercise due diligence, ensure proper care and exercise independent professional judgment. 5. A Merchant Banker shall endeavor to ensure that6. inquiries from investors are adequately dealt with; 7. grievances of investors are redressed in a timely and appropriate manner; 8. where a complaint is not remedied promptly, the investor is advised of any further steps which may be available to the investor under the regulatory system. 9. A Merchant Banker shall ensure that adequate disclosures are made to the investors in a timely manner in accordance with the applicable regulations and guidelines so as to enable them to make a balanced and informed decision. 10. A Merchant Banker shall endeavor to ensure that the investors are provided with true and adequate information without making any misleading or exaggerated claims or any misrepresentation and are made aware of the attendant risks before taking any investment decision. 11. A Merchant Banker shall endeavor to ensure that copies of the prospectus, offer document, letter of offer or any other related literature is made available to the investors at the time of issue or the offer. 12. A Merchant Banker shall not discriminate amongst its clients, save and except on ethical and commercial considerations.

13. A Merchant Banker shall not make any statement, either oral or written, which would misrepresent the services that the Merchant Banker is capable of performing for any client or has rendered to any client. 14. A Merchant Banker shall avoid conflict of interest and make adequate disclosure of its interest. 15. A Merchant Banker shall put in place a mechanism to resolve any conflict of interest situation that may arise in the conduct of its business or where any conflict of interest arises, shall take reasonable steps to resolve the same in an equitable manner. 16. A Merchant Banker shall make appropriate disclosure to the client of its possible source or potential areas of conflict of duties and interest while acting as Merchant Banker which would impair its ability to render fair, objective and unbiased services. 17. A Merchant Banker shall always endeavor to render the best possible advice to the clients having regard to their needs. 18. A Merchant Banker shall not divulge to anybody either orally or in writing, directly or indirectly, any confidential information about its clients which has come to its knowledge, without taking prior permission of its clients, except where such disclosures are required to be made in compliance with any law for the time being in force. 19. A Merchant Banker shall ensure that any change in registration status / any penal action taken by the Board or any material change in the Merchant Bankers financial status, which may adversely affect the interests of clients / investors is promptly informed to the clients and any business remaining outstanding is transferred to another registered intermediary in accordance with any instructions of the affected clients. 20. A Merchant Banker shall not indulge in any unfair competition, such as weaning away the clients on assurance of higher premium or advantageous offer price or which is likely to harm the interests of other Merchant Bankers or investors or is likely to place such other Merchant Bankers in a disadvantageous position while competing for or executing any assignment. 21. A Merchant Banker shall maintain arms length relationship between its merchant banking activity and any other activity.

22. A Merchant Banker shall have internal control procedures and financial and operational capabilities which can be reasonably expected to protect its operations, its clients, investors and other registered entities from financial loss arising from theft, fraud, and other dishonest acts, professional misconduct or omissions. 23. A Merchant Banker shall not make untrue statement or suppress any material fact in any documents, reports or information furnished to the Board. 24. A Merchant Banker shall maintain an appropriate level of knowledge and competence and abide by the provisions of the Act, regulations made thereunder, circulars and guidelines, which may be applicable and relevant to the activities carried on by it. The merchant banker shall also comply with the award of the Ombudsman passed under Securities and Exchange Board of India (Ombudsman) Regulations, 2003. 25. A Merchant Banker shall ensure that the Board is promptly informed about any action, legal proceedings etc., initiated against it in respect of material breach or non compliance by it, of any law, rules, regulations, directions of the Board or of any other regulatory body. (a) A Merchant Banker or any of its employees shall not render, directly or indirectly, any investment advice about any security in any publicly accessible media, whether real-time or non real-time, unless a disclosure of his interest including a long or short position, in the said security has been made, while rendering such advice. (b) In the event of an employee of the Merchant Banker rendering such advice, the merchant banker shall ensure that such employee shall also disclose the interests, if any, of himself, his dependent family members and the employer merchant banker, including their long or short position in the said security, while rendering such advice. 26. A Merchant Banker shall demarcate the responsibilities of the various intermediaries appointed by it clearly so as to avoid any conflict or confusion in their job description.

27. A Merchant Banker shall provide adequate freedom and powers to its compliance officer for the effective discharge of the compliance officers duties. 28. A Merchant Banker shall develop its own internal code of conduct for governing its internal operations and laying down its standards of appropriate conduct for its employees and officers in carrying out their duties. Such a code may extend to the maintenance of professional excellence and standards, integrity, confidentiality, objectivity, avoidance or resolution of conflict of interests, disclosure of shareholdings and interests etc. 29. A Merchant Banker shall ensure that good corporate policies and corporate governance are in place. 30. A Merchant Banker shall ensure that any person it employs or appoints to conduct business is fit and proper and otherwise qualified to act in the capacity so employed or appointed (including having relevant professional training or experience) 31. A Merchant Banker shall ensure that it has adequate resources to supervise diligently and does supervise diligently persons employed or appointed by it in the conduct of its business, in respect of dealings in securities market. 32. A Merchant Banker shall be responsible for the acts or omissions of its employees and agents in respect of the conduct of its business. 33. A Merchant Banker shall ensure that the senior management, particularly decision makers have access to all relevant information about the business on a timely basis. 34. A Merchant Banker shall not be a party to or instrumental for creation of false market; price rigging or manipulation or; passing of unpublished price sensitive information in respect of securities which are listed and proposed to be listed in any stock exchange to any person or intermediary in the securities market.

Chapter-I Introduction of Financial system & Merchant Banking

End Chapter quizzes

1. In recent years, financial markets have become more stable and less risky. 2. Financial innovation has provided more options to both investors and borrowers. 3. A financial intermediary borrows funds from people who have saved. 4. Financial markets and institutions (a) involve the movement of huge quantities of money. (b) affect the profits of businesses. (c) affect the types of goods and services produced in an economy. (d) do all of the above. (e) do only (A) and (B) of the above. 5. __________ are the economies Central nervous system. a. Financial Instruments b. Financial Markets c. Financial Institutions d. Financial Companies

6. The most important economic function of financial institutions is: a. financial intermediation. b. setting the interest rates for personal loans and commercial paper. c. redistributing income and wealth. d. creating money through loans from excess reserves. e. facilitating the financing of federal budget deficits.

7. a. b. c. d.

Primary and Secondary markets compete with each other complement each other function independently control each other

8. The markets in which the general public is least likely to learn about activities are: a. primary markets. b. secondary markets. c. money market markets. d. residential real estate markets. 9. Money markets can broadly be characterized as: (a) wholesale markets. (b) direct markets. (c) primary markets. (d) secondary markets. 10. The best-known capital market securities are. (a) CDs and stocks. (b) mutual funds and bonds. (c) commodities and futures. (d) stocks and bonds.

Chapter-II Pre-issue & Post-issue Management

Contents: 2.1 Introduction of Issue Management 2.2 Pre-issue Management 2.3 Post-issue Management 2.4 Summary 2.5 End chapter Quiz

ISSUE MANAGEMENT

Introduction Issue management, now days, is one of the very important fee based services provided by the financial institutions. In recent past various companies have entered into issue management activities. Still there are very few large scale and specialized issue management agencies in the country. With the growth of stock market and opening up of economy, the scope for issue management activity is widening day by day. To protect the investors interest and for orderly growth and development of market, SEBI has put in place guidelines as ground rules relating to new issue management activities. These guidelines are in addition to the company law requirements in relation to issues of capital / securities. Financial instruments can be classified into two main groups share capital and debt capital. There are various other classifications in each of the two categories. Also, there are various types of companys i.e. listed, unlisted, public, private etc. For each of them SEBI has issued comprehensive guidelines, related to issue of financial instruments.

Types of Issues

MARKET GUIDANCE FOR THE ISSUE OF SECURITIES (Securities and Exchange Commission , Ghana) The following guidelines are provided to aid the process of issuing securities to the public. These guidelines will be used in all Initial Public Offers (IPO) as well as Additional Listings in which case the details will be varied as the case may be. I. OFFER DOCUMENT SUBMISSION REQUIREMENTS a. Time Frame The circular of 5th December 2002, which was distributed to all Licensed Dealing Members, the Stock Exchange, Investment Advisers, and Listed Companies, refers. You are reminded that the circular requires draft prospectuses or documents to be submitted to the Commission at least 6 weeks before the proposed date for the opening of an offer. This does not mean that the Commission will take 6 weeks to process the application in each case. The processing time may be more or less than 6 weeks depending on how much review has to be done. It will also depend to a great extent on the nature of the document, the gravity of the issues raised, and how quickly sponsors respond to issues that will be raised during the process. In every case the Commission will endeavor to act as quickly as possible. b. Prospectus and Supporting Documents An application for the approval of an offer document shall be addressed to the Director General of the SEC. Every application for approval shall be accompanied with two draft offer documents for review and examination. After the review has been completed, ten copies of the final draft offer document shall be submitted for onward submission to the members of the Approvals Committee. Copies of the following documents should be submitted with the draft prospectus/document: All resolutions passed by shareholders in respect to the offer and

the company.

referenced in the prospectus as available for inspection during the offer period. II. REVIEW PROCESS The Commission will acknowledge receipt of a draft prospectus within five working days. It is important to note that the minimum processing period of six-weeks shall be effective only when the Commission is satisfied with the completeness on the face of it, of the draft prospectus, and this shall be communicated to the Lead Manager. It is therefore the duty of the Lead Manager to ensure the completeness and accuracy of the prospectus before submitting it to the Commission. The review process itself, is to establish that the prospectus has been prepared in accordance with the Securities and Exchange Regulations, 2003 (L.I. 1728) and contains adequate disclosure. During the review the Commission will, 1. schedule meetings with sponsor (and/or issuer) to discuss issues that need to be discussed. 2. advise amendments to the timetable as may be necessary in view of issues that arise. III. RESPONSIBILITIES OF THE SPONSOR AND ISSUER DURING THE EXAMINATION AND APPROVAL PERIOD The sponsor/issuer will be required to cooperate fully with the Commission during the process. Any new material information regarding the issue/issuer that becomes available during the period (from the submission of the application to the SEC until the Offer closes) must be communicated to the SEC and incorporated in the offer document. The Commission will treat any such information that is not disclosed as material withheld. Appropriate sanctions will apply in the event of such conduct.

The issuer may proceed on a publicity campaign during this period with the sole intention of generating interest of the investing public and to solicit commitments in the offer. IV. LAUNCHING AND OPENING OF THE OFFER The offer can be launched and declared open only after the Commissions approval of the prospectus or offer document has been given in writing. It is only then that the timetable for the offer can be fixed and presented to the Commission for approval. The prospectus should then be made available to the public and investors can formally apply for the shares. Where the issuer intends to use mini prospectuses, the Commission needs to be informed about this. It should be stated on the front cover that the Mini Prospectus should be read in conjunction with the full prospectus. Full Prospectuses should be made available for inspection and for applicants who wish to have them. During the offer period the issuer can continue to advertise or promote the issue to ensure success, but cannot introduce any new information that is not already disclosed in the prospectus or offer document without prior permission from the Commission. Both Manager and Issuer however, have an obligation to report to the Commission on any new information that is material to the offer, and to do so in a timely manner. Such new material information will be disclosed to the public in the form of an addendum or by way of a publication or any other mode of dissemination as the SEC may direct. The Commission has the power to invalidate the offer should the circumstances so warrant. V. USE OF THE ESCROW ACCOUNT The Commission requires the use of an escrow account for the lodgement of all subscription monies for any public issue of securities. A template for a typical escrow agreement is available at the SEC for guidance. The following procedures are to be followed in the use of an escrow account. 1. Open an Escrow account at a bank and submit the Agreement to the SEC. 2. Escrow accounts shall be non-interest bearing.

3. All subscription monies shall be paid directly into the escrow account. 4. The escrow account shall not be debited except as a result of returned cheques, refund of over subscription monies, or the payment of the offer amount to the issuer. 5. All refunds shall be paid out of the escrow account that received the monies. 6. Refunds shall be in the form of printed cheques (like dividend warrants) payable to subscribers and may be opened for cash on request. 7. A statement of account of the escrow account shall be submitted to the Commission within 14 days after the close of the offer. 8. A bank issuing shares to the public may not hold its own escrow account. During the period of refunding money to subscribers the Commission shall be furnished with periodic (fortnightly) reports on the status of the refund process. VI. EXTENSION OF THE OFFER PERIOD Sponsors of the offer may apply to the Commission for an extension of the offer period. The following points should guide such requests. 1. Problems that may affect the success of the offer must be brought to the notice of the Commission before the offer closes. 2. The Commission will consider applications for extension on a casebycase basis, especially in situations where market dynamics may have created a situation that might have affected the overall response to an offer. 3. The sponsor/issuer is required to monitor the progress of the offer and the market as a whole during the offer period, and this must be demonstrated to the Commission. An application for extension therefore should be made at least one week before the close of the offer(and not after the Offer has closed), stating tangible reasons for the request. The Commission has the discretion to approve or decline the request. 4. The Commission will respond to an extension request within 2 days of receipt of the request in writing.

VII. REPORT ON THE OUTCOME OF THE OFFER Regulation 33 (5) of the L.I. 1728 requires a person performing the functions of an issuing house or a manager of a public issue of securities to submit to the Commission, a report on the offer. This report should be submitted within 14 days (two weeks) after the close of the offer, and shall include among others information on the Offer such as: 1. Total number of applications 2. Total subscription amount 3. Basis of allotment 4. Amount raised after allotments (if that is the case) 5. List of the top twenty after the flotation 6. Distribution of the shares 7. Statistics of the allotment Anyone who contravenes the provision of this regulation is liable for the payment of a penalty of 1m for each day that the default subsists. The fee for the examination and approval of a prospectus or offer document shall be based on the amount realized for the shares issued. This fee should accompany the report. The fees as set out in Schedule 2 of L.I. 1728 are as follows: a) 1 million for any offer where the value is less than or equal to 1 billion b) 0.05% of the offer where the value of the offer is greater than 1 billion VIII. REFUND OF MONEY IN THE CASE OF AN UNSUCCESSFUL ISSUE In the event that the minimum subscription is not attained, monies must be returned to applicants immediately after the offer closes. The refund shall be made in accordance with section 284 (4) of the Companies Code. The Lead Manager/Issuer shall cause a publication in a newspaper of national circulation and announcements on local radio stations on how and where subscribers are to collect refunds.

IX. ALLOTMENT Under the Plan of Distribution in schedule five of the L.I. 1728, the offer document shall provide information on the allotment policy, which will be adopted if applications exceed the securities on offer. The regulations do not make any provision for an allotment period, especially in the event of over-subscription or where the total applications for an issue far exceed expectations. This has been taken into consideration in preparing these guidelines, and should be factored into the structure of the offer timetable. The responsibilities of the Manager of a public issue of securities after the offer closes includes the following: 1. Submitting a report pursuant to Regulation 33 (5) 2. Allotting the shares to successful applicants 3. Issuing and dispatching certificates to successful applicants 4. Refunding excess monies 5. Commence trading in the shares In the light of recent developments with the floatation of IPOs, the Commission reminds managers that they must ensure that they keep to the timetable set out in offer documents and the Commission will enforce same. X. REFUND OF MONEY OVERSUBSCRIBED SHARES In the event that the shares on offer are over-subscribed, monies should be returned to applicants within ten (10) days after the allotment of shares. Any refunds that are returned after the deadline shall attract interest at the Bank of Ghana Prime Rate. The Commission hereby emphasises that proceeds from the offer shall be held in the escrow account, and refunds shall be made out of this account directly to subscribers. The Commission shall consider refund as having been dispatched to subscribers where the following conditions have been fulfilled: 1. As set out in the offer prospectus. Using the stated mode of dispatch By the stated date of dispatch For the full refund amount (including the correct computation of interest if that is the case)

If refund has been sent out by registered mail to individual subscribers, evidence of such dispatch should be made available. 2. If the refund is being affected through receiving brokers, then dispatch shall be considered concluded when the following are all in place, Brokers have received a list of subscribers and amount due to each, Brokers have received the full refund amount, and The public has been informed of the availability of refund monies at the brokerage houses. If refunds occur later than the date indicated in the prospectus, then the SEC shall consider the process complete only when the Manager has notified subscribers of the refund. Until the refund process is complete the Commission will require periodic (weekly) reports on the refund of excess subscription monies. XI. DISPATCH OF CERTIFICATES AND THE COMMENCEMENT OF TRADING All share certificates must be dispatched at least one week before trading can commence. 1. Mode of dispatch of Certificates shall be according to the provisions of the prospectus. 2. If dispatch of certificates and or excess monies occurs later than the date indicated in the prospectus, the manager for the floatation has an obligation to inform applicants/subscribers of a new timetable via a medium that is acceptable by the SEC. NOTICE ON INITIAL PUBLIC OFFER (IPO) AND RIGHTS ISSUES The following guidelines are provided to aid the process of issuing securities to the public. INITIAL PUBLIC OFFER (IPO) AND RIGHTS ISSUES A. PUBLIC OFFERS

In the light of increased issues of securities to the public and recent developments with the flotation of IPOs, it has become necessary for the Commission to provide a guide to the market to streamline the process. In furtherance of the above, the attached guidelines have been developed by SEC. The guidelines are based on the provisions of the Securities and Exchange Regulations 2003, LI 1728 and do not replace the Law and Regulations. The Commission in addition to the provisions set out in Regulation 51 and Schedule 5 Part II A of LI 1728, issues the following notices to guide market participants. Issuers are reminded that the proceeds of any public offer/ rights issue are to be used in strict accordance with the purpose(s) indicated in the offer document. -IPO /PostRights Issue inspections to ascertain whether proceeds of the IPO / Rights Issue have been / are being utilised as indicated in the offer document. uired to disclose all fees to be paid out to persons or bodies in pursuance of the IPO / Rights Issue. The Commission shall require the refund of all amounts disbursed from the proceeds of the offer which were not disclosed e.g. success fees and other such fees however described. The Lead Manager shall be required to refund all such monies which were illegally paid out to recipients. The Commission reserves the right to investigate all payments to be paid out to persons or bodies in pursuance of the IPO / Rights Issue. The Commission wishes to remind Issuers that full disclosure of use of proceeds of IPO / Rights Issue is a requirement under the law as it enables investors to make informed decisions.

B. APPROVAL REQUIRED IN THE INSTANCE OF CHANGE OF USE OF THE IPO /RIGHTS ISSUE FUNDS AS CONTAINED IN PROSPECTUS Issuers shall require the approval of the Issuers registered shareholders granted at an Annual General Meeting or Extraordinary General Meeting before funds raised by the offer are used for any other purpose other than those disclosed in the offer document. A resolution to this effect when taken shall be communicated to the Commission. 2 The involvement and / or decisions of shareholders in the abovementioned action at the AGM or EGM is necessary as the law requires that the shareholders receive full disclosure of all information that will enable them to make an informed decision. C. FLOTATION EXPENSES The Securities and Exchange Commission acknowledges that some expenses must necessarily be incurred in any Initial Public Offer or Rights Issue. The Commission has however noted with disquiet that the flotation expenses incurred in some IPOs / Rights Issues amount to as much as 10% of the proceeds raised. The Commission is concerned that such expenditure prejudices the purpose for which the money was ostensibly raised, i.e. the proposed expansion of the Issuers business. As the underlying purpose of the flotation is the increased value of the shareholders investment, the Issuer should endeavour to increase or maximize the net proceeds of the flotation for the expansion of the business. The Commission therefore directs that total flotation costs should not exceed 5% of the total amount to be raised. D. REPORTING ACCOUNTANT LI 1728 Regulation 51 and Schedule 5 requires that an Offer Document should contain a report by an accountant, i.e. normally referred to as the reporting accountant. The law also requires that the reporting accountant should be an accountant qualified to be appointed auditors

of the issuer or other qualified accountants acceptable to SEC. The offer document should contain disclosures, on the identity and addresses of the issuers auditors and reporting accountants. Further to these statutory requirements, the Commission has determined that for the protection of investors and to ensure transparency and independence of functions, the reporting accountant in a public issue: 1. shall not be the same as the Issuers external auditors; 2. shall not be the same as the Issuers accountants who may be carrying out normal accounting functions or performing any other services for the Issuer.

E. INTRODUCTION OF PROCESSING FEE FOR REVIEW OF PROSPECTUSES The SEC in its review of prospectuses submitted by proposed Issuers, has found it necessary to offer both technical advice and editorial services to Issuers in order that their offer documents meet international standards. The SEC has on numerous occasions had to perform this preliminary (and often extensive) screening before the offer documents are laid before the Approval & Licensing Committee. This service which the SEC has hitherto been providing gratis takes a heavy toll on the SECs human resources and detracts from its other statutory duties. 3 The Commission is of the view that it is proper Issuers pay for this crucial and invaluable service it provides as in other emerging markets. The Commission has therefore proposed the following scale of st processing fees for the review of prospectuses with effect from 1 July 2006 (proposed starting date): 1. 20,000,000.00. for first submission

2. 10,000,000.00. for all re-submission due to material omissions or discrepancies identified by the Commission after initial review at the first submission. ISSUED BY SECURITES AND EXCHANGE COMMISSION nd 2 AUGUST 2006 (Source: http://www.secghana.org/aboutus/commissioners.asp)

SECONDARY MARKET

Securities market: Trends and current market situation in Africa With a market capitalization of USD 600 billion, the South African (Johannesburg) market is the fourth largest emerging market in the World (after Korea, Russia and India; before Brazil, China and Hong Kong). Yet even Johannesburg is not a big enough market to retain the primary listings of several of South Africas largest companies. Altogether, 21 of the companies listed in Johannesburg have their primary listings elsewhere, including the mining conglomerate Anglo American, the banking group Investec, the brewing company SABMiller, the insurance giant Old Mutual and the technology company Dimension Data, all of which have their primary listings in London. This shows that the context in which African securities markets are operating is one in which the larger companies will be looking abroad as well as to the home market. There are 15 organized securities markets in Africa. Several other projects are under discussion, or partly implemented, but without any activity so far. (This does not count Cameroon and Gabon both of which recently established stock exchanges but have not attracted any listings yet.) One exchange, the BRVM headquartered in Abidjan, caters to the eight country UEMOA zone, having been expanded from the Abidjan stock exchange created in 1976. Four other exchanges were started in the days of the British Empire, those with headquarters at Nairobi, Lagos, Harare and Johannesburg, the latter two having histories going back into the 19th Century. The older exchanges also

have the largest number of equities listed. These five, along with those established in 1988-89 in Botswana, Ghana and Mauritius, are the only exchanges with market capitalization at end-2004 in excess of 10 per cent of GDP, even though market capitalization has been increasing in recent years (Figure 2.15). Trading data shows a different aspect of the contribution of stock exchanges in developing countries. It is influenced by secondary market liquidity and also by the degree to which a large fraction of the shares in developing markets are effectively locked-up in the strategic stakes of controlling shareholders and are not normally available for trading. It should be noted in this context that funds actually raised on these as on most capital markets are but a tiny fraction of market capitalization. The eight oldest exchanges also have the most trading, with value traded fluctuating around 2 per cent of GDP for the past several years (Table 2.4 ). Even these more active African exchanges (Johannesburg aside) cannot be considered to have much trading. Except for Johannesburg, turnover on all markets is less than 15 per cent of market capitalization. There was no trading on the Maputo exchange in 2004. Low turnover is reflected in, and feeds back onto, a lack of liquidity as illustrated by large gaps between buy and sell orders, and high price volatility. This lack of transactions is also somewhat reinforcing, as the transaction volume does not justify investment in technology either by the exchange itself or member brokers. Limited trading discourages listing and raising money on the exchanges. Even linking different centers electronically (as for example in the BRVM, or with the case of Namibia whose stock exchange is now electronically linked to the JSE) cannot guarantee much more trading and liquidity.

The small size and illiquidity of Africas stock exchanges partly reflects low levels of economic activity, making it hard to reach a minimum efficient size or critical mass, and partly also the state of company accounts and their reliability. Several of the exchanges established in the late 1980s and 1990s were set up mainly in order to facilitate privatization, and in the hope of attracting inward investment with the modernization and technology transfer that that could convey

(Moss, 2003). For example, the stock exchange in Maputo was established in the process of privatizing Mozambiques national brewery, which is still the only listed company and which has to bear the operating costs of the stock exchange. To the extent that their establishment was driven by outside influencesrather than emerging from a realistic need felt in the market, whether by investors or issuersit is perhaps unsurprising that many have so far struggled to reach an effective scale and activity level. Pricing on all of the markets appears to build in a sizable risk premium to judge for example from the low price-earnings ratios that have been prevalent (Moss, 2003; Senbet and Otchere, 2005). The widespread limitations on foreign holdings of listed shares, although diminishing in recent years, have also contributed to low prices.24 High risk perceptions affect all countries, even those with stable macroeconomic environment; indeed, most countries lack sovereign credit ratings. The perceived risk is reflected also in the very small amount of funds raised through new issues including IPOs and other public sales of equities. Nevertheless, issuing activity has been picking-up. Ghana had five new equity issues in 2004, accounting for USD 60 million, the Kenya Electricity Generating Company KenGen IPO of 2006 the first for five years in Kenya attracted strong demand and enormous public interest raising over USD 100 million.26 In Nigeria the equivalent of almost USD 3 billion in new capital was raised on the exchange in 2003-5 in connection with the new capital requirements for banks. Scale issues in equities have been mirrored in the bond market; only a limited number of private bonds have been listed, with little secondary market trading. In Tanzania, capitalization of corporate bonds amounts to TZS 89 billion (about USD 90 million) compared to equity market capitalization of TZS 2.3 trillion. Ghana has three corporate bonds, compared to 30 listed companies. Bond market capitalization of the BRVM is relatively higher about one-fifth of equity market capitalization, most of the larger issues are governmental or from government-owned enterprises, and trading is very light. African Governments27 have relied more on foreign debt than on domestic debt, though about one in two have issued significant domestic debt instruments (not all of them traded on an organized market), eight of them with domestic debt to GDP ratios in excess of 20 per cent. Banks

tend to be the biggest holders, with about two-thirds of the stock outside of the central bank. With an estimated 87 per cent of the debt having initial maturity of 12 months or less, there is little secondary trading (Christensen, 2004). Longer term issues have only recently been appearing (or re-appearing) on some of the exchanges (with the 7 and 10 year issues of the regional development banks BOAD and EADB being noteworthy, together with a handful of government and corporate bonds); the absence of such issues in most currencies means a lack of good reference rates for long-term finance. (Source: Making Finance work for Africa: World Bank Report) Eligibility to make a public issue of shares SEBIs regulations prescribe certain eligibility requirements for a company planning a public issue. This includes: Minimum net worth requirement of Rs one Crore and distributable profits in the last three years, and The proposed issue along with all other issue of capital made during the year should not exceed five times the pre-issue net worth. or The issue to be made through a book building process in which 50% of the issue is reserved for qualified institutional buyers (QIB) and The minimum post-issue paid up capital shall be Rs 10 Crores. Or The project should be appraised by commercial banks/FIs who also contribute to the capital to the extent of 10%, and There will be compulsory market-making for at least two years from the date of listing of the shares Eligibility Norms To make an issue, the company must fulfill the eligibility norms specified by SEBI and Companies Act. The companies issuing securities through an offer document, that is (a) prospectus in case of public issue or offer for sale and (b) letter of offer in case of right issue, should satisfy the eligibility norms as specified by SEBI, below:

Filing of Offer Document: In the case of a public issue of securities, as well as any issue of security, by a listed company through rights issue in excess of Rs. 50 lakh, a draft prospectus should be filed with SEBI through an eligible registered merchant banker at least 21 days prior to filing it with ROC. Companies prohibited by SEBI, under any order/direction, from accessing the capital market cannot issue any security. The companies intending to issue securities to public should apply for listing them in recognized stock exchange(s). Also, all the issuing companies must (a) enter into an agreement with a depository registered with SEBI for dematerialization of securities already issued / proposed to be issued and (b) give an option to subscribers / shareholder / investors to receive security certificates or hold securities in a dematerialized form with a depository. Public issue / Offer for sale by Unlisted Companies: An unlisted company can make a public issue / offer for sale of equity shares / security convertible into equity shares on a late date if it has in three out of preceding five years (a) a pre issue net worth of Rs. 1 crore (b) a track record of distributable profit in terms of Sec. 205 of the Companies Act. The size of the issue should not exceed five times of the pre-issue net worth as per last available audited accounts either at the time of filing of offer or at the time of opening of issue. There are separate norms for companies in the information technology sector and partnership firms converted into companies or companies formed out of a division on an existing company. If the unlisted company does not comply with the aforesaid requirement of minimum pre-issue net worth and track record of distributable profits or its proposed size exceeds five times its pre-issue net worth, it can issue shares / convertible security only through book building process on the condition that 60% of the issue size would be allotted to qualified institutional buyers (QIB) failing which the full subscription should be refunded. Public issue by listed companies: All listed companies are eligible to make a public issue of equity shares/ convertible securities if the issue size does not exceed five times its pre-issue net worth as per the last

available audited accounts at the time of either filing of documents with SEBI or opening of the issue. A listed company which does not satisfy this condition would be eligible to make issue only through book building process on the condition that 60% of the issue size would be allotted to QIBs, failing which full subscription money would be refunded. Public Offer of Shares In a public offer of shares, a company issues shares to a large number of new investors, who are members of the public. When these investors become shareholders of the company, none of them, in themselves, hold a large enough portion of the equity capital of a company to participate in the management of the company. Therefore a public issue refers to a distribution, rather than concentration of ownership in a company. This market for the first time offer of shares is called the primary market offer. It is an opportunity given by the promoters of the company for the retail investors to participate in the ownership of the company. This also means that the proportional holding of promoters and large investors in the company, will reduce after the public issue. When a company offers shares to the public, they have to comply with the regulatory requirements laid down by SEBI and the Companies Act. The listing agreement that the company enters into with the stock exchange where the shares are to be listed, also provides for periodic disclosures. The regulations of SEBI and the Companies Act aim at protecting the interest of the retail investors by prescribing: - Disclosure of relevant information both at the time of the issue and periodically thereafter so that investors can evaluate the viability of their investments. - Arrangement for the allotment of shares in dematerialized form. - Getting an IPO graded by at least one credit rating agency. - Listing the shares on a stock exchange so that investors have liquidity. - The continued participation of the promoters in the business through a lock-in of the promoters holdings.

The price at which the shares are issued to the public is decided by the company in consultation with the lead manager to the issue. A public offer of shares results in a change in the shareholding pattern of the company. A company making an issue of shares has to go through certain internal and external steps to give effect to the issue. Internally, the company needs to get the approval of the board of directors and the existing shareholders for the issue. Once this is done, the company has to appoint a merchant banker who will be the lead manager of the issue. The lead manager is responsible for ensuring that the regulatory requirements of the issue are complied with. The lead manager is responsible for all activities till the issue is listed.

Roles and Responsibilities in a Public Issue An issue of shares by a company involves detailed activity, coordination and compliance with regulatory requirements. The lead manager to the issue is primarily responsible for the issue process. The other entities who are involved include the registrar and transfer agents, bankers and brokers to the issue. The role and responsibility of each constituent is clearly laid out by SEBI. All constituents who are involved with an issue have to be registered with SEBI under the relevant rules. Registrar and Transfer Agents The R&T agents have a significant role to play in a public issue of shares. They are appointed by the issuer in consultation with the lead manager to the issue and enter into an agreement detailing their responsibility in the issue work. The scope of activity of the R&T agents is spread before the issue opens, during the period of issue and after the issue closes.

Pre-Issue Work - Assist in the finalization of bankers to the issue, controlling and collection branches, syndicate members, bidding centres and give instructions on the procedures to be followed. - Assist in the work related to designing the application forms and other issue material. Issue Work - Collect and report information on the daily collections/bid information to the lead manager/ book running lead managers. - Provide statutory reports on the progress of the issue as required. - Arrange for the collection of application forms and their data entry for further processing. - In case of a book built offer, make a table of all valid applications to identify the cut-off price. Once the cut-off price is determined, the valid applications are identified. - Identify valid bids from QIBs and print and dispatch Confirmatory Allocation Notice (CAN) so that the balance money can be collected. - Reconcile funds with the final collection certificate received from the bankers. Post- Issue Work Scrutinize the application forms for completeness and correctness of information. Applications may be rejected, among other reasons, if: - Application is incomplete - Information such as PAN number, bank account is not provided - Supporting documents such as those required for corporate applicants is absent - The bid is at cut-off price for an applicant other than a retail individual investor Terms of offer in terms of minimum application is not met - Applications from minors - Multiple applications - Get the approval of the issuer and the lead manager/book running lead manager for applications rejected on technical grounds. - Draw up the underwriters obligations in case the issue is undersubscribed and send devolvement notices on the instruction of the lead manager/ book running lead manager.

- Finalise the basis of allotment, if the issue is oversubscribed, in consultation with the lead manager/book running lead manager, issuer and stock exchange. - Submit the following documents to the stock exchange: - Basis of allotment - Top 100 applications - Certificate of final collection from the bankers and reconciliation statement - List of applications rejected on technical grounds - Minutes of the meeting held with the issuer, lead manager/book running lead manager and stock exchange for finalizing the basis of allotment - Make the allotment of shares to the investors on the approved basis. - Ensure that legal requirements such as payment of stamp duty by the issuer, creation of register of members, approvals of the board of directors of the issuing company and the stock exchange are complied with. - Print the Confirmatory Allotment Note (CAN) for all successful applicants. - Arrange for the printing, signing and dispatch of certificates if allotment is in physical form in case of a fixed price offer or upload securities to demat account of the applicants. - Arrange for the refund orders to be dispatched. - Draw up the list of brokers to whom commissions have to be paid. - Manage the issue work so that the shares are listed on the stock exchange within 30 days from the closure of the issue for a fixed price issue and 15 days for a book built issue. - Handle all post issue queries from investors. Bankers to the Issue The bankers to the issue are appointed by the lead managers/book running lead managers to manage the collection of funds in the issue into the escrow account opened for the purpose. The bankers to an issue must have collection branches in the mandatory centres as specified by the regulations. They are responsible for giving updates on the collection figures to the managers of the issue based on which the decision to close the issue will be taken.

ASBA SEBI has also recently introduced an additional mode of payment in public as well as rights issues made through the book built route called the Applications Supported by Blocked Amount popularly known as ASBA. ASBA is an application for subscription to an issue containing an authorization to the investors bank to block the application money in his bank account. For this purpose his bank should have been registered with SEBI as Self Certified Syndicate Bank (SCSB). The SCSB will identify its designated branches (DB) where the ASBA investor can submit his form. All the DBs of an SCSB will be controlled by one branch of that Bank which will be designated as Controlling Branch (CB). An investor will be eligible to apply through the ASBA process if he/she: is a resident retail individual investor; is bidding at cut-off price, with single option as to the number of shares bid for; is applying through blocking of funds in a bank a/c with a SCSB agrees not to revise the bid; is not bidding under any of the revised categories. ASBA Process An ASBA investor shall submit the application physically or through electronic means to the SCSB with whom the bank Account to be blocked is maintained. The SCSB will block the application money in the investors account, which will remain so till finalisation of the basis of allotment or till withdrawal of the issue or withdrawal by the applicant. The SCSB thereafter will upload the application data through a web enabled interface to be provided by the stock exchanges. After the basis of allotment is finalised the registrar shall apply the basis and identify against each one of the ASBA investor the number of shares, if any, allotted and the amount if any to be appropriated for the allotment made and the balance amount to be unblocked/refunded. This information will be furnished by the registrar to the controlling branch who in turn debits the required amount from the investors account to be

given to the issuer for the shares allotted. They will also unblock the balance amount in the account of the investor. Brokers to the Issue/Syndicate Members Brokers to the issue are appointed to facilitate the collections of application forms and bids. They are members of stock exchanges. They are responsible for collecting the bid/application forms and ensure that it is accompanied by a payment instrument. They are paid a commission for their role depending upon their collection.

Exemption: The eligibility norms specified above are not applicable in the following cases: Private sector banks Infrastructure companies, wholly engaged in the business of developing, maintaining and operating infrastructure facility within the meaning of Sec. 10(23-G) of the Income Tax Act (a) whose project has been appraised by a public financial institution / IDFC/ILFS and (b) not less than 5% of the project cost has been financed by any of the appraising institutions jointly / severally by way of loan / subscription to equity or combination of both and Rights issue by a listed company. Credit Rating for Debt Instruments: A debt instrument means an instrument / security which creates / acknowledges indebtedness and includes debentures, bonds and such other securities of a company whether constituting charge on its assets or not. For issue, both public and rights, of a debt instrument, including convertibles, credit rating irrespective of the maturity or conversion period is mandatory and should be disclosed. The disclosure should also include the unaccepted credit rating. Two ratings from two different credit rating agencies registered with SEBI should be obtained in case of public/rights issue of Rs.100 crore and more. All credit ratings obtained during the three years preceding the public/rights issue for any listed security of the issuing company should also be disclosed in the offer document.

Outstanding Warrants / Financial Instruments: An unlisted company is prohibited from making a public issue of shares /convertible securities in case there are any outstanding financial instruments / any other rights entitling the existing promoters / shareholders any option to receive equity share capital after the initial public offering. Partly Paid-up Shares: Before making a public / rights issued of equity shares / convertible securities, all the existing partly paid up shares should be made fully paid up or forfeited if the investor fails to pay call money within 12 months. Pricing of Issues A listed company can freely price shares/convertible securities through a public/ rights issue. An unlisted company eligible to make a public issue and desirous of getting its securities listed on a recognized stock exchange can also freely price shares and convertible securities. The free pricing of equity shares by an infrastructure company is subject to the compliance with disclosure norms as specified by SEBI from time to time. While freely pricing their initial public issue of shares/ convertible, all banks require approval by the RBI. Differential Pricing: Listed/unlisted companies may issue shares/convertible securities to applicants in the firm allotment category at a price different from the price at which the net offer to the public is made, provided the price at which the securities are offered to public. A listed company making a composite issue of capital may issue securities at differential prices in its public and rights issue. In the public issue, which is a part of a composite issue, differential pricing in firm allotment category vis--vis the net offer to the public is also permissible. However, justification for the price differential should be given in the offer document in case of firm allotment category as well as in all composite issues.

Price Band: The issuer / issuing company can mention a price band of 20% (cap in the price band should not exceed 20% of the floor price) in the offer document filed with SEBI and the actual price can be determined at a later date before filing it with the ROC. If the BOD of the issuing company has been authorized to determine the offer price within a specified price band, a resolution would have to be passed by them to determine such a price. The lead merchant banker should ensure that in case of listed companies, a 48 hours notice of the meeting of BOD for passing the resolution for determination of price is given to the regional stock exchange. The final offer document should contain only one price and one set of financial projections, if applicable. Payment of Discount / Commissions: Any direct or indirect payment in the nature of discount / commission / allowance or otherwise cannot be made by the issuer company / promoter to any firm allottee in a public issue. Denomination of Shares: Public / rights issue of equity shares can be made in any denomination in accordance with Sec. 13(4) of the Companies Act and in compliance with norms specified by SEBI from time to time. The companies which have already issued shares in the denominations of Rs. 10 or Rs. 100 may change their standard denomination by splitting / consolidating them. Promoters Contribution and Lock-in Requirements Regulations regarding promoters contribution are discussed as under: Public issue by unlisted companies: The promoters should contribute at least 20% and 50% of the post issue capital in public issue at par and premium respectively. In case the issue size exceeds Rs. 100 crores, their contribution would be computed on the basis of total equity to be issued, including premium at present and in the future, upon conversion of optionally convertible instruments, including warrants. Such contribution may be computed by applying the slab rated mentioned below:

Size of Capital Issue (including premium) On first Rs. 100 crores On next Rs. 200 crores On next Rs. 300 crores On balance

Percentage of contribution 50 40 30 15

While computing the extent of contribution, the amount against the last slab should be so adjusted that on an average the promoters contribution is not less than 20% of post issue capital after conversion. Offer for sale by unlisted companies: The promoters shareholding, after offer for sale, should at least 20% of the post issue capital. Public issue by listed companies: The participation of the promoters should either be (i) to the extent of 20% of the proposed issue or (ii) to ensure shareholding to the extent of 20% of the post-issue capital. Composite issue by Listed Companies: At the option of the promoters, the contribution would be either 20% of the proposed public issue or 20% of the post-issue capital, excluding rights issue component of the composite issue. Public Issue by unlisted infrastructure companies at premium: The promoters contribution, including contribution by equipment suppliers and other strategic investors, should be at least 50% of the post-issue capital at the same or a price higher than the one at which the securities are being offered to public. Securities Ineligible for computation of promoters contribution: The securities specified below acquired by/allotted to promoters would not be considered for computation of promoters contribution: Where before filing the offer document with SEBI, equity shares were acquired during the preceding three years (a) for consideration other than cash and revaluation of assets / capitalization of intangible assets

is involved in such transactions and (b) from a bonus issue out of revaluation reserves or reserves without accrual of cash revenues; In the case of a public issue by unlisted companies, securities issued to promoters during the preceding one year at a price lower than the price at which equity is offered to the public. The shares allotted to promoters during the previous year out of funds brought in during that period in respect of companies formed by conversion of partnership firms where the partners of the firm and the promoters of the converted company are the same and there is no change in management unless such shares have been issued at the same price at which the public offer is made. However, if partners capital existed in the firm for a period exceeding one year on a continuous basis, the shares allotted to promoters against such capital would be eligible. The ineligible shares specified in the above three categories would, be eligible for computation of promoters contribution if they are acquired in pursuance of a scheme of merger/ amalgamation approved by a high court. Securities of any private placement made by solicitation of subscription from unrelated persons either directly or through an intermediary; and Securities for which a specific written consent has not been obtained from the respective shareholders for inclusion of their subscription in the minimum promoters contribution. Issue of convertible security: In the case of issue of convertible security, promoters have an option to bring in their subscription by way of equity or subscription to the convertible security being offered so that their total contribution would not be less than the required minimum in cases of (a) par/ premium issue by unlisted companies (b) offer for sale, (c) issues/ composite issue by listed companies and (d) public issue at premium by infrastructure companies. Promoters Participation in Excess of Required Minimum: In a listed company participation by promoters in excess of the required minimum percentage in public/ composite issues would be subject to pricing of preferential allotment, if the issue price is lower than the price as determined on the basis of preferential allotment pricing.

Promoters contribution before public issue: Promoters should bring in the full amount of their contribution, including premium, at least one day before the public issue opens/ issue opening date which would be kept in an escrow account with a bank and would be released to the company along with the public issue proceed. Exemption from Requirement of Promoters Contribution: The requirement of promoters contribution is not applicable in the following three cases, although in all the cases, the shareholders should disclose in the offer document their existing shareholding and the extent to which they are participating in the proposed issue: a. Public issue by a company listed on a stock exchange for at least three years and having a track record of dividend payment for at least three immediately preceding years. However, if the promoters participate in the proposed issue to the extent greater than higher of the two options available, namely, 20% of the issue or 20% of the post issue capital, the excess contribution would attract pricing guidelines on preferential issues if the issue price is lower than the price as determined on the basis of the guidelines on preferential issue. b. Where no identifiable promoter / promoter group exists. c. Rights issue. Lock-in requirements of Promoters contribution: Promoters contribution is subject to a lock-in period as detailed below: Lock-in of Minimum Required Contribution: In case of any (all) issues of capital to the public, the minimum promoters contribution would be locked in for a period of three years. The lock-in period would start from the date of allotment in the proposed issue and the last date of the lock-in period would be reckoned as three years from the date of commencement of commercial production or the date of allotment in the public issue, or whichever is later. Lock-in excess promoters contribution: In the case of public issue by an unlisted company, excess promoters contribution would be locked

in for a period of one year. The excess contribution in a public issue by a listed company would also be locked in for a period of one year as per the lock-in provisions. Securities issued last to be locked in first: The securities, forming part of the promoters contribution issued last to them, would be locked in first for the specified period. However, if securities were issued last to financial institutions as promoters, these would not be locked in before the shares allotted to other promoters. Lock-in of Pre-issue share capital of an unlisted company: The entire pre-issue share capital, other than locked in as promoters contribution, would be locked-in for one year from the date of commencement of commercial production or the date of allotment in the public offer whichever is later.

Lock-in of securities issued on firm allotment basis: Securities issued on firm allotment basis would be locked in for one year from the date of commencement of commercial production, or date of allotment in public issue, whichever is later. Other requirements in respect of Lock-in: The other requirements relating to the lock-in of promoters contribution is discussed hereunder: Pledge of securities: Locked-in securities held by the promoters may be pledged only with banks/financial institutions, as collateral security for loans granted by them provided the pledge of shares is one the terms of the sanction of the loan. Inter-se transfer of Securities: Transfer of locked in securities amongst promoters as named in the offer document can be made subject to lock-in being applicable to the transferees for the remaining lock-in period.

Inscription of Non-transferability: The securities, which are subject to a lock-in period, should carry inscription nontransferable, along with duration of specified non-transferable period mentioned in the face of the security certificate. Issue Advertisement The term advertisement is defined to include notices, brochures, pamphlets, circulars, show cards, catalogues, placards, posters, insertions in newspapers, pictures, films, cover pages of offer documents or any other print medium, radio, television programs through any electronic media. The lead merchant banker should ensure compliance with the guidelines on issue advertisement by the issuing companies. Issue of Debt Instruments A company offering convertible/non-convertible debt instruments through an offer document should, in addition to the other relevant provisions of these guidelines, complies with the following provisions: Requirement of credit rating: A public or rights issue of debt instruments (including convertible instruments) in respect of their maturity or conversion period can be made only if the credit rating has been obtained and disclosed in the offer document. For all issues greater than or equal to Rs.100 crore, two ratings from two different credit rating agencies should be obtained. Requirements in Respect of Debenture Trustees: In the case of issue of debentures with maturity of more than 18 months, the issuer should appoint debenture trustees whose name must be stated in the offer document. The issuer company in favor of the debenture trustees should execute a trust deed within six months of the closure of the issue. Creation of Debenture Redemption Reserves (DRR): A company has to create DRR in the case of the issue of debentures with maturity of more than 18 months.

Distribution of Dividends: In the case of new companies, distribution of dividends would require the approval of the trustees to the issue and the lead institution, if any. In case of existing companies, prior permission of the lead institution for declaring dividend, exceeding 20% as per the loan covenants, is necessary if the company does not comply with institutional condition regarding interest and debt service coverage ratio. Redemption: The issuer company should redeem the debentures as per the offer documents. Disclosure and Creation of Charge: The offer document should specifically state the assets on which the security would be created as also the ranking of the charge(s). In the case of second/residual charge or subordinated obligation, the risks associated with should clearly be stated. Filing of Letter of Option: A letter of option containing disclosures with regards to credit rating, debentures holders resolution, option for conversion, justification for conversion price and such other terms which SEBI may prescribe from time to time should be filed with SEBI through an eligible merchant banker, in case of a roll over of nonconvertible portions of PCD/NCDs, etc.

PRE-ISSUE MANAGEMENT Pre-issue management involves many steps before approaching the market. Pre-issue management is concerned with issue of share & pricing of shares. The pre-issue management can be categorized as follows: 1. Issue of Shares. 2. Marketing, coordination & Underwriting of issue. 3. Pricing of issues. Issue of Shares Funds raised through the public is called as primary market public issue of securities, shares or debentures are made in the primary market. There is no fixed place for the issue of new securities. The household savings constitute the primary sources of capital sources of capital formation in the country. The net savings ratio will encourage the capital market. It is the job of the merchant banker to help the company in mobilization of pooled savings. The shares & debentures have to compete with other financial instruments to attract the savings. Public issues are offered through a prospectus. Prospectus is a document which invites the public to contribute the share capital to attain better returns on their investments. Wide publicity about the offer is to be made through different media like newspapers, periodicals & television. The merchant bankers will put their entire efforts to make t successful. The issues of equity shares are further categorized as issue of shares at the first time, further issue, of shares made by existing companies either by public issue or rights issue. Right issue of share means the new issue of shares to the existing shareholders at a stated proportion and at a fixed price. Right shares are issued at a premium which is freely determined by the company making issue. Issue of share can be made as follows:

1. public issue through prospectus 2. offer for sale 3. private placement

Public Issue through Prospectus

This is the most common & popular method of public issues through prospectus. Shares & debentures are issued in this method. For public issue, every company has to fulfill the legal formalities with the SEBI. SEBI has the legal authority in permitting the companies to enter the capital market. A fixed number of shares at the stated price will be issued in primary market. According to SEBI guidelines, a company which has not completed 12 months of commercial operation can issue shares only at par or face value. If a new company is set up by an existing company with 5 years track record, the new company is free to determine the price of the share. The prospectus has to be vetted by the SEBI before the public issue. The merchant banker has to draft the prospectus and get clearance from the officials. The prospectus should contain all the information about the company as presented below: 1. The main objective of the company. 2. Particulars about the signatories to the memorandum of association. 3. Qualification shares of directors. 4. Number & classes of shares. 5. Number of redeemable preference shares. 6. Particulars about the board of directors & managing directors. 7. Minimum subscription for shares. 8. The time & opening of shares. 9. The amount of application money, allotted money should be indicated.

10. Premium on shares issued. 11. Name of the underwriter, & their commission. 12. Particulars of preliminary expenses. 13. The benefits provided to promoters, if any. 14. Particulars about the contracts made by the company. 15. Voting & dividend rights. 16. Capitalisation of profits & surplus from the revaluation of assets.

Offer for Sale The sale of shares through intermediary of issue house or firm of a stock broker is called as offer for sale. The company sells the shares or debentures to the issue house at an agreed price then the issue house resold the shares to the public at a stated price. In this context, the company need not issue a prospectus. But a statement in lieu of prospectus should be filed with the registrar of companies. Three days before the allotment of shares of debentures. In this method the company can get substantial earnings because no flotation costs are involved.

Private Placement The issue of shares or debentures or preference shares by the company to the individual investors is called as private placement. The company will sell the securities directly to the genuine investors. There is no need of issue of prospectus in the private placement. In the private placement market the individual investors means, UTI, LIC, GIC, SFCs, Pension funds, Insurance fund owners. Private Placement of Shares A public offer of shares involves regulatory compliances and process that have been laid down to ensure that public investors are protected. These requirements can be time-consuming, elaborate, and intended to protect the less informed investor. A company may decide to make an

offer to a select group of investors, who may be better informed, and therefore not requiring elaborate protection mechanisms. The company can also save time, cost and effort in placing its shares to such a group. This is called a private placement of shares. A private placement of shares can be done by a company irrespective of whether it has made a public offer of shares or not. A private placement of shares made by a listed company is called a preferential allotment of shares. Since the company is listed and has public shareholders, it is required to meet the regulation in this regard of SEBI and the Companies Act. These regulations aim at ensuring that promoters and large investor groups do not take any action that may be detrimental to the interests of the public investors. The regulations require that a resolution is passed by the shareholders allowing such allotment of shares. A placement document giving material information will be made available to select investors and on the website of the company and the stock exchange. The shares will be allotted at a price which is the higher of the average of the weekly high and low closing prices on the stock exchange for the previous six months or previous two weeks. The shares will be locked-in for a period of one year from the date of allotment.

The issue could be a public limited company or private limits company. The intermediaries in this market are rating agencies, trustees, financial advisers, merchant bankers. In this market the investors have sufficient knowledge & well experience in evaluating the merits & demerits of the financial investment. The merchant banker will pay an important in deal of private placement. His role cannot be ignored. The private placement provides a time saving channel in mobilization of required funds. It also saves the substantial amount of expenses in the form of flotation charges. It is possible to raise funds from this method within 2 or 3 months. But public issue will take at least 6 months to one year. In private placement market, the investors are more perfect about the assessment of their buying financial asset. The private placement is equal to the primary market without combines equity and debentures

the private placement business cannot exist without the active connivance of promoters. The SEBI has put a restriction on FIIs, regarding the investment in shares of a particular in private placement process; they must hold the shares for 5 years. Qualified Institutional Placement Qualified institutional placement (QIP) is a private placement of shares made by a listed company to certain identified categories of investors known as Qualified Institutional Buyers (QIBs). To be eligible to make such a placement the shares of the company should have been listed on the stock exchange for a period at least one year before the notice of such issue is given. A qualified institutional placement will be made at a price not less than the price of the shares will not be lower than the average of the weekly high and low of the closing prices for the two weeks preceding the relevant date. Qualified institutional buyers (QIB) include financial institutions, mutual funds, scheduled commercial banks, and the like. Preferential allotment of the shares may be made to QIBs at a price which is not lower than the average of the weekly high and low closing prices on the stock exchange for the previous two weeks provided the number of allottees do not exceed five. There must be a minimum of two allottees under this category if the issue size is less than or equal to Rs 250 Core and five if it is more than Rs 250 Crore. A sale of shares allotted under this category, within one year from the date allotment, can be made by the QIB only on a recognised stock exchange.

Marketing condition, Coordination & Underwriting of Issues The successful closure of public issue depends upon the efficiency of merchant bankers to that issue. The merchant banker will have to coordinate many activities elating to issue with different agencies. Appointment of brokers, registrars, underwriters, leads managers, bankers, and share transfer agents is to be done. The issue has to be groomed, publicity campaign and arrangements for printing & mailing

to be made. In this context, the merchant banker should attend to the following functions of public issue: 1. Marketing 2. Coordination 3. Underwriting

Pre-Issue Management Activities 1. Sending memorandum of association & articles of association to the concerned stock exchange. 2. Furnishing the consent letters from bankers, auditors, registrars, experts, solicitors to the prospectus. 3. Drafting the power of attorney from all the directors in favour of two directors. 4. Selection of advertising agents & printers. 5. Selection prospectus application forms to the concerned stock exchange. 6. Receipt of comments from stock exchange. 7. To discuss draft prospectus with the company. 8. Apply for the private placement with financial intermediaries. 9. Advertising strategy commencement. 10. Conducting of extraordinary general meeting for the draft resolution. 11. To collect balance sheet & audit report. 12. Company to hold meeting for approving, signing & filling prospectus. 13. To forward the prospectus to the SEBI. 14. Forwarding prospectus after vetting by the SEBI to stock exchanges. 15. To file prospectus with registrar of companies. 16. Decide the quantum of issue material that is to be printed. 17. File listing application with the concerned stock exchange. 18. Press release & briefing 19. Announcement of prospectus in Newspapers.

20. Registrars to issue, to prepare & send bank procedure to bankers. 21. Announcement of brief prospectus in papers. 22. Opening of subscription list, earliest closing, and latest closing. 23. Company to review position in public response. 24. Closure of issue & issue of advertising. 25. Specimen of equity certificate/refund orders to be sent for approval to the stock exchange. 26. Registrars finalize the allotment process in consultation with stock exchange. 27. Board meeting for approval of allotment. 28. Payment of consolidated stamp duty. 29. Registrars to issue letters of allotment/refund orders/equity certificates. 30. Company to complete listing formalities.

Pre-Issue management & Pricing According to the SEBI guidelines for capital issues a company can issue the share at its own discretion. Pricing of issues is done by the companies themselves in consultation with the merchant banker. Pricing of the issue is a part of pre-issue management. The companies are free from pricing of their equity with some limitations with the introduction of the free pricing almost all companies have the freedom to determine the issue price. If the amount of premium is low the issue gets over subscribed & if the premium is very high it is bound to be undersubscribed & fail. The merchant banker will decide the amount of the premium taking into consideration of EPS, book value, the average market price for the last 3 years, future prospect of the company and assess whether the market can absorb the premium on issue. The SEBI is concerned only with giving permission & checking about the facts shown in prospectus. Justification of issue price has to be

stated & included in the prospectus. The equity shares offered to the existing shareholders is called Right issue. According to section 81 of the Companies Act, stipulates that a company can increase subscribed capital at any time after the expiry of 2 years or one year from the first allotment of shares & such further issue of shares must be offered to the existing shareholders in proportion to the share held. Sometimes the company can made rights issue and public issue at the same time. Right issues are very popular. Rights may be issued below the market price to compensate the shareholders. Though there are no restrictions on fixation of premium but some guidelines are issued by the Ministry of Finance which is to be taken into consideration. The fair value of a share is determined by1. Net asset value 2. Profit earning approach 3. Market value Net asset value is the net worth after providing all the liabilities. Net asset value should be equal to equity + reserves + surplus + contingent liabilities. While calculating the NAV proper attention should be taken. Profit earning approach is based on the average of the profits. It is arrived at by capitalizing the average of the after tax profits for five years. The rate of capitalization is different from sector to sector. The average profits are arrived at on the basis 3 years profits in the audited accounts. Market value of a share will be found, it they are listed in stock exchange. The average market value of a share in the preceding 3 years after making appropriate adjustments for bonus issue and dividend payment would be determined by high and low of the preceding two years and the high and low of each month in the preceding twelve months. The average market price is used to check the reasonableness of the average net asset value and profit earning capacity value.

Pre-Issue Work The lead manager undertakes the following steps in managing a public offer of shares: 1. Appoint R&T agents, bankers, brokers and underwriters to the issue. In case of a book built issue, the book runners, who are merchant bankers, will be appointed. The merchant banker has to ensure that the constituents are registered with SEBI. 2. Obtain the in-principle approval of the stock exchange where the shares are proposed to be listed. 3. Ensure that the mandatory number of collection centres is covered by the collection bankers to the issue. 4. For an issue by an unlisted company, get the IPO graded by an approved credit rating agency. 5. Enter into agreements with depositories for the admission of the securities in both the depositories. 6. File draft prospectus with SEBI 7. Make changes, if any, to the prospectus as suggested by SEBI and files the prospectus with the Registrar of Companies 8. Sign the due diligence that all the regulatory requirements are complied with. 9. Issue advertisements in national papers as required by regulations 10. Arrange for the printing and dispatch of prospectus and application forms and other issue material. 11. Ensure that every application form is accompanied by an abridged prospectus.

Post Issue Management The major post issue obligations of the merchant banker(s) relate to association with allotment procedure, post-issue monitoring reports, redressal of investors grievances, coordination with intermediaries, post-issue advertisements, basis of allotment in over-subscribed issues, other responsibilities and a certificate regarding realization of stock invests.

After closing of public issue the next task of the merchant bankers is post-issue management. It consisting of collection of application forms from designated banks & the amount received, scrutinizing of applications, deciding allotment procedure in consultation with stock exchange. This process ends with the mailing of share certificates/refund orders/allotment orders. Registrar to issue occupies a key role in the post-issue management activities. They work with the association of bankers to issue. The registrars will collect the application forms from bankers, sorting them & arranging them in an order. The merchant banker will assist the company & keep in touch with the completion of process. The registrars to issue collect the application forms on behalf of the company with the amount. They scrutinize of all forms and ensures that the applications are proposed & allotment, if share certificate/refund orders are sent within 30 days of the close of the issue. The registrars should take all the precautions about the simplifications of the process. Listing Requirement of Stock Exchanges Listing means admit of scrip for trading on a stock exchange. The objective of listing is to provide liquidity & free negotiability to securities. Listing is advantageous to the company as well as shareholders. Listing is not a mandatory but it is an option. The company should indicate in the prospectus about listing. The securities contract act specifies that a public limited company should list in a recognized stock exchange. Financial institutions also require listing.

The SEBI also stipulates that companies should get their shares listed on a recognized stock exchange or OTC. Companies entering the primary market are required to advertise in the newspapers an announcement regarding the proposed issue of capital. Until the subscription list is closed, no advertisement should be given about over subscription. Stock exchange can refuse enlistment in the case of companies which advertise oversubscription. The allotment process should be made fairly & equitably. In case of oversubscription the allotment should be made on drawal of lots upto certain categories of applications. If the oversubscription is marginal the allotment may be done on the basis of pro-rata method. The allotment should be in multiples of trading lots. The issue of shares through public issue, it may be a costly affair. The overall ceiling of the cost of public issue has been fixed. The public issue cost includes Underwriting Commission, Brokerage Commission, and Fee to the registrars, publicity cost & listing fee.

Post Issue Monitoring Reports Irrespective of the level of subscription, the post issue lead merchant banker must ensure the submission of the post-issue monitoring reports. The due date for submitting post-issue monitoring reports in the case of public issues by listed/unlisted companies are: 3-day monitoring report for book-built portion, in case of issue through book-building; the due date of the report would be the third day from the date of allocation in the book-built portion, or one day prior to the opening of the fixed price portion, whichever is earlier, 3-day monitoring report in other cases, including fixed price portion of book-built issue; the due date for the report would be the third day from the date of closure of the issue, Final post issue monitoring report for all issues. The due date for this report would be the third day from the date of listing or 78 days from the date of closure of the subscription of the issue, whichever is earlier.

The post issue monitoring report in case of rights issues should be submitted within three working days from the due dates. Public Issues In case of public issues, 3-day & 78-day monitoring reports are to be submitted. 3-day post issue Monitoring Report The due date for this report would be the third day from the date of closure of subscription of the issue. Final Post-issue Monitoring Report The due date for this report would be 78th day from the date of closure of subscription of the issue. Right issue For right issues, 3-day and 50-day monitoring reports are required. 3-day post issue Monitoring Report The due date for this report would be the third day from the date of closure of subscription of the issue. 50-day Post-issue Monitoring Report The due date for this would be the 50th day from the date of closure of subscription of the issue. Redressal of investors Grievances The post-issue lead merchant banker should actively associate himself with post-issue activities namely, allotment, refund and dispatch and regularly monitor the redressal of investors grievances arising there from. Co-ordination with intermediaries (1) The post-issue merchant banker shall maintain close co-ordination with the registrars to the issue and arrange to depute its officers to the offices of various intermediaries at regular intervals after the closure of the issue to monitor the flow of applications from collecting bank

branches and/or Self Certified Syndicate Banks, processing of the applications including application form for ASBA and other matters till the basis of allotment is finalised, despatch of security certificates and refund orders are completed and securities are listed. (2) Any act of omission or commission on the part of any of the intermediaries noticed during such visits shall be duly reported to the Board. (3) In case there is a devolvement on underwriters, the merchant banker shall ensure that the notice for devolvement containing the obligation of the underwriters is issued within a period of ten days from the date of closure of the issue. (4) In case of undersubscribed issues, the merchant banker shall furnish information in respect of underwriters who have failed to meet their underwriting devolvement to the Board in the format specified in Schedule XVII. (5) The post-issue merchant banker shall confirm to the bankers to the issue by way of copies of listing and trading approvals that all formalities in connection with the issue have been completed and that the banker is free to release the money to the issuer or release the money for refund in case of failure of the issue.

Post-Issue Work An issue is required to be kept open for a minimum of three days and a maximum of seven working days. The following are the functions of the lead manager in the post-issue period: 1. Once the issue opens, ensure that the collection banks and R&T agents collect and reconcile the forms received and obtain a final collection certificate. 2. Finalize the basis of allotment in consultation with the stock exchange. 3. Basis of allotment is the process of deciding the number of shares that each investor is entitled to be allotted. If the number of shares that have been subscribed for is equal to or less than the number of shares offered by the company, then each investor will get the same number of shares he applied for. If the issue is over-

4.

5.

6. 7. 8.

subscribed, then the number of shares allotted to each investor will be in proportion to the oversubscription. Once the issue closes, the applications are collated under various categories such as retail investors, HNIs, QIBs and firm allotment. The number of shares applied for is compared with the shares reserved for each category and the oversubscription ratio is calculated. This is applied to each application to determine the shares to be allotted. The basis of allotment has to be approved by the board of directors of the company and published in national newspapers. Ensure that the shares are credited to the individual shareholders depository account and dispatch of refund orders. Seek listing of shares on the stock exchange and commencement of trading.

Post-issue Advertisements. (1) The post-issue merchant banker shall ensure that advertisement giving details relating to oversubscription, basis of allotment, number, value and percentage of all applications including ASBA, number, value and percentage of successful allottees for all applications including ASBA, date of completion of despatch of refund orders or instructions to Self Certified Syndicate Banks by the Registrar, date of despatch of certificates and date of filing of listing application, etc. is released within ten days from the date of completion of the various activities in at least one English national daily newspaper with wide circulation, one Hindi national daily newspaper with wide circulation and one regional language daily newspaper with wide circulation at the place where registered office of the issuer is situated. (2) The post-issue merchant banker shall ensure that issuer, advisors, brokers or any other entity connected with the issue do not publish any advertisement stating that issue has been oversubscribed or indicating investors response to the issue, during the period when the public issue is still open for subscription by the public.

An advertisement stating that the subscription to the issue has been closed may be issued after the actual closure of the issue. Basis of Allotment In a public issue of securities, the Executive Director/Managing Director of the designated stock exchange along with the post-issue lead merchant banker and the registrar to the issue would be responsible to ensure that the basis of allotment is finalized in a fair and proper manner on the basis of proportionate allotment. However, in the book building portion of book built issue, the allotment would be made in accordance with the prescribed guidelines. Other responsibilities. (1) The post-issue merchant banker shall ensure that the despatch of refund orders, allotment letters and share certificates is done by way of registered post or certificate of posting, as may be applicable. (2) The post-issue merchant banker shall ensure payment of interest to the applicants for delayed dispatch of allotment letters, refund orders, etc. as per the disclosure made in the offer document. (3) In case of absence of definite information about subscription figures, the issue shall be kept open for the required number of days to avoid any dispute, at a later date, by the underwriters in respect of their liability. (4) The issuer shall ensure that transactions in securities by the promoter and promoter group during the period between the date of registering the offer document with the Registrar of Companies or filing the letter of offer with the designated stock exchange, as the case may be and the date of closure of the issue shall be reported to the recognized stock exchanges where the specified securities of the issuer are listed, within twenty four hours of the transactions.

Terms and concepts in public issue of shares A public issue of shares has certain processes, commitments and concepts that require understanding. Categories of Investors in public issue The various categories of investors who are eligible to invest in a public issue of shares are: - Retail Individual Investors are those who invest less than Rs 1,00,000 in an issue. In a book building issue this category of investors are alone allowed to bid at cut-off price. They are required to tender the entire subscription amount at the time of making the application; unless otherwise specified in the Prospectus. - Non-Institutional Investors who are individual investors who invest more than Rs 1,00,000 in an issue - Qualified Institutional Buyers (QIB) which includes mutual funds, financial institutions, scheduled commercial banks, FIIs - Shareholders of the promoter group companies - Employees of the company - Promoters A public issue by an unlisted company is required by regulations to make a minimum net public offer of 25% of the post-issue paid up capital while for a listed company this limit is applied to the issue size. The remaining portion of the public issue can be reserved on a competitive basis or allotted on a firm allotment basis or on preferential basis to categories of investors such as employees, mutual funds, FIIs, shareholders of the promoting company, employees of the issuer company and scheduled banks. Out of the total issue, 50% shall be offered to the QIBs and 15% to HNIs and balance 35% to the retail investors. This is the allocation for a book building offer. For fixed price offers, a minimum of 50% of the net offer of securities to the public shall be initially made for allotment to retail individual investors and the balance to HNIs and other investors. A company which desires to have less than 25% of the post issue capital offered to the public should then at least offer 10% of the post issue capital to the public subject to the condition that the issue size

shall be a minimum of 100 Crores and there will be 20 lac units of shares which will be on offer and out of the total issue, at least 60% shall be offered to the QIBs and the balance 10% to HNI and 30% to the retail segment. Prospectus The prospectus is the document which contains all the information relevant to an investor to make an investment in a public issue of shares made through a fixed price offer. The content and format of the prospectus is prescribed by SEBI in its regulations. A company making a public issue of shares files a draft prospectus with SEBI through the lead manager of the issue. SEBI may require clarifications or changes to be made to the draft prospectus which have to be complied with before the prospectus is filed with the Registrar of companies. Red Herring Prospectus This is the document of information made according to SEBIs guidelines for a public issue of shares made through a book building exercise. In this, the price at which the issue is being made and the number of shares being offered or the total number of shares on offer is not given. The upper and lower band of the price and the number of shares may be disclosed or the issue size may be mentioned. This is because the price at which the shares are being issued will be determined based on the bids received in a book building offer which will be known only after the issue closes. A preliminary red herring prospectus is filed with SEBI before the issue opens and the observations made by SEBI, if any, are incorporated into it. Once the price is discovered, it is included in the offer document along with the number of shares if not already mentioned and the prospectus signed and dated is filed with the Registrar of companies and SEBI.

Underwriting SEBIs guidelines on public issues and the Companies Act require that an issue should receive subscription of a minimum of 90% of the net offer to the public failing which the company has to refund the entire subscription amount received. To protect against this, Companies enter into an underwriting agreement with institutions at the time of a public offer of shares to subscribe to the shares of the company if they remain unsubscribed by the investors. For undertaking this commitment, the underwriters are paid a commission. Underwriting for a fixed price issue is discretionary. However in the case of a book built issue underwriting is mandatory. Underwriters agreement is signed only after the closure of the issue subject to the minimum subscription being received. For an issue that is underwritten, SEBIs minimum subscription requirement will be 90% of the net public offer including the subscription by the underwriters. The underwriting may be a hard or soft commitment. In hard underwriting, the underwriter is expected to subscribe to the extent of commitment if the issue is undersubscribed. In soft underwriting, the underwriter buys the share at a later stage when the pricing process is complete and if investors do not pay-up on allotment. They usually place these shares with institutional investors. The minimum subscription norms of SEBI, and hence the requirement for underwriting, does not apply for a public issue through an offer for sale.

Methods of Making a Public Issue of Shares There are basically two ways in which a company can raise capital from a public issue of shares. These are - Fixed Price Issue - Book Built Issue Fixed Price Issue In a fixed price issue of shares to the public, the company in consultation with the lead manager to the issue would decide on the price at which the shares will be issued.

Currently, SEBI permits companies to freely price the issue. The price is justified by the company on the basis of quantitative and qualitative factors. This is clearly laid out in the prospectus for the investors to make an informed investment decision. Investors know the price at which the shares will be allotted to them at the time of making the application. Shares allotted to the investor will depend upon the basis of allotment finalized after the issue closes. If the issue is oversubscribed, the investor will get shares proportionate to the oversubscription in the respective category. The investor is sent a (Confirmatory Allotment Note) (CAN)/refund order within 30 days of the issue closing date. Book Built Issue The objective of a book build process is to identify the price that the market is willing to pay for the shares being issued by the company. The company and its lead managers will specify either a floor price or a price band within which investors can bid. This information is in the red herring prospectus. When the issue opens, investors will put in bid applications specifying the price and the amount of shares bid at that price. The price bid should be above the floor price or within the price band, as applicable, depending upon the specification in the red herring prospectus of the issue. Investors can revise the bids in the period when the issue is open. The issuer, in consultation with the book running lead manager will decide on the cut-off price at which the issue gets subscribed. All allottees who bid at or above the cut-off price are successful bidders and are eligible for allotment in the respective categories.

Key Concepts 1. A public issue of shares involves entities such as R&T agents, bankers and brokers apart from the lead manager of the issue. 2. All such entities have to be registered with SEBI. 3. The R&T agent manages the collection, collation, scrutinizing and distribution of information related to the application forms received. 4. They are involved in finalizing the basis of allotment, identifying the allottees, making the allotment and sending data to the depository. 5. Legal formalities such as payment of stamp duty, creating the register of members and the like are the functions of the R&T. 6. Bankers handle the funds collected in an issue and account for the same. 7. Brokers receive a commission for the role of collection agent in the issue.

Chapter-II Pre-issue & Post-issue Management

End Chapter quizzes

1. Only a listed company can make a public issue of shares. 2. SEBIs regulation does not consider the financial performance of a company in specifying the eligibility norms for a public issue. 3. A promoters entire holding in the company is locked-in for a specified period after a public issue of shares. 4. A firm allotment of shares has to be made at a price higher than the price of issue shares to the retail investor. 5. Promoters can divest their entire holdings in a company through a public issue of shares. 6. A private placement of shares is not regulated by SEBI or the Companies Act. 7. Companies prefer private placement because it gives cost and time benefits. 8. The definition of a QIB depends upon the Company. 9. A QIP of shares can be made only to QIBs. 10. There is a one-year lock-in on the sale of shares allotted to a QIB in a preferential allotment.

Chapter-III Topic: Book public issue

Contents: 3.1 Introduction 3.2 Basic Mechanism 3.3 Underwriting 3.4 Allotment 3.5 Activity Chart of book-building process 3.6 Reverse book building 3.7 Green Shoe option 3.8 Summary

Building

process

for

3.9 End Chapter Quiz

Book Building Mechanism

Book-building means a process by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of notice/ circular / advertisement/ document or information memoranda or offer document. A company proposing to issue capital through bookbuilding has to comply with the requirements of SEBI in this regard. These are discussed here. Book-building process is a transparent and flexible price discovery method used in most developed countries for marketing a public offer of equity shares either Initial Public Offerings (IPOs) or Further Public Offerings (FPOs) of a company. Under this method, price of securities is fixed by the issuer company along with Book Running Lead Managers (BRLM) on the basis of feedback received from investors through market intermediaries during a certain period, in accordance with Sebi guidelines in India. In this perspective, this article makes an attempt to review the different aspects of the book-building process of public issues and merchant banking activities relating to such process in the Indian primary capital market. The liberalization policies ushered in by the government, in 1991, have brought about a new dimension in the capital market as well as corporate environment in India. The investment climate improved considerably following the modification of licensing procedures and the freedom to fix issue prices for new issues, etc. The abolition of the Capital Issue Control Act, 1947 also welcomed a new era in the primary capital markets in India. Controls over the pricing of the issues, and designing and tenure of the capital issues were abolished after establishment of Securities and Exchange Board of India (SEBI) in 1988. The issuers, at present, are free to make the price of the issues under the ambit of Sebi. Before the establishment of Sebi, the quality of disclosures in the offer documents was very poor. Sebi also formulated and prescribed stringent disclosure norms in conformity to global

standards. These favorable developments lead to rapid growth in the quantum of financial investment. Thus, the primary capital market in India has been witnessing tremendous growth in the number of new issues hitting the market, surpassing the normal growth that is expected as a result of growth in the economy. While companies are very much keen on taking finance from the public through primary capital market, they require financial services in mobilization of finance from the capital market. Today is the era of specialization in service functions, and the merchant banker plays a very significant role in tandem with the corporate clients and the national economy. Though the merchant bankers remained almost stagnant and stereotyped till the 1990s, they have witnessed a remarkable growth during this period after the process of economic reforms and deregulation of the Indian economy. With free pricing of issues coupled with an increasing trend towards equity financing by companies, more and more companies are entering the capital market for funds resulting in a great scope for merchant banking services. As capital markets assume increased complexities, the need for such services from an investors point of view has also become enhanced. To keep pace with the globalization and liberalization process the government of India is very much concerned with the Indian capital market. Book building means a process by which a demand for the securities proposed to be issued by a body corporate is elicited & built up & the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice/circular/advertisings/document or information memoranda or offer document.

Nature: Book building is a process of price discovery. It is a market related process of demand & price determination. Book building is a transparent & flexible pricing method based on feed back from investors. In book building new shares are values on the basis of a demand feed back from investors and are a viable alternative to the

existing rigid system of fixed pricing which is to a large extent unavoidable at a retail level. The objective of book building is to find the highest market clearing price and the term and level from high quality long term investors in order to reach appropriate allocation decisions. It works on the assumption that the intermediary, the underwriting syndicate, estimates demand & takes the allocation on to their books before the sale to the investor who is a retail one. The syndicate is a wholesale concept while the ultimate investor is a retail one. SEBI guidelines for Book Building Conditions for Applicability: According to SEBI guidelines in an issue of securities to the public through a prospectus, the option of book building shall be available to the issuer company subjects to the following main conditions: The size of issue exceeds Rs. 100 crore. Only as an alternative to and to the extent of, the percentage of the issue which can be reserved for firm allotment, as per the existing guidelines, Book building process to be separately identified/indicated as a placement portion category, in the prospectus, Underwriting will be mandatory to the extent of the net offer to the public, One of the lead merchant bankers to the issue shall be nominated by the issuer company as book runner and his name shall be mentioned in the draft prospectus submitted to SEBI. In June 1996 SEBI has decided that in case of debt issues not accompanied by equity component the book building process could be allowed for the entire issue. A proposal for allowing 100% book building in equity issues by SEBI has been put on hold (23.12.1996) by the SEBI board on the ground that it would inhibit the right of investors to apply for an issue. The guidelines provide separate requirements to be met for 75% & 100%, book building for the issue of securities.

75% Book Building Process: The option of book-building is available to all body corporate which are eligible to make an issue of capital to the public as an alternative to and to the extent of the percentage of the issue, which can be reserved for firm allotment. The issuer company can either reserve the securities for firm allotment or issue them through book building process. The issue of securities though bookbuilding route should be separately identified/indicated as placement Portion category in the prospectus. The securities available to the public should be separately identified as net offer to the public. The requirement of minimum 25% of the securities to be offered to the public is also applicable. Underwriting is mandatory to the extent of the net offer to the public. The draft prospectus containing all the details except the price at which the securities are offered should be filed with SEBI. The issuer company should nominate one of the lead merchant bankers to the issue as book runner, and his name should be mentioned in the prospectus. The copy of the draft prospectus, filed with SEBI, should be circulated by the book runner to the institutional buyers, who are eligible for firm allotment, and to the intermediaries, eligible to act as underwriters inviting offers for subscription to the securities. In an issue of securities to the public through a prospectus, the option of book building is available to all body corporate that are otherwise eligible to make an issue of capital to the public as an alternative to, and to the extent of, the percentage of the issue, which can be reserved for firm allotment. The issuer company can either reserve the securities for the firm allotment or issue them through the book building process. The issue of securities through the book building process should be separately identified/indicated as placement portion category, in the prospectus. The securities available to the public should be separately identified as net offer to the public. The requirement of minimum 25% of the securities to be offered to the public is also applicable. Underwriting is mandatory to the extent of the net offer to the public. The draft prospectus containing all the information, except the information regarding the price at which the securities are offered, should be filed with the SEBI. One of the lead merchant banker(s) to the issue should be nominated by the issuer

company as a book runner and his name should be mentioned in the prospectus. The copy of the draft prospectus, filed with the SEBI, should be circulated by the book runner to the (i) institutional buyers, who are eligible for firm allotment, and (ii) intermediaries, eligible to act as underwriters, inviting offers for subscription to the securities. The draft prospectus circulated should, however, indicate the price band within which the securities are being offered for subscription. The book runner on receipt of the offer should maintain a record of the names & number of securities ordered & the price at which the institutional buyer/underwriter is willing to subscribe to the securities under the placement portion. The underwriter(s) should maintain a record of the orders received by him for subscribing to the issue out of the placement portion. He should aggregate these offers & intimate the same to the book runner. The institutional investor should also forward its orders, if any, to the book runner. On receipt of the information, the book runner and the issuer company determine the price at which the securities would be offered to the public. The issue price for the placement portion & offer to the public should be the same. On determination of the price, the underwriter should enter into an underwriting agreement with the issuer indication the number of securities as well as the price at which the former would subscribe to the securities. The book runner should, however, have an option to require the underwriters to pay all monies with respect to their underwriting commitment in advance. Within two days of determination of the issue price, the prospectus should be filed with the ROCs. The issuer company should open two different accounts for collection of application money (ies) - one for the private placement portion & the other for the public subscription. A day prior to the opening of the issue to the public, the book runner should collect the application forms along with the application money(ies), from the institutional buyers & the underwriters to the extent of the securities proposed to be allotted to them/subscribed by them.

The allotments for the private placement portion should be made on the second day from the closure of the issue. However, to ensure that the securities allotted under the placement portion and public portion are pari passu in all respects, the issuer company may have one date of allotment, which should be deemed as the date of allotment for the issue of securities through the book building process. In case the book runner has exercise the option to require the underwriter to pay in advance all money (ies) required to be paid with respect to their underwriting commitment by the 11th day of the closure of the issue, the shares allotted as per the private placement category would be eligible to be listed. The allotment of securities under the public category should be made as per the relevant SEBI guidelines. The securities allotment under the public category are eligible to be listed. In case of under subscription should be permitted from the placement portion subject to the condition that preference would be given to individuals investors. In case of under subscription in the placement portion, spillover would be permitted from the net offer to public. The issuer company may pay interest on the application money (ies) till the date of allotment or the deemed date of allotment uniformly to all the applicants. The book runner and other intermediaries should maintain records of the book building process. The SEBI has the right to inspect such records.

100% Book Building Process: In an issue of securities to the public through a prospectus, the option for 100% book building is available to any issuer company. The issue of capital should be Rs. 25 crore and above. Reservation for firm allotment to the extent of the percentage specified in the relevant SEBI guidelines can be made only to promoters, permanent employees of the issuer company and in the case of new company to the permanent employees of the promoting Company. It can also be made to shareholders of the promoting companies, in the case of new company and shareholders of group companies in the case of existing company either on a competitive basis or on a firm allotment basis. The issuer company should appoint

eligible merchant bankers as book runner(s) and their names should be mentioned in the draft prospectus. The lead merchant banker should act as the lead book runner and the other eligible merchant bankers are termed as co-book runner. The issuer company should compulsorily offer an additional 10% of the issue size offered to the public through the prospectus. 100% of the net offer to the public through 100% Book Building Process

75% of the net offer to the public through Book Building Process

Need of Book Building

The abolitions of the capital Issue Contract Act, 1947 has brought a new era in the primary capital markets in India. Controls over the pricing of the issues, designing and tenure of the capital issues were abolished. The issuers, at present, are free to make the price of the issues. Before establishment of SEBI in 1992, the quality of disclosures in the offer documents was very poor. SEBI has also formulated and prescribed stringent disclosure norms in conformity to global standards. The main drawback of free pricing was the process of pricing of issues. The issue price was determined around 60-70 days before the opening of the issue and the issuer had no clear idea about the market perception of the price determined. The traditional fixed price method of tapping individual investors suffered from two defects: 1. Delays in the IPO process and 2. Under-pricing of issue. In fixed price method, public offers do not have any flexibility in terms of price as well as number of issues. From experience it can be stated that a majority of the public issues coming through the fixed price method are either under-priced or over-priced. Individual investors (i.e. retail investors), as such, are unable to distinguish good issues from bad one. This is because the issuer company and the merchant banker as lead manager do not have the exact idea on the fixed pricing of public issues. Thus it is required to find out a new mechanism for fair price discovery and to help the least informed investors. Thats why, Book Building mechanism, a new process of price discovery, has been introduced to overcome this limitation and determine issue price effectively. Public offers in fixed price method involve a pre issue cost of 2-3% & carry the risk of failure if it does not receive 90% of the total subscription. In Book Building such cost & risks can be avoided because the issuer company can withdraw from the market if demand for the security does not exist.

Book Building Process

Steps Involved in Book Building Process

IPO Through Stock Exchange On-line System (E-IPO) In addition to other requirements for public issue as given in SEBI guidelines wherever applicable, a company proposing to issue capital to public through the on-line system of the stock exchange for offer of securities has to comply with the additional requirements in this regard. They are applicable to the fixed price issue as well as for the fixed price portion of the book-built issues. The issuing company would have the option to issue securities to public either through the on-line system of the stock-exchange or through the existing banking channel. For E-IPO the company should enter into agreement with the stock-exchange(s) and the stock-exchange would appoint SEBI registered stockbrokers of the stock exchange to accept applications. The brokers and other intermediaries are required to maintain records of (a) orders received, (b) applications received, (c) details of allocation and allotment, (d) details of margin collected and refunded and (e) details of refund of application money. Issue of Capital by Designated Financial Institutions Designated financial institutions (DFI), approaching the capital market for fund though an offer document, have to follow following guidelines. Promoters contributions: There is no requirement of minimum promoters contribution in the case of any issue by DFIs. If any DFI proposes to make a reservation for promoters, such contribution should come only from actual promoters and not from directors, friends, relatives and associates, etc. Reservation for employees: The DFIs may reserve out of the proposed issues for allotment only to their permanent employees, including their MD or any fulltime director. Such reservations should be restricted to Rs. 2000 per employee, subject to five percent of the issue size. The shares allotted under the reserved category are subject to a lock-in for a period of three years. Pricing of the issue: The DFIs, may freely price the issues in consultation with the lead managers, if the DFIs have a three years

track record of consistent profitability out of immediately preceding five years, with profit during last two years prior to the issue. Preferential Issue The preferential issue of equity shares/ fully convertible debentures (FCD)/ partly convertible debentures (PCDs) or any other financial instruments, which would be converted into or exchanged with equity shares at a later date by listed companies to any select group of persons under section 81(1A) of the Companies Act, 1956 on a private placement basis, are governed by the following guidelines: Pricing of issue: The issue of shares on a preferential basis can be made at a price not less than the higher of the following: (i) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange and (ii) The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date. Pricing of Shares arising out of warrants: Where warrants are issued on a preferential basis with an option to apply for and be allotted shares, the issuer company should determine the price of the resultant shares in accordance with the provisions discussed in the above point. Pricing of shares on Conversion: Where PCDs/FCDs/ other convertible instruments are issued on a preferential basis, providing for the issuer to allot shares at a future date, the issuer should determine the price at which the shares could be allotted in the same manner as specified for pricing of shares allotted in lieu of warrants. Currency of Financial Instruments: In the case of warrants / PCDs / FCDs / or any other financial instruments with a provision for the allotment of equity shares at a future date, either through conversion or otherwise, the currency of the instruments cannot exceed beyond 18 months from the date of issue of the relevant instruments. Non-transferability of Financial Instruments: The instruments allotted on a preferential basis to the promoters / promoter groups are

subject to a lock-in period of three years from the date of allotment. In any case, not more than 20% of the total capital of the company, including the one brought in by way of preferential issue would be subject to a lock-in period of three years from the date of allotment. Currency of Shareholders Resolutions: Any allotment pursuant to any resolution passed at a meeting of shareholders of a company granting consent for preferential issues of any financial instrument, should be completed within a period of three months from the date of passing of the resolution. Certificate from Auditors: In case every issue of shares/ FCDs/PCDs/ or other financial instruments has the conversion option, the statutory auditors of the issuer company should certify that the issue of said instruments is being made in accordance with the requirements contained in these guidelines.

OTCEI Issues A company making an initial public offer of equity shares / convertible securities and proposing to list them on the Over The Counter Exchange of India (OTCEI) has to comply with following requirements: Eligibility Norms: Such a company is exempted from the eligibility norms applicable to unlisted companies, provided (i) it is sponsored by a member of the OTCEI and (ii) has appointed at least two market makers. Any offer of sale of equity shares / convertible securities resulting from a bought out deal registered with OTCEI is also exempted from the eligibility norms subject to the fulfillment of the listing criteria laid down by the OTCEI. Pricing norms: Any offer for sale of equity shares or any other convertible security resulting from a bought out deal registered with OTCEI is exempted from the pricing norms specified for unlisted companies, subject to following conditions: (a) The promoters after such issue would retain at least 20% of the total issued capital with a

lock-in of three years from the date of the allotment of securities in the proposed issue and (b) at least two market makers are appointed in accordance with the market making guidelines stipulated by the OTCEI. Projection: In case of securities proposed to be listed on the OTCEI, projections based on the appraisal done by the sponsor who undertakes to do market-making activity can be included in the offer document subject to compliance with the other conditions relating to the contents of offer documents.

Offer to public through Book-Building Process An issuer company may make an issue of securities to the public through a prospectus in the following manner: 100% of the net offer to the public through the book-building process 75% of the net offer to the public through the book-building process and 25% at the price determined through book-building. Reservation or firm allotment to the extent of the percentage specified in the relevant SEBI guidelines can be made only to promoters, permanent employees of the issuer company and, in the case of a new company, to the permanent employees of the promoting companies. It can also be made to the shareholders of the promoting companies in the case of a new company & shareholders of group companies in the case of an existing company, either on a competitive basis or on a firm allotment basis. The issuer company should appoint merchant banker(s) as book runner(s) & their names should be mentioned in the draft prospectus. The issue company should enter into an agreement with stock exchange(s) which have the requisite system of online offer of securities specifying, inter alia, their inter se rights, duties, responsibilities and obligations. It should also provide for a dispute resolution mechanism between them.

Regulatory requirements in a book building offer - The issue must be compulsorily underwritten to the extent of net offer to the public. - The lead managers have to be appointed as the book runner. - The cap of the price band will not be higher than 20% of the floor price. - The price band can be revised during the offer period within the 20% band between floor and cap price. The revision will have to be advertised and the issue period extended by three days. - In a book built offer, not less than 35% of the net offer to the public will be reserved for retail individual investors, not less than 15% for non-institutional investors and not more than 50% for qualified institutional buyers. The issue will be open for a minimum of 3 working days and a maximum of seven days. If the price band is revised, then the issue will be open for 10 days. 118 The details of the syndicate members who can accept the bids as well as bidding centres all of which should have electronically connected terminals should be made widely available. Bids can also be placed with the syndicate members who are brokers of the exchange through which the securities are being offered under the on-line system. All bids shall be accepted in the standardised bid forms that will have the details of the investor, the price and the quantity bid for. The bids can be revised during the period that the offer is open. Investors who are entitled to allotment in the issue should be sent a confirmatory allotment note (CAN) within 15 days of the issue closing. Demat credit of shares or dispatch of refund order should be completed within 15 days of the closure of the issue. Limitation of Book Building Mechanism Retail investors are not free from certain disadvantages compared to institutional investors in Book Building, which does not provide an appropriate price discovery mechanism. It is the main reason why small investors have stayed away from the market. It needs changes to make

it more suitable to the Indian context and the conditions prevailing in the Indian capital market. In the IPOs through the Book building route, it would be difficult to find dubious issues of the kind that put off investors. The book building system has various limitations. Some of them are as follows: 1. Book building is appropriate for mega issues only. In the case of the potential investors, the companies can adjust the attributes of the offer according to the preference of the potential investors. It may not be possible in big issues since the risk-return preference of the investors cannot be estimated easily. 2. The issuer company should be fundamentally strong and well known to the investors. 3. The book building system works very efficiently in matured market conditions. 4. The investors are aware of the various parameters affecting the market price of the securities. But, such conditions are not commonly found in practice. 5. There is a possibility of price rigging on listing as promoters may try to bail out syndicate members.

GREEN SHOE OPTION A company making an initial public offer of equity shares through the book building mechanism can avail of the green shoe option (GSO) for establishing the post-listing of its shares. The GSO means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism through a stabilizing agent (SA). The concerned issuing company should seek authorization for the possibility of allotment of further issues to the SA at the end of the stabilization period together with the authorization for the public issue in the general meeting of its shareholders. It should appoint one of the lead book runners as the SA who would be responsible for the price stabilization process. The SA should enter into an agreement with the issuer company, prior to the filing of the offer document with SEBI, clearly stating all the terms/conditions relating to GSO including fee charged/expenses to be incurred by him for this purpose. He should also enter into an agreement with the promoter(s) who would lend their shares, specifying the maximum number of shares that may be borrowed from the promoters, but in no case exceeding 15% of the total issue size. The details of these two agreements should be disclosed in the draft red herring prospectus, red herring prospectus and the final prospectus. They should also be included as material documents for public inspection in terms of the disclosures in the contents of the offer documents. The lead book runner, in consultation with the SA, would determine the amount of shares to be over-allotted with the public issue within the ceiling specified (i.e. 15% of the issue size). Over allotment refers to an allocation of shares in excess of the size of the public issue made by the SA out of shares borrowers from promoters in pursuance of a GSO exercised by the issuing company.

In most of the cases, it is experienced that IPO through Book Building method in India turns out to be overpriced or under priced after their listing of them and ultimately the small investors become a net looser.

If the IPO is overpriced it creates a bad feeling in investors mind as initial returns to them maybe negative at that point of time. On the other side, if the prices in the open market fall below the issue price, small investors may start selling their securities to minimize losses. Therefore, there was a vital need of a market stabilizer to smoothen the swings in the open market price of a newly listed share, after an initial public offering. Market stabilization is the mechanism by which stabilizing agent acts on behalf of the issuer company, buys a newly issued security for the limited purpose of preventing a declining in the new securitys open market price in order to facilitate its distribution to the public. It can prevent the IPO from huge price fluctuations and save investors from potential loss. Such mechanism is known as Green Shoe Option (GSO) which is an internationally recognized for market stabilization. So GSO can rectify the demand and supply imbalances and can stabilize the price of the stock. It owes its origin to the Green Shoe Company which used this option for the first time throughout the world. In case an initial public offer of equity shares is made by an issuer company through the book building mechanism, the Green Shoe option (GSO) can be used by such company for stabilizing the post listing price of its shares, subject to the guidelines prescribed by SEBI. According to SEBI guidelines, a company desirous of availing the GSO shall in the resolution of the general meeting authorizing the public issue, seek authorization also for the possibility of allotment of further shares to the stabilizing agent (SA). The company shall appoint one of the lead book runners, amongst the issue management team, as the stabilizing agent (SA), who will be responsible for the price stabilization process, if required. The SA shall enter into an agreement with the issuer company, prior to filling of offer document with SEBI, clearly stating all the terms & conditions relating to this option including fees charged/expenses to be incurred by SA for this purpose. The SA shall also enter into an agreement with the

promoter(s) who will lead their shares, specifying the maximum number of shares that may be borrowed from the promoters, which shall not be in excess of 15% of the total issue. The stabilization mechanism shall be available for the period disclosed by the company in the prospectus, which shall not exceed 30 days from the date when trading permission was given by the exchange(s). The draft red herring/red herring prospectus/final prospectus should contain the following additional disclosures. Name of the SA Maximum number of shares as well as the percentage of the proposed issue size. Period for which the company proposes to avail of the stabilization mechanism, Maximum amount of funds to be received by the company in case of further allotment and the use of these additional funds in final document to be filed with the ROCs. Details of the agreement/arrangement between the SA and the promoters to borrow shares including, inter alia, (i)name of the promoters (ii) their existing shareholders (iii) number & percentage of shares to be lent by them (iv) rights/obligations of each party and so on. The final prospectus should additionally disclose the exact number of shares to be allotted pursuant to the public issue, stating separately the number of shares to be borrowed from the promoters and over-allotted by the SA & their percentage in relation to the total issue size.

Companies may also go in for a Green Shoe Option (GSO). The objective of this option is to provide stability to price of the share in the secondary market immediately on listing. A company, which opts for Green Shoe option shall disclose the same in the offer document. The company can allot additional shares not exceeding 15% of the issue size to the general public who have subscribed in the issue. The shares will be allotted in the same ratio in which reservation is being made for

the various categories. For this purpose, the required over allotment shares will be lent by the promoter and/or any investor holding more than 5% of the total issued capital. The money realised out of this over-allotment will be kept in a separate bank A/c to be designated as GSO bank A/c. This amount will be used by the Stabilizing Agent (SA), who is usually one of the merchant bankers or lead managers to the issue. The SA will utilize the money for buying shares from the secondary market whenever the market price goes below the issue price. However, he is under no obligation to take any direction from the issuing company or the promoter for his market operations. The SA can only buy shares and cannot sell any shares. Moreover, he can buy a maximum up to the extent of the over-allotment made. The shares purchased from the secondary market will be kept in a separate demat A/c designated as GSO demat A/c. The entire process of stabilization will be available only for a period of 30 days from the date on which the shares are listed and traded. At the end of the 30 day period, the SA will take stock of the shares purchased and these shares will be returned to the lender/promoter. In the event of any shortfall in the shares bought in relation to the shares lent, additional allotment will be made by the company against the unutilized funds lying in the GSO Bank A/c. This will be at the same price as per the original issue price. Any balance money lying in the GSO bank A/c (arising out of difference between the issues and buying price of the SA) will be transferred by the SA to the Investor Protection Fund of the designated stock exchange. - The GSO bank A/c and the GSO demat A/c are closed once the period of stabilization is over

Allotment of Shares It means an appropriation of a certain number of shares to an applicant in response to his application for shares. Allotment means distribution of shares among those who have submitted written application. Procedures regarding Allotment of Shares (1) Fulfillment of statutory conditions which need to be fulfilled: The company secretary has to see that the statutory conditions regarding the allotment of shares are fulfilled before the Board proceeds to allot the shares. The following are the statutory conditions which need to be fulfilled: (i) Valid offer and acceptance: There should be a valid offer and acceptance for the allotment to be a valid one. Here the company is the offertory and the acceptors are the general public. If there is no company to offer then there would be no public to accept. (ii) Unconditional Allotment: The allotment must be absolute and unconditional and also as per the terms and conditions mentioned in the application. The allotment should be unbiased, and not according to the caste, creed, and religion. It is not that rich shareholders pay more on the shares and the poor share holders pay less on the shares. All have to pay the same price on the shares. (iii) Collection of minimum subscription amount: The minimum subscription amount as noted in the prospectus has been received within 120 days of the issue of prospectus. (iv) Receipt of application money: Not less than 5% of the nominal value of the share has been secured and has been received along with the applications. (v) Deposition of application of money in a scheduled bank: All application money received along with the applications must be deposited in a scheduled bank. It cannot be withdrawn until the

company gets trading certificate or where such certificate is already received or till the minimum subscription amount is received. (vi) Filing of prospectus with the registrar: A copy of the prospectus or statement in lieu of prospectus has been duly filed with the registrar and at least three days have elapsed after such filing before the allotment is taken up. (vii) Time of allotment: No allotment of shares can be effected until the beginning of the fifth day from the date of issue of prospectus. The subscription list must be opened for at least 3 days as disclosed in the prospectus. (viii) Proper communication: The allotment must be duly communicated to the applicant through post i.e. registered post with necessary details. (ix) Allotment strictly as per documents issued: The Board of Directors have to make the allotment of shares strictly as per the documents issued which include the prospectus and the application form. The provisions made in the Memorandum of Association and the Articles of Association must also be given due consideration. (x) SEBI nominee: If the issue is over subscribed, the shares are allotted on a proportionate basis. SEBI's nominee is associated while finalizing the basis of allotment. The purpose is to see that the allotment is done on a fair and just basis. The allotment also needs to be approved by a leading stock exchange. (2) Appointment of allotment committee: The secretary informs the Board, that the share applications are received and are ready for allotment. If the issue is just subscribed or under subscribed, the Board will do the allotment of shares, but if the issue is over subscribed, the Board appoints an allotment committee to do the allotment work. The allotment committee will study the problem, prepare a report and submit to the Board.

(3) Board meeting for finalization of allotment formula: A meeting of the Board of Directors will be called to finalize the allotment formula, which is being prepared by the allotment committee. If the shares are listed, the allotment formula is to be finalized with the approval of the concerned Stock Exchange Authorities. (4) SEBI's association with allotment work: A representative of SEBI need to be associated while finalizing the allotment formula. For this, the company has to request SEBI to nominate a public representation for allotment work. SEBI's nominee is necessary when the issue is over subscribed. (5) Signature of chairman on application and allotment list: The secretary has to see that every sheet of application and allotment list is signed by the chairman. The secretary also has to sign the application and allotment lists. (6)Resolution of the Board for allotment: The secretary has to see that the Board passes a resolution regarding the allotment of shares and authorizing him to issue letters of allotment and letters of regret. (7) Issue of letters of allotment and letters of regret: After the Board's resolution to allot shares, the secretary prepares the allotment list. Then he will send allotment letters to those who have been allotted shares and regret letters to those who could not be allotted shares. (8) Refund / Adjustment of application money: The secretary has to make suitable arrangement for the repayment of application money sent by the applicant. The refunded application money is made to those share holders who could not be allotted shares. The refund order is sent along with the letters of regret. If an applicant has been allotted a smaller number of shares than the number applied for, the secondary has to adjust the excess amount with the amount due on allotment. (9) Collection of allotment money: The secretary has to make suitable arrangements with the Company's Bankers for collection of allotment money against the allotment letters.

(10) Arrangement relating to letters of renunciation: To renounce means to give up. Certain applicants who are being allotted shares do not want them, so they return the shares back to the company. this is known as renunciation. The blank form of letter of renunciation and letter of request for allotment along with the letter of renunciation duly executed and the original letter of allotment from the renounces, the secretary has to make necessary changes in the Application of Allotment list in order to enter the names of the new allot-tees. (11) Arrangement relating to splitting of allotment letters: Splitting means putting the shares in one or more names. In case any allottee requests for a split of the allotment letter, the secretary places such a request before the Board for approval. Once the Board approves the splitting of the allotment letter, the secretary has to enter the details of the split in a separate list of split allotments and issue the necessary 'split' letters. (12) Submission of return of Allotment: Every company whether public or private and having a share capital ans within 30 days of allotment is required to send to the Registrar, a document known as the "Return of Allotment". The return of allotment contains various details on allotment of shares such as the nominal value of shares allotted, names and addresses of allotees, amount paid or payable on each share and particulars of bonus shares and shares issued at discount. The secretary has to see that these documents are prepared and submitted in time to the Registrar. (13) Preparation of Register of members and issue of share certificates: The secretary has to prepare the Register of members from the Application and Allotment lists. He has to see that the shares certificates are properly printed, sealed, signed and distributed to all the allot-tees within three months after the allotment of shares. He has also to see that the share certificates are issued against the letters of allotment.

Reverse Book Building Securities and Exchange Board of India has issued the SEBI (Delisting of Securities) Guidelines 2003 for delisting of shares from stock exchanges which provide the overall framework for voluntary delisting by a promoter or acquirer through a process referred to as Reverse Book Building. The promoter or acquirer shall appoint trading members for placing bids on the online electronic system. Investors may approach trading members for placing offers on the on-line electronic system. The shareholders desirous of availing the exit opportunity shall deposit the shares offered with the trading members prior to placement of orders. Alternately, they may mark a pledge for the same to the trading member. The final offer price shall be determined as the price at which the maximum number of shares have been offered. The promoter / acquirer shall have the choice to accept the price. If the price is accepted, the acquirer shall be required to accept all offers upto and including the final price. If the quantity eligible for acquiring securities at the final price offered does not result in public shareholding falling below the required level of public holding for continuous listing, the company shall remain listed. At the end of the book building period, the merchant banker to the book building exercise shall announce the final price and the acceptance (or not) of the price by the promoter / acquirer.

Key Concepts 1. The company appoints a merchant bank to lead manage the proposed public issue of the company. 2. Other constituents such as the R&T agent, bankers, underwriters are appointed by the lead manager in consultation with the company. All constituents have to entities registered with SEBI. 3. The lead manager gets in-principle approval of the stock exchange, files the draft prospectus with SEBI, files the final prospectus with the RoC and ensure compliance with SEBIs regulations. 4. Once the issue closes, the lead manager and R&T agent in consultation with the stock exchange finalises the basis of allotment. 5. The basis of allotment is the process of defining the number of shares allotted to each investor based on the oversubscription. 6. Retail investors, institutional investors, promoters, shareholders of promoter group companies, employees are categories of investors eligible to apply in a public issue. 7. A prospectus is the offer document prepared according to regulations which gives the investors complete information about the issue. 8. A Red herring prospectus is an offer document where the price at which the issue is being made and the number of shares is not mentioned as in a book building process. 9. Underwriting is the process of getting commitments from institutions to pick up shares in a public issue if the issue is under subscribed. 10. a book-built issue the price at which the shares will be allotted and the successful allottees will be decided upon by a bidding process. 11. The process of bidding will be done as per the rules laid down by SEBI. 12. The Green Shoe Option is used by companies making an issue to stabilize the price in the secondary markets. Shares are over-allotted to the investing public for which shares is lent by the promoter. The money received through this over-allotment process is used for stabilizing the price in the secondary market, post the listing of the shares.

Conclusion Book building process aims at fair pricing of the issue which is supposed to emerge out of offers made by various investors. One question may arise whether book building is the right mechanism for fair pricing discovery in IPOs? The answer may be in the negative because a floor price is fixed for the book building below which no bid can be accepted. Since investors participate through Book Building process in making fair pricing of IPOs whether there is no ceiling price, there should not be any floor price. In addition to this, unlike international market, India has not reached the stage of development of the institutional framework to experiment with the book building process because retail investors are still now an integrated part of Indian capital market. If the interest of the small investors is not safeguard appropriately, this may be very dangerous to the primary capital market.

Chapter-III Book Building Process

End Chapter quizzes

1. Book Building is a (a) method of placing an issue (b)method of entry in foreign market (c) price discovery mechanism in case of an IPO (d)none of the above 2. In a book built issue a ______ investor can bid at cut-off price. a. QIBs b. Employees of the issuer company c. Retail d. Financial institution 3. A fixed price issue has to be listed within ______ days of closure of issue. a. 10 days b. 15 days c. 30 days d. 50 days 4. Bankers to an issue are appointed by the _______. A. Lead banker B. Issuer company C. SEBI D. All of the above

5. Brokers to an issue are ________. a. Merchant bankers b. Members of stock exchange c. Company members d. Appointed by Lead bankers 6. Stock exchange helps in (a) fixation of stock prices (b)ensures safe and fair dealing (c) induces good performance by the company (d)all of the above

7. The role and responsibility of each constituent is define by the lead manager. 8. An application form is rejected if the bank account details are missing. 9. SEBI has laid down a list of mandatory collection centres for public issues. 10. The lead manager has to be given only the final collection figures as per regulation. 11. Brokers to an issue are responsible for building demand for the share in the secondary market

Chapter-IV Loan Syndication Evaluation & Performance

Contents: 4.1 Introduction to loan syndication 4.2 Steps involved in the process 4.3 Performance evaluation 4.4 Summary 4.5 End chapter Quiz

Loan Syndication: Domestic & External

INTRODUCTION Borrowing by way of a loan facility can provide a borrower with a flexible and efficient source of funding. If a borrower requires a large or sophisticated facility or multiple types of facility this is commonly provided by a group of lenders known as a syndicate under a syndicated loan agreement. A syndicated loan agreement simplifies the borrowing process as the borrower uses one agreement covering the whole group of banks and different types of facility rather than entering into a series of separate bilateral loans, each with different terms and conditions. Loan syndication refers to assistance rendered by merchant banks to get mainly term loans for projects. Such loans may be obtained from a single development finance institution or a syndicate or consortium as in the case of large term loans. Merchant banks can also help corporate clients to raise syndicated loans from commercial banks.

The purpose of this note is to provide guidance on various aspects of a syndicated loan transaction, focusing on the following: (i) the types of borrowing facilities commonly seen in a syndicated loan agreement; (ii) a description of the parties to a syndicated loan agreement and an explanation of their role; (iii) a brief explanation of the documentation entered into by the parties; (iv) the time line for a typical syndicated loan transaction; and

(v) a description of the common methods used by lenders to transfer syndicated loan participations. The guidance in this note is given on the basis of a typical syndicated loan transaction undertaken in the European loan market as envisaged in the LMA Primary Loan documents and governed by the laws of England. This note is not intended to provide a detailed explanation of the provisions of the LMA Primary Loan Agreements - guidance on this is set out in the "Users Guide to the Recommended Form of Primary Documents" published by the LMA and available to LMA members on the LMA website. 2. TYPES OF FACILITY COMMONLY SYNDICATED Two types of loan facility are commonly syndicated: term loan facilities and revolving loan facilities. 1. Term Loan Facility: Under a term loan facility the lenders provide a specified capital sum over a set period of time, known as the "term". Typically, the borrower is allowed a short period after executing the loan (the "availability" or "commitment" period), during which time it can draw loans up to a specified maximum facility limit. Repayment may be in instalments (in which case the facility is commonly described as "amortising") or there may be one payment at the end of the facility (in which case the facility is commonly described as having "bullet" repayment terms). Once a term loan has been repaid by the borrower, it cannot be re-drawn. Development Finance Institutions (DFIs) or development banks starting with Industrial finance Corporations to assist the promotion & financing of fixed assets of industrial units have been in existence since 1948. DFIs have been an integral part of the capital market and have played a significant role in financing investment activity. Long term borrowings by corporate from financial institutions constitute about 10% of total sources of funds of corporate. At the all India level, there is Industrial Development Bank of India, the apex development finance institution, Industrial credit & investment

corporation, Industrial Reconstruction bank of India & Small Industries Development Bank of India & Small Industries development Bank of India. At the state level there are 18 state Finance Corporations (SFCs) & 28 State Industrial Development Corporations. Investment institutions, Unit Trust of India, Life Insurance Corporation of India & General Insurance Corporation of India and its subsidiaries also grant term loans.

2 Revolving Loan Facility: A revolving loan facility provides a borrower with a maximum aggregate amount of capital, available over a specified period of time. However, unlike a term loan, the revolving loan facility allows the borrower to drawdown, repay and re-draw loans advanced to it of the available capital during the term of the facility. Each loan is borrowed for a set period of time, usually one, three or six months, after which time it is technically repayable. Repayment of a revolving loan is achieved either by scheduled reductions in the total amount of the facility over time, or by all outstanding loans being repaid on the date of termination. A revolving loan made to refinance another revolving loan which matures on the same date as the drawing of the second revolving loan is known as a "rollover loan", if made in the same currency and drawn by the same borrower as the first revolving loan. The conditions to be satisfied for drawing a rollover loan are typically less onerous than for other loans. A revolving loan facility is a particularly flexible financing tool as it may be drawn by a borrower by way of straightforward loans, but it is also possible to incorporate different types of financial accommodation within it - for example, it is possible to incorporate a letter of credit facility, swing line facility or overdraft facility within the terms of a revolving credit facility. This is often achieved by creating a sublimit within the overall revolving facility, allowing a certain amount of the lenders' commitment to be drawn in the form of these different facilities.

General: Syndicated loan agreements may contain only a term or revolving facility or they can contain a combination of both or several of each type (for example, multiple term loans in different currencies and with different maturity profiles are not uncommon). There can be one borrower or a group of borrowers with provision allowing for the accession of new borrowers under certain circumstances from time to time. The facility may include a guarantor or guarantors and again provisions may be incorporated allowing for additional guarantors to accede to the agreement. 3. PARTIES TO A SYNDICATED LOAN The syndication process is initiated by the borrower, who appoints a lender through the grant of a mandate to act as the Arranger (also often called a Mandated Lead Arranger) on the deal. There is often more than one Arranger on any transaction but for the purposes of this note we will refer to this role in the singular. The Arranger is responsible for advising the borrower as to the type of facilities it requires and then negotiating the broad terms of those facilities. By the very nature of this appointment, it is likely that the Arranger will be a lender with which the borrower already has an established relationship, although it does not have to be. At the same time the Arranger is negotiating the terms of the proposed facility, one of the Arrangers appointed by the Borrower to act as Bookrunner also starts to put together a syndicate of banks to provide that facility. Syndication is often done in stages, with an initial group of lenders agreeing to provide a share of the facility. This group of lenders is often referred to as Co-Arranger, although other titles may be used however, we shall continue to refer to this group of lenders as CoArrangers for the purposes of this note. The Co-Arrangers then find more lenders to participate in the facility, who agree to take a share of the Co-Arrangers' commitment. To facilitate the process of administering the loan on a daily basis, one bank from the syndicate is appointed as Agent. The Agent who is

appointed acts as the agent of the lenders not of the borrower and has a number of important functions: - Point of Contact: (maintaining contact with the borrower and representing the views of the syndicate) - Monitor: (monitoring the compliance of the borrower with certain terms of the facility) - Postman and Record-keeper: (it is the agent to whom the borrower is usually required to give notices) - Paying Agent: (the borrower makes all payments of interest and repayments of principal and any other payments required under the Loan Agreement to the Agent. The Agent passes these monies back to the banks to which they are due. Similarly the banks advance funds to the borrower through the Agent). The terms of a syndicated loan agreement empower the Agent to undertake the roles described above in return for a fee. Any decisions of a material nature (for example, the granting of a waiver) must usually be taken by a majority, if not by the whole syndicate. Whilst the Agent carries the standard duties and responsibilities of any agent under English Law, the facility agreement will contain a number of exculpatory provisions to limit the scope of the Agent's relationship with the syndicate lenders and with the borrower. If the syndicated loan is to be secured, a lender from the syndicate is usually appointed to act as Security Trustee to hold the security on trust for the benefit of all the lenders. The duties imposed upon the Security Trustee are typically more extensive than those of an agent. In large syndicates, it is sometimes decided that some decision making power should be delegated to the majority from time to time (often referred to as the 'majority lenders' or 'instructing group'). This group usually consists of members of the syndicate at the relevant time that hold a specified percentage of the total commitments under the facility. By delegating some of the decision-making, the mechanics of the loan are able to work more effectively than if each and every member of the syndicate had to be consulted and subsequently reach unanimous agreement on every request from the borrower.

4. DOCUMENTATION FOR A SYNDICATED LOAN Mandate Letter: The borrower appoints the Arranger via a Mandate Letter (sometimes also called a Commitment Letter). The content of the Mandate Letter varies according to whether the Arranger is mandated to use its "best efforts" to arrange the required facility or if the Arranger is agreeing to "underwrite" the required facility. The provisions commonly covered in a Mandate Letter include: (i) an agreement to "underwrite" or use "best efforts to arrange"; (ii) titles of the arrangers, commitment amounts, exclusivity provisions; (iii) conditions to lenders' obligations; (iv) syndication issues (including preparation of an information memorandum, presentations to potential lenders, clear market provisions, market flex provisions and syndication strategy); and (v) costs cover and indemnity clauses. Term Sheet: The Mandate Letter will usually be signed with a Term Sheet attached to it. The Term Sheet is used to set out the terms of the proposed financing prior to full documentation. It sets out the parties involved, their expected roles and many key commercial terms (for example, the type of facilities, the facility amounts, the pricing, the term of the loan and the covenant package that will be put in place). Information Memorandum: Typically prepared by both the Arranger and the borrower and sent out by the Arranger to potential syndicate members. The Arranger assists the borrower in writing the information memorandum on the basis of information provided by the borrower during the due diligence process. It contains a commercial description of the borrower's business, management and accounts, as well as the details of the proposed loan facilities being given. It is not a public document and all potential lenders that wish to see it usually sign a confidentiality undertaking.

Syndicated Loan Agreement: The Loan Agreement sets out the detailed terms and conditions on which the Facility is made available to the borrower.

Fee Letters: In addition to paying interest on the Loan and any related bank expenses, the borrower must pay fees to those banks in the syndicate who have performed additional work or taken on greater responsibility in the loan process, primarily the Arranger, the Agent and the Security Trustee. Details of these fees are usually put in separate side letters to ensure confidentiality. The Loan Agreement should refer to the Fee Letters and when such fees are payable to ensure that any non-payment by the borrower carries the remedies of default set out in the Loan Agreement. 5. TIMING Whilst the principal documents required for the provision of a syndicated loan are the same, the timing of producing such documentation often depends on whether or not the loan is being underwritten (see diagrams below).

6. SYNDICATION LOAN TRANSFERS Why sell a participation in a syndicated loan? A lender under a syndicated loan may decide to sell its commitment in a facility for one or more of the following reasons: Realizing Capital: if the loan is a long-term facility, a lender may need to sell its share of the commitment to realize capital or take advantage of new lending opportunities; Risk/Portfolio Management: a lender may consider that its loan portfolio is weighted with too much emphasis on a particular type of borrower or Loan or may wish to alter the yield dynamics of its loan

portfolio. By selling its commitment in this loan, it may lend elsewhere, thus diversifying its portfolio; Regulatory Capital Requirements: a bank's ability to lend is subject to both internal and external requirements to retain a certain percentage of its capital as cover for its existing loan obligations. These are known as "Regulatory Capital Requirements"; and Crystallize a loss: the lender might decide to sell its commitment if the borrower runs into difficulties - specialists dealing in distressed debts provide a market for such loans. However, before the lender can go ahead and transfer its participation in a syndicated loan, it must consider the implications of the methods of transfer available to it under the Syndicated Loan Agreement. Forms of Transfer The most common forms of transfer to enable a lender to sell its loan commitment are: (i) Novation (the most common legal mechanic used in transfer certificates scheduled to loan agreements); (ii) Legal assignment; (iii) Equitable assignment; (iv) Funded participation; and (v) Risk participation. Methods (i) and (ii) result in the lender disposing of its loan commitment with the new lender assuming a direct contractual relationship with the borrower, whilst methods (iii) to (v) result in the lender retaining a contractual relationship with the borrower. Each of these methods is now examined in more detail. Novation: Novation is the only way in which a lender can effectively 'transfer' all its rights and obligations under the Loan Agreement. The process of transfer effectively cancels the existing lender's obligations and rights under the loan, while the new lender assumes identical new rights and obligations in their place.

Therefore the contractual relationship between the transferring lender and the parties to the loan agreement cease and the new lender enters into a direct relationship with the borrower, the agent and the other lenders. At the time the new lender becomes a party to the Loan Agreement the loan could be fully drawn, particularly if it is a term loan facility. However, particularly in the case of a revolving credit facility the new lender could be assuming obligations to advance monies to the borrower. The borrower has to be a party to the novation process. The documentation required to affect a novation of a participation in a syndicated loan depends on the provisions in the Loan Agreement. However most Loan Agreements (including the LMA recommended form) have a transfer certificate attached as a schedule that operates by way of novation. There is also a provision in the Loan Agreement where all parties (including the borrower) agree that provided the other conditions to any transfer set out in the Loan Agreement are complied with they consent to the novation effected by the execution of the transfer certificate. The Agent, the new lender and the existing lender are the only parties usually required to execute the transfer certificate.

Legal Assignment: Assignment involves the transfer of rights, but not obligations. For a legal assignment, s.136 of the Law of Property Act 1925 provides that the assignment must be: absolute (i.e. the whole of the debt outstanding to the existing lender); in writing and signed by the existing lender; and notified in writing to the borrower. If any element of this requirement is missing, the assignment is likely to be equitable. In the context of the syndicated loan, a legal assignment will transfer all of the existing lender's rights under the Loan Agreement (including the right to sue the borrower and the right to discharge the assigned debt) to the new lender. The obligation of the existing lender to provide funds to the borrower cannot be transferred by legal assignment and thus remains with the existing lender.

The new lender pays the existing lender any funds due under the loan and the existing lender sends those funds on to the Agent, who then passes such funds on to the borrower. Equitable Assignment: As mentioned above, an equitable assignment is created when one or more of the provisions of section 136 of the Law of Property Act 1925 is not met, provided the intention to assign is present between the parties. In contrast to a legal assignment, the new lender, as the equitable assignee, must join the existing lender, as assignor, in any action on the debt. The most significant difference between a legal and equitable assignment arises if the borrower is not notified of the assignment. If the borrower is not notified of the assignment, the new lender will be subject to all equities (for example, mutual rights of set-off) which arise between the existing lender and the borrower, even after the loan has been assigned. Funded participation: Under a funded participation the existing lender and the participant enter into a contract providing that in return for the participant paying the existing lender an amount equal to all or part of the principal amount of the Loan made by the existing lender to the borrower ("the deposit"), the existing lender agrees to pay to the participant all or the relevant share of principal and interest received by the existing lender from the borrower in respect of that amount. A funded participation agreement is made between the existing lender and the participant. This creates new contractual rights between the existing lender and the participant which mirror existing contractual rights between the existing lender and the borrower. However this is not an assignment of those existing rights and the existing lender remains in a direct contractual relationship with the borrower. In a funded participation, the participant agrees that its deposit will be serviced (in terms of payment of interest) and repaid only when the borrower services and repays the loan from the existing lender. The participant has effectively taken on the risk of the first loan. The funded participation agreement must ensure that the existing bank is put in

funds by the participant in time to meet the borrower's demands for drawdown in order to remove the risk. The existing lender remains liable under the Syndicated Loan Agreement.

Risk Participation: Risk participation is a form of participation which acts like a guarantee. The risk participant will not immediately place any money with the existing lender, but will agree, for a fee, to put the existing lender in funds in certain circumstances (typically on any payment default by the borrower). Risk participation may be provided by a new lender as an interim measure before it takes full transfer of a loan. No borrower consent is required for either a Funded Participation or a Risk Participation, so this process can be confidential. There is no direct contract between the new lender and the borrower but the participant usually obtains rights of subrogation, therefore if the participant has to pay after the borrower defaults, the participant gains the right to step into the existing lender's shoes and pursue all remedies of the existing lender against the borrower.

Performance Evaluation of Merchant Bankers

The country is served by thousands of Merchant bankers with a network with SEBI acting as an apex regulatory body for supervising their activities. The policies, programmes, and strategies and promotional efforts of these Merchant Banks subserve the larger national objectives of rapid capital market development. It is common to hear often among Merchant Bankers circle that, more than ninety percent of Merchant Banking activities are managed by a handful of Merchant Bankers. A fairly long experience of working and operational performance of Merchant Bankers is available.

The data related to all Merchant Bankers were collected based on the criteria of the category-I registration with SEBI. Secondly, the deregistered Merchant Bankers irrespective of their past experience and performance were deleted from the sample. The reason being is to avoid the Institutions, which are not presently engaging in Merchant Banking activities. Further, the data had been classified, based on the study period and by considering the representation of public sector, private sector and foreign firms to the sample.

The performance analysis is divided into three sections. The first section deals with issue analysis, both public & rights. The significance of this is to understand the development of the capital market and also the role of Merchant Bankers to meet the requirements to make the issue success. The activity based analysis with regard to meeting the requirements as Merchant Banker, Lead manager and underwriters are analyzed in section II. The operational & financial performance of selected Merchant Banking firms are analyzed in section III.

Section I PUBLIC AND RIGHT ISSUE ANALYSIS

Public Issue Analysis The primary market is volatile in nature. The reasons for this continuing volatility are investors decision, their confidence in market practices, regulations, and international market movements. Public issue analysis based on Sector wise i.e. public or private sector Institution wise i.e. FI, Banks, etc. Services wise i.e. NBFCs, Banks, other FI Intrument wise i.e debt & equity

Right Issue Analysis The performance of right issue is also calculated & analyzed with the help of past performance. Section II Section II and III deal with the performance analysis of select Merchant Bankers. The present section includes Activity based performance & section III devoted for operational & financial performance of Merchant Bankers. Precisely, this section has been devided inot two parts viz, Part A & Part B. Part A covers the profile of the sample Merhcant Banking firms. Whereas, the activity based i.e., firms role as a Merchant Banker, Bank, Lead Managers, Co-manager & Underwriters performance in detail is covered in Part B.

Section III The operational performance of select Merchant Bankers is classified into two parts. The first Part A deals with Operational performance & Part b devoted for financial performance of the selected Merchant Banking firms.

PART A Operational Performance The operational performance, of selected Merchant Banker had been done based on the selective indicators from the financial statement of respective Merchant Banks. The value in real terms, percentages, and growth rate over the previous years have been calculated and presented. For comparative operational performance analysis average & growth rates have been calculated. Operational Performance Indicators Operating Income (OPI) Expenses (EXP) Operating profit (OPP) Other recurring income (ORI) Profit before depreciation but after interest & tax (PBDIT) Depreciation Profit before tax (PBT) Profit after tax (PAT) Net profit (NP) Earning before appropriation (EBA) Retained Earning (RE)

PART B Financial Performance

The financial performance analysis of merchant bankers has, mainly, based on select Ratios & Indicators. These ratios & indicators have been calculated from the financial statements of respective Merchant Banking firms. The selected financial performance Indicators are EPS, DPS, DPR, ERR etc. Whereas the financial performance of these Merchant banking firms are mainly based on Ratios

Data Analysis & Interpretation In order to evaluate the financial performance of Merchant Banking firms various ratios (indicators) have been computed for the period under study. An obsolete figure does not convey anything unless it is related with the other relevant figure. Ratios make a humble attempt in this direction. Ratio is defined formally as, the indicated quotient of two mathematical expressions. Ratios are one among the best known and most widely used tools to financial analysis. An operational definition of a financial ratio is the relationship between two financial values.

Financial Performance Indicators: Earning per share (EPS), Dividend per share (DPS), Dividend pay-out ratio (DPR), Earning retention ratio (ERR), Operating profits per share (OPPS), Operating Margin (OPM), (in percentage) Net profit Margin (NPM), (in percentage) Return on net Worth (RONW) (in percentage)

Chapter-IV Loan Syndication & Performance Evaluation

End Chapter quizzes

1. Financial securities are assets for the __________ and liabilities for the _________. (a) issuer, buyer. (b) buyer, issuer. (c) grantor, grantee. (d) brokerage house, client. 2. Performance evaluation of issues done on the basis of i. Data related to merchant banker ii. Issue analysis iii. Activity analysis iv. Operational analysis v. Financial analysis a. Only 2 & 5 b. Only 3,4 & 5 c. Only 5 d. All statements are necessary

3. Issue analysis means i. understand the development of capital market ii. the role of merchant banker iii. performance of the issue

a. b. c. d.

only 1 only 2 only 1 &2 All statements are necessary

4. Performance evaluation of merchant banker is based on: i. ii. iii. a. b. c. d. past experience of merchant bankers financial performance operation efficiency

only 1 only 2 only 2 & 3 1, 2 & 3

5. SEBIs regulation does not consider the financial performance of a company in specifying the eligibility norms for a public issue. A. True B. False 6. (I) Banks are financial intermediaries that accept deposits and make loans. (II) Included under the term banks are firms such as commercial banks, savings and loan associations, mutual savings banks, credit unions, and insurance companies. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.

7. Banks, savings and loan associations, mutual savings banks, and credit unions A) are no longer important players in financial intermediation.

B) have been providing services only to small depositors since deregulation. C) have been adept at innovating in response to changes in the regulatory environment. D) all of the above. E) only (A) and (C) of the above.

Frequently Asked Questions (FAQs) on Issues: 1. Understanding Issues This portion tries to cover the basic concepts and questions related to issues (issues in the meaning of issuance of securities). The aim is towards understanding the various types of issues, eligibility norms, exemptions from the same. The disclosure requirements regarding the issuance of securities are covered in detail in the SEBI (Disclosure and Investor Protection) Guidelines, 2000. a. What are the different kinds of issues? Primarily, issues can be classified as a Public, Rights or preferential issues (also known as private placements). While public and rights issues involve a detailed procedure, private placements or preferential issues are relatively simpler. The classification of issues is illustrated below: Public issues can be further classified into Initial Public offerings and further public offerings. In a public offering, the issuer makes an offer for new investors to enter its shareholding family. The issuer company makes detailed disclosures as per the DIP guidelines in its offer document and offers it for subscription. The significant features are illustrated below: Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuers securities. Initial Public Offer and Follow-on Public Offer The first public offer of shares made by a company is called an Initial Public Offer (IPO). An IPO is made by a company whose shares are not listed on a stock exchange. Once the IPO is made, the shares have to be compulsorily listed and the shares become available for trading on the stock exchange. An IPO can either be a fresh issue of shares or it

can be an offer for sale of existing shares by any of the existing share holder. A fresh issue of shares results in an increase in the share capital of the company. New shares are allotted to the investors. A fresh issue does not change the holding of shares of the investors prior to the issue in terms of the number of shares held. The percentage holding of the investors in the share capital of the company may however change. In an offer for sale, existing promoters/or any other existing share holder (venture fund or private equity) off-load a portion of their holdings to the public. This will not increase the share capital of the company. The proceeds of the public offer go to the persons offloading the shares and not to the company. In a public offer, the money invested by the new shareholders, goes to the company, and its share capital increases. In an offer for sale, the promoters holding or the existing share holder who has sold his shares in the company comes down and new shareholders get added to the list of shareholders. There is a change in the list of shareholders, but not in the amount of share capital. The Government had made offer for sale of its holding in several public sector companies/banks to the public, through the divestment route. The shares of the company get listed on the stock market after the offer for sale is over. A Further public offering (FPO) is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations. FPO also known as Follow-on Public Offer A follow-on public offer is made by a listed company. This means, a company that has already made an IPO in the past and the shares have been listed now makes a further issue of shares to the public. A follow

on public offer may be through an issue of additional shares or through an offer for sale. When a company wants additional capital for growth or to redo its capital structure by retiring debt, it raises equity capital through a follow-on public offer. A follow-on public offer may also be through an offer for sale. This usually happens when it is necessary to increase the public shareholding to meet the requirements laid down by the listing agreement between the company and the stock exchange. Or promoters may look to dilute their holdings in the company after the lock-in imposed at the time of the IPO is over. A public offer, whether an IPO or a follow-on public offer has to meet the regulatory requirements laid down by SEBI and the Companies act. This limits a further issue of shares in a financial year to five times its pre-issue net worth based on the audited balance sheet of the last financial year. A listed company can also make a further issue of shares if it complies with the regulatory requirements laid down for IPOs. A follow-on public offer, as in the case of an initial public offer, is exempt from the requirements of the contribution of the promoter and the lock-in on the promoters holding if the company has been listed on a stock exchange for at least three years and has a track record of paying dividends for at least the three out of the immediately preceding 5 years. Rights Issue (RI) is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders unless they do not intend to subscribe to their entitlements. A rights issue is an issue of fresh capital made to the existing investors of a company. In a rights issue the company has to decide on the proportion of fresh shares to be issued to the investors. For example, a company may decide to issue rights shares in the ratio 2:3. This means that existing investors of the company on a specified date called the

record date will be entitled to 2 shares for every 3 shares held by them. An investors percentage holding in the company remains the same after the rights issue unless the shares are foregone by the investor.

A private placement is an issue of shares or of convertible securities by a company to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. A private placement of shares or of convertible securities by a listed company is generally known by name of preferential allotment. A listed company going for preferential allotment has to comply with the requirements contained in Chapter XIII of SEBI (DIP) Guidelines pertaining to preferential allotment in SEBI (DIP) guidelines which interalia include pricing, disclosures in notice etc, in addition to the requirements specified in the Companies Act. A Qualified Institutions Placement is a private placement of equity shares or securities convertible in to equity shares by a listed company to Qualified Institutions Buyers only in terms of provisions of Chapter XIIIA of SEBI (DIP) guidelines. The Chapter contains provisions relating to pricing, disclosures, currency of instruments etc. b. What are the eligibility norms for making these issues? SEBI has laid down eligibility norms for entities accessing the primary market through public issues. There is no eligibility norm for a listed company making a rights issue as it is an offer made to the existing shareholders who are expected to know their company. There are no eligibility norms for a listed company making a preferential issue. However for Qualified Institutions placement (QIP), only those companies whose shares are listed in NSE or BSE and those who are having a minimum public float as required in terms of the Listing agreement, are eligible. The main entry norms for companies making a public issue (IPO or FPO) are summarized as under:

Entry Norm I (EN I): The company shall meet the following requirements: (a) Net Tangible Assets of at least Rs. 3 crores for 3 full years. (b) Distributable profits in atleast three years (c) Net worth of at least Rs. 1 crore in three years (d) If change in name, atleast 50% revenue for preceding 1 year should be from the new activity. (e) The issue size does not exceed 5 times the pre- issue net worth To provide sufficient flexibility and also to ensure that genuine companies do not suffer on account of rigidity of the parameters, SEBI has provided two other alternative routes to company not satisfying any of the above conditions, for accessing the primary Market, as under: Entry Norm II (EN II): (a) Issue shall be through book building route, with at least 50% to be mandatory allotted to the Qualified Institutional Buyers (QIBs). (b) The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a compulsory market-making for at least 2 years OR Entry Norm III (EN III): (a) The project is appraised and participated to the extent of 15% by FIs/Scheduled Commercial Banks of which at least 10% comes from the appraiser(s). (b) The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a compulsory market-making for at least 2 years. In addition to satisfying the aforesaid eligibility norms, the company shall also satisfy the criteria of having at least 1000 prospective allotees in its issue b. Is there any category of entities which are exempted from the aforesaid eligibility norms? Yes, SEBI (DIP) guidelines have provided certain exemptions from the

eligibility norms. The following are eligible for exemption from entry norms. (a) Private Sector Banks (b) Public sector banks (c) An infrastructure company whose project has been appraised by a PFI or IDFC or IL&FS or a bank which was earlier a PFI and not less than 5% of the project cost is financed by any of these institutions. (d) Rights issue by a listed company 2. What is SEBIs 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 lakhs is required to file a draft offer document with SEBI for its observations. The validity period of SEBIs observation letter is three months only i.e the company has to open its issue within three months period. There is no requirement of filing any offer document / notice to SEBI in case of preferential allotment and QIP. In QIP, Merchant Banker handling the issue has to file copy of placement document with SEBI post allotment for record purpose. Given below are few questions in regard to issues, offer documents of which are submitted to SEBI, for its observations: a. Does it mean that 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. b. Does SEBI approve the contents of the issue? It is to be distinctly understood that submission of offer document to SEBI should not in any way be deemed or construed that the same has been cleared or approved by SEBI. The Lead manager certifies that the disclosures made in the offer document are generally adequate and are in conformity with SEBI guidelines for disclosures and investor protection in force for the time being. This requirement is to facilitate investors to take an informed decision for making investment in the proposed issue.

c. Does SEBI tag make my money safe? The investors should make an informed decision purely by themselves based on the contents disclosed in the offer documents. SEBI does not associate itself with any issue/issuer and should in no way be construed as a guarantee for the funds that the investor proposes to invest through the issue. However, the investors are generally advised to study all the material facts pertaining to the issue including the risk factors before considering any investment. They are strongly warned against any tips or news through unofficial means. d. What are DIP guidelines? The primary issuances are governed by SEBI in terms of SEBI (Disclosures and Investor protection) guidelines. SEBI framed its DIP guidelines in 1992. Many amendments have been carried out in the same in line with the market dynamics and requirements. In 2000, SEBI issued Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 which is compilation of all circulars organized in chapter forms. These guidelines and amendments thereon are issued by SEBI India under section 11 of the Securities and Exchange Board of India Act, 1992. SEBI (Disclosure and investor protection) guidelines 2000 are in short called DIP guidelines. It provides a comprehensive framework for issuances buy the companies. e. How does SEBI ensure compliance with DIP? The Merchant Banker are the specialized intermediaries who are required to do due diligence and ensure that all the requirements of DIP are complied with while submitting the draft offer document to SEBI. Any non compliance on their part, attract penal action from SEBI, in terms of SEBI (Merchant Bankers) Regulations. The draft offer document filed by Merchant Banker is also placed on the website for public comments. Officials of SEBI at various levels examine the compliance with DIP guidelines and ensure that all necessary material information is disclosed in the draft offer documents. 3. What is the difference between an offer document, RHP, a prospectus an abridged prospectus, letter of offer, abridged letter

of offer and Placement document? What does it mean when someone says draft offer doc? 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 Registrar of Companies (ROC) and Stock Exchanges. An offer document covers all the relevant information to help an investor to make his/her investment decision. 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 specifies 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. Red Herring Prospectus is a prospectus which does not have details of either price or number of shares being offered or the amount of issue. This means that in case price is not disclosed, the number of shares and the upper and lower price bands are disclosed. On the other hand, an issuer can state the issue size and the number of shares are determined later. An RHP for and FPO can be filed with the RoC without the price band and the issuer, in such a case will notify the floor price or a price band by way of an advertisement one day prior to the opening of the issue. In the case of book-built issues, it is a process of price discovery and the price cannot be determined until the bidding process is completed. Hence, such details are not shown in the Red Herring prospectus filed with ROC in terms of the provisions of the Companies Act. Only on completion of the bidding process, the details of the final price are included in the offer document. The offer document filed thereafter with ROC is called a prospectus. Abridged Prospectus means the memorandum as prescribed in Form 2A under sub-section (3) of section 56 of the Companies Act, 1956. It

contains all the salient features of a prospectus. It accompanies the application form of public issues. Letter of offer means the offer document prepared by company for its rights issue and which is filed with the Stock Exchanges. The letter of offer contains all the disclosures as required in term of SEBI(DIP) guidelines and enable shareholder in making an informed decision. Abridged letter of offer means the abridged version of the letter of offer. Listed company is required to send the abridged letter of offer to each and every shareholder who is eligible for participating in the rights issue along with the application form. A company is also required to send detailed letter of offer upon request by any Shareholder. Placement Document means document prepared by Merchant Banker for the purpose of Qualified Institutions placement and contains all the relevant and material disclosures to enable QIBs to make an informed decision. 4. What does one mean by Lock-in? Lock-in indicates a freeze on the shares. SEBI (DIP) Guidelines have stipulated lock-in requirements on shares of promoters mainly to ensure that the promoters or main persons who are controlling the company, shall continue to hold some minimum percentage in the company after the public issue. The requirements are detailed in Chapter IV of DIP guidelines. There is lock-in on the shares held before IPO and also on shares acquired through preferential allotment route. However there is no lock- in on shares/ securities allotted through QIP route. The requirements are detailed in Chapter IV, Chapter XIII and Chapter XIIIA of DIP guidelines. 5. How the word Promoter has been defined? The promoter has been defined as a person or persons who are in overall control of the company, who are instrumental in the formulation of a plan or programme pursuant to which the securities are offered to the public and those named in the prospectus as promoters(s). It may be

noted that a director / officer of the issuer company or person, if they are acting as such merely in their professional capacity are not be included in the definition of a promoter. 'Promoter Group' includes the promoter, an immediate relative of the promoter (i.e. any spouse of that person, or any parent, brother, sister or child of the person or of the spouse). In case promoter is a company, a subsidiary or holding company of that company; any company in which the promoter holds 10% or more of the equity capital or which holds 10% or more of the equity capital of the Promoter; any company in which a group of individuals or companies or combinations thereof who holds 20% or more of the equity capital in that company also holds 20% or more of the equity capital of the issuer company. In case the promoter is an individual, any company in which 10% or more of the share capital is held by the promoter or an immediate relative of the promoter' or a firm or HUF in which the 'Promoter' or any one or more of his immediate relative is a member; any company in which a company specified in (i) above, holds 10% or more, of the share capital; any HUF or firm in which the aggregate share of the promoter and his immediate relatives is equal to or more th an 10% of the total, and all persons whose shareholding is aggregated for the purpose of disclosing in the prospectus "shareholding of the promoter group" The details are provided in the explanatory notes to Clause 6.4.2 of the SEBI (DIP) Guidelines on Notes to Capital Structure. 6. Who decides the price of an issue? Indian primary market ushered in an era of free pricing in 1992. Following this, the guidelines have provided that the issuer in consultation with Merchant 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 LM fix a price (called fixed price) and other, where the company and LM stipulate a floor price or a price band and leave it to market forces to determine the final price (price discovery through book building process).

a. What are Fixed Price offers? An issuer company is allowed to freely price the issue. The basis of issue price is disclosed in the offer document where the issuer discloses in detail about the qualitative and quantitative factors justifying the issue price. The Issuer company can mention a price band of 20% (cap in the price band should not be more than 20% of the floor price) in the Draft offer documents filed with SEBI and actual price can be determined at a later date before filing of the final offer document with SEBI/ROCs. b. What does price discovery through book building process mean? Book Building means a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for the securities is assessed on the basis of the bids obtained for the quantum of securities offered for subscription by the issuer. This method provides an opportunity to the market to discover price for securities. 7. Book Building in Detail: a. How does Book Building work? The logic: Book building is a process of price discovery. Hence, the Red Herring prospectus does not contain a price. Instead, the red herring prospectus contains either the floor price of the securities offered through it or a price band along with the range within which the bids can move. The applicants bid for the shares quoting the price and the quantity that they would like to bid at. Only the retail investors have the option of bidding at cut-off. After the bidding process is complete, the cut-off price is arrived at on the lines of Dutch auction. The basis of Allotment (Refer Q. 15.j) is then finalized and letters allotment/refund is undertaken. The final prospectus with all the details including the final issue price and the issue size is filed with ROC, thus completing the issue process. b. What is a price band? As stated in the answer to Q. 7.a above, the red herring 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 press release and also indicating the change on the relevant website and the terminals of the syndicate members. 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 thirteen days. c. Who decides the price band? 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. The basis of issue price is disclosed in the offer document. The issuer is required to disclose in detail about the qualitative and quantitative factors justifying the issue price. d. What is firm allotment? A company making an issue to public can reserve some shares on allotment on firm basis for some categories as specified in DIP guidelines. Allotment on firm basis indicates that allotment to the investor is on firm basis. DIP guidelines provide for maximum % of shares which can be reserved on firm basis. The shares to be allotted on firm allotment category can be issued at a price different from the price at which the net offer to the public is made provided that the price at which the security is being offered to the applicants in firm allotment category is higher than the price at which securities are offered to public. Firm allotments A public issue of shares could be combined with a firm allotment of shares to certain categories of investors such as the employees, mutual funds, scheduled banks and development financial institutions provided

such shares are allotted at a price that is higher than the price at which shares are allotted to the public. The issuing company can have differential pricing for the retail investors, which can be at a discount not exceeding 10% of the price at which shares are allotted to other categories of investors. Shares issued on a firm allotment basis will be locked-in for a period of one year from the date of commercial production or allotment in the public issue, whichever is later. The promoters of a company making a public issue of shares are required to continue to hold at least 20% of the post-issue paid up capital of the company. This is to ensure that they continue to have a high interest in the performance of the company, even after shares are issued to the public. This is not required for a listed company that has been paying dividends for the three years prior to the public issue. The minimum contribution made by the promoters will be locked-in for a period of three years from the date of allotment of shares or commencement of commercial production whichever is later. Any holding of the promoter in excess of the minimum prescribed holdings will be locked-in for a period of one year from the date of allotment.

e. What is reservation on competitive basis? Reservation on Competitive Basis is when allotment of shares is made in proportion to the shares applied for by the concerned reserved categories. Reservation on competitive basis can be made in a public issue to the Employees of the company, Shareholders of the promoting companies in the case of a new company and shareholders of group companies in the case of an existing company, Indian Mutual Funds, Foreign Institutional Investors (including non resident Indians and overseas corporate bodies), Indian and Multilateral development Institutions and Scheduled Banks. f. Is there any preference while doing the allotment?

No, there cannot be any discretion in the allotment process. Prior to the SEBI Circular on DIP Guidelines dated September 19, 2005, the allotment to the Qualified Institutional Buyers (QIBs) was on a discretionary basis. This however has been amended and all allottees are allotted shares on a proportionate basis within their respective categories. g. Who is eligible for reservation and how much? (QIBs, NIIs, etc,) In a book built issue allocation to Retail Individual Investors (RIIs), Non Institutional Investors (NIIs) and Qualified Institutional Buyers (QIBs) is in the ratio of 35:15: 50 respectively. In case the book built issues are made pursuant to the requirement of mandatory allocation of 60% to QIBs in terms of Rule 19(2)(b) of SCRR, the respective figures are 30% for RIIs and 10% for NIIs. This is a transitory provision pending harmonization of the QIB allocation in terms of the aforesaid Rule with that specified in the guidelines. h. How is the Retail Investor defined as? Retail individual investor means an investor who applies or bids for securities of or for a value of not more than Rs.1,00,000. i. Can a retail investor also bid in a book-built issue? Yes. He can bid in a book-built issue for a value not more than Rs.1,00,000. Any bid made in excess of this will be considered in the HNI category. j. Is there anything like online bidding? A company proposing to issue capital to public through the on-line system of the stock exchange for offer of securities can do so if it complies with the requirements under Chapter 11A of DIP Guidelines. The appointment of various intermediaries by the issuer includes a prerequisite that such members/registrars have the required facilities to accommodate such an online issue process. An investor may place his bids through the online terminals offered by some of the brokers.

8. Issue Process: a. Where can I get a form for applying/ bidding for the shares? The form for applying/bidding of shares is available with all syndicate members, collection centers, the brokers to the issue and the bankers to the issue. b. What is the amount of faith that I can lay on the contents of the documents? And whom should I approach if there are any lacunae? The document is prepared by an independent specialized agency called Merchant Banker, which is registered with SEBI. They are required to do through due diligence while preparing an offer document. The draft offer document submitted to SEBI is put on website for public comments. In case, you have any information about the issuer or its directors or any other aspect of the issue, which in your view is not factually reflected, you may send your complaint to Lead Manager to the issue or to SEBI, Division of Issues and Listing. c. Is it compulsory for me to have a Demat Account? As per the requirement, all the public issues of size in excess of Rs.10 crore, are to made compulsorily in the demat more. Thus, if an investor chooses to apply for an issue that is being made in a compulsory demat mode, he has to have a demat account and has the responsibility to put the correct DP ID and Client ID details in the bid/application forms. d. What is the procedure for getting a demat account? The FAQs relating to demat have been covered in the Investor Education section of the SEBI website in a separate head. They are available on the URL http://investor.sebi.gov.in/faq/dematfaq.html. e. What are the dos and donts for bidding / applying in the issue? The investors are generally advised to study all the material facts pertaining to the issue including the risk factors before considering any investment. They are strongly warned against any tips or relying on news obtained through unofficial means. f. How many days is the issue open?

As per Clause 8.8.1, Subscription list for public issues shall be kept open for at least 3 working days and not more than 10 working days. In case of Book built issues, the minimum and maximum period for which bidding will be open is 3 7 working days extendable by 3 days in case of a revision in the price band. The public issue made by an infrastructure company, satisfying the requirements in Clause 2.4.1 (iii) of Chapter II may be kept open for a maximum period of 21 working days. As per clause 8.8.2., Rights issues shall be kept open for at least 30 days and not more than 60 days. g. Can I change/revise my bid? Yes. The investor can change or revise the quantity or price in the bid using the form for changing/revising the bid that is available along with the application form. However, the entire process of changing of revising the bids shall be completed within the date of closure of the issue. h. What proof can bidder request from a trading member or a syndicate member for entering bids? The syndicate member returns the counterfoil with the signature, date and stamp of the syndicate member. The investor can retain this as a sufficient proof that the bids have been taken into account. i. Can I know the number of shares that would be allotted to me? In case of fixed price issues, the investor is intimated about the CAN/Refund order within 30 days of the closure of the issue. In case of book built issues, the basis of allotment is finalized by the Book Running lead Managers within 2 weeks from the date of closure of the issue. The registrar then ensures that the demat credit or refund as applicable is completed within 15 days of the closure of the issue. The listing on the stock exchanges is done within 7 days from the finalization of the issue. j. Which are the reliable sources for me to get information about response to issues? In the case of book-built issues, the exchanges (BSE/NSE) display the data regarding the bids obtained (on a consolidated basis between both

these exchanges). The data regarding the bids is also available categorywise. After the price has been determined on the basis of bidding, the statutory public advertisement containing, inter alia, the price as well as a table showing the number of securities and the amount payable by an investor, based on the price determined, is issued. k. How do I know if I am allotted the shares? And by what timeframe will I get a refund if I am not allotted? The investor is entitled to receive a Confirmatory Allotment Note (CAN) in case he has been allotted shares within 15 days from the date of closure of a book Built issue. The registrar has to ensure that the demat credit or refund as applicable is completed within 15 days of the closure of the book built issue. The Lead Merchant Banker also publishes an advertisement giving details relating to oversubscription, basis of allotment, number, value and percentage of applications, number, value and percentage of successful allottees, date of completion of despatch of refund orders, date of despatch of certificates and date of filing of listing application is released within 10 days from the date of completion of the various activities at least in an English National Daily with wide circulation, one Hindi National Paper and a Regional language daily circulated at the place where registered office of the issuer company is situated. l. How long will it take after the issue for the shares to get listed? The listing on the stock exchanges is done within 7 days from the finalization of the issue. Ideally, it would be around 3 weeks after the closure of the book built issue. In case of fixed price issue, it would be around 37 days after closure of the issue. m. How does one come to know about the issues on offer? And from where can I get copies of the draft offer document? SEBI issues press releases every week regarding the draft offer documents received and observations issued during the period. The draft offer documents are put up on the website under Reports/Documents section. The final offer documents that are filed with SEBI/ROC are also put up for information under the same section.

Copies of the draft offer documents in hard copy form may be obtained from the office of SEBI, Mittal Court, A wing, Ground Floor, 224, Nariman Point, Mumbai 400021 on a payment of Rs.100 or from SES, LMs etc. The soft copies can be downloaded from the SEBI website under Reports/Documents section. Some LMs also make it available on their webisties for download. The final offer documents that are filed with SEBI/ROC can also be downloaded from the same section of the website. Issue advertisements are issued by the Issuer companies in an English national Daily with wide circulation, one Hindi National newspaper and a regional language newspaper with wide circulation at the place where the registered office of the issuer is situated. The format for these advertisements is prescribed in the DIP Guidelines and the advertisement provides brief details such as Opening & Closing dates of the issue, the names of the promoters, contact particulars of Lead Managers, Registrar, Compliance Officer, availability of applications, etc. 9. Understanding the role of intermediaries: a. Who are the intermediaries in an issue? Merchant Bankers to the issue or Book Running Lead Managers (BRLM), syndicate members, Registrars to the issue, Bankers to the issue, Auditors of the company, Underwriters to the issue, Solicitors, etc. are the intermediaries to an issue. The issuer discloses the addresses, telephone/fax numbers and email addresses of these intermediaries. In addition to this, the issuer also discloses the details of the compliance officer appointed by the company for the purpose of the issue. b. Who is eligible to be a BRLM? A Merchant banker possessing a valid SEBI registration in accordance with the SEBI (Merchant Bankers) Regulations, 1992 is eligible to act as a Book Running Lead Manager to an issue. c. What is the role of a Lead Manager? (pre and post issue) In the pre-issue process, the Lead Manager (LM) takes up the due diligence of companys operations/ management/ business plans/ legal

etc. Other activities of the LM include drafting and design of Offer documents, Prospectus, statutory advertisements and memorandum containing salient features of the Prospectus. The BRLMs shall ensure compliance with stipulated requirements and completion of prescribed formalities with the Stock Exchanges, RoC and SEBI including finalization of Prospectus and RoC filing. Appointment of other intermediaries viz., Registrar(s), Printers, Advertising Agency and Bankers to the Offer is also included in the pre-issue processes. The LM also draws up the various marketing strategies for the issue. The post issue activities including management of escrow accounts, coordinate non-institutional allocation, intimation of allocation and dispatch of refunds to bidders etc are performed by the LM. The post Offer activities for the Offer will involve essential follow-up steps, which include the finalization of trading and dealing of instruments and dispatch of certificates and demat of delivery of shares, with the various agencies connected with the work such as the Registrar(s) to the Offer and Bankers to the Offer and the bank handling refund business. The merchant banker shall be responsible for ensuring that these agencies fulfill their functions and enable it to discharge this responsibility through suitable agreements with the Company. A merchant banker is required to do the necessary due diligence in case of QIP mechanism. d. What is the role of a registrar? 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. e. What is the role of bankers to the issue? Bankers to the issue, as the name suggests, carries out all the activities of ensuring that the funds are collected and transferred to the Escrow

accounts. The Lead Merchant Banker shall ensure that Bankers to the Issue are appointed in all the mandatory collection centers as specified in DIP Guidelines. The LM also ensures follow-up with bankers to the issue to get quick estimates of collection and advising the issuer about closure of the issue, based on the correct figures. f. Question on Due diligence The Lead Managers state that they have examined various documents including those relating to litigation like commercial disputes, patent disputes, disputes with collaborators etc. and other materials in connection with the finalization of the offer document pertaining to the said issue; and on the basis of such examination and the discussions with the Company, its Directors and other officers, other agencies, independent verification of the statements concerning the objects of the issue, projected profitability, price justification, etc., they state that they have ensured that they are in compliance with SEBI, the Government and any other competent authority in this behalf. 10. What is the recourse available to the investor in case of issue complaints? Most of the issue complaints pertain to non-receipt of refund or allotment, or delay in receipt of refund or allotment and payment of interest thereon. These complaints shall be made to the post issue Lead Manger, who in turn will take up the matter with registrar to redress the complaints. In case the investor does not receive any reply within a reasonable time, investor may complain to SEBI, Office of investors Assistance 11. I am a researcher: a. Where do I get data on primary issues? (Issuer, total issues, issue size, the intermediaries, etc., during a given period) SEBI brings out a monthly bulletin that is available off the shelf at Bookstores. A digital version of the same is available on the SEBI website under the News/Publications section. The Bulletin contains all the relevant historical figures of intermediary issue and intermediary particulars during the given period placed against historical figures.

b. What are the relevant regulations and where do I find them? The SEBI Manual is SEBI authorized publication that is a comprehensive databank of all relevant Acts, Rules, Regulations and Guidelines that are related to the functioning of the Board. The details pertaining to the Acts, Rules, Regulations, Guidelines and Circulars are placed on the SEBI website under the Legal Framework section. The periodic updates are uploaded onto the SEBI website regularly. c. Will SEBI answer my queries online in case of doubts and clarifications? The Feedback section on the SEBI website has a provision for the visitors to the site to ask questions on clarifications on smaller issues pertaining to the availability of information and a facility for users to provide feedback on the same. However, if the queries are legalistic and deep in nature, they are to be referred to SEBI under the SEBI (informal Guidance) Scheme, 2003. 12. Guide to understand an Offer Document This section basically tries to tell the reader about the structure of presentation of the content in the Offer Document. This is with a view to help the reader navigate through the content of an offer document. a. Cover Page The Cover Page of the offer document covers full contact details of the issuer company, lead managers and registrars, the nature, number, price and amount of instruments offered and issue size, and the particulars regarding listing. Other details such as Credit Rating, IPO Grading, if opted for, risks in relation to the first issue, etc are disclosed if applicable. b. Risk Factors Here, the issuers management gives its view on the Internal and external risks faced by the company. Here, the company also makes a note on the forward looking statements. This information is disclosed in the initial pages of the document and it is also clearly disclosed in the abridged prospectus. It is generally advised that the investors should

go through all the risk factors of the company before making an investment decision. c. Introduction The introduction covers a summary of the industry and business of the issuer company, the offering details in brief, summary of consolidated financial, operating and other data. General Information about the company, the merchant bankers and their responsibilities, the details of brokers/syndicate members to the Issue, credit rating (in case of debt issue), debenture trustees (in case of debt issue), monitoring agency, book building process in brief and details of underwriting Agreements are given here. Important details of capital structure, objects of the offering, funds requirement, funding plan, schedule of implementation, funds deployed, sources of financing of funds already deployed, sources of financing for the balance fund requirement, interim use of funds, basic terms of issue, basis for issue price, tax benefits are covered. d. About us This presents a review of on the details of the business of the company, business strategy, competitive strengths, insurance, industry-regulation (if applicable), history and corporate structure, main objects, subsidiary details, management and board of directors, compensation, corporate governance, related party transactions, exchange rates, currency of presentation dividend policy and management's discussion and analysis of financial condition and results of operations are given. e. Financial Statements Financial statement, changes in accounting policies in the last three years and differences between the accounting policies and the Indian Accounting Policies (if the Company has presented its Financial Statements also as per Either US GAAP/IAS are presented. f. Legal and other information Outstanding litigations and material developments, litigations involving the company and its subsidiaries, promoters and group companies are

disclosed. Also material developments since the last balance sheet date, government approvals/licensing arrangements, investment approvals (FIPB/RBI etc.), all government and other approvals, technical approvals, indebtedness, etc. are disclosed. g. Other regulatory and statutory disclosures Under this head, the following information is covered: authority for the Issue, prohibition by SEBI, eligibility of the company to enter the capital market, disclaimer clause, disclaimer in respect of jurisdiction, distribution of information to investors, disclaimer clause of the stock exchanges, listing, impersonation, minimum subscription, letters of allotment or refund orders, consents, expert opinion, changes in the auditors in the last 3 years, expenses of the issue, fees payable to the lead managers, fees payable to the issue management team, fees payable to the registrars, underwriting commission, brokerage and selling commission, previous rights and public issues, previous issues for cash, issues otherwise than for cash, outstanding debentures or bonds, outstanding preference shares, commission and brokerage on, previous issues, capitalization of reserves or profits, option to subscribe in the issue, purchase of property, revaluation of assets, classes of shares, stock market data for equity, shares of the company, promise vis--vis performance in the past issues and mechanism for redressal of investor grievances. h. Offering information Under this head, the following information is covered: Terms of the Issue, ranking of equity shares, mode of payment of dividend, face value and issue price, rights of the equity shareholder, market lot, nomination facility to investor, issue procedure, book building procedure if applicable, bidform, who can bid, maximum and minimum bid size, bidding process, bidding bids at different price levels, escrow mechanism, terms of payment and payment into the escrow collection account, electronic registration of bids, build up of the book and revision of bids, price discovery and allocation, signing of underwriting agreement and filing of prospectus with SEBI/ROC, announcement of statutory advertisement, issuance of confirmation of allocation note("can") and allotment in the issue, designated date, general

instructions, instructions for completing the bid form, payment instructions, submission of bid form, other instructions, disposal of application and application moneys, , interest on refund of excess bid amount, basis of allotment or allocation, method of proportionate allotment, dispatch of refund orders, communications, undertaking by the company, utilization of issue proceeds, restrictions on foreign ownership of Indian securities, etc., i. Other Information This covers description of equity shares and terms of the Articles of Association, material contracts and documents for inspection, declaration, definitions and abbreviations, etc., 13. I have heard a lot about these new terms. What do they mean? a. Green-shoe Option A Green Shoe option means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism for a period not exceeding 30 days in accordance with the provisions of Chapter VIIIA of DIP Guidelines, which is granted to a company to be exercised through a Stabilizing Agent. This is an arrangement wherein the issue would be over allotted to the extent of a maximum of 15% of the issue size. From an investors perspective, an issue with green shoe option provides more probability of getting shares and also that post listing price may show relatively more stability as compared to market. b. e-IPO A company proposing to issue capital to public through the on-line system of the stock exchange for offer of securities can do so if it complies with the requirements under Chapter 11A of DIP Guidelines. The appointment of various intermediaries by the issuer includes a prerequisite that such members/registrars have the required facilities to accommodate such an online issue process. c. Safety Net

Any safety net scheme or buy-back arrangements of the shares proposed in any public issue shall be finalized by an issuer company with the lead merchant banker in advance and disclosed in the prospectus. Such buy back or safety net arrangements shall be made available only to all original resident individual allottees limited up to a maximum of 1000 shares per allottee and the offer is kept open for a period of 6 months from the last date of dispatch of securities. The details regarding Safety Net are covered under Clause 8.18 of DIP Guidelines. d. Syndicate Member The Book Runner(s) may appoint those intermediaries who are registered with the Board and who are permitted to carry on activity as an Underwriter as syndicate members. The syndicate members are mainly appointed to collect and entre the bid forms in a book built issue. e. Open book/closed book Presently, in issues made through book building, Issuers and merchant bankers are required to ensure online display of the demand and bids during the bidding period. This is the Open book system of book building. Here, the investor can be guided by the movements of the bids during the period in which the bid is kept open. Under closed book building, the book is not made public and the bidders will have to take a call on the price at which they intend to make a bid without having any information on the bids submitted by other bidders. f. Hard underwriting Hard underwriting is when an underwriter agrees to buy his commitment at its earliest stage. The underwriter guarantees a fixed amount to the issuer from the issue. Thus, in case the shares are not subscribed by investors, the issue is devolved on underwriters and they have to bring in the amount by subscribing to the shares. The underwriter bears a risk which is much higher in soft underwriting. g. Soft underwriting

Soft underwriting is when an underwriter agrees to buy the shares at later stages as soon as the pricing process is complete. He then, immediately places those shares with institutional players. The risk faced by the underwriter as such is reduced to a small window of time. Also, the soft underwriter has the option to invoke a force Majeure (acts of God) clause in case there are certain factors beyond the control that can affect the underwriters ability to place the shares with the buyers. h. Cut Off Price In Book building issue, the issuer is required to indicate either the price band or a floor price in the red herring prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called Cut off price. This is decided by the issuer and LM after considering the book and investors appetite for the stock. SEBI (DIP) guidelines permit only retail individual investors to have an option of applying at cut off price. i. Differential pricing Pricing of an issue where one category is offered shares at a price different from the other category is called differential pricing. In DIP Guidelines differential pricing is allowed only if the securities to applicants in the firm allotment category is at a price higher than the price at which the net offer to the public is made . Thenet offer to the public means the offer made to the Indian public and does not include firm allotments or reservations or promoters contributions. j. Basis of Allocation/Basis of Allotment After the closure of the issue, the bids received are aggregated under different categories i.e., firm allotment, Qualified Institutional Buyers (QIBs), Non-Institutional Buyers (NIBs), Retail, etc. The oversubscription ratios are then calculated for each of the categories as against the shares reserved for each of the categories in the offer document. Within each of these categories, the bids are then segregated into different buckets based on the number of shares applied for. The oversubscription ratio is then applied to the number of shares applied

for and the number of shares to be allotted for applicants in each of the buckets is determined. Then, the number of successful allottees is determined. This process is followed in case of proportionate allotment. In case of allotment for QIBs, it is subject to the discretion of the post issue lead manager. k. Qualified Institutional Buyer (QIBs) Qualified Institutional Buyers are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets. In terms of clause 2.2.2B (v) of DIP Guidelines, a Qualified Institutional Buyer shall mean: a. public financial institution as defined in section 4A of the Companies Act, 1956; b. scheduled commercial banks; c. mutual funds; d. foreign institutional investor registered with SEBI; e. multilateral and bilateral development financial institutions; f. venture capital funds registered with SEBI. g. foreign Venture capital investors registered with SEBI. h. state Industrial Development Corporations. i. insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA). j. provident Funds with minimum corpus of Rs. 25 crores k. pension Funds with minimum corpus of Rs. 25 crores) These entities are not required to be registered with SEBI as QIBs. Any entities falling under the categories specified above are considered as QIBs for the purpose of participating in primary issuance process. FAQs on use of Electronic Clearing Scheme for refunds 1. We have heard that SEBI has allowed use of ECS for refunds in the issue process? Now will all the applicants get refund through ECS? Yes, SEBI vide its circular dated January 20, 2006, has permitted use of ECS for refunds in the issue process. However to start with, SEBI has made it mandatory that the applicants in 15 cities viz. Ahmedabad,

Bangalore, Bhubaneshwar, Kolkata, Chandigarh, Chennai, Guwahati, Hyderabad, Jaipur, Kanpur, Mumbai, Nagpur, New Delhi, Patna and Thiruvananthapuram will get refunds through ECS. Applicants in other cities will get refunds through normal practice of registered / ordinary post. SEBI will enhance number of centers after reviewing feedback on the system. 2. Is ECS refund mandatory now for 15 said centers or still depends on choice of registrar? Refund through ECS is mandatory in the said 15 centers. 3. Is it applicable to all the issues opened on or after January 20, 2006? No, it is applicable to those issues whose offer documents are filed with SEBI on or after January 20, 2006. 4. But how will we know which issue is having this facility? Along with the above mentioned circular, separate instructions have been given to Lead Managers, Registrars and Bankers to the Issue to ensure that the facility is available to the investor in case of all issues filed on or after January 20, 2006. Relevant disclosures pertaining to this facility will be made in the Prospectus, application form and abridged prospectus. The applicants are advised to carefully read the prospectus/ abridged prospectus/ application form. 5. Whether I will get refunds through ECS if my correspondence address is in one of the 15 centers or am I required to have bank account in banks in one of the 15 centers? The applicant having a bank account in banks in one of the aforesaid 15 centers will get refunds through ECS. 6. Are we required to give details of bank account where the refund amount shall be credited? The bank account details will be directly taken from the depositories database and hence are not required to be filled in the application form for issues wholly made in dematerialized form.

7. Are we required to do any thing in order to ensure that we get refund through ECS? The applicants are required to ensure that bank details including MICR code ( a 9 digit code which appears in the cheque leaf) maintained at the depository level are updated. 8. If refund amount is credited directly to our account, how will we come to know about the same? The applicants will get individual intimations about details of the bank where refunds shall be credited along with amount and expected date of electronic credit of refunds. These individual intimations will be dispatched by the Registrars within 15 days ( in case of a Book Built issue) and 30 days (in case of Fixed price issue) of closure of the issue. Accordingly, the concerned applicant can check with the relevant bank on the status of the refund. 9. Does it mean that now all refunds will either come through ECS or ordinary/registered post? SEBI has provided for various mode of making refund to the applicants viz. Direct Credit, RTGS (Real Time Gross Settlement), ECS (Electronic Clearing Service) and NEFT (National Electronic Funds Transfer). As stated above, applicants in 15 centers where clearing houses are managed by RBI will get refunds through ECS only except where the applicants is otherwise disclosed eligible under Direct Credit and RTGS. Applicants at other centers will continue to get refunds through Registered/ordinary post. Applicants are advised to read the instructions given in the prospectus/ abridged prospectus/ application form carefully.

END CHAPTER QUIZES ANSWERS

Chapter 1 Answer1: FALSE, Answer2: TRUE, Answer3: TRUE Answer4: D, Answer5: C, Answer6: A, Answer7: B Answer8: A, Answer9: a, Answer10: D

Chapter 2 1- False, 2- False 6- False 7- True

3-True 8-False

4-True 9- True

5- False 10- False

Chapter 3 Ans1: C Ans2: C Ans3: C Ans4: B Ans5: B Ans6: B 7-False 8-True 9-True 10-False 11-False

Chapter 4 Ans1: B Ans2: D Ans5: B Ans6: C

Ans3: C Ans7: C

Ans4: D

Assignment

Part A
1) Who is Merchant banker? Elucidate the services rendered by merchant bankers. 2) Discuss the role of registrars in the new issue. State the obligations & responsibilities of an underwriter. 3) Explain Book Building Mechanism in detail. 4) Comment over role of financial services in economic development & present evolution of financial services sector. 5) Write short notes on: a. Green shoe option b. Offer for sale c. Private Placement d. Red Herring Prospectus

Part B
6. .Discuss the major functions and services rendered by merchant bankers as regards credit syndication. 7. Comment over performance evaluation of Merchant Bankers. 8. Write a detailed note on pre-issue management activities.

Case Study
Reliance Power Ltd has announced that the Board of Directors of the Company at its meeting held on February 24, 2008, has approved a proposal for issuing free bonus shares to all categories of shareholders, excluding the promoter group ( comprising of reliance Energy Ltd. And

the ADA Group), in the ratio of 3 shares for every 5 shares held, subject to necessary approvals. The proposed bonus offering will result in reduction of the cost of reliance power shares below the IPO price as follows: Rs 269 per share for retail investors, 40% lower than the IPO price of Rs 430. Rs 281 per share for other investors, 37% lower than the IPO price of Rs 450. In a related development, Mr. Anil D Ambani, chairman, Reliance ADA group, on February 24, 2008 simultaneously announced a voluntary contribution of 2.6% of his shareholding in Reliance Power to Reliance energy Ltd., to protect the Company from any dilution of its existing 45% stake in Reliance Power, as a result of the bonus proposal. Accordingly, Reliance Energys stake in Reliance Power will be maintained at the existing level of 45%, and the revised shareholding pattern of Reliance Power will be as follows: Previous 45% 45% 10% Existing 40% 45% 15%

Anil D Ambani Reliance Energy Public shareholding

The reduction of Mr. Ambanis shareholding in Relaince Power by 5% from 45% to 40%, represents a contribution of nearly Rs 5,000 crore (US$ 1.2 billion) by him, in favor of nearly 6 million investors in Reliance Energy and Reliance Power. Coomenting on the move, Mr. Ambani said, I have been personally concerned by the notional losses arising to millions of long term investors in reliance Power, as a result of a dramatic adverse change in sentiment in global and domestic capital markets, subsequent to the pricing of our IPO. An over view of Reliance Power IPO: Reliance Power IPO has been issued by Reliance Power Limited. Reliance Power IPO was issued on 15th January, 2008 and closed on 18th January, 2008. Reliance Power Ltd Company is planning to generate capital worth Rs. 11,700 crores through the IPO. This makes it the largest IPO in the country as on 17th January, 2008. the price band of the equity shares of Reliance Power IPO has been fixed at Rs. 405450 per equity share. The total size of Reliance Power IPO is around 26

crores equity shares. Reliance Power IPO will be listed on the national stock exchange (NSE) and also on the Bombay Stock Exchange (BSE). The lead bankers of Reliance Power IPO are Enam securities, Kotak Mahindra capital Co, ABN Amro Rothschild, ICICI securities, JP Morgan chase & Co, UBS AG. Reliance Power IPO Analysis Reliance Power Ltd. IPO details: Price band: Rs. 405-450 per share Issue opened between: January 15-18, 2008 Book running lead managers: Kotak, UBS, Enam, I-sec and others To list on: NSE & BSE Market cap post-listing: Rs. 1017 billion (based on the cap price) Highlights: Reliance Power Limited (Relaince Power), part of RADAG has been set up to develop, construct and operate power projects domestically and internationally. It aims to develop 13 power projects with an aggregated generation capacity of 28, 200 MW. Suggestion: Open 138.00 High 141.90 Low 133.05 Last price 135.05 Please go through the Reliance Power IPO case study and give your conclusion on the following points: 1. Understand the affect of Reliance Power IPO on Indian share market. 2. Factors responsible for the fall in price of Reliance Power equity. 3. Perception of a retail investor toward Reliance Power before listing of IPO.

Part C

1. The securities that a fund invests in depend upon its ________. a. Fund value b. Time period c. Investment objective d. Issuing company 2. The type of expenses that can be charged to a fund and the limit is decided by _______. a. Issuing company b. SEBI c. Merchant banker d. underwriter

3. A mutual fund cannot have ________ liabilities on its balance sheet. a. Short term b. Long term c. Medium term d. None of the above 4. Mutual funds have lower risks because of ________ & _______. a. Portfolio diversification b. Professional management c. Portfolio diversification & Professional management d. None of the above

5. The first contribution the___________. a. Issuer company b. Promoters c. Leas Manager

of

equity

capital

is

made

by

d. Registrars

6. A company has to follow the guidelines laid down by _______for the issue of capital. a. Issuer company b. Merchant banker c. SEBI d. All of the above

7. A/An ____________ is a method of issue of shares to the public where the money raised does not add to the equity of the company. a. Fresh issue b. Book built method c. Offer for sale d. IPOs

8. The shares have to be ___________ after a public issue of shares. a. Listed b. Unlisted c. Both of the above d. None of the above

9. A ________ issue can be made only by a listed company. a. FPOs b. IPOs c. Private Placement d. None 10. a. b. c. d. The purpose of financial markets is to: Increase the price of common stocks Lower the yield on bonds. Allocate savings efficiency Control inflation.

11. Both Debentures and Term Finance Certificates are usually issued by: a. b. c. d. Public Companies Private Companies Listed Companies Non listed companies

12. Who decides the date of the issue? a. b. c. d. Issuer company SEBI Banker to issue Lead manger

13. Who decides the Price Band? a. b. c. d. Company with help of lead managers SEBI Lead manager only Issuer company

14. If you buy stock from a corporation newly-formed by your sibling when the firm makes its initial public offering (IPO), you would be engaged in: a. direct primary financing. b. long-term debt financing. c. pari-mutuel financing. d. short term equity financing.

15. A corporation acquires new funds only when its securities are sold in the: a. secondary market by an investment bank. b. primary market by an investment bank.

c. international money market by a stock exchange broker d. secondary market by a commercial bank.

16. Security transactions that do not yield flows of funds to the issuers of the financial instruments traded are financial investments involving: a. brokerage services by investment bankers. b. initial public offerings [IPOs] c. secondary markets. d. new issues of seasoned instruments.

17. Financial instruments issued by government agencies or corporations that promise to pay certain amounts of money to the holder on specific future dates are called: a. Liens. b. Preferred stock. c. Chattel. d. bonds.

18. Book Building is a a. Price Discovery mechanism b. Secondary market operation c. Offer of shares to public d. None of the above

19. A private placement of shares by a listed company is called a ____________ of shares. a. Fresh issue b. Private placement c. Preferential allotment d. Fixed price issue

20. a. b. c. d.

Privately placed shares are locked-in for ______ . 10 months 12 months 6 months 3 months

21. A QIP can be only made by a company that has been listed on a stock exchange for ________. a. 5 years. b. 1 years. c. 3 years d. 2 years 22. a. b. c. d. A _______ issue of shares is made to existing share holders. Fresh issue Right issue Both Offer for sale

23. A 3:4 rights issue of shares means the investor is entitled to _____________. a. Three shares for every four shares held b. Four shares for every three shares held c. Three shares for every seven shares held d. None of the above

24. a. b. c. d.

The due diligence certificate is signed by ____________. Registrar Banker to issue Issuer company Lead manger

25. company must make a minimum public issue of __________ a. 15% of the post issue capital

b. 25% of the post issue capital c. 50% of the post issue capital d. 10% of the post issue capital

26. A company has to refund the monies collected in a public issue if the issue does not garner _______ subscription in the issue. a. 50% b. 70% c. 90% d. 75% 27. SEBIs rules for underwriting and minimum subscription does not apply to __________ a. Private placement b. IPO c. FPO d. Offer for sale

28. The two ways a company can conduct a public issue of shares are _______ and ________. a. b. c. d. Private Placement & fixed price issue Book built issue & fixed price issue Fixed price issue & Book built issue Right issue & private placement

29. Changes in stock prices a. affect peoples wealth and their willingness to spend. b. affect firms decisions to sell stock to finance investment spending. c. are characterized by considerable fluctuations. d. all of the above. 30. Financial markets and institutions

a. b. c. d.

involve the movement of huge quantities of money. affect the profits of businesses. affect the types of goods and services produced in an economy. do all of the above.

31. Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called a. commodity markets. b. fund-available markets. c. derivative exchange markets. d. financial markets.

32. Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. Financial intermediaries a. Act as middlemen, borrowing funds from those who have saved and lending these funds to others. b. produce nothing of value and are therefore a drain on societys resources. c. help promote a more efficient and dynamic economy. d. do only (A) and (C) of the above. 33. Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. Financial intermediaries a. Act as middlemen, borrowing funds from those who have saved and lending these funds to others. b. Play an important role in determining the quantity of money in the economy. c. help promote a more efficient and dynamic economy.

d. do all of the above.

34. Banks are important to the study of money and the economy because they a. Provide a channel for linking those who want to save with those who want to invest. b. have been a source of rapid financial innovation that is expanding the alternatives available to those wanting to invest their money. c. are the only financial institution to play a role in determining the quantity of money in the economy. d. do only (A) and (B) of the above. 35. Capital Adequacy for Category II Merchant banker is: a. Rs. 5 crore b. Rs. 50 Lakh c. Rs. 20 Lakh d. Nil

36. a. b. c.

Right issue is: issue of securities by issue of prospectus to the public Securities are issued through some selected investors. Selling securities in the primary market by issuing rights to the existing shareholders. d. None of the above

37. a. b. c. d.

Book Building Process is completed with the help of a Book runner Underwriter Registrar Lead manager

38. In a book built issue a ______ investor can bid at cut-off price. a. QIBs b. Employees of the issuer company

c. Retail d. Financial institution 39. a. b. c. Financial intermediation is, broadly, the process of: lending money out at interest. spending funds faster than revenues are acquired. channeling funds from savers to dissavers, and to investors in economic capital. d. buying and selling currencies in international money markets.

40. a. b. c. d. e.

A financial system's major economic purpose is to: channel savings to more efficient and productive uses. print money to support the government. determine the prime nominal rate of interest. increase the value of the money multiplier. ensure that entrepreneurs make economic profits

REFERENCE BOOKS
1. E.Gordon, K.Natarajan, Emerging Scenario of Financial Services, Himalaya Publishing House, Mumbai. 2. Mutual funds in India: Marketing strategies and investment practices, H Sadhak. 3. Merchant Banking: Principles and Practice by H.R.Machiraju, New Age International (P) Limited, New Delhi, 1995. 4. Merchant banking and financial services, S.Gurusamy, Thomson South Western. 5. M.Y.Khan, Financial Services Tata McGraw Hill, 3rd Edition, 2005. 6. Machiraju, Indian Financial System Vikas Publishing House, 2nd Edition, 2002. 7. J.C.Verma, A Manual of Merchant Banking, Bharath Publishing House, New Delhi, 2001. 8. Sadhale H., Mutual Funds in India, Sage, New Delhi 1997.

List of online content 1. 2. 3. 4. www.nseindia.com www.bseindia.com www.wikipedia.com www.investopedia.com