Issue Price The price at which a companys shares are offered to the market for the first time,

which might be at par or at a premium or discount. When they begin to be traded, the market price may be above or below the issue price. Issue Pricing Key To Primary Market Success GN Bajpai, chairman of Sebi, deserves three cheers for the bold initiative he has taken to kickstart the primary market, which has been in the doldrums in the last 10 years ever since the repeal of the Capital Issues (Control) Act, 1947 in May 1992, and the consequent repeal of the valuation guidelines issued under the said Act. Valuation guidelines had two strict parameters, viz., net asset value of the company and average post-tax profits of the company of the preceding three years being capitalised at 15 per cent to 8 per cent (which meant P/Es of 6.66 and 12.5 respectively) as the basic parameters to determine the offer prices. As a result, the primary market blossomed with the capital raised rising from an annual average of about Rs 90 crore in the 1970s to about Rs 2,000 crore in the 1980s. Out of these amounts, equities accounted for about Rs 75 crore and Rs 500 crore respectively, most of which, particularly the FERA issues, showered the investors with handsome rewards. The quantum of capital raised continued, no doubt, to rise till the mid 1990s with the peak amount of Rs 27,633 crore being raised in 1994-95. Thereafter, there has been generally a progressive decline and in 2002-03, the amount raised was a paltry sum of Rs 4,070 crore and the amount raised in the first quarter of this year is just Rs 1,019 crore. The decline in the quantum of capital raised was almost solely due to the free pricing policy and the unacceptable liberality indulged in by the issuers aided by the competing merchant bankers in pricing the issues at artificially unsustainable levels. As a result, prices of most of the issues crashed after listing. Out of 3,872 equity issues made during the period of four years from April 1 1992 to March 31, 1996, 2,987 issues were traded below the offer prices, a majority of which were below 50 per cent of the offer prices, 205 companies were not traded at all and 118 companies turned out to be vanishing companies, with the balance 562 companies alone being quoted above the offer prices. This was the position as on January 14, 1997, and possibly the position has worsened since then. The sharp decline in prices after the IT boom in 2000 added to the woes of the investors. Another major cause for the lacklustre conditions in the primary market was introduction of book-building, effective from November 1, 1995, partially and subsequently fully with effect from December 1, 2001.

Book-building route not only resulted in the small investors shying away from the market due to the complexity of the process of book-building, but also in heavy erosion in post-listing prices, majority of which eroding by more than 50 per cent. The decision of Sebi to do away with vetting of the offer documents effective from December 10, 1996 emboldened the merchant bankers and issuers to be more aggressive in fixing offer prices. Welcome Measures In the light of the above background, Sebis decision to raise the share of non-qualified institutional buyers (QIBs) from 40 per cent to 50 per cent of the public offer and consequently to reduce the share of QIBs from 60 per cent to 50 per cent, redefining a retail investor as one applying for securities worth upto Rs 50,000 instead of upto 1,000 securities, prohibiting QIBs from withdrawing bids in book-built issues, extending the blackout period on research reports of Issue Management team and its associates, rendering the green shoe option mandatory, introduction of mandatory certification of disclosures by CEO/CFO of the issuer company to ensure authenticity of the disclosures, barring willful defaulters from making debt issues, etc. are welcome measures which can help to nurse the equity cult in the country. Modifications Needed To expect miracles to happen on the basis of these guidelines, particularly in the context of the overwhelming response to the public offer by Maruti Udyog, may prove to be illusory. The guidelines need a few more modifications, some of which are suggested below. The key to the success of the primary market lies in the pricing of the issue. The six parameters prescribed by Sebi effective from 1996 viz., EPS for the last three years, P/E preissue and comparison with industry P/E, average return on networth in the last three years, latest net asset value per share and net asset value after issue and comparison with the issue price, have also failed to check the issuers from fixing issue prices at artificially high levels as it is not difficult to justify an issue price of any range, say from Rs 100 to Rs 200 on the face value of Rs 10 on the basis of the same parameters. The Central Listing Authority (CLA) needs to have a thorough scrutiny of the movement of post-listing prices of all the issues made through both fixed price and book-building routes and come out with a set of revised norms with a view to ensuring that post-listing prices do not fall below the offer prices save in circumstances due to force majeure. The CLA should also exercise its power of rejecting issue of letter of recommendation for listing if it forms an opinion that the offer price by the issuer is on the higher side. (The author is the chairman of Inter-Connected Stock Exchange of India Ltd. These are his personal views)

Issue and Pricing of Shares by Private Sector Banks Please refer to our circular DBOD.No.PSBS.BC.79 /16.13.100/2001-2002 dated March 20, 2002, in terms of which guidelines on issue and pricing of shares had been prescribed. As per the extant instructions, all banks in private sector were required to obtain approval of Reserve Bank of India (RBI) for issue of shares through Initial Public Offers (IPOs) and preferential issues. Further, while the banks were advised to follow certain prescriptions relating to pricing in respect of Initial Public Offers (IPOs), Bonus issues and Preferential issues, SEBI requirements in respect of Bonus issues have also been indicated. 2. SEBI had introduced an additional capital raising route in May 2006 viz. Qualified Institutional Placements (QIPs) that would enable listed companies to raise funds from the domestic market. Consequently, many of the private sector banks have been availing this route for raising capital. Since in terms of SEBI Guidelines the allotments under QIP are on private placement basis, the QIP issues have been treated as preferential issue of shares which requires RBIs prior approval in terms of circular DBOD.No.PSBS.BC.79 /16.13.100/20012002 dated March 20, 2002. 3. It is considered necessary to clearly spell out the approval mechanism in respect of Qualified Institutional Placements (QIPs). Accordingly, the guidelines in respect of issue and pricing of shares by private sector banks have been revised to incorporate the Qualified Institutional Placements mode of raising capital and also draw a reference to the stipulations communicated vide our circular DBOD.No.PSBD.BC.99/16.13.100/2004-05 dated June 25, 2005 in respect of Rights Issue. The revised guidelines are as follows: 4. Initial Public Offers (lPOs): (i) All banks should obtain RBI approval for IPOs. After listing on the stock exchanges, banks are free to price their subsequent issues. (ii) Issue price should be based on merchant bankers recommendation. There need be no reference to the CCI formula for deciding on the pricing of such issues. 5. Rights issues: RBI approval would not be required for rights issues by both listed and unlisted banks. However, banks need to comply with the requirements that have been laid down in the circular DBOD.No.PSBD.BC.99/16.13.100/2004-05 dated June 25, 2005 on Rights Issue. 6. Bonus issues: Private sector banks, both listed and unlisted, need not seek RBIs approval for bonus issues. The issues would, however, be subject to SEBIs requirements on issue of bonus shares, viz. bonus issues (a) should be made from free reserves built out of genuine profits or share premium, (b) should not dilute the value or rights of partly or fully convertible debentures, (c) should not be in lieu of dividend and (d) should not be made unless all partly paid-up shares are fully paid-up. Further, bonus issues may be issued without linkage to rights issues.

7. Preferential issue:

All preferential issues would require prior approval of RBI. Pricing of preferential issues by listed banks may be as per SEBI formula, while for unlisted banks the fair value may be determined by a chartered accountant or a merchant banker. 8. Qualified Institutional Placement (QIP): Private Sector Banks need to approach RBI for prior in principle approval in case of Qualified Institutional Placements. Banks need to approach RBI along with details of the issue once the banks Board approves the proposal of raising capital through this route. Further, allotment to the investors would be subject to compliance with SEBI guidelines on QIPs and RBI guidelines dated February 3, 2004 on acknowledgement of allotment / transfer of shares. Once the allotment process is complete, the banks would also be required to furnish complete details of the issue to RBI in the enclosed format for seeking post facto approval. This would be irrespective of whether any acquisition results in shareholding of 5% or more of the paid up capital of the bank. 9. In case of pricing of issues where RBI approval is not required, pricing of issues should be as per SEBI guidelines; in cases where prior approval of RBI is required, pricing should take into account both SEBI and RBI guidelines. 10. These instructions come into force with immediate effect and supersede the instructions issued vide our circular DBOD.No.PSBS.BC.79 /16.13.100/2001-2002 dated March 20, 2002. Yours faithfully, (P. Vijaya Bhaskar) Chief General Manager-in-Charge Format for furnishing details of the QIBs Sr. Name of No. of No. the shares Allottees held prior to allotment (A) % of total No. of paid-up shares share prior approved to for allotment allotment (B) (C) % of shares now allotted to paid up shares (D) Aggregate % of total no. of paid-up shares shares (i.e. aggregate (post percentage issue) shareholding post QIP issue) (A + C) (B + D)

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