Project On IPO(Initial Public Offering)

Submitted to Dr. S.V. Ramana Rao

Submitted by Deepak Verma M507 Izhar Ansari M512 Manish pandey M521 Himanshu Mishra M51 Vinod Patil M558

What is Primary Market:A market that issues new securities on an exchange. Companies, governments and other groups obtain financing through debt or equity based securities. Primary markets are facilitated by underwriting groups, which consist of investment banks that will set a beginning price range for a given security and then oversee its sale directly to investors. Also known as "new issue market" (NIM). OR

Primary Market
The primary markets are where investors can get first crack at a new security issuance. The issuing company or group receives cash proceeds from the sale, which is then used to fund operations or expand the business. Exchanges have varying levels of requirements which must be met before a security can be sold. Once the initial sale is complete, further trading is said to conduct on the secondary market, which is where the bulk of exchange trading occurs each day. Primary markets can see increased volatility over secondary markets because it is difficult to accurately gauge investor demand for a new security until several days of trading have occurred.

Fully Paid Shares

Shares issued in which no more money is required to be paid to the company by shareholders on the value of the shares. When a company issues shares upon incorporation or through an issuance, either initial or secondary, shareholders are required to pay a set amount for those shares. Once the company has received the full amount from shareholders, the shares become fully paid shares. This is in contrast to partially paid shares in which only a portion of the face value has been received by the company. In the case of partially paid shares, the shareholder is still required to pay the remaining amount to the company. For example, let's say Company XYZ sells shares for $50. If the company has received $50, it becomes a fully paid share, but if less than $50 has been collected, it is a partially funded share. 1. MERCHANT BANKING Merchant Banker is one who underwrites corporate securities and advises clients on issues like corporate mergers. The Merchant banker may be in the form of a company, firm or even a proprietory concern.It is basically service banking which provides non-financial services such as arranging for funds rather than providing

them. The merchant banker understands the requirements of the business concerns and arranges finance with the help of financial institutions, banks, stock exchanges and money market. Ist M.banker in India Grindlays Bank-1969 IInd SBI in 1973 followed by ICICI. According to SEBI (Merchant bankers) rules 1992, A Merchant banker has been defined as any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, advisor or rendering corporate advisory services in relation to such issue management

Functions of Merchant Bankers

Corporate counseling Project counseling Working capital Pre-investment studies Capital restructuring services Credit syndication Issue management Foreign currency financing Underwriting Portfolio management Working capital Acceptance credit Merger&Acquisation Venture Financing Lease Financing Mutual Funds Relief to sick Industries 2. Project Counselling: with regard to conception of ideas, identification of various projects, preparation of projects,feasibility reports,location of factory,obtaining funds, approval from govts., 3. Working capital : Assessment of W.C.requirements, assistance in negotiation with banks & co-ordinating in documentation & advising on issue of debentures (L.term working capital requirement). 4. Pre-investment studies: With regards to carrying out an in-depth investigation in order to assess the financial& economic viability of a project, identifying the strength of the client for growth in long run. 5. Capital restructuring services: To assist projects in achieving their maximum potential through effective capital structuring(Widening capital base) by implementing schemes of amalgamations, merger or change in business status. 6.Credit syndication: Activities connected with credit procurement and project financing, aimed at raising Indian & foreign currency loans from financial institutions for long term & short term requirements are collectively called as credit syndication or consortium finance.

7.Issue Management& Underwriting: Deals with obtaining clearances, drafting prospectus, underwriting, liasioning with brokers & bankers and keeping constant communication with investors with regard to public issue of corporate securities. 8. Foreign currency financing: Finance provided to fund foreign trade transaction is called foreign currency finance.The provision of foreign currency finance takes the form of exportimport trade finance, euro currency loans, Indian joint ventures abroad and foreign collaborations. The M.B assists in making study of the projects, assists in liaison with RBI and other institutions, getting foreign currency loans etc. 9. Portfolio Management: Making decision relating to investment of cash resources of a corporate enterprise in marketable securities by deciding the quantum,timing and the type of security to be bought. Acceptance & Bill discounting: Activities relating to acceptance and discounting of bills of exchange, besides advancement of loans to business concerns on the strength of such instruments are collectively known as acceptance credit and bills discounting. 10. Mergers & Acquisition: M.B renders specialised services of mergers & acquisition by offering expert valuation regarding the quantum and the nature of consideration and other related matters (formulating schemes for financial reconstruction, getting approval from shareholders, implementing mergers & acquisition) 11. Venture financing: A specially designed capital, as a form of equity financing for funding high-risk and high-reward projects is known as venture capital. 13. Lease financing: Leasing involves letting out assets on lease for a particular time period for use by the lessee. leasing provides an important alternative source of financing capital outlay. M.Banker advices on choice of favorable rental structure for acquiring capital asset etc. 14. Mutual Funds: Institutions or agencies engaged in the mobilization of savings of innumerable investors for the purpose of channeling them into productive investments of a wide variety of corporate and other securities are called mutual Funds. 15. Relief to Sick Industries: Merchant bankers extend their support by providing relief to sick industries a) by assessing their requirements and restructuring their capital base b) Evolving rehabilitation packages acceptable to financial institutions and banks & obtaining approvals from BIFR . c) Other services of merchant bankers include management of cash and short term funds required by client companies, stock broking, servicing of issue by maintaining of registers of share holders and debenture holders of ,client companies, small scale industry counselling, equity research and investment counselling to investors, assistance to NRI

Regulations by SEBI
Sebi has made following reforms for M.B. :  Multiple categories of M.B. will be abolished & there will be only one equity M.B.  A M.B. will have to seek separate registration from SEBI to do different functions like underwriting portfolio management.  Should not undertake the function of banking company like accepting deposits, Financing etc.  A M.B. has to confine himself to capital market activities. Recognition by SEBI ON MERCHANT BANKERS     Professional competence of merchant bankers Their capital adequacy Track record, experience & general reputation of merchant bankers. Adequacy and quality of personnel employed by them and also the available infrastructure.

Conditions by SEBI for Merchant Bankers SEBI will give authorization for a m.b to operate only for 3 years. The minimum net worth of M.B should be Rs.5 crores. M.B. has to pay authorization fee, annual fee& renewal fee All issues should be managed by a lead merchant banker. Lead M.B. is responsible for allotment of securities, refunds etc. M.B. will submit to SEBI all returns & send reports regarding the issue. Code of conduct for M.B. is given by SEBI Any violation by M.B will lead to revocation of authorization by SEBI

SEBI
After the abolishing of CCI , SEBI has become an apex body in controlling the stock exchange and also regulates the different types of securities in the stock exchange. Functions of SEBI are:

1. Regulating and controlling the stock-exchanges in the country 2. Regulating the different kinds of securities by companies 3. Acts as a circuit breaker or cut-off switch when there are abnormal fluctuations in the stock exchange. 4. Protecting the investors. SEBI as a part of general obligation of merchant banker. A merchant banker has to disclose the SEBI to following:1.His responsibility with regards to the issue 2.Any change in the information which has been already furnished. 3.Names of companies of which merchant bankers is associated as the lead manager. 4. Any breach in the capital adequacy requirements

Securities contracts regulation Act

Through this act Government regulates the activities of stock-exchanges in the country. This act tells about the trading of securities in the stock exchange and the conditionsto companies for listing their shares in the stock market.

FERA
FERA has been replaced by FEMA. Far-reaching amendments were made in the Indian companies act, Income-tax act, etc. to facilitate safe and orderly trading, and the settlement of transaction as FERA was concerned only with regulation. Also the aim of FEMA is facilitating trade as against that of FERA, which was to prevent misuse. In other words, the theme of FERA was: everything that is specified is under control. While the theme of FEMA is: everything other than what is expressly covered is not controlled. Thus there is a lot of deregulation Difference between FERA and FEMA Important FERA and FEMA have been summed up as follows: 1. In FEMA, only the specified acts relating to foreign exchange are regulated, while in FERA, anything and everything that has to do with foreign exchange was controlled. Also the aim of FEMA is facilitating trade as against that of FERA, which was to prevent misuse. In other words, the theme of FERA was: everything that is specified is under control. While the theme of FEMA is: everything other than what is expressly covered is not controlled. Thus there is a lot of deregulation

OTCEI market
The OTCEI was started with the objective of providing a market for the smaller companies that could not afford the listing fees of the large exchange and did not fulfill the minimum capital requirement for listing. It aimed at creating a fully decentralized and transparent market. Over the counter means trading across the counter in scrips. The counter refers to the location of the member or dealer of the OTCEI where the deal or trade takes place. Every counter is treated as the trading floor for the OTCEI where the investors can buy and sell. Book-building. A company, instead of offering shares directly to the public, invites bids from the merchant bankers for the sale of shares, it is called book building.The entire procedure of the allotment of listing of share will be undertaken by the merchant bankers. The share price depends on the demand for the shares in the market. The book runner or the merchant banker will select any stock exchange and register the shares for issue. Depending on the demand for shares, the price of shares will be fixed and then allotment will be made. Green shoe option A company making a public offer of equity shares by book building can avail green shoe option for stabilizing the post listing price of its shares .The company shall appoint one of the merchant bankers or book runners as stabilizing agent who is responsible for price stabilizing. The stabilizing agent shall enter into agreement with the promoter or pre issue shareholder to lend their shares for additional public issue. The size of these shares shall not be more than 15% of the total issue size. E-IOP When a company goes into public issue of securities, it can resort to different methods of raising money. When securities or shares are issued using electronic media i.e., through internet then we call the issue as E-IPO. In the current day this is the quickest and easy way of raising initial offer. A company before making E-IPO should follow guidelines prescribed by SEBI.

ESOP A method of marketing the securities of a company whereby its employees are encouraged to take up shares and subscribe to it is known as stock option. It is a voluntary scheme on the part of company to encourage employees participation in the company. The scheme offers an incentive to employees to stay in the company

Role of Registrars to an issue.

Registrar to issue play a major role in the post-issue management. The work is in close collaboration with bankers to issue. The task of getting application together sorting them and arranging in an order is undertaken by registrar to issue Registrar should also reconcile the total application collected by the banker to issue on behalf of the company. Role of Bankers to an issue. Banker to the issue accept application along with the subscription tendered at their designated branches and forward them to the registrar or issue houses in accordance with instruction issued to them. Banker to issue also undertake publicity to the issue by issuing publicity material

Guidelines on initial public offers through the stock exchange on-line system (e-IPO)
11A.1 A company proposing to issue capital to public through the on-line system of the stock exchange for offer of securities shall comply with the requirements as contained in this Chapter in addition to other requirements for public issues as given in these Guidelines, wherever applicable. 11A.2 Agreement with the Stock exchange 11A.2.1 The company shall enter into an agreement with the Stock Exchange(s) which have the requisite system of on-line offer of securities. 11A.2.2 The agreement mentioned in the above clause shall specify inter alia, the rights, duties, responsibilities and obligations of the company and stock exchange(s) inter se. The agreement may also provide for a dispute resolution mechanism between the company and the stock exchange. 11A.3 Appointment of Brokers 11A.3.1 The stock exchange, shall appoint brokers of the exchange, who are registered with SEBI, for the purpose of accepting applications and placing orders with the company. 11A.3.2 For the purposes of this Chapter, the brokers, so appointed accepting applications and application monies, shall be considered as 'collection centres'. 11A.3.3 The brokers so appointed, shall collect the money from his/their client for every order placed by him/them and in case the client fails to pay for shares allocated as

per the Guidelines, the broker shall pay such amount. 11A.3.4 The company/lead manager shall ensure that the brokers having terminals are appointed in compliance with the requirement of mandatory collection centres, as specified in clause 5.9 of Chapter V of the Guidelines. 11A.3.5 The company/lead manager shall ensure that the brokers so appointed are financially capable of honouring their commitments arising out of defaults of their clients. 11A.3.6 The company shall pay to the broker/s a commission/fee for the services rendered by him/them. The exchange shall ensure that the broker does not levy a service fee on his clients in lieu of his services Responsibility of the Lead Manager 11A.6.1 The Lead Manager shall be responsible for co-ordination of all the activities amongst various intermediaries connected in the issue/system. 11A.6.2 The names of brokers appointed by the issuer company alongwith the names of the other intermediaries namely Lead managers to the issue and Registrars to the Issue shall be disclosed in the prospectus and application form. Guidelines on Advertisement The Lead Merchant Banker shall ensure compliance with the guidelines on Advertisement by the issuer company. 9.1 Guidelines on Advertisements 9.1.1An issue advertisement shall be truthful, fair and clear and shall not contain any statement which is untrue or misleading. 9.1.2Any advertisement reproducing or purporting to reproduce any information contained in a offer document shall reproduce such information in full and disclose all relevant facts and not be restricted to select extracts relating to that item. 9.1.3An issue advertisement shall be considered to be misleading, if it contains(a) Statements made about the performance or activities of the company in the absence of necessary explanatory or qualifying statements, (a) An advertisement shall be set forth in a clear, concise and understandable language. (b) Extensive use of technical, legal terminology or complex language and the inclusion of excessive details which may distract the investor, shall be avoided.

9.1.5An issue advertisement shall not contain statements which promise or guarantee rapid increase in profits. 9.1.6An issue advertisement shall not contain any information that is not contained in the offer document. 9.1.7No models, celebrities, fictional characters, landmarks or caricatures or the likes shall be displayed on or form part of the offer documents or issue advertisements. [9.1.8] Issue advertisements shall not appear in the form of crawlers (the advertisements which run simultaneously with the programme in a narrow strip at the bottom of the television screen) on television. [9.1.8A In case of issue of advertisement on television screen: (a) the risk factors shall not be scrolled on the screen; and (b) the advertisement shall advise the viewers to refer to the red herring prospectus or other offer document for details.] 9.1.9No advertisement shall include any issue slogans or brand names for the issue except the normal commercial name of the company or commercial brand names of its products already in use. 9.1.10No slogans, expletives or non-factual and unsubstantiated titles shall appear in the issue advertisements or offer documents. 9.1.11If any advertisement carries any financial data, it shall also contain data for the past three years and shall include particulars relating to sales, gross profit, net profit, share capital, reserves, earnings per share, dividends and the book values. 9.1.12(a) All issue advertisements in newspapers, Magazines, brochures, pamphlets containing highlights relating to any issue shall also contain 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. (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 preissue 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 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 month 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 offerprice 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 Percentage of contribution (including premium) On first Rs. 100 crores 50 On next Rs. 200 crores 40 On next Rs. 300 crores 30 On balance 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 promotersshareholding, 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 nd 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-n of Minimum Required Contribution: In case of any (all) issues of capital to the public, the minimum promoterscontribution 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 non-convertible portions of PCD/NCDs, etc.

Book Building
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 book-building has to comply with the requirements of SEBI in this regard. These are discussed here. 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 book-building 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. 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. 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. (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.