LEARNING OBJECTIVES

After studying this chapter, you will be able:

• To understand the primary markets and their functions.
• To know the development of Indian Primary Markets.
• To overview the reforms in Indian Primary Markets.
• To understand the roles and functions of different
participants in the Initial Public Offers.
• To know the various methods of issuing securities in
the Primary Markets.
 INTRODUCTION
1. In order to finance their operations as well as expand, business firms must
invest capital in amount that are beyond their capacity to save in any
reasonable period of time. Similarly, governments must borrow large
amounts of money to provide the goods and services that the people
demand of them.
2. The financial markets permit both business and government to raise the
needed funds by selling securities. Simultaneously, investors with excess
funds are able to invest and earn a return, enhancing their welfare.
3. Financial markets are absolutely vital for the proper functioning of
capitalistic economies, because they serve to channel funds from savers to
borrowers.
4. In this chapter we discuss the primary markets, where in a borrower
issues new securities in exchange for cash from an investor (buyer). The
issuers of these securities receive cash from the buyers of these new
securities, who in turn receive financial claims that previously did not
exist.
 INTRODUCTION
5. The existence of well-functioning secondary markets, where investors come
together to trade existing securities, assures the purchasers of primary
securities that they can quickly sell their securities if the need arises.
6. In summary, in India secondary markets are indispensable to the proper
functioning of the primary markets. The primary markets, in turn, are
indispensable to the proper functioning of the economy.
 Primary Markets
1. Companies raise funds to finance their projects through various methods.
The promoters can bring their own money of borrow from the financial
institutions or mobilize capital by issuing securities.
2. The funds maybe raised through issue of fresh shares at par or premium,
preferences shares, debentures or global depository receipts.
3. The main objectives of a capital issue are given below:
• To promote a new company
• To expand an existing company
• To diversify the production
• To meet the regular working capital requirements
• To capitalize the reserves
4. Stocks available for the first time are offered through primary market. The
issuer may be a new company or an existing company. These issues may be
of new type or the security used in the past. In the primary market the
issuer can be considered as a manufacturer.
4. The issuing houses, investment bankers and brokers act as the channel of
distribution for the new issues. They take the responsibility of selling the
stocks to the public.
 Why Do Companies Go Public?

1. Cutting down debts

• Many companies, planning to go public, run up big debt loads.
Therefore, many companies look to reduce their debt levels by using the
IPO money. Investors support this move because the credit crunch sends
debt and financing charges higher.
2. Raise Capital
• One of the evident benefits of having an IPO is that it increases capital.
The other methods of raising funds, such as applying for loans, are
expensive and riskier. Banks offer a limited fund based on the analysis of
the company applying for a loan. The interest rates are usually high when
it comes to bank loans.
• On the other hand, IPO can help the company have a lump sum amount
that can be used for various purposes like clearing off debts, research and
development, expansion of business, etc. In other words, the more the
funds, the better the possibility of growth of the business.
3. Financing future projects
• There are companies that fund future projects using the IPO money.
Investors and shareholders are especially inclined towards such companies
because these steps show potential, accountability towards shareholder’s
money and social responsibility.
4. Price Transparency
• Selling the equities will generate a lot of liquidity. It will make the
company reach a stable financial condition, thereby increasing price
transparency. This can also generate a liquid entity for shareholders who
have been associated with the company for a long term.
5. Value Assessment
• Once a company's stock gets listed in the exchange, its value is equal to
that an investor is willing to pay for. Hence, it lets outsiders know the
current value or worth of the company. Value assessment is indispensable
for a company willing to grow in future and carry out mergers and
acquisitions.
6. Enhanced Credibility
• As a result of the launching of IPO and increased visibility, the company's
credibility can also increase. The fiscal data can become more transparent
and thereby fulfil SEBI's requirement by reporting to it periodically.
7. Mergers and acquisitions
• A well-managed company is regularly on the radar of big firms for mergers
or acquisitions. Companies also use the IPO money to fund mergers. A
successful IPO brings value, credibility and prestige to a company and the
added funds facilitate a successful merger.
8. Diversification
• Another use of the IPO money is to invest in other similar businesses,
which make the core company even more powerful and successful. Using
the IPO money for diversification is a common strategy for many
companies.
Source- Indian Financial System
Bharati V. Pathak
 Methods of Raising Funds
1. Public Issue- IPO , FPO and Offer for Sale
2. Venture Capital
3. Private Equity
4. Rights Issue
5. Private Placement, Preferential Issue and
QIPs
6. Disinvestment
 Initial Public Offer (IPO)
1. Initial public offering is the process by which a private company can go
public by sale of its stocks to general public. It could be a new, young
company or an old company which decides to be listed on an exchange
and hence goes public.
2. The company which offers its shares, known as an 'issuer', does so with
the help of investment banks. After IPO, the company's shares are traded
in an open market. Those shares can be further sold by investors through
secondary market trading.
3. In the sixties and seventies, the company and its personnel managed IPO.
But, at present initial public offering involves a number of agencies.
4. The rules and regulations, the changing scenario of the capital market
necessitated the company to seek for the support of many agencies to
make the public issue a success.
5. The manager to the issue, registrars to the issue, underwriters, bankers,
advertising agencies, financial institutions and government /statutory
agencies.
 Entry Norms for IPO by SEBI
• An Initial Public Offering is the process through which companies sell their
first shares to the public.
• To go public, a company must first file an IPO prospectus with the
Securities and Exchange Board of India (SEBI), which outlines the details of
the offering.
• Eligibility requirements for an IPO

1. First, the company must have existed for at least three years.
2. Second, it must have made profits in at least two years.
3. Third, it must have a minimum net worth of Rs. 3 crores.
4. Fourth, it must have a minimum float of 20%. This means that at least
20% of its shares must be available for public trading.
5. Specific financial and legal requirements must be fulfilled. A SEBI-
registered Merchant Banker must audit the financial statements.
 Entry Norms
1. Profitability Route (Entry Norm I)
• The companies must meet all the following conditions in terms of profit
standards to be eligible for an IPO through this route:
1. The company should have net assets of at least Rs 3 crores in each of
the three preceding years.
2. For fresh issues (not for OFS) the above Rs 3 crores of tangible
assets, not more than 50% should be cash or cash equivalent.
3. The company should have an average operating profit (before tax) of at
least Rs 15 crore in any of the three years out of the last five years.
4. In case of a name change, 50% of the revenue generated in the previous
year should be from the business carried on under the new name.
5. The issue size should not exceed five times the net worth of the
company before the issue (pre-issue).
2. QIB Route (Entry Norm II)

• The QIB route is an alternative route developed by SEBI for genuine,

capable and legitimate companies that are unable to meet strict
profitability parameters. The companies going for IPO through the QIB
route have to ensure that:
• IPO through the book-building process.
• Allocate at least 75% of the net offering to qualified institutional buyers .
• Refund of IPO subscription money if the minimum allotment requirement
is not met.
3. Entry Norm III It is commonly known as ‘Appraisal Route’.

• The ‘project’ is appraised and participated to the extent of 15 per cent by

FIs/scheduled commercial banks of which atleast 10 per cent comes from
the appraiser(s).
• The minimum post-issue face value capital shall be `10 crore or there shall
be a compulsory market making for atleast 2 years.
 Initial Public Offer (IPO) - Parties
Involved
1. Managers to the Issue

• Lead managers are independent financial institution appointed by the

company going public. Companies appoint more then one lead manager
to manage big IPO‟s. They are known as Book Running Lead Manager or
Company Book Running Lead Managers.
• Lead managers are appointed by the company to manage the initial public
offering campaign. Their main duties are:
 Drafting of prospectus
 Preparing the budget of expenses related to the issue
 Suggesting the appropriate timings of the public issue
 Assisting in marketing the public issue successfully
 Advising the company in the appointment of registrars to the issue,
underwriters, brokers, bankers to the issue, advertising agents etc.
 Directing the various agencies involved in the public issue.
• Many agencies are performing the role of lead managers to the issue. The
merchant banking division of the financial institutions, subsidiary of
commercial banks, foreign banks, private sector banks and private
agencies are available to act as lead mangers such as SBI Capital Markets
Ltd., Bank of Baroda, Canara Bank, DSP Financial Consultant Ltd. ICICI
Securities & Finance Company Ltd., etc.
• The company negotiates with prospective managers to its issue and settles
its selection and terms of appointment.
• Usually companies appoint lead managers with a successful background.
There may be more than one manager to the issue.
• The fee payable to the lead managers is negotiable between the company
and the lead manager. The fee agreed upon is revealed in the
memorandum of the understanding filed along with the offer document.
2. Registrar to the Issue

• After the appointment of the lead managers to the issue, in consultation

with them, the Registrar to the issue is appointed.
• A registrar is the institution, often a bank or trust company, responsible for
keeping records of bondholders and shareholders when an issuer sells
securities to the public.
• The Registrars are appointed by the company going public to create a total
list of eligible applicants by removing ineligible or faulty applicants.
• They recommend the basis of allotment in consultation with the Regional
Stock Exchange for approval.
• They also allocate shares to applicants based on the guidelines provided
by SEBI and process refunds when required.
3. Underwriters

• Underwriting (issue of shares or debentures) is a contract between a

company and another party called underwriter, where by, in the event of the
shares or debentures not being subscribed fully by the public, the
underwriter agrees to take up the balance.
• The underwriters are exposed to the risk of non-subscription and for such
risk exposure they are paid an underwriting commission.
• The underwriters do not buy and sell securities. They stand as back-up
supporters and underwriting is done for a commission. Underwriting
provides an insurance against the possibility of inadequate subscription.
• Underwriters are divided into two categories- Financial Institutions, banks
and Brokers and approved investment companies.
• Before appointing an underwriter, the financial strength of the prospective
underwriter and his previous experience is considered because he has to
undertake and agree to subscribe the non-subscribed portion of the public
issue.
• The company after the closure of subscription list communicates in writing
to the underwriter the total number of shares/debentures under subscribed,
the number of shares/debentures required to be taken up by the underwriter.
• The underwriter would take up the agreed portion. If the underwriter fails
to pay, the company is free to allot the shares to others or take up
proceeding against the underwriter to claim damages for any loss suffered
by the company for his denial.
• Examples
1. Development banks like IFCI, ICICI and IDBI
2. Institutional investors like LIC.
4. Bankers to the Issue-Bankers to the issue have the responsibility of
collecting the application money along with the application form. The
bankers to the issue generally charge commission besides the brokerage, if
any. Depending upon the size of the public issue more than one banker to
the issue is appointed.
5. The Financial Institutions-Financial institutions generally underwrite the
issue and lend term loans to the companies. Hence, normally they go
through the draft of prospectus, study the proposed program for public
issue and approve them. IDBI, IFCI & ICICI, LIC, GIC and UTI are the
some of the financial institutions that underwrite and give financial
assistance.
6. Advertising Agents- Advertising plays a key role in promoting the public
issue. Hence, the past track record of the advertising agency is studied
carefully. Tentative program of each advertising agency along with the
estimated cost are called for. After comparing the effectiveness and cost of
each program with the other, a suitable advertising agency if selected in
consultation with the lead managers to the issue. The advertising agencies
take the responsibility of giving publicity to the issue on the suitable
media.
 Green Shoe Option
• Many companies launch their IPOs at a reasonable price which is a conscious
decision. Successful launch is important not only for brand building but
becomes the basis for all subsequent launches by the company.
• For pricing the issue, the promoters & the underwriters see the Price Earnings
of the principal competitors and also attempt a discounted cash flow analysis.
Issue is generally underwritten to avoid risk of failure.
• Underwriters get a commission for underwriting the issue.
• Companies that want to venture out and start selling their shares to the public
have ways to stabilize their initial share prices. One of these ways is through
a legal mechanism called the greenshoe option.
• The term "greenshoe" arises from the Green Shoe Manufacturing Company
(now called Stride Rite Corporation), founded in 1919.
• It was the first company to implement the greenshoe clause into their
underwriting agreement.
• The legal name is "overallotment option" because, in addition to shares
originally offered, additional shares are set aside for underwriters
• A greenshoe is a clause contained in the underwriting agreement of
an initial public offering (IPO) that allows underwriters to buy up to an
additional 15% of company shares at the offering price.

• The investment banks and brokerage agencies (the underwriters) that take
part in the greenshoe process have the ability to exercise this option if
public demand for the shares exceeds expectations and the stock trades
above the offering price.
 Working of GSO
• The green shoe option allows companies to intervene in the market to
stabilise share prices during the 30-day stabilisation period immediately
after listing. This involves purchase of equity shares from the market by
the company-appointed agent in case the shares fall below issue price.
• The green shoe option is exercised by a company making a public issue.
The issuer company uses green shoe option during IPO to ensure that the
shares price on the stock exchanges does not fall below the issue price
after issue of shares.
• Green shoe is a kind of option which is primarily used at the time of IPO or
listing of any stock to ensure a successful opening price. Any company
when decides to go public generally prefers the IPO route, which it does
with the help of big investment bankers also called underwriters. These
underwriters are responsible for making the public issue successful and
find the buyers for company’s shares. They are paid a certain amount of
commission to do this work.
• Green shoe option is a clause contained in the underwriting agreement of
an IPO. The green shoe option is also often referred to as an over-
allotment provision. It allows the underwriting syndicate to buy up to an
additional 15% of the shares at the offering price if public demand for the
shares exceeds expectations and the stock trades above its offering price.
• From an investor's 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.

• In a company prospectus, the legal term for the greenshoe is "over-

allotment option", because in addition to the shares originally offered,
shares are set aside for underwriters.
 PROCESS
• The entire process of a greenshoe option works on over-allotment of shares.
• For instance, a company plans to issue 1 lakh shares, but to use the greenshoe
option; it actually issues 1.15 lakh shares, in which case the over-allotment
would be 15,000 shares. Please note, the company does not issue any new
shares for the over-allotment.
• The underwriter does not have these shares to sell, so it effectively shorts the
shares (sells shares it does not have). It owes these shares to the investors,
and it must deliver these shares to the investors.
• The 15,000 shares used for the over-allotment are actually borrowed from the
promoters with whom the stabilising agent signs a separate agreement.
• For the subscribers of a public issue, it makes no difference whether the
company is allotting shares out of the freshly issued 1 lakh shares or from the
15,000 shares borrowed from the promoters.
• Once allotted, a share is just a share for an investor. For the company,
however, the situation is totally different. The money received from the over-
allotment is required to be kept in a separate bank account (i.e. GSO/escrow
account)
 Price Fluctuation
Day Price (Rs) Day Price (Rs)
1 10 5 10
2 10 6 10
3 10 7 10
4 8 8 12
What happens if the share price falls?

• When a public offering trades below its offering price, the offering is said
to have "broke issue" or "broke syndicate bid".
• If the shares trade below the offer price, it may create a wrong
impression in the minds of the investors and they may sell the shares
they have bought or stop buying more from the market.
• In case the shares are trading at a price lower than the offer price, the
stabilising agent starts buying the shares by using the money lying in the
separate bank account.
• In this manner, by buying the shares when others are selling, the
stabilising agent tries to put the brakes on falling prices. The shares so
bought from the market are handed over to the promoters from whom
they were borrowed.
• The underwriter will make profit as will have sold the additional shares at
the IPO price and will buy them back at the lower price.
• For example, if the issue price was Rs.10/share, the underwriter receives
(10*15m) when it sells the additional 15m shares.
• If price falls to Rs 8/share.
• Underwriter buys them back at 120m (8*15m).
• Underwriter sells them at 150m and buys them back from the market at
120m to close short position and makes a Rs 30m profit.

• This process is called Stabilizing Mechanism.

What happens if the share price rises?

• This is a problem as the underwriter needs to close the short position. In

such a scenario, the underwriters cannot buy back the shares at the current
market price since doing so would result in a loss.
• At this point, the underwriters can exercise their greenshoe option to buy
additional shares at the original offer price without incurring a loss.
• The underwriter sold the shares at Rs.10/share and would have to buy them
back at the higher price to deliver these shares to the investor (if it were to
buy the shares on the market).
• The underwriter would clearly make a loss in this situation. This is where
the Greenshoe option kicks in – this allows the underwriter to buy the
shares at an issue price (in this example 10) from the company.
• The company receives additional proceeds; the underwriter will have sold
shares at Rs.10, buying the shares at 10. The underwriter would not gain or
lose.
 Example – Overallotment of
Facebook’s IPO
• When Facebook held its IPO in 2012, it sold 421 million Facebook shares at
$38 to the underwriters, which included a group of investment banks who
were tasked with ensuring that the stocks get sold and the capital raised
sent to the company. In return, they would get 1.1% of the transaction.
Morgan Stanley was the lead underwriter.
• In total, the underwriters sold 484 million Facebook shares at $38. It
means that the underwriters exercised an allotment option by selling an
additional 63 million shares.
• When Facebook stock started trading, the initial price was $42.05, an
increase of 11% above the IPO price.
• The stock soon became volatile, and the stock price fell to $38.
• Press statements indicated that the underwriters stepped in and
purchased additional shares as a way of stabilizing the prices.
• The underwriters had the opportunity of buying back the additional 63
million shares at $38 per share to compensate for any loss incurred in
stabilizing the prices.
 Significance of Exercising the Green
shoe Option
1. The Greenshoe Option helps in Price stabilization for the company, market,
and economy as a whole. It controls the shooting up of prices of a company’s
shares due to uncontrollable demand and tries to align the demand-supply
equation.
2. This arrangement is beneficial to the underwriters (who sometimes act as the
Stabilizing Agents for the company), in a way that they borrow the shares
from promoters at a particular price, and sell them at a higher price to
investors once the prices go up. Then, when the prices tend to go down, they
purchase shares from the market and return them to the promoters. This is
how they earn profits.
3. This mechanism is beneficial to investors as well, as it works in a way to
stabilize the prices, thus making it cleaner and transparent to investors and
helps them to make the better analysis.
4. Greenshoe option is beneficial for the markets because they intend to correct
the prices of the company’s securities in the market. Merely shooting up of
prices due to increase in demand is an incorrect measure of the shares
prices. Hence, the company tries to direct the investors rightly by analyzing
other things (rather than only demand) for the correct share prices.
 Important terms
1. Retail individual investor means an investor who applies or bids for
securities of or for a value of not more than Rs.2,00,000.
• Any bid made in excess of this will be considered in the HNI category.
2. Qualified Institutional Buyers are financial Institutions, Banks, FII's and
Mutual Funds who are registered with SEBI are called QIB's. They usually
apply in very high quantities.
• QIBs are mostly representatives of small investors who invest through
mutual funds, ULIP schemes of insurance companies and pension schemes.
QIB's have an allocation of 50% of shares of the total issue size in Book
Building IPO's.
3. ASBA (Applications Supported by Blocked Amount) is a process
developed by the India's Stock Market Regulator SEBI for applying to IPO.
In ASBA, an IPO applicant's account doesn't get debited until shares are
allotted to them.
• ASBA is an application containing an authorization to block the application
money in the bank account, for subscribing to an issue.
• If an investor is applying through ASBA, his application money shall be
debited from the bank account only if his/her application is selected for
allotment after the basis of allotment is finalized, or the issue is
withdrawn/failed.
4. Dematerialization- Dematerialization is the process of converting
physical share certificates into electronic form i.e. crediting of equivalent
number of shares to your depository account electronically.
5. Depository Account-For dematerialization of shares you have to open a
depository account with a Depository Participant (DP) having
connectivity with National Securities Depository Ltd (NSDL) / Central
Depository Services (I) Ltd (CDSL). You are free to open an account
with any of the DPs for demat.
 Book Building
• Book building is a mechanism through which the initial public offerings
(IPOS) take place in the U.S. and in India it is gaining importance with
every issue. Most of the recent new issue offered in the market has been
through Book Building process.
• Book Building may be defined as a process used by companies raising
capital through Public Offerings-both Initial Public Offers (IPOs) and
Follow-on Public Offers (FPOs) to aid price and demand discovery.
• It is a mechanism where, during the period for which the book for the offer
is open, the bids are collected from investors at various prices, which are
within the price band specified by the issuer.
• The process is directed towards both the institutional investors as well as
the retail investors.
• The issue price is determined after the bid closure based on the demand
generated in the process.
• Under book building the price of the shares is not predetermined by
company or underwriters rather the price of the share is determined on the
basis of bids received .
• Nirma by offering a maximum of 100 lakh equity shares through this
process was set to be the first company to adopt the mechanism.
 Process of Book Building
1. The Issuer who is planning an offer nominates lead merchant banker(s) as
„book runners‟.
2. The Issuer specifies the number of securities to be issued and the price
band for the bids.
3. The Issuer also appoints syndicate members with whom orders are to be
placed by the investors.
4. The syndicate members put the orders into an „electronic book‟. This
process is called „bidding‟ and is similar to open auction.
5. The book normally remains open for a period of 3-5 days.
6. Pricing of the issue under book-building is slightly different than the
normal fixed pricing under public issues.
7. Here price is not fixed upfront but the company may follow any of the
following options:
 Company may give indicative floor price for the benefit of the investor.
 Book Building Process---contd
• This is the minimal bid price per share at which the investor can bid.
However the investor is free to bid any price higher than the floor price.
 Company may fix a price band : a floor & a cap price enabling the investor
to know what can be the highest & the lowest price at which share can be
priced.
• Flexibility is provided to the issuer company by permitting them to indicate
a 20% price band.
8. Bids have to be entered within the specified price band.
9. Bids can be revised by the bidders before the book closes.
10. On the close of the book building period, the book runners evaluate the
bids on the basis of the demand at various price levels.
11. The book runners and the Issuer decide the final price at which the
securities shall be issued.
12. Generally, the number of shares is fixed; the issue size gets frozen based on
the final price per share.
13. Allocation of securities is made to the successful bidders. The rest bidders
get refund orders.

• How is the Price Fixed?

1. All the applications received till the last dates are analyzed and a final
offer price, known as the cut-off price is arrived at.
2. The final price is the equilibrium price or the highest price at which all the
shares on offer can be sold smoothly. If the price quoted by an investor is
less than the final price, he will not get allotment.
3. If price quoted by an investor is higher than the final price, the amount in
excess of the final price is refunded if he gets allotment.
4. If the allotment is not made, full money is refunded within 15 days after
the final allotment is made. If the investor does not get money or allotment
in a month‟s time, he can demand interest at 15 per cent per annum on the
money due.
 Book Building Process---contd
• An issuer company proposing to issue capital through book building has
two options viz., 75% book building route and 100% book building route.
• In case 100% book building when entire public issue is through book
building ( without any fixed price offer) norm is 50% institutions, 35%
retail investor‟s and rest 15% HNIs.
• In case 75% of net public offer is made through book building, not more
than 60% of the net offer can be allocated to QIBs and not less than 15% of
the net offer can be allocated to non-institutional investors. The balance
25% of the net offer to public.
• Allotment to retail individual or non-institutional investors is made on the
basis of proportional allotment system. In case of under subscription in any
category, the un-subscribed portions are allocated to the bidder in other
categories.
 Book Building Process---contd
• Other requirements for book building include: Only electronic bidding is
permitted, Bids are submitted through syndicate members, Bids can be
revised, bidding demand is displayed at the end of every day and allotments
are made not later than 15 days from the closure of the issue etc.
 Pricing of issues under book building

• A co intends to raise Rs.

500 cr by issuing shares
of Rs. 10 each The
Merchant Banker Builds Investor Price Investment Weight W*P Allotment
quoted (Rs. Cr) value (Cr)
a book of five investors
applying for cos shares
with quotes. A 95 300
• Calculate price at which B 98 500
MB will issue shares
and the allotment
value for each investor
C 101 100
The weighted average Price will be
WP =1,17500 = 97.92 D 100 200
W 1200
* (500/900)  500 (where
900 being total weight E 99 100
excluding A)

** (100/900)  500
 Pricing of issues under book building

• A co intends to raise Rs.

500 cr by issuing shares
of Rs. 10 each The
Merchant Banker Builds Investor Price Investment Weight W*P Allotment
quoted (Rs. Cr) value (Cr)
a book of five investors
applying for cos shares
with quotes. A 95 300 300 28500 Nil
• Calculate price at which B 98 500 500 49000 278*
MB will issue shares
and the allotment
value for each investor
C 101 100 100 10100 55.5
The weighted average Price will be
WP =1,17500 = 97.92
**
W 1200 D 100 200 200 20000 111
* (500/900)  500 (where
900 being total weight
excluding A) E 99 100 100 9900 55.5
** (100/900)  500
W=1200 WP=1,17
500
 Changes by SEBI in the norms of Book Building

• Allowing underwriting of public issues even under book building.

• Success of Book building is so much that it is now being used by
companies for even buy back of shares & also by those companies
intending to delist their shares.
• Certain benefits can be attached to the small retail investors in their bids
like their bids can be at a discount to the price bid by institutional investors,
certain percentage of shares (presently 25% ) are specifically reserved for
small investors.
• Confirmatory allotment note with in 15 days of the closure of the issue is
issued to every successful investor. If the allotment is not finalized within
15 days from the date of the closure of the issue , the issuer has to pay an
interest of 15% p.a till the allotment is finalized.
• It can be applied in case of public issue as well as private placement.
• The issue process is quite transparent. The daily status wrt bids received,
the price bid for & the response from various categories of investors can be
easily known from the websites of stock exchanges.

• The daily status gives the investor an idea about the chance of getting the
allotment & thus gives him an opportunity to revise the bid price by
submitting the revision form.
 Difference Between Fixed Price Issue & Book Building Issue
Features Fixed Price Issue Book Building Issue

Under this method, the issue price

Under this specific method, the
gets finalised through a bidding
shares’ issue price is given in the
Meaning method. The investors will have to
prospectus, and investors must
bid between a price band provided
buy at that price only.
to them.

The price at which securities are

The price at which securities get
allotted is not disclosed to investors
Pricing allotted is intimated to investors in
in advance, and they only get to
advance.
know the indicative price range.

Demand for securities is known Demand for securities is known

Demand
after the issue is closed. every day as the book gets built.

Payment is made during the time

Payment of subscription, and the refund is Payment is made after allocation.
provided after allocation.
Features Fixed Price Issue Book Building Issue

Application Supported by Application Supported by

Payment Type Blocked Amount (ASBA) and Blocked Amount (ASBA) and
UPI UPI

50% of shares are for Qualified

50% of shares are reserved Institutional Buyers (QIBS),
Reservations for applications that are below 15% of shares are for retail
Rs. 2 lakhs. investors, and 35% of shares
are for non-retail investors.

The company must issue a

prospectus that should
The company must issue a red
contain all the details about
herring prospectus that
Prospectus the initial offering, including
comprises the total size of the
the price at which shares are
issue and the price band.
provided and the number of
shares offered.

It can be used for almost any

issue, such as ESOS, rights It is generally used in public
Uses
issues, public issues, and issues, such as FPO and IPO.
more.
 Follow on Public Offer

FPO
• A follow-on public offer (FPO) is the issuance of shares to investors by a
company listed on a stock exchange.
• A follow-on offering is an issuance of additional shares made by a
company after an initial public offering (IPO).
• Follow-on offerings are also known as secondary offerings.
• Companies usually announce FPOs to raise equity or reduce debt.
 Types of FPO’S
1. Dilutive FPO:
• This is the process where the company issues additional fresh shares to
the public to raise capital.
• It results in increasing the company’s total outstanding shares, decreasing
the Earnings Per Share (EPS).

2. Non-Dilutive FPO:
• A non-diluted FPO is when the company’s largest shareholders, such as
the founders or board of directors, offer the shares they hold privately to
the general public.
• Unlike a diluted IPO, this method does not increase or decrease the
company’s number of shares.
 IPO v/s FPO
[Link]. Particulars IPO FPO

The first issue of Issuance of shares by a company

1. Meaning
shares by a company to raise additional capital after IPO

Price is market driven and

Fixed or variable price
2. Price dependent on the number of
range
shares increasing or decreasing

Increases because the

Number of shares increases in
company issues fresh
3. Share capital dilutive FPO and remains the same
capital to the public for
in non-dilutive FPO
listing.

Cheaper in most cases because the

4. Value Expensive value of the company is getting
further diluted.
[Link]. Particulars IPO FPO

Comparatively less
5. Risk Riskier
risky

An already-listed
Status of the An unlisted company issues an
6. company issues an
company IPO
FPO
VENTURE CAPITAL
 MEANING
• Venture capital is financing that investors provide to startup companies
and small businesses that are believed to have long-term
growth potential.
• Venture capital generally comes from well-off investors, investment
banks and any other financial institutions.
• However, it does not always take just a monetary form; it can be provided
in the form of technical or managerial expertise.
• This is a very important source of funding for startups that do not have
access to capital markets. It typically entails high risk for the investor, but
it has the potential for above-average returns.
• For new companies or ventures that have a limited operating history
(under two years), venture capital funding is increasingly becoming a
popular – even essential – source for raising capital, especially if they lack
access to capital markets, bank loans or other debt instruments.
• The main downside is that the investors usually get equity in the
company, and thus a say in company decisions.
• With venture capital financing, the venture capitalist acquires an agreed
proportion of the equity of the company in return for the funding. Equity
finance offers the significant advantage of having no interest charges.

• The venture capital fund makes money by owning equity in the companies
it invests in, which and usually have a novel technology or business model
in high technology industries, such as biotechnology, IT, software, etc.

• Venture capital is attractive for new companies with limited operating

history that are too small to raise capital in the public markets and have
not reached the point where they are able to secure a bank loan or
complete a debt offering.
• Example- Helion Venture Partners, Kalaari Capital, Accel Partners, Venture
East, Nexus Venture Partners.
• Venture capital has a number of advantages over other forms of finance,
such as:

 It injects long term equity finance which provides a solid capital base for
future growth.
 The venture capitalist is a business partner, sharing both the risks and
rewards. Venture capitalists are rewarded by business success and the
capital gain.
 The venture capitalist is able to provide practical advice and assistance to
the company based on past experience with other companies which were
in similar situations.
 The venture capitalist also has a network of contacts in many areas that
can add value to the company, such as in recruiting key personnel,
providing contacts in international markets, introductions to strategic
partners, and if needed co-investments with other venture capital firms
when additional rounds of financing are required.
 The venture capitalist may be capable of providing additional rounds of
funding should it be required to finance growth.
 How does the VC industry work
• In exchange for the high risk that venture capitalists assume by investing in
smaller and less mature companies, venture capitalists usually get
significant control over company decisions, in addition to a significant
portion of the company's ownership (and consequently value).
• Venture capital firms typically source the majority of their funding from
large investment institutions such financial institutions, insurance
companies, pension funds and banks. These institutions typically invest in
a venture capital fund for a period of up to ten years.
• To compensate for the long term commitment and lack of both security
and liquidity, investment institutions expect to receive very high returns
on their investment. Therefore venture capitalists invest in either
companies with high growth potential where they are able to exit through
either an IPO or a merger/acquisition.
• Although the venture capitalist may receive some return through
dividends, their primary return on investment comes from capital gains
when they eventually sell their shares in the company, typically between
three to five years after the investment.
• Venture capitalists are therefore in the business of promoting growth in
the companies they invest in and managing the associated risk to protect
and enhance their investors' capital.
 Stages
 Financing under venture capital can be divided under the
following:
1. Early stage- seed capital
2. Expansion stage – modernization, expansion
3. Acquisition stage- form of buyouts & turnarounds- money in
sick & ailing units
4. Miscellaneous Purposes – working capital needs, for bringing
public issue or providing bridge loan.

 64% of total the investments in India by venture capital goes

as seed capital/ startups.
 Venture capital is not suitable for all businesses, as a
venture capitalist typically seeks :
1. Superior Businesses Venture capitalists look for companies with superior
products or services targeted at large, fast growing or untapped markets
with a defensible strategic position such as intellectual property or
patents.
2. Quality and Depth of Management Venture capitalists must be
confident that the firm has the quality and depth in the management
team to achieve its aspirations. Venture capitalists seldom seek
managerial control, rather they want to add value to the investment
where they have particular skills including fund raising, mergers and
acquisitions, international marketing, product development, and
networks.
3. Appropriate Investment Structure As well as the requirement of being
an attractive business opportunity, the venture capitalist will also seek to
structure a deal to produce the anticipated financial returns to investors.
This includes making an investment at a reasonable price per share
(valuation).
4. Exit Opportunity Lastly, venture capitalists look for the clear exit
opportunity for their investment such as public listing or a third party
acquisition of the investee company.
 Private Equity
• The term private equity refers to the capital investment made by the
investors or companies in the private companies that are not quoted on
the stock exchange.
• The funds may also be invested in a public company to conduct buyout,
through, which the public company will be delisted. The investments are
made at the maturity level of the company, having a substantial operating
history. The package may include both equity and debt financing.
• Private Equity firms buy an already existing company and restructure it to
develop further, expand and make it better than before
• The basic principle has remained constant: a group of investors buy out a
company and use that company's earnings to pay themselves back
• The majority of private equity consists of institutional investors and
accredited investors who can commit large sums of money for long
periods of time.
 MEANING
• Investments in private equity most often involve either an investment of
capital into an operating company or the acquisition of an operating
company.
• ICICI Venture, Chrys Capital, Sequoia Capital, India Value Fund and Kotak
Private Equity Group
• Private equity consists of investors and funds that make investments
directly into private companies or conduct buyouts of public companies
that result in a delisting of public equity.
• Capital for private equity is raised from retail and institutional investors,
and can be used to fund new technologies, expand working capital within
an owned company, make acquisitions, or to strengthen a balance sheet.
• Private equity investments often demand long holding periods to allow
for a turnaround of a distressed company or a liquidity event such as an
IPO or sale to a public company.
 Difference
BASIS FOR
PRIVATE EQUITY VENTURE CAPITAL
COMPARISON
Meaning Private Equity are the Venture Capital refers to financing of
investments, that are made in small business by the investors,
those firms which are not seeking high growth potential.
publicly listed on any stock
exchange.
Stage of Investment Later stage Initial stage
Investments made in Few companies Large number of companies
Companies Funds are provided to matured Investments are made in startup
companies having good track companies.
record.
Focus on Corporate Governance Management Capability
Industries All industries Industries that require heavy initial
investments like energy
conservation, high technology, etc.
 BASIS FOR COMPARISON PRIVATE EQUITY VENTURE CAPITAL
Risk Involved Less risky High risk
Fund Requirement For growth and expansion For scaling up operations
of business
Ownership of investor Generally 100% Does not exceed 49%
 Source- Business Today dated 1/2/23
• In 2022, PEs and VCs invested $23 billion in Indian start-ups, a 35 per cent
fall from $35 billion in 2021.
• In the absence of any major announcements with respect to tax parity
and favourable structures, this is expected to continue.
• Investors and funds are grappling with ambiguity related to taxation of
carried interest, treatment of long-term capital gains (LTCG), restrictive
foreign pricing rules and co-investment framework, use of convertible
instruments, absence of hedging and leveraging options, downside
protections, and lack of a single-window system to address the issues of
the industry.
 Bought out Deals (Offer for Sale)
• Here, the promoter places his shares with an investment banker (bought out
dealer or sponsor) who offers it to the public at a later date. The issue is
sold to a group of brokers or issue houses (the intermediaries) who then
resell to the public in the usual manner.

• Usually the intermediaries buy it a low price from the company and sell it
at a higher price to public. The difference is called turn or spread – the
profit of the issue houses.

• In US there is no first method & the issue must compulsorily be first sold
to the underwriters, who then issue these shares to public.

• The advantage is that the company is relieved from the trouble of selling
shares directly to the public but the disadvantage is the profit is pocketed
by intermediaries instead of becoming additional funds for the company.

• In India this method is experimented under the name bought out deals
where the shares are first sold to the sponsor under an agreement that the
sponsor shall sell them to public within specific period of time.
• Here, the promoter places his shares with an investment banker (bought out
dealer or sponsor) who offers it to the public at a later date.
• In addition to the main sponsor, there could be individuals and other
smaller companies participating in the syndicate. The sponsors hold on to
these shares for a period and at an appropriate date they offer the same to
the public.
• The hold on period may be as low as 70 days or more than a year.
 Advantages of offer for sale for the
issuing company:
• Firstly, a medium or small sized company, which is already facing working
capital shortage, cannot afford to have long lead-time before the funds
could be mobilized from the public. Bought out deal helps the promoters to
realize the funds without any loss of time.
• Secondly, the cost of raising funds is reduced in bought out deals. For
issuing share to the public the company incurs heavy expenses, which may
invariably be as high as 10 percent of the cost of the project, if not more.
• Thirdly, bought out deal helps the entrepreneurs who are not familiar with
the capital market but have sound professional knowledge to raise funds.
• Fourthly, for a company with no track record of projects, public issues at a
premium may pose problems, as SEBI guidelines come in the way. The
stipulations can be avoided by a bought out deal.
 Private Placement
• A private placement is a capital raising event that involves the sale of
securities to a relatively small number of select investors. Investors
involved in private placements can include large banks, mutual funds,
insurance companies and pension funds.

• A private placement is different from a public issue in which securities are

made available for sale on the open market to any type of investor.
• Mostly in the private placement securities are sold to financial institutions
like Unit Trust of India, mutual funds, insurance companies, and merchant
banking subsidiaries of commercial banks and so on.

• Corporate use this method to place more of debt rather than equity and
reason for that is that the issue of debt can be tailor-made according to the
particular co‟s requirement.
• Till recently corporate were allowed to go ahead with the issue made
through placement method with very less disclosures as compared to a
public issue.
• Section 42 of the Companies Act, 2013 allows any company, whether
private or public, to make private placement of securities through issue of a
“Private Placement Offer Letter” (PPOL).

• Section 42 of the Act, 2013 defines 'private placement' which can be said in
consonance with the interpretation of the Supreme Court as "any offer of
securities or invitation to subscribe securities to a select group of persons
by a company (other than by way of public offer) through issue of a private
placement offer letter and which satisfies the conditions specified in this
section including the condition that he offer or invitation is made to not
more than 50 or such higher number of persons as may be prescribed in a
financial year".
 Advantages of Private Placement
• Cost Effective: Private placement is a cost-effective method of raising
funds. In a public issue underwriting, brokerage, printing, mailing and
promotion account for 8 to 10 percent of the issue cost. In the case of the
private placement several statutory and non-statutory expenses are avoided.
• Time Effective: In the public issue the time required for completing the
legal formalities and other formalities takes usually six months or more.
But in the private placement the requirements to be fulfilled are less and
hence, the time required to place the issue is less, mostly 2 to 3 months.
• Structure Effectiveness: It can be structured to meet the needs of the
entrepreneurs. It is flexible to suit the entrepreneurs and the financial
intermediaries.
• Access Effective: Through private placement a public limited company
listed or unlisted can mobilize capital. Like-wise issue of all size can be
accommodated through the private placement either small or big where as
in the public issue market, the size of the issue cannot fall below a certain
minimum size.
 Preferential Issue of Shares
• Preferential Issue is the fastest way for a company to raise capital. A
preferential issue is an issue of shares or convertible securities by listed or
unlisted companies to a select group of investors, but it is neither a rights
issue nor a public issue.
• A person holding preferential shares has the right to be paid from
company assets before common stockholders if the company goes into
bankruptcy. They usually do not have voting rights, and are rewarded only
by dividends.
• Section 62 along with Rule 13 of the Companies (Share Capital and
Debentures) Rules, 2014 and Section 42 along with Rule 14 of the
Companies (Prospectus and Allotment of Securities) Rules, 2014
prescribes the procedures and provisions for preferential allotment of
shares.
• In order to issue and allot shares on a preferential basis, one needs to
send a notice to convene a board meeting at least seven days before the
meeting takes a decision on the proposed preferential Issue.
 BASIS FOR COMPARISON PRIVATE PLACEMENT PREFERENTIAL ALLOTMENT

Meaning Private Placement refers to the Preferetial Allotment, is the

offer or invitation to offer allotment of shares or
made to specified investors, debentures to a selected
for inviting them to subscribe group of persons is made by a
for shares, so as to raise funds. listed company, to raise funds.

Governed by Section 42 of the Companies Section 62 (1) of the

Act, 2013 Companies Act, 2013
Offer letter Private placement offer letter No such document

Consideration Payment is made by way of Cash or consideration other

cheque, demand draft or other than cash.
modes except cash.

Bank account To keep the application money, Not required.

separate bank account in a
scheduled commercial bank is
required.

Articles of association Articles of association of the No authorization is required.

company must authorize it.
 QIP
• At its most basic level, a qualified institutional placement (QIP) is
a mechanism for publicly traded companies to obtain capital without
having to file formal documentation with market regulators.
• In India and other Southeast Asian countries, the usage of QIPs is very
widespread.
• The Securities and Exchange Board of India (SEBI) enacted this rule to
prevent enterprises from relying on foreign financing.
• A publicly traded firm can issue equity shares, completely and partially
convertible debentures, or any other security that is convertible to equity
shares in a QIP.
• QIP is a fast way for a publicly-traded firm to issue shares or convertible
instruments to a small number of investors.
• Only institutions or qualified institutional buyers (QIBs) can participate in
a QIP issuance, unlike an IPO or an FPO.
• Mutual funds, domestic financial institutions including banks and
insurance firms, venture capital funds, foreign institutional investors, and
others are all examples of QIBs.
 Rights Issue
• Restricted to existing shareholders of the company. Existing shareholders
get a right of pre-emption ie right to subscribe to new shares to be issued by
co in proportion to their existing holdings.

• The existing shareholder has the option to exercise the right or renounce it.
He is also given a chance to subscribe to additional shares than his right
but such additional shares can be given to him only when other
shareholders do not exercise their right.

• A rights issue of 1: 20 means for every 20 shares held, the right of the
shareholder is 1 share.

• A company must go ahead with its rights issue within three months when it
gets green signal from SEBI. Unlike Public Issue in case of rights issue
SEBI shall give only its observation & takes no responsibility of financial
soundness of any scheme or project.

• Nowadays like public issues, rights issues too are also underwritten.
However, issue costs like advertisement, printing are minimal and stand
nowhere in comparison to that of a public issue
Conditions to issue right shares.
• Right shares must be offered to the equity shareholders in the proportion to
the capital paid on those shares.
• A notice should be issued to specify the number of shares issued.
• The time given to accept the right offer should not be less than 15 days.
• The notice also should state the right of the shareholders to renounce the
offer in favor of others.
• After the expiry of the time given in the notice, the Board of Directors has
the right to dispose the unsubscribe shares in such a manner, as they think
most beneficial to the company.
 Employee Stock option
• The idea that employees should have an ownership stake in the company
led to the emergence of concept of Employee Stock Option Plan (ESOP). A
scheme that encourages employees to participate in the management of
the company by offering shares of the company at a discount to the market
price.
• The scheme is optional & the shares are offered after the lock in period is
over. The shares are a part of their consideration for spending certain no of
years in the company.

• The objective of issuing ESOP is to:

1. Provide incentive to attract, retain and reward employees of the company
2. Motivate employees to contribute to the growth and profitability of the
company.
3. The phenomena of stock options is more prevalent in start-up companies
which can not afford to pay huge salaries to its employees but are willing
to share the future prosperity of the company. In such cases the
employees are given the stock options as part of the compensation
package.
4. Moreover in some cases, the employee is given such stock options which
he can exercise in future date/s, in order to ensure long-term commitment
of the employee.
 Employee stock options---contd.

5. So apart from rewarding the employees with monetary gains, ESOP

also help create a sense of belonging and ownership amongst the
employees.
6. Stock option is considered to a solution to Principal-agent problem.
A principal agent problem arises when the authority is delegated &
the employees use that authority to perform the assigned duties.
• However in order that employee carry out the duties in the best
possible manner, purchasing the best quality & at best possible prices,
selecting the most efficient staff etc there is a need to give some
incentive & one of the best ways to do so is to make him a partner or
allow him to share the profits of the business & this is what is behind
the stock options.
• Ultimate loss due to stock option scheme is for the existing
shareholders of the company in terms of equity, their consent is
required before a company goes in for such a scheme.
• Usually such shares are allotted from either Promoter’s Quota or from
the lot it has brought back.
• Certain legal guidelines- only employees are eligible for such shares,
shares allotted cannot exceed 5% of paid up capital in any one yr and any
capital gains arising at the time of sale shall be taxed.
• For senior executives stock options are good because their salary is such
that if they go for cash incentive they would be paying more in the form of
tax as they are in higher tax bracket.
 Disinvestment
• In general terms Disinvestment is simply selling the equity (share)
invested by the government in Public Sector Enterprises (PSU). PSUs are
enterprises which are either owned completely by the government or
whose shares are maximum owned by the government (51% or above).
Examples include LIC, BHEL, ONGC, and NTPC etc.
• If there is no progress achieved by the PSU or if there are no profits
obtained (sometimes government may not be able to recover the
investment capital also) by it, government sells some part of the equity to
private companies. The funds raised by this sale can be used to develop
other underperforming PSUs.
• Disinvestment is the action of an organization or government selling or
liquidating an asset or subsidiary. It is done by
company/organization/government to do away with those entities which
do not fit with its overall strategy.
• For example- An automobile company want to focus on domestic
consumers only then it may sell off its international divisions due to
complexities and costs of integration.
Background of Disinvestment in India
• The Indian economy had virtually embraced bankruptcy during the period
1981-91. The public sector which was to achieve commanding heights and
was taught to be the correct path for India’s economic growth, right from
independence was characterised by poor performance.
• In 1991 there were 236 operating public sector undertakings, of which
only 123 were profit making. The top 20 profit making PSU’s counted for
80 per cent of the profits, implying that less than 10 percent of the PSU’s
were responsible for 80 percent of profits. The return on public sector
investment for the year 1990-91 was just over 2 percent.
• The basic charges against the public sector for its poor performance are as
follows:
(i) Low rate of return on investment.
(ii) Declining contribution to national savings.
(iii) Poor capacity utilization.
(iv) Overstaffing, bureaucratization leading to excessive delays and wastage of
scare resources.
• However, they continue to exist due to state granted monopoly and
excessive assets. Being huge burden on taxpayers, they almost always
returned less than investment. In the period of 1986-1991, State owned
enterprises made 39% of GDP as gross investment, but generated only
14% of GDP.
• Conceding to demands of privatisation and with tough resistance from
labour unions, government of India started divesting from PSUs. It was a
concrete step towards privatisation and liberalisation of our economy. The
process of disinvestment was started in the year 1992.
• In order to avoid more losses (at taxpayer's expense) incurred by
inefficient and loss-making PSUs, the BJP-led Vajpayee government (1999-
2004) made four strategic disinvestments - in Bharat Aluminium Company
(BALCO) and Hindustan Zinc (both to Sterlite Industries), Indian
Petrochemicals Corporation Limited (to Reliance Industries) and VSNL (to
the Tata group)
 Merits/Objectives of Disinvestment:

1. To obtain release of the large amount of public resources locked up in

non-strategic Public sector units for re-employment in areas that are
much higher on the social priority e.g. health, family, welfare etc. and to
reduce the public debt that is assuming threatening proportions.
2. Disinvestment would help in stopping further outflows of the scarce
public resources of sustaining the unviable non-strategic public sector
unit.
3. Disinvestment would facilitate transferring the commercial risk to which
the tax payer’s money locked up in the public sector is exposed to the
private sector wherever the private sector is willing to step in.
4. Disinvestment would expose privatized companies to market disciplines
and help them become self reliant.
5. Disinvestment would result in wider distribution of wealth by offering
shares of privatized companies to small investors and employees.
6. Disinvestment would have a beneficial effect on the capital market. The
increase in floating stock would give the market more depth and liquidity,
give investors early exit options, help establish more accurate
benchmarks for valuation and raising of funds by privatized companies
for their projects and expansion.
7. Opening up the public sector to private investment will increase
economic activity and have an overall beneficial effect on economy,
employment and tax revenues in the medium to long term.
8. Bring relief to consumers by way of more choices and better quality of
products and services, e.g. Telecom sector.
9. To bridge fiscal deficit using funds from disinvestment.
 Demerits/Criticism of Disinvestment:

1. The amount raised through disinvestment from 1991-2001 was Rs. 2051
crores per year which is too meagre. Further, the way money released by
disinvestment is being used, remaining undisclosed.
2. Using funds made available from disinvestment to bridge the fiscal deficit
is an unhealthy and a short term practice. It is said that it is equivalent of
selling 'family silver' to meet short term monetary requirements. In the
case of disinvestment, The Government will forego dividends on the
equity holdings by selling off its stakes.
3. The loss of PSU’s is rising. It was 9305 crore in 1998 and 10060 crore in
2000.
4. Loss of public involvements- PSUs are resources of the state. They belong
to the people. By selling them to private companies, authorities is
earnestly impacting the people ‘s public assistance.
5. Profit making units, which were under the classification of Ratnas, were
also targeted for disinvestment. BALCO was a profit making co., which
earned the government an average dividend, over eight years, of Rs.569
crore every year on the equity sold.
6. Fear of foreign control- Selling equities to foreign companies result in
serious effects switching the state ‘s wealth, power and control to
foreigners.
7. Issues with workers- The occupations of Lakhs of workers in the PSUs will
fall in danger by denationalization.
8. Complete Privatisation may result in public monopolies becoming private
monopolies, which would then exploit their position to increase costs of
various services and earn higher profits.
 Sell Off Methods
• The three basic methods of disinvestment are:
1. Minority Disinvestment
• A minority disinvestment is one such that, at the end of it, the government
retains a majority stake in the company, typically greater than 51%, thus
ensuring management control.
• Historically, minority stakes have been either auctioned off to institutions
(financial) or offloaded to the public by way of an Offer for Sale. The
present government has made a policy statement that all disinvestments
would only be minority disinvestments via Public Offers.
• Examples of minority sales via auctioning to institutions go back into the
early and mid 90s. Some of them were Andrew Yule & Co. Ltd., CMC Ltd.
etc.
• Examples of minority sales via Offer for Sale include recent issues of Power
Grid Corp. of India Ltd., Rural Electrification Corp. Ltd., NTPC Ltd., NHPC
Ltd. etc.
2. Majority Disinvestment
• A majority disinvestment is one in which the government, post
disinvestment, retains a minority stake in the company i.e. it sells off a
majority stake.
• Historically, majority disinvestments have been typically made to strategic
partners. These partners could be other CPSEs themselves, a few
examples being BRPL to IOC, MRL to IOC, and KRL to BPCL. Alternatively,
these can be private entities, like the sale of Modern Foods to Hindustan
Lever, BALCO to Sterlite, CMC to TCS etc.

3. Complete Privatisation
• Complete privatisation is a form of majority disinvestment wherein 100%
control of the company is passed on to a buyer. Examples of this include
18 hotel properties of ITDC and 3 hotel properties of HCI.
 IMPORTANT
• Disinvestment and Privatisation are often loosely used interchangeably.
There is, however, a vital difference between the two. Disinvestment may
or may not result in Privatisation.
• When the Government retains 26% of the shares carrying voting powers
while selling the remaining to a strategic buyer, it would have disinvested,
but would not have ‘privatised’, because with 26%, it can still stall vital
decisions for which generally a special resolution (three-fourths majority)
is required.
 Euro issue
• Firms raise capital by either getting debt or by raising equity. Equity can be
raised in the home country or in other international markets. When a firm
trades simultaneously in different international market, it is termed as
Euro-issues.
• Euro issue is a name given to sources of finance or capital available to
raise money outside the home country in foreign currency.
• The most commonly used sources of funds that fall under Euro issues are
American Depository Receipts (ADR), Global Depository Receipts (GDR),
and Foreign Currency Convertible Bonds (FCCB) among others.
• Rules and regulations for Indian Companies :

1. These issues will be done through depository receipt mechanism.

2. Every Indian company has to get approval from ministry of finance if it
has to get money through euro issue.
3. Company must also get approval from RBI under FERA/FEMA laws.
American Depository Receipts (ADRs) & Global
Depository Receipts (GDRs)
• Indian companies are permitted to raise foreign currency resources
through two main sources:
1. Issue of Foreign Currency Convertible Bonds (FCCBs)
2. Issue of Ordinary equity shares through depository receipts, namely,
Global Depository Receipts/ American Depository Receipts to foreign
investor's i.e. institutional investors or investors residing abroad.
• An American depositary receipt (ADR) is a negotiable certificate issued by
a U.S. bank representing a specified number of shares (or one share) in a
foreign stock traded on a U.S. exchange.
• The certificate is issued by an overseas depository bank against certain
underlying stocks/shares.
• The shares are deposited by the issuing company with the depository
bank. The depository bank in turn tenders DRs to the investors.
• This is a financial instrument used by the companies to raise capital in
either dollars or Euros. GDRs are also called European Depositary Receipt.
• These are mainly traded in European countries and particularly in London.
• However, ADRs and GDRs make it easier for individuals to invest in foreign
companies, due to the widespread availability of price information, lower
transaction costs, and timely dividend distributions.
 Why do Companies go for ADRs or
GDRs?
• Indian companies need capital from time to time to expand their business.
If any foreign investor wants to invest in any Indian company, they follow
two main strategies.
• Either the foreign investors can buy the shares in Indian equity markets or
the Indian firms can list their shares abroad in order to make these shares
available to foreigners.
• But the foreign investors often find it very difficult to invest in India due to
poor market design of the equity market. Here, they have to pay hefty
transaction costs.
• This is an obvious motivation for Indian firms to bypass the incompetent
Indian equity market mechanisms and go for the well-functioning overseas
equity markets.
• When they issue shares in forms of ADRs or GDRs, their shares command
a higher price over their prices on the Indian bourses.
• A Depository Receipt represents a particular bunch of shares on which the
receipt holder has the right to receive dividend, other payments and
benefits which company announces from time to time for the
shareholders.
• However, it is non-voting equity holding. DRs facilitate cross border trading
and settlement, minimize transaction cost and broaden the potential base,
especially among institutional investors.
• More and more Indian companies are raising money through ADRs and
GDRs these days.
• ADR holders do not have to transact in foreign currencies, because ADRs
trade in U.S. dollars and clear through U.S. settlement systems.
• The U.S. banks require that the foreign companies provide them with
detailed financial information, making it easier for investors to assess the
company's financial health compared to a foreign company that only
transacts on international exchanges.
Source- Slideshare
 Indian Companies Listed Abroad?
• Infosys Technologies was the first Indian company to be listed on
NASDAQ in 1999.
• However, the first Indian firm to issue sponsored GDR or ADR was
Reliance industries Limited.
• Beside, these two companies there are several other Indian firms are also
listed in the overseas bourses.
• These are Wipro, Vedanta, Makemytrip, State Bank of India, Tata Motors,
Dr Reddy's Lab, Ranbaxy, Larsen & Toubro, ITC, ICICI Bank, Hindalco,
HDFC Bank and Bajaj Auto.
 Dividend Payment
• ADRs are issued and pay dividends in U.S. dollars, making them a good
way for domestic investors to own shares of a foreign company without
the complications of currency conversion.
• However, this does not mean ADRs are without currency risk.
• Rather, the company pays dividends in its native currency and the issuing
bank distributes those dividends in dollars -- net of conversion costs and
foreign taxes -- to ADR shareholders.
 Example
• When the exchange rate changes, the value of the dividend changes. or
example, let's assume the ADRs of XYZ Company, a French company, pay
an annual cash dividend of 3 euros per share.
• Let's also assume that the exchange rate between the two currencies is
even -- meaning one Euro has an equivalent value to one dollar. XYZ
Company's dividend payment would therefore equal $3 from the
perspective of a U.S. investor.
• However, if the euro were to suddenly decline in value to an exchange rate
of one euro per $0.75, then the dividend payment for ADR investors would
effectively fall to $2.25.
• The reverse is also true. If the euro were to strengthen to $1.50, then XYZ
Company's annual dividend payment would be worth $4.
 GDR
• A global depository receipt (GDR) is a certificate issued by a depository
bank, which purchases shares of foreign companies and deposits it on
the account.
• They are the global equivalent of the original American depository
receipts (ADR) on which they are based.
• A global depositary receipt (GDR) is similar to an ADR, but is a depositary
receipt sold outside the United States and outside the home country of
the issuing company.
• GDRs represent ownership of an underlying number of shares of a foreign
company and are commonly used to invest in companies from developing
or emerging markets by investors in developed markets.
• Each GDR represents a particular number of shares in a specific company.
A single GDR can represent anywhere from a fraction of a share to
multiple shares, depending on its design.
Summarized Working
 BASIS FOR
ADR GDR
COMPARISON
Acronym American Depository Receipt Global Depository Receipt

Meaning ADR is a negotiable instrument GDR is a negotiable instrument issued by

issued by a US bank, representing the international depository bank,
non-US company stock, trading in representing foreign company's stock
the US stock exchange. trading globally.

Relevance Foreign companies can trade in US Foreign companies can trade in any
stock market. country's stock market other than the US
stock market.

Issued in United States domestic capital European capital market.

market.
Listed in American Stock Exchange such as Non-US Stock Exchange such as London
NYSE or NASDAQ Stock Exchange or Luxemberg Stock
Exchange.

Negotiation In America only. All over the world.

 Indian Depository Receipts (IDRs)
• A foreign company can access Indian securities market for raising funds
through issue of Indian Depository Receipts (IDRs).
• An IDR is an instrument denominated in Indian Rupees in the form of a
depository receipt created by a Domestic Depository (custodian of
securities registered with the Securities and Exchange Board of India)
against the underlying equity of issuing company to enable foreign
companies to raise funds from the Indian securities Markets.
• DR are issued by a domestic depository in India and denominated in
Rupees. It represents an ownership interest in a fixed number of
underlying equity shares of the Issuing Company. These shares are called
Deposited Shares.
• Standard Chartered Bank created history in the Indian Capital Market by
becoming the first foreign company to come up with an IDR issue.
• According to Sebi guidelines, the minimum bid amount in an IDR issue is
Rs 20,000 per applicant.
• Like in any public issue in India, resident Indian retail (individual) investors
can apply up to an amount of INR 2,00,000 and non-institutional investors
(also called high-net-worth individuals) can apply above INR 1,00,000 but
up to applicable limits.
 Foreign Currency Convertible Bond -
FCCB
• A bond is a debt instrument that provides income to investors in the form
of regular scheduled interest payments called coupons.
• At the maturity date of the bond, the investors are repaid the full face
value of the bond. Some corporate entities issue a type of bond known as
convertible bonds.
• A foreign currency convertible bond (FCCB) is a type of convertible bond
issued in a currency different than the issuer's domestic currency.
• A bondholder with a convertible bond has the option of converting the
bond into a specified number of shares of the issuing company.
• Convertible bonds have a conversion rate at which the bonds will be
converted to equity.
• In other words, the money being raised by the issuing company is in the
form of a foreign currency.
• A convertible bond is a mix between a debt and equity instrument. It acts
like a bond by making regular coupon and principal payments, but these
bonds also give the bondholder the option to convert the bond into stock.
• A foreign currency convertible bond (FCCB) is a convertible bond that is
issued in a foreign currency, which means the principal repayment and
periodic coupon payments will be made in a foreign currency.
• For example, an American listed company that issues a bond in India in rupees
has, in effect, issued an FCCB.
• Foreign currency convertible bonds are typically issued by multinational
companies operating in a global space and looking to raise capital in foreign
currencies.
• A company may decide to raise money outside its home country to gain access
into new markets for new or expansionary projects.
• FCCBs are generally issued by companies in the currency of those countries
where interest rates are usually lower than the home country or the foreign
country economy is more stable than the home country economy.
• An FCCB investor can purchase these bonds at a stock exchange, and has the
option to convert the bond into equity or a depositary receipt after a certain
period of time. Investors can participate in any price appreciation of the
issuer’s stock by converting the bond to equity.
 Performance of Primary Market in
India
• Indian companies mobilised Rs 5.06 lakh crore through the equity and
debt routes during April-November 2022, a drop of 8.5 per cent from the
year-ago period according to the Economic Survey 2022-23.
• India's capital market had a good year in FY23 though global
macroeconomic and financial market developments exercised some
influence.
• With Indian indices outperforming global peers, the IPO market also
started seeing increased activity with 40 companies raising ₹594 billion in
2022.
• In May 2022, the central government diluted its stake in the Life Insurance
Corporation (LIC) of India and listed it on the stock exchanges, thereby
making it the largest IPO ever in India and the sixth biggest IPO globally of
2022.
• Primary markets saw a substantial reduction in Qualified Institutional
Placements (QIPs) by 73% compared to last year, majorly impacted by
global scnario and increased market volatility.
 LISTING OF SECURITIES
 Listing means admission of securities to dealings on a recognized stock
exchange. The securities may be of any public limited company, Central or State
Government and other financial institutions/corporations, municipalities, etc.

 The objectives of listing are mainly to :

1. provide liquidity to securities;
2. mobilize savings for economic development;
3. protect interest of investors by ensuring full
disclosures.
 A company, desirous of listing its securities on the Exchange, shall be required to
file an application, in the prescribed form, with the Exchange before issue of
Prospectus by the company, where the securities are issued by way of a
prospectus or before issue of 'Offer for Sale', where the securities are issued by
way of an offer for sale.
 LISTING OF SECURITIES(Cont.)

 The company shall be responsible to follow all the requirements specified in

the Companies Act, the listing norms issued by SEBI and in accordance with
the provisions of the Securities Contracts (Regulation) Act, 1956, Securities
Contracts (Regulation) Rules, 1957, Companies Act, 1956.
 Earlier a minimum of six days was required to do the IPO listing in the stock
market for trading. However, as of September 2018, the Securities and
Exchange Board of India (SEBI) cut down the time to three days.
 Benefits of listing
1. A premier marketplace: The sheer volume of trading activity ensures that
the impact cost is lower on the Exchange which in turn reduces the cost of
trading to the investor. The automated trading system ensure consistency and
transparency in the trade matching which enhances investors confidence and
visibility of our market.
2. Visibility: The trading system provides unparallel level of trade and post-
trade information. The best 5 buy and sell orders are displayed on the trading
system and the total number of securities available for buying and selling is
also displayed. This helps the investor to know the depth of the market.
Further, corporate announcements, results, corporate actions etc are also
available on the trading system.
3. Unprecedented reach: Stock exchanges provide a trading platform that
extends across the length and breadth of the country. Investors from number
of centers can avail of trading facilities. The Exchange uses the latest in
communication technology to give instant access from every location.
 Benefits of listing(Cont.)
4. Value addition: A listing can also be anticipated to attach importance to a
company's Employee Share Ownership Scheme. In addition, a listing on a stock
exchange can add value to a company. A listing could press forward brand
awareness of company products and can augment a company's corporate
standing. Furthermore, the superior profile, tied with larger visibility could add
to the company's capacity to have access to traditional sources of capital.
5. Increasing capital: The Stock Exchange makes available access to a
collection of institutional and retail investors and to the capital market. A
registration on the exchange allows a company to raise capital and use it to
sponsor investment and expansion. Even after a company is listed, it can boost
up capital from the market, through the issue of fresh securities such as Rights
issues or through the issue of a new nature of securities.
6. Access to a widespread shareholder base: The stock exchange puts forward
companies a right of entry to a wide-ranging and mounting investor base, which
contains both entity investors and plentiful local and international institutional
investors.
 Benefits of listing (Cont.)

7. Price Detection: A listing facilitates companies to ascertain a price for their

shares.
8. Low cost capital: The primary gain of raising capital from the market is that
it reduces a number of the intermediation expenses apparent in the other forms
of capital raising. Consequently, the market endows companies with capital at
a cheaper cost.
9. Corporate Information’s: The stock exchanges used to disseminate
information and company announcements across the country. Important
information regarding the company is announced to the market through the
Broadcast Mode through the websites of the stock exchanges. Corporate
developments such as financial results, book closure, announcements of
bonus, rights, takeover, mergers etc. are disseminated across the country thus
minimizing scope for price manipulation or misuse.
 Pre-requisites for Listing
• According to regulation 4(2) of the SEBI Regulations, 2009, if a company wants to
list its securities on a stock exchange then it has to make an application to one or
more designated stock exchange, which has nationwide trading capacity. Certain
other conditions need to be fulfilled by a company to enter the stock market,
they are as follows:
1. A company has to publish a prospectus through which twenty-five percent of the
securities are to be offered to the public.
2. The company must have a good amount of capital structure and the securities
which are being listed must be in the public interest.
3. The prospectus should also contain the date of receipt of the application and
such other details as necessary.
4. The basic or minimum requirement of capital is three crore rupees out of which
sixty percent,i.e., one crore eighty lakh rupees should be made available for the
public. If the share capital exceeds five crore rupees then it becomes mandatory
for the company to get itself registered under a recognized stock exchange.
5. The company must inform the stock exchange in case the board of directors
changes or new securities are issued.
6. A company needs to file the annual return and inform the stock exchange.
7. Last but not least, a company must comply with the terms and conditions of the
stock exchange under which it is getting registered and strictly adhere to them.
 Categories of Listing
1. Initial listing: Here, the shares of the company are listed for thefirst time on
a stock exchange.
2. Listing for public Issue: When a company which has listed its shares on a
stock exchange comes out with a public issue.
3. Listing for Rights Issue: When the company which has already listed its
shares and it issues securities to the existing shareholders on rights basis,
it has to go for listing of these shares on stock exchange.
4. Listing of Bonus shares: When a listed company in a stock exchange is
capitalizing its profit by issuing bonus shares to the existing shareholders.
5. Listing for merger or amalgamation: When the amalgamated company
issues new shares to the shareholders of amalgamated company, such
shares are listed.
 Legal Provisions for Listing
1. Securities Contracts (Regulation) Act, 1956 (SCRA, 1956) Guidelines

• Section 21 of SCRA, 1956 provides for conditions for listing of securities

and says that where securities are listed on the application of any person
in any recognized stock exchange (RSE), such person shall company with
the conditions of listing agreement with that RSE.
• Section 9 of the SCRA act empowers the recognized stock exchange to
make bye laws for the regulation and control of contracts. Such bye laws
may provide for the listing of securities on the stock exchange, the
inclusion of any security for the purpose of dealings and the suspension
or withdrawal of any such securities, and the suspension or prohibition
of trading in any specified securities.
• Section 21 of the SCRA act provides that where securities are listed on
the application of any person if any recognised stock exchange, such
person shall comply with the conditions of the listing agreement with
that stock exchange.
2. SEBI Rules for Listing
i. In-principle approval from recognized tock exchange/s- A company,
desirous of listing its securities on the Stock Exchange, shall be required
to file an application, in the prescribed form, with the Exchange and
obtain an in-principle approval from the recognized stock exchange.
ii. Application for listing- The applicant company is required to complete
the pre- listing formalities within the time frame specified by board
from time to time.
iii. Listing Agreement- Every issuer desirous of listing securities on a stock
exchange shall execute a listing agreement with the stock exchange as
per SEBI regulation, 2015.
iv. Obligations of Stock Exchange/s- The stock exchanges/s shall grant in-
principle approval/ list the securities or reject the application from the
company within 30 days from the later of following dates:
• Date of receipt of application
• Date of receipt of satisfactory reply from issuing company in case the
stock exchange sought any clarification.
 DELISTING
 The term "delisting" of securities means permanent removal of securities
of a listed company from a stock exchange. As a consequence of delisting,
the securities of that company would no longer be traded at that stock
exchange.
 Companies are now aiming at reducing costs, which do not have any
returns. Payment of listing fees to the stock exchanges today is considered
by some Companies as a burden because the companies feel that neither the
shares are traded on the stock exchanges nor the exchanges provide any
value added service to the companies. The Company has an option to Delist
any or all class of securities. There is no restriction as to class of securities.
However, a Company is not allowed to delist its securities through Buy-
back.
• Broadly, delisting of securities may be of two types:
1. Voluntary Delisting : delisting of securities of a body corporate
voluntarily by a promoter or an acquirer or any other person other than the
stock exchange(s), i.e., a listed Company seeks delisting of securities on
its own motion.
 DELISTING (Cont.)
2. Compulsory Delisting : a listed Company is compelled by the Stock Exchange
to delist its securities. Here the securities of a company are removed from a
stock exchange as a penal measure for not making submissions/complying
with various requirements set out in the Listing agreement within the time
frames prescribed
 A company can delist for several reasons. The promoters may want to increase
their stake in the company, especially in depressed market conditions; the
management may be seeking greater freedom in decision-making, without
having to adhere to tedious compliance rules of stock exchanges and approval
of shareholders; or the company is merged or acquired by another firm.
 Example- Cadbury India Ltd, Kodak India Ltd. , TVS Finance and Services Ltd,
Ray Ban Sun Optics India Ltd., Deccan Chronicle Holdings Ltd., Jaypee Infratech
Ltd.
 SEBI (Delisting of Securities) Guidelines, 2003 provide an exit mechanism,
whereby the exit price for voluntary delisting of securities is determined by the
promoter of the concerned company which desires to get delisted, in
accordance to book building process.
 NEED OF DELISTING
• Relinquishing control through sale.
• Regulatory Demands.
• Changing Investor Profile and funding patterns.
• Emergence of National Exchanges.
• Lack of trading volume in regional exchanges.
• Compliance and disclosure requirements.
• Administrating and cost of servicing large shareholder base.
 CAUSES OF COMPULSORY DELISTING
1. Non payment of listing fees.
2. Non compliance with listing requirements and listing agreement.
3. Non redressal of investor‟s complaints despite repeated reminders.
4. Unfair trading practices at the behest of the promoters/ management.
5. Other malpractice such as fake, original or duplicate share certificates
deliberately issued by the management.
6. Whereabouts of the Company / or its Promoters / Directors not known
7. Reduction in the number of public holders of securities.
CAUSES OF VOLUNTARY DELISTING
1. A Listed Company finds the listing fees payable to the stock exchanges
burdensome and disproportionate to the benefits accruing to the company
or its stock holders.
2. Regional imbalance of the holders of the securities either due to shifting of
the companies registered office and / or location of manufacturing unit, or
for any other reason.
3. Negligible trading or total absence of trading for a considerable long
period of time.
4. The company has either suspended its business or is under closure or has
become sick industrial company.
5. Small capital base or failure to comply with the requirement of increasing
the capital, not justifying listing to be continued.
6. Mergers, Amalgamations, Takeovers, etc.
 CONDITIONS of Voluntary Delisting
1. Listing for minimum period of 3 years at any stock exchange.
2. An exit opportunity has been given to the investors for the purpose of
which an exit price shall be determined in accordance with the “book
building process”.
3. However, an exit opportunity need not be given in cases where securities
continue to be listed in a stock exchange having nation wide trading
terminals.
 Exit opportunity available for investors in
case a company gets delisted
• SEBI (Delisting of Securities) Regulations, 2009 provide an exit mechanism to
the existing shareholders in the following manner:

1. Voluntary delisting whereby the exit price is determined through the

Reverse Book Building process (OPEN OFFER)
• The floor price is calculated in accordance with the regulations and the
shareholders have to make a bid at a price either on or above the floor price.
• The exit price would be decided on the basis of bidding by the public
shareholders.
• If the exit price so determined is acceptable to the promoter, the promoter
pays that price to the investors and the investors can exit.
• Those investors who do not participate in the Reverse Book Building process
have an option to offer their shares for sale to the promoters.
• The promoters are under an obligation to accept the shares at the same exit
price.
• This facility is usually available for a period of at least one year from the date
of closure of the delisting process.
2. Voluntary Delisting for a small company
• Any company with paid up capital of less than Rs. ten crore and net worth
less than Rs. twenty five crores, whose equity shares have not been
frequently traded on any recognized stock exchange for a period of one
year and has not been suspended for any non-compliance in the preceding
one year would not be required to follow the Reverse Book Building
process.
• In such cases, the promoter decides the exit price in consultation with the
merchant banker.
• The promoter writes to all public shareholders informing the proposal for
delisting.
• Once the requisite consent is received, the promoter makes payment of
consideration for the same and the shareholders can exit.