Dr.

Parmjit Kaur

Assignment of
Management of Financial
Services

Primary
Market
in

India

Submitted by:
Rajneesh Bansal
Shweta Sailani
Yogesh Dubey
MBA-gen, IV Semester
Submitted to: University Busuness School

Primary Market in INDIA

The primary market is that part of the capital markets that deals with the issuance of
new securities. Companies, governments or public sector institutions can obtain funding through
the sale of a new stock or bond issue. This is typically done through a syndicate of securities
dealers. The process of selling new issues to investors is called underwriting. In the case of a
new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is
built into the price of the security offering, though it can be found in the prospectus. Primary
markets creates long term instruments through which corporate entities borrow from capital
market.

Features of primary markets are:

 This is the market for new long term equity capital. The primary market is the market
where the securities are sold for the first time. Therefore it is also called the new issue market
(NIM).
 In a primary issue, the securities are issued by the company directly to investors.
 The company receives the money and issues new security certificates to the investors.
 Primary issues are used by companies for the purpose of setting up new business or for
expanding or modernizing the existing business.
 The primary market performs the crucial function of facilitating capital formation in the
economy.
 The new issue market does not include certain other sources of new long term external
finance, such as loans from financial institutions. Borrowers in the new issue market may be
raising capital for converting private capital into public capital; this is known as "going
public."
 The financial assets sold can only be redeemed by the original holder.

Methods of issuing securities in the primary market are:

(a) Public issue
(i) Initial Public offer (IPO)
(ii) Further public offer (FPO)
(b) Rights issue
(c) Bonus issue
(d) Private placement
(i) Preferential issue
(ii) Qualified institutional placement

Primary market provides opportunity to issuers of securities, Government as well as corporates,

to raise resources to meet their requirements of investment and/or discharge some obligation.
The issuers create and issue fresh securities in exchange of funds through public issues and/or as
private placement. When equity shares are exclusively offered to the existing shareholders it is
called ‘Rights Issue’ and when it is issued to selected mature and sophisticated institutional
investors as opposed to general public it is called ‘Private Placement Issues’. Issuers may issue
the securities at face value, or at a discount/premium and these securities may take a variety of
forms such as equity, debt or some hybrid instruments. The issuers may issue securities in
domestic market and /or international market through ADR/GDR/ECB route.

Trends
The issuers issue fresh securities through public issues as well as private placements. During
2007-08, a total of Rs. 5,788,150 million (US $ 144,812 million) were mobilized (increase of
46.74% over the previous year) by both the government and corporate sector from the primary
market through public issues and private placement. After a long period of subdued activity,
there were signs of revival in the public issues in 2003-04 and this state was maintained till the
year 2007-08. The resources raised through public issues from the primary market by the
corporate sector increased by 166.71%. The private placement market accounted for 71.75% of
the total resources mobilized domestically, whereas the public issues accounted for 28.25%. The
resources raised by Indian corporates from the international capital market through the issuance
of FCCBs, GDRs and ADRs have increased significantly (56.17%) during 2007-08 raising Rs.
265,560 million (US $ 6,644 million) as against Rs. 170,050 million.(US $ 3,901 million) in the
previous year.

Since the primary market has continued to remain dormant, SEBI considered on priority basis
the recommendations made by the “Informal Group on Primary Market”, and accepted most of
the recommendations, including the following, which were accepted for immediate
implementation:—

(i) Primary issues to be compulsorily made through the depository mode after a specified date.

(ii) 100 per cent book building in respect of issues of Rs. 25 crore and above.

(iii) Reduction in the minimum number of mandatory collection centers in respect of issues
above Rs. 10 crore to 4 metropolitan cities plus the place having the regional stock
exchange.
In order to facilitate flow of funds to the infrastructure sector, the SEBI Board decided to grant
specific relaxations to public issues by infrastructure companies. These relaxations would be
applicable to infrastructure companies as defined under Section 10 (23G) of the Income Tax Act,
1961 subject to the condition that their projects are appraised by any Development Financial
Institution (DFI) or Infrastructure Development Finance Company (IDFC) or Infrastructure
Leasing and Financial Services (IL&FS). Further, the projects must also have a participation of
at least 5 per cent of the project cost in debt and/or equity by the appraising institution. Subject to
these conditions, the infrastructure company can avail of specified relaxations/exemptions from
the existing requirements as per SEBI's Disclosure and Investor Protection Guidelines.

Collective Investment Schemes

As per Government decision, entities issuing instruments like agro bonds, plantation bonds, etc.
come under the regulatory purview of SEBI. Such entities have been prohibited by SEBI from
launching any fresh scheme till the notification of Regulations for collective investment
schemes. However, the existing schemes were allowed to continue provided they submitted the
requisite information to SEBI and complied with the code of advertisement as prescribed in the
SEBI Guidelines on Disclosure and Investor Protection. SEBI also directed them through a
public notice to file details of their schemes with SEBI. Based on the interim recommendations
made by the Dave Committee, SEBI prohibited existing schemes from mobilizing money from
public/investors unless their instruments were rated by recognized credit rating agencies. The
Draft Regulations for Collective Investment Schemes based on the Dave Committee’s
deliberations have been circulated to Public for comments.

Different kinds of issues

Primarily, issues made by an Indian company can be classified as Public, Rights, Bonus and
Private Placement. While right issues by a listed company and public issues involve a detailed
procedure, bonus issues and private placements are relatively simpler. The classification of
issues is as illustrated below:

(a) Public issue: When an issue / offer of securities is made to new investors for becoming
part of shareholders’ family of the issuer it is called a public issue. Public issue can be
further classified into Initial public offer (IPO) and Further public offer (FPO).

(i) Initial public offer (IPO): When an unlisted company makes either a fresh issue of
securities or offers its existing securities for sale or both for the first time to the
public, it is called an IPO. This paves way for listing and trading of the issuer’s
securities in the Stock Exchanges.

(ii) Further public offer (FPO) or Follow on offer: When an already listed company
makes either a fresh issue of securities to the public or an offer for sale to the public,
it is called a FPO.

(b) Rights issue (RI): When an issue of securities is made by an issuer to its shareholders
existing as on a particular date fixed by the issuer (i.e. record date), it is called an rights
issue. The rights are offered in a particular ratio to the number of securities held as on the
record date.

(c) Bonus issue: When an issuer makes an issue of securities to its existing shareholders as on a
record date, without any consideration from them, it is called a bonus issue. The shares
are issued out of the Company’s free reserve or share premium account in a particular
ratio to the number of securities held on a record date.

(d) Private placement: When an issuer makes an issue of securities to a select group of
persons not exceeding 49, and which is neither a rights issue nor a public issue, it is called
a private placement. Private placement of shares or convertible securities by listed issuer
can be of two types:

(i) Preferential allotment: When a listed issuer issues shares or convertible securities, to
a select group of persons in terms of provisions of Chapter XIII of SEBI (DIP)
guidelines, it is called a preferential allotment. The issuer is required to comply with
various provisions which inter‐alia include pricing, disclosures in the notice, lock‐in
etc, in addition to the requirements specified in the Companies Act.

(ii) Qualified institutions placement (QIP): When a listed issuer issues equity shares or
securities convertible in to equity shares to Qualified Institutions Buyers only in terms
of provisions of Chapter XIIIA of SEBI (DIP) guidelines, it is called a QIP.

Offer Document (OD)

‘Offer document’ is a document which contains all the relevant information about the company,
promoters, projects, financial details, objects of raising the money, terms of the issue etc and is
used for inviting subscription to the issue being made by the issuer.

Issue Requirements :
SEBI has laid down entry norms for entities making a public issue/ offer. The same are
detailed below:-

Entry Norms: Entry norms are different routes available to an issuer for accessing the
capital market.

(i) An unlisted issuer making a public issue i.e (making an IPO) is required to satisfy
the following provisions:

Entry Norm I (commonly known as “Profitability Route”)

The Issuer Company shall meet the following requirements:
(a) Net Tangible Assets of at least Rs. 3 crores in each of the preceding three full
years.
(b) Distributable profits in atleast three of the immediately preceding five years.
(c) Net worth of at least Rs. 1 crore in each of the preceding three full years.
(d) If the company has changed its name within the last one year, atleast 50%
revenue for the preceding 1 year should be from the activity suggested by the new
name.
(e) The issue size does not exceed 5 times the pre‐ issue net worth as per the audited
balance sheet of the last financial year.

To provide sufficient flexibility and also to ensure that genuine companies do not
suffer on account of rigidity of the parameters, SEBI has provided two other
alternative routes to the companies not satisfying any of the above conditions, for
accessing the primary Market, as under:

Entry Norm II (Commonly known as “QIB Route”)

(a) Issue shall be through book building route, with at least 50% to be mandatory
allotted to the Qualified Institutional Buyers (QIBs).

(b) The minimum post‐issue face value capital shall be Rs. 10 crores or there shall be
a compulsory market‐making for at least 2 years.

Entry Norm III (commonly known as “Appraisal Route”)

(a) The “project” is appraised and participated to the extent of 15% by Financial
Institutions / Scheduled Commercial Banks of which at least 10% comes from the
appraiser(s).
(b) The minimum post‐issue face value capital shall be Rs. 10 crores or there shall be
a compulsory market‐making for at least 2 years.

In addition to satisfying the aforesaid entry norms, the Issuer Company shall also
satisfy the criteria of having at least 1000 prospective allotees in its issue.

(ii) A listed issuer making a public issue (FPO) is required to satisfy the following
requirements :

(a) If the company has changed its name within the last one year, atleast 50%
revenue for the preceding 1 year should be from the activity suggested by the new
name.
(b) The issue size does not exceed 5 times the pre‐ issue net worth as per the audited
balance sheet of the last financial year.

Any listed company not fulfilling these conditions shall be eligible to make a public
issue by complying with QIB Route or Appraisal Route as specified for IPOs.

(iii) Certain category of entities which are exempted from the aforesaid entry norms,
are as under :
(a) Private Sector Banks
(b) Public sector banks
(c) An infrastructure company whose project has been appraised by a Public Financial
Institution or IDFC or IL&FS or a bank which was earlier a PFI and not less than 5%
of the project cost is financed by any of these institutions.

Besides entry norms, are there any mandatory provisions which an issuer is expected to
comply before making an issue:-

An issuer making a public issue is required to inter‐alia comply with the following
provisions mentioned in the guidelines:

Minimum Promoter’s contribution and lock‐in: In a public issue by an unlisted issuer, the
promoters shall contribute not less than 20% of the post issue capital which should be
locked in for a period of 3 years. “Lock‐in” indicates a freeze on the shares. The remaining
pre issue capital should also be locked in for a period of 1 year from the date of listing. In
case of public issue by a listed issuer [i.e. FPO], the promoters shall contribute not less
than 20% of the post issue capital or 20% of the issue size. This provision ensures that
promoters of the company have some minimum stake in the company for a minimum
period after the issue or after the project for which funds have been raised from the public
is commenced.

IPO Grading:

IPO grading is the grade assigned by a Credit Rating Agency registered with
SEBI, to the initial public offering (IPO) of equity shares or other convertible securities. The
grade represents a relative assessment of the fundamentals of the IPO in relation to the
other listed equity securities. Disclosure of “IPO Grades”, so obtained is mandatory for
companies coming out with an IPO.

Pricing of an Issue:

Who fixes the price of securities in an issue:-

Indian primary market ushered in an era of free pricing in 1992. SEBI does not play any role
in price fixation. The issuer in consultation with the merchant banker on the basis of
market demand decides the price. The offer document contains full disclosures of the
parameters which are taken in to account by merchant Banker and the issuer for deciding
the price. The Parameters include EPS, PE multiple, return on net worth and comparison of
these parameters with peer group companies.
How does one come to know about the issues on offer? And from where can I get copies of
the draft offer document?

SEBI issues press releases every week regarding the draft offer documents received and
observations issued during the period. The draft offer documents are put up on the website under
Reports/Documents section. The final offer documents that are filed with SEBI/ROC are also put
up for information under the same section. Copies of the draft offer documents in hard copy form
may be obtained from the office of SEBI
Mittal Court, 'A' wing,
Ground Floor, 224, Nariman Point,
Mumbai - 400021

on a payment of Rs.100 or from SES, LMs etc. The soft copies can be downloaded from the
SEBI website under Reports/Documents section. Some LMs also make it available on their
webisties for download. The final offer documents that are filed with SEBI/ROC can also be
downloaded from the same section of the website.

Who is eligible to be a BRLM?

A Merchant banker possessing a valid SEBI registration in accordance with the SEBI (Merchant
Bankers) Regulations, 1992 is eligible to act as a Book Running Lead Manager to an issue.

Difference between “Fixed price issue” and “Book Built issue”:-

On the basis of Pricing, an issue can be further classified into Fixed Price issue or Book Built
issue.
Fixed Price Issue: When the issuer at the outset decides the issue price and mentions it in
the Offer Document, it is commonly known as “Fixed price issue”.

Book built Issue: When the price of an issue is discovered on the basis of demand received
from the prospective investors at various price levels, it is called “Book Built issue”.

SEBI’s Role in an Issue :

Any company making a public issue or a rights issue of securities of value more than Rs 50
lakhs is required to file a draft offer document with SEBI for its observations. The validity
period of SEBI’s observation letter is twelve months only i.e the company has to open its
issue within the period of twelve months starting from the date of issuing the observation
letter.

There is no requirement of filing any offer document / notice to SEBI in case of preferential
allotment and Qualified Institution Placement (QIP). In QIP, Merchant Banker handling the
issue has to file the placement document with Stock Exchanges for making the same
available on their websites.
Given below are few clarifications regarding the role played by SEBI:

(a) Till the early nineties, Controller of Capital Issues used to decide about entry of company in
the market and also about the price at which securities should be offered to public.
However, following the introduction of disclosure based regime under the aegis of SEBI,
companies can now determine issue price of securities freely without any regulatory
interference, with the flexibility to take advantage of market forces.

(b) The primary issuances are governed by SEBI in terms of SEBI (Disclosures and Investor
protection) guidelines. SEBI framed its DIP guidelines in 1992. The SEBI DIP Guidelines over
the years have gone through many amendments in keeping pace with the dynamic market
scenario. It provides a comprehensive framework for issuing of securities by the
companies.

(c) Before a company approaches the primary market to raise money by the fresh issuance of
securities it has to make sure that it is in compliance with all the requirements of SEBI (DIP)
Guidelines, 2000. The Merchant Banker are those specialised intermediaries registered
with SEBI, who perform the due diligence and ensures compliance with DIP Guidelines
before the document is filed with SEBI.

(d) Officials of SEBI at various levels examine the compliance with DIP guidelines and ensure
that all necessary material information is disclosed in the draft offer documents.
Still there are certain mis‐conceptions prevailing in the mind of investors about the role of
SEBI which are clarified here in under:

Does SEBI recommend any Issue?

It should be distinctly understood that SEBI does not recommend any issue nor does it
take any responsibility either for the financial soundness of any scheme or the project for
which the issue is proposed to be made.

Does SEBI approve the contents of an issue?

Submission of offer document to SEBI should not in any way be deemed or construed
that the same has been cleared or approved by SEBI. The Lead manager certifies that the
disclosures made in the offer document are generally adequate and are in conformity
with SEBI guidelines for disclosures and investor protection in force for the time being.
This requirement is to facilitate investors to take an informed decision for making
investment in the proposed issue.

How does SEBI ensure compliance with DIP?

The Merchant Banker are the specialized intermediaries who are required to do due diligence and
ensure that all the requirements of DIP are complied with while submitting the draft offer
document to SEBI. Any non compliance on their part, attract penal action from SEBI, in terms of
SEBI (Merchant Bankers) Regulations. The draft offer document filed by Merchant Banker is
also placed on the website for public comments. Officials of SEBI at various levels examine the
compliance with DIP guidelines and ensure that all necessary material information is disclosed in
the draft offer documents.

With the presence of the Central Listing Authority (CLA), what would be the role of SEBI in the
processing of Offer docume nts for an issue?

The Central Listing Authority's (CLA) functions have been detailed under Regulation 8 of
SEBI (Central Listing Authority) Regulations, 2003 (CLA Regulations) issued on August
21, 2003 and amended up to October 14, 2003.

In brief, it covers processing applications for letter precedent to listing from applicants; to make
recommendations to the Board on issues pertaining to the protection of the interest of the
investors in securities and development and regulation of the securities market, including the
listing agreements, listing conditions and disclosures to be made in offer documents; and; to
undertake any other functions as may be delegated to it by the Board from time to time.

SEBI as the regulator of the securities market examines all the policy matters pertaining to issues
and will continue to do so even during the existence of the CLA.

If SEBI has issued observations on the offer document, does it mean that
investment is safe?
The investors should make an informed decision purely by themselves based on the
contents disclosed in the offer documents. SEBI does not associate itself with any
issue/issuer and should in no way be construed as a guarantee for the funds that the
investor proposes to invest through the issue. However, the investors are generally
advised to study all the material facts pertaining to the issue including the risk factors
before considering any investment.

Basis of Allocation/Basis of Allotment

After the closure of the issue, for eg a book built public issue, the bids received are
aggregated under different categories i.e., firm allotment, Qualified Institutional Buyers
(QIBs), Non‐Institutional Buyers (NIBs), Retail, etc. The oversubscription ratios are then
calculated for each of the categories as against the shares reserved for each of the
categories in the offer document. Within each of these categories, the bids are then
segregated into different buckets based on the number of shares applied for. The
oversubscription ratio is then applied to the number of shares applied for and the number
of shares to be allotted for applicants in each of the buckets is determined. Then, the
number of successful allottees is determined. This process is followed in case of
proportionate allotment. Thus allotment to each investor is done based on proportionate
basis in both book built and fixed price public issue.
SECURITIES LAWS AND CAPITAL MARKET —

CONTEMPORARY DEVELOPMENTS
As far as infrastructure reach, volume of trade and market capitalisation is concerned, the Indian
capital market has achieved major transformation parallel to many emerging capital markets.
Presently there are 2 National level exchanges (Bombay Stock Exchange – BSE and National
Stock Exchange – NSE) and 21 regional exchanges with fully electronic trading platforms and
around 9400 broking outfits of which 29 are foreign brokers. The turnover of NSE and BSE in
financial year 2001-2002 was around US $ 102 Billion and US $ 62 Billion, respectively. There
was negligible trade failure of .003% of the total traded value in financial year 2001 – 02 and at
present, more than 90% of the Market capitalization is in the electronic form. There are 38
Mutual Funds with 396 schemes having an asset base of nearly US $21.96 Billion. In terms
of regulatory framework there are strict disclosure and accounting norms for the listed
companies and facility of book building in public offerings through a transparent price discovery
mechanism is also available to the issuers.
SEBI from its very inception, has been continuously endeavouring to make the Indian Capital
Market effective, transparent and investor friendly. In this direction, SEBI has undertaken
several initiatives of far-reaching consequences which have not only radically reformed but
totally transformed Indian Securities Market. SEBI is persistently striving to ensure that
objectivity and pragmatism is maintained in all its decisions and accordingly, the regulatory
process is made extremely transparent and interactive vis-a-vis the stakeholders.
As a measure of proactive regulatory approach following regulations and guidelines were
amended:
(i) SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 
(ii) SEBI (Credit Rating Agencies) Regulations, 1999 
(iii) SEBI (Portfolio Managers) Regulations, 1993
(iv) SEBI (Insider Trading) Regulations, 1992
(v) SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty)
Regulations, 2002
(vi) SEBI (Foreign Institutional Investors) Regulations, 1995
(vii) SEBI (Issue of Sweat Equity) Regulations, 2002
(viii) SEBI (Underwriters) Regulations 1993
(ix) SEBI (Mutual Fund) Regulations, 1996
(x) SEBI (Disclosure & investor Protection) Guidelines, 2000.
AMENDMENTS TO THE SEBI (DISCLOSURE AND INVESTOR
PROTECTION) GUIDELINES, 2000
As mentioned in the preceding paragraphs, the Securities & Exchange Board of India has
taken various measures to realize its vision to be the most Dynamic and Respected regulator
globally. The amendments to its DIP guidelines is another step to implement its stretagic Action
Plan
SEBI, after considering the recommendations of its various Committees and public
comments thereon, has approved certain modifications to be incorporated in the Guidelines and
accordingly, under the provision of Section 11(1) of SEBI Act issued the amendments to SEBI
(DIP) Guidelines, [Link] amendments are applicable to all public issues/ rights issues/offer
for sale and come into effect [Link] major highlights of the amendments made are as
under:
(i) Review of Eligibility Norms
The purpose of review of existing eligibility norms of the issuers is to strengthen the
existing norms, to facilitate entry of mid-cap, small-cap new entrepreneurs to the primary
market without exposing the public to undue risk, to maintain quality of issuer companies
and also to keep fly by night issuers at bay. Accordingly, amendments to SEBI(DIP)
Guidelines include introduction of Net Tangible Assets and minimum number of allottees
as additional criterion, appraisal route as an alternative to the mandatory book building
route etc.
(ii) Review of Book Building guidelines
With a view to make price discovery process more realistic, immune from artificial
demand and more responsive to the market demand, SEBI has been reviewing the
existing book building guidelines on an ongoing basis. The amendment provides
companies a flexibility of indicating a movable price band or a fixed floor price in Red
Herring prospectus, definition of Qualified Institutional Buyers has been enlarged to
include Insurance companies, Provident and Pension funds with minimum corpus of Rs.
25 crores. Further operational guidelines are amended thus shortening the interregnum
between the closure of issue and listing/ trading of securities to T+6 ( T stands for date of
closure of issue). Setting up of price band will assist the retail participants in placing
their bids and would Act as a good guidance for the retail investor in placing the bids.
Also the stipulation to list book built issues within 6 days instead of earlier 15 days of the
closure of the issue will benefit the investors in two ways. Firstly, there will be no
artificial market between the issue closing date and date of listing and secondly investors
money will not remain locked in for a longer period of time.
(iii) Introduction of Green Shoe Option
Green Shoe option denotes an option of allocating shares in excess of the shares included
in the public issue. Green Shoe option is extensively used in international IPOs as
stabilization tool for post listing price of the newly issued shares. It has been introduced
in the Indian Capital Market in the initial public offerings using book building method.
SEBI has introduced this option with a view to boost investors’ confidence by arresting
the speculative forces which work immediately after the listing and thus results in short-
term volatility in post listing price. Green shoe option would definitely ensure price
stability, so that visual volatility in first few days of listing is curbed.
(iv) Review of Disclosure Requirements in the Offer Documents
SEBI has been reviewing the existing disclosure requirements in the offer documents on
an ongoing basis .The amendments to disclosure requirements in the offer document
 inter alia include full disclosure about the promoters including their photograph, PAN
number etc, classification of risk factors, use of standard financial units etc.
(v) Review of Requirements Pertaining to Issue of Debt Instruments
SEBI has reviewed the role of debenture trustees and also the provisions pertaining to
issue of debt instruments in SEBI (DIP) guidelines 2000. Accordingly, the amendments
to requirements in relation to debt instruments inter alia include prohibition on a willful
defaulter to make a debt issue, requirement of investment grade credit rating for making a
debt issue, relaxation in the existing provisions of promoters contribution in IPO of debt
issue etc.
(vi) Modifications Related to Employee Stock Option and Employee Stock Purchase
Scheme
In accordance with amendments effected in SEBI (Employee Stock Option Scheme &
Employee Stock Purchase Scheme) Guidelines, 1999 on June 30, 2003, SEBI (DIP)
Guidelines, 2000 have been amended providing for relaxation in the provisions of lock-in
for the pre-IPO shares held by employees, which were issued under employee stock
option or employee stock purchase scheme of the issuer company before the IPO and
inclusion of provision of existing clauses of SEBI (ESOP & ESPS) guidelines in SEBI
(DIP) Guidelines, 2000.
(vii) Designated Stock Exchange
SEBI (DIP) Guidelines, 2000 also include amendments to give effect to Ministry of
Finance (MOF) circular dated April 23, 2003, thereby withdrawing the concept of
regional stock exchange.
Accordingly, the companies have been given flexibility to choose a Stock Exchange
defined as a Designated Stock Exchange in the guidelines for a particular issue made
under these guidelines and for subsequent issues also, the companies have freedom to
choose some other stock Exchange as a Designated Stock Exchange.

(viii) Review of Operational/Procedural Requirements

With a view to streamline Operational and Procedural Requirements, Amendments to
SEBI (DIP) Guidelines, 2000 inter alia include reducing the validity period of SEBI’s
observation letter to 6 months from 365 days, demarking the responsibilities of lead
managers, defining associate etc.
Amendments to the SEBI (Disclosure And Investor Protection) Guidelines,2000 and
other Regulations are a welcome step towards investor Protection and restoring the
confidence of investors in the capital market. However the present system of due
diligence by an eligible merchant banker needs a relook. Therefore, it is suggested that
the due diligence and certification that all norms laid down by SEBI has been complied
with should be issued by the panel constituted by SEBI which should consist of
independent professionals like Practising Company Secretaries. The carrying out of the
due diligence by an independent agency would definitely provide a level playing field to
the professionals. Thus independent professionals be entrusted to perform the due
diligence and certify that all norms prescribed by SEBI have been complied with.
 The existing disclosure requirements under SEBI (Disclosure & Investor Protection)
Guidelines, 2000 are quite exhaustive and give an insight to the investor in the affairs of
the company. However, there are few areas/points which need to be disclosed in the
prospectus/letter of offer in addition to the present disclosures. Also various companies
while making disclosures adopt divergent practices in the absence of standardised
formats in the guidelines. Therefore, there is a need to provide comprehensive formats
incorporating the requisite details asked for in the guidelines in order to upgrade the
quality of disclosures made, in prospectus/letter of offer. The standardised formats, if
introduced as part of SEBI (Disclosure & Investor Protection) Guidelines, 2000 would
definitely prove to be a benchmark for disclosure of information and would provide more
inputs to the investors/analysts.
Disclosures on Management Changes

The saga involving the removal of SKS Microfinance’s chief executive raises a number of issues
relating to corporate governance as well as securities regulation. One such issue pertains to the
nature of public disclosures made regarding the removal of the chief executive, which acquires
prominence considering SKS is a public listed company. Circumstances that have panned out
over the last few days indicate that the company at first merely notified the stock exchange of the
event. Detailed reasons were forthcoming only subsequently after requests were made by SEBI
and questions were raised in the media. Apart from the specificities of the goings on in SKS, this
episode provides an opportunity to review the disclosure norms applicable in this regard.

Clause 41(IV) of the listing agreement provides for continuous disclosures by listed companies
as follows:

k) The company shall disclose any event or transaction which occurred during or before the
quarter that is material to an understanding of the results for the quarter including but not limited
to completion of expansion and diversification programmes, strikes and lock-outs, change in
management and change in capital structure. The company shall also disclose similar material
events or transactions that take place subsequent to the end of the quarter.

At the outset, it may seem that SKS has been in technical compliance with the requirements of
the clause as they notified the stock exchanges of the change. However, the more crucial
information regarding the background and reasons for the change were missing. If the stock
markets are to be truly efficient the reasons are as important for securities investors as the
management change itself. The current requirements focus on the events to be reported without
emphasis on the underlying reasons.

This raises a larger issue of disparity between primary market disclosures and secondary market
disclosures. While there have been significant regulatory developments in strengthening primary
market disclosures over the years (recently culminating in the promulgation of the SEBI (Issue of
Capital and Disclosure Requirements) Regulations, 2009), the disclosure requirements in the
secondary markets (primarily contained in the listing agreement) have not quite kept up pace.
Although there have been constant calls for streamlining primary and secondary market
disclosures, no concrete steps appear to have been taken in that direction, although it is a matter
that requires attention.

Recent issues in primary market:

The IPO market which was very buoyant in Sep-Oct has moderated. Several recent IPO’s are in
the red post the recent correction. Market sell-offs usually impact the retail end of the IPO
market the most. The Reliance Power IPO debacle hurt a lot of retail investors (several of whom
had opened fresh Demat account for the IPO). Also IPO subscription figures available with NSE
seem to suggest that the retail part of the IPO gets fully subscribed at the very end. The QIB end
of the market is usually the first to get fully subscribed. So I though I will look at the retail end of
the market for this article.

The MOIL IPO subscription has been excellent at 56x which was more due to the quality of the
issue as well as the attractive price.

When markets are selling off, as a buyer you are bound to wonder when the selling will stop.
And is there enough liquidity available with buyers to halt the fall. Measuring market liquidity is
both difficult and complicated. Money can enter or leave the system via FII flows, DII flows,
Retail money, Insurance fund flows etc.

Also during IPO’s a large part of funds committed to the IPO may be borrowed for short term. It
is common for brokers to lend funds to investors for IPO subscription. Similarly, investors could
exit from some stocks and commit those funds to the IPO. So there is no simple way to calculate
net inflow of fresh funds.

Since the beginning of the year FII’s have bought close to $28 Bn. MF’s on the other hand have
been facing shrinking asset base and have been net sellers. A lot of Retail money (some of it
would be fresh) has entered the market due to the COAL India IPO, Power Grid FPO and the
MOIL IPO. LIC has been indicating that they will be investing more year after year on back of
record Premium collections.

I was looking at a way of gauging the approximate funds available with Retail investors (the
smallest lot) to begin with. To do so let’s look at 3 IPO’s (Coal India, Power Grid – FPO and
MOIL) all of which received good response and were well priced.
If we look at all 3 issues, we can see that there is money to the order of 10000-14000 Cr.
available with retail investors. However these are the funds available for good quality companies
with a fair bit of operational history.  Given the recent scams related to insider trading and the
housing loans the retail end of IPO’s could become subdued.

Most big issues in India have been in the range of 8-15K crores. Coal India was around 15,000
Cr while Reliance Power in 2008 was 11,700 Cr. ONGC in 2004 had raised around 9,500 Cr.
Since retail category is 35% of issue size, the retail end of all these biggest IPO’s have been in
the range of 4000 – 5000 Cr. Current subscription figures suggest there is ample liquidity to
absorb the retail end of these Mega IPO’s. However, quality remains a key criterion to attract
retail funds.

This data should be good news for the Govt. given that many more FPO’s are planned over the
coming months including the likes of SCI, SAIL, IOC, Hindustan Copper and ONGC. If other
private companies planning to list soon want a piece of the Retail Pie, they will have to focus on
the pricing and issue quality