Issue Management
Course Objectives
▪ To understand the process of Public Issue.
▪ To examine the issue pricing, including the Book-Building process, designing and pricing,
and the Green Shoe Option of a Public Issue.
▪ To explore the Right Issue, including the promoter’s contribution, Bought out Deals, Post
issue work & obligations.
▪ To explore Investor protection, Including Brokers, sub-brokers, and underwriters.
Issue Management
▪ The issue is that the process of offering securities is an attempt to raise funds. Companies
issue bonds or shares to investors as a method of financing a business. The term issue also
refers to a series of stocks or bonds that have been offered to the public and typically relate
to a set of instruments that were released under one offering.
▪ The merchant banker acts as a financial architect and a "pilot" for the entire process,
guiding the company from the initial decision to raise capital to the final listing of the
securities on a stock exchange.
Public Issue Right Issue Bonus Issue Private Placement
Public Issue
• A public issue may be defined as an offer for subscription by a company of its securities to
the general public.
• A public issue is a much wider term and includes within its purview both IPOs as well as
all other subsequent public offerings, also known as FPOs or Follow-on Public Offers.
• The public issue by a company is governed by the SEBI (Disclosure and Investor
Protection) Guidelines, 2000, also known as the DIP Guidelines.
There are three types of Public Issues by which a public company can raise funds:
(a)IPO: Initial Public Offering, which is once in the Company’s lifetime
(b) FPO: Follow-on Public Offers, which a Company can raise any number of times
(c) Rights Issue: When a Company makes an Offer to raise capital from its existing
shareholders.
Eligibility
The DIP Guidelines define a Public Issue to mean an invitation by a Company to the public
to subscribe to its securities offered by a prospectus.
▪ The essential features of a public issue are:
(a)There must be a prospectus
(b) must be an invitation to the public,
(c) the offer must be to subscribe to the securities of the company.
▪ It is important to note that a public issue could be for any security of the company and not
just equity shares.
▪ Security is defined in s.2(h) of the Securities Contracts (Regulation) Act, 1957 (see para
20.2) and includes within its scope equity shares, convertible preference shares, non-
convertible preference shares, convertible debentures, warrants, etc.
▪ The earlier Guidelines contained various stringent conditions for a company to make a
public issue. However, SEBI has relaxed these conditions to a great extent. Any company
can now make a Public Issue only after:
a) Draft Prospectus has been filed with SEBI by the Merchant Banker at least 21 days
before the filing of the same with the ROC;
b) SEBI’s corrections, if any, have been incorporated in the Prospectus;
c) The company has made an application for listing of the securities to the Exchanges
d) It has entered into an Agreement for the dematerialisation of its securities with a
Depository.
• There are currently two Depositories in India, namely, NSDL (National Securities
Depository Ltd.) and CSDL (Central Securities Depository Ltd.). In addition to the above,
the DIP Guidelines lay down specific conditions for an Initial Public Offer and a Further
Public Offer.
Company (SME)
Public Issue Merchant Banker Role
▪ offer for subscription ▪ Prospectus
• securities to the general public ▪ invitation to the public
▪ IPO ▪ securities of the company
▪ Follow-on Public Offers ▪ Draft Prospectus has been filed with
▪ governed by the SEBI DIP Guidelines. SEBI by the Merchant Banker at least 21
days
▪ application for listing of the securities to
the Exchanges
Conditions for making an IPO
An Unlisted Company can make a Public Issue/ IPO under any of the two options mentioned
a. Net Tangible Assets > 3 crore, 3 preceding full years, a maximum of 50% monetary assets.
b. minimum net worth of Rs. ≥1 crore in each of the 3 preceding full years.
c. track record of distributable profits for 3 out of the immediately preceding 5 years.
d. The proposed issue + all other issues made in the same financial year ≤ 5 times the pre-
issue networth as per the latest audited balance sheet of the last financial year.
e. In case of a name change in the last year, at least 50% of the revenue of the last full year is
from the activity suggested by the name.
f. The Offer can be made by way of a Book Building or Fixed Price Offer.
g. The minimum number of prospective allottees must be 1,000.
▪ In these Conditions Required to satisfy all the conditions.
Option-B: If it does not satisfy the conditions stated in Option-A
a) The Offer must only be made by way of a Book Building, Further, at least 50% of the
Offering must be allotted to Qualified Institutional Buyers (QIBs.
Or
a) The Project is appraised by FIs/ Scheduled Banks and at least 10% participation comes
from the Appraiser and a further minimum 5% from other FIs/ Scheduled Banks.
b) The minimum post-issue face value of the capital is Rs. 10 crores.
Or
b) compulsory market-making for 2 years from date of listing. The minimum buy and sell
quotes must be for 300 shares and the difference between sell and buy quotes must not exceed
10%.
c) The minimum number of prospective allottees must be 1,000.
▪ it must fulfill any one condition from (a) and any one condition from (b), in addition to
(c).
Conditions are not be applicable to a listed company
a) public issue by a Banking Company set up under the Banking Regulation Act
b) public issue by a Public Sector Bank
c) public issue by an infrastructure company whose project has been appraised in a certain
manner
d) Rights Issue.
Issue Pricing
▪ Issue Pricing" refers to the method of determining the price at which securities (shares,
debentures, bonds, etc.) are offered to the public or investors in the primary market.
▪ It is a key function in capital markets, especially in merchant banking and public issues.
▪ The goal is to set a price that is attractive to investors while also raising the maximum
amount of capital for the issuing company.
▪ Parameter to consider issuing pricing
• Price to earnings ratio
• Price to book value ratio
Strategies
1. Differential Pricing:
• A company issues securities (shares, debentures, etc.) at different prices for different
categories of investors in the same public issue.
• Encourage participation of small/retail investors
• SEBI permits differential pricing provided it is disclosed clearly in the prospectus.
2. Price Band:
A range of prices within which investors can bid for shares in a book-built issue.
• Provides flexibility to both issuers and investors.
• Helps in price discovery through demand and supply
• Avoids underpricing or overpricing of securities
• SEBI guidelines, the cap price cannot be more than 20% higher than the floor price.
3. Payment of Discount/ Commission:
• A company may issue shares at a price lower than their face value
• Companies are allowed to pay a commission to intermediaries (like underwriters,
brokers, or merchant bankers) for assisting in the subscription or sale of securities.
4. Denomination of Share:
Method of Pricing
Book Building Method
a process undertaken to elicit demand/assess the price to determine the quantum/value of
specified securities/Indian depository receipts (IDRs). The issuer should also appoint a
registrar for an issue which has connectivity with all the depositories.
(i) determination of prices and (ii) allocation/allotment to non-anchor investors on
proportionate basis.
(ii)A floor price should be disclosed in the red-herring prospectus and the non-retail
individual investors (RIIs) should bid above the floor price.
(iii)The allotment would be in descending order of bids beginning with the highest price till
the securities on offer are exhausted.
(iv)The issuer may place a cap
(i) in terms of number of securities, (ii) percentage of its issued capital that may be
allotted to a single bidder.
Process of Book Building
▪ Appointment of Lead Merchant Banker = Lead Book Runner (primary responsibility),
Other Merchant Bankers = Co-Book Runners / Syndicate members.
▪ Issue should be Compulsory underwriting by book/co-book runners & syndicate
members, Agreements filed with SEBI & disclosed in Prospectus before ROCs.
▪ The issuer enters agreement with the Stock Exchange (online system).
▪ The book runner(s)/syndicate members should appoint SEBI-registered stock brokers
financially capable of honouring their commitments on defaults of clients/investors to
accept bids/applications and place orders with the issuer.
▪ If the issue size is specified, the preliminary prospectus may not contain the price/number
of securities.
▪ The issuer may mention the floor price/price band in the red-herring (preliminary)
prospectus.
▪ Issuer enters agreement with Stock Exchange (online system)
▪ SEBI-registered brokers/SCSBs = bidding & collection centres
▪ Draft Red Herring Prospectus (RHP) filed with SEBI
▪ Price Band Rules: Cap ≤ 120% of floor, revision Floor ±20%, Extension = 3 days
▪ Shares locked-in for 30 days, Promoter/related parties not eligible
▪ Per SEBI, anchor investors can be allotted up to 60% of the portion reserved for QIBs or
30% of the total IPO size.
▪ Bidding through an electronically linked transparent system (RSE)
▪ Brokers accept all investors; SCSBs only for ASBA
▪ QIBs bid only through brokers; they cannot withdraw after closure
▪ Demand graphically displayed online (updated every 30 mins)
▪ Issuer + Lead Book Runner determine final price & issue size
▪ Retail investors can bid at the cut-off price
▪ Final Prospectus registered with ROCs
▪ Allotment: Retail, Non-Institutional, QIBs (non-anchor) = proportionate
▪ Unsubscribed portion reallocated (QIB undersubscription excluded)
Face Value of Equity Shares
Subject to the provisions of the Companies/SEBI Act/regulations, an issuer (other than a
Government company/statutory authority/corporation/any SPV set by them engaged in
infrastructure sector) making an IPO may determine the face value of the shares in the
following manner: (i) Issue price per share is `RS 500 and more, below RS 10 but not below
RS1; (ii) Issue price per share is below RS 500, RS10 per share. The disclosures about the
face value of shares (including a statement about the issue price being X times of the face
value) should be made in the advertisements/offer documents/application forms in font size
identical to the issue price/price band.
Minimum Public Offer
The minimum net offer to the public would be subject to the provisions of Rule 19(2)(b) of the
Securities Contracts (Regulation) Rules,
that is, at least (i) 25 per cent and 10 per cent of each class of issued shares/convertible
debentures if the post-issue capital of the company calculated at offer price is upto RS1,600
crore and above RS 4,000 crores respectively, (ii) such percentage of issued shares/convertible
debentures equivalent to RS 400 crore if the port-issued capital calculated at offer price is RS
1,600 crore.
▪ Small companies (up to ₹1,600 cr) → 25% to public.
▪ Very large companies (above ₹4,000 cr) → 10% to public.
▪ Mid-sized companies (₹1,600–₹4,000 cr) → At least ₹400 cr worth to public
PROMOTER CONTRIBUTION
1. Minimum Promoters Contribution
▪ IPO (Initial Public Offer): Promoters must contribute at least 20% of the post-issue capital.
If their holding falls below 20%, Alternative Investment Funds (AIFs) may contribute up to
10% of post-issue capital to meet the shortfall.
▪ FPO (Further Public Offer): Promoters must contribute 20% of the proposed issue size or
post-issue capital, whichever is applicable.
▪ Composite Issue (Public + Rights Issue): Promoters must contribute 20% of the proposed
issue size/post-issue capital, excluding the rights issue component.
Mode of Contribution
Contribution in a public/composite issue of convertible securities can be: By way of
equity shares or by way of subscription to convertible securities.
Pricing of Contribution
Contribution through equity shares to be made at weighted average price of shares arising
on conversion. Weighted average price 1. Weights: No. of shares at each conversion
stage. 2. Price: Predetermined conversion price at each stage.
2. Promoters’ Contribution – Ineligible Securities
1. Acquired in the Last 3 Years
▪ Not eligible if:
▪ Acquired for consideration other than cash involving revaluation of assets/intangible assets.
▪ Resulting from a bonus issue out of revaluation reserves/unrealised profits or against
ineligible equity.
▪ Eligible exception: If acquired under a Scheme of Arrangement (Sections 391–394, Companies
Act).
2. Acquired in Last 1 Year at Lower Price than IPO Price
▪ Not eligible if bought cheaper than IPO offer price.
▪ Eligible if:
▪ Promoters/AIFs pay the difference between acquisition price & IPO price.
▪ Acquired under a High Court–approved scheme in place of business/capital >1 year old.
▪ In case of an IPO by Govt. company/statutory authority/SPV in infrastructure sector.
3. Any specified securities pledged as collateral are not eligible for promoters’ contribution.
Prospectus
▪ Definition: A legal document issued by a company inviting the public to subscribe to its
securities.
▪ Issued under: Section 26 of the Companies Act, 2013.
▪ Purpose: Provides full disclosure about the company and the issue.
▪ Helps investors make informed investment decisions.
▪ Issued in: Case of Public Issue of shares/debentures.
Key Contents of a Prospectus
Company Details – Name, registered office, promoters, directors.
Issue Details – Type (IPO/FPO), size, price band, and objects of the issue.
Financial Information – Past performance, auditor’s report.
Risk Factors – Business & industry risks.
Promoters’ Contribution – Minimum 20% and escrow requirements.
Other Disclosures – Legal cases, material contracts, credit rating (if debt issue).
Preferential Allotment
Definition: Preferential Allotment means the issue of shares or other securities by a company to a selected group
of persons on a preferential basis, and not to the general public.
Basis: Done in accordance with Section 62(1)(c) of the Companies Act, 2013 and SEBI (ICDR) Regulations for
listed companies.
Key Features:
• Issued to identified persons (e.g., promoters, investors, institutions).
• Requires special resolution in a general meeting.
• Pricing is regulated (must be at or above the price determined under SEBI regulations).
• Consideration can be cash or non-cash (e.g., conversion of debt into equity).
• Must comply with rules on lock-in period and disclosures.
Purpose:
• Raise quick capital from strategic investors.
• Allot shares for debt restructuring.
• Strengthen promoters’ holding.
Green Shoe Option
▪ The Green Shoe Option (also called an over-allotment option) is a provision used in
public issues of shares (especially IPOs) that allows the underwriters (merchant
bankers/managers to the issue) to sell more shares than originally planned, usually up to
15% extra, if investor demand is higher than expected.
▪ Purpose: To stabilise the post-issue price of shares and protect against volatility
▪ Mechanism: Company issues extra shares (up to 15% of the issue size).
▪ Underwriters use these shares to meet excess demand.
▪ If the share price rises above the issue price, underwriters exercise the option to allot
the extra shares.
▪ If the price falls below the issue price, underwriters buy back shares from the market to
support the price.
▪ Regulation in India: SEBI permits the use of the Green Shoe Option to stabilize post-
listing prices.
Procedure for Implementing Green Shoe Option (GSO)
• Shareholders’ Approval
• The shareholders’ resolution approving the public issue must authorise the issuer to use the Green Shoe
Option.
• Appointment of Stabilising Agent (SA)The issuer appoints a merchant banker/book runner as the Stabilising
Agent (SA), who is responsible for executing the price stabilisation process after listing.
• Agreements before Filing Draft Offer Document.
• Before submitting the Draft Red Herring Prospectus (DRHP) to SEBI:
• Issuer & SA Agreement → covering terms/conditions of the GSO, fees, and expenses of the SA.
• SA & Promoters/Pre-Issue Shareholders Agreement → for borrowing shares (from holders of more than
5% of securities).
• Must specify the maximum number of shares borrowed (up to 15% of the issue size).
• Determination of Over-Allotment The Lead Merchant Banker, in consultation with the SA, decides how
much to over-allot (not exceeding 15% of the issue size).
• Disclosure in Offer Document: Both the Draft Offer Document and Final Offer Document must contain full
disclosures regarding the Green Shoe Option, as per Part A of Appendix 11-G (SEBI guidelines).
• Nature of Borrowed Securities Borrowed securities must be in dematerialised form.
• Allocation of these securities will be made pro rata to all successful applicants.
Case Study: ICICI Prudential Life (2016)
▪ IPO Price: ₹334 per Subscription:
▪ Well received, but post-listing demand was volatile.
▪ Post-listing Price Movement: On listing day, the stock opened flat and later dipped below
the issue price.
▪ Role of GSO: The Stabilising Agent (ICICI Securities) bought shares from the market when
prices dipped below ₹334.
▪ This created artificial demand, preventing further fall.
▪ As a result, prices stayed relatively close to the issue price, and investor confidence was
maintained.
▪ Without GSO, prices could have fallen sharply due to oversupply and panic selling.
Allotment Processor- Case Study
Given: AB Limited.
Issue Price = ₹600 per share
Total securities offered = 10 crore shares
Retail Individual Investors (RII) quota = 2.5 crore shares
Oversubscription: overall = 4 times, retail = 8.25 times
So, RII applications received = 2.5 crore × 8.25 = 20.625 crore shares
Minimum application (bid lot) = 9 shares (₹5,400 at ₹600 each, within the ₹5,000–₹7,500
band)
Three applicants:
Investor A → 81 shares
Investor B → 72 shares
Investor C → 45 shares
Step 1: Proportionate Allotment Formula
Shares Applied
Allotment = × Retail Quota
Total Applied in Retail
But since we don’t know the total pool of applications except the oversubscription factor, we use that:
Applied Shares
Allotment =
Oversubscriptio Factor
For retail, oversubscription = 8.25.
Step 2: Calculate Individual Entitlements
81 72 45
Investor A: = 9.82 ≈ 10shares Investor B: = 8.73 ≈ 9shares Investor C: = 5.45
8.25 8.25 8.25
≈ 5shares
Step 3: Apply Minimum Allotment Rule
The minimum bid lot = 9 shares, Each successful RII must get at least 9 shares (if available).
So we adjust:
A (81 applied) → gets 10 shares (already ≥9) B (72 applied) → gets 9 shares (meets minimum), C (45 applied)
→ should get at least 9 shares (upgraded from 5.45 to 9)
Step 4: Check Proportionality vs. Availability
Approximate demand covered = yes, since we only scaled a few small investors.
In actual SEBI allotments, computerised lottery/rounding ensures fairness, but the principle is: each retail
investor gets minimum 1 lot (9 shares), and balance is proportionately allotted.
Right Issue
▪ A Right Issue is an invitation by a company to its existing shareholders to buy additional
shares, usually at a discounted price, in proportion to their current shareholding.
▪ It is a method of raising additional capital without involving outsiders first.
▪ Shareholders have a “right of first refusal” (i.e., they can accept or decline).
▪ Rights can sometimes be renounced (transferred to someone else).
Key Features:
▪ Offered only to existing shareholders.
▪ Usually priced lower than the current market price.
▪ Helps the company raise funds for expansion, debt repayment, or working capital.
▪ Does not dilute ownership like a public issue (since proportionate rights are given).
Case Study: Reliance Industries Limited (RIL) Right Issue 2020Background
In May 2020, RIL announced India’s largest-ever rights issue.
The aim was to strengthen the balance sheet and reduce debt.
Details of the Right Issue
Size: ₹53,124 crore
Ratio: 1:15 (For every 15 shares held, shareholders could buy 1 additional share).
Issue Price: ₹1,257 per share (discounted from the then market price of ~₹1,450).
Payment: Payable in instalments instead of full upfront.
Objective
1. To make RIL net debt-free. 2. To raise funds for digital and retail expansion.
Outcome
1. The issue was fully subscribed (100%+ subscription). 2. Helped RIL become net debt-free ahead of
schedule. 3. Boosted investor confidence and improved stock valuation
Advantages & Disadvantages (from the case)
Advantages:
1. RIL raised funds without going to outsiders. 2. Shareholders got shares at a discount. 3. The company
avoided taking on more debt.
Disadvantages:
1. Shareholders had to invest additional money to maintain their stake. 2. If they didn’t participate, their
ownership percentage was diluted.
1. Record Date: The company fixes a record date to determine which shareholders are eligible for rights.
• Only those whose names appear in the register on this date can apply. After announcing the record
date, a rights issue cannot be withdrawn. If withdrawn, the issuer is barred from applying for listing of
any new securities for 12 months, except equity shares arising from conversion of earlier convertible
securities.
2. Restrictions on Rights Issues: Issuer must reserve rights shares for holders of outstanding compulsorily
convertible debt instruments (CCDIs/CDIs). These reserved shares will be issued at the time of conversion
and on the same terms as the rights issue.
3. Letter/Abridged Letter of Offer, Pricing & Subscription Period: Abridged letter of offer + application
form must be sent to all eligible shareholders (registered/speed post) at least 3 days before issue opens.
Any shareholder may also request a copy from the issuer or lead manager. Plain paper applications with
application money are allowed, but renunciation is not permitted in such cases. Pricing: Must be fixed
before record date, in consultation with the Designated Stock Exchange (DSE).Subscription period:
Minimum 15 days, maximum 30 days.
4. Payment flexibility: Either full payment at application, or part-payment (≥25% of issue price) at
application and balance in calls.
5. Pre-Issue: Advertisement Issuer must publish an advertisement in at least one English national daily,
one Hindi national daily, and one regional language daily at least 3 days before opening. The ad should
disclose details of the record date, issue price, ratio, and procedure
6. Utilisation of Funds: Funds raised must be used only for the stated purposes in the offer document.
Monitoring of utilisation is mandatory (especially for large issues). Any deviation must be reported to
shareholders and SEBI.
Minimum Subscription Requirement (SEBI Norms)
Definition
▪ Minimum subscription means the least percentage of the issue that must be subscribed for the issue to be
considered successful.
▪ As per SEBI, an issuer must receive at least 90% of the total offer size (through application money) for the
issue to proceed.
Non-Underwritten Issues
▪ If 90% subscription is not achieved at closure, or
▪ If after closure, the effective subscription falls below 90% due to cheque bounces/withdrawals,
▪ The entire subscription money must be refunded immediately.
▪ If not refunded within 15 days, the issuer is liable to pay 15% interest per annum for the delay period.
Underwritten Issues
▪ Even if underwriters are there, the minimum 90% rule still applies.
▪ If subscription falls below 90% (even after devolvement on underwriters), the issue is considered failed.
▪ Issuer must refund the entire subscription amount within 60 days of closure.
▪ Delay beyond 60 days → issuer pays 15% interest to investors.
Advertisement
(a) Dispatch Details
•The date of completion of dispatch of the abridged letter of offer and the application form.
(b) Availability of Duplicate Forms
•Details of centres/locations (other than the registered office) where shareholders entitled to rights can
obtain duplicate application forms, if not received within a reasonable time.
(c) Plain Paper Applications
•A statement that if shareholders do not receive or cannot obtain duplicate forms, they may apply in writing
on plain paper to subscribe to the rights issue.
(d) Format for Plain Paper Applications
•The advertisement must provide a format including key particulars:
• Name, address
• Rights issue ratio
• Issue price
• Number of shares held
• Ledger folio no./DP ID/Client ID
• Number of shares entitled + applied for
• Additional shares (if any)
• Amount payable
• Cheque/DD details (payable to issuer’s account)
(e) Submission Procedure
•Statement that applications (form/plain paper) can be sent by registered post along with the application money
to the issuer’s designated official address (given in the ad).
(f) Rejection of Duplicate Applications
•Statement that if a shareholder applies both on plain paper and on the application form, both applications will
be liable for rejection at the option of the issuer.
Disclosure in Offer Documents
Disclosures in the Offer Document
▪ Offer documents must contain all material disclosures that are true and adequate.
▪ Types of documents:
▪ Red Herring Prospectus / Shelf Prospectus / Prospectus → Must contain disclosures as per:
▪ Schedule II of the Companies Act, and
▪ Parts A, B, and C of Appendix 11-G (SEBI).
▪ Letter of Offer → Must contain disclosures as per Part E of Appendix 11-G.
▪ Any updated disclosures must be clearly referred to in the offer document.
Abridged Letter of Offer
▪ Must contain disclosures as per Part F of Appendix 11-G.
▪ Should not contain any matter extraneous to the offer document.
ASBA (Application Supported by Blocked Amount)
▪ A copy of the abridged prospectus/letter of offer must accompany every application form (including ASBA
form).
▪ In all:
▪ Public Issues and
▪ Rights Issues (with one payment option) → bids should be accepted only via ASBA.
▪ For QIBs (Qualified Institutional Buyers) and Non-Institutional Investors (NIIs) → bids must be through
ASBA only.
Post Issue Work and Obligations
1. Post-Issue Lead Merchant Banker (PILMB)
• The lead merchant banker acts as the overall co-ordinator.
Duties include:
• Ensuring basis of allotment is finalized in a fair and proper manner with the stock exchange.
• Co-ordination with registrars, bankers to the issue, and stock exchange.
• Ensuring that all post-issue monitoring reports are submitted to SEBI within the prescribed time.
• Handling grievances of investors regarding allotment, refunds, and delays.
2. Basis of Allotment
• Finalized in consultation with the Designated Stock Exchange (DSE).
• Allotment must follow SEBI’s rules (e.g., proportionate allotment, minimum bid lot, cap of ₹2 lakh for retail).
• ED/MD of stock exchange, lead merchant banker, and registrar must certify fairness.
3. Dispatch of Allotment/Refund Orders
• Refund orders, allotment advice, and credit of securities into demat accounts must be completed within 15
days of issue closure.
• If delayed, → company must pay 15% interest per annum for the delay period.
4. Filing of Reports
• 3-day monitoring report (within 3 days of closure of issue).
• Final post-issue monitoring report (within 15 days of completion of allotment, refund, and listing).
5. Listing of Securities
• Issuer must complete all formalities for listing on stock exchanges within 7 working days from the
finalization of basis of allotment.
• Trading permission is essential for investors to start transactions.
6. Investor Grievances:
• The issuer and lead merchant banker are responsible for resolving complaints related to: Non-receipt of
refund, Non-credit of securities, Wrong allotment, etc. SEBI may call for reports and penalise delays.
7. Utilization of Issue Proceeds
• Funds must be used only for purposes stated in the prospectus/letter of offer.
• Monitoring agency (for large issues >₹100 crore) must track usage and report deviations to SEBI and
shareholders.
Bought out Deals
Bought-out deal (BOD) is a private placement arrangement where a financial institution (the
sponsor) buys a large block of shares directly from a private company and then sells them to
the public in an initial public offering (IPO) within an agreed-upon timeframe. This method
provides private companies with quick access to capital, avoids the complex public issue
process, and allows for swift and efficient fundraising by transferring the risk of selling to the
sponsor.
Agreement: The private company and the sponsor (underwriter/merchant bank) agree on
the terms for the shares, including the price.
Purchase: The sponsor purchases the shares from the company, which provides the
company with immediate funds.
Resale: The sponsor then takes on the responsibility of selling these shares to the public,
often through a later IPO.
Profit: The sponsor aims to profit from selling the shares at a higher price to the public.
Benefits
Speedy Fundraising:
It's a faster way to raise capital compared to a traditional public offering.
Cost & Time Savings:
The company avoids the time-consuming and costly process of managing a public issue itself.
Fixed Price:
The company receives a pre-negotiated, realistic price for its securities upfront.
Benefits for the Sponsor
Investment Opportunity:
Sponsors can gain significant stakes in promising private companies.
Profit Potential:
Sponsors can profit by selling the shares to the public at a premium after listing on a stock exchange.
Risks and Considerations
Market Risk for Sponsor:
Sponsors bear the risk of not being able to sell all the shares or sell them at a profitable price if market
conditions change.
Potential for Sponsor Control:
The sponsor's investment can lead to increased control or influence over the company.
Regulatory Oversight:
Bought out deals are subject to the regulations set by bodies like SEBI (in India) to prevent market
manipulation.
Investor protection
Investor Protection refers to the set of laws, regulations, mechanisms, and institutional
frameworks designed to safeguard the interests of investors in the securities market. Its main
purpose is to ensure fairness, transparency, and accountability in the functioning of financial
markets, thereby building trust and confidence among investors.
Objectives of Investor Protection
Transparency – Ensuring that companies disclose accurate and timely information.
Fair Practices – Preventing fraud, insider trading, and market manipulation.
Safeguarding Rights – Protecting small/retail investors against exploitation.
Grievance Redressal – Providing mechanisms to resolve investor complaints.
Confidence Building – Encouraging public participation in capital markets.
Key Measures for Investor
▪ Protection Legal Framework Companies Act, 2013 – Ensures accountability of company management.
▪ Securities and Exchange Board of India (SEBI) Act, 1992 – Regulates capital markets.
▪ Securities Contracts (Regulation) Act, 1956 – Governs trading of securities.
▪ Regulatory Mechanisms SEBI Regulations: Insider Trading regulations, Listing obligations (LODR), Takeover
Code, Mutual Fund regulations.
▪ Disclosure Norms: Prospectus, offer documents, and periodic disclosures.
▪ Investor Grievance Redressal SEBI SCORES Portal – Online system for investor complaints.
▪ Investor Protection Funds (IPF) – Exchanges maintain funds to compensate investors in case of broker
defaults.
▪ Ombudsman – For arbitration and dispute resolution.
▪ Market Practices Dematerialization (Demat) – Reduces frauds and loss of securities.
▪ Corporate Governance Norms – Independent directors, audit committees, etc.
▪ Fair Allotment Rules – Proportionate allotment to retail investors in IPOs.
Broker
• A Broker is an intermediary who facilitates the buying and selling of securities (shares, bonds,
derivatives, etc.) on behalf of investors in stock exchanges. Brokers act as a link between
investors and the stock market and are regulated by SEBI (Securities and Exchange Board of
India).
Functions of a Broker
• Trade Execution – Buy/sell securities on behalf of clients.
• Advisory Services – Give market research and investment advice (mainly full-service brokers).
• Demat & Trading Accounts – Provide facilities for holding and trading securities.
• Margin Funding – Allow clients to buy shares by partially funding the purchase.
• Investor Protection – Must follow SEBI and exchange rules, ensuring fair practices.
• Settlement of Transactions – Ensure securities are delivered, and payments are received after
trades.
Full-Service Brokers
•Provide trading, research, advisory, wealth management, and personalized services.
•Charge higher brokerage fees.
•Examples: ICICI Direct, HDFC Securities, Kotak Securities.
Discount Brokers
•Focus mainly on trade execution (buy/sell orders).
•Charge lower fees (flat rate per trade).
•Examples: Zerodha, Upstox, Angel One.
Broker Registration in India
• Must be registered with SEBI and affiliated with a stock exchange (NSE, BSE, etc.).
• Receive a Unique Registration Number.
• Must comply with capital adequacy, reporting, and investor protection norms.
Investor Protection Against Brokers
• Brokers cannot charge unauthorized fees.
• Must provide contract notes after each trade.
• Maintain segregation of client funds from their own.
• Investors can file complaints against brokers via SEBI SCORES or the stock exchange arbitration mechanism.
Sub-Broker
A Sub-Broker is an agent of a stockbroker who helps investors trade in securities through
the main broker.
• They cannot directly trade on a stock exchange.
• They act as a link between investors and a broker.
• Earlier, SEBI used to register sub-brokers, but since 2018, sub-brokers are required to
register as Authorised Persons (APs) under a stockbroker with SEBI’s approval.
Functions of Sub-Brokers
• Assist investors in opening trading/demat accounts.
• Collect orders from clients and forward them to the main broker.
• Provide basic investment guidance.
• Earn commission from the broker (sharing brokerage revenue).
Underwriters
An Underwriter is an institution (merchant banker, financial institution, or broker) that
guarantees the subscription of securities (shares, debentures, bonds) in case the public
does not subscribe fully during an IPO/FPO.
Functions of Underwriters
• Risk Absorption: If investors don’t buy all the securities, underwriters purchase the
remaining.
• Confidence Building: Their guarantee assures the company that funds will be raised.
• Due Diligence: Help in pricing and assessing demand for securities.
• Advisory Role: Often guides companies in structuring and marketing public issues.
Types of Underwriting
• Firm Underwriting – Underwriter agrees to buy a certain portion irrespective of public
subscription.
• Conditional Underwriting – Underwriter buys only if the public fails to subscribe fully.