NEW ISSUE MARKET

MEANING
market and stock exchange.
The industrial securities market in India consists of newissue
were not previously available to the
The new issue market deals with the new securities which
investing public for the first time. The
investing public, i.e., the securities that are offered tothe
securities for publicsubscription. In other
market, therefore, makes available a new block of
by companies either for cash or for
words, new issue market deals with raising of fresh capital
consideration other than cash.
institutions dealing in fresh claim. These claims
The new issue market encompasses all
debentures, rights issues,deposits, etc.
may be in the form of equity shares, preference shares,
and directly subscribe to the securities
All financial institutions which contribute, underwrite
are part of new issue market.
STOCK EXCHANGE
those which have been already
The stock exchange is a market for old securities, i.e.,
purchased and sold continuously
issued and listed on a stock exchange. These securities are
Stock exchange provides not only free
among investors without the involvement of companies.
transferability of shares but also makes continuous evaluation
of securities traded in the market.
STOCK EXCHANGE
DISTINCTION BETWEEN NEW ISSUE MIARKET AND
stock exchange can be made on
The distinction between the new issue market and the
three grounds.
(i) Functional difference.
(iü) Organisational difference.
(iüi) Nature of contribution toindustrial finance.

65
66 FINANCIAL MARKETS AND SERVICES

(i) Functional difference

The new issue marlket deals with new securities which are issued for the frst time for
publicsubscription. The stock exchange provides a ready market for buying and selling of old
securities.

(ii) Organisational difference

The stock exchanges have physical existence and are located in particular geographical
areas. The stock exchange is a place, where dealers of security meet regularly at appointed time
announced by the market. It is a well established organisation with rules and regulations for a
smooth conduct of the business. The members are supplied with information about companies
and daily changes in prices of stockS.
The new issue market enjoys neither any tangible form nor any administrative organisational
set-up nor is subject to any centralised control and administration for the execution of the
business. It renders service to the lenders and borrowers of funds at the time of any particular
operation and the services are taken up entirely by banks, brokers and underwriters.
(iii) Nature of contribution to industrial finance
The new issue market provides the issuing company with funds for starting a new enterprise
or for either expansion or diversification of an existing one by making a direct link between
companies which require funds and the investing public. So, the contribution of new issue market
is direct. The role of stock exchange in providing capital is indirect as it provides marketability
to the shares.

RELATIONSHIP BETWEEN NEW ISSUE MARKET AND STOCK EXCHANGE

Despite the above-mentioned differences, the new issue market and stock exchange are
inseparably connected and work in conjunction with each other.
The new issues first placed in the new issue market can be disposed of subsequently in the
stock exchange. The stock exchange provides the mechanism for regular and continuous purchase
and sale of securities. This facility is ofimmense utility to potential investors who are assured
that they will be able to dispose of the allotment of shares at any time. Thus, the two markets
are complementary in nature.
Both the markets are connected to each other even at the time of new issue. The companies
which make new issue apply for listing of shares on a recognised stock exchange. Listing of
shares adds prestige tothe firm and widens the market for the investors. The companies which
want stock exchange listing have to comply with statutory rules and regulations of the stock
exchangeto ensure fair dealing in them. The stock exchanges, thus, exercise considerable control
over the organisation of new issues.
The new issue market and stock market are economically an
market, i.e., industrial securities market. Both are susceptible to the integral part of a single
common influence of the
environmental conditions such as political stability, economic
central bank and the fiscal policy of the government. The two conditions, monetary policy of the
markets act and react upon each
other in the samne [Link] the stock prices go up in the market,
the new issues increase
 NEW ISSUE MARKET 67
and when the stock prices show a downward trendthe new issues decline.
The new issue market
also depends on the stock exchange to find out price movements and
ond to forecast the climnate for the general economic outlook
success of new issues.

FUNCTIONS OF NEW ISSUE MARKET

The main function of a new issue market is to facilitate
transfer of resources fronm savers
to the users. "The savers are individuals. commercial
banks, insurance companies, ete. lne
users are public limited conmpanies and the government. The new issue
role of mobilising the funds from the savers and transferring them market plays an important
to borTOwers for productive
purposes, an important requisite of economic growth. It is not only a platform for raising finance
to establish new enterprises but also for
On this basis, the new issue market can beexpansion/diversification/modernisation of existing units.
classified as:
1. Market where firms go to the public for the first time through Initial Public
(IPO). Offering
2. Market where firms which are already trading raise additional capital through Seasoned
Equity Offering (SE0).
The main functions of a new issue market can be divided into a triple service functions:
1. Origination.
2. Underwriting.
3. Distribution.
Origination
Origination refers to the work of investigation, analysis and processing of new project
proposals. Origination starts before an issue is actually floated in the market. There are two
aspects in this function:
() Acareful study of the technical, economic and financial viability toensure soundness
of the project. This is a preliminary investigation undertaken by the sponsors of the
issue.

(ü) Advisory services which improve the quality of capital issues and ensure its success.
The advisory services include:
(a) Type of [Link] refers to the kind of securities to be issued whether equity share.
preference share, debenture or convertible debenture.
6) Magnitude of issue.
(c) Time of floating an issue.
(d) Pricing of an issue - whether shares are to be issued at par or at premium.
(e) Methods of issue.
) Technique of selling the securities.
The function of origination is done by merchant bankers who may be commercial banks
all India finan cial institutions or private firms. Initially, this service was provided by specialised
division of commercial banks. At present, financial institutions and private firms also perform
68 FINANCIAL MARKETS AND SERVICES
this service. Though this service is highly important, the success of
the issue depends, to a large
extent, on the efficiency of the market.
The origination itself does not guarantee the success of the issue. Underwriting, a
specialised
service, is required in this regard.
Underwriting
Underwriting is an agreement, whereby the underwriter promises to subscribe to a specified
number of shares or debentures or a specified amount of stock in the event of public not
subscribing
to the issue. If the issue is fully subscribed, then there is no liability for the underwriter.
Ifa part
of share issues remains unsold, the underwriter will buy the shares. Thus, underwriting
is a
guarantee for the marketability of shares.
Methods of underwriting
An underwriting agreement may take any of the following three forms:
(1) Standing behind the issue: Under this method, the underwriter guarantees the
sale of a specified number of shares within a specified period. If the public do not
subscribe to the specified amount of issue, the underwriter buys the balance in the
issue.
(iü) Outright purchase: The underwriter, in this method, makes outright purchase of
shares and resells them to the investors.
(iii) Consortium method: Underwriting is jointly done by a group of underwriters in
this method. The underwriters form a syndicate for this purpose. This method is
adopted for large issues.
$ Advantages of underwriting
Underwriting assumes great significance as it offers the following advantages to the issuing
company.
1. The issuing company is relieved from the risk of finding buyers for the issue offered to
the public. The company is assured of raising adequate capital.
2. The company is assured of getting the minimum subscription within the stipulated
time, a statutory obligation to be fulfilled by the issuing company.
3. Underwriters undertake the burden of highly specialised function of distributing
securities.

4. They provide expert advice with regard to timing of security issue, the pricing of
issue, the size and type of securities to be issued, etc.
5. Public confidence on the issue is enhanced when underwriting is done by reputed
underwriters.
The underwriters in India may be classified into two categories:
(i) Institutional underwriters.
(iü) Non-institutional underwriters.
 NEW ISSUE MARKET 69
The institutional underwriters are: (a) Life
InSurance Corporation of India (LIC), (6) Unt
Trust of India (UTI), (c) Industrial
Development Bank of India (d) Industrial Credit and
Investment Corporation of
India (ICICI), and (e) Commercial (IDBI),
Companies. The pattern of underwriting of the above institutionalBanks and General Insurance
Todia LIC and UTIhave purchased industrial underwriters differ vastly in
securities from the new issue market with a view
to holding them on their own portfolio. They have a
ond wellestablished firms. The development banks preference for underwriting shares in large
have given special attention to the 1Ssues in
hackward states and industries in the priority ist. The thrust of the development banks is also
towards small and new issues which do not have
adequate support from other institutions.
General insurance companies have shown preference in
new issues.
underwriting the securities of fairly
The non-institutional underwriters are brokers. They
guarantee shares only with a view
to earning commission from the company floating the issue. They are
known to
shares later to make a profit. The brokers work with profit motive in underwritingoff-load the
industrial
securities. After the elimination of forward trading, stock exchange brokers have begun to take
an underwriting business. The percentage of securities underwritten tothe total private
issue varies between 72 per cent and 97 per cent.
capital
Distribution
Distribution is the function of sale of securities to ultimate investors. This service is
performed by brokers and agents who maintaina regular and direct contact with the ultimate
investors.

METHODS OF FLOATING NEW ISSUES

The various methods which are used in the floatation of securities in the new issue market
are:

(i) Public issues.

(ü) Offer for sale.
(üi) Placement.
(w) Rights issues.
& Public issues
Under this method, the issuing company directly offers to the general public/institutions a
xed number of shares at a stated price through a document called prospectus. This is the most
Common methodfollowed by joint stock companies to raise capital through the issue of securities,.
The prospectus must state the following:
1. Name of the company.
2. Address of the registered office of the company.
3. Existing and proposed activities.
4. Location of the industry.
5. Names of directors.
70 FINANCIAL MARKETS AND SERVICES
6. Authorised and proposed issue capital to the public.
7. Dates of opening and closing the subscription list.
8. Minimum subscription.
9. Names of brokers/underwriters/bankers/managersand registrars to the issue.
10. A statement by the company that it will apply to stock exchange for quotations of it.
shares.

According to the Companies Act, 1956, every application form must be accompanied by a
[Link], it is no longer necessary tofurnish a copy of the prospectus along with ever
application form as per the Companies Amendment Act, 1988. Now, an abridged prospectus. is
being annexed to every share application form.
Merits of issue through prospectus
1. Sale through prospectus has the advantage of inviting a large section of the investing
public through advertisement.
2. It is a direct method and nointermediaries are involved in it.
3. Shares, under this method, are allotted to a large section of investors on a non
discriminatory basis. This procedure helps in wide dispersion of shares and to avoid
concentration of wealth in few hands.
Demerits
1. Itis an expensive method. The company has to incur expenses on printing of prospectus,
advertisement, bank's commission, underwriting commission, legal charges, stamp
duty, listing fee and registration charges.
2. This method is suitable only for large issues.
§ Offer for sale
The method of offer of sale consists in outright sale of securities through the intermediary
of issue houses or share brokers. In other words, the shares are not offered to the public directly.
Thismethod consists of twostages: The first stage is a direct sale by the issuing company to the
issue house and brokers at an agreed price. In the second stage, the intermediaries resell the
above securities to the ultimate investors. The issue houses or stock brokers purchase the
securities at a negotiated price and resell at a higher price. The difference in the purchase and
sale price is called turn or spread. It is otherwise called Bought Out Deals (BOD).
Let us take a simple example. X, a small company has a turnover of 72 crores a year. It
requires additional funding of 8 erores to expand its capacity. The merchant banker sees
potential business for the company. He asks the promoters ofthe company to sell 8 lakh shares
of itscapital to it. The company gets 8 crores to expand its business. The merchant banker
issue house is now holding 80 per cent of the company's entire capital. In 12 month's time the
company expanded its operations marketed its products successfully and earned sufficient pron
Now, the issue house decides to off-load the 80per cent capital to the public at a premium ofk o
per share. In a period of 18 months, the merchant bank/issue house has earned a profit ofr 2*
crores.
 NEW ISSUE MARKET 71

Advantages

Bought out deal enables an issuer with good proiect toobtain funds with a minimum c0st
without the fear of undersubscription. The intermediary, i.e., merchant bankers/issue houses
get higher return than the conventional merchant banking services.
Indbank Merchant Banking had gone in for a buvout agreement with Madhya Pradesh
based distillery to buy shares worth 2.5 crores each at 60. After six months, the shares were
anld at 71.50per share with a assured return of 38.33 per cent for the sponsor.
The advantage of this method is that the company is relieved from the problem of printing
andadvertisement of prospectus and making allotment of shares. Offer for sale is not common
in India. This method is used generally in two instances:
() Offer by a foreign company of a part of it to Indian investors.
(ü) Promoters diluting their stake to comply with requirements of stock exchange at the
time of listing of shares.
New Provision
To accommodate more companies under offer for sale mechanism, now SEBI has permitted
promoters or large investors in companies with a market capitalisation of? 1,000 erores and
above, to opt for this route in case they want to dilute their stakes in listed companies. Hindustan
Copper, BGR Energy and SAIL have tapped this market through this route.
Placement
Under this method, the issue houses or brokers buy the securities outright with the intention
selling
of placing them with their clients afterwards. Here, the brokers act as almost wholesalers
to the
them in retail to the public. The brokers would make profit in the process of reselling
and through customer
public. The issue houses or brokers maintain their own list of clients
well as underwriting
contact sell the securities. There is no need for a formal prospectus as
agreement.
Placement has the following advantages:
floatation of shares. In a depressed market
1. Timing of issue is important for successful response through prospectus,
conditions when the issues are not likely to get publicshares.
placement method is a useful method
of floatation of
companies issue their shares.
2. This method is suitable when small
involved in public issue and it also reduces
the expenses involved in
3. It avoids delays
public issue. placement market.
a company to access the private
4. There are no entry barriers for companies.
unlisted and closely held public
This route is also available to
be successfully executed much faster than a public offering
O. Aprivate placement deal canfor a private placement are minimal. Aprivate placement
The procedural formalities
closed in 4 to 6 weeks.
deal can be successfully [Link] issues deal
flexibility in the working out the terms of the is
O. There is greater renegotiating the terms of isSue
institutional investors and hence
with only a few
easy.
72
FINANCIAL MARKETS AND SERVICES

7. This method is also suitable to first generation entrepreneurs who are less
the public which makes the public issue less successful. known t
8. The issue
expenses in case of private placement is low. The absence of several
and non-statutory expenses associated with underwriting, brokerage, statutory
printingt
promotion, etc., makes the transaction cost of private placement approximate]y
per cent of the total cost of issue.
The main disadvantage of this method is that the securities are not
the large section of investors. A selected group of small widely distributed s.
investors are able to buy a large numhas
of shares and get majority holding in a
company.
This method of private placement is used to a limited extent
the shares to their friends, relatives and well-wishers to in India. The promoters gel
get minimum subscription which isa
precondition for issue of shares to the public.
$ Rights issue
Rights issue is a method of raising funds in the market
by an existing comnpany.
A right means an option to buy certain
securities at acertain privileged price within a
certain specified period. Shares, so offered to the existing
shareholders are called rights shares.
Rights shares are offered to the existing shareholders
existing share ownership. The ratio in which the new ina particular proportion to their
shares
existing share capital would depend upon the requirement of or debentures are offered to the
transferable and saleable in the market.
capital. The rights themselves are
Section 81 of the Companies Act deals with rights
company increases its subscribed capital by the issue ofissue.
new
According to this section, where a
formation or after one year of its first issue of share shares either after two years of its
offered to the existing shareholders with the right whichever is earlier, these have to be first
to reserve them in favour of a nominee.
A company issuing rights is required to send a
circular should provide information on how circular to all existing shareholders. The
theearning capacity of the company. The additional funds would be used and their effect 0u
one month to two months to company should normally give a time limit of at leas
shareholders
taken up, the balance is tobe equitably to exercise their rights. If the
rights are not 1
Any balance still left over may be distributed among the applicants
the company. disposed of in the market in a way whichforis mostadditional sha
beneiel
Advantages
1. The cost of issue is
minimum.
printing of prospectus [Link] is no underwriting, brokerage, advertising
and

2. It ensures equitable
of company remains distribution
undisturbed ofas shares to all existing control

proportionate ownership in the company

shareholders and soremains
the same.
3. It prevents the
at a lower price directors from issuing new shares in
and get controlling their own name or to their:
relatives

right.
 NEW ISSUE MARKET 73

Auction based offer-for-sale

The SEBI has introduced a new 'Auction based offer-for-sale' method to allow promoters in
leading listed companies to off-load small trenches of their shares through a fast-tracked offer
made via the stock exchanges. Under this method, the issuer has to simply auction shares at
different prices subject to a floor, with the flexibility to allocate additional shares to investors
placing higher bids. It does not require any reservation for retail investors, tedious process of
preparing ared-herring prospectors, fixinga price brand mandatory for public offers and hiring
investment bankers which are normal under book-building route. It is very much preferable to
other options such as getting these companies to buyback only the shares of the government or
draining them of their cash hoard through hefty dividend payouts. This new method can be
quickly executed at minimal cost, while allowing limited opportunity for speculation in the
secondary market.
Distinction between public offer and offer for sale conventional method vs.
Auction method (offer-for-sale on stock exchanges)
The conventional method, i.e., follow on public offer is different from 'offer-for-sale on
stock exchange' or 'auction method' in the following ways:
S. Follow-on public offer Offer-for-sale on stock
No. exchange
1. One has to comply with an elaborate The process is very simple requiring less than
process with lot of documentations. one week and the duration of offer for sale will
not exceed one trading day.

2 It requires filling of the requisite No such filings is required.

number of independent directors with
the regulators.
3. There is overhand of extra liquidity Since the process is very short there is no overhand,
into the market through FPO. no hammering of shares in the secondary market.

4. Allotment is made at one price on Allotment is made on price priority or at one

proportion ate basis. proportionate basis.

5. Institutional investors cannot get huge A minimum of 25 per cent is reserved for
chunk of shares despite their willingness. mutual funds, insurance companies. One fund
or an insurance company may get the entire
25 per cent.

Institutional Placement Programme (IPP)

IPP is yet another method authorised by SEBI recently to access the capital market.
Companies including Government companies will be able to place up to 10 per cent of their
equity with institutional investors. This IPP route will obviate the need for agovernment company
to undertake a block deal or a follow-on-offer-for-sale to meet the listing guidelines.
74 FINANCIAL MARKÉTS AND SERVICES

GENERAL GUIDELINES FOR NEW ISSUE

All issues by a new company haveto be made at par and for existing companies
the
price should be justified as per Malegam Committee's recommendations which are as follows:issue.
The issue price should be justified by:
() The Earnings Per Share (EPS) for the last three years and comparison of pre-isov
price to earnings ratio to the Price to Earnings (P/E)of the industry.
(ü) The latest Net Asset Value (NAV).
( ) The minimum return on increased net worth to maintain pre-issue EPS. A comn
may also raise funds from the international markets by issuing Global Deposito
Receipts (GDRs) and American Depository Receipts (ADRS).
The SEBIdoes not play any role in price fixation. In fact, the issuers in consultation witk
the merchant bankers will decide the price. However, they are required to give full disclosures
of the parameters which they had considered while deciding the issue price. In actual practioe
there are two types of issue pricing namely:
) In the first type, the company and the lead manager fix the price which is called fxei
price.
(ü) In the second type, the company and the lead manager stipulate a floor price or a price
band and leave it to market forces to determine the final price which is called book
building price.

PRINCIPAL STEPS OF A PUBLIC ISSUE

Public issue, as already stated, refers to the isSue of new shares to the public. The new
shares/debentures may be offered either directly to the public through a prospectus (offer
document) or indirectly through an offer for sale involving financial intermediaries or issuing
houses.
The main steps involved in public issue are the following:
(i) Draft prospectus
A draft prospectus is prepared giving all details as mentioned earlier. Any company or d
listed company making a public issue or a rights issue of value of more than 50 lakhs has to fle
a draft offer document with SEBI for its observation. The company can proceed further on)
after getting observations from the SEBI. The company has to open its issue within three montis
from the date of SEB>'s observation letter.
(iü) Fulfillment of Entry Norms (ENs)
The SEBI has laid down certain parameters for accessing the primary market. If a compa
fulfils these parameters (entry norms), then only it can enter into the primary market.
entry norms are:
The company should have net tangible assets of at least3 crores for three full ye
. It should have distributable profits in at least three
years.
. It should possess net worth of at least 1 crore in
three years.
 NEW ISSUE MARKET 75

"Ifit has to change its name, at least 50 per cent revenue for the preceding one year
should be from the new activity.
e The issue size should not exceed 5 times the
pre-issue net worth.
To ensure that genuine companies do not suffer due to the rigidity of those parameters,
Mhe SEBIhas laid down twomore alternative routes for accessing the primary markel.
& Entry Norm II (EN I)
The Entry Norm II is as follows:
" Ifthe issue is through b0ok-building route, at least 50 per cent of the issue should be
allotted toQualified Institutional Buyers (QIBs).
" The minimum post-issue face value capital shall be 10 crores or there shall be a
compulsory market-making for at least two years.
Entry Norm III (EN II)
Ifa company cannot satisfy the requirements laid down under Entry Norm I, it can enter
into the primary market through EN III route:
The EN III requires the following:
1. The company should have at least 1,000 prospective allottees.
2. The project should be appraised and participated to the extent of 15 per cent by financial
institutions and scheduled commercial banks of which at least 10 per cent comes from
the appraisers.
be a
3. The minimum post-issue face value capital shall be 10 crores or there shall
compulsory market-making for at least 2 years.
listed companies
The above entry norms are not applicable to private and public sector banks,
been appraised by a financial
rights issue and an infrastructure company whose project has
institution or a bank and not less than 5per cent of the project cost
is financed by these institutions.
(ii) Appointment of underwriters
subscribe to the shortfall in case
Underwriters are appointed to shoulder the liability and
commitment, they are entitled to get a maximum
the issue is undersubscribed. For this
Commission of 2.5per cent on the
amount undertaken.

(iv) Appointment of bankers

banker to act as collecting agent. The bankers
Generally, the company nominates its own
their branch network act as collecting agencies and process the funds procured during
along with
the publicissue.
(V) Initiating allotment procedure tabulate the amounts
registrars process the application forms,
The next step is that the allotment procedures. The allotment procedure can
collected during theissue and initiate the minimum level.
be subscribed to the
initiated only when the issue is
(vi) Brokers to the issue appointed as brokers tothe issue for
of the stock exchanges are
Then, recognised members
for a maximum brokerage
of 1.5 per cent.
marketing the issue. They are eligible
76 FINANCIAL MARKETS AND SERVICES

(vii) Filing of documents

The draft prospectus, along with the copies of the agreements entered into with the lead
manager, underwriters, bankers, registrars and brokers to the issue have to be filed with the
Registrar of Companies of the State where the registered office of the company is located.
(viii) Printing of prospectus and application forms
After filing the above documents, the prospectus and application forms are printed and
dispatchedto allmerchant bankers, underwriters and brokers to the issue.
(ix) Listing the issue
It is essential tosend a letter to the stock exchange concerned where the issue is proposed
to be listed giving all necessary details and stating the intention of gettingthe shares listed on
the stock exchange. The initial listing application has to be sent with a fee of 7,500.
(x) Publication in newspapers
The next step is to publish an abridged version of the prospectus and the issues commencing
and closing dates in major English dailies and vernacular newspapers.
(xi) Allotment of shares
After the close of thepublic issue allapplication forms are scrutinised, tabulated and then
shares are allotted against those applications received.
(xii) Underwriter's liability
In case,the issue is not fully subscribed, then the liability for the subscription to the extent
of undersubscription falls on the shoulders of underwriters who have to subscribe to the shortfall.
(xiii) Optional listing
The shares,after having been allotted, have to be listed compulsorily in the Regional Stock
Exchange and optionally at other stock exchanges.
& Central Listing Authority (CLA)
A Central Listing Authorityhas been set up and its functions have been detailed under
Regulation 8 of SEBI (Central Listing Authority) Regulations, 2003.
The main functions of CLA are:
Processing applications for letter precedent to listing from applicants.
Making recommendations to the SEBIon issues pertaining to the protection of the
interest of investors in securities.
Making suggestions for the development and regulation of the securities market
including listing agreements, listing conditions and disclosures to be made in offer
documents.
Undertaking any other functions as may be delegated to it by the SEBI.
Grading of PO mandatory
SEBI has made grading of allIPOs mandatory for which draft documents are filed with it
after April 2007. It shall be mandatory to obtain grading from at least one credit rating agency.
 77
NEW ISSUE MARKET

The issues shall be required to disclose all thegrades obtained by it in the prospectus,
advertising
abridged prospectus, issue advertisements and all other places where the issuer is
for the IPO.

PRINCIPAL STEPS OF PRIVATE PLACEMENT

Private placement may be done in respect of equity shares, preference shares, bonds and
debentures. Generally, the private placement of bonds and debentures is very popular. The
private placement involves the following steps for adebt instrument.
(i) Terms and conditions
The terms and conditions of the issue like the value of the instrument, maturity period,
yield rate, issue and redemption details, etc. should be clearly laid down and the instrument
should be structured accordingly.
(ii) Credit rating
It is mandatory to obtain credit rating from a recognised credit rating agency who will
evaluate the variousaspects con cerned with the instrument and give proper rating.
(iii) Confidential Information Memorandum (CIM)
contains all details about
Just like the offer document in the case of shares, this document
knowledge about the issue
the company and the instrument. An investor can have a thorough
by going through this document.
(iv) Trustees to the issue
interest ofinvestors. Generally,
The next step is toappoint trustees tothe issue toprotect the
trustees.
banks or other financial institutions may be appointed as
(v) Pre-launching formality
sent tothe prospective investors
Just one or two days before the launching date, the CIM is
inviting them to subscribe to the issue.
(vi) Pricing the issue ascertain
Sometimes, pre-marketing campaign may be conducted by the Issue Houses to
investors towards private placement and the probable prices. Since book-building method is
the
many companies, this campaign is not generally resorted to.
adopted by
(vii) Post-issue steps are
the issue expires, a decision is taken on allotment and the certificates
After the closing of exchange
Oversubscriptions are refunded. The details of the issue are sent to the stock
ISSued.
Concerned where it is likely to be listed. conditions
are followed for shares also except the fact that the terms and
The above steps shareholders at their meeting and there is
no
modalities. ete. are decided by the
O 1ssue,its
need to appoint trustees.
78
FINANCIAL MARKETS AND SERVICES

PRINCIPAL STEPS INVOLVED IN THE CASE OF OFFER-FOR-SAL E

In the case of offer-for-sale, generally merchant bankers play adominant role e
a conduit through which a company routes its shares to the public. There may be by acting
promoters a
Sponsors also who may off-load the shares by offering them to the public. at an appropriate
The steps involved are: time.
(i) Agreement: The first step is to enter into an agreement with the merchant hos
or sponsor group laying down the terms and conditions of the issue.
(ii) Registration: The agreement has to be registered with the stock exchange
concerned
(iiü) Default: If any default is committed by the sponsor, it will be referred toan arbitrati
committee set up by the stock exchange.
(iv) Off-loading: The sponsor can off-load his position provided the promoter's post-issi.
holding will not be less than 20per cent with a three-year lock-in period.
(v) Market-maker: The sponsor should agree to act as a market-maker for the companie:
share for 18 months and should also identify another market-maker for such compulson:
market-making. These two market-makers should hold up to 5 per cent of the equit
offered to the publicbetween themselves.
SEBI's GUIDELINES FOR IPOs
The SEBI has been issuing guidelines from time-to-time with regard to IPOs so as to
protect the interest of investors and also to promote a healthy capital market in the country
Some of the important guidelines pertaining to IPOs are:
1. All allotments have to be made within 30 days of the closure of the public issue and 42
days in the case of a rights issue.
2. The set offer to the general public has to be at least 25 per cent of the total issue size
for listing on a stock exchange. For listing an IPO on the NSE:
(a) The paid-up capital should be 20 crores.
(6) The issuing company should have a track record of profitability.
(c) The project should be appraised by a financial institution or acommercial bana
or category IMerchant Banker.
3. In case an issue exceeds more than 100 crores, the issue is allowed to place the
whole issue through book-building.
4. Aminimum of 50per cent of thenet offer to the publichas to be reserved for investor
applying for less than 1,000 shares.
5. All listing formalities for a public issue have to be completed within 70 days from
date of closure of the subscription list.
6. There should be at least 5 investors for every1 lakh of equity offered.
7. The PAN or GIR number should be compulsory quoted in the application where the
monetary value of investment is 50,000 or above.
 NEW ISSUE MARKET 79

8. The subscription list for public issues shall be kent,onen for at least 3 working days
and not more than 10 working days.
9. SEBI has launched Unified Payments Interface (UUP) as an alternative payment option
for retail investors for buying shares in a publicissue from January 1, 2019. 1wm
reduce the listing time for an IPO to three davs from the existing six at present aue o
the avoidance of any manual intervention.
Other methods

Issue of bonus shares,offer to the employees, offer tothe creditors and offer to the customers
are other methods of issuing securities.
1. Issue of bonus shares: (Refer Chapter 5).
2. Offer to the employees: The issue of shares may be offered to employees. This
helps to promote better industrial relations and higher productivity. Public sector
organisations and joint sector organisations offer shares to their employees.
3. Offer to the creditors: At the time of reorganisation of capital, creditors may be
asked to buy shares in full settlement of their loans or advances.
4. Offer to the customers:Public utility undertakings offer shares to their customers.
Shareholding by customers give them a say in the affairs and functioning of the concern.
INSTRUMENTS OF ISSUE
Traditionally, equity shares and preference shares are issued by companies as ownership
capital and debentures ànd bonds as debt capital. Recently, new instruments to meet the varied
appreciation in value
needs of investors in terms of security, rate of return, marketability and
are being issued by the companies.
explained below.
The important new instruments and their characteristics are
detachable warrants
i) Secured Premiumn Notes (SPN) with
warrant. The warrants attached
Secured Premium Notes are issued along with a detachable
apply and get equity shares after a notified period provided the
to it ensure the holders right to
SPN is fully paid-up.
does not carry any interest.
The SPN is issued at a nominal value and
instalments at a premium over the face
The SPN is redeemed by repayment in several
value. The premium amount is distributed equally
over the period of maturity of the instrumnent.
no interest will be paid for the invested
There is a lock-in period for SPN during which
amount.
mortgage of allimmovable properties of
the companv
The instrument is secured by a
of the SPN on allotment at a premium if the shares of the issuing
The investor can dispose
market.
company commands a high premiumin the equity shares will have to be done within the
warrant into
The conversion of detachable
time limit given by the company.
80 FINANCIAL MARKETS AND SERVICES
(ii) Equity shares with detachable warrants
In this instrument, along with fully paid-up equity shares, detachable warrants
are issued
which entitle the warrant holder to apply for aspecified number of shares at a determined
Detachable warrants are registered separately with the stock exchange and traded price,
(iii) Preference shares with warrants separately.
This instrument shall carry a certain number of warrants entitling the holder
equity shares 'at premium' at any time in one or more stages between the third andtofAh
apply for
from the date of allotment. From the date of allotment, the preference
should not be transferred or sold for aperiod of three years. shares with warra
(iv) Non-convertible debentures with detachable equity
warrants
The holder of the instrument is given an option to buy a
the company at a predetermined price with a definite time-frame. specified number of shares from
There is a specific lock :
period after which the holder can exercise his option to apply for
equity shares.
(v) Fully convertible cumulative preference shares
This instrument has two parts Aand B. Part A is
automatically on the date of allotment without application by the convertible into equity shares
allottee. Part B will be redeemed
at par/converted into equity after a lock-in period, at
the option of the investors.
(vi) Zero interest fully convertible debentures
(FCDs)
No interest will be paid to the holders of this
notified period, this debenture will be automaticallyinstrument till the lock-in period. After a
Before the conversion of FCDs into equity, if the and compulsorily converted into shares.
the holders in the proportion decided by company issues rights, it would be available to
the company.
(vii) Fully Convertible Debentures (FCDs)
with interest
This instrument carries no interest for a
to apply for equities at premium for which specified period. After this period, option is given
no additional amount is payable.
on FCDs is payable at a determined rate
from the date of first conversion to However, interest
and equity will be issued in lieu of it
interest amount.
second/final conversion
(viii) Zero interest partly Convertible
separately tradable warrants Debentures (PCDs) with detachable and
This partly convertible debenture has two
equity shares at a fixed amount on the date of parts Aand B. Part A is convertible inl0
at par at the end of aspecific period. allotment. Part B is non-convertible and redeemeu
warrant. It also gives an option to thePart B willalso carry a detachable and
holder to receive equity share for separately tradau
(ix) Zero interest bonds every warrant.
Zero interest bonds are sold at a
In India, zero interest convertible discount fromn their eventual maturity vvalue and bear no interest.
interest till the date of conversion bonds are issued by companies. These bonds do not Carty e
and are converted into equity
expiry ofa fixed period. shares at par or premu
 NEW ISSUE MARKET 81

bonds
(x) Deep discount
These bonds are sold at a large discount totheir nominal value. There is no interest
payments on these bonds and the investors get return as accretion to the par value of the
instrument over its life

The Industrial Development Bank of India issued in February 1996 Deep Discount Bonds. Each
bond having a face value ofr 2,00,000was issued at a discounted price of 53,000 with a maturity
period of25 years. The Industrial Finance of India issued Deep Discount Bonds of 2,500and promised
1.00,000 after 25 [Link] Small Industrial Bank of Indiaalso issued similar type of bonds.
(xi)Option bonds
Option bonds may be cumulative or non-cumulative as per the option of the holder of the
bonds. In case of cumulative bonds, interest is accumulated and is payable on maturity only. In
case of non-cumulative bonds,the interest is paid periodically. The option is to be exercised by
the investor at the time of investment. The Industrial Development Bank of India issued option
bonds in January 1992.
(xii) Bonds with warrants
Awarrant allows the holder to buy anumber of equity shares at apre-specified pricesweeteners
in fiuture.
The warrants are usually attached to debenturesor preference shares issued by companies as
equity
to make issues more attractive. Essar Gujarat, Ranbaxy and Reliance have issued bonds with
warrants.

(xiii) Indian Depository Receipt (IDR)

company
An IDR in nothing but a document representing underlying shares of a foreign capital
denominated in Indian currency. In other words, when a foreign company
wants to raise
(Global Depository Receipt).
from Indian investors,it issues IDRs. It is just the opposite of GDR
raise money in the capital markets of a
A GDR is used when an Indian company decides to
500 million through GDR which was listed
foreign country. For instance, the Tata Steel raised $
represented one share in Tata Steel. Each GDR was
on the London stock exchange. Each GDR
priced at $ 7.644 during the issue and now
it is trading at $ 14.5.
exchangesthe BSE, NSE,etc.; and one can trade
in
An IDR willbe listed on Indian stock is
one of the owners of a foreign company and he
IRDs just like regular shares. An IDR holder is
dividends, rights issue, ete. that the company gives. The Standard Chartered Bank is
entitled to
ID Rs to raise capital in India.
ne irst company to malke use of
IDR Vs. Share
the following ways:
An IDR is different froma share in of share
holding in a company whereas an IDR is a representation
() A share is a direct
in an indirect way.
required to hold a single share.
W) Multiple IDRs may be such rights have to be
are automatically entitled to certain rights while
() Shareholders
holders.
Specifically set out for IDR restrictions.
converted into shares subject to certain
0) 1DRs may be
82 FINANCIAL MARKETS AND SERVICES

(0) Taxation rules are different for shares and IDRs. For instance,IDRs are not
from long-term capital gains like shares. exempted
Advantages
The following are the merits of investing in IDRs:
() One can invest in a foreign company without any backgroundat the trading laws ax 3
practices of that country.
( ) One is free to invest without any limits on individual overseas investments.
(üi) Since IDRs are denominated in rupees, they are free from risks on forex fluctuation.
(iv) IDR provides an opportunity to diversify one's investment portfolio by investing in
foreign companies.
$ Restrictions
) Generally, an IDR holder cannot redeem the IDR intoa share for at least one vear
from the issue date.
(ü) After conversion, it has to be held for a maximum of 30 days, after which
it can be
liquidated.
(xiv) Inflation-indexed Bonds (IIBs)
Inflation-indexed Bonds are those bonds where the return increases along with inflation in
the economy. It guarantees a real return to the investors. It has been designed primarily to
hedge investors against inflation risk of an [Link] the principal amount alone is indexed
to inflation and not the coupon, it is called capital indexed bonds.
Features of IIBs in India
() Initially, its maturity period is 10years.
(iü) Infation protection is available for both bond and coupon.
(üi) The coupon rate will be fixed for entire duration of the bond.
(iv) Periodiccoupon payments will be paid on adjusted principal on the basis of the inflation
rate (India's WPI).
(v) Interest will be paid half-yearly.
(vi) The investment limit is from 10,000 to 2 crores.
(vii) The adjusted principal or the face value whichever is higher will bepaid on maturity
(viüi) It will be available for trading in the secondary market also.
Besides the above, the Abid Hussain Committee has recommended the issue of
instruments:
the followie
) Floating rate notes (ü) Clip and strip bonds
(üii) Dual convertible bonds (iv) Index rate notes
(u) Stepped coupon bonds (vi) Dual option warrants
(vii) Extendable notes (viüi) Level pay floating rate notes
(ic) Commodity bonds (x) Industrial revenue bonds.
 NEW ISSUE MARKET 83

The Pherwani Study Group has recommended

the following new instrumet
.1. Participating preference share
2. Participating debenture
q Convertible debenture with options
4. Third party convertible debenture
5 Convertible debentures redeemable at premium
6. Debt for equity swap
(xv) Blue Bonds

Those securities which are issued for various blue econoy related activities including
oceanic resource mining and sustainable fishing are called Blue Bonds.

PLAYERS IN THE NEVW ISSUE MARKET

There are many players in thenew issue [Link] important of them are the following:
1. Merchant bankers.
2. Registrars.
3. Collecting and coordinating bankers.
4. Underwriters and brokers.
5. Printers, advertising agencies and mailing agencies.
1. Merchant bankers
They are the issue mnanagers, lead managers, co-mnanagers and are responsible to the
company and SEBI. Their functions and working are described ina separate chapter.

2. Registrars to the issue

activities connected
Registrars are an important category of intermediaries who undertake all
in consultation with the
with new issue management. They are appointed by the company merchant bankers, in
merchant bankers to the issue. Registrars have a major role, next to
respect of servicing of investors.
of issue, pre-allotment, allotment
The role of registrar in the pre-issue, during the currency
and post-allotment are described below:
Role of registrar in pre-issue
to the merchant bankers.
l. Suggest draft application form and of collecting
identifving the collection centres. The choice of collection centre
Z. Help in issue.
success of the
banker is critical to the
accountswith banks and lay down procedure for operation
O. Assist in opening collection
of these accounts. cheques.
collecting branches, for collection of application along with
4. Send instructions to of funds.
separately and remittance
arafts, stock inyest
84
FINANCIAL MARKETS AND SERVICES
5.
Workout modalities to receive the collection figures on a regular
basis until
subscription list is closed. the
$ During the currency of issue
1. Receive the collection figures everyday.
2. Tabulate and classify the collection data on the basis of
the standard proforma of sl.3
of shares applied for.
3. Keep the mnerchant bankers and the company
informed of the progress of tota
subscriptions.
4. Inform the stock exchange albout the closure of
issue.
$ Pre-allotmnent work
1. Get all application forms from the collecting
bankers and sort out valid and invalid
application forms.
2. The valid applications are tobe categorised and
grouped as cash, draft and stock invest
applications.
3. Reclassify the valid applications eligible for allotment.
4. Prepare the list with inverted numbers and then
approach the regional stock exchange
for finalising the basis of allotment, in the event of
oversubscription.
5. Finalise the allotment as per the basis approved
by the stock exchange.
6. Tally the final list approved for allotment and
rejections with the in-house control
numbers and correct mistakes, if any.
& Allotment work
The most important work of a registrar is allotment of shares. The
allotment was adopted for new issues in 1993. A new quota system of proportional
system was approved by SEBI n
April 1995. According to the new system 50 per cent of quota is for small
50 per cent for other categories. The small investors include all
investors and another,
applicants up to 1,000 shares. It
has also been revised recently.
Post-allotment work
1, Get the letters of allotment and refund orders printed ready for
tobe mailed on or before 70 days from the closing date of despatch. They have
subscription.
get the permission of the Registrar of Companies and the relevant For any delay
exchange. regional stoch
2. Submit all statements tothe company for
their final approval.
3. Arrange to pay the brokerage and underwriting commission and submit
statements.
their releva
4. Assist the company in getting the allotted shares listed on the
stock exchange.
 NEW ISSUE MARKET
Qualifications for registrars to the issue
Tobe appointed as Registrar to the Issue. registration with SEBI is essential. The criteria
adopted by SEBI for registration are the competency and expertise, quality of manpower, their
track record, adequacy of infrastructure such as computers, storage space, etc. and capital
adequacy. A net worth of 6 lakhs is essential for Registrars. SEBI has laid down a code of
conduct for their observance. They have to maintain proper books of accounts and registers for
a period of three years.
3. Collecting and coordinating bankers
Collecting bankers collect the subscriptions in cash, cheques, stock invest, ete.
Coordinating bankers collect information on subscriptions and co-ordinate the collection
work. They monitor the work and inform it to the registrars and merchant bankers.
Collecting banker and coordinating banker may be the same bank or diferent banks.
4. Underwriters and brokers
The functions and role of underwriters are explained separately.
Brokers along with the network of sub-brokers market the new issues. They send their
own circulars and applications to the clients and do follow-up work to market the securities.
5. Printers, advertising agencies and mailing agencies are other organisations
involved in the new issue market operations.

RECENT TRENDS IN NEW ISSUE MARKET

Economic liberalisation, privatisation, foreign private participation, disinvestment in public
sector andregulatory changes have provided a new impetus to the capital market.
Table 3.1 shows the resources mobilised from the primary market during 2020-21 and
2021-22.