CHAPTER 3: PRIMARY MARKETS

LEARNING OBJECTIVES:

After studying this chapter, you should know about:

 Meaning of Primary markets and its functions

 Issuers in Primary market and its regulatory framework
 Types of issues and its process: public issue, rights issue and private placement
 Public Issue: Types, pricing, process

3.1 Primary Market: Definition and Functions

3.1.1 Nature and Definition
The primary market refers to the market where equity or debt capital is raised by issuers from
public investors through an offer of securities. It is called the primary market because investors
purchase the security from the issuer. It is also called the “new issue market” where securities are
issued for the first time. The process of expanding the ability of an issuer to raise capital from
public investors, who may not have been associated with the initial stages of the business, is also
known as “going public.” The issuance of securities in the primary markets expands the reach of
an issuer and makes long-term capital available to the issuer from a larger number of investors.
Raising capital for a company may also be conducted through a syndicate of institutional investors
who buy equity or debt securities through a private placement. This is also a primary market
activity but the investors in these securities are a few pre-identified institutional investors. These
investors may also seek sale of their holdings, conversion of debt to equity, or may offload their
holdings in a public issue on a later date. Private placement of debt is similar to private equity or
venture capital deals, except that the security issued is debt in the former and equity in the latter
case.
An issuer who seeks capital through the primary market has to work with a merchant banker. The
merchant banker gauges the readiness of the business to raise fresh capital, structures the
instrument to be issued, enables pricing the issue, identifies the investors to whom the securities
will be offered and manages the entire capital mobilization process. The merchant banker earns
fee for such services. Primary market issues may also need arrangements such as a syndicate of
investors to buy a portion of the issue, or avail underwriting services by specified intermediaries
for a fee, to subscribe to the securities being offered if the issue fails to garner the required
response. Securities offered in the primary market are distributed through a network of brokers
to prospective investors. The security issuance process varies depending on the nature of the
issue, the size and the target investors.

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The ability of a company to raise funds from such external sources will depend upon the
performance of the company in the past and the expected performance in the future. Outside
investors will also require protection against a possible default on getting their dues or their rights
getting diluted. This protection is available to them when they fund the company through investing
in securities rather than one-on-one agreement with the promoters. This is because securities are
issued under regulatory overview, which also imposes obligations on the issuer of securities, to
honor the commitments made at the time of raising funds. Investors may also require the
flexibility to review their investment and exit the investment if need be. A security provides this
facility as it is listed on the exchanges, where key information about the company has to be
periodically disclosed. The expectation for its performance reflects in the prices at which its
securities tend to trade.
The primary market for equity shares is regulated by SEBI. Companies can make a public offer of
equity shares or a private placement of shares to their promoters or institutional investors. Issuers
have to meet the eligibility norms and disclosure requirements laid down by SEBI. A number of
market intermediaries are involved in the primary market and all these are regulated by SEBI.
The primary market for debt securities has two regulators. The primary market for government
securities is regulated by the RBI. It acts as the treasury manager for the government. It issues
government securities to eligible participants such as banks and primary dealers through the
auction method. There is a predefined auction calendar according to which the government
borrowing takes place. The primary market for corporate bonds is regulated by SEBI. Companies
can issue bonds either through the public offer or private placement process.
The primary market for depository receipts (ADRs/GDRs) is regulated by SEBI. SEBI has laid down
detailed eligibility criteria for Indian companies that desire to issue and list ADRs/GDRs on foreign
stock exchanges. The issue of such depository receipts must comply with the limits on foreign
holding of Indian securities under FEMA regulations.
3.1.2 Functions of the Primary Market
The primary markets serve the following functions:
 Tap larger markets for capital

By involving other investors in raising money for an issuer, the primary market enables tapping a
larger market for its capital requirements. When an Indian company issues a global depository
receipt (GDR) in the Euro markets, it reaches out to institutional and retail investors in those
markets who may find investing in a growing Indian enterprise an attractive proposition. For
raising capital, the primary market enables a company to shift from the known sources of funding
(i.e. from its promoters, interested parties, banks and such close-knit arrangements) to the new
investors who can potentially subscribe to the company’s capital.

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  Fosters Competitive Process

Securities are issued for public subscription at a price that is determined by the demand and supply
conditions in the market. The rate of interest a debt instrument will have to offer and the price at
which an equity share will be purchased are dependent on the pricing mechanisms operating in
the primary market. For example, government securities, which are issued by RBI on behalf of the
government, are priced through an auction process. Banks and institutional investors are the main
buyers of government securities, and they bid the rates they are willing to accept and the final
pricing of the instrument depends on the outcome of the auction. This enables fair pricing of
securities in the primary market.
 Diversify Ownership

As new subscribers of equity capital come in, the stakes of existing shareholders reduce and the
ownership of the business become more broad-based and diversified. As the company expands
and seeks capital from the public, ownership and management gets separated. Since it is not
feasible for thousands of shareholders holding a small proportion of capital each, to be involved
in managing the company, professional managers work in the broad interest of a large group of
diverse shareholders. Publicly held companies also have professional independent directors who
represent the interest of common small shareholders which enhances the governance standards
of the companies. Thus, the primary market facilitates diversification of ownership which in turn
strengthens governance norms.
 Better Disclosures

A business that seeks to raise capital from new investors (who may not be familiar with the history
and working of the enterprise) has to meet higher standards of disclosure and transparency.
Investors need to have adequate, relevant, accurate and verifiable financial and other information
about the business before buying the securities being offered. Thus, the primary market brings
about transparency between the businesses and the investors through means of disclosures by
various firms raising capital.
 Evaluation by Investors

The information provided by the issuer company is evaluated by a large number of prospective
investors. Thus, investor evaluation forms another layer of scrutiny of the operations and
performance of the company, apart from its auditors and regulators. Apart from these groups
(investors, auditors and regulators), the publicly disclosed financial statements, reports,
prospectus and other information are scrutinized and discussed by the analysts, researchers,
activists, and media. Thus, evaluation by various groups helps the investors to make informed
decisions.

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  Exit for Early Investor

Promoters, private and inside investors who subscribed to the initial capital requirements (early
requirements for capital of a business) are able to seek an exit in the primary markets by selling
their stakes fully or partly as required. They invest in early-stage business with the intent to
nurture the business to a level at which public and other investors would be interested. A primary
market offer of securities provides them the opportunity to exit their investments at a profit.
 Liquidity for Securities

When capital is held by a few inside investors, the equity and debt securities held are not liquid,
unless sold in a chunk to another set of interested investors. A primary market issue distributes
the securities to a large number of investors and it is mandatory to list a public issue of securities
in the stock exchange. This opens up the secondary market where the securities can be bought
and sold between investors, without impacting the capital raised and used by the business.
 Regulatory Supervision

Inviting outside investors to subscribe to the capital or buy securities of an issuer comes under a
comprehensive regulatory supervision. The issue process, intermediaries involved, the disclosure
norms, and every step of the primary issue process is subject to regulatory provisions and
supervision. The objective is to protect the interest of investors who contribute capital to a
business which they may not directly control or manage. While there is no assurance of return,
risk, safety or security, regulatory processes are designed to ensure that fair procedures are used
to raise capital in the primary market, adequate and accurate information is provided, and rights
of all parties is well defined, balanced and protected.
3.2 Primary Vs Secondary Markets
Securities are listed on the stock exchange after the public issue, so they can be traded between
investors who may like to buy or sell them. The stock market is also called the secondary market,
because investors purchase and sell securities among themselves, without engaging with the
issuer. While the primary market enables the issuer to raise capital, the secondary market enables
liquidity for securities bought by investors to subscribe to such capital. Secondary markets also
enable new investors to purchase securities from the existing investors, who may like to sell the
securities. Activities in the secondary market do not modify the capital available to the issuer. The
prices of stocks in the secondary market, for the issuer and the peer group as well as the overall
trends in the secondary market, are used as signals in pricing primary market issues.
Primary market issues tend to depend on the cycles in the secondary market. In a bull market
when secondary market activity is high and prices are on a general upswing, the number of primary
issues is also higher, cashing in on the buying interest among investors. Pricing of primary issues

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is also higher and favourable to issuers during such phase. A bear market, when activity in
secondary markets is lower and prices are also low due to lack of buying interest, is a tough time
for primary issues when adequate subscription to new issues of securities is difficult to manage.
3.3 Intermediaries in Primary Market
The different intermediaries that function in the primary market for equity and debt securities
include:
 Merchant bankers – These are entities that provide services connected with the
management of a primary issue of securities. Such services include advising the issuer
regarding the pricing of the issue, preparation of the issue document, application for listing
of securities, advertising the issue, finalizing the allotment and generally managing all
aspects of the issue process. Merchant bankers also act as the underwriters to the issue
i.e. they provide a commitment to subscribe to the issue of securities in the event of failure
of the issue to get full subscription from the public. They receive a commission for
providing such commitment. Their obligations are defined in their agreement.
 Book Running Lead Managers (BRLM) – An issuer may appoint several merchant bankers
for managing a primary issue of securities. One of these merchant bankers is known as the
Book Running Lead Manager (BRLM). The BRLM is specifically responsible for some
activities such as the due diligence of the issuer’s operations, drafting and vetting of the
prospectus and other issue documents, compliance with requirements of SEBI, stock
exchanges and other laws and the marketing of the issue. Key post-issue responsibilities of
the BRLM include finalizing the basis of allotment, managing the money in the escrow
account and coordinating the activities of the other intermediaries such as bankers to the
issue and registrars to the issue.
 Registrar and Transfer Agents (RTA) – Registrars are entities that maintain a record of
applications and money received from investors in a primary issue. They assist the issuer
in determining the basis of allotment of securities. After the allotment is finalized,
registrars are responsible for processing and despatching allotment communications/
letters, refund orders etc. Share Transfer Agents maintain records of holdings of securities.
They handle matters relating to transfer and redemption of securities and act as DPs.
 Bankers to the issue–These are banks that are specifically appointed by the issuer for
managing the sale proceeds of the issue of securities. They are engaged in acceptance of
applications for securities along with application money from investors and also refund of
application money to unsuccessful applicants. They are required to maintain daily records
regarding number of applications and application money received and refunds made.

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  Brokers to the issue–These are stock brokers that are responsible for procuring
subscription to the issue. They serve as the link between prospective investors and the
issuer.
 Depositories and Depository Participants–A depository holds securities in electronic form
and enables processing of securities transactions by means of a book entry. The process of
conversion of physical securities to electronic form is known as dematerialization. The
depository becomes the registered owner of securities that are dematerialized while the
investor remains the beneficial owner. A Depository Participant (DP) is an agent of the
depository through which it interfaces with the investor and provides depository services.
The actual process of dematerialization is undertaken by the DP.
 Debenture Trustees– These are appointed to safeguard interests of debenture holders.
They are required to be appointed before an issue of debt securities. They must exercise
due diligence to ensure that the secured assets are sufficient to discharge claims of
debenture holders. They must ensure calling of a meeting of all debenture holders when it
is required by at least one-tenth of debenture holders or in the event of any default by the
issuer.
 Portfolio Managers–These are entities that advise clients regarding investments or manage
a portfolio of investments on behalf of the client in accordance with an agreement.
Portfolio managers can be categorized as discretionary or non-discretionary.
A discretionary portfolio manager manages the funds of each client in an independent
manner but in accordance with the needs of the client. A non-discretionary portfolio
manager manages the funds in accordance with the directions of the client.
 Primary Dealers – These are entities that are licensed by the RBI to act as underwriters for
securities issued by the RBI on behalf of the government. Primary dealers have an
agreement with the RBI which defines their underwriting obligations. They receive an
underwriting commission in return for their commitment. Primary dealers subscribe to
government securities in auctions announced by the RBI and then resell these securities in
the secondary market.
All these intermediaries (except the primary dealers) must be registered with SEBI to function as
intermediaries. Each intermediary is required to follow the Code of Conduct framed under the
applicable SEBI regulations. Primary dealers are authorized by the RBI to act as such.
3.4 Types of Issues
All primary market issues need not be public issues. A primary issue of securities is made to
promoters when a company is set up and equity shares are issued to them; if bonds are issued to
institutions that lend to a company, that is also a primary issue, but issued privately only to a select

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set of investors. It is common for companies in early stages to issue equity capital to venture
capitalists and private equity investors, who help the business to grow in size and scale. When an
issuer does not choose any specific group of investors, but offers securities inviting anyone
interested in buying the securities of the business, we have a public issue.
Issuance of capital in the primary market can be classified under four broad heads:
a. Public issue: Securities are issued to the members of the public, and anyone eligible to invest
can participate in the issue.

b. Private placement: Securities are issued to a select set of institutional investors and other
eligible investors, who can bid and purchase the securities on offer. This is primarily a
wholesale issue of securities to institutional investors.

c. Preferential issue: Securities are issued to an identified set of investors, on preferential terms,
along with or independent of a public issue or private placement. This may include promoters,
strategic investors, employees and such specified preferential groups.

d. Rights and bonus issues: Securities are issued to existing investors as on a specific cut-off date,
enabling them to buy more securities at a specific price (rights) or get an allotment of
additional shares without any consideration (bonus).

When a public issue is made, it is common to have a portion issued preferentially, or as rights, and
for a portion to be privately placed to institutional investors, before the issue is open for
subscription by retail investors. The investment banker who is responsible for the issue will work
out how much has to be offered to whom and at what prices, within the framework of regulation
and in consultation with the issuing company.

3.5 Types of Issuers

An issuer in the primary market is the entity seeking capital through the issue of securities. The
securities are part of the equity or debt capital of the entity, on its balance sheet. The primary
responsibility to meet obligations associated with the security being issued rests on the issuer. For
example, an issuer of bonds is responsible for paying interest and returning the principal on
maturity; an issuer of equity shares is responsible to pay dividends as and when declared and
notify equity shareholders about resolutions being brought for their approval through voting in
the annual general meeting.
The following is a summary of issuers in the primary markets for securities:

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Issuer Type of Securities Specific Needs and Structures

Central, State and Local Bonds (G-secs)  Do not issue equity capital
Governments Treasury bills  Only Central Government issues T-bills
 Instruments carry government guarantee
Sovereign Gold Bonds
 Issued only in domestic markets in India
(SGB)

Public Sector Units Equity shares  May offer equity held by the
Bonds Government to the public as
disinvestment
 Bonds may have special tax concessions

Private Sector Equity shares  High dependence on securities markets

Companies for raising capital
Preference shares
 May issue equity and debt instruments
Bonds
in international markets
Convertible bonds
Commercial Paper
Securitized paper

Banks, Non-banking Equity shares  Banks have low dependence on

Finance Companies, securities market due to access to public
Preference shares
and Financial deposits
Bonds
Institutions  May offer long-term bonds and
Convertible bonds preference shares as Tier-2 capital
Securitized paper  Issues may have special tax concessions
 May issue in international markets
Commercial paper
Certificates of deposit

Mutual Funds Units  Capital is raised for specifically defined

schemes
 Schemes may be issued for a fixed
tenor (closed-end) or as open ended
schemes
 Issues are only made in domestic
markets

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Issuer Type of Securities Specific Needs and Structures

Investment Trusts Units  Capital is raised for specifically defined

(such as REITs, InvITs) schemes

3.6 Types of Investors

Both retail and institutional investors participate in primary market issues. The debt markets are
dominated by institutional investors; equity markets have a higher level of retail investor
participation. The following are the various categories of investors who buy securities in the
primary markets:
 Association of Persons
 Banks
 Companies
 Limited Liability Partnerships (LLP)
 Financial Institutions
 Mutual Funds
 Insurance companies
 Foreign Portfolio Investors (FPIs)
 Hindu Undivided Family (HUF)
 Minors through Guardians
 Non-Resident Indians (NRI)
 Persons of Indian Origin (PIO)
 Registered societies and clubs
 Resident individuals
 Partnership firms
 Trusts
Individual investors are further categorized based on the amount invested as:
 Retail Individual Investors who invest not more than Rs.2 lakhs in a single issue and;
 Non-Institutional Buyers (NIBs) who invest more than Rs. 2 lakhs in a single issue.
The other category of investors is the institutional investors and is also known as Qualified
Institutional Buyers (QIBs). In case of institutional investors, an internal approval for making
investment is required by their respective governing bodies. Specifically identified personnel of
institutional investors may be authorized to transact in the primary markets to buy securities on
behalf of the institutional investors.

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The foreign investors may use foreign currency to buy securities, but their purchase and sale is
subject to the foreign exchange rules and regulations in force.
Some securities may be available only to specific categories of investors. The information about
who can purchase securities being offered is provided in the offer document.
3.7 Regulatory Framework for Primary Markets
The primary markets are regulated by the Companies Act, 2013, Securities Contracts (Regulation)
Act, 1956, SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, the Government
Securities Act, 2006 and the Government Securities Regulations, 2007.
The Companies Act provides detailed guidelines on raising capital through issue of securities by a
company.
Government securities are issued by RBI on behalf of the government and are subsequently listed
on stock exchanges. The primary issue of government securities does not come under the
regulatory purview of SEBI, but is governed by the Government Securities Act, 2006 and the
Government Securities Regulations, 2007. Instruments such as certificates of deposit and
commercial paper are money market securities, whose issuance is also governed by RBI.
The provisions of these aforementioned Acts and Regulations regulate the following with respect
to public issues:
 Eligibility to make public issue
 Information to be provided to the public and regulators
 Reservation for different categories of investors
 Methods of making the offer to investors
 Timelines for the public issue process
 Usage of funds raised in issues
 Continued involvement and accountability of promoters and other inside investors
 Provision for investors to continuously evaluate the investment and execute investment
and exit decisions.
Regulatory framework for the types of Issuers
a. The business enterprise seeking capital cannot be a sole proprietorship, partnership or
association of persons. It has to have a legal structure approved by law as suitable for raising
money from the members of the public.
b. A business enterprise seeking equity capital has to structure itself as a limited company. This
requires registration with the Ministry of Corporate Affairs and compliance with requirements
of the Indian Companies Act.

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c. Banks, financial institutions and non-banking finance companies (NBFCs) who raise money
from the public through deposits have to be approved by the RBI and permitted to borrow in
the securities markets.
d. Companies, governments, municipalities, government organisations and other entities issuing
bonds, debentures and any other instrument evidencing a borrowing, will have to comply with
the relevant regulation that governs them.
e. Mutual funds have to be registered with SEBI to be able to raise unit capital from the public.
Types of Instruments
All securities issued to the public will have to be structured as securities, as defined under the
Securities Contracts (Regulation) Act (SCRA), 1956 or deposits as defined by the Banking
Regulation Act, 1949 or the Companies (Acceptance of Deposits) Rules, 1975. The definition of
securities under section 2(h) of the SCRA is detailed out in Chapter 1, section 1.2 of this workbook.
3.7.1 Regulations pertaining to Public Issue of Shares
Eligibility
1. An issuer may make an initial public offer only if it has:
 Net tangible assets of at least Rs. 3 crores, calculated on a restated and consolidated
basis, in each of the preceding three full years (of 12 months each) of which not more
than 50 percent are held in monetary assets. Provided that if more than 50 percent of
the net tangible assets are held in monetary assets, the issuer has utilised or made firm
commitment to utilise such excess monetary assets in its business or project. Provided
further that the limit of 50 percent on monetary assets shall not be applicable in case
the initial public offer is made entirely through an offer for sale.
 An average operating profit of atleast Rs. 15 crores, calculated on a restated and
consolidated basis, during the preceding 3 years (of 12 months each) with operating
profit in each of these preceding 3 years.
 A net worth of at least Rs. 1 crore in each of the preceding 3 full years (of 12 months
each), calculated on a restated and consolidated basis.
 Changed its name within the last 1 year, at least 50 percent of the revenue, calculated
on a restated and consolidated basis, for the preceding 1 full year has been earned by
it from the activity indicated by its new name.
2. An issuer not satisfying the conditions stipulated in (1) above shall be eligible to make an
initial public offer only if the issue is made through the book-building process and the issuer
undertakes to allot, at least 75 percent of the net offer to the qualified institutional buyers
(QIB) and to refund the full subscription money if it fails to do so.

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 3. If an issuer has issued SR equity shares to its promoters/founders, the issuer shall be
allowed to make an initial public offer of only ordinary shares for listing on the Main Board
subject to compliance with provisions and clauses as per SEBI (ICDR) Regulations, 2018.1617
Promoters’ Contribution
SEBI’s regulations ensure the continued participation of the promoters in a company by requiring
a minimum contribution by promoters in all public issues of shares.
In an initial public offer, the promoters’ contribution shall be not less than 20 percent of the post-
issue capital of the company. In case the post-issue shareholding by the promoters is less than 20
percent then the alternative investment funds or foreign venture capital investors or scheduled
commercial banks or public financial institutions or insurance companies registered with IRDAI or
any non-individual public shareholder holding at least 5 percent of the post issue capital or any
entity (individual or non-individual) forming part of promoter group other than promoters may
contribute for meeting the shortfall in minimum contribution specified for the promoters, subject
to a maximum of 10 percent of the post-issue capital without being identified as promoter(s).18
Further, that the requirement of minimum promoters’ contribution shall not apply in case an
issuer does not have any identifiable promoter.
The promoter shall contribute either by way of equity shares, including SR equity shares held, if
any, or by way of subscription to convertible securities. The minimum promoters’ contribution
including contribution made by the alternative investment funds or foreign venture capital
investors or scheduled commercial banks or public financial institutions or insurance companies
registered with IRDAI or any non-individual public shareholder holding at least 5 percent of the
post issue capital or any entity (individual or non-individual) forming part of promoter group other
than promoters will be locked-in for a period of 18 months from the date of allotment in the IPO.
In case the majority of the issue proceeds (excluding the portion of offer for sale) is proposed to
be utilized for capital expenditure, then the same will be locked in for a period of 3 years from the
date of allotment in the IPO.
Promoters’ holding in excess of the minimum promoters’ contribution will be locked-in for a
period of 6 months from the date of allotment in the IPO. In case the majority of the issue proceeds

16
SEBI (ICDR) Regulations, 2018 vide its third amendment dated July 29, 2019 has introduced the criteria for issuers
who had issued SR equity shares before making an IPO. SR equity share means the equity share of an issuer having
superior voting rights compared to all other equity shares issued by that issuer.
17
SEBI (ICDR) Regulations, 2018 defines main board as a recognized stock exchange having nationwide trading
terminals, other than SME exchange.
18
Vide SEBI (ICDR) (Amendment) Regulations, 2024 w.e.f. May 18, 2024.

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(excluding portion of offer for sale) is proposed to be utilised for capital expenditure, the lock-in
period will be 1 year from the IPO allotment date. 1920
Minimum Offer to Public
A company coming out with a public issue must make a net offer to the public of:
a) At least 25 percent of each class or kind of equity shares or debenture convertible into equity
shares issued by the company, if the post-issue capital of the company calculated at offer price
is less than or equal to Rs.1,600 crore.
b) At least such percentage of each class or kind of equity shares or debentures convertible into
equity shares issued by the company equivalent to the value of Rs.400 crore, if the post issue
capital of the company calculated at offer price is more Rs.1,600 crore but less than or equal
to Rs.4,000 crore.
c) At least 10 percent of each class or kind of equity shares or debentures convertible into equity
shares issued by the company, if the post issue capital of the company calculated at offer price
is above Rs.4,000 crore but less than or equal to Rs. 1 lakh crore.21
Provided that the company referred to in (b) or (c) above shall increase its public shareholding
to at least 25 percent within a period of 3 years from the date of listing of the securities as
specified by SEBI.
Also, the company who has issued equity shares having superior voting rights to its promoters
or founders and is seeking listing of its ordinary shares for offering to the public shall
mandatorily list its equity shares having superior voting rights at the same recognized stock
exchange along with the ordinary shares being offered to the public.22
Period of Subscription
(a) A public issue will be open for a minimum of 3 working days and a maximum of 10 working
days.
(b) In case of a revision in the price band, the issuer shall extend the bidding (issue) period
disclosed in the red herring prospectus, for a minimum period of 3 working days, subject
to the maximum limit stated in (a) above.

19
Vide SEBI (ICDR) (Third Amendment) Regulations, 2021, w.e.f August 13, 2021.
20
Capital expenditure includes civil work, miscellaneous fixed assets, purchase of land, building and plant and
machinery, etc.
21
Vide Securities Contracts (Regulation) (Amendment) Rules, 2021, w.e.f. June 18, 2021.
22
The provision was introduced to the Securities Contracts (Regulation) Rules, 1957 vide amendment dated March
19, 2020.

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 (c) In case of force majeure, banking strike or similar unforeseen circumstances, the issuer
may, for reasons to be recorded in writing, extend the bidding (issue) period disclosed in
the red herring prospectus (in case of a book built issue) or the issue period disclosed in
the prospectus (in case of a fixed price issue), for a minimum period of 1 working day,
subject to the maximum limit stated in (a) above.23
Underwriting
SEBI’s regulations on public issues and the Companies Act require that an issue should receive
subscription of a minimum of 90 percent of the net offer to the public, failing which the company
has to refund the entire subscription amount received to the applicants not later than 4 days from
the closure of the issue.24 To protect against this, Companies enter into an underwriting
agreement with institutions prior to filling of the prospectus for public offer of shares to subscribe
to the shares of the company if they remain unsubscribed by the investors. For undertaking this
commitment, the underwriters are paid a commission.

Underwriting for a fixed price issue is discretionary. Any issuer making an IPO, other than through
the book-building process, if desires to have its issue underwritten, should appoint SEBI registered
Merchant Bankers or Stock Brokers to act as underwriters. However, in the case of a book built
issue, underwriting is mandatory by the lead managers and syndicate members. Under book-built
issue, the issuer is required to allot at least 75 percent of the net offer to Qualified Institutional
Buyers (QIB) to meet the eligibility criteria; however, such QIB portion cannot be underwritten.25
Dematerialization of Shares
SEBI’s regulations require a company making a public issue of shares to enter into an agreement
with all the depositories to dematerialize its shares.
Grading of IPO
Companies making a public offer of shares may get the IPO graded by one or more credit rating
agency registered with SEBI. The grading is done based on the prospects of the industry, the
competitive strength of the company and risks in the business. The grade assigned based on the
evaluation is an assessment of the fundamentals of the issuer and is not a commentary on the
issue price or a recommendation to subscribe to the issue. The grade ranges from 1 to 5, with 5
indicating strong fundamentals and 1 poor fundamental. A company graded by multiple agencies
has to publish all the grading it has received.
3.8 Types of Public Issue of Equity Shares
Public issue of equity shares can be categorized as follows:
 Initial Public Offer (IPO)

23
Vide SEBI (ICDR) (Amendment) Regulations, 2024 w.e.f. May 18, 2024.
24
Vide SEBI (ICDR) (Amendment) Regulations, 2022 w.e.f. January 14, 2022.
25
Vide SEBI (ICDR) (Second Amendment) Regulations, 2023 w.e.f. May 23, 2023.

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 o Fresh Issue
o Offer for Sale (OFS)
 Further Public Offer (FPO)
3.8.1 Initial Public Offer (IPO)
The first public offer of shares made by a company is called an Initial Public Offer (IPO). When a
company makes an IPO the shares of the company become widely held and there is a change in
the shareholding pattern. The shares which were initially held by promoters are now held by the
retail investors and institutions. An IPO can be in the form of (a) fresh issue of shares by the
company or it can be (b) an offer for sale to the public by any of the existing shareholders, such as
the promoters or financial institutions.
a. Fresh Issue of Shares

In case of fresh issue of shares, new shares are issued by the company to public investors. This
results in an increase in issued share capital of the company. The percentage holding of existing
shareholders in the expanded capital base of the company will come down due to the issuance of
new shares.
b. Offer for Sale (OFS)

Existing shareholders such as promoters or financial institutions offer a part of their holdings to
the public investors. The share capital of the company does not change since the company is not
issuing new shares. The proceeds from the IPO go to the existing shareholders who sell their stake
or shares and not to the company. The holding of such existing shareholders in the share capital
of the company will reduce.
Example
A company has issued 1000 shares of a face value of Rs. 10 each. The shares are equally held by
the two promoters X and Y.
A. The company decides to make a fresh issue of 500 shares.
B. The company decides to offer 250 shares of each promoter to the public.
The fresh issue of shares in the IPO (A) will result in the following post-IPO situation:
 The issued capital of the company will now be 1500 shares with a face value of Rs. 10 each.
 Promoters X and Y continue to hold 500 shares each. The percentage holding of each of the
promoters in the share capital of the company will change from 50 percent (500 shares out of
1000 shares issued by the company) to 33.33 percent (500 shares out of 1500 shares issued by
the company).
 The money raised in the IPO will go to the company and the share capital of the company will
increase.
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The offer for sale in the IPO (B) will result in the following post-IPO situation:
 The capital of the company will remain at Rs.10,000 of 1000 shares with a face value of Rs.10
each.
 The holding of the promoters will decrease to 250 shares each from 500 shares each pre-issue.
They now hold 25 percent each of the share capital; 50 percent is held by the public.
 The money raised in the IPO will go to the promoters who have sold the shares and not to the
company.
The disinvestment of shares by the government in PSUs is an example of an offer for sale. The
government offers a portion of its shares to the public in an IPO. The proceeds collected go the
government which is selling the shares and not to the company. There will be no change in the
share capital of the company. However, there will be a change in the list of shareholders as new
investors buy the shares and a reduction in the government’s holding in the company.
An IPO may also be a combination of an offer for sale and a fresh issue of shares by the issuing
company.
3.8.2 Further Public Offer
A further public offer is made by an issuer that has already made an IPO in the past and now makes
a further issue of securities to the public.
An issuer may make a further public offer if it has not changed its name within the last 1 year
immediately preceding the date of filing the offer document.26 In the case of a change in the name
in the last 1 year at least 50 percent of the revenue for the preceding 1 full year should have been
earned by it from the activity indicated by the new name.
If it does not satisfy the above condition, then it may make a further public offer only if the issue
is made through the book-building process and the issuer undertakes to allot at least 75 percent
of the net offer to the qualified institutional buyers and to refund full subscription money if it fails
to make the said minimum allotment to qualified institutional buyers.
When a company wants additional capital for growth or to redo its capital structure by retiring
debt, it raises equity capital through a fresh issue of capital in a further public offer. A further
public offer may also be through an offer for sale. This usually happens when it is necessary to
increase the public shareholding to meet the requirements laid down in the listing agreement
between the company and the stock exchange; or promoters may dilute their holdings in the
company after the lock-in imposed at the time of the IPO is over.

26
Vide SEBI (ICDR) (Amendment) Regulations, 2022 w.e.f. January 14, 2022.

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3.9 Pricing a Public Issue of Shares
SEBI regulations allow an issuer to decide the price at which the shares will be allotted to investors
in a public issue. This can either be fixed by the issuer in consultation with the managers of the
issue or it can be determined by a process of bidding by investors. Based on the method used to
determine the price, a public issue can be categorized as:
 Fixed Price Issue
 Book Built Issue
3.9.1 Fixed Price Issue
In a fixed price issue of shares to the public, the company in consultation with the lead manager
(who is the merchant banker in-charge of the issue) would decide on the price at which the shares
will be issued. The company justifies the price based on the expected performance of the company
and consequent increase in the share price. This information is made available to the investors
when the issue is announced so that investors know the price at which the shares will be allotted
to them at the time of making the application.
3.9.2 Book Built Issue
The objective of a book building process is to identify the price that the market is willing to pay for
the securities being issued by the company. The company and its issue managers will specify either
a floor price or a price band within which investors can bid. When the issue opens, investors will
put in bid applications specifying the price and the number of securities (or total amount) bid at
that price. The price bid should be above the floor price or within the price band, as applicable.
Retail investors can revise the bids in the period when the issue is open. The issuer, in consultation
with the book running lead manager will decide on the cut-off price which is the price at which the
issue gets subscribed. All allottees who bid at or above the cut-off price are successful bidders
and are eligible for allotment in the respective categories.
For example, a company wants to issue 5000 shares through a book built offer within a price band
of Rs 120 to Rs 144. Bids are received as follows:
Sl. No. Price No. of Shares Total Demand

1. Rs. 144 1000 1000

2. Rs. 140 1500 2500

3. Rs. 135 2500 5000

4. Rs. 130 1000 6000

5. Rs. 120 500 6500

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The offer is filled up at the cut-off price of Rs. 135. All investors who bid at this price and higher
are eligible for allotment in their respective categories. The company may decide the cut-off price
at a price lower than the price at which the issue is subscribed for the benefit of the investors.
Book built issues may also have a clause which allows allotment to retail investors at a price that
is at a discount to the cut off price which cannot however exceed 10 percent of the price at which
shares are allotted to the other category of investors.
In a book built offer, where the issuer fulfills the eligibility criteria regarding net tangible assets,
average operating profit, networth etc. the allocation pattern in the net offer shall be as follows:
 not less than 35 percent to the retail individual investors,
 not less than 15 percent to non-institutional investors and
 not more than 50 percent to the QIBs of which 5 percent shall be reserved for mutual
funds.
However, in a book-built offer, where an issuer does not satisfy the criteria regarding net tangible
assets, net worth and profitability track record, the allocation pattern shall be as follows:
 not more than 10 percent to the retail individual investors,
 not more than 15 percent to non-institutional investors and
 not less than 75 percent to the QIBs of which 5 percent shall be reserved for mutual funds.
In a book-built issue, the allocation in the non-institutional investors' category shall be as follows:27
 one -third of the portion available to non-institutional investors shall be reserved for
applicants applying for amounts more than Rs. 2 lakhs and up to Rs. 10 lakhs; and

 the remaining, i.e., two-thirds of the portion shall be reserved for applicants with
application size of more than Rs. 10 lakhs.

For issue made other than through book-built offer, following shall be the allocation pattern in the
net offer:
 minimum 50 percent to retail individual investors and
 remaining to (i) individual applicants other than retail individual investors and (ii) other investors
including corporate bodies or institutions, irrespective of the number of specified securities applied
for.

27
Vide SEBI (ICDR) (Amendment) Regulations, 2022 w.e.f. April 1, 2022.

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3.10 Public Issue Process of Equities
A company making an initial issue of shares has to go through certain internal and external steps.
Internally, the company needs to get the approval of the board of directors and the existing
shareholders for the issue. The company then must appoint a lead manager of the issue to be in
charge of the issue process. The lead managers are also known as investment bankers, merchant
bankers or issue managers. They are involved in every aspect of the issue from the pre-issue period
till the issue is listed and all regulatory compliances are completed. Large issues may have more
than one lead manager. They appoint all other constituents in consultation with the issuer and
oversee their activities.
The following are the steps in making a public issue:
 The company (issuer) passes a board resolution and shareholders resolution for the issue of
shares and related activities.
 The issuer appoints the lead manager who will manage the regulatory and operational aspects
of the public offer of shares.
 The lead manager in consultation with the issuer appoints R&T agents, bankers, brokers and
underwriters to the issue. The pricing of the issue is decided between the issuer and the lead
manager.
 In-principle approval of the stock exchange where the shares are proposed to be listed is
obtained.
 The IPO may be graded by an approved credit rating agency.
 The issuer in consultation with the lead manager enters into agreements with depositories for
the admission of the securities in both the depositories.
 The draft prospectus is filed with SEBI.
 Changes, if any, to the prospectus as suggested by SEBI has to be made and the prospectus has
to be filed with the Registrar of Companies.
 The lead manager signs the due diligence that all the regulatory requirements are complied
with.
 Marketing activities such as advertisements, analysts and broker meetings are conducted to
promote the issue.
 The issuer publishes advertisements in national papers as required by regulations.
 The printing and dispatch of prospectus and application forms and other issue material is
arranged. Every application form has to be accompanied by an abridged prospectus.
 During the period the issue is open to the public for bidding, the applicants may approach the
stock brokers of the stock exchange/s through which the securities are offered under on-line
system, self-certified syndicate bank(s), registrar and share transfer agents or depository
participants, as the case may be, to place their bids.

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 Every stock broker, self-certified syndicate bank, registrar and share transfer agent and
depository participant shall accept bids using only applications supported by blocked amount
(ASBA) facility.28 Retail investors also have the facility to use UPI in ASBA for applying in a public
issue.
 Once the issue opens, the collection banks and R&T agents collect and reconcile the forms
received on a daily basis and give a final collection certificate.
 In case of a book built offer the bids are collated and the cut-off price is determined.
 The basis of allotment is finalised in consultation with the stock exchange.
 Shares are credited to the depository account of successful allottees and amounts are
unblocked where the applications are rejected.
 The shares are listed on the stock exchange and trading commences in the shares.
3.10.1 Constituents in a Public Issue
A public issue of shares by a company involves detailed activity, co-ordination and compliance
with regulatory requirements. The issuer appoints the lead manager to the issue who is primarily
responsible for the issue process. The lead manager appoints other entities who are assigned the
responsibility of marketing of the issue and distribution of application forms, collection of funds
and application, collating details for price discovery and allotment and collecting and providing
information to the issuer and regulators. These entities, called constituents or intermediaries,
include the registrar and transfer agents, bankers and brokers to the issue. The role and
responsibility of each constituent is laid out by SEBI. All constituents who are involved with an
issue have to be registered with SEBI under the relevant regulations.
Registrar and Transfer Agents
The Registrar and Transfer Agents (RTA) are appointed by the lead manager to the issue in
consultation with the issuer.
Pre-issue work of the RTA includes work related to designing of application forms and other issue
material and finalization of the procedure to be followed during the issue for bidding, collection
and reporting of numbers and information. Issue work includes collecting and reporting
information on the daily collections/bid information to the lead manager, providing statutory
reports, collating bid information to identify cut-off price in a book built offer and reconciling funds
and applications received.

28
Investors can apply for any public issue only through ASBA (Application Supported by Blocked Amount) facility. ASBA
means an application for subscribing to a public issue or rights issue, along with an authorisation to self-certified
syndicate bank to block the application money in a bank account. “Self-certified syndicate bank” means a banker to
an issue registered with the Board, which offers the facility of ASBA. SEBI has mandated the ASBA facility for all public
issues.

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Post-issue work includes scrutinizing the application forms and rejecting those that are incomplete
or incorrect, finalizing the basis of allotment if the issue is oversubscribed in consultation with the
lead manager, issuer and stock exchange, make allotments and send rejection communications,
and provide all statutory information to the regulators.
Bankers to the Issue
The bankers to the issue are appointed by the lead managers to manage the collection of funds in
the issue. The bankers to an issue must have collection branches in the mandatory centers as
specified by the regulations. They are responsible for giving updates on the collection figures to
the managers of the issue based on which the decision to close the issue will be taken.
Brokers to the Issue/Syndicate Members
Brokers to the issue are appointed to facilitate the collections of application forms and bids. They
are members of stock exchanges. They are responsible for collecting the bid/application forms and
ensure that it is accompanied by an authorisation to block the application money in a bank
account. They are paid a commission for their role depending upon their collection.
Underwriters
The issuers enter into an underwriting agreement with institutions at the time of a public offer of
shares to subscribe to the shares of the company if they remain unsubscribed by the investors. For
undertaking this commitment, the underwriters are paid a commission.
Underwriting for a fixed price issue is discretionary. However, in the case of a book-built issue
underwriting is mandatory. For an issue that is underwritten, SEBI’s minimum subscription
requirement is 90 percent of the net public offer including the subscription by the underwriters.
Stock brokers and merchant bankers perform the function of underwriting.
3.11 Prospectus
The prospectus is a document, which contains all the information relevant to an investor to make
an investment in a fixed price public issue of shares. The content and format of the prospectus is
prescribed by SEBI and the Companies Act. The prospectus shall have the following information:
 Details of the issuer including information on the company, promoters, board of directors, key
employees, industry and business overview.
 Objective of the public issue.
 Details of the issue such as opening and closing dates, information on the lead manager, RTA
and bankers to the issue, listing details.
 Terms of the public issue including details of the shares offered, method of offering, procedure
for application, allotment and refund procedures.
 Financial statements, capital structure and accounting policies of the company.

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 Regulatory and statutory disclosure to provide all information of interest to a shareholder.
 Risk factors specific to the company and industry and generic to the type of issue.
A company making a public issue of shares files a draft prospectus with SEBI through the lead
manager of the issue. SEBI may require clarifications or changes to be made to the draft
prospectus.
Red Herring Prospectus

This is the document of information made according to SEBI guidelines for a public issue of shares
made through a book building exercise. The upper and lower band of the price and the number of
shares may be disclosed or the issue size may be mentioned. This is because the price at which the
shares are being issued will be determined based on the bids received in a book-building offer
which will be known only after the issue closes.
A preliminary red herring prospectus is filed with SEBI before the issue opens and the observations
made by SEBI, if any, are incorporated into it. Once the price is discovered, it is included in the
offer document along with the number of shares if not already mentioned and the prospectus
signed and dated is filed with the regulator.
A draft offer document filed with SEBI may be rejected if:
 the promoter’s contribution is not in compliance with the regulations,
 the document does not clearly lay out the usage of the issue proceeds or if does not result
in the creation of tangible assets for the company,
 the business model is misleading,
 there are inconsistencies in the financial statements or
 there are litigation issues which may put the business at risk.
Information provided in the prospectus has to be updated on an annual basis by the issuer and
made available to the public.
3.12 Applying to a Public Issue
The prospectus or offer document lays down the process of applying to a public issue of securities.
Information about a forthcoming public issue is typically available from the mandatory
advertisements that the company issues and from the coverage that IPOs get in the press. The soft
copies of the offer document are available on the SEBI website and on the websites of the lead
manager to the issue.
A public issue is open for subscription during a limited period as notified by the company. The date
on which the issue will open for subscription and the earliest closing date are mentioned in the
announcements about the issue. Investors have to make their application during this period. The

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application forms are available with the brokers and syndicate members and with collection banks
appointed as constituents to the issue.
The NSE and the BSE provide an online bidding system for the book building process for IPOs. It is
a screen-based system in which investors enter the bids through the trading terminals of broker-
members. This is a lower cost option for reaching out to a large number of investors electronically.
This segment is called the IPO market and is operated from 10 a.m. to 5 p.m. during the IPO period.
The lead manager can seek an extension of bidding time on the closing date.
From the year 2013, all public issues are provided with the e-IPO facility under which investors bid
for IPOs using the electronic trading facility of any broker of the exchange, whether or not the
broker is appointed as such for the issue.
The price band is announced at least 2 working days before the issue opens. This enables the
investors to evaluate the issue and decide the price that they are willing to bid for.
In a book-built offer, investors must place bids for the minimum bid lot specified by the issuer so
that the minimum application value adheres to the SEBI prescribed range of Rs.10,000 to Rs.
15,000. Investors can either specify the bidding price or they may choose to bid at the cut-off.
Bidding at the cut-off implies that the price they would accept is the price determined by the
bidding process. Since all applications which bid at this price and higher price will be successful,
bidding at the cut-off ensures that the investor’s application is always accepted.
Investors who bid a price can revise/modify their bid at any time (before the issue closing date)
using the revision form attached to the application form or by using the online modification
facility.
Payment for applications made in a public issue must be made using the ASBA (application
supported by blocked amount) facility. ASBA is an application for subscription to an issue
containing an authorization to the investors’ bank to block the application money in the bank
account and releasing the funds only on allotment. All the investors applying in a public issue use
only Application Supported by Blocked Amount (ASBA) facility for making payment, hence upon
finalisation of allotment, funds are debited or unblocked from the investors’ bank account as the
case may be. ASBA applications are submitted to the Self-Certified Syndicate Bank with which the
investor holds their bank account.
SEBI as a part of its continuing efforts to streamline the public issue process, has introduced the
use of Unified Payment Interface (UPI) as a payment mechanism with Application Supported by
Blocked Amount (ASBA) for applications in public issues by retail individual investors through
intermediaries (Syndicate members, Registered Stock Brokers, Registrar and Transfer agent and
Depository Participants) in a phased manner from January 1, 2019. SEBI further notified a circular
stating that all individual investors applying in public issues where the application amount is upto

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Rs. 5 lakhs should use UPI, effective from May 1, 2022.29 Banks and UPI apps are now required to
send SMS alerts to investors for blocking and unblocking of application amounts.

SEBI has also introduced additional channels for making subscription and/or paying call money in
respect of partly paid specified securities through SCSBs and intermediaries. Such additional
channels are:30
 Online ASBA: This facility can be availed through an online portal of SCSB. The SCSB will
send the application to the RTA and block funds in shareholders account.
 Physical ASBA: This can be availed physically at a SCSB branch. The SCSB will send the
application to the RTA and block funds in shareholders account.
 Additional Online mode: This mode is availed through the linked online trading-demat-
bank account provided by some brokers.
Once the issue closes, the cut-off price is determined based on the bids received. All investors who
bid at the cut-off price or higher are successful bidders and receive allotment at the cut-off price.
The blocked application amount is released for investors who bid lower than the cut-off price.
The issue may be over-subscribed, which means that the bids made at the cut-off price and higher
were for a higher number of shares than what was offered. In an over-subscribed issue, the shares
will be allotted to an investor on a proportionate basis. There will be a refund made to the extent
that the shares allotted are lesser than the shares applied for. If subscriptions are lower than the
offered number of shares, it is undersubscribed and all investors who have applied at or above the
cut-off price will receive allotments. The issuer credits the shares to the beneficiary demat account
of the successful applicants.
3.12.1 Basis of Allotment
Basis of allotment is the process of deciding the number of shares that each investor is entitled to
be allotted. If the number of shares that have been subscribed for is equal to or less than the
number of shares offered by the company, then each investor will get the same number of shares
he applied for. If the issue is over-subscribed, then the number of shares allotted to each investor
will be in proportion to the oversubscription.
Once the issue closes, the applications are collated under various categories such as retail
investors, HNIs, QIBs and firms for the purpose of allotment. The number of shares applied for is
compared with the shares reserved for each category and the oversubscription ratio is calculated
as the ratio of number of shares on offer to number of shares applied for. This ratio is applied to
each application, under each category to determine the shares to be allotted. The basis of

29
SEBI Circular No.: SEBI/HO/CFD/DIL2/CIR/P/2022/45 dated April 5, 2022 on Revision of UPI limits in public issue of
equity shares and convertibles.
30
SEBI Circular No.: SEBI/HO/CFD/DIL1/CIR/238/2020 dated December 8, 2020 regarding availability of additional
payment mechanism.

99
allotment is then approved by the board of directors of the company and published in national
newspapers.
Assume that the retail portion of an issue was over-subscribed 1.52 times. The successful bids will
be categorized on the basis of number of shares applied for, to arrive at the allotment. The
oversubscription ratio will be applied to each category as follows:

Category Applications Total no. of No. of shares Total No. of

shares applied allotted Shares allotted
(No. of shares
for (Category/1.52)
bid for)

20 100 2000 13 1300

30 150 4500 20 3000

40 200 8000 26 5200

50 160 8000 33 5280

Investors who bid for 20 shares will be allotted 13 shares and will receive a refund for 7 shares and
so on for each category of bidders. The basis of allotment for each category of investors in the
public issue, such as retail investors and non-institutional buyers will be done separately since the
over-subscription in each investor category is likely to be different. The minimum allotment will
be the minimum application size as disclosed by the issuer.
3.12.2 Green Shoe Option
The Green Shoe Option (GSO) in a public offer is used by companies to provide stability to price of
the share in the secondary market immediately on listing. A company, which opts for Green Shoe
option can allot additional shares not exceeding 15 percent of the issue size, to the general public
who have subscribed to the issue. The proceeds from this additional allotment will be kept in a
separate bank account and used to buy shares in the secondary markets once the shares are listed,
in case the price falls below the issue price. This is expected to provide support to the price of the
shares. This price stabilization activity will be done by an entity appointed for this purpose. Usually,
the lead manager of the issue will be assigned the responsibility. The intervention in the secondary
market will be done only for a period of 30 days from the day of listing.

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3.13 Listing of Shares
A company making a public issue of shares has to arrange for the shares to be listed on a stock
exchange after allotment. To get the shares listed, the company must enter into a listing
agreement with the stock exchange, pay listing fees and agree to abide by the rules regarding
notification and disclosure of price sensitive information, investor services and corporate
governance, among others.
Once the shares are listed, they are available for trading by investors on the stock exchange using
the trading and settlement mechanism provided by the exchange. Listing a share brings liquidity
to the investment made by the investor and enables discovery of the fair price of the share based
on the company’s performance.
The price in the stock market may be above or below the issue price in the IPO.

Company Issue Price (Rs.) Current Price (Rs.) Gain/Loss

ABC Infra 15 44.90 199.33%

XYZ Retail 10 16.60 66%

MNP Microfinance 985 565.80 -42.56%

DEF Restaurants 150 157 4.67%

3.14 Rights Issue of Shares

Whenever a company makes a fresh issue of shares, it has an impact on the existing shareholders
since their proportionate holding in the share capital of the company gets diluted. For example, a
company may have 10 lakhs shares of Rs.10 each, amounting to an issued and paid-up capital of
Rs. 1 crore. If it issues another 10 lakhs shares, to increase its capital, the proportion held by
existing shareholders will come down by half, as the issued and paid-up capital has doubled. This
is called as dilution of holdings. To prevent this, the Companies Act requires that a company which
wants to raise more capital through an issue of shares must first offer them to the existing
shareholders. Such an offer of shares is called a rights issue.
The rights shares are offered to the existing shareholders in a proportion as approved by the board
of a company. For example, the company may choose to issue rights at 1 for 1, to double its capital.
This means each existing shareholders will get one equity share for every one equity share that
they already hold. The issued and paid-up capital will double, but proportionate holdings will not
change. Ratio of rights issues need not always be one. They can be 1:2, 2:3, 2:5 and so on,
depending on the decision of the board of the company.

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A rights issue of shares must follow all SEBI regulations on issue of shares. A listed company making
a rights issue shall fix a record date to determine the eligibility to the rights. The company must
issue a letter of offer giving details of the issue including the purpose for which funds are being
raised. The draft letter of offer must be filed with SEBI. An abridged letter of offer must be
dispatched to all investors at stipulated time before the issue opens. Investors can also apply on a
plain paper if they do not receive the application form. The rights issue is kept open for a period
not less than 7 days and not exceeding 30 days during which investors can subscribe to the
shares.31 The rights entitlements are credited to the demat account of the investor.

Rights Issue process has undergone significant changes. Payments of all applications in a rights
issue have to be through Applications Supported by Blocked Amount (ASBA) facility only. Also,
email delivery of entitlement form and offer document is permitted which makes it convenient for
investors who have registered their email ID with Depository Participants (DP) or Registrar and
Transfer Agents (RTA) to receive it electronically.
Investors can also choose to decline the offer or sell their entitlement to another. This is called
renouncing the rights. Rights entitlements are traded on the stock exchange during the period.
The entitlement will be traded distinct from the equity share of the company. The trading in the
entitlement will cease before the period of the rights issue ends, which gives the investors who
bought the entitlement the time to apply for the shares.32
3.15 Regulatory requirements for a Public Issue of Debt Securities
A company can make a public issue of debt securities, such as debentures by making an offer
through a prospectus. The issue of debt securities is regulated by the provisions of the Companies
Act and SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (SEBI (NCS)
Regulations).33 The company will appoint a lead manager who will ensure compliance with all the
regulatory requirements for the issue.
Eligibility
A public issue of debt securities is possible by a company registered as a public limited company
under the Companies Act, 2013. An unlisted company, in other words a company that has not
made an initial public offer of its shares, can make a public issue of debentures and list them on a
stock exchange. Issuer as per the SEBI (NCS) Regulations means any company, public sector
undertaking or statutory corporation or Trusts registered with SEBI as Real Estate Investment

31
Vide SEBI (ICDR) (Amendment) Regulations, 2022 w.e.f. January 14, 2022
32
SEBI Circular No.: SEBI/HO/CFD/DIL2/CIR/P/2020/13 dated January 22, 2020 on Streamlining the process of Rights
Issue.
33
SEBI notified the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 in August 9, 2021 pursuant
to merger and repeal of earlier regulations namely, SEBI (Issue and Listing of Debt Securities) Regulations, 2008 and
SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013.

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Trusts (REIT) or Infrastructure Investment Trusts (InvIT) which are authorized to issue and seek to
list non-convertible securities and/or commercial papers on any recognized stock exchange(s).
Offer Document
A company making a public issue of debt securities must file a draft offer document with the stock
exchanges where the issue is proposed to be listed through its lead managers. The offer document
contains all the material information necessary for the investor to evaluate the offer. The
document will be available for public comments for a stipulated time period after which the final
offer document will be filed with the Registrar of Companies (RoC). Prior to filing the final offer
document with RoC, the lead manager is required to furnish a due diligence certificate to SEBI. The
final offer document will be available for download from the websites of the stock exchange, issuer
and lead manager prior to the issue opening.
Shelf Prospectus
Eligible entities are permitted to file a shelf prospectus with the Registrar of Companies for public
issuance of their debt securities and make multiple issues under this document through tranche
prospectus. Eligible entities include Public Financial Institutions, scheduled banks, entities allowed
by the Central Board of Direct Taxes (CBDT) to issue tax free secured bonds, Infrastructure Debt
Funds, listed entities, Non-Banking Finance Companies (NBFCs) and Housing Finance Companies
meeting requirements on networth, profitability and credit rating etc. The issuer, who has filed a
shelf prospectus, should also file a copy of tranche prospectus with the stock exchanges, SEBI and
RoC.34
Listing of Securities
The debentures issued under a public offer must mandatorily be listed on a stock exchange. An
application has to be made to a stock exchange to list the debentures and an in-principle approval
obtained before the draft offer document is filed with the stock exchange.
Credit rating
Credit rating has to be obtained from at least one credit rating agency registered with SEBI and
the rating has to be disclosed in the offer document. If the rating has been obtained from more
than one rating agency, all the ratings have to be disclosed.
Minimum Subscription
The minimum subscription in a public issue of debt securities should not be less than 75 percent
of the base issue size or as specified by SEBI. If the minimum subscription is not received then the

34
A tranche prospectus contains details of the issue and material changes, if any, in the information including the
financial information provided in the shelf prospectus or the earlier tranche prospectus, as applicable.

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entire blocked application monies will be unblocked within the stipulated timeframe from the date
of the closure of the issue. Any delay in unblocking of funds will attract interest for the delayed
period by the issuer.
However, the issuer issuing tax free bonds as specified by CBDT is exempted from the minimum
subscription limit.
Dematerialization
The issuer has to enter into an agreement with a depository for dematerialization of the securities
proposed to be issued.
Debenture Trustees
Debenture trustees have to be appointed to oversee the interests of the investors. Trustees are
banks and financial institutions who are registered with SEBI to act as debenture trustees. If the
debentures are secured, they ensure that the property charged as security is adequate to meet
the obligations to the debenture holders at all times.
Debenture Redemption Reserve
For the redemption of the debt securities issued by a company, the issuer must create a debenture
redemption reserve and transfer a portion of profits into it each year till the redemption of the
debentures.
Creation of Security
The Companies Act states that the Central Government may prescribe the procedure, for securing
the issue of debentures. As per the SEBI (Issue and Listing of Non-Convertible Securities)
Regulations, 2021, the proposal to create a charge or security in respect of secured debt securities
has to be disclosed in the offer document along with its implications. The issuer has to provide an
undertaking in the offer document that the assets on which the charge is created are free from
any encumbrances and if the assets are already encumbered, the permissions or consent to create
second or pari passu charge on the assets of the issuer have been obtained from the earlier
creditor.
The issue of an unsecured debenture will be treated as deposits raised by the company and will
require adherence to the Companies (Acceptance of Deposits) Rules.
Coupon Rate
The issuer in consultation with the lead manager may fix the coupon payable on the debenture.
The coupon may be determined through a book building process also.
3.16 Public issue process for debt securities
A company making a public offer of debt securities must follow the same process as that for a
public issue of equity shares. The primary requirement is that the issuer should not be declared as
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a willful defaulter and has not been barred from accessing the capital market. The important steps
in the public issue of debt securities are listed below.

 Board resolution for issue of debt securities authorized by shareholders’ resolution.

 Submission of draft prospectus to stock exchanges and SEBI.

 Submission of final offer document to Registrar of Companies after addressing any

comments from stock exchanges or SEBI or the public.

 Application to the exchanges for listing of the debt securities.

 Application to the depositories for dematerialization of the debt securities.

 Issuing advertisements regarding the proposed public issue.

 Execution of Debenture Trust Deed.

 Obtaining a credit rating for the issue.

 Compliance with SEBI regulations relating to issue and listing of securities, disclosure
requirements and provisions of the Companies Act, 2013 and other applicable regulations.

 Deciding the basis of allotment, allotment of securities and unblocking of funds in case of
not receiving the minimum subscription.

 Listing of securities on the stock exchanges.

3.16.1 Process of issue for government securities

The process explained above relates to a public issue of corporate debt securities. Government
securities are issued by the RBI on behalf of the government. The RBI conducts periodic auctions
through which these securities are sold to investors. Auctions are held according to a calendar
which is typically announced by the RBI every six months. Scheduled Commercial Banks and
primary dealers are the main participants in an auction and bid for securities through a process
of competitive bidding. Competitive bidding is open only to participants such as banks and
primary dealers that maintain a current account and a subsidiary general ledger account with the
RBI. Investors such as co-operative banks, non-banking finance companies, mutual funds, pension
funds, companies etc. who lack these facilities and may not have the technical knowledge and
expertise for direct participation in auctions can participate in non-competitive bidding. Non-
competitive bidders receive allotment of securities at the weighted average price or yield that
emerges in the auction on the basis of competitive bidding. In order to encourage participation
of retail investors in the government securities market, RBI has now allowed retail investors to
participate in the primary market for government securities through stock exchanges via the non-
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 competitive bidding route.35 As a result, retail investors can now bid in the auctions of
government securities and treasury bills through a stock exchange. Brokers can enter bids on
behalf of retail investors till the specified cut-off time on the auction day. The stock exchange will
aggregate the orders received from retail investors and submit a single consolidated bid for the
aggregate amount on a non-competitive basis. The exchange will make the investor-wise
allocation of securities based on the consolidated allocation received from the RBI. This facility is
aimed at enabling retail investors including individual investors to participate in the primary
market for government securities.

3.17 Private Placements in Equity and Debt

A private placement of securities is an offer made by a company to a select group of investors such
as financial institutions, banks, mutual funds and other eligible investors. The advantage of private
placement as a way to issue securities and raise funds comes from the following:
 Investors are better informed and there are less regulatory compliances in issuances to them.
 Issuing securities is less time consuming and cost-efficient since there are fewer procedures.
According to the Companies Act, 2013, an offer to subscribe to securities is made to not more than
50 persons is called private placement of securities. The requirements of SEBI’s regulations with
respect to a public issue will not apply to a private placement. An offer for a private placement of
securities shall be made by name to identified persons and the details of the offer made shall be
filed with the Registrar of Companies. The payment by investors for subscription to a private
placement shall only be through banking channels and not by cash. The company is not allowed
to advertise the issue or use any marketing or distribution channels to inform the public about
such an issue. A privately placed security can seek listing on a stock exchange provided it meets
the listing requirements of SEBI and the stock exchange. A private placement of securities can be
done by a company irrespective of whether it has made a public offer of shares or not.
A private placement of shares or debt securities that can be converted into shares at a future date,
such as fully convertible and partly convertible debentures and warrants, made by a listed
company is called a preferential allotment of securities.
 Preferential allotment requires a resolution to be passed by the existing shareholders.
 Pricing of the securities will be done according to the formula laid down by SEBI.
 Preferential allotment made to the promoters or promoter group will be locked in for a period
as stipulated by the regulation.

35
RBI Circular No.: IDMD.1080/08.01.001/2017-18 dated November 23, 2017 on Auction of Government Securities:
Non-Competitive Bidding Facility to retail investors.

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These regulations aim at ensuring that promoters and large investor groups do not take any action
that may be detrimental to the interests of the public investors.
3.17.1 Qualified Institutions Placement
SEBI (ICDR) Regulations, 2018, defines Qualified Institutions Placement (QIP) as an issue of eligible
securities by a listed issuer to Qualified Institutional Buyers (QIBs) on a private placement basis
and includes an offer for sale of specified securities by the promoters and/or promoter group on
a private placement basis.36 QIBs include financial institutions, mutual funds and banks among
others.
To be eligible to make such a placement the company should:
(a) Pass a special resolution approving the QIP by its shareholders
(b) List its shares on the stock exchange for a period of at least 1 year before notice of such
issue is given.
The promoters or promoter group of the company may make an offer for sale through QIP for the
purpose of achieving minimum public shareholding in terms of the Securities Contracts
(Regulation) Rules, 1957. As prescribed by SEBI, companies to be listed on the stock exchanges
have to adhere to the listing requirement of a minimum public shareholding of 25 percent.
Investors must bid using the ASBA facility only and the bids made cannot be revised downward or
withdrawn after the closure of the issue. A minimum of 10 percent of the eligible securities will be
allotted to mutual funds, provided that any unsubscribed portion of the said minimum percentage
may be allotted to other QIBs.
QIPs are made at a price derived from the share prices according to the formula prescribed by
SEBI. Shares allotted in a QIP can be sold by the allottee within 1 year of allotment only on a
recognized stock exchange.
3.17.2 Electronic system for book-building in debt securities
Companies in India prefer the private placement method of issuing debt securities to the public
issue route. This is because private placement is more cost-effective and less time-consuming as
compared to a public issue. In order to bring about greater transparency and efficiency in the
private placement process and to further reduce the cost and time required, SEBI has set up a
framework for electronic bidding of debt securities on private placement basis.37 Use of electronic
bidding is compulsory for:

36
“Eligible securities” include equity shares, non-convertible debt instruments along with warrants and convertible
securities other than warrants. [SEBI (ICDR) Regulations, 2018]
37
SEBI Circulars Nos: SEBI/HO/DDHS/CIR/P/2018/05 dated January 5, 2018 and SEBI/HO/DDHSP/CIR/2021/613 dated
August 10, 2021 on operational guidelines for issue and listing of non-convertible securities.

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 a. Private placement of debt issues if,

i. a single issue, for an amount equal to or greater than Rs. 50 crore (inclusive of green
shoe option);

ii. a shelf issue, consisting of multiple tranches, cumulatively amounting to Rs. 50

crore or more, in a financial year; and

iii. a subsequent issue, where all previous issues by an issuer in a financial year
aggregating to Rs. 50 crore or more.

b. Private placement of debt securities by issuers in existence for less than 3 years and

c. Issuance of debt securities being non-equity regulatory instruments forming part of the
capital of a bank or NBFC.38

The electronic Book Provider platform (EBP) is provided by the stock exchanges. The main features
of this facility are:

 An issuer going for a private placement of debt securities and all other participants in the
private placement process such as the arranger of the issue, the qualified institutional
investors, custodians are required to register with the exchange to access the electronic
bidding facility.

 The issuing company must upload the issue documents like the private placement
memorandum, term sheet etc. on the electronic bidding platform (EBP) at least 2 working
days prior to the issue opening date. It must inform the market about the details of issue
and green shoe option, date of opening and closing of the bids, the mode of bidding (open
or closed), manner of allotment (uniform price/yield or multiple price/yield), the manner
of settlement and the settlement cycle etc. Issuer issuing securities for the first time
through EBP must provide the above information at least 5 working days prior to the issue
opening date.

 Participants must enroll with the EBP prior to entering the bidding process. EBP should
ensure that eligible participants have access to the issue-related information and the
bidding portal of the exchange.

38
SEBI Circular No.: SEBI/HO/DDHS/DDHS_Div1/P/CIR/2022/00139 dated October 10, 22 on Review of provisions
pertaining to Electronic Book Provider platform.

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 The EBP should not provide preferential access to any bidder on a selective basis.

 The issuer must make the bidding announcement on EBP at least 1 working day before
initiating the bidding process.

 An eligible participant cannot bid for an amount more than Rs.100 crore or 5 percent of
the base issue size, whichever is lower, through arranger(s) on the EBP platform. Foreign
Portfolio Investors (FPIs) may bid through their custodians.

 The cut-off price/yield must be calculated by the system after completion of the bidding
process.

 Once the issue is accepted by the issuer, the EBP system must determine the successful
bids on the basis of price-time priority (in the case of coupon specified by the issuer) or
yield-time priority (in the case of coupon discovered during bidding) and inform the bidders
about the status of their bids. Successful bidders must be notified electronically about the
total amount payable and details of pay-in.

 The EBP must disseminate information regarding the bidding and allotment to the market
as per SEBI guidelines.

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Chapter 3: Sample Questions
1. A retail investor in a public issue is an investor ______.

a. Who is not an institutional investor

b. Who invests not more than Rs. 2 lakhs
c. Who applies for atleast 100 shares
d. Who does not have a demat account

2. In an offer for sale, the funds raised by the issue ________.

a. Increases the share capital of the company
b. are settled through the stock markets
c. are the sale proceeds for the existing shareholders

3. Which of the following categories of shares have to be mandatorily listed on a stock

exchange?
a. All shares issued by a company
b. All shares issued to non-promoters
c. All shares depending upon the terms of the issue
d. All shares issued through a public offer

4. If a public issue is heavily over-subscribed, _________.

a. The issue price will be lower
b. The number of shares allotted to each investor will be lower
c. The listing price will be higher
d. The amount raised will be higher

5. Which of the following is essential for the public issue of a debt security?
a. The shares must be listed on the stock exchange.
b. The debt instruments must be credit rated.
c. The promoters must stand guarantee for the payment of principal and interest.
d. The instruments do not require minimum coupon specified.

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