Issue management

Issue management
Issue management refers to managing issues of
corporate securities like equity shares, preference shares
and debentures or bonds. It involves marketing of
capital issues, of existing companies including rights
issues and dilution of shares by letter of offer.
The merchant bank usually acts as a sponsor of
issues. They obtain consent of the controller of capital
issues now, SEBI & provide a number of other services
to ensure success in the marketing of securities.
• Primary Classification
Companies are primarily classified into private and public.
Private companies or private limited companies are those
companies that are closely-held and have less than 200
shareholders. Public companies are limited companies that have
more than 200 shareholders and are listed on a stock exchange.
Classification of Companies
• Classification on the Basis of Control.
• Classification on the Basis of Liability.
• Classification on the Basis of Access to Capital.
• Classification on the Basis of Size.
• Classification on the Basis of Objects.
• Classification on the basis of Holding of Shares.
 Classification on the Basis of Control
• Companies, on the basis of control, are classified as follows:
• Holding company.
• Associate company.
• Holding Company
• The relationship of holding or subsidiary companies is established
either with the control of Board of Directors or control of share
capital. A company will be a holding company of another in the
following scenarios:
• Controls the composition of the Board of Directors of the other
company.
• Exercises or controls more than 50% of the total share capital either
on its own or together with one or more of its subsidiary companies.
 Associate Company
• Associate company, in relation to another company,
means a company in which that other company has a
significant influence, but which is not a subsidiary
company of the company having such influence and
includes a joint venture company.
• Companies, on the basis of liability, are classified
into the following:
• Company Limited by Shares.
• Company Limited by Guarantee.
• Unlimited Liability Company.
 Company Limited by Shares
• Company limited by share means when the liability of the member of
a company is limited by its memorandum to the amount if any unpaid
on the share held by them it is known as company limited by share.
• Company Limited by Guarantee
• A company limited by guarantee refers to a company having the
liability of its members limited by the memorandum to an amount the
members may respectively undertake to contribute to the assets of the
company in the event of it being wound up.
• Unlimited Liability Company
• Unlimited Company is a kind of a company which doesn’t have any
limit on the liability of its members. The liability of the member’s
will not cease until the final payment. Such a company may or may
not have a share capital of its own.
 Classification on the Basis of Access to
Capital
• Companies, on the basis of access to capital, are classified as follows.
• Unlisted company.
• Listed Company.
• Unlisted company
• When the securities of a private or public company aren’t listed on any
of the stock exchanges, it is an unlisted company. Such companies
cannot raise funds from the public at large by issuing a prospectus.
However, an unlisted company may issue shares on Private Placement
basis or to raise private equity funding.
• Listed company
• A listed company is a kind of a company whose securities are listed on
at-least one of the stock exchanges. Such a company must comply with
the provisions of listing.
Classification on the Basis of Size
• Companies were earlier not classified on the basis of size, but the
introduction of “Small Company” back in 2013 prompted the need
for this kind of classification. Any company other than a small
company is either a mid-size or a large company.
• Small company
• Companies, whose paid-up share capital does not exceed fifty lakh
rupees or any prescribed amount not exceeding 5 crore rupees, and
its turnover as per its latest profit and loss account is limited to 2
crore rupees or any prescribed amount not exceeding 20 crore
rupees, will be considered as a small company. A public company
can never be a small company. Likewise, a holding or subsidiary
company will not be a small company.
• Classification on the Basis of Objects
 This classification is based on the objective of a firm, which could be
profit-oriented or otherwise.
• Not for Profit Company.
• A company whose sole objective is to promote commerce, art,
science, sports education, research, social welfare, religion, charity,
protection of environment or any other useful purpose and not
having any profit motive will be termed as a not-for-profit
company. Such a company must apply its profits or other incomes
in promoting its objects. It mustn’t make any payment of dividend
to its members. Section 8 Company is the only type of company
that is a not-for-profit company.
• Classification on the basis of Holding of Shares
• Companies, on the basis of holding of shares, are classified into the
following.
• Government Company.
• Foreign Company
 Government Company
• A Government company is a kind of a company in which
not less than 51% of the paid-up share capital is held by
the Central or State Government, or partly by the Central
and State Governments, and includes any company
which is a subsidiary of a Government company.
• Foreign Company
• A foreign company is any company or body corporate
incorporated outside India which has a place of business
in India, and conducts any business activity in India.
 Eligibility
Qualifications for listing Initial Public Offerings (IPO) are as below:
[Link] up Capital
The paid-up equity capital of the applicant shall not be less than 10
crores and the capitalization of the applicant's equity shall not be less
than 25 crores.
For this purpose, capitalisation will be the product of the issue price
and the post issue number of equity shares. In respect of the
requirement of paid-up capital and market capitalisation, the issuers
shall be required to include, in the disclaimer clause of the Exchange
required to put in the offer document, that in the event of the market
capitalisation (Product of issue price and the post issue number of
shares) requirement of the Exchange not being met, the securities
would not be listed on the Exchange.
[Link] Precedent to Listing:
The Issuer shall have adhered to conditions precedent to listing as
emerging from inter-alia from Securities Contracts (Regulations) Act
1956, Companies Act 1956/2013, Securities and Exchange Board of
India Act 1992, any rules and/or regulations framed under foregoing
statutes, as also any circular, clarifications, guidelines issued by the
appropriate authority under foregoing statutes.
[Link] three years track record of either:
The applicant seeking listing; or
The promoters/promoting company, incorporated in or outside India or
Partnership firm and subsequently converted into a Company (not in
existence as a Company for three years) and approaches the Exchange
for listing. The Company subsequently formed would be considered for
listing only on fulfillment of conditions stipulated by SEBI in this
regard.
For this purpose, the applicant or the promoting company shall submit
annual reports of three preceding financial years to NSE and also
provide a certificate to the Exchange in respect of the following:
• That the company has not referred to the Board of Industrial &
Financial Reconstruction (BIFR) &/OR No proceedings have been
admitted under Insolvency and Bankruptcy Code against the issuer
and Promoting companies.
• The company has not received any winding up petition admitted by
a NCLT
• The net worth of the company should be positive. (Provided this
criteria shall not be applicable to companies whose proposed issue
size is more than Rs.500 crores)
• [Net Worth – as defined under SEBI (Issue of Capital and
Disclosure Requirements) Regulations , 2018.
• Promoters mean one or more persons with minimum 3 years of
experience of each of them in the same line of business and shall be
holding at least 20% of the post issue equity share capital
individually or severally.
[Link] applicant desirous of listing its securities should satisfy the
exchange on the following:
• Redressal Mechanism of Investor grievance
• The points of consideration are:
• Details of pending investor grievances against Issuer, listed
subsidiaries and top 5 listed group companies by Market Cap.
• Arrangements or mechanism evolved for redressal of investor
grievances including through SEBI Complaints Redress System.
• Defaults in payment
• Defaults in respect of payment of interest and/or principal to the
debenture/bond/fixed deposit holders by the applicant,
promoters/promoting companies, group companies, Subsidiary
Companies shall also be considered while evaluating a company's
application for listing. The securities of the applicant company
may not be listed till such time it has cleared all pending
obligations relating to the payment of interest and/or principal.
• Note:
a) In case a company approaches the Exchange for listing within
six months of an IPO, the securities may be considered as eligible
for listing if they were otherwise eligible for listing at the time of
the IPO. If the company approaches the Exchange for listing after
six months of an IPO, the norms for existing listed companies
may be applied and market capitalisation be computed based on
the period from the IPO to the time of listing.
 Issue pricing
An issue price refers to the initial cost of a
security when it first becomes available for
purchase by the public. Sometimes, the term is
also used to define a dollar amount requested
from the market to the issuer in exchange for a
share, bond, or other type of security. Issue
prices are calculated with formula that combines
the value of a share with how many shares are
available.
 Promoter contribution
A person who takes necessary steps to form a company is known as
promoter.
According to sec2(69) of the companies Act, 2013 the term
‘promoter’ can be defined as the following:
1. A person who has been named as such in a prospectus or is
identified by the company in the annual return is sec 92 or
2. A person who has control over the affairs of the company, directly
or indirectly whether as a shareholder, director or otherwise or
3. A person who is in agreement with whose advice, directions or
instructions the board of directors of the company is accustomed
to Act.
 Minimum promoters' contribution
1) The promoters of the issuer shall contribute in the public issue as
follows:
a. in case of an initial public offer, not less than twenty per cent of the
post issue capital
[Provided that in case the post issue shareholding of the promoters is
less than twenty per cent, alternative investment funds may contribute
for the purpose of meeting the shortfall in minimum contribution as
specified for promoters, subject to a maximum of ten per cent of the
post issue capital.]
b. in case of a further public offer, either to the extent of twenty per
cent of the proposed issue size or to the extent of twenty per cent of the
post-issue capital;
c. in case of a composite issue, either to the extent of twenty per cent of
the proposed issue size or to the extent of twenty per cent of the post-
issue capital excluding the rights issue component.
2) In case of a public issue or composite issue of convertible securities,
minimum promoters' contribution shall be as follows:
a. The promoters shall contribute twenty per cent as stipulated in clause
(a), (b) or (c) of sub-regulation (1), as the case may be, either by way of
equity shares or by way of subscription to the convertible securities:
Provided that if the price of the equity shares allotted pursuant to
conversion is not predetermined and not disclosed in the offer
document,
a. the promoters shall contribute only by way of subscription to the
convertible securities being issued in the public issue and shall
undertake in writing to subscribe to the equity shares pursuant to
conversion of such securities;
b. in case of any issue of convertible securities which are convertible or
exchangeable on different dates and if the promoters' contribution is by
way of equity shares (conversion price being pre-determined), such
contribution shall not be at a price lower than the weighted average
price of the equity share capital arising out of conversion of such
securities;
c. subject to the provisions of clauses (a) and (b) above, in case of an
initial public offer of convertible debt instruments without a prior
public issue of equity shares, the promoters shall bring in a contribution
of at least twenty per cent of the project cost in the form of equity
shares, subject to contributing at least twenty per cent of the issue size
from their own funds in the form of equity shares:

• Provided that if the project is to be implemented in stages, the

promoters' contribution shall be with respect to total equity
participation till the respective stage vis-à-vis the debt raised or
proposed to be raised through the public issue.
3. In case of a further public offer or composite issue where the
promoters contribute more than the stipulated minimum promoters'
contribution, the allotment with respect to excess contribution shall be
made at a price determined in terms of the provisions of regulation 76
or the issue price, whichever is higher.
4. The promoters shall satisfy the requirements of this regulation at
least one day prior to the date of opening of the issue and the
amount of promoters' contribution shall be kept in an escrow
account with a scheduled commercial bank and shall be released to
the issuer along with the release of the issue proceeds:
Provided that where the promoters' contribution has already been
brought in and utilised, the issuer shall give the cash flow
statement disclosing the use of such funds in the offer document:

• Provided further that where the minimum promoters'

contribution is more than one hundred crore rupees, the
promoters shall bring in at least one hundred crore rupees
before the date of opening of the issue and the remaining
amount may be brought on pro rata basis before the calls are
made to public.
 Allotment
• The term allotment refers to the systematic distribution or assignment of
resources in a business to various entities over time. Allotment generally
means the distribution of equity, particularly shares granted to a
participating underwriting firm during an initial public offering (IPO).
• An allotment is the systematic distribution of business resources across
different entities and over time.
• It generally refers to the allocation of shares granted to a participating
underwriting firm during an initial public offering.
• Allotments are commonly executed when demand is strong and exceeds
demand.
• Companies can also execute allotments through stock splits, employee
stock options, and rights offerings.
• The main reason that a company issues new shares for allotment is to raise
money to finance business operations.
 Introduction of Preferential Allotment:
• Preferential allotment is a process in which shares are allotted to a
specific group of people or companies which are interested in it on
preferential basis at a predetermined price and does not include
shares or other securities offered through a public issue, rights issue,
employee stock option scheme, employee stock purchase scheme or
an issue of sweat equity shares or bonus shares or depository
receipts issued in a country outside India or foreign securities.

Applicable Section and Rules

Pursuant to Section 62(1)(c) of the Companies Act, 2013, Rule 13

(issue of shares on Preferential basis) of Companies (Share Capital
and Debentures) Rules, 2014 is [Link], in addition to
above Rule, Rule 14 (Private Placement section 42) of Companies
(Prospectus and allotment of Securities) Rules, 2014 is applicable.
• . Eligible person to get securities under Preferential Allotment: Any person,if
it is authorized by Special Resolution, including person allotted shares under
right issue or ESOP therefore it can be said that any person either existing
shareholder or outsider is eligible to get securities under preferential
allotment.
• . Company eligible to allot securities under preferential allotment: Any
company can go for preferential allotment, whether it’s a Public or private,
listed or unlisted, Section 8 Companies, etc, Except Nidhi Company because
it is not governed by section 62 by amendment notification dated 5th June
2015.
• kind of Securities to be allotted under Preferential allotment:

The expression “shares or other securities” means equity shares, fully

convertible debentures, partly convertible debentures or any other securities,
which would be convertible into or exchanged with equity shares at a later
date.
• Type of Consideration Required: In cash and/or Consideration
other than Cash
• Valuation Report: The price of the shares or other securities to be
issued on a preferential basis, either for cash or for consideration
other than cash, shall be determined on the basis of valuation
report of a registered valuer; where shares or other securities are
to be allotted for consideration other than cash, the valuation of
such consideration shall be done by a registered valuer who shall
submit a valuation report to the company giving justification for
the valuation; The price of shares or other securities to be issued
on preferential basis shall not be less than the price determined on
the basis of valuation report of a registered valuer (by Sub-rule (3)
is inserted by notification G.S.R. 413 (E) dated 18 June, 2014).
 Difference between private placement &
preferential allotment
• Private Placement means any offer or invitation to subscribe or issue of
securities to a selected group of persons by a company (other than by
way of public offer) through Private Placement offer-cum-application,
which satisfies the conditions specified in Section 42 of the Companies
Act, 2013.
• Preferential Allotment means issue of shares or other securities (shares or
other securities” means equity shares, fully convertible debentures, partly
convertible debentures or any other securities, which would be
convertible into or exchanged with equity shares at a later date) by a
company to any selected person or group of persons, on preferential basis
• The term “Securities” play a crucial role in interpretation of these two terms.
Allotment of any kind of security on a private basis which attracts provisions
of Section 42 is called as Private Placement of Securities whereas allotment
of equity shares or securities convertible into equity shares attracts both
Section 42 and 62(1)(c) and called as Preferential Allotment of securities.

PRIVATE PLACEMENT OF SECURITIES :- “Private placement” means any

offer or invitation to subscribe or issue of securities to a selected group of
persons by a company (other than by way of public offer) through private
placement offer-cum-application, which satisfies the conditions specified in
Section 42.
Section 42 read with Rule 14 of Companies (Prospectus and Allotment of
Securities) Rules, 2014 deals with Private Placement of Securities. Important
• Provisions :- An offer to be made only to a selected group of persons as
identified by the Board whose number not to exceed 200; Private Placement
Offer Letter in Form PAS – 4 to be circulated among the investors (Letter of
offer, serially numbered, to be given either in writing or electronic mode
within 30 days of recording of the investor’s name by the Company)
BASIS FOR
PRIVATE PLACEMENT PREFERENTIAL ALLOTMENT
COMPARISON
Meaning Private Placement refers to Preferetial Allotment, is the
the offer or invitation to allotment of shares or debentures to
offer made to specified a selected group of persons is made
investors, for inviting them by a listed company, to raise funds.
to subscribe for shares, so as
to raise funds.

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

Act, 2013 Act, 2013
Offer letter Private placement offer letter No such document
Consideration Payment is made by way of Cash or consideration other than
cheque, demand draft or cash.
other modes except cash.
Bank account To keep the application Not required.
money, separate bank
account in a scheduled
commercial bank is required.

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

association company must authorize it.
Prospectus
It refers to an information booklet or offer document on the
basis of which an investor invests in the securities of an issuer
company. The definition clarifies that any notice, circular,
advertisement or any other document inviting offers from
public for the subscription or purchase of securities shall be
included in the definition of prospectus.
What is a Prospectus?
A prospectus is a legal disclosure document that provides
information about an investment offering to the public, and
that is required to be filed with the Securities and Exchange
Commission (SEC) or local regulator. The prospectus contains
information about the company, its management team,
recent financial performance, and other related information
that investors would like to know.
Prospectus for a stock or bond issue
When a company is issuing stocks or bonds, it publishes a prospectus to provide
investors with all the information that they need to make an informed decision.
The issuer provides both a preliminary and a final prospectus. A preliminary
prospectus is the initial offering document that provides details about the
proposed transaction. The final prospectus is offered when the offering’s been
finalized and is being offered to the public for subscription.
• Prospectus for mutual funds
• A mutual fund prospectus is a legal disclosure
document that the SEC requires mutual funds
to file and make available to interested
investors. The details provided in the
document include the fund’s objectives, risks,
performance, distribution policy, executive
team, investment strategies, etc.
• Components of a prospectus
• The following are the components of a
prospectus:
• 1 Overview and history of the company
• The prospectus gives an overview of the company since its
creation. It provides a chronology of events that have occurred
over the years, such as those that have helped the company
experience growth. It also includes information about the
founders, company registration, and initial service offerings.
This section may also include an overview of the
company’s strategy and what management believes is
its competitive advantage or “unique selling proposition”
(USP).
• #2 Services/products offered by the company
• The services/products section lists the core economic activities
undertaken by the company. The company provides
information about the services and products provided to
customers, and any additions to its operations over the years.
• 3 Management profile
• A prospectus also includes information about the
company’s executive management. It outlines the management
team’s experience and education qualifications that make them a
good fit for the company. Investors want assurance that the
company’s executives have what it takes to safeguard their
investments.
• #4 Desired deal structure
• If the issuer is an existing company that has issued securities before,
it may provide an overview of its current capital structure and how
the new issue will affect the structure. For example, when selling
bonds, the investors will be interested in knowing the level of the
company’s debt and its ability to pay. Equity investors will want to
see the current equity ownership structure and how their investment
will influence the structure and the expected rate of return.
• 5 Use of proceeds
• A company will often offer an issue of securities when it is unable to
raise capital internally to finance a large investment. For example,
the company may want to expand its operations to other
geographical locations, acquire proprietary technology, purchase
large machinery, finance the production of a new line of products,
execute mergers and acquisitions (M&A), etc.
• #6 Security offering details
• The prospectus also provides information on the number of
securities that are being offered to the public and the price for each
security. It should also state the expected rate of return on the
investor’s funds. This section also provides information on the
subscription period when interested investors can purchase the
securities.
• 7 Financial information
• The prospectus should provide investors with information about the
company’s past financial performance. The information may include
EBIT, net profit, stock performance, etc. The security performance
• #8 Risks involved
• The prospectus should disclose the risks that investors face
when investing in a mutual fund. For example, an
international mutual fund may include a disclosure detailing
the currency risks that investors face when investing in the
fund.
• Other risks that a company may reveal include possible
capital restrictions, government regulations, individual
investors holding large numbers of stocks, etc. The
disclosures protect the company from accusations that it
withheld vital information that caused the investors to incur
losses.
 Private Placement
• Private Placement Meaning
• As per the Section 42 of the Companies Act, 2013, private placement
means any offer or invitation to subscribe or issue of securities to a
selected group of persons by a company (other than by way of public
offer) through private placement offer-cum-application form, which
satisfies the conditions specified in section 42 of the Companies Act,
2013.
• Section 42 of the Companies Act, 2013 states that the maximum allotment
that can be done in a year is 200, exceeding which the issue is considered
public and the company has to follow the procedure of public issue.
• In the process of private placement, no prospectus is issued.
• Types of Private Placement
• There are two types of private placement that are followed:
• 1. Preferential Allotment
• 2. Qualified institutional placement
• Preferential Allotment: Preferential allotment is the practice of
issuing of securities to a selected group of entities such as mutual fund
companies, financial institutions or promoters at a particular price.
• The directives for such an allotment is specified in the Chapter XIII of
SEBI (DIP) guidelines. The investors may also have a lock-in period
for the issue of securities and the company needs to take.
• Qualified Institutional Placement: In this mode of private
placement, a listed company is able to issue shares or other securities
to only institutional buyers. It is a way of encouraging the listed
companies to raise capital from the domestic market. The rule
governing such placements is specified in Chapter XIIIA of SEBI
(DIP) guidelines.
Advantages of Private Placement
The following are the advantages of private placement.
1. Speeds up financing: A company willing to raise capital through fresh
issue by going for public issue of shares has to go through a lot of
procedures that will be time consuming. Whereas it becomes easier to raise
capital from private placement within a few months.
2. Economical: For public issue of shares, a company has to spend on
preparation and printing of prospectus, application forms, transportation and
also on advertisement in various forms of media. All these expenses will not
be required if a public placement route is selected.
3. Confidentiality: In private placement, the shares are allotted to selected
business groups and hence, the whole procedure is confidential, while in a
public issue many disclosures need to be made.
4. Market Stability: The private placement market is more stable as
compared to the stock market. There is less volatility in the private
placement market.
5. Raising small capital: Small amounts of capital can be raised through
private placement, whereas public issue is required when the capital
requirement is high.
 BOOK BUILDING
 Book Building is the process by which an
underwriter determines the price at which the
shares must be sold in an Initial Public Offer (IPO).

 The process of price discovery requires the

underwriter to call forth bids from various
institutional investors such as fund managers and
[Link], there always exists a risk of
overpricing or undervaluing the shares.
• 1. Hiring Underwriter
Firstly, the issuing company needs to hire an investment bank that acts
as an underwriter. With the help of issuing company management, the
investment bank identifies the size of the issue and determines the
price range of the securities. An investment bank drafts the company
prospectus, including all the relevant details about the issuing company
such as financials, issue size, price range, future growth perspectives,
etc. The share price range consists of floor price (lower end of the price
range) and ceiling price (upper end of the price range).
2. Investor’s Bidding
Investment banks invite investors. Usually, these are high net-
worth individuals and fund managers to submit their bids on the
number of shares they are willing to buy at different prices. Sometimes,
not a single investment bank underwrites the entire issue. Rather, the
lead investment bank is engaged with other investment banks who use
their networks to tap many investors for the bidding process.
• 3. Share Pricing
• After the investment bank collects all the bids at different price levels, they
evaluate the aggregate demand for the issue from the submitted bid. To price
the share of the issue, the underwriter uses the weighted-average method to
arrive at the final price of the share. This final price is also known as the ‘cut-
off price.’ If investors have a good response for any issue, the ceiling price is
usually a ‘cut-off price.’
• 4. Biding Process Transparency
• Most of the regulators and the stock exchanges in the world require companies
to make public the details of the bidding process. An underwriter must
publicize the details of the bids submitted by the investor to purchase the
shares of the issue.
• 5. Allotment & Settlement
• Lastly, the allotment process begins by allocating the shares of the issue to the
accepted bidders. Now, as you know, initially, investors had bid for this issue
at a different price range, but the settlement process ensures that all allotments
happen at the cut-off price of this issue. An investor who had bid in excess to
cut off cost, their excess money is returned, and investors who had bid less
than the cut-off price, investment bank ask them to pay the difference amount.
 Benefits of Book Building
• Book building leads to price discovery and helps in finding the
intrinsic value of the security being offered.
• The price of a security is determined in a more realistic way by
taking into consideration the demand for security.
• The issuer gets the maximum price for the security.
• The issuer company can choose the quality investors.
• There is greater transparency in the allotment of shares to the
investors.
• Book building process results in lower costs of issue. Especially,
Book building helps the issuer save a lot of money on advertising
and brokerage.
 Greenshoe
• What is a Greenshoe Option?
• A greenshoe option is an over-allotment option. In the context of
an initial public offering (IPO), it is a provision in an underwriting
agreement that grants the underwriter the right to sell investors more
shares than initially planned by the issuer if the demand for a
security issue proves higher than expected.
• How Does Greenshoe Option Work?
• Greenshoe Option, coined after the firm named “Green Shoe
Manufacturing ” (first to incorporate the greenshoe clause in its
underwriter’s agreement). That is how it works:
• When a company wants to raise capital for some of its future
developmental plans, it can raise money through an IPO.
• During an IPO, a company declares an issue price for its securities
and announces a particular quantity of stocks it will issue (suppose 1
million securities at $5.00 each). In the case of a blue-chip company
or a company with a very good background and statistics, it may so
happen that the demand for such security goes uncontrollably up,
and due to which, prices will rise.
• Secondly, the existing subscriptions are way more than expected
(e.g., 500,000 actual vs. 100,000 expected). In this case, the number
of shares allotted to each subscriber comes down proportionately (2
numbers actual vs. 10 expected).
• Thus, there is a gap between the required and actual prices due to
the unexpected demand for this security. To control this demand-
supply gap, companies develop the “Greenshoe Option.”
• In this type of option, the company, at the time of its proposal for
IPO, declares its strategy to exercise the greenshoe option. Hence, it
approaches a merchant banker in the market, who will act as a
“stabilizing agent.”
• At the time of the issue of securities, the stabilizing
agent borrows certain shares from promoters of the company to
allow them additional subscribers in the market. In this way, the
security price is not dramatically raised due to demand-supply
inconsistency when the trading starts.
• The money raised from this additional offering in the market is
not deposited in any party’s accounts. Instead, this money is
deposited in an escrow account created for this process.
• Once the trading starts in the market, this stabilizing agent can
withdraw money deposited in the escrow account, as per
requirement, purchase back excess shares from the shareholders
and repay to the company’s promoters.
• The entire process of lending shares by promoters and repaying
the same after a particular period by the stabilizing agent is
called the “stabilizing mechanism.”
 Features

• The entire stabilizing mechanism needs to be completed within 30

days. Therefore, the stabilizing agent has a maximum of 30 days
from listing the company he needs to borrow and return the required
shares for further process. If he cannot complete the process within
this timeline and can return only part of the total shares to the
promoters, the issuing company will allow the remaining shares to
the promoters.
• Promoters can lend up to a maximum of 15.0% of the total issue to
the stabilizing agent. For example, if the total issue is supposed to be
1 million shares, promoters can lend the stabilizing agent only up to
a maximum of 150,000 shares for allotment to excess subscribers.
• The first exercise of this option was made in 1918 by a firm named
“Green Shoe Manufacturing” (now known as Stride Rite
Corporation), and this option is also known as “Over-allotment
Option.”
• Greenshoe option is price stabilization and is
regulated and permitted by the SEC (Securities and
Exchange Commission). Accordingly, if the
company wishes to exercise this option in the
future, it needs to mention all detailed red herring
prospectus it shall publish during the issue of
securities.
• The stabilizing agents (or underwriters) need to
execute separate agreements with the company and
the promoters, which mention all details about the
price and quantities of the shares to be listed. It also
says deadlines for the stabilizing agents.
 Right issue
• A rights issue is an offering of rights to the existing shareholders of a company that gives
them an opportunity to buy additional shares directly from the company at a discounted
price rather than buying them in the secondary market. The number of additional shares that
can be bought depends on the existing holdings of the shareowners.
• Features of a Rights Issue
• Companies undertake a rights issue when they need cash for various objectives. The process
enables the company to raise money without incurring underwriting fees.
• A rights issue gives preferential treatment to existing shareholders, where they are given the
right (not obligation) to purchase shares at a lower price on or before a specified date.
• Existing shareholders also enjoy the right to trade with other interested market participants
until the date at which the new shares can be purchased. The rights are traded in a similar
way as normal equity shares.
• The number of additional shares that can be purchased by the shareholders is usually in
proportion to their existing shareholding.
• Existing shareholders can also choose to ignore the rights; however, if they do not purchase
additional shares, then their existing shareholding will be diluted post issue of additional
shares.
• Reasons for a Rights Issue
• When a company is planning an expansion of its
operations, it may require a huge amount of capital.
Instead of opting for debt, they may like to go for equity to
avoid fixed payments of interest. To raise equity capital, a
rights issue may be a faster way to achieve the objective.
• A project where debt/loan funding may not be
available/suitable or expensive usually makes a company
raise capital through a rights issue.
• Companies looking to improve their debt-to-equity ratio or
looking to buy a new company may opt for funding via the
same route.
• Sometimes troubled companies may issue shares to pay off
debt in order to improve their financial health.
INVESTOR PROTECTION
• INVESTOR PROTECTION Investor protection is one of the crucial elements of a
growing securities market. It focuses on making sure that investors are fully
informed about their purchases, transactions and the corporate affairs and
updates. Various procedures, guidelines, rules and regulation have been issued
in the legislations to protect the investor’s right and repose their confidence.
• ROLE OF SEBI IN INVESTOR PROTECTION
• Investors are the pillar of the financial and securities market. They determine
the level of activity in the market. They put the money in funds, stocks, etc. to
help grow the market and thus, the economy. It is thus very important to
protect the interests of the investors. investor protection involves various
measures established to protect the interests of investors from malpractices.
Securities and Exchange Board of India (SEBI) is responsible for regulations of
the Mutual Funds and safeguard the interests of the investors. Investor
protection measures by SEBI are in place to safeguard the investors from the
malpractices in shares, the stock market, Mutual Fund, etc.
• The two broad objectives of SEBI are given below:
i. Conducive environment: SEBI aims at creating a
proper and conducive environment for raising money
from capital market through the rules, regulation,
trade practices and guidelines. SEBI regulates stock
exchanges and other intermediaries in securities
market such as brokers, sub-brokers, merchant
bankers, venture funds, mutual funds, FII etc.
ii. Investor protection and Education: SEBI aims at
protecting investors from fraudulent practices and
educating investors so as to make them aware of their
rights as well as duties.
• Measures taken by SEBI for Investor Protection SEBI has given out
various methods and measures to ensure the investor protection
from time to time. It has published various directives, driven many
investor awareness programmes, set up investor protection Fund
(IPF) to compensate the investors. We will look into the investor
protection measures by SEBI in detail.
i. Issue of regulation and guidelines : Build the capacity of investors
through education and awareness to enable an investor to take informed
investment decisions. SEBI endeavours to ensure that the investor
learns investing, that is, he obtains and uses information required for
investing, evaluates various investment options to suit his specific
goals, ascertains his rights and obligations in a particular investment,
deals through registered intermediaries, takes necessary precautions,
seeks help in case of any grievance, etc. SEBI has been organizing
investor education and awareness workshops directly, and through
investor associations and market participants, and been encouraging
market participants to organize similar programmes.
 It maintains an updated, comprehensive web site for education of investors. It
publishes various kinds of cautions through media. It responds to the queries of
investors through telephone, e-mails, letters, and in person for those who visit
SEBI office.
ii. Investor education: Make available every detail relevant for investment in
public domain. SEBI has adopted disclosure based regulatory regime. Under
this framework, issuers and intermediaries disclose relevant details about
themselves, the products, the market and the regulations so that the investor can
take informed investment decisions based on such disclosures. SEBI has
prescribed and monitors various initial and continuous disclosures.
iii. Safe transactions: Ensure that the market has systems and practices which
make transactions safe. SEBI has taken various measures such as screen based
trading system, dematerialization of securities, T+2 rolling settlement, and
framed various regulations to regulate intermediaries, issue and trading of
securities, corporate restructuring, etc. to protect the interests of investors in
securities. It also ensures that only the fit and proper persons are allowed to
operate in the market, every participant has incentive to comply with the
prescribed standards, and the miscreant are awarded exemplary punishment.
iv. Grievance redressal system: Facilitate redressal of investor
grievances. SEBI has a comprehensive mechanism to facilitate
redressal of investor grievances against intermediaries and listed
companies. It follows up with the companies and intermediaries
who do not redress investors' grievances, by sending reminders
to them and having meetings with them. It takes appropriate
enforcement actions as provided under the law (including launch
of adjudication, prosecution proceedings, directions) where
progress in redressal of investor grievances is not satisfactory.
v. Other measures: SEBI conducts inspection, inquiries and
audits of stock exchanges, intermediaries and self-regulating
organisations and takes suitable remedial measures whenever
necessary. Further it penalises those who undertake fraudulent
and unfair tradepractices.
 Broker, subbroker and underwriter
• KEY FUNCTIONS OF THE BROKER
• Understand the client’s business and its risk and insurance needs .
• Design the most appropriate insurance cover, explaining the options
and the reasons for their advice.
• Execute the client’s instructions in an efficient manner including the
arrangement of insurance, and negotiation with the insurance market.
• Take instructions from their clients.
• Place business with all registered insurers operating in Sri Lanka.
• Explain the needs of and the behaviour of the market to clients.
• Maintain effective relationships with the market – local and
international.
• Assist in the negotiation of claims.
• Provide continuous service and advice.
• TASKS AND RESPONSIBILITIES
• Obtain a detailed knowledge of the client’s business and philosophy
regarding risk.
• Maintaining clear records of the client’s business history so that it can
be explained to insurers.
• Explaining the information insurers need to enable them to underwrite a
given risk.
• Provision of technical insurance advice and advice on developments in
the insurance market.
• Co-ordinate global programmes.
• Maintain records, documents, handle renewals, placement of new
business etc.
• Take instructions from their clients.
• Explaining the law as it relates to the client’s risks and insurance
programme.
• Maintaining a detailed knowledge of available markets.
• Selection and recommendation of an insurer or group of insurers.
• Advising the client on the most appropriate insurance programme.
• Presenting the client’s risk to the insurance market.
• Negotiating with insures on the client’s behalf.
• Acting promptly on instructions from a client and providing written
acknowledgement and progress reports.
• Providing the client with a written record of the insurance programme.
• Checking and issuing policies.
• Collecting and remitting premiums.
• Providing additional Services, such as risk management and uninsured
loss recoveries.
• Assisting in the negotiation of claims.
• Maintaining precise records of past claims and maintaining historic
records of policies, underwriting submission and other key documents.