CHAPTER-1

INTRODUCTION

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INTRODUCTION TO THE STUDY

This report, with the title “Public Issue” suggests an attempt to bring forth the

importance of the process of Issue of an Initial Public Offer (IPO).

When a Company issues an IPO, it means it is ‘Going Public’. The issue of an IPO

introduces a great degree of transparency in a Company’s operations. All the

relevant and updated information pertaining to the company is laid down before the

investors so that they may make an investment decision. Again, there are setoff

procedures, rules, regulations and laws to be followed in laying down this

information before the investors. A document called the ‘Prospectus’ must be

prepared. The Prospectus captures all the necessary information that is to be made

available to the investors. Apart from the Prospectus, there are various other

company documents that need to be verified and summarized in order to present

them before the investors.

Many Intermediaries are appointed for the purpose of managing the public issue of

an IPO of a company. They play a vital role by co-ordinating the activities of the

company and the Regulatory Bodies and Investors. The following are the

responsibilities:

Company, to manage the entire process of issue of its IPO, and to present the

Company’s information before the investors in a concise and unambiguous

form.

Investors, to give them all the relevant and updated information on the

Company, while at the same time protecting their interests

Regulatory Bodies such as the Securities and Exchange Board of India, to

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adhere to all secretarial and legal work.

In order to fulfill all their responsibilities well, they must work diligently. The

process through which they verify and summarize the Company’s information is

thus called the process of Due Diligence.

These Intermediaries must issue “Due Diligence Certificates” at various points

during the issue process, saying that all the documents of the company have

been verified and are correct.

This report will take the reader through the entire process of the issue of an IPO

and will lay special emphasis on the dynamic role played by them.

This report aims at highlighting the key points about an IPO issue by separating

the concrete points regarding an issue from the frills and focusing on these

concrete points.

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The National Stock Exchange (NSE) is India's leading stock exchange covering

various cities and towns across the country. Capital market reforms in India and the

launch of the Securities and Exchange Board of India (SEBI) accelerated the

incorporation of the second Indian stock exchange called the National Stock Exchange

(NSE) in 1992. Three segments of the NSE trading platform were established one after

another. The Wholesale Debt Market (WDM) commenced operations in June 1994 and

the Capital Market (CM) segment was opened at the end of 1994. Finally, the Futures and

Options segment began operating in 2000.

In 1996, the National Stock Exchange of India launched S&P CNX Nifty and CNX

Junior Indices that make up 100 most liquid stocks in India. In 1998, the National Stock

Exchange of India launched its web-site and was the first exchange in India that started

trading stock on the Internet in 2000.

In the fast growing Indian financial market, there are 23 stock exchanges trading

securities. The National Stock Exchange of India (NSE) situated in Mumbai - is the

largest and most advanced exchange with 1016 companies listed and 726 trading

members. The NSE is owned by the group of leading financial institutions such as Indian

Bank or Life Insurance Corporation of India. Only qualified traders can be involved in

the securities trading.

Unlike most world exchanges, the NSE uses the satellite communication system that

connects traders from 345 Indian cities. NSE has played a catalytic role in reforming the

Indian securities market in terms of microstructure, market practices and trading

volumes. The market today uses state-of-art information technology to provide an

efficient and transparent trading, clearing and settlement mechanism, and has witnessed

several innovations in products & services.

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Bombay Stock Exchange Limited is known as the oldest exchange in Asia. It

traces its history to the 1850s, when stockbrokers would gather under banyan trees in

front of Mumbai's Town Hall. The location of these meetings changed many times, as the

number of brokers constantly increased. The group eventually moved to Dalal Street in

1874 and in 1875 became an official organization known as 'The Native Share & Stock

Brokers Association'. In 1956, the BSE became the first stock exchange to be recognized

by the Indian Government under the Securities Contracts Regulation Act.

The Bombay Stock Exchange developed the BSE Sensex in 1986, giving the BSE a

means to measure overall performance of the exchange. In 2000 the BSE used this index

to open its derivatives market, trading Sensex futures contracts. The development of

Sensex options along with equity derivatives followed in 2001 and 2002, expanding the

BSE's trading platform. As the first stock exchange in India, the Bombay Stock Exchange

is considered to have played a very important role in the development of the country's

capital markets. The Bombay Stock Exchange is the largest of 22 exchanges in India,

with over 6,000 listed companies. It is also the fifth largest exchange in the world, with

market capitalization of $466 billion.

The Bombay Stock Exchange uses the BSE Sensex, an index of 30 large, developed BSE

stocks. Based on the Sensex, the BSE equity market has grown significantly since 1990.

In addition to individual stocks, the BSE also has a market in derivatives, which was the

first to be established in India. The Bombay Stock Exchange is also actively involved

with the development of the retail debt market.

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OBJECTIVES

To study and understand the concept of and procedure involved in Initial Public

Offers (IPO’s).

To study and understand the process of Due Diligence and its significance in Initial

Public Offers.

To analyze the effect of Initial Public Offers on the issuing company, investors and

the stock market.

To understand the role of intermediaries in managing Initial Public Offers.

To be actively involved in merchant banking activities, in order to gain valuable

knowledge through first-hand experience in managing the issue of Initial Public

Offers of various client companies.

To assess and evaluate Initial Public Offers and the process of Due Diligence based

on financial, legal and secretarial compliance.

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SCOPE

The following research report is an attempt to analyze thoroughly, the behavior and

dynamics of Initial Public Offerings in India. In other words, it’s a detailed study on the

Primary Market in India. This study takes into account Public Offerings made by major

companies in three sectors.

The sectors taken into consideration are-

a) Information Technology

b) Infrastructure

c) Power and Energy

The study analyses the behavior of public offerings of companies within each

sector and also attempts to make a comparative analysis among the sectors, with the

purpose of gauging investor preference. The performance of these companies is measured

using their P/E ratios and the risk they entail is determined by their beta values. Over

subscription and under subscription analysis determines the investor preference at the

time of issue.

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LIMITATIONS

Considerable information has been extracted from the financial statements and

documents provided to KISL by its client companies. If any incorrect information

is furnished in these documents, the same will be carried forward in this project

work.

Although Initial Public Offers are issued by many companies, this study is confined

to a few companies only. These are companies that fall within the clientele of

Religare securities limited (RSL)

This study will be limited to the information willingly shared by the authorities and of

RSL

The findings of this study cannot be generalized.

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RESEARCH METHODOLOGY

The data for the project has been collected from both primary and secondary sources.

Primary data has been collected from

Consulting the officials of various organizations who have been involved in the

IPO’s and Due Diligence process of client companies.

Also, the financial statements, certificates, and all the necessary documents

required for, and furnished by, the companies for managing the issue of IPO’s

have been used as primary data.

Secondary data includes, information secured from web sites, magazines and the

daily experience, observations and knowledge gained out of project work at Religare

securities limited.

The theoretical knowledge gained out of the primary and secondary sources of

data have then been integrated to prepare an in-depth and comprehensive report,

which addresses the topic from theoretical points of view.

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CHAPTER-2

PUBLIC ISSUE

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A BRIEF OVERVIEW ON INDIAN CAPITAL MARKETS

Industry raises finance from the Capital Markets with the help of a number of

instruments. A market consists of sellers of products and buyers thereof. Obviously, the

securities market refers to investors i.e. wealth savers, who mobilize their savings and

search for a remunerative source of investment thereof on the one hand, and on the other

the capital seekers, that is, business, industry or government. These two constitute the

core elements of the capital market.

Way Back:-

Indian Stock Markets are one of the oldest in Asia. The origination of the Indian

securities market may be traced back to 1875. It started its operations in the year 1875

with the functioning of first ever stock exchange in Mumbai and since then it has

undergone a lot of changes. Over the last 130 years the Indian securities market has

evolved continuously to become one of the most dynamic, modern and efficient securities

markets in Asia. Today, Indian markets conform to international standards both in terms

of structure and in terms of operating efficiency. At present there are about 22 stock

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exchanges in India. India’s 2 biggest stock exchanges in terms of volume transactions are

BSE (Bombay Stock Exchange) & NSE (National Stock Exchange) which account to

90% of transaction. The Indian capital market has to arrange funds to meet the financial

needs of both domestic and foreign resources.

The wider economy:-

The Indian securities market is emerging from the slowdown that has affected all

markets. It is expected the most likely outcome for Indian capital markets in the coming

year to show a healthy upswing. The fundamentally sound situation that the Indian

economy continues to experience promises a rosy future for domestic and international

investors. The capital market is one of the most vibrant sectors in the financial system,

marking an important contribution to the country’s economic development. With the

sweeping economic changes witnessed globally towards more market oriented

economies, the government of India too has embarked upon radical economic policy

measures to revitalize its economy. The Indian capital markets, which have attained a

remarkably high degree of growth in the last decade, are poised for a further leap forward

over the next ten years. With the opening of the economy to multinationals and the

adoption of more liberal economic policies, the economy is driven more towards the free

market economy.

Constituents of the capital markets:-

The capital market consists of Primary Markets and Secondary Markets.

The Primary Market deals with the issue of new instruments by the corporate sector

such as equity shares, preference shares and debt instruments. Central and State

governments, various public sector industrial units (PSUs), statutory and other authorities

such as state electricity boards and port trusts also issue bonds/debt instruments.

The primary market in which public issue of securities is made through a prospectus is a

retail market and there is no physical location. Offer for subscription to securities is made

to the investing community.

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The Secondary Market or Stock Exchange is a market for trading and settlement of

securities that have already been issued. The investors holding securities sell securities

through registered brokers/sub-brokers of the stock exchange. Investors who are desirous

of buying securities purchase securities through registered brokers/sub-brokers of the

stock exchange. It may have a physical location like a stock exchange or a trading floor.

In the secondary market, there are the Stockbrokers (who are members of the stock

exchanges), The Mutual Funds, Financial Institutions, Foreign Institutional

Investors (FIIs), and Individual Investors.

Registrars and Transfer Agents, Custodians and Depositories are capital market

intermediaries that provide important infrastructure services for both primary and

Secondary market. For ensuring the smooth working of the capital market, certain

regulatory frame works have been passed from time to time to meet this objective.

SENSEX – The barometer of the Indian Capital Markets:-

The premier Stock Exchange that pioneered the stock broking activity in India, 128

years of experience seems to be a proud milestone. A lot has changed since 1875 when

318 persons became members of what today is called “The Stock Exchange, Mumbai”

by paying a princely amount of Re1. Till the decade of eighties, there was no scale to

measure the ups and downs in the Indian stock market. The Stock Exchange, Mumbai

(BSE) in 1986 came out with a stock index that subsequently became the barometer of

the Indian Stock Market.

The base year of SENSEX is 1978-79 and the base value is 100. The index is widely

reported in both domestic and international markets through print as well as electronic

media. The Index was initially calculated based on the “Full Market Capitalization”

methodology but was shifted to the free-float methodology with effect from September 1,

2003.

The SENSEX captured all these events in the most judicial manner. One can identify the

booms and busts of the Indian stock market through SENSEX.

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Highlights of the highly attractive Indian Capital Markets:-

Two major reasons why Indian Securities are now increasingly regarded as attractive to

International Investors are:

The relatively high returns compared with more developed global markets.

2) Low correlation with world markets. However until the early 90s, the Foreign Investors were the only way of accessing the

Indian Capital Markets through listed country funds. The first fund of this type was

launched by the Unit Trust of India (UTI) in London in 1986. The success of this

initiative ensured that this fund was followed by numerous others. Indian companies are

now also allowed to raise equity capital in the international market through the issue of

GDRs. India’s regulator; Securities Exchange Board of India (SEBI) is playing more of

a development role rather than being merely a Watchdog.

This makes the market place attractive for Foreign and Domestic Investors. With SEBI

recognizing the benefits of, and actively campaigning for the adoption of Straight

Through Processing as the market standard, the market is making significant progress

towards the goal of executing and settling the transactions without any human

intervention – the so called STP Nirvana. Successful implementation of STP will

considerably reduce the transaction processing cost in the market, eliminating the manual

work involved in transaction processing.

The derivatives market in the last few years has shown spectacular growth. As if further

evidence was needed of India’s willingness to embrace change, the availability of Internet

trading and dual fungibles of American Depository Receipts (ADRs) and Global

Depository Receipts (GDRs) provides a clear indication of the vibrancy and dynamism

of the Indian Securities Market.

Key progressive initiatives:-The Indian Capital Markets have witnessed a transformation over the last decade. India is

now placed among the mature markets of the world. Key progressive initiatives in recent

years include:

The depository and share dematerialization systems that have enhanced the efficiency

of the transaction cycle.

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Introduction of new instruments and institutions.Replacing the flexible, but often exploited, forward trading mechanism with rolling

settlement, to bring about transparency.

The InfoTech-driven National Stock Exchange (NSE) with a national presence (for

the benefit of investors across locations) and other initiatives to enhance the

quality of financial disclosures.

The Securities and Exchange Board of India (SEBI) has effectively been

functioning as an independent regulator with statutory powers.

Indian capital markets have rewarded Foreign Institutional Investors (FIIs) with

attractive valuations and increasing returns.

AN OVERVIEW ON INITIAL PUBLIC OFFER

Initial Public Offering (IPO), also referred to simply as a "Public Offering" or

"Flotation" means when a company issues common stock or shares to the public for the

first time. They are often issued by smaller, younger companies seeking capital to

expand, but can also be done by large privately owned companies looking to become

publicly traded. An IPO or an Initial Public Offer is a company's first sale of equity

shares to the general public. An Initial Public Offering (IPO) can be a good investment

avenue for equity investors. While the IPO market is dry these days, a fresh crop is

expected soon. It is important to understand IPO’s and decide whether to invest in them

or not.

In an IPO the issuer may obtain the assistance of an underwriting firm which helps it

determine what type of security to issue and best offering price and time to bring it to

market.IPO can be a risky investment. It is tough to predict what the stock or shares will

do on its initial day of trading and in the near future.

Example of IPO:-

Suppose Mr.X owns a business, his company is profitable and he wants to grow the

company faster. For this he needs money. Instead of debt, he wants to offer a part of his

company for sale in the stock market. He will make, what is called, a ‘Public Offer’ of

shares (after a number of procedures and regulatory processes). If the issue is successful, 15

his company will be listed or begin to trade in a stock exchange. So, an IPO is a fresh

offer, where a company that is not yet trading, wants to sell shares directly to the

investors. The shares can be offered ‘At Par’, that is, at face value of Rs 2, Rs 5 or Rs 10,

or ‘At Premium’. After this, Mr.X is no longer the only owner of the company.The

‘Owners’ of the company may now be thousands of people he may not even know. Yet,

if he holds the majority shares, he will still take all the decisions about the company. All

the share holders are now entitled to vote and may get dividends and bonuses.

Need of an IPO for a Company:-

Every company needs funds for its business for short term or for long term. To meet

short-term requirements, the company may approach banks, lenders or may even accept

fixed deposits from the public/shareholders. To meet its long-term requirements, funds

can be raised either through Loan from Lenders, Banks, Institutions etc., (which carry

financial burden) or through the Issue of Capital. Capital can be raised through Public

Issue, Private Placement of Shares, Rights Issue, etc. Public Issue means raising funds

from the public. Promoters of the company may have plans for the company that may

require infusion of money. The main purpose of the public issue, amongst others, is to

raise money through the public and to get its shares listed at any of the recognized stock

exchanges in India.

Reason for going for public issue by the company:

Raising funds to finance capital expenditure programs like expansion,

diversification, modernization, etc;

Financing of increased working capital requirements;

Financing acquisitions like a manufacturing unit, brand acquisitions,

tender offers for shares of another firm, etc;

Debt financing ;

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Exit route for exiting investors.

An IPO has two sides to it, consisting of advantages and disadvantages. Moreover, it

needs to be balanced, and this is done by the Regulatory Bodies such as The Securities

and Exchange Board of India (SEBI), so that it does not fall on one side.

Advantages of Public Issue are:-

Money non-refundable except in the case of winding up or buyback of shares.

No financial burden i.e., no fixed rate of interest payable. However in order to service

the equity, the dividend may be paid.

Enhances shareholder’s value if the company performs well.

Greater transferability.

Trading and listing of securities at stock exchanges.

Better liquidity of securities.

Disadvantages of Public Issue are:-

Time consuming process.

Expensive.

Several legal formalities.

Involvement of many intermediaries.

Transparency Requirements and public disclosure of information may lead to lack of

privacy.

Continuous compliance of provisions of listing agreement and other legal

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requirements.

Constant scrutiny of performance by investors.

May lead to takeover of the company.

Applicable Laws:-

A company is required to comply with the following laws in connection with a Public

Issue which are as follows:

Provisions of Companies Act, 1956.

Securities Contracts (Regulations) Act, 1956.

SEBI rules & regulations.

Compliance of Listing Agreement with the concerned stock exchanges after the

listing of securities.

RBI regulations in case of foreign/NRI equity participation.

BOOK BUILDING

Book Building is a process used for marketing a public offer of equity shares of a

company and is a common practice in most developed countries. Book Building is so-

called because the collections of bids from investors are entered in a "Book". These bids

are based on an indicative price range. The issue price is fixed after the bid closing date.

How is Book Built?

A company that is planning an Initial Public Offer (IPO) appoints a category-I Merchant

Banker as a Book Runner. Initially, the company issues a Draft Prospectus which does

not mention the price, but gives other details about the company with regards to issue

size, past history and future plans among other mandatory disclosures. After the draft

prospectus is filed with the SEBI, a particular period is fixed as the bid period and the

details of the issue are advertised. The Book Runner builds an order book, that is, collates

the bids from various investors, which shows the demand for the shares of the company

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at various prices. For instance, a bidder may quote that he wants 50,000 shares at Rs.500

while another may bid for 25,000 shares at Rs.600. Usually, the bid must be for a

minimum of 500 equity shares and in multiples of 100 equity shares thereafter. The Book

Runner appoints a Syndicate Member, a registered intermediary who garners subscription

and underwrites the issue.

On what basis is the Final Price decided?

On closure of the Book, the quantum of shares ordered and the respective prices offered

are known. The price discovery is a function of demand at various prices, and involves

negotiations between those involved in the issue. The Book Runner and the company

conclude the pricing and decide the allocation to each syndicate member.

When is the Payment for the Shares made?

The Bidder has to pay the maximum bid price at the time of bidding based on the highest

bidding option of the bidder. The bidder has the option to make different bids like quoting

a lower price for higher number of shares or a higher price for lower number of shares.

The Syndicate Member may waive the payment of bid price at the time of bidding. In

such cases, the issue price may be paid later to the syndicate member within four days of

confirmation of allocation. Where a bidder has been allocated lesser number of shares

than he or she had bid for, the excess amount paid on bidding, if any will be refunded to

such bidder.

Is the process followed in India different from abroad?

Unlike International Markets, India has a large number of retail investors who actively

participate in IPOs. Internationally, the most active investors are the Mutual Funds and

other Institutional Investors. So the entire issue is Book Built. But in India, 25 per cent of

the issue has to be offered to the general public. Here there are two options to the

company. According to the first option, 25 per cent of the issue has to be sold at a fixed

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price and 75 per cent is through Book Building. The other option is to split the 25 per

cent on offer to the public (small investors) into a fixed price portion of 10 per cent and a

reservation in the book built portion amounting to 15 per cent of the issue size. The rest

of the book built portion is open to any investor.

What is the advantage of the Book Building process versus the normal

IPO marketing process?

The Book Building process allows for price and demand discovery. Also, the cost of the

public issue is reduced and so is the time taken to complete the entire process.

How is Book Building different from the normal IPO marketing process

as practiced in India?

Unlike in Book Building, IPOs are usually marketed at a fixed price. Here the demand

cannot be anticipated by the merchant banker and only after the issue is over the response

is known. In book building, the demand for the share is known before the issue closes.

The issue may be deferred if the demand is less.

Entry Norms-who can come out with a public issue:-

Entry norms for the public issues are governed by the SEBI Guidelines, SEBI

(Disclosure for Investor and Protection) Guidelines, 2000. SEBI, keeping in view the

objective of greater transparency, investor protection and development of capital market,

has from time to time amended the entry norms for companies to come out with the

public issue. Entry norms are categorized into the following:

Unlisted companies.

Listed companies.

Unlisted Companies:-

Unlisted Companies are those public limited companies which are presently not listed at

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any of the recognized stock exchanges in India. The shares of such companies are

therefore not traded at any of the stock exchanges in India. Presently, there are two

options available for the unlisted companies to come out with the public issue.

1st Option:

It should have a track record of distributable profits for at least 3 out of immediately

preceding 5 years and

The pre-issue net worth (i.e., net worth before the issue) should be at least Rs.1 crore

in 3 out of 5 years, with the minimum net worth in the immediately preceding 2

years.

The issue size (includes offer to public, firm allotment, promoters contribution through

offer document) should not exceed 5 times its pre-issue net worth as per the last available

audited accounts.

2nd Option:

With the guidelines amended on August 04, 2000 SEBI has amended the 2nd option

available for an unlisted companies. Earlier the guidelines stated that if the company is

not able to satisfy the 1st option as mentioned above, the company can come out with the

public issue provided the project is appraised by any bank or public financial institutions

with at least 10% of the project cost financed by such appraiser.

As per the recent guideline, if the company is unable to satisfy the 1st option or if the

issue size is more than 5 times its pre-issue net worth, then the second option to come out

with the issue is through the book building process only.

The issue can come out through book building process provided 60% of the issue size is

allotted to the Qualified Institutional Buyers (QIB). If the company fails to allot 60%

of the issue of the issue size to QIB the entire money so received shall be refunded.21

“Three years out of immediately preceding five years” means 3 years audited accounts

for a period of at least 36 months are available for computation of the minimum track

record of 3 years of distributable profits.

Listed companies:-

Listed Companies are those which are presently listed on any one or more recognized

Stock Exchanges in India. The securities of such companies are traded on such stock

exchanges where they are listed.

All listed companies can come out with further public issue provided the net worth of the

company after the proposed issue is less than 5 times the net worth prior to the issue. In

case the net worth is more than 5 times the net worth prior to the issue, the company

should comply with any of the options as available for unlisted companies.

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ROLE OF SEBI-REGULATORY BODY

Up to 1992, the Capital Primary Market was controlled by the Controller of Capital

Issue (CCI) formed under the Capital Issues Control Act. During that period, the

pricing of capital issues was controlled by CCI. The premium on issue of equity shares

issued through the primary markets was done in accordance with the Capital Issues

Control Act.

The CCI guidelines were abolished with the introduction of Securities & Exchange

Board of India (SEBI) formed under the SEBI Act,1992 with the prime objective of

protecting the interest of investors in securities, promoting the development of and

regulating ,the securities market and for matters connected therewith or incidental

thereto.

The SEBI Act came into force on 30th Jan 1992 and with its establishment all Public

Issues are governed by the rules and regulations issued by SEBI.

SEBI was formed to promote fair dealing in issue of securities and to ensure that the

capital markets functions efficiently, transparently and economically in the better interest

of both the issuers and investors.

The promoters should be able to raise funds at relatively low cost. At the same time

investors must be protected from unethical practices and their rights must be safeguarded

so that there is a steady flow of savings into the market. There must be proper regulation

and code of conduct and fair practice by intermediaries to make them competitive and

professional.

Since, its formation SEBI has been instrumental in bringing greater transparency in

capital issues. Under the SEBI companies issuing shares are free to fix the premium

provided adequate disclosure is made in the offer documents.

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Role of Intermediaries:-Many intermediaries are involved in connection with the Public Issue. Following are the

intermediaries who have to be registered with SEBI and must have a valid certificate

from SEBI to act as an intermediary:

Merchant Bankers

Registrar and Share Transfer Agents

Bankers to the Issue

Underwriters

Stock Brokers and Sub Brokers

Depositories

Merchant Bankers:-

They play the most vital role amongst all intermediaries. They assist the company right

from preparing prospectus to the listing of securities at the stock exchanges. Merchant

Bankers have to satisfy themselves about the correctness and propriety of all the

information provided in the prospectus. It is mandatory for them to carry due diligence

for all the information provided in the prospectus and they must issue a certificate to this

effect to SEBI. A company may appoint more than one Merchant Banker provided inter-

se allocations of responsibilities between the Merchant Bankers are properly structured.

Under writers:-

They are those intermediaries who underwrite the securities offered to the public. In case

there is under subscription (in short, the company doesn’t receive good response from

public and amount received from investors is less than the issue size), underwriters

subscribe to the unsubscribed amount so that the issue is successful.

Registrar and Share Transfer Agents:-

They process all applications received from the public and prepare the basis of allotment.

The dispatch of share certificates / refund orders is handled by them.

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Bankers to the Issue:- These are banks which accept application from the public on

behalf of the company. These applications are then forwarded to Registrar and Share

Transfer Agent for further processing.

Stock Brokers and Sub-Brokers:-

These are those intermediaries who through their contacts /services invite the public for

subscribing shares for which they get commission.

Depositories:-

These are the intermediaries who hold securities in dematerialized form on behalf of

shareholders.

Promoter’s Contribution & Lock-in Requirement:-

Some specific provisions have been inserted with regard to the contribution of the

promoters in the capital of the company.

Promoter’s Contribution should be a minimum 20% of the Post Issue Capital. In order to

calculate the minimum 20%, following shares allotted to promoters during the last 8

years before filing prospectus with SEBI will not be included:-

Shares acquired for consideration other than cash and revaluation of assets or

capitalization of intangible assets.

Shares allotted on account of bonus issue, out of revaluation reserves or reserves

without accrual of cash resources.

Shares allotted at a price lower than the price at which equity is being offered to

public during the preceding one year. (however, if the amount of difference is

bought in by the promoters it will be considered as promoter’s contribution)

Applications received for less than Rs.25,000 per applicant in case of each individual

and Rs. 1lakh from firms and companies (not being business associates like

dealers and distributors)25

In case of public issues by listed companies, the promoter’s contribution should be either

20% of the proposed issue or 20% of the Post Issue Capital. Also, if the promoter’s

contribution in such companies exceeds the 20%, then the excess of 20% shall attract the

provisions of the guidelines on preferential allotment, if the issue price is lower than the

price as determined on the basis of said preferential allotment guidelines.

Promoters’ contribution to be brought in before the Issue:-

Promoters are required to bring the full amount of promoter’s contribution atleast one day

prior to the opening of the Public Issue and should be kept in an Escrow Account with a

scheduled bank. The said amount shall be released after the finalization of the basis of

allotment with the proceeds of public issue.

However, if the promoter’s contribution has been brought prior to Public Issue and has

been utilized by the company, the company is required to insert cash flow statement in

the prospectus, in this regard disclosing the use of such fund received from promoters.

If the minimum promoter’s contribution exceeds Rs.100 crore, the promoters are required

to bring at least Rs.100 crore before the opening date of public issue and the balance

contribution can be bought by the promoters in advance on pro-rata basis before the calls

are made to the public.

Issue procedure:-

Book Building Procedure:-

The Issue is being made through the 100% Book Building scheme wherein a minimum of

25% of the issue shall be for allocation on a proportionate basis to Retail Bidders, not less

than 15% of the issue shall be available for allocation on a proportionate basis to Non-

Institutional Bidders and the remaining up to 60% of the issue may be allocated on a

discretionary basis to QIBs subject to valid bids being received at or above the issue

price. Bidders are required to submit their bids through the members of the syndicate.

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Bid cum Application Form:-

Bidders shall only use the specified Bid Cum Application Form bearing the stamp of a

member of the syndicate for the purpose of making a Bid in terms of this Red Herring

Prospectus. The Bidder shall have the option to make a maximum of 3 Bids in its Bid

Cum Application Form and such options shall not be considered as Multiple Bids.

The prescribed color of the Bid Cum Application Form for various categories is as

follows:

Category Color of Bid Cum Application Form

Indian Public, NRI or OCB applying on

a non-repatriation basis

White

NRI,OCB or FII applying on a

repatriation basis

Blue

Who can Bid:-

Indian nationals resident in India who are majors, in single or joint names (not

more than 3).

Hindu Undivided Families, in the individual name of Karta.

Indian Mutual Funds registered with SEBI;

Indian Financial Institutions, Commercial Banks, Regional Rural Banks,

Cooperative Banks(Subject to RBI permission, as applicable );

Venture Capital Funds registered with SEBI;

Foreign Venture Capital Investors registered with SEBI;

State Industrial Development Corporations;

Trusts registered under the Societies Registration Act, 1860, as amended or under

any other law relating to Trust and who are authorized under their constitution

to hold and invest in Equity Shares;

NRI’s, OCB’s and FII’s on a repatriation basis or a non-repatriation basis subject

to applicable laws; and

27

Scientific and/or Industrial Research Organizations authorized to invest in Equity

Shares.

Maximum and Minimum Bid Size:-

For Retail Bidders: The Bid must be for a minimum of 100 Equity Shares and in

multiples of 50 Equity Shares thereafter, up to a maximum of 1000 Equity

Shares. In case the Bid is for more than 1000 Equity Shares, the same would be

considered for allocation under the Non-Institutional category.

For other Bidders (Non-Institutional Bidders and QIBs): The Bid must be for a

minimum of 1050 Equity Shares and in multiples of 50 Equity Shares thereafter.

A Bid cannot be submitted for more than 32,04,684 Equity shares. However, the

maximum Bid by an Institutional Investor should not exceed the investment

limits prescribed for them by the regulatory or statutory authorities governing

them.

Bidding process:-

Investors who are interested in subscribing for the company’s Equity Shares

should approach any of the members of Syndicate or their authorized agents

to register their Bid.

Bid Cum Application Forms which do not bear the stamp of any of the BRLMs or

Syndicate Member will be rejected.

Bids at Different Price Levels are as follows:-

The Floor Price has been fixed at Rs.130 per Equity Share of Rs.10 each for

reference purposes of the Bidders. The floor price is only indicative. The

Company in consultation with the BRLMs can finalize the Issue Price at or

above the Floor Price in accordance with this clause, if any, without the prior

approval of, or intimation, to the Bidders.28

The Bidder can Bid at any price at or above the Floor Price. The Bidder has to bid

for the desired number of Equity Shares at a specific price and any Bid at

“cut-off” price will be rejected, except for Retail Bidders. A Retail Bidder will

also have an option of putting “Cut off Price Bid” on the on-line system. Such

bid would imply that the investor is willing to put the Bid for quantity on

Equity shares, at whatever the issue price is arrived by the book building

procedure.

The Bidder can bid at any price in multiples at Re.1.00 only, at or above the Floor

Price.

Escrow Account of the members of the Syndicate:-

Cheques or demand drafts received from Bidders would be deposited in the Escrow

Account of the respective member of the Syndicate.

Terms of payment into the Escrow Account:-

Each Bidder shall, with the submission of the Bid cum Application Form for, draw a

cheque, demand draft or stock invest for the maximum amount of his bid in favor of the

Escrow Account of the Escrow Collection Bank and submit the same to the member of

the syndicate. Bid cum application forms accompanied by cash shall not be accepted. The

maximum bid amount has to be paid at the time of submission of the bid cum application

form based on the highest bidding option of the bidder. The member of the syndicate

shall deposit the cheque, demand draft or stock invests with the Escrow Collection Bank.

Electronic Registration of Bids:-

The members of the syndicate will register the bids using the on-line facilities of NSE

and BSE.

NSE and BSE will offer a screen-based facility for registering bid for the issue.

Members of the syndicate can also set up facilities for off-line electronic

registration of bids subject to the condition that they will subsequently download

29

the off-line data file into the on-line facilities for book building on half hourly

basis.

At the time of registering each bid, the members of the syndicate shall enter the

following details of the investor in the on-line system:

Name of investor

Investor Category- Individual, HUF, Corporate, NRI, OCB, FII or Mutual

Funds etc.

Numbers of equity shares

Bid price

Bid cum application form number

Whether payment is made upon submission of bid cum application form, if

yes, amount paid

Depository participant identification no. and client identification no. for

Demat Account of the bidder.

After the above data is entered, the system will generate a unique transaction

identification code, which will indicate the identity of the member of the

syndicate and the bidder’s registration with him. A system generated TRS will be

given to the bidder as a proof of the registration of each bid price of demand

option.

Such TRS will be non-negotiable and by itself will not create any obligation of any

kind.

The member of the syndicate has the right to review the bid. Consequently, the

member of the syndicate also has the right to accept the bid or reject it without

assigning any reason. In case of Non-Institutional bidders and retail bidders, bids

would normally not be rejected except on the technical grounds listed on page 26

of this red herring prospectus

It is also to be distinctly understood that the approval given by BSE is only to use the

software for participating in book building process.

Responsibilities of BRLM and CBRLM:-30

Capital structuring.

Drafting and approval of all publicity material, arranging road shows, preparing

corporate films etc.

Finalizing Floor Price and Cap Price.

Institutional Marketing of the Issue.

Finalizing Registrars & Bankers to the issue.

Deciding pricing and institutional allocation in consultation with the company.

Responsibilities of Registrars:-

Collection of the Application from Bankers.

Numbering of Applications and Maintenance of Control Registers.

Data Entry the Applications and check listing the Applications.

Rectification of Data corrections.

Bank Branch reconciliation.

Reconciliation of applications received with electronic book.

Finalizations of Rejections.

Preparation of Basis of Allocation.

Allotment process.

Filing of RBI report and Return of Allotment.

Handling Queries of Investors.

Responsibilities of Escrow Bankers:-

Opening of Escrow accounts separately for Public and NRI for crediting of amounts

received on application.

Bank Branches to collect applications from Syndicate members.

Reconciliation of amounts received.

Preparation of Bank schedules.

Procedure for the Public Issue:-

31

In short, if the company has satisfied the entry norms it should approach a merchant

banker with whom Memorandum of Understanding (MOU) has to be executed. The

Merchant Banker shall carry due diligence for all the information provided in the

prospectus. The obligations are divided into pre-issue and post issue which are as

follows:-

Pre-Issue Obligation (i.e. before the 0pening of Issue):-

Board Resolution for approving the draft prospectus and related resolutions

Shareholder’s Resolution pursuant to Section 81(A) of the Companies Act, 1956.

Filing of form 23 with ROC for passing special resolution for issuing shares as above.

Appointment of intermediaries and entering into MOU with them

Due diligence by a merchant banker

Submission of all required papers/documents with merchant bankers.

Preparation of draft prospectus in consultation with the merchant banker and

submitting the same with SEBI along with the fees & other requirements and

submitting the same with stock exchanges as per guidelines.

Receipt of queries form SEBI/stock exchanges, if any and make changes in

prospectus, if required.

Reply to SEBI/stock exchanges in connection with changes in prospectus.

Obtaining in-principle approval from stock exchanges

File final prospectus with SEBI/stock exchanges/ROC

Statutory Advertisements

Submission of 1% Security Deposit with the Regional Stock Exchange.

Depositing Promoter’s Contribution in the issue in separate bank account

Post-Issue Obligation (i.e., after the closure of issue):-

Collection of Application forms and processing the same at the Registrar & Share

Transfer Agent in consultation with the merchant banker.

Separate account to be opened for the applications received from public

Submitting 3-day post issue monitoring report with SEBI by merchant banker.32

Basis of allotment in consultation with the regional stock exchange.

Post Issue Advertisement

Entering into an listing agreement

Obtaining permission from Stock Exchanges for listing & trading of securities

Commencement of trading of securities

78-day post issue monitoring report to be submitted by merchant banker with SEBI.

Redressal of Investors Grievances.

Some important issues pertaining to public issues are as follows:

Companies can freely price its securities.

Company cannot come out with public issue unless all its existing partly paid up

shares, if any, are made fully paid up.

Before filing the final prospectus, the company can keep a price band of

maximum 20%. It means that if the company is not sure of the issue price, it

may keep a floor price with a price band of 20%.

Net offer to public should be at least 25% of the issue size.

Public issue should be opened for at least 3 working days and not more than 10

working days.

The minimum amount to be received from each investor should be Rs.2000.

Promoters may at their discretion arrange for buy back facility or safety net

facility in the prospectus subject to the maximum 1000 shares per allotted.

The validity of such scheme, if any shall be for at least 6 months from the date

of dispatch of share certificates.

Company can come out with an issue within 365 days from the date of the

observation letter received from SEBI or where such letter is not received,

issue can come out within 365 days from the 22nd day of the date of filing of

the prospectus with SEBI.

Trading of securities of all new public issues will be in dematerialized form only.

The refund orders demat credit, allotment and submission of listing documents to

stock exchanges should be completed within 2 working days of finalization of 33

the basis of allotment.

Concept of Dematerialization:-

Keeping in mind the risks involved on account of fake/forged certificates, bad delivery

and delays in transfer SEBI has made recent changes by which all the public issues shall

be in dematerialized form only. It means that no physical share certificate will be given to

the shareholders. The shares shall be electronically be transferred to the shareholders

account opened by its Depository Participant.

CHAPTER-3

34

COMPANY PROFILE

HISTORY OF THE COMPANY

About the Religare:-

Religare is one of the leading Integrated Financial Services Institutions of India. Our

businesses are broadly clubbed across 3 key verticals i.e. The Retail, Institutional

Spectrum and Wealth Management, catering to a diverse and wide base of clients spread

across the length and breadth of the country. Structurally, all business is operated through

various subsidiaries held through the holding company Religare Enterprises Limited.

REL offers a multitude of investment options and a diverse bouquet of financial services

with its pan India reach in more than 1550 locations across more than 460 cities and

towns. REL also currently operates from 10 countries globally following its acquisition of

London's oldest brokerage & investment firm, Hichens, Harrison & Co. plc.

With a view to expand, diversify and introduce offerings benchmarked against global best

practices it partnered with Vistaar Entertainment to launch India's first SEBI approved

Film Fund offering a unique alternative asset class of investments.

Customer Service:-

Religare believes in providing independent research for clients to make investment

decisions, with strict emphasis on self-regulation, avoiding possible conflict of interest in

35

objectivity.

Varied research reports are prepared on different categories of Equities like:

Fundamental research

Technical research

Daily reports

Intraday trading tech calls

Intraday Derivative call

Directional F&O call

Structured products

Index Arbitrage

About The Securities the Company Offers:-

Religare Securities Limited (RSL) is a leading Equity and Securities firm in India. The

Company currently handles sizeable volumes traded on NSE and in the realm of Online

Trading and Investments it currently holds a reasonable share of the market. The major

activities and offerings of the company are Equity Broking, Depository Participant

Services, Portfolio Management Services, Institutional Brokerage & Research,

Investment Banking and Corporate Finance.

RSL is a member of the National Stock Exchange of India, Bombay Stock Exchange of

India, Depository Participant with National Securities Depository Limited and Central

Depository Services (I) Limited, and SEBI approved Portfolio Manager.

Religare has a very credible Research and Analysis division, which not only caters to the

need of our Institutional clientele, but also gives their valuable inputs to investment

dealers.

Merchant Banking:-

Recognized as a leading Merchant Banker in the country, it is registered with SEBI as a

Category-I Merchant Banker. This reputation was built by capitalizing opportunities in

Corporate Consolidations, Mergers and Acquisitions and Corporate Restructuring.

36

It has also emerged as a Pioneer in the arena of relationships, both at the customer and

trade levels because of its unshakable integrity, seamless service and innovative solutions

that are tuned to meet varied needs.

VISION, MISSION &BRAND ESSENCE

Vision:-

To build Religare as a globally trusted brand in the Financial Services domain and present

it as the ‘Investment Gateway of India'

Mission:-

Providing complete financial care driven by the core values of Diligence and

Transparency.

Brand Essence:-

Core brand essence is Diligence and Religare is driven by Ethical and Dynamic processes

for Wealth creation.

37

CHAPTER-4

38

DETAILS OF THE STUDY

PROCEDURE FOR AN IPO

Issuing an IPO must be an organized process. At each stage verification is done

and clarifications are sought between the Client Company and the Merchant Banker.

There is a significant need for clarity and communication between the Client Company

and the Merchant Banker. A cordial and trusting relationship must exist between the two.

The Client should cooperate with the Merchant Banker in revealing necessary details,

while at the same time; the Merchant banker must be able to maintain a certain degree of

privacy for the Client.

As always, there is a step-by-step procedure involved in entering into a contract

with the client to act as his Lead Manager. Like all other goals, there could be more than

one way to fulfill this goal too. The following is an attempt to outline such a procedure.

Procedure for Contract Review:-

39

Purpose:-

To offer and execute services to meet Client Company’s requirement in the

capacity of Lead Managers, Co- Managers, Advisors or Underwriters to the Issue.

Procedure:-

Firstly, the prospective clients are identified and the assignment to be done is

assessed on various parameters. Often, a presentation may be made to the Client

Company on the organization and the various services it has to offer. Thereafter, a

detailed Offer Letter is prepared and submitted. Once the Client Company decides on

appointing the Merchant Banker, a Letter of Appointment is formally received. A

contractual agreement is entered into, and a Consent Letter is submitted.

Once a contract has been finalized between the issuer Client Company and the

Merchant Banker, the management of the IPO starts. This is the core activity performed

by the Merchant Banker and involves the collection and verification of various company

documents and consents.

The Merchant Banker confirms that the documents provided by the company are all

genuine and adhere to all relevant laws, and finally issues a Due Diligence Certificate.

A host of other activities are also performed, which stress on the fact that the

Merchant Banker must always be available to guide the company and co-ordinate other

intermediaries, while protecting the interests of the investor.

Procedure for Issue of an IPO:-

Purpose:-

To raise funds from the Public through issue of Equity Shares for new as well as

existing companies for expansion, diversification etc.

Procedure:-

Collection of all relevant information / documents needed for preparing the

Prospectus from the concerned Company is done, wherever necessary. On receiving the

40

information from the company, draft prospectus is prepared by referring to the checklist

of documents required for preparation of prospectus and as per the SEBI guidelines

issued from time to time.

The Lead Manager advises the issuer company in selection of various

intermediaries such as:

Advisors to the Issue,

Co-managers to the Issue,

Bankers to the Issue, who are SEBI registered.

10 Copies of Draft Prospectus, Interest Certificate, a Floppy containing Draft Prospectus,

MOU, Filing Fee and a Due-Diligence Certificate is submitted to the Regional SEBI

Office / SEBI Mumbai (as the case may be) and 10 copies of draft prospectus and a

floppy containing draft prospectus with SEBI, Mumbai, by the MBD Representative.

MBD representative submits 10 Copies of draft prospectus to SE’s where listing is

sought. A copy of the draft prospectus is filed along with a request letter from the

Company for Demat of shares to both NSDL & CDSL. An acknowledgment is obtained

from the SEBI Office, wherever submitted.

On receipt of observations from SEBI, MBD representative to SEBI covering

all the observations within the stipulated time submits a reply. A material changes report

is submitted by the MBD Representative to SEBI, 21 days after filing of draft prospectus,

stating the complaints received, if any, from public/institutions and the additions /

amendments to be made in draft prospectus. On receipt of SEBI Card, if the company

intends to get its issue underwritten, certain documents have to be sent to the

Brokers/Merchant Bankers by the MBD Representatives inviting them to participate in

the underwriting. Finalization of underwriting is then done, and the Final Draft

Prospectus is filed.

The final draft prospectus is filed to SEBI after incorporating all the

observations as specified in the acknowledgment card before filing with ROC. On

41

finalization of underwriters to the issue it is ensured that all material documents as

mentioned in the prospectus along with a copy of prospectus duly signed by the Board of

directors (of Issuer Company) are filed with ROC. Filing of due-diligence certificate with

SEBI is then completed.

Issue application form (Form 2A) is prepared as per the Ministry of Finance

and SEBI guidelines. Share Application forms and prospectus is then printed. A

distribution schedule is then prepared for the dispatch and issue of the Application Forms

and Prospectus. The printed copies of the Prospectus are then submitted to SEBI. 5

printed copies of the prospectus are submitted to SEBI Regional and Mumbai offices, at

least 10 days before the opening of the issue.

All necessary arrangements are made for opening of the issue. The Lead

Manager before the opening of the issue informing that no corrective action is required

files a due - diligence certificate with SEBI. Auditor's certificate, confirming the receipt

of promoter's contribution, giving the detailed list of Promoter's group, is filed with SEBI

and SE's (where listing is sought) by Issuer Company, at least one day before the opening

of the issue.

The Issuer Company deposits 1% of the issue amount with Regional Stock

Exchange at least one day before the opening of the issue. A final compliance certificate

is filed with SEBI before the closure of issue. On receipt of 90 % subscription the issue is

closed on the earliest closing date, if any. If the issue is still unsubscribed, it is kept open

for a total period of 10 working days, before the devolvement notices are served to the

underwriters of the issue.

A 3-Day Compliance Report and a 78-Day Compliance Report are then filed with

SEBI. Whenever and wherever required, MBD representative assists the issuer company

in completing the listing formalities by referring to the checklist of documents to be filed

with stock exchanges for listing securities in case of public issues.

The above procedure brings out the involvement of the Merchant banker in the

42

Issue Process. The next few pages will focus on some key points such as the Prospectus,

the concept of Due Diligence, the Application Form, the Post-Issue Monitoring Reports,

and so on.

The Merchant Banker must work diligently in order to ensure that all relevant

and updated information is captured aptly and truly in the Prospectus. The importance of

the Prospectus must therefore be understood.

43

PROSPECTUS

The ‘Prospectus’ is the most important document, for the company to come out

with a Public Issue. Pursuant to Section 2(36) of The Companies Act, ‘Prospectus’

means any document described or issued as a prospectus and includes any notice,

circular, advertisement or other document inviting deposits from the public or inviting

offers from the public for the subscription or purchase of any shares in, or debentures of,

a body corporate. The purpose of the Prospectus is to provide all the necessary and true

information to investors about a Company in order to enable him to make an investment

decision.

The Prospectus is a document by way of which the investor gets all the

information pertaining to the company in which he is going to invest. It gives the

detailed information about the company, its promoters and directors, group

companies, capital structure, terms of the present issue, details of the proposed

project, particulars of the issue etc.

There may be two kinds of Prospectus:

An Ordinary Prospectus is a formal written offer to sell securities that provides an

investor with the necessary information to make an informed decision. It is used in

case of an IPO Issue under the Fixed- Price Process, where the investors know the

Price of the IPO beforehand. It explains a proposed or existing business enterprise

and must disclose any material risks and information according to the securities laws.

A Red Herring Prospectus is a preliminary prospectus issued by underwriters or

issuers to gauge interest in a prospective offering. It is used in the case of an IPO

issue under the book-building process, where applicants are to bid for the IPOs. It

receives its name from the warning, printed in red, that information in the document

is incomplete or subject to change before the issue. It relates to a registration

44

statement filed with the Securities and Exchange Board of India that has not yet

become effective.

Vetting by SEBI/Stock Exchanges:-

A Company cannot come out with a public issue unless a Draft Prospectus is filed with

SEBI.

A Company cannot file the Prospectus directly with SEBI. It has to be filed through a

Merchant Banker. After the preparation of the Prospectus, the Merchant Banker along

with the Due Diligence Certificate and other compliance sends the same to SEBI for

vetting.

SEBI on receiving the same scrutinizes it and may suggest changes within 21 days of

receipt of the Prospectus.

If the issue size is up to Rs. 20Crores, the Merchant Bankers is required to file the

Prospectus with the regional office of SEBI falling under the jurisdiction in which the

registered office of the Company is situated. If the issue size is more than Rs.

20Crores, merchant bankers are required to file the prospectus at SEBI, Mumbai

office.

Date of Prospectus and ROC Card:-

After making changes, if any, as recommended by SEBI / Stock Exchanges, the

final Prospectus, duly signed by all the Directors must be filed with the Registrar of

Companies (ROC) along with the copy of all material documents. The ROC may suggest

changes which should also be reported to SEBI / Stock Exchanges. The date on which

ROC Card is obtained is the date of the prospectus.

Contents of the Prospectus:-

The word "Prospectus".

The name of the Issuer Company and address of the registered office of the

company, along with telephone fax number and E-mail address.

The nature, number, price and amount of the instruments offered.

Risk in Relation to First Issue and General Risk of Investment Clauses.45

Issuer’s Absolute Responsibility Clause.

Various Disclaimer Clauses of the SEBI, the Stock Exchanges, the Merchant

Banker, and the Company.

Various Undertakings by the Company and its Board of Directors.

The names and address of the Merchant bankers, and other intermediaries

involved in the Issue.

The Issue Opening and Closing Dates.

Risk Factors associated with the Issue and Management Perception to handle

these factors thereof.

Information on various transactions by the issuer Company.

Government Approvals and Filing.

Instructions to investors on who can apply and how to apply.

Information on the utilization of Issue Proceeds.

Full details on the Capital Structure of the Company and Shareholding Pattern.

Terms of the Offer and Rights of Shareholders.

Basis of Allotment of Shares.

Details of existing facilities.

Details of project cost and means of financing the project.

Full Financial Details and Financial Statements for last five years, complete with

the Auditor’s Report.

Details on Promoters and their Background.

Basis of the Issue Price.

The Prospectus is prepared after much verification and clarification between the Client

Company, the Regulatory Bodies and the Merchant Banker. The contents of the

Prospectus must be reliable and relevant. The Merchant Banker performs Due Diligence

in order to ensure this and Issues Certificates of Due Diligence at various stages.

46

PRICING OF AN IPO

Both the Lead Manager and Underwriter have the explicit responsibility of raking up

enough investment for the issue. The first has its income attached to the applications and

second bears the market risk failing which it has to cough up the amount which it may

not recover in case of a below average market response as this is the factor that decides

the scripts performance in secondary market. Therefore, both play important role in the

price determination of the issue.

The issuing company obviously wants to raise as much money as possible by selling as

less number of securities possible. This is definitely in the interest of shareholders of the

company as the dilution of equity is tried to be kept at minimum. Some of the general

aspects by which the issuing company decides the price are the company image, project

strength, business prospects and the incremental cash flows that are expected to be

accrued as a result of the program (Issue).

But the Lead Manager and Underwriter vet the price going by the general market

sentiment at the point of time. This basic inter locations of difference opinion is what

leads ultimately to price discovery for the issue.

47

MARKETING OF AN IPO

The marketing strategy is a crucial factor in determining the success of the issue.

The various components of the strategy are:

Timing of the issue

Retail distribution of the issue

Reservation in the issue

Advertising campaign.

Timing of the issue:-

The timing of the issue is of critical importance to ensure its success. Timing refers to the

general sentiment prevailing in the market at the time of the issue though it is extremely

difficult in practice to determine the right time for the issue. The decision regarding the

timing is a futuristic decision as it involves predicting the expected market sentiment

during the time of the issue. The lead manager normally depends upon the following

factors to determine the issue timing.

Prevailing market sentiments.

Market forecasts by research reports of reputed outfits.

Response to some of the recent public offerings in the primary market.

Avoid clashing with mega-issues or economic or political events like budgets,

elections etc.

Retail Distribution:-

The retail distribution is an important success variable in an issue. Normally, the retail

distribution is done through a network of brokers. This involves identifying the

geographical idea where the lead manager expects the subscription flow; and the brokers

48

who have a strong distribution network in these areas are identified. The brokers

generally appoint the sub-broker at various places. The sub-brokers interact with the

investors and procure subscriptions for the issue.

The maximum brokerage payable is 1.5% on the amount subscribed and allotted. The

brokers are free to pass on the whole or part of the brokerage to their sub-brokers. The

issue company also conducts road shows at various places. Here the lead manager

accompanied by a team of senior officials of the companies, holds a conference. The

network investors, brokers and sub-brokers attend these road shows. The team makes a

presentation about the company and answers the queries raised by the participants .Road

shows gives an opportunity for the investors and the brokers to directly interact with the

issuer company.

The following points are normally highlighted in the road shows:

Past performance of the company

Promotes and their track record.

Appraisal and funding by banks and financial institutions

Foreign collaboration if any;

Industry prospectus

Promoters stake in the company

Current stage of project implementation.

Special features like marketing tie-up, tax benefits, brand equity , patents held etc;

Some of the companies use direct mailers to market the issue. A database of target

investors is prepared. The application alone with the prospectus is directly mailed to the

investors. Though the company incurs the cost of mailing, it can save on the brokerage

cost.

Reservation in the issue:-

Apportion of the issue can be reserved for specific class of investors. This helps on pre 49

sailing the issue and reduces the net offer to the public. The classes of investors to whom

reservations can be made are as follows:

Mutual funds

Banks and financial institutions

Non-resident Indians and overseas corporate bodies

Foreign institutional investors

Employees

The following regulations have to be complied with regard to reservations in the

issue:-

The net offer to the public (total issue size less all reservations) should not be

less than 25% of the post issue equity capital of the company.

Reservation for a single NRI / OCB cannot exceed 55% of the post issue

capital and the total reservation for all NRIs and OCBs cannot exceed 10%

of post issue capital as per RBI guidelines.

Reservations for single FIIs cannot exceed 5% of the post issue capital and the

total reservations for all FIIs cannot exceed 10% of the post issue capital.

The reservations for employees of the issuer company cannot exceed 10% of

the total issue size.

The reservation for group shareholders cannot exceed 10% of the total size of

the issue.

The reservation for group shareholders cannot exceed 10% of the total size of the issue

Reservation in a public issue can be either on firm basis or competitive basis. If the

amount is reserved for a specific investor, it is called as Firm Reservation .The identity

of the investor should be disclosed in the offer document. If the reservation is made for a

particular class of investors, it is called as Reservation on Competitive Basis. In case of

over subscription in the competitive category, the allotment to the various applicants in

the category will be made on a proportionate basis. The amount will be added to the net

offer to the public. In case of under subscription of the portion reserved on firm basis, the 50

amount has to be brought in by the promoters with 3 year lock-in period.

Advertising campaign:-

The main function of the advertising agencies is to give wide publicity to the issue. The

company decides on the size of the advertising budget in consultation with the lead

managers. Once this is decided, the agency and the lead manager draw up a publicity

campaign. The common channels of publicity are:

Adv insertions in the print media

Adv in audio-visual media via radio and television

Press releases and press conferences

Hoardings , banners and posters at important locations

At Investor conferences

The following advertisement has to be statutorily released:

Issue announcement advertisement at least ten days before opening of

the issue. This advertisement contains an abridged version of the

prospectus

Issue opening advertisement on the day of the opening of the issue

Issue closing advertisement on the day of closing of the issue

The basis of allotment advertisement after finalizing it.

The following guidelines have to be observed with regard to issue advertisement:

The advertisement shall not contain any information or language which is extraneous

to the prospectus.

No models, celebrities, fictional characters, land marks or caricatures shall be

displayed in any advertisement.

The advertisement should not include any issue slogans or brand name for the issue

except the commercial brand name of its product.51

The advertisement shall not contain statements which promise or guarantee rapid

profits.

No advertisements of the company, from 21 days of filing of the prospectus with

SEBI till the closure of the issue, shall be released without containing the risk

factors.

LISTING OF SECURITIES

Listing means admission of the securities to dealings on a recognized stock exchange.

These may be of any public limited company, Central or State Government, quasi-

governmental financial institutions/corporations, municipalities, etc.

The objectives of listing are mainly to:-

Provide liquidity to securities.

Mobilize savings for economic development.

Protect interest of investors by ensuring full disclosures.

The exchange has a separate Listing Department to grant approval for listing of securities

in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956,

Securities (Regulation) Rules, 1957, Companies Act, 1956, Guidelines issued by SEBI

and Rules, By Regulations of the exchange.

A company intending to have its securities listed on the exchange has to comply with

requirements prescribed by the exchange. Some of the requirements are as under: -

Minimum Listing Requirements for new companies

Minimum Listing Requirements for companies listed on other stock exchanges

Minimum Requirements for companies delisted by this Exchange seeking relisting of this Exchange

Permission to use the name of the Exchange in an Issuer Company’s prospectus

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Submission of letter of application

Allotment of Securities

Trading Permission

Requirement of 1% security

Payment of Listing FeesMinimum Listing Requirements for new companies:-

Minimum Capital:

Few companies can be listed on the Exchange, if their issued & subscribed

equity capital public issue is Rs. 10crores. In addition, this issuer company

should have a post issue net worth (equity capital + free reserves excluding

revaluation reserve) of Rs. 20crores.

For new companies in high technology (i.e., Information Technology, Internet,

E-commerce, Telecommunication, Media including Advertisement,

Entertainment etc.) the following criteria is applicable regarding threshold

limit:

The total income/sales from the main activity from the above fields should

not be less than 75% of the total income during the two preceding years

as certified by the Auditors of the Company.

The minimum post-issue paid-up equity capital should be Rs.5Crores.

The minimum market capitalization should be Rs.50crores.

Minimum Public offer:-

As per Rule 19(2) (b) of the Securities Contracts (Regulation) Rules, 1957,

Securities of a Company are listed on a Stock Exchange only when at least 25% of each

class or kind of securities is offered public for subscription.

In case of IPO’s by unlisted companies in IT and Entertainment sector, at least 10% of

issue by the company may be offered to the public subject to the following:

Minimum 20lakhs securities are offered to the public.

The size of the offer to the public is minimum 50 Crores.

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For this purpose, the term “Offered to the Public” means only that portion offered to the

public and include reservations of securities on firm or competitive basis.

Minimum Listing Requirements for companies Listed on other stock

exchanges:-

The Governing Board of the Exchanges at its meeting held on 6th August, 2002

amended norms for Companies listed on other Stock Exchanges and seeking listing at

BSE. These are applicable with immediate effect.

The Company should have minimum Issued and Paid-up Equity Capital of Rs.3

Crores.

The Company should have profit making track record for last 3yrs. The

revenues or profits of non–recurring nature should be excluded while

calculating distributable profits.

Must have a minimum net worth of Rs.20 Crores [net worth includes Equity

capital and free reserves revaluation reserves.]

Minimum market capitalization of the listed capital should be atleast two times

of the paid up capital.

The Company should have a dividend paying track record for the last 3

consecutive years. Minimum dividend should be at least 10%.

The Company should have atleast two yrs listing record with any of the

Regional Stock Exchanges.

The Company should sign an agreement with CDSL and NSDL for Demat

Trading.

Minimum Requirements for Companies delisted by this Exchange

seeking relisting of this Exchange:-

The companies delisted by this Exchange and seeking relisting are required to

make a fresh bid and comply with the prevailing SEBI’s and BSE’s guidelines regarding

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Initial Public Offerings.

Permission to use the name of the Exchange in an Issuer Company’s

Prospectus:-

The Exchange follows a procedure in terms of which companies desiring to list

their securities through public issues are required to obtain its prior permission to use the

name of the Exchange in the Prospectus or Offer for Sale Documents before filing the

same with the concerned office of the companies. The Exchange has formed a “Listing

Committee” since last four years to decide upon the matter of granting them permission

to use the name of “Bombay Stock Limited” in their prospectus/offer documents. The

committee evaluates the Promoters, Companies and several other factors before taking

any decision in this regard.

Submission of Letter of Application:-

As per Section 73 of the Companies Act, 1956, a Company seeking listing of its

securities is required to submit a Letter of Application to all the Stock Exchanges and

have its securities listed before filing the prospectus with the Registrar of Companies.

Allotment of Securities:-

As per the Listing Agreement, a Company is required to complete allotment of

securities offered to public within 30 days of the date of closure of the subscription list

and approach the Regional Stock i.e. Stock Exchange nearest to its Registered Office for

approval of the Basis of Allotment.

In case of Book Building issue, allotment shall be made not later than 15 days

from the close issue and if it fails to allot it has to pay interest at the rate of 15% to the

investors.

Trading Permission:-

As per Securities and Exchange Board of India guidelines, the Issuer Company 55

should complete formalities for trading at all the Stock Exchanges where the securities

are to be listed within few days of finalization of Basis of Allotment.

A company should carefully stick to the time limit for allotment of all securities and

Allotment Letters/Share Certificates and Refund Orders and for obtaining the Listing

Permission from Exchanges whose names are stated in its Prospectus or Offer

Documents. In the event of the permission to a company being denied by any Stock

Exchange where it had applied for Listing Securities, it cannot proceed with the

Allotment of Shares. However, the company may file before the Securities and Exchange

Board of India under Section 22 of the Securities (Regulation) Act, 1956.

Requirement of 1% Security:-

The companies making Public/Rights Issue are required to deposit 1% of issue

amount with the Stock Exchange before the issue opens. This amount is liable to be

forfeited in the event of their not resolving the complaints of investors regarding delay in

sending Refund Orders/Share Certificates, Payment of commission to Underwriters,

Brokers, etc.

Payment of Listing Fees:-

All companies listed on the Exchange have to pay Annual Listing Fees by the 30 th

April of every year to the Exchange as per the Schedule of Listing Fees prescribed from

time to time.

The Post-Issue Monitoring Reports:-

The Merchant Banker’s Obligations do not end with the closure of the Issue of the

IPO. Irrespective of the level of subscription, the Merchant Banker must ensure the

submission of the Post-Issue Monitoring Reports as specified by SEBI, Guidelines. There

are mainly two Post-Issue Monitoring Reports:

The 3-Day Post-Issue Monitoring Report.

The 78-Day Post-Issue Monitoring Report56

The 3-Day Post-Issue Monitoring Report:-

This report is to be submitted within 3 days of the Closure of the Issue. It is quantitative

in nature. The Report contains details on:

Issue Opening and Closing dates.

Actual Closing date.

Date of filing with ROC.

Nature of the instrument.

Offer Price, Face Value and Premium.

Issue Size.

Amount per instrument on application.

The 78-Day Post-Issue Monitoring Report:-

The 78-Day Post Issue Monitoring Report focuses on the smoothness with which the

concerned issue of the Initial Public Offer took place in the 78 days after the Closure of

the Issue. Any non-compliance is specifically spelled out in this report. This report serves

as an indicator to point out any discrepancies encountered against any initial proposals

made. It also draws attention to the targets that have been met and the proposed goals that

have been achieved. Just like the Prospectus of a company sets out the objectives and the

purpose behind the issue in detail, the 78-Day Post Issue Monitoring Report shows how

far these objectives and purpose have been accomplished. It is a report on the

performance versus the promises made.

The following are some of the details that may be included in the 78- Day

Post Issue Monitoring Report:

General Details about the Issue Opening and Closing Dates.

Number of collecting banks and bank branches.

Subscription Details and Number of Applications received.

Number of times Issue Subscribed (= No. Of instruments applied for / No. Of

instruments under net public offer category)

Information related to reserved categories such as NRIs, Banks, FIIs, Employees, etc.

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Names and amount of Firm Allottees who did not meet their commitments though

mentioned in the Prospectus.

Allotment Details such as Number of successful Allottees, number of unsuccessful

Allottees, etc.

Amount of Refund due and names of Refund Bankers.

Details on the amount of issue underwritten and details of underwriters, in case of

under subscription.

The Application Form:-

The Application Form is an Instrument whereby investors can apply for an IPO.

An investor’s signature on an Application Form means that he has gone through the

Prospectus of the Company and that he would like to be registered as the holder of Equity

Shares that would be allocated to him. The Investor may apply for an IPO anytime

between the Opening and the Closing of the Issue.

The Application Form must contain Undertakings by Investors about their

acceptance of the Terms of the Offer, the decision of the Board of Directors, etc. It also

contains all the necessary details about the denomination in which shares will be issued,

minimum subscription, mode of payment, and so on

In brief, the main contents of an Application Form are as follows:-

Name of the Issuer Company along with registered office address, telephone

number, and fax and email id.

Nature, numbers, price and amount of the issue.

Offer Opening and Closing Dates.

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Broker, Sub-Broker, Bank Branch and Registrar’s respective Stamps and Codes.

Applicant’s undertaking.

Minimum Subscription and other instructions for payment.

Applicant’s details on address, Father’s/Husband’s Name, Bank Particulars,

Details of Nominee, if any, Age, Status (whether Individual, Body Corporate,

Company, NRI, Bank or Other) and Occupation.

Applicant’s PAN/ GIR No. and Applicant’s Depository Account details.

Bank’s Counterfoil details.

An Abridged Prospectus of the Issuer Company, which contains all details of the

Prospectus in brief, as specified by the SEBI Guidelines.

DUE DILIGENCE

Investing in Initial Public Offerings (IPO), which seemed like a no-brainer till recently

with most IPO’s yielding handsome returns post-listing, has turned riskier with shares

trading at various levels not very different from the offer price? The case for re-

examining the way one has been assessing IPO’s as an investment avenue has become

stronger.

What is Due Diligence?Due diligence is used to investigate and evaluate a business opportunity. The term due

diligence describes a general duty to exercise care in any transaction. As such, it spans

investigation into all relevant aspects of the past, present, and predictable future of the

business of a target company. Due diligence sounds impressive but ultimately it translates

into basic commonsense success factors such as "thinking things through" and "doing

your homework".

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Why is Due Diligence Conducted?There are many reasons for conducting due diligences which are as follows:-

Confirmation that the business is what it appears to be.

Identify potential "deal killer" defects in the target and avoid a bad business

transaction.

Gain information that will be useful for valuing assets, defining representations and

warranties, and/or negotiating price concessions.

Verification that the transaction complies with investment or acquisition criteria.

Who Conducts Due Diligence?Lead and co-investors, Corporate Development Staff, Attorneys, Accountants, Investment

Bankers, Loan Officers and other Professionals involved in a transaction may have a need

or an obligation to conduct independent Due Diligence. Target management typically

assists these parties in obtaining due diligence information but because it is unwise to

totally rely on management third party consultants such as Astute Diligence are often

brought in to conduct Due Diligence.

When is Due Diligence Conducted?Initial data collection and evaluation commences when a business opportunity first arises

and continues throughout the talks. Thorough detailed due diligence is typically

conducted after the parties involved in a proposed transaction have agreed in principle

that a deal should be pursued and after a preliminary understanding has been reached, but

prior to the signing of a binding contract.

How is Due Diligence Conducted?The parties conducting due diligence generally create a checklist of needed information.

Management of the target company prepares some of the information. Financial

statements, business plans and other documents are reviewed. In addition, interviews and

site visits are conducted. Finally, thorough research is conducted with external sources

including customers, suppliers, industry experts, trade organizations, market research

firms, and others.

Does Due Diligence Ensure that a Business Transaction Will Be Successful?A well-run due diligence program cannot guarantee that a business transaction will be

60

successful. It can only improve the odds. Risk cannot be totally eliminated through due

diligence and success can never be guaranteed.

CHAPTER-5

FINDINGS &

SUGGESTIONS

61

FINDINGS

IPO’s are playing major role in the field of investment.

In IPO’s investors can earn more money with in a short span of time.

In IPO’s when compared to Bank Deposits, we can gain returns within 15 days of

allotment of shares.

The shareholders who invest more than 100,000Rs.of shares they come under HNI

category and if it is less than 100,000Rs.they are treated as Retail Investors.

HNI investors will have more benefits and there will be compulsory allotment

when compared to Retail investors.

“KYC”-Know Your Client norms are introduced by SEBI. The investor should

compulsory fill and open account according to this “KYC” rules.

As per SEBI duplicate application is not allowed i.e. the same person cannot apply

for many.

This “KYC” Norms has been introduced to overcome malpractices and duplication

of applications.

The risk is limited to the amount they subscribed only.

Finally I conclude that this is the best way to earn more money with a little investment.

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SUGGESTIONS

To improve the channel to penetrate to every level of the Investors.

The investors who have positive opinion toward Karvy Finance can be taken as

reference to reach new customers who are potential to invest.

To analyze the effect of Stock Market before going for the Initial Public Offer.

The Intermediaries should be monitored in managing Initial Public Offers.

The Company should concentrate more on the sub-brokers who play a major role in

Initial Public Offers.

It would be very helpful to the company if it is known to the investors and they must

be informed before going Public.

To be actively involved in Merchant Banking activities to get experience in managing

the issue of Initial Public Offers.

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CHAPTER-6

OBSERVATIONS &

CONCLUSION64

OBSERVATIONS

Years 2003, 2004 for the first-time left the investors under the impression to be

more cautious in choosing companies in which they are investing. The year 2005-2006

has opened with strong returns from IPO’s which clearly suggest that this is the safest

route for first-time investors. It also suggested that the quality of IPO’s have improved

following the stringent norms set by SEBI, for clearing the new issue. IPO’s have proved

to be a good way to expand the investor base which was proved from the fact that demat

registration had shot up at the time of the TCS and NTPC issues last year.

The year 2006-2007 had seen a very good picture of markets growing in the initial

stages where the FII’s have been investing into Indian stocks in huge amounts which in

turn increased the growth of the market, which it had never seen in last 20 years but in

the month of May the FII’s have started selling their equity and it was about 7000 Crores

in amount which slashed the market and the Sensex was down by about 1111 points at

that point of time and it was a bearish market.

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CONCLUSION

The issue of an IPO by a Company involves a number of stages, each calling for

a great deal of verification. The relevant and updated information on the Company has to

be captured precisely in the Prospectus. The decision by the Investors on whether to

invest in a Company is influenced significantly by the information contained in the

Prospectus. The Regulatory Bodies are also involved and there are set procedures that

must be followed. Legal compliance has to be maintained. Moreover, the Company’s

potential should not be understated in or lost in the Prospectus because of the weight of

such rules, regulations and formalities.

Initial public offerings of companies are popular with investors. In the recent

years due to its popularity gained many companies have been registered with heavy over

subscriptions.

Though it is profitable to investors, a certain amount of caution is desirable.

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APPENDIX

67

GLOSARRY

Allotment of Shares:

In a new issue of shares, if more shares are demanded at the price than are

available, they may be apportioned (allotted) between the applicants.

Application Money:

The amount an investor is asked to pay with the application for new issues,

usually less than the full value of the shares, and the remaining being either fully or partly

collected on actual allotment or even later.

At Par:

A Price equal to the face value of a share or other security i.e. if the face value

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of a share is Rs.10 it is being issued or sold at Rs.10.If the market value of a share

exceeds the Par it is said to be above Par, if it is falls below the par value it is below Par.

It is not the market price.

At Premium:

A Price higher than the face value, i.e. above Par. When a well

established company issues new shares, either as rights or to the public, it may ask

for higher price.

Basis of Allotment:

In case of over subscription of issues, the shares to be allotted to the

applicants are determined by a specific procedure as instructed by the Securities

Exchange Division or Minister of Finance, to issuing companies. This way of fixing

the final allotment figure for different categories of the investors is called as Basis

of Allotment.

Bid:

It means an offer by a prospective investor to subscribe equity shares of

the company at a desired price, during the Bidding period and includes all revisions

and modifications there to.

Bid Opening Date:

Bid Open Date means the date on which Syndicate Member Services /

Brokers to the issue would start accepting Bids; such date is the date which is

notifies and communicated through a notice in an English / Hindi national news

papers etc.

Bid Closing Date:

Bid Closing Date means the date on which Syndicate Member Services / 69

Brokers to the issue will not accept any more Bids; such date is the date which is notified

and communicated through a notice in an English / Hindi national news papers etc.

Bid Application Form:

The form in terms of which the Bidder makes bid for equity shares of the

Company. Upon allocation of the equity shares by the BRLM and filing of the Offer

Document with the ROC, it is considered as the application for the allotment of the equity

shares in terms of Draft Offer Document.

Lead Manager to the Issue:

Means a Merchant Banker (Registered with SEBI) appointed by the

Issuing Company to manage the issue.

Pro-rata Allotment:

It is a method of fixing the allotment to the different categories of

investor. In this method, shares are allotted proportionally to the investors of

different categories, based on the number of shares for which application is made

by the applicant and oversubscription.

Reservation on Competitive Basis (or Preferential Basis):

A portion of the issue can be reserved for specific class of investors. If the

reservation is made for a particular class of the investors (e.g. Mutual Funds, with

out identifying a specific Mutual Fund) it is called as reservation on competitive

basis.

Registration statement:

A document that must be filed with SEBI before securities can be sold to public.

Rights Offering:

Issuing rights to a company's existing shareholders to buy a proportional

number of additional securities at a given price (usually at a discount) within a 70

fixed period.

Underwriters to the Issue :

Merchant Banker or Member of any Stock Exchange or SEBI registered

underwriters, who enter into underwriting agreement with the company. According to this

agreement the underwriter agrees to subscribe a specified number of securities of the

issue in the event of non-subscription of the same.

Road shows:

The processes buy which underwriters acquaint potentional institutional

investors with the products, people, and finances of a company planning to go public.

Generally this presentation is a face-to-face meeting. How ever they are emerged on

online and video presentations.

Escrow Account of the Company:-

Means that account opened with the Escrow Collection Bank(s) and in whose

favor the Bidder will issue cheques in respect of his Bid and in which account the

cheques will be deposited by the Syndicate Member(s).

ABBREVATIONS

MBD: Member Board Of Directors

MOU: Memorandum Of Understanding

SEBI: The Securities Exchange Board Of India

IPO: Initial Public Offer

NSDL: National Securities Depository Limited

CSDL: Central Depository Services (India) Limited

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ROC: Registrar Of Companies

BRLM: Book Running Lead Manager

CBRLM: Co-Book Running Lead Manager

QIB'S: Qualified institutional investors

CCI: Controller Of Capital Issues

NRIs: Non-Residents Of India

FIIs: Foreign Institutional Investors

OCBs: Overseas Corporate Bodies

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BIBLIOGRAPHY

BIBLIOGRAPHY

Websites:

Www. bseindia.com

www.religareonline.in

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www.business-standard.com

www.moneycontrol.com

Magazines:

Capital Market

Institutional Investor

News Papers:

The Economic Times

India Times

Indian Express

Books:

Initial Public Offerings by Gerg N. Gregoriou

Financial Valuation by James R. Hitchner

The Stock Markets by Rik W. Hafer, Scott E. Hein

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