study

What is an Initial Public Offering?
Initial Public Offering, IPO, is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities.

What is a Follow on Public Offering?
A Follow on Public Offering, FPO, is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations.
What is a Rights Issue?
Rights Issue, RI, is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders unless they do not intend to subscribe to their entitlements

What is a Preferential Issue?
A Preferential Issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer company has to comply with the Companies Act and the requirements contained in Chapter pertaining to preferential allotment in Sebi (DIP) guidelines which inter-alia include pricing, disclosures in notice etc.

What is Sebi’s role in an issue?
Any company making a public issue or a listed company making a rights issue of value of more than Rs 50 lakh is required to file a draft offer document with Sebi for its observations. The company can proceed further on the issue only after getting observations from Sebi. The validity period of Sebi’s observation letter is three months only i.e. the company has to open its issue within three months period.

What is the difference between an Offer Document, Red Herring Prospectus, a Prospectus and an Abridged Prospectus? What does it mean when someone says “Draft Offer Document”?
“Offer Document” means prospectus in case of a public issue or offer for sale and Letter of Offer in case of a rights issue, which is filed Registrar of Companies, RoC, and Stock Exchanges. An Offer Document covers all the relevant information to help an investor to make his/her investment decision. “Draft Offer document” means the offer document in draft stage. The draft offer documents are filed with Sebi, atleast 21 days prior to the filing of the Offer Document with ROC/ SEs. Sebi may specifies changes, if any, in the Draft Offer Document and the issuer or the lead merchant banker shall carry out such changes in the Draft Offer Document before filing the Offer Document with ROC/ SEs. The Draft Offer document is available on the Sebi website for public comments for a period of 21 days from the filing of the Draft Offer Document with Sebi.


What is a Red Herring Prospectus?
Red Herring Prospectus, RHP, is a prospectus, which does not have details of either price or number of shares being offered, or the amount of issue. This means that in case price is not disclosed, the number of shares and the upper and lower price bands are disclosed. On the other hand, an issuer can state the issue size and the number of shares are determined later. An RHP for and FPO can be filed with the RoC without the price band and the issuer, in such a case will notify the floor price or a price band by way of an advertisement one day prior to the opening of the issue. In the case of book-built issues, it is a process of price discovery and the price cannot be determined until the bidding process is completed. Hence, such details are not shown in the Red Herring Prospectus filed with RoC in terms of the provisions of the Companies Act. Only on completion of the bidding process, the details of the final price are included in the offer document. The offer document filed thereafter with RoC is called a Prospectus.

What is an Abridged Prospectus?
Abridged Prospectus means the memorandum as prescribed in Form 2A under sub-section (3) of section 56 of the Companies Act, 1956. It contains all the salient features of a prospectus. It accompanies the application form of public issues.

What does one mean by Lock-in?
Lock-in indicates a freeze on the shares. Sebi (DIP) guidelines have stipulated lock-in requirements on shares of promoters mainly to ensure that the promoters or main persons who are controlling the company, shall continue to hold some minimum percentage in the company after the public issue.


How the word Promoter has been defined?
The Promoter has been defined as a person or persons who are in overall control of the company, who are instrumental in the formulation of a plan or programme pursuant to which the securities are offered to the public and those named in the prospectus as Promoters(s). It may be noted that a director/officer of the issuer company or person, if they are acting as such merely in their professional capacity are not be included in the definition of a Promoter. 'Promoter Group' includes the Promoter, an immediate relative of the Promoter (i.e. any spouse of that person, or any parent, brother, sister or child of theperson or of the spouse). In case promoter is a company, a subsidiary or holding company of that company; any company in which the Promoter holds 10% or more of the equity capital or which holds 10% or more of the equity capital of the Promoter; any company in which a group of individuals or companies or combinations thereof who holds 20% or more of the equity capital in that company also holds 20% or more of the equity capital of the issuer company. In case the Promoter is an individual, any company in which 10% or more of the share capital is held by the promoter or an immediate relative of the promoter' or a firm or HUF in which the 'Promoter' or any one or more of his immediate relative is a member; any company in which a company specified in (i) above, holds 10% or more, of the share capital; any HUF or firm in which the aggregate share of the promoter and his immediate relatives is equal to or more than 10% of the total, and all persons whose shareholding is aggregated for the purpose of disclosing in the prospectus "shareholding of the promoter group".

Who decides the price of an issue?
Indian primary market ushered in an era of free pricing in 1992. Following this, the guidelines have provided that the issuer in consultation with Merchant Banker shall decide the price. There is no price formula stipulated by Sebi. Sebi does not play any role in price fixation. The company and merchant banker are however required to give full disclosures of the parameters which they had considered while deciding the issue price. There are two types of issues one where company and LM fix a price (called fixed price) and other, where the company and LM stipulate a floor price or a price band and leave it to market forces to determine the final price (price discovery through book building process).

What is firm allotment?
A company making an issue to public can reserve some shares on “allotment on firm basis” for some categories as specified in DIP guidelines. Allotment on firm basis indicates that allotment to the investor is on firm basis. DIP guidelines provide for maximum percent of shares, which can be reserved on firm basis. The shares to be allotted on “firm allotment category” can be issued at a price different from the price at which the net offer to the public is made provided that the price at which the security is being offered to the applicants in firm allotment category is higher than the price at which securities are offered to public.


Is there any preference while doing the allotment?
The allotment to the Qualified Institutional Buyers, QIBs, is on a discretionary basis. The discretion is left to the merchant bankers who first disclose the parameters of judgment in the Red Herring Prospectus. There are no objective conditions stipulated as per the DIP guidelines. The merchant bankers are free to set their criteria and mention the same in the Red Herring Prospectus.


How is the Retail Investor defined as?
‘Retail Individual Investor’ means an investor who applies or bids for securities of or for a value of not more than Rs 1,00,000.


Can a Retail Investor also bid in a book-built issue?
Yes. He can bid in a book-built issue for a value not more than Rs 1,00,000. Any bid made in excess of this will be considered in the HNI category.

How many days is the issue open?
As per Clause 8.8.1, subscription list for public issues shall be kept open for at least 3 working days and not more than 10 working days. In case of book-built issues, the minimum and maximum period for which bidding will be open is 3–7 working days extendable by 3 days in case of a revision in the price band. The public issue made by an infrastructure company, satisfying the requirements in Clause 2.4.1 (iii) of Chapter II may be kept open for a maximum period of 21 working days. As per clause 8.8.2., rights issues shall be kept open for at least 30 days and not more than 60 days.

Can I know the number of shares that would be allotted to me?
In case of fixed price issues, the investor is intimated about the CAN/Refund order within 30 days of the closure of the issue. In case of book built issues, the basis of allotment is finalized by the book running lead Managers within 2 weeks from the date of closure of the issue. The registrar then ensures that the demat credit or refund as applicable is completed within 15 days of the closure of the issue. The listing on the stock exchanges is done within 7 days from the finalization of the issue.


Is it compulsory for me to have a Demat Account?
As per the requirement, all the public issues of size in excess of Rs 10 crore, are to made compulsorily in the demat mode. Thus, if an investor chooses to apply for an issue that is being made in a compulsory demat mode, he has to have a Demat Account and has the responsibility to put the correct DP ID and Client ID details in the bid/application forms.

How do I know if I am allotted the shares? And by what timeframe will I get a refund if I am not allotted?
The investor is entitled to receive a Confirmatory Allotment Note, CAN, in case he has been allotted shares within 15 days from the date of closure of a book-built issue. The registrar has to ensure that the demat credit or refund as applicable is completed within 15 days of the closure of the book-built issue.

How long will it take after the issue for the shares to get listed?
The listing on the stock exchanges is done within 7 days from the finalization of the issue. Ideally, it would be around 3 weeks after the closure of the book-built issue. In case of fixed price issue, it would be around 37 days after closure of the issue.

Who are the intermediaries in an issue?
Merchant bankers to the issue or Book Running Lead Managers, BRLM, syndicate members, Registrars to the issue, Bankers to the issue, Auditors of the company, Underwriters to the issue, Solicitors, etc. are the intermediaries to an issue. The issuer discloses the addresses, telephone/fax numbers and email addresses of these intermediaries. In addition to this, the issuer also discloses the details of the compliance officer appointed by the company for the purpose of the issue.

What is a Green shoe option?
Green shoe option means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism for a period not exceeding 30 days in accordance with the provisions of Chapter VIIIA of DIP guidelines, which is granted to a company to be exercised through a Stabilizing Agent. This is an arrangement wherein the issue would be over allotted to the extent of a maximum of 15% of the issue size. From an investor’s perspective, an issue with green shoe option provides more probability of getting shares and also that post listing price may show relatively more stability as compared to market.


What is an e-IPO?
A company proposing to issue capital to public through the on-line system of the stock exchange for offer of securities can do so if it complies with the requirements under Chapter 11A of DIP guidelines. The appointment of various intermediaries by the issuer includes a prerequisite that such members/registrars have the required facilities to accommodate such an online issue process.


What is open book/closed book?
Presently, in issues made through book building, Issuers and merchant bankers are required to ensure online display of the demand and bids during the bidding period. This is the open book system of book building. Here, the investor can be guided by the movements of the bids during the period in which the bid is kept open. Under closed book building, the book is not made public and the bidders will have to take a call on the price at which they intend to make a bid without having any information on the bids submitted by other bidders.


What is Hard underwriting?
Hard underwriting is when an underwriter agrees to buy his commitment at its earliest stage. The underwriter guarantees a fixed amount to the issuer from the issue. Thus, in case the shares are not subscribed by investors, the issue is devolved on underwriters and they have to bring in the amount by subscribing to the shares. The underwriter bears a risk which is much higher in soft underwriting.


What is Soft underwriting?
Soft underwriting is when an underwriter agrees to buy the shares at later stages as soon as the pricing process is complete. He then, immediately places those shares with institutional players. The risk faced by the underwriter as such is reduced to a small window of time. Also, the soft underwriter has the option to invoke a force Majeure (acts of God) clause in case there are certain factors beyond the control that can affect the underwriter’s ability to place the shares with the buyers.


What is a Cut Off Price?
In Book building issue, the issuer is required to indicate either the price band or a floor price in the red herring prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called “Cut Off Price”. This is decided by the issuer and LM after considering the book and investors’ appetite for the stock. Sebi (DIP) guidelines permit only retail individual investors to have an option of applying at Cut Off Price.


What is Differential Pricing?
Pricing of an issue where one category is offered shares at a price different from the other category is called Differential Pricing. In DIP guidelines Differential Pricing is allowed only if the securities to applicants in the firm allotment category is at a price higher than the price at which the net offer to the public is made. The net offer to the public means the offer made to the Indian public and does not include firm allotments or reservations or promoters’ contributions.

What is Basis of Allocation/Basis of Allotment?
After the closure of the issue, the bids received are aggregated under different categories i.e., firm allotment, Qualified Institutional Buyers, QIBs, Non-Institutional Buyers, NIBs, Retail, etc. The oversubscription ratios are then calculated for each of the categories as against the shares reserved for each of the categories in the offer document. Within each of these categories, the bids are then segregated into different buckets based on the number of shares applied for. The oversubscription ratio is then applied to the number of shares applied for and the number of shares to be allotted for applicants in each of the buckets is determined. Then, the number of successful allottees is determined. This process is followed in case of proportionate allotment. In case of allotment for QIBs, it is subject to the discretion of the post issue lead manager.

Who is a Qualified Institutional Buyer?
Qualified Institutional Buyers are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets. In terms of clause 2.2.2B (v) of DIP guidelines, a ‘Qualified Institutional Buyer’ shall mean: a. Public financial institution as defined in section 4A of theCompanies Act, 1956; b. Scheduled commercial banks; c. Mutual funds; d. Foreign institutional investor registered with Sebi; e. Multilateral and bilateral development financial institutions; f. Venture capital funds registered with Sebi. g. Foreign Venture capital investors registered with Sebi. h. State Industrial Development Corporations. i. Insurance Companies registered with the Insurance Regulatoryand Development Authority, IRDA. j. Provident Funds with minimum corpus of Rs 25 crore k. Pension Funds with minimum corpus of Rs 25 crore These entities are not required to be registered with Sebi as QIBs. Any entities falling under the categories specified above are considered as QIBs for the purpose of participating in primary issuance process.