Let’s start

with the

positive

energy…

Primary Market

This boy is struggling with a problem!!!!!I want to invest money in shares!!!!In which market I should go?

Types of capital market

There are two types of capital market:

Primary market,

Secondary market

Primary Market

• It is that market in which shares, debentures and other securities

are sold for the first time for collecting long-term capital.

• This market is concerned with new issues. Therefore, the

primary market is also called NEW ISSUE MARKET.

• In this market, the flow of funds is from savers to borrowers (industries),

hence, it helps directly in the capital formation of the country.

• The money collected from this market is generally used by the

companies to modernize the plant, machinery and buildings, for

extending business, and for setting up new business unit.

Features of Primary Market

It Is Related With New Issues

It Has No Particular Place

It Has Various Methods Of Float Capital: Following are the

methods of raising capital in the primary market:

i) Public Issue

ii) Offer For Sale

iii) Private Placement

iv) Right Issue

v) Electronic-Initial Public Offer

It comes before Secondary Market

• Initial public offering (IPO) The first sale of a company’s

stock to the general public.

• Investment bankers Financial specialists who handle the

sales of most corporate and municipal securities.

• Underwriting Process of purchasing an issue from a firm

or government and then reselling the issue to investors.

Factors to be considered by Investors

• Promoters Credibility

• Project Details

• Product

• Financial data

• Risk factors

• Auditors report

Secondary Market

The secondary market is that market in

which the buying and selling of the

previously issued securities is done.

The transactions of the secondary market

are generally done through the medium of

stock exchange.

The chief purpose of the secondary

market is to create liquidity in securities.

If an individual has bought some security and he now wants

to sell it, he can do so through the medium of stock

exchange to sell or purchase through the medium of stock

exchange requires the services of the broker presently, their

are 24 stock exchange in India.

.

Features of Secondary Market

• It Creates Liquidity

• It Comes After Primary Market

• It Has A Particular Place

• It Encourage New Investments

• Aids in financing the industry

• Ensures safe & fair Dealing (MEDIA BROADCASTING)

Functions of Secondary Markets

• Provides regular information about the value of security.

• Helps to observe prices of bonds and their interest rates.

• Offers to investors liquidity for their assets.

• Secondary markets bring together many interested parties.

• It keeps the cost of transactions low.

Famous Secondary Markets worldwide

• New York Stock Exchange

• NASDAQ

• The London Stock Exchange

• The Tokyo Stock Exchange

• Shanghai Stock Exchange

PRIMARY MARKET

SECONDARY MARKET

LEGAL FRAMEWORK

Legal

Framework

Companies Act,

1956

Securities

And Exchange

Board of

India Act,

1992

The

Depositories

Act, 1996

All the Rules &

Regulations

Listing

Agreements

Securities

Contract

(Regulation)

Act, 1956

Fund Raising in a Company

at Different Stages

Seed Capital

Shares

Personal Contribution, Family, Friends, Angel Investors

IPO: Initial Public Offer

QIP: Qualified Institutions

Placement

GDR: Global Depository

Receipts

FCCB: Foreign Currency

Convertible Bond

ADR: American Depository

Receipts

Venture Capital

Warrants / Shares

Venture Capitalist

Private Equity

Shares

Private Equity investors

IPO

Shares

FIIs, FI, Banks, Insurance Cos, MF, HNI, Individuals including NR

Private Placeme

nt

Shares / Warrants / FCD /

PCD

Promoters, Financial Investor, Strategic Investor

Follow-on

Public Issue

Shares

FIIs, FI, Banks, Insurance Cos, MF, HNI, Individuals including NR

Rights Issue

Shares / PCD / FCD

Existing Shareholders

QIP

Shares

QIB

GDR, FCCB & ADR

Depository Receipts with the underlying being Shares, Foreign Currency Bond convertible into

shares, Depository receipts with the underlying being

shares.

FII, Hedge funds and FII, US QIB

Strategic Investment

Customer, Supplier, Competitor

Seed capital

• The initial capital used to start a business.

• Seed capital often comes from the company founders' personal assets or

from friends and family.

• The amount of money is usually relatively small because the business is

still in the idea or conceptual stage.

• Such a venture is generally at a pre-revenue stage and seed capital is

needed for research & development, to cover initial operating expenses

until a product or service can start generating revenue, and to attract the

attention of venture capitalists

Venture Capital

• Venture capital (VC) is financial capital provided to early-stage, high-

potential, growth startup companies.

• The venture capital fund earns money by owning equity in the

companies it invests in, which usually have a novel technology

or business model in high technology industries

• This is a very important source of funding for startups that do not have

access to capital markets. It typically entails high risk for the investor, but

it has the potential for above-average returns.

Private Equity• There is no universally agreed definition of private equity

• Private equity as an illiquid investment since there is no active

secondary market for such investments, investors have little control

over how capital is invested and the investment profile covers a long

horizon.

• Venture capital is a subset of private equity and refers to equity

investments made for the launch, early development, or expansion of

a business

• They generally act as partner

IPO• Initial public offering (IPO) or stock market launch is a type of public

offering in which shares of stock in a company usually are sold to

institutional investors that in turn sell to the general public, on a securities

exchange, for the first time.

• Through this process, a private company transforms into a public company.

Private Placement• A private placement is an issue of shares or of convertible securities by a

company 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

• A private placement of shares or of convertible securities by a listed

company is generally known by name of preferential allotment

Private Placement• Investors involved in private placements are usually large banks, mutual

funds, insurance companies and pension funds.

• Private placement is the opposite of a public issue, in which securities are

made available for sale on the open market

• Since a private placement is offered to a few, select individuals, the

placement does not have to be registered with the Securities and Exchange

Commission.

Follow-on Public Issue• A Further 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

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

QIP• A Qualified Institutions Placement is a private placement of equity shares or

securities convertible in to equity shares by a listed company to Qualified

Institutions Buyers only in terms of provisions of Chapter XIIIA of SEBI

(DIP) guidelines

GDR, FCCB & ADR• Foreign Currency Convertible Bond is a type of convertible bond issued in a

currency different than the domestic currency

• (ADR)Let us take Infosys example – trades on the Indian stock at around Rs.2000/-

• This is equivalent to US$ 40 – assume for simplicity(1:50)

• Now a US bank purchases 10000 shares of Infosys and issues them in US in the ratio of 10:1

• This means each ADR purchased is worth 10 Infosys shares.

• Quick calculation means 1 ADR = US $400

• Once ADR are priced and sold, its subsequent price is determined by supply and demand factors, like any ordinary shares.

GDR, FCCB & ADR• Both ADR and GDR are depository receipts, and represent a claim on the

underlying shares. The only difference is the location where they are traded.

• Depositary receipts traded in USA – ADR

• Depositary receipts traded in a country other than USA - GDR

Strategic Investment• A Qualified Institutions Placement is a private placement of equity shares or

securities convertible in to equity shares by a listed company to Qualified

Institutions Buyers only in terms of provisions of Chapter XIIIA of SEBI

(DIP) guidelines

Investor Categories

QIB means;

A MF, VCF, FVCF

Foreign Institutional investor

Public Financial Institution

Scheduled commercial bank

Multilateral and bilateral development financial institution

State Industrial development corporation

Insurance Company

Provident Fund (Min Corpus 25 Cr )

Pension fund ( R 25 Cr )

National Investment Fund

Insurance funds setup and managed by the Dept of Posts, India” as per the amendment of SEBI

(ICDR) Reg, 09 on 12th November,2010)

Retail Investor means an investor who applies or bids

for specified securities for a

value of not more than

Rs. 2 Lakh (as per the amendment of SEBI (ICDR) Reg,

09 on 12th

November,2010)

Non Institutional investor means an investor other than a retail individual

investor and qualified

institutional buyer

COMMON CONDITIONS FOR PUBLIC ISSUES AND RIGHTS ISSUES

Issue Opening

date

Within 12 months from the date of issuance of OBSERVATIONS from

SEBI

Underwriting

& Minimum

Subscription

The issuer may appoint Syndicate Members to the extent of the

minimum subscription. The Minimum subscription shall not be less than

90% of the offer through offer document.

Appoint of Syndicate Member mandatory in case of Issue through Book

Building Mechanism.

Call money

The issue shall be made fully paid up within 12 months from the date of

allotment.

This 12 months not applicable where the size of the issue is more than Rs.

500 Cr, wherein the call money shall be at least 25%.

Filing of Offer

Document

The issuer shall submit the draft prospectus / RHP enclosing certain

documents. The MB give due diligence certificates.

In – principle

approval from

Stock

exchange

The issuer must obtain the in-principle approval at least from one of the

recognised SE having nation wide trading platform

SEBI ( ICDR ) Regulations, 2009

INITIAL PUBLIC OFFER ( IPO) – ICDR REG, ‘09

Eligibility criteria for Unlisted Companies for I P O

Book building route mandatory with 50% QIB participation if all issues during the same financial year (including proposed IPO) > 5X pre-issue net worth

Exemptions from SEBI Eligibility Norms Listing criteria of Bombay Stock Exchange Limited

Banking company

Correspondent new bank (“public sector banks”)

Infrastructure company

Whose project is appraised by a FI/ IDFC/ IL&FS or bank

which was earlier an FI

5% of the project cost is financed by the appraiser(s)/

institutions jointly or severally

Rights issues

For large cap companies:

Post Issue paid up equity capital - Rs. 3 Crores

Issue size - Rs. 10 Crores

Post Issue market capitalization – Rs. 25 Crores

Option I: Net

tangible assets,

profitability and

net worth track

record

Net tangible assets of at least

Rs.3 Crores in the preceding 3

full years, not more than 50%

held in monetary assets

+

Track record of distributable

profits in terms of Section 205

of Companies Act, 1956 (excl

extra ordinary items) for 3 out

of preceding 5 years

+

Net worth of at least Rs.

1 Crore in each of the

preceding 3 full years

Option II: No net

tangible assets,

profitability and

net worth track

record

Issue through book building

route with at least 50% allotted

to QIBs

Minimum post issue face value

capital of the Company shall be

Rs 10 Crores

Or + or

‘Project’ has at least 15%

participation by Financial

institutions/banks of which

10% comes from appraiser and

at least 10% of issue size

allotted to QIBs

Compulsory market making for

at least 2 years

Pricing

Pricing

There exists free pricing. The issuer may determine the price in

consultation with the lead merchant banker or through book building

process.

Different

ial

Pricing

Specified securities may be offered at different prices, subject to the

following:

Retail individual investors or retail individual shareholders may

be offered specified securities at a price lower than the price at which

net offer is made to other categories of applicants. difference shall

not be more than ten per cent of the price offered to other categories

In Book built issue, the price of the specified securities offered to

an anchor investor shall not be lower than the price offered to other

applicants.

In composite issue, the price of specified securities offered in

public issue may be different from the price offered in rights issue

and justification for such price difference shall be given in the offer

document.

Initial Public Offer ( IPO) – ICDR Reg, ‘09

Initial Public Offer ( IPO) – ICDR Reg, ‘09

Price

and

price

band

The issuer may mention a price or price band and floor price or

price band in the red herring prospectus and determine the price

at a later date before registering the prospectus with the ROC.

If floor price or price band is not mentioned in the RHP, the

same shall be announced at least two working days before the

opening of the bid in IPO and one working day bin FPO.

Such announcement shall contain relevant financial ratios and a

statement titled “BASIS OF ISSUE PRICE” in the prospectus.

The cap on the price band shall be less than or equal to 120% of

the floor price. ( Cap includes cap on the coupon rate in case of

convertible debt instruments ).

Floor price shall not be less than the face value.

Face

Value

of

Equity

Shares

Issuer company free to fix the face value of the shares offered,

subject to :

If price of share is Rs. 500 or more, then face value can be less

than Rs. 10 but should be more than Re. 1

If price of share is less than Rs. 500, then the face value must be

Rs. 10.

Reservation on a competitive basis

Employees Shareholders Business

AssociatesNew Company Permanent employees

of the Issuer and

promoting companies

Shareholders of the

promoting companies

Persons who have

business association

with the Issuer, as

depositors, bondholders

and subscribers to

services

Existing Company Permanent employees

of the issuer company

Shareholders of group

companies

Limit as a % of Issue size 10%* 10% 5%

Available for bidding in

net Public issue

Yes Yes No

• No reservation can be made for the issue management team, syndicate members, their promoters, directors and employees and for the group/associate companies of issue management team

• Net Public Offer” i.e. the size of the offer, net of reservations and firm allotments, if any, has to be greater than 10% of post issue capital

* Firm allotment + Reservation

Initial Public Offer ( IPO) – ICDR Reg, ‘09

Promoters’ Contribution and Lock-in Requirements

Promoters’

contribution

At least 20% of post-IPO capital of the company to be held by the Promoters,

which is referred to as Promoters’ contribution

The Promoters’ can comply with the Promoters’ contribution condition by

bringing in the full amount of promoters contribution, including premium, at

least one day prior to the issue opening date

Securities ineligible for computation of promoters’ contribution are those that are

Acquired for consideration other than cash and revaluation of assets or

capitalization of intangible assets is involved

A result of bonus issues out of revaluation reserves or reserves without accrual

of cash resources or against shares which are ineligible for computation of

promoter contribution

Acquired by the promoters at a price lower than the IPO price during the

preceding 1 year from the date of filing the DRHP with SEBI, unless the

difference in price is brought in. However, this is not valid if these acquired

shares result from an inter-se promoter transfer and (i) such shares were

acquired by the transferor promoter during the past 1 year at or more than

the IPO price; or (ii) such shares were acquired by the transferor promoter

prior to the past 1 year

Ineligible shares acquired in pursuance to a scheme of merger or

amalgamation approved by a High Court shall be eligible for computation of

promoter’s contribution

Compliance with norms for Promoters’ contribution shall be required at the time

of filing the DRHP with SEBI

Initial Public Offer ( IPO) – ICDR Reg, ‘09

Promoters’ Contribution and Lock-in Requirements

Lock-in Requirements

(Unlisted companies)

Entire pre-IPO capital locked in for 1 year from date of allotment in IPO

(exempt for (a) Venture Capital Funds which have held shares for a

minimum of 1 year; (b) pre-IPO shares held by employees which were

issued under ESOP or ESPS before the IPO). Transfer of locked-in

shares among pre-IPO shareholders allowed, provided lock-in continues

with transferee

Promoter’s holding up to 20% of post-IPO capital locked-in for 3 years

from the date of allotment in IPO and excess promoter’s holding locked-

in for 1 year

Pledge

Pledged securities held by promoters shall not be eligible for

computation of Promoters’ contribution

If securities are locked-in as Promoters’ contribution, the same may be

pledged if the loan has been granted by such Banks/ FIs for the purpose

of financing one or more objects of the Issue

Initial Public Offer ( IPO) – ICDR Reg, ‘09

Key Parties and Responsibilities for an IPO

Intermediary Structure

BRLMBook Runners’

Legal Counsel

Broker /

Syndicate

Advertisi

ng

Agency

Printers

IPO

Grading

Agency

Registrar

s

Escrow

Bankers

Issuer

Company /

Selling

ShareholderArrangement

Coordination

Legal

Counsels

Green shoe option

Definition

• A green shoe is a clause contained in the underwriting agreement ofan initial (IPO) that allows underwriters to buy up to an additional15% of company shares at the offering price (of the total IPO size).

What is it ?

• Green shoe option means an option of allocatingshares in excess of the shares included in the publicissue and operating a post listing price.

• It is a provision, in underwriting agreement, thatallows the underwriter to sell the additional sharesthen the original number of shares offered.

Origination

• The term Green Shoe Option derived from aCompany named Green Shoe ManufacturingCompany, founded in 1919.

• This company is now called as Stride Rite Corp.

• This Company was the 1st who initiated this optionin 1960.

• It is also known as GSO.

Why GSO?• This would normally done to reduce the risk of theIPO (Initial Public offering).

• Also, when the public demand for the sharesexceeds expectations and the stock trades above theoffering price.

• It is mainly practiced in US and European Market.

Objectives

•Price stability.

•Reduce the risk.

SEBI Guidelines

• A pre-issue contract is required to be entered into forthis purpose with an existing shareholders.

1. Underwriter can issue 15% additional shares ofthe original offer price.

2. Underwriter can exercise that option within 30days from the date of allotment of shares.

Requirements (process)

3. The SA shall enter into a agreement withpromoter's and per issue share holders who willlend their shares up to 15% of the issue size.

4. The details of the agreements shall be disclosed inthe draft Red Herring prospectus, Red Herringprospectus and the final prospectus.

5. In case of an initial public offer unlisted companyand in case of public issue by a listed company,the promoters and pre- issue shareholders holdingmore than 5% shares, may lend the shares.

Requirements (process)

6. The SA shall borrow shares from the promoters orthe pre-issue shareholders of the issuer companyor both, to the extent of the proposed over-allotment (not more than 15%).

7. Provided that the shares shall be in dematerializedform only.

8. The allocation of these shares shall be pro-rata toall the applicants.

9. The stabilization mechanism shall be available forthe period not exceed 30 days from the date whentrading permission was given by the exchange(s)

Requirements (process)

10. The SA shall open a special account with a bank to be called the “Special Account for GSO proceeds of _____ company” and a special account for securities with a depository participant to be called the “Special Account for GSO shares of company”

11. The money received from the applicants against the overallotment in the green shoe option shall be kept in the GSO Bank Account and shall be used for the purpose of buying shares from the market, during the stabilization period.

Requirements (process)

12. The shares bought from the market by the SA, ifany during the stabilization period, shall becredited to the GSO Demat Account.

13. The shares bought from the market and lying inthe GSO Demat Account shall be returned to thepromoters immediately, in any case not later than2 working days after the close of the stabilizationperiod.

Requirements (process)

14. On expiry of the stabilization period, in case theSA does not buy shares to the extent of sharesover-allotted, the issuer company shall allot sharesto the extent of the shortfall in dematerializedform to the GSO Demat Account, within five daysof the closure of the stabilization period.

15. The shares returned to the promoters under shallbe subject to the lock in period

Requirements (process)

16. The SA shall remit an amount equal to (furthershares allotted by the issuer company to the GSODemat Account) * (issue price) to the issuercompany from the GSO Bank Account. Theamount left in this account, if any, after thisremittance and deduction of expenses incurred bythe SA for the stabilization mechanism, shall betransferred to the investor protection fund(s) of thestock exchange(s) where the shares of issuercompany are listed.

17. The SA shall submit a report to the stockexchange(s) on a daily basis during thestabilization period

SA Requirements

The SA shall maintain a register in respect of each issue having the green shoe option in which he acts as a SA. The register shall contain the following details of:

1. Record each transaction effected in the course of the stabilizing action, the price, date and time.

2. The details of the promoters from whom the shares are borrowed and the number of shares borrowed from each.

3. The register must be retained for a period of at least three years from the date of the end of the stabilizing period.

Additional Disclosures

The draft Red Herring prospectus, the Red Herring prospectus and the final prospectus shall contain the following additional disclosures:

1. Name of the SA

2. The maximum number of share (in % also) proposed to be over-allotted by the company.

3. The period, for which the company proposes to avail of the stabilization mechanism.

4. The maximum increase in the capital of the company and the shareholding pattern post issue

5. The maximum amount of funds to be received by the company in case of further allotment.

Additional Disclosures

6. Details of the agreement entered in to by SA with the promoters to borrow shares, agreement shall include1. Name of the promoters,

2. Existing shareholding,

3. Number & percentage of shares to be lent by them

4. Other important terms and conditions including the rights and obligations of each party.

7. The final prospectus shall additionally disclose the exact number of shares to be allotted in the public issue, stating separately therein the number of shares to be borrowed from the promoters and over allotted by the SA, and the percentage of such shares in relation to the total issue size.

Example• For example, if a company decides to publicly sell 1 lakh

shares, the underwriters (or "stabilizers") can exercise theirgreen shoe option and sell 1.15 lakh shares. When the shares arepriced and can be publicly traded, the underwriters can buy back15% of the shares. This enables underwriters to stabilizefluctuating share prices by increasing or decreasingthe supply of shares according to initial public demand.

• If the market price of the shares exceeds the offering price thatis originally set before trading, the underwriters could not buyback the shares without incurring a loss. This is where the greenshoe option is useful: it allows the underwriters to buy back theshares at the offering price, thus protecting them from the loss.

Continued…..

• If a public offering trades below the offering price of thecompany, it is referred to as a "break issue". This can createthe assumption that the stock being offered might beunreliable, which can push investors to either sell the sharesthey already bought or refrain from buying more.

• To stabilize share prices in this case, the underwritersexercise their option and buy back the shares at the offeringprice and return the shares to the lender.

Why we need

prospectus

There is two type of companies

Genuine Want to exploit

investors

Who will save us from these type of companies

SEBI

What is red –herring

prospectus

Prospectus without fullInformation about price,

Number of securities offered

REASON FOR PREPARING• First thing to attract people without disclosing much information about thedeal.

• The “red herring” is a reference to a legal disclosure, printed in red.

• Informing to readers that the SEC has not yet reviewed and approved thedocument.

• Securities may not be sold or may offers to buy be accepted prior to the timethe Registration Statement becomes effective.

REASON FOR PREPARING

• Investors can get an idea of upcoming offerings.

• How much they can get away with before the SEC registration.

RED HERRING PROSPECTUS ISSUERS

1.Apollo health street limited.

2.Power finance corporation ltd.

3.Engineers India limited.

4.Tata steel limited.

Sir, who prepares the prospectus

Generally

Merchant banker

• IPO grading is the grade assigned by a Credit Rating

Agency registered with SEBI, to the initial public

offering (IPO) of equity shares or any other security

which may be converted into or exchanged with equity

shares at a later date.

• Such grading is generally assigned on a five-point point

scale with a higher score indicating stronger

fundamentals.

• IPO grade 1: Poor fundamentals

• IPO grade 2: Below-average fundamentals

• IPO grade 3: Average fundamentals

• IPO grade 4: Above-average fundamentals

• IPO grade 5: Strong fundamentals

• No, IPO grading is not optional. A company which has

filed the draft offer document for its IPO with SEBI,

on or after 1st May, 2007, is required to obtain a grade

for the IPO from at least one CRA.

• IPO grading can be done either before filing the draft offer documents with SEBI or thereafter.

• However, the Prospectus/Red Herring Prospectus, as the case may be, must contain the grade/s given to the IPO by all CRAs approached by the company for grading such IPO.

• Further information regarding the grading process may be obtained from the Credit Rating Agencies.

• IPO grade/s cannot be rejected.

• Irrespective of whether the issuer finds the grade given by the rating agency acceptable or not, the grade has to be disclosed as required under the DIP Guidelines.

• However the issuer has the option of opting for another grading by a different agency. In such an event all grades obtained for the IPO will have to be disclosed in the offer documents, advertisements etc.

The IPO grading process is expected to take into account theprospects of the industry in which the company operatesThe areas listed below are generally looked into by the ratingagencies, while arriving at an IPO grade

Ø Business Prospects and Competitive Positioni. Industry Prospectsii. Company Prospects

Ø Financial PositionØ Management QualityØ Corporate Governance PracticesØ Compliance and Litigation HistoryØ New Projects—Risks and Prospects

It may be noted that the above is only indicative of some of thefactors considered in the IPO grading process and may vary on acase to case basis.

• No. IPO grading is done without taking into account the price at

which the security is offered in the IPO.

• Since IPO grading does not consider the issue price, the investor

needs to make an independent judgment regarding the price at

which to bid for/subscribe to the shares offered through the

IPO.

BOOK BUILDING

WHAT IS BOOK BUILDING?

• Book Building is the process of determining the priceat which an Initial Public Offering will be offered.

• SEBI guidelines, 1995 defined book-building as

“A process undertaken by which a demand for thesecurities proposed to be issued by a body ofcorporate and built up and the price for such securitiesis assessed for the determination of the quantum ofsuch securities to be issued by means of a notice,circular, advertisement, document or informationmemoranda or offer document”.

WHAT IS BOOK?

Buy side book

Sell side book

An book is thelist of ordersthat a tradingvenue uses torecord theinterest ofbuyers andsellers in aparticularfinancialinstrument

WHAT IS BOOK BUILDING?

• Book building is a process inwhich share prices aredetermined on the basis of realdemand for the shares atvarious price levels in themarket

Types of investors for book building

There are three kinds of investors in a book-building issue. 1. The retail individual investor (RII),2. The non-institutional investor (NII) 3. The Qualified Institutional Buyers

(QIBs)

Retail Individual Investor (RII):

• In the retail individual investor category, investors cannot apply more than Rs 2 lakh (Rs 2, 00,000) in an IPO.

• Retail Individual investors have an allocation of 35% of shares of the total issue size in Book build IPOs.

• NRI’s who apply with less than Rs 200000/ are also considered as RII category.

• Retail Individual investor can bid for more than Rs200000 in an IPO by applying in NON institutional Investors Category. There is no upper limit for bidding amount in ‘NON institutional Investors Category.

HNI and NIBs

• High Networth Individual (HNI): If Retail Investor applies for more than Rs 200000 of shares in an IPO , they are considered as HNI

• Non Institutional bidders :Individual investors , NRI’s, Companies , trusts, etc. who bid for more than Rs 2 lakh are known as Non Institutional bidders , Non Institutional bidders have an allocation of 15% of shares of the total issue size in Book build IPOs.

QIBS

• Qualified Institutional Bidders (QIBs): Financial institutions , banks , FII’s and Mutual funds who are registered with SEBI are called QIB’s. They usually apply in very high quantities. QIBs are mostly representatives of small investors who invest through mutual funds, ULIP schemes of insurance companies and pension schemes . QIB have an allocation of 50% of shares of the total issue size in book build IPOs.

GUIDELINES BY SEBI

• On the recommendations of Malegam committee, The concept of Book Building assumed significance in India as SEBI approved, with effect from November 1, 1995, the use of the process in pricing new issues.

• SEBI issued the guidelines under which the option of 100%book-building was available to only those issuer companies which are to make an issue of capital of and above Rs.100crore.

• These guidelines were modified in 1998-99.The ceiling of issue size was reduced to Rs. 25crore.

Modified Guidelines

1. Compulsory display of demand at the terminals was made optional.

2. The reservation of 15% of the issue size for individual investors.3. The issuer was allowed to disclose either the issue size or the

number of securities being offered.4. The allotment of the book built portion was required to be made

in Demat mode only.5. In an issue made through the book building process, the

allocation in the net offer to public category is made as follows

I. Not less than 35 % to retail individual investors.II. Not less than 15 % to non institutional investors i.e. investors

other than retail individual investors and qualified institutional buyers.

III.Not more than 50% to Qualified Institutional Buyers; 5 % of which would be allocated to mutual funds

Modified Guidelines

In an issue made other than through the book building process, allocation in the net offer to public category will be made as follows:

1. Minimum 50% to retail individual investors; and2. Remaining to individual applicants other than retail individual

investors and other investors including corporate bodies or institutions, irrespective of the number of equity shares and convertible securities applied for;

3. The unsubscribed portion in either of the categories specified above (point a and b) may be allocated to applicants in the other category

TYPES OF BOOK-BUILDING:

There are two type of book building process according to SEBI’s guidelines.

1. 75% book building2. 100% book building

75% Book-Building ProcessUnder this process 25 per cent of the issue is to be sold at a fixed price and the balance of 75 per cent through the Book Building process.

BOOK BUILDING

METHOD

FIXED PRICE

METHOD

75% OF THE PUBLIC ISSUE CAN

BE OFFERED TO INSTITUTIONAL

INVESTORS WHO HAVE

PARTICIPATED IN THE BIDDING

PROESS.

25% OF THE PUBLIC ISSUE CAN

BE OFFERED THROUGH

PROSPECTUS AND SHALL BE

RESERVED FOR ALLOCATION TO

INDIVIDUAL INVESTORS WHO

HAVE NOT PARTICIPATED IN

THE BIDDING PROCESS.

TOTAL PUBLIC ISSUE

(i.e. net offer to the public)

CHART 1

ADVANTAGE OF BOOK BUILDING

1. less cost2. Fast process 3. Fair price

DUTCH AUCTION METHOD FOR FPO

SEBI on 10th nov 2009 introduced an additional method of pricing shares via the book building route, namely dutch auction method or the pure action method.Unlike the present system known as the frenchauction method, where companies fix a band of prices for public offers,Under the dutch auction method companies making public issue will fix only floor pricesHowever, the dutch auction method has not been made mandatory by SEBI. A company can choose dutch auction but only for FPO

Case study

CASE STUDY

Incorporated in 2008, Birla Pacific Medspa Limited is an Indiabased healthcare provider. Birla Pacific Medspa is a jointventure of Yash Birla Group, a Rs 30 billion (group of over 20diversified companies) and Pacific Healthcare, East Asia’sleading healthcare provider, with healthcare facilities inSingapore, Hong Kong, and China.

CASE STUDY

Company Promoters:Company is promoted by Mr. Yashovardhan Birla and one of his group companies, Birla Wellness & Healthcare Private Limited.Objects of the Issue:The objects of the issue are1. To meet the capital 2. To meet expenses towards brand promotion.3. To meet the working capital requirements4. To meet Issue related expenses.5. To enlist the Company's Shares on Bombay Stock

Exchange Limited (BSE).

CASE STUDY

»» Issue Open: Jun 20, 2011 - Jun 23, 2011

»» Issue Type: 100% Book Built Issue IPO

»» Issue Size: 65,175,000 Equity Shares of Rs. 10

»» Issue Size: Rs. 65.18 Crores

»» Face Value: Rs. 10 Per Equity Share

»» Issue Price: Rs. 10 - Rs. 11 Per Equity Share

»» Market Lot: 500 Shares

»» Minimum Order Quantity: 500 Shares

»» Listing At: BSE

CASE STUDY

Birla Pacific Medspa Ltd IPO Grading

BWR (Brickworks Ratings India Pvt Ltd) has assigned an IPO Grade 2 to Birla Pacific Medspa IPO. This means as per BWR, company has 'Below Average Fundamentals'.

BWR assigns IPO grading on a scale of 5 to 1, with Grade 5 indicating strong fundamentals and Grade 1 indicating poor fundamentals. Read Birla Pacific Medspa IPO Grading Report.

CASE STUDY

As on Date & Time

Qualified Institutional Buyers (QIBs)

Non Institutional Investors (NIIs)

Retail Individual Investors (RIIs)

Total

Shares Offered / Reserved

32,587,500 9,776,250 22,811,250 65,175,000

Day 1 - Jun 20, 2011 17:00 IST

0.3300 0.0000 0.2500 0.2500

Day 2 - Jun 21, 2011 17:00 IST

0.6700 0.0000 0.3700 0.4600

Day 3 - Jun 22, 2011 17:00 IST

0.9900 0.0000 0.5800 0.7000

Day 4 - Jun 23, 2011 17:00 IST

1.0400 0.1700 1.8200 1.1800

CASE STUDY

Public Issue Of 65,175,000 Equity Shares Of Rs.10/-

The equity shares of the Company are proposed to belisted on Bombay Stock Exchange Limited ("BSE") andTrading is expected to commence on 7th july 2011

ISSUE PRICE: RS. 10/- PER EQUITY SHARE OF THEFACE VALUE OF RS. 10/- EACH

CASE STUDY

BID/ISSUE OPENED ON JUNE 20, 2011 CLOSED ON JUNE23, 2011This Issue was made through a 100% Book Building Process interms of regulation 26(2)(a)(i) and b(i) of SEBI (ICDR)Regulations, 2009whereby at least 50% of the Issue was to be allocated toQualified Institutional Buyers (QIBs) on a proportionate basis,subject to valid bids being received at or above the Issue Price.

5% of the QIB Portion was available for allocation onproportionate basis to Mutual Funds only and the remaining NetQIB portion was available for allocation on a proportionate basisto all Qualified Institutional Buyers, including Mutual Funds,subject to valid bids being received at or above Issue Price.

CASE STUDY

Further, upto 15% of the Issue was availablefor allocation on a proportionate basis to NonInstitutional Bidders and upto 35% of theIssue was available for allocation on aproportionate basis to Retail IndividualBidders, subject to valid bids being receivedat or above the Issue Price.

The Issue received 3138 applicationsfor 74670000 equity shares resultingin 1.15 times subscription.

CASE STUDY(THIS IS THEN BIGGEST IPO EVER)

Incorporated in 1946, DLF Limited is a real estate development company based in India. DLF is the largest Indian company in terms of the area of completed residential and commercial developments. DLF’s main area of operation is Delhi and surrounding areas.DLF is in almost each and every area of real estate development including identification and acquisition of land, planning, execution, marketing and maintenance of the projects.

DLF's major line of business

DLF's major line of business includes:Residential business - DLF builds and sells a wide range of properties including houses, duplexes and apartments of varying sizes, with a focus on the higher end of the market.Commercial business - DLF builds and sells or lease commercial office space, with a focus on properties attractive to large multinational tenants.Retail business - DLF develop and manages leases based shopping malls, which in many cases include multiplex cinemas.DLF is now focusing on more infrastructure, SEZs(special economic zones) and hotel projects.

Few more facts:

Developed approximately 220 million square feet,

including approximately 195 million square feet of

plots, 17 million square feet of residential properties,

6 million square feet of commercial properties and 2

million square feet of retail

Properties.

Land Reserves of approximately 10,255 acres.

for the three years ended March 31, 2006, 2005 and 2004,

DLF's consolidated total income was Rs. 12,420 million, Rs.

6,260 million and Rs. 5,266 million, respectively, and

consolidated net profit was Rs. 1,917 million, Rs. 865 million

and Rs. 538 million, respectively.

Objects of the Issue:

The objects of the Issue are to achieve the benefits of listing on the Stock Exchanges & to raise capital for1. Finance expenditure for acquisition of land and development rights;2. Finance the construction and development costs for some of our existing projects;3. Repay certain loans of the Company.

DLF issue the shares at Rs 525/sh

• The IPO comprised 175 million shares, out of which 1 million shares were reserved for employees resulting in a net issue of 174 million shares.

• 60% of the net issue was offered to qualified institutional buyers (QIBs),

• 10% was offered to non institutional investors (including high net worth individuals)

• 30% was offered to retail investors. • The offering was launched with a price band of Rs 500 to Rs

550 per share. The issue was subscribed approximately 2.75 times at the top end of the price band (Rs 550 per share).

Cont…

• At Rs 550 per share, the QIB portion was subscribed 3.94 times.

• The retail portion was 0.96 times subscribed• The non – institutional was subscribed 1.08 times. The

offering received nearly 5,90,000 bids.• Overall, DLF issue subscribed 3.47 times. Qualified

institutional investors were the major supporter to the issue, in which contribution was seen from FIIs.

Cont…

• The company could have comfortably priced the issue at top end of the price band.

• However, the company chose to price the IPO at Rs 525 per share as a gesture of their appreciation to the tremendous response and keeping in mind the long-term relationship with investors.

• At he issue price, the offering size is Rs. 9, 187.5 corer. The global coordinators to the issue were Kotak Investment

Issue Detail:

»» Issue Open: Jun 11, 2007 - Jun 14, 2007

»» Issue Type: 100% Book Built Issue IPO

»» Issue Size: 175,000,000 Equity Shares of Rs. 2

»» Issue Size: Rs. 9,187.50 Crore

»» Face Value: Rs. 2 Per Equity Share

»» Issue Price: Rs. 500 - Rs. 550 Per Equity Share

»» Market Lot: 10 Shares

»» Minimum Order Quantity: 10 Shares

»» Listing At: BSE, NSE

Payment Method

Payment Methods for Retail Individual Bidders:DLF IPO has two payment methods for retail applicants.Payment Method 1:Retail Individual Bidders can pay Rs. 150 per share on application of which Re. 1 will be credited to face value and Rs.149 towards premium. The payment of the balance amount will be payable by the due date.Payment Method 2:Retail Individual Bidders can pay full application money while submitting the bid.

CASE STUDY

Global Coordinators and Book Running Lead Managers

Kotak Mahindra Capital Company Ltd. and DSP Merrill Lynch Ltd.

Senior Book Running Lead Manager Lehman Brothers Securities Pvt. Ltd.

Book Running Lead ManagersCitigroup Global Markets India Pvt. Ltd., Deutsche Equities India Pvt. Ltd., ICICI Securities Primary Dealership Ltd. and UBS Securities India Pvt. Ltd.

Co - Book Running Lead Manager SBI Capital Markets Ltd.

Syndicate MembersKotak Securities Ltd., ICICI Securities Ltd. and SBICAP Securities Ltd..

Categories FI, MF, IC, FII, VC, OTH, IND, HUF, NRI, BC and EMP.

No. of Cities with Bidding Centers 69

Inclusion in F&O segment Eligible, subject to SEBI approval

Number of Times Issue is Subscribed

Number of Times Issue is Subscribed (BSE + NSE)

As on Date & Time

Qualified Institutional

Buyers (QIBs)

Non Institutional Investors (NIIs)

Retail Individual Investors (RIIs)

Employee Reservations Total

Shares Offered / Reserved

Day 1 - Jun 11, 2007 17:00 IST 1.2806 0.0160 0.0328 0.0000 0.7800

Day 2 - Jun 12, 2007 17:00 IST 2.0813 0.0260 0.1018 0.0768 1.2800

Day 3 - Jun 13, 2007 17:00 IST 3.1755 0.0491 0.2012 0.5047 1.9600

Day 4 - Jun 14, 2007 17:00 IST 5.1288 1.1434 0.9752 0.7862 3.4700

DLF Ltd. - Bid details

Sr.No. CategoryNo.of shares

offered/reserved

No. of shares

bid for

No. of times of

total meant for the

category

1 Qualified Institutional Buyers (QIBs) 104400000 535447120 5.1288

1(a) Foreign Institutional Investors (FIIs) 485470830

1(b)Domestic Financial Institutions(Banks/ Financial Institutions(FIs)/ Insurance Companies)

35172900

1(c) Mutual Funds 14585870

1(d) Others 217520

2 Non Institutional Investors 17400000 19894650 1.1434

2(a) Corporates 11118540

2(b) Individuals (Other than RIIs) 8335190

2(c) Others 440920

3 Retail Individual Investors (RIIs) 52200000 50903990 0.9752

3(a) Cut Off 47556030

3(b) Price Bids 3347960

4 Employee Reservation 1000000 786150 0.7862

4(a) Cut Off 59870

4(b) Price Bids 726280

DUTCH AUCTION METHOD FOR FPO

SEBI on 10th nov 2009 introduced an additional method of pricing shares via the book building route, namely dutch auction method or the pure action method.Unlike the present system known as the frenchauction method, where companies fix a band of prices for public offers,Under the dutch auction method companies making public issue will fix only floor pricesHowever, the dutch auction method has not been made mandatory by SEBI. A company can choose dutch auction but only for FPO

ALLOTMENT OF SHARES

• As per section 69(1) a public limited company cannot make anyallotment of shares unless

1. Subscription less than 90%

2. Application money is paid by applicants and received by thecompany

Subscription less than 90%

• As per SEBI guidelines, if subscription is less than 90%

I. Within 60 days of the closure of the issue, all money must berefunded

II. If not, company shall be to pay interest@15% from the 70th

day

Price and price band

• The issuer may mention a price or price band in the draft prospectus (in case of a fixed price issue) and floor price or price band in the red herring prospectus (in case of a book built issue)

• If the floor price or price band is not mentioned in the red herring prospectus, the issuer shall announce the floor price or price band at least 2 working days before the opening of the bid (for IPO) and at least 1working day before the opening of the bid (for FPO)

Price and price band

• The cap on the price band shall be less than or equal to 100 and 20% of the floor price.

• The floor price or the final price shall not be less than the face value of the specified securities.

Escrow account

• An escrow is:

• A contractual arrangement in which a third party receives

and disburses money or documents for the primary transacting

parties, with the disbursement dependent on conditions agreed

to by the transacting parties.

• This account is used in ipo subscription.

• All the money received from application must go in this account

• All refund is done by this account.

• After allotting shares to shares holder money sent to companies account

Margins

Margins

• A margin is cash or marketable securities deposited by an investor with his or her broker

• The balance in the margin account is adjusted to reflect daily settlement

• Margins minimize the possibility of a loss through a default on a contract

Margin requirement

• NSCCL imposes stringent margin requirements as part of its

risk containment measures. The categorisation of stocks for

imposition of margins is as given below:

• The stocks, which have traded at least 80% of the days during

the previous 18 months, should constitute as the

• Group I and Group II.

• Out of the scrips identified above, those having mean impact

cost of less than or equal to 1% should be under

• Group I and

Margin requirement

• The scrips where the impact cost is more than 1, should be

under

• Group II.

• The remaining stocks should be under

• Group III.

VaR Based Margins

• All securities are classified into three groups for the purpose of

calculating VaR margin.

• For the securities listed in Group I,

• Scrip wise daily volatility is calculated using the exponentially weighted moving

average should be 3.5 times the volatility.

• For the securities listed in Group II

• The VaR margin should be higher of scrip VaR (3.5 δ) or three times the index VaR.

• For the securities listed in Group III,

• The VaR margin would be equal to five times the index VaR .

Margins…

• Initial margin : Amount that is deposited at the time of contract

At the end of each trading day the margin account is adjusted to reflect the investor’s gain or loss - marking to market the account.

• Maintenance margin: To ensure that the balance never becomes negative ( if balance falls below this level margin call – investor required to top up the margin account to the initial margin level)

Example of a Futures Trade

•An investor takes a long position in 2 December gold futures contracts on June 5

• Contract size is 100 oz.

• Futures price is US$400/oz

• Margin requirement is US$2,000/contract (US$4,000 in total)

• Maintenance margin is US$1,500/contract (US$3,000 in total)

Example of a Futures Trade

• Total margin requirement

= 2 x 2000 = $ 4000

• Maintenance margin requirement

= 2 x 1000 = $ 3000

Suppose the price goes down to 397 the next day

Loss = (397-400) x 2 x 100 = (600)

Day Closing

price

Daily p/l Cumulative

p/l

Margin Margin call

5 June 400* 4000

5 June 397

6 June 396.1

9 June 398.2

10 June 397.1

11 June 396.7

12 June 395.4

13 June 393.3

16 June 393.6

17 June 391.8

18 June 392.7

19 June 387

20 June 387

23 June 388.1

24 June 388.7

Day Futures price

Daily gains ($)

Cumulative gains ($)

Margin account balance

Margin call

400.00 40005-Jun 397.00 (600) (600) 34006-Jun 396.10 (180) (780) 32209-Jun 398.20 420 (360) 3640

10-Jun 397.10 (220) (580) 342011-Jun 396.70 (80) (660) 334012-Jun 395.40 (260) (920) 308013-Jun 393.30 (420) (1340) 2660 134016-Jun 393.60 60 (1280) 406017-Jun 391.80 (360) (1640) 370018-Jun 392.70 180 (1460) 388019-Jun 387.00 (1140) (2600) 2740 126020-Jun 387.00 0 (2600) 400023-Jun 388.10 220 (2380) 422024-Jun 388.70 120 (2260) 434025-Jun 391.00 460 (1800) 480026-Jun 392.30 260 (1540) 5060

131