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Q. What kind of equipment can we get financing for? A.
Anything that belongs to the category of equipment and machinery for any industrial plants, office automation, medical treatment diagnosis, transportation etc comes under the purview of equipment leasing.
Q. Who chooses the Equipment? A.
You have the liberty to decide equipment, supplier, terms and conditions including price. IDLC will buy the equipment of your choice.
Q. What is the Lease term? A.
Lease term means the non-cancellable period during which you can use the leased equipment exclusively. Generally it ranges from 3 to 5 years.
Q. Who bears the cost of opening the L/C or other related charges? A.
The actual purchase price and other incidental expenses including financial expenses and all bank charges shall constitute the acquisition cost and would be capitalized at the time of execution.
Q. How much would be the Lease rental A.
Lease rental is determined based on acquisition cost and lease term. Monthly lease rental is most common, however, quarterly or half yearly payment can also be considered.
Q. What is Contract and execution? A.
Lease contract is based on the basis of negotiated terms and estimated acquisition cost. The lease is executed on the basis of actual acquisition cost on delivery or installation of the equipment. At the time of execution the actual payment schedule is fixed and you are required to start paying the rental.
Q. Who pays for the insurance cost? A.
You are required to arrange the insurance coverage on the leased equipment for the entire lease term.
Q. Whose responsibility is it to maintain the equipment? A.
You are required to maintain the leased equipment in good operating condition, though insurance shall cover most of the abnormal risks.
Q. What happens at the expiry of lease term? A.
At the expiry of lease term, you may
Renew the lease on a year to year basis at a predetermined lower rental
Return the equipment to IDLC.
Purchase the equipment from IDLC at negotiated price.
IDLC is a multiproduct financial institution, established in 1985 with the collaboration of reputed international development agencies like: -
Korean Development Financing Corporation, South Korea Kookmin Bank, South Korea International Finance Corporation of the World Bank Group Aga Khan Fund for Economic Development German Investment and Development Company
The management of securities of the corporate sector offered to the public on a regular basis, and existing shareholders on a rights basis, is known as public issue management. Issue management is an important function if merchant bankers and lead managers. The management of issues for raising funds though various types of instruments by companies is known as Issue management. The function of capital issues management in India is carried out by merchant bankers who have the requisite professional skill and competence. One of their functions, in fact, is issue management. Factors such as the tremendous growth in the number and size of public listed companies, and the complexity arising due to the ever increasing SEBI requirements have all attributed to the increasingly significant role played by merchant bankers in the recent past. The definition of merchant baker as contained in SEBI (Merchant Banker) Rules and Regulations, 1992 clearly brings out the significance of Issue Management as follows: any person who is engaged in the business of issue management either by making arrangement regarding selling, buying or subscribing to securities as manager, consultant advisor or rendering corporate advisory services in elation to such issue management. A fast growing economy like India offers tremendous scope for issue management and the merchant bankers provide their skills and expertise to companies in the management of capital issues. This essentially aims at channeling household savings into the corporate sector through the issue of corporate securities. Companies raise funds for the purposes of financing new projects, expansion/modernization/diversification of existing units and augmenting long term resources for working capital purposes. Functions:
The general functions that form part of the capital issues management of merchant of merchant bakers are as follows: 1. Obtaining approval for the issue from SEBI 2. Arranging for underwriting the proposed issues 3. Preparation of draft and finalization of the prospectus and obtaining its clearance from the various agencies concerned. 4. Preparation of draft and finalization of other documents such as application forms, newspaper advertisements and other statutory requirements. 5. Making a choice regarding registrar to the issues, printing press, advertising agencies brokers and bankers to the issue and finalization of the fees to be paid to them. 6. Arranging for press conference and the investors’ conferences 7. coordinating printing, publicity and other work in order it get everything ready at the time f the public issue. 8. Complying with SEBI guidelines after the issue is over by sending various reports as required by the authorities Categories of Securities issue: Corporate enterprises use several sources for raising funds from the capital market. Issue of securities constitutes an important mode of raising such finances. Security takes the following forms: 1. Public Issue 2. Right Issue 3. Private Placements Public Issue of Securities: When capital funds are raised through the issue of a prospectus, it is called public issue of securities. It is the most common method of raising funds in the capital market. A security issue may take place either at par, or at a premium or at a discount. The prospectus has to disclose all the essential facts about the company to the prospective purchasers of the shares. Further, the prospectus must conform to the format set out in Schedule II of the Companies Act 1956, besides taking into the account SEBI guidelines. SEBI insists on the adequacy of disclosure of information that should serve as the basis for investors take a decision about the investment of their money. Rights Issue: When shares are issued to the existing shareholders of a company on a privileged basis, it is called as Rights Issue. The existing shareholders have a pre-emptive to subscribe to the new issue of shares. Rights shares are offered as additional issues by corporate to mop up further capital funds. Such shares are offered in proportion to the capital paid up on the shares held by them at the time of the offer. Private Placements: When the issuing company sells securities directly to the investors especially institutional investors, it takes the form of private placement. In this case no prospectus is issued since it is presumed that the inverts have sufficient knowledge and experience and are capable of evaluating of the risk of the investment. Private
placement covers shares, preference shares and debentures. The role of the financial intermediary such as the merchant Bankers and lead managers assumes greater significance in private placement. They involve themselves in the task of preparing a offer memorandum and negotiating it investors. –
Book Building About Book Building Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery. It is a process used for marketing a public offer of equity shares of a company. It is a mechanism where, during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The process aims at tapping both wholesale and retail investors. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria. The Process: >>The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'. >>The Issuer specifies the number of securities to be issued and the price band for orders. >>The Issuer also appoints syndicate members with whom orders can be placed by the investors. >>Investors place their order with a syndicate member who inputs the orders into the 'electronic book'. This process is called 'bidding' and is similar to open auction. >>A Book should remain open for a minimum of 5 days. >>Bids cannot be entered less than the floor price. >>Bids can be revised by the bidder before the issue closes. >>On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation criteria which may include -Price Aggression -Investor quality -Earliness of bids, etc. >>The book runner and the company conclude the final price at which it is willing to issue the stock and allocation of securities. >>Generally, the number of shares are fixed, the issue size gets frozen based on the price per share discovered through the book building process. >>Allocation of securities is made to the successful bidders. >>Book Building is a good concept and represents a capital market which is in the process of maturing. Initial Public Offerings Corporates may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. This Initial Public Offering can be made through the fixed price method, book building method or a combination of both. In case the issuer chooses to issue securities through the book building route then as per SEBI guidelines, an issuer company can issue securities in the following manner: 100% of the net offer to the public through the book building route. 75% of the net offer to the public through the book building process and 25% through the fixed price portion.
Under the 90% scheme, this percentage would be 90 and 10 respectively. Difference between shares offered through book building and offer of shares through normal public issue: Features Fixed Price process (FPP) Book Building process (BBP) Pricing (FPP)--> Price at which the securities are offered/allotted is known in advance to the investor. (BBP) --> Price at which securities will be offered/allotted is not known in advance to the investor. Only an indicative price range is known. Demand (FPP)--> Demand for the securities offered is known only after the closure of the issue (BBP)--> Demand for the securities offered can be known everyday as the book is built. Payment (FPP)---> Payment if made at the time of subscription wherein refund is given after allocation. (BBP)--> Payment only after allocation.
The major change brought about by SEBI in the primary markets was the improvement in the quality of disclosure norms for IPOs or listed companies raising additional capital through the securities markets. SEBI's attempts are directed towards ensuring full and fair disclosure by issuers. SEBI has also set a standard for companies that can issue securities through the securities market. As a merchant banker, the pre-issue management procedure can be briefly summarized as follows:
1. Eligibility Criteria An unlisted company, in order to issue its securities, has to have a pre-issue net worth of Rs. 10 million in 3 out of the last 5 years. Also, the issue size must not exceed 5 times the companies pre-issue net worth. The Company must have a track record of dividend payment for the immediately preceding three years or a public financial institution or scheduled commercial bank must have appraised the project to be financed and have participated in financing the project by way of loan or equity to the extent of at least 10% of the project cost. The fulfilment of the eligibility criteria needs to be verified. 2. Promoters Contribution In a public issue by a listed company, the promoters are either required to contribute at least 20%
of the proposed issue, or to ensure that their shareholding be kept at 20% or more of the company's expanded capital, subject to certain exemptions. This also needs to be verified. 3. Planning, Coordinating and Marketing Successfully raising capital from the market needs well planned and chalked out marketing strategy. As a merchant banker, one has to therefore help the company in making an analytical study of various sources, the quantum, the appropriate time, the cost of raising capital and the possible impact of such resources on the overall capital structure of the Company, besides the law governing their issue. The company's management needs to be educated on the latest acts, rules, regulations and guidelines, viz. the Companies Act, the SEBI guidelines and Clarifications, the Securities Contracts (Regulation) Act and the Securities Contracts (Regulation) Rules. One also needs to coordinate various activities with the bodies of the Government and professional agencies as well as the public at large. One also needs to help the company in successfully marketing the issue, organizing publicity campaigns, press releases and press conferences, printing and mailing of offer letters, prospectuses, etc. 3. Appointment of other professional agencies One has to ensure that various agencies, viz Brokers who are members of recognized stock exchange; principal brokers who would assist us in devising a success strategy; bankers to the issue and registrars to the issue who are duly registered with SEBI, etc are all appointed by the company. Also, the underwriters, solicitors and advisors to the issue need to be appointed. Consent letters, as required have to be obtained from each of these along with consent letters from the auditors of and bankers to the company. 4. Listing requirements One needs to verify whether any amendments are required to the Memorandum and Articles of Association along with the Solicitors. A copy has to be sent to the Stock Exchange for approval. We also need to know and inform the company on the various norms to be followed for the stock exchanges identified for listing of the securities. 5. Board Resolutions One has to verify with the company that its limits within 293 (1) (d) are adequate and also on the adequacy of the authorised share capital. Thereafter, one has to direct the company to pass the necessary board resolutions as required by the Stock Exchanges and the financial institutions and the Companies Act, 1956 for this purpose as well as for the approval of all appointments. 6. Draft Prospectus, Abridged Prospectus and Letter of Offer One needs to help the company in preparing the draft prospectus, the abridged prospectus and in case of rights issue, the Letter of Offer. We are expected to exercise due diligence in ensuring compliance by the company in regard to the prospectus. The draft prospectus is required to be submitted to SEBI and the relevant stock exchange at least 21 days before the filing of the final offer documents with the Registrar of Companies (ROC) and the stock exchange for disclosure purposes. One also has to ensure that all the disclosure requirements are fully met, viz. Schedule
II to the Companies Act, Form No. 2A of the General Rules & Forms, Guidelines for Disclosure and Investor Protection issued by SEBI, the RMB Circulars issued by SEBI and the Observation Letters issued by SEBI. Prior to filing the draft prospectus with SEBI, one also has to ensure that all the government approvals and consents from various agencies have been obtained. Further the auditors report and the balance sheet (not later than 6 months from the date of signing the balance sheet) has also got to be incorporated. 7. Finalize and file the Prospectus Considering the comments from or approval of SEBI, the prospectus has to be finalised. It will also need to be vetted by the legal advisors, solicitors to the issue, the auditors, lead institutions and stock exchanges. The final prospectus would then be sent to SEBI along with a copy of the due diligence certificate and other essential documents. Immediately thereafter one has to instruct the company to hold a Board Meeting for approving, signing and filing of the prospectus and for various related activities concomitant with the issue in the capital market. The prospectus duly signed needs to be filed along with all requisite documents with the Registrar of Companies (ROC) and receive its acknowledgement. 8. Launching the Issue One would then help the company in its advertisement and publicity campaigns including hoardings, advertisements in newspapers, magazines and periodicals, holding of press conferences, press write-ups, brokers conferences, investors conferences, trade conferences, etc. Concurrently, printers have to be instructed to print and distribute copies of the prospectus, abridged prospectus and application forms. The subscription list is then opened.
Introduction to Primary Markets
Most listed companies are usually started privately by their promoter(s). However, the promoters’ capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. So, companies invite the public to contribute towards the
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equity and issue shares to individual investors. The way to invite the public to subscribe to the
Investing Basics
share capital of the company is through a ‘Public Issue’. Once this is done, the company allots
Financial planning
shares to the applicants as per the prescribed guidelines laid down by SEBI.
Investment risk management
The Primary Market is, hence, the market that provides a channel for the sale of new securities to issuers, which may can be the Government or corporates, to raise resources to meet their fund raising requirements. The securities may be issued at face value, or at a discount/premium and
Why Equities are a Must Equity Basics Getting started
may take a variety of forms such as equity, debt etc. They may be issued in the domestic and/or international market. Issue at Face Value: The nominal value of the share, assigned to it by the issuer, is called the Face Value or Par Value. It is the original cost shown on the share certificate and the extent to which the shareholder is liable to the company. In case of equity shares, the value is generally quite small; for instance Rs 1, Rs 2, Rs 5, Rs 10 etc. Hence, if shares are offered at this value then it is said they are being offered at Face Value or at Par.
Issue at a premium or at a discount: When shares are offered at more than the Face Value, then it is said that the issue is at a premium. The premium is the amount charged over the Face Value. Conversely, if shares are offered at a price lower than Face Value, then the issue is at a discount. The difference between the Face Value and the Offer Price is the discount.
What Are The Types of Issues? Primary market Issues can be classified into four types. 1.
Initial Public Offer
2.
Follow on Offer
3.
Rights Issue
4.
Preferential Issue
Initial Public Offer (IPO): 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, the issue is called as an Initial Public Offer.
Follow On Public Offer (FPO): When an already listed company makes either a fresh issue of securities to the public or an offer for sale of existing shares to the public, through an offer document, it is referred to as Follow on Offer (FPO).
Rights Issue: When a listed company proposes to issue fresh securities to its existing shareholders, as on a record date, it is called as a rights issue. 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.
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, that 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 the chapter, pertaining to preferential
allotment in SEBI guidelines, which inter-alia include pricing, disclosures in notice etc.
Who Are The Various Intermediaries In A Public Issue? Issuing Company has to appoint various intermediaries for the issue process. The various intermediaries involved are: •
Book Running Lead Managers (BRLMs)
•
Bankers to the Issue
•
Underwriters
•
Registrars to the Issue etc.
What Is The Role Of The Intermediaries? Book Running Lead Managers: The Company issuing shares appoints the BRLM or the Lead Merchant Bankers. The role of the BRLM can be divided into two parts, viz., Pre Issue and Post Issue. The Pre Issue role includes compliance with the stipulated requirements of the SEBI and other regulatory authorities, completion of formalities for listing on the Stock Exchanges, appointing of various agencies such as advertising agencies, printers, underwriters, registrars, bankers etc.
Post Issue activities include management of escrow accounts, deciding the final issue price, final allotment, ensuring proper dispatch of refunds, allotment letters and ensuring that each agency is carrying out their part properly.
Bankers to the Issue: Bankers to the issue, as the name suggests, carry out all the activities of ensuring that the funds are collected and transferred to the Escrow accounts.
Registrars to the Issue: The Registrar finalizes the list of eligible allottees after deleting invalid applications and ensures that the corporate action for crediting shares to the demat accounts of the applicants is done and the refund orders, where applicable, are sent.
Underwriters to the Issue: An investment banking firm enters into a contract with the issuer to distribute securities to the investing public. They get an Underwriting Commission for their services. In case of under subscription, they have the obligation to subscribe to the left over portion.
Underwriters to the Issue: An investment banking firm enters into a contract with the issuer to distribute securities to the investing public. They get an Underwriting Commission for their services. In case of under subscription, they have the obligation to subscribe to the left over portion.
Benefits & and Drawbacks of Investing in the Primary Market: Investing in the primary market has its own benefit and drawbacks. Some of the key benefits are: •
It is safer to invest in the primary markets than in the secondary markets as the scope for manipulation of price is smaller.
•
The investor does not have to pay any kind of brokerage or transaction fees or any tax such as service tax, stamp duty and STT.
•
No need to time the market as all investors will get the shares at the same price.
Some of the major drawbacks are as following: •
In case of over subscription, the shares are allotted in proportionate basis. Thus, small investors hardly get any allotment in such a case.
•
Money is locked for a long time and the shares are allotted after a few days where as in case of purchase from the secondary market the shares are credited within three working days.
Classification of Issue Procedure of arriving at the issue price: •
Fixed Price
•
Book Building
Fixed Price: Any IPO can be priced by two methods. Firstly, where the issuing company, in consultation with the BRLM, arrives at a fixed price at which it offers the shares to the public. In the second method, the company and the BRLM fix a floor and cap price for the issue. This range is called the price band. Investors are free to bid at any price in this range. The final price is determined by market forces according to the demand for the issuing company’s shares. This is called the Book Building Process.
Book Building: In case of a book building IPO, the offer must be open for at least three days. The BRLM declares the issue price before the allotment, which must be completed within 15 days from the closure of the IPO. The shares should get credited to the respective bidders’ account within two working days from the date of allotment. The refund orders are also dispatched within this time.
Category of investors who can invest in an IPO: As far as the IPO is concerned, there are three categories of investors. •
Qualified Institutional Bidders.
•
Non-Institutional Investors.
•
Retail Investors.
Qualified Institutional Investors: Under this head, financial institutions such as Banks, Mutual funds, Insurance companies, Foreign Institutional investors etc. are permitted to bid for the shares. A mMaximum of 50% of the issue can be kept reserved for investors falling under the QIB category. Out of the 50% shares, 5% are reserved for Mutual Funds.
Non-Institutional Investors: Under this category, resident Indian individuals, HUFsS, companies, corporate bodies, NRIs, societies and trusts whose application size in terms of value is more than Rs 1 lakh are allowed to bid. At least 15% of the total issue has to be reserved for Non-Institutional Bidders.
Retail Investors: Under this category, only Individuals, both Resident and NRIs along with HUFs are allowed to bid. At least 35% of the issue has to be reserved for such investors. The size in terms of value should not exceed Rs 1 lakh if one wants to apply under this category.
Q. What kind of equipment can we get financing for? A.
Anything that belongs to the category of equipment and machinery for any industrial plants, office automation, medical treatment diagnosis, transportation etc comes under the purview of equipment leasing.
Q. Who chooses the Equipment? A.
You have the liberty to decide equipment, supplier, terms and conditions including price. IDLC will buy the equipment of your choice.
Q. What is the Lease term? A.
Lease term means the non-cancellable period during which you can use the leased equipment exclusively. Generally it ranges from 3 to 5 years.
Q. Who bears the cost of opening the L/C or other related charges? A.
The actual purchase price and other incidental expenses including financial expenses and all bank charges shall constitute the acquisition cost and would be capitalized at the time of execution.
Q. How much would be the Lease rental A.
Lease rental is determined based on acquisition cost and lease term. Monthly lease rental is most common, however, quarterly or half yearly payment can also be considered.
Q. What is Contract and execution? A.
Lease contract is based on the basis of negotiated terms and estimated acquisition cost. The lease is executed on the basis of actual acquisition cost on delivery or installation of the equipment. At the time of execution the actual payment schedule is fixed and you are required to start paying the rental.
Q. Who pays for the insurance cost? A.
You are required to arrange the insurance coverage on the leased equipment for the entire lease term.
Q. Whose responsibility is it to maintain the equipment? A.
You are required to maintain the leased equipment in good operating condition, though insurance shall cover most of the abnormal risks.
Q. What happens at the expiry of lease term? A.
At the expiry of lease term, you may
Renew the lease on a year to year basis at a predetermined lower rental
Return the equipment to IDLC.
Purchase the equipment from IDLC at negotiated price.
IDLC is a multiproduct financial institution, established in 1985 with the collaboration of reputed international development agencies like: -
Korean Development Financing Corporation, South Korea Kookmin Bank, South Korea International Finance Corporation of the World Bank Group Aga Khan Fund for Economic Development German Investment and Development Company
The management of securities of the corporate sector offered to the public on a regular basis, and existing shareholders on a rights basis, is known as public issue management. Issue management is an important function if merchant bankers and lead managers. The management of issues for raising funds though various types of instruments by companies is known as Issue management. The function of capital issues management in India is carried out by merchant bankers who have the requisite professional skill and competence. One of their functions, in fact, is issue management. Factors such as the tremendous growth in the number and size of public listed companies, and the complexity arising due to the ever increasing SEBI requirements have all attributed to the increasingly significant role played by merchant bankers in the recent past. The definition of merchant baker as contained in SEBI (Merchant Banker) Rules and Regulations, 1992 clearly brings out the significance of Issue Management as follows: any person who is engaged in the business of issue management either by making arrangement regarding selling, buying or subscribing to securities as manager, consultant advisor or rendering corporate advisory services in elation to such issue management. A fast growing economy like India offers tremendous scope for issue management and the merchant bankers provide their skills and expertise to companies in the management of capital issues. This essentially aims at channeling household savings into the corporate sector through the issue of corporate securities. Companies raise funds for the purposes of financing new projects, expansion/modernization/diversification of existing units and augmenting long term resources for working capital purposes. Functions:
The general functions that form part of the capital issues management of merchant of merchant bakers are as follows: 1. Obtaining approval for the issue from SEBI 2. Arranging for underwriting the proposed issues 3. Preparation of draft and finalization of the prospectus and obtaining its clearance from the various agencies concerned. 4. Preparation of draft and finalization of other documents such as application forms, newspaper advertisements and other statutory requirements. 5. Making a choice regarding registrar to the issues, printing press, advertising agencies brokers and bankers to the issue and finalization of the fees to be paid to them. 6. Arranging for press conference and the investors’ conferences 7. coordinating printing, publicity and other work in order it get everything ready at the time f the public issue. 8. Complying with SEBI guidelines after the issue is over by sending various reports as required by the authorities Categories of Securities issue: Corporate enterprises use several sources for raising funds from the capital market. Issue of securities constitutes an important mode of raising such finances. Security takes the following forms: 1. Public Issue 2. Right Issue 3. Private Placements Public Issue of Securities: When capital funds are raised through the issue of a prospectus, it is called public issue of securities. It is the most common method of raising funds in the capital market. A security issue may take place either at par, or at a premium or at a discount. The prospectus has to disclose all the essential facts about the company to the prospective purchasers of the shares. Further, the prospectus must conform to the format set out in Schedule II of the Companies Act 1956, besides taking into the account SEBI guidelines. SEBI insists on the adequacy of disclosure of information that should serve as the basis for investors take a decision about the investment of their money. Rights Issue: When shares are issued to the existing shareholders of a company on a privileged basis, it is called as Rights Issue. The existing shareholders have a pre-emptive to subscribe to the new issue of shares. Rights shares are offered as additional issues by corporate to mop up further capital funds. Such shares are offered in proportion to the capital paid up on the shares held by them at the time of the offer. Private Placements: When the issuing company sells securities directly to the investors especially institutional investors, it takes the form of private placement. In this case no prospectus is issued since it is presumed that the inverts have sufficient knowledge and experience and are capable of evaluating of the risk of the investment. Private
placement covers shares, preference shares and debentures. The role of the financial intermediary such as the merchant Bankers and lead managers assumes greater significance in private placement. They involve themselves in the task of preparing a offer memorandum and negotiating it investors. –
Book Building About Book Building Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery. It is a process used for marketing a public offer of equity shares of a company. It is a mechanism where, during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The process aims at tapping both wholesale and retail investors. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria. The Process: >>The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'. >>The Issuer specifies the number of securities to be issued and the price band for orders. >>The Issuer also appoints syndicate members with whom orders can be placed by the investors. >>Investors place their order with a syndicate member who inputs the orders into the 'electronic book'. This process is called 'bidding' and is similar to open auction. >>A Book should remain open for a minimum of 5 days. >>Bids cannot be entered less than the floor price. >>Bids can be revised by the bidder before the issue closes. >>On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation criteria which may include -Price Aggression -Investor quality -Earliness of bids, etc. >>The book runner and the company conclude the final price at which it is willing to issue the stock and allocation of securities. >>Generally, the number of shares are fixed, the issue size gets frozen based on the price per share discovered through the book building process. >>Allocation of securities is made to the successful bidders. >>Book Building is a good concept and represents a capital market which is in the process of maturing. Initial Public Offerings Corporates may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. This Initial Public Offering can be made through the fixed price method, book building method or a combination of both. In case the issuer chooses to issue securities through the book building route then as per SEBI guidelines, an issuer company can issue securities in the following manner: 100% of the net offer to the public through the book building route. 75% of the net offer to the public through the book building process and 25% through the fixed price portion.
Under the 90% scheme, this percentage would be 90 and 10 respectively. Difference between shares offered through book building and offer of shares through normal public issue: Features Fixed Price process (FPP) Book Building process (BBP) Pricing (FPP)--> Price at which the securities are offered/allotted is known in advance to the investor. (BBP) --> Price at which securities will be offered/allotted is not known in advance to the investor. Only an indicative price range is known. Demand (FPP)--> Demand for the securities offered is known only after the closure of the issue (BBP)--> Demand for the securities offered can be known everyday as the book is built. Payment (FPP)---> Payment if made at the time of subscription wherein refund is given after allocation. (BBP)--> Payment only after allocation.
The major change brought about by SEBI in the primary markets was the improvement in the quality of disclosure norms for IPOs or listed companies raising additional capital through the securities markets. SEBI's attempts are directed towards ensuring full and fair disclosure by issuers. SEBI has also set a standard for companies that can issue securities through the securities market. As a merchant banker, the pre-issue management procedure can be briefly summarized as follows:
1. Eligibility Criteria An unlisted company, in order to issue its securities, has to have a pre-issue net worth of Rs. 10 million in 3 out of the last 5 years. Also, the issue size must not exceed 5 times the companies pre-issue net worth. The Company must have a track record of dividend payment for the immediately preceding three years or a public financial institution or scheduled commercial bank must have appraised the project to be financed and have participated in financing the project by way of loan or equity to the extent of at least 10% of the project cost. The fulfilment of the eligibility criteria needs to be verified. 2. Promoters Contribution In a public issue by a listed company, the promoters are either required to contribute at least 20%
of the proposed issue, or to ensure that their shareholding be kept at 20% or more of the company's expanded capital, subject to certain exemptions. This also needs to be verified. 3. Planning, Coordinating and Marketing Successfully raising capital from the market needs well planned and chalked out marketing strategy. As a merchant banker, one has to therefore help the company in making an analytical study of various sources, the quantum, the appropriate time, the cost of raising capital and the possible impact of such resources on the overall capital structure of the Company, besides the law governing their issue. The company's management needs to be educated on the latest acts, rules, regulations and guidelines, viz. the Companies Act, the SEBI guidelines and Clarifications, the Securities Contracts (Regulation) Act and the Securities Contracts (Regulation) Rules. One also needs to coordinate various activities with the bodies of the Government and professional agencies as well as the public at large. One also needs to help the company in successfully marketing the issue, organizing publicity campaigns, press releases and press conferences, printing and mailing of offer letters, prospectuses, etc. 3. Appointment of other professional agencies One has to ensure that various agencies, viz Brokers who are members of recognized stock exchange; principal brokers who would assist us in devising a success strategy; bankers to the issue and registrars to the issue who are duly registered with SEBI, etc are all appointed by the company. Also, the underwriters, solicitors and advisors to the issue need to be appointed. Consent letters, as required have to be obtained from each of these along with consent letters from the auditors of and bankers to the company. 4. Listing requirements One needs to verify whether any amendments are required to the Memorandum and Articles of Association along with the Solicitors. A copy has to be sent to the Stock Exchange for approval. We also need to know and inform the company on the various norms to be followed for the stock exchanges identified for listing of the securities. 5. Board Resolutions One has to verify with the company that its limits within 293 (1) (d) are adequate and also on the adequacy of the authorised share capital. Thereafter, one has to direct the company to pass the necessary board resolutions as required by the Stock Exchanges and the financial institutions and the Companies Act, 1956 for this purpose as well as for the approval of all appointments. 6. Draft Prospectus, Abridged Prospectus and Letter of Offer One needs to help the company in preparing the draft prospectus, the abridged prospectus and in case of rights issue, the Letter of Offer. We are expected to exercise due diligence in ensuring compliance by the company in regard to the prospectus. The draft prospectus is required to be submitted to SEBI and the relevant stock exchange at least 21 days before the filing of the final offer documents with the Registrar of Companies (ROC) and the stock exchange for disclosure purposes. One also has to ensure that all the disclosure requirements are fully met, viz. Schedule
II to the Companies Act, Form No. 2A of the General Rules & Forms, Guidelines for Disclosure and Investor Protection issued by SEBI, the RMB Circulars issued by SEBI and the Observation Letters issued by SEBI. Prior to filing the draft prospectus with SEBI, one also has to ensure that all the government approvals and consents from various agencies have been obtained. Further the auditors report and the balance sheet (not later than 6 months from the date of signing the balance sheet) has also got to be incorporated. 7. Finalize and file the Prospectus Considering the comments from or approval of SEBI, the prospectus has to be finalised. It will also need to be vetted by the legal advisors, solicitors to the issue, the auditors, lead institutions and stock exchanges. The final prospectus would then be sent to SEBI along with a copy of the due diligence certificate and other essential documents. Immediately thereafter one has to instruct the company to hold a Board Meeting for approving, signing and filing of the prospectus and for various related activities concomitant with the issue in the capital market. The prospectus duly signed needs to be filed along with all requisite documents with the Registrar of Companies (ROC) and receive its acknowledgement. 8. Launching the Issue One would then help the company in its advertisement and publicity campaigns including hoardings, advertisements in newspapers, magazines and periodicals, holding of press conferences, press write-ups, brokers conferences, investors conferences, trade conferences, etc. Concurrently, printers have to be instructed to print and distribute copies of the prospectus, abridged prospectus and application forms. The subscription list is then opened.
Introduction to Primary Markets
Most listed companies are usually started privately by their promoter(s). However, the promoters’ capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. So, companies invite the public to contribute towards the
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equity and issue shares to individual investors. The way to invite the public to subscribe to the
Investing Basics
share capital of the company is through a ‘Public Issue’. Once this is done, the company allots
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shares to the applicants as per the prescribed guidelines laid down by SEBI.
Investment risk management
The Primary Market is, hence, the market that provides a channel for the sale of new securities to issuers, which may can be the Government or corporates, to raise resources to meet their fund raising requirements. The securities may be issued at face value, or at a discount/premium and
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may take a variety of forms such as equity, debt etc. They may be issued in the domestic and/or international market. Issue at Face Value: The nominal value of the share, assigned to it by the issuer, is called the Face Value or Par Value. It is the original cost shown on the share certificate and the extent to which the shareholder is liable to the company. In case of equity shares, the value is generally quite small; for instance Rs 1, Rs 2, Rs 5, Rs 10 etc. Hence, if shares are offered at this value then it is said they are being offered at Face Value or at Par.
Issue at a premium or at a discount: When shares are offered at more than the Face Value, then it is said that the issue is at a premium. The premium is the amount charged over the Face Value. Conversely, if shares are offered at a price lower than Face Value, then the issue is at a discount. The difference between the Face Value and the Offer Price is the discount.
What Are The Types of Issues? Primary market Issues can be classified into four types. 1.
Initial Public Offer
2.
Follow on Offer
3.
Rights Issue
4.
Preferential Issue
Initial Public Offer (IPO): 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, the issue is called as an Initial Public Offer.
Follow On Public Offer (FPO): When an already listed company makes either a fresh issue of securities to the public or an offer for sale of existing shares to the public, through an offer document, it is referred to as Follow on Offer (FPO).
Rights Issue: When a listed company proposes to issue fresh securities to its existing shareholders, as on a record date, it is called as a rights issue. 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.
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, that 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 the chapter, pertaining to preferential
allotment in SEBI guidelines, which inter-alia include pricing, disclosures in notice etc.
Who Are The Various Intermediaries In A Public Issue? Issuing Company has to appoint various intermediaries for the issue process. The various intermediaries involved are: •
Book Running Lead Managers (BRLMs)
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Bankers to the Issue
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Underwriters
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Registrars to the Issue etc.
What Is The Role Of The Intermediaries? Book Running Lead Managers: The Company issuing shares appoints the BRLM or the Lead Merchant Bankers. The role of the BRLM can be divided into two parts, viz., Pre Issue and Post Issue. The Pre Issue role includes compliance with the stipulated requirements of the SEBI and other regulatory authorities, completion of formalities for listing on the Stock Exchanges, appointing of various agencies such as advertising agencies, printers, underwriters, registrars, bankers etc.
Post Issue activities include management of escrow accounts, deciding the final issue price, final allotment, ensuring proper dispatch of refunds, allotment letters and ensuring that each agency is carrying out their part properly.
Bankers to the Issue: Bankers to the issue, as the name suggests, carry out all the activities of ensuring that the funds are collected and transferred to the Escrow accounts.
Registrars to the Issue: The Registrar finalizes the list of eligible allottees after deleting invalid applications and ensures that the corporate action for crediting shares to the demat accounts of the applicants is done and the refund orders, where applicable, are sent.
Underwriters to the Issue: An investment banking firm enters into a contract with the issuer to distribute securities to the investing public. They get an Underwriting Commission for their services. In case of under subscription, they have the obligation to subscribe to the left over portion.
Underwriters to the Issue: An investment banking firm enters into a contract with the issuer to distribute securities to the investing public. They get an Underwriting Commission for their services. In case of under subscription, they have the obligation to subscribe to the left over portion.
Benefits & and Drawbacks of Investing in the Primary Market: Investing in the primary market has its own benefit and drawbacks. Some of the key benefits are: •
It is safer to invest in the primary markets than in the secondary markets as the scope for manipulation of price is smaller.
•
The investor does not have to pay any kind of brokerage or transaction fees or any tax such as service tax, stamp duty and STT.
•
No need to time the market as all investors will get the shares at the same price.
Some of the major drawbacks are as following: •
In case of over subscription, the shares are allotted in proportionate basis. Thus, small investors hardly get any allotment in such a case.
•
Money is locked for a long time and the shares are allotted after a few days where as in case of purchase from the secondary market the shares are credited within three working days.
Classification of Issue Procedure of arriving at the issue price: •
Fixed Price
•
Book Building
Fixed Price: Any IPO can be priced by two methods. Firstly, where the issuing company, in consultation with the BRLM, arrives at a fixed price at which it offers the shares to the public. In the second method, the company and the BRLM fix a floor and cap price for the issue. This range is called the price band. Investors are free to bid at any price in this range. The final price is determined by market forces according to the demand for the issuing company’s shares. This is called the Book Building Process.
Book Building: In case of a book building IPO, the offer must be open for at least three days. The BRLM declares the issue price before the allotment, which must be completed within 15 days from the closure of the IPO. The shares should get credited to the respective bidders’ account within two working days from the date of allotment. The refund orders are also dispatched within this time.
Category of investors who can invest in an IPO: As far as the IPO is concerned, there are three categories of investors. •
Qualified Institutional Bidders.
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Non-Institutional Investors.
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Retail Investors.
Qualified Institutional Investors: Under this head, financial institutions such as Banks, Mutual funds, Insurance companies, Foreign Institutional investors etc. are permitted to bid for the shares. A mMaximum of 50% of the issue can be kept reserved for investors falling under the QIB category. Out of the 50% shares, 5% are reserved for Mutual Funds.
Non-Institutional Investors: Under this category, resident Indian individuals, HUFsS, companies, corporate bodies, NRIs, societies and trusts whose application size in terms of value is more than Rs 1 lakh are allowed to bid. At least 15% of the total issue has to be reserved for Non-Institutional Bidders.
Retail Investors: Under this category, only Individuals, both Resident and NRIs along with HUFs are allowed to bid. At least 35% of the issue has to be reserved for such investors. The size in terms of value should not exceed Rs 1 lakh if one wants to apply under this category.
