Classification of Issues:

Public issues: The most common method of raising capital by new companies is through sales of securities to the public. Right Issues: When an existing company wants to raise additional capital securities are first offered to the existing shareholders on pre-emptive bases. Private Placement: Private Placement is way of selling securities privately to a small group of investors. Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds.

IPOs: Initial Public Offering (IPO) in India is defined the selling of the shares of a company, for the first time, to the public in the country's capital markets. This is done by giving to the public and shares, which are either owned by the promoters of the company or by issuing new shares. IPO in India is done through different methods like fixed price method, book building method, or a mixture of both. The method of book building has been introduced in the country in 1999 and it helps the company to find out the demand and price of its shares. The company that is issuing the Initial Public Offering (IPO) decides the number of shares that it wil l issue and also fixes the price band of the shares.

SEBI Guidelines for IPOs

1. IPOs of small companies Public issue of less than five crores has to be through OTCEI and separate guidelines apply for floating and listing of these issues. (Public Offer By Small Unlisted Companies) 2. Size of the Public Issue Issue of shares to general public cannot be less than 25% of the total issue, incase of information technology, media and telecommunication sectors this stipulation is reduced subject to the conditions that: y y y Offer to the public is not less than 10% of the securities issued. A minimum number of 20 lakh securities is offered to the public and Size of the net offer to the public is not less than Rs. 30 crores.

3. Promoter Contribution y y y y Promoters should bring in their contribution including premium fully before the issue Minimum Promoters contribution is 20-25% of the public issue. Minimum Lock in period for promoters contribution is five years Minimum lock in period for firm allotments is three years.

4. Collection centers for receiving applications y y There should be at least 30 mandatory collection centers, which should include invariably the places where stock exchanges have been established. For issues not exceeding Rs.10 crores (including premium, if any), the collection centres shall be situated at:o o the four metropolitan centres viz. Bombay, Delhi, Calcutta, Madras; and at all such centres where stock exchanges are located in the region in which the registered office of the company is situated.

5. Regarding allotment of shares y y y y y y y y y Net Offer to the General Public has to be at least 25% of the Total Issue Size for listing on a Stock exchange. It is mandatory for a company to get its shares listed at the regional stock exchange where the registered office of the issuer is located. In an Issue of more than Rs. 25 crores the issuer is allowed to place the whole issue by book -building Minimum of 50% of the Net offer to the Public has to be reserved for Investors applying for less than 1000 shares. There should be atleast 5 investors for every 1 lakh of equity offered (not applicable to infrastructure companies). Quoting of Permanent Account Number or GIR No. in application for allotment of securities is compulsory where monetary value of Investment is Rs.50,000/- or above. Indian development financial institutions and Mutual Fund can be allotted securities upto 75% of the Issue Amount. A Venture Capital Fund shall not be entitled to get its securities listed on any stock exchange till the expiry of 3 years from the date of issuance of securities. Allotment to categories of FIIs and NRIs/OCBs is upto a maximum of 24%, which can be further extended to 30% by an application to the RBI - supported by a resolution passed in the General Meeting.

6. Timeframes for the Issue and Post- Issue formalities y The minimum period for which a public issue has to be kept open is 3 working days and the maximum for which it can be kept open is 10 working days. The minimum period for a rights issue is 15 working days and the maximum is 60 working days. A public issue is effected if the issue is able to procure 90% of the Total issue size within 60 days from the date of earliest closure of the Public Issue. In case of over-subscription the company may have the right to retain the excess application money and allot shares more than the proposed issue, which is referred to as the green-shoe option. A rights issue has to procure 90% subscription in 60 days of the opening of the issue. Allotment has to be made within 30 days of the closure of the Public Issue and 42 days in case of a Rights issue. All the listing formalities for a public Issue has to be completed within 70 days from the date of closure of the subscription list.

y y y

7. Despatch of Refund Orders y y Refund orders have to be dispatched within 30 days of the closure of the Public Issue. Refunds of excess application money i.e. for un-allotted shares have to be made within 30 days of the closure of the Public Issue.

8. Other regulations pertaining to IPO y y y Underwriting is not mandatory but 90% subscription is mandatory for each issue of capital to public unless it is disinvestment in which case it is not applicable. If the issue is undersubscribed then the collected amount should be returned back (not valid for disinvestment issues). If the issue size is more than Rs. 500 crores voluntary disclosures should be made regarding the deployment of the funds and an adequate monitoring mechanism to be put in place to ensure compliance.

y y

y y

There should not be any outstanding warrants or financial instruments of any other nature, at the time of initial public offer. In the event of the initial public offer being at a premium, and if the rights under warrants or other instruments have been exercised within the twelve months prior to such offer, the resultant shares will not be taken into account for reckoning the minimum promoter's contribution and further, the same will also be subject to lock-in. Code of advertisement specified by SEBI should be adhered to. Draft prospectus submitted to SEBI should also be submitted simultaneously to all stock exchanges where it is proposed to be listed.

9. Restrictions on other allotments y y y Firm allotments to mutual funds, FIIs and employees not subject to any lock-in period. Within twelve months of the public/rights issue no bonus issue should be made. Maximum percentage of shares, which can be distributed to employees cannot be more than 5% and maximum shares to be allotted to each employee cannot be more than 200.

10. Relaxations to public issues by infrastructure companies. These relaxations would be applicable to Infrastructure Companies as defined under Section 10(23G) of the Income Tax Act, 1961, provided their projects are appraised by any Developmental Financial Institution (DFI) or IDFC or IL&FS. The projects must also have a participation of at least 5% of the project cost (in debt and/or equity) by the appraising institution. y y y The infrastructure companies will be exempted from the requirement of making a minimum public offer of 25 per cent of its securities. The requirement of 5 shareholders per Rs. 1 lakh of offer is also waived in case of offerings by infrastructure companies. For public issues by infrastructure companies, minimum subscription of 90% would no longer be mandatory provided disclosure is made about the alternate source of funding which the company has considered, in the event of under subscription in the public issue. Infrastructure companies are permitted to freely price the offerings in the domestic market provided that the promoter companies along with Equipment Suppliers and other strategic investors subscribe to 50% of the equity at the same or a higher price than what is being offered to the public. Adequate disclosures about the justification for the pricing will be required to be made in the offer documents. The Infrastructure Companies would be allowed to keep their issues open for 21 days. The relaxation would give infrastructure companies sufficient time to mobilise funds for their issues. Infrastructure Companies would not be required to create and maintain a Debenture Redemption Reserve (DRR) in case of Debenture Issues.

y y

Book Building: The process of determining the price at which an Initial Public Offering will be offered. The book is filled with the prices that investors indicate they are willing to pay per share, and when the book is closed, the issue price is determined by an underwriter by analyzing these values. Book Building Process: y y y y y y y y 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 o Price Aggression o Investor quality o 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 is 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.

y y y y

Difference between shares offered through book building and offer of shares through normal public issue: Features Fixed Price process Pricing Book Building process

Price at which the securities are offered/ Price at which securities will be offered/ allotted is not allotted is known in advance to the investor. known in advance to the investor. Only an indicative price range is known. Demand for the securities offered can be known

Demand Demand for the securities offered is

known only after the closure of the issue everyday as the book is built. Payment Payment if made at the time of subscription wherein refund is given after allocation. Payment only after allocation.

Underwriter: An investment bank that acts as an intermediary between the issuing company and the investors who purchase the company's debt instruments and/or stock at the Initial Public Offering (IPO). The underwriter buys the newly issued securities from the company and sells them to investors on the secondary market through a stock exchange.

Merchant bank: A merchant bank is a financial institution which provides capital to companies in the form of share ownership instead of loans. A merchant bank also provides advisory on corporate matters to the firms they lend to.