Primary market

The chapter comprises of Primary Market - Its Role and Functions; Issue of Capital - Methods of Issuing Securities in Primary Market, Intermediaries in New Issue Market - Merchant Bankers, Underwriters, Brokers, Registrars and Managers Bankers; Pricing of Issue - Book Building, Green Shoe Option, Procedure for New Issues and SEBI Guidelines for Issue in Primary Market.
The primary market is where securities are created. It's in this market that firms sell (float) new stocks and bonds to the public for the first time. An initial public offering, or IPO, is an example of a primary market.
These trades provide an opportunity for investors to buy securities from the bank that did the initial underwriting for a particular stock.
An IPO occurs when a private company issues stock to the public for the first time.
Companies and government entities sell new issues of common and preferred stock, corporate bonds and government bonds, notes, and bills on the primary market to fund business improvements or expand operations. Although an investment bank may set the securities' initial price and receive a fee for facilitating sales, most of the funding goes to the issuer. Investors typically pay less for securities on the primary market than on the secondary market.
A rights offering (issue) permits companies to raise additional equity through the primary market after already having securities enter the secondary market. Current investors are offered prorated rights based on the shares they currently own, and others can invest anew in newly minted shares.
Companies can raise capital at relatively low cost, and the securities so issued in the primary market provide high liquidity as the same can be sold in the secondary market almost immediately.
The primary market is an important source for mobilisation of savings in an economy. Funds are mobilised from commoners for investing in other channels. It leads to monetary resources being put into investment options.
Chances of price manipulation in the primary market are considerably less when compared to the secondary market. Such manipulation usually occurs by deflating or inflating a security price, thereby deliberately interfering with fair and free operations of the market.
The primary market acts as a potential avenue for diversification to cut down on risk. It enables an investor to allocate his/her investment across different categories involving multiple financial instruments and industries.
It is not subject to any market fluctuations. The prices of stocks are determined before an initial public offering, and investors know the actual amount they will have to invest.

1. Stock Market Operations
Unit-II: Primary Market
PrimaryMarket-ItsRoleandFunctions;IssueofCapital-Methods
ofIssuingSecuritiesinPrimaryMarket,IntermediariesinNewIssue
Market-MerchantBankers,Underwriters,Brokers,Registrarsand
ManagersBankers;PricingofIssue-BookBuilding,GreenShoeManagersBankers;PricingofIssue-BookBuilding,GreenShoe
Option,ProcedureforNewIssuesandSEBIGuidelinesforIssuein
PrimaryMarket.
Prepared by:
Mr. DayanandaH. Huded
M.ComJRF, NET 3 Times, & KSET
Teaching Assistant,
Rani Channamma University, P. G. Centre, jamkhandi

2. Primary Market
•Theprimarymarketiswheresecuritiesarecreated.It'sin
thismarketthatfirmssell(float)newstocksandbondstothepublicfor
thefirsttime.Aninitialpublicoffering,orIPO,isanexampleof
aprimarymarket.
•Thesetradesprovideanopportunityforinvestorstobuysecuritiesfrom
thebankthatdidtheinitialunderwritingforaparticularstock.
•AnIPOoccurswhenaprivatecompanyissuesstocktothepublicforthe
firsttime.
•Companiesandgovernmententitiessellnewissuesofcommonand
preferredstock,corporatebondsandgovernmentbonds,notes,and
Companiesandgovernmententitiessellnewissuesofcommonand
preferredstock,corporatebondsandgovernmentbonds,notes,and
billsontheprimarymarkettofundbusinessimprovementsorexpand
operations.Althoughaninvestmentbankmaysetthesecurities'initial
priceandreceiveafeeforfacilitatingsales,mostofthefundinggoesto
theissuer.Investorstypicallypaylessforsecuritiesontheprimary
marketthanonthesecondarymarket.
•Arightsoffering(issue)permitscompaniestoraiseadditionalequity
throughtheprimarymarketafteralreadyhavingsecuritiesenterthe
secondarymarket.Currentinvestorsareofferedproratedrightsbased
onthesharestheycurrentlyown,andotherscaninvestanewinnewly
mintedshares.

3. FEATURES OF PRIMARY MARKET
•It Is Related With New Issues
•It Has No Particular Place
•Primary issues are used by companies for the purpose of setting up new
business or for expanding or modernizing the existing business.
•The company receives the money and issues new security certificates to
the investors.
•It Has Various Methods of Float Capital: Following are the methods of
raising capital in the primary market: 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

4. Functions of Primary Market
•Household Savings
•Global Investments
•Sale of Government Securities
•Primary Market Participants
•Marker Risk
•Distribution of new issue
•Underwritingservices:Underwritingisanessentialaspectwhileofferinga
newissue.Anunderwriter’sroleinaprimarymarketplaceincludespurchasingnewissue.Anunderwriter’sroleinaprimarymarketplaceincludespurchasing
unsoldsharesifitcannotmanagetoselltherequirednumberofsharestothe
public.Afinancialinstitutionmayactasanunderwriter,earningacommission
onunderwriting.
Players in the Primary market (The three I’s )
Issuers
Intermediaries
Investors
Individual Investors
Corporate Investors and FIIs

5. Role of Primary Market
•Companiescanraisecapitalatrelativelylowcost,andthesecuritiesso
issuedintheprimarymarketprovidehighliquidityasthesamecanbesold
inthesecondarymarketalmostimmediately.
•Theprimarymarketisanimportantsourceformobilisationofsavingsin
aneconomy.Fundsaremobilisedfromcommonersforinvestinginother
channels.Itleadstomonetaryresourcesbeingputintoinvestmentoptions.
•Chancesofpricemanipulationintheprimarymarketareconsiderablyless
whencomparedtothesecondarymarket.Suchmanipulationusuallyoccurswhencomparedtothesecondarymarket.Suchmanipulationusuallyoccurs
bydeflatingorinflatingasecurityprice,therebydeliberatelyinterfering
withfairandfreeoperationsofthemarket.
•Theprimarymarketactsasapotentialavenuefordiversificationtocut
downonrisk.Itenablesaninvestortoallocatehis/herinvestmentacross
differentcategoriesinvolvingmultiplefinancialinstrumentsandindustries.
•Itisnotsubjecttoanymarketfluctuations.Thepricesofstocksare
determinedbeforeaninitialpublicoffering,andinvestorsknowtheactual
amounttheywillhavetoinvest.

6. Contd.
•It studies needs, wants and expectations of the customers.
•It finds out reactions of customers to products of the company.
•It evaluates company’s sales promotion measures for suitable
adjustment and improvements.
•It studies current marketing problems and opportunities for suitable
follow up.
•It suggest introduction of new products, modification of existing
products.products.
•It studies marketing competition, channel of distribution and pricing
for suitable changes if necessary.
•It find methods for making the product popular and raising its goodwill
and marketing reputation.

7. Methods of Issuing Securities in Primary Market
•Distributionofsecuritiestoprospectiveinvestorstomopuptheirsurplusesisa
highlyspecializedactivitythatrequiresalotofexpertiseandexperience.
•Assuch,companiesseekingtogarnerfundsfromalargenumberofinvestors-
bothindividualsandinstitutions-havetohiretheservicesofthespecialized
agenciessuchasunderwriters,brokers,merchantbankers,etc.
•Besides,thereareotherwayswhichcanbeemployedforsellingsecuritiestothe
investingpublic.InIndia,followingmethodsareusuallyemployedtogarner
fundsfromthepublicthroughfloatationofsecurities.
•Methods:•Methods:
–1PublicIssueThroughProspectus
–2OfferforSale
–3PrivatePlacement
–4RightsIssue
–5Over-the-CounterPlacement
–6InitialPublicOfferthroughStockExchangeOnlineSystem(E-IPO)
–7Book-Building
–8GreenShoeOption

8. 1 Public Issue Through Prospectus
•Publicissue:Issueofstockonapublicmarketratherthanbeing
privatelyfundedbythecompaniesownpromoter(s),whichmaynotbe
enoughcapitalforthebusinesstostartup,produce,orcontinuerunning.
Byissuingstockpublically,thisallowsthepublictoownapartofthe
company,thoughnotbeacontrollingfactor.
•Basicallywhenshares,bondsetcaremadeavailableforanyonetobuy.
•ThemainpurposeofthepublicissueistoraisemoneythroughpublicThemainpurposeofthepublicissueistoraisemoneythroughpublic
andgetitsshareslistedatanyoftherecognizedstockexchangesin
India.
•Thismethodalsopromotesconfidenceofinvestorsthrough
transparencyandnon-discriminatorybasisofallotment.Thereishardly
anyscopeofartificialjackingupofpricesiftheissueismadepublic.

9. •Inthismethod,apubliclimitedcompanyinvitesthepublicatlarge
throughprospectustosubscribetotheissueofsecurities.Accordingto
theSEBInorms,aminimumof49%ofthetotalissueatatimeistobe
offeredtopublic.
•Aprospectusisadocumentthatprovidesinformationaboutthe
companyanditsproposedissue.Thecompanyandthedirectorssigning
thisdocumentarepersonallyliableforanyfalsestatementor
misrepresentationofmaterialfactsintheprospectus.
•Publicissuethroughprospectusmaytaketheformofdirectselling,sale
throughinvestmentintermediariesandunderwritingofissues.Directthroughinvestmentintermediariesandunderwritingofissues.Direct
sellingofsecuritiesmethodcanbeusedwhenacompanyintendsto
approachasmallnumberoflargeindividualorinstitutionalinvestors.
•However,thereisnocertaintyofprocuringthedesiredfundsfrom
investorsthroughdirectselling.Thisiswhycompaniesmaytakethe
helpofintermediariesandspecializedagenciessuchasbrokers,
merchantbankers,forsellingsuchsecurities.Theseagenciescharge
commissionfortheirservice.However,theydonotprovideany
guaranteetotheissueregardingthesaleofsecurities.

10. •Thepureprospectusmethodofsellingsecuritiesisverypopular
methodbecauseitisusefultobothtotheissuersaswellastothe
investors.
•Theissuershavethebenefitofwiderdiffusionofownershipof
securities,thusavoidingthepossibilityofconcentrationofcontrolling
powerinthehandsofafew.
•Investorshavetheadvantageofgettingdetailedinformationaboutthe
companyanditsissuethroughprospectusaspertheSEBI
requirements.
•This method can be gainfully employed by large companies offering big •This method can be gainfully employed by large companies offering big
issues because of high costs involved in raising capital.
•Further, it is a time-consuming method as a lot of legal formalities need
to be complied with before floating an issue.

11. 2. Offer for Sale
•Thismethodinvolvesoutrightsaleofsharesenblocbythecompanyto
issuehousesoragroupofbrokersatanagreedpricewhointurnresell
themtothepublicatlarge.
•Insuchcases,theissuinghousesmayactasagentsofthecompany.
•Thedifferencebetweentheresalepriceandpurchasepriceistermedas
spreadandrepresentstheprofitoftheissuehouses.
•IntheUS,issuingcompaniescannotapproachthepublicdirectly.They
areunderobligationtoselltheirsharesinthefirstinstanceto
underwriters,whothenissuethesesharestotheinvestingpublic.underwriters,whothenissuethesesharestotheinvestingpublic.
•InIndia,thismethodhasbeenemployedonanexperimentalbasis
underthename‘boughtoutdeals’whereinthesharesarefirstsoldto
thesponsorunderanagreementthatthesponsorshallsellthemto
publicwithinaspecifiedperiodoftime.
•Thismethodofdistributionofsecuritieshastheadvantageof
ensuringsuccessoftheissueandeconomizingoncostofnewissues
andthustheissuingcompanyisrelievedofthebotherationsinvolvedin
sellingsecuritiestothepublic.
•Theissuehousesalsostandtogainbycharginghigherprices.

12. 3. Private Placement
•Inthismethod,theissuingcompanyoffersissueprivatelytoaselect
groupofinvestorswithouttheprospectus.Inthisprocess,theissuer
maycallupontheservicesofbrokersorissuehouses.
•Thismethodworksinamannersimilartothe‘offerforsalemethod’
wherebysecuritiesarefirstsoldtoissuehouses,etc.,whothensellthem
athigherpricestoindividualsandinstitutions.
•Thismethodofsellingsecuritiesisveryeconomicalandless
troublesome.Assuch,itsuitstherequirementsofsmallcompanies.
•Toothers,thismethodisusefulespeciallywhenthestockmarketisin•Toothers,thismethodisusefulespeciallywhenthestockmarketisin
bearishstateandthepublicresponseispoor.
•However,thedisadvantageofthismethodisthattheinvestorcannot
resellthesecurityforaspecificperiodoftime.
•Thismethodmayalsoleadtoconcentrationofsecuritiesinafewhands.
•Thereisalsoscopeforcreatingartificialscarcityforthesecurities,thus
jackingupthepricestemporarilyandmisleadingthegeneralpublic.

13. 4. Right Issue
•Rightsissuemethodisanimportantmethodof
distributingsecuritiesinwhichtheexistingcompanyoffers
sharestoitsexistingshareholdersinproportiontotheir
existingownership(Pro-rataBasis).
•AsperSection81oftheCompaniesAct,1956,existing
shareholdersgetarightof‘pre-emption’andtheyhavethe
optiontoexercisetherighttorenounceitorthrowaway.
•Forthatpurpose,acompanyintendingtoincreaseits•Forthatpurpose,acompanyintendingtoincreaseits
subscribedcapitalbytheissueofnewshareseitherafter
twoyearsofitsformationorafteroneyearofthefirst
issueofshareswhicheverisearlierwillhaveNotestooffer
thesharestotheexistingshareholderswiththerightto
reservetheminfavourofanominee.
•Rightsissueisthecheapestandconvenientmethodof
raisingfundsandprotectstheinterestoftheexisting
shareholdersagainstthedilutionoftheirownership.

14. 5. Over-the-Counter Placement
•Thismethodhascometobeemployedinrecentyears,especiallyafter
thecommencementoftheoperationsofOver-the-CounterExchange
(OTCE)in1992.
•TheOTCpermitssmallcompaniestoraisefundsthroughitsexchange.
•Underthismethod,thecompanyintendingtoraisefundsthrough
OTCEappointsamemberoftheOTCEassponsor.
•Thesponsorappraisestheprojectandvaluesthesharesofthe•Thesponsorappraisestheprojectandvaluesthesharesofthe
company.Thesharesareplacedbythesponsorwithitselfandother
membersanddealersoftheOTCE.
•Thesponsorensuresthesuccessoftheissueevenifitisrequiredto
subscribetoallthesharesbyitself.
•TheOTCEmembersanddealersoperatecounterstofacilitatetrading
withinvestingpublic.
•ThedistributionofsharesthroughOTCEhastobemadeasperthe
SEBIguidelines.
•Thismethodofsellingsecuritiesismostsuitedtosmallenterprises.

15. 6. Initial Public Offer through Stock Exchange Online
System (E-IPO)
•InadditiontootherrequirementsforpublicissuesasgivenintheSEBI
guidelineswhereverapplicable,acompanyproposingtoissuecapitalto
public,throughtheonlinesystemofthestockexchangeforofferof
securities,hastocomplywiththerequirementsdiscussedbelow.
•Theyareapplicabletothefixedpriceissueaswellasforthefixedprice
portionofbook-builtissues.
•Theissuingcompanieswouldhavetheoptiontoissuesecuritiestothe•Theissuingcompanieswouldhavetheoptiontoissuesecuritiestothe
publiceitherthroughtheonlinesystemofthestockexchangeor
throughtheexistingbankingchannel.
•1.AgreementwithStockExchange:Thecompanyshouldenterinto
anagreementwiththestockexchange(s),specifying,interalia,their
mutualrights/duties/responsibilitiesandobligationsinterse.Itmay
alsoprovideforadisputeresolutionmechanismbetweenthem.

16. •2.AppointmentofBrokers:Thestockexchange(s)wouldappointthe
SEBIregisteredstockbrokersoftheexchangetoacceptapplicationsand
placeorderswiththecompany,consideringthemascollectioncentres.They
wouldcollectthemoneyfromtheclientsforordersplacedandincase
clientsfailtopayforsharesallocated,thebrokerswouldhavetopaythe
amount.Thecompany/leadmanagershouldensurethattheappointed
brokersarefinanciallycapableofhonoringtheircommitmentsiftheir
clientsdefault.Thecompanywouldpaythebrokersacommission/feefor
theirservicesandthestockexchangeshouldensurethattheydonotlevya
servicefeeontheirclientsinlieuoftheirservices.
•3.AppointmentofRegistrartoIssue:Thecompanyshouldappointa
registrartotheissuewithelectronicconnectivitywiththestock
exchange(s)throughwhichthesecuritiesareofferedunderthesystem.
•4.Listing:Thecompanymaylistitssecuritiesonanexchangeotherthan
theonethroughwhichitoffersitssecuritiestothepublicviatheonline
system.
•5.ResponsibilityofLeadManager: Theleadmanagerwouldbe
responsibleforcoordinationofalltheactivitiesamongvarious
intermediariesconnectedontheissuesystem.The

17. 7. Book-Building
•Book-buildingmeansaprocessbywhichademandforthesecurities
proposedtobeissuedbyabodycorporateiselicitedandbuilt-upand
thepriceforsuchsecuritiesisassessedforthedeterminationofthe
quantumofsuchsecuritiestobeissuedbymeansofanotice/circular/
advertisement/documentorinformationmemorandaorofferdocument.
•Acompanyproposingtoissuecapitalthroughbook-buildinghasto
complywiththerequirements.complywiththerequirements.
•Inbookbuildingmethod,thecompanygivesapriceband,e.g.,80-110.
•Thelowestpriceisknownasthefloorpriceandthehighestpriceis
knownasthecapprice.
•Whenbiddingforshares,investorshavetodecideatwhichpricethey
wouldliketobidfortheshares.
•Theycanbidforsharesatanypricewithinthisrange.
•Thepriceatwhichthesharesareallottedisknownascut-offprice.

18. 8. Green Shoe Option
•ACompanymakinganinitialpublicofferofequitysharescanavailof
theGreenShoeOption(GSO)forstabilizingthepost-listingpriceofits
shares.
•TheGSOmeansanoptionofallocationofsharesin excessofthe
sharesincludedinthepublicissueandoperatingapost-listingprice
stabilizingmechanismthroughaStabilizingAgent(SA).
•Over-allotmentreferstoanallocationofsharesinexcessofthesizeof
thepublicissuemadebytheSAoutofsharesborrowedfrompromotersthepublicissuemadebytheSAoutofsharesborrowedfrompromoters
inpursuanceofaGSOexercisedbytheissuingcompany.
•Theconcernedissuingcompanyshouldseekauthorizationforthe
possibility.IfallotmentoffurtherissuestotheSAattheendofthe
stabilizationperiodtogetherwiththeauthorizationforthepublicissue
inthegeneralmeetingofitsshareholders.
•Itshouldappointoneofthemerchantbankers/bookrunnersfrom
amongsttheissuemanagementteamastheSAwhowouldbe
responsibleforthepricestabilizationprocess.

19. •TheSAshouldenterintoanagreementwiththeissuercompany,prior
tothefilingoftheofferdocumentwithSEBI,clearlystatingallthe
termsconditionsrelatingtoGSOincludingfeeschargedexpensestobe
incurredbyhimforthispurpose.
•Heshouldalsoenterintoanagreementwiththepromoter(s)orpre-
issueshareholderswhowouldlendtheirshares,specifyingthe
maximumnumberofsharesthatmaybeborrowedfromthem,butinno
caseexceeding15percentofthetotalissuesize.
•Thedetailsofthesetwoagreementsshouldbedisclosedinthedraft•Thedetailsofthesetwoagreementsshouldbedisclosedinthedraft
prospects,draftredherringprospectus,redherringprospectusandthe
finalprospectus.Theyshouldalsobeincludedasmaterialdocuments
forpublicinspection.
•Theleadbookrunnerortheleadmerchantbankerinconsultationwith
theSAwoulddeterminetheamountofsharestobeover-allottedwith
thepublicissuewithintheceilingspecifiedabove(i.e.15percentofthe
issuesize).

20. Intermediaries in New Issue Market
•Anumberofintermediariesareassociatedwithactivitiesofthe
primarymarketinIndia.Theyare:MerchantBankers,Underwriters,
BankerstoanIssue,BrokerstoanIssue,RegistrarsandShareTransfer
AgentsandDebentureTrustees.Abriefdiscussionoftasksand
obligationsofeachoftheseparticipants,aspertheSEBIguidelinesis
broughtoutbelow:
•1.MerchantBankers:MerchantbankersinIndia,akinto‘accepting
andissuehouses’oftheUKand‘Investmentbanks’oftheUS,offeraandissuehouses’oftheUKand‘Investmentbanks’oftheUS,offera
packageoffinancialservicesrelatingtotheissue.
•AccordingtotheSEBI(MerchantBankers)RegulationAct,1992,“a
merchantbankerisapersonwhoisengagedinthebusinessofissue
managementeitherbymakingarrangementsregardingselling,buying
orsubscribingtosecuritiesoractingasmanager,consultant,advisoror
renderingcorporateadvisoryserviceinrelationtosuch‘issue
management’.”

21. •TheSEBIhasclassified‘merchantbankers’intofourcategories:
•CategoryIMerchantBankers: Thesemerchantbankerscanactasissue
manager,advisor,consultant,underwriterandportfoliomanager.
•CategoryIIMerchantBankers:Thesemerchantbankerscanactasadvisor,
consultant,underwriterandportfoliomanager.Theycannotactasissue
managerontheirownbutcanactasco-manager.
•CategoryIIIMerchantBankers:Thesebankerscanactasadvisor,consultant
andunderwriteronly.Theycanneitherundertakeissuemanagementbusiness
ontheirownnoractasco-manager.
•CategoryIVMerchantBankers:Thesebankerscanmerelyactasconsultant•CategoryIVMerchantBankers:Thesebankerscanmerelyactasconsultant
oradvisortoanissueofcapital.
•AspertheSEBIguidelinesintroducedonSeptember5,1997,allthemerchant
bankersbelowtheCategoryIwouldstandabolished.Theguidelinesobligated
themerchantbankersfunctioningbelowtheCategoryItoupgradethemselves
toCategoryI.Accordingly,themerchantbankers,presentlyengagedin
underwriting,portfoliomanagement,besidesissuemanagement,wouldhaveto
getseparateregistrationasportfoliomanagers,whileunderwritingbusiness
couldbecarriedonwithoutadditionalregistration.

22. Tasks and Responsibilities of Merchant Bankers
•The SEBI has laid down the following guidelines regarding duties and
obligations of the merchant bankers:
•1. Merchant bankers shall have to be compulsorily registered with the
SEBI. The following conditions have to be fulfilled for registration by the
SEBI:
–Merchant bankers must have a minimum net worth of ₹5 crore. Those
acting only as portfolio managers must have a net worth of ₹50 lakh.
Those acting only as underwriters must have a net worth of ₹20 lakh. Those acting only as underwriters must have a net worth of ₹20 lakh.
–Merchant bankers should have adequate and necessary infrastructure
for effective performance of their activities.
–Merchant bankers should have expertise in the areas of finance, law
and management and are not involved in any litigation relating to the
securities market.
–Every merchant banker shall pay a sum of ₹5 lakhas registration fees
within 15 days of receipt of intimation from the SEBI.

23. •2.Themerchantbankershallenterintoagreementwiththeissuing
company,spellingouttheirmutualrights,obligationsandliabilities
pertainingtotheissue.Acopyoftheagreementistobesubmittedto
theSEBIatleastonemonthbeforeopeningoftheissueforsubscription.
•3.Themerchantbankerwillhavetoundertakeaminimumunderwriting
obligationof5%oftotalunderwritingcommitmentor ₹25lakh;
whicheverisless,onhisownorthroughitsassociate.
•4.Themerchantbankercannotcarryonanybusinessotherthanthatof
thesecuritiesmarket.
•5.ThemerchantbankerisrequiredtosubmittotheSEBI‘Due•5.ThemerchantbankerisrequiredtosubmittotheSEBI‘Due
DiligenceCertificate’atleasttwoweeksbeforetheopeningoftheissue
forsubscription.
•6.ThemerchantbankerisunderobligationtosubmittotheSEBI
variousdocumentsrelatingtotheissue,draftprospectus/letterofoffer
andotherliteraturetobecirculatedtotheinvestors/shareholders,etc.,
atleasttwoweeksbeforethedateoffilingthemwiththeRegistrarof
Companiesandregionalstockexchanges.

24. •7.Themerchantbankershallkeepandmaintainacopyofbalancesheet
attheendofeachaccountingperiod,profitandlossaccountforthat
period,acopyoftheauditor’sreportontheaccountsforthatperiod
andastatementoffinancialposition.
•8.Themerchantbankerisrequiredtomakedisclosureofthefollowing
totheSEBI:
–Itsresponsibilitiesregardingthemanagementoftheissue.
–Anychangeintheinformation/particularspreviouslyfurnished
withtheSEBIhavingbearingoncertificateofregistrationgranted
toit.toit.
–Detailsregardingbreachofcapitaladequacynorms.
–Namesandaddressesofthecompanieswhoseissuesithasmanaged
orhasbeenassociatedwith.
–Informationpertainingtoitsactivitiesasmanager,underwriter,
consultantoradvisortotheissue.

25. 2. Underwriters
•Acompanyintendingtogarnerfundsfromthemarketisnotcertainabout
theavailabilityofthedesiredquantumoffundsthroughsubscriptionof
securities.
•Toensurethecertainty,somesortofinstitutionalarrangementneedstobe
madewherebytheissuingcompanyisgiventheguaranteeofpurchaseof
allunsubscribedsecurities.
•Thisarrangementisakintoinsurancethatprovidesprotectionagainstthe
failureofanissueofcapitaltothepublic.Suchaninsurancearrangementfailureofanissueofcapitaltothepublic.Suchaninsurancearrangement
toensuresuccessoftheissueistermedas‘underwriting’.
•Underwriters,therefore,undertaketheguaranteeofbuyingtheshares
placedbeforethepublicintheeventofnon-subscriptionofthesecurities.
•Thus,anissuingcompanyhastoenterintoanagreementwithan
underwriterwhomaybeindividualorinstitutionforunderwritingthe
issue.
•Theobligationoftheunderwriteraspertheagreementariseswhenthe
eventofnon-subscriptionofissuesbythepublictakesplace.

26. •Underwritingmaytakedifferentformsdependingonnatureofthe
agreemententeredintobetweentheissuerandtheunderwriter.Thus,
theremaybestandbyunderwriting,outrightpurchase,joint
underwriting,syndicateunderwritingandsub-underwriting.
•Understandbyunderwriting,underwritersenterintoanagreementwith
anissuingcompanytotakeallsuchsecuritiesasarenotsubscribedin
themarketortobuycertainportionofthesecurityissue.Thistypeof
underwritingisverypopularinIndia.
•Inoutrightpurchase,underwritersbuytheentireissueoutrightand
makethepaymentthereof.Thereafter,theyarrangetosellthemtomakethepaymentthereof.Thereafter,theyarrangetosellthemto
investorsthroughtheirownorganization.Thistypeofunderwritingis
verypopularintheUS.
•Jointunderwritingtakesplacewherecapitalissueislargeandriskistoo
highandinsuchcases,theissuingcompanyapproachesmorethanone
underwriter.Eachunderwriterundertakestoguaranteefortheissueof
acertainportionofthewholeissueofferedtothepublicandthereby
sharestheriskproportionately.

27. •Insyndicateunderwriting,anumberofunderwritersenterintoan
agreementamongthemselvestounderwriteanissueparticularlythe
onewhichisquitelargeand/orpotentiallyrisky.Syndicate
underwritingseemstobeakintojointunderwriting.Butactually
thisisnotso.Inthecaseofjointunderwriting,underwritersare
approachedbytheissuerforunderwritinganissueandno
agreementtakesplaceamongtheunderwritersthemselves.In
contrast,inthecaseofsyndicateunderwriting,underwritersenter
intoaformalagreementamongthemselvestoundertaketheintoaformalagreementamongthemselvestoundertakethe
guaranteeofbuyingsharesofdebenturesofapublicissue.
•Sub-underwritingofanissuetakesplacewhenanunderwriter
entersintoagreementwithsomeotherunderwriterstounderwrite
thewholeorpartoftheissueunderwrittenbyhim.Inthiscase,sub-
underwritersdonotenterintoagreementwiththe‘issuing
company’.

28. 3. Bankers to an Issue
•BankersrepresentanimportantsegmentofIndianprimarymarket.They
carryoutthefunctionofacceptingapplicationsandapplicationmoneysfrom
investorsinrespectofsecuritiesandrefundingofapplicationmoneytothe
applicantstowhomsecuritiescouldnotbeallotted.Theyalsoparticipateinthe
paymentofdividendsbycompanies.
•A.Abankerintendingtoactasbankertoanissuecandosobygettingitself
Tasks and Responsibilities of Bankers to an Issue
registeredwiththeSEBIandobtainingacertificateofregistrationtothat
effect.TheSEBIissuesthecertificateonbeingsatisfiedabouttheavailability
ofthenecessaryinfrastructure,communicationanddataprocessingfacilities
withtheapplicantandtheadequacyofmanpowertoeffectivelyperform
activitiesrelatingtotheissue.
•B.Anannualregistrationfeeof₹2.5lakhforthefirsttwoyearsfromthedate
ofinitialregistrationand₹1lakhforthethirdyearhastobepaidbythe
bankertoanissuetotheSEBI.Therenewalfeesare₹1lakhannuallyforthe
firsttwoyearsand₹20,000forthethirdyear.

29. •C.Abankerisrequiredtoenterintoanagreementwiththeissuing
company,specifyingnumberofcentresatwhichapplicantsfrom
investorswillbecollectedandthetimewithinwhichstatements
regardingapplicationsandmoneyreceivedwillbesenttotheregistrars
totheissuebythedesignatedbranchesofthebankertotheissue.
•D.Abankertotheissuehastomaintainbooksofaccounts,recordsand
documentsforaminimumperiodofatleastthreeyearsregarding
numberofapplications,namesofinvestors,timewithinwhich
applicationsreceivedwereforwardedtotheissuingcompany/registrarapplicationsreceivedwereforwardedtotheissuingcompany/registrar
totheissueanddatesandamountofrefundtoinvestors.
•E.AbankertotheissueisrequiredtofurnishtotheSEBIdetailed
informationpertainingtonumberofapplicationsreceived,numberof
issuesforwhichheactedasbankertotheissue,thedatesonwhich
applicationsfrominvestorswereforwardedtotheissuing
company/registrartotheissueandamountofrefundtoinvestors.

30. •F. A banker to the issue has to observe all the codes of conduct ordained by
the SEBI for the merchant bankers and underwriters. Besides, it has to
adhere to the following norms laid down by the SEBI:
–Make all efforts to protect the interests of investors;
–Observe high standards of integrity and fairness in the conduct of the
business;
–Exercise due diligence, ensure proper care and exercise independent
professional judgement;
–Not to keep blank application forms bearing broker’s stamp at the bank
premises or at the entrance of the bank;premises or at the entrance of the bank;
–Not to accept applications after office hours, on bank holidays or after
the date of the closure of the issue;
–Not to act any time in collusion with other agents in a manner
detrimental to the interest of small investors; and
–Abide by all acts, rules, regulations, notifications, directions, circulars,
instructions and guidelines issued by the Government, the RBI, Indian
Banks’ Association and SEBI that are relevant to his operation as
banker to an issue.

31. 4. Brokers to an Issue
•Brokerstoanissuerepresentintermediarieswhoareconcernedwith
procuringthesubscriptiontotheissuefromprospectiveinvestors
acrossthecountry.Inthisway,theyserveasavitallinkbetweenthe
issuerandtheprospectiveinvestorsandassistinspeedysubscriptionof
theissuebythepublic.
•Anissuingcompanycanappointasmanynumberofbrokersasitwants
providedthestockexchangeofwhichtheissuerisamemberpermits
andthelistingrequirementsarefulfilled.Acopyoftheconsentletterandthelistingrequirementsarefulfilled.Acopyoftheconsentletter
shouldbefiledwiththeRegistrarofCompaniesalongwithacopyof
theprospectusstatingthenamesandaddressesofthebrokerstothe
issue.
•Thebrokerstotheissuemustbeendowedwiththeexpertise,
professionalcompetenceandmustbehonestsoastobeabletocarry
outthevariousfunctionsofanissue.

32. •Theissuingcompanyhastopaybrokerageaccordingtothe
provisionsoftheCompaniesActandrulesandregulationsthe
agreementbetweenthebrokersandthecompanyand
guidelinesprescribedbytheSEBI.
•Maximumbrokeragerate,applicabletoalltypesofindustrial
securities,whetherunderwrittenornot,is1.5percent.
•Thebrokerswillhavetomeetallmailingcosts,canvassing
expensesandallotherout-of-pocketexpensesrelatingtothe
subscriptionoftheissueoutoftheirbrokerage.subscriptionoftheissueoutoftheirbrokerage.
•Onprivateplacement,thelistedcompanycanpaybrokerageat
themaximumrateof0.5%.

33. 5. Registrar to an Issue and Transfer Agent
•Registrarandtransferagentarethetwocategoriesofintermediaries
whoactivelyparticipateinthenewissueactivityofacompany.
•TheRegistrarperformsthefunctionsofcollectingapplicationsfrom
prospectiveinvestors,keepingarecordoftheapplicationsandmoneys
receivedfromtheinvestors,assistingtheissuingcompanyinthe
determinationofthebasisofallotmentofsecurities,processingand
dispatchingofallotmentlettersandrefundorders,shareanddebenture
certificatesandotherdocumentsrelatedtotheissueandactingascertificatesandotherdocumentsrelatedtotheissueandactingas
DepositoryParticipants(DPs).
•TransferAgent,ontheotherhand,carriesouttheactivities,suchas
maintainingtherecordsofholdersofsecuritiesofthecompanyfor
andonbehalfofthecompany,handlingallmattersrelatingtotransfer
andredemptionofsecuritiesofthecompanyandactingasDepository
Participants(DPs).

34. 6. Debenture Trustees
•Acompanycontemplatingtoissuedebenturestoraiselong-
termfundsfromthemarkethastoappointatrusteeto
safeguardtheinterestsofthedebentureholders.Thefollowing
maybeappointedasdebenturetrustee:
–1.Ascheduledbank,or
–2.Apublicfinancialinstitution,asdefinedinSection4-Aof
theCompaniesAct,1956,ortheCompaniesAct,1956,or
–3.Aninsurancecompany,or
–4.Abodycorporate.

35. Procedure for Issuing Securities
Thebasicstepsforissuingsecuritiesare–
•1.ApprovalfromtheBoardofDirectors.
•2.TheFirmmustfileaRegistrationStatementwiththeSEBI.This
statementcontainsfinancialinformation,financialhistoryandplansfor
future.
•3.TheSEBIstudiestheregistrationstatementduringawaitingperiod.
Duringthistimethefirmmaydistributecopiesofapreliminary
prospectusofthepotentialinvestors.ThisiscalledRedHerring
becauseboldredlettersareprintedonthecover.Thecompanycannot
sellthesecuritiesduringthewaitingperiod.
becauseboldredlettersareprintedonthecover.Thecompanycannot
sellthesecuritiesduringthewaitingperiod.
•4.Aregistrationstatementwillbecomeeffectiveonthe20thdayafter
itsfilingunlesstheSEBIsendsaletterofcommentsuggesting
changes.
•5.Ontheeffectivedateoftheregistration,apriceisdeterminedanda
fullfledgedsellingeffortstarts.
•6.Afinalprospectusmustaccompanythedeliveryofsecuritiesor
confirmationofsalewhichevercomesfirst.

36. SEBI Guidelines for Issue in Primary Market
•I.InitialPublicOffering&PrimaryMarket-SEBI(Disclosure&
InvestorsProtection)RulesandRegulation,24thFeb.,2009.
•1.Minimumofferingof25%ofpostissuecapitaltothepublic.This
requirementwasrelaxedto10%firstforITsector,lateritwasrelaxedto
allthesectors.
•2.IPOofissuesizeupto5timesofpre-issue,shallbeallowedonlyto
thosecompanieshavingconsistenttrackrecordofmakingprofitatleast
for5years.for5years.
•3.ForissueaboveRs.100croresbookbuildingroutehasbeenmade
compulsoryforcomp.makingIPO.
•4.Timeforfinalizingtheallotmentofsharesandrefundhasbeenreduced
from30to15days.
•5.Issueshallopenwithin12monthsfromthedateofissueofobservation
letterbySEBI.
•6.Shoulddisclosepricebandatleast2workingdaysbeforeopeningofbid
byannouncementinallnewspapersinwhichpre-issueadvt.wasreleased.

37. •II.SEBIGuidelinestoMerchantBankers(SEBIMBRules&Regulations
2006.(Ref.MarketIntermediaries–MerchantBankers)
•III.SEBIGuidelinestoUnderwriters:SEBI(Underwriters)Rulesand
RegulationAct,1993
•Underwritersareintermediarieswhoundertaketosubscribetheunsubscribed
portionofissuedcapital.Conditionforgrantorrenewalofcertificate
•Incaseofanychangeintheconstitution,underwritershallobtainprior
permissionoftheBoardtocontinuetoactasunderwriter.
•theunderwritershouldenterintovalidagreementwithbodycorporateon
whosebehalfheisactingasunderwriter.whosebehalfheisactingasunderwriter.
•Heshallpaytheamountoffeesofregistrationinthemanner
•Anunderwritermay,ifsodesiredmakesanapplicationinFORMAfor
renewalofcertificatebefore3monthsoftheexpiryofperiodofcertificate.
•WhichisRs2lakyfor1st,2ndyearandRs20,000for3rdyear.Registrationis
grantedfor3years.
•Hasthenecessaryinfrastructurelikeadequateofficespace,equipment
manpowertoeffectivelydischargehisactivities.
•Hasanypastexperienceinunderwritingorhasinhisemploymentminimum2
personswhohadtheexperienceinunderwriting.

38. •NottoActasunderwriterwithoutcertificate:--
•Nopersonshallactunderwriterunlessheholdsacertificategrantedbythe
Boardundertheregulation.
•Notwithstandinganythingcontainedinsub-rule(1),everystock-brokeror
merchantbankerholdingavalidcertificateofregistrationunderSection12of
theAct,shallbeentitledtoactasanunderwriterwithoutobtainingaseparate
certificateforunderwritingactivitieswhichshallbegovernedbytherulesand
regulations.
•IV.SEBIGuidelinestoStockBrokersandSub-brokers(Rules1992)
•Stockbrokermeansamemberofstockexchange•Stockbrokermeansamemberofstockexchange
•Sub-brokermeansanypersonnotbeingamemberofstockexchange
whoactsonbehalfofastockbrokerasanagentorotherwisefor
assistingtheinvestorsinbuying,sellingordealinginsecurities
throughstockbroker.
•Nostockbrokerorsubbrokershallbuy,sellordealinsecuritiesunless
heholdsacertificategrantedbyboardundertheregulation,provided
thatsuchpersonmaycontinuetobuy,sellordealinsecuritiesifhehas
madeanapplicationforsuchregistration.

39. •Condition for Grant of Certificate of Registration:-
•He holds the membership of any stock exchange
•He shall abide by rules, regulation and bye-laws of stock exchange of
which he is a member.
•He shall pay the fees for registration in the manner provided in the
regulations
•He shall take adequate steps for redressalof grievances of the investors
within one month of the date of receipt of complaints.
•Condition for the Grant of Certificate to Sub-Broker:-
•He shall pay the fees in the manner provided in the regulations Every stock
broker shall subject to pay registration fees in the manner set out below :
–(a) where the annual turnover does not exceed rupees Rs. 1 crore
during any financial year, a sum of Rs. 5,000 for each financial year;
–(b) where the annual turnover of the stock-broker exceeds Rs 1 crore
during any financial year, a sum of Rs. 5,000 plus 1 % of the turnover
in excess of Rs. 1 crorefor each financial year
•He shall take adequate steps in redressalof grievances of the investors
within one month of the date of complaints. Etc…