Chapter:- 1 Introduction To Bank

1.1 An Introduction
Finance is the life blood of trade, commerce and industry. Now-adays, banking sector acts as the backbone of modern business. Development of any country mainly depends upon the banking system. The term bank is derived from the French word Banco which means a Benchor Money exchange table. In olden days, European money lenders or money changers used to display (show) coins of different countries in big heaps (quantity) on benches or tables for the purpose of lending or exchanging. Its and advances and other related services. It receives money from those who want to save in the form of deposits and it lends money to those who need it. A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers that have capital deficits to customers with capital surpluses.[citation needed] Due to their critical status within the financial system and the economy[citation needed] generally, banks are highly regulated in most countries. Most banks operate under a system known as fractional reserve banking where they hold only a small reserve of the funds deposited and lend out the rest for profit. They are generally subject to minimum capital requirements which are based on an international set of capital standards, known as the Basel Accords.

The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472.

1.2 Definition of a Bank

"an establishment for custody of money, which it pays out on customer's order." ---Dictionary Oxford

Bank is an organization whose principal operations are concerned with the accumulation of the temporarily idle money of the general public for the purpose of advancing to others for expenditure. ----Kent Prof.

Bank are institutions whose debts are usually referred to as bank deposits are commonly accepted in final settlement of other peoples debts. ---- R.S.Sayers

1.3 Characteristics 1. Dealing in Money

/ Features of a Bank

Bank is a financial institution which deals with other people's money i.e. money given by depositors.

2. Individual / Firm / Company

A bank may be a person, firm or a company. A banking company means a company which is in the business of banking.

5. Payment and Withdrawal

A bank provides easy payment and withdrawal facility to its customers in the form of cheques and drafts, It also brings bank money in circulation. This money is in the form of cheques, drafts, etc.

6. Agency and Utility Services

A bank provides various banking facilities to its customers. They include general utility services and agency services.

7. Profit and Service Orientation

A bank is a profit seeking institution having service oriented approach.

9. Connecting Link
A bank acts as a connecting link between borrowers and lenders of money. Banks collect money from those who have surplus money and give the same to those who are in need of money.

10. Banking Business

A bank's main activity should be to do business of banking which should not be subsidiary to any other business.

1.4 Functions Of Bank

The functions of banks are briefly highlighted in following Diagram or Chart.

A. Primary Functions of Banks

The primary functions of a bank are also known as banking functions. They are the main functions of a bank.These primary functions of banks are explained below.

1. Accepting Deposits
The bank collects deposits from the public. These deposits can be of different types, such as :a. Saving Deposits b. Fixed Deposits c. Current Deposits d. Recurring Deposits

2. Granting of Loans and Advances

The bank advances loans to the business community and other members of the public. The rate charged is higher than what it pays on deposits. The difference in the interest rates (lending rate and the deposit rate) is its profit. The types of bank loans and advances are :a. Overdraft b. Cash Credits c. Loans d. Discounting of Bill of Exchange

B. Secondary Functions of Banks

The bank performs a number of secondary functions, also called as non-banking functions.These important secondary functions of banks are explained below.

1. Agency Functions
The bank acts as an agent of its customers. The bank performs a number of agency functions which includes :a. Transfer of Funds b. Collection of Cheques c. Periodic Payments d. Portfolio Management e. Periodic Collections f. Other Agency Functions

2. General Utility Functions

The bank also performs general utility functions, such as :a. Issue of Drafts, Letter of Credits, etc. b. Locker Facility c. Underwriting of Shares d. Dealing in Foreign Exchange e. Project Reports f. Social Welfare Programmes
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g. Other Utility Functions

CHAPTER:-2 FINANCIAL MARKET

In economics, typically, the term market means the aggregate of possible buyers and sellers of a thing and the transactions between them. Financial markets are an important component of a financial system in an economy. Financial system aims at establishing regular, smooth, efficient and cost effective link between savers and investors so it helps encouraging both saving and investment. Financial systems facilitate expansion of financial market over space and time and promote efficient allocation of financial resources for socially desirable and economically productive purpose. The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. Much trading of stocks takes place on an exchange; still, corporate actions (merger, spin-off) are outside an exchange, while any two companies or people, for whatever reason, may agree to sell stock from the one to the other without using an exchange.

2.1 Types of Financial Market:The financial markets can be divided into three parts Money market Capital market Forex market

FINANCIAL MARKET MONEY MARKET FOREX MARKET CAPITAL MARKET

MONEY MARKET:Money market is the market for short term financial assets which are near substitutes for money. Money markt instruments are liquid and can be turned over quickly at low transaction cost and without loss.The money market is a wholesale market. The volumes are very large and generally transactions are settled on daily bases. Trading in the money market is conducted over the telephone followed by written confirmation from both the borrowers and lenders. There are large numbers of participants in the money market : commercial banks, mutual funds, investment institutions, financial instutions and finally RBI. Money market performs the crucial role of providing an equilibrating mechanism to evenout short term liquidity and in the process, facilitating the conduct of monetary policy. Short term surpluses
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and deficits are evenedout. The money market is the major mechanism through which the reserve bank of india influences liquidity and the general level of interest rates.

FOREX MARKET:Eevey sovereign nation has its own currency. Theoretically the monetary unit of a country can be exchnged with any other currency of any other country. Most of the international financial transactions involve an exchange of one currency for another. The ratio in which they are exchanged, or prices in terms of each other are known as exchange rate. Countries when they trade with each other require money flows. Foreign exchange markets provides the mechanism for exchanging different monetary units for each other. Sometimes, nationals of one country may prefer to hold financial assets in a foregin or dominated in a foregin because Domestic currency may be subject to variable and high inflation, rendering it a poor store of value; Foreign currency balance may reduce risks; Foreign currency assets help hedge anticipated foreign currency liabilities. The efficiency of the internation financial system and its degree of integration with individual sovereign financial system depends to a large extent on how cheaply and quickly, foregin exchange transaction can be effected.

2.2 AN INTRODUCTION TO CAPITAL MARKET:The capital markets consist of primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets. Secondary markets allow investors to sell securities that they hold or buy existing securities.

CLASIFICATION OF CAPITAL MARKET

CAPITAL MARKET PRIMARY MARKET

Primary market:The primary is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue to meet their requirements of investment and/or discharge some obligation. This is the market for new long term capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called New Issue Market (NIM). It facilitates direct conversion of savings into corporate investment or diversion of resources from the rest of the system to the corporate sector. Primary market deals in only new securities which acquire for the first time i.e. which were not available previously. They are offered to the investors for the first time.

SECONDARY MARKET

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Features of primary market

In a primary issue, the securities are issued by the company directly to investors. The company receives the money and issues new security certificates to the investors. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. The primary market performs the crucial function of facilitating capital formation in the economy. The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as going public.

Secondary Market:The capital market apart from the primary market also includes the secondary market where existing issues are traded. These secondary market also referred to as stock markets predominantly deal in the stock or equity shares. They enable shareholders to sell their holdings readly thereby ensuring liquidity. Any trading of a share subsequent to its primary offering, is the secondry transection. The initial buyer (in the primary market) may reoffer the securities to an intrested buyer at a price which is mutually satisfectory. An active secondary market in fact promotes the growth of the primary market and aids capital formation. For the general investors, the secondary market provides an efficient platform for trading of a securities

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The indian security market, in the last decade, witnessed a significant transformation in the market design, to a paperless market characterised by a transparent screen-based trading system with complete restructuring of the trading, clearing and settelement infrastructure. The indian securities market has developed and grown voluminously on several counts such as the number of stock exchanges, intermediaries and institutional investors, the number of listed stock, market captilisation, trading volumes and turnover on stock exchanges. The two major stock exchange in india are BSE (Bombay Stock Exchange) and NSE (National Stock Exchange).

2.3 Difference Between Primary Market And Secondary Market

S.NO PRIMARY MARKET SECONDARY MARKET

1.

Market for new securities.

Market for existing securities.

2.

No fixed geographical location.

Located at a fixed place.

3.

Results in raising fresh resources Facilitate transfer of securities from one for the corporate sector. corporate investor to another.

4.

All companies enter primary Securities of only listed companies can market. be traded at stock exchanges.

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5.

No

tangible

form

or Has a definite administrative setup and

administrative setup. Recognised a tangible form. only by the service it renders. 6. Subjected to outside control by Subjected to control both from within SEBI, stock exchange and the and outside. companies act.

2.4 Relationship between Primary market and Secondary market

Securities traded at stock exchanges are those which have first been issued by the companies i.e. securities first pass through primary market and only thereafter enter the secondary market. While issuing prospectus for fresh issue of capital, the companies stipulate in the prospectus that application has been made or will be made in due course for listing of shares with the stock exchanges. Stock exchanges exercise significant control over the organisation of new issues to their regulatory framework as a precondition for listing of shares. Stock exchanges provide liqudity to the securities which has pass through primary market. A period of rising activity in stock exchanges is accompanied with higher activity in primary market resulting in large numder of seccessful issues a vice versa. In a period of rising prices in stock exchanges premiums are high in primary market and oversubscription becomes a common

phenomenon.
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CHAPTER:-3 AN INTRODUCTION TO IPO

3.1 MEANING
A public offering is the offering of securities of a company or a similar corporation to the public. Generally, the securities are to be listed on a stock exchange. In most jurisdictions, a public offering requires the issuing company to publish a prospectus detailing the terms and rights attached to the offered security, as well as information on the company itself and its finances. Many other regulatory requirements surround any public offering and they vary according to jurisdiction. Initial public offering (IPO) is one type of public offering. Not all public offerings are IPOs. An IPO occurs only when a company offers its shares (not other securities) for the first time for public ownership and trading, an act making it a public company. However, public offerings are also made by already-listed companies. The company issues additional securities to the public, adding to those currently being traded. For example, a listed company with 8 million shares outstanding can offer to the public another 2 million shares. This is a public offering but not an IPO. Once the transaction is complete, the company will have 10 million shares outstanding. Non-initial public offering of equity is also called seasoned equity offering. A shelf prospectus is often used by companies in exactly that situation. Instead of drafting one before each public offering, the company can file a single prospectus detailing the terms of many different securities it might offer in the next several years. Shortly before the offering (if any) actually takes place, the company informs the public of material changes in its finances and outlook since the publication of the shelf prospectus.
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Other types of securities, besides shares, can be offered publicly. Bonds, warrants, capital notes and many other kinds of debt and equity vehicles are offered, issued and traded in public capital markets. A private company, with no shares listed publicly, can still issue other securities to the public and have them traded on an exchange. A public company, of course, may also offer and list other securities alongside its shares. Most public offerings are in the primary market, that is, the issuing company itself is the offerer of securities to the public. The offered securities are then issued (allocated, allotted) to the new owners. If it is an offering of shares, this means that the company's outstanding capital grows. If it is an offering of other securities, this entails the creation or expansion of a series (of bonds, warrants, etc.). However, more rarely, public offerings take place in the secondary market. This is called a secondary market offering: existing security holders offer to sell their stake to other, new owners, through the stock exchange. The offerer is different from the issuer (the company). A secondary market offering is still a public offering with much the same requirements, including a prospectus. The services of an underwriter are often used to conduct a public offering. An initial public offering (IPO) or stock market launch is a type of public offering where shares of stock in a company are sold to the general public, on a securities exchange, for the first time. Through this process, a private company transforms into a public company. Initial public offerings are used by companies to raise expansion capital, to possiblymonetize the investments of early private investors, and to

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become publicly traded enterprises. A company selling shares is never required to repay the capital to its public investors. After the IPO, when shares trade freely in the open market, money passes between public investors. Although an IPO offers many advantages, there are also significant disadvantages. Chief among these are the costs associated with the process, and the requirement to disclose certain information that could prove helpful to competitors, or create difficulties with vendors. Details of the proposed offering are disclosed to potential purchasers in the form of a lengthy document known as a prospectus. Most companies undertaking an IPO do so with the assistance of an investment banking firm acting in the capacity of an underwriter. Underwriters provide a valuable service, which includes help with correctly assessing the value of shares (share price), and establishing a public market for shares (initial sale). Alernative methods, such as the dutch auction have also been explored. The most notable recent example of this method is the Google IPO. China has recently emerged as a major IPO market, with several of the largest IPO offerings taking place in that country. When a company lists its securities on a public exchange, the money paid by the investing public for the newly issued shares goes directly to the company (primary offering) as well as to any early private investors who opt to sell all or a portion of their holdings (secondary offering) as part of the larger IPO. An IPO, therefore, allows a company to tap into a wide pool of potential investors to provide itself with capital for future growth, repayment of debt, or working capital. A company selling common shares is never required to repay the capital to its public investors. Those investors must endure the unpredictable nature of the open market to price and trade their shares. After the IPO, when shares trade freely in the open market, money passes between public investors.
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For early private investors who choose to sell shares as part of the IPO process, the IPO represents an opportunity tomonetize their investment. After the IPO, once shares trade in the open market, investors holding large blocks of shares can either sell those shares piecemeal in the open market, or sell a large block of shares directly to the public, at a fixed price, through a secondary market offering. This type of offering is not dilutive, since no new shares are being created. Once a company is listed, it is able to issue additional common shares in a number of different ways, one of which is the follow-on offering. This method provides capital for various corporate purposes through the issuance of equity (see stock dilution) without incurring any debt. This ability to quickly raise potentially large amounts of capital from the marketplace is a key reason many companies seek to go public.

3.2 ADVANTAGE/DISADVANTAGE OF IPO Advantages Of An IPO

Enlarging and diversifying equity base Enabling cheaper access to capital Increasing exposure, prestige, and public image Attracting and retaining better management and employees through liquid equity participation Facilitating acquisitions (potentially in return for shares of stock) Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.

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Disadvantages of an IPO
There are several disadvantages to completing an initial public offering: Significant legal, accounting and marketing costs, many of which are ongoing Requirement to disclose financial and business information Meaningful time, effort and attention required of senior management Risk that required funding will not be raised Public dissemination of information which may be useful to competitors, suppliers and customers.

3.3 PARTIES INVOLVED IN THE IPO:

The promoters also should have a clear idea about the agencies to coordinate their activities effectively in the public issue. The various parties involved are: The manager to the issue, The registrars to the issue, Underwriters, Bankers, Advertising agencies, Financial Institutions and Government /Statutory Agencies.

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The Managers To The Issue:

Lead managers are appointed by the company to manage the initial public offering campaign. Their main duties are: Drafting of prospectus Preparing the budget of expenses related to the issue Suggesting the appropriate timings of the public issue Assisting in marketing the public issue successfully Advising the company in the appointment of registrars to the issue, underwriters, brokers, bankers to the issue, advertising agents etc. Directing the various agencies involved in the public issue. The merchant banking division of the financial institutions, subsidiary of commercial banks, foreign banks, private sector banks and private agencies are available to act as lead mangers. Such as SBI Capital Markets Ltd., Bank of Baroda, Canara Bank, DSP Financial Consultant Ltd. ICICI Securities & Finance Company Ltd., etc.

The Registrar To The Issue

After the appointment of the lead managers to the issue, in consultation with them, the Registrar to the issue is appointed. Quotations containing the details of the various functions they would be performing and charges for them are called for selection. Among them the most suitable one is selected. It is always ensured that the registrar to the issue has the necessary infrastructure like Computer, Internet and telephone. The Registrars normally receive the share application from various collection centers. They recommend the basis of allotment in consultation with the Regional Stock Exchange for approval. Usually registrars to the issue retain the issuer records at least for a period of six
19

months from the last date of dispatch of letters of allotment to enable the investors to approach the registrars for redressal of their complaints.

The Underwriters
Underwriting is a contract by means of which a person gives an assurance to the issuer to the effect that the former would subscribe to the securities offered in the event of non-subscription by the person to whom they were offered. The person who assures is called an underwriter. The underwriters do not buy and sell securities. They stand as back-up supporters and underwriting is done for a commission. Underwriting provides an insurance against the possibility of inadequate subscription. Underwriters are divided into two categories: Financial Institutions and Banks Brokers and approved investment companies. The company after the closure of subscription list communicates in writing to the underwriter the total number of shares/debentures under subscribed, the number of shares/debentures required to be taken up by the underwriter. The underwriter would take up the agreed portion. If the underwriter fails to pay, the company is free to allot the shares to others or take up proceeding against the underwriter to claim damages for any loss suffered by the company for his denial.

The Bankers To The Issue:

Bankers to the issue have the responsibility of collecting the application money along with the application form. The bankers to the issue generally charge commission besides the brokerage, if any. Depending upon the size of the public issue more than one banker to the issue is appointed. When the size of the issue is large, 3 to 4 banks are
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appointed as bankers to the issue. The number of collection centers is specified by the central government. The bankers to the issue should have branches in the specified collection centers.

Advertising Agents:
Advertising plays a key role in promoting the public issue. Hence, the past track record of the advertising agency is studied carefully. Tentative program of each advertising agency along with the estimated cost are called for. After comparing the effectiveness and cost of each program with the other, a suitable advertising agency if selected in consultation with the lead managers to the issue. The advertising agencies take the responsibility of giving publicity to the issue on the suitable media. The media may be newspapers/ magazines/

hoardings/press release or a combination of all.

The Financial Institutions

Financial institutions generally underwrite the issue and lend term loans to the companies. Hence, normally they go through the draft of prospectus, study the proposed program for public issue and approve them. IDBI, IFCI & ICICI, LIC, GIC and UTI are the some of the financial institutions that underwrite and give financial assistance. The lead manager sends copy of the draft prospectus to the financial institutions and includes their comments, if any in the revised draft.

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Government And Statutory Agencies

The various regulatory bodies related with the public issue are: Securities Exchange Board of India Registrar of companies Reserve Bank of India (if the project involves foreign investment) Stock Exchange where the issue is going to be listed Industrial licensing authorities

3.4 SEBIs Guidelines for IPO

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.

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: 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.

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3. Promoter Contribution
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

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 centers shall be situated at the four metropolitan centers viz. Mumbai, Delhi, Calcutta, Chennai; and at all such centers where stock exchanges are located in the region in which the registered office of the company is situated.

5. Regarding allotment of shares

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
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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 at least 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

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.
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 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.

7. Dispatch of Refund Orders

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

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.

There should not be any outstanding warrants or financial instruments of any other nature, at the time of initial public offer.

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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.

9. Restrictions on other allotments

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 Section10(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.

The infrastructure companies will be exempted from the requirement of making a minimum public offer of 25 per cent of its securities.

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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.

3.5 Seven Steps for companies for success of its IPO

With IPO being the buzzword in the industry sector, following the seven steps would ensure a smooth climb up the IPO ladder when an Initial Public Offering (IPO) comes in for funding ambitious, gigantic projects. . However, going for an IPO is definitely not easy. An industry expert cautions, "The right recipe is to go step by step with each step dependent on the other. If you miss out one step the whole structure will crumble." Making an IPO involves immense research, planning and strategizing. One must bear in mind that here the ownership and management of the organization is not just focused on a particular person(s), but instead distributed and diluted on a larger scale and hence

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the stakes are automatically higher. So, an error even on a miniscule level can have drastic repercussions.

1. Choosing the Perfect Time Before even plunging into the intricacies of the pre-IPO arrangements, choosing the ideal time to go public is of core importance. The timing of going public is very crucial in the pre-IPO process. One should look into many aspects before the plungelike looking into the prevailing market sentiment. In the 1980's and early 1990's when branding and marketing were non-existent, liquidity in the market, behavior of the secondary market and merchant bankers' advice were instrumental in deciding the right time for the IPO.

2. Choosing the Right Team

Forming the right team is essential before going for an IPO. Apart from the Chief Executive Officer (CEO) or the Chairman, the main members are the Chief Financial Officer (CFO), Chief Operating Officer (COO), the Company Secretary, the auditors, professional merchant bankers, and the Chief Information Officer (CIO) in the current age of information and legal advisors. It is very important for the board of directors involved in the venture to have a progressive outlook. Only an intelligent team can contribute to the success of the venture. Team building and the professional team that you bring in is very important. You should be very careful not only about land and equipment but also while deploying money and manpower.
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Apart from the CFO and the Company Secretary, choosing appropriate auditors makes a world of difference. Unlike other members of the team, the auditor has the additional job of assessing whether the entire accounting system is in order, is transparent and analyzing whether the numbers and projections as shown in the Excel sheet are realistic and practical. If you have a good auditor, half your battle is won. In fact, one should employ auditors at least one or two years before the IPO is launched. When the company goes public, it must make a note of disclosures about the company operations and past records. It can't afford to make any observations which are incorrect or not backed by strong evidence. You should have a team who can strategies and can plan the inflow and outflow of resources and money.

3. Definite Goals and Purposes

A company should be focused and clear about the purpose of the IPO. Usually, the purpose behind making an IPO is to accumulate funds and finances for expansion and investments and above all woo the investors and consolidate as a brand. This requires a purely corporate structure. Currently, there are stringent SEBI guidelines to be followed before any company goes public. Keeping this in mind, the valuations which the company wishes to command will depend on the future goals and projects of the company, and the management team. Unless the management is fully sure of the ultimate goals, the company will not be able to come up with a high valuation for the proposed issue of shares.

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4. Choosing the Right Merchant Bankers

The primary role of a merchant banker should be to act as a bridge between the organization and the investors. Firstly, the merchant banker should have a brand image in the market. A merchant banker should have the capability and the experience to handle a large-scale IPO. And they should be able to reach a larger mass of people because investors today are just not located in the metros but also in tier-II and tier-III cities." Simultaneously, they also chalk out the risk management strategies for the company since risks and ventures are two sides of the same coin. Hence a company should choose such a merchant banker who is just not professional but who understands the logistics and mechanics of the industry. Apart from being a link between the organization and the investors, a banker also has to generate interest and build up the confidence of the investors.

5. Capital Restructuring
Companies should decide on the ways to deploy their capital, namely capital restructuring. Companies should be clear about the debt and equity ratio. This boils down to setting the ideal Debt-Equity Ratio (DER), which can vary from 1:1 to 2:2. "You have to work out your ratio according to the cash and the growth rate, so that they can accordingly structure their profits. In capital restructuring, you have to be sure of the DER maintained, what are the facilities you are planning to set up and what is the land value you are going to purchase. The way you are going to deploy your capital is also very important. You have to be very careful while deploying the resources and forecast the profit you will incur in three-four years' time."

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6. Creating Investor Interest Confidence building and generating investor interest should be on the priority list for a company. A Company must project an image of transparency and good governance to the investors. Infosys should be the role model for all companies going in for an IPO. Many of the experts agree that IT giant Infosys is a role model because their balance sheet is very clear, they value their managers as assets and year after year they expand rapidly. A company is accountable to its investors, which is why when they go public they have to disclose company projectionspast, present and future prospects. This is where the team of advisors, consultants and legal experts comes into the picture. IPO is all about building investors' confidence so we over perform to hike up investor confidence. If you raise the expectations and do not meet them, then investors will not excuse you for the next two-three years. Infosys, for instance, follows this strategy and gets higher multiples because they understate their plans.The projections given to the public should be realistic. The excel sheet might project rosy details of growth, but if they do not live up to the expectations then public confidence is sure to plummet to the lowest level.

7. Media Campaigns
A few years ago, marketing and media campaigns were considered a luxury, but today they are absolutely necessary. They contribute to the relative success of an IPO venture. The campaigns can be in the form of road shows and extensive investor meetings. They are required because the investors need to be made aware of the company and its past performances and any important projects undertaken/completed. During the campaigns, various facets related to company performance, the need to raise money and future plans are disclosed, information that investors

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seek. A successful media campaign ensures complete participation in the IPO by one and all. In fact, recently when a bigwig real estate company went public, a few crores went in media campaigns alone. However, there is no short cut to success. A step-by-step approach always pays in the end.

3.6 PLACEMENT OF THE IPO

Initial public offers are floated through Prospectus; Bought out deals/offer for sale; Private Placement and Book Building.

OFFER THROUGH PROSPECTUS

According to Companies (Amendment) Act 1985, application forms for shares of a company should be accompanied by a Memorandum (abridged prospectus). In simple terms a prospectus document gives details regarding the company and invites offers for subscription or purchase of any shares or debentures from the public. The draft prospectus has to be sent to the Regional Stock Exchange where the shares of the company are to be listed and also to all other stock exchanges where the shares are proposed to be listed. The stock exchange scrutinizes the draft prospectus. After scrutiny if there is any clarification needed, the stock exchange writes to the company and also suggests modification if any. The prospectus should contain details regarding the statutory provisions for the issue, program of public issue opening, closing and earliest closing date of the issue, issue to be
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listed at, highlights and risk factors, capital structure, board of directions, registered office of the company, brokers to the issue, brief description of the issue, cost of the project, projected earnings and other such details. The board, lending financial institutions and the stock exchanges in which they are to be listed should approve the prospectus. Prospectus is distributed among the stock exchanges, brokers and underwriters, collecting branches of the bankers and to the lead managers.

BOUGHT OUT DEALS (OFFER FOR SALE)

Here, the promoter places his shares with an investment banker (bought out dealer or sponsor) who offers it to the public at a later date. In other works in a bought out deal, an existing company off-loads a part of the promoters capital to a wholesaler instead of making a public issue. The wholesaler is invariably a merchant banker or some times just a company with surplus cash. In addition to the main sponsor, there could be individuals and other smaller companies participating in the syndicate. The sponsors hold on to these shares for a period and at an appropriate date they offer the same to the public. The hold on period may be as low as 70 days or more than a year. In a bought out deal, proving is the essential element to be decided. The bought out dealer decides the price after analyzing the viability, the gestation period, promoters background and future projections. A bough out dealer sheds the shares at a premium to the public.

PRIVATE PLACEMENT
In this method the issue is placed with a small number of financial institutions, corporate bodies and high net worth individuals. The financial intermediaries purchase the shares and sell them to investors at a later date at a suitable price. The stock is placed with issue house
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client with the medium of placing letter and other documents which taken together contribute a prospectus, giving the information regarding the issue. The special feature of the private placement is that the issues are negotiated between the issuing company and the purchasing intermediaries. Listed public limited company as well as closely held private limited company can access the public through the private placement method. Mostly in the private placement securities are sold to financial institutions like Unit Trust of India, mutual funds, insurance companies, and merchant banking subsidiaries of commercial banks and so on. Through private placement equity shares, preference shares, cumulative convertible preference shares, debentures and bonds are sold.

BOOK BUILDING
Book building is a mechanism through which the initial public offerings (IPOS) take place in the U.S. and in India it is gaining importance with every issue. Most of the recent new issue offered in the market has been through Book Building process. Similar mechanisms are used in the primary market offerings of GDRs also. In this process the price determination is based on orders placed and investors have an opportunity to place orders at different prices as practiced in international offerings. The recommendations given by Malegam Committee paved way for the introduction of the book building process in the capital market in Oct 1995. Book building involves firm allotment of the instrument to a syndicate created by the lead managers who sell the issue at an acceptable price to the public. Originally the potion of book building process was available to companies issuing more than Rs.100 cr. The restriction on the minimum size was removed and SEBI gave impression to adopt the book building method to issue of any size. In the prospectus, the company
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has to specify the placement portion under book building process. The securities available to the public are separately known as net offer to the public. Nirma by offering a maximum of 100 lakh equity shares through this process was set to be the first company to adopt the mechanism. Among the lead managers or the syndicate members of the issue or the merchant bankers as member. The issuer company as a book runner nominates this member and his name is mentioned in the draft prospectus. The book runner has to circulate the copy of the draft prospectus to be filed with SEBI among the institutional buyers who are eligible for firm allotment. The draft prospectus should indicate the price band within which the securities are being offered for subscription. The offers are sent to the book runners. He maintains a record of names and number of securities offered and the price offered by the institutional buyer within the placement portion and the price for which the order is received to the book runners. The book runner and the issuer company finalize the price. The issue price for the placement portion and offer to the public should be the same. Underwriting agreement is entered into after the fixation of the price. One day earlier to the opening of the issue to the public, the book runner collects the application forms along with the application money from the institutional buyers and the underwriters. The book runner and other intermediaries involved in the book building process should maintain records of the book building process. The SEBI has the right to inspect the records. Book building as discussed is a process of offering securities in which bids at various prices from investors through syndicate members are collected. Based on bids, demand for the security is assessed and its price discovered. In case of normal public issue, investor knows the price
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in advance and the demand is known at the close of the issue. In case of public issue through book building, demand can be known at the end of everyday but price is known at the close of issue. An issuer company proposing to issue capital through book building has two options viz., 75% book building route and 100% book building route. In case of 100% book building route is adopted, not more than 60% of net offer to public can be allocated to QIBs (Qualified Institutional Buyers), not less than 15% of the net offer to the public can be allocated to non-institutional investors applying for more than 1000 shares and not less than 25% of the net offer to public can be allocated to retail investors applying for up to 1000 shares. In case 75% of net public offer is made through book building, not more than 60% of the net offer can be allocated to QIBs and not less than 15% of the net offer can be allocated to non-institutional investors. The balance 25% of the net offer to public, offered at a price determined through book building, are available to retail individual investors who have either not participated in book building or have not received any allocation in the book built portion. Allotment to retail individual or non-institutional investors is made on the basis of proportional allotment system. In case of under subscription in any category, the un-subscribed portions are allocated to the bidder in other categories. The book built portion, 100% or 75%, as the case may be, of the net offer to public, are compulsorily underwritten by the syndicate members or book runners. Other requirements for book building include: Bids remain open for at least 5 days. Only electronic bidding is permitted. Bids are submitted through syndicate members.

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 Bids can be revised. Bidding demand is displayed at the end of every day. Allotments are made not later than 15 days from the closure of the issue etc. The SEBI guidelines for book building provides that the company should be allowed to disclose the floor price, just prior to the opening date, instead of in the Red herring prospectus, which may be done by any means like a public advertisement in newspaper etc. Flexibility should be provided to the issuer company by permitting them to indicate a 20% price band. Issuer may be given the flexibility to revise the price band during the bidding period and the issuers should be allowed to have a closed book building i.e. the book will not be made public. The mandatory requirement of 90% subscription should not be considered with strictness, but the prospectus should disclose the amount of minimum subscription required and sources for meeting the shortfall. The Primary Market Advisory Committee recommended the practice of green-shoe option available in markets abroad which is an over allotment option granted by the issuer to the underwriter in a public offering. This helps the syndicate member to over allocate the shares to the extent of option available and to consequently purchase additional shares from the issuer at the original offering price in order to cover the over-allotments.

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3.7 Procedure of IPO

IPOs generally involve one or more investment banks known as "underwriters". The company offering its shares, called the "issuer", enters into a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell those shares. The sale (allocation and pricing) of shares in an IPO may take several forms. Common methods include: Best efforts contract Firm commitment contract All-or-none contract Bought deal A large IPO is usually underwritten by a "syndicate" of investment banks, the largest of which take the position of "lead underwriter". Upon selling the shares, the underwriters retain a portion of the proceeds as their fee. This fee is called an underwriting spread. The spread is calculated as a discount from the price of the shares sold (called the gross spread). Components of an underwriting spread in an initial public offering (IPO) typically include the following (on a per share basis): Manager's fee, Underwriting fee earned by members of the syndicate, and the Concession earned by the broker-dealer selling the shares. The Manager would be entitled to the entire underwriting spread. A member of the syndicate is entitled to the underwriting fee and the concession. A broker dealer who is not a member of the syndicate but sells shares would receive only the concession, while the member of the syndicate who provided the shares to that broker dealer would retain the underwriting fee. Usually, the managing/lead underwriter, also known as the
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bookrunner, typically the underwriter selling the largest proportions of the IPO, takes the highest portion of the gross spread, up to 8% in some cases. Multinational IPOs may have many syndicates to deal with differing legal requirements in both the issuer's domestic market and other regions. For example, an issuer based in the E.U. may be represented by the main selling syndicate in its domestic market, Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in the main selling group is also the lead bank in the other selling groups. Because of the wide array of legal requirements and because it is an expensive process, IPOs typically involve one or more law firms with major practices in securities law, such as the Magic Circle firms of London and the white shoe firms of New York City. Public offerings are sold to both institutional investors and retail clients of the underwriters. A licensed securities salesperson (Registered Representative in the USA and Canada) selling shares of a public offering to his clients is paid a portion of the selling concession (the fee paid by the issuer to the underwriter) rather than by his client. In some situations, when the IPO is not a "hot" issue (undersubscribed), and where the salesperson is the client's advisor, it is possible that the financial incentives of the advisor and client may not be aligned. The issuer usually allows the underwriters an option to increase the size of the offering by up to 15% under certain circumstance known as the greenshoe or overallotment option. This option is always exercised when the offering is considered a "hot" issue, by virtue of being oversubscribed.
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In the USA, clients are given a preliminary prospectus, known as a red herring prospectus, during the initial quiet period. The red herring prospectus is so named because of a bold red warning statement printed on its front cover. The warning states that the offering information is incomplete, and may be changed. The actual wording can vary, although most roughly follow the format exhibited on the Facebook IPO red herring.During the quiet period, the shares cannot be offered for sale. Brokers can, however, take "indications of interest" from their clients. At the time of the stock launch, after the Registration Statement has become effective, indications of interest can be converted to buy orders, at the discretion of the buyer. Sales can only be made through a final prospectus cleared by the Securities and Exchange Commission. Before legal actions initiated by New York Attorney General Eliot Spitzer, which later became known as the Global Settlement enforcement agreement, some large investment firmshad initiated favorable research coverage of companies in an effort to aid Corporate Finance departments and retail divisions engaged in the marketing of new issues. The central issue in that enforcement agreement had been judged in court previously. It involved the conflict of interest between the investment banking and analysis departments of ten of the largest investment firms in the United States. The investment firms involved in the settlement had all engaged in actions and practices that had allowed the inappropriate influence of their research analysts by their investment bankers seeking lucrative fees. A typical violation addressed by the settlement was the case of CSFB and Salomon Smith Barney, which were alleged to have engaged in inappropriate spinning of "hot" IPOs and issued fraudulent research reports in violation of various sections within the Securities Exchange Act of 1934.
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3.8 TYPES OF OFFERING

Dutch Auction
A Dutch Auction allows shares of an initial public offering to be allocated in an impartial way, with all successful bidders paying the same price per share. One version of the Dutch auction is OpenIPO, which is based on an auction system designed by Nobel Prize-winning economist William Vickrey. This auction method uses a mathematical model to treat all qualifying bids in an impartial way. It is similar to the model used to auction Treasury bills, notes, and bonds. Like a typical auction, the highest bidders win in this type of auction, but there are important differences. In the OpenIPO auction, the entire auction is private, and winning bidders all pay the same price per sharethe public offering price. A variation of the Dutch Auction has been used to take a number of companies public including Morningstar, Interactive Brokers Group, Overstock.com, Ravenswood Winery,Clean Energy Fuels, and Boston Beer Company. In 2004, Google used the Dutch Auction system for its Initial Public Offering. Traditional investment banks have shown resistance to the idea of using an auction process to engage in public securities offerings. The auction method allows for equal access to the allocation of shares and eliminates the favorable treatment accorded important clients by the underwriters in conventional IPOs. In the face of this resistance, the Dutch Auction is still a little used method in public offerings. In determining the success or failure of a Dutch Auction, one must consider competing points of view. If the objective is to raise as much money as possible for the issuer, a traditional IPO offering, priced near
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the top end of the underwriter's range, would likely achieve that objective. From the viewpoint of the investor, however, the Dutch Auction would be more effective at price discovery, and potentially result in a lower offering price.

Direct Public Offering

Financial historians Richard Sylla and Robert E. Wright have shown that before 1860 most early U.S. corporations sold shares in themselves directly to the public without the aid of intermediaries like investment banks.The direct public offering or DPO, as they term it,[6] was not done by auction but rather at a share price set by the issuing corporation. The DPO eliminated the agency problem associated with offerings intermediated by investment banks but was not as effective at price discovery as the Dutch Auction.

3.9 Pricing of IPO

A company planning an IPO typically appoints a lead manager, known as a bookrunner, to help it arrive at an appropriate price at which the shares should be issued. There are two primary ways in which the price of an IPO can be determined. Either the company, with the help of its lead managers, fixes a price (fixed price method) or the price can be determined through analysis of confidential investor demand data, compiled by the bookrunner. That process is known as book building. Historically, some IPOs both globally and in the United States have been underpriced. The effect of "initial underpricing" an IPO is to generate additional interest in the stock when it first becomes publicly traded. Flipping, or quickly selling shares for a profit, can lead to
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significant gains for investors who have been allocated shares of the IPO at the offering price. However, underpricing an IPO results in lost potential capital for the issuer. One extreme example is theglobe.com IPO which helped fuel the IPO "mania" of the late 90's internet era. Underwritten by Bear Stearns on November 13, 1998, the IPO was priced at $9 per share. The share price quickly increased 1000% after the opening of trading, to a high of $97. Selling pressure from institutional flipping eventually drove the stock back down, and it closed the day at $63. Although the company did raise about $30 million from the offering it is estimated that with the level of demand for the offering and the volume of trading that took place the company might have left upwards of $200 million on the table. The danger of overpricing is also an important consideration. If a stock is offered to the public at a higher price than the market will pay, the underwriters may have trouble meeting their commitments to sell shares. Even if they sell all of the issued shares, the stock may fall in value on the first day of trading. If so, the stock may lose its marketability and hence even more of its value. This could result in losses for investors, many of whom being the most favored clients of the underwriters. Underwriters, therefore, take many factors into consideration when pricing an IPO, and attempt to reach an offering price that is low enough to stimulate interest in the stock, but high enough to raise an adequate amount of capital for the company. The process of determining an optimal price usually involves the underwriters ("syndicate") arranging share purchase commitments from leading institutional investors. Some researchers (e.g. Geoffrey C., and C. Swift, 2009) believe that the underpricing of IPOs is less a deliberate act on the part of issuers

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and/or underwriters, than the result of an over-reaction on the part of investors (Friesen & Swift, 2009). One potential method for determining underpricing is through the use of IPO Underpricing Algorithms.

CHAPTER:-4 MERCHANT BANK & IPO

4.1 AN INTRODUCTION TO MERCHANT BANKING
A merchant banker, according to securities and exchange broad of india (merchant bankers) regulations, 1992is a person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager, consultant, adviser or rendering corporate advisory services in relation to such issue management. In banking, a merchant bank is a financial institution primarily engaged in offering financial services and advice to corporations and wealthy individuals on how to use their money. The term can also be used to describe the private equity activities of banking. Merchant banking is the financial intermediation that matches the entities that need capital and those that have capital. It is a function that facilitates the low of capital in the market. Merchant banking is a service-oriented industry specializing in investment and financial decision making, assisting in making corporate strategies, assessing capital needs and helping in procuring the equity and

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debt funds for corporate sectors and ultimately helping establishing favorable economic environment. Merchant banker renders services to meet the needs of trade and industry and investors, by performing as intermediary, consultant and a liason. Companies raise capital by issuing securities in the market. Merchant bankers act as intermediaries between the issuers of capital and the ultimate investors who purchase these securities. Their primary sources of income are PIPE financings and international trade. Their secondary income sources are consulting, Mergers & Acquisitions help and financial market speculation. Because they do not invest against collateral, they take far greater risks than traditional banks. Because they are private, do not take money from the public and are international in scope, they are not regulated.

4.2 Scope of merchant banking activities

Merchant banking activity helps:

In channelising the financial surplus of the general public into productive investment avenues.

To coordinate the activities of various intermediaries to the share issue such as the registrar, bankers, advertising agency, printers, underwriters, brokers etc.

To ensure the compliance with rules and regulations governing the securities market

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4.3 SERVICES OFFERED BY MERCHANT BANKER

Merchant banks offer many of the following services: Consulting advice on going public and international business. Advice and help in taking your company public. If they are unwilling to supply Investment Banking bridge loans, they have a low cost strategy for taking your company public. The do PIPE (Private Investment in Public Equities) financings. They can advise or help with a companys M&A strategy. They are essential advisors for companies seeking to become multinational corporations. They off pragmatic general business advice for real world situations. In providing advice and assistance, merchant bankers must possess a complete understanding of all facets of capital markets. This includes every type of debt and equity financing both domestically and internationally. Merchant bankers cognizant of capital costs, seek optimum sources of capital. It is fundamental to acknowledge that interest rates are not the only standard relating to capital costs. Restrictions on funding availability, repayment terms, and operating effectiveness often outweigh what might appear to be inexpensive capital. Too frequently capital costs compel a growing business to undesirable actions. Some action might be necessary - or advantageous but in the long run - inordinate capital costs can be detrimental. The traditional merchant banker understands capital limitations and is able to structure transactions which are beneficial to all parties - not just the capital source. A knowledgeable merchant banker knows how to
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substitute one kind of capital for another - sometimes utilizing internal sources by way of either asset or corporate repositioning or equity creation. Above all, a merchant banker fully comprehends the "risk" versus "return" element necessary to complete the capital procurement process.

Modern practices
The definition of merchant banking has changed greatly since the days of the Rothschilds. The great merchant banking families dealt in everything from underwriting bonds to originating foreign loans. Bullion trading and bond issuing were some of the specialties of the Rothschild family. The modern merchant banks, however, tend to advise corporations and wealthy individuals on how to use their money. The advice varies from counsel on Mergers and acquisitions to recommendation on the type of credit needed. The job of generating loans and initiating other complex financial transactions has been taken over by investment banks and private equity firms. Today there are many different classes of merchant banks. One of the most common forms is primarily utilized in America. This type initiates loans and then sells them to investors. Even though these companies call themselves "Merchant banks," they have few if any of the characteristics of former Merchant banks.

A bank that deals mostly in (but is not limited to) international finance , long-term loans for companies and underwriting. Merchant banks do not provide regular banking services to the general public.

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4.4 Functions Of A Merchant Banker In IPO Managment

The following comprise the main functions of a merchant banker:

Management of debt and equity offeringsThis forms the main function of the merchant banker. He assists the companies in raising funds from the market. The main areas of work in this regard include: instrument designing, pricing the issue, registration of the offer document, underwriting support, marketing of the issue, allotment and refund, listing on stock exchanges.

Placement and distributionThe merchant banker helps in distributing various securities like equity shares, debt instruments, mutual fund products, fixed deposits, insurance products, commercial paper to name a few. The distribution network of the merchant banker can be classified as institutional and retail in nature. The institutional network consists of mutual funds, foreign institutional investors, private equity funds, pension funds, financial institutions etc. The size of such a network represents the wholesale reach of the merchant banker. The retail network depends on networking with investors.

Financial structuringFinancial structuring includes determining the right debt-equity ratio and gearing ratio for the client, the appropriate capital structure theory is also framed. Merchant bankers also explore the refinancing alternatives of the client, and evaluate cheaper sources of funds. Another area of advice
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is rehabilitation and turnaround management. In case of sick units, merchant bankers may design a revival package in coordination with banks and financial institutions. Risk management is another area where advice from a merchant banker is sought. He advises the client on different hedging strategies and suggests the appropriate strategy.

Project advisory servicesMerchant bankers help their clients in various stages of the project undertaken by the clients. They assist them in conceptualising the project idea in the initial stage. Once the idea is formed, they conduct feasibility studies to examine the viability of the proposed project. They also assist the client in preparing different documents like the detailed project report.

Loan syndicationMerchant bankers arrange to tie up loans for their clients. This takes place in a series of steps. Firstly they analyse the pattern of the clients cash flows, based on which the terms of borrowings can be defined. Then the merchant banker prepares a detailed loan memorandum, which is circulated to various banks and financial institutions and they are invited to participate in the syndicate. The banks then negotiate the terms of lending on the basis of which the final allocation is done.

Providing venture capital and mezzanine financingMerchant bankers help companies in obtaining venture capital financing for financing their new and innovative strategies.

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4.5 Registration of merchant bankers

Registration with SEBI is mandatory to carry out the business of merchant banking in India. An applicant should comply with the following norms:

The applicant should be a body corporate The applicant should not carry on any business other than those

connected with the securities market

The applicant should have necessary infrastructure like office space,

equipment, manpower etc.

The applicant must have at least two employees with prior experience in

merchant banking

Any associate company, group company, subsidiary or interconnected

company of the applicant should not have been a registered merchant banker

The applicant should not have been involved in any securities scam or

proved guilt for any offence

The applicant should have a minimum net worth of Rs.5 crores

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CHAPTER:-5 ROLE OF MERCHANT BANKER IN IPO

5.1 Role Of Merchant Banker In Ipo:A company selects an investment bank to be lead manager of a securities offering; responsibilities include leading the due diligence and drafting the prospectus. The lead manager forms a team of third-party specialists, including legal counsel, accounting and tax specialists, financial printers and others. In addition, the lead manager invites other banks into an underwriting syndicate as co-managers. The lead and co-managers will allot portions of the shares to be offered among themselves. Because their underwriting fees derive from how much of the issue they sell, the competition for lead manager and senior allotment positions is quite intense. When a company issues publicly traded securities for the first time through an initial public offering (IPO), the lead manager appoints a research analyst to write a research report and begin ongoing coverage of the company. The report will contain an economic analysis of the business and its prospects given the market for its products and services, competition and other factors. Once the analyst initiates coverage, he or she will make ongoing recommendations to the bank's clients to buy, hold or sell shares based on the perceived fair value relative to current share price. Distribution begins with the book-building process. The underwriting syndicate builds a book of interest during the offering period, usually accompanied by a road show, in which the issuer's senior management and syndicate team members meet with potential investors (mostly institutional investors such as pension funds, endowments and insurance companies). Potential investors receive a red herring, a preliminary prospectus that contains all materially significant information about the issuer but omits the final issuing price and number of shares. At the end of the road show, the lead manager sets the final offering price based on the prevailing demand. Underwriters seek to have the offering oversubscribed (create more demand than available shares).
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If they succeed, they will exercise a 15% overallotment option, called a greenshoe, which is named after the Green Shoe Company, the first issuer of such an option. This permits the underwriters to increase the number of new shares issued by up to 15% (from the number stated in the prospectus) without going through any additional registration. The new issue market is called the primary market. The Securities and Exchange Commission (SEC) registers the securities prior to their primary issuance, then they start trading in the secondary market on the New York Stock Exchange, Nasdaq or other venue where the securities have been accepted for listing and trading.

5.2 SOME EXAMPLE OF BANKS HAVING MERCHANT BANKING DIVISION FOR IPO MANAGMENT
A) PUNJAB NATIONAL BANK
Punjab National Bank, Indias one of the Leading Nationalized Bank established in 1895, serving over 3.5 crore customers through 4520 branches and 439 extension counters is the largest amongst Nationalized Banks. The Bank has recently been ranked 21st among top 500 companies and 9th among top 50 brands by the Economic Times. All the Branches of the Bank have been computerized. The Bank has a concept of "Any Time, Any Where Banking" through the introduction of Centralized Banking Solution (CBS) and over 2511 offices have already been brought under its ambit. The Bank is registered with SEBI as Category I Merchant Banker for providing all the major Merchant Banking services.

Their gamut of Merchant Banking services includes:

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 Issue Management Services to act as Book Running Lead Manager/Lead Manager for the IPOs/FPOs/Right issues/Debt issues Project appraisal Corporate Advisory Services Underwriting of equity issues Banker to the Issue/Paying Banker Refund Banker Monitoring Agency Debenture Trustee Marketing of the issue through a strong network of

QIBs/HNIEs/Corporates and Retail investor. The Bank itself is one of the major investor in the market having a treasury of 45000 crores.

Depository Services Bank offers Depository Services to its clients and has designated large network of branches to cater to their demat requirements through Depository Participant of NSDL and CDSL depositories. We also provide the Speed e facility to demat account holders to submit their delivery instructions through Internet. The Bank has recently launched online securities trading facility in strategic alliance with IDBI Capital Market Services Ltd.

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B) CANARA BANK AN INTRODUCTION:

Canara Bank is also one of the leading Merchant Bankers in India, offering specialised services to Banks, PSUs, State owned Corporations, Local Statutory bodies and corporate sector. They are SEBI registered Category I Merchant Banker / Underwriter to carry on Issue Management (Public / Rights / Private Placement Issues), Underwriting, Consultancy and Corporate Advisory Services etc. They also hold SEBI registration Certificate to act as "Bankers to an Issue" with network of exclusive Capital Market Service Branches to handle "Capital Market" related assignments. They undertake "project appraisals" with resource raising plans from Capital Market/ Debt Markets and facilitate tie-ups with Banks / Financial Institutions and Potential Investors. Their uniqueness is extending services under single window concept covering the following areas: 1. Merchant Banking 2. Commercial Banking 3. Investments 4. Bankers to Issue - Escrow Bankers 5. Underwriting

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6. Loan Syndication

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