Issue Management Ebook PDF

Issue
Management
Amity Directorate
of Distance &
Online Education
The economic development of any country depends upon

the existence of a well organized financial system. It is the
financial system which supplies the necessary financial
inputs for the production of goods and services which in
turn promote the wellbeing and standard of living of the
people of a country. Thus, the financial system is a
broader term which brings under its fold the financial
markets and the financial institutions which support the
system.
BFIA
Semester -5
Issue Management Semester V
PREFACE
The financial services sector is an important constituent of the financial system and plays
a significant role in the realm of economic development of a country. Merchant banking
is a prominent component of the financial sector of our country.
Merchant banking provides specialist services including portfolio management, project
financing and counseling, issue management & underwriting, mergers, acquisitions,
venture capital financing, leasing and so on. Merchant banks play a significant role in the
financial services sector.
Capital issue management is concerned with the management of issues for raising capital
through various types of instruments by corporate. It has to conform to SEBI stipulations.
The obligations of the lead merchant banker(s) fall into four groups:
pre-issue
post-issue
compliance with other requirements
Operational guidelines prescribed by SEBI.
The pre-issue obligations of the merchant banker(s) relate to due diligence, requisite fee,
submission of documents, appointment of intermediaries, underwriting, making public
the offer document, dispatch of issue material, no-complaints certificate, mandatory
collection centers, authorized collection agents, advertisement for right post-issues,
appointment of compliance officer and an abridge prospectus.
Ms. Shruti Ashok
Amity College of Commerce and Finance

Updated Syllabus
Course Objective
The aim of the course is to familiarize the students about the background of
the Indian Financial System, issues involved in pre- issue management and
other key concerns of merchant banking activities.
Course Contents
Module I: Introduction
Financial System: An Overview; Merchant Banking: Meaning, importance and its growth
in India; Range of Merchant banking services; Merchant banking organizations; Future
challenges.
Module II: Legal aspects involved in Issue of Securities
Rules and regulation of merchant bankers; SEBI (Merchant Bankers) Rules, 1992;
Compendium of circulars to merchant bankers.
Module III: Pre issue Management
Types and characteristics of corporate securities: Shares, Debentures, Other instruments;
Procedure of issues of GDR; Selection of instruments; Assessment of going public;
Different aspects of issue management, Role of various operations, in the success of PreIssue decision making, Pricing and timing of the issue, advertising right issue.
Module IV: Post-issue management
Naive analysis of collection; Closure of subscription list; Processing; SEBI guidelines
regarding post-issue; Obligation of lead managers; Allotment of shares and debentures;
Issue of refund orders; Listing and its regulations.
Module V: Book-building Process for Public Issues
SEBI guidelines; Salient features, procedures; Drafting for offer documents;
Determination of pricing; Allocation of securities to members of syndicates;
Underwriting agreements, Subscription agreements; Marketing of the issues; Allotment;
Activity chart of book-building process, Reverse Book-Building.
Module VI: Loan Syndication: Domestic and External
Meaning and its scope; Steps involved in loan syndication; Syndication of working
capital loans from banks; Syndication of euro currency loans; Merits and its limitations
Module VII: Performance Evaluation

Public and Rights issue analysis; Activity performance; Operational and financial
performance; Comparative operational performance, revising of funds through various
financial markets instruments.
Index
Chapter
no.
Particulars
Page no.
1.
Introduction of Financial
System & Merchant Banking
7-63
Pre-issue & Post issue

Management
64-184
3.
Book-Building Mechanism
185-233
4.
Loan Syndication and

Performance Evaluation
234-255
5.
Answer Keys
256

Chapter-I
Introduction of Financial System & Merchant Banking
Contents:
Introduction
Merchant Banking: an overview
Function of Merchant bankers
Rules & regulations
Future challenges
Summary
End Chapter Quiz
INTRODUCTION
FINANCIAL SYSTEM

INTRODUCTION TO FINANCIAL SYSTEM
The economic development of any country depends upon the existence of a well
organized financial system. It is the financial system which supplies the necessary
financial inputs for the production of goods and services which in turn promote the well
being and standard of living of the people of a country. Thus, the financial system is a
broader term which brings under its fold the financial markets and the financial
institutions which support the system.
The major assets traded in the financial system are money and monetary assets. The
responsibility of the financial system is to mobilize the savings in the form of money and
monetary assets and invest them to productive ventures. An efficient functioning of the
financial system facilitates the free flow of funds to more productive activities and thus
promotes investment. Thus, the financial system provides the intermediation between
savers & investors and promotes faster economic development.
A financial system plays a vital role in the economic growth of a country. It intermediates
with the flow of funds between those who save a part of their income to those who invest
in productive assets. It mobilizes and usefully allocates scarce resources of a country. A
financial system is a complex well integrated set of sub systems of financial institutions,
markets, instruments and services which facilitates the transfer and allocation of funds,
efficiently and effectively.
The financial system is possibly the most important institutional and functional Vehicle
for economic transformation. Finance is a bridge between the present and the future and
whether it be the mobilization of savings or their efficient, effective and equitable
allocation for investment, it is the success with which the financial system performs its
functions that sets the pace for the achievement of broader national objectives.
The process of savings, finance and investment involves financial institutions, markets,
instruments and services. Above all, supervision control and regulation are equally
significant. Thus, financial management is an integral part of the financial system.
On the basis of the empirical evidence, Goldsmith said that "...a case for the hypothesis
that the separation of the functions of savings and investment which is made possible by
the introduction of financial instruments as well as enlargement of the range of financial
assets which follows from the creation of financial institutions increase the efficiency of
investments and raise the ratio of capital formation to national production and financial
activities and through these two channels increase the rate of growth"
The inter-relationship between varied segments of the economy is illustrated below:
A financial system provides services that are essential in a modern economy. The use of a
stable, widely accepted medium of exchange reduces the costs of transactions. It
facilitates trade and, therefore, specialization in production.
Financial assets with attractive yield, liquidity and risk characteristics encourage saving
in financial form. By evaluating alternative investments and monitoring the activities of
borrowers, financial intermediaries increase the efficiency of resource use. Access to a
variety of financial instruments enables an economic agent to pool, price and exchange
risks in the markets. Trade, the efficient use of resources, saving and risk taking are the
cornerstones of a growing economy. In fact, the country could make this feasible with the
active support of the financial system. The financial system has been identified as the
most catalyzing agent for growth of the economy, making it one of the key inputs of
development
THE ORGANISATION OF THE FINANCIAL SYSTEM IN INDIA

The Indian financial system is broadly classified into two broad groups:
Organised sector and
Unorganised sector.

"The financial system is also divided into users of financial services and providers.
Financial institutions sell their services to households, businesses and government. They
are the users of the financial services. The boundaries between these sectors are not
always clear cut.
In the case of providers of financial services, although financial systems differ from
country to country, there are many similarities.
(i) Central bank
(ii) Banks
(iii) Financial institutions
(iv) Money and capital markets and
(v) Informal financial enterprises.
i) ORGANISED INDIAN FINANCIAL SYSTEM

The organised financial system comprises of an impressive network of banks, other
financial and investment institutions and a range of financial instruments, which together
function in fairly developed capital and money markets. Short term funds are mainly
provided by the commercial and cooperative banking structure. Nine-tenth of such
banking business is managed by twenty-eight leading banks which are in the public
sector. In addition to commercial banks, there is the network of cooperative banks and
land development banks at state, district and block levels. With around two-third share in
the total assets in the financial system, banks play an important role. Of late, Indian banks
have also diversified into areas such as merchant banking, mutual funds, leasing and
factoring.
The organized financial system comprises the following sub-systems:
1. Banking system
2. Cooperative system
3. Development Banking system
(i) Public sector
(ii) Private sector
4. Money markets and
5. Financial companies/institutions.
Over the years, the structure of financial institutions in India has developed and become
broad based. The system has developed in three areas - state, cooperative and private.
Rural and urban areas are well served by the cooperative sector as well as by corporate
bodies with national status. There are more than 4, 58,782 institutions channellising credit
into the various areas of the economy.

ii) UNORGANISED FINANCIAL SYSTEM
On the other hand, the unorganised financial system comprises of relatively less
controlled moneylenders, indigenous bankers, lending pawn brokers, landlords, traders
etc. This part of the financial system is not directly amenable to control by the Reserve
Bank of India (RBI). There are a host of financial companies, investment companies, chit
funds etc., which are also not regulated by the RBI or the government in a systematic
manner. However, they are also governed by rules and regulations and are, therefore
within the orbit of the monetary authorities.
FORMAL AND INFORMAL FINANCIAL SYSTEMS

The financial systems of most developing countries are characterized by co existence and
co operation between formal and informal financial sectors. This co existence of two
sectors is commonly referred to as financial dualism . The formal financial sector is
characterized by the presence of an organized, institutional and regulated system which
caters to the financial needs of the modern spheres of economy; the informal sector is an
unorganized, non-institutional and non regulated system dealing with the traditional and
rural spheres of the economy.
COMPONENTS OF FORMAL FINANCIAL SYSTEM

The formal financial system consists of four segments or components. These are:
Financial Institutions, Financial markets, financial instruments and financial services.
FINANCIAL INSTITUTIONS:
Financial Institutions are intermediaries that mobilize savings and facilitate the allocation
of funds in an efficient manner.
Financial institutions can be classified as banking and non banking financial institutions.
Banking institutions are creators of credit while non-banking financial institutions are
purveyors of credit. While the liabilities of banks are part of the money supply, this may
not be true of non banking financial institutions. Financial institutions can also be
classified as the term finance institutions such as IDBI (Industrial development bank of
India) ICICI (Industrial credit and investment corporation of India) etc.
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FINANCIAL MARKETS:
Financial markets are the mechanism enabling participants to deal in financial claims.
The markets also provide a facility in which their demands and requirements interact to
set a price for such claims. The main organized financial markets in a country are
normally money market and capital market. The first is market for short term securities
while the second is a market for long term securities, i.e. securities having maturity
period of one year or more.
Financial markets are also classified as primary, market and secondary market. While the
primary market deals in new issues, the secondary market deals for trading in outstanding
or existing securities. There are two components of the secondary market, OTC (over the
counter) market and Exchange traded market. The government securities market is an
OTC market, spot trades are negotiated or traded for immediate delivery and payment
while in the exchange traded market, trading takes place over a trading cycle in stock
exchanges .Derivatives markets are OTC in some countries and exchange traded in some
other countries.
FINANCIAL INSTRUMENT:
A financial instrument is a claim against a person or an institution for the payment at a
future date a sum of money and/or a periodic payment in the form of interest or dividend.
The term and/or implies that either of the payments will be sufficient but both of them
may be promised.
Financial securities may be primary or secondary securities. Primary securities are
also termed as direct securities as they are directly issued by the ultimate borrowers of the
funds to the ultimate savers. Examples of primary or direct securities include equity
shares and debentures. Secondary securities are also referred to as indirect securities, as
they are issued by financial intermediaries to the ultimate savers. Bank deposits, mutual
fund units, and insurance policies are secondary securities.
Financial instruments differ in terms of marketability, liquidity, reversibility, type
of options, return, risk and transaction costs. Financial instruments help the financial
markets and the financial intermediaries to perform the important role of channelizing
funds from lenders to borrowers.
FINANCIAL SERVICES:
Financial intermediaries provide key financial services such as merchant banking,
leasing, hire purchase, credit-rating, and so on. Financial services rendered by the
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financial intermediaries bridge the gap between lack of knowledge on the part of
investors and increasing sophistication of financial instruments and markets. These
financial services are vital for creation of firms, industrial expansion, and economic
growth.
Before investors lend money, they need to be reassured that it is safe to exchange
securities for funds. This reassurance is provided by the financial regulator who regulates
the conduct of the market, and intermediaries to protect the investors interests. The
Reserve Bank on India regulates the money market and Securities and Exchange Board of
India (SEBI) regulates capital market.
INTERACTION AMONG THE COMPONENTS

These four sub-systems do not function in isolation. They are interdependent and interact
continuously with each other. Their interaction leads to the development of a smoothly
functioning financial system.
Financial institutions or intermediaries mobilize savings by issuing different types
of financial instruments which are traded in financial markets. To facilitate the credit
allocation process, they acquire specialization and render specialized financial services.
Financial intermediaries have close links with the financial markets in the
economy. Financial institutions acquire, hold, and trade financial securities which not
only help in the credit-allocation process but also make the financial markets larger, more
liquid, and stable and diversified. Financial intermediaries rely on financial markets to
raise funds whenever they are in need of some. This increases the competition between
financial markets and financial intermediaries for attracting investors and borrowers. The
development of new sophisticated markets has led to the development of complex
securities and complex portfolios. The evaluation of these complex securities, portfolios,
and strategies requires financial expertise which financial intermediaries provide through
financial services.
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FUNCTIONS OF THE FINANCIAL SYSTEM

Financial system is very important for the economic & all round development of any
country, its major functions can be explained as following:
Promotion of liquidity
The major function of the financial system is the provision of money & monetary assets
for the production of goods and services. There should not be any shortage of money for
productive ventures. In financial language, the money & monetary assets are referred to
as liquidity. In other words, the liquidity refers to cash or money and other assets which
can be converted into cash readily without loss. Hence, all activities in a financial system
are related to liquidity either provision of liquidity or trading in liquidity.
Mobilization of savings
Another important activity of the financial system is to mobilize savings and channelise
them into productive activities. The financial system should offer appropriate incentives
to attract savings and make them available for more productive ventures. Thus, the
financial system facilitates the transformation of savings into investment & consumption.
The financial intermediaries have to play a dominant role in this activity.
A good financial system serves in the following ways:
One of the important functions of a financial system is to link the savers and
investors and thereby help in mobilizing and allocating the savings efficiently and
effectively. By acting as an efficient conduit for allocation of resources, it permits
continuous up gradation of technologies for promoting growth on a sustained basis.
A financial system not only helps in selecting projects to be funded but also
inspires the operators to monitor the performance of the investment. It provides a
payment mechanism for the exchange of goods and services and transfers economic
resources through time and across geographic regions and industries.
One of the most important functions of a financial system is to achieve optimum
allocation of risk bearing. It limits, pools, and trades the risks involved in mobilizing
savings and allocating credit. An efficient financial system aims at containing risk within
acceptable limits and reducing the cost of gathering and analyzing information to assist
operators in taking decisions carefully.
It makes available price-related information which is a valuable assistance to
those who need to take economic and financial decisions.
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A financial system minimizes situations where the information is asymmetric and
likely to affect motivations among operators or when one party has the information and
the other party does not. It provides financial services such as insurance and pension and
offers portfolio adjustment facilities.
A financial system helps in the creation of a financial structure that lowers the
cost of transactions. This has a beneficial influence on the rate of return to savers. It also
reduces the cost of borrowing. Thus, the system generates an impulse among the people
to save more.
A well-functioning financial system helps in promoting the process of financial
deepening and broadening. Financial deepening refers to an increase of financial assets as
a percentage of Gross Domestic Product (GDP). Financial broadening refers to building
an increasing number and a variety of participants and instruments.
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FINANCIAL SYSTEM DESIGNS

A financial system is a vertical arrangement of a well-integrated chain of financial
markets and financial institutions for providing financial intermediation. Different
designs of financial systems are found in different countries. The structure of the
economy, its pattern of evolution, and political, technical and cultural differences affect
the design (type) of financial system.
Two prominent polar designs can be identified among the varieties that exist. At
one extreme is the bank-dominated system, such as in Germany, where a few large banks
play a dominant role and the stock market is not important. At the other extreme is the
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market-dominated financial system, as in the US, where financial markets play an
important role while the banking industry is much less concentrated.
In bank-based financial systems, banks play a pivotal role in mobilizing savings,
allocating capital, overseeing the investment decisions of corporate managers, and
providing risk-management facilities. In market based financial systems, the securities
markets share centre stage with banks in mobilizing the societys savings to firms,
exerting corporate control, and easing risk management.
The other major industrial countries fall in between these two extremes. In India,
banks have traditionally been the dominant entities of financial intermediation. The
nationalization of banks, an administered interest rate regime, and the government policy
of favouring banks led to the predominance of a bank-based financial system in India.
FINANCIAL MARKETS
Financial markets are an important component of the financial system. A financial market
is a mechanism for the exchange trading of financial products under a policy framework.
The participants in the financial markets are the borrowers (issuers of securities), lender
(buyers of securities), and financial intermediaries.
Financial markets comprise two distinct types of markets:
Money market
Capital market
MONEY MARKET:
A money market is a market for short-term debt instruments (maturity below one year). It
is a highly liquid market wherein securities are bought and sold in large denominations to
reduce transaction costs. Call money market, certificates of deposit, commercial paper,
and treasury bills are the major instruments/segments of the money market.
The function of a money market is
To serve as an equilibrating force that redistributes cash balances in accordance with the
liquidity needs of the participants;
To form a basis for the management of liquidity and money in the economy by monetary
authorities; and
To provide a reasonable access to the users of short-term money for meeting their
requirements at realistic prices.
As it facilitates the conduct of monetary policy, a money market constitutes a very
important segment of the financial system.
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CAPITAL MARKET:
A capital market is a market for long-term securities (equity and debt). The purpose of
capital market is to
Mobilize long-term savings to finance long-term investments;
Provide risk-capital in the form of equity or quasi-equity to entrepreneurs;
Encourage broader ownership to productive assets;
Provide liquidity with a mechanism enabling the investor to sell financial assets;
Lower the costs of transactions and information; and
Improve the efficiency of capital allocation through a competitive pricing mechanism.
A capital market can be further classified into primary and secondary markets. The
primary market is meant for new issues and the secondary market is a market where
outstanding issues are traded. In other words, the primary market creates long-term
instruments for borrowings, whereas the secondary market provides liquidity through the
marketability of these instruments. The secondary market is also known as the stock
market.
MONEY MARKET AND CAPITAL MARKET

There is strong link between the money market and the capital market:
Often, financial institutions actively involved in the capital market are also involved in
the money market.
Funds raised in the money market are used to provide liquidity for longer-term
investment and redemption of funds raised in the capital market.
In the development process of financial markets, the development of money market
typically precedes the development of the capital market.
CHARACTERISTICS OF FINANCIAL MARKETS

Financial markets are characterized by a large volume of transactions and a speed with
which financial resources move from one market to another.
There are various segments of financial markets such as stock markets, bond markets
primary and secondary segments, where savers themselves decide when and where they
should invest money.
There is scope of instant arbitrage among various markets and types of instruments.
Financial markets are highly volatile and susceptible to panic and distress selling as the
behavior of a limited group of operators can get generalized.
Markets are dominated by financial intermediaries who take investment decisions as well
as risks on behalf of their depositors. Negative externalities are associated with financial
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markets. A failure in any one segment of these markets may affect many other segments
of the market, including the non financial markets.
Domestic financial markets are getting integrated with worldwide financial markets. The
failure and vulnerability in a particular domestic market can have international
ramifications. Similarly, problems in external markets can affect the functioning of
domestic markets.
In view of the above characteristics, financial markets need to be closely monitored and
supervised.
FUNCTIONS OF FINANCIAL MARKETS

The cost of acquiring information and making transactions creates incentives for the
emergence of financial markets and institutions. Different types and combinations of
information and transaction costs motivate distinct financial contracts, instruments, and
institutions.
Financial markets perform various functions such as
Enabling economic units to exercise their time preference;
Separation, distribution, diversification, and reduction of risk;
Efficient payment mechanism;
Providing information about companies. This spurs investors to make inquiries
themselves and keep track of the companies activities with a view to trading in their
stock efficiently;
Transmutation or transformation of financial claims to suit the preferences of both savers
and borrowers;
Enhancing liquidity of financial claims through trading in securities; and
Portfolio management.
A variety of services is provided by financial markets as they can alter the rate of
economic growth by altering the quality of these services.
FINANCIAL SYSTEM AND ECONOMIC DEVELOPMENT

The role of financial system in economic development has been a much discussed topic
among economists. Is it possible to influence the level of national income, employment,
standard of living, and social welfare through variations in the supply of finance?
In what way financial development is affected by economic development? There is no
unanimity of reviews on such questions. A recent literature survey concluded that the
existing theory on this subject has not given any generally accepted model to describe the
relationship between finance and economic development. The importance of finance in
development depends upon the desired nature of development. In the environmentfriendly, appropriate-technology-based, decentralized Alternative Development Model,
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finance is not a factor of crucial importance. But even in a conventional model of modem
industrialism, the perceptions in this regard vary a great deal.
One view holds that finance is not important at all. The opposite view regards it to be
very important. The third school takes a cautionary view. It may be pointed out that there
is a considerable weight of thinking and evidence in favour of the third view also. Let us
briefly explain these viewpoints one by one.
In his model of economic growth, Solow has argued that growth results predominantly
from technical progress, which is exogenous, and not from the increase in labour and
capital. Therefore, money and finance and the policies about them cannot contribute to
the growth process.
EFFECTS OF FINANCIAL SYSTEM ON SAVING AND INVESTMENT

It has been argued that men, materials, and money are crucial inputs in production
activities. The human capital and physical capital can be bought and developed with
money. In a sense, therefore, money, credit, and finance are the lifeblood of the economic
system. Given the real resources and suitable attitudes, a well--developed financial
system can contribute significantly to the acceleration of economic development
through three routes. First, technical progress is endogenous; human and physical capital
is its important sources and any increase in them requires higher saving and investment,
which the financial system helps to achieve. Second, the financial system contributes to
growth not only via technical progress but also in its own right. Economic development
greatly depends on the rate of capital formation. The relationship between capital and
output is strong, direct, and monotonic (the position which is sometimes referred to as
capital fundamentalism). Now, the capital formation depends on whether finance is
made available in time, in adequate quantity, and on favorable terms-all of which a good
financial system achieves. Third, it also enlarges markets over space and time; it
enhances the efficiency of the function of medium of exchange and thereby helps in
economic development.
We can conclude from the above that in order to understand the importance of the
financial system in economic development, we need to know its impact on the saving and
investment processes. The following theories have analyzed this impact:
(a) The Classical Prior Saving Theory,
(b) Credit Creation or Forced Saving or Inflationary Financing Theory, (c) Financial
Repression Theory,
(d) Financial Liberalisation Theory.
The Prior Saving Theory regards saving as a prerequisite of investment, and stresses the
need for policies to mobilise saving voluntarily for investment and growth. The financial
system has both the scale and structure effect on saving and investment. It increases the
rate of growth (volume) of saving and investment, and makes their composition,
allocation, and utilization more optimal and efficient. It activates saving or reduces idle
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saving; it also reduces unfructified investment and the cost of transferring saving to
investment. How is this achieved? In any economy, in a given period of time, there are
some people whose current expenditures is less than their current incomes, while there
are others whose current expenditures exceed their current incomes. In well-known
terminology, the former are called the ultimate savers or surplus--spending-units, and the
latter are called the ultimate investors or the deficit-spending-units.
Modern economies are characterized (a) by the ever-expanding nature of business
organisations such as joint-stock companies or corporations, (b) by the ever-increasing
scale of production, (c) by the separation of savers and investors, and (d) by the
differences in the attitudes of savers (cautious, conservative, and usually averse to taking
risks) and investors (dynamic and risktakers).
In these conditions, which Samuelson calls the dichotomy of saving and investment, it is
necessary to connect the savers with the investors. Otherwise, savings would be wasted or
hoarded for want of investment opportunities, and investment plans will have to be
abandoned for want of savings. The function of a financial system is to establish a bridge
between the savers and investors and thereby help the mobilisation of savings to enable
the fructification of investment ideas into realities. Figure below reflects this role of the
financial system in economic development.
RELATIONSHIP BETWEEN FINANCIAL SYSTEM AND ECONOMIC

DEVELOPMENT
A financial system helps to increase output by moving the economic system towards the
existing production frontier. This is done by transforming a given total amount of wealth
into more productive forms. It induces people to hold less savings in the form of precious
metals, real estate land, consumer durables, and currency, and to replace these assets by
bonds, shares, units, etc. It also directly helps to increase the volume and rate of saving
by supplying diversified portfolio of such financial instruments, and by offering an array
of inducements and choices to woo the prospective saver. The growth of
Banking habit helps to activise saving and undertake fresh saving. The saving is said to
be institution-elastic i.e., easy access, nearness, better return, and other favourable
features offered by a well-developed financial system lead to increased saving.
A financial system helps to increase the volume of investment also. It becomes possible
for the deficit spending units to undertake more investment because it would enable them
to command more capital. As Schumpeter has said, without the transfer of purchasing
power to an entrepreneur, he cannot become the entrepreneur. Further, it encourages
investment activity by reducing the cost of finance and risk. This is done by providing
insurance services and hedging opportunities, and by
making financial services such as remittance, discounting, acceptance and guarantees
available. Finally, it not only encourages greater investment but also raises the level of
resource allocation efficiency among different investment channels. It helps to sort out
and rank investment projects by sponsoring, encouraging, and selectively supporting
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business units or borrowers through more systematic and expert project appraisal,
feasibility studies, monitoring, and by generally keeping a watch over the execution and
management of projects.
The contribution of a financial system to growth goes beyond increasing prior-savingbased investment. There are two strands of thought in this regard. According to the first
one, as emphasized by Kalecki and Schumpeter, financial system plays a positive and
catalytic role by creating and providing finance or credit in anticipation of savings. This,
to a certain extent, ensures the independence of investment from saving in a given period
of time. The investment financed through created credit generates the appropriate level of
income. This in turn leads to an amount of savings, which is equal to the investment
already undertaken. The First Five Year Plan in India echoed this view when it stated that
judicious credit creation in production and availability of genuine savings has also a part
to play in the process of economic development. It is assumed here that the investment
out of created credit results in prompt income generation. Otherwise, there will be
sustained inflation rather than sustained growth.
The second strand of thought propounded by Keynes and Tobin argues that investment,
and not saving, is the constraint on growth, and that investment determines saving and
not the other way round. The monetary expansion and the repressive policies result in a
number of saving and growth promoting forces: (a) if resources are unemployed, they
increase aggregate demand, output, and saving; (b) if resources are fully employed, they
generate inflation which lowers the real rate of return on financial investments. This in
turn, induces portfolio shifts in such a manner that wealth holders now invest more in
real, physical capital, thereby increasing output and saving; (c) inflation changes income
distribution in favour of profit earners (who have a high propensity to save) rather than
wage earners (who have a low propensity to save), and thereby increases saving; and (d)
inflation imposes tax on real money balances and thereby transfers resources to the
government for financing investment.
The extent of contribution of the financial sector to saving, investment, and growth is said
to depend upon its being free or repressed (regulated). One school of thought argues that
financial repression and the low/ negative real interest rates which go along with it
encourage people (i) to hold their saving in unproductive real assets, (ii) to be rent seekers because of non-market allocation of investible funds, (iii) to be indulgent which
lowers the rate of saving, (iv) to misallocate resources and attain inefficient investment
profile, and (v) to promote capital intensive industrial structure inconsistent with the
factor-endowment of developing countries. Financial liberalisation or deregulation
corrects these ill effects and leads to financial as well as economic development.
However, as indicated earlier, some economists believe that financial repression is
beneficial.
FINANCIAL MARKETS IN AFRICA
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The present condition of the financial markets in Sub-Saharan Africa (SSA) is largely the
result of three factors -the lack of financial development during the colonial period; the
economic and financial policies pursued by post-colonial governments; and the effect of
changes in monetary and financial conditions outside of Africa. In the pre-colonial
period, indigenous financial arrangements met the needs of different regions and as
formal arrangements, such as commercial banks and trade-financing enterprises did not
exist. During Africa's colonial period, the first banks operated in Africa as branches of
foreign banks and were not concerned with developing monetary and financial policies
for the colonies. Not until the post-colonial period could the independent African
governments begin to promote financial development and improve the control over the
monetary and financial system. Since the formation of the independent nations, the fragile
financial system of post-colonial Sub-Saharan Africa was not resilient enough to
withstand the shocks caused by the rapidly changing conditions of the international
financial markets and has been struggling to adjust to the turbulence caused by external
forces.
Pre-Colonial Period
The earliest history of finance, credit and debt in Africa can be traced to copper bars,
shells, calico, iron rods, bracelets and other commodities that served as financial
instruments. Salt and gold were utilized in trans-Sahara trade. Evidence indicates that
before the ravages of the slave trade, many regions of Africa were dynamic, wellgoverned and prosperous.
Many sophisticated indigenous financial arrangements were developed. Bills of exchange
were utilized in trade in West Africa. All of these instruments, however, were "special
purpose monies" or special financial arrangements; there were no "general purpose
monies" (such as francs, pounds and pesetas) that were generally accepted as a means of
payment on a continent-wide basis. In many parts of Africa, the search for an efficient
medium of exchange eventually led to the monetization of precious metals. Metallic
payment, such as coin-based instruments, was an important milestone in the development
of the financial system in Africa as it simplified the payment mechanism and facilitated
trade. Even though the metallic payment system provided a common means by which
merchants, farmers and craftsmen could easily sell goods and services, the system was
still a regional method of payment; the fragmentation of political power prevented the
widespread acceptability of a particular coin or bullion. Furthermore, inconvenience and
danger of carrying large sums of coins prevented the coin-based instruments from being
established as a widely accepted method of payment.
The evolution to a paper-based monetary instrument used throughout the continent did
not occur until the colonization of Africa by the European powers. Payment ,letter sof
credit and negotiable bills of exchange became common as Europeans required more
convenient and more sophisticated financial instruments. The introduction of genereal
purpose monies by the Europeans through merchandise trade, slave trade, settler and
explorers were powerful instruments of modernization and social change. Many
traditional social relations, such as the bride-price, were monetized.
Sophisticated indigenous institutions existed in the pre-colonial period and are still in use
today. The rotating savings and credit associations (ROSCA), referred to as isusu or
tontines,are examples of such institutions which villagers could participate in to raise
22

capital. A clear division of labors and responsibilities is found in the organization of a
ROSCA. The president of the association provides leadership, arbitrates disputes, sets
policies on loans and interest rates; the "bankers" are those who monitor the transactions
of the ROSCA; an assistant is appointed to help the president implement decisions; and
the secretary records the members' subscriptions.
Colonial Period to World War II

The colonial period in Africa can be divided into three phases. The first phase, from 1875
until World War I, involved occupation and pacification of the subcontinent by military
forces. The second phase, from 1920 to 1940, was a time of economic stagnation as
Africa was not immune from the world economic depression beginning in 1929-30.
During these two phases, the economic growth of Africa was controlled by private
foreign companies such as United Africa Company (controlled by Unilever) and
Companies Frangaise de l'Afrique Occidentale; the colonial governments were primarily
concerned with providing the infrastructure needed to support private sector activity and
colonial administration rather than formulating developmental plans for the colonies.
(The third phase, from 1945 to about 1960, is discussed in the next section.)
With the exception of the Union of South Africa, the change and growth of colonial
Africa was mostly externally-driven, influenced by the international economy; financial
institutions existed primarily as extensions of the European financial systems. Since the
capital needed to explore, pacify and colonize Africa largely originated from Europe,
there was no need to develop an internal African financial system as these enterprises
required few financial services from local institutions. Furthermore, the profits from
commercial ventures in Africa were repatriated back to Europe, providing little economic
growth for the continent. Apart from the large foreign-owned trading and financial
companies. major shipping agents and the ,mining companies, there were few other
financial institutions located in colonial Africa. Where financial institutions existed, the
services provided had little to do with the normal business conducted by the majority of
the African population. In Nigeria, attempts by local businessmen to establish banks and
financial institutions resulted in failure, largely because of the lack of capital.
Another factor that inhibited the economic growth of Africa was the employment and
labor policy of the colonial administrations. The majority of Africans did not have access
to higher-paying jobs and discriminatory policies prevented the growth of indigenous
enterprises, resulting in low effective demand. To provide the European mines and farms
with inexpensive labor, most of the administrations implemented policies in which only
those who had worked as laborers were allowed into urban areas. For example, large
numbers of laborers from Zambia, Malawi and Zimbabwe were recruited under shortterm contracts (less than a year) to work in the mines in South Africa. The
accommodation was suited for bachelors and at the end of the contract, they were
repatriated. This system of periodic migration had the effect of depleting the rural sector
of its young, male labor force. The effect of this system was to lower the productivity of
indigenous agriculture, alter the relation of power and status within the village
community and create dependence on the earnings of urban workers. The combination of
employee discrimination and the system of periodic migration, combined with neglected
educational and health policy, resulted in a low growth rate. It also retarded the expansion
of industries such as financial services and agriculture.
23

This policy of neglect and discrimination was in accord with Britain's colonial doctrine
which emphasized the separateness of its colonies from the imperial power; it
theoretically envisaged the eventual political independence of the colonies and therefore
did not warrant investment to develop the colonized nations. In contrast, the French
doctrine of assimilation.
Post-World War 11 to Early 1960

Not until the third phase, from 1945 to about 1960, did the European colonial powers
become directly involved in the growth and development of the individual colonies. The
post-World War II period saw the greatest developments in SSA as the colonial power
could no longer ignore the needs of the colonies for better infrastructure, better education
and adequate health standards. This was both a reaction to international criticism of the
exploitative nature of colonialism and a means of rebuilding after destruction caused by
the war. Post-World War 11 institutional changes in the European countries also had an
effect on the colonial territories. In both Britain and France, socialist governments were
elected, and central to the socialist agenda was governmental control of commercial
activities. This enthusiasm for governmental control also applied to colonial policy.
An example of post-World War II colonial policies was the creation of a unified French
currency for the Francophone territories in Africa. Prior to World War II, each colony
typically maintained its own currency at a parity that was firmly linked. after World War
II, the currencies of all the French colonies in Africa were consolidated into a single
currency known as the CFA franc ("le franc des Colonies Francaises d'Afrique").
African Independence
Characteristic of most SSA countries' post-colonial development was the enthusiasm for
central planning and the belief that industrialization was the path towards modernization.
This enthusiasm extended to the financial markets as the newly-formed nations viewed
the role of banks, the dominant financial institution, as a powerful instrument of
government policy. Consequently, these new governments devised different means to
control foreign commercial banks. The level of control ranged from outright
nationalization of the banks to limiting foreign ownership. For example, in Tanzania the
government-owned National Bank of Commerce nationalized the assets of foreign banks
and took over their branches. In Malawi, Standard Chartered was given a government
contract to manage the National Bank of Malawi and the right to hold a 20% share in its
formerly 100%-owned bank operations in that country.
The new mission of the banking system shifted from ensuring the viability of the system
to directing credit to priority sectors regardless of risk. Government intervention often
resulted in artificially low interest rates. Since inflation rates were often higher than the
interest charged by the banks, voluntary savings dropped. To protect their purchasing
power, savers invested in real assets, such as gold and jewelry or transferred their
resources abroad. Despite the ambitious reform efforts of the last decade, these problems
continue to exist today.
Compounding the commercial banks' inability to mobilize savings from the general
public are tenuous linkages between the formal financial sector, of which the commercial
banks are a major component, and the informal sector. In some SSA countries, the ratio
24

of money in circulation in the informal sector to the formal sector is estimated at five to
one. No more than 10 percent of rural households and businesses receive formal loans in
any one year in Sub-Saharan Africa.' The implication of this weak linkage is important
for two reasons. First, government control over macroeconomic factors, such as the
supply of money in circulation, is possible only if the formal sector has a significant
impact on the informal sector. Second, if the linkages were strong, loans to large banks
would filter down to small and micro-enterprises including those businesses in rural areas
most distant from urban centers. This has been the exception, not the rule.
The development strategy of most SSA governments in the 1960s concentrated on
industrialization. Agricultural development was considered secondary and only as a
means to provide raw materials and tax revenues. At first, this strategy seemed to work as
strong export demand and high investment boosted GDP growth. Countries financed
much of the growth with foreign funds, taking advantage of heavier borrowing abilities
based on high export prices and negative real interest rates in international markets. This
strategy was predicated on the following factors, all of which were dictated by the
economic and financial conditions outside of Africa: 1) inexpensive petroleum to fuel
Africa's industrial boom; 2)continuing forced investment to sustain its rapid industrial
expansion;3)Continuous high demand for its imports and 4) stable and strong exchange
rates to ease import and interest payments. The first oil shock in 1973-74 and its
subsequent impacts on international financial markets demonstrated the precariousness of
the industrialization strategy pursued by SSA nations after independence. The first oil
shock and the oil shortfall in 1978-79 caused a sharp increase in interest rates worldwide,
which in turn, substantially slowed the rate of foreign investment in Africa. With oil
prices escalating at an exponential rate, most Sub-Sahara Africa countries' rates of
production declined. As a consequence of the decline in foreign investment and the
increase in energy costs, most SSA nations resorted to borrowing heavily at high interest
rates to sustain production. This reliance on foreign debt instead of domestic resources
had grown to crisis proportions as the amount of debt in 1989 was 115 percent of SubSaharan Africa's GDP. Competition from other developing countries and sharp currency
devaluations in the mid 1980s further exposed the weakness in the development strategy
of the SSA nations. The emergence of other newly industrialized economies, particularly
in East Asia (e.g., Korea and China) also negatively affected the demand for exports from
Sub-Saharan Africa. Whereas the growth of export volume in East Asia from 1973 to
1988 was over nine percent, by contrast, Sub- Saharan Africa's growth in exports was
only slightly over one percent, resulting in an almost twenty percent decline in per capita
real GDP between 1974 and 1984. Overall, Africans were almost as poor in the mid1980s as they were at independence in the 1960s.
Even though the sharp devaluation of SSA currencies in the mid-1980s helped in making
exports cheaper, in reality, it severely burdened the economic system of SSA. At the end
of 1989 Sub-Saharan African's debt was about $161 billion or 352 percent of exports.
Since most commercial bank lending was based on floating rates, SSA borrowers were
exposed to interest rate and exchange rate fluctuations. The devaluation of SSA
currencies put additional pressure on the debt crisis. For example, in 1989, foreign debtservice obligations amounted to 22.1% of export revenue. According to the IMEF, only
twelve SSA nations have been able to regularly service their debt since 1980.2 Adding to
25

its woes, Sub-Saharan Africa also suffered severe droughts, famines, wars and political
conflicts during these years, contributing further to the deterioration of their economies.
The effect of these developments on the Sub-Saharan financial systems was devastating.
The following examples illustrate the severity of the financial crisis: in Guinea, when the
new government assumed power in 1984, it inherited a virtually defunct banking system
with The above statistics were taken from World Development Report 1989 and African
External Finance in the 1990s by The World Bank, and from Africa South of the Sahara
1993, by Europa Publications JLd.
99 percent of loans being irrecoverable; in Ghana, the net worth of the banking ystem in
mid-1988 was negative; in Tanzania, the losses in the main financial institutions were
nearly 10 percent of GNP. Besieged by such losses, African economic policymakers
recognized that structural reforms were needed to foster viable financial systems.
Considerable efforts have been made to reform, privatize or liquidate enterprises that
were inefficient or were not self-sustained. The World Bank and the IMF have assisted
thirty-three nations in their effort to restructure their financial systems.
African Financial Systems in the 1990s

The greatest challenge for Sub-Saharan Africa in the 1990s is to develop a viable
financial system in order to increase the financial resources available for growth and
development and to ensure a more productive use of those resources. The experiences in
Sub-Saharan Africa in the last two decades have demonstrated that infusions of money
from external borrowing into economies without efficient financial structures and sound
plans for their utilization can result in an unhealthy dependency on continuous borrowing.
The first step in developing a strong financial system in SSA is to shift from relying on
external to domestic sources of financing by better mobilizing savings of households and
businesses. This will be a difficult task. As discussed earlier, a common reason for the
dispropensity to deposit savings in the banking system has been government-controlled
negative real rates of interest on deposits. To compound the problem, the collapse of
banking systems in many SSA countries in the 1980's reduced the attractiveness of
commercial banks as a vehicle for savings. Since commercial banks are the most
important financial intermediaries in Sub-Saharan Africa, banking reform is a
prerequisite in harnessing domestic financial resources. According to Babacar Ndiaye,
the president of the African Development Bank, building the public confidence in the
3
banking system is one of the most important goals in reforming the banking sector. Some
of the steps in reforming the banking sector are: 1)improve prudential bank supervision to
protect depositors and to ensure the health of the banking industry; 2) train bank
examiners to perform banking supervision; and 3) enforce strict accounting, auditing and
disclosure standards, in order to provide accurate and reliable financial information.
The second step in cultivating a healthy financial system (given an adequate regulatory
environment) is to promote increased competition among the providers of financial
services. These institutions, including securities firms, mutual fund companies, venture
capitalists, insurance companies etc., play a key role in fostering economic development
as they increase the range of financial instruments available locally and discourage
capital flight. The existence of a strong capital market is critical to a balanced financial
system as it provides long-term financing to those emerging enterprises with the potential
26

to expand jobs, output and GDP in the long-run. The capital markets in Sub-Saharan
Africa are in an infancy stage. For example, the SSA stock market capitalization
(excluding the Johannesburg Stock Exchange) is less than 0.1% of the U.S. market
capitalization. The insurance industry is similarly underdeveloped; only one country,
Zimbabwe, does the ratio of annual premiums to GDP, exceed one percent (see the
section on insurance companies in Chapter I for further information). In order to create a
suitable environment for capital markets, SSA governments can: 1) draft tax laws that do
not discriminate against equity financing; 2) allow market forces to regulate prices and
the number of participants (e.g., insurance companies, brokerage houses, venture
capitalist companies, etc.); and 3) educate the public about instruments such as stocks and
mutual funds.
1.2 MERCHANT BANKING
INTRODUCTION
The new issue market/activity was regulated by the controller of capital (CCIs) under the
provisions of the Capital Issues (control) Act, 1947 and the exemption orders & rules
made under it. With the repeal of the Act & the consequent abolition of the office of the
CCI in 1992, the protection of the interest of the investors in securities market &
27

promotion of the development & regulation of the market/activity became the
responsibility of the SEBI.
MERCHANT BANKING
Merchant banking may be defined as an institution which covers a wide range of
activities such as underwriting of shares, portfolio management, project counseling,
insurance etc. They render all these services for a fee ORIGIN : The term merchant
banking originated from the London who started financing foreign trade through
acceptance of bills Later they helped government of under developed countries to raise
long term funds Later these merchants formed an association which is now called
Merchant Banking and Securities House Association
Merchant Bankers
The merchant bankers as sponsors of capital issues is reflected in their major services/
functions such as, determining the composition of the capital structure (type of securities
to be issued), draft of prospectus(offer documents) and application forms, compliance
with procedural formalities, appointment of registrars to deal with the share application &
transfers, listing of securities, arrangement of underwriting/sub-underwriting, placing of
issues, selection of brokers & bankers to the issue, publicity & advertising agents,
printers, and so on.
Registration
SEBI (Merchant Bankers) Regulation Act, 1992 defines a Merchant Banker as any
person who is engaged in the business of issue management either by making agreements
regarding selling, buying or subscribing to securities or acting as manager, consultant,
advisor or rendering corporate advisory service in relation to such issue management.
At present no organization can act as a Merchant Banker without obtaining a certificate
of registration from the SEBI. However, it must be noted that a person/organization has
to get him registered under these regulations if he wants to carry on or undertake any of
the authorized activities, i.e., issue management assignment as manager, consultant,
advisor, underwriter or portfolio manger. To obtain the certificate of registration, one had
to apply in the prescribed form and fulfill two sets of norms
Operational capabilities
Capital adequacy norms
28
COMPULSORY REGISTRATION
Merchant bankers require compulsory registration with the SEBI to carry out their
activities. Earlier they fell under four categories.
CLASSIFICATION OF MERCHANT BANKERS
Category I Merchant Bankers. These merchant bankers can act as issue manager,
advisor, consultant, underwriter & portfolio manager.
Category II merchant Bankers. Such merchant bankers can act as advisor, consultant,
underwriter & portfolio manager. They cannot act as issue manager of their own but can
act co-manager.
Category II Merchant Bankers. They are allowed to act as advisor, consultant &
underwriter only. They can neither undertake issue management of their own nor do they
act as co-manager. They can not undertake the activities of portfolio management also.
Category IV Merchant Bankers. A category IV Merchant Banker can merely act as
consultant or advisor to an issue of capital.
CAPITAL ADEQUACY NORMS

SEBI has prescribed capital adequacy norms for registration of the various categories of
merchant bankers. The capital adequacy is expressed in terms of minimum net worth, i.e.,
capital contributed to the business plus free reserves. The following are the capital
adequacy norms as laid down by SEBI.
Capital Adequacy Norms

Category of Merchant Bankers
Category I
Category II
Category III
29
Minimum Net Worth

Rs. 5 crore
Rs. 50 Lakh
Rs. 20 Lakh

Category IV
Nil
FEES
According to the SEBI (Merchant Bankers) Amendment Regulations, 1999, w.e.f.
30.09.1999, every merchant banker shall pay a sum of Rs. 5 lakhs as registration fees at
the time of grant of certificate by the board. The fee shall be paid by the merchant banker
within 15 days of receipt of intimation from the board. Further, a merchant banker to
keep registration in force shall pay renewal fee of Rs. 2.5 lakhs every three years from the
forth year from the date of initial registration.
1.3 FUNCTIONS OF MERCHANT BANKS

The basic function of merchant banker or investment banker is marketing corporate &
other securities. In the process, he performs a number of services concerning various
aspects of marketing, viz., origination, underwriting, and distribution, of securities. The
activities or services performed by merchant banks, in India, today include:
Corporat
ecounsel
i
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Proj
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i
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Capi
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uri
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Port
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omanagement
Issue management
Credi
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W orki
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Vent
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Fi
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s
(I)CORPORATE COUNSELING:
Corporate counseling covers counseling in the form of project counseling, capital
restructuring, project management, public issue management, loan syndication, working
capital fixed deposit, lease financing, acceptance credit etc., The scope of corporate
counseling is limited to giving suggestions and opinions to the client and help taking
actions to solve their problems. It is provided to a corporate unit with a view to ensure
better performance, maintain steady growth and create better image among investors.
30

(II)PROJECT COUNSELING
Project counseling is a part of corporate counseling and relates to project finance. It
broadly covers the study of the project, offering advisory assistance on the viability and
procedural steps for its implementation. a. Identification of potential investment avenues.
b. A general view of the project ideas or project profiles. c. Advising on procedural
aspects of project implementation d. Reviewing the technical feasibility of the project e.
Assisting in the selection of TCOs (Technical Consultancy Organizations) for preparing
project reports f. Assisting in the preparation of project report g. Assisting in obtaining
approvals, licenses, grants, foreign collaboration etc., from government h. Capital
structuring i. Arranging and negotiating foreign collaborations, amalgamations, mergers
and takeovers. Assisting clients in preparing applications for financial assistance to
various national and state level institutions banks etc., k. Providing assistance to
entrepreneurs coming to India in seeking approvals from the Government of India.
(III)CAPITAL STRUCTURE:
Here the Capital Structure is worked out i.e., the capital required, raising of the capital,
debt-equity ratio, issue of shares and debentures, working capital, fixed capital
requirements, etc.,
(IV)PORTFOLIO MANAGEMENT
It refers to the effective management of Securities i.e., the merchant banker helps the
investor in matters pertaining to investment decisions. Taxation and inflation a: e taken
into account while advising on investment in different securities. The merchant banker
also undertakes the function of buying and selling of securities on behalf of their client
companies. Investments are done in such a way that it ensures maximum returns and
minimum risks.
(V)ISSUE MANAGEMENT:
Management of issues refers to effective marketing of corporate securities viz., equity
shares, preference shares and debentures or bonds by offering them to public. Merchant
banks act as intermediary whose main job is to transfer capital from those who own it to
those who need it. The issue function may be broadly divided in to pre issue and post
issue management. a. Issue through prospectus, offer for sale and private placement. b.
Marketing and underwriting c. Pricing of issues
31

(VI)CREDIT SYNDICATION
Credit Syndication refers to obtaining of loans from single development finance
institution or a syndicate or consortium. Merchant Banks help corporate clients to raise
syndicated loans from commercials banks. Merchant banks helps in identifying which
financial institution should be approached for term loans. The merchant bankers follow
certain steps before assisting the clients approach the appropriate financial institutions. a.
Merchant banker first makes an appraisal of the project to satisfy that it is viable b. He
ensures that the project adheres to the guidelines for financing industrial projects. c. It
helps in designing capital structure, determining the promoters contribution and arriving
at a figure of approximate amount of term loan to be raised. d. After verifications of the
project, the Merchant Banker arranges for a preliminary meeting with financial
institution. e. If the financial institution agrees to consider the proposal, the application is
filled and submitted along with other documents.
(VII)WORKING CAPITAL
The Companies are given Working Capital finance, depending upon their earning
capacities in relation to the interest rate prevailing in the market.
(VIII)VENTURE CAPITAL
Venture Capital is a kind of capital requirement which carries more risks and hence only
few institutions come forward to finance. The merchant banker looks in to the technical
competency of the entrepreneur for venture capital finance.
(IX)FIXED DEPOSIT
Merchant bankers assist the companies to raise finance by way of fixed deposits from the
public. However such companies should fulfill credit rating requirements.
(X)OTHER FUNCTIONS
Treasury Management- Management of short term fund requirements by client
companies.
Stock broking- helping the investors through a network of service units
Servicing of issues- servicing the shareholders and debenture holders in distributing
dividends, debenture interest.
Small Scale industry counseling- counseling SSI units on marketing and finance
32

Equity research and investment counseling merchant banker plays an important role
in providing equity research and investment counseling because the investor is not in a
position to take appropriate investment decision. Assistance to NRI investors - the NRI
investors are brought to the notice of the various investment opportunities in the country.
Foreign Collaboration: Foreign collaboration arrangements are made by the Merchant
bankerst Banking in India .
The first merchant bank was set up in 1969 by Grind lays Bank. Initially they were issue
mangers looking after the issue of shares and raising capital for the company. But
subsequently they expanded their activities such as working capital management;
syndication of project finance, global loans, mergers, capital restructuring, etc., initially
the merchant banker in India was in the form of management of public issue and
providing financial consultancy for foreign banks. In 1973, SBI started the merchant
banking and it was followed by ICICI. SBI capital market was set up in August 1986 as a
full fledged merchant banker. Between 1974 and 1985, the merchant banker has
promoted lot of companies. However they were brought under the control of SEBI in
1992. Disinvestment in the government sector in the country gives a big scope to the
merchant banks to function as consultants. New financial instruments are introduced in
the market time and again. This basically provides more and more opportunity to the
merchant banks. The mergers and corporate restructuring along with MOU and MOA are
giving immense opportunity to the merchant bankers for consultancy jobs. The net worth
requirement is very high in categories I and II specially, so many professionally
experienced person/ organizations cannot come into the picture. Poor New issues market
in India is drying up the business of the merchant bankers. Thus the merchant bankers are
those financial intermediary involved with the activity of transferring capital funds to
those borrowers who are interested in borrowing. The activities of the merchant banking
in India is very vast in the nature of the management of the customers securities
The management of the portfolio
The management of projects and counseling as well as appraisal
The management of underwriting of shares and debentures
The circumvention of the syndication of loans
Management of the interest and dividend etc .
BANKS PROVIDING MERCHANT BANKING SERVICES IN INDIA
Commercial banks Foreign banks like National Grindlays Bank, Citibank, HSBC bank
etc.. Development banks like ICICI,IFCI,IDBI etc.. SFC , SIDCs Private firms like JM
Financial and Investment service , DSP Financial Consultants, Ceat Financial
Services,Kotak Mahindra, VMC Project Technologies, Morgan Stanley, Jardie Fleming,
Klienwort Benson etc
33

1.4 RULES AND REGULATIONS FOR MERCHANT BANKERS
GUIDELINES FOR MERCHANT BANKERS:

SEBIs authorization is a must to act as merchant bankers. Authorisation criteria include
Professional qualification in finance, law or business management Infrastructure like
office space, equipment and man power Capital adequacy Past track of record,
experience, general reputation and fairness in all transactions Every merchant banker
should maintain copies of balance sheet, Profit and loss account, statement of financial
position Half-yearly unaudited result should be submitted to SEBI Merchant bankers are
prohibited from buying securities based on the unpublished price sensitive information of
their clients
SEBI has been vested with the power to suspend or cancel the authorisation in case of
violation of the guidelines Every merchant banker shall appoint a Compliance Officer
to monitor compliance of the Act SEBI has the right to send inspecting authority to
inspect books of accounts, records etc of merchant bankers Inspections will be
conducted by SEBI to ensure that provisions of the regulations are properly complied An
initial authorisation fee, an annual fee and renewal fee may be collected by SEBI A lead
manager holding a certificate under category I shall accept a minimum underwriting
obligation of 5% of size of issue or Rs.25 lakhs whichever is less
SOME PROBLEMS OF MERCHANT BANKERS

SEBI stipulates high capital adequacy norms for authorization which prevents young,
specialized professionals into merchant banking business Non co-operation of the issuing
companies in timely allotment of securities and refund of application of money etc. is
another problem Yet merchant banking is vast but should develop adequate expertise to
provide a full range of merchant banking services.
CODE OF CONDUCT FOR MERCHANT BANKERS

A Merchant Banker shall make all efforts to protect the interests of investors.
A Merchant Banker shall maintain high standards of integrity, dignity and fairness in the
conduct of its business.
A Merchant Banker shall fulfill its obligations in a prompt, ethical, and professional
manner.
34

A Merchant Banker shall at all times exercise due diligence, ensure proper care and
exercise independent professional judgment.:
inquiries from investors are adequately dealt with;
grievances of investors are redressed in a timely and appropriate manner;
Where a complaint is not remedied promptly, the investor is advised of any further steps
which may be available to the investor under the regulatory system.
A Merchant Banker shall ensure that adequate disclosures are made to the investors in a
timely manner in accordance with the applicable regulations and guidelines so as to
enable them to make a balanced and informed decision.
A Merchant Banker shall endeavor to ensure that the investors are provided with true and
adequate information without making any misleading or exaggerated claims or any
misrepresentation and are made aware of the attendant risks before taking any investment
decision.
A Merchant Banker shall endeavor to ensure that copies of the prospectus, offer
document, letter of offer or any other related literature is made available to the investors
at the time of issue or the offer.
A Merchant Banker shall not discriminate amongst its clients, save and except on ethical
and commercial considerations.
A Merchant Banker shall not make any statement, either oral or written, which would
misrepresent the services that the Merchant Banker is capable of performing for any
client or has rendered to any client.
A Merchant Banker shall avoid conflict of interest and make adequate disclosure of its
interest.
A Merchant Banker shall put in place a mechanism to resolve any conflict of interest
situation that may arise in the conduct of its business or where any conflict of interest
arises, shall take reasonable steps to resolve the same in an equitable manner.
A Merchant Banker shall make appropriate disclosure to the client of its possible source
or potential areas of conflict of duties and interest while acting as Merchant Banker
which would impair its ability to render fair, objective and unbiased services.
A Merchant Banker shall always endeavor to render the best possible advice to the clients
having regard to their needs.
A Merchant Banker shall not divulge to anybody either orally or in writing, directly or
indirectly, any confidential information about its clients which has come to its
knowledge, without taking prior permission of its clients, except where such disclosures
are required to be made in compliance with any law for the time being in force.
35

A Merchant Banker shall ensure that any change in registration status / any penal action
taken by the Board or any material change in the Merchant Bankers financial status,
which may adversely affect the interests of clients / investors is promptly informed to the
clients and any business remaining outstanding is transferred to another registered
intermediary in accordance with any instructions of the affected clients.
A Merchant Banker shall not indulge in any unfair competition, such as weaning away
the clients on assurance of higher premium or advantageous offer price or which is likely
to harm the interests of other Merchant Bankers or investors or is likely to place such
other Merchant Bankers in a disadvantageous position while competing for or executing
any assignment.
A Merchant Banker shall maintain arms length relationship between its merchant banking
activity and any other activity.
A Merchant Banker shall have internal control procedures and financial and operational
capabilities which can be reasonably expected to protect its operations, its clients,
investors and other registered entities from financial loss arising from theft, fraud, and
other dishonest acts, professional misconduct or omissions.
A Merchant Banker shall not make untrue statement or suppress any material fact in any
documents, reports or information furnished to the Board.
A Merchant Banker shall maintain an appropriate level of knowledge and competence
and abide by the provisions of the Act, regulations made thereunder, circulars and
guidelines, which may be applicable and relevant to the activities carried on by it. The
merchant banker shall also comply with the award of the Ombudsman passed under
Securities and Exchange Board of India (Ombudsman) Regulations, 2003.
A Merchant Banker shall ensure that the Board is promptly informed about any action,
legal proceedings etc., initiated against it in respect of material breach or non compliance
by it, of any law, rules, regulations, directions of the Board or of any other regulatory
body.
A Merchant Banker or any of its employees shall not render, directly or indirectly, any
investment advice about any security in any publicly accessible media, whether real-time
or non real-time, unless a disclosure of his interest including a long or short position, in
the said security has been made, while rendering such advice.
(b) In the event of an employee of the Merchant Banker rendering such advice, the
merchant banker shall ensure that such employee shall also disclose the interests, if any,
of himself, his dependent family members and the employer merchant banker, including
their long or short position in the said security, while rendering such advice.
A Merchant Banker shall demarcate the responsibilities of the various intermediaries
appointed by it clearly so as to avoid any conflict or confusion in their job description.
36

A Merchant Banker shall provide adequate freedom and powers to its compliance officer
for the effective discharge of the compliance officers duties.
A Merchant Banker shall develop its own internal code of conduct for governing its
internal operations and laying down its standards of appropriate conduct for its
employees and officers in carrying out their duties. Such a code may extend to the
maintenance of professional excellence and standards, integrity, confidentiality,
objectivity, avoidance or resolution of conflict of interests, disclosure of shareholdings
and interests etc.
A Merchant Banker shall ensure that good corporate policies and corporate governance
are in place.
A Merchant Banker shall ensure that any person it employs or appoints to conduct
business is fit and proper and otherwise qualified to act in the capacity so employed or
appointed (including having relevant professional training or experience)
A Merchant Banker shall ensure that it has adequate resources to supervise diligently and
does supervise diligently persons employed or appointed by it in the conduct of its
business, in respect of dealings in securities market.
A Merchant Banker shall be responsible for the acts or omissions of its employees and
agents in respect of the conduct of its business.
A Merchant Banker shall ensure that the senior management, particularly decision
makers have access to all relevant information about the business on a timely basis.
A Merchant Banker shall not be a party to or instrumental for Creation of false market; price rigging or manipulation or; passing of unpublished price
sensitive information in respect of securities which are listed and proposed to be listed in
any stock exchange to any person or intermediary in the securities market.
Registration of Merchant Bankers Application for Grant of Certificate

Category ITo carry on any activity of the issue management, which will interalia consist of
preparation of prospectus and other information relating to the issue, determining
financial structure, tie-up of financiers and final allotment and refund of the subscription;
and to act as adviser, consultant, manager, underwriter, portfolio manager.
Conformance to Requirements
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Subject to the provisions of the regulations, any application, which not complete in all
respects and does not conform to the instructions specified in the form, shall be rejected.
However, before rejecting any such application, the applicant will be given an
opportunity to remove within the time specified such objections and may be indicated by
the board.
Furnishing of Information
The Board may require the applicant to furnish further information or clarification
regarding matter relevant to the activity of a merchant banker for the purpose of disposal
of the application. The applicant or its principal officer shall, if so required, appear before
the Board for personal representation.
Consideration of Application
The Board shall take into account for considering the grant of a certificate, all matters,
which are relevant to the activities relating to merchant banker and in particular whether
the applicant complies with the following requirements;
1. That the applicant shall be a body corporate other than a non-banking financial
company as defined by the Reserve Bank of India Act, 1934.
2. That the merchant banker who has been granted registration by the Reserve Bank of
India to act as Primary or Satellite Dealer may carry on such activity subject to the
condition that it shall not accept or hold public deposit.
3. That the applicant has the necessary infrastructure like adequate office space,
equipments, and manpower to effectively discharge his activities.
4. That the applicant has in his employment minimum of two persons who have the
experience to conduct the business of the merchant banker.
5. That a person (any person being an associate, subsidiary, inter-connected or group
Company of the applicant in case of the applicant being a body corporate) directly or
indirectly connected with the applicant has not been granted registration by the Board.
6. That the applicant fulfils the capital adequacy as specified.
7. That the applicant, his partner, director or principal officer is not involved in any
litigation connected with the securities market which has an adverse bearing on the
business of the applicant.
8. That the applicant, his director, partner or principal officer has not at any time been
convicted for any offence involving moral turpitude or has been found guilt of any
economic offence.
9. That the applicant has the professional qualification from an institution recognized by
the Government in finance, law or business management.
10. That the applicant is a fit and proper person.
11. That the grant of certificate to the applicant is in the interest of investors.
38

Procedure for Registration
The Board on being satisfied that the applicant is eligible shall grant a certificate in Form
B. On the grant of a certificate the applicant shall be liable to pay the fees in accordance
with Schedule II.
Renewal of Certificate
Three months before expiry of the period of certificate, the merchant banker, may if he
so desired, make an application for renewal in Form A. The application for renewal shall
be dealt with in the same manner as if it were a fresh application for grant of a certificate.
In case of an application for renewal of certificate of registration, the provisions of clause
(a) of regulation 6 shall not be applicable up to June 30th , 1998. The Board on being
satisfied that the applicant is eligible for renewal of certificate shall grant a certificate in
form B and send intimation to the applicant. On the grant of a certificate the applicant
shall be liable to pay the fees in accordance with Schedule II.
Procedure where Registration is not Granted

Where an application for grant of a certificate under regulation 3 or of renewal under
regulation 9, does not satisfy the criteria set out in regulation 6, the Board may reject the
application after giving an opportunity of being heard. The refusal to grant registration
shall be communicated by the Board within thirty days of such refusal to the applicant
stating therein the grounds on which the application has been rejected. Any applicant
may, being aggrieved by the decision of the Board, under subregulation( 1), apply within
a period of thirty days from the date of receipt of such intimation to the Board for
reconsideration for its decision. The Board shall reconsider an application made under
sub-regulation (3) and communicate its decision as soon as possible in writing to the
applicant.
Effect of Refusal to Grant Certificate

Any merchant banker whose application for a certificate has been refused by the Board
shall on and from the date of the receipt of the communication under sub-regulation (2) of
regulation 10 cease to carry on any activity as merchant banker.
Payment of Fees
39

Every applicant eligible for grant of a certificate shall pay such fees in such manner and
within the period specified in Schedule II. Where a merchant banker fails to any annual
fees as provided in sub-regulation (1), read with Schedule II, the Board may suspend the
registration certificate, whereupon the merchant banker shall cease to carry on any
activity as a merchant banker for the period during which the suspension subsists.
GENERAL OBLIGATIONS
The 1992 regulations have enunciated the following general obligations and
responsibilities for the merchant bankers.
SOLE FUNCTION
Every merchant banker shall abide by the Code of Conduct as specified in Schedule III.
They are as follows 1. Merchant Banker not to associate with any business other that that
of the securities market. 2. No merchant banker, other than a bank or a public financial
institution, who has been granted certificate of registration under these regulations, shall
after June 30th, 1998 carry on any business other than that in the securities market.
However , a merchant banker who prior to the date of notification of the Securities and
exchange board of India (Merchant Bankers) Amendment Regulations, 1997, has entered
into a contract in respect of a business other that that of the securities market may, f he so
desires, discharge his obligations under such contract. Similarly, a merchant banker who
has been granted certificate of registration to act as primary or satellite dealer by the
Reserve Bank of India may carry on such business as may be permitted by Reserve Bank
of India.
MAINTENANCE OF BOOKS
Every merchant banker shall keep and maintain the following books of accounts, records
and documents:
1. A copy of balance sheet as at the end of each accounting period.
2. A copy of profit and loss account for that period;
3. A copy of the auditors report on the accounts for that period; and
4. A statement of financial position. Every merchant banker shall intimate to the Board
the place where the books of accounts, record and documents are maintained. Every
merchant banker shall, after the end of each accounting period furnish to the Board copies
of the Balance sheet, profit and loss account and such other documents for any other
preceding five accounting years when required by the Board.
40

SUBMISSION OF HALF-YEARLY RESULTS
Every merchant banker shall furnish to the Board half-yearly unaudited financial results
when required by the Board with a view to monitor the capital adequacy of the merchant
banker.
PRESERVATION OF BOOKS OF ACCOUNT, RECORDS, ETC.,
The merchant banker shall preserve the books of accounts and other records and
documents maintained under regulation 14 for a minimum period of five years.
REPORT ON STEPS TAKEN ON AUDITORS REPORT

Every merchant banker shall within two months from the date of the auditors report take
steps to rectify the deficiencies, made out in the auditors report.
APPOINTMENT OF LEAD MERCHANT BANKERS
All issues should be managed by at least one merchant banker functioning as the lead
merchant banker. In an issue of offer of rights to the existing members with or without
the right of renunciation, the amount of the issue of the body corporate does not exceed
rupees fifty lakhs, the appointment of a lead merchant banker shall not be essential. Every
lead merchant banker shall before taking up the assignment relating to an issue enter into
an agreement with such body corporate setting out their mutual right, liabilities and
obligations relating to such issue an in particular to disclosures, allotment and refund.
RESTRICTION ON APPOINTMENT OF LEAD MANAGERS
The number of lead merchant bankers may not, exceed in case of any issue of the
following:
RESPONSIBILITIES OF LEAD MANAGERS
No lead manager shall agree to manage or be associated with any issue unless his
responsibilities relating to the issue mainly, those of disclosures, allotment and refund are
Size of Issue Number of Merchant Bankers Less than Rs. 50 Crores Two, Above Rs.
50 Crores but less than Rs.100 Crores Three, Above Rs. 100 Crores but less that Rs.200
Crores Four, Above Rs.200 Crores but less that Rs.400 Crores Five, Above Rs.400
Crores Five or more as agreed by SEBI clearly defined, allocated and determined and a
statement specifying such responsibilities is furnished to the Board at least one month
41

before the opening of the issue for subscription. Where there are more than one lead
merchant bankers to the issue the responsibilities of each of such lead merchant banker
shall clearly be demarcated and a statement specifying such responsibilities shall be
furnished to the Board at least one month before the opening of the issue for subscription.
No lead merchant banker shall, agree to manage the issue made by any body corporate, if
such body corporate is an associate of the lead merchant banker. A lead merchant banker
shall not be associated with any issue if a merchant banker who is not holding a
certificate is associated with the issue.
UNDERWRITING OBLIGATIONS
In respect of every issue to be managed, the lead merchant banker holding a certificate
under Category I shall accept a minimum Underwriting obligation of five percent of the
total underwriting commitment or rupees twenty-five lakhs whichever is less. If the lead
merchant banker is unable to accept the minimum underwriting obligation, that lead
merchant banker shall make arrangement for having the issue underwritten to that extent
by a merchant banker associated with the issue and shall keep the board informed of such
arrangement.
SUBMISSION OF DUE DILIGENCE CERTIFICATE
The lead merchant bankers, who is responsible for verification of the contents of a
prospectus or the Letter of Offer in respect of an issue and the reasonableness of the
views expressed therein, shall submit to the Board at least two weeks prior to the opening
of the issue for subscription, a due diligence certificate in Form C.
DOCUMENTS TO BE FURNISHED TO THE BOARD
The lead manager responsible for the issue shall furnish to the Board, the following
documents
1. Particulars of the issue;
2. Draft prospectus or where there is an offer to the existing shareholders, the draft letter
of offer;
3. Any other literature intended to be circulated to the investors, including the
shareholders; and
4. Such other documents relating to prospectus or letter of offer as the case may be.
The documents shall be furnished at least two weeks prior to the date of filing of the draft
prospectus or the letter of the offer, as the case may be, with the Registrar of Companies
or with the Regional Stock Exchanges or with both. The lead manager shall ensure that
the modifications and suggestions, if any, made by the Board on the draft prospectus or
the Letter of Offer as the case may be, with respect to information to be given to the
investors are incorporated therein.
42
PAYMENT OF FEES TO THE BOARD

The draft prospectus or draft letter of offer referred to in regulation 24 shall be submitted
along with such fees and in such manner as may be specified in Schedule IV.
CONTINUANCE OF ASSOCIATION OF LEAD MANAGER
The lead manager undertaking the responsibility for refunds or allotment of securities in
respect of any issue shall continue to be associated with the issues till the subscriber have
received the share or debenture certificates or refund of excess application money. Where
a person other than the lead manager is entrusted with the refund or allot of securities in
respect of any issue the lead manager shall continue to be responsible for ensuring that
such other person discharges the requisite responsibilities in accordance with the
provisions of the Companies Act and the listing agreement entered into but the body
corporate with the stock Exchange.
ACQUISITION OF SHARES PROHIBITED
No merchant banker or any of its directors, partner manager or principal shall either on
their respective accounts or through their associates or relative enter into transaction in
securities of bodies corporate on the basis of unpublished price sensitive information
obtained by them during the course of any professional assignment either from the clients
or otherwise.
INFORMATION TO THE BOARD
Every merchant banker shall submit to the Board complete particulars of any transaction
for acquisition of securities of any body corporate whose issue is being managed by that
merchant banker within fifteen days from the date of entering into such transaction.
DISCLOSURES TO THE BOARD
A merchant banker shall disclose to the Board as and when required, the following
information:
1. His responsibilities with regard to the management of the issue; Any change in the
information o particulars previously furnished, which have a bearing on the certificate
granted to it;
2. The names of the body corporate whose issues he has managed or has been
ass0oiciated with;
3. The particulars relating to breach of the capital adequacy requirement as specified in
regulation 7;
43

4. Relating to his activities as a manager, underwriter, consultant or adviser to an issue as
the case may be.
APPOINTMENT OF COMPLIANCE OFFICER
Every merchant banker shall appoint a compliance officer who shall be responsible for
monitoring the compliance of the Act, rules and regulations notifications, guidelines,
instructions etc., issued by the board or the Central Government and for redressed of
investors grievances. The compliance officer shall immediately and independently report
to the Board any non-compliance observed by him and ensure that the observations made
or deficiencies pointed out by the Board on/in the draft prospectus or the Letter of offer
as the case may be, do not recur.
PROCEDURE FOR INSPECTION BOARDS RIGHT TO INSPECT
The Board may appoint one or more persons as inspecting authority to undertake
inspection of the books of accounts, records and documents of the merchant banker for
any of the purposes specified in sub-regulation(2). The purposes referred to in subregulation (1) may be as follows: 1. To ensure that the books of account are being
maintained in the manner required; 2. To ensure that the provisions of the Act, rules,
regulations are being complied with; 3. To investigate into the complaints received from
investors, other merchant bankers or any other person on any matter having a bearing on
the activities of the merchant banker; and 4. To investigate suo-moto in the interest of
securities business or investors interest in the affairs of the merchant banker.
NOTICE BEFORE INSPECTION
Before undertaking an inspection under regulation 29 the Board shall give a reasonable
notice to the merchant banker for that purpose. Where the Board is satisfied that in the
interest of the investors no such notice should be given, it may, by an order in writing
directing that the inspection of the affairs of the merchant banker be taken up without
such notice. During the course of inspection, the merchant banker against whom an
inspection is being carried out shall be bound to discharge his obligations as provided
under regulation 31.
OBLIGATIONS OF MERCHANT BANKER ON INSPECTION
It shall be the duty of every director, proprietor, partner, officer and employee of the
merchant banker, who is being inspected, to produce to the inspecting authority such
books, accounts and other documents in his custody or control and furnish him with the
statements and information relating to his activities as a merchant banker within such
time as the inspecting authority may require. The merchant banker shall allow the
inspecting authority to have reasonable access to the premises occupied by such merchant
44

banker or by any other person on his behalf and also extend reasonable facility for
examining any books, records, documents and computer data in the possession of the
merchant banker or any such other person and also provide copies of documents or other
materials which, in the opinion of the inspecting authority are relevant for the purposes of
the inspection. The inspecting authority, in the course of inspection, shall be entitled to
examine or record statements of any principal officer, director, partner, proprietor and
employee of the merchant banker. It shall be the duty of every director, proprietor,
partner, officer or employee of the merchant banker to give to the inspecting authority all
assistance in connection with the inspection which the merchant banker may be
reasonably expected to give.
SUBMISSION OF REPORT TO THE BOARD
The inspecting authority shall, as soon as possible submit, an inspection report to the
Board. Action on Inspection or Investigation Report The Board of the Chairman shall
after consideration of inspection or investigation report take such action and the board or
chairman may deem fit and appropriate including action under the Securities and
Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and
imposing Penalty) Regulations, 2002.
APPOINTMENT OF AUDITOR
The Board may appoint a qualified auditor to investigate into the books of account or the
affairs of the merchant banker. The auditor so appointed shall have the same powers of
the inspecting authority as are mentioned in regulation 29 and the obligations of the
merchant banker in regulation 31 shall be applicable to the investigations under this
regulation.
COMMUNICATION OF FINDINGS
The Board shall after consideration of the inspection report communicate the findings to
the merchant banker to give him an opportunity of being heard before any action is taken
by the Board on the findings of the inspecting authority. On receipt of the explanation if
any, from the merchant banker, the Board may call upon the merchant banker to take
such measures as the Board may deem fit in the interest of the securities market and for
due compliance with provisions of the Act, rules and regulations.
PROCEDURE FOR ACTION INCASE OF DEFAULT LIABILITY FOR
ACTION IN CASE OF DEFAULT
A merchant banker who fails to comply with any conditions subject to which certificate
has been granted, and contravenes any of the provisions of the Act rules or regulations
shall be dealt with in the manner provided under the Securities and Exchange Board of
45

India (Procedure for Holding Enquiry by Enquiry Officer and imposing Penalty)
Regulations, 2002.
SUSPENSION OF REGISTRATION
SEBI Regulations, 2002 published in the official Gazette of India dated 27.09.2002 A
penalty for suspension of registration of a merchant banker may be imposed under the
following circumstances:
Where the merchant banker violates the provisions of the Act, rules or regulations; or
Where the merchant banker fails to furnish any information relating to his activity as
merchant banker as required by the Board; or furnishes wrong or false information, or
does not submit periodical returns as required by the Board; or does not co-operate in any
enquiry conducted by the Board ; or
Where the merchant banker fails to resolve the complaints of the investors or fails to
give a satisfactory reply to the Board in this behalf; or
Where the merchant banker indulges in manipulation or price rigging or cornering
activities; or
Where the merchant banker is guilty of misconduct or improper or unbusiness like or
unprofessional conduct which is not in accordance with the Code of Conduct specified in
Schedule III; or
Where the merchant banker fails to maintain the capital adequacy requirement in
accordance with provisions of regulation 7; or
Where the merchant banker fails to pay the fees; or
Where the merchant banker violates the conditions of registration ; or
Where the merchant banker does not carry out his obligations as specified in the
regulation. Cancellation or Registration A penalty of cancellation of registration of a
merchant banker may be imposed where;
The merchant banker indulges in deliberate manipulation or price rigging or cornering
activities affecting the securities market and the investors interest;
The financial position of the merchant banker deteriorates to such an extent that the
Board is of the opinion that his continuance as merchant banker is not in the interest of
investors;
The merchant banker is guilty of fraud, or is convicted of a criminal offence;
In case of repeated defaults of the nature mentioned in regulation 36 provided that the
Board furnishes reasons for cancellation in writing.
MANNER OF MAKING ORDER OF SUSPENSION OR CANCELLATION
No order of penalty of suspension or cancellations the case may be shall be imposed
except after holding an enquiry in accordance with procedure specified in regulation.
MANNER OF HOLDING ENQUIRY BEFORE SUSPENSION OR
CANCELLATION.
46

For the purpose of holding an enquiry under regulation 38, the board may appoint an
enquiry officer. The enquiry officer shall issue to the merchant banker a notice the
registered office or the principal place of business of the merchant banker. The merchant
banker may, within thirty days from the date of receipt of such notice,furnish to the
enquiry officer a reply together with copies of documentary or other evidence relied on
by him or sought by the Board from the merchant banker. The enquiry officer shall, give
a reasonable opportunity or hearing to the merchant banker to enable him to make
submissions in support of his reply made under sub-regulation (3). The merchant banker
may either appear in person or through any duly authorized person. No lawyer or
advocate shall be permitted to represent the merchant banker at the enquiry. Where a
lawyer or an advocate has been appointed by the Board as a presenting officer under subregulation (6), it shall be lawful for the merchant banker to present its case through a
lawyer or advocate. It is considered necessary that the enquiry officer may ask the Board
to appoint a presenting officer to present its case. The enquiry officer shall, after taking
into account all relevant facts and submissions made by the merchant banker, submit a
report the Board and recommend the penalty to be imposed as also the grounds on the
basis of which proposed penalty is justified.
SHOW CAUSE NOTICE AND ORDER
On receipt of the report from the enquiry officer, the Board shall consider the same and
issue a show-cause notice as to why the penalty as proposed by the enquiry officer should
not be imposed. The merchant banker shall within twenty-one days of the date of the
receipt of the show-cause send a reply to the Board. The Board after considering the reply
to the show-cause notice, if received, shall as soon as possible or not later than thirty days
from the receipt of the reply, if any, pass such order as it deems fit. Every order passed
under sub-regulation (3) shall be self-contained and give reasons for the conclusions
stated therein including justification of the penalty imposed by that order. The Board
shall send a copy of the order under sub-regulation (3) to the merchant banker.
EFFECT OF SUSPENSION AND CANCELLATION
On and from the date of the suspension of their merchant banker he shall cease to carry
on any activity as a merchant banker during the period of suspension. On and from the
date of cancellation the merchant banker shall with immediate effect cease to carry on
any activity as a merchant banker. The order of suspension or cancellation of certificate
passed under sub-regulation (3) of regulation 40 shall be published in at least two daily
newspapers by the Board.
Appeal to the Securities Appellate Tribunal Any person aggrieved by an order of the
board may, on and after the commencement of the /securities Laws (second amendment)
Act, 1999, under these regulations may prefer an appeal to a Securities Appellate
Tribunal having jurisdiction in the matter.
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FEES
Every merchant banker shall pay a sum of Rupees five lacs as registration fees at the time
of the grant of certificate by the Board. The fee shall be paid by the merchant a banker
within fifteen days from the date of receipt of the intimation from the Board under
subregulation (1) of regulation 8. A merchant banker to keep registration in force shall
pay renewal fee of Rs.2.5 lacs every three years from the fourth year from the date of
initial registration. The fee shall be paid by the merchant banker within fifteen days from
the date of receipt of intimation from the Board under sub-regulation (3) of regulation 9.
The fees specified shall be payable by merchant banker by a demand draft in favor of
securities and Exchange Board of India payable at Mumbai or at the respective regional
office. Every Merchant banker shall pay registration fees as set out below:
1. Category I merchant banker; A sum of Rs. 2.5 lakhs to be paid annually for the first
two years commencing from the date of initial registration and thereafter for the third
year a sum of Rs. 1 lakh to keep his registration in force.
2. Category II merchant banker; A sum of Rs. 1.5 lakhs to be paid annually for the first
year a sum of Rs. 50,000 to keep his registration in force.
3. Category III merchant bankers ; A sum of Rs.1 lakh to be paid annually for the first
year a sum of Rs.25,000 to keep his registration in force.
4.Category IV merchant bankers ; A sum of Rs.5,000/- to be paid annually for the first
year a sum of Rs.1000/- to keep his registration in force.
RENEWAL FEES
1. Category I merchant bankers : A sum of Rs.1 lakh to be paid annually for the first
two years commencing from the date of each renewal and thereafter for the third year a
sum of Rs.20,000/- to keep his registration in force;
2. Category II merchant bankers : A sum of Rs.75,000/- to be paid annually for the
first two years commencing from the date of each renewal and thereafter for the third
year a sum of Rs.10,000/- to keep his registration in force ;
3. Category III merchant bankers : A sum of s.50,000/ to be paid annually for the first
sum of Rs.5,000/- to keep his registration in force ;
48

4.Category IV merchant bankers : A sum of Rs.5,000/- to be paid annually for the first
sum of Rs.2,500/- to keep his registration in force ; In addition, the merchant banker has
to pay the following fees towards documentation
Size of the Issue Fee per Document (Rs.) Up to 5 crores 10,000 More than 5 crores and
up to 10 crores 15,000 More than 10 crores and up to 50 crores 25,000 More than 50
crores and up to 100 crores 50,000 More than 100 crores and up to 500 crores 2,50,000
More than 500 crores 5,00,000.
CODE OF CONDUCT FOR MERCHANT BANKERS

The SEBI regulations have outlined the following code of conduct for the merchant
bankers operation in India ;
A merchant banker shall make all efforts to protect the interests of investors.
A Merchant Banker shall maintain high standards of integrity, dignity and fairness in
the conduct of its business.
A Merchant Banker shall fulfill its obligations in a prompt, ethical, and professional
manner.
A Merchant Banker shall at all times exercise due diligence, ensure proper care and
exercise independent professional judgment.
A Merchant Banker shall Endeavour to ensure that enquiries from the investors are
adequately dealt with, grievances of investors are redressed in a timely and appropriate
manner, where a complaint is not remedied promptly, the investor is advised of any
further steps which may be available to the investor under the regulatory system.
A Merchant Banker shall ensure that adequate disclosures are made to the investors in
a timely manner in accordance with the applicable regulations and guidelines so as to
enable them to make a balanced and informed decision.
A Merchant Banker shall endeavour to ensure that the investors are provided with true
and adequate information without making any misleading or exaggerated claims or any
misrepresentation and are made aware of the attendant risks before taking any investment
decision.
A Merchant Banker shall endeavour to ensure that copies of the prospectus, offer
document, letter of offer or any other related literature is made available to the investors
at the time of issue of the offer.
A Merchant Banker shall not discriminate amongst its clients, save and except on
ethical and commercial considerations.
A Merchant Banker shall not make any statement, either oral or written, which would
misrepresent the services that the Merchant Banker is capable of performing for any
client or has rendered to any client.
A Merchant Banker shall avoid conflict of interest and make adequate disclosure of its
interest.
A Merchant Banker shall put in place a mechanism to resolve any conflict of interest
situation that may arise in the conduct of its business or where any conflict of interest
arises, shall take reasonable steps to resolve the same in an equitable manner.
49

Merchant Banker shall make appropriate disclosure to the client of its possible source
or potential areas of conflict of duties and interest while acting as Merchant Banker
which would impair its ability to render fair, objective and unbiased services.
A Merchant Banker shall always endeavour to render the best possible advice to the
clients having regard to their needs.
A Merchant Banker shall not divulge to anybody either oral or in writing, directly or
indirectly, any confidential information about its clients which has come to its
knowledge, without taking prior permission of its client, except where such disclosures
are required to be made in compliance with any law for the time being in force.
A Merchant Banker shall ensure that any change in registration status/any penal action
taken by the Board or any material change in the Merchant Bankers financial status,
which may adversely affect the interests of clients/investors is promptly informed to the
clients and any business remaining outstanding is transferred to another registered
intermediary in accordance with any instructions of the affected clients.
A Merchant Banker shall not indulge in any unfair competition, such as weaning away
the clients on assurance of higher premium or advantageous offer price or which is likely
to harm the interests of other Merchant Bankers or investors or is likely to place such
other Merchant Bankers in a disadvantageous position while competing for or executing
any assignment.
A Merchant Banker shall maintain arms length relationship between its merchant
banking activity and any other activity.
A Merchant Banker shall have internal control procedures and financial and
operational capabilities which can be reasonably expected to protect its operations, its
clients, investors and other registered entities from financial loss arising from theft, fraud,
and other dishonest acts, professional misconduct or omissions.
A Merchant Banker shall not make untrue statement or suppress any material fact in
any documents, reports or information furnished to the Board.
A Merchant Bankers shall maintain an appropriate level of knowledge and competence
and abide by the provisions of the Act, regulations made there under, circulars and
guidance, which may be applicable and relevant to the activities carried on by it. The
merchant banker shall also comply with the award of the Ombudsman passed under
Securities and Exchange Board of India (Ombudsman) Regulations, 2003.
A Merchant Banker shall ensure that the Board is promptly informed about any action,
legal proceedings etc., initiated against it in respect of material breach or non-compliance
by it, of any law, rules, regulations, directions of the Board or of any other regulatory
body.
A Merchant Banker or any of its employers shall not render, directly or indirectly, any
investment advice about any security in any publicly accessible media, whether real-time
, unless a disclosure of his interest including a long or short position, in the said security
has been made, while rendering such advice. In the event of an employee of the Merchant
Banker rendering such advice, the merchant banker shall ensure that such employee shall
also disclose the interests, if any, of himself, his dependent family members including
their long or short position in the said security, while rendering such advice.
A Merchant Banker shall demarcate the responsibilities of the various intermediaries
appointed by it clearly so as to avoid any conflict or confusion in their job description.
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A Merchant Banker shall provide adequate freedom and powers to its compliance
officer for the effective discharge of the compliance officers duties.
A Merchant Banker shall develop its own internal code of conduct for governing its
internal operations and laying down its standards of appropriate conduct for its
employees and officers in carrying out their duties. Such a code may extend to the
maintenance of professional excellence and standards, integrity, confidentiality,
objectivity, avoidance or resolution of conflict of interests, disclosure of shareholdings
and interests etc.
A Merchant Banker shall ensure that good corporate policies and corporate governance
are in place.
A Merchant Banker shall ensure that any person it employs or appoints to conduct
business is fit and proper and otherwise qualified to act in the capacity so employed or
appointed A Merchant Banker shall ensure that it has adequate resources to supervise
diligently and does supervise diligently persons employed if appointed by it in the
conduct of its business, in respect of dealings in securities market.
A Merchant Banker shall be responsible for the acts or omissions of its employees and
agents in respect of the conduct of its business.
A Merchant Banker shall ensure that the senior management, particularly decision
makers have access to all relevant information about the business on a timely basis.
A Merchant Banker shall not be a party to or instrumental for creation of false market;
price rigging or manipulation; or passing of unpublished price sensitive information in
respect of securities which are listed and proposed to be listed in any stock exchange to
any person or intermediary in the securities market.
SEBI GUIDELINES
OPERATIONAL GUIDELINES
SEBI has pronounced the following guidelines for merchant bankers:
1. SUBMISSION OF OFFER DOCUMENT:
The offer documents of issue size up to Rs. 20 crores shall be filed by lead merchant
bankers with the concerned regional office of the Board under the jurisdiction of which
the registered office of the issuer company falls. The jurisdiction of regional offices/head
office shall be as per Schedule XXII. According to Clause 5.6 of Chapter V of the
Guidelines, the draft offer document filed with the Board shall be made public. The lead
merchant banker shall make available 10 copies of the draft offer document to the Board
and 25 copies to the stock exchange(s) where the issue is proposed to be listed. Copies of
the draft offer document shall be made available to the public by the lead merchant
bankers/Stock Exchange. The lead merchant banker and the Stock Ex change(s) may
charge a reasonable charge for providing a copy of the draft offer document. The lead
merchant banker shall also submit to the Board the daft offer document on a computer
floppy in the format specified in Schedule XXIII. The Lead Merchant Banker shall
51

submit two copies of the printed copy of the final offer document to dealing offices of the
Board within three days of filing offer document with Registrar of companies/concerned
Stock Exchange(s) as the case may be. The lead merchant banker shall submit one
printed copy of the final offer document to the Primary Market Department, SEBI, Head
Office, within three days of filing the offer document with Registrar of
Companies/concerned Stock Exchange(s) as the case may be. The lead merchant banker
shall submit a computer floppy containing the final prospectus/letter of offer to the
Primary Market Department, SEBI, Head Office, as specified in Schedule XXIII within
three days of filing the final prospects/letter of offer with the Registrar of
Companies/concerned Stock Exchange(s). Along with the floppy, the lead manager shall
submit an undertaking to SEBI certifying that the contents of the floppy are in HTML,
format, and are identical to the printed version of the proposes/letter of offer filed with
the registrar of Companies/concerned Stock Exchange, as the case may be. Wherever
offer documents (for public/rights issues, takeovers or for any other purpose) are filed
with any Department/Office of the Board, the following details certified as correct
shall be given by the lead merchant banker in the forwarding letters: a. Registration
number b. Date of registration/Renewal of registration c. Date of expiry of registration d.
If applied for renewal, date of application e. Any communication from the Board
prohibiting them from acting as a f. merchant banker g. Any inquiry/investigation being
conducted by the Board h. Period up to which registration/renewal fees has been paid i.
Whether any promoter/group and/or associate company of the issuer company is
associated with securities-related business and registered with SEBI j. If any one or more
of these persons/entities are registered with SEBI, their respective registration numbers k.
If registration has expired, reasons for non-renewal
l. Details of any enquiry/investigation conducted by SEBI at any time m. Penalty imposed
by SEBI n. Outstanding fees payable to SEBI by these entities, if any Offer documents
not accompanied by the information as contained above may be rejected. Lead merchant
bankers shall obtain similar information from other intermediaries to ensure that they
comply with these guidelines and are eligible to be associated with the concerned issue.
The intermediaries shall also indicate in their letters that they have obtained such
information from other intermediaries.
2. DISPATCH OF ISSUE MATERIAL :
Lead merchant bankers shall ensure that whenever there is a reservation for NRIs, 10
copies of the prospectus together with 1000 application forms are dispatched in advance
of the issue opening date, directly along with a letter addressed in person to Adviser
(NRI), Indian Investment Centre, Jeevan Vihar Building Sansad Marg, New Delhi.
Twenty copies of the prospectus and application forms shall be dispatched in advance of
the issue opening date to the various Investors Associations.
3. UNDERWRITING
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While selecting underwriters and finalizing underwriting arrangement, lead merchant
bankers shall ensure that the underwriters do not overexpose themselves so that it
becomes difficult to fulfill their underwriting commitments. The overall exposure of
underwriter(s) belonging to the same group or management in an issue shall be assessed
carefully by the lead merchant banker. OTC Dealers registered with the Board under
SEBI (Stock Brokers and Sub-Brokers) Rules and Regulations, 1992 shall be treated at
par with the brokers of other stock exchanges in respect of underwriting arrangement.
4. COMPLIANCE OBLIGATIONS
The merchant banker shall ensure compliance with the following post-issue obligations
a. Association of resource personnel : In terms of Clause 7.1 of Chapter VII of these

Guidelines, in case of over-subscription in public issues, a Board nominated public
representative shall be associated in the process of finalization of the basis of allotment.
The lead merchant banker shall intimated to the person so nominated the date, time,
venue etc. regarding the process of finalization of the basis of allotment. The expenses of
the public representatives associated in the allotment process of oversubscribed issues
shall be borne by the lead merchant bankers, and recovered from the issues. Honorarium
at a minimum of Rs.500/- per day, plus normal conveyance charges shall be paid to them,
and the Boards Regional Managers at New Delhi, Chennai and Calcutta shall be
associated with them. b. Redressal of investor grievances The merchant bankers shall
assign high priority to investor grievances, and take all preventive steps to minimize the
number of complaints. The lead merchant banker shall set up a proper grievance
monitoring and redressal system in co-ordination with the issuers and the Registrars to
Issue.. They shall take all necessary measures to resolve the grievances quickly. They
shall actively associate with post-issue refund and allotment activities and regularly
monitor investor grievances arising there from. c. Submission of post issue monitoring
reports The concerned lead merchant banker shall submit, in duplicate, the Post Issue
Monitoring Reports specified in Clause 7.2 of Chapter VII of these Guidelines, within 3
working days from the due dates, either by registered post or deliver them at the
respective regional offices/head office give in Schedule XXII. Where the offer documents
have been dealt with by any of the regional offices of the Board, a copy of the report shall
be sent to the Boards Head office, Mumbai.
The Lead Merchant Banker(s) shall inform the Board on important developments about
the particular issues being lead managed by them during the period intervening the
reports. d. Issue of No objection Certificate (NOC) In accordance with the Listing
Agreement of the Stock Exchanges, the issuer companies shall deposit 1% of the amount
of securities offered to the public and/or to the holders of the existing securities of the
company, as the case may be, with the regional Stock Exchange. These securities can be
related by the concerned Stock Exchange only after obtaining an NOC from the Board.
An application for NOC shall be submitted by the issue company to the Board in the
53

format specified in Schedule XXIV. The following conditions shall be complied with
before submitting the application for the issue of NOC.
Completion of 4 months from the date of obtaining the listing permission from the
concerned Regional Stock Exchange, or the last date when the listing permission was
obtained from any of the other Stock Exchanges, where the securities are proposed to be
listed, whichever is later
Satisfactory redressal of all complaints received by the Board against the company
Certificate from the Regional Stock Exchange to the issuer company to the effect that
underwriting/brokerage commission as well as the Registrars/Lead merchant bankers fees
been duly paid by the company Application for issue of NOC shall be filed with the
concerned regional office of the Board , under the jurisdiction in which the registered
office of the issuer company falls, as specified in Schedule XXII.. In cases where issues
fail, and the investors monies are fully refunded, an NOC from the Board may not be
required, and the concerned regional Stock Exchange can refund the 1% security deposit
after duly verifying that the refund orders have actually been dispatched. The complaints
with respect to non-receipt of underwriting/brokerage commission and Registrars/Lead
merchant bankers fees may be filed with the concerned regional Stock Exchanges.
Responses to complaints forwarded by the Board to the concerned companies shall be
submitted to the Board in the proforma specified in Schedule XXV for updation of
records. e. Registration of merchant bankers Application for renewal of Certificate of
Registration shall be made by the merchant bankers according to Regulation 9 of SEBI
(Merchant Bankers) Rules and Regulations, 1992. While filing the renewal application
for the certificate of registration as merchant banker, it shall provide a statement
highlighting the changes that have taken place in the information that was submitted to
the Board for the earlier registration, and a declaration stating that no other changes
besides those mentioned in the above statement have taken place. Merchant Bankers,
while forwarding the renewal application in Form A of the SEBI (Merchant Bankers)
Rules and Regulations, 1992, shall also forward the additional information as specified in
Schedule XXVI. Registered Merchant Bankers shall inform the Board of their having
become a member of AMBI, with the relevant details. f. Reporting requirements In terms
of Regulation 28 of SEBI (Merchant Bankers Regulation) 1992, the merchant bankers
shall send a half yearly report, in the format specified in Schedule XXVII, relating to
their merchant banking activities. The report referred to in sub-clause (a) shall be
submitted twice a year, on March 31 and September 30, and it should reach the Board
within three months from the close of the period to which it relates. g. Impositions of
penalty points Penalty points may be imposed on the merchant banker for violation of
any of the provisions for operational guidelines. The merchant banker, on whom penalty
points of four or more has been imposed, may be restrained from filing any offer
document or associating or managing any issues for a particular period. The Board may
initiate action under the SEBI (Merchant Bankers) Regulations against the merchant
bankers, irrespective of whether any penalty point is imposed or not. Imposition of
penalty point is not a precondition for initiation of proceedings against the merchant
banker under the SEBI (Merchant Bankers) Regulations. Guidelines on Advertisement
54

Following are the guidelines applicable le to the lead merchant banker who shall ensure
due compliance by the issuer company :
1. Factual and truthful : issue advertisement shall be truthful, fair and clear, and shall not
contain any statement that is untrue or misleading. Any advertisement reproducing, or
purporting to reproduce, any information contained in an offer document shall reproduce
such information in full and disclose all relevant facts. It should not be restricted to select
extracts relating to that item. An issue advertisement shall be considered to be
misleading, if it contains : a. Statements made about the performance or activities of the
company in the absence of necessary explanatory or qualifying statements, which may
give an exaggerated picture of the performance or activities. b. An inaccurate portrayal of
past performance, or its portrayal in a manner which implies that past gains or income,
will be repeated in the future.
2. Clear and concise advertisement shall be set forth in a clear, concise and
understandable language. Extensive use of technical, legal terminology or complex
language and the inclusion of excessive details, which may distract the investor, shall be
avoided.
3. Promise or profits in issue advertisement shall not contain statements which promise or
guarantee rapid increase in profits. An issue advertisement shall not contain any
information that is not contained in the offer document.
4. Mode of advertising: No models, celebrities, fictional characters, landmarks,
caricatures or the likes shall be displayed on or form part of the offer documents or issue
advertisements. Issue advertisements shall not appear in the form of crawlers (the
advertisements which run simultaneously with the program in a narrow strip at the
bottom of the television screen) on television. Similarly, no advertisement shall include
any issue slogans or brand names for the issue, except the normal commercial name of
the company or commercial brand names of its products already in use. No slogans,
expletives or non-factual and unsubstantiated titles shall appear in the issue
advertisements or offer documents.
5. Financial data: If any advertisement carries any financial data, it shall also contain
data for the past three years and shall include particulars relating to sales, gross profit, not
profit, share capital, reserves, earnings per share, dividends, and book values.
6. Risk factors: issue advertisements carried in the print media such as newspapers,
magazines, brochures or, pamphlets shall contain highlights relating to any issue, besides
containing detailed information on the risk factors. The print size of highlights and risk
factors in issue advertisements shall not be less than point 7 size. It shall contain the
names of Issuer Company, address of its registered office, names of the main lead
merchant bankers and Registrars to the Issue. No issue advertisement shall be released
without giving Risk Factors in respect of the concerned issue, provided that an issue
opening/closing advertisement which does not contain the highlights need not contain
risk factors.
55

7. Issue date: No corporate advertisement of issuer company shall be issued after 21 days
of filing of the offer document with the Board until the closure of the issue, unless the
risk factors which are required to be mentioned in the offer document, are mentioned in
the advertisement.
8. Product advertisement: No product advertisement of the company shall contain any
reference, directly or indirectly, to the performance of the company during the period.
9. Subscription: No advertisement shall be issued stating that the issue has been fully
subscribed or oversubscribed during the period the issue is open for subscription, except
to the effect that the issue is open or closed.
10. Issue closure: No announcement regarding closure of the issue shall be made except
on the closing date. If the issue is fully subscribed before the closing date stated in the
offer document, the announcement should be made only after the issue is fully subscribed
, and such announcement is made on the date on which the issued is to be closed.
Announcements regarding closure of the issue shall be made only after the lead merchant
banker is satisfied that at least 90% of the issue has been subscribed, and a certificate has
been obtained to that effect from the Registrar to the issue.
11. Incentives - No incentives, apart from the permissible underwriting commission and
brokerage, shall be offered through advertisements to anyone associated with marketing
the issue.
12. Reservation: In case there is a reservation for NRIs, the issue advertisement shall
specify the same, and also indicate the place in India from where the individual NRI
applicant can procure application forms.
13. Undertaking: An undertaking has to be obtained from the issuer as part of the MoU
between the lead merchant banker and the issue company to the effect that the issuer
company shall not directly or indirectly release, during any conference or at any other
time, any material or information which is not contained in the offer documents.
14. Availability of copies: To ensure that the issuer company obtains approval for all
issue advertisements and publicity materials from the lead merchant banker responsible
for marketing the issue and also ensure the availability of copies of all issue related
materials with the lead merchant banker, at least until the allotment is completed. by the
SEBI.
SUMMARY
Currently, Merchant banking in India is considered fairly matured in terms of supply,
product range and reach, even though the reach India still remains a challenge for the
private sector and foreign banks. With the growth of Indian economy expected to be
56

strong for quite some time especially in its service sector, the demand for Merchant
banking services esp. investment services are expected to be strong. Stock exchange is an
organized market place for the investors to buy and sell securities freely. The market
offers perfectly competitive conditions where a large number of sellers and buyers
participate. Further stock exchange provides an auction market in which members of the
exchange participate to ensure continuity of price and liquidity to investors. An active
and healthy secondary market in existing securities leads to a better psychology of
expectations, considerably broadening the investment enquiries and thereby, rendering
the task of raising resources by entrepreneurs easier.
57

Chapter 1: Introduction of Financial system & Merchant Banking
End Chapter quizzes
Q1. __________ are the economies Central nervous system.

a) Financial Instruments
b) Financial Markets
c) Financial Institutions
d) Financial Companies
Q2. The most important economic function of financial institutions is:

a) Financial intermediation.
b) Setting the interest rates for personal loans and commercial paper.
c) Redistributing income and wealth.
d) Creating money through loans from excess reserves.
e) Facilitating the financing of federal budget deficits.
Q3. Primary and Secondary markets

a) Compete with each other
b) Complement each other
c) Function independently
d) Control each other
Q4. The markets in which the general public is least likely to learn about activities are:
a) Primary markets.
b) Secondary markets.
c) Money market markets.
d) Residential real estate markets.
Q5. Money markets can broadly be characterized as:
a) Wholesale markets.
b) Direct markets.
c) Primary markets.
d) Secondary markets.
Q6. The best-known capital market securities are.

a) CDs and stocks.
58

b) Mutual funds and bonds.
c) Commodities and futures.
d) Stocks and bonds.
Q7. Financial markets and institutions

a) Involve the movement of huge quantities of money.
b) Affect the profits of businesses.
c) Affect the types of goods and services produced in an economy.
d) all of the above.
e) only (A) and (B) of the above.
Q8. Renewal Fees for Category 1 Merchant Bankers is:

Rs 100000 for first two years
Rs 100000 for first three years
Q9. For any issue of Rs 400 cr and above, the number of merchant bankers to be
appointed is:
2
3
5
4
Q10. The minimum net worth required for a category III Merchant Banker is:
Rs 10 lakhs
Rs 15 lakhs
Rs 50 lakhs
Rs 20 lakhs
CHAPTER-II
59

PRE-ISSUE MANAGEMENT & POST ISSUE
MANAGEMENT
Contents:
2.1
Introduction of Issue Management
2.1.1
Types of corporate Securities
2.1.2
ADR
2.1.3
GDR
2.1.4
Market Guidance For The Issue Of Securities (Securities and
Exchange Commission , Ghana
2.2
Eligibility to make a Public Issue
2.2.1 Pre Issue Work
2.3 Pre-issue Management
2.4 Contents of the Prospectus
2.5 Post Issue Management
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2.5.1 Functions of the Merchant Banker Post issue
2.6 Listing Of Securities
2.7 Summary
2.8
End chapter Quiz
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2.1 ISSUE MANAGEMENT
INTRODUCTION
Issue management, now days, is one of the very important fee based services provided by
the financial institutions. In recent past various companies have entered into issue
management activities. Still there are very few large scale and specialized issue
management agencies in the country. With the growth of stock market and opening up of
economy, the scope for issue management activity is widening day by day.
To protect the investors interest and for orderly growth and development of market,
SEBI has put in place guidelines as ground rules relating to new issue management
activities. These guidelines are in addition to the company law requirements in relation to
issues of capital / securities. Financial instruments can be classified into two main groups
share capital and debt capital.
There are various other classifications in each of the two categories. Also, there are
various types of companys i.e. listed, unlisted, public, private etc. For each of them SEBI
has issued comprehensive guidelines, related to issue of financial instruments
2.2 TYPES OF CORPORATE SECURITIES

I BONDS
This market trades in the debt instruments issued by governments, government agencies,
such as municipalities, and corporations. The bond market usually attracts more interest
from professional and institutional investors than from the general public. Institutional
investors include pension funds, insurance companies, bank trust departments and
collective investment schemes.
A bond is a long-term loan issued in the form of a negotiable security by a corporation,
government, or government agency. Bonds are loans from the bondholder (buyer) to the
issuer (seller). A bond is a promise by the issuer to pay back the amount loaned to it
(called principal) plus an agreed to amount of interest on or before a stated date. The
interest may be paid periodically during the life of the loan or all at once when the loan is
paid back. Bonds are also called fixed income instruments, because the amount of income
that the bond will generate is fixed by the stated interest rate of the bond. The date when
the loan becomes due is called the maturity date of the bond. The loan is represented by
a physical piece of paper and if it pays interest periodically during the life of the loan, the
certificate may also consist of coupons. Coupons are detachable from the bond certificate
62

itself, usually by a perforation, and are presented to the paying agent of the issuer, usually
a commercial bank, for payment. For this reason they are called coupon bonds. While
coupon bonds are no longer widely used, the amount of interest that a bond pays is still
known as the coupon rate and the bond is still known as a coupon bond.
BEARER AND REGISTERED BONDS

Bonds are also identified by the way they are owned. Bearer bonds, for example, belong
to the person who holds them and ownership is not otherwise recorded. Eurobonds are
issued in this format.
The other common type of format is a fully registered bond, either in certificate form or
in book entry. The owners name is recorded with a transfer agent and interest payments
are made either by check or electronic credit. The book entry method, where no
certificate is issued and ownership is merely recorded in a ledger, is growing in
popularity because it reduces transfer costs, simplifies handling, and decreases the
probability of loosing the certificate or having it stolen.
The reason a bond is called a debt instrument is because there are no ownership rights in
a bond. The promise to pay is what distinguishes bonds from stocks. The holder of a bond
is a creditor, the holder or a stock is an owner. Although the holders of corporate bonds
lack voting rights and have no participation in net profits, they may demand full payment
of their bonds even if it means forcing the company into bankruptcy. Owners of stock
have no such claim. In the case of liquidation or bankruptcy of the issuer, the bondholders
are paid before shareholders. Bondholders are said to have a superior claim on the assets
of the issuer. They are superior creditors in the eyes of the law.
TREASURY AND GOVERNMENT BONDS

A countrys long term financing needs are met by issuing bonds that mature from
anywhere after one year up to essentially as long as a country wants and to which the
public is willing to commit its money. Average lengths run to 20 or 30 years and are
called long-term bonds. These long-term bonds are watched closely by the market as an
indication of where long-term interest rates will be heading.
Long -term bonds may be subject to being called before they mature. Callable means that
the issuer has the right to pay off the bond sooner than the maturity date. If a bond is
subject to being called before it matures, both dates are mentioned in its listing.
TREASURY/GOVERNMENT NOTES
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Notes usually have a maturity of from 2 to 10 years and are known as intermediate term
investment instruments. Notes are not callable before their maturity date. Notes usually
pay interest semiannually.
TREASURY/GOVERNMENT BILLS
T-bills, or bills, are the shortest term Treasury security and usually mature in 3, 6, 9 or 12
months. T-bills carry no coupon rate of interest but are sold at a discount from par. Par is
the face amount of the bond. This means that the price paid for a T-bill is less than its
value at maturity. Thus a 12 month T-bill yielding 5% would be sold at a 5% discount
from the face value of the bond.
PARTICIPATING BONDS
These bonds not only bear a fixed rate of interest, but also have a profit-sharing feature.
CONVERTIBLE BONDS
Usually all that the bondholder is promised is the principal and interest. There is an
exception to this rule and it is called a convertible bond. This is a bond that at its
maturity, or some other stated date, may be converted to a stated number of common
shares in a corporation. A new corporation without much money or track record for
paying off bonds or a corporation with a low credit rating might offer convertible bonds
because the borrowing costs of straight bonds would be prohibitive.
ZERO COUPON BONDS

Zeros, as they are frequently referred to, are issued at a discount from their par value.
Unlike a conventional bond, zeros pay no interest between issuance and redemption but
only at maturity. Although the bondholder forfeits immediate income from the zero, the
yield to maturity is computed on the assumption that the coupon interest is reinvested at
the prevailing rate when received. Consequently, as interest rates fall the reinvestment is
presumed to be at the lower rate, reducing the yield but increasing the price of the bond.
Likewise, if interest rates rise, the bonds price will fall, but the coupons are reinvested at
the higher rate, raising the yield to maturity. With no cash flow from coupon payments to
act as a cushion, zero prices swing rapidly up and down in response to even minor
changes in the interest rate. In times of high interest rates, zeros are very popular in order
to lock in those high rates.
64
HIGH YIELD (JUNK) BONDS

The top four rankings of any rating service are usually known as investment grades.
Bonds in these categories may generally be bought for fiduciary accounts unless
specifically restricted. Fiduciary accounts include pension plans and some bank trust
accounts. Any bond below investment grade is referred to as a junk bond. but, in the
terms of the market, it is called a high-yield bond. It is called junk, because it describes
the quality of the bond. Brokers and dealers prefer the term high yield because it sounds
better and also because it describes the yield. The yield is how much a bond pays, or the
interest rate. The bond must pay a high level of interest because of its low rating. The risk
of the issuer not being able to pay off the bonds is high, so the potential return to the
investor must also be high in order to justify taking the risk.
WARRANT BONDS OR BONDS WITH WARRANTS

These bonds contain the right (warrants) to purchase shares of common stock at a
specified price. Usually the warrant price is higher than the current market price.
INDEXED BONDS
These bonds are used in periods of high inflation. The interest payments are indexed to
the inflation rate.
SINKING BOND FUNDS
This is not technically a separate category of bonds. Any bond issue may have a
sinking feature. With this feature, the issuer agrees to set aside a certain amount of
money each and every year for the eventual retirement of the bond issue. A bond issue is
retired when it is fully paid. After a specified period, redemptions may begin and bonds
may be called. This results in the shortening of the life of the issue so that even if an issue
was originally offered with a 20-year maturity, the bonds might be called after 10 or 15
years. Because the sinking fund deposits are to be used only for the retirement of a
specific outstanding issue, the existence of a sinker increases the bonds safety and
marketability. Payments by the issuer to a sinking fund are mandatory and the failure to
make them in a timely manner could threaten the issuer with default.
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COMMERCIAL PAPER
Commercial paper is short- term debt issued by a corporation. Commercial paper has a
maturity date of less than one year, sometimes just a few months. It is an unsecured
promissory note and may be issued at a discount to the par value. Interest on commercial
paper is usually paid only at the maturity date.
MORTGAGE BACKED SECURITIES

Mortgages are a conveyance of title to property that is given as security for the payment
of a debt. When a person obtains a mortgage on a house he or she actually signs two
instruments. The first is the note that is a simple promise to pay, like any other note. The
mortgage document is the document that transfers title of the house to the name of the
institution or person lending the money as security for the note. The house is put up as
security in order that the lender will have an asset behind the note in case the debtor
defaults on the payments. If the debtor does default, the lender has the right to sell the
house in order to cover the debt.
Mortgages are combined with other mortgages to create what is called mortgage backed
securities. These securities are backed by the mortgages attached. The payments are
passed through from the debtor to the investor. These mortgages can then be sold in the
open market and do not have to be held until the entire debt is paid off. The process of
converting assets into a negotiable security for resale in the financial markets is known as
securitizing the asset. Mortgage backed securities may be sold with the principal and
interest, principal only, or interest only being passed through to the buyer.
II EQUITIES
The principal focus of securities regulation is on the equities market because it attracts
much more interest from the general public which are usually less sophisticated than
professional or institutional investors. This market trades shares of common stocks issued
by corporations.
Common Stock
All corporations issue a stock that has the last claim on the corporations assets. The most
frequently used term for this kind of stock is common stock, although in the United
Kingdom they are called ordinary shares. It is the first security to be issued and the last to
be retired. Common stock represents the chief ownership of a corporation and usually is
the only issue that has a vote in managing the corporation. Should a company go
bankrupt, holders of senior securities like bonds and preferred stock will be paid first.
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Common stock owners, therefore, may receive nothing for their shares in the event the
corporation becomes bankrupt or is forced into liquidation.
Common stock is also usually the only stock that can vote for the members of the board
of directors of a corporation, although there are exceptions, such as some issues of
preferred stock.
Preferred Stock
The term preferred stock is almost a misnomer. This type of stock usually does not have
any voting rights and is often retired after a certain period of time, usually about 10 years.
The preference comes in that these shares are entitled to dividend payments or claims
on assets in the case of bankruptcy before any payment to the common stock holders, but
still only after all bondholders have been paid. Dividends are usually, but not always,
cumulative.
Dividends are a distribution to stockholders declared by a corporations board of
directors based upon profits. Dividends may be declared either in cash or additional
stock. Cumulative means that if a dividend payment is missed because there are no
profits to pay the dividend, the preferred stock holders must be paid all missed dividends
before the common stock holders can be paid anything.
Dividends
Dividends, earnings from stocks, are declared by the board of directors and usually paid
in either cash or additional shares. A corporations dividend policy depends upon such
factors as cash position, growth prospects, stability of earning, capital spending needs and
reputation. Many investors buy stocks because of the companys dividend history and
rely on the cash distributions for income. Generally, the larger and older companies pay
dividends in cash and the smaller and newer companies pay dividends, if they pay them
at all, in additional shares. Since cash dividends are paid out of current earnings of the
company, the smaller and newer companies that find it necessary to retain the cash for
future growth cannot afford to pay cash dividends. Dividends may also be paid in the
form of other property, such as shares in another company such as a subsidiary.
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2.3 DEPOSITORY RECEIPTS
What are depositary receipts?
A depositary receipt (DR) is a type of negotiable (transferable) financial security that is
traded on a local stock exchange but represents a security, usually in the form of equity
that is issued by a foreign publicly listed company. The DR, which is a physical
certificate, allows investors to hold shares in equity of other countries.
How does DR work?

The DR is created when a foreign company wishes to list its already publicly traded
shares or debt securities on a foreign stock exchange. Before it can be listed to a
particular stock exchange, the company in question will first have to meet certain
requirements put forth by the exchange. Initial public offerings, however, can also issue a
DR. DRs can be traded publicly or over-the-counter. Let us look at an example of how an
ADR is created and traded.
Origin of Depository Receipts

The origin of depository receipt is USA. It started in 1920s. In this period, it was
difficult and risky to invest on the originals of foreign securities by American investors
and brokers. The risks in this condition have been causing delays and some kind of extra
expenses. In order to avoid the practical problems, they should have looked for solutions.
In the solution produced, it was aimed at constituting a system that will be able to
eliminate those handicaps. In those times, financial and economical system was national.
For the system started to function badly, the investors and brokers were not able to transit
to international market in the investment and financial activities they have been carried
out. They were as if trapped inside a no end box and it was impossible for them to open
global market. Something was clearer than anything else. The key was as if climbing up a
hill in the desert under the sun in 70 C in vein, and it was time consuming. The distance
between American and European stock exchange markets was high, for this reason, what
is to be was to reach the international arena in world of stock exchange market. For the
reason of investors demand of diversifying their financial resources internationally,
American Depository Receipts revealed.
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TYPES OF DR
There are a variety of DR program types. These can be divided into capital raising and
non capital raising structures. The type of program used will depend on the requirements
of the issuer, the features of the issuer's domestic market and on investor attitudes.
A third type of DR program is known as "unsponsored". This differs from other types in
that the company whose shares are represented by unsponsored DRs is not involved in
setting up the program.
*Source: ADR Reference Guide JP Morgan, February 2005
NON CAPITAL RAISING DRS
SPONSORED ADR PROGRAM - LEVEL 1

A Level I sponsored ADR program is the easiest and least expensive means for a
company to provide for issuance of its shares in ADR form in the US. A Level I program
is initiated by the issuer and involves the filing of an F-6 registration statement, but
allows for exemption under Rule12g 3-2(b) from full SEC reporting requirements. The
issuer has a certain amount of control over the ADRs issued under a sponsored Level I
program, since a depositary agreement is executed between the issuer and one selected
depositary bank. Level I ADRs can however only be traded over-the-counter and cannot
be listed on a national exchange in the US.
Advantages of a Level I ADR program:
It avoids full compliance with the SEC's reporting requirements. By working with a
single depositary bank, the issuer has greater control over its ADR program than would
be the case with an unsponsored program.
The depositary acts as a channel of communication between the issuer and its US
shareholder base. Dividend payments, financial statements and details of corporate
actions will be passed on to US investors via the depositary.
The depositary bank maintains accurate shareholder records for the issuer and can, if
requested, monitor large stock transactions and report them to the issuer.
Set-up costs are minimal and all transaction costs are absorbed by the ADR holder.
It is easy and relatively inexpensive to upgrade the program to Level II or III as the
issuer and depositary bank do not have to negotiate cancellation of unsponsored ADRs
with several depositaries, as would be the case if upgrading an unsponsored program.
Disadvantages of a Level I ADR program
69

It cannot be listed on any of the national exchanges in the US. As a result, investor
interest might be somewhat restricted which may limit the issuer's ability to enhance its
name recognition in the US.
Capital raising is not permitted under a Level I program.
SPONSORED ADR PROGRAM - LEVEL II
A sponsored Level II ADR must comply with the SEC's full registration and reporting
requirements. In addition to filing an F-6 registration statement, the issuer is also required
to file SEC Form 20-F and to comply with the SEC's other disclosure rules, including
submission of its annual report which must be prepared in accordance with US Generally
Accepted Accounting Principles (GAAP). Registration allows the issuer to list its ADRs
on one of the three major national stock exchanges, namely the New York Stock
Exchange (NYSE), the American Stock Exchange (AMEX), or the National Association
of Securities Dealers Automated Quotation (NASDAQ) Stock Market, each of which has
reporting and disclosure requirements. Level II sponsored programs are initiated by nonUS companies to give US investors access to their stocks in the US. As with a Level I
program, a depositary agreement is signed between the issuer and a depositary bank. The
agreement defines the responsibilities of the depositary, which usually include responding
to investor enquiries, mailing annual reports and other important material to shareholders
and maintaining shareholder records.
Advantages of a Level II ADR program:

It is more attractive to US investors than a Level I program because the ADRs may be
listed on one of the major US exchanges. This raises the profile of the ADR program to
investors, thus increasing the liquidity and marketability of the securities.
Listing and registration also enhance the issuer's name recognition in the US.
US disclosure regulations for large investors enable the issuer to monitor the ownership
of its shares in the US.
Disadvantages of a Level II ADR program

More detailed SEC disclosure is required than for a Level I program. For example, the
issuer's financial statements must conform to US Generally Accepted Accounting
Principles (GAAP), or else a detailed summary of the differences in financial reporting
between the home country and the US must be submitted.
SEC regulations do not permit a public offering of ADRs under a Level II program.
It is more expensive and time-consuming to set up and maintain a Level II program
than a Level I program because of the more stringent reporting requirements and higher
legal, accounting and listing costs.
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CAPITAL RAISING DRs
SPONSORED ADR PROGRAM - LEVEL III
Level III sponsored ADRs are similar to Level II ADRs in that the issuer initiates the
program, deals with one depositary bank, lists on one of the major US exchanges, and
files Form F-6 and 20-F registration statements with the SEC. The major difference is
that a Level III program allows the issuer to raise capital through a public offering of
ADRs in the US and this requires the issuer to submit a Form F-1
Advantages of a Level III ADR program
It permits public offerings of ADRs in the US which can be used for a variety of
purposes, for example the raising of capital to finance acquisitions or the establishment of
an Employee Stock Ownership Plan (ESOP) for the issuer's US subsidiary.
Disadvantages of a Level III ADR program
SEC reporting is more onerous than for Level I or II programs.
The costs of setting up and maintaining a Level III program can be high. Set-upcosts,
which would include listing, legal, accounting, investor relations and "road show" costs,
might amount to approximately US$ 300,000 to US$ 500,000.
ADVANTAGES OF DRs
Depository stocks are within processing mechanisms for foreign securities. Depository
receipt agreements serve various advantages to investors like transfer and exchanging
dividends paid over foreign money currencies to their currency.
Also, depository receipts are used in privatization, mergers, foreign governments
Dept, imports and employment financing
Mostly, foreign securities are written for the bearer. For this reason, the lists of securities
can not be pursued. Depository receipts try to minimize the problems of promissory notes
written for the bearer. It makes having information about the foreign company easier.
Foreign companies having relationships with investors are restricted with law. Depositor
or its division can learn the information and declarations send by the foreign importer.
Even though the securities are written for the bearer, depository Bank has the best
conditions to get this information.
BUYING AND SELLING DRS
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If an investor wishes to purchase shares in a foreign company, he can either buy the
foreign shares in the local market through a broker in that country or, providing the
foreign company in question has a DR program, the investor can request his broker to
buy DRs. The broker may either purchase existing DRs or, if none are available, he may
arrange for a depositary bank (e.g. Deutsche Bank) to issue new ones.
The process for issuing new DRs is very simple. The investor's broker contacts a broker
in the issuing company's home market and acquires shares in that company. These shares
are then deposited with the depositary bank's local custodian. Upon confirmation that the
custodian has received the shares, the depositary issues the requisite number of DRs to
the investor via the broker. In some exceptional cases there may be restrictions on the
issuance of new DRs under existing programs (e.g. Indian GDR programs) because of
local regulations. DRs can be sold in DR form, in which case they trade and settle like
other US or Euro securities.
They can also, however, be cancelled. In this case the broker acting on behalf of the
owner of the DRs will request the depositary bank to cancel the DRs and release the
underlying shares to a domestic broker in the issuing company's home market. The
domestic broker will then sell the shares locally and the proceeds will be remitted to the
investor who cancelled those DRs.
DRs certify that a stated number of underlying shares have been deposited with the
depositary's custodian in the foreign country.
DR holders are entitled to all the dividends payable on the underlying foreign shares
and, furthermore, to have these paid in the currency in which the DRs are denominated
usually US dollars.
The DRs may be bought or sold through investors' own brokers, and they clear and
settle through the Depository Trust Company (DTC) for ADRs, through Euro clear and
Clear stream for EDRs and through all three (and possibly other clearing systems) in the
case of GDRs, depending on which markets they access.
Shareholder information such as annual reports, notices of general meetings and
corporate actions, and official news releases are provided by the issuer to the depositary
and to the receipt holders, either direct or through the local custodian.
The investor is thus spared the costs and difficulties often encountered when direct
investment is made in local markets, where currency, settlement, and linguistic problems
may be compounded by an excessive number of intermediaries.
WHY DO INVESTORS BUY DRs?

US investors have become increasingly interested in overseas markets as a result of
their higher yields compared to the US equity market over recent years.
International investors are also eager to diversify their portfolios, both geographically
and by industry sector, in order to increase their returns while spreading their risk.
They have long been active in the debt markets, as evidenced by the vast size of the
Euromarkets, and sophisticated international clearing systems have been developed to
handle Euro instruments.
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Until recently, however, cross-border equity investments have involved all the currency,
settlement and linguistic problems which occur when dealing with overseas equity
markets.
Building on the concept of the ADR, investment banks developed the EDR/GDR to solve
these problems for international investors.
Liquidity and investor demand
Liquidity is enhanced when there are a significant number of depositary receipts eligible
for trading in the United States. In a US public offering, retail and institutional investors
are more likely to buy depositary receipts that are perceived to be liquid and fairly priced.
A useful structuring tool
While DRs are generally used to make equity more widely available or to raise capital
outside the issuer's domestic market, they can also be used as part of many other
financing structures. The concept of a receipt trading in one market, which represents an
instrument held in custody in a different market, can be adapted to a wide variety of
transactions.
*Source ADR AND GDR OVERCOMING OBSTACLES OF INTERNATIONA
LINVESTING
AMERICAN DEPOSITORY RECEIPTS

Background
ADRs were primarily created to increase investment access to widely known and often
multinational companies. They are typically formed by a depository bank depositing
ordinary shares of a foreign company into a trust and issuing receipts of interest in the
underlying shares on a domestic exchange. The bank will act as a custodian for the trust
handling dividend distribution, currency exchange, proxies, tax reporting, and regulatory
filings. It receives a management fee for these services, either from the shareholders or
the issuing company.
Trading of ADRs occurs by brokers purchasing/selling outstanding ADRs in the domestic
market, or on the foreign markets if no shares are available domestically. In the case of
purchases in the foreign market, the broker then deposits the foreign shares with the bank
in exchange for newly created ADRs. In the case of sales
in the local market, the broker will cancel the ADR causing the depository bank to sell
the shares in the foreign market and deliver the proceeds in the investors currency. Units
in the trust are listed on large exchanges primarily in countries with developed capital
markets, as if they were shares of a company domiciled in the same country
as the exchange. The listing company of the ADR must adhere to the same regulatory
requirements and disclosures as the other listed issuers on the exchange. In effect, shares
of a foreign company can be purchased on a U.S. stock exchange in the same manner as
stock of a U.S. company.
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So why have the middlemen (trust)? Many investors do not have efficient means of
diversifying into foreign companies because of the administrative and implementation
issues. Often, trading in foreign markets is more expensive relative to U.S. exchange
transaction costs, as well as difficult to execute due to time zone differences. Also,
foreign exchanges do not usually have the same regulatory requirements that investors
are familiar with here in the U.S., and custody of the assets is costly. Currency exchanges
will also have to be utilized in order to purchase ordinary shares of foreign companies.
ADRs trade easily and pay dividends in U.S. dollars and settle through U.S.
clearinghouses. These implementation barriers coupled with the desire of investors to
diversify internationally created a market for underwriters of ADR trusts. There
are also Global Depository Receipts (GDRs), International Depository Receipts (IDRs),
and European Depository Receipts (EDRs), which accomplish the same benefits already
stated but trade in one or more international markets.
By early 1998, 429 out of 3,104 companies listed in the NYSE, 437 of 6008 listed in
NASDAQ, and 61 out of 690 in the AMEX were foreign companies from over 50
different countries. In addition, 412 out of about 6,200 equity securities traded in the
OTC Bulletin Board were from foreign issuers. Clearly, foreign firms must find listing in
the US (or more generally, outside their home market) advantageous. Then, why do
foreign firms list their shares in the US? From the firm's perspective, why is it that listing
in the US is desirable, and the cost-benefit tradeoff a positive one? Listing in the US can
take many forms. Foreign firms can list their stock directly or through an American
Depositary Receipt (ADR) program. This listing can take place in an organized exchange
(e.g. NYSE, AMEX), NASDAQ, an OTC market, or as a private placement. The listing
can also be accompanied by an IPO, or a seasoned equity offering.
ADRs are issued by a U.S. bank that functions as a depositary, having ADR being backed
by a specific number of shares in the non-U.S. company. ADRs can be traded on any of
the US stock exchange (NYSE, NASDAQ, or AMEX) and over-the-counter. In the case
of Rule 144A, they are privately placed and traded. The same concept for ADR has been
spread into other regions with the creation of the global depositary receipts (GDRs),
international depositary receipts (IDRs), and European depositary receipts (EDRs), which
are generally traded or listed in one or more international markets. As of February 2005,
this instrument is used by around 2,100 non-US issuers from approximately 80 countries.
About 500 of those ADRs are listed in the US exchanges.
ADR PROGRAM TYPES
SPONSORED AND UNSPONSORED ADR PROGRAMS

Issuers seeking the benefits of ADRs generally pursue what are called sponsored ADR
programs. They initiate the process and, working with a depositary bank, actively manage
the program going forward. The issuer benefits by making a strategic foray into the U.S.
market, controlling
its image and reputation in the capital markets. In general, only sponsored ADRs can be
listed on the major stock exchanges or quoted under the NASDAQ system. While most
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new ADR programs are sponsored, many unsponsored programs (in which the ADRs are
created and offered to investors without a company's active participation) still exist.
ADAVANTAGES OF USING ADRs

The main advantage of buying an American Depositary Receipt rather than the foreign
stock itself is the ease of the transaction.
ADRs are a great way to invest abroad without having to convert U.S. dollars to many
different currencies
Another advantage offered by an ADR is that if the foreign stock does pay dividends,
the investment bank will convert the dividends to U.S. dollars and remit the payment to
you. In addition, if the dividend is subject to foreign tax, the investment bank will
withhold the tax so you don't have to worry about it
Therefore, if exchange rates were to move against you, it would hurt the value of your
ADR. If you are considering investing in foreign stocks, ADRs should be part of your
investment decision; however, you should become familiar with all the risks associated
with foreign investing before making an investment decision.
Advantages to Issuers
o Provides a simple means of diversifying a companys shareholder base and accessing
important U.S. market
o May increase the liquidity of the underlying shares of the issuer
o ADRs can be used as an equity financing tool in both M&A transactions and ESOPs for
U.S. subsidiaries
o Helps increase a non-U.S. companys visibility and name recognition in the U.S.
investor community
o May raise capital in the U.S. market through some types of programs
Advantages to Investors
o Offers a convenient means of holding foreign shares
o Simplifies the trading & settlement of foreign securities; ADRs trade and settle just like
U.S. securities
o Offers lower trading & custody costs when compared with shares bought directly in the
foreign market
DISADVANTAGES OF USING ADRs
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Despite all the described advantages, the ADRs do represent the same asset as local
shares but may not be fully fungible in several countries (meaning they cannot be
seamless exchanged with its home market security). For example, until 2001 there was no
two-way fungibility for Indian ADRs; in that environment, investors could convert ADRs
into local shares but they could not reconvert them back to ADRs. This and other capital
control regulations prevent risk less arbitrage opportunities to exist between ADRs and
the underlying stock and are one of the reasons that premiums/discounts exist in the ADR
market.
PROCEDURES AND MECHANICS OF ISSUING ADRS
ADRs are issued by a US bank, such as J. P. Morgan or The Bank of New York, which
functions as a depositary, or stock transfer and issuing agent for the ADR program.
The foreign, or local shares, remain on deposit with the Depositarys custodian issuers
home market.
Each ADR is backed by a specific number of an issuers local shares (e.g. one ADR
representing one share, one ADR representing ten shares, etc.) This is the ADR ratio,
which is designed to set the price of each ADR in US dollars.
Financial information, including annual reports and proxies are delivered to US holders
on a consistent basis by the Depositary. The dividends are converted into dollars and paid
to ADR holders by the Depositary.
KEY COMPONENTS OF A SUCCESSFUL ADR PROGRAM

Successful ADR programs are actively traded and widely held. They typically share the
following attributes:
Attractive market, industry and equity story
Active communication of the story to US investors
Investor friendly ADR structure (ratio of shares to ADRs)
Research and market-making by US investment banks and brokers
US LISTINGS ADRs
THE OVER-THE-COUNTER MARKET
Over-The-Counter (OTC) market trades are listed in the "Pink Sheets". The Pink Sheets
are published daily by the National Quotation Bureau and represent a non-automated
listing of stocks, which trade outside the three major exchanges. Listing fees are paid by
the broker dealer who seeks the listing.
The broker-dealer must file a National Quotation Form 211, which includes updated
financials of the company and other relevant information. Listing on the "Pink Sheets" is
available for sponsored Level I and unsponsored ADR programs, while a listing on
NASDAQ, AMEX or the NYSE is only available to Level II and III sponsored programs.
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THE NATIONAL EXCHANGES

Issuers of Level II or III sponsored ADRs will benefit in several ways from a listing on
any one of the three national exchanges. The increased visibility to the US investment
community, which a listing provides, together with access to the automated trading and
efficient market pricing available on the national exchanges, should lead to a significant
expansion of the issuer's investor base. Importantly, listing fees for ADRs are generally
less expensive than those for ordinary shares in the US. A description of the three
exchanges follows
NASDAQ (NATIONAL ASSOCIATION OF SECURITIES DEALERS AUTOMATED

QUOTATION)
NASDAQ, the first electronic stock market, operates a system of competing market
makers linked to investors by sophisticated telecommunications networks. There are two
options for listing; the Small Cap Market which, as its name implies caters for smaller
companies, and the National Market System, where the majority of NASDAQ securities
are listed.
While criteria for listing on these two markets differ, the ADR listing charges are very
similar. The NASD also operates PORTAL, the market for securities issued under Rule
144(a).
AMEX (AMERICAN STOCK EXCHANGE)

AMEX operates an auction market system, intended to facilitate trading between buyers
and sellers with minimum intervention from professional dealers. Each listed stock is
handled by a specialist unit. There are special listings requirements for non-US issuers,
with "Alternate" requirements intended to cover companies which are financially sound
but which, because of the nature of their business, would not qualify under the "Regular"
requirements.
NYSE (NEW YORK STOCK EXCHANGE)

The NYSE, like AMEX, operates an auction market system where stock prices are
determined largely by public orders competing with each other. By value of shares listed
and by volume of trading, the NYSE is the largest exchange in the United States.
Foreign companies listing on the NYSE can choose to qualify either under the "Alternate
Listing Standards" designed specifically for non-US corporations, or under the "Original"
or "Alternate Original" standards which apply to US domestic corporations. Each of the
exchanges sets additional standards concerning corporate governance. However, non-US
corporations may be exempted from these requirements upon application. Confidential
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meetings can be arranged with the exchanges in advance of any decision-making to
discuss specific concerns or exemptions.
FOLLOWING ARE A FEW INDIAN ADRs TRADING IN US

HDFC BANK LTD
ICICI BANK LTD
INFOSYS TECHNOLOGIES LTD
VIDESH SANCHAR NIGAM LTD
WIPRO LTD
REDIFF.COM INDIA LTD
HOW ARE ADRs PRICED?

Let us assume that Russian Vodka Ltd, trades on a Russian stock exchange at 127
Russian roubles
This is equivalent to US$4.58 assume this for simplicity
Now, a US bank purchases 30 million shares of Russian Vodka Ltd. and re-issues them
in the US at a ratio of 10:1
This means that each ADR you purchase is worth 10 shares on the Russian stock
exchange
A quick calculation tells us that each ADR should have an issue price of US$45.80
(US$4.58 per share X 10 shares) since 10 shares equal 1 ADR
Once an ADR is priced and sold, its subsequent price is determined by supply and
demand factors, like any ordinary share
PROCEDURE FOR ISSUE OF ADRs/GDRs

1. Approvals
The issue of ADRs/GDRs requires the approvals of Board of Directors, Shareholders,
Ministry of Finance, Ministry of Company Affairs, Reserve Bank of India, Stock
Exchange and Financial Institutions. 2. Appointment of Intermediaries
ADR/GDR normally involve a number of Intermediaries including lead Manager, CoManager, Overseas Depository Banks, Listing Agent, Legal Advisor, Printer, Auditors
and Underwrites.
3. Principal Documentation
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The principal documents required to be prepared
includesubscriptionagreement,Depository
Agreement, Custodian Agreement, Agency Agreement and Trust Deed.
4. Pre and Post Launch - Additional Key Actions

Apart from obtaining necessary approvals,
Documentation, additional key actions necessary for making the issue of ADR/GDR a
success, include :
(i) Co appointment of various agencies and proper
institution of a Board Sub-Committee
(ii) Selection of Syndicate Members
(iii) Constitution of a task force for due diligence
(iv) Listing
(v) Offering Circular
(vi) Research Papers
(vii) Pre-marketing
(viii) Timing, pricing and size of the issue
(ix) Road shows
(x) Book Building and pricing of the issue
(xi) Closing of the issue
(xii) Allotment
US SECURITIES AND ECXHANGE COMPLIANCE

The following table outlines the different filings required by the SEC in the US, the way
ADRs are traded and whether new capital can be raised, according to the type of ADR
program issued
GDR Filings for any US tranche will depend on which structure is chosen:
Normally a Level III or Rule 144(a) program.
The right granted to existing shareholders of a company to receive or to subscribe to new
shares under a "rights" or "bonus" issue is also extended to registered ADR holders.
However, a US investor can only take possession of these rights in the US if the issuer
undertakes to register the offering, or if an exemption from registering it is available. In
all other cases, the depositary must arrange to sell the entitlement to the rights in the
home country and distribute the cash proceeds
to the ADR holders.
Form F-6
Form F-6 is used for the registration of depositary shares as evidenced by ADRs (or
GDRs) that are issued by a depositary bank against the deposit of securities of a foreign
issuer under the Securities Act of 1933. The information is prepared by the company
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under the guidance of the depositary bank at the inception of either an unsponsored or
sponsored program.
Form 20-F
A Form 20-F is filed as a registration statement/annual report by issuers of Level II or III
sponsored ADRs/GDRs. It is a comprehensive report of all material business activities
and financial results and must comply with US GAAP. The Form 20-F consists of four
distinct parts.
Part I requires a full description of the issuer's business, details of its property, any
outstanding legal proceedings, taxation and any exchange controls that might affect
security holders.
Part II requires a description of any securities to be registered, the name of the depositary
bank for the DRs and all fees to be charged to the holders of DRs.
Part III requires information on any defaults upon senior securities.
Part IV requires various financial statements to be submitted.
Form F-1
Foreign issuers planning a public offering in the US via a Level III DR program must
register the proposed new securities by filing Form F-1. This form requires the following
information to be included in the prospectus: use of proceeds, summary information, risk
factors and ratio of earnings to fixed charges, determination of offering price, dilution,
plan of distribution, description of securities to be registered, name of legal counsel and
disclosure of commissions.
GAAP Conversion (Level II and Level III ADR Programs)

The process of converting financial statements to the US standard of Generally Accepted
Accounting Principles (GAAP) can be complex but depends on the compatibility of
accounting procedures in the issuer's home country with those of the US. Regulated
industries such as banking may find the costs of conversion more onerous than those
companies in less regulated sectors.
Indian ADRs Will Shine in 2009

(Created by EQUITIES Magazine)
Indias cheaper than its been in decades and offering 5% growth. By Anthony W.
Haddad
Like many emerging markets, the past year was a difficult one for India. After five years
of 9% GDP growth and a booming stock market, a global recession, a group of terrorists,
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and an Enron-type scandal at Satyam helped shed 60% from shares in the countrys
companies and 20% of the value of the rupee against the dollar.
Though its growth is expected to be trimmed by more than a third this year, this country
of more than a billion people is still estimated to grow by more than 5%, beating even
China. And the growth rates of the past are expected to return in years to come. Since the
reforms of the early 1990s, Indias development has always been more a question of
when than if.
After all, the countrys growth was never based on exporting cheap, labor-intensive
goods to developed countries. It was about the development of a consumption-based
domestic market on the back of technology, services, and natural resources.
India is the largest democracy in the world. With the exception of the recent scandal, it
uses conservative accounting practices. English is its official language of business, and its
students compete with Western students in the global marketplace.
In the recent past, these qualities have made India a popular destination for investment
capital. In the very near future, it will return as such. The country still has robust
economic growth, contained inflation, and a growing middle class whose current
spending potential dwarfs the level it will soon become.
Millions of Indians have benefited from its years of economic expansion, but millions
more still live in abject poverty. Its road network is the second largest in the world yet
still in need of upgrades. Its cities can dazzle with light, but power outages are common.
Over the next five years, India intends on investing a half-trillion dollars on
infrastructure.
One company that can benefit from this is Sterlite Industries Ltd. (NYSE: SLT), Indias
largest copper producer. Valued at less than $4 billion, the stock trades at a 75% discount
to its 2007 high, has a little less than $4 billion in cash and equivalents on the books, and
is virtually debt free.
Like many other commodities, the price of copper is down to multiyear lows, affecting
Sterlites bottom line. The question remains exactly how long the company can survive
with decreased demand, a glut of copper, and a weak economy. But with that much
cashand at the extremely
low price it can produce copperthe company seems to be positioned well to survive this
downturn, and perhaps even grow at robust rates in the latter half of this year.
You may have heard about the incredible expansion of mobile phones in India. But keep
in mind that its still going on. The country adds millions of new users to its network
every month, and still only 20% to 30% of people have them today.
Mahanagar Telephone Nigam Ltd. (NYSE: MTE),

a provider of telecommunications services in Delhi and Mumbai, is down 70% from its
highs to a market cap of less than $1 billion. Its holding $700 million in cash and is debt
free. The company raised its dividend in September and has a dividend yield of about 5%
at the current numbers. Mahanagar may be tempting at these levels.
A story about India seems incomplete without some mention of its outsourcing
companies. Youve probably spoken to employees from WNS Limited (NYSE: WNS)
before. Its clients include about 20 U.S. retail banks, 10 financial advisory firms,
81

electronics giants, pharmaceutical companies, and more. It has more than 20,000
employees.
A smaller company, WNS had been hit harder than Sterlite, but its mounted a nice gain
off its lows. With about a $300 million (and growing) market cap, the company stands at
an 80% discount to its highs. The company has less cash on hand than many will feel
comfortable with. Although I expect them to survive, waiting for their March 2009
annual filing seems prudent, even at the cost of missing out on the early gains.
Indias rising middle class will create even more opportunities. In 2005, its middle class
was about 5% of the population. By 2015, it is expected to rise to 20% and by 2025 to
more than 40%. While much of this segments money goes to consumables and luxury
items, some of it ends up as investments with financial institutions. After all, the middle
class can afford to send their children to school, buy businesses, and retire younger. This
is why some of the biggest gains well see in India will be in financials. This long-term
trend in India also has many short-term opportunities right now. Financials are cheaper
today than theyve been in years. And though its current growth pales in comparison to
previous years, it dwarfs the growth, or lack thereof, that were seeing in most of the
largest economies. (The U.S. economy is expected to contract by 2%, Japan by 4%,
German by 2.5%, and Britain by 3%.)
HDFC Bank Ltd. (NYSE: HDB)

is a private sector bank and financial services company. The $7.5 billion company
engages in retail banking, wholesale banking, and treasury operations. It has been
affected by the economic downturn, but its all overblown, and the company doesnt
deserve the 60% loss in its price. Asset growth has slowed, but it continues to grow
steadily.
Management believes that loans will grow at 20% during the next year, marginally lower
than the previous year. This is largely because of the lower demand for property. The
company believes that customers are waiting for property prices to drop. Indias secondlargest private sector lender beat forecasts with a 45% jump in profits in its most recent
quarterly report, but its shares have fallen. Banks in India are dealing with rising defaults
by customers, caused by high borrowing costs and a slowing economy that has hit some
jobs.
The companys gross non-performing loans rose to $392 million in the most recent
quarter, up 14% from July to September 2008. In the kind of environment we are going
through, [non-performing loans] are expected to go up, Executive Director Paresh
Sukthankar said on CNBC. With adequate provisioning, we are not concerned by the
slight rise. HDFC has seen 30% or better growth in net profit for 27 consecutive
quarters. It has raised its dividend five times in the past six years. Its sitting on $3.5
billion in cash (a little less than half its market cap) and has a 15% ROE. Quarterly
revenue growth for the most recent quarter is up 58% over the 2007 quarter. The
company pays a paltry dividend (about 1%), but this kind of growth isnt cheap. While
Id be a fool to promise that any banking company doesnt have potential time bombs,
HDFC appears healthy, and I expect a 25% capital gain by the end of the year, bringing it
82

into the upper $60s. And while thats attractive, its nothing compared to what HDFC
will do in coming years.
Not only will it benefit from Indias continued boom, but also its not difficult to imagine
it entering the U.S. and U.K. markets. After all, they understand how to grow, and its a
more open playing field these days.
ICICI Bank (NYSE: IBN

is an Indian bank in the United States, Canada, and the United Kingdom, where the
company is gaining customers and increasing its deposit base by offering higher interest
rates. But thats not hurting their bottom line. In the fourth quarter of 2008, the
companys profits were up 25% over the same period in 2007. The $7.5 billion bank
offers commercial banking, treasury and investment banking, and other products such as
insurance and asset management. The company has about 1,500 branches around the
world, and it expects to open another 500 in the next two years.
Having fallen from the low $70s to the low teens, ICICI looks like a steal. Revenue has
shot up 40% in the fourth quarter over 2007. Its P/E is around 10, and its trailing yield
(dividends over the last 12 months/the current stock price) is nearly 4%. (Although I
wouldnt bet the bank that ICIC will give that out this year.)
With a quarter of its loan book coming from international business, investors are still
worried about problems that might appear amid the current crises. ICICI has slowed
credit growth and is looking to preserve capital. This is part of the reason we wont likely
see the full dividend this year, but I dont see the growth story being interrupted. I expect
the company to gain 50% and pass the $20 mark this year.
83
2.1.3 GLOBAL DEPOSITORY RECEIPTS

A negotiable certificate held in the bank of one country representing a specific number of
shares of a stock traded on an exchange of another country
To raise money in more than one market, some corporations use global depositary
receipts (GDRs) to sell their stock on markets in countries other than the one where they
have their headquarters.
The GDRs are issued in the currency of the country where the stock is trading. For
example, a Mexican company might offer GDRs priced in pounds in London and in yen
in Tokyo. Individual investors in the countries where the GDRs are issued buy them to
diversify into international markets. GDRs let you do this without having to deal with
currency conversion and other complications of overseas investing. The objective of a
GDR is to enable investors in developed markets, who would not necessarily feel happy
buying emerging market securities directly in the securities home market, to gain
economic exposure to the intended company and, indeed, the overall emerging economy
using the procedures with which they are familiar.
Global Depository Receipt (GDR) - certificate issued by international bank, which can be
subject of worldwide circulation on capital markets. GDR's are emitted by banks, which
purchase shares of foreign companies and deposit it on the accounts. Global Depository
Receipt facilitates trade of shares, especially those from emerging markets. Prices of
GDR's are often close to values of related shares.
GDRs are securities available in one or more markets outside the companys home
country. The basic advantage of the GDRs, compared to the ADRs, is that they allow the
issuer to raise capital on two or more markets simultaneously, which increases his
shareholder base. They gained popularity also due to the flexibility of their structure.
GDRs are typically denominated in USD, but can also be denominated in Euros. GDRs
are commonly listed on European stock exchanges, such as the London Stock Exchange
(LSE) or Luxembourg Stock Exchange, or quoted on SEAQ (Stock Exchange Automated
Quotations) International, and traded at two other places besides the place of listing, e.g.
on the OTC market in London and on the private placement market in the US. Large part
of the GDR programs consists of a US tranche, which is privately placed and a non-US
tranche that is sold to investors outside the United States, typically in the Euro markets.
An overwhelming majority of DR programs by companies from Central and Eastern
European countries are established as GDRs, typically listed in London and traded by
qualified institutional investors in Euromarkets under regime of so called Regulation S
and some of them also in the American OTC markets in accordance with Rule 144A.
Two different GDR structures :
84

When GDRs are structured with a Rule 144(a) offering for the US and a "Regulation S"
offering for non-US investors, there are two possible options for the structure.
Unitary Structures
Under a unitary structure, a single class of DRs is offered both to QIBs in the US and to
offshore purchasers outside the issuer's domestic market, in accordance with Regulation
All DRs are governed by one Deposit Agreement and all are subject to deposit,
Withdrawal and resale restrictions.
Bifurcated Structure
Under a bifurcated structure, Rule 144(a) ADRs are offered to QIBs in the US and
Regulation S DRs are offered to offshore investors outside the issuer's domestic market.
The two classes of DRs are offered using two separate DR facilities and two separate
Deposit Agreements. The Regulation DRs are not restricted securities, and can therefore
be deposited into a "side-by-side" Level I DR program, and are not normally subject to
restrictions on deposits, withdrawals or transfers. However, they may be subject to
temporary resale restrictions in the US.
ADVANTAGES OF GDR/EDR
o EDRs/GDRs can be launched as part of a private or public offering.
o They allow a single fungible security to be placed in one or more international markets,
thus giving access to a global investor base.
o They may allow the issuer to overcome local selling restrictions to foreign share
ownership.
o GDRs are eligible for settlement through Clearstream, Euroclear.
DISADVANTAGES
If the US tranche of a GDR is structured as a Rule 144(a) private placement, the
disadvantages of an RADR program will apply. If it is structured as a Level III program,
the reporting and cost features of such programs will apply.
INDIAN GDRs THE COMPREHENSIVE GDR LISTING
85

GDR
Companies #
euro
convertible
bond
**adjusted for
bonus
Arvind Mills
Ashok
Leyland
Bajaj Auto
Ballarpur
Ind.#
Bombay Dye
BSES Ltd
Century
Textiles
CESC
Core Parent
Crompton
Greaves
DCW
Dr. Reddy's
E. I. Hotels
EID Parry
Industry
Segregation
Date Of
GDR Issue
Size Of GDR Shares per

Issue US $
GDR
Mill
GDR Issue
Price **(US$)
Textiles
03-Feb-94
125.00
1.0
9.78
Autos
Autos
20-Mar-95
27-Oct-94
137.77
110.00
3.0
1.0
12.79
16.89
Paper
Textiles
Power
27-May-94
16-Nov-93
04-Mar-96
35.00
50.00
125.00
1.0
1.0
3.0
8.77
9.20
14.40
Diversified
Power
Pharma
21-Sep-94
14-Apr-94
21-Jun-94
100.00
125.00
70.00
2.0
1.0
1.0
254.00
10.67
12.60
Electrical
Diversified
Pharma
Hotels
Fertiliser
02-Jul-96
19-May-94
18-Jul-94
07-Oct-94
07-Jul-94
50.00
25.00
48.00
40.00
40.00
1.0
5.0
1.0
1.0
1.0
7.56
13.55
11.16m
9.30
8.39
19JulCables
94 55.00
30Flex
NovIndustries Packaging 95 30.00
17G.E.
Feb- 100.0
Shipping Shipping 94 0
06OctG.N.F.C Fertiliser 94 61.11
04Oil &
NovGAIL
Refineries 99 22.50
04Garden
MarSilk
Textiles 94 45.00
Finolex
Cab
86
1.0
16.60
2.0
8.05
5.0
15.94
5.0
12.75
6.0
9.67
5.0
26.28

Grasim
(1st)
Grasim
(2nd)
Guj
Ambuja #
Himachal
Futuri
Hindalco
(1st)
Hindalco
(2nd)
Hindustan
Dev.
India
Cements
Indian
Alum.
Indian
Hotels
Indian
Rayon
Indo Gulf
Indo
Rama
ICICI
ICICI
(ADR)
87
25NovDiversified 92 90.00
09Jun- 100.0
Diversified 94 0
26NovCement
93 80.00
02AugTelecomm. 95 50.00
22JulAluminium 93 72.00
08Jul- 100.0
Aluminium 94 0
21SepDiversified 94 76.00
11OctCement
94 90.00
22FebAluminium 94 60.00
28AprHotels
95 86.25
25Jan- 125.0
Diversified 94 0
18Jan- 100.0
Fertiliser 94 0
21MarTextiles 96 50.00
02Aug- 230.0
Finance
96 0
22SepFinance
99 315
1.0
12.98
1.0
20.50
1.0
5.95
4.0
9.30
1.0
10.73
1.0
16.00
1.0
2.05
1.0
4.23
1.0
6.77
1.0
16.60
1.0
15.01
1.0
4.51
10.0
11.37
5.0
11.50
5.0
9.80
Infosys
IT
11Mar99 70.38 0.5
34
EUROPEAN LISTINGS LONDON AND LUXEMBOURG

At the time of writing, most GDRs have consisted of a Rule 144a offering in the US and a
Euromarkets element. With these instruments there is no listing in the US, but many are
listed in London or Luxembourg, the traditional exchanges for listing euro market
instruments.
A listing on a recognized stock exchange adds to the visibility of the issue and provides a
wider potential market; many institutional investors have limits on the number of unlisted
securities, or securities which are not listed on certain specified exchanges, in which they
can invest.
Both the London and Luxembourg Stock Exchanges list GDRs, and since both are
governed by the same European Union directive, their listing requirements are broadly
similar. The differences lie mainly in the level of disclosure, the ease and speed with
which listings can be obtained and the level of visibility afforded by the listing.
Listings on the London Stock Exchange are generally arranged by the Lead Manager of
the GDR issue acting as Listing Agent, while for Luxembourg the Listing Agent must be
a Luxembourg bank with a seat on the Luxembourg Stock Exchange. This is not normally
a service the Lead Manager of the GDR issue can provide directly.
A listing on the London Stock Exchange makes it easier for a GDR to be quoted on
SEAQ International, the exchange's electronic price quotation service, although such a
listing is not a requirement for trading on SEAQ.
REGULATORY PROVISIONS FOR ADR/GDR

The issue of ADR/GDR by India Inc. is governed by following legal provisions:
1. Section 6 (3) (b) of Foreign Exchange Management Act (FEMA), 1999 reads as
follows:
6. Capital account transactions.
(1) Subject to the provisions of sub-section (2), any person may sell or draw foreign
exchange to or from an authorized person for a capital account transaction.
(2) The Reserve Bank may, in consultation with the Central Government, specify-
88

(a) Any class or classes of capital account transactions which are permissible;
(b) the limit up to which foreign exchange shall be admissible for such transactions:
Provided that the Reserve Bank shall not impose any restriction on the drawl of foreign
exchange for payments due on account of amortization of loans or for depreciation of
direct investments in the ordinary courts of business. (3) Without prejudice to the
generality of the provisions of sub-section (2), the Reserve Bank may, by regulations,
prohibit, restrict or regulate the following(a) Transfer or issue of any foreign security by a person resident in India;
(b) Transfer or issue of any security by a person resident outside India
FOREIGN EXCHANGE MANAGEMENT ACT (FEMA)

An Indian corporate can raise foreign currency resources abroad through the issue of
American Depository Receipts (ADRs) or Global Depository Receipts (GDRs).
Regulation 4 of Schedule I of FEMA Notification no. 20 allows an Indian company to
issue its Rupee denominated shares to a person resident outside India being a depository
for the purpose of issuing Global Depository Receipts (GDRs) and/ or American
Depository Receipts (ADRs), subject to the conditions that:
the ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign
Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt
Mechanism) Scheme, 1993 and guidelines issued by the Central Government there under
from time to time
The Indian company issuing such shares has an approval from the Ministry of Finance,
Government of India to issue such ADRs and/or GDRs or is eligible to issue ADRs/
GDRs in terms of the relevant scheme in force or notification issued by the Ministry of
Finance, and
There are no end-use restrictions on GDR/ADR issue proceeds, except for an express
ban on investment in real estate and stock markets.
The FCCB issue proceeds need to conform to external commercial borrowing end use
requirements; in addition, 25 per cent of the FCCB proceeds can be used for general
corporate restructuring
Is not otherwise ineligible to issue shares to persons resident outside India in terms of
these Regulations.
There is no limit up to which an Indian company can raise ADRs/GDRs. However, the
Indian company has to be otherwise eligible to raise foreign equity under the extant FDI
policy.
A company engaged in the manufacture of items covered under Automatic route, whose
direct foreign investment after a proposed GDRs/ADRs issue is likely to exceed the
percentage limits under the automatic route, or which is implementing a project falling
under Government approval route, would need to obtain prior Government clearance
through FIPB before seeking final approval from the Ministry of Finance.
89
WHO CAN ISSUE ADR/GDR?

A company can issue ADR/GDR, if it is eligible to issue shares to person resident outside
India under the FDI Scheme.
WHO CANNOT ISSUE ADR/GDR?

o An Indian listed company, which is not eligible to raise funds from the Indian Capital
Market including a company which has been restrained from accessing the securities
market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue
ADRs/GDRs.
o Erstwhile OCBs who are not eligible to invest in India through the portfolio route and
entities prohibited to buy, sell or deal in securities by SEBI will not be eligible to
subscribe to ADRs / GDRs issued by Indian companies.
END USE RESTRICTIONS
No end-use restrictions except for a ban on deployment / investment of such funds in
Real Estate or the Stock Market.
LIMIT OF OFFERINGS
There is no monetary limit up to which an Indian company can raise ADRs / GDRs.
VOTING RIGHTS
Voting rights on shares issued under the Scheme shall be as per the provisions of
Companies Act, 1956 and in a manner in which restrictions on voting rights imposed on
ADR/GDR issues shall be consistent with the Company Law provisions.
RBI regulations regarding voting rights in the case of banking companies will continue to
be applicable to all shareholders exercising voting rights.
PRICING OF ADR/GDR
The pricing of ADR / GDR issues should be made at a price not less than the higher of
the following two averages:
(i) The average of the weekly high and low of the closing prices of the related shares
quoted on the stock exchange during the six months preceding the relevant date;
(ii) The average of the weekly high and low of the closing prices of the related shares
quoted on a stock exchange during the two weeks preceding the relevant date.
90

TWO WAY FUNGIBILITY SCHEME
Under the limited Two-way fungibility Scheme, a registered broker in India can purchase
shares of an Indian company on behalf of a person resident outside India for the purpose
of converting the shares so purchased into ADRs/GDRs. The operative guidelines for the
same have been issued vide A.P. (DIR Series) Circular No.21 dated February 13, 2002.
The Scheme provides for purchase and re-conversion of only as
many shares into ADRs/GDRs which are equal to or less than the number of shares
emerging on surrender of ADRs/GDRs which have been actually sold in the market.
Thus, it is only a limited two-way fungibility wherein the headroom available for fresh
purchase of shares from domestic market is restricted to the number of converted shares
sold in the domestic market by non-resident investors. So long ADRs/GDRs are quoted at
discounts to the value of shares in domestic market, an investor will gain by converting
the ADRs/GDRs into underlying shares and selling them in the domestic market. In
case of ADRs/GDRs being quoted at premium, there will be demand for reverse
fungibility, i.e. purchase of shares in domestic market for re-conversion into
ADRs/GDRs.
The scheme is operationalized through the Custodians of securities and stockbrokers
under SEBI
ADR AND GDR POTENTIAL IN CENTRAL EUROPE
Depositary receipts (mostly denoted as ADR or GDR), an equity instrument representing

shares of a company listed on a foreign exchange, are still very little known in the Czech
Republic (and not only there), although their history reaches back to 1927. DRs have
gained much popularity in the 1990s. After a slowdown in 2001/2002, the years 2003 and
especially 2004 brought a renewed progress of the DR markets, which seems to be
sustained in 2005. Also the Central European companies are gradually becoming aware
of the advantages of DR offering. There is, however, still enough unused potential.
In case the domestic and DR markets are integrated, there is a possibility of cross-border
trading. The prices of underlying shares in the local market and the DRs should be
therefore virtually equal, not allowing for arbitrage opportunities. The first hypothesis we
tested is that the price of ordinary share in the local market and underlying local currency
equivalent of the DR price are very closely correlated.
The price of underlying shares in the local market rarely remains unaffected by the DR
issue. A company listing its equity internationally can gain from diversified shareholders
base, increased demand or lower cost of capital. These are only some of the factors that
may drive the shares price up. Several studies have dealt with response of the underlying
shares price to the DR offering. The obtained results are, however, ambiguous. We
focused on the impact of DR program establishment on the price of Czech, Polish and
Hungarian shares. We wanted to prove that a price increase would follow the DR
offering.
91

It is usually expected a DR listing also improves liquidity of the companys stock, as the
potential investors base is extended, the visibility of the company both in DR and local
markets is enhanced and cross-border trading is enabled. On the other hand, some argue,
that trading in the stock shifts to the DR market and they worry about the impact on the
overall liquidity of the local market. We tested whether a positive reaction of the
domestic markets to the DR offering in terms of trading activity can be observed on a
sample of Central European shares.
The first chapter brings an insight into the DR world. In the second chapter we focus on
prices of depositary receipts and the underlying shares. The two fields of interest are the
correlation between the underlying shares price and the local currencys equivalent of
the DR Price, and the response of the ordinary shares price in the local market to the DR
program introduction. The third chapter deals with liquidity effects subsequent to the DR
listing. In the last chapter, we identify a few areas, where DRs are frequently employed
and we suggest there is an unused potential of the instrument in the Czech Republic.
Ministry of Finance Department of Economic Affairs
31st July, 2008
Proposed changes in the ADR/GDRs Pricing guidelines

The Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through
Depositary Receipt Mechanism) Scheme, 1993 was initiated in 1993 to allow the Indian
Corporate sector to access global capital markets through issue of Foreign Currency
Convertible Bonds (FCCBs)/Equity Shares under the Global Depository Receipt
Mechanism (GDR) and American Depository Receipt Mechanism (ADR). The Scheme
has been amended several times since then. In order to bring the ADR/GDR guidelines in
alignment with SEBI guidelines on domestic capital issues, Government, vide Press Note
dated August 31, 2005, amended the pricing guidelines for Indian listed companies
issuing ADR/GDR. The present pricing clause, thus, reads as under:
Listed Companies The pricing should not be less than the higher of the following two
averages:
(i) The average of the weekly high and low of the closing prices of the related shares
quoted on the stock exchange during the six months preceding the relevant date;
(ii) The average of the weekly high and low of the closing prices of the related shares
quoted on a stock exchange during the two week preceding the relevant date.
The relevant date means the date thirty days prior to the date on which the meeting of
the general body of shareholders is held, in terms of section 81 (IA) of the Companies
Act, 1956, to consider the proposed issue.
(iii) In the normal circumstances the extant pricing norms provides protection from price
manipulation by the Issuer in domestic market. In the recent period, Government has
received a number of representations from corporate that the extant pricing norms affect
them adversely in the falling market. In order to remove hardship to companies in a
falling market, Government is considering modifying the pricing guidelines for
ADR/GDR issues. The proposal is to amend the parameter of the pricing norms to two
months in place of six months. In addition the definition of the relevant date for such
92

issues is also proposed to be modified as per SEBI (DIP) guidelines on preferential
allotment and qualified institutions placements (QIP).
2.1.4 MARKET GUIDANCE FOR THE ISSUE OF SECURITIES (Securities and

Exchange Commission , Ghana)
The following guidelines are provided to aid the process of issuing
securities to the public. These guidelines will be used in all Initial
Public Offers (IPO) as well as Additional Listings in which case the
details will be varied as the case may be.
I. OFFER DOCUMENT SUBMISSION REQUIREMENTS
a. Time Frame
The circular of 5th December 2002, which was distributed to all Licensed Dealing
Members, the Stock Exchange, Investment Advisers, and Listed Companies, refers. You
are reminded that the circular requires draft prospectuses or documents to be submitted to
the Commission at least 6 weeks before the proposed date for the opening of an offer.
This does not mean that the Commission will take 6 weeks to process the application in
each case. The processing time may be more or less than 6 weeks depending on how
much review has to be done. It will also depend to a great extent on the nature of the
document, the gravity of the issues raised, and how quickly sponsors respond to issues
that will be raised during the process.
In every case the Commission will endeavor to act as quickly as possible.
b. Prospectus and Supporting Documents
An application for the approval of an offer document shall be addressed to the Director
General of the SEC. Every application for approval shall be accompanied with two draft
offer documents for review and examination. After the review has been completed, ten
copies of the final draft offer document shall be submitted for onward submission to the
members of the Approvals Committee.
Copies of the following documents should be submitted with the draft
prospectus/document:
All resolutions passed by shareholders in respect to the offer and
the company.
93

Revaluation report on assets
Share price valuation
Company regulations
Audited financial statements for the relevant period
Certificate of Incorporation and Commencement of Business
An Escrow Account agreement
Any other documents that may have been referenced in the prospectus as available for
inspection during the offer period.
II. REVIEW PROCESS

The Commission will acknowledge receipt of a draft prospectus within five working
days. It is important to note that the minimum processing period of six-weeks shall be
effective only when the Commission is satisfied with the completeness on the face of it,
of the draft prospectus, and this shall be communicated to the Lead Manager. It is
therefore the duty of the Lead Manager to ensure the completeness and accuracy of the
prospectus before submitting it to the Commission.
The review process itself, is to establish that the prospectus has been prepared in
accordance with the Securities and Exchange Regulations, 2003 (L.I. 1728) and contains
adequate disclosure.
During the review the Commission will,
1. schedule meetings with sponsor (and/or issuer) to discuss issues that need to be
discussed.
2. advise amendments to the timetable as may be necessary in view of
issues that arise.
III. RESPONSIBILITIES OF THE SPONSOR AND ISSUER DURING THE

EXAMINATION AND APPROVAL PERIOD
The sponsor/issuer will be required to cooperate fully with the Commission during the
process. Any new material information regarding the issue/issuer that becomes available
during the period (from the submission of the application to the SEC until the Offer
closes) must be communicated to the SEC and incorporated in the offer
document. The Commission will treat any such information that is not disclosed as
material withheld. Appropriate sanctions will apply in the event of such conduct.
The issuer may proceed on a publicity campaign during this period with the sole intention
of generating interest of the investing public and to solicit commitments in the offer.
IV. LAUNCHING AND OPENING OF THE OFFER
94

The offer can be launched and declared open only after the Commissions approval of the
prospectus or offer document has been given in writing. It is only then that the timetable
for the offer can be fixed and presented to the Commission for approval. The prospectus
should then be made available to the public and investors can formally apply for the
shares.
Where the issuer intends to use mini prospectuses, the Commission needs to be informed
about this. It should be stated on the front cover that the Mini Prospectus should be read
in conjunction with the full prospectus. Full Prospectuses should be made available for
inspection and for applicants who wish to have them.
During the offer period the issuer can continue to advertise or promote the issue to
ensure success, but cannot introduce any new information that is not already disclosed in
the prospectus or offer document without prior permission from the Commission. Both
Manager and Issuer however, have an obligation to report to the Commission on any new
information that is material to the offer, and to do so in a timely manner. Such new
material information will be disclosed to the public in the form of an addendum or by
way of a publication or any other mode of dissemination as the SEC may direct.
The Commission has the power to invalidate the offer should the circumstances so
warrant.
V. USE OF THE ESCROW ACCOUNT

The Commission requires the use of an escrow account for the lodgement of all
subscription monies for any public issue of securities. A template for a typical escrow
agreement is available at the SEC for guidance. The following procedures are to be
followed in the use of an escrow account.
1. Open an Escrow account at a bank and submit the Agreement to the SEC.
2. Escrow accounts shall be non-interest bearing.
3. All subscription monies shall be paid directly into the escrow account.
4. The escrow account shall not be debited except as a result of returned cheques, refund
of over subscription monies, or the payment of the offer amount to the issuer.
5. All refunds shall be paid out of the escrow account that received the
monies.
6. Refunds shall be in the form of printed cheques (like dividend warrants) payable to
subscribers and may be opened for cash on request.
7. A statement of account of the escrow account shall be submitted to the Commission
within 14 days after the close of the offer.
8. A bank issuing shares to the public may not hold its own escrow account.
During the period of refunding money to subscribers the Commission shall be furnished
with periodic (fortnightly) reports on the status of the refund process.
VI. EXTENSION OF THE OFFER PERIOD
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Sponsors of the offer may apply to the Commission for an extension of the offer period.
The following points should guide such requests.
1. Problems that may affect the success of the offer must be brought to
the notice of the Commission before the offer closes.
2. The Commission will consider applications for extension on a case-bycase basis,
especially in situations where market dynamics may have
created a situation that might have affected the overall response to an
offer.
3. The sponsor/issuer is required to monitor the progress of the offer and the market as a
whole during the offer period, and this must be demonstrated to the Commission. An
application for extension therefore should be made at least one week before the close of
the offer(and not after the Offer has closed), stating tangible reasons for the request. The
Commission has the discretion to approve or decline the request.
4. The Commission will respond to an extension request within 2 days of receipt of the
request in writing.
VII. REPORT ON THE OUTCOME OF THE OFFER

Regulation 33 (5) of the L.I. 1728 requires a person performing the functions of an
issuing house or a manager of a public issue of securities to submit to the Commission, a
report on the offer. This report should be submitted within 14 days (two weeks) after the
close of the offer, and shall include among others information on the Offer such as:
1. Total number of applications
2. Total subscription amount
3. Basis of allotment
4. Amount raised after allotments (if that is the case)
5. List of the top twenty after the flotation
6. Distribution of the shares
7. Statistics of the allotment
Anyone who contravenes the provision of this regulation is liable for the payment of a
penalty of 1m for each day that the default subsists.
The fee for the examination and approval of a prospectus or offer document shall be
based on the amount realized for the shares issued. This fee should accompany the report.
The fees as set out in Schedule 2 of L.I. 1728 are as follows:
a) 1 million for any offer where the value is less than or equal to 1 billion
b) 0.05% of the offer where the value of the offer is greater than 1 billion
VIII. REFUND OF MONEY IN THE CASE OF AN UNSUCCESSFUL ISSUE
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In the event that the minimum subscription is not attained, monies must be returned to
applicants immediately after the offer closes. The refund shall be made in accordance
with section 284 (4) of the Companies Code.
The Lead Manager/Issuer shall cause a publication in a newspaper of national circulation
and announcements on local radio stations on how and where subscribers are to collect
refunds.
IX. ALLOTMENT
Under the Plan of Distribution in schedule five of the L.I. 1728, the offer document
shall provide information on the allotment policy, which will be adopted if applications
exceed the securities on offer.
The regulations do not make any provision for an allotment period, especially in the event
of over-subscription or where the total applications for an issue far exceed expectations.
This has been taken into consideration in preparing these guidelines, and should be
factored into the structure of the offer timetable.
The responsibilities of the Manager of a public issue of securities after the offer closes
includes the following:
1. Submitting a report pursuant to Regulation 33 (5)
2. Allotting the shares to successful applicants
3. Issuing and dispatching certificates to successful applicants
4. Refunding excess monies
5. Commence trading in the shares
In the light of recent developments with the floatation of IPOs, the Commission reminds
managers that they must ensure that they keep to the timetable set out in offer documents
and the Commission will enforce same.
X. REFUND OF MONEY OVERSUBSCRIBED SHARES

In the event that the shares on offer are over-subscribed, monies should be returned to
applicants within ten (10) days after the allotment of shares. Any refunds that are returned
after the deadline shall attract interest at the Bank of Ghana Prime Rate.
The Commission hereby emphasises that proceeds from the offer shall be held in the
escrow account, and refunds shall be made out of this account directly to subscribers.
The Commission shall consider refund as having been dispatched to subscribers where
the following conditions have been fulfilled:
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1. As set out in the offer prospectus.
Using the stated mode of dispatch
By the stated date of dispatch
For the full refund amount (including the correct computation of interest if that is the
case)
If refund has been sent out by registered mail to individual subscribers, evidence of such
dispatch should be made available.
2. If the refund is being affected through receiving brokers, then dispatch shall be
considered concluded when the following are all in place,
Brokers have received a list of subscribers and amount due to each,
Brokers have received the full refund amount, and
The public has been informed of the availability of refund monies at the brokerage
houses.
If refunds occur later than the date indicated in the prospectus, then the SEC shall
consider the process complete only when the Manager has notified subscribers of the
refund.
Until the refund process is complete the Commission will require periodic (weekly)
reports on the refund of excess subscription monies.
XI. DISPATCH OF CERTIFICATES AND THE COMMENCEMENT OF

TRADING
All share certificates must be dispatched at least one week before trading can commence.
1. Mode of dispatch of Certificates shall be according to the provisions of the prospectus.
2. If dispatch of certificates and or excess monies occurs later than the date indicated in
the prospectus, the manager for the floatation has an obligation to inform
applicants/subscribers of a new timetable via a medium that is acceptable by the SEC.
NOTICE ON INITIAL PUBLIC OFFER (IPO) AND RIGHTS ISSUES

The following guidelines are provided to aid the process of issuing securities to the
public.
INITIAL PUBLIC OFFER (IPO) AND RIGHTS ISSUES

A. PUBLIC OFFERS
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In the light of increased issues of securities to the public and recent developments with
the flotation of IPOs, it has become necessary for the Commission to provide a guide to
the market to streamline the process.
In furtherance of the above, the attached guidelines have been developed by SEC. The
guidelines are based on the provisions of the Securities and Exchange Regulations 2003,
LI 1728 and do not replace the Law and Regulations.
The Commission in addition to the provisions set out in Regulation 51 and Schedule 5
Part II A of LI 1728, issues the following notices to guide market participants.
Issuers are reminded that the proceeds of any public offer/ rights issue are to be used in
strict accordance with the purpose(s) indicated in the offer document.
The Commission will continue to undertake Post-IPO /Post-Rights Issue inspections to
ascertain whether proceeds of the IPO / Rights Issue have been / are being utilised as
indicated in the offer document.
Issuers are required to disclose all fees to be paid out to persons or bodies in pursuance of
the IPO / Rights Issue. The Commission shall require the refund of all amounts disbursed
from the proceeds of the offer which were not disclosed e.g. success fees and other such
fees however described. The Lead Manager shall be required to refund all such monies
which were illegally paid out to recipients. The Commission reserves the right to
investigate all payments to be paid out to persons or bodies in pursuance of the IPO /
Rights Issue.
The Commission wishes to remind Issuers that full disclosure of use of proceeds of IPO /
Rights Issue is a requirement under the law as it enables investors to make informed
decisions.
B. APPROVAL REQUIRED IN THE INSTANCE OF CHANGE OF USE OF THE

IPO /RIGHTS ISSUE FUNDS AS CONTAINED IN PROSPECTUS
Issuers shall require the approval of the Issuers registered shareholders granted at an
Annual General Meeting or Extraordinary General Meeting before funds raised by the
offer are used for any other purpose other than those disclosed in the offer document.
A resolution to this effect when taken shall be communicated to the Commission. 2
The involvement and / or decisions of shareholders in the above-mentioned action at the
AGM or EGM is necessary as the law requires that the shareholders receive full
disclosure of all information that will enable them to make an informed decision.
C. FLOTATION EXPENSES
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The Securities and Exchange Commission acknowledges that some expenses must
necessarily be incurred in any Initial Public Offer or Rights Issue. The Commission has
however noted with disquiet that the flotation expenses incurred in some IPOs / Rights
Issues amount to as much as 10% of the proceeds raised.
The Commission is concerned that such expenditure prejudices the purpose for which the
money was ostensibly raised, i.e. the proposed expansion of the Issuers business. As the
underlying purpose of the flotation is the increased value of the shareholders investment,
the Issuer should endeavour to increase or maximize the net proceeds of the flotation for
the expansion of the business. The Commission therefore directs that total flotation costs
should not exceed 5% of the total amount to be raised.
D. REPORTING ACCOUNTANT
Regulation 51 and Schedule 5 requires that an Offer Document should contain a report by
an accountant, i.e. normally referred to as the reporting accountant. The law also
requires that the reporting accountant should be an accountant qualified to be appointed
auditors of the issuer or other qualified accountants acceptable to SEC. The offer
document should contain disclosures, on the identity and addresses of the issuers
auditors and reporting accountants.
Further to these statutory requirements, the Commission has determined that for the
protection of investors and to ensure transparency and independence of functions, the
reporting accountant in a public issue:
1. shall not be the same as the Issuers external auditors;
2. shall not be the same as the Issuers accountants who may be carrying out normal
accounting functions or performing any other services for the Issuer.
E. INTRODUCTION OF PROCESSING FEE FOR REVIEW OF
PROSPECTUSES
The SEC in its review of prospectuses submitted by proposed Issuers, has found it
necessary to offer both technical advice and editorial services to Issuers in order that their
offer documents meet international standards. The SEC has on numerous occasions had
to perform this preliminary (and often extensive) screening before the offer documents
are laid before the Approval & Licensing Committee.
This service which the SEC has hitherto been providing gratis takes a heavy toll on the
SECs human resources and detracts from its other statutory duties. 3
The Commission is of the view that it is proper Issuers pay for this crucial and invaluable
service it provides as in other emerging markets. The Commission has therefore proposed
st
the following scale of processing fees for the review of prospectuses with effect from 1
July 2006 (proposed starting date):
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1. 20,000,000.00. for first submission
2. 10,000,000.00. for all re-submission due to material omissions or discrepancies
identified by the Commission after initial review at the first submission.
nd
ISSUED BY SECURITES AND EXCHANGE COMMISSION 2 AUGUST 2006

(Source: http://www.secghana.org/aboutus/commissioners.asp)
SECONDARY MARKET
Securities market: Trends and current market situation in Africa
With a market capitalization of USD 600 billion, the South African (Johannesburg)
market is the fourth largest emerging market in the World (after Korea, Russia and India;
before Brazil, China and Hong Kong). Yet even Johannesburg is not a big enough market
to retain the primary listings of several of South Africas largest companies. Altogether,
21 of the companies listed in Johannesburg have their primary listings elsewhere,
including the mining conglomerate Anglo American, the banking group Investec, the
brewing company SAB-Miller, the insurance giant Old Mutual and the technology
company Dimension Data, all of which have their primary listings in London. This shows
that the context in which African securities markets are operating is one in which the
larger companies will be looking abroad as well as to the home market.
There are 15 organized securities markets in Africa. Several other projects are under
discussion, or partly implemented, but without any activity so far. (This does not count
Cameroon and Gabon both of which recently established stock exchanges but have not
attracted any listings yet.) One exchange, the BRVM headquartered in Abidjan, caters to
the eight country UEMOA zone, having been expanded from the Abidjan stock exchange
created in 1976. Four other exchanges were started in the days of the British Empire,
those with headquarters at Nairobi, Lagos, Harare and Johannesburg, the latter two
having histories going back into the 19th Century. The older exchanges also have the
largest number of equities listed. These five, along with those established in 1988-89 in
Botswana, Ghana and Mauritius, are the only exchanges with market capitalization at
end-2004 in excess of 10 per cent of GDP, even though market capitalization has been
increasing in recent years (Figure 2.15).
Trading data shows a different aspect of the contribution of stock exchanges in
developing countries. It is influenced by secondary market liquidity and also by the
degree to which a large fraction of the shares in developing markets are effectively
locked-up in the strategic stakes of controlling shareholders and are not normally
available for trading. It should be noted in this context that funds actually raised on these
as on most capital markets are but a tiny fraction of market capitalization. The eight
oldest exchanges also have the most trading, with value traded fluctuating around 2 per
cent of GDP for the past several years (Table 2.4 ). Even these more active African
exchanges (Johannesburg aside) cannot be considered to have much trading.
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Except for Johannesburg, turnover on all markets is less than 15 per cent of market
capitalization. There was no trading on the Maputo exchange in 2004.
Low turnover is reflected in, and feeds back onto, a lack of liquidity as illustrated by
large gaps between buy and sell orders, and high price volatility. This lack of transactions
is also somewhat reinforcing, as the transaction volume does not justify investment in
technology either by the exchange itself or member brokers. Limited trading discourages
listing and raising money on the exchanges. Even linking different centers electronically
(as for example in the BRVM, or with the case of Namibia whose stock exchange is now
electronically linked to the JSE) cannot guarantee much more trading and liquidity.
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The small size and illiquidity of Africas stock exchanges partly reflects low levels of
economic activity, making it hard to reach a minimum efficient size or critical mass, and
partly also the state of company accounts and their reliability. Several of the exchanges
established in the late 1980s and 1990s were set up mainly in order to facilitate
privatization, and in the hope of attracting inward investment with the modernization and
technology transfer that that could convey (Moss, 2003). For example, the stock
exchange in Maputo was established in the process of privatizing Mozambiques national
brewery, which is still the only listed company and which has to bear the operating costs
of the stock exchange. To the extent that their establishment was driven by outside
influencesrather than emerging from a realistic need felt in the market, whether by
investors or issuersit is perhaps unsurprising that many have so far struggled to reach
an effective scale and activity level.
Pricing on all of the markets appears to build in a sizable risk premium to judge for
example from the low price-earnings ratios that have been prevalent (Moss, 2003; Senbet
and Otchere, 2005). The widespread limitations on foreign holdings of listed shares,
although diminishing in recent years, have also contributed to low prices.24 High risk
perceptions affect all countries, even those with stable macroeconomic environment;
indeed, most countries lack sovereign credit ratings. The perceived risk is reflected also
in the very small amount of funds raised through new issues including IPOs and other
public sales of equities.
Nevertheless, issuing activity has been picking-up. Ghana had five new equity issues in
2004, accounting for USD 60 million, the Kenya Electricity Generating Company
KenGen IPO of 2006 the first for five years in Kenya attracted strong demand and
enormous public interest raising over USD 100 million.26 In Nigeria the equivalent of
almost USD 3 billion in new capital was raised on the exchange in 2003-5 in connection
with the new capital requirements for banks.
Scale issues in equities have been mirrored in the bond market; only a limited number of
private bonds have been listed, with little secondary market trading. In Tanzania,
capitalization of corporate bonds amounts to TZS 89 billion (about USD 90 million)
compared to equity market capitalization of TZS 2.3 trillion. Ghana has three corporate
bonds, compared to 30 listed companies. Bond market capitalization of the BRVM is
relatively higher about one-fifth of equity market capitalization, most of the larger
issues are governmental or from government-owned enterprises, and trading is very light.
African Governments27 have relied more on foreign debt than on domestic debt, though
about one in two have issued significant domestic debt instruments (not all of them traded
on an organized market), eight of them with domestic debt to GDP ratios in excess of 20
per cent. Banks tend to be the biggest holders, with about two-thirds of the stock outside
of the central bank. With an estimated 87 per cent of the debt having initial maturity of 12
months or less, there is little secondary trading (Christensen, 2004). Longer term issues
have only recently been appearing (or re-appearing) on some of the exchanges (with the 7
and 10 year issues of the regional development banks BOAD and EADB being
noteworthy, together with a handful of government and corporate bonds); the absence of
such issues in most currencies means a lack of good reference rates for long-term finance.
(Source: Making Finance work for Africa: World Bank Report)
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2.2 Eligibility to make a public issue of shares

SEBIs regulations prescribe certain eligibility requirements for a company planning a
public issue. This includes:
Minimum net worth requirement of Rs one Crore and distributable profits in the last three
years, and The proposed issue along with all other issue of capital made during the year
should not exceed five times the pre-issue net worth. or
The issue to be made through a book building process in which 50% of the issue is
reserved for qualified institutional buyers (QIB) and The minimum post-issue paid up
capital shall be Rs 10 Crores. Or The project should be appraised by commercial
banks/FIs who also contribute to the capital to the extent of 10%, and There will be
compulsory market-making for at least two years from the date of listing of the shares
Eligibility Norms
To make an issue, the company must fulfill the eligibility norms specified by SEBI and
Companies Act. The companies issuing securities through an offer document, that is (a)
prospectus in case of public issue or offer for sale and (b) letter of offer in case of right
issue, should satisfy the eligibility norms as specified by SEBI, below:
Filing of Offer Document: In the case of a public issue of securities, as well as any issue
of security, by a listed company through rights issue in excess of Rs. 50 lakh, a draft
prospectus should be filed with SEBI through an eligible registered merchant banker at
least 21 days prior to filing it with ROC.
Companies prohibited by SEBI, under any order/direction, from accessing the capital
market cannot issue any security. The companies intending to issue securities to public
should apply for listing them in recognized stock exchange(s). Also, all the issuing
companies must (a) enter into an agreement with a depository registered with SEBI for
dematerialization of securities already issued / proposed to be issued and (b) give an
option to subscribers / shareholder / investors to receive
security certificates or hold securities in a dematerialized form with a depository.
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Public issue / Offer for sale by Unlisted Companies: An unlisted company can make a
public issue / offer for sale of equity shares / security convertible into equity shares on a
late date if it has in three out of preceding five years (a) a pre issue net worth of Rs. 1
crore (b) a track record of distributable profit in terms of Sec. 205 of the Companies Act.
The size of the issue should not exceed five times of the pre-issue net worth as per last
available audited accounts either at the time of filing of offer or at the time of opening of
issue.
There are separate norms for companies in the information technology sector and
partnership firms converted into companies or companies formed out of a division on an
existing company.
If the unlisted company does not comply with the aforesaid requirement of minimum preissue net worth and track record of distributable profits or its proposed size exceeds five
times its pre-issue net worth, it can issue shares / convertible security only through book
building process on the condition that 60% of the issue size would be allotted to qualified
institutional buyers (QIB) failing which the full subscription should be refunded.
Public issue by listed companies: All listed companies are eligible to make a public
issue of equity shares/ convertible securities if the issue size does not exceed five times
its pre-issue net worth as per the last available audited accounts at the time of either filing
of documents with SEBI or opening of the issue. A listed company which does not satisfy
this condition would be eligible to make issue only through book building process on the
condition that 60% of the issue size would be allotted to QIBs, failing which full
subscription money would be refunded.
Public Offer of Shares

In a public offer of shares, a company issues shares to a large number of new investors,
who are members of the public. When these investors become shareholders of the
company, none of them, in themselves, hold a large enough portion of the equity capital
of a company to participate in the management of the company. Therefore a public issue
refers to a distribution, rather than concentration of ownership in a company.
This market for the first time offer of shares is called the primary market offer. It is an
opportunity given by the promoters of the company for the retail investors to participate
in the ownership of the company. This also means that the proportional holding of
promoters and large investors in the company, will reduce after the public issue. When a
company offers shares to the public, they have to comply with the regulatory
requirements laid down by SEBI and the Companies Act. The listing agreement that the
company enters into with the stock exchange where the shares are to be listed, also
provides for periodic disclosures.
The regulations of SEBI and the Companies Act aim at protecting the interest of the retail
investors by prescribing:
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- Disclosure of relevant information both at the time of the issue and periodically
thereafter so that investors can evaluate the viability of their investments.
- Arrangement for the allotment of shares in dematerialized form.
- Getting an IPO graded by at least one credit rating agency.
- Listing the shares on a stock exchange so that investors have liquidity.
- The continued participation of the promoters in the business through a lock-in of the
promoters holdings.
The price at which the shares are issued to the public is decided by the company in
consultation with the lead manager to the issue. A public offer of shares results in a
change in the shareholding pattern of the company.
A company making an issue of shares has to go through certain internal and external
steps to give effect to the issue. Internally, the company needs to get the approval of the
board of directors and the existing shareholders for the issue. Once this is done, the
company has to appoint a merchant banker who will be the lead manager of the issue.
The lead manager is responsible for ensuring that the regulatory requirements of the issue
are complied with. The lead manager is responsible for all activities till the issue is listed.
Roles and Responsibilities in a Public Issue
An issue of shares by a company involves detailed activity, coordination and compliance
with regulatory requirements. The lead manager to the issue is primarily responsible for
the issue process. The other entities who are involved include the registrar and transfer
agents, bankers and brokers to the issue.
The role and responsibility of each constituent is clearly laid out by SEBI. All
constituents who are involved with an issue have to be registered with SEBI under the
relevant rules.
Registrar and Transfer Agents
The R&T agents have a significant role to play in a public issue of shares. They are
appointed by the issuer in consultation with the lead manager to the issue and enter into
an agreement detailing their responsibility in the issue work. The scope of activity of the
R&T agents is spread before the issue opens, during the period of issue and after the issue
closes.
2.2.1 Pre-Issue & post Issue Work

- Assist in the finalization of bankers to the issue, controlling and collection branches,
syndicate members, bidding centres and give instructions on the procedures to be
followed.
- Assist in the work related to designing the application forms and other issue material.
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Issue Work
- Collect and report information on the daily collections/bid information to the lead
manager/ book running lead managers.
- Provide statutory reports on the progress of the issue as required.
- Arrange for the collection of application forms and their data entry for further
processing.
- In case of a book built offer, make a table of all valid applications to identify the cut-off
price. Once the cut-off price is determined, the valid applications are identified.
- Identify valid bids from QIBs and print and dispatch Confirmatory Allocation Notice
(CAN) so that the balance money can be collected.
- Reconcile funds with the final collection certificate received from the bankers.
Post- Issue Work

Scrutinize the application forms for completeness and correctness of information.
Applications may be rejected, among other reasons, if:
- Application is incomplete
- Information such as PAN number, bank account is not provided
- Supporting documents such as those required for corporate applicants is absent
- The bid is at cut-off price for an applicant other than a retail individual investor Terms
of offer in terms of minimum application is not met
- Applications from minors
- Multiple applications
- Get the approval of the issuer and the lead manager/book running lead manager for
applications rejected on technical grounds.
- Draw up the underwriters obligations in case the issue is under-subscribed and send
devolvement notices on the instruction of the lead manager/ book running lead manager.
- Finalise the basis of allotment, if the issue is oversubscribed, in consultation with the
lead manager/book running lead manager, issuer and stock exchange.
- Submit the following documents to the stock exchange:
- Basis of allotment
- Top 100 applications
- Certificate of final collection from the bankers and reconciliation statement
- List of applications rejected on technical grounds
- Minutes of the meeting held with the issuer, lead manager/book running lead manager
and stock exchange for finalizing the basis of allotment
- Make the allotment of shares to the investors on the approved basis.
- Ensure that legal requirements such as payment of stamp duty by the issuer, creation of
register of members, approvals of the board of directors of the issuing company and the
stock exchange are complied with.
- Print the Confirmatory Allotment Note (CAN) for all successful applicants.
- Arrange for the printing, signing and dispatch of certificates if allotment is in physical
form in case of a fixed price offer or upload securities to demat account of the applicants.
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- Arrange for the refund orders to be dispatched.
- Draw up the list of brokers to whom commissions have to be paid.
- Manage the issue work so that the shares are listed on the stock exchange within 30
days from the closure of the issue for a fixed price issue and 15 days for a book built
issue.
- Handle all post issue queries from investors.
Bankers to the Issue

The bankers to the issue are appointed by the lead managers/book running lead managers
to manage the collection of funds in the issue into the escrow account opened for the
purpose. The bankers to an issue must have collection branches in the mandatory centres
as specified by the regulations. They are responsible for giving updates on the collection
figures to the managers of the issue based on which the decision to close the issue will be
taken.
ASBA
SEBI has also recently introduced an additional mode of payment in public as well as
rights issues made through the book built route called the Applications Supported by
Blocked Amount popularly known as ASBA. ASBA is an application for subscription
to an issue containing an authorization to the investors bank to block the application
money in his bank account.
For this purpose his bank should have been registered with SEBI as Self Certified
Syndicate Bank (SCSB). The SCSB will identify its designated branches (DB) where the
ASBA investor can submit his form. All the DBs of an SCSB will be controlled by one
branch of that Bank which will be designated as Controlling Branch (CB). An investor
will be eligible to apply through the ASBA process if he/she:
is a resident retail individual investor;
is bidding at cut-off price, with single option as to the number of shares bid for;
is applying through blocking of funds in a bank a/c with a SCSB
agrees not to revise the bid;
is not bidding under any of the revised categories.
ASBA Process
An ASBA investor shall submit the application physically or through electronic means to
the SCSB with whom the bank Account to be blocked is maintained. The SCSB will
block the application money in the investors account, which will remain so till
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finalisation of the basis of allotment or till withdrawal of the issue or withdrawal by the
applicant.
The SCSB thereafter will upload the application data through a web enabled interface to
be provided by the stock exchanges. After the basis of allotment is finalised the registrar
shall apply the basis and identify against each one of the ASBA investor the number of
shares, if any, allotted and the amount if any to be appropriated for the allotment made
and the balance amount to be unblocked/refunded. This information will be furnished by
the registrar to the controlling branch who in turn debits the required amount from the
investors account to be given to the issuer for the shares allotted. They will also unblock
the balance amount in the account of the investor.
Brokers to the Issue/Syndicate Members

Brokers to the issue are appointed to facilitate the collections of application forms and
bids. They are members of stock exchanges. They are responsible for collecting the
bid/application forms and ensure that it is accompanied by a payment instrument. They
are paid a commission for their role depending upon their collection.
Exemption: The eligibility norms specified above are not applicable in the following
cases:
- Private sector banks
- Infrastructure companies, wholly engaged in the business of developing, maintaining
and operating infrastructure facility within the meaning of Sec. 10(23-G) of the Income
Tax Act (a) whose project has been appraised by a public financial institution /
IDFC/ILFS and (b) not less than 5% of the project cost has been financed by any of the
appraising institutions jointly / severally by way of loan / subscription to equity or
combination of both and Rights issue by a listed company.
Credit Rating for Debt Instruments:

A debt instrument means an instrument / security which creates / acknowledges
indebtedness and includes debentures, bonds and such other securities of a company
whether constituting charge on its assets or not. For issue, both public and rights, of a
debt instrument, including convertibles, credit rating irrespective of the maturity or
conversion period is mandatory and should be disclosed. The disclosure should also
include the unaccepted
credit rating. Two ratings from two different credit rating agencies registered with SEBI
should be obtained in case of public/rights issue of Rs.100 crore and more. All credit
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ratings obtained during the three years preceding the public/rights issue for any listed
security of the issuing company should also be disclosed in the offer document.
Outstanding Warrants / Financial Instruments:

An unlisted company is prohibited from making a public issue of shares /convertible
securities in case there are any outstanding financial instruments / any other rights
entitling the existing promoters / shareholders any option to receive equity share capital
after the initial public offering.
Partly Paid-up Shares:
Before making a public / rights issued of equity shares / convertible securities, all the
existing partly paid up shares should be made fully paid up or forfeited if the investor
fails to pay call money within 12 months.
Pricing of Issues
A listed company can freely price shares/convertible securities through a public/ rights
issue. An unlisted company eligible to make a public issue and desirous of getting its
securities listed on a recognized stock exchange can also freely price shares and
convertible securities. The free pricing of equity shares by an infrastructure company is
subject to the compliance with disclosure norms as specified by SEBI from time to time.
While freely pricing their initial public issue of shares/ convertible, all banks require
approval by the RBI.
Differential Pricing:
Listed/unlisted companies may issue shares/convertible securities to applicants in the
firm allotment category at a price different from the price at which the net offer to the
public is made, provided the price at which the securities are offered to public.
A listed company making a composite issue of capital may issue securities at differential
prices in its public and rights issue. In the public issue, which is a part of a composite
issue, differential pricing in firm allotment category vis--vis the net offer to the public is
also permissible. However, justification for the price differential should be given in the
offer document in case of firm allotment category as well as in all composite issues.
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Price Band:
The issuer / issuing company can mention a price band of 20% (cap in the price band
should not exceed 20% of the floor price) in the offer document filed with SEBI and the
actual price can be determined at a later date before filing it with the ROC. If the BOD of
the issuing company has been authorized to determine the offer price within a specified
price band, a resolution would have to be passed by them to determine such a price. The
lead merchant banker should ensure that in case of listed companies, a 48 hours notice of
the meeting of BOD for passing the resolution for determination of price is given to the
regional stock exchange. The final offer document should contain only one price and one
set of financial projections, if applicable.
Payment of Discount / Commissions:

Any direct or indirect payment in the nature of discount / commission / allowance or
otherwise cannot be made by the issuer company / promoter to any firm allottee in a
public issue.
Denomination of Shares:
Public / rights issue of equity shares can be made in any
denomination in accordance with Sec. 13(4) of the Companies Act and in compliance
with norms specified by SEBI from time to time. The companies which have already
issued shares in the denominations of Rs. 10 or Rs. 100 may change their standard
denomination by splitting / consolidating them.
Promoters Contribution and Lock-in Requirements

Regulations regarding promoters contribution are discussed as under:
-Public issue by unlisted companies: The promoters should contribute at least 20% and
50% of the post issue capital in public issue at par and premium respectively. In case the
issue size exceeds Rs. 100 crores, their contribution would be computed on the basis of
total equity to be issued, including premium at present and in the future, upon conversion
of optionally convertible instruments, including warrants. Such contribution may be
computed by applying the slab rated mentioned below:
Size of Capital Issue
(including premium)
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Percentage of contribution

On first Rs. 100 crores
On next Rs. 200 crores
On next Rs. 300 crores
On balance
50
40
30
15
While computing the extent of contribution, the amount against the last slab should be so
adjusted that on an average the promoters contribution is not less than 20% of post issue
capital after conversion.
- Offer for sale by unlisted companies:
The promoters shareholding, after offer for sale, should at least 20% of the post issue
capital.
- Public issue by listed companies:
The participation of the promoters should either be (i) to the extent of 20% of the
proposed issue or (ii) to ensure shareholding to the extent of 20% of the post-issue
capital.
-Composite issue by Listed Companies:
At the option of the promoters, the contribution would be either 20% of the proposed
public issue or 20% of the post-issue capital, excluding rights issue component of the
composite issue.
-Public Issue by unlisted infrastructure companies at premium:
The promoters contribution, including contribution by equipment suppliers and other
strategic investors, should be at least 50% of the post-issue capital at the same or a price
higher than the one at which the securities are being offered to public.
Securities Ineligible for computation of promoters contribution:

The securities specified below acquired by/allotted to promoters would not be considered
for computation of promoters contribution:
Where before filing the offer document with SEBI, equity shares were acquired during
the preceding three years (a) for consideration other than cash and revaluation of assets /
capitalization of intangible assets is involved in such transactions and (b) from a bonus
issue out of revaluation reserves or reserves without accrual of cash revenues;
In the case of a public issue by unlisted companies, securities issued to promoters during
the preceding one year at a price lower than the price at which equity is offered to the
public.
The shares allotted to promoters during the previous year out of funds brought in during
that period in respect of companies formed by conversion of partnership firms where the
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partners of the firm and the promoters of the converted company are the same and there is
no change in management unless such shares have been issued at the same price at which
the public offer is made. However, if partners capital existed in the firm for a period
exceeding one year on a continuous basis, the shares allotted to promoters against such
capital would be eligible. The ineligible shares specified in the above three categories
would, be eligible for computation of promoters contribution if they are acquired in
pursuance of a scheme of merger/ amalgamation approved by a high court.
Securities of any private placement made by solicitation of subscription from unrelated
persons either directly or through an intermediary; and Securities for which a specific
written consent has not been obtained from the respective shareholders for inclusion of
their subscription in the minimum promoters contribution.
Issue of convertible security:
In the case of issue of convertible security, promoters have an option to bring in their
subscription by way of equity or subscription to the convertible security being offered so
that their total contribution would not be less than the required minimum in cases of (a)
par/ premium issue by unlisted companies (b) offer for sale, (c) issues/ composite issue
by listed companies and (d) public issue at premium by infrastructure companies.
Promoters Participation in Excess of Required Minimum:

In a listed company participation by promoters in excess of the required minimum
percentage in public/ composite issues would be subject to pricing of preferential
allotment, if the issue price is lower than the price as determined on the basis of
preferential allotment pricing.
Promoters contribution before public issue:
Promoters should bring in the full amount of their contribution, including premium, at
least one day before the public issue opens/ issue opening date which would be kept in an
escrow account with a bank and would be released to the company along with the public
issue proceed.
Exemption from Requirement of Promoters Contribution:
The requirement of promoters contribution is not applicable in the following three cases,
although in all the cases, the shareholders should disclose in the offer document their
existing shareholding and the extent to which they are participating in the proposed issue:
a. Public issue by a company listed on a stock exchange for at least three years and
having a track record of dividend payment for at least three immediately preceding years.
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However, if the promoters participate in the proposed issue to the extent greater than
higher of the two options available, namely, 20% of the issue or 20% of the post issue
capital, the excess contribution would attract pricing guidelines on preferential issues if
the issue price is lower than the price as determined on the basis of the guidelines on
preferential issue.
b. Where no identifiable promoter / promoter group exists.
c. Rights issue.
Lock-in requirements of Promoters contribution:

Promoters contribution is subject to a lock-in period as detailed below:
Lock-in of Minimum Required Contribution:
In case of any (all) issues of capital to the public, the minimum promoters contribution
would be locked in for a period of three years. The lock-in period would start from the
date of allotment in the proposed issue and the last date of the lock-in period would be
reckoned as three years from the date of commencement of commercial production or the
date of allotment in the public issue, or whichever is later.
Lock-in excess promoters contribution:
In the case of public issue by an unlisted company, excess promoters contribution would
be locked in for a period of one year. The excess contribution in a public issue by a listed
company would also be locked in for a period of one year as per the lock-in provisions.
Securities issued last to be locked in first:

The securities, forming part of the promoters contribution issued last to them, would be
locked in first for the specified period. However, if securities were issued last to financial
institutions as promoters, these would not be locked in before the shares allotted to other
promoters.
Lock-in of Pre-issue share capital of an unlisted company:
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The entire pre-issue share capital, other than locked in as promoters contribution, would
be locked-in for one year from the date of commencement of commercial production or
the date of allotment in the public offer whichever is later.
Lock-in of securities issued on firm allotment basis:
Securities issued on firm allotment basis would be locked in for one year from the date of
commencement of commercial production, or date of allotment in public issue, whichever
is later.
Other requirements in respect of Lock-in: The other requirements relating to the lockin of promoters contribution is discussed hereunder:
Pledge of securities:
Locked-in securities held by the promoters may be pledged only with banks/financial
institutions, as collateral security for loans granted by them provided the pledge of shares
is one the terms of the sanction of the loan.
Inter-se transfer of Securities:
Transfer of locked in securities amongst promoters as named in the offer document can
be made subject to lock-in being applicable to the transferees for the remaining lock-in
period.
Inscription of Non-transferability:
The securities, which are subject to a lock-in period, should carry inscription
nontransferable, along with duration of specified non-transferable period mentioned in
the face of the security certificate.
Issue Advertisement
The term advertisement is defined to include notices, brochures, pamphlets, circulars,
show cards, catalogues, placards, posters, insertions in newspapers, pictures, films, cover
pages of offer documents or any other print medium, radio, television programs through
any electronic media.
The lead merchant banker should ensure compliance with the guidelines on issue
advertisement by the issuing companies.
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Issue of Debt Instruments
A company offering convertible/non-convertible debt instruments through an offer
document should, in addition to the other relevant provisions of these guidelines,
complies with the following provisions:
Requirement of credit rating:

A public or rights issue of debt instruments (including convertible instruments) in respect
of their maturity or conversion period can be made only if the credit rating has been
obtained and disclosed in the offer document. For all issues greater than or equal to
Rs.100 crore, two ratings from two different credit rating agencies should be obtained.
Requirements in Respect of Debenture Trustees:
In the case of issue of debentures with maturity of more than 18 months, the issuer should
appoint debenture trustees whose name must be stated in the offer document. The issuer
company in favor of the debenture trustees should execute a trust deed within six months
of the closure of the issue.
Creation of Debenture Redemption Reserves (DRR):
A company has to create DRR in the case of the issue of debentures with maturity of
more than 18 months.
Distribution of Dividends:
In the case of new companies, distribution of dividends would require the approval of the
trustees to the issue and the lead institution, if any. In case of existing companies, prior
permission of the lead institution for declaring dividend, exceeding 20% as per the loan
covenants, is necessary if the company does not comply with institutional condition
regarding interest and debt service coverage ratio.
Redemption:
The issuer company should redeem the debentures as per the offer documents.
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Disclosure and Creation of Charge:
The offer document should specifically state the assets on which the security would be
created as also the ranking of the charge(s). In the case of second/residual charge or
subordinated obligation, the risks associated with should clearly be stated.
Filing of Letter of Option:

A letter of option containing disclosures with regards to credit rating, debentures holders
resolution, option for conversion, justification for conversion price and such other terms
which SEBI may prescribe from time to time should be filed with SEBI through an
eligible merchant banker, in case of a roll over of non-convertible portions of
PCD/NCDs, etc.
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2.3 PRE-ISSUE MANAGEMENT

Pre-issue management involves many steps before approaching the market. Pre-issue
management is concerned with issue of share & pricing of shares. The pre-issue
management can be categorized as follows:
-Issue of Shares.
-Marketing, coordination & Underwriting of issue.
-Pricing of issues.
Issue of Shares
Funds raised through the public is called as primary market public issue of securities,
shares or debentures are made in the primary market. There is no fixed place for the issue
of new securities. The household savings constitute the primary sources of capital sources
of capital formation in the country. The net savings ratio will encourage the capital
market. It is the job of the merchant banker to help the company in mobilization of
pooled savings. The shares & debentures have to compete with other financial
instruments to attract the savings. Public issues are offered through a prospectus.
Prospectus is a document which invites the public to contribute the share capital to attain
better returns on their investments.
Wide publicity about the offer is to be made through different media like newspapers,
periodicals & television. The merchant bankers will put their entire efforts to make t
successful. The issues of equity shares are further categorized as issue of shares at the
first time, further issue, of shares made by existing companies either by public issue or
rights issue. Right issue of share means the new issue of shares to the existing
shareholders at a stated proportion and at a fixed price. Right shares are issued at a
premium which is freely determined by the company making issue.
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Types of Issues
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Primarily, issues made by an Indian company can be classified as Public, Rights, Bonus
and Private Placement. While right issues by a listed company and public issues involve a
detailed procedure, bonus issues and private placements are relatively simpler. The
classification of issues is as illustrated below:
(a) Public issue
(i) Initial Public offer (IPO)
(ii) Further public offer (FPO)
(b) Rights issue
(c) Bonus issue
(d) Private placement
(i) Preferential issue
(ii) Qualified institutional placement
(a) Public issue:
When an issue / offer of securities is made to new investors for becoming part of
shareholders family of the issuer3 it is called a public issue. Public issue can be further
classified into Initial public offer (IPO) and Further public offer (FPO). The significant
features of each type of public issue are illustrated below:
(i) Initial public offer (IPO):
When an unlisted company makes either a fresh issue of securities or offers its existing
securities for sale or both for the first time to the 3 Entity making an issue is referred as
Issuer
public, it is called an IPO. This paves way for listing and trading of the issuers securities
in the Stock Exchanges.
(ii) Further public offer (FPO) or Follow on offer:
When an already listed company makes either a fresh issue of securities to the public or
an offer for sale to the public, it is called a FPO.
(b) Rights issue (RI):
When an issue of securities is made by an issuer to its shareholders existing as on a
particular date fixed by the issuer (i.e. record date), it is called a rights issue. The rights
are offered in a particular ratio to the number of securities held as on the record date.
(c) Bonus issue:
When an issuer makes an issue of securities to its existing shareholders as on a record
date, without any consideration from them, it is called a bonus issue. The shares are
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issued out of the Companys free reserve or share premium account in a particular ratio to
the number of securities held on a record date.
(d) Private placement:
When an issuer makes an issue of securities to a select group of persons not exceeding
49, and which is neither a rights issue nor a public issue, it is called a private placement.
Private placement of shares or convertible securities by listed issuer can be of two types:
(i) Preferential allotment:
When a listed issuer issues shares or convertible securities, to a select group of persons in
terms of provisions of Chapter XIII of SEBI (DIP) guidelines, it is called a preferential
allotment. The issuer is required to comply with various provisions which inter-alia
include pricing, disclosures in the notice, lock-in etc, in addition to the requirements
specified in the Companies Act.
(ii) Qualified institutions placement (QIP):
When a listed issuer issues equity shares or securities convertible in to equity shares to
Qualified Institutions Buyers only in terms of provisions of Chapter XIIIA of SEBI (DIP)
guidelines, it is called a QIP.
Categories of Investors in public issue
The various categories of investors who are eligible to invest in a public issue of shares
are:
- Retail Individual Investors are those who invest less than Rs 1,00,000 in an issue. In a
book building issue this category of investors are alone allowed to bid at cut-off price.
They are required to tender the entire subscription amount at the time of making the
application; unless otherwise specified in the Prospectus.
- Non-Institutional Investors who are individual investors who invest more than Rs
2,00,000 in an issue
- Qualified Institutional Buyers (QIB) which includes mutual funds, financial institutions,
scheduled commercial banks, FIIs
- Shareholders of the promoter group companies
- Employees of the company
- Promoters
A public issue by an unlisted company is required by regulations to make a minimum net
public offer of 25% of the post-issue paid up capital while for a listed company this limit
is applied to the issue size.
The remaining portion of the public issue can be reserved on a competitive basis or
allotted on a firm allotment basis or on preferential basis to categories of investors such
as employees, mutual funds, FIIs, shareholders of the promoting company, employees of
the issuer company and scheduled banks.
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Out of the total issue, 50% shall be offered to the QIBs and 15% to HNIs and balance
35% to the retail investors. This is the allocation for a book building offer. For fixed price
offers, a minimum of 50% of the net offer of securities to the public shall be initially
made for allotment to retail individual investors and the balance to HNIs and other
investors.
A company which desires to have less than 25% of the post issue capital offered to the
public should then at least offer 10% of the post issue capital to the public subject to the
condition that the issue size shall be a minimum of 100 Crores and there will be 20 lac
units of shares which will be on offer and out of the total issue, at least 60% shall be
offered to the QIBs and the balance 10% to HNI and 30% to the retail segment.
Issue of share can be made as follows:

-public issue through prospectus
-offer for sale
- private placement
Public Issue through Prospectus

This is the most common & popular method of public issues through prospectus. Shares
& debentures are issued in this method. For public issue, every company has to fulfill the
legal formalities with the SEBI. SEBI has the legal authority in permitting the companies
to enter the capital market. A fixed number of shares at the stated price will be issued in
primary market.
According to SEBI guidelines, a company which has not completed 12 months of
commercial operation can issue shares only at par or face value. If a new company is set
up by an existing company with 5 years track record, the new company is free to
determine the price of the share. The prospectus has to be vetted by the SEBI before the
public issue. The merchant banker has to draft the prospectus and get clearance from the
officials.
The prospectus should contain all the information about the company as presented below:
The main objective of the company.
Particulars about the signatories to the memorandum of association.
Qualification shares of directors.
Number & classes of shares.
Number of redeemable preference shares.
Particulars about the board of directors & managing directors.
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Minimum subscription for shares.
The time & opening of shares.
The amount of application money, allotted money should be indicated.
Premium on shares issued.
Name of the underwriter, & their commission.
Particulars of preliminary expenses.
The benefits provided to promoters, if any.
Particulars about the contracts made by the company.
Voting & dividend rights.
Capitalisation of profits & surplus from the revaluation of assets.
Offer for Sale

The sale of shares through intermediary of issue house or firm of a stock broker is called
as offer for sale. The company sells the shares or debentures to the issue house at an
agreed price then the issue house resold the shares to the public at a stated price. In this
context, the company need not issue a prospectus. But a statement in lieu of prospectus
should be filed with the registrar of companies. Three days before the allotment of shares
of debentures. In this method the company can get substantial earnings because no
flotation costs are involved.
Private Placement
The issue of shares or debentures or preference shares by the company to the individual
investors is called as private placement. The company will sell the securities directly to
the genuine investors. There is no need of issue of prospectus in the private placement. In
the private placement market the individual investors means, UTI, LIC, GIC, SFCs,
Pension funds, Insurance fund owners.
Private Placement of Shares

A public offer of shares involves regulatory compliances and process that have been laid
down to ensure that public investors are protected. These requirements can be timeconsuming, elaborate, and intended to protect the less informed investor. A company may
decide to make an offer to a select group of investors, who may be better informed, and
therefore not requiring elaborate protection mechanisms. The company can also save
time, cost and effort in placing its shares to such a group. This is called a private
placement of shares.
A private placement of shares can be done by a company irrespective of whether it has
made a public offer of shares or not. A private placement of shares made by a listed
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company is called a preferential allotment of shares. Since the company is listed and has
public shareholders, it is required to meet the regulation in this regard of SEBI and the
Companies Act. These regulations aim at ensuring that promoters and large investor
groups do not take any action that may be detrimental to the interests of the public
investors. The regulations require that a resolution is passed by the shareholders allowing
such allotment of shares.
A placement document giving material information will be made available to select
investors and on the website of the company and the stock exchange. The shares will be
allotted at a price which is the higher of the average of the weekly high and low closing
prices on the stock exchange for the previous six months or previous two weeks. The
shares will be locked-in for a period of one year from the date of allotment.
The issue could be a public limited company or private limits company. The
intermediaries in this market are rating agencies, trustees, financial advisers, merchant
bankers. In this market the investors have sufficient knowledge & well experience in
evaluating the merits & demerits of the financial investment. The merchant banker will
pay an important in deal of private placement. His role cannot be ignored. The private
placement provides a time saving channel in mobilization of required funds. It also saves
the substantial amount of expenses in the form of flotation charges. It is possible to raise
funds from this method within 2 or 3 months. But public issue will take at least 6 months
to one year. In private placement market, the investors are more perfect about the
assessment of their buying financial asset. The private placement is equal to the primary
market without combines equity and debentures the private placement business cannot
exist without the active connivance of promoters. The SEBI has put a restriction on FIIs,
regarding the investment in shares of a particular in private placement process; they must
hold the shares for 5 years.
Qualified Institutional Placement
Qualified institutional placement (QIP) is a private placement of shares made by a listed

company to certain identified categories of investors known as Qualified Institutional
Buyers (QIBs). To be eligible to make such a placement the shares of the company
should have been listed on the stock exchange for a period at least one year before the
notice of such issue is given. A qualified institutional placement will be made at a price
not less than the price of the shares will not be lower than the average of the weekly high
and low of the closing prices for the two weeks preceding the relevant date.
Qualified institutional buyers (QIB) include financial institutions, mutual funds,
scheduled commercial banks, and the like. Preferential allotment of the shares may be
made to QIBs at a price which is not lower than the average of the weekly high and low
closing prices on the stock exchange for the previous two weeks provided the number of
allottees do not exceed five. There must be a minimum of two allottees under this
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category if the issue size is less than or equal to Rs 250 Core and five if it is more than Rs
250 Crore. A sale of shares allotted under this category, within one year from the date
allotment, can be made by the QIB only on a recognised stock exchange specified in
Schedule IIIA along with the draft offer document.
In addition to the due diligence certificate furnished along with the draft offer document,
the Lead Merchant Banker shall also:
certify that all amendments suggestion or observations made by Board have been
incorporated in the offer document; furnish a fresh "due diligence" certificate at the time
of filing the prospectus with the Registrar of Companies as per the format specified at
Schedule IV of the Regulations furnish a fresh certificate immediately before the opening
of the issue that no corrective action on its part is needed as per the format specified at
Schedule V of the Regulations furnish a fresh certificate after the issue has opened but
before it closes for subscription as per the format specified at Schedule VI of the
Regulations The lead managers who are responsible for conducting due diligence
exercise with respect to contents of the offer document, as per inter-se allocation of
responsibilities shall sign due diligence certificate
Certificates Signed by the Company Secretary or Chartered Accountant, in Case of Listed

Companies Making Further Issue of Capital
The Lead Merchant Banker shall furnish the following certificates duly signed by
40(Company Secretary) or Chartered Accountants along with the draft offer documents:
all refund orders of the previous issues were despatched within the prescribed time and in
the prescribed manner;
all security certificates were despatched to the allottees within the prescribed time and in
the prescribed manner;
the securities were listed on the Stock Exchanges as specified in the offer documents.
Undertaking to be submitted by the Issuer

The issuer shall also submit an undertaking to the Board to the effect that transactions in
securities by the `promoter' the 'promoter group' and the immediate relatives of the
`promoters during the period between the date of filing the offer documents with the
Registrar of Companies or Stock Exchange as the case may be and the date of closure of
the issue shall be reported to the Stock exchanges concerned within 24 hours of the
transaction(s).
List of Promoters Group and other Details

The issuer company shall submit to the Board the list of the persons who constitute the
Promoters Group and their individual shareholding. The issuer company shall submit to
the Stock Exchanges on which securities are proposed to be listed, the Permanent
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Account Number, Bank Account Number and Passport Number of the promoters at the
time of filing the draft offer document to them).
Pre-Issue management & Pricing

According to the SEBI guidelines for capital issues a company can issue the share at its
own discretion. Pricing of issues is done by the companies themselves in consultation
with the merchant banker. Pricing of the issue is a part of pre-issue management. The
companies are free from pricing of their equity with some limitations with the
introduction of the free pricing almost all companies have the freedom to determine the
issue price.
If the amount of premium is low the issue gets over subscribed & if the premium is very
high it is bound to be undersubscribed & fail. The merchant banker will decide the
amount of the premium taking into consideration of EPS, book value, the average market
price for the last 3 years, future prospect of the company and assess whether the market
can absorb the premium on issue.
The SEBI is concerned only with giving permission & checking about the facts shown in
prospectus. Justification of issue price has to be stated & included in the prospectus. The
equity shares offered to the existing shareholders is called Right issue.
According to section 81 of the Companies Act, stipulates that a company can increase
subscribed capital at any time after the expiry of 2 years or one year from the first
allotment of shares & such further issue of shares must be offered to the existing
shareholders in proportion to the share held.
Sometimes the company can made rights issue and public issue at the same time. Right
issues are very popular. Rights may be issued below the market price to compensate the
shareholders. Though there are no restrictions on fixation of premium but some
guidelines are issued by the Ministry of Finance which is to be taken into consideration.
The fair value of a share is determined byNet asset value
Profit earning approach
Market value
Net asset value is the net worth after providing all the liabilities. Net asset value should
be equal to equity + reserves + surplus + contingent liabilities. While calculating the
NAV proper attention should be taken.
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Profit earning approach is based on the average of the profits. It is arrived at by
capitalizing the average of the after tax profits for five years. The rate of capitalization is
different from sector to sector. The average profits are arrived at on the basis 3 years
profits in the audited accounts.
Market value of a share will be found, it they are listed in stock exchange. The average
market value of a share in the preceding 3 years after making appropriate adjustments for
bonus issue and dividend payment would be determined by high and low of the preceding
two years and the high and low of each month in the preceding twelve months. The
average market price is used to check the reasonableness of the average net asset value
and profit earning capacity value.
Pre-Issue Work
The lead manager undertakes the following steps in managing a public offer of shares:
Appoint R&T agents, bankers, brokers and underwriters to the issue. In case of a book
built issue, the book runners, who are merchant bankers, will be appointed. The merchant
banker has to ensure that the constituents are registered with SEBI.
Obtain the in-principle approval of the stock exchange where the shares are proposed to
be listed.
Ensure that the mandatory number of collection centres is covered by the collection
bankers to the issue.
For an issue by an unlisted company, get the IPO graded by an approved credit rating
agency.
Enter into agreements with depositories for the admission of the securities in both the
depositories.
File draft prospectus with SEBI
Make changes, if any, to the prospectus as suggested by SEBI and files the prospectus
with the Registrar of Companies
Sign the due diligence that all the regulatory requirements are complied with.
Issue advertisements in national papers as required by regulations
Arrange for the printing and dispatch of prospectus and application forms and other issue
material.
Ensure that every application form is accompanied by an abridged prospectus.
Appointment of Merchant Bankers
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Merchant Banker who is associated with the issuer company as a promoter or a director
shall not be the lead manager the issue of the company. However the lead merchant
banker holding the securities of the issuer company may lead manage the issue;
if the securities of the issuer company are listed or proposed to be listed on the Over the
Counter Exchange of India (OTCEI) and; the Market Makers have either been appointed
or are proposed to be appointed as per the offer document.
Explanation : For the purposes of this clause, a merchant banker shall be deemed to be an
associate of the issuer if: either of them controls directly or indirectly, through itself, its
subsidiary or holding company, not less than 15 percent of the voting power of the other;
or either of them, directly or indirectly, by itself or in combination with other persons,
exercises control over the other; or There is a common director, excluding nominee
director, amongst the body corporate/ its subsidiary or holding company and the
Merchant Banker.
APPOINTMENT OF INTERMEDIARIES
(i) Appointment of Co-managers

Lead Merchant Bankers shall ensure that the number of co-managers to an issue does not
exceed the number of Lead Merchant Bankers to the said issue and there is only one
advisor to the issue.
(ii) Appointment of Other Intermediaries

Lead Merchant Banker shall ensure that the other intermediaries being appointed are duly
registered with the Board, wherever applicable. The Lead Merchant Banker shall
independently assess the capability and the capacity of the various intermediaries to carry
out assignment.The Issuer companies should enter into a Memorandum of Understanding
with the intermediary(ies) concerned whenever required.
a) SELECTION OF BANKERS
Merchant bankers assist in selecting the appropriate bankers based on the proposals or
projects. Because the commercial bankers are merely financiers and their activities are
appropriately arrayed around credit proposals, credit appraisal and loan sanctions. But
merchant banking include services like project counseling , corporate counseling in areas of
capital restructuring amalgamations, mergers, takeover etc., discounting and rediscounting of
short term paper in money markets, managing, underwriting and supporting public issues in
new issue market and acting as brokers and advisers on portfolio management in stock
exchange.
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b)ADVERTISING CONSULTANTS
Merchant bankers arrange a meeting with company representatives and advertising agents to
finalize arrangements relating to date of opening and closing of issue, registration, of
prospectus, launching publicity campaign and fixing date of board meeting to approve and
sign prospectus and pass the necessary resolutions. Publicity campaign covers the preparation
of all publicity material and brochures, prospectus, announcement, advertisement in the press,
radio, TV, investors conference etc., The merchant bankers help choosing the media,
determining the size and publications in which the advertisement should appear. The
merchant Bankers role is limited to deciding the number of copies to be printed, checking
accuracy of statements made and ensure that the size of the application form and prospectus
conform to the standard prescribed by the stock exchange. The Merchant banker has to
ensure that the material is delivered to the stock exchange at least 21 days before the issue
opens and to brokers to the issue, branches of brokers to the issue and underwriter in time.
Securities issues are underwritten to ensure that in case of under subscription the issues are
taken up by the underwriters. SEBI has made underwriting mandatory for issues to the
public. The underwriting arrangement should be filed with the stock exchange. Particulars of
underwriting arrangement should be mentions in the prospectus. The various activities
connected with pres issue management are a time bound programme which has to be
promptly attended to. The execution of the activities with clock work efficiency would lead
to a successful issue.
c) REGISTRARS TO AN ISSUE AND SHARE TRANSFER AGENTS
REGISTRATION
The registrars to an issue, as an intermediary in the primary market, carry on activities such
as collecting application from the investors, keeping a proper record of applications and
money received from investors or paid to the seller of securities and assisting companies in
determining the basis of allotment of securities in consultation with stock exchanges,
finalizing the allotment of securities and processing/despatching allotment letters, refund
orders, certificates and other related documents in respect of issue of capital. The share
transfer agents maintain the records of holders of securities or on behalf of companies, and
deal with all matters connected with the transfer/redemption of its securities. To carry on
their activities, they must be registered with the SEBI which can also renew the certificate of
registration. They are divided into two categories; a. Category I, to carry on the activities as a
registrar to an issue and share transfer agent; b. Category II; to carry on the activity either as a
registrar or as a share transfer agent.
The registration is granted by the SEBI on the basis of consideration of all relevant matters
and, in particular, the necessary infrastructure, past experience and capital adequacy. It also
takes into account the fact that any connected person has not been granted registration and
any director/partner/principal officer has not been convicted for any offence involving moral
turpitude or has been found guilty of any economic offence.
Capital Adequacy Fee
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The capital adequacy requirement in terms of net worth (capital and free reserves) was Rs.6
lakh and Rs.3 lakh for Category I and Category II of registrars and share transfer agents
respectively. However, the capital adequacy requirements are not applicable since November
1999 for a department/division of a body corporate maintaining the records of holders of
securities issued by them and deal with all matters connected with transfer/ redemption of
securities. The two categories of registrars and transfer agents had to pay an annual fee
respectively of Rs.15,000 and Rs.10,000 for initial registration a well as renewal. With effect
from November 1999, while Category I is required to pay a registration fee of Rs.50,000 and
a renewal fee of Rs.40,000 every three years, Category II has to pay Rs.30,000 and Rs.25,000
respectively.
General Obligations And Responsibilities Code Of Conduct For Registrar To An Issue

And Share Transfer Agents:
A registrar to an issue and share transfer agent should :
1. Maintain high standards of integrity in the conduct of its business.
2. Fulfill its obligations in a prompt, ethical and professional manner.
3. At all times exercise due diligence, ensure proper care and exercise independent
professional judgment.
4. Exercise adequate care, caution and due diligence before dematerialization of securities by
confirming and verifying that the securities to be dematerialized have been granted listing
permission by the stock exchange(s).
5. Always endeavour to ensure that (a) inquiries from investors are adequately dealt with; (b)
grievances of investors are redressed without any delay; (c) transfer of securities held in
physical form and confirmation of dematerialization/ rematerialisation requests and
distribution of corporate benefits and allotment of securities is done within the time specified
under any law.
6. Make reasonable efforts to avoid misinterpretation and ensure that the information
provided to the investors is not misleading.
7. Not reject the dematerialization/rematerialisation requests on flimsy grounds. Such
requests could be rejected only on valid and proper grounds and supported by relevant
documents.
8. Avoid conflict of interest and make adequate disclosure of its interest.
9. Put in place a mechanism to resolve any conflict of interest situation that may arise in the
conduct of its business or where any conflict of interest arises, should take reasonable steps to
resolve the same in an equitable manner.
10. Make appropriate disclosure to the client of its source or potential areas of conflict of
duties and interest which would impair its ability to render fair, objective and unbiased
services.
11. Not indulge in any unfair competition, which is likely to harm the interests of other
registrar to the issue and share transfer agent or investors or is likely to place him in
disadvantageous position while competing for or executing any assignment.
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12. Always endeavour to render the best possible advice to the clients having regard to their
needs.
13. Not divulge to other clients, press or any other person any confidential information about
its clients which as come to its knowledge except with the approval/ authorization of the
client or when it is required to disclose the information under any law for the time being in
force.
14. Not discriminate among its clients, save and except on ethical and commercial
considerations.
15. Ensure that any change in registration status/any penal action taken by the SEBI or any
material change in financials which may adversely affect the interest of clients/ investors is
promptly informed to the clients.
16. Maintain the required level of knowledge and competence and abide by the provisions of
the SEBI Act, rules, regulations, circulars and directions issued by the SEBI and also comply
with the award of the Ombudsman under the SEBI (Ombudsman) Regulations, 2003.
17. Co-operate with the SEBI as and when required.
18. Not neglect or fail or refuse to submit to the SEBI or other agencies with which he is
registered, such books, documents, correspondence, and papers or any part thereof as may be
demanded/requested from time to time.
19. Ensure that the SEBI is promptly informed about any action, legal proceeding, etc.
Initiated against it in respect of any material breach or non-compliance by it, of any law,
rules, regulations, directions of the SEBI or of any other regulatory body.
20. Take adequate and necessary steps to ensure that continuity in data and recordkeeping is
maintained and that the data or records are not lost or destroyed. Further, it should ensure that
for electronic records and data, up-to-date back up is always available with it.
21. Endeavour to resolve all the complaints against it or in respect of the activities carried out
by it as quickly as possible.
22. (a) Not render, directly or indirectly any investment advice about any security in the
publicly accessible media, whether real-time or non-real time, unless a disclosure of its long
or short position in he securities has been made, while rendering such advice; (b) In case an
employee of a registrar to an issue and share transfer agent is rendering such advice, the
registrar to an issue and share transfer agent should ensure that it also discloses its own
interest, the interests of his dependent family members and that of the employer including
their long or short position in the security, while rendering such advice.
23. Handover all the records/data and all related documents which are in its possession in its
capacity as a registrar to an issue and/or share transfer agent to the respective clients, within
one month from the date of termination of agreement with the respective clients within or
within one month from the date of expiry/cancellation of certificate of registration as registrar
to an issue and/or share transfer agent, whichever is earlier.
24. Not make any exaggerated statement, whether oral or written, to the clients its
qualifications or capability to render certain services or should its achievements in regard to
services rendered to other clients.
25. Ensure that it has satisfactory internal control procedures in place as well as adequate
financial and operational capabilities which can be reasonably expected to take care of any
losses arising due to theft, fraud and other dishonest acts, professional misconduct or
omission.
26. Provide adequate freedom and powers to its compliance officer for the effective discharge
of its duties.
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27. Develop its own internal code of conduct for governing its internal operations and laying
down its standards of appropriate conduct for its employees and officers in carrying out its
duties as a registrar to an issue and share transfer agent and as a part of the industry. Such a
code may extend to the maintenance of professional excellence and standards, integrity,
confidentiality, objectivity, avoidance of conflict of interests, disclosure of shareholdings and
interests, etc.
28. Ensure that good corporate policies and corporate governance are in place.
29. Ensure that any person it employs or appoints to conduct business is fit and proper and
otherwise qualified to act in the capacity so employed or appointed (including having
relevant professional training or experience).
30. Be responsible for the acts or omissions of its employees and agents in respect of the
31. Not in respect of any dealings in securities be party to or instrumental for: (a) creation of
false market, (b) price rigging or manipulations; (c) passing of unpublished price sensitive
information in respect of securities which are listed and proposed to be listed in any stock
exchange to any person or intermediary.
Maintenance Of Records
The registrars and share transfer agents have to maintain records relating to all applications
received from investors in respect of an issue, all rejected applications together with reasons,
basis of allotment of securities in consultation with the stock exchanges, terms and conditions
of purchase of securities, allotment of securities, list of allottees and non-allotees, refund
orders, and so on. In addition, they should also keep a record to the list of holders of
securities of corporates, the names of transfer agents to file the books of accounts, and
records, and so on. These have to be preserved by them for a period of three years.
Inspection
The SEBI is authorized to undertake the inspection of the books of accounts, other records,
and documents of the registrars and share transfer agents to ensure that they are being
maintained in a proper manner and the provisions of the SEBI Act, rules, regulations and the
provisions of the SCRA and the relevant rules are complied with, to investigate into
complaints from investors/other registrars and share transfer agents/other intermediaries in
the securities market or any matter relating to their activities, and to investigate on its own in
the interest of securities market/investors into their affairs. On the basis of the inspection
report, the SEBI can direct the concerned partly to take such measures as it deems fit in the
circumstances. It can also appoint a qualified auditor to investigate into the books of accounts
and affairs of the registrars and share transfer agents.
Action In Default
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A registrar/share transfer agent who fails to comply with any condition subject to which
registration is granted, or contravenes any of the provisions of the SEBI Act/SCRA,
rules/regulations and stock exchange bye-laws, rules and regulations is liable to suspension or
cancellation of registration. The penalty for suspension is imposed for
(a) violations of the provisions of the SEBI Act, rules/regulations,
(b) non-observance of the code of conduct,
(c) failure to furnish information, furnishing of wrong/false information, non-submission of
periodical information and non-cooperation in any enquiry,
(d) failure to resolve investor complaints or give a satisfactory reply to the SEBI in this
behalf,
(e) involvement in manipulation/price rigging/ cornering activities,
(f) guilty of misconduct/improper business-like or unprofessional conduct business-like or
unprofessional conduct,
(g) failure to maintain capital adequacy requirement or to pay the requirement or to pay the
requisite fee; and
(h) violation of the conditions of registration. In case of their repeated defaults, the certificate
of registration can be cancelled. The other reasons for cancellation of registration are
deliberate manipulation/price rigging/ cornering activities affecting the securities market and
the investor interest; violation of the provisions of the SEBI Act, rules/regulations; violation
of any provisions of insider trading/ take-over regulations and guilty of fraud/conviction on a
criminal offence. The procedure for inspection, holding enquiry and suspension/cancellation
is the same as in the case of lead managers, underwriters, bankers to the issue, and so on.
d) UNDERWRITERS
Another important intermediary in the new issue/primary market is the underwriters to issues
of capital who agree to take up securities which are not fully subscribed. They make a
commitment to get the issue subscribed either by others or by themselves. Though
underwriting is not mandatory after April 1995, its organization is an important element of
the primary market. Underwriters are appointed by the issuing companies in consultation
with the lead managers/merchant bankers to the issues. A statement to the effect that in the
opinion of the lead manager, the underwriters assets are adequate to meet their obligation
should be incorporated in the prospectus.
Registration
To act as underwriter, a certificate of registration must be obtained from the SEBI. In
granting the certificate of registration, the SEBI considers all matters relevant/relating to the
underwriting and in particular, a) the necessary infrastructure like adequate office space,
equipment and manpower to effectively discharge the activities b) past experience in
underwriting/employment of at least two persons with experience in underwriting c) any
person directly/indirectly connected with the applicant is not registered with the SEBI as
under or a previous application of any such person has been rejected or any disciplinary
action has been taken against such person under the SEBI Act/ rules/regulations, d) capital
adequacy requirement of not less than net worth (capital + free reserves) of Rs.20 lakhs; and
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e) the applicant/director/principal officer/partner has been convicted of offence involving
moral turpitude or found gully of any economic offence.
Fee
Underwriters, had to, for grant or renewal of registration, pay a fee to the SEBI from the date
of initial grant of certificate, Rs. 2 lakhs for the first and second years and Rs.1 lakh for the
third year. A fee of Rs.20,000 was payable every year to keep the certificate in force or for its
renewal. Since 1999, the registration fee has been raised to Rs.5 lakhs. To keep the
registration in force, renewal fee of Rs.2 lakhs every three years from the fourth year from
the date of initial registration is payable. Failure to pay the fee would result in the suspension
of the certificate of registration.
General Obligations And Responsibilities Code Of Coduct For Underwriters

An underwriter should : 1. Make all efforts to protect the interests of its clients.
2. Maintain high standards of integrity, dignity and fairness in the conduct of its business.
3. Ensure that it and its personnel will act in an ethical manner in all its dealings with a body
corporate making an issue of securities (i.e. the issuer).
4. Endeavour to ensure all professional dealings are effected in a prompt, efficient and
effective manner
5. At all times render high standards of service, exercise due diligence, ensure proper care
and exercise independent professional judgment.
6. Not make any statement, either oral or written, which would misrepresent (a) the services
that the underwriter is capable of performing for its client, or has rendered to any other issuer
company; (b) his underwriting commitment.
7. Avoid conflict of interest and make adequate disclosure of his interest.
conduct of its business or where any conflict of interest arises, should take reasonable steps to
resolve the same in any equitable manner.
9. Make appropriate disclosure to the client of its possible source or potential in areas of
conflict of duties and interest while acting as underwriter which would impair its ability to
render fair, objective and unbiased services.
10. Not divulge to other issuer, press or any party any confidential information about its
issuer company, which has come to its knowledge and deal in securities of any issuer
company without making disclosure to the SEBI as required under these regulations and also
to the Board directors of the issuer company.
11. Not discriminate amongst its clients, save and except on ethical and commercial
considerations.
12. Ensure that any charge in registration status/any penal action taken by SEBI or any
material change in financials which may adversely affect the interests of clients/ investors is
promptly informed to the clients and any business remaining outstanding is transferred to
another registered person in accordance with any instructions of the affected clients/investors.
13. Maintain an appropriate level of knowledge and competency and abide by the provisions
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of the SEBI Act, regulations, circulars and guidelines issued by the SEBI. The underwriter
should also comply with the award of the Ombudsman under the SEBI (Ombudsman)
Regulations, 2003.
14. Ensure that the SEBI is promptly informed about any action, legal proceedings, etc.
initiated against it in respect of any material breach or non-compliance by it, of any law,
rules, regulations, directions of the SEBI or of any other regulatory body.
15. Not make any untrue statement or suppress any material fact in any documents, reports,
papers or information furnished to the SEBI.
16. (a) Not render, directly or indirectly any investment advice about any security in the
publicly accessible media, whether real-time or non-real-time, unless a disclosure of his
interest including its long or short position in the security has been made, while rendering
such advice; (b) In case an employee or an underwriter is rendering such advice, the
underwriter should ensure that he should disclose his interest, the interest of his dependent
family members and that of the employer including their long or short position in the
security, while rendering such advice.
17. Not either through its account or their respective accounts or through their associates or
family members, relatives or friends indulge in any insider trading.
18. Not indulge in any unfair competition, which is likely to be harmful to the interest of
other underwriters carrying on the business of underwriting or likely to place such other
underwriters in a disadvantageous position in relation to the underwriter while competing for,
or carrying out any assignment.
19. Have internal control procedures and financial and operational capabilities which can be
reasonably expected to protect its operations, its clients and other registered entities from
financial loss arising from theft, fraud, and other dishonest acts, professional misconduct or
commissions.
of his duties.
down its standards of appropriate conduct for its employees and officers in the carrying out of
their duties. Such a code may extend to the maintenance of professional excellence and
standards, integrity, confidentiality, objectivity, avoidance of conflict of interest, disclosure
of shareholdings and interests, etc.
22. Ensure that good corporate policies and corporate governance is in place.
23. Ensure that any person it employs or appoints to conduct business is fit and proper and
24. Ensure that it has adequate resources to supervise diligently and does supervise diligently
persons employed or appointed by it to conduct business on its behalf.
25. Be responsible for the acts or omissions of its employees and agents in respect to the
26. Ensure that the senior management, particularly decision makers have access to all
relevant information about the business on a timely basis.
27. Not be party to or instrumental for (a) certain of false market, (b) price rigging or
manipulation, or; (c) passing of unpublished price sensitive information in respect of
securities which are listed and proposed to be listed in any stock exchange to any person or
intermediary.
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Agreement With Clients
Every underwriter has to enter into an agreement with the issuing company. The agreement,
among others, provides for the period during which the agreement is in force,the amount of
underwriting obligations, the period within which the underwriter has to be subscribe to the
issue after being intimated by/on behalf of the issuer, the amount of commission/brokerage,
and details of arrangements, if any, made by the underwriter for fulfilling the underwriting
obligations.
General Responsibilities
An underwriter cannot derive any direct or indirect benefit from underwriting the issue other
than by the underwriting commission. The maximum obligation under all underwriting
agreements of an underwriter cannot exceed twenty times his net worth. Underwriters have to
subscribe for securities under the agreement with 45 days of the receipt of intimation from
the issuers.
Inspection And Disciplinary Proceedings
The framework of the SEBIs right to undertake the inspection of the books of accounts,
other records and documents of the underwriters, the procedure for inspection and obligations
of the underwriters is broadly on the same pattern as applicable to the lead managers.
Action In Case Of Default
The liability for action in case of default arising out of i. non-compliance with any conditions
subject to which registration was granted. ii. contravention of any provision of the SEBI
Act/rules/regulations, by an underwriter involves the suspension/cancellation of registration,
the effect of suspension/ cancellation are on the lines followed by the SEBI in case of lead
managers.
e) BANKERS TO AN ISSUE
The bankers to an issue are engaged in activities such as acceptance of applications along
with application money from the investors in respect of issues of capital and refund of
application money.
Registration
To carry on activity as a banker to issue, a person must obtain a certificate of registration
from the SEBI. The SEBI grants registration on the basis of all the activities relating to
banker to an issue in particular with reference to the following requirements:
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The applicant has the necessary infrastructure, communication and data processing facilities
and manpower to effectively discharge his activities
The applicant/any of the directors of the applicant is not involved in any litigation connected
with the securities market/has not been convicted of any economic offence;
The applicant is a scheduled bank and
Grant of a certificate is in the interest of the investors. A banker to an issue can apply for the
renewal of his registration three months before the expiry of the certificate. Every banker to
an issue had to pay to the SEBI an annual fee of Rs.2.5 lakhs for the first two years from the
date of initial registration, and Rs.1 lakh for the third year to keep his registration in force.
The renewal fee to be paid by him annually for the first two years was Rs.1 lakh and
Rs.20,000 for the third year. Since 1999, schedule of fee is Rs.5 lakhs as initial registration
fee and Rs.2.5 lakhs renewal fee every three years from the fourth year from the date of
initial registrations. Non-payment of the prescribed fee may lead to the suspension of the
registration certificate.
General Obligations And Responsibilities Furnish Information
When required, a banker to an issue has to furnish to the SEBI the following information; a)
The number of issues for which he was engaged as a banker to an issue; b) The number of
application/details of the application money received, c) The dates on which applications
from investors were forwarded to the issuing company /registrar to an issue; d) The
dates/amount of refund to the investors.
Dba 1724 Books Of Account/Record/Documents
A banker to an issue is required to maintain books of accounts/records/documents for a
minimum period of three years in respect of, inter-alia, the number of applications received,
the names of the investors, the time within which the applications received were forwarded to
the issuing company/registrar to the issue and dates and amounts of refund money to
investors.
Disciplinary Action By The RBI
If the RBI takes any disciplinary action against a banker to an issue in relation to issue
payment, the latter should immediately inform the SEBI. If the banker is prohibited from
carrying on his activities as a result of the disciplinary action, the SEBI registration is
automatically deemed as suspended/cancelled.
Code Of Conduct For Bankers To Issue
A banker to an issue should:
1. Make all efforts to protect the interest of investors.
2. Observe high standards of integrity and fairness in the conduct of its business.
3. Fulfill its obligations in a prompt, ethical and professional manner.
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4. At all times exercise due diligence, ensure proper care and exercise independent
professional judgment
5. Not any time act in collusion with other intermediates over the issuer in a manner that is
detrimental to the investor
6. Endeavour to ensure that a) inquiries from investors are adequately dealt with; b)
grievances of investors are redressed in a timely and appropriate manner; c) where a
complaint is not remedied promptly, the investor is advised of any further steps which may
be available to the investor under the regulatory system.
7. Not a) Allow blank applications forms bearing brokers stamp to be kept the bank premises
or peddled anywhere near the entrance of the premises; b) Accept applications after office
hours or after the date of closure of the issue or on bank holidays; c) After the closure of the
public issue accept any instruments such as Cheques/ demand drafts/stock invests from any
other source other than the designated registrar to the issue; d) Part with the issue proceeds
until listing permission is granted by the stock exchange to the body corporate; e) Delay in
issuing the final certificate pertaining to the collection figures to the registrar to the issue, the
lead manager and the body corporate and such figures should be submitted within seven
working days from the issue closure date.
8. Be prompt in disbursing dividends, interests or any such accrual income received or
collected by him on behalf of his clients.
9. Not make any exaggerated statement whether oral or written to the client, either about its
qualification or capability to render certain services or its achievements in regard to services
rendered to other client.
10. Always Endeavour to render the best possible advice to the clients having regard to the
clients needs and the environments and his own professional skill.
11. Not divulge to any body either orally or in writing, directly or indirectly, any confidential
information about its clients which has come to its knowledge, without taking prior
permission of its clients
12. Avoid conflict of interest and make adequate disclosure of his interest.
conduct of its business or where any conflict of interest arise, should take reasonable steps to
resolve the same in an equitable manner.
14. Make appropriate disclosure to the client of its possible source or potential areas of
conflict of duties and interest while acting as banker to an issue which would impair its
ability to render fair, objective and unbiased services.
15. Not indulge in any unfair competition, which is likely to harm the interests of other
bankers to an issue or investors or is likely to place such other bankers to an issue in a
disadvantageous position while competing for or executing any assignment.
16. Not discriminate amongst its clients, save and except on ethical and commercial
considerations.
17. Ensure that any change in registration status/any penal action taken by the SEBI or any
material change in financials which may adversely affect the interests of clients/ investors is
promptly informed to the clients and business remaining outstanding is transferred to another
registered person in accordance with any instructions of the affected clients/investors.
18. Maintain an appropriate level of knowledge and competency and abide by the provisions
of the SEBI Act, regulations, circulars and guidelines of the SEBI. The banker to an issue
should also comply with the award of the Ombudsman passed under the SEBI (Ombudsman)
Regulations, 2003.
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19. Ensure that the SEBI is promptly informed about any action, legal proceedings, etc.,
initiated against it in respect of any material breach of non-compliance by it, of any law,
rules, regulations, and directions of the SEBI or of any other regulatory body.
20. Not make any untrue statement of suppress any material fact in any documents, reports,
papers or information furnished to the SEBI.
21. Not neglect or fail or refuse to submit to the SEBI or other agencies with which it is
registered, such books, documents, correspondence, and papers or any part thereof as may be
demanded/requested from time to time.
22. Abide by the provisions of such acts and rules, regulations, guidelines, resolutions,
notifications, directions, circulars and instructions as may be issued from time to time by the
Central Government, relevant to the activities carried on the banker to an issue.
23. (a) Not render, directly or indirectly, any investment advice about any security in the
publicly accessible media, whether real-time or non-real-time, unless a disclosure of its
interest including long or short position in the security has been made, while rendering such
advice; (b) in case an employee of the banker to an issue is rendering such advice, the banker
to an issue should ensure that he discloses his interest, the interest of his dependent family
members and that of the employer including employers long or short position in the security,
while rendering such advice.
24. A banker to an issue or any of its directors, or employee having the management of the
whole or substantially the whole of affairs of the business, should not, either through its
account or their respective accounts or through their family members, relatives or friends
indulge in any insider trading.
25. Have internal control procedures and financial and operational capabilities which can be
reasonable expected to protect its operations, its clients, investors and other registered entities
from financial loss arising from theft, fraud, and other dishonest acts, professional
misconduct or omissions.
of its duties.
down its standards of appropriate conduct for its employees and officers in the carrying out of
their duties as a banker to an issue and as a part of the industry. Such a code may extend to
the maintenance of professional excellence and standards, integrity, confidentiality,
objectivity, avoidance of conflict of interests, disclosure of shareholding and interests, etc.
28. Ensure that any person it employs or appoints to conduct a business is fit and proper and
29. Ensure that it has adequate resources to supervise diligently and does supervise diligently
persons employed or appointed by it to conduct business on its behalf.
30. Be responsible for the acts or omissions of its employees and agents in respect to the
31. Ensure that the senior management, particularly decision makers have access to all
relevant information about the business on a timely basis.
32. Endeavour to ensure that arms length relationship is maintained in terms of both
manpower and infrastructure between the activities carried out as banker to an issue and other
permitted activities.
33. Not be a party to or instrumental for (a) creation of false market; (b) price rigging or
manipulations; or (c) passing of unpublished price sensitive information in respect of
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securities which are listed and proposed to be listed in any stock exchange to any person or
intermediary.
Inspection
Such inspection is done by the RBI upon the request of the SEBI. The purpose of inspection
is largely to ensure that the required books of accounts are maintained and to investigate into
the complaints received from the investors against the bankers to an issue. The foregoing
rules and regulations have brought the bankers to an issue under the regulatory framework of
the SEBI with a view to ensuring greater investor protection. On the basis of the inspection
report, the SEBI can direct the banker to an issue to take such measures as it may deem fit in
the interest of the securities market and for due compliance with the provision of the SEBI
Act.
Action In Case Of Default

With a view to ensure effective regulation of the activities of the bankers to an issue, the
SEBI is empowered to suspend/cancel their registration certificate. The grounds of
suspension are:
a) The banker violates the provisions of the SEBI Act, rules/regulations;
b) Fails to/does not furnish the required information or furnishes wrong/false information;
c) Fails to resolve investor complaints/to give satisfactory reply to SEBI;
d) Is guilty of misconduct/unprofessional conduct inconsistent with the prescribed code of
conduct; and
e) Fails to pay fees and carry out his obligations as specified in the regulations.
The SEBI can cancel registration in case of i. Repeated defaults leading to suspension of a
banker, ii. The deterioration in is financial position which likely to adversely affect the
interest of the investors, and iii. The being found guilty of fraud/convicted of a criminal
offence.
f) BROKERS TO THE ISSUE
Brokers are the persons mainly concerned with the procurement of subscription to the issue
from the prospective investors. The appointment of brokers is not compulsory and the
companies are free to appoint any number of brokers. The managers to the issue and the
official brokers organize the preliminary distribution of securities and procure direct
subscriptions from as large or as wide a circle of investors as possible. The stock exchange
bye-laws prohibits the members from the acting as managers or brokers to the issue and
making preliminary arrangement in connection with any flotation or new issue, unless the
stock exchange of which they are members gives its approval and the company conforms to
the prescribed listing requirements and undertakes to have its securities listed on a recognized
stock exchange. The permission granted by the stock exchange is also subject o other
stipulations which are set out in the letter of consent. Their active assistance is indispensable
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for broad basing the issue and attracting investors. By and large, the leading merchant
bankers in India who act as managers to the issue have particulars of the performance of
brokers in the country. The company in consultation with the stock exchange writes to all
active brokers of all exchanges and obtains their consent to act as brokers to the issue.
Thereby, the entry of experienced and unknown agencies in to the field of new issue activity
as issue managers, underwriters, brokers, and so on, is discouraged. A copy of the consent
letter should be filed along with the prospectus to the ROC. The names and addresses of the
brokers to the issue are required to be disclosed in the prospectus. Brokerage may be paid
within the limits and according to other conditions prescribed. The brokerage rate applicable
to all types of public issue of industrial securities is fixed at 1.5 percent, whether the issue is
underwritten or not. The mailing cost and other out-ofpocket expenses for canvassing of
public issues have to be borne by the stock brokers and no payment on that account is made
by the companies. A clause to this effect must be included in the agreement to be entered into
between the broker and the company. The listed companies are allowed to pay a brokerage on
private placement of capital at a maximum rate of 0.5 percent. Brokerage is not allowed in
respect of promoters quota including the amounts taken up by the directors, their friends and
employees, and in respect of the rights issues taken by or renounced by the existing
shareholders. Brokerage is not payable when the applications are made by the
institutions/bankers against their underwriting commitments or on the amounts devolving on
them as underwriters consequent to the under subscription of the issues. The issuing company
is expected to pay brokerage within two months from the date of allotment and furnish to the
broker, on request, the particulars of allotments made against applications bearing their
stamp, without any charge. The Cheques relating to brokerage on new issues and
underwriting commission, if any, should be made payable at par at all centre where the
recognized stock exchanges are situated. The rate of brokerage payable must be is enclosed in
the prospectus.
Banking All types of foreign exchange transactions including advice on exchange, imports,
exports finance, financing the movement of goods through acceptance credits, the handling of
commercial letters of credit, the negotiation and collection of foreign bills, accepting call or
term deposits, short or medium term finance, bridging finance, leading; corporate banking,
treasury/trading services, discount/guarantee facilities. Issuing and underwriting. Public
issues; underwriting of issues, preparation of prospectuses; new equity; obtaining stock
exchange listings/broking services.
Corporate Finance New issues; development capital; negotiation of mergers and takeovers;
capital reconstruction; bridging finance, medium term loans; public sector finance.
Management Services Economic planning; trusts administration; share secretarial services;
primary capital market participation.
Product Knowledge Foreign exchange, import finance; export finance; commercial LCs;
FBCSs; Call/ Term deposits; medium term loans (MTL); Bridging finance; leasing, treasury
services, discount/guarantees, Acceptance credits, public issues, underwriting, equity,
broking, estate planning, trusts, share transfers. Marketing the public issue arises because of
the highly competitive nature of the capital market. Moreover, there is a plethora of
companies, which knock at the doors of investors seeking to sell their securities. Above all
the media bombards the modern investors with eye catching advertisement to sell their
concepts to prospective investors.
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MERCHANT BANKING AND MARKETING OF NEW ISSUES
Following are the steps involved in the marketing of the issue of securities to be undertaken
by the lead manager:
1. Target market : The first step towards the successful marketing of securities is the
identification of a target market segment where the securities can be offered for sale. This
ensures smooth marketing of the issue. Further, it is possible to identify whether the market
comprises of retail investors, wholesale investors or institutional investors.
2. Target concentration : After having chosen the target market for selling the securities,
steps are to be taken to assess the maximum number of subscriptions that can be expected
from the market. It would work to the advantage of the company if it concentrates on the
regions where it is popular among prospective investors.
3. Pricing : After assessing market expectations, the kind and level of price to be charged for
the security must be decided. Pricing of the issue also influences the design of capital
structure. The offer has to be made more attractive by including some unique features such as
safety net, multiple options for conversion, attaching warrants, etc.
4. Mobilizing intermediaries : For successful marketing of public issues, it is important that
efforts are made to enter into contracts with financial intermediaries such as an underwriter,
broker/sub-broker, fund arranger, etc.
5. Information contents : Every effort should be mad3e to ensure that the offer document for
issue is educative and contains maximum relevant information. Institutional investors and
high net worth investors should also be provided with detailed research on the project,
specifying its uniqueness and its advantage over other existing or upcoming projects in a
similar field.
6. Launching advertisement campaign : In order to push the public issue, the lead manager
should undertake a high voltage advertisement campaign. The advertising agency must be
carefully selected for this purpose. The task of advertising the issue shall be entrusted to
those agencies that specialize in launching capital offerings. The theme of the advertisement
should be finalized keeping in view SEBI guidelines. An ideal mix of different advertisement
vehicles such as the press, the radio and the television, the hoarding, etc. should be used.
Press meets, brokers and investors conference, etc. shall be arranged by the lead manager at
targeted in carrying out opinion polls. These services would useful in collecting data on
investors opinion and reactions relating to the public issue of the company, such a task
would help develop an appropriate marketing strategy. This is because, there are vast
numbers of potential investors in semi-urban and rural areas. This calls for sustained efforts
on the part of the company to educate them about the various avenues available for
investment.
7. Brokers and investors conferences : As part of the issue campaign, the lead manager
should arrange for brokers and investors conferences in the metropolitan cities and other
important centre which have sufficient investor population. In order to make such endeavors
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more successful, advance planning is required . It is important that conference materials such
as banners, brochures, application forms, posters, etc. reach the conference venue in time. In
addition, invitation to all the important people, underwriters, bankers at the respective places,
investors associations should also be sent.
8. A critical factor that could make or break the proposed pu8blic issue is its timing. The
market conditions should be favorable. Otherwise, even issues from a company with an
excellent track record, and whose shares are highly priced, might flop. Similarly, the number
and frequency of issues should also be kept to a minimum to ensure success of the public
issue.
Methods Following are the various methods being adopted by corporate entities for
marketing the securities in the new Issues Market:
1. Pure Prospectus Method
2. Offer for Sale Method
3. Private Placement Method
4. Initial Public Offers Method
5. Rights Issue Method
6. Bonus Issue Method
7. Book-building Method
8. Stock Option Method and
9. Bought-out Deals Method
(i) Bankers to the Issue

The Lead Merchant Banker shall ensure that Bankers to the Issue are to be appointed in
all the mandatory collection centers
(ii) Registrars to the Issue

The Lead Merchant Banker shall not act as a Registrar to an issue in which it is also
handling the post issue responsibilities.
The Lead Merchant Bankers shall ensure that;
the Registrars to Issue registered with the Board are appointed in all public issues and
rights issues; in case where the issuer company is a registered Registrar to an Issue, the
issuer shall appoint an independent outside Registrar to process its issue.
The lead merchant banker shall ensure that Registrar to an issue which is associated with
the issuer company as a promoter or a director shall not act as Registrar for the issuer
company.
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Where the number of applications in a public issue is expected to be large, the issuer
company in consultation with the lead merchant banker may associate one or more
Registrars registered with the Board for the limited purpose of collecting the application
forms at different centres and forward the same to the designated Registrar to the Issue as
mentioned the offer document. The designated Registrar to the Issue shall, be primarily
and solely responsible for all the activities as assigned to them for the issue management.
(iii) Underwriters
The Lead merchant banker shall satisfy themselves about the ability of the underwriters
to discharge their underwriting obligations.incorporate a statement in the offer document
to the effect that in the opinion of the lead merchant banker, the underwriters' assets are
adequate to meet their underwriting obligations; obtain Underwriters' written consent
before including their names as underwriters in the final offer document. In respect of
every underwritten issue, the lead merchant banker(s) shall undertake a minimum
underwriting obligation of 5% of the total underwriting commitment or Rs.25 lacs
whichever is less.
The outstanding underwriting commitments of a merchant banker shall not exceed 20
times its net-worth at any point of time. In respect of an underwritten issue, the lead
merchant banker shall ensure that the relevant details of underwriters are included in the
offer document.
(iv) Appointment of Compliance Officer

An issuer company shall appoint a compliance officer who shall directly liaise with the
Board with regard to compliance with various laws, rules, regulations and other directives
issued by the Board and investors complaints related matter. The name of the compliance
officer so appointed shall be intimated to the Board
(v) Agreements with depositories

The lead manager shall ensure that the issuer company has entered into agreements with
all the depositories for dematerialisation of securities. He shall also ensure that an option
be given to the investors to receive allotment of securities in dematerialised form through
any of the depositories.
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OTHER PRE-ISSUE ACTIVITIES
(i) Offer Document
The draft offer document filed with the Board shall be made public for a period of 21
days from the date of filing the offer document with the Board.
The lead merchant banker shall, while filing the draft offer document with the Board also
file the draft offer document with the stock exchanges where the securities are proposed
to be listed make copies of draft offer document available to the public. host the draft and
final offer documents on the websites of the all the lead managers / syndicate members
associated with the issue and also ensure that the contents of documents hosted on the
websites are the same as that of their printed versions)
obtain and furnish to the Board, an in-principle approval of the stock exchanges for
listing of the securities within 15 days of filing of the draft offer document with the stock
exchanges.Lead merchant banker or stock exchanges may charge an appropriate sum to
the person requesting for the copy of offer document.
(ii) Dispatch of Issue Material
The lead merchant banker shall ensure that for public issues offer documents and other
issue materials are dispatched to the various stock exchanges, brokers, underwriters,
bankers to the issue, investors associations, etc. in advance as agreed upon.
In the case of rights issues, lead merchant banker shall ensure that the letters of offer are
dispatched to all shareholders at least one week before the date of opening of the issue.
(iii) No Complaints Certificate
After a period of 21 days from the date the draft offer document was made public, the
Lead Merchant Banker shall file a statement with the Board :
giving a list of complaints received by it,
a statement by it whether it is proposed to amend the draft offer document or not, and;
highlight those amendments.
(iv) Mandatory Collection Centres

The minimum number of collection centres for an issue of capital shall bethe four metropolitan centres situated at Mumbai, Delhi, Calcutta and Chennai
all such centres where the stock exchanges are located in the region in which the
registered office of the company is situated. (the regional division of collection centres is
indicated in Schedule VII of the Regulations)
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The issuer company shall be free to appoint as many collection centres as it may deem fit
in addition to the above minimum requirement
(v) Authorised Collection Agents

The issuer company can also appoint authorised collection agents in consultation with the
Lead Merchant Banker subject to necessary disclosures including the names and
addresses of such agents made in the offer document. The modalities of selection and
appointment of collection agents can be made at the discretion of the Lead Merchant
Banker.
The lead merchant banker shall ensure that the collection agents so selected are properly
equipped for the purpose, both in terms of infrastructure and manpower requirements.
The collection agents may collect such applications as are accompanied by payment of
application moneys paid by cheques, drafts and stock invests. The authorised collection
agent shall not collect application moneys in cash
The applications collected by the collection agents shall be deposited in the special share
application account with designated scheduled bank either on the same date or latest by
the next working day.
The application forms along with duly reconciled schedules shall be forwarded by the
collection agent to the Registrars to the Issue after realisation of cheques and after
weeding out the applications in respect of cheques return cases, within a period of 2
weeks from the date of closure of the public issue.
The applications accompanied by stockinvests shall be sent directly by the collection
agent to the Registrars to the Issue along with the schedules within one week from the
date of closure of the issue.
The offer documents and application forms shall specifically indicate that the
acknowledgement of receipt of application moneys given by the collection agents shall be
valid and binding on the issuer company and other persons connected with the issue.
The investors from the places other than from the places where the mandatory collection
centres and authorised collection agents are located, can forward their applications along
with stockinvests to the Registrars to the Issue directly by Registered Post with
Acknowledgement Due.
The applications received through the registered post shall be dealt with by the Registrars
to the Issue in the normal course.
(vi) Advertisement for Rights Post Issues

The Lead Merchant Banker shall ensure that in case of a rights issue, an advertisement
giving the date of completion of despatch of letters of offer, shall be released in at least in
an English National Daily with wide circulation, one Hindi National Paper and a
Regional language daily circulated at the place where registered office of the issuer
company is situated at least 7 days before the date of opening of the issue.
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The advertisement shall indicate the centres other than registered office of the company
where the shareholders or the persons entitled to rights may obtain duplicate copies of
composite application forms in case they do not receive the original application form
within a reasonable time even after opening of the rights issue.
Where the shareholders have neither received the original composite application forms
nor are they in a position to obtain the duplicate forms, they may make applications to
subscribe to the rights on a plain paper.
The advertisement shall also contain a format to enable the shareholders to make the
application on a plain paper containing necessary particulars like name, address, ratio of
right issue, issue price, number of shares held, ledger folio numbers, number of shares
entitled and applied for, additional shares if any, amount to be paid along with
application, particulars of cheque, etc. to be drawn in favour of the company Account Rights issues.
The advertisement shall further mention that applications can be directly sent by the
shareholder through Registered Post together with the application moneys to the
company's designated official at the address given in the advertisement.
The advertisement may also invite attention of the shareholders to the fact that the
shareholders making the applications otherwise than on the standard form shall not be
entitled to renounce their rights and shall not utilise the standard form for any purpose
including renunciation even if it is received subsequently.
If the shareholder makes an application on plain paper and also in standard form, he may
face the risk of rejection of both the applications.
(vii) Abridged Prospectus

The Lead Merchant Banker shall ensure the following:
Every application form distributed by the issuer Company or anyone else is accompanied
by a copy of the Abridged Prospectus.
The application form may be stapled to form part of the Abridged Prospectus.
Alternatively, it may be a perforated part of the Abridged Prospectus.
The Abridged Prospectus shall not contain matters which are extraneous to the contents
of the prospectus.
The Abridged Prospectus shall be printed at least in point 7 size with proper spacing.
Enough space shall be provided in the application form to enable the investors to file in
various details like name, address, etc.
(viii) Branding of securities

Securities may be branded describing their nature but not the quality
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(ix) Marketing condition, Coordination & Underwriting of Issues
The successful closure of public issue depends upon the efficiency of merchant bankers
to that issue. The merchant banker will have to coordinate many activities elating to issue
with different agencies. Appointment of brokers, registrars, underwriters, leads managers,
bankers, and share transfer agents is to be done. The issue has to be groomed, publicity
campaign and arrangements for printing & mailing to be made. In this context, the
merchant banker should attend to the following functions of public issue:
Marketing
Coordination
Underwriting
What is the difference between an offer document, an RHP, a prospectus and an
abridged prospectus? What is a draft offer doc?
Offer document means a prospectus in the case of a public issue or offer for sale which
is filed with Registrar of Companies (RoC) and the stock exchanges. An offer document
covers all the relevant information required to help an investor to make his/her
investment decision.
Draft offer document refers to an offer document in a draft stage. The draft offer
documents are filed with Sebi at least 21 days prior to the filing of the offer document
with the registrar and the exchanges. Sebi may specify necessary changes in the draft
offer document and the issuer or the lead merchant banker is required to implement
changes in the draft offer document before filing the offer document. The draft offer
document is available on the Sebi website for public comments for a period of 21 days
from the filing of the draft offer document with Sebi.
A red herring prospectus does not have details of either price or the number of shares
being offered or the amount of issue. However, this prospectus mentions the number of
shares and the upper and lower price bands. An issuer can also state that the issue size
and the number of shares would be determined later. In case of a book-built issues, RHP
is a process of price discovery and the price cannot be determined until the bidding
process is completed. Hence, such details are not shown in the RHP filed with the RoC.
Only on completion of the bidding process, the details of the final price are included in
the offer document.
The offer document filed thereafter with ROC is called a prospectus. Abridged
prospectus refers to a prospectus that contains all the salient features of a prospectus. It
accompanies the application form of public issues.
CONTENTS OF OFFER DOCUMENT

The Offer document shall contain the following:
SECTION I - CONTENTS OF THE PROSPECTUS
- The offer document shall contain all material information which shall be true and
adequate so as to enable the investors to make informed decision on the investments in
the issue.
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- The offer document shall also contain the information and statements specified in this
chapter.
Cover Pages
Front Outer Cover Page
a) The front cover page of the prospectus shall be white and no patterns or
pictures shall be printed on this page.
The cover page paper shall be of adequate thickness (preferably minimum 100 gc
quality).
The front outer cover page of the prospectus shall contain the following details only:
The word "Prospectus"
The name of the issuer company and address of the registered office of the company
along with telephone fax number and E.mail address.
The nature, number, price and amount of the instruments offered.
iv) a) The Risks in relation to the first issue (wherever applicable) shall be incorporated
in a box format in case of a initial public issue:
"This being the first issue of the company, there has been no formal market for the
securities of the company. The issue price (has been determined and justified by the Lead
Merchant Banker and the issuer company as stated under Justification of Premium
paragraph - in case of premium issue) should not be taken to be indicative of the market
price of the equity shares after the shares are listed. No assurance can be given regarding
an active or sustained trading in the shares of the company nor regarding the price at
which the equity shares will be traded after listing."
b) In case of issue proposed to be listed on the Over the Counter Exchange of India and /
or where market maker has been appointed, the concluding sentence of the above risk
factor shall read as under:
"No assurance can be given regarding the price at which the equity shares of the company
will be traded after listing."
v) The following general risk shall be incorporated:
"Investment in equity and equity related securities involve a degree of risk and investors
should not invest any funds in this offer unless they can afford to take the risk of losing
their investment. Investors are advised to read the risk factors carefully before taking an
investment decision in this offering. For taking an investment decision, investors must
rely on their own examination of the issuer and the offer including the risks involved. The
securities have not been recommended or approved by Securities and Exchange Board of
India (SEBI) nor does SEBI guarantee the accuracy or adequacy of this document."
Specific attention of investors shall be invited to the summarised and detailed statement
of Risk Factors by indicating their page number(s) in the General Risks.
vi) Issuers Absolute Responsibility clause shall be incorporated as under :
"The issuer, having made all reasonable inquiries, accepts responsibility for and confirms
that this offer document contains all information with regard to the issuer and the issue,
which is material in the context of the issue, that the information contained in the offer
document is true and correct in all material aspects and is not misleading in any material
respect, that the opinions and intentions expressed herein are honestly held and that there
are no other facts, the omission of which make this document as a whole or any of such
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information or the expression of any such opinions or intentions misleading in any
material respect."
a) The name and address of only of the Lead Merchant Banker who files the offer
document with Board along with its telephone, fax number and E.mail address shall
appear on the front outer cover page.
b) The names of the other Lead Merchant Bankers, Co-Managers, etc. may be mentioned
on the back cover page.
The name and address of the Registrar to the issue along with the telephone number and
fax number.
Issue Opening Date
Credit Rating, if applicable
Name/s of stock exchanges where listing of the securities is proposed.
Front Inside Cover Page
Index shall appear on the Front Inside Cover Page.
Inner Cover Pages
The other risk factors shall be printed in clear readable font (preferably of minimum point
10 size) starting on the first inner cover page to be numbered page i (and, if need be, shall
continue on subsequent pages ii, iii, etc. as distinct from the page number of the offer
document proper which would run as 1, 2, 3, etc.) in addition to appearing in the Part I of
the Prospectus. The risk factors shall be classified as those which are specific to the
project and internal to the issuer company and those which are external and beyond the
control of the issuer company. Management perception of the internal and external risk
factors shall be given immediately after each of the risk factors and not as a separate
heading under management perception.
Back Cover Pages
Back Inside Cover Page and Back Outside Cover Page shall be in white.
Any notes required to be given prominence shall appear immediately after the Risk
Factors wherever they appear.
PART I
General Information
Name and address of registered office of the issuer company.
Letter of intent / industrial license and declaration of the Central Govt./RBI about nonresponsibility for financial soundness or correctness of statements.
Disclaimer Clause
1 A prospectus shall contain the following disclaimer clause in bold capital letters:
"It is to be distinctly understood that submission of offer document to SEBI should not in
any way be deemed or construed that the same has been cleared or approved by SEBI.
SEBI does not take any responsibility either for the financial soundness of any scheme or
the project for which the issue is proposed to be made or for the correctness of the
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statements made or opinions expressed in the offer document. Lead Merchant Banker,
______________ has certified that the disclosures made in the offer document are
generally adequate and are in conformity with SEBI (Disclosures and Investor Protection)
Guidelines in force for the time being. This requirement is to facilitate investors to take
an informed decision for making investment in the proposed issue.
It should also be clearly understood that while the Issuer Company is primarily
responsible for the correctness, adequacy and disclosure of all relevant information in the
offer document, the Lead Merchant Banker is expected to exercise Due Diligence to
ensure that the Company discharges its responsibility adequately in this behalf and
towards this purpose, the Lead Merchant Banker _______________________ has
furnished to SEBI a Due Diligence Certificate dated ________________ in accordance
with SEBI (Merchant Bankers) Regulations 1992 which reads as follows :
We have examined various documents including those relating to litigation like
commercial disputes, patent disputes, disputes with collaborators etc. and other materials
in connection with the finalisation of the offer document pertaining to the said issue;
On the basis of such examination and the discussions with the Company, its Directors and
other officers, other agencies, independent verification of the statements concerning the
objects of the issue, projected profitability, price justification and the contents of the
documents mentioned in the Annexure and other papers furnished by the company.
WE CONFIRM that :
(a) the offer document forwarded to SEBI is in conformity with the documents, materials
and paper relevant to the issue;
(b) all the legal requirements connected with the said issue, as also the guidelines,
instructions, etc. issued by SEBI, the Government and any other competent authority in
this behalf have been duly complied with; and
(c) the disclosures made in the offer document are true, fair and adequate to enable the
investors to make a well informed decision as to the investment in the proposed issue.
iii. We confirm that beside ourselves, all the intermediaries named in the prospectus are
registered with SEBI and till date such registration is valid.
iv. We have satisfied ourselves about the worth of the underwriters to fulfill their
underwriting commitments.
The filing of offer document does not, however, absolve the company from any liabilities
under section 63 or 68 of the Companies Act, 1956 or from the requirement of obtaining
such statutory or other clearances as may be required for the purpose of the proposed
issue. SEBI, further reserves the right to take up, at any point of time, with the lead
merchant banker(s) any irregularities or lapses in offer document."
Disclaimer Statement from the Issuer
A statement to the effect that the issuer accepts no responsibility for statements made
otherwise than in the prospectus or in the advertisement or any other material issued by or
at the instance of the issuer and that anyone placing reliance on any other source of
information would be doing so at his own risk should be incorporated .
Filing of offer document with the Board and RoC
a) Under this head, the office of the Board where the offer document has been filed shall
be mentioned.
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The RoC where copy of the offer document, having attached thereto the Material
Contracts and Documents referred to elsewhere in the offer document, has been filed
shall also be mentioned.
Names of regional stock exchange and other stock exchanges where application made for
listing of present issue, shall be mentioned.
Provisions of sub-section (1) of section 68A of the Companies Act, relating to
punishment for fictitious applications, shall be mentioned.
Minimum Subscription Clause
Following statements shall appear:
For Non-underwritten Public Issues
" If the company does not receive the minimum subscription of 90% of the issued amount
on the date of closure of the issue, or if the subscription level falls below 90% after the
closure of issue on account of cheques having being returned unpaid or withdrawal of
applications, the company shall forthwith refund the entire subscription amount received.
If there is a delay beyond 8 days after the company becomes liable to pay the amount, the
company shall pay interest as per Section 73 of the Companies Act 1956."
For Underwritten Public Issues
"If the company does not receive the minimum subscription of 90% of the net offer to
public including devolvement of Underwriters within 60 days from the date of closure of
the issue, the company shall forthwith refund the entire subscription amount received. If
there is a delay beyond 8 days after the company becomes liable to pay the amount, the
company shall pay interest prescribed under Section 73 of the Companies Act 1956."
For Composite Issues
The Lead Merchant Banker shall ensure that the requirement of "minimum subscription"
is satisfied both jointly and severally, i.e., independently for both rights and public issues.
If the company does not receive the minimum subscription in either of the issues the
company shall refund the entire subscription received.
Issue Schedule
Date of opening of the issue
Date of closing of the issue
Date of earliest closing of the issue
Intermediaries and auditors
Name and address of auditors and lead managers.
Name and address of registrars to the issue.
Name and address of trustee under debenture trust deed (in case of debenture issue)
Credit Rating
The credit rating obtained from a credit rating agency for the proposed issue of debt
security including convertible instruments.
If the rating has been obtained from more than one credit rating agencies, disclosures
shall be made of all ratings including unaccepted rating.
All the credit ratings obtained during the previous three years before filing of the offer
document for any of its listed debt-securities at the time of accessing the market through a
rated debt-security shall be disclosed.
Underwriting of the issue
Names and addresses of the underwriters and the amount underwritten by them
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Declaration by board of directors of the issuer company that the underwriters have
sufficient resources to discharge their respective obligations.
Compliance Officer
The name, address telephone number, fax and E.mail number and address of Compliance
Officer.
The investors attention shall also be invited to contact the compliance officer in case of
any pre-issue / post-issue related problems such as non-receipt of letters of allotment /
share certificates / refund orders / cancelled stockinvests, etc.
Capital Structure of the company
The lead merchant banker shall present the capital structure in the following manner:
Authorised issued subscribed and paid up capital (Number of instruments, description,
aggregate nominal value)
Size of present issue giving separately promoters contribution, firm allotment /
reservation for specified categories and net offer to public. (Number of instruments,
description, aggregate nominal value and issue amount shall be given in that order,
Name(s) of group companies to be given, in case, reservation has been made for
shareholders of the group companies)
Paid-up Capital
after the issue
after conversion of securities (if-applicable)
d) Share Premium Account (before and after the issue)
DESPATCH OF REFUND ORDERS
The following clause shall be incorporated in the prospectus:
"The company shall ensure despatch of refund orders of value over Rs.1500/- and
share/debenture certificates by Registered Post only and adequate funds for the purpose
shall be made available to the Registrars by the issuer company ".
UNDERTAKING BY THE ISSUER COMPANY.
The following undertaking by the issuer company shall be incorporated in the offer
document :
that the complaints received in respect of the Issue shall be attended to by the issuer
company expeditiously and satisfactorily;
that the issuer company shall take necessary steps for the purpose of getting the securities
listed in the concerned stock exchange within the specified time;
that the issuer company shall apply in advance for the listing of equities on the
conversion of Debentures / Bonds;
that the funds required for despatch of refund orders/allotment letters/ certificates by
registered post shall be made available to the Registrar to the Issue by the issuer
company;
that the promoters contribution in full, wherever required, shall be brought in advance
before the Issue opens for public subscription and the balance, if any, shall be brought in
pro rata basis before the calls are made on public;
that the certificates of the securities/refund orders to the non-resident Indians shall be
despatched within specified time.
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that no further issue of securities shall be made till the securities offered through this
offer document are listed or till the application moneys are refunded on account of nonlisting, undersubscription, etc.
that necessary cooperation with the credit rating agency(ies) shall be extended in
providing true and adequate information till the debt obligations in respect of the
instrument are outstanding.
UTILISATION OF ISSUE PROCEEDS
A statement by the Board of Directors of issuer company to the effect that
all monies received out of issue of shares or debentures to public shall be transferred to
separate bank account other than the bank account referred to in sub-section (3) of section
73;
details of all monies utilised out of the issue referred to in sub-item(i) shall be disclosed
under an appropriate separate head in the balance-sheet of the company indicating the
purpose for which such monies had been utilised; and
details of all unutilised monies out of the issue of shares or debentures, if any, referred to
in sub-item(i) shall be disclosed under an appropriate separate head in the balance-sheet
of the company indicating the form in which such unutilised monies have been invested.
Promoters and their Background
A complete profile of the promoters including their age, educational qualifications,
experience in the business or employment and in the proposed line of business, their
business and financial activities shall be furnished.
In case, the promoters are companies, history of the companies and the promoters of the
companies shall be furnished.
Details in change of management of the companies if any, including details of the persons
who are holding the controlling interest together with the applicability and compliance of
Securities and Exchange Board of India (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997.
Key Managerial Personnel
A paragraph on the key managerial personnel shall be incorporated giving full details of
the personnel recruited as on the date of filing of the offer document with the Board
indicating name, date of joining, qualification, details of previous employment etc.
The Lead Merchant Banker shall verify and ensure that the persons whose name appear
in this para are in the employment of the company as permanent employees."
Any change otherwise than by way of retirement in the normal course in the key senior
managerial personnel particularly in charge of production, planning, finance and
marketing within one year prior to the date of filing the offer document with the Board
shall be disclosed.
FUTURE PROSPECTS
Management Discussion And Analysis Of The Financial Condition And Results Of
The Operations As Reflected In The Financial Statements.
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A summary of past financial results after adjustments as given in the auditors report for
the past three years containing significant items of income and expenditure shall be
given.
An analysis of reasons for the changes in significant items of income and expenditure
shall also be given, inter alia, containing the following:
unusual or infrequent events or transaction;
significant economic changes that materially affected or (are likely to effect income from
continuing operations;
known trends or uncertainties that have had or are expected to have a material adverse
impact on sales, revenue or income from continuing operations;
future changes in relationship between costs and revenues, in case of events such as
future increase in labour or material costs or prices that will cause a material change are
known;
the extent to which material increases in net sales or revenue are due to increased sales
volume, introduction of new products or services or increased sales prices;
total turnover of each major industry segment in which the company operated
status of any publicly announced new products or business segment;
the extent to which business is seasonal;
any significant dependence on a single or few suppliers or customers;
competitive conditions.
6.8.3 A statement by the directors whether in their opinion there have arisen any
circumstances since the date of the last financial statements as disclosed in the prospectus
any which materially and adversely affect or is likely to affect the trading or profitability
of the company, or the value of its assets, or its ability to pay its liabilities within the next
twelve months.
Financial of Group Companies
The following information for the last 3 years based on the audited statements in respect
of all the companies, firms, ventures, etc. promoted by the promoters irrespective of
whether these are covered under section 370 (1)(B) of the Companies Act, 1956 shall be
given, wherever applicable:
Date of Incorporation;
Nature of activities;
Equity Capital;
Reserves (excluding revaluation reserve);
Sales;
Profit after tax (PAT);
Earnings per share (EPS); and
Net Asset Value (NAV);
The highest and lowest market price of shares during the preceding six months with
suitable disclosures for changes in capital structure during the period and the market
value on the date of filing the prospectus with the Registrar of Companies;
If any of the companies has made public or rights issue in the preceding three years, the
issue price of the security, the current market price and particulars of changes in the
capital structure, if any, since the date of issue and a statement regarding the cost and
progress of implementation of the project in comparison with the cost and
implementation schedule given in the offer document;
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Information regarding adverse factors related to the company and in particular regarding;
whether the company has become a sick company within the meaning of the Sick
Industrial Companies (Special Provisions) Act, 1995 or is under winding up;
whether the company has made a loss in the immediately preceding year and if so, the
profit or loss figures for the immediately preceding three years.
(a) In case, the issuer company has more than five listed group companies, the financial
information may be restricted to the five largest listed companies to be determined on the
basis of market capitalisation one month before the date of filing draft prospectus with
the Board.
(b) The information regarding company(ies) which has become BIFR company or is
under winding up or has a negative net worth shall be provided.
If the promoters have disassociated themselves from any of the companies/firms during
preceeding three years, the reasons therefor and the circumstances leading to the
disassociation shall be furnished together with the terms of such disassociation.
(a) In case there are common pursuits among these companies, the reasons
and justification for the same shall be spelt out and the conflict of interest situations shall
be stated.
The related business transactions within the group shall also be mentioned.
The significance of these transactions on the financial performance of the
company/companies shall be stated.
6.9.5 Sales or purchase between companies in the promoter group when such sales or
purchases exceed in value in the aggregate 10% of the total sales or purchases of the
issuer and also disclose material items of income or expenditure arising out of
transactions in the promoter group.
Projections
No projections of profits shall be made except
by a company which has not completed twelve months of commercial operations and its
audited operative results are not available; or
by a company which is undertaking a new project or is proposing to substantially expand
its activities beyond 100% of the existing capacity.
Basis for Issue Price
Following information shall be disclosed for all issues irrespective of the issue price.
Earnings per share i.e. EPS pre-issue for the last three years (as adjusted for changes in
capital);
P/E pre-issue and comparison thereof with industry P/E where available (giving the
source from which industry P/E has been taken) ;
average return on net worth in the last three years;
minimum return on increased net worth required to maintain pre-issue EPS;
Net Asset Value per share based on last balance sheet;
Net Asset Value per share after issue and comparison thereof with the issue price.
Provided that the projected earnings shall not be used as a justification for the issue price
in the offer document.
Outstanding litigations or Defaults
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All pending litigations in which the promoters are involved, defaults to the financial
institutions/banks, non-payment of statutory dues and dues towards instrument holders
like debenture holders, fixed deposits, and arrears on cumulative preference shares by the
promoters and the companies/firms promoted by the promoters, shall be listed in the
prospectus together with the amounts involved and the present status of such
litigations/defaults. The likely adverse effect of these litigations/defaults, etc. on the
financial performance of the company shall also be mentioned.
Further, the cases of pending litigations, defaults, etc. in respect of
companies/firms/ventures with which the promoters were associated in the past but are no
longer associated shall also be disclosed in case their name(s) continues to be associated
with particular litigation(s).
i) The above information is required to be furnished in addition to the litigations against
the company or against any other company whose outcome could have a materially
adverse effect of the position of the company.
Further, all the litigations against the promoter or directors involving violation of
statutory regulations or criminal offence shall be furnished in the offer document.
i) The pending proceedings initiated for economic offences against the directors, the
promoters, companies and firms promoted by the promoters shall be disclosed separately
indicating their present status.
Disclosure on Investor Grievances and Redressal System
The offer documents shall disclose the arrangements or any mechanism evolved by the
company for redressal of investor grievances.
The company shall disclose the time normally taken by it for disposal of various types of
investor grievances.
Similar disclosure shall be made in regard to the listed companies under the same
management within the meaning of Section 370 (1B) of the Companies Act for the period
of 3 years prior to the date of filing of the offer documents with ROC / Stock Exchange.
PART II
General Information
Consent of directors, auditors, solicitors/ advocates, managers to the issue, Registrar of
Issue, Bankers to the company, bankers to the issue and experts.
Expert opinion obtained, if any
Change, if any, in directors and auditors during the last three years, and reasons, thereof
Authority for the issue and derails of resolution passed for the issue
Procedure and time of schedule for allotment and issue of certificates
Names and address of the company secretary, legal adviser, lead managers, co-managers,
auditors, bankers to the company, bankers to the issue and brokers to the issue.
Risk Factors and Issue Highlights:The Risk Factors and management perception on the
same shall be printed along with Issue Highlights with equal treatment in printing in all
respects.
Summary of the Pre-Issue Management Activities

Sending memorandum of association & articles of association to the concerned stock
exchange.
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Furnishing the consent letters from bankers, auditors, registrars, experts, solicitors to the
prospectus.
Drafting the power of attorney from all the directors in favour of two directors.
Selection of advertising agents & printers.
Selection prospectus application forms to the concerned stock exchange.
Receipt of comments from stock exchange.
To discuss draft prospectus with the company.
Apply for the private placement with financial intermediaries.
Advertising strategy commencement.
Conducting of extraordinary general meeting for the draft resolution.
To collect balance sheet & audit report.
Company to hold meeting for approving, signing & filling prospectus.
To forward the prospectus to the SEBI.
Forwarding prospectus after vetting by the SEBI to stock exchanges.
To file prospectus with registrar of companies.
Decide the quantum of issue material that is to be printed.
File listing application with the concerned stock exchange.
Press release & briefing
Announcement of prospectus in Newspapers.
Registrars to issue, to prepare & send bank procedure to bankers.
Announcement of brief prospectus in papers.
Opening of subscription list, earliest closing, and latest closing.
Company to review position in public response.
Closure of issue & issue of advertising.
Specimen of equity certificate/refund orders to be sent for approval to the stock
exchange.
Registrars finalize the allotment process in consultation with stock exchange.
Board meeting for approval of allotment.
Payment of consolidated stamp duty.
Registrars to issue letters of allotment/refund orders/equity certificates.
Company to complete listing formalities.
2.5 POST ISSUE MANAGEMENT

The major post issue obligations of the merchant banker(s) relate to association with
allotment procedure, post-issue monitoring reports, redressal of investors grievances,
coordination with intermediaries, post-issue advertisements, basis of allotment in oversubscribed issues, other responsibilities and a certificate regarding realization of stock
invests.
After closing of public issue the next task of the merchant bankers is post-issue
management. It consisting of collection of application forms from designated banks & the
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amount received, scrutinizing of applications, deciding allotment procedure in
consultation with stock exchange. This process ends with the mailing of share
certificates/refund orders/allotment orders.
2.5.1 Functions of the Merchant Banker Post Issue

1. Post Issue Monitoring Reports
Irrespective of the level of subscription, the post issue lead merchant banker must ensure
the submission of the post-issue monitoring reports. The due date for submitting postissue monitoring reports in the case of public issues by listed/unlisted companies are:
-3-day monitoring report for book-built portion, in case of issue through book-building;
the due date of the report would be the third day from the date of allocation in the bookbuilt portion, or one day prior to the opening of the fixed price portion, whichever is
earlier,
- 3-day monitoring report in other cases, including fixed price portion of book-built issue;
the due date for the report would be the third day from the date of closure of the issue,
-Final post issue monitoring report for all issues. The due date for this report would be
the third day from the date of listing or 78 days from the date of closure of the
subscription of the issue, whichever is earlier.
The post issue monitoring report in case of rights issues should be submitted within three
working days from the due dates.
Public Issues
In case of public issues, 3-day & 78-day monitoring reports are to be submitted.
-3-day post issue Monitoring Report The due date for this report would be the third day
from the date of closure of subscription of the issue.
-Final Post-issue Monitoring Report The due date for this report would be 78th day
-Right issue For right issues, 3-day and 50-day monitoring reports are required.
-3-day post issue Monitoring Report The due date for this report would be the third day
-50-day Post-issue Monitoring Report The due date for this would be the 50th day from
the date of closure of subscription of the issue.
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(1) The lead merchant banker shall submit post-issue reports to the Board in accordance with
sub-regulation.
(2) The post-issue reports shall be submitted as follows:
(a) initial post issue report as specified in Parts A and B of Schedule XVI, within three days of
closure of the issue
(b) final post issue report as specified in Parts C and D of Schedule XVI, within fifteen days
of the date of finalisation of basis of allotment or within fifteen days of refund of money in
case of failure of issue.
(3) The lead merchant banker shall submit a due diligence certificate as per the format specified
in
Form G of Schedule VI, along with the final post issue report.
2.Post-issue Advertisements.
The post-issue merchant banker shall ensure that advertisement giving details relating to
oversubscription, basis of allotment, number, value and percentage of all applications including
ASBA, number, value and percentage of successful allottees for all applications including ASBA,
date of completion of despatch of refund orders or instructions to Self Certified Syndicate Banks
by
the Registrar, date of despatch of certificates and date of filing of listing application, etc. is
released
within ten days from the date of completion of the various activities in at least one English
national
daily newspaper with wide circulation, one Hindi national daily newspaper with wide circulation
and one regional language daily newspaper with wide circulation at the place where registered
office of the issuer is situated.
(2) The post-issue merchant banker shall ensure that issuer, advisors, brokers or any other entity
connected with the issue do not publish any advertisement stating that issue has been
oversubscribed or indicating investors response to the issue, during the period when the public
issue is still open for subscription by the public.
3.Co-ordination with Intermediaries.

(1) The post-issue merchant banker shall maintain close co-ordination with the registrars to the
issue and arrange to depute its officers to the offices of various intermediaries at regular intervals
after the closure of the issue to monitor the flow of applications from collecting bank branches
and/or Self Certified Syndicate Banks, processing of the applications including application form
for
ASBA and other matters till the basis of allotment is finalised, despatch of security certificates
and
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refund orders are completed and securities are listed.
(2) Any act of omission or commission on the part of any of the intermediaries noticed during
such
visits shall be duly reported to the Board.
(3) In case there is a devolvement on underwriters, the merchant banker shall ensure that the
notice
for devolvement containing the obligation of the underwriters is issued within a period of ten days
from the date of closure of the issue.
(4) In case of undersubscribed issues, the merchant banker shall furnish information in respect of
underwriters who have failed to meet their underwriting devolvement to the Board in the format
specified in Schedule XVII.
(5) The post-issue merchant banker shall confirm to the bankers to the issue by way of copies of
listing and trading approvals that all formalities in connection with the issue have been completed
and that the banker is free to release the money to the issuer or release the money for refund in
case
of failure of the issue.
4.Audited financial statements in the offer document.

The merchant banker shall ensure that the information contained in the offer document and the
particulars as per audited financial statements in the offer document are not more than six months
old from the issue opening date.
5.Redressal of investors Grievances

The post-issue lead merchant banker should actively associate himself with post-issue
activities namely, allotment, refund and dispatch and regularly monitor the redressal of
investors grievances arising there from.
6. Despatch 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
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days of the closure of the Public Issue.
7.Other responsibilities.
(1) The post-issue merchant banker shall ensure that the despatch of refund orders, allotment
letters and share certificates is done by way of registered post or certificate of posting, as may be
applicable.
(2) The post-issue merchant banker shall ensure payment of interest to the applicants for delayed
dispatch of allotment letters, refund orders, etc. as per the disclosure made in the offer document.
(3) In case of absence of definite information about subscription figures, the issue shall be kept
open for the required number of days to avoid any dispute, at a later date, by the underwriters in
respect of their liability.
(4) The issuer shall ensure that transactions in securities by the promoter and promoter
group during the period between the date of registering the offer document with the
Registrar of Companies or filing the letter of offer with the designated stock exchange, as
the case may be and the date of closure of the issue shall be reported to the recognised
stock exchanges where the specified securities of the issuer re listed, within twenty four
hours of the transactions.
8.Post Issue activities and Right issues

1. Collect figures of applications money from the controlling branches and as far as
possible from other key branches, and send one day report to the SEBI. If the issue is
subscribed obtain the certificates from the registrars for 30 per cent/100 percent (as the
case may be) subscription and send the copy of the same to the SEBI and the regional
stock exchange.
2. Write to the related stock exchange regarding closure of subscription list and
advertisements declaring issue to be closed is published.
3. Compliance reports to the SEBI are to be sent. There were four different types of
reports in case of subscribed public issues (7, 45, 70 and 90 days reports) and six reports
in case of unsubscribed public issues (7, 30, 45, 60, 90 and 100 days reports). With effect
from July 1995, only two post-issue reports for public issue are to be submitted (3 and 78
days post-issue monitoring reports) (Annexures 10 (a) and 10(b)). The merchant bankers
have to keep the SEBI informed on important developments about the particular issues
being lead managed by them during the intervening period of the reports.
4. The following are to be submitted the regional stock exchange:
(a) Statement of valid application
(b) Certificate of 90 percent subscription
(c) Bank certificates
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5. Obtain letter from regional stock exchange approving basis of allotment for different
categories.
6. Send copy of the letter of regional stock exchange to other exchanges where listing
permission is sought.
7. Make public a copy of basis of allotment in two national dailies
8. Publish advertisements mentioning the various dates on which refunds/ allotments and
listing were dispatched and sought respectively.
9. In case of delay by more than 78 days the lead manager should see that the interest for
the delayed period is paid by the issuer.
10. Confirm that the listing formalities have been completed where the listing has been
sought
11. Arrange for permission for dealing in securities
12. Confirm that various comissions/brokerage/payments to various intermediaries
ranged by the merchant banker have been paid by the company.
13. Obtain RBI permission of allotment of shares/debentures to NRIs and FIIs.
The lead manager should submit the draft of the letter of offer to the SEBI six weeks
before the issue is scheduled to open for subscription. The suggestion, if any would be
conveyed within three weeks from the date of receipt of such draft, should be
incorporated /complied with by the merchant bankers before fling a copy of the letter of
offer. A copy of the letter of offer should be submitted by the merchant bankers to the
SEBI two weeks before the issue opens for subscriptions. The merchant banker should
submit along with the letter of offer a due diligence certificate to the SEBI in the form,
already prescribed by the SEBI. The merchant banker submitting he letter of offer is
responsible for ensuring compliance with he SEBI rules, regulation and guidelines and
requirements of other laws , which are for the time being, in force. Rest of the reports and
regulations are to be complied with by the merchant bankers as already specified. The
changes being made are only in respect of submission of letter of offer and the rest
remains the same.
Registrar to issue occupies a key role in the post-issue management activities. They
work with the association of bankers to issue. The registrars will collect the application
forms from bankers, sorting them & arranging them in an order. The merchant banker
will assist the company & keep in touch with the completion of process. The registrars to
issue collect the application forms on behalf of the company with the amount. They
scrutinize of all forms and ensures that the applications are proposed & allotment, if share
certificate/refund orders are sent within 30 days of the close of the issue. The registrars
should take all the precautions about the simplifications of the process.
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Post Issue allotment

An issue is required to be kept open for a minimum of three days and a maximum of
seven working days. The following are the functions of the lead manager in the post-issue
period:
Once the issue opens, ensure that the collection banks and R&T agents collect and
reconcile the forms received and obtain a final collection certificate.
Finalize the basis of allotment in consultation with the stock exchange.
Basis of allotment is the process of deciding the number of shares that each investor is
entitled to be allotted. If the number of shares that have been subscribed for is equal to or
less than the number of shares offered by the company, then each investor will get the
same number of shares he applied for. If the issue is over-subscribed, then the number of
shares allotted to each investor will be in proportion to the oversubscription.
Once the issue closes, the applications are collated under various categories such as retail
investors, HNIs, QIBs and firm allotment.
The number of shares applied for is compared with the shares reserved for each category
and the oversubscription ratio is calculated. This is applied to each application to
determine the shares to be allotted.
The basis of allotment has to be approved by the board of directors of the company and
published in national newspapers.
Ensure that the shares are credited to the individual shareholders depository account and
dispatch of refund orders.
Seek listing of shares on the stock exchange and commencement of trading.
Basis of Allotment
In a public issue of securities, the Executive Director/Managing Director of the
designated stock exchange along with the post-issue lead merchant banker and the
registrar to the issue would be responsible to ensure that the basis of allotment is finalized
in a fair and proper manner on the basis of proportionate allotment. However, in the book
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building portion of book built issue, the allotment would be made in accordance with the
prescribed guidelines.
Net Offer to the General Public has to be at least 25 per cent of the total issue size for
listing on a Stock exchange. It is mandatory for a company to get its shares listed at the
regional stock exchange where the registered office of the issuer is located.
In an issue of more than Rs 25 crores the issuer is allowed to place the whole issue by
book-building.
Minimum of 50 per cent of the net offer to the public has to be reserved for investors
applying for less than 1,000 shares.
There should be atleast five 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 per cent of the Issue Amount.
Timeframes for the Issue and Post- Issue formalities

The minimum period or which a public issue has to be kept open is three 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 per cent of the Total issue size within 60
days from the date of earliest closure of the Public Issue. In case of over-subscription the
company may have the right to retain the excess application money and allot shares more
than the proposed issue, which is referred to as the green-shoe option.
A rights issue has to procure 90 per cent 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.
Special rules for Infrastructure firms

For public issues by infrastructure companies, minimum subscription of 90 per cent
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 per cent of the
equity at the same or a higher price than what is being offered to the public.
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The Infrastructure Companies would be allowed to keep their issues open for 21 days.
The relaxation would give infrastructure companies sufficient time to mobilise funds for
their issues.
2.6 LISTING OF SECURITIES

Listing means admission of the securities to dealings on a recognized stock exchange.
The securities may be of any public limited company, Central or State Government, quasi
governmental and other financial institutions/corporations, municipalities, etc.
The objectives of listing are mainly to:
provide liquidity to securities; mobilize savings for economic development; Protect
interest of investors by ensuring full disclosures.
Listing is advantageous to the company as well as shareholders. Listing is not a
mandatory but it is an option. The company should indicate in the prospectus about
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listing. The securities contract act specifies that a public limited company should list in a
recognized stock exchange. Financial institutions also require listing. The SEBI also
stipulates that companies should get their shares listed on a recognized stock exchange or
OTC.
Companies entering the primary market are required to advertise in the newspapers an
announcement regarding the proposed issue of capital. Until the subscription list is
closed, no advertisement should be given about over subscription. Stock exchange can
refuse enlistment in the case of companies which advertise oversubscription. The
allotment process should be made fairly & equitably.
In case of oversubscription the allotment should be made on drawal of lots upto certain
categories of applications. If the oversubscription is marginal the allotment may be done
on the basis of pro-rata method. The allotment should be in multiples of trading lots. The
issue of shares through public issue, it may be a costly affair. The overall ceiling of the
cost of public issue has been fixed. The public issue cost includes Underwriting
Commission, Brokerage Commission, and Fee to the registrars, publicity cost & listing
fee.
The Exchange has a separate Listing Department to grant approval for listing of securities
of companies in accordance with the provisions of the Securities Contracts (Regulation)
Act, 1956, Securities Contracts (Regulation) Rules, 1957, Companies Act, 1956,
Guidelines issued by SEBI and Rules, Bye-laws and Regulations of the Exchange.
A company intending to have its securities listed on the Exchange has to comply with
the listing requirements prescribed by the Exchange. Some of the requirements are as
under:I
Minimum Listing Requirements for new companies
II Minimum Listing Requirements for companies listed on other stock exchanges
Minimum Requirements for companies delisted by this Exchange seeking relisting o
III
Exchange
IV Permission to use the name of the Exchange in an Issuer Company's prospectus
V Submission of Letter of Application
VI Allotment of Securities
VII Trading Permission
VIII Requirement of 1% Security
IX Payment of Listing Fees
X Compliance with Listing Agreement
Cash Management Services (CMS) - Collection of Listing Fees
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[I] Minimum Listing Requirements for new companies
The following revised eligibility criteria for listing of companies on the Exchange, through
Initial Public Offerings (IPOs) & Follow-on Public Offerings (FPOs), effective August 1,
2006.
ELIGIBILITY CRITERIA FOR IPOs/FPOs
Companies have been classified as large cap companies and small cap companies. A large
cap company is a company with a minimum issue size of Rs. 10 crores and market
capitalization of not less than Rs. 25 crores. A small cap company is a company other than
a large cap company.
In respect of Large Cap Companies:
The minimum post-issue paid-up capital of the applicant company (hereinafter referred to
as "the Company") shall be Rs. 3 crores; and
The minimum issue size shall be Rs. 10 crores; and
The minimum market capitalization of the Company shall be Rs. 25 crores (market
capitalization shall be calculated by multiplying the post-issue paid-up number of equity
shares with the issue price)
In respect of Small Cap Companies
The minimum post-issue paid-up capital of the Company shall be Rs. 3 crores; and The
minimum issue size shall be Rs. 3 crores; and The minimum market capitalization of the
Company shall be Rs. 5 crores (market capitalization shall be calculated by multiplying the
post-issue paid-up number of equity shares with the issue price); and The minimum
income/turnover of the Company should be Rs. 3 crores in each of the preceding three 12months period; and The minimum number of public shareholders after the issue shall be
1000.
A due diligence study may be conducted by an independent team of Chartered Accountants
or Merchant Bankers appointed by the Exchange, the cost of which will be borne by the
company. The requirement of a due diligence study may be waived if a financial institution
or a scheduled commercial bank has appraised the project in the preceding 12 months.
For all companies :
In respect of the requirement of paid-up capital and market capitalisation, the issuers shall
be required to include in the disclaimer clause forming a part of the offer document that in
the event of the market capitalisation (product of issue price and the post issue number of
shares) requirement of the Exchange not being met, the securities of the issuer would not
be listed on the Exchange.
The applicant, promoters and/or group companies, should not be in default in compliance
of the listing agreement.The above eligibility criteria would be in addition to the conditions
prescribed under SEBI (Disclosure and Investor Protection) Guidelines, 2000.
[II] Minimum Listing Requirements for companies listed on other stock exchanges
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The Governing Board of the Exchange at its meeting held on 6th August, 2002 amended
the direct listing norms for companies listed on other Stock Exchange(s) and seeking listing
at BSE. These norms are applicable with immediate effect.
The company should have minimum issued and paid up equity capital of Rs. 3 crores.
The Company should have profit making track record for last three years. The
revenues/profits arising out of extra ordinary items or income from any source of nonrecurring nature should be excluded while calculating distributable profits.
Minimum networth of Rs. 20 crores (networth includes Equity capital and free reserves
excluding revaluation reserves).
Minimum market capitalisation of the listed capital should be at least two times of the paid
up capital.
The company should have a dividend paying track record for the last 3 consecutive years
and the minimum dividend should be at least 10%.
Minimum 25% of the company's issued capital should be with Non-Promoters shareholders
as per Clause 35 of the Listing Agreement. Out of above Non Promoter holding no single
shareholder should hold more than 0.5% of the paid-up capital of the company individually
or jointly with others except in case of Banks/Financial Institutions/Foreign Institutional
Investors/Overseas Corporate Bodies and Non-Resident Indians.
The company should have at least two years listing record with any of the Regional Stock
Exchange.
The company should sign an agreement with CDSL & NSDL for demat trading.
[III] Minimum Requirements for companies delisted by this Exchange seeking
relisting of this Exchange
The companies delisted by this Exchange and seeking relisting are required to make a fresh
public offer and comply with the prevailing SEBI's and BSE's guidelines regarding initial
public offerings.
[IV] Permission to use the name of the Exchange in an Issuer Company's prospectus
The Exchange follows a procedure in terms of which companies desiring to list their
securities offered through public issues are required to obtain its prior permission to use the
name of the Exchange in their prospectus or offer for sale documents before filing the same
with the concerned office of the Registrar of Companies. The Exchange has since last three
years formed a "Listing Committee" to analyse draft prospectus/offer documents of the
companies in respect of their forthcoming public issues of securities and decide upon the
matter of granting them permission to use the name of "Bombay Stock Exchange Limited"
in their prospectus/offer documents. The committee evaluates the promoters, company,
project and several other factors before taking decision in this regard.
[V] Submission of Letter of Application
As per Section 73 of the Companies Act, 1956, a company seeking listing of its securities
on the Exchange is required to submit a Letter of Application to all the Stock Exchanges
where it proposes to have its securities listed before filing the prospectus with the Registrar
of Companies.
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[VI] Allotment of Securities

As per Listing Agreement, a company is required to complete allotment of securities
offered to the public within 30 days of the date of closure of the subscription list and
approach the Regional Stock Exchange, i.e. Stock Exchange nearest to its Registered
Office for approval of the basis of allotment.
In case of Book Building issue, Allotment shall be made not later than 15 days from the
closure of the issue failing which interest at the rate of 15% shall be paid to the investors.
[VII] Trading Permission
As per Securities and Exchange Board of India Guidelines, the issuer company should
complete the formalities for trading at all the Stock Exchanges where the securities are to
be listed within 7 working days of finalisation of Basis of Allotment.
A company should scrupulously adhere to the time limit for allotment of all securities and
dispatch of Allotment Letters/Share Certificates and Refund Orders and for obtaining the
listing permissions of all the Exchanges whose names are stated in its prospectus or offer
documents. In the event of listing permission to a company being denied by any Stock
Exchange where it had applied for listing of its securities, it cannot proceed with the
allotment of shares. However, the company may file an appeal before the Securities and
Exchange Board of India under Section 22 of the Securities Contracts (Regulation) Act,
1956.
[VIII] Requirement of 1% Security
The companies making public/rights issues are required to deposit 1% of issue amount with
the Regional Stock Exchange before the issue opens. This amount is liable to be forfeited
in the event of the company not resolving the complaints of investors regarding delay in
sending refund orders/share certificates, non-payment of commission to underwriters,
brokers, etc.
[IX] Payment of Listing Fees
All companies listed on the Exchange have to pay Annual Listing Fees by the 30th April of
every financial year to the Exchange as per the Schedule of Listing Fees prescribed from
time to time.
The schedule of listing fees for the year 2006-2007, prescribed by the Governing Board of
the Exchange is given hereunder :
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SCHEDULE OF LISTING FEES FOR THE YEAR 2006-2007
Sr.
No.
Particulars
Amount
(Rs.)
Initial Listing Fees
20,000
Annual Listing Fees

(i) Companies with paid-up capital* upto Rs. 5 crores
(ii) AboveRs. 5 crores and upto Rs. 10 crores
(iii) Above Rs. 10 crores and upto Rs. 20 crores
Companies which have a paid-up capital* of more than Rs. 20 crores

will pay additional fee of Rs. 750/- for every increase of Rs. 1 crores or
part thereof.
In case of debenture capital (not convertible into equity shares) of

companies, the fees will be charged @ 25% of the fees payable as per
the above mentioned scales.
10,000
15,000
30,000
*includes equity shares, preference shares, fully convertible debentures, partly convertible
debenture capital and any other security which will be converted into equity shares.
Kindly Note the last date for payment of listing fee for the year 2006-2007 is April 30,
2006. Failure to pay the listing fee(for the equity and/or debt segment) before the due date
i.e. April 30, 2006 will attract imposition of interest @ 12% per annum w.e.f. May 1,
2006.
[X] Compliance with Listing Agreement

The companies desirous of getting their securities listed are required to enter into an
agreement with the Exchange called the Listing Agreement and they are required to make
certain disclosures and perform certain acts. As such, the agreement is of great importance
and is executed under the common seal of a company. Under the Listing Agreement, a
company undertakes, amongst other things, to provide facilities for prompt transfer,
registration, sub-division and consolidation of securities; to give proper notice of closure of
transfer books and record dates, to forward copies of unabridged Annual Reports and
Balance Sheets to the shareholders, to file Distribution Schedule with the Exchange
annually; to furnish financial results on a quarterly basis; intimate promptly to the
Exchange the happenings which are likely to materially affect the financial performance of
the Company and its stock prices, to comply with the conditions of Corporate Governance,
etc.The Listing Department of the Exchange monitors the compliance of the companies
with the provisions of the Listing Agreement, especially with regard to timely payment of
annual listing fees, submission of quarterly results, requirement of minimum number of
shareholders, etc. and takes penal action against the defaulting companies.
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[XI] Cash Management Services (CMS) - Collection of Listing Fees
As a further step towards simplifying the system of payment of listing fees, the Exchange
has entered into an arrangement with HDFC Bank for collection of listing fees, from 141
locations, situated all over India.Details of the HDFC Bank branches, are available on our
website site www.bseindia.com as well as on the HDFC Bank website www.hdfcbank.com
The above facility is being provided free of cost to the Companies.
Companies intending to utilise the above facility for payment of listing fee would be
required to furnish the information, (mentioned below) in the Cash Management Cash
Deposit Slip. These slips would be available at all the HDFC Bank centres.
The Cheque should be drawn in favour of Bombay Stock Exchange Limited , and should
be payable, locally.Companies are requested to mention in the deposit slip, the financial
year(s) for which listing fee is being paid. Payment made through any other slips would not
be considered. The above slips will have to be filled in quadruplicate. One acknowledged
copy would be provided to the depositor by the HDFC Bank.
General criteria
1) Conditions Precedent to Listing: The Issuer shall have adhered to conditions precedent
to listing as emerging inter-alia from Securities Contracts (Regulations) Act 1956,
Companies Act 1956, Securities and Exchange Board of India Act 1992, any rules and/or
regulations framed under foregoing statutes, as also any circular, clarifications, guidelines
issued by the appropriate authority under foregoing statutes.
2) The Project/ Activity plan of the applicant must have been appraised by a financial
institution u/s 4A of the Companies Act, 1956 or a state finance corporation or a
scheduled commercial bank with a paid up capital exceeding Rs.50 crores or a category I
Merchant Banker with a net worth of atleast Rs.10 crores or a venture capital fund with a
net worth of atleast Rs. 50 crores. or
In the case of an existing company the applicant should have been listed on any other
recognised stock exchange for atleast last three years
This clause shall however not be applicable to listing of securities issued by Government
Companies, Public Sector Undertakings, Financial Institutions, Nationalised Banks,
Statutory Corporations Banking Companies and subsidiaries of scheduled commercial
bank who are otherwise bound to adhere to all the relevant statutes, guidelines, circulars,
clarifications etc. that may be issued by various regulatory authorities from time to time
and in case of an Offer for Sale.
3) The applicant desirous of listing its securities should satisfy the exchange on the
following:
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No Disciplinary action has been taken by other stock exchanges and regulatory
authorities in the past three years: The promoting company (if any) has not been in
default in payment of listing fees to any stock exchange in the last three years or has not
been delisted or suspended in the past and has not been proceeded against by SEBI or
other regulatory authorities in connection with investor related issues or otherwise.
Redressal mechanism of Investor grievance: The points of consideration are: promoting
companys (if any) track record in redressal of investor grievances promoting companys
arrangements envisaged are in place for servicing its investor promoting companys
general approach and philosophy to the issue of investor service and protection
Distribution of shareholding: The promoting companys (if any) shareholding pattern on
March 31 of preceding three years separately showing promoters and other groups
shareholding pattern should be as per the regulatory requirements
Details of Litigation: The promoting companys (if any) litigation record, the nature of
litigation, status of litigation during the preceding three years need to be clarified to the
exchange.
KEY CONCEPTS
1. A public issue of shares involves entities such as R&T agents, bankers and brokers
apart from the lead manager of the issue.
2. All such entities have to be registered with SEBI.
3. The R&T agent manages the collection, collation, scrutinizing and distribution of
information related to the application forms received.
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4. They are involved in finalizing the basis of allotment, identifying the allottees, making
the allotment and sending data to the depository.
5. Legal formalities such as payment of stamp duty, creating the register of members and
the like are the functions of the R&T.
6. Bankers handle the funds collected in an issue and account for the same.
7. Brokers receive a commission for the role of collection agent in the issue.
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Chapter-III
Pre issue and Post-issue Management

End Chapter quizzes
Q1. The bondholder is entitled to participate along with shareholders in earnings of the
corporation in which kind of bond?
Convertible Bond
Treasury Bond
Participating Bond
Zero Coupon Bond
Q2. Which of the following bonds pay no interest between issue and redemption, except
at maturity?
Convertible Bond
Treasury Bond
Participating Bond
Zero Coupon Bond
Q3. Which of the following are characteristics of Commercial Paper?

Short term Promissory Note
Maturity> 1 year
Secured Promissory Note
Issued at discount
I and II only
I and III only
I and IV only
I, II and IV
Q4. A type of negotiable (transferable) financial security that is traded on a local stock
exchange but represents a security, usually in the form of equity that is issued by a
foreign publicly listed company is called:
Depository Receipt
Common Stock
Preferred Stock
Mortgage Backed Securities
175
Q5. What type of issue has to be necessarily credit rated before being launched:
Stock issue
Debenture Issue
Preferred Stock Issue
Private Placement
Q6. When an already listed company makes either a fresh issue of securities to the public
or an offer for sale to the public, it is called
FPO.
IPO
Private Placement
Rights Issue
Q7Which of the following is not a pre issue activity?

Appointment of Intermediaries
Drafting the offer Document
Appointment of Compliance Officer
Listing
Q8. Which of the following does not have details of either price or the number of shares
being offered or the amount of issue? However, this prospectus mentions the number of
shares and the upper and lower price bands.
Red Herring prospectus
Draft Prospectus
Abridged Prospectus
Offer Document
Q9. Which of the following is not a basis for the issue price as mentioned in the
prospectus?
EPS
P/E
Net Asset Value per share
Goodwill of the company
Q10. Which of the following is not a post issue activity?
Post issue monitoring Report
Redressal of Investors Grievances
Dispatch of refund orders
Appointment of intermediaries
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.
Chapter-IV
Book Building process for public issue
Contents:
3.1 Introduction: Book Building

3.2 Basic Mechanism: Book Building
3.3 Green Shoe option
3.4 Underwriting
3.5 Allotment of Shares
3.6 Delisting
3.7 Reverse book building
3.8
Summary
3.9 Conclusion
3.10 End Chapter Quiz
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Methods of Making a Public Issue of Shares

There are basically two ways in which a company can raise capital from a public issue of
shares. These are
- Fixed Price Issue
- Book Built Issue
Fixed Price Issue
In a fixed price issue of shares to the public, the company in consultation with the lead
manager to the issue would decide on the price at which the shares will be issued.
Currently, SEBI permits companies to freely price the issue. The price is justified by the
company on the basis of quantitative and qualitative factors. This is clearly laid out in the
prospectus for the investors to make an informed investment decision. Investors know the
price at which the shares will be allotted to them at the time of making the application.
Shares allotted to the investor will depend upon the basis of allotment finalized after the
issue closes. If the issue is oversubscribed, the investor will get shares proportionate to
the oversubscription in the respective category. The investor is sent a (Confirmatory
Allotment Note) (CAN)/refund order within 30 days of the issue closing date.
Book Built Issue

The objective of a book build process is to identify the price that the market is willing to
pay for the shares being issued by the company. The company and its lead managers will
specify either a floor price or a price band within which investors can bid. This
information is in the red herring prospectus. When the issue opens, investors will put in
bid applications specifying the price and the amount of shares bid at that price. The price
bid should be above the floor price or within the price band, as applicable, depending
upon the specification in the red herring prospectus of the issue.
Investors can revise the bids in the period when the issue is open. The issuer, in
consultation with the book running lead manager will decide on the cut-off price at which
the issue gets subscribed. All allottees who bid at or above the cut-off price are successful
bidders and are eligible for allotment in the respective categories.
178
3.1 Introduction :Book Building Mechanism

Book-building means a process by which a demand for the securities proposed to be
issued by a body corporate is elicited and built up and the price for such securities is
assessed for the determination of the quantum of such securities to be issued by means of
notice/ circular / advertisement/ document or information memoranda or offer document.
A company proposing to issue capital through book-building has to comply with the
requirements of SEBI in this regard. These are discussed here.
Book-building process is a transparent and flexible price discovery method used in most
developed countries for marketing a public offer of equity shares either Initial Public
Offerings (IPOs) or Further Public Offerings (FPOs) of a company. Under this method,
price of securities is fixed by the issuer company along with Book Running Lead
Managers (BRLM) on the basis of feedback received from investors through market
intermediaries during a certain period, in accordance with Sebi guidelines in India. In this
perspective, this article makes an attempt to review the different aspects of the bookbuilding process of public issues and merchant banking activities relating to such process
in the Indian primary capital market.
The liberalization policies ushered in by the government, in 1991, have brought about a
new dimension in the capital market as well as corporate environment in India. The
investment climate improved considerably following the modification of licensing
procedures and the freedom to fix issue prices for new issues, etc. The abolition of the
Capital Issue Control Act, 1947 also welcomed a new era in the primary capital markets
in India. Controls over the pricing of the issues, and designing and tenure of the capital
issues were abolished after establishment of Securities and Exchange Board of India
(SEBI) in 1988. The issuers, at present, are free to make the price of the issues under the
ambit of Sebi. Before the establishment of Sebi, the quality of disclosures in the offer
documents was very poor. Sebi also formulated and prescribed stringent disclosure norms
in conformity to global standards. These favorable developments lead to rapid growth in
the quantum of financial investment. Thus, the primary capital market in India has been
witnessing tremendous growth in the number of new issues hitting the market, surpassing
the normal growth that is expected as a result of growth in the economy.
While companies are very much keen on taking finance from the public through primary
capital market, they require financial services in mobilization of finance from the capital
market. Today is the era of specialization in service functions, and the merchant banker
plays a very significant role in tandem with the corporate clients and the national
economy. Though the merchant bankers remained almost stagnant and stereotyped till the
1990s, they have witnessed a remarkable growth during this period after the process of
economic reforms and deregulation of the Indian economy. With free pricing of issues
coupled with an increasing trend towards equity financing by companies, more and more
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companies are entering the capital market for funds resulting in a great scope for
merchant banking services. As capital markets assume increased complexities, the need
for such services from an investors point of view has also become enhanced. To keep
pace with the globalization and liberalization process the government of India is very
much concerned with the Indian capital market.
Book building means a process by which a demand for the securities proposed to be
issued by a body corporate is elicited & built up & the price for such securities is assessed
for the determination of the quantum of such securities to be issued by means of a
notice/circular/advertisings/document or information memoranda or offer document.
Nature: Book building is a process of price discovery. It is a market related process of
demand & price determination. Book building is a transparent & flexible pricing method
based on feed back from investors. In book building new shares are values on the basis of
a demand feed back from investors and are a viable alternative to the existing rigid
system of fixed pricing which is to a large extent unavoidable at a retail level. The
objective of book building is to find the highest market clearing price and the term and
level from high quality long term investors in order to reach appropriate allocation
decisions. It works on the assumption that the intermediary, the under-writing syndicate,
estimates demand & takes the allocation on to their books before the sale to the investor
who is a retail one. The syndicate is a wholesale concept while the ultimate investor is a
retail one.
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3.2 Basic Mechanism: SEBI guidelines for Book Building
Conditions for Applicability:

According to SEBI guidelines in an issue of securities to the public through a prospectus,
the option of book building shall be available to the issuer company subjects to the
following main conditions:
The size of issue exceeds Rs. 100 crore.
Only as an alternative to and to the extent of, the percentage of the issue which can be
reserved for firm allotment, as per the existing guidelines,
Book building process to be separately identified/indicated as a placement portion
category, in the prospectus,
Underwriting will be mandatory to the extent of the net offer to the public,
One of the lead merchant bankers to the issue shall be nominated by the issuer company
as book runner and his name shall be mentioned in the draft prospectus submitted to
SEBI.
In June 1996 SEBI has decided that in case of debt issues not accompanied by equity
component the book building process could be allowed for the entire issue.
A proposal for allowing 100% book building in equity issues by SEBI has been put on
hold (23.12.1996) by the SEBI board on the ground that it would inhibit the right of
investors to apply for an issue.
The guidelines provide separate requirements to be met for 75% & 100%, book building
for the issue of securities.
75% Book Building Process:

The option of book-building is available to all body corporate which are eligible to make
an issue of capital to the public as an alternative to and to the extent of the percentage of
the issue, which can be reserved for firm allotment. The issuer company can either
reserve the securities for firm allotment or issue them through book building process. The
issue of securities though book-building route should be separately identified/indicated as
placement Portion category in the prospectus. The securities available to the public
should be separately identified as net offer to the public. The requirement of minimum
25% of the securities to be offered to the public is also applicable. Underwriting is
mandatory to the extent of the net offer to the public. The draft prospectus containing all
the details except the price at which the securities are offered should be filed with SEBI.
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The issuer company should nominate one of the lead merchant bankers to the issue as
book runner, and his name should be mentioned
in the prospectus. The copy of the draft prospectus, filed with SEBI, should be circulated
by the book runner to the institutional buyers, who are eligible for firm allotment, and to
the intermediaries, eligible to act as underwriters inviting offers for subscription to the
securities.
In an issue of securities to the public through a prospectus, the option of book building is
available to all body corporate that are otherwise eligible to make an issue of capital to
the public as an alternative to, and to the extent of, the percentage of the issue, which can
be reserved for firm allotment. The issuer company can either reserve the securities for
the firm allotment or issue them through the book building process. The issue of
securities through the book building process should be separately identified/indicated as
placement portion category, in the prospectus. The securities available to the public
should be separately identified as net offer to the public.
The requirement of minimum 25% of the securities to be offered to the public is also
applicable. Underwriting is mandatory to the extent of the net offer to the public. The
draft prospectus containing all the information, except the information regarding the price
at which the securities are offered, should be filed with the SEBI. One of the lead
merchant banker(s) to the issue should be nominated by the issuer company as a book
runner and his name should be mentioned in the prospectus. The copy of the draft
prospectus, filed with the SEBI, should be circulated by the book runner to the (i)
institutional buyers, who are eligible for firm allotment, and (ii) intermediaries, eligible to
act as underwriters, inviting offers for subscription to the securities.
The draft prospectus circulated should, however, indicate the price band within which the
securities are being offered for subscription. The book runner on receipt of the offer
should maintain a record of the names & number of securities ordered & the price at
which the institutional buyer/underwriter is willing to subscribe to the securities under the
placement portion. The underwriter(s) should maintain a record of the orders received by
him for subscribing to the issue out of the placement portion. He should aggregate these
offers & intimate the same to the book runner. The institutional investor should also
forward its orders, if any, to the book runner.
On receipt of the information, the book runner and the issuer company determine the
price at which the securities would be offered to the public. The issue price for the
placement portion & offer to the public should be the same. On determination of the
price, the underwriter should enter into an underwriting agreement with the issuer
indication the number of securities as well as the price at which the former would
subscribe to the securities.
The book runner should, however, have an option to require the underwriters to pay all
monies with respect to their underwriting commitment in advance. Within two days of
determination of the issue price, the prospectus should be filed with the ROCs. The issuer
company should open two different accounts for collection of application money (ies) -
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one for the private placement portion & the other for the public subscription. A day prior
to the opening of the issue to the public, the book runner should collect the application
forms along with the application money(ies), from the institutional buyers & the
underwriters to the extent of the securities proposed to be allotted to them/subscribed by
them.
The allotments for the private placement portion should be made on the second day from
the closure of the issue. However, to ensure that the securities allotted under the
placement portion and public portion are pari passu in all respects, the issuer company
may have one date of allotment, which should be deemed as the date of allotment for the
issue of securities through the book building process. In case the book runner has exercise
the option to require the underwriter to pay in advance all money (ies) required to be paid
with respect to their underwriting commitment by the 11th day of the closure of the issue,
the shares allotted as per the private placement category would be eligible to be listed.
The allotment of securities under the public category should be made as per the relevant
SEBI guidelines. The securities allotment under the public category are eligible to be
listed. In case of under subscription should be permitted from the placement portion
subject to the condition that preference would be given to individuals investors. In case of
under subscription in the placement portion, spillover would be permitted from the net
offer to public. The issuer company may pay interest on the application money (ies) till
the date of allotment or the deemed date of allotment uniformly to all the applicants. The
book runner and other intermediaries should maintain records of the book building
process. The SEBI has the right to inspect such records.
183
100% Book Building Process:

In an issue of securities to the public through a prospectus, the option for 100% book
building is available to any issuer company. The issue of capital should be Rs. 25 crore
and above. Reservation for firm allotment to the extent of the percentage specified in the
relevant SEBI guidelines can be made only to promoters, permanent employees of the
issuer company and in the case of new company to the permanent employees of the
promoting
Company. It can also be made to shareholders of the promoting companies, in the case
of new company and shareholders of group companies in the case of existing company
either on a competitive basis or on a firm allotment basis. The issuer company should
appoint eligible merchant bankers as book runner(s) and their names should be mentioned
in the draft prospectus. The lead merchant banker should act as the lead book runner and
the other eligible merchant bankers are termed as co-book runner. The issuer company
should compulsorily
184

offer an additional 10% of the issue size offered to the public through the prospectus.
100% of the net offer to the public through 100% Book Building Process
185
186

75% of the net offer to the public through Book Building Process
NEED OF BOOK BUILDING
187

The abolitions of the capital Issue Contract Act, 1947 has brought a new era in the
primary capital markets in India. Controls over the pricing of the issues, designing and
tenure of the capital issues were abolished. The issuers, at present, are free to make the
price of the issues. Before establishment of SEBI in 1992, the quality of disclosures in the
offer documents was very poor. SEBI has also formulated and prescribed stringent
disclosure norms in conformity to global standards. The main drawback of free pricing
was the process of pricing of issues. The issue price was determined around 60-70 days
before the opening of the issue and the issuer had no clear idea about the market
perception of the price determined. The traditional fixed price method of tapping
individual investors suffered from two defects:
Delays in the IPO process and
Under-pricing of issue.
In fixed price method, public offers do not have any flexibility in terms of price as well as
number of issues. From experience it can be stated that a majority of the public issues
coming through the fixed price method are either under-priced or over-priced. Individual
investors (i.e. retail investors), as such, are unable to distinguish good issues from bad
one. This is because the issuer company and the merchant banker as lead manager do not
have the exact idea on the fixed pricing of public issues.
Thus it is required to find out a new mechanism for fair price discovery and to help the
least informed investors. Thats why, Book Building mechanism, a new process of price
discovery, has been introduced to overcome this limitation and determine issue price
effectively. Public offers in fixed price method involve a pre issue cost of 2-3% & carry
the risk of failure if it does not receive 90% of the total subscription. In Book Building
such cost & risks can be avoided because the issuer company can withdraw from the
market if demand for the security does not exist.
188

BOOK BUILDING PROCESS
189

STEPS INVOLVED IN BOOK BUILDING
PROCESS
190
HOW IS BOOK BUILT IN INDIA?

The main parties who are directly associated with book building process are the issuer
company, the Book Runner Lead Manager (BRLM) and the syndicate members. The
Book Runner Lead Manager (i.e. merchant banker) and the syndicate members who are
the intermediaries are both eligible to act as underwriters. The steps which are usually
followed in the book building process can be summarized below:
1. The issuer company proposing an IPO appoints a lead merchant banker as a BRLM.
2. Initially, the issuer company consults with the BRLM in drawing up a draft prospectus
(i.e. offer document) which does not mention the price of the issues, but includes other
details about the size of the issue, past history of the company, and a price band. The
securities available to the public are separately identified as net offer to the public.
3. The draft prospectus is filed with SEBI which gives it a legal standing.
4. A definite period is fixed as the bid period and BRLM conducts awareness
campaigns like advertisement, road shows etc.
5. The BRLM appoints a syndicate member, a SEBI registered intermediary to
underwrite the issues to the extent of net offer to the public.
6. The BRLM is entitled to remuneration for conducting the Book Building process.
7. The copy of the draft prospectus may be circulated by the BRLM to the institutional
investors as well as to the syndicate members.
8. The syndicate members create demand and ask each investor for the number of shares
and the offer price.
9. The BRLM receives the feedback about the investors bids through syndicate
members.
10. The prospective investors may revise their bids at any time during the bid period.
11. The BRLM on receipts of the feedback from the syndicate members about the bid
price and the quantity of shares applied has to build up an order book showing the
demand for the shares of the company at various prices. The syndicate members must
also maintain a record book for orders received from institutional investors for
subscribing to the issue out of the placement portion
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12. On receipts of the above information, the BRLM and the issuer company determine
the issue price. This is known as the market-clearing price.
13. The BRLM then closes the book in consultation with the issuer company and
determine the issue size of (a) placement portion and (b) public offer portion.
14. Once the final price is determined, the allocation of securities should be made by
the BRLM based on prior commitment, investors quality, price aggression, earliness of
bids etc. The bid of an institutional bidder, even if he has paid full amount may be
rejected without being assigned any reason as the Book Building portion of institutional
investors is left entirely at the discretion of the issuer company and the BRLM.
15. The Final prospectus is filed with the registrar of companies within 2 days of
determination of issue price and receipts of acknowledgement card from SEBI.
16. Two different accounts for collection of application money, one for the private
placement portion and the other for the public subscription should be opened by the
issuer company.
17. The placement portion is closed a day before the opening of the public issue through
fixed price method. The BRLM is required to have the application forms along with the
application money from the institutional buyers and the underwriters to the private
placement portion.
18. The allotment for the private placement portion shall be made on the 2nd day from
the closure of the issue and the private placement portion is ready to be listed.
19. The allotment and listing of issues under the public portion (i.e. fixed price portion)
must be as per the existing statutory requirements.
20. Finally, the SEBI has the right to inspect such records and books which are
maintained by the BRLM and other intermediaries involved in the Book Building process
BOOK BUILDING PROCESS IN US

Unlike India, in international markets the most active investors are the mutual funds and
other institutional investors and the entire issue is made through book building process. In
India, on the other, a large number of retail investors participate actively in IPOs made by
the company. In US, book building is called soft underwriting moded by investment
bankers which implies that they sell the securities on a best efforts basis and they are not
obliged to take up the unsold stock of securities if there is no demand for such securities.
Public issue through book building process in US takes an average of 75 days to make a
prospectus, file it with SEC, NYSE or NASDAQ, talk to select investors, establish a price
range, print the red herring prospectus and launch the offering. Trading of securities
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begins on the 16th day and payment by investors and delivery of shares are completed by
the 20th day.
IPO Through Stock Exchange On-line System (E-IPO)
In addition to other requirements for public issue as given in SEBI guidelines wherever
applicable, a company proposing to issue capital to public through the on-line system of
the stock exchange for offer of securities has to comply with the additional requirements
in this regard. They are applicable to the fixed price issue as well as for the fixed price
portion of the book-built issues. The issuing company would have the option to issue
securities to public either through the on-line system of
the stock-exchange or through the existing banking channel. For E-IPO the company
should enter into agreement with the stock-exchange(s) and the stock-exchange would
appoint SEBI registered stockbrokers of the stock exchange to accept applications. The
brokers and other intermediaries are required to maintain records of (a) orders received,
(b) applications received, (c) details of allocation and allotment, (d) details of margin
collected and refunded and (e) details of refund of application money.
Issue of Capital by Designated Financial Institutions
Designated financial institutions (DFI), approaching the capital market for fund though
an offer document, have to follow following guidelines.
Promoters contributions:
There is no requirement of minimum promoters contribution in the case of any issue by
DFIs. If any DFI proposes to make a reservation for promoters, such contribution should
come only from actual promoters and not from directors, friends, relatives and associates,
etc.
Reservation for employees:
The DFIs may reserve out of the proposed issues for allotment only to their permanent
employees, including their MD or any fulltime director. Such reservations should be
restricted to Rs. 2000 per employee, subject to five percent of the issue size. The shares
allotted under the reserved category are subject to a lock-in for a period of three years.
Pricing of the issue:

The DFIs, may freely price the issues in consultation with the lead managers, if the DFIs
have a three years track record of consistent profitability out of immediately preceding
five years, with profit during last two years prior to the issue.
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Preferential Issue
The preferential issue of equity shares/ fully convertible debentures (FCD)/ partly
convertible debentures (PCDs) or any other financial instruments, which would be
converted into or exchanged with equity shares at a later date by listed companies to any
select group of persons under section 81(1A) of the Companies Act, 1956 on a private
placement basis, are governed by the following guidelines:
Pricing of issue:
The issue of shares on a preferential basis can be made at a price not less than the higher
of the following: (i) The average of the weekly high and low of the closing prices of the
related shares quoted on the stock exchange and (ii) The average of the weekly high and
low of the closing prices of the related shares quoted on a stock exchange during the two
weeks preceding the relevant date.
Pricing of Shares arising out of warrants:

Where warrants are issued on a preferential basis with an option to apply for and be
allotted shares, the issuer company should determine the price of the resultant shares in
accordance with the provisions discussed in the above point.
Pricing of shares on Conversion:

Where PCDs/FCDs/ other convertible instruments are issued on a preferential basis,
providing for the issuer to allot shares at a future date, the issuer should determine the
price at which the shares could be allotted in the same manner as specified for pricing of
shares allotted in lieu of warrants.
Currency of Financial Instruments:

In the case of warrants / PCDs / FCDs / or any other financial instruments with a
provision for the allotment of equity shares at a future date, either through conversion or
otherwise, the currency of the instruments cannot exceed beyond 18 months from the date
of issue of the relevant instruments.
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Non-transferability of Financial Instruments:

The instruments allotted on a preferential basis to the promoters / promoter groups are
subject to a lock-in period of three years from the date of allotment. In any case, not more
than 20% of the total capital of the company, including the one brought in by way of
preferential issue would be subject to a lock-in period of three years from the date of
allotment.
Currency of Shareholders Resolutions:

Any allotment pursuant to any resolution passed at a meeting of shareholders of a
company granting consent for preferential issues of any financial instrument, should be
completed within a period of three months from the date of passing of the resolution.
Certificate from Auditors:

In case every issue of shares/ FCDs/PCDs/ or other financial instruments has the
conversion option, the statutory auditors of the issuer company should certify that the
issue of said instruments is being made in accordance with the requirements contained in
these guidelines.
OTCEI Issues
A company making an initial public offer of equity shares / convertible securities and
proposing to list them on the Over The Counter Exchange of India (OTCEI) has to
comply with following requirements:
Eligibility Norms:
Such a company is exempted from the eligibility norms applicable to unlisted companies,
provided (i) it is sponsored by a member of the OTCEI and (ii) has appointed at least two
market makers. Any offer of sale of equity shares / convertible securities resulting from a
bought out deal registered with OTCEI is also exempted from the eligibility norms
subject to the fulfillment of the listing criteria laid down by the OTCEI.
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Pricing norms:
Any offer for sale of equity shares or any other convertible security resulting from a
bought out deal registered with OTCEI is exempted from the pricing norms specified for
unlisted companies, subject to following conditions: (a) The promoters after such issue
would retain at least 20% of the total issued capital with a lock-in of three years from the
date of the allotment of securities in the proposed issue and (b) at least two market
makers are appointed in accordance with the market making guidelines stipulated by the
OTCEI.
Projection:
In case of securities proposed to be listed on the OTCEI, projections based on the
appraisal done by the sponsor who undertakes to do market-making activity can be
included in the offer document subject to compliance with the other conditions relating to
the contents of offer documents.
OFFER TO PUBLIC THROUGH BOOK-BUILDING PROCESS

An issuer company may make an issue of securities to the public through a prospectus in
the following manner:
100% of the net offer to the public through the book-building process
75% of the net offer to the public through the book-building process and 25% at the price
determined through book-building. Reservation or firm allotment to the extent of the
percentage specified in the relevant SEBI guidelines can be made only to promoters,
permanent employees of the issuer company and, in the case of a new company, to the
permanent employees of the promoting companies. It can also be made to the
shareholders of the promoting companies in the case of a new company & shareholders
of group companies in the case of an existing company, either on a competitive basis or
on a firm allotment basis.
The issuer company should appoint merchant banker(s) as book runner(s) & their names
should be mentioned in the draft prospectus. The issue company should enter into an
agreement with stock exchange(s) which have the requisite system of online offer of
securities specifying, inter alia, their inter se rights, duties, responsibilities and
obligations. It should also provide for a dispute resolution mechanism between them.
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REGULATORY REQUIREMENTS IN A BOOK BUILDING OFFER

- The issue must be compulsorily underwritten to the extent of net offer to the public.
- The lead managers have to be appointed as the book runner.
- The cap of the price band will not be higher than 20% of the floor price.
- The price band can be revised during the offer period within the 20% band between
floor and cap price. The revision will have to be advertised and the issue period extended
by three days.
- In a book built offer, not less than 35% of the net offer to the public will be reserved for
retail individual investors, not less than 15% for non-institutional investors and not more
than 50% for qualified institutional buyers.
The issue will be open for a minimum of 3 working days and a maximum of seven days.
If the price band is revised, then the issue will be open for 10 days. 118
The details of the syndicate members who can accept the bids as well as bidding centres
all of which should have electronically connected terminals should be made widely
available.
Bids can also be placed with the syndicate members who are brokers of the exchange
through which the securities are being offered under the on-line system.
All bids shall be accepted in the standardised bid forms that will have the details of the
investor, the price and the quantity bid for. The bids can be revised during the period that
the offer is open. Investors who are entitled to allotment in the issue should be sent a
confirmatory allotment note (CAN) within 15 days of the issue closing. Demat credit of
shares or dispatch of refund order should be completed within 15 days of the closure of
the issue.
LIMITATION OF BOOK BUILDING MECHANISM

Retail investors are not free from certain disadvantages compared to institutional
investors in Book Building, which does not provide an appropriate price discovery
mechanism. It is the main reason why small investors have stayed away from the market.
It needs changes to make it more suitable to the Indian context and the conditions
prevailing in the Indian capital market.
In the IPOs through the Book building route, it would be difficult to find dubious issues
of the kind that put off investors.
The book building system has various limitations. Some of them are as follows:
Book building is appropriate for mega issues only. In the case of the potential investors,
the companies can adjust the attributes of the offer according to the preference of the
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potential investors. It may not be possible in big issues since the risk-return preference of
the investors cannot be estimated easily.
The issuer company should be fundamentally strong and well known to the investors.
The book building system works very efficiently in matured market conditions.
The investors are aware of the various parameters affecting the market price of the
securities. But, such conditions are not commonly found in practice.
There is a possibility of price rigging on listing as promoters may try to bail out syndicate
members.
If small investors still stay away from the IPOs, it is because of their unpleasant
experience in the mid-1990sa process that actually continued till 1998, albeit on a
smaller scale. In the IPOs through the Book-Building route, it would be difficult to find
dubious issues of the kind that put off investors. Interestingly, the primary advisory
markets of SEBI has recommended that QIBs limit should be reduced to 40 per cent due
to thin interest and enhance the share for retail investors. SEBI needs to put this
recommendation, as well as its proposed review of the entire book-building process, on
the backburner. Important suggestion is the lowering down of the mandatory participation
by QIBs in bookbuilt issues, which is currently at 50%. This level is proposed to be
brought down to 40%. Of late, more and more public issues are using the Book-Building
route, which would result in a progressively smaller amount being allotted for small
investors. In other words, the small investor who is sometimes described in a flattering
manner as the backbone of the bourses, has in effect been driven out of the capital
markets not so much on account of their lack of interest but because of the policy
framework. This, in turn, has led to other problems a low public float makes it easier
for promoters to manipulate prices and also leads to lack of liquidity. It is heard that small
investors are not just uninterested but also lack resources. Both these contentions are
incorrect. Say for instance, a study of four IPOs issued by banks during 2002 reveals that
in three out of the four instances, small investors subscribed to more than three-fourths of
the total issue despite the prevalence of bearish and nervous sentiments in the markets.
Actually, vanishing companies and scamsters galore have shattered the confidence of
small investors. Yet it is also clear that it would be unrealistic to expect the stock markets
to revive or remain healthy without the active participation of small investors.
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RECENT TRENDS IN BOOK- BUILDING ISSUES IN INDIA
1. The book-building process in India is very transparent. All investors (including small
investors) can see on an hourly basis where the book is being built before applying.
Therefore, no asymmetry as far as information dissemination is concerned.
2. The year 2004 was a significant and bumper because companies have raised Rs. 30,511
crore through public issue and 99 per cent of this being good quality securities from
established companies and almost all issues were through book-building.
3. The practice of book building is new to the ndian capital market and the procedure is
still volving. ICICI was the first company to use ook-building method for its Rs. 1000
crore bond ssue in April 1996 followed by Rs. 4,323 crore Larsen & Toubro issue and Rs.
5,878 crore TISCO bond issue for the placement portion.
4. The recent issue of Hughes Software made history in more than one way. It was the
first Indian IPO in IT industries to adopt the Book- Building process and the issue was
highly over subscribed.
5. In November 1999 the HCL technologies has raised capital through IPO Book-building
method, investors gave an enthusiastic response. The issue got over subscribed by 27
times. This was despite the fact that the company revised its original price band of Rs.
450-540 to Rs. 500- 580. The final price offered was Rs. 580 for the shares.
Other companies which have accepted the bookbuilding mechanism were Shree Rama
Multi Tech Ltd., Sydus Cadila Healthcare Ltd., Mascot Systems Ltd., Creative Eye Ltd.,
MosChip Semiconductor Technology Ltd., SIP Technologies and Exports Ltd., Hughes
Tele. Com India Ltd., MRO TEK Ltd., Pritish Nandy Communications Ltd., Balaji
Telefilms Ltd., ASTEC Software & Technology Services Ltd., Mid- Day Multimedia
Ltd., D-Link (India) Ltd., Jet Airways (India) Ltd., UTV Software Communications Ltd.,
Punjab National Bank, Gateway Distriparks Ltd., IVRCL Infrastructure & Projects Ltd.
The Pattern of Mega Issues and their role in relation to total amount of capital mobilized
by Indian companies.
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3.3 GREEN SHOE OPTION
A company making an initial public offer of equity shares through the book building
mechanism can avail of the green shoe option (GSO) for establishing the post-listing of
its shares. The GSO means an option of allocating shares in excess of the shares included
in the public issue and operating a post-listing price stabilizing mechanism through a
stabilizing agent (SA). The concerned issuing company should seek authorization for the
possibility of allotment of further issues to the SA at the end of the stabilization period
together with the authorization for the public issue in the general meeting of its
shareholders. It should appoint one of the lead book runners as the SA who would be
responsible for the price stabilization process.
The SA should enter into an agreement with the issuer company, prior to the filing of the
offer document with SEBI, clearly stating all the terms/conditions relating to GSO
including fee charged/expenses to be incurred by him for this purpose. He should also
enter into an agreement with the promoter(s) who would lend their shares, specifying the
maximum number of shares that may be borrowed from the promoters, but in no case
exceeding 15% of the total issue size. The details of these two agreements should be
disclosed in the draft red herring prospectus, red herring prospectus and the final
prospectus. They should also be included as material documents for public inspection in
terms of the disclosures in the contents of the offer documents. The lead book runner, in
consultation with the SA, would determine the amount of shares to be over-allotted with
the public issue within the ceiling specified (i.e. 15% of the issue size). Over allotment
refers to an allocation of shares in excess of the size of the public issue made by the SA
out of shares borrowers from promoters in pursuance of a GSO exercised by the issuing
company.
In most of the cases, it is experienced that IPO through Book Building method in India
turns out to be overpriced or under priced after their listing of them and ultimately the
small investors become a net looser. If the IPO is overpriced it creates a bad feeling in
investors mind as initial returns to them maybe negative at that point of time. On the
other side, if the prices in the open market fall below the issue price, small investors may
start selling their securities to minimize losses. Therefore, there was a vital need of a
market stabilizer to smoothen the swings in the open market price of a newly listed share,
after an initial public offering.
Market stabilization is the mechanism by which stabilizing agent acts on behalf of the
issuer company, buys a newly issued security for the limited purpose of preventing a
declining in the new securitys open market price in order to facilitate its distribution to
the public. It can prevent the IPO from huge price fluctuations and save investors from
potential loss. Such mechanism is known as Green Shoe Option (GSO) which is an
internationally recognized for market stabilization. So GSO can rectify the demand and
supply imbalances and can stabilize the price of the stock.
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It owes its origin to the Green Shoe Company which used this option for the first time
throughout the world.
In case an initial public offer of equity shares is made by an issuer company through the
book building mechanism, the Green Shoe option (GSO) can be used by such company
for stabilizing the post listing price of its shares, subject to the guidelines prescribed by
SEBI.
According to SEBI guidelines, a company desirous of availing the GSO shall in the
resolution of the general meeting authorizing the public issue, seek authorization also for
the possibility of allotment of further shares to the stabilizing agent (SA). The company
shall appoint one of the lead book runners, amongst the issue management team, as the
stabilizing agent (SA), who will be responsible for the price stabilization process, if
required. The SA shall enter into an agreement with the issuer company, prior to filling of
offer document with SEBI, clearly stating all the terms & conditions relating to this
option including fees charged/expenses to be incurred by SA for this purpose. The SA
shall also enter into an agreement with the promoter(s) who will lead their shares,
specifying the maximum number of shares that may be borrowed from the promoters,
which shall not be in excess of 15% of the total issue. The stabilization mechanism shall
be available for the period disclosed by the company in the prospectus, which shall not
exceed 30 days from the date when trading permission was given by the exchange(s).
The draft red herring/red herring prospectus/final prospectus should contain the following
additional disclosures.
Name of the SA
Maximum number of shares as well as the percentage of the proposed issue size.
Period for which the company proposes to avail of the stabilization mechanism,
Maximum amount of funds to be received by the company in case of further allotment
and the use of these additional funds in final document to be filed with the ROCs.
Details of the agreement/arrangement between the SA and the promoters to borrow
shares including, inter alia, (i)name of the promoters (ii) their existing shareholders (iii)
number & percentage of shares to be lent by them (iv) rights/obligations of each party
and so on.
The final prospectus should additionally disclose the exact number of shares to be allotted
pursuant to the public issue, stating separately the number of shares to be borrowed from
the promoters and over-allotted by the SA & their percentage in relation to the total issue
size.
Companies may also go in for a Green Shoe Option (GSO). The objective of this option
is to provide stability to price of the share in the secondary market immediately on listing.
A company, which opts for Green Shoe option shall disclose the same in the offer
document. The company can allot additional shares not exceeding 15% of the issue size
to the general public who have subscribed in the issue. The shares will be allotted in the
same ratio in which reservation is being made for the various categories. For this purpose,
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the required over allotment shares will be lent by the promoter and/or any investor
holding more than 5% of the total issued capital.
The money realised out of this over-allotment will be kept in a separate bank A/c to be
designated as GSO bank A/c. This amount will be used by the Stabilizing Agent (SA),
who is usually one of the merchant bankers or lead managers to the issue.
The SA will utilize the money for buying shares from the secondary market whenever the
market price goes below the issue price. However, he is under no obligation to take any
direction from the issuing company or the promoter for his market operations.
The SA can only buy shares and cannot sell any shares. Moreover, he can buy a
maximum up to the extent of the over-allotment made. The shares purchased from the
secondary market will be kept in a separate demat A/c designated as GSO demat A/c. The
entire process of stabilization will be available only for a period of 30 days from the date
on which the shares are listed and traded. At the end of the 30 day period, the SA will
take stock of the shares purchased and these shares will be returned to the
lender/promoter. In the event of any shortfall in the shares bought in relation to the shares
lent, additional allotment will be made by the company against the unutilized funds lying
in the GSO Bank A/c. This will be at the same price as per the original issue price.
Any balance money lying in the GSO bank A/c (arising out of difference between the
issues and buying price of the SA) will be transferred by the SA to the Investor Protection
Fund of the designated stock exchange. The GSO bank A/c and the GSO demat A/c are
closed once the period of stabilization is over.
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3.4 UNDERWRITING
Meaning:
A guarantee given by underwriters to take up whole or part of the issue of securities not
subscribed by the public. According to Gerstenberg: Underwriting is an agreement
entered into before the shares are brought before the public that in the event of the public
not taking the whole of them the underwriter will take an allotment of such part of the
shares as the public has not subscribed for.
Underwriting is an agreement, entered by a company with a financial agency, in order to
ensure that the public will subscribe for the entire issue of shares or debentures made by
the company. The financial agency is known as the underwriter and it agrees to buy that
part of the company issues which are not subscribed to by the public in consideration of a
specified underwriting commission. The underwriting agreement, among others, must
provide for the period during which the agreement is in force, the amount of underwriting
obligations, the period within which the underwriter has to subscribe to the issue after
being intimated by the issuer, the amount of commission and details of arrangements, if
any, made by the underwriter for fulfilling the underwriting obligations. The underwriting
commission may not exceed 5 percent on shares and 2.5 percent in case of debentures.
UNDERWRITING AGREEMENT
A contract between an underwriter and the company issuing capital with regard to the
commitment for subscription of securities is known as underwriting agreement. while
arrangements The resources of the underwriters and The marketing aspects of the issue
are kept in mind Underwriting agreement:-
BENEFITS OF UNDERWRITING
It relieves the company of the risk and uncertainty of marketing the securities.
Underwriters have an intimate and specialized knowledge of the capital market. They
offer valuable advice to the issuing company in the preparation of the prospectus, time of
floatation and the price of securities, etc. They also provide publicity service to the
companies which have entered into underwriting agreements with them.
It helps in financing of new enterprises and in the expansion of the existing projects.
It builds up investors' confidence in the issue of securities.
The issuing company is assured of the availability of funds. Important projects are not
delayed for want of funds.
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It facilitates the geographical dispersal of securities because generally, the underwriters
maintain contacts with investors throughout the country.
FACTORS CONSIDERED WHILE SELECTING UNDERWRITERS

Financial strength
Experience in the primary market
Past underwriting performance and defaults if any
Network of investor clientele and Overall reputation.
When selecting an underwriter, it's important to seek out an established company with a
good reputation and quality research coverage in your field. The decision may also
depend on the kind of agreement the underwriter is willing to make regarding the sale of
shares.
BY UNDERWRITERS
Companys standing & records Competence of the mgt.
Objectives of the issue
Project details
Offer price
Terms of issue
TYPES OF UNDERWRITERS
Firm underwriting
Sub-underwriting
Joint underwriting
Syndicate underwriting
FIRM UNDERWRITING
Firm Underwriting is an underwriting agreement whereby the underwriter agrees to take
up a specified number of securities, irrespective of the securities offered to the public. It
is an agreement for the outright purchase of securities, the underwriter being given a
preference in allotment over the general public in respect of the commitment given by the
company. Such an agreement is designed to create confidence in the minds of the
investing public.
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SUB-UNDERWRITING
Sub-Underwriting is one in which an underwriter gets a part of the issue further
underwritten by another agency for a commission This is done to diffuse the risk
involved in underwriting. This type of underwriting helps the main underwriter minimize
the risk of loss of investment in the event of the issue being unpopular.
JOINT UNDERWRITING
When an issue of securities by a company is underwritten by two or more underwriting
intermediaries jointly, it is called Joint underwriting. The objective is to minimize the risk
and share the benefit arising from the capital issue. Besides, it also helps the underwriters
with limited resources to pool and successfully take up bigger issues.
SYNDICATE UNDERWRITING
When a syndicate of underwriters by means of an agreement, underwrites the issue of
securities collectively, it is known as Syndicate Underwriting. Such an arrangement is
worked out in case of issues that are considered potentially risky. Two types of
arrangements:
Between the issuing company and the underwriter
Between the underwriters themselves
HARD UNDERWRITING
Hard underwriting is when an underwriter agrees to buy his commitment at its earliest
stage. The underwriter guarantees a fixed amount to the issuer from the issue. Thus, in
case the shares are not subscribed by investors, the issue is devolved on underwriters and
they have to bring in the amount by subscribing to the shares. The underwriter bears a
risk which is much higher in soft underwriting.
SOFT UNDERWRITING
Soft underwriting is when an underwriter agrees to buy the shares at later stages as soon
as the pricing process is complete. He then, immediately places those shares with
institutional players. The risk faced by the underwriter as such is reduced to a small
window of time. Also, the soft underwriter has the option to invoke a force Majeure (acts
of God) clause in case there are certain beyond the control that can affect the
underwriters ability to place the shares with the buyers.
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VARIANTS OF UNDERWRITING
Bought out deals
Offer for Sale
Private Placement
BOUGHT OUT DEAL

A bought out deal occurs when an underwriter, such as an investment bank or a
syndicate, purchases securities from an issuer before a preliminary prospectus is filed.
The investment bank (or underwriter) acts as principal rather than agent and thus actually
"goes long" in the security. The bank negotiates a price with the issuer (usually at a
discount to the current market price, if applicable).
The advantage of the bought deal from the issuer's perspective is that they do not have to
worry about financing risk (the risk that the financing can only be done at a discount too
steep to market price.) This is in contrast to a fully-marketed offering, where the
underwriters have to "market" the offering to prospective buyers, only after which the
price is set.
The advantages of the bought deal from the underwriter's perspective include:
Bought deals are usually priced at a larger discount to market than fully marketed deals,
and thus may be easier to sell; and The issuer/client may only be willing to do a deal if it
is bought (as it eliminates execution or market risk.) The disadvantage of the bought deal
from the underwriter's perspective is that if it cannot sell the securities, it must hold them.
This is usually the result of the market price falling below the issue price, which means
the underwriter loses money. The underwriter also uses up its capital, which would
probably otherwise be put to better use (given sell-side investment banks are not usually
in the business of buying new issues of securities).
OFFER FOR SALE

It takes place when a company arranges to obtain money from private sources, by making
the issue of securities fully to them. The private sources include issue houses and
merchant bankers. Issue is generally made at below par, which is the sold to public. In
such an eventuality, the company issues a statement in lieu of prospectus instead of a
regular prospectus. A statement in lieu of prospectus with information to be disclosed
according to schedule III of the Companies Act( Sec 70(1) should be filed with ROC 3
days before the allotment.
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PRIVATE PLACEMENT
The sale of securities to a relatively small number of select investors as a way of raising
capital. Investors involved in private placements are usually large banks, mutual funds,
insurance companies and pension funds. Private placement is the opposite of a public
issue, in which securities are made available for sale on the open market.
Since a private placement is offered to a few, select individuals, the placement does not
have to be registered with the Securities and Exchange Commission. In many cases,
detailed financial information is not disclosed and a the need for a prospectus is waived.
Finally, since the placements are private rather than public, the average investor is only
made aware of the placement after it has occurred.
3.5 ALLOTMENT OF SHARES

It means an appropriation of a certain number of shares to an applicant in response to his
application for shares. Allotment means distribution of shares among those who have
submitted written application.
PROCEDURES REGARDING ALLOTMENT OF SHARES

(1) Fulfillment of statutory conditions which need to be fulfilled:
The company secretary has to see that the statutory conditions regarding the allotment of
shares are fulfilled before the Board proceeds to allot the shares.
The following are the statutory conditions which need to be fulfilled:
(i) Valid offer and acceptance: There should be a valid offer and acceptance for the
allotment to be a valid one. Here the company is the offertory and the acceptors are the
general public. If there is no company to offer then there would be no public to accept.
(ii) Unconditional Allotment: The allotment must be absolute and unconditional and also
as per the terms and conditions mentioned in the application. The allotment should be
unbiased, and not according to the caste, creed, and religion. It is not that rich
shareholders pay more on the shares and the poor share holders pay less on the shares. All
have to pay the same price on the shares.
(iii) Collection of minimum subscription amount: The minimum subscription amount as
noted in the prospectus has been received within 120 days of the issue of prospectus.
(iv) Receipt of application money: Not less than 5% of the nominal value of the share has
been secured and has been received along with the applications.
(v) Deposition of application of money in a scheduled bank: All application money
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received along with the applications must be deposited in a scheduled bank. It cannot be
withdrawn until the company gets trading certificate or where such certificate is already
received or till the minimum subscription amount is received.
(vi) Filing of prospectus with the registrar: A copy of the prospectus or statement in lieu
of prospectus has been duly filed with the registrar and at least three days have elapsed
after such filing before the allotment is taken up.
(vii) Time of allotment: No allotment of shares can be effected until the beginning of the
fifth day from the date of issue of prospectus. The subscription list must be opened for at
least 3 days as disclosed in the prospectus.
(viii) Proper communication: The allotment must be duly communicated to the applicant
through post i.e. registered post with necessary details.
(ix) Allotment strictly as per documents issued: The Board of Directors have to make the
allotment of shares strictly as per the documents issued which include the prospectus and
the application form. The provisions made in the Memorandum of Association and the
Articles of Association must also be given due consideration.
(x) SEBI nominee: If the issue is over subscribed, the shares are allotted on a
proportionate basis. SEBI's nominee is associated while finalizing the basis of allotment.
The purpose is to see that the allotment is done on a fair and just basis. The allotment also
needs to be approved by a leading stock exchange.
(2) Appointment of allotment committee:
The secretary informs the Board, that the share applications are received and are ready for
allotment. If the issue is just subscribed or under subscribed, the Board will do the
allotment of shares, but if the issue is over subscribed, the Board appoints an allotment
committee to do the allotment work. The allotment committee will study the problem,
prepare a report and submit to the Board.
(3) Board meeting for finalization of allotment formula:
A meeting of the Board of Directors will be called to finalize the allotment formula,
which is being prepared by the allotment committee. If the shares are listed, the allotment
formula is to be finalized with the approval of the concerned Stock Exchange Authorities.
(4) SEBI's association with allotment work:
A representative of SEBI need to be associated while finalizing the allotment formula.
For this, the company has to request SEBI to nominate a public representation for
allotment work. SEBI's nominee is necessary when the issue is over subscribed.
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(5) Signature of chairman on application and allotment list:

The secretary has to see that every sheet of application and allotment list is signed by the
chairman. The secretary also has to sign the application and allotment lists.
(6)Resolution of the Board for allotment:
The secretary has to see that the Board passes a resolution regarding the allotment of
shares and authorizing him to issue letters of allotment and letters of regret.
(7) Issue of letters of allotment and letters of regret:
After the Board's resolution to allot shares, the secretary prepares the allotment list. Then
he will send allotment letters to those who have been allotted shares and regret letters to
those who could not be allotted shares.
(8) Refund / Adjustment of application money:
The secretary has to make suitable arrangement for the repayment of application money
sent by the applicant. The refunded application money is made to those share holders who
could not be allotted shares. The refund order is sent along with the letters of regret. If an
applicant has been allotted a smaller number of shares than the number applied for, the
secondary has to adjust the excess amount with the amount due on allotment.
(9) Collection of allotment money:
The secretary has to make suitable arrangements with the Company's Bankers for
collection of allotment money against the allotment letters.
(10) Arrangement relating to letters of renunciation:
To renounce means to give up. Certain applicants who are being allotted shares do not
want them, so they return the shares back to the company. this is known as renunciation.
The blank form of letter of renunciation and letter of request for allotment along with the
letter of renunciation duly executed and the original letter of allotment from the
renounces, the secretary has to make necessary changes in the Application of Allotment
list in order to enter the names of the new allot-tees.
(11) Arrangement relating to splitting of allotment letters:
Splitting means putting the shares in one or more names. In case any allottee requests for
a split of the allotment letter, the secretary places such a request before the Board for
approval. Once the Board approves the splitting of the allotment letter, the secretary has
to enter the details of the split in a separate list of split allotments and issue the necessary
'split' letters.
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(12) Submission of return of Allotment:

Every company whether public or private and having a share capital ans within 30 days
of allotment is required to send to the Registrar, a document known as the "Return of
Allotment". The return of allotment contains various details on allotment of shares such
as the nominal value of shares allotted, names and addresses of allotees, amount paid or
payable on each share and particulars of bonus shares and shares issued at discount. The
secretary has to see that these documents are prepared and submitted in time to the
Registrar.
(13) Preparation of Register of members and issue of share certificates:
The secretary has to prepare the Register of members from the Application and Allotment
lists. He has to see that the shares certificates are properly printed, sealed, signed and
distributed to all the allot-tees within three months after the allotment of shares. He has
also to see that the share certificates are issued against the letters of allotment.
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3.6 DELISTING
As the name suggests, delisting involves removing a company from the list of entities
traded on the stock exchange. Post this; a public company becomes a private one.
Delisting can either be voluntary (where the company chooses to go private on its own
accord), or compulsory (where the stock exchange removes a company from its list for
violation of rules and regulations or trading parameters).
It is the generally the former which sees significant market interest and a rapid run-up in
the prices of the concerned stock.
While voluntary delisting may help shareholders of companies whose stocks have
suffered unwarranted sharp declines, critics point out that delisting prevents shareholders
from participating in the future growth of companies.
KEY RULES
Delisting in India is governed by regulations issued by SEBI in 2009, which replaced the
earlier delisting guidelines of 2003, and tightened the norms in favour of public
shareholders. Under the new regulations, companies seeking voluntary delisting need to
obtain prior approval (by postal ballot) of at least two-thirds of the public shareholders,
for the board resolution seeking delisting.
Also, the base offer price (the minimum price) has to be computed taking into account the
average of weekly high and low closing prices for the last 26 weeks or the last two
weeks, whichever is higher, preceding date of notification to the stock exchange.
For the offer to be successful, the promoter stake, post the completion of the process,
should become more than 90 per cent, or more than the aggregate of pre-offer promoter
holding and 50 per cent of the offer size, whichever is higher.
Translated, this means that companies with pre-offer promoter stake of less than 80 per
cent need to take the promoter stake to more than 90 per cent.
On the other hand, companies with pre-offer promoter stake of more than 80 per cent
need to be successful in at least 50 per cent of the offer to the public shareholders.
The regulations also provide that promoters should not use the company's funds for the
delisting process. This implies that the funds for delisting would have to be arranged by
the promoters.
APPLICABILITY
These guidelines shall be applicable to delisting of securities of companies and
specifically shall apply to:
a. Voluntary delisting being sought by the promoters of a company
b. any acquisition of shares of the company (either by a promoter or by any other person)
or scheme or arrangement, by whatever name referred to, consequent to which the public
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shareholding falls below the minimum limit specified in the listing conditions or listing
agreement that may result in delisting of securities;
c. Promoters of the companies who voluntarily seek to delist their securities from all or
some of the stock exchanges;.
d. Cases where a person in control of the management is seeking to consolidate his
holdings in a company, in a manner which would result in
the public shareholding in the company falling below the limit specified in the listing
conditions or in the listing agreement that may have the eff ct
of company being delisted;
e. companies which may be compulsorily delisted by the stock exchanges; Provided that
company shall not be permitted to use the buy-back provision to delist its securities.
DELISTING OF SECURITIES (VOLUNTARY) OF A LISTED COMPANY
A company may delist from stock exchange where its securities are listed. - Provided that
the securities of the company have been listed for a minimum period of 3 years on any
stock exchange.
- Provided further that an exit opportunity has been given to the investors for the purpose
of which an exit price shall be determined in accordance with the book building
process described in clauses 7-10 and 13 and 14 of these guidelines.
An exit opportunity need not be given in cases where securities continue to be listed in a
stock exchange having nation wide trading terminals.
Explanation: For the purposes of these guidelines, stock exchange having nationwide
trading terminals means the Stock Exchange, Mumbai, the National Stock Exchange and
any other stock exchange, which may be specified by the Board.
PROCEDURE FOR VOLUNTARY DELISTING

Any promoter or acquirer desirous of delisting securities of the company under
the provisions of these guidelines shall : (a) obtain the prior approval of shareholders of the company by a special resolution
passed at its general meeting;
(b) make a public announcement in the manner provided in these Guidelines.
(c) make an application to the delisting exchange in the form specified by the exchange,
annexing therewith a copy of the special resolution passed
under sub-clause (a); and; (d) comply with such other additional conditions as may be
specified by the concerned stock exchanges from where securities are to be delisted.
PUBLIC ANNOUNCEMENT FOR VOLUNTARY DELISTING
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Before making application for delisting, the promoters or the acquirers of the Company
shall make a public announcement.
-The public announcement shall contain inter-alia information.
-Before making the public announcement, the promoter shall appoint a merchant banker
registered with the Board, who is not an associate of the promoter.
EXIT PRICE FOR VOLUNTARY DELISTING OF SECURITIES
Any promoter of a company which desires to delist from the stock exchange shall
determine an exit price for delisting of securities in accordance with the book building
process described in Schedule II of these guidelines.
The offer price shall have a floor price, which will be the average of 26 weeks traded
price quoted on the stock exchange where the shares of the company are most frequently
traded preceding 26 week from the date of the public announcement and without any
ceiling of maximum price.
8In the case of infrequently traded securities the offer price shall be as per regulation
20(5) of the SEBI (Substantial Acquisition and Takeover) Regulations, and the
infrequently traded securities shall be determined in the manner explained
under regulation 20(5) of the SEBI (Substantial Acquisition and Takeover) Regulations.
The stock exchange(s) shall provide the infrastructure facility for display of the
price at the terminals of the trading members to enable the investors to access the price on
the screen to bring transparency to the delisting process.
- In the event of securities being delisted, the acquirer shall allow a further period of 6
months for any of the remaining shareholders to tender securities at the same price;
- The stock exchanges shall monitor the possibility of price manipulation and keep under
special watch the securities for which announcement for delisting has been made.
- To ascertain the genuineness of physical securities if tendered and to avoid the bad
delivery, Registrar and Transfer Agent shall co-operate with the Clearing House /
Clearing Corporation to determine the quality of the papers upfront.
- If the quantity eligible for acquiring securities at the final price offered does not result in
public shareholding falling below required level of public holding for continuous listing,
the company shall remain listed.
- The paid up share capital shall not be extinguished as in the case of buyback of
securities;
- In case of partly paid-up securities, the price determined by the book building process
shall be applicable to the extent the call has been made and paid.
-The amount of consideration for the tendered and accepted securities shall be settled in
cash;
RIGHT OF PROMOTER
-The promoter may not accept the securities at the offer price determined by the book
building process.
-Where the promoter decides not to accept the offer price so determined:
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(a) he shall not make an application to the exchange for delisting of the securities; and
(b) the promoter shall ensure that the public shareholding is brought up to the minimum
limits specified under the listing conditions within a period of 6 months from the date of
such decision, by any of the modes specified in sub-clause 9.3.
-For the purposes of sub-clause 9.2(b), the public shareholding may be increased by any
of the following means: (a) by issue of new shares by the company in compliance with
the provisions of the Companies Act, 1956 and the Securities and Exchange Board of
India (Disclosure and Investor Protection) Guidelines, 2000; (b) by the promoter making
an offer for sale of his holdings in compliance with the provisions of the Companies Act,
1956 and the Securities and Exchange Board of India (Disclosure and Investor
Protection) Guidelines, 2000;
(c ) by the promoter making sale of his holdings through the secondary market in a
transparent manner;
- In the event of the promoter not being able to raise the public shareholding in
accordance with sub-clause 9.3 within six months, he shall offer for sale to the public
such portion of his holdings as would bring up the public shareholding to the minimum
limits specified in the listing agreement or the listing conditions at the price determined
by the Central Listing Authority.
PUBLIC ANNOUNCEMENT OF FINAL PRICE

- On determination of the final price pursuant to the book building, the promoter or the
acquirer shall within a period of two working days from such determination:
(a) make a public announcement in the newspapers of the final price as
discovered by the book building process and whether or not the promoter or the acquirer
has accepted the price; and,
(b) communicate to, exchange or exchanges from which delisting is sought to be made,
the final price discovered and whether the promoter has accepted the price.
DELISTING FROM ONE OR MORE STOCK EXCHANGES

-When a company which is listed on any stock exchange or stock exchanges other than
the stock exchanges having nationwide trading terminals, seeks delisting, an exit offer
shall be made to the shareholders in accordance with these guidelines.
-There shall not be any compulsion for the existing company to remain listed on
any stock exchange merely because it is a regional stock exchange.
MINIMUM NUMBER OF SHARES TO BE ACQUIRED
215

Where the offer for delisting results in acceptance of a fewer number of share than the
total shares outstanding and as a consequence the public shareholding does not fall below
the minimum limit specified by the listing conditions or the listing agreement, the offer
shall be considered to have failed and no securities shall be acquired pursuant to such
offer.
PAYMENT OF CONSIDERATION
The payment of consideration for delisting of securities shall be paid in cash by the
promoter or acquirer.
DELISTING OF ONE OR ALL CLASS OF SECURITIES

A company may delist one or all of its class of securities subject to the provisions
of this clause.
- If the equity shares of a company are delisted, the fixed income securities may continue
to remain listed on the stock exchange.
-A company which has a convertible instrument outstanding, it shall not be permitted to
delist its equity shares till the exercise of the conversion options.
COMPULSORY DELISTING OF COMPANIES BY STOCK EXCHANGES

The Stock Exchanges may delist companies which have been suspended for a minimum
period of six months for non-compliance with the Listing Agreement.
- The Stock Exchanges may also delist companies as per the norms provided in Schedule
III.
-The Stock Exchange shall give adequate and wide public notice through news papers (
including one English national daily of wide circulation) and through display of the
notice on the notice board/ website/ trading systems of the Exchange.
- The stock exchange shall give a show cause notice to a company or adopt procedure
provided under Part B of Schedule III for delisting under sub-clause.
- The exchange shall provide a time period of 15 days within which representation may
be made to the exchange by any person who may be aggrieved by the proposed delisting.
- The stock exchange may, after consideration of the representations received from
aggrieved persons, delist the securities of such companies.
-A Where the stock exchange delists the securities of a company, it shall ensure that
adequate and wide public notice of the fact of delisting is given through newspapers and
on the notice boards/trading systems of the stock exchange and
216

shall ensure disclosure in all such notices of the fair value of such securities determined
in accordance with the Explanation to clause 16.1 15.7 The stock exchange shall display
the name of such company on its website.
REINSTATEMENT OF DELISTED SECURITIES

Reinstatement of delisted securities should be permitted by the stock exchanges with a
cooling period of 2 years. In other words, relisting of securities should be allowed only
after 2 years of delisting of the securities. It would be based on the
respective norms/criteria for listing at the time of making the application for listing and
the application will be initially scrutinized by the Central Listing Authority.
EXAMPLE OF DELISTING
Goodyear Orient Company has decided on a floor price of Rs 194 per equity share for the
proposed acquisition and delisting of Goodyear India. The delisting offer would open on
May 28 and close on June 3. Shares of Goodyear India are currently trading at Rs 351 on
the Bombay Stock Exchange (BSE).
In a public announcement made on Friday, the acquirer Goodyear Orient Company has
said that it intends to acquire up to 5.99 million equity shares, representing 26 per cent of
the equity capital of Goodyear India.
While the acquirer currently holds no equity shares in the company, its parent
organisation Goodyear Tire & Rubber Company (GTRC), holds 17.07 million equity
shares, representing 74 per cent of the equity capital.
The minimum price per equity share payable by the acquirer for the shares it acquires
pursuant to the delisting offer will be the price at which the maximum number of offer
shares are tendered pursuant to a reverse book-building process.
Consequent to the delisting offer and upon the combined shareholding of GTRC and the
acquirer reaching a minimum of 90 per cent of the equity capital and fulfilment of other
conditions stipulated under the Delisting Regulations, the Goodyear India will seek to
voluntarily delist the Equity shares from the Bombay Stock Exchange (BSE).
GTRC has also intimated the board of directors of Goodyear India that it is willing to
acquire the offer shares at a price of Rs 245 (Indicative Price) per equity share.
"The indicative price should in no way be construed as either (a) a ceiling or maximum
price for the purposes of acquisition under the reverse book-building process and the
public shareholders are free to tender their equity shares at any price higher than the floor
price," says the public announcement.
Citigroup Global Markets India Pvt Ltd is the manager to the delisting offer.
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3.7 REVERSE BOOK BUILDING
One of the key processes involved in voluntary delisting is reverse book- building'. This
is quite similar to the book-building process employed by companies at the time of public
issues.
The key difference is that, in reverse book-building, instead of placing bids for buying the
stock, shareholders place bids (at or above the base offer price) for selling the stock.
The price at which the maximum number of shares is offered by the public shareholders
is known as the discovered price, which becomes the basis for determining the final offer
price.
It is important to note that promoters are not bound to accept the equity shares at the offer
price determined by the reverse book building process. This could happen if the
promoters find the final offer price unrealistic.
In such cases, the delisting process falls through. In fact, the regulations laid out in 2009
are said to be quite onerous and have made delisting easier said than done. As a result,
several delisting proposals have been unsuccessful.
Securities and Exchange Board of India has issued the SEBI (Delisting of Securities)
Guidelines 2003 for delisting of shares from stock exchanges which provide the overall
framework for voluntary delisting by a promoter or acquirer through a process referred to
as Reverse Book Building.
The promoter or acquirer shall appoint trading members for placing bids on the online
electronic system. Investors may approach trading members for placing offers on the online electronic system. The shareholders desirous of availing the exit opportunity shall
deposit the shares offered with the trading members prior to placement of orders.
Alternately, they may mark a pledge for the same to the trading member.
The final offer price shall be determined as the price at which the maximum numbers of
shares have been offered. The promoter / acquirer shall have the choice to accept the
price. If the price is accepted, the acquirer shall be required to accept all offers upto and
including the final price. If the quantity eligible for acquiring securities at the final price
offered does not result in public shareholding falling below the required level of public
holding for continuous listing, the company shall remain listed.
At the end of the book building period, the merchant banker to the book building exercise
shall announce the final price and the acceptance (or not) of the price by the promoter /
acquirer.
218
219
3.8 SUMMARY
1. The company appoints a merchant bank to lead manage the proposed public issue of
the company.
2. Other constituents such as the R&T agent, bankers, underwriters are appointed by the
lead manager in consultation with the company. All constituents have to entities
registered with SEBI.
3. The lead manager gets in-principle approval of the stock exchange, files the draft
prospectus with SEBI, files the final prospectus with the RoC and ensure compliance
with SEBIs regulations.
4. Once the issue closes, the lead manager and R&T agent in consultation with the stock
exchange finalises the basis of allotment.
5. The basis of allotment is the process of defining the number of shares allotted to each
investor based on the oversubscription.
6. Retail investors, institutional investors, promoters, shareholders of promoter group
companies, employees are categories of investors eligible to apply in a public issue.
7. A prospectus is the offer document prepared according to regulations which gives the
investors complete information about the issue.
8. A Red herring prospectus is an offer document where the price at which the issue is
being made and the number of shares is not mentioned as in a book building process.
9. Underwriting is the process of getting commitments from institutions to pick up shares
in a public issue if the issue is under subscribed.
10. a book-built issue the price at which the shares will be allotted and the successful
allottees will be decided upon by a bidding process.
11. The process of bidding will be done as per the rules laid down by SEBI.
12. The Green Shoe Option is used by companies making an issue to stabilize the price in
the secondary markets.
Shares are over-allotted to the investing public for which shares is lent by the promoter.
The money received through this over-allotment process is used for stabilizing the price
in the secondary market, post the listing of the shares.
220
CONCLUSION
Book building process aims at fair pricing of the issue which is supposed to emerge out
of offers made by various investors. One question may arise whether book building is the
right mechanism for fair pricing discovery in IPOs?
The answer may be in the negative because a floor price is fixed for the book building
below which no bid can be accepted. Since investors participate through Book Building
process in making fair pricing of IPOs whether there is no ceiling price, there should not
be any floor price. In addition to this, unlike international market, India has not reached
the stage of development of the institutional framework to experiment with the book
building process because retail investors are still now an integrated part of Indian capital
market. If the interest of the small investors is not safeguard appropriately, this may be
very dangerous to the primary capital market.
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Chapter-III
Book Building Process

End Chapter quizzes
Q1. Book Building is a

method of placing an issue
method of entry in foreign market
price discovery mechanism in case of an IPO
none of the above
Q2. In a book built issue a ______ investor can bid at cut-off price.
QIBs
Employees of the issuer company
Retail
Financial institution
Q3. A fixed price issue has to be listed within ______ days of closure of issue.
10 days
15 days
30 days
50 days
Q4.Bankers to an issue are appointed by the _______.

Lead banker
Issuer company
SEBI
All of the above
222
Q5. Brokers to an issue are ________.

Merchant bankers
Members of stock exchange
Company members
Appointed by Lead bankers
Q6. Stock exchange helps in

fixation of stock prices
ensures safe and fair dealing
induces good performance by the company
all of the above
Q7. A form of underwriting where the underwriter agrees to take up take up a specified
number of securities, irrespective of the securities offered to the public is:
Firm underwriting
Sub-underwriting
Joint underwriting
Syndicate underwriting
Q8. For successful implementation of the Green shoe option, the following intermediary
is appointed:
Merchant Banker
Stabilizing Agent
Banker to an issue
Underwriter
Q9. Which of the following is false?

Limitations to the book building process include the following:
Its suitable for mega issues only
Issue Company should be fundamentally weak
Book building works well in weak markets only
Only b and c
All of the above
223

Q10. In reverse book-building, instead of placing bids for buying the stock, shareholders
place bids:
At or above the base offer price
At the offer price
At the Base Price
At neither the base price nor the offer price
224

Chapter-IV
Loan Syndication & Performance Evaluation
Contents:
4.1
Introduction to loan syndication
4.2
Steps involved in the process
4.3
Performance evaluation
4.4
Summary
4.5
End chapter Quiz
225
LOAN SYNDICATION: DOMESTIC & EXTERNAL
INTRODUCTION
Borrowing by way of a loan facility can provide a borrower with a flexible and efficient
source of funding. If a borrower requires a large or sophisticated facility or multiple types
of facility this is commonly provided by a group of lenders known as a syndicate under a
syndicated loan agreement. A syndicated loan agreement simplifies the borrowing
process as the borrower uses one agreement covering the whole group of banks and
different types of facility rather than entering into a series of separate bilateral loans, each
with different terms and conditions.
Loan syndication refers to assistance rendered by merchant banks to get mainly term
loans for projects. Such loans may be obtained from a single development finance
institution or a syndicate or consortium as in the case of large term loans. Merchant banks
can also help corporate clients to raise syndicated loans from commercial banks.
The purpose of this note is to provide guidance on various aspects of a syndicated loan
transaction, focusing on the following:
(i) the types of borrowing facilities commonly seen in a syndicated loan agreement;
(ii) a description of the parties to a syndicated loan agreement and an explanation of their
role;
(iii) a brief explanation of the documentation entered into by the parties;
(iv) the time line for a typical syndicated loan transaction; and
(v) a description of the common methods used by lenders to transfer syndicated loan
participations.
The guidance in this note is given on the basis of a typical syndicated loan transaction
undertaken in the European loan market as envisaged in the LMA Primary Loan
documents and governed by the laws of England. This note is not intended to provide a
detailed explanation of the provisions of the LMA Primary Loan Agreements - guidance
on this is set out in the "Users Guide to the Recommended Form of Primary Documents"
published by the LMA and available to LMA members on the LMA website.
The basic concept behind the syndicated loan agreement is a syndicate, or consortium, of
banks. The joint provision of funds saves time and cuts expenses that the individual bank
would otherwise have to invest if it negotiated the transaction on its own. At the same
time, the participating banks split and allocate the risks connected with the loan. After
negotiations with the borrower have been initiated, the consortium of banks will usually
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authorize one from their ranks, the so-called arranger, or several banks (then called coarrangers), to act on the consortium's behalf.
The thus authorized banks take all steps related to the syndicated loan, such as the indepth assessment of the borrower's credit rating, the compilation of the loan
documentation, the commissioning of the assisting legal firm, and the negotiations with
the borrower that follow the first contact. The borrower communicates exclusively with
the arranger (or co-arrangers). Usually, the only obligation of the other banks
participating in the syndicate is to execute the loan documentation - and to provide the
borrowed funds, which is the moment when the (co-)arranger(s)'s task is complete.
After the loan agreement has been concluded, the syndicate character of the loan is most
prominent in the administration of the loan: all of the participating banks undertake to
comply with majority decisions of the consortium, even if they do not consent to the
respective measure as an individual entity. The required majority of credit grantors is laid
down in the loan agreement and is usually fixed at 50% or 66%.
Such decisions may include, for instance, declaring the loan's accelerated maturity,
granting forbearance in various events of default, changing the purpose of earmarked
loans, or extending the term of maturity. Such decisions will actually result in a
modification of the loan agreement. If, say, the consortium has agreed on a 50% majority
vote and four of the six participating banks pass a decision whereby the loan's maturity is
accelerated, the remaining two banks must comply.
The Agent A Partner to the Borrower

Another feature of the syndicated loan agreement is the so-called agent, usually an officer
from one of the participating banks. Upon the compilation of the loan documentation,
he/she is in charge of the entire loan administration until the loan has been repaid in full.
The borrower then communicates exclusively via the agent and is not required to canvass
all the involved banks. This concerns namely requests for drawing on the borrowed
funds, repaying them prior to the maturity date, extending the term of maturity, or
possibly the disclosure of the agreed documentation or other information. In all these
activities and for the entire life of the loan agreement, the agent is the borrower's partner,
a fact which also has an impact in the reverse direction.
If any of the participating banks wants to communicate with the borrower, they must do
so by means of the agent, not on their own account. The loan is drawn upon and paid
back through the agent. Furthermore, the agent is also in charge of the actual transfer of
funds from the bank (when drawing upon the loan) or to the bank (when acquitting the
loan). For her performance, the agent receives an agreed remuneration fee, usually to be
paid by the borrower once per year.
The advantages for the borrower are that he may negotiate a higher total sum of borrowed
funds, that it is not necessary to enter personal negotiations with each and every one of
the financing banks, and that the terms and conditions agreed in the syndicated loan
agreement equally bind all of the participating banks. At the same time, the accrual of
funds is more stable, since the drawdown of loan tranches is not at the discretion of a
single bank, as is the case in a bilateral relationship, but depends on the decision of the
syndicate majority.
227

Flexibility and Anonymity
As is the case with anything in life, a consortium of banks also has its limits: the
proportion of the loan granted by a given bank based upon the syndicated loan agreement,
for instance, represents that bank's direct liability which does not bind the other
participating banks. In the event that one bank, for whatever reason, fails to provide their
proportion of the loan, the other banks are not obliged to remargin from their own funds.
Likewise, if the borrower fails to acquit the drawn loan, each of the banks is entitled to
assert their claim individually, without having to collect their partners' approval first.
Syndicated loan agreements are marked by their flexibility, paired with anonymity: the
participating banks are usually entitled to transfer their proportion of the loan to a third
party without the borrower's consent. It may thus happen that a bank that originally
participated in the syndicate sells its share, and a new bank - the transferee - enters the
syndicate, without the borrower being aware of these transactions.
Given the brisk loan participation market, it is not unusual that the borrower, at a given
time, is unable to name his 'actual' financier. His rights and liabilities from the loan
agreement remain unaffected, though, since each 'new' bank that enters the existing
syndicated loan agreement must comply with the conditions laid down in the latter, and
since any modification of the loan agreement requires the borrower's consent.
Of course, the contractual arrangement for transferability may take different forms, so
that the scope of rights the borrower achieves depends on his financial standing, i.e.
whether he may condition the transfer with certain prerequisites or, as it were, with his
consent. Syndicated loans that do not provide for the transfer of portions of the loan to
third parties are also called club deals.
CREDIT SYNDICATION SERVICES

Ascertaining Promoter details
Ascertainment of cost details
Comparison of cost details
Identification of funding sources
Ascertainment of loan details
Furnishing beneficiary details
Making application
Compliance for loan disbursement
Documentation and creation of security
Pre disbursement compliance
TYPES OF FACILITY COMMONLY SYNDICATED

Two types of loan facility are commonly syndicated: term loan facilities and revolving
loan facilities.
1. TERM LOAN FACILITY:
228

Under a term loan facility the lenders provide a specified capital sum over a set period of
time, known as the "term". Typically, the borrower is allowed a short period after
executing the loan (the "availability" or "commitment" period), during which time it can
draw loans up to a specified maximum facility limit.
Repayment may be in instalments (in which case the facility is commonly described as
"amortising") or there may be one payment at the end of the facility (in which case the
facility is commonly described as having "bullet" repayment terms). Once a term loan has
been repaid by the borrower, it cannot be re-drawn.
Development Finance Institutions (DFIs) or development banks starting with Industrial
finance Corporations to assist the promotion & financing of fixed assets of industrial
units have been in existence since 1948. DFIs have been an integral part of the capital
market and have played a significant role in financing investment activity. Long term
borrowings by corporate from financial institutions constitute about 10% of total sources
of funds of corporate.
At the all India level, there is Industrial Development Bank of India, the apex
development finance institution, Industrial credit & investment corporation, Industrial
Reconstruction bank of India & Small Industries Development Bank of India & Small
Industries development Bank of India. At the state level there are 18 state Finance
Corporations (SFCs) & 28 State Industrial Development Corporations. Investment
institutions, Unit Trust of India, Life Insurance Corporation of India & General Insurance
Corporation of India and its subsidiaries also grant term loans.
2 REVOLVING LOAN FACILITY:

A revolving loan facility provides a borrower with a maximum aggregate amount of
capital, available over a specified period of time.
However, unlike a term loan, the revolving loan facility allows the borrower to
drawdown, repay and re-draw loans advanced to it of the available capital during the term
of the facility. Each loan is borrowed for a set period of time, usually one, three or six
months, after which time it is technically repayable. Repayment of a revolving loan is
achieved either by scheduled reductions in the total amount of the facility over time, or
by all outstanding loans being repaid on the date of termination. A revolving loan made
to refinance another revolving loan which matures on the same date as the drawing of the
second revolving loan is known as a "rollover loan", if made in the same currency and
drawn by the same borrower as the first revolving loan. The conditions to be satisfied for
drawing a rollover loan are typically less onerous than for other loans.
A revolving loan facility is a particularly flexible financing tool as it may be drawn by a
borrower by way of straightforward loans, but it is also possible to incorporate different
types of financial accommodation within it - for example, it is possible to incorporate a
letter of credit facility, swing line facility or overdraft facility within the terms of a
revolving credit facility. This is often achieved by creating a sublimit within the overall
229

revolving facility, allowing a certain amount of the lenders' commitment to be drawn in
the form of these different facilities.
GENERAL:
Syndicated loan agreements may contain only a term or revolving facility or they can
contain a combination of both or several of each type (for example, multiple term loans in
different currencies and with different maturity profiles are not uncommon). There can be
one borrower or a group of borrowers with provision allowing for the accession of new
borrowers under certain circumstances from time to time. The facility may include a
guarantor or guarantors and again provisions may be incorporated allowing for additional
guarantors to accede to the agreement.
PARTIES TO A SYNDICATED LOAN

The syndication process is initiated by the borrower, who appoints a lender through the
grant of a mandate to act as the Arranger (also often called a Mandated Lead Arranger)
on the deal. There is often more than one Arranger on any transaction but for the
purposes of this note we will refer to this role in the singular.
-Lead Manager
The Arranger is responsible for advising the borrower as to the type of facilities it
requires and then negotiating the broad terms of those facilities. By the very nature of this
appointment, it is likely that the Arranger will be a lender with which the borrower
already has an established relationship, although it does not have to be. At the same
time the Arranger is negotiating the terms of the proposed facility, one of the Arrangers
appointed by the Borrower to act as Bookrunner also starts to put together a syndicate of
banks to provide that facility.
-Participating Bank:
This bank participates in the syndication by lending a portion of the total amount
required. It is entitled to receive the interest and the participation fee. But it, however,
faces risks such as: * Borrower credit risk
* Passive approval and complacency
Syndication is often done in stages, with an initial group of lenders agreeing to provide a
share of the facility. This group of lenders is often referred to as Co-Arranger, although
other titles may be used - however, we shall continue to refer to this group of lenders as
Co-Arrangers for the purposes of this note. The Co-Arrangers then find
more lenders to participate in the facility, who agree to take a share of the Co-Arrangers'
commitment.
230

Underwriting Bank:
It is the bank that commits to supplying the funds to the borrower - if necessary from its
own resources if the loan is not fully subscribed. The lead manager or another bank may
play this role. Not all syndications are underwritten. The risk is that the loan may not be
fully subscribed
Facility Manager / Agent:
This bank takes care of all the administrative arrangements over the term of loan, e.g.,
disbursements, repayments, compliance. This bank acts on behalf of all the banks
participating. This may be either the lead manger or the
underwriting bank. To facilitate the process of administering the loan on a daily basis,
one bank from the syndicate is appointed as Agent. The Agent who is appointed acts as
the agent of the lenders not of the borrower and has a number of important functions:
- Point of Contact: (maintaining contact with the borrower and representing the views of
the syndicate)
- Monitor: (monitoring the compliance of the borrower with certain terms of the facility)
- Postman and Record-keeper: (it is the agent to whom the borrower is usually required
to give notices)
- Paying Agent: (the borrower makes all payments of interest and repayments of
principal and any other payments required under the Loan Agreement to the Agent. The
Agent passes these monies back to the banks to which they are due.
Similarly the banks advance funds to the borrower through the Agent).
The terms of a syndicated loan agreement empower the Agent to undertake the roles
described above in return for a fee. Any decisions of a material nature (for example, the
granting of a waiver) must usually be taken by a majority, if not by the whole syndicate.
Whilst the Agent carries the standard duties and responsibilities of any agent under
English Law, the facility agreement will contain a number of exculpatory provisions to
limit the scope of the Agent's relationship with the syndicate lenders and with the
borrower.
If the syndicated loan is to be secured, a lender from the syndicate is usually appointed to
act as Security Trustee to hold the security on trust for the benefit of all the lenders.
The duties imposed upon the Security Trustee are typically more extensive than those of
an agent.
In large syndicates, it is sometimes decided that some decision making power should be
delegated to the majority from time to time (often referred to as the 'majority lenders' or
'instructing group'). This group usually consists of members of the syndicate at the
relevant time that hold a specified percentage of the total commitments under the facility.
By delegating some of the decision-making, the mechanics of the loan are able to work
231

more effectively than if each and every member of the syndicate had to be consulted and
subsequently reach unanimous agreement on every request from the borrower.
4. DOCUMENTATION FOR A SYNDICATED LOAN

Mandate Letter: The borrower appoints the Arranger via a Mandate Letter (sometimes
also called a Commitment Letter). The content of the Mandate Letter varies according to
whether the Arranger is mandated to use its "best efforts" to arrange the required facility
or if the Arranger is agreeing to "underwrite" the required facility. The provisions
commonly covered in a Mandate Letter include:
(i) an agreement to "underwrite" or use "best efforts to arrange";
(ii) titles of the arrangers, commitment amounts, exclusivity provisions;
(iii) conditions to lenders' obligations;
(iv) syndication issues (including preparation of an information memorandum,
presentations to potential lenders, clear market provisions, market flex provisions and
syndication strategy); and
(v) costs cover and indemnity clauses.
Term Sheet: The Mandate Letter will usually be signed with a Term Sheet attached to it.
The Term Sheet is used to set out the terms of the proposed financing prior to full
documentation. It sets out the parties involved, their expected roles and many key
commercial terms (for example, the type of facilities, the facility amounts, the pricing,
the term of the loan and the covenant package that will be put in place).
Information Memorandum: Typically prepared by both the Arranger and the borrower
and sent out by the Arranger to potential syndicate members. The Arranger assists the
borrower in writing the information memorandum on the basis of information provided
by the borrower during the due diligence process. It contains a commercial description of
the borrower's business, management and accounts, as well as the details of the proposed
loan facilities being given.
It is not a public document and all potential lenders that wish to see it usually sign a
confidentiality undertaking.
Syndicated Loan Agreement: The Loan Agreement sets out the detailed terms and
conditions on which the Facility is made available to the borrower.
Fee Letters: In addition to paying interest on the Loan and any related bank expenses,
the borrower must pay fees to those banks in the syndicate who have performed
additional work or taken on greater responsibility in the loan process, primarily the
Arranger, the Agent and the Security Trustee. Details of these fees are usually put in
232

separate side letters to ensure confidentiality. The Loan Agreement should refer to the
Fee Letters and when such fees are payable to ensure that any non-payment by the
borrower carries the remedies of default set out in the Loan Agreement.
5. TIMING
Whilst the principal documents required for the provision of a syndicated loan are the
same, the timing of producing such documentation often depends on whether or not the
loan is being underwritten (see diagrams below).
233
6. SYNDICATION LOAN TRANSFERS

Why sell a participation in a syndicated loan?
A lender under a syndicated loan may decide to sell its commitment in a facility for one
or more of the following reasons:
Realizing Capital: if the loan is a long-term facility, a lender may need to sell its share of
the commitment to realize capital or take advantage of new lending opportunities;
Risk/Portfolio Management: a lender may consider that its loan portfolio is weighted
with too much emphasis on a particular type of borrower or Loan or may wish to alter the
yield dynamics of its loan portfolio. By selling its commitment in this loan, it may lend
elsewhere, thus diversifying its portfolio;
234

Regulatory Capital Requirements: a bank's ability to lend is subject to both internal
and external requirements to retain a certain percentage of its capital as cover for its
existing loan obligations. These are known as "Regulatory Capital Requirements"; and
Crystallize a loss: the lender might decide to sell its commitment if the
borrower runs into difficulties - specialists dealing in distressed debts provide a market
for such loans.
However, before the lender can go ahead and transfer its participation in a syndicated
loan, it must consider the implications of the methods of transfer available to it under the
Syndicated Loan Agreement.
Forms of Transfer
The most common forms of transfer to enable a lender to sell its loan commitment are:
(i) Novation (the most common legal mechanic used in transfer certificates scheduled to
loan agreements);
(ii) Legal assignment;
(iii) Equitable assignment;
(iv) Funded participation; and
(v) Risk participation.
Methods (i) and (ii) result in the lender disposing of its loan commitment with the new
lender assuming a direct contractual relationship with the borrower, whilst methods (iii)
to (v) result in the lender retaining a contractual relationship with the borrower.
Each of these methods is now examined in more detail.
Novation: Novation is the only way in which a lender can effectively 'transfer' all its
rights and obligations under the Loan Agreement. The process of transfer effectively
cancels the existing lender's obligations and rights under the loan, while the new lender
assumes identical new rights and obligations in their place.
Therefore the contractual relationship between the transferring lender and the parties to
the loan agreement cease and the new lender enters into a direct relationship with the
borrower, the agent and the other lenders. At the time the new lender becomes a party to
the Loan Agreement the loan could be fully drawn, particularly if it is a term loan facility.
However, particularly in the case of a revolving credit facility the new lender could be
assuming obligations to advance monies to the borrower.
The borrower has to be a party to the novation process. The documentation required to
affect a novation of a participation in a syndicated loan depends on the provisions in the
Loan Agreement. However most Loan Agreements (including the LMA recommended
form) have a transfer certificate attached as a schedule that operates by way of novation.
There is also a provision in the Loan Agreement where all parties (including the
borrower) agree that provided the other conditions to any transfer set out in the Loan
Agreement are complied with they consent to the novation effected by the execution of
235

the transfer certificate. The Agent, the new lender and the existing lender are the only
parties usually required to execute the transfer certificate.
Legal Assignment:
Assignment involves the transfer of rights, but not obligations. For a legal assignment,
s.136 of the Law of Property Act 1925 provides that the assignment must be:
absolute (i.e. the whole of the debt outstanding to the existing lender);
in writing and signed by the existing lender; and
notified in writing to the borrower.
If any element of this requirement is missing, the assignment is likely to be equitable. In
the context of the syndicated loan, a legal assignment will transfer all of the existing
lender's rights under the Loan Agreement (including the right to sue the borrower and the
right to discharge the assigned debt) to the new lender.
The obligation of the existing lender to provide funds to the borrower cannot be
transferred by legal assignment and thus remains with the existing lender.
The new lender pays the existing lender any funds due under the loan and the existing
lender sends those funds on to the Agent, who then passes such funds on to the borrower.
Equitable Assignment:
As mentioned above, an equitable assignment is created when one or more of the
provisions of section 136 of the Law of Property Act 1925 is not met, provided the
intention to assign is present between the parties.
In contrast to a legal assignment, the new lender, as the equitable assignee, must join the
existing lender, as assignor, in any action on the debt. The most significant difference
between a legal and equitable assignment arises if the borrower is not notified of the
assignment. If the borrower is not notified of the assignment, the new lender will be
subject to all equities (for example, mutual rights of set-off) which arise between the
existing lender and the borrower, even after the loan has been assigned.
Funded participation:
Under a funded participation the existing lender and the participant enter into a contract
providing that in return for the participant paying the existing lender an amount equal to
all or part of the principal amount of the Loan made by the existing lender to the
borrower ("the deposit"), the existing lender agrees to pay to the participant all or the
relevant share of principal and interest received by the existing lender from the borrower
in respect of that amount.
A funded participation agreement is made between the existing lender and the participant.
This creates new contractual rights between the existing lender and the participant which
236

mirror existing contractual rights between the existing lender and the borrower. However
this is not an assignment of those existing rights and the existing lender remains in a
direct contractual relationship with the borrower.
In a funded participation, the participant agrees that its deposit will be
serviced (in terms of payment of interest) and repaid only when the borrower services and
repays the loan from the existing lender. The participant has effectively taken on the risk
of the first loan. The funded participation agreement must ensure that the existing bank is
put in funds by the participant in time to meet the borrower's demands for drawdown in
order to remove the risk.
The existing lender remains liable under the Syndicated Loan Agreement.
Risk Participation:
Risk participation is a form of participation which acts like a guarantee. The risk
participant will not immediately place any money with the existing lender, but will agree,
for a fee, to put the existing lender in funds in certain circumstances (typically on any
payment default by the borrower). Risk participation may be provided by a new lender as
an interim measure before it takes full transfer of a loan.
No borrower consent is required for either a Funded Participation or a Risk Participation,
so this process can be confidential. There is no direct contract between the new lender
and the borrower but the participant usually obtains rights of subrogation, therefore if the
participant has to pay after the borrower defaults, the participant gains the right to step
into the existing lender's shoes and pursue all remedies of the existing lender against the
borrower.
USE OF SYNDICATED LOANS

Working capital credit (refinancing of small lines of credit, etc.);
Export finance (including ECAs);
Capital goods financing (machinery, etc.);
Mergers & Acquisitions;
Project finance (SPVs, structured according to cash flow);
Stand-by facilities;
Trade finance (Letters of credit, promissory notes, forfaiting);
Guarantees (supply, service, etc.
237
ADVANTAGES AND DISADVANTAGES OF SYNDICATED LOANS
ADVANTAGES:
Allows the borrower to access from a diverse group of financial institutions.
Borrowers can raise funds more cheaply in the syndicated loan market than by borrowing
the same amount of money through a series of bilateral loans. This cost saving increases
as the amount required rises.
DISADVANTAGES
Each bank needs to come to an understanding of the business and how its financial
activities are conducted.
A comfort level must be established on both sides of the transaction, which requires time
and effort.
Negotiating a document with one bank can take days. To negotiate documents with four
to five banks separately is a time-consuming, inefficient task.
Staggered maturities must be monitored and orchestrated.
Multiple lines require an inter-creditor agreement among the banks, which takes
additional time to negotiate.
SYNDICATION FOR WORKING CAPITAL LOANS

Locating working capital needs
Identifying the type of loan
Cash credit: Under this system, the banker allows for the drawal of cash against security
of hypothecation of pledge of goods. Quality and the value of the security offered is
considered.
Overdraft: Overdrawing the current account is permitted up to the sanctioned limit. Limit
is fixed on parameters like value of security, margin, and creditworthiness.
Demand Loans: Against demand promissory notes executed by the borrower, the
proceeds of which is credited to the loan account.
Bill Financing: Advance extended to client against genuine trade bills drawn by the
purchaser in favor of the client company.
238

Letter of Guarantee: Commitment by the lending bank on behalf of their clients to pay the
third party in the event of default by the client. Letter of guarantee available for a definite
period and definite purpose.
Letter of Credit: The banker issues commitment on behalf of its client to the supplier of
goods to accept clients bills up to the amount stated in the letter of credit, subject to
certain terms and conditions.
Information Processing
PERFORMANCE EVALUATION OF MERCHANT BANKERS

The country is served by thousands of Merchant bankers with a network with SEBI
acting as an apex regulatory body for supervising their activities. The policies,
programmes, and strategies and promotional efforts of these Merchant Banks subserve
the larger national objectives of rapid capital market development. It is common to hear
often among Merchant Bankers circle that, more than ninety percent of Merchant
Banking activities are managed by a handful of Merchant Bankers. A fairly long
experience of working and operational performance of Merchant Bankers is available.
The data related to all Merchant Bankers were collected based on the criteria of the
category-I registration with SEBI. Secondly, the deregistered Merchant Bankers
irrespective of their past experience and performance were deleted from the sample. The
reason being is to avoid the Institutions, which are not presently engaging in Merchant
Banking activities. Further, the data had been classified, based on the study period and by
considering the representation of public sector, private sector and foreign firms to the
sample.
THE PERFORMANCE ANALYSIS IS DIVIDED INTO THREE SECTIONS.
The first section deals with issue analysis, both public & rights. The significance of this
is to understand the development of the capital market and also the role of Merchant
Bankers to meet the requirements to make the issue success.
The activity based analysis with regard to meeting the requirements as Merchant Banker,
Lead manager and underwriters are analyzed in section II.
The operational & financial performance of selected Merchant Banking firms are
analyzed in section III.
SECTION I
PUBLIC AND RIGHT ISSUE ANALYSIS
239

PUBLIC ISSUE ANALYSIS
The primary market is volatile in nature. The reasons for this continuing volatility are
investors decision, their confidence in market practices, regulations, and international
market movements.
Public issue analysis based on
Sector wise i.e. public or private sector
Institution wise i.e. FI, Banks, etc.
Services wise i.e. NBFCs, Banks, other FI
Intrument wise i.e debt & equity
RIGHT ISSUE ANALYSIS

The performance of right issue is also calculated & analyzed with the help of past
performance.
Section II
Section II and III deal with the performance analysis of select Merchant Bankers. The
present section includes Activity based performance & section III devoted for operational
& financial performance of Merchant Bankers. Precisely, this section has been devided
inot two parts viz, Part A & Part B.
Part A covers the profile of the sample Merhcant Banking firms. Whereas, the activity
based i.e., firms role as a Merchant Banker, Bank, Lead Managers, Co-manager &
Underwriters performance in detail is covered in Part B.
Section III
The operational performance of select Merchant Bankers is classified into two parts. The
first Part A deals with Operational performance & Part b devoted for financial
performance of the selected Merchant Banking firms.
240
PART A
OPERATIONAL PERFORMANCE
The operational performance, of selected Merchant Banker had been done based on the
selective indicators from the financial statement of respective Merchant Banks. The value
in real terms, percentages, and growth rate over the previous years have been calculated
and presented.
For comparative operational performance analysis average & growth rates have been
calculated.
OPERATIONAL PERFORMANCE INDICATORS

Operating Income (OPI)
Expenses (EXP)
Operating profit (OPP)
Other recurring income (ORI)
Profit before depreciation but after interest & tax (PBDIT)
Depreciation
Profit before tax (PBT)
Profit after tax (PAT)
Net profit (NP)
Earning before appropriation (EBA)
Retained Earning (RE)
241
PART B
FINANCIAL PERFORMANCE
The financial performance analysis of merchant bankers has, mainly, based on select
Ratios & Indicators. These ratios & indicators have been calculated from the financial
statements of respective Merchant Banking firms. The selected financial performance
Indicators are EPS, DPS, DPR, ERR etc. Whereas the financial performance of these
Merchant banking firms are mainly based on Ratios
DATA ANALYSIS & INTERPRETATION
In order to evaluate the financial performance of Merchant Banking firms various ratios
(indicators) have been computed for the period under study. An obsolete figure does not
convey anything unless it is related with the other relevant figure. Ratios make a humble
attempt in this direction. Ratio is defined formally as, the indicated quotient of two
mathematical expressions. Ratios are one among the best known and most widely used
tools to financial analysis. An operational definition of a financial ratio is the relationship
between two financial values.
FINANCIAL PERFORMANCE INDICATORS:

Earning per share (EPS),
Dividend per share (DPS),
Dividend pay-out ratio (DPR),
Earning retention ratio (ERR),
Operating profits per share (OPPS),
Operating Margin (OPM), (in percentage)
Net profit Margin (NPM), (in percentage)
242

Return on net Worth (RONW) (in percentage)
Chapter-IV
Loan Syndication & Performance Evaluation
End Chapter quizzes

Q1. Financial securities are assets for the __________ and liabilities for the _________.
(a) issuer, buyer.
(b) buyer, issuer.
(c) grantor, grantee.
(d) brokerage house, client.
Q2. Performance evaluation of issues done on the basis of

1) Data related to merchant banker
2) Issue analysis
3) Activity analysis
4) Operational analysis
5) Financial analysis
a) Only 3 & 5
b) Only 3, 4 & 5
c) Only 5
d) All statements are necessary
Q3. Issue analysis means

1) understand the development of capital market
2) the role of merchant banker
3) performance of the issue
243

a) only 1
b) only 2
c) only 1 &2
d) All statements are necessary
Q4. Performance evaluation of merchant banker is based on:

1)past experience of merchant bankers
2)financial performance
3)operation efficiency
only 1
only 2
only 2 & 3
1, 2 & 3
Q5. SEBIs regulation does not consider the financial performance of a company in
specifying the eligibility norms for a public issue.
True
False
Q6. (I) Banks are financial intermediaries that accept deposits and make loans.
(II) Included under the term banks are firms such as commercial banks, savings and
loan associations, mutual savings banks, credit unions, and insurance companies.
(I) is true, (II) false.
(I) is false, (II) true.
Both are true.
Both are false.
Q7. Banks, savings and loan associations, mutual savings banks, and credit unions
A) are no longer important players in financial intermediation.
B) have been providing services only to small depositors since deregulation.
C) have been adept at innovating in response to changes in the regulatory environment.
D) all of the above.
E) only (A) and (C) of the above.
244

Q8. Which of the following is not a financial performance Indicator?
Earning per share (EPS)
Dividend per share (DPS)
Dividend pay-out ratio (DPR)
Rate of Interest offered
Q9. Which of the following is not a operational performance Indicator?

Profit before tax (PBT)
Profit after tax (PAT)
Net profit (NP)
Earnings Per Share
Q10. Which of the following is not a party to a syndicated loan?

Lead Manager
Broker
Participating Bank
Facility Manager
245
Answer Keys
Chapter 1
Q1. - b, Q2- a,Q3- b, Q4- d, Q5- b, Q6- d, Q7-d, Q8- a, Q9- c, Q10- d.
Chapter-2
Q1. - c, Q2- d, Q3- c, Q4- a, Q5- b, Q6- a, Q7-d, Q8- a, Q9- d, Q10- d.
Chapter 3
Q1- c, Q2-c, Q3- , Q4-a, Q5- b, Q6-d, Q7- a, Q8-b, Q9- d, Q10- a
Chapter-4
Q1. - b, Q2- d, Q3- d, Q4- d, Q5- b, Q6- a, Q7-c, Q8- d, Q9- d, Q10- b.
246
REFERENCE BOOKS
1. E.Gordon, K.Natarajan, Emerging Scenario of Financial Services,
Himalaya Publishing House, Mumbai.
2. Mutual funds in India: Marketing strategies and investment practices,
H Sadhak.
3. Merchant Banking: Principles and Practice by H.R.Machiraju, New Age International
(P) Limited, New Delhi, 1995.
4. Merchant banking and financial services, S.Gurusamy, Thomson
South Western.
5. M.Y.Khan, Financial Services Tata McGraw Hill, 3rd Edition, 2005.
6. Machiraju, Indian Financial System Vikas Publishing House, 2nd
Edition, 2002.
7. J.C.Verma, A Manual of Merchant Banking, Bharath Publishing
House, New Delhi, 2001.
8. Sadhale H., Mutual Funds in India, Sage, New Delhi 1997.
247

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Issue

The economic development of any country depends upon

Issue Management Semester V

Issue Management Semester V

Issue Management Semester V

Pre-issue & Post issue

Loan Syndication and

Issue Management Semester V

Issue Management Semester V

Issue Management Semester V

Issue Management Semester V

THE ORGANISATION OF THE FINANCIAL SYSTEM IN INDIA

Issue Management Semester V

i) ORGANISED INDIAN FINANCIAL SYSTEM

Issue Management Semester V

FORMAL AND INFORMAL FINANCIAL SYSTEMS

COMPONENTS OF FORMAL FINANCIAL SYSTEM

Issue Management Semester V

Issue Management Semester V

INTERACTION AMONG THE COMPONENTS

Issue Management Semester V

FUNCTIONS OF THE FINANCIAL SYSTEM

Issue Management Semester V

Issue Management Semester V

FINANCIAL SYSTEM DESIGNS

Issue Management Semester V

Issue Management Semester V

MONEY MARKET AND CAPITAL MARKET

CHARACTERISTICS OF FINANCIAL MARKETS

Issue Management Semester V

FUNCTIONS OF FINANCIAL MARKETS

FINANCIAL SYSTEM AND ECONOMIC DEVELOPMENT

Issue Management Semester V

EFFECTS OF FINANCIAL SYSTEM ON SAVING AND INVESTMENT

Issue Management Semester V

RELATIONSHIP BETWEEN FINANCIAL SYSTEM AND ECONOMIC

Issue Management Semester V

FINANCIAL MARKETS IN AFRICA

Issue Management Semester V

Issue Management Semester V

Colonial Period to World War II

Issue Management Semester V

Post-World War 11 to Early 1960

Issue Management Semester V

Issue Management Semester V

African Financial Systems in the 1990s

Issue Management Semester V

1.2 MERCHANT BANKING

Issue Management Semester V

Issue Management Semester V

CAPITAL ADEQUACY NORMS

Capital Adequacy Norms

Minimum Net Worth

Issue Management Semester V

1.3 FUNCTIONS OF MERCHANT BANKS

Issue Management Semester V

Issue Management Semester V

Issue Management Semester V

Issue Management Semester V

GUIDELINES FOR MERCHANT BANKERS:

SOME PROBLEMS OF MERCHANT BANKERS

CODE OF CONDUCT FOR MERCHANT BANKERS