ELECTRONIC - INITIAL PUBLIC OFFERING AND REAL TIME GROSS SETTLEMENT SYSTEM

SUBMITTED BY:CHAITALI BAHRUCHA LILY GEDDAM SNEHA MANE 30 39 40

Electronic-IPO OVERVIEW:-

An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to public. This paves way for listing and trading of the issuers securities. The sale of securities can be either through book building or through normal public issue. The major advantages of launching an IPO are as follows: Increase in the capital Liquidity Valuation of the companies Increase in wealth

The IPO Market in India has been developing since the liberalization of the Indian economy. It has become one of the foremost methods of raising funds for various developmental projects of different companies. The IPO Market in India is on the boom as more and more companies are issuing equity shares in the capital market. With the introduction of the open market economy, in the 1990s, the IPO Market went through its share of policy changes, reforms and restructurings. One of the most important developments was the disassembling of the Controller of Capital Issues (CCI) and the introduction of the free pricing mechanism. This step helped in developing the IPO Market in India, as the companies were permitted to price the issues. The Free pricing mechanism permitted the companies to raise funds from the primary market at competitive price. But, as few corporate houses were using the abolition of the Controller of Capital Issues (CCI) in a negative manner, the Securities Exchange Board of India (SEBI) was established in the year 1992 to regulate the capital market.

The Government has been exploring various methods of IPO delivery since 1993, including the introduction of paperless methods, as another step towards the development of the securities market. The e-IPO is an application based and browser based software intended for use by Distributors of IPO and their end clients The e-IPO software facilitates online bidding for Retail/HNI/QIB clients of the member in different IPOs, this software works as a single interface to bid for different IPOs in NSE and BSE at one go and also do activities such as viewing the details of upcoming IPOs, transferring funds etc. It is just not only a data entry software for IPOs but also provides a host of other functionalities, thereby making the process easier for its users. It facilitates both medium for bidding i.e. online & offline.

 FEATURES:-

Facility to create and maintain the users and assign rights to them based on the members business modulate Multiple users with enhanced user access and rights Detailed price wise demand analysis of IPOs based on the files as received by the exchange Facility to bulk upload of orders for institutional clients Facilitates generation of bulk files online, through a single platform Facilitates export of bids Facilitates import of the bid confirmation file received from the exchange Multiple reports are available to end clients with report formation and export to excel facility Facilitate post IPO closure activities such as allocation etc. Supports both Fixed Price and Book Building methods of IPO Bidding Facility to print the IPO forms

BENEFITS:-

Comprehensive functionality coverage Customization / enhancements of Reports for IPO Analysis Cost-effective maintenance Email and Mobile Alerts can be customized as per the clients' requirements to receive emails when a bid is placed by the client or on his/her behalf by the member Clients demand for detailed reporting and access to their financial snapshot at any given point of time can be achieved

 PROCESS: APPLICANTS

Payment

e-IPO WEBSITE

Payment

INTERNET BILL PAYMENT FACILITIES

PSS INTERNET & PHONE PAYMENT

e-IPO SERVICE PROVIDER

PAYMENT MATCHING

Invalid Application

REFUND

Valid application IPO RECEIVING BANKS

IPO PROCESS & BALLOTING

Successful

Not successful

SHARE CERTIFICATE

REFUND

1. Self Certified Syndicate Banks (SCSBs) accept retail individual investors bid for IPO Shares at Cut-Off price through internet banking or at certain designated branches.

2. Investor receives the acknowledgement from the bank along with the IPO Application Number.

3. Bank blocks the amount in investor's bank account for the IPO as applied and send the application information to the designated stock exchanges for that IPO. In case of insufficient amount in investor's bank account, the bank can reject the IPO application and do not sent the bidding to stock exchanges.

4. Bank keeps the physical forms or electronic date (in case of online IPO Application) for specified period of time.

5. IPO Registrar receives the final bidding information from stock exchanges soon after issue get close. Applications are processed.

6. IPO Registrar validates the bids and rejects the application who doesn't match the application requirements.

7. Registrar complete the Basis of Allotment' and get it approved from stock exchanges.

8. Registrar sends request for money to SCSB's to transfer money to escrow public issue account.

9. Registrar receives the money and transfers the allocated shares to investors Demat Account.

SEBI Guidelines:-

1) A company proposing to issue capital to public through the on-line system of the stock exchange for offer of securities shall comply with the requirements as contained in addition to other requirements for public issues as given in these Guidelines, wherever applicable.

2) The company shall enter into an agreement with one or more of the Stock Exchange(s) which have the requisite system of on-line offer of securities. The agreement mentioned in the above clause shall specify inter-alia, the rights, duties, responsibilities and obligations of the company and stock exchange(s) .The agreement may also provide for a dispute resolution mechanism between the company and the stock exchange.

3) The brokers shall be appointed who are registered with SEBI, for the purpose of accepting and placing order with the company.

4) The company shall appoint a Registrar to the Issue having electronic connectivity with the Stock Exchange(s) through which the securities are offered under the system.

5) During the period the issue is open to the public for subscription, the applicants may approach the brokers of the stock exchange(s) through which the securities are offered under on-line system, to place an order for subscribing to the securities. Every broker shall accept orders from all clients who place orders through him.

6) The brokers and other intermediaries engaged in the process of offering shares through the on-line system shall maintain the following records for a period of 5 years: a) Orders received b) Applications received c) Details of allocation and allotment d) Details of margin collected and refunded e) Details of refund of application money

REAL TIME GROSS SETTLEMENT SYSTEM

A Real Time Gross Settlement (RTGS) System can be defined as a gross settlement system in which both processing and final settlement of funds transfers (based on instructions received from payer bank/institution) takes place continuously (i.e., in real time). As it is a gross settlement system, the transactions are settled individually without netting debits against credits. As it is a real time settlement system, the final settlement of funds is effected by the system continuously rather than periodically at pre-specified times. This, of course, is based on payment instructions received from the paying bank instructing the settlement bank (mostly central bank) to transfer funds from its settlement account to the settlement account of the payee / beneficiary bank. In other words, an RTGS system is an instruction-based credit transfer system settling the obligations continuously throughout the processing day. The RTGS is a system, which provides real-time online settlement of payments among banks and financial institutions. In this system payment instructions between banks are processed and settled individually and continuously throughout the day. A lag between the time at which information is made available to receiving banks and the time at which settlement takes place may have important risk implications in large funds transfer system. This is in contrast to net settlements where payment instructions are processed throughout the day but inter-bank settlement takes place only afterwards typically at the end of the day. Payee banks and their customers receive funds with certainty, or so-called finality, during the day, enabling them to use the funds immediately without exposing themselves to risk. To initiate a funds transfer, the sending bank dispatches a payment message, which is subsequently routed to the central bank and to the receiving bank as the system process and settles the transfer. RTGS system settles payments on a transaction-by-transaction basis as soon as they are accepted by the system. RTGS system does not create credit risk for the receiving participant because the settlement takes place individually. RTGS system can require relatively large amounts of intra-day liquidity because participants need sufficient fund in the settlement account to cover their outgoing payments. The cost of intra-day liquidity depends on variables such as amount required, the opportunity cost of maintaining liquid balances and the cost of intra-day credit.

The RTGS system in India commenced operations from March 26, 2004 with the objective of settling inter-bank transactions emanating from the Money market, Forex market and Securities market. It also facilitates customer based inter-bank transactions in addition to government and RBI transactions. The RTGS system is also being integrated, in phases, with the accounting system of the RBI and other payment systems and services including clearing obligations. RBI itself participates in the RTGS system as a Type A member, and is also the operator and manager of the system besides providing the settlement bank services for settlement of transactions put through in the RTGS system

 Message flow structures:An RTGS system, is a large value inter-bank funds transfer system, which in the evolution of payment systems in different countries, has come about to replace the paper-based or instrument-based (Eg. inter-bank cheque clearing) settlement system to enable the settlement of inter-bank obligations. In its place, the transfer of funds or settlement takes places based on the electronic instructions sent by paying members. After the final transfer of funds takes place, the information or credit advice is sent to the receiving bank or beneficiary bank, which can then utilize these funds for its own transactions with certainty (in other words, without any risk). In the above context, there can be different ways in which these payment messages can be transmitted (with varying time lags) between and among the three entities namely, the paying bank, the beneficiary bank and the settlement bank. RTGS systems are, therefore, said to have four different topologies based on the different types of message flow structures. V-shaped message flow structure: Under this message flow structure in an RTGS system, the full message with all the information about the payment (including the details of the ultimate beneficiary, in case of a customer-based funds transfer) is initially sent by the paying or sending bank to the settlement bank i.e., the central bank. The settlement takes place at the central bank based on the funds availability. Only then, the full payment message is sent to the receiving or beneficiary bank. Y-shaped message flow structure: Under the Y-shaped topology for an RTGS system, the payment message is transmitted by the sending bank to a central processor. This central processor takes a portion or relevant details from the original payment message that is necessary for settlement and routes this core information to the central bank for the purpose of settlement of funds (the original message is kept in the central processor itself). Upon receipt of this core information (details pertaining to the paying and receiving banks, amount etc), the central bank completes the funds transfer depending upon the availability of funds in the account of the paying bank and informs the status to the central processor. Thereafter, the full message containing the confirmation of the settlement is rebuilt by the central processor and sent to the receiving bank. The business information exchanged between the sending and receiving bank (for Example the details of the beneficiary, transaction details etc.) is not known by the settlement bank. L-shaped message flow structure: In this design of RTGS message flows, the payment message dispatched by the sending bank is held at a system gateway attached to the sending banks internal processing system itself, and only a subset of the information contained in the original message (a settlement

request) is sent to the settlement / central bank to facilitate actual transfer of funds. Provided the sending bank has sufficient funds in its account with the settlement bank, the transaction is complete by the settlement bank which sends a confirmation to the sending banks gateway. Upon receipt of this confirmation, the original payment message is released automatically from the gateway of the sending bank and sent to the receiving / beneficiary bank. T-shaped message flow structure: In the three topologies explained above, the common feature is that the receiving bank will receive full payment message only after the transaction has been settled by the central bank. The message flow structure itself, thus, ensures that the receiving bank will not act upon unsettled payments, thereby minimizing risks for the system. Alternatively, RTGS systems could apply a T-shaped structure, wherein the sending bank routes the payment message directly to the receiving bank and simultaneously sending a copy of the payment message to the settlement / central bank. This means that the receiving bank will first receive the full, unsettled payment message immediately after the sending bank has dispatched it and will subsequently also receive a confirmation message from the settlement bank after the completion of the funds transfer. If the receiving bank is unable to or is lax in monitoring or distinguishing between settled and unsettled payment messages, it may act upon such unsettled messages and release funds to the beneficiary customer etc., thereby generating credit and liquidity risks not just for itself but for the system as well. As such, the T-shaped structure has been viewed as being incompatible with the basic principle of RTGS that a funds transfer should be passed to the receiving bank if and only if it has been settled irrevocably and unconditionally.

 Features: Membership criteria: Membership is open to all scheduled banks and to any other institution at the discretion of RBI. The criteria for membership include: Member of INFINET Member of Negotiated Dealing System Maintain Current Account with DAD, Mumbai Scheduled bank or Primary Dealer Clearing house or clearing agency

RTGS Transaction types: Inter-Institutional transactions these are the main or principal transactions of members Customer transactions funds transfers of customers are also put through the RTGS system where in the funds have to be credited to the beneficiary account within two hours of receipt of credit. RBI transfers - Transactions initiated by RBI (g-sec, forex etc) Own Account Transfer transactions - Transfers of funds between members own current accounts with any DAD of the Bank. Multilateral Net Settlement Batch (MNSB) transactions - Batch transactions from clearing entities such as clearing houses (cheque clearing), Clearing Corporation of India Ltd (Government securities transactions, forex transactions and CBLO transactions) etc.

Membership category: Type A Membership includes RBI, all Scheduled banks including scheduled cooperative banks. These members will be required to open a separate Settlement account in DAD, Mumbai that will be distinct from their existing current account. These members will have a Participant Interface, which will enable them to communicate with the RTGS system through the IFTP. These members are eligible for availing the Intra-Day Liquidity facility extended by RBI, and can have access to all kinds of RTGS transactions.

 Type B membership is extended to Primary Dealers who will have similar features extended to Type A members except putting through customer transactions. Type C membership will be extended to Scheduled banks and PDs, participating in call money operations, who will avail of RTGS services through either a Type A member of the Bank. Hence these members will not require complete infrastructure facilities. Type D membership will be extended to Clearing entities, which will submit clearing batches for settlement to the RTGS system (through Clearing Interface / Net Settlement Interface). It could include NCCs, Clearing Houses, CCIL and Stock Exchanges. Type E membership will be extended to Non-scheduled banks and other financial institutions if so decided by RBI in the future.

Settlement A/c and Funding A/c: Settlement account is a dedicated Account for RTGS transactions to be opened with RBI, DAD, Mumbai by members. It will be an Intra Day Account, which will be funded (from the regular current account of the member with DAD, Mumbai) at RTGS Start of Day, and the balance will be flushed at RTGS End of Day. Accordingly, funding instructions (for transfer of funds from current account to settlement account) have to be given by the members in the form of Standing Instructions. Liquidity in RTGS: RTGS systems entail active management of intra-day liquidity as adequate liquidity makes possible a smooth flow of payments in RTGS helping to avoid delays to individual payments and minimizing liquidity risks. Generally, sources and management of funds include: Balances maintained in the account with the central bank / settlement bank Incoming transfers from other banks including borrowing from money market Credit extensions from the central bank Separate RTGS settlement account Own Account Transfers (from current accounts of members maintained with DAD Mumbai as well as at other DADs) Queuing facilities (holding payment instructions in a separate queue till such time sufficient balance is available in the settlement account) Priority assignment by members along with re-prioritization facility Intra-Day Liquidity facility Gridlock Resolution Mechanism

 Mechanics of Intra Day Liquidity (IDL): In our RTGS system, IDL is sought to be provided in the form of Intra Day Repos which will be fully collateralized in the form of government securities. For this purpose, the RTGS system will have an interface with the Securities Settlement System. In the SSS, members will have a separate SGL account called as IDL SGL account into which members have to deposit government securities from their SGL account which will be used as collateral (after applying suitable margin / haircut) as and when IDL is to be used by a member. The underlying principle in an intra-day credit facility is that participants must extinguish it by the close of the day by fiat money to the central bank. Thus, the stock of reserve money which expands during the course of the day returns to its initial level. The Reserve Bank would charge Rs.25 per transaction following the recommendations of the Working Group on Intra-day Credit Facility. In order to minimize credit risk IDL would be provided against Central Government marketable securities with appropriate haircut up to a limit of three times of net owned funds (NOF) (Tier I Capital) as per the latest audited balance sheet. The system will automatically attempt to reverse outstanding IDL at frequent time intervals. At any cost, outstanding IDL has to be reversed by the member by end of the RTGS day. Accordingly, if a participant is unable to extinguish its intra-day repo position during the course of the day, the outstanding amount would attract a penal rate pegged at twice the Bank Rate or twice the corresponding days maximum call money rate, whichever is higher. If this breach (i.e., spillover to the overnight loan) occurs once, the participant would have to pay the penalty, besides being cautioned by the RBI. The account would also be placed under surveillance. If it happens for a second time in a six-month period, the intraday facility would be suspended by the Bank and supervisory surveillance would be triggered. For restoration of intra-day facility, reasonable evidence has to be provided to the RBI that prudential treasury management is in place. If after restoration, it recurs for the third time during the six-month period, the intra-day facility will be withdrawn permanently

 Steps involved in RTGS processing of transactions:-

The following are the sequence of steps in a typical RTGS transactions, simplified so as to enable a better understanding of the process flow of transactions. 1) RTGS being a Credit-push mechanism (where the payers account is first debited before passing on credit to other members in the system), the paying bank / member will send the payment instruction to the IFTP (Inter-bank Funds Transfer Processor). This payment instruction could be on its own account or on account of customer requests. 2) The IFTP receives the messages, validates them for security and authentication considerations at the outset and if the message passes such validations send an acknowledgement to the sender. In case of any problem, an error message is sent and in case of any security breach, the logical connectivity with the sender is severed immediately. Thereafter, the content of the message is verified and taken up for further processing. Only that information which is relevant for settlement at RTGS will be stripped from the payment instruction and forwarded to RTGS and the rest of the information (such as transaction details, customer information etc.) is stored at the IFTP itself. 3) 3 The instruction sent by IFTP is received by the RTGS which maintains the settlement base / accounts where the funds transfer actually takes place. The availability of necessary balance in the paying members account is checked. If sufficient balance is available, the paying banks settlement account (distinct from and funded from the current account at Mumbai DAD) is debited and the amount credited to the receiving banks settlement account. The message is returned to the IFTP from where an acknowledgement is sent to the sending bank / member and a credit advice is sent to the receiving bank / member. The relevant details (transaction details, customer information etc.) that were stripped earlier from the payment instruction, are added to the message by the IFTP and then forwarded to the receiving bank. In case the transaction relates to customer funds transfer, then the credit has to be passed on to the ultimate beneficiary / customer within the stipulated time. 4) In case sufficient funds are not available in the paying members settlement account, the payment instruction is put in a logical queue. The pending payments in the queue are monitored at scheduled intervals and will be processed on FIFO basis (within the priority allotted to each payment). At the end of the day, any unprocessed message will be returned to the sender. 5) Where the transaction is eligible for availing Intra-Day Liquidity (IDL) facility then the system will start the process for obtaining IDL so that necessary funds can be obtained and the payment instruction can be processed successfully. Accordingly, a message will be sent to the Securities Settlement System which is a component of the PDO-NDS / SSS application (having an interface with the RTGS system).

6) When the SSS receives the message from RTGS for IDL requirement, the first step will be to authenticate the message from security aspects. SSS is a component where all the investment details of members are available not only to RBI but also to the members themselves. 7) As stated earlier, for the purpose of obtaining IDL, members have to open a separate SGL account with PDO Mumbai. Into this account, members have to deposit sufficient amount of eligible securities from their own SGL account so that as and when IDL is required by the member, the securities lodged in the IDL SGL account will be used as collateral. Hence, when the IDL request is received by SSS, the availability of securities balance in the IDL SGL account is first verified (after applying the stipulated margins / hair-cut). 8) The unencumbered balance of securities in the IDL SGL account of the member will be reckoned for SLR calculation. 9) If securities are available to cover the required amount of funding, then the securities are debited from the members IDL SGL account and a success message is sent from the SSS to RTGS. 10) If sufficient securities balance is not available, then a failure message will be sent to RTGS system. In case no IDL can be given, the payment instruction will be put back into the queue. 11) If a successful message is received from SSS, then IDL as required (within the stipulated limit) will be made available to the member so that the transaction in the payment queue can be processed. 12) Whenever IDL is used by a member, the members settlement account will be monitored / checked at stipulated time intervals by the IDL Reversal process wherein, any fresh liquidity coming into the account (from other sources) would be used to first reverse the IDL availed by the member. In such a case, a message will be sent to SSS to release the securities back into the members IDL SGL account so that the same will be available for further utilization of IDL by the member. 13) Based on availability of this liquidity, the paying members settlement account is debited and the receiving members account is credited. Message to the paying member and credit advice to receiving member is sent as explained in step 3 above.

 Diagrammatic representation:-

 Creating Outward Payment Request in Core Banking:-

Select R41: Customer Payment Request or R42: Interbank Payment Request

Enter remitters account number (i.e. the account to be debited) Enter Amount of remittance

Enter amount of commission

Enter Beneficiary account number correctly

Enter IFSC Code

Enter Beneficiary Name and Address

Message Type Amount Account Number Commission Total amount Beneficiary Account Number Beneficiary Name and Address Beneficiary Bank/Branch IFSC CODE Details of the Payment

Select R41 Customer Payment Request or R42 Interbank Payment Request Enter the amount of remittance Give Account Number to which the amount has to be debited Calculate and enter commission to be recovered as per extant instructions This will appear automatically Enter account number of the beneficiary, in the case of R41 messages. In the case of R42 messages, the name of the beneficiary Bank may be given in this field. Enter name and address of the ultimate beneficiary. In the case of R42 messages, the name of the Bank and (optionally) address may be given. Enter IFSC code of the bank branch where beneficiary maintains the account

The contents of Details of Payment are not conveyed to the beneficiary Bank. However, the remitting branch may enter details in this field for its own reference.

Remitters Name and Give the Name and address of the remitter. Address

After entering the above details, click Transmitand authorise the queue. Once the queue is passed, the customers account (BGL account in the case of R42 message) will automatically get debited and message passed on to PI-RTGS. On transmitting the message Branch will get STATUS: REMIT After few minutes, when the Message get settled at RBI END Branch will be able to see ACKNOWLEDGED status.

 USES:-

1. To reduce payment system risk: With the availability of sufficient funds to cover the settlement, the time to process the settlement is almost zero and hence the primary source of risks in inter-bank funds transfers is eliminated. However, in the situation where the sending bank does not have sufficient funds for settlement, the operational design of the RTGS System ensures that that particular transaction is not lost by either putting it into a queue or by ways of extension of bank credit to the sending bank.

2. To reduce credit risk: Since final funds transfer takes place in real time, the payment leg (final transfer of funds) can be coordinated with the delivery leg (final transfer of assets) such that one takes place only if the other also takes place. This ensures that the system is safeguarded against credit risk and is very beneficial in securities and foreign exchange transaction settlements.

3. To reduce systemic risk: With real time settlement taking place, intraday inter-bank exposures are substantially reduced. This decreases the likelihood of banks having to absorb liquidity shortfalls in the event of any participating institution failing to settle its obligations. Central banks also look forward to reduce systemic risk and hence this is a key reason for them to adopt RTGS System for large value payments and transfers.

4. Speed up the process of high value payments 5. To give accurate position of the participating bank

6. Easy to use