Unit 2

Capital Market Operations

1. 2. 3. 4. 5. Functions of New Issue Market Contents of Offer Document Methods of Floating New Issue Procedure for Initial Public Offer (IPO) SEBI Guidelines

4. Procedure for Initial Public Offer (IPO)

Meaning : Public Issue

Refers to the Issue Of Shares
Directly to The Public

Through Prospectus
(Offer Document)

THE MAIN STEPS INVOLVED IN PUBLIC ISSUE 1. Draft Prospectus: A draft prospectus should be prepared giving all details (as mentioned earlier) Any company making a Public Issue or Rights Issue of a value more than Rs. 50 Lakhs has to file a draft offer document with

SEBI for its observation

The company can proceed further only after getting observations from the SEBI The company has to open its issue within 3months from the date of SEBIs observation letter.

2. Fulfillment of Entry Norms (EN):

The SEBI has laid down certain Parameters for Accessing

the Primary Market. If a company fulfills these parameters (entry norms), then only it can enter into the Primary Market.

The Entry Norms are:

1. The company should have Net Tangible Assets of at least Rs. 3 crores for three full years

2. It should have Distributable Profits in at least three years

3. It should posses Net Worth of at least Rs. 1 crore in three years

4. If it has to change its name , at least 50% Revenue for the

preceding 1 year should be from the new activity.

5. The issue size should not exceed 5 times the Pre-Issue Net Worth.

Homework:
Entry Norm II Entry Norm III

3. Appointment of Underwriters
Why?

Underwriters are appointed to shoulder the liability and subscribe

to the shortfall in case the issue is under subscribed

For this commitment they are entitled to get a maximum commission of 2.5% on the amount undertaken

4. Appointment of Bankers: Generally the company nominates its own Banker to act as collecting agent. The bankers along with their branch network act as a

collecting agencies and process the funds procured during the

Public Issue.

5. Brokers to the issue: Then recognized members of the stock exchanges are appointed as brokers to the issue for marketing the issue. They are eligible for a maximum brokerage of 1.5 %
6. Filling of Documents:
The draft prospectus along with copies of agreement s entered into with the
lead manger Underwriters Bankers Registrars and Brokers to The issue the state Registrar of the companies where the registered office of the company is located

have to be filled with

7 .Printing of Prospectus and Application Forms:

After filling the above documents, the Prospectus and Application forms are printed and dispatched to all: Merchant Bankers Underwriters Broker to the issue

8. Listing the issue: It is essential to send a letter to the stock exchange concerned, where the issue is proposed to be listed, giving all necessary details

and stating the intension of getting the shares listed on the stock
exchange application has to be sent with specified fee

9. Publication in Newspapers:
The next step is to publish an Abridged version of the prospectus and the Issues commencing and closing dates in Major English Dailies and Vernacular newspapers.

10. Allotment of Shares:

After the closing of Public issue all application forms are scrutinized , tabulated and then shares are allotted against those applications Received.

11. Underwriters Liability

In case , the issue is not fully subscribed , then the liability for the subscription to the extent of under subscription falls on the shoulders of underwriters who have to subscribe to the shortfall.

Home Work: 1. Principal Steps Involved in the case of Private Placement 2. Principal Steps Involved in the case of Offer for sale

SEBIs Guidelines for IPOS:

The SEBI has been issuing guidelines from time to time

with regard to IPOs so as to Protect the interest of investors

and also to promote a healthy capital market in the country.

Some of the important guidelines Pertaining to IPOs are :

1. All allotments have to be made within 30 days of the closure of the Public issue and 42 days in the case of a rights issue. 2. The set offer to the general public has to be at least 25% of

the total issue size for listing on a stock exchange.

For listing an IPO on the NSE:

a) The paid up capital should be Rs. 20 crores

b) The issuing company should have track record of profitability

c) The project should be appraised by a financial institution or a

commercial bank or merchant banker

3. In case an issue exceeds more than Rs. 100 crores , the issue is allowed to place the whole issue through book building.

4. A minimum 50% of the net offer to the public has to be reserved

for investors applying for less than 1000 shares.

5. All listing formalities for a public issue have to be completed within 70 days from the date of closure of the subscription list.

6. There should be at least 5 investors for every Rs. 1 lakh of equity offered.

7. The PAN number should be compulsory quoted in the

application where the monetary value of investment is Rs. 50,000 or above.

8. The subscription list for public issues shall be kept open for at

least 3 working days and not more than 10 working days.