UNIT 2 - ISSUE MANAGEMENT

Role of merchant banker in project appraisal :

PROJECT :
In the current scenario Projects is the new buzz word. A Project can be defined as an action
plan, directed at achieving specific objectives within a stipulated period of time. A project can be
long term or short term. Examples of projects are: Project to develop infrastructure facilities,
preparation of a marketing plan or a research project. The term Project essentially means,
different types of Projects, Project Life Cycle, Project Appraisal and Evaluation process.
PROJECT APPRAISAL
Project Appraisal involves a careful checking of the basic data, assumptions and methodology
used in project preparation, an in-depth review of the work plan, cost estimates and proposed
financing, an assessment of the project's organizational and management aspects, and finally the
viability of project.
Merchant bankers as one of their important roles, appraise the projects, evaluate it before it is
being sent to the bankers for financial assistance. They conduct a very exhaustive study in each
and every key areas and give their clients very constructive recommendations wherever
necessary. Merchant bankers appraise the projects from different angles as follows :
VARIOUS ASPECTS OF PROJECT APPRAISAL
1. Management Appraisal :
Management appraisal is related to the technical and managerial competence, integrity,
knowledge of the project, managerial competence of the promoters etc. The promoters should
have the knowledge and ability to plan, implement and operate the entire project effectively. The
past record of the promoters is to be appraised to clarify their ability in handling the projects.
2. Technical Feasibility :
Technical feasibility analysis is the systematic gathering and analysis of the data pertaining to the
technical inputs required and formation of conclusion there from. The availability of the raw
materials, power, transportation facility, skilled man power, engineering facilities, maintenance,
local people etc will come under technical analysis. This feasibility analysis is very important
since its significance lies in planning the exercises, documentation process, risk minimization
process and to get approval.
3. Financial feasibility:
One of the very important factors that a project team should meticulously prepare is the financial
viability of the entire project. This involves the preparation of cost estimates, means of financing,
financial institutions, financial projections, break-even point, ratio analysis etc. The cost of
project includes the land and site development, building, plant and machinery, technical knowhow fees, pre-operative expenses, contingency expenses etc. The means of finance includes the
share capital, term loan, special capital assistance, investment subsidy, margin money, loan etc.
The financial projections include the profitability estimates, cash flow and projected balance
sheet. The ratio analysis will be made on debt equity ratio and current ratio.
4. Commercial Appraisal:
In the commercial appraisal many factors are involved. The scope of the project in market or the
beneficiaries, customer friendly process and preferences, future demand of the supply,
effectiveness of the selling arrangement, latest information availability in all areas, government
control measures, etc. The appraisal involves the assessment of the current market scenario,

which enables the project to get adequate demand. Estimation, distribution and advertisement
scenario also to be here considered into.
5. Economic Appraisal:
How far the project contributes to the development of the sector, industrial development, social
development, maximizing the growth of employment, etc. are kept in view while evaluating the
economic feasibility of the project.
6. Environmental Analysis :
Environmental appraisal concerns with the impact of environment on the project. The factors
include the water, air, land, sound pollution, geographical location etc.
PROJECT EVALUATION PROCESS
According to International Labour Organization (ILO)Project evaluation is a systematic and
objective assessment of an ongoing or completed project. The aim is to determine the relevance
and level of achievement of project objectives, development effectiveness, efficiency, impact and
sustainability.
The following are the steps in the Project Evaluation process:
CONCEPT DEVELOPMENT:
The first step in the project evaluation process is concept development. In concept development
the need for the project is described. This step also includes establishment of desired outcomes
and outputs, drawing of timetables or scheduling of activities and setting of strategies for the
development and review of the project. During concept development, it is important to determine
that the project proposal is consistent with any relevant laws or regulations and Government
policy in general.

DESIGNING CAPITAL STRUCTURE DECISIONS

The term capital structure refers to the proportionate claims of debt and equity in the
total long-term capitalization of a company.
According to Weston and Brigham, Capital structure is the permanent financing of
the firm, represented primarily by long-term-debt, preferred stock and common equity,
but excluding all short-term credit. Common equity includes common stock, capital
surplus and accumulated retained earnings.
OPTIMAL CAPITAL STRUCTURE :
An ideal mix of various sources of long-term funds that aims at minimizing the overall
cost of capital of the firm, and maximizes the market value of shares of a firm is known
as Optimal capital structure.
PATTERN OF CAPITAL STRUCTURE
The different pattern of capital structure are followed with the help of following
principles
The decisions regarding the use of different types of capital funds in the overall
longterm capitalization of a firm are known as capital structure decisions.
Any decisions on Capital Structure are based on different principles.
a. Cost Principle
An ideal pattern of capital structure is one that costs the least. The returns must be

maximized and cost minimized. The cost of capital of a firm is greatly influenced by the
amount of interest to be paid to its debenture holders in a particular period. A firm
would be well advised to employ the debt capital, as it is a cheap source of funds.
Using debt would give the firm a tax shield advantage. Such an arrangement is
technically
known as trading on equity.
b. Control principle
The amount of control to be exercised by the shareholders over the management is an
important principle underlining capital structure decisions. Accordingly, the finance
manager, while making a fresh issue of capital funds, should ensure that the control of
the existing shareholders remain unaffected. In this connection, it is to be noted that the
issue of bonds and preference shares offers the advantage of non-dilution of existing
ownership. However, debt funds pose the formidable problem of a heavy interest cost
burden and the consequent risk of bankruptcy.
c. Return principle
According to this principle, the patterns of capital structure must be devised to allow for
enhanced returns to the shareholders. It also implies that the kind of capital source
chosen must be secure. Besides, the principle amount having to be returned
immediately after the expiry of the stipulated time period, the bonds require obligated
debt servicing by way of fixed periodic interest. Hence, debt capital may prove fatal to
the company in time of low/non-profits. In the context of risk, equity stands a fair
chance of being included as part of an efficient capital structure.
d. Flexibility Principle
For capital structure decisions to be efficient, there must be adequate flexibility in the
capitalization. The addition of a capital fund must be such that it should be possible for
a firm to redeem or add capital to the existing capital structure. It is equally important
that the terms and conditions of raising funds be flexible. This maneuverability would
give the firm a more efficient capital structure.
e. Timing Principle
The quality of decisions depends on the time at which the capital funds are either
raised or returned. This would help minimize the cost of capital, and thus help
maximize returns to shareholders. Timing greatly affects the preferences and choices
of investors, which in turn depends on the general state of the economy. Accordingly, in
periods of boom equity shares should be issued to raise resources. Conversely, in
periods of depression, bonds are ideal, as they entail payment of lower rate interest.
TYPES OF CAPITAL MARKET INSTRUMENTS
The various capital market instruments used by corporate entities for raising resources
are as follows:
1. Preference shares
2. Equity shares
3. Non-voting equity shares
4. Cumulative convertible preference shares
5. Company fixed deposits
6. Warrants
7. Debentures and Bonds
1. PREFERENCE SHARES

Shares that carry preferential rights in comparison with ordinary shares are called
Preference Shares. The preferential rights are the rights regarding payment of
dividend
and the distribution of the assets of the company in the event of its winding up, in
preference to equity shares.
2. Equity Shares
Equity shareholders represent proportionate ownership in a company. They have
residual claims on the assets and profits of the company. They have unlimited potential
for dividend payments and price appreciation in comparison to the owners of
debentures and preference shares who enjoy just a fixed assured return in the form of
interest and dividend. Higher the risk, higher the return and vice-versa.
3. Non voting equity shares
Non-voting equity shares will be entitled to rights and bonus issues and preferential
offer of shares on the same lines as that of ordinary shares. The objective will be to
compensate the sacrifice made for the voting rights. For this purpose, these shares will
carry higher dividend rate than that of voting shares. If a company fails to pay dividend,
non-voting shareholders will automatically be entitled to voting rights on a prorate basis
until the company resumes paying dividend.

4. CONVERTIBLE CUMULATIVE PREFERENCE SHARES (CCPS)

These are the shares that have the twin advantage of accumulation of arrears of
dividends and the conversion into equity shares. Such shares would have to be the
face
value of Rs.100 each. The shares have to be listed on one or more stock exchanges in
the country. The object of the issue of CCP shares is to allow for the setting up of new
projects, expansion or diversification of existing projects, normal capital expenditure for
modernization and for meeting working capital requirements.
5. COMPANY FIXED DEPOSITS
Fixed deposits are the attractive source of short-term capital both for the companies
and investors as well. Corporates favour fixed deposits as an ideal form of working
capital mobilization without going through the process of mortgaging assets. Investors
find fixed deposits a simple avenue for investment in popular companies at attractively
reasonable and safe interest rates. Moreover, investors are relieved of the problem of
the hassles of market value fluctuation to which instruments such as shares and
debentures are exposed. There are no transfer formalities either. In addition, it is quite
possible for investors to have the option of premature repayment after 6 months,
although such an option entails some interest loss.
6. WARRANTS
An option issued by a company whereby the buyer is granted the right to purchase a
number of shares of its equity share capital at a given exercise price during a given
period is called a warrant. Although trading in warrants are in vogue in the U.S,. Stock
markets for more than 6 to 7 decades, they are being issued to meet a range of
financial requirements by the Indian corporate.
A security issued by a company, granting its holder the right to purchase a specified

number of shares, at a specified price, any time prior to an expirable date is known as a
warrant. Warrants may be issued with either debentures or equity shares. They
clearly
specify the number of shares entitled, the expiration date, along with the stated/exercise
price. The expiration date of warrants in USA is generally 5 to 10 years from the date of
issue and the exercise price is 10 to 30 percent above the prevailing market price.
Warrants have a secondary market. Warrants in the Indian context are called
sweeteners and were issued by a few Indian companies since 1993.
7. DEBENTURES AND BONDS
a. Debuntures :
A document that either creates a debt or acknowledges it, is known as a debenture.
Accordingly, any document that fulfills either of these conditions is a debenture. A
debenture, issued under the common seal of the company, usually takes the form of a
certificate that acknowledges indebtedness of the company.
A document that shows on the face of it that a company has borrowed a sum of
money from the holder thereof upon certain terms and conditions is called a debenture.
Debentures may be secured by way of fixed or floating charges on the assets of the
company. These are the instruments that are generally used for raising long-term debt
capital.
b. Bonds :
Bonds are the debt instruments issued by companies in both domestic and international
market with a pre - determined interest rate for a specific interest rate. Unlike
dividends, interest rate on bonds will not get accumulated. Bonds sometimes are
attached with warrants. Bonds are traded in the secondary market too.

Pricing of Issues
A listed company can freely price equity 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 recognised 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 / convertibles, all
banks require approval by RBI.
Differential pricing :
Listed / unlisted companies may price the shares / convertible securities to the
applicants in the firm allotment category (IE allotment on firm basis) at a price different
from the price at which the net offer to the public (ie Indian public - excluding firm
allotments, reserves , promoters, private placement etc) is made, provided the price at
which the security is offered to the applicants in firm allotment

category is higher than the price at which securities are offered to the public. A listed
company making a composite issue of capital (ie public cum rights issue) may issue
securities at differential prices in its public and rights issues. However, justification for
the price differential should be given in the offer document.
Price Band :
The issuing company can mention a price band of 20 percent (should not exceed 20
percent of floor price) in the offer document filed with SEBI and actual price can be
determined at a later date before filing it with ROCs (Registrar of companies). Board of
Directors has to pass a resolution with in 2 days to determine the price. The final offer
document should contain only one price.
Book building :
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 quantum of such securities to be issued by means of
a notice / circular / advertisement /
document or information memoranda or offer document.
BOOK BUILDING METHOD
A method of marketing the shares of a company whereby the quantum and the price of
the securities to be issued will be decided on the basis of the bids received from the
prospective shareholders by the lead merchant bankers is known as book-building
method.
Under the book-building method, share prices are determined on the basis of real
demand for the shares at various price levels in the market. For discovering the price at
which issue should be made, bids are invited from prospective investors from which the
demand at various price levels is noted. The merchant bankers undertake full
responsibility for the same.
The option of book-building is available to all body corporate, which are otherwise
eligible to make an issue of capital to the public. The initial minimum size of issue
through book-building route was fixed at Rs.100 crores. However, beginning from
December 9, 1996 issues of any size will be allowed through the book-building route.
Book-building facility is available as an alternative to firm allotment. Accordingly, a
company can opt for book-building route for the sale of shares to the extent of the
percentage of the issue that can be reserved for firm allotment as per the prevailing
SEBI guidelines. It is therefore possible either to reserve securities for firm allotment or
issue them through the book-building process.
The book-building process involves the following steps:
1. Appointment of book-runners
The first step in the book-building process is the appointment by the issuer company, of
the book-runner, chosen from one of the lead merchant bankers. The book-runner in
turn forms a syndicate for the book-building. A syndicate member should be a member
of National Stock Exchange (NSE) or Over-the-Counter Exchange of India (OTCEI).
Offers of bids are to be made by investors to the syndicate members, who register the
demands of investors. The bid indicates the number of shares demanded and the
prices offered.

This information, which is stored in the computer, is accessible to the company

management or to the book-runner. The name of the book-runner is to be mentioned in
the draft prospectus submitted to SEBI.
2. Drafting prospectus
The draft prospectus containing all the information except the information regarding the
price at which the securities are offered is to be filed with SEBI as per the prevailing
SEBI guidelines. The offer of securities through this process must separately be
disclosed in the prospectus, under the caption placement portion category. Similarly,
the extent of shares offered to the public shall be separately shown under the caption
net offer to the public. According to the latest SEBI guidelines issued in October 1999,
the earlier
stipulation that at least 25 percent of the securities were to be issued to the public has
been done away with. This is aimed at enabling companies to offer the entire public
issue through the book-building route.
3. Circulating draft prospectus
A copy of the draft prospectus filed with SEBI is to be circulated by the book-runner to
the prospective institutional buyers who are eligible for firm allotment and also to the
intermediaries who are eligible to act as underwriters. The objective is to invite offers
for subscribing to the securities. The draft prospectus to be circulated must indicate the
priceband within which the securities are being offered for subscription.
4. Maintaining offer records
The book-runner maintains a record of the offers received. Details such as the name
and the number of securities ordered together with the price at which each institutional
buyer or underwriter is willing to sub scribe to securities under the placement portion
must find place in the record. SEBI has the right to inspect such records.
5. Intimation about aggregate orders
The underwriters and the institutional investors shall give intimation on the aggregate of
the offers received by the book-runner.
6. Bid analysis
The bid analysis is carried out by the book-runner immediately after the closure of the
bid offer date. An appropriate final price is arrived at after a careful evaluation of
demands at various prices and the quantity. The final price is generally fixed reasonably
lower than the possible offer price. This way, the success of the issue is ensured. The
issuer company announce the pay-in-date at which expiry of which shares are allotted.
7. Mandatory underwriting
Where it has been decided to make offer of shares to public under the category of Net
Offer to the Public, it is incumbent that the entire portion offered to the public is fully
underwritten. In case an issue is made through book-building route, it is mandatory that
the portion of the issue offered to the public be underwritten. This is the purpose, an
agreement has to be entered into with the underwriter by the issuer. The agreement
shall specify the number of securities as well as the price at which the underwriter
would
subscribe to the securities. The book-runner may require the underwriter of the net offer
to the public to pay in advance all money required to be paid in respect of their
underwriting commitment.

8. Filling with ROC

A copy of the prospectus as certified by the SEBI shall be filed with the Registrar of
Companies within two days of the receipt of the acknowledgement card from the SEBI.
9. Bank accounts
The issuer company has to open two separate accounts for collection of application
money, one for the private placement portion and the other for the public subscription.
10. Collection of completed applications
The book-runner collects from the institutional buyers and the underwriters the
application forms along with the application money to the extent of the securities
proposed to be allotted to them or subscribed by them. This is to be done one day
before the opening of the issue to the public.
11. Allotment of securities
Allotment for the private placement portion may be made on the second day from the
closure of the issue. The issuer company, however, has the option to choose one date
for both the placement portion and the public portion. The said date shall be
considered to be the date of allotment for the issue of securities through the bookbuilding process.
The issuer company is permitted to pay interest on the application money till the date of
allotment or the deemed date of allotment provided that payment of interest is uniformly
given to all the applicants.
12. Payment schedule and listing
The book-runner may require the underwriters to the net offer to the public to pay in
advance all money required to be paid in respect of their underwriting commitment by
the eleventh day of the closure of the issue. In that case, the shares allotted as per the
private placement category will become eligible for being listed. Allotment of securities
under the public category is to be made as per the prevailing statutory requirements.
13. Under-subscription
In the case of under-subscription in the net offer to the public category, any spillover to
the extent of under-subscription is to be permitted from the placement portion category
subject to the condition that preference is given to the individual investors. In the case
of under-subscription in the placement portion, spillover is to be permitted from the net
offer to the public to the placement portion.
ADVANTAGES OF BOOK BUILDING
Book-building process is of immense use in the following ways:
1. Reduction in the duration between allotment and listing
2. Reliable allotment procedure
3. Quick listing in stock exchanges possible
4. No price manipulation as the price is determined on the basis of the bids received.
Private Placement
When the issuing company sells securities directly to the investors, especially
institutional investors, it takes the form of private placement. In this case, no prospectus
is issued, since it is presumed that the investors have sufficient knowledge and
experience and are capable of evaluating the risks of the investment. Private
placement covers shares, preference shares and debentures. The role of the financial
intermediary, such as the merchant bankers and lead managers, assures great

significance in private placement. They involve themselves in the task of preparing an

offer memorandum and negotiating with investors.
PREPARATION OF PROSPECTUS
Prospectus is defined as a document through which public are solicited to subscribe
to the share capital of a corporate entity. Its purpose is to invite the public for the
subscription/purchase of any securities of a company.
PROSPECTUS FOR PUBLIC OFFER :
1. Regular prospectus
2. Abridged prospectus
3. Prospectus for rights issue
4. Disclosures in prospectus
5. Disclosures in abridged prospectus and letter of offer
REGULAR PROSPECTUS
The regular prospectus are presented in three parts
PART I
a. General Information about the company e.g. Name and address of the registered
office consent of the Central Government for the issue and names of regional
stock exchanges etc.,
b. Capital Structure such as authorized, issued, subscribed and paid up capital
etc.,
c. Terms of the issue like mode of payment , rights of instruments holders etc.,
d. Particulars of the issue like project cost , means of financing etc.,
e. Company, Management and project like promoters for the project, location of
the project etc.,
f. Disclosures of public issues made by the Company, giving information about
type of issue, amount of issue, date of closure of issue, etc.,
g. Disclosure of Outstanding Litigation, Criminal Prosecution and Defaults
h. Perception of Risk factors like difficulty in marketing the products, availability
of raw materials etc.,
PART II
a. General Information
b. Financial Information like Auditors Report, Chartered Accountants Report etc.,
c. Statutory and Other Information
PART III
a. Declaration i.e., by the directors that all the relevant provisions of the companies
Act, 1956 and guidelines issued by the Government have been complied with.
b. Application with prospectus
2. ABRIDGED PROSPECTUS
The concept of abridged prospectus was introduced by the Companies (amendment)
Act of 1988 to make the public issue of shares an inexpensive proposition. A
memorandum containing the salient features of a prospectus as prescribed is called as
Abridged Prospectus.
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.
5. 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.
6. 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.
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.

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.
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:
a) The applicant has the necessary infrastructure, communication and data processing
facilities and manpower to effectively discharge his activities,
b) 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.
offence;
c) The applicant is a scheduled bank and
d) 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 RESPONISBILITIES
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.
The applicant is a scheduled bank and
d) 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 RESPONISBILITIES
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.
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.
Green shoe option (GSO) :
A company making an initial public offer of equity shares can avail of the GSO for
stabilising the post - listing price 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 stablising mechanism through a stabilising agent (SA). The concerned issuing
company should seek authorisation for the possibility of allotment of further issues to
the SA at the end of the stabilisation period together with the authorisation for the public
issue in the general meeting of its shareholders. It should appoint one of the merchant
bankers / book runners from amongst the issue management team as the SA who
would be responsible for the price stabilisation 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 and conditions relating to GSO including fees charged /
expenses to be incurred.
The money received from the applicants against the over-allotment in the GSO should
be kept in GSO bank account to be used for the purpose of buying shares from the
market during the stabilization period. These shares should be credited to GSO demat
account . They should be returned to the promoters immediately within 2 working after
close of stabilisation period.
PRIVATE PLACEMENT :
Private placement involve sale of securities to a limited number of sophisticated
investors such as financial institutions, mutual funds, venture capital funds, banks and
so on. In a private placement, the identity of investors may not be known when the offter
document is prepared. Private placement refers to sale of equity, equity related
instruments or sale of debuntures of a listed or unlisted company.
Private placement of Equity :
An unlisted company which requires infusion of equity funds but is not yet ready to
make an IPO may place privately its equity or equity-related instruments with one or
more sophisticated investors. It can freely choose the quantity and price as such issues
are not regulated by SEBI. Typically mutual funds, venture capital funds, private equity
funds and alliance partners participate in such an issue.
Private placement of Debt:
Corporates, financial institutions, infrastructure companies and others depended
considerably on privately placed debentures which were subscribed mainly by mutual
funds, banks, insurance organisations and provident funds.

Information and disclosures to be included in the private placement memoranda were

not defined, credit rating was not mandatory, listing was not compulsory and banks and
financial institutions could subscribe to these issues without too many constraints.
The regulatory framework changed significantly in late 2003 when SEBI and RBI
tightened their regulations over the issuance of privately placed debuntures and the
subscription of the same by banks and financial institutions. The key features of the
new regulatory dispensation are :
The disclosure requirement for privately placed debentures are similare to those
of publicly offered debentures.
Debt securities shall carry a credit rating of not less than investment grade from a
credit rating agency registered with SEBI.
Debt securities shall be issued and traded in demat form.
Debt securities shall be compulsorily listed.
The trading in privately placed debt shall take place between QIBs and HNIs
(High Net worth Individuals) in standard denomination of Rs.10 lakh.
Bought out deal
A bought out deal is a method of offering securities to the public through a sponsor (a bank,
financial institution, or an individual). The securities are listed in one or more stock exchanges
within a time frame mutually agreed upon by the company and the sponsor. This option saves the
issuing company the costs and time involved in a public issue. The cost of holding the shares can
be reimbursed by the company, or the sponsor can offer the shares to the public at a premium to
earn profits. Terms are agreed upon by the company and the sponsor.
The Securities and Exchange Board of India mandates that only private companies can choose
this method of issuing securities. If the issue size is too huge the sponsor company team up by
syndicating other sponsors. The merchant banker, investment banker and agents can act as
sponsors.
E - IPO
Market regulator the Securities and Exchange Board of India is considering a proposal to allow
the companies to sell shares through an all-electronic Initial Public Offer (e-IPO), wherein
investors would be able to bid for shares electronically and without the need for signing any
papers physically.
The proposed move would help in fast-tracking the IPO process and lower the costs, besides
allowing the investors to apply for shares and buy them at a click on computers without the need
for signature on bulky physical documents.
The Sebi is currently awaiting a formal clearance from the Ministry of Corporate Affairs (MCA)
for the e-IPO process, although the ministry has already given a go-ahead informally.
MCA has held the view that in the case of subscription of the to be listed shares which is in
demat form, it may not be necessary that an investor needs to "agree in writing"," Sebi told its
board.
"However, MCA is to give a written clarification to this effect," it added.
In order to make the IPOs further paperless, the regulator also plans to do away with the
requirement of attaching certain documents with the public offer filings by the companies.

The Sebi told its board in a memorandum that certain accompanying documents filed along with
the offer documents were not very relevant for the purpose of processing the documents at its
end.
In order to make the IPOs further paperless, the regulator also plans to do away with the
requirement of attaching certain documents with the public offer filings by the companies.
Further, filing such accompanying documents in pursuance of the regulatory requirement only
made the file so much more bulky to handle.
"Therefore, a review of the various documentation requirements under the said regulations was
undertaken to identify documentation that are considered redundant and could be done away
with," the Sebi said.
OFF - SHORE ISSUES
Offshore company can issue shares of stock up to the amount authorised by its Memorandum of
Association. Once issued, shares represent ownership interest in the company.
Holders of shares enjoy certain rights defined in the Articles of Association; amongst these is the
right to a proportionate part of profits, the right to vote for directors or the right to inspect the
books of the company.
A share certificate (or stock certificate) is a written instrument evidencing the legal title to
shares in the company.
A typical share certificate contains:
Details identifying the company that issued it (name, company number, date of
formation);
The authorised capital of the company;
The number of shares represented by the certificate;
The class of the shares represented by the certificate (if there are different classes)
including any special conditions, preferences or restrictions pertinent to the
particular class;
Details identifying the owner of the shares represented by the certificate.
> The authorised capital of the company;
Bearer shares - Where legislation permits, share certificates may be issued to bearer -- meaning
that the details identifying the owner of shares are omitted both on the certificate and in the
company's share register.
In addition to owner anonymity, bearer share certificates allow an easy transfer of title. They are
negotiable without endorsement; the person having physical possession of a bearer share
certificate is assumed to be the legal owner.
In contrast, registered share certificates can only be transferred by endorsement and the relevant
entry made in the company's share register. A new certificate is issued to replace the endorsed
certificate.
ISSUE MARKETING
Norms :
In order to ensure that the gullible investing public are not iveigled into subscribing for shares,
by the creation of a false picture by the company, entering the capital market, the government has
issued detailed guidelines regarding publicity about new issues.

ISSUE MARKETING
Norms :
In order to ensure that the gullible investing public are not iveigled into subscribing for shares,
by the creation of a false picture by the company, entering the capital market, the government has
issued detailed guidelines regarding publicity about new issues.
1. Between the date of announcement and the closing date of the subscription list, companies
as also those connected with the new issues should not publish any material relating to the
new issue.
2. At press conferences too, rosy picture about the prospects of the company should not be
painted nor information about turnover, profits, dividends for the future years be
mentioned in the prospectus.
3. Further advertisements about oversubscription before the closure of the subscription list
should be based on documentary evidence, available for verification.
Mass mailing is permitted in order to have qualitative restriction on the literature, so as to
confirm to the information contained in the prospectus , has been imposed.
NEW ISSUE MARKETING
1. Companies entering the capital market are required to advertise in the news
papers and give announcements regarding the proposed issue of capital.
2. Sometimes, companies give advertisements in the newspapers in support of the
public issue. Such advertisements and press conferences are used to give
exaggerated claims, dividends, prospects and capital appreciation. Such claims
are likely to mislead investors.
3. To protect the investor, it is indicated that between the date of announcement and
the closing of the subscription list, no material relating to the new issue or any
other information such as turnover, profit, dividends for future years which is not
contained in the prospectus, should be released.
4. Until the subscription list is closed, no advertisement should be given about
oversubscription. Stock exchange can refuse enlsitment in the case of
companies which advertise oversubscription.
SEBI Guidelines for issue of Advertisement (11.10.1993)
On the basis of various suggestions and comments received from merchant bankers,
financial institutions, banks and advertisers, the SEBI has formulated a code of
advertisement governing advertisements issued in connection with capital issues. All
the lead managers are expected to ensure that issuer companies strictly observe the
code of advertisement set out in these guidelines. Advertisements also means notices,
brochures, pamphlets, circulars, catalogues, showcards, hoardings, posters, placards
etc.
1. SEBI suggested a code of advertisements to be followed by the issuers of capital.
2. Issue advertisement on television in the form of crawlers is not allowed.
Lead managers and observance of advertisement code.
Lead manager shall comply with the following to ensure the strict compliance of guide
lines by the issuer:

To obtain an undertaking from the issuer as a part of the MOU, to be entered into,
by the lead manager with the issuer company to the effect that issuer company
would 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.

To ensure that the issuer company obtains an approval with respect to all the
issue advertisements and publicity materials from the lead manager and also
ensure availability of copies of all the issue-related materials with the lead
manager, atleast till the allotment is completed.
NRI MARKETING
Non-resident Indians are permitted to subscribe for up to 51 per cent of the equity
capital, proposed to be issued in the new companies. This is in addition to any foreign
investments in equity capital that may be permitted. Further, a general facility is also
available which is applicable to all companies entering the capital market. Under the
Foreign Exchange Regulation Act (FERA), NRIs can subscribe to new issues from their
funds in India. Abroad investment in new issues out of their funds is allowed. Capital or
income can be repatriated after the payment of taxes on dividends and capital gains.
The company has to obtain the necessary permission from the Reserve Bank of India.
Non-residents need not apply to the RBI to subscribe for shares.