the detail about primary and secondary market for BBS final Year students of finance stream. comple detail about unit 2

1. Let’s start
with the
positive
energy…

4. Primary Market

5. This boy is struggling with a problem!!!!!
I want to invest money in shares!!!!
In which market I should go?

6. Types of capital market
There are two types of capital market:
Primary market,
Secondary market

7. Primary Market
• It is that market in which shares, debentures and other securities
are sold for the first time for collecting long-term capital.
• This market is concerned with new issues. Therefore, the
primary market is also called NEW ISSUE MARKET.

8. • In this market, the flow of funds is from savers to borrowers (industries),
hence, it helps directly in the capital formation of the country.
• The money collected from this market is generally used by the
companies to modernize the plant, machinery and buildings, for
extending business, and for setting up new business unit.

9. Features of Primary Market
It Is Related With New Issues
It Has No Particular Place
It Has Various Methods Of Float Capital: Following are the
methods of raising capital in the primary market:
i) Public Issue
ii) Offer For Sale
iii) Private Placement
iv) Right Issue
v) Electronic-Initial Public Offer
It comes before Secondary Market

10. • Initial public offering (IPO) The first sale of a company’s
stock to the general public.
• Investment bankers Financial specialists who handle the
sales of most corporate and municipal securities.
• Underwriting Process of purchasing an issue from a firm
or government and then reselling the issue to investors.

11. Factors to be considered by Investors
• Promoters Credibility
• Project Details
• Product
• Financial data
• Risk factors
• Auditors report

12. Secondary Market
The secondary market is that market in
which the buying and selling of the
previously issued securities is done.
The transactions of the secondary market
are generally done through the medium of
stock exchange.
The chief purpose of the secondary
market is to create liquidity in securities.

13.  If an individual has bought some security and he now wants
to sell it, he can do so through the medium of stock
exchange to sell or purchase through the medium of stock
exchange requires the services of the broker presently, their
are 24 stock exchange in India.
.

14. Features of Secondary Market
• It Creates Liquidity
• It Comes After Primary Market
• It Has A Particular Place
• It Encourage New Investments
• Aids in financing the industry
• Ensures safe & fair Dealing (MEDIA BROADCASTING)

15. Functions of Secondary Markets
• Provides regular information about the value of security.
• Helps to observe prices of bonds and their interest rates.
• Offers to investors liquidity for their assets.
• Secondary markets bring together many interested parties.
• It keeps the cost of transactions low.

16. Famous Secondary Markets worldwide
• New York Stock Exchange
• NASDAQ
• The London Stock Exchange
• The Tokyo Stock Exchange
• Shanghai Stock Exchange

17. PRIMARY
MARKET
SECONDARY
MARKET

18. LEGAL FRAMEWORK
Legal
Framework
Companies Act,
1956
Securities
And Exchange
Board of
India Act,
1992
The
Depositories
Act, 1996
All the Rules &
Regulations
Listing
Agreements
Securities
Contract
(Regulation)
Act, 1956

19. Fund Raising in a Company
at Different Stages
Seed
Capital
Shares
Personal
Contribution,
Family,
Friends,
Angel
Investors
IPO: Initial Public Offer
QIP: Qualified Institutions
Placement
GDR: Global Depository
Receipts
FCCB: Foreign Currency
Convertible Bond
ADR: American Depository
Receipts
Venture
Capital
Warrants
/ Shares
Venture
Capitalist
Private
Equity
Shares
Private
Equity
investo
rs
IPO
Shares
FIIs,
FI,
Banks,
Insuran
ce Cos,
MF,
HNI,
Individu
als
includin
g NR
Private
Placeme
nt
Shares /
Warrants
/ FCD /
PCD
Promoters,
Financial
Investor,
Strategic
Investor
Follow-
on
Public
Issue
Shares
FIIs, FI,
Banks,
Insurance
Cos, MF,
HNI,
Individual
s including
NR
Rights
Issue
Shares /
PCD /
FCD
Existing
Shareholders
QIP
Shares
QIB
GDR, FCCB &
ADR
Depository
Receipts with the
underlying being
Shares, Foreign
Currency Bond
convertible into
shares, Depository
receipts with the
underlying being
shares.
FII, Hedge
funds and
FII, US QIB
Strategic
Investment
Customer,
Supplier,
Competitor

20. Seed capital
• The initial capital used to start a business.
• Seed capital often comes from the company founders' personal assets or
from friends and family.
• The amount of money is usually relatively small because the business is
still in the idea or conceptual stage.
• Such a venture is generally at a pre-revenue stage and seed capital is
needed for research & development, to cover initial operating expenses
until a product or service can start generating revenue, and to attract the
attention of venture capitalists

21. Venture Capital
• Venture capital (VC) is financial capital provided to early-stage, high-
potential, growth startup companies.
• The venture capital fund earns money by owning equity in the
companies it invests in, which usually have a novel technology
or business model in high technology industries
• This is a very important source of funding for startups that do not have
access to capital markets. It typically entails high risk for the investor, but
it has the potential for above-average returns.

22. Private Equity
• There is no universally agreed definition of private equity
• Private equity as an illiquid investment since there is no active
secondary market for such investments, investors have little control
over how capital is invested and the investment profile covers a long
horizon.
• Venture capital is a subset of private equity and refers to equity
investments made for the launch, early development, or expansion of
a business
• They generally act as partner

23. IPO
• Initial public offering (IPO) or stock market launch is a type of public
offering in which shares of stock in a company usually are sold to
institutional investors that in turn sell to the general public, on a securities
exchange, for the first time.
• Through this process, a private company transforms into a public company.

24. Private Placement
• A private placement is an issue of shares or of convertible securities by a
company to a select group of persons under Section 81 of the Companies
Act, 1956 which is neither a rights issue nor a public issue. This is a faster
way for a company to raise equity capital
• A private placement of shares or of convertible securities by a listed
company is generally known by name of preferential allotment

25. Private Placement
• 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.

26. Follow-on Public Issue
• A Further public offering (FPO) is when an already listed company makes
either a fresh issue of securities to the public or an offer for sale to the public,
through an offer document. An offer for sale in such scenario is allowed only
if it is made to satisfy listing or continuous listing obligations

27. Rights Issue
• Rights Issue (RI) is when a listed company which proposes to issue fresh
securities to its existing shareholders as on a record date.
• The rights are normally offered in a particular ratio to the number of
securities held prior to the issue.
• This route is best suited for companies who would like to raise capital
without diluting stake of its existing shareholders unless they do not intend to
subscribe to their entitlements

28. QIP
• A Qualified Institutions Placement is a private placement of equity shares or
securities convertible in to equity shares by a listed company to Qualified
Institutions Buyers only in terms of provisions of Chapter XIIIA of SEBI
(DIP) guidelines

29. GDR, FCCB & ADR
• Foreign Currency Convertible Bond is a type of convertible bond issued in a
currency different than the domestic currency
• (ADR)Let us take Infosys example – trades on the Indian stock at around
Rs.2000/-
• This is equivalent to US$ 40 – assume for simplicity(1:50)
• Now a US bank purchases 10000 shares of Infosys and issues them in US in
the ratio of 10:1
• This means each ADR purchased is worth 10 Infosys shares.
• Quick calculation means 1 ADR = US $400
• Once ADR are priced and sold, its subsequent price is determined by supply
and demand factors, like any ordinary shares.

30. GDR, FCCB & ADR
• Both ADR and GDR are depository receipts, and represent a claim on the
underlying shares. The only difference is the location where they are traded.
• Depositary receipts traded in USA – ADR
• Depositary receipts traded in a country other than USA - GDR

31. Strategic Investment
• A Qualified Institutions Placement is a private placement of equity shares or
securities convertible in to equity shares by a listed company to Qualified
Institutions Buyers only in terms of provisions of Chapter XIIIA of SEBI
(DIP) guidelines

32. Investor Categories
QIB means;
A MF, VCF, FVCF
Foreign Institutional investor
Public Financial Institution
Scheduled commercial bank
Multilateral and bilateral
development financial institution
State Industrial development
corporation
Insurance Company
Provident Fund (Min Corpus 25 Cr )
Pension fund ( R 25 Cr )
National Investment Fund
Insurance funds setup and
managed by the Dept of Posts,
India” as per the amendment of SEBI
(ICDR) Reg, 09 on 12th November,2010)
Retail Investor
means an investor
who applies or bids
for specified
securities for a
value of not more
than
Rs. 2 Lakh (as per
the amendment of
SEBI (ICDR) Reg,
09 on 12th
November,2010)
Non Institutional
investor means an
investor other than
a retail individual
investor and
qualified
institutional buyer

33. COMMON CONDITIONS FOR PUBLIC ISSUES AND RIGHTS ISSUES
Issue Opening
date
Within 12 months from the date of issuance of OBSERVATIONS from
SEBI
Underwriting
& Minimum
Subscription
The issuer may appoint Syndicate Members to the extent of the
minimum subscription. The Minimum subscription shall not be less than
90% of the offer through offer document.
Appoint of Syndicate Member mandatory in case of Issue through Book
Building Mechanism.
Call money
The issue shall be made fully paid up within 12 months from the date of
allotment.
This 12 months not applicable where the size of the issue is more than Rs.
500 Cr, wherein the call money shall be at least 25%.
Filing of Offer
Document
The issuer shall submit the draft prospectus / RHP enclosing certain
documents. The MB give due diligence certificates.
In – principle
approval from
Stock
exchange
The issuer must obtain the in-principle approval at least from one of the
recognised SE having nation wide trading platform
SEBI ( ICDR ) Regulations, 2009

34. INITIAL PUBLIC OFFER ( IPO) – ICDR REG, ‘09
Eligibility criteria for Unlisted Companies for I P O
Book building route mandatory with 50% QIB participation if all issues during the same
financial year (including proposed IPO) > 5X pre-issue net worth
Exemptions from SEBI Eligibility Norms Listing criteria of Bombay Stock Exchange Limited
 Banking company
 Correspondent new bank (“public sector banks”)
 Infrastructure company
 Whose project is appraised by a FI/ IDFC/ IL&FS or bank
which was earlier an FI
 5% of the project cost is financed by the appraiser(s)/
institutions jointly or severally
 Rights issues
For large cap companies:
 Post Issue paid up equity capital - Rs. 3 Crores
 Issue size - Rs. 10 Crores
 Post Issue market capitalization – Rs. 25 Crores
Option I: Net
tangible assets,
profitability and
net worth track
record
Net tangible assets of at least
Rs.3 Crores in the preceding 3
full years, not more than 50%
held in monetary assets
+
Track record of distributable
profits in terms of Section 205
of Companies Act, 1956 (excl
extra ordinary items) for 3 out
of preceding 5 years
+
Net worth of at least Rs.
1 Crore in each of the
preceding 3 full years
Option II: No net
tangible assets,
profitability and
net worth track
record
Issue through book building
route with at least 50% allotted
to QIBs
Minimum post issue face value
capital of the Company shall be
Rs 10 Crores
Or + or
‘Project’ has at least 15%
participation by Financial
institutions/banks of which
10% comes from appraiser and
at least 10% of issue size
allotted to QIBs
Compulsory market making for
at least 2 years

35. Pricing
Pricing
There exists free pricing. The issuer may determine the price in
consultation with the lead merchant banker or through book building
process.
Different
ial
Pricing
Specified securities may be offered at different prices, subject to the
following:
Retail individual investors or retail individual shareholders may
be offered specified securities at a price lower than the price at which
net offer is made to other categories of applicants. difference shall
not be more than ten per cent of the price offered to other categories
In Book built issue, the price of the specified securities offered to
an anchor investor shall not be lower than the price offered to other
applicants.
In composite issue, the price of specified securities offered in
public issue may be different from the price offered in rights issue
and justification for such price difference shall be given in the offer
document.
Initial Public Offer ( IPO) – ICDR Reg, ‘09

36. Initial Public Offer ( IPO) – ICDR Reg, ‘09
Price
and
price
band
The issuer may mention a price or price band and floor price or
price band in the red herring prospectus and determine the price
at a later date before registering the prospectus with the ROC.
If floor price or price band is not mentioned in the RHP, the
same shall be announced at least two working days before the
opening of the bid in IPO and one working day bin FPO.
Such announcement shall contain relevant financial ratios and a
statement titled “BASIS OF ISSUE PRICE” in the prospectus.
The cap on the price band shall be less than or equal to 120% of
the floor price. ( Cap includes cap on the coupon rate in case of
convertible debt instruments ).
Floor price shall not be less than the face value.
Face
Value
of
Equity
Shares
Issuer company free to fix the face value of the shares offered,
subject to :
 If price of share is Rs. 500 or more, then face value can be less
than Rs. 10 but should be more than Re. 1
If price of share is less than Rs. 500, then the face value must be
Rs. 10.

37. Reservation on a competitive basis
Employees Shareholders Business
Associates
New Company Permanent employees
of the Issuer and
promoting companies
Shareholders of the
promoting companies
Persons who have
business association
with the Issuer, as
depositors, bondholders
and subscribers to
services
Existing Company Permanent employees
of the issuer company
Shareholders of group
companies
Limit as a % of Issue size 10%* 10% 5%
Available for bidding in
net Public issue
Yes Yes No
• No reservation can be made for the issue management team, syndicate members, their
promoters, directors and employees and for the group/associate companies of issue
management team
• Net Public Offer” i.e. the size of the offer, net of reservations and firm allotments, if
any, has to be greater than 10% of post issue capital
* Firm allotment + Reservation
Initial Public Offer ( IPO) – ICDR Reg, ‘09

38. Promoters’ Contribution and Lock-in Requirements
Promoters’
contribution
 At least 20% of post-IPO capital of the company to be held by the Promoters,
which is referred to as Promoters’ contribution
 The Promoters’ can comply with the Promoters’ contribution condition by
bringing in the full amount of promoters contribution, including premium, at
least one day prior to the issue opening date
 Securities ineligible for computation of promoters’ contribution are those that are
 Acquired for consideration other than cash and revaluation of assets or
capitalization of intangible assets is involved
 A result of bonus issues out of revaluation reserves or reserves without accrual
of cash resources or against shares which are ineligible for computation of
promoter contribution
 Acquired by the promoters at a price lower than the IPO price during the
preceding 1 year from the date of filing the DRHP with SEBI, unless the
difference in price is brought in. However, this is not valid if these acquired
shares result from an inter-se promoter transfer and (i) such shares were
acquired by the transferor promoter during the past 1 year at or more than
the IPO price; or (ii) such shares were acquired by the transferor promoter
prior to the past 1 year
 Ineligible shares acquired in pursuance to a scheme of merger or
amalgamation approved by a High Court shall be eligible for computation of
promoter’s contribution
 Compliance with norms for Promoters’ contribution shall be required at the time
of filing the DRHP with SEBI
Initial Public Offer ( IPO) – ICDR Reg, ‘09

39. Promoters’ Contribution and Lock-in Requirements
Lock-in Requirements
(Unlisted companies)
Entire pre-IPO capital locked in for 1 year from date of allotment in IPO
(exempt for (a) Venture Capital Funds which have held shares for a
minimum of 1 year; (b) pre-IPO shares held by employees which were
issued under ESOP or ESPS before the IPO). Transfer of locked-in
shares among pre-IPO shareholders allowed, provided lock-in continues
with transferee
Promoter’s holding up to 20% of post-IPO capital locked-in for 3 years
from the date of allotment in IPO and excess promoter’s holding locked-
in for 1 year
Pledge
Pledged securities held by promoters shall not be eligible for
computation of Promoters’ contribution
If securities are locked-in as Promoters’ contribution, the same may be
pledged if the loan has been granted by such Banks/ FIs for the purpose
of financing one or more objects of the Issue
Initial Public Offer ( IPO) – ICDR Reg, ‘09

40. Key Parties and Responsibilities for an IPO
Intermediary Structure
BRLM
Book Runners’
Legal Counsel
Broker /
Syndicate
Advertisi
ng
Agency
Printers
IPO
Grading
Agency
Registrar
s
Escrow
Bankers
Issuer
Company /
Selling
Shareholder
Arrangement
Coordination
Legal
Counsels

41. Green shoe option

42. Definition
• A green shoe is a clause contained in the underwriting agreement of
an initial (IPO) that allows underwriters to buy up to an additional
15% of company shares at the offering price (of the total IPO size).

43. What is it ?
•Green shoe option means an option of allocating
shares in excess of the shares included in the public
issue and operating a post listing price.
•It is a provision, in underwriting agreement, that
allows the underwriter to sell the additional shares
then the original number of shares offered.

44. Origination
•The term Green Shoe Option derived from a
Company named Green Shoe Manufacturing
Company, founded in 1919.
•This company is now called as Stride Rite Corp.
•This Company was the 1st who initiated this option
in 1960.
•It is also known as GSO.

45. Why GSO?
•This would normally done to reduce the risk of the
IPO (Initial Public offering).
•Also, when the public demand for the shares
exceeds expectations and the stock trades above the
offering price.
•It is mainly practiced in US and European Market.

46. Objectives
•Price stability.
•Reduce the risk.

47. SEBI Guidelines
•A pre-issue contract is required to be entered into for
this purpose with an existing shareholders.
1. Underwriter can issue 15% additional shares of
the original offer price.
2. Underwriter can exercise that option within 30
days from the date of allotment of shares.

48. Requirements (process)
3. The SA shall enter into a agreement with
promoter's and per issue share holders who will
lend their shares up to 15% of the issue size.
4. The details of the agreements shall be disclosed in
the draft Red Herring prospectus, Red Herring
prospectus and the final prospectus.
5. In case of an initial public offer unlisted company
and in case of public issue by a listed company,
the promoters and pre- issue shareholders holding
more than 5% shares, may lend the shares.

49. Requirements (process)
6. The SA shall borrow shares from the promoters or
the pre-issue shareholders of the issuer company
or both, to the extent of the proposed over-
allotment (not more than 15%).
7. Provided that the shares shall be in dematerialized
form only.
8. The allocation of these shares shall be pro-rata to
all the applicants.
9. The stabilization mechanism shall be available for
the period not exceed 30 days from the date when
trading permission was given by the exchange(s)

50. Requirements (process)
10. The SA shall open a special account with a bank
to be called the “Special Account for GSO
proceeds of _____ company” and a special
account for securities with a depository participant
to be called the “Special Account for GSO shares
of company”
11. The money received from the applicants against
the overallotment in the green shoe option shall be
kept in the GSO Bank Account and shall be used
for the purpose of buying shares from the market,
during the stabilization period.

51. Requirements (process)
12. The shares bought from the market by the SA, if
any during the stabilization period, shall be
credited to the GSO Demat Account.
13. The shares bought from the market and lying in
the GSO Demat Account shall be returned to the
promoters immediately, in any case not later than
2 working days after the close of the stabilization
period.

52. Requirements (process)
14. On expiry of the stabilization period, in case the
SA does not buy shares to the extent of shares
over-allotted, the issuer company shall allot shares
to the extent of the shortfall in dematerialized
form to the GSO Demat Account, within five days
of the closure of the stabilization period.
15. The shares returned to the promoters under shall
be subject to the lock in period

53. Requirements (process)
16. The SA shall remit an amount equal to (further
shares allotted by the issuer company to the GSO
Demat Account) * (issue price) to the issuer
company from the GSO Bank Account. The
amount left in this account, if any, after this
remittance and deduction of expenses incurred by
the SA for the stabilization mechanism, shall be
transferred to the investor protection fund(s) of the
stock exchange(s) where the shares of issuer
company are listed.
17. The SA shall submit a report to the stock
exchange(s) on a daily basis during the
stabilization period

54. SA Requirements
The SA shall maintain a register in respect of each issue having the
green shoe option in which he acts as a SA. The register shall contain
the following details of:
1. Record each transaction effected in the course of the stabilizing
action, the price, date and time.
2. The details of the promoters from whom the shares are borrowed
and the number of shares borrowed from each.
3. The register must be retained for a period of at least three years
from the date of the end of the stabilizing period.

55. Additional Disclosures
The draft Red Herring prospectus, the Red Herring prospectus and the
final prospectus shall contain the following additional disclosures:
1. Name of the SA
2. The maximum number of share (in % also) proposed to be over-
allotted by the company.
3. The period, for which the company proposes to avail of the
stabilization mechanism.
4. The maximum increase in the capital of the company and the
shareholding pattern post issue
5. The maximum amount of funds to be received by the company in
case of further allotment.

56. Additional Disclosures
6. Details of the agreement entered in to by SA with the promoters to
borrow shares, agreement shall include
1. Name of the promoters,
2. Existing shareholding,
3. Number & percentage of shares to be lent by them
4. Other important terms and conditions including the rights and obligations
of each party.
7. The final prospectus shall additionally disclose the exact number
of shares to be allotted in the public issue, stating separately
therein the number of shares to be borrowed from the promoters
and over allotted by the SA, and the percentage of such shares in
relation to the total issue size.

58. Example
• For example, if a company decides to publicly sell 1 lakh
shares, the underwriters (or "stabilizers") can exercise their
green shoe option and sell 1.15 lakh shares. When the shares are
priced and can be publicly traded, the underwriters can buy back
15% of the shares. This enables underwriters to stabilize
fluctuating share prices by increasing or decreasing
the supply of shares according to initial public demand.
• If the market price of the shares exceeds the offering price that
is originally set before trading, the underwriters could not buy
back the shares without incurring a loss. This is where the green
shoe option is useful: it allows the underwriters to buy back the
shares at the offering price, thus protecting them from the loss.

59. Continued…..
• If a public offering trades below the offering price of the
company, it is referred to as a "break issue". This can create
the assumption that the stock being offered might be
unreliable, which can push investors to either sell the shares
they already bought or refrain from buying more.
• To stabilize share prices in this case, the underwriters
exercise their option and buy back the shares at the offering
price and return the shares to the lender.

60. Why we need
prospectus

61. There is two type of companies
Genuine
Want to exploit
investors

62. Who will save
us from these
type of
companies
SEBI

63. What is red –
herring
prospectus

64. Prospectus without full
Information about price,
Number of securities
offered

65. REASON FOR PREPARING
• First thing to attract people without disclosing much information about the
deal.
• The “red herring” is a reference to a legal disclosure, printed in red.
• Informing to readers that the SEC has not yet reviewed and approved the
document.
• Securities may not be sold or may offers to buy be accepted prior to the time
the Registration Statement becomes effective.

66. REASON FOR PREPARING
• Investors can get an idea of upcoming offerings.
• How much they can get away with before the SEC registration.

67. RED HERRING PROSPECTUS
ISSUERS
1.Apollo health street limited.
2.Power finance corporation ltd.
3.Engineers India limited.
4.Tata steel limited.

68. Sir, who
prepares the
prospectus
Generally
Merchant banker

69. • IPO grading is the grade assigned by a Credit Rating
Agency registered with SEBI, to the initial public
offering (IPO) of equity shares or any other security
which may be converted into or exchanged with equity
shares at a later date.
• Such grading is generally assigned on a five-point point
scale with a higher score indicating stronger
fundamentals.

70. • IPO grade 1: Poor fundamentals
• IPO grade 2: Below-average fundamentals
• IPO grade 3: Average fundamentals
• IPO grade 4: Above-average fundamentals
• IPO grade 5: Strong fundamentals

71. • No, IPO grading is not optional. A company which has
filed the draft offer document for its IPO with SEBI,
on or after 1st May, 2007, is required to obtain a grade
for the IPO from at least one CRA.

72. • IPO grading can be done either before filing the draft
offer documents with SEBI or thereafter.
• However, the Prospectus/Red Herring Prospectus, as
the case may be, must contain the grade/s given to the
IPO by all CRAs approached by the company for
grading such IPO.
• Further information regarding the grading process may
be obtained from the Credit Rating Agencies.

73. • IPO grade/s cannot be rejected.
• Irrespective of whether the issuer finds the grade
given by the rating agency acceptable or not, the grade
has to be disclosed as required under the DIP
Guidelines.
• However the issuer has the option of opting for
another grading by a different agency. In such an
event all grades obtained for the IPO will have to be
disclosed in the offer documents, advertisements etc.

74. The IPO grading process is expected to take into account the
prospects of the industry in which the company operates
The areas listed below are generally looked into by the rating
agencies, while arriving at an IPO grade
Ø Business Prospects and Competitive Position
i. Industry Prospects
ii. Company Prospects
Ø Financial Position
Ø Management Quality
Ø Corporate Governance Practices
Ø Compliance and Litigation History
Ø New Projects—Risks and Prospects
It may be noted that the above is only indicative of some of the
factors considered in the IPO grading process and may vary on a
case to case basis.

75. • No. IPO grading is done without taking into account the price at
which the security is offered in the IPO.
• Since IPO grading does not consider the issue price, the investor
needs to make an independent judgment regarding the price at
which to bid for/subscribe to the shares offered through the
IPO.

76. BOOK
BUILDING

77. WHAT IS BOOK BUILDING?
• Book Building is the process of determining the price
at which an Initial Public Offering will be offered.
• SEBI guidelines, 1995 defined book-building as
“A process undertaken by which a demand for the
securities proposed to be issued by a body of
corporate 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 a notice,
circular, advertisement, document or information
memoranda or offer document”.

78. WHAT IS BOOK?
Buy side
book
Sell side
book
An book is the
list of orders
that a trading
venue uses to
record the
interest of
buyers and
sellers in a
particular
financial
instrument

79. WHAT IS BOOK BUILDING?
• Book building is a process in
which share prices are
determined on the basis of real
demand for the shares at
various price levels in the
market

80. Types of investors for book building
There are three kinds of investors in a
book-building issue.
1. The retail individual investor (RII),
2. The non-institutional investor (NII)
3. The Qualified Institutional Buyers
(QIBs)

81. Retail Individual Investor (RII):
• In the retail individual investor category, investors
cannot apply more than Rs 2 lakh (Rs 2, 00,000) in an
IPO.
• Retail Individual investors have an allocation of 35%
of shares of the total issue size in Book build IPOs.
• NRI’s who apply with less than Rs 200000/ are also
considered as RII category.
• Retail Individual investor can bid for more than Rs
200000 in an IPO by applying in NON institutional
Investors Category. There is no upper limit for
bidding amount in ‘NON institutional Investors
Category.

82. HNI and NIBs
• High Networth Individual (HNI): If Retail Investor
applies for more than Rs 200000 of shares in an IPO
, they are considered as HNI
• Non Institutional bidders :Individual investors ,
NRI’s, Companies , trusts, etc. who bid for more
than Rs 2 lakh are known as Non Institutional
bidders , Non Institutional bidders have an
allocation of 15% of shares of the total issue size in
Book build IPOs.

83. QIBS
• Qualified Institutional Bidders (QIBs): Financial
institutions , banks , FII’s and Mutual funds who are
registered with SEBI are called QIB’s. They usually
apply in very high quantities. QIBs are mostly
representatives of small investors who invest
through mutual funds, ULIP schemes of insurance
companies and pension schemes . QIB have an
allocation of 50% of shares of the total issue size in
book build IPOs.

85. GUIDELINES BY SEBI
• On the recommendations of Malegam committee,
The concept of Book Building assumed significance in
India as SEBI approved, with effect from November
1, 1995, the use of the process in pricing new issues.
• SEBI issued the guidelines under which the option of
100%book-building was available to only those issuer
companies which are to make an issue of capital of
and above Rs.100crore.
• These guidelines were modified in 1998-99.The
ceiling of issue size was reduced to Rs. 25crore.

86. Modified Guidelines
1. Compulsory display of demand at the terminals was made
optional.
2. The reservation of 15% of the issue size for individual investors.
3. The issuer was allowed to disclose either the issue size or the
number of securities being offered.
4. The allotment of the book built portion was required to be made
in Demat mode only.
5. In an issue made through the book building process, the
allocation in the net offer to public category is made as follows
I. Not less than 35 % to retail individual investors.
II. Not less than 15 % to non institutional investors i.e. investors
other than retail individual investors and qualified institutional
buyers.
III.Not more than 50% to Qualified Institutional Buyers; 5 % of
which would be allocated to mutual funds

87. Modified Guidelines
In an issue made other than through the book building process,
allocation in the net offer to public category will be made as follows:
1. Minimum 50% to retail individual investors; and
2. Remaining to individual applicants other than retail individual
investors and other investors including corporate bodies or
institutions, irrespective of the number of equity shares and
convertible securities applied for;
3. The unsubscribed portion in either of the categories specified
above (point a and b) may be allocated to applicants in the other
category

88. TYPES OF BOOK-BUILDING:
There are two type of book
building process according to
SEBI’s guidelines.
1. 75% book building
2. 100% book building

89. 75% Book-Building Process
Under this process 25 per cent of the issue is to be
sold at a fixed price
and the balance of 75 per cent through the Book
Building process.
BOOK BUILDING
METHOD
FIXED PRICE
METHOD
75% OF THE PUBLIC ISSUE CAN
BE OFFERED TO INSTITUTIONAL
INVESTORS WHO HAVE
PARTICIPATED IN THE BIDDING
PROESS.
25% OF THE PUBLIC ISSUE CAN
BE OFFERED THROUGH
PROSPECTUS AND SHALL BE
RESERVED FOR ALLOCATION TO
INDIVIDUAL INVESTORS WHO
HAVE NOT PARTICIPATED IN
THE BIDDING PROCESS.
TOTAL PUBLIC ISSUE
(i.e. net offer to the public)
CHART 1

90. ADVANTAGE OF BOOK BUILDING
1. less cost
2. Fast process
3. Fair price

91. DUTCH AUCTION METHOD FOR FPO
SEBI on 10th nov 2009 introduced an additional
method of pricing shares via the book building route,
namely dutch auction method or the pure action
method.
Unlike the present system known as the french
auction method, where companies fix a band of prices
for public offers,
Under the dutch auction method companies making
public issue will fix only floor prices
However, the dutch auction method has not been
made mandatory by SEBI. A company can choose
dutch auction but only for FPO

93. Case study

94. CASE STUDY
Incorporated in 2008, Birla Pacific Medspa Limited is an India
based healthcare provider. Birla Pacific Medspa is a joint
venture of Yash Birla Group, a Rs 30 billion (group of over 20
diversified companies) and Pacific Healthcare, East Asia’s
leading healthcare provider, with healthcare facilities in
Singapore, Hong Kong, and China.

95. CASE STUDY
Company Promoters:
Company is promoted by Mr. Yashovardhan Birla and
one of his group companies, Birla Wellness &
Healthcare Private Limited.
Objects of the Issue:
The objects of the issue are
1. To meet the capital
2. To meet expenses towards brand promotion.
3. To meet the working capital requirements
4. To meet Issue related expenses.
5. To enlist the Company's Shares on Bombay Stock
Exchange Limited (BSE).

96. CASE STUDY
»» Issue Open: Jun 20, 2011 - Jun 23, 2011
»» Issue Type: 100% Book Built Issue IPO
»» Issue Size: 65,175,000 Equity Shares of Rs. 10
»» Issue Size: Rs. 65.18 Crores
»» Face Value: Rs. 10 Per Equity Share
»» Issue Price: Rs. 10 - Rs. 11 Per Equity Share
»» Market Lot: 500 Shares
»» Minimum Order Quantity: 500 Shares
»» Listing At: BSE

97. CASE STUDY
Birla Pacific Medspa Ltd IPO Grading
BWR (Brickworks Ratings India Pvt Ltd) has assigned
an IPO Grade 2 to Birla Pacific Medspa IPO.
This means as per BWR, company has 'Below Average
Fundamentals'.
BWR assigns IPO grading on a scale of 5 to 1, with
Grade 5 indicating strong fundamentals and Grade 1
indicating poor fundamentals. Read Birla Pacific
Medspa IPO Grading Report.

98. CASE STUDY
As on Date
& Time
Qualified
Institutional
Buyers (QIBs)
Non Institutional
Investors (NIIs)
Retail Individual
Investors (RIIs)
Total
Shares
Offered /
Reserved
32,587,500 9,776,250 22,811,250 65,175,000
Day 1 - Jun
20, 2011
17:00 IST
0.3300 0.0000 0.2500 0.2500
Day 2 - Jun
21, 2011
17:00 IST
0.6700 0.0000 0.3700 0.4600
Day 3 - Jun
22, 2011
17:00 IST
0.9900 0.0000 0.5800 0.7000
Day 4 - Jun
23, 2011
17:00 IST
1.0400 0.1700 1.8200 1.1800

99. CASE STUDY
Public Issue Of 65,175,000 Equity Shares Of Rs.10/-
The equity shares of the Company are proposed to be
listed on Bombay Stock Exchange Limited ("BSE") and
Trading is expected to commence on 7th july 2011
ISSUE PRICE: RS. 10/- PER EQUITY SHARE OF THE
FACE VALUE OF RS. 10/- EACH

100. CASE STUDY
BID/ISSUE OPENED ON JUNE 20, 2011 CLOSED ON JUNE
23, 2011
This Issue was made through a 100% Book Building Process in
terms of regulation 26(2)(a)(i) and b(i) of SEBI (ICDR)
Regulations, 2009
whereby at least 50% of the Issue was to be allocated to
Qualified Institutional Buyers (QIBs) on a proportionate basis,
subject to valid bids being received at or above the Issue Price.
5% of the QIB Portion was available for allocation on
proportionate basis to Mutual Funds only and the remaining Net
QIB portion was available for allocation on a proportionate basis
to all Qualified Institutional Buyers, including Mutual Funds,
subject to valid bids being received at or above Issue Price.

101. CASE STUDY
Further, upto 15% of the Issue was available
for allocation on a proportionate basis to Non
Institutional Bidders and upto 35% of the
Issue was available for allocation on a
proportionate basis to Retail Individual
Bidders, subject to valid bids being received
at or above the Issue Price.
The Issue received 3138 applications
for 74670000 equity shares resulting
in 1.15 times subscription.

102. CASE STUDY(THIS IS THEN BIGGEST IPO EVER)
Incorporated in 1946, DLF Limited is a real estate development
company based in India. DLF is the largest Indian company in
terms of the area of completed residential and commercial
developments. DLF’s main area of operation is Delhi and
surrounding areas.
DLF is in almost each and every area of real estate
development including identification and acquisition of land,
planning, execution, marketing and maintenance of the
projects.

103. DLF's major line of business
DLF's major line of business includes:
Residential business - DLF builds and sells a wide range of
properties including houses, duplexes and apartments of
varying sizes, with a focus on the higher end of the market.
Commercial business - DLF builds and sells or lease commercial
office space, with a focus on properties attractive to large
multinational tenants.
Retail business - DLF develop and manages leases based
shopping malls, which in many cases include multiplex
cinemas.
DLF is now focusing on more infrastructure, SEZs(special
economic zones) and hotel projects.

104. Few more facts:
Developed approximately 220 million square feet,
including approximately 195 million square feet of
plots, 17 million square feet of residential properties,
6 million square feet of commercial properties and 2
million square feet of retail

105. Properties.
Land Reserves of approximately 10,255 acres.
for the three years ended March 31, 2006, 2005 and 2004,
DLF's consolidated total income was Rs. 12,420 million, Rs.
6,260 million and Rs. 5,266 million, respectively, and
consolidated net profit was Rs. 1,917 million, Rs. 865 million
and Rs. 538 million, respectively.

106. Objects of the Issue:
The objects of the Issue are to achieve the benefits of listing on
the Stock Exchanges & to raise capital for
1. Finance expenditure for acquisition of land and development
rights;
2. Finance the construction and development costs for some of
our existing projects;
3. Repay certain loans of the Company.

107. DLF issue the shares at Rs 525/sh
• The IPO comprised 175 million shares, out of which 1 million
shares were reserved for employees resulting in a net issue
of 174 million shares.
• 60% of the net issue was offered to qualified institutional
buyers (QIBs),
• 10% was offered to non institutional investors (including
high net worth individuals)
• 30% was offered to retail investors.
• The offering was launched with a price band of Rs 500 to Rs
550 per share. The issue was subscribed approximately 2.75
times at the top end of the price band (Rs 550 per share).

108. Cont…
• At Rs 550 per share, the QIB portion was subscribed 3.94
times.
• The retail portion was 0.96 times subscribed
• The non – institutional was subscribed 1.08 times. The
offering received nearly 5,90,000 bids.
• Overall, DLF issue subscribed 3.47 times. Qualified
institutional investors were the major supporter to the issue,
in which contribution was seen from FIIs.

109. Cont…
• The company could have comfortably priced the issue at top
end of the price band.
• However, the company chose to price the IPO at Rs 525 per
share as a gesture of their appreciation to the tremendous
response and keeping in mind the long-term relationship
with investors.
• At he issue price, the offering size is Rs. 9, 187.5 corer. The
global coordinators to the issue were Kotak Investment

110. Issue Detail:
»» Issue Open: Jun 11, 2007 - Jun 14, 2007
»» Issue Type: 100% Book Built Issue IPO
»» Issue Size: 175,000,000 Equity Shares of Rs. 2
»» Issue Size: Rs. 9,187.50 Crore
»» Face Value: Rs. 2 Per Equity Share
»» Issue Price: Rs. 500 - Rs. 550 Per Equity Share
»» Market Lot: 10 Shares
»» Minimum Order Quantity: 10 Shares
»» Listing At: BSE, NSE

111. Payment Method
Payment Methods for Retail Individual Bidders:
DLF IPO has two payment methods for retail applicants.
Payment Method 1:
Retail Individual Bidders can pay Rs. 150 per share on
application of which Re. 1 will be credited to face value and
Rs.149 towards premium. The payment of the balance amount
will be payable by the due date.
Payment Method 2:
Retail Individual Bidders can pay full application money while
submitting the bid.

112. CASE STUDY
Global Coordinators and Book Running Lead
Managers
Kotak Mahindra Capital Company Ltd. and DSP Merrill
Lynch Ltd.
Senior Book Running Lead Manager Lehman Brothers Securities Pvt. Ltd.
Book Running Lead Managers
Citigroup Global Markets India Pvt. Ltd., Deutsche Equities
India Pvt. Ltd., ICICI Securities Primary Dealership Ltd. and
UBS Securities India Pvt. Ltd.
Co - Book Running Lead Manager SBI Capital Markets Ltd.
Syndicate Members
Kotak Securities Ltd., ICICI Securities Ltd. and SBICAP
Securities Ltd..
Categories FI, MF, IC, FII, VC, OTH, IND, HUF, NRI, BC and EMP.
No. of Cities with Bidding Centers 69
Inclusion in F&O segment Eligible, subject to SEBI approval

113. Number of Times Issue is Subscribed
Number of Times Issue is Subscribed (BSE + NSE)
As on Date &
Time
Qualified
Institutional
Buyers (QIBs)
Non Institutional
Investors (NIIs)
Retail Individual
Investors (RIIs)
Employee
Reservations Total
Shares Offered /
Reserved
Day 1 - Jun 11,
2007 17:00 IST 1.2806 0.0160 0.0328 0.0000 0.7800
Day 2 - Jun 12,
2007 17:00 IST 2.0813 0.0260 0.1018 0.0768 1.2800
Day 3 - Jun 13,
2007 17:00 IST 3.1755 0.0491 0.2012 0.5047 1.9600
Day 4 - Jun 14,
2007 17:00 IST 5.1288 1.1434 0.9752 0.7862 3.4700

114. DLF Ltd. - Bid details
Sr.No. Category
No.of shares
offered/reserved
No. of shares
bid for
No. of times of
total meant for the
category
1 Qualified Institutional Buyers (QIBs) 104400000 535447120 5.1288
1(a) Foreign Institutional Investors (FIIs) 485470830
1(b)
Domestic Financial Institutions(Banks/ Financial
Institutions(FIs)/ Insurance Companies)
35172900
1(c) Mutual Funds 14585870
1(d) Others 217520
2 Non Institutional Investors 17400000 19894650 1.1434
2(a) Corporates 11118540
2(b) Individuals (Other than RIIs) 8335190
2(c) Others 440920
3 Retail Individual Investors (RIIs) 52200000 50903990 0.9752
3(a) Cut Off 47556030
3(b) Price Bids 3347960
4 Employee Reservation 1000000 786150 0.7862
4(a) Cut Off 59870
4(b) Price Bids 726280

115. DUTCH AUCTION METHOD FOR FPO
SEBI on 10th nov 2009 introduced an additional
method of pricing shares via the book building route,
namely dutch auction method or the pure action
method.
Unlike the present system known as the french
auction method, where companies fix a band of prices
for public offers,
Under the dutch auction method companies making
public issue will fix only floor prices
However, the dutch auction method has not been
made mandatory by SEBI. A company can choose
dutch auction but only for FPO

116. ALLOTMENT OF SHARES
• As per section 69(1) a public limited company cannot make any
allotment of shares unless
1. Subscription less than 90%
2. Application money is paid by applicants and received by the
company

117. Subscription less than 90%
• As per SEBI guidelines, if subscription is less than 90%
I. Within 60 days of the closure of the issue, all money must be
refunded
II. If not, company shall be to pay interest@15% from the 70th
day

118. Price and price band
• The issuer may mention a price or price band in the
draft prospectus (in case of a fixed price issue) and
floor price or price band in the red herring prospectus
(in case of a book built issue)
• If the floor price or price band is not mentioned in the
red herring prospectus, the issuer shall announce the
floor price or price band at least 2 working days
before the opening of the bid (for IPO) and at least 1
working day before the opening of the bid (for FPO)

119. Price and price band
• The cap on the price band shall be less than or equal to
100 and 20% of the floor price.
• The floor price or the final price shall not be less than
the face value of the specified securities.

120. Escrow account
• An escrow is:
• A contractual arrangement in which a third party receives
and disburses money or documents for the primary transacting
parties, with the disbursement dependent on conditions agreed
to by the transacting parties.
• This account is used in ipo subscription.
• All the money received from application must go in this account
• All refund is done by this account.
• After allotting shares to shares holder money sent to companies account

121. Margins

122. Margins
• A margin is cash or marketable securities deposited by an investor
with his or her broker
• The balance in the margin account is adjusted to reflect daily
settlement
• Margins minimize the possibility of a loss through a default on a
contract

123. Margin requirement
• NSCCL imposes stringent margin requirements as part of its
risk containment measures. The categorisation of stocks for
imposition of margins is as given below:
• The stocks, which have traded at least 80% of the days during
the previous 18 months, should constitute as the
• Group I and Group II.
• Out of the scrips identified above, those having mean impact
cost of less than or equal to 1% should be under
• Group I and

124. Margin requirement
• The scrips where the impact cost is more than 1, should be
under
• Group II.
• The remaining stocks should be under
• Group III.

125. VaR Based Margins
• All securities are classified into three groups for the purpose of
calculating VaR margin.
• For the securities listed in Group I,
• Scrip wise daily volatility is calculated using the exponentially weighted moving
average should be 3.5 times the volatility.
• For the securities listed in Group II
• The VaR margin should be higher of scrip VaR (3.5 δ) or three times the index VaR.
• For the securities listed in Group III,
• The VaR margin would be equal to five times the index VaR .

126. Margins…
• Initial margin : Amount that is deposited at the time of contract
At the end of each trading day the margin account is adjusted to
reflect the investor’s gain or loss - marking to market the account.
• Maintenance margin: To ensure that the balance never becomes
negative ( if balance falls below this level margin call – investor
required to top up the margin account to the initial margin level)

127. Example of a Futures Trade
•An investor takes a long position in 2
December gold futures contracts on June
5
• Contract size is 100 oz.
• Futures price is US$400/oz
• Margin requirement is US$2,000/contract (US$4,000 in total)
• Maintenance margin is US$1,500/contract (US$3,000 in total)

128. Example of a Futures Trade
• Total margin requirement
= 2 x 2000 = $ 4000
• Maintenance margin requirement
= 2 x 1000 = $ 3000
Suppose the price goes down to 397 the next day
Loss = (397-400) x 2 x 100 = (600)

129. Day Closing
price
Daily p/l Cumulative
p/l
Margin Margin call
5 June 400* 4000
5 June 397
6 June 396.1
9 June 398.2
10 June 397.1
11 June 396.7
12 June 395.4
13 June 393.3
16 June 393.6
17 June 391.8
18 June 392.7
19 June 387
20 June 387
23 June 388.1
24 June 388.7

130. Day Futures
price
Daily
gains ($)
Cumulative
gains ($)
Margin
account
balance
Margin
call
400.00 4000
5-Jun 397.00 (600) (600) 3400
6-Jun 396.10 (180) (780) 3220
9-Jun 398.20 420 (360) 3640
10-Jun 397.10 (220) (580) 3420
11-Jun 396.70 (80) (660) 3340
12-Jun 395.40 (260) (920) 3080
13-Jun 393.30 (420) (1340) 2660 1340
16-Jun 393.60 60 (1280) 4060
17-Jun 391.80 (360) (1640) 3700
18-Jun 392.70 180 (1460) 3880
19-Jun 387.00 (1140) (2600) 2740 1260
20-Jun 387.00 0 (2600) 4000
23-Jun 388.10 220 (2380) 4220
24-Jun 388.70 120 (2260) 4340
25-Jun 391.00 460 (1800) 4800
26-Jun 392.30 260 (1540) 5060

131. 131