Unit 3- Issue Management

CONTENTS

1. Primary Market-
a) SEBI Guidelines
b) Types of issue management

2. Secondary Market-
Cash/ Equity Market :
The Equity segment allows dealing in shares, debentures,
Equity derivatives market, Debt Market, Corporate Bond Market,
Forex Market.

3. Depositories:
NSDL & CDSL
Primary Market: SEBI Guidelines of Public issue
 Meaning : Public Issue

Public offer or public Issue is defined as the process of issuing

securities of a company to new investors and making them a part of
a company’s shareholders’ group.

Public offer is made to raise more funds and infuse more capital in
the company for its financial needs and growth.

Public offer has been categorised as Initial Public Offer (IPO) and
Further Public Offer (FPO).
 Initial Public Offer (IPO)

When a company which is not yet listed on any stock exchange, i.e.
it is an unlisted company and makes a fresh issue of its securities or
an offer of its existing securities for sale for the first time to public,
it is known as an Initial Public Offer or IPO.

IPO allows the company to list and trade its securities on the
different stock exchanges and raise a large amount of capital.
 Further Public Offer (FPO)

When a company when is already listed on a stock exchange, i.e. it

is a listed company, and it makes a fresh issue of securities or an
offer for sale to the public, it is known as Further Public Offer
(FPO) or Follow-On Offer.
 SEBI Guidelines for IPO in India

The Securities Exchange Board of India was established in 1988.

It is the primary authority engaged in the regulation of Indian

corporate securities market – Primary Market and Secondary
Market.

Not only private entities, but also the commercial enterprises of

the central government can enter the primary market to raise
funds from the public to fulfill their financial requirements.
To ensure a healthy and transparent market, SEBI keeps on
introducing changes to the process of Initial Public Offer – IPO.

SEBI did not have any substantial powers to regulate the securities
market until 1992, which was then regulated by the Controller of
Capital Issues.

When the Securities Exchange Board of India Act, 1992 was

passed, SEBI was allotted numerous powers to regulate and
supervise the securities market.
To SEBI guidelines for IPO are divided into two processes – for
unlisted companies and for listed companies.

LISTED UNLISTED
COMPANIES COMPANIES
 SEBI Guidelines for IPO for Unlisted Companies:

There are three different routes available to an unlisted

company for making its initial public offer in India:

1. Entry Norm I -Profitability Route

2. Entry Norm II- QIB Route
3. Entry Norm III- Appraisal Route
 Norm I: Profitability Route, for Unlisted Companies:
The minimum net worth of the issuer must be more than
INR 1 crore in each previous three years.

The minimum net tangible assets of the issuer must be more than
INR 3 crores each, and not more than 50% of these assets must
be held in the form of monetary assets in the previous three
years.

The minimum average operating profit (before tax) of the

company must be more than INR 15 crores in at least three out
of five previous years.

The issue size must not be more than five times the pre-issue net
worth.
 Norm I: Profitability Route, for Unlisted Companies:
(Continued)
 If the company has changed its name, then a minimum of 50% of
the revenue in the previous year must be received from activities
done under the new name.

 Additionally, to provide ease of doing business and allow

companies to easily make their public offer, SEBI has
introduced two alternative routes for companies who are
unable to fulfill the requirements under the profitability route.
The following routes also allow a company to access the primary
market for its public offer:
 Norm I: Profitability Route, for Unlisted Companies:
(Continued)
Entry Norm II- QIB Route :

 Companies that require a large capital base for their operations but are
unable to fulfill the conditions laid down under the profitability route
can choose the QIB route to make their public offer.

 Under the QIB Route, company can access the public interest via the
book-building procedure.

 Under this process, 75% of the company’s net offer to the public must
be allotted compulsorily to the Qualified Institutional Buyers
(QIB’s). If the company is unable to achieve the minimum subscription
of QIB, it becomes liable to refund the subscription fee.
 Norm I: Profitability Route, for Unlisted Companies:
(Continued)
Entry Norm III- Appraisal Route :

 Under the appraisal route, the project or the public offer is appraised
and participated to the extent of 15% by Financial Institutions or
Scheduled Commercial Bank, of which, a minimum of 10% comes
from the appraisers.

 The appraisal route comes with the condition that the minimum post-
issue face value capital must be INR 10 crores or a mandatory
market-making must be there for at least two years.

 All the above- mentioned entry norms also include the requirement of
at least 1000 prospective allotees in the issuer company’s public issue.
SEBI Guidelines for Public Issue for Listed Companies:

A listed company that wants to make a further public issue (FPO)

fulfill the following SEBI guidelines :

1. If the company has changed its name during the last one year,
atleast 50% of its revenue for the previous one year must be
from the activities performed by the company under its new
name.

2. The size of its issue must not be more than five times the pre-
issue net worth per the company’s audited balance sheet of its
last financial year.
SEBI Guidelines for Public Issue for Listed Companies:
(Continued)
A company that wants to make a Public offer must also adhere to
the following general SEBI guidelines for IPO in India:

 The directors, promoters or other KMP’s must not be associated with

any other company in a similar role.
The directors, promoters or any other key management personnel
who have the control of the company must not be debarred from
accessing the primary market.
The application to list the company’s shares must be filed with a
recognized stock exchange in India.
The company must enter into legal contracts with a depository to
dematerialize its specific securities.
The partly paid-up equity shares must be fully paid-up.
SEBI Guidelines for Public Issue for Listed Companies:
(Continued)
 A listed company must maintain a minimum public shareholding of
25%. Incase of failure to do so, the company gets one year to meet the
requirement.
The process of an initial public offer of more than INR 50 lakhs must
start with the company filing a draft offer in the form of Draft Red
Herring Prospectus with the SEBI.
 Once the draft is reviewed and received by the company along with
the issue of final observation letter, the final offer document or the red
herring prospectus must be filed with the Registrar of Companies (ROC).
The company may choose the book building process under Entry
Norm II. In this case, the company must complete the IPO process
within one year from the date of receiving the final observation letter
from SEBI.
SEBI Guidelines for Public Issue for Listed Companies:
(Continued)
 50% of Board of Directors of the company must be independent
investors.
The same 50% of the Board of Directors of the company must have no
obligations to the promoters or the company.
No directors or promoters of the company must be guilty of an
economic offence.
The company or any of its promoters or directors must not be a
willful defaulter.
The issuer company must disclose the number of shares to SEBI
between the date of filing its draft red herring prospectus and issue of
specified securities.
DEPOSITORIES
 Before 1996
Script based Trading System
BANKS

DEPOSITORIES
Started by Regulatory authority

Stores shares, debentures and Mutual

funds in Demat form.
 They are linked to Stock Exchange

• CDSL formed in 1999.

• NSDL formed in 1996.
•It is for BSE.
• It is for NSE.
•It was sponsored by BSE and other banks.
• It was sponsored by NSE and other banks.
•If your account is in CDSL , it consists 16
• If your account is in NSDL, it’s a 16 digit
digit alphanumeric number.
alphanumeric number. It’s a Demat Account
•First 8 are Demat account number and
Number or Demat ID.
other 8 are unique customer id.
•Already listed company.
 National Security Depository Limited (NSDL)
Why established?

The paper based settlement of trades caused substantial

problems like bad delivery and delayed transfer of title, etc.

Because of this tiring procedure many of the Foreign Institutional

Investor restrict their trading in Indian Stock Market.

To Remove this difficulty NSDL national security depository

limited was established.

The enactment of Depositories Act in August 1996 paved the way

for establishment of NSDL.
 National Security Depository Limited

NSDL, One of the largest (NSDL)

depository in world established in
August 1996, NSDL provide Electronic Depository Facility for
securities traded in the equity and the debt market.

Aims – To ensure the safety and soundness of Indian marketplaces

by developing settlement solutions that increase Efficiency,
minimize risk and reduce costs.

Promoted by- The (IDBI) Industrial Development Bank of India,

(UTI) the Unit Trust of India and (NSE) the National Stock
Exchange of India Limited.
 National Security Depository Limited
(NSDL)
Maintains investor holding in Electronic Form.

It enables surrender and withdrawal of securities to and

from the depository.

Effects settlement of securities traded on Exchange.

 National Security Depository Limited
(NSDL)can be a Public Financial
NSDL (DP) Depository participant
Institution, Bank Custodian, Registered Stock Broker or a NBFC
subject to approval from depository company and the SEBI.

NSDL operates on Two Tier Structure where it maintains an

account of its DP and the DP’s maintain the account of their clients.
NSDL

Depository
Participant

A/c of Clients
 National Security Depository Limited

With the help of continuous (NSDL)Electronic Connectivity,

Reconciliation of all accounts is done Daily Basis to balance the
number of stock issued and dematerialized.

The SEBI has now made it mandatory for all Stock Exchange to
have Clearing Corporation.
NSDL
NSE- ?? NSCCL.
Depository
NSCCL participate in the functioning of Participant
NSDL.
A/c of Clients
 Investor, DP & NSDL

The investor has to Open An Account with DP that is similar to

the opening of a bank account.

Investor can get a List of Depository Participant from NSDL.

DP may also advertise the service offered by them once they are
registered. NSDL

Investor can choose any DP of his choice Depository

and fill up an account opening form. Participant

A/c of Clients
 Investor, DP & NSDL

Reasonable charges are received by the depositories for the opening of the
account and every transaction in the accounts.

The investor receives a Passbook/ Statement of Holding, just like the bank
passbook from depository agent.

He statement of holding is Dispatched/Mail to the investors periodically.

The investor can contact the DP for Any Disparity in the statement of
holding. (DIS Slip)
 Investor, DP & NSDL

Reasonable charges are received by the depositories for the opening of the
account and every transaction in the accounts.

The investor receives a Passbook/ Statement of Holding, just like the bank
passbook from depository agent.

He statement of holding is Dispatched/Mail to the investors periodically.

The investor can contact the DP for Any Disparity in the statement of
holding. (DIS Slip)
 CAPITAL MARKET INSTRUMENTS
Capital market instruments are various financial tools available in
the capital markets for investment and fund raising. They include
equities like stocks, debt securities like bonds and debentures,
derivatives such as options and futures and foreign exchange
instruments.

Each serves a unique purpose, helping companies raise capital and

offering investors diverse ways to grow their wealth and manage
financial risks.
 CAPITAL MARKET INSTRUMENTS
1. Equities:
a) Equity Share
b) Preference Share

2. Debt Instruments:
a) Bonds
b) Debentures

3. Derivative Instruments:
Forward, Future, Options, Interest Rate Swap

4. Foreign Exchange Instruments

Equities:
As capital market instruments, equities enable companies to raise capital
by selling ownership stakes. They are traded on stock markets, allowing
investors to buy and sell shares, with their value influenced by the
company's performance and market dynamics. This trading not only
provides liquidity but also helps in price discovery, making equities
vital for both corporate financing and investment opportunities.
Equities, includes both equity and preference shares, serve as key capital
market instruments.

a) Equity Share
b) Preference Share
Equity Share:
An equity share represents a portion of ownership in a company.
When you buy equity shares, you become a part-owner of that
company. As a shareholder, you may get voting rights in major
company decisions and a share of the profits, known as dividends.
These shares can increase in value if the company does well, offering
profit potential.

Preference Share:
Preference shares are a type of stock in a company that gives
shareholders certain advantages over common stockholders.
Typically, preference shareholders receive dividends before
common shareholders, and these dividends are often fixed. While
they usually don't have voting rights in company decisions, they
have a higher claim on company assets if the company goes bankrupt.
Preference shares are a blend of stocks and bonds.
Debt Instruments:

Debt instruments, like bonds and debentures, are essentially loans

that investors give to companies or governments. When you
invest in these, you're lending money and in return, you receive
interest payments over a specified period. At the end of the term,
the principal amount is repaid.

They are a key part of capital markets, providing a way for entities
to raise funds for various projects. Unlike equities, which represent
ownership, debt instruments are a form of borrowing and offer a
fixed return, making them a different kind of investment with
generally lower risk compared to stocks.

a) Bonds
b) Debentures
a) Bonds :
Bonds are like loans given by investors to companies or governments. When
you buy a bond, you're lending money to the bond issuer. In return, they
promise to pay you back the principal amount on a future date and make
regular interest payments along the way, known as coupon payments. Bonds
are a way to invest while earning steady income, and are generally considered
lower-risk compared to stocks.

b) Debentures:
Debt instruments, like bonds and debentures, are essentially loans that investors
give to companies or governments. When you invest in these, you're lending
money, and in return, you receive interest payments over a specified period.
At the end of the term, the principal amount is repaid. They are a key part of
capital markets, providing a way for entities to raise funds for various projects.
Unlike equities, which represent ownership, debt instruments are a form of
borrowing and offer a fixed return, making them a different kind of
investment with generally lower risk compared to stocks.
Derivative Instruments:

Derivative instruments are financial contracts whose value is

derived from an underlying asset, like stocks, commodities, or
interest rates.

They are used for hedging risks or speculation. Examples

include:

a) Forward (predetermined future date and price and fixed quantity;

Counterparty risk exist)
b) Future (similar to forward, but it oblige to buy/sell asset, no default risk)
c) Options (Get right to buy/sell on fixed date and fixed price, no obligation.
Option buyer= Right; Option seller=Obliged)
d) Interest Rate Swap
Forward: A customized contract between two parties to buy or
sell an asset at a predetermined future date and price.

Future: Similar to forwards but standardized and traded on

exchanges. They oblige the buyer to purchase, or the seller to
sell, an asset at a set future date and price.

Options: Options give the buyer the right, but not the
obligation, to buy (call option) or sell (put option) an asset at a
specified price before a certain date.

Interest Rate Swap: A contract in which two parties exchange

cash flows based on different interest rates applied to a principal
amount, often used to hedge interest rate risks.
Foreign Exchange Instruments:

Foreign Exchange Instruments in the capital market are tools used

for trading currencies between countries.

These include currency pairs like the US Dollar against the

Euro. Investors and companies use them to exchange one
currency for another, which is essential for international trade,
travel, or investment.

They can also be used for speculation and profit-making by

betting on currency movements. These instruments help manage
risks associated with currency fluctuations and play a vital role
in global financial markets, facilitating cross-border
transactions and investments.