MARKET DESIGN FOR PRIMARY MARKET

The market design for primary market is provided in the provision of the Companies Act, 1956, which deals with issues, listing and allotment of securities. In addition, ICDR guidelines of SEBI prescribe a series of disclosures norms to be complied by issuer, promoter, management, project, risk factors and eligibility norms for accessing the market. In this section, the market design as provided in securities laws has been discussed.

1) SEBI Issue of Capital and Disclosure Requirements (ICDR) Regulations 2009

General conditions for public issues and rights issues

An issuer cannot make a public issue or rights issue of equity shares and convertible securities under the following conditions: a. If the issuer, any of its promoters, promoter group or directors or persons in control of the issuer are debarred from accessing the capital market by SEBI or b. If any of the promoters, director or person in control of the issuer was or also is a promoter, director or person in control of any other company which is debarred from

accessing the capital market under the order or directions made by SEBI. c. If the issuer of convertible debt instruments is in the list of willful defaulters published by the RBI or it is in default of payment of interest or repayment of principal amount in respect of debt instruments issued by it to the public, if any, for a period of more than 6 months. d. Unless an application is made to one or more recognised stock exchanges for listing of equity shares and convertible securities on such stock exchanges and has chosen one of them as a designated stock exchange. However, in case of an initial public offer, the issuer should make an application for listing of the equity shares and convertible securities in at least one recognised stock exchange having nationwide trading terminals.

e. Unless it has entered into an agreement with a depository for dematerialisation of equity shares and convertible securities already issued or proposed to be issued. f. Unless all existing partly paid-up equity shares of the issuer have either been fully paid up or forfeited.

Appointment of Merchant banker and other intermediaries The issuer should appoint one or more merchant bankers, at least one of whom should be a lead merchant banker. The issuer should also appoint other intermediaries, in consultation with the lead merchant banker, to carry out the obligations relating to the issue. The issuer should in consultation with the lead merchant banker, appoint only those intermediaries which

are registered with SEBI. Where the issue is managed by more than one merchant banker, the rights, obligations and responsibilities, relating inter alia to disclosures, allotment, refund and underwriting obligations, if any, of each merchant banker should be predetermined and disclosed in the offer document.
Conditions for Initial Public Offer

1) An issuer may make an initial public offer if: a. The issuer has net tangible assets of at least Rs.3 crores in each of the preceding 3 years (of 12 months each) of which not more than 50% are held in monetary assets. If more than 50% of the net tangible assets are held in monetary assets, then the issuer has to make firm commitment to utilize such excess monetary assets in its business or project. b. The issuer has a track of distributable profits in at least 3 out of the immediately preceding 5 years.

c. The issuer company have a net worth of at least Rs.1 crores in each of the preceding 3 full years (of 12 months each). d. The aggregate of the proposed issue and all previous issues made in the same financial year in terms of issue size does not exceed 5 times its pre-issue net worth as per the audited balance sheet of the preceding financial year. e. In case of change of name by the issuer company within last one year, at least 50% of the revenue for the preceding one year should have been earned by the company from the activity indicated by the new name.

An issuer may make an initial public offer of convertible debt instruments without making a prior public issue of its equity shares and listing.
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3) An issuer cannot make an allotment pursuant to a public issue if the number of prospective allottees is less than one thousand.

5) No issuer can make an initial public offer if there are any outstanding convertible securities or any other right which would entitle any person any option to receive equity shares after the initial public offer. Conditions for further public offer
An issuer may make a further public offer (an offer of equity shares and convertible securities) if it satisfies the following conditions: a) the aggregate of the proposed issue and all previous issues made in the same financial year in terms of issue size does not exceed 5 times its pre-issue net worth as per the audited balance sheet of the preceding financial year; (b) if it has changed its name within the last one year, at least 50% of the revenue for the preceding one full year has been earned by it from the activity indicated by the new name.

Pricing in Public Issues The issuer determines the price of the equity shares and convertible securities9 in consultation with the lead merchant banker or through the book building process. In case of debt instruments, the issuer determines the coupon rate and conversion price of the convertible debt instruments in consultation with the lead merchant banker or through the book building process. Differential Pricing An issuer may offer equity shares and convertible securities at different prices; subject to the following condition; (a) the retail individual investors/shareholders or employees entitled for reservation 10 making an application for equity shares and convertible securities of value not more than Rs.2 lakh, may be offered equity shares and convertible securities at a price lower than the price at which net offer is made to other categories of applicants provided that such difference is not more than 10% of the price at which equity shares and convertible securities are offered to other categories of applicants; (b) in case of a book built issue, the price of the equity shares and convertible securities offered to an anchor investor(investor means a qualifi ed institutional buyer who makes an application for a value of Rs.10 crores or more in a public issue through the book building process) cannot be lower than the price offered to other applicants; (c) in case of a composite issue(Composite issue means an issue of equity shares and convertible
securities by a listed issuer on public cumrights)

, the price of the equity shares and convertible securities offered in the public issue may be different from the price offered in rights issue and justification for such price difference should be given in the offer document. (d) in case the issuer opts for the alternate method of book building, the issuer may offer

specified securities to its employees at a price lower than the floor price. However, the difference between the floor price and the price at which equity shares and convertible securities are offered to employees should not be more than 10% of the floor price.

Promoters Contribution The promoters minimum contribution varies from case to case. The promoters of the issuer are required to contribute in the public issue as follows: In case of an initial public offer, the minimum contribution should not be less than 20% of the post issue capital; In case of further public offer, it should be either to the extent of 20 % of the proposed issue size or to the extent of 20% of the postissue capital; In case of a composite issue, either to the extent of 20% of the proposed issue size or to the extent of 20% of the post-issue capital excluding the rights issue component.

Lock-in of specified securities held by promoters. In a public issue, the equity shares and convertible debentures held by promoters are lockedin for the period stipulated below: (a) minimum promoters contribution is locked-in for a period of 3 years from the date of commencement of commercial production or date of allotment in the public issue, whichever is later; (b) promoters holding in excess of minimum promoters contribution is locked-in for a period of 1 year: However, excess promoters contribution in a further public offer are not subject to lock in.
Book Building Book Building means a process undertaken to elicit demand and to assess the price for determination of the quantum or value of specified securities or Indian Depository Receipts, as the case may be in accordance with the SEBI ICDR Regulations 2009. 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 funds15. However, if the issue is made through the book building process and the issuer undertakes to allot at least 50% of the net offer to public to qualified institutional buyers and to refund full subscription monies if it fails to make allotment to the qualified institutional buyers then in that case at least 50% of the net offer to public should be allotted to qualified institutional buyers. In an issue made through the book building process, the issuer may allocate upto 30% of the portion available for allocation to qualified institutional buyers to an anchor investor in accordance with the conditions laid down in ICDR Regulations 2009 16.

In an issue made other than through the book building process, allocation in the net offer to public category will be made as follows: (a) minimum 50% to retail individual investors; and (b) 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; (c) the unsubscribed portion in either of the categories specified above (point a and b) may be allocated to applicants in the other category. If the retail individual investor category is entitled to more than 50% on proportionate basis, the retail individual investors will be allocated that higher percentage.

Indian Depository Receipts A foreign company can access Indian securities market for raising funds through issue of Indian Depository Receipts (IDRs). An IDR is an instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian securities markets. An issuing company making an issue of IDR is required to satisfy the following: (a) it should be listed in its home country. (b) it should not be prohibited to issue securities by any regulatory body. (c) it should have a track record of compliance with securities market regulations in its home country. Conditions for issue of IDR. An issue of IDR is subject to the following conditions: (a) issue size should not be less than Rs.50 crore. (b) procedure to be followed by each class of applicant for applying should be mentioned in the prospectus; (c) minimum application amount should be Rs.20,000; (d) at least 50 %. of the IDR issued should be allotted to qualified institutional buyers on proportionate basis. (e) the balance 50 % may be allocated among the categories of non-institutional investors and retail individual investors including employees at the discretion of the issuer and the manner of allocation has to be disclosed in the prospectus. Allotment to investors within a category will be on proportionate basis. Further, atleast 30% of the IDRs issued will be allocated to retail individual investors and in case of under-subscription in retail individual investor category, spill over to

other categories to the extent of under-subscription may be permitted. (f) At any given time, there will be only one denomination of IDR of the issuing company.

2) Merchant Banking
The merchant banking activity in India is governed by SEBI (Merchant Bankers) Regulations, 1992. All merchant bankers have to be registered with SEBI. The person applying for certificate of registration as merchant banker has to be a body corporate other than a nonbanking financial company, has necessary infrastructure, and has at least two persons in his employment with experience to conduct the business of the merchant banker. The applicant has to fulfill the capital adequacy requirements, with prescribed minimum net worth. The regulations specify the code of conduct to be followed by merchant bankers, responsibilities of lead managers, payments of fees and disclosures to SEBI. They are required to appoint a Compliance Officer, who monitors compliance requirements of the securities laws and is responsible for redressal of investor grievance.

3) Credit Rating
Credit rating is governed by the SEBI (Credit Rating Agencies) Regulations, 1999. The Regulations cover rating of securities only and not rating of fixed deposits, foreign exchange, country ratings, real estates etc. CRAs can be promoted by public financial institutions, scheduled commercial banks, foreign banks operating in India with the approval of RBI,foreign credit rating agencies recognised in the country of their incorporation, having at least five years experience in rating, or any company or a body corporate having continuous net worth of minimum Rs.100 crore for the previous five years. CRAs would be required to have a minimum net worth of Rs. 5 crore. No Chairman, Director or Employee of the promoters shall be Chairman, Director or Employee of CRA or its rating committee. A CRA can not rate (i) a security issued by its promoter, (ii) (ii) securities issued by any borrower, subsidiary, an associate promoter of CRA, if there are common Chairman, Directors and Employees between the CRA or its rating committee and these entities (iii) a security issued by its associate or subsidiary if the CRA or its rating committee has a Chairman, Director or Employee who is also a Chairman, Director or Employee of any such entity. For all public and rights issues of debt securities, an obligation has been cast on the issuer to disclose in the offer documents all the ratings it has got during the previous 3 years for any of its listed securities. CRAs would have to carry out periodic reviews of the ratings given during the lifetime of the rated instrument.

4) Demat Issues
As per SEBI mandate, all new IPOs are compulsorily traded in dematerialised form. The admission to a depository for dematerialisation of securities is a prerequisite for making a public or rights issue or an offer for sale. The investors would however, have the option of either subscribing to securities in physical form or dematerialised form. The Companies Act, 1956 requires that every public listed company making IPO of any security for Rs.10 crore or more shall issue the same only in dematerialised form.

5) Private Placement
The private placement involves issue of securities, debt or equity, to a limited number of subscribers, such as banks, FIs, MFs and high net worth individuals. It is arranged through a merchant/investment banker, who acts as an agent of the issuer and brings together the issuer and the investor(s). On the presumption that these are allotted to a few sophisticated and experienced investors and the public at large does not have much stake in it, the securities offered in a private placement are exempt from the public disclosure regulations and registration requirements of the regulatory body. What distinguishes private placement from public issues is while the latter invite application from as many subscribers, the subscriptions in the private placement are normally restricted to a limited number. In terms of the Companies Act, 1956, offer of securities to more than 50 persons is deemed to be public issue.

6) ADRs/GDRs Indian companies are permitted to raise foreign currency resources through two main sources:(a) issue of Foreign Currency Convertible Bonds (FCCBs) more commonly known as Euro Issues and (b) issue of ordinary equity shares through depository receipts, namely, Global Depository Receipts (GDRs)/American Depository Receipts (ADRs) to foreign investors i.e. institutional investors or individuals (including NRIs) residing abroad. A depository receipt (DR) is any negotiable instrument in the form of a certificate denominated in US dollars. The certificates are issued by an overseas depository bank against certain underlying stock/shares. The shares are deposited by the issuing company with the depository bank. The depository bank in turn tenders DRs to the investors. A DR represents a particular bunch of shares on which the receipt holder has the right to receive dividend, other payments and benefits which company announces from time to time for the share holders. However, it is non-voting equity holding.

ADR
An American Depository Receipt (ADR) is a negotiable U.S. certificate representing ownership of shares in a non-U.S. corporation. ADRs are quoted and traded in U.S. dollars in the U.S.securities market. Also, the dividends are paid to investor in U.S. dollars. ADRs

were specifically designed to facilitate the purchase, holding and sale of non-U.S. securities by U.S. investor, and to provide a corporate finance vehicle for non-U.S. companies. Any non-U.S. company seeking to raise capital in the U.S. or increase their base of U.S. investor can issue ADRs. Advantages of ADRs are: ADRs allow you to diversify your portfolio with foreign securities easily. ADRs trade, clear and settle in accordance with U.S. market regulations and permit prompt dividend payments and corporate action notification. If an ADR is exchange-listed, investor also benefits from readily available price and trading information.

GDR
Global Depository Receipts (GDRs) may be defined as a global finance vehicle that allows an issuer to raise capital simultaneously in two or more markets through a global offering. GDRs may be used in either the public or private markets inside or outside the US. GDR, a negotiable certificate usually represents a companys publicly traded equity or debt. ADRs and GDRs are identical from a legal, operational, technical and administrative standpoint. The word global denotes receipts issued are on a global basis that is to investors not restricted to US. The FCCBs/GDRs/ADRs issued by Indian companies to non-residents have free convertibility outside India. In India, GDRs/ADRs are reckoned as part of foreign direct investment and hence need to conform to the existing FDI policy. Resource mobilisation by Indian corporates through Euro issues by way of FCCBs, GDRs and ADRs has been significant in the 1990s. As per current guidelines, the proceeds of ADRs/GDRs/FCCBs cannot be used on investment in real estate and stock markets.