27 Primary Market ISMR

Primary Market

Introduction
The primary market plays an important role in the securities market by forming a link between
the savings and investments. It is through this market that the borrower’s viz., the Government
and the corporates issue securities in which the investors deploy their savings. The primary
market comprises, the public issues and the private placement market. A public issue consists
of a company entering the market to raise funds from all types of investors; its debut is known
as the initial public offer (IPO). In case of private placement, there are only a few select
subscribers to the issue. The securities can be issued at a face value, or at a discount/premium;
they may take a variety of forms such as equity, debt or some hybrid instrument. Apart from
raising funds in domestic markets, resources are mobilized in international markets through
the issuance of American Depository Receipts (ADRs)/Global Depository Receipts (GDRs)
and External Commercial Borrowing (ECB) route. This chapter presents developments in
primary market for corporate securities in India, both equity
and debt, while the primary market for government securities is discussed separately in
Chapter 6.
After a long period of subdued activity, there were signs of revival in the public issues in
2003-04. This was due to the offers made by quality issuers evoking buoyant investors’ interest
(Table 2-1). In the private placement market, the SEBI, for the first time, imposed
Table 2-1: Resource Mobilisation by Government and Corporate Sector
(Rs. mn.)
Issues 2002-03 2003-04
Corporate Securities 752,411 695,030
Domestic Issues 718,147 664,050
Public Issues 48,667 71,900
Non-Govt. Public Companies 18,777 32,100
PSU Bonds — —
Govt. Companies — 1,000
Banks & FIs 29,890 38,800
Private Placement 669,480 592,150
Euro Issues 34,264 30,980
Government Securities 1,819,790 1,981,570
Central Government 1,511,260 1,476,360
State Governments 308,530 505,210
Total 2,572,201 2,676,600
Source: RBI Annual Report.

stringent disclosure norms in September 2003. As a result, the resources mobilised by

non-government entities fell from 88% in 2002-03 to 85% in 2003-04. The public issues mobilised

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Rs. 71,900 million during this year. Further, the resources raised by Indian corporates from the
international capital market through the issuance of FCCBs, GDRs and ADRs have declined
marginally during 2003-04. With a view to integrate the Indian capital market, the foreign
companies have been allowed to access the Indian capital market through Indian Depository
Receipts (IDR) (discussed in detail in chapter 4).

Policy Developments
In order to refine the primary market design and boost the waning investors’ confidence,
various measures have been taken by the Government, RBI and SEBI. This section throws
light on the policy measures initiated during the financial year 2003-04 and till June 2004.

I. DIP Guidelines
Given the SEBI’s commitment to protect the investors’ interests and to increase the transparency
and efficiency of the primary market, stringent disclosure and eligibility norms have been
issued. Further, various operational procedures for the issuers have been simplified to facilitate
smooth mobilization of resources. In this regard, SEBI has set up various committees, which
constantly review the guidelines; subsequently, SEBI has amended the SEBI (Disclosure and
Investor Protection) Guidelines, 2000 as enumerated below:
Eligibility Norms
• An unlisted company may make an 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. Provided, it has a track record of profitability, and meets the conditions of net
worth, net tangible assets etc. as specified in the guidelines.
• An unlisted company not complying with any of the above conditions may still make an
IPO, if it meets the conditions: (a)(i) The issue is made through the book-building process,
with at least 50% of the issue size being allotted to the Qualified Institutional Buyers
(QIBs). Failing which the full subscription money have to be refunded OR (a)(ii) The
“project” has at least 15% participation by Financial Institutions/Scheduled Commercial
Banks, of which at least 10% comes from the appraiser(s). In addition, at least 10% of
the issue size is to be allotted to QIBs, otherwise, the full subscription monies is to be
refunded AND (b)(i) The minimum post-issue face value capital of the company has to
be Rs. 10 crore OR (b)(ii) There should be a compulsory market-making for at least 2
years from the date of listing of the shares subject to certain conditions as specified in
the guidelines.
• A listed company is eligible to make a public offer of equity shares or any other security
which is convertible into equity shares. But, the aggregate issue size of the proposed
issue along with all the previous issues made during the same financial year should not
exceed 5 times its pre-issue net worth as per the audited balance sheet of the last financial
year. If the name of the company has been changed in the last one year, then the
revenue accounted for by the activity suggested by the new name should not be less
than 50% of its total revenue in the preceding one full-year period.
• No company can make a public or rights issue of debt instruments (whether convertible
or not), unless the following conditions are satisfied: (i) Credit rating of not less than
investment grade is obtained from not less than two SEBI registered credit rating agencies.

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(ii) Company should not be in the list of willful defaulters of RBI. They should not have
defaulted payment of interest or repayment of principal, if any, for a period of more
than 6 months.
• An issuer company should not allot non-convertible debt instrument pursuant to a public
issue, if the proposed allottees are less than fifty. In such a case, the company should
forthwith refund the entire subscription amount received, a delay beyond 8 days attracts
a penal charge of 15% per annum.
Promoters Contribution and Lock-in
• Prior to an IPO, the shares held by the persons other than the promoters, which are
locked in may be transferred to any other person holding shares. This should be subjected
to continuation of lock-in in the hands of transferees for the remaining period and
compliance with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
1997.
• Shares held by promoter(s), which are locked-in, may be transferred to and amongst
promoter/promoter group or to a new promoter or persons in control of the company.
Provided the lock-in of shares in the hands of transferees for the remaining period
remains. They should also comply with the SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997.
Preferential Issues
• As in case of equity shares, the transfer of the locked in preference shares/instruments is
subject to the same norms and comply with SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997.
• The lock-in period in respect of the shares issued on preferential basis pursuant to a
scheme approved under Corporate Debt Restructuring framework should commence
from the date of allotment. The lock-in period should continue for a period of one
year. In case of partly paid up shares the lock-in period should commence from the date
of allotment and continue for a period of one year from the date when shares become
fully paid up.
• Unless the entire shareholding is held in dematerialized form, no listed company is
permitted to make preferential issue of equity shares, warrants, Partly Convertible
Debentures (PCDs), Fully Convertible Debentures (FCDs) or any other financial
instruments convertible into or exchanged with equity shares at a later date.
• In case of the shares, warrants, PCDs, FCDs or any other financial instruments convertible
into equity shares, which are issued on preferential basis, the entire pre-preferential
allotment shareholding should be under lock-in. The lock-in period shall start from the
relevant date up to a period of six months from the date of preferential allotment. In
addition, the shareholders, who have sold their shares during the six months period
prior to the relevant date, would not be eligible for allotment of shares on preferential
basis.
Designated Stock Exchange
Following the withdrawal of the concept of a regional stock exchange, companies have to
choose one stock exchanges as a designated stock exchange for the purpose of finalization of
the basis of allotment.

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Book Building Guidelines

• The issuer company should enter into an agreement with one or more stock exchange(s),
which have the requisite system to offer on-line securities. The agreement should specify
the rights, duties, responsibilities and obligations of the company and the stock
exchange(s). The agreement should also provide for a dispute resolution mechanism
between them.
• The freedom is given to the issuer company to list the securities on any other exchange
and not necessarily on the exchange through which the company has offered the securities.
• The book runner(s)/syndicate members should appoint SEBI registered brokers to accept
bids, applications and placing orders with the company. The appointed brokers should be
financially capable of honouring their commitments arising out of defaults of their clients/
investors, if any.
• The company should pay the broker/s a commission/fee for the services rendered.
The brokers’ are not allowed to levy a service fee on his clients/investors for his
services.
• If the offer is through 100% book building process, then the following rules apply:
(a) not less than 25% of the net offer should be made to retail individual investors;
(b) not less than 25% of the net offer to non-institutional investors i.e. other than retail
individual investors and QIBs; (c) not more than 50% of the net offer for QIBs.
• If 75% of the net offer is through book building process and 25% at the price determined
through book building, then — (a) in the book built portion, not less than 25% and not
more than 50% of the net offer should be available for allocation to non QIBs; (b) the
balance 25%, offered at a price determined through book building, should be available
only to retail individual investors. They will be either those who have not participated
or have not received any allocation, in the book built portion. It is mandatory that 50%
of the issue size is allotted to the QIBs.
Pricing of Issues
For an IPO by an unlisted company, if the issue price is Rs. 500 or more, the issuer company
has the discretion to fix the face value below Rs. 10 per share subject to a lower limit of not
less than Re. 1 per share. In case the issue price is below Rs. 500 per share, the face value ought
to be Rs. 10 per share. The face value of shares should be disclosed in the advertisements and
offer documents.
Post Issue Obligations
The allotment of shares should be on a proportionate basis within the specified categories,
rounded off to the nearest integer. This will be subject to a minimum allotment being equal
to the minimum application size as fixed and disclosed in the offer document.
Green Shoe Option
An issuer company making a public offer of equity shares can avail of the Green Shoe Option
(GSO) for stabilising post listing of its shares, subject to certain provisions in the guidelines
such as:
• A company desirous of availing the option should seek authorization in the general meeting
for allotment of the additional shares to the ‘stabilising agent’ (SA) at the end of the
stabilisation period.

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• The company should appoint one of the merchant bankers or book runners, as the SA.
They will be responsible for the price stabilisation process, if required. Prior to filing of
offer document with SEBI, the SA should enter into an agreement with the issuer
company clearly stating all the terms and conditions relating to this option including
fees charged/expenses to be incurred.
• The SA should also enter into an agreement with the promoter(s) or pre-issue shareholders
who will lend their shares. The agreement should specify the maximum number of
shares that may be borrowed from the promoters or the shareholders which should not
be in excess of 15% of the total issue size.
• The allocation of these shares should be on pro-rata basis to all the applicants. The
stabilisation mechanism should be available for not more than 30 days from the date
when trading is permitted on the exchange(s).
• The promoters and pre-issue shareholders, of both unlisted and listed company, holding
more than 5% shares should lend the shares for the purpose of GSO.

Contents of Offer Document

The draft offer document and the final offer document should be approved by the Board of
Directors and signed by all the Directors (including the managing director), Chief Executive
Officer and Chief Financial Officer. They should also certify that all the disclosures made in
the offer document are true and correct.
• Some of the pertinent information have to be disclosed irrespective of the issue prices
viz., Earnings per share, EPS pre-issue for the last three years, P/E pre-issue, average
return on net worth in the last 3 years, minimum return on increased net worth required
to maintain pre-issue EPS, NAV per share based on last balance sheet, NAV per share
after issue and comparison thereof with the issue price, comparison of all the accounting
ratios of the issuer company. However, the projected earnings should not be used as a
justification for the issue price in the offer document. Further, the accounting ratios
disclosed in the offer documents in support of the issue price should be calculated after
giving effect to the consequent increase in capital on account of compulsory conversions
outstanding as well as on the assumption that the options outstanding, if any, to subscribe
for additional capital will be exercised.

Guidelines for Issue of Advertisements

Every time the issue is advertised on television screen, the risk factors should not be scrolled
on the screen, but the advertisement should advise the viewers to refer to the red herring
prospectus or other offer document for details.

Miscellaneous
• The Board should provide exemptions regarding any particular provision(s) of these
guidelines viz., (i) on an application made by any listed company or intermediary
connected with the issue, (ii) of a technical violation or a possible violation, or (iii) on
being satisfied that the violation was caused or may be caused due to factors beyond the
control of the applicant.
• The minimum application value should be within the range of Rs. 5,000 to Rs. 7,000 and
in multiples thereof.

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• In a public issue by a listed company, the reservations can be made for the shareholders,
who hold shares worth up to Rs. 50,000 on the record date, for allotment on proportionate
basis as in case of allotment in public category.

II. Debenture Trustees Regulations, 2003

SEBI amended the SEBI (Debenture Trustees) Regulations, 2003 to include the following:
(a) The capital adequacy should not be less than the networth of Rs. 1 crore, provided that
a debenture trustee, who already is registered, should fulfill the networth requirements
within two years from that date.
(b) The net worth should be monitored by the debenture trustee on a continuous basis and
inform SEBI for any shortfall in it. In such a case, they would not be entitled to
undertake new assignments until they restore the net worth to the required level within
a specified time.
(c) Debenture trustee should not relinquish its assignments unless and until another
debenture trustee is appointed in its place.
(d) No debenture trustee should act as such for any issue of debentures in case it has lent
and the loan is not yet fully repaid or is proposing to lend money to the body corporate.
However, this requirement is not applicable in respect of debentures issued prior to the
commencement of the Companies (Amendment) Act, 2000, where (i) recovery proceedings
in respect of the assets charged against security has been initiated, or (ii) the body
corporate has been referred to BIFR under the Sick Industrial Companies (Special
Provisions) Act, 1985, prior to commencement of the SEBI (Debenture Trustees)
(Amendment) Regulations, 2003.

III. Unlisted Public Companies (Preferential Allotment) Rules, 2003

The Unlisted Public Companies (Preferential Allotment) Rules, 2003, which came into force
w.e.f. December 4, 2003, are applicable to all unlisted public companies issuing equity shares,
FCDs, PCDs or any other financial instruments, which would be convertible or exchanged
with equity shares. It states that no issue of shares on a preferential basis can be made by a
company unless authorized by its articles of association and unless a special resolution is passed
by the members in a General Meeting. The special resolution should be acted upon within a
period of 12 months. In case, if warrants are issued on preferential basis with an option to
apply for and get the shares allotted, then the issuing company should determine in advance
the price of the resultant shares. In case of every issue of shares/warrants or any other financial
instrument with a conversion option, the statutory auditor has to certify that the issue of
securities has been done in accordance to the Rules.

Market Design
The primary market is governed by the provisions of the Companies Act, 1956, which
deals with issues, listing and allotment of securities. Additionally the SEBI (Disclosure
and Investor Protection) guidelines issued under the securities law prescribes a series of eligibility
and disclosure norms to be complied by the issuer, promoter for accessing the market.
However, in this section we discuss the market design as stipulated in the SEBI (DIP)
guidelines.

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DIP Guidelines, 2000

Disclosure and Investor Protection (DIP) Guidelines of SEBI, issued in June 1992, governs
the issues of capital by Indian companies. SEBI has since then been issuing clarifications/
amendments to these guidelines from time to time, in order to streamline the public issue
process. In January 2000, a comprehensive coverage of all DIP guidelines has been made
available through a series of compendium ‘SEBI (DIP) Guidelines, 2000’. The guidelines
provide norms relating to the eligibility for companies issuing securities, pricing of issues,
listing requirements, disclosure norms, lock-in period for promoters’ contribution, contents
of offer documents, pre and post-issue obligations, among others. The guidelines apply to all
public issues, offer for sale, and rights issues by listed and unlisted companies. This
section attempts to highlight some of the important clauses in the guideline in a precise
manner.
Eligibility Norms
Any company issuing securities has to satisfy the following conditions at the time of filing the
draft offer document and the final offer document with SEBI and Registrar of Companies
(ROCs)/Designated Stock Exchange respectively.
• A company making a public issue of securities has to file a draft prospectus with SEBI,
through an eligible merchant banker, at least 21 days prior to the filing of prospectus
with the ROCs. For a rights issue, filing of offer document is mandatory where the
aggregate value of securities, including premium, if any, exceeds Rs. 50 lakh. An
application for listing of those securities with stock exchange(s) is also to be made.
Further, the company must enter into an agreement with the depository for
dematerialisation of its securities and should give an option to subscribers/shareholders/
investors to receive the security certificates either in physical or in dematerialised form.
A company cannot make an issue if the company has been prohibited from accessing
the capital market under any order or discretion passed by SEBI.
• An unlisted company can make an IPO of equity shares or any other security, which may
be converted into equity shares, only if it has a track record of profitability and required
net worth and net tangible assets. Some of the conditions are specified hereunder: (i) it
has net tangible assets of at least Rs. 3 crore in each of the preceding 3 full years, of
which not more than 50% is held in monetary assets; (ii) it has a net worth of at least
Rs. 1 crore in each of the preceding 3 full years; (iii) it has a track record of distributable
profits in terms of section 205 of the Companies Act, 1956, for at least 3 out of the
immediately preceding 5 years; (iv) the aggregate of the proposed issue and all previous
issues made in the same financial year in terms of size (offer through offer document
plus firm allotment plus promoters contribution through the offer document) does
not exceed five times its pre-issue net worth and (v) in case the company has changed its
name within the last one year, at least 50% of the revenue for the preceding one full year
is earned by the company from the activity suggested by the new name.
• Even if the above mentioned conditions are not satisfied, an unlisted company can still
make an IPO on compliance of the guidelines as specified: (a)(i) issue should be made
through the book building process with at least 50% of the issue size being allotted to
the QIBs, if not, then the full subscription monies has to be refunded, OR (a)(ii) the
project should have at least 15% participation by FIs/SCBs of which at least 10% should

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come from the appraiser. In addition, at least 10% of the issue size should be allotted to
QIBs, otherwise, the full subscription monies would be refunded; AND (b)(i) minimum
post-issue face value capital of the company should be Rs. 10 crore, OR (b)(ii) there
should be compulsory market making for at least 2 years from the date of listing subject
to certain conditions as specified in the guidelines.
• For a listed company the aggregate of the proposed issue and all previous issues made in
the same financial year in terms of issue size should not exceed 5 times its pre-issue net
worth. In case of the change in name of the issuer company within the last 1 year, the
revenue accounted for by the activity suggested by the new name should not be less
than 50% of its total revenue in the preceding one full year period.
• Infrastructure companies are exempt from the requirement of eligibility norms if their
project has been appraised by a public financial institution (PFI) or Infrastructure
Development Finance Corporation (IDFC) or Infrastructure Leasing and Financing
Services Ltd. (ILFS) or a bank which was earlier a PFI and not less than 5% of the
project cost is financed by any of the institutions referred above, jointly or individually,
by way of loan and/or subscription to equity or a combination of both.
• No public issue or rights issue of debt instruments (whether convertible or not) can be
made unless (a) it has a credit rating of not less than investment grade from not less than
two credit rating agencies registered with SEBI, all the credit ratings, including the
rejected ones, needs to be disclosed. All the credit ratings obtained during the 3 years
preceding the public or rights issue of debt instrument for any listed security of the
issuer company should also be disclosed in the offer document. (b) the company should
not feature in the list of willful defaulters of RBI (c) company has not defaulted on
payment of interest or repayment of principal of debentures issued to the public, if any
for a period more than 6 months.

Pricing of Issues
The companies, including the eligible infrastructure companies, have the freedom to price their
equity shares or any security convertible into equity in public or rights issues as the case may be.
The banks, however, can price their shares subject to the approval by the RBI. A company
(listed or unlisted) should issue shares to applicants in the firm allotment category at a different
price from the one at which the net offer to the public is made. That is, at a higher price than at
which the securities are offered to the public. A listed company making a composite issue of
capital may issue securities at differential prices in its public and rights issue. Further, an eligible
company is free to make public/rights issue of equity shares in any denomination determined
by it in accordance with sub-section (4) of section 13 of the Companies Act, 1956 and norms
as specified by SEBI from time to time.

Contribution of Promoters and lock-in

The promoters’ contribution in case of public issues by unlisted companies should not be less
than 20% of the post issue capital. In case of public issues by listed companies, promoters
should contribute to the extent of 20% of the proposed issue or should ensure post-issue
share holding to the extent of 20% of the post-issue capital. For a composite issue, the
promoters’ contribution should either be 20% of the proposed public issue or 20% of the

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post-issue capital. At least one day prior to the opening of the issue, the promoters should
bring in the full amount of the promoters contribution including premium. Except for (i)
public issue of securities which have been listed for at least 3 years and has a track record of
dividend payment for at least 3 immediate preceding years, (ii) companies wherein no
identifiable promoter or promoter group exists, and (iii) rights issues.
The minimum promoters’ contribution should be locked in for a period of 3 years in
case of all types of issues. However, if the promoters’ contribution exceeds the required
minimum, then the excess is locked in for a period of one year. The lock-in period starts
from the date of allotment in the proposed public issue and the last date of the lock-in is to
be reckoned as three years from the date of commencement of commercial production or the
date of allotment in the public issue whichever is later. In case of pre-issue share capital of
unlisted company, the entire pre-issue share capital, other than that locked in as promoters
contribution, is locked for a period of one year from the date of commencement of commercial
production or the date of allotment in the public issue, whichever is later. Securities allotted
in firm allotment basis are also locked in for a period of one year. The locked-in securities
held by promoters may be pledged only with banks or FIs as collateral security for loans
granted by such banks or FIs.

Issue Obligations
Each company issuing securities has to enter into a Memorandum of Understanding with
the lead merchant banker, which specifies their mutual rights, liabilities and
obligations. The lead merchant banker has to exercise due diligence and satisfies himself
about all aspects of offering, veracity and adequacy of disclosures in the offer document.
All the other formalities like, allotment, refund and despatch of certificates are also taken
care by the lead merchant banker. The lead manager should also ensure that the issuer
company has entered into agreements with all the depositories for dematerialization of
securities. Also, the investors should be given an option to receive securities in dematerialized
form through any of the depositories. In case of under-subscription of an issue, the lead
merchant banker invokes underwriting obligations and ensures that the underwriters pay
the amount devolved. The merchant banker has to appoint a compliance officer who will
directly liaise between the Board and the issuer company with regard to compliance of
various laws, rules, regulations and other directives issued by the Board. Twenty-one days
after the draft offer document has been made public, the lead merchant banker should file
a statement with the SEBI giving a list of complaints received, a statement as to whether
it is proposed to amend the draft offer document or not, and highlighting those
amendments.
Subsequent to the post issue, the lead merchant banker should ensure that the post-issue
monitoring reports are submitted irrespective of the level of subscription. Also, the merchant
banker should be associated with allotment, refund and dispatch and also monitor the redressal
of investor grievances arising therefrom. In a public-issue, the Managing Director of the
Designated Stock Exchange along with the post issue Lead Merchant Banker and the Registrars
to the Issue would be responsible for the finalization of allotment in a fair and proper manner.
Allotment should be on proportionate basis within the specified categories rounded off to the
nearest integer subject to the minimum allotment being equal to the minimum application size
as fixed and disclosed by the issuer.

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Book Building
Book building is a price discovery mechanism. Based on the bids received at various prices
from the investors, demand is assessed and then the price of the securities is discovered.
The issuer proposing to issue capital through book building has two options, viz., 75%
book building route and 100% book building route. In case of issue of securities through the
first route, 75% of the net offer is made through book building process and 25% at the price
determined by book building. In this case not more than 50% should be available for allocation
to QIBs and not less than 25% to non-QIBs. The balance 25% should be made to the public
at the price determined through book building. In case a company makes a issue of 100% of
the net offer to public through 100% book building process, then not less than 25% should
be available for allocation to retail individual investors, not less than 25% to non-institutional
investors and not more than 50% for QIBs. Allotment to retail individual investors and non-
institutional investors are made on the basis of the proportionate allotment system within
15 days of the closure of the issue; failing of which attracts a penal charge of 15% which is
paid to the investors. In case of under subscription in any category, the unsubscribed portions
can be allocated to the bidders in other categories.
Besides, book building also requires that: issuer should provide indicative floor price and
no ceiling price, bids to remain open for at least 5 days, only electronic bidding is permitted,
bids are submitted through syndicate members, investors can bid at any price, retail investors
have option to bid at cut off price, bidding demand is displayed at the end of every day, the lead
manager analyses the demand generated and determines the issue price in consultation with
the issuer, etc.

e-IPOs
A company proposing to issue capital to public through the on-line system of the stock exchanges
has to enter into an agreement with the stock exchange(s). SEBI registered brokers should be
appointed for the purpose of accepting applications and placing orders with the company. The
issuer company should also appoint a Registrar to the Issue having electronic connectivity with
the Exchanges. The issuer company can apply for listing of its securities on any Exchange
other than the Exchange through which it has offered its securities. The lead manager co-
ordinates all the activities amongst various intermediaries connected in the
issue/system.

Credit Rating
Credit Rating Agencies (CRA) can be promoted by public financial institutions, scheduled
commercial banks, foreign banks operating in India, and by any body corporate having
continuous minimum net worth of Rs. 100 crore for the previous five years. Further, foreign
credit rating agencies having at least five years experience in rating can also operate in the
country. The SEBI (Credit Rating Agencies) Regulations, 1999 cover the rating of the securities
listed and not fixed deposits, foreign exchange, country ratings and real estates. The applicant/
promoters of a CRA should have professional competence, financial soundness and general
reputation of fairness and integrity in business transaction; they should not be involved in
any legal proceedings connected with the securities market. The CRAs are required to have a
minimum net worth of Rs. 5 crore. A CRA can not rate (i) a security issued by its promoter,
(ii) securities issued by any borrower, subsidiary, an associate promoter of CRA, if there are

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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 share a common Chairman, Director or Employee.
For debt securities with issue size greater than or equal to Rs. 100 crore, two ratings from
different CRAs are required. The issuer should disclose in the offer documents all the ratings
it has got during the previous 3 years for any of its listed securities, irrespective of whether it
has been accepted or not. CRAs should continuously monitor the securities rated by them
and disseminate any changes in its ratings, along with its history through websites, press
releases etc.

Merchant Banking
The merchant banking activity in India is governed by SEBI (Merchant Bankers) Regulations,
1992. Consequently, all the merchant bankers have to be registered with SEBI. The details
about them are presented in the table below:
Category of Permitted Activity Net worth
Merchant (Rs. Crore)
Banker
Category I To carry on activity of the issue management, to act as adviser, consultant,
manager, underwriter, portfolio manager 5.00

Category II To act as adviser, consultant, co-manager, underwriter, portfolio manager 0.50

Category III To act as underwriter, adviser, consultant to an issue 0.20

Category IV To act only as adviser or consultant to an issue Nil

Only a corporate body other than a non-banking financial company having necessary
infrastructure, with at least two experienced persons employed can apply for registration as a
merchant banker. The applicant has to fulfill the capital adequacy requirements, with prescribed
minimum net worth. The regulations cover 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.

Demat issues
SEBI has mandated that all new IPOs compulsorily should be traded in dematerialised form
only. Further, the section 68B of the Companies Act, 1956, requires that every listed public
company making IPO of any security for Rs. 10 crore or more should issue the same only in
dematerialised form. The investors, however, would have the option of either subscribing to
securities in physical or dematerialised form.

Private Placement
The private placement involves issue of securities, debt or equity, to selected 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). Since these securities are allotted to a few sophisticated and experienced investors,

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 ISMR Primary Market 38

the stringent public disclosure regulations and registration requirements are relaxed. The
Companies Act, 1956, states that an offer of securities to more than 50 persons is deemed to
be public issue.

Market Outcome
Public Issues
The year 2003-04 witnessed an upsurge in the primary market activity induced by a buoyant
secondary market, sharp economic recovery, and political stability. The resource mobilisation
by way of IPOs and new issues by listed companies leaped to Rs. 200,592 million in 2003-04
from Rs. 40,703 million in 2002-03. As compared with 52 total schemes in 2003-04, there were
only 26 in the previous year (Table 2-2). The share of public issues in the total resources
mobilized rose from 89% in 2002-03 to 92% in 2003-04. The mobilisation by rights issues also
witnessed a manifold increase as compared to the previous year. According to a press statement
of the Prime database (country’s premier database on primary capital market), “the turnaround
in the fortunes of the rights issues both by numbers and by amount has come about primarily
because of the steady conditions in the secondary market and drying up of the ECB market.
Companies offer shares on rights basis either to expand, diversify or simply to restructure their
balance sheets.”
Table 2-2: Resource Mobilisation from Public Issues
(Amount in Rs. mn.)
Issue 2002-03 2003-04
Number Amount Number Amount

IPOs 6 10,387 17 32,766

Issues by Listed Companies 20 30,316 35 167,826
Public Issues 8 26,004 16 150,739
Rights Issues 12 4,312 19 17,087
Total 26 40,703 52 200,592

Source: SEBI.
A significant spurt can be seen in the total resource mobilisation from the public issues as
shown in the Table 2-2. The listed companies mobilised Rs. 167,826 million through 35 issues
during 2003-04, accounting for 84% of the resources, while in 2002-03, there were 20 issues by
listed companies for Rs. 30,316 million.
During 2003-04, there were 22 mega issues (Rs. 1000 million and above) as against 12
such issues in the preceding year. The average size of an issue was Rs. 6,327 million in 2003-04
as against Rs. 4,094 million in 2002-03. There were only 2 issues below Rs. 30 million during
2003-04.
Most of the issues were made by private sector companies. Of the 52 issuers which
tapped the market in 2003-04, 34 issues where by private sector issuers. They mobilised around
19.6% of the total resources raised. The public sector companies made 18 issues mobilising
80.4% to the total resources mobilised (Table 2-3). The joint sector has not been making any
issue of capital for the past few years.

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Table 2-3: Sector-wise Distribution of Resources Mobilised

(Amount in Rs. mn)
Sector 2002-03 2003-04
Number Amount Number Amount
Private 18 18,973 34 39,342
Joint 0 — 0 —
Public 8 21,730 18 161,250
Total 26 40,703 52 200,592
Source: SEBI.
For the past few years, debentures have been pre-dominant in the public issues. However,
in 2003-04, there has been a reversal in this trend. The share of debt in resource mobilisation
through public issues decreased from 82% in 2002-03 to mere 19.53% in 2003-04 (Table 2-4).
While, the amount raised through equity issues have been the highest ever in the history so
far of the Indian capital market.
Table 2-4 Resources Mobilised through Debt and Equity
Year Percentage Share
Equity Debt
1995-96 72.39 27.61
1996-97 55.99 44.01
1997-98 41.17 58.83
1998-99 15.34 84.66
1999-00 58.41 41.59
2000-01 52.79 47.21
2001-02 16.88 83.12
2002-03 18.00 82.00
2003-04 80.47 19.53
Source: Prime Annual Report
The Banks and Financial Institutions (FIs) had assumed a dominant role in fund
mobilisation. Their offers in 2001-02 and 2002-03 were 68.16% and 84.58% respectively, however,
the year 2003-04 saw a significant fall to only 15.5% (Table 2-5). The chemical and the
Information Technology (IT) industry collectively contributed approximately 10.2% in the
resource mobilisation in 2003-04.
Table 2-5 Industry-wise Resource Mobilisation
Industry Percentage Share
2002-03 2003-04
Banking/FIs 84.58 15.48
Cement & Construction 0.75 0.00
Chemical 0.38 7.34
Entertainment 0.00 0.76
Finance 0.72 0.35
Information Technology 5.58 2.82
Paper & Pulp 0.00 0.00
Plastic 5.34 0.00
Telecom 0.00 0.00
Textile 0.00 0.24
Others 2.65 73.00
Total 100.00 100.00
Source: SEBI.

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 ISMR Primary Market 40

Euro Issues
Indian companies raise resources from international markets through the issue of Foreign
Currency Convertible Bonds (FCCBs), GDRs and ADRs. GDRs/ADRs are similar to Indian
shares and are traded on overseas stock exchanges. In India, they are reckoned as part of
foreign direct investment and hence, need to conform to the existing FDI policy. During
2003-04, the resources mobilised through Euro issues have been lower at Rs. 30,980 million as
against Rs. 34,264 million raised during 2002-03 (Table 2-1).

Performance of IPOs
During 2003-04, eleven IPOs were listed on NSE of different sectors viz., Media and
Entertainment, Finance, Information Technology, Pharmaceuticals and Manufacturing. The
market price of almost all the IPOs appreciated quite substantially on the first day of listing/
trading itself against their issue price. The price of Indraprastha Gas Limited rose by a whopping
148.75%, followed by TV Today Networks Limited (91.74%) and UCO Bank (63.33%). For few
IPOs like Vardhaman Acrylics Limited, BAG Films Limited, Surya Pharmaceuticals Limited,
Patni Computers Systems Limited and Petronet LNG Limited, the prices depreciated by end
March 2004 (Table 2-6).
Table 2-6: Performance of IPOs Listed on NSE During April 01, 2003 to March 31, 2004

Sl. Name of Company Date of Issue Close Close Price Price

No. Listing Price Price on Price Apprecia- Apprecia-
(Rs.) first day as at end- tion/ tion/
of Trading March, Deprecia- Deprecia-
(Rs.) 2004 tion on tion upto
(Rs.) first day end-March,
of Trading 2004
(%) (%)
1. Maruti Udyog Limited 9-Jul-03 125 164.3 497.45 31.44 297.96
2. Vardhman Acrylics Limited 30-Sep-03 10 11.1 8.8 11.00 -12.00
3. UCO Bank 9-Oct-03 12 19.6 22.22 63.33 85.17
4. B.A.G. Films Limited 17-Oct-03 10 12.45 6.4 24.50 -36.00
5. Jai Balaji Sponge Limited 9-Dec-03 10 13.1 15.95 31.00 59.50
6. Indraprastha Gas Limited 26-Dec-03 48 119.4 82.9 148.75 72.71
7. TV Today Network Limited 16-Jan-04 95 182.15 133.45 91.74 40.47
8. Surya Pharmaceutical 21-Jan-04 45 52.25 37.75 16.11 -16.11
Limited
9. Patni Computer Systems 25-Feb-04 230 234.45 214.4 1.93 -6.78
Limited
10. Four Soft Limited 12-Mar-04 25 26.05 23 4.20 -8.00
11. Petronet LNG Limited 26-Mar-04 15 14.65 14.7 -2.33 -2.00
Source: NSE

As quoted in the RBI annual report 2003-04, “empirical evidence regarding the variation
of IPO share prices for the period 2001-02 to 2003-04 indicates that share prices of about 75%
IPOs improved upon listing. The variation was measured as the percentage change between
the offer price and the market price of the scrip’s after six months. Stringent entry and
disclosure norms introduced by the SEBI have had a significant impact on the quality of
issues entering the market as well as their post-listing performance”.

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41 Primary Market ISMR

Book Building through On-line IPO System

Book building is basically a process used in IPO for efficient price discovery. During the period
when the offer is open, bids are collected from investors at various prices, which are above or
equal to the floor price. The offer price is determined after the bid closing date. In its endeavor
to continuously improve the Indian securities market, NSE has offered an infrastructure for
conducting online IPOs through book building. It helps to discover price as well as demand for
the security to be issued through a process of bidding. The advantages are: a) the investor parts
with money only after the allotment, b) it eliminates refunds except in case of direct applications
and c) it reduces the time taken to process the issue. The securities get listed within 15 days
from the closure of the issue. Though the guidelines for book building were issued in 1995, it
is being also used for IPOs only from 1999. Till June 2004, 36 issuers have used this route for
making IPO issues.
Disinvestment in PSUs in India1
The terms ‘disinvestment’ and ‘privatisation’ are usually used interchangeably all over the world.
In actuality though disinvestment represents sale of government share holding in public sector
undertakings (PSUs), ‘privatisation’ is a more comprehensive concept and implies
denationalisation including transfer of management and control to private entities. The
disinvestment process in India has evolved over for more than a decade. The union budget of
1991-92 contained the first explicit statement on divestiture – the proposal to divest up to 20%
of Government equity in select PSUs. The disinvestment commission was set up in 1996 and
it recommended mainly a shift from public offerings to a strategic/trade sale with transfer of
management in respect of a number of PSUs. The broad objective of disinvestment has been
to reduce the fiscal deficit, and distribute the shares to a wider investor base. The disinvestment
from fiscal 1991-92 is given in the table below:
(Amount in Rs. crore)

Year No. of Company Target Actual

in which receipt receipts
equity sold for the year

1991-92 47 2,500 3,038

1992-93 35 2,500 1,913
1993-94 — 3,500 —
1994-95 13 4,000 4,843
1995-96 5 7,000 361
1996-97 1 5,000 380
1997-98 1 4,800 902
1998-99 5 5,000 5,371
1999-00 4 10,000 1,860
2000-01 4 10,000 1,871
2001-02 9 12,000 5,632
2002-03 6 12,000 3,348
2003-04 9 13,200 15,547
Source: Department of Disinvestment, Govt. of India (www.divest.nic.in)
Disinvestment through the capital market route is most preferred route these days as it
has certain advantages over the strategic sale route e.g. (a) increases public ownership;
(b) helps in better price discovery. This can be affirmed by the success of the companies which
1
References: Ministry of Disinvestment website (www.divest.nic.in), Government of India and RBI Annual Report.

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 ISMR Primary Market 42

went for disinvestment through this route in 2003-04 viz., Maruti Udyog Limited, Indian
Petrochemicals Corporation Limited, Gas Authority of India Limited, Oil and Natural Gas
Corporation, CMC, IBP, ICI and DRDG.

Debt Issues
Government and corporate sector collectively raised a total of Rs. 2,509,089 million from
primary market during 2003-04. About 78.97% has been raised by the Government, while the
balance by the corporate sector through public issues and private placement (Table 2-7).
Table 2-7: Resources Raised from Debt Markets
(Rs. mn.)
Issuer 2002-03 2003-04
Corporate 531,166 527,519
Public Issues 46,930 43,240
Private Placement* 484,236 484,279
Government 1,819,790 1,981,570
Total 2,350,956 2,509,089
* Only debt placements with a tenor and put/call option of 1 year or more.
Source: Prime Database (for corporate debt) & RBI (for Government debt).

Private Placement of Debt

According to Prime Database estimates, a total of 140 issuers (institutional and corporates)
raised Rs. 484,279 million through 364 privately placed issues in 2003-04. 188 issues out of 364
were made by the public sector units, which together mobilised 87% of the total. The amount
raised through the private placement of debt issues have been on an increasing trend over the
past few years (Chart 2-1).

Mostly, debt securities were privately placed. Though, there were some instances of
private placements of equity shares, there is no comprehensive data coverage of this. The two

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sources of information regarding private placement market in India are Prime Database and
RBI. The former data set, however, pertains exclusively to debt issues. RBI data, which is
compiled from information gathered from arrangers, covers equity private placements also.
RBI estimates the share of equity in total private placements as rather insignificant. Some
idea, however, can be derived from the equity shares issued by NSE-listed companies on
private placement basis. A total of 20 companies listed on NSE privately placed equities,
mobilising around Rs. 8,536 million during 2003-04 (Annexure 2-1).
Of the 364 debt private placements, 188 (52%) were from the government/banking
sector that together mobilised 87% of the total amount mobilised. The All India Financial
Institutions (AIFIs) & Banks continued to top the list with 52.3% (Rs. 253,088 million),
followed by the State Level Undertakings with 13.5% share (Rs. 65,642 million) (Table 2-8 and
Chart 2-2). The top ‘10’ issuers accounted for 41.2% of total private placement during
2003-04.
Table 2-8: Issuer-wise Distribution of Private Placement of Debt
Issuer Issue Amount % of Issue Amount
(Rs. mn.)
2002-03 2003-04 2002-03 2003-04
All India Financial Institutions/Banks 173,687 253,088 35.87 52.26
State Financial Institutions 38665.2 42,084 7.98 8.69
Public Sector Undertakings 125,491 58,809 25.92 12.14
State Level Undertakings 43,894 65,642 9.06 13.55
Private Sector 102,498 64,656 21.17 13.35
Total 484,236 484,279 100.00 100.00
Source: Prime Database.

Sectoral distribution shows that the financial sector continued to dominate the private
placement market, raising 67% in 2003-04 followed by power sector, which accounted for 17%
during the year (Table 2-9).

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Table 2-9: Sectoral Distribution of Resources Mobilised by Private Placement

(In per cent)
Sector 2002-03 2003-04
Financial 50 67
Power 16 17
Water Resources 3 5
Telecommunications 1 1
Others 30 10
Total 100 100
Source: Prime Database.

The maturity profile of issues in the private placement market ranged between 12 months
to 180 months during 2003-04. The largest number of placements was for 36 months and
120 months. A total of 65 offers had a put option, while 69 offers had a call option.
Unlike public issues of bonds, it is not mandatory for corporates issuing bonds in the
private placement market to obtain and disclose credit rating from an approved credit rating
agency. Rating is, however, required for listing. Of the 364 debt private placement deals
during 2003-04, 328 issues (90%) went for rating and 36 did not get rated.
Private placement accounted for 68.6% of total resources mobilised by the corporate
sector from the primary market (Table 2-10). The corresponding share of public issues was a
meager 25.3%.
Table 2-10: Resources Raised by Corporate Sector
(Amount in Rs. mn.)
Year Public Debt Issues Total Share (%) of Private Share (%)
Equity Public Private Total Resource placement of Debt
Issues Issues Place- (3+4) Mobilisation Total Total in Total
ments* (2+5) Debt Resource Resource
(4/5*100) Mobilisation Mobilisation
(4/6*100) (5/6*100)
1 2 3 4 5 6 7 8 9
1995-96 88,820 29,400 100,350 129,750 218,570 77.34 45.91 59.36
1996-97 46,710 69,770 183,910 253,680 300,390 72.50 61.22 84.45
1997-98 11,320 19,290 309,830 329,120 340,450 94.14 91.01 96.67
1998-99 5,040 74,070 387,480 461,550 466,580 83.95 83.05 98.92
1999-00 29,750 46,980 547,010 593,990 623,740 92.09 87.70 95.23
2000-01 24,790 41,390 524,335 565,725 590,520 92.68 88.79 95.80
2001-02 10,820 53,410 462,200 515,610 526,430 89.64 87.80 97.94
2002-03 10,390 46,930 484,236 531,166 541,556 91.16 89.42 98.08
2003-04 178,210 43,240 484,279 527,519 705,729 91.80 68.62 74.75
*Data from 2000-01 onwards include only issues with a tenor and put/call option of 1 year or more, while data for
earlier years include all privately placed debt issues irrespective of tenor.
Source: Prime Database.

Corporate Debt
During 2003-04, the corporates raised a total of Rs. 527,519 million through debt issues, of
which Rs. 484,279 million through private placement and Rs. 43,240 million through public
issues. The privately placed debt issues make up a bulk of total debt issuances by accounting

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45 Primary Market ISMR

for 91.8%. The share of debt in total collection had been increasing consistently over the years
but witnessed a reversal in the trend and stood at 74.8% in 2003-04 (Table 2-10).

International Scenario
The much talked about ‘Google IPO’ has made a history in the international primary market by
auctioning the securities to the retail investors and keeping investment bankers out of the
whole process. Nevertheless, there were few such instances before, but they were unable to
attract the investors community so significantly. Though, Google faced with criticism from
all quarters, its IPO managed to pull through successful, this is expected to rewrite IPO rules
in the US.
Most of the exchanges world-wide have indicated an increase in the capital raised in the
year 2003 as compared with the previous year. Annexure 2-2 indicates region-wise mobilisation
through IPO and capital increased by already listed companies.

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 ISMR Primary Market 46

Annexure 2-1: Details of Private Placement Issues by NSE-listed Companies during the period April 1, 2003
to March 31, 2004 and listed on the Capital Market segment of the Exchange

Sl. Name of Company Number of Funds Raised Face Value Issue Price Close Price as
No. Securities (Rs. lakh) (Rs.) (Rs.) end-March
2004 (Rs.)
1. Aurobindo Pharma Ltd. 1,050,000 2,373 10 226.00 374.6
2. Usha Beltron Ltd. 5,264,727 1,737 5 33.00 37.80
3. Usha Beltron Ltd. 5,345,455 1,764 5 33.00 37.80
4. The Dhampur Sugar Mills Ltd. 10,000,000 1,000 10 10.00 24.50
5. Padmalaya Telefilms Ltd. 2,000,000 2,844 10 142.20 56.05
6. UTI Bank Ltd. 38,362,834 16,400 10 42.75 148.65
7. Nuchem Ltd. 2,067,130 207 10 10.00 1.95
8. Arvind Mills Ltd. 146,033 22 10 15.00 45.55
9. Arvind Mills Ltd. 63,949 10 10 15.00 45.55
10. Arvind Mills Ltd. 7,776,489 1,166 10 15.00 45.55
11. Arvind Mills Ltd. 1,551,796 233 10 15.00 45.55
12. Arvind Mills Ltd. 7,350,000 1,103 10 15.00 45.55
13. Khandwala Securities Ltd. 120,000 26 10 22.00 9.05
14. Strides Arcolab Ltd. 3,144,445 3,144 10 100.00 –
15. Orchid Chemicals & 4,382,727 9,642 10 220.00 200.15
Pharmaceuticals Ltd.
16. Pantaloon Retail (India) Ltd. 865,000 433 10 50.00 288.65
17. Jindal Vijayanagar 279,034,907 27,903 10 10.00 8.20
Steel Ltd.**
18. Shriram Transport Finance 6,243,000 749 10 12.00 –
Co. Ltd.
19. Strides Arcolab Ltd. 13,714,286 9,600 10 70.00 –
20. Glenmark Pharmaceuticals Ltd. 8,185,570 5,000 2 61.08 143.70
– 85,356 – – –
Source: NSE.
Note:
** indicates preference shares issued on preferential basis.

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47 Primary Market ISMR

Annexure 2-2: Investment Flows Region-wise - New Capital Raised

(USD million)
Exchange 2003 2002
Capital Capital Capital Capital
Raised by Raised by Total Raised by Raised by Total
New Shares Existing New Shares Existing
Shares Shares
AMERICA
Amex 23 3,589 3,612 20 1,949 1,969
Bermuda NA 11 11 NA 16 16
Buenos Aures 0 349 349 0 173 173
Lima 0 397 397 0 290 290
Mexico 42 691 732 204 210 414
Nasdaq 6,365 NA 6,365 4,504 NA 4,504
NYSE 27,362 54,197 81,559 27,178 60,202 87,381
Santiago 2,573 0 2,573 0 152 152
Sao Paulo 0 1,955 1,955 130 5,114 5,244
TSX Group 8,465 9,439 17,904 5,808 8,646 14,454
Total Region 115,458 114,596

EUROPE - AFRICA - MIDDLE EAST

Athens 69 2,113 2,182 87 1,736 1,824
Borsa Italiana 11,356 3,021 14,377 4,364 1,881 6,245
Budapest 66 1 67 0 3 3
Copenhagen 160 0 160 601 199 800
Deutsche Borse 0 0 0 203 0 203
Euronext 682 50,480 51,162 3,501 32,454 35,955
Helsinki 0 83 83 0 443 443
Irish 673 179 852 1,510 39 1,549
Istanbul 12 497 510 739 404 1,144
JSE South Africa 525 2,522 3,047 0 9,806 9,806
Ljubljana 41 0 41 116 0 116
London 7,591 22,624 30,216 8,093 26,310 34,403
Luxembourg 241 2,030 2,271 405 1,792 2,196
Malta 4 N.A. 4 98 NA 98
Oslo 834 52 886 685 27 712
Spanish Exchanges (BME) 12,439 5,371 17,809 16,001 5,389 21,390
Stockholm NA NA NA NA NA NA
Swiss Exchange 0 NA 0 7 NA 7
Tehran 242 675 917 38 505 543
Tel Aviv 32 703 735 15 1,184 1,199
Warsaw 0 379 379 2 139 141
Wiener Borse 1,701 1,078 2,779 1,085 51 1,137
Total Region 128,475 119,913
(Contd.)

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 ISMR Primary Market 48

Annexure 2-2: Investment Flows Region-wise - New Capital Raised (Contd.)

(USD million)
Exchange 2003 2002
Capital Capital Capital Capital
Raised by Raised by Total Raised by Raised by Total
New Shares Existing New Shares Existing
Shares Shares
ASIA - PACIFIC
Australian 6,013 16,824 22,837 2,880 9,430 12,310
Colombo 11 102 112 1 10 11
HongKong 7,598 19,855 27,454 6,665 7,504 14,169
Jakarta 1,110 532 1,642 121 802 923
Korea 612 0 612 5,009 1,040 6,049
Kuala Lumpur 823 953 1,776 1,835 1,550 3,385
Mumbai 2,917 0 2,917 2,269 83 2,352
National Stock Echange of 2,420 5,192 7,612 2,936 1,752 4,688
India
New Zealand 384 1,002 1,386 665 703 1,367
Osaka 39 4,934 4,973 28 2,242 2,269
Philipine 3 28 32 77 709 786
Shanghai 5,479 1,298 6,777 6,246 802 7,048
Shenzhen 616 438 1,054 1,207 307 1,514
Singapore 1,087 200 1,286 434 885 1,319
Taiwan 3,456 5,150 8,606 1,316 11,931 13,247
Thailand NA NA NA NA NA NA
Tokyo NA 29,006 29,006 NA 15,749 15,749
Total Region 89,075 71,437
Source: WFE Annual Report & Statistics 2003.

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