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RECENT REVALOPMENTS IN PRIMARY MARKET

Significant improvements have taken place to institutional mechanisms during the financial year since 2001. Equity market achieved major landmark in the form of complete switchover to rolling settlement and extension of derivatives trading in equity to index options, stock options and stock futures. The onest of a full range of equity derivatives is an important landmark in the development of the Indian stock market. The developments in the stock market necessitate more safety, transparency and efficiency of the capital market.

The government proposed the following steps:

(1) Corporatisation of Stock Exchanges involving segregation of ownership, management and trading membership from each other. SEBI had decided that a broker can be an office bearer of a stock exchange. Further no official of SEBI will be nominated on the Board of any stock exchange.

(2) Extension of Rolling Settlement to 200 "A" category stocks in Modified Carry Forward Scheme(MCFS), Automated Lending and Borrowing Mechanisms (ALBM) and Borrowing and Lending Securities Scheme(BLESS)

(3) Legislative Changes aimed at further strengthening the provisions in the SEBI Act ,1992 to ensure investor protection.

OTHER DEVELOPMENTS

(a) All companies, now, will have freedom to issue debt security without listing equity subject to the following conditions :

(1) Issues below Rs100 crores shall carry an investment grade credit rating.

(2) Issues above Rs100 crore shall carry an investment grade credit rating from two credit rating agencies.

(3) The issuer shall comply with the provisions of Rule 19(2)(b) of the Securities Contracts (Regulation) Act(SCRA),1956 regarding the size of the public offer, and

(4) The promoters shall bring in the equity contribution of 20% and lock in the same for three years.

(b) The SEBI, DIP (Disclosure and Investor Protection) Guidelines, 2000 were amended. The main provisions include :

(1) Permission to Foreign Venture Capital Investors (FVCIs) registered with SEBI and State Industrial Development Corporations to participate in public issues through the book building route as Qualified Institutional Buyers (QIBs).

(2) No lock-in requirements for the pre-issue share capital of an unlisted company held by Venture Capital Funds (VCFs) and FVCIs.

(3) Restriction on minimum public issue size of Rs25 crore in respect of a IPO through the book building route has been removed.

(4) Removal of exemption from public offer requirement in view of reduction in quantum from 25% to 10%.

(c) Since a substantial proportion of the non-SLR securities are issued via the private placement market, RBI issued guidelines to banks in June, 2001 which interalia relate, to prudential limits on investments, due diligence, and internal ratings in respect of unrated issues.

PRIMARY MARKET INTERMEDIARIES

A number of agencies called intermediaries play a critical role in the process of issue of new securities. The major intermediaries of the primary securities market include.

1.Merchant bankers/Lead managers.

2.Underwriters.

3.Bankers to an issue.

4.Registrars to an issue.

5.Share transfer agents.

6.Debenture trustees.

7.Brokers to an issue.

8.Pportfolio managers.

These have been discussed below briefly.

MERCHANT BANKERS/LEAD MANAGERS

Merchant bank is an institution or an organisation which provides a number of services including management of securities issues, portfolio management services, underwriting of capital issues, insurance, credit syndication, financial advices and project counselling etc. They mainly offer financial services for a fee. They are also different from the dealers, traders and brokers of securities. It has become mandatory now that all public issues should be managed by merchant banker(s) acting as the lead manager (s). But in case of right issues not exceeding 50 lakh, above said condition is not applicable.

UNDERWRITERS

Underwriting in the context of a company means undertaking a responsibility or giving a guarantee that the securities (shares and debentures) offered to the public will be subscribed for. The firms which undertake the guarantee are called 'underwriters'. Underwriting is similar to insurance in the sense that it provides protection to the issuing company against the failure of an issue of capital to the public. It ensures success of new issues of capital and if the shares or debentures are not subscribed by the public. Wholly, the underwriters'

will have to take them up and pay for them. Underwriting is, therefore an act of undertaking the guarantee by an underwriter of buying the shares or debentures placed before the public in the event of non-subscription. According to SEBI Rules 1993, underwriting means an agreement with or without conditions to subscribe to the securities of a body corporate when the existing shareholders of such body corporate or the public do not subscribe to the securities offered to them. 'Underwriter'means a person who engages in the business of underwriting of an issue of securities of a body corporate.

The underwriters ,for providing this services to the issuing companies charge a commission generally calculated at an agreed specified rate on the issue price of whole of the shares or debentures under written. Such a commission is called underwriting commission which is payable on the whole of shares or debentures underwritten even if the public takes up all the shares or debentures offered.

BANKERS TO AN ISSUE

Bankers to an issue is an important intermediary who accepts application monies, collects all monies, refund application monies after allotment and participates in the payment of dividends by companies.

No person can act as a banker to an issue without obtaining a certificate of registration from SEBI. Registration is granted by SEBI after it is satisfied that the applicant possesses the necessary infrastructure, communication and data processing facilities and requisite manpower to discharge its duties effectively.

Every banker to issue is required to maintain records and other documents for a minimum period of three years in respect of number of applications, names of investors, time with which applications received were forwarded to the body corporate or the registrar to the issue and dates and amounts of refund money paid to investors.

Bankers to the issue has to furnish information as stipulated by the regulations to SEBI as to (1) no. of applications received ,(2) no. of issues for which he has acted as a banker to an issue, (3) the dates on which applications from investors were forwarded to the issuing company /registrar to an issue, and (4) the dates and amounts of refund to investors.

REGISTRAR TO AN ISSUE AND SHARE TRANSFER AGENT

The Registrar to an issue is an intermediary who performs the functions of :

(1) collecting applications from investors.

(2) keeping a record of applications .

(3) keeping record of money received from investors or paid to sellers of shares.

(4) assisting the companies in the determination of basis of allotment of shares.

(5) helping in despatch of allotment letter refund orders, share certificates etc.

The Share Transfer Agents on the other hand maintain the record of holders of securities or on behalf of the companies and deal with all activities connected with the transfer/redemption of its securities.

BROKERS TO AN ISSUE

Brokers are the person who procure subscriptions to issue from prospective investors spread over larger area. A company can appoint as many number of brokers as it wants. Members are prohibited from acting as managers or brokers to issue by SEBI regulations unless the stock exchange of which they are members give its approval and company complies with the listing requirements and undertakes to have its securities listed on a recognised stock exchange. Particulars of the performance of brokers lie with the leading merchant bankers who act as managers to the issue.

DEBENTURES TRUSTEES

The Regulations define a debenture trustee as a trustee of a trust deed for securing any issue of debentures of a body corporate. Trust deed means a deed executed by the company in favour of trustees named therein for the benefit of the debentureholders.

Registration before acting as a debenture trustee is mandatory. Only the following categories of persons are eligible to act as debenture trustees.

(1) A scheduled bank carrying on commercial activity, or

(2) A public financial institution within the meaning of section 4A of the companies Act, or

(3) An insurance company, or

(4) A body corporate.

No debenture trustee can act as such in an issue of debentures, unless he gives his consent to do so in writing to the body corporate before the issue of debentures for subscription.

The debenture trustee performs following duties :

(1) Call for periodic reports from the body corporate.

(2) Carry out inspection of books of accounts /records /documents and registers and trust property.

(3) Take possession of the property as per provisions of the Deed.

(4) Enforce security in the interest of debentureholders.

(5) Carryout such as may be necessary for the protection of interest of debentureholders.

(6) Resolve grievances of debentureholders with respect to receipt of certificates, interest and other dues.

(7) Exercise due diligence to ensure that the property secured is sufficient to pay the dues.

(8) Ensure that provisions of the relevant laws adhered to by the body corporate.

PORTFOLIO MANAGERS

Portfolio construction, formulation of investment strategy, evaluation and regular monitoring of portfolio is an art and requires skill and high degree of expertise. Any person who enters into a contract with the client to advise, to direct or to manage the portfolio of securities or the funds of the client is known as portfolio manager. A person can act as portfolio manager after obtaining a certificate from SEBI and by depositing Rs5 lakh as registration fees.

GENERAL GUIDELINES FOR NEW ISSUES

All issues by a new company have to be made at par and for existing companies the issue price should be justified as per Malegam Committee's recommendations which are as follows :

The issue price is justified by :

1. The earnings per share (EPS) for the last 3years and comparison of pre-issue price to earnings ratio to the P/E of the industry.

2. The latest Net Asset Value (NAV).

3. The minimum return on increased networth to maintain pre-issue EPS. A company may also raise funds from the international markets by issuing Global Depository Receipts (GDR) and American Depository Receipts (ADR).

SEBI does not play any role in price fixation. In fact the issuers in consultation with the Merchant Bankers will decide the price. However , they are required to give full disclosures of the parameters which they had considered while deciding the issue price. In actual practice, there are two types of issue pricing namely -Fixed price and Book building price. Lead manager fixes the price under fixed price. Under book building pricing method, the company and lead manager stipulate a floor price and cap price or a price band and leave it on market forces to determine the final price (book building price).

ADVANTAGES OF NEW ISSUE/PRIMARY MARKET

1.Mobilisation of Savings. The market helps in mobilizing surplus savings of individuals and others to investments.

2. Channelizing Savings for Productive use. The funds so raised are used for expansion, diversification or modernization purposes by corporstes.

3. Source of Large Supply of Funds. The new issue market is a market for raising long term capital funds from investors who are spread across the country. Thus large amount of funds can be raised for a longer period.

4.Rapid Industrial Growth. Investment of surplus savings by corporates in industrial sector has lead to increase in production and productivity in the economy.

DISADVANTAGES OF NEW ISSUE/PRIMARY MARKET

1.Possibility for Deceiving Investors. The corporates raising money through public issues may not disclose detailed information in the prospectus in order to deceive investors.

2.No Fixed Norms for Project Appraisal. The projects for which money is raised are to be evaluated in terms of financial, economic, profitability and market feasibility by the project manager. As there are no fixed norms for appraisal of a project, the evaluation is subject to the personal capability and judgment of the project.

3. Ineffective Role of Merchant Banks. Merchant bankers perform most of the pre-issue and post-issue obligations with regard to the new issues. But it has been observed that they do not follow the code of conduct and indulge in ill-legal practices.

4. Lack of Confidence among Investors. Investors lack confidence in the new issue market and do not want to invest because of delay in the allotment of securities or delay in refund of money (in case of no allotment) by the companies.

METHODS OF MARKETING SECURITIES /ISSUE MECHANISM

Marketing of securities is a process of approaching a large number of investors, both individual and institutional, to invest their savings and surpluses in the shares of debentures of a company. It is a highly specialised activity that-involves a lot of skill and experience. In case a company wants to approach only a limited number of institutional or other investors there is hardly any need to take help of the specialised agencies or intermediaries operating in the field of marketing of securities. But, if a company is seeking to approach widely scattered large number of small investors, it has to arrange for advertisements, press conferences, etc. to persuade investors and further there is not certainty of sale of the total number of securities. Thus, in such case, there is a need to take help of the specialised agencies or intermediaries such as underwriters ,brokers, investment bankers, etc.

There are a number of methods /techniques for marketing of securities. A company may adopt any one or more than one of these methods. The various methods for marketing of securities are as below :

1. Public issue by prospectus, which includes:

(a) Direct selling

(b) Sale through Investment Intermediaries.

(c) Underwritten placement.

2. Offer for sale

3.Placement method

4.Tender method

5.Over-the Counter Placement

6.Rights Issue

7.Binus Issue

1.Public Issue by Prospectus

This is the most popular method of raising capital or marketing of securities (shares and debentures) for the public limited companies. (Under this method, a public limited company issues a document, called prospectus, containing information about the company and inviting public to apply for shares or debentures of the company. If the promoters are confident of raising the required funds through private contacts, it may issue a statement in lieu of prospectus. A prospectus gives details about the company and proposed issue to the prospective investors. The company ties to convince the public that it offers best opportunity for their investment. The company as well as the directors signing this document are personally liable for any false statement or misrepresentation of material facts in the prospectus .

A company may issue a prospectus inviting applications direct from the public or through some intermediaries such as brokers, investment bankers and underwriters,etc. Thus, this methods includes (a) Direct selling of securities by the company, (b) Sale through investment intermediaries, and (c) Underwritten placement.

Direct selling of securities can be successfully employed if the company wants to approach only a small number of institutional or other large investors. A company may convince such investors through conferences, personal meetings, advertisements, etc. This method is economical as it saves expenses and commission or profit of the intermediaries. But if a company wants to approach a large number of small investors, direct selling of securities may not be a sufficient-method .Further, there is no certainty about the success in raising funds through sale of securities in direct selling.

To remove the difficulties of direct selling, a company may take help of intermediaries and specialised agencies in marketing of its securities. There are brokers, merchant bankers and others who provide specialised services and help company in selling its securities on commission basis. These agencies may not guarantee the issue of securities or invest their own funds in purchase of securities but attract investors for the company. These intermediaries charge commission for the securities issued through them. The prestige of these intermediaries also attracts investors to purchase securities of a company.

As direct selling as well as marketing of securities through brokers, etc. does not provide any guarantee to the issuing company regarding the sale of securities, a company is not certain about the procurement of funds. To remove this drawback ,a company may approach a firm of underwriters who guarantee the issue of securities for a fixed commission payable to them. In case a company is not able to sell its securities in full, the underwriters purchase the unsubscribed securities out of their own funds. There are a number of financial institutions, commercial banks, life insurance companies, etc. as well as a number of private firms which provide underwriting facilities. An underwritten placement is a safer way of marketing securities and investors in advanced countries are influenced more by the prestige of the underwriting agencies than by the prestige of issuing company.

2.Offer for Sale

This method of marketing securities is generally adopted in case of large issues by companies. Under this method, the issuing companies sell or agrees to sell the securities for sale to certain issue houses or the specialised financial institutions at a fixed price. The issue house or the financial institutions then issue advertisements making offer for sale of such securities at a price higher than the price at which they obtain the securities from the issuing company. The objective of this method is to ensure success in sale of securities. The issue houses may retain the securities for sometime and may not offer the entire stock in one lot. This avoids glut of such securities in the market. The main advantages of this method include surety of success of issues and saving in costs of new issues. But at the same time, the issue houses make considerable profits by charging higher prices.

3.Placement Method

Under this method the securities are sold by the issuing companies to certain intermediaries such as brokers, issue houses or financial institutions, etc. so as to be privately placed to their clients and associates. The issuing company may also use their service for private placement to certain individuals or institutions without having sold such securities to the intermediaries. Usually, the companies reserve certain number of securities for private placement. The Securities and Exchange Board of India has laid down certain restrictions on the reservation of securities in any public issues. The maximum permissible allotment through reservation is restricted to 10% for permanent employees, 10% for shareholders of promoting companies, 20% for Indian mutual funds, 24% for foreign institutional investors and 20% for Indian and multilateral development-financial institutions.

The main advantage of this method is that it is very cheap way of marketing securities as it saves in issuing costs but the securities are sold to only a selected group of investors.

4.Tender Method

Under the tender method of marketing the securities, the issue price is not pre-determined like the other usual methods of public issues. The company announces the public issue without indicating the issue price inviting bids from various interested parties. The parties participating in the tender submit their maximum offers indicating the maximum price they are willing to pay as well as the number of shares they are interested to buy. The company, after receiving various offers, may decide about the price in such a manner that the entire issue is fairly subscribed or sold to the parties participating in the tender.

5.Over The Counter Placement

It is a recent development in the indian securities market. The Over-the Counter Exchange began its operations as a second tier bourse only in 1992. It permits smaller companies to raise funds. A company may place its issue through OTC Exchange. The procedure involved under this method is that the company wishing to raise capital through OTC Exchange appoints a member of the OTCEI as sponsor. The sponsor appraises the the project and values the shares of the company. The shares proposed to be offered for public trading by the company are placed by the sponsor with itself and other members and dealers of the OTCEI. The sponsor ensures the success of the issue even if it has to subscribe to all the shares by itself. The OTCEI members and dealers operate counters to facilitate trading with investing public. The SEBI has issued certain guidelines for issue of shares through OTC exchange of India. This method of marketing securities is very suitable for smaller companies.

6.Rights Issue

Rights issue is an invitation to the existing shareholders to subscribe for further shares to be issued by a company. A right simply means an option to buy certain securities at a certain privileged price within a certain specified period. Section 81 of the Companies Act, 1956 has provided a pre-pemptive to the existing shareholders of a company to purchase shares in further issues of the company. In recent years, many companies are coming up with further issues of capital and the practice of issuing securities to the existing securities to the existing investors of the company has increased over a period of time. In terms of value, rights issues account for 10 to 25 percent of the new issues.

7. Bonus Issue

A company having free reserves built out of genuine profits or share premium collected in cash may issue bonus shares to its existing shareholders. Usually, the companies which have huge accumulated profits and reserves but not so good liquidity position prefer to capitalise profits by the issue of bonus shares. Bonus issue does not bring in fresh capital for the company, it only enables a company to restructure its capital.

8.Book Building

Book building is a process of fixing price for an issue of securities on a feedback from potential investors based upon their perception about a company. It involves selling an issue step-wise to investors at an acceptable price with the help of a few intermediaries/merchant bankers who are called book-runners. Under book-building process, the issue price is not determined in advance, it is determined by the offer of potential investors. The book runner maintains a record of various offers and the price at which the institutional buyers, mutual funds, underwriters etc. are willing to subscribe to securities. On receipt of the information, the book runner and the issuer company determine the price at which the issue will be made. Thus, book-building helps in determining the price of an issue on more realistic way based on the intrinsic worth of the security. On the recommendations of Malegam Committee, the SEBI introduced the option of book-building in October 1995. The option of book-building was initially available only to those issuer companies which proposed to make an issue exceeding Rs100crore. However, this requirement of Rs100crore issue was removed in November, 1996. The issuer company was given an option for either reserving the securities for firm allotment or issuing the securities through book-building. On the basis of recommendations made by the Informal Group on Primary Market, the SEBI introduced 100 percent book-building in respect of issues of Rs25 crore and above in 1998-99. Buy-back of shares through book building was also allowed by SEBI subject to certain conditions. In order to further popularise the book-building mechanism for public issues, SEBI modified the existing frames work for book-building during 1999-2000 and a few public issues came to the market taking advantage of the book-building process.

The new mechanism is fast becoming an vogue and increasingly a large number of companies are using it to leverage booming market conditions. For, instance let us look at the recent (February 2004) Patni (Computer Systems LTd) IPO offer. This had a price band of Rs200-230. This band denotes the range for bidding. Investors can bid at any price between Rs200 to Rs230. The floor price, here, is Rs200 and the investors cannot bid below the floor price or above the maximum price. The price band here is capped at Rs230 .The shares in case of Patni were finally offered at the upper band of Rs230 which also became the cut-off price. The situation in most of the government disinvestment issues is slightly different as there is just the floor price which is given. Investors in such cases can bid at any price or above the floor price. In issues like IPCL, IBP, CMC, GAIL etc. launched in February /March 2004 there is no cut-off.

CONCLUSION

Over the years, SEBI and government have come up with a series of regulatory measures to give boost to new issue market. A lot of merchant bankers don't follow the code of conduct and as a result are debarred, however, these cases have reduced. As per the 1997 amendment to the SEBI Rules and Regulations, 1992 only corporate bodies will be allowed to function as merchant bankers.

These measures and also the new policy where SEBI has made the safety net compulsory. SEBI had put out draft norms for safety net after its study showed that 62% of the 117 companies listed between 2008 and 2011 fell below (IPO) price within the first six months of listing. SEBI would be the first regulator around the world, to make such a proposal mandatory. However it met with strong criticism from investment bankers.

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