CHAPTER 3

ANALYSIS OF ISSUE MECHANISM

3.1 Introduction

In the preceding chapter, the importance of primary securities market in an

economy and its significance in providing long-term capital to the industrial
sectors were discussed. In this chapter, the various issue mechanisms of raising
industrial capital in Indian primary securities market and the role of various
financial institutions which specialized in assisting industries to raise their
requirements of long-term capital have been highlighted.
The primary securities market deals with the raising of capital by
corporate sectors. Types of new issues and the issue mechanisms are closely
related. A large number of new companies as well as existing companies
entered into the primary securities market for raising the required capital for
financing, modernization and expansion of their projects. The tasks involved in
raising capital from the market are performed by the various financial
intermediaries who are specialized in this job. Before liberalization of Indian
economy, methods available for resource mobilization are prospectus method,
offer for sale, rights issue and private placement. After the liberalization, Indian
corporate sector was allowed to raise capital from international capital markets
through American Depository Receipts (ADRs), Global Depository Receipts
(GDRs), Foreign Currency Convertible Bonds (FCCBs) and External
Commercial Borrowing, (ECB) all these known as EURO issues.
The various issue mechanisms arise from the point of view of the
success of the particular issue of securities. The success of various issues
depends on the several factors such as price, size and type of the issue,
promoter‟s reputation, goodwill of the lead manager in past issue, condition of
the secondary market, investor sentiment, overall economic condition of the
country, government policy, rules and regulation etc. Again an issue of
securities may be successful in one mechanism and it may be unsuccessful in
other issue mechanism. Therefore success of an issue also depends on the
39 | P a g e
choice of the flotation method on the basis of types of issuing securities in the
primary securities market.
This chapter is divided into seven sections. Section 3.2 deals with the
types of issue mechanism in Indian securities market. Section 3.3 discusses the
various domestic methods of floatation in primary market. Section 3.4 shows
the methods of pricing of domestic issue of securities. Section 3.5 discusses the
method of raising fund from international market i.e. Euro Issues. Section 3.6
deals with primary market intermediaries. Section 3.7 contains findings and
conclusion.

3.2 Types of Issue Mechanism

Primarily issues can be classified as domestic issue and EURO issue. Domestic
issue classified as public issue, rights issue and private placement issue. This
public offering can be made through the fixed price method, book building
method or a combination of both.
Figure 3.1 shows the different issue mechanism in Indian securities market.
Figure 3.1: Issue Mechanism

Issues

Domestic Issues Euro Issues

Rights Placement Method

Public

Preferential Issue Qualified

(For listed institutional
Companies) placement

Initial Public Offering Further Public Offering

(For unlisted Companies) (For listed Companies)
Companies.)
Fresh Issue Offer for sale Fresh Issue Offer for sale

Source: SEBI

40 | P a g e
3.3 Domestic Issues
Domestic issue may be classified into public issue, rights issue and placement
method. Further, public issue may be divided into two types (a) Initial Public
Offer (IPO) i. e. the selling of securities to the public in the primary market: it
is when an unlisted company makes either a fresh issue of securities (also
known as prospectus method) or an offer for sale of its existing securities or
both for the first time to the public; (b) a follow on public offering (FPO), when
an already listed company makes either a fresh issue of securities to the public
or an offer for sale to the public, through an offer document. Therefore public
issue can be made through prospectus method or through offer for sale. Further
placement method is mainly divided into two types namely private placement /
preferential issue and qualified institutional placement. SEBI recently
introduced another two methods of raising capital from the primary market.
These are fast track issue and institutional placement method.

3.3.1 Prospectus Method

The most important method of issuing corporate securities is the prospectus
method. This involves inviting subscription from the public through issue of
securities. In this method issuing companies themselves offer directly to the
general public a fixed number of shares at a stated price, which in the case of
new companies is invariably the face value of the securities, and in the case of
existing companies, it may sometimes include a premium amount. Under this
method, minimum contents in the prospectus prescribed by the Companies Act,
1956 and SEBI mandated the additional disclosure standards in it. The
Companies Act, 1956 also provides both civil and criminal liability for any
misstatement in the prospectus. The prospectus must include: (i) name and
registered office of the issuing company; (ii) location of the industry; (iii)
existing and proposed activities; (iv) Board of directors; (v) dates of opening
and closing the subscription list; (vi) authorized, subscribed and proposed issue
of capital to public; (vii) minimum subscription; (viii) name of broker,
underwriters, bankers and other intermediaries associated with the issue

41 | P a g e
process; (ix) a statement that the company will make an application to the stock
exchange(s) for the permission to deal in or for quotations for its shares.
The main advantage of this issue mechanism is that transaction is
carried on in the light of publicity approach to the whole section of investing
public. This mechanism ensures better distribution of shares and prevents
artificial concentration on the quantity of share available. It also helps in
removing concentration of wealth and economic power.
The main disadvantage of this method is that it is a highly expensive
mechanism. The cost of an issue involves underwriting expenses, brokerage
and other administrative expenses, which include printing charges of
prospectus, publicity charges, bank charges etc. Due to these, this mechanism
is suitable for large issues not for small issues. Before liberalization of Indian
economy, this method was the only important method for raising fund from the
capital market. The trend also continues even after 1990‟s. Table 3.1 shows the
fund raised through prospectus issues by new companies and existing
companies during the last 21 years.

Table 3.1: Resource Mobilized through Public Issue of Prospectus

Year Total Prospectus New Issue by listed
Companies(IPO) companies
No. Amount(Cr.) No. Amount(Cr.) No. Amount(Cr.)
1992-93 NA NA NA NA NA NA
1993-94 773 15449 692 7864 81 7585
1994-95 1342 21045 1239 16572 103 4473
1995-96 1426 14240 1357 10924 69 3316
1996-97 753 11565 717 5959 36 5606
1997-98 62 2862 52 1048 10 1814
1998-99 32 5019 18 404 14 4614
1999-00 65 6257 51 2719 14 3538
2000-01 124 5378 114 2722 10 2656

42 | P a g e
2001-02 20 6502 7 1202 13 5300
2002-03 14 3639 6 1039 8 2600
2003-04 35 22265 21 3434 14 18831
2004-05 34 24640 23 13749 11 10891
2005-06 103 23294 79 1936 24 12358
2006-07 85 29796 77 28504 8 1293
2007-08 92 54511 85 42595 7 11916
2008-09 22 3582 21 2082 1 1500
2009-10 47 49236 39 24696 8 24540
2010-11 68 58105 53 35559 15 22546
2011-12 55 46093 54 41515 1 4578
Total 5152 403478 4705 244523 447 149955
Source: calculated from ISMR & SEBI various reports
It has been found from the above table that in the first six years of post
liberalization period, number of public issues has accounted for highest
proportion for new companies. Maximum fund was mobilized through public
issues by the new companies compared to existing companies, but the average
issue size is highest in case of existing companies.

3.3.2 Offer for Sale

Another method of issuing corporate securities is known as the offer for sale
method. Under this method, securities are purchased straightway by some issue
houses, stock brokers, investment bankers, merchant bankers etc. from the
issuing company1. Sale to the general public or investors is made at the time
when the market condition is favorable that means in this method issuing
company does not offer its share directly to the public.
The sale of securities under this mechanism is done in two stages. In the
first stage, the issuing company sells the securities en block to the issuing
houses or stock brokers at an agreed fixed price or negotiated price. The
acquired securities are resold in the second stage by the issuing houses to the
investors. In this method, the securities are offered to public or investors at a
43 | P a g e
price higher than the price at which the sponsoring institutions were acquired
from the issuing company. The difference between sale and purchased price is
called „turn‟. The main advantages of this method of floatation are (i) the
issuing company is saved from the cost and trouble of selling the share to the
public, (ii) this mechanism is governed by the sponsoring institutions and
because of this issuing company does not face any kind of risk. Table 3.2
shows the amount of fund mobilized through this method of floatation during
the last 9 years.

Table 3.2: Resource Mobilized through Public Issue of offer for sale
Number of Amount Rs. in Percentage share in total
Year issues Cr. resource mobilization
2003-04 8 15294 65.5
2004-05 3 3200 11.32
2005-06 3 296 1.08
2006-07 6 587 1.75
2007-08 7 2152 2.47
2008-09 3 48 0.30
2009-10 9 11756 20.4
2010-11 12 19036 28.2
2011-12 5 2056 4.2
Source: Complied by Researcher from SEBI Annual Reports, various years

It is observed from the table 3.2 that during the year 2003-04, share of offer
sale in total resource mobilization was highest in comparison with other
methods but in the subsequent years it declined. This was due to the fact that
during these years 6 public sector units together raised Rs. 14,254 crore, of
which equity issue of Oil and Natural Gas Corporation Limited (ONGC)
accounted for Rs. 10,695 crore2. During the year 2009-10 and 2010-11,
resource mobilization through this route increased but declined again in 2011-
12.

44 | P a g e
3.3.3 Placement Method
Another important issue mechanism in primary securities market is placement
method. According to London Stock Exchange a placement method is “sale by
an issuing house or broker to their own client of securities which have been
previously purchased or subscribes”. A private placement is an issue of share
or of convertible securities by a company to select group of persons. Under
section 81 of the Companies Act, 1956 a private placement is neither a public
issue nor a rights issue. It is arranged through a merchant banker/ investment
banker who acts as an agent of the issuer and brings together the issuer and
investors. The main advantage of this method is its cheapness, because many
items of expenses in public offer and offer for sale can be avoided. The SEBI
has given permission to the companies of raising capital from primary market
through private placement method. A picture of resource mobilization through
private placement method by the corporate sector is shown in table 3.3.
Table 3.3: Resource Mobilized through Private Placement
Year Amount Rs. in Cr. Annual growth rate
1991-92 4463
1992-93 1635 -63.3654
1993-94 7466 356.6361
1994-95 11174 49.66515
1995-96 13361 19.57222
1996-97 15066 12.76102
1997-98 30099 99.78096
1998-99 49664 65.00216
1999-00 61259 23.34689
2000-01 67836 10.73638
2001-02 64876 -4.36346
2002-03 66948 3.193785
2003-04 63901 -4.55129
2004-05 83406 30.52378
2005-06 96473 15.66674
2006-07 145866 51.19878
2007-08 212725 45.8359
2008-09 204057 -4.07474
2009-10 343280 68.22751
2010-11 238396 -30.5535
2011-12 217982 -8.56306
Source: Compiled by researcher from ISMR & RBI various reports

45 | P a g e
3.3.3.1 Qualified Institutional Placement
SEBI introduced a new method of raising funds from market by companies in
the form of Qualified Institutions‟ Placement (QIP) in 2006. Provided that in
case of a QIP issue minimum of 10 percent of specified securities shall be
allotted to mutual funds and no allotment shall be made, directly or indirectly,
to any Qualified Institutional Buyers (QIB) being a promoter or any person
related to promoters. There should be at least two allottees for an issue of size
up-to Rs. 250 crore and at least five allottees for an issue size in excess of Rs.
250 crore. No single allottees shall be allotted more than 50 per cent of the
issue size. The placement size shall not exceed five times the pre-issue net-
worth as per the audited balance sheet of the previous financial year.
Listed companies who are desirous of making QIP shall have to comply
with the condition that the equity shares of the same class of such companies
should be listed on a stock exchange having nationwide terminals, for a period
of at least one year as on the date of issuance of notice to shareholders for
considering the QIP. Table 3.4 shows the amount mobilized through this route.

Table 3.4 Fund Mobilized through QIP

Year No. of Issues Amount Rs. in (Cr.)
2006-07 25 4963
2007-08 36 25525
2008-09 2 189
2009-10 62 42729
2010-11 59 25850
2011-12 16[1]* 2163[470.74]**
Total 200 101419
Source: SEBI various annual reports
Asterisk [* & **] denotes No. and Amount of issues through IPP.
It is observed from the table 3.4 that during 2007-08, Rs. 25,525 crore was
mobilized through QIP, however it decline to Rs. 189 crore in 2008-09. The

46 | P a g e
reason for decline in resource mobilization through this route in 2008-09, was
due to delay of expansion plans by Indian companies3.
3.3.4 Rights Issue
The methods which have been discussed earlier are mainly used by new
companies as well as existing companies. Under rights issue method only
existing companies whose shares are already listed and widely-held can offer
shares to the existing shareholders. In this method, issuing company offers the
rights issue to subscribe new shares to the existing shareholders in proportion
to the number shares held by them.
According to section 81 of the Companies Act, 1956 a company can
increase its subscribed capital by issuing new share either after two years of its
establishment or after one year of first issue of share whichever is earlier.
These have to be first offer to the existing shareholders with a right to reject
them in favour of nominee. Table 3.5 shows the capital raised through rights
issues.
Table 3.5: Resources Mobilization through Rights Issue
Year Rights Issue

No. Amount
1992-93 NA NA
1993-94 370 8923
1994-95 350 6588
1995-96 299 6564
1996-97 131 2719
1997-98 49 1708
1998-99 26 568
1999-00 28 1560
2000-01 27 729
2001-02 15 1041
2002-03 12 431
2003-04 22 1007
2004-05 26 3616
2005-06 36 4088
2006-07 39 3710
2007-08 32 32518
2008-09 25 12637
2009-10 29 8319

47 | P a g e
 2010-11 23 9503
2011-12 16 2375
2012-13 16 8945
Total 1571 117549
Source: Compiled by researcher from ISMR & SEBI various reports

In the year 1993-94, number of issues launched was 370 and Rs.8923 crore
was mobilized. After 1993-94, capital raised through this mechanism was
declined and this trend continued up-to 1998-99. In the year 1999-2000, capital
raised increased by 174.64% compared to 1997-98, but the number of issues
marginally increased. Declining trend continued up to the period of 2002-03. In
the year 2002-03, number of issues declined to 12 only and amount raised only
Rs.431 crore. From the year 2003-04, when the revival of the primary market
started, resource mobilized through this issue also increased. In 2007-08,
companies raised huge resources through this method which was Rs. 32,518
crore.

3.3.5 Fast Track Issue

SEBI introduced Fast Track Issue (FTI) mechanism in 2007, which would
allow listed companies to raise funds from the markets in the least possible
time4. Under this new mechanism lead managers can proceed with the issue or
capital raising plans of companies listed on NSE or BSE after filing the offer
document with SEBI. The new mechanism will benefit only those companies
which are listed on BSE and NSE for at least three years, and have a market
capitalization of at least Rs. 10,000 crore during the last one year.5 SEBI
decided to relax certain requirements of FTIs such as reducing the average
market capitalization of public shareholding of the issuer to Rs. 5000 crore
from Rs. 10,000 crore, pegging the annualized trading turnover to free float for
companies whose public shareholding is less than 15 percent of the issued
capital. It was also decided that in-case the clause relating to composition of
Board of Directors has not been complied within one or more quarters, it need
not be deemed as non-compliance, provided the company is in compliance in
this regard at the time of filing the offer document with stock exchange/ ROC

48 | P a g e
and adequate disclosures are made in the offer document in this respect. During
the year 2012, SEBI reduced free float market capitalization threshold for
issuer to access the market through the fast-track follow-on public offering
(FPO) and rights issues from Rs 5,000 crore to Rs. 3,000 crore6.

3.3.6 Institutional Placement Programme

SEBI has amended the Issue of Capital and Disclosure Requirements
Regulations, 2009 in 2012 whereby Chapter VIII-A - Institutional Placement
Programme (IPP) has been inserted7. "Institutional Placement Programme"
means a further public offer of eligible securities by an eligible seller, in which
the offer, allocation and allotment of such securities is made only to qualified
institutional buyers in terms of this Chapter.
An institutional placement programme may be made only after a special
resolution approving the institutional placement programme has been passed by
the shareholders of the issuer in terms of section 81(1A) of the Companies Act,
1956. No partly paid-up securities shall be offered in this method. The issuer
shall obtain an in-principle approval from the stock exchange(s).
The promoter or promoter group who are offering their eligible
securities should not have purchased and/ or sold the eligible securities of the
company in the twelve weeks period prior to the offer and they should
undertake not to purchase and / or sell eligible securities of the company in the
twelve weeks period after the offer. Allocation/allotment under the institutional
placement programme shall be made subject to the following conditions:
 Minimum of 25% of eligible securities shall be allotted to mutual funds
and insurance companies provided that if the mutual funds and
insurance companies do not subscribe to said minimum percentage or
any part thereof, such minimum portion or part thereof may be allotted
to other qualified institutional buyers;
 No allocation/allotment shall be made, either directly or indirectly, to
any qualified institutional buyers who is a promoter or any person
related to promoters of the issuer provided that a qualified institutional

49 | P a g e
 buyer who does not hold any shares in the issuer and who has acquired
the rights in the capacity of a lender shall not be deemed to be a person
related to promoters.
 The bids made by the applicants in institutional placement programme
shall not be revised downwards or withdrawn. The issuer shall accept
bids using Application Supported Block Amount (ASBA) facility only.
The aggregate of all the tranches of institutional placement programme made
by the eligible seller shall not result in increase in public shareholding by more
than 10 % or such lesser per cent. Where the issue has been oversubscribed, an
allotment of not more than 10 % of the offer size shall be made by the eligible
seller8.

3.4 Pricing of Domestic Issue of Securities

Corporate sectors may raise capital in the primary market by way of an initial
public offer (IPO), rights issue or private placement. This IPO can be made
through the fixed price method, book building method or a combination of
both.
3.4.1 Fixed Price Method
An issuer company is allowed to freely price the issue. The basis of issue price
is disclosed in the offer document where the issuer discloses in detail about the
qualitative and quantitative factors justifying the issue price. The issuer
company can mention a price band of 20% (cap in the price band should not be
more than 20% of the floor price) in the draft offer documents filed with SEBI
and actual price can be determined at a later date before filing of the final offer
document with SEBI/ROCs9.

3.4.2 Book Building Method

Book Building is essentially a process used by companies raising capital
through Public Offerings-both Initial Public Offers (IPOs) and Follow-on
Public Offers (FPOs) to aid price and demand discovery. It is a mechanism
where, during the period for which the book for the offer is open, the bids are

50 | P a g e
collected from investors at various prices, which are within the price band
specified by the issuer. The process is directed towards both the institutional as
well as the retail investors. The issue price is determined after the bid closure
based on the demand generated in the process.
SEBI introduced book building process of price and demand discovery
in 199510, which was then restricted to 75% of the issue size at Rs 100 crore or
more. In order to encourage the use of these facilities SEBI had reduced during
1998-99, the earlier unit of issue size of Rs 100 crore to Rs 25 crore though the
book building. It remains silent in the public issue market till 1999. Hughes
Software Limited made first IPO of equity issue through this route in
September 1999 and the issue was highly over-subscribed11.
SEBI, from time to time, amended its Disclosure and Investor
Protection (DIP) Guidelines to make changes in the book building route12, such
as: on 29th November 2001 SEBI introduced 100% book building facilities with
effect from December 1, 2001 and underwriting was made mandatory for the
book building portion by the syndicate members/ book runners. In order to
make price discovery process more transparent, realistic, free from artificial
demand and responsive to the market demand, SEBI had given freedom to the
companies for indicating either a movable price band or fixed floor price in the
Red Herring Prospectus (RHP), during 2003-04. SEBI also restricted Qualified
Institutional Buyers13 from withdrawing their bids after closure of bids and
include insurance companies, pension and provident funds under QIB category.
Book Building Process involves the following steps:
The issuer who is planning an offer nominates lead merchant banker(s)
as 'book runners'.
The issuer specifies the number of securities to be issued and the price
band for the bids.
The issuer also appoints syndicate members with whom orders are to be
placed by the investors.
The syndicate members input the orders into an 'electronic book'. This
process is called 'bidding' and is similar to open auction.

51 | P a g e
 The book normally remains open for a period of 5 days.
Bids have to be entered within the specified price band.
Bids can be revised by the bidders before the book closes.
On the close of the book building period, the book runners evaluate the
bids on the basis of the demand at various price levels.
The book runners and the issuer decide the final price at which the
securities shall be issued.
Generally, the numbers of shares are fixed; the issue size gets frozen
based on the final price per share.
Allocation of securities is made to the successful bidders. The rest get
refund orders.
The book building process adopted in India is quite in different from that of
USA. In India, the book building activity is shown live on the stock exchange
websites, in the USA it is built behind close doors. In USA, road shows are
held and issue price is arriving at a few hours before the issue opens. In India,
the book is built within a time span of 3 to 7 days and the maximum price of
the book building range cannot be more than 120% of the minimum price, but
in USA, the book building period is not mandated and the difference between
the minimum and maximum field price is almost always US $2.

3.4.3 Pure Auction Method

In order to enable better price discovery and to maximize the amount which
could be raised by an issuer, SEBI introduced the pure auction method during
2009-10, which is an additional method to book building, to start with for FPOs
in which the bidders would be free to bid any price above the floor price and
allotment would be on price priority basis and at differential prices for qualified
institutional buyers14. However allotment to retail individual investors, non-
institutional investors and employees of the issuer shall be made
proportionately as illustrated in Schedule XI of SEBI Issue of Capital and
Disclosure Regulations (ICDR) 2009.

52 | P a g e
3.4.4 Comparison between Fixed Price Issue and Book Building Issue
In book building issue retail investors have no role to play in price discovery,
though it is a price discovery mechanism. The main difference between a fixed
price and a book building issue is in the process of allotment15. In the fixed
pricing issue 50% is reserved for retail individual investors and 50% for other
investors and there is no chance for issuer or merchant bankers for
discretionary allotment. But in book building issue, 50% is reserved for QIBs
and 35% is for retail investors and there is a chance for discretionary allotment.

Table 3.6 Book Building v/s Fixed Price Issue

Issue Offer Price Demand Payment Reservations
Type
Fixed Price at Demand for 100 % advance 50 % of the shares
Price which the the securities payment is offered are
Issues securities offered is required to be reserved for
are offered known only made by the applications below
and would after the investors at the Rs. 1 lakh and the
be allotted is closure of the time of balance for higher
made known issue. application. amount
in advance applications.
to the
investors.
Book A 20 % Demand for 10 % advance 50 % of shares
Building price band is the securities payment is offered are
Issues offered by offered, and required to be reserved for QIBs,
the issuer at various made by the 35 % for small
within prices, is QIBs along investors and the
which available on with the balance for all
investors are a real time application, other investors.
allowed to basis on the while other
bid and the BSE website categories of
final price is during the investors have
determined bidding to pay 100 %
by the issuer period. advance along
only after with the
closure of application.
the bidding.
Source: BSE

53 | P a g e
Between these two methods book building becomes the most favourite route of
raising capital. The table 3.7 shows the amount of capital raised through fixed
price and book building route during the last 9 years16.
Table 3.7 Comparative view of Book Building and Fixed Price Issues
Year Book Building Fixed Price Total
No. Amount % No. Amoun % No. Amount
of (Rs. in of t of (Rs. in
IPO cr.) IPOs (Rs. in IPO cr.)
s cr.) s
2003-04 9 2641.04 82.8 10 550.07 17.2 19 3191.10
2004-05 15 14507.04 98.9 8 155.28 1.1 23 14662.32
2005-06 53 10225.43 94.7 23 572.45 5.3 76 10797.88
2006-07 65 23469.07 99.0 11 237.10 1.0 76 23706.16
2007-08 74 41068.98 99.4 10 254.47 0.6 84 41323.45
2008-09 17 1959.92 96.4 4 74.07 3.6 21 2033.99
2009-10 39 24948.31 100.0 0 0.00 0.0 39 24948.31
2010-11 50 33028.27 99.8 2 69.50 0.2 52 33097.77
2011-12 29 4977.02 98.8 1 60.00 1.2 30 5037.02
Source: Ministry of Corporate Affairs, www.mca.gov.in
3.5 EURO Issues
Indian firms are allowed to raise capital from international markets from April,
1992 in the form of American Depository Receipts (ADR), Global Depository
Receipts (GDR) and Foreign Currency Convertible Bonds (FCCBs). Many
companies have been looking beyond their domestic financial markets, in an
effort to enhance their global presence. International capital market played an
important role for financing the growth of the emerging market economics17.
Indian companies, who are interested in raising funds through foreign
listing, must obtain prior permission of the Department of Economic Affairs,
Ministry of Finance Government of India. An issuing company seeking such
permission was required to have a consistent track record of good performance

54 | P a g e
for a minimum period of three years. However, the mandatory requirement of
three years track record was relaxed for infrastructure sectors, such as power
generation, telecom, airports; roads etc. Table 3.8 shows the resource mobilized
from international market.
Table 3.8 Resource Mobilized through Euro Issues
Year No. of Issues Amount (Rs. in Cr.)
1992-93 2 702.32
1993-94 27 7897.82
1994-95 31 6743.23
1995-96 5 1296.69
1996-97 16 5594.27
1997-98 7 4009.46
1998-99 3 1147.78
1999-00 6 3487.21
2000-01 13 4197.07
2001-02 5 2384.81
2002-03 11 3426.42
2003-04 18 3097.55
2004-05 15 3353.25
2005-06 49 11357.52
2006-07 40 17005.11
2007-08 26 26556.39
2008-09 13 4788.36
2009-10 18 15967.37
2010-11 42 9441.58
2011-12 22 2712
Total 369 135166.2
Source: Compiled by researcher
It is observed from the above table that Indian companies started raising funds
from the international market from the year 1992-93. Till 2004-05 fund raised
was not significant. During our study period only Rs. 1,35,166 crore was
mobilized through this method, of which 64.978 % was raised during the
period 2005-06 to 2011-12.

55 | P a g e
3.6 Primary Market Intermediaries
The Indian primary market mainly suffered from the functional and
institutional gaps before liberalization. There was basically no such expert
institution for managing issues of capital before liberalization. There was a
serious drawback in Indian primary market in terms of not only distributing the
securities but also arrange for underwriting, investigation and sponsor of issues
of capital. So far another weakness of Indian market in mid-eighties was the
obstacle in floating small issues18.
To tone up the operation in primary market in India as a solution to the
foregoing deficiencies the Industrial Credit and Investment Corporation in
India (ICICI) and some commercial banks, such as State Bank of India and
ANZ Grindlays Bank did set up merchant banking division to provide issue
management, advisory and other procedural services to entering corporate
sector in Indian primary market.
A significant organizational development in Indian primary market has
been the emergence of an array of intermediaries. These primary market
intermediaries play an important role in channelizing the funds from the savers
to the ultimate users. Figure 3.2 shows the various intermediaries related with
the primary securities market in India.

Figure 3.2: Primary Market Intermediaries

Primary Market Intermediaries

Debenture Registrar to
Merchant Underwriters Trustees
Brokers Issue
Bankers/
to an & Share
Lead
Bankers to Issue Portfolio Transfer
Managers
Issue Managers Agent

Source: Compiled by researcher

56 | P a g e
3.6.1 Merchant Bankers/Lead Managers
A Merchant bankers (MBs) means any person who is engaged in the business
of issue management either by banking arrangements regarding selling, buying
or subscribing to securities or acting as manager/consultant/advisors or
rendering corporate advisory service in relation to such issue management.
Merchant bankers play an important role in issue management process. Lead
managers (category I merchant bankers) have to ensure correctness of the
information furnished in the offer document. They have to ensure compliance
with SEBI rules and regulations as also Guidelines for Disclosures and Investor
Protection. To this effect, they are required to submit to SEBI a due diligence
certificate confirming that the disclosures made in the draft prospectus or letter
of offer are true, fair and adequate to enable the prospective investors to make a
well informed investment decision. The role of merchant bankers in performing
their due diligence functions has become even more important with the
strengthening of disclosure requirements and with SEBI giving up the vetting
of prospectuses. From1995-96, lead manager to an issue is required to furnish
due diligence certificate at five different stages of the issue process and satisfy
himself about all the aspects of the issue and adequacy of the disclosure in the
offer documents19.
It was felt that a further strengthening of the criteria for registration of
merchant bankers was necessary, primarily through an increase in the net-
worth requirements, so that their capital would be commensurate with the level
of activities undertaken by them. With this in view, the net-worth requirement
for category I merchant bankers was raised in 1995-96 to Rs. 5 crore. In 1996-
97, the SEBI (Merchant Bankers) Regulations, 1992 were amended to require
the payment of fees for each letter of offer or draft prospectus that is filed with
SEBI20. During the year 2010-11 SEBI mandated the lead manager to submit
compliance certificate in respect of news report in order to ensure better
consistent with the disclosure made in offer documents21. In order to encourage
investors, SEBI made it mandatory in 2012 that MBs must disclose the track

57 | P a g e
record of the public issue managed by them in the past along with the price
performance of the issues managed by them in the past in offer documents22.
3.6.2 Underwriters
Another important intermediary in the primary market is the underwriters to
issues of capital who agree to take up securities which are not fully
subscribed23. They make a commitment to get the issue subscribed either by
other or by them selves. Underwriters are required to register with SEBI in
terms of the SEBI (Underwriters) Rules and Regulations, 1993. In addition to
underwriters registered with SEBI in terms of these regulations, all registered
merchant bankers in categories I, II and III and stockbrokers and mutual funds
registered with SEBI can function as underwriters. Part III of the regulations
gives further details of registration of underwriters.
3.6.3 Bankers to an Issue
The bankers to an issue are engaged in activities such as acceptance of
applications along with application money from the investor in respect of
issues of capital and refund of application money24. Scheduled banks acting as
bankers to an issue are required to be registered with SEBI in terms of the
SEBI (Bankers to the Issue) Rules and Regulations, 1994. These regulations
lay down eligibility criteria for bankers to an issue and require registrations to
meet periodic reporting requirements.
3.6.4 Portfolio Managers
Portfolio managers are defined as persons who, in pursuance of a contract/
arrangement with client, advise/direct/undertake, on behalf of the client(s),
whether discretionary portfolio manager or other wise
management/administration of portfolio of securities/funds of clients. The term
portfolio means total holding of securities belonging to any person25. Portfolio
management can be i) discretionary or ii) non-discretionary. Portfolio managers
are required to register with SEBI in terms of the SEBI (Portfolio Managers)
Rules and Regulations, 1993. The registered portfolio managers exclusively
carry on portfolio management activities. In addition all merchant bankers in

58 | P a g e
categories I and II can act as portfolio managers with prior permission from
SEBI. Part III gives further details of the registration of portfolio managers.
3.6.5 Debenture Trustees
A debenture trustees is a trustee for a trust deed needed for securing any issue
of debenture by a company or body corporate or any private placement of
debentures by a listed/ proposed to be listed company. Debenture trustees are
registered with SEBI in terms of the SEBI (Debenture Trustees) Rules and
Regulations, 1993. Since 1995-96, SEBI has been monitoring the working of
debenture trustees by calling for details regarding compliance by issuers of the
terms of the debenture trust deed, creation of security, payment of interest,
redemption of debentures and redressal of complaints of debenture-holders
regarding non-receipt of interest/redemption proceeds on due dates. Part III
gives further details of the registration of debenture trustees.
3.6.6 Registrars to an Issue and Share Transfer Agents
The Registrars to an Issue (RTI), as an intermediary in the primary market,
carry on activities such as collecting application from the investor, keeping a
proper record of application and money receipt from investor or paid to the
seller of securities and assisting companies in determining the basis of
allotment of securities in consultation with stock exchanges, finalizing the
allotment of securities and processing/ dispatching allotment letters, refund
orders, certificates and other related documents in respect of issue of capital.
Registrars to an issue and share transfer agents (STA) are registered with SEBI
in terms of the SEBI (Registrar to the Issue and Share Transfer Agent) Rules
and Regulations, 1993. Under these regulations, registration commenced in
1993-94 and is granted under two categories: category I - to act as both
registrars to the issue and share transfer agent and category II - to act as either
registrar to an issue or share transfer agent. With the setting up of the
depository and the expansion of the network of depositories, the traditional
work of registrars is likely to undergo a change.
All the intermediaries are required to register their name, with SEBI and
they are required to maintain the code of conduct prescribed by SEBI. Usually

59 | P a g e
intermediaries are granted registration for a period of three to five years, but
after the amendment of SEBI Regulations in 2011 they are granted initial
registration for a period of five years and they can apply for permanent
registration before expiry of initial registration, except stock brokers. SEBI
registered primary market intermediaries are given in Table 3.9.
Table 3.9 SEBI Registered Primary Market Intermediaries
Year Merchant Unde Bankers Portfolio Debentu Registra
Bankers rwrit to an Managers re r to an
ers Issue Trustees Issue &
Share
Transfer
Agent
1992-93 74 - - 28 - -
1993-94 422 - - 40 - 100
1994-95 790 36 70 61 20 264
1995-96 1012 40 77 13 23 334
1996-97 1163 38 80 16 27 386
1997-98 802 43 72 16 32 334
1998-99 415 17 66 18 34 251
1999-00 186 42 68 23 38 242
2000-01 233 57 69 39 37 186
2001-02 145 54 68 47 40 161
2002-03 124 43 67 54 35 143
2003-04 123 47 55 60 34 78
2004-05 128 59 59 84 35 83
2005-06 130 57 60 132 32 83
2006-07 152 45 47 158 30 82
2007-08 155 35 50 205 28 76
2008-09 134 19 51 232 30 71
2009-10 164 5 48 243 30 74

60 | P a g e
2010-11 192 3 55 267 31 73
2011-12 200 3 56 250 32 74
Source: SEBI Annual Reports various issues
During the year 1997-98, SEBI amended its merchant banking regulations,
1992 to tighten registration norms by increasing the requirement of net-worth
to rupees five crore. SEBI also abolished Category II, III, and IV merchant
26
bankers and prohibited them from carrying fund-based activities . If MBs
wish to act as underwriter or portfolio manager they must register separately.
As a result, SEBI registered merchant bankers declined drastically in
subsequent years.
3.7 Conclusion
Different issue mechanisms for issuing securities by corporate sectors in Indian
primary market have been discussed. Each and every method has certain
advantages and disadvantages. In the post-liberalization era, SEBI introduced
different methods of floatation for the development of Indian primary market.
Introduction of book building mechanism during the year 1995 as a price and
demand discovery method made this market more transparent in terms of
pricing of securities.
As an additional method to book building, pure auction method was
introduced by SEBI during 2009-10, for issuing securities by listed companies
in FPO category. SEBI introduced Fast Track Issue mechanism on the basis of
recommendations of the Primary Market Advisory Committee (PMAC) in the
year 2007, for listed companies to raise capital in a cost effective manner27.
Introduction of QIP also helped the issuer to raise capital from the market. In
the post-liberalization era, SEBI allowed Indian companies to raise capital from
the international market from April, 1992 in the form of ADR, GDR, and
FCCB etc.
Maximum fund is mobilized through private placement method, but it is
restricted to QIBs not for retail investors. In case of public issue method,
prospectus method has been considered to be the most important method of
mobilizing fund from the public.

61 | P a g e
 Notes and References

1. Khan M. Y. (2011). Indian Financial System. Tata McGraw-Hill Pvt.

Ltd. p- 3.9
2. SEBI Annual Report 2003-04, p-28.
3. SEBI Annual Report 2009-10, p-40.
4. Fast Track Route for follow on equity issue. (2007). Business Line. 25th
August 2007.
5. Gupta, A. (2007). Issue of securities put on fast track. Economic Times.
September 30.
6. Modak, S., Divase, A. (2012) Relaxation of fast-track route criteria to
benefit 80 cos. Business Standard. September 30.
7. SEBI Annual Report (2011-12). P-
8. Retrieved from www.bseindia.com
9. SEBI, FAQ
10. SEBI Annual Report. (1996-97).
11. Bora, B., Adhikary, A., Jha, A. (2012). An Empirical Perspective on
Book Building as Effective Tool for Price Discovery. International
Conference on Economics, Business and Marketing Management,
IPEDR vol. 29
12. SEBI Annual Report. (2001-02). Part-1. P-2
13. SEBI Annual Report. (2003-04). Part 1. P-1
14. Indian Securities Market Review (2009-10). p-27
15. Haldea, P. (2005). Fixed price issue v/s book built issue. Retrieved from
http://www.moneycontrol.com/news/ipo-news/fixed-price-issue-vs-
book-built-issue_169890.html
16. Ministry of Corporate Affairs. Retrieved from
http://www.iepf.gov.in/IEPF/Types_of_Issues.html
17. (October 2010). Emerging markets - International capital raising trends.
City of London Economic Development. Retrieved from,
http://www.cityoflondon.gov.uk/business/support-promotion-and-

62 | P a g e
 advice/promoting-the-city-
internationally/india/Documents/EmergingmarketsInternationalcapitalrai
singtrends.pdf.
18. Op.cit. Khan, M.Y
19. SEBI Annual Report (1995-96)
20. SEBI Annual Report (1996-97)
21. SEBI Annual Report (2010-11). p-7
22. SEBI Annual Report (2011-12). Pp 9-12
23. Op.cit. Khan, M.Y. p-6.8
24. Op.cit. Khan, M.Y. p-6.11
25. Op.cit. Khan, M.Y. p-6.26
26. SEBI Annual Report (1997-1998). P-40
27. SEBI allows fast-track issues by companies. (2007). Indian Express.
August 25, 2007.

63 | P a g e