Comprehensive Guide to Indian Primary Markets: Part 4

This fourth installment of the Chapter 3 notes from the NISM Securities Markets Foundation Workbook focuses on the procedural aspects of public offerings, including the critical information contained in prospectuses, the modern mechanisms for applying to an issue, and the protections offered to existing shareholders through rights issues.

3.11 Prospectus: The Critical Information Document

The prospectus is a comprehensive document containing all information relevant to an investor for making an informed investment decision in a fixed-price public issue. Its content and format are strictly prescribed by SEBI and the Companies Act.

Contents and Format

A standard prospectus must include:

Issuer Details: Information on the company, its promoters, board of directors, key employees, and an industry/business overview.
Issue Objectives: The specific purpose for which the capital is being raised.
Logistics: Opening/closing dates, contact information for Lead Managers, RTAs, and bankers, and listing details.
Terms and Procedures: Details of shares offered, application methods, and allotment/refund procedures.
Financial Records: Audited financial statements, capital structure, and accounting policies.
Risk Factors: Disclosure of risks specific to the company, industry, or the type of issue.

Red Herring Prospectus (RHP)

For issues conducted via book building, a Red Herring Prospectus is used. Unlike a final prospectus, the RHP may disclose a price band or the total issue size rather than a fixed price, as the final price is only discovered through bidding after the issue closes. A preliminary RHP is vetted by SEBI before the issue opens.

Grounds for Rejection of Draft Documents

SEBI may reject a draft offer document if:

Promoter contributions do not comply with regulations.
The usage of proceeds is unclear or does not create tangible assets.
The business model is deemed misleading.
There are inconsistencies in financial statements or significant litigation risks.

3.12 Applying to a Public Issue

Investors typically learn of forthcoming issues through mandatory advertisements, press coverage, or by visiting the websites of SEBI and the Lead Managers.

The Subscription Window and Bidding

Timing: Public issues are open for a limited period, and investors must submit applications within this window.
Online Bidding: The NSE and BSE provide an online bidding system (the IPO market), allowing investors to enter bids through broker terminals.
e-IPO Facility: Since 2013, all public issues provide an e-IPO facility, enabling bidding through the electronic facility of any exchange broker.
Pricing: The price band is announced at least 2 working days before the issue opens.
Bid Lots: Investors must bid for a minimum "bid lot" such that the total application value falls between Rs. 10,000 and Rs. 15,000.
Cut-off Bidding: Bidding at the "cut-off" price ensures the application is accepted at the final discovered price.

Application Supported by Blocked Amount (ASBA) and UPI

Payment for all public issues must be made via ASBA.

Mechanism: ASBA authorizes the investor's bank to block the application money in their account; funds are only debited upon successful allotment.
UPI Integration: Retail individual investors (applying for up to Rs. 5 lakhs) must use the Unified Payment Interface (UPI) mechanism with ASBA.
Channels: Investors can use Online ASBA (via bank portals), Physical ASBA at bank branches, or additional online modes provided by some brokers.

Allotment Process and Green Shoe Option

Basis of Allotment: If over-subscribed, shares are allotted proportionately within different categories (Retail, NIB, QIB).
Allotment Formula: The oversubscription ratio is calculated as: number of shares on offer divided by number of shares applied for.
Green Shoe Option (GSO): Companies may allot up to 15 percent additional shares to a stabilization agent to support the share price in the secondary market for 30 days post-listing if it falls below the issue price.

3.13 Listing of Shares

After allotment, a company must list its shares on a stock exchange to provide investors with liquidity and a mechanism for price discovery. Listing requires a formal agreement with the exchange, payment of fees, and a commitment to ongoing disclosure and corporate governance standards.

3.14 Rights Issue of Shares: Protecting Shareholder Stakes

A rights issue is an offer of fresh shares made to existing shareholders in a specific ratio to their current holdings. This prevents the dilution of their proportionate holding and voting power.

Key Features of Rights Issues

Record Date: Eligibility is determined by a specific record date.
Subscription Period: The issue remains open for 7 to 30 days.
ASBA Mandatory: Like IPOs, payments for rights issues must be made through the ASBA facility.
Renunciation: Investors can choose to "renounce" (sell) their rights entitlements on the stock exchange to other investors.
Digital Delivery: Entitlement forms and offer documents can be delivered via email to investors who have registered their addresses with DPs or RTAs.

Key Terms to Remember

KIM (Key Information Memorandum): A document containing essential information from the prospectus for quick investor review.
Folio Number: A unique identification number for a mutual fund investor's holdings.
Draft Red Herring Prospectus (DRHP): The preliminary version of the RHP filed with SEBI for vetting.
Dilution: The reduction in the percentage ownership of a company caused by the issuance of new shares.

Chapter 3: Comprehensive Guide to Indian Primary Markets: Part 4