It provides a comprehensive analysis of the SEBI Invetsor Protection Guideline 2000 from the point of view of the companies. It covers offer documents, exceptions, price discovery, green shoe option, e-IPO, etc.

1. DECONSTRUCTING AN IPO
DISCLOSURE AND INVESTMENT PROTECTION GUIDELINES

2. WHAT IS INVESTOR PROTECTION GUIDELINE BY SEBI
 The primary issuances are governed by SEBI in terms of SEBI (Disclosures and
Investor protection) guidelines. SEBI framed its DIP guidelines in 1992. Many
amendments have been carried out in the same in line with the market
dynamics and requirements. In 2000, SEBI issued “Securities and Exchange
Board of India (Disclosure and Investor Protection) Guidelines, 2000”
 These guidelines and amendments thereon are issued by SEBI India under
section 11 of the Securities and Exchange Board of India Act, 1992. SEBI
(Disclosure and investor protection) guidelines 2000 are in short called DIP
guidelines. It provides a comprehensive framework for issuances buy the
companies.

3. OFFER DOCUMENT
 Offer document means Prospectus in case of a public issue or offer for sale and Letter of offer in case
of a rights issue, which is filed with the Registrar of Companies (ROC) and Stock Exchanges. An offer
document covers all the relevant information to help an investor to make his/her investment
decision.
 Public issue prospectus to be filed with Registrar of companies after 21 days of filing draft
prospectus with SEBI. In case there is any change in the prospectus, then 15 days are provided for
clarification.
 Subscription list for public issues shall be kept open for at least 3 working days and not more than
10 working days.
 In case of Book built issues, the minimum and maximum period for which bidding will be open is 3–7
working days extendable by 3 days in case of a revision in the price band.

4. ELIGIBILITY NORMS
SEBI has stipulated the eligibility norms for companies planning an IPO which are as follows:
Entry Norm I (Profitability Route)
a) Net tangible assets of at least Rs. 3 crore in each of the preceding three full years of which not more
than 50% are held in monetary assets. However, the limit of 50% on monetary assets shall not be
applicable in case the public offer is made entirely through offer for sale.
b) Distributable pre-tax operating profit in at least three years of the immediately preceding five years.
c) Net worth of at least Rs. 1 crore in each of the preceding three full years.
d) If there has been a change in the company’s name, at least 50% of the revenue for preceding one
year should be from the new activity denoted by the new name
e) The issue size should not exceed 5 times the pre-issue net worth.

5. ELIGIBILITY NORMS
To provide sufficient flexibility and also to ensure that genuine companies do not suffer on account of
rigidity of the parameters, SEBI has provided two other alternative routes to company not satisfying any of
the above conditions, for accessing the primary Market, as under:
Entry Norm II
(a) Issue shall be through book building route, with at least 50% to be mandatory allotted to the
Qualified Institutional Buyers (QIBs).
(b) The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a compulsory
market-making for at least 2 year.

6. QUALIFIED INSTITUTIONAL BUYERS (QIB’S)
1. Public financial institution
2. Scheduled commercial banks
3. Mutual funds
4. Foreign institutional investor registered with SEBI
5. Multilateral and bilateral development financial
institutions
6. Venture capital funds registered with SEBI.
7. Foreign Venture capital investors registered with
SEBI.
8. State Industrial Development Corporations.
9. Insurance Companies registered with the
Insurance Regulatory and Development Authority
(IRDA).
10. Provident Funds with minimum corpus of Rs.25
crores
11. Pension Funds with minimum corpus of Rs. 25
crores
Qualified Institutional Buyers are those institutional investors who are generally perceived to possess
expertise and the financial muscle to evaluate and invest in the capital markets.
They include the following:

7. IF PUBLIC ISSUE IS OF A DEBT INSTRUMENT IRRESPECTIVE OF
MATURITY
 The issuer needs to obtain a rating from a recognized rating agency.
 If above Rs.100 cr. Then ratings from two agencies is required.
 Public issued is not allowed if there are any outstanding financial instrument / right
entitling existing promoters / shareholders if any partly paid up shares are yet to be fully paid
or forfeited.

8. EXCEPTIONS TO ELIGIBILITY NORMS
SEBI (DIP) guidelines have provided certain exemptions from the eligibility norms.
The following are eligible for exemption from entry norms:
1. Private Sector Banks
2. Public sector banks
3. An infrastructure company whose project has been appraised by a PFI or IDFC or IL&FS or a bank which
was earlier a PFI and not less than 5% of the project cost is financed by any of these institutions.
4. Rights issue by a listed company

9. FAST TRACK ISSUE
Fast Track issue is a faster and cost effective method of raising capital by listed companies. Means the
listed companies can access the Indian Primary market for raising the capital through public issue without
complying anything contained in the standard regulations.
1. Listed on BSE or NSE, for at least three years immediately preceding the date of filing of the offer
document.
2. Companies having an excellent track record in redressing Shareholders / Investor Grievances.
3. Average market capitalization ≥ 3000 Crores or more during last one year
4. Annualized Trading Turnover of shares ≥ 2% of the weighted average number of listed shares
during the previous one year
5. No prosecution proceedings or show cause notice issued by SEBI is pending against the company /
its promoters / whole time directors.

10. IPO GRADING
IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI, to the 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. The grade represents a relative assessment of the fundamentals of that issue in
relation to the other listed equity securities in India. Such grading is generally assigned on a five-point
point scale with a higher score indicating stronger fundamentals and vice versa as below.
1. IPO grade 1: Poor fundamentals
2. IPO grade 2: Below-average fundamentals
3. IPO grade 3: Average fundamentals
4. IPO grade 4: Above-average fundamentals
5. IPO grade 5: Strong fundamentals

11. PRICE OF AN ISSUE
 Indian primary market ushered in an era of free pricing in 1992. Following this, the guidelines have
provided that the issuer in consultation with Merchant Banker shall decide the price.
 There is no price formula stipulated by SEBI. SEBI does not play any role in price fixation. The company
and merchant banker are however required to give full disclosures of the parameters which they had
considered while deciding the issue price.
 There are two types of issues
1. Fixed Price
2. Price discovery through book building process
 Denomination of shares
1. Issue Price is Rs 500 or above, FV of Rs 10 or below
2. Issue Price is less than Rs 500, FV is Rs 10
(Not applicable to government companies , corporation, SPV in infrastructure sector : transportation,
agriculture, telecommunication, water management, industrial commercial and social development, power,
petroleum, natural gas, housing etc.)

12. FIXED PRICE ISSUE
1. Price at which the securities are offered and would be allotted is made known in
advance to the investors
2. Demand for the securities offered is known only after the closure of the issue
3. 50 % of the shares offered are reserved for applications below Rs. 2 lakh and the balance
for higher amount applications.
4. Subscription list for public issues shall be kept open for at least 3 working days and not
more than 10 working days.

13. BOOK BUILDING ISSUES
 A 20 % price band is offered by the issuer within which investors are allowed to bid and the final price
is determined by the issuer only after closure of the bidding.
 Demand for the securities offered , and at various prices, is available on a real time basis during the
bidding period.
 In case the price band is revised, the bidding period shall be extended for a further period of three
days, subject to the total bidding period not exceeding thirteen days.
 50 % of shares offered are reserved for QIBS, 35 % for Non Institutional Investors and 15% for Retail
Individual Investors. Retail Individual Investor means an investor who applies or bids for securities of
or for a value of not more than Rs.1,00,000.
 Types of book building issues:
1. 100% Book Building
2. 75% Book Building

14. 100% BOOK BUILDING ISSUES
 Here the whole issue is through book building, and no offer to the public is necessary whatever may
be the size of the issue.
 Out of 100%, maximum 60% will be allotted to the institutional investors like bank, FII’s, Mutual funds
and financial institutions.
 At least 15% of the book built portion shall be allocated on proportionate basis to non institutional
investors i.e., high net worth investors applying for more that 1000 shares.
 Minimum 35% of the shares would be available to RII investors i.e. who apply for a value not more
that Rs, 2,00,000.
 In case the issuer does not have a 3 year profitability track record, then SEBI has restricted the issue
to RII to a maximum of 10% to safeguard small investors. 60% and 30% respectively will be issued
to QIB’s and HNI’s.

15. 75% BOOK BUILDING ISSUE
 In this system, 75% of the net offer to the public is done through the book building process and
balance 25% will be issued to public at the fixed price through book building process.
 The 75% portion is termed as ‘placement proportion category’.
 Issue price for the placement proportion (75%) and the fixed price (25%) should be the same.
 Here, the issuing company has to open bank account with two different banks for collecting of the
application money for the placement proportion and fixed price.
 The placement proportion is closed a day before the opening for the fixed price issue.

16. BOOK BUILDING PROCESS
The company appoints a Book Runner Lead Manager
Book Runner prepares a draft Red Hearing prospectus and sending them to corporate investors
The book runner along with the company decides a price band for the issue, includes the same in
the prospectus and files the prospectus with SEBI and NOC at least 3 days before the opening.
A definite period is set as the bidding period and the book runner spreads awareness through
advertisement, etc.

17. Book runner appoints Syndicate members such as mutual funds, stock brokers,
merchant bankers, etc. They act as an interface between company and investors.
Syndicate members create demand for the issue and ask the investors for the number of
shares and offer price. Book runner underwrites the issue and syndicate members
sub-underwrites the issue.
Order book showing the demand of shares at various prices is constructed by the book
runner. On the basis of which the book runner and the issuer company arrive at the
issue price also known as the market clearing price.
Once the final price is determined, the book runner allocates securities to the
syndicate members and other investors. Allotment of shares happen within 15 days
after the close of the public issue.
The final prospectus is filled within 2 days with the ROC and receipts of
acknowledgement with SEBI. It is mandatory, as per SEBI, for companies to list shares
within 12 days after the closure of public issue.

18. RED HERRING PROSPECTUS
 Red Herring Prospectus is a prospectus, which does not have details of either price or number of
shares being offered, or the amount of issue. This means that in case price is not disclosed, the
number of shares and the upper and lower price bands are disclosed.
 On the other hand, an issuer can state the issue size and the number of shares are determined later.
An RHP for and FPO can be filed with the ROC without the price band and the issuer, in such a case will
notify the floor price or a price band by way of an advertisement one day prior to the opening of
the issue.
 In the case of book-built issues, it is a process of price discovery and the price cannot be determined
until the bidding process is completed.
 Hence, such details are not shown in the Red Herring prospectus filed with ROC in terms of the
provisions of the Companies Act. Only on completion of the bidding process, the details of the final
price are included in the offer document. The offer document filed thereafter with ROC is called a
prospectus.

19. GREEN SHOE OPTION
 Green Shoe option means an option of allocating shares in excess of the shares included in the
public issue and operating a post-listing price stabilizing mechanism for a period not exceeding 30
days in accordance with the provisions of Chapter VIIIA of DIP Guidelines, which is granted to a
company to be exercised through a Stabilizing Agent.
 This is an arrangement wherein the issuer would be over allotted to the extent of a maximum of
15% of the issue size.
 From an investor's perspective, an issue with green shoe option provides more probability of getting
shares and also that post listing price may show relatively more stability as compared to market.
 A resolution is passed in the general meeting authorizing the public issue.

20. GREEN SHOE OPTION
 The company appoints one of the lead book runners as the Stabilizing Agent (SA), who will be
responsible for the price stabilizing process.
 The stabilizing process is available for a period of 30 days from the date on which trading permission is
recognised by the stock exchange.
 The basic purpose of green shoe is to act a stabilizing agent if the issue is over subscribed.
 The promoter lend shares to SA so that the market price of the share doesn’t shoot up. If the price in
the market goes below the issue prize, SA buys shares from the market so the price rises to the desired
level.
 Once the stabilization is complete the shares are returned to the promoters immediately or not later
that two working days, who does not derive any profit from the same.

21. GREEN SHOE OPTION
 It can only be exercised if a resolution has been passed in the general meeting held for approving
public issue.
 It requires the stabilizing agent to open a special account, distinct from the public issue account with
a bank.
 A special account for keeping the depositories is also opened for the SA.
 SA determines the time and quantity of shares.
 Daily report is given to the stock exchange and the record is kept for three years.
 The issue price is given to the company and the balance goes to the investor protection fund.

22. E-IPO
 A company proposing to issue capital to public through the on-line system of the stock exchange for
offer of securities can do so if it complies with the requirements under Chapter 11A of DIP Guidelines.
 The appointment of various intermediaries by the issuer includes a prerequisite that such
members/registrars have the required facilities to accommodate such an online issue process.
 The issuing company enters into an agreement with a stock exchange.
 It appoints brokers to collect money, pay for shortfall and let them charge commission.
 The issuer appoints registrar to issue the securities and the listing goes live.

23. E-IPO
 The listing is advertised after the offer document is submitted and before the opening of the issue.
 The offer document contains the date for opening and closing, the method of allotment and the
names of the brokers.
 An applicant may approach the broker or apply directly through the e-IPO website of the stock
exchange.
 The securities are held in dematerialized form in demat account.
 The issue should be more than Rs. 10 Cr. and the issuer can collect upto 100% and deposit

24. E-IPO
 Basis of allocation is fair and transparent.
 The shares go from the registrar to the broker to the client .The broker acts as the intermediary.
 The registrar hands over the successful application and refunds others.
 The broker makes good for the shortfall in case the minimum subscription is not received.
 The shares are issued within 15 days.
 A record for the same is maintained for 5 years.
 SEBI has the right to inspection for the issue.