Investment Management notes by Mr.

Yogesh Soni

Method of Floatation of Securities in Primary Market/ Methods of

Marketing Securities -
One can issue the securities in the primary market with the help of the following methods:

1. Public Issue through Prospectus

The first method of floatation of securities in a primary market is ‘Public Issue through
Prospectur’. Under this method, a company issues a prospectus to inform the general public
and attract them to invest in the company. The prospectus of a company contains information
regarding the purpose for which it wants to raise funds, its past financial performance, its
background, and future prospects. The information provided in the prospectus helps the
general public, get to know about the earning potential of the company and the risks involved
in investing in the company. Based on this information, the public decides whether or not
they want to invest in the company. With the help of an IPO, a company can easily approach
a large number of persons and can approach the public at large. Sometimes under this
method, the companies take help of the intermediaries like underwriters, brokers, and bankers
for raising capital from the general public.

2. Offer for Sale

The second method is ‘Offer for Sale’, and under this method, the new securities are offered
to the general public not by the company directly, but by an intermediary who has bought a
whole lot of securities from the company. These intermediaries are generally the firms of
brokers. As the intermediaries offer the new securities to the general public, the company is
saved from the complexities and formalities of issuing the securities directly to the public.

The sale of securities through Offer for Sale takes place in two steps:

Firstly, when the company issues the new securities to the intermediary at face value.

Secondly, when the intermediaries issue securities to the general public at a higher price with
the motive of earning profit.

3. Private Placement

It is a method in which a company sells securities to an intermediary at a fixed price, and then
the intermediaries sell these securities to selected clients at a higher price instead of the
general public. The company issuing securities issues a prospectus providing details about the
objective and future prospects of the company so that the reputed clients will prefer to
purchase the securities from the intermediary. The selected clients to whom securities are
issued by the intermediaries are LIC, UTI, General Insurance, etc. As the company does not
have to incur expenses on manager fees, brokerage, underwriter fees, the listing of the
company’s name on the stock exchange, agent’s commission, etc., it is considered as a cost-
saving method. This method is preferred by small-scale companies and new companies that
cannot afford to raise funds from the general public.
 Investment Management notes by Mr. Yogesh Soni

4. Right Issue

Under this method, new shares are issued to the existing shareholders of a company. It is
known as the right issue because it is the pre-emptive right of the shareholders that the
company must offer them the new issue of shares before subscribing them to outsiders. The
existing shareholders have the right to subscribe to the new shares in the proportion of the
shares they already hold.

5. Bonus issue

When a company issues fully paid additional shares to its existing shareholders for free. The
company issues shares from its free reserves or securities premium account. These shares are
a gift for its current shareholders. However, the issuance of bonus shares does not require
fresh capital.

6. Further Public Offer or Follow on Offer or FPO.

When a listed company on the stock exchange announces fresh issues of shares to the general
public. The listed company does this to raise additional funds.

7. Stock Option or employees Stock Option Scheme (ESOP)

A method of marketing the securities of a company whereby its employees are encouraged to
take up shares and subscribe to it is known as stock option. It is a voluntary scheme on the
part of the company to encourage employees participation in the company. The scheme also
offers an incentive to the employees to stay in the company.

What Is The Process Of IPO In India

The process of IPO in India can be complex involving several regulatory requirements and
legal procedures. To help you understand this process, let's break down the steps involved in
launching an IPO in India.

Step 1: Hire An Investment Bank

The first step in the process of IPO in India is to hire an investment bank or a team of
underwriters. The company typically works with more than one bank to get the best possible
deal. The role of the underwriters is to provide guidance and assistance in preparing for the
IPO. They analyse the company's financial situation, assets and liabilities, and help the
company to determine the amount of capital to be raised from the IPO. An underwriting
agreement is then signed, which outlines the details of the deal, including the amount to be
raised and the securities to be issued.

The underwriters also provide their expertise in pricing the shares to be issued, and the type
of securities that will be offered. They also help the company to determine the optimal time
to launch the IPO. However, the underwriters assume responsibility for raising the capital,
they do not bear all the risks associated with the process.
 Investment Management notes by Mr. Yogesh Soni

Step 2: Prepare Rhp And Register With The Sebi

After hiring an investment bank, the next step in the initial public offering process is to
prepare the Red Herring Prospectus (RHP) and register with SEBI. The RHP is a preliminary
prospectus that contains all the necessary information about the company, including financial
data, management details, business plans, and risk reports. It is called the Red Herring
Prospectus because the initial details of the prospectus contain a warning that it is not a final
prospectus, and certain details may change.

The RHP must be filed with the SEBI along with the registration statement as per the
Companies Act. The registration statement includes details of the securities that will be
issued, the amount that will be raised, and how the funds will be utilised. The RHP must also
declare how the business will use the funds it will raise from the IPO.

After submitting the registration statement and RHP to the local Registrar of Companies
(ROC) at least three days before the IPO is opened to the public for bidding, the company can
make an application for the IPO to the SEBI. The SEBI scrutinises the registration statement
and RHP to make sure that the business has disclosed every detail that a potential investor
should know. If the SEBI finds any discrepancies, it will send back the documents with
comments, and the company will have to work on them and file for registration again.

Step 3: Application To Stock Exchange

Once the company has prepared its registration statement and the RHP has been approved by
the SEBI, the next step in the process of ipo is to apply for listing on the stock exchange. The
company must decide on the stock exchange where it wants to list its shares, and then make
an application for the IPO.

The application for listing on the stock exchange is a detailed process that involves a lot of
paperwork. The company must submit various documents to the stock exchange, including
copies of the prospectus, the registration statement, and any other relevant documents. The
stock exchange will then review the application and decide whether or not to approve it.

Step 4: Go On A Road show

Before the IPO goes public, the company will embark on a road show, which usually lasts
around two weeks. During this time, the executives of the company will travel around the
country to major financial centres, meeting with potential investors, mostly QIBs, to market
the upcoming IPO. The objective of this marketing activity in the process of ipo is to create
positive interest in the IPO and to present the facts and figures that support the company's
potential for growth and profitability.

Road shows usually involve presentations to institutional investors, such as mutual funds and
pension funds, as well as to high net worth individuals. During this stage, the company may
also offer bigger organisations the opportunity to purchase the company stocks at a price set
before the stock goes public. This allows the company to raise additional capital and establish
valuable relationships with key investors.
 Investment Management notes by Mr. Yogesh Soni

Step 5: IPO Is Priced

After concluding the roadshow, the company needs to decide on the offering price for its
shares to the public, which is a crucial factor that can affect the success of the offering to a
great extent. The company has two methods at its disposal to determine the IPO price:

● Fixed Price Method

In this method, both the company and the underwriter work together to fix a price for their
shares. The company will take into account its liabilities, the target capital to be raised, and
the demand for stocks, among other factors, to come up with a price that is attractive to
potential investors.

● Book Building Method

The underwriter and the company will establish a range of prices in which potential investors
can submit their bids. The final price is dependent on the demand for the shares, the bidding
received, and the target capital to be achieved. The company is allowed to set the cap price at
20% higher than the floor price. Books are normally open for three days during which bidders
can revise their bids. Issuers often prefer book-building as it allows better price discovery.
The final price of the issue is called the Cut-off Price.

Step 6: Available To The Public

Once the company has completed the roadshow and the pricing of shares, it is time to make
the IPO available to the public. The company announces the availability of IPO forms on a
specified date, and these forms can be obtained from designated banks or brokers. Interested
investors fill in the details in the form and submit it along with a cheque or electronically.
The SEBI has set a period of five working days for the availability of IPO forms to the
public.

The timing of making the IPO available to the public is a critical decision for the company. It
is essential to choose the right time to offer shares to maximise earnings from the sale. Some
companies may have their own economic timeline for going public, and they may avoid
entering the market at the same time as giant companies, fearing that the larger companies
may steal the limelight.

Once the IPO bidding is closed, the company must submit the final prospectus to both the
Registrar of Companies (ROC) and SEBI. The prospectus is required to include both the
amount of shares being allocated and the final issue price at which the sale is concluded.

Step 7: Going Through With The IPO

Once the IPO price has been determined, the stakeholders and underwriters collaborate to
allocate the number of shares that each investor will receive. Generally, investors will receive
full securities unless they are oversubscribed. The shares are then credited to their demat
account. In case the shares are oversubscribed, the refund is given to the investor. It is crucial
 Investment Management notes by Mr. Yogesh Soni

for the business to ensure that its internal investors do not trade and manipulate the stock
prices of the IPO.

The allotment of IPO shares to bidders takes place within ten days from the final date of
bidding. In case of oversubscription, the shares are assigned proportionately among the
applicants. For example, if the oversubscription is five times the allocated number of shares,
an application for ten lakh shares will be granted only two lakh shares. Following the
allotment of securities, the Company's IPO will commence trading in the stock market. It is
imperative to adhere to SEBI regulations when conducting the allotment process.

How to Apply For an Initial Public Offering (IPO)

To apply for an IPO, the investor needs to choose for the IPO and apply for it. Next, the
investor needs the following accounts –

 Demat account – it is mandatory for an investor to have a Demat account and hold the
shares in electronic form.

 Bank account – for making the payment for shares. It is done via Application
Supported by Blocked Amount (ASBA) facility.

 Trading account – one can open this account with any of the brokerage firms which
offer trading facilities.

The following is the process for applying for an IPO online –

1. Log in to the trading account and select the IPO for investing.

2. Enter the price and number of lots of the shares

3. Fill the application form and provide UPI Id.

4. Approve the funds request through the UPI app

5. Application is successful.

Once the issue closes, the company determines the share price and allot shares. After 15 days,
the share allotment happens to the investors. If the investors receive the shares, the amount is
deducted from the bank account.

After the allotment process, investors receive a Confirmation Allotment Note (CAN). The
shares are visible in the Demat account. In case, the investors do not receive the allotment,
the amount blocked is released back to them.

Finally, the shares issued during the IPO are listed on the stock exchange and available for
trading.