FM session 3

1. SHARES

2. SHARES
Types
Authorized Share Capital :Authorized share capital is the number
of ordinary shares capital that a firm can raise without further
shareholder approval.
Issued Capital : The portion of the authorized capital offered by
the company to the investors is the issued capital.
Subscribed Share Capital : Subscribed share capital is the number
of share (capital) outstanding.
Paid-up Capital :The actual amount paid by the shareholders is
the paid-up capital.
Par (face) Value : Par (face) value is a value arbitrarily placed on
the shares.

3. FEATURES OF SHARES
Residual claim to income
Residual claim on assets
Right to control
Pre-emptive rights
Limited liability.

4. LEGAL FRAMEWORK
Legal
Framewor
k
Companies
Act,
1956 Securities
And
Exchange
Board of
India Act,
1992
The
Depositori
es
Act, 1996All the
Rules &
Regulation
s
Listing
Agreemen
ts
Securities
Contract
(Regulation
)
Act, 1956

5. FUND RAISING OPTIONS
Initial Public
Offer
An Offer of SPECIFIED
SECURITIES by an unlisted
issuer to the public for
subscription and includes offer
for sale of specified securities
to the public by any existing
holders of such securities in an
unlisted issuer.
RIGHTS ISSUE
An offer of SPECIFIED
SECURITIES by a listed
issuer to the shareholders of the
issuer as on the record date
fixed for the said purpose.
FPO
An offer of SPECIFIED
SECURITIES by a listed
issuer to the public for
subscription and includes an
offer for sale of specified
securities to the public by
any existing holders of such
securities in a listed issuer.
BONUS
ISSUES.
A premium or gift, usually
of stock, by a corporation to
shareholders’ or “an extra
dividend paid to
shareholders in a joint stock
company from surplus
profit.”
QIP
A designation of a securities
issue given by the Securities
and Exchange Board of
India (SEBI) that allows an
Indian-listed company to raise
capital from its domestic
markets without the need to
submit any pre-issue filings to
market regulators.
Preferential
Allotment
An issue of SPECIFIED
SECURITIES by a listed issuer to
any select person or group of persons
on a private placement basis and does
not include an offer of specified
securities made through a public
issue, rights & bonus issue, ESOP,
ESPS or QIP or sweat equity or
Depository receipts.
Debt Securities
A non-convertible debt
securities (NCD) which creates
or acknowledges indebtedness,
and include debenture, bonds
and such other securities of a
body corporate or any statutory
body, security receipts and
securitized debt instruments.
IDR
An Indian Depository
Receipt is an instrument
denominated in Indian
Rupees in the form of a
depository receipt created
by a Domestic Depository
(custodian of securities
registered with the SEBI)
against the underlying
equity of issuing company to
enable foreign companies to
raise funds from the Indian
securities Markets.

6. Investor Categories
QIB means;
A MF, VCF, FVCF
Foreign Institutional investor
Public Financial Institution
Scheduled commercial bank
Multilateral and bilateral
development financial institution
State Industrial development
corporation
Insurance Company
Provident Fund ( Min Corpus 25 Cr
)
Pension fund ( R 25 Cr )
National Investment Fund
Insurance funds setup and
managed by the Dept of Posts,
India”
Retail Investor
means an investor
who applies or bids
for specified
securities for a
value of not more
than
Rs. 2 Lakh
Non Institutional
investor means an
investor other than
a retail individual
investor and
qualified
institutional buyer

7. Key Parties and Responsibilities for an IPO
Book Running
Lead Manager
Book Runners’
Legal Counsel
Broker /
Syndicate
Advertising
Agency
Printers
IPO
Grading
Agency
Registrars
Escrow
Bankers
Issuer
Company /
Selling
Shareholder
Arrangement
Coordination
Legal
Counsels

9. Book building
 Book-building is a process of price discovery
used in public offers. The issuer sets a floor
price and a band within which the investor is
allowed to bid for shares.
 The upper price of the band can be a maximum
of 1.2 times the floor price.
 The investor had to bid for a quantity of shares
he wished to subscribe to within this band.

10. Book building
 Bids to remain open for at least 5 days
 Only electronic bidding is permitted
 Bidding demand is displayed at the end of
every day.
 The lead manager analyses the demand
generated and determines the issue price or
cut-off price in consultation with the issuer.

11. Cut-off price
 The cut-off price is the price discovered by
the market. It is the price at which the
shares are issued to the investors.
 Investors bidding at a price below the cut-off
price are ignored.

12. Example of Book Building
 Let’s say a company wants to issue
10,00,000 shares. The floor price for one
share of face value, Rs10, is Rs48 and the
band is between Rs48 and Rs55.
 At Rs55, on the basis of bids received, the
investors are ready to buy 2,00,000 shares.
So the cut-off price can not be set at Rs55
as only 2 lacs shares will be sold.

13.  So as a next step, the price is lowered to
Rs54. At Rs54, investors are ready to buy 4
lacs shares. So if the cut-off price is set at
Rs54, 6 lacs shares will be sold. This still
leaves 4 lacs shares to be sold.

14.  The price is now lowered to Rs53. At Rs53,
investors are ready to buy 4 lacs shares.
Now if the cut-off price is set at Rs53, all ten
lacs shares will be sold.
 Investors who had applied for shares at
Rs55 and Rs54 will also be issued shares at
Rs53.

15. Book Building
 Objective is efficient price discovery.
 Asymmetric information between promoter and
investors.
 Investors always remain in dark.

16. Private placement
 It involves issues of securities to a limited number
of subscribers, such as banks, FIs, MFs and high
net worth individual.
 It is arranged through a merchant banker, an agent
of issuers, who brings together the issuers and
investor(s).
 Securities offered are exempt from public disclosers
regulations and registration requirements of the
regulatory body.
 This market is preferred by small and medium size
firms, particularly new entrants who do not have
track record of performance.

17. Private Placement vs Public Issues
Private Placement Public Issues
1. Issues are offered to mature
and sophisticated institutional
investors.
2. No discloser requirements.
3. Issues are not screened and
this increases the risk.
1. Issues are primarily offered to
retail investors.
2. Discloser requirement is
there.
3. All issues are screened.

18. DEMATERIALISATION OF SHARES:
 Trading in the shares of the Company is
compulsory in dematerialized form for all
investors.
 The Company has, therefore, enlisted its
shares with both the depositories, viz, National
Securities Depository Limited (NSDL) and
Central Depository Services India Limited
(CDSL).

19. What is Dematerialization?
 Dematerialisation is a process by which the
physical share certificates of an investor are
taken back by the Company and an
equivalent number of securities are credited
in electronic form at the request of the
investor.
 An investor will have to first open an
account with a Depository Participant so
that the dematerialised holdings can be
credited into that account.
 This is very similar to opening a Bank
Account.

20. What is a Depository?
 A Depository (NSDL & CDSL) is an
organisation like a Central Bank where the
securities of a shareholder are held in the
electronic form at the request of the
shareholder through the medium of a
Depository Participant.

21. Who is a Depository Participant?
 A Depository Participant (DP) is your
representative (agent) in the depository
system providing the link between the
Company and you through the Depository.
 While the Depository can be compared to a
Bank, DP is like a branch of your bank with
whom you can have an account.
 According to SEBI guidelines, Financial
Institutions like banks, stockbrokers etc. can
become participants in the depository.

22. How does the Depository System
operate?
 The Depository System functions very much
like the banking system.
 A bank holds funds in accounts whereas a
Depository holds securities in accounts for
its clients.
 A Bank transfers funds between accounts
whereas a Depository transfers securities
between accounts.
 In both systems, the transfer of funds or
securities happens without the actual
handling of funds or securities.