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What is an Initial Public Offering?
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Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue
of securities or an offer for sale of its existing securities or both for the first
time to the public. This paves way for listing and trading of the issuer’s securities.
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What is a Rights Issue?
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Rights Issue (RI) is when a listed company which proposes to issue fresh securities
to its existing shareholders as on a record date. The rights are normally offered
in a particular ratio to the number of securities held prior to the issue. This
route is best suited for companies who would like to raise capital without diluting
stake of its existing shareholders unless they do not intend to subscribe to their
entitlements.
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What is a Preferential Issue?
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A preferential issue is an issue of shares or of convertible securities by listed
companies to a select group of persons under Section 81 of the Companies Act, 1956
which is neither a rights issue nor a public issue. This is a faster way for a company
to raise equity capital. The issuer company has to comply with the Companies Act
and the requirements contained in Chapter pertaining to preferential allotment in
SEBI (DIP) guidelines which inter-alia include pricing, disclosures in notice etc.
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What is the difference between an offer document, Red a prospectus and a“draft
offer doc”?
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“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 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. “Draft Offer document”
means the offer document in draft stage. The draft offer documents are filed with
SEBI, atleast 21 days prior to the filing of the Offer Document with ROC/ SEs. SEBI
may specifies changes, if any, in the draft Offer Document and the issuer or the
Lead Merchant banker shall carry out such changes in the draft offer document before
filing the Offer Document with ROC/ SEs. The Draft Offer document is available on
the SEBI website for public comments for a period of 21 days from the filing of
the Draft Offer Document with SEBI.
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What is a Red Herring Prospectus?
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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.
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What is an Abridged Prospectus?
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Abridged Prospectus means the memorandum as prescribed in Form 2A under sub-section
(3) of section 56 of the Companies Act, 1956. It contains all the salient features
of a prospectus. It accompanies the application form of public issues.
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What is a Green-shoe Option?
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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 VIII
A of DIP Guidelines, which is granted to a company to be exercised through a Stabilizing
Agent. This is an arrangement wherein the issue 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.
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Who decides the price of an issue?
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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 one where company and Lead
Manager (LM) fix a price (called fixed price) and other, where the company and LM
stipulate a floor price or a price band and leave it to market forces to determine
the final price (price discovery through book building process).
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What is Fixed Price offer?
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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 / ROCs.
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What is book building?
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Securities and Exchange Board of India (SEBI) guidelines define book building as
"a process undertaken by which a demand for the securities proposed to be issued
by a body corporate is elicited and built-up and the price for such securities is
assessed for the determination of the quantum of such securities to be issued by
means of a notice, circular, advertisement, document or information memoranda or
offer document". Book building is basically a process used in Public Issue for efficient
price discovery. It is a mechanism where, during the period for which the Public
Issue is open, bids are collected from investors at various prices within a Price
Band. The offer price is determined after the bid closing date.
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What is the main difference between offer of shares through book building
and offer of shares through normal public issue?
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Price at which securities will be allotted is not known in case of offer of shares
through book building while in case of offer of shares through normal public issue,
price is known in advance to investor. In case of Book Building, the demand can
be known everyday as the book is built. But in case of the public issue the demand
is known at the close of the issue.
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What is the number of days for which bid remains open in book building?
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Book remains open for a minimum three days in the book building process.
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What is a price band?
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The red herring prospectus may contain either the floor price for the securities
or a price band within which the investors can bid. The spread between the floor
and the cap of the price band shall not be more than 20%. In other words, it means
that the cap should not be more than 120% of the floor price. The price band can
have a revision and such a revision in the price band shall be widely disseminated
by informing the stock exchanges, by issuing press release and also indicating the
change on the relevant website and the terminals of the syndicate members. 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 ten days.
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What are floor and ceiling prices in book building?
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When a company offers shares to the public through the book building process, it
fixes a price band, which sets the minimum and maximum price limits at which the
bids can be made by the investors for acquiring the shares of the company. While
the floor price symbolizes the minimum price at which the investors can bid for
the shares, ceiling price is the maximum price at which the investor can make bids.
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What is 'Cut-Off' price?
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The Cut-off option is an option given only to the Retail Individual Bidders indicating
their agreement to bid and purchase at the final Issue Price as determined at the
end of the Book Building Process.
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How is the Retail Investor defined as?
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‘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.
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How is the Non Institutional Bidder defined as?
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If in case your investment exceeds Rs.1, 00,000/- you will need to make an application
as Non Institutional Bidder .
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Can a retail investor also bid in a book-built issue?
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Yes. He can bid in a book-built issue for a value not more than Rs.1,00,000. Any
bid made in excess of this will be considered in the HNI category.
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Can investor make multiple applications?
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No. You can make only one application under one given demat account for a given
IPO .
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What is Basis of Allocation/Basis of Allotment?
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After the closure of the issue, the bids received are aggregated under different
categories i.e., firm allotment, Qualified Institutional Buyers (QIBs), Non-Institutional
Buyers (NIBs), Retail, etc. The oversubscription ratios are then calculated for
each of the categories as against the shares reserved for each of the categories
in the offer document. Within each of these categories, the bids are then segregated
into different buckets based on the number of shares applied for. The oversubscription
ratio is then applied to the number of shares applied for and the number of shares
to be allotted for applicants in each of the buckets is determined. Then, the number
of successful allottees is determined. This process is followed in case of proportionate
allotment. In case of allotment for QIBs, it is subject to the discretion of the
post issue lead manager.
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Can I know the number of shares that would be allotted to me?
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In case of fixed price issues, the investor is intimated about the Confirmatory
Allotment Note (CAN)/Refund order within 30 days of the closure of the issue. In
case of book built issues, the basis of allotment is finalized by the Book Running
lead Managers within 2 weeks from the date of closure of the issue. The registrar
then ensures that the demat credit or refund as applicable is completed within 15
days of the closure.
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How do I know if I am allotted the shares? And by what timeframe will I get
a refund if I am not allotted?
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The investor is entitled to receive a Confirmatory Allotment Note (CAN) in case
he has been allotted shares within 15 days from the date of closure of a book Built
issue. The registrar has to ensure that the demat credit or refund as applicable
is completed within 15 days of the closure of the book built issue.
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How long will it take after the issue for the shares to get listed?
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The listing on the stock exchanges is done within 7 days from the finalization of
the issue. Ideally, it would be around 3 weeks after the closure of the book built
issue. In case of fixed price issue, it would be around 37 days after closure of
the issue.
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What are Bonds?
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A bond is a debt security, by which you are lending money to a government, municipality,
corporation, or other entity known as the issuer.
In return for the loan, the issuer promises to pay you a specified rate of interest
during the life of the bond and to repay the face value of the bond (the principal)
when it matures or becomes due.
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Why Invest in Bonds?
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Because bonds typically have a predictable stream of payments and repayment of principal,
many people invest in them to preserve and increase their capital or to receive
dependable interest income.
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What should be the key Bond Investment Considerations?
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There are a number of key variables to look at when investing in bonds: the bond’s
maturity, redemption features, credit quality, interest rate, price and yield. Together,
these factors help determine the value of your bond investment and the degree to
which it matches your financial objectives.
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What is meant by the term Face Value?
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Securities are generally issued in denominations of 10, 100 or 1000. This is known
as the Face Value or Par Value of the security.
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What is the Coupon rate of the Security?
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The Coupon rate is simply the interest rate that every debenture/Bond carries on
its face value and is fixed at the time of issuance. For example, a 10% p.a coupon
rate on a bond/debenture of Rs 100 implies that the investor will receive Rs 10
p.a. The coupon can be payable monthly, quarterly, half-yearly, or annually or cumulative
on redemption
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What is Interest Rate?
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Bonds pay interest that can be fixed, floating or payable at maturity. Most debt
securities carry an interest rate that stays fixed until maturity and is a percentage
of the face (principal) amount. Typically, investors receive interest payments semiannually.
For example, a Rs.1000 bond with an 8% interest rate will pay investors Rs.80 a
year, in payments of Rs.40 every six months. When the bond matures, investors receive
the full face amount of the bond—Rs.1, 000.
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What is Floating Interest rate?
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Some sellers and buyers of debt securities prefer having an interest rate that is
adjustable, and more closely tracks prevailing market rates. The interest rate on
a floating—rate bond is reset periodically in line with changes in a base interest—rate
index, such as the rate on Treasury bills.
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What is a zero Coupon Bond?
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Some bonds have no periodic interest payments. Instead, the investor receives one
payment at maturity that is equal to the purchase price (principal) plus the total
interest earned, compounded semiannually at the (original) interest rate. Known
as zero coupon bonds, they are sold at a substantial discount from their face amount.
For example, a bond with a face amount of Rs.10, 000 maturing in 5 years might be
purchased for about Rs.7130. At the end of the 5 years, the investor will receive
Rs.10, 000. The difference between Rs.10, 000 and Rs.7, 130 represents the interest,
based on an interest rate of 7%, which compounds automatically until the bond matures.
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What do you mean by the Maturity of the bond?
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Securities are issued for a fixed period of time at the end of which the principal
amount borrowed is repaid to the investors. The date on which the term ends and
proceeds are paid out is known as the Maturity date. It is specified on the face
of the instrument. Maturity ranges are often categorized as follows:
 Short—term notes: maturities
of up to five years
Intermediate notes/bonds:
maturities of five to 12 years
Long—term bonds: maturities
of 12 or more years
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What is redemption and what are the various Redemption Features?
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On reaching the date of maturity, the issuer repays the money borrowed from the
investors. This is known as Redemption or Repayment of the bond/debenture.
Call Provisions:
Some bonds have redemption, or “call” provisions that allow or require the issuer
to repay the investors’ principal at a specified date before maturity. Bonds are
commonly “called” when prevailing interest rates have dropped significantly since
the time the bonds were issued.
Puts: Conversely,
some bonds have “puts,” which allow the investor the option of requiring the issuer
to repurchase the bonds at specified times prior to maturity. Investors typically
exercise this option when they need cash for some purpose or when interest rates
have risen since the bonds were issued. They can then reinvest the proceeds at a
higher interest rate.
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How is the Price of the bond calculated?
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The price paid for a bond is based on a whole host of variables, including interest
rates, supply and demand, credit quality, maturity and tax status. Newly issued
bonds normally sell at or close to their face value. Bonds traded in the secondary
market, however, fluctuate in price in response to changing interest rates. When
the price of a bond increases above its face value, it is said to be selling at
a premium. When a bond sells below face value, it is said to be selling at a discount.
When prevailing interest rates rise, prices of outstanding bonds fall to bring the
yield of older bonds into line with higher—interest new issues.When prevailing interest
rates fall, prices of outstanding bonds rise, until the yield of older bonds is
low enough to match the lower interest rate on new issues.
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What is the Yield on a Bond?
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Yield is the return you actually earn on the bond—based on the price you paid and
the interest payment you receive. There are basically two types of bond yields you
should be aware of: current yield and yield to maturity or yield to call.
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What is Current Yield?
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Current yield is the annual return on the amount paid for the bond and is derived
by dividing the bond’s interest payment by its purchase price. If you bought at
Rs.1, 000 and the interest rate is 8% (Rs.80), the current yield is 8% (Rs.80 ÷
Rs.1, 000). If you bought at Rs.800 and the interest rate is 8% (Rs.80), the current
yield is 10% (Rs.80 ÷ Rs.800).
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What is Yield to Maturity/Yield to Call?
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Yield to maturity and yield to call, tell you the total return you will receive
by holding the bond until it matures or is called. It also enables you to compare
bonds with different maturities and coupons. Yield to maturity equals all the interest
you receive from the time you purchase the bond until maturity (including interest
on interest at the original purchasing yield), plus any gain (if you purchased the
bond below its par, or face, value) or loss (if you purchased it above its par value).
Yield to call is calculated the same way as yield to maturity, but assumes that
a bond will be called and that the investor will receive face value back at the
call date.
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What is Yield Curve?
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The relationship between time and yield on a homogenous risk class of securities
is called the Yield Curve. The relationship represents the time value of money -
showing that people would demand a positive rate of return on the money they are
willing to part today for a payback into the future. A yield curve can be positive,
neutral or flat. A positive yield curve, which is most natural, is when the slope
of the curve is positive, i.e. the yield at the longer end is higher than that at
the shorter end of the time axis. This result, as people demand higher compensation
for parting their money for a longer time into the future. A neutral yield curve
is that which has a zero slope, i.e. is flat across time. This occurs when people
are willing to accept more or less the same returns across maturities. The negative
yield curve (also called an inverted yield curve) is one of which the slope is negative,
i.e. the long term yield is lower than the short term yield.
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How are the Interest Rates and Maturity related?
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Changes in interest rates don’t affect all bonds equally. The longer it takes for
a bond to mature, the greater the risk that prices will fluctuate along the way
and that the fluctuations will be greater—and the more the investors will expect
to be compensated for taking the extra risk. There is a direct link between maturity
and yield.
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Who are institutional investors in the Indian Debt Market?
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Institutional investors operating in the Indian Debt Market are: Banks, Insurance
companies, Provident funds, Mutual funds, Trusts, Corporate, treasuries, Foreign
investors (FIIs)
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What factors determine interest rates?
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When we talk of interest rates, there are different types of interest rates - rates
that banks offer to their depositors, rates that they lend to their borrowers, the
rate at which the Government borrows in the bond/G-Sec, market, rates offered to
small investors in small savings schemes like NSC rates at which companies issue
fixed deposits etc.
The factors which govern the interest rates are mostly economy related and are commonly
referred to as macroeconomic. Some of these factors are:
Demand for money
Government borrowings
Supply of money
Inflation rate
The Reserve Bank of
India and the Government policies which determine some of the variables mentioned
above.
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What is record date/shut period?
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G-Sec/Bonds/Debentures keep changing hands in the secondary market. Issuer pays
interest to the holders registered in its register on a certain date. Such date
is known as record date. Securities are not transferred in the books of issuer during
the period in which such records are updated for payment of interest etc. Such period
is called as shut period.
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What do you mean by "Cum-Interest" and "Ex-Interest"?
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Cum-interest means the price of security is inclusive of the interest accrued for
the interim period between last interest payment date and purchase date. Security
with ex-interest means the accrued interest has to be paid separately
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What are G-Secs?
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G-Secs or Government of India dated Securities are Rupees One hundred face-value
units / debt paper issued by Government of India in lieu of their borrowing from
the market. These can be referred to as certificates issued by Government of India
through the Reserve Bank acknowledging receipt of money in the form of debt, bearing
a fixed interest rate (or otherwise) with interests payable semi-annually or otherwise
and principal as per schedule, normally on due date on redemption
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What are ‘Gilt edged’ securities?
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The term government securities encompass all Bonds & T-bills issued by the Central
Government, state government. These securities are normally referred to, as "gilt-edged"
as repayments of principal as well as interest are totally secured by sovereign
guarantee.
'Gilt Securities' are issued by the RBI, the central bank, on behalf of the Government
of India. Being sovereign paper, gilt securities carry absolutely no risk of default.
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What is Inflation linked bond?
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These are bonds for which the coupon payment in a particular period is linked to
the inflation rate at that time - the base coupon rate is fixed with the inflation
rate (consumer price index-CPI) being added to it to arrive at the total coupon
rate. The idea behind these bonds is to make them attractive to investors by removing
the uncertainty of future inflation rates, thereby maintaining the real value of
their invested capital.
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What is SDL?
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State government securities (State Loans): These are issued by the respective state
governments but the RBI coordinates the actual process of selling these securities.
Each state is allowed to issue securities up to a certain limit each year. The planning
commission in consultation with the respective state governments determines this
limit. Generally, the coupon rates on state loans are marginally higher than those
of GOI-Secs issued at the same time.
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What is a PSU Bond?
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Public Sector Undertaking Bonds (PSU Bonds): These are Medium or long term debt
instruments issued by Public Sector Undertakings (PSUs). The term usually denotes
bonds issued by the central PSUs (i.e. PSUs funded by and under the administrative
control of the Government of India). Most of the PSU Bonds are sold on Private Placement
Basis to the targeted investors at Market Determined Interest Rates.
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What is a Debenture?
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A Debenture is a debt security issued by a company (called the Issuer), which offers
to pay interest in lieu of the money borrowed for a certain period. In essence it
represents a loan taken by the issuer who pays an agreed rate of interest during
the lifetime of the instrument and repays the principal normally, unless otherwise
agreed, on maturity. These are long-term debt instruments issued by private sector
companies. These are issued in denominations as low as Rs 1000 and have maturities
ranging between one and ten years.
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What is the difference between a bond and a debenture?
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Long-term debt securities issued by the Government of India or any of the State
Government’s or undertakings owned by them or by development financial institutions
are called as bonds. Instruments issued by other entities are called debentures.
The difference between the two is actually a function of where they are registered
and pay stamp duty and how they trade.
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What are the different types of debentures?
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Debentures are divided into different categories on the basis of Convertibility
of the instrument and security
On the basis of convertibility, debentures are classified into:
Non Convertible Debentures
(NCD): These instruments retain the debt character and can not be converted
in to equity shares
Partly Convertible Debentures
(PCD): A part of these instruments are converted into Equity shares in the
future at notice of the issuer. The issuer decides the ratio for conversion. This
is normally decided at the time of subscription.
Fully convertible Debentures
(FCD): These are fully convertible into Equity shares at the issuer's notice.
The ratio of conversion is decided by the issuer. Upon conversion the investors
enjoy the same status as ordinary shareholders of the company.
Optionally Convertible
Debentures (OCD): The investor has the option to either convert these debentures
into shares at price decided by the issuer/agreed upon at the time of issue.
On the basis of Security, debentures are classified into:
Secured Debentures:
These instruments are secured by a charge on the fixed assets of the issuer company.
So if the issuer fails on payment of the principal or interest amount, his assets
can be sold to repay the liability to the investors
Unsecured Debentures:
These instrument are unsecured in the sense that if the issuer defaults on payment
of the interest or principal amount, the investor has to be along with other unsecured
creditors of the company.
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Who Regulates Indian G-Secs and Debt Market?
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RBI: The Reserve Bank of India is the main regulator for the Money Market.
Reserve Bank of India also controls and regulates the G-Secs Market. Another major
area under the control of the RBI is the interest rate policy. Earlier, it used
to strictly control interest rates through a directed system of interest rates.
Each type of lending activity was supposed to be carried out at a pre-specified
interest rate. Over the years RBI has moved slowly towards a regime of market determined
controls.
SEBI: Regulator for the Indian Corporate Debt Market is the Securities and
Exchange Board of India (SEBI). SEBI controls bond market and corporate debt market
in cases where entities raise money from public through public issues.
Apart from the two main regulators, the RBI and SEBI, there are several other regulators
specific for different classes of investors, e.g. the Central Provision Fund Commissioner
and the Ministry of Labour regulate the Provident Funds.
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