Pricing for Raising Capital- Who decides and how
India has a booming capital market. In FY 2024-25, the total capital raised through, debt and equity combined were approximately INR 13 Lakh crores by 79 main board listings and 233 from SME Listings and QIPs and other sources. In such a huge market, there are multiple pulls and pressures operating behind the scene. In this article, let us explore the pricing, how price of instruments are decided, who are the decision makers, legal architecture and practical reality.
Let us start various methods of raising capital from the market:
1. Modes of raising capital: There are six modes for raising capital: Each mode of raising capital has specific terms and conditions and specific regulations for SEBI ICDR Regulations, 2018, last amended in 2025.
(a) IPO/FPO: This is the first time listing or follow on listing. For example, the listing of shares of Zomato (2021) or LIC in 2022.
(b) Rights Issue: Here the company raises capital from existing shareholders as done by Tata Motors in 2021.
(c) Preferential Allotment: This is suitable for strategic investors like Private Equity/Venture Capital.
(d) Qualified Institutional Placement: This is the fastest route for raising capital, as was done by Zomato in 2023.
(e) Bonus Shares: Here the shareholders are rewarded from cash reserves for the company. No payment from shareholders is required.
(f) Non-Convertible Debentures: Raising of debt capital as was done by Bajaj Finance in FY 2024-25
One has to carefully evaluate the particular mode of raising capital, depending upon its situation. Otherwise, a wrong mode will result into following wrong process, resulting into SEBI’s violation.
2. Two Routes for raising capital:
- Profitability Route: In case the entity has net tangible assets is > or equal to 3 crore in last 3 years; and operating profit (EBITDA) is> or equal to 15 crore in any 3 of the last 5 years; and Net worth > or equal to 1 crore in each year in the last 3 years. This route requires consistent track record. The best example was listing of D-mart IPO in 2017.
- QIB Route: In case of loss making but high growth and future prospects, this route is preferred. Here, 75% of issue has to be subscribed by QIBs. Again, a good example is Zomato IPO in 2021.
3. Private Placement: It is the simplest route for fund raising. The legal framework is provided by Section 42 of the Companies Act and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2024. For unlisted companies, this is the only way for raise capital. Only condition under this method that the maximum offerees cannot be more than 200 persons per financial year per security type. This excludes QIBs and ESOP employees. The moment this threshold is breached, it becomes deemed public offer and full disclosure and compliance of SEBI ICDR is required. In SEBI vs Sahara India case, the Supreme Court upheld that the Sahara’s offer of Optionally Fully Convertible Debentures to million of investors was a public issue.
Pricing: The pricing under Private Placement in case of unlisted company is determined by the Board of Directors of the Company, supported by the Shareholders resolution. In order to have a justification for the pricing, the Board obtains the valuation report from Registered Valuer (S &F A).
4. Preferential Allotment: This route comes under Section 62 (1) (c,) of the Companies Act and Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014. Here, only equity shares or convertible instruments are eligible.
Pricing:
In case of Unlisted Companies, the pricing is determined based on the valuation report of Registered Valuer (S & F A). The RV follows the methods of Discounted Cash Flow, Net Assets Value, Company Comparable Analysis or any other internationally accepted method.
In case of Listed Companies, the price is determined following SEBI ICDR Regulation, which we are going to discuss shortly.
5. Pricing of Frequently Traded Shares (Regulation 164):
Frequently Trade shares are those where during last 240 days, at least 10% of total shares of that class are traded in stock exchange.
In case of preferential allotment, the floor price will be higher of the following two:
- Average of weekly high and low of the Volume Weighted Average Price (VWAP) of equity shares during last 26 weeks prior to relevant date OR
Average of weekly high and low of the VWAP during the 2 weeks preceding the relevant date.
Logic behind these two dates is the protection of investors from market fluctuations.
6. Optional Pricing Frequently Traded Shares (Regulation 164B)
This is the alternative pricing method, where a listed entity can choose to use a shorted look back period in place of 26 weeks.
Pricing: Higher of (a) average of weekly high and low of VWAP during prior 12 weeks; OR (b) average of weekly high and low of VWAP during 2 weeks preceding the relevant date.
7. Pricing in case of Infrequently Traded Shares (Regulation 165): Infrequently traded shares are those where the traded turnover is less than 10% of total shares in last 240 days period. Here again, the role of Registered Valuer is very important. The floor price will be determined by the Registered Valuer using one or more methods: (a) NAV- Net Asset Value Method, where book value per share is taken the balance sheet; (b) Comparable Company Trading Multiples like EV/EBITDA, P/E Ratio; (c) DCF-Discounted Cash Flow Method, where the future projected cash flow is discounted at appropriate WACC; (d) following any other internationally accepted method. Normally, the higher of any of these methods is taken as floor price.
8. Pricing in case of Stressed Assets (Regulation 164A):
In case of companies qualifying as “Stressed Assets”, the floor price is based on the average of weekly high and low of VWAP during the 2 weeks preceding the relevant date only. This pricing flexibility is given to rescue investors. The acquisition through this method is exempt from mandatory open offer under SEBI Takeover Regulations. Further, the existing promoters is not allowed to use this route to acquire cheap shares.
9. Pricing under Initial Public Offer (IPO): In case of IPO, the book building process is adopted by companies. Demand is elicited through bids within a price band. SEBI only mandates that the cap price should be less than or equal to 120% of floor price. Then, how is the price determined? The key role is played by Book Running Lead Manager (BRLM). Its valuation team does the first level of valuation and determines the possible price range. Then, the opinion of the institutional investors is sought. Market conditions are evaluated and road shows are conducted. Finally, the cut off price is determined, leaving some margin for upward movement on the day of listing of shares.
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In case you have any concern and queries or need any support for raising capital or valuation, you may like to contact us.
Abhinarayan Mishra, FCA, FCS, RV; Managing Partner, SAM Law Associates LLP; KPAM & Associates, Chartered Accountants, Dwarka, New Delhi; +9910744992, ca.abhimishra@gmail.com
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