–   Saibal Chandra Pal

Indian Capital market has matured with SEBI, the regulator playing an active and judicious role. The country has an investor base of about 1.4 per cent of its 130 bn population. So there are about 2 crore investors having exposure to the Indian capital market represented through the Stock Exchanges (SEs). What the SEs reflects is the activities of companies and the resultant factor which goes to test the performance is price. Price is the ultimate factor reflected on the SEs. Compared to the population size of the country, the investors’ family is small.  With household savings at over 35 per cent of the total income, Indian capital market is expected to experience a further quantum leap. Securities Exchange Board of India (SEBI) is trying hard to regulate the securities market in an orderly manner so that economy can prosper and take on the might of advanced countries.  Indian stock market has adopted the electronic mode in its operation substituting the outcry method. To-day there is transparency in the market. Investors feel confident and this is likely to help in the growth of number of investors. Optimism, however, should be combined with caution all round considering the 2008 experience.

Stock market is a market place where only securities of companies registered under the Companies Act, 1956(`Companies Act’) are bought and sold. Only listed securities are dealt. It is regulated by SEBI.  Securities are defined in S 2 (h) of the Securities Contracts (Regulation) Act and include shares and convertible securities.  S 2 (24) of the Companies Act, defines, `share’ to mean which is a part in the share capital of a company, and includes stock except where a distinction between stock and share is expressed or implied.  Companies raise capital from the securities market in the form of shares, convertible debentures, debentures, bonds and these being termed as securities are traded in the stock market on being listed. For listing and trading of their shares, companies enter into listing agreement with stock exchanges (SEs).  To enlist a share or security, certain procedures have to be followed. Manner of listing shares with SEs have laid down in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (`ICDR’). Various methods by which a company can get its securities listed is termed a initial public offer (`IPO’). It is through an IPO an unlisted company transforms into a listed company on listing of its shares. The Companies Act through the Companies (Amendment) Act, 2000 effective from 13.12.2000 for the first time distinguished between a listed (S 2(23A)) and unlisted company.  S 2(1) (p) of ICDR defines Initial Public Offer (IPO) as an offer of specified securities by an unlisted issuer to the public for subscription and includes an offer for sale of specified securities to the public by any existing holder of such securities in an unlisted company/issuer. R 2(1) (zm) further defines `unlisted issuer’ as a company whose securities are not listed on any stock exchange. IPOs adopt through the `book building ‘method defined in R 2(1) (f) of ICDR to mean a process undertaken to elicit demand and to assess the price for determination of the quantum or value of specified securities or Indian Depository Receipts, as the case may be, in accordance with ICDR.  Issues of shares are required to be guided by a Book Running Lead Manager, registered as Merchant Banker under the SEBI (Merchant Bankers) Regulations, 1992 with SEBI.

Pricing of shares is the most significant factor in an IPO. Two common methods of pricing of issues are the:  (i) Dutch auction method; and (ii) French auction method.  In an issue, there are various price related factors and are enumerated below:

(a)   Floor Price- Lower end of the Price Band at or about which the issue Price is finalized below which no bid is accepted.

(b)  Issue Price – Final Price at which Equity Shares are issued and allotted in terms of the Red Herring Prospectus.   Issue Price is decided by the Company in consultation with the Book Running Lead Manager on the Pricing Date.

© Price Band:  Band of minimum price (floor price) of say Rs X and the maximum price (cap price) of say Rs X + and includes revision thereof.

(d) Cap Price: Higher end of the Price Band above which price will not be finalized and above which no Bid will be accepted.

(e)  Issue Price: Final price at which Equity Shares will be issued and allotted in terms of the Red Herring Prospectus filed under S 60 B of the Companies Act. Issue Price is decided by the company in consultation with Book Running Lead Manager on the Pricing date.

(f)  Pricing Date: It is the date on which the issuer company finalises the issue price in consultation with the Book Running Lead Manager.

When an access to the capital market is for the first time, the issue is known as an initial public offer (IPO). Issues of companies raising capital after an IPO and listing of shares are called a Follow-on Public Offer or Further Public Offer (FPO). IPOs and FPOs methodology may be by issue of fresh issue of shares by group of shareholders. While, in IPOs the company issues entirely new shares and its share capital expands to that extent. Accordingly, holding of the existing shareholders become lower in percentage terms.

Offer for sale of shares by existing shareholders to the public to satisfy the listing norms provided in R 19(2) (b) of the Securities Contracts (Regulation) Rules, 1957, by putting up their shares for sale to the public does not result in change in the amount of share capital and the company does not receive funds from the sale of the shares offered to the public. IPOs can mix both offer for fresh issue of shares and offer for sale of existing shares.  IPO of 1.43 crore shares of Rs 10/- each at a price to be decided by the company in consultation with the Book Running Lead Managers of Shree Ganesh Jewellery House Limited which opened on 19th March, 2010 and closes on 23rd March, 2010 includes both issue of fresh shares and offer for sale of shares held by the existing shareholders.

Offer for sale of shares is dealt with in S 64 of the Companies Act.   NTPC FPO was an offer for sale of shares..To know the amount a company has raised for its issue, it is important to know the type of offer. All amount raised through an IPO may not be received by the company even though it is categorized as an IPO. Investors should be made to realize this aspect and must be informed categorically. Intermediaries connected with an issue and the Regulatory Authority (SEBI) play an important role in this regard.  Through an offer for sale, promoters remunerate themselves for their past effort in building the company the benefit of which is to pass to the new shareholders. However, whether the price for such action of the promoter is justifiable is to be examined critically. .Price per share offered to the public needs examination.


Pricing is considered most significant in an issue. Starting from the CCI days to this day debate on issue pricing continues. Price at which shares are issued rarely satisfies all.  Issues are sometimes regarded over priced. This again depends on market conditions. By the time the issue opens in the market the stock market sentiments may be low and the price may be considered in excess thus keeping away investors. Securities laws is always directed to protect small investors otherwise termed as retail investors. Retail Individual  Investor has been defined  in R 2(ze) of ICDR  to mean an investor who applies or bids for specified securities for a value of not more than one lac value.. Methodology for determining price in an IPO is by bidding process through which the most acceptable price is determined. There are two methods into play in price determination of shares offered in IPOs namely, the Dutch and French methods of determining price.

Dutch Auction Method (DAM)

Under the DAM, Investors are required to put in bids for quantum of shares and the price they are willing to pay. The last or lowest price at which all shares are assigned becomes the issue price of the shares provided it is not lower then the floor price. Investors are allotted shares at the issue price.

Example: Where X Co. Ltd., offered 10000 shares and  bids were  received for 2500 shares at Rs 500/ – per share;  further 3500 shares at Rs 475/- per share; another 3000 shares at Rs 400/- per share  and 1000 shares at Rs 375/-. At Rs 375/- which is the lowest for the 10000 shares becomes the issue price. Book Building Method is based on the Dutch auction method where the issuer determines a price band within which bids are invited to determine the price and the lowest price offered is considered the issue price.

French Auction Method (FAM)

Under FAM issuing company sets a floor price (ibid) which investors place their bids. On a price-priority basis, allotments are made.  Investors are issued shares at the prices they have indicated and not the cut off price as is the system under DAM. Investors are bound to pay the price they have stated in their applications.

Example: Floor price of the share is assumed to be Rs 370/- per share.  Investors who bid in the first lot of 2500 shares would be allotted shares at Rs 500/- per share while the next 3500 shares would be Rs 475/- per share as their issue price. Whoever states the price per share in the manner above will have to pay the amount but the price must not be less than Rs 370/- per share.

Composite Issues

Companies after being listed can go for composite issues meaning combination of both public and rights issues. R 2(1) (h) of ICDR defines, `Composite Issue ‘.

IPOs must be understood with reference to pricing and investors need direction in this regard. Pricing is still not understood by most investors unless it is explained; rapid increase in the retail investor base increase will remain a wishful thinking in the capital market.

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June 2021