Chapter 13: Process of Investing in Primary Market

A public capital issuance is governed by strict disclosure and transparency mandates. Investors must familiarize themselves with the progressive stages of regulatory documentation:

1. Draft Red Herring Prospectus (DRHP): Prepared by the Lead Merchant Bankers and filed with SEBI and the stock exchanges for review. It contains comprehensive disclosures regarding the company's business model, promoter background, financial history, risk factors, and proposed use of proceeds, but excludes details on price and issue quantity. The DRHP is hosted on SEBI's website for at least 21 days for public comments.
2. Red Herring Prospectus (RHP): Filed with the Registrar of Companies (RoC) after incorporating regulatory observations. It contains all material operational and financial facts, along with the Price Band or Floor Price and issue dates, but omits the final issue price.
3. Final Prospectus: Filed with the RoC after the bidding process concludes and the final issue price (clearing price) has been established through book building.

Primary market offerings are priced using one of two regulatory methodologies:

1. Fixed Price Issue

• The issuer and merchant bankers determine the exact issue price upfront prior to opening the issue (e.g., Rs. 250 per share).
• Investors apply for a specific number of shares at this predetermined fixed price.
• Demand is known only after the issue closes.

2. Book Building Issue

Book building is a dynamic, transparent price discovery mechanism where the market determines the fair value of the shares:

• The issuer announces a Price Band containing a Floor Price (lower limit) and a Cap Price (upper limit). Under SEBI regulations, the Cap Price cannot exceed 120% of the Floor Price (i.e., a maximum 20% spread).
• Bid Lot: The issuer specifies the minimum number of shares an investor must bid for, and multiples thereof (e.g., a lot size of 40 shares).
• Cut-off Price: Retail Individual Investors (RIIs) have the unique option to bid at the 'Cut-off Price', meaning they agree to purchase shares at whatever final price is discovered through book building.
• Clearing Price Determination: After bidding closes, the Lead Managers aggregate the demand book and determine the equilibrium clearing price at which the entire public issue is absorbed.

When an IPO is oversubscribed, the allocation of shares follows strict regulatory protocols overseen by the exchange and designated stock exchange representatives:

Retail Allotment Formula

• The total retail quota is divided by the minimum bid lot size to calculate the maximum number of retail applicants who can receive a lot.
• If the number of retail applicants exceeds this capacity, allotment is conducted via an automated, audited computerized lottery.
• Successful applicants receive one minimum lot; unsuccessful applicants receive an immediate unblocking of their bank funds.

Timeline from Bidding to Listing

Under modern SEBI regulations, the timeline from issue closure to stock exchange listing has been streamlined to T+3 business days (where T is the issue closing date):

• T Day: Issue bidding closes at 5:00 PM.
• T+1 Day: Finalization of the Basis of Allotment with stock exchanges and validation of funds.
• T+2 Day: Processing of debit of blocked funds, credit of shares to successful allottees' demat accounts, and release of unblocking instructions for non-allottees.
• T+3 Day: Trading commences on the stock exchanges.