351

32
Prospectus
ompany may raise its capital by way of:
, P u b l i cO f f e r

Offer for Sale

or Bonus Issue
Right Issue
Private Placement

company may issue securities by way of:

private

Rightsi s s u e o r Bonus issue, or

Private Placement

offer may be Initial Public Offer (IPO) or

ie
Apublic

APTng Further/Follow-on Public Offer (FP0). It

he securities by the company to the public in the primary market.
selling ofsecuritie
It is essential for a
mnany
ompany issue aa
to 1Ssueprospectus if it
intends to appeal to the
public for capital to carry out the
for
fects
which it has been constituted.
Prospectus is a document which gives all the details
he company and the proposed issue of shares to enable informed decision by the
the intending
of shares in
estor of
the
company. It is, in fact a 'market show so as to attract investors for
money into the securilies or the company. A public ofer can be
made through: fixed price
hod or book building method.
hoffer for sale method, a company allots shares to issue houses or other intermediaries or
romoters with a view to such shares being offered for sale to the public by such issue houses
he promoters. In certain situations, this offer tor sale is deemed as a public offer by the
mpany,
Right issue is the offer for subscription of shares made by a public company to its existing
y shareholders as a matter of their right. In fact, it is obligatory for a public company to make
dan offer in case of further issue of shares.
Private placement is issuing of shares privately to the friends, relatives or acquiesces of the
noters
ApTivate company is, by its very constitution, prohibited from inviting the monetary participation
public, and, therefore, it need not issue a
prospectus.
 Issue of Sec urities
(shares &
Usiness Lo
debentures) by a Public Company

Public Offer Offer for

(POFPO) Right Issue a
Sale Bonus
Issue Private
Placement
Fixed Price Book Series of
Offer Building Prospecius by Private
Offer Implication Placemert
Offer Letter

Prospectus andor Red-Herring Shelf

Abridged Prosp ectus Prospectus

Meaning of Prospectus
According to Section 2 (70), "prospectus" means any document described or
and includes red issued as a prospectne
a herring prospectus
reterred to in section 52 or
section 31 or any notice, circular, advertisement or other shelt prospectus referred to im
document inviting offers
for the subscription or purchase of from the publi-
any securities of a body corporate;
Thus, prospectus is a document inviting general public to subscribe to
the share capital of a
public company. Any document which has the object of securing the required
deposits for a company comes within the definition of prospectus. capital or public
Invitation to public. Where a
company allots or agrees to allot any securities of the company
with a view to all or any of those securities being offered for sale to the
public, any document by
which the offer for sale to the public is made shall, for all be deemed to be a
purposes, prospectus
1sSued by the company. The term public', therefore, includes any section of the public howsoever
selected. It connotes persons not personally known to the promoter as distinguished from his own
friends, relatives, connections and acquaintances. Even an offer to a limited class of people shall
be an offer to public.
Case
Re. South of England Natural Gas and Petroleum Co. Ltd. (1911) 3,000 copies of docu
n the form of a prospectus were sent out and distributed among the members of certa
companies only. It was held that though the offer was only to limited class, it was nevertnel
offer to the public," as those persons were nonetheless "the public", vis-a-vs ain
the
although they were not public at large, but selected portion of it. It must, thereror
particulars as required by the Act.
aws pryeUs

n the ollowing
case 351
it is not es, however, the
made in a way so asoffer shall not be treated as
made to the public:
D g to result,
available for subscription or directly
ofier
or
indirectly in the shares or debentures
ornvitation provided purchase
the offer is made to by persons other than those
year.Section 2014] with Rule 14 of the not receivinE the
Securities) Rules42(2)read
more than 200
persons in financial
a
Companies (Prospectus and Allotment of
3 It is only a domestic concern
of the
arovided the offer persons making and
pr is made to not more receiving the offer
persons and each offer is made invitatíon
than 200 or

to a particular addressee. separately

Case
ch . Lvnde (1929) Nash applied for certain shares in a
company on the basis of a document
t to him by Lynde, the managing director of thecompany. The document was marked "strictly
ivate and confidential. The document did not contain all the material facts required by the Act to
disclosed. Nash's filed a suit for compensation for loss suffered him by by of
missions. It was dismissed. The court observed, "The "public" is of course a general word. the
reason
No
pm
particular numbers are prescribed. Anything from two to infinity may serve: perhaps even one, i
he is intended to be the first of a series of subscribers, but make further proceedings needless by
himself subscribing the whole. The point is that the offer as such is to be open to anyone who
brings his money and applies in due form, whether the prospectus was addressed to him on behalf
f the company or not. A private communications is not thus open and does not construe to be a
prospectus"
Gii) If shares are offered to a few issue houses or Qualified Institutional Investors (Ql)orto
employees of the company under a scheme of employees stock option.
(iv) If the shares are offered exclusively to the existing members of the company.
( ) I fthe offer is made in connection with a bonafide invitation to a person to enter into an
underwriting agreement with respect to the shares.

Offer for Sale or Prospectus by Implication

Meaning of Offer for Sale In this method entire share capital of a company is allotted to an
intermediary called "Issue House. The "house then otfers the shares to the public by means of an
advertisement of its own. On an application being made by a member of the public, the issue house
renounces the allotment of the number of shares mentioned in the application, usually at a higher
orice, in favor of the applicant purchaser, who then becomes a direct allottee of the shares or

debentures. Company, thus, is ensured of the whole isSue and is also relieved
ofa lot of administrative
ork.

rospectus by Implication
to allot any securities of thee
company allots or agrees
provisions of section 25, where a
sper the offered by the allottees for sale to the public, the document by
mpany with a view to these being is shall be taken as a prospectus by implication
such an offer Jor sale to the publie made,
aich
ued by the company if:
 offers these shares
(a) the allottee (issue
house or other person)
or
bentures to the
debentur.

for sale within six

months after the
allotment o r agreement to allot, or
the company has not received the whole c o w .
pubie
(b) at the date of
respect of the
ofer to the public
shares or debentures. deration in
house does not in any way reduce 1he 1
Thus, sale of shares through an 'issue
other officers.
to th
On the otherr hand, in addition to the
ability
y of the
of s

promoters or em, the issue

company's directors, effect as
if the persons making the offer
liabilities. It shall
have were
houseincurs its o w n
as directors
of a company. persons
named in a prospectus

Prospectus
Requirements as to requirements:-
must satisty the following legal
in order to be valid,
Issue of prospectus, Disclosure Requirements) Regulatin.
of Capital and
1. Obligations of
SEBI (Issue
Banker, Bankers to
to the issue,
2009
These regulations
inter-alia deal with appointment
ot
Lead Merchant
with Iraft prospectus,
draft prospectus, pricing prici e
documents along a
of various of the
to the issue, filing and disclosure in the offer
Registrar minimum public offer,
securities, promoters
contribution,
offer
bantaen
merchant banke
document through the lead merchant
document
to file a draft
is required
The company the Registrar of Companies.
the prospectus with
30 days prior to registering

2. It must be dated.
shall be taken to be the.
be dated. The date given in the prospectus
Every prospectus
must
Date of filing of the prospectus with the
Rei
to the contrary.
its publication unless proved fe
may, however, be differentfrom
its issue. Date of issue or tne prospectus
be the date of
taken to
the date of its publication.

3. It must be registered.
director filed with
and
must be signed by every arcctor or proposed
A copy of every prospectus public. Subsequent issues of copies of the
before it is issued to the
the Registrar for registration filed. This copy must be accompanied
state on their face that a copy has been so
prospectus must
documents:
with the following
Written consent to such publication;
of an expert is to be pubished, his
(a) if the report whose n a m e s are mentioned
in the prospectus as
of all those persons
(b) written consent
solicitors, bankers, etc.;
auditors, legal advisors,
and r e m u n e r a t i o n of managerial personne
contract relating to appointment
(C)a copy ofevery
and their consent to act as such; course of
business o
entered into in the ordinary
material contract unless
(d) a copy of every
the issue of the prospectus,
two years before the date of
by Sec 26 have made any adjusu
report required
(e) where the persons making any
liabilities dealt with by tne k
and the
losses or assets
"igures ot profits or setting
o
Tegards the written statement signed by those persons
without giving the reasons, a
the therefore.
adjustments and giving reasons
 1he
rospectus
red for
regi must be
issued within
353
all t
On.bIfa prospectus 90 days after the date on which
Prospectus is issued
jon. Thise
istration. This a copy thereof has been a
default
such issue will a copy of subsequently
which after the
has not been expiry of this
y an
l o su
make liable, the delivered period, it
of
cpert to
not include a
prospectus, to a company, and every
De unconnected withh
the
fine which
to the
Registrar for
may extend up person
to three
who is
knowingly a
ASt statenment formation or lakh rupees.
tant, etc., unless the
expert
purporting
is
to be made management
by
of the
company. A
ion or promot motion or in the
a
person who has an
expert such as an prospects
mau
pert's consent to be of themanagement never been engineer,
engaged or interestedvaluer,
obtained.
an expert, it must not
If the company [(Sec. 26(5)). in the
padeby
make such reports and ha
had
be
issued, unlessprospectus
the includes a statement
ch consen before the written given his an expert was
independent purporting be to
of a copy of consent to the issue
delivery person
thereof and has not competent
t efect appea in the prospectus. the
for prospectus registration and
withdrawm
E aDplication
form to be
accompanied
with a copy
a
statement to
Section 33(1)] of
Cuerv form of
prospectus abridged prospectus.
or

application for subscribing the shares or

unless accompanied by
Suedi it is
a debentures of a
itation has not deen made to the prospectus or an
abridged company shall not be
public. prospectus, unless the offer
Punishment 1or personation for
or

Any person who -

acquisition, etc., of securities (Section 38).
i Makes or abets
making of an application in
or
subscribing for, its
securities; or
fictitious name to a
a
company for acquiring.
b) Makes or abets making of
multiple applications to a
different combinations of his name
or surname for company in different names or in
(c) Otherwise induces directly or acquiring or subscribing for its securities;
securities to him, or to any other indirectly a
company to allot, or or

Section 447. person in fictitious name, a

shall
register any transfer of,
be liable for
The above action under
provisions shall be prominently
and in every form of reproduced
every prospectus issued a
application for securities.
in

Disclosure Requirement and Contents by company

as
ompany must state the matters and per Section 26.
contain reports Every prospectus issued a
specified in Section 26 of the Act
by
bridged Prospectus [Sec. 33]
s per Sec
2(1), abridged prospectus is a
memorandum
T0spectus as
Da the
bemay prescribed. Thus, it a brief version of containing
the salient
such salient features of a
cost involved in the features of a
publication of large number of prospectus which has prospectus to
pplication forms for shares or debentures
public offer. in case of
to
accompany
Section 33 (1)
provides that every
Ompanied with the abridged application form for shares or debentures has to be
prospectus, provided that a full prospectus is to be made
person who asks for it before the of the closing available
subscription list.
 the requirement of abridgcd prospectus does.
oes not apply: Lrws
In the following cases, however,
when application fom is issued to shhares o r debentures:
vitation
in connection With bona fide invitation to a
a

persontto enter
underwriting agreement with respect
intoan which w e r e not offered to the public., or
in relation to shares or debentures
members of the company.
where ofer is made only to existing
default in complying with the
provisions of this
ons of this
Tfa company makes any
for each default. [Sec
33 (3]). section, it shall
liable to a penalty of 50,000 be
Misleading Prospectus
1.e, utmost good fait
A contract of shares in a company
is
an uberrimae
are entitled
to true
Jeder
and correct dis
disclosures
of
faith" contract
all the
purchasers of shares he
intendingg information which the requires law to be disclosd
d to the acts in the
prospectus. Neither any informot
concealed oromitted to be stated
from the prospectus nor should the ion givenpublifalse
ic be
statements with
must make all ace
scrupulous
and misleading. A prospectus be talse not only because of and not
facts which are not strictly
correct. A statement may tate
also because of what it conceals, omits or implies. Suppression of facts will be states
as
but
of wrong facts. "Truth, whole truth and nothing but truth must be disclosed Half-truti
(KerV. Ayisant)
isclosure
no
better than a downright falsehood.
"A statement included in
a prospectus shal be
deemed to be untrue, ifthe statemene :
it is included; or where any inclusion or omission
in the form and context in which f any
is likely to mislead"(Section 34). A statement can also becomne false because it
produce a matter
facts. However, an untrue statement Will not include in its def wrong
impression of actual
expectation. nere
expression of opinion or
Rex v Klysant In the prospectus of a company it was stated that the company had
dividends during the last several years when the company had actually been incurrine paid
converted its losses into profits by writino antial
losses during all those years. Company had
bfthe past provisions to the credit of the profit and loss account. It was held that the pr ome
the prospectus
did not disclose the true picture of the company.
Shiromani Sugar Mills Ltd. . Debi Prasad Aprospectus contained statements that the mamaoi
to take shares and that the company would go into nrod
agents and their friends had promised
soon. Subsequently, it transpired that the managmg a e n t s and their Iriends did not keep up thei
tion
promise and that the company did not go into production soon. The statement was held to be only
apuff and not a statement fact and further that the failure to keep up their promise by managing
did not amount to a misrepresentation of fact.
agents
Henderson v. Lacon The prospectus of a company contained a statement, "the directors and thei
riends have subscribed a large portion of the capital and they now offer to the public the remaining
shares." Actually each director had subscribed only ten shares. The statement was held to be
misleading
Smith v. Chadwick The prospectus of a manufacturing company contained the statement, "the
present value of turnover is £ 10,00,000 sterling per annum." The statement was true if it mea
ne present capacity of the works, But it was untrue if it meant the present production of the w0
Was held that"if the directors put forth a statement which they knew may bear two meanu
pne of which is false to their knowledge and thereby the plaintiff putting the meaning on itsmisi

hey cannot escape by saying that he "ought to have put the other
 gct of
he prospect
Misleading Prospectus 355
Cr amounts to contains
misrepresentation.
misleading or false
a n
statement
omits to disclose or
Agains , the a
material fact
) the
director and other aggrieved shareholder has the
remedies:
) Age nst the company. persons responsible for the issue of the
prospectus, and

Remedies in case of
Misrepresentation
in the Prospectus

Against the
Company
Against the
Dire ctors & Others

Rescission
Damages Compensaton
(Civil Liability) Criminal
Acton for
Liability De ceit
ahility of Directors,
Promoters, etc. in case of
eDersons liable in case of the issue of the Misleading Prospectus
prospectus containing false or
misleading statements
.
every person who is
director of the
a
company at the time of the issue of the
every person who has authorised prospectus;
himself to be named and is
director, named in the
as prospectus a
every person who is a
promoter of the company; and
every person who has authorised the issue nogn
of the prospectus
The liability of the directors, promoters and others falls under the
Criminal Liability. following heads:
Civil Liability.
Lability under the general law of contracts. ff.owgbhe

iminal liability (Sec 34)

ere a prospectus, issued, circulated or distributed, includes any statement which is untrue
or
cdding in form or context in which it is included or wnere any ineusion or onmission of any
T IS
1ikely tomislead, every person who authorizes the 1Sue of suen prospeetnus shall be liable
Cr section 447:
 ARy person who is
shall not be less thanfound
to be guilty, shall be
six months but which punishable with imprisonme
may extend to
Business Laws
shall also be liable to fine which shall not for a
ten years
be less than the
and term
which may extend to three times the amount amount
involved in the fraud involved
in the
whick
In case the fraud in
question involves public interest, the term of fray iraud, bat
less than three years. imprisonme
Provided that nothing in this section shal apply to a Tot be
omission was immaterial or that he had reasonable person if he proves t
grounds to believe, and did
issue of the prospectus believe, that the statement was
necessary.
true or the up
inclusion
inclusion statement o
to the
or omission
timene of
Civil Liability (Sec 35) was
Where a person has subscribed for securities of a
company acting on any statenmend
the inclusion or omission of any matter, in the
prospectus which is misleading and i statement included,
, or
any loss or damage as a consequence thereot, the company and
every person who:-has sustained
i s a director of the company at the time of the issue of the
prospectus;
has authorised himselfto be named and is named in the
prospectus as a director of the
or has agreed to become such director, either immediately orafter an interval
.

is a promoter of the company; of tim ompany,

has authorised the issue of the prospectus; and
1s anexpert referred to in sub-section (5) of section 26,
shall, without prejudice to any punishment to which any person may be liable
under section 26
liable to pay compensation to every person who has sustained such loss , be
or damage.
Defenses available
The person sued for damages can escape liability for damages by successfully pleading any of the
following defenses,
(a) Authority of an expert. He made the statement on the authority of an expert whom he
believed to be competent and that the expert had given his consent and had not withdrawn it.
(b) Reasonable ground for belief. He had reasonable grounds for believing the statement to
be true and that he did believe it to be true up to the time of allotment.
(c) Correct copy of an extract. The statement was a correct coPy of some extract from an
official document and that he had in fact believed it to be true.
(d) Consent withdrawn. That having consented to become a director, he withdrew his consent
to become a director before the issue of the
prospectus and the prospectus was isu
without his authority or consent.
nt
(e) Issued without knowledge. The prospectus was issued without his knowledgeor
was
and that on knowing the fact he forthwith gave a reasonable public notce
issued without his knowledge or consent.
Tws an expert or a
in the
ectusin
capacity ofperson ho has given his 357
if any. purporting to auditor, legal adviser consent
an
etc., is to
ich his name
e m e n

have been made

by himm liable only to
being mentioned in the
ity under General Law as an the
the extent
e

ut expert. of any untrue

ersons responsible for the issue
of
De Drovided
law as provide
by section prospectus
19 of
can also
be held
where the Temedy
remedy the Indian Contract liable in an
by way of action for
rescission Act. deceit, under
or evenn if the
company goes into against the companyThisis lost
as
egligence
remedy shall be
available
MlOWing:

liquidation. But the plaintiff either through latches

S ) There s a
fraudulent mis-statement. A will have to
prove the
presentation
made knowingly or fraud
rom this iit
follows without belief is said to have been
gse. that there is
no
fraud
in its truth or committed it a false
wjieves it to be a true one. if the recklessly,
person making a falsewhether it be true
epresentation rela
related
to some statement honestiyor
e important for the contract. existing material facts.
) Hehad seen the Material facts
cts mean facts which
hares on the
he prospectus and is the
basic of the
original allottee. A
he entitled to any remedy, prospectus, which
either contained false andperson who had not
n purchased
an
A man cannot be that
said of
to misleading statements, shall
rescinding the contract or that
have
shares from an existing purchased on the basis of the of claiming the
prospectus when he has damages.
thoses

shareholder.
nnot be looked upon as one to Similarly,
action of deceit because "the whom the prospectus ispurchaser
a
of shares from the share purchased
market
he allotment having been object of prospectus is addressed
a and is
precluded from
completed, such
to invite
persons
bringing
allow the shares into the hands of object is exhausted and the to become allottees and
for all the subsequent
dealings
subsequent transferees. Directors
liabilities to allottees do not
which may take cannot be made liable
xchange."The leading case is that of Peek
place with regard to those infinitum
shares upon the stock
Gurney issued a fraudulent Gurmey: v

prospectus on behalf of a
Peek at that time. Several months company. No shares were
he stock exchange. He afterwards, Peek purchased 2,000 shares of the purchased by
ot liable.
brought an action
against the directors for deceit. Held, the company from
directors were
()He has been actually deceived. There
been can be no action
deceived. A deceit which does not unless the shareholder has
deceive is no fraud. Besides actually
cannot form the basis of an action mere
for deceit misreading of a prospectus
Liability of the Company
The
shareholder, who has purchased shares on the basis of
wO
rights against the misleading a
or false
prospectus
company under general law of has
(a) Right of rescission
contracts:
(6) Right of action for
damages
Peek v. Gurney (1873)
358 Business Laws
Right of Rescission
the company
on asis
the basis of the.
of the
purchased
shares from
generprospectu
the generpeo
under the
A person who has
untnae and misleading
statement

rescission of the
material facts is
of
contract. The
agreement
entitled under

to take
aw to apnnin
up shares is votto
he actually reeable at t
to
containing
apply
the
court for the valid unless
r e S If the i P
will remain
shares. It it,
the subscriber to the the contract, company will
of
for the repudiation
or
other incid
ove
e
his narme
hi
his application vith
with interest
interest and
and incider
acvepts
members and
returm his money
allotment ofsharee..
costs from
the register of or to rescind ares will not bea
from the company
claim not be
to
Right to
the
claim
subsequent
damages
purchasers of
shares from the

shares.
market. They

A subscriber
cannot
claim
to the Memo
any relief labyewailable
relief unles
them to buy OTAsS0cie
to induce
prospectus was issued cannot be considered to be in evic.
also seek any relief,
as the company
Association. He can
ce at th
cannot
to the
Memorandum
of Association. cannot be s time
when he appended
his signatures
prospectus.
to have
s t a t e m e n t in the
been influenced by any

of the Right of Rescission

Conditions for the exercise
of shares can be exercised only when tha
the contract for the purpose
c ..

Right ofrescinding
conditions are satisfied:
following
which induced the
shareholders to subscribe for
The statement share
(a) Material fact. an expression of opinion or expectation
material fact and not
must relate to a
will not give any remedy
to the aggrieved party. Further,
misrepresentation of law
had induced the other party to suhseel
representation. The statement which
False
(b) both in form and context in which it had been iw.te
must have been untrue or misleading ded.
shares
Shareholder must have actually relied upon the statement
inducement.
(c) Reliance and it to purchase the shares. It is not neces
must have been induced by
applving for the shares and ssary
it before relying upon it.
that he should have verified
No only that the false statement should be addressed to the
(d) By or on behalf of the company.
the contract but it must also be addressed to him by someone who
plaintiff who seeks to rescind
has the company's authority to do
so.

for rescission must have been started by the shareholders

(e) Reasonable time. Proceedings
within reasonable time before the company goes into liquidation.

Loss of the Right of Rescission

taken advantage of by the purchaser
The right of rescinding the contract will be lost and cannot be
of material facts under the following
ofshares who relied on a prospectus containing mis-statement
circumstances:
within a reasonable tnc
(a) Unreasonable delay. When the shareholder fails to take any action
after he comes to know of the untrue statement.
even
(b) Affirmation. When the allottee, expressly or impliedly, ratifies or adopts the contract
alter he comes to know of the untrue statement, e.g., acceptance of dividend, executing u

etc

3.Crowley'sCase (1867) L.R. 4Ch. App. 322.

 napec

scement of the winding up. A

Comme 359
shareholder will not be entitled to
Comer the company gOes into lhquidation.
price
of1aares
siohares
the
sh soso long as he does not rescindThetheshareholder will continueexercise his right of
to pay the
purchase
contract of
Righto fA c for Damages
of Action
purchase of
shares
n
here mis-stateme
c a s e sw h e r e

amounts to fraud,
zainst the
ennagesaagainst the company. This right
company. This
right isis availabi aggrieved investo
available even after the
stor also gets a right of action for

claim damages, Irom the company has gone into liquídation.

n orde

company the claimant shall have to liquidaton

)
the representation
in the
prospectus was made prove that

6) it rel ated to a material fact and not a

fraudulently,
mere
expectation,
promise, forecast or expression of opinion or
class of erson intended
he was a to act
upon it and that
he had actually acted upon it and
he had suffered
amages damages. Allottee cannot, however, both retain the
harce
ares
and get
against the company.

Book-Building
Acompany may raise capital in the primary capital market through initial public offers (IPOs),
ights issues and private placement. IPOs, the
largest sources of funds in the primary capa
market, are basically an invitation by a company to the public to subscribe to its securities
market, are offered
through prospectus. A company can make public offering through:
Fixed Price Method

.Book Building Method, or

Combination of Both.
olls of a b
Fixed Priced Method
shares it wishes. The
Fixed price issues are issues in which the issuer is allowed to price the
as

and quantitative statements.

basis for the price is explained in an offer document through qualitative
and the Registrar of Companies.
This offer document is filed with the stock exchanges

Book Building Method

Public Offerings
essentially a process used by companies raising capital through
Book Building is
(IPOs) or FolloW-on Public Offers (FPOs) to aid price and demand
Initial Public Offers
either
and a band within which the investor is allowed to bid for
sets a base price
iscoverv. The issuer
for which the book for the offer is open, the
where, during the period
shares, It is a mechanism
at various prices, which are within the price band specified by
idc collected from investors
both the institutional as well as the retail investors, The
are

is directed towards
heissuer
ne
sSue priceThe
issuer process
is determined after the bid closure based on the demand generated in the process. S
 360

Book building process is a common practice used in most developed

ed cosws
countries
Business Laws
public ofner of eguity shares of a company. Book building is a transparensfor
diacovery method of initial public offerings
(TPOs) in which
kssever company along with the Book Running Lead Manager (BRLM) on
price of secueisd flexibi. marketing
n the the
Is fixed s Price
received from the investors and market intermediary basis of
Charecteristics of Book-Building
feedback
1. Price Band: The range of price (the highest and the lowest price) at

subscription of securities is made, is

known as 'price band'. Investe which offer for
the price hand. price withinthe
2. Floor Price: Floor price is the minimum price set by the lead manager i
issue for subscription. Investors fr ation with
On with
issoer. This is the price at which the open
is

at arty price higher than the floor price.

are
the
s

bid
3. Tendering Process: Book building involves inviting subscriptions to a public offer of
essentially through a tendering process. Eligible investors are required to place their
their place securit
number of shares to be issued and the price at which they are willing to invest, witbids for the
manager running the book. At the end of the cut off period, the lead with
manager det the lead
response to the issue in terms of the quantum of shares and the highest price at which d s the
sufficient to match the size of the issue.
4. Bid: The investor can place a bid with the authorized lead manager. In the case oe .
shares, usually several brokers in the stock exchange are also authorized by the lead mar
imvestor fills up a bid-cum-application form, which gives a choice to bid for up to three onti
prices. The price and demand options submitted by the bidder are treated as optional demand
are not cumulated. and

5. Allotment: The lead manager, in consultation with the issuer, decides the price at which ths
issue will be subscribed and proceeds to allot shares to investors who have bid at or above the
fixed price. All
investors are allotted shares at the same Ixed price. For any allottee, therefore the
orice would be equal to or less than the price bid.
. Participants: There are 3 kinds of investors in a Book Building Issue:
( Retail Individual Investors (RI)- RII is an investor who applies for securities for a value
of not more than 200,000.
(i) Non Institutional Investors (NII)- Any bid exceeding 2,00,000 amount is considered in
the NII category. NIIs are commonly referred to as high net-worth individuals.
ii) Qualified Institutional Buyers (QIB) - QIBs are institutional investors who possess the
expertise and funds to invest in the securities market. Mutual funds, financial institutions
commercial banks, insurance companies, provident funds, state industrial
scheduled
development corporations come in this category.
generally, all investors, including individuals, eligible to invest in a particular issue of securt
participate in the book building process. However, if the issue is restricted to qualnic
uuuonal, as in the case of government securities, then, only those eligible can participalc
P r a p e c n s

361
The
Princip
The issuer/company
parties/intermediaries involved n a book building proces
in
ok
The Book
Running Lead
SEBI Manager
anager (BRLM)
(BRLM) who
wl is a Merchant Banker registered with
(in The Syn yndicate Members who are
carry on activities intermediaries
ies permitted
and who are
Lead Manager.
as
underwriters. Syndicateregistered with SEBI
Members are
are appointed
a by Book Running

The Process of Book Building

Issuer
The Issuer who is
planning
offer nominates an
lead merchant banker(s) as "book runners
4 draft offer document is sent to the SEBI.
.Circulation of Information Memorandum.

Filing of
of Re Red herring Prospectus at least three days before the
opening of the
.

offer.
The specifies number of securities to be issued and the
Issuer the

The Issuer alsoappoints syndicate members with

price band for the bids.
whom orders are
svndicate members input the orders into
ed by the investors. to be placed
The
bidding' and is similar to open auction.
an 'electronic book'. This process is called

The book normally remains open for aperiod of 5 days.

Bids have to be entered within the specified price band.
Bids can be revised by the bidders before the book closes,
On the close of the book building period, the book runners evaluate the bids on
the basis of the
demand at various price levels.

The book runners and the Issuer decide the final

price at which the securities shall be issued.
Generally, the number of shares is fixed; the issue size
gets frozen based on the final price per
share.
Final Prospectus specifying the price and size ofthe offer is issued.
Allocation of securities is made to the successful bidders. The rest get refund orders.
Every public offer through the book-building process has a book running lead manager (BRLM)D.
Imerchant banker, who manages the issue.

The investor had to bid fora quantity of shares he wished to subscribe to within this band. The
9perprice of the band can be a maximum of 1.2 times the floor price.
Further, an order book, in which the investors the
quantity of the stock they are
can state
ung to buy, at a price within the band, is built. Thus the term 'book-building.
15Sue
through the book-building route remains open for a period of 3 to 7 days and can b
y another three if the issuer decides to revise the floor price and the band.
days
 362 Business Laws
Illustration
Determination of Cut off Price:
10/each. The Floor Price is
ACompany issues 10 lakh shares offace value do
48, and
Band is 48-F 55. the PrieKice
received, the price can't be fixed at zss
Ifat55, bids for 2 lakh shares are

the price can't be fixed at 54

At 54, bids for 5 lakh shares are received;
at this price are for at least 3 lakh she
The Cut-off price will be 53 when bids ares. At
as 10 lakh shares
are placed. this
the book would be completed/built price
rice
and Normal Public Issue
Difference between Book Building
In fixed price process, allotments of shares to all the investors are made on prono
Institutional investors normally are not interested to participate in fixed price public: ate basis.
uncertainty of allotment and lack of opportunity cost. On the other, they like to particip issues dueto
in book built transactions as in this process the costs of public issue and the ate largely
time taken
completion of the entire process are much lesser
than the fixed price iissues. In
Book for the
price is determined on the basis of demand received or at price above or equal to the flo Buildin the
whereas in fixed price option the price of issues is fixed first and then the securities e rice
the investors. In case of Book Building process, book is built by Book Runner Lead offered
Managerto
to
Runner Lead
(BRLM) to know the everyday demand whereas in case offixed price
ce of public issues, the
is known at the close of the issue. den
Fixed Price Process Book Building process
Price at which the securities are Price which securities will be
at
offered/ allotted is known in advance allotted is not known in advance offered
to the
to the investor. investor. Only an indicative price
range is known,
Demand for the securities offered is Demand for the securities offered can be
known only after the closure of the issue everyday as the book is built. known
Payment is made at the time of
Payment is made only after allocation
subscription wherein refund is given
after allocation.
 363

Book-Building Process
Nominte Book Runer (ERLM

of Brokers, Arangers,
omSyndica
Uhdewiters, Finandal Irstitutions, ec
fer Doaument to SEBI Indcang the Phie Bard (ithout mentionirg the Pice df the
lssu
Graulae Offer Documentamong the
Syndcate Marbers
Ask for Bds an Piae (ithin the Price Band) and
Quartityd Securities

Aggregate and forwardal Cfers to BRLM

Runthe Bodk to maintain a recard o Subsaribers, their Offer Price and Cdes

Consut with lssLer and BRUM to determne the Firal Issue Pice based on the Offers Recaved

Fimup Uhdewriting Commitments

Issue Firal Prospectus spedfying the Price and Size ofthe Offer

Albt Securiies to the successiul Bidders/Syndicate Members

Securities Issued and Listed

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