Page 46 - DCOM507_STOCK_MARKET_OPERATIONS

Unit 3: Primary Market and Secondary Market

Self Assessment Notes
Fill in the blanks:
1. The agencies associated with functions of originating underwriting and distributions
constitute the organization of the ............................... market in India.
2. Subscribers also form part of the ...............................

Caselet The Indian IPO Market in Early 2008

n the first half of February 2008, Wockhardt Hospitals Ltd. (Wockhardt), Emaar MGF
Land Ltd. (Emaar MGF), and SVEC Constructions (SVEC) withdrew their Initial Public
IOfferings (IPOs) owing to poor investor response. Some analysts were of the opinion
that overpricing was the main reason for their withdrawal, while others felt that the
turmoil in the global financial markets had played a larger role. Still others were of the
view that the IPO of Reliance Power Ltd. (RPL), part of the Reliance Anil Dhirubhai
Ambani Group (ADAG), which opened on January 15, 2008, was responsible for the tepid
response to these three IPOs, as the RPL IPO had sucked out liquidity from the market.

Source: http://www.icmrindia.org/casestudies/catalogue/Business%20Environment/The%20Indian%
20IPO%20Market.htm
3.2 Investment Procedure

Distribution of securities to prospective investors to mop up their surpluses is a highly specialized
activity that requires a lot of expertise and experience. As such, companies seeking to garner
funds from a large number of investors—both individuals and institutions—have to hire the
services of the specialized agencies such as underwriters, brokers, merchant bankers, etc. Besides,
there are other ways which can be employed for selling securities to the investing public. In
India, following methods are usually employed to garner funds from the public through floatation
of securities.

3.2.1 Public Issue Through Prospectus

In this method, a public limited company invites the public at large through prospectus to subscribe
to the issue of securities. According to the SEBI norms, a minimum of 49% of the total issue at a
time is to be offered to public. A prospectus is a document that provides information about the
company and its proposed issue. The company and the directors signing this document are
personally liable for any false statement or misrepresentation of material facts in the prospectus.
Public issue through prospectus may take the form of direct selling, sale through investment
intermediaries and underwriting of issues. Direct selling of securities method can be used when
a company intends to approach a small number of large individual or institutional investors.
However, there is no certainty of procuring the desired funds from investors through direct
selling. This is why companies may take the help of intermediaries and specialized agencies
such as brokers, merchant bankers, for selling such securities. These agencies charge commission
for their service. However, they do not provide any guarantee to the issue regarding the sale of
securities. To remove this deficiency and to ensure certainty of procurement of the desired
funds, companies approach underwriting firms who, in lieu of commission, undertake the
guarantee of buying the unsubscribed portion of the offer. Thus, an underwritten placement
method is relatively more safe method of acquiring funds from the public at large.

LOVELY PROFESSIONAL UNIVERSITY 41