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Unit 3: Primary Market and Secondary Market

years of its formation or after one year of the first issue of shares whichever is earlier will have Notes
to offer the shares to the existing shareholders with the right to reserve them in favour of a
nominee.

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Caution Rights issue is the cheapest and convenient method of raising funds and protects
the interest of the existing shareholders against the dilution of their ownership.

3.2.5 Over-the-Counter Placement

This method has come to be employed in recent years, especially after the commencement of the
operations of Over-the-Counter Exchange (OTCE) in 1992. The OTC permits small companies to
raise funds through its exchange. Under this method, the company intending to raise funds
through OTCE appoints a member of the OTCE as sponsor. The sponsor appraises the project
and values the shares of the company. The shares are placed by the sponsor with itself and other
members and dealers of the OTCE. The sponsor ensures the success of the issue even if it is
required to subscribe to all the shares by itself. The OTCE members and dealers operate counters
to facilitate trading with investing public. The distribution of shares through OTCE has to be
made as per the SEBI guidelines. This method of selling securities is most suited to small
enterprises.

3.2.6 Initial Public Offer through Stock Exchange Online System (E-IPO)

In addition to other requirements for public issues as given in the SEBI guidelines wherever
applicable, a company proposing to issue capital to public, through the online system of the
stock exchange for offer of securities, has to comply with the requirements discussed below.
They are applicable to the fixed price issue as well as for the fixed price portion of book-built
issues. The issuing companies would have the option to issue securities to the public either
through the online system of the stock exchange or through the existing banking channel.

Agreement with Stock Exchange: The company should enter into an agreement with the
stock exchange(s), specifying, inter alia, their mutual rights/duties/responsibilities and
obligations inter se. It may also provide for a dispute resolution mechanism between
them.
Appointment of Brokers: The stock exchange(s) would appoint the SEBI registered
stockbrokers of the exchange to accept applications and place orders with the company,
considering them as collection centres. They would collect the money from the clients for
orders placed and in case clients fail to pay for shares allocated, the brokers would have to
pay the amount. The company/lead manager should ensure that the appointed brokers
are financially capable of honouring their commitments if their clients default.
The company would pay the brokers a commission/fee for their services and the stock
exchange should ensure that they do not levy a service fee on their clients in lieu of their
services.
Appointment of Registrar to Issue: The company should appoint a registrar to the issue
with electronic connectivity with the stock exchange(s) through which the securities are
offered under the system.

Listing: The company may list its securities on an exchange other than the one through
which it offers its securities to the public via the online system.

Responsibility of Lead Manager: The lead manager would be responsible for coordination
of all the activities among various intermediaries connected on the issue system. The

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