MOST of us have an inner rebel. That’s why often fall for the guy mother warned us against. Or continue smoking even when told not to.

So, it’s no wonder that when mutual fund advertisements worth millions of dollars, tell us to ‘Please read the offer document (OD) carefully before investing’, we still don’t! This is understandable; after all it’s a 100-page document filled with jargon. But in the long run, you will be the loser, if you don’t.

The Securities and Exchange Board of India (SEBI) have even come out with an abridged version called the Key Information Memorandum, which stipulates standard sections and disclosures in all ODs.

An OD is critical because it tells you whether your money is in the right hands, at the right place and at the right time. Your financial advisor will have a copy, and the company web site should have it online, too.

If you still don’t want to read the whole document, take the easy way out. wealth scopes out 10 must-reads in the OD.

1. Date of issue

Verify that you have the latest edition of the OD (an OD must be updated once a year, at least).

2. The minimum investment

Mutual funds differ both in the minimum initial investment required, and the minimum for subsequent investments.

For example, equity funds may stipulate Rs 5,000, while institutional premium liquid plans may stipulate Rs 10,000,000 (Rs 10 crore) as the minimum amount.
3. Why invest

The goal of each fund must be clearly defined, from income to long-term capital appreciation. You, the investor, must be sure that the fund’s objective matches with your’s.

4. Investment policy

An OD will outline general strategies implemented by the fund managers. You will learn what types of investments will be included, such as government bonds (with ratings) or stocks, considered appropriate. Be sure to check if it offers adequate diversification.

5. Risk factors

Every investment involves some level of risk. Look for descriptions of the risks associated with investments in the fund (like credit risk, market risk or interest-rate risk) and decide if it matches your risk appetite.

For example, a mutual fund Monthly Income Plan (MIP) invests mainly in bonds and gilts (up to 90 per cent) with a sprinkling of equity(10 per cent) to generate capital appreciation. This is passed on to customers as monthly income.

But remember: it is subject to availability of distributable surplus. In 2004, many mutual fund customers underestimated this market risk and were caught by surprise when the MIPs gave low/negative returns.

They may have been better off with a a Post Office MIP that assures an 8 per cent monthly income payment for its six-year tenure.
6. Past record

ODs contain selected per-share data, which includes the net asset value and total return for different time periods, since the fund’s inception.

Performance data listed in an OD are based on standard formulae established by the SEBI and enable investors to make comparisons with other funds. So investors should check track records over a period of time that matches their own investment horizon but always remember that ‘past performance is not an indication of future performance’.

Additionally, investors must check that the benchmark chosen by the fund to compare its relative performance is appropriate. In addition, investors should keep in mind that many of the returns presented in historical data don’t account for tax. They must look at any fine print in these sections, as they should say whether or not taxes have been taken into account.

BANKS today offer a slew of services to the customer, which only seem to increase by the day. However, remember this: there’s no such thing as a free lunch. Let’s take stock of what you pay to avail of services for a typical savings bank account.

1. Non-maintenance of minimum balance
You must maintain a stipulated minimum balance in your account (Rs 1,000 for a nationalised bank, Rs 5000 for a private bank).

If you fail to maintain this average quarterly minimum balance, you attract a bank charge of Rs 750-1,500 respectively. You could also face fines for cash transactions at branches and ATMs.

2. Cheque book charges
Most nationalised banks provide chequebooks free as per your requirement. Many private ones, on the other hand, charge you Rs 50-200 per chequebook, if you use up more than 2-3 per quarter.

3. Account closure charges
Some banks charge Rs 50-200 if the account is closed before six months elapse.

4. Charges for certificates
Unlike most nationalised banks, private banks charge Rs 50-Rs 250 for documents such as balance certificate, interest certificate, address confirmation, signature attestation, photo attestation.

5. Cheque return charges
Nationalised banks fine you Rs 50-Rs 200 in case of cheque return (due to insufficient funds, signature mismatch etc) but private ones charge you Rs 100-Rs 500.

6. Cash transaction at other branches
In case of a cash transaction at a branch other than where your account is opened, 1-3 transactions are free per quarter. Beyond that, be prepared to be charged at the rate of Rs 5 per for every Rs 1000 transacted.

7. ATM charges
If you use the ATM of another back for balance enquiry or cash, you could be charged anything from Rs 10-100 per transaction.

8. Account statement
RBI directs that all banks must send free quarterly statements to their customers. Should you require more statements (in case of loss etc), you may have to pay Rs 50-500 per statement.

9. ATM or Debit Card fees
Most banks offer ATM cards free of cost but some do charge their customers for debit cards. For example, ICICI Bank provides a combo ATM/ Debit card, for which it charges Rs 99 per annum.

Over and above these, there are several other charges, such as outstation clearing charge (Rs 50- 500), pay order/ demand draft charge (based on amount), standing instruction charges, home cash delivery charges, old records retrieval charges, activation of dormant account charge etc.

Note: Visit the bank’s web site or any of the branches, for a copy of these expenses. It is mandatory for every bank to give it to you.

There are basically two categories of applicants:
1. Individuals / HUFs
2. Others.

1. Individuals and HUFs

This form is 12 pages long. But don’t get alarmed. Out of the 12 pages, six pages are only by way of guidance notes. The actual form is only six pages long.

ITR 3

2. Others

ITR 5
This form is to be used by Firms/ AOPs/ BOIs to file their returns. It is a 22-page Form with 30 schedules to it. In addition, there are 10 pages of guidance notes to help taxpayers fill up the form. Apart from the details of the income and tax, this form requires the taxpayer to fill in details of the FBT. ( Fringe Benefit Tax)

ITR 6
This form is to be used by companies to file their returns. It is a 24-page form with 34 Schedules to it. This form replaces the earlier Form no 1. In addition to 24 pages, there are nine pages of guidance notes to help taxpayers in filling up the form. Apart from the details of the income and the tax, this form also requires the taxpayer to fill in details of the FBT.

ITR 7

ITR 8
This form is to be used by those who are liable to file returns for fringe benefits and not the Return of Income. It is a four page form with three additional pages of guidance notes.

So, Am I succeeded in confusing or clarifying? If it’s the latter then my is done. The above should help you to select the form which is most appropriate for you and that is half the battle won for paying your tax. The other half of course is finding creative ways to save your tax! Lets leave that for another article.

Disclaimer: While I have made efforts to ensure the accuracy of my content neither this website nor the author shall be held responsible for any losses/ incidents suffered by people accessing, using or is supplied with the content.

ING MF has unveiled a new fund called ING Latin America Equity Fund and it is a an open-ended fund of fund scheme. The primary investment objective of the scheme is to seek capital appreciation by investing predominantly in ING (L) Invest Latin America Fund. The scheme may, at the discretion of the Investment Manager, also invest in the units of other similar overseas mutual fund schemes, which may constitute a significant part of its corpus. The Scheme may also invest a certain portion of its corpus in money market securities, in order to meet liquidity requirements from time to time.

Birla Sun Life Mutual Fund announced to declare dividend under institutional plan with dividend reinvestment option of both the Birla Sun Life Interval Income Fund-Quarterly Plan-Series II and - Birla Sun Life Interval Income Fund-Quarterly Plan-Series III.

The fund house fixed 30 June 2008 as the record date for the declaration of dividend under both the schemes.

The NAV of Birla Sun Life Interval Income Fund-Quarterly Plan-Series II was Rs 10.0940 and that of under Birla Sun Life Interval Income Fund-Quarterly Plan-Series III was Rs 10.0790 as on 24 June 2008. Both the schemes are is an open-ended interval income schemes.

The primary objective of the scheme is to generate regular income through investment in debt and money market instruments.

ABN Amro mutual fund announced that ABN Amro Asset Management (India) Limited, a public limited company is converted to a private limited company ABN Amro Asset Management (India) Private Limited.

We have received one circular that the amount as donation will be deducted from our salary to pay to recognized charitable trust (which has 80G deduction number allotted by IT Department) for the hospitalization of cancer patient. Accordingly, amount is directly deducted from our salaries and the lump sum amount is paid by the Employer to that charitable trust through cheque. Charitable trust has issued 80G certificate in the name of the Employer and saying that employees can not claim deduction for this donation. My question is that “Can Employees claim deduction for this donation?” & How? Geeta Thakur , Mumbai

Yes, employees can claim deduction u/s 80G provided a certificate from the Employer is received in which employer states the fact that

• It has not claimed the deduction u/s 80G

• The contribution was made out of deduction from salaries of employees.

• The quantum of deduction made from the employee whom the certificate is being issued If you get this certificate, keep it in record and claim the 80G deduction. Since no documents required to be attached with the return , the certificate kept in your record will come handy of the income tax department wants to verify such claims.

Courtesy- http://www.taxworry.com/

Life (including investments ) is not about not making mistakes, but to learn from them. A wise person quickly learns from his mistakes - and those of the others too. Given below are 7 do’s and don’ts which we can follow to avoid mistakes commonly made by investors in MFs.

Rule 1 : Don’t look at NAV
I would be repeating this maybe a 100th time - Rs 10 NAV does NOT mean that the fund is cheaper than an existing fund with say Rs 200 NAV. Therefore, never look at NAV when you are making an investment decision.

Rule 2 : Do systematic investment
The market valuations today, despite the recent correction, are still not cheap. Also, there is risk of a possible slowdown in the economy. Therefore, averaging one’s investment by doing SIP is a safer route to investing in equity markets.Lump-sum investment is advisable only at very low market PE levels, when the risk of markets going down further is low and the probability of appreciation high.Of course, this does not apply so much to debt funds, where the returns are relatively much more stable.

Rule 3 : Don’t go for Dividend option
If the investment horizon is more than 1 year (which should ideally be the case when one invests in equity funds), Growth option is generally preferable both from the point of view of wealth creation and tax efficiency. For investment period less than 1 year for the short-term needs - and usually invested in debt funds - dividend option would generally be better.

Rule 4 : Don’t have too many or too few funds
Don’t invest in too many or too few funds. While, there is no specific number of funds which you may own, a portfolio of 12-18 funds should in most cases be OK.Too large a portfolio will mean many similar funds, which could dilute your overall returns. Too small a portfolio will mean that you are not covering the entire breadth of the market, besides exposing yourself to high risk of a concentrated portfolio.Further, your corpus should be appropriately spread across large-cap/diversified funds, mid-cap funds and sector funds from different fund houses. Large-cap/diversified funds are relatively less risky, mid-cap funds are riskier and sector funds carry highest risk. Therefore, to have a balanced and stable portfolio, maximum money should go to large-cap/diversified funds, some amount to mid-caps and only a small portion should be invested in sector funds.

I have seen many portfolios which are stacked with infrastructure funds (the latest market fancy). Such concentrated portfolios carry very high risk.

Rule 5 : Don’t invest in New Fund Offers
Do not invest in NFOs; unless they have something very different to offer, which the existing funds don’t.Since there is no portfolio or performance to look it, it is difficult to assess whether the fund would add value to our portfolio or not. Besides, most of the NFOs launched today are the risky sector funds.

Rule 6 : Do your own study before investing
Ads are meant to lure people. Therefore, it will not be prudent to invest just because some advertisements say so.

Further, it would also not be prudent to blindly trust your distributor (especially those who are not professional advisors too). One, they may not be fully equipped to understand your needs and advise accordingly. Two, they may not be selling all the products you may need. Three, they may be guided more by their commissions than your interest.Hence, always cross-check the advice you receive with multiple sources, before you commit your money.

Rule 7 : Don’t invest too much in global funds
Be very careful when investing in global funds. Global funds would probably be the riskiest amongst the equity funds. Like any equity funds, they face the equity-risk.Besides this they are also open to currency risk. If the rupee appreciates, you will get less rupees/dollar. Therefore, it is possible that whatever returns you make in dollar terms, may get fully eroded if in the meantime the dollar has depreciated. Given the strength of the Indian economy vis-à-vis the US/Europe etc., the chances of rupee appreciation are high. In fact, had RBI not intervened, dollar might have already depreciated to Rs 35-38.Therefore, invest only a small percentage of your corpus in good diversified global funds; that too primarily for diversification purposes.

These rules will guide an uninformed investor to invest his money wisely and profit from the potential that the Indian economy offers today.

Step1
Talk to your agent about multi-policy discounts. Most companies want to write your home and auto coverage and will provide significant discounts for packaging them together.
Step2
Tickets and accidents can severely increase your insurance premium … remember to be a safe and courteous driver.
Step3
Be aware of WHAT you are driving …. sporty and classic vehicles as well as large trucks can be higher to insure. Contact you agent for a quote before purchasing a new vehicle.
Step4
Raise your deductible and drop any unnecessary coverages. (As a general rule, any car worth less than $1,000 should not carry comprehensive and collision coverage.)
Step5
Check your credit. Many insurance companies are now using an insurance score to evaluate your premium. Your credit score can have a huge impact on your insurance score.
Step6
And finally, shop with an independent agent. They will have access to more carriers and can quote you many companies at the same time

Many times we come across some blog, information or news about new IPO and urging people to go for it. A number of investors, especially, beginners do not know What is an IPO at all? what are the benefits or demerits of going for IPOs. What are the term used? They want to know about listing process, book building process etc. Here we tried to put all this information in questions and answers form. Hope it comes out to be useful for all.

1 What is an IPO?
An IPO is defined as an exercise when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public.
The exercise refers the issue of shares to the public by the promoters of the company. The shares are made available to the investors at the face value of the share or with a premium as per the perceived market value of the share by the promoters.
The IPO can be in the form of a fixed price portion or in the form of a book building portion. The IPO paves way for listing and trading of the issuer’s securities.

2 What are primary/secondary market transactions?
Primary market transaction is usually referred to the purchase of shares in an IPO. The purchases are made through applications for the shares on a prescribed form. Once the shares are allotted, the share transactions are carried out in secondary market or stock exchanges.
Secondary market transactions refer to those transactions under which an investor purchases shares from another investor at the prevailing market price or at whatever price the buyer and seller agrees upon.
The primary and secondary markets are governed by a regulatory authority Security and Exchange Board of India (SEBI).
3 What are eligibility norms for making an IPO?

SEBI has laid down eligibility norms for entities planning to enter the primary market through public issues. An unlisted company needs to satisfy following criteria to be eligible for making a public issue:

• Net tangible assets of at least Rs 3 crore for three full years• Distributable profits in at least three years• Net worth of at least Rs 1 crore in three years• If change in name, at least 50 per cent of revenue for preceding one year should be from the new activity• The issue size should not exceed five times the pre-issue net worth

SEBI also provides alternate routes to the companies not satisfying any of the above parameters, for accessing the primary market.
The alternative conditions are as follows:

• Issue shall be made through book-building route, with at least 50 per cent to be mandatory allotted to the QIBs.• The minimum post-issue face value capital shall be Rs 10 crore or there shall be a compulsory market-making for at least two years.
4 How can one apply for an IPO?

An investor needs to first obtain an IPO application form through a share broker, an investment consultant or from the collecting banks. The investors are required to fill up the form and remit the amount after calculating the number of shares applied for in the bank, which has been designated as a collecting centre for the particular IPO.
An investor holding a demat account can either apply for the shares directly through the account or can opt for physical delivery of share certificates. There are certain IPOs, which offer only demat form of shares, while others offer both the demat and regular shares. Application forms can be rejected due to incomplete details.
Every week SEBI issues press releases for information of the public, details of offer documents filed with SEBI and observations issued. The required details can be obtained from the ‘Primary Market’ section of the SEBI website. The draft offer document can also be purchased from the SEBI office. The draft offer document/letter of offer remains posted on SEBI website for a period of 21 days from the date of filing the same to SEBI and can also be downloaded from there.
Application forms can also be obtained from the lead manager and brokers to the issue. The application forms are also generally available at collecting bankers. Name and addresses of the lead manager are available in the prospectus/letter of offer.

5 What is book-building process?
SEBI guidelines defines book building as “a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for the securities is assessed on the basis of the bids obtained for the quantum of securities offered for subscription by the issuer”.
This process provides an opportunity to the market to discover price for the securities on offer. In common words, book building is a method for public offer of equity shares of a company. The process is named so because it refers to collection of bids from investors, which is based on a price range. The issue price is fixed after the closing date of the bid.
A company planning an IPO appoints a merchant bank as a book runner. Then the company issues a prospectus that does not mention the price, but provides other details related to the issue size, the company’s operating area and business, the promoters and future plans among other disclosures.A particular time frame is also fixed as the bidding period. Then the book runner builds an order book that collates bids from various investors. Potential investors are allowed to revise their bids at any time during the bidding period.
At the end of bidding period the order book is closed and consequently the quantum of shares ordered and the respective prices offered are known. The calculation of final price is based on demand at various prices and also involves negotiations between those involved in the issue.
The book runner and the company finalise the pricing and allocation to each syndicate member.

6 What is the main difference between a book-building route and the normal public issue?
Unlike the book-building route, the price is known in advance to investors in case of offer of shares through normal public issue. On the other hand, the demand can be known everyday as the book is built in case of book building, which demand is not known until the close of the issue in case of the normal public issue.

7 What is the minimum number of days for which a bid should remain open in book building?
Book should remain open for a minimum of five days.

8 Can open outcry system be used for book building?
No. As per SEBI, only electronically linked transparent facility is allowed to be used in case of book building.

9 Is the issue price for placement portion and net offer to public the same?
Yes.

10 What is the floor price in case of book building?
Floor price is the minimum price at which bids can be made. The issuer company in consultation with the book-running lead manager fixes the floor price.

11 Can the individual investor use book building facility for making an application?
Yes.

12 Can the bidder revise his bids?
Yes.

13 What proof can a bidder request from a trading member for entering bids?
A bidder can request for a transaction registration slip as proof of his/her having entered the bid. Whenever a bid is entered by trading members into the system, a unique transaction registration slip is automatically generated. Transaction registration slip gives details regarding number of shares bid for, price, the client name among other details.

14 Is it possible to enter bids less than floor price?
No. The system automatically rejects the bids if price is less than floor price.

15 Are there any restrictions on pricing by companies?
The companies can freely price their equity shares. However they have to give justification of the price in the offer document.

16 Who are syndicate members?
Syndicate members are the intermediaries registered with the board and permitted to carry on activity as underwriters. The book-running lead managers to the issue appoint the syndicate members.

17 What is an order book?
It is an ‘electronic book’ that shows the demand for the shares of the company at various prices.

18 What is a red herring prospectus?
A red herring prospectus (RHP) is a preliminary registration statement that must be filed with the regulatory authority describing the IPO and the prospects of the issuing company. There is no price or issue size stated in the red herring, and it is sometimes updated several times before being called the final prospectus.
It is known as a red herring because it contains a passage in red that states the company is not attempting to sell their shares before the registration is approved by the regulatory authority.

19 What is the difference between an offer document, an RHP, a prospectus and an abridged prospectus? What is a “draft offer doc”?
“Offer document” means a prospectus in the case of a public issue or offer for sale which is filed with Registrar of Companies (RoC) and the stock exchanges. An offer document covers all the relevant information required to help an investor to make his/her investment decision.
“Draft offer document” refers to an offer document in a draft stage. The draft offer documents are filed with SEBI at least 21 days prior to the filing of the offer document with the registrar and the exchanges. SEBI may specify necessary changes in the draft offer document and the issuer or the lead merchant banker is required to implement changes in the draft offer document before filing the offer document. The draft offer document is available on the SEBI website for public comments for a period of 21 days from the filing of the draft offer document with SEBI.
A red herring prospectus does not have details of either price or the number of shares being offered or the amount of issue. However, this prospectus mentions the number of shares and the upper and lower price bands. An issuer can also state that the issue size and the number of shares would be determined later. In case of a book-built issues, RHP is a process of price discovery and the price cannot be determined until the bidding process is completed. Hence, such details are not shown in the RHP filed with the RoC. Only on completion of the bidding process, the details of the final price are included in the offer document.
The offer document filed thereafter with ROC is called a prospectus. “Abridged prospectus” refers to a prospectus that contains all the salient features of a prospectus. It accompanies the application form of public issues.20 What does one mean by ‘lock-in’?
Lock-in refers to a freeze on the shares. SEBI guidelines have stipulated lock-in requirements on shares of promoters primarily to ensure that the promoters, who are controlling the company, shall continue to hold some minimum percentage in the company after the public issue.

21 Who is a promoter?
The promoter is defined as a person (or persons, as the case may be) who is in over-all control of the company, is instrumental in the formulation of a plan or programme pursuant to which the securities are offered to the public and who is named in the prospectus as promoter. A director/officer of the issuer company or person, if they are acting as such merely in their professional capacity are not be included in the definition of a promoter.
‘Promoter group’ includes the promoter, an immediate relative of the promoter (i.e. spouse of that person, or any parent, brother, sister or child of the person or of the spouse).
In case the promoter is a company, a subsidiary or holding company of that company; any company in which the promoter holds 10 per cent or more of the equity capital or which holds 10 per cent or more of the equity capital of the promoter; any company in which a group of individuals or companies or combinations thereof who holds 20 per cent or more of the equity capital in that company also holds 20 per cent or more of the equity capital of the issuer company.

22 What are the requirements regarding promoter’s contribution and lock-in?
In case of an IPO, the promoters have to necessarily offer at least 20 per cent of the post issue capital. In case of public issues by listed companies, the promoters shall participate either to the extent of 20 per cent of the proposed issue or ensure post-issue share holding to the extent of 20 per cent of the post-issue capital.
In case of any issue of capital to the public the minimum contribution of promoters shall be locked in for a period of three years, both for an IPO and public issue by listed companies. In case of an IPO, if the promoters’ contribution in the proposed issue exceeds the required minimum contribution, such excess contribution shall also be locked in for a period of one year. In addition, the entire pre-issue share capital, or paid up share capital prior to IPO, and shares issued on a firm allotment basis along with issue shall be locked-in for a period of one year from the date of allotment in public issue.

23 What is the basis of allotment?
In case of over-subscription in a fixed price issue, the allotment is done in marketable lots and on a proportionate basis. In case of a book building issue, allotment to Qualified Institutional Buyers (QIBs) and Non-Institutional Buyers (NIBs) are done on a discretionary basis. Allotment to retail investors is done on a proportionate basis.
After the closure of the issue, the bids received are aggregated under different categories, such as firm allotment, Qualified Institutional Buyers (QIBs), Non-Institutional Buyers (NIBs) and Retail Individual Investors. The oversubscription ratios are calculated for each of the categories as against the shares reserved for each of the categories in the offer document. Within each of these categories, the bids are segregated into different segments based on the number of shares applied for.
The oversubscription ratio is then applied to the number of shares applied for and the number of shares to be allotted for applicants in each of the buckets is determined. Then, the number of successful allottees is determined. This process is followed in case of proportionate allotment. In case of allotment for QIBs, it is subject to the discretion of the post issue lead manager.

24 Can the public give their comments/complaints on the issuer company or others connected with the issue?
Yes, the objective of making offer document public is to invite public comments. The comments should be given within 21 days of the filing of the draft offer document with SEBI.

25 Within how many days should an investor receive the refund order/allotment advise?
The investor is entitled to receive a confirmatory allotment note (CAN) in case he has been allotted shares within 15 days from the date of closure of a book-built issue. The registrar has to ensure that the demat credit or refund as applicable is completed within 15 days of the closure of the book built issue.
The refund orders/allotment advice is to be despatched within two working days of finalising the basis of allotment. Companies are required to finalise the basis of allotment within 30 days from the closure of the issue in case of a fixed price issue and within 15 days from the closure of the issue in case of a book building issue or else they are liable to pay interest at the rate of 15 per cent per annum

26 In case of non-receipt of the refund order/share certificate/allotment advise, what is the course of action available to the investor?
The investor should complain in writing to the lead manger/registrar/SEBI’s Investor Grievance Cell.

27 Within how many days should the company get its securities listed after the issue?
The post-issue lead manager ensures that all steps for completion of the necessary formalities for listing and commencement of trading at all stock exchanges where the securities are to be listed are taken within 7 working days of finalisation of basis of allotment.

28 Is it mandatory to have a demat account for applying in public issue?
An investor has the option to apply for and receive the shares in physical form. However, it is advisable to get the allotment in demat form as the shares in IPO shall be compulsorily tradable in demat segment in stock exchanges. In case of an IPO of any security of issue size of Rs 10 crore or more, security shall be issued only in dematerialised form.
In book built issues, for QIBs and large investors (applying for more than 1,000 shares) allotment shall be only in demat form and hence they should have a demat account.

29 What are greenshoe option and safety net?
Greenshoe is an option that allows the underwriting syndicate of an IPO to sell additional shares to public if the demand is high.
The name comes from the fact that Green Shoe Company was the first to issue this type of option.
A safety net means investors who subscribe to the IPO of a company can sell those shares to the entity offering safety net at the IPO price. Safety net is actually a put option given to the investors, but not by the company issuing the shares. A put option gives the right but not the obligation to the investors to sell the stock to the entity offering the option at a particular price before a certain period.
Any safety net scheme or buy-back arrangements of the shares proposed in any public issue shall be finalised by the issuer company with the lead merchant banker in advance and should be disclosed in the prospectus.

30 What are fixed price offers?
An issuer company is allowed to freely price the issue. The basis of issue price is disclosed in the offer document where the issuer discloses in detail about the qualitative and quantitative factors justifying the issue price. The issuer company can mention a price band of 20 per cent (cap in the price band should not be more than 20 per cent of the floor price) in the draft offer documents filed with SEBI and actual price can be determined at a later date before filing of the final offer document with SEBI/RoCs.

31 What is a price band?
The RHP may contain either the floor price for the securities or a price band within which the investors can bid. The spread between the floor and the cap of the price band shall not be more than 20 per cent. The price band can be revised also and any such revision is required to be widely disseminated by informing the stock exchanges, by issuing press release and also indicating the change on the relevant website and the terminals of the syndicate members.
In case the price band is revised, the bidding period shall be extended for additional three days, subject to the total bidding period not exceeding thirteen days.

32 Who decides the price band?
The regulators do not play a role in setting the price for issues. The company decides the price or the price band in consultation with merchant bankers. The basis of issue price is disclosed in the offer document. The issuer is required to disclose in detail about the qualitative and quantitative factors justifying the issue price.

33 What is firm allotment?
A company making an issue to public is eligible to reserve some shares on ‘allotment on firm basis’ for certain categories. The shares to be allotted on ‘firm allotment category’ can be issued at a price different from the price at which the net offer to the public is made, provided that the price at which the security is being offered to the applicants in firm allotment category is higher than the price at which securities are offered to public.

34 What is reservation on competitive basis?
Reservation on competitive basis refers to allotment of shares made in proportion to the shares applied for by the concerned reserved categories. Reservation on competitive basis can be made in a public issue to the employees of the company, shareholders of the promoter companies in the case of a new company and shareholders of group companies in the case of an existing company, Indian mutual funds, foreign institutional investors (FIIs), Indian and multilateral development institutions and scheduled banks.
In a book built issue allocation to Retail Individual Investors (RIIs), Non Institutional Investors (NIIs) and Qualified Institutional Buyers (QIBs) is in the ratio of 35: 15: 50 respectively.

35 Is there any preference while doing the allotment?
The allotment to the Qualified Institutional Buyers (QIBs) is made on a discretionary basis. The discretion is left to the merchant bankers who first disclose the parameters of judgment in the Red Herring Prospectus. The merchant bankers are free to set their criteria and mention the same in the Red Herring Prospectus.

36 How is the Retail Investor defined as?
Retail individual investor refers to an investor who applies or bids for securities of or for a value of not more than Rs.1,00,000.

37 What is an e-IPO?
A company can also issue capital to public through the online system of the stock exchange. The appointment of various intermediaries by the issuer includes a prerequisite that such members/registrars have the required facilities to accommodate such an online issue process.
38 What is open book/closed book?
In book-built issues issuers and merchant bankers are required to ensure online display of the demand and bids during the bidding period. This is known as open book system of book building. Under closed book building, the book is not made public and the bidders will have to take a call on the price at which they intend to make a bid without having any information on the bids submitted by other bidders.

39 What is hard/soft underwriting?
Hard underwriting refers to an exercise when an underwriter agrees to buy his commitment at its earliest stage. The underwriter guarantees a fixed amount to the issuer from the issue. If the shares are not subscribed by investors, the issue is devolved on underwriters and they have to bring in the amount by subscribing to the shares.
Soft underwriting refers to a process when an underwriter agrees to buy the shares at later stages as soon as the pricing process is complete. Subsequently, he places those shares with institutional players. The soft underwriter also holds an option to invoke a force majeure (acts of God) clause in case there are certain factors beyond the control that can affect the underwriter’s ability to place the shares with the buyers.

40 What is a cut-off price?
In book-building issues, the issuer is required to indicate either the price band or a floor price in the Red Herring Prospectus. The actual issue price can be any price in the price band or any price above the floor price. This issue price is called “Cut off price”. This is decided by the issuer and lead managers after considering the book and investor demand for the stock.

41 What is differential pricing?
Pricing of an issue where one category is offered shares at a price different from the other category is called differential pricing. According to regulatory guidelines, differential pricing is allowed only if the securities to applicants in the firm allotment category are offered at a price higher than the price at which the net offer to the public is made.

42 Who is qualified institutional buyer (QIBs)?
QIBs are those institutional investors who are perceived to possess expertise and the financial strength to evaluate and invest in the capital markets. A QIB is defined as
• Public financial institution as defined in section 4A of The Companies Act, 1956;• Scheduled commercial banks;• Mutual funds;• Foreign institutional investor registered with SEBI;• Multilateral and bilateral development financial institutions;• Venture capital funds registered with SEBI.• Foreign venture capital investors registered with SEBI.• State Industrial Development Corporations.• Insurance companies registered with the Insurance Regulatory and Development Authority (IRDA).• Provident Funds with minimum corpus of Rs 25 crores• Pension Funds with minimum corpus of Rs 25 crores

43 Why go public?
Usually it is not possible to buy shares in a private company. A potential investor can approach the owners, but they’re not obliged to sell any shares. However, public companies sell at least a portion of themselves to the public and they also trade on stock exchanges.
Public companies have thousands of shareholders and are subject to strict rules and regulations. They must have a board of director and they must report financial information every quarter. Public companies are regulated by governing bodies. The stock is traded in the open market and any investor, who has got money, can invest in them. The CEO and the owner can not prevent an investor from buying stock.
Going public provides an opportunity to raise cash for the companies, while opening many financial doors as well. Public companies can get better rates when they issue debts because of the increased scrutiny involved. A public company can always issue more stock, as long as there is market demand. Consequently, mergers and acquisitions become easier to execute as stock can be issued as part of the deal.

When an issue is not made to only a select set of people but is open to the general public and any other investor at large, it is a public issue. But if the issue is made to a select set of people, it is called private placement. As perCompanies Act, 1956, an issue becomes public if it results in allotment to 50persons or more. This means an issue can be privately placed where an allotment is made to less than 50 persons.

What is an Initial Public Offer (IPO)?

An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities. The sale of securities can be either through book building or through normal public issue.

Who decides the price of an issue?

Indian primary market ushered in an era of free pricing in 1992. Following this, the guidelines have provided that the issuer in consultation with Merchant Banker shall decide the price. There is no price formula stipulated by SEBI. SEBI does not play any role in price fixation. The company and merchant banker are however required to give full disclosures of the parameters which they had considered while deciding the issue price. There are two types of issues, one where company and Lead Merchant Banker fix a price (called fixed price) and other, where the company and the Lead Manager (LM) stipulate a floor price or a price band and leave it to market forces to determi ne the final price (price discovery through book building process).

What does ‘price discovery through Book Building Process’ mean?

Book Building is basically a process used in IPOs for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.

What is the main difference between offer of shares through book building and offer of shares through normal public issue?

Price at which securities will be allotted is not known in case of offer of shares through Book Building while in case of offer of shares through normal public issue, price is known in advance to investor. Under Book Building, investors bid for shares at the floor price or above and after the closure of the book building process the price is determined for allotment of shares. In case of Book Building, the demand can be known everyday as the book is being built. But in case of the public issue the demand is known at the close of the issue.

What is Cut-Off Price?

In a Book building issue, the issuer is required to indicate either the price band or a floor price in the prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called “Cut-Off Price”. The issuer and lead manager decides this after considering the book and the investors’ appetite for the stock.

What is the floor price in case of book building?

Floor price is the minimum price at which bids can be made.

What is a Price Band in a book built IPO?

The prospectus may contain either the floor price for the securities or a price band within which the investors can bid. The spread between the floor and the cap of the price band shall not be more than 20%. In other words, it means that the cap should not be more than 120% of the floor price. The price band can have a revision and such a revision in the price band shall be widely disseminated by informing the stock exchanges, by issuing a press release and also indicating the change on the relevant website and the terminals of the trading members participating in the book building process. In case the price band is revised, the bidding period shall be extended for a further period of three days, subject to the total bidding period not exceeding ten days.

Who decides the Price Band?

It may be understood that the regulatory mechanism does not play a role in setting the price for issues. It is up to the company to decide on the price or the price band, in consultation with Merchant Bankers.

What is minimum number of days for which a bid should remain open during book building?

The Book should remain open for a minimum of 3 days.

Can open outcry system be used for book building?

No. As per SEBI, only electronically linked transparent facility is allowed to be used in case of book building.

Can the individual investor use the book building facility to make an application?
Yes.

How does one know if shares are allotted in an IPO/offer for sale? What is the timeframe for getting refund if shares not allotted?

As per SEBI guidelines, the Basis of Allotment should be completed with 15 days from the issue close date. As soon as the basis of allotment is completed, within 2 working days the details of credit to demat account / allotment advice and despatch of refund order needs to be completed. So an investor should know in about 15 days time from the closure of issue, whether shares are allotted to him or not.

How long does it take to get the shares listed after issue?

It would take around 3 weeks after the closure of the book built issue.

What is the role of a ‘Registrar’ to an issue?

The Registrar finalizes the list of eligible allottees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of refund orders to those applicable are sent. The Lead Manager coordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank branches, processing of the applications and other matters till the basis of allotment is finalized, dispatch security certificates and refund orders completed and securities listed.

Does NSE provide any facility for IPO?

Yes. NSE’s electronic trading network spans across the country providing access to investors in remote areas. NSE decided to offer this infrastructure for conducting online IPOs through the Book Building process. NSE operates a fully automated screen based bidding system called NEAT IPO that enables trading members to enter bids directly from their offices through a sophisticated telecommunication network.

Book Building through the NSE system offers several advantages:

?The NSE system offers a nation wide bidding facility in securities ?It provide a fair, efficient & transparent method for collecting bids using the latest electronic trading systems Costs involved in the issue are far less than those in a normal IPO
The system reduces the time taken for completion of the issue process
The IPO market timings are from 10.00 a.m. to 3.00 p.m. On the last day of the IPO, the session timings can be further extended on specific request by the Book Running Lead Manager.

What is a Prospectus?

A large number of new companies float public issues. While a large number of these companies are genuine, quite a few may want to exploit the investors. Therefore, it is very important that an investor before applying for any issue identifies future potential of a company. A part of the guidelines issued by SEBI (Securities and Exchange Board of India) is the disclosure of information to the public. This disclosure includes information like the reason for raising the money, the way money is proposed to be spent, the return expected on the money etc. This information is in the form of ‘Prospectus’ which also includes information regarding the size of the issue, the current status of the company, its equity capital, its current and past performance, the promoters, the project, cost of the project, means of financing, product and capacity etc. It also contains lot of mandatory information regarding underwriting and statutory compliances. This helps investors to evaluate short term and long term prospects of the company.

What does ‘Draft Offer document’ mean?

‘Offer document’ means Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a rights issue which is filed with the Registrar of Companies (ROC) and Stock Exchanges (SEs). An offer document covers all the relevant information to help an investor to make his/her investment decision.
‘Draft Offer document’ means the offer document in draft stage. The draft offer documents are filed with SEBI, atleast 21 days prior to the filing of the Offer Document with ROC/SEs. SEBI may specify changes, if any, in the draft Offer Document and the issuer or the lead merchant banker shall carry out such changes in the draft offer document before filing the Offer Document with ROC/SEs. The Draft Offer Document is available on the SEBI website for public comments for a period of 21 days from the filing of the Draft Offer Document with SEBI.

What is an ‘Abridged Prospectus’?

‘Abridged Prospectus’ is a shorter version of the Prospectus and contains all the salient features of a Prospectus. It accompanies the application form of public issues.

Who prepares the ‘Prospectus’/‘Offer Documents’?

Generally, the public issues of companies are handled by ‘Merchant Bankers’ who are responsible for getting the project appraised, finalizing the cost of the project, profitability estimates and for preparing of ‘Prospectus’. The ‘Prospectus’ is submitted to SEBI for its approval.

What does one mean by ‘Lock-in’?

‘Lock-in’ indicates a freeze on the sale of shares for a certain period of time.
SEBI guidelines have stipulated lock-in requirements on shares of promoters mainly to ensure that the promoters or main persons, who are controlling the company, shall continue to hold some minimum percentage in the company after the public issue.

What is meant by ‘Listing of Securities’?

Listing means admission of securities of an issuer to trading privileges (dealings) on a stock exchange through a formal agreement. The prime objective of admission to dealings on the exchange is to provide liquidity and marketability to securities, as also to provide a mechanism for effective control and supervision of trading.

What is a ‘Listing Agreement’?

At the time of listing securities of a company on a stock exchange, the company is required to enter into a listing agreement with the exchange. The listing agreement specifies the terms and conditions of listing and the disclosures that shall be made by a company on a continuous basis to the exchange.

What does ‘Delisting of securities’ mean?

The term ‘Delisting of securities’ means permanent removal of securities of a listed company from a stock exchange. As a consequence of delisting, the securities of that company would no longer be traded at that stock exchange.

What is SEBI’s Role in an Issue?

Any company making a public issue or a listed company making a rights issue of value of more than Rs 50 lakh is required to file a draft offer document with SEBI for its observations. The company can proceed further on the issue only after getting observations from SEBI. The validity period of SEBI’s observation letter is three months only i.e. the company has to open its issue within three months period.

Does it mean that SEBI recommends an issue?

SEBI does not recommend any issue nor does take any responsibility either for the financial soundness of any scheme or the project for which the issue is proposed to be made or for the correctness of the statements made or opinions expressed in the offer document. SEBI mainly scrutinizes the issue for seeing that adequate disclosures are made by the issuing company in the prospectus or offer document.

Does SEBI tag make one’s money safe?

The investors should make an informed decision purely by themselves based on the contents disclosed in the offer documents. SEBI does not associate itself with any issue/issuer and should in no way be construed as a guarantee for the funds that the investor proposes to invest through the issue. However, the investors are generally advised to study all the material facts pertaining to the issue including the risk factors before considering any investment. They are strongly warned against relying on any ‘tips’ or news through unofficial means.

Foreign Capital Issuance

Can companies in India raise foreign currency resources?

Yes. Indian companies are permitted to raise foreign currency resources through two main sources: a) issue of foreign currency convertible bonds more commonly known as ‘Euro’ issues and b) issue of ordinary shares through depository receipts namely ‘Global Depository Receipts
(GDRs)/American Depository Receipts (ADRs)’ to foreign investors i.e. to the institutional investors or individual investors.

What is an American Depository Receipt?

An American Depositary Receipt (”ADR”) is a physical certificate evidencing ownership of American Depositary Shares (”ADSs”). The term is often used to refer to the ADSs themselves.

What is an ADS?

An American Depositary Share (”ADS”) is a U.S. dollar denominated form of equity ownership in a non-U.S. company. It represents the foreign shares of the company held on deposit by a custodian bank in the company’s home country and carries the corporate and economic rights of the foreign shares, subject to the terms specified on the ADR certificate. One or several ADSs can be represented by a physical ADR certificate. The terms ADR and ADS are often used interchangeably. ADSs provide U.S. investors with a convenient way to invest in overseas securities and to trade non-U.S. securities in the U.S. ADSs are issued by a depository bank, such as JPMorgan Chase Bank. They are traded in the same manner as shares in U.S. companies, on the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) or quoted on NASDAQ and the over-the-counter (OTC) market. Although ADSs are U.S. dollar denominated securities and pay dividends in U.S. dollars, they do not eliminate the currency risk associated with an investment in a non-U.S. company.

What is meant by Global Depository Receipts?
Global Depository Receipts (GDRs) may be defined as a global finance vehicle that allows an issuer to raise capital simultaneously in two or markets through a global offering. GDRs may be used in public or private markets inside or outside US. GDR, a negotiable certificate usually represents company’s traded equity/debt. The underlying shares correspond to the GDRs in a fixed ratio say 1 GDR=10 shares.

Source:-NCFM