Primary Market: Methods and Participants
The primary market, also called the new issues market, is where fresh capital is mobilised through the initial sale of securities. Companies access this market by issuing a prospectus, offering rights issues to existing shareholders, or through private placement to select investors. While bonus shares are often discussed alongside these methods, they do not bring in new funds; instead, they convert a company’s retained earnings or free reserves into issued capital and thus restructure the equity base.
Bonus shares are allotted to existing shareholders in proportion to their holdings, free of any payment. Because they increase the number of equity shares without raising fresh cash, bonus issues expand the company’s equity capital—for example, a 1:1 bonus doubles the equity base—while leaving the underlying net worth unchanged. A bonus issue is the capitalization of free reserves and is commonly interpreted by the market as a signal of management’s confidence in continued earnings and dividend maintenance. Corporates typically declare bonus issues for several practical reasons: to improve stock liquidity by increasing the number of shares available for trading, to reduce the market price per share so the stock becomes more affordable for retail investors (a scrip trading at 600 cum-bonus would trade at roughly 300 ex-bonus with a 1:1 bonus), and to restructure capital where large reserves exist and investor expectations favour such an action.
Public offers and private placements represent the two broad channels for raising fresh capital in India. Where an offer is made to 200 or more persons, it is treated as a public offering and must comply with the Companies Act, 2013 and the Securities and Exchange Board of India (SEBI) regulations applicable to public issues; such offers are widely publicised and, increasingly, are organised by merchant bankers rather than by brokers as in earlier practice. In contrast, private placement is the direct sale of securities to selected persons or institutional investors without issuing a prospectus. It can cover equity shares, preference shares and debentures, and is often faster and less costly than a public issue because it avoids many of the expenses and regulatory requirements associated with public offers.
Participants in the primary market fall into three categories: issuers (companies and other entities raising capital), investors (individual and institutional buyers of the securities), and intermediaries (merchant bankers, registrars, brokers and others) who provide the services and infrastructure that enable the issuance, distribution and subscription processes. Intermediaries play a critical bridging role, assisting both issuers and investors in executing primary market transactions.
Intermediaries in Public Issue Process
An issue involves several intermediaries—merchant bankers, notably the book‑running lead manager (BRLM), syndicate members, registrars to the issue, bankers to the issue, the company’s auditors and its solicitors—each responsible for functions such as managing and distributing the offer, maintaining investor records, handling funds, and providing legal and financial assurance. To ensure transparency and facilitate investor communication, the issuer must disclose the addresses, telephone and fax numbers, and email addresses of these intermediaries.
A merchant banker must be registered with SEBI under the SEBI (Merchant Bankers) Regulations, 1992 to act as the book-running lead manager (BRLM) for an issue. As the BRLM, the lead merchant banker carries primary responsibility for both the preparatory work before an issue and the operational tasks that follow its closure.
Before the issue, the lead manager conducts thorough due diligence of the company’s operations, management, business plans and legal position; prepares and designs the offer document and prospectus; formulates the marketing strategy for the issue; and ensures compliance with regulatory requirements and completion of formalities with the stock exchanges and the Registrar of Companies. After the issue, the lead manager oversees management of escrow accounts, handles allocations (including to non-institutional investors) and communicates allotment details, coordinates with the registrar for dispatch of refunds and for dematerialization of securities, facilitates listing and trading, and coordinates the activities of other intermediaries involved in the process.
The registrar to the issue is responsible for finalizing the list of eligible allottees, ensuring allotted shares are credited to investors’ demat accounts, and arranging dispatch of refund orders to those not allotted shares. This requires accurate verification of entitlements, prompt instruction for electronic crediting of securities, and timely processing and dispatch of refunds to protect investor interests and maintain market integrity.
Bankers to the Issue are appointed at all designated collection centres and by the lead merchant banker to handle the financial logistics of a public offering. Their principal duties include collecting application monies, transferring those funds into the designated escrow account, and arranging refunds to applicants when necessary. By centralising these tasks with appointed bankers, the process ensures proper accounting, timely remittances, and secure handling of investor funds.
All new initial public offerings must now be issued in dematerialized form because trading on the stock exchanges is conducted electronically. This means no physical share certificates are issued; securities are held in electronic form in investors’ demat accounts. Dematerialization streamlines settlement, reduces paperwork and the risks associated with loss or forgery of physical certificates, and facilitates faster, more secure transfer and trading of shares.
Deregulation of Issue Pricing
Before 1992 the new‑issues market in India operated under tight statutory control. The Controller of Capital Issues (CCI), working under the Capital Issues (Control) Act, 1947, had to approve every fund‑raising from the primary market. The controller decided the timing, size and price of issues: new companies could issue shares only at par, while established firms with adequate reserves could issue at a prescribed premium. That premium was calculated by a formula that balanced net asset value and price‑earnings value. In practice this fixed‑price system set offer prices well below prevailing market levels and produced widespread underpricing of new issues.
The repeal of the Act in 1992 ushered in a free‑pricing regime: promoters, together with their merchant bankers, were free to determine whether to make an issue and at what price. Almost immediately, however, the absence of controls encouraged an alliance of unscrupulous promoters and willing intermediaries. Many offers were marketed on optimistic or unrealistic projections and launched at very high premiums; when those projections failed to materialize, prices crashed. Loss‑making firms repeatedly came back to the market with rights issues at premiums, and a flood of overpriced offers undermined confidence in the primary market. Of roughly 4,000 issues that hit the market between 1992 and 1996, more than 3,000 were quoted below their offer price on the day of listing. One striking case was Saurashtra Cements, which opened with an offer price of about Rs 250 per share in September 1993 but was trading near Rs 85 on listing and fell sharply thereafter.
Regulators eventually tightened rules for merchant bankers, brokers and other intermediaries and introduced stronger disclosure requirements to protect investors. Promoters must now justify the issue price in the prospectus and disclose material risk factors in the offer document. Unfortunately, much of this corrective action came after small investors had already been driven out of the market.
Book Building Mechanism in India
Under the earlier Controller of Capital Issues (CCI) regime, companies issued shares at a fixed offer price set by the issuer and its merchant banker, without taking investor feedback into account. These fixed‑price issues were directed at relatively uninformed investors and suffered from long delays between pricing, the opening of the issue, and the start of trading. That gap made share prices vulnerable to fluctuations in the intervening period, and empirical studies have shown that fixed‑price offerings often raised a firm’s cost of capital because issuers underpriced shares to attract subscriptions.
When controls on pricing were relaxed in the subsequent free‑pricing era, the market experienced sharp and often unrealistic price movements. Many issues carried hefty premiums at launch only to trade below their issue price — and in some cases below par — soon after, eroding investor confidence and dampening participation in the primary market.
As a response, India gradually adopted an alternative called book building. Book building is a demand‑driven method for arriving at the offer price of an IPO: instead of fixing a price up front, the issuer solicits bids from investors at various price levels and uses that information to determine the final price and allocation. This approach explicitly incorporates investor demand into price discovery and is widely used internationally; it was a principal mechanism that helped develop the U.S. equity market in the 1940s and 1950s.
SEBI defines book building as a process by which demand for securities proposed to be issued is elicited and built up, and the price is assessed to determine the quantum of securities to be issued. Practically, book building is akin to an auction. During the offer period, exchanges such as the NSE and BSE display real‑time charts showing bid prices and the quantity of shares bid for, allowing investors to observe how the “book” is being built. This transparency, together with the analytical capacity of institutional bidders, improves price discovery.
Prior to August 2009, book building in India could be conducted in two ways: a partial route (75% book building) and a full route (100% book building). Under the partial model, 75% of the issue was allocated through the book building process while the remaining 25% was offered to the general market at a fixed price discovered during the book build; the IPOs of Hughes Software and HCL Technologies are often cited as successful examples of this approach. The 100% route completed the entire issue through the book building mechanism in a single stage, without any mandatory fixed‑price portion. Initially, 100% book building was permitted only for very large issues (above Rs 7,100 crore), a restriction that prevented its widespread use until guidelines were relaxed in 1998–99, lowering the threshold to Rs 725 crore.
The first notable 100% book building issue after these changes was Bharti Televentures, which raised Rs 7,834 crore in 2001–02. The full book building route accelerates the public offering and allotment process because everything is handled through the stock exchange network. It also gives issuers the flexibility to defer or withdraw the offer if the discovered price is deemed inappropriate. Given these advantages and market preference for the single‑stage route, SEBI eventually withdrew the 75% option, making 100% book building the standard approach for demand‑based IPO pricing.
Book-Building Procedure and Regulations
The book building process begins with the issuer appointing one or more merchant bankers as book runners; their names must appear in the draft red herring prospectus. One of these will act as the lead book runner, who is primarily responsible for running the book. If more than one lead banker is appointed, they must be designated as co-book runners or as members of a syndicate; there can be only one lead book runner. The lead book runner and any co-book runners are required to underwrite the issue, while other syndicate members may sub-underwrite through them. Final details of the underwriting arrangement, showing the exact number of shares underwritten by each party, must be disclosed and printed in the prospectus before it is filed with the Registrar of Companies.
The issuer must also enter into an agreement with one or more recognized stock exchanges that operate an on-line offer system. That agreement should set out the respective rights, duties and obligations of the issuer and the exchange. Book runners and syndicate members in turn appoint stock brokers who are members of the recognized exchange and registered with SEBI to accept bids and place orders with the issuer; these brokers must be financially able to meet commitments arising from any client defaults. Where the Application Supported by Blocked Amount (ASBA) facility is used, Self-certified Syndicate Banks — bankers to the issue registered with SEBI and offering ASBA — must accept such applications and upload them to the exchange’s electronic bidding system. Stock brokers and Self-certified Syndicate Banks that accept applications and monies are treated as bidding/collection centres.
A critical marketing step is the road show: underwriters gather information about potential investors and build interest by presenting the company and the offer across cities through press interactions, broker–analyst meetings and investor presentations. Meanwhile, the lead merchant banker files a draft red herring prospectus with SEBI that contains all required disclosures about the issue except the final price and the exact number of securities to be offered.
The concept of a price band was introduced to book built issues to give investors a range within which they may bid. Regulators subsequently moved between a fixed floor-price approach and a moving price band; the current framework allows a moving band that can be adjusted during the bidding process. The spread between the floor and the cap of the price band must not exceed 20 per cent, and any revision during the bidding period may not exceed 20 per cent on either side. Revisions must be widely disseminated through the stock exchanges, press releases, relevant websites and syndicate member terminals, and a revision may trigger an extension of the bidding period up to a maximum of ten working days. If the issuer chooses not to disclose a floor price or price band in the red herring prospectus, the prospectus must state that the floor price or band will be announced at least two working days before bidding opens for an IPO (and at least one working day before for a further public offer), advise that secondary market prices may be used as a guide in follow-on offers, and identify the newspapers, websites and other media where the announcement will appear. If the band is revised downward, the prospectus must explain how any resulting shortfall in project financing will be met, and make clear that allotment will not proceed unless financing is tied up.
The issuer must justify the basis for the issue price, floor price or price band in consultation with the lead merchant banker, and disclose the underlying financial data. This includes earnings per share and diluted EPS for the last three years (adjusted for capital changes), the pre-issue price–earnings ratio, average return on net worth over the last three years, the minimum return on the increased net worth required to maintain pre-issue EPS, and net asset value per share before and after the issue, with comparisons to the issue price. These accounting ratios must also be compared with the industry average and with a peer group of comparable companies, with the sources of those comparisons cited.
The face value of equity shares and the relationship between face value and issue price must be disclosed; an issuer may determine face value subject to the Companies Act, 1956 and the applicable regulations, and the prospectus must state the multiple of face value represented by the issue price. Where differential pricing is used, the offer document must justify the differences: retail individual investors may be offered securities at a price lower than that offered to other categories, but the difference cannot exceed 10 per cent; in a book-built issue, the price offered to an anchor investor cannot be lower than the price offered to other applicants; and in composite issues any price difference between public and rights portions must be explained. When fully convertible debt instruments carry interest below the prevailing bank rate, the offer document must disclose the effective price to investors after accounting for the notional interest shortfall from allotment to conversion.
Regulatory timing rules require that a public issue remain open for at least three working days but no more than ten, including any additional days necessitated by a revision to the price band. If the band is revised, the bidding period specified in the red herring prospectus must be extended by at least three working days, while the total bidding period must still not exceed ten working days.
After the red herring prospectus (for book-built issues) or prospectus (for fixed-price issues) is registered with the Registrar of Companies, the issuer must publish a pre-issue advertisement in one English national daily with wide circulation, one Hindi national daily with wide circulation, and one regional language daily where the issuer’s registered office is located. This advertisement must give the issuer’s and lead book runner’s names and addresses and key issue details — the nature and size of the securities, face value, price band, allocation proportions across investor categories including anchor investors, proposed listing, disclaimer clause, opening and closing dates, IPO grading and bankers to the issue. The issue advertisements must also disclose the financial ratios calculated for both the upper and lower ends of the price band.
Book-Build Bidding Procedures
Bidding for book-built public issues must take place only through an electronically linked transparent bidding facility provided by recognized stock exchanges. The lead book runner is responsible for ensuring that syndicate members have adequate infrastructure and personnel to enter bids promptly; syndicate members must be present at bidding centres so that at least one electronically linked computer terminal is available for bidding at each centre.
During the public bidding period, applicants may place orders either through stock brokers of the stock exchange(s) offering the on-line facility or through Self Certified Syndicate Banks (SCSBs) under Applications Supported by Blocked Amount (ASBA). Every stock broker is required to accept orders from all clients who approach them, and every SCSB must accept ASBA applications from investors. Institutional investors classified as Qualified Institutional Buyers (QIBs) must place their bids only through stock brokers, who retain the right to vet those bids.
Bidding terminals must display an on-line graphical view of demand and bid prices, updated at intervals not exceeding 30 minutes. At the end of each day during the bidding period, the total demand—including allocations made to anchor investors—must be shown graphically on the bidding terminals of syndicate members and on the websites of the recognized stock exchanges, so the information is available to the public. Investors (other than ASBA investors) are permitted to revise their bids while the issue remains open; however, QIBs are not allowed to withdraw their bids after the bidding period closes. The identities of QIBs who bid are to be kept confidential.
Stock exchanges must continue to publish, in a uniform format, data relating to book-built issues—giving category-wise details of bids received—for at least three days after bid closure. Margin collection across the book runner(s), syndicate members and SCSBs must be uniform for each investor category other than QIBs. Historically, margins of not less than 10% for QIBs and not less than 25% for anchor investors were required until April 30, 2010; to curb artificially inflated demand and ensure a level playing field, all types of investors are now required to bring 100% of the application money as margin along with their application for securities in public issues.
Issue Price Determination and Allotment
The issuer, in consultation with the lead book runner, determines the issue price on the basis of bids received through the book-building process. Once the final price is fixed, the number of securities to be offered is calculated by dividing the total issue size by that price.
When the cut-off (final) price is announced, allotment is made to all bidders whose bids are at or above that price. Retail individual investors have the option to bid at the cut-off price rather than specifying a numeric bid. The lead book runner may, however, reject a bid from a qualified institutional buyer; any such rejection must be recorded in writing at the time the bid is accepted and the reasons communicated to the bidders. These practices and the grounds for rejection must be disclosed in the red herring prospectus.
Registration of Final Prospectus
The final prospectus — containing all disclosures required by the applicable regulations, and specifying the price and the number of the securities proposed for issuance — must be registered with the Registrar of Companies.
ASBA Mechanism and Adoption
In August 2008 the Securities and Exchange Board of India (SEBI) introduced an alternate payment mechanism for book-built public issues called Applications Supported by Blocked Amount (ASBA). Designed to spare retail investors from making full upfront payments, ASBA allows the application amount to remain blocked in the investor’s bank account until allotment is finalised. The facility is optional for retail investors and coexists with the traditional cheque-based payment method.
An ASBA is simply an application form that includes an authorization to the bank to block the application money in the investor’s account. The key advantage is that funds remain in the investor’s account — earning interest and avoiding the need for refunds — until the basis of allotment is determined, or until the application is withdrawn or rejected. By eliminating the refund cycle, ASBA shortens the time between issue closure and listing.
Under the process, the investor submits the ASBA form, either physically or through internet banking, to a Self‑Certified Syndicate Bank (SCSB) where the account to be blocked is held. The SCSB blocks the specified amount on the basis of the investor’s authorization and uploads the application details to the electronic bidding system of the stock exchange. Once allotment is finalised, the registrar to the issue requests the SCSB to unblock accounts and transfer the requisite funds to the issuer; if the issue is withdrawn or fails, funds are unblocked on receipt of appropriate information from the pre‑issue merchant bankers.
SCSBs act as single‑window intermediaries: they collect ASBA applications, block and, where applicable, debit the accounts, and transfer monies to escrow upon allotment. They also provide aggregated data on applications and amounts to the registrar, who reconciles this information with the depository’s records. This streamlined workflow has simplified the application and refund process for public and rights issues.
ASBA was first used in the IPO of 20 Microns in September 2008. SEBI extended the facility to rights issues the same month — the rights offers of Tata Motors and Sadhana Nitro Chem opened on September 29, 2008 using ASBA — and shareholders could opt for ASBA in a similar manner as for IPOs. Over time the scope was broadened: from May 1, 2010 ASBA became available to all investors in public issues, and from July 1, 2010 it was extended to investors subscribing to new fund offers (NFOs) of mutual funds. SEBI also made ASBA mandatory for non‑retail applicants such as Qualified Institutional Buyers and non‑institutional investors (including HNIs) in public and rights issues.
Adoption has been widespread: more than 99.5% of applications now come from centres where ASBA is available. To further increase access points, registrars and share transfer agents (RTAs) as well as depository participants (DPs) were permitted to accept physical and online application forms and place bids on the exchange platform, supplementing banks and brokers. The system was made mandatory for public issues opening on or after January 1, 2016.
Book-Built Issue Allocation Rules
When an issuer offers 100 per cent of the net public offer through a fully book-built process, the SEBI-prescribed allocation split among investor categories is clear: at least 35 per cent of the net offer must be reserved for retail individual investors, at least 15 per cent for non-institutional investors (investors other than retail individuals and qualified institutional buyers), and no more than 50 per cent may be allotted to qualified institutional buyers (QIBs). An exception applies to issues made under Rule 19(2)(b) of the Securities Contract (Regulation) Rules, 1957 — that is, offers representing less than 25 per cent of the post-issue capital — where QIBs must receive 60 per cent of the net offer, leaving 30 per cent for retail individual investors and 10 per cent for non-institutional investors.
Within the QIB portion, the issuer may allocate up to 30 per cent to anchor investors before the book-building process opens. Separately, five per cent of the QIB portion is required to be allocated proportionately to mutual funds; mutual funds are also eligible to receive further proportionate allotments from the remaining QIB pool.
To illustrate this with round numbers: for an issue of 100 crore shares, the QIB slice would be 50 crore shares. Up to 30 per cent of that QIB slice — 15 crore shares — may be allotted to anchor investors. Five per cent of the QIB portion — 2.5 crore shares — is reserved for mutual funds, and the balance (32.5 crore shares in this example) is apportioned proportionately among the remaining QIB applicants; mutual funds can also participate in that proportionate allocation.
Allotment must be completed no later than 15 days after the issue closes; failure to do so attracts interest payable to investors at 15 per cent. Under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, a QIB includes entities such as public financial institutions (as defined in the Companies Act), scheduled commercial banks, mutual funds, registered foreign institutional investors (excluding foreign corporate or individual sub-accounts), multilateral and bilateral development financial institutions, SEBI-registered venture capital funds and foreign venture capital investors, state industrial development corporations, IRDA‑registered insurance companies, provident funds with a minimum corpus of Rs. 225 crore, pension funds with a minimum corpus of Rs. 25 crore, and the National Investment Fund established by the Government of India.
A retail individual investor is defined by two tests: his or her existing shareholding must not exceed a value of Rs. 2,00,000 on the day immediately before the record date determined by the issuer, and the application or bid must itself be for securities valued at not more than Rs. 2,00,000. For book-built issues there is an additional bid-size limit: a retail individual investor may bid up to Rs. 1,00,000; any bid above that amount is treated as a high net worth or non-institutional bid and reclassified accordingly.
Historically, merchant bankers — the book running lead managers (BRLMs) — had discretionary power to allocate shares to institutional bidders, taking into account factors such as prior commitments, investor quality, price aggression and timing. SEBI has since removed discretionary allotments in the QIB portion and mandates proportionate allotments. In practice the BRLM finalizes the basis of allotment within two weeks from the issue closure; allotments are then made proportionately within each category, rounded to the nearest integer, subject to a predetermined minimum allotment equal to the minimum application size. Previously, when issues were oversubscribed, allotments could be made by drawing lots, typically with a minimum allotment of one tradable lot (often 100 shares).
Finally, the registrar to the issue is responsible for ensuring that demat credit or refunds are completed within 15 days of the issue closing, and the company’s securities are listed on the stock exchanges within seven days of the finalization of the issue.
SEBI Anchor Investor Framework
The Securities and Exchange Board of India (SEBI) introduced the concept of an anchor investor on June 18, 2009 to strengthen the primary market by helping issuers place their issues more securely, improving price discovery and instilling confidence among retail investors. An anchor investor subscribes to a public issue before it opens to the public, pays a minimum upfront margin of 25 per cent at the time of application and remits the balance within two days of the issue’s closure. The shares allotted to anchor investors are locked in for 30 days from allotment, which signals long‑term intent to smaller investors and supports the success of the offer. Anchor investors must be qualified institutional buyers (QIBs), and an issuer may allot up to 30 per cent of its QIB quota to them; neither the anchor investor nor any person related to the promoter, promoter group or the lead managers may participate as an anchor.
The mechanism was first used in the Indian market in the Adani Power IPO in July 2009, which attracted six anchor investors including T. Rowe Price, AIG, Ecofin, TPG (through CLSA), Legg Mason and Sundaram Mutual Fund. SKS Microfinance’s IPO in August 2010 drew a large number of anchor investors—36 in that issue—illustrating how the route can mobilize substantial institutional support.
SEBI’s guidelines set out specific eligibility and allocation norms. A single anchor investor must make an application of at least Rs. 10 crore. Allocation to anchors is discretionary but follows capacity limits: for allocations up to Rs. 10 crore a maximum of two anchor investors may be permitted; for allocations above Rs. 10 crore and up to Rs. 250 crore between two and fifteen anchors may be allowed, subject to a minimum allotment of Rs. 5 crore per investor; and for allocations beyond Rs. 250 crore, ten additional anchor investors may be added for every further Rs. 250 crore of allocation, again with a minimum allotment of Rs. 5 crore per anchor. These thresholds help issuers structure large raises while ensuring meaningful participation by each anchor.
Operationally, up to 60 per cent of the QIB portion of the issue may be allocated to anchor investors, and one‑third of the anchor portion is reserved for domestic mutual funds. Bidding by anchor investors opens one day before the public issue opens. Allocations to anchors are completed on the day their bids are made. If the final price determined through book building is higher than the price at which anchors were allocated, the anchor must pay the additional amount; if the final price is lower, the anchor does not receive a refund and retains the allotment at the originally allocated price. The merchant banker must disclose to the public, before the issue opens, the number of shares allotted to each anchor investor and the prices at which those allocations were made. Selection parameters used by the merchant banker must be documented and retained for SEBI inspection.
Finally, neither merchant bankers nor persons related to the promoter/promoter group or the merchant bankers themselves may apply as anchor investors. Applications made by QIBs under both the anchor and non‑anchor categories are not treated as multiple applications. These safeguards and procedural requirements aim to make the anchor investor route transparent and effective for supporting primary issuances.
Book-Building in India: Methods and Challenges
Book building allows issuers to discover both the market demand and an appropriate issue price before shares are offered publicly. Because interest and price expectations are gauged in advance, the issue can effectively be pre‑sold, which reduces the risk of under‑subscription or devolvement (where any unsubscribed portion falls back on the underwriters). The process also shortens the time and lowers the cost of raising capital by streamlining procedures compared with a conventional public offer.
Investors benefit from greater price transparency: when syndicate members (typically underwriters or merchant bankers) indicate the price at which they are willing to buy, the market gains confidence that the offer price reflects genuine demand. This makes large immediate falls below the issue price after listing less likely, protecting investor interests.
The book-building method in India remains at an early stage and displays several important weaknesses. Unlike the US practice—where roadshows are held, final pricing is determined shortly before an issue opens, and the lead manager actively makes a two-way market until secondary trading firms up—the Indian model lacks comparable pre-issue marketing and market-making provisions. As a result, the process in India depends heavily on good faith, reputational enforcement and a limited pool of invited investors rather than on broad, transparent market interaction.
This reliance on informal mechanisms is compounded by a relative absence of transparency and robust regulation at key stages of the process. Book building is intended to be an interactive price-discovery exercise among issuers, merchant bankers and investors; where that interaction is weak, price discovery suffers. Empirically, many book-built issues have listed below their issue price, indicating that the mechanism has not reliably delivered accurate pricing.
A central criticism is the tilt in favour of institutional investors. The same price is often applied to both the public and placement portions, yet institutions typically have greater bargaining power, access to research and the ability to revise bids or provide margin upfront rather than full funds. Merchant bankers also enjoy discretionary allocation powers that tend to favour qualified institutional buyers (QIBs). These features reduce the pricing influence of retail investors, who must back bids with full funds and generally lack comparable information and negotiating power. High levels of institutional holding can further impair liquidity and increase volatility if large blocks are sold off.
Allocation rules have also shifted the balance away from the public. The public offer’s share of total capital has fallen—from earlier levels around 75 per cent to 25 per cent, and in some cases to 10 per cent—so that retail investors are effectively allotted only a small fraction of total capital (for example, 35 per cent of the public portion translates into just 8.75 per cent of total capital when the public portion is 25 per cent). Where retail demand is weak, a larger share of the issue can be steered toward institutions, further concentrating ownership.
Taken together, these factors—limited pre-issue marketing and market-making, dependence on reputation rather than formal safeguards, weak transparency and regulatory oversight, preferential treatment for institutional bidders, and shrinking public allocations—have undermined the book-building method’s effectiveness in India. The pattern of post-listing price movements, with several scrips displaying significant under- or over-pricing, underscores the need for clearer procedures and stronger oversight. SEBI should re-examine the operational aspects of the book-building framework and consider guideline revisions to restore balance between retail and institutional interests and to improve price discovery.
In November 2009 SEBI introduced an auction-based variant for follow-on public issues called the "pure auction". Unlike the conventional book-built issue—where the merchant banker prescribes a price band that may not always reflect market value and can lead to post-listing discounts—pure auction makes pricing more market-driven by letting investors determine the issue price.
Under pure auction mechanics, the issuer sets a floor price, and institutional bidders are free to bid any price above that floor. Allotment to institutions is made top-down from the highest bid, so different institutional investors can receive shares at different prices. Retail and other non-institutional investors, by contrast, are allocated shares at the floor price. To ensure wider distribution and prevent a single buyer from cornering the issue, SEBI allows issuers to cap the number of shares that can be allotted to a single bidder or to limit allotment as a percentage of the company’s issued capital.
The key benefit of this method is improved price discovery: institutions bid only for the quantity and at the price they actually want, which tends to reduce indiscriminate oversubscription. Institutional bidders may still quote higher prices when they want to secure a large block at a single price, but overall the process aligns allocation and price more closely with demand. SEBI left adoption of pure auction optional—issuers can choose traditional book building, pure auction, or a combination of the two.
Reverse book building is a market mechanism in which shareholders are invited to bid the price at which they are willing to sell their shares to an acquirer. Functionally similar to a reverse auction, it is used primarily to discover an exit price when a company or its promoters seek to buy back shares and delist the company from the stock exchanges.
The process begins with the acquiring entity obtaining board and shareholder approval for delisting and appointing a designated Book Running Lead Manager (BRLM) to run the exercise. The BRLM fixes a floor price and the bidding timetable. The floor price for frequently traded shares is set with reference to market quotations: it cannot be lower than the higher of either the average of the weekly high and low of closing prices over the 26-week or the two-week period preceding the date on which the stock exchanges were notified of the board meeting that considered delisting, on the exchange where the shares are most frequently traded. For infrequently traded shares, the BRLM determines the floor price by looking at relevant factors such as the highest price paid by promoters for recent acquisitions of the same class of shares (during the 26-week period before the notification date and up to the public announcement) and other financial parameters like return on net worth, book value, earnings per share and the price‑earnings multiple relative to the industry average.
Once an in-principle approval for delisting is received from the stock exchange, the acquirer must make a public announcement in one widely circulated English national daily, one Hindi national daily, and one regional newspaper where the exchange is located. Before that announcement is published the acquirer must open an escrow account and deposit the estimated consideration calculated on the basis of the floor price and the number of public equity shares outstanding. The escrow may consist of cash with a scheduled commercial bank, a bank guarantee in favour of the merchant banker, or a combination of both.
The acquirer must send a letter of offer to all public shareholders within 45 working days of the public announcement so that it reaches them at least five working days before the bidding opens. The offer must open within 55 working days of the public announcement and remain open for a minimum of three and a maximum of five working days. Bidding is electronic and conducted through the stock exchange trading mechanism. Holders of physical share certificates may submit their bid forms together with the certificates and transfer deeds to an appointed trading member; after the trading member records the bid on the system, the company or its share transfer agent verifies the genuineness of the certificates. Certificates found genuine are handed to the merchant banker, who will release them to the promoter only if the corresponding bids are accepted and payment is made; any bids relating to certificates found not genuine are deleted from the system.
The BRLM provides the stock exchange with the list of trading members eligible to participate. Public shareholders place bids through these trading members at or above the floor price. There is no upper limit on bid prices and shareholders may revise bids upward or withdraw bids up to one day before the close of the bidding period; downward revision is not permitted.
The acquirer is not obliged to accept the final price discovered through the book building. If the acquirer rejects that price, it must not accept any shares tendered under the offer, and shares deposited or pledged by shareholders must be returned or released within ten working days of the bidding closure. The acquirer will also refrain from making a final application for delisting and may close the escrow account. If, at the opening of the bidding period, public shareholding was below the minimum level required under the listing agreement, the acquirer must restore the required public shareholding within six months of bidding closure.
Within eight working days of the offer’s closure, the BRLM must announce in the same newspapers whether the offer succeeded and, if so, the final price accepted; or whether the offer failed; or whether the promoters rejected the final price discovered. If the shares are delisted, remaining public shareholders have the right to tender their shares to the promoter for at least one year from the date of delisting, and the promoter must accept such tenders at the same final price previously paid. Payments for these shares are made from the balance in the escrow account.
The reverse book building route is complex and costly. Price discovery can be especially difficult for small companies whose shares are thinly traded, which makes delisting via this route challenging; until delisting is achieved, such companies continue to incur listing and compliance costs.
SEBI Delisting of Equity Shares
CHAPTER I
“Compulsory delisting” means the removal of a company’s equity shares from trading by a recognised stock exchange.
“Voluntary delisting” means the removal of a company’s equity shares from trading at the company’s own initiative, on its application.
“Public shareholders” means holders of equity shares other than (a) promoters and (b) holders of depository receipts issued overseas against equity shares held with a custodian, and the custodian.
These regulations govern the delisting of equity shares of a company from any or all recognized stock exchanges where those shares are listed. They do not apply to securities that were listed without a public issue on the institutional trading platform of a recognized stock exchange. Nor do they apply to delisting carried out under a scheme sanctioned by the Board for Industrial and Financial Reconstruction under the Sick Industrial Companies (Special Provisions) Act, 1985, or by the National Company Law Tribunal under Section 424D of the Companies Act, 1956, provided the sanctioned scheme either prescribes a specific procedure for completing the delisting or offers an exit option to existing public shareholders at a specified rate.
A company must not apply for, and a recognized stock exchange must not permit, delisting of equity shares in certain situations. Delisting will not be permitted where it is the result of a company’s buyback of equity shares or of a preferential allotment. Delisting is also barred unless at least three years have elapsed since the relevant class of equity shares was first listed, and it cannot proceed while any instruments that are convertible into the same class of equity shares remain outstanding. In addition, no promoter or promoter group may propose delisting if any entity belonging to that promoter or promoter group has sold equity shares of the company during the six months preceding the board meeting at which the delisting proposal was approved (as referred to in sub‑regulation (1B) of Regulation 8).
For clarity, these regulations also make clear that convertible securities themselves cannot be delisted. However, the requirement of a three‑year listing period and the prohibition where convertible instruments are outstanding do not apply to delisting that falls under clause (a) of Regulation 6.
Promoters are further prohibited from directly or indirectly using company funds to finance an exit opportunity under Chapter IV or to fund an acquisition of shares made pursuant to sub‑regulation (3) of Regulation 23. Finally, no acquirer, promoter, promoter group or their related entities may employ any device, scheme or artifice to defraud shareholders, engage in transactions or practices that operate as fraud or deceit, or otherwise commit any fraudulent, deceptive or manipulative act in connection with any delisting, exit opportunity or other acquisition of shares under these regulations.
CHAPTER III — Voluntary Delisting
A company may voluntarily delist its equity shares from all the recognized stock exchanges where they are listed, or from the only recognized stock exchange where they are listed, subject to these regulations. Whenever a company seeks delisting of a particular class of equity shares from all exchanges, every public shareholder holding that class must be offered an exit opportunity in the manner prescribed in Chapter IV.
A company may also delist its equity shares from one or more exchanges while continuing to be listed on others. If, after the proposed delisting, the shares remain listed on at least one recognized stock exchange that has nationwide trading terminals, no exit opportunity needs to be provided to public shareholders. If, however, the proposed delisting would leave the shares unlisted on any exchange with nationwide trading terminals, an exit opportunity must be offered to all public shareholders holding the affected class, in accordance with Chapter IV. For this purpose, a “recognized stock exchange having nationwide trading terminals” means the Bombay Stock Exchange Limited, the National Stock Exchange of India Limited, or any other exchange the Board may specify.
Where no exit opportunity is required (Regulation 6), the company must first obtain board approval in a board meeting. It must publish a public notice of the proposed delisting in at least one widely circulated English national daily, one widely circulated Hindi national daily, and one regional language newspaper of the region where the concerned exchanges are located. The company must then apply to the concerned exchange for delisting, and disclose the delisting in the first annual report prepared after the delisting. The public notice must name the exchanges from which delisting is proposed, explain the reasons for delisting, and state that listing will continue on an exchange with nationwide trading terminals. The concerned exchange is required to dispose of a complete delisting application within thirty working days of receipt.
Where an exit opportunity is required (Regulation 7), the company must, except in the case covered by Regulation 6(a), obtain prior board approval and then seek shareholders’ approval by a special resolution passed through postal ballot, having first disclosed all material facts in the explanatory statement sent to shareholders. The special resolution will be acted upon only if the votes cast by public shareholders in favour are at least twice the votes cast by public shareholders against it. The company must also apply to the concerned exchange for in-principle approval in the form specified by that exchange, and within one year of passing the special resolution submit the final application for delisting in the prescribed form. If the special resolution was passed before these regulations came into force, the final application must be filed within one year of passing the resolution or within six months of the commencement of these regulations, whichever is later.
Before granting board approval, the board must disclose to the exchanges that promoters or acquirers have proposed delisting; appoint a merchant banker to carry out due diligence and disclose that appointment to the exchanges; obtain trading details for the two years prior to the board meeting from the top twenty-five shareholders as on the date of that meeting (including off‑market transactions for the same period) and furnish these details to the merchant banker; and obtain any further information required under sub‑regulation (1D) of Regulation 7 and provide that to the merchant banker.
An application seeking in-principle approval for delisting must be disposed of by the concerned exchange within five working days of receipt of a complete application. While the exchange should not unreasonably withhold in-principle approval, it may require the company to satisfy it on matters such as compliance with the shareholder approval requirement, resolution of investor grievances, payment of listing fees, compliance with any listing-agreement condition materially affecting shareholders, the existence of any litigation or regulatory action relevant to shareholders’ interests, and any other matter the exchange deems relevant. The final delisting application must be accompanied by such proof of having provided the exit opportunity in accordance with Chapter IV as the exchange may require.
This Chapter governs the procedure and rights connected with voluntary delisting sought under Regulation 5 (including clause (b) of that Regulation). It sets deadlines for public disclosures, safeguards for public shareholders, and the financial and procedural safeguards that acquirers or promoters must follow.
From the date the recognized stock exchange grants in-principle approval for delisting, the acquirers or promoters must, within one working day, make a public announcement in at least one national English daily, one national Hindi daily and one regional newspaper of the exchange’s region. That announcement must state all material facts truthfully and specify a “specified date” — not later than thirty working days after the announcement — for determining the shareholders to whom the letter of offer will be sent. Before announcing, the acquirer or promoter must appoint a merchant banker registered with the Board and any other intermediaries considered necessary; the acquirer/promoter and the merchant banker share responsibility for ensuring compliance with these requirements. No merchant banker who is an associate of the acquirer/promoter may be appointed, and no entity in the acquirer, promoter or promoter group may sell company shares from the board meeting approving the delisting proposal until the delisting process is complete.
Financial safeguards begin with an escrow account that the acquirer or promoter must open before making the public announcement. This account must initially hold the total estimated consideration calculated using the floor price and the number of equity shares outstanding with public shareholders. Once the final price is determined and accepted, the acquirer/promoter must immediately top up the escrow so it fully covers the consideration payable for all outstanding public equity shares. The escrow can comprise cash with a scheduled commercial bank, a bank guarantee in favour of the merchant banker, or a combination of both. Where cash is deposited, the promoter must empower the merchant banker to instruct the bank to issue banker’s cheques or demand drafts for permitted payments; any balance remaining after payment for accepted shares (including those tendered later under the one-year post-delisting right) may be released to the promoter. If a bank guarantee is used, it must remain valid until all payments for accepted shares have been made.
The acquirer or promoter must despatch a detailed letter of offer to public shareholders within two working days of the public announcement. That letter — addressed to all public shareholders of the class proposed for delisting whose names appear on the company register or depository records as of the specified date — must repeat the public announcement disclosures and include any additional information necessary for shareholders to make an informed choice. It must be accompanied by a bidding form and a form for tendering shares under the post-offer acceptance provisions.
The offer shall open no later than seven working days from the public announcement and must remain open for five working days to allow public shareholders to tender bids. The acquirer or promoter must facilitate tendering and settlement through the stock exchange mechanisms specified by the Board. All public shareholders of the class sought to be delisted are entitled to participate in the book-building process; however, the acquirer or promoter and persons acting in concert with them are barred from bidding, and the merchant banker must ensure compliance. Holders of depository receipts and custodians are not eligible to participate unless the depository receipts are exchanged for the underlying shares proposed to be delisted.
The offer price is determined through book building after a floor price has been fixed in accordance with the relevant provisions of SEBI’s Substantial Acquisition of Shares and Takeovers Regulations, 2011. Importantly, the acquirer or promoter is not obliged to accept the final price discovered through book building. If the acquirer or promoter elects not to accept that final price, no shares will be acquired under the offer, deposited or pledged shares must be returned or released within ten working days of the bidding period’s close, the company will not file for final delisting with the exchange, and the acquirer/promoter may close the escrow account.
An offer under this Chapter is successful only if two quantitative thresholds are met. First, after the offer, the promoter’s shareholding (together with persons acting in concert) plus the shares accepted through eligible bids at the final price must reach ninety per cent of the total issued shares of that class, excluding shares held by a custodian against which depository receipts have been issued overseas. Second, at least twenty-five percent of public shareholders holding shares in dematerialised form as on the relevant board meeting date must have participated in the book-building process. This participation requirement is waived if the acquirer and the merchant banker can demonstrate delivery of the letter of offer to all public shareholders by registered post, speed post, courier, hand delivery (with proof), or by email/notification providing an electronic link (with read receipt). In cases where the delisting is made under Regulation 5A of the SEBI Takeover Regulations, the calculation for the ninety per cent threshold is adjusted to take into account existing and triggered acquisitions as specified in those provisions.
Within five working days of the offer’s closure, the promoter/acquirer and the merchant banker must publish a notice in the same newspapers used for the initial announcement disclosing whether the offer succeeded (with the final price), failed, or was rejected by the promoter.
If the offer fails or is rejected, it is deemed unsuccessful and no shares are acquired. Deposited or pledged shares must be returned or released within ten working days of the bidding period’s end (subject to the limited exception for offers made under Regulation 5A). The acquirer will not make a final delisting application to the exchange and the escrow account must be closed.
When the offer succeeds, the promoter must immediately open a special account with a banker to an issue registered with the Board and transfer the full consideration from the escrow account to that account. All shareholders whose tendered shares are verified as genuine must receive the final price within ten working days of the offer’s closure. Any shares not accepted must be returned or released to the shareholder within the same ten-working-day period.
Even after delisting, remaining public shareholders retain a right to tender their equity shares to the promoter for at least one year from the date of delisting; the promoter must accept such tenders at the same final price at which the earlier acceptance occurred. Payments for these subsequent acceptances must be made from the balance in the escrow account, and neither the escrow funds nor any bank guarantee may be released to the promoter until all such payments have been satisfied.
Separately, a recognised stock exchange may compulsorily delist equity shares on grounds prescribed under rules made under section 21A of the Securities Contracts (Regulation) Act, 1956, but only after giving the company a reasonable opportunity to be heard. Such compulsory delisting decisions are taken by a panel constituted by the exchange composed of two directors of the exchange (including one public representative), one investor representative, one representative of the Ministry of Corporate Affairs or the Registrar of Companies, and the exchange’s Executive Director or Secretary. The exchange must publish public notice of the proposed delisting in an English national daily and a regional language newspaper and display it on its trading system and website, allowing at least fifteen working days for representations; the exchange must consider any representations before passing an order. Chapter IV’s voluntary delisting provisions do not apply to compulsory delisting under this Chapter.
Where a stock exchange orders compulsory delisting, it must publish a notice stating the fact of delisting, the company’s name and address, the fair value of the delisted shares as determined under the valuation procedure, and the names and addresses of promoters who would be liable under the valuation order; it must also inform all other stock exchanges where the company’s shares are listed. For valuation, the exchange will appoint independent valuer(s) from a panel of expert valuers to determine the fair value of the delisted shares. The promoter must then acquire delisted shares from public shareholders by paying the valuer-determined fair value, subject to each shareholder’s option to retain shares.
For valuation purposes, a “valuer” means either a chartered accountant (within the meaning of the Chartered Accountants Act, 1949) who has undergone peer review as specified by the Institute of Chartered Accountants of India, or a merchant banker appointed for the valuation; the valuer will determine fair value having regard to the factors laid down in the relevant valuation regulation.
Finally, a company compulsorily delisted under this Chapter, its whole-time directors, its promoters and any companies promoted by them are prohibited from accessing the securities market or seeking listing of any equity shares for a period of ten years from the date of such delisting.
Small companies may be allowed to delist their equity shares from all recognised stock exchanges without following the Chapter IV procedure, but only if they meet strict eligibility tests and additional safeguards. To qualify, the company’s paid-up capital must not exceed ten crore rupees and its net worth must not exceed twenty-five crore rupees as on the last date of the preceding financial year. Trading in the company’s equity must also be thin: during the twelve calendar months immediately preceding the date of the board meeting referred to in sub‑regulation (1B) of Regulation 8, the number of equity shares traded on each relevant recognised exchange must be less than ten per cent of the company’s total shares; where the share capital of a particular class has varied during that period, a weighted average shall be used to represent the total for that class. Finally, the company must not have been suspended for non‑compliance by any recognised exchange with nationwide trading terminals during the preceding year.
Even where these eligibility conditions are met, delisting may proceed only if the requirements of Regulation 7 are satisfied and a set of procedural safeguards is followed. The promoter must appoint a merchant banker and, in consultation with that merchant banker, decide an exit price. That exit price cannot be lower than the floor price determined under sub‑regulation (2) of Regulation 14 read with clause (e) of sub‑regulation (2) of Regulation 8 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. The promoter must also write individually to every public shareholder, informing them of the intention to delist, stating the offered exit price and providing a justification for it, and seeking the shareholder’s consent to the proposal.
Consent must be obtained in writing from at least ninety per cent of the public shareholders. Those shareholders must either agree to sell their equity shares at the offered price or indicate that they are willing to remain shareholders even after delisting. The promoter must complete the process of inviting and collecting positive consents and finalise the delisting proposal within seventy‑five working days of the first communication to shareholders. Once the seventy‑five working days have expired, the promoter is required to make payment of the consideration in cash within fifteen working days.
The communication sent to public shareholders must set out the justification for the offer price with specific reference to the parameters listed in Regulation 15, and must explicitly state that consenting to the proposal also means consenting to dispense with exit price discovery through the book‑building method. If the recognised stock exchange is satisfied that these conditions and procedures have been complied with, it may proceed to delist the equity shares.
Separately, where a company is subject to winding‑up proceedings while its equity shares are listed, the rights of its shareholders will be governed by the laws applicable to those proceedings. And if the Board withdraws recognition of, or refuses to renew recognition for, a stock exchange, the Board may, in the interest of investors, pass appropriate orders concerning the status of equity shares of companies listed on that exchange.
The book-building process must be conducted through an electronically linked transparent facility, and the promoter is required to enter into an agreement with a stock exchange for this purpose. The public announcement and the letter of offer must be filed promptly with that stock exchange, which in turn will publish them on its website.
Bidding must be available at a minimum number of centres: the four metropolitan cities of Mumbai, Delhi, Kolkata and Chennai, and such other cities in the region of the company’s registered office as the stock exchange may specify. Each bidding centre must have at least one electronically linked computer terminal. The promoter will appoint trading members at these centres so that public shareholders can place bids on the online system.
Shareholders may withdraw their bids or revise them upwards, but only until one day before the bidding period closes; downward revision is not permitted. Holders of dematerialised shares who wish to use the exit opportunity must either deposit the shares against which bids are made into a special depository account opened by the merchant banker before placing orders, or mark a pledge in favour of that account.
The merchant banker must ensure that shares held in the special depository account are not transferred to the promoter unless the corresponding bids are accepted and payment is made. Holders of physical share certificates should submit the bidding form together with the share certificate and transfer deed to the appointed trading member. After the trading member enters the bid, they must send these documents without delay to the company or its share transfer agent for verification. Certificates found to be genuine will be delivered to the merchant banker, who will not hand them over to the promoter unless the related bids are accepted and payment is completed; certificates found not to be genuine will have their bids deleted from the system. Verification of physical certificates must be completed in time for the public announcement.
All bids entered in the system must leave an audit trail that includes the stockbroker’s identification details, a time stamp and a unique order number. The procedural requirements described above do not apply when settlement is carried out through the stock exchange’s settlement mechanism.
The final offer price is the price at which accepted eligible bids, if allotted, would take the promoter or acquirer (together with persons acting in concert) up to 90% of the total issued shares of that class, excluding shares held by a custodian against which depository receipts have been issued. If the final price is fixed and accepted, the promoter must accept all shares tendered where the corresponding bids are at the final price or at a lower price; the promoter may, however, choose to fix a higher final price.
Over the past two years the process, methodology and structure of book building in India have become noticeably more robust, but the mechanism has yet to win broad acceptance among retail investors. Greater retail participation will require practical changes at the operational level—simpler subscription procedures, clearer investor guidance and better transparency around pricing—together with effective safeguards and checks to protect small subscribers. Implemented carefully, this new-issue mechanism can play a constructive role in restoring and strengthening investor confidence.
Equally important is speeding up the overall IPO cycle by upgrading market infrastructure and back-office systems so that investor funds are not tied up unnecessarily long. Faster processing, clearer timelines and improved settlement systems will reduce friction for issuers and subscribers alike, making public offerings more efficient and more attractive to a wider base of investors.
Green-Shoe Stabilization Mechanism
SEBI introduced the green‑shoe option into book‑building issues in August 2003 to give issuers and underwriters a tool for post‑listing price stability. In essence, a green‑shoe option (also called an over‑allotment option) permits an issuer to allocate up to an additional 15 per cent of the issue size to the stabilizing agent (SA) or underwriter. These extra shares are either borrowed from promoters or pre‑issue shareholders or bought in the market during a limited stabilization window that cannot exceed 30 days from the start of trading.
The stabilizing agent is normally one of the merchant bankers, book runners or lead managers and must be appointed before filing the offer document. The SA signs an agreement with the issuer setting out the terms of the stabilization arrangement, including fees and expenses, and also enters into a separate agreement with the promoters or shareholders who will lend shares. Promoters and pre‑issue shareholders who hold more than 5 per cent are eligible to lend shares for this purpose; the maximum number that may be borrowed cannot exceed 15 per cent of the issue size. All material details and copies of these agreements must be disclosed in the draft prospectus and subsequent offer documents.
To operationalize stabilization, the SA opens a dedicated bank account (the GSO Bank Account) and a securities account (the GSO Demat Account). Money received from investors for the over‑allotment is kept in the GSO Bank Account, distinct from the main issue account, and is available to the SA to buy shares in the market during the stabilization period. Any shares purchased for stabilization are credited to the GSO Demat Account and must be returned to the lenders promptly — in any case no later than two working days after the close of the stabilization period. If, at the end of stabilization, the SA has not purchased enough shares in the market to cover the over‑allotment, the issuer must allot new shares equal to the shortfall in dematerialized form to the GSO Demat Account (within five days of the close of the stabilization period). Those allotted shares are then returned to the promoters in place of the borrowed shares; after this process the GSO accounts are closed. Shares returned to promoters remain subject to any continuing lock‑in obligations.
The SA has primary responsibility for stabilizing the post‑listing price and therefore decides the timing, quantity and price at which to buy shares during the stabilization window. The SA may buy shares from institutional holders or in the open market, but in aggregate not beyond the 15 per cent limit. From the GSO Bank Account the SA remits an amount equal to the number of additional shares finally allotted times the issue price to the issuer. Any residual funds after such remittance and after deducting stabilization expenses are transferred to the investor protection fund(s) of the stock exchange(s) where the issuer’s shares are listed. The SA must report daily to the stock exchange(s) during the stabilization period and file a final report with SEBI in the prescribed format; a register for each issue in which the SA acts must also be maintained.
A simple illustration helps clarify the mechanics. If a company issues 1,000 equity shares and arranges a 15 per cent green‑shoe, the SA borrows 150 shares from promoters for up to 30 days. The issuer may initially allocate 1,150 shares to applicants. If the market price falls below the issue price after listing, the SA can buy up to 150 shares in the market to support the price; those purchased shares are then returned to the promoters and only 1,000 shares remain listed after stabilization. Conversely, if the price rises and the SA does not cover the over‑allotment by market purchases, the issuer issues and lists the extra 150 shares, so 1,150 shares remain on the market.
The green‑shoe option is primarily an investor‑protection and market‑stability measure. It cushions temporary post‑listing volatility and helps protect small investors in the critical early trading period. It also benefits underwriters: in a strong market they can take the over‑allotment and profit if prices rise, while in a weak market they can support the price by buying in the market up to the agreed limit. Initially available only for book‑built IPOs, the green‑shoe can now be exercised in all IPOs, a change intended to reduce volatility and bolster investor confidence.
Practically, the green‑shoe has been used in notable Indian issues. The first exercise in India occurred in the ICICI Bank public issue, when the Life Insurance Corporation lent shares to the stabilizing agent. Later, in the high‑profile TCS IPO, the lead book runner acted as the SA and a stabilizing fund helped keep the post‑listing price above the offer price during the 30‑day period.
Primary issuances in India are regulated by SEBI under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (the ICDR Regulations), which replaced the earlier Disclosure and Investor Protection Guidelines. Modern primary issue processes increasingly use secondary‑market infrastructure and electronic flows—for example ASBA (Application Supported by Blocked Amount), depository and stock‑broker platforms and centralized banking mechanisms such as NACH—to streamline applications, reduce paper, shorten timelines (from T+12 toward T+6 and potentially lower) and reduce the overall cost of public issues. The green‑shoe option sits within this regulatory and operational framework as a formal, disclosed mechanism to manage post‑listing price behavior.
Regulatory Framework for Public Issues
Companies proposing a public issue of securities must comply not only with the disclosure and procedural requirements of the Companies Act, 2013 and the rules framed under it, but also with the regulations issued by the Securities and Exchange Board of India (SEBI). At the company-law level, a firm intending a public offer is required to apply for listing with recognised stock exchanges and to file a prospectus with the Registrar of Companies (RoC), the content of which is governed by detailed statutory disclosure norms.
Section 24 of the Companies Act, 2013 delegates administration of the provisions relating to the issue and transfer of securities—where the issuer is already listed or intends to seek listing—to SEBI. In practice this means SEBI oversees not only public offers but also any private placements that are intended to be listed on stock exchanges, establishing a regulatory handover for market-facing transactions.
For equity and other specified securities offered to the public, SEBI’s regulatory framework is set out in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR). These regulations require appointment of intermediaries such as merchant bankers and registrars to the issue, filing of a draft offer document with SEBI, and satisfaction of eligibility conditions including an established track record, minimum promoter contribution and prescribed lock‑in periods. The ICDR also mandates appointment of monitoring mechanisms where required and prescribes extensive disclosure obligations to protect investor interests.
Debt issuances follow a relatively simpler regulatory route under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (ILDS). The ILDS focuses on essential safeguards such as appointment of a debenture trustee, obtaining a credit rating and meeting prescribed disclosure standards. Irrespective of whether the issue is equity or debt, once securities are admitted to a recognised stock exchange the issuer must thereafter comply with the continuous listing requirements imposed by that exchange and SEBI.
An Initial Public Offering (IPO) is the first-time invitation by an unlisted company to the public to subscribe to its securities — either through a fresh issue, an offer for sale of existing securities, or a combination of both. At the IPO stage, information about the firm’s past performance and governance is often limited and sometimes unreliable. This information asymmetry can give rise to adverse selection, where investors cannot distinguish strong firms from weak ones, and moral hazard, where management may take opportunistic risks once funds are raised. To mitigate these risks and protect public investors, the Securities and Exchange Board of India (SEBI) has prescribed strict entry and disclosure requirements for companies seeking to list.
A Follow-on Public Offering (FPO) is a public offer of securities by a company that is already listed, and it may also consist of a fresh issue, an offer for sale, or both. Because listed companies have an operating and regulatory track record, investors can make more informed decisions about FPOs by relying on disclosed financials, past performance and market behaviour.
SEBI has therefore framed eligibility criteria and entry norms for entities raising funds through both IPOs and FPOs. The specific conditions applicable to an IPO of equity shares, or of any security that can be converted into or exchanged for equity shares at a later date, are set out under these norms and determine which companies may access the primary market.
Primary Market Issuance Norms and Procedures
Primary issues — the ways a company raises fresh capital in the primary market — are broadly classified as public or private. Public issues include the Initial Public Offering (IPO), which is the first-time sale of a company’s securities by an unlisted company, and follow-on public offerings, where a listed company issues additional securities, often directed to its existing shareholders. Private routes include private placement, which is a direct sale of securities to a select group of persons or financial institutions; preferential allotment, a direct sale to selected persons carried out under the provisions of Chapter XIV of the SEBI (DIP Guidelines); and Qualified Institutions Placement (for listed companies), in which securities are allotted specifically to qualified institutional investors.
Entry Norm I, commonly called the “Profitability Route,” sets the basic financial thresholds for a company seeking access to the primary market. Under this route the issuer must have net tangible assets of at least ₹3 crore for each of the preceding three full years, with not more than half of those assets held in monetary form. The company must have reported distributable profits in at least three of the preceding five years on both a standalone and consolidated basis, and the minimum average pre‑tax operating profit over the three most profitable years must meet the prescribed threshold of ₹15 crore. In addition, the company’s net worth should be at least ₹1 crore over the three‑year period. If the company has changed its name, at least 50 per cent of its revenue in the preceding year should have been derived from the new line of business. The size of the proposed issue should not exceed five times the pre‑issue net worth shown in the latest audited balance sheet.
Recognising that rigid thresholds could exclude otherwise viable businesses, SEBI permits two alternative routes. Entry Norm II, the “QIB Route,” requires the issue to be conducted through book building with a mandatory minimum allocation of 50 per cent to qualified institutional buyers (QIBs); failure to secure this minimum requires refund of subscription monies. The issuer must have a minimum post‑issue face value capital of ₹10 crore, or else commit to compulsory market‑making for at least two years. Entry Norm III, the “Appraisal Route,” is available when the project is appraised and financial institutions or scheduled commercial banks subscribe to at least 15 per cent of the project, of which at least 10 per cent must be contributed by the appraiser(s). Under this route at least 10 per cent of the issue must be allotted to QIBs (otherwise subscriptions are refundable) and the same post‑issue capital or market‑making requirement applies.
Beyond these eligibility norms, a company must offer its issue to at least 1,000 prospective allottees. SEBI has exempted certain entities from entry norms, including private and public sector banks; infrastructure companies whose projects have been appraised by specified institutions (such as PFIs, IDFC or IL&FS, or a bank that was earlier a PFI) with at least 5 per cent project financing by those institutions; and rights issues by listed companies.
For public or rights issues of debt instruments (convertible or non‑convertible), two additional conditions must be satisfied: the instrument must have an investment‑grade credit rating from at least two SEBI‑registered credit rating agencies, and the issuer must not be on the Reserve Bank’s list of wilful defaulters. The issuer must also not have defaulted on interest or principal repayment for more than six months. If a public issue of non‑convertible debt results in fewer than 50 proposed allottees, the company must refund the entire subscription amount; delays in refund beyond eight days attract a penal charge of 15 per cent per annum.
An unlisted company cannot make a public issue of equity (or securities convertible into equity) if there are outstanding instruments or rights that would entitle existing promoters or shareholders to receive equity after the IPO. All partly paid‑up shares must be fully paid or forfeited as per the guidelines before a public or rights issue can proceed. The company must have firm, verifiable arrangements of finance for at least 75 per cent of the stated means of finance, excluding the amount to be raised through the proposed issue.
To help investors assess new equity issues, IPO grading by at least one credit rating agency is required either before or after filing with SEBI; the prospectus or red herring prospectus must disclose all grades assigned to the IPO by rating agencies. For an unlisted company’s public issue, promoters must contribute at least 20 per cent of the post‑issue capital, which is locked in for three years. Pre‑issue shareholding (other than the promoters’ required contribution) is locked in for one year from the date of listing. Securities pledged as collateral for loans are not eligible for computation towards the minimum promoters’ contribution. To support first‑generation entrepreneurs and professional promoters where post‑issue promoter shareholding would otherwise fall below 20 per cent, Alternative Investment Funds (AIFs) may contribute up to 10 per cent of post‑issue capital to meet the shortfall.
Issuers raising more than ₹500 crore must appoint an independent monitoring agency. The monitoring agency files periodic reports with the issuer, which places them before its audit committee for recommendations to the board. Any material deviations in utilisation of issue proceeds must be informed to the stock exchanges and publicly disclosed, along with material observations from the audit committee or monitoring agency, by way of advertisement. This monitoring requirement does not apply to issues by banks and public financial institutions, nor to offers for sale.
The procedure for filings and disclosures is tightly regulated. A draft offer document must be filed with SEBI through a merchant banker at least 21 days prior to filing the prospectus with the Registrar of Companies and the stock exchanges. SEBI examines the draft and issues observations—generally within 21 days—and the draft is hosted on SEBI’s website for public comments for 21 days from filing. SEBI’s observations must be complied with before the final prospectus is filed. SEBI has extended the validity of its observations to one year, allowing companies to launch the issue within one year from the date observations are communicated. The lead merchant banker must ensure compliance with the Disclosure and Investor Protection (DIP) guidelines when submitting the draft offer document.
The prospectus must contain comprehensive financial and risk information to enable investor evaluation: earnings per share (EPS) and pre‑issue EPS for the last three years, pre‑issue price‑earnings ratio, average return on net worth over three years, the minimum return on increased net worth required to maintain pre‑issue EPS, net asset value (NAV) per share before and after the issue and comparison with the issue price, relevant accounting ratios, credit ratings, internal and external risk factors, underwriting details, the objects of the offering with the funding plan and schedule of implementation, dividend policy, material developments since the last balance sheet date, and statutory and legal disclosures.
Issuers have freedom to determine the issue price, but must justify it in the prospectus. Pricing can follow the fixed‑price method—where the issuer and merchant banker set the offer price—or the book‑building route, where a floor price or price band is indicated and the final price is discovered through bids. In a book‑building process, the cut‑off price (the final price at which the issue is fully subscribed) is determined on Dutch auction principles. Differential pricing across investor categories is permitted under DIP guidelines provided securities allotted in the firm‑allotment category are not priced lower than those in the net offer to the public; retail individual investors may be offered a discount of up to 10 per cent relative to other public categories. The final prospectus filed with the Registrar of Companies must record the final issue price and size.
On closure, bids are categorised as firm allotment, QIBs, non‑institutional investors (NIIs) and retail investors. Firm allotments are reserved for certain institutions—such as Indian and multilateral development financial institutions, Indian mutual funds, foreign institutional investors (including NRIs), permanent employees of the issuer and scheduled banks—and the ICDR regulations cap the share reserved under firm allotment. Qualified institutional buyers include Indian mutual funds, scheduled banks, foreign institutional investors and Indian or multilateral development institutions. A retail individual investor is defined as one who bids for securities valued at not more than ₹1,00,000; investors outside the retail and QIB definitions are treated as non‑institutional investors. Every applicant must quote a PAN in the application form.
When an issuer offers 100 per cent of the net offer to the public through a 100 per cent book‑building process, the public portion must be divided between investor categories in fixed proportions. At least 35 per cent of the net offer must be reserved for retail individual investors (RIIs), at least 15 per cent must be reserved for non‑institutional investors (NIIs) — that is, investors other than RIIs and qualified institutional buyers (QIBs) — and not more than 50 per cent may be allocated to QIBs.
For compulsory book‑built issues there is an additional safeguard: at least 50 per cent of the net offer must be allotted to QIBs; if this minimum is not met, the entire subscription amount must be refunded to applicants.
Where a book‑built issue is made to satisfy the specific requirement of a 60 per cent allocation to QIBs under Rule 19(2)(b) of the Securities Contract (Regulation) Rules, 1957, the resulting split of the remaining public offer is 30 per cent for RIIs and 10 per cent for NIIs.
In a fixed-price public issue, at least 50 per cent of the net offer available to the public must initially be reserved for retail individual investors. The remaining portion of the public offer is available to other individual applicants (other than retail investors) and to institutional or corporate investors, irrespective of the number of securities they apply for.
Once the issue closes, allotment is made on a proportionate basis within each investor category, whether the issue was book-built or fixed-price. For this purpose the oversubscription ratio is calculated separately for every category against the shares reserved for that category in the offer document. Bids within each category are then grouped into buckets according to the number of shares applied for. The oversubscription ratio is applied to the number of shares in each bucket to determine allotments per applicant, and from that the number of successful allottees is derived. All public issues with a size in excess of 10 crore must be made compulsorily in dematerialised form.
Timelines for allotment and refunds differ by issue mechanism: in fixed-price issues allotment or refund must be completed within 30 days of issue closure, while in book-built issues the deadline is 15 days. For listed companies, the aggregate size of a proposed issue together with all previous issues in the same financial year must not exceed five times the company’s pre-issue net worth as shown in the audited balance sheet of the last financial year. If a company has changed its name within the preceding year, the revenue attributable to activities suggested by the new name must account for at least 50 per cent of its total revenue for the preceding full year.
Under the Companies Act, 2013, a company that has raised money from the public through a prospectus and still holds unutilised proceeds cannot change the objects for which the money was raised or vary the terms of any contract disclosed in the prospectus unless shareholders pass a special resolution. The Act also requires promoters and controlling shareholders to provide an exit opportunity to dissenting shareholders in a manner and on conditions to be specified by SEBI. In response, SEBI has prescribed a detailed framework covering the conditions for an exit offer, pricing parameters and procedures. These rules apply to issues opened after 1 April 2014 where the amount to be utilised for the originally stated objects is less than 75 per cent of the funds raised (including any amount earmarked for general corporate purposes), provided at least 10 per cent of shareholders dissent to the proposed change in objects.
No company may make a public or rights issue of debt instruments (convertible or non-convertible) unless it satisfies two conditions: it has obtained a credit rating of at least investment grade from not fewer than two SEBI-registered credit rating agencies, and it is not listed as a wilful defaulter by the Reserve Bank of India. The company must also not have defaulted on interest or principal payments for a period exceeding six months. Further, an issuer should not allot non-convertible debt instruments after a public issue if the number of proposed allottees is fewer than fifty; in that event the issuer must refund the entire subscription amount, and any delay beyond eight days attracts a penal interest charge of 15 per cent per annum.
Following market reforms a record number of large issues were launched; an issue with a minimum size of 7,100 crore is typically classified as a “mega” issue. Empirically, most IPOs tend to list at a premium to their offer price.
Follow-on Public Offers and Regulations
A Follow-on Public Offer (FPO), also called a subsequent or seasoned public offering, is an offer of sale of securities by a company that is already listed on a recognised stock exchange. Under the SEBI (DIP) Guidelines, a listed company is one that has any of its securities listed on a recognised exchange; this definition also covers public sector undertakings whose securities are listed. Listed companies typically use FPOs to raise equity for growth and expansion.
There are specific limits and eligibility conditions for listed companies seeking to make an FPO. The aggregate size of the proposed issue, together with all previous issues made in the same financial year (including offer-through-offer-document, firm allotment and promoters’ contribution), must not exceed five times the company’s pre-issue net worth as shown in the audited balance sheet of the last financial year. If the company has changed its name in the past year, at least half of its total revenue in the preceding full year must have come from the activity implied by the new name. A listed company that does not meet these requirements may still make a public issue but must follow the Qualified Institutional Buyer (QIB) route or the appraisal route applicable to IPOs.
Promoters are required to contribute not less than 20 per cent of the post-issue capital or 20 per cent of the issue size, whichever is applicable. Any additional participation by promoters beyond this minimum will attract the pricing provisions laid down for preferential allotments if the issue price is lower than the price determined under those preferential allotment guidelines.
To speed up access to the primary market for reputable, compliant issuers, SEBI has introduced the Fast Track Issue (FTI) route. FTIs allow eligible listed companies to raise equity through follow-on or rights issues with a streamlined process. Such companies may file a Red Herring Prospectus (for book-built issues) or a prospectus with the Registrar of Companies (RoC), or file the letter of offer with the designated stock exchange for rights issues, without first submitting a draft offer document to SEBI for comments. This presumes that the requisite information about the company is already in the public domain.
When the aggregate value of securities (including premium) in the proposed issue exceeds Rs. 50 lakhs, a listed company must satisfy several entry norms to use the FTI route. These include: (1) continuous listing on a stock exchange with nationwide terminals for at least three years immediately before filing the offer document; (2) an average market capitalisation of public shareholding of at least 71,000 crores for one year up to the quarter-end preceding board/shareholder approval of the issue; (3) an annualised trading turnover in the six months before the reference month equal to at least 2 per cent of the weighted average number of shares listed during that period; (4) redressal of at least 95 per cent of shareholder/investor grievances recorded up to the quarter-end preceding the filing month; (5) compliance with the listing agreement for at least three years immediately preceding the reference date; (6) auditors’ qualifications, if any, in the audited accounts disclosed in the offer document should not have an aggregate impact exceeding 5 per cent of net profit/loss after tax for the relevant years; (7) no pending prosecution proceedings or show-cause notices issued by SEBI against the company, its promoters or whole-time directors as on the reference date; and (8) the promoter group’s entire shareholding must be held in dematerialised form as on the reference date.
For these purposes, the “reference date” means the date of filing the Red Herring Prospectus (for a book-built public issue) or prospectus (for a fixed-price public issue) with the RoC, or the date of filing the letter of offer with the designated stock exchange in the case of a rights issue. The “average market capitalisation of public shareholding” is calculated as the sum of the daily market capitalisation of public shareholding over the one-year period up to the quarter-end preceding board/shareholder approval, divided by the number of trading days in that period.
Although listed companies with a strong track record find it easier to raise funds through FPOs, the procedural burden, time and cost involved have made FPOs a less attractive option in recent years. Many listed issuers now prefer rights issues or the Qualified Institutions Placement (QIP) route to raise equity capital more quickly and efficiently.
The Securities and Exchange Board of India framed the SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 to provide a comprehensive framework for issuance and listing of non-convertible redeemable preference shares (NCRPS). Recognising the risk profile of this instrument, the Regulations prescribe specific safeguards for public issues: a minimum tenor of three years and a minimum credit rating of “AA—” (or equivalent). For privately placed NCRPS the Regulations fix the minimum application size at Rs. 10 lakh per investor.
Under Basel III norms, banks may also issue certain non‑equity instruments — notably Perpetual Non‑Cumulative Preference Shares and Innovative Perpetual Debt Instruments — provided they meet the criteria for inclusion in Additional Tier I capital. The SEBI Regulations are intended to apply, mutatis mutandis (with necessary adaptations), to these bank‑issued instruments as well, subject to compliance with the provisions of the Companies Act, 1956 and any other applicable laws, any additional conditions that SEBI may prescribe, and the requirement to make adequate disclosures and disclose relevant risk factors in the offer document.
Rights Issue: Regulations and Procedure
Rights issue is the offer of new shares made to a company’s existing shareholders. Under Section 81(1) of the Companies Act, 1956, such an offer must be made to shareholders in proportion to the capital paid up on their existing shares; SEBI’s (ICDR) Regulations define it similarly as an offer of specified securities by a listed issuer to shareholders on the record date. For entitlement purposes, only the capital paid up on each share on the record date matters.
A rights issue gives existing shareholders a pre-emptive, pro‑rata opportunity to subscribe to fresh shares at a predetermined price. Companies use rights issues to raise funds for expansion, diversification or balance‑sheet restructuring, or to increase promoter holding without resorting to preferential allotment. To ensure subscription and to reward shareholders, issuers commonly price rights offers at a discount to the market. A discounted offer can also reflect a deliberate strategy when promoters believe the market price does not reflect the stock’s fair value. Rights offers can raise funds while limiting dilution of control for existing shareholders and promoters.
Rights issues differ from public issues in important respects. New shares in a rights issue are offered only to existing shareholders, whereas a public issue is open to the general public. Rights give shareholders a transferable claim—rights entitlements (REs)—which can be renounced or sold; there is no comparable entitlement in a public issue. Finally, allotment in a rights issue is determined by shareholding on the record date, whereas public-issue allotment is proportionate to application size.
SEBI requires that a draft letter of offer be filed through a merchant banker at least 30 days before filing the final letter of offer with the stock exchange when the aggregate value of the securities to be offered (including any premium) exceeds Rs. 50 lakh. The ICDR Regulations also restrict rights issues when convertible debt is outstanding: an issuer cannot make a rights issue unless it reserves, pro rata, equity shares of the same class for holders of outstanding fully or partly convertible instruments; those reserved shares must be issued on conversion on the same terms as the rights issue.
A listed issuer must announce a record date to determine eligible shareholders, and once the record date is announced the issuer cannot withdraw the rights issue. Withdrawal after the record date bars the issuer from applying for listing of any specified securities on a recognised stock exchange for 12 months from that announcement. The issuer may, however, seek listing for equity shares allotted on conversion or exchange of convertible securities issued before the record date announcement.
The practical process begins with a letter of offer sent to shareholders whose names appear on the books on the record date. A shareholder typically has four options: (a) exercise the rights and subscribe to the new shares at the offer price; (b) renounce the rights in favour of another party or sell them in the market; (c) partially renounce and partly subscribe; or (d) do nothing and allow the entitlement to lapse. Rights issue application forms normally contain three parts: the shareholder’s application (including requests for additional shares), the form of renunciation, and the application by any renouncee. Shareholders may also request split application forms when they wish to renounce only part of their entitlement or renounce in favour of more than one person.
Historically, the rights market was a major source of corporate capital but contracted sharply—from about Rs. 715,000 crore a year to around Rs. 71,500 crore—largely because there was no organised trading platform for post‑issue trading of rights. Rights traded over the counter, which impaired price discovery and liquidity; many unsubscribed rights simply expired. The process was also cumbersome, with a minimum 30‑day issue period and extensive disclosure requirements. To revive the market and speed up fundraising, SEBI simplified disclosure norms for rights issues: issuers are now required to provide only the audited accounts for the last financial year and audited or unaudited financials with limited review for the interim period, rather than five years of restated financials. SEBI removed the need for summaries of industry and business, past-performance comparisons, and management discussion and analysis in the rights offer, and it simplified disclosures on financial statements, litigation and risk factors.
SEBI also reduced the regulatory timeline for rights issues from 109 days to 43 days. Key changes included shortening the board meeting notice from seven days to two working days; reducing the notice period for the record date to seven working days for all scrips (from varied earlier periods of 15/21/30 days); shortening the issue period to a minimum of 15 days (previously a minimum of 30 days) while retaining a maximum of 30 days; and cutting post‑issue completion time from 42 days to 15 days. These measures were intended to lower the risk of adverse market movements during the issue period and to reduce project financing costs.
In September 2008 SEBI proposed that rights entitlements be tradable both electronically and physically on stock exchanges and that each entitlement be assigned a separate ISIN (the depository code for a security). The proposal aimed to create a transparent trading platform for REs, improve liquidity and price discovery, and make the rights market more accessible to shareholders.
The issuer first fixes a Record date to determine which shareholders are eligible to participate in the rights issue. Those eligible shareholders receive a letter informing them that their Rights Entitlements (RE) have been credited to their respective demat accounts, the period during which REs can be traded, and enclosing the Letter of Offer along with a blank application form. Unlike the current practice of sending personalised forms showing a shareholder’s name and entitlement, the issued form is blank. Copies of the blank form are also made available with stock exchanges, merchant bankers and brokers, and in soft copy on their websites.
On the issuer’s instruction, the registrar credits the REs into eligible shareholders’ demat accounts through a corporate action, in the prescribed ratio based on the Record date. With the REs credited, the rights issue opens both for subscription and for renunciation/trading of REs through the stock exchange platform. To keep trading in REs distinct from trading in ordinary shares, the stock exchanges assign a separate ISIN to the REs; trading then takes place on the secondary market platform in the same way as shares.
Shareholders who do not wish to subscribe can renounce their entitlement by selling their REs on the electronic trading platform. Those who keep their REs — whether original shareholders who have not renounced or renouncees who acquire REs in the market — may apply for shares during the issue period (which includes the RE trading window). Applications may be submitted using the blank form received with the Letter of Offer, a downloaded blank form, or by furnishing the required particulars on plain paper along with the payment instrument to the Bankers to the Issue.
Trading in REs is normally suspended at least three working days before the rights issue closes, to prevent a last‑minute rush and to give beneficial owners enough time to submit applications. When trading closes, the ISIN for the REs is suspended. After trading is closed and trades are settled, the depositories provide the registrar with two lists: the holders of REs as of the date the ISIN was suspended, and the shareholders as of the Record date, each showing the number of REs held.
The registrar then reconciles applications by matching the number of shares applied for with the number of REs available in the respective demat accounts, using the lists supplied by the depositories. Once reconciliation is complete, the registrar finalises allotment and, on the issuer’s instruction, credits the rights shares to the successful applicants’ demat accounts through a corporate action. Finally, the registrar debits the corresponding REs from demat accounts — both for REs against which shares have been allotted and for any REs that have lapsed.
In a physical rights issue the issuer first fixes a record date to identify the shareholders who will be eligible to participate. Those entitled shareholders receive the Letter of Offer and the Composite Application Form (CAF), pre‑printed with a unique number, the shareholder’s name and the entitlement of rights. The issue then opens both for subscription and for renunciation or trading of the rights entitlements (RE) in physical form.
Shareholders who decide not to renounce their entitlements, and any buyers of renounced entitlements (renouncees), must apply for shares during the issue period. Applications are made by submitting the CAF (or the required information on plain paper) together with the prescribed payment instrument to the bankers to the issue. To avoid a last‑minute rush and to give the beneficial owners of REs time to apply, trading of REs may be closed at least three working days before the rights issue itself closes.
The bankers to the issue forward the CAFs or plain‑paper applications to the registrar, who reconciles the applications against entitlement records in accordance with prevailing practice. The registrar finalizes the basis of allotment and arranges for despatch of the physical share certificates to the allotted shareholders.
After remaining dormant for more than a decade, the market for rights issues has revived. Rights issues tend to be attractive to companies when the primary market is weak because they are relatively straightforward to execute and are often priced at a discount to the prevailing market price, which encourages shareholder participation. Nevertheless, several companies continue to prefer raising funds through private placement rather than by a rights issue.
IDRs: Structure and Regulation
Indian Depository Receipts (IDRs) allow foreign companies to raise capital in India by issuing receipts denominated in Indian rupees against their underlying equity. Introduced to help Indian investors diversify and to integrate India’s capital market with global markets, an IDR represents a claim on shares of a foreign issuer and is structured to function like a locally listed security while the underlying shares remain deposited abroad.
The legal framework was put in place after the Companies Act was amended in 2002, and detailed procedures were issued by the Department of Company Affairs in February 2004 as the Companies (Issue of Indian Depository Receipts) Rules, 2004. Under these rules an overseas issuer must meet stringent eligibility tests: it should be incorporated abroad, listed in its home jurisdiction, and should not be barred by any regulator from issuing securities. Financial conditions require a pre-issue paid-up capital and free reserves of at least USD 50 million, an average market capitalisation of at least USD 100 million over the preceding three years, profit-making for at least five years with a dividend track record of no less than 10 per cent in those years, and a pre-issue debt–equity ratio not exceeding 2:1. In addition, IDRs issued in any financial year are capped at 15 per cent of the issuing company’s paid-up capital and free reserves.
Issuers must follow several procedural and compliance requirements. An application for approval must be filed in advance and accompanied by a refundable fee (USD 10,000 under the rules). On approval, an issue fee is payable according to the prescribed slab rates. The issuer is required to appoint an overseas custodian bank to hold the underlying shares, a domestic depository authorised to issue and manage the IDRs, and a merchant banker registered with SEBI to conduct due diligence and file the draft prospectus. The draft prospectus must be filed with the Registrar of Companies and SEBI, which may suggest modifications within 21 days. The domestic depository is responsible for passing on dividends and corporate actions to IDR holders in proportion to their holdings, and issuers must publish statements disclosing any variation in fund utilisation and quarterly audited financial results in English-language newspapers.
IDRs must be denominated in Indian rupees and listed on one or more recognised stock exchanges with nationwide trading terminals. They are not redeemable into the underlying equity for one year from the date of issue; conversion into underlying shares is permitted only after the one-year lock-in and subject to compliance with the Foreign Exchange Management Act (FEMA) and RBI regulations governing foreign exchange and capital flows. The repatriation of proceeds from an IDR issue is similarly governed by the foreign exchange laws in force.
Investor eligibility is carefully defined. IDRs may be purchased and freely transferred by persons resident in India as per FEMA. Certain foreign entities that are resident or registered in India—such as subsidiaries of global corporations and foreign funds registered in India—may also invest. However, NRIs and foreign institutional investors (FIIs) cannot hold IDRs unless they obtain specific permission from the Reserve Bank of India. Domestic companies’ investments in IDRs must respect any applicable investment limits under Indian law. Automatic fungibility of IDRs into underlying shares is not permitted.
SEBI’s norms govern allocation and subscription. At least 50 per cent of each issue must be allotted to qualified institutional buyers (QIBs); the remaining portion is available to non-institutional investors and retail individual investors (including employees), with the issuer disclosing the allocation policy in the prospectus. SEBI has allowed the facility of anchor investors on terms similar to domestic public issues, and it mandates a significant retail allocation to protect small investors. The minimum issue size for an IDR is Rs 50 crore, the minimum application amount is specified in the prospectus (typically in the lower tens of thousands of rupees), and the issuer must receive at least 90 per cent of the issue amount by the closing date—otherwise all subscription amounts must be refunded promptly, with delayed refunds attracting interest.
Finally, issuers of IDRs must obtain prior approval from SEBI and comply with any additional eligibility criteria or disclosure requirements it prescribes. Despite this comprehensive framework, IDRs have seen limited uptake in India to date.
On March 1, 2013, SEBI issued a detailed roadmap to encourage more foreign companies to list in India through Indian Depository Receipts (IDRs) and to help investors make informed choices. Central to the new framework is the principle of partial two‑way fungibility: IDRs may be converted into the issuer’s underlying equity shares, and those underlying shares may be reconverted into IDRs, but only within the available Headroom. “Headroom” is defined as the number of IDRs originally issued minus the number of IDRs currently outstanding, adjusted for any IDRs already redeemed into underlying equity.
For new IDR issues, fungibility is subject to a one‑year lock‑in from the date of listing. After that year, the issuer must provide two‑way fungibility on a continuous basis. Fungibility can be offered in any of three ways: by converting IDRs into the underlying shares; by converting and immediately selling the underlying shares in the foreign market where the issuer’s shares are listed and remitting the sale proceeds to IDR holders; or by offering both options. If the issuer specifies an option at the time of the public offer, it cannot change that choice without SEBI’s specific approval. When holders apply for conversion, the IDRs applied for must be moved into an IDR redemption account and the issuer must take steps to provide either shares or sale proceeds as chosen. Issuers may also accept requests from holders of underlying shares who wish to convert into IDRs, provided such conversions do not exceed the available Headroom and comply with SEBI and RBI guidelines.
Where the issuer elects to convert IDRs into underlying shares and to sell those shares abroad on behalf of IDR holders, the issuer must disclose upfront the range of fixed and variable costs as a percentage of sale proceeds and ensure that total costs do not exceed 5% of the sale proceeds. In all cases, issuers must continuously disclose available Headroom and any significant conversion or reconversion transactions, and they must publish detailed operational procedures consistent with SEBI and RBI requirements.
For IDRs already listed, a somewhat different timetable and mechanism apply. After one year from the date of issue, the issuer must, each year, offer redemption/conversion of up to 25% of the IDRs originally issued. The issuer must invite expressions of interest by advertising in leading national English and Hindi newspapers and notifying the stock exchanges at least one month before implementing the redemption/conversion program. The modes of fungibility available to existing issuers mirror those for new issues: conversion into shares; conversion and sale of the shares abroad with proceeds to holders; or both.
Fungibility windows for existing issuers must open at least once every quarter and remain open for at least seven days. The total number of IDRs available for conversion in any window must be fixed before the window opens. Any re‑issuances of IDRs during a window are counted toward Headroom only in the next fungibility cycle. If conversion requests exceed the available limit, allocations will be made on a proportionate basis. Retail investors are protected by a reservation: 20% of the IDRs made available for conversion in a window are set aside for them. If retail demand exceeds the reserved portion, allocations are made proportionally and any unsatisfied retail demand is added back into the unreserved pool; if retail demand is lower, the unallocated share joins the unreserved portion.
As with new issues, all IDRs tendered for conversion must be transferred to an IDR redemption account at the time of application; unsuccessful bids result in the return of IDRs to the applicant. Issuers may also accept conversions from holders of underlying shares into IDRs, subject to Headroom and RBI guidelines. When issuers choose the option of selling underlying shares abroad, they must disclose upfront the range of fixed and variable costs and ensure total costs do not exceed 5% of sale proceeds. Continuous disclosure of Headroom and major conversion/reconversion events is mandatory.
Existing issuers were required to offer the option under these guidelines within three months of the circular’s notification. Alternatively, an existing issuer could opt to adopt the fungibility regime applicable to new issuers beginning from the anniversary of its IDR listing or from any subsequent quarter; such a choice must be announced by advertisement in leading national newspapers and via stock exchange notification at least one month before implementation and, once exercised, cannot be reversed. In all cases issuers must frame detailed procedures consistent with the broad SEBI and RBI norms set out in the circular.
To enable foreign issuers that have listed their Indian Depository Receipts (IDRs) on Indian stock exchanges to conduct simultaneous rights offerings both in their home jurisdiction and in India, a specific regulatory framework was introduced. Rather than requiring a separate Indian prospectus, the regime allows the overseas issuer to attach an additional “wrap” to the letter of offer distributed in its home market; this wrap contains the information and disclosures required under Indian law and explains the procedure that IDR holders in India must follow.
Disclosure obligations for IDR rights issues were largely aligned with the reduced disclosure norms that apply to domestic rights offers, thereby simplifying documentation and compliance. In addition, IDR issuers that met continuous listing requirements were permitted to file their offer documents on a fast-track basis, streamlining the approval process for eligible issuers.
The existing platform has been renamed the Institutional Trading Platform (ITP) and will now also serve as a channel for start‑up capital raising. Access to the ITP is restricted. Eligible companies include those that are technology‑intensive — for example firms relying on information technology, intellectual property, data analytics, biotechnology or nanotechnology to deliver products, services or business platforms with substantial value addition — provided that at least 25 per cent of the pre‑issue capital is held by Qualified Institutional Buyers (QIBs). Alternatively, any company in which QIBs hold at least 50 per cent of the pre‑issue capital is eligible.
Post‑issue shareholding is likewise constrained: no single person, alone or together with persons acting in concert, may hold 25 per cent or more of the post‑issue share capital. Disclosure requirements for issuers on the ITP are simplified to reflect the nature of start‑ups; prospectuses may state only the broad objects of the issue, and the usual cap on funds raised for general corporate purposes applicable to main‑board listings will not apply. The entire pre‑issue capital will be subject to a uniform lock‑in of six months from allotment for all shareholders, with specified exemptions to preserve market liquidity.
Recognising that conventional valuation metrics such as P/E and EPS may not be meaningful for many start‑ups, issuers may use alternative bases for pricing their issues, and may include other appropriate disclosures — except financial projections. Access to the ITP’s offerings is limited to two investor classes: institutional investors (QIBs, family trusts, systemically important NBFCs registered with the RBI, and intermediaries registered with SEBI, each with a net worth exceeding ₹2,500 crore) and non‑institutional investors (NIIs) other than retail individual investors.
In a public offer through the ITP, 75 per cent of the issue will be allocated to institutional investors and 25 per cent to NIIs. Institutional allotments may be made on a discretionary basis, while NII allotments will be proportionate. Where allotment to institutions is discretionary, no single institutional investor may receive more than 10 per cent of the issue; all shares allotted on a discretionary basis will be locked in for 30 days, consistent with the anchor investor lock‑in norm. The minimum application size and the minimum trading lot will be set uniformly, and the number of allottees in a public offer must exceed 200. After three years a company listed on the ITP may choose to migrate to the main board, subject to meeting the stock exchanges’ eligibility requirements.
For Alternative Investment Funds (AIFs) in Category I and II that are required under the SEBI (Alternative Investment Funds) Regulations, 2012 to invest minimum amounts in unlisted securities, investments in shares of companies listed on the ITP may be treated as investments in “unlisted securities” for the purpose of calculating those investment limits. The same platform will also facilitate capital raising by small and medium enterprises.
In the primary capital market, corporates raise funds by issuing securities through three main routes: public issues, rights issues and private placements. A public issue makes securities available to the general public, while a rights issue offers additional securities to existing shareholders in proportion to their current holdings (pro rata).
Private placement, by contrast, involves the issuer selling newly issued securities directly to a limited, pre-selected group of investors rather than to the public. These placements are typically arranged through merchant bankers and are offered to institutional and high‑value clients such as financial institutions, banks, corporates and high‑net‑worth individuals.
Private Placement Regulatory Framework
Private placements became a widely used route for raising funds in India after some companies began using it to issue large volumes of debt to the public while evading the stricter requirements that govern public offers. The Companies Act, 2013 and the accompanying Companies (Prospectus and Allotment of Securities) Rules, 2014 therefore introduced several conditions to curb abuse and bring greater transparency to the process.
Under these rules, a company’s private placement offer or invitation cannot be made to more than 200 persons in the aggregate in a financial year, excluding qualified institutional buyers (QIBs) and employees receiving securities under an employee stock option plan. Offers must be made only to named persons whose names are recorded by the company before the invitation is issued; the offer must be addressed to those persons individually and a complete record of such offers must be maintained. The company is also required to file details of the private placement offer with the Registrar of Companies within 30 days of circulating the offer letter.
Payments for subscription to privately placed securities must be made through banking channels — cheques, demand drafts or other electronic means — and not in cash. Payments should originate from the bank account of the subscriber, and the company must keep records of these accounts. Securities must be allotted within 60 days of receipt of application money; failure to allot requires repayment of the money to the investors. Public advertising, mass media campaigns or use of marketing/distribution channels to inform the public about a private placement are expressly prohibited.
The rules also require that each private placement offer letter be accompanied by a serially numbered application form addressed to a specific person; only the person so addressed may apply using that form. The face value investment per person in such an offer must meet the statutory minimum threshold. A return of allotment, together with a complete list of security-holders (including name, address, PAN and email id), must be filed with the Registrar within 30 days of allotment. Any offer or invitation that does not comply with Section 42 of the Companies Act is treated as a public offer, thereby triggering compliance with the Companies Act, the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992.
The statutory limit of 200 investors does not apply to QIBs. QIBs include entities such as mutual funds, foreign portfolio investors, alternate investment funds, scheduled commercial banks and insurance companies registered with IRDA, as defined in SEBI’s regulations. This carve-out, together with other features of private placement, explains why institutional participation is significant in this market.
Private placement remains attractive to issuers because it is faster and cheaper than public or rights issues, allows tailor-made terms to suit issuer and investor requirements, and involves fewer formalities, disclosures and rating obligations than public offers. These benefits have made private placement a dominant route for debt financing in markets such as the United States, and have driven its growing importance in India, particularly during periods of weakness in the new-issues market.
In India, privately raised resources have been largely concentrated in debt instruments — bonds and debentures of various maturities — while equity has been raised more often through preference shares. Major issuers are financial institutions, banks and public sector undertakings; typical subscribers include banks, provident funds, mutual funds and high net-worth individuals. Because privately placed securities are often not listed and are usually held to maturity by banks and institutions, the secondary market has limited depth and liquidity.
Until September 2003, private placements in India were lightly regulated. Issuers could sometimes structure issues with fewer than 50 participants to avoid certain regulatory guidelines, and the lack of disclosure norms encouraged rapid growth in the segment. Following SEBI’s disclosure requirements introduced in 2003, resource mobilisation from the market temporarily declined. Over time, regulators have tightened oversight: companies seeking to list privately placed bonds must comply with disclosure norms under the Companies Act and SEBI regulations and adhere to stock exchange listing agreements. Privately placed debt typically requires a credit rating (at least investment grade for listing), appointment of a SEBI-registered debenture trustee, and issuance and trading in dematerialised form. With a few exceptions (such as spot transactions in listed debt), trades are to be executed on recognised stock exchange trading platforms, and secondary market participation is largely limited to QIBs and HNIs.
The Reserve Bank of India has also imposed prudential limits and disclosure requirements. It has prohibited financial institutions from investing in unrated paper or paper rated below investment grade, set ceilings on investment in unlisted securities and securitised paper (including sub-limits for financial institutions), and capped banks’ exposure to unrated debt. Financial institutions must follow SEBI guidelines when raising resources via private placement and disclose issuer composition and non-performing investments in their financial statements. These measures were designed to reduce regulatory arbitrage, improve transparency and contain systemic risks arising from concentrations in privately placed instruments.
Preferential Allotment of Securities
Preferential issue is a common alternative to a public or rights issue when companies wish to raise funds without the procedural burden and disclosure requirements of a public offer. Under a preferential allotment, shares or convertible securities are issued to a selected set of investors — for example promoters, foreign partners, technical collaborators or private equity funds — after obtaining shareholder approval. Unlike a public offer, an issuer need not file a prospectus or offer document for a preferential allotment.
Legally, a “preferential issue” refers to an issuance of shares or specified convertible securities by a listed company to a select group on a private placement basis. The concept is governed by Section 81 of the Companies Act, 1956 and by the detailed pricing, disclosure and procedural requirements in the SEBI (ICDR) Regulations. The SEBI definition specifically excludes public issues, rights issues, bonus issues, ESOPs, qualified institutions placements, sweat equity and foreign depository receipts.
The regulatory framework also defines who counts as a promoter and who belongs to the promoter group. A promoter is ordinarily a person or persons in overall control of the company, instrumental in framing the plan under which securities are offered to the public, or named as promoters in the prospectus. Directors or officers acting in a purely professional capacity are not promoters. Financial institutions, scheduled banks, FIIs and mutual funds are not to be treated as promoters merely because they hold 10 per cent or more of equity, although they are treated as promoters for companies they promote or for mutual funds they sponsor. The promoter group includes the promoter and immediate relatives (spouse, parents, siblings, children), related companies and certain other entities where prescribed shareholding thresholds (10 per cent or 20 per cent as applicable) link them to the promoter or the issuer.
A company may issue equity shares, warrants, partly or fully convertible debentures, or other instruments that convert into equity at a later date through a preferential issue. Listed companies must have their entire share capital in dematerialised form before making such an issue. Earlier rules required that pre-preferential allotment shareholding be under lock-in from the relevant date until six months after allotment; SEBI’s subsequent norms have specified different lock-in periods depending on the nature of the allottee and the instrument. Notably, securities allotted to promoters by way of preferential allotment attract a three‑year lock-in. Shares allotted on conversion of warrants are locked in from the date of share allotment (not from the date of warrant issuance). For partly paid-up shares, the lock-in begins on allotment but continues for one year after the shares become fully paid up. Shareholders who sold their holdings during the six months prior to the relevant date are not eligible to receive allotment on a preferential basis.
SEBI’s pricing, disclosure and operational requirements for preferential allotments are detailed and prescriptive. The issue price must be at least the higher of: (a) the average of the weekly high and low of the closing prices of the scrip on the stock exchange during the six months preceding the general meeting that approves the issue; or (b) the same average computed over the two weeks preceding that meeting. For companies listed for less than six months, the floor price is the higher of the IPO issue price, the average during the listing period up to the relevant date, or the two‑week average; once the company completes six months of listing it must recompute the price and recover any shortfall from the allottees. To remove ambiguity, the “relevant date” is clarified as 30 days prior to the shareholders’ meeting called to consider the preferential issue; if that day falls on a weekend or holiday, the preceding working day is used. SEBI has also standardized time references from “months” to “weeks” for certain pricing computations.
SEBI has tightened other operational safeguards: upfront margin for warrant allottees was increased from 10 per cent to 25 per cent to discourage speculative issuance of warrants at discounts; companies must disclose in the balance sheet the amount of preferential issue proceeds utilized and the purposes for which funds were applied, with unutilized funds shown separately and the form of investment indicated; listed companies must obtain PAN from each allottee; and where debt restructuring is involved, the restructuring framework should commence on the allotment date and continue for a year.
Companies pursue preferential allotments for several strategic reasons: to raise working capital quickly and at relatively low cost; to increase promoters’ stake (sometimes by issuing warrants to promoters); to convert debt into equity as part of restructuring; to bring in strategic or institutional investors; to issue shares under ESOPs; or to facilitate management-led takeovers. Institutional and private equity investors often favour this route because it can preserve management control and may entail shorter lock-in obligations in certain cases.
While preferential issues can be an efficient and flexible financing tool that signals commitment by promoters and institutional investors, they also dilute the holdings of existing shareholders and can reduce earnings per share. When preferential allotments largely benefit promoters or selected outsiders — particularly if made when the company is not fund-constrained — they can be perceived as inequitable and may depress valuation ratios and market prices, adversely affecting minority shareholders.
Qualified Institutional Placement (QIP)
Qualified Institutional Placement (QIP) has emerged as an important fundraising route for listed Indian companies. Under the provisions of Chapter XIIIA of the SEBI (DIP) guidelines, a QIP is an issue of equity shares or securities convertible into equity, offered only to institutional investors. It allows a company to raise funds from both domestic and foreign institutions without the time-consuming process of listing abroad. Compared with private placements, QIPs do not carry a lock‑in requirement, and the process is simpler and faster because the company issues equity directly rather than creating depository receipts or other derivatives. Investors benefit too, since they acquire equity without the additional costs of holding and converting instruments such as GDRs/ADRs. A QIP can also be offered to a broader set of institutions—including Indian mutual funds, banks, insurance companies and foreign institutional investors—while avoiding the ongoing disclosure and administrative burdens associated with a new exchange listing.
SEBI issued detailed guidelines for QIPs on 8 May 2006. To be eligible to raise funds through a QIP, a company must have its equity shares listed on a stock exchange with nationwide trading terminals for at least one year and must comply with the minimum public shareholding requirements under its listing agreement. The securities that may be issued through a QIP are equity shares or securities (other than warrants) that are convertible into or exchangeable with equity shares. Any such convertible security must be capable of being converted or exchanged into equity within sixty months of allotment, and the securities must be fully paid at the time of allotment.
QIP issues may be made only to Qualified Institutional Buyers (QIBs) as defined in the DIP guidelines, and such QIBs must not be promoters or related to promoters of the issuer, directly or indirectly. Each placement is treated as a private placement in accordance with the first proviso to clause (a) of sub‑section (3) of Section 67 of the Companies Act, 1956. There is a requirement that at least 10 per cent of the securities in each placement be allotted to mutual funds. For investor diversification, each placement must have multiple allottees (a minimum number for smaller issues and a larger minimum for bigger issues), and no single allottee may be allotted more than 50 per cent of the issue. Bidders are not permitted to withdraw their applications after the issue has closed.
The aggregate amount that a company may raise through QIPs in a single financial year is capped at five times the issuer’s net worth as shown at the end of the previous financial year. The issuer must prepare a placement document containing all material disclosures; there is no requirement to file this document with SEBI before the issue. Instead, the placement document must be made available on the websites of the issuer and the stock exchanges.
Pricing of QIP securities follows a mechanism similar to that used for GDR/FCCB issues and is subject to adjustment for corporate actions such as stock splits, rights or bonus issues. The floor price is calculated on a two‑week average, with the relevant date taken as the day the board meets to decide to open the QIP, and a maximum discount of 5 per cent to that price is permitted with shareholders’ approval.
On the procedural side, the shareholders’ resolution authorizing the QIP—passed under sub‑section (1A) of Section 81 of the Companies Act, 1956 or other applicable provisions—remains valid for 12 months from the date it is passed. If multiple placements are made under the authority of the same resolution, there must be at least a six‑month gap between placements. Finally, the issuer and the merchant banker must submit the documents and undertakings specified in the listing agreement to obtain in‑principle approval and final listing permission from the stock exchanges.
Institutional Placement Programme Regulations
The Institutional Placement Programme (IPP) was introduced to help listed companies meet the minimum public shareholding requirements under the Securities Contracts (Regulation) Rules, 1957 — namely 10% for PSUs and 25% for non‑PSUs. An IPP can be used either as a fresh issue of shares or through dilution by promoters via an offer for sale, and it is intended to effect compliance with Rule 19(2)(b) and Rule 19A of the said Rules.
Eligible securities for an IPP are equity shares of the same class that are already listed and traded. Eligible sellers include the listed issuer itself or its promoters/promoter group. By definition, an IPP is a further public offer of such eligible securities in which the offer, allocation and allotment are made exclusively to qualified institutional buyers (QIBs).
An IPP can proceed only after shareholders pass a special resolution in accordance with section 81(1A) of the Companies Act, 1956. Partly paid‑up securities are not permitted and the issuer must secure in‑principle approval from the stock exchange(s) prior to the offer. The programme must be managed by merchant banker(s) registered with the Board (SEBI), who are responsible for conducting and certifying due diligence.
The offer must be supported by an offer document that discloses all material information, including particulars specified in Schedule XVIII. While registering the offer document with the Registrar of Companies, the issuer must simultaneously file copies with the Board and the stock exchange(s) through the lead merchant banker, and must also file a soft copy with the Board as per Schedule V, accompanied by the fee in Schedule IV. The offer document must be posted on the websites of the issuer and the stock exchange, clearly stating that the offer is an IPP and that subscriptions are limited to QIBs. The lead merchant banker must also submit a due diligence certificate to the Board in the prescribed Form A (Schedule VI), confirming compliance with the chapter governing IPPs.
Pricing and allocation procedures are subject to specific timing and disclosure requirements. The eligible seller must announce a floor price or a price band at least one day before the IPP opens. Allocation can be carried out on a proportionate basis, on price‑priority, or by criteria set out in the offer document; the chosen method must be disclosed. Final allocation/allotment is to be overseen by the stock exchange before it is confirmed.
Several restrictions govern participation and trading around an IPP. Promoters or promoter groups selling under an IPP must not have bought or sold the company’s eligible securities in the twelve weeks preceding the offer and must undertake not to trade in those securities for twelve weeks after the offer. At least 25% of the eligible securities must be allotted to mutual funds and insurance companies; if these investors do not take up the minimum portion, the shortfall may be offered to other QIBs. No allocation may be made, directly or indirectly, to any QIB who is a promoter or related to promoters, except that a QIB acting solely in the capacity of lender and holding no shares is not deemed related. Bids must be placed only through the ASBA facility, and bidders are not permitted to revise their bids downward or withdraw them once made.
For the purposes of identifying related parties, a QIB will be treated as related to the promoters if it holds rights under a shareholders’ or voting agreement with the promoters, has veto rights, or holds the right to appoint a nominee director on the board.
To ensure broad ownership, each IPP must have a minimum of ten allottees, and no single allottee may receive more than 25% of the offer size. QIBs that belong to the same group or are under common control are to be treated as a single allottee, with the meaning of “same group” aligned to that given in section 372(11) of the Companies Act, 1956.
Size and timing constraints limit how IPPs can be used to alter public shareholding. The aggregate of all tranches offered under IPPs by an eligible seller must not increase public shareholding by more than 10%, or by any lesser percentage required to reach the statutory minimum. Where an issue is oversubscribed, the eligible seller may allot up to a further 10% of the offer size. Each IPP must remain open for subscription for a minimum of one day and a maximum of two days, and stock exchanges will display the aggregate demand schedule without revealing price details. The eligible seller retains the right to withdraw the offer if it is not fully subscribed.
Finally, eligible securities allotted under an IPP are subject to a one‑year lock‑in from the date of allocation; such securities may not be sold by the allottee during this period except on a recognized stock exchange.
Promoter Offer-for-Sale via Exchanges
To provide a transparent, widely accessible route for promoters to dilute or exit their shareholding in listed companies, SEBI permitted promoters to sell shares through a dedicated window operated by the stock exchanges. This facility is initially available on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). It is intended both for promoter entities that must increase public shareholding to comply with minimum public float norms under the Securities Contracts (Regulation) Rules, 1957 and the listing agreement, and for promoter/promoter‑group entities of the top 100 companies by average market capitalisation in the last completed quarter.
Eligible sellers must be promoter or promoter‑group entities that are entitled to trade in the company’s shares. Where the sale is to meet minimum public shareholding requirements, promoters who use this window must not have bought or sold the company’s shares in the 12 weeks preceding the offer and must undertake not to buy or sell in the 12 weeks following the offer. Eligible buyers are all investors who are registered with brokers of the participating exchanges, except the promoter and promoter‑group entities themselves.
The minimum size of an offer through this window is 1% of the company’s paid‑up capital, subject to a floor value of ₹25 crore. If the value of 1% of paid‑up capital at the closing price on the specified date (the last trading day of the most recently completed quarter) is less than ₹25 crore, the dilution through this route must be at least 10% of the paid‑up capital, or such lesser percentage as is necessary to achieve the required minimum public shareholding in a single tranche.
Operationally, sellers must appoint seller’s broker(s) to execute the sale; these brokers may also process orders on behalf of eligible buyers. The seller must announce the intention to sell at least one clear trading day before the offer opens. The announcement must identify the seller(s) and the company, state the exchange(s) where orders will be placed (where both exchanges are used, one must be designated the Designated Stock Exchange), give the opening and closing date and time, specify the allocation methodology (either price priority with multiple clearing prices or proportionate allocation at a single clearing price), disclose the number of shares on offer, name the seller’s broker(s), and state any conditions for withdrawal or cancellation of the offer. The seller may either publicise a floor price in the announcement or submit the floor price in a sealed envelope to the Designated Stock Exchange before the offer opens; if submitted sealed, it must not be disclosed to anyone, including selling brokers, and will be opened and disseminated by the exchange only after the offer closes.
The offer window is short: the duration of the offer cannot exceed one trading day. Exchanges will create a separate trading window for these offers and allow order placement only during trading hours. Orders may be modified or cancelled during the offer period except in the final 30 minutes, when modification or cancellation is not permitted. Cumulative order and bid quantities will be displayed online by the exchanges at specified intervals, while an indicative price will be revealed only during the last half hour of the offer. Normal price bands do not apply to orders in this window; however, the usual stock‑specific tick sizes used in regular trading sessions will apply. Trading in the normal market continues while the offer runs, but the offer will be halted if market trading is suspended due to a market‑wide circuit filter. Only limit orders are permitted, multiple orders by a single buyer are allowed, and if a floor price has been publicly disclosed, orders below that floor will not be accepted.
Access to International Capital Markets
Resource mobilization from international markets became an important feature of India’s capital-raising after the 1991 economic reforms. Until then, Indian firms were largely limited to raising debt abroad; the post‑1991 policy shift permitted Indian companies to issue equity internationally as well. This change came against the backdrop of depleted foreign exchange reserves and a sovereign rating downgrade in the early 1990s, which had created a foreign exchange crunch and constrained the government’s ability to meet import needs. Allowing firms to access equity and bond markets overseas therefore offered a practical route to attract capital and integrate Indian corporates with global markets.
Indian companies have tapped international capital through several instruments: Global Depository Receipts and American Depository Receipts (GDRs/ADRs), Foreign Currency Convertible Bonds (FCCBs), and External Commercial Borrowings (ECBs). Typically, equity-linked routes such as GDRs/ADRs and FCCBs are used as primary sources of external finance, while ECBs—long‑term loans raised abroad—frequently serve as a residual source for large projects after external equity has been exhausted.
From the early 1990s many firms began preferring the offshore primary market to the domestic primary market. Several practical advantages explain this shift. Offshore issues conducted through book‑building are generally quicker to complete and involve lower issue costs. They also allow foreign shareholding to exceed domestic ownership ceilings, which can be attractive for firms seeking large foreign participation. Foreign institutional investors often favour Euro issues because they can avoid certain domestic formalities and taxes: GDRs traded on foreign exchanges may not be subject to SEBI registration or domestic capital gains tax, and pricing differences sometimes create short‑term arbitrage opportunities.
International markets also allow companies to raise larger volumes of foreign‑currency finance than domestic markets typically permit. The growing prominence of the Eurobond market has reinforced this trend: Eurobonds are underwritten by international syndicates and placed in countries other than the one whose currency they carry, placing them largely outside any single country’s regulatory framework. Compared with dollar‑denominated bonds issued in the United States, Eurobonds often face less stringent disclosure requirements, which increases their appeal to some issuers.
Macro factors have supported demand for Indian issuances overseas. Strong and consistent GDP growth projections have created a robust appetite for Indian paper among global investors, while an overseas listing or issue also raises a company’s visibility and access to international investor bases. Typical international investors in Indian issuances include hedge funds, long‑only equity funds and self‑managed pension funds.
In short, long‑term external finance for Indian firms has been raised either through equity instruments such as GDRs/ADRs and FCCBs, or through long‑term loans known as ECBs, each route chosen to suit the firms’ financing needs, cost considerations and strategic objectives.
Structure and Trading of GDRs
Global Depository Receipts (GDRs) are equity instruments issued abroad by authorized overseas depository banks against the shares or bonds of Indian companies that are held with nominated domestic custodian banks. When an Indian company decides to issue GDRs, it issues the corresponding number of underlying shares to the overseas depository, which holds them with the designated custodian. Each GDR represents a fixed ratio of one or more of these underlying shares and is freely transferable outside India. Dividends on the shares represented by a GDR are paid in Indian rupees. Until a GDR is converted into the underlying shares, it does not carry voting rights; after conversion the shares are listed and tradable on the domestic exchange, and the holder can instruct the depository to vote on their behalf. GDRs are fungible—holders may ask the depository to convert them into the underlying shares and sell those shares in the domestic market.
Although GDRs are commonly listed on foreign stock exchanges, trading often occurs between professional market makers on an over‑the‑counter (OTC) basis. Indian companies have typically listed their GDRs on exchanges such as Luxembourg and London, and the primary demand has come from institutional investors in markets including the UK, US, Hong Kong, Singapore, France and Switzerland. Under Rule 144A of the US Securities and Exchange Commission, non‑US companies are permitted to offer their GDRs to qualified institutional buyers in the United States, which facilitates access to institutional capital.
American Depositary Receipts: Overview and Impact
An American Depository Receipt (ADR) is a dollar‑denominated negotiable instrument issued by a US depository bank to represent ownership of shares in a non‑US company. The issuing company deposits its ordinary shares with a custodian bank in its home market; the US depository then issues American Depositary Shares (ADSs), which function as the tradeable securities in the United States. ADSs and ADRs are commonly used interchangeably to denote the US‑market vehicle that stands in for the underlying foreign equity.
While ADRs and Global Depository Receipts (GDRs) both represent ownership of deposited foreign shares, they differ in practical terms of market access and disclosure. ADRs are typically listed on US exchanges such as the NYSE and NASDAQ (National Association of Securities Dealers Automated Quotations) and therefore provide access to both US institutional and retail investors. GDRs, by contrast, generally give access mainly to the international institutional market. Listing as an ADR requires more extensive disclosure and greater transparency to meet US regulatory standards.
A company can convert GDRs into ADRs by surrendering its existing GDRs and arranging for the underlying shares to be deposited with a US ADR depository; this exchange must comply with the Securities and Exchange Commission’s procedures for such offers. The conversion itself does not raise fresh capital for the company, but firms increasingly choose conversion because ADRs are usually more liquid and reach a broader investor base in the US.
ADRs tend to attract companies that demonstrate strong transparency and governance, attributes that often translate into higher valuation multiples locally. For issuers, ADRs offer flexibility in using the proceeds — funds can be deployed in the home market or abroad — while raising a company’s international profile, improving stock liquidity, and widening options for financing mergers and acquisitions. An ADR program also creates a dollar‑denominated instrument that can be used for employee stock options, helping firms compete for and retain talent. Historically, significant resources have been mobilised from international capital markets through both GDR and ADR issues.
Several well‑governed Indian firms have succeeded in cross‑listing on major global exchanges such as the LSE, NASDAQ and NYSE; at the time referenced, twelve Indian companies were listed on the NYSE and two on NYSE Euronext. Following a series of high‑profile accounting scandals in the US, listing rules were tightened and the introduction of the Sarbanes‑Oxley Act imposed more stringent compliance requirements. These changes made it harder, particularly for small and mid‑sized Indian companies, to raise capital through ADRs, prompting many to seek listings on alternative venues such as London’s Alternative Investment Market (AIM), whose listings may also trade on other global exchanges. In a notable instance, Satyam Computers pursued cross‑listing on NYSE Euronext in addition to the NYSE in early 2008.
Foreign Equity and Debt Issues
The Euro-issue market for Indian firms primarily comprises GDRs/ADRs and FCCBs; since FCCBs and FCEBs are debt instruments, they fall under the regulatory ambit of External Commercial Borrowings (ECBs). A company that seeks funds abroad must first restate its financials for the previous three to five years in the accounting format required by the relevant overseas market—typically the UK or US GAAP—before launching a GDR/ADR offer.
A merchant banker is then appointed to organise the issue and plays a central role: designing the issue structure, formulating the marketing strategy, and assembling syndicate members, underwriters and other intermediaries. Once the offer document is finalised, the merchant banker conducts road shows—meetings and presentations for fund managers and prospective investors supported by pamphlets, brochures and the issuer’s financial reports. These road shows serve to gauge investor appetite and inform pricing decisions. The final issue price is set a few hours before the issue opens, taking into account investor response and the security’s domestic market price. In the early years Indian GDRs were routinely priced at a discount to their domestic quotes; this practice ended in November 1993 when Mahindra & Mahindra priced its GDR at par with the domestic price.
ADRs and GDRs are treated as a form of foreign direct investment and therefore must comply with the prevailing FDI policy, applicable only where foreign investment is permitted. Indian companies may now access ADR/GDR markets through registered exchanges on the automatic route, without prior approval from the Ministry of Finance, Department of Economic Affairs; however, prior government permission remains mandatory for the issue of foreign currency convertible bonds (FCCBs). Issuers are expected to have a consistently good track record of at least three years, and foreign equity — direct or indirect — is generally capped at 51 per cent of the issued and subscribed capital.
Since June 1996, banks, financial institutions and registered non‑bank financial companies have been eligible to float Euro issues, subject originally to the condition that proceeds not be channelled into the stock market or real estate; there is no longer any limit on the number of Euro issues a company or group may launch in a year. Over time the government has refined prescriptions on the end‑use of proceeds raised abroad. Because ADRs and GDRs represent full‑risk equity, specific end‑use restrictions on their proceeds have been withdrawn; the funds must, however, remain overseas until actually required in India. Pending repatriation or utilization, Indian companies may park these proceeds in (a) deposits, certificates of deposit or similar instruments of internationally rated banks that meet the Reserve Bank’s minimum rating threshold (currently around AA(‑) by Standard & Poor’s/Fitch or Aa3 by Moody’s), (b) deposits with branches of Indian authorised dealers outside India, or (c) treasury bills and other monetary instruments with a remaining maturity of one year or less. Indian companies are also free to use up to 100 per cent of ADR/GDR proceeds for overseas investment without prior approval.
ADRs/GDRs can be used in the disinvestment of public sector undertakings, including first‑stage share acquisitions and the mandatory second‑stage public offer where strategic considerations apply. Voting rights attached to shares issued under ADR/GDR schemes must comply with the provisions of the Companies Act, 1956, and any restrictions on voting rights must be consistent with company law; in the case of banking companies, Reserve Bank rules on voting rights apply to all shareholders exercising such rights. In his 1998–99 budget, the finance minister announced a special stock option scheme for Indian software firms linked to ADR/GDR offerings, intended to help retain highly skilled personnel.
In March 2001 the government introduced two‑way fungibility for Indian ADRs/GDRs, permitting reconversion of local shares back into ADRs/GDRs subject to sectoral caps. Under this mechanism a SEBI‑registered stock broker may purchase domestic shares for conversion to ADRs/GDRs on behalf of overseas investors, and re‑issuance is allowed only to the extent that ADRs/GDRs have previously been redeemed into underlying shares and sold in India. This reverse fungibility gathered momentum, at times exhausting the “headroom” — the number of domestic shares available for reconversion — as occurred in the ICICI case in September 2002.
Rules governing FCCB proceeds limit their use largely to restructuring external debt; no more than 25 per cent of FCCB issue proceeds may be used for general corporate restructuring, including working capital. Unlisted companies are prohibited from issuing shares or debt overseas through FCCBs unless they obtain a prior or simultaneous listing on domestic stock exchanges. Companies that are listed but ineligible to raise funds in the domestic capital markets (including those subject to SEBI restraints) cannot issue FCCBs or GDRs. Likewise, overseas corporate bodies barred from the portfolio route and entities prohibited by SEBI from dealing in securities are not permitted to invest in FCCBs or GDRs.
To align offshore issuance with domestic capital market standards and to strengthen quality control over FCCB issues, the government mandated that companies issuing GDRs, ADRs or FCCBs obtain a domestic listing within three years of the issue. Pricing norms were tightened to prevent companies from tapping foreign markets at discounts to domestic prices. The pricing methodology was revised in December 2005 so that the floor price would be the higher of (a) the average of weekly highs and lows over the 26 weeks ending one month before the “relevant date,” or (b) the average of daily highs and lows in the last fortnight of those 26 weeks; the relevant date is the day the company’s annual general meeting approves the issue. In declining markets this rule raised the floor price and made foreign raisings more difficult; accordingly the norms were adjusted again in 2008. Under the revised approach, issues must be priced at the higher of the two‑months’ average price or the 15‑day average price preceding the decision to issue overseas, and closing prices up to the shareholders’ decision date may be considered.
Finally, Indian companies issuing ADRs/GDRs must furnish full details of the issue to the Reserve Bank within 30 days of its closure. Takeover norms were also amended in August 2009: ADR/GDR holders with voting rights who acquire holdings that touch the 15 per cent threshold are required to make a public open offer to minority shareholders.
In 1993–94 and 1994–95 Indian companies mounted a record wave of Euro issues, raising 714,500 crore rupees over those two years. India also emerged as the country with the largest number of GDR issues, an unusual distinction at the time. Interest in raising equity overseas then waned for the next four years as Indian corporates postponed foreign fundraising plans in the wake of the South‑East Asian crisis and the political and security fallout from the Pokhran nuclear tests.
The year 1999 marked a turning point: for the first time Indian firms raised equity directly from the US markets. Infosys Technologies led the move in March 1999, soon followed by ICICI and Satyam Infoway. Infosys and Satyam secured listings on the NASDAQ, while ICICI listed on the NYSE. Satyam was notable for tapping the overseas market despite not being listed on any Indian stock exchange at the time.
Between 1999–2001 Indian issuers became Asia’s largest originators of American Depositary Receipts (ADRs): about USD 1 billion was raised in 1999–2000 and roughly USD 4 billion in 2000–01. This overseas capital exceeded the total equity mobilised through domestic public issues in the same period. ADRs and similar instruments allowed Indian firms to access deep pools of international capital and investor communities focused on high‑growth sectors.
Demand for Indian ADRs was driven by investor enthusiasm for knowledge‑based sectors—information technology, pharmaceuticals and biotechnology—whose growth prospects resonated strongly with US and global investors. Rediff.com illustrated this trend: it became the first Indian dot‑com to list on NASDAQ at nearly a 100 percent premium, bypassing the BSE. At the same time, Rediff.com’s accumulated losses (about USD 8.6 million) meant it did not meet SEBI’s three‑year profitability criterion, which helps explain why some firms chose direct overseas listings. Many companies preferred ADRs because US markets tended to value future potential more highly, producing greater immediate appreciation in the scrip.
A key consequence of the overseas listings was that domestic retail investors were often shut out of subscription to strong, blue‑chip issues that no longer entered the Indian primary market. Reviving the sluggish domestic primary market would be helped if leading companies channelled at least part of their fund‑raising through domestic routes, thereby widening participation and deepening the Indian investor base.
External Commercial Borrowings in India
External Commercial Borrowings (ECBs) are loans that Indian corporates raise from international markets. The scheme for ECBs is administered jointly by the Ministry of Finance and the Reserve Bank of India (RBI). Companies may access these foreign funds subject to overall limits and guidelines; allocations are typically made on a first‑come, first‑served basis within the limits specified by the policy.
ECBs supplement domestic resources, providing capital for expansion of existing capacity and for fresh investment. Because interest rates and borrowing costs are often lower in international markets, Indian firms have frequently preferred this route. At the same time, ECBs expose borrowers to interest‑rate and foreign‑exchange risk, so sound risk management is essential. Defaults on ECBs carry wider consequences: they can raise the perceived country risk and increase the risk premium that subsequent Indian borrowers must pay in global markets.
Several landmark ECB transactions illustrate the evolution of India’s access to international debt. In August 1996 Reliance Petroleum raised USD 125 million without any bank or institutional guarantee, at a low coupon of 7.84 per cent — notable for being unsecured by domestic intermediaries. In October 1996 Global Telesystems issued the country’s first floating‑rate ECB, raising 60 million Swiss francs (about USD 48 million) through fully convertible bonds that paid 175 basis points over LIBOR (the London Interbank Offered Rate). In 2005 SIDBI raised USD 20 million with a 38‑year tenor — one of the longest‑dated ECBs then issued in India. During 2007–08 several large corporates, including Reliance Petroleum, Adani Power and Essar Oil, each raised USD 500 million overseas.
ECBs form a significant component of India’s external debt, alongside external assistance, buyers’ credit, suppliers’ credit, non‑resident Indian (NRI) deposits, short‑term credit and rupee debt. By definition, ECBs comprise commercial loans—bank loans, buyers’ and suppliers’ credit, and securitized instruments such as floating‑rate notes and fixed‑rate bonds—obtained from non‑resident lenders with a minimum average maturity of three years. The definition also covers credit from official export credit agencies and commercial borrowings obtained through the private‑sector windows of multilateral financing institutions.
Access to ECBs is regulated through two channels: the automatic route, where borrowing can proceed without prior regulatory approval subject to prescribed conditions, and the approval route, which requires permission from the relevant authority before funds can be raised.
External Commercial Borrowings Framework
External Commercial Borrowings (ECB) are commercial loans that eligible resident entities raise from recognized non-resident lenders. Such borrowings must meet a set of prescribed parameters—most notably minimum average maturity, permitted and prohibited end-uses, and a ceiling on the maximum all-in-cost—each of which must be satisfied together rather than in isolation. These conditions form the ECB Framework that governs how and on what terms Indian borrowers can access foreign funds.
The ECB Framework is organised into three tracks. Track I covers medium‑term, foreign‑currency‑denominated borrowings with a minimum average maturity of 3 or 5 years. Track II covers long‑term, foreign‑currency‑denominated borrowings with a minimum average maturity of 10 years. Track III permits rupee‑denominated ECBs, also with a minimum average maturity of 3 or 5 years. Each track carries its own detailed eligibility, cost and end‑use requirements within the overall ECB regulatory regime.
The ECB framework permits specified resident entities to borrow from recognised non-resident lenders in a variety of forms. These include loans (including bank loans); securitised instruments—such as floating-rate notes and fixed-rate bonds and certain preference shares or debentures that may be non-convertible, optionally convertible or partially convertible; buyers’ credit and suppliers’ credit; foreign currency convertible bonds (FCCBs); financial leases; and foreign currency exchangeable bonds (FCEBs).
The framework, however, does not apply to investments in non-convertible debentures (NCDs) in India made by Registered Foreign Portfolio Investors (RFPIs).
External Commercial Borrowings (ECB) may be raised either under the automatic route or under the approval route. Under the automatic route, transactions are processed and cleared by Authorised Dealer Category‑I (AD Category‑I) banks, which examine the proposals against the prevailing regulations. Under the approval route, prospective borrowers must seek prior permission from the Reserve Bank of India by submitting their requests through their ADs for RBI’s consideration.
Although the broad regulatory framework for both routes is similar, they differ in certain specifics such as the permissible amount of borrowing, the eligibility criteria for borrowers, and allowable end‑uses of the funds. The first six types of borrowing listed earlier (see paragraph 2.2) may be raised under either the automatic or approval route, whereas Foreign Currency Exchangeable Bonds (FCEBs) are permitted only under the approval route.
The framework for raising external commercial borrowings (ECBs) sets out a number of parameters—minimum average maturities, eligible borrowers, recognised lenders, cost limits, permitted end‑uses, annual limits, currency rules and hedging requirements. These are best understood as a connected set of rules that vary across the three tracks of the ECB framework.
Minimum average maturity requirements depend on the track and the size of the borrowing. Under Track I, ECBs up to USD 50 million (or equivalent) must have a minimum average maturity of three years; ECBs above USD 50 million require a minimum average maturity of five years. Track II generally requires a minimum average maturity of ten years irrespective of the amount, although certain eligible borrowers listed under paragraph 1.4.2.vi are subject to a five‑year minimum regardless of size. Track III follows the same maturity requirements as Track I. For Foreign Currency Convertible Bonds (FCCBs) and Foreign Currency Exchangeable Bonds (FCEBs) the minimum is five years irrespective of amount, and any call or put options on FCCBs must not be exercisable before five years.
Eligibility to raise ECBs is prescribed separately for each track. Track I borrowers include companies in manufacturing and software development, shipping and airline companies, the Small Industries Development Bank of India (SIDBI), units in Special Economic Zones (SEZs) and, under the approval route only, the Export‑Import Bank of India (Exim Bank). Track II expands the list to include infrastructure companies, NBFC‑Infrastructure Finance Companies (NBFC‑IFCs), NBFC‑Asset Finance Companies (NBFC‑AFCs), holding companies and Core Investment Companies (CICs), and also permits REITs and INVITs that fall under SEBI’s regulatory framework. Track III covers all entities eligible under Track II and additionally allows all NBFCs regulated by the RBI, NBFC‑MFIs, not‑for‑profit companies, societies, trusts and cooperatives, NGOs engaged in micro‑finance, companies providing certain services (for example R&D, non‑educational training and logistics), and developers of SEZs/National Manufacturing and Investment Zones (NMIZs). A specific eligibility condition for entities engaged in micro‑finance is that they must have a satisfactory borrowing relationship of at least three years with an AD Category‑I bank and a certificate of due diligence from that bank attesting to their ‘fit and proper’ status.
Recognised lenders and investors vary by track but broadly include international banks, overseas capital markets, multilateral and regional financial institutions (for example IFC, ADB), export credit agencies, equipment suppliers and foreign equity holders. Long‑term overseas investors such as prudentially regulated financial entities, pension funds, insurance companies, sovereign wealth funds and financial institutions located in India’s International Financial Services Centres are also permitted. Overseas branches or subsidiaries of Indian banks may lend only under Track I and their participation is subject to prudential norms issued by the Department of Banking Regulation, RBI. Indian banks are not permitted to participate in refinancing of existing ECBs. Overseas organisations proposing to lend must provide the borrower’s authorised dealer with a due‑diligence certificate from an overseas bank confirming, among other things, a minimum two‑year relationship with the lender, the lender’s legal standing and that no criminal action is pending. Individual lenders must similarly obtain a due‑diligence certificate; lenders from countries that do not adhere to FATF AML/CFT standards are ineligible.
All‑in‑cost (AIC) ceilings differ across tracks and maturities. For Track I the AIC ceiling is fixed as a spread over the relevant benchmark: for ECBs with minimum average maturity of 3–5 years the spread is 300 basis points per annum over 6‑month LIBOR (or the applicable currency benchmark); for ECBs with maturity over five years the spread is 450 basis points per annum. Penal interest for default or covenant breach may not exceed 2 percentage points above the contracted rate. Under Track II the maximum spread over the benchmark is 500 basis points; other conditions for Track II generally mirror those under Track I. For Track III the AIC is expected to be in line with market conditions.
End‑use prescriptions specify permitted and prohibited applications of ECB proceeds. Under Track I, proceeds may be used for capital expenditure—import or local sourcing of capital goods (including associated services, technical know‑how and license fees when part of the capital goods), new projects, modernisation/expansion, overseas direct investment in JVs/WOS, acquisition of shares in public sector undertakings during government disinvestment, refinancing of trade credit for import of capital goods, payment for already shipped/imported capital goods, and refinancing of existing ECBs provided the residual maturity is not reduced. SIDBI may raise ECBs only for on‑lending to the MSME sector; SEZ units only for their own requirements; and shipping and airline companies only for import of vessels and aircraft respectively. ECB proceeds may be used for general corporate purposes (including working capital) only when the lender is a direct/indirect equity holder or a group company and the ECB has a minimum average maturity of five years. NBFC‑IFCs and NBFC‑AFCs may raise ECBs only for financing infrastructure, and holding companies/CICs must use proceeds only for on‑lending to infrastructure SPVs. Certain uses—such as import of second‑hand goods (subject to DGFT guidelines) and on‑lending by Exim Bank—are permitted only under the approval route. Track II borrowers may use proceeds for all purposes except a limited set: real estate activities, investments in the capital market, domestic equity investments, on‑lending for any of those prohibited objectives, and purchase of land. Track III imposes specific limits for NBFCs (per RBI regulations) and for NBFC‑MFIs/eligible MFIs/NGOs/not‑for‑profit companies, which are generally restricted to on‑lending for bona fide micro‑finance activities (such as loans to self‑help groups, micro‑credit and capacity‑building). Developers of SEZs/NMIZs may raise ECBs only for providing infrastructure within the zones. Other eligible Track III entities face the same exclusions as Track II.
Individual annual limits under the automatic route are prescribed by borrower category. In a financial year a borrower may raise up to USD 750 million (or equivalent) if it is a company in infrastructure or manufacturing, an NBFC‑IFC, NBFC‑AFC, holding company or CIC; up to USD 200 million for companies in the software development sector; up to USD 100 million for entities engaged in micro‑finance activities; and up to USD 500 million for other eligible entities. Proposals beyond these limits require approval. For Track III, the exchange rate on the date of agreement is to be used for computing limits. When ECB is raised from a direct equity holder, an ECB liability‑to‑equity ratio applies: under the automatic route the borrower’s ECB liability to the foreign equity holder (including existing and proposed ECBs) must not exceed four times the equity contributed by that foreign shareholder; under the approval route the ratio limit is 7:1. This ratio does not apply where total ECBs raised by the entity are up to USD 5 million. For the purpose of this ratio, the foreign equity holder’s ‘equity’ may include paid‑up capital and free reserves (including share premium received in foreign currency) as per the latest audited balance sheet; where there are multiple foreign equity holders, only the portion of share premium in foreign currency brought in by the concerned lender(s) is considered.
Currency rules permit ECBs to be denominated in any freely convertible foreign currency and also in Indian rupees. For rupee‑denominated ECBs, non‑resident lenders other than foreign equity holders must mobilise rupees through swaps or outright sale executed via an AD Category‑I bank in India. Conversion of an ECB from one convertible foreign currency to another, and conversion from a foreign currency into INR, are freely permitted; conversion from INR into a foreign currency is not allowed. When changing currency into INR, the exchange rate may be the rate prevailing on the date of the agreement between parties or a lower rate if agreed with the ECB lender.
Hedging obligations are mandatory for certain borrowers and may be required by the RBI for others. Borrowers specified under paragraph 1.4.2.vi must have a board‑approved risk management policy and are required to maintain 100 per cent hedge of their ECB exposure at all times. The designated AD Category‑I bank must verify compliance with the 100 per cent hedging requirement throughout the life of the ECB and report positions to the RBI through ECB‑2 returns. Entities borrowing under Tracks I and II must also follow any hedging guidelines issued by the relevant sectoral or prudential regulator. Where hedging is mandated by the RBI, financial hedges must cover both principal and coupon and must commence from the date the liability is created in the borrower’s books. A minimum hedge tenor of one year is required, with appropriate rollovers to ensure the exposure is never unhedged. A natural hedge—i.e., offsetting projected cash flows or revenues in the same currency—may be accepted in lieu of a financial hedge only to the extent it demonstrably offsets projected exposures net of all other projected currency flows.
Borrowers eligible under paragraph 1.4.2.vi must have a board‑approved risk management policy and keep their foreign currency borrowing (ECB) fully hedged at all times. The designated AD Category‑I bank is responsible for verifying that the 100% hedging requirement is complied with throughout the life of the ECB and for reporting the hedging position to the RBI through ECB‑2 returns. Entities raising ECB under tracks I and II must also follow any hedging directions issued by the relevant sectoral or prudential regulator.
Where the RBI mandates hedging, the following operational requirements apply. First, coverage: both principal and coupon payments must be covered by financial hedges, and hedging must commence from the date the liability is recorded in the borrower’s books. Second, tenor and rollover: each financial hedge must have a minimum tenor of one year and be rolled over as needed so that the borrower’s exposure under the ECB is never left unhedged during its currency. Third, natural hedge: a natural hedge may substitute for a financial hedge only to the extent that projected inflows in the same foreign currency offset projected outflows, after accounting for all other projected payments. An ECB may be treated as naturally hedged if the offsetting exposure has maturity or cash flow within the same accounting year. Revenue streams merely indexed to a foreign currency do not qualify as a natural hedge.
AD Category‑I authorised dealers may permit creation of security—whether by way of charge on immovable or movable assets, pledge of financial securities, or the issuance of corporate or personal guarantees—in favour of an overseas lender or security trustee to secure an ECB, provided the bank is satisfied that: (a) the underlying ECB complies with the extant ECB guidelines; (b) the loan agreement contains a security clause requiring the borrower to create such charge or guarantee in favour of the overseas lender/security trustee; and (c) where applicable, a “no objection” certificate from existing domestic lenders has been obtained.
When these preconditions are met, the AD Category‑I bank may allow the security to be created during the currency of the ECB, with the security co‑terminating with the underlying ECB. The permissibility and enforcement of such securities are subject to additional conditions depending on the type of asset.
Security over immovable property is allowed only in accordance with the provisions of the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000. This permission does not amount to consent for the overseas lender or security trustee to acquire the immovable property in India. If the charge is enforced, the immovable property must be sold to a person resident in India and the sale proceeds repatriated to liquidate the outstanding ECB.
Security over movable assets may be taken, but on enforcement the lender’s claim—whether the lender takes possession of the movable asset or otherwise—is limited to the outstanding ECB claim. Encumbered movable assets may be taken out of India only after obtaining a no‑objection certificate from any domestic lender(s).
Pledge or charge over financial securities is permitted with certain stipulations. Promoters’ shares in the borrowing company and shares in domestic associate companies may be pledged. Pledges of other financial securities—such as bonds, debentures, government securities, government savings certificates, deposit receipts of securities, and units of UTI or mutual funds—standing in the name of the borrower or promoter are also permitted. In addition, security interests may extend to all current and future loan assets and all current assets, including cash and cash equivalents and rupee accounts with ADs in India; these rupee accounts may be structured as escrow accounts or debt service reserve accounts. On invocation of a pledge, transfer of financial securities must comply with the extant FDI/FII policy (including sectoral caps and pricing) and the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.
The issue of corporate or personal guarantees to secure an ECB is allowed subject to prescribed safeguards. For corporate guarantees, a certified copy of the board resolution authorising the guarantee and naming the officials empowered to execute it must be obtained. For personal guarantees, a specific request from the individual guarantor identifying the details of the ECB is required. Such guarantees are also subject to the Foreign Exchange Management (Guarantees) Regulations, 2000. Finally, an ECB may be credit‑enhanced, guaranteed or insured by overseas parties only if those parties meet the criteria of a recognised lender under the extant ECB guidelines.
Indian banks, All India Financial Institutions (AIFIs) and non‑banking financial companies (NBFCs) are prohibited from issuing guarantees, standby letters of credit, letters of undertaking or letters of comfort in connection with External Commercial Borrowings (ECBs). ECBs refer to borrowings in foreign currency by Indian entities from non‑resident lenders. Similarly, these financial intermediaries are barred, under any circumstances, from investing in Foreign Currency Convertible Bonds (FCCBs), which are foreign‑currency denominated bonds that can be converted into equity.
Borrowing entities must comply with any guidelines on the debt–equity ratio issued by the relevant sectoral or prudential regulator. The debt–equity ratio, which compares borrowed funds to shareholders’ equity, is used by regulators to limit excessive leverage and promote financial stability.
Parking of ECB proceeds is allowed both abroad and in India, but different rules apply depending on whether the funds are intended for foreign-currency or rupee expenditure. While waiting to be used, such funds may be temporarily “parked” in specified liquid instruments subject to the conditions described below.
Proceeds intended solely for foreign-currency expenditure may be parked abroad until they are utilised. Pending utilisation, these funds may be invested in liquid instruments such as deposits, certificates of deposit or similar bank products with institutions rated not lower than AA(-) by Standard & Poor’s/Fitch IBCA or Aa3 by Moody’s; treasury bills and other monetary instruments of up to one year’s maturity with the same minimum rating; or deposits with the overseas branches or subsidiaries of Indian banks.
Proceeds intended for rupee expenditure must be repatriated immediately and credited to the borrower’s rupee account with an authorised dealer (AD) Category‑I bank in India. Such borrowers are also permitted to park the rupee proceeds in term deposits with AD Category‑I banks in India for a maximum of 12 months. These term deposits must be kept in an unencumbered position (i.e., not pledged or used as security).
Conversion of External Commercial Borrowings (ECB) into equity, including ECBs that have matured but remain unpaid, is permitted subject to specified conditions. First, the borrowing company’s activity must be permitted under the automatic route for Foreign Direct Investment (FDI), or, where applicable, prior approval from the Foreign Investment Promotion Board (FIPB) for foreign equity participation must have been obtained in accordance with the extant FDI policy. Second, the conversion must take place with the lender’s consent and without any additional cost, and it must not cause the foreign equity holding to exceed the applicable sectoral cap. Third, applicable pricing guidelines for the shares to be issued must be complied with, and all prescribed reporting requirements must be fulfilled.
Further, where the borrower has availed other credit facilities from the Indian banking system, including from overseas branches or subsidiaries, the borrower must comply with the prudential guidelines issued by the Department of Banking Regulation of the Reserve Bank of India, including those relating to restructuring. Finally, consent of other lenders to the same borrower should be obtained where applicable; if that is not possible, information about the conversion should at least be exchanged with those other lenders.
For the purpose of conversion, the exchange rate to be used may be the rate prevailing on the date of the agreement between the parties for such conversion, or any lower rate agreed mutually with the ECB lender. The fair value of the equity shares to be issued must, however, be determined with reference to the date of conversion only.
Under the approval route, borrowers must submit a Form ECB application to the Reserve Bank of India through their AD Category‑I bank. The RBI examines these proposals against the prevailing ECB guidelines, the overall macroeconomic context and the merits of each case. Proposals above a threshold amount (periodically revised) are referred to an empowered committee constituted by the RBI; this committee has both internal and external members, and the RBI takes its recommendations into account when arriving at the final decision. Entities that wish to raise ECB under the automatic route may directly approach an AD Category‑I bank with their proposal.
Foreign Currency Convertible Bonds (FCCBs) were brought under the External Commercial Borrowings (ECB) framework in August 2005. Their issuance must follow the Foreign Direct Investment (FDI) guidelines, including any applicable sectoral caps, and they are governed by the same regulations that apply to ECBs.
In addition to the FDI requirements, FCCBs must meet specific conditions: a minimum maturity of five years; any call or put options, if provided, cannot be exercised before five years; issuance cannot include warrants; and issue-related expenses are capped—at 4% of the issue size in public issues and 2% in the case of private placements. These conditions are set out in Regulation 21 of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000 (read with Schedule I).
Foreign Currency Exchangeable Bonds (FCEBs) may be issued only under the approval route and must carry a minimum maturity of five years. These bonds are convertible into equity shares of a different company—the “offered company”—either wholly or partially, or by reference to equity‑related warrants attached to the debt instruments.
Issuance of FCEBs must comply with Regulation 21 of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000, read with Schedule IV, which lay down eligibility criteria for the issuer, the offered company, the subscriber and the permitted end‑uses. The all‑in cost of FCEBs is required to remain within the ceiling prescribed by the Reserve Bank of India for external commercial borrowings; the term “all‑in cost” denotes the total cost of borrowing, including interest, fees and other charges.
Refinancing of existing External Commercial Borrowings (ECB) with fresh ECB is permitted only if the new facility carries a lower all‑in‑cost than the original loan and the residual maturity is not shortened. The requirement on all‑in‑cost ensures the exercise is used to reduce the overall cost of borrowing, while the restriction on maturity preserves the original tenor of external debt. Indian banks are not permitted to participate in refinancing of existing ECBs.
Entities that had entered into External Commercial Borrowing (ECB) agreements under the framework in force before 2 December 2015 may continue to raise and disburse funds under those agreements without fresh approval, provided the loan agreement was already signed before the new framework took effect. Disbursements under such pre‑2 December 2015 agreements may proceed according to the original schedules without further consent from the Reserve Bank of India or an AD Category‑I bank. However, for three specific carve‑outs borrowers were allowed additional time — until 31 March 2016 — to sign the loan agreement and obtain the LRN (Loan Registration Number) from the Reserve Bank: (i) working‑capital ECBs for airline companies; (ii) ECBs under the USD 10 billion scheme for consistent foreign‑exchange earners; and (iii) ECBs for low‑cost affordable housing projects (as defined in the extant FDI policy).
Airlines could raise ECB for working capital provided they were companies registered under the Companies Act and held a scheduled operator permit from the DGCA for passenger transport. Such ECBs had to be justified by cash flows, foreign‑exchange earnings and debt‑servicing capacity, and carried a minimum average maturity of three years. The overall cap for the civil aviation sector was USD 1 billion, with a maximum of USD 300 million per airline. These funds could be used for working capital or to refinance outstanding rupee working‑capital loans from the domestic banking system, but ECBs raised for working capital or its refinancing could not be rolled over. Repayment obligations arising from such ECBs had to be discharged only from the borrowing company’s foreign‑exchange earnings; the foreign exchange required for repayment could not be accessed from Indian markets.
The USD 10 billion scheme allowed eligible Indian companies in manufacturing, infrastructure and the hotel sector (hotels with a total project cost of Rs. 250 crore or more) to raise ECB for repayment of outstanding rupee loans taken for capital expenditure and/or for fresh rupee capital expenditure. Borrowers had to be consistent foreign‑exchange earners over the preceding three financial years and must not appear on the RBI’s default or caution lists. The maximum ECB per company was linked to past export earnings: it could be up to 75 percent of the average annual export earnings for the past three years or 50 percent of the highest foreign‑exchange earnings in any one of the immediate past three years, whichever was higher. For Special Purpose Vehicles with at least one year of existence but lacking a three‑year track record, the limit was 50 percent of last year’s export earnings. Repayment of ECB under this scheme also had to be met from the company’s foreign‑exchange earnings and not from Indian markets. The overall ceiling for the scheme was USD 10 billion, with a maximum of USD 3 billion available to any one company or corporate group. Within these limits, Indian companies that had overseas joint ventures, wholly owned subsidiaries or assets acquired overseas in compliance with FEMA could also raise ECB to repay term loans with an average residual maturity of five years or more and to refinance credit facilities taken from domestic banks for overseas investments, in addition to capital expenditure. For such overseas investments the maximum ECB per company could be up to 75 percent of either the average annual export earnings of the past three years or of an assessed three‑year foreign‑exchange earnings potential certified by statutory auditors/chartered accountants/Certified Public Accountants/Category‑I merchant bankers registered with SEBI or by an investment banker registered with the appropriate foreign authority; past inward forex flows such as dividends, repatriated profits, royalties and fees would be counted as foreign‑exchange earnings. ECBs under the USD 10 billion scheme could not be raised from overseas branches or subsidiaries of Indian banks.
For low‑cost affordable housing projects the ECB terms were aligned with the definition used in the prevailing FDI policy, and ECB proceeds were expressly prohibited from being used for acquisition of land. Developers/builders registered as companies could raise ECB for such projects only if they had at least three years’ experience in residential development, a satisfactory record of project quality and delivery, all requisite approvals (including land‑use and environment clearances) on record, no defaults on financial commitments, and no pending litigation in respect of the project. Eligible developers were required to apply to the National Housing Bank (NHB) in the prescribed format; NHB acted as the nodal agency to decide project eligibility and, if satisfied, forwarded the case to the RBI under the approval route and advised the borrower to approach RBI through an authorised dealer. ECB for low‑cost housing had to be fully hedged and swapped into rupees for the entire maturity. Housing Finance Companies (HFCs) registered with NHB and operating under NHB regulations could also avail ECB for financing low‑cost housing, provided their Net Owned Funds (NOF) had been at least Rs. 300 crore for the past three years, borrowing stayed within an overall limit of 16 times NOF, and net non‑performing assets did not exceed 2.5 percent of net advances. Loans to individual home buyers under this route were capped at Rs. 25 lakh, provided the cost of the individual unit did not exceed Rs. 30 lakh; HFCs had to submit an NHB certificate confirming that ECB funds would finance prospective owners of individual units and ensure that the spread charged to ultimate buyers was reasonable. NHB itself was eligible to raise ECB for financing individual housing units, and where a developer could not raise ECB directly, NHB was permitted to raise ECB and on‑lend to such developers subject to the prescribed developer eligibility and interest‑rate conditions; the on‑lending spread framework was to take into account cost and other relevant factors and NHB was responsible for ensuring that spreads to HFCs for on‑lending remained reasonable. Developers, builders, HFCs and NHB were not permitted to issue Foreign Currency Convertible Bonds under this scheme. Finally, an aggregate limit of USD 1 billion was fixed for ECBs under the low‑cost affordable housing scheme for each of the financial years 2013–14, 2014–15 and 2015–16, covering ECBs raised by developers, NHB and specified HFCs.
AD Category‑I banks are permitted to allow central government‑recognised startups to raise external commercial borrowings (ECBs) under the automatic route, subject to the following framework. To qualify, an entity must be recognised as a startup by the central government on the date it raises the ECB. The minimum average maturity of such borrowings is three years, and the amount per startup is capped at USD 3 million (or equivalent) in any financial year, whether taken in Indian rupees, a freely convertible currency, or a combination of both.
Lenders must be residents of countries that are members of the Financial Action Task Force (FATF) or of FATF‑style regional bodies, and must not be jurisdictions listed in the FATF public statement as having strategic anti‑money‑laundering or counter‑terrorist‑financing deficiencies to which counter‑measures apply, nor those that have not made sufficient progress or committed to an action plan with the FATF. Overseas branches or subsidiaries of Indian banks, and overseas wholly owned subsidiaries or joint ventures of Indian companies, are excluded from being recognised lenders under this facility.
Borrowings may take the form of loans or preference shares that are non‑convertible, optionally convertible, or partially convertible. If the ECB is denominated in Indian rupees, the non‑resident lender must mobilise the rupee funds through swaps or an outright sale executed via an AD Category‑I bank in India. The all‑in cost of the ECB is to be mutually agreed between borrower and lender. Funds raised under this facility may be used for any expenditure connected with the borrower’s business.
Conversion of ECB into equity is permitted, subject to the foreign investment rules applicable to startups. The borrowing entity may determine the security to be offered to the lender; acceptable security may include movable and immovable assets, intangible assets such as patents and other intellectual property rights, and financial securities. Any security provided must comply with applicable foreign direct investment, foreign portfolio investment, or other norms governing foreign entities holding such securities.
Issuance of corporate and personal guarantees is allowed. Guarantees provided by non‑residents are permitted only if the guarantors meet the recognised‑lender criteria described above. However, Indian banks, All India Financial Institutions and NBFCs are not permitted to issue guarantees, standby letters of credit, letters of undertaking, or letters of comfort under this framework.
For INR‑denominated ECBs, the overseas lender may hedge its rupee exposure by using permitted derivative products with AD Category‑I banks in India, and may also access the domestic market on a back‑to‑back basis through branches or subsidiaries of Indian banks abroad or branches of foreign banks with an Indian presence. Startups raising ECBs in foreign currency—whether they have a natural hedge or not—remain exposed to exchange‑rate risk and are advised to adopt an appropriate risk‑management policy.
Where borrowing is denominated in INR but originates as foreign currency, the conversion between foreign currency and INR will be at the market rate prevailing on the date of the agreement. Other operational provisions — such as parking of ECB proceeds, reporting requirements, powers delegated to AD banks, borrowing by entities under investigation, and conversion procedures referenced in paragraphs up to 2.20 — apply to startups raising ECBs, except that requirements on leverage ratios and the ECB liability‑to‑equity ratio are not applicable under this facility.
Indian companies and their authorised dealers (ADs — banks authorised by the Reserve Bank to deal in foreign exchange) are prohibited from providing direct or indirect guarantees, creating contingent liabilities, or offering any form of security for borrowings undertaken by their overseas holding, associate, subsidiary or group companies, except where such support is explicitly permitted by the applicable regulations. Similarly, funds raised abroad by those overseas entities with the support of the Indian company or its ADs cannot be brought into or used in India unless such use conforms to the general or specific permissions granted under the relevant regulations. Any arrangement or structure devised by an Indian company or its ADs to circumvent these restrictions will attract penal action under the provisions of FEMA.
PART III
Trade credits are short- to medium-term credits extended by overseas suppliers, banks or financial institutions for imports into India, with maturities up to five years. Depending on the source of finance they are classed as suppliers’ credit—where the overseas supplier itself provides the credit—or buyers’ credit—where the importer obtains financing from an overseas bank or financial institution. All imports financed through trade credit must be permissible under the extant Foreign Trade Policy of the Director General of Foreign Trade (DGFT).
Authorised Dealer Category‑I (AD Category‑I) banks may approve trade credit under two routes. Under the automatic route, ADs can approve trade credit for both non‑capital and capital goods up to USD 20 million (or equivalent) per import transaction. Proposals exceeding USD 20 million per transaction follow the approval route and are considered by the Reserve Bank of India.
Maturity rules are common to both routes. For imports of non‑capital goods, the maturity may be up to one year from the date of shipment or the operating cycle, whichever is shorter. For capital goods, maturity may extend up to five years from the date of shipment. Where trade credit has a maturity of up to five years, the initial (ab‑initio) contractual period must be six months. Roll‑overs or extensions beyond the permitted period are not allowed.
The all‑in‑cost ceiling for raising trade credit is 350 basis points over the six‑month LIBOR (or the applicable benchmark for the currency of credit). The all‑in‑cost includes arranger, upfront and management fees, handling/processing charges, out‑of‑pocket expenses and legal fees, if any.
AD Category‑I banks may issue guarantees, Letters of Undertaking (LoUs) or Letters of Comfort in favour of overseas suppliers, banks or financial institutions up to USD 20 million per import transaction. For non‑capital goods (excluding items such as gold, palladium, platinum, rhodium, silver, etc.), such guarantees may be for a maximum period of one year. For capital goods, the maximum guarantee period is three years. Guarantee periods are reckoned from the date of shipment, must be co‑terminus with the period of credit, and are subject to applicable prudential guidelines issued by the RBI.
Trade credit transactions carry reporting obligations. AD Category‑I banks must submit, on a monthly basis, a consolidated statement showing approvals, drawals, utilization and repayments of trade credit approved by all branches. Additionally, they must furnish consolidated quarterly data on issuance of guarantees, LoUs and Letters of Comfort by all branches to the Foreign Exchange Department.
Facility of credit enhancement
Eligible non‑resident entities—such as multilateral and regional financial institutions, and government‑owned financial institutions (directly or indirectly owned)—may provide credit enhancement to domestic debt raised through capital market instruments (for example, rupee‑denominated bonds and debentures). This facility is available to borrowers eligible to raise External Commercial Borrowings (ECBs) under the automatic route, subject to the following conditions:
i. The underlying debt instrument must have a minimum average maturity of three years.
ii. Prepayment, call and put options are not permitted for such instruments up to an average maturity of three years.
iii. Guarantee fees and other costs associated with the credit enhancement are capped at 2 per cent of the principal amount.
iv. If the guarantor meets the liability on invocation and repayment to the eligible non‑resident is permissible in foreign currency, the all‑in‑cost ceilings applicable to the relevant maturity period of the trade credit/ECB will apply to the novated loan.
v. If, in case of default, the loan is serviced in Indian rupees, the applicable interest rate will be either the bond coupon or 250 basis points over the prevailing secondary market yield on the 5‑year Government of India security as on the date of novation, whichever is higher.
vi. Non‑banking financial companies and infrastructure finance companies seeking credit enhancement must comply with the prescribed eligibility criteria and prudential norms; if the novated loan is denominated in foreign currency, the infrastructure finance company should hedge the full foreign currency exposure.
vii. Reporting requirements applicable to ECBs will also apply to novated loans.
Historically, ECBs were a preferred route for large and mid‑sized companies to obtain borrowed funds because interest rates in international markets were often attractive.
FCCBs: Structure and Regulatory Framework
Foreign Currency Convertible Bonds (FCCBs) are debt instruments issued by Indian companies and subscribed to by non-residents in a foreign currency. They carry a fixed coupon and can be converted—either wholly or in part—into ordinary shares of the issuing company at a predetermined conversion price. Until conversion, interest and, if applicable, redemption are paid in foreign currency, which exposes the issuer to exchange-rate risk even though the coupon is typically lower than on comparable domestic debt.
Because they combine features of both equity and debt, FCCBs attract investors seeking upside through conversion while providing borrowers with cheaper financing than straight debt. The equity component makes them less immediately dilutive than a fresh equity issue: dilution occurs gradually as bonds convert. Coupon rates on FCCBs have been as low as around 0–1.5 percent, keeping initial cash outflows minimal, while yield-to-maturity for some issues has been reported in the 6–7 percent range and may be payable at maturity. Higher conversion premiums generally raise the yield investors demand.
The government introduced a scheme in 1993 to facilitate issuance of FCCBs and ordinary shares abroad. Under that scheme, proposals up to USD 50 million received automatic approval, proposals up to USD 100 million required Reserve Bank clearance, and larger proposals were considered by the Ministry of Finance. The minimum maturity for FCCBs is five years, although there is no prescribed limit on the period during which conversion may take place.
When international equity markets are buoyant, Indian firms often prefer FCCBs to pure foreign borrowings (ECBs) because of the potential equity upside and lower coupon burden. Over recent years, Indian corporates have raised substantial amounts—reported in the range of USD 20–50 billion—through FCCBs to finance their growth.
In August 2005 the issuance of FCCBs was brought under the External Commercial Borrowing (ECB) framework and required conformity with Foreign Direct Investment norms, including sectoral caps. Additional conditions included a minimum maturity of five years, any call or put options not being exercisable before five years, and a prohibition on attaching warrants to the issue (a change from earlier practice where equity-related warrants were sometimes linked to the debt). Issue-related expenses were capped—generally at 4 percent of the issue size and at 2 percent for private placements—in accordance with the requirements set out in Regulation 21 of the Foreign Exchange Management regulations.
FCEBs: Issuance and Eligibility
Foreign Currency Exchangeable Bonds (FCEBs) are debt instruments issued in a foreign currency by an Indian company and sold to investors resident outside India, with the option that the bond—either wholly or in part, or through equity‑related warrants attached to the debt—can be converted into equity shares of a different company (the “offered company”). In practice, an issuer from the promoter group of the offered company raises foreign currency by issuing such exchangeable bonds; a well‑known example is Tata Sons issuing exchangeable bonds to raise funds for Tata Motors.
The Central Government notified a scheme to facilitate the issue of FCEBs and brought it into effect on 23 September 2008. An FCEB must be denominated in any freely convertible foreign currency, with principal and interest payable in that foreign currency.
To issue an FCEB, the issuing company must be part of the promoter group of the offered company and must hold the equity shares that may be offered at the time of issuance. The offered company itself must be a listed company, operating in a sector eligible to receive Foreign Direct Investment (FDI) and qualified to issue or avail of instruments such as Foreign Currency Convertible Bonds (FCCBs) or External Commercial Borrowings (ECBs).
Certain entities are barred from issuing FCEBs. An Indian company that is not eligible to raise funds from the Indian securities market—including any company restrained from accessing the securities market by SEBI—cannot issue FCEBs. Likewise, only subscribers who comply with the FDI policy and the applicable sectoral caps at the time of issue may subscribe to FCEBs; where the FDI policy requires prior approval, that approval from the Foreign Investment Promotion Board (FIPB) must be obtained. Finally, entities that are prohibited by SEBI from buying, selling, or dealing in securities are not eligible to subscribe to FCEBs.
Permitted Uses and Terms of FCEBs
The proceeds of a Foreign Currency Exchangeable Bond (FCEB) may be used by the issuing company for overseas investments, including direct investments in joint ventures or wholly owned subsidiaries abroad, subject to the prevailing guidelines on overseas investment in such entities. The issuing company may also invest FCEB proceeds in companies within the promoter group.
Promoter‑group companies that receive investments funded by FCEB proceeds must apply those funds only for end‑uses permitted under the External Commercial Borrowings (ECB policy). Such promoter‑group recipients are explicitly prohibited from using the proceeds for investments in the Indian capital market or for real estate activity in India.
Interest payable on FCEBs and any issue expenses incurred in foreign currency must fall within the all‑in‑cost ceiling prescribed by the Reserve Bank under the ECB policy.
At the time of issuance, the exchange price for the listed equity shares to be delivered on conversion of an FCEB must not be less than the higher of two benchmarks: (a) the average of the weekly high and low of the company’s closing share prices on the stock exchange during the six months preceding the relevant date; and (b) the average of the weekly high and low of the company’s closing share prices on the stock exchange during the two weeks preceding the relevant date.
The minimum maturity of an FCEB is five years. The exchange option may be exercised at any time before redemption, and on exercise the holder must take delivery of the offered shares; net cash settlement is not permitted.
Overseas Deployment of FCEB Proceeds
The proceeds of FCEBs must be held and deployed overseas by the issuing company or other promoter‑group companies strictly in accordance with the External Commercial Borrowing (ECB) policy. It is the issuing company’s responsibility to ensure that any promoter‑group entity using those proceeds does so only for end‑uses permitted under the ECB framework. To demonstrate compliance, the issuing company must furnish an audit trail of how the proceeds were applied—covering both the issuer and any promoter‑group recipients—duly certified by the designated Authorized Dealer bank, to the Reserve Bank of India.
On the operational side, issuance of FCEBs requires the Reserve Bank’s prior approval under the Approval Route for raising ECBs, and all reporting must follow the extant ECB reporting requirements. In practice, FCEBs are intended to help promoters finance intra‑group needs, for example where a promoter‑group company acquires a foreign firm. However, despite this utility, FCEBs have not gained significant market traction so far.
Rupee-Denominated Offshore Bonds
About one-fifth of Indian corporate funding historically came from foreign-currency debt—external commercial borrowings, trade credits and bonds. Such borrowings expose firms to exchange‑rate risk, which must be hedged; inadequate hedging can convert currency movements into large losses for individual firms and, in extreme cases, pose systemic risk to the wider financial system.
Against this backdrop, several jurisdictions have allowed corporates to issue overseas bonds denominated in their home currency. In June 2015 the Reserve Bank of India permitted Indian corporates to issue rupee‑denominated bonds abroad. By shifting repayment liability into rupees, these issues reduce exchange‑rate exposure for issuers and can be attractive to foreign investors because they provide direct access to India’s currency markets without the administrative requirements of Foreign Portfolio Investor registration. Even before the RBI’s general permission, multilateral and development institutions such as the Asian Development Bank and the International Finance Corporation had obtained specific approval to issue rupee bonds overseas. The IFC’s rupee‑denominated issues—marketed as “Masala Bonds”—were issued repeatedly with maturities of up to fifteen years.
In August 2016 the RBI extended the route to banks, allowing them to raise long‑term rupee‑denominated bonds overseas specifically for financing infrastructure and affordable housing projects.
Overseas Rupee Bond Framework
The framework for issuing rupee‑denominated bonds overseas permits eligible resident entities to raise funds only through plain‑vanilla rupee‑denominated bonds in Financial Action Task Force (FATF)‑compliant financial centres. These bonds may be placed privately or listed on foreign exchanges, subject to host‑country rules.
Issuance is permitted both under an automatic route and under an approval route. Under the automatic route, borrowing is allowed up to INR 50 billion per financial year; proposals beyond this ceiling require prior approval from the Reserve Bank under the approval route. All issuances also fall within the overall foreign investment limit in corporate debt of INR 2,443.23 billion.
The bonds must have a minimum maturity of three years, and any call or put option cannot be exercised before that minimum period. Eligible issuers include any corporate or body corporate, and REITs and INVITs regulated by the Securities and Exchange Board of India (SEBI). Indian banks are also eligible to issue rupee‑denominated bonds overseas, notably perpetual debt instruments (PDIs) that qualify as additional Tier‑1 capital, debt instruments eligible as Tier‑2 capital, and long‑term rupee bonds for financing infrastructure and affordable housing.
Foreign subscription is restricted to recognised investors in jurisdictions that meet multiple safeguards: the country must be a member of the FATF or a FATF‑style regional body; its securities market regulator must be a signatory to IOSCO’s multilateral MoU or have a bilateral MoU with SEBI for information sharing; and it must not appear on the FATF public statement as a jurisdiction subject to counter‑measures or insufficient progress in addressing AML/CFT deficiencies. Multilateral and regional financial institutions of which India is a member are also treated as recognised investors.
Indian banks may act as arrangers and underwriters, subject to prudential norms. If an Indian bank underwrites an issue, its holding in that issue must not exceed 5 per cent after six months. Underwriting by overseas branches or subsidiaries of Indian banks for issues by Indian banks is not permitted.
The all‑in cost of such borrowings should be in line with prevailing market conditions. Proceeds may be used for all purposes except certain restricted activities: real estate development other than integrated townships or affordable housing projects; investments in the domestic capital market or using proceeds for equity investments in India; activities prohibited under foreign direct investment rules; on‑lending for any of the foregoing purposes; and purchase of land. Foreign‑currency/rupee conversion for the issue and servicing of the bonds will use the market exchange rate prevailing on the settlement date.
Overseas investors can hedge their rupee exposure through permitted derivative products with AD Category‑I banks in India, and may access the domestic market on a back‑to‑back basis through branches or subsidiaries of Indian banks abroad or branches of foreign banks with an Indian presence. Borrowing by financial institutions under this framework is also subject to any leverage ratio prescribed by the relevant sectoral regulator under prudential norms.
An example of market activity under this framework is HDFC’s issuance of unrated rupee‑denominated bonds to investors in Europe and Asia: the issue of ₹3,300 crore, with a 37‑month maturity and a yield of 7.3 per cent, was listed on the London Stock Exchange and remains the largest Masala Bond programme by an Indian issuer to date. The market for such bonds is likely to develop gradually as they appeal to foreign investors seeking higher yields, while Indian issuers benefit from retaining rupee currency exposure and facing relatively liberal rules on cost and permitted end‑uses.
Primary Market: Decline and Revival
For many years the Indian primary market remained depressed, punctuated only by brief upswings — notably the financial-sector IPO boom of 1994–95, the IT surge in 1999–2000, and a recovery around 2002. Over 1,000 IPOs were launched in 1994–95, yet by 2001–02 only six equity issues aggregating about Rs 860 crore came from the private sector, underlining the depth of the slump.
The collapse in new issues reflected a sharp erosion of investor confidence. A string of frauds by unscrupulous promoters, coupled with perceived delays in regulatory action, discouraged small investors from participating in primary offerings. Confidence in the primary market is tightly linked to sentiment in the secondary market; when the secondary market was tainted by scams, it further depressed primary market activity. At the same time, SEBI’s stringent disclosure requirements and entry-point norms, intended to protect investors, also contributed to a decline in listings by newer companies.
Faced with a weak domestic primary market, many established firms tapped international investors through GDR/ADR routes, while corporates, banks and financial institutions increasingly relied on private placements. Within private placements, debt instruments gained favour because investors preferred safety over higher equity returns, which in turn raised the debt–equity ratios of several private companies.
A sustained revival began in 2004–05, driven by a spate of good-quality private sector issues that found strong investor demand and by the government’s disinvestment programme, which encouraged retail participation. In November 2005 the finance ministry permitted superannuation and gratuity funds, alongside private provident funds, to invest up to 5 per cent of their new inflows in equities. These retirement funds — estimated at about 10–15 per cent of the roughly ₹2.5 lakh crore provident fund sector — began, for the first time, to purchase shares in the secondary market and to participate in IPOs, follow-on issues and equity-linked mutual funds. Initially, direct investment in company equity was restricted to cases where the company’s debt instruments carried an investment-grade rating from at least two agencies. To channel more long-term savings into capital markets, the government further liberalized guidelines for private provident funds in August 2008: from April 1, 2009 these funds could invest up to 15 per cent of their corpus in equities and up to 40 per cent in private-sector debt, with the requirement for debt to be rated investment grade by one (rather than two) agencies. Policymakers have also argued for opening up the broader pension sector to attract additional long-term domestic capital into both primary and secondary markets.
Nevertheless, bearish phases in stock markets have periodically disrupted companies’ fund-raising plans, and corporate India has had to reassess business and growth strategies against the backdrop of global funding stress. Despite this, 2015–16 and 2016–17 saw a renewed wave of IPO activity: a larger number of companies came to market and received encouraging investor response, signaling a restoration of confidence.
India’s high household saving rate — about 35 per cent of GDP, amounting roughly to ₹6 lakh crore a year — represents a vast reservoir of domestic capital. Retail investors, seeking both profit and safety, remain attracted to primary issues; however, the emphasis many small investors place on listing-day gains has at times made the primary market speculative. Sustaining the revival therefore depends on prudent pricing by merchant bankers and, crucially, the good faith of small investors, promoters and regulators. When these actors act responsibly, the primary market can once again become a reliable conduit for long-term capital formation.
Primary Market: Issuance, Regulation, Trends
The primary market is where new securities are issued and funds are mobilized. Companies raise capital here through four main routes: issuing a prospectus to the public, offering shares by way of a rights issue to existing shareholders, making preferential allotments to a selected group, and selling directly to a limited set of investors through private placement.
When an issue is offered to the general public by means of a prospectus, investors subscribe directly. An initial public offering (IPO) is the first time an unlisted company offers either fresh securities, existing securities for sale, or both, to the public. An already-listed company may raise further capital through a seasoned public offering (SPO), which similarly involves a fresh issue or an offer for sale accompanied by an offer document. A rights issue gives existing shareholders a preemptive, pro rata opportunity to subscribe to new shares. Preferential allotment—governed under Section 81 of the Companies Act, 1956—is a route for listed companies to issue shares or convertible securities to a select group; it is distinct from both rights issues and public issues.
Private placement denotes the direct sale of newly issued securities to a limited number of investors, often institutional, typically arranged through merchant bankers. Historically, the public sector mobilized substantial resources through private placements, with debt instruments such as bonds and debentures preferred. Private placements are now regulated: companies that wish to list privately placed bonds must make disclosures in accordance with the Companies Act and SEBI guidelines.
Participants in the primary market fall into three broad categories: issuers, investors, and intermediaries. Intermediaries involved in an issue include merchant bankers or book-running lead managers (BRLMs), syndicate members, registrars, bankers to the issue, company auditors, and legal advisors.
A major shift occurred after the repeal in 1992 of the Capital Issues (Control) Act, 1947; controls on resource-raising from the market were removed, and promoters no longer need prior authority consent to make or price an issue. In this liberalized environment, market-based mechanisms such as book building gained prominence. Book building is a process by which the offer price of an IPO is discovered through investor demand; it helps presell the issue, reduces the risk of undersubscription, cuts cost and time, and simplifies procedures. SEBI reintroduced a moving price band for book-built IPOs—allowing revisions to the band subject to stock-exchange notification—and reduced mandatory allocation to qualified institutional buyers (QIBs) in book-built issues from 60% to 50%.
Reverse book building works like a reverse auction in which shareholders bid the price at which they are willing to sell their shares. The green-shoe option allows an issuer to allocate shares in excess of the amount in the public offer and operate a post-listing price-stabilization mechanism for up to 30 days, under the DIP Guidelines. A stabilizing agent may, at its discretion, buy shares in the market to support the post-listing price, deciding when, how many, and at what price to intervene. The online issue of shares through the electronic networks of stock exchanges is covered by guidelines incorporated in the SEBI (Disclosure and Investor Protection) Guidelines, 2000.
Patterns of resource mobilization through prospectuses and rights issues have varied over time: an increasing trend from 1991–92 to 1994–95 was followed by a decline from 1995–96, intermittent revivals around 1998–99, and a renewed upswing from 2003–04. In the 1990s, the private sector accounted for about 45% of funds mobilized via prospectus and rights issues. Large issues have dominated the market—constituting over 90% of total issues, and more than 97% in 2003–04—while equity issues generally outnumbered bond issues. Banks and financial institutions emerged as major issuers, raising substantial resources in 2002–03 and 2003–04.
The Indian capital market has been gradually institutionalizing: many retail investors, having experienced losses from direct market exposure, increasingly prefer mutual funds as their investment vehicle. At the same time, Indian companies have tapped international markets through instruments such as Global Depository Receipts (GDRs), American Depository Receipts (ADRs), Foreign Currency Convertible Bonds (FCCBs), and External Commercial Borrowings (ECBs).