Methods of raising funds in primary market:

Initial Public Offering (IPO)

It is an offering of either a fresh issue of securities or an offer for sale of existing securities or
both by an unlisted company for the first time to the public. In the case of an IPO, the availability
of information regarding the past performance of the company and its track record is generally
inadequate and may lack credibility. This information asymmetry may lead to the problems of
moral hazard and adverse selection. To enable investors to take informed decisions and protect
their interests, the SEBI has laid down stringent entry norms.

Follow-on public offering (FPO)

A follow-on public offering (FPO) is an offering of either a fresh issue of securities or an offer
for sale to the public by an already listed company through an offer document. Investors
participating in these offerings take informed decisions based on its track record and
performance.

The SEBI has laid down eligibility norms for entities raising funds through an IPO and an FPO.

The two types of offerings in FPO are Dilutive and Non-dilutive offerings.

In dilutive FPO, the value of a firm remains unchanged. Earnings per share decline since new
shareholders enter the firm and dilute its ownership. The firm issues more fresh shares to raise
capital in a dilutive offering.

In the non-dilutive offering, existing shareholders sell their shares to the public. They are
generally founders or directors. Since existing shares are sold to the public, earnings per share
don't get affected. Here, the proceeds from the sale go to the existing shareholders of the
company.

Private Placement

When a company offers its securities to a small group of investors, it is called private placement.
Such securities may be bonds, stocks or other securities, and the investors can be both individual
and institutional.

Private placements are easier to issue than initial public offerings as the regulatory stipulations
are significantly less. It also incurs reduced cost and time, and the company can remain private.

Such issuance is suitable for start-ups or companies which are in their early stages. The company
may place this issuance to an investment bank or a hedge fund or place before ultra-high net
worth individuals (HNIs) to raise capital.
Rights Issue: Rights issue is the issue of new shares in which existing shareholders are given
pre-emptive rights to subscribe to the new issue on a pro-rata basis. The right is given in the form
of an offer to existing shareholders to subscribe to a proportionate number of fresh, extra shares
at a pre-determined price.

Companies offer shares on a rights basis either to expand, diversify, restructure their balance
sheet or raise the promoter stake. Promoters offer rights issues at attractive price often at a
discount to the market price due to a variety of reasons.

Firstly, they want to get their issues fully subscribed to. Secondly, to reward their shareholders.
Thirdly, it is possible that the market price does not reflect a stock’s true worth or that it is
overpriced, prompting promoters to keep the offer price low. Fourthly, to hike their stake in their
companies, thus, avoiding the preferential allotment route which is subject to lot of restrictions.
Moreover, funds can be raised by a company through this route without diluting the stakes of
both its existing shareholders and promoters.

Offer for sale (OFS)

It is a simpler method of share sale through the exchange platform for listed companies. The
mechanism was first introduced by India’s securities market regulator Sebi, in 2012, to make it
easier for promoters of publicly-traded companies to cut their holdings and comply with the
minimum public shareholding norms by June 2013. The method was largely adopted by listed
companies, both state-run and private, to adhere to the Sebi order. Later, the government started
using this route to divest its shareholding in public sector enterprises.

Unlike a follow-on public offering (FPO), where companies can raise funds by issuing fresh
shares or promoters can sell their existing stakes, or both, the OFS mechanism is used only when
existing shares are put on the block. Only promoters or shareholders holding more than 10 per
cent of the share capital in a company can come up with such an issue.
In an OFS, a minimum of 25 per cent of the shares offered, are reserved for mutual funds (MFs)
and insurance companies. At any point, no single bidder other than these two institutional
categories is allocated more than 25 per cent of the size of the offering.
A minimum of 10 per cent of the offer size is reserved for retail investors. A seller can offer a
discount to retail investors either on the bid price or on the final allotment price. The OFS
window is open only for a single day. It is mandatory for the company to inform the stock
exchanges two banking days prior to the OFS about its intention.
MONEY MARKET
Money market is a market for short-term loans or financial assets. It is a market for the lending
and borrowing of short-term funds. As the name implies, it does not actually deal in cash or
money. But it actually deals with near substitutes for money or near money like trade bills,
promissory notes and Government Papers drawn for a short period not exceeding one year.
These short-term instruments can be converted into cash readily without any loss and at low
transaction cost.
Money market is the centre for dealing mainly in short-term money assets. It meets the short
term requirements of borrowers and provides liquidity or cash to lenders. It is the place where
short-term surplus funds at the disposal of financial institutions and individuals are borrowed by
individuals, institutions and also the Government. The money market does not refer to a
particular place where short-term funds are dealt with. It includes all individuals, institutions and
intermediaries dealing with short-term funds. The transactions between borrowers, lenders and
middlemen take place through telephone, telegraph, mail and agents. No personal contact or
presence of the two parties is essential for negotiations in a money market. However, a
geographical name may be given to a money market according to its location. For example, the
London money market operates from Lambard Street and the New York money market operates
from Wall Street. But, they attract funds from all over the world to be lent to borrowers from all
over the globe. Similarly, the Bombay money market is the centre for short-term loanable funds
of not only Bombay, but also the whole of India.

Features of a Money Market

The following are the general features of a money market:
(i) It is a market purely for short-term funds or financial assets called near money. (ii) It deals
with financial assets having a maturity period up to one year only.
(iii) It deals with only those assets which can be converted into cash readily without loss and
with minimum transaction cost.
(iv) Generally, transactions take place through phone, i.e., oral communication. Relevant
documents and written communications can be exchanged subsequently. There is no formal
place like stock exchange as in the case of a capital market.
(v) Transactions have to be conducted without the help of brokers.
(vi) It is not a single homogeneous market. It comprises of several submarkets, each specialising
in a particular type of financing. E.g., Call money market, Acceptance market, Bill market and so
on.
(vii) The components of a money market are the Central Bank, Commercial Banks, Non-banking
financial companies, discount houses and acceptance houses. Commercial banks generally play a
dominant role in this market.
 IMPORTANCE OF MONEY MARKET
A developed money market plays an important role in the financial system of a country by
supplying short-term funds adequately and quickly to trade and industry. The money market
is an integral part of a country’s economy. Therefore, a developed money market is highly
indispensable for the rapid development of the economy. A developed money market helps
the smooth functioning of the financial system in any economy in the following ways:
(i) Development of Trade and Industry: Money market is an important source of
financing trade and industry. The money market, through discounting operations and
commercial papers, finances the short-term working capital requirements of trade and
industry and facilitates the development of industry and trade both – national and
international.
(ii) Development of Capital Market: The short-term rates of interest and the conditions
that prevail in the money market influence the long-term interest as well as the
resource mobilisation in capital market. Hence, the development of capital market
depends upon the existence of a developed money market.
(iii) Smooth Functioning of Commercial Banks: The money market provides the
commercial banks with facilities for temporarily employing their surplus funds in
easily realisable assets. The banks can get back the funds quickly, in times of need, by
resorting to the money market. The commercial banks gain immensely by
economising on their cash balances in hand and at the same time meeting the demand
for large withdrawal of their depositors. It also enables commercial banks to meet
their statutory requirements of cash reserve ratio (CRR) and Statutory Liquidity Ratio
(SLR) by utilising the money market mechanism.
(iv) Effective Central Bank Control: A developed money market helps the effective
functioning of a central bank. It facilitates effective implementation of the monetary
policy of a central bank. The central bank, through the money market, pumps new
money into the economy in slump and siphons it off in boom. The central bank, thus,
regulates the flow of money so as to promote economic growth with stability.
(v) Formulation of Suitable Monetary Policy: Conditions prevailing in a money market
serve as a true indicator of the monetary state of an economy. Hence, it serves as a
guide to the government in formulating and revising the monetary policy then and
there depending upon the monetary conditions prevailing in the market.

Non-inflationary source of Finance to Government: A developed money market helps the

government to raise short-term funds through the treasury bills floated in the market. In the
absence of a developed money market, the government would be forced to print and issue more
money or borrow from the central bank. Both ways would lead to an increase in prices and the
consequent inflationary trend in the economy.
TREASURY BILLS
Treasury bills are short-term instruments issued by the Reserve Bank on behalf of the
government to tide over short-term liquidity shortfalls. This instrument is used by the
government to raise short-term funds to bridge seasonal or temporary gaps between its receipts
(revenue and capital) and expenditure. They form the most important segment of the money
market not only in India but all over the world as well. T-bills are repaid at par on maturity. The
difference between the amount paid by the tenderer at the time of purchase (which is less than
the face value) and the amount received on maturity represents the interest amount on T-bills and
is known as the discount. Tax deducted at source (TDS) is not applicable on T-bills.

COMMERCIAL PAPER
A commercial paper is an unsecured short term promissory note issued at a discount by
creditworthy corporates, primary dealers and all-India financial institutions, creditworthy and
highly rated corporates to meet their working capital requirements. Depending upon the issuing
company, a commercial paper is also known as a finance paper, industrial paper, or corporate
paper.
Initially only leading highly rated corporates could issue a commercial paper. The issuer base has
now been widened to broad-base the market. Commercial papers can now be issued by primary
dealers and all-India financial institutions, apart from corporates, to access short-term funds.
Effective September 6, 1996 and June 17, 1998, primary dealers and satellite dealers were also
permitted to issue commercial papers to access greater volume of funds to help increase their
activities in the secondary market.
A commercial paper can be issued to individuals, banks, companies, and other registered Indian
corporate bodies and unincorporated bodies. Non-resident Indians can be issued a commercial
paper only on a non-transferable and non-repatriable basis. Banks are not allowed to underwrite
or co-accept the issue of a commercial paper. Foreign institutional investors (FIIs) are eligible to
invest in commercial papers but within the limits set for their investments by the SEBI.
A commercial paper is usually privately placed with investors, either through merchant bankers
or banks. A specified credit rating of P2 of CRISIL or its equivalent is to be obtained from credit
rating agencies.

COMMERCIAL BILLS
The working capital requirement of business firms is provided by banks through
cash-credits/overdraft and purchase/discounting of commercial bills.
A commercial bill is a short-term, negotiable, and self-liquidating instrument with low risk. It
enhances the liability to make payment on a fixed date when goods are bought on credit.
According to the Indian Negotiable Instruments Act, 1881, a bill of exchange is a written
instrument containing an unconditional order, signed by the maker, directing to pay a certain
amount of money only to a particular person, or to the bearer of the instrument.
Bills of exchange are negotiable instruments drawn by the seller (drawer) on the buyer (drawee)
for the value of the goods delivered to him. Such bills are called trade bills. When trade bills are
accepted by commercial banks, they are called commercial bills. The bank discounts this bill by
keeping a certain margin and credits the proceeds. Banks, when in need of money, can also get
such bills rediscounted by financial institutions such as LIC, UTI, GIC, ICICI, and IRBI. The
maturity period of the bills varies from 30 days, 60 days, or 90 days, depending on the credit
extended in the industry.
Commercial bills were introduced in the money market in 1970. The RBI rediscounted genuine
trade bills at the bank rate or at a rate specified by it. The development of the bills market
enabled banks and financial institutions to invest their short-term surplus funds in bills of varying
maturities.

CERTIFICATES OF DEPOSIT
Certificates of deposit (CDs) are unsecured, negotiable, short-term instruments in bearer form,
issued by commercial banks and development financial institutions. Certificates of deposit were
introduced in June 1989. Only scheduled commercial banks excluding Regional Rural Banks and
Local Area Banks were allowed to issue them initially. Financial institutions were permitted to
issue certificates of deposit within the umbrella limit fixed by the Reserve Bank in 1992.
Certificates of deposit are time deposits of specific maturity similar to fixed deposits (FDs). The
biggest difference between the two is that CDs, being in bearer form, are transferable and
tradable while FDs are not. Like other time deposits, CDs are subject to SLR and CRR
requirements. There is no ceiling on the amount to be raised by banks. The deposits attract stamp
duty as applicable to negotiable instruments.
They can be issued to individuals, corporations, companies, trusts, funds, associates, and others.
NRIs can subscribe to the Deposits on a Non-repatriable Basis.
CDs are issued by banks during periods of tight liquidity, at relatively high interest rates. They
represent a high cost liability. Banks resort to this source when the deposit growth is sluggish but
credit demand is high. Compared to other retail deposits, the transaction costs of CDs is lower.
CDs are issued at a discount to face value. Banks and FIs can issue CDs on floating rate basis
provided the methodology of computing the floating rate is objective, transparent and market-
based.
CALL/NOTICE MONEY MARKET
It is by far the most visible market as the day-to-day surplus funds, mostly of banks, are traded
there. The call money market accounts for a major part of the total turnover of the money
market. It is a key segment of the Indian money market. Since its inception in 1955–56, the call
money market has registered a tremendous growth in volume of activity.
The call money market is a market for very short-term funds repayable on demand and with a
maturity period varying between one day to a fortnight. When money is borrowed or lent for a
day, it is known as call (overnight) money. Intervening holidays and/or Sundays are excluded for
this purpose.
When money is borrowed or lent for more than a day and upto 14 days, it is known as notice
money. No collateral security is required to cover these transactions. The call money market is a
highly liquid market, with the liquidity being exceeded only by cash.
Call money is required mostly by banks. Commercial banks borrow money without collateral
from other banks to maintain a minimum cash balance known as the cash reserve requirement
(CRR). This interbank borrowing has led to the development of the call money market.

REPOS
The major function of the money market is to provide liquidity. To achieve this function and to
even out liquidity changes, the Reserve Bank uses repos.
Repo is a useful money market instrument enabling the smooth adjustment of short-term
liquidity among varied market participants such as banks and financial institutions.
Repo refers to a transaction in which a participant acquires immediate funds by selling securities
and simultaneously agrees to the repurchase of the same or similar securities after a specified
time at a specified price. In other words, it enables collateralised short-term borrowing and
lending through sale/purchase operations in debt instruments. It is a temporary sale of debt
involving full transfer of ownership of the securities, i.e., the assignment of voting and financial
rights.

Repo is also referred to as a ready forward transaction as it is a means of funding by selling a

security held on a spot basis and repurchasing the same on a forward basis.
Reverse repo is exactly the opposite of repo—a party buys a security from another party with a
commitment to sell it back to the latter at a specified time and price. In other words, while for
one party the transaction is repo, for another party it is reverse repo. A reverse repo is undertaken
to earn additional income on idle cash. In India, repo transactions are basically fund
management/SLR management devices used by banks.
The difference between the price at which the securities are bought and sold is the lender’s profit
or interest earned for lending the money.

Defects of Indian Money Market:

A well-developed money market is a necessary pre-condition for the effective implementation of
monetary policy. The central bank controls and -regulates the money supply in the country
through the money market. But, unfortunately, the Indian money market is inadequately
developed, loosely organised and suffers from many weaknesses.

Major defects are discussed below:

I. Dichotomy between Organised and Unorganised Sectors:
The most important defect of the Indian money market is its division into two sectors- (a) the
organised sector and (b) the unorganised sector. There is little contact, coordination and
cooperation between the two sectors. In such conditions it is difficult for the Reserve Bank to
ensure uniform and effective implementations of its monetary policy in both the sectors.

II. Predominance of Unorganised Sector:

Another important defect of the Indian money market is its predominance of unorganised sector.
The indigenous bankers occupy a significant position in the money- lending business in the rural
areas. In this unorganised sector, no clear-cut distinction is made between short- term and long-
term and between the purposes of loans.

These indigenous bankers, which constitute a large portion of the money market, remain outside
the organised sector. Therefore, they seriously restrict the Reserve Bank’s control over the
money market.

III. Wasteful Competition:

Wasteful competition exists not only between the organised and unorganised sectors, but also
among the members of the two sectors. The relation between various segments of the money
market is not cordial; they are loosely connected with each other and generally follow separatist
tendencies.

For example, even today, the State Bank of Indian and other commercial banks look down upon
each other as rivals. Similarly, competition exists between the Indian commercial banks and
foreign banks.

IV. Absence of All-India Money Market:

Indian money market has not been organised into a single integrated all-Indian market. It is
divided into small segments mostly catering to the local financial needs. For example, there is
little contact between the money markets in the bigger cities, like, Bombay, Madras, and Calcutta
and those in smaller towns.
V. Inadequate Banking Facilities:
Indian money market is inadequate to meet the financial need of the economy. Although there
has been rapid expansion of bank branches in recent years particularly after the nationalisation of
banks, yet vast rural areas still exist without banking facilities. As compared to the size and
population of the country, the banking institutions are not enough.

VI. Shortage of Capital:

Indian money market generally suffers from the shortage of capital funds. The availability of
capital in the money market is insufficient to meet the needs of industry and trade in the country.
The main reasons for the shortage of capital are- (a) low saving capacity of the people; (b)
inadequate banking facilities, particularly in the rural areas; and (c) undeveloped banking habits
among the people.

VII. Seasonal Shortage of Funds:

A Major drawback of the Indian money market is the seasonal stringency of credit and higher
interest rates during a part of the year. Such a shortage invariably appears during the busy
months from November to June when there is excess demand for credit for carrying on the
harvesting and marketing operations in agriculture. As a result, the interest rates rise in this
period. On the contrary, during the slack season, from July to October, the demand for credit and
the rate of interest decline sharply.

VIII. Diversity of Interest Rates:

Another defect of Indian money market is the multiplicity and disparity of interest rates. In 1931,
the Central Banking Enquiry Committee wrote- “The fact that a call rate of 3/4 per cent, a hundi
rate of 3 per cent, a bank rate of 4 per cent, a bazar rate of small traders of 6.25 per cent and a
Calcutta bazar rate for bills of small trader of 10 per cent can exist simultaneously indicates an
extraordinary sluggishness of the movement of credit between various markets.”

The interest rates also differ in various centres like Bombay, Calcutta, etc. Variations in the
interest rate structure are largely due to the credit immobility because of inadequate, costly and
time-consuming means of transferring money. Disparities in the interest rates adversely affect
the smooth and effective functioning of the money market.

IX. Absence of Bill Market:

The existence of a well-organised bill market is essential for the proper and efficient working of
money market. Unfortunately, in spite of the serious efforts made by the Reserve Bank of India,
the bill market in India has not yet been fully developed.
Merchant Banks: A merchant banker is defined as an organization that acts as an intermediary
between the issuers and the ultimate purchaser of securities in the primary market. They facilitate
the issue process and their activities are called as merchant banking.
A. Asset/Fund Based Services:
1. Equipment leasing/Lease financing: A lease is an agreement under which a firm acquires
a right to make use of a capital asset like machinery etc. on payment of an agreed fee called lease
rentals. The person (or the company) which acquires the right is known as lessee. He does not
get the ownership of the asset. He acquires only the right to use the asset. The person (or the
company) who gives the right is known as lessor.
2. Hire purchase and consumer credit: Hire purchase is an alternative to leasing. Hire
purchase is a transaction where goods are purchased and sold on the condition that payment is
made in instalments. The buyer gets only possession of goods. He does not get ownership. He
gets ownership only after the payment of the last instalment. If the buyer fails to pay any
instalment, the seller can repossess the goods. Each instalment includes interest also.

3. Bill discounting: Discounting of bill is an attractive fund based financial service provided
by the finance companies. In the case of time bill (payable after a specified period), the holder
need not wait till maturity or due date. If he is in need of money, he can discount the bill with his
banker. After deducting a certain amount (discount), the banker credits the net amount in the
customer’s account.
4. Venture capital: Venture capital simply refers to capital which is available for financing
the new business ventures. It involves lending finance to the growing companies. It is the
investment in a highly risky project with the objective of earning a high rate of return. In short,
venture capital means long term risk capital in the form of equity finance.
5. Housing finance: Housing finance simply refers to providing finance for house building.
It emerged as a fund based financial service in India with the establishment of National Housing
Bank (NHB) by the RBI in 1988. It is an apex housing finance institution in the country. Till
now, a number of specialised financial institutions/companies have entered in the field of
housing finance. Some of the institutions are HDFC, LIC Housing Finance, Citi Home, Ind Bank
Housing etc
6. Insurance services: Insurance is a contract between two parties. One party is the insured
and the other party is the insurer. Insured is the person whose life or property is insured with the
insurer. That is, the person whose risks are insured is called insured. Insurer is the insurance
company to whom risk is transferred by the insured. That is, the person who insures the risk of
insured is called insurer. Thus, insurance is a contract between insurer and insured.
7. Factoring: Factoring is an arrangement under which the factor purchases the account
receivables (arising out of credit sale of goods/services) and makes immediate cash payment to
the supplier or creditor. Thus, it is an arrangement in which the account receivables of a firm
(client) are purchased by a financial institution or banker. Thus, the factor provides finance to the
client (supplier) in respect of account receivables. The factor undertakes the responsibility of
collecting the account receivables. The financial institution (factor) undertakes the risk. For this
type of service as well as for the interest, the factor charges a fee for the intervening period. This
fee or charge is called factorage.
8. Forfeiting: Forfaiting is a form of financing of receivables relating to international trade.
It is a non-recourse purchase by a banker or any other financial institution of receivables arising
from export of goods and services. The exporter surrenders his right to the forfeiter to receive
future payment from the buyer to whom goods have been supplied. Forfaiting is a technique that
helps the exporter sells his goods on credit and yet receives the cash well before the due date. In
short, forfaiting is a technique by which a forfeiter (financing agency) discounts an export bill
and pay ready cash to the exporter. The exporter need not bother about collection of export bill.
He can just concentrate on export trade.
9. Mutual fund: Mutual funds are financial intermediaries which mobilise savings from the
people and invest them in a mix of corporate and government securities. The mutual fund
operators actively manage this portfolio of securities and earn income through dividend, interest
and capital gains. The incomes are eventually passed on to mutual fund shareholders.

B. Non-Fund Based/Fee Based Financial Services:

1. Merchant banking: The merchant banker merely acts as an intermediary. Its main job is
to transfer capital from those who own it to those who need it. Today, merchant banker acts as an
institution which understands the requirements of the promoters on the one hand and financial
institutions, banks, stock exchange and money markets on the other. SEBI (Merchant Bankers)
Rule, 1992 has defined a merchant banker as, “any person who is engaged in the business of
issue management either by making arrangements regarding selling, buying or subscribing to
securities or acting as manager, consultant, advisor, or rendering corporate advisory services in
relation to such issue management”.
2. Credit rating: Credit rating means giving an expert opinion by a rating agency on the
relative willingness and ability of the issuer of a debt instrument to meet the financial obligations
in time and in full. It measures the relative risk of an issuer’s ability and willingness to repay
both interest and principal over the period of the rated instrument. It is a judgement about a
firm’s financial and business prospects. In short, credit rating means assessing the
creditworthiness of a company by an independent organisation.
3. Stock broking: Now stock broking has emerged as a professional advisory service. Stock
broker is a member of a recognized stock exchange. He buys, sells, or deals in shares/securities.
It is compulsory for each stock broker to get himself/herself registered with SEBI in order to act
as a broker. As a member of a stock exchange, he will have to abide by its rules, regulations and
by-laws.
4. Custodial services: In simple words, the services provided by a custodian are known as
custodial services (custodian services). Custodian is an institution or a person who is handed
over securities by the security owners for safe custody. Custodian is a caretaker of a public
property or securities. Custodians are intermediaries between companies and clients (i.e. security
holders) and institutions (financial institutions and mutual funds). There is an arrangement and
agreement between custodian and real owners of securities or properties to act as custodians of
those who hand over it. The duty of a custodian is to keep the securities or documents under safe
custody. The work of custodian is very risky and costly in nature. For rendering these services,
he gets a remuneration called custodial charges.
5. Loan syndication: Loan syndication is an arrangement where a group of banks participate
to provide funds for a single loan. In loan syndication, a group of banks comprising 10 to 30
banks participate to provide funds wherein one of the banks is the lead manager. This lead bank
is decided by the corporate enterprises, depending on confidence in the lead manager.
6. Securitisation (of debt): Loans given to customers are assets for the bank. They are called
loan assets. Unlike investment assets, loan assets are not tradable and transferable. Thus, loan
assets are not liquid. The problem is how to make the loan of a bank liquid. This problem can be
solved by transforming the loans into marketable securities. Now loans become liquid. They get
the characteristic of marketability. This is done through the process of securitization.
Securitisation is a financial innovation. It is conversion of existing or future cash flows into
marketable securities that can be sold to investors. It is the process by which financial assets such
as loan receivables, credit card balances, hire purchase debtors, lease receivables, trade debtors
etc. are transformed into securities. Thus, any asset with predictable cash flows can be
securitised.

Securitisation is defined as a process of transformation of illiquid asset into security which may
be traded later in the opening market. In short, securitization is the transformation of illiquid,
non- marketable assets into securities which are liquid and marketable assets.
It is a process of transformation of assets of a lending institution into negotiable instruments.
Securitisation is different from factoring. Factoring involves transfer of debts without
transforming debts into marketable securities. But securitisation always involves transformation
of illiquid assets into liquid assets that can be sold to investors.
Prospectus: Significance and Contents

An IPO prospectus, often known as Red Herring Prospectus, is a formal document required by
the Securities and Exchange Board of India (SEBI) for a company to go public. It includes
information about the company's business, financial condition, and risk factors. The Prospectus
is also used to sell shares of the company to investors.

Investors rely on the Prospectus to make an informed decision about whether or not to purchase
shares in the company. For this reason, it is important that the Prospectus is clear, concise, and
easy to understand. SEBI reviews prospectuses to ensure that they meet these standards.

If you are considering investing in a company that is planning an IPO, be sure to read the
Prospectus carefully. Pay special attention to the section on risk factors, as this will help you
understand the potential risks involved in investing.

An Initial Public Offering Prospectus typically contains information about the company's
business model, financial statements, and a description of the risks involved in investing in the
company. The Prospectus also contains information about the company's management team and
the underwriters managing the offering.

The structure of an Initial Public Offering Prospectus typically contains the following sections:

An overview of the company, its business model, and strategy

A discussion of the company's financial condition and historical financial performance
A description of the offering, including the number of shares being offered, the price range,
and the expected use of proceeds
A description of the company's management team and board of directors
A description of the company's material contracts and relationships
A description of the company's intellectual property and other proprietary rights
A description of the company's principal risks
A description of the regulatory environment in which the company operates
A description of the company's competition
A description of the company's market opportunity
Importance: IPO prospectus is an essential document for investors who are planning to invest in
newly issued shares. This is because it contains all the information you need to decide whether
you want to invest in a company. As most private companies do not have such information
widely available, the DRHP becomes necessary for investors.

The IPO prospectus announces a company’s proposal to go public by opening a quantum of its
shares for general investors. Investors can gain essential information about the company that
enables them to conduct comprehensive research before investing in their IPO shares.

Furthermore, as stated earlier, an IPO prospectus is also a marketing document for a company.
By issuing a well-structured prospectus, a company can invite a large number of investors to
invest in it.

There are several types of IPO prospectus that a company may choose to present in different
situations. The list below highlights the four major types of IPO prospectus:

Red Herring Prospectus

A Draft Red Herring Prospectus (DRHP) carries all details about the company that is planning to
issue IPO shares. However, this type of prospectus does not mention any quantity or number of
shares the company proposes to offer for IPO. Companies can make changes here several times,
therefore, this document is referred to as Draft Red Herring Prospectus (DRHP) until SEBI signs
its final issue.

Companies need to submit the RHP at least 3 days before issuing their IPO shares. After the IPO
offer ends, this document must mention how much cash the company intends to raise. It also
needs to provide details on the closing price of securities and other essential inputs that were
absent in its DRHP.

Abridged Prospectus

As the name implies, an abridged prospectus carries only the salient features of a prospectus. As
a result, an abridged prospectus acts as a memorandum that mentions the details of an IPO in
brief. Companies must compulsorily attach an abridged prospectus with every application form
for their IPOs. Therefore, the information here must be simple and to the point to enable quick
decision-making for investors.

Shelf Prospectus

A shelf prospectus allows companies to issue multiple shares with a single document. When a
company provides a shelf prospectus, they do not need to file a prospectus for every new issue..
In case, a company wishes to make a change in its shelf prospectus, it can file the same in its
information memorandum. It is also important to note that shelf prospectuses have a validity
period of only 1 year.

Deemed Prospectus

A deemed prospectus is required when an intermediary or issuing house plans to issue an Offer
For Sale (OFS). It acts as an invitation to investors when an intermediary is offering shares to the
public on the behalf of a company. This type of document is applicable in case an intermediary
promised to sell shares allotted to it to the public or it needs to pay the issuing company for its
allotment.
Regulatory Framework of Indian Capital Market
Functions of SEBI:
The main primary three functions are-
1. Protective Functions
As the name suggests, these functions are performed by SEBI to protect the interest of investors
and other financial participants.
It includes-
Checking price rigging
Prevent insider trading
Promote fair practices
Create awareness among investors
Prohibit fraudulent and unfair trade practices

2. Regulatory Functions
These functions are basically performed to keep a check on the functioning of the business in the
financial markets.
These functions include-
Designing guidelines and code of conduct for the proper functioning of financial
intermediaries and corporate.
Regulation of takeover of companies
Conducting inquiries and audit of exchanges
Registration of brokers, sub-brokers, merchant bankers etc.
Levying of fees
Performing and exercising powers
Register and regulate credit rating agency
3. Development Functions
This regulatory authority performs certain development functions also that include but they are
not limited to-
Imparting training to intermediaries
Promotion of fair trading and reduction of malpractices
 Carry out research work
Encouraging self-regulating organizations
Buy-sell mutual funds directly from AMC through a broker

Role of RBI:
of ways to the development of the stock market.
1. Regulatory Framework
The RBI serves as the principal regulator for the Indian stock market, ensuring its orderly
functioning. It formulates and implements comprehensive policies and regulations that govern
various aspects of the market.
2. Monetary Policy and Interest Rates
One of the key tools at the disposal of the RBI is its control over monetary policy and interest
rates. Through its monetary policy decisions, the RBI manages inflation, stimulates economic
growth, and maintains price stability.
3. Liquidity Management
The RBI plays a pivotal role in managing liquidity within the Indian stock market. By employing
open market operations (OMOs), repo auctions, and other measures, the RBI provides liquidity
support to banks and financial institutions.
4.Foreign Institutional Investment (FII) Regulations
Foreign institutional investors (FIIs) contribute significantly to the Indian stock market. The RBI
formulates and updates policies and guidelines related to FII investments. These regulations
govern areas such as registration requirements, investment limits, and compliance norms.
5. Exchange Rate Management

The RBI actively manages the exchange rate of the Indian rupee against major global currencies.
It intervenes in the foreign exchange market by buying or selling foreign currencies to maintain
stability and prevent excessive volatility.
6. Risk Management and Financial Stability
The RBI serves as the guardian of financial stability in the Indian stock market. It assesses and
monitors risks, such as market volatility, credit risks, and systemic risks, to prevent any
disruptions that could undermine the stability of the financial system.