INTRODUCTION IPO stands for Initial Public Offering and means the new offer of shares from a company which was previously unlisted. This is done by offering those shares to the public, which were held by the promoters or the private investors prior to the IPO. In the case when other investors or Promoter held the shares the stake holding comes down to the extent their shares are offered to the public. In other cases new shares are issued to the public and the shares, which are with the promoters stay with them. In both cases the share of the promoters in the total capital comes down. For example say there are 100 shares in a company and 50 of these are offered to the public in an IPO then in such a case the promoter’s stake in the company comes down from 100% to 50%. In another case the company issues 50 additional shares to the public and the stake of the promoter comes down from 100% to 67%. Normally in an IPO the shares are issued at a discount to what is considered their intrinsic value and that’s why investors keenly await IPOs and make money on most of them. IPO are generally priced at a discount, which means that if the intrinsic value of a share is perceived to be Rs.100 the shares will be offered at a price, which is lesser than Rs.100 say Rs.80 during the IPO. When the stock actually lists in the market it will list closer to Rs.100. The difference between the two prices is known as Listing Gains, which an investor makes when investing in IPO and making money at the listing of the IPO. A Bullish Market gives IPO investors a clear opportunity to achieve long term targets in a short term phase. Why Go Public? Basically, going public (or participating in an "initial public offering" or IPO) is the process in which a business owned by one or several individuals is converted into a business owned by many. It involves the offering of part ownership of the company to the public through the sale of debt or more commonly, equity securities (stock). Going public raises cash and usually a lot of it. Being publicly traded also opens many financial doors: Because of the increased scrutiny, public companies can usually get better rates when they issue debt. As long as there is market demand, a public company can always issue more stock. Thus, mergers and acquisitions are easier to do because stock can be issued as part of the deal.
Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent. Being on a major stock exchange carries a considerable amount of prestige. In the past, only private companies with strong fundamentals could qualify for an IPO and it wasn't easy to get listed. The internet boom changed all this. Firms no longer needed strong financials and a solid history to go public. Instead, IPOs were done by smaller startups seeking to expand their businesses. There's nothing wrong with wanting to expand, but most of these firms had never made a profit and didn't plan on being profitable any time soon. Founded on venture capital funding, they spent like Texans trying to generate enough excitement to make it to the market before burning through all their cash. In cases like this, companies might be suspected of doing an IPO just to make the founders rich. This is known as an exit strategy, implying that there's no desire to stick around and create value for shareholders. The IPO then becomes the end of the road rather than the beginning. How can this happen? Remember: an IPO is just selling stock. It's all about the sales job. If you can convince people to buy stock in your company, you can raise a lot of money.
The IPO Process in India The IPO process in India consists of the following steps:
Appointment of merchant banker and other intermediaries Registration of offer document Marketing of the issue Post- issue activities
Appointment of Merchant Banker and Other Intermediaries One of the crucial steps for successful implementation of the IPO is the appointment of a merchant banker. A merchant banker should have a valid SEBI registration to be eligible for appointment. A merchant banker can be any of the following – lead manager, co-manager, underwriter or advisor to the issue.
Certain guidelines are laid down in Section 30 of the SEBI Act, 1992 on the maximum limits of intermediaries associated with the issue: Size of the Issue No. Of lead Managers 50 cr. 2 50 – 100 cr. 3 100 – 200 cr. 4 200 - 400 cr. 5 Above 400 cr. 5 or more as agreed by the board The number of co- managers should not exceed the number of lead managers. There can only be one advisor/consultant to the issue. There is no limit on the number of underwriters. Other Intermediaries Registrar to the Issue: Registration with SEBI is mandatory to take on responsibilities as a registrar and share transfer agent. The registrar provides administrative support to the issue process. The registrar of the issue assists in everything from helping the lead manager in the selection of Bankers to the Issue and the Collection Centres to preparing the allotment and application forms, collection of application and allotment money, reconciliation of bank accounts with application money, listing of issues and grievance handling. Bankers to the Issue: Any scheduled bank registered with SEBI can be appointed as the banker to the issue. There are no restrictions on the number of bankers to the issue. The main functions of bankers involve collection of application forms with money, maintaining a daily report , transferring the proceeds to the share application money account maintained by the controlling branch, and forwarding the money collected with the application forms to the registrar. Underwriters to the Issue: Underwriting involves a commitment from the underwriter to subscribe to the shares of a particular company to the extent it is under subscribed by the public or existing shareholders of the corporate. An underwriter should have a minimum net worth of 20 lakhs, and his total obligation at any time should not exceed 20 times the underwriter’s net worth. A commission is paid to the writers on the issue price for undertaking the risk of under subscription. The maximum rate of underwriting commission paid is as follows:
Nature of Issue
Equity shares, preference shares and debentures Issue amount upto Rs.5 lakhs Issue amount exceeding %
On amount Devolving On Underwriters 2.5%
On amounts subscribed by public
2.5%
1.5%
2.0%
1.0%
2.5%
Broker To the Issue: Any member of a recognized stock exchange can become a broker to the issue .A broker offers marketing support, underwriting support, disseminates information to investors about the issue and distributes issue stationery at retail investor level. Registration Of The Offer Document For registration,10 copies of the draft prospectus should be filed with SEBI. The draft prospectus filed is treated as a public document. The lead manger also files the document with all listed stock exchanges. Similarly, SEBI uploads the document on its website www.sebi.com. Any amendments to be made in the prospectus should be done within 21days of filing the offer document. Thereafter the offer document is deemed to have been cleared by SEBI. Promoters Contribution: In the public issue of an unlisted company, the promoters shall contribute not less than 20% of the post issue capital as given in Chapter- IV of the SEBI Act, 1992.The entire contribution should have been made before the opening of the issue. Lock-in Requirement The minimum promoter’s contribution will be locked in for a period of 3 years. The lockin period commences from the date of allotment or from the date of commencement of commercial production, whichever is earlier. Marketing of the Issue
Timing of the Issue Retail distribution
Reservation of the Issue Advertising Campaign
Timing of the Issue An appropriate decision regarding the timing of the IPO should be made, keeping in mind the general sentiments prevailing in the investor market. For example, if recession is prevailing in the economy (the investors are pessimistic in their approach), then the firm will not be able to get a good pricing for its IPO, as investors may not be willing to put their money in stocks. Retail distribution: Retail distribution is the process through which an attempt is made to increase the subscription. Normally, a network of brokers undertakes retail distribution. The issuer company organises road shows in which conferences are held, which are attended by high networth investors, brokers and sub-brokers. The company makes presentations and solves queries raised by participants. This is one of the best ways to raise subscription. Reservation in the Issue Sometimes reservations are tailored to a specific class of investors. This reduces the amount to be issued to the general public. The following are the classes of investors for whom reservations are made:
Mutual Funds Banks and Financial Institutions; Non-resident Indians (NRI) and Overseas Corporate Bodies (OCB) The total reservation for NRI/OCB should not exceed 10% of the post-issue capital, and individually it should not exceed 5% of the post issue capital. Foreign Institutional Investors (FII): The total reservation for FII cannot exceed 10% of the post-issue capital, and individually it should not exceed 5% of the post issue capital. Employees: Reservation under this category should not exceed 10% of the post issue capital. Group Shareholders: Reservation in this category should not exceed 10% of the post issue capital.
The net offer made to the public should not be less then the 25% of the total issue at any point of time. Post-Issue Activities
Principles of Allotment: After the closure of the subscription list, the merchant banker should inform, within 3 days of the closure, whether 90% of the amount has been subscribed or not. If it is not subscribed up to 90%, then the underwriters should bring the shortfall amount within 60 days. In case of over subscription, the shares should be allotted on a pro-rata basis, and the excess amount should be refunded with interest to the shares holders within 30 days from the date of closure. Formalities Associated With Listing: The SEBI lists certain rules and regulations to be followed by the issuing company. These rules and regulations are laid down to protect the interests of investors. The issuing company should disclose to the public its profit and loss account, balance sheet, information relating to bonus and rights issue and any other relevant information.
WHAT IS BOOK BUILDING? Book Building is the process of determining the price at which an Initial Public Offering will be offered. Book building is a common practice in developed countries and has recently been making inroads into emerging markets as well. When companies are on the look out to raise money for their business operations, they use various means for the same. Two of the most popular means to raise money are Initial Public Offer (IPO) and Follow on Public Offer (FPO). During the IPO or FPO, the company offers its shares to the public either at fixed price or offers a price range, so that the investors can decide on the right price. The method of offering shares by providing a price range is called as book building method. Types of investors There are three kinds of investors in a book-building issue. The retail individual investor (RII), The non-institutional investor (NII) The Qualified Institutional Buyers (QIBs) There are two types of Public Issues: FIXED PRICE ISSUE: - When the issuer at the outset decides the issue price and mentions it in the offer document, it is commonly known as fixed price issue.
BOOK BUILT ISSUE:-When the price of an issue is discovered on the basis of demand received from the prospective investors at various price levels, it is called as book built issue. BOOK BUILDING PROCESS IN INDIA
Book Building is fundamentally a procedure utilized in IPOs for effective price discovery. It’s a method where, during the time period for which the initial public offer is open, bids are gathered from traders at different prices, which are higher or equal to the ground price. The IPO offer price is decided following the bid ending date.
GUIDELINES BY SEBI On the recommendations of Malegam committee, The concept of Book Building assumed significance in India as SEBI approved, with effect from November 1, 1995, the use of the process in pricing new issues.
SEBI issued the guidelines under which the option of 100%book-building was available to only those issuer companies which are to make an issue of capital of and above Rs. 100crore.
These guidelines were modified in 1998-99.The ceiling of issue size was reduced to Rs. 25crore.
SEBI modified book-building and allowed the issuer to modified mode of book building.
norms choose
for public either the
issues in 1999 existing or the
Modified Guidelines:
Compulsory display of demand at the terminals was made optional.
The reservation of 15% of the issue size for individual investors could be clubbed with fixed price offer.
The issuer was allowed to disclose either the issue size or the number of securities being offered.
The allotment of the book built portion was required to be made in Demat mode only. In April 2000, SEBI modified guidelines for the 100% bookbuilding process. i.e. a maximum of 60% of the issue was allowed to Institutional investors and atleast 15% to noninstitutional investors who had applied for more than 1,000 share
TYPES OF BOOK-BUILDING: The Companies are bound to adhere to the SEBI’s guidelines for book building offers in the following manner:
Ø
75% book building
Ø 100% book building 75 per cent Book-Building Process: Under this process 25 per cent of the issue is to be sold at a fixed price and the balance of 75 per cent through the Book Building process. CHART 1
TOTAL PUBLIC ISSUE (i.e. net offer to the public)
BOOK BUILDING METHOD
75% OF THE PUBLIC ISSUE CAN BE OFFERED TO INSTITUTIONAL INVESTORS WHO HAVE PARTICIPATED IN THE BIDDING PROESS.
FIXED PRICE METHOD
25% OF THE PUBLIC ISSUE CAN BE OFFERED THROUGH PROSPECTUS AND SHALL BE RESERVED FOR ALLOCATION TO INDIVIDUAL INVESTORS WHO HAVE NOT PARTICIPATED IN THE BIDDING PROCESS.
2. Offer to Public through Book Building Process: The process specifies that an issuer company may make an issue of securities to the public through prospectus in the following manner: A. 100 per cent of the net offer to the public through book building process, or B. 75 per cent of the net offer to the public through book building process and 25 per cent of the net offer to the public at a price determined through book building process. 100% BOOK BUILDING
75% OF THE NET OFFER THROUGH BOOK BUILDING PROCESS
ROLE OF INTERMEDIARIES Who are the intermediaries in an issue?
Merchant Bankers to the issue or Book Running Lead Managers (BRLM), syndicate members, Registrars to the issue, Bankers to the issue, Auditors of the company, Underwriters to the issue, Solicitors, etc. are the intermediaries to an issue. The issuer discloses the addresses, telephone/fax numbers and email addresses of these intermediaries. In addition to this, the issuer also discloses the details of the compliance officer appointed by the company for the purpose of the issue. Role of Merchant Bankers in Public Issues: (i) Deciding on the size and timing of a public issue in the light of the market conditions. (ii) Preparing the base of successful issue marketing from the initial documentation to the preparation of the actual launch. (iii) Optimum underwriting support. (iv) Appointment of bankers and brokers as well as issue houses. (v) Professional liaison with share market functionaries like brokers, portfolio managers and financial press for pre-selling and media coverage. (vi) Preparation of draft prospectus and other documents. (vii) Wide coverage throughout the country for collection of applications. (viii) Preparation of advertising and promotional material
Who is eligible to be a BRLM? A Merchant banker possessing a valid SEBI registration in accordance with the SEBI (Merchant Bankers) Regulations, 1992 is eligible to act as a Book Running Lead Manager to an issue. What is the role of a Lead Manager? (Pre and post issue) In the pre-issue process, the Lead Manager (LM) takes up the due diligence of company’s operations/ management/ business plans/ legal etc. Other activities of the LM include drafting and design of Offer documents, Prospectus, statutory advertisements and memorandum containing salient features of the Prospectus. The BRLMs shall ensure compliance with stipulated requirements and completion of prescribed formalities with the Stock Exchanges, RoC and SEBI including finalization of Prospectus and RoC filing. Appointment of other intermediaries viz., Registrar(s), Printers, Advertising Agency and Bankers to the Offer is also included in the pre-issue processes. The LM also draws up the various marketing strategies for the issue. The post issue activities including management of escrow accounts, coordinate non-institutional
allocation, intimation of allocation and dispatch of refunds to bidders etc are performed by the LM. The post Offer activities for the Offer will involve essential follow-up steps, which include the finalization of trading and dealing of instruments and dispatch of certificates and demat of delivery of shares, with the various agencies connected with the work such as the Registrar(s) to the Offer and Bankers to the Offer and the bank handling refund business. The merchant banker shall be responsible for ensuring that these agencies fulfill their functions and enable it to discharge this responsibility through suitable agreements with the Company. What is the role of a registrar? The Registrar finalizes the list of eligible allottees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of refund orders to those applicable are sent. The Lead manager coordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank branches, processing of the applications and other matters till the basis of allotment is finalized, dispatch security certificates and refund orders completed and securities listed. Importance of Underwriting in book building. Underwriting is a good technique of marketing the securities. The importance of underwriting can be adjudged by the following advantages Assurance of Adequate Finance. Benefit of Expert Advice. Increase in Goodwill of the Company. Geographical Dispersion of Securities. Service to Prospective Buyers.
BOOK BUILDING- A PRICE DISCOVERY METHOD. Book building is actually a price discovery method. In this method, the company doesn't fix up a particular price for the shares, but instead gives a price range, e.g. Rs 80-100. When bidding for the shares, investors have to decide at which price they would like to bid for the shares, for e.g. Rs 80, Rs 90 or Rs 100. They can bid for the shares at any price within this range. Based on the demand and supply of the shares, the final price is fixed. The lowest price (Rs 80) is known as the floor price and the highest price (Rs 100) is known as cap price.
The price at which the shares are allotted is known as cut off price. The entire process begins with the selection of the lead manager, an investment banker whose job is to bring the issue to the public. Both the lead manager and the issuing company fix the price range and the issue size. Next syndicate members are hired to obtain bids from the investors. Normally the issue is kept open for 5 days. Once the offer period is over, the lead manager and issuing company fix the price at which the shares are sold to the investors. If the issue price is less than the cap price, the investors who bid at the cap price will get a refund and those who bid at the floor price will end up paying the additional money. For e.g. if the cut off in the above example is fixed at Rs 90, those who bid at Rs 80, will have to pay Rs 10 per share and those who bid at Rs 100, will end up getting the refund of Rs 10 per share. Once each investor pays the actual issue price, the shares are allotted.
