IPO (Through Book Building)

Basic Concepts(Part I)CPCM

AtBSE BTI

On14th June 2010

by

B. NARASIMHAN

Types of Issues Different Types of Issues :

Key Players

Price Band & Cut-off Price

Categories of Investors

Red Herring Prospectus

Book Building Process

Escrow Account

Minimum Lot size

Basis of Allotment

Margin Amount

Revision of Bids

Book Building Process

Bidding Period & Bidding Centers

KEY PLAYERS The Investors The Issuer Book Running Lead Managers Syndicate Members Bidding Centers Escrow Bankers Registrars Legal Advisors and Global coordinators Ad agencies/publicity• With the support of The stock exchanges The Depositories The Postal System

20

Evolution of Pricing Norms in Indian Primary Market

Price decided by CCI based on profit-earning capacity GOI approval required for pricing below par No issue price flexibility

Pricing based on historical data

Free Pricing, decided by Lead Managers and Issuers Pricing based on projected financials

Pricing decided 45-60 days before issue launch, exposing issuer to the risk of market volatility.

Pricing discovered through

bids from investors Pricing more market driven Floor Price / Price band decided 2 days before issue opening (for an IPO), thereby limiting market risk No flexibility to change floor

price

ICDR Changes Pricing before Issue opening, 15days completion

CCI Regime

Fixed Pricing

Bookbuilding

21

Bookbuilding, internationally a well-accepted practice, was introduced in Indian Primary Markets in 1996

However, lack of clarify on guidelines kept issuers away till 1999

Hughes Software System became the first issuer to adopt bookbuilding in Sept 1999

100% bookbuilding was introduced in 2001 and Bharti Televentures IPO was the first case

Evolution of Evolution of book buildingbook building

Book Building Process

Public Issue / Offer of securities through book building process is designed to ascertain demand for the security at various prices within a price-band to facilitate discovery of the issue price.

ESCROW ACCOUNT Bid amount is called the Margin amount

The margin amount is kept in a Escrow a/c

Margin amount comprises of application and refund

to investors

RTI will identify the amount to be transferred to

Issuers Application money and Refund after basis is

approved

Instruction given to Escrow bankers for transferring

funds

Utilization of proceeds after Listing approval only

Red Herring Prospectus

Dictionary meaning of Red Herring is misleading or deceitCritical information is not made knownActual Issue price and in some cases number of shares on offerOnly price band is given Based on the offer size No: of shares on offer is determinedRequirement of the Companies Act ?

A Prospectus for raising money from Public

DR HP to RHP To Prospectus?

Categories of InvestorsQualified Institutional Investors 50% or 60%Non Institutional Investors / HNI 15% or 10%Retail Individual Investors 35% or 30%

•Additionally there can be reservations for

Employees / Existing retail shareholders (market value is less than 1,00,000/- (Ref 29th Nov 2007) as of the cut of date) of the issuer.5% of the issue size can be reserved for EmployeesValue of allotment to be not more than 1 Lakh

IPO Process Price Discovery Finalizing Basis of

Allotment Documentation with

Depositories Credit into Investor

Accounts Listing Approvals from

the Stock Exchanges Post Issue Research

Support for Sustained Coverage

Long term value Creation

Due Diligence Drafting of Prospectus IPO Grading Statutory Approvals Appointing

Intermediaries Valuation and Pricing Marketing Strategy Arranging Firm

Allotments Circulating Quality

Research Report Printing and Distribution

of Stationery Timing of Issue

Media Strategy for Wide Publicity

Road shows Press Brokers Analyst

One to One Meets Analyst Meets / Plant

Visits NRI Investors Retail Distribution Advertising campaigns Positioning &

Marketing to Institutional & Retail Investors

Pre IssueMarketing

Post Issue

Valuation MethodologyDiscounted

Cash Flow (DCF) Analysis

Trading Multiples

Transaction Multiples

Net Asset Value (NAV)

• “Fundamental” or “Theoretical” valuation

• Estimates firm’s value by discounting expected free cash flows at a rate which reflects the risk of the cash flows

• Terminal Value – Perpetuity– Discount Factor(The resulting free cash flows at a cost of capital that reflects company specific risk)

• “Market” Valuation

• Investors view on prospects of an entire industry sector and specific companies

• Considerations for peer group include similar size, life of assets and similar management quality

• Difficult to establish peer group on account of diverse business activities

• “Acquisition” related Valuation

• Applies Multiples of related Industry Transactions to the valuation of a business

• Measures Premium paid for Acquiring Control and places value on intangible strategic factors

• Useful when the historical costs of assets purchased is not comparable to its Current Market Value

• NAV is based on Expected Future Cash Flows the market expects from the asset

• Two Methods– Replacement Cost

– Future Cash Flows

IPO Pricing

Valuation Methodology• Discounting Cash Flows• Trading Multiple• P/E Multiple• EV / EBIDTA• NAV or Price to Book Value Multiple• Return on Net worth• Transaction Multiple

Free PricingDifferential Pricing (upto 10% discount for retail)• Firm Allotment to be at a Price equal

to or Higher than IPO Price• Composite Issue• Public Issue

Price Band Scientific method of

determination Participation in Issue By

QIB’s/ FII’s/ MF/ Institutions (atleast 50%)

Other factors Comparison with Peers Performance indicators Advantages enjoyed

Price BandTrack record of the

PromotersIn case of FPO-current

market valueProduct EnhancementPerformance of the

BRLM for past IssuesIssuers Right to higher

Valuation

Price Band• Price Band – gives the range for bid

price• Lower end of price band is floor price• Higher end of price band is ceiling

price• Price Band to be not more than 20%• Can be revised – upwards or

downwards• Revision not to exceed 20% of the

floor price• Revised price band to conform

to to guidelines

Cut-off price• Option available only to Retail

Individual Investors• Willingness to accept the shares at

any price in the price band• Required to pay at the top end of

the price band• Obviates need for calling balance

money from investors• Cut off price determined after the

bids are closed• Cut off price prohibited for QIB and

HNI

Minimum Lot SizeMinimum lot size in the range Rs 5000/- to 7000

MLS multiplied by the floor price =or > Rs 5000

MLS multiplied by ceiling price = or < Rs 7000

MLS determined after price band is known

Flexibility to the issuer to fix the MLS

Bidding Centres• Investors submit bids to the bidding centres

listed in the application form for getting their bids registered

• Mandatory to have all stock exchange centers (23 operational earlier)

• Suggested size of bidding centers to be around 50 to 60

• 15 centers caters to 85% of all India volumes• Issue TRS to investors for each of the

options• Lodge BCAF with an escrow banker on daily

basis

Bidding period• Minimum of 3 working days• Maximum of 7 working days• To be extended by 3 days if

price band is revised• On line Bidding time 10 AM

to 3 PM on all days except the last day

• On line Bidding time 10AM to 5 PM on the last day

• Beyond 5 pm only for retail• For QIB HNI only till 4 PM

Revision of Bids• Investors can revise bids• Revision of quantity and / or price

permitted• Prescribed revision form to be used• Unlimited revision permitted• Should be done through same

bidding centres• To pay differential amount where

needed• Excess paid will be refunded after

allotment

Payment Methodology

Method 1:Option for making part payment for Retail

Normally done for Mega issues to get subscription from retail

If heavily over subscribed provision to adjust excess payment

Allotment under separate ISIN

ISIN to be frozen for all trades

Balance payment Notice

Debit and Credit Corporate Action after Reconciliation

Payment Methodology

Method 2:

Regular Method.

100% along with application

Available including to Retail Category.

Shares – Credited and Tradable on Listing.

Margin Amount Money received is against Auction Bid amount is margin money Bid amount comprises of

Allocation amount and refund On approval basis allocation amount

transferred to “Public Issue A/C” Margin amount for QIB’s is at least 10 %

and others full bid amount

Basis of Allotment•The Basis of allotment shall be proportionate

for all categories

•The allotment will be subject to the minimum

lot size prescribed

•Thereafter rounded of to the nearest integer

•Where the shares to be allotted is less than the

minimum number there will be drawl of lots

Basis of Allotment•The Basis of allotment shall be proportionate

for all categories

•The allotment will be subject to the

minimum lot size prescribed

•Thereafter rounded of to the nearest integer

•Where the shares to be allotted is less than

the minimum number there will be drawl of

lots

IPO APPLICATION e.g. Edelweiss IPOPrice BandRs 735/- to Rs 825/-

Lot size 8Rs 100000/825/-= 121…15*8 = 120120*825= 99000/-

Lot size 8Rs 100000/735= 136….17*8 = 136136*735=99960/-

Lot size 8100000/128=781.2 781*128=99968/-

Total Bids = 3Amount paid = 99968/-

Advantage if cop =735/- entitlement is larger

IPO APPLICATION e.g. RECPrice BandRs 90/-to Rs 105/-

Lot size 60Rs 100000/105/-= 952…15*60 = 900900*105= 94500/-(1)

Lot size 60Rs 100000/90/-= 1111….….18*60 = 10801080*90/-=97200/-(2)

Lot size 60960 or 1020 alternate lot size100000/1020=98…1020*98=99960/-(3)100000/960=104…960*104 =99840/-.(4)

Total Bids = 4Maximum Bid Amount equals= 99960/- (3) Opt for 1,3,4 since good sub is reported

Advantage if cop is below ceiling entitlement is larger

BASIS OF ALLOTMENT HISTORIC TRENDS OF THE PAST WEIGHTAGE FOR LOWER

CATEGORY HIGHER PERCENTAGE OF

ALLOCATION MULTIPLE APPLICATIONS

(EXAMPLES) EXAMPLES OF RS/RPPL/ REPL STOCK INVESTS

BASIS OF ALLOTMENT

CHANGE TO PRORATA ALLOTMENT IN 1993/94

SEGREGATION OF APPLICATIONS – 2 CATEGORIES

SMALL INVESTORS – GRIEVANCES REVERSE NUMBERING ALLOTMENT IN DEMAT FORM

2001 PREREQUISITES FOR OPENING

DEMAT A/C TILL 2005 REQUIREMENT SPECIFIED POST

IPO SCAM

BASIS OF ALLOTMENT

FORMATION OF COMMITTEE FOR MULTIPLE APPLICATIONS IN 2001 UNDER CHAIRAMNSHIP OF JK VERMA

SCAM AS IT UNFOLDED CASE OF PARAG JHAVERI

2007 MISUSE OF THE SYSTEM

BASIS OF ALLOTMENT (contd)

EXAMPLES OF NEW BASIS MINIMUM APPLICATION SIZE

Rs.5,000/- TO Rs.7,000/- MINIMUM APPLICATION LOT IN

THE RANGE PRICE BAND IS SAY 500/- TO 530-

LOT SIZE CAN BE 10 TO 13 ISSUER TO DECIDE IN

CONSULTATION WITH BRLM BIDS TO BE IN MULTIPLE OF

MINIMUM LOT IF 12 IS LOT, BID LOTS WILL BE

24,36,48,60, 72,84,96 UPTO 192 FOR RETAIL

BASIS OF ALLOTMENT (contd)

TOTAL SHARES ON OFFER @Rs.500/- PER SHARE SAY 10 CRORE

FOR RETAIL SAY 3.5 CRORES RETAIL OVERSUBSCRIBED 6 TIMES

12/6=2, 24/6=4, 48/6=8 ----- LOTTERY72/6=12 ----FIRM 84/6=14 ---- FIRM96/6=16 ----FIRM 192/6=32----FIRM

IF RETAIL IS 7 TIMES12/7=1.71=2 24/7=3.42=3 }LOTTERY48/7=6.85=7 72/7=10.28=10 }84/7=12 ---- FIRM 192/7=27 FIRM

610.22 13.572340 Number of Amount Subscription Shares (Face value) List

68400000 10 684000000 Opening :

68400000 10 684000000 Closing :No. of Total No.of Propor - Number of Total No. of

Shares Number of Shares tionate successful Shares Surplus/applied for applications applied in shares Before After applicants allocated/ Defecit(Category received each available rounding rounding (after rounding allotted

wise) category off off off) (7)-(14)(2) (3) (5) (7) (8) (9) (10) (12) (14) (16)

15 60176 902640 66506 1.11 15 2 27 4457 66855 -34930 82844 2485320 183117 2.21 15 4 27 12273 184095 -97845 67812 3051540 224835 3.32 15 2 9 15069 226035 -120060 112793 6767580 498630 4.42 15 8 27 33420 501300 -267075 40359 3026925 223022 5.53 15 10 27 14948 224220 -119890 70934 6384060 470373 6.63 15 4 9 31526 472890 -2517

105 151763 15935115 1174087 7.74 15 14 27 78692 1180380 -6293120 66497 7979640 587934 8.84 15 16 27 39406 591090 -3156135 19057 2572695 189554 9.95 15 2 3 12705 190575 -1021

150 57122 8568300 631306 11.05 15 20 27 42313 634695 -3389165 14203 2343495 172667 12.16 15 5 6 11836 177540 -4873180 30708 5527440 407258 13.26 15 8 9 27296 409440 -2182195 19752 3851640 283786 14.37 15 1 1 19752 296280 -12494210 172499 36224790 2669016 15.47 15 1 1 172499 2587485 81531

1 1 147 1173 1173 -1173225 3656564 822726900 60617909 16.58 16 1 1 3656564 58505024 2112885

1 10 17 2150923 2150923 -2150923

4623083 928348080 68400000 4173929 68400000 0

Allocation per

GRAND TOTAL

Face value Rs.

toapplicants

allottees

15-01-2008

Ratio of18-01-2008

KARVY Public issue of 68400000 equity shares of Rs 10/- each issued for cash at a price of Rs.430/- per share.

NAME OF THE COMPANY : RELIANCE POWER LIMITED

BASIS OF ALLOCATION - BOOK BUILT PORTION FOR RETAIL INVESTORS

(1) No.of allottees per Rs.1 Lakh of offer (upto 225 shares) : (2) Subscription as multiple of offer (upto 225 shares):

Net quantum available for allotment

Shares issued vide Offer Document dated 19.01.2008

Applicant

THANK YOUCS B. Narasimhan, Vice President

Karvy Computershare Pvt Ltd24, Maharashtra Chamber of Commerce

Lane Fort, Mumbai - 400 023

bn@karvy.comPhone Off 22838497 Mob 9004089490