IPO_Presentation_21.07.2012

Initial Public Offers CONCEPT & KEY REGULATORY PROVISIONS

ByManoj Kumar

AVP, Corporate Professionals Capital Private LimitedSEBI Registered Merchant Banker

21.07.2012

West Delhi Study Circle Meeting, NIRC

AGENDA

• Concept IPO – What, Why &

How

• Procedure & Timeline

• Regulatory Framework

• Procedural Aspects of IPO

• New Concept – SME IPO

• Key Considerations

CONCEPT IPO – WHAT, WHY & HOW

“Initial Public Offer” means an offer of specified securities

by an unlisted issuer

to the public for subscription

and includes

an offer for sale of specified securities to the public

by any existing holders

of such securities in an unlisted issuer”

THE CONCEPT

WHAT IS INITIAL PUBLIC OFFER?

IPO is not just an event of fund raising… it’s a PROCESS OF

TRANSFORMATION:

It can be successful only if PLANNED WELL IN ADVANCE and

executed well - at least one year of planning and practicing like a

Listed Company is required

The Company should outperform the Peers on key Performance

Measures

IPO should be considered only after reaching certain Level of

Corporate Life Cycle

THE CONCEPT …cont

THE CONCEPT …cont

WHEN SHOULD ONE GO FOR IPO?

Private Equity Funding

Support of VC/ Angel Investors

IPO

Decline due to lack of funds

Nascent Stage

Growth Stage

Developing Stage

Expansion Stage

Un

lockin

g t

he C

ap

ital M

ark

et

Op

port

un

itie

s

Profitability

High Risk & Lower Profit Margins

Increase in Sales & Rise in Profit

Stable Profit Margins

Profit Margin tends to rise as the business expands

THE CONCEPT …cont

It helps to raise low cost funds for the business

It Unlocks access to new financing means – QIP, ADR/GDR/FCCB

Provides an exit opportunity for Private Equity or other investors

Improves perceptions of your business and brand with customers,

suppliers and employees

Creates opportunities to expand your business into new markets

Offers Market Capitalization / Visibility

WHY IS IPO IMPORTANT?

HOW TO GET READY FOR IPO?

Appropriate Stage for IPO

Approach Market only when minimum level Financial Status reached

Do not wait for dire fund situation as Capital Market is Volatile and

might get delayed

Company should be top growth phase and should outperform the Peers

on Financial Parameters –

Sales & Sales Growth Rate

EBDITA & EBDITA Growth Rate

Debt Equity Ratio

EPS & Return on Equity

There should be a Growth Story which is Compelling and Convincing

PLAN WELL & PREPARE WELL IN ADVANCE

HOW TO GET READY FOR IPO ..cont

Good Governance

Create habit of Transparency in Disclosure & Financial Reporting

Create Systems & Procedures

Develop Good Management Team

To the extent possible remove dependency on a few

Visible Risk Mitigation strategies

Learn not only to Create Wealth but to Share Wealth (Good

Governance)

Start acting as a Widely Held Company well in advance & Learn to

Explain Public queries

BEHAVIOURAL CHANGES

HOW TO GET READY FOR IPO ..cont

Create Strong Systems & Procedures

Develop Good Management Team

To the extent possible remove dependency on a few KMPs

Create visible Risk Mitigation strategies

Develop Good Governance behavior

Create habit of Transparency in Disclosure & Financial Reporting

Learn not only to Create Wealth but to Share Wealth (Good

Governance)

Start acting as a Widely Held Company well in advance & Learn to

Explain Public queries

BEHAVIOURAL CHANGES

OPTIMAL GOVERNANCE CONCEPT

A widely held company must learn not only create and mange Wealth but also ready to share it

PROCEDURE & TIMELINE

PROCEDURE & MILESTONES

TYPE & PROCEDURE

14

A COMPARATIVE ANALYSIS

15

Fixed Price Issue Book-Building Issue

Pre-determination of price / price band, which is made known to the investors

Determination of price on the basis of bids received from the investors. Investors are made known only an indicative floor price / price range.

Demand for the securities offered is known only after the closure of the issue.

Demand for the securities offered can be known everyday as the book is built.

Underwriting is not compulsory in case of Fixed Price Issue

Underwriting is compulsory in case of Book-Built Issue

REGULATORY FRAMEWORK

PUBLIC ISSUES FRAMEWORK

Book Build Issue

Fixed Issue

Type & Procedure

Eligibility Requirements

Allocation of Issue

Pricing Promoters’ Contribution

& Lock-in

Public Issue Framework under

SEBI (ICDR) Regulations

Issue Period

CORPORATE GOVERNANCE IMPLEMENTATION

Corporate Governance

Clause 49 of the Listing Agreement

Board Composition

Optimum number of executive and non executive directors with at least

50% being non-executive.

If the chairman, has executive powers then 50% of Board comprises of

Independent directors.

If Chairman has non-executive powers then 1/3 of the Board comprises

of Independent directors

Audit Committee

Mandatory constitution of Audit Committee with minimum three

directors and headed by an Independent director

The audit committee should meet at least four times in a year and not

more than four months shall elapse between two meetings

Key Responsibilities

• Oversight of the company’s financial reporting process and the

disclosure of its financial information to ensure that the financial

statement is correct, sufficient and credible

• Recommending appointment and remuneration of statutory

auditors

• Reviewing annual and quarterly financial statements,

management discussion and analysis and results of operations of

the company

• Reviewing the internal audit function

CORPORATE GOVERNANCE IMPLEMENTATION

Corporate Governance

Clause 49 of the Listing Agreement

Subsidiary Company

• At least one director on the Board of the holding company shall be a director

on the Board of a material non listed Indian subsidiary Company

• Audit committee of the listed holding company shall also review the financial

statements, in particular, the investments by the unlisted subsidiary Company

Report on CorporateGovernance

• A separate section on Corporate Governance to be included in the Annual

Reports with disclosures on compliance of mandatory and non-mandatory

requirements

• Submission of quarterly compliance report to the stock exchanges

CEO/CFO CEO/CFO to certify the financial statements and cash flow statements

Investor Committee

Shareholder/Investor Grievances Committee to be formed under the

chairmanship of a non executive director to look into the redressing of

shareholder and investor complaints like transfer of shares, non-receipt of

balance sheet, non-receipt of declared dividend

ELIGIBILITY REQUIREMENTS

Primary Eligibility Requirements

ALTERNATE ELIGIBILITY REQUIREMENTS

Alternate Eligibility Requirements:

Issue through Book-Building Process with minimum 50% net

offer to QIBs

‘Project’ has 15% participation from public financial

institutions/scheduled commercial banks of which 10% comes from

appraisers and min. 10% net offer to QIBs

Minimum post issue face value capital – Rs. 10 Crores

2 years of compulsory market making from the date of listing of

specified securities

OR

OR

AND

OTHER PRE-REQUISITES

• Prospective allottees to be not less than 1000.

• Compulsory IPO Grading by credit rating agency registered with SEBI

before filling RHP with ROC

• No outstanding convertible securities or other right which would entitle

the existing promoters or shareholders any option to receive equity shares

after public offer.

• Firm arrangements of finance, through verifiable means, for 75% of the

stated means of finance excluding the amount to be raised through the

public issue to be made.

• Partly paid up shares to be made fully paid or forfeited in the manner

specified, before the public offering.

MINIMUM LISTING REQUIREMENTS

MINIMUM LISTING REQUIREMENT -BSE

New Companies Listing (IPO)

Small Cap Companies Large Cap Companies

Minimum issue size of Rs. 3 crore Minimum issue size of Rs. 10 crore

Market capitalization of not less than Rs. 5 crore

Market capitalization of not less than Rs. 25 crore

Minimum post-issue paid-up capital of Rs. 3 crore

Minimum post-issue paid-up capital of Rs. 3 Crores

Minimum income/turnover of Rs. 3 crore in preceding 3 Years

Compulsory due diligence by CA or Merchant Banker. No Requirement of Due Diligence if FIs or SCB has appraised the project in 12 months

Minimum No. of Public Shareholders after the Issue shall be 1000.

MINIMUM LISTING REQUIREMENT -NSE

25

New Companies Listing (IPO)

Minimum paid-up capital of Rs. 10 crore

However, if Market Capitalization > Rs. 100 Crore, then Minimum

Post-issue paid-up capital is Rs. 5 Crore.

Minimum Market capitalization of Rs. 25 crore

Minimum 3 years of track record of Issuer Company or its promoter

company.

PRICING NORMS

26

• Free Pricing – Price to be determined by Issuer in consultation with Lead Merchant Banker

• Differential Pricing

– Retail Individual Investor my be offered shares at less price than that of other categories

– Anchor investors can not be offered shares at less price than any that of other categories

– In case of Composite issue, the price of public issue and right issue can be different.

– In case of alternate method of book building, shares may be issued to employees at lower price.

(the differential pricing shall not be more than 10% of the floor price)

PRICING NORMS …cont.

PROMOTERS

PROMOTERS’ CONTRIBUTION

Certain specified securities are ineligible for minimum promoters’ contribution

SECURITIES INELIGIBLE FOR PROMOTERS’ CONTRIBUTION

• Securities acquired during the preceding 3 years for consideration other than

cash and revaluation of assets or capitalisation of intangible assets is involved

• Specified securities acquired during the preceding 1 year at a price below

Issue price,

However, if promoters pay the difference, or acquired pursuant to merger etc.,

then such securities are eligible.

• Securities allotted to promoters acquired during the preceding 1 year at a price

below Issue price against funds brought in by them in case of conversion of

partnership firm into company.

• Securities pledged with any creditor.

LOCK-IN OF PROMOTERS’ CONTRIBUTION

ALLOCATION OF ISSUE – BOOK BUILDING ROUTE

Retail individual investor

QIB

Offer through offer document

Promoters’ Contribution

Issue Size

Non-institutional investor

Anchor Investor

Mutual Funds

ReservationNet offer to

public

Min. 20% of Issue Size


Min. 15% of NOPMax. 50% of NOP Min. 35% of NOP

Min. 5% of NOP Max. 30% of QIB

ALLOCATION OF ISSUE – FIXED PRICE ISSUE

Other investors

Offer through offer document

Promoters’ Contribution

Issue Size

Retail Individual Investors

ReservationNet offer to

public



Min. 50% of NOP Max. 50% of NOP

ISSUE PERIOD

Activity Fixed Price Issue

Book-build Issue

Minimum day 3 3

Maximum days 10 7

Maximum number of days issue to be kept open in case of revision in price band

N.A. 10

PROCEDURAL ASPECTS OF IPO

APPROVALS FOR IPO

Authorities Approvals

Board of Directors • Fresh issue of shares under Section 81(1A) of the Companies Act

(including reservations, green shoe etc.)

• Offer for sale, if applicable;

• Increase in authorised capital, if any

• Amendment in the Articles of Association of the Company

• Constitution of the IPO Committee

• Increase the number of directors to comply with Corporate

Governance Norms

• Finalization of Offer Price based on demand

• Approve the basis of allotment as passing of allotment resolution

Shareholders Approval

• Fresh issue of shares under Section 81(1A) of the Companies Act

(including reservations, green shoe etc.)

• Offer for sale, if applicable;

• Increase in authorised capital, if any

• Amendment in the Articles of Association of the Company

APPROVALS FOR IPO ..cont.

Authorities Approvals/Observations

SEBI • Filing of the draft offer document (DRHP) with SEBI

• Observations on the offer documents filed with the SEBI

• Modifications and corrections in DRHP & Re-submission

• Final approval from SEBI post the release of observations and

prior to filing the Red Herring Prospectus with ROC

FIPB/ RBI • Key Approvals required from FIPB or any other industry

regulator

• Approval may be required for the participation by FII and NRI in

the Issue

• Post the allotment filing of the report with RBI for final

allotment/subscription by FIIs and NRIs

Stock Exchanges • In-Principle Approval for putting names in DRHP

• Post Issue Decisions and Actions along with the Company

• Finalization of the basis of allotment with the Designated Stock

Exchanges

• Approval for listing and trading from the Stock Exchange

04/15/23 39

OFFER DOCUMENT CONTENTS

04/15/23 40

KEY INTERMEDIARIES

Intermediaries Role Timing

Merchant Banker • Structuring the Issue & Planning

• Due diligence & drafting

• Develop the key “equity story” and

selling the IPO

• Representing before SEBI

• Managing the whole show

Immediately upon decision to

go ahead with the IPO

Underwriter • Manage the retail and institutional

investor offers and pricing process

• Target and distribute shares to specific

investors

• Help to ensure a strong and stable market

for shares,

Anytime before the

finalisation of RHP, but better

to appoint simultaneously

with MB

Auditors • Fulfill regulators’ requirements for independent audit of historical financial statements

• Statement of Tax Benefits • Various Certifications



04/15/23 41

KEY INTERMEDIARIES…cont

Intermediaries Role Timing Legal Advisor

• Participation in due diligence & drafting

• Provision of legal opinion

• Participation in due diligence & drafting

• Advisory on Indian legal/ regulatory issues



Registrar (RTA) • Co-ordination with the Issuer and Bankers

regarding

• collections, reconciliation, refunds etc

• Post issue co-ordination, collation and

reconciliation of information

2-3 weeks prior to filing DRHP

with SEBI

IPO Grading Agency • Issuer is required to appoint one IPO Grader

to assign an IPO grade

• Disclose the grades obtained, along with the

rationale in the Red Herring Prospectus

Around the time of filing DRHP

with SEBI

PR Agency • Preparation of PR & Marketing Strategies• Financial PR• Organizing Road Shows

Immediately upon decision to go

ahead with the IPO

THE NEW CONCEPT - SME IPO

THE NEW CONCEPT - SME IPO

SME ELIGIBLE FOR IPO:

• Issuer with post issue face value capital up to Rs.10 crores shall be covered under the SME Platform;

• Issuer with post issue face value capital between Rs.10 – 25 crores may get listed at SME Platform and Issue with post issue face value capital above Rs.25 crores has to necessarily listed at main board of the Exchanges

SME IPO REGULATORY PROVISIONS:

• Simplified and fast track process

• Offer Document will be vetted by SE (BSE or NSE) only in place of SEBI

• Mandatory 100% underwritten issues and Merchant Banker/s shall underwrite 15% in their own account

• The minimum application amount as well as minimum trading lot shall not be less than Rs.1,00,000/-

• Mandatory market making by the Merchant Banker for 3 years through a stock broker who is registered as Market Maker with SME Exchange.

• Possibility of shifting to Main Board after reaching paid-up equity of Rs. 10 Cr.

04/15/23 44

Objects and Requirement of Funds

• Requirement of funds need to be specifically identified

• Raising funds for unidentified purposes are restricted

• Firm arrangement for 75% of requirement after excluding issue

proceeds to be in place

• Memorandum of Association should allow for proposed use

Offer for Sale in IPO • If there is any plan for Offer for Sale or Sale of existing capital

• This generally to give exist opportunity to PE investor etc.

Selection of Intermediaries

Selection of various intermediaries in consultation with the Merchant

Banker

Timing for appointments

Pre-IPO Placement & Anchor Investor

• Whether there is a plan for placement of certain portion of shares as

Pre-IPO Placement

• Whether there will be some Anchor Investor

Appropriate time • Success of IPO depends upon many internal as well as external factors

hence appropriateness of timing is very crucial

KEY CONSIDERATIONS & DECISIONS

TO SUM UP…

For fast-growing companies……. an IPO can be a very crucial phase to funding growth…...so:

…….Prepare early.Prepare early

…… …….Prepare Well.Prepare Well

……… ……….Prove yourself BEFORE….DURING and even AFTER .Prove yourself BEFORE….DURING and even AFTER

the IPOthe IPO

While challenging markets will come and go, it’s the companies that are fully prepared that will best be able to leverage the windows of IPO opportunity whenever they open.

Thank You

Manoj KumarAsst. Vice President

CORPORATE PROFESSIONALS CAPITAL PVT. LTD.

D-28, South Extension -I,New Delhi-110 049

M: +91.9910688433 | E: [email protected]

IPO_Presentation_21.07.2012

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