Kotak Mahindra Group - Project (2003) New

8/8/2019 Kotak Mahindra Group - Project (2003) New

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REPORT ON IPO MARKET ININDIA

Presented By:SHELLY

Roll No.: RR1902AO3

REGS. NO.: 10901200

1 | P a g e L O V E L Y P R O F E S S I O N A L U N I V E R S I T Y


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A PROJECT REPORTA PROJECT REPORT

ONON

IPO ISSUES THROUGH BOOK-BUILDING PROCESS

UNDERTAKEN ATUNDERTAKEN AT

KOTAK SECURITIES LIMITEDKOTAK SECURITIES LIMITED

Submitted To: - Submitted By:-MR. KAPIL TANDON SHELLY

(Cluster Head) Regs No.-10901200MR. AMIT MBA- 3rd

Semester(Br. Manager)MR. NITESH MANOCHA(Relationship manager)

LOVELY PROFESSIONAL UNIVERSITYLOVELY PROFESSIONAL UNIVERSITY



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TABLE OF CONTENTSR. NO. CONTENTS PAGE

1. PREFACE 5

2. ACKNOWLEGEMENT 6

3. INTRODUCTION & FEATURES OF STOCK MARKET 7

4. NEED, SCOPE AND OBJECTIVE OF THE STUDY 8-9

5. INTRO KOTAK MAHINDRA GROUP 10

6. INTRO & FEATURE OF KOTAK SECURITIES 10-11

7. INTRO ABOUT TOPIC - IPO (INITIAL PUBLIC OFFER)

- REASONS, ADVANTAGES & DISADVANTAGES

FOR GOING PUBLIC

12-14

8. EVOLUTION OF INDIAN PRIMARY MARKET

- EARLY LIBERALIZATION POLICY (1992-95)

- LATE LIBERALIZATION POLICY (1996- 2005)

15-16

9. ELIGIBILTY CONDITIONS FOR COMPANY 17

10. ELIGIBILTY NORMS FOR IPO 18

11. FIXED PRICING Vs BOOK-BUILDING 18-19

12. BOOK-BUILDING PROCESS IN US

- 75% BOOK-BUILDING PROCESS

- 100% BOOK- BUILDING PROCESS

20-21

13. BOOK-BUILDING PROCESS IN INDIA 22-23

14. UNDERWRITING PROCESS & PRICING 24-27

15. ROLE OF VARIOUS INTERMEDIARIES 27-29

16. REVERSE BOOK-BUILDING PROCESS 29-31

17. BUY-BACK OF SHARES

- OBJECTIVES, SOURCES OF BUY-BACK N

PROCEDURE OF BUY-BACK

32-34

18. SUGGESTIONS FOR SHAREHOLDERS 34-35

19. GREEN SHOE OPTION 35-36

20. IPO SCAM OF 2005 36-37

21. IPO GRADING

- MEANING, PROCESS

37-43



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22. PRESENT SCENERIO OF IPOS 44-45

23. REVIEW OF RECENT 5 IPOs 45-57

24. RESEARCH METHODOLOGY WITH RESEARCH DESIGN 58-60

25. REVIEW OF LITERATURE 60-62

26. DATA ANALYSIS N DATA INTERPRETATION 63-7527. RECOMMENDATIONS 76-77

28. BIBLIOGRAPHY N FINDINGS 78-79

PREFACE



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This report is result of my 6 weeks summer training at KOTAK

SECURITIES LTD., summer training is integral part of MBA and efficient utilization of

material, time, resources is very important for successful completion of any task. As it is said

Never stop Listening

Never stop Learning

Never stop Training

Above to this co-ordination is must which determines the degree of

success. In order to be competent all students are required to take a project on any topic relating

to training institute. So I made a project on INITIAL PUBLIC OFFER. This exposure to

project work has given me chance to know working of stock market as well as know how

academic knowledge is applied into actual business situation. The all rounded encouragement

and support by many persons towards this report has created confidence in me regarding

approval of subject matter.

The project report is well arranged in coherent manner. The main aim of

this report is to compile the subject matter in such a way that anybody who has no prior

knowledge of capital market easily understands the concept.

I have done my best to make it a genuine study. But we all know a maxim

To Err Is Human therefore a critical appraisal by anyone will be heartily welcomed.

ACKNOWLEDGEMENT



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Stock Market is the veiled treasure to innocent public. In this part of the

country the level of awareness about securities market is not so encouraging. The innocent

investors often loose their hard money because of lack of awareness about securities market.

These incidents stirred me to make up the project of a starting programmed in Kotak Securities(brokerage firm) at Jalandhar. I sincerely believe that this project will help the readers and will

open their eyes and enlighten their lives by right decision.

I would like to thank almighty, who have given me courage and resources

to undertake this huge exercise of making a project on capital market.

This project would not be completed without active cooperation of Mr.

Kapil Tandon (cluster head), Mr. Amit (br. Manager) and Mr. Nitesh Manocha (RM), Mr.

Chetan Bhanot who provided valuable inputs and precious time. They special admiration for

their cooperation and extended efforts. Mr. Kapil & Mr. Manocha, right from the point ofinitiating this idea of writing this project, helped me a lot. They contributed immensely in

materialization of my dream of making this project on IPO - Primary market.

My special thanks to Mrs. Gagandeep Bhatara for her contribution in

editing the manuscripts of this project. My acknowledgements are also to Mr. Lokesh Jasrai,

who also put forward his valuable suggestion during the compilation of this project.

I am also thankful to KOTAK SECURITIES LTD., for giving me the great

opportunity to make this project.

At last, our warmest thanks to our parents, friends for their kind support.

INTRODUCTION ABOUT STOCK MARKET



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A stock exchange is that segment of the capital market where thesecurities issued by the corporate, are traded, these are organized and regulated markets for various

securities issued by the corporate sector and other institutions. Stock exchange is a platform where

buyers and sellers of securities issued by government, financial institutions, corporate houses etc.Meet and where trading of these corporate securities take place.

The securities that are traded in stock exchange are shares and

debentures of public companies, port trust utility undertakings and such other securities. Sincebuying and selling of different types of securities takes place in stock exchange, the prices of

particulars securities reflect their demand and supply. In fact, stock exchange is said to be a

barometer of economic and financial health. The stock exchanges formation and in raising for thecorporate sector. It provides place for sale and purchase of securities i.e. share, bonds etc. It

provides linkage between the savings of household sector and investment in corporate sector or

economy.

FEATURES OF STOCK EXCHANGES:-

1. The stock exchange provides a ready market for the conversion of existing securities into

cash and vice versa.

2. People having surplus funds invest in the securities and these funds are used for

industrialization and ultimately for the economic development of the country that leads to

the capital formation.

3. Stock exchange act as a center of providing business information relating to anenterprises whose securities are traded at the listed companies are to present the financial

and other statements to it.

4. It provides a linkage between savings of household and investment in corporate sector oreconomy.

5. It provides market quotations for shares, bonds and debentures and serves role as a

barometer not only of the state of health of individual companies, but also of the

economy as a whole.

NEED OF THE STUDY



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With the onset of globalized economy in India, the psyche of Indianinvestor is changing. In recent scenario instead of putting their money in bank and fixed deposit

where there is minimum risk and minimal return they are investing their money in various other

opportunities where risk is high as well as the returns. Now days Indian investors are wellversed with various investment opportunities that are available to them or various financial

instruments in which they can invest into. As earlier many researches has been conducted whichare either restricted to a particular age group or to a particular area or not particularly concerned

with IPOs but with financial instruments as a whole. So an urgent need was felt to conduct astudy on investors perception regarding IPOs which cover all age groups.

SCOPE OF THE STUDYThis study is related with finding out perception of investors towards

initial public offer, when Issue comes in the market by Book- Building Process. The securities

which the companies issue for the first time to the public and other financial institutions is calledINITIAL PUBLIC OFFER or IPO. This study emphasizes on finding out what factors affect

the performance of an IPO and what are the factors an investor keeps in mind before investing in

an IPO.

This study includes all those people whore are aware of initial public

offers and who invest their money in initial public offers. The investors covered in the study arefrom the cities of Jalandhar and Shahkot .This study tends to explore the investors beliefs,

perceptions and views with regard to IPOs and their investing intention.

OBJECTIVES OF THE STUDY

The main objective of the study is to make the investors know about how the

IPO IS ISSUED THROUGH BOOK-BUILDING PROCESS



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To determine the perception of the investors regarding initial public offer.

To know the factors that they keep in mind or which affect their decision regarding

investment in initial public offers

To know which sector/sectors they prefer while investing in initial public offers

To know about the time period for which they invest their money in initial public offers

whether for long, medium or short term.

To know how they rate the performance of the initial public offers they have invested in.



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KOTAK MAHINDRA GROUP - INTRO

Kotak Mahindra is one of the leading financial organizations, offering awide range of financial services that encompass every sphere of life. From commercial banking,

to stock broking, to mutual funds, to life insurance, to investment banking, the group caters to

the diverse financial needs of individuals and corporate. The group has a net worth of over Rs 7,100 crore and has a distributionnetwork of branches, franchisees, representative offices and satellite offices across cities and

towns in India and offices in New York, London, San Francisco, Dubai, Mauritius and

Singapore. The group services around 6.5 million customer accounts.

KOTAK SECURITIES LIMITED

Kotak Securities is one of the oldest and leading broking house in India witha market Kotak securities ltd. has also been the largest in IPO distribution. Kotak securities have

a strong presence in retail and institutional segments. It caters to the needs of high net worthindividuals, foreign and Indian Institutional Investors in Indian Equities. Their network spans

over 400 cities with 1113 outlets. Kotak Securities Limited has Rs. 2300 crore of Assets underManagement (AUM) as of 31st March, 2010. The portfolio Management Service provides top

class service, catering to the high end of the market. Portfolio Management from Kotak

Securities comes as an answer to those who would like to grow exponentially on the crest of thestock market, with the backing of an expert.

http://www.kotaksecurities.com/whatweoffer/portfoliomanagement.htmlhttp://www.kotaksecurities.com/whatweoffer/portfoliomanagement.html


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FEATURES OF KOTAK SECURITIES LTD.

1. Kotak securities are the 100% subsidiary of kotak Mahindra bank and one of the oldest

and largest stock broking firms in the industry.

2. Kotak securities have been awarded Best Brokerage Firm in 2009, 2008, 2007 & 2006 by

Asia Money.

3. Through its web portal company provides a single platform for investments in equities,

Mutual Funds and Currency Derivatives. Available margin can be used for any of the

three segments.

4. In late 2008 company launched an interesting Smart Order feature to its online trading

portal. While placing an order to buy and sell stocks at BSE and NSE, customer can sharethis option. Once selected, these options offer customers the best available price between

NSE and BSE. This option available for all the customers of the company.

5. Kotak securities provide daily SMS alerts, market pointers, periodical research reports,

stock recommendations etc.

6. Kotak securities have Citibank, HDFC, UTI bank and Kotak Mahindra Bank as a

designated banks for its trading account. Investors holding account with these banks caneasily integrate the brokerage account with bank.

7. Kotak provides call & trade facility to its customers wherein they can place and tracktheir orders through phone when they are away from home

NAME OF

DIRECTOROther Directorships

Other Committee

Memberships

Mr. Uday Kotak Kotak Securities Limited Chairman Audit Committee Chairman

Kotak Mahindra AssetManagement Company

Limited

Chairman Audit Committe Member

Kotak Mahindra Capital

Company LimitedChairman Audit Committee

Chairman



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INTRODUCTION ABOUT TOPIC

A company can raise capital through issue of shares and debentures. The various types of issues

are:-

Public issue

Right issue

Bonus issue

Private placement

Bought out deal

There can be two types of public issue:-

Initial public offer (IPO) Follow On public Offer (FPO)

IPO

An initial public offer is the selling of securities to the public in the primary market. It is when

an unlisted company makes either a fresh issue of securities or an offer for sale of its existing



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securities or both for the first time to the public. This paves way for listing and trading of theissuers securities. The sale of securities can be through book building and normal public issue.

FPO

Further public issues are issued by companies and corporate bodies whose shares are

already being traded in the capital market and they are issuing fresh shares either to fund the

expansion of existing business or to invest into the business activities.

REASONS FOR GOING PUBLIC:

1. Financing of the increased working capital requirement

2. Raising funds to finance capital requirement programs like expansion, diversification,modernization etc.

3. Debt refinancing

4. Financing acquisitions like a manufacturing unit, brand acquisitions, tender offers forshare of the another firm

5. Exit route for existing investors

ADVANTAGES OF GOING PUBLIC

1. Facilitates future funding by means of subsequent public offering2. Enables Valuation of company

3. Provides liquidity to existing shares4. Increase visibility and reputation of the company

5. Command better pricing than placement with few investors

6. Enables the company to offer its shares as purchase consideration or as an exchange forthe shares of another company.

DISADVANTAGES OF GOING PUBLIC

1. Involves substantial expenses2. Need to make continuous disclosures

3. Listing fees and documentation

4. Cost of maintaining investor relations5. Takes substantial amount of management time and efforts.

6. Increased regulatory monitoring



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An IPO is the first sale of the corporations common sharesto investors on the public stock exchange. The main purpose for the IPO is to raise capital for the

corporation. While IPOs are effective at raising capital, being listed on the stock exchangeimposes heavy regulatory compliance and reporting requirements

An initial public offer occurs when security is sold to the

general public, with the expectation that liquid market will develop. Most companies are starting

out by raising equity capital from a small number of investors, with no liquid market existing ifthese investors wish to sell their stock. If a company prospers and need an additional equity

capital, at some point the firm generally finds it desirable to go public by selling stock to large

number of diversified investors. Once the stock is publicly traded, this enhanced liquidity allowsthe company to raise capital on more favorable terms than if it had to compensate investors for

the lack of liquidity associated with a privately-held company.

In particular, there is certain ongoing cost associated with the

need to supply information on a regular basis to investors and regulators for the publicly-traded

firms. Furthermore, there are substantial one-time costs associated with initial public offerings

that can be categorized as direct and indirect costs. The direct costs include legal, auditing andunderwriting fees. The indirect costs are the management time and efforts devoted to conducting

the offerings and the dilution associated with the selling shares at an offering price that is, on

average, below the price prevailing in the market shortly after the IPO. The direct and indirectcosts affect the cost of capital for firms going public.

The existence of the phenomenon under pricing is well established fact for the

common stock initial public offerings (IPO). Research concerning the primary capital market isfound to be unequivocal in its conclusion that initial public offerings are offered at a discount. It

has been found that an average firm goes public with an offer price that is lower than price that

prevails in the immediate aftermarket. As a result, IPOs register significant excess returns on thevery first day of trading. Under pricing is a phenomenon that is largely restricted to the opening

transaction and hence the under pricing is almost entirely corrected by the market at opening

transaction.



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EVOLUTION OF INDIAN PRIMARY MARKET

To keep pace with the globalization and liberalization process, the

government of India was very keen to bring the capital market in line with international

practices through gradual deregulation of the economy. It led to liberalization of capitalmarket in the countrywith more expectations from primary market to meet the growing needs

for funds for investment in trade and industry. Therefore, there was a vital need to strengthen

the capital market which, it felt, could only be achieved through structural modifications,introducing new mechanism and instruments, and by taking steps for safeguarding the

interest of the investors through more disclosures and transparency.

Early Liberalization Phase: 1992-1995 (Fixed Pricing)

The initiation of the process of reform in India also would not

have been possible without changes in the regulatory framework. The New Economic policy(1991) led to a major change in the regulatory framework of the capital market in India. The

Capital Issues (Control) Act 1947 was repealed and the Office of the Controller of Capital

Issues (CCI) was abolished. The Securities and Exchange Board of India (SEBI),established in 1988 and armed with statutory powers in 1992, came to be established as

the regulatory body with the necessary authority and powers to regulate and reform the

capital market.

SEBI came to be recognized as a regulatory body for the capital

market after the abolition of the CCI. The control on pricing of capital issue has been abolished

and easy access is provided to the capital market. Initial Public Issue caught the attention ofgeneral public only after the success of Reliance, when millions of small investors made huge

returns which were unheard of till then. Dhirubhai Ambani was the first promoter who raised

huge amounts through the public issue route to finance large facilities.

The issue process was smoothened, procedures were simplified and

free pricing was allowed, although with certain restrictions, The Indian market had theconcept of par value of equity shares, and anything above par was considered premium.

The only companies that were allowed to come with premium issues were those, which had a

three year profit-track record for the preceding five years. New companies without this record

could float premium issues if their promoting companies had the same track record and theyhad to hold 50% of the post issue capital. Any new company floated by first generation

entrepreneurs could only issue equity at par. There was no restriction about prices in a

premium issue.

The offer was always at a fixed price, whether premium or par. The

companies had to appoint intermediaries like merchant bankers, registrars, bankers etc.Merchant bankers had the responsibility of fixing the prices, in consultation with the



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company, carrying out with due diligence, preparing the prospectus (offer documents) etc.The prospectus had to be submitted to SEBI for getting scrutiny

There could be firm or preferential allotments to mutual funds, non-resident Indians etc. but the price in those cases could not be less than that in the public

offer. The post-issue share holding by the promoters could not be less than 25% of the total paidup capital. Also, at least 25% of the total post issue capital would have to be offered through the

prospectus to the public

The primary market came into its own in the eighties when a largenumber of companies came out with public issues. An entire industry of merchant bankers,

brokers, agents and publicity Managers were built around the primary issues market. The interest

in new issues rose so high that investors were willing to pay for application forms.

The trend continued in the early nineties as many large projectswere launched after the economy was liberalized. Many of these companies came out with

public issues and the retail participation increased dramatically. But many of the companieswhich raised money during this period just disappeared without a trace.

Late Liberalization Period: 1996-2005 (Book Building)

The late nineties and the first few years of the current decade did not see

much activity in the primary market even though we saw a huge bull run led by technology

stocks at the turn of the decade. The bad experiences of retail investors kept them away from the

market and made it difficult for companies to launch successful issues. The corporate sector wasrecovering from the damage caused by large capacity expansions and new projects set up in the

nineties.

The dormant primary issues market came alive after 2003 mostlybecause of the divestment programme of the government. The issue of Maruti Udyog, through

which the government sold part of its stake in the company, rekindled retail investor interest in

the primary market. The issue was made at a very reasonable price and investors made very goodreturns immediately.

The year 2004 saw the primary market activity at its historic peak assome large private companies also came out with issues. Further divestment by the

government; including the largest ever issue by an Indian company from ONGC, attractedmore retail investors into the market. The IPO market continues to buzz in the current year as

well. Taking advantage of the strength in the secondary market, many high profile companiesare lining up to raise money from the market. The year started with the issue from Jet

Airways which attracted a lot of interest from investors. As a result of tougher regulations, the

quality of the issues has gone up substantially.

Most of the recent issues have been from well established and well known



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companies. Though some of these issues were overpriced, investors have made significantreturns in most of the issues. With a number of primary issues coming out, many who have never

invested in stocks before are considering applying for some of these issues. The more

experienced investors are doubtful about participating when the stock markets are at a peak.Many have had bad experiences investing in new issues during the nineties. But the incredible

returns made by investors in some of the recent issues keep their interest alive.

ELIGIBILTY CONDITIONS FOR COMPANIES ISSUING SECURITIES

The companies issuing securities offered through an offer document shallsatisfy the following at the time of filing the draft offer document with SEBI and also at the time

of filing the final offer document with the Registrar of Companies/ Designated Stock Exchange:

Filing of offer document

No issuer company shall make any public issue of securities, unless a draft

Prospectus has been filed with the Board through a Merchant Banker, at least 30 days prior to the

filing of the Prospectus with the Registrar of Companies (ROC):

Provided that if the Board specifies changes or issues observations on the draft

Prospectus (without being under any obligation to do so), the issuer company or the Lead

Manager to the Issue shall carry out such changes in the draft Prospectus or comply withthe observation issued by the Board before filing the Prospectus with ROC.

Provided further that where the Board has sought any clarification or additional

information from the Lead Manager/s to the Issue, the period within which the Board mayspecify changes or issue observations, if any, on the draft Prospectus shall be 15 days from

the date of receipt of satisfactory reply from the Lead Manager/s to the Issue.

Companies barred not to issue security

No company shall make an issue of securities if the company has beenprohibited from accessing the capital market under any order or direction passed by the Board.

Application for Listing

No company shall make any public issue of securities unless it hasmade an application for listing of those securities in the stock exchange .

Issue of securities in Dematerialized form

No company shall make public or rights issue or an offer for sale of

securities, unless:

a. the company enters into an agreement with a depository for dematerialization of

securities already issued or proposed to be issued to the public or existing shareholders;

and



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b. the company gives an option to subscribers/ shareholders/ investors toreceive the

security certificates or hold securities in dematerialized form with a depository.

IPO Grading

No unlisted company shall make an IPO of equity shares unless the following

conditions are satisfied as on the date of filing of Prospectus with ROC:1. The unlisted company has obtained grading for the IPO from at least one credit rating agency

2. disclosures of all the grades obtained, along with the rationale/ description furnished by

the credit rating agency(ies) for each of the grades obtained

ELIGIBILITY NORMS FOR IPO

An unlisted company may make an initial public offering (IPO) of equity shares only if :

The company has net tangible assets of at least Rs. 3 crores in each of the preceding 3

Full years (of 12 months each), of which not more than 50% is held in monetary assets

The company has a track record ofdistributable profits in terms of Section 205 of the

Companies Act, 1956, for at least three (3) out of immediately preceding five (5) years

The company has a net worth of at least Rs. 1 crore in each of the preceding 3 full

Years (of 12 months each)

In case the company has changed its name within the last one year, atleast 50% of therevenue for the preceding 1 full year is earned by the company from the activity

Suggested by the new name

The aggregate of the proposed issue and all previous issues made in the same financial

Year in terms of size (i.e., offer through offer document + firm allotment + promoters

Contribution through the offer document), does not exceed five (5) times its pre-issueNet worth as per the audited balance sheet of the last financial year

FIXED PRICES VERSUS TRUE PRICING (BOOK-BUILDING)

The traditional method of doing IPOs is the fixed price offering. Here,the issuer and the merchant banker agree on an issue price. Then the investor has a choice of

filling in an application form at this price and subscribing to the issue. Extensive research hasrevealed that the fixed price offering is a poor way of doing IPOs. Fixed price offerings, all over

the world, suffer from IPO under pricing. In India, on average, the fixed-price seems to be



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around 50% below the price at first listing; i.e. the issuer obtains 50% lower issue proceeds ascompared to what might have been the case. This average masks a steady stream of dubious

IPOs who get an issue price which is much higher than the price at first listing. Hence fixed price

offerings are weak in two directions: dubious issues get overpriced and good issues getunderpriced.

What is needed is a way to engage in serious price discovery in setting the price at

the IPO. No issuer knows the true price of his shares; no merchant banker knows the trueprice of the shares; it is only the market that knows this price. In that case, a better and true price

can be obtained only if the system is designed in such a way that the market decides the price of

an IPO.

Imagine a process where an issuer only releases a prospectus, announces the

number of shares that are up for sale, with no price indicated. People from all over India wouldbid to buy shares in prices and quantities that they think fit. This would yield a price. Such a

procedure should innately obtain an issue price which is very close to the price at first listing --

the hallmark of a healthy IPO market.

BOOK-BUILDING

A mechanism where, during period for which the IPO is open, bids are

collected from investors at various prices which are above or equal to the floor price (theminimum price). The final price of the share is determined after the bid closing date, based on

certain evaluation criteria.

The SEBI (Disclosure and Investor Protection) Guidelines, 2000, define theterm `book-building' in a rather complex language as "a process undertaken by which a demand

for the securities proposed to be issued by a body corporate is elicited and built-up and the

price for such securities is assessed for determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information

memoranda or offer document.''

Book building process is a common practice used in most developed

countries for marketing a public offer of equity shares of a company. However, Book building

acts as scientific as well as flexible price discovery method through which a consensus price ofIPOs may be determined by the issuer company along with the Book Running Lead Manager

(i.e. merchant banker) on the basis of feedback received from individual investors as well as

most informed investors (who are institutional and corporate investors like, UTI, LICI,GICI, FIIs, and SFCI etc). The method helps to make a correct evaluation of a companys

potential and the price of its shares.



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BOOK- BUILDING PROCESS IN US

Unlike India, in international markets the most active investors are the

mutual funds and other Institutional investors and the entire issue is made through book building

process. In India, on the other, a large number of retail investors participate actively in IPOs

made by the company. In US, book building is called soft underwriting model byinvestment bankers which implies that they sell the securities on a best efforts basis and

they are not obliged to take up the unsold stock of securities if there is no demand for such

securities. Public issue through book building process in US takes an average of 75 days to makea prospectus, file it with SEC, NYSE or NASDAQ, talk to select investors, establish a price

range, print the red herring prospectus and launch the offering. Trading of securities begins on

the 16th day and payment by investors and delivery of shares are completed by the 20th day .

BOOK- BUILDING PROCESS

ISSUER

BOOK RUNNER

LEAD MANAGERS

MUTUAL FUNDS STOCK BROKERS UNDERWRITERS

MERCHANT BANKERS

I N V E S T O R S

MFs financial foreign financial NRIs Corporations HNs Retail InvestorsInstitutional institutions



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In simple terms, book-building is a mechanism by which the issue price is discovered on the basis of bids received from syndicate members/brokers and notby the issuers/merchant bankers.

An Issuer Company can issue capital through book building in following two ways:

75% book- building process:

Under this process 25% of the issue is to be sold at a fixed price and the balance 75%through the Book Building process. As per Rule 19 (2) b of Securities Contracts (Regulation)

Rules, 1957:

The NPO shall consist of min of 20 Lakhs shares

Size of public offer is at least Rs.100cr

Issue was offered to maximum extend permissible (50%) to QIBs

100% book-building process:

The process specifies that an issuer company may make an issue of securitiesto

the public through prospectus in the following manner:

100% of the net offer to the public through book building process, or

75% of the net offer to the public through book building process and 25% of the net offer to the

public at the price determined through book building process.

In case of a 100% book built issue:

Not more than 50% of NPO (Net Public Offer) shall be allocated to QIBs (Qualified

Institutional Buyers)

Not less than 25% of NPO shall be allocated to non-institutional bidders

Not less than 25% of NPO shall be available for allocation to retail investors



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BOOK-BUILDING PROCESS IN INDIA

Book Building is basically a capital issuance process used in Initial

Public Offer (IPO) which aids price and demand discovery. It is a process used for marketing apublic offer of equity shares of a company. It is a mechanism where, during the period for which

the book for the IPO is open bids are collected from investors at various prices, which are above

or equal to the floor price. The process aims at tapping both wholesale and retail investors. Theoffer/issue price is then determined after the bid closing date based on certain evaluation criteria.

The main parties who are directly associated with book building process are the issuer company, the Book Runner Lead Manager (BRLM) and the syndicate

members (Fig-1.1). The Book Runner Lead Manager (i.e. Merchant banker) and the syndicate

members who are the intermediaries are both eligible to act as underwriters. The steps which areusually followed in the book building process can be summarized below :

1. The issuer company proposing an IPO appoints a lead merchant banker as a BRLM.

2. Initially, the issuer company consults with the BRLM in drawing up a draft prospectus

(i.e. offer document) which does not mention the price of the issues, but includes other details

about the size of the issue, past history of the company, and a price band. The securities

available to the public are separately identified as net offer to the public.

3. The draft prospectus is filed with SEBI which gives it a legal standing

4. A definite period is fixed as the bid period and BRLM conducts awareness

Campaigns like advertisement, road shows etc.

5. The BRLM appoints a syndicate member, a SEBI registered intermediary to underwrite

the issues to the extent of net offer to the public.

6. The BRLM is entitled to remuneration for conducting the Book Building process.

7. The copy of the draft prospectus may be circulated by the BRLM to the

institutional investors as well as to the syndicate members.

8. The syndicate members create demand and ask each investor for the number of shares

and the offer price.

9. BRLM receives the feedback about the investors bids through syndicate members.

10. The prospective investors may revise their bids at any time during the bid period.

11. The BRLM on receipts of the feedback from the syndicate members about the bid price



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and the quantity of shares applied has to build up an order book showing the demand for the

shares of the company at various prices. The syndicate members must also maintain a record

book for orders received from institutional investors for subscribing to the issue out of the

placement portion.

12. On receipts of the above information, the BRLM and the issuer company determine the

issue price. This is known as the market-clearing price.

13. The BRLM then closes the book in consultation with the issuer company and determine

the issue size of (a) placement portion and (b) public offer portion.

14. Once the final price is determined, the allocation of securities should be made by the

BRLM based on prior commitment, investors quality, price aggression, earliness of bids etc.

Thebid of an institutional bidder, even if he has paid full amount may be rejected without being

assigned any reason as the Book Building portion of institutional investors is left entirely at the

discretion of the issuer company and the BRLM.

15. The Final prospectus is filed with the registrar of companies within 2 days of

determination of issue price and receipts of acknowledgement card from SEBI.

16. Two different accounts for collection of application money, one for the private placement

portion and the other for the public subscription should be opened by the issuer company

17. The placement portion is closed a day before the opening of the public issue through

fixed price method. The BRLM is required to have the application forms along with theapplication money from the institutional buyers and the underwriters to the private

placement portion.

18. The allotment for the private placement portion shall be made on the 2nd day from

the closure of the issue and the private placement portion is ready to be listed.

19. The allotment and listing of issues under the public portion (i.e. fixed price portion) must

be as per the existing statutory requirements.

20. Finally, the SEBI has the right to inspect such records and books which are maintained

by the BRLM and other intermediaries involved in the Book Building process.



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THE UNDERWRITING PROCESS

A company that plans an IPO contacts an investment banker

who will in turn call on securities dealers to help sell the new stock issue. This process of sellingthe new stock issues to prospective investors in the primary market is called underwriting.

A company that plans an IPO contacts an investment bankerwho will in turn call on securities dealers to help sell the new stock issue. This process of selling

the new stock issues to prospective investors in the primary market is called underwriting.

The company and the investment bank will first meet tonegotiate the deal. Items usually discussed include the amount of money a company will

raise, the type of securities to be issued, and all the details in the underwriting agreement.

The deal can be structured in a variety of ways. For example, in a "firm commitment," theunderwriter guarantees that a certain amount will be raised by buying the entire offer and then

reselling to the public. In a Best efforts" agreement, however, the underwriter sells securities

for the company but doesn't guarantee the amount raised. Also, investment banks are hesitant toshoulder all the risk of an offering. Instead, they form a syndicate of underwriters. One

underwriter leads the Syndicate and the others sell a part of the issue.

Once all sides agree to a deal, the investment bank puts

together a registration statement to be filed with the SEC. This document contains informationabout the offering as well as company info such as financial statements, management

background, any legal problems, where the money is to be used, and insider holdings. The SEC

then requires a "cooling off period," in which they investigate and make sure all materialinformation has been disclosed. Once the SEC approves the offering, a date (the effective date)

is set when stock will be offered to the public. During the cooling off period the underwriter

puts together what is known as the red herring. This is an initial prospectus containing all theinformation about the company except for the offer price and the effective date, which

aren't known at that time. With the red herring in hand, the underwriter and company attempt

to hype and build up interest for the issue. They go on a road show - also known as the "dogand pony show" - where the big institutional investors are courted.

As the effective date approaches, the underwriter and

company sit down and decide on the price. This isn't an easy decision: it depends on thecompany, the success of the road show, and most importantly, current market conditions. Of

course, its in both parties' interest to get as much as possible.

Finally, the securities are sold on the stock market and the money is collected from investors.



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PRICING

Before establishment of SEBI in 1992, the quality of disclosures in the offer

documents was very poor.

The main drawback of free pricing was the process of pricing of

issues. The issue price was determined around 60-70 days before the opening of the issue and

the issuer had no clear idea about the market perception of the price determined.In Book Building the price is determined on the basis of demand received or

at price above or equal to the floor price.

The Allotment Process through Book-building:

Step1-The Company will 'discover' its price

Earlier, the company determined a fixed price for the stock issue. The issue wasmarketed to the general public through advertisements and a media campaign.

Today, companies prefer a book building process. Book building is the processof price discovery. That means there is no fixed price for the share. Instead, the company

issuing the shares comes up with a price band. The lowest price is referred to as the floor andthe highest, the cap. Bids are then invited for the shares. Each investor states how many sharess/he wants and what s/he is willing to pay for those shares (depending on the price band). The

actual price is then discovered based on these bids.

Step2-Players of the game

Three classes of investors can bid for the shares:

Qualified Institutional Buyers: QIBs include mutual funds and Foreign Institutional

Investors. At least 50% of the shares are reserved for this category.

Retail investors: Anyone who bids for shares under Rs 50,000 is a retail investor. At least

25% is reserved for this category.

The balance bids are offered to high networth individuals and employees of thecompany.

Individuals who apply for the IPO put in their bids.



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The process is transparent. One can check on the issue subscription at the BSE and NSE WebSites.

After evaluating the bid prices, the company will accept the lowest price that will allow it

to dispose the entire block of shares. That is called the cut-off price.

The process can be illustrated with an example:

Number of shares issued by the company = 100.

Price band = Rs 30 - Rs 40.

If individuals have bid for prices as follows:

BID NUMBER OF

SHARES

PRICE PER

SHARES (Rs)

1 20 40

2 10 383 20 37

4 30 36

5 20 35

6 20 33

7 20 30

The shares will be sold at the Bid 5 price of 20 shares for Rs 35.

Why?

Because Bidders 1 to 5 are willing to pay at least Rs 35 per share.

The total bids from Bidders 1 to 5 ensure all 100 shares will be sold (20 + 10 + 20 + 30

+20).

The cut-off price is therefore Bid 5's price = Rs 35.

Bidders 1 to 5 get allotments at that price. Bidders 6 and 7 don't get an allotment because their

bids are below the cut-off price.

The bids are first allotted to the different categories and the over-subscription (more shares

applied for than the shares available) in each category is determined.

Retail investors and high net worth individuals get allotments on a proportional basis.

If a retail investor has applied for 200 shares in the issue, and the issue is over-subscribed fivetimes in the retail category, he qualify to get 40 shares (200 shares/5).

Sometimes, the over-subscription is huge or the issue is priced so high that the bidder can't



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really bid for too many shares before the Rs 50,000 limit is reached.

In such cases, allotments are made on the basis of a lottery.

If a retail investor has applied for 5 shares in an issue, and the retail category has been

oversubscribed 10 times, the investor is entitled to half a share.

Since that isn't possible, it may then be decided that every 1 in 2 retail investors will get

allotment. The investors are then selected by lottery and the issue allotted on a proportional basis

among.

Application for an IPO?

To apply to an IPO one has to fill an IPO application form, better known as Bid cum Application

form. These forms are available in stalls outside the stock exchanges and with vendors invarious other areas. One can also get an application form through a share broker orinvestmentconsultant. Else forms are available at various banks. A good idea is to check the Web site of

Karvy Consultants (www.karvy.com) who are often registrars or lead managers for issues. Theother option is to check the SEBI Website (http://www.sebi.gov.in/) for the prospectus of a

particular IPO. The prospectus lists the lead managers for the IPO and one can get a copy of the

application form from their centers.

After filling the form, remitting of the amount is done after calculating the number of shares

applied for in the bank that is designated in the form as collecting centre for that IPO. If one has

a demat account, he can apply for the shares directly through demat account or there is an

option of physical delivery of share certificates.

Some IPOs offer only demat (dematerialized) form of shares, while others offer both demat aswell as regular (physical) shares. SEBI advises investors to get the allotment in demat form as

the shares in IPO are tradable only in demat segment in the stock exchanges. Dealing of

physical shares (allocated in IPO) is not accepted.

ROLE OF VARIOUS INTERMEDIARIES IN IPO

Intermediaries help corporations design securities that will beattractive to investors, buy these securities from the corporations, and then resell them tosavers in the primary markets.

Merchant Bankers/ Lead Manager

Merchant bankers play an important role in issue management process.

Lead managers have to ensure correctness of the information furnished in the offer document.



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They have to ensure compliance with SEBI rules and regulations as also Guidelines forDisclosures and Investor Protection. To this effect, they are required to submit to SEBI a

due diligence certificate confirming that the disclosures made in the draft prospectus or letter of

offer are true, fair and adequate to enable the prospective investors to make a well informedinvestment decision. The role of merchant bankers in performing their due diligence functions

has become even more important with the strengthening of disclosure requirements and withSEBI giving up the vetting of prospectuses. SEBI's various operational guidelines issued during

the year to merchant bankers primarily addressed the need to enhance the standard ofdisclosures. It was felt that a further strengthening of the criteria for registration of

merchant bankers was necessary, primarily through an increase in the net worth requirements,

so that their capital would be commensurate with the level of activities undertaken by them.With this in view, the net worth requirement forcategory I merchant bankers was raised in 1995-

96 to Rs. 5 crore. In 1996-97, the SEBI (Merchant Bankers) Regulations, 1992 were amended to

require the payment of fees for each letter of offer or draft prospectus that is filed with SEBI.Part III gives further details of the registration of merchant bankers during 1996-97.

Their functions are:

To act as intermediaries between the company seeking to raise money and the

Investors. They must possess a valid registration from SEBI enabling them to do this job.

They are responsible for complying with the formalities of an issue, like drawing up the

Prospectus and marketing the issue.

If it is a book building process, the lead manager is also in charge of it. In such a case,

They are also called Book Running Lead Managers.

Post issue activities, like intimation of allotments and refunds, are their responsibility asWell.

Underwriters

Underwriters are required to register with SEBI in terms of the SEBI (Underwriters)

Rules and Regulations, 1993. In addition to underwriters registered with SEBI in terms of these

regulations, all registered merchant bankers in categories I, II and III and stockbrokersand mutual funds registered with SEBI can function as underwriters. Part III gives further

details of registration of underwriters. In 1996-97, the SEBI (Underwriters) Regulations, 1993were amended mainly pertaining to some procedural matters.

Bankers to an Issue

Scheduled banks acting as bankers to an issue are required to be registered with SEBI in terms of

the SEBI (Bankers to the Issue) Rules and Regulations, 1994. These regulations lay down



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eligibility criteria for bankers to an issue and require registrants to meet periodic reportingrequirements. Part III gives further details of registration of bankers to an issue.

Portfolio managers

Portfolio managers are required to register with SEBI in terms of the SEBI (PortfolioManagers) Rules and Regulations, 1993. The registered portfolio managers exclusively carry

on portfolio management activities. In addition all merchant bankers in categories I and II canact as portfolio managers with prior permission from SEBI. Part III gives further details of the

registration of portfolio managers.

Registrars to an Issue and Share Transfer Agents

Registrars to an issue (RTI) and share transfer agents (STA) are registered with SEBI in terms of

the SEBI (Registrar to the Issue and Share Transfer Agent) Rules and Regulations, 1993. Under

these regulations, registration commenced in 1993-94 and is granted under two categories:category I - to act as both registrar to the issue and share transfer agent and category II -

to act as either registrar to an issue or share transfer agent. With the setting up of the

depository and the expansion of the network of depositories, the traditional work of registrars

is likely to undergo a change.

REVERSE BOOK-BUILDING

Reverse book-building is a mechanism by which companies listed on

a stock exchange can delist their shares. The reasons for delisting may be several and sometimes

intentional.

The reverse book building is an efficient price discoverymechanism of de-listing of securities, which is provided for capturing the sell orders on online

basis from the shareholders through respective BRLM. In the reverse book-building scenario, the

acquirer or promoter of a company offers to get back shares from the shareholders. It is a

mechanism where, during the period for which the reverse book building is open, offers arecollected at various prices, which are above or equal to the floor price from the share holders

through trading members appointed by the acquirer or promoter of a company. The reverse book

building price (i.e. final price/ exist price)is determined by BRLM in consultation with theacquirer or promoter of the company after the offer closing date in accordance with the SEBI

(De-listing of Securities) Guidelines, 2003. This desires to get de-listed, in accordance to bookbuilding process. The offer price has a floor price, which is fixed for de-listing of securitiesbelow which no offer can be accepted. The floor price is the average of 26 weeks traded price

quoted on the stock exchange where the shares of the company are most frequently traded

preceding 26 weeks from the date of public announcement is made. There is no ceiling on the

maximum price.

Why Does Company seeks de-listing of securities?



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There are several reasons for seeking de-listing of securities from the stock exchanges.

These can be highlighted as follows:

When market conditions are so depressed, the acquirer or promoter of a company

can exploit the opportune moment for acquisition of the remaining securities from theshareholders through de-listing;

In the liberalized economy, the regulatory framework relating to FDI norms permits

foreign companies to hold 100 per cent equity in many key sectors;

As per the regulatory framework of FDI norms foreign companies are allowed to

take an opportunity to control entire holdings which give complete flexibility in

operational decisions, and preference of retaining listing only in one place, preferably inthe home country;

Besides the flexibility in operational decisions, on account of de-listing boards ofcompanies enjoy the sole decision making powers, greater independence in investment

decisions, freedom from the regulatory environment, possibility of easier repatriation of

profits and tax rebates in the country of their origin.

THE BOOK BUILDING PROCESS

1. The book building process shall be made through an electronically linked transparent

facility.

2. The number of bidding centres shall not be less than thirty, including all stock exchangecentres and there shall be at least one electronically linked computer terminal at all

Bidding centres.

3. The promoter shall deposit in an escrow account, 100 per cent of the estimated amount of

consideration calculated on the basis of the floor price indicated and the number of

Securities required to be acquired. The provisions of clause 10 of the Securities andExchange Board of India (Buyback of Securities) Regulations, 1998 shall be applicablemutatis mutandis to such escrow account.

4. The offer to buy shall remain open to the security holders for a minimum period

of Three days. The security holders shall have a right to revise their bids before theclosing of the bidding.

5. The promoter or acquirer shall appoint trading members for placing bids on the on-line

Electronic system.

6. Investors may approach trading members for placing offers on the on-line electronic

system. The format of the offer form and the details that it must contain shall be



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specified.

7. The security holders desirous of availing the exit opportunity shall deposit the

shares offered with the trading members prior to placement of orders. Alternatelythey may mark a pledge for the same to the trading member. The trading members in turn

may place these securities as margin with the exchanges/clearing corporations.

8. The offers placed in the system shall have an audit trail in the form of confirmations which gives broker ID details with time stamp and unique order number.

9. The final offer price shall be determined as the price at which the maximumnumber of

Shares have been offered. The acquirer shall have the choice to accept the price. If the

price is accepted then the acquirer shall be required to accept all offers upto andincluding the final price but may not have to accept higher priced offers, subject to

Clause 15. An illustration is given below:

Offer Quantity Offer Price Remarks

50 120 FLOOR PRICE

82 125

108 130 FINAL PRICE (AS QTY.

OFFERED IS MAXIMUM)

27 135

5 140

10. If final price is accepted the acquirer shall have to accept offers up to and including theFinal price i.e. 240 shares at the final price of Rs. 130/-.

11. At the end of the book build period the merchant banker to the book building exerciseshall announce in the press and to the concerned exchanges the final price and the

Acceptance (or not) of the price by the acquirer.

12. The acquirer shall make the requisite funds available with the exchange/clearingCorporation on the final settlement day (which shall be three days from the end of the

Book builds period). The trading members shall correspondingly make the shares

Available. On the settlement day the funds and securities shall be paid out in a processAkin to secondary market settlements.

The entire exercise shall only be available for demat shares. For holders of physicalcertificates the acquirer shall keep the offer open for a period of 15 days from the final



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settlement day for the shareholders to lodge the certificates with custodian(s) specified by themerchant banker.

BUY - BACK OF SHARES

It is a process whereby a company purchases its own shares or otherspecified securities from the holders thereof for improving the earnings per share (EPS), or to

improve return on capital or return on net worth and to enhance the long-term shareholder value,

among other things.

OBJECTIVES OF BUY - BACK OF SHARES

To increase promoters holding

Increase earnings per share Rationalize the capital structure by writing off capital not represented by available

Assets

Support share value

To thwart takeover bid

To pay surplus cash not required by business

COMMENT It is an interesting fact to note that MNCs are using buyback process as the beststrategy to maintain their share price in a bear run by buying back the shares from the open

market at a premium over the prevailing market price.

RESOURCES OF BUY- BACK OF SHARES:-

A Company can purchase its own shares from:-

1.Free Reserves: Where a company purchases its own shares out of free reserves, then a sum

equal to the nominal value of the share so purchased shall be transferred to the

Capital redemption reserve and details of such transfer shall be disclosed in the balance-

Sheet, or

2. Securities Premium Account, or

3. Proceeds of any shares or other specified securities. A Company cannot buyb ack its shares

or other specified securities out of the proceeds of an earlier issue of the same kind of shares or

specified securities.



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SOURCES FROM WHERE THE SHARES WILL BE PURCHASED

1. Existing security-holders on a proportionate basis; Buyback of shares may be made by a

tender offer through a letter of offer from the holders of shares of the company or ;

2. The open market through

Book building process;

Stock exchanges or

3. Odd lots, that is to say, where the lot of securities of a public company, whose shares

Are listed on a recognized stock exchange, is smaller than such marketable lot, as mayBe specified by the stock exchange; or

4. Purchasing the securities issued to employees of the company pursuant to a scheme of

stock option or sweat equity.

ISSUE OF FURTHER SHARES AFTER BUY BACK

Every buy-back shall be completed within twelve months from the date of passing the

special resolution or Board resolution as the case may be. A company which has bought back

any security cannot make any issue of the same kind of securities in any manner whether by wayof public issue, rights issue up to six months from the date of completion of buy back.

PROCEDURE FOR BUY-BACK OF SHARES :-

1. Where a company proposes to buy back its shares, it shall, after passing of theSpecial/Board resolution make a public announcement at least one English National

Daily, one Hindi National daily and Regional Language Daily at the place where the

Registered office of the company is situated.

2. The public announcement shall specify a date, which shall be specified date for thepurpose of determining the names of shareholders to whom the letter of offer has to be sent.

3. A public notice shall be given containing disclosures as specified in Schedule I of the

SEBI regulations.

4. A draft letter of offer shall be filed with SEBI through a merchant Banker. The letter

Of offer shall then be dispatched to the members of the company.



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5. A copy of the Board resolution authorizing the buyback shall be filed with the SEBI

And stock exchanges.

6. The date of opening of the offer shall not be earlier than seven days or later than 30

Days after the specified date.

7. The buyback offer shall remain open for a period of not less than 15 days and not morethan 30 days.

8. A company opting for buy back through the public offer or tender offer shall open anescrow Account.

COMMENT MNCs are taking advantage of the depressed market conditions to mop upthe shares. There is nothing legally wrong in buying back shares, but it should be by paying a

fair price to minority shareholders.

SUGGESTIONS FOR THE SHAREHOLDERS

One should check out the previous price pattern of the share. Companiesgenerally tend

to buy back shares at a higher premium over the market price if they feel that their

Shares are under-priced. This decision to buyback often leads to an increase in share price. One

should analyze the fluctuation in the price of the scrip for a specific time period (one year ormore) and if found that the scrip moved a band lower than the offer price, selling of the scrip

would be a better option.

Shareholders should also take note of any irrationality. A buyback offer with a

huge premium may appear very attractive. He should investigate and ensure that any

temporary negatives do not affect the share price. If the share prices of the company arepresently undervalued, he should refrain from selling, since a company buying back its

shares is indirectly conveying that its shares are undervalued.

One should have a long term perspective in the company. If the

fundamentals of the company are strong and if the future growth is well expected, factors

like bonus issues or split shares can be sidelined for the time being and for the long term

scrip should not be sold.

The share prices of some companies are highly volatile in spite of the strongFundamentals of the company. It is better to sell and dispose off such volatile shares.

Even after buyback is announced, the purchase price need not necessarily be the

Highest if a price band is given. Further, there is no guarantee that all the shares offeredfor buyback would be bought. Companies mostly buy about 10% of the equity in buybacks. In

such cases it would be wiser to sell stake in the market at a time when prices of the scrip



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are trading at a price equivalent to the highest in the offer band.

COMMENT There could be instances where some promoters would misuse the buyback

concept and declare shocking results. Consequently, when share prices are depressed, they willcome out with buyback offer, a bit less than the intrinsic value, thereby increasing their stake in

the company at the expense of the shareholders. Because such buybacks reduce equity base but

increase the EPS (Earning per Share). This would result in an increase in share prices.

DIFFERENCE BETWEEN DELISTING AND BUYBACK

De-listing is different from buy back of securities in which the

securities of a company are extinguished with consequent reduction of capital of the company.In the case of de-listing there is no reduction of capital. It is needless to mention that in the case

of buy back securities, the company itself is the acquirer and hence provides the funds for buy

back. In the case of de-listing, the securities are acquired by a person other than the company and

who could be the promoter, majority shareholder or a person in control of the management andthe funds have to be provided by that acquirer.

GREEN SHOE OPTION

A green shoe option is a clause contained in the underwritingagreement of an initial public offering (IPO). This is an option granted to the investment banker

in most IPOs that allows him to sell additional shares if market conditions warrant. (i.e. if the

market price is higher than the issue price, the investment banker can go back to the firm and

get more stock to sell at the offer price.)

This option is sometimes also referred to as an over-allotment

provision, allows the underwriting syndicate to buy up to an additional 15% of the sharesat the offering price if public demand for the shares exceeds expectations and the stock

trades above its offering price.

The green shoe option provides extra incentive for the underwriters of a new stock offering. Inaddition, these investment banks, brokerages and other financing parties also often exercise

the green shoe option to cover some of the short position they may have created in an effort to

maintain a stable market after a new stock begins to trade, as well as to meet aftermarketdemand.



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The green shoe option provides extra incentive for the

underwriters of a new stock offering. In addition, these investment banks, brokerages and

other financing parties also often exercise the green shoe option to cover some of the short position they may have created in an effort to maintain a stable market after a new stock

begins to trade, as well as to meet aftermarket demand.

Investment bankers regularly sell more than the entireallotment of shares in an IPO (for example they sell 115% of the originally allotted

shares. If the shares drop in the secondary market, the Investment banker will cover the short

position by buying in the secondary market. If the shares rose in the secondary market fromthe offer price, the IB will cover the short position buy buying new shares with the Green

Shoe Option from the firm.

IPO SCAM



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The IPO scam of 2005 involving irregularities in theshares of Yes Bank Ltd. And IDFC Ltd. occurred during a bull phases in the stock market.

The initial public offer of Yes Bank Ltd. (YBL) opened on June 15, 2005 and its shares werelisted on the Stock Exchanges namely, Bombay Stock Exchange and National Stock Exchange

on July 12, 2005. IDFC Ltd. came out with an IPO during July 2005. The shares of IDFC Ltd.Were credited to the allottees on August 5-6, 2005. The shares of IDFC were listed on August

12, 2005.

SEBI, in its Interim Orders dated 15.12.2005 and 12.01.2006

(in the context of examination of irregularities in the IPOs of Yes Bank Ltd. and IDFC Ltd.

respectively) noted that certain entities namely Roopalben Panchal, Sugandh Estates andInvestments Pvt. Ltd., Purshottam Budhwani and Manojdev Seksaria had cornered IPO shares

reserved for retail applicants by making applications in the retail categories through the

medium of thousands of fictitious/benami IPO applicants with each of the application being forsmall value so as to be eligible for allotment under the retail citatory

It was alleged by several investors for that several fake

demat accounts giving a common address were opened on a single day, with the connivanceof certain individuals, brokers, bankers and the Depository Participants (DPs). This scheme

was master mined to target several IPOs and to siphon off shares meant for small investors

thereby making a huge amount of illicit gains.

The initial reports stated that the banks involved in the scam continued to

finance the IPO applications to a single person, namely Roopalben Panchal, and here

accomplices, in the name of thousands of fictitious applicants. The DP involved i.e. KarvyGroup of Companies, too processed these applications and in many cases, allotted shares

without even receiving applications. This was considered to be a clear abuse of the very process

of IPO that intends to encourage the participation of Retail Individual Investors (RIIs).

IPO GRADING

IPO grading (initial public offering grading) is a service aimed at

facilitating the assessment of equity issues offered to public. The grade assigned to anyindividual issue represents a relative assessment of the fundamentals of that issue in relation to

the other listed equity securities in India. IPO grading is positioned as a service that providesanindependent assessment of fundamentals to aid comparative assessment that would proveuseful as an information and investment tool for investors. Moreover, such a service would be

particularly useful for assessing the offerings of companies accessing the equity markets for the

first time where there is no track record of their market performance.

IPO grade assigned to any issue represents a relative assessment of the

fundamentals of that issue in relation to the universe of other listed equity securities in



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India. This grading can be used by the investor as tool to make investment decision. The IPOgrading will help the investor better appreciate the meaning of the disclosures in the issue

documents to the extent that they affect the issues fundamentals. Thus, IPO grading is an

additional investor information and investment guidance tool.Credit Rating agencies (CRAs) like ICRA, CRISIL, CARE and Fitch

Ratings who are registered with SEBI will carry out IPO grading. SEBI does not play any rolein the assessment made by the grading agency. The grading is intended to be an

independent and unbiased opinion of that agency. IPO grading is not mandatory but isoptional and the assigned grade would be a onetime assessment done at the time of the IPO and

meant to aid investors who are interested in investing in the IPO. The grade will not have any

ongoing validity.

IPO grading brings value to issuer, merchant banker and investors in the

following way:

It provides an independent, unbiased assessment of the fundamentals of the company. The grade enables easy comparison between companies, irrespective of the size or the

industry they operate in.

It is a collaborative initiative to widen and deepen market participation.

Increasing participation from new and foreign investors necessitates greater

Awareness about the company and its fundamentals.

It will help issuers to benchmark themselves and project their underlying strengths

better.

IPO GRADING: MANDATORY

Earlier IPO-grading was only optional for the company coming out with the issue but

due to various reasons some of which has been discussed in later part of this project, the SEBIboard on March 22, 2007 has made grading of IPOs mandatory. The cost of IPO grading

previously was borne from Investor protection funds administered by stock exchanges or

from Investor Education and Protection Fund (IEPF) administered by the Ministry ofCompanies Affairs but now in the wake of IPO-grading becoming mandatory the total cost

shall charged to the respective issuing companies.

SEBI GUIDELINES ON IPO GRADING

No unlisted company shall make an IPO of equity shares or any other

security which may be converted into or exchanged with equity shares at a later date,

unless the following conditions are satisfied as on the date of filing of Prospectus (in case of

fixed price issue) or Red Herring Prospectus (in case of book built issue) with ROC:

The unlisted company has obtained grading for the IPO from at least one credit rating



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agency;

Disclosures of all the grades obtained, along with the rationale/description

furnished by the credit rating agency(ies) for each of the grades obtained, have been made in

the Prospectus (in case of fixed price issue) or Red Herring Prospectus (in case of book built

issue); and

The expenses incurred for grading IPO have been borne by the unlisted company

Obtaining grading for IPO.

Most of the market analysts have welcomed this move of SEBI as it will help the investorsin a volatile market to know whether the merchant banker has carried the exercise in determining

the price of an issue in a proper manner or not. It will also help the investors in knowing

whether the price of the issue is justified or not. They even said that management of a goodcompany will never get afraid of getting graded of their IPOs if they are good. The only demerit

of this step by the SEBI was said by many experts is that there will be a slowdown in the number

of IPOs coming out as grading will be a bit lengthy process and there will be a cost-factorattached to it also. Till now only 16 IPO has opted for the grading and here is the list.

FEATURES OF IPO GRADING

IPO grading covers both internal and external aspects of acompany seeking to make an IPO in general. The internal factors include competence and

effectiveness of the management, profile of promoters, marketing strategies, size and growth of

revenues, competitive edge, technology, operating efficiency, liquidity and financial

flexibility, asset quality, accounting quality, profitability and hedging of risks. Amongexternal factors, the key one is the industry and economic/business environment for the issuer.

Here, it is important to note that internationally, the global rating agencies such asStandard & Poors and Moodys do not perform grading of IPOs at all. While Standard &

Poors is the majority stakeholder in CRISIL Ltd, Moodys is the single biggest stakeholder in

ICRA Ltd. Similarly, the third global player Fitch IBCA (which acquired another rating agencyDun & Bradstreet in 2000) also does not grade IPOs as yet. The IPO grading is indicated on a

five point scale and a higher score indicating stronger fundamentals.

An IPO grading Scale

IPO Grade Assessment

5/5 Strong fundamentals

4/5 Above average fundamentals

3/5 Average fundamentals

2/5 Below average fundamentals



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1/5 Poor fundamentals

How can a company get its IPO graded?The company needs to first contact one of the grading agencies and mandate it for the grading

exercise. The agency would then follow the process outlined below.

Seek information required for the grading from the company.

On receipt of required information, have discussions with the companys management

and visit the companys operating locations, if required prepare an analytical assessment report.

Present the analysis to a committee comprising senior executives of the concerned

grading agency. This committee would discuss all relevant issues and assign a grade.

Communicate the grade to the company along with an assessment report outlining the

rationale for the grade assigned.



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Data-flow diagram showing the entire IPO-grading procedure

This process will ideally require 2-3 weeks for completion, so it may be a good idea for

companies to initiate the grading process about 6-8 weeks before the targeted IPO date to

provide sufficient time for any contingencies.

DIFFERENT PARAMETERS USED IN AN IPO GRADING

The IPO grading report will comprise of assessment on the following parameters:

Management quality

Business prospects: Industry & Company

Financial performance

Corporate governance

Project related factors

Other factors: Compliance track record

Litigation history

Capital history

COST INVOLVED

Though nothing has been declared officially but most of the credit rating have said that IPO-grading would not cost much to the issuers. They would be charging 10 basis points of the

amount to be raised with a ceiling of about Rs 10-15 lakhs. Thus, even in the case of a megaIPO, there would be a cap on fees, he noted. Around 100 IPOs hit the market on an average

every year. However, despite this seemingly big number, the total receipts for the entire rating

industry on account of grading fees would be only about Rs 10-15 crore.



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1992-93 6,252 528

1993-94 13,443 770

1994-95 12,928 1,336

1995-96 11,663 1,407

1996-97 11,387 697

1997-98 3,061 621998-99 7,911 32

1999-00 7,673 65

2000-01 6,618 119

2001-02 6,423 19

2002-03 5,732 14

2003-04 22,130 34

2004-05 25,526 34

2005-06 23,676 102

2006-07 19,718 93

TOTAL 1,90,536 5806

Thus we see that number of issue in the last 10 years has decreased but issue amount has

increased over the years. The highest number Initial Public Issue came in year 1995-96(1407 issues with a total issue amount of Rs.11,663 crore only). While in year 2004-05

number of issues were only 34 but issue amount was 25,526 crore.

PRESENT SCENERIO OF IPOs

IPO ISSUE

OPEN

(2010)

ISSUE

CLOSES

(2010)

PRICE

BAND

PROFIT/

LOSS

CRISIL,CARE,ICRA

IPO GARDING

(1-5)

SKS

MICROFINANCE

LTD

JUL 28 AUG 2 Rs850/- To

Rs 985/-

4

ENGINEERS

INDIA LTD

JUL 27 JUL 30 Rs 270/-

To Rs290/-

MIDFIELDINDUSTRIES LTD. JUL 19 JUL 21 Rs 126/-To Rs133/-

2

HINDUSTANMEDIA

VENTURES LTD.

JUL 05 JUL 07 Rs162/- ToRs 175/-

8.10% 4

ASTER

SILICATES LTD.

JUN 24 JUN 28 Rs112 /-

To Rs

61.23% 2



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116/-

TECHNOFABENGINEERING

LTD

JUN 29 JUL 02 Rs 230/-To Rs

240/-

17.19% 3

PARABOLICDRUGS LTD.

JUN 14 JUN 17 Rs75/- ToRs 85/-

27.33% 2

FATPIPE

NETWORKS

INDIA LTD.

JUN 07 JUN 09 Rs 82/- To

Rs 85/-

2

STANDARD

CHARTERED PLC

MAY 25 MAY 28 Rs 100/-

To Rs115/-

15.29%

JAYPEEINFRATECH LTD.

APR 29 MAY 04 Rs102/- ToRs 117/-

17.99% 3

SATLUJ JALVIDHYUT NIGAM

LTD.

APR 29 MAY 03 Rs 23/- ToRs 26/-

8.08% 4

TARA HEALTH

FOODS LTD.

APR 28 MAY 05 Rs175/- To

Rs 185/-

2

REVIEW OF RECENT FIVE IPOs

HINDUSTAN MEDIA VENTURES LIMITED

COMPANY - PRINT MEDIA

PRICE BAND - Rs 162 Rs 175

RECOMMENDATIONS - Subscribe (Emkay Global, Angel Broking)

Invest with high risk (Hem Securities)

ISSUE OPENS JUL 05, 2010

ISSUE CLOSES JUL 07, 2010

PRICE BAND Rs 162 Rs 175

FACE VALUE Rs 10



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ISSUE SIZE (Rs Mn. ) 2700

EPS (31/ 12/ 09) 5.11

LISTING BSE, NSE

REGISTRAR KARVY COMPUTER SHARE PVT. LTD.

LEAD MANAGER KATAK MAHINDRA, EDELWEIS S

PROMOTERS H T MEDIA LIMITED

COMPANY BACKGROUND

The Company was incorporated on July 9, 1918 under theIndian Companies Act, 1913 as a public limited company under the name 'The Behar Journals

Limited' and received the certificate of commencement of business on January 14, 1919. On

November 17, 1987 the name of the Company was changed to 'Searchlight Publishing House

Limited' to reflect to make the name of the Company more in consonance with its publication,'Searchlight'. Subsequently, the name of Company was changed to its present name 'Hindustan

Media Ventures Limited' to reflect the expanded business activities intended to be undertaken by

the Company and to be in consonance with the prevailing industry trends and a fresh certificateof incorporation to this effect was issued on November 11, 2008.

One of the leading print media company, which publishes,among others, Hindustan, the third largest daily newspaper in India, in terms of

Readership, with a Readership of 9.3 million readers. Hindustan began publication in

1936, during freedom movement and has been one of Indias eminent Hindi newspaperdailies for over 70 years. Hindustan has the largest Readership in key Hindi-speaking

markets of Bihar and Jharkhand, with a strong and growing presence in Delhi NCR and the

states of Uttar Pradesh and Uttarakhand. It is one of the fastest growing Hindi daily newspapers

in India.

Hindustanis presently printed at 16 locations in the states/regions of Uttar Pradesh, Bihar,

Jharkhand, Uttarakhand, Punjab and Delhi NCR. The distribution of newspapers takes place

through a multi-tiered network of agents and vendors.

They also publish two Hindi magazines, Nandan, a childrens magazine, andKadambini, a general interest magazine. The company also operates the website,

www.livehindustan.com, which focuses on providing news in Hindi with regional content



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OBJECT OF THE ISSUE

The objects of the Issue are to raise funds for:-

Setting up new publishing units (Rs 66cr)

upgrading existing plant and machinery (Rs 55cr)

prepayment of loans (Rs153cr)

STRENGTHS

Hindustan Strong brand recognition.

Emerging as a leading Hindi daily with leadership in key markets.

Ability to successfully launch Hindustan daily - in new markets.

Stron

Kotak Mahindra Group - Project (2003) New

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