The IPO Process in India

7/30/2019 The IPO Process in India

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INTRODUCTION

IPO stands forInitial Public Offering and means the new offer of shares

from a company which was previously unlisted. This is done by offering those shares to

the public, which were held by the promoters or the private investors prior to the IPO. In

the case when other investors or Promoter held the shares the stake holding comes down

to the extent their shares are offered to the public. In other cases new shares are issued to

the public and the shares, which are with the promoters stay with them. In both cases the

share of the promoters in the total capital comes down.

For example say there are 100 shares in a company and 50 of these are

offered to the public in an IPO then in such a case the promoters stake in the company

comes down from 100% to 50%. In another case the company issues 50 additional shares

to the public and the stake of the promoter comes down from 100% to 67%.

Normally in an IPO the shares are issued at a discount to what is

considered their intrinsic value and thats why investors keenly await IPOs and make

money on most of them. IPO are generally priced at a discount, which means that if the

intrinsic value of a share is perceived to be Rs.100 the shares will be offered at a price,

which is lesser than Rs.100 say Rs.80 during the IPO. When the stock actually lists in the

market it will list closer to Rs.100. The difference between the two prices is known as

Listing Gains, which an investor makes when investing in IPO and making money at the

listing of the IPO. A Bullish Market gives IPO investors a clear opportunity to achieve

long term targets in a short term phase.

Why Go Public?

Basically, going public (or participating in an "initial public offering" or

IPO) is the process in which a business owned by one or several individuals is converted

into a business owned by many. It involves the offering of part ownership of the company

to the public through the sale of debt or more commonly, equity securities (stock).Going public raises cash and usually a lot of it. Being publicly traded also

opens many financial doors:

Because of the increased scrutiny, public companies can usually get better rateswhen they issue debt.

As long as there is market demand, a public company can always issue morestock. Thus, mergers and acquisitions are easier to do because stock can be issued

as part of the deal.


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Trading in the open markets means liquidity. This makes it possible to implementthings like employee stock ownership plans, which help to attract top talent.

Being on a major stock exchange carries a considerable amount of

prestige. In the past, only private companies with strong fundamentals could qualify for

an IPO and it wasn't easy to get listed.

The internet boom changed all this. Firms no longer needed strong

financials and a solid history to go public. Instead, IPOs were done by smaller startups

seeking to expand their businesses. There's nothing wrong with wanting to expand, but

most of these firms had never made a profit and didn't plan on being profitable any time

soon. Founded on venture capital funding, they spent like Texans trying to generate

enough excitement to make it to the market before burning through all their cash. In cases

like this, companies might be suspected of doing an IPO just to make the founders rich.

This is known as an exit strategy, implying that there's no desire to stick around and

create value for shareholders. The IPO then becomes the end of the road rather than the

beginning.

How can this happen? Remember: an IPO is just selling stock. It's all

about the sales job. If you can convince people to buy stock in your company, you can

raise a lot of money.

The IPO Process in India

The IPO process in India consists of the following steps: -

Appointment of merchant banker and other intermediaries Registration of offer document Marketing of the issue Post- issue activities

Appointment of Merchant Banker and Other Intermediaries

One of the crucial steps for successful implementation of the IPO is the appointment of amerchant banker. A merchant banker should have a valid SEBI registration to be eligible

for appointment.

A merchant banker can be any of the followinglead manager, co-manager,

underwriter or advisor to the issue.


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Certain guidelines are laid down in Section 30 of the SEBI Act, 1992 on the maximum

limits of intermediaries associated with the issue:

Size of the Issue No. Of lead Managers

50 cr. 2

50100 cr. 3

100200 cr. 4

200 - 400 cr. 5

Above 400 cr. 5 or more as agreed by

the board

The number of co- managers should not exceed the number of lead managers.

There can only be one advisor/consultant to the issue.

There is no limit on the number of underwriters.

Other Intermediaries

Registrar to the Issue: Registration with SEBI is mandatory to take on responsibilities

as a registrar and share transfer agent. The registrar provides administrative support to the

issue process. The registrar of the issue assists in everything from helping the lead

manager in the selection of Bankers to the Issue and the Collection Centres to preparing

the allotment and application forms, collection of application and allotment money,

reconciliation of bank accounts with application money, listing of issues and grievance

handling.

Bankers to the Issue: Any scheduled bank registered with SEBI can be appointed as the

banker to the issue. There are no restrictions on the number of bankers to the issue. The

main functions of bankers involve collection of application forms with money,

maintaining a daily report , transferring the proceeds to the share application money

account maintained by the controlling branch, and forwarding the money collected with

the application forms to the registrar.

Underwriters to the Issue: Underwriting involves a commitment from the underwriter

to subscribe to the shares of a particular company to the extent it is under subscribed bythe public or existing shareholders of the corporate. An underwriter should have a

minimum net worth of 20 lakhs, and his total obligation at any time should not exceed 20

times the underwriters net worth. A commission is paid to the writers on the issue price

for undertaking the risk of under subscription. The maximum rate of underwriting

commission paid is as follows:


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Nature of Issue On amount

Devolving On

Underwriters

On amounts

subscribed by public

Equity shares,

preference shares

and debentures

2.5% 2.5%

Issue amount

upto Rs.5 lakhs

2.5% 1.5%

Issue amount

exceeding %

2.0% 1.0%

Broker To the Issue: Any member of a recognized stock exchange can become a broker

to the issue .A broker offers marketing support, underwriting support, disseminates

information to investors about the issue and distributes issue stationery at retail investorlevel.

Registration Of The Offer Document

For registration,10 copies of the draft prospectus should be filed with SEBI. The draft

prospectus filed is treated as a public document. The lead manger also files the document

with all listed stock exchanges. Similarly, SEBI uploads the document on its website

www.sebi.com. Any amendments to be made in the prospectus should be done within

21days of filing the offer document. Thereafter the offer document is deemed to have

been cleared by SEBI.

Promoters Contribution: In the public issue of an unlisted company, the promoters

shall contribute not less than 20% of the post issue capital as given in Chapter- IV of the

SEBI Act, 1992.The entire contribution should have been made before the opening of the

issue.

Lock-in Requirement

The minimumpromoters contribution will be locked in for a period of 3 years. The lock-

in period commences from the date of allotment or from the date of commencement ofcommercial production, whichever is earlier.

Marketing of the Issue

Timing of the Issue Retail distribution


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Reservation of the Issue Advertising Campaign

Timing of the Issue

An appropriate decision regarding the timing of the IPO should be made, keeping in mindthe general sentiments prevailing in the investor market. For example, if recession is

prevailing in the economy (the investors are pessimistic in their approach), then the firm

will not be able to get a good pricing for its IPO, as investors may not be willing to put

their money in stocks.

Retail distribution:

Retail distribution is the process through which an attempt is made to increase the

subscription. Normally, a network of brokers undertakes retail distribution. The issuer

company organises road shows in which conferences are held, which are attended by high

networth investors, brokers and sub-brokers. The company makes presentations and

solves queries raised by participants. This is one of the best ways to raise subscription.

Reservation in the Issue

Sometimes reservations are tailored to a specific class of investors. This reduces the

amount to be issued to the general public. The following are the classes of investors for

whom reservations are made:

Mutual Funds Banks and Financial Institutions; Non-resident Indians (NRI) and Overseas

Corporate Bodies (OCB) The total reservation for NRI/OCB should not exceed

10% of the post-issue capital, and individually it should not exceed 5% of the post

issue capital.

Foreign Institutional Investors (FII): The total reservation for FII cannot exceed10% of the post-issue capital, and individually it should not exceed 5% of the post

issue capital.

Employees: Reservation under this category should not exceed 10% of the postissue capital.

Group Shareholders: Reservation in this category should not exceed 10% of thepost issue capital.

The net offer made to the public should not be less then the 25% of the total issue at any

point of time.

Post-Issue Activities


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Principles of Allotment: After the closure of the subscription list, the merchantbanker should inform, within 3 days of the closure, whether 90% of the amount

has been subscribed or not. If it is not subscribed up to 90%, then the underwriters

should bring the shortfall amount within 60 days. In case of over subscription, the

shares should be allotted on a pro-rata basis, and the excess amount should be

refunded with interest to the shares holders within 30 days from the date of

closure.

Formalities Associated With Listing: The SEBI lists certain rules andregulations to be followed by the issuing company. These rules and regulations

are laid down to protect the interests of investors. The issuing company should

disclose to the public its profit and loss account, balance sheet, information

relating to bonus and rights issue and any other relevant information.

WHAT IS BOOK BUILDING?

Book Building is the process of determining the price at which an Initial Public Offering

will be offered. Book building is a common practice in developed countries and has

recently been making inroads into emerging markets as well. When companies are on the

look out to raise money for their business operations, they use various means for the

same.

Two of the most popular means to raise money are Initial Public Offer (IPO) and Follow

on Public Offer (FPO).

During the IPO or FPO, the company offers its shares to the public either at fixed price oroffers a price range, so that the investors can decide on the right price. The method of

offering shares by providing a price range is called as book building method.

Types of investors

There are three kinds of investors in a book-building issue.

The retail individual investor (RII),

The non-institutional investor (NII)

The Qualified Institutional Buyers (QIBs)

There are two types of Public Issues:

FIXED PRICE ISSUE: - When the issuer at the outset decides the issue price and

mentions it in the offer document, it is commonly known as fixed price issue.
http://en.wikipedia.org/wiki/Emerging_marketshttp://en.wikipedia.org/wiki/Emerging_markets


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BOOK BUILT ISSUE:-When the price of an issue is discovered on the basis of demand

received from the prospective investors at various price levels, it is called as book built

issue.

BOOK BUILDING PROCESS IN INDIA

Book Building is fundamentally a procedure utilized in IPOs for effective pricediscovery. Its a method where, during the time period for which the initial public offer is

open, bids are gathered from traders at different prices, which are higher or equal to the

ground price. The IPO offer price is decided following the bid ending date.


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GUIDELINES BY SEBI

On the recommendations of Malegam committee, The concept of Book Buildingassumed significance in India as SEBI approved, with effect from November 1,

1995, the use of the process in pricing new issues.

SEBI issued the guidelines under which the option of 100%book-building wasavailable to only those issuer companies which are to make an issue of capital of

and above Rs. 100crore.

These guidelines were modified in 1998-99.The ceiling of issue size was reducedto Rs. 25crore.

SEBI modified book-building norms for public issues in 1999and allowed the issuer to choose either the existing or the

modified mode of book building.

Modified Guidelines:-

Compulsory display of demand at the terminals was made optional. The reservation of 15% of the issue size for individual investors could be clubbed

with fixed price offer.

The issuer was allowed to disclose either the issue size or the number of securitiesbeing offered.

The allotment of the book built portion was required to be made in Demat modeonly.

In April 2000, SEBI modified guidelines for the 100% book-building process. i.e. a maximum of 60% of the issue was

allowed to Institutional investors and atleast 15% to non-

institutional investors who had applied for more than 1,000

share

TYPES OF BOOK-BUILDING:

The Companies are bound to adhere to the SEBIs guidelines for book building offers in

the following manner:


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75% book building

100% book building

75 per cent Book-Building Process:

Under this process 25 per cent of the issue is to be sold at a fixed price and the balance

of 75 per cent through the Book Building process.

2. Offer to Public through Book Building Process:The process specifies that an issuer company may make an issue of securities to the

public through prospectus in the following manner:

A. 100 per cent of the net offer to the public through book building process, or

B. 75 per cent of the net offer to the public through book building process and 25 per cent

of the net offer to the public at a price determined through book building process.

100% BOOK BUILDING

BOOK BUILDING

METHOD

FIXED PRICE

METHOD

75% OF THE PUBLIC ISSUE CAN

BE OFFERED TO INSTITUTIONAL

INVESTORS WHO HAVE

PARTICIPATED IN THE BIDDING

PROESS.

25% OF THE PUBLIC ISSUE CAN

BE OFFERED THROUGH

PROSPECTUS AND SHALL BE

RESERVED FOR ALLOCATION TO

INDIVIDUAL INVESTORS WHO

HAVE NOT PARTICIPATED IN

THE BIDDING PROCESS.

TOTAL PUBLIC ISSUE

i.e. net offer to the ublic

CHART 1


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75% OF THE NET OFFER THROUGH BOOK BUILDING PROCESS

ROLE OF INTERMEDIARIES

Who are the intermediaries in an issue?


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Merchant Bankers to the issue or Book Running Lead Managers (BRLM), syndicate

members, Registrars to the issue, Bankers to the issue, Auditors of the company,

Underwriters to the issue, Solicitors, etc. are the intermediaries to an issue. The issuer

discloses the addresses, telephone/fax numbers and email addresses of these

intermediaries. In addition to this, the issuer also discloses the details of the compliance

officer appointed by the company for the purpose of the issue.

Role of Merchant Bankers in Public Issues:

(i) Deciding on the size and timing of a public issue in the light of the market conditions.

(ii) Preparing the base of successful issue marketing from the initial documentation to the

preparation of the actual launch.

(iii) Optimum underwriting support.

(iv) Appointment of bankers and brokers as well as issue houses.

(v) Professional liaison with share market functionaries like brokers, portfolio managersand financial press for pre-selling and media coverage.

(vi) Preparation of draft prospectus and other documents.

(vii) Wide coverage throughout the country for collection of applications.

(viii) Preparation of advertising and promotional material

Who is eligible to be a BRLM?

A Merchant banker possessing a valid SEBI registration in accordance with the SEBI

(Merchant Bankers) Regulations, 1992 is eligible to act as a Book Running LeadManager to an issue.

What is the role of a Lead Manager? (Pre and post issue)

In the pre-issue process, the Lead Manager (LM) takes up the due diligence of companys

operations/ management/ business plans/ legal etc. Other activities of the LM include

drafting and design of Offer documents, Prospectus, statutory advertisements and

memorandum containing salient features of the Prospectus. The BRLMs shall ensure

compliance with stipulated requirements and completion of prescribed formalities with

the Stock Exchanges, RoC and SEBI including finalization of Prospectus and RoC filing.

Appointment of other intermediaries viz., Registrar(s), Printers, Advertising Agency and

Bankers to the Offer is also included in the pre-issue processes.

The LM also draws up the various marketing strategies for the issue. The post issue

activities including management of escrow accounts, coordinate non-institutional


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allocation, intimation of allocation and dispatch of refunds to bidders etc are performed

by the LM. The post Offer activities for the Offer will involve essential follow-up steps,

which include the finalization of trading and dealing of instruments and dispatch of

certificates and demat of delivery of shares, with the various agencies connected with the

work such as the Registrar(s) to the Offer and Bankers to the Offer and the bank handling

refund business. The merchant banker shall be responsible for ensuring that these

agencies fulfill their functions and enable it to discharge this responsibility through

suitable agreements with the Company.

What is the role of a registrar?

The Registrar finalizes the list of eligible allottees after deleting the invalid applications

and ensures that the corporate action for crediting of shares to the demat accounts of the

applicants is done and the dispatch of refund orders to those applicable are sent. The Lead

manager coordinates with the Registrar to ensure follow up so that that the flow of

applications from collecting bank branches, processing of the applications and othermatters till the basis of allotment is finalized, dispatch security certificates and refund

orders completed and securities listed.

Importance of Underwriting in book building.

Underwriting is a good technique of marketing the securities. The importance of under-

writing can be adjudged by the following advantages

Assurance of Adequate Finance.

Benefit of Expert Advice.Increase in Goodwill of the Company.

Geographical Dispersion of Securities.

Service to Prospective Buyers.

BOOK BUILDING- A PRICE DISCOVERY METHOD.

Book building is actually a price discovery method. In this method, the company doesn't

fix up a particular price for the shares, but instead gives a price range, e.g. Rs 80-100.

When bidding for the shares, investors have to decide at which price they would like to

bid for the shares, for e.g. Rs 80, Rs 90 or Rs 100. They can bid for the shares at any

price within this range.

Based on the demand and supply of the shares, the final price is fixed. The lowest price

(Rs 80) is known as the floor price and the highest price (Rs 100) is known as cap price.


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The price at which the shares are allotted is known as cut off price.

The entire process begins with the selection of the lead manager, an investment banker

whose job is to bring the issue to the public.

Both the lead manager and the issuing company fix the price range and the issue size.

Next syndicate members are hired to obtain bids from the investors. Normally the issue is

kept open for 5 days.

Once the offer period is over, the lead manager and issuing company fix the price at

which the shares are sold to the investors. If the issue price is less than the cap price, the

investors who bid at the cap price will get a refund and those who bid at the floor price

will end up paying the additional money.

For e.g. if the cut off in the above example is fixed at Rs 90, those who bid at Rs 80, will

have to pay Rs 10 per share and those who bid at Rs 100, will end up getting the refund

of Rs 10 per share. Once each investor pays the actual issue price, the shares are allotted.

The IPO Process in India

Documents

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