Blackbook.docx

Initial Public Offering

Declaration of Learner

I the undersigned Mr. Suraj Surendra Gupta here by, declare that the work embodied in this project work titled “Initial Public Offering (IPO)”, forms my own contribution to the research work carried out under the guidance of Mr. Prasanna Choudhari is a result of my own research work and has not been previously submitted by any other University for any other Degree/Diploma to this or any other University. Wherever reference has been made to previous works of others, it has been clearly indicated as such and included in the bibliography. I, here by further declare that all information of this document has been obtained and presented in accordance with academic rules and ethical conduct.

College Seal

Name and Signature of the learner

Certified by Name and Signature of the Guiding Teacher Signature of External Teacher Signature of Principal Date of Submission

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Initial Public Offering

Ghanshyamdas Saraf College of Arts & Commerce S.V. Road, Malad West, Mumbai 4000

Certificate

This is to certify that Mr. Suraj Surendra Gupta has worked and duly completed his Project Work for the degree of Bachelor in Commerce (Financial Markets) under the Faculty of Commerce in the subject of Finance and his project is entitled, “Initial Public Offering (IPO)” under my supervision. I further certify that the entire work has been done by the learner under my guidance and that no part of it has been submitted previously for any Degree or Diploma of any University. It is his own work and facts reported by his personal findings and investigations.

Name and Signature of Guiding Teacher

Date of submission:

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Initial Public Offering

Initial Public Offering (IPO)

A Project Submitted to University of Mumbai for partial completion of the degree of Bachelor in Commerce (Financial Markets) Under the Faculty of Commerce

By Suraj Surendra Gupta

Under the Guidance of Mr. Prasanna Choudhari

Ghanshyamdas Saraf College of Arts & Commerce S.V. Road, Malad West, Mumbai 4000

April 2019

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Initial Public Offering

Acknowledgment

To list who all have helped me is difficult because they so numerous and the depth is so enormous. I would like to acknowledge the following as being idealistic channels and fresh dimensions in the completion of this project. I take this opportunity to thank the University of Mumbai for giving me chance to do this project. I would like to thank my Principal, _______________ for providing the necessary faculties required for completion of this project. I take this opportunity to thank our Coordinator Lipi Mukherjee, for his moral support and guidance. I would also like to express my sincere gratitude towards my project guide Prof. Prasanna Choudhary whose guidance and care made the project successful. I would thank mu College Library, for having provided various reference books and magazines related to my project. Lastly, I would like to thank each and every person who directly or indirectly helped me in the completion of the project especially my Parents and Peers who supported me throughout my project.

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Initial Public Offering

INDEX

Sr.

Titles

No. 1.

INTRODUCTION

2.

IPO HISTORY & BACKGROUND

3.

WHAT IS AN IPO (INITIAL PUBLIC OFFERING)?

4.

WHY HAVE AN IPO?

5.

ADVANTAGES & DISADVANTAGES OF IPO

6.

PROCEDURE TO APPLY FOR AN IPO

7.

STEPS IN AN INITIAL PUBLIC OFFERING (IPO)

8.

WHAT IS THE IPO PROCESS?

9.

UNDERSTANDING FINANCIAL LINGO IN IPO

10.

WHAT IS BOOK BUILDING?

11.

REVERSE BOOK BUILDING

12.

PROCEDURES FOR BOOK BUILDING & REVERSE BOOK BUILDING

13.

APPLICATION SUPPORTED BY BLOCKED AMOUNT (ASBA)

14.

Q&A REGARDING IPO & ASBA

15.

ALTERNATIVE SHARE OFFERING STRATEGIES

16.

TOP IPOS OF 2018

17.

VENTURE-CAPITAL-BACKED IPO

18.

IPO LOCK-UP

19.

IPO VS PRIVATE PLACEMENT: WHAT'S THE DIFFERENCE?

20.

WHAT IS THE DIFFERENCE BETWEEN AN IPO AND A SEASONED ISSUE?

21.

HOW AN IPO IS VALUED

22.

PRE-IPO PLACEMENT

23.

INVESTING IN IPO ETFS

24.

OVERVIEW OF IPO

Page No.

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Initial Public Offering

1. INTRODUCTION

The term Initial Public Offering (IPO) has been a buzzword amongst the investors for decades. It is the process where a privately held company becomes a publicly traded company with the initial sale of its stock. An IPO is a tool that companies use to secure capital through investments for future use. In most instances, this investment is used to expand or improve the business. Market experts provide ratings for different upcoming IPOs which tend to be one of the reasons to subscribe for retail investors.

Market Regulator, Securities and Exchange Board of India (SEBI) says on its website: “...Irrespective of the grade obtained by the issuer, the investor needs to make his/her own independent decision regarding investing in any issue after studying the contents of the prospectus, including risk factors, carefully.” In other words, IPO rating is, at the most, an add-on.

Indian Securities market has witnessed introduction of some important institutional mechanisms in the early part of this millennium in the realms of primary market & secondary market as well. These initiatives were aimed at bringing in the best practices and making the Indian Capital Market comparable to the global markets. An important reform in the primary market sphere is the introduction of Book Building process of issuing shares. Book Building involves soliciting from the professional investors how many shares they are willing to buy and at what price. On the basis of the resulting demand curve, the firm and its investment bankers determine the IPO price. Book Building process helps the Issuer not only to determine the demand but also aids the process of ‘price discovery’ i.e. the price at which shares shall be issued will be determined by the demand and supply forces of the market. A retail investor can bid in a book-built issue for a value not more than `2 00,000. Any bid made in excess of this will be considered in the HNI category.

Initial public offering (IPO) or stock market launch is a type of public offering in which shares of a company are sold to institutional investors and usually also retail (individual) investors; an IPO is underwritten by one or more investment banks, who also arrange for the shares to be listed on one or more stock exchanges. Through this process, colloquially known as floating, or going public, a privately held company is transformed into a public company. Initial public offerings can be used: to raise new equity capital for the company concerned; to monetize the investments of private shareholders such as

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Initial Public Offering company founders or private equity investors; and to enable easy trading of existing holdings or future capital raising by becoming publicly traded enterprises.

After the IPO, shares traded freely in the open market are known as the free float. Stock exchanges stipulate a minimum free float both in absolute terms (the total value as determined by the share price multiplied by the number of shares sold to the public) and as a proportion of the total share capital (i.e., the number of shares sold to the public divided by the total shares outstanding). Although IPO offers many benefits, there are also significant costs involved, chiefly those associated with the process such as banking and legal fees, and the ongoing requirement to disclose important and sometimes sensitive information.

Details of the proposed offering are disclosed to potential purchasers in the form of a lengthy document known as a prospectus. Most companies undertake an IPO with the assistance of an investment banking firm acting in the capacity of an underwriter. Underwriters provide several services, including help with correctly assessing the value of shares (share price) and establishing a public market for shares (initial sale). Alternative methods such as the Dutch auction have also been explored and applied for several IPOs.

After the IPO, shares traded freely in the open market are known as the free float. Stock exchanges stipulate a minimum free float both in absolute terms (the total value as determined by the share price multiplied by the number of shares sold to the public) and as a proportion of the total share capital (i.e., the number of shares sold to the public divided by the total shares outstanding). Although IPO offers many benefits, there are also significant costs involved, chiefly those associated with the process such as banking and legal fees, and the ongoing requirement to disclose important and sometimes sensitive information.

Details of the proposed offering are disclosed to potential purchasers in the form of a lengthy document known as a prospectus. Most companies undertake an IPO with the assistance of an investment banking firm acting in the capacity of an underwriter. Underwriters provide several services, including help with correctly assessing the value of shares (share price) and establishing a public market for shares (initial sale). Alternative methods such as the Dutch auction have also been explored and applied for several IPOs. 8

Initial Public Offering

2. IPO HISTORY & BACKGROUND

The Dutch are credited with conducting the first modern IPO by offering shares of the Dutch East India Company - often called VOC for short - to the general public. The company paid an annual dividend that ranged between 12% and 63% to its shareholders.

In modern times, IPOs have become a favoured instrument of entrepreneurs to raise capital for future expansion. As a new industry gains prominence and its future prospects hyped by the media, start-ups in the sector capitalize by offering shares in their company to the public.

Companies in the technology sector are examples of this trend. Tech IPOs multiplied at the height of the dot com boom as start-ups without revenues rushed to list themselves on the stock market. 2008's financial crisis resulted in a year with the least number of IPOs. The market for IPOs has recovered since then but not so much.

India is a promising market when it comes to commodity, currency, equity or derivatives. This means that in the coming decade, exchanges engaged in these asset classes will only see higher growth as more and more investors take to investing. Beginning of 2017 has proved to be yet another good year for IPOs as some of the well-known names like Bombay Stock Exchange (BSE), D-Mart’s parent company Avenue Supermarts have given tremendous returns to investors on the day of the listing. Among the other companies (some of them already armed with a SEBI approval) coming to tap the primary market this year includes India’s premier stock exchange; National Stock Exchange, Cochin Shipyard Ltd. etc. Looking back, 2016 turned out to be a good year for IPOs both in terms of funds raised and performance & we anticipate that this trend will continue in 2017 too.

Before we go into the detailing of the IPO, let’s understand what an IPO is. An IPO, or Initial Public Offering, is an invitation to the public to subscribe to a company's share capital. When these needs are large, companies need to approach investors to finance their future fund requirements. In return, investors can expect a share of the company's future profits through dividends, and capital growth through stock price appreciation.

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Initial Public Offering The company management is responsible for running the business well, with healthy revenue and profit growth. In turn, this induces more investors to participate in that business by buying the company's shares in the stock market (secondary market). The result: share price appreciation. When investors are highly confident of both the prospects of the company's business and its management's ability to deliver on that potential, the scope for future share price appreciation tends to get factored into the price of the newlyissued shares as soon as they are listed on the stock exchange.

The earliest form of a company which issued public shares was the case of the publicani during the Roman Republic. Like modern joint-stock companies, the publicani were legal bodies independent of their members whose ownership was divided into shares, or partes. There is evidence that these shares were sold to public investors and traded in a type of over-the-counter market in the Forum, near the Temple of Castor and Pollux. The shares fluctuated in value, encouraging the activity of speculators, or quaestors. Mere evidence remains of the prices for which partes were sold, the nature of initial public offerings, or a description of stock market behaviour. Publicani lost favour with the fall of the Republic and the rise of the Empire.

In the early modern period, the Dutch were financial innovators who helped lay the foundations of modern financial systems. The first modern IPO occurred in March 1602 when the Dutch East India Company offered shares of the company to the public in order to raise capital. The Dutch East India Company (VOC) became the first company in history to issue bonds and shares of stock to the general public. In other words, the VOC was officially the first publicly traded company, because it was the first company to be ever actually listed on an official stock exchange. While the Italian city-states produced the first transferable government bonds, they did not develop the other ingredient necessary to produce a fully-fledged capital market: corporate shareholders. As Edward Stringham (2015) notes, "companies with transferable shares date back to classical Rome, but these were usually not enduring endeavours and no considerable secondary market existed (Neal, 1997, p. 61)."

In the United States, the first IPO was the public offering of Bank of North America around 1783.

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Initial Public Offering

3. WHAT IS AN IPO (INITIAL PUBLIC OFFERING)?

An Initial Public Offering (IPO) is the first sale of stocks issued by a company to the public. Prior to an IPO, a company is considered a private company, usually with a small number of investors (founders, friends, families, and business investors such as venture capitalists or angel investors). When a company goes through an IPO, the general public is able to buy shares and own a portion of the company for the first time. An IPO is often referred to as “going public” and the underwriting process is typically led by an investment bank.

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Initial Public Offering A corporate may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is the largest source of funds with long or indefinite maturity for the company.

An initial public offering, or IPO, is the very first sale of stock issued by a company to the public. Prior to an IPO the company is considered private, with a relatively small number of shareholders made up primarily of early investors (such as the founders, their families and friends) and professional investors (such as venture capitalists or angel investors). The public, on the other hand, consists of everybody else – any individual or institutional investor who wasn’t involved in the early days of the company and who is interested in buying shares of the company. Until a company’s stock is offered for sale to the public, the public is unable to invest in it. You can potentially approach the owners of a private company about investing, but they're not obligated to sell you anything. Public companies, on the other hand, have sold at least a portion of their shares to the public to be traded on a stock exchange. This is why an IPO is also referred to as "going public."

A privately held company has some benefits that are forfeited once it goes public. For example, its owners do not have to disclose much financial or accounting information about the company. In the United States, it is easy and relatively inexpensive to found a private company, and most small to medium sized businesses are private. But large companies can be private too. For example, IKEA, Publix Supermarkets, Mars Candy, and Hallmark Cards are all privately held.

Public companies have thousands of shareholders and are subject to strict rules and regulations. They must form a board of directors and they must report auditable financial and accounting information every quarter. In the United States, public companies report to the Securities and Exchange Commission (SEC). In other countries, public companies are overseen by governing bodies similar to the SEC. In addition, public companies must adhere to regulations and requirements set forth by the stock exchanges where their shares are listed. Being on a major stock exchange carries a considerable amount of prestige. Historically, only private companies with strong fundamentals and proven profitability potential could qualify for an IPO and it wasn't easy to get listed. Today, with competition among many stock exchanges, listing requirements have relaxed a bit.

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Initial Public Offering

4. WHY HAVE AN IPO?

Why go public, then? Going public raises a great deal of money for the company in order for it to grow and expand. Private companies have many options to raise capital – such as borrowing, finding additional private investors, or by being acquired by another company. But, by far, the IPO option raises the largest sums of money for the company and its early investors. Some of the largest IPO’s to date are:



Alibaba Group (BABA) in 2014 raising $25 billion



American Insurance Group (AIG) in 2006 raising $20.5 billion



VISA (V) in 2008 raising $19.7 billion



General Motors (GM) in 2010 raising $18.15 billion



Facebook (FB) in 2012 raising $16.01 billion

Reasons Why Companies Go Through an IPO Companies that are looking to grow often use an Initial Public Offering to raise capital. The biggest advantage of an IPO is the additional capital raised. The capital raised can be used to buy additional property, plant and equipment (PPE), fund research and development (R&D), expand, or pay off existing debt. There is also an increased awareness of a company through an IPO, which typically generates a wave of potential new customers.

In addition, private investors/founding partners/venture capitalists can use an IPO as an exit strategy. For example, when Facebook went public, Mark Zuckerberg sold nearly 31 million shares worth US$1.1 billion. A public offering is one of the most common ways venture capitalists make a significant amount of money.

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Initial Public Offering The top reason to go public… to raise money!

Largest IPO markets Prior to 2009, the United States was the leading issuer of IPOs in terms of total value. Since that time, however, China (Shanghai, Shenzhen and Hong Kong) has been the leading issuer, raising $73 billion (almost double the amount of money raised on the New York Stock Exchange and NASDAQ combined) up to the end of November 2011. The Hong Kong Stock Exchange raised $30.9 billion in 2011 as the top course for the third year in a row, while New York raised $30.7 billion. Indian Stock Markets are also emerging as a leading IPO market in the world. As many as 153 initial public offers hit the Indian stock market in 2017 and raised USD 11.6 billion. 14

Initial Public Offering Largest IPOs Company

Year of IPO

Amount

Inflation adjusted

The Alibaba Group

2014

$25B

$26 billion

SoftBank Group

2018

$23.5B

$24 billion

Agricultural Bank of China

2010

$22.1B

$25 billion

Industrial and Commercial Bank of China

2006

$21.9B

$27 billion

American International Assurance

2010

$20.5B

$24 billion

Visa Inc.

2008

$19.7B

$23 billion

General Motors

2010

$18.15B

$21 billion

NTT DoCoMo

1998

$18.05B

$28 billion

Enel

1999

$16.59B

$25 billion

Facebook

2012

$16.01B

$17 billion

The Government of Saudi Arabia is considering IPO of Saudi Aramco and selling around 5% of them. The IPO has been predicted by Forbes to have a price of $100 billion.

Being publicly traded also opens many financial doors: Because of the increased scrutiny from analysts and investors, public companies can usually enjoy better (i.e. lower) interest rates when they issue debt. Moreover, as long as there is market demand, a public company can issue more stock in a socalled secondary offering. Thus, mergers and acquisitions are easier to arrange because stock can be issued as part of the deal.

For investors, trading in the open markets means liquidity. If you are a shareholder of a private company, it is very difficult to sell your shares, and even more difficult to value your shares. A public company trades on a stock market, with ready buyers and sellers and known price and transaction data. The stock market is therefore referred to as the secondary market, since investors are buying and selling stock from 15

Initial Public Offering other public investors and not from the company itself. Public markets and liquidity also makes it possible for a company to implement benefits like employee stock ownership plans (ESOPs), which help to attract top talent.

The biggest motivation to conduct an initial public offering (IPO) is typically financial. “Going public gets you cash – and usually lots of it,” says Eric Chen, an associate professor of business administration at the University of Saint Joseph in West Hartford, Conn., where he teaches finance, strategy and law classes. In his previous career in corporate finance and equity research, Chen says he led or participated in taking more than 25 companies public. “Where you might have been cash-constrained before, you’re now flush with capital that you’re supposed to invest in the company in order to make it grow exponentially,” he says.

In addition, you can also use your company stock as currency. It’s worth something because people can buy and sell it on a public exchange. You can use it to acquire other companies to grow faster, to take out competitors or to strengthen your market position through synergy.

There is also a certain perceived legitimacy in being public, Chen says. “People will know about you. Being public will make it easier for you to do business with others. Securing financing will also be easier,” he says, since the money companies raise from going public usually shores up the balance sheet. Potential investors and business partners may feel more comfortable working with you since your company information will be filed with the Securities and Exchange Commission (SEC) and available for all to see.

In addition to increasing perceptions of your company’s legitimacy, “there is just a perceived cool factor about going public, ringing the bell, and trading on the stock market—it’s like a rite of passage,” says Jeremy S. Office, founder and principal of Maclendon Wealth Management and co-founder and managing partner of venture fund SJO Worldwide, both in in Delray Beach, Fla.

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Initial Public Offering

5. ADVANTAGES & DISADVANTAGES OF IPO

Advantages: The primary objective of an IPO is usually to raise capital for a business. However, a public offering has other benefits as well. 

A public company can raise additional funds in the future through secondary offerings because it already has access to the public markets through the IPO.



Many companies will compensate executives or other employees through stock compensation. Stock in a public company is more attractive to potential employees because shares can be sold more easily. Being a public company may help a company recruit better talent.



Merger and acquisition activity may be easier for a public company that can use its shares to acquire another firm. Similarly, it is easier to establish the value of an acquisition target if it has publicly listed shares.

Some companies will conduct an IPO because of the prestige and credibility it imbues. This may be a factor for future lenders who might be more willing to make loans at more favourable terms if they know the company has a diversified shareholder base and is accountable to the SEC for accurate financial reporting. However, the real value of intangible advantages like prestige are difficult to measure.

Disadvantages: An IPO is expensive, and the costs of maintaining a public company are ongoing and usually unrelated to the other costs of doing business. There are other disadvantages of an IPO as well. 

Fluctuations in a company's share price can be a distraction for management, which may be compensated and evaluated based on stock performance rather than real financial results.



Strategies used to inflate the value of a public company's shares, such as using excessive debt to buy back stock, can increase the risk and instability in the firm.



A public company must file reports with the SEC that may reveal secrets and business methods that could help competitors.



Rigid leadership and governance by the board of directors can make it more difficult to retain good managers willing to take risks. 17

Initial Public Offering Having public shares available requires significant effort and expense that does not end after the IPO has completed. Public companies are also at risk of lawsuits and legal actions related to their public shares that can be expensive and distracting.

Key Points: Pros 

A large, diverse group of investors to raise

Cons 

Company becomes required to disclose

capital

financial, accounting, tax, and other



Gives the company a lower cost of capital

business information



Increase the company’s exposure, prestige,





and public image, which can help the

marketing costs, many of which are

company’s sales and profits

ongoing

Public companies can attract and retain



through liquid equity participation (e.g.



Increased time, effort and attention required of management for reporting

better management and skilled employees



Significant legal, accounting and



Risk that required funding will not be

ESOPs)

raised if the market does not accept the

Facilitating acquisitions (potentially in

IPO price, sending the stock price lower

return for shares of stock)

right after the offering

Raises the largest amount of money for the



Public dissemination of information which may be useful to competitors, suppliers

company compared to other options

and customers 

Loss of control and stronger agency problems due to new shareholders, who obtain voting rights and can effectively control company decisions via the board of directors



Increased risk of legal or regulatory issues, such as private securities class action lawsuits and shareholder actions

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Initial Public Offering

6. PROCEDURE TO APPLY FOR AN IPO

You can apply for an IPO through online as well as offline mode: Online Mode: To apply in IPO's online, an investor has to open a demat account / trading account with financial institution that provide this facility. Most Nationalised Banks and Stock Brokers in India offer the facility to apply IPO's online. Once demat & trading account is opened, one should follow below steps to apply online: 1. First login in your trading account and select the IPO you wish to invest in. 2. Transfer funds from your bank account to your trading account. 3. Select the number of shares you want to apply for and the price at which you want to bid for (or use cut off option) and then press submit button. If you get the allotment, the shares will be credited to your demat account. The remaining money will be credited to your bank account through ECS. The most convenient way to apply in an IPO online is using 3-in-1 account (bank account, demat account & trading account) offered by banks. The process of applying IPO's online is extremely convenient.

Offline Mode: You can apply in any public issue through your bank account. You have to fill the details such as your Name, PAN number, Demat account number, bid quantity, bid price and other relevant details and submit the ASBA application form to the banking branch which has been designated to act as a Self-Certified Syndicate Banks (SCSB) for providing ASBA services. After the submission of your application, the bank will upload the details of the application in the bidding platform. Ensure that you fill the correct details in the form, otherwise your application may get rejected.

Note: ASBA forms are available at the designated branches of the bank authorized to act as a SelfCertified Syndicate Banks (SCSB). List of the Banks and their designated branches where ASBA form can be submitted is available on BSE, NSE and SEBI website. List of SCSB would also be available in the ASBA application form.

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Initial Public Offering

INVESTORS IN IPO

There we have 4 types of investors in IPO. Categorically they are: 1. Qualified Institutional Buyers (QIB) 2. Non-institutional investors (NII) 3. Retail individual investors (RII) 4. High net worth individual or investors (HNI)

All above categories of investors have to pass through a specific quota allotment against over subscribe as per SEBI rule to be maintained by the concerned IPO company obviously through computerised method with no chance of manipulation.

Basically there is a little difference between RII and HNI. Any individual a RII can invest up to rs.2 lakh and as a HNI can invest more than 2 lakh. Matter is very simple and non -obligatory. You can easily be a HNI investor and you will be allotted total number of shares in ipo you have applied for in case of no question of oversubscribe or undersubscribe. But if company has already decided and declared that no one shall be allowed to apply for 2 lots containing 50+50=100 shares valued of RS. 1 lakh, then you will have to be satisfied as RII investor.

Allotment procedure for HNI investor is settled in respect of no. of shares applied for divided by no. of times exceeded HNI QUOTA due to oversubscribe. Example, suppose you have applied for 10000 shares (your total Investment on application will be RS.40 lakh, if value of each share is RS.400), and HNI quota exceeds 10 times for oversubscription. At this situation, you will allotted 1000 shares (10000 shares÷10 time’s oversubscription of HNI quota. Thus, your actual Investment after allotment will be 4 lakh (1000 shares allotted×rs.400/ share).

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Initial Public Offering 1. Retail Individual Investor (RII)

In retail individual investor category, investors can not apply for more than Rs two lakh (Rs 2,00,000) in an IPO. Retail Individual investors have an allocation of 35% of shares of the total issue size in Book Build IPO's. NRI's who apply with less than Rs 2,00,000 /- are also considered as RII category.

2. High Net worth Individual (HNI)

If retail investor applies more than Rs 2,00,000 /- of shares in an IPO, they are considered as HNI.

3. Non-institutional bidders

Individual investors, NRI's, companies, trusts etc. who bid for more than Rs 2 lakhs are known as Non-institutional bidders. They need not to register with SEBI like RII's. Non-institutional bidders have an allocation of 15% of shares of the total issue size in Book Build IPO's.

4. Qualified Institutional Bidders (QIB's)

Financial Institutions, Banks, FII's and Mutual Funds who are registered with SEBI are called QIB's. They usually apply in very high quantities.

QIBs are mostly representatives of small investors who invest through mutual funds, ULIP schemes of insurance companies and pension schemes.

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Initial Public Offering

7. STEPS IN AN INITIAL PUBLIC OFFERING (IPO)

The first step in an Initial Public Offering is to hire an investment bank, or banks, to handle the IPO. Investment banks can either work together, with one taking the lead, or work alone.

Next, everyone involved in the IPO – the management team, auditors, accountants, the underwriting banks, lawyers, and Securities and Exchange Commission (SEC) experts – attend a meeting to discuss the offering and determine the timing of the filing. Similar meetings happen throughout the entire underwriting process.

After the meeting, due diligence is required to be conducted on the company to make sure the registration statements are accurate. Tasks include market due diligence, legal and IP due diligence, financial and tax due diligence.

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Initial Public Offering The end result of the due diligence is the S-1 Registration Statement. The information in the statement includes historical financial statements, key data, company overview, risk factors, and more.

A pre-IPO analyst meeting is held after the S-1 Registration Statement is filed to educate bankers and analysts about the company. Bankers and analysts are also briefed on how to sell the company to investors. A preliminary prospectus can also be drafted.

Pre-marketing is conducted to determine whether institutional investors like the sector and the company, and the price they would pay per share. In conjunction with the internal valuation, a price range for the offering is set by the banks. The S-1 Registration Statement is amended with the price range.

After the pre-marketing work and S-1 Registration Statement is completed, the management team travels around the world to meet with investors and market the company. This is a very important process as orders for the number of shares by investors and the price they are willing to pay are determined. The price range may be further revised.

The management team will meet with the investment banks to decide on the final price of the deal based on the orders. If there are a lot of orders (oversubscribed), the company will price the shares higher.

Once the IPO is priced, the investment banks will allocate shares to investors and the stock will start trading in the primary market for the public to buy and sell.

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Initial Public Offering

8. WHAT IS THE IPO PROCESS?

The Initial Public Offering IPO Process is where a previously unlisted company sells new or existing securities and offers them to the public for the first time. Prior to an IPO, a company is considered to be private – with a smaller number of shareholders, limited to accredited investors (like angel investors/venture capitalists and high net worth individuals) and/or early investors (for instance, the founder, family, and friends). After an IPO, the issuing company becomes a publicly listed company on a recognized stock exchange. Thus, an IPO is also commonly known as “going public”.

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Initial Public Offering

Overview of the IPO Process This guide will break down the steps involved in the process, which can take anywhere from six months to over a year to complete. Below are the steps a company must undertake to go public via an IPO process: 1. Select a bank 2. Due diligence and filings 3. Pricing 4. Stabilization 5. Transition

Step 1: Select an investment bank The first step in the IPO process is for the issuing company to choose an investment bank to advise the company on its IPO and to provide underwriting services. The investment bank is selected according to the following criteria: 

Reputation



The quality of research 25

Initial Public Offering 

Industry expertise



Distribution i.e. if the investment bank can provide the issued securities to more institutional investors or to more individual investors.



Prior relationship with the investment bank

Step 2: Due diligence and regulatory filings Underwriting is the process through which an investment bank (the underwriter) acts a broker between the issuing company and the investing public to help the issuing company sell its initial set of shares. The following underwriting arrangements are available to the issuing company: 

Firm Commitment: Under such an agreement, the underwriter purchases the whole offer and resells the shares to the investing public. The firm commitment is the most common underwriting arrangement because it guarantees the issuing company that a particular sum of money will be raised.



Best Efforts Agreement: Under such an agreement, the underwriter does not guarantee the amount that they will raise for the issuing company. It only sells the securities on the behalf of the company.



Syndicate of Underwriters: Public offerings can be managed by one underwriter (sole managed) or by multiple managers. When there are multiple managers, one investment bank is selected as the lead or book-running manager. Under such an agreement, the lead investment bank forms a syndicate of underwriters by forming strategic alliances with other banks, each of which then sells a part of the IPO. Such an agreement arises when the lead investment bank wants to diversify the risk of an IPO among multiple banks.

An underwriter must draft the following documents: Engagement Letter: A letter of engagement typically includes: 1. Reimbursement clause: This clause mandates that the issuing company must cover the all out-ofthe-pocket expenses incurred by the underwriter, even if the IPO is withdrawn during the due diligence stage, the registration stage, or the marketing stage. 2. Gross spread/underwriting discount: Gross spread is arrived at by subtracting the price at which the underwriter purchases the issue from the price at which they sell the issue. 26

Initial Public Offering Gross spread = Sale price of the issue sold by the underwriter – Purchase price of the issue bought by the underwriter

Typically, the gross spread is fixed at 7% of the proceeds. The gross spread is used to pay a fee to the underwriter. If there is a syndicate of underwriters, the lead underwriter is paid 20% of the gross spread. 60% of the remaining spread, called “selling concession”, is split between the syndicate underwriters in proportion to the number of issues sold by the underwriter. The remaining 20% of the gross spread is used for covering underwriting expenses (for instance, road show expenses, underwriting counsel, etc.).

Letter of Intent: A letter of intent typically contains the following information: 1. The underwriter’s commitment to enter an underwriting agreement with the issuing company 2. A commitment by the issuing company to provide the underwriter with all relevant information and thus, fully co-operate in all due diligence efforts. 3. An agreement by the issuing company to provide the underwriter with a 15% overallotment option. The letter of intent does not mention the final offering price.

Underwriting Agreement: The letter of intent remains in effect till the pricing of the securities, after which the Underwriting Agreement is executed. Thereafter, the underwriter is contractually bound to purchase the issue from the company at a specific price.

Registration Statement: The registration statement consists of information regarding the IPO, the financial statements of the company, the background of the management, insider holdings, any legal problems faced by the company, and the ticker symbol to be used by the issuing company once listed on the stock exchange. The SEC requires that the issuing company and its underwriters file a registration statement after the details of the issue have been agreed upon. The registration statement has two parts: 

The Prospectus – this is provided to every investor who buys the issued security



Private filings – this comprises information which is provided to the SEC for inspection but is not necessarily made available to the public

27

Initial Public Offering The registration statement ensures that investors have adequate and reliable information about the securities being important. The SEC then carries out due diligence to ensure that all the required details have been disclosed correctly.

Red herring document: In the cooling off period, the underwriter creates an initial prospectus which consists of the details of the issuing company, save the effective date and offer price. Once the red herring document has been created, the issuing company and the underwriters market the shares to public investors. Often, underwriters go on road shows (called the dog and pony shows – lasting for 3 to 4 weeks) to market the shares to institutional investors and evaluate the demand for the shares.

Step 3: Pricing After the IPO is approved by the SEC, the effective date is decided. On the day before the effective date, the issuing company and the underwriter decide the offer price (i.e. the price at which the shares will be sold by the issuing company) and the precise number of shares to be sold. Deciding the offer price is important because it is the price at which the issuing company raises capital for itself. However, after the stock starts trading on the secondary market, money raised through the sale of shares the company, not the underwriter. The following factors affect the offering price:



the success/failure of the road shows (as recorded in the order books)



the company’s goal



condition of the market economy

IPOs are often under-priced to ensure that the issue is fully subscribed/ oversubscribed by the public investors, even if it results in the issuing company not receiving the full value of its shares. If an IPO is under-priced, the investors of the IPO expect a rise in the price of the shares on the offer day. This increases the demand for the issue. Furthermore, under-pricing compensates investors for the risk that they take by investing in the IPO. An offer which is oversubscribed 2 to 3 times is considered to be a “good IPO”.

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Initial Public Offering Step 4: Stabilization After the issue has been brought to the market, the underwriter has to provide analyst recommendations, after-market stabilization and create a market for the stock issued. The underwriter carries out after-market stabilization in the event of order imbalances by purchasing shares at the offering price or below it. Stabilization activities can only be carried out for a short period of time – however, during this period of time, the underwriter has the freedom to trade and influence the price of the issue as prohibitions against price manipulation are suspended.

Step 5: Transition to Market Competition The final stage of the IPO process, the transition to market competition, starts 25 days after the initial public offering, once the “quiet period” mandated by the SEC ends. During this period, investors transition from relying on the mandated disclosures and prospectus to relying on the market forces for information regarding their shares. After the 25-day period lapses, underwriters can provide estimates regarding the earning and valuation of the issuing company. Thus, the underwriter assumes the roles of advisor and evaluator once the issue has been made.

Metrics for judging a successful IPO process

The following metrics are used for judging the performance of an IPO: Market Capitalization: The IPO is considered to be successful if the company’s market capitalization is equal to or greater than the market capitalization of industry competitors within 30 days of the initial public offering. Otherwise, the performance of the IPO is in question. Market capitalization = Stock Price x Total Number of Company’s Outstanding Shares

Market Pricing: The IPO is considered to be successful if the difference between the offering price and the market capitalization of the issuing company 30 days after the IPO is less than 20%. Otherwise, the performance of the IPO is in question. 29

Initial Public Offering

9. UNDERSTANDING FINANCIAL LINGO IN IPO

Primarily, issues made by an Indian company in primary market can be classified as public, rights, bonus and private placement. While right issues by a listed company and public issues involve a detailed procedure, bonus issues and private placements are relatively simpler. The classification of issues is as illustrated below: 

Public issue Initial Public Offer (IPO) Follow on Public Offer (FPO)



Rights issue



Bonus issue



Private placement Preferential issue Qualified institutional placement

Public issue: When an issue / offer of securities is made to new investors for becoming part of shareholders’ family of the issuer, it is called a public issue. Public issue can be further classified into Initial Public Offer (IPO) and Follow on Public Offer (FPO). The significant features of each type of public issue are illustrated below: 

Initial Public Offer (IPO): When an unlisted company makes either a fresh issue of securities or offers its existing securities for sale or both for the first time to the public, it is called an IPO. This paves way for listing and trading of the issuer’s securities in the Stock Exchanges.



Follow on Public Offer (FPO): When an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, it is called a Follow on Public Offer (FPO).

Rights Issue:

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Initial Public Offering When an issue of securities is made by an issuer to its shareholders existing as on a particular date fixed by the issuer (i.e. record date), it is called a rights issue. The rights are offered in a particular ratio to the number of securities held as on the record date.

Bonus Issue: When an issuer makes an issue of securities to its existing shareholders as on a record date, without any consideration from them, it is called a bonus issue. The shares are issued out of the Company’s free reserve or share premium account in a particular ratio to the number of securities held on a record date.

Private placement: A private placement is the sale of securities to a relatively small number of select investors as a way of raising capital. Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds. A private placement is different from a public issue, in which securities are made available for sale on the open market to any type of investor. Private placement of shares or convertible securities by listed issuer can be of two types: 

Preferential allotment: When a listed issuer issues shares or convertible securities, to a selected group of persons as per SEBI guidelines, it is called a preferential allotment. The issuer is required to comply with various provisions which inter-alia include pricing, disclosures in the notice, lockin etc., in addition to the requirements specified in the Companies Act.



Qualified Institutions Placement (QIP): When a listed issuer issues equity shares or securities convertible in to equity shares to qualified institutions buyers only in terms of provisions as per SEBI guidelines, it is called a QIP.

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Initial Public Offering

10. WHAT IS BOOK BUILDING?

SEBI guidelines defines Book Building 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 the 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 is basically a process used in Initial Public Offer (IPO) for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.

As per SEBI guidelines, an issuer company can issue securities to the public though prospectus in the following manner: 

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



75% of the net offer to the public through book building process and 25% at the price determined through book building. The Fixed Price portion is conducted like a normal public issue after the Book Built portion, during which the issue price is determined.

The concept of Book Building is relatively new in India. However it is a common practice in most developed countries.

Difference between Book Building Issue and Fixed Price Issue In Book Building securities are offered at prices above or equal to the floor prices, whereas securities are offered at a fixed price in case of a public issue. In case of Book Building, the demand can be known everyday as the book is built. But in case of the public issue the demand is known at the close of the issue.

The NSE has set up nation-wide network for trading whereby members can trade remotely from their offices located all over the country. The NSE trading network spans various cities and towns across India. 32

Initial Public Offering

NSE decided to offer this infrastructure for conducting online IPOs through the Book Building process. NSE operates a fully automated screen based bidding system called NEAT IPO that enables trading members to enter bids directly from their offices through a sophisticated telecommunication network.

Book Building through the NSE system offers several advantages: 

The NSE system offers a nationwide bidding facility in securities



It provides a fair, efficient & transparent method for collecting bids using latest electronic trading systems



Costs involved in the issue are far less than those in a normal IPO

The IPO market timings are from 10.00 a.m. to 5.00 p.m. On the last day of the IPO, the session timings can be further extended on specific request by the Book Running Lead Manager.

BREAKING DOWN Book Building Book building is the process of price discovery that involves generating and recording investor demand for shares during an initial public offering (IPO) or other issuance stages. The issuing company hires an investment bank to act as underwriter. The underwriter determines the price range the security can be sold for, and sends out the draft prospectus to multiple investors. The large-scale buyers and investors bid the number of shares that they are willing and able to buy, given the price range. As initial prices and transaction sizes are provided by investors, the book is created by listing the information provided during the predetermined time period before the book is considered to be closed.

The book is open for a fixed period of time, during which the bidder can revise the price offered. After five days, the book is closed and the aggregated demand for the issue can be evaluated so that a value is placed on the security. Once closed, the underwriter analyses the information to determine the initial selling price, also known as the issue price, for the particular offering. The final price chosen in simply the weighted average of all the bids that have been received by the investment banker.

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Initial Public Offering Even if the information collected during the book building suggests a particular price point is best, that does not guarantee a large number of actual purchases once the IPO is open to buyers. Further, it is not a requirement that the IPO be offered at that price suggested during the analysis. Accelerated Book Building An accelerated book build is often used when a company is in immediate need of financing, in which case, debt financing is out of the question. This can be the case when a firm is looking to make an offer to acquire another firm. Basically, when a company is unable to obtain additional financing for a short-term project or acquisition due to its high debt obligations, it can use an accelerated book build to obtain quick financing from the equity market.

With an accelerated book build, the offer period is open for only one or two days and with little to no marketing. In other words, the time between pricing and issuance is 48 hours or less. A block build that is accelerated is frequently implemented overnight, with the issuing company contacting a number of investment banks that can serve as underwriters on the evening prior to the intended placement. The issuer solicits bids in an auction-type process and awards the underwriting contract to the bank that commits to the highest back stop price. The underwriter submits the proposal with the price range to institutional investors. In effect, placement with investors happens overnight with the security pricing occurring most often within 24 to 48 hours.

IPO Pricing Risk With any IPO, there is a risk of the stock being overpriced or undervalued when the initial price is set. If it is overpriced, it may discourage investor interest if they are not certain that the company’s price corresponds with its actual value. This reaction within the marketplace can cause the price to fall further, lowering the value of shares that have already been secured.

In cases where a stock is undervalued, it is considered to be a missed opportunity on the part of the issuing company; it could have generated more funds than were acquired as part of the IPO.

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Initial Public Offering

11. REVERSE BOOK BUILDING

Delisting of shares under SEBI (delisting of Securities) guidelines 2003 Securities and Exchange Board of India has issued the SEBI (Delisting of Securities) Guidelines 2003’ for delisting of shares from stock exchanges. The guidelines inter alia provide the overall framework for voluntary delisting by a promoter. In accordance with the guidelines for the first time in India by any Exchange, National Stock Exchange now provides online reverse book building for promoter/acquirer through its trading network which spans various cities and towns across India. NSE operates a fully automated screen based bidding system that enables trading members to enter offers directly from their offices through a sophisticated telecommunication network.

What is Reverse Book Building (Delisting of shares)? The Reverse Book Building is a mechanism provided for capturing the sell orders on online basis from the shareholders through respective Book Running Lead Managers (BRLMs) which can be used by companies intending to delist its shares through buy back process. In the Reverse Book Building scenario, the Acquirer/Company offers to buy back shares from the shareholders. The Reverse Book Building is basically a process used for efficient price discovery. It is a mechanism where, during the period for which the Reverse Book Building is open, offers are collected from the shareholders at various prices, which are above or equal to the floor price. The buyback price is determined after the offer closing date

Business process for delisting through book building is as follows: 

The acquirer shall appoint designated Book Running Lead Manager (BRLM) for accepting offers from the shareholders.



The company/acquirer intending to delist its shares through Book Building process is identified by way of a symbol assigned to it by BRLM.



Orders for the offer shall be placed by the shareholders only through the designated trading members, duly approved by the Exchange.



The designated trading members shall ensure that the security / shareholders deposit the securities offered with the trading members prior to placement of an order.



The offer shall be open for 'n' number of days.

35

Initial Public Offering 

The BRLM shall intimate the final acceptance price and provide the valid accepted order file to the National Securities Clearing Corporation Limited (A wholly owned subsidiary of NSE carrying out clearing and responsible for settlement operations.)

SEBI guidelines shall be applicable to delisting of securities of companies and specifically apply to: 

Voluntary delisting being sought by the promoters of a company.



Any acquisition of shares of the company (either by a promoter or by any other person) or scheme or arrangement, by whatever name referred to, consequent to which the public shareholding falls below the minimum limit specified in the listing conditions or listing agreement that may result in delisting of securities.



Promoters of the companies who voluntarily seek to delist their securities from all or some of the stock exchanges.



Cases where a person in control of the management is seeking to consolidate his holding in a company, in a manner which would result in the public shareholding or in the listing agreement that may have the effect of company being delisted.



Companies which may be compulsorily delisted by the stock exchanges.

NSE Reverse Book Building System NSE uses the reverse book building system; a fully automated screen based bidding system that allows offers to run in several issues concurrently. The system has the facility of defining a hierarchy amongst the users of the system. The Book Running Lead Manager can define who will be the Syndicate member and who will be the other members participating in the issue. The Syndicate Member and other Members also have a facility of defining a hierarchy among the users of the system as Corporate Manager, Branch Manager and Dealer.

Trading Members The Book Running Lead Manager will give the list of trading members who are eligible to participate in the Book Building process to the Exchange. Members have to submit a one-time undertaking to the Exchange. Eligible trading members have to give in the prescribed format details of the user IDs that they would like to use.

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Initial Public Offering List of Approved Trading Members: 

ICICI Brokerage Services Limited.



Karvy Stock Broking Limited.



Master Capital Services Limited.

Subscribers Subscribers can approach any of the approved trading members for submitting offers in the NEAT IPO system. On line transaction registration slip are generated automatically after entering the offers in to the system, which acts as proof of the registration of each offer.

Reverse Book Building through the NSE system offers several advantages: 

The NSE system offers a nationwide bidding facility in securities.



It provides a fair, efficient & transparent method for collecting offers using latest electronic trading systems.

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Initial Public Offering

12. PROCEDURES FOR BOOK BUILDING & REVERSE BOOK BUILDING

Book Building Issuers Issuers desirous of using NSE's online IPO system are required to comply with the following procedures: 

Submit a written request as per prescribed format for usage of electronic facilities and software of NSE



Give details regarding Book Running Lead Manager, Co Book Running Lead Managers and Syndicate Members.



Pay the requisite charges to NSE.

Trading Members The Book Running Lead Manager will give the list of trading members who are eligible to participate in the Book Building process to the Exchange. Members have to submit a onetime undertaking to the Exchange. Eligible trading members have to give in the prescribed format details of the user IDs that they would like to use.

Subscribers Subscribers can approach any of the approved trading members for submitting bids in the NEAT IPO system. On line transaction registration slip are generated automatically after entering the bids in to the system which acts as proof of the registration of each Bid option.

Reverse Book Building Acquirers/Companies desirous of using NSE's system for reverse book building & settlement mechanism are required to comply with the following procedures 

Letter from Lead Manager providing details of the issue.



Tri-partite Agreement between NSE, the Acquirer (including Issuer Company) and the Lead Manager along with the requisite charges.

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Initial Public Offering

12.1 User Hierarchy: Corporate Manager The Corporate Manager is the user placed at the highest level. Such a user can perform all offer-related activities and receive the reports for all branches of the trading member. Additionally, the Corporate Manager can define the offer value limits for the branches and individual dealers of his firm. This facility is available only to the Corporate Manager. The Corporate Manager can modify his own offer or offers of all dealers and branch managers of his trading member firm.

Branch Manager The Branch Manager is the user who is placed under the Corporate Manager. Such user can perform and view Bid related activities for all dealers under that branch. The Branch Manager can modify his own offer or offers of any dealer under his branch.

Dealer Dealers are users at the lower most level of hierarchy. A Dealer can perform and view offer related activities and information only for oneself and does not have access to information on other dealers under either, the same branch or other branches. A Dealer can modify only the Offers entered by him. Additionally, Syndicate members can view, modify and cancel bids placed by other members.

12.2 Order Book As and when valid Offers are received by the system, they are first numbered, time stamped, and stored in the book. Each offer has a distinctive offer number and a unique time stamp on it. All the Offers placed in the system will remain outstanding till the last day of the book building process. Trading Members can modify/cancel all the offers placed in the system from the start till the last day of the Book-Building process.

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Initial Public Offering

12.3 Bidding Workstation The following windows are displayed on the Trader Workstation screen of the User:

Title Bar The title bar displays the current time, bidding system name i.e. NEAT-IPO and the date.

Tool Bar The toolbar has functional buttons which can be used with the mouse for quick access to various functions such as Buy Order Entry, Market By Price (MBP), Outstanding Order (OO), Activity Log (AL), Order Status (OS), Market Watch (MW), Order Modification, Order Cancellation, Security List, On-Line Backup, Supplementary Menu and Help. All these functions are also accessible through the keyboard.

Market Watch Window The purpose of Market Watch is to view the securities available for bidding.

Inquiry Window The Inquiry window enables the user to view information such as Market By Price (MBP), Outstanding Orders (OO), Activity Log (AL), Order Status (OS) and On Line Backup so on. Relevant information for the selected security can be viewed. 

Market by Price The purpose of Market By Price is to enable the Trading Member to view aggregate Offers in the book at given prices. Orders at the best five price points are displayed.



Outstanding Orders The purpose of Outstanding Orders (OO) is to enable the user to view his own outstanding Offers for a security. The Corporate Manager can view all the OOs for all branches or for a specific branch. Within a specific branch, the Corporate Manager can view OO details for a specific dealer or for all dealers. Similarly, it is possible to view OOs for a particular Application No. or for all Application Nos. The Branch Manager can view all OO details under that Branch i.e. all OOs for all dealers and for all clients or for all clients of a specific dealer. A dealer can view OOs for own User Id only

40

Initial Public Offering 

Activity Log The Activity Log (AL) shows all the activities which have been performed on any offer belonging to that user. These activities include offer modification and cancellation.



Order Status The purpose of the Order Status is to look into the status of one of dealers own specific offers. The screen provides the current status of Offers and complete Bid details.

Order Window The order window enables the user to enter/modify/cancel Offers. The member will get a download of only those securities for which he is eligible. Trading members can enter only buy offers in book building market. The system does not allow entry of offers at a price less than the floor price or minimum bid size. The trading members have to enter the following details at the time of the offer: quantity, price, application number, Depository Participant ID, Beneficiary ID, Category, margin amount, and client name. The system requires the application number to be entered twice to avoid data entry errors. Margin amount, application number, category and client names are compulsory fields.

Message Window The Message window enables the user to view messages broadcast by the Exchange such as Offer start date, Offer End date, Offer time etc. and other messages like bid confirmation, offer modification, offer cancellation, offers which have resulted in quantity freeze and name and time when the user logs in /logs off from the system, messages specific to the trading member etc. These messages appear as and when the event takes place in a chronological sequence.

Demand Graph The system has a functionality by which an offerer can view the demand at various price points. This is an online real-time graph available by clicking the demand graph icon on the Toolbar.

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Initial Public Offering Reports The following reports are available at the trader workstation: 

Open orders today A report showing the Offers for the dealers belonging to a trading member or a branch of a trading member which are outstanding at the end of the bidding day i.e. all orders entered by all the dealers.



Order Log It is a report giving the activity log of the offers for the dealers belonging to a trading member or a branch of a trading member. The report shows offers placed today, offers modified today, offers cancelled and offers deleted by the system.

42

Initial Public Offering

13. APPLICATION SUPPORTED BY BLOCKED AMOUNT (ASBA)

What is ASBA? ASBA means “Application Supported by Blocked Amount”. ASBA is an application containing an authorisation to block the application money in the bank account, for subscribing to an issue. If an investor is applying through ASBA, his application money shall be debited from the bank account only if his/her application is selected for allotment after the basis of allotment is finalized.

It is a supplementary process of applying in Initial Public Offers (IPO), right issues and Follow on Public Offers (FPO) made through book building route and co-exists with the current process of using cheque as a mode of payment and submitting applications.

Benefits of ASBA 

The investor need not pay the application money by cheque rather block his / her bank account to the extent of the application money, thus continue to earn interest on application money.



The investor does not have to bother about refunds, as in ASBA only an amount proportionate to the securities allotted is taken from the bank account when his / her application is selected for allotment after the basis of allotment is finalised.



The application form is simpler.



The investor deals with the known intermediary i.e. his or her own bank.



No loss of interest, since the application amount is not debited from the savings account on application.



Customer can revise / withdraw the bid before the end of the Issue in the prescribed format with the Bank.

Eligibility criteria SEBI has been specifying the investors who can apply through ASBA. In public issues with effect from May 01, 2010, all the investors can apply through ASBA. In rights issues, all shareholders of the company as on record date are permitted to use ASBA for making applications provided he/she/it: 

is holding shares in dematerialised form and has applied for entitlements or



has additional shares in the issue in dematerialised form;

43

Initial Public Offering 

has not renounced its entitlements in full or in part;



Is not a renounce; who is applying through blocking of funds in a bank account with the Self Certified Syndicate Bank (SCSB). An “ASBA investors”, at the time of submitting ASBA application should provide correct information related to: PAN

DP ID

Client ID

Bid quantity

Bank account number

Application forms for applying/bidding for shares are available with all syndicate members, collection centres, the brokers to the issue and the bankers to the issue. In case applicant intend to apply through new process introduced by SEBI i.e. Applications supported by blocked amount (ASBA), applicant may get the ASBA application forms from the Self Certified Syndicate Banks (SCSB).

The document is prepared by Merchant Banker(s), registered with SEBI. They are required to do the due diligence while preparing an offer document. The draft offer document submitted to SEBI is put on website for public comments.

ASBA is stipulated by SEBI, and available from most of the banks operating in India. This allows the investors’ money to remain with the bank till the shares are allotted after the IPO. Only then does the money transfer out of the investors account to the company. This eliminates the need for refunds on shares not being allotted.

As of December 3, 2012, 52 Banks are acting as SCSBs. Investors may submit their ASBA Applications to these SCSBs in order to apply for Public Issues. The list of SCSBs include the likes of The Jammu & Kashmir Bank Limited, Bank of India, Axis Bank, HDFC Bank, ICICI Bank, State Bank of India, Punjab National Bank, UCO Bank, IDBI Bank among others.

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Initial Public Offering

13.1 Application Supported by Blocked Amount (ASBA) Procedure Main Features of ASBA process ASBA provides an alternative mode of payment in issues whereby the application money remains in the investor's account till finalization of basis of allotment in the issue.

ASBA process facilitates investors bidding with multiple options, to apply through Self Certified Syndicate Banks (SCSBs), in which the investors have bank accounts. SCSBs are those banks which satisfy the conditions laid by SEBI. SCSBs would accept the applications, verify the application, block the fund to the extent of bid payment amount, upload the details in the web based bidding system of NSE, unblock once basis of allotment is finalized and transfer the amount for allotted shares, to the issuer.

As per sebi circular no CIR/CFD/POLICY CELL/11/2015 dated November 10, 2015. All shall mandatorily use only Application Supported by Blocked Amount (ASBA) facility for all issues opening from 01 January, 2016 onwards. 

Registration procedure of Self Certified Syndicate Bank (SCSB): In order to register with the Exchange the SCSB has to submit a onetime undertaking as per the prescribed format. Download prescribed format (.doc)



SCSB List



Registration procedure for Registrars to an Issue and Share Transfer Agents (RTAs) and Depository Participants (DPs): In order to register with the Exchange the RTAs/DPs has to submit the application as per the prescribed format attached below : Download prescribed format (.doc)



Download List of RTAs and DP (including details of location where Application Forms will be accepted) (.zip)



Apply online through ASBA e-Forms

As per SEBI Cir no SEB/HO/CFD/DIL2/CIR/P/2018/138 dated November 01, 2018. To further streamline the process, the use of Unified Payment Interface (UPI) as a payment mechanism with Application Supported by Block Amount (ASBA) for application in public issues by retail investors through intermediaries (Syndicate members, Registered Stock Brokers, Registrar and Transfer agent and

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Initial Public Offering Depository Participants).The proposed process would increase efficiency, eliminate the need for manual intervention at various stages, and will reduce the time duration from issue closure to listing by up to 3 working days.3. Considering the time required for making necessary changes to the systems and to ensure complete and smooth transition to UPI payment mechanism, the proposed alternate payment mechanism and consequent reduction in timelines is proposed to be introduced in a phased manner as under

Phase I: From January 01, 2019, the UPI mechanism for retail individual investors through intermediaries will be made effective along with the existing process and existing timeline of T+6 days. The same will continue, for a period of 3 months or floating of 5 main board public issues, whichever is later.

Phase II: Thereafter, for applications by retail individual investors through intermediaries, the existing process of physical movement of forms from intermediaries to Self-Certified Syndicate Banks (SCSBs) for blocking of funds will be discontinued and only the UPI mechanism with existing timeline of T+6 days will continue, for a period of 3 months or floating of 5 main board public issues, whichever is later.

Phase III: Subsequently, final reduced timeline will be made effective using the UPI mechanism

13.2 User Hierarchy SCSB Admin The SCSB Admin is placed at the highest level. The admin can monitor all offer-related activities and receive the reports for all users under different branches of the SCSB’s. The Admin can create designated branches under itself, on the basis of IFSC code. It can also create users under the designated branches. Admin user cannot enter bids by itself. The SCSB Admin can take a report/export data of all the securities and view summary of applications for an issue.

Users Users are at the lower most level of hierarchy. The User will be added under the designated branches. A User can enter bids and view bid related activities and information only for the bids entered by it. It does not have access to information of other users under either the same branch or other branches. A user can 46

Initial Public Offering delete only the bids entered by him. The user also can take a report/export data of all the securities and view summary of applications for an issue

13.3 Order Book As and when valid Bids are received by the system, they are first numbered, time stamped, and stored in the book. Each offer has a distinctive offer number and a unique time stamp on it. All the Offers placed in the system will remain outstanding till the last day of the book building process. Users can cancel all the bids placed in the system from the start till the last day of the Book-Building process.

13.4 Bidding Workstation for ASBA user The Exchange provides a web based application to the SCSBs to enter the ASBA bids. The features of the same are as follows. The following windows are displayed on the Trader Workstation screen of the User:

Title Bar The title bar displays the website address followed by the word 'Applications through ASBA'.

Header The header is the first line below the title bar. It shows the NSE e-IPO logo & the user identification on the left hand corner, application title in the centre & utilities (4 numbers) on the right hand side.

Tabs & links

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Initial Public Offering The application functions can be accessed through various tabs & links discussed hereunder: Controls

Brief description on functionality

Home

It shall display the issue summary for various issues that are open & closed.

Transaction

The user shall be able to inquire the details of the transactions entered/uploaded by

Inquiry

him

Transaction Entry

The user shall be allowed to enter data online.

Bulk upload

The user shall be allowed to do batch upload of data.

Reports

The user shall be provided various reports.

Body The body encloses the various functionalities within it & displays the result of various enquiries etc.

Status Bar On the bottom bar, the current date & time is displayed on the left hand side while on the right hand side, the status of the user login shall be displayed.

Reports SCSB user can view the following reports: 

Securities Report

The following details shall be displayed: i.

Symbol

ii.

Series

iii.

Company Name

iv.

Market Lot

v.

Face Value 48

Initial Public Offering vi.

Price Range Min

vii.

Price Range Max

viii.

Cut off Price

ix.

Issue Start Date

x.

Issue End Date

xi.

Issue Start Time

xii.

Issue End Time

xiii.

Status

By clicking on 'Download' button, the enquired details displayed on the screen will get downloaded in Securities.csv’ to the selected path of user’s local machine as under.



Issue wise Summary

The following details shall be displayed: i.

Symbol

ii.

Company Name

iii.

Total No. of Applications

iv.

Total Quantity

v.

Total Value

vi.

Issue End Date Time

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Initial Public Offering

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

75% Book Building process The option of 75% Book Building is available to all body corporates that are otherwise eligible to make an issue of capital to the public. The securities issued through the book building process are indicated as 'placement portion category' and securities available to public are identified as 'net offer to public'. In this option, underwriting is mandatory to the extent of the net offer to the public. The issue price for the placement portion and offers to public are required to be same.



100% of the net offer to the public through Book Building process In the 100% of the net offer to the public, entire issue is made through Book Building process. However, there can be a reservation or firm allotment to a maximum of 5% of the issue size for the permanent employees, shareholders of the company or group companies, persons who, on the date of filing of the draft offer document with the Board, have business association, as depositors, bondholders and subscribers to services, with the issuer making an initial public offering.

The number of bidding centres, in case of 75% book building process should not be less than the number of mandatory collection centres specified by SEBI. In case of 100% book building process, the bidding centres should be at all the places where the recognised stock exchanges are situated. For additional details, issuers are requested to refer to SEBI guidelines.

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Initial Public Offering

TRACKING STOCKS

Closely related to a traditional IPO is when an existing company spins off a part of the business as its own standalone entity, creating tracking stocks. The rationale behind spin-offs and the creation of tracking stocks is that in some cases individual divisions of a company can be worth more separately than as part of the company as a whole. For example, if a division has high growth potential but large current losses within an otherwise slowly growing company, it may be worthwhile to carve it out and keep the parent company on as a large shareholder, and let it raise additional capital from the public. For example, during the dotcom bubble, many established companies that created internet subsidiaries spun them off, such as Walt Disney Corp. (DIS) which issued a tracking stock for its internet property Go.com. Telecom companies AT&T (T) and Sprint also once created tracking stocks for their wireless divisions. These tracking stocks no longer exist, since they’ve either been acquired by other companies, or have gone out of business.

From the parent company's perspective, there are many advantages to issuing a tracking stock. The company gets to retain control over the subsidiary but all revenues and expenses of the division are separated from the parent company's financial statements and attributed to the tracking stock. Importantly, if the tracking stock rockets up, the parent company can make acquisitions with the subsidiary's stock instead of cash.

While a tracking stock may be spun off in an IPO, the mechanics are not the same as the IPO of a private company going public. This is because tracking stocks usually have no voting rights, and often there is no separate board of directors looking after the rights of the tracking stock. This doesn't mean that a tracking stock can't be a good investment. Just keep in mind that a tracking stock isn't a normal IPO.

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Initial Public Offering

14. Q&A REGARDING IPO & ASBA

1. What is an offer document in an IPO? "Offer document" is a document which contains all the relevant information about the company, promoters, project, financial details, objective of raising money, terms of the issue etc. and is used for inviting subscription to the issue being made by the issuer.

2. What is the difference between Fixed Price Issue and Book Built Issue? As the name suggests, a "Fixed Price Issue" is an Initial Public Offering (IPO) where the issuer at the outset decides the issue price & mentions it in the offer document. In a "Book Built Issue" the price of an issue is discovered on the basis of demand received from the prospective investors at various price levels.

3. What is a price band? The price band is a band of price within which investors can bid. The spread between the floor and the cap of the price band shall not be more than 20%. The price band can be revised. If revised, the bidding period shall be extended for a further period of three days, subject to the total bidding period not exceeding thirteen days.

4. What is a bid lot? A Bid-lot is the pre-determined number of shares which have to be applied for by an investor. It is different for each issue. There is a minimum lot size which is pre-decided by the company and mentioned in the application form. Example: Minimum bid lot in IPO of XYZ co. - 10 Bid-lot Multiples of 10 Price Band - 100-120. It

means that a retail investor cannot apply for less than 10 shares in that particular issue. The application for more than 10 shares has to be in multiples of 10 like 20, 30, 40, etc.

5. What is a cut off price? This term relates to a book build issue wherein the issuing company must specify the price band or a floor price in the offer document. The actual price of the issue is discovered on the basis of demand for the issue. The actual price must be within the price band or any price above the floor price. This issue price is called Cut off price. Only retail individual investors have an option of applying at this price. 52

Initial Public Offering 6. Can I cancel my Bid for online IPO order? Yes, you can cancel your bid for online order any time before Modification/ Revision / Cancellation cutoff time.

7. What are the different types of investor categories? Investors are broadly classified under following categories: 

Retail Individual Investor (RIIs)



Non Institutional Investors (NIIs)



Qualified Institutional Buyers (QIBs) "Retail Individual Investor" means an investor who applies or bids for securities for a value of not more than `2,00,000/-.

8. What is a Red Herring Prospectus (RHP)? A Red Herring Prospectus (RHP) is a preliminary registration document that is filed with SEBI in the case of book building issue which does not have details of either price or number of shares being offered or the amount of issue. This means that in case price is not disclosed, the number of shares and the upper and lower price bands are disclosed. On the other hand, an issuer can state the issue size and the number of shares are determined later. In the case of book-built issues, it is a process of price discovery as the price cannot be determined until the bidding process is completed. Hence, such details are not shown in the Red Herring prospectus filed with ROC in terms of the provisions of the Companies Act. Only on completion of the bidding process, the details of the final price are included in the offer document. The offer document filed thereafter with ROC is called a prospectus.

9. What is Self-Certified Syndicate Bank (SCSB)? SCSB is a bank which is recognized as a bank capable of providing ASBA services to its customers. Names of such banks would appear in the list available on the website of SEBI.

10. Will I get the acknowledgement of receipt for applications submitted through ASBA from the SCSB? Yes. The SCSB shall give a counterfoil as an acknowledgement at the time of submission of ASBA and also the order number, generated at the time of uploading the application details, if sought by the investors in case of need. 53

Initial Public Offering

15. ALTERNATIVE SHARE OFFERING STRATEGIES

There are other methods to offer shares to the public besides an IPO. They share many of the pros and cons with an IPO but may be a better strategy for some companies.

Direct Listing When an IPO is conducted, the investment bank or syndicate of investment banks will buy the shares from the issuer. The bank then plans to offer those shares on the secondary market, where they will trade on an exchange. In addition to fees, the bank may profit from selling the shares on the secondary market at a price that is higher than what it paid the issuer for the shares.

The investment banks that conduct the IPO will make a market for the shares and provide liquidity as they start trading. This is risky, so banks try to make sure IPO shares are priced so that the offering will be oversubscribed, which means there are more buyers for the shares at that price than will be available.

When the issuer conducts an IPO this way, the company is raising money from the investment banks and their clients rather than from the market directly. This method helps avoid some risks, and the banks can help promote the stock to increase its IPO price.

A direct listing, such as the one completed by Spotify Technology S.A. (SPOT) in 2018, occurs when a company simultaneously lists its shares on an exchange and offers ownership to the public for the first time. Direct listings skip the underwriting process, which means that the issuer has more risk if the offering does not do well, but issuers also may benefit from a higher share price. A direct offering is probably only feasible for a company with a well-known brand and an attractive business. These kinds of offerings are referred to as a "hot issue" and can generate enough interest from investors on their own without the help of an investment bank.

Key Takeaways 

The process for making shares of a private company available to the public for the first time to raise capital is called an initial public offering or IPO. 54

Initial Public Offering 

The advantages of an IPO include ease in raising and accessing funds and conducting M&A activity. The corresponding disadvantages of an IPO are that they require rigorous reporting and can be a distraction for founders from the main task of executing their vision.



Alternative methods to conducting a traditional IPO are Direct Listing and Dutch Auctions. While they are easier, the alternative formats involve investors taking on more risk.

Dutch Auction In a Dutch auction, potential buyers are able to bid for the shares they want and the price they are willing to pay. The bidders who were willing to pay the highest price are then allocated the shares available. However, they will all pay the same price. For example, imagine there are 10 bidders vying for stock and the top three bidders are willing to pay $9, $8 and $7.50 per share. Between these three bidders, the company can raise the money it needs but will have to sell the shares to all three for $7.50 per share. This is very similar to the method used to sell U.S. Treasury bonds.

In 2004, Alphabet Inc. (GOOG) conducted its IPO through a Dutch auction. Other companies like Interactive Brokers Group, Inc. (IBKR), Morningstar, Inc. (MORN) and The Boston Beer Company, Inc. (SAM) have also conducted Dutch auctions for their shares rather than a traditional IPO.

An argument in favour of a Dutch auction is that it provides more information about the value of the shares than an IPO. The issuer has more transparency into the potential demand for the shares and can use that information to adjust the size of its offering and its expectations for the capital that will be raised.

IPO Performance Traders can be distracted by survivorship bias and assume that buying shares after an IPO or from a direct offering is likely to be profitable. Studies have shown that, based on price performance, shares following an IPO have more than a 50% chance of being worth less than their offering price within three months of the offering.

There are several factors that may affect the short-term return from an IPO. Because the company is usually being promoted by investment banks, it is easy to set overly high expectations, which are then deflated once the market is more broadly aware of the company and its real value. Following an IPO,

55

Initial Public Offering employees and early investors in the company may sell their shares as soon as they can in order to realize their gains. This selling can trigger severe declines if market conditions are poor or the company isn't performing well.

Blue Apron Holdings, Inc. (APRN) shares were available after their IPO on June 19, 2017, and the stock began falling right away before rising briefly following earnings in mid-December 2017. Unfortunately, the initial investors and employees whose shares were "locked up" or restricted from sale became available on Dec. 26, 2017, and the stock continued falling. This sequence is common among new companies and presents special risks for IPO investors.

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Initial Public Offering

16. TOP IPOs OF 2018

The number of companies engaged in initial public offerings (IPOs) in the U.S. in 2018 far surpassed rates in 2017 and 2016. The first three quarters of the year brought about 173 IPOs, raising combined $45.7 billion. This value raised figure was nearly 47% higher than the value raised by IPOs in the first three quarters of 2017, and it was a whopping three times that for the same period in 2016. Most IPOs in 2018 were for technology, media and telecom companies or biotech names.

What made 2018 such a great year for IPOs? The majority of the year saw very strong market conditions overall, which many companies likely viewed as an ideal time to go public. Corporate earnings set records for the second quarter as S&P 500 companies earned an average $38.65 per share. Consumer confidence reached its highest levels in nearly 20 years by September. Of course, the final weeks of the year erased the gains of the previous several months in the market and sent the S&P into losses for 2018 overall. Nonetheless, the large majority of companies going public in 2018 had already completed that process by the time the situation turned.

Below, we'll explore some of the biggest IPOs of 2018 in terms of overall size of launch. We'll compare their performance to the S&P 500 as a benchmark, which saw an average of -4.4% returns.

1. Spotify Technology S.A. (SPOT) Sector: Technology IPO size: $9.2 billion Performance for 2018: -23.8% (SPOT)

2. AXA Equitable Holdings, Inc. (EQH) Sector: Financials IPO size: $2.7 billion Performance for 2018: -17.2% (EQH)

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Initial Public Offering 3. PagSeguro Digital Ltd. (PAGS) Sector: Technology IPO size: $2.3 billion Performance for 2018: -35.9% (PAGS)

4. iQiyi, Inc. (IQ) Sector: Consumer goods IPO size: $2.3 billion Performance for 2018: -4.4% (IQ)

5. Pinduoduo, Inc. (PDD) Sector: Technology IPO size: $1.6 billion Performance for 2018: -16.0% (PDD)

Spotify Technology S.A. The largest IPO both in terms of overall size and in terms of investor anticipation was for Swedish music streaming service Spotify Technology S.A. (SPOT). However, the unusual method of going public makes Spotify's IPO a bit difficult to categorize. The company decided on a direct listing, a sort of "non-IPO", where the company sells shares directly to the public and without any brokers or banks to act as intermediaries. Essentially, the process allowed all existing investors, including employees of the company, to sell their shares to the public, and no new shares were issued in the process. Some estimates for the size of the IPO ranged up to nearly $30 billion, but in all likelihood the total offering was much smaller.

AXA Equitable Holdings, Inc. Raising more than $2.7 billion, AXA Equitable Holdings, Inc. (EQH) logged the second-largest IPO of the year. The company represents the American operations arm of the French insurance company AXA SA. Even given the massive haul, the AXA IPO reportedly fell short of its targeted share sale. Per Bloomberg, the proceeds gained from the IPO were to be used for a major acquisition in which Axa SA would take over XL Group Ltd.

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PagSeguro Digital Ltd. Brazilian payment services company PagSeguro Digital Ltd. (PAGS) earned an estimated $2.3 billion in its IPO in January of 2018. The company offered more than 105 million shares at $21.50 each. PagSeguro, founded in 2006, is a major payment services company for small businesses across Brazil. It has set as one of its primary goals the support of digital payment infrastructure to allow for e-commerce to continue to grow in Brazil.

iQiyi, Inc. Raising just slightly less than PagSeguro was Chinese video streaming service iQiyi, Inc. (IQ). The company earned about $2.3 billion through its IPO in March. However, the company's share price dropped significantly immediately after the offering. Nonetheless, IQ stock was the most stable of all of the companies on this list; by the end of 2018, it had fallen by just 4.4%.The Chinese Netflix competitor is a subdivision of Baidu, the producer of China's largest search engine. Although Baidu has now spun iQiyi off into its own entity, it retains majority ownership of the video streaming platform, so it will continue to guide the company's path into the future.

Pinduoduo, Inc. In July, another Chinese company launched a successful IPO in the U.S., earning it a spot among the biggest public offerings of 2018. Pinduoduo IPO'd at $19 per American depositary share. As a result, the company raised more than $1.6 billion in its public offering. Pinduoduo is an online group discounting company which offers customers the chance to group together in order to earn greater discounts from a variety of merchants. Pinduoduo managed to outpace other popular and highly-anticipated Chinese-U.S. public offerings in 2018, including the October IPO of Tencent Music Entertainment. Tencent earned about $1.2 billion in its IPO, just barely failing to make it onto the list of the top five IPOs of the year.

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17. VENTURE-CAPITAL-BACKED IPO

What is Venture-Capital-Backed IPO? A venture-capital-backed IPO refers to the selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative to an IPO for a venture-capital-backed company is an acquisition (getting purchased by another company). Both options are known as "exit strategies" because they allow venture capitalists and entrepreneurs to get money out of their investments.

BREAKING DOWN Venture-Capital-Backed IPO Multiple sources regularly report on both venture-capital-backed IPOs and M&A volume. In lean economic times, there tend to be fewer venture-capital-backed IPOs because of low investor confidence. As a result of the financial crisis, 2008 and 2009 saw record low numbers of venture-capital-backed IPOs. Examples of companies that were once venture-capital-backed IPOs are Tesla Motors and Open Table.

What is Venture Capital? Venture capital (VC) is a type of private equity, a form of financing provided by firms or funds that judge a company to have high growth potential or which have demonstrated high growth. Venture capital firms or funds invest in these early-stage companies in exchange for an equity stake. Venture capitalists take on these associated risks in the hopes that some of the firms they support will become successful.

The typical venture capital investment occurs after an initial "seed funding" round. The first round of institutional venture capital to fund growth is called the Series A round. Venture capitalists provide this financing in the interest of generating a return through an eventual "exit" event, such as the company selling shares to the public for the first time in an IPO or doing a merger and acquisition (also known as a "trade sale") of the company.

In addition to angel investing, equity crowdfunding and other seed funding options, venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering. 60

Initial Public Offering

Venture Capital Funding vs. Debt or Loan Financing Attracting venture capital is very different from raising debt or a loan. While lenders have a legal right to interest on a loan and repayment of the capital irrespective of the success or failure of a business, venture capital invested in exchange for an equity stake in the business carries no such legal protection and is speculative in nature. The return on a venture capitalist's investment depends entirely on the growth and profitability of the business.

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18. IPO LOCK-UP

What is IPO Lock-Up? An IPO lock-up also referred to as a "lock-up period," is a contractual caveat referring to a period after a company has gone public when major shareholders are prohibited from selling their shares. Lock-up periods usually last between 90 to 180 days. Once the lock-up period ends, most trading restrictions are removed. An initial public offering (IPO) lock-up period is a contractual restriction preventing insiders who acquired shares of a company's stock before it went public from selling the stock for a stated period of time after it goes public. Although this waiting period varies on a case-by-case basis, it typically ranges from 90 to 180 days after the date of the IPO. Lock-up periods typically apply to insiders such as a company's founders, owners, managers and employees. But it also may apply to venture capitalists and other early private investors. The chief purpose of an IPO lock-up period is to thwart investors from flooding the market with large numbers of shares, which would initially depress the stock's price. Simply put: Company insiders tend to own disproportionately high percentages of stock shares compared to the general public. Consequently, their high-volume selling activities could drastically price immediately after the company goes public. Lock-up periods don't just stave off the short-term negative economic ramifications that may occur from insiders selling large chucks of their stock positions after an IPO. Lock-up periods can also eliminate the appearance that those closest to the company harbour a lack of faith in its prospects. Even if this is not actually the case, and that in reality, insiders simply wish to cash in long-anticipated profits, this false perception could potentially cripple a company's long-term stock performance for no truly legitimate reason. In some cases, insiders may be forbidden from selling their shares, even after the lock-up period expires. This most often occurs when an insider possesses material, non-public information, where the sale of shares would legally constitute insider trading. Such a scenario might occur if the end of the lock-up period coincided with earnings season.

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Initial Public Offering BREAKING DOWN IPO Lock-Up The purpose of an IPO lock-up is to prevent the flooding of the market with too much of a company's stock supply too quickly. Typically, only 20% of a company's outstanding shares are initially offered to the investing public. A single large shareholder trying to unload all of his holdings in the first week of trading could send the stock downward to the detriment of all shareholders. Empirical evidence suggests that after the end of the lock-up period, stock prices experience a permanent drop of about 1 to 3 percent.

Usefulness of Lock-Up Periods IPO lock-up periods allow for the newly issued shares to stabilize without additional selling pressures from insiders. This cooling-off period allows for the market to price the shares according to natural supply and demand. Liquidity may be low initially, but it will eventually increase over time with the establishment of a trading range. Option contracts may begin trading during the lock-up period, which further allows for stability and liquidity. The lock-up period also allows for up to two consecutive earnings report releases, which provide more clarity on the business operations and the outlook for investors.

IPO Lock-Up Expiration As the lock-up expiration date nears, traders often anticipate a price drop due to the additional supply hitting the market. The anticipation of a price drop can result in an increase in short interest as trader’s short-sell stock into the expiration. Investors that are concerned about the upcoming lock-up expiration may try to collar or hedge their long positions with options.

While stocks tend to sell-off ahead of a lock-up expiration, they don't necessarily continue the selling pressure in all cases. If the pre-expiration sell-off is too dramatic, it can often cause a short squeeze on expiration day as short-sellers look to cover their shares with hopes to lock in profits or cut losses.

A short squeeze is often the case when a trade gets too crowded, and margin interest is exorbitant. Shares of Shake Shack Inc. (NASDAQ: SHAK) triggered a short squeeze from the day before its first lock-up expiration on July 28, 2015, which catapulted the stock price over 30% in less than two weeks. The margin interest had risen to over 100% to borrow shares to short.

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19. IPO Vs PRIVATE PLACEMENT: WHAT'S THE DIFFERENCE?

Private companies that seek to raise capital through issuing securities have two options: offering securities to the public or through a private placement. Regulations on publicly traded securities are subject to more scrutiny than those for private placements.

Each offers the necessary capital, but the criteria for issuing, ongoing financial reporting and availability to investors differs with each type of issue.

What Is a Private Placement? Private placement offerings are securities released for sale only to accredited investors such as investment banks, pensions or mutual funds. Some high-net-worth individuals may also purchase the shares through these options.

Companies using private placements generally seek a smaller amount of capital from a limited number of investors. If issued under Regulation D, these securities are exempt from many of the financial reporting requirements of public offerings, saving the issuing company time and money.

A private placement issuer can sell a more complex security to accredited investors who understand the potential risks and rewards, allowing the firm to remain as a privately-owned company and avoiding the need to file annual disclosures with the SEC. Marketing an issue may be more difficult for private placements, as these investments can be quite risky with lower liquidity than publicly traded securities.

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20. WHAT IS THE DIFFERENCE BETWEEN AN IPO AND A SEASONED ISSUE?

When a privately owned company decides to raise capital by offering shares of stock or debt securities to the public for the first time, it conducts an initial public offering (IPO), at which point it becomes a publicly traded company. When an existing publicly traded company decides to raise additional capital by selling additional shares of its stock or debt instruments to the public, the share offering is considered a seasoned issue.

All companies start as privately owned entities, generally created by an individual or a group of founders. The owners typically hold all or most of the stock, which is authorized within the company's articles of incorporation, a legal instrument created when the corporation is first established.

To fund operations during the early years, the owners typically put up their own money (known as selffunding), seek venture capital backing, and/or obtain loans or other forms of private financing from banks or other financial institutions.

If and when a company decides to sell shares of its stock to the public to raise money for operations or other uses, it engages the services of one or more investment banks to act as the underwriters responsible for managing the underwriting process of the IPO.

The underwriters help the company organize and file information that is required by regulators; they also create a prospectus disclosing all relevant information about the company (covering investment basics regarding finances and operations) and making it available to the public. Underwriters assess the value of the stock to be issued and, at the same time, determine the initial price the new shares sell for to the public. Once the initial shares are purchased in the IPO, they start to trade among the public in the secondary market. Seasoned issues, also known as secondary offerings or subsequent offerings, involve the issuance of additional shares of a publicly traded company to the public. Given that the company's shares already trade in the secondary market, the underwriters handling the seasoned or secondary offering price the shares at the prevailing stock market price on the day of the offering. 65

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21. HOW AN IPO IS VALUED

To a certain type of investor, few scenarios sound more satisfying than the idea of getting in on the ground floor of an investment opportunity and then watching said investment rise in price while the latecomers vie for the dwindling and ever more precious table scraps. People want to stake the gold claim on the previously overlooked part of the Klondike, drill the productive wildcat well in the Permian Basin or be Steve Jobs’ and Steve Wozniak’s third partner. Doing this involves slightly more work and more risk than finding a winning lottery ticket on the street, but without an appreciably better chance of success.

Among a few other reasons, this innate covetous desire to move to the front of the line is why the underwriting industry attracts the kind of people that it does – and why initial public offerings (IPOs) attract such attention.

An initial public offering (IPO) is the process by which a private company becomes publicly traded on a stock exchange. Once a company is public, it is owned by the shareholders who purchase the company's stock. Every public corporation in existence had to start trading at some point, which is to say, initiate an IPO.

The only real exposure many retail investors have to the IPO process occurs a few weeks prior, when media sources inform the public of the offering. How a company gets valued at a particular share price is relatively unknown, except to the investment bankers involved and those serious investors who are willing to pour over registration documents for a glimpse at the company's financials. (For some quick background, see "IPOs for Beginners.")

Where to Begin Which indirectly leads to the first rule of effective IPO analysis: analyse. Or to elaborate, do not be swayed by publicity and exposure. Loading up on Groupon, Inc. (GRPN) just because your friends use the service daily and the company spokespeople give entertaining interviews on CNBC is asking to be poor. Like any investment, you need to research, even scrutinize, before committing money. Spending a

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Initial Public Offering couple of hours hovering over prospectuses and financial statements is not tedium, it is leveraging a little bit of time for the potential of a large monetary payoff. Doing anything less isn’t investing, it’s wagering.

Even if one of the richest private corporations were to go public, say Cargill or Koch Industries, it wouldn’t be enough to just buy shares as soon as they became available and then assume the rocket ride will continue. As the old-but-true saw goes, you make your money going in. A lucrative but overpriced money-maker might not be as good a deal as its mildly profitable but much less expensive counterpart.

The problem, of course, is that incipient IPOs, by virtue of being currently private companies, don’t have long histories of disclosing financial statements publicly. But disclose they do, in much the same manner of established public companies. Every one produces balance sheets, income statements and cash flow statements – all the usual culprits.

Quantitative Components of IPO Valuation Like any sales effort, a successful IPO hinges on the demand for the product you are selling – a strong demand for the company will lead to a higher stock price. Strong demand does not mean the company is more valuable; rather, the company will have a higher valuation. In practice, this distinction is important. Two identical companies may have very different IPO valuations, merely because of the timing of the IPO as compared to market demand.

An extreme example is the massive valuations of IPOs at the 2000 peak of the tech bubble compared to similar (and even superior) tech IPOs since that time. The companies that went public at the peak received much higher valuations – and consequently much more investment capital – merely because they launched when demand was high. (Find out how companies can save or boost their public offering price with "Green shoe Options: An IPO's Best Friend.")

Another aspect of IPO valuation is industry comparables. If the IPO candidate is in a field that already has comparable publicly traded companies, the IPO valuation may be linked to the valuation multiples being assigned to competitors. The rationale is that investors will be willing to pay a similar amount for a new company in the industry as they are currently paying for existing companies.

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Initial Public Offering In addition to viewing comparables, an IPO valuation depends heavily on the company's future growth projections. Growth is a significant part of value creation, and the primary motive behind an IPO is to raise more capital to fund further growth. The successful sale of an IPO often depends on the company's plans and projections for aggressive expansion.

Spend less than a minute looking up the company’s financial disclosures, contrast that with the company’s expected theoretical initial book value (IPO price times number of shares issued), then determine for yourself whether company management and the underwriting banks have overshot, undershot, or assessed accurately.

Qualitative Components of IPO Valuation Some of the factors that play a large role in an IPO valuation are not based on numbers or financial projections. Qualitative elements that make up a company's story can be as powerful – or even more powerful – as the revenue projections and financials. A company may have a new product or service that will change the way we do things, or it may be on the cutting edge of a whole new business model. Again, it is worth recalling the hype over internet stocks back in the 1990s. Companies that promoted new and exciting technologies were given multi-billion-dollar valuations, despite have little or no revenues. Similarly, companies undergoing an IPO can bulk up their story by adding industry veterans and consultants to their payroll, giving the appearance of a growing business with experienced management.

Herein rests a harsh truth about IPOs; sometimes, the actual fundamentals of the business take a back seat to the marketability of the business. It is important for IPO investors to have a firm understanding of the facts and risks involved in the process, and not be distracted by a flashy back story. (For more, see "The Ups and Downs of Initial Public Offerings.")

Facts and Risks of IPOs The first goal of an IPO is to sell the pre-determined number of shares being issued to the public at the best possible price. This means that very few IPOs come to market when the appetite for stocks is low – that is, when they're cheap. When equities are undervalued, the likelihood of an IPO getting priced at the high end of the range is very slim.

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Initial Public Offering So, before investing in any IPO, understand that investment bankers promote them during times when demand for stocks is favourable. When demand is strong and prices are high, there is a greater risk of an IPO's hype outstripping its fundamentals. This is great for the company raising capital, but not so good for the investors who are buying shares. (IPOs have many unique risks that make them different from the average stock. For more, see "The Murky Waters of the IPO Market.")

The IPO market basically died during the 2009-2010 recession because stock valuations were low across the market. IPO stocks couldn't justify a high offering valuation when existing stocks were trading in value territory, so most chose not to test the market.

The Bottom Line Valuing an IPO is no different than valuing an existing public company. Consider the cash flows, balance sheet and profitability of the business in relation to the price paid for the company. Sure, future growth is an important component of value creation, but overpaying for that growth is an easy way to lose money.

Most IPOs render their investors disappointed. But again, that’s reflective of the market as a whole, which is comprised of nothing but IPOs of varying vintages. The intelligent investor (with apologies to Benjamin Graham) understands that the fundamentals of the game transcend the particular investment. Buy under-priced assets. Sell, or eschew, overpriced ones. Then be patient, then profit.

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22. PRE-IPO PLACEMENT

What is Pre-IPO Placement A pre-IPO placement occurs when a portion of an initial public offering (IPO) is placed with private investor’s right before the IPO is scheduled to hit the market. Typically, private investors in a pre-IPO placement are large private equity or hedge funds that are willing to buy a large stake in the company. The size of the investment means the price paid for shares in a pre-IPO placement is usually less than the prospective IPO price.

BREAKING DOWN Pre-IPO Placement Pre-IPO placements only occur when there is high demand for an imminent IPO. This is because the placement's price per share, and its risk, is contingent on the company eventually going IPO and the trading volume it is able to generate. So, pre-IPO placements compensate for that risk by offering a price per share that is much lower than it is expected to be at IPO. The risk arises when the post-IPO demand is lower than the expected demand, decreasing share price.

However, if the demand increases post-IPO prices, it may seem like these private equity and hedge funds would be able to turn around and sell the shares at a higher price right away. To stop this from happening, there is generally a lock-up period attached to the placement. This lock-up period prevents these funds from selling the shares in the short term and tends to attract investors who are looking to invest in the company for the long term.

An Example of a Pre-IPO Placement Prior to going public in September 2014, Alibaba opened up a pre-IPO placement for large funds and wealthy private investors. The company, as of June 2014, was thought to be valued as highly as $150 billion, and the demand that was already building for its eventual IPO made private investors salivate with the chance to invest in the company prior to it going public.

Ozi Amanat, an investor who manages the portfolio of billionaire businessman B.K. Modi’s Smart Global Holdings Pte., was able to obtain a block of $35 million worth of pre-IPO Alibaba shares. He allocated 70

Initial Public Offering the shares among various Asian families who had ties to the fund, with each of the families gaining shares below $60 per share. Then, when Alibaba went public, the demand was even higher than expected, and those who received parts of the $35 million block of stock were rewarded with returns of at least 48%.

For Alibaba, this pre-IPO placement actually mitigated its risk. Even though share prices were trading higher on the public exchanges, the company was able to ensure that it received adequate funding before its IPO.

What are the shares offered in the pre-IPO? The shares offered in the pre-IPO can be either shares of existing shareholders or the new shares being issued by the company.

What is the price of pre-IPO shares? Pre-IPO shares are usually sold at a discount.

What is the use of a pre-IPO? A pre-IPO provides an exit for the existing shareholders and an entry to private investors for a coveted IPO. For the issuer, getting a backing from a well-known marquee investor helps in the marketing of the IPO and setting the benchmark price.

What is the minimum amount to be invested to get access to a pre-IPO placement? An eight-figure amount is required to invest in a pre-IPO placement, making it available only to investors and funds having huge capital.

Why are private investors investing in pre-IPOs? It is becoming increasingly difficult for private investors, especially HNIs to get their desired number of shares in an IPO. In the pre-IPO stage, investors can get a higher number of shares at a lower price. 71

Initial Public Offering Pre-IPO shares have a higher risk adjusted return compared to listed shares.

Is it possible for retail investors to buy shares in a pre-IPO? Currently, in India, it is not possible for retail investors to directly buy shares in a pre-IPO.

What is the biggest risk of investing in a pre-IPO? The biggest risk is when the company either delays or cancels the plan of getting listed. If the company delays the listing, the lock in period does not allow the sale of shares for one year, extending the investment duration and the investor might not get the expected return due to changes in the market conditions. If the company cancels the listing, it will be difficult to exit since there is no organised market for sale of unlisted shares.

Are there any funds in India investing in pre-IPOs in India? Some funds investing in pre-IPOs in India are IIFL’s Special Opportunities Fund, Edelweiss Crossover Opportunity Fund, and Axis Asset Management.

What is the time horizon involved in investing in pre-IPOs? Most pre-IPOs take about 2-3 years to get listed and there is a lock in period after the shares are listed.

What is the lock-in period? As per SEBI guidelines, the private investors in the pre-IPO placements cannot sell their shares for one year from the listing date.

What is the purpose for the lock-in period? The lock-in period ensures that the private investor does not manipulate the price of the share after it is listed. Since short term trading is not allowed, investors in the pre-IPO placement are usually long term investors.

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23. INVESTING IN IPO ETFs

An IPO ETF is an exchange-traded fund (ETF) that tracks initial public stock offerings (IPOs) of various companies. Many investors are attracted to IPO ETFs because they follow a large pool of initial public offerings, rather than exposing the investor to one or a few selected companies. This process serves two main purposes: 

To create greater ease and familiarity with IPO investing.



To allow for a greater degree of diversification against the traditionally volatile and unpredictable IPO market.

The Origins of IPO ETFs The First Trust IPOX-100 (ARCA: FPX) was the first available IPO ETF, launching in early 2006. IPOX100 follows the market in the United States for IPOs based on the IPOX-100 U.S. Index - like the soaring stock prices following Google's (Nasdaq:GOOG) IPO in 2004.

The creation of IPO ETFs is a direct result of the many successful IPOs that were offered between 2004 and 2005. The attraction to investing in a company at its IPO is that the investor can get in on the ground floor of a newer company with a high-growth potential. In the past, investors have reaped large gains from successful IPOs, like the 2006 IPO of Chipotle Mexican Grill (NYSE:CMG), in which the stock price doubled on its first day as a public company. This vehicle came together at a time when the popularity of ETFs was soaring, and many investors distinctly remembered the investment losses realized by those who took the risk of investing in one-off IPO securities in the late 1990s.

IPOX: Not All-Inclusive However, the IPOX Index has specific stipulations that would prohibit it from including IPOs, like that of Chipotle. The IPOX Composite does not include companies with a more-than-50% gain on the first day of trading; this was put in place to avoid those securities that were thinly traded or overly volatile. Many IPOs are known for being bid up within the first weeks or months, only to drop back down to the original prices (or below) by the end of their first year on the market.

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Initial Public Offering The index also excludes issuing companies for a variety of other reasons. Only U.S. corporations are accepted, and a number of investment vehicles are excluded, such as real estate investment trusts, closeended funds, American depositary receipts from non-U.S. companies and American depositary receipts from foreign companies, as well as unit investment trusts and limited partners.

Companies that meet the requirements for the IPOX Composite also need to have a market capitalization of $50 million or more. Additionally, the IPO must provide at least 15% of the total outstanding shares. Another way that the IPOX-100 Index Fund does not allow for enormous first-day gains (like that of Chipotle) to be included within the portfolio is through only investing in securities after they have already been on the market for a period of seven days. In addition to having to be publicly traded for this period, securities are removed from the fund on their 1,000th day of trading, which means that the index could suffer when a major performer is removed.

Rules of the Fund Google is a good example of how this 1,000-day limit can hurt the index. Google was the top performing company in the IPOX-100 index when the IPOX-100 ETF was launched, but exceeded the 1,000-day limit in 2009. The 2008 decline in the performance of the IPO index suggests that IPO ETFs are especially vulnerable to economic declines. The IPO index that the IPOX-100 ETF follows struggles to perform during difficult economic periods. Also, the vulnerability to a single major company in the index illustrates the inherent danger in IPO ETFs.

Another timing-based rule the fund has in place is that companies are added or removed from the index on a quarterly basis, which could potentially limit the IPOX-100 ETF's returns. For example, if a company peaks during the quarter before the fund adds it, an ideal investing opportunity may be lost.

IPO ETFs Under Fire Some critics charge that investing in an IPO ETF is risky. The risk of investing in companies that are going public is often associated with the "dotcom bubble" of start-up companies. In the late 1990s, many companies were valued unusually high, which created a public buzz around IPOs. However, many of these companies collapsed shortly after the IPO, and investors lost considerable amounts of money. In recent years, underwriters seem to have adjusted to more accurate pricings for IPOs, and thus the IPO index has been more stable and predictable. Another potential problem for IPO ETFs is that the IPO 74

Initial Public Offering companies, usually relatively small corporations, will be more prone to failing in a down market than well-established companies will.

The Bottom Line It is yet to be seen whether this unique way of gaining exposure to IPOs will grow, but it is certainly unique. While there are some rules that make IPO ETFs risky and limited in returns(i.e., they invest and divest on a quarterly basis; they have a seven-day purchasing rule, and a 1,000-day selling rule), the funds are becoming more reliable and stable as the market becomes more comfortable with them.

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UPCOMING IPO 2019

Here is the list of Upcoming IPO in 2019 in India. The companies have drafted DRHP with SEBI for Initial Public Offer to change their company identity from Private Limited to Limited. The company need to file DRHP (draft red hearing prospectus) and then final RHP (red hearing prospectus) for IPO. SEBI approves the Initial Public Offer for the companies and then they go for the IPO.

2018 was a mix year for the investors but we can expect few big names can turn a lucky for the investors. There are few companies in the pipeline for the ipos in 2019. Last few months from September to December 2018, there were no ipos due to negative market sentiment and even companies like Dinesh Engineers withdrawn their ipo. We can expect a good year 2019 for upcoming ipos but it depends on market sentiment. SEBI already gave tips to companies for new ipo to decide a good price band which can be fruitful both for the companies and investors. It will ease pressure from investors and they subscribe to the upcoming ipos. So these will be via-versa for both investors and companies. Checkout the latest and new ipo calendar of companies who geared up for the upcoming ipo in 2019 with their DRHP dates. Few companies already got go ahead from the SEBI for the ipos and they might come with their initial public offers in few months.

List of Upcoming IPO in March 2019

Forthcoming IPOs

IPO Size

Tentative Dates

Rail Vikas (RVNL)

482 Cr.

29-Mar-2019

Polycab

2000 Cr.

Mar-2019

Metropolis Healthcare

1527 Cr.

Mar-2019

Muthoot Microfin

700 Cr.

Mar-2019

MSTC Ltd

226 Cr.

13-Mar-2019

Embassy REIT

4750 Cr.

18-Mar-2019

Mazagon Dock Shipbuilders

500-600 Cr.

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Initial Public Offering Narmada Bio-chem

90 Cr.

-

Lodha Developers

5300 Cr.

-

Hinduja Leyland Finance

500 Cr.

-

Penver Products

242 Cr.

-

Srei Equipment Finance

1100 Cr

-

Aakash Educations

-

-

Ami Organics

-

-

Century Metal Recycling

-

-

-

-

-

Note for the Investors:

- Upcoming IPO Calendar is based on the news we get from internet so dates might vary sometime.

- We are giving just information about upcoming IPOs with details. We do not trade or offer any grey market premium or kostak rates for any IPO.

- Current & Latest / New IPO List is based on the DRHP filed by the companies. Upcoming IPOs list of DRHP dates might vary at a time.

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24. OVERVIEW OF IPO “An initial public offering (IPO), referred to simply as an "offering" or "flotation", is when a company (called the issuer) issues common stock or shares to the public for the first time.”

A corporate may raise capital in the primary market by way of an Initial Public Offer (IPO), rights issue or private placement. An IPO is the selling of securities to the public in the primary market. It is the largest source of funds with long or indefinite maturity for the company. Requirement of funds in order to finance the business activities motivates entrepreneurs to approach the new issue market. Initial Public Offer (IPO) is a route for a company to raise capital from investors to meet the expenses of its projects and to get a global exposure by getting listed in the Stock Exchange.

IPOs are issued by smaller, younger companies seeking capital to expand, as well as by large privately owned companies looking to expand & become publicly traded. When a company lists its securities on a public exchange, the money paid by investors for the newly-issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO, therefore, allows a company to tap a wide pool of investors to provide it with capital for future growth, repayment of debt or working capital. IPO can be used as both a financing strategy and an exit strategy. In a financing strategy the main purpose of the IPO is to raise funds for the company. In an exit strategy for existing investors, IPOs may be used to offload equity holdings to the public through a public issue. A company selling common shares is never required to repay the capital to investors. Once a company is listed, it is able to issue additional common shares via a secondary offering, thereby again providing itself with capital for expansion without incurring any debt. This ability to quickly raise large amounts of capital from the market is a key reason many companies seek to go public.

There are several benefits for being a public company, namely: 

Bolstering and diversifying equity base



Enabling cheaper access to capital



Exposure, prestige and public image



Attracting and retaining better management and employees through liquid equity participation



Facilitating acquisitions

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Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.



Increased liquidity for equity holder 78

Initial Public Offering Let's review the basics of an IPO:



An initial public offering (IPO) is the first sale of stock issued by a company to the public.



Broadly speaking, companies are either private or public. Going public means a company is switching from private ownership to public ownership, where public shareholders get the right to vote in company decisions.



Private companies typically have a small number of closely knit shareholders.



Public companies can have thousands of different shareholders.

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Going public raises cash and provides many benefits for a company.

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Getting in on a hot IPO is very difficult, if not impossible.

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The process of underwriting involves raising money from investors by issuing new securities to institutional investors.



Companies hire a syndicate of investment banks to underwrite an IPO.

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The road to an IPO consists mainly of putting together the formal documents for the Securities and Exchange Commission (SEC) and selling the issue to institutional clients.

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The only way for you to get shares in an IPO is to have a frequently traded account with one of the investment banks in the underwriting syndicate.



An IPO company is difficult to analyze in the market because there isn't a lot of historical info.

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Lock-up periods prevent insiders from selling their shares for a certain period of time. The end of the lockup period can put strong downward pressure on a stock.



Flipping may get you blacklisted from future offerings.



Road shows and red herrings are marketing events meant to get as much attention as possible. Don't get sucked in by the hype.



A tracking stock is created when a company spins off one of its divisions into a separate entity through an IPO.



Don't consider tracking stocks to be the same as a normal IPO, as you are essentially a secondclass shareholder.

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BIBLIOGRAPHY Investopedia Wikipedia National Stock Exchange Corporate Finance Institute Quora

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