Financial Management: Class Of 2011 Icfai Business School Ipos (session 26)

Financial Management Class of 2011 ICFAI Business School IPOs (Session 26) Nupur Pavan Bang

Fixed Price Offers  

An issuer company is allowed to freely price the issue The basis of issue price is disclosed in the offer document where the issuer discloses in detail about the qualitative and quantitative factors justifying the issue price

Book Building “Book Building” means 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 the securities is assessed on the basis of the bids obtained for the quantum of securities offered for subscription by the issuer”.

Book Building     

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Used in Public offers to arrive at a price Price Discovery Mechanism Lets the investors arrive at a price Floor Price eg: DCL EQ IPO – Rs.45 Book built issues, the minimum and maximum period for which bidding will be open is 3 – 7 working days extendable by 3 days in case of a revision in the price band Infrastructure company, issues may be kept open for a maximum period of 21 working days

Intermediaries 

Merchant Bankers to the issue or Book Running Lead Managers (BRLM), syndicate members, Registrars to the issue, Bankers to the issue, Auditors of the company, Underwriters to the issue etc

Book Running lead manager  

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Drafting and design of Offer document Certifying that the information in the offer document is correct Advertisements Compliance with stipulated requirements and completion of prescribed formalities with the Stock Exchange Marketing strategies for the issue Finalizing the cut off price

Book Running lead manager 

The Lead Managers state that they have examined various documents including those relating to litigation like commercial disputes, patent disputes, disputes with collaborators etc. And on the basis of such examination and the discussions with the Company, its Directors and other officers, other agencies, independent verification of the statements concerning the objects of the issue, projected profitability, price justification, etc., they state that they have ensured that they are in compliance with SEBI, the Government and any other competent authority in this behalf.

Registrar 

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Finalizes the list of eligible allottees after deleting the invalid applications Ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done The dispatch of refund orders to those applicable are sent The lead manager co-ordinates with the Registrar on these activities

Banker 

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Bankers to the issue, as the name suggests, carries out all the activities of ensuring that the funds are collected and transferred to the Escrow accounts Escrow Account – An account opened by a third party on behalf of other two parties in a transaction. The funds are held in the escrow account until the banker receives an appropriate written communication from the BLRM

How is the cut off price fixed   

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Number of shares known in advance Cut off price – Dutch Auction An auction where the price of an item is lowered until it gets its first bid and then the item is sold at that price Retail Investors - Cut off price Retail investors can revise their bids Only electronic bidding The excess part refunded in 15 days ( else 15% interest per annum)

How are the Shares Allocated   

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Min 35% Retail Investors ( <=Rs.1 lakh) Not more than 50% QIBs Qualified Institutional Buyers are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets. Mutual Funds, FIs, Banks, Insurance Comp, Provident Funds, Pension Funds, State Industrial Development Corporations, Foreign Institutional Investors, Venture Capitalists etc Min 15% Non Institutional Investors ( HNIs)

Allotment 

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Allotment to Retail and non institutional investors made on the basis of proportionate allotment system within 15 days of closing of the issue Confirmatory Allotment Note RPL Example

QIB allotment 

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Allotment made by the Merchant Banker – Discretionary basis SEBI is reviewing it Several QIBs have complained of favouritism and arbitrary allotment by Merchant Bankers No bands earlier No need to put in money upfront Listing done within seven days of the finalization of the issue (nearly 3 weeks from closure)

Types of Book Building   

100% Book Building 75% Book Building 25% Fixed Price Retail investor not a part of the book building process

Green shoe option  

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To stabilize prices post listing In case of over subscription the green shoe option is mandatory Stabilizing Agent Promoter and Pre issue shareholders 15% of shares max of the total issue size Pro-rata allotment

Prospectus 

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“Offer document” means Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a rights issue which is filed with the Registrar of Companies (ROC) and Stock Exchanges “Draft Offer document” means the offer document in draft stage. The draft offer documents are filed with SEBI, atleast 21 days prior to the filing of the Offer Document with ROC/ SEs SEBI may specify changes to it Red herring prospectus Herring – A silver coloured edible fish Red Herring – A thing that draws attention from something more important

Prospectus 

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“Red Herring Prospectus” is a prospectus 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. In the case of book-built issues, it is a process of price discovery and the price cannot be determined until the bidding process is completed. 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. “Abridged Prospectus” available with the application form of the public issue.

Reverse Book Building     

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SEBI (Delisting of Securities) Guidelines 2003 Voluntary delisting by promoters Sell orders captured online for delisting Buyback shares from shareholders Floor price – average of 26 weeks trading price preceding the date of public announcement Cut off price – Price at which maximum shares are offered No upper cap Bids below floor price are not accepted Bidding only in electronic form

Reverse Book Building   

Buyback offer should not be open for more than 30 days Verification – 15 days of closure of offer Payment – 7 days of completion of process