Ipo 1

Issue Management

Raising Funds • 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.

PRIMARY MARKETS OR NEW ISSUE MARKET • Primary markets - include all types of securities - being sold for the first time • After being offered in the primary market, it becomes part of the secondary market • Primary market offered consist of (1) FPOs (Follow on Public Offering), new offerings of listed companies that have sold securities to the public before, • And (2) IPOs, where an unlisted company is selling securities to the public for the first time

PLACEMENT OF THE ISSUE • Initial issues are floated: Through prospectus Bought out deals/offer for sale Private placement Right issue Book building

OFFER THROUGH PROSPECTUS • Invites offers for subscription or purchase of any shares or debentures from the public The salient features of the prospectus are:  General Information about company  Capital structure of the company  Terms of the present issue  Particulars of the Issue - issue-opening, closing and earliest closing date of the issue  Company Management and Project  Details of the outstanding litigations  Management perception of risk factors  Justification of the issue premium  Financial Information - cost of the project, projected earnings

OFFER FOR SALE • Promoter places his shares with an investment banker (bought out dealer or sponsor) • who offer it to the public at a later date • Hold on period is 70 days to more than a year Bought out dealer decides the price after analyzing the viability, the gestation period, promoters’ background and future projections. • Boughs out dealer sheds the shares at

Advantages • The issuing company helps the promoters to realize the funds without any loss of time • The cost of raising funds is reduced - For issuing share cost as high as 10 percent of the cost of the project helps the new entrepreneurs, not familiar with the capital market, to raise adequate capital from the market. • A company with no track record of projects, public issues at a premium may pose problems but it possess low risk to investors since the sponsors have already held the shares for a certain period . • Disadvantage  Sell at a hefty premium,  Manipulation of the results,  Insider trading and price rigging

PRIVATE PLACEMENT • Small number of financial intermediaries (like Unit Trust of India, mutual funds, insurance companies, merchant banking subsidiaries of commercial banks) purchase the shares and sell them to investors at a later date at a suitable price • Advantages:  Cost Effective - statutory and non-statutory expenses are avoided.  Time Effective  Structure Effectiveness - flexible to suit the financial intermediaries  Access Effective - issue of all sizes can be accommodated

RIGHTS ISSUE • RIGHTS ISSUE Offers shares at first to the existing share holders In proportion to the shares held by them at the time of offer Offered at a advantageous rate compared with the market rate • Certain conditions: A notice should be issued to specify the number of shares issued • The time given to accept should not be less than 15 days • Right of the share holders to renounce the offer in favor of others

BOOK BUILDING • Process of price discovery • Not a fixed price for its shares • Indicates a price band that mentions the lowest (referred to as the floor) and the highest (the cap) prices • The spread between the floor and the cap of the price band shall not be more than 20%. • The cap should not be more than 120% of the floor price. • Price is finalized by the book runner and the issuer company Malegam • Committee - introduction of the book building process Oct 1995 Originally, companies issuing more than Rs 100 cr allowed; Later SEBI allowed for issue of any size

BOOK BUILDING • Nirma offered a maximum of 100 lakh equity shares through this process; • first company to adopt the mechanism • An example of pricing securities - Google’s IPO offer: Google’s IPO offer on the Dutchauction basis, similar to the book-building process. • Target range between U.S. $105 and U.S. $135 per share • Market response to offer not too good; final issue price U.S. $85 • Enabled Google to find price that market was willing to pay for its issue

RED HERRING PROSPECTUS • Prospectus without details of either price or number of shares being offered or the amount of issue • A preliminary registration statement that must be filed with the SEBI describing a new issue of stock (IPO) and the prospects of the issuing company • It is known as a red herring because it contains a passage in red that states the company is not attempting to sell their shares before the registration is

PRICING OF ISSUE • Prior to 1992, governed by Controller of Capital Issues Act 1947 • Fixation of a fair price on the basis of the net asset value per share • Era of free pricing in 1992; • SEBI does not play any role in price fixation • Issuer in consultation with Merchant Banker shall decide the price • FIXED PRICE - company and LM fix a price • PRICE DISCOVERY THROUGH BOOK BUILDING company and LM stipulate a floor price or a price band and leave it to market forces to determine the final price • Blue Chip Companies are permitted to price their issues at premium • At par value In certain cases, companies are not permitted to fix their issue prices at premium

INTERMEDIATRIES TO ISSUE • Merchant Bankers to the issue or Book Running Lead Managers (BRLM) • Registrars to the issue • Bankers to the issue • Auditors of the company • Underwriters to the issue • Solicitors, Advertising agencies, Financial institutions, Government/ statutory agencies

LEAD MANAGER • LEAD MANAGER Appointed by company to manage the public issue programmes. • BRLM - A Merchant banker possessing a valid SEBI registration Main duties  Drafting of prospectus  Preparing the budget of expenses related to the issue  Suggesting the appropriate timings of the public issue  Assisting in marketing the public issue successfully  Advising the company in the appointment of registrars to the issue, underwriters, brokers, bankers to the issue, advertising agents etc.  Directing the various agencies involved in the

LEAD MANAGER • The merchant banking division of the financial institutions, subsidiary of commercial banks, Foreign banks, Private sector banks and private agencies are available to act as lead managers SBI Capital Markets Ltd., Bank of Baroda, Canara Bank, DSP Financial Consultant Ltd. ICICI Securities & Finance Company Ltd., etc

Role of Lead Manager in the Pre & Post Issue • • • • • • • • • •

Due diligence Design of offer doc, prospectus, memo… Ensure the formalities with SE, ROC & SEBI Appointment of intermediaries Marketing strategy Mgt of escrow a/ct Co-ordinate non institutional allocation I intimation of allocation Dispatch of refunds to bidders Follow up steps finalization of trading,  Dealing of instruments,  dispatch of certificates & demat of delivery of shares

REGISTRAR • Finalizes the list of eligible allotees after deleting the invalid applications • Corporate action for crediting of shares to the demat accounts of the applicants • Dispatch of refund orders to those applicable • Receive the share application from various collection centres • Recommend the basis of allotment in consultation with the Stock Exchange and seek approval • Arrange for the dispatching of the share certificates

BANKERS TO THE ISSUE • Ensure that the funds are collected and transferred to the Escrow accounts. • Estimates of collection and advising the issuer about closure of the issue

UNDERWRITERS • Underwriting means they will subscribe to the balance shares if all the shares offered at the IPO are not picked up • Could be a banker, broker, merchant banker or financial institution • Insurance against the possibility of inadequate subscription • Done for a commission • The aspects considered before appointing are  Experience in the primary market  Past underwriting performance and default  Outstanding underwriting commitment  The network of investor clientele of the underwriter and his overall reputation

ISSUE TYPE: BSE • Fixed Price Issues – Offer Price: Price at which the securities are offered and would be allotted is made known in advance to the investors – Demand: for the securities offered is known only after the closure of the issue – Payment:100 % advance payment is required to be made by the investors at the time of application – Reservation: 50 % of the shares offered are reserved for applications below Rs. 1 lakh and the balance for higher amount applications.

ISSUE TYPE: BSE • Book Building Issues – Offer Price: A 20 % price band is offered by the issuer within which investors are allowed to bid and the final price is determined by the issuer only after closure of the bidding. – Demand: for the securities offered , and at various prices, is available on a real time basis on the BSE website during the bidding period.. – Payment: 10 % advance payment is required to be made by the QIBs along with the application, while other categories of investors have to pay 100 % advance along with the application. – Reservation: 50 % of shares offered are reserved for QIBS, 35 % for small investors and the balance for all other investors.

More About Book Building • Book Building is essentially a process used by companies raising capital through Public Offerings-both Initial Public Offers (IPOs) or Follow-on Public Offers ( FPOs) to aid price and demand discovery. • It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer. • The process is directed towards both the institutional as well as the retail investors. • The issue price is determined after the bid

The Process: • • • • • • • •

• • •

The Issuer who is planning an offer nominates lead merchant banker(s) as 'book runners'. The Issuer specifies the number of securities to be issued and the price band for the bids. The Issuer also appoints syndicate members with whom orders are to be placed by the investors. The syndicate members input the orders into an 'electronic book'. This process is called 'bidding' and is similar to open auction. The book normally remains open for a period of 5 days. Bids have to be entered within the specified price band. Bids can be revised by the bidders before the book closes. On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels. The book runners and the Issuer decide the final price at which the securities shall be issued. Generally, the number of shares are fixed, the issue size gets frozen based on the final price per share. Allocation of securities is made to the successful bidders. The rest

BSE's Book Building System • BSE offers a book building platform through the Book Building software that runs on the BSE Private network. • This system is one of the largest electronic book building networks in the world, spanning over 350 Indian cities through over 7000 Trader Work Stations via leased lines, VSATs and Campus LANS. • The software is operated by book-runners of the issue and by the syndicate members , for electronically placing the bids on line real-time for the entire bidding period. • In order to provide transparency, the

Green shoe Option • What Does Green shoe Option Mean? A provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. Legally referred to as an over-allotment option. A green shoe option can provide additional price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges.

Greenshoe Option • Greenshoe options typically allow underwriters to sell up to 15% more shares than the original number set by the issuer, if demand conditions warrant such action. • However, some issuers prefer not to include greenshoe options in their underwriting agreements under certain circumstances, such as if the issuer wants to fund a specific project with a fixed amount of cost and does not want more capital than it originally sought. • The term is derived from the fact that the Green Shoe Company was the first to issue this type of option.