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IPOs

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What is an IPO?

IPO stands for Initial Public Offering.

An IPO happens when a privately owned company

issues shares of stock to be sold to the general

public.

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What is an IPO?

This means the company is no longer privately

owned,

but is owned by a variety of investors, some of

whom are not involved with the day-to-dayoperations of the company

these investors simply own some of the company's

stock, which they purchased on the open market.

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Although IPOs can vary greatly from one

company to another, and they require a long,

expensive and complicated process,

the IPO is basically a way for the company to

make money based on expectations of future

success and profit.

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Why Have an IPO?

The obvious reason that any company has an

IPO is to raise money.

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Having an IPO is not so much an event as it is a

process.

It takes months of planning to prepare a company to

go public.

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A board of directors must be assembled,

accounts audited for accuracy,

consultants and advisers hired.

In fact, a whole cast of characters must take the

stage to help an IPO happen.

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One of the first things that a company does is

that it appoints one or more Investment or

Merchant Banks.

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The most important role of Investment

bankers is of lead managers and Underwriters.

The lead manager assists the company in all

aspects of the issue process like preparing the

draft prospectus, organizing Road Shows etc.

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The most important character is probably the

underwriter, an investment banker who works for an

investment company.

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Underwriters have the distribution channels and

business community contacts that can get a

company's shares out to the right investors.

They will also help set the initial offering price forthe stocks, work to create enthusiasm for the stock,

and assist in creating the prospectus.

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The underwriting deal is structured in a

variety of ways.

In a firm commitment, the underwriter

guarantees a certain minimum amount that

will be raised by buying the entire offer and

selling it to the public.

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In a Best Efforts agreement, the underwriter

sells the securities for the company but does

not guarantee the amount that will be raised.

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There can be a syndicate of Underwriters

where one underwriter leads the syndicate

and the others sell part of the issue.

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Prospectus

The prospectus is an important document that

describes the company in great detail to

potential investors.

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Once the prospectus has been drafted, it is

reviewed by the SEC.

SEC approval only means that the prospectus

follows the regulations for such documents --

it says nothing about the quality or future

profitability of the company.

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Road show

Following SEC approval, company executives go on the road

show, otherwise known as the dog-and-pony show.

This is a tour of major cities and cities where important

brokerage houses have their headquarters.

At these invitation-only slide shows (a few elite investors will

even get one-on-one presentations), potential investors are

given "goodie bags" containing calendars, pens, samples of

the company's product,

and whatever else might help investors think favorably about

the company.

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The Day of the IPO

The day before the stocks are issued, the underwriter and the

company must determine a starting price for the stocks.

A target price will have been set early on in the process, but

IPOs are rarely stable.

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The Day of the IPO

Obviously, the higher the price, the more money the company

gets;

but if the price is set too high, there won't be enough demand

for the stocks,

and the price will drop on the aftermarket (the open financial

markets where the stock will be traded after the initial

offering).

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The ideal stock price will keep demand just

higher than supply, resulting in a stable,

gradual increase in the stock's price on the

aftermarket.

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Who gets to buy the shares during an IPO is a

complicated matter.

In most cases, your typical, individual investor

doesn't get access to these offerings.

Instead, the underwriter gets to allocate the

shares to associates, clients, and major

investors of his choosing.

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Most of the shares (about 80 percent) will go to institutional

investors, which are major brokerage firms and investment

banks, and a few high-profile individual investors.

The remaining shares that do make their way to small-time,

individual investors are hard to obtain:

Stock brokers usually only offer access to IPOs to higher

volume traders, and traders with a long-term relationship

with the broker.

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After the initial offering, the stocks hit the

open stock market, where they begin trading

at a price set by market forces.

IPO stocks tend to trade at a very high volume

on that first day -- that is, they change hands

many times.

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Some IPOs can jump in price by a huge amount -- some more

than 600 percent.

Many IPOs do poorly, dropping in price the day of the

offering.

Others fluctuate, rising and then dipping again -- it all

depends on the confidence the market has in the company,

how strong the company is vs. the "hype" surrounding it, and

what outside forces are affecting the market at the time.

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After about a month, the underwriter issues a

report on the IPO, which is always positive.

This tends to give the stock a slight boost.

After 180 days have passed, people who held

shares in the company prior to its going public

are allowed to sell their shares.

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PRIMARY MARKETS

Companies raise funds to finance their

projects through various methods.

The promoters can bring their own money or

borrow from the financial institutions or

mobilize capital by issuing securities.

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THE FUNCTION

The main service functions of the primary

market are

origination,

under writing and

distribution.

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Origination

Origination deals with the origin of the new

issue.

The proposal is analyzed in terms of the

nature of the security, the size of the issue,

timing of the issue and floatation method of

the issue.

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Underwriting

Underwriting contract makes the share

predictable and removes the element of

uncertainty in the subscription

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Distribution

Distribution refers to the sale of securities to

the investors.

This is carried out with the help of the lead

managers and brokers to the issue.

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Primary market for equity, which consists of

both the

initial public offering (IPO) market and

the seasoned equity offering (SEO) markets

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Parties Involved in the IPO

The manager to the issue,

registrars to the issue,

underwriters,

bankers,

advertising agencies,

financial institutions and

government /statutory agencies.

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MANAGERS TO THE ISSUE

Lead managers are appointed by the company tomanage the initial public offering campaign.

Their main duties are:

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 tothe issue, underwriters, brokers, bankers to the issue,advertising agents etc.

Directing the various agencies involved in the public issue.

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Many agencies are performing the role of lead

managers to the issue.

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 mangers.

Such as SBI Capital Markets Ltd., Bank of Baroda,Canara Bank, DSP Financial Consultant Ltd. ICICI

Securities & Finance Company Ltd., etc.

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The company negotiates with prospective

mangers to its issue and settles its selection

and terms of appointment.

Usually companies appoint lead managers

with a successful background.

There may be more than one manager to the

issue.

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Some times the banks or financial institutionsimpose a condition while sanctioning term loanor underwriting assistance to be appointed asone of the lead managers to the issue.

The fee payable to the lead managers isnegotiable between the company and the leadmanager.

The fee agreed upon is revealed in thememorandum of the understanding filed alongwith the offer document.

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REGISTRAR TO THE ISSUE

After the appointment of the lead managers

to the issue, in consultation with them, the

Registrar to the issue is appointed.

Quotations containing the details of the

various functions they would be performing

and charges for them are called for selection.

Among them the most suitable one is

selected.

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The Registrars normally receive the share

application from various collection centers.

They recommend the basis of allotment in

consultation with the Regional Stock Exchange forapproval.

They arrange for the dispatching of the share

certificates. They hand over the details of the share allocation

and other related registers to the company.

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Usually registrars to the issue retain the issuer

records at least for a period of six months

from the last date of dispatch of letters of

allotment to enable the investors to approachthe registrars for redressal of their complaints.

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Share Transfer Agents

The Share Transfer Agents maintain the

records of holders of securities on behalf of

companies and deal with all matters

connected with the transfer/redemption of itssecurities.

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UNDERWRITERS

Underwriting is a contract by means of which a

person

gives an assurance to the issuer to the effect

that the former would subscribe to the securitiesoffered in the event of non-subscription by the

person to whom they were offered.

The person who assures is called an underwriter.

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The underwriters do not buy and sell

securities.

They stand as back-up supporters and

underwriting is done for a commission.

Underwriting provides an insurance against

the possibility of inadequate subscription.

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Underwriters are divided into two

categories:

Financial Institutions and Banks

Brokers and approved investment companies

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Some of the underwriters are financial

institutions, commercial banks, merchant

bankers, members of the stock exchange,

Export and Import Bank of India etc.

The underwriters are exposed to the risk of

non-subscription and for such risk exposure

they are paid an underwriting commission.

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Before appointing an underwriter,

the financial strength of the prospective

underwriter is considered

because he has to undertake and agree to

subscribe the non-subscribed portion of the

public issue.

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The other aspects considered 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.

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The company after the closure of subscription listcommunicates in writing to the underwriter the totalnumber of shares/debentures under subscribed, thenumber of shares/debentures required to be taken up

by the underwriter. The underwriter would take up the agreed portion.

If the underwriter fails to pay, the company is free toallot the shares to others or take up proceeding against

the underwriter to claim damages for any loss sufferedby the company for his denial.

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BANKERS TO THE ISSUE

Bankers to the issue have the responsibility of

collecting the application money along with the

application form.

The bankers to the issue generally chargecommission besides the brokerage, if any.

Depending upon the size of the public issue more

than one banker to the issue is appointed. When the size of the issue is large, 3 to 4 banks

are appointed as bankers to the issue.

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The bankers to the issue should have branches inthe specified collection centers.

In big or metropolitan cities more than onebranch of the various bankers to the issue are

designated as collecting branches. Branches are also designated in the different

towns of the state where the project is being setup.

If the collection centers for application money arelocated nearby people are likely to invest themoney in the company shares.

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ADVERTISING AGENTS

Advertising plays a key role in promoting thepublic issue.

Hence, the past track record of the advertising

agency is studied carefully. Tentative program of each advertising agency

along with the estimated cost are called for.

After comparing the effectiveness and cost of

each program with the other, a suitableadvertising agency if selected in consultation withthe lead managers to the issue.

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The advertising agencies take the

responsibility of giving publicity to the issue

on the suitable media.

The media may be

newspapers/magazines/hoardings/press

release or a combination of all.

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THE FINANCIAL INSTITUTIONS

Financial institutions generally underwrite the issueand lend term loans to the companies.

Hence, normally they go through the draft ofprospectus, study the proposed program for public

issue and approve them.

IDBI, IFCI & ICICI, LIC, GIC and UTI are the some of thefinancial institutions that underwrite and give financialassistance.

The lead manager sends copy of the draft prospectusto the financial institutions and includes theircomments, if any in the revised draft

GOVERNMENT AND STATUTORY

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GOVERNMENT AND STATUTORY

AGENCIES

The various regulatory bodies related with thepublic issue are:

Securities Exchange Board of India

Registrar of companies Reserve Bank of India (if the project involves foreign

investment)

Stock Exchange where the issue is going to be listed

Industrial licensing authorities Pollution control authorities (clearance for the project

has to be stated in the prospectus)

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COLLECTION CENTERS

Generally there should be at least 30 mandatorycollection centers inclusive of the places wherestock exchanges are located.

If the issue is not exceeding Rs.10 Cr (excludingpremium if any) the mandatory collection centersare the four metropolitan centers viz. Mumbai,Delhi, Kolkatta and Chennai

and at all such centers where stock exchanges arelocated in the region in which the registeredoffice of the company is situated.

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In addition to the collection branch, authorizedcollection agents may also be appointed.

The names and addresses of such agent shouldbe given in the offer documents.

The collection agents are permitted to collectsuch application money in the form of cheques,draft, and not in the form of cash.

The application money so collected should be

deposited in the special share application accountwith the designated scheduled bank either on thesame day or latest by the next working day.

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Debenture Trustees

The company appoints a Debenture Trustee,

which is an independent body whose job is to

keep vigil to protect the interests of the

investors.

The services of the Trustee are not free but

paid for by the company to protect the

interest of the debenture holders.

Functions of the Debenture

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Functions of the Debenture

Trustees (a) to ensure that the assets of the company issuing

debentures and each of the guarantors are sufficient to

discharge the principal amount at all times;

(b) to satisfy himself that the prospectus or the letter of offerdoes not contain any matter which is inconsistent with the

terms of the debentures or with the trust deed;

(e) to take steps to call a meeting of holders of debentures as

and when such meeting is required to be held.

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Placement of the IPO

Initial public offers are floated through

Prospectus;

Bought out deals/offer for sale;

Private Placement;

Right Issue and Book Building.

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OFFER THROUGH PROSPECTUS

According to Companies (Amendment) Act

1985, application forms for shares of a

company should be accompanied by a

Memorandum (abridged prospectus).

In simple terms a prospectus document gives

details regarding the company and invites

offers for subscription or purchase of anyshares or debentures from the public.

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The draft prospectus has to be sent to theRegional Stock Exchange where the shares of thecompany are to be listed and also to all otherstock exchanges where the shares are proposedto be listed.

The stock exchange scrutinizes the draftprospectus.

After scrutiny if there is any clarification needed,the stock exchange writes to the company andalso suggests modification if any.

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The prospectus should contain details

regarding the statutory provisions for the

issue,

program of public issue opening, closing andearliest closing date of the issue,

highlights and risk factors,

capital structure,

board of directors,

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registered office of the company,

brokers to the issue,

brief description of the issue,

cost of the project,

projected earnings and other such details.

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The board, lending financial institutions and

the stock exchanges in which they are to be

listed should approve the prospectus.

Prospectus is distributed among the stockexchanges, brokers and underwriters,

collecting branches of the bankers and to the

lead managers.

BOUGHT OUT DEALS (OFFER FOR

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BOUGHT OUT DEALS (OFFER FOR

SALE)

Here, the promoter places his shares with an

investment banker (bought out dealer or

sponsor) who offers it to the public at a later

date. In other words in a bought out deal, an

existing company off-loads a part of the

promoters capital to a wholesaler instead ofmaking a public issue.

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The wholesaler is invariably a merchant banker orsome times just a company with surplus cash.

In addition to the main sponsor, there could be

individuals and other smaller companiesparticipating in the syndicate.

The sponsors hold on to these shares for a periodand at an appropriate date they offer the same to

the public. The hold on period may be as low as 70 days or

more than a year.

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There are many advantages for the issuing

company:

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Firstly

Firstly, a medium or small sized company,

which is already facing working capital

shortage, cannot afford to have long lead-time

before the funds could be mobilized from thepublic.

Bought out deal helps the promoters to realize

the funds without any loss of time.

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Secondly

Secondly, the cost of raising funds is reduced

in bought out deals.

For issuing share to the public the company

incurs heavy expenses, which may invariablybe as high as 10 percent of the cost of the

project, if not more.

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Thirdly

Thirdly, bought out deal helps the entrepreneurswho are not familiar with the capital market buthave sound professional knowledge to raisefunds.

Sponsors of the deal are mostly concerned withthe promoters background and governmentpolicies than about the past track record or

financial projections. This helps the new entrepreneur to raise

adequate capital from the market.

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Fifthly

Fifthly, to the investors bought out deals

possess low risk since the sponsors have

already held the shares for a certain period

and the projects might have been completedor may be in the verge of completion, the

investors need not wait for returns

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PRIVATE PLACEMENT

In this method the issue is placed with a smallnumber of financial institutions, corporate bodiesand high net worth individuals.

The financial intermediaries purchase the shares

and sell them to investors at a later date at asuitable price.

The stock is placed with issue house client withthe medium of placing letter and other

documents which taken together contribute aprospectus, giving the information regarding theissue.

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The special feature of the private placement is that theissues are negotiated between the issuing companyand the purchasing intermediaries.

Listed public limited company as well as closely held

private limited company can access the public throughthe private placement method.

Mostly in the private placement securities are sold tofinancial institutions like Unit Trust of India, mutual

funds, insurance companies, and merchant bankingsubsidiaries of commercial banks and so on.

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Through private placement equity shares,preference shares, cumulative convertiblepreference shares, debentures and bonds are

sold. In India private placement market is

witnessing the introduction of severalinnovative debt market instruments such as

step-down/step-up debentures, liquiddebentures, bonds etc.

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Private placement has several inherent

advantages:

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Cost Effective

Cost Effective: Private placement is a cost-

effective method of raising funds.

In a public issue underwriting, brokerage,

printing, mailing and promotion account for 8to 10 percent of the issue cost.

In the case of the private placement several

statutory and non-statutory expenses areavoided.

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Time Effective

Time Effective: In the public issue the time

required for completing the legal formalities

and other formalities takes usually six months

or more. But in the private placement the requirements

to be fulfilled are less and hence, the time

required to place the issue is less, mostly 2 to3 months.

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Structure Effectiveness

Structure Effectiveness: It can be structured to meet theneeds of the entrepreneurs.

It is flexible to suit the entrepreneurs and the financialintermediaries.

To make the issue more attractive the corporate canprovide discounts to the intermediaries who are buying it.

This is not possible with the public issue with stringentrules and regulations. In the case of debentures the interestceiling cannot be breached in a public issue.

Here the terms of the issue can be negotiated withpurchasing institutions easily since they are few in number.

ff

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Access Effective

Access Effective: Through private placement a

public limited company listed or unlisted can

mobilize capital.

Like-wise issue of all size can beaccommodated through the private

placement either small or big where as in the

public issue market, the size of the issuecannot fall below a certain minimum size.

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RIGHTS ISSUE

According to Sec 81 of the Companies Act1956, if a public company wants to increase itssubscribed capital by allotment of furthershares after two years from the date of itsformation or one year from the date of its firstallotment,

which ever is earlier should offer share at first

to the existing share holders in proportion tothe shares held by them at the time of offer.

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The shareholders have no legal binding to

accept the offer and they have the right to

renounce the offer in favor of any person.

Shares of this type are called rights shares.

Generally right shares are offered at an

advantageous rate compared with the market

rate.

The company has to satisfy certain conditions to issue

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p y y

right shares.

Right shares must be offered to the equity shareholders inthe proportion to the capital paid on those shares.

A notice should be issued to specify the number of sharesissued.

The time given to accept the right offer should not be lessthan 15 days.

The notice also should state the right of the shareholders torenounce the offer in favor of others.

After the expiry of the time given in the notice, the Board

of Directors has the right to dispose the unsubscribe sharesin such a manner, as they think most beneficial to thecompany.

T f IPO

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Types of IPO

Fixed Price IPO.

Book Building

Dutch Auction Method

Fi d P i IPO

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Fixed Price IPO

The price at which the share will be offered isdetermined before the issue opens.

BOOK BUILDING

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BOOK BUILDING

Book building is a mechanism through whichthe initial public offerings (IPOS) take place in

the U.S. and in India it is gaining importance

with every issue. Most of the recent new issue offered in the

market has been through Book Building

process.

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In this process the price determination is based onorders placed and investors have an opportunity to

place orders at different prices as practiced in

international offerings.

An indicative price range is given to investors as a

starting point and they are required to bid for

different numbers of shares at different prices.

Alternatively, a floor price may be indicated.

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Nirma by offering a maximum of 100 lakhequity shares through this process was set to

be the first company to adopt the mechanism.

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Among the lead managers or the syndicate members ofthe issue or the merchant bankers as member.

The issuer company as a book runner nominates thismember and his name is mentioned in the draft

prospectus. The book runner has to circulate the copy of the draft

prospectus to be filed with SEBI among theinstitutional buyers who are eligible for firm allotment.

The draft prospectus should indicate the price bandwithin which the securities are being offered forsubscription.

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The offers are sent to the book runners. He maintains a record of names and number of

securities offered and the price offered by theinstitutional buyer within the placement portion andthe price for which the order is received to the bookrunners.

The book runner and the issuer company finalize theprice.

The issue price for the placement portion and offer to

the public should be the same. Underwriting agreement is entered into after the

fixation of the price.

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One day earlier to the opening of the issue tothe public, the book runner collects theapplication forms along with the applicationmoney from the institutional buyers and theunderwriters.

The book runner and other intermediariesinvolved in the book building process should

maintain records of the book building process. The SEBI has the right to inspect the records.

BOOK BUILDING THROUGH ONLINE

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IPO

Book building as discussed earlier is a process ofoffering securities in which bids at various prices frominvestors through syndicate members are collected.

Based on bids, demand for the security is assessed and

its price discovered. In case of normal public issue, investor knows the price

in advance and the demand is known at the close ofthe issue.

In case of public issue through book building, demandcan be known at the end of everyday but price isknown at the close of issue.

Green shoe Option

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Green shoe Option

This is an option to subscribe to theoversubscribed portion of the Capital.

A Company is not free to decide about the

Green Shoe option.

It must clearly state the proportion of

oversubscription it intends to subscribe to in

the offer document.


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The Dutch Auction method is similar to theBook Building method except that in this

system, the number of shares allotted finally,

at the lowest bid reached, must be the sameas the original number of shares bid.

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In the past, investment bankers could allocate alarger fraction of shares to those who agreed to pay

higher commissions to them a process called

laddering or

To those who agreed to do more business with them

A process called spinning.

Dutch auction eliminates the process of laddering

and spinning since neither the company nor the bookrunner has any discretion regarding how the

allotment is done.

ON LINE INITIAL PUBLIC OFFERS (IPO)

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ON-LINE INITIAL PUBLIC OFFERS (IPO)

The company is required to enter into anagreement with the stock exchange(s), which

have the requisite system for on-line offer of

securities. The agreement should cover rights, duties,

responsibilities and obligations of the company

and the stock exchanges inter-se, with provision

for a dispute resolution mechanism between the

company and the stock exchange.

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The issuer company appoints a Registrar tothe Issue having electronic connectivity with

the stock exchanges.

The issuer company can apply for listing of itssecurities at any exchange through which it

offers its securities to public through on-line

system, apart from the requirement of listingon the regional stock exchange.

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The stock exchange appoints brokers for thepurpose of accepting applications and placing

orders with the company.

The lead manager would co-ordinate all theactivities amongst various intermediaries

connected in the system.

BOOK BUILDING THROUGH ON-LINE

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IPO SYSTEM

Book building is basically a process used in IPO forefficient price discovery, wherein during the period forwhich the IPO is open, bids are collected from investorsat various prices, which are above or equal to the floorprice.

The offer price is determined after the bid closing date.In its strive to continuously improve Indian SecuritiesMarket; NSE offers its infrastructure for conductingonline IPOs through book building.

It helps to discover price as well as demand for asecurity to be issued through a process of bidding byinvestors.

The advantages of this new system

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are:

The investor parts with money only afterallotment,

It eliminates refunds except in case of direct

applications and,

It reduces the time taken for issue process.

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The securities get listed within 15 days fromthe closure of the issue.

Though the guidelines for book building were

issued in 1995, it is being used for IPOs from1999.

ELIGIBILITY TO ISSUE SECURITIES

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ELIGIBILITY TO ISSUE SECURITIES

The issues of capital to public by Indiancompanies are governed by the Disclosure and

Investor Protection (DIP) Guidelines of SEBI,

which were issued in June 1992. SEBI has been issuing clarifications to these

guidelines from time to time aiming at

streamlining the public issue process.

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Prior to 1992, the new issue market / activitywas regulated by the controller of Capital

Issues (CCIs) under the provisions of the

Capital Issues Control Act, 1947. The act was repealed and the office of the CCI

was abolished in 1992.

SEBI was entrusted with the responsibility ofregulating the securities market in 1992.

Eligibility Norms

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Eligibility Norms

A company making a public issue of securitieshas to file a draft prospectus with SEBI,

through an eligible merchant banker, at least

21 days prior to the filing of prospectus withthe Registrar of Companies (RoCs).

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An unlisted company can make public issue ofequity shares or any other security convertible

into equity shares, on fixed price basis or on

book building basis, provided:

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It has a pre-issue net worth of not less than Rs.1 crore in 3out of the preceding 5 years and has minimum net worth inimmediately preceding two years,

It has a track record of distributable profits in terms ofsection 205 of the Companies Act, 1956, for at least 3 out

of immediately preceding 5 years, and The issue size (offer through offer document + firm

allotment + promoters contribution through the offerdocument) does not exceed five times its pre-issue networth.

A listed company is eligible to make a public issue, on fixedprice basis or on book building basis, if the issue size doesnot exceed five times its pre-issue net worth.

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If the company, listed or unlisted, does notmeet the above criteria, then the issue will

have to be compulsorily made through book

building route. In such a case, 60% of the issue size will have

to be allotted to the Qualified Institutional

Buyers (QIBs) failing which the fullsubscription money shall be refunded.

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Infrastructure companies are exempt from therequirement of eligibility norms

if their project has been appraised by a public financialinstitution or infrastructure development financecorporation or infrastructure leasing and financingservices

and not less than 5% of the project cost is financed byany of the institutions, jointly or severally, by way ofloan and/or subscription to equity or a combination of

both. Banks and rights issues of listed companies are also

exempt from the eligibility norms.

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For public and rights issues of debt instrumentsirrespective of their maturities or conversion

period,

it is mandatory to obtain credit rating from aregistered credit rating agency and to disclose the

same in the offer document.

If the credit rating is obtained from more than

one credit rating agency, all the credit ratings,

including the rejected ones, need to be disclosed.

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For a public and rights issue of debt securitieswith issue size greater than or equal to Rs.100crore, credit rating from two rating agencies ismandatory.

In case of issue of debentures with maturity ofmore than 18 months, the issuer shall create adebenture redemption reserve and appoint a

debenture trustee to protect the interest ofdebenture holders.

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Thus the quality of the issue is demonstratedby track record/appraisal by approved

financial institutions/credit rating/subscription

by QIBs.

PRICING OF ISSUES

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PRICING OF ISSUES

The Controller of Capital Issues Act governedissue of capital prior to May 27, 1992 1947.Under the Act, the premium was fixed as perthe valuation guidelines issued.

The guidelines provided for fixation of a fairprice on the basis of the net asset value pershare on the expanded equity base taking into

account, the fresh capital and the profitearning capacity.

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The repealing of the Capital Issue Control Actresulted in an era of free pricing of securities.

Issuers and merchant bankers fixed the offer

prices. Pricing of the public issue has to be carried

out according to the guidelines issued by SEBI.

Companies are permitted to price their issues at

h f h f ll

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premium in the case of the following:

First issue of new companies set up by existing companies with thetrack record.

First issue of existing private/closely held or other existing unlistedcompanies with three-year track record of consistent profitability.

First public issue by exiting private/closely held or other existingunlisted companies without three-year track record but promotedby existing companies with a five-year track record of consistentprofitability.

Existing private/closely held or other existing unlisted company withthree-year track record of consistent profitability, seekingdisinvestments by offers to public without issuing fresh capital

(disinvestments). Public issue by existing listed companies with the last three years of

dividend paying track record.

At Par Value

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At Par Value

In certain cases companies are not permitted to fixtheir issue prices at premium. The prices of the shareshould be at par. They are for:

First public issue by existing private, closely held or

other existing unlisted companies without three-yeartrack record of consistent profitability and

Existing private/closely held and other unlistedcompanies without three-year track record of

consistent profitability seeking disinvestments offer topublic without issuing fresh capital (disinvestments).

FIXED VERSUS BOOK BUILDING

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ISSUES

The main difference between offer of sharesthrough book building and offer of shares

through normal public issue can be identified

on the following parameters:

Price

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Price

Priceat which securities will be allotted is notknown in case of offer of shares through Book

Building while in case of offer of shares

through normal public issue, price is known inadvance to investor.

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In case of Book Building, the demandcan beknown everyday as the book is being built.

But in case of the public issue the demand is

known at the close of the issue.

Indian companies are permitted to raise foreign

currency resources through two main sources:

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currency resources through two main sources:

Issue of Foreign Currency Convertible Bonds(FCCBs)

Issue of Ordinary equity shares through

depository receipts, namely, GlobalDepository Receipts/ American Depository

Receipts to foreign investors i.e. institutional

investors or investors residing abroad.

Depository Receipt

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Depository Receipt

A Depository Receipt (DR) is any negotiableinstrument in the form of a certificate denominated

in US dollars.

The certificate is issued by an overseas depository

bank against certain underlying stocks/shares.

The shares are deposited by the issuing company

with the depository bank.

The depository bank in turn tenders DRs to theinvestors.

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A DR represents a particular bunch of shares onwhich the receipt holder has the right to receive

dividend, other payments and benefits which

company announces from time to time for the

shareholders.

However, it is non-voting equity holding.

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DRs facilitate cross border trading andsettlement, minimize transaction cost and

broaden the potential base, especially among

institutional investors. More and more Indian companies are raising

money through ADRs and GDRs these days.

WHAT ARE ADRs OR GDRs?

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WHAT ARE ADRs OR GDRs?

American Depository Receipts (ADRs) aresecurities offered by non-US companies who

want to list on any of the US exchange.

Each ADR represents a certain number of acompany's regular shares.

These are deposited in a custodial account in

the US.

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ADRs allow US investors to buy shares of thesecompanies without the costs of investing directly in a

foreign stock exchange.

ADRs are issued by an approved New York bank or

trust company against the deposit of the original

shares.

When transactions are made, the ADRs change

hands, not the certificates. This eliminates the actual transfer of stock

certificates between the US and foreign countries.

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Global Depository Receipts (GDRs) are negotiable certificateheld in the bank of one country representing a specific

number of shares of a stock traded on the exchange of

another country.

This is a financial instrument used by the companies to raisecapital in either dollars or Euros.

GDRs are also called European Depositary Receipt.

These are mainly traded in European countries and

particularly in London.

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However, ADRs and GDRs make it easier forindividuals to invest in foreign companies,

due to the widespread availability of price

information, lower transaction costs, andtimely dividend distributions.

WHY DO COMPANIES GO FOR ADRs OR GDRs?

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Indian companies need capital from time to time toexpand their business.

If any foreign investor wants to invest in any Indian

company, they follow two main strategies.

Either the foreign investors can buy the shares in

Indian equity markets or the Indian firms can list

their shares abroad in order to make these shares

available to foreigners.

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But the foreign investors often find it very difficult to invest inIndia due to poor market design of the equity market.

Here, they have to pay hefty transaction costs.

This is an obvious motivation for Indian firms to bypass the

incompetent Indian equity market mechanisms and go for thewell-functioning overseas equity markets.

When they issue shares in forms of ADRs or GDRs, their

shares commanded a higher price over their prices on the

Indian bourses.

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Another problem faced by the foreign investors isrestrictions on equity ownership by foreigners.

Only foreign institutional investors can buy shares in

India whereas in case of ADRs or GDRs, anyone can

buy this.

FIIs face restrictions of ceilings or stakes in Indian

companies.

In contrast, there is no such restriction on GDRs orADRs, and hence GDRs or ADRs generally enjoy a

premium.

WHICH INDIAN COMPANIES ARE

LISTED ABROAD?

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LISTED ABROAD?

Infosys Technologies was the first Indian company to be listedon NASDAQ in 1999.

However, the first Indian firm to issue sponsored GDR or ADR

was Reliance industries Limited.

Beside, these two companies there are several other Indianfirms are also listed in the overseas bourses.

These are Satyam Computer, Wipro, MTNL, VSNL, State Bank

of India, Tata Motors, Dr Reddy's Lab, Ranbaxy, Larsen &

Toubro, ITC, ICICI Bank, Hindalco, HDFC Bank and Bajaj Auto.

WHAT ARE THE PRICES OF INDIAN ADRs & GDRs?

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The ADR and GDR prices of the Indian companies are muchhigher compared to the prices on the Indian bourses.

HOW TO TRADE IN ADRs?

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ADRs can be traded either by trading existingADRs or purchasing the shares in the issuer's

home market and having new ADRs created,

based upon availability and market conditions.

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When trading in existing ADRs, the trade isexecuted on the secondary market on the

New York Stock Exchange (NYSE) through

Depository Trust Company (DTC) withoutinvolvement from foreign brokers or

custodians.

The process of buying new, issued ADRs goesthrough US brokers, Helsinki Exchanges and

DTC as well as Deutsche Bank.

WHAT ARE THE NORMS FOR INDIAN ADRs AND GDRs?

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There are no ceilings on investment in ADRs or GDRs. An applicant company seeking the government's

approval in this regard should have a consistent good

track record for a minimum period of 3 years.

This condition can be relaxed for infrastructure

projects such as power generation, telecomm,

petroleum exploration and refining, ports, airports

and roads.

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There is no restriction on the number of GDRsor ADRs to be floated by a company or a group

of companies in a financial year.

The government has also relaxed theconversion and re-conversion (i.e. two-way

conversion or fungibility) of shares of Indian

companies into depository receipts listed inforeign bourses.

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The companies have been allowed to invest100 per cent of the proceeds of ADR or GDR

issues for acquisitions of foreign companies

and direct investments in joint ventures.

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ALLOTMENT OF SHARES

PROHIBITION OF ALLOTMENT UNLESS MINIMUM

SUBSCRIPTION RECEIVED

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A companys offer to the public for subscription ofequity shares cannot be allotted unless the minimum

amount is subscribed for.

This minimum amount is decided by the Board of

Directors, which according to them must be raised by

the issue of share capital in order to provide for the

specific objective as mentioned in the prospectus

and which has been subscribed by the public for.

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The amount payable on application on eachshare cannot be less than five per cent of the

nominal amount of the share.

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All money received from applicants for issueof shares is kept deposited in a Schedule Bank

until the certificate to commence business is

obtained by the company. Where such certificate has already been

obtained, the deposits are kept until the

company has received the entire amountpayable on applications for shares up to

minimum subscription.

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On the expiry of 120 days after the issue ofthe prospectus, if the above conditions are

not complied with, all money received from

applicants has to be repaid without interest. In case money is not repaid within 130 days

after the issue of the prospectus, directors of

the company is held responsible to repay thatmoney with interest at the rate of 6% per

annum from the expiry of the 130th day.

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The above conditions do not apply to anyallotment of shares made subsequent to the

first allotment of share by the company to the

public.

PROHIBITION OF ALLOTMENT IN CERTAIN CASES UNLESS STATEMENT IN LIEU

OF PROSPECTUS DELIVERED TO REGISTRAR

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If a company having a share capital did not issue aprospectus

or has issued a prospectus but has not proceeded to

allot any of the shares offered to the public for

subscription,

cannot allot any of its shares or debentures unless at

least 3 days before the first allotment of either

shares or debentures it has delivered a statement inlieu of prospectus signed by all director in writing to

the Registrar for registration.

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This prohibition of allotment does not apply toa private company.

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If this statement in lieu of prospectusdelivered to the Registrar includes any untrue

statement, then the person authorizing the

delivery is held responsible and is liable forpunishment.

This is a punishable offence with

imprisonment for a term up to 2 years or withfine which may be up to the extend of 50,000

or with both.

BASIS OF ALLOTMENT

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According to SEBI regulation, the allocation ofshares is done under proportionate allotment

method.

The allotment for each category is inverselyproportional to the over subscription ratio.

The applications will be categorized according

to the number of shares applied for. The allocation is done by proportionate basis.

ILLUSTRATION

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Basis of Allocation

Reliance PetroleumLimited(Incorporated under the Companies

Act, 1956 on October 24, 2005)

Issue Detail

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Issue Detail: Issue of 135,00,00,000 equity shares of Rs.10each for cash at a price of Rs.60 per equity share (Including a

share premium of Rs.50 per equity share) aggregating to

Rs.81,000 million including promoter contribution of

90,00,00,000 equity shares of Rs.10 each for cash at a price of

Rs.60 per share (Promoter Contribution) and the net issue

to public of 45,00,00,000 equity shares of Rs.10 each (Net

Issue).

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The net issue will constitute 10% of the fullydiluted post issue paid up capital of Reliance

Petroleum Limited (Company or Issuer).

The face value per equity share is Rs.10.

The issue price per equity share is Rs.60 and it

is 6 times of the face value.

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The issue was made through the 100% BookBuilding Process where at least 60% of the Net

Issue was to be allocated on proportionate

basis to Qualified Institutional Buyers (QIBs)(including 5% of the QIB portion that was to

specifically be allotted to mutual funds on

proportionate basis).

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Further, not less than 10% of the Net Issuewas available for allocation on proportionate

basis to Non-Institutional Bidders and not less

than 30% of the Net Issue was available forallocation on proportionate basis to Retail

Bidders, subject to valid bids being received at

or above the Issue Price.

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The Issue received 21,08,279 applications for23,04,97,33,824 equity shares resulting in

51.22 times subscription.

PRIVATE PLACEMENT

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The private placement involves issue ofsecurities, to selected subscribers, such as

banks, FIs, MFs and high net worth individuals.

It is arranged through a merchant/investmentbanker, who acts as an agent of the issuer and

brings together the issuer and the investor(s).

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Since these securities are allotted to a fewsophisticated and experienced investors, the

stringent public disclosure regulations and

registration requirements are relaxed. The Companies Act, 1956, states that an offer

of securities to more than 50 persons is

deemed to be public issue.

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In sharp contrast to a shrinking public issuesmarket for corporate securities, the last few

years have witnessed huge resource

mobilization through private placement. Mostly, debt securities were privately placed.

Though, there were some instances of private

placements of equity shares, there is nocomprehensive data coverage of this.

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Unlike public issues of bonds, it is notmandatory for corporate issuing bonds in the

private placement market to obtain and

disclose credit rating from an approved creditrating agency.

Qualified Institutional Buyers

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[As defined in Clause 2.2.2B(v) of Chapter II ofThe SECURITIES AND EXCHANGE BOARD OF

INDIA (DISCLOSURE AND INVESTOR

PROTECTION) GUIDELINES, 2000

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"Qualified Institutional Buyers are thoseinstitutional investors who are generally

perceived to possess expertise and the

financial muscle to evaluate and invest in thecapital markets.

In terms of clause 2.2.2B (v) of DIP Guidelines, a

Qualified Institutional Buyer shall mean:

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"a) Public financial institution as defined in section 4A of the Companies Act, 1956;

"b) Scheduled commercial banks;

"c) Mutual funds;

"d) Foreign institutional investor registered with SEBI;

"e) Multilateral and bilateral development financial institutions;

"f) Venture capital funds registered with SEBI.

"g) Foreign Venture capital investors registered with SEBI.

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"h) State Industrial Development Corporations.

"i) Insurance Companies registered with the Insurance Regulatory and

Development Authority (IRDA).

"j) Provident Funds with minimum corpus of Rs.25 crores

"k) Pension Funds with minimum corpus of Rs. 25 crores

"These entities are not required to be registered with SEBI as QIBs.

Any entities falling under the categories specified above are considered as

QIBs for the purpose of participating in primary issuance process.

Questions for Revision

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What is an IPO? Why is it required? Who are themain players in the process?

Describe the various steps in taking out an IPO?

Write short notes on:

Fixed Price IPO

Book Building


Green Shoe option

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Write short notes on Prospectus

Private Placement

Online IPO Write short notes on

Bought out Deals

ADRs and GDRs

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The End

Documents

iponew-101108234219-phpapp01