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Initial Public

Offering (IPO)

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Definition

Initial Public Offering refers to the selling of shares by aprivate company to the public for the first time. Initial PublicOffering is a source of funds raised from the primary market.All subsequent public offerings are known as Follow-onPublic Offerings or Secondary Market Offerings.

An IPO is an abbreviation for Initial Public Offer. When a

company goes public for the first time or issues a fresh stockof shares, it offers it to the public directly. This happens inthe primary market. The primary market is where a companymakes its first contact with the public at large.

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Why Companies Bring IPO?

There are mainly any of the two purposes behind an IPO

1. ESTABLISHING NEW BUSINESS

2. EXPANSION OF EXISTING BUSINESS

Companies, new as well as old, can offer shares to the investors

in the primary market. This kind of tapping the savings is

called an IPO (Initial Public Offering). SEBI regulates the way

in which the companies can make this offering.

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Reason for listing in IPO

y The increase in the capital: An IPO allows a company toraise funds for utilizing in various corporate operational

purposes like acquisitions, mergers, working capital, researchand development, expanding plant and equipment andmarketing.

y Liquidity: The shares once traded have an assigned marketvalue and can be resold. This is extremely helpful as the

company provides the employees with stock incentivepackages and the investors are provided with the option oftrading their shares for a price.

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Cont

Valuation: The public trading of the shares determines a value for

the company and sets a standard. This works in favor of the

company as it is helpful in case the company is looking foracquisition or merger. It also provides the share holders of the

company with the present value of the shares.

Increased wealth: The founders of the companies have an affinity

towards IPO as it can increase the wealth of the company, without

dividing the authority as in case of partnership.

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Red Herring Prospectus (RHP)

A formal legal document, which is required by and filedwith the Securities and Exchange Commission, that

provides details about an investment offering for sale to

the public. A prospectus should contain the facts that an

investor needs to make an informed investment decision.

Also known as an "offer document".

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MoreonRHP

RHP contains all the information and factor which caninfluence the decision of an investor. Like

1. Where the company will use the funds so raised

2. Companies previous records

3. Promoters track records

4. Companies current, likely profit and EPS

5. Companies future plan

The investor should thoroughly go through RHP beforesubscribing the issue. RHP is available at SEBIs andmerchant bankers website. It may be available in physicalform at broking houses

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ProcessofIPOMethod of IPO:

When a Company Floats IPO, it Print forms for application to be

filled by investor. Public Issues are open for a few days only, in the method of IPO

company gives a price band. The subscriber can bid any wherewithin the range of price band. An applicant has to fill completeapplication form, accompanied by cash, cheque, D.D. and to be

deposited before the closing date. This is the most popular of IPOwhich is BOOK BUILDING.

As per the instruction on the form all the qualitative and quantitativefactor related to the IPO, offering company, promoters and parties tothe issue are disclosed in a document

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BookBuilding

Book building is a process of price discovery used in Initial

Public Offering. As per SEBI guidelines, Book Building is

defined 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". Investors bid at different prices which may be

equal to or more than the floor price and the issue price of

shares is determined at the end of the bidding period.

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ProcessofBookBuilding

In book building IPO method the final prices at which

shares are allotted is determined by investors. The issuingcompany gives a price range which consist of a higher

price and a lower price. Lower price is known as floor

price. The higher price is said to be the cap price. And this

range is called price band. The investor can apply

anywhere between the price range. On receiving all theapplication the company calculate average price at which

majority of application are received. This is the final price

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BoughtoutDeals

A bought out deal is a deal in which the company

sells its shares to an agent or a merchant banker,this merchant banker then offloads or sells the

shares at an appropriate time.

A new share issue that is bought entirely by one

underwriter to resell to investors.

An underwriter will only do a bought deal if it is

confident there is enough demand for the shares.

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Private Placement

Raising of capital via private rather than public placement.The result is the sale of securities to a relatively smallnumber of investors. Investors involved in private

placements are usually large banks, mutual funds,insurance companies, and pension funds.

Since a private placement is offered to a few, selectindividuals, the placement does not have to be registeredwith the Securities and Exchange Commission. In manycases detailed financial information is not disclosed and athe need for a prospectus is waived. Finally since the

placements are private rather than public, the averageinvestor is only made aware of the placement usually afterit has occurred.

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Whoare Underwriters

An underwriter to the issue could be a banker, broker,merchant banker or a financial institution. They give a

commitment to underwrite the issue.

Underwriting means they will subscribe to balance shareif all the shares offered at the IPO are not picked up.

Suppose there is an issue forRs. 100 crore andsubscriptions are received only for 90 crore. It is then leftto the underwriter to pick up the balance Rs. 10 crore.

If underwriters dont pay up SEBI will cancel their

licenses.

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Whattolookfor beforeinvestinginan

IPO

1. Valuation: First thing to look at is how aggressively the IPO is Priced. Themore aggressively it is priced the lesser the chances of price appreciation.

2. Promoters Goodwill: the Promoters Goodwill is an important parameterin analyzing an IPO as a goodwill creates trust in taking decision for applyingfor an IPO.

3. Brokers Report: Brokers can provide an investor with all the info he needson the co. so an investor must take advice from his stock broker before

applying for an IPO.

4. Ratings: SEBI has now made it mandatory for every co. to get its IPO ratedthrough any approved rating agencies like CRISIL, ICRA etc. but rememberthat it does not provide guarantee of success.

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Procedure for IPO

y IPOs generally involve one or more investment banks as"underwriters." The company offering its shares, called the

"issuer," enters a contract with a lead underwriter to sell its sharesto the public. The underwriter then approaches investors withoffers to sell these shares.

y The sale (that is, the allocation and pricing) of shares in an IPOmay take several forms. Common methods include:

y Bought deal

y Dutch auctiony Firm commitment

y Self Distribution of Stock

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Pricing IPO

Investment banks, take many factors into consideration

when pricing an IPO, and attempt to reach an offering

price that is low enough to stimulate interest in the stock,but high enough to raise an adequate amount of capital

for the company. The process of determining an optimal

price usually involves the underwriters ("syndicate")

arranging share purchase commitments from leadinginstitutional investors.

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Issue Price

y A company that is planning an IPO appoints lead managers to help itdecide on an appropriate price at which the shares should be issued.

There are two ways in which the price of an IPO can be determined:either the company, with the help of its lead managers, fixes a priceor the price is arrived at through the process of book building.

y Note: Not all IPOs are eligible for delivery settlement through theDTC system, which would then either require the physical delivery ofthe stock certificates to the clearing agent bank's custodian, or adelivery versus payment ("DVP") arrangement with the selling groupbrokerage firm. This information is not sufficient.

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How public can apply in IPO?

y When a company floats a public issue orIPO, it prints formsfor application to be filled by the investors.

y

. Public issues are open for a few days only. As per law, anypublic issue should be kept open for a minimum of 3days anda maximum of 21 days.

y The duly complete application from, accompanied by cash,cheque, DD or stock invest should be deposited before theclosing date as per the instruction on the from. IPO's by

investment companies (closed end funds) usually containunderwriting fees which represent a load to buyers.

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Factors that require to keep in mindbefore deciding to apply to an IPO?

Track record of the promoters

Financials position of that company

Read Prospectus very carefully

Issue price

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Is IPO Risky for Public

IPOs can be a risky investment. For the individual

investor, it is tough to predict what the stock or shares

will do on its initial day of trading and in the near futuresince there is often little historical data with which to

analyze the company. Also, most IPOs are of companies

going through a transitory growth period, and they are

therefore subject to additional uncertainty regarding their

future value.

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Drawbacks of IPO

It is true that IPO raises huge capital for the issuing

company. But, in order to launch an IPO, it is also

necessary to make certain investments.

Setting up an IPO does not always lead to an

improvement in the economic performance of the

company. A continuing expenditure has to be incurred

after the setting up of an IPO by the parent company.

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Cont.

A lot of expenses have to be incurred in the form of legal

fees, printing costs and accounting fees, which are

connected to the registering of an IPO.

the rules and regulations involved to set up public

offerings and this entire process on the other hand

involve a number of complexities which sometimerequire the services of experts in relevant fields.

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MANAGEMENT OF IPO

SEBI GUIDELINES:

1. Filing of prospectus:

Prospectus to be filed with SEBI

Through Merchant Banker

At least 30 days < filing with ROC

SEBI may suggest changes < 30 days

SEBI to consider only after approval from St.Ex

Issuer is obligated

SEBI is not obligated

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MANAGEMENT OF IPO

SEBI GUIDELINES:

2. Application for Listing:

No IPO without application for listing

3. Dematerialization of shares:

Agreement with Depository

Present shares also to be in dmat

public may opt either physical or dmat shares

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MANAGEMENT OF IPO

SEBI GUIDELINES:

4. Qualified Institutional Buyer shall mean:

a. public financial institution as defined in section 4A

of theCompanies Act, 1956;

b. scheduled commercial banks;

c. mutual funds;

d. foreign institutional investor registered with SEBI;

e. multilateral and bilateral development financialinstitutions;

f. venture capital funds registered with SEBI;

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MANAGEMENT OF IPO

SEBI GUIDELINES:

g. foreign venture capital investors registered withSEBI;

h. state industrial development corporations;

i. insurance companies registered with the InsuranceRegulatory and Development Authority (IRDA);

j. provident funds with minimum corpus of Rs.25

crores; k. pension funds with minimum corpus of Rs.25 crores).

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MANAGEMENT OF IPO

SEBI GUIDELINES:

5. Exemption from Eligibility Norms:

Banking Co. including Pvt. Banks

Subject to licensing by RBI.

New Bank being set up on acquisition or take over of a

bank

An infrastructure Company, whose project is appraised by

F/I, IL & FS and IDFC

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MANAGEMENT OF IPO

SEBI GUIDELINES:

6. IPO Grading:

No IPO unless; (as on the date of filing theprospectus with ROC):

Grading for IPO has been obtained fromat least one

agency.

Grading and the rationale have been included in theprospectus.

Grading expenses to be borne by the issuer.

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MANAGEMENT OF IPO

SEBI GUIDELINES:

7. Present shares to be fully paid-up:

No IPO, if there are any shares partly paid up as on the

date of IPO

The Shares to be fully paid up or forfeited

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MANAGEMENT OF IPO

SEBI GUIDELINES:

8. Price Band:

Price Band to be 20%.

Max price can be 20% above the floor price.

Board of directors may be authorized to fix the price.

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MANAGEMENT OF IPO

SEBI GUIDELINES:

9. Denomination of shares

Denomination of the shares is not restricted.

In case the issue price is

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MANAGEMENT OF IPO

SEBI GUIDELINES:

10. Promoter Contribution and Lock-in:

20% of the post issue share cap is to be held by promoters

11. Securities not included in the above:

Where the equity has been acquired during the preceding 3 yearsand;

- where the consideration is not cash

or

- where the shares are given through bonus issuefrom revaluation reserve

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MANAGEMENT OF IPO

SEBI GUIDELINES:Guidelines on issue of advertisement:

advertisement shall be truthful, fair and clear

shall not contain untrue or misleading or misleading

statement disclose all relevant facts

clear, concise and

understandable language

Avoid technical, legal, complex terms No advertisement in Crawlers

Reference to the red-herring prospectus

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MANAGEMENT OF IPO

SEBI GUIDELINES:

Guidelines on issue of advertisement:

No slogans, captions or one liners

Shall include risk factors

Risk factors to be given in the same font size The print size shall not be less than point size 7

The style of the font shall be Times new roman

No advertisement relating to the full or over subscription while theissue is open

Closure announcement can be made only after RTA certifies that90% is subscribed

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