1Nelson Jacob

What are IPOs????

When private companies, invite the public to subscribe to their

shares, this issue of shares is called an Initial Public Offering (IPO).

The shares issued could be in the form of fresh equity and/or the

promoters sell a portion of their equity to the public.

These shares are then listed on a stock exchange where they can be

bought and sold by investors.

IPOs are a very popular way of investing in the stock market as they

allow investors a simple entry route to buying stocks.

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Companies come out with IPO’s

Expand its existing facilities

E.g. Reliance Petroleum Ltd, Power Grid Corporation

Undertake a new project

E.g. GMR Infrastructure

Repay a high cost loan

Augment its working capital

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Follow on Public Offer (FPO) When an already listed company makes either an offer for

sale to the public or a fresh issue of shares, this issue of

shares is called Follow on Public Offer (FPO).

ICICI Bank, Motilal Oswal Securities Ltd

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Intermediaries in an IPO procedure

Merchant Banker or Book Running Lead Managers (BRLM)

to the issue

Syndicate Members

Underwriters to issue

Registrars to issue

Bankers to issue

Auditors

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Role of BRLM / Merchant Bankers

Performs all the pre and post issue activities.

Pre-issue activities :

involves due diligence of company’s Operations/ Legal / Management / Business plans etc

designing & drafting Offer Document, Prospectus, memorandum for salient features of Prospectus and statutory advertisements.

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Ensuring to comply with stipulated requirement and formalities in prescribed formats with SEBI, Stock Exchanges, Registrar of Companies (ROC).

They also have market the issue and appoint other intermediaries like Advertising Agency, Registrar, Bankers and Printers.

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Post-issue Activities

Activities like managing escrow accounts

Allocation to non-institutional

Intimation of allocation

Dispatch of refunds to bidders

Necessary follow ups like Finalization of trading Dealing of instruments Dispatch certificates Demat of delivery of shares

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Coordinating with Registrar and Escrow Bankers to ensure

follow up for proper flow of applications from bank branches to

registrar

Processing of these applications and other works till the Basis of

Allotment is finalized

Arranging necessary agreements and documents between these

agencies and the Company

Ensuring that these agencies fulfil their functions and discharge

responsibilities according to the agreements

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Role of a Registrar

Finalizes the list of eligible bidders after rejecting invalid

applications

Ensures credit of allotted shares to Demat accounts of

respective bidder by taking the corporate action and

dispatch refund orders & Confirmatory Allotment Note to

those applicable

E.g.: Karvy Computershare

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Role of Bankers to issue

Collecting funds in the escrow accounts

Inform Issuers, Registrar and Lead Manager about the

figures collected.

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How is the issue price decided on???

There are two ways in which the price

of an IPO can be determined –

The company could fix a price. The price could be arrived at through the process of book

building.

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IPO Pricing

Fixed price IPOs

In this case, the company, together with the lead managers, decides at what price they would like to issue the shares. The share prices of competitor companies’ equities and others in the same league are also taken into consideration when the IPO price is fixed.

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Book Built IPO’s

In the book building approach to price setting, the price of an IPO is demand driven

The issuing company sets a base price and a band within which an investor is allowed to bid for shares. Then the company, through its lead managers, invites price bids from investors

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One of the lead managers, who is called the ‘book runner’, maintains an order book in which the investors demand and price bids are registered

Once the issue period is over, the book runner demarcates a cut off price

All bids that are below the cut off price are ignored and investors who have bid at the cut off price or above can purchase shares that have been allotted to them at the cut-off price

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IPO Quotas

A company that is coming out with an IPO can reserve a part of its issue as “allotment on firm basis”

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Firm Allotment For certain categories such as Indian mutual funds,

FIIs, permanent/regular employees of the company, scheduled banks, merchant bankers, etc

Guidelines that indicate the maximum percentage of shares that can be reserved for firm allotment for each category

E.g. The total of reservations and firm allotment for employees cannot exceed 10 per cent of the issue size

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Quotas for Specific investors

For allotment purposes, investors in a book building issue are divided into three categories :–

Retail Individual Investors (RIIs) Non Institutional Investors (NIIs) Qualified Institutional Buyers (QIBs)

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Retail Individual Investor

A retail investor is one whose application for shares does not exceed Rs 1 lakh in value.

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Non Institutional Investors (NIIs) NIIs are investors whose bid values

amount to over Rs 1 lakh each

E.g. High Net worth Individuals

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Qualified Institutional Buyers (QIBs) QIBs consist of

Mutual funds – E.g. Pru ICICI Mutual fund

Financial institutions–E.g. Reliance Capital

Scheduled Commercial banks - Axis Bank

Insurance companies - LIC

Provident funds, State industrial development

corporations, etc

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SEBI guidelines

Each of these categories must be allocated a certain percentage of the total issue

The total amount allotted to RII must be at least 35% of the total issue

At least 15% must be given to NII QIB must be allotted no more than 50% cent of the issue In QIB 5% is reserved for mutual funds companies

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Other Possibilities

In case an issue is over-subscribed, the company could decide to use the green shoe option - an option to retain a portion of the oversubscription amount by allotting more shares than initially offered

The excess shares are allotted on a pro-rata basis across different categories of investors

If there is any under-subscription in any of the categories, any over-subscription in another category can be allotted shares from the under-subscribed category

The method of allotment is at the discretion of the company and its lead managers

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Final Criteria for listing

The company must get a minimum subscription of 90% of the issue amount in order to be eligible to list its shares

If it does not, the company will have to return all the money and cancel the IPO

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IPO Procedure

Finding out about IPOs that are available From SEBI’s weekly press releases and monthly bulletins Draft and final offer documents are put up on SEBI’s website

under the ‘Reports/Documents’ section Hard copies of the draft offer documents can be obtained

from SEBI’s office by paying a small fee or from the lead managers

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Some lead managers also post these documents on their websites

Through their advertisements in popular English, Hindi and regional daily newspapers

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Number of days for which IPOs are open

Public issues are kept open for at least 3 and not more than 10 working days

In the case of book built issues, the minimum and maximum period for which bidding is open is 3–7 working days and can be extended by 3 days, in case the price band is revised

Public issue of some infrastructure companies can be kept open for a maximum period of 21 working days

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Obtaining and submitting your form

The form for applying/bidding for IPO shares is available with all the issue managers, specified collection centres and brokers and bankers to the issue

The form elicits personal information like your name and address, your demat and bank account details, income tax PAN (in case your application is above a certain value), the number of shares that you are applying for and your bid price, in the case of book built issues

Also required to sign the form You can submit your form to the agency from which you

acquired it

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Revising bids in case of book built IPOs

Must enter the revised quantity or price (in the case of book built issues) on a special form that is available along with the application form

However, you must make sure that you complete the entire process of revising your bid within the date of closure of the issue

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Receiving allotment and refund

Public issues with a value in excess of Rs 10 crore are compulsorily in the demat mode

Fixed price issues, are intimated through a Confirmatory Allotment Note (CAN) or a refund order, within 30 days of the closure of the issue

In the case of book built issues, the registrar ensures that investors receive a CAN in case they have been allotted shares and the demat credit or a refund, as applicable, within 15 days of the closure of the issue

The stock is listed on the stock exchange within 7 days from the finalization of the issue

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IPO listing

The equity shares allotted in the IPO are listed on the stock exchanges within 7 days from the finalization of the IPO

Total processing time between the closure of a book built issue and listing is around 3 weeks

Fixed price issue, 37 days after closure of the issue

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Applying for an IPO online

IPO online, from the comforts of your home or office or anywhere else

Registered with an online broking house, which offers the facility to apply for IPOs online

Log on to the broking houses’ website page which lists the IPOs that are currently available and fill in the application form online

In the form, you will have to mention the number of shares that you wish to apply for and the bid price

The broking house will, fill in and sign the physical IPO application form and draw a cheque

The broking house will, fill in and sign the physical IPO application form and draw a cheque

Will receive an email from the broking house regarding your application status

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IPO Funding

loan from banks and finance companies They provide finance for subscribing to shares in the public /

rights issues of reputed companies that are/will be listed as per the listing requirements of NSE / BSE

Interest Charged Processing Fee 50% of the total value of your application bid Balance – Margin Money

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Benefits and Pitfalls of IPO funding

Access to a higher amount Chances of being allotted a larger number of shares Rate of interest on such loans is steeper than most other

loans in the market If the stock doesn't lists at a sufficient premium to the issue

price, investor could end up with losses over and above the interest payable

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IPO funding procedure

Choosing financer (the lending bank) according to your loan requirements

Savings and a demat account with the bank Bank will apply for shares in the IPO

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Dutch Auction Method of IPO Allocation

Bill Hambrecht, an American investment banker and chairman of W. R. HAMBRECHT & CO., devised the Dutch auction method of share allocation and pricing, and is known as "Open IPO" Model

Company reveals the maximum amount of shares being sold and sometimes a potential price for those shares

Investors then bid for the number of shares they want and the price they are willing to pay

Once a minimum clearing price is determined, investors who bid at least that price are awarded shares

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Co XYZ wants to let 100 shares in market

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Investor No. of Shares Applied for Bid Price Per Share (Rs.)

A 15 500

B 30 480

C 25 470

D 35 465

E 20 462

Benefits

Minimization in "Spike" or "Pop“ Small investor participation Role of investment banks

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Shortcomings

Lack of information to small investors Mispricing Minimum Price Spike

E.g. Google Inc

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IPO Listings on Private Exchange

Oaktree Capital Management LLC, which raised $ 800 million by selling a 15% stake through GS TRuE

American companies raised $ 221 billion last year by listing on private exchanges

This segment of securities market has touched $ 1 trillion

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Individual or retail investors Goldman Sachs exchange is open only to institutional

investors with assets of more than $ 100 million

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Why Private Exchanges????

Stocks of companies that trade in public exchanges need to be registered with Securities and Exchange Commission (SEC)

Numerous Disclosures

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NELSON JACOB

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