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Nelson 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
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
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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
07D 1836
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