INDEX

1. Introduction
2. Review of Literature
3. Overview on Global “INITIAL PUBLIC OFFER - THROUGH
BOOK BUILDING ROUTE” industry
4. Trends in IPO Industry
5. Problems & Suggestions relating to “INITIAL PUBLIC OFFER –
THROUGH BOOK BUILDING ROUTE” industry
6. Conclusions and Findings
7. References

1
 Chapter – 1

INTRODUCTION

1.1 A profile on IPO Industry

1.2 Rationale of the study

1.3 Objective of the study

1.4 Hypothesis of the study

1.5 Research methodology

1.6 Sources of data

1.7 Utility of the study

1.8 Limitation of the study

1.9 Chapter proposal

References

2
1.1 A profile on IPO Industry:-

IPO industry globally has seen a paradigm shift towards the funds raised by this process.
Below figures clearly indicates the number of deals & the amount raised in each quarter
of respective financial year.

1.2 Rationale of the Study

In the present trend of economics wherein every company / organization wants to grow
by leaps & bounds and to maintain the pace of their organization with India’s economic
growth all the companies needs to raise funds either for diversification or for further
investment in the existing business. Funds can be either raised from private equity
investors or through retail / organizational investors. IPO is one of the ways of raising
such huge amount of money; IPO also increases the brand value of the company in the
market.

3
Now since IPO is of great importance to major organizations & the recent trend suggests
that major IPO’s were through the book building process, I have opted for my detailed
research in IPO through Book Building Process.

1.3 Objective of the study

It is an accepted fact that in research, although the aim is to achieve the maximum there
are always constraints of time, efforts and resources. The objectives are framed to prove
its considering the above limitations and the data taken for testing it will be from 2001 –
02 to 2007 -08. The following are the objectives:-

1) To examine the role of IPO’s in fund raising globally as well as in India, and to
assess whether or not it has increased in the number of deals globally.
2) To review the trend of IPO in India
3) To review the trends & growth of IPO industry for the period of 2001 – 02 to
2007 -08, and to make a comparative analysis between the numbers of deals &
fund raised through this process.
4) To have a birds eye view of the IPO industry globally vis – a – vis in India
(Comparison charts on the same are attached later in the document).

1.4 Hypothesis of the study

In the light of above – cited objective, the researcher for the present study has set the
following hypothesis:

• The volume of fund raised by book building process have been increased by
more then 60% in the last 5 years.

Based on the theoretical data, tables, diagrams and secondary data the hypothesis
formulated by the researcher is being examined.

1.5 Research Methodology

The available published data have been interpreted in conformity with the accepted
norms to draw conclusion. In a study of this kind sampling is not much desirable so
less importance is given to the same. The research methodology used is given below
in chart 1.2

4
Literature News Papers Books Journal Reports
Scanning

Interview Investment
Personnel

Discussions Academicians Consultants Professionals

Statistical T Test is used to

Technique test the hypothesis

1.6 Sources of Data

In this research secondary data has been used. All the data necessary for this study has
been taken as follows:-

• Official records on IPO – book building process on BSE / NSE websites

• Dealogic, Thomson Financial for 2001 – 02 to 2006 – 07
• Articles & journals from leading institutions.
• Various white papers issued by leading authors

1.7 Utility of the study

This study provides ample scope for the development of this industry and creates
awareness about the importance of this industry. The present research is the result of
an original study based on the systematic and careful scrutiny of published and
unpublished data. It is a careful analysis of the physical and financial aspects and
evaluation of IPO industry in particular with an objective to draw valid conclusions
and give valuable suggestions. It also focuses on the prevalent problems relating to
this industry and the findings of the research study.

5
1.8 Limitations of the study

To study on the topic ““INITIAL PUBLIC OFFER - THROUGH BOOK BUILDING

ROUTE”, the author relied on the data collected from published sources by various
consultancy, investments & financial organizations. The author has tried the best of her
abilities to get the closest information to make the research as authentic as possible
considering the time, resources and money constraints.

1.9 Chapter Proposal

The present research study has been divided into six chapters

Chapter – 1 Introduction

This chapter highlights the detailed design of the study commencing with a brief profile
about the ““INITIAL PUBLIC OFFER - THROUGH BOOK BUILDING ROUTE”
industry describing the importance of book building in India and the attributes of
“INITIAL PUBLIC OFFER - THROUGH BOOK BUILDING ROUTE” which states the
reason why the this process has gained more importance & the number of deals clinched
with such high values.

It also includes rationale of study, objectives, hypothesis, sources of data, research

methodology, utility of study and limitations of the study. The last part consists of the
chapter scheme of the research study.

Chapter – 2 Review of Literature

It consists of research studies by various authors published in the form of books and
reports. Also there are research articles published in magazines, websites which have
immense information about the “INITIAL PUBLIC OFFER - THROUGH BOOK
BUILDING ROUTE” industry. However, all the studies more or less lay stress on the
general information about this industry and it is repetitive in nature. The researchers have
not properly focused on the problems relating to this industry and its suggestions.

Chapter – 3 Overview on Global “INITIAL PUBLIC OFFER - THROUGH BOOK

BUILDING ROUTE” industry.

This chapter emphasizes on the role of each sector in the total industry. It deals with the
number of deals & the funds raised in last 5 years along with the contribution of
globalization in IPO industry as an whole.

Chapter – 4 Trends in IPO Industry

This chapter deals with the organization aiding the development of this industry giving in
brief about the global trends and specific to Indian markets. It mainly focuses on the

6
changes in this industry and their reasons for the changes year wise commencing from
2001 – 02.

Chapter – 5 Problems & Suggestions relating to “INITIAL PUBLIC OFFER -

THROUGH BOOK BUILDING ROUTE” industry.

This chapter mainly focuses on the problems being faces by this industry and its possible
solutions.

Chapter – 6 conclusions and Findings

What all findings the researcher has found during the research study has been included in
this chapter along with the comparison with the objective of the research study and then
conclusion is drawn by bifurcating it into general and specific. The findings of the
research study are also classified and shown as general findings and specific findings.

References:-

1. White papers / presentation shared by leading consultants in IPO industry.

2. BSE / NSE India.

7
 Chapter – 2

REVIEW OF LITERATURE

• Review of literature relating to IPO Industry

• References

8
 Chapter – 2

REVIEW OF LITERATURE

In order to find out the gaps in the studies it is pertinent to review the available literature
on the related aspects of the present study. The studies on the performance of “INITIAL
PUBLIC OFFER - THROUGH BOOK BUILDING ROUTE” industry in India is few
though it is an important industry showing dynamic changes since last few decades in
terms of funds raised. There is a pressing need to study the significance of this industry
with a view to find out its contribution in the finance industry.

1. Sunil Damania - The Managing Editor of Dalal Street in his article that the volatile
Indian stock market continues to surprise everyone with the way it is showing its
strength. In straight 10 days, the market has shown a remarkable recovery of 1300 points
(Sept 2007). With this buoyancy back in the market, companies hoping to raise money to
fund their expansion pan,, want to make the most of it, and are immediately tapping the
market. Secundrabad – based kaveri seed company (KSC) is one such company, which is
coming out with an IPO of 40 lakh shares. The company has set the price – band in the
range of Rs. 150 and Rs. 170.

2. Ari Weinberg, The Industry Standard magazine, Jul 9th 2001. THE IPO
MARKET'S FRAGILE COMEBACK DOESN'T NECESSARILY MEAN WALL
STREET IS INTERESTED IN STARTUPS AGAIN.

On the surface, the initial public offering -- the great Springboard that sent many a startup
into corporate adulthood and financial largesse -- seems to be emerging from its coma.
IPOs raised $12.9 billion in the first three weeks of June, up from January's dismal $212
million take. But a closer look at this year's more notable IPOs -- Kraft Foods, Instinet,
KPMG Consulting -- tells a different story. All of these are long-standing businesses that
were locked up in larger firms before being spun off for public consumption -- not the
young, promising enterprises that fueled the bulk of the IPO market in recent decades.

A staggering 81 percent of the $23 billion raised by IPOs this year have come from
spinning off mature units of established companies, compared with 31 percent for all of
2000. IPOs for startups, on the other hand -- which drove demand during the past five
years -- is still in torpor, amounting to a mere $4.3 billion in 2001. This trend should
continue: A glance into the IPO pipeline shows it is dominated by large, mature
companies. Consulting house Accenture and financial services firm Prudential, while not
spinoffs of larger companies, aren't exactly wet behind the ears. Prudential, which is
seeking to raise $4 billion, has been around for 126 years.

9
What's behind the trend? Only the bravest companies and the boldest banks have dared to
test the markets. "People are more risk-averse," says Randall Roth of the IPO Plus Fund.
"Psychologically, there is more shelter in these deals."

3. Chilli breeze – Window 2 India.com

Investments in stock markets are hot! So which are the successful IPOs this year and
which companies are running high on the stock exchange? Where have majority
investors put their money? Read on to find out!

2006 saw several successful IPO issues. Astounding economic growth rates, large
amounts of corporate profits, expansion plans, buoyancy of the stock market, and
political stability are some of the factors that encouraged companies to opt for IPOs in
2007 and 2008 to raise funds. The strengthening position of the Indian Rupee also added
to the optimism. Further, the secondary markets for stocks are flourishing which also is a
factor that influenced companies to participate in the primary markets. Last year, India
had the 8th largest volume of IPOs in the world with Indian companies raising US$ 7.23
billion in the domestic stock markets! This year the stock markets have performed even
better. 2007 began on an optimistic note. Financial experts estimated around 150
companies to turn to the stock markets to raise around US$ 10 billion in capital through
the primary market

4. Banks Flock to India for IT Services IPOs , 7th March 2006 , By Staff Writer

Freeborders could be the first major Chinese service provider to go public after one of its
executives said last month that an IPO would happen in the "not too distant future". A
study published by consultants Avendus Advisors claims that there are a number of other
mid-sized IT and BPO service providers in India which could go for an IPO this year
including Caritor, Corpus, Infinite Computer Systems, L&T Infotech, and Persistent
Systems.

On top of these, there are some major BPO firms in India that must be considering such a
move. WNS Global Services, the former finance and accounting arm of British Airways
now majority-owned by private equity firm Warburg Pincus, is an obvious candidate, as
is Genpact, another former captive which is now majority-owned by investment firms.
When it changed its name from GECIS last year, executives said it was too early to plan
an IPO, though it was a longer-term target. Office Tiger, a US-based offshore provider,
may choose India for its IPO, which could happen by the end of the year, though it is also
wary of giving an indication of the timeframe.

There are slim pickings for IT services firms in the US. There have been a few human
resources flotations in the past year though, such as employee management specialists
Taleo and Kenexa. There are others which will make the jump this year such as
EXLService Holdings, which plans to raise $75m on Nasdaq, but even this is an offshore
provider with an Indian-based service provision. Achievo Corp, which has a strong

10
presence in China could also file this year, but there are few opportunities compared to
India. This is in part because of the increased costs associated with becoming a public
company as a result of the introduction of Sarbanes-Oxley laws.

Private firms that realized in 2002 when the act was made law that becoming public was
a serious prospect would have started ensuring that their financial processes met
Sarbanes-Oxley rules there and then. Unfortunately the cost of doing so for many may
have seemed like an unnecessary gamble, especially through the early-funding years
when cash is tight, and such companies need to be run on a very strict budget.

The effect is that many private companies haven't budgeted for these extra costs, and
haven't ensured that their processes are compliant, therefore slowing the IPO pipeline.
Some may decide that the extra costs are not worth it, and there have been a number of
cases of public firms returning to private ownership in the last year. Another consequence
of Sarbanes-Oxley is the fact that private firms that are not compliant become less
attractive to being takeover by public ones.

5. Othman Yong, 29th September 2006, Pacific – Basin finance journal: - The current
status of research on IPOs in general, with special focus on Asian IPOs. As in the case of
U.S. IPOs, most past studies on Asian IPOs deal with the issue of under-pricing in IPOs
and the factors, usually unique to Asian IPOs, that can explain the levels of the IPO
under-pricing. Studies on long-term IPO performances are also carried out with results
not always consistent with long-term underperformance observed in the U.S. In general,
research on Asian IPOs is still quite preliminary with many IPO phenomena discovered
in the U.S. are not fully investigated. This paper also suggests some possible areas of IPO
research in the future.

6. Boom and Slump Periods in the Indian IPO Market

Saurabh Ghosh* - RBI Publications 31st oct 2005

This paper attempts a detailed investigation of the boom and slump phases in the Indian
primary capital market. It concentrates on two key variables, namely, IPO volume and
initial returns and analyses their nature and interrelation during these two periods. This
study also analyses the firm-specific characteristics and their influence on the timing of a
company getting listed in the hot and cold market. The IPO volume series was auto
correlated over the entire period and especially during the boom period. This shows a
firm's decision to go public over the last decade depended on the number of other
companies that were getting listed over the previous months. Turning to the interrelation
of volume and initial return, the empirical exercise (Granger causality test) found no
significant relation between IPO volume and initial returns during the hot and cold
periods. This suggests that over the sample period, the Indian issuers' did not depend on
the information content of the initial returns while taking their decision to go public.
Amongst the other characteristics that might have influenced the likelihood of IPOs
during hot and cold market (e.g. industry classification, age, size and underpricing of new

11
issues), this paper finds no significant influence of industry affiliation on the IPOs during
the boom period. The results also documented that more established firms have greater
likelihood to get listed on the capital market to raise large amounts and under price more
during the slump period.

7.Hot Issue" Markets

Roger G. Ibbotson, Jeffrey F. Jaffe
The Journal of Finance, Vol. 30, No. 4 (Sep., 1975), pp. 1027-1042
doi:10.2307/2326721

The notion of hot issue has been widely discussed and examined in the financial
community during the past decade. Hot issues usually refer to particular stock issues that
have risen from the offering prices to higher then average premia in the after market. The
most well – known investigations of these issues were the securities and exchange
commission (SEC) report on the special study of securities market (28) and the SEC “ hot
issue” hearing of 1972.

8. Jain, Bharat A
Kini, Omesh

Bharat investigates the change in operating performance of firms as they make the
transition from private to public ownership. A significant decline in operating
performance subsequent to the initial public offering (IPO) is found. Additionally, there
is a significant positive relation between post-IPO operating performance and equity
retention by the original entrepreneurs but no relation between post-IPO operating
performance and the level of initial under pricing. Postissue declines in the market-to-
book ratio, price/earnings ratio, and earnings per share are also documented. Copyright
1994 by American Finance Association.

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 49 (1994)

Issue (Month): 5 (December)

9. Michelle Lowry
G. William Schwert

We examine the strong cycles in the number of initial public offerings (IPOs) and in the
average initial returns realized by investors who participated in the IPOs. At the
aggregate level, initial returns are predictably related to past initial returns and also to
future IPO volume from 1960-1997. To understand these patterns, we use firm-level data
from 1985-97 to model the initial return. Our results show that aggregate IPO cycles

12
occur because of the time it takes to complete an IPO, the clustering of similar types of
IPOs in time, and information spillovers among IPOs.

10. Michelle Lowry

G. William Schwert

By investigating the entire IPO pricing process, beginning when the offering is filed, the
paper contributes to the existing literature along four dimensions. First, price updates
during the registration period are predictable based on firm and offer-specific
characteristics known at the time the offer is filed. Second, price updates reflect market
movements prior to the initial filing date as well as during the registration period. Third,
positive and negative information learned during the registration period affect the offer
price asymmetrically. Finally, public and private information learned during the
registration period have different effects on the offer price. While a number of the biases
that we uncover are consistent with one or more theories regarding IPOs, many remain a
puzzle.

11. Ajay Shah

India's vibrant IPO market, via a dataset of the 2056 IPOs which took place in the last 4.5
years. We study the overall underpricing, the delay between issue date and listing date,
the time- series of monthly volume of IPO issues and average underpricing in a given
month, the cross-section of underpricing across companies, the post-listing trading
frequency, the long-run returns to new listings, and price discovery by the market shortly
after first listing.

13
References:

1. The managing editor of Dalal Street (Sept 2007).

2. Ari Weinberg, The Industry Standard magazine, Jul 9th 2001.

3. Chilli breeze – Window 2 India.com

4. Banks Flock to India for IT Services IPOs , 7th March 2006 , By Staff Writer

5. Othman Yong, 29th September 2006, Pacific – Basin finance journal: -

6. Boom and Slump Periods in the Indian IPO Market - Saurabh Ghosh* - RBI
Publications 31st oct 2005

7.Hot Issue" Markets

Roger G. Ibbotson, Jeffrey F. Jaffe
The Journal of Finance, Vol. 30, No. 4 (Sep., 1975), pp. 1027-1042
doi:10.2307/2326721

8. Jain, Bharat A
Kini, Omesh - Article provided by American Finance Association in its journal Journal
of Finance.

Volume (Year): 49 (1994)

Issue (Month): 5 (December)

9. Michelle Lowry
G. William Schwert

Date of creation: Oct 2000

Publication status: published as Lowry, Michelle and G. William Schwert. "IPO Market Cycles: Bubbles
Or Sequential Learning?," Journal of Finance, 2002, v57(3,Jun), 1171-1200.

10. Michelle Lowry

G. William Schwert

Paper provided by National Bureau of Economic Research, Inc in its series NBER
Working Papers with number 8586.

Date of creation: Nov 2001

11. Ajay Shah

Date of creation: 11 Jul 1995

Paper provided by EconWPA in its series Finance

14
Chapter – 3

Overview on ““INITIAL PUBLIC OFFER - THROUGH BOOK BUILDING

ROUTE”.

NO. Topic
3.1. Introduction
3.2. What is an IPO?
3.3. Benefits of going public
3.4. Cost of going public
3.5. Eligibility for an IPO
3.6. Issue Management Activity Chart
3.7. Defining Book-Building
3.8. What is book-building?
3.9. Book Building Process
3.10. Methods of Book Building
3.11. Why book-building?
3.12. Fixed Price V/S Book Building
3.13. Some Recent Amendments
3.14. Role of Intermediaries
3.15. Key Functions of Merchant Bankers
3.16. Issue through Prospectus
3.17. Marketing of the Issue
3.18. Pricing of Issues
3.19. Early Guidelines for pricing
3.20. Price Methodologies used by various Merchant Bankers
3.21. Principles of Price Fixation
3.22. Law governing Capital Issues to Public
3.23. Pre Issue Obligations
3.24. Post Issue Obligations

15
 3.1 Introduction

Every company needs funds for its business. Funds requirement can be for short
term or for long term. To meet short term requirements, the company may
approach banks, lenders & may even accept fixed deposits from
public/shareholders. To meet its long term requirements, funds can be raised either
through loans from lenders, Banks, Institutions etc., (which carry financial burden)
or through issue of capital. Capital can be raised through private placement of
shares, public issue, rights issue, etc. Public Issue means raising funds from
public. Promoters may have plans which may require infusion of money. The main
purpose of the public issue, amongst others, is to raise money through public and
get its shares listed at any of the recognized stock exchanges in India.

3.2 WHAT IS AN IPO?

The First public offering of equity shares of a company, which is followed by a

listing of its shares on the stock exchange, is called the Initial public Offering.

♦ Decision to go public
♦ Largest source of funds.

3.3 BENEFITS OF GOING PUBLIC

♦Access to Capital
♦ Respectability
♦ Investor Recognition
♦ Window of Opportunity
♦ Liquidity
♦ Diversification

Access to Capital : The principal motivation for going public is to have access to
larger capital. A company that does not tap public financial market may find it
difficult to grow beyond certain point for want of capital.

Respectability : Many entrepreneurs believe that they have “arrived” in some

sense if there company goes public because a public company may demand greater
respectability. Competent and ambitious executives will like to work for growth.
Other things being equal, public companies offer greater growth potential
compared to non public companies, hence they can attract superior talent.

16
 Investor Recognition : In the Capital Asset Pricing Model with incomplete
information, according to Robert Merton, other thing being equal, stock prices are
higher, the larger the number of investors aware of the securities of the firm.

Window of opportunity : As suggested by Jay Ritter and others there are periods in
which stocks are overpriced. Hence, when a non-public company recognizes that
other companies in its industry are overpriced, it has an incentive to go public and
exploit that opportunity.

Liquidity : Promoters of the company would eventually like there investment to

become liquid. These becomes possible only when they take their company public.

Diversification : When a firm goes public those who have investment in it –

original owners, investors, management and others – can cash out of the firm and
build a diversified portfolio.

3.4 COST OF GOING PUBLIC

♦ Adverse Selection
♦ Dilution
♦ Loss of Flexibility
♦ Disclosure
♦ Accountability
♦ Public Pressure

Adverse Selection : Investors in general, know less than the issuers about the
value of the companies that go public. Putting it differently, they are potential
victims of adverse selection. Aware of this trap, they are reluctant to participate in
the public issues unless they are significantly under priced. Hence a company
making an IPO typically has to under price its securities in order to stimulate
investor interest and participation.

Dilution : When a company issues shares to public, existing shareholders suffer

dilution of their proportionate ownership of their firm.

Loss of Flexibility : The affairs of the company are subject to fairly

comprehensive regulation. Hence when a non-public company is transferred into
public company there is some loss of flexibility.

Disclosures : A public company is required to disclose a lot of information to

investors and others. Hence it cannot maintain a strict veil of secrecy over its
expansion plans and product market strategies as its non-public counterpart can
do.

17
 Accountability: Understandably, the degree of accountability of a public company
is higher. It has to explain a lot to its investors.

Public Pressure: Because of its greater visibility a public company may be

pressurized to do things that it may not otherwise do.

3.5 ELIGIBILITY FOR AN IPO

An Indian company, excluding certain banks, can make an IPO if it satisfies the
following conditions.

♦ Track Record
♦ Listing
♦ Promoters Minimum Contribution
♦ Lock in Period

Track Record : The company has a track record of paying dividends for the
immediate preceding three years or a public financial institution or scheduled bank
has appraised the project to be financed through the proposed IPO and participates
in financing the proposed project by way of loan or equity to the extent of at least
10% of the project cost.

Listing : The securities are compulsory listed on a recognized stock exchange if

the paid-up capital is more than Rs 50 million). An important precondition for
listing is that a certain minimum % of each class of securities must be offered to
the public.

Promoters Minimum Contribution : The promoter group (promoters, directors,

friends, relatives, associates, etc) is required to make a certain minimum
contribution to the post-issue capital. If there is no identifiable promoter group the
issue of minimum promoters contribution does not arise.

Lock-in-period : The promoters contribution in an IPO is subject to a lock-in-

period of three years from the date of allotment or the date of commercial
production.

Entry Norms – Who can come out with a public issue

Entry norms for the public issues are governed by the SEBI guidelines, SEBI
(Disclosure for Investor and Protection), Guidelines, 2000. SEBI, keeping in view
the objective of greater transparency, investor protection and development of
capital market, has from time to time amended the entry norms for companies to
come out with the public issue. Entry norms are categorised into the following :-

18
 • Unlisted Companies
• Listed Companies

Unlisted Companies

Unlisted companies are those public limited companies which are presently not
listed at any of the recognised stock exchanges in India. The shares of such
companies are therefore not traded at any of the Stock Exchanges in India.

Presently, there are two options available for the unlisted companies to come out
with public issue: -

1st Option

• It should have a track record of distributable profits for at least 3 out of

immediately preceding 5 years and
• The pre-issue net worth (i.e. net worth before the issue) should be at least
Rs 1 crore in 3 out of 5 years, with the minimum net worth in the
immediately preceding 2 years.

The issue size (includes offer to public, firm allotment, promoters contribution
through offer document) should not exceed 5 times its pre-issue net worth as per
the last available audited accounts

2nd Option

With the recent guidelines amended on August 04, 2000 SEBI has amended the
second option available for an unlisted companies. Earlier the guidelines stated
that if the company is not able to satisfy the 1st option as mentioned above, the
company can come out with the public issue provided the project is appraised by
any bank or public financial institution with at least 10% of the project cost
financed by such appraiser.

As per the recent guideline, if the company is unable to satisfy the 1st option or if
the issue size is more than 5 times its pre-issue net worth, then the second option
to come out with the issue is through the book building process only.

The issue can come out through book building process provided 60% of the issue
size is allotted to the Qualified Institutional Buyers (QIB). If the company fails to
allot 60% of the issue size to QIB the entire money so received shall be refunded.

"Three years out of immediately preceding five years" means 3 years audited
accounts for a period of at least 36 months are available for computation of the
minimum track record of 3 years of distributable profits.

19
Listed Companies

Listed Companies are those which are presently listed on any one or more
recognised Stock Exchanges in India. The securities of such companies are traded
on such stock exchanges where they are listed.

All listed companies can come out with further public issue provided the net worth
of the company after the proposed issue is less than 5 times the net worth prior to
the issue. In case the net worth is more than 5 times the net worth prior to the
issue, the company should comply with any of the options as available for unlisted
companies.

3.6 Issue Management Activity Chart

1. Approval of Board
2. Appointment of Lead Managers
3. Appointment other Intermediaries
 Co-managers and Advisors
 Underwriters
 Bankers
 Brokers and Principal Brokers
 Registrars
4. Filing of Prospectus with SEBI
5. Filing of Prospectus with registrar of Companies
6. Printing and Dispatch of Prospectus
7. Filing of Initial listing Application
8. Promotion of the Issue
9. Statutory Announcement
10. Processing of Applications
11. Establishing the Liability of Underwriters
12. Allotment of Shares
13. Listing of the issue

1.Approval of Board : An approval of the board of directors of the company is

required for raising capital from public.

2.Appointment of Lead Managers : The lead manager is a merchant banker who

orchestrates the issue in consultation with the company. The lead manager must
be selected carefully .

3.Appointment other Intermediaries : Several intermediaries facilitate public issue

process .

20
  Co-managers and Advisors : A co-manager shares the work of the lead
manager and an advisor provides counsel .The lead manager may appoint
co-managers and advisors if required .

 Underwriters : An underwriter agrees to subscribe to a given number of

shares in the event of the public do not subscribe them .The underwriter , in
essence ,stands guarantee for public subscription in consideration for
underwriting commission. The principle underwriters in India are the public
finanicial institutions , commercial banks , insurance companies, merchant
bankers ,and brokers .

 Bankers : The bankers to the issue collect money on behalf of the company
from the applicants . SEBI guidelines stipulate the minimal banking
arrangements that have to be made for the collection of applications . The
bankers chosen for the issue typically are the ones
(1) with whom the company has its credit accounts
(2) who provide term loans to the company, and
(3) who underwrite and / or manage the issue .

 Brokers and Principal Brokers : The brokers of the issue facilitate its
subscription .In appointing the brokers to the issue / the following points
should be borne in the mind :
(1) only members of the recognised stock exchanges can be appointed as
brokers.
(2) The number of brokers appointed has to bear a reasonable relationship
to the size of the issue.
A company may , if such a need is felt ,appoint a principle broker to
coordinate the work of the brokers .

 Registrars : The registrars to the issue perform a series of tasks from the
time the subscription is closed to the time allotment is made i.e. collection
of the applications forms from the banks , scrutiny of the application
forms, classification and tabulation of the data ,finalization on the basis of
allotment , issue and dispatch of allotment of letters, share / debenture
certificates, and refund orders. Registrars may be selected on the basis of
experience, expertise, credibility, and cost.

4.Filing of Prospectus with SEBI : The prospectus or the offer document

communicates information about the company and the proposed security issue to
the investing public. All companies seeking to make a public issue have to file
their offer document with SEBI .If SEBI or the public does not communicate its
observation within 21 days from the filing of the offer document, the company
can proceed with its public issue .The prospectus and the application form (along

21
 with the articles and memorandum of the association ) must be forwarded to the
concerned stock exchange, where the issue is proposed to be listed, for
approval .

5.Filing of Prospectus with registrar of Companies : Once the prospectus is

approved by the concerned stock exchanges and the consents obtained from the
bankers , auditors, legal advisors, registrars, underwriters, and others the
prospectus, signed by the directors, must be filed with the registrar of the
companies, along with requisite documents as required by the companies act ,
1956.

6.Printing and Despatch of Prospectus : After prospectus is filed with the registrar
of companies, the company should print the prospectus (along with the
application form). The quantity in which the prospectus is printed should be
sufficient to meet the requirements of brokers, underwriters and bankers to the
issue. They should be sent to stock exchanges and brokers so they receive them
at least 21 days before the first announcement is made in the newspapers.
Brokers serving as links between the company and the potential investors,
receive the prospectus, application form, and brochure in bulk and, in turn, mail
them to their clients. The company may share their cost of mailing incurred by
brokers on some basis.

7.Filing of Initial listing Application : Within ten days of filing of prospectus, the
initial listing application must be made to the concerned stock exchanges, along
with the initial listing fees.

8.Promotion of the Issue : The promotional campaign typically commences with

the filing of prospectus with the registrar of companies and ends with the release
of the statutory announcement of the issue. To promote the issue the company
holds conferences for brokers, press and investors. At these conferences the
company seeks to get adequate publicity. Advertisements are also released in
newspapers and periodicals to generate interest among potential investors.

9.Statutory Announcement : The statutory announcement of the issue must be

made after seeking the approval of the lead stock exchange. This must be
published at least ten days before the opening of the subscription list.

10.Collecting of Applications : The statutory announcement (as well as

prospectus) specifies when the subscription would open, when it would close,
and banks where the applications is made. During the period the subscription is
kept open, the bankers to the issue collect application money on behalf of the
company and managers to the issue, with the help of the registrars to the issue,
monitor the situation. Information is gathered about the number of applications

22
 received in various categories, the number of shares applied for, and the amount
received.

11.Processing of Applications : The application forms received by the bankers are

transmitted to the registrars of the issue for processing. This mainly involves
♦ Scrutinizing the applications to see whether the proper amount has been
received, whether the applicants name is correctly mentioned, whether
particulars such as address, age, occupation, etc, have been provided, whether
applications has been signed correctly, and whether the application is
genuine.
♦ Serially numbering the applications
♦ Coding the applications for items like the name of the applicant, broker,
underwriter, occupation, etc.
♦ Preparing a list of applications with all relevant details.

12.Establishing the Liability of Underwriters : If the issue is undersubscribed, the

liability of the underwriters has to be established. For this purpose, the
following procedures may be followed :
♦ Segregate the applications which bear the stamp of an underwriter and
applications which do not bear the stamp of any underwriter. Determine the
number of shares procured by each underwriter and carry the number of
shares relating to applications which do not the bear the stamp of any
underwriter to a general pool.
♦ Compare the number of shares procured by each underwriter with his
underwriting commitment. If an underwriter procures more shares than his
underwriting commitment, carry the excess to the general pool. If an
underwriter procures less shares than his underwriting commitment,
determine his shortfall.
♦ Credit the total number of shares in the general pool to the underwriters
with shortfall in proportion to their underwriting commitments and then
determine the net shortfall of each underwriter who could not procure enough
shares. This represents the underwriters liability.

To illustrate the determination of liability of underwriters, let us consider an

example.
Parigraha Limited received subscriptions for 80,000 shares as against 100,000
shares that were offered and underwritten. The underwriting commitment of four
underwriters P, Q, R and S were as follows: 40,000, 30,000, 20,000 and 10,000
shares respectively. The subscription for 80,000 shares which carried the
underwriters stamp were procured by P, Q, R and S as follows : 20,000, 20,000,
15,000 and 25,000 respectively. Given this information, the liability of
underwriters may be established as follows:

23
 Underwriting
Shares Net
Commitment Excess or Credit
Shortfall Shortfall
Procured
P 40,000 20,000 (20,000) 6,667 13,333
Q 30,000 20,000 (10,000) 5,000 5,000
R 20,000 15,000 (5,000) 3,333 1,667
S 10,000 25,000 15,000 -- --

13.Allotment of Shares : According to SEBI guidelines, one-half of the net public

offer has to reserved for applications up to 1,000 shares and the balance one-
half for larger applications. For each of theses segments the proportionate
system of allotment is to be followed.

14.Listing of the issue : The detailed listing applications should be submitted to

the concerned stock exchanges along with the listing agreement and the listing
fee. The allotment formalities should be completed within the 30 days after the
subscription list is closed or such extended period as permitted by the lead
stock exchange.

24
 Now Let us learn more about Book Building ????????????

Maruti Udyog Ltd., India’s largest passenger car manufacturer, has been in
the news recently. The government, which had a majority stake in the company,
divested a part of its stake in the company. But instead of taking the traditional
IPO issue route, it opted for the ‘book-building’ route. However, it is not the first
company to do so. Some companies, which adopted the book-building route in the
recent past, include Hughes Software, Mukta Arts, Creative Eye, HCL
Technologies, Bharti Televentures and i-flex. So what exactly is this book-
building?

OUTDATED INFORMATION

Book building is still a relatively new concept, especially amongst Indian

retail investors. With transactions such as Maruti, which reached about 75 cities
and over 650 bidding centers, we believe that more and more retail investors will
become familiar with the book building concept. In this presentation we attempt to
capture some of the elementary concepts pertaining to book building, the
guidelines relating to book building and merchant banker’s role in the same.

But before we proceed to BB lets briefly analyze an IPO.

IPO

(What used to happen until now was that a price was agreed upon i.e. a
fixed price & shares were issued at that very price by the co. now is it done
through bb.)

3.7 BB defined

BB as defined by SEBI, “"Book Building" means 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."

As all definitions by SEBI even this sounds too complicated and confusing.
But to put it in one word BB is an auction.

3.8 What is Book Building

Book building is a method of issuing or offering shares to investors in

which the price at which the shares are offered is discovered through a bidding
process.

25
 It is a process wherein various bids are collected from investors and the
entries made in a book. It must be noted here that book building is just another
form of an IPO wherein investors, retail and institutional, can participate in the
process and acquire shares of the company up for divestment or whose equity is at
sale.

Thus, unlike the fixed price method in which the offer price of the shares is
decided by the company in consultation with lead managers much before the issue
actually opens, in a book-built IPO, potential investors or bidders have the
flexibility to bid for the shares at prices they are willing to pay. The final price is
decided after an analysis of demand generated.

3.9 The Process:

* The Issuer who is planning an IPO nominates a lead merchant banker as a

'book runner'.

* The Issuer specifies the number of securities to be issued and the price band for
orders.

*The Issuer also appoints syndicate members with whom orders can be placed
by the investors.

*Investors place their order with a syndicate member who inputs the orders into
the 'electronic book'. This process is called 'bidding' and is similar to open
auction.

* A Book should remain open for a minimum of 5 days.

* Bids cannot be entered less than the floor price.

* Bids can be revised by the bidder before the issue closes.

*On the close of the book building period the 'book runner evaluates the bids on
the basis of the evaluation criteria which may include -

o Price Aggression

o Investor quality

o Earliness of bids, etc.

*The book runner and the company conclude the final price at which it is
willing to issue the stock and allocation of securities.

26
 *Generally, the number of shares are fixed, the issue size gets frozen based on
the price per share discovered through the book building process.

*Allocation of securities is made to the successful bidders.

*Book Building is a good concept and represents a capital market which is in

the process of maturing.

3.10 In case the issuer chooses to issue securities through the book building
route then as per SEBI guidelines, an issuer company can issue securities in
the following manner:

1. 100% of the net offer to the public through the book building route.

2. 75% of the net offer to the public through the book building process and 25%
through the fixed price portion (fixed price is the price determined through book
building process).

3.11 Why book building?

Why does a company choose to go through the book-building route when

the conventional method (IPO) is still prevalent? The most apparent reason for this
could be the price discovery mechanism, which is inherent in this process. Since
institutional and retail investors have the option to bid for the equity, at or above a
particular floor price, decided by the company in consultation with the merchant
bankers, it helps the company realise the true value for its equity, or simply put,
what the investors perceive the value (or rather intrinsic value) of the company to
be. It also gives the company an insight into its credibility factor amongst the
investors, which could be gauged by the demand generated for the purchase of
equity up for sale. Also, through this route, the company saves on cost and time
required to complete the issue.

27
3.12 Difference between shares offered through book building and offer of
shares through normal public issue:

Fixed Price process Book Building process

Pricing

Price at which the securities are Price at which securities will be

offered/allotted is known in advance to offered/allotted is not known in advance
the investor. to the investor. Only an indicative price
range is known.
Demand

Demand for the securities offered is Demand for the securities offered can
known only after the closure of the be known everyday as the book is built.
issue.
Payment

Payment if made at the time of Payment if made at the time of

subscription wherein refund is given subscription wherein refund is given
after allocation. after allocation.

28
3. 13 Recent Amendments

In its recent amendments, SEBI has reduced the allocation of equity to Qualified
Institutional Buyers (QIB’s), which includes financial Institutions, banks and the
newly added insurance companies, and increased the share of retail investors.
Prior to the amendments, QIB’s could be allotted up to 60% shares, which now
stands reduced to up to 50%.

Also, another change was the definition of retail investors, which previously
meant those investors who bid for less than 1,000 shares. However, the definition
now stands changed to an investor who bids for shares less than worth Rs 50,000.

Another positive step taken by SEBI is the setting up of a price band, which will
assist the retail participants in placing their bids. This would act as a good
guidance for the retail investor in placing the bid, as the previous method had a
flaw in the sense that a floor price was fixed below which the bidder was not
allowed to bid while there was no upper limit to the bid price.

Another change made by SEBI in the rules governing primary market issues is that
institutional bidders cannot withdraw their bids. This move is again in the interest
of retail investors as the current ‘avtaar’ of book building could be misused to take
small investors for a ride. Prior to this change, institutional bidders could tie-up
with the lead book running managers and submit inflated bids thus creating an
artificial demand and price for the issue.

A couple of other changes include the introduction of a 15% greenshoe option for
IPO’s adopting the book building route in case of an oversubscription of the issue.
The greenshoe option, basically, gives the issuer company a right to allot an
additional 15% of equity. This right will be exercised by the company, but
naturally, in the case of extra demand due to oversubscription of the issue.

This would, thus, help reduce price volatility post listing of the security.
Moreover, the decision to reduce the listing period interval from 15 days to 6 days
post the date of allotment ensures that the investor’s finances do not remain locked
in for a longer period of time. This move is more in line with the international
practice.

29
3.14 Role of Intermediaries

Many intermediaries are involved in connection with the public issue. Following
are the intermediaries who have to be registered with SEBI and must have valid
certificate from SEBI to act as an intermediaries: -

• Merchant Bankers
• Registrar and Share Transfer Agents
• Bankers to the Issue
• Underwriters
• Stock Brokers and Sub Brokers
• Depositories

3.15 Merchant Bankers play the most vital role amongst all intermediaries. They
assist the company right from preparing prospectus to the listing of securities at
the stock exchanges. Merchant Bankers have to satisfy themselves about the
correctness and propriety of all the information provided in the prospectus. It is
mandatory for them to carry due diligence for all the information provided in the
prospectus and they must issue a certificate to this effect to SEBI. A Company
may appoint more than one Merchant Banker provided Inter-Se Allocation of
Responsibilities between the Merchant Bankers are properly structured.

Underwriters are those intermediaries who underwrite the securities offered to

the public. In case there is under subscription (in short, the company does not
receive good response from public and amount received from is less than the issue
size), underwriters subscribe to the unsubscribed amount so that the issue is
successful.

Registrar & Share Transfer Agents processes all applications received from the
public and prepare the basis of allotment. The despatch of share certificates /
refund orders are handled by them.

Bankers to the Issue are banks which accept application from the public on
behalf of the company. These applications are then forwarded to Registrar &
Share Transfer Agent for further processing.

Stock Brokers & Sub-Brokers are those intermediaries who through their
contacts / sources invite the public for subscribing shares for which they get
commission.

Depositories are the intermediaries who holds securities in dematerialised form on

behalf of the shareholders. Keeping in mind the risks involved on account of fake /
forged certificates, bad delivery and delays in transfer SEBI has made recent

30
changes by which all the public issues shall be in dematerialised form only. It
means that no physical share certificate will be given to the shareholders. The
shares shall be electronically be transferred to the shareholders account opened its
Depository Participant

Let us see How Merchant Bankers manage the issue ??????????????????

Pre Issue Management

Key Functions of Merchant Bankers

 Issue through Prospectus

 Marketing of the Issue

 Pricing of Issues

3.16 Issue through Prospectus

Prospectus

`Prospectus’ is the most important document for the company to come out with a
public issue. Pursuant to Section 2(36) of the Act, `Prospectus’ means any
document described or issued as a prospectus and includes any notice, circular,
advertisement or other document inviting deposits from the public or inviting
offers from the public for the subscription or purchase of any shares in, or
debentures of, a body corporate.

Prospectus is a document by way of which the investor gets all the information
pertaining to the company in which they are going to invest. It gives the detailed
information about the Company, Promoter / Directors, group companies, Capital
Structure, Terms of the present issue, details of proposed project, particulars of the
issue etc. There are certain mandatory disclosures which have to be made in the
prospectus. The mandatory disclosures to be made in the prospectus includes in
Schedule II of the Companies Act, 1956. SEBI has issued guidelines, SEBI
(Disclosure for Investor and Protection), Guidelines, 2000 which gives details
about the contents of prospectus.

Vetting by SEBI/Stock Exchanges

• A company cannot come out with public issue unless draft prospectus is
filed with SEBI.

31
 • A company cannot file prospectus directly with SEBI. It has to be filed
through a merchant banker. After the preparation of prospectus, the
merchant banker along with the due diligence certificates and other
compliances sends the same to SEBI for vetting.
• SEBI on receiving the same, scrutinizes it and may suggest changes within
21 days of receipt of prospectus. (Earlier, the situation was that the
company was required to obtain Acknowledgement Card from SEBI).
• However, now the concept of obtaining acknowledgement card has been
removed and the company can come out with a public issue any time within
365 days from the date of the letter from SEBI or if no letter is received
from SEBI, within 365 days from the date of expiry of 21 days of
submission of prospectus with SEBI.
• If the issue size is up to Rs. 20 crores then the merchant bankers are
required to file prospectus with the regional office of SEBI falling under the
jurisdiction in which registered office of the company is situated.
• If the issue size is more than Rs. 20 crores, merchant bankers are required
to file prospectus at SEBI, Mumbai office.
• Prospectus is also required to be filed with the concerned stock exchanges
along with the application for listing its securities. Presently, companies
approaching the stock exchange for public issues should obtain in-principal
approval from such stock exchanges.

Date of Prospectus and ROC Card

After making changes, if any made by SEBI / Stock Exchanges, the final
Prospectus duly signed by all the Directors (or by Authorized Representatives
through its Power of Attorney) must be filed with the Registrar of Companies
(ROC) along with the copy of all material documents.

The ROC may suggest changes which should also be reported to SEBI / Stock
Exchanges. The date on which ROC Card is obtained is the date of the prospectus.

In case Book Building Issue, Red Herring Document cannot become a Prospectus
unless it is filed with Registrar of Companies. Issue Price is arrived only after the
Issue is closed.

Contents of Offer Document

Section I - Contents of Prospectus

Section II - Contents of Abridged Prospectus

Section III - Contents of Letter of Offer

32
Section I - Contents of Prospectus
The offer document shall contain material information which shall be true and
adequate so as to enable the investors to take a informed decision on the
investments in the issue.

PART I
♦ General Information
◊ Name and Address of Registered office of the issuer company
◊ Disclaimer Clause
◊ Letter of Intent/Industrial License
◊ Disclaimer statement from the Issuer
◊ Filing of Offer document with the Board and RoC
◊ Names of the Regional Stock Exchange and other stock exchange
where application is made for listing of present issue
◊ Minimum Subscription Clause
◊ Issue Schedule
◊ Intermediaries and Auditors
◊ Credit Rating
◊ Underwriting of the Issue
◊ Compliance Offer

♦ Capital Structure of the company

◊ Authorised, issued, subscribed and paid-up capital
◊ Size of present issue (giving separately, promoters
contribution, firm allotment/reservation for specified categories and
net offer to public)
◊ Paid-up Capital (after the issue)
◊ Share Premium Account (before and after the issue)
◊ Notes to Capital Structure

♦ Terms of Present Issue

◊ Terms of Payments
◊ Arrangement of disposal of Odd lots
◊ Rights of the instrument holders
◊ How to apply – availability of forms, prospectus, and mode of
payment
◊ Despatch of Refund orders
◊ Utilisation of Issue proceeds

♦ Particulars of the Issue

◊ Objects

33
 ◊ Project Cost
◊ Means of Financing
◊ Appraisal
◊ Deployment of funds in the project
◊ Name of monitoring agency, if applicable

♦ Company, Management and Project

◊ History and main objects and present business of the
company
◊ Subsidiaries of the company, if any
◊ Promoters and their background
◊ Key Management Personnel
◊ Name, address and occupation of manager, managing
director, and other directors
◊ Location of the project
◊ Collaboration, any performance guarantee or assistance in
marketing by the collaborators
◊ Infrastructure facilities for raw materials and utilities like
water, electricity etc.
◊ Schedule of implementation of project and progress made so
far
◊ The products
◊ Future Prospects
◊ Stock Market data

♦ Management Discussion and Analysis of the Financial Condition and

results of the operations as reflected in the financial statements

♦ Financial information of Group Companies

♦ Details of the Public Issue made by the same management during the last
three years

♦ Promise vis-à-vis Performance (about previous issues)

♦ Basis of Issue Price

♦ Outstanding Litigations or defaults

♦ Risk Factors and management perception on the same

◊ Disclosure of investor grievances and Redressal System

34
PART II

♦ General Information
◊ Consent of directors, solicitors/advocates, managers to the issue,
Registrars to the issue, Bankers of the company, bankers to the issue
and experts.
◊ Expert opinion obtained, if any
◊ Authority of the present issue and details of resolution passed in the
issue
◊ Procedure and time of schedule for allotment and issue of
certificates.
◊ Name and address of the company secretary, legal advisor, lead
managers, co-managers, auditors, bankers to the company, bankers
to the issue, brokers to the issue

♦ Financial Information

♦ Statutory and other information

◊ Minimum Subscription
◊ Expenses of the issue
◊ Underwriting commission and brokerage
◊ Previous issue for cash
◊ Previous public/rights issue, if any
◊ Commission or brokerage on previous issues
◊ Issue of shares otherwise than for cash
◊ Debentures and redeemable preference shares and other instrument
issued by the company
◊ Purchase of property
◊ Revaluation of assets, if any
◊ Material contracts and inspection of documents

Section II - Contents of Abridged Prospectus

Bid cum Application form comprises the copy of Abridged Prospectus. It contains
the features of contents of prospectus. Abridged Prospectus should not contain
matter extraneous to the content of prospectus

Section III - Contents of Letter of Offer

Letter of Offer is in case of Rights Issue.

35
3.17 Marketing of the Issue

 Grooming of Issue
 Publicity Campaign
 Printing and Mailing Arrangements

Grooming of the Issue :

After dispatch of prospectus to SEBI, Merchant Bankers should arrange a meeting

with company representatives and advertising agents to finalise arrangements
relating to
♦ Date of opening and closing of issue
♦ Registration of prospectus
♦ Launching publicity campaign
♦ Fixing the of board meeting to approve and sign prospectus and pass
necessary resolutions.

In deciding the timing of the issue following points are to be considered

1. State of secondary market
2. No of other issues in the market
3. Proximity to festival time
4. Tax payment time
5. Proximity to time of refunds from previous issues in the market
should be taken into account.

Publicity Campaign :

It includes preparation of
♦ All publicity material and brochures
♦ Prospectus
♦ Announcement
♦ Advertising in Radio, TV, Press
♦ Investors conferences and hoardings

Success of an issue essentially depends on

♦ Size of media

36
 ♦ Media
♦ Frequency and Placement of advertisement

Merchant Bankers play a key role by helping in the

♦ Choice of media
♦ Determination of size
♦ Publication in which the advertising should appear and
♦ Ensure that advertisement discloses proper details about the project
prospects and profitability for the benefits of investors.

Advertising could be
♦ Corporate group related
♦ Company related or
♦ Issue related

Sometimes sweeteners or additions for product enhancement are made

♦ Could be Insurance benefits
♦ Early bird incentives
♦ Scholarships
♦ Assurance of Bonus

Other facilities to the investors could be

♦ Payment by credit cards
♦ Bank loans for application
♦ Khoka or buyback agreement
♦ Safety Net Scheme & others

Effective Marketing includes arrangement of conferences at potential centers to

explain the nature and strength of project to various cross section of investors and
their counselors.

Printing and Mailing arrangement :

Merchant Bankers role is to

♦ Decide the no of copies of application form and prospectus to be printed
♦ Checking the accuracy of statements made
♦ ensure that the size and weight of the application form and prospectus
conform to the standards prescribed by the stock exchange.

Stock exchange requires that prospectus, application form, and other publicity
material should be made available to the

37
 ♦ Stock Exchange
♦ Brokers to the issue
♦ Branches of bankers to the issue and
♦ Underwriters
on time or at least 21 days before the issue opens for subscription

3.18 Pricing of Issues

 Early guidelines of Pricing

 Price Methodologies used by various Merchant Bankers

 SEBI guidelines for pricing of securities

3.19 Early Guidelines for pricing

Prior ahead of 1992 Controller of Capital Issues (CCI) used to control and monitor
the issues in primary market. . During that period, the pricing of capital issues was
controlled by CCI. The premium on issue of equity shares issued through the
primary markets was done in accordance with the Capital Issues Control Act.

They had laid down the guidelines and the method to be used by the company for
computation of premium to be charged from the public.

 Net Asset Value

 Profit Earning Capacity Value
 Market Value

Calculation of Net Asset Value

There are two methods for computation of Net worth as per CCI guidelines
The resulting answer would be the equivalent via either of the methods.

1st Method

Total Assets XXX

Deduct all Liab

Preference Share Capital XXX
Secured & Unsecured Liabilities XXX

38
Current Liabilities XXX
Contingent Liabilities XXX
Net Worth XXX

2nd Method

Shareholders Funds
1. Equity Share Capital XXX
2. Free Reserves XXX
Total XXX
(Deduct)
Contingent Liabilities XXX
Net Worth XXX

Computation of NAV

Net Worth XXX

Add Fresh Issue of Capital XXX
Total Net Worth XXX

No of Shares XXX
(incl Fresh & Bonus issue) XXX
Net Asset Value (NAV) per Share XXX

Profit Earning Capacity Value (PECV)

PECV is arrived at by capitalizing the average of the after tax profits for three or
five years. The rates of capitalization originally mentioned in the guidelines were

15% in the case of manufacturing companies

20% in case of trading companies
17.5% in case of intermediate companies i.e. companies whose turnover from
trading is more is more than 40% but less than 60% of total turnover.

The capitalization rate may be liberalized up to 12% in case of a manufacturing

company with a view to ensure fair and equitable valuation.
Sometimes the NAV and PECV based on 15% capitalization rate fall short of the
market price of the share which reflects the track record of high and consistent
dividend payments and bonus issues, established position as a market leader in its

39
field, good reputation of management, they may no be reflected in NAV and
PECV.

Secondly capitalization rate may be liberalized in the case of a company with high
profitability rate as revealed by the percentage of after tax profits to the equity
capital of the company. Finally, capitalization rate may be liberalized in case of a
well diversified multi-product firm because it can sustain its overall profits even if
its operations in any one part run into difficulties.

Provisions for taxation has to be made according to the current statutory rate under
the Income Tax Act. Average profits should be calculated on the basis of a true
and realistic estimate of the future maintainable earnings of the business. No
window dressing of balance sheet to inflate profits should be done. Non-recurring
miscellaneous income of an abnormal nature or magnitude, writing back of
provisions should be excluded.

Average profits are arrived at on the basis of three years profits in the audited
accounts. In special cases, where the capital base of company is large or proposed
issue is large, income of the company is erratic or premium is substantive, an
average of 5 years may be taken. Average profits may be calculated on the basis of
a simple arithmetical average if the annual variation is not large, up to 20% or
maximum does not vary by more than 50% from the minimum.

If the profits are rising steadily and the trend is likely to continue, average profits
may be calculated on a weighted basis, 3 for latest years, 2 for middle years and 1
for farthest year. If the profits are declining constantly, the profits of the latest year
may be taken. For a judgment of a trend it will be helpful if 5 years data are
examined.

In case of loss making companies (all three or two years) profit earning capacity
would be nil.

Calculation of Profit Earning Capacity Value (PECV)

Average PBT for last 5 yrs XXX

Less Provision for Tax XXX
Average Profit After Tax XXX
Less Pref dividend XXX
Net Profit after Tax XXX
Add Contribution to Profits XXX
by Fresh Issue
Total PAT XXX

40
No of Equity Shares XXX
EPS XXX
PECV at 15% Capitalisation Rate XXX

Assessment of the profitability of fresh issue of capital

Fresh issue of capital should be assumed to be profitable only when it is used to

finance
♦ New project or expansion and
♦ It is on ground and tangible progress has been made in implementing it

If capital is being raised for

♦ Modernization or
♦ Replacement of assets or
♦ Dilution of foreign equity or
♦ Getting shares listed on stock exchange
Then fresh capital would not contribute to profitability of business.

If fresh issue of capital is to finance a new project or for expansion then it could be
assumed that fresh capital could contribute up to max 50% of the existing rate of
profitability.

Contribution to profits = 1/2 x Fresh Capital x Existing PAT

by fresh issue Existing Net Worth

Market value

It consist of computation of
♦ Average Market Price
♦ Fair Value

Average Market Price

Market price as a criterion would be valid only if the share is listed on stock
exchange. The average market price of a share in preceding three years after
making appropriate adjustments for bonus issues and dividend payment would be
determined by
♦ High and Low of preceding two years
♦ High and low of each month preceding twelve months

Market Price of the share reflects the track record of

♦ High and consistent dividend payments and bonus issues

41
 ♦ Established positions as market leaders in the field
♦ Good reputation of management
(If at all it be existent)
Which may not be reflected in Net Asset Value and Profit Earning Capacity Value

Performa for Computation of Average Market Price

High Low
 First Year
 Second Year
 Latest Year
1st month
2nd month
|
|
(For preceding 12 month) _____ _____
Average Market Price _____ _____

Computation of Fair Value

Average of Net Asset Value & Profit Earning Capacity Value

FAIR VALUE = NAV + PECV

2

The Average market price is used to check the reasonableness of the average NAV
and PECV i.e. Fair Value. The FV should be less than 20% of Average Market
Price otherwise PECV has to be reworked with liberalized capitalization rate.

Comparison of Average Market Price with Fair Value

Conditions Capitalisation
Rate
20% of FV < AMP < 50% of FV 12 %

50% of FV < AMP < 75% of FV 10 %

42
AMP > 75% of FV 8%

Hypothetical Example
Amount
Liabilities Amount Assets
(in Crs)
(in Crs)
Equity Share Capital 500 Fixed Assets 600
Reserves & Surplus 100 Current Assets 400
Preference Share Capital 200
Secured & Unsecured 100
Borrowings
Current Liabilities 100
Total 1000 Total 1000
Foot Note : Contingent Liability of Rs 100 crores

Computation of Net worth

1st Method
Total Assets 1000

Deduct all Liab

Pref Share Cap 200
Sec & Unsec Liab 100
Current Liab 100
Contingent Liab 100
Net Worth 500

2nd Method
Shareholders Funds
1. Eq Sh Cap 500
2. Free Reserves 100
Total 600
(Deduct)
Contingent Liab 100
Net Worth 500

43
Calculation of Net Asset Value

Net Worth 500 cr

Add Fresh Issue of Capital 500cr
Total Net Worth 1000 cr

No of Shares
(including Fresh & Bonus issue) 10 cr
Net Asset Value (NAV) per Share Rs.100
Calculation of Profit Earning Capacity Value (PECV)
Rs (in Crs)
Average PBT for last 5 yrs 80
Less Provision for Tax 10
Average Profit After Tax 70
Less Preference dividend 20
Net Profit after Tax 50
Add Contribution to Profits
by Fresh Issue 40
Total PAT 90
No of Eq Sh (Fresh +Bonus) 10
EPS Rs.9
PECV at 15% Capitalisation Rate 60

Calculation of Fair Value

FAIR VALUE = NAV + PECV

2

FV = 100 + 60 = 80
2

Net Asset Value (NAV) = Rs.100

Earnings Per Share (EPS) = Rs.9
Average Market Price for 3 yrs = 150

Capitalise EPS
PECV = 9 x 100/15 = 60
Fair Value = 100 + 60/2 = 80

Comparison between FV and AMP

(150-80) x 100/80 = 87.5 %
The Fair Value should be less than Average Market price by 20%
If not then we have to rework the PECV under following conditions

44
 Conditions Capitalisation
Rate
20% of FV < AMP < 50% of FV 12 %

50% of FV < AMP < 75% of FV 10 %

AMP > 75% of FV 8%

Capitalise EPS by 8 %
9 x 100/8 = 112.5

Calculation of FAIR VALUE

100 +112.5/2 = 106.25

For a share price of FV of Rs.10, premium will be Rs 96.25

The CCI guidelines were abolished with the introduction of Securities &
Exchange Board of India (SEBI) formed under the SEBI Act, 1992 with the prime
objective of protecting the interests of investors in securities, promoting the
development of, and regulating, the securities market and for matters connected
therewith or incidental thereto.

The SEBI Act came into force on 30th January, 1992 and with its establishment, all
public issues are governed by the rules & regulations issued by SEBI.

SEBI was formed to promote fair dealing in issue of securities and to ensure that
the capital markets function efficiently, transparently and economically in the
better interests of both the issuers and the investors.

Since, its formation, SEBI has been instrumental in bringing greater transparency
in capital issues. Under the umbrella of SEBI, companies issuing shares are free to
fix the premium provided adequate disclosure is made in the offer documents

3.20 Price Methodologies used by various Merchant Bankers

 ICICI Securities & Financial Co Ltd

 Canara Bank

45
 PNB Capital Services
 Kotak Mahindra
 Enam Financial Securities
 Bank of Baroda

ICICI Securities & Financial Co Ltd

1. a. NAV per share

b. Past PECV
c. Future PECV
Average of the above

2. Industry P/E comparison with P/E taken

3. Issue Price = 1.5 times the average

projected NAV for next 3 yrs

Canara Bank

1. Issue Price at around CCI Valuation

2. The MP of Share is based on average of two methods given below

a. Issue Price = 1.5 times the average
projected NAV for next 3 yrs
b. P/E multiple x EPS

3. Based on Future projection of NAV & EPS

Average NAV + Average EPS
2

PNB Capital Services

1. Industry P/E comparison with P/E taken

2. NAV Method
Existing Share Capital XXX
Add Reserves & Surplus XXX
Less Misc exp write off XXX
Divide by no of shares
outstanding XXX
Net worth per share = Issue price

46
Kotak Mahindra

1. Capitalization of the Weighted Average EPS for the past 3 yrs at 15 %.

2. Fixation of Premium is in such a way that the Projected EPS discounts the issue
price by less than 10 times.

3. Issue Price is determined around current NAV .

Enam Financial Securities

1.Fixation of Premium is in such a way that the Projected EPS discounts the issue
price by less than 10 times.

2. Issue Price = Projected Book Value

Bank of Baroda

1. Book Value Method

a. Average Book Value per share of preceding 3 yrs
b. Estimated Book Value per share of next 3 yrs
c. Estimated Book Value per share of current yr
a+b+c
3

2. Profit Earning Capacity Value

a. Average EPS of preceding 3 yrs
b. Estimated EPS of next 3 yrs
c. Estimated EPS of current yr
a+b+c
3
3. Industry P/E comparison with P/E taken

3.21 Principles of Price Fixation

♦ Charge what the market can bear

♦ Make price comparable to similar companies in same industry
♦ Should not be much of undervaluation or overvaluation
♦ Based on estimate of NAV or earning capacity of the company

47
Charge what the market can bear :
The company may be very excellent, good fundamentals, and good management,
but it comes out with the issue price of Rs 400-1000 per share and if market
environment is bearish then issue is bound to be undersubscribed. Therefore
market conditions should be taken into account before charging the premium or
deciding the issue price.

Make price comparable to similar companies in same industry:

The criteria to make a comparison with similar companies in same industry could
be
♦ Size of the company
♦ Net worth
♦ P/E Ratio
♦ Market price
♦ Recent Issue price of similar companies in same industry

Should not be much of undervaluation or overvaluation :

Book Value of the company should also be taken into consideration

Based on estimate of NAV or earning capacity of the company :

3.22 Law governing Capital Issues to Public

 Provision of Companies Act

 Provision Securities Contract Regulation [ S C (R) ] Act
 Provision of SEBI

Provision of Companies Act

 Draft prospectus (Sec 55 to Sec 68 A)

 Allotment (Sec 69 to 75)
 Commissions and Discounts (Sec 76 & 77)
 Issue of shares at premium and discount (Sec 78 to 79)
 Further issue of capital (Sec 81)
 Nature numbering and certification of shares (Sec 82 to 84)
 Prohibition of issue of shares with disproportionate rights (Sec 88)
 Certain Miscellaneous provision as to issue of share capital such as call on
shares of same class to be made on uniform basis (Sec 91 to 99)

48
Sec 55, the data of prospectus shall be the data of publication of prospectus.

Sec 56, particulars to be contained in prospectus are laid down in part I of

Schedule II has to be give the memorandum of prospectus (Form 2A).

Sec 58/B & 59, public deposits to be accepted by the company and provisions
thereto – Advertisement to be as good as prospectus and details to be contained in
it such as financial position, overdue deposits, amount eligible to be accepted etc.

Sec 60 provides for Registration of prospectus with the Registrar before issuing it
to the public.

Sec 62 sets out civil liability of directors for misstatements, untrue statements

Sec63 Criminal Liability of director for untrue statements which are material and
deliberately misleading to the investors.

Sec68 & 68A provide for penalty for fraudulently including persons to invest
money or impersonation of any persons for getting the allotment will be liable to
prosecution and punishment.

Sec 69, Allotment only if minimum subscription (90% of the offer) has come in.

Sec 70 and 71 deal with prohibition of allotment, if statement in lieu of prospectus

is not delivered to Registrar and such allotment if done is voidable by the
applicant, within 2 months from the allotment date.
Sec 72 Time limit of 5 days for allotment from the day on which the prospectus is
first issued to public.

Sec 73 Listing of securities on a stock exchange is necessary if a public issues

shares to public through prospectus. The time limit for listing is 70 days from the
last day of subscription unless it is permitted to be extended by the concerned
stock exchange.

Sec 76 Commission and Discounts payable to other parties.

Sec 78 and 79 Issue of shares at premium or discount.

Sec 81 (IA), if further shares of the company are offered to the existing
shareholders only they are rights and if any person do not accepts the rights, they
are available to be allotted by the Board of Directors as they think fit.

49
Sec 83 Distinctive numbering of shares in each series to be given by the company.

Sec 85 - 88 sets out kinds of share capital, equity and preference capital and their
voting rights in the meeting of the shareholders etc.

Sec 91 – 99, Calls on shares of the same class to be made on uniform basis – calls,
when to be made – power to raise capital conversion of shares into stock – notice
to members of 30 days and ROC to be informed of the calls made and paid up.

Provision Securities Contract Regulation [S C (R) ] Act

 Compulsory listing of shares (Sec 21)

 Types of contracts in shares permitted for trading (Sec 13 to 19)

 Permitted restrictions on transfer of shares and assurance of transferability

(Sec 22 A)

Sec 21 of the SCR Act empowers the Central Government to compel a company to
list its securities, if the central government is of the opinion that having regard to
the nature of securities issued by a public company or to the dealings in them, it is
necessary or expedient in the interest of trade or in public interest to do so.

Sec 22A, A public company whose securities are listed on recognized stock
exchange cannot refuse to transfer shares lodged with it for transfer or do not act
in arbitrary or capricious manner in dealing with transfer application lodged with
it, unless the case for refusal falls under the specific provisions laid down in Sec
22A.

Under the specific provisions laid down in Sec 22A a public company whose
shares are listed on recognized stock exchange can refuse an application for
transfer only on following grounds :

i. That the instrument of transfer is not proper or has not been duly stamped
and executed or that certificated relating to the security has not been
delivered to the company, or that any other requirement under the law
relating to registration of such transfer has not been complied with;
ii. That the transfer is in contravention of any law
iii. That the transfer is likely to result in such change in the composition of the
board of directors as would be prejudicial to the interests of the company
or to the public interest;
iv. That the transfer is prohibited by any order of a court, tribunal or other
authority under any law for time being in force.

50
Provision of SEBI

 Pre Issue Obligations

 Post Issue Obligations

3.23 Pre Issue Obligations

1. Exercising of due diligence

2. Payment of requisite fee
3. Document to be submitted
 Memorandum of Understanding
 Inter se Allocation of Responsibilities
 Due Diligence Certificate
 Certificate signed by CA or CS
 Undertaking
 List of Promoters group
4. Appointment of Intermediaries
 Merchant Bankers
 Co-Managers
 Other Intermediaries
5. Underwriting
6. Offer Document to be made Public
7. Dispatch of Issue Material
8. No Complaints Certificate
9. Mandatory Collection Centers
10. Authorized Collecting Agents
11. Appointment of Compliance officer
12. Abridged Prospectus
13. Agreement with Depositories

1. Exercising of due diligence:

The lead Merchant Banker shall exercise due diligence in following
♦ They shall satisfy himself about all the aspects of offering, veracity, and
adequacy of disclosure in the offer document.
♦ The liability of the merchant banker shall continue even after the
completion of the issue process.

2. Payment of requisite fee:

The lead Merchant banker with pay requisite fee in accordance with regulation
24A of SEBI 1992, along with draft offer document filed with the board.

51
3. Document to be submitted
Document to be submitted along with the offer document by the lead manager
 Memorandum of Understanding (MOU)
a. Memorandum of Understanding has to be entered into between a lead
merchant banker and the issuer company specifying their mutual rights,
liabilities and obligations relating to the issue.

b. The MOU shall contain such clause as per schedule I and such other
clauses as considered necessary by the lead merchant banker and the
issuer company.

c. Lead Merchant Banker shall ensure that the copy of MOU is to be

submitted to the board along with the draft offer document.

 Inter se Allocation of Responsibilities

a. In case a public or rights issue is managed by more than 1 merchant
banker, the rights obligations and responsibilities of each merchant banker
shall be demarcated as specified in the schedule II

b. In case of under subscription the lead merchant banker responsible for

underwriting arrangements shall invoke underwriting obligations and
ensure that the underwriters pay the amount of devolvement.

 Due Diligence Certificate (DDC)

a. The lead merchant banker shall furnish to board a DDC along with the
draft prospectus as per schedule III.

b. In addition to DDC and offer document lead merchant banker shall also
i. Certify that all amendments, suggestions or observations made by
the board have been incorporated in the offer document.
ii. Furnish a fresh DDC at the time of filing the prospectus with
Registrar of companies as per schedule IV
iii. Furnish a fresh certificate before opening of issue that no corrective
action on its part is needed as per format schedule V
iv. Furnish a fresh certificate after the issue has opened but before it
closes for subscription as per format of schedule VI

 Certificates to be signed by CA or CS
Certificates are signed by the Company Secretary or Charted Accountant in
case if listed company making further issue of capital

52
 a. All refund orders of the previous issue were dispatched within the
prescribed time and prescribed manner.
b. All security certificated were dispatched to allots within the prescribed
time and prescribed manner.
c. The securities were listed on the stock exchange as specified in the offer
document.
 Undertaking
The issuer shall submit an undertaking to the effect that that transactions in
securities by the promoters, the promoters group and immediate relatives of
the promoters during the between date of filing of offer document with
Registrars of companies or Stock exchange and date of closure of issue
shall be reported to stock exchange within 24 hrs of transactions.

 List of Promoters group

The issuer shall submit to the board a list of persons who constitute te
promoters group and there individual shareholding.

4. Appointment of Intermediaries:
 Appointment of Merchant Bankers
Merchant Banker who is associated with the issuer company as a promoter
or director shall not lead manage the issue of the company.

 Appointment of Co-Managers
Lead Merchant Banker to ensure that no. of co-managers to an issue does
not exceed the no of lead merchant bankers to the said issue and there is
only one advisor to the issue.

 Other Intermediaries :
a. Lead merchant banker should ensure that other intermediaries appointed
are duly registered with board before advising the issuer company on
there appointment
 Shall independently assess the capability and capacity of the
various other intermediaries to carry out the assignments.
 Also ensure that Issuer Company enters in to a memorandum of
understanding with the other intermediaries whenever required.
b. Lead Merchant Banker should ensure that Bankers to the issue are
appointed in all mandatory collection centers.
c. LMB shall not act as a Registrar to an issue in which it is also handling
post issue obligations.
d. LMB to ensure
 Registrars to Issue registered with the board are appointed in all
public issues and rights issues.

53
  In case where Issuer Company is a registered Registrar to Issue than
they shall appoint an independent outsider Registrar to process its
issue.
Promoter of an issuer company who is Registrar to issue cannot act
as a same for its own company.
 Where the no. of applications in a public issue is expected to be
large, the issuer company with the lead Merchant Banker may
associate with one or more registrars for the limited purpose of
collecting the application forms at different centers and forward the
same to the designated Registrar to the issue as mentioned in offer
document.
The designated Registrar of the issue shall, be primarily and
solely responsible for all the activities as assigned to them for the
issue management.

5. Underwriting:
The Lead Merchant Banker shall
 Incorporate a statement in the offer document to the effect that in opinion of
Lead Merchant Banker, underwriter’s assets are adequate to meet underwriting
obligations.
 Obtain underwriters consent before including there names
as underwriters in final offer document.
 Undertake a minimum underwriting obligation of 5% of total underwriting
commitment of Rs 25 Lacs which ever is less and shall not exceed 20 times of
its net worth at any point of time.

6. Offer Document to be made Public:

a. The draft offer document can be made public only after the period of 21 days
from the date of filing of offer document with the board.
b. The lead Merchant banker shall
 Draft offer document with stock exchange where securities are proposed
to be listed along with the board.
 Obtain and furnish to the board an in principal approval of the stock
exchange for listing of securities within 15 days of filing the draft offer
document with the stock exchange.
 LMB or stock exchange may charge an appropriate sum to
person requesting for the copy of offer document.

7. Dispatch of Issue Material:

The LMB to ensure

54
  that offer document and other issue material are dispatched to various stock
exchange, brokers, underwriters, bankers to the issue, investors associations
etc in advance as agreed upon.
 In case of rights issue letter of offer are dispatched to all shareholders at
least one week before the date of opening of the issue.

8. No Complaints Certificate:
After a period of 21 days from the date draft offer document was made public,
the LMB shall file a statement with the board
i. Presenting complaints received by it
ii. A statement by it whether it is proposed to amend draft offer document or
not.
iii. Highlight those amendments.

9. Mandatory Collection Centers:

The minimum no. of collection centers for an issue
 4 metropolitan centers namely – Mumbai, Delhi, Kolkatta, and Chennai.
 All such centers where stock exchange is located in the region the registered
office of the company is situated.
 The issuer company is free to appoint as many collection centers as it may
deem fit above minimum requirement.

10. Authorized Collecting Agents:

The issuer company can appoint additional Authorized Collecting Agents in
consultation with LMB but there relevant details name, address, should be
disclosed in the offer document. The modalities of selection and appointment
can be made at the discretion of LMB. The LMB to ensure

 Collection Agents selected are properly equipped for the purpose both in
terms of infrastructure and manpower requirement.

 The collection agents may collect application form and money in form of
cheques, drafts or stock invests but not in cash and the same should be
deposited in the Escrow account either on the same date or latest by the
next week day.

 The application forms along with duly reconciled schedules shall be

forwarded by collection agents to registrars of the issue after realization of
cheques and after weeding out application in respect of cheques return
cases within a period of 2 weeks from date of closure of public issue.

55
  Application form with stock invests will be directly sent along with
schedules within 1 week from date of closure of issue.

 The investors who are located away from mandatory collection centers and
Authorized collecting agents can forward there applications along with
stockinvests to Registrar of issue directly by registered post with
Acknowledgement due.

11. Appointment of Compliance Officer:

 An issuer company shall appoint a compliance officer directly liaison with
the board with regard to compliance of various law, rules, regulations and
other directives issued by the board and investments complaints related
matter.

 The name of the concerned to be intimated to be intimated to the board.

12. Abridged Prospectus:

 Application form distributed by the company should be accompanied by
abridged prospectus.
 Should not contain matter extraneous to the content of prospectus
 Print should be 7 size with proper spacing.
 Enough space to be provided to the investors to fill in their details

13. Agreement with Depositories:

The LMB shall also ensure that the issuer company has entered into the
agreement with all depositories for dematerialization of securities. Investors to
receive allotment of securities in dematerialized form through any of the
depositories.

3.24 Post Issue Obligations

 Monitoring Report
 Processing of Application
 Establishment of Underwriters Liability
 Advertising
 Listing of Issue

Post- issue Monitoring Reports

56
Irrespective of the level of subscription, the post-issue Lead Merchant Banker
shall ensure the submission of the post-issue monitoring reports. These reports
shall be submitted within 3 working days from the due dates.

The due date for submitting Post Issue Monitoring report in case of public issues
by listed and unlisted companies

a) 3 day monitoring report in case of issue through book building route, for book
built portion.

b) The due date of the report shall be 3rd day from the date of allocation in the
book built portion or one day prior to the opening of the fixed price portion
whichever is earlier.

3 day monitoring report in other cases, including fixed price portion of book built
issue.

a) The due date for the report shall be the 3rd day from the date of closure of the
issue.

Final post issue monitoring report for all issues:

The due date for this report shall be the 3rd day from the date of listing or 78 days
from the date of closure of the subscription of the issue, whichever is earlier

The due dates for submitting post issue monitoring report in case of Rights issues

(a) 3-Day Post-Issue Monitoring Report

The due date for this report shall be the 3rd day from the date of closure of
subscription of the issue.

(b) 50-Day Post-Issue Monitoring Report

The due date for this report shall be the 50th day from the date of closure
of subscription of the issue.

Processing of Application

The Post-issue lead merchant banker shall maintain close co-ordination with the
Registrars to the Issue and arrange to depute its officers to the offices of various
intermediaries at regular intervals after the closure of the issue to monitor the flow
of applications from collecting bank branches, processing of the applications
including those accompanied by Stock invest and other matters till the basis of
allotment is finalized, dispatch security certificates and refund orders completed
and securities listed.

57
Allotment of Public Issue Of Equity

Category No of % of No. of No. of Total

Applications Applications shares shares Shares
Applied Allocated Allocated
100
500
1000
10000
100000
Max Bid

Allotment Procedure

Total number of applicants in category of 1500

100’s
Total number of shares applied for. 1,50,000
Number of times oversubscribed 3
Proportionate allotment to category 1,50,000 * 1/3 =
50,000
Number of share applied for by each applicant 1500
Number of times oversubscribed. 3
Proportionate allotment to each successful 100 * 1/3 = 33
applicant (to be rounded off to 100)

The allotment shall be subject to allotment in marketable lots, on a proportionate

basis as explained below:

a) Applicants shall be categorized according to the number of shares applied for.

b) The total number of shares to be allotted to each category as a whole shall be

arrived at on a proportionate basis i.e. the total number of shares applied for in that
category (number of applicants in the category x number of shares applied for)
multiplied by the inverse of the oversubscription ratio

c) Number of the shares to be allotted to the successful allottees shall be arrived at

on a proportionate basis i.e. total number of shares applied for by each applicant
in that category multiplied by the inverse of the oversubscription ratio.

58
d) All the applications where the proportionate allotment works out to less than
100 shares per applicant, the allotment shall be made as follows:
Each successful applicant shall be allotted a minimum of 100 securities

e) If the proportionate allotment to an applicant works out to a number that is more

than 100 but is not a multiple of 100 (which is the marketable lot), the number in
excess of the multiple of 100 shall be rounded off to the higher multiple of 100 if
that number is 50 or higher.

f) If that number is lower than 50, it shall be rounded off to the lower multiple of
100.

g) If however the proportionate allotment works out to 240, the applicant shall be
allotted 200 shares.

h) All applicants in such categories shall be allotted shares arrived at after such
rounding off.

i) If the shares allocated on a proportionate basis to any category is more than the
shares allotted to the applicants in that category, the balance available shares for
allotment shall be first adjusted against any other category, where the allocated
shares are not sufficient for proportionate allotment to the successful applicants
in that category.

j) The balance shares if any, remaining after such adjustment shall be added to the
category comprising applicants applying for minimum number of shares.

Establishment of Underwriters Liability

(a) i) If the issue is proposed to be closed at the earliest closing date, the lead
Merchant Banker shall satisfy himself that the issue is fully subscribed before
announcing closure of the issue.

ii)In case, there is no definite information about subscription figures, the issue
shall be kept open for the required number of days to take care of the
underwriters' interests and to avoid any dispute, at a later date, by the
underwriters in respect of their liability.

(b) In case there is a devolvement on underwriters, the lead Merchant Banker shall
ensure that the underwriters honor their commitments within 60 days from the date
of closure of the issue.

59
(c)In case of undersubscribed issues, the lead merchant banker shall furnish
information in respect of underwriters who have failed to meet their underwriting
devolvements to the Board.

Post-issue Advertisements

Post-issue Lead Merchant Banker shall ensure that in all issues, advertisement
giving details relating to oversubscription, basis of allotment, number, value and
percentage of applications received along with Stock invest, number, value and
percentage of successful allottees who have applied through Stock invest, date of
completion of dispatch of refund orders, date of dispatch of certificates and date of
filing of listing application is released within 10 days from the date of completion
of the various activities at least in an English National Daily with wide circulation,
one Hindi National Paper and a Regional language daily circulated at the place
where registered office of the issuer company is situated.

Post-issue Lead Merchant Banker shall ensure that issuer company /advisors /
brokers or any other agencies connected with the issue do not publish any
advertisement stating that issue has been oversubscribed or indicating investors’
response to the issue, during the period when the public issue is still open for
subscription by the public.

Advertisement stating that "the subscription to the issue has been closed" may be
issued after the actual closure of the issue.

Listing of the issue

The detailed listing applications should be submitted to the concerned stock

exchanges along with the listing agreement and the listing fee. The allotment
formalities should be completed within the 30 days after the subscription list is
closed or such extended period as permitted by the lead stock exchange.

60
 Chapter – 4

Trends in ““INITIAL PUBLIC OFFER - THROUGH BOOK BUILDING ROUTE”

4.1 Introduction

4.2 Trends in Global Capital Markets

4.3 IPO Activity – Number of Deals and Capital Raised

4.4 2006 IPO Activity – By Capital Raised and Primary Regions

4.5 India: Indian Exchanges Host Billion-Dollar IPOs

4.6 IPO Trend in India

4.7 Testing of Hypothesis

61
 4.1 Introduction

This chapter deals with the trends in “INITIAL PUBLIC OFFER - THROUGH BOOK
BUILDING ROUTE” industry from 2001 – 02 to 2006 – 07 and focuses on the number
of deals & the funds raised by them. This chapter also gives a brief view about the rising
trend in the IPO market. Consultants & advisory firms plays a important role in launching
an IPO in the market.

Globalization Broadens Markets Horizons

 Propelled by mega deals from China and Russia, global IPO markets soared in 2006,
and remain buoyant in 2007.
 Bullish equity markets fueled worldwide IPO activity in 2006 with the
greatest amount of capital raised, a record US$246 billion raised through
1,729 deals.
 In 2007, a rich variety of high quality companies surge through world IPO
pipelines with last year’s momentum, albeit with smaller deal sizes.

 Growth-hungry investors hunt for higher returns abroad, especially in emerging

markets.
 The rapid growth in emerging market economies has resulted in a migration of
capital from the developed economies into the emerging markets and the
availability of capital around the globe.
 As local stock markets grow more liquid and well-regulated (and in keeping with the
historical norm), 90% of the world’s companies list on domestic exchanges.
 Prelisted companies prefer to stay local since customer base is usually local
and local investors best understand business; it’s where infrastructure,
investors and liquidity can most easily be found, and where investor relations,
market expectations and regulatory framework are most familiar.

 Reflecting the rise of more world-class financial centers, Hong Kong and London lure
the top global IPOs (all of them were domestic IPOs except for two on the LSE).
 For the first time ever, HKSE led with 19% of total value (US$46.1 billion of
global capital raised), bolstered by Chinese mega deals, LSE with 13.5%,
thanks to high numbers of cross-border issuers, and NYSE with 10%, the
perennial leader until this year.

62
 Global bourse rivalry leads to transatlantic NYSE Euronext merger, with more
exchange alliances expected soon.
 NYSE Euronext consists of 4000 listed companies with a total market
capitalization of US$28.5 trillion. However, since the exchange is not yet a
single regulated platform, the US-registered companies are regulated by the
SEC and those listed in Europe are regulated by the European markets and by
the FSA.

 A wide array of capital-raising options exist including private equity, Rule 144A
and M&A.
 Under Rule 144A, stocks of foreign issuers can be sold only to US
“qualified institutional buyers”, but are exempt from SEC registration,
thereby providing quicker, cheaper access to the US capital markets.
 As global M&A volumes rose to their highest peaks ever at US 3.8
trillion, a trade sale through M&A is also seen as an appealing alternative
to a traditional IPO, especially if there’s buyer willing to pay a premium.

 Private equity’s impact on world IPO markets mounts as LBOs swell in size.
 For companies that consider themselves undervalued by public markets,
not operationally ready to go public, and not willing to take on the
regulatory and reporting requirements required of a public company,
acquisition by a private equity is considered an attractive alternative to an
IPO.
 Private equity firms are churning their companies at ever-greater speeds;
buying private entities, or taking private public entities; adding
shareholder value, then putting them back into the public markets.
 The bigger the company that private equity buys, the more likely it is that
the exit will be IPO. Thus, experts predict many more IPOs, as public
companies taken out by private equity become larger.

63
4.2 Trends in Global Capital Markets

North Europe,
America
4 Exchanges Middle East
Market 2006 IPO and Africa
23 Exchanges
Capitalization Activity 2006 IPO
Market
Capitalization Activity

$8.9 $21. $38. 29

T 3T 5B 2
19 20
$80. 46
96 06 $5.1 $16.
3B 4
T 2T
19 20
Asia-
96 06
Pacific
17 Exchanges
Market 2006 IPO
Capitalization Activity
Central & South
America and
Caribbean
7 Exchanges
Market 2006 IPO
Capitalization Activity
$5.0 $11. $90. 75
T 8T 3B 8
19 20
96 06
$0.4 $1.4 $9.4
31 Capital Raised
T T B
19 20 in US$
96 06 Number of
Companies
Going Public

4.3 IPO Activity – Number of Deals and Capital Raised

$ 300 1837 1883 1729 2,000

1748
1,517 1,537 1,800
$ 250 1372 1,600
1290
Capital Raised ($B)

1,400
Number of IPOs

$ 200 1042
1,200
864
$ 150 832 839 1,000
$246 800
$ 100 $210
$177 $167 600
$132 $145 $116 $125 400
$ 50 $86 $94
$66 $50 200
$0 0
1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Capital Raised ($B) Number of Deals

64
4.4 2006 IPO Activity – By Capital Raised and Primary Regions

China Leads by Total Capital Raised, Followed by US, Russia and UK

Asia/Pacific
EMEA China/ 23% ($56.6b)
Russian Fed
UK 7% ($18.0b) Hong
JapanKong
7% ($17.2b) India 5% ($12.8b)
Central/South America France 5% ($13.0b) 3% ($7.2b)
and the Caribbean Germany 3.4% ($8.3b) South Korea 2% ($5.1b)
Brazil 3.2% ($7.8b) Netherlands 2.5% ($6.1b)
Italy Australia 2% ($4.2b)
Mexico 0.7% ($1.6b) 1.7% ($4.2b) Thailand 0.9% ($2.1b)
North America Spain Arabia1.6% ($4.0b)
Saudi Singapore 0.3% ($0.7b)
USA 14% ($34.1b) Switzerland 1.6% ($3.8b) Philippines 0.2% ($0.6b)
1.2% ($2.9b) Taiwan 0.2% ($0.5b)
Canada 2% ($4.4b) Austria 1.1% ($2.8b) Indonesia 0.2% ($0.5b)

16% 42%
37%

5%

Source: Dealogic, Thomson Financial

4.5 India: Indian Exchanges Host Billion-Dollar IPOs

 The strength of India’s economy, stock market, corporate profits, energy sector,
and private equity fuel IPOs in 2006 and 2007.
 In 2006, India’s IPO market raised US$7.23 billion, through 78 IPOs. IPO
activity has has been fairly broad-based, although energy companies dominated
with more than 50% share of funds raised.
 India’s greater number of larger deals has been driven by the growth of
Indian corporations and their need for additional capital for potential
acquisitions.

 The localization trend in India is evidenced by several billion-dollar IPOs in 2006.

 In 2006, India’s largest IPO, Reliance Petroleum raised US$1.8 billion,
followed by the oil production and exploration company, Cairn Energy, which
raised US$1.3 billion –- both companies listed on domestic exchanges only.

4.6 IPO Trend in India

No. of
Year Capital Raised (B $) Deals
2002 0.4 6
2003 0.4 12
2004 2.9 21
2005 2.1 53
2006 7.2 78

65
Source:- Dealogic Thomson Financial

IPO Trend in India

90
Capital Raised & No. of Deals

78
80
70
60 Chapter - 5 53
50 Case Study Series1
40 Divi’s Lab Series2
30 21
20 12
6 7.2
10 0.4 0.4 2.9 2.1
0
2002 2003 2004 2005 2006
Year

4.7 Testing of Hypothesis

The hypothesis which the researcher has made is as follows:-

• The volume of fund raised by book building process has been increased by
more then 60% in the last 5 years.

In order to prove the hypothesis the researcher has used the t- test due to the use of small
data of only 5 years and the level of significance taken is 5%. The hypothesis is tested as
follows:

H0 - The volume of fund raised by book building process have been increased by more
then 60%

H1 - The volume of fund raised by book building process have not been increased by
more then 60%.

Given the volume of finds raised by book building process of IPO in India for last 5 years
is as follows:-
Year Capital Raised (B $)
2002 0.4
2003 0.4
2004 2.9
2005 2.1

66
 2006 7.2

T n-1 = X - µ , n = 5
σ / √n

X = 2.6
σ = 2.52
µ = 0.6

t4 = 2.6 – 0.6 = 1.59

2.52 / √4

Table value of t at 5 degrees of freedom is 2.776

T calculated is less than t table value at 5 % level of significance H0 is accepted.

Hence the hypothesis stands accepted.

DO YOU UNDERSTAND THIS?

67
Chapter – 5

Conclusion & Findings

5.1 Conclusion

5.2 Comparative study of objective & finding

68
5.1 Conclusion

Going forward, since this is a relatively new concept for the Indian markets, it will
take some time for an average investor to grasp all the nitty-gritty’s involved in the
book building process. Indian investors are now ready to accept change for the
betterment of the capital markets. Always remember, an aware investor always has
an edge.

Investor is having a faith in IPO that’s why in India it is increasing trend from last
5 years. Due to expansion of the company, introduction of new technology, take
over & Mergers Company wants finance. So they come up with IPO & gaining the
faith of investors and contributing to India for betterment of their economy. Let’s
have a look on some examples like-

1. RIL

It is now gearing up to do a repeat in the oil and gas. To achieve global leadership
in the polyester business, RIL is trying to extend its petrochemicals participation
to countries with feedstock advantage and high growth markets such as Egypt and
RUSSIA. RIL converted the existing Jamnagar refinery into 100% export-oriented
unit in FY 2007. Over the next 3 – 4 years RIL will be investing US$ 8Bn to US$
9Bn in the Jamnagar ‘super site’ with considerable profitability potential.

RIL will be building the world’s largest integrated combined cycle coke
gasification complex (IGCC) with a capacity of 6 million tones per year at
Jamnagar by 2012. This complex will gasify all the petroleum coke from the
refinery, adding to its complexity, even more bottom of the barrel up gradation
and further value addition. The two refineries combined with IGCC, the olefins
complex and the aromatic complex will make the Jamnagar complex a ‘super site’
over the next 3 – 4 years.

2. BGR Energy
BGR Energy Systems

The Chennai-based BGR Energy Systems (BGR), which is into plant equipment
supplies and engineering & procurement & construction (EPC) contracts, is
coming out with an IPO; pursuing the book building process BGR aims to raise
through the issue Rs. 388.28 crore- Rs 438.52 crore of which Rs. 183.60 – Rs.
207.36 crore would be used for expansion the reset of the raised funds of Rs.
204.68 – Rs. 231.16 crore would go towards selling promoters.

69
3. Religare Enterprises
The financial services industry is set to scale new highs. In such a conducive
scenario REL, which is into financial services like Equity stock broking,
commodities broking, personal credit like, loan against shares, IPO financing,
mutual fund distribution & investment banking through its subsidiaries companies
is tapping the primary market to further consolidate its growth. REL is coming out
an IPO of 75.76 Lakh equity share of face value of Rs. 10 each and price band of
Rs. 160 – 185. On the higher price band, the company will mop up more then Rs.
140 crore, which it will use to increase its branch network & fund its retail finance
and lending business. The enduring Bull Run in the stock market has of late
encouraged many broking firms to tap the primary market.

4. Precision Pipes & profiles company

Precision Pipes & profiles company (PPAP) is engaged in the business of
manufacturing automobile sealing system & exterior products. At present PPAP
has 5 manufacturing facilities in the national capital region of delhi, with an
aggregate capacity of 4.75 million Kg. It has proposed a capital expenditure Rs.
95.80 crore to increase its capacity. The company plans to increase its capacity
from 4.75 Mn Kg to 7 Mn Kg by march 2008, 9.15 million KG by march 2009 &
11.26 Mn Kg by march 2010. The balance of 10.2 crore would be spent on general
corporate expense & public issue expense. PPAP plans to fund its expansion
initiative through term loan of Rs. 25 crore and internal accruals of Rs. 6 crore.

ALL ABOVE ISSUES HAVE ALREADY TAKEN PALCE

5.2 Comparative study of objective & finding
OBJECTIVES
To examine the role of IPO’s in fund
raising in India as well as globally, and
to assess whether or not it has increased
in the number of deals globally.
FINDINGS
1. “INITIAL PUBLIC OFFER -
THROUGH BOOK BUILDING ROUTE”
plays a very important role in raising the
funds for the organization.

2. The number of deals & the amount of

fund raised has increased substantially.

To review the trend of IPO in India The trend has revealed a positive growth in
the last five years not only in India but
across the globe.

Going ahead the momentum on IPO will be

maintained by various markets & will be
To review the trends & growth of IPO used a primary
Bullish resourcefueled
equity markets for raising funds
worldwide
industry for the period of 2001 – 02 to formactivity
IPO the market.
in 2006 with the greatest
2006 -07, and to make a comparative amount of capital raised, a record US$246
analysis between the numbers of deals billion raised through 1,729 deals.
& fund raised through this process.
70
To have a birds eye view of the IPO India continued contributing a substantial
industry in India vis – a – vis globally proportion of 3% of the funds raised
globally.
71
Chapter – 6

Problems and suggestions of ““INITIAL PUBLIC OFFER - THROUGH BOOK

BUILDING ROUTE”

6.1 Introduction
6.2 problems in “INITIAL PUBLIC OFFER - THROUGH BOOK BUILDING ROUTE”
6.3 suggestions to improve
6.4 Notifications from BSE to strengthen the IPO Process

72
6.1 Introduction

As it is observed that every filed and every industry faces certain problems in its effective
functioning, so also is the case with “INITIAL PUBLIC OFFER - THROUGH BOOK
BUILDING ROUTE” industry. This chapter deals with the problems faced by “INITIAL
PUBLIC OFFER - THROUGH BOOK BUILDING ROUTE” industry followed by
suggestions to overcome the same.

6.2 Problems in “INITIAL PUBLIC OFFER - THROUGH BOOK BUILDING

ROUTE”

The “INITIAL PUBLIC OFFER - THROUGH BOOK BUILDING ROUTE” industry

has grown and prospered to a considerable extent but yet it has not reached its potential.
Though the Indian as well as international markets as growing at a faster pace it still
faced certain challenges in reality:-

1. This theory says that the investors are willing to bid up the price of an issue if another
recent issue has risen in price. If a large fraction of investors follow this logic, then it
generates a positive autocorrelation among IPOs in a self-fulfilling prophecy.

Against the above backdrop, the objective of this paper is to study the hot and cold
phases in the Indian IPO market and to analyze the factors that influenced the volume,
underpricing and timing of issues during these two phases. In particular, this paper
addresses the following questions:

a. Is there any time pattern evident in the IPO volume and the underpricing series
observed during the 1990s? Are the two series affected by their past behaviour?

b. Does the initial return series convey any information that affects the volume of
subsequent IPOs? In other words, did the issuers in India time their IPOs in response to
the information content of initial return series?

73
c. Whether the firm-specific characteristics have a role in influencing the decision of
firms getting listed during the hot and cold phases?

2. Launch of IPO & success has a huge dependency on the stock market performance of
that country. If the market is in the bull phase the chances of IPO getting over subscribed
is much higher then in a bear rally.

3. A lot of IPO success depends on the investment houses reports & suggestions. Retail
investors do not get into the detailed understanding of the company by using some ratios
but try to invest in IPO by the means of word of mouth power.

6.3 Suggestions:-

1. Companies to more focus on the reality of the business & market pulse rather playing
with the sentiments & the expected buying behavior of the investor. Average initial return
and subsequent IPO volume ratio should be within the industry limits.

2. Investors should look each IPO in isolation rather following the trends of past IPO in
market. Each company is different with different assets & liabilities value. Ratios
reflecting the strength & weakness of the company are not similar to each other.

3. Launch of IPO for a company to be evaluated from all the parameters rather just
getting into rally of sensex.

4. Investors to spend some time in understanding the strength & weakness of the
company by using the ratios to evaluate the business cash flows, assets & liabilities,
rather just investing in IPO on the basis of recommendation.

74
6.4 Notifications from BSE to strengthen the IPO Process:-
Recent Amendments

In its recent amendments, SEBI has reduced the allocation of equity to Qualified
Institutional Buyers (QIB’s), which includes financial Institutions, banks and the
newly added insurance companies, and increased the share of retail investors.
Prior to the amendments, QIB’s could be allotted up to 60% shares, which now
stands reduced to up to 50%.

Also, another change was the definition of retail investors, which previously
meant those investors who bid for less than 1,000 shares. However, the definition
now stands changed to an investor who bids for shares less than worth Rs 50,000.

Another positive step taken by SEBI is the setting up of a price band, which will
assist the retail participants in placing their bids. This would act as a good
guidance for the retail investor in placing the bid, as the previous method had a
flaw in the sense that a floor price was fixed below which the bidder was not
allowed to bid while there was no upper limit to the bid price.

Another change made by SEBI in the rules governing primary market issues is that
institutional bidders cannot withdraw their bids. This move is again in the interest
of retail investors as the current ‘avtaar’ of book building could be misused to take
small investors for a ride. Prior to this change, institutional bidders could tie-up
with the lead book running managers and submit inflated bids thus creating an
artificial demand and price for the issue.

A couple of other changes include the introduction of a 15% greenshoe option for
IPO’s adopting the book building route in case of an oversubscription of the issue.
The greenshoe option, basically, gives the issuer company a right to allot an
additional 15% of equity. This right will be exercised by the company, but
naturally, in the case of extra demand due to oversubscription of the issue.

This would, thus, help reduce price volatility post listing of the security.
Moreover, the decision to reduce the listing period interval from 15 days to 6 days
post the date of allotment ensures that the investor’s finances do not remain locked
in for a longer period of time. This move is more in line with the international
practice.

75
Chapter 7 – Case Study

Case Study
Divi’s Lab

100 % Book Building Process

Public Issue of 32, 04,684 Equity Shares of Rs.10 each
Floor Price Rs 130 per share

Issue Structure

Qualified
Non Institutional
Institutional Retail Bidders
Bidders
Bidders
% of Issue size 60 % Min 15 % Min 25 %

No of Equity
19,22,734 4,80,750 8,01,200
Shares

Basis of
Discretionary Proportionate Proportionate
Allocation

Minimum Bid 1050 Equity shares 1050 Equity shares 100 Equity shares

Maximum Bid Not exceeding Not exceeding 1000 Equity

total issue size total issue size Shares

Allotment mode Compulsory in Compulsory in Compulsory in

Dematerialised Dematerialised Dematerialised
form form form

Market lot Fifty Fifty Fifty

Who can Apply Public Financial High Net worth

Institutions, Individuals, HUF,
Mutual Funds, Non Resident Individuals
Financial Indians, (including Non
Institutional Corporate bodies, Resident Indians &
Investors, Venture Overseas HUF’s) applying
Capitals, Corporate Bodies, up to 1000 shares
Commercial Societies and
Banks, Provident Trusts.
Funds

76
 Bidding Procedure

Issuer Company
Divi’s Lab

BRLM BRLM
Investsmart India Kotak Mahindra Capital
Ltd Company Ltd

NS
E
BS
Registrars to the Issue Electronic E
Karvy Consultants Ltd Registration of bids

Bankers
Syndicate Member
to Issue
Kotak Securities Ltd

Bidders

Escrow collection Bank ICICI Bank Ltd

77
In the above case Issuer company is Divi’s Lab . Two Book Running Lead
Managers (BRLM) are appointed in this issue Investsmart India Ltd (IIL) & Kotak
Mahindra Capital Company Ltd (KMCC). The Underwriting obligation is divided
between these two. Yet again there is the sub underwriting agreement between
BRLM’s and Syndicate Member. The BRLM’s appoint the Syndicate Member,
Bankers to the Issue, and Registrars to the issue and other intermediaries. The
Bidders submit there application form and cheques to the syndicate member.
Syndicate member verifies whether the application form is duly filled up, also that
the bid is at or above floor price and then the cheque amount.

Bidding Process

 The company will file a red herring prospectus with the ROC at least three days
before the Bid/Issue opening date.

 The members of the syndicate will circulate copies of the Red Herring
Prospectus along with the bid cum application form to potential investors.

 The company and the BRLMs shall declare the Bid/ Issue opening date, Bid/
Issue closing date and Floor Price and publish the same in three widely
circulated newspapers (one each in English, Hindi and Telegu). This
advertisement shall contain the salient features of the Red Herring Prospectus
as specified of the Form 2A of the companies act, the method and process of
bidding and the names address of BRLMs and the Syndicate member. The
BRLMs and the Syndicate member shall start accepting bids from the bidders
from the bid/Issue opening date.

 Investors who are interested in subscribing for the investors equity shares
should approach any of the member of the syndicate or their authorized
agent(s) to register their bid.

 The bids should be submitted on the prescribed bid cum application form only.
Bid cum application form should bear the stamp of any of the member of the
syndicate. Bid cum application form which do not bear the stamp of any of the
BRLMs or syndicate member will be rejected.

Bidding

 Each Bid cum application form will give the bidder the choice to bid for up to
three optional prices and specify the demand (i.e. the number of equity shares
bid for). The price and demand options submitted by the bidder in the bid cum
application form will be treated as optional demands from the bidder and will

78
 not be cumulated. After determination of the issue price, the maximum no of
equity shares bid for by the bidder at or above the issue price will be
considered for allocation and the rest of the bid, irrespective of the bid price,
will become automatically invalid.

 The bidder cannot bid on another bid cum application form after his bid one bid
cum application form have been submitted to any member of the syndicate.
Submission of a second bid cum application form to either the same or to
another member of the syndicate will be treated as multiple bidding and is
liable to be rejected either before entering the bid into the electronic bidding
system, or at any point of time prior to the allocation of equity shares of the
issue.

 The BRLMs and Syndicate member will enter each option into the electronic
bidding system as a separate bid and generate a Transaction Registration Slip
(TRS), for each price and demand option and give the same to the bidder.
Therefore, a can receive up to three TRS for each bid cum application form.

Bid at Different Price Levels

 The Floor price has been fixed at Rs.130/- per equity share of Rs.10 each.

 The Bidder can bid only at any price at or above the Floor Price. The bidder has
to bid for required no of equity shares at a specific price and any bid at cut-off
price will be rejected, except for retail bidders. A retail bidder will also have an
option of putting “Cut off Price Bid” on the on-line system. Such bid would
imply that the investor is willing to put the bid for quantity of equity shares, at
whatever be the Issue Price, arrived by the book building procedure.

 The bidder can bid at any price in multiples of Re. 1.0 only, at or above the
Floor Price.

Escrow mechanism

The members of the syndicate will open an escrow account of the syndicate with
the escrow collection bank in whose favor the bidders shall make out the cheque
or demand draft in respect of his bids. Cheques or demand drafts received from the
bidders would be deposited in the Escrow account of the respective member of the
syndicate. The Escrow collection bank shall maintain the monies in the escrow
account of the members of the syndicate for and on behalf of the bidders. The
Escrow collection bank shall not exercise any lien whatsoever over the monies
deposited therein in trust for the bidders. On the Designated date escrow collection

79
bank shall transfer the monies from the Escrow A/c of the members of the
syndicate to the public issue account with the bankers to the issue and application
form to the registrar of the issue, as per the terms of the Escrow agreement with
the members of the syndicate.

Terms of payment and payment into the Escrow Account

 Each bidder shall, with the submission of the bid cum Application Form draw a
cheques, demand draft or Stock invest for the maximum amount of his bid in
favor of the escrow account of the escrow collection bank and submit the same
to the members of the syndicate. Bid cum Application Forms accompanied by
cash shall not be accepted. The maximum bid amount has to be paid at the time
of the submission of bid cum application form based on the highest bidding
option of the bidder. The members of the syndicate shall deposit the cheques,
demand draft or the Stock invest with the escrow collection bank which will
hold the monies for the benefit of the bidders till such time as the designated
date. On the designated date, the escrow collection bank shall transfer the
funds from the escrow account of the members of the syndicate, as per the
terms of the escrow agreement, into the Public Issue Account with the bankers
to the issue.

 In case of qualified institutional bidders, the members of the syndicate may, at

their discretion, waive such payment, at the time of submission of the bid cum
application form. Where such payment, at the time of submission of the bid
cum application form, is waived at the discretion of the members of the
syndicate, the issue price shall be payable for the allocated equity shares, not
later than the date specified in the CAN, which shall be subjected to the
minimum period of two days from the date of communication of the allocation
list to the members of the syndicate by the BRLMs. If the payment is not made
favoring the escrow account within the time stipulated above, the bid of the
bidder is liable to be cancelled. However, if the members of the syndicate do
not waive such payment, full payment has to be made at the time of the
submission of bid form.

 Where the bidders has been allocated lesser no of equity shares than he has bid
for, the excess amount paid on bidding, if any, after adjustment for allocation,
will be refunded to such bidder within 15 days from the Bid/Issue closing date.

Electronic registration of bids

 The members of the syndicate will register the bids using the online facilities of
NSE and BSE. There will be bidding centers at all mandatory centers (all stock
exchange centers) and some other centers as may be decided by the company

80
 and the BRLMs. There will be at least one on-line connectivity to each city
where bids are accepted.

 NSE and BSE will offer a screen- based facility for registering bids for the
issue. The facility will be available on the terminals of the members of the
syndicate and their authorized agents during the bidding period. Members of
the syndicate can also set up the facilities for offline electronic registration of
bids subject to the condition that they will subsequently download the offline
data file into the on-line facilities for book building on half hourly basis.

 The aggregate demand and price for bids registered on the electronic facilities
of NSE and BSE will be downloaded on half hourly basis on a single book and
graphical representation of demand and price would be made available on a
separate terminal during the bidding period.

 At the time of registering each bid, the members of the syndicate shall enter
following details of the investors in the on-line system
♦ Name of the investor
♦ Investor Category – Individual, HUF, Corporate, NRI, OCB, FII, or Mutual
Funds etc
♦ Numbers of equity shares
♦ Bid price
♦ Bid cum Application Form number
♦ Whether payment is made upon submission of Bid cum Application Form,
if yes amount paid
♦ Depository Participant Identification no. and Client Identification no. for
Demat Account of bidder.

 After the above data is entered, the system will generate a Unique Transaction
Identification Code, which will indicate the identity of the member of the
syndicate and the bidder’s registration with him. A system generated (TRS)
Transaction Registration Slip will be given to the bidder as the proof of
registration of each bid price or the demand option. It is the bidders
responsibility to obtain the TRS from the members of the syndicate. The
registration of the bid by the member of the syndicate does not guarantee that
the equity shares will be allotted either by the members of the syndicate or the
company.

81
Build Up of the Book and Revision of Bids

 Bids registered by various bidders through the members of the syndicate shall
be electronically transmitted to the NSE or BSE mainframe on an on-line basis.
Data would be uploaded on half hourly basis.

 The book gets build up at various price levels. The information will be
available with the BRLMs on an on-line basis.

 During the bidding period, any bidder who has registered his interest in the
equity shares at a particular price level is free to revise his bid to a higher price
level (upward revision) as well as to lower price level (downward revision)
using the printed revision form which is the part of the bid cum application
form.

 Revision can be made in both, the desired no of equity shares and the bid price
by using the revision form. The bidder must complete his bid cum application
form or earlier revision form and revisions for all the options as per his bid
cum application form or earlier revision form. For example, if a bidder has bid
for three options in the bid cum application form and he is changing only one
of the options in the revision form, he must still fill the details of the other two
options in the revision form unchanged. Incomplete or inaccurate revision
forms will not be accepted by the members of the syndicate.

 The bidder can make this revision any number of times during the bidding
period. However, for any revision(s) in the earlier bid, the bidders will have to
use the services of the same member of the syndicate through whom he has
placed the original bid.

 Any revision of the original bid shall be accompanied by payment in the form
of cheque or demand draft or Stockinvest for the incremental amount, if any, to
be paid on account of the upward revision of the bid. The excess amount if any
resulting from the downward revision of the bid would be returned to the
bidder at the time of refund in accordance of the terms of Red Herring
Prospectus. In case of Qualified Institutional Bidders, the members of the
syndicate may at their sole discretion waive the payment requirement at the
time of one or more revision by the bidders.

 When the bidder revises his or her bid, he shall surrender the earlier TRS from
the members of the syndicate. It is the responsibility of the bidder to request

82
 for and obtain the revised TRS, which will act as proof for his having revised
the previous bid.

 In case of the discrepancy of data between NSE or BSE and the members of the
syndicate, the decision of the BRLMs, based on the record of NSE or BSE,
shall be final and binding to all concerned.

Inter-se Allocation of Responsibilities

Book Running Lead Managers to the Issue
Investsmart India Ltd (IIL)
Kotak Mahindra Capital Company Ltd (KMCC)

Sr.
Activities Responsibility Coordinator
No

1. Capital Structuring IIL, KMCC IIL

2. Due Diligence IIL IIL

3. Drafting, Designing of Red

Herring Document, Compliance
KMCC, IIL KMCC
with Stock Ex, Registrar Of
Companies, & SEBI.

4. Selection of intermediaries IIL, KMCC KMCC

5. Marketing of the issue KMCC, IIL KMCC

6. Pricing Strategy, Allotment KMCC, IIL KMCC

7. Post bidding activities KMCC, IIL IIL

Both the Book Runner lead managers are equally responsible for the fulfillment of
above duties and obligations.

Capital structuring is the responsibility of both BRLMs. But the Investmart India
Ltd is the one who would coordinate the activities of Capital Structuring.

83
 Basis of Issue Price

Merchant Bankers has to justification for the amount of premium to be charged

from the public.
 Qualitative Factors
 Quantitative Factors

Qualitative Factors
 Promoter Mr.Murali . K . Divi –25 yrs Exp
 R&D center recognized by DISR of GOI
 Co recognized as a “Trading House” by DGFT, MOC, GOI.
 ISO 9001, ISO9002, ISO14001
 Certification for Quality of medicines
 Received several awards for export performance, Quality & R&D efforts

Quantitative factors

 Adjusted Weighted EPS

Year EPS Weightage
99-00 13.99 1 13.99
00-01 22.75 2 22.75
01-02 31.67 3 95.01
154.5
Weightage Average EPS = 154.5 = 25.75
6
 Price Earnings Ratio relation issue price
a) Based on Fiscal 2002
EPS = 31.67
b) Industry P/E
i) Highest – 39
ii) Lowest – 2.50
iii) Average – 8.90

 Return on Year- end Net Worth

Year RoNW(%) Weightage

84
 99-00 24.86 124.86
00-01 30.49 260.98
01-02 34.29 3102.87
188.71
Weightage Average RoNW = 188.71 = 31.45 %
6
Allocation Process

Total
32,04,684 Equity Shares

Retail Bidders Qualified

(RBs) Institutional
Min 25% Bidders (QIBs)
8,01,200 60%
Equity Shares 19,22,734
Equity Shares

Institutional

Equity Shares
Min 15%
4,80,750

Bidders
(NIBs)

Non

Final Demand

No of valid No of Shares Subscription

Category
Bids Bid (Times)
Qualified Institutional 80 1,87,99,050 9.78
Buyers
Non Institutional Investors 380 2,31,09,850 48.07
Retail Bidders 11,661 63,54,800 7.93

The above data gives you an idea about demand for shares or number of times it is
oversubscribed at various categories.

85
In the class of Qualified Institutional Buyers 80 bids has been received
Total demand (total no shares applied for) = 1,87,99,050
Total supply (total no shares to allocated ) = 19,22,734
Oversubscription = 1,87,99,050 = 9.78
19,22,734
Therefore the class of Qualified Institutional Buyers has been oversubscribed by
9.78 times.

In the class of Qualified Institutional Buyers 380 bids has been received
Total demand (total no shares applied for) = 2,31,09,850
Total supply (total no shares to allocated ) = 4,80,750
Oversubscription = 2,31,09,850 = 48.07
4,80,750

Therefore the class of Non Institutional Buyers has been oversubscribed by 48.07
times.

In the class of Retail Bidders 11,661 bids has been received

Total demand (total no shares applied for) = 63,54,800
Total supply (total no shares to allocated ) = 8,01,200
Oversubscription = 63,54,800 = 7.93
8,01,200

Therefore the class of Retail Bidders has been oversubscribed by 7.93 times.

A Sample of Final Demand at different Bid Prices

Bid Price No of Shares % of Total Cumulative Cumulative

Shares (%)
210 100 0.000% 100 0.000%
200 750 0.001% 850 0.001%
180 150 0.000% 11,300 0.018%
170 650 0.001% 12,700 0.020%
160 1,850 0.003% 4,89,050 0.789%
150 8,09,000 1.305% 14,65,900 2.365%
145 20,30,500 3.276% 35,10,450 5.664%
140 4,19,34,800 67.666% 4,92,57,450 79.482%
135 43,29,950 6.987% 5,36,22,400 86.525%
131 41,100 0.066% 5,42,82,300 87.268%
130 78,90,700 12.732% 6,19,73,000 100.00%

86
The above figures show the final consolidated demand from all categories. The 1st
and 2nd column gives details about the demand for shares at various bid prices.

The BRMLs will start evaluating the bids obviously from the highest level because
the issuer company would like to charge the maximum premium.

At bid price of Rs.210, 100 shares are demanded.

At bid price of Rs.200, 750 shares are demanded which 0.0001% of Total shares
demanded and cumulative % of shares demand is 0.0001%

When we come down to bid price of Rs. 150; 8,09,500 are demanded whereas
cumulative demand is 14,65,900 shares which makes up 46% of the total shares to
be allocated. [i.e. The supply is 32,04,684 shares].

This means that if BRLMs fix the cut-off price of Rs.150 then it will lead to under
subscription to the extent of 64%

At a bid price of Rs. 145, 20,30,500 shares are demanded whereas cumulative
demand is 35,10,450 shares which makes up 110% of the total shares to be
allocated. The Total supply is 32,04,684 shares whereas the Total demand is
35,10,450. Therefore demand exceeds supply. If BRLMs fix the cut-off price
Rs.145 then there can be full allotment and there would be no devolvement on the
lead managers.

If we go one step further down at the bid price of Rs.140, we see that at this price,
single-handedly respective demand is 4,19,34,800 which is more than 1300% of
total shares to be allocated whereas the cumulative demand is 1537% which is
very high.

The Book Runner Lead Managers decided to fix the cut-off price of Rs.140 for
two reasons:
1.Demand at this price was very high. Cumulative Demand exceed supply by
1537%.

2.There should be further scope of appreciation after the company gets listed
on the stock exchange. The investors should be benefited, only then they would
like to invest in the initial public offer. Otherwise they could have directly
bought the shares from secondary market after the company gets listed on stock
exchange.

In this manner the Cut-off price or issue price was ascertained at Rs. 140. Those
bidders who bided below cut-off price there bids were out rightly rejected.

87
Whereas those investors who bided at cut-off price were also rejected except for
retail bidders. Those investors who bided above cut-off where allotted the shares
at cut-off price.

Allocation to Non Institutional Bidders

Category No of No of No of Ratio Total

Applications Shares Shares Shares
Applied Allocated Allocated
1,050 8 8,400 50 1:1 400
1,100 4 4,400 50 1:1 200
1,500 2 3,000 50 1:1 100
2,000 7 14,000 50 1:1 350
3,000 7 21,000 50 1:1 350
5,000 24 1,20,000 100 1:1 2,400
10,000 36 3,60,000 200 1:1 7,200
25,000 11 2,75,000 500 1:1 5,500
50,000 19 9,50,000 1,050 1:1 19,950
1,00,000 15 15,00,000 2,100 1:1 31,500
10,00,000 1 10,00,000 20,800 1:1 20,800
11,42,000 1 11,42,000 23,750 1:1 23,750

In the class of Non Institutional Bidders 380 bids has been received and it has
been oversubscribed by 48.07 times.

The 1st column i.e. category indicates no of equity shares demanded by investors.
The 2nd column indicates the number of applications received from investors at
the respective category.
The 3rd, Total Number of shares applied for.
The 4th, Number of shares allocated in this category
The 5th is the ratio of Total Number of shares applied for to the total Number of
shares allocated in this category
Total shares allocated  No of applications received x No of shares allocated in
the respective category

88
The basis of allocation is proportionate in case on Non Institutional Bidders. Since
this class is oversubscribed by 48.07 times, the number of shares to be allocated in
each category will be inverse of oversubscription ratio.

In 1000 shares category the demand (total no of shares applied for) is 8400
Therefore total no of shares to be allocated in this category will be

1050 x 1 = 21.84
48.07

No of shares to be allotted in this category will be 21.84

But since the market lot is 50. Therefore shares will be allocated in the multiples
of 50.

Allocation to Retail Bidders

Category No of No of No of Ratio Total

Applications Shares Shares Shares
Applied Allocated Allocated
100 2,857 2,85,700 50 2:7 40,800
200 1,084 2,16,800 50 5:9 30,100
300 767 2,30,100 50 9:10 34,500
400 198 79,200 50 1:1 9,900
500 536 2,68,000 50 1:1 26,800
600 113 67,800 100 1:1 11,300
700 100 70,000 100 1:1 10,000
800 110 88,000 100 1:1 11,000
900 186 1,67,400 100 1:1 18,600
1000 4464 44,64,000 100 1:1 4,46,400
50 7:15 1,04,150

In the class of Retail Bidders 11,661 bids has been received and it has been
oversubscribed by 7.93 times.

In 100 shares category the demand (total no of shares applied for) is 2,85,700
Therefore total no of shares to be allocated in this category will be

100 x 1 = 12.61
7.93

89
No of shares to be allotted in this category will be 12.61

2857 x 50 x 2 = 40814
7
But since the market lot is 50. Therefore shares will be allocated in the multiples
of 50.

Allocation to QIB Bidders

Category FI/Banks Mutual Financial Venture

Funds Institutional Capitals
Investors
No of Shares 0 13,18,734 5,68,000 36,000
Allocated

In the class of Retail Bidders 80 bids has been received and it has been
oversubscribed by 9.78 times.

The allocation in this class is totally at the discretion of Book Running Lead
Managers.

90
Bibliography

A. Books

1. Machiraju, H.R., “Merchant Banking in Principals & Practice” Pakistan,

Pioneer Book House Edition 1999

2. Lakshmanna, B.C., and Naik, C.N. Krishna “Merchant Banking in India” –

New Delhi, Deep & Deep,

3. Chandra, Prasanna, “Financial Management” – Mumbai, Tata McGraw – Hill.

4. Khan, M.Y. & Jain, P.K. “Financial Management” - SEBI Guidelines, Mumbai,
Tata McGraw – Hill.

B. Magazines

1. Capital Market
a. Vol XX 11/17 Oct 22 – Nov 04,07, Page 13,Mumbai Edition.
b. Vol XX 11/21 Dec 17 – 30,07, Page 08, Mumbai Edition.

2. Dalal Street
a. Vol XX 11 No. 26, Dec 10 – 23, 07, Page 93,Mumbai Edition.
b. Vol XX 11 No.23, Oct 29 – Nov 11,07, Page 34 08, Mumbai Edition.

3. The Industry Standard magazine, Jul 9th 2001.

4. Chilli breeze – Window 2 India.com
5. 29th September 2006, Pacific – Basin finance journal
6. RBI Publications 31st oct 2005
7. The Journal of Finance, Vol. 30, No. 4 (Sep., 1975), pp. 1027-1042
8. American Finance Association in its Journal of Finance.
Volume (Year): 49 (1994) , Issue (Month): 5 (December)
10. Paper provided by National Bureau of Economic Research, Inc in its series NBER
Working Papers with number 8586.

C. Website

1. www.sebi.gov.in
2. www.ipoadvisory.com
3. www.indiainfo.com

91