INITIAL PUBLIC OFFER (IPO)

NEW ISSUE MANAGEMENT

INTRODUCTION
Initial Public Offering refers to the selling of

shares by a private company to the public for the first time. Initial Public Offering is a source of funds raised from the primary market. All subsequent public offerings are known as Followon Public Offerings or Secondary Market Offerings.
An IPO is an abbreviation for Initial Public Offer.

When a company goes public for the first time or issues a fresh stock of shares, it offers it to the public directly. This happens in the primary market. The primary market is where a company

CLASSIFICATION OF ISSUES
Issues

PREFRENTIAL

PUBLIC

RIGHTS

ISSUES

UNDER PUBLIC ISSUE

PRIMARY ISSUE MARKET OR NEW ISSUE MARKET

PRIMARY MARKETS- Include all types of

securities being sold for the first time. Becomes part of the Secondary market after offered in Primary market.
Primary Market Offer consist of1.FPOs,new offerings of listed companies that have sold securities to the public before, and 2.IPOs,where an unlisted company is selling securities to the public for the first time.

PLACEMENT OF THE ISSUE

INITIAL ISSUES ARE FLOATED1.Through prospectus. 2.Bought out deals/Offer for sale. 3.Private placement. 4.Rights issue. 5.Book building.

OFFER THROUGH PROSPECTUS

Invites offers for subscription or purchase of any shares or

debentures from the public. The salient features of the prospectus are1.General information about the company. 2.Capital structure of the company. 3.Terms of the present issue. 4.Particluars of the issue-issue opening, closing and earliest closing date of the issue. 5.Company management and project. 6.Detalis of the outstanding litigations. 7.Management perception of risk factors. 8.Justification of the issue premium. 9.Financial information-cost of project, project earnings.

OFFER FOR SALE

Promoter places his shares with an investment

banker (bought out dealer or sponsor) who offer it to the public at a later date Hold on period is 70 days to more than a year. Bought out dealer decides the price after analyzing the viability, gestation period, promoters background andfuture projections. Bought out dealer sheds the shares at a premium to the public.
PROMOTER INVESTMENT BANKER PUBLIC

contd.
ADVANTAGES FOR THE ISSUING COMPANY Helps the promoters to realize the funds without any loss of time. The cost of raising the funds is reduced-for issuing share cost as high as 10 percent of the cost of project. Helps the new entrepreneurs, not familiar with the capital market, to raise adequate capital from market. A company with no track record of projects, public issues at a premium may pose problems. Possess low risk to investors since the sponsors hav already held the shares for a certain period. DISADVANTAGE Sell at a hefty premium, manipulation of the results, insider trading and price rigging.

PRIVATE PLACEMENT
Small number of financial intermediaries (UTI,

mutual funds, insurance companies, merchant banking subsidiaries of commercial banks) purchase the shares and sell them to investors at a later date at a suitable price.
ADVANTAGES-

1.Cost effective- statutory and non-statutory expenses are avioded. 2.Time effective, structure effectiveness- flexible to suit all the financial intermediaries. 3.Access effective- issues of all sizes can be accomodated.

RIGHTS ISSUE
Offers shares at first to the existing shareholders. In proportion to the shares held by them at the

time of offer. Offered at an advantageous rate compared with the market rate.
Certain conditions-

1.A notice should be issued to specify the number of shares issued. 2.The time given to accept should not be less than 15 days. 3.Right of the shareholders to renounce the offer in favor of others.

BOOK BUILDING
Process of price discovery Not a fixed price for its shares. Indicates a price band that mentions the lowest

(referred to as floor) and the highest (cap) prices. The spread between the floor and the cap of the price band shall not be more than 20%. The cap should not be more than 120% of the floor price. Price is finalized by the book runner and the issuer company.
Malegam committee- introduction of book building

process OCT 1995. Originally, companies issuing more than Rs.100 cr. Allowed; Later SEBI allowed for issue of any size.

contd.
NIRMA offering a maximum of 100 lakh equity

shares through this process, 1st company to adopt the mechanism.

An example of pricing securities- GOOGLEs IPO

offerGoogles IPO offer on the Dutch auction basis, similar o the book building process. Target range between U.S.$105 and U.S.$ 135 per share. Market response to offer not too good, final issue price U.S.$ 85.

RED HERRING PROSPECTUS

Prospectus without details of either price or

number of shares being offered or the amount of issue.

A preliminary registration statement that must be

filed with the SEBI describing a new issue of stock(IOP) and the prospectus of the issuing company.
It is known as a RED HERRING because it

contains a passage in red that states the company is not attempting to sell their shares

PRICING OF ISSUE
Prior to 1992, governed by Controller of Capital Issues

Act 1947, fixation of a fair price on the basis of the net asset calue per share. Era of free pricing in 1992, SEBI does not play any role in price fixation. Issuer in consultation with merchant banker shall decide the price. FIXED PRICE- company and LM fix a price. PRICE DISCOVERY THROUGH BOOK BUILDINGcompany and LM stipulate a floor price or a price band and leave it to market forces to determine the final price. AT PREMIUM- companies are permitted to price their issues at a premium. AT PAR VALUE- in certain cases companies are not permitted to fix their issue prices at premium.

INTERMEDIARIES TO THE ISSUE

INTERMEDIARIES TO THE ISSUE ARE-

1.Merchant bankers to the issue or Book running lead managers (BRLM). 2.Registrars to the issue. 3.Bankers to the issue. 4.Auditors of the company. 5.Underwriters to the issue. 6.Solicitors 7.Advertising agencies. 8.Financial institutions. 9.Government / statutory agencies

LEAD MANAGER
Appointed by company to manage public issue

programmes. BRLM-A merchant banker possessing valid SEBI registration. Main duties1.Drafting of prospectus. 2.Preparing the budget of expenses related to the issue. 3.Suggesting the appropriate timings of the public issue. 4.Assisting in marketing the public issues successfully. 5.Advising the company in the appointment of registrars to the issue, underwriters, brokers, bankers to the issue, advertising agents. 6.Detecting the various agencies involved in public

contd.
The merchant banking division of the financial

institutions, subsidiaries of commercial banks, foreign banks, private sector banks and private agencies are available to act as lead managers.
Some of them are SBI capital markets ltd. Bank

of Baroda, Canara bank, DSP financial consultant ltd. ICICI securities and Finance company ltd. Etc.

ROLE OF LEAD MANAGER IN PRE AND POST ISSUE.

PRE ISSUE 1.Due diligence 2.Design of offer doc.prospectus,m em, 3.Ensure the formalities with SE,ROC & SEBI. 4.Appointment with intermediaries. 5.Marketing strategy. POST ISSUE 1.Mgt of escrow act. 2.Co-ordinate noninstitutional allocation. 3.Intimation of allocation. 4.Dispatch of refunds to bidders. 5.Follow up stepsFinalization of trading, dealing of instruments, dispatch of certificates & demat of deliver of shares. 6.Look at the functioning of agencies.

REGISTRAR.
Finalizes the list of eligible allotees after deleting

the invalid applications. Corporate action for crediting of shares to demat accounts of the applicants. Dispatch of refund orders to those applicable. Receive the share application from various collection centres Recommend the basis of allotment in consultation with the regional stock exchange for approval. Arrange for the dispatching of the share certificates.

BANKERS TO THE ISSUE.

Ensure that the funds are collected and

transferred to the Escrow accounts. Estimates of collection and advising the issuer about the closure of the issue.

UNDERWRITERS
Underwriting means they will subscribe to the

balance shares if all the shares offered at the IPO are not picked up. Could be a banker, broker, merchant banker or financial institution. Insurance against the possibility of inadequate subscription. Done for a commission The aspects considered before appointing are1.Experience in the primary market. 2.Past underwriting performance and default. 3.Outstanding underwriting commitment. 4.The network of investor clientele of the underwriter.

KEY TERMS
GREEN SHOE OPTION An option of allocating shares in excess of the shares included in the public issue. Post-listing price stabilizing mechanism for a period not exceeding 30 days through a Stabilizing Agent. Issue would be over allotted to the extent of a maximum of 15% of the issue size. Provides an investor more probability of getting shares. Post-listing price may show relatively more stability as compared to market. QUALIFIED INSTITUTIONAL BUYERS (QIBs) Institutional buyers who are perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets.

What to look for before investing in an IPO

1. Valuation: First thing to look at is how aggressively the IPO is

Priced. The more aggressively it is priced the lesser the chances of price appreciation.
2. Promoters Goodwill: the Promoters Goodwill is an important

parameter in analyzing an IPO as a goodwill creates trust in taking decision for applying for an IPO.
3. Brokers Report: Brokers can provide an investor with all the info

he needs on the co. so an investor must take advice from his stock broker before applying for an IPO.
4. Ratings: SEBI has now made it mandatory for every co. to get its

IPO rated through any approved rating agencies like CRISIL, ICRA etc. but remember that it does not provide guarantee of success.