m An initial public offering is referred to as sale of equity of a company

to the public by the promoters of the company.

m Companies prefer to go for Initial Public offering due to following

reasons:

 Additional Capital resources for funding of projects/expansion plans.

 Dilution of existing promoters share holding or by venture capitalist
 Liquidity for shareholders.
 Enhances corporate image thus providing visibility.
 There are mainly any of the two purposes behind an IPO

1. ESTABLISHING NEW BUSINESS

2. EXPANSION OF EXISTING BUSINESS

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

investors in the primary market. This kind of tapping the
savings is called an IPO (Initial Public Offering). SEBI
regulates the way in which the companies can make this
offering.
 Net Tangible Assets of at least Rs. 3 crores for 3
full years.
 Distributable profits in at least three years
 Net worth of at least Rs. 1 crore in three years
 If change in name, at least 50% revenue for
preceding 1 year should be from the new
activity.
 The issue size does not exceed 5 times the pre-
issue net worth.
a) The "project" is appraised and participated to the extent
of 15% by FIs/Scheduled Commercial Banks of which at
least 10% comes from the appraiser.

b) The minimum post-issue face value capital shall be Rs.

10 crore or there shall be a compulsory market-making
for at least 2 years.

c) In addition to satisfying the aforesaid eligibility norms,

the company shall also satisfy the criteria of having at
least 1000 prospective allotees in its issues.
 G
 
 
 :- means an investor who applies or bids
for securities of or for face value of not more than Rs 100,000/-

 
 




 : Any investor who bids for an
amount above Rs 100,000 and does not fall in the QIB category e.g
HNI investors.

 
 




  shall mean:
a. public financial institution as defined in section 4A of the
Companies Act, 1956;
b. scheduled commercial banks;
c. mutual funds;
d. foreign institutional investor registered with SEBI;
e. multilateral and bilateral development financial
institutions;
f. venture capital funds registered with SEBI.
g. foreign Venture capital investors registered with
SEBI.
h. state Industrial Development Corporations.
i. insurance Companies registered with the Insurance
Regulatory and Development Authority
j. provident Funds with minimum corpus of Rs. 25
crores
k. pension Funds with minimum corpus of Rs. 25 crores
 r




  
 
 
 

 ! r 
  
  





 

 

 



r " 





 

#$%
'$##($ r 
  &


 



  


&

  



r #$%&
 



 
 )



#$%

 
'#$ (#'$+$, r   

#$%) *
 







r 




&
 
 


-


#(%1'#$ (#
r ,  




# 2$3 /4$ 

 




.'/



0
 r 




 

"#'%(5'/  


 

 

"5'1

r 

 
&
  


(%  ##($ 
 
r  




   

r 

 ) 
' $534 



#$%

' $##45 r 


 
)&



 )


)

 

  %6 
 )
 

 
 
'$4#'' 



 

r   



) 


#4/$# 2 






-
$3 /4$
 ‰

The Issuer who is planning an offer nominates lead merchant

banker as 'book runners'.
† The Issuer specifies the number of securities to be issued and
the price band for the bids.
† The Issuer also appoints syndicate members with whom orders
are to be placed by the investors.
† The syndicate members input the orders into an 'electronic
book'. This process is called 'bidding' and is similar to open
auction.
† The book normally remains open for a period of 5 days.
† Bids have to be entered within the specified price band.
† Bids can be revised by the bidders before the book closes.

† On the close of the book building period, the book runners evaluate
the bids on the basis of the demand at various price levels.

† The book runners and the Issuer decide the final price at which the
securities shall be issued.

† Generally, the number of shares are fixed, the issue size gets frozen
based on the final price per share.
†
† Allocation of securities is made to the successful bidders. The rest
get refund orders.
 An underwriter to the issue could be a banker, broker,
merchant banker or a financial institution. They give a
commitment to underwrite the issue.
 Underwriting means they will subscribe to balance share if
all the shares offered at the IPO are not picked up.
 Suppose there is an issue for Rs. 100 crore and
subscriptions are received only for 90 crore. It is then left to
the underwriter to pick up the balance Rs. 10 crore.
 If underwriters don¶t pay up SEBI will cancel their licenses.
 he underwriter puts together what is known as the
RED HERRING.
 his is an initial prospectus containing all the
information about the company except for the offer
price and the effective date, which aren't known at
that time.
 With the red herring in hand, the underwriter and
company attempt to hype and build up interest for
the issue. hey go on a road show - also known as
the "dog and pony show" - where the big
institutional investors are courted.
 RHP contains all the information and factor which can
influence the decision of an investor. Like

1. Where the company will use the funds so raised

2. Companies previous records
3. Promoters track records
4. Companies current, likely profit and EPS
5. Companies future plan

 The investor should thoroughly go through RHP before

subscribing the issue. RHP is available at SEBI¶s and
merchant banker¶s website. It may be available in physical
form at broking houses
 m Fixed Price Issue
m Book Building Issue
FIXED PRICE BOOK BUILDING
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
the investor. advance to the investor. Only an
indicative price range is known

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

Payment if made at the time of Payment only after allocation

subscription wherein refund is given after
allocation.
 Book building is actually a price discovery method. In this method, the company
doesn't fix up a particular price for the shares, but instead gives a price range, e.g. Rs
80-100.

 When bidding for the shares, investors have to decide at which price they would like
to bid for the shares, for e.g. Rs 80, Rs 90 or Rs 100. They can bid for the shares at
any price within this range.

 Based on the demand and supply of the shares, the final price is fixed. The lowest
price (Rs 80) is known as the floor price and the highest price (Rs 100) is
known as cap price.

 The price at which the shares are allotted is known as cut off price. The
entire process begins with the selection of the lead manager, an investment
banker whose job is to bring the issue to the public
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. Promoter¶s Goodwill: the Promoter¶s Goodwill is an important
parameter in analyzing an IPO as a goodwill creates trust in taking
decision for applying for an IPO.
3. Broker¶s 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.