INITIAL PUBLIC OFFERING (IPO)

An initial public offering (IPO), referred to simply as an "offering" or "flotation", is when a company

(called the issuer) issues common stock or shares to the public for the first time. They are often issued by
smaller, younger companies seeking capital to expand, but can also be done by large privately owned
enterprises looking to become publicly traded.

In an IPO the issuer may obtain the assistance of an underwriting firm, which helps it determine what
type of security to issue (common or preferred), best offering price and time to bring it to market.

An IPO can be a risky investment. For the individual investor it is tough to predict what the stock or
shares will do on its initial day of trading and in the near future since there is often little historical data
with which to analyze the company. Also, most IPOs are of companies going through a transitory growth
period, and they are therefore subject to additional uncertainty regarding their future value.

When a company lists its shares on a public exchange, it will almost invariably look to issue additional
new shares in order at the same time. The money paid by investors for the newly-issued shares goes
directly to the company (in contrast to a later trade of shares on the exchange, where the money passes
between investors). An IPO, therefore, allows a company to tap a wide pool of stock market investors to
provide it with large volumes of capital for future growth. The company is never required to repay the
capital, but instead the new shareholders have a right to future profits distributed by the company and the
right to a capital distribution in case of dissolution.

The existing shareholders will see their shareholdings diluted as a proportion of the company's shares.
However, they hope that the capital investment will make their shareholdings more valuable in absolute
terms.

In addition, once a company is listed, it will be able to issue further shares via a rights issue, thereby again
providing itself with capital for expansion without incurring any debt. This regular ability to raise large
amounts of capital from the general market, rather than having to seek and negotiate with individual
investors, is a key incentive for many companies seeking to list.

There are several benefits to being a public company, namely:

 Bolstering and diversifying equity base

 Enabling cheaper access to capital
 Exposure and prestige
 Attracting and retaining the best management and employees
 Facilitating acquisitions
  Creating multiple financing opportunities: equity, convertible debt,
cheaper bank loans, etc.
 Increased liquidity for equity holder

IPOs generally involve one or more investment banks known as “underwriters”. Company offering its
shares, called the "issuer", enters a contract with a lead underwriter to sell its shares to the public. The
underwriter then approaches investors with offers to sell these shares.

The sale (allocation and pricing) of shares in an IPO may take several forms. Common methods include:

 Best efforts contract

 Firm Commitment contract
 All or none contract
 Bought deal
 Dutch auction
 Self distribution of stock

A large IPO is usually underwritten by a “syndicate”, investment banks led by one or more major
investment banks (lead underwriter). Upon selling the shares, the underwriters keep a commission based
on a percentage of the value of the shares sold (called the gross spread). Usually, the lead underwriters,
i.e. the underwriters selling the largest proportions of the IPO, take the highest commissions—up to 8% in
some cases.

Public offerings are primarily sold to institutional investors, but some shares are also allocated to the
underwriters' retail investors. A broker selling shares of a public offering to his clients is paid through a
sales credit instead of a commission. The client pays no commission to purchase the shares of a public
offering; the purchase price simply includes the built-in sales credit.

The issuer usually allows the underwriters an option to increase the size of the offering by up to 15%
under certain circumstance known as the green shoe or overallotment option.

A company that is planning an IPO appoints lead managers to help it decide on an appropriate price at
which the shares should be issued. There are two ways in which the price of an IPO can be determined:
either the company, with the help of its lead managers, fixes a price or the price is arrived at through the
process of book building.

Note: Not all IPOs are eligible for delivery settlement through the DTC system, which would then either
require the physical delivery of the stock certificates to the clearing agent bank's custodian, or a Delivery
Versus Payment (DVP) arrangement with the selling group brokerage firm.
There are two time windows commonly referred to as "quiet periods" during an IPO's history. The first
and the one linked above is the period of time following the filing of the company's S-1 but before SEC
staff declare the registration statement effective. During this time, issuers, company insiders, analysts, and
other parties are legally restricted in their ability to discuss or promote the upcoming IPO.

The other "quiet period" refers to a period of 40 calendar days following an IPO's first day of public
trading. During this time, insiders and any underwriters involved in the IPO are restricted from issuing
any earnings forecasts or research reports for the company. Regulatory changes enacted by the SEC as
part of the Global Settlement enlarged the "quiet period" from 25 days to 40 days on July 9, 2002. When
the quiet period is over, generally the underwriters will initiate research coverage on the firm.
Additionally, the NASD and NYSE have approved a rule mandating a 10-day quiet period after
a Secondary Offering and a 15-day quiet period both before and after expiration of a "lock-up agreement"
for a securities offering.

Stag profit is a stock market term used to describe a situation before and immediately after a company's
Initial public offering (or any new issue of shares). A stag is a party or individual who subscribes to the
new issue expecting the price of the stock to rise immediately upon the start of trading. Thus, stag profit is
the financial gain accumulated by the party or individual resulting from the value of the shares rising.

For example, one might expect a certain LT company to do particularly well and purchase a large volume
of their stock or shares before flotation on the stock market. Once the price of the shares has risen to a
satisfactory level the person will choose to sell their shares and make a stag profit.

Largest IPOs:

 Agricultural Bank of China $22.1B in 2010

 Industrial and Commercial Bank of China $21.9B in 2006
 American International Assurance $20.5B in 2010
 NTT DoCoMo $18.4B in 1998
 Visa Inc. $17.9B in 2008
 AT&T Wireless $10.6B in 2000
 Rosneft $10.4B in 2006
 Santander Brasil $8.9B in 2009
 CAPITAL MARKET INSTRUMENTS
A capital market is a market for securities (debt or equity), where business enterprises and government
can raise long-term funds. It is defined as a market in which money is provided for periods longer than a
year, as the raising of short-term funds takes place on other markets (e.g., the money market).

The capital market is characterized by a large variety of financial instruments:

 Equity Shares
 Preference Shares
 Fully Convertible Debentures (FCDs)
 Non-Convertible Debentures (NCDs)
 Partly Convertible Debentures (PCDs) - currently dominate the capital market
 Debentures bundled with warrants
 Participating Preference shares
 Zero-coupon bonds
 Secured Premium Notes
 Foreign Exchange
 Treasury Bills, etc.

The market is composed of the primary and secondary market.

Quite simply, the primary market is designed for new issues (IPO’s) and the secondary market is meant to
trade existing issues (i.e. already established companies).

Instruments issued and traded in the capital market differ in certain characteristics, such as:

 Term to maturity
 Interest rate paid on the nominal value
 Interest payment dates
 Nominal amount in issue.

Capital Market instruments like the ones named all exist for one common reason; to generate funds for
companies and corporations.

In the case of t-bills, bonds capital market instruments also benefit many nationalized governments.

In any market these instruments hold weighted value and are designed for different purposes.

Typically, stocks are more volatile than bonds.

T-bills are considered secured but yield less of a return than others.
While all capital market instruments are designed to provide a return on investment, the risk factors are
different for each and the selection of the instrument depends on the choice of the investor.

The risk tolerance factor and the expected returns from the investment play a decisive role in the selection
by an investor of a capital market instrument.

SPN is a secured debenture redeemable at premium issued along with a detachable warrant, redeemable
after a notice period, say four to seven years. The warrants attached to SPN gives the holder the right to
apply and get allotted equity shares; provided the SPN is fully paid.

Deep Discount Bond is a bond that sells at a significant discount from par value and has no coupon rate or
lower coupon rate than the prevailing rates of fixed-income securities with a similar risk profile. They are
designed to meet the long term funds requirements of the issuer and investors who are not looking for
immediate return and can be sold with a long maturity of 25-30 years at a deep discount on the face value
of debentures.

A negotiable certificate held in the bank of one country (depository) representing a specific
number of shares of a stock traded on an exchange of another country. GDR facilitate trade of
shares, and are commonly used to invest in companies from developing or emerging markets.
GDR prices are often close to values of related shares, but they are traded and settled
independently of the underlying share.

Listing on a foreign stock exchange requires compliance with the policies of those stock
exchanges. Many times, the policies of the foreign exchanges are much more stringent than the
policies of domestic stock exchange. However a company may get listed on these stock
exchanges indirectly – using ADRs and GDRs.

If the depository receipt is traded in the United States of America (USA), it is called an
American Depository Receipt, or an ADR. If the depository receipt is traded in a country other
than USA, it is called a Global Depository Receipt, or a GDR.

But the ADRs and GDRs are an excellent means of investment for NRIs and foreign nationals
wanting to invest in India. By buying these, they can invest directly in Indian companies without
going through the hassle of understanding the rules and working of the Indian

Financial market – since ADRs and GDRs are traded like any other stock, NRIs and foreigners
can buy these using their regular equity trading accounts.

Foreign Currency Convertible Bond is a convertible bond is a mix between a debt and equity
instrument. It is a bond having regular coupon and principal payments, but these bonds also give
the bondholder the option to convert the bond into stock. FCCB is issued in a currency different
than the issuer's domestic currency.

The investors receive the safety of guaranteed payments on the bond and are also able to take
advantage of any large price appreciation in the company's stock. Due to the equity side of the
bond, which adds value, the coupon payments on the bond are lower for the company, thereby
reducing its debt-financing costs.
Every capital market instrument is important in its own way. Firstly, attraction to a particular instrument
is also dependent upon an investors risk tolerance level.

An example is that an investor with more conservative objectives may prefer to get involved with bond
trading as opposed to the more volatile stock market.

However I do believe that of all the capital instruments, the most important instrument tasking into
consideration the economic times we are upon is stock.

The stock market has an unlimited cap and truly makes the financial world tic. In October 2008, the size
of the world’s stock market was estimated at $36.6 trillion.

The stock market is instrumental in obtaining capital for new and existing companies, hence supporting
the economy.

Stocks are also liquid instruments (as opposed to bonds) and the stock market has proven to tie directly to
the world economy including the housing market).

*****