ASSIGNMENT

ON
PROCESS OF IPO

SUBMITTED TO:
PROF. R.K.JOSHI

SUBMITTED BY:
DIVYA JYOTI JOSHI MANJARI LOIYA NIKITA PAVITRAN SANA ISMAIL SUGANDHA SHRIVASTVA IPER PGDM (Trim IV)

INITIAL PUBLIC OFFERING (IPO)

MEANING
An initial public offering (IPO) is the first sale of stock by a formerly private company. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises . Many companies that undertake an IPO also request the assistance of an Investment Banking firm acting in the capacity of an underwriter to help them correctly assess the value of their shares, that is, the share price. In 1602, the Dutch East India Company was the first company in the world to issue stocks and bonds in an initial public offering (Chambers, 2006).

Reasons for listing

When a company lists its securities on a public exchange, the money paid by investors for the newly issued shares goes directly to the company. An IPO, therefore, allows a company to tap a wide pool of investors to provide it with capital for future growth, repayment of debt or working capital. A company selling common shares is never required to repay the capital to investors. Once a company is listed, it is able to issue additional common shares via a secondary offering, thereby again providing itself with capital for expansion without incurring any debt. This ability to quickly raise large amounts of capital from the market is a key reason many companies seek to go public. There are several benefits to being a public company, namely: Bolstering and diversifying equity base Enabling cheaper access to capital Exposure, prestige and public image Attracting and retaining better management and employees through liquid equity participation Facilitating acquisitions Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc. Increased liquidity for equity holder.

STEPS OF IPO PROCESS

This is how an initial public offering process is initiated and reaches its conclusion. The entire process is regulated by the 'Securities and Exchange Board of India (SEBI)', to prevent the possibility of a fraud and safeguard investor interest. Selection of Investment Bank The first thing that company management must do when they have taken a unanimous decision to go public is to find an investment bank or a conglomerate of investment banks that will act as underwriters on behalf of the company. Underwriter's buy the shares of the company and resell them to the general public. The company must also hire lawyers that can guide them through the legal maze that an IPO setup can be. It must be ready with detailed financial records for intensive fiscal health scrutiny that SEBI would perform. Some companies may also opt to directly sell their shares through the stock market, but most prefer going through the underwriters.

Step 1: Preparation of Registration Statement

To begin an IPO process, the company involved must submit a registration statement to the SEBI, which includes a detailed report of its fiscal health and business plans. SEBI scrutinizes this report and does its own background check of the company. It must also see that registration statement fulfils all the mandatory requirements and satisfies all rules and regulations.

Step 2: Getting the Prospectus Ready while awaiting the approval, the company, with assistance from the underwriters, must create a preliminary 'Red Herring' prospectus. It includes detailed financial records, future plans and the specification of expected share price range. This prospectus is meant for prospective investors who would be interested in buying the stock. It also has a legal warning about the IPO pending SEBI approval. Step 3: The Road show

once the prospectus is ready, underwriters and company officials go on countrywide 'road
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shows', visiting the major trade hubs and promote the company's IPO among select few private buyers (Usually corporate or HNIs). They are fed with detailed information regarding company's future plans and growth potential. They get a feel of investor response through these tours and try to woo big investors. Step 4: SEBI Approval & Go Ahead Once SEBI is satisfied with the registration statement, it declares the statement to be effective, giving a go ahead for the IPO to happen and a date to be fixed for the same. Sometimes it asks for amendments to be made before giving its approval. The prospectus cannot be given to the public without the amendments suggested by SEBI. The company needs to select a stock exchange where it intends to sell its shares and get listed. Step 5: Deciding On Price Band & Share Number After the SEBI approval, the company, with assistance from the underwriters decide on the final price band of the shares and also decide the number of shares to be sold. There are two types of issues: Fixed Price and Book Building Fixed Price - In a Fixed price issue - the company decides the price of the share issue and the number of shares being sold. Ex: ABC Ltd public issue of 10 lakh shares of face value Rs. 10/each at a premium of Rs. 55/- each is available to the public thereby generating Rs. 6.5 Crores. Book Building - A Book building issue helps the company discover the price of the issue. The company decides a price band and it gives the investor an option to choose the price at which he/she wishes to bid for the company shares. Ex: ABC Ltd issue of 10 lakh shares of face value Rs. 10/- each at a price band of Rs. 60 to 70 is available to the public thereby generating upto Rs. 7 Crores. Here the amount generated through the issue would depend on the highest amount bid by most investors. Step 6: Available to Public for Purchase On the dates mentioned in the prospectus, the shares are available to public. Investors can fill out the IPO form and specify the price at which they wish to make the purchase and submit the application. This open period usually lasts for 5 working days which is a SEBI requirement. Step 7: Issue Price Determination & Share Allotment once the subscription period is over, members of the underwriting banks, share issuing company etc will meet and determine the price at which shares are to be allotted to the prospective investors. The price would be directly determined by the demand and the bid price quoted by
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investors. Once the price is finalized, shares are allotted to investors based on the bid amounts and the shares available. Note: In case of oversubscribed issues, shares are not allotted to all applicants. Step 8: Listing & Refund The last step is the listing in the stock exchange. Investors to whom shares were allotted would get the shares credited to their DEMAT accounts and for the remaining the money would be refunded

About Public Issues

Corporate may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. This Initial Public Offering can be made through the fixed price method, book ISSUE OFFER DEMAND PAYMENT RESERVATIONS TYPE PRICE

building method or a combination of both. There are two types of Public Issues:
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Fixed Price Issues

Book Building Issues

Price at which the securities are offered and would be allotted is made known in advance to the investors A 20 % price band is offered by the issuer within which investors are allowed to bid and the final price is determined by the issuer only after closure of the bidding.

Demand for the securities offered is known only after the closure of the issue

100 % advance payment is required to be made by the investors at the time of application. 10 % advance payment is required to be made by the QIBs along with the application, while other categories of investors have to pay 100 % advance along with the application.

50 % of the shares offered are reserved for applications below Rs. 1 lakh and the balance for higher amount applications.

Demand for the securities offered , and at various prices, is available on a real time basis on the BSE website during the bidding period..

50 % of shares offered are reserved for QIBS, 35 % for small investors and the balance for all other investors.

SEBI Guidelines for IPOs 1. IPOs of small companies

Public issue of less than five crores has to be through OTCEI and separate guidelines apply for floating and listing of these issues. (Public Offer By Small Unlisted Companies) 2. Size of the Public Issue Issue of shares to general public cannot be less than 25% of the total issue, in case of information technology, media and telecommunication sectors this stipulation is reduced subject to the conditions that: Offer to the public is not less than 10% of the securities issued. A minimum number of 20 lakh securities is offered to the public and Size of the net offer to the public is not less than Rs. 30 crores.

3. Promoter Contribution
Promoters should bring in their contribution including premium fully before the issue Minimum Promoters contribution is 20-25% of the public issue.
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Minimum Lock in period for promoters contribution is five years Minimum lock in period for firm allotments is three years.

4. Collection centers for receiving applications

There should be at least 30 mandatory collection centers, which should include invariably the places where stock exchanges have been established. For issues not exceeding Rs.10 crores (including premium, if any), the collection centres shall be situated at:o The four metropolitan centres viz. Bombay, Delhi, Calcutta, Madras; and o at all such centres where stock exchanges are located in the region in which the registered office of the company is situated.

5. Regarding allotment of shares

Net Offer to the General Public has to be at least 25% of the Total Issue Size for listing on a Stock exchange. It is mandatory for a company to get its shares listed at the regional stock exchange where the registered office of the issuer is located. In an Issue of more than Rs. 25 crores the issuer is allowed to place the whole issue by book-building Minimum of 50% of the Net offer to the Public has to be reserved for Investors applying for less than 1000 shares. There should be atleast 5 investors for every 1 lakh of equity offered (not applicable to infrastructure companies). Quoting of Permanent Account Number or GIR No. in application for allotment of securities is compulsory where monetary value of Investment is Rs.50,000/- or above. Indian development financial institutions and Mutual Fund can be allotted securities upto 75% of the Issue Amount.

A Venture Capital Fund shall not be entitled to get its securities listed on any stock exchange till the expiry of 3 years from the date of issuance of securities. Allotment to categories of FIIs and NRIs/OCBs is up to a maximum of 24%, which can be further extended to 30% by an application to the RBI - supported by a resolution passed in the General Meeting.

6. Timeframes for the Issue and Post- Issue formalities

The minimum period for which a public issue has to be kept open is 3 working days and the maximum for which it can be kept open is 10 working days. The minimum period for a rights issue is 15 working days and the maximum is 60 working days. A public issue is effected if the issue is able to procure 90% of the Total issue size within 60 days from the date of earliest closure of the Public Issue. In case of over-subscription the company may have the right to retain the excess application money and allot shares more than the proposed issue, which is referred to as the green-shoe option. A rights issue has to procure 90% subscription in 60 days of the opening of the issue. Allotment has to be made within 30 days of the closure of the Public Issue and 42 days in case of a Rights issue. All the listing formalities for a public Issue has to be completed within 70 days from the date of closure of the subscription list.

7. Dispatch of Refund Orders

Refund orders have to be dispatched within 30 days of the closure of the Public Issue. Refunds of excess application money i.e. for un-allotted shares have to be made within 30 days of the closure of the Public Issue.

8. Other regulations pertaining to IPO

Underwriting is not mandatory but 90% subscription is mandatory for each issue of capital to public unless it is disinvestment in which case it is not applicable. If the issue is undersubscribed then the collected amount should be returned back (not valid for disinvestment issues). If the issue size is more than Rs. 500 crores voluntary disclosures should be made regarding the deployment of the funds and an adequate monitoring mechanism to be put in place to ensure compliance. There should not be any outstanding warrants or financial instruments of any other nature, at the time of initial public offer.

In the event of the initial public offer being at a premium, and if the rights under warrants or other instruments have been exercised within the twelve months prior to such offer, the resultant shares will not be taken into account for reckoning the minimum promoter's contribution and further, the same will also be subject to lock-in. Code of advertisement specified by SEBI should be adhered to. Draft prospectus submitted to SEBI should also be submitted simultaneously to all stock exchanges where it is proposed to be listed.

9. Restrictions on other allotments

Firm allotments to mutual funds, FIIs and employees not subject to any lock-in period. Within twelve months of the public/rights issue no bonus issue should be made. Maximum percentage of shares, which can be distributed to employees, cannot be more than 5% and maximum shares to be allotted to each employee cannot be more than 200.

10. Relaxations to public issues by infrastructure companies.

These relaxations would be applicable to Infrastructure Companies as defined under Section 10(23G) of the Income Tax Act, 1961, o provided their projects are appraised by any Developmental Financial Institution (DFI) or IDFC or IL&FS. The projects must also have a participation of at least 5% of the project cost (in debt and/or equity) by the appraising institution. The infrastructure companies will be exempted from the requirement of making a minimum public offer of 25 per cent of its securities. The requirement of 5 shareholders per Rs. 1 lakh of offer is also waived in case of offerings by infrastructure companies. For public issues by infrastructure companies, minimum subscription of 90% would no longer be mandatory provided disclosure is made about the alternate source of funding which the company has considered, in the event of under subscription in the public issue. Infrastructure companies are permitted to freely price the offerings in the domestic market provided that the promoter companies along with Equipment Suppliers and other strategic investors subscribe to 50% of the equity at the same or a higher price than what is being offered to the public. Adequate disclosures about the justification for the pricing will be required to be made in the offer documents. The Infrastructure Companies would be allowed to keep their issues open for 21 days. The relaxation would give infrastructure companies sufficient time to mobilize funds for their issues.

Infrastructure Companies would not be required to create and maintain a Debenture Redemption Reserve (DRR) in case of Debenture Issues.

Procedure
IPOs generally involve one or more investment banks known as "underwriters". The 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

A large IPO is usually underwritten by a "syndicate" of 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 commissionsup to 8% in some cases. Multinational IPOs may have many syndicates to deal with differing legal requirements in both the issuer's domestic market and other regions. For example, an issuer based in the E.U. may be represented by the main selling syndicate in its domestic market, Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in the main selling group is also the lead bank in the other selling groups. Because of the wide array of legal requirements and because it is an expensive process, IPOs typically involve one or more law firms with major practices in securities law, such as the Circle firms of London and the white shoe firms of New York City. Public offerings are sold to both institutional investors and retail clients of underwriters. A licensed securities salesperson ( Registered Representative in the USA and Canada ) selling shares of a public offering to his clients is paid a commission from their dealer rather than their client. In cases where the salesperson is the client's advisor it is notable that the financial incentives of the advisor and client are not aligned. In the US sales can only be made through a final prospectus cleared by the Securities and Exchange Commission.
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Investment dealers will often initiate research coverage on companies so their Corporate Finance departments and retail divisions can attract and market new issues. 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.

CURRENT NEWS RELATED TO IPO IPO closure, listing time gap to be cut--SEBI panel to revisit norms for IPOs, mutual funds.
The Securities and Exchange Board of India (SEBI) has decided to go for a comprehensive review of the primary market processes and norms governing the mutual fund industry. These are the two major areas where retail investors' participation has been affected badly in the past few years. The initial public offer process review will involve further reducing the time between closure of an issue and listing. At present, listing has to be made within 12 days. To help investors make informed judgment, SEBI has already asked merchant bankers (issue managers) to reduce the size of the application form for IPOs and disclose their track record of the issues managed and their performance. "We want to review the process further since our basic approach is to make life easier for retail investors," top sources in Sebi said. Sebi is also looking at cutting down the number of days it takes to clear IPO applications.In the past few years, several path-breaking measures have been taken for deepening and regulating the primary capital market (IPO market). These include 100 per cent payment along with applications for institutional investors, including foreign investors, and the introduction of applications supported by the blocked amount (ASBA) facility. That has almost removed the problem of refunds.However, ever since these measures were implemented, the primary market has been facing rough weather because of external factors. The sources say the situation gives an opportunity to simplify the processes further. The standing advisory committee for the primary market has been assigned the task of undertaking the review
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and a meeting to be held in the next couple of weeks will begin this process.The process will take a few months before any consensus. Sebi's role will come after the committee submits its recommendations. The regulator has already taken a few measures to incentivise the mutual fund industry since retail participation has been a concern. However, the reconstituted standing MF advisory committee's meeting will be called soon to discuss issues the industry is facing .This is warranted as Sebi's move to ban the entry load two years back has shaken the industry. Sebi sources say the measures taken so far are "just a beginning". It has been felt there is a need to improve buying and selling of mutual fund units on the floor of stock exchanges and expanding the base of investors in mutual funds. All these issues will be deliberated by the standing committee.
Source: Business Standard

Disadvantages of IPO
There are several disadvantages to completing an initial public offering, namely: Significant legal, accounting and marketing costs Ongoing requirement to disclose financial and business information Meaningful time, effort and attention required of senior management Risk that required funding will not be raised Public dissemination of information which may be useful to competitors, suppliers and customers.

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