Initial Public offer

Initial Public Offer (IPO)

• The first public offering of equity shares of a
company, which is followed by a listing of its
shares on the stock market
• Benefits of going public
– Access to larger capital
– Respectability
– Investor Recognition
– Signals from the market

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 IPO..
• Costs of going public
– Adverse selection by investors
– Dilution
– Loss of flexibility
– Disclosures
– Accountability
– Public pressure

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 Eligibility for an IPO for company
1. It has net tangible assets of at least Rs.3 crores in each of the preceding
3 years.
2. It has a track record of distributable profits for at least 3 out of the
immediately proceeding 5 years
3. It has a net worth of at least Rs. 1 crore in each of the preceding 3
financial years
4. The issue size (offer through the offer document + firm allotment +
promoters’ contribution through the offer document) does not exceed
five times the pre issue net worth.
5. The Company must have a track record of dividend payment for the
immediately preceding three years or
a public financial institution or scheduled commercial bank must have
appraised the project to be financed and have participated in financing the
project by way of loan or equity to the extent of at least 10% of the project
cost.

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 Book building
• Involves inviting subscriptions to a public offer of securities
through a process of tendering.
• The merchant banker fixes the floor price in consultation with
the issuer
• Lead manager assesses the response to the issue, ascertains
the highest price at which demand is sufficient to match the
size of the issue, decides on the final subscription price in
consultation with the issuer and works out the pattern of
allotment.

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 Principal steps for public issue
1. BODs approves proposal for raising capital from public, authorizes the
MD to do all tasks for the same.
2. Company organizes a meeting to seek shareholders approval,
shareholders pass a special resolution for public issue
3. Appointment of merchant banker as a lead manager (LM) to the issue
4. LM carries out due diligence checks all information, documents and
certificates for the issue
5. Company appoints intermediaries such as the registrar to the issue, the
bankers, the printers and advertiser.
6. LM draws up the issue budget (fees for LM, underwriters, registrars and
bankers, brokerage, postage, stationery, issue marketing exps etc.),
company approves the same.
7. LM prepares draft prospectus in consultation with management and
seeks approval of the board.

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 Principal steps in an IPO
8. LM files draft prospectus with SEBI for its observation along with a soft
copy. SEBI places the same on its website for public comments.
9. Company makes listing application to all the stock exchanges where the
shares are proposed to be listed along with copies of the draft
prospectus.
10. Company enters into a tripartite agreement with the registrar and all
the depositories for providing the facility of offering the shares in a
demat mode.
11. If the issue is proposed to be underwritten, LM makes underwriting
arrangements
12. Within 21 days, SEBI makes its observations on draft prospectus. The
stock exchanges also suggest changes if any. Company carries out
modifications accordingly.

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 Principal steps in an IPO
13. The company files the prospectus with the Registrar of Companies
(ROC)
14. The LM and company market the issue using combination of press
meeting, brokers’ meetings, investors’ meetings and so on.
15. The company releases a mandatory advertisement, called the
‘announcement advertisement’ 10 days prior to the opening of the
issue.
16. The LM and the printer dispatch the application forms to all stock
exchanges, SEBI collection centers, brokers, underwriters and investor
associations. Every application form is accompanied by the abridged
prospectus.
17. The issue is kept open for minimum of 3 days and a maximum of 21
days.

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 Principal steps in an IPO
18 After the issue closure, the basis of allotment is finalized by
the stock exchange, the LM and the registrar in conformity
with SEBI prescribed rules.
19 The LM ensures that the demat credit or dispatch of shares
certificates and refund orders to the allottees is completed
within two working days after the basis of allotment is
finalized and the shares are listed within 7 days of the
finalization of the basis of allotment.

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 Private placement
• Sales of securities to a limited no. of sophisticated investors such as FIs,
MFs, VCFs, banks etc.
• The identity of investors may not be known when the offer document is
prepared.
• Subject to much less compliance than public issue
• Cost effective
• Time effective, as deals can be easily and directly negotiated with a few
investors
• But, little information available about this market and there is little
transparency.
• In Indian context, private placement refers to sales of equity of equity
related instruments of an unlisted company or sales of debentures of a
listed or unlisted company.

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 Venture capital
• It is a type of private equity capital typically provided to early-stage, high-
potential, growth companies in the interest of generating a return through an
eventual realization event such as an IPO or trade sale of the company.
• A young private company which is not yet ready or willing to tap the public
financial market may seek venture capital
• Provided by venture capital funds which are prepared to finance an untried
concept that appears to have promising prospects.
• Venture capitalists are typically very selective in deciding what to invest in
• Represent financial investment in highly risky proposition made in the hope of
earning a high rate of return.
• Venture capital typically comes from institutional investors and high net worth
individuals and is pooled together by dedicated investment firms.

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 Venture capital
• The early stage financing of new and young enterprises seeking to grow
rapidly
• Long period of 5-10 years
• Venture financing ensures continuing participation of venture capitalists in
the management of entrepreneur's business.
• It is promoted by central government controlled
development financial institutions
– IFCI (Industrial Finance Corporation of India)
– RCTFCI
• It is promoted by state government controlled development financial
institutions e.g.
– GVFL (Gujarat Venture finance Ltd)
– APVCL
• VCFs promoted by public sector banks such as Canara finance, SBI-cap

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Key Steps in determining the viability of
the project
• Estimation of the costs and benefits of the
project
• Assessing the riskiness of the project
• Calculation of cost of capital
• Computation of the criterion of merit and
judge whether the project is good or bad

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 Global Depository Receipts (GDRs)
• Internally traded equity investments
• Issued by international depositories and
denominated in US$.
• Negotiable certificates and are freely traded in the
overseas financial markets
• For the issuing company – no foreign exchange risk,
as the transaction is reflected in its books only on
rupee terms.
• Issue enhances the corporate image of the company
in the international financial circles.

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American Depository Receipts (ADRs)

• US $ denominated equity instruments traded in US financial

markets.
• Issuance requires strict compliance with the guidelines issued
by USD Security Exchange Regulation Commission, the
counterpart of SEBI in India
• Trading could be done only by QIBs.
• Visible image of the company in the US financial markets

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 Credit Rating Agencies in India
• Credit Rating Information Services of India Limited (CRISIL)

• Investment Information and Credit Rating Agency of India (ICRA)

• Credit Analysis & Research Limited (CARE)

• Duff & Phelps Credit Rating India Private Ltd. (DCR India)

• ONICRA Credit Rating Agency of India Ltd

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 Ratings awarded by major credit
rating agencies

• AAA - : Highest Safety

• AA - : High Safety
• A - : Adequate Safety
• BBB - : Moderate Safety
• BB - : Sub -moderate Safety
• B - : Inadequate Safety
• C - : Substantial Risk
• D - : Default

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 Credit Rating Process
A credit rating agency constantly monitors all ratings with reference to
new political, economic and financial developments and industry
trends. The process/ procedure followed by all the major credit rating
agencies in the country is almost similar and usually comprises of the
following steps
1. Receipt of the request:
Receipt of formal request for rating from a company. An agreement is
entered into between the rating agency and the issuer company. As per the
agreement
• It requires the CRA (Credit Rating Agency) to keep the information confidential.
• It gives right to the issuer company to accept or not to accept the rating.
• It requires the issuer company to provide all material information to the CRA for
rating and subsequent surveillance.

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2 Assignment to analytical team
3 Obtaining information
 Issuers are usually provided a list of information requirements and
broad framework for discussions.
 The analytical team analyses the information relating to its financial
statements, cash flow projections and other relevant information.
4 Plant visits and meeting with management
 Interaction with company executives in visits
 Understanding of the production process, assess the state of
equipment and main facilities, evaluate the quality of technical
personnel and form an opinion on the key variables that influence
level, quality and cost of production.
 The topics discussed during the management meeting are wide
ranging including competitive position, strategies, financial policies,
historical performance, risk profile and strategies in addition to
reviewing financial data.

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5 Presentation of findings
 Discussion in the Internal Committee, comprising senior
analysts of the credit rating agency.
 All the issue having a bearing on rating are identified.
 An opinion on the rating is also formed.
 The findings of the team are finally presented to Rating
Committee.
6 Rating committee meeting
 Here, issuer does not participate directly.
 The rating is arrived at after composite assessment of all
the factors concerning the issuer, with the key issues
getting greater attention.

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7 Communication of Decision
 Ratings communicated along with reasons or rationale supporting
the rating.
 The rejected ratings are not disclosed and complete confidentiality
is maintained.
8 Dissemination to the public
 Through printed reports to the public.
9 Monitoring for possible change
 CRAs are obliged to monitor the accepted ratings over the life of the
instrument.
 The CRA constantly monitors all ratings with reference to new
political, economic and financial developments and industry trends.
 Any changes in the rating are made public through published
reports by CRAs.

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 Rights Issue
• Issue of capital to the existing shareholders of the
company on pro rata basis.
• Process
1. A company sends a ‘letter of offer’ along with a
composite application form consisting of four forms
(A,B,C,D) to the shareholders
 Form A- for acceptance of the rights and application for
additional shares. It shows the number of rights shares the
shareholder is entitled to. It also has a column through which a
request for additional shares may be made.

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 Rights Issue Process Contd..
 Form B - used for renouncing the rights in favor of
someone.
 Form C - meant for application by the renouncee in
whose favor the rights have been renounced, by the
original allottee through form B.
 Form D - used to make a request for split forms.
2 The composite application form must be mailed to
the company within a stipulated period which is
usually about 30 days.

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