IPO- Initial Public Offer

By:
Vibha Mittal
Pricing of new issue
 Prior to 1992 was governed by
controller of capital.
 The guidelines provided for fixation of a
fair price on the basis of net asset value
per share.
 The repealing of cic act resulted in an
era of free pricing of securities
ISSUE PRICING
 There are two types of issues
 Fixed Price issues
An issuer company is allowed to freely price the issue.
The basis of issue price is disclosed in the offer
document where the issuer discloses in detail about
the qualitative and quantitative factors justifying the
issue price. The Issuer company can mention a price
band of 20% (cap in the price band should not be
more than 20% of the floor price) in the Draft offer
documents filed with SEBI and actual price can be
determined at a later date before filing of the final
offer document with SEBI/ROCs.
Price discovery through
book building process

“Book Building” means a process undertaken by
which a demand for the securities proposed to be
issued by a body corporate is elicited and built up
and the price for the securities is assessed on the
basis of the bids obtained for the quantum of
securities offered for subscription by the issuer. This
method provides an opportunity to the market to
discover the price for securities.
 The process is named so because it refers to
collection of bids from investors, which is based on a
price range. The issue price is fixed after the closing
date of the bid.
Book Building- Benefits
 Discovery of Realistic Price
 Proper Allocation
 Ascertainment of level of subscription
 Overall improvement over fixed price
IPO
 Other Advantages
AT PREMIUM
 First issue of new companies set up by an
exiting company of a track record.
 First issue of a privately held company with
three year record of profit
 First public issue by existing company
promoted by existing company with a 5 year
track record.
 Public issue by existing listed companies with
the last three year of dividend paying record
At par value
 First public issue by existing private,
closely held without track record of
profitability.
Some more Basic & Key
Concepts
 Price Band
 Margin money
 Bidding Centre
 Revision of bids
 Escrow Account
 Basis of allotment
 Basis of Allotment
 In case of over-subscription in a fixed price issue, the
allotment is done on a proportionate basis.
 The oversubscription ratios are calculated for each of
the categories against the shares reserved for each
of the categories in the offer document.
 E.g total number of application in the categories of
100s- 200
 Number of time over subscribes- 5
 Proportionate allotment= 2,00,000 X 1/5 = 40,000
Major timeline
Activity Day after clousre
Clousre of bidding process T
3 day monitoring report T+6
Scrutiny and basis of approval T+13
by stock exchange
Dispatch of refund and filing T+15
of application
Completion of necessary T+20
formalities for listing
Post issue advertisement T+25
Final 3 day of reporting T+27
DIP - Eligibility
 Net tangible assets of Rs 3crore in each of the
preceding 3 full years.

 Track record of distributable profit at least 3 out of

last 5 years.

 Pre-issue Rs. 1 Crore (Net Worth) in last 3 years

 In case of change of name, 50% revenues from

activity suggested by new name.

 Aggregate of all issues in one financial year not to

exceed 5 times issuer’s pre issue net worth
 Alternative routes
 Recognizing that many good companies, for one reason or the other, may
not be able to comply with all the eligibility norms, two other alternative
routes are available to such companies:
Alternative I:
 (a)        Issue shall be through book building route, with at least 50% to be
mandatory allotted to the Qualified Institutional Buyers (QIBs). (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
OR
Alternative II:
 (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(s).
 (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. In addition
to satisfying the aforesaid eligibility norms, the company shall also satisfy the
criteria of having at least 1000 prospective allottees in its issue.
Exemptions to certain category of
entities from the eligibility norms

The following categories of entities are eligible

for exemption from
entry norms.
 (a) Private Sector Banks
 (b) Public sector banks
 (c) An infrastructure company whose project has
been appraised by a PFI or IDFC or IL&FS or a
bank which was earlier a PFI and not less than
5% of the project cost is financed by any of
these institutions.
 DIP- other conditions
 No partly paid up shares
 Prospective allottees not to be less than
1000.
 No outstanding convertible security or right.
 IPO grading (effective 2007)
a) Grading to be obtained from at least one
b) All grades to be disclosed
c) Expenses to be born by the company.
DIP- Other Important
provision
 Filling of offer document : 30 days prior
to filing with registrar

 Filling of book built issue.: 3 days

before bid opens
DIP- Promoters Contribution
 Not less than 20% of the post issue
capital.
 Promoters to bring in ( upto RS 100 cr)
1 day prior to the opening of the issue.
DIP- Lock In
 Minimum Contribution of 20% for 3
years. Excess promoter contribution for
1 year.
 Pledge- only with banks/FI as collateral
against loan
DIP- Bidding related
 BID period
 Revision of price band
 BID
a) Individual as well as QIB to place their bids
only through designated brokers.
b) RII may bid at cut-off price.
c) Bidding permitted only if an electronically
linked bidding facility is used.
 Time limit for allotment :As far as
possible allotment should be made
within 15 days after closure of public
issue. The company to pay an interest
of 15% after this limit.
DIP- Other Imp Provision
 Time limit for making calls: 12 months
from date of allotment
 Dispatch of Refund money – Registered
post
 Disclosure of further issue
DIP- Collection centres
 There should be 30 collection center including
places where stock exchanges are.
 For issues not exceeding rs 10 crore the
collection centres shall be situated at:
 The four metropolitan
 All such centres where stock exchange are
located in the region in which registered
office of the company is
SRCC – Minimum offer to
public
 25% of the share to public. In case of
following only 10%
 - Minimum 20lakhs security is offered to
public.
 -Minimum size of the offer is atleast Rs 100
crore.
 Book building process of atleast 60% to QIB
 Exemption Infrastructure Sector
Stock Exchange Regulation
 BSE
a) Minimum issue size – Rs10 crore.
b) Minimum post paid up capital- Rs20
crore
c) Minimum market capitalization- Rs 25
crore.
STOCK EXCHANGE LISTING
 NSE
a) Post issue capital- Rs 10 crore
b) Capitalisaion – Rs25 crore
c)3 year track record.
d) project/ activity must be approved by
FI.
Other stock exchange minimum 3crore
paid up capital.
ROLE of the Bidding Centre
 Accept bid-cum-application form from
investors
 Register bids.
 Locked bid with escrow banker
Role of Escrow banker
 Receive bid-cum-application form from
bidding center.
 Sort them according to categories
 Affix unique running number for each of the
application.
 Prepare bank schedule
 Schedules are to be serially numbered and
totaled
 Send or cheque draft on clearing
 Account for cheque return
Technical rejection of an IPO
 Pan number not provided.
 HNI/QIB applying at cut off
 Application not bid but banked.
 Application bid but not banked
 Multiple bid
 Bid by minors
 Bid outside the price band.
Restriction on other allotments
 Allotment to mf/fii without any lock in period.
 Within 12 months no right, bonus or public
issue.
 Max % of shares which can be distributed to
employees cannot be more than 5% and
maximum shares to be allotted to a single
employee cannot be more than 200.
Green shoe option
 Introduction
-For stabilising
Factors to be considered by
the investors
1 Promoters credibility
2. Efficiency of management
3 Project details.
4.Product
5. Financial data
6. Litigation
7.Risk factors
8.Auditors report
9.Statutory Clearance
10Investor service
Investors protection in the
primary market
a) Provision of all the relevant
information,
b) Provision of accurate information
c) Transparent allotment procedures
without any bias.
Investors Projection in the
primary market
 Project Appraisal
 Underwriting
 Disclosure in prospectus
 Clearance by the stock exchange
 Signing by board of directors/promoter
lock in.
 Redressal of investor grievance