Requirements for a First Time Requirements for a First Time Issuer Issuer of Securities – IPO Requirementsof Securities – IPO Requirements

October 31, 2008

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Agenda

• Fund Raising Options

• Fund Raising History – India

• Why IPO?

• Eligibility Criteria under SEBI DIP and BSE Regulations

• Minimum Public Shareholding

• Minimum Promoters Contribution and Lock-in

• Pricing

• Issue Structure – Book Building

• Corporate Governance Requirements

• Disclosures in the Offer Document

• Special Dispensation to PSUs

• Intermediaries involved and their Roles

• Process and Timeline

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Options for Raising Funds

Fund Raising Options

HybridDebt Equity

In India

outside India

From Banks & FIs

Public issue of Bonds/Debentures

ECB ADR/GDR

IPO

FPO

Rights Issue

Pref. Issue

Various forms of Convertibles

FCCB & FCEB

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Fund Raising History – India

Capital Market Issues

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

FY-2004 FY-2005 FY-2006 FY-2007 FY-2008

IPO FPO Rights Issue QIPTotal Funds

RaisedRs. 18,812 cr Rs. 24,707 cr Rs. 27,477 cr Rs. 32,950 cr Rs. 104,937 cr

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Why IPO??

For Funding Needs

• Funding Capital Requirements for Organic Growth

– Expansion through Greenfield or Brownfield or De-bottle Necking Projects

– Diversification

• Funding Inorganic Growth through Acquisitions

• Funding Global Requirements

• Funding Joint Venture and Collaborations needs

• Funding Infrastructure Requirements, Marketing Initiatives and Distribution Channels

• Financing Working Capital Requirements

• Funding General Corporate Purposes

• Investing in businesses through other companies

• Repaying debt to strengthen the Balance Sheet

• Meeting Issue Expenses

For Non-funding Needs

• Enhancing Corporate Stature

• Retention and incentive for Employees through stock options

• Providing Investors exit options

• Provide liquidity to the shareholders

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IPO Requirements

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Eligibility Criteria for Unlisted Companies - SEBI

Companies with track record Companies without track record

• Track record of distributable profits for 3 out of the immediately preceding 5 years

• Pre-issue net worth of not less than Rs. 1 Crore in each of the preceding 3 full years

• Net tangible assets of atleast Rs. 3 Crores for each of the preceding 3 full years

– Not more than 50% of these to be held in the form of monetary assets

• (Proposed IPO + Previous Issues in the same financial year) < 5 times the pre-issue net worth

• In case the company has changed its name within the last one year, atleast 50% of the revenue for the preceding 1 full year is earned by the company from the activity suggested by the new name

• Prospective allottees in the IPO should not be less than 1000 in number

Primary Criteria

Choice of Route: Fixed Price or Book Building

Choice of Route: Book Building

• In case of project funding, 15% participation by Financial Institutions / Scheduled Commercial Banks– 10% of this must come

from appraiser– 10% of issue size to

be allotted to QIBs

• 50% of the net offer to public being allotted to QIBs

• Minimum post-issue face value capital must be Rs. 10 Crores

OR• Compulsory market

making for at least 2 years from the date of listing of shares

+ +• Minimum post-issue face

value capital must be Rs. 10 Crores

OR• Compulsory market

making for at least 2 years from the date of listing of shares

Choice of Route: Fixed Price or Book Building

Exemptions

• A banking company including a local area bank set up under the Banking Regulation Act, 1949

• A corresponding new bank set up under the Banking Companies Act, 1970

• An infrastructure company:

– Whose project has been appraised by a public financial institution (PFI)

– Not less then 5% of the project cost is financed by any of the PFI

• Rights issue by a listed company

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Eligibility Criteria For IPO – Stock Exchange (BSE)

Large Companies Small Companies

• The minimum post-issue paid-up capital of the applicant company (hereinafter referred to as "the Company") shall be Rs. 3 crore; and

• The minimum issue size shall be Rs. 10 crore; and

• The minimum market capitalization of the Company shall be Rs. 25 crore (market capitalization shall be calculated by multiplying the post-issue paid-up number of equity shares with the issue price).

BSE Eligibility Criteria

• The minimum post-issue paid-up capital of the applicant company (hereinafter referred to as "the Company") shall be Rs. 3 crore; and

• The minimum issue size shall be Rs. 3 crore; and

• The minimum market capitalization of the Company shall be Rs. 5 crore (market capitalization shall be calculated by multiplying the post-issue paid-up number of equity shares with the issue price).

• The minimum income/turnover of the Company shall be Rs. 3 crore in each of the preceding three 12 – months period; and

• The minimum number of public shareholders after the issue shall be 1000

• A due diligence study may be conducted by an independent team of CAs or Merchant Bankers appointed by BSE.

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Minimum Public Shareholding‘Promoter’ includes:

• The person or persons who are in over-all control of the company;

• The person or persons who are instrumental in the formulation of a plan or programme pursuant to which the securities are offered to the public;

• The persons or persons named in the prospectus as promoters(s).

Promoter Group

• Defined under clause 6.8.3.2 of SEBI DIP

Public

• Implies all investors other than Promoter and Promoter Group

In case of PSUs, the Promoter is Government of India (represented by President of India).

SEBI has granted exemption on issue structure from Rule 19(2)(b) on case to case basis

Clause 40A of the Listing Agreement

• At least 25% of the post issue paid up capital with the public (ie. other than promoter and promoter group)

Exceptions under Rule 19(2)(b) of SCRR

• As per rule 19(2)(b), a minimum of 25% of each class of security must be offered to the public for subscription

• However, at least 10% can be offered if the following 3 conditions are fulfilled:

– Minimum 2 MM securities (excluding reservations, firm allotment & promoter contribution) to be offered to the public

– Minimum offer size – Rs. 100 crores

– Issuance through book building with 60% QIB allocation

Continuous fulfillment of minimum shareholding criteria

• Continuous public shareholding needs to be maintained as per Clause 40A of the listing agreement since listing

Exemption

• The aforesaid requirement of maintaining minimum level of public shareholding on a continuous basis will not be applicable to government companies (as defined under Section 617 of the Companies Act, 1956), infrastructure companies (as defined under clause 1.2.1(xv) of the SEBI (DIP) Guidelines, 2000) and companies referred to the Board for Industrial and Financial Reconstruction.

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Government Cos & Infrastructure Cos

Government Companies

Section 617 of the Companies Act, 1956

Government company, means any company in which not less than fifty one per cent of

the paid-up share capital is held by the Central Government, or by any State Government

or Governments, or partly by the Central Government and partly by one or more State

Governments, and includes a company which is a subsidiary of a Government company

as thus defined.

Infrastructure Companies

Clause 1.2.1(xv) of the SEBI (DIP) Guidelines, 2000

“Infrastructure Company” means, a company wholly engaged in the business of

developing, maintaining and operating infrastructure facility.

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Minimum Promoters Contribution and Lock-in

Promoter’s Contribution

• Minimum of 20% of the post issue capital of the Company for unlisted companies; for listed companies, either to extent of 20% in issue or to ensure post issue holding of 20%

• Following shares are ineligible for the computation of Promoter’s contribution

– Issued in last one year at a price lower than issue price, unless topped up

– Issued in last three years out of bonus issue or revaluation reserve for consideration other than cash

Lock-in period

• For Promoters:

– Lock-in for a period of 3 years from the date of allotment or from the date of commencement of commercial production, whichever is later

• Balance pre-issue capital, other than held by Indian and Foreign Venture Funds (registered with SEBI) and shares held for at least one year and being offered for sale in the issue

– Must be locked-in for a period of 1 year from the date of allotment

– Shares issued last will be locked-in first

Exemption

• In case of public issue of securities by a company which has been listed on a stock exchange for at least 3 years and has a track record of dividend payment for at least 3 immediately preceding years.

• In case of companies where no identifiable promoter or promoter group exists.

• In case of rights issues.

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Pricing

• SEBI allows free pricing of equity shares in an IPO

– Approval of RBI might be required for public issues by banks

• Differential pricing is permissible in a public issue to retail individual investors and retail individual shareholders

– Retail investors can be offered shares at a discount to the price offered to other investor categories (Max discount can be 10%)

• Price Band: The cap price can be 20% more than the floor price. Price band can be revised by 20% from the floor price.

• No payment of commission by the promoter or issuer company to the public

• If the issue price is above Rs.500 then the issuer can fix the FV of shares below Rs.10 but a minimum of Rs.1.

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Issue Structure – Book Building

Of the Net Offer to Public

• Maximum 50% to QIBs

• At least 15% to HNIs

• At least 35% to retail

Dilution = 25% Dilution = 10% to 25%

Of the Net Offer to Public

• At least 60% to QIBs

• Maximum 10% to HNIs

• Maximum 30% to retail

• Net offer to the public shall mean the offer made to Indian public and does not include reservations/ firm allotments/ promoters’ contribution.

Net Offer to Public

Reservations / Firm Allotment shall not be made to categories other than:

• ‘Permanent employees of the issuer company and in the case of a new company the permanent employees of the promoting companies';

• ‘Shareholders of the promoting companies in the case of a new company and shareholders of group companies in the case of an existing company’ either on a ‘competitive basis’ or on a ‘firm allotment basis’.

• Persons who, on the date of filing of the draft offer document with the Board, have business association, as depositors, bondholders and subscribers to services, with the issuer making an initial public offering,

Reservations

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Corporate Governance Requirements

Composition of the Board

• Optimum number of executive and non executive directors with at least 50% being non-executive. If the chairman, has executive powers then 50% of Board comprises of Independent directors. While if chairman has non-executive powers then 1/3 of the Board comprises of Independent directors.

Audit Committee

• Mandatory constitution of Audit Committee with minimum three directors and headed by an Independent director.

• All members shall be financially literate (should be able to understand financial statements) and at least one member should have accounting and financial management expertise.

Investor Committee

• Shareholder/Investor Grievances Committee to be formed under the chairmanship of a non executive director to look into the redressing of shareholder and investor complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends

• At least one director on the Board of the holding company shall be a director on the Board of a material non listed Indian subsidiary Company

- Material non-listed subsidiary means a subsidiary whose turnover or net worth exceeds 20% of the consolidated turnover or net worth in the preceding accounting year

• Audit committee of the listed holding company shall also review the financial statements, in particular, the investments by the unlisted subsidiary Company

• A separate section on Corporate Governance to be included in the Annual Reports with disclosures on compliance of mandatory and non-mandatory requirements

• Submission of quarterly compliance report to the stock exchanges

• CEO/CFO to certify the financial statements and cash flow statements

Subsidiary Company

Report on Corp.

Governance

CEO/CFO Certification

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Disclosures in the Offer Document

Capital Structure

• Shareholding Pattern (pre-issue and post-issue)

• Securities Premium Account (pre-issue and post-issue)

• Holding of the promoter and promoter group

• Disclosure about ESOPs if any

Objects of the Issue

• Total requirements of funds

• Means of Financing

– Undertaking by the issuer company confirming firm arrangements of finance through verifiable means towards 75% of the stated means of finance (excluding proposed IPO)

• Details about the appraisal of the project

• Interim use of funds

Business• Description about the Industry in which the Company operates

• Detailed description about the business of the Company

• Risks related to the Company

• External Risk Factors

• Details about the Board of Directors and various committees

• Details about key management persons

Risk Factors

Company Management

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Disclosures in the Offer Document (Cont’d)

Financial Disclosures

• Auditors Report to have five year restated financials for the – Issuer Company, and– All Subsidiaries of the Issuer Company or Consolidated Financials of the Issuer Company

• Audited financials presented should not be more than six months old at the time of filing DRHP with SEBI and must be updated to be not more than six months old on the date of filing the prospectus with the ROC

• All financials should be presented based on Indian GAAP

MD&A

• Detailed discussion on performance for the past 3 years• Capital Expenditure• Cash Flow and Liquidity

Litigations and Defaults

• All pending litigations in which the Company/Promoters / Promoter Group / Directors / Group companies are involved.– Both, litigations filed by or against the Company/Promoters / Promoter Group / Directors /

Group companies• Outstanding litigations, defaults, etc., pertaining to matters likely to affect operations and

finances of the company.• The pending proceedings initiated for economic offences against the directors, the promoters,

companies and firms promoted by the promoters indicating their present status.

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Special dispensation to PSU - Precedents

* Obtained relaxation from SEBI and issue structure is 50% to QIB, 15% to HNI and 35% Retail# Based on DRHP filed with SEBI

REC PFC Power Grid OIL India#

Promoter

Government of India, represented by the President of India disclosed as promoter with no additional details

Yes Yes Yes Yes

Promoter group companies

No promoter group companies disclosed. However, the disclosures w.r.t Subsidiaries need to be made

No No No No

Corporate governance

Clause 49 of the listing agreement Yes Yes Yes Yes

Issue structureCompliance with rule 19(2)(b) of SCRR

Yes No* No* Yes

DisclosuresRemarksParticulars

Only restated Audited Financial Statements needs to be disclosed in the DRHP. However, SEBI has granted exemption on case to case basis to PSU Banks whereby, even limited review figures were disclosed in DRHP, so as to comply with the criteria of financial statements being not more than six months old.

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Special dispensation to PSU

• Has 2689 branches + subsidiaries in India (BOB Caps, BOB Cards, BOB AMC) + foreign subsidiaries

• Limited Review for June 2005 numbers allowed. Limited Review done for only select (around 20 branches) by auditors and rest were relied on by auditors. Limited review of foreign subsidiary for June 2005 allowed.

• Has 2689 branches + subsidiaries in India (BOB Caps, BOB Cards, BOB AMC) + foreign subsidiaries

• Limited Review for June 2005 numbers allowed. Limited Review done for only select (around 20 branches) by auditors and rest were relied on by auditors. Limited review of foreign subsidiary for June 2005 allowed.

Bank of BarodaBank of Baroda

NTPC NTPC

• Promoter is president of India

• Relaxation in disclosure of promoter and promoter group in offer document

• Promoter is president of India

• Relaxation in disclosure of promoter and promoter group in offer document

• SEBI guidelines do not allow limited review or unaudited numbers in prospectus

– Limited review allowed

– Disclosure of promoter and promoter group

• Need to comply with

– Corporate governance norms

– Promoter’s contribution and lock-in

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Intermediaries Involved

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Intermediaries and their Roles

Lead Managers

• Overall Co-ordination

• Conduct due diligence and finalize disclosure in Offer Document

• Assist the legal counsel in drafting of Offer Document

• Interface / ensure compliance protocol with SEBI / NSE / BSE

Domestic & International Legal

Counsels

• Legal Due Diligence

• Drafting the offer document

• Guidance on any other incidental legal matters

• Assistance in complying with requirement for selling in international geographies

Bankers • Acting as collecting agents

• Escrow Account & Refund account

• Co-ordination with the Issuer and Bankers regarding collections, reconciliation, refunds etc

• Securing allocation approval from Stock Exchanges

• Post issue co-ordination collation and reconciliation of information

• Reviewing and auditing financials and preparing financial statements for inclusion in the Offer Document

• Verify/audit various financial and other data used in the Offer document and provide Comfort Letter

• Bulk printing of the Red Herring Prospectus Bid Forms, final Prospectus, CAN, Refund orders etc.

• Ensure timely dispatch and distribution of stationery to all centers

Registrars

Auditors

Printers

• Preparing and getting published all statutory notices

• Creating all advertisement materialsAdvertisers

Self Certified Syndicate Bank (SCSB)

• Acting as collecting agents for ASBA (Application Supported by Block Amount) process

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Process & Timeline

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IPO Process – Fixed Price Issue

Due diligence

Appointment of BRLM and legal

counsel

Drafting of Draft Prospectus

Filing with SEBI & Stock Exchanges

SEBI Clearance & ROC Filing of the Prospectus

Pre-Marketing

Decision to go for IPO

Roadshows

Issuer

Issue Open

Allotment

Issue Closure

Listing

Funds transferred to issuer

Preparation / Approvals Filing the Prospectus and Marketing Launch & Completion

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IPO Process – Book Built Issue

Due diligence

Appointment of BRLM and legal

counsel

Drafting of Draft Red Herring

Filing with SEBI & Stock Exchanges

SEBI Clearance & ROC Filing Pre-Marketing

Decision to go for IPO

Roadshows

Issuer

Book building

RoC filing of final Prospectus

Pricing & Allocation

Listing

Funds transferred to issuer

Preparation / Approvals Marketing and Estimation of Price Range Launch & Completion

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Execution Process Timeline

Activity

Preparation Phase

Due Diligence

Filing of Draft Document1

week

Sebi Observation

Finalization & filing of offer Document

Issue PeriodMin. 3 Days

Post Issue Activities 2 - 3 weeks

IPO Process - 23 weeks

2 weeks

4 - 5 weeks

4 - 8 weeks

2 - 3 weeks

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Thank You