INITIAL PUBLIC OFFERING

INTRODUCTIONThe first public offering of equity shares or convertible securities by a company, which is followed by the listing of a company’s shares on a stock exchange, is known as an ‘Initial Public Offering’. In other words, it refers to the first sale of a company’s common shares to investors on a public stock exchange, with an intention to raise new capital. The most important objective of an IPO is to raise capital for the company. It helps a company to tap a wide range of investors who would provide large volumes of capital to the company for future growth and development. A company going for an IPO stands to make a lot of money from the sale of its shares which it tries to anticipate how to use for further expansion and development. The company is not required to repay the capital and the new shareholders get a right to future profits distributed by the company.

There are mainly any of the two purposes behind an IPO

1. ESTABLISHING NEW BUSINESS2. EXPANSION OF EXISTING BUSINESS

Companies, new as well as old, can offer shares to the investors in the primary market. This kind of tapping the savings is called an IPO (Initial Public Offering). SEBI regulates the way in which the companies can make this offering.

PRINCIPAL STEPS IN AN IPOThe issue of securities to members of the public through a prospectus involves a fairly elaborate process, the principal steps of which are as follows.

1. The board of directors approves the proposal to raise capital from the public and authorises the managing director (or a board committee) to do all the tasks relating to the public issue.

2. The company convenes a meeting to seek the approval of shareholders and the share holders pass a special resolution under section 81(1A) of the Companies Act authorising the company to make the public issue.

3. The company appoints a merchant banker as the lead manager (LM) to the issue.

4. The LM carries out due diligence to check all relevant information, documents, and certificates for the issue.

5. The company, advised by the LM, appoints various intermediaries such as the registrar to the issue, the bankers to the issue, the printers, and advertiser.

6. The LM draws up the issue budget, keeping in mind the guidelines issued by the Ministry of Finance on issue expenses, and the company approves the same (The main components of the issue expenses are fees for LM, underwriters, registrar and bankers, brokerage, postage, stationery, issue marketing expenses, etc.)

7. The LM prepares the draft prospectus in consultation with management and seeks the approval of the board.

8. The LM files the draft prospectus, approved by the board, with SEBI for its observation along with a soft copy. SEBI places the same on its website for comments from the public.

9. The company makes listing application to all the stock exchanges where the shares are proposed to be listed along with copies of the draft prospectus. The draft prospectus is also hosted on the websites of the LM and the underwriters.

10. The company enters into a tripartite agreement with the registrar and all the depositories for providing the facility of offering the shares in a dematerialized mode.

11. If the issue is proposed to be underwritten (it is optional in a retail issue and mandatory in a book built issue to the extent of the net public offer), the LM makes underwriting arrangements.

12. Within 21 days, SEBI makes its observations on the draft prospectus. The stock exchanges also suggest changes, if any. The company carries out the modifications to the satisfaction of these authorities.

13. The company files the prospectus with the Registrar of Companies (ROC).

14. The LM and the company market the issue using a combination of press meetings, brokers‘ meetings, investors' meeting and so on.

15. The company releases a mandatory advertisement, called the 'announcement advertisement‘ 10 days prior to the opening of the issue. This has to conform to Form 2A, also called the

abridged prospectus.

16. The LM and the printer dispatch the application forms to all stock exchanges, SEBI, collection centres brokers, underwriters, and investor associations. Every application form is accompanied by the abridged prospectus.

17. The issue is kept open for a minimum of 3 days and a maximum of 21 days.

18. After the issue is closed, the basis of allotment is finalised by the stock exchange, LM, and the registrar, in conformity with certain SEBI- prescribed rules.

19. The LM ensures that the demat credit or dispatch of share certificates and refund orders to the allottees is completed within two working days after the basis of allotment is finalised and the shares are listed within 7 days of the finalisation of the basis of allotment.

PRICING OF AN IPOThe pricing of an IPO is a very critical aspect and has a direct impact on the success or failure of the IPO issue. There are many factors that need to be considered while pricing an IPO and an attempt should be made to reach an IPO price that is low enough to generate interest in the market and at the same time, it should be high enough to raise sufficient capital for the company. The process for determining an optimal price for the IPO involves the underwriters arranging share purchase commitments from leading institutional investors.

PROCESS

Once the final prospectus is printed and distributed to investors, company management meets with their investment bank to choose the final offering price and size. The investment bank tries to fix an appropriate price for the IPO depending upon the demand expected and the capital requirements of the company. The pricing of an IPO is a delicate balancing act as the investment firms try to strike a balance between the company and the investors. The lead underwriter has the responsibility to ensure smooth trading of the company’s stock. The underwriter is legally allowed to support the price of a newly issued stock by either buying them in the market or by selling them short.

UNDERPRICING AND OVERPRICING OF IPO’sUNDERPRICING:

The pricing of an IPO at less than its market value is referred to as ‘Underpricing’. In other words, it is the difference between the offer price and the price of the first trade. Historically, IPO’s have always been ‘underpriced’. Underpriced IPO helps to generate additional interest in the stock when it first becomes publicly traded. This might result in significant gains for investors who have been allocated shares at the offering price. However, underpricing also results in loss of significant amount of capital that could have been raised had the shares been offered at the higher price.

OVERPRICING

The pricing of an IPO at more than its market value is referred to as ‘Overpricing’. Even “overpricing” of shares is not as healthy option. If the stock is offered at a higher price than what the market is willing to pay, then it is likely to become difficult for the underwriters to fulfill their commitment to sell shares. Furthermore, even if the underwriters are successful in selling all the issued shares and the stock falls in value on the first day itself of trading, then it is likely to lose its marketability and hence, even more of its value.

BOOK BUILDING PROCESSBook Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery. It is a process used for marketing a public offer of equity shares of a company. It is a mechanism where, during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The process aims at tapping both wholesale and retail investors. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria.

The Process

• The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'.

• The Issuer specifies the number of securities to be issued and the price band for orders.

• The Issuer also appoints syndicate members with whom orders can be placed by the investors.

• Investors place their order with a syndicate member who inputs the orders into the 'electronic book'. This process is called 'bidding' and is similar to open auction.

• A Book should remain open for a minimum of 5 days.

• Bids cannot be entered less than the floor price.

• Bids can be revised by the bidder before the issue closes.

• On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation criteria which may include -

· Price Aggression

· Investor quality

· Earliness of bids, etc.

• The book runner the company concludes the final price at which it is willing to issue the stock and allocation of securities.

• Generally, the numbers of shares are fixed; the issue size gets frozen based on the price per share discovered through the book building process.

• Allocation of securities is made to the successful bidders.

• Book Building is a good concept and represents a capital market which is in the process of maturing.

How is the price fixed?

All the applications received till the last date are analysed and a final offer price, known as the cut-off price is arrived at. The final price is the equilibrium price or the highest price at which all the shares on offer can be sold smoothly. If your price is less than the final price, you will not get allotment. If your price is higher than the final price, the amount in excess of the final price is refunded if you get allotment. If you do not get allotment, you should get your full refund of your money in 15 days after the final allotment is made. If you do not get your money or allotment in a month's time, you can demand interest at 15 per cent per annum on the money due.

Documents Required

• A company coming out with a public issue has to come out with an Offer Document/ Prospectus.

• An offer document is the document that contains all the information you need about the company. It will tell you why the company is coming is out with a public issue, its financials and how the issue will be priced.

• The Draft Offer Document is the offer document in the draft stage. Any company making a public issue is required to file the draft offer document with the Securities and Exchange Board of India, the market regulator.

• If SEBI demands any changes, they have to be made. Once the changes are made, it is filed with the Registrar of Companies or the Stock Exchange. It must be filed with SEBI at least 21 days before the company files it with the RoC/ Stock Exchange. During this period, you can check it out on the SEBI Web site.

• Red Herring Prospectus is just like the above, except that it will have all the information as a draft offer document; it will, however, not have the details of the price or the number of shares being offered or the amount of issue. That is because the Red Herring Prospectus is used in book building issues only, where the details of the final price are known only after bidding is concluded.

Players

• Co-managers and advisors

• Underwriters

• Lead managers

• Bankers

• Brokers and principal brokers

• Registrars

• Stock exchanges.

What to look for before investing in an IPO1. Valuation: First thing to look at is how aggressively the IPO is

Priced. The more aggressively it is priced the lesser the chances of price appreciation.

2. Promoter’s Goodwill: the Promoter’s Goodwill is an important parameter in analyzing an IPO as a goodwill creates trust in taking decision for applying for an IPO.

3. Broker’s Report: Brokers can provide an investor with all the info he needs on the co. so an investor must take advice from his stock broker before applying for an IPO.

4. Ratings: SEBI has now made it mandatory for every co. to get its IPO rated through any approved rating agencies like CRISIL, ICRA etc. but remember that it does not provide guarantee of success.

THANK YOU pranit habil lakra

ravi prakash singh

shivam singh

vinita dubey

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rashmi sharma