The Initial Public Offering (IPO)

Definition:

A company’s first equity issue made available to the public.

This issue occurs when a privately held company decides to go public

Also called an “unseasoned new issue.” An "initial public offering" is a company's

first sale of stock to the public. This is why it is also referred to as "going public". When a company that has already issued stock issues more stock it is called a "secondary offering".

Why do companies go public?

New capital◦ Almost all companies go public primarily because

they need money to expand the business Future capital

◦ Once public, firms have greater and easier access to capital in the future

Mergers and acquisitions◦ Its easier for other companies to notice and

evaluate a public firm for potential synergies◦ IPOs are often used to finance acquisitions

Governing Laws – Before 1992, Public issues were governed by Chief

Controller of Capital Issues (CCCI). In 1992, CCCI has been abolished and SEBI has been

formed.

Dutch East India company was the 1st company in the world to issue stock and bonds IPO

Now IPO is governed by Followings:

1. The Companies Act 19562. SEBI (Disclosure & Investor Protection) Guidelines, 20003. Securities Contracts (Regulation) Act, 1956 4. Listing norms/Guidelines of NSE/BSE

HISTORY

REASONS FOR LISTINGWhen 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 itself with capital for future growth, repayment of debt and 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. This ability to quickly raise large amounts of capital from the market is a key reason many companies seek to go public.

Diversifying equity base Enabling 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.

BENEFITS

Significant legal, accounting and marketing costs

Disclosure of financial and business information

Meaningful time, effort and attention of management

Risk related to funding Regulations Dilution of control

DISADVANTAGE

Select an underwriter

Register IPO with SEC

Print prospectus

Present road show

Price the securities

Sell the securities

Procedure.

PRICINGGlobally IPO have been underpriced. Generate additional interest. Significant gains.

Overpricing of IPO. Underwriters may have trouble in making commitments. If stock falls, it lose its marketability

“LOW ENOUGH TO STIMULATE INTEREST IN THESTOCK, BUT HIGH ENOUGH TO RAISE AN

ADEQUATEAMOUNT OF CAPITAL FOR THE COMPANY”.

Agricultural Bank of China US$22.1 billion (2010)

Industrial and Commercial Bank of China US$21.9 billion (2006)

American International Assurance US$20.5 billion (2010)

Visa Inc. US$19.7 billion (2008) General Motors US$18.15 billion (2010) Facebook, Inc. US$16 billion (2012)

Largest IPO

US last topped the IPO league tables in 2008

overtook with China raising $73 billion

almost double the amount of money raised on the New York Stock Exchange and Nasdaq combined up to the end of November 2011.

SEBI GUIDELINES FOR IPO IPOs of small companies

Public issue of less than five crores has to be throughOTCEI and separate guidelines apply for floating

   Size of the Public Issue

Issue of shares to general public cannot be less than 25of the total issue, incase of information technology,media and telecommunication sectors this stipulation isreduced subject to the conditions that:

  Offer to the public is not less than 10% of the securitiesissued.A minimum number of 20 lakh securities is offered tothe public andSize of the net offer to the public is not less than Rs. 30crores.

Promoter Contribution Promoters should bring in their contribution including

premium fully before the issue

Minimum Promoters contribution is 20-25% of the public

issue.

Minimum Lock in period for promoters contribution is five

years

Minimum lock in period for firm allotments is three years.

  

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:-

the four metropolitan centres viz. Bombay, Delhi, Calcutta,

Madras; and

at all such centres where stock exchanges are located in the

region

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.

Minimum of 50% of the Net offer to the Public has to be reserved for Investors applying for less than 1000 shares.

Indian development financial institutions and Mutual Fund can be allotted securities upto 75% of the Issue Amount.

Allotment to categories of FIIs and NRIs is upto 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.

IPO GRADING

Graded from at least one CRARegistered with SEBI like

-CRISIL -FITCH -ICRA -CARE

TIMEFRAMES FOR THE ISSUE AND POST- ISSUE FORMALITIES

The min. period = 3 working days max.= 10 working days.

Allotment has to be made within 30 days of the 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.

RESTRICTIONS ON OTHER ALLOTMENTS: Firm allotments to mutual funds, FIIs and

employees not subject to any lock-in period. Within 12 months of the public no bonus

issue should be made. For Employees I ) Maximum % of shares = 5%

PROSPECTUS

ABRIDGED prospectus must be attached

Risk factor Objective of issue& cost of project Company’s past/ present business

must be disclosed

Other requirements

NET TANGIBLE ASSET ≥ 3 CRORES NET WORTH ≥ 1 CRORE In case of name change 50% of

revenue should be under new name

New IPO guidelines of SEBI The new guidelines of Applications

Supported by Blocked Amount (ASBA) allows investors to apply for an IPO, keeping the application money in their bank accounts till the finalization of the allotment.

All scrip will have a circuit limit from the day of listing on exchanges based on a one-hour pre-open trade

The normal trading would start after the pre-open session of call auction on BSE and NSE

In the pre-auction trade, for issues less than Rs 250 crore the margin money of 100 per cent of the order value would have to be paid for placing bids.

issue size up to Rs 250 crore, the applicable price bands for the first day would be 5 per cent of the equilibrium price discovered during the pre-open session and for IPOs above Rs 250 crore it will be 20 per cent.

equilibrium price is not discovered during the call auction, the price band would be fixed on the issue price at the above percentage.

Thank you…