issue management new

8/8/2019 Issue Management New

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Issue ManagementBy- Rahul Bansal

Taureq Walizada

Ayush Singhal

Vasvi Aren


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What Is a Public Issue?

When an issue/offer of securities is made to new

investors for becoming part of shareholdersfamily of the issuer it is called a public issue.

Public issue can be further classified into Initialpublic offer (IPO) and Further public offer

(FPO).


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Initial public offer (IPO):When an unlisted

company makes either a fresh issue of securitiesor offers its existing securities for sale or both forthe first time to the public, it is called an IPO.This paves way for listing and trading of the

issuers securities in the Stock Exchanges. Further public offer (FPO) or Follow on

offer:When an already listed company makeseither a fresh issue of securities to the public or

an offer for sale to the public, it is called a FPO.


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Classification of Companies

Companies have been classified as large cap

companies and small cap companies. A large capcompany is a company with a minimum issuesize of Rs. 10 crore and market capitalization ofnot less than Rs. 25 crore. A small cap company

is a company other than a large cap company.


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Preconditions for Issue of IPOs by

UnlistedCompaniesEntry Norm I (commonly known as Profitability Route)

First, it should have net tangible assets of at least Rs. 3 crore in eachof preceding 3fullyears of which not more than 50% in monetaryassets

Second, it has distributable profits in terms with Sec. 205 of the

Companies Act for at least 3 out of last 5 years through the ordinarycourse of business (i.e. not through extraordinary items) Third, networth ( paid-up equity capital + reserves- accumulated

losses- deferred expenditure) of minimum Rs. 1 crore in each ofpreceding 3 full years

Fourth, the issue size does not exceed 5 times the pre issue networth as per the audited balance sheet of the last financial year

Lastly, if name of co. changed within the last one year, at least 50%of the total revenue for preceding full year is earned by co. from theactivity said under the new name


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Satisfy All 5 conditions OR..

1.) Entry Norm II (Commonly known as QIBRoute)

Issue made through book building process withminimum 50% of net offer to public going to QIBs

OR..Entry Norm III (commonly known as AppraisalRoute) -At least 15% participation by banks/ financial

institutions + minimum 10% issue size allotted to QIBs.2.) Minimum post- issue face value of capital of the co.

would be Rs. 10 crore or a compulsory market makingfor at least 2 years from the date of listing of the sharessubject to conditions.


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Preconditions for public Issues byListed Companies1.) The issue size (i.e. offer through offer document +

firm allotment + promoters contribution through

the offer document) shall not exceed five times itspre-issue networth. )2.) If name of co. changed within the last one year, at

least 50% of the total revenue for preceding full yearis earned by co. from the activity said under the new

name. ORIssue made through book building process with sameconditions as applicable to unlisted companies.

(Also, after May 2006, another mode to raise fundsfrom domestic markets is through QIPs.)


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Issue Pricing The price at which a company's shares are offered initially in the primary

market is called as the Issue price. When they begin to be traded, themarket price may be above or below the issue price.

Who decides the price for the issue? Indian primary market ushered in an era of free pricing in 1992. Following

this, the guidelines have provided that the issuer in consultation withMerchant Banker shall decide the price. There is no price formulastipulated by SEBI. SEBI does not play any role in price fixation. Thecompany and merchant banker are however required to give full disclosuresof the parameters which they had considered while deciding the issue price.The Parameters include EPS, PE multiple, return on net worth andcomparison ofthese parameters with peer group companies.

There are two types of issues, one where company and Lead MerchantBanker fix a price (called fixed price) and other, where the company and theLead Manager (LM) stipulate a floor price or a price band and leave it tomarket forces to determine the final price (price discovery through bookbuilding process).


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Minimum Promoters contributionand Lock-in: In a public issue by an unlisted issuer, the promoters shall

contribute not less than 20% of the post issue capital whichshould be locked in for a period of 3 years. Lockin indicatesa freeze on the shares. The remaining pre issue capital shouldalso be locked in for a period of 1 year from the date of listing.

In case of public issue by a listed issuer [i.e. FPO], thepromoters shall contribute not less than 20% of the post issuecapital or 20% of the issue size.

In composite issues byListed companies, at the option of thepromoters, it should be 20% of the issue size or 20% of thepost issue capital, excluding the rights issue component.

In cases above, minimum promoters contribution is Rs.25000 per application from each individual and Rs. 1 lakhfrom firms and companies.


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The Book Building Process

Book Building is basically a process used in IPOsfor efficient price discovery. The issuer disclosesa price band or floor price before opening of theissue of the securities offered. On the basis of thedemands received at various price levels withinthe price band specified by the issuer, Book

Running Lead Manager (BRLM) in closeconsultation with the issuer arrives at a price at

which the security offered by the issuer, can beissued.


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What is a price band?

The prospectus may contain either the floor price for the securitiesor a price band within which the investors can bid. The price band isa band of price within which investors can bid. The spread between

the floor and the cap of the price band shall not be more than 20%.In other words, it means that the cap should not be more than 120%of the floor price. The price band can be revised. If revised, thebidding period shall be extended for a further period of three days,subject to the total bidding period not exceeding thirteen days.

What is Cut-Off Price?

In a Book building issue, the issuer is required to indicate either theprice band or a floor price in the prospectus. The actual discoveredissue price can be any price in the price band or any price above thefloor price. This issue price is called "Cut-OffPrice". The issuer andlead manager decides this after considering the book and theinvestors' appetite for the stock.


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How does Book Building Work?

Book building is a process of price discovery. A floorprice or price band within which the bids can move is

disclosed at least two working days before opening of theissue in case of an IPO and atleast one day beforeopening of the issue in case of an FPO. The applicants

bid for the shares quoting the price and the quantity thatthey would like to bid at. After the bidding process iscomplete, the cutoff price is arrived at based on the

demand of securities. The basis of Allotment is thenfinalized and allotment/refund is undertaken. The finalprospectus with all the details including the final issueprice and the issue size is filed with ROC, thuscompleting the issue process. Only the retail investorshave the option of bidding at cutoff.


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How does cut-off option works forinvestors? Cutoff option is available for only retail

individual investors i.e. investors who areapplying for securities worth up to Rs 1,00,000/

only. Such investors are required to tick thecutoff option which indicates their willingnessto subscribe to shares at any price discovered

within the price band. Unlike price bids (where aspecific price is indicated) which can be invalid,if price indicated by applicant is lower than theprice discovered, the cutoff bids always remain

valid for the purpose of allotment


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Can I change/revise my bid?

Yes, you can change or revise the quantity orprice in the bid using the form forchanging/revising the bid that is available along

with the application form. However, the entire

process of changing or revising the bids shall becompleted within the date of closure of the issue.

Can I cancel my Bid?

Yes, you can cancel your bid anytime before the

finalization of the basis of allotment byapproaching/ writing/ making an application tothe registrar to the issue.


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What is the main difference between offer of

shares through book building and normal publicissue?

Price at which securities will be allotted is notknown in case of offer of shares through Book

Building while in case of offer of shares throughnormal public issue, price is known in advance toinvestor. Under Book Building, investors bid forshares at the floor price or above and after theclosure of the book building process the price is

determined for allotment of shares.In case of Book Building, the demand can beknown everyday as the book is being built. But incase of the public issue the demand is known at theclose of the issue.


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Allotment to various investorcategories In case of Book Built issue 1. In case an issuer company makes an issue of 100% of the

net offer to public through 100% book building process

(a) Not less than 35% of the net offer to the public shall beavailable for allocation to retail individual investors;

(b) Not less than 15% of the net offer to the public shall beavailable for allocation to noninstitutional investors i.e.

investors other than retail individual investors and QualifiedInstitutional Buyers; (c) Not more than 50% of the net offer to the public shall be

available for allocation to Qualified Institutional Buyers:


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In case of fixed price issue The proportionate allotment of securities to the different

investor categories in an fixed price issue is as describedbelow: 1. A minimum 50% of the net offer of securities to the public

shall initially be made available for allotment to retailindividual investors, as the case may be.

2. The balance net offer of securities to the public shall be

made available for allotment to: a. Individual applicants other than retail individual investors,and

b. Other investors including corporate bodies/ institutionsirrespective of the number of securities applied for.


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Preferential Allotment

To any select group of individuals is guided by Sec.81(IA) of the Companies Act, 1956.

The issue of shares on a preferential basis cannot bedone at a price less than the higher of the following two-Average of the weekly high and low of the closing pricesof shares quoted on the stock exchange during-

(1) six months prior to the cut-off date of 30 days before

the meeting of shareholders to discuss the proposedissue.

OR(2) Two weeks prior to the cut-off date


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Private Placement

It is the sale of securities to a relatively small number ofselect investors as a way of raising capital. Investors

involved in private placements are usually large banks,mutual funds, insurance companies and pension funds.Private placement is the opposite of a public issue, in

which securities are made available for sale on the openmarket.

Since a private placement is offered to a few, select

individuals, the placement does not have to be registeredwith SEBI. In many cases, detailed financial informationis not disclosed and a the need for a prospectus is

waived. Finally, since the placements are private ratherthan public, the average investor is only made aware ofthe placement after it has occurred.


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Qualified Institutional Placement

A designation of a securities issue given by the SEBI thatallows an Indian-listed company to raise capital from itsdomestic markets, introduced on May 8, 2006.

Apart from preferential allotment, this is the only otherspeedy method of private placement for companies to raisemoney. It scores over other methods, as it does not involvemany of the common procedural requirements, such as thesubmission of pre-issue filings to the market regulator.

The Why?- This was also done to prevent listed companies inIndia from developing an excessive dependence on foreigncapital. Prior to introduction of QIPs, the complicationsassociated with raising capital in the domestic markets hadled many companies to look at tapping overseas markets viaforeign currency convertible bonds (FCCB) and globaldepository receipts (GDR).


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A Greeenshoe Option

A greenshoe is a clause contained in the underwritingagreement of an initial public offering (IPO) thatallows underwriters to sell or buy up to an additional 15% ofcompany shares at the offering price. This would normally be

done if the demand for a security issue proves higher thanexpected. Legally referred to as an over-allotment option.A greenshoe option can provide additional price stability to asecurity issue because the underwriter has the ability toincrease supply and smooth out price fluctuations if demandsurges.

For example, if a company decides to publicly sell 1 millionshares, the underwriters (or "stabilizers") can exercise theirgreenshoe option and sell 1.15 million shares. When theshares are priced and can be publicly traded, the underwriterscan buy back 15% of the shares. This enables underwriters tostabilize fluctuating share prices by increasing or decreasingthe supply of shares according to initial public demand.

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