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INITIAL PUBLIC OFFERING
CHAPTER 1 Introduction
Every company needs funds for its business. Funds requirement can be for short term or for long term. To meet short-term requirements, the company may approach banks, lenders & may even accept fixed deposits from public/shareholders. To meet its long term requirements, funds can be raised either through loan from lenders, Banks, Institutions etc., (which carry financial burden) or through issue of capital. Capital can be raised through private placement of shares, public issue, rights issue, etc. Public Issue means raising funds from public. Promoters of the company may have plans for the company, which may require infusion of money. The main purpose of the public issue, amongst others, is to raise money through public and get its shares listed at any of the recognized stock exchanges in India.
Advantages of Public Issue are:
Money non-refundable except in the case of winding up or buy back of shares.
No financial burden i.e. no fixed rate of interest payable. However, in order to service the equity, dividend may be paid.
Enhances shareholder's value if the company performs well Greater Transferability. Trading & Listing of securities at stock exchanges.

Better Liquidity of securities. Helps building reputation of promoters, company & its products / services, provided the company performs well.
Public Issues have disadvantages too. Some of the main ones are:
Time consuming process Expensive Several Legal formalities. Involvement of many intermediaries Transparency Requirements and public disclosure of information may lead to lack of privacy
Continuous Compliance of provisions of listing agreement and other legal requirements
Constant scrutiny of performance by investors May lead to takeover of the company Securities of the company may be made subjective to speculative attacks.
Applicable Laws A company is required to comply with the following laws in connection with a public issue:
Provisions of Companies Act, 1956 Securities Contracts (Regulations) Act, 1956 SEBI DIP Guidelines, 2000 (as amended up to date)

SEBI rules & regulations Compliance of Listing Agreement with the concerned stock exchanges after the listing of securities.
RBI regulations in case of foreign/NRI equity participation.
Applicability criteria for issuing securities under SEBI DIP Guidelines are: (a) The company has net tangible assets of at least Rs.3 crores in each of the preceding 3 full years (of 12 months each), of which not more than 50% is held in monetary assets: Provided that if more than 50% of the net tangible assets are held in Monetary assets, the company has made firm commitments to deploy such excess monetary assets in its business/project; (b) The company has a track record of distributable profits in terms of Section 205 of the Companies Act, 1956, for at least three (3) out of immediately Preceding five (5) years; Provided further that extraordinary items shall not be considered for calculating distributable profits in terms of Section 205 of Companies Act, 1956; (c) The company has a net worth of at least Rs.1crore in each of the Preceding 3 full years (of 12 months each); (d) In case the company has changed its name within the last one year, At least 50% of the revenue for the preceding 1 full year is earned by the Company from the activity suggested by the new name; and

(e) The aggregate of the proposed issue and all previous issues made in the same financial year in terms of size (i.e., offer through offer document + firm allotment + promoters contribution through the offer document), does not exceed five (5) times its pre-issue networth as per the audited balance sheet of the last financial year.) 2.2.2 15(An unlisted company not complying with any of the conditions specified in Clause 2.2.1 may make an initial public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date, only if it meets both the conditions (a) and (b) given below: (a) (i) The issue is made through the book-building process, with at least 50% of the issue size being allotted to the Qualified Institutional Buyers (QIBs), failing which the full subscription money shall be refunded. OR (a) (ii) The project has at least 15% participation by Financial Institutions/ Scheduled Commercial Banks, of which at least 10% comes from the appraiser(s). In addition to this, at least 10% of the issue size shall be allotted to QIBs, failing which the full subscription monies shall be refunded & (b) (i) The minimum post-issue face value capital of the company shall be Rs.10 crores. OR (b) (ii) There shall be a compulsory market-making for at least 2 years from the date of listing of the shares, subject to the following:

(a) Market makers undertake to offer buy and sell quotes for a minimum depth of 300 shares; (b) Market makers undertake to ensure that the bid-ask spread (difference between quotations for sale and purchase) for their quotes shall not at any time exceed 10%: (c) The inventory of the market makers on each of such stock exchanges, as on the date of allotment of securities, shall be at least 5% of the proposed issue of the company.) 2.2.2A An unlisted public company shall not make an allotment pursuant to a public issue or offer for sale of equity shares or any security convertible into equity shares unless, in addition to satisfying the conditions mentioned in Clause 2.2.1 or 2.2.2 as the case may be, the prospective allottees are not less than one thousand (1000) in number.
CHAPTER 2 Process For Bringing An Initial Public Offering

Step 1. Stock Exchange Approval
The first step in the direction of management of capital issues is the approval of the stock exchanges to the memorandum and articles of association of the issuer where it desires to be enlisted. The basic purpose to be served by obtaining stock exchange approvals to memorandum and articles of association is that the restriction which are put on the transferability of shares of the private limited or closely-held public limited companies are sought to be removed in the wider interest of the investors and the general public, the ceilings put on the number of members are removed, curb placed on invitation being extended to the public for subscription to shares and debentures in the company are deleted . Generally the scrutinizes of articles are made keeping in view the following points: 1. The company shall use common form of transfer of share. 2. Fully paid up shares shall be free from all lien, and in the case of partly paid shares, the companys lien is restricted to money called or payable at a fixed time in respect of such shares. 3. Registration of transfer of shares shall not be refused on the grounds of the transfer being either along or jointly with any another persons indebted to the company on any account, whatsoever.

4. That any refusal of transfer shall be communicated to the transferee within one month from the date on which the transfers have been lodged. 5. That any amount paid up in advance of calls on any shares, may carry interest but shall not in receipt thereof have a right to dividend or to participate in profits. 6. That article contains no provision that restricts free dealings. 7. That there shall be no forfeiture of unclaimed dividend before the claim becomes barred by law. 8. Standard Denomination for the new issues to be followed i.e. new equity shares to be issued should be Rs.10 each and that of new preference shares and non convertible debentures/bond should be Rs.100 each. 9. To ensure compliance of any other requirement placed by SEBI .
Principal consideration for equity issue The principal considerations,

which should be followed in managing issue by merchant bankers are based on guidelines, which were earlier in vogue before the release of SEBI guidelines. The following consideration do not find any reference in SEBI guidelines but merchant bankers should keep them in view while planning a public issue are noted below: 1. Adequacy of capital capital being raised by public issue should be adequate to meet the requirements of the funds to finance the project in a balanced manner over-capitalisation and under-capitalisation could be avoided.

2. Balanced capital structures A proper mix of equity, preference and loan capital in the capital structure is desired keeping in view the nature of industry. Highly capitals intensive industries require higher proportion of debt capital whereas lower intensive industry with lower proportion of debt capital in capital structure. 3. Debt-equity ratio Preferred debt equity ratio is between 1.5:1 to 2:1 i.e. debt exceeds one and half or twice the equity only. 4. Preference-equity ratios A company qualifies for exemption if the preference-equity ratio does not exceed 1:3. Higher ratios up to 2:5 are allowed where justification exists.
Step 2. Fresh Issue of Equity Shares

First Issue of New Companies
New Companies Defined SEBI has defined new company, which has the following
characteristics: It has not completed 12 months of commercial operations, Its audited operative results are not available, It has been set-up by entrepreneurs without a track record, It has been set-up by existing companies having five-year track record of consistent profitability. Existing company includes existing
private/unlisted closely held/listed companies. Track Record Defined For verifying the track record of consistent profitability SEBI has clarified that it is to be construed as distinct from continuous Profitability. The promoting companies should have shown profits in their respective audited profits and loss accounts after providing for interest, tax and depreciation in 5 out of preceding 7 with profit during the last 2 years prior to the issue. In case the new company is promoted by more than one existing companies than each of them should fulfill the criteria of five years track record of consistent profitability as explained above. In case the new company is promoted by (i) existing private sector companies and (ii) a state level agency or Government Company or a

foreign collaborator, then it will be sufficient to satisfy the above condition if the private sector company proves a five year track record. Minimum Offer Not less than 20% of the equity (issued capital) should be offer to the public. This would mean that the reservations preferential allotment would be adjusted within the balance 80% of the issue capital. Draft prospectus to be vetted by SEBI Draft prospectus containing the disclosers to ensure adequacy of disclosers will be vetted by SEBI before the public issue is made. Justification for Pricing of the Issue The pricing would be determined by the issuer and the lead managers to the issue and would be subject to specific discloser requirement including: (a) discloser of the net asset value of the company as per the last audited balance sheet, (b) justification of the issue price The intention behind the above requirements is that the company and the lead managers would justify the fixation of premium on the eligible issues as per the forgone discussion.
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Step 3. Firming up the Appointment

Appointment of a Merchant Banker
The merchant banker should write to the client company firming up the appointment as lead merchant banker/lead manager to the proposed issue. After checking the compliance of the company with SEBI guidelines the proposal of the company is accepted by the merchant banker. This acceptance is in the form of a simple letter. Mandate is an acknowledgement from the issuing company that the company for a particular issue has appointed a particular merchant banker. It is a kind of promissory note making the issuing company liable to pay to the merchant banker the specified amount. Board resolution It is also necessary to have the authority of the board of directors of the company for the appointment of merchant bankers. The company may do so by passing a resolution in the board meeting. Appointment of Underwriters to the Issue Underwriters may be selected out of the financial institutions, SEBI registered merchant bankers, bankers or members of recognized stock exchanges all registered with SEBI who agree to take
upshares/debentures specified in the underwriting agreement if the public or other persons fail to subscribe for them. Consideration for this contract takes the form of payment of commission whether or not the underwriters are called upon to take up any shares. Underwriters are
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paid for the risk they expose themselves to in the placing of shares before the public. Appointment of Bankers to the Issue The appointment of bankers to the issue is made by the company with the help of the merchant bankers, managing the issue, from the empanelled banks which may be either companys own bankers providing working capital credit or managing the issue through its Merchant Banking Division, or banks which agree to provide underwriting support for the issue or other bankers which are efficient in handling the work of public issue having recorded appreciation by investors. The important aspects in selection of bankers to the issue to be borne in mind are: the bank should have a net work of branches in the area in which it seeks to take the responsibility to act as a lead collecting bank. The branch managers and other staff of the bank of the collecting centers should be trained so as to handle the collections of money and applications efficiently. Such bank should be well connected with means of effective communications so as to inform the registrar to the issue/managers or the company on day-today basis of the latest collection figures. Appointment of Printers Merchant bankers responsibility extends to ensure the printing and issue of prospectus application forms, brochure and other stationery. Merchant bankers maintain list of approved printers and on their recommendations the company appoints printers after getting tenders or ascertaining their charges and cost of printing involved. 12

The printers prints the ordered number of copies of prospectus, application form, brochure and posters or other required stationery and arrange to distribute within the scheduled time period the stationery to underwriters, brokers, stock exchanges, managers and financial institutions or investment organizations participating in the public issue. Before making appointment, managers should analyse the rates of the printers and then appoint the one with least cost and attractive service package. Appointment of Advertising Agency Merchant bankers do maintain a list of advertising agencies experienced and reputed in the publicity of the public issues and the company appoints the advertising agency on the recommendations of the managers. The main activities which advertising agency undertake in this regard include campaign about the image of the company and its product, popularize the issue and publish advertisement and statutory announcements in selected newspapers. Advertising agency also designs the prospectus, write-ups, application forms, brochures, press folders, etc. Advertising agency also makes arrangements for press conference, brokers conference and investors conference at different centers where the publicity campaign is planned to elicit investors response through press reports and brokers conviction about the issue. Registrar to an Issue The registrar to an issue mean to the person appointed by a body corporate or any person or group of persons to carry on the following 13

activities on its or their behalf namely: (i) collecting applications from investors in respect of an issue; (ii) keeping a proper record of applications and monies received from investors or paid to the sellers of the securities; and (iii) assisting body corporate or person or group of persons in: (a) determining the basis of allotment of securities in consultation with the stock exchange; (b) finalizing the list of persons entitled to allotment of securities; (c) processing and dispatching of letters, refund orders or certificates or other related documents in respect of the issue. Appointment of other Agencies The Merchant Banks may also advise the company that in additions to the above agencies it may also appoint the following persons involved in the public issue: Auditors of the company; Solicitors/Advocate as legal advisors to the public issue/issue of prospectus. Board base of the Board of Directors so as to appoint or nominate prominent parties in India or abroad on its Board.
Step 4. Drafting of Prospectus

CONTENTS OF OFFER DOCUMENT
I. Cover Pages
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(i) Issue Details:
(a) Logo, name, previous name, if any, address, telephone number, fax number, contact person, website address and e-mail address of the issuer company. (b) Nature, number, price and amount of instruments offered and issue size, as may be applicable. (c) Risks in relation to first issue. (d) General risk regarding investments in equity. (e) Issuer's Absolute Responsibility clause. (f) Logo, names and addresses of all the Lead Merchant Bankers with their titles who file the prospectus with the Board, along with their telephone numbers, fax numbers, website addresses and e-mail addresses. (g) Logo, names of the Registrar to the Issue, along with its telephone number, fax number, website address and e-mail address. (h) Issue Schedule. (i) Credit Rating, if applicable. (j) Names of the Stock Exchanges where listing is proposed along with details of in-principle approval.
II. Table of Contents

To include all the main heads.
III. Definitions and Abbreviations

1. Conventional/ General terms. 2. Offering-related Terms. 3. Company/ Industry-related Terms. 4. Abbreviations.
IV. Risk Factors

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1. Forward-looking Statements and Market Data, if any (to be disclosed on voluntary basis). 2. Risk Factors: (i) Risks envisaged by Management. (ii) Proposals, if any, to address the risks. (iii) Notes to the risk factors.
V. Introduction
1. Summary:
(i) Summary of the industry and business of the issuer company. (ii) Offering details in brief. (iii) Summary Consolidated Financial, Operating and Other Data.
2. General Information:
(i) Name, address of registered office and the registration number of the issuer company, along with the address of the Registrar of Companies where the issuer company is registered. (ii) Board of Directors of the issuer company. (iii) Brief details of the Chairman, Managing Director, Whole Time Director, etc. (iv) Names, addresses, telephone numbers, fax numbers and e-mail addresses of the Company Secretary, Legal Advisor and Bankers to the Company. (v) Name, address, telephone number, fax number and e-mail address of the Compliance Officer. (vi) Names, addresses, telephone numbers, fax numbers, contact person, website addresses and e-mail addresses of the Merchant Bankers, CoManagers, Registrars to the Issue, Bankers to the Issue, Brokers to the Issue, Syndicate members, etc.
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(vii) Names, addresses, telephone numbers, fax numbers and e-mail addresses of the auditors of the issuer company. (viii) Statement of interse allocation of responsibilities among Lead Managers. (ix) Credit Rating (in case of debenture issue). (x) Names, addresses, telephone numbers, fax numbers, website addresses and e-mail addresses of the trustees under debenture trust deed (in case of debenture issue). (xi) Name of the monitoring agency, if applicable. (xii) Where the project is being appraised, name, address, telephone number and e-mail address of the appraising entity. (xiii) Book Building Process in brief. (xiv) Details of Underwriting, if any.
3. Capital Structure:
(i) Capital structure. (ii) Classes of shares, if applicable. (iii) Notes to capital structure.
4. Objects of the Offering:

(i) Funds Requirement. (ii) Funding Plan (Means of Finance). (iii) Appraisal. (iv) Schedule of Implementation. (v) Funds Deployed. (vi) Sources of Financing of Funds already deployed. (vii) Details of Balance Fund Requirement. (viii) Interim Use of Funds. (ix) Basic Terms of Issue.
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(x) Basis for issue price. (xi) Tax Benefits.
VI. About the Issuer Company

1. Industry overview 2. Business overview.
(i) Details of the Business of the Issuer Company:

(a) Location of the project. (b) Plant, machinery, technology, process, etc. (c) Collaborations, any performance guarantee or assistance in marketing by the collaborators. (d) Infrastructure facilities for raw materials and utilities like water, electricity, etc. (e) Products/ services of the company.
(ii) Business Strategy:

(a) Brief statement about business strategy. (b) Brief statement about future prospects, including capacity & capacity utilization and projections.
(iii) Competitive Strengths (to be disclosed on a voluntary basis). (iv) Insurance (to be disclosed on a voluntary basis).
(v) Property.
(vi) Purchase of Property.

3. Key Industry-Regulation (if applicable). 4. History and Corporate Structure of the issuer company:
(i) History and Major Events. (ii) Main objects.
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(iii) Subsidiaries of the issuer company, if any and their businesses. (iv) Shareholders agreements. (v) Other agreements. (vi) Strategic partners. (vii) Financial partners.
5. Management:
(i) Board of Directors. (ii) Compensation of Managing Directors/ Whole time Directors. (iii) Compliance with Corporate Governance requirements. (iv) Shareholding of Directors, including details of qualification shares held by them. (v) Interest of the Directors. (vi) Change, if any, in the directors in last three years and reasons thereof, wherever applicable. (vii) Management Organisation Structure. (viii) Details regarding Key Management Personnel. (ix) Employees. (x) Disclosures regarding employees stock option scheme/ employees stock purchase scheme of the issuer company, if any, as required by the Guidelines or Regulations of the Board relating to Employee Stock Option Scheme and Employee Stock Purchase Scheme. (xi) Payment or Benefit to Officers of the Company (non-salary related).
6.Promoters/ Principal Shareholders:

(i) Details about promoters who are individuals. (ii) Details about promoters which are companies. (iii) Common pursuits.
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(iv) Interest of promoters. (v) Payment or benefit to promoters of the issuer company. (vi) Related party transactions as per the Financial Statements. 7. Exchange rates (to be disclosed on voluntary basis). 8. Currency of presentation. 9. Dividend policy.
VII. Financial Statements

1. Selected Consolidated Financial and Operating data. 2. Financial information of the issuer company. 3. Financial information of group companies. 4. Changes in Accounting Policies in the last three years. 5. Managements Discussion and Analysis of Financial Condition and Results of Operations as Reflected in the Financial Statements: (i) Overview of the business of the issuer company. (ii) Significant developments subsequent to the last financial year. (iii) Factors that may affect Results of the Operations. (iv) Discussion on Results of Operations. (v) Comparison of recent financial year with the previous financial years (last three years) on the major heads of the Profit & Los Statement. (vi) Liquidity and Capital Resources (to be disclosed on voluntary basis). (vii) Capital Expenditure (to be disclosed on voluntary basis). (viii) Foreign Exchange Risk (to be disclosed on voluntary basis). (ix) Interest rate Risk (to be disclosed on voluntary basis). (x) Recent accounting pronouncements (to be disclosed on voluntary basis).
VIII Legal & Other Information
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1. Outstanding litigations and Material Developments (i) Outstanding litigations involving the issuer company. (ii) Outstanding litigations against the issuer companys subsidiaries (if applicable). (iii) Outstanding litigations involving the promoter and group companies. (iv) Material developments since the last balance sheet date. 2. Government approvals/ Licensing Arrangements: (i) Investment approvals (FIPB/ RBI, etc.). (ii) All government and other approvals. (iii) Technical approvals. (iv) Letter of intent/ industrial license and declaration of the Central Government/ RBI about non-responsibility for financial soundness or correctness of statements.
IX. Other Regulatory and Statutory Disclosures

1. Authority for the issue and details of the resolution passed for the issue. 2. Prohibition by SEBI. 3. Eligibility of the Issuer Company to enter the Capital market. 4. Disclaimer clause. 5. Caution. 6. Disclaimer in respect of jurisdiction. 7. Disclaimer clause of the stock Exchanges. 8. Disclaimer clause of the Reserve Bank of India (if applicable). 9. Filing of prospectus with the Board and the Registrar of Companies. 10. Listing. 11. Impersonation.
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12. Consents. 13. Expert opinion obtained, if any. 14. Expenses of the issue. 15. Details of fees payable . 16. Underwriting commission, brokerage and selling commission. 17. Previous rights and public issues if any (during the last five years). 18. Previous issues of shares otherwise than for cash. 19. Commission and brokerage on previous issues. 20. Particulars in regard to the issuer company and other listed companies under the same management within the meaning section 370 (1)(B) of the Companies Act, 1956 which made any capital issue during the last three years. 21. Promise vis --vis performance. 22. Outstanding debentures or bonds and redeemable preference shares and other instruments issued by the issuer company outstanding as on the date of prospectus and terms of issue. 23. Stock market data for equity Shares of the issuer company, if listed. 24. Mechanism evolved for redressal of investor grievances. 25. Change, if any, in the auditors during the last three years, and reasons, thereof. 26. Capitalization of reserves or profits (during last five years). 27. Revaluation of assets, if any (during last five years).
X. Offering Information
1. Terms of the issue: (i) Ranking of equity shares. (ii) Mode of payment of dividend.
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(iii) Face value and issue price/ floor price/ price band. (iv) Rights of the equity shareholder. (v) Market lot. (vi) Nomination facility to investor. (vii) Minimum subscription. (viii) Arrangements for Disposal of Odd Lots. (ix) Restrictions, if any, on transfer and transmission of shares/ debentures and on their consolidation/ splitting. 2. Issue procedure: (i) Fixed price issue or book building procedure as may be applicable, including details regarding bid form / application form, who can bid/apply, maximum and minimum bid/application size, bidding process, bidding, bids at different price levels, etc. (ii) Option to subscribe in the issue. (iii) How to apply - availability of forms, prospectus and mode of payment. (iv) Escrow mechanism: (a) Escrow A/c. of the company. (b) Escrow A/c. of the syndicate member. (v) Terms of payment and payment into the Escrow Collection Account. (vi) Electronic registration of bids. (vii) Build up of the book and revision of bids. (viii) Price discovery and allocation. (ix) Signing of underwriting agreement. (x) Filing of prospectus with the Registrar of Companies. (xi) Announcement of pre-issue Advertisement.
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(xii) Issuance of Confirmation of Allocation note (CAN) and Allotment in the Issue. (xiii) Designated date. (xiv) General instructions: (a) Dos. (b) Donts. (c) Instructions for completing the Bid form. (d) Bidders bank details. (e) Bids by NRIs or FIIs on a repatriation basis. (xv) Payment instructions: (a) Payment into escrow account of the Issuer Company. (b) Payment into escrow account of the Syndicate member. (xvi) Submission of bid form. (xvii) Other instructions: (a) Joint bids in the case of individuals. (b) Multiple bids. (c) Pan or GIR number. (d) Companys right to reject bids. (e) Equity shares in demat form with NSDL or CDSL. (f) Investors attention invited to contact the compliance officer in case of any pre -issue/ post-issue related problems. (xviii) Disposal of application and Application moneys. (xix) Provisions of sub-section (1) of section 68A of the Companies Act, 1956 relating to punishment for fictitious applications. (xx) Interest on refund of excess bid amount. (xxi) Basis of allotment or allocation.
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(xxii) Procedure and time of schedule for allotment and issue of certificates. (xxiii) Method of proportionate allotment. (xxiv) Letters of allotment or refund orders. (xxv) Despatch of refund orders. (xxvi) Interest in Case of Delay in Despatch of Allotment Letters/ Refund Orders in Case of Public Issues. (xxvii) Undertaking by the company. (xxviii) Utilisation of Issue Proceeds. (xxix) Restrictions on foreign ownership of Indian securities, if any. (a) Investment by NRIs . (b) Investment by FIIs.
XI. Description of Equity Shares and Terms of the Articles of Association

1. Rights of members regarding voting, dividend, lien on shares and the process for modification of such rights and forfeiture of shares. 2. Main provisions of the Articles of Association.
Step 5. SEBI Clearance to Prospectus

A company cannot come out with public issue unless draft prospectus is filed with SEBI. A company cannot file prospectus directly with SEBI. It has to be filed through a merchant banker. After the preparation of prospectus, the merchant banker along with the due diligence certificates and other compliances sends the same to SEBI for vetting.
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SEBI on receiving the same, scrutinizes it and may suggest changes within 21 days of receipt of prospectus. (Earlier, the situation was that the company was required to obtain Acknowledgement Card from SEBI). However, now the concept of obtaining acknowledgement card has been removed and the company can come out with a public issue any time within 365 days from the date of the letter from SEBI or if no letter is received from SEBI, within 365 days from the date of expiry of 21 days of submission of prospectus with SEBI. If the issue size is upto Rs. 20 crores then the merchant bankers are required to file prospectus with the regional office of SEBI falling under the jurisdiction in which registered office of the company is situated. If the issue size is more than Rs. 20 crores, merchant bankers are required to file prospectus at SEBI, Mumbai office. Prospectus is also required to be filed with the concerned stock exchanges along with the application for listing its securities. Presently, companies approaching the stock exchange for public issues should obtain in-principal approval from such stock exchanges. Alongwith draft prospectus due diligence certificate to be furnished. Certify that all the amendments suggested/observations made by SEBI have been given effect to in the prospectus. Furnish a fresh due diligence certificate at the time of filing the prospectus with the Registrar of Companies. Furnish a fresh certificate immediately before the opening of the issue that no corrective action is needed. Furnish a fresh final compliance certificate before the issue is closed for subscription. 26
Step 6. Action to be taken by the Company

Board of directors meetings Once prospectus has been approved by all the concerned parties and all formalities for filing the prospectus have been complied with as per the activity schedule, for pre-issue programme, the manager to the issue may advice the client company to call the meeting of the Board of Directors with the agenda including, inter alias, the following business:-
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To appoint the different agencies viz. bankers to the issue, registrar, solicitor or advocated and accept their consent. To accept and approve underwriting arrangements. To date and sign the prospectus and authorize the secretary/director of the company to file it with Registrar of Companies and empower the attorney to make such corrections as may be required by the Registrar of Companies. To pass resolution to submit applications for listing with stock exchanges. To give authority to one of the directors for closing the subscription earlier if the issue is over-subscribed. The prospectus complete in all respects, with enclosures and certificates by the advocate that the prospectus is in conformity with the Directors and is approved by passing the requisite resolutions in the draft from provided hereunder and signed by all the directors with the exception that the person holding special power of attorney to the absentee directors will sign it. Specimen of special and general power of attorney is given below.
Making application to stock exchange(s) for permission to listingSection 73 of the Companies Act, 1956 requires companies intending to offer shares or debentures to the public for subscription by issue of prospectus, to make application to one or more recognized Stock Exchanges for permission for the shares or debentures intended to be so offered to be dealt with in the stock exchange or each such stock exchange. Therefore, a company seeking enlistments of its securities should submit an application to the stock exchange before filing the prospectus with the Registrar of the Companies. The fact that an application(s) has/have made to the stock exchange(s) must 28

be stated in the prospectus vide clause 1(c) in Part I of Schedule II to the Companies Act. Filing prospectus with Registrar of Companies- The prospectus is thus signed and dated and filed in the office of Registrar of Companies with requisite fee Rs.100. The prospectus is filed with the Registrar of Companies in the state where Registered office of the company is located on the same day of the Board meeting or the next day. One copy of the prospectus duly signed by directors with two additional copies along with original consent, auditors report, certified copies of all other material contracts and documents for inspection mentioned in the prospectus, original power of attorney and demand draft are filed with the Registrar of Companies. Forwarding copy of the prospectus to SEBI- The acknowledgement card issued by SEBI having vetted the offer documents remaining valid for three months. However, according to SEBI Clarification VIII the concerned lead managers and the issuers company are free to resubmit the offer documents even if SEBI has issued the acknowledgement card after vetting the offer documents or where the offer documents are pending with SEBI for vetting. Appointment of underwriters/brokers by the boardAll the
underwriters/brokers are informed of their appointment by the Board. A specimen of the letter addressed by the company to the underwriters/brokers is appended below. Nine copies of the prospectus in each page are signed. The prospectus is generally printed before filing with the Registrar of Companies and printed copy is filed. Printers are aware of this requirement and co-operate and guide the company executives. Once acknowledgment of
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filing of prospectus is obtained from Registrar of Companies the printers execute the order of printing the prospectus. Specimen board resolutions (i) Resolution to be passed in the meeting of Board of Directors approving appointments of various agencies: Resolved that the appointment of Brokers, Underwriters, Managers, Solicitors, Principal Brokers, Registrars, Auditors and Advisors to the Equity Share Issue as detailed in the draft prospectus be and is hereby approved, confirmed and ratified. (ii) Resolution to be passed in the Board meeting of the company towards utilization of issued capital. Resolved that the amount of share capital proposed to be raised from the public would be utilized by the company explicitly for the purposes of business of construction, manufacture or production of an article or thing not being an article or thing specified in the Eleventh Schedule of the Income-tax Act, 1961.
Ensuring completion of all formalities by the company Check-lists- To ensure compliance of all formalities, the merchant bankers should give the following check-list to the company for striking the action taken and work pending. Check-list of all government approvals and consents from various agencies Stock exchange approval of memorandum and articles of association. Government approval for relaxation under rule 19(2)(b) of Securities Contracts (Regulation) Rules through stock exchange. 30

RBI approval under FERA for the schemes of
modernization/diversification/business plan. Special resolution under section 81 of the Companies Act for authorizing the public issue. Resolutions under sections 293(1)(a) and 293(1)(d) for debentures and creating security. Board resolutions for approval of all appointments. Board resolutions for appointment of trustees (for debentures issue). Industrial license, letter of intent for schemes. Capital goods clearance, import licenses for the schemes. Approval for draft prospectus by auditors, legal advisers, underwriters, financial institutions, stock exchange, Registrar of Companies and holding company, if any. Consents of auditors including consent for incorporating their report. Consents of managers to the issue. Consents of advisers to the issue. Consents of legal advisers, solicitors. Consents of registrar to the issue. Consents of trustees for the debenture holders. Consents of bankers to the company. Consents of bankers to the issue. Consents of brokers to the issue. Consents of underwriters to the issue.
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Specific approval of auditors certifying the information on the tax benefits as incorporated in the prospectus. Auditors report. Power of attorney authorizing the secretary to make corrections and to sign the prospectus, on behalf of the directors. Board resolutions for accepting underwriting commitments. Resolution approving the draft and signing of prospectus. Preparation of abridged prospectus for statutory announcements in the newspapers. Finalization of quantity of stationery and distribution schedule with printer. Check-list of documents to be filed with the Registrar of Companies along with prospectus Acknowledgement Card from SEBI. Stock Exchange approval under rule 19(2)(b) of Securities Contracts (Regulation) Rules. Consent letter from managers to the issue. Consent letter of registrars to the issue. Consent (to act in their respective capacities) (a) Solicitors. (b) Auditors. (c) Bankers to the company. (d) Bankers to the issue. (e) Managers to the issue. (f) Advisors to the issue. 32

(g) Registrars to the issue. (h) Brokers to the issue. Underwriting agreements. Brokers agreements. Brokers agreements, others. Certificate of incorporation. Memorandum and Articles of Association. New certificate of incorporation. Industrial license. Resolution passed under section o 81(1A) o 293(1)(a). o 293(1)(d). For appointment of Joint Managing Director and Managing Director and Executive Director. Sanction letters in respect of loan from: State level financial institutions, All-India financial institutions, Banks. Auditors certificates: Certificate of commencement of business if applicable, Tax benefits. NOC for water environmental pollution. Annual report for the years ending (latest). Sanction letter from Electricity Board. Copies of Power of Attorney. Auditors Report.
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Material contracts (all). Collaboration agent; purchase agent. Reserve Bank if India approval for non-resident Indian investment. 100% export legal documents. Text of board resolution prior to filing. Draft prospectus to be signed by Directors or by one. Director on behalf of all other based on Power of Attorney. Other Documents Board Resolution approving prospectus. Board Resolution for opening the account. Once the above formalities are completed the prospectus may be filed with Registrar of Companies the same day or next day of the Board meeting held by the company.
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Step 7. Printing and Dispatch of Issue Material

Issue material On receipt of the acknowledgement of the prospectus from the Registrar of Companies in the printing of prospectuses, application forms, brochure, press release and other material should start. Both printers and advertising agency should coordinate to get efficiency and economy of the time and money. The merchant bankers should go through the final proof of the entire issue material before printing starts. The application form, brochure and press releases as designed by advertising agency should be approved by managers to the issue before the company gives print orders to avoid errors and discrepancies. Requirement of stationary should be assessed on the basis of the existing practice of minimum stationary required to be supplied (under the CCI guidelines) earlier to stock exchanges where listing applications have been made, managers to the issue, brokers, underwriters and bankers to the issue. The company should enquire specific requirements of brokers to the issue and take into consideration for assessing the total requirements the stationary. According to SEBI guidelines, issue material is required to be sent to Investors clubs/India Investment Center and SEBI as discussed earlier.
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Step 8. Publicity Campaign

The publicity campaign for the public issue may be organized with a view to make the investors aware of the opening of the public issue, inform them about the company bringing out the public issue, its promoters background and credibility, the status of the projects to be financed out of the public issue, the marketability of the product to be manufactured or service to be provided by the company and the future profitability projection to enable the investors to make their independent judgments about the future of the company and the money they may decide to invest in the company by subscribing to its shares. More efforts are needed in disseminating such information to the investors in respect of those companies which are new and their promoters are new in the industry than the existing well reputed companies with proven track record and promoters credibility. Publicity campaign assumed in the public issue comprises the following devices Advertisements; Write w ups/reporting about the company/its promoters in economic journals; Holding press/brokers/investors conferences at prominent centers.
Step 9. Instructions to Bankers

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The appointment of bankers to the issue is made in accordance with the provisions of SEBI (Bankers to an Issue) Regulations,1994 and SEBI (Bankers to an Issue) Rules,1994,reproduced at Annexure VI and VII. Banking activity Bankers to the issue designate their branches, as collection centers keeping in view the general response of the investors, location of the project, expectation of regional support from the public, their past performance in the area, facilities available in their branches to handle the collection of public issue applications. These branches work under the directions of a controlling branch or pooling center. SEBI guidelines in connection with collections centers as under: In case of public issues there should be at least 30 mandatory collection centers which should include invariably the places where stock exchanges have been established. By way of additional facility, the issuer may in consultation with the lead manager appoint authorized collection agents and necessary disclosers including the names and addresses of such agents should be made in the offer documents. The collection agents should be permitted to collect such applications as are accompanied by payment of application moneys paid by cheques, drafts stock invests. Under no circumstances they should be permitted to collect application moneys in cash. The application so collected should be deposited in the special share application account with designated scheduled back either on the same date or latest by the next working day. The application forms along with duly reconciled Schedules as should be forwarded to the Registrars to the Issue after realization of cheques after weeding out the applications in respect of cheques return cases, within a period of 2 weeks from the date of closure of 37

the public issue. The applications accompanied by stock invests should be sent directly to the Registrars to the Issue along with the Schedules within one week from the date of closure of the issue. Further, the offer documents and application forms should specifically indicate that the acknowledgement of receipt of application moneys given by collection agents shall be valid and binding on the company and other persons connected with the issue. The investors from the places other than from the places where the mandatory centers and authorized collection centers are located, can forward their applications along with stock invests to the Registrar to the Issue directly by Registered Post with Acknowledgement Due and such applications shall be dealt with by the Registrars to the Issue in the normal course. SEBI has further clarified that the minimum number of collection centers in case of issues not exceeding Rs. 10 corers (including premium, if any), shall be situated at:The four metropolitan centers viz. Bombay, Delhi, Calcutta, Madras; and at all such centers where stock exchanges are located in the region in which the registered office of the company is situated.
CHAPTER 3
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BOOK BUILDING
Definition Book 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. Overview and Executive Summary The Initial Public Offering (IPO) market in India has undergone a major change. There has been a transition from the times of under priced issues in the Controller of Capital Issues (CCI) days where getting allotment was akin to winning a lottery .Then came the era of free pricing when a number of overpriced issues hit the market but all through the conventional fixed priced issue route. Then in 1998, Securities and Exchange Board of India (SEBI) allowed issuers of equity shares of Rs 250 million and above to have an option to make an issue through the Book Building process. This was to facilitate the institutional investors comprising foreign financial investors, mutual funds and domestic institutions to participate in the IPOs of companies. Book Building refers to the collection of bids from investors which are based on an indicative floor price, the issue price being fixed after the bid closing
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date. The principal intermediaries involved in a book building process are the Company, Book Running Lead Manager {BRLM), Co-Book Running Lead Manager (CBRLM) and syndicate members who are intermediaries registered with SEBI and are eligible to act as underwriters. Syndicate members are typically appointed by the BRLM. The BRLM along with the syndicate helps the issuer company to market the IPO and get an optimum price for its offering. The Book Building process is undertaken basically to determine investor appetite for a share at a particular price. It is undertaken before making a public offer and it helps determine the issue price/number of shares to be issued. The book building process begins with the BRLM getting a feel of the possible pricing from institutional investors. Based on this feedback, the issuer company and BRLM fix a floor price or a minimum price for the issue. The investors are informed of the floor price and they bid for the equity shares at appropriate prices at or above the floor price. The bidding is akin to an open auction. The bidding period is kept open for at least five working days. The advertisement announcing the bidding contains the floor price, date of the opening of the offer and the closing date. An issue document is prepared for guidance of investors which contains the names of syndicate members who are entitled to receive the bids. All bids have to be electronically received and the bidding centers are electronically connected to maintain transparency and ensure online entry of all bids received. All investors-have to place their bids only through the Syndicate Members' who have the right to vet the bids. The SEBI guidelines also prescribe the minimum number of bidding centers depending on the registered office of the issuer company. The bids can be revised by the bidder before the issue40

closes. To maintain transparency in 'the bidding process, at the end of every bidding session, the demand of the issue is shown in graph form on the terminals. Once the company gets the various bids from the investor, it plots the bids at various prices and the quantity of shares at these prices. It along with the BRLM then decides the final price at which it is willing to issue the stock. Generally, the numbers of shares are fixed; the issue size gets frozen based on the price per share discovered through book building process. As per the extant SEBI guidelines, a company going public has to offer a minimum of 25% of issued post issue capital to the public. However, by a recent amendment companies making issuances in certain sectors like software, telecom, media etc., can dilute a minimum of 10% of the issued post issue capital subject to certain additional conditions like minimum issue size of Rs 500m and issuance of 20,00,000 shares. SEBI guidelines currently allow issuers the choice between a 90% scheme and 75% scheme for book built IPO's. Under the 90% scheme, 90% of the issue can be offered through book building process while only 10% of the issue has to be offered via fixed price portion. Under the 75% scheme the percentages are 75 and 25 respectively. Aft the Companies Amendment Bill came into effect in 2001; SEBI is now contemplating a 100% Book building scheme where the whole issue can be done through book building process. Both retail investors and wholesale investors participate in the Book Building issue. A retail investor in book building process is an investor who has to bid for a minimum of 100 equity shares or such other minimum number as decided by the company and in multiples of 1 equity share thereafter 41

subject to a maximum of 1000 equity shares. In case of wholesale bidders, the bid has to be for a minimum of 1000 equity shares and in multiples of 50 equity shares thereafter. In case of oversubscription in the retail category, allocation will be made on a proportionate basis and in consultation with the stock exchange. The balance book-built portion shall be available to wholesale bidders and the company in consultation with the allocation committee has the discretion to allocate to any of the investors, who have bid, at or above the issue price in wholesale bidder category. While bidding for the equity shares of the company in a book- built portion, each bidder shall with the submission of the bid-cum-application form, draw a cheques / demand draft/stock invest for the maximum amount of this bid in favor of escrow account of the escrow collection bank. However, the syndicate member(s) at their discretion may waive such requirement of payment at the time of submission of the bid form. For wholesale bidders where such payment at the time of bidding is waived at the discretion of the syndicate member, the issue price would be paid, favoring the escrow bank account within 4 days of communication by the BRLM of the list of bidders who have been allocated equity shares to the syndicate members.
CHAPTER 4
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PROCESS OF BOOK-BUILDING
The Process The basic process of Book-Building is as follows: The issuer who is planning an IPO nominates a lead merchant 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 five 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 and the company conclude the final price at which it is willing to issue the stock and allocation of securities.
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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 successful bidders. Book Building is a good concept and represents a capital market which is in the process of maturing. Detailed Steps in Book-Building a) Approvals required Shareholders' approval to the Public Issue under section 81 (IA) Board of Directors resolution - For Public Issue - Appointment of BRLM(s) and other members of syndicate team - Appointment to the Registrar to the Issue - Appoint a committee to take all decisions for the issue RBI approval for issue of shares to NRls, OCBs and FIls b) The Issue Management Team -Syndicate team to the issue -Book Running Lead Manager (BRLM) -Co-Book Running Lead Manager (CBRLM) -Lead manager(s)/ Co-Lead Manager(s)/ Co- Managers -Syndicate Members Brokers to the issue (they must accept cheques upfront) who are registered with BSE/NSE to accept only retail Registrar to the issue Legal Advisor to the Company 44

Legal Advisor to the Syndicate Team Auditor to the Company Bankers to the issue - Escrow collection bankers (For the Book Built portion, in case the syndicate members insist on upfront payment and for bids through brokers) - Bankers for fixed price offer c) Red Herring Prospectus The BRLM conducts due diligence on the issuer during the preparation of a Red Herring Prospectus. - Meetings with the Company & its management - Discussions with legal advisors & auditors of the Company - Site visit - Detailed study of the approvals received by the Company during the course of business. d)The Red Herring Prospectus is filed with SEBI SEBI reverts with observations on the Red Herring Prospectus (in 21 days) during which period the Red Herring Prospectus is a public document. The observations of SEBI and any material developments are- updated in the Red Herring Prospectus. The Red Herring Prospectus is filed with RoC prior to opening the issue and on the basis of this RoC filed document, bids are solicited e) Procedure for bidding
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Syndicate Members to circulate Red Herring Prospectus, after ROC filing to the prospective investors both wholesale and retail Company and BRLM declare bid opening and closing date through newspaper ads (statutory ad). As per SEBI Guidelines, bids have to be open for a minimum of 5 days. Investors to register bids in the prescribed format through. Syndicate Members or their authorized agents. - Investors can also register their bids with brokers to the issue provided the entire money is taken upfront and put in escrow account. - Syndicate members will have the discretion to take money upfront. f) Offer structure Book built portion - Institutional - 60% of the Issue - Non Institutional- Wholesale- 15% of the issue - Non-institutional Retail -15% of the issue (defined as 10 market lots) Fixed price offer - Retail- 1O% of the offer (defined as 10 market lots g) Electronic Connectivity and Registration. BSE/NSE offers a screen based facility for registering bids - This facility shall be linked to the terminals of Syndicate Members for registering bids * hence requirement of Syndicate Members and BRLMs is a terminal(s) with BSE/NSE connectivity. No interconnectivity between any members of the Syndicate team book built issues till date have used NSE/BSE platform. 46

- Syndicate Members will be required to enter details of the Investor and the system will generate a Unique Transaction Identification Code (UTIC) and a Transaction Registration Slip confirming the registration of the bid. - Bids registered with Syndicate Members will be electronically transmitted to BSE/NSE mainframe on-line and available to the BRLM on-line. h) Bidding process Investor to bid in only ONE Bid form (maximum 3 bids at various prices) Revision of bids to be done only in the Bid Revision form (any number of times) through the Syndicate Member with whom the first bid was registered. i) Price discovery Book is built at various price levels Company, BRLM to finalise the cut-off price and allocation BRLM to Intimate the Syndicate Members of the allocation and price Syndicate Members to collect subscription amount from successful bidders Securities are allotted within 15 days of offer closing date (the pay-in date) j) Underwriting arrangement Company to sign underwriting agreement with the BRLM. This has to be done after price discovery and on the basis of demand received In the book built portion. 47

BRLM to enter into underwriting agreement with the Syndicate Members, If required For the Company, in case of any shortfall, the BRLM will be liable for making good the shortfall in payment. In case there is no underwriting agreement with the Syndicate Members, the risk of default after allocation will be on the BRLM/ Co-BRLM this could be offset by insisting on collection of full money upfront by Syndicate Members. - However, this will dissuade Institutional Investors, especially since they may revise bids hence this could be insisted upon only in case of bids by Individual/ retail investors. k) RoC filling After signing of the underwriting agreement, and finalising the price, the prospectus is finalised and filed with RoC. Statutory advertisement to be released with price and a table indicating amount payable by investors, as in a normal Public Issue. Fixed price offer date for opening and closing of the issue to be announced l) Fixed price offer The fixed price offer Is-open only to retail investors Application forms and Prospectus with the issue price are made available The procedure is similar to a plain -vanilla Public Issue m) Other Relevant Issues Bidding centres - 4 metropolitan cities 48

- All Stock Exchange centers in the region of the Companys registered office - For companies registered at New Delhi the centers are Delhi, Mumbai, Kolkata, Chennai, Kanpur, Jaipur, Ludhiana Additionally, CMC may consider Ahemedabad, Hyderabad,
Bangalore, Pune. Syndicate team - BRLM - Lead Managers - Co-Lead Managers/ Co-Managers viz. - Syndicate Members - Brokers who are registered with BSE/NSE at bidding centres. Marketing Strategy. Coordinated corporate & issue campaign & PR campaign Focus on institutional investors for 600% of the issue - One-to-one meetings with the Institutional Investors - Presentations to them by the Company and the BRLM & Co-BR.LM - Analysts' and press meet - Follow-up with the prospective investors to gauge appetite - Assist investors in the bidding process - Meetings with high net worth individuals (HNIs) Retail investors - Appoint brokers who will accept bids to increase reach - Incentives the broker channels with suitable brokerage. - Press and broker conference 49
CHAPTER 5 Guidelines for Book Building

An issuer company proposing to issue capital through book building shall comply with the following: 50

(A) 75% Book Building Process (11.2). In an issue of securities to the public through a prospectus the option for 75% book building shall be available to the issuer company subject to the following: (i) The option of book building shall be available to all body corporate which are other wise eligible to make an issue of capital to the public. (ii)(a) The book building facility should be available as an alternative to, and to the extent of the percentage of the issue which can be reserved for firm allotment as per these guidelines. (ii)(b) The issuer company shall have an option of either reserving the securities for firm allotment or issuing the securities through book building process. (iii) The issue of securities through book-building process shall be separately identified/indicated as placement portion category in the prospectus. (iv)(a) The securities available to the public shall be separately identified as net offer to the public. (iv)(b) The requirement of minimum 25% of the securities to be offered to the public shall also be applicable. (v) In case the book-building option is availed of, underwriting shall be mandatory to the extent of the net offer to the public. (vi) The draft prospectus containing all the information except the information regarding the price at which the securities are offered shall be filed with the Board.
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(vii) One of the Lead Merchant Banker to the issue shall be nominated by the user company as the Book runner and his name shall be mentioned in the prospectus. (viii)(a)The copy of the draft prospectus filed with the Board may be circulated by the Book Runner to the institutional buyers who are eligible for firm allotment and to the intermediaries eligible to act as underwriters inviting offers for subscribing to the securities. (viii)(b)The draft prospectus to be circulated shall indicate the price band within which the securities are being offered for subscription. (ix) The book Runner on receipt of the offers shall maintain a record of the names and number of securities ordered and the price at which the intuitional buyer or underwriter is willing to subscribe to securities under the placement portion. (x) The underwriter(s) shall aggregate the offers so received for subscribing to the issue out of the placement portion. (xi)(a) The underwriter(s) shall aggregate the offers so received for subscribing to the issue and intimate to the Book runner the aggregate amount of orders received by him. xi)(b) The intuitional investor shall also forward its orders, if any, to the book runner. (xii) On receipt of the information, the Book Runner and the issuer company shall determine the price at which the securities shall be offered to the public. (xiii) The issue price for the placement portion and offer to the public shall be the same. 52

(xiv) On determining the price of the underwriter shall enter into an underwriting agreement with the issuer indicating the number of securities as well as the price at which the underwriters shall subscribe to the securities. Provided that the Book Runner shall have an option of requiring the underwriters to the net offer to the public pay in advance all monies required to be paid in respect of their underwriting commitment. (xv) On determination of the issue price within two days, thereafter the prospectus shall be filed with the Registrar of Company. (xvi) The issuer company shall open two different accounts for collection of application moneys, one for the private placement portion and the other for the public subscription. (xvii) One day prior to the opening of the issue to the public, Book Runners shall collect from the institutional buyers and the underwriters the application forms along with the application moneys to the extent of the securities proposed to be allotted to them/ subscribed by them. (xviii)(a) Allotments for the private placement portion shall be made on the second day from the closure of the issue. (xviii)(b) However, to ensure that the securities allotted under placement portion and public portion are paripasu in all respects, the issuer company may have one date of allotment which shall be the deemed date of allotment for the issue of securities through book building process. (xix) In case the Book Runner has exercised the option of requiring the underwriter to the net offer to the public to pay in advance all moneys 53

required to be paid in respect of their underwriting commitment by the eleventh day of the closure of the issue the shares allotted as per the private allotment category shall be eligible to be listed. (xx)(a) Allotment of securities under the public category shall be made as per the guidelines. (xx)(b) Allotment of securities under the public category shall be eligible to be listed. (xxi)(a) In case of under subscription in the net offer to the public spillover to the extent of under subscription shall be permitted from the placement portion to the net offer to the public portion subject to the condition that preference shall be given to the individual investors. (xxi)(b) In case of under subscription of the placement portion spillover shall be permitted from the net offer to the public to the placement portion. (xxii) The issuer company may pay interest on the application moneys till the date of allotment provided that payment of interest is uniformly given to all the applicants. xxiii)(a) The Book Runner and other intermediaries associated with the book building process shall maintain records of the book building process. (xxiii)(b) The Board shall have the right to inspect such records. (B) 100% Book Building Process In an issue of securities to the public through a prospectus option Book Building shall be available to any issuer company subject to the following: (i) Issue of capital shall be Rs 25 crores and above. 54

(ii) Reservation or firm allotment to the extent of percentage specified in these guidelines shall not be made to categories other than the categories mentioned in sub-clause (iii) below. (iii) Book Building shall be for the portion other than the promoters contribution and the allocation made to: (a) Permanent employees of the issuer company and in the case of a new company the permanent employees of the promoting companies. (b) 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. (iv) The issuer company shall appoint an eligible Merchant Banker(s) as book runner(s) and their name(s) shall be mentioned in the draft prospectus. (v) The lead Merchant Banker shall act as the Lead Book Runner and the other eligible Merchant Banker(s), so appointed by the Issuer, shall be termed as Co-Book Runner(s) (vi)The primary responsibility of building the book shall be that of the Lead Book Runner. (vii) The Book Runner(s) may appoint those intermediaries who are registered with the Board and who are permitted to carry on activity as an Underwriter as syndicate members. (viii) The draft prospectus containing all the disclosures as laid down in Chapter VI except that of price and number of securities to be offered to the public shall be filed by the Lead Merchant Banker with the Board 55

provided that the total size of the issue shall be mentioned in the draft prospectus. (ix)(a) In case of appointment of more than one lead Merchant Banker or Book Runner for Book Building, the rights, obligations and responsibilities of each should be delineated. (ix)(b) In case of an under subscription in an issue, the shortfall shall have to be made good by the Book Runner(s) to the issue and the same shall be incorporated in the inters allocation of responsibility given in Schedule II. (x)(a) The Board within 21 days of the receipt of the draft prospectus may suggest modifications to it. (x)(b) The Lead Merchant Banker shall be responsible for ensuring that the modifications/ final observations made by the Board are incorporated in the prospectus. (xi)(a) The issuer company shall after receiving the final observations if any on the offer document from the Board make an advertisement in an English national daily with wide circulation, one Hindi National newspaper and a Regional language newspaper with wide circulation at the place where the registered office of the Issuer Company is situated. (xi)(b) The advertisement so issued shall contain the salient features of the final offer document as specified in Form 2A of the Companies Act along with the application form. (xii) The issuer company shall compulsorily offer an additional 10% of the issue size offered to the public through the prospectus. 56

(xiii) The pre-issue obligations and disclosure requirements as specified in Chapter V and VI respectively of these Guidelines shall be applicable to issue of securities through book building unless stated otherwise in this Chapter. (xiv) The Book Runner(s) and the issuer company shall determine the price issue based on the bids received through the syndicate members (xv) On determination of the price, the number of securities to be offered shall be determined (issue size divided by the price which has been determined). xvi) Once the final price (cut-off price) is determined all those bidders whose bids have been found to be successful (i.e. at and above the final price or cut-off price) shall become entitle for allotment of securities. (xvii) No incentive, whether in cash or kind, shall be paid to the investors who have become entitled for allotment of securities. (xviii) On determination of the entitlement under sub-clause (xvi), the information regarding the same (i.e. the number of securities which the investor becomes entitled) shall be intimated immediately to the investors. (xix) The final prospectus containing all disclosures as per these Guidelines including the price and the number of securities proposed to be issued shall be filed with the Registrar of Companies. (xx) Arrangement shall be made by the issuer for collection of the applications by appointing mandatory collection centers as per these guidelines. 57

(xxi) The investors who had not participated in the bidding process or have not received intimation of entitlement of securities may also make an application. Additional Disclosures Apart from meeting the disclosure requirements as specified in these guidelines, the following disclosures shall be suitably made: (i) The particulars of syndicate members along with the details of registrars, bankers to the issue, etc. (ii)(a) The following statement shall be given under the basis for issue price The issue price has been determined by the Issuer in
consultation with the Book Runner(s), on the basis of assessment of market demand for the offered securities by way of Book-building. (ii)(b) The following accounting ratios shall be given under the basis for issue price for each of the accounting periods for which the financial information is given: 1. EPS, pre-issue, for the last three years (as adjusted for charges in capital) 2. P/E, pre-issue and comparison thereof with industry P/E where available (giving the source from which industry P/E has been taken). 3. Average return on net-worth in the last three years. 4. Net-Asset value per share based on last balance sheet. 5. The accounting ratios disclosed in the offer document shall be calculated after giving effect to the consequent increase of capital on account of compulsory conversions outstanding, as well as on the
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assumption that the options outstanding, if any, to subscribe for additional capital shall be exercised. Underwriting (i) The entire offer other than to the categories referred to in clause 11.3(iii) above shall be fully underwritten by the syndicate members/ Book Runner(s) (ii)(a) The syndicate members shall enter into an underwriting agreement with the Book Runner(s) indicating the number of securities which they would subscribe at the predetermined price. (ii)(b) The Book Runner shall in turn enter into an underwriting agreement with the Issuer Company. (iii) In the event of the syndicate members not fulfilling their underwriting obligations the Book Runner(s) shall be responsible for bringing in the amount devolved. (iv) There shall not be any under subscription in the category reserved for persons applying up to 10 tradable lots as the Underwriters shall bring in the amount devolved subject to the fulfillment of the minimum shareholders criterion. Procedure for Bidding The method and process of bidding shall be subject to the following: (i) Bid shall be open for at least 5 days. (ii) The advertisement mentioned at clause 11.3.1 (xi) shall also contain the following: (a) The date of opening and closing of the bidding (not less than 5 days). 59

(b) The names and addresses of the syndicate members as well as the bidding terminals for accepting the bids. (c) The method and process of bidding. (iii) Bidding shall be permitted only if an electronically linked transparent facility is used. (iv) The syndicate members shall be present at the bidding centers so that at least one electronically linked computer terminal at all the bidding centers is available for the purpose of bidding. (v)(a) The number of bidding centers shall not be less than the number of mandatory collection centers specified in these guidelines. (v)(b) The same norms as applicable for collection centers shall be applicable for the bidding centers also. (v) Individual as well as institutional investors shall place their bids only through the syndicate members who shall have the right to vet the bids. (vi) The investors shall have the right to revise their bids. (vii) Bidding Form (a) There shall be standard bidding form to ensure uniformity in bidding and accuracy. (b) The bidding form shall contain information about the investor, the price and the number of securities that the investor wishes to bid. (c) The bidding form before being issued to the bidder shall be serially numbered at the bidding centers and date and time stamped. (d) The serial number may be system generated or stamped with an automatic numbering machine. 60

(e) The bidding form shall be issued in duplicate signed by the investor and countersigned by the syndicate member, with one form for the investor and the other for the syndicate member(s)/ Book Runner(s). (viii) At the end of each day of the bidding period the demand shall be shown graphically on the terminals for information of the syndicate members as well as the investors. Allocation/ Allotment Procedure (i) At least 15 % of the issue size shall be reserved for allocation to individual investors applying up to 10 tradable lots through the syndicate member. (ii) 10% of the issue size offered to the public through the prospectus shall be reserved for allocation to individual investors who had not participated in the bidding process or have not received an intimation for entitlement of securities under clause 11.3 (xix). (iii) Allotment to investors under sub-clauses (i) and (ii) of this clause, shall be made on the basis of the proportionate allotment system as specified in Schedule XVIII. (iv) In case of under subscription in the category referred to in clause (ii) of this clause, the Issuer company has the option to allocate it to whichever category it deems fit or let the under subscribed portion lapse. (v) (a) For the class of investors other than those mentioned at clauses (i) and (ii) of this clause, the allocation shall be determined by the Book Runner(s) based on prior commitment, investor quality, price aggression, earliness of bids, etc. 61

(b) The minimum shareholders criterion shall not be applicable to this category. (vi) Allotment shall be made not later than 15 days from the closure of the issue failing which interest at the rate of 15% shall be paid to the investors. (vii) Schedule XX may be referred to for Clarificatory Examples for issue size and allocation has been specified in Schedule XX. (viii) Model Time Frame for Book Building is specified in Schedule XXI. (ix) (a) The offer shall remain open for subscription from the public for a period of at least 3 working days after completing all the requirements of advertisement and dispatch of issue material to all the stock exchanges. (b) During the time when the offer is open, the investors who have received an intimation of entitlement of securities under the clause (xviii) shall submit the application forms along with the application moneys. (c) The other individual investors who had not participated in the bidding process or have not received intimation of entitlement of securities under clause (xviii) may also make an application. Maintenance of Books and Records (i) A final book of demand showing the result of the allocation process shall be maintained by the book runner(s). (ii) The Book Runner(s) and other intermediaries in the Book Building process associated shall maintain records of the book building prices.
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(iii) The Board shall have the right to inspect the records, books and documents relating to the Book Building process and such person shall extend full co-operation. Important SEBI Guidelines and Stock Exchange Guidelines (a) Eligibility Criteria The minimum size for a book-built issue should be Rs 25 mn and in the case of 10% dilution would be Rs 50 mn. QIBs mean institutions that have been mentioned in the section 4A of the Companies Act, Mutual Funds, Banks, FIIs, registered VCs, bilateral & multilateral development institutions. (b) Three Critical Regulatory Issues. Corporate Governance requires recasting of Board of Directors before listing - One half non-executive Directors - One-third independent Directors (in case Chairman is non-executive) or one-half independent Directors (in case Chairman is executive) Best to implement ESOP plan pre-IPO - Post listing, listed price becomes benchmark price Full dividend to be paid on IPO shares - Articles to be amended in case the current articles do not give this power to the Board of Directors. (c) Other Regulatory Requirements. Key SEBI and Listing requirements
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- Minimum post-issue equity capital requirement for listing at BSE and NSE is Rs 100 mn and post-issue networth requirement of Rs 200 mn for BSE alone. - Minimum post-issue capital requirement of Rs 50 mn for knowledge based industries; minimum issue size of Rs 500 mn. - At least 25% of the emerging equity must be offered to the public except in the case of knowledge based sectors where the level of dilution can be 10% - Under 10% dilution minimum offer size of Rs 500 mn and minimum 2 million shares offered - Minimum offer size under 10% dilution is being reviewed and could go upto Rs 1.5 bn. - Minimum 5 shareholders per Rs 0.1 mn of paid up capital offered to the public - Promoters contribution (20% of the post issue capital) shall be locked in for a period of three years from the date of filing the draft prospectus - The balance of the entire pre-issue capital shall be locked in for one year from the date of allotment in the IPO. (d) Salient features of Indian Book Building Guidelines Book Building facility available for issue size greater than Rs 250 m Both retail and wholesale investors participate in the bidding process electronic bidding mode Number of bidding centers should be minimum of 4 Metro and regional Stock exchange centers 64

NSE/BSE has developed customized software to meet the issue process through electronic bidding mode. Schedule XX - Clarificatory Examples (i) In case of an issuer making an initial public offer: Suppose the post Issue capital is Rs 100 crores. As per the extant guidelines the promoters contribution shall not be less than 20% of the post issue capital subject to the condition that at least 25% of the post issue capital shall be offered to the public. In case, the promoters bring in only the minimum specified contribution, then Rs 20 crores shall be allocated to the promoters. In such a scenario, Book Building facility may be for Rs 80 crores, which is the issue size offered to the public through the prospectus. Allocation in such a scenario shall be as follows: Allocation for individual investors applying upto 10 tradable lots through the syndicate members shall be at least 15% of the post-issue capital (Rs 100 crores) i.e. at least Rs 15 crores. Allocation to Institutional investors as well as other investors applying through the syndicate members shall be Rs 65 crores (Rs 80 crores Rs 15 crores) Allocation to individual investors applying not through the syndicate members but during the time when the issue is open would be 10% of the issue size offered to the the public through the prospectus (Rs 80 crores) i.e. Rs 8 crores. Due to allocation to individual investors applying not through the syndicate members the post issue capital would increase to Rs 108 crores and therefore the promoters need to bring in extra capital of Rs 65

2.4 crores to ensure that their post issue holding (Rs 20 crores + Rs 2.4 crores = Rs 22.4 crores) does not fall below the minimum specified percentage (20% of Rs 110.4 crores i.e. Rs 108 crores + Rs 2.4 crores). Allocation to individual investors would therefore total at least Rs 23 crores (Rs 15 crores + Rs 8 crores). Similarly, the consumption can be worked out for varying levels of promoters contribution. The point that needs to be understood is that in case of a company going in for an initial public offer and availing the facility of Book Building, the allocation to the individual investors applying through the syndicate members shall be with reference to the post issue capital, while the allocation to individual investors applying not through the syndicate members shall be with reference to the issue size offered to the public through the prospectus. (ii) The allocation process for a listed company. Suppose a listed company with a capital of Rs 50 crores makes a further issue of capital to the public of Rs 50 crores. As per the guidelines, the promoters has to participate to the extent of 20% of the proposed issue or ensure that his post-issue holding not fall below 20% of the expanded capital. In case the promoters participate to the extent of 20% of the proposed issue, then the promoters contribution shall be Rs 10 crores. The amount available for Book-Building, in such a case, shall be Rs 40 crores, which is the issue size offered to the public through the prospectus. Allocation in such a scenario shall be as follows:
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Allocation for individual investors applying up to 10 tradable lots through the syndicate members shall be at least 15% of the post-issue capital (Rs 50 crores) i.e. at least Rs 7.5 crores. Allocation to Institutional investors as well as other investors applying through the syndicate members shall be Rs 32.5 crores (Rs 40 crores Rs 7.5 crores). Allocation would be determined by the Book Runner(s) in consultation with the Issuer as well as the syndicate members on the basis of prior commitment, quality of investor, earliness of bid, price aggression etc. Allocation to individual investors applying not through the syndicate members but during the time when the issue is open would be 10% of the issue size offered to the public through the prospectus (Rs 40 crores) i.e. Rs 4 crores. Due to allocation to individual investors applying not through the syndicate members the capital issued through the present issue would increase to Rs 54 crores and therefore the promoters need to bring in extra capital of Rs 1.2 crores to ensure that their post issue holding (Rs 10 crores + Rs 1.2 crores = Rs 11.2 crores) does not fall below the minimum specified percentage (20% of Rs 55.2 crores i.e. Rs 54 crores + Rs 1.2 crores). Allocation to individual investors would therefore total at least Rs 11.5 crores (Rs 7.5 crores + Rs 4 crores). In case of a listed company going in for a further issue of capital and availing the facility of Book Building, the allocation to individual investors applying through the syndicate members shall be with reference to the proposed 67

issue, while the allocation to individual investors applying not through the syndicate members shall be with reference to the issue size offered to the public through the prospectus. (iii) The allocation process for an unlisted company going in for an offer for sale. Suppose an unlisted company with a capital of Rs 100 crores makes an offer for sale. As per the guidelines, the promoters shall ensure that their shareholding after disinvestments shall not be less than 20% of the total issued capital of the company subject to the condition that at least 25% of the total issued capital of the company shall be offered to the public. In case the promoters shareholding after disinvestments remains at 20% of the total issues capital, then the promoters contribution shall be Rs 20 crores. The amount available for Book Building, in such a case, shall be Rs 80 crores, which is the issue size offered to the public through the prospectus. Allocation in such a scenario shall be as follows: Allocation for individual investors applying up to 10 tradable lots through the syndicate members shall be at least 15% of the post-issue capital (Rs 100 crores) i.e. at least Rs 15 crores. Allocation to Institutional investors as well as other investors applying through the syndicate members shall be Rs 57 crores (Rs 80 crores Rs 15 crores Rs 8 crores). Allocation would be determined by the Book Runner(s) in consultation with the Issuer as well as the syndicate members on the basis of quality of investor, earliness of bid, price aggression etc. Allocation to individual investors applying not through the syndicate members but during the time when the issue is open would be 10% of 68

the issue size offered to the public through the prospectus (Rs 80 crores) i.e. Rs 8 crores. Allocation to individual investors would therefore total at least Rs 23 crores (Rs 8 crores + Rs 15 crores). In case of an unlisted company going in for sale and availing the facility of Book Building, the allocation to individual investors applying through the syndicate members shall be with reference to the post-issue capital, while the allocation to individual investors applying not through the syndicate members shall be with reference to the issue size offered to the public through the prospectus Book Building Model Time Frame After, the final observation from SEBI has been received on the offer document, the minimum number of application forms accompanied with Form 2A and offer document containing the final observations received from SEBI, without mentioning the final price, shall be dispatched to the members of the Stock Exchanges. However, the issue opening and closing date shall be mentioned in the application form. A minimum of 200 application forms per active member of the Stock Exchange where the securities of the issuer company are proposed to be listed and 10,000 forms each to other Stock exchanges shall be dispatched. Further , minimum 1,000 offer documents, containing the final observations received from SEBI, to each Stock Exchange where the securities of the issuer company are proposed to be listed and minimum 200 offer document, containing the final observations received from SEBI, each to other Stock Exchanges would also have to be dispatched. These shall be dispatched subject to the condition that a 69

minimum gap of 14 days is maintained between the receipt of these applications and the issue opening date. After, the price has been determined on the basis of bidding the statutory public advertisement containing, inter alia, the price as well as a table showing the number of securities and the amount payable by an investor, based on the price determined, shall be issued. The statutory advertisement may be issued before the ROC filing. There shall be a minimum gap of five days between the statutory public advertisement and the issue opening date. The statutory public advertisement shall be issued for a continuous period of three days in an English National daily with wide circulation, one Hindi National paper and a Regional language newspaper with daily circulation at the place where the registered office of the issuer company is situated.
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CHAPTER 6 BOOK BUILDING MODEL TIME FRAME

After, the final observation from SEBI has been received on the offer document, the minimum number of application forms accompanied with Form 2A and offer document containing the final observations received from SEBI, without mentioning the final price, shall be dispatched to the members of the Stock Exchanges. However, the issue opening and closing date shall be mentioned in the application form. A minimum of 200 application forms per active member of the Stock Exchange where the securities of the issuer company are proposed to be listed and 10,000 forms each to other Stock exchanges shall be dispatched. Further, minimum 1,000 offer documents, containing the final observations received from SEBI, to each Stock exchange
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where the securities of the issuer company are proposed to be listed and minimum 200 offer document, containing the final observations received from SEBI, each to other Stock Exchanges would also have to be dispatched. These shall be dispatched subject to the condition that a minimum gap of 14 days is maintained between the receipt of these applications and the issue opening date. 4.2 After, the price has been determined on the basis of bidding the statutory public advertisement containing, inter alia, the price as well as a table showing the number of securities and the amount payable by an investor, based on the price determined, shall be issued. The statutory advertisement may be issued before the ROC filing. There shall be a minimum gap of five days between the statutory public advertisement and the issue opening date. The statutory public advertisement shall be issued for a continuous period of three days in an English National daily with wide circulation, one Hindi National paper and a Regional language newspaper with daily circulation at the place where the registered office of the issuer company is situated.
Typical Time Line
S.No 1 2 3 4 5
Activity Book Closes Finalise CANs Issue Pricing Submission of all forms to the
Responsibility ISSUER / BRLMs BRLMs/Lawyer ISSUER/BRLMs BRLMs
No Days T T+1 T+4 T+2 T+3
Of
Banker by Syndicate Bankers to hand over 100% of the Bankers
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6 7 8 9 Bid forms to Registrar Underwriting Agreement Signed ISSUER/BRLMs T+4 Publish Statutory Advertisement ISSUER / BRLMs / Ad T+6 (Issue Price AD) Agency Bankers to Provide Provisional Bankers Certificate by 6 pm File duly updated Prospectus ISSUER T+4 T+6
signed by the Board of directors 10 along with the U/A with ROC Complete the formalities for ISSUER / Registrars T+7
payment of stamp duty in relation 11 12 13 14 15 16 to the shares to be issued File Prospectus & Underwriting BRLMs agreement with SEBI Submit three day report to SEBI Obtain RoC Approval Final Certificate from ISSUER / BRLMs T+6 / T+5
Registrar Issuer Bankers BRLMs
T+7 Registrar/ T+6 T+7 / T+7
along with cheque return summary ISSUER / Bankers Registrar to complete Data entry Registrar ISSUER Secretarial team's ISSUER/ BRLMs meeting with BSE/NSE Registrar /
Stock BRLMs / T+7
17 18 19 20 21
Exchanges Conference call with Bankers on ISSUER /
Refund modalities Registrar Request BSE for arranging drawl BRLMs / Registrar / Stock T+8 of lots by public representative Exchanges Registrar to complete reconciliation Bankers / Registrar Registrar draws the Basis of ISSUER / BRLMs Allocation Submit basis of allocation to Stock ISSUER / BRLMs T+9 T+12 / T+12
Exchange for approval Morning 12 Registrar/SE
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22 23 24 noon Basis of Allocation approved by the ISSUER / BRLMs / T+12 T+13 / 11.00 (T+13) 12.00 noon (T+13) 12.30 pm (T+13) 1230 pm
Stock Exchanges evening Registrar Designated date ISSUER / BRLMs Instructions to Escrow banks to BRLMs / Registrar transfer funds to Public Issue and Banker
am
25 26 27 28 29
Refund account Transfer of funds from Escrow to Banker Public offer a/c Committee approval/ BoD approval Issuer for adopting the basis of allotment Dispatch notice to retail investors Registrar
for balance payment (T+13) Closing Date - receive all the ISSUER / BRLMs / Auditor 2.00 pm required certifications and opinions / Legal Counsel Allotment of Shares / Corporate RIL/Registrar/BRLMs/DPs Action begisns first QIBs to be (T+13) 2.00 pm (T+13) 10.00 am
30 31
completed on same day Complete Corporate Action for all RIL/Registrar/BRLMs/DPs categories of investors Auditors to certify that the ISSUER/Auditors
(T+14) 10.00 am (T+14)
Allotment has been done on the basis 32 33 approved by stoock / BRLMs BRLMs
exchange Submit all allotment and listing ISSUER
/ 11.00
am
documents to the Designated SE Registrar/SE Submit Corporate Action report ISSUER / from the DPs and the Auditors Registrar/SE certificate and dispatch certificate
(T+14) / 12.00 noon (T+14)
34
to SE Retail, Non Institutional & QIB Registrar
2.00
pm
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CANs 35 and refunds dispatch / BRLMs (T+14) / 2.00 (T+14) 6.00 pm pm
completed Submit the allotment details to BSE ISSUER and NSE and complete all Registrar
36 37 38 39 40
documentation for listing & trading Receive listing approval Receive notice of trading Basis of Allotment advertisement Listing of Equity Shares Submit 78 day report
Stock Exchanges Stock Exchanges
(T+14) 6.00 pm (T+14) T+14 T+15
ISSUER BRLMs / Registrar
CHAPTER 7 Book Built Issue Structure

(a) Issue structure I (i) Main Issue: Book Built 90% of the Offer - 60% allocation to Institutional Investors on a discretionary basis - 15% allocation to wholesale/ other investors on a proportionate basis for greater than 1000 shares - 15% on a proportionate basis to individual investors bidding upto 1000 shares (ii) Fixed Price Issues : 10% of the Offer
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- Only for individual investors on a proportionate basis as per normal public issue guidelines (b) Issue Structure II (i) Main Issue : Book Built 75% Offer - 60% allocation to institutional investors on a discretionary basis - 15% allocation to wholesale/ other investors on a proportionate basis for greater than 1000 shares. (ii) Fixed Price Issues : 10% of the Offer - Only for individual investors on a proportionate basis as per normal public issue guidelines.
CHAPTER 8 Book Building in the International Markets

(a) The international book building process: Prior to the launch of the issue, the lead manager and the issuer agree on a price range to be communicated to the potential investors during the marketing and the book building process For an initial public offering, an exact price range is used while for a secondary offering, a discount or premium to the existing market price is used
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The price range determined is primarily based on -Company's projections -Valuations of similarly traded and comparable companies in the industry -Feedback from equity sales force -Market conditions -Company's expectations Once the price range is determined, a preliminary prospectus called the 'red herring' is published and this document, along with equity research reports by syndicate members is used for marketing. Institutional and retail investors take a decision to invest in the company based upon the information in the prospectus, research reports, information received from sales people, company's management and research analysts The book runner and the syndicate members are in constant contact with the potential investors during the pre-marketing stage and roadshows to provide answers and information Once an investor decides to invest, he communicates to the salesman who in turn informs the syndicate that is responsible for the keeping track of the 'book of demand Institutional investors can specify the number of shares they would like at different prices Pricing and volume parameters specified by institutional investors help the book runner determine the final size and price of the offering Retail investors must place their order at the issue price and have no influence over the setting of the final price. 77

The size and price of an investor's order may be increased or decreased during the book building period
CHAPTER 9 Case Study
Name of Company Type of Securities Offer Price Band Issue Size Book Building Size (Rs.) Book Building Start Date Book Building End Date
CINEMAX INDIA Equity Shares Rs 135 - 155 138cr Rs. 741.20 crs 18 January 2007 24 January 2007
Source of Funding
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Cinemax India Ltd. (Cinemax) intends to raise a total of Rs 138cr, of which Rs 0.9cr (60,000 shares) is reserved for its employees and the balance will be raised from the capital market. Objects of the issue The key objectives of the issue are: Setting up of new Theatres (~Rs 107cr) Others i.e. General Corporate Purposes including acquisitions and capital expenditures and Issue Expenses. As per the details provided in the prospectus, Cinemax is in the process of setting up several theatres at various locations across India. As part of its expansion plans, over the next two years, it plans to set up 19 theatres with a total seating capacity of 15,864 seats. These projects are in different stages of negotiations/implementation. The total cost of this expansion plan is Rs 110.7cr. The company has already spent Rs 8.6cr up till November 30, 2006, which has been funded from internal accruals/debt and the same would be recovered from the proceeds of the fresh issue (Rs 108.5cr). Company Background Cinemax India Ltd. is part of the Kanakia Group which has a track record of over 20 years in real estate development. The Kanakia Group has developed over 5 million sq. ft. of Residential and Commercial real estate. Cinemax is an emerging family entertainment centre focused primarily on Exhibition and Gaming business with limited interests in mall development. Cinemax is one of the largest Exhibition theatre chains in India operating 10 properties with 33 screens and 9,220 seats and is a dominant player in Mumbai, which is home to the Hindi Film industry (Bollywood). Cinemax 79

owns/controls about 30 screens in Mumbai and Thane and is one of the largest owners of multiplex properties in India with 21 screens spread over 146,242 sq. ft. area. The company also has a Gaming business, which is currently operational under the brand name Giggles-The Gaming Zone at Eternity Mall, Thane. It has also developed over 200,000 sq. ft. of mall area at eternity Mall, Thane, part of which has been rented out. From the current Theatre presence primarily in Mumbai and Thane, the company has plans to expand across India and have a pan-India presence by FY2009, by when it has projected having 42 properties with 141 screens and having a seating capacity of over 36,000 seats i.e. 4x its current capacity. It also intends to expand its Gaming business and take the total to 10 gaming zones at some of its future multiplexes. Cinemax has decided to focus only on its Exhibition business going forward and thus, its mall development is limited to the development of Nagpur mall and development of the balance FSI available at Eternity Mall phase 2, Thane, which will be completed by FY2008. The Indian Film Industry The Indian Film Industry contributes a significant proportion (28%) to Indias Entertainment Industry. It is the largest in the world in terms of the number of films released per year (1,000) and is amongst the largest in terms of the number of admissions (3 bn tickets). However, despite this, the size of the industry at Rs 70 bn (US$ 1.5 bn) in 2005 is amongst the smallest in the world. This could be attributed to two factors low occupancy rates of 35%40% and low ticket prices (avg. Rs 20/ticket). It must be noted that almost
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75% to 80% of the Indian Film Industry revenues are contributed by the Exhibition sector. However, the above scenario is already changing and is likely to continue to improve further over the next few years. Disposable income in the hands of the Indian consumers has been on the rise, which has encouraged increased spending on leisure and entertainment avenues, including movies. This has led to the rise of multiplexes in the country, which has enhanced the experience of movie goers. Further, for this improved experience and quality service, consumers have shown their willingness to spend extra in terms of higher ticket prices (avg. Rs 80-100/ticket). Thus, considering that the average admissions continue to remain at the current levels and the average movie ticket prices double in the next 5 years, it would translate into a significant revenue growth for the domestic box office, which is a positive for film exhibitionists also. The Indian Film Industry is expected to grow at ~15% CAGR for the next few years. Investment arguments The Indian Media and Entertainment industry has been amongst the fastest growing sectors in the country. Strong economic growth over the last decade has lead to rising disposable incomes in the hands of the consumer. Apart from this, larger number of Indians are now becoming part of the consuming middle class on the back of improving literacy rates and greater job opportunities. Moreover, the favourable demographic profile of the country has been supporting the greater spend on leisure and entertainment, including movies.
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The companys exhibition business model consists of both budget retrofitted/single screens as well as the higher end multiplexes. While in the former model, the ticket prices range from Rs 40- 110, which is aimed at the middle income households, the multiplexes (ticket prices range from Rs 100450) helps the company cater to the up market households. Cinemax is one of the largest Exhibition theatre chains in India operating 10 properties with 33 screens and 9,220 seats and is a dominant player in Mumbai, which is home to the Hindi Film industry (Bollywood). Cinemax owns/controls about 30 screens (8,218 seats) in Mumbai and Thane and is amongst the largest exhibition players in this region. This is of significance considering the fact that Mumbai is the hub for Indian cinema and accounts for 15% of all- India box-office collections. Cinemax has strategically decided to focus only on its Exhibition business going forward and thus, its mall development is limited to the development of Nagpur mall and development of the balance FSI available at Eternity Mall phase 2, Thane, which will be completed by FY2008. This decision by the company comes in wake of the considerably lower margins (2.2% EBITDA margin in 1HFY2007) in the mall development business vis--vis the exhibition business (27.1%), owing to certain factors such as longer gestation period and higher interest costs, which has resulted in a downward impact on its overall business margins. The company has witnessed a steady rise in total revenues earned per patron (exhibition business) over the last few years. Its exhibition revenues comprise of three sources box office, food & beverages (F&B) and advertising and rental revenue. While the increase in box office revenues has been a factor of 82

both a significant rise in number of patrons as well as an increase in average ticket prices, F&B revenues have also witnessed a sharp increase. The significant increase in advertising and rental revenues over the years has come about on the back of focused marketing efforts, which have resulted in an increase in displays and hoardings and setting up of new kiosks in the multiplex.
Break-up of Revenue per Patron FY2004 Box-office F&B Ad & Rental Other Total 89.8 18.5 2.5 110.9 FY2005 92.0 19.0 2.2 0.2 113.4 FY2006 112.9 20.7 6.5 0.3 140.4 1HFY2007 109.7 23.1 7.2 2.3 142.3
Note: Excluding the operations of theatres of subsidiaries, which have now become parts of the company. Cinemax is in the process of setting up several theatres at various locations across India. As part of its expansion plans over the next two years, part of which would be met through the proceeds of the current issue, it plans to set up 19 theatres with a total seating capacity of 15,864 seats. These projects are in different stages of negotiations/implementation. The total cost of this expansion plan is Rs 110.7cr. 83

Details of Expansion Plan No. of Ppty FY2007 FY2008 FY2009 Total 5 15 12 32 Screens 11 50 47 108 Seats 2,996 12,291 11,625 26,912 Eligibility of E-Tax Benefit 2 out of 5 3 out of 15 6 out of 12 11 out of 32
The company intends to set up a total of 108 screens having a total seating capacity of 26,912 seats across 32 properties. Thus, post the completion of this phase of expansion, Cinemax would be having a total of 42 properties with 141 screens and 36,312 seats by FY2009. Further, it must be noted that apart from the above stated expansion plans, the company has entered into more MoUs for establishing multiplexes (aggregating to 150+ screens subject to various approvals) on lease basis, the final terms of which are yet to be agreed upon. Cinemax by FY2009 No. of Properties West North South East Total 26 9 4 3 42 Screens 85 31 16 9 141 Seats 22,385 7,812 3,538 2,397 36,132
Investment concerns Exhibitors (like Cinemax) are not in a position to entirely judge the commercial success of a film prior to its release for public viewing. They expect to have
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attendance/seat utilization rates, which will enable them to recoup the cost of screening the film over the films run time. A flop or a below than average performance by a particular film will have an adverse impact on the per show collection figures for the exhibitor, which would ultimately impact the overall financials of the company and could make the companys quarterly earnings volatile. Cinemax faces intense competition from the other established players like Adlabs Films, PVR Cinemas, Inox Leisure and Shringar Cinemas, and the competition is likely to heat up further going forward as most of these exhibitors have also embarked on capacity expansion plans. A wider choice of multiplexes offering almost similar services could adversely affect the ticket pricing power of exhibitors like Cinemax. Thus, there is seemingly not much headroom left for exhibitors to raise ticket prices from hereon. Apart from this, other forms of media like cable & satellite television and home video (VHS/VCD/DVD) are the other competitors for the company as the runtime for films in theatres has shrinked considerably and is available for cable and home viewing in a much shorter time span than what was existent a few years ago. Cinemaxs expansion plans going into the future are based on the leased model vis--vis its current ownership model. Thus, lease rental expenses, which currently form a small portion (5% in FY2006) of the companys total exhibition costs, would increase going forward, which could impact operating margins. Entertainment tax represents the tax payable on the box office collections. This usually is a key component of cost (~17% of the companys total 85

exhibition costs in FY2006), except in cases where the multiplex enjoys a concessional tax regime due to a tax exemption policy. Many States have, in order to encourage the growth of the Multiplex industry, announced an entertainment tax policy, which grants exemptions to multiplexes, subject to fulfillment of certain conditions. Most of the companys multiplexes currently enjoy an entertainment tax exemption. Such exemption, where available, directly adds to its profits. However, considering the companys expansion plans, most of its future multiplex properties may not enjoy Entertainment Tax benefits, which could adversely affect the companys profitability.
Valuations and Outlook At the upper end of the price band of Rs 155, Cinemax would trade at a P/E multiple of 39.3x our FY2007E EPS. Though the issue is priced at a premium to its peers, considering the fact that the company would be increasing its seating capacity by 4 times current capacity (from ~9,000 to ~36,000 by FY2009), its revenues and profits would be growing at a very robust pace. We believe that the Multiplex sector in India is still at a nascent stage of its strong growth path and we believe that Cinemax is well placed to capitalize on the available opportunities in the industry.
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CONCLUSION
Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery. It helps in getting best issue price and cost as opposed to Indian fixed price method. Public issue of common shares is essentially carried out in two ways: Fixed price method, and Book-building method. Fixed price issues are issues in which the issuer is allowed to price the shares as he wishes. The basis for the price is explained in an offer document through qualitative and quantitative statements. This offer document is filed with the stock exchanges and the registrar of companies. Book-building is a process of price discovery used in public offers. The issuer sets a base price and a band within which the investor is allowed to bid for
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shares. Take the recent, Yes Bank IPO, the floor price was Rs 38 and the band was from Rs 38 to Rs 45. The investor had to bid for a quantity of shares he wished to subscribe to within this band. The upper price of the band can be a maximum of 1.2 times the floor price. Every public offer through the book-building process has a book running lead manager (BRLM), a merchant banker, who manages the issue. Further, an order book, in which the investors can state the quantity of the stock they are willing to buy, at a price within the band, is built. Thus the term 'book-building.' An issue through the book-building route remains open for a period of 3 to 7 days and can be extended by another three days if the issuer decides to revise the floor price and the band. Prominent financial institutions may agree to underwrite the issue. The issue may end up being oversubscribed. But the responsibility for investing in an issue rests fairly and squarely on the investor. In view of the above advantages of Book Building Process over fixed Indian price method more and more companies are going for making IPO through Book Building method.
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Glossary Bid A bid is the demand for a security that can be entered by the syndicate/sub-syndicate members in the system. The two main components of a bid are the price and the quantity. Bidder The person who has placed a bid in the Book Building process. Book Running Lead Manager A Lead Merchant Banker who has been appointed by the Issuer Company as the Book Runner Lead Manager. The name of the Book Runner Lead Manager is mentioned in the offer document of the Issuer Company. Floor Price The minimum offer price below which bids cannot be entered. The Issuer Company in consultation with the Book Running Lead Manager fixes the floor price. Merchant Banker An entity registered under the Securities and Exchange Board of India (Merchant Bankers) Regulations, 1999.
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Syndicate Members Syndicate Members are the intermediaries registered with the Board and permitted to carry on activity as underwriters. The Book Running Lead Managers to the issue appoints the Syndicate Members. Order Book It is an 'electronic book' that shows the demand for the shares of the company at various prices.
Bibliography www.bseindia.com www.nseinsia.com www.sebi.gov.in
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INITIAL PUBLIC OFFERING

Advantages of Public Issue are:

Money non-refundable except in the case of winding up or buy back of shares.

INITIAL PUBLIC OFFERING

Continuous Compliance of provisions of listing agreement and other legal requirements

INITIAL PUBLIC OFFERING

RBI regulations in case of foreign/NRI equity participation.

INITIAL PUBLIC OFFERING

INITIAL PUBLIC OFFERING

INITIAL PUBLIC OFFERING

CHAPTER 2 Process For Bringing An Initial Public Offering

INITIAL PUBLIC OFFERING

Principal consideration for equity issue The principal considerations,

INITIAL PUBLIC OFFERING

INITIAL PUBLIC OFFERING

Step 2. Fresh Issue of Equity Shares

INITIAL PUBLIC OFFERING

INITIAL PUBLIC OFFERING

Step 3. Firming up the Appointment

INITIAL PUBLIC OFFERING

INITIAL PUBLIC OFFERING

INITIAL PUBLIC OFFERING

Step 4. Drafting of Prospectus

INITIAL PUBLIC OFFERING

II. Table of Contents

III. Definitions and Abbreviations

IV. Risk Factors

INITIAL PUBLIC OFFERING

INITIAL PUBLIC OFFERING

4. Objects of the Offering:

INITIAL PUBLIC OFFERING

VI. About the Issuer Company

(i) Details of the Business of the Issuer Company:

(ii) Business Strategy:

(vi) Purchase of Property.

INITIAL PUBLIC OFFERING

6.Promoters/ Principal Shareholders:

INITIAL PUBLIC OFFERING

VII. Financial Statements

VIII Legal & Other Information

INITIAL PUBLIC OFFERING

IX. Other Regulatory and Statutory Disclosures

INITIAL PUBLIC OFFERING

INITIAL PUBLIC OFFERING

INITIAL PUBLIC OFFERING

INITIAL PUBLIC OFFERING

XI. Description of Equity Shares and Terms of the Articles of Association

Step 5. SEBI Clearance to Prospectus

INITIAL PUBLIC OFFERING

INITIAL PUBLIC OFFERING

Step 6. Action to be taken by the Company

INITIAL PUBLIC OFFERING

INITIAL PUBLIC OFFERING

INITIAL PUBLIC OFFERING

INITIAL PUBLIC OFFERING

INITIAL PUBLIC OFFERING

INITIAL PUBLIC OFFERING

INITIAL PUBLIC OFFERING

INITIAL PUBLIC OFFERING

Step 7. Printing and Dispatch of Issue Material

INITIAL PUBLIC OFFERING

Step 8. Publicity Campaign

Step 9. Instructions to Bankers