Initial Public Offers and Due Diligence

Executive summary

This report, as the Title “Initial Public Offers and Due Diligence: The Role of a
Investment Banker”, is an attempt to bring forth the importance of the process of Due
Diligence and the significance of the vital role played by the Investment Banker in
managing the issue of an Initial Public Offer (IPO).
When a Company issues an IPO, it means it is going public. The issue of an IPO
introduces a great degree of transparency in a Company’s operations. All the relevant and
updated information pertaining to the company is laid down before the investors so that
they may make an investment decision. Again, there are set procedures, rules, regulations
and laws to be followed in laying down this information before the investors. A document
called the ‘Prospectus’ must be prepared. The Prospectus captures all the necessary
information that is to be made available to the investors. Apart from the Prospectus, there
are various other company documents that need to be verified and summarized in order to
present them before the investors.
An Investment Banker is appointed for the purpose of managing the issue of an IPO of a
Company. The Investment Banker plays a fiduciary role by coordinating the activities of
the Company, the Regulatory Bodies, and the Investors. The Investment Banker has
responsibilities towards the
 Company, to manage the entire process of issue of its IPO, and to present the
Company’s information before the investors in a concise and unambiguous form.
 Investors, to give them all the relevant and updated information on the Company,
while at the same time protecting their interests.
 Regulatory Bodies such as the Securities and Exchange Board of India, to adhere
to all secretarial and legal compliance.
In order to fulfill all his responsibilities well, the Investment Banker must work diligently.
The process through which he verifies and summarizes the Company’s information is thus
called the process of Due Diligence. He must issue Due Diligence Certificates at various
points during the issue process, saying that the company documents have all been verified
and are correct.
This report will take the reader through the entire process of the Issue of an IPO and
will lay special emphasis on the dynamic role played by the Investment Banker.
 Initial Public Offers and Due Diligence

Theoretical background

What is an IPO?
An IPO or an Initial Public Offer is a company's first sale of equity shares to general
public. Shares offered in an IPO are often, but not always, those of newly set up
companies seeking outside equity capital and a public market for their shares.

“An initial public offer is an equity product that allows you to buy cheap tomorrow’s
possible winners”
-George Mathew

An Initial Public Offering (IPO) can be a good investment avenue for equity
investors. While the IPO market is dry these days, a fresh crop is expected soon. Let us
take five minutes to understand IPOs and to decide whether to invest in them or not.

Suppose your friend owns a business, his company is profitable and he wants to
grow the company faster. For this he needs money. Instead of debt, he wants to offer a
part of his company for sale in the stock market. He will make, what is called, a ‘public
offer’ of shares (after a number of procedures and regulatory processes). If the issue is
successful, his company will ‘list’ or begin to trade in a stock exchange. So, an IPO is a
fresh offer, where a company that is not yet trading, wants to sell shares directly to the
investors. The shares can be offered ‘at par’, that is, at face value of Rs 2 Rs 5 or Rs 10,
or at a premium. After this, your friend is no longer the only owner but will have
‘diluted’ his share. The ‘owners’ of the company may now be thousands of people he
may not even know. Yet, if he holds the majority shares, he will still take all the decisions
about the company. All the share holders are now entitled to vote, may get dividends and
bonuses. They also have the option to exit from the shares by selling their stock in the
secondary market, making a capital appreciation or loss as the price changes from the
issue price.
 Initial Public Offers and Due Diligence

Why may a Company need an IPO?

To meet short-term requirements, the company may approach banks, lenders or may
even accept fixed deposits from the 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 the issue of capital. Capital
can be raised through private placement of shares, public issue, rights issue, etc.
Public Issue means raising funds from the public. Promoters of the company may
have plans for the company that may require infusion of money. The main purpose of
the public issue, amongst others, is to raise money through the public and to get its
shares listed at any of the recognized stock exchanges in India. The following may be
some other reasons for a company to go public:

 Raising funds to finance capital expenditure programs like expansion,

diversification, modernization, etc;
 Financing of increased working capital requirements;
 Financing acquisitions like a manufacturing unit, brand acquisitions, tender
offers for shares of another firm, etc;
 Debt financing ;
 Exit route for exiting investors.

An IPO has two sides to it, consisting of advantages and disadvantages.

Moreover, it needs to be balanced, and this is done by the Regulatory Bodies such as
The Securities and Exchange Board of India (SEBI), so that it does not fall on one
side. Due to this property of an IPO, it has been referred to as a “Coin” in this report.
 Initial Public Offers and Due Diligence

What are the two sides of IPO coin?

Advantages
 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
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
Disadvantages
 Time consuming process
 Expensive
 Several Legal formalities.
 Involvement of many intermediaries
 Transparency Requirements and public
the 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.

How is the “coin” made to balance (Controls)?

Applicable Laws
A Company is required to comply with the following laws in connection with a
public issue:
 Provisions of The Companies Act, 1956
 Securities Contracts (Regulations) Act, 1956
 SEBI Rules & Regulations
 Compliance to the Listing Agreement with the concerned stock exchanges
after the listing of securities.
 RBI regulations in case of foreign/NRIs equity participation.
 Yes
Yes

Initial Public Offers and Due Diligence

Who can “Toss the IPO Coin”?

Eligibility Criteria for Public Issuance of Securities

Net
Net Tangible
Tangible Assets
Assets of
of at
at least
least Rs.
Rs. 33 crores
crores inin each
each ofof the
the preceding
preceding 33 full
full
years
years (of 12 months each), of which not more than 50% is held in
(of 12 months each), of which not more than 50% is held in
monetary
monetary assets.
assets. If
If more
more thanthan 50%
50% is is held
held inin monetary
monetary assets,
assets, the
the
company
company should
should have
have firm
firm commitments
commitments to to deploy
deploy such
such excess
excess in
in its
its
business/project
business/project
Track
Track record
record ofof distributable
distributable profits
profits in
in for
for 33 out
out of
of preceding
preceding 55 years
years
Net
Net Worth of at least Rs. 1 crores in each of the preceding 3 full years
Worth of at least Rs. 1 crores in each of the preceding 3 full years (of
(of
12
12 months
months each)
each)
Issue
Issue size
size ++ previous
previous issue
issue inin current
current FYFY isis lesser
lesser than
than 55 times
times pre-issue
pre-issue net
net
worth
worth

Yes
Yes No
No

Fixed
Fixed Price
Price or
or Book
Book Only Book building, with compulsory allocation of at
building
building (no
(no least 50% to QIBs
minimum
minimum allocation
allocation Or
to
to QIBs)
QIBs) At least 15% participation in project by FIs/banks, of
which at least 10% should come from the
appraiser(s) and additionally allocation of at least
10% to QIBs.

And
And

Minimum post-issue face value capital of the

Company shall be Rs. 10 crores
Or
Compulsory market making for 2 years
 Initial Public Offers and Due Diligence

Eligibility Criteria for Public Issuance of Securities (Contd)

Minimum
Minimum 2.0mn 2.0mn securities
securities (excluding
(excluding reservations,
reservations, firm
firm allotment
allotment and
and
promoters’
promoters’contribu1ion)
contribu1ion) isis offered
offered to
to the
the public;
public;
The
The size
size of
of the
the offer
offer is
is minimum
minimum Rs1.0bn;
Rs1.0bn; and
and
The
The issue
issue is
is made
made only
only through
through book
book building
building method
method with
with allocation
allocation of
of 60%
60% of
of
the issue size to the qualified institutional buyers as specified
the issue size to the qualified institutional buyers as specified by the by the
Securities
Securities andand Exchange
Exchange Board
Board of
of India
India

Yes
Yes No
No

Offer
Offer at
at least
least 10%
10% of of each
each class
class of
of Offer at least 25% Of each class or
securities issued can be offered
securities issued can be offered kind of securities to the public
to
to the
the public
public for
for subscription
subscription for subscription

In case of more than 25% dilution, the above additional conditions

are not applicable
 Initial Public Offers and Due Diligence

The Regulatory Framework

Up to 1992, the Controller of Capital Issue (CCI) formed under the Capital Issues
Control Act controlled the capital primary market. The premium on issue of equity
shares issued through the primary markets was done in accordance with the Capital
Issues Control Act.
The CCI guidelines were abolished with the introduction of Securities & Exchange
Board of India (SEBI) .The SEBI Act came into force on 30 th January, 1992 and with
its establishment, all public issues are governed by the rules & regulations issued by
SEBI.

SEBI – The Regulatory Body

SEBI was formed to promote fair dealing in issue of securities and to ensure that the
capital markets function efficiently, transparently and economically in the better
interests of both the issuers and the investors.
The promoters should be able to raise funds at a relatively low cost. At the same time,
investors must be protected from unethical practices and their rights must be
safeguarded so that there is a steady flow of savings into the market. There must be
proper regulation and code of conduct and fair practice by intermediaries to make them
competitive and professional.

Since its formation, SEBI has been instrumental in bringing greater transparency in
capital issues. Under the umbrella of SEBI, companies issuing shares are free to fix the
premium, provided adequate disclosure is made in the offer documents.
The greater focus being investor protection, SEBI has become a vigilant watchdog.

Role of Intermediaries
Many intermediaries are involved in connection with the public issue. The following
are the intermediaries who have to be registered with SEBI and must have a valid
certificate from SEBI to act as intermediaries: -
 Initial Public Offers and Due Diligence

 Investment Bankers
 Registrar and Share Transfer Agents
 Bankers to the Issue
 Underwriters
 Stock Brokers and Sub Brokers
 Depositories

Investment Bankers play the most vital role amongst all intermediaries. They assist
the company right from preparing the prospectus to the listing of securities at the stock
exchanges. Investment Bankers play a fiduciary role between SEBI, the Client
Company and the investors. Investment Bankers also have to verify the correctness and
propriety of all the information provided in the prospectus. It is mandatory for them to
carry out Due Diligence for all the information provided in the prospectus and they
must issue a certificate to this effect to SEBI. A Company may appoint more than one
Investment Banker provided Inter-Se Allocation of Responsibilities between the
Investment Bankers is properly structured.

Underwriters are those intermediaries who underwrite the securities offered to the
public. In case there is under subscription, underwriters subscribe to the unsubscribed
amount so that the issue is successful. Before the opening of the Issue, decisions such
as who will be the underwriter and what amount can be underwritten have to be taken.
This information must be disclosed to not only the Regulatory Framework, but also to
the investors.

Registrar & Share Transfer Agents processes all applications received from the
public. Invalid applications have to be rejected, and the valid ones considered. At times,
there may be an oversubscription. In such cases, they must arrive at a valid basis of
allotment of shares among the applicants. They handle the dispatch of share certificates
and refund orders.
 Initial Public Offers and Due Diligence

Bankers to the Issue are banks that accept application from the public on behalf of the
company. These applications are then forwarded to the Registrar and Share Transfer
Agent for further processing.

Stock Brokers & Sub-Brokers are those intermediaries who, through their contacts,
invite the public for subscribing shares for which they get commission. The
stockbrokers and Sub Brokers play an important part in the distribution of shares to the
public, and need to also be informed about the company and its performance.

Depositories are the intermediaries who hold securities in dematerialized form on

behalf of the shareholders.

SEBI lays down guidelines and regulations for all the above intermediaries. The main
purpose is to maintain discipline and transparency in the Issue Process. The
intermediaries, in turn, are bound to adhere to the guidelines and rules put down by
SEBI.
 Initial Public Offers and Due Diligence

The Investment Banker Enters

The Investment Banker must prove his competence to his clients and show his areas of
core competency to attract clients. Moreover, he must do so while adhering to the strict
regulatory framework put down by SEBI, The Companies Act, The Government, and
other regulatory bodies. Therefore, the only way for him to strive to stay in the
competition and be among the best is neither through great innovations or entrancing
creativity, but rather through just being excellent at his job.

The following illustration is an attempt to depict the role of an Investment Banker:

REGULATORY
BODIES

Compliance to Regulatory
Framework

ISSUER INVESTMEN INVESTO

T BANKER R

Capital
Market Interest
Info. Protectn.

The Investment Banker plays a vital role in channeling the financial surplus of the
society into productive investment avenues. The Investment Banker has a fiduciary role
in relation to the investors. He has to ensure that only quality paper emanates from his
 Initial Public Offers and Due Diligence

firm. He is required to exercise due diligence to ensure the adequacy and

appropriateness of the disclosures made in offer document.

The Investment Banker is the leader among all the intermediaries associated with the
issue. He is required to guide and co-ordinate the activities of the Registrar to the issue,
Banker to issue, Advertising Agency, Printers, Underwriters, Brokers, etc.

The Investment Banker has to ensure the compliance of all the laws and regulations
governing the securities market. He may also be called upon to assist the statutory
authorities in developing a regulatory framework for the orderly growth of capital
markets.

General Obligations and Responsibilities

The Investment Banker must meet the following general obligations and
responsibilities:
 Every Investment Banker must abide by the code of conduct as specified by
SEBI1.
 An Investment Banker should not carry on any business other than that in
the securities market. An exception to this rule is a bank or a public financial
institution that has been granted a certificate of registration under these
regulations.
 Every Investment Banker must maintain his own books of accounts, records
and documents. This includes the balance sheets, Profit and Loss Accounts,
Copy of Auditor’s Report, Statements of Financial Position, etc. This must also
be easily accessible to SEBI. This must be done so that SEBI can monitor the
capital adequacy of the Investment Banker.
 All issues should be managed by at least one Investment banker functioning as
the lead Investment banker.
 Every lead Investment banker must enter into an agreement with his client
company and other Investment Bankers setting out their mutual rights, liabilities
and obligations relating to such issue and in particular to disclosures, allotment
and refund, before taking up the assignment relating to an issue.

1
 Initial Public Offers and Due Diligence

Size of No. of Investment

Issue bankers
Less Two
than
Rs. 50
Crores
Betwe Three
en Rs.
50-
100
Crores
Betwe Four
en Rs.
100-
200
Crores
Betwe Five
en Rs.
200-
400
Crores
Above Five or more as may be
Rs. agreed by SEBI
400
Crores

 Where there are more than one lead Investment Banker to the issue, the
responsibilities of each such Investment Banker must be clearly
demarcated and a statement furnished to SEBI.
 A Lead Investment Banker cannot manage the issue of any associated Body
Corporate.
 Initial Public Offers and Due Diligence

 A Lead Investment Banker cannot associate with any other Investment Banker
without registration under SEBI.
 The Investment Banker may even have to accept Underwriting obligations in
some cases.
 The lead Investment banker, who is responsible for verification of the contents
of the prospectus in respect of an issue and the reasonableness of the views
expressed therein, must submit to SEBI at least two weeks prior to the opening
of the issue for subscription, a Due Diligence Certificate.
 The Lead Investment Banker must submit the Particulars of the Issue, the Draft
Prospectus and any other literature intended to be circulated among the
shareholders.
 The lead manager undertaking the responsibility for refunds or allotment of
securities in respect of any issue must continue to be associated with the issue
till the subscribers have received the share certificates or refund of excess
application money.
 The above obligations and responsibilities may be considered as constraints
within which the Investment Banker must operate. Keeping these constraints in
mind, the Investment Banker’s

 objective function becomes that of maximizing the benefit derived by the Client
Company and the investors out of the Issue.

 The next chapter will explain the procedure involved in managing the Issue of
an IPO, from the Investment Banker’s point of view.
 Initial Public Offers and Due Diligence

The Procedure for the Issue of an IPO

Many of these steps can be undertaken prior to formal launch of the offering and filing
of the offer document with SEBI and other regulators
 Preparing for IPO.
 Review business plan.
 Capital structuring.
 Initiate research.
 Corporate governance.
 Financial statements.

 Due diligence.

 Business and legal due diligence.

 Re-stated audited financials.
 Exemptions and approvals.

 Offer document.

 Business overview.
 Management discussion.
 Statutory disclosures.

 Pre-issue marketing.

 Meeting with institutional investors.

 Research briefings.
 Corporate publicity.

 Launch IPO

 File with SEBI.

 Road shows.
 Initial Public Offers and Due Diligence

Preparing for IPO - Regulatory

Company should adopt best corporate governance practices to assist Investors
appreciate greater transparency and disclosure. These have to be complied with before
listing.

Board of Directors Committees

 Change in Board  Audit committee of at least

composition to reflect public 3, all being non-executive
shareholders’ interest directors, with majority
 Increase number of non- being independent & at least
executive directors to 1 director having financial &
constitute at least 50% (If accounting knowledge
the chairman of the board is  Remuneration committee to
an executive director then determine the Company’s
the board should have at policy on specific
least 50% independent remuneration packages for
directors or else at least executive directors
1/3rd)  Investor Grievance
committee

Company would have to ramp up Secretarial and Compliance

teams
 Initial Public Offers and Due Diligence

Preparing for IPO – Financial Statements

 SEBI Guidelines require disclosure of previous five years accounts after making the
following adjustments:
 Audit qualifications for all non-standard accounting practices, failure to make
provisions or other adjustments
 Prior period items
 Changes in accounting policies or incorrect accounting policy
 All financial information (EPS, book value, etc.) presented in the Offer Document
should be based on the adjusted accounts
 The above accounts have to be certified by the auditors
 Management Discussion and Analysis Report (MD&A) along with the Annual Report
 Besides the accounts the financial ratios, capitalization statement and statement of tax
benefits have to be certified by the auditors
 Matters which needs to be addressed while re-stating accounts
 Accounting for deferred taxed; segmental reporting;
 Complete disclosure will be required regarding joint ventures and foreign
operations
 Initial Public Offers and Due Diligence

Preparing for IPO – Capital Structuring

 Examine need for corporate action to arrive at optimal capital structure and attractive
issue price
 Bonus issue of shares
 Split face value of shares
 SEBI Guidelines require
 No outstanding convertible instruments/ securities
 No partly paid shares
 Recent amendments to the DIP guidelines - In case of initial public offer by an
unlisted company,
 If the issue price is Rs 500/- or more, the issuer company shall have a discretion
to fix the face value below Rs. 10/- per share subject to the condition that the face
value shall in no case be
 Less than Rs. 1 per share.
 If issue price is less than Rs 500 per share, the face value shall be Rs. 10/- per
share.
 Initial Public Offers and Due Diligence

Comparison of Fixed Price V/s Book Building

  Fixed Price Route Book Building Route
Methodology Easy to understand for retail Relatively difficult to understand for
investors retail investors. Book building is
preferred by institutional investors
(especially FIIs, Mutual Funds)
Pricing Limited flexibility because price Greater flexibility as pricing is done
Flexibility band is pre-determined at least 2 closer to the issue opening date
months in advance
Limited flexibility partially
compensated by offering higher
discount to market price
Indicative No maximum or cap has to be Price band consisting of Floor and
price determined Cap (Floor + 20%) has to be
determined
Reservation 50% of the issue has to be 25% of the issue has to be reserved.
for small reserved Additional shares can be allotted out
investors of the QIB portion
(<=1,000
shares)
Decision Investor does not have to make Investor needs to decide the bid
making by the decision regarding the price price. This may be difficult for
investor certain institutional investors like
PSU banks, insurance companies
and non-professional investors like
corporate investors
Track record Method has been successfully Typically used for issues with a
used in IPOs as well as issues by minimum size of Rs500-600mn
existing listed companies
Investor Reach Banks operate as collection Investor reach is relatively limited
centers and hence investor reach because broker terminals are
is significantly enhanced required
Institutional Low because the entire High because bids are not
Participation application amount has to be paid accompanied by funds; payment to
upfront and locked up for 30 days be made just for the allocated
amount
 Initial Public Offers and Due Diligence

Intermediaries

 Investment banker

 Assist in appointment of all intermediaries

 Detailed valuation and advice on pricing
 Conduct due diligence and finalize disclosure in offering documents
 Assist in drafting of Prospectus
 Prepare company presentations for analysts, syndicate sales force, road show
and other meetings; publish research reports
 Coordinate with syndicate on publication of research reports
 Prepare and implement marketing strategy
 Pre-marketing; Arrangements for road show / investor meetings and
presentations
 Distribution / selling of the issue
 Interface compliance with SEBI / Stock Exchange / other legal authorities for
the domestic offer
 Co-ordination with retail brokers
 Allocation of shares post-issuance
 Co-ordination for listing and other post-issue formalities
 Overall Issue Co-ordination

 Legal counsel

 Legal due diligence

 Drafting the Offer Document
 Advising research, guidelines, etc.
 Advice on syndicate agreement, underwriting agreement
 Ensuring overall compliance with regulatory guidelines
 Initial Public Offers and Due Diligence

 Accountants / auditors
 Reviewing and auditing financials and preparing
financial statements as per DIP Guidelines for inclusion in the Prospectus

 Registrar
 Receiving applications from prospective investors/bankers/brokers
 Managing data on applications received and working with the Company and
Investment Banks to identify successful shareholders
 Reconciliation between application forms, book and bankers’ statements
 Co-coordinating with the Company and the Bankers regarding collections,
 Refunds, dispatch of shares
 Securing allocation approval from Stock exchanges

 Printers
 Bulk printing of
the Red Herring prospectus and application forms
 Ensuring timely
dispatch and distribution of stationery to all centers

 Bankers
 Managing the logistics of depositing the application;
 Reconciliation of the cheques deposits with the applications received by the
Registrar
 Issue Provisional and Final certificates

 PR agency
 Advising the Company and Investment Banks on formulation and
execution of the Media and PR Strategy
 Assisting the Company and Investment Banks for statutory
advertisements
 Organizing the Road Shows
 Initial Public Offers and Due Diligence

 Ensure adequate coverage of IPO and positive news flow

Due Diligence – Process Overview

The process involves understanding the gamut of the company’s operations, compliance
with procedures and guidelines and presenting a fair picture to investors.
Approvals, regulations, litigations
 Risk factors associated with the company and the external environment
 Analysis of applicable regulations like FDI/FII, etc
Business activities past performance financial results
 Industry background, competition & business environment
 Description of the company’s business
 Financial performance for the last five years
 Objects of the issue
 Future plans and strategy of the company
 Management’s discussion and analysis of the financial results
Material contracts agreements
 Enabling provisions of MoA & AoA for allowed lines of business
 Letters of Contract with each member of the issue management team
 Loan agreements & sanction letters with FIs/ Banks
 Deeds of hypothecation executed in favor of the lenders
 Underwriting agreements
 Agreement with the KMP
 Purchase order with major suppliers
 All utilities contracts & permissions
 Syndicate & Escrow agreement
Promoters & Management
 Quality, experience, qualifications, reporting structures, composition of Board
of Directors
 Quality of human resources
 Initial Public Offers and Due Diligence

 Details of KM.

Offer Document – Three Distinct Sections

Formally divided into Part I & II as per Companies Act format, covering three sections -
issue structure, operating details, and general & statutory information
Issue structure
 Capital structure of the company
 Terms and conditions governing the instruments being
issued

Operating details
 Information gathered during the Due Diligence process
 Highlight the company's strengths and operations

General and statutory information

 Description on the basis of allotment
 Auditors report
 Extracts of the Articles of Association
 List of Material Contracts and Documents
 Initial Public Offers and Due Diligence

Reservations and Firm Allotment

Reservations can be made for the following investors

 Permanent employees (not exceeding 10% of the issue)

 Indian Mutual Funds
 Foreign Institutional Investors
 NRI investors
 Indian and Multilateral Development Financial Institutions
 Scheduled Banks

Firm allotment can be made to the following investors

 Permanent employees (not exceeding 10% of the issue)

 Indian Mutual Funds
 Foreign Institutional Investors
 NRI investors
 Indian and Multilateral Development Financial Institutions
 Scheduled Banks

IMPORTANT NOTES TO REMEMBER

 Firm allotment can be made at a price higher than the issue price
 Firm allotments are locked in for one year
 Persons to whom firm allotment has been made cannot apply in the portion for the
public
 Category of investors for whom reservation has been made cannot apply in the
portion for the public
 Above mentioned condition is not applicable to employees
 Initial Public Offers and Due Diligence

NOTE:
The Investment Banker Representative only has an advisory role in selection of the above
intermediaries. The final decision for selection will rest with the Issuer Company.

 Filing of the prospectus with SEBI along with due-diligence certificate and
SE's (only draft prospectus)
10 Copies of the Draft Prospectus, the Inter Se Certificate, and a floppy containing
the Draft Prospectus, MOU, Filing Fee and a Due-Diligence Certificate is
submitted to the Regional SEBI Office / SEBI Mumbai (as the case may be).IB
representative submits 10 Copies of the Draft Prospectus to SE’s where listing is
sought. A copy of the draft prospectus is filed along with a request letter from the
Company for Demat of shares to both NSDL & CDSL. An acknowledgment is
obtained from the SEBI Office, wherever submitted.

 Replying to all observations

On receipt of observations from SEBI, IB representative to SEBI covering all the
observations within the stipulated time submits a reply.

 Submission of complaints / material changes report

A complaint / material changes report is submitted by the IB Representative to
SEBI, 21 days after filing of the Draft Prospectus, stating the complaints received,
if any, from public/institutions and the amendments to be made in the Draft
Prospectus.

 Receipt of SEBI card

All the observations given by SEBI are incorporated and the final prospectus is
filed to SEBI.

 Underwriting of the issue

 Initial Public Offers and Due Diligence

On receipt of SEBI Card, if the company intends to get its issue underwritten the
following documents are sent to the Brokers/Investment Bankers by the IB
Representatives inviting them to participate in the underwriting:

 Draft prospectus
 Underwriting agreements
 Performa for devolvement made by the Underwriters (if any)
 Certificate regarding the net worth of the Underwriters (confirmation
letter )
 Consent letter to act as Brokers to the issue

 Finalization of underwriting
On receipt of underwriting confirmations, the IB In charge in consultation with
the Company finalizes the underwriting amount.

 Filing of Final Draft Prospectus

The Final Draft Prospectus is filed to SEBI after incorporating all the observations as
specified in the acknowledgment card before filing with ROC.

 Filing of material documents with ROC:

On finalization of underwriters to the issue by IB representative, all material
documents as mentioned in the Prospectus along with a copy of the Prospectus duly
signed by the Board of Directors (of the Issuer Company) are filed with ROC.

 Filing of Due-Diligence Certificate with SEBI

A Due - Diligence Certificate is filed with SEBI by IB Representative on filing of
prospectus to ROC.

 Preparation of Application Form

Issue Application Form is prepared as per the Ministry of Finance and SEBI
guidelines.
 Initial Public Offers and Due Diligence

 Printing of Share Application Forms and Prospectus.

On receipt of the ROC card the IB Representative arranges for the Issue Application
Forms and Prospectus to be printed.

 Preparation of distribution schedule for dispatch of

Issues Applications Forms & Prospectus.
A distribution schedule is prepared by the IB Representative for dispatch of Issue
Application Forms and Prospectus to Brokers, SEs, Underwriters, and Bankers to the
issue, Advertisement agency, Investment Bankers etc.

 Submission of printed copies of Prospectus to SEBI

IB representative submits 5 printed copies of prospectus to SEBI Regional and
Mumbai offices, at least 10 days before the opening of the issue.

 Arranging for the Opening of the Issue.

IB representative makes all necessary arrangements for opening of issue.

 Filing of the Due-Diligence Certificate with SEBI.

A Due - Diligence Certificate is filed with SEBI by IB representative before the
opening of the issue informing that no corrective action is required.

 Filing of the Auditor's Certificate regarding receipt of promoter's

contribution.
IB representative ensures that Auditor's certificate, confirming the receipt of
promoter's contribution, giving the detailed list of Promoter's group, is filed
with SEBI and SE's (where listing is sought) by the Issuer Company, at least
one day before the opening of the issue. He also ensures that 1% of the issue
amount is deposited with Regional Stock Exchange at least one day before the
opening of the issue by the Issuer Company.
 Initial Public Offers and Due Diligence

 Filing of Final Compliance Certificate with SEBI:

A Final Compliance Certificate is filed with SEBI before the closure of issue.

 Closure of issue
On receipt of 90 % subscription (as per the details provided by Bankers to the
issues and Registrar's to the issue) the issue is closed on the earliest closing
date, if any. If the issue is still unsubscribed, it is kept open for a total period
of 10 working days, before the devolvement notices are served to the
underwriters of the issue.

 Filing of 3- Day Compliance Report with SEBI

IB representative files a 3-Day Compliance Report with SEBI.

 Filing of 78- Day Compliance Report with SEBI

IB representative files a 78-Day Compliance Report with SEBI

 Assisting the Issuer Company in completion of listing formalities

Whenever and wherever required, IB representative assists the issuer company
in completing the listing formalities by referring to the checklist of documents
to be filed with the stock exchanges for listing securities in case of public
issues.

The above procedure brings out the involvement of the Investment banker in the
Issue Process. The next few chapters will focus on some key points such as the
Prospectus, the Due Diligence, Post-Issue Monitoring Reports, and so on.
The Investment Banker must work diligently in order to ensure that all relevant
and updated information is captured aptly and truly in the Prospectus. The
importance of the Prospectus must therefore be understood. The next chapter
 Initial Public Offers and Due Diligence

explains the Prospectus in detail, so that the reader may understand its
significance and purpose.

The Prospectus
The `Prospectus’ is the most important document for the company to come out
with a public issue. Pursuant to Section 2(36) of The Companies Act, `Prospectus’
means any document described or issued as a prospectus and includes any notice,
circular, advertisement or other document inviting deposits from the public or
inviting offers from the public for the subscription or purchase of any shares in, or
debentures of, a body corporate. The purpose of the Prospectus is to provide all
the necessary and true information to investors about a Company in order to
enable him to make an investment decision.
The Prospectus is a document by way of which the investor gets all the
information pertaining to the company in which he is going to invest. It gives the
detailed information about the company, its promoters and directors, group
companies, capital structure, terms of the present issue, details of the proposed
project, particulars of the issue etc.

There may be two kinds of Prospectus:

 An Ordinary Prospectus is a formal written offer to sell securities that
provides an investor with the necessary information to make an informed
decision. It is used in case of an IPO Issue under the Fixed- Price Process, where
the investors know the Price of the IPO beforehand. It explains a proposed or
existing business enterprise and must disclose any material risks and information
according to the securities laws.
 A Red Herring Prospectus is a preliminary prospectus issued by
underwriters or issuers to gauge interest in a prospective offering. It is used in the
case of an IPO issue under the book-building process, where applicants are to bid
for the IPOs. It receives its name from the warning, printed in red, that
 Initial Public Offers and Due Diligence

information in the document is incomplete or subject to change before the issue. It

relates to a registration statement filed with the Securities and Exchange Board of
India that has not yet become effective.
There are certain mandatory disclosures that have to be made in the prospectus. These are
included in Schedule II of the Companies Act, 1956. Moreover, SEBI (Disclosure and
Investor Protection), Guidelines, 2000 give details about the contents of prospectus
Vetting by SEBI/Stock Exchanges
 A Company cannot come out with public issue unless a Draft Prospectus is filed
with SEBI.
 A Company cannot file the Prospectus directly with SEBI. It has to be filed
through an Investment Banker. After the preparation of the Prospectus, the
Investment Banker along with the Due Diligence Certificate and other
compliance sends the same to SEBI for vetting
 SEBI on receiving the same scrutinizes it and may suggest changes within 21
days of receipt of the Prospectus.
 If the issue size is upto Rs. 20 crores, the Investment Bankers is required to file
the Prospectus with the regional office of SEBI falling under the jurisdiction
in which the registered office of the Company is situated. If the issue size is
more than Rs. 20 crores, Investment bankers are required to file prospectus at
SEBI, Mumbai office.
 The Prospectus is also to be filed with the concerned Stock Exchanges along
with the application for listing of securities. Presently, Companies
approaching the Stock Exchange for public issues should obtain In-Principal
Approval from such Stock Exchanges.

Date of Prospectus and ROC Card

After making changes, if any, as recommended by SEBI / Stock Exchanges, the
final Prospectus, duly signed by all the Directors must be filed with the Registrar of
Companies (ROC) along with the copy of all material documents. The ROC may
 Initial Public Offers and Due Diligence

suggest changes which should also be reported to SEBI / Stock Exchanges. The date
on which ROC Card is obtained is the date of the prospectus.

Contents of the Prospectus

 The word "Prospectus".
 The name of the Issuer Company and address of the registered office of the
company, along with telephone fax number and E-mail address.
 The nature, number, price and amount of the instruments offered.
 Risk in Relation to First Issue and General Risk of Investment Clauses.
 Issuer’s Absolute Responsibility Clause.
 Various Disclaimer Clauses of the SEBI, the Stock Exchanges, the
Investment Banker, and the Company.
 Various Undertakings by the Company and its Board of Directors.
 The names and address of the Investment bankers, and other intermediaries
involved in the Issue.
 The Issue Opening and Closing Dates.
 Risk Factors associated with the Issue and Management Perception to handle
these factors thereof.
 Information on various transactions by the issuer Company.
 Government Approvals and Filing.
 Listing with the Stock Exchanges.
 Credit Rating.
 Instructions to investors on who can apply and how to apply.
 Information on the utilization of Issue Proceeds.
 Full details on the Capital Structure of the Company and Shareholding
Pattern.
 Initial Public Offers and Due Diligence

 Terms of the Offer and Rights of Shareholders.

 Basis of Allotment of Shares.
 History of the Company and details on its present business, market position,
etc.
 Details of existing facilities.
 Details of project cost and means of financing the project.
 Full Financial Details and Financial Statements for last five years, complete
with the Auditor’s Report.
 Details on Promoters and their Background.
 Basis of the Issue Price.
 Statutory and other Information.
 Outstanding litigation, defaults, adverse events and material developments.
 Material contracts and Inspection of Documents.
The Prospectus is prepared after much verification and clarification between the
Client Company, the Regulatory Bodies and the Investment Banker. The contents of
the Prospectus must be reliable and relevant. The Investment Banker performs Due
Diligence in order to ensure this and Issues Certificates of Due Diligence at various
stages. The next chapter explains the concept of Due Diligence in detail.
 Initial Public Offers and Due Diligence

Due Diligence
A Company that wants to issue IPOs needs to first gets listed. Several other
formalities are also involved in the entire process of issuing IPOs. An Investment
Banker is thus appointed for managing the process for the issue of IPOs.

The Investment Banker must perform a fiduciary role by balancing the interests of
the investors, the client companies and the regulatory bodies (e.g., SEBI), all at
once. Within these constraints, he must perform DUE DILIGENCE, which is
making sure that all relevant and updated information of the Client Company is
captured in the Prospectus. This is because the Prospectus is the main document that
an investor would go through while deciding on whether to invest in a company.
This is why the Prospectus is aimed at revealing every detail about the company,
which could have an impact on the investor’s decision.

The process of Due Diligence is a time-consuming one and it involves a number of

mental efforts. It involves the verification of various documents provided by the
Client Company. The information and calculations in these documents need to be
checked, summarized, modified and updated so that it may be accurately stated in
the Prospectus. Any wrong inaccurate information needs to be identified and
corrected by the Investment Banker. If left uncorrected, it is passed on to the
Prospectus. This could ultimately put the Investment Banker’s reputation and
license at stake in extreme cases.
 Initial Public Offers and Due Diligence

In order to ensure a flawless Prospectus, the Investment Banker must therefore work
diligently and skeptically. All relevant details about the client must be backed with
supporting evidence.

The following are some details that need to be scrutinized for a typical client
company:

1. General:
The MOA and AOA provide information on the company, its business, and its
norms, rules and regulations. These documents need to be checked in order to
get a good picture about the kind of business the company is engaged in, the
risk attached to it, and the procedures followed by it. Various clearances and
approvals also need to be looked into in order to be sure that the company has
been carrying on a fully legal and approved business.

2. Company Details:
A brief history of the company gives an insight into the changes in office
addresses, conversion to Public Limited Company, and so on. The present
business of the company gives investors an idea on the risk attached. Further
details may be provided, regarding the achievements and milestones attained,
in order to give an idea about the success of the company.

3. Project Details:
Full project details give the investor a chance to determine the viability of the
very project for which the company is issuing IPOs. Project cost estimates,
technology to be adopted, Project Appraisal Report, and other such statements
enable the investor to decipher the potential of a particular project.

A SWOT Analysis of the company and the industry in which it is operating

also illustrates the areas that it can exploit and the ones that it is vulnerable to.
 Initial Public Offers and Due Diligence

An overview of the industry in which it operates is also needed in order to

judge the present and future performance of the company, and also to know
the external factors that may affect its performance. Any unusual events and
future anticipated changes must also be brought to the attention of the
investors.

4. Promoters:
The promoters’ reputation and capability affects the success of the company.
Therefore, their age, qualifications and work experience have to be revealed.
Also, the other ventures that they may be promoting and the number of shares
held by them need to be known, in order to know the promoters’ share in the
control of the company and their ownership stake.

5. Directors:
The Directors of the company must also have a good reputation and must be
capable enough to run the company. Their brief bio-data must be disclosed
and any changes in directors, details of other directorships and details of
remuneration must be known.

6. Auditors:
The names and addresses of the Auditors and any changes in Auditors need to
be disclosed. The Auditors employed must have a good recognition in the
market and must be of repute. They must be known to be accurate in their
work.

7. Product Details, Raw Materials, Plant & Machinery:

The entire details on the availability of raw material, technology used to make
the product, existing cost of Plant & Machinery, import of raw material,
 Initial Public Offers and Due Diligence

approvals and even the method of manufacture of the product need to be

disclosed. The description of the product itself, its market demand scenario,
price trend and relative market position must be captured aptly.

This information illustrates the performance of the product in the market and
the profit the company would be expected to make. The disclosures on input
and output are needed so that any future scarcity or unfavorable events that
may affect the company can be anticipated.

8. Marketing:
Existing competition and the proposed marketing strategy should be
effectively summarized so that the standing of the company in the market is
brought out. The chances of a successful performance can also be brought out
from this information.

9. Outstanding Litigation:
Criminal prosecution, non-payments or pending disputes are likely to affect
the finances and operations of the company. In turn, they affect the investor’s
decision since he may not be willing to take the risk of investing in a company
with too much outstanding litigation.

10. Companies under the same management:

Details such as names and addresses of companies under the same
management and details of the capital issue made by them during the last three
years need to be furnished. Also, any particulars of strikes/ lockouts or any
form of labor unrest should be specified. Promise vs. Performance should also
be given. Such details are necessary since the performance of a company
under the same management can be used as a parameter to predict the
performance of the concerned company.

11. Consents:
 Initial Public Offers and Due Diligence

Consent Letters from Auditors, Company Secretary, Legal Advisors, Lead

Managers, Bankers, etc. need to be obtained to act in their capacity.

12. Land, Civil Work and Assets:

Land may have been leased; architects and contractors may have been
appointed. Supporting papers for all such agreements need to be
scrutinized and the terms and conditions weighed. Any change in assets
must also be mentioned.

13. Financial Assistance:

Applications made by the company to Banks/ Financial Institutions must
be checked. The corresponding Sanction Letters, Principle terms of the
loan and assets charged, as security must also be disclosed.

14. Financial Information:

The performance of the company in the past has to be evaluated on the
basis of financial figures. The Balance Sheet, Profit & Loss Account, Key
Accounting Ratios, Capitalization Statements, Tax Shelter Statements, etc.
have to be provided for the company, for the last five years, and for its
subsidiaries, for the last three years. The Auditor’s Certificate regarding
the financial statements is also needed. It is on this basis that one can see if
the company is doing well in the market, whether it is healthy, what its
credit worthiness is how its profitability is, etc. These calculations form
the crucial crux of the investor’s decision.

15. Miscellaneous:
Notes on Investor Grievances and Redressed, Notes on Corporate
Governance, Amalgamations/ Mergers need to be additionally provided.
 Initial Public Offers and Due Diligence

The above disclosures need to be made in order to open up the information on the
company before the investors. SEBI is a ‘vigilant watchdog’ for the protection of
the investors’ interests, and is thus justified in laying down the Disclosure and
Investor Protection Guidelines for any Public Issue. The Investment Banker’s duty
is to follow these Guidelines and to perform Due Diligence, so that the investors are
given a Prospectus that they can rely on and make a suitable investment decision.
The Application Form
The Application Form is an Instrument whereby investors can apply for an IPO. An
investor’s signature on an Application Form means that he has gone through the
Prospectus of the Company and that he would like to be registered as the holder of
Equity Shares that would be allocated to him. The Investor may apply for an IPO
anytime between the Opening and the Closing of the Issue.
The Application Form must contain Undertakings by Investors about their
acceptance of the Terms of the Offer, the decision of the Board of Directors, etc. It
also contains all the necessary details about the denomination in which shares will
be issued, minimum subscription, mode of payment, and so on.

In brief, the main contents of an Application Form are as follows:

 Name of the Issuer Company along with registered office address, telephone
number, and fax and email id.
 Nature, numbers, price and amount of the issue.
 Offer Opening and Closing Dates.
 Broker, Sub-Broker, Bank Branch and Registrar’s respective Stamps and
Codes.
 Applicant’s undertaking.
 Minimum Subscription and other instructions for payment.
 Applicant’s details on address, Father’s/Husband’s Name, Bank Particulars,
Details of Nominee, if any, Age, Status (whether Individual, Body
Corporate, Company, NRI, Bank or Other) and Occupation.
 Applicant’s PAN/ GIR No.
 Applicant’s Depository Account details.
 Initial Public Offers and Due Diligence

 Bank’s Counterfoil details.

 An Abridged Prospectus of the Issuer Company which contains all details of
the Prospectus in brief, as specified by the SEBI DIP Guidelines.

The main purpose of the Application Form is to remind Investors once again about
the contents and position of the Issuer Company, and to take all the investors’
details required for the allotment of shares. The Registrar of Companies (ROC)
receives all Application Forms where the Basis of Allotment is also decided.

The Application Forms are processed to arrive at the number of shares to be allotted
to the applicants, according to the Basis of Allotment. Any details that are left
unfilled or incorrectly filled can make the Form liable to be rejected. Therefore the
applicant must also go through the Checklist provided in the Application Form in
order to ensure that the Form has been correctly filled.

The Post-Issue Monitoring Reports

The Investment Banker’s Obligations do not end with the closure of the Issue of the
IPO. Irrespective of the level of subscription, the Investment Banker must ensure
the submission of the Post-Issue Monitoring Reports as specified by SEBI, DIP
Guidelines. There are mainly two Post-Issue monitoring Reports:

 The 3-Day Post-Issue Monitoring Report.

 The 78-Day Post-Issue Monitoring Report

The 3-Day Post-Issue Monitoring Report

This report is to be submitted within 3 days of the closure of the issue. It is
quantitative in nature. The Report contains details on:

 Issue Opening and Closing dates.

 Actual Closing date.
 Date of filing with ROC.
 Initial Public Offers and Due Diligence

 Nature of the instrument.

 Offer Price, Face Value and Premium.
 Issue Size.
 Amount per instrument on application.

The 78-Day Post-Issue Monitoring Report

The 78-Day Post Issue Monitoring Report focuses on the smoothness with which
the concerned issue of the Initial Public Offer took place in the 78 days after the
closure of the issue. Any non- compliance is specifically spelled out in this report.
This report serves as an indicator to point out any discrepancies encountered against
any initial proposals made. It also draws attention to the targets that have been met
and the proposed goals that have been achieved. Just like the Prospectus of a
company sets out the objectives and the purpose behind the issue in detail, the 78-
Day Post Issue Monitoring Report shows how far these objectives and purpose have
been accomplished. It is a report on the performance versus the promises made.
The 78- Day Monitoring Report is thus not a mere formality. It brings out the
progress of the issue and helps locate shortfalls, if any, on time. It is needed in order
to satisfy the regulatory bodies, and the Issuer Company on the performance of the
issue. The following are some of the details that may be included in the 78- Day
Post Issue Monitoring Report:

 General Details about the Issue Opening and Closing Dates.

 Number of collecting banks and bank branches.
 Subscription Details.
 Amount of subscription received.
 Number o Applications received and instruments applied for.
 Number of times issue subscribed (= No. Of instruments applied for / no. o
instruments under net public offer category)
 Information related to reserved categories such as NRIs, Banks, FIIs,
Employees, etc.
 Initial Public Offers and Due Diligence

 Names and amount of Firm Allottees who did not meet their commitments
though mentioned in the Prospectus.
 Allotment Details such as Number of successful Allottees, number of
unsuccessful Allottees, etc.
 Amount of Refund due and names of Refund Bankers.
 Details on the amount of issue underwritten and details of underwriters, in case
of under subscription.