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MBA 2nd sem Cosmic Business School
Somendr a Tripathi
[A PROJECT REPORT BASED ON INTERNSHIP EXECUTED AT ANZEL BROKING LTD AHMDABAD, GUZRAT.]
The Report is based on the project given which is “An Initial Public Offer strategy formulation and Reliance Power IPO preceding and its consequents” Project th th Duration – 5 of April to 5 of june
The Process of IPO & its implementation in Reliance Power LtdThe Process of an IPOIn order to understand the process of an IPO we must first know the meaning of it.
So what does the IPO mean?
An IPO is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity. If the company has never issued equity to the public, it's known as an IPO.
The Type of companies and their respective characteristics
Companies fall into two broad categories: private and public. A privately held company has fewer shareholders and its owners don't have to disclose much information about the company. Anybody can go out and incorporate a company: just put in some money, file the right legal documents and follow the reporting rules of your jurisdiction. Most small businesses are privately held. But large companies can be private too. It usually isn't possible to buy shares in a private company. You can approach the owners about investing, but they're not obligated to sell you anything. Public companies, on the other hand, have sold at least a portion of themselves to the public and trade on a stock exchange. This is why doing an IPO is also referred to as "going public."
Public companies have thousands of shareholders and are subject to strict rules and regulations. They must have a board of directors and they must report financial information every quarter. In India public companies report to Security Exchange Board Of India ( SEBI).
Why Go Public? Going public raises cash and usually a lot of it.
Being publicly traded also opens many financial doors: • Because of the increased scrutiny, public companies can usually get better rates when they issue debt. • As long as there is market demand, a public company can always issue more stock. Thus, mergers and acquisitions are easier to do because stock can be issued as part of the deal.
• Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent.
Now Let us move towards the Process.. The first step is called The Underwriting Process The Underwriting Process
When a company wants to go public, the first thing it does is hire an investment bank. A company could theoretically sell its shares on its own, but realistically, an investment bank is required. Underwriting is
the process of raising money by either debt or equity (in this case we are referring to equity). we can think of underwriters as middlemen between companies and the investing public. The biggest underwriters are Goldman Sachs, Merrill Lynch, Credit Suisse First Boston, Lehman Brothers and Morgan Stanley. The company and the investment bank will first meet to negotiate the deal. Items usually discussed include the amount of money a company will raise, the type of securities to be issued and all the details in the underwriting agreement.
The role of Investment Banks in the processWhen a corporation first makes stock available for public purchase, it works with an investment banking firm to arrange an initial public
offering (IPO). The investment bank acquires the first issue of stocks from the corporation at a negotiated price, and then makes the shares available for sale to its clients and other investors. Corporations that have IPOs are usually young companies in need of large amounts of capital.
The deal can take place in several ways which are as follows.. 1-- Firm commitment- the underwriter guarantees that a certain
amount will be raised by buying the entire offer and then reselling to the public.
2-- Best efforts- the underwriter sells securities for the company but doesn't guarantee the amount raised. Also, investment banks are hesitant to shoulder all the risk of an offering. Instead, they form a syndicate of underwriters. One underwriter leads the syndicate and the others sell a part of the issue. Once all sides agree to a deal, the investment bank puts together a registration statement to be filed with the SEC. This document contains information about the offering as well as company info such as financial statements, management background, any legal problems, where the money is to be used and insider holdings.
The Second step is called cooling off period
Cooling off period
After underwriting proposal, SEBI requires the cooling off period in which they investigate and make sure all material information has been disclosed. Once the SEBI approves the offering, a date (the effective date) is set when the stock will be offered to the public. An important phenomenon takes place during the cooling off period which is known as the Red Hearing.
Red Hearing- This is an initial prospectus containing all the
information about the company except for the offer price and the effective date, which aren't known at that time. With the red herring in hand, the underwriter and company attempt to hype and build up interest for the issue. They go on a road show where the big institutional investors are courted.
Third step- Price determination for offer
As the effective date approaches, the underwriter and company sit down and decide on the price. it depends on the company, the success of the road show and, most importantly, current market conditions. Of course, it's in both parties' interest to get as much as possible. Usually there are two methods for this purpose..
1- price fixed before the issue- The offer price for shares in a
public offer can be fixed before the issue. It can also be discovered by gauging the demand in the market for shares at various price points.
2- book building method- In this, the issue manager fixes a priceband rather than a single price for the IPO and asks investors to bid for shares in that price range. The price band is fixed on the basis of the fundamentals of the company, the performance of share prices of other companies in the same sector on bourses and market survey conducted by issue managers. 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. Investment banks, therefore, take many factors into consideration when pricing an IPO, and attempt to reach an offering price that is low enough to stimulate interest in the stock, but high enough to raise an adequate amount of capital for the company. The process of determining an optimal price usually involves the underwriters ("syndicate") arranging share purchase commitments from lead institutional investors.
An investor can bid for shares at various price levels. Normally the demand for shares at the minimum price level is maximum. But when the market is booming, the issue is often oversubscribed at the higher end of the band itself. In such a case, the offer price is ultimately fixed at the upper end of the band.
OVERPRICING & UNDERPRICING
Historically, IPOs both globally and in the US have been underpriced. The effect of underpricing an IPO is to generate additional interest in the stock when it first becomes publicly
traded. This can lead to significant gains for investors who have been allocated shares of the IPO at the offering price. However, underpricing an IPO results in "money left on the table"—lost capital that could have been raised for the company had the stock been offered at a higher price. The danger of overpricing is also an important consideration. If a stock is offered to the public at a higher price than what the market will pay, the underwriters may have trouble meeting their commitments to sell shares. Even if they sell all of the issued shares, if the stock falls in value on the first day of trading, it may lose its marketability and hence even more of its value.
Some important terms related to IPO
1-The Lock-Up Period- When a company goes public, the
underwriters make company officials and employees sign a lock-up agreement. Lock-up agreements are legally binding contracts between the underwriters and insiders of the company, prohibiting them from selling any shares of stock for a specified period of time. The period can range anywhere from three to 24 months. The problem is, when lockups expire all the insiders are permitted to sell their stock. The result is a rush of people trying to sell their stock to realize their profit. This excess supply can put severe downward pressure on the stock price.
2- Flipping- Flipping is reselling a hot IPO stock in the first few days
to earn a quick profit. This isn't easy to do, and you'll be strongly discouraged by your brokerage. The reason behind this is that companies want long-term investors who hold their stock, not traders. There are no laws that prevent flipping, but your broker may blacklist you from future offerings Of course, institutional investors flip stocks all the time and make big money. The double standard exists and there is nothing we can do about it because they have the buying power. Because of flipping, it's a good rule not to buy shares of an IPO if you don't get in on the initial offering. Many IPOs that have big gains on the first day will come back to earth as the institutions take their profits.
3- Tracking Stocks- Tracking stocks appear when a large company
spins off one of its divisions into a separate entity. The rationale behind the creation of tracking stocks is that individual divisions of a company will be worth more separately than as part of the company as a whole. From the company's perspective, there are many advantages to issuing a tracking stock. The company gets to retain control over the subsidiary but all revenues and expenses of the division are separated from the parent company's financial statements and attributed to the tracking stock. This is often done to separate a high-growth division with large losses from the financial statements of the parent company. Most importantly, if the tracking stock rockets up, the parent company can make acquisitions with the subsidiary's stock instead of cash. While a tracking stock may be spun off in an IPO, it's not the same as the IPO of a private company going public. This is because tracking stocks usually
have no voting rights, and often there is no separate board of directors looking after the rights of the tracking stock.
That completes the whole phenomenon and the process of an IPO.
RELIANCE POWER INITIAL PUBLIC OFFERING
RELIANCE POWER IPO
The hitherto biggest-ever IPO in India, Reliance Power IPO has turned heads around and evoked a much wider public interest, going beyond the hardened circles of stock investors.
After the flush of power sector IPOs through 2007, investors are now bracing for the biggest of them all – the Reliance Power (RPL) IPO, which was opened on January 15. The RPL IPO, which was finally given a goahead by SEBI, will have an unprecedented issue size of Rs 11,700 crore ($3 billion), on the upper priceband. With this IPO, Reliance Power will eclipse the hitherto biggest $2.5 billion DLF IPO on the Indian bourses
Behind the growing number of power IPOs is the proposed 2012 generation target of up to 2,14,359 mw, provisioned in the 11th Fiveyear Plan. The total installed capacity, as on September 2007,stood at 1,35,782 mw power generation shortfall of 78,577 mw needs to be
covered in the next five years. This has opened up opportunities for various power players to grow in the coming years. To make the most of this opportunity and fund its identified projects, RPL is tapping the capital market with an IPO of 26 crore equity shares in the priceband of Rs 405-450. It is looking to raise around Rs 10,530-11,700 crore through the IPO, which would be spent on power and power-related projects, besides setting aside funds for meeting corporate expenses.
METHODS OF PAYMENT
The company has spelt out two methods of payment. In the first option, for retail and noninstitutional bidders, the company would only accept 25 per cent or Rs 115 with the application. The balance amount RPL would
realize after the allotment of shares. In the second option, bidders of any category, except QIBs, would be allowed to make full payment against the shares bid. QIBs here would be paying 10 per cent of the bid amount and the balance on allotment of shares. Besides, the company has also decided to offer a discount of Rs 20 on the issue price to retail investors.
QUALIFIED INSTITUTIONAL BUYER (QIBs)- Qualified Institutional buyer
primarily refers to institutions that manage at least $100 million in securities including banks, savings and loans institutions, insurance companies, investment companies, employee benefit plans, or an entity owned entirely by qualified investors. Also included are registered broker-dealers owning and investing, on a discretionary basis, $10 million in securities of non-affiliates.
INSTITUTIONAL INVESTORSAn institutional investor is an investor, such as a bank, insurance company, retirement fund, hedge fund, or mutual fund, that is financially sophisticated and makes large investments, often held in very large portfolios of investments.
In other words, institutional investor is a person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. Institutional investors face fewer protective regulations because it is assumed that they are more knowledgeable and better able to protect themselves.
Issue Opened On 15-Jan-08
• Issue Closed On 18-Jan-08 • Number of shares- 26 crore equity shares. • Price Band- Rs 405-450 (F.V. Rs 10). • Issue route- Book Building. • Promoters- Anil Ambani. • Post issue Equity- 266 crore equity shares. • Minimum Bid- 15 equity shares. • Lead managers- Kotak, UBS, JP Morgan, ABN AMRO, Enam etc. • Listing- BSE, NSE. • QIB Portion- 13.68 crore equity shares. • Non Institutional- 2.28 crore equity shares. • Retail Portion- 6.84 crore equity shares.
• Robust growth in power sector
Power sector in priority of 11th five year plan
• Diversified project portfolio and customers • 7 more projects in pipeline • Super-critical technology in three out of thirteen projects
No power project operational till date
• First project will go on stream in Dec. 2009 only • No definite fuel supply contracts till date
• No experience for executing big power projects
Rival companies NTPC and TATA Power will tighten the competition.
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