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Topics Covered
Executive Summary ----------------------------------------------------- 3

Introduction ----------------------------------------------------------------- 4

What Is An IPO ---------------------------------------------------------------- 5

Why Go Public ----------------------------------------------------------------- 8

Getting In An IPO ----------------------------------------------------------- 9

IPO  Advantages & Disadvantages ---------------------- 11

Parameters To Judge An IPO ----------------------------------- 14
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Understanding The Role Of Intermediaries -- 16

Registration Process ----------------------------------------------- 18 IPO Scams ------------------------------------------------------------------------19

Salient Features Of IPO Scams ------------------------------ 26

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Operational Deficiencies --------------------------------------- 27

Measures To Prevent Scams ---------------------------------- 28

Recent IPO’s ------------------------------------------------------------------ 29

DEFINITIONS AND ABBREVIATIONS --------------------------- 30

 Bibliography --------------------------------------------------------------- 34

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As we all know IPO – INITIAL PUBLIC OFFERING is the hottest topic in the current industry, mainly because of India being a developing country and lot of growth in various sectors which leads a country to ultimate success. And when we talk about country’s growth which is dependent on the kind of work and how much importance to which sector is given. And when we say or talk about industries growth which leads the economy of country has to be balanced and given proper finance so as to reach the levels to fulfill the needs of the society. And industries which have massive outflow of work and a big portfolio then its very difficult for any company to work with limited finance and this is where IPO plays an important role. This report talks about how IPO helps in raising fund for the companies going public, what are its pros and cons, and also it gives us detailed idea why companies go public. How and what are the steps taken by the companies before going for any IPO and also the role of (SEBI) Securities and Exchange Board of India the BSE and NSE , what are primary and secondary markets and also the important terms related to IPO. It gives us idea of how IPO is driven in the market and what are various factors taken into consideration before going for an IPO. And it also tells us how we can more or less judge a good IPO. Then we all know that scams have always been a part of any sector you go in for which are covered in it and also few recommendations are given for the same. It also gives us some idea about what are the expenses that a company undertakes during an IPO. IPO has been one of the most important generators of funds for the small companies making them big and given a new vision in past and it is still continuing its work and also for many coming years.

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IPO stands for Initial Public Offering and means the new offer of shares from a company which was previously unlisted. This is done by offering those shares to the public, which were held by the promoters or the private investors prior to the IPO. In the case when other investors or Promoter held the shares the stake holding comes down to the extent their shares are offered to the public. In other cases new shares are issued to the public and the shares, which are with the promoters stay with them. In both cases the share of the promoters in the total capital comes down. For example say there are 100 shares in a company and 50 of these are offered to the public in an IPO then in such a case the promoter’s stake in the company comes down from 100% to 50%. In another case the company issues 50 additional shares to the public and the stake of the promoter comes down from 100% to 67%. Normally in an IPO the shares are issued at a discount to what is considered their intrinsic value and that’s why investors keenly await IPOs and make money on most of them. IPO are generally priced at a discount, which means that if the intrinsic value of a share is perceived to be Rs.100 the shares will be offered at a price, which is lesser than Rs.100 say Rs.80 during the IPO. When the stock actually lists in the market it will list closer to Rs.100. The difference between the two prices is known as Listing Gains, which an investor makes when investing in IPO and making money at the listing of the IPO. A Bullish Market gives IPO investors a clear opportunity to achieve long term targets in a short term phase. Page |5

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What is an IPO
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. 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. Did you know that IKEA, Domino's Pizza and Hallmark Cards are all privately held? 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 the United States, public companies report to the Securities and Exchange Commission (SEC). In other countries, public companies are overseen by governing bodies similar to the SEC. From an investor's standpoint, the most exciting thing about a public company is that the stock is traded in the open market, like any other commodity. If you have the cash, you can invest. The CEO could hate your guts, but there's nothing he or she could do to stop you from buying stock. The first sale of stock by a private company to the public, IPO’s are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market. IPO’s can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most IPO’s are of Page |6

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Primary and Secondary markets

In the primary market securities are issued to the public and the proceeds go to the issuing company. Secondary market is term used for stock exchanges, where stocks are bought and sold after they are issued to the public.

The first time that a company’s shares are issued to the public, it is by a process called the initial public offering (IPO). In an IPO the company offloads a certain percentage of its total shares to the public at a certain price. Most IPO’S these days do not have a fixed offer price. Instead they follow a method called BOOK BUILDIN PROCESS, where the offer price is placed in a band or a range with the highest and the lowest value (refer to the newspaper clipping on the page). The public can bid for the shares at any price in the band specified. Once the bids come in, the company evaluates all the bids and decides on an offer price in that range. After the offer price is fixed, the company allots its shares to the people who had applied for its shares or returns them their money.

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Once the offer price is fixed and the shares are issued to the people, stock exchanges facilitate the trading of shares for the general public. Once a stock is listed on an exchange, people can start trading in its shares. In a stock exchange the existing shareholders sell their shares to anyone who is willing to buy them at a price agreeable to both parties. Individuals cannot buy or sell shares in a stock exchange directly; they have to execute their transaction through authorized members of the stock exchange who are also called STOCK BROKERS.

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Why Go Public?
Basically, going public (or participating in an "initial public offering" or IPO) is the process in which a business owned by one or several individuals is converted into a business owned by many. It involves the offering of part ownership of the company to the public through the sale of debt or more commonly, equity securities (stock). Going public raises cash and usually a lot of it. Being publicly traded also opens many financial doors:

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Downloaded from  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. Being on a major stock exchange carries a considerable amount of prestige. In the past, only private companies with strong fundamentals could qualify for an IPO and it wasn't easy to get listed. The internet boom changed all this. Firms no longer needed strong financials and a solid history to go public. Instead, IPOs were done by smaller startups seeking to expand their businesses. There's nothing wrong with wanting to expand, but most of these firms had never made a profit and didn't plan on being profitable any time soon. Founded on venture capital funding, they spent like Texans trying to generate enough excitement to make it to the market before burning through all their cash. In cases like this, companies might be suspected of doing an IPO just to make the founders rich. This is known as an exit strategy, implying that there's no desire to stick around and create value for shareholders. The IPO then becomes the end of the road rather than the beginning. How can this happen? Remember: an IPO is just selling stock. It's all about the sales job. If you can convince people to buy stock in your company, you can raise a lot of money.

Getting In On an IPO
The Underwriting Process Getting a piece of a hot IPO is very difficult, if not impossible. To understand why, we need to know how an IPO is done, a process known as underwriting. When a company wants to go public, the first thing it does is hire an investment bank. A company could theoretically sell its P a g e | 10

Downloaded from shares on its own, but realistically, an investment bank is required - it's just the way Wall Street works. Underwriting is the process of raising money by either debt or equity (in this case we are referring to equity). You 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 deal can be structured in a variety of ways. For example, in a firm commitment, the underwriter guarantees that a certain amount will be raised by buying the entire offer and then reselling to the public. In a best efforts agreement, however, 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 SEC then requires a cooling off period, in which they investigate and make sure all material information has been disclosed. Once the SEC approves the offering, a date (the effective date) is set when the stock will be offered to the public. During the cooling off period the underwriter puts together what is known as the red herring. 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 - also known as the "dog and pony show" - where the big institutional investors are courted. As the effective date approaches, the underwriter and company sit down and decide on the price. This isn't an easy decision: 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.

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Downloaded from Finally, the securities are sold on the stock market and the money is collected from investors. As you can see, the road to an IPO is a long and complicated one. You may have noticed that individual investors aren't involved until the very end. This is because small investors aren't the target market. They don't have the cash and, therefore, hold little interest for the underwriters. If underwriters think an IPO will be successful, they'll usually pad the pockets of their favorite institutional client with shares at the IPO price. The only way for you to get shares (known as an IPO allocation) is to have an account with one of the investment banks that is part of the underwriting syndicate. But don't expect to open an account with $1,000 and be showered with an allocation. You need to be a frequently trading client with a large account to get in on a hot IPO. Bottom line, your chances of getting early shares in an IPO are slim to none unless you're on the inside. If you do get shares, it's probably because nobody else wants them. Granted, there are exceptions to every rule and it would be incorrect for us to say that it's impossible. Just keep in mind that the probability isn't high if you are a small investor.

The decision to take a company public in the form of an initial public offering (IPO) should not be considered lightly. There are several advantages and disadvantages to being a public company, which should thoroughly be considered. This memorandum will discuss P a g e | 12

Downloaded from the advantages and disadvantages of conducting an IPO and will briefly discuss the steps to be taken to register an offering for sale to the public. The purpose of this memorandum is to provide a thumbnail sketch of the process. The reader should understand that the process is very time consuming and complicated and companies should undertake this process only after serious consideration of the advantages and disadvantages and discussions with qualified advisors.

Advantages of going public
 Increased Capital A public offering will allow a company to raise capital to use for various corporate purposes such as working capital, acquisitions, research and development, marketing, and expanding plant and equipment.  Liquidity Once shares of a company are traded on a public exchange, those shares have a market value and can be resold. This allows a company to attract and retain employees by offering stock incentive packages to those employees. Moreover, it also provides investors in the company the option to trade their shares thus enhancing investor confidence.  Increased Prestige Public companies often are better known and more visible than private companies, this enables them to obtain a larger market for their goods or services. Public companies are able to have access to larger pools of capital as well as different types of capital.

 Valuation Public trading of a company's shares sets a value for the company that is set by the public market and not through more subjective standards set by a private valuator. This is helpful for P a g e | 13

Downloaded from a company that is looking for a merger or acquisition. It also allows the shareholders to know the value of the shares.  Increased wealth The founders of the company often have the sense of increased wealth as a result of the IPO. Prior to the IPO these shares were illiquid and had a more subjective price. These shares now have an ascertainable price and after any lockup period these shares may be sold to the public, subject to limitations of federal and state securities laws.

Disadvantages of going Public
 Time and Expense Conducting an IPO is time consuming and expensive. A successful IPO can take up to a year or more to complete and a company can expect to spend several hundreds of thousands of dollars on attorneys, accountants, and printers. In addition, the underwriter's fees can range from 3% to 10% of the value of the offering. Due to the time and expense of preparation of the IPO, many companies simply cannot afford the time or spare the expense of preparing the IPO.  Disclosure The SEC disclosure rules are very extensive. Once a company is a reporting company it must provide information regarding compensation of senior management, transactions with parties related to the company, conflicts of interest, competitive positions, how the company intends to develop future products, material contracts, and lawsuits. In addition, once the offering statement is effective, a company will be required to make financial disclosures required by the Securities and Exchange Act of 1934. The 1934 Act requires public companies to file quarterly statements containing unaudited financial statements and audited financial statements annually. These statements must also contain updated information regarding nonfinancial matters similar to information provided in the initial registration statement. This usually entails retaining lawyers and auditors to prepare these quarterly and annual statements. In addition, a company must report certain material events as they arise. This P a g e | 14

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 Decisions based upon Stock Price Management's decisions may be effected by the market price of the shares and the feeling that they must get market recognition for the company's stock.  Regulatory Review The Company will be open to review by the SEC to ensure that the company is making the appropriate filings with all relevant disclosures.  Falling Stock Price If the shares of the company's stock fall, the company may lose market confidence, decreased valuation of the company may effect lines of credits, secondary offering pricing, the company's ability to maintain employees, and the personal wealth of insiders and investors.  Vulnerability If a large portion of the company's shares are sold to the public, the company may become a target for a takeover, causing insiders to lose control. A takeover bid may be the result of shareholders being upset with management or corporate raiders looking for an opportunity. Defending a hostile bid can be both expensive and time consuming. Once a company has weighed the advantages and disadvantages of being a public company, if it decides that it would like to conduct an IPO it will have to retain a lead

Parameters to judge an IPO
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Downloaded from Good investing principles demand that you study the minutes of details prior to investing in an IPO. Here are some parameters you should evaluate:-

 Promoters
Is the company a family run business or is it professionally owned? Even with a family run business what are the credibility and professional qualifications of those managing the company? Do the top level managers have enough experience (of at least 5 years) in the specific type of business?

 Industry Outlook
The products or services of the company should have a good demand and scope for profit.

 Business Plans
Check the progress made in terms of land acquisition, clearances from various departments, purchase of machinery, letter of credits etc. A higher initial investment from the promoters will lead to a higher faith in the organization.

 Financials
Why does the company require the money? Is the company floating more equity than required? What is the debt component? Keep a track on the profits, growth and margins of the previous years. A steady growth rate is the quality of a fundamentally sound company. Check the assumptions the promoters are making and whether these assumptions or expectations sound feasible.

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 Risk Factors
The offer documents will list our specific risk factors such as the company’s liabilities, court cases or other litigations. Examine how these factors will affect the operations of the company.

 Key Names
Every IPO will have lead managers and merchant bankers. You can figure out the track record of the merchant banker through the SEBI website.

 Pricing
Compare the company’s PER with that of similar companies. With this you can find out the P/E Growth ratio and examine whether its earning projections seem viable.

 Listing
You should have access to the brokers of the stock exchanges where the company will be listing itself.

Understanding the role of intermediaries
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Downloaded from  Who are the intermediaries in an issue? Merchant Bankers to the issue or Book Running Lead Managers (BRLM), syndicate members, Registrars to the issue, Bankers to the issue, Auditors of the company, Underwriters to the issue, Solicitors, etc. are the intermediaries to an issue. The issuer discloses the addresses, telephone/fax numbers and email addresses of these intermediaries. In addition to this, the issuer also discloses the details of the compliance officer appointed by the company for the purpose of the issue.  Who is eligible to be a BRLM? A Merchant banker possessing a valid SEBI registration in accordance with the SEBI (Merchant Bankers) Regulations, 1992 is eligible to act as a Book Running Lead Manager to an issue.  What is the role of a Lead Manager? (pre and post issue) In the pre-issue process, the Lead Manager (LM) takes up the due diligence of company’s operations/ management/ business plans/ legal etc. Other activities of the LM include drafting and design of Offer documents, Prospectus, statutory advertisements and memorandum containing salient features of the Prospectus. The BRLMs shall ensure compliance with stipulated requirements and completion of prescribed formalities with the Stock Exchanges, RoC and SEBI including finalization of Prospectus and RoC filing. Appointment of other intermediaries viz., Registrar(s), Printers, Advertising Agency and Bankers to the Offer is also included in the pre-issue processes. The LM also draws up the various marketing strategies for the issue. The post issue activities including management of escrow accounts, co-ordinate non-institutional allocation, intimation of allocation and dispatch of refunds to bidders etc are performed by the LM. The post Offer activities for the Offer will involve essential followup steps, which include the finalization of trading and dealing of instruments and dispatch of certificates and demat of delivery of shares, with the various agencies connected with the work such as the Registrar(s) to the Offer and Bankers to the Offer and the bank handling refund business. The merchant banker shall be responsible for ensuring that these agencies fulfill their functions and enable it to discharge this responsibility through suitable agreements with the P a g e | 18

Downloaded from Company.  What is the role of a registrar? The Registrar finalizes the list of eligible allottees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of refund orders to those applicable are sent. The Lead manager co-ordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank branches, processing of the applications and other matters till the basis of allotment is finalized, dispatch security certificates and refund orders completed and securities listed.  What is the role of bankers to the issue? Bankers to the issue, as the name suggests, carries out all the activities of ensuring that the funds are collected and transferred to the Escrow accounts. The Lead Merchant Banker shall ensure that Bankers to the Issue are appointed in all the mandatory collection centers as specified in DIP Guidelines. The LM also ensures follow-up with bankers to the issue to get quick estimates of collection and advising the issuer about closure of the issue, based on the correct figures.  Question on Due diligence The Lead Managers state that they have examined various documents including those relating to litigation like commercial disputes, patent disputes, disputes with collaborators etc. and other materials in connection with the finalization of the offer document pertaining to the said issue; and on the basis of such examination and the discussions with the Company, its Directors and other officers, other agencies, independent verification of the statements concerning the objects of the issue, projected profitability, price justification, etc., they state that they have ensured that they are in compliance with SEBI, the Government and any other competent authority in this behalf.

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What is the Registration Process?
Going public requires a Registration Statement which is a carefully crafted document that is prepared by your attorneys and accountants. It requires detailed discussions on information pertaining to:
       

Business product/service/markets Company Information Risk Factors Proceeds Use (How are you going to use the money) Officers and Directors Related party transactions Identification of your principal shareholders Audited financials

After your registration statement is prepared, it is submitted to the Securities and Exchange Commission and various other regulatory bodies for their detailed review. When this process is completed, you and your management team will do a "road show" to present your company to the stock brokers who will then sell your stock to the public investors. Assuming they can successfully sell your issue, you’ll receive your money. Then it's simple, all you have to do is make a lot more money with the proceeds so as to increase the value of your, your teams and the public investors stock.

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Downloaded from The modus operandi adopted in manipulating the YES Bank Ltd (YBL)'s initial public offering (IPO) allotment involved opening of over 7,500 benami dematerialised accounts. These accounts were with the National Securities Depository Ltd (NSDL) through Karvy Stockbroking Ltd (Karvy-DP). Of the 13 erring entities, the chief culprits identified by SEBI were Ms Roopalben Panchal and Sugandh Estates and Investments Pvt Ltd. While Ms Panchal opened 6,315 benami DP accounts, another entity Sugandh opened 1,315 benami accounts. Each of these accounts applications were made for 1,050 shares, paying application money of Rs 47,250 each. By applying for small lots (1,050 shares through each accounts), they misused the retail allotment quota stipulated for IPOs. The shares allotted in IPO to the benamis of Ms Panchal and Sugandh would have otherwise gone to genuine retail applicants. The IPO of YBL opened on June 15, 2005 and its shares were listed on the BSE and the NSE on July 12, 2005. It was observed that Ms Panchal had transferred 9,31,600 shares to various entities in seven off-market transactions on July 11 a day prior to the listing and commencement of trading on the stock exchanges. In order to get an allotment of 9,31,600 shares, Ms Panchal would have had to apply for crores of shares involving many crores of rupees in application money. However, Ms Panchal's name did not appear in the list of top 100 public issue allottees. Thus, it was suspected that Ms Panchal must have made multiple applications or that other applicants were acting as a front for her. Ms Panchal had applied for only 1,050 shares in the YES Bank IPO, paying the application money of Rs 47,250. And she did not receive any allotment in the IPO. On July 6, Ms Panchal received 150 shares each from 6,315 allottees through off-market transactions aggregating 9,47,250 YBL shares. Curiously, as per the dematerialised account data furnished by NSDL, of the above 6,315 entities as many as 6,221 entities have a P a g e | 21

Downloaded from same address in Ahmedabad. There are three more addresses of locations in Ahmedabad, which have been linked to Ms Panchal. All the 6,315 entities have their bank accounts with Bharat Overseas Bank and demat accounts with Karvy-DP. By applying for the maximum possible number of shares per applicant while being categorised as retail applicant and by putting in large number of applications in the lot of 1,050 shares, Ms Panchal and her associates (real or fictitious) have attempted to corner the maximum possible number of shares in the IPO allotment. This tantamounts to an abuse of IPO allotment process, the SEBI order said. A similar modus operandi was adopted by Sugandh, which received 150 shares each from 1,315 dematerialised accounts aggregating 1,97,250 shares in off market transactions. According to SEBI findings, Ms Panchal and others booked profits to the tune of about Rs 1.70 crore on the day of the listing of YES Bank shares.

SEBI unearths another IPO scam in IDFC
SEBI on Thursday 12th Jan 06 unearthed yet another abuse of IPO norms in the IDFC's initial public offering (IPO) where a few investors opened over 14,000 dematerialised accounts to corner large number of shares of the company. This is the second such incident, after a similar such violations were detected in the YES Bank's IPO. P a g e | 22

Downloaded from SEBI said in IDFC's IPO too four investors opened as many as 14,807 dematerialized accounts with Karvy-DP and "strangely", all these account holders have their bank accounts with Bharat Overseas Bank Ltd, Ahmedabad. SEBI order said: "further probe is required for examining the systemic fault, if any, of the registrar Karvy-RTI i.e. Karvy Computer Shares P Ltd, and the lead managers Kotak Mahindra Capital Company Ltd, DSP Merrill Lynch Ltd and SBI Capital Markets Ltd in identifying and weeding out the benami applications." Reference is being made to the RBI to examine the role of BhOB, HDFC Bank, Indian Overseas Bank, ING Vysya Bank and Vijaya Bank in opening the bank accounts of these benami entities and apparently funding them. According to SEBI, Karvy-DP, which was also named in the YES Bank IPO case, has not adhered to `Know-your-Client' norms, as per the reports of inspection submitted by NSDL and CDSL on the DP. Also, some of the documents collected by CDSL during the course of inspection show that Karvy-DP has obtained letters purportedly issued by the banks' concerned such as BhOB as proof of identity and proof of address of the person for the purpose of opening dematerialised accounts. "It is seen that one branch manager has on the same date signed as authorized signatory of different branches of the bank. This raises a doubt as to the authenticity of the bank documents obtained by Karvy-DP for opening dematerialised accounts," the SEBI order by its Whole-time Director Mr G. Anantharaman said. SEBI also banned four investors (in whose names the multiple accounts were opened) viz., Ms Roopalben Nareshbhai Panchal (who was also named in the YES Bank IPO scam), Sugandh Estates & Investments P Ltd, Mr Purshottam Ghanshyam Budhwani and Mr Manojdev Seksaria from doing any kind of transactions in the securities market, till further directions. Another 35 firms were also barred from participating in the IPOs in the future, till further orders, the SEBI order said.

Fictitious Demat A/c’s opened in 2003 itself
`First IPO in which key players took part was Maruti'

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The Charges
DPs have been accused by SEBI of not fully implementing the `maker-checker' concept, data entry errors, scanning of officials' signatures, and appointing themselves as the second holder.

Some of the demat accounts that were used to manipulate allotments in the initial public offer of Yes Bank and IDFC were opened during 2003, and not in the last year as was earlier believed. The first IPO in which the key operators have participated was that of Maruti Udyog Ltd, in June 2003, though the numbers of fictitious demat accounts were not very high then, the interim order from Securities and Exchange Board of India has said. SEBI's investigations have now pegged that a "total of 24 key operators have indulged in abusive practices in respect of 21 IPOs". The evidence against Karvy DP has stemmed from the fact that almost all the demat accounts which served as conduits for these master account holders were held with Karvy DP, according to the order. These 24 operators have 34 demat accounts; of which 16 demat accounts are held with Karvy DP. Due Diligence Not Taken The market regulator's investigations have pointed out that, while opening demat accounts the depository participants were not exercising due diligence. Persons involved in the scam have collected proofs of identity and addresses from groups of persons and used this to open bogus bank accounts.

Inter-linkages The master account holders were found to have made offmarket transfer of the IPO shares to various common groups of entities who appear to be their principals. It is seen that some of the master account holders have also made off-market transfers amongst P a g e | 24

Downloaded from themselves. This shows that there are inter-linkages amongst the master account holders as well as between groups of master account holders and their principals, the order said. Depository participants have been accused by SEBI of not fully implementing the `maker-checker' concept, data entry errors, scanning of officials' signatures, and appointing themselves as the second holder. With some of the DPs also acting as brokers, stock exchanges have been advised to examine the role and involvement of brokers and sub-brokers by way of participation in IPOs either directly or indirectly and their dealings in the shares subsequent to listing. Exchanges are to submit a report on this within a month.

SEBI bars Karvy, 23 other entities
Alleged involvement in IPO allotment scam

In the dock
Ban on several entities including HDFC Bank, IDBI Bank, ING Vysya Bank and Motilal Oswal Securities from opening fresh demat accounts. The regulator also pulled up NSDL and CDSL for `grave management lapses'.

SEBI on Thursday 27th April 2006 came down heavily on stock market intermediaries by banning several entities including Karvy group of companies, Pratik DP and Indiabulls Securities, for their alleged involvement in the IPO allotment scam. SEBI has also barred several entities including HDFC Bank, IDBI Bank, ING Vysya Bank and Motilal Oswal Securities from opening fresh demat accounts. In an interim order issued today after the second round of investigations, the capital market regulator has banned 24 entities from buying and selling securities till further orders.

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Common address
SEBI also said 15 Depository Participants at National Securities Depository Ltd (NSDL) including Kotak Securities, Citibank, ICICI Bank, Bank Paribas and IndusInd Bank had more than 500 demat account holders sharing the common address. It asked NSDL to conduct inspection on whether all the demat account holders are genuine. NSDL has also been asked to check whether the Know Your Customer norms of SEBI have been duly complied with and take action against suspect accounts on verification. Analysts felt the SEBI order was akin to capital punishment for the entities involved in the securities market scam. "In view of the detailed findings, Karvy DP and Pratik DP prima facie do not appear to be fit to deal in securities market as SEBIregistered intermediaries. Appropriate quasi-judicial proceedings are being initiated against the two DPs," the 252-page order issued late in the evening said. SEBI said the other business groups of Karvy appear to have acted in concert in the gamut of IPO manipulations. "I further direct Karvy Stock Broking Ld, Karvy Computer Share PVT Ltd, Karvy Investor Services and Karvy Consultants not to undertake fresh business as registrar to the issue and share transfer agent," Mr G Anantharaman, Whole-Time Member, SEBI, said.

NSDL, CDSL pulled up
The regulator also pulled up NSDL and CDSL for `grave management lapses'. The findings revealed "contributory negligence" on the part of the depositories and their managements. "The promoters of NSDL and CDSL are directed to take all appropriate actions including revamping of management which clearly has allowed matters to come to such a sorry pass," the order said. The order, to be treated as a `show-cause notice', has given 15 days time to the parties named for filing objections.

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IPO scam: HDFC Bank, 2 others fined
The Reserve Bank of India on Monday 27th Feb 2006 fined HDFC Bank, IDBI and ING Vysya Bank for violation of Know Your Customer norms and other irregularities in relation to the recent IPO scam. HDFC Bank has been slapped with the highest penalty of Rs 25 lakh; ING Vysya Bank - Rs 10 lakh and IDBI Ltd Rs 5 lakh. This is the second time HDFC Bank has been fined for violation of KYC norms. In January, the bank was imposed a penalty of Rs 5 lakh. According to an RBI release, these banks have been fined, "for violation of regulations on KYC norms, for breach of prudent banking practices and for not adhering to its directives/guidelines relating to loans against shares/ IPO."

Salient Features of IPO scam
Modus operandi

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Downloaded from  Current account opened in the name of multiple companies on the same date in the same branch of a bank  Sole person authorized to operate all these accounts who was also a Director in all the companies  Identity disguised by using different spelling for the same name in different companies  Multiple accounts opened in different banks by the same group of joint account holders  Huge funds transferred from companies accounts individual’s account which was invested in IPO’s to the

 Loans/ overdrafts got sanctioned in multiple names to bypass limit imposed by RBI  Loans sanctioned to brokers violating guidelines  Multiple DP accounts opened to facilitate investment in IPO  Large number of cheques for the same value issued from a single account on the same day  Multiple large value credits received by way of transfer from other banks  Several accounts opened for funding the IPO on the request of brokers, some were in fictitious names  Refunds received got credited in brokers a/cs  Margin money provided by brokers through single cheque  Nexus between merchant banker, brokers and banks suspected

Operational deficiencies
Factors that facilitated the scam
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Downloaded from  Photographs not obtained  Proper introductions not obtained  Signatures not taken in the presence of bank official  Failure to independently verify the identity and address of all joint account holders  Directors identity/ address not verified  Customer Due Diligence done by a subsidiary  Objective of large number of jt. account holders opening account not ascertained  Purpose of relationship not clearly established

 Customer profiling based on risk classification not done  Poor monitoring and reporting system due to appreciation of ML issues  Absence of investigation about use and sources of funds  Unsatisfactory training of personnel  No system of fixing accountability of bank officials responsible for opening of accounts and complying with KYC procedures  Ineffective monitoring and control inadequate

Measures to prevent scams
 An analysis of IPO scam clearly brings out the laxity on the part of banks to scrupulously implement the KYC/AML guidelines P a g e | 29

Downloaded from issued from time to time. It also raises serious concerns about the integrity of the systems & systemic risks.  While scams may still happen despite best of preventive measures, it should not undermine the efforts being made to insulate the financial sector from money laundering. It is going to be a long fight with constant need to improve and innovate new strategies.  It is important to understand that the risks banks run as a result of non-compliance with regulatory and statutory guidelines can cause severe reputational and financial damage to individual banks and the Indian banking system as a whole  Need for comprehensive operational framework implementing important aspects of KYC instructions e.g.  Documentation procedure for opening of all types of customer accounts;  Clarity in understanding of risk classification of accounts and proper customer profiling  Ongoing monitoring of medium and high risk accounts  Enhanced due diligence in respect of accounts with beneficial ownership, non-face to face transactions, group companies, high risk businesses and wire transfers etc.  Prompt reporting of cash and suspicious transactions to Principal Officer by branches  An effective audit machinery  Good understanding of regulatory and statutory prescriptions in letter and spirit  Clear demarcation of duties and responsibilities  Violations to be dealt with sternly

Recent IPOs
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IPO September Richa Knits Gwalior Chem Usher Agro Atlanta HOV Services Action Const Deep Industries KEW Industries August Voltamp Trans Tech Mahindra GMR Infra July Shirdi Ind June Vigneshwara Bluplast Ind Allcargo Global Prime Focus


Offer Price 30 71-85 15 150 200-240 110-130 36 30 345 365 210 67-78 110-124 32 675 417

Open Date 13 Sep 2006 11 Sep 2006 05 Sep 2006 01 Sep 2006 04 Sep 2006 01 Sep 2006 29 Aug 2006 28 Aug 2006 24 Aug 2006 01 Aug 2006 31 Jul 2006 29 Jun 2006 07 Jun 2006 05 Jun 2006 01 Jun 2006 25 May 2006

Close Date 19 Sep 2006 14 Sep 2006 11 Sep 2006 07 Sep 2006 07 Sep 2006 07 Sep 2006 04 Sep 2006 01 Sep 2006 29 Aug 2006 04 Aug 2006 04 Aug 2006 08 Jul 2006 16 Jun 2006 09 Jun 2006 06 Jun 2006 03 Jun 2006

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Term AGM Articles / Articles Association / AOA Companies Act / Act Depository Description Annual General Meeting of Pratibha Industries Limited of Articles of Association of Pratibha Industries Limited

The Companies Act, 1956 as amended from time to time A Company formed and registered under the Companies Act, 1956 and which has been granted a certificate of registration under subsection (1A) of Section 12 of the Securities and Exchange Board of India Act, 1992 Depositories Act The Depositories Act, 1996, as amended from time to time Depository Participant A depository participant registered as such under sub-section (1A) of Section 12 of the Securities and Exchange Board of India Act, 1992 FEMA Foreign Exchange Management Act, 1999, as amended from time to time, and the regulations framed there under FDI Foreign Direct Investment FII Foreign Institutional Investor [as defined under FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000] registered with SEBI. Financial year / Fiscal Period of twelve months ended March 31 of that particular year year / FY Indian GAAP Generally accepted accounting principles in India I.T. Act The Income-Tax Act, 1961, as amended from time to time Memorandum / MOA Memorandum of Association of Pratibha Industries Limited NRI / Non-Resident A person resident outside India who is a citizen of India or is person Indian of Indian origin as defined in Foreign Exchange Management (Deposit) Regulations, 2000] ROC Registrar of Companies, Maharashtra situated at 100, Everest Building, Marine Lines, Mumbai 400002 RBI Reserve Bank of India SCRR Securities Contracts (Regulation) Rules, 1957, as amended from time to time. SEBI The Securities and Exchange Board of India, constituted under the SEBI Act, 1992 SEBI Act Securities and Exchange Board of India Act, 1992 as amended from time to time SEBI/(DIP) Guidelines SEBI (Disclosure and Investor Protection) Guidelines, 2000, as amended, including instructions and clarifications issued by SEBI from time to time


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Allotment Allottee Bankers to the Issue Bid

Bid Price / Bid Amount Bid Opening Dates / Issue Opening Date Bid Closing Date / Issue Closing Date Bid cum Application Form Bidder Bidding Period / Issue Period Book Building Process BRLM CAN / Confirmation of Allocation Note Cap Price Cut-off price Designated Exchange Designated Date Stock

Issue of Equity Shares of the Company pursuant to the Public Issue to the successful Bidders. The successful Bidder to whom the Equity Shares are being issued. ICICI Bank Limited, Standard Chartered Bank, Deutsche Bank, Kotak Mahindra Bank Limited An indication to make an offer made during the Bidding Period by a prospective investor to subscribe to Equity Shares of the Company at a price within the Price Band, including all revisions and modifications thereto The amount equal to highest value of the optional Bids indicated in the Bid cum Application Form and payable by the Bidder on submission of the Bid in the Issue The date on which the Syndicate Members shall start accepting Bids for the Issue, which shall be the date notified in a widely circulated English national newspaper, a Hindi national newspaper and a Marathi regional newspaper The date after which the Syndicate Members will not accept any Bids for the Issue, which shall be notified in a widely circulated English national newspaper, a Hindi national newspaper and a Marathi regional newspaper The Form in terms of which the Bidder shall make an offer to purchase the Equity Shares of the Company and which will be considered as the application for allotment of the Equity Shares in terms of this Red Herring Prospectus Any prospective investor who makes a Bid pursuant to the terms of this Red Herring Prospectus The period between the Bid/Issue Opening Date and the Bid/Issue Closing Date inclusive of both days and during which prospective Bidders can submit their Bids Book building route as provided under Chapter XI of the SEBI Guidelines, in terms of which, this Issue is being made Book Running Lead Manager to the Issue, in this case being Vivro Financial Services Private Limited The note or advice or intimation of allocation of Equity Shares sent to the Bidders who have been allocated Equity Shares in accordance with the Book Building Process The higher end of the Price Band, above which the Issue Price will not be finalized and above which no bids will be accepted Cut-off price refers to any price within the Price Band. A Bid submitted at Cut-off is a valid Bid at all price levels within the Price Band Bombay Stock Exchange Limited The date on which the funds are transferred from the Escrow Account of the Company to the Public Issue Account after the Prospectus is filed with the ROC, following which the Board of Directors shall allot Equity Shares to successful bidders This Red Herring Prospectus issued in accordance with Section 60B of the Companies Act, which does not have complete

Red Herring Prospectus

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particulars on the price at which the Equity Shares are offered and size of the Issue. It carries the same obligations as are applicable in case of a Prospectus and will be filed with ROC at least three days before the bid/offer opening date. It will become a Prospectus after filing with ROC after the pricing Equity Shares Equity Shares of the Company of the face value Rs. 10 each, unless otherwise specified in the context thereof Escrow Account Account opened with the Escrow Collection Bank(s) and in whose favour the Bidder will issue cheques or drafts in respect of the Bid Amount and refunds (if any) of the amount collected to the Bidders Escrow Agreement Agreement entered into amongst the Company, the Registrar, the Escrow Collection Bank(s), the Syndicate Members and the BRLMs for collection of the Bid Amounts and refunds (if any) of the amounts collected to the Bidders Escrow Collection ICICI Bank Limited, Standard Chartered Bank, Deutsche Bank, Bank(s) Kotak Mahindra Bank Limited First Bidder The Bidder whose name appears first in the Bid cum Application Form or Revision Form Floor Price The lower end of the Price Band, below which the Issue Price will not be finalized and below which no Bids will be accepted Fresh Issue / Issue / Public Issue of 42,85,000 new Equity Shares of Rs. 10/- each for Public Issue / Offer cash at the Issue Price of Rs. [•] per equity share aggregating to Rs. [•] Lakhs by the Company in terms of this Red Herring Prospectus Issue Account Account opened with the Banker to the issue to receive monies from the Escrow Accounts on the Designated Date Issuer Pratibha Industries Limited Issue Price The final price at which Equity Shares will be issued and allotted in terms of this Red Herring Prospectus, as determined by the Company in consultation with the BRLMs, on the Pricing Date Margin Amount The amount paid by the Bidder at the time of submission of his/her Bid, being 10% to 100% of the Bid Amount Members of the Syndicate The BRLM and the Syndicate Members Non-Institutional Bidders All Bidders that are not Qualified Institutional Buyers, or Retail Individual Bidders and who have Bid for Equity shares for an amount more than Rs.1,00,000. Non-Institutional Portion The portion of the Issue being a minimum of 5,78,475 Equity Shares of Rs. 10/- each available for allocation to Non-Institutional Bidders Pay-in-date The last date specified in the CAN sent to the Bidders Pay-in-Period This term means (i) With respect to Bidders whose Margin Amount is 100% of the Bid Amount, the period commencing on the Bid/issue Opening Date and extending until the Bid/issue Closing Date, and (ii) With respect to Bidders whose Margin Amount is less than 100% of the Bid Amount, the period commencing on the Bid/issue Opening Date and extending until the closure of the Pay-in-Date Price Band The Price band of a minimum price (Floor Price) of Rs.100/- and the maximum price (Cap Price) of Rs. 120/- and includes revision thereof Pricing Date The date on which the Company in consultation with the BRLM

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finalizes the Issue Price Mr. Ajit B. Kulkarni, Mrs. Usha B. Kulkarni, Mr. Datta B. Kulkarni, Mr. Vinayak B. Kulkarni, Mr. Ramdas B. Kulkarni and Pratibha Shareholding Private Limited Prospectus The Prospectus filed with the ROC containing, inter alia, the Issue Price that is determined at the end of the Book Building Process, the size of the Issue and certain other information Public Issue Account In accordance with Section 73 of the Companies Act, 1956, an account opened with the Banker(s) to the Issue to receive monies from the Escrow Account for the Issue on the Designated Date QIB Portion The portion of the net issue being not less than mandatory 19,28,250 Equity Shares of Rs. 10 each at the Issue Price, available for allocation to QIBs Qualified Institutional Public Financial Institutions as specified in Section 4A of the Buyers/ QIBs Companies Act, Scheduled Commercial Banks, Mutual Funds registered with SEBI, Foreign Institutional Investors registered with SEBI, Multilateral And Bilateral Development Financial Institutions, Venture Capital Funds registered with SEBI, Foreign Venture Capital Investors registered with SEBI, State Industrial Development Corporations, Insurance Companies registered with the Insurance Regulatory And Development Authority (IRDA), Provident Funds with a minimum corpus of Rs.2500 Lakhs and Pension Funds with a minimum corpus of Rs. 2500 Lakhs. Retail Individual Bidders Individual Bidders (including HUFs and NRIs) who have not Bid for an amount in excess of Rs.1,00,000/- in any of the bidding options in the Issue. Retail Portion The portion of the Net Issue being a minimum of 13,49,775 Equity Shares of Rs.10 each available for allocation to Retail Individual Bidder(s) Registrar/ Registrars to Intime Spectrum Registry Limited the Issue Revision Form The Form used by the Bidders to modify the quantity of Equity Shares or the Bid Price in any of their Bid cum Application Forms or any previous Revision Form(s). Syndicate Agreement The agreement to be entered into among the Company and the members of the Syndicate in relation to the collection of Bids in this Issue Syndicate Members Intermediaries registered with SEBI and eligible to act as underwriters. Syndicate Members are appointed by the BRLM and include the BRLM Syndicate The Syndicate Members collectively TRS or Transaction The slip or document issued by the Syndicate Members to the Registration Slip Bidder as proof of registration of the Bid Underwriters The BRLM and Syndicate Members Underwriting Agreement The Agreement among the BRLM, the Syndicate Members and the Company to be entered into on or after the Pricing Date Promoters

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Web Based      Book Based
 

Share Market Book  By Tarun Shah IPO Decision  By Jason Draho


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