Public Offering

An Insight

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Basics of Public Offering

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Public Offering – An Understanding

 Initial Public Offering (IPO) is the first sale of a Company's common shares
to investors on a public stock exchange

 The main purpose of an IPO is to raise capital for the Company.

 If a Company later sells newly issued shares again to the market, it is

called a “Follow on Public Offering"

 When a shareholder sells shares through public offer, it is called a “Offer

for Sale" and the shareholder, not the company who originally issued the
shares, retains the proceeds of the offering

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Public Offering – An Analysis
Benefits
 Public Issue is an efficient way to raise long term capital
 Public Issue helps in expanding and diversifying the investor base
 Prestige and public awareness for Company
 Liquidity to shareholders
 Improved financial positioning and leveraging
 Ability to attract and retain key personnel (ESOP)
 Facilitates mergers and acquisitions

Attended responsibilities and concerns

 Stringent eligibility and compliance norms
 Elaborate disclosures and continuous information sharing
 Concerns of control, Management and Corporate governance
 On going costs – Listing fees, Information dissemination, Public Disclosures
through newspapers, etc.

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Types of Public Offering

Initial Public Offering (IPO) (by Unlisted Companies)

 Booking Building Issue
 Fixed Price
 Composite Issue

Follow on Public Offering (FPO) (by Listed Cos)

 Booking Building Issue
 Fixed Price

Rights (by Listed Cos)

 Fixed Price

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Participants of Public Offering

Issue Company
 A Public Limited Company
 Plans to raise long term resources
 Planning to provide liquidity to existing holders

Book Running Lead Managers

 Conduct Due Diligence
 Preparation of Offer Document
 Assisting in SEBI and Stock Exchange Clearances
 Preparing the Marketing Strategy
 Marketing the Issue
 Post Issue Formalities

Syndicate Members / Sub-Syndicate and Brokers

 Distribution Channels
 Collection and Bidding of Application Forms
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Participants of Public Offering

Legal Counsels
 Domestic Legal Counsel to the Issue
 International Legal Counsel to the Issue
 Domestic Legal Counsel to the Underwriters
 Assist in Due Diligence and Drafting of Document

Registrar
 Allotment of Shares and Refund of Money
 Handles Shareholders registrar
 Dematerialization of the Company's shares
 Processing of Bid-cum Application forms

Printer
 Printing of Draft Red Herring Prospectus, Red Herring Prospectus and Prospectus
 Printing and Distribution of Forms and other Stationery

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Participants of Public Offering

Advertising Agency
 Prepare Media Strategy
 Managing Logistics of Domestic Road Shows
 Issue Advertisements – Statutory and Other
 Corporate Advertisements
 PR activities

Collection / Refund Bankers to the Issue

 Collection of Application Money
 Preparing various reports
 Co-ordination with Registrars
 ECS and RTGS facilities

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Fixed Price Issue
Model

Entire allotment on a proportionate basis to Retail Investors (RIs), Non-Institutional

Investors (NIIs) and Qualified Institutional Buyers (QIBs)
 At least 50% of the issue to be allotted to Retail Investors (applying for up to an
amount of Rs.100,000)
 Balance to be allotted to Non-Institutional Investors and QIBs (applying for an amount
of > Rs.100,000)

Pros
 Lesser number of Market Intermediaries
 Wider distribution since no requirement of electronic bidding
 Operationally simpler
 Retail participation (due to proportionate allotment) leads to wide spread shareholding

Cons
 Price discovery not as efficient as book-building since price decided at SEBI filing stage
 Longer time between finalisation of price and closure of issue (30-35 days)
 Very low institutional appetite since, QIBs required to pay full amount on application

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Book Built Issue
Model

 Upto 50% allocation on a proportionate basis to QIBs with upto 15% allotment to Anchor
Investors , i.e., Banks, FIIs, Mutual Funds, VCs, etc.
 At least 35% offer on a proportionate basis to Retail Investors (individuals bidding for an
amount upto Rs.100,000)
 At least 15% offer on a proportionate basis to Non-Institutional Investors (bidding for an
amount of > Rs.100,000)

Pros
 Efficient price discovery could lead to potential to capture a higher valuation
 Large institutional appetite
 Shorter time gap between determination of the price band and closure of the book (15-
20 days) reduces market risk
 Shorter timeline for allotment
 Compulsory underwriting

Cons
 Institutional investors prefer bigger bites, hence large IPO size a prerequisite
 Need significant institutional demand since retail participation alone may not lead to
efficient price discovery
 Higher Issue expenses

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Key Regulations

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Key Regulations

 Companies Act, 1956

 SEBI (Disclosure for Investor Protection) Guidelines, 2000

 Securities Contracts and Regulations Act, 1956

 SEBI Act, 1992

 Listing Guidelines by Stock Exchanges

 Listing Agreement

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Eligibility and Listing Criteria

Initial Public Offerings by Unlisted Companies

Option I
(a) Net tangible assets of at least Rs.3 crores in each of the preceding 3 full years, of which not
more than 50% is held in monetary assets; and
(b) The company has a track record of distributable profits in terms of Section 205 of the
Companies Act (excl. extra ordinary items) for at least 3 out of immediately preceding 5
years; and
(c) The company has a net worth of at least Rs.1 crore in each of the preceding 3 full years
(d) In case the Company has changed its name in the preceding one year then at least 50% of
the revenue earned for the preceding one full year should have been earned from the activity
suggested by the name.
(e) The aggregate of the proposed issue and all previous issues made in the same financial year in
terms of size should not exceed 5times the pre-issue net worth as per the last audited
financials

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Eligibility and Listing Criteria

Option II - If an unlisted company does not meet the above eligibility norms, then,

Issue thru Book building process with Minimum post issue capital of the
atleast 50% allotment to QIBs company shall be Rs.10 crores

or + or

“project” has at least 15% participation

by FIs / Banks, of which 10% comes Compulsory market making for
from the appraiser(s) and atleast 10% atleast 2 years
of issue size is allotted to QIBs

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Eligibility and Listing Criteria

Exemptions from Eligibility Norms

(a) Banking Company
(b) Correspondent New Bank (“Public Sector Bank”)
(c) Infrastructure Company
(i) Whose project has been appraised by FI / IDFC / ILFS or bank which was earlier an FI
(ii) 5% of the project cost is financed by the appraiser(s) / institutions jointly or severally

(d) Rights Issue

Listing Criteria (Stock Exchanges)

BSE • Post Issue Equity Capital – Rs.100mn
• Post Issue Networth – Rs.200mn

NSE • Post Issue Equity Capital – Rs.100mn

• Market Capitalisation – Rs.250mn

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Promoters Contribution and Lock-in Requirements

Promoters’  Promoters Contribution not less than 20% of post issue capital
Contribution

 Promoters holding upto 20% of post issue capital locked-in for 3 years and
Lock-in
Requirements excess of promoters holding locked-in for 1 year
 Entire pre-issue capital locked-in for 1 year from the date of allotment in IPO or
commencement of commercial production, whichever is later

Minimum Dilution  Atleast 10% or 25% of Issue Size to be offered to public

(Unlisted Cos)  Net offer to public would exclude reservations and firm allotments
 Infrastructure companies exempt from these requirements

Offer for Sale  Only securities held for more than 1 year can be offered for sale

Public Issue by  No requirement for promoters contribution if company listed for 3 years and
Listed Cos has paid dividends for 3 years

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Key Book Building Guidelines
 50% allocation to QIBs on proportionate basis, of which 5% to Mutual Funds
Allotment and upto 15% allotment to Anchor Investors on discretionary basis
 50% offer to non-QIBs on a proportionate basis
 35% to retail investors applying for upto an amount of Rs.100,000
 15% to non-institutional investors applying for an amount > Rs.100,000
 Spill over permitted among categories

Bidding  Bidding mandatory on electronically linked platform of Stock Exchanges

 Bidding terminals at all centres where there is a Stock Exchange

On line display  Graphical display of demand and price at the bidding terminals is mandatory
Price Discovery  Bidding permitted by using a floor price or a price band having 20% range
 Price band during the bidding period can be revised within a 20% band, provided
bid open for 3 days after revision, and not more than 10 days in all
 Bidding at different price levels, expect retail investors who can bid at “cut off”

Underwriting  Signed post price discovery and allocation

Bidding Period  Mandatory period of 3 days and upto 7 days, in case of price revision upto 10
days. QIBs bidding may close 1 day prior to issue closure

Offer Document  Red Herring Prospectus filed with RoC with price band used for bidding
 Prospectus filed along with discovered price post bidding

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Public Offering Process

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Public Offering Process
Designated Date
Listing of securities on the
Issuer Exchange  On designated date
Monies transferred to
Company amount transferred from
Issuer Company Escrow to the Issue
account
 Allotment of shares is
completed
Finalisation of Issue Price
and
Post Issue formalities
Appointment of BRLMs

 Final Cut-off Price

Appoints Merchant  Allocation for QIBs
Bankers as Book  Finalisation of Basis of
Running Lead Managers
Allotment
 Board Meeting of Issuer
SEBI Comments IPO Grading  Filling of Prospectus

BRLMs conducts Drafting of DRHP Pre-Marketing and Bidding/Issue period

Due Diligence Roadshows and Pricing

 Understanding Issuer  Disclosures about  1–on–1 meetings  Fixation of Price Band

Company’s revenue business strategy, arranged with  Date Fixation
model objectives, management institutional  Issue opening
 Identify key selling points Filing of investors Filing of  Collection of bid cum
and financial condition
DRHP  Brokers meeting for RHP
 Build case for valuation  Emphasize key growth application forms
with with
 Fiduciary obligations drivers for the Issuer HNI and Retail  Bidding by investors
SEBI SEBI &
 Identify key concerns Company’s and SEs investors in various SEs on online system
 Statutory obligations  Positioning of the cities  Closure of Issue
Company

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Issue Timeline

Module I: Approvals and Pre Launch

Week 1 to Week 3 – Due Diligence, Drafting of DRHP, Resolve Structural and Legal Issues
Week 4 – File DRHP with SEBI and Stock Exchanges, where shares are proposed to be listed
Week 4 to Week 7 – SEBI Review Period and obtain Stock Exchange Approval and IPO Grading
Week 7 – Receive and Comply with SEBI Comments
Week 8 – Filing of RHP with RoC
Module II: Marketing
Week 1 to Week 3 – Develop Positioning, Research Briefing and Presentation, Research Report
Week 3 – Review & Circular Research Reports
Week 5 to Week 7 – Pre-Marketing
Week 8 – Print Red Herring and Announce Floor Price
Week 8 to Week 9 – Institutional and Retail Road Shows
Module III: Issue Period, Allotment and Listing
Week 10 – Bidding
Week 11 – Pricing and Institutional Allocation
Week 11 and Week 12 – Non-Institutional and Retail Allocation
Week 13 – Listing and Trading Approvals

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 Pre Issue – Before SEBI Filing

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Steps prior to SEBI filing

 To constitute dedicated “IPO team” with significant time allocation to the IPO process

 Selection and appointment of the Legal Counsel team

 Domestic Legal Counsels (DLCs)
 International Legal Counsel (ILC), if necessary

 Commence collation of information for the Draft Red Herring Prospectus (DRHP) and the
due diligence process based on the list provided by the BRLMs and LCs

 Finalization on capital structure and composition of the issue

 Discuss with the Company and auditor the audit requirements of the issue

 Commence process of due diligence and preparation of DRHP

 Appoint other intermediaries for the Issue

 Registrar to the Issue
 Advertising and PR agency
 Printer to the issue

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Steps prior to SEBI filing

 Final and signed auditors report received for the draft RHP

 Finalize communication strategy, corporate advertising plan and issue advertising plan

 Ensure compliance with SEBI code on issue advertising

 Company to furnish all the certificates required prior to filing based on the formats
provided by the BRLM and LCs

 Research report published and circulated

 CMD, Directors and CFO to sign the draft RHP for filing with SEBI

 File DRHP with SEBI and SEs

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Critical Disclosure Requirements..

 Risk Factors
 Business related risks
 Factors that could adversely impact revenues or profitability of the company
 Dependence on one / few customers
 Dependence on key employees
 Seasonality in business
 Project related risks, etc.
 Non-business related risk
 Material litigations of the company and its group companies, promoters, directors
 Approvals for the business / IPO not received
 Loss making group companies, etc.
 External Risks
 Competition
 Changes in Government policies which impact the company
 Changes in, economic conditions in India and markets which impact the company’s
business
 Force majeure

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..Critical Disclosure Requirements..

 Capital Structure
 Composition of the offer – primary and secondary
 Build up of capital structure since inception
 Promoters contribution and lock-in
 Details of top ten shareholders, 2 year prior, 10 days prior and as on SEBI filing date
 Details of equity transactions by the promoters during the last six months
 Details of ESOP scheme, if any
 Terms of the Issue
 Authority of the issue
 Rights of the shareholders
 Category-wise offer size – QIBs, non-institutional and retail investors
 Trading and market lot
 Eligible investors in each category
 Terms, mode and process of payment
 Allotment mode and process of allotment
 Bidding process
 General Instructions

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..Critical Disclosure Requirements..

 Objects of Issue
 Project cost and details of appraisal, if any
 Use of proceeds
 Means of financing – firm arrangements of finance through verifiable means towards
75% of the stated means of finance, excluding IPO should have been made
 Deployment of funds raised in the issue
 Actual expenditure already made
 Year-wise break-up of expenditure
 Investment avenues for funds raised, pending utilisation
 History of the Company
 Key events since inception
 Changes in name, registered office, memorandum and articles of association
 Objects clause of the company
 Promoters and Promoter Group Companies
 In case of individual promoters, profile including age, qualification, experience in
business, credentials, etc.
 In case of corporate promoters, history of the company, its promoters, financial
highlights, etc.

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..Critical Disclosure Requirements..

 Management
 Board of Directors – name, address, occupation, other directorships, independent non-
independent, brief profile, terms of directorship including remuneration, shareholding in the
company, litigations, interest in property, changes in directors and reasons thereof in the last
3 years, etc.
 Key Management Personnel – name, address, educational qualifications, date of joining the
company, previous employment, years of experience, brief profile, remuneration,
shareholding in the company, changes in key personnel and reasons thereof in the last 1
year, etc.
 Business of the Company
 Brief Overview of the business offerings – products and services
 Industry Overview
 Competitor landscape
 Plant, machinery, technology, process details
 Approach to marketing
 Employee details
 Facilities, technology, property

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..Critical Disclosure Requirements..

 Auditors Report – 5 years and the stub period

(not older than six months as on the date of issue opening)
 Financial accounts for five years and the stub period – balance sheet, profit and loss,
notes to accounts, significant accounting policies, changes in accounting policies,
auditors qualification, cash flow statement, previous year adjustments, if any after
recasting
 Indian GAAP accounts on stand alone basis
 Indian GAAP accounts on a consolidated basis
 US GAAP accounts for past 5 years and stub period not mandatory but recommended
 Dividend policy, taxation and capitalisation statements
 Loans and Advances
 Related Party Transactions
 Key Financial Ratios
 Basis of Issue Price
 Comfort letter from the auditors on all financial information in the Draft RHP
 Tax Benefit Certificate from auditors

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..Critical Disclosure Requirements..

 Management Discussion and Analysis on Performance

 Summary of past financial results based on Indian accounts
 Reasons of change in significant items of income and expenditure
 Management Discussion on
 Unusual or infrequent events
 Significant economic changes that are material
 Known trends or uncertainties that may adversely impact sales, revenues or income
 Future changes in relationship between costs and revenues
 Total turnover of each major industry segment in which the company operates
 Status of publicly announced new products/business segments
 Extend to which business is seasonal
 Competitive conditions
 Dependence on single or few suppliers or customers
 Material developments, if any, since the last balance sheet date

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..Critical Disclosure Requirements

 Previous or current Credit Ratings

 Details of financial indebtedness by the Company
 Financial of Group Companies
 In case of listed group companies, details of previous issue, stock market data
 Litigations against the company, promoters, directors, group companies
 Statutory Information as per Companies Act
 Details on previous issue
 Expenses of the issue
 Consents, expert advice
 Purchase of property
 Main provisions of the Articles of Association
 Material Contracts and documents
 Declaration and sign-off by the Board, CEO and CFO of the company on the SEBI and
ROC filed Red Herrings

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After SEBI Filing

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Steps after SEBI Filing
 File Draft Red Herring with SEBI and SEs where shares are listed
 Prepare drafts and commence discussions on various agreements like Escrow, Syndicate
and Underwriting Agreements
 Discuss the marketing plan including
 Public relations plan
 Corporate ads (can be issued without risk factors during this period)
 Advertising campaign, ad budget, ad media
 Conferences plan, i.e., press and broker conferences, analyst meets
 Statutory distrbution schedule (forms and prospectus)
 Direct marketing to shareholders / stakeholders
 Sign tripartite agreement with NSDL and CDSL
 Finalise the arrangements with Escrow Bankers
 Receive all relevant clarifications / exemptions from various regulators
 Obtain initial listing permission from the SEs
 Obtain comments from SEs on Draft RHP

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Valuation Methodology

• The pricing of the issue will be driven by the following broad

factors:
Overall • Brand Equity
Valuation • Fundamental Strengths and Track Record
Methodology • Sector Valuation
• Earnings and asset based valuation
• Market sentiments prevailing at the time of the issue

• The secondary market multiples of similar companies in the industry are

used for benchmarking
Industry • Company specific discount based on various financial metrics
Comparables • An additional IPO discount of 20%-30% is applied to the company (IPO
Pop)

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Marketing Strategy

Proper focus on Retail and

Optimize on the Timing - Be ready
Optimize on the Timing - Be ready Institutional Investor

Retail

HNIs /NRIs
Corporates

Banks and Financial Institutions / FIIs

Mutual Funds

Insurance Investors

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Marketing Strategy

NIIs
NIIs

• Target few Large Investors

• Information dissemination
• One on One interaction
• Positioning and Valuations
• Continue interaction
• Arrive at pre marketing feedback
• Ensure interest in the IPO at a
higher price band

QIBs
QIBs Retail
Retail

• Target Platinum, A, B and C class • Tie up with aggressive brokers

Investors • Information dissemination
• Research material, conference calls and • One on one interaction with brokers
investor meetings • Positioning and Valuations
• Positioning and Valuations • Continue interaction
• Continue interaction and prepare for • Arrive at pre marketing feedback
management meetings • Ensure interest in the IPO at a
• Arrive at pre marketing feedback higher price band
• Ensure interest in the IPO at a higher
price band

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Marketing Strategy

Broker and Press meets

Broker and Press meets

 Develop equity story

In top 15 cities in India
 Top 15 cities contribute to through equity research
90%+ of the IPO demand.  Communicate equity story
 Finalisation of cities based on A week prior to issue opens during pre-marketing one to
Issuers presence across the one meetings with fund
length and breadth of the managers
Need to cover “influencers”
country to further enhance  Collate pre-marketing
the retail reach, feedback and decide price
Supported by… band
 Internationally - London, Supported by…
NewYork, Tokyo, Dubai, Honk  One-on-one meetings and
Kong, Singapore needs to be Adequate and timely supply of issue group functions with
covered at least, depending stationery management of the
on the marketing strategy company.
finalised
Sustained awareness programme  Regular interface by
salespersons with fund
managers
Press Releases and Relations

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Steps before Bid Opening..

 Receive SEBI observations (expected after 45-60 days of filing), valid upto 1 year of
issue opening
 Incorporate changes in the Red Herring as per comments from SEBI and SEs
 Discuss with SEBI clarifications / deviations on their observations and inform them of
material changes
 Send reply to the SEBI observations – based on discussions with them and obtain written
/ verbal concurrence on the same
 All corporate advertisements whilst conforming to SEBI guidelines must contain risk
factors
 Product advertisements can continue as usual without risk factors

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..Steps before Bid Opening..

 Pre-marketing to investors to receive guidance on Floor Price/Band Price

 Analysis of pre-marketing feedback
 Demand Assessment
 Price Band/Floor Price discussion
 Identify issues that need to be addressed during road-shows
 Tie-up of NSE/BSE for the book building software
 Finalise Price Band and file Red Herring Prospectus with RoC along with material
contracts and documents
 In case of a price band, it should be a 20% band, from the floor
 Price band can be revised during the bidding period, limited to 20% from the floor and cap, but
issue to be open for an additional 3 days, subject to maximum issue period of 10 days
 Give strike order for Red Herring and Bid forms and commence distribution
 Commence management road shows – retail and QIB
 Finalise the syndicate and escrow agreements and file the same with SEBI

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Bidding Period

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Steps during the Bidding Period

 Finalise the Underwriting agreement

 Deposit 1% of the issue with DSE, at least 1 day before bid opening
 Commence bidding
 Analyse demand and built-up of the book on an on-going basis
 Announce movements in the price band, if any
 Co-ordinate with the Registrars on a daily basis
 For collection of bid forms from syndicate members

 Complete management road-shows

 Co-ordinate with the bankers for collection and clearance of instruments
 Complete bidding

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Steps during the Bidding Period

 Minimum bidding period of 3 days, maximum 7 days, can be extended to maximum 10

days in case of price revision
 Bidding permitted only on an electronically linked platform, linking all bidding centres
 BSE / NSE platform is used

 Investors to place bids through brokers / syndicate only

 Brokers / Syndicate can vet the bids
 However, they cannot reject technically valid bids accompanied by appropriate payment

 Bidding Form
 Should be serially numbered, should bear brokers’ / syndicates’ stamp and date and time of bidding
and accompanied with the Revision Form and Form 2A

 Graphical display of price and demand mandatory on terminals

 Floor price / Price Band to be decided before RoC filing of the Red Herring
 Bidding at “cut off” price is allowed for retail individual investors
 Mandatory to offer bid revision facility to bidders
 Revision can be of price or of quantity, can be at any time prior to bid closure only
 Revision can be done with brokers / syndicate where the bid was originally registered

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Post Issue

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Steps after Bid Closing

 Finalise Issue Price

 Complete QIB Allocation
 Update information in the Red Herring like stock market data, audited results, etc. as
applicable
 Organise Board / Committee meeting to
• Accept letters of underwriting
• Approve, sign and authorise filing of Prospectus with RoC
• Note the listing application made with SEs
• Authorise opening of accounts with the bankers

 File the Prospectus with RoC, after pricing, along with material contracts and documents

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Post Issue Activities

 Receive provisional collection certificate from bankers and file 3-day repot to SEBI
 Obtain approval of the basis of allotment from designated SE
 Obtain Board / Committee approval for allotment and other post issue formalities
 Ensure printing of allotment letters and refund orders
 Despatch security certificates, allotment letters and refund orders
 Advertise the basis of allotment and despatch details for the public issue
 Upload shares in demat accounts of the successful bidders
 Apply for listing and trading permission
 Obtain listing and trading approvals
 Obtain permission to utilise the proceeds of the issue from the Designated Stock
Exchange
 Submit the “78 day report” to SEBI

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 Thank You

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