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4. Public Offerings_Augiust 07

4. Public Offerings_Augiust 07

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10/31/2011

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Public Offering

An Insight

For Private Circulation Only

Basics of Public Offering

For Private Circulation Only

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 ³Follow on Public Offering"  When a shareholder sells shares through public offer, it is called a ³Offer for Sale" and the shareholder, not the company who originally issued the shares, retains the proceeds of the offering

For Private Circulation Only

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.

For Private Circulation Only

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

For Private Circulation Only

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
For Private Circulation Only

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

For Private Circulation Only

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

For Private Circulation Only

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

For Private Circulation Only

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 (1520 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
For Private Circulation Only

Key Regulations

For Private Circulation Only

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

For Private Circulation Only

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

For Private Circulation Only

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

Issue thru Book building process with atleast 50% allotment to QIBs or

Minimum post issue capital of the company shall be Rs.10 crores

+

or

³project´ has at least 15% participation by FIs / Banks, of which 10% comes from the appraiser(s) and atleast 10% of issue size is allotted to QIBs

Compulsory market making for atleast 2 years

For Private Circulation Only

Eligibility and Listing Criteria
Exemptions from Eligibility Norms
(a) Banking Company (b) Correspondent New Bank (³Public Sector Bank´) (c) Infrastructure Company
(i) (ii) Whose project has been appraised by FI / IDFC / ILFS or bank which was earlier an FI 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

For Private Circulation Only

Promoters Contribution and Lock-in Requirements
Promoters¶ Contribution Lock-in Requirements  Promoters Contribution not less than 20% of post issue capital  Promoters holding upto 20% of post issue capital locked-in for 3 years and 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 Atleast 10% or 25% of Issue Size to be offered to public Net offer to public would exclude reservations and firm allotments Infrastructure companies exempt from these requirements Only securities held for more than 1 year can be offered for sale No requirement for promoters contribution if company listed for 3 years and has paid dividends for 3 years

Minimum Dilution  (Unlisted Cos)   Offer for Sale Public Issue by Listed Cos  

For Private Circulation Only

Key Book Building Guidelines 
Allotment  50% allocation to QIBs on proportionate basis, of which 5% to Mutual Funds 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 

Bidding       Underwriting Bidding Period  

Spill over permitted among categories Bidding mandatory on electronically linked platform of Stock Exchanges Bidding terminals at all centres where there is a Stock Exchange Graphical display of demand and price at the bidding terminals is mandatory 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 ³cut off´ Signed post price discovery and allocation 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 Red Herring Prospectus filed with RoC with price band used for bidding Prospectus filed along with discovered price post bidding

On line display Price Discovery

Offer Document  

For Private Circulation Only

Public Offering Process

For Private Circulation Only

Public Offering Process
Issuer Company
Listing of securities on the Exchange Monies transferred to Issuer Company
Designated Date 

On designated date amount transferred from Escrow to the Issue account  Allotment of shares is completed

Appointment of BRLMs

Finalisation of Issue Price and Post Issue formalities

Appoints Merchant Bankers as Book Running Lead Managers
SEBI Comments IPO Grading 

Final Cut-off Price  Allocation for QIBs  Finalisation of Basis of Allotment  Board Meeting of Issuer  Filling of Prospectus

BRLMs conducts Due Diligence

Drafting of DRHP

Pre-Marketing and Roadshows

Bidding/Issue period and Pricing 

Understanding Issuer Company¶s revenue model  Identify key selling points  Build case for valuation  Fiduciary obligations  Identify key concerns  Statutory obligations 

Disclosures about business strategy, objectives, management and financial condition  Emphasize key growth drivers for the Issuer Company¶s  Positioning of the Company

Filing of DRHP with SEBI and SEs 

1±on±1 meetings arranged with institutional investors  Brokers meeting for HNI and Retail investors in various cities

Filing of RHP with SEBI & SEs 

  

Fixation of Price Band Date Fixation Issue opening Collection of bid cum application forms  Bidding by investors on online system  Closure of Issue

For Private Circulation Only

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

For Private Circulation Only

Pre Issue ± Before SEBI Filing

For Private Circulation Only

Steps prior to SEBI filing 
To constitute dedicated ³IPO 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

For Private Circulation Only

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

For Private Circulation Only

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

For Private Circulation Only

..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 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 

Terms of the Issue

For Private Circulation Only

..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.

For Private Circulation Only

..Critical Disclosure Requirements.. 
Management 
Board of Directors ± name, address, occupation, other directorships, independent nonindependent, 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

For Private Circulation Only

..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

For Private Circulation Only

..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

For Private Circulation Only

..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

For Private Circulation Only

After SEBI Filing

For Private Circulation Only

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

For Private Circulation Only

Valuation Methodology

‡ The pricing of the issue will be driven by the following broad factors:
Overall Valuation Methodology
‡ Brand Equity ‡ Fundamental Strengths and Track Record ‡ 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 Comparables ‡ Company specific discount based on various financial metrics ‡ An additional IPO discount of 20%-30% is applied to the company (IPO Pop)

For Private Circulation Only

Marketing Strategy
Optimize on the Timing - Be ready Proper focus on Retail and Institutional Investor

Retail HNIs /NRIs Corporates

Banks and Mutual Funds

Financial Institutions / FIIs

Insurance Investors

For Private Circulation Only

Marketing Strategy
KKC

Re ta il 35% QIB 50%

NII 15%

QIBs
‡ Target Platinum, A, B and C class Investors ‡ Research material, conference calls and investor meetings ‡ Positioning and Valuations ‡ Continue interaction and prepare for management meetings ‡ Arrive at pre marketing feedback ‡ Ensure interest in the IPO at a higher price band

¡ 

BOOK

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

Retail
‡ ‡ ‡ ‡ ‡ ‡ ‡ Tie up with aggressive brokers Information dissemination One on one interaction with brokers Positioning and Valuations Continue interaction Arrive at pre marketing feedback Ensure interest in the IPO at a higher price band

For Private Circulation Only

Marketing Strategy

Broker and Press meets 

Top 15 cities contribute to 90%+ of the IPO demand.  Finalisation of cities based on Issuers presence across the length and breadth of the country to further enhance the retail reach,  Internationally London, NewYork, Tokyo, Dubai, Honk Kong, Singapore needs to be covered at least, depending on the marketing strategy finalised

A week prior to issue opens

Need to cover ³influencers´

Supported by«

Adequate and timely supply of issue stationery

Sustained awareness programme

Press Releases and Relations

For Private Circulation Only

£¢

In top

cities in India 

Develop equity story through equity research  Communicate equity story during pre-marketing one to one meetings with fund managers  Collate pre-marketing feedback and decide price band  One-on-one meetings and group functions with management of the company.  Regular interface salespersons with managers by fund

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

For Private Circulation Only

..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

For Private Circulation Only

Bidding Period

For Private Circulation Only

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

For Private Circulation Only

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 ³cut 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

For Private Circulation Only

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 ³78 day report´ to SEBI

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Thank You

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