Initial Public

Offering (IPO)
 Definition

 Initial Public Offering refers to the selling of shares by a private

company to the public for the first time. Initial Public Offering is
a source of funds raised from the primary market. All subsequent
public offerings are known as Follow-on Public Offerings or
Secondary Market Offerings.

 An IPO is an abbreviation for Initial Public Offer. When a

company goes public for the first time or issues a fresh stock of
shares, it offers it to the public directly. This happens in the
primary market. The primary market is where a company makes
its first contact with the public at large.
 Why Companies Bring IPO?

 There are mainly any of the two purposes behind an IPO

1. ESTABLISHING NEW BUSINESS

2. EXPANSION OF EXISTING BUSINESS

Companies, new as well as old, can offer shares to the investors

in the primary market. This kind of tapping the savings is
called an IPO (Initial Public Offering). SEBI regulates the way
in which the companies can make this offering.
Reason for listing in IPO

 The increase in the capital: An IPO allows a company to

raise funds for utilizing in various corporate operational
purposes like acquisitions, mergers, working capital, research
and development, expanding plant and equipment and
marketing.

 Liquidity: The shares once traded have an assigned market

value and can be resold. This is extremely helpful as the
company provides the employees with stock incentive
packages and the investors are provided with the option of
trading their shares for a price.
Cont……………

 Valuation: The public trading of the shares determines a value for

the company and sets a standard. This works in favor of the
company as it is helpful in case the company is looking for
acquisition or merger. It also provides the share holders of the
company with the present value of the shares.
 Increased wealth: The founders of the companies have an affinity
towards IPO as it can increase the wealth of the company, without
dividing the authority as in case of partnership.
 Red Herring Prospectus (RHP)

 A formal legal document, which is required by and filed

with the Securities and Exchange Commission, that
provides details about an investment offering for sale to
the public. A prospectus should contain the facts that an
investor needs to make an informed investment decision.
 Also known as an "offer document".
 More on RHP

 RHP contains all the information and factor which can influence
the decision of an investor. Like
1. Where the company will use the funds so raised
2. Companies previous records
3. Promoters track records
4. Companies current, likely profit and EPS
5. Companies future plan
 The investor should thoroughly go through RHP before
subscribing the issue. RHP is available at SEBI’s and merchant
banker’s website. It may be available in physical form at broking
houses
 Process of IPO
Method of IPO:

 When a Company Floats IPO, it Print forms for application to be filled

by investor.
 Public Issues are open for a few days only, in the method of IPO
company gives a price band. The subscriber can bid any where within the
range of price band. An applicant has to fill complete application form,
accompanied by cash, cheque, D.D. and to be deposited before the
closing date. This is the most popular of IPO which is BOOK
BUILDING.
 As per the instruction on the form all the qualitative and quantitative factor
related to the IPO, offering company, promoters and parties to the issue are
disclosed in a document
 Book Building

 Book building is a process of price discovery used in Initial

Public Offering. As per SEBI guidelines, Book Building is
defined as "a process undertaken by which a demand for the
securities proposed to be issued by a body corporate is elicited
and built-up and the price for such securities is assessed for the
determination of the quantum of such securities to be issued by
means of a notice, circular, advertisement, document or
information memoranda or offer document". Investors bid at
different prices which may be equal to or more than the floor
price and the issue price of shares is determined at the end of the
bidding period.
 Process of Book Building

 In book building IPO method the final prices at which

shares are allotted is determined by investors. The issuing
company gives a price range which consist of a higher
price and a lower price. Lower price is known as floor
price. The higher price is said to be the cap price. And this
range is called price band. The investor can apply
anywhere between the price range. On receiving all the
application the company calculate average price at which
majority of application are received. This is the final price
 Bought out Deals

 A bought out deal is a deal in which the company

sells its shares to an agent or a merchant banker,
this merchant banker then offloads or sells the
shares at an appropriate time.
 A new share issue that is bought entirely by one
underwriter to resell to investors.
 An underwriter will only do a bought deal if it is
confident there is enough demand for the shares.
 Private Placement

 Raising of capital via private rather than public placement. The

result is the sale of securities to a relatively small number of
investors. Investors involved in private placements are usually
large banks, mutual funds, insurance companies, and pension
funds.
 Since a private placement is offered to a few, select individuals,
the placement does not have to be registered with the Securities
and Exchange Commission. In many cases detailed financial
information is not disclosed and a the need for a prospectus is
waived. Finally since the placements are private rather than
public, the average investor is only made aware of the placement
usually after it has occurred.
 Who are Underwriters

 An underwriter to the issue could be a banker, broker, merchant

banker or a financial institution. They give a commitment to
underwrite the issue.

 Underwriting means they will subscribe to balance share if all

the shares offered at the IPO are not picked up.

 Suppose there is an issue for Rs. 100 crore and subscriptions are
received only for 90 crore. It is then left to the underwriter to
pick up the balance Rs. 10 crore.

 If underwriters don’t pay up SEBI will cancel their licenses.

What to look for before investing in an
IPO
1. Valuation: First thing to look at is how aggressively the IPO is Priced. The
more aggressively it is priced the lesser the chances of price appreciation.

2. Promoter’s Goodwill: the Promoter’s Goodwill is an important parameter

in analyzing an IPO as a goodwill creates trust in taking decision for applying
for an IPO.

3. Broker’s Report: Brokers can provide an investor with all the info he needs
on the co. so an investor must take advice from his stock broker before
applying for an IPO.

4. Ratings: SEBI has now made it mandatory for every co. to get its IPO rated
through any approved rating agencies like CRISIL, ICRA etc. but remember
that it does not provide guarantee of success.
 Procedure for IPO

 IPOs generally involve one or more investment banks as

"underwriters." The company offering its shares, called the
"issuer," enters a contract with a lead underwriter to sell its shares
to the public. The underwriter then approaches investors with
offers to sell these shares.
 The sale (that is, the allocation and pricing) of shares in an IPO
may take several forms. Common methods include:
 Bought deal
 Dutch auction
 Firm commitment
 Self Distribution of Stock
Pricing IPO

 Investment banks, take many factors into consideration

when pricing an IPO, and attempt to reach an offering
price that is low enough to stimulate interest in the stock,
but high enough to raise an adequate amount of capital
for the company. The process of determining an optimal
price usually involves the underwriters ("syndicate")
arranging share purchase commitments from leading
institutional investors.
Issue Price

 A company that is planning an IPO appoints lead managers to help it

decide on an appropriate price at which the shares should be issued.
There are two ways in which the price of an IPO can be determined:
either the company, with the help of its lead managers, fixes a price
or the price is arrived at through the process of book building.
 Note: Not all IPOs are eligible for delivery settlement through the
DTC system, which would then either require the physical delivery of
the stock certificates to the clearing agent bank's custodian, or a
delivery versus payment ("DVP") arrangement with the selling group
brokerage firm. This information is not sufficient.
How public can apply in IPO?

 When a company floats a public issue or IPO, it prints forms

for application to be filled by the investors.
 . Public issues are open for a few days only. As per law, any
public issue should be kept open for a minimum of 3days and
a maximum of 21 days.
 The duly complete application from, accompanied by cash,
cheque, DD or stock invest should be deposited before the
closing date as per the instruction on the from. IPO's by
investment companies (closed end funds) usually contain
underwriting fees which represent a load to buyers.
Factors that require to keep in mind
before deciding to apply to an IPO?

 Track record of the promoters

 Financials position of that company
 Read Prospectus very carefully
 Issue price
Is IPO Risky for Public

 IPOs can be a risky investment. For the individual

investor, it is tough to predict what the stock or shares
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 IPOs are of companies
going through a transitory growth period, and they are
therefore subject to additional uncertainty regarding their
future value.
Drawbacks of IPO

 It is true that IPO raises huge capital for the issuing

company. But, in order to launch an IPO, it is also
necessary to make certain investments.
 Setting up an IPO does not always lead to an
improvement in the economic performance of the
company. A continuing expenditure has to be incurred
after the setting up of an IPO by the parent company.
Cont….

 A lot of expenses have to be incurred in the form of legal

fees, printing costs and accounting fees, which are
connected to the registering of an IPO.

 the rules and regulations involved to set up public

offerings and this entire process on the other hand
involve a number of complexities which sometime
require the services of experts in relevant fields.
 MANAGEMENT OF IPO

SEBI GUIDELINES:

1. Filing of prospectus:

Prospectus to be filed with SEBI

Through Merchant Banker
At least 30 days < filing with ROC
SEBI may suggest changes < 30 days
SEBI to consider only after approval from St.Ex
Issuer is obligated
SEBI is not obligated
 MANAGEMENT OF IPO

SEBI GUIDELINES:

2. Application for Listing:

No IPO without application for listing

3. Dematerialization of shares:
Agreement with Depository
Present shares also to be in dmat
public may opt either physical or dmat shares
 MANAGEMENT OF IPO

SEBI GUIDELINES:

4. “Qualified Institutional Buyer” shall mean:

 a. public financial institution as defined in section 4A of the

Companies Act, 1956;
 b. scheduled commercial banks;
 c. mutual funds;
 d. foreign institutional investor registered with SEBI;
 e. multilateral and bilateral development financial
institutions;
 f. venture capital funds registered with SEBI;
 MANAGEMENT OF IPO

SEBI GUIDELINES:

 g. foreign venture capital investors registered with

SEBI;
 h. state industrial development corporations;
 i. insurance companies registered with the Insurance
Regulatory and Development Authority (IRDA);
 j. provident funds with minimum corpus of Rs.25
crores;
 k. pension funds with minimum corpus of Rs.25 crores).
 MANAGEMENT OF IPO

SEBI GUIDELINES:

5. Exemption from Eligibility Norms:

Banking Co. including Pvt. Banks

Subject to licensing by RBI.
New Bank being set up on acquisition or take over of a
bank
An infrastructure Company, whose project is appraised by
F/I, IL & FS and IDFC
 MANAGEMENT OF IPO

SEBI GUIDELINES:

6. IPO Grading:
No IPO unless; (as on the date of filing the
prospectus with ROC):
Grading for IPO has been obtained fromat least one
agency.
Grading and the rationale have been included in the
prospectus.
Grading expenses to be borne by the issuer.
 MANAGEMENT OF IPO

SEBI GUIDELINES:

7. Present shares to be fully paid-up:

No IPO, if there are any shares partly paid up as on the

date of IPO

The Shares to be fully paid up or forfeited

 MANAGEMENT OF IPO

SEBI GUIDELINES:

8. Price Band:

Price Band to be 20%.

Max price can be 20% above the floor price.
Board of directors may be authorized to fix the price.
 MANAGEMENT OF IPO

SEBI GUIDELINES:

9. Denomination of shares

Denomination of the shares is not restricted.

In case the issue price is <Rs.500, the Face Value shall
be Rs.10/-
The Face Value may be less, where the issue price is
Rs.500 or more
Full disclosure of the face value in offer document
 MANAGEMENT OF IPO

SEBI GUIDELINES:

10. Promoter Contribution and Lock-in:

20% of the post issue share cap is to be held by promoters

11. Securities not included in the above:

Where the equity has been acquired during the preceding 3 years
and;
- where the consideration is not cash
or
- where the shares are given through bonus issue
from revaluation reserve
 MANAGEMENT OF IPO

SEBI GUIDELINES:
Guidelines on issue of advertisement:

 advertisement shall be truthful, fair and clear

 shall not contain untrue or misleading or misleading
statement
 disclose all relevant facts
 clear, concise and
 understandable language
 Avoid technical, legal, complex terms
 No advertisement in Crawlers
 Reference to the red-herring prospectus
 MANAGEMENT OF IPO

SEBI GUIDELINES:
Guidelines on issue of advertisement:

 No slogans, captions or one liners

 Shall include risk factors
 Risk factors to be given in the same font size
 The print size shall not be less than point size 7
 The style of the font shall be Times new roman
 No advertisement relating to the full or over subscription while the
issue is open
 Closure announcement can be made only after RTA certifies that
90% is subscribed