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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.
TITLE: Book-Building Mechanism in India: The Built-in Inefficiencies AUTHOR INFO: Banerjee Rachna (email@example.com) (Fortune Institute of International Business, Plot no. 6, Vasant Gaon, Nr. RR hospital, New Delhi, 110010, INDIA) ABSTRACT The price of any scrip depends upon investors’ perceptions about the company. To overcome the problem of high pricing, SEBI, in its series of measures to streamline the capital market, introduced the book-building concept in 1995, which was widely followed in markets in developed nations When book-building was introduced in India, the main objective was that book-building would help ‘discover’ the right price for a public issue which in turn would eliminate unreasonable issue pricing by greedy promoters. This article analyzes the efficiency of the book building mechanism which is adopted by issuers for pricing of IPOs in India. There are reasons to believe that the current book-building system is not really efficient. An analysis of IPO issue prices and their market prices shows that there is a considerable difference between them. Further, in most of the IPOs, the market prices are trading way below their issue prices which indicate that book building is not an efficient mechanism of price discovery. Besides, in the current system, investors have an illusion of discovering the price. That is not true because the underwriting entities have already estimated a price band for the stock in consultation with other stakeholders to the issue. The investor’s options are severely circumscribed. The book building method is heavily tilted against the retail investors’ right from the run-up to determine the pricing to the allocation quota. Our observation is that the current system of book building is neither realistic nor reflects investor sentiment towards an IPO. TITLE: The Indian IPO Market: Empirical Facts AUTHOR INFO: Ajay Shah ABSTRACT This article studies India's vibrant IPO market, via a dataset of the 2056 IPOs which took place in the last 4.5 years. We study the overall under pricing, the delay between issue date and listing date, the time- series of monthly volume of IPO issues and average under pricing in a given month, the cross-section of under pricing across companies, the post-listing trading
frequency, the long-run returns to new listings, and price discovery by the market shortly after first listing. TITLE: IPO Pricing and Allocation: A Survey of the Views of Institutional Investors AUTHOR INFO: Tim Jenkinson, Howard Jones ABSTRACT Despite the central importance of investors to all initial public offering (IPO) theories, relatively little is known about their role in practice. This article is based on a survey of how institutional investors assess IPOs, what information they provide to the investment banking syndicate, and the factors they believe influence allocations. We find that investor characteristics, in particular brokerage relationships with the book runner, are perceived to be the most important factors influencing allocations, which supports the view that IPO allocations are part of implicit quid pro quo deals with investment banks. The survey raises doubts as to the extent of information production or revelation.
no primary data was collected.OBJECTIVES OF THE STUDY • • • • • To get an overview of Initial Public Offering To study the significance of IPO To know the kinds of issues and procedure of sale of IPO To study the intermediaries involved in IPO To study the IPO investment strategies SCOPE OF THE STUDY The study limited to IPO. analyzing and interpreting the data to diagnose the problem. Primary Data 2. and for the purpose of the study data collected only through secondary sources. No Primary data collected for the study SECONDARY DATA Secondary data are those which have already been collected by some one else and which have already been passed through the statistical process. RESEARCH METHODOLOGY COLLECTION OF DATA Research design or research methodology is the procedure of collecting. Secondary Data PRIMARY DATA Primary data are collected through the unstructured questionnaire. The data collected from the • • Books Websites and Articles . Data can be collected on two types 1.
which controls its own performance.ORGANISATION An organization is a social arrangement which pursues collective goals. TYPES OF ORGANIZATION OR COMPANIES • • • • • On the basis of incorporation Statutory companies Registered companies On the basis of liability Companies with limited liability Companies with unlimited liability On the basis of number of members Private company Public company On the basis of control Holding companies Subsidiary companies On the basis of ownership Government companies . Organizations vary greatly in size from local businesses employing a small number of people to large multinational corporations that operate globally. Groups of people work together in organizations to make a product or provide a service. and which has a boundary separating it from its environment.
They are financed through national and local taxes. Corporations have five primary methods for obtaining that money. shops . Non-government companies DIFFERENT TYPES OF ORGANIZATION • Multinational commercial companies: Multinational companies trade globally. IPOs are often issued by smaller. They include: Banks. FUND RAISING METHODS • Large corporations could not have grown to their present size without being able to find innovative ways to raise capital to finance expansion. • IPO: Initial public offering also referred to simply as a "public offering. They include Local Financial service providers: These are organizations that provide financial services to utility for the people and business • • • support we need in our everyday lives." is the first sale of stock by a private company to the public. younger companies .High Street shops and Supermarkets their customers. They may be organized with subsidiary or partner companies trading in different countries or regions of the world • Utility companies: These are the companies which works in order to meet the necessary Public service organizations: Public service organizations provide the services and Retail outlets: Retail outlets are the places we use to buy goods. Insurance Companies.
companies also can finance their operations by retaining their by getting loans from banks or other lenders. it refers to the first sale of a company’s common shares to investors on a public stock exchange. Holders can sell bonds to someone else before they are due. If a company is in good financial health. If profits are limited. • Selling Common Stock. INITIAL PUBLIC OFFERING The first public offering of equity shares or convertible securities by a company. bondholders receive interest payments at fixed rates on specified dates. A company may choose to issue new "preferred" stock to raise capital. is known as an ‘Initial Public Offering’. Typically. In other words. It helps a company to tap a wide range of investors who would provide large volumes of capital to the company for future growth and development.usually to finance inventories -Using profits. The company is not required to repay the capital and the new shareholders get a right to future profits distributed by the company. In the interim. As noted. investment banks help companies issue stock. Strategies concerning retained earnings vary. • earnings. The most important objective of an IPO is to raise capital for the company. which is followed by the listing of a company’s shares on a stock exchange.seeking capital to expand. but can also be done by large privately-owned companies looking to become publicly traded • Issuing Bonds: A bond is a written promise to pay back a specific amount of money at a certain date or dates in the future. WHY IPO? . • Issuing Preferred Stock. preferred-stock owners will be paid their dividends after bondholders receive their guaranteed interest payments but before any common stock dividends are paid. Buyers of these shares have special status in the event the underlying company encounters financial trouble. with an intention to raise new capital. A company going for an IPO stands to make a lot of money from the sale of its shares which it tries to anticipate how to use for further expansion and development. Companies can also raise short-term capital -. agreeing to buy any new shares issued at a set price if the public refuses to buy the stock at a certain minimum price • Borrowing. it can raise capital by issuing common stock.
it can even result in a higher rate of return. it can borrow cash or sell stock to raise needed funds. Despite this apparent benefit. This is discussed in detail as follows: SIGNIFICANCE TO THE COMPANY When a privately held corporation needs additional capital. But then investment also comes with an advantage for both the company and the investors. Or else. it may decide to “go public”. Both have a lot of risk involved. The most common reason is that capital raised through an IPO does not have to be repaid. If the corporation chooses to sell ownership to the public. "Going Public" is the best choice for a growing business for the following reasons. if successful. Corporations choose to "go public" instead of issuing debt securities for several reasons. Where on one hand. The company issues an IPO with its own set of management objectives and the investor looks for investment keeping in mind his own objectives. there are also many drawbacks to an IPO. whereas debt securities such as bonds must be repaid with interest. • The costs of an initial public offering are small as compared to the costs of borrowing large sums of money for ten years or more. • The capital raised never has to be repaid. The rule is: Higher the risk. SIGNIFICANCE OF IPO Investing in IPO has its own set of advantages and disadvantages. higher the returns. high element of risk is involved. it engages in an IPO. A large drawback to going public is that the current owners of the privately held corporation lose a part of their ownership. The significance of investing in IPO can be studied from 2 viewpoints – for the company and for the investors. Corporations weigh the costs and benefits of an IPO carefully before performing an IPO.When a privately held corporation needs to raise additional capital. . it can either take on debt or sell partial ownership.
there is also the possibility for appreciation of the share price due to market factors not directly related to the company. While public and rights issues involve a detailed procedure. • It allows a company to tap a wide pool of investors to provide it with large volumes of capital for future growth.• When a company sells its stock publicly. SIGNIFICANCE TO THE SHAREHOLDERS The investors often see IPO as an easy way to make money. The classification of issues is illustrated below: . KINDS OF ISSUES Primarily. private placements or preferential issues are relatively simpler. The ‘speculative investors’ are interested only in the short-term potential rather than long-term gains. Rights or preferential issues (also known as private placements). One of the most attractive features of an IPO is that the shares offered are usually priced very low and the company’s stock prices can increase significantly during the day the shares are offered. This is seen as a good opportunity by ‘speculative investors’ looking to notch out some short-term profit. issues can be classified as a Public.
the issuer makes an offer for new investors to enter its shareholding family. The significant features are illustrated below: INITIAL PUBLIC OFFERING (IPO) It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities.Figure-1 Public issues can be further classified into Initial Public offerings and further public offerings. The issuer company makes detailed disclosures as per the DIP guidelines in its offer document and offers it for subscription. FURTHER PUBLIC OFFERING (FPO) . In a public offering.
The sale (that is. called the "issuer. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations. PROCEDURE OF SALE OF IPO IPO’s generally involve one or more investment banks as "underwriters. in addition to the requirements specified in the Companies Act. Common methods include: • • • • Dutch auction Firm commitment Best efforts Bought deal . disclosures in notice etc. A listed company going for preferential allotment has to comply with the requirements contained in Chapter XIII of SEBI (DIP) Guidelines pertaining to preferential allotment in SEBI (DIP) guidelines include pricing. the allocation and pricing) of shares in an IPO may take several forms. PRIVATE PLACEMENT It is an issue of shares or of convertible securities by a company to a select group of persons under Section 81 of the Companies Act. The underwriter then approaches investors with offers to sell these shares. RIGHTS ISSUE (RI) It is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. through an offer document." The company offering its shares. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders unless they do not intend to subscribe to their entitlements.It is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public. The rights are normally offered in a particular ratio to the number of securities held prior to the issue." enters a contract with a lead underwriter to sell its shares to the public. 1956 which is neither a rights issue nor a public issue. A private placement of shares or of convertible securities by a listed company is generally known by name of preferential allotment. This is a faster way for a company to raise equity capital.
Theoretically. since a sale never requires more than one bid. the underwriter agrees to use all efforts to sell as much of an issue as possible to the public. the bidding strategy and results of this auction are equivalent to those in a sealed first-price auction. This type of auction is convenient when it is important to auction goods quickly. The underwriter can purchase only the amount required to . BEST EFFORT An agreement an underwriter makes to act as an agent between an issuing company and investors. The submitted bids are then compared and the person with the highest bid wins the award. or a predetermined reserve price (the seller's minimum acceptable price) is reached. FIRM COMMITEMENT A lending institution's promise to enter into a loan agreement with a specific entity within a certain period of time is called firm commitment. In a best efforts agreement. and pays the amount of his bid to the seller. A sealed first-price auction is a form of auction where bidders submit one bid in a concealed fashion. An underwriter's agreement to assume all inventory risk and purchase all securities directly from the issuer for sale to the public at the price specified. The winning participant pays the last announced price.• Self Distribution of Stock DUTCH AUCTION Dutch auction is a type of auction where the auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneer's price.
or initial public offering. if applicable). The investment bank (or underwriter) acts as principal rather than agent and thus actually "goes long" in the security. such as an investment bank or a syndicate.) This is in contrast to a fully-marketed offering. only after which the price is set. where the underwriters have to "market" the offering to prospective buyers. and The issuer/client may only be willing to do a deal if it is bought (as it eliminates execution or market risk. such as unseasoned offerings. The advantages of the bought deal from the underwriter's perspective include: Bought deals are usually priced at a larger discount to market than fully marketed deals. The underwriter also uses up its capital.) SELF DISTRIBUTION OF STOCK Self distribution of stock is a type of IPO. the company selling stocks will offer its shares directly to the public and cut out the need for an . which would probably otherwise be put to better use (given sell-side investment banks are not usually in the business of buying new issues of securities. BOUGHT DEAL A bought deal occurs when an underwriter. The bank negotiates a price with the issuer (usually at a discount to the current market price. purchases securities from an issuer before selling them to the public. In this offering. Best effort agreements are used mainly for securities with higher risk.) The disadvantage of the bought deal from the underwriter's perspective is that if it cannot sell the securities.fulfill its client's demand or the entire issue. This is usually the result of the market price falling below the issue price. it must hold them. it is not responsible for any unsold inventory. and thus may be easier to sell. if the underwriter is unable to sell all securities. The advantage of the bought deal from the issuer's perspective is that they do not have to worry about financing risk (the risk that the financing can only be done at a discount too steep to market price. However. which means the underwriter loses money.
underwriters subscribe to the unsubscribed amount so that the issue is successful. the company does not receive good response from public and amount received from is less than the issue size). UNDERWRITERS Underwriters are those intermediaries who underwrite the securities offered to the public. These types of IPOs save the company money because it doesn't have to sell stock at a discounted price to the underwriters. This can be a difficult way to purchase shares in IPO’s.underwriter. INTERMEDIARIES INVOLVED IN IPO • • • • • • Merchant Bankers Registrar and Share Transfer Agents Bankers to the Issue Underwriters Stock Brokers and Sub Brokers Depositories MERCHANT BANKERS They play the most vital role amongst all intermediaries. In case there is under subscription (in short. Merchant Bankers have to satisfy themselves about the correctness and propriety of all the information provided in the prospectus. REGISTRAR & SHARE TRANSFER AGENTS .A Company may appoint more than one Merchant Banker provided Inter-Se Allocation of Responsibilities between the Merchant Bankers are properly structured. They assist the company right from preparing prospectus to the listing of securities at the stock exchanges. It is mandatory for them to carry due diligence for all the information provided in the prospectus and they must issue a certificate to this effect to SEBI.
ICICI Banking Corporation is renamed as 'ICICI Bank Limited. INDUSTRIAL DEVELOPMENT BANK OF INDIA LIMITED (IDBI) . DEPOSITORIES Depositories are persons who hold the share in the dematerialized form for the public. BANKERS TO THE ISSUE They are bank who accept application and application money from the public on behalf of the company and transfer it the registrar and share transfer agent. the Government of India and representatives of Indian industry formed ICICI Limited as a development finance institution to provide medium-term and long-term project financing to Indian businesses in 1955. These brokers get a commission for inviting the public.They are the person who processes and prepares the basis of allotment of shares to public based on the applications received from the public. SPECIALISED FINANCIAL INSTITUTIONS INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA (ICICI) The World Bank. This makes it easier for the share holder to trade in the secondary market. STOCK BROKERS & SUB-BROKERS Brokers are the intermediaries who use their contact / sources to invite the public to subscribe for shares issued by the company. Any refund that has to be made is done through this bank only. It also reduces the burden of carrying to deliver it after every transaction. 1999 ICICI becomes the first Indian company and the first bank or financial institution from non-Japan Asia to list on the NYSE.1994 ICICI establishes ICICI Banking Corporation as a banking subsidiary. They are the persons who handle dispatches of shares certificates and refund orders to the public.
the former continues to be the major shareholder (current shareholding: 58. the ownership of IDBI was transferred to the Government of India and it was made the principal financial institution for coordinating the activities of institutions engaged in financing. both in rupee and foreign currencies. (IVCF) in February 2000. diversified and efficient industrial and institutional structure but also adding a qualitative dimension to the process of industrial development in the country. for green-field projects as also for expansion. IDBI provides financial assistance. IDBI also provides indirect financial assistance by way of refinancing of loans extended by State-level financial institutions and banks and by way of rediscounting of bills of exchange arising out of sale of indigenous machinery on deferred payment terms. including manufacturing and services. . During the four decades of its existence. To reflect the shift in the company’s activities.The Industrial Development Bank of India (IDBI) was established on July 1. Risk Capital and Technology Finance Corporation Ltd. Although Government shareholding in the Bank came down below 100% following IDBI’s public issue in July 1995. (IVCF) was originally set up by IFCI as a Society by the name of Risk Capital Foundation (RCF) in 1975 to provide institutional support to first generation professionals and technocrats setting up their own ventures in the medium scale sector. In 1988. IDBI evolved an array of fund and fee-based services with a view to providing an integrated solution to meet the entire demand of financial and corporate advisory requirements of its clients. under the Risk Capital Scheme. promoting and developing industry in the country. in consonance with national plans and priorities. 1964 under an Act of Parliament as a wholly owned subsidiary of the Reserve Bank of India. (RCTC). the name of RCTC was changed to IFCI Venture Capital Funds Ltd. IDBI has enlarged its basket of products and services. modernization and diversification purposes. INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI) IFCI Venture Capital Funds Ltd. In February 1976. IDBI has played a pioneering role in fulfilling its mission of promoting industrial growth through financing of medium and long-term projects. RCF was converted into a company. covering almost the entire spectrum of industrial activities.47%). when it also introduced the Technology Finance and Development Scheme for financing development and commercialization of indigenous technology. IDBI has been instrumental not only in establishing a well-developed. Over the years. In the wake of financial sector reforms unveiled by the Government since 1992.
is India’s only all-India public financial institution headquartered in Kolkata.However we have serviced our outstanding debt till date. underwriting and guarantees. INDUSTRIAL INVESTMENT BANK OF INDIA (IIBI) The "Industrial Investment Bank of India Ltd ". IVCF has provided financial assistance to new ventures. equity or debentures and bonds. Merchant Banking services such as Issue management. SMALL INDUSTRIES DEVELOPMENT BANK (SIDBI) SIDBI Venture Capital Limited (SVCL) is a wholly owned subsidiary of SIDBI. SVCL will manage the various Venture Capital Funds launched/ being launched by SIDBI. They have a track record of profitability since inception in 1997 till 200203. small industries. handicrafts and other rural crafts and other allied economic activities in rural areas with a view to promoting integrated rural development and securing prosperity of rural areas and for matters connected therewith or incidental thereto. HOUSING DEVELOPMENT FINANCE CORPORATION (HDFC) . It is IVCF who has catalyzed introduction of concept of venture capital activity in India. Loan Syndication. Project / reconstruction / one-time-settlement consultancy/appraisal. helped in widening entrepreneurial base in the country. incorporated in July 1999 to act as an umbrella organization to oversee the Venture Capital operation of SIDBI. structured products besides providing various services like deferred payment guarantee. Current fund managed by SVCL is: National Venture Fund for Software and Information Technology (NFSIT) NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT (NABARD) National Bank for Agriculture and Rural Development is established as a Development Bank for providing and regulating credit and other facilities for the promotion and development of agriculture. They acquire and/or trade in varied financial instruments from term loans. cottage and village industries.Over the years. supported commercialization of new technologies.
• SPECULATOR .HDFC Securities. Before investing. The potential investors and their objectives could be categorized as: • INCOME INVESTOR An ‘income investor’ is the one who is looking for steadily rising profits that will be distributed to shareholders regularly. whether it is long-term capital growth or short-term capital gains. For this. • GROWTH INVESTOR A ‘growth investor’ is the one who is looking for potential steady increase in profits that are reinvested for further expansion. is a leading stock broking company in the country. a trusted financial service provider promoted by HDFC Bank and JP Morgan Partners and their associates. he needs to examine the company's potential for profits and its dividend policy. serving a diverse customer base of institutional and retail investors. The investor must be clear about the objective he has for investing. For this he needs to evaluate the company's growth plan. ANALYZING AN IPO INVESTMENT POTENTIAL INVESTORS AND THEIR OBJECTIVES Initial Public Offering is a cheap way of raising capital. but all the same it is not considered as the best way of investing for the investor. He must be clear about the benefits he hope to derive from the investment. earnings and potential for retained earnings. the investor must do a proper analysis of the risks to be taken and the returns expected.
So. INVESTOR RESEARCH It is imperative to properly analyze the IPO the investor is planning to invest into. The unpredictable nature of IPO’s and volatility of the stock market adds greatly to the risk factor. The investor should know about the following: • BUSINESS OPERATIONS What are the objectives of the business? What are its management policies? What is the scope for growth? What is the turnover of the labour force? Would the company have long-term stability? • FINANCIAL OPERATIONS What is the company’s credit history? What is the company’s liquidity position? Are there any defaults on debts? Company’s expenditure in comparison to competitors. before investing. it is advisable that the investor does his homework.A ‘speculator’ looks for short-term capital gains. He needs to do a thorough research at his end and try to figure out if the objective of the company match his own personal objectives or not. Company’s ability to pay-off its debts. For this he needs to look for potential of an early market breakthrough or discovery that will send the price up quickly with little care about a rapid decline. .
• GATHER KNOWLEDGE It would be beneficial to gather as much knowledge as possible about the IPO market. And immediately following the offering. This is because there is limited information and research on IPOs. prior to the offering. What are the projected earnings of the company • MARKETING OPERATIONS Who are the potential investors? What is the scope for success of the IPO? What is the appeal of the IPO for the other investors? What are the products and services offered by the company? IPO INVESTMENT STRATEGIES Investing in IPOs is much different than investing in seasoned stocks. the company offering it. the demand for it and any offer being planned by a competitor. There are some of the strategies that can be considered before investing in the IPO: • UNDERSTAND THE WORKING OF IPO The first and foremost step is to understand the working of an IPO and the basics of an investment process. Other investment options could also be considered depending upon the objective of the investor. • INVESTIGATE BEFORE INVESTING . research opinions emanating from the underwriters are invariably positive.
and the big step needs to be taken. essential to measure the risks and take the decision accordingly. Do not take a risk greater than your capacity. All the companies seeking to make a public issue have to file their offer document with . • INVEST AT YOUR OWN RISK Finally. All that can be suggested is to ‘invest at your own risk’.The prospectus of the company can serve as a good option for finding all the details of the company. Appointment of other intermediaries: • Co-managers and advisors Underwriters Bankers Brokers and principal brokers Registrars Filing the prospectus with SEBI: The prospectus or the offer document communicates information about the company and the proposed security issue to the investing public. It is therefore. • KNOW YOUR BROKER This is a crucial step as the broker would be the one who would majorly handle your money. • MEASURE THE RISK INVOLVED IPO investments have a high degree of risk involved. after the homework is done. It gives out the objectives and principles of the management and will also cover the risks. IPO allocations are controlled by underwriters. Appointment of lead managers: the lead manager is the merchant banker who orchestrates the issue in consultation of the company. The first step to getting IPO allocations is getting a broker who underwrites a lot of deals. PRINCIPAL STEPS IN AN IPO • • • Approval of BOD: Approval of BOD is required for raising capital from the public.
• Printing and dispatch of prospectus: After the prospectus is filed with the registrar of companies. the prospectus signed by the directors. Establishing the liability of the underwriters: If the issue is undersubscribed. Promotion of the issue: The promotional campaign typically commences with the filing of the prospectus with the registrar of the companies and ends with the release of the statutory announcement of the issue. • Collections of applications: The Statutory announcement specifies when the subscription would open. • Filing of the prospectus with the registrar of the companies: once the prospectus have been approved by the concerned stock exchanges and the consent obtained from the bankers. . the company should print the prospectus. They should be send to the stock exchanges and brokers so they receive them at least 21 days before the first announcement is made in the news papers. If SEBI or public does not communicate its observations within 21 days from the filing of the offer document. the bankers will collect the applications on behalf of the company. registrar. The allotment formalities should be completed within 30 days. • • Filing of initial listing application: Within 10 days of filing the prospectus. must be filed with the registrar of companies. Listing of the issue: The detail listing application should be submitted to the concerned stock exchange along with the listing agreement and the listing fee. when it would close.SEBI. The quantity in which prospectus is printed should be sufficient to meet requirements. During the period the subscription is kept open. Allotment of shares: Proportionate system of allotment is to be followed. and the banks where the applications can be made. the liability of the underwriters has to be established. • Statutory announcement: The issue must be made after seeking approval of the stock exchange. This must be published at least 10 days before the opening of the subscription list. • • • • Processing of applications: Scrutinizing of the applications is done. the company can proceed with its public issue. auditors. underwriters and others. the initial listing application must be made to the concerned stock exchanges with the listing fees. with the required documents as per the companies act 1956.
It is a process used for marketing a public offer of equity shares of a company. This limit and categorization are provided by the regulator. during the period for which the book for the IPO is open. Once the issue is closed a book with descending order of prices is prepared. This is the most commonly used method. However the exact price is decided by one of the following methods. The maximum quantity (amount) that an investor can subscribe to depends on the category (eg. This cut-off price is decided once the bid period is over. retail investor. It is a mechanism where. Mutual Fund etc) that the investor falls into. which are above or equal to . This price could be at par value or at a premium above the par value. Cutoff price is the price at which the entire issue gets subscribed. BOOK BUILDING PROCESS Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery.IPO METODS OF PRICING Once the registration gets approved by the regulator and the completion of meetings with potential investors the company and investment bank together decide on issue date. The lowest price in the price band is called as ‘floor price’ and the highest price is called as ‘cap price’. bids are collected from investors at various prices. issue price and the minimum lot quantity that an investor should subscribe to. • • Fixed Price Method Book Building method FIXED PRICE METHOD: In this method of pricing the investment bank in consultation with the firm fixes the price at which an investor can subscribe to. Book Building Method: In this method of pricing a price band is fixed instead of a fixed price. An investor who wants to subscribe at any price can mention the ‘cut-off price’. Investors can subscribe at a price anywhere in the price band.
the floor price. BOOK BUILDING PROCESS . The process aims at tapping both wholesale and retail investors. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria.
. • The Issuer specifies the number of securities to be issued and the price band for orders.Figure-2 THE PROCESS • The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'.
• On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation criteria which may include – Price Aggression Investor quality Earliness of bids • The book runner the company concludes the final price at which it is willing to issue the stock and allocation of securities. • Generally. the issue size gets frozen based on the price per share discovered through the book building process. • Bids cannot be entered less than the floor price. • A Book should remain open for a minimum of 5 days. This process is called 'bidding' and is similar to open auction. • Investors place their order with a syndicate member who inputs the orders into the 'electronic book'. the numbers of shares are fixed.• The Issuer also appoints syndicate members with whom orders can be placed by the investors. • Bids can be revised by the bidder before the issue closes. .
as in Biocon. you can just agree to pick up the shares at the final price fixed. In some cases. called the floor price. The price discovery is made depending on the demand for the stock. You can get the application forms from the nearest offices of the lead managers to the offer or from the corporate or the registered office of the company. the amount in excess of the final price is refunded if you get allotment. as a retail investor. The price that you can suggest is subject to a certain minimum price level. which means that the price you are willing to pay should be at or above Rs 115. If your price is higher than the final price. you will not get allotment. you can demand interest at 15 per cent per annum on the money due. . If you are not still very comfortable fixing a price. you should get your full refund of your money in 15 days after the final allotment is made. This way. You. then the managers to the offer may reduce the number of shares allotted to keep it within the payment already made. Book Building is a good concept and represents a capital market which is in the process of maturing. the floor price fixed for the Maruti's initial public offering was Rs 115. If you bid at the cut-off price and the price is revised upwards. The final price is the equilibrium price or the highest price at which all the shares on offer can be sold smoothly. you do not run the risk of not getting an allotment because you have bid at a lower price. A price band of Rs 270 to Rs 315 means that you can apply at a floor price of Rs 270 and a ceiling of Rs 315.• • Allocation of securities is made to the successful bidders. For instance. the price band (minimum and maximum price) at which you can apply is specified. If your price is less than the final price. HOW IS THE PRICE FIXED? All the applications received till the last date are analyzed and a final offer price. That is. known as the cut-off price is arrived at. have the option of applying at the cut-off price. Book-building is all about letting the company know the price at which you are willing to buy the stock and getting an allotment at a price that a majority of the investors are willing to pay. If you do not get allotment. If you do not get your money or allotment in a month's time. do not worry.
1.500 applicants have applied for 100 shares each. As. the minimum allotment lot is 100 shares. If any of these categories is under-subscribed. • QIBs can be mutual funds.300 shares in a similar manner.000 (100*1500*1/3). Qualified Institutional Bidders (QIB) are specified under the regulation and allotment to this class is made at the discretion of the company based on certain criteria.HOW ARE SHARES ALLOCATED? • As per regulations. • Shares allotted to each applicant in category A should be 33 shares (100*1/3). the number of shares applied for (100)* number of applications received (1500)* oversubscription ratio (1/3). around 50. • The total number of shares to be allotted in category A will be 50. foreign institutional investors. Category B will be allotted 33. banks or insurance companies.000 shares (or generally 25 per cent of the offer) are reserved for retail investors. bids are received for six lakh shares. then 10. In the above illustration. say. Fifty per cent of the offer is for qualified institutional investors. the retail portion is not adequately subscribed. all investors who applied for 100 shares will fall in category A and those for 500 shares in category B and so on. and 200 applicants have bid for 500 shares each. The shares would be allotted in the following manner: • Shares are segregated into various categories depending on the number of shares applied for. at least 25 per cent of the shares on offer should be set aside for retail investors.000 shares can be allocated either to the QIBs or non-institutional investors. shares applied by each applicant in the category multiplied by the oversubscription ratio. in an offer for two lakh shares. The minimum allotment is 100 shares. it is rounded off to the nearest minimum lot.000 shares. • The allotment of shares is made on a pro-rata basis. But if the bids from this category are received are only for 40. That is. Consider this illustration: An offer is made for two lakh shares and is oversubscribed by times. then that portion can be allocated among the other two categories at the discretion of the management. For instance. That is. . that is.
In India. • The shares are listed and trading commences within seven working days of finalisation of the basis of allotment. This average masks a steady stream of dubious IPOs who get an issue price which is much higher than the price at first listing.100. Then one have the choice of filling in an application form at this price and subscribing to the issue. with a prevalence of under pricing on average. the fixed-price seems to be around 50% below the price at first listing. it is only the market that knows this price.000) divided by the minimum lot size (100).e. no merchant banker knows the true price of the shares. You can check the daily status of the bids received. on average. the issuer obtains 50% lower issue proceeds as compared to what might have been the case. Fixed price offerings. can we just ask the market to pick the price at the IPO? . all over the world. • The final allotment is made by drawing a lot from each category. Here. • The traditional method of doing IPOs is the fixed price offering. • In category B.e. each applicant should be allotted 167 shares (500/3). No issuer knows the true price of his shares. if you feel you have bid at a higher or a lower price. If you are lucky you may get allotment in the final draw. suffer from `IPO under pricing'. What is needed is a way to engage in serious price discovery in setting the price at the IPO. In that case. Hence fixed price offerings are weak in two directions: dubious issues get overpriced and good issues get underpriced. But it is rounded off to 200 shares each. Rs.Therefore. the issuer and the merchant banker agree on an "issue price" . Extensive research has revealed that the fixed price offering is a poor way of doing IPOs. you can always change the bid price and submit a revision form. After seeing the response. i. the price bid for and the response form various categories in the Web sites of stock exchanges.g. Therefore. 167 applicants out of 200 (33300/200) would get an allotment of 200 shares each in category B. This will give you an idea of the demand for the stock and a chance to change your mind. 500 applicants will get 100 shares each in category A — total shares allotted to the category (50.
to 82/2011 Jun 29.00 203.to 2011 117/Jul 14. Offer Price (Rs. 2011 Aug 16. 2011 Jul 20. People from all over India would bid to buy shares in prices and quantities that they think fit. with no price indicated. 58/. While the HSS issue has many positive and fascinating features.10 34.245.the hallmark of a healthy IPO market. 2011 Jul 27.to 59/2011 Jul 22.16 120. Current IPO's and Recently Closed IPO's in India Issuer Company Issue Open Sep 07.83 1. there had been issue from Hughes Software Solutions which was a milestone in our growth from fixed price offerings to true price discovery IPOs. Such a procedure should innately obtain an issue price which is very close to the price at first listing -. 2011 Aug 24.) Sep 12. the design adopted was still riddled with flaws. 51/.to 2011 153/Jul 29. 135/.to 2011 108/Jun 23.to 2011 261/Aug 26.00 227.65 227. and we can do much better.90 55.to 65/2011 Aug 18.Imagine a process where an issuer only releases a prospectus. 2011 Jun 27.00 113. announces the number of shares that are up for sale. 90/. 2011 Jun 20. 75/.to 72/Issue Close Issue Type IPOBB IPOBB IPOBB IPOBB IPOBB IPOBB IPOBB IPOBB IPOBB IPOIssue Size (Crore Rs.75 40. This would yield a price. 190/.64 PG Electroplast Limited IPO TD Power Systems Ltd IPO SRS Limited IPO Brooks Laboratories Ltd IPO Tree House Education & Accessories Ltd IPO L&T Finance Holdings Limited IPO Inventure Growth & Securities Ltd IPO Bharatiya Global Infomedia Ltd IPO Readymade Steel India Ltd IPO Rushil Decor Ltd IPO .) 109. 90/.00 81. 2011 Aug 23. 63/. List of Upcoming IPO's. in India. Recently. 2011 Jul 11. 100/. 256/.50 63. 2011 Aug 10.to 2011 100/Aug 12.to 2011 210/Aug 26.
2011 May 13.00 4. 2011 2011 Jun 23.to 340/193/. 2011 Jun 02.90 Table-1 CONCLUSION IPO is used by a company to raise its funds. although it costs a little to a company but it gives a way to get more money for long term investments. 2011 May 09. The study about IPO and its methods helped us to know the principal steps in an IPO. The study about IPO and its methods helped us to know the different issues for an IPO.578.to 63/325/. 2011 May 04. types of organization or companies studied. Thus the overall knowledge about IPO is gathered. IPO methods of pricing.to 11/36/. Intermediaries involved in IPO. Organization. 2011 Jun 02.to 40/54/.Birla Pacific Medspa Ltd IPO VMS Industries Ltd IPO Timbor Home Limited IPO Galaxy Surfactants Ltd IPO Power Finance Corporation Ltd FPO Aanjaneya Lifecare Ltd IPO Sanghvi Forging & Engineering Ltd IPO 2011 Jun 20. 2011 May 19.75 23. . The extra amount obtained from public may be invested in the development o f the company.20 117.to 85/- BB IPOBB IPOBB IPOBB IPOBB FPOBB IPOBB IPOBB 65.25 0.00 36. 2011 May 30.to 240/80/. 2011 May 30. Book building process explained in the study. 2011 May 13. 2011 May 09. Analyzing an IPO investment studied. 2011 10/. 2011 May 12.18 25. 2011 May 10.to 203/228/.
moneycontrol.hoovers.com • www.investopedia.com • www.BIBLIOGRAPHY • www.bullishindian.com .com • www.com • www.com • www.wikipedia.essortment.com • www.com • www.moneycentral.ipoavenue.ipohome.
investorguide.com • www.• www.rupya.in .com • www.hdil.
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