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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. For issues, which are underwritten by financial institutions, the offer should be kept open for a minimum of 3 days and a maximum of 21 days. For issues, which are underwritten by all India financial institutions, the offer should be kept open for a maximum of 10 days. Generally, issues are kept open for only 3 to 4 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 form. IPO’s by investment companies (closed end funds) usually contain underwriting fees which represent a load to buyers. Before applying for any IPO, analyze the following factors: 1. Who are the Promoters? What is their credibility and track record? 2. What is the company manufacturing or providing services – Product, its potential. 3. Does the Company have any Technology tie-up? If yes, what is the reputation of the collaborators? 4. What has been the past performance of the Company offering the IPO? 5. What is the Project cost, what are the means of financing and profitability Â Â Â Â Â Â Â Â Â Â Â projections? 6. What are the Risk factors involved? 7. Who has appraised the Project? In India Projects apprised by IDBI and ICICI have more credibility than small Merchant Bankers? How to make payments for IPOâ€™s: The payment terms of any IPO or Public issue is fixed by the company keeping in view its fund requirements and the statutory regulations. In general, companies stipulate that either the entire money should be paid along with the application or 50 percent of the entire amount be paid along with the application and rest on allotment. However, if the funds requirements are staggered, the company may ask for the money in calls, that is, the company demands for the money after allotment as and when the cash flow demands. As per the statutory requirements, for public issue large than Rs. 250 crore, the money is to be collected as under: 25 per cent on application 25 per cent on allotment 50 per cent in two or more calls
Understanding IPO Grading: IPO grading is a unique concept involving an independent agency that is free from bias and with the available tools for assessing the investment attractiveness of an equity security.Â IPO grading is a service aimed at facilitating the assessment of equity issues offered to the public,
collapsing all of the above information into a single digit.e. IPO IPO IPO IPO IPO IPO Grade Grade Grade Grade Grade Grading is not 4: 5: a 2: 3: 1: Poor Below-average Average Above-average Strong recommendation to fundamentals fundamentals fundamentals fundamentals fundamentals invest: Even if a Company is Graded 5 (i.Â The idea is that IPO grading will help the investor better appreciate the meaning of the disclosures in the issue documents. It does not a comment on the price of the graded security or its suitability for a particular investor. IPO grading is not a recommendation to invest in the graded instrument. IPO grading in general would be a relative assessment of the fundamentals of the equity security by credit rating agencies registered with SEBI.says SEBI.Â Grading of IPOâ€™s in terms of their fundamental quality will enable investors steer clear of unsound offers. Such grading is generally assigned on a five-point point scale with a higher score indicating stronger fundamentals and vice versa as below.Â The company needs to first contactone of the grading agencies and mandate it for the grading exercise. likely price on listing or movement in price post listing. It does not comment on issue price.Â The grading is intended to be an independent and unbiased opinion of that agency.Â SEBI does not play any role in the assessment made by the grading agency . This memorandum will discuss the advantages and disadvantages of conducting an IPO and will briefly discuss the steps to be .Â Though this process will ideally require 2-3 weeks for completion.Â IPO grading is a service aimed at facilitating the assessment of equity issues offered to the public. vÂ Â IPO â€“ ADVANTAGES AND DISADVANTAGES The decision to take a company public in the form of an initial public offering (IPO) should not be considered lightly.Â IPO grading can act as an additional decision-making tool for them. to be done by the SEBI-registered credit rating agencies. SEBI said in a circular. to the initial public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later dateâ€ . would be applicable to all IPOâ€™s for which offer documents are filed after April 30. IPO grading could be seen as an added investment guidance tool seeking to hide the ignorance of the above factors and still help the investors make an informed decision. with strong fundamentals). The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India. But IPO grading is totally unheard of anywhere else and is a First-From-India initiative. which should thoroughly be considered. â€œIPO grading is the grade assigned by a Credit Rating Agency registered with SEBI. it may be a good idea for companies to initiate the grading process about 6-8 weeks before the targeted IPO date to provide sufficient time for any contingencies.Â Thus. There are several advantages and disadvantages to being a public company. says SEBI.Â The grading.
marketing. The purpose of this memorandum is to provide a thumbnail sketch of the process. Increased Prestige Public companies often are better known and more visible than private companies. this enables them to obtain a larger market for their goods or services. This allows a company to attract and retain employees by offering stock incentive packages to those employees. Prior to the IPO these shares were illiquid and had a more subjective price. Due to the time and expense of preparation of the IPO. acquisitions. In addition. This is helpful for a company that is looking for a merger or acquisition. Moreover. Liquidity Once shares of a company are traded on a public exchange. Disadvantages of going Public: Time and Expense Conducting an IPO is time consuming and expensive. accountants. Advantages of going public: Increased Capital A public offering will allow a company to raise capital to use for various corporate purposes such as working capital. research and development. it also provides investors in the company the option to trade their shares thus enhancing investor confidence. Disclosure . These shares now have an ascertainable price and after any lockup period these shares may be sold to the public. subject to limitations. The reader should understand that the process is very time consuming and complicated and companies should undertake this process only after serious consideration of the advantages and disadvantages and discussions with qualified advisors. Increased wealth The founders of the company often have the sense of increased wealth as a result of the IPO. It also allows the shareholders to know the value of the shares. and expanding plant and equipment. Public companies are able to have access to larger pools of capital as well as different types of capital. many companies simply cannot afford the time or spare the expense of preparing IPO. the underwriter’s fees can range from 3% to 10% of the value of the offering. those shares have a market value and can be resold. and printers. A successful IPO can take up to a year or more to complete and a company can expect to spend several hundreds of thousands of dollars on attorneys.taken to register an offering for sale to the public. Valuation Public trading of a company’s shares sets a value for the company that is set by the public market and not through more subjective standards set by a private valuator.
employees. These statements must also contain updated information regarding nonfinancial matters similar to information provided in the initial registration statement.The SEC disclosure rules are very extensive. vÂ Â PARAMETERS TO JUDGE AN IPO Good investing principles demand that you study the minutes of details prior to investing in an IPO. if it decides that it would like to conduct an IPO it will have to retain a lead Regulatory Review The Company will be open to review by the SEC to ensure that the company is making the appropriate filings with all relevant disclosures. a company will be required to make financial disclosures required by the Securities and Exchange Act of 1934. The 1934 Act requires public companies to file quarterly statements containing unaudited financial statements and audited financial statements annually. Falling Stock Price If the shares of the company’s stock fall. Vulnerability If a large portion of the company’s shares are sold to the public. Once a company has weighed the advantages and disadvantages of being a public company. and lawsuits. a company must report certain material events as they arise. the company’s ability to maintain employees. once the offering statement is effective. Business Plans . the company may lose market confidence. Here are some parameters you should evaluate: Promoters Is the company a family run business or is it professionally owned? Even with a family run business what are the credibility and professional qualifications of those managing the company? Do the top level managers have enough experience (of at least 5 years) in the specific type of business? Industry Outlook The products or services of the company should have a good demand and scope for profit. and the personal wealth of insiders and investors. causing insiders to lose control. Defending a hostile bid can be both expensive and time consuming. and competitors. material contracts. Once a company is a reporting company it must provide information regarding compensation of senior management. competitive positions. conflicts of interest. A takeover bid may be the result of shareholders being upset with management or corporate raiders looking for an opportunity. how the company intends to develop future products. decreased valuation of the company may effect lines of credits. secondary offering pricing. This information is available to investors. the company may become a target for a takeover. This usually entails retaining lawyers and auditors to prepare these quarterly and annual statements. In addition. transactions with parties related to the company. In addition.
Financials Why does the company require the money? Is the company floating more equity than required? What is the debt component? Keep a track on the profits. Examine how these factors will affect the operations of the company. Listing You should have access to the brokers of the stock exchanges where the company will be listing . it is by a process called the initial public offering (IPO). growth and margins of the previous years. Key Names Every IPO will have lead managers and merchant bankers. clearances from various departments. In an IPO the company offloads a certain percentage of its total shares to the public at a certain price. The public can bid for the shares at any price in the band specified. Instead they follow a method calledBOOK BUILDING PROCESS. Once the bids come in. letter of credits etc. court cases or other litigations. After the offer price is fixed. A higher initial investment from the promoters will lead to a higher faith in the organization. You can figure out the track record of the merchant banker through the SEBI website. the company evaluates all the bids and decides on an offer price in that range. purchase of machinery. Pricing Compare the companyâ€™s PER with that of similar companies. itself. A steady growth rate is the quality of a fundamentally sound company. vÂ Â PRIMARY AND SECONDARY MARKETS In the primary market securities are issued to the public and the proceeds go to the issuing company. the company allots its shares to the people who had applied for its shares or returns them their money. Most IPOâ€™S these days do not have a fixed offer price. Secondary market is term used for stock exchanges. where the offer price is placed in a band or a range with the highest and the lowest value (refer to the newspaper clipping on the page).Check the progress made in terms of land acquisition. Check the assumptions the promoters are making and whether these assumptions or expectations sound feasible. Risk Factors The offer documents will list our specific risk factors such as the companyâ€™s liabilities. where stocks are bought and sold after they are issued to the public. With this you can find out the P/E Growth ratio and examine whether its earning projections seem viable. Primary Market: The first time that a companyâ€™s shares are issued to the public.
In a stock exchange the existing shareholders sell their shares to anyone who is willing to buy them at a price agreeable to both parties. National Stock Exchange NSE. the Lead Manager (LM) takes up the due diligence of companyâ€™s operations/ management/ business plans/ legal etc. Underwriters to the issue. Solicitors. UNDERSTANDING THE ROLE OF INTERMEDIARIES Who are the intermediaries in an issue? Merchant Bankers to the issue or Book Running Lead Managers (BRLM). people can start trading in its shares. A market is primary if the proceeds of sales go to the issuer of the securities sold. Registrars to the issue. Most trading is done in the secondary market. Appointment of other intermediaries viz. Once a stock is listed on an exchange. it is trading in previously issued financial instruments. Bankers to the issue. as distinguished from the Secondary Market. Other activities of the LM include drafting and design of Offer documents. the issuer also discloses the details of the compliance officer appointedÂ by the company for the purpose of the issue. over-the-counter markets. where previously issued securities are bought and sold. RoC and SEBI including finalization of Prospectus and RoC filing. telephone/fax numbers and email addresses of these intermediaries. statutory advertisements and memorandum containing salient features of the Prospectus. The issuer discloses the addresses. An organized market for used securities. are the intermediaries to an issue. Bombay Stock Exchange (BSE). etc. they have to execute their transaction through authorized members of the stock exchange who are also called STOCK BROKERS. Examples are the New York Stock Exchange (NYSE). stock exchanges facilitate the trading of shares for the general public. It is characterized by being the only moment when the enterprise receives money in exchange for selling its financial assets. Secondary Market: Once the offer price is fixed and the shares are issued to the people. 1992 is eligible to act as a Book Running Lead Manager to an issue. syndicate members. Registrar(s). Advertising Agency and Bankers to the Offer is also . This is part of the financial market where enterprises issue their new shares and bonds. Who is eligible to be a BRLM? A Merchant banker possessing a valid SEBI registration in accordance with the SEBI (Merchant Bankers) Regulations. Printers. bond markets. The market where securities are traded after they are initially offered in the primary market. Individuals cannot buy or sell shares in a stock exchange directly. Prospectus. governmental guaranteed loans etc.. What is the role of a Lead Manager? (pre and post issue) In the pre-issue process. The BRLMs shall ensure compliance with stipulated requirements and completion of prescribed formalities with the Stock Exchanges. In addition to this. Auditors of the company. To explain further. residential mortgage loans.Market for new issues of securities.
What is the role of a registrar? The Registrar finalizes the list of eligible allottees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of refund orders to those applicable are sent. What is the role of bankers to the issue? Bankers to the issue. dispatch security certificates and refund orders completed and securities listed. co-ordinate noninstitutional allocation. carries out all the activities of ensuring that the funds are collected and transferred to the Escrow accounts. The Lead manager coordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank branches. intimation of allocation and dispatch of refunds to bidders etc are performed by the LM. based on the correct figures. as the name suggests. The post Offer activities for the Offer will involve essential follow-up steps. The post issue activities including management of escrow accounts. The LM also draws up the various marketing strategies for the issue. patent disputes. price justification. The LM also ensures follow-up with bankers to the issue to get quick estimates of collection and advising the issuer about closure of the issue. which include the finalization of trading and dealing ofÂ instruments and dispatch of certificates and demat of delivery of shares. and on the basis of such examination and the discussions with the Company. The Lead Merchant Banker shall ensure that Bankers to the Issue are appointed in all the mandatory collection centers as specified in DIP Guidelines.. disputes with collaborators etc. etc. the Government and any other competent authority in this behalf. processing of the applications and other matters till the basis of allotment is finalized. its Directors and other officers. with the various agencies connectedÂ with the work such as the Registrar(s) to the Offer and Bankers to the Offer and the bank handling refund business. and other materials in connection with the finalization of the offer document pertaining to the said issue. The merchant banker shall be responsible for ensuring that these agencies fulfill their functions and enable it to discharge this responsibility through suitable agreements with the Company. vÂ Â IPO SCAMS YES Bank Ltd.included in the pre-issue processes. other agencies. Case: . Question on Due diligence The Lead Managers state that they have examined various documents including those relating to litigation like commercial disputes. they state that they have ensured that they are in compliance with SEBI. projected profitability. independent verification of the statements concerning the objects of the issue.
500 benami dematerialized accounts. While investigating the Yes Bank scam. SEBI declared results of its probe. an Income Tax raid on businessman Purushottam Budhwani accidentally found he was controlling over 5. The SEBIi started a broad investigation into IPO allotments after it detected irregularities in the buying of shares of YES Bankâ€™s IPO in 2005. What triggered the SEBI probe? On October 10 last year. making windfall gains from the price difference between the IPO price and the listing price. Suzlon Energy. PVR Cinema. Here is a lowdown on the IPO scam: What was the scam? It involved manipulation of the primary marketâ€”read initial public offers (IPOs)â€”by financiers and market players by using fictitious or benaami demat accounts. 2004 and 2005. They then transferred the shares to financiers. SEBI finds this suspicious. The SEBI probe covered several IPOâ€™s dating back to 2005. Punj Lloyds. it ended digging up more dirt and probably prevented a larger conspiracy to hijack the market.New Delhi: When the Securities Exchange Board of India (SEBI) started scanning an entire spectrum of IPOâ€™s launched over 2003. the fictitious investors transferred them to financiers. how a few people cornered a large chunk of YES Bank IPO shares.000 demat accounts. 2004 and 2003 to detect misuse. These included the offerings of Jet Airways. The financiers then sold these shares on the first day of listing. Roopalben Panchal. had allegedly opened several fake demat accounts and subsequently raised finances on the shares allotted to her through Bharat Overseas Bank branches. NTPC. reaping huge profits between the IPO price and the listing price. SEBI found that certain entities had illegally obtained IPO shares reserved for retail applicants through thousands of benaami demat accounts. A lot more dubious accounts across several IPOâ€™s are expected to tumble out in the next few days. Roopalben Panchal was found to be controlling nearly 15. The modus operandi adopted in manipulating the YES Bank Ltd (YBL)’s initial public offering (IPO) allotment involved opening of over 7. It was found that once they obtained these shares. When was the scam detected? The IPO scam came to light in 2005 when the private ‘Yes Bank’ launched its initial public offering. On December 15. Sasken Communications.000 demat accounts. . who sold on the first day of listing. The SEBI report covered 105 IPOâ€™s from 2003-2005. These accounts were with the National Securities Depository Ltd (NSDL) through Karvy Stock broking Ltd (Karvy-DP). JP Hydro Power. Shringar Cinema and others. a resident of Ahmedabad.
The shares allotted in IPO to the benamis of Ms Panchal and Sugandh would have otherwise gone to genuine retail applicants. While Ms Panchal opened 6. The Income-Tax Department in Ahmedabad has found that two major accused. the chief culprits identified by SEBI were Ms Roopalben Panchal and Sugandh Estates and Investments Pvt Ltd.62 crore in 18 months.050 shares. This time. Roopalben Panchal of IndiaBulls Securities is allegedly the mastermind of the scam.It also detected similar irregularities in the IDFC IPO. The IPO of YBL opened on June 15. read stocks. A Glance on the Scam: YES Bank Ltd shares were listed on the BSE and the NSE on July 12. 2005. These accounts were with the National Securities Depository Ltd (NSDL) through Karvy Stockbroking Ltd (Karvy-DP).31.050 shares through each accounts).Direct Participants (DPs) used retail applicantsâ€™ shares for reaping benefits in the stock market. the chief culprits identified by SEBI were Ms Roopalben Panchal and Sugandh Estates and Investments Pvt Ltd. How is this different from Harshad Mehtaâ€™s scam? The securities scam involved price manipulation in the secondary market. Of the 13 erring entities. Of the 13 erring entities. the manipulation happened in the primary marketâ€”even before the shares (IPOâ€™s) entered the stocks market. in which over 8 per cent of the allotment in the retail segment was cornered by fictitious applicants through multiple demat accounts. have together made Rs 60. The modus operandi adopted in manipulating the YES Bank Ltd (YBL)’s initial public offering (IPO) allotment involved opening of over 7. paying application money of Rs 47. fraudsters targeted the primary market to make a quick buck at the expense of the gullible small investors. they misused the retail allotment quota stipulated for IPOs.600 shares to various entities in seven off-market transactions on July 11 – a day prior to . Each of these accounts applications were made for 1. Finance Ministry officials are expected to act against her soon. but market observers believe the scam is far bigger.315 benami accounts. The SEBI probe has identified more operators and some market intermediaries involved in the misuse of the initial allotment process in public offerings dating back to â€™04-05. SEBI reportedly has definite data about two IPOâ€™s where retail allotments were rigged.250 each. 2005 and It was observed that Ms Panchal had transferred 9. Who is Roopalben Panchal? . Panchal and Sugandh Investments. another entity Sugandh opened 1.500 benami dematerialised accounts. How big is the scam? Apart from the YES Bank fraud.315 benami DP accounts. By applying for small lots (1. Whereas in this case.
50.901 shares which is equal to 0. There are three more addresses of locations in Ahmedabad. of the above 6.70 crore on the day of the listing of YES Bank shares.the listing and commencement of trading on the stock exchanges. Ms Panchal’s name did not appear in the list of top 100 public issue allottees. 97. 12.713. as per the dematerialized account data furnished by NSDL.23. On July 6. which have been linked to Ms Panchal.3 per cent of the total number of shares allotted to retail investors. Ms Panchal received 150 shares each from 6.692 fictitious accounts to corner 3.14 crore (Oct 7-14. In order to get an allotment of 9. However.368.250 shares in off market transactions. paying the application money of Rs 47.52 per cent of the total number of shares allotted to retail investors. Curiously.250.47.221 entities have a same address in Ahmedabad.315 entities have their bank accounts with Bharat Overseas Bank and demat accounts with Karvy-DP.186 fake accounts for cornering 20.315 allottees through off-market transactions aggregating 9. Role of Depository Participants Suzlon Energy IPO: Rs 1.250 YBL shares. 2005) Key operators used 21.315 dematerialised accounts aggregating 1. Ms Panchal had applied for only 1. the SEBI order said.31.74 per cent of the total number of shares allotted to retail individual investors. And she did not receive any allotment in the IPO.09 per cent of the total shares allotted to retail individual investors .315 entities as many as 6. Tata Consultancy Services IPO: Rs 4.023 shares which is equal to 3.853 afferent accounts were used for cornering 27. By applying for the maximum possible number of shares per applicant while being categorised as retail applicant and by putting in large number of applications in the lot of 1. 2004). According to SEBI findings. which received 150 shares each from 1. This tantamount to an abuse of IPO allotment process. Ms Panchal and others booked profits to the tune of about Rs 1.730 shares representing 1.600 shares. National Thermal Power Corporation IPO Rs 5. 2005) Key operators used 1.619 ‘benami’ accounts were used to corner 2. 61. Ms Panchal would have had to apply for crores of shares involving many crores of rupees in application money. Jet Airways IPO: Rs 1899.34 cr (September 23-29. All the 6.3 crore (Feb 18-24.496.Â A similar modus operandi was adopted by Sugandh.294 shares representing 2.050 shares. Thus.050 shares in the YES Bank IPO. it was suspected that Ms Panchal must have made multiple applications or that other applicants were acting as a front for her. Ms Panchal and her associates (real or fictitious) have attempted to corner the maximum possible number of shares in the IPO allotment.47 crore 14.
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