SUBMITTED TO:

Prof. KUNAL SONI

SUBMITTED BY:
EKTA TANEJA
 INITIAL PUBLIC OFFERING (IPO)

Initial public offering (IPO), also referred to simply as a

"public offering", is when a company issues common stock
or shares to the public for the first time. They are often
issued by smaller, younger companies seeking capital to
expand, but can also be done by large privately-owned
companies looking to become publicly traded. In an IPO,
the issuer may obtain the assistance of an underwriting
firm, which helps it determine what type of security to
issue (common or preferred), best offering price and time
to bring it to market. Initial Public Offering (IPO) in India
means the selling of the shares of a company, for the first
time, to the public in the country's capital markets. This is
done by giving to the public, shares that are either owned
by the promoters of the company or by issuing new
shares. During an Initial Public Offer (IPO) the shares are
given to the public at a discount on the intrinsic value of
the shares and this is the reason that the investors buy
shares during the Initial Public Offering (IPO) in order to
make profits for them selves. IPO in India is done through
various methods like book building method, fixed price
method, or a mixture of both. The method of book building
has been introduced in the country in 1999 and it helps
the company to find out the demand and price of its
shares. A merchant banker is nominated as a book runner
by the Issuer of the IPO. The company that is issuing the
Initial Public Offering (IPO) decides the number of shares
that it will issue and also fixes the price band of the
shares. All these information are mentioned in the
company's red herring prospectus. During the company's
Initial Public Offering (IPO) in India, an electronic book is
opened for at least five days. During this period of time,
bidding takes place which means that people who are
interested in buying the shares of the Company makes an
offer within the fixed price band.
Once the book building is closed then the issuer as well as
the book runner of the Initial Public Offering (IPO) evaluate
the offers and then determine a fixed price. The offers for
shares that fall below the fixed price are rejected. The
successful bidders are then allotted the shares IPO’s 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 IPO’s are of companies going
through a transitory growth period, and they are therefore
subject to additional uncertainty regarding their future
value

REASONS FOR LISTING

When a company lists its shares on a public exchange, it
will almost invariably look to issue additional new shares
in order to raise extra capital at the same time. The
money paid by investors for the newly-issued shares goes
directly to the company (in contrast to a later trade of
shares on the exchange, where the money passes
between investors). An IPO, therefore, allows a company
to tap a wide pool of stock market investors to provide it
with large volumes of capital for future growth. The
company is never required to repay the capital, but
instead the new shareholders have a right to future profits
distributed by the company and the right to a capital
distribution in case of dissolution.
The existing shareholders will see their shareholdings
diluted as a proportion of the company's shares. However,
they hope that the capital investment will make their
shareholdings more valuable in absolute terms. In
addition, once a company is listed, it will be able to issue
further shares via a rights issue, thereby again providing
itself with capital for expansion without incurring any debt.
This regular ability to raise large amounts of capital from
the general market, rather than having to seek and
negotiate with individual investors, is a key incentive for
many companies seeking to list.

Major Reason for Listing 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.
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.
 IPO MARKET IN INDIA

The IPO Market in India has been developing since the

liberalization of the Indian economy. It has become one of
the foremost methods of raising funds for various
developmental projects of different companies. The IPO
Market in India is on the boom as more and more
companies are issuing equity shares in the capital market.
With the introduction of the open market economy, in the
1990s, the IPO Market went through its share of policy
changes, reforms and restructurings. One of the most
important developments was the disassembling of the
Controller of Capital Issues (CCI) and the introduction of
the free pricing mechanism. This step helped in
developing the IPO Market in India, as the companies were
permitted to price the issues. The Free pricing mechanism
permitted the companies to raise funds from the primary
market at competitive price. The Central Government felt
the need for a governed environment pertaining to the
Capital market, as few corporate houses were using the
abolition of the Controller of Capital Issues (CCI) in a
negative manner. The Securities Exchange Board of India
(SEBI) was established in the year 1992 to regulate the
capital market. SEBI was given the authority of monitoring
and regulating the activities of the bankers to an issue,
portfolio managers, stockbrokers, and other
intermediaries related to the stock markets. The effects of
the changes are evident from the trend of the resources of
the primary capital market which includes rights issues,
public issues, private placements and overseas issues. The
IPO Market in India experienced a boom in its activities in
the year 1994. In the year 1995 the growth of the Indian
IPO market was 32 %. The growth was halted with the
South East Asian crisis. The markets picked up speed
again with the introduction of the software stocks.

IPO ALLOTMENT STATUS

Initial public offering is also popularly known as
IPO, is the first time sale of stocks, of a private company.
A new company can launch IPO to raise capital to initiate
its business. Moreover, Initial Public Offering can also be
launched to raise money for expansion or other important
operations of an existing company. The sale of stock
through such Initial Public Offering (IPO) is meant for the
individual and corporate investors. The aim of such
issuance of Initial Public Offering is to invest the
accumulated corpus for, either opening -up of a company
or expansion of an existing company.
Thus, effectively, an Initial Public Offering pools
investments and utilizes it in building or expansion of the
said company. The shares held by such investors give
them the rights of the company and to its future profits.
The process which involves determination of the issue size
and type, offer price and best time of introduction into the
market is called "underwriting". The underwriting is
generally done by the investment bankers. These
underwriting firms or investment bankers are allotted
some specified numbers of shares to sell, which is called
as IPO Allotment Status. In other words, IPO Allotment
Status can also be defined as the number of stocks which
an investment banker is permitted to sell to the general
investor before the share is being traded on an exchange.
The excess shares are then allotted to other investment
bankers which are eligible to sell such shares. In India, the
main governing body that determines such eligibility
criteria and the IPO Allotment Status is the Securities and
Exchange Board of India (SEBI).

IPO - PROCEDURE

IPO’s 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:
· Best efforts contract
· Firm commitment contract
· All-or-none contract
· Bought deal
· Dutch auction
· Self distribution of stock
A large IPO is usually underwritten by a "syndicate" of
investment banks led by one or more major investment
banks (lead underwriter). Upon selling the shares, the
underwriters keep a commission based on a percentage of
the value of the shares sold. Usually, the lead
underwriters, i.e. the underwriters selling the largest
proportions of the IPO, take the highest commissions—up
to 8% in some cases. Multinational IPOs may have as
many as three syndicates to deal with differing legal
requirements in both the issuer's domestic market and
other regions. For example, an issuer based in the E.U.
may be represented by the main selling syndicate in its
domestic market, Europe, in addition to separate
syndicates or selling groups for US/Canada and for Asia.
Usually, the lead underwriter in the main selling group is
also the lead bank in the other selling groups. Because of
the wide array of legal requirements, IPO’s typically
involve one or more law firms with major practices in
securities law, such as the Magic Circle firms of London
and the white shoe firms of New York City. Usually, the
offering will include the issuance of new shares, intended
to raise new capital, as well the secondary sale of existing
shares. However, certain regulatory restrictions and
restrictions imposed by the lead underwriter are often
placed on the sale of existing shares. Public offerings are
primarily sold to institutional investors, but some shares
are also allocated to the underwriters' retail investors. A
broker selling shares of a public offering to his clients is
paid through a sales credit instead of a commission. The
client pays no commission to purchase the shares of a
public offering; the purchase price simply includes the
built-in sales credit. The issuer usually allows the
underwriters an option to increase the size of the offering
by up to 15% under certain circumstance known as the
green shoe or over allotment option. The first sale of stock
by a private company to the public. IPO’s are often issued
by smaller, younger companies seeking the capital to
expand, but can also be done by large privately owned
companies looking to become publicly traded. In an IPO,
the issuer obtains the assistance of an underwriting firm,
which helps it determine what type of security to issue
(common or preferred), the best offering.
 MAJOR PROCESS OF AN IPO

Eligibility Criteria:
· Net Tangible assets of Rs. 3.00 Crore in each of the
preceding 3 years.
· Track record of Distributable profits at least 3 out of 5
preceding years.
· The Company has a Net worth of Rs. 1.00 Crore in
preceding 3 years.
· The proposed issue should not exceed 5 times of its Pre-
issue
The process of an IPO - Eligibility criteria:
(Alternate route)
· Book building process and 50% of the offer to QIBs or
· 15% participation in project by F/Is or Schedule Banks;
· 10% of the Project cost from appraiser;
· 10% of the Issue to QIBs.
· Minimum post issue face capital of Rs.10 Crores or
· Market making for 2 years and Minimum number of
allottees atleast 1000

Official Process of IPO

· Appointment of Brokers, Advertisers and Bankers
· Conducting Road shows and Press Conference
· Opening and closing of Subscription list
· Preparation of Basis of Allotment
· Allotment of shares
· Listing of shares
· Price and the time to bring it to market

SEBI'S TRANSPARENCY NORMS MAY

CHANGE IPO GAME

NEW DELHI: The stock market regulator’s move to create

a level-playing field between institutional and other
investors by prohibiting companies doing initial public
offers (IPO’s) from sharing financial projections with
research arms associated with the sale arrangers may
change the way IPO’s are sold to investors, investment
bankers say.
Since analysts associated with investment bankers who
are selling the issue cannot make financial projection, it
would be difficult for the advisors to come up with price
estimates even in pre-IPO road shows, said a leading
investment banker on condition of anonymity.
The Securities and Exchange Board of India, or SEBI, came
out with a new disclosure and investor protection
guidelines on September 3, which state that the research
report should be only based on the published information
as contained in the offer documents which analysts at
non-arranging brokerages and retail investors rely on.
Before SEBI’s rule tweak, the market practice was for
banks advising companies to share financial numbers with
the analysts associated with their research department,
which in turn prepare a report making their own future
projection in comparison to the peer group. These reports
are subsequently shared with institutional investors prior
to filing the prospectus. They are not meant for the retail
or ordinary investors.
But the new guidelines say that “no selective or additional
information or information extraneous to the offer
document shall be made available by the issuer or any
member of the issue management team/ syndicate to any
particular section of the investors or to any research
analyst in any manner whatsoever including at road
shows, presentations, in research or sales reports or at
bidding centres”.
Research houses not associated with the issue and have
no access to the company’s financial details can make
their own projections based on publicly available
information. In the recent NHPC share sale, for instance,
CLSA, a unit of France’s Calyon, which was not advising on
the issue, said the issue was overpriced in comparison to
its peer group.
Some 30 companies, which were planning to file
prospectus for public offers by September 30, including
Sahara Prime City, Lodha Developers, Emaar MGF, and
Godrej Properties, have to decide the prices at which they
plan to sell their shares based on the new rules. These
companies plan to raise between Rs 3,000 crore and Rs
5,000 crore.
Reaction from investment bankers to the new rule were
generally negative, though none were willing to be quoted
by name. Reports from analysts at
investment banks involved with the share sale help in
pricing IPOs, and in arriving at the company’s fund
requirements, said another banker and added such a
practice is followed in the US.

Based on the investment plan and implementation

schedule of the companies, analysts make their future
projections and fund requirements, which are used to give
a benchmark valuation and arrive at a price band, said a
banker. These reports are not shared with ordinary
investors, he added.

If under the new dispensation, even indicative projections

are not available, how will you price the issue, asked a
banker.

The latest move hinders price discovery and provides

room for uninformed analysts’ reports to confuse
investors, according to investment bankers.

Bankers said that even in case of follow-on public issues,

such as those of Rural Electrification Corporation and
NTPC, which are planning to sell shares by the end of this
fiscal, analysts associated with advisors to the issue
cannot project earnings. This may distort pricing, said a
banker.

A senior official at a Singapore-based fund, who did not

want to be identified, said research reports from analysts
at bankers to the issue do help in understanding the
pricing, as it is difficult to arrive at a valuation based on
the past earnings without knowing the future plans.
 SEBI GUIDELINES

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

Application for Listing:

No IPO without application for listing
Dematerialization of shares:
Agreement with Depository Present shares also to be in
demat public may opt either physical or demat shares
“Qualified Institutional Buyer” shall mean:
· Public financial institution as defined in section 4A of the
Companies Act, 1956; scheduled commercial banks;
· Mutual funds;
· Foreign institutional investor registered with SEBI;
· Multilateral and bilateral development financial
institutions;
· Venture capital funds registered with SEBI;
· Foreign venture capital investors registered with SEBI;
· State industrial development corporations;
· Insurance companies registered with the Insurance
Regulatory and Development Authority (IRDA);
· Provident funds with minimum corpus of Rs. 25 crores;
· Pension funds with minimum corpus of Rs. 25 crores).

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
IPO Grading:
· No IPO unless; (as on the date of filing the prospectus
with ROC):
· Grading for IPO has been obtained from at least one
agency
· Grading and the rationale have been included in the
prospectus
· Grading expenses to be borne by the issuer
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
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
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
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
· No slogans, captions or one liner
· 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
 CONCLUSION

IPO is used by a company to raise its funds. The extra

amount obtained from public may be invested in the
development o f the company, although it costs a little to
a company but it gives a way to get more money for long
term investments.