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IPO – AN INTRODUCTION VARIOUS TYPES OF ISSUES
REGULATORY FRAMEWORK SYNDICATE MEMBERS BOOK BUILDING
GREEN SHOE OPTION
OBSERVATION AND COMMENTS
PUBLIC ISSUES - INTRODUCTION
Capital is like blood for any company. A company, in absence of appropriate composition of funds available with it for its disbursal cannot function properly, no matter how good the entrepreneur may be. The funds can be resorted through various means like loans from financial institutions but if huge amount of capital is needed then a company has to make alternative arrangements for raising capital by Public Issues. Public Issue, in layman, can be defined as a simple means of collecting funds from the public, who in turn receive various benefits like dividend, bonus, rights and above all, profit on their investment in the corporate. The stock market has been acknowledged all over the world as vital for long-term economic growth. Several empirical studies have proved that there is a strong positive correlation between the level of sophistication of a country’s stock market and its level of economic growth and development. Countries with well-developed stock markets generally tend to enjoy higher economic growth and development than those with underdeveloped stock markets. There was a vital need to strengthen the capital market, which could only be achieved through structural modifications, introducing new market mechanism, instruments, and by taking steps for safeguarding the interest of the investors through more disclosures and transparency. In this context, an important mechanism named as Book-Building in the system of Initial Public Offerings (IPOs) was introduced by SEBI in India on the basis of the recommendations of the committee constituted under the chairmanship of YH Malegam in October 1995. The Book-Building is the most practical mechanism for the quick and efficient management of mega issues. (Including offers for sale).
The public issues are now controlled and scrutinized by SEBI, Ministry of Company Affairs, Ministry of Commerce and other allied departments from which appropriate approval is to be required before coming out with a issue. The methods of bringing out public issues have also been changing day by day to match the international standards. Over the time, various agencies involved in the work of Public Issues have emerged to facilitate the clients. The Merchant Bankers, Registrar to Issue, Advertising agents, underwriters have moved in and are acting as great comfort providers in coming out with a public issue, thereby, saving a lot of time and money. These agencies have shown remarkable performances in completing the task of issues. New Concepts like Book Building, Green Shoe Option and Credit Rating have been added as a new spice to the public issues. These techniques have provided a totally new outlook to the public issues. Information Technology has also played a major role in streamlining the public issues. National Stock Exchange and Bombay Stock Exchange has devised various new methods with the help of IT to make the procedure swift.
What do public issue/ going public mean for the companies? Going public refers to a private company’s initial public offering (IPO), thus becoming a publicly traded and owned entity. An initial public offering, or IPO, is the first sale of stock by a company to the public. Facts about privately held companies A privately held company has fewer shareholders and its owners don't have to disclose much information about the company. Anybody can go out and incorporate a company: just put in some money, file the right legal documents and follow the reporting rules of your jurisdiction. Most small businesses are privately held. But large companies can be private too. Did you know that IKEA, Domino's Pizza, and Hallmark Cards are all privately held?
What are the positive forces for a company to come up with public issue? Prime forces Strengthens capital base. Businesses usually go public to raise capital in hopes of expanding. Venture capitalist may use IPOs as an exit strategy - that is, a way of getting out of their investment in a Company.
Other forces Increase prestige/ credibility of the company in the market. Makes acquisitions easier. Diversifies ownership. Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent.
What are the negative forces for a company restricting it from going public? Puts pressure on short term growth. Forces disclosure to the public. Imposes more restriction on management and on trading. Makes former business owners lose controls of decision making, etc. Companies must consider all the forces before deciding upon public issue. For some entrepreneurs, taking a company public is the ultimate dream and mark of success. However, before an IPO can even be discussed, a company must meet requirements laid out. What are the characteristics that may qualify a company for a successful IPO? Some of the characteristics are as follows:
Public issue has turned global. Some facts about public issue Indian primary stock market has grew by over 158% to gross 25. (Source: The Financials Express – 10/02/2007) The line up for 2007 already seems impressive with IPO from both private and public players like Power Grid Corporation of India Ltd.com. Innovative product or services Competitive in industry. there were two successful IPOs of internet companies Rediff. High growth prospects. Sound governance and idealistic vision.100 crore in 2006 compared to 9700 crore in 2005. 5 . Companies are looking to IPOs in international browse such as US & Europe. National Hydroelectric Power Corporation Ltd and DLF coming up.com and Sify. During the dotcom era.
VARIOUS TYPES OF ISSUES The classification of issues can be described as below: ISSUES Public Issues Right Issues Private Placement Qualified Institutions Placement (Listed Cos.) Private Placement (For unlisted companies) Preferential Issue (For Listed Companies) IPO (For Unlisted Compani es) FPO (For Listed Compani es) Fresh Issue Offer for Sale Fresh Issue Offer for Sale 6 .
disclosures in notice etc. Rights Issue and Private Placement. Public issues can be further classified into Initial Public offerings and further public offerings. Private Placement Private Placement of shares or of convertible securities by a listed company is generally known by name of preferential allotment.Classification Issues can be broadly classified into Public Issue. This is a faster way for a company to raise equity capital.. In a public offering. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. Rights Issue It is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The significant features of each type of Issue are illustrated below: Initial Public Offering IPO 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. 7 . A private placement 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. This provides a listing and trading of the issuer’s securities. 2000 in its offer document and offers it for subscription. in addition to the requirements specified in the Companies Act. the issuer makes an offer for new market investors to join their shareholders family. 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 which inter-alia includes pricing. 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. 1956 which is neither a rights issue nor a public issue. The issuer company makes detailed disclosures as per the SEBI (DIP) Guidelines.
8 . An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations. through an offer document.Further public offering FPO is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public.
Non-connection of expert with formation and management of the Company (Section 57) A prospectus inviting persons to subscribe for shares in or debentures of a company shall not include a statement purporting to be made by an expert. of the company. 1956 Specific Sections dealing with Issue of Shares Dating of Prospectus (Section 55) A prospectus issued by or on behalf of the company or in relation to an intended company shall be dated and that date shall unless contrary is proved. or b. Shall state the matters specified in Part I of Schedule II and set out the reports specified in Part II of that Schedule. 9 . and has not been. engaged or interested in the formation or promotion. or in the management. Matters to be stated and reports to be set out in prospectus (Section 56) Every prospectus issued: a. be taken as the date of publication of the prospectus.REGULATORY FRAMEWORK The Companies Act. unless the expert is a person who is not. By or on behalf of any person who is or has been engaged or interested in the formation of a company. By or on behalf of a company. and Parts I and II shall have effect subject to the provisions contained in Part III of that Schedule.
10 . also. on or before the date of its publication. A statement that he has given and has not withdrawn his consent as aforesaid appears in the prospectus. A copy of every contract required by clause 16 of Schedule II to be specified in the prospectus. and having endorsed thereon attached thereto: a. indicated therein. or have. and has not withdrawn such consent before delivery of a copy of the prospectus for registration. Registration of Prospectus (Section 60) No prospectus shall be issued by or on behalf of a company or in relation to an intended company unless. and b. unless: a. and b. ii. or. In case of a prospectus issued generally.Expert’s consent to issue of prospectus containing statement by him (Section 58) A prospectus inviting persons to subscribe for shares in or debentures of a company and including a statement purporting to be made by an expert shall not be issued. i. there has been delivered to the Registrar for registration a copy thereof signed by every person who is named therein as a director or proposed director of the company or by his agent authorized in writing. without giving the reasons. Where the persons making any report required by Part II of that Schedule have made therein. any such adjustments as are mentioned in clause 32 of that schedule. Any consent to the issue of the prospectus required by section 58 from any person as an expert. He has given his written consent to the issue thereof with the statement included in the form and context in which it is included. a memorandum giving full particulars thereof. a written statement signed by those persons setting out the adjustments and giving the reasons therefore. in the case of a contract not reduced into writing.
Every prospectus to which above conditions apply shall on face of it state: a. Allotment and Minimum Subscription (Section 69) No allotment shall be made of any share capital of a company offered to the public for subscription. at any time. must be raised by the issue of share capital in order to provide for the matters specified in clause 5 of Schedule II has been subscribed. State that a copy of has been delivered for registration as required by this section: and b. in the opinion of the Board of Directors. whether in cash or by Cheque or other instrument which has been paid. vary the terms of a contract referred to in the prospectus or statement in lieu of prospectus. shall issue the same only in dematerialized form by complying with the requisite provisions of the Depositories Act1996. the company in general meeting. or except on authority given by. The amount payable on application on each share shall not be less than five percent of the nominal amount of the share. Initial offer of securities to be in dematerialized form in certain cases (Section 68) Every listed public company. or refer to statements included in the prospectus which specify those documents. Variation in terms of contract mentioned in prospectus or statement in lieu of prospectus (Section 61) A company shall not. 11 . except subject to the approval of. making initial public offer of any security for a sum of rupees ten crores or more. Specify any documents required by this section to be endorsed on or attached to the copy so delivered. The amount so stated in the prospectus shall be reckoned exclusively of any amount payable otherwise than in money and is referred to as Minimum Subscription. and the sum payable on application for the amount so stated has been paid to and received by the company. unless the amount stated in the prospectus as the minimum amount which.
as may be specified in the prospectus. 12 . or which has issued such a prospectus but has not proceeded to allot any of the shares offered to the public for subscription.Statement in lieu of prospectus (Section 70) A company having a share capital. shall not allot any of its shares or debentures unless at least three days before the first allotment of either shares or debentures. and no proceedings shall be taken on applications made in pursuance of a prospectus so issued. and allotment of. setting out the reports specified therein. make an application to one or more recognized stock exchanges for permission for the shares or debentures intending to be so offered to be dealt with in the stock exchange or each such stock exchange. which does not issue a prospectus on or with reference to its formation. Applications for. and the said Parts I and II shall have effect subject to the provisions contained in Part III of that Schedule. until the beginning of the fifth day after that on which the prospectus is first so issued or such later time. shares and debentures (Section 72) No allotment shall be made of any shares in or debentures of a company in pursuance of a prospectus issued generally. in the form and containing the particulars set out in Part I of Schedule III and. in the cases mentioned in Part II of that schedule. if any. there has been delivered to the Registrar for registration a statement in lieu of prospectus signed by every person who is named therein as a director or proposed director of the company or by his agent authorized in writing. Allotment of shares and debentures to be dealt in on Stock Exchange (Section 73) Every company intending to offer shares or debentures to the public for subscription by the issue of a prospectus shall before such issue.
whichever is earlier. the names. being entitled so to do. Further Issue of Capital (Section 81) Where at any time after the expiry of two years from the formation of a company or at anytime after the expiry of one year from the allotment of shares in that company made for the first time after its formation. if any cast against the proposal by members so entitled and voting and the Central Government is satisfied. it is proposed to increase the subscribed capital of the company by allotment of further shares then. Such further shares shall be offered to the persons who. Where no such special resolution is passed. paid or due and payable on each share. are holders of the equity shares of the company. a. b. and the amount if any.Return as to Allotments (Section 75) Whenever a company having a share capital makes any allotment of its shares. or where proxies are allowed. as nearly circumstances admit. The offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days from the date of the offer within which the offer if. will be deemed to have been declined. If a special resolution to that effect is passed by the company in the general meeting. not accepted. the company shall within thirty days file with the Registrar of Companies a return of the allotment stating the number and nominal amount of the shares comprised in the allotment. addresses and occupations of the allottees. by proxy exceed the votes. if the votes cast in favour of the proposal contained in the resolution moved in that general meeting by members who. or b. on 13 . vote in person. at the date of the offer. in proportion. to the capital paid up on those shares at that date. There is a exception to above conditions by way of Section 81(1A) which says that the further shares aforesaid may be offered to any person whether it includes persons referred above or not in any manner whatsoever: a.
and enter therein. if any. the shares held by each member. specifying any shares held by any member. that the proposal is most beneficial to the company. In the case of a company having share capital. Numbering of Shares (Section 83) Each share in a company having a share capital shall be distinguished by its appropriate number but this condition will not apply to shares held with depository. and the occupation. 14 .an application made by the Board of Directors in this behalf. b. Certificate of Shares (Section 84) A certificate under the common seal of the company. of each member. Register of Members (Section 150) Every company shall keep in one or more books a register of its members. The date on which person was entered in the register as a member. the following particulars:a. The name and address. d. shall be prima facie evidence of the title of the member to such shares. c. and the amount paid or agreed to be considered paid as on those shares. The date on which person ceased to be a member.
From an investor’s perspective. “Qualified Institutional Buyers” are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets. where aggregate value of securities offered does not exceed Rs. which is granted to a company to be exercised through a Stabilizing Agent. This is an arrangement wherein the issue would be over allotted to the extent of a maximum of 15% of the issue size. 50 lakhs. all offer for sale and right issues by listed companies. Some Common Terms as defined in Guidelines “Green Shoe option” means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism for a period not exceeding 30 days in accordance with the provisions of Chapter VIIIA of DIP Guidelines. whose equity share capital is listed. an issue with green shoe option provides more probability of getting shares and also that post listing price may show relatively more stability as compared to market. 2000 Chapter I Applicability of Guidelines This Guidelines is applicable to all public issues by listed and unlisted companies.SEBI (Disclosure and Investor Protection) Guidelines. 50 lakhs. Foreign institutional investor registered with SEBI. 1956. Scheduled commercial banks. 15 . In terms of DIP Guidelines. except in case of right issues where the aggregate value of the securities offered does not exceed Rs. a ‘Qualified Institutional Buyer’ shall mean: • • • • Public financial institution as defined in section 4A of the Companies Act. Mutual funds. In case of right issues. in accordance with these guidelines is to be filed with SEBI. an offer for letter.
shall continue to hold some minimum percentage in the company after the public issue. SEBI (DIP) Guidelines have stipulated lockin requirements on shares of promoters mainly to ensure that the promoters or main persons who are controlling the company. Insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA). 16 . However there is no lock. 25 crores Pension Funds with minimum corpus of Rs. There is lock-in on the shares held before IPO and also on shares acquired through preferential allotment route. Provident Funds with minimum corpus of Rs. 25 crores) These entities are not required to be registered with SEBI as QIBs. Foreign Venture capital investors registered with SEBI. if they are acting as such merely in their professional capacity are not be included in the definition of a promoter.• • • • • • • Multilateral and bilateral development financial institutions. Chapter XIII and Chapter XIIIA of DIP guidelines “Promoter” has been defined as a person or persons who are in over-all control of the company. It may be noted that a director / officer of the issuer company or person. State Industrial Development Corporations. The requirements are detailed in Chapter IV. who are instrumental in the formulation of a plan or program pursuant to which the securities are offered to the public and those named in the prospectus as promoters(s). The requirements are detailed in Chapter IV of DIP guidelines.in on shares/ securities allotted through QIP route. Any entities falling under the categories specified above are considered as QIBs for the purpose of participating in primary issuance process. Venture capital funds registered with SEBI. “Lock-in” indicates a freeze on the shares.
“Red Herring Prospectus” is a prospectus which does not have details of either price or number of shares being offered or the amount of issue. in the draft Offer Document and the issuer or the Lead Merchant banker shall carry out such changes in the draft offer document before filing the Offer Document with ROC/ SEs. On the other hand. Minimum Lock in period for promoters contribution is five years Minimum lock in period for firm allotments is three years “Offer document” means Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a rights issue which is filed Registrar of Companies (ROC) and Stock Exchanges. SEBI may specifies changes. The offer document filed thereafter with ROC is called a prospectus. The Draft Offer document is available on the SEBI website for public comments for a period of 21 days from the filing of the Draft Offer Document with SEBI. atleast 21 days prior to the filing of the Offer Document with ROC/ SEs. the details of the final price are included in the offer document. an issuer can state the issue size and the number of shares are determined later. Only on completion of the bidding process. if any.Promoter Contribution Promoters should bring in their contribution including premium fully before the issue Minimum Promoters contribution is 20-25% of the public issue. Hence. such details are not shown in the Red Herring prospectus filed with ROC in terms of the provisions of the Companies Act. This means that in case price is not disclosed. An RHP for and FPO can be filed with the RoC without the price band and the issuer. In the case of book-built issues. An offer document covers all the relevant information to help an investor to make his/her investment decision. in such a case will notify the floor price or a price band by way of an advertisement one day prior to the opening of the issue. The draft offer documents are filed with SEBI. “Draft Offer document” means the offer document in draft stage. it is a process of price discovery and the price cannot be determined until the bidding process is completed. the number of shares and the upper and lower price bands are disclosed. 17 .
A company is also required to send detailed letter of offer upon request by any Shareholder. 2000 and enable shareholder in making an informed decision. The price band can have a revision and such a revision in the price band shall be widely disseminated by informing the stock exchanges. it means that the cap should not be more than 120% of the floor price. The appointment of various intermediaries by the issuer includes a prerequisite that such members/registrars have the required facilities to accommodate such an online issue process.“Abridged Prospectus” means the memorandum as prescribed in Form 2A under sub-section (3) of section 56 of the Companies Act. “Letter of offer” means the offer document prepared by company for its rights issue and which is filed with the Stock Exchanges. “Price Band” as stated in the answer to. In case the price band is revised. It contains all the salient features of a prospectus. the bidding period shall be extended for a further period of three days. In other words. “Online bidding” A company proposing to issue capital to public through the on-line system of the stock exchange for offer of securities can do so if it complies with the requirements under Chapter 11A of DIP Guidelines. by issuing press release and also indicating the change on the relevant website and the terminals of the syndicate members. the red herring prospectus may contain either the floor price for the securities or a price band within which the investors can bid. It accompanies the application form of public issues. An investor may place his bids through the online terminals offered by some of the brokers. “Abridged letter of offer” means the abridged version of the letter of offer. The letter of offer contains all the disclosures as required in term of SEBI (DIP) Guidelines. subject to the total bidding period not exceeding thirteen days. The spread between the floor and the cap of the price band shall not be more than 20%. Listed company is required to send the abridged letter of offer to each and every shareholder who is eligible for participating in the rights issue along with the application form. 18 . 1956.
The Manager to the Issue is actively associated with the selection of various agencies cum planning the timing of the issue. Underwriters. recommending the basis of allotment to the designated Stock Exchange for its approval. However good the script may be and however talented an individual actor may be. 19 . a play cannot be a success unless the Director is able to effectively tap and channelise the efforts of the various participants. strategies to be adopted by way of publicity and marketing of the issue. Printers etc. Their job normally starts with the opening of the subscription list. preparing basis of allotment.SYNDICATE MEMBERS Managers to the issue The Manager to the issue is equivalent to the Director of a play. etc. and continues till is given in the Depositories Participants Accounts of the respective allottees. and the Register of Members along with other related Register/details are handed over to the Company. Advertising Agents. etc. Brokers. Underwriters The underwriters are the people who actually ensure that the Company is able to raise the capital issued by it for a commission charged by them. preparing details of successful allottees for crediting their accounts with respective DP’s and preparing the Register of Members. arranging for dispatch of allotment letters/ Share Certificates. They make a commitment to get the issue subscribed either through others or themselves. Bankers to the Issue. He advises the Company on the selection the Registrars to the issue. Registrar to the Issue The Registrar to the issue are responsible for receiving the share applications from various collection centers.
its plan of action for future. etc. its performances. They provide better and professional services to investing public and to promote development of capital market on healthy lines. including OTCEI and NSE. V. where the details of the applications are consolidated. advertisements. These branches are called Collecting Branches.Brokers to the Issue These are the people who actually bring the prospective investors and the Company together. it is essential that the general public is made aware of the Company. Public Issue is an effort to motivate and persuade members of the public to invest in the shares of the Company. The names of the brokers to the issue need not be specified in the prospectus. Such specified branches of the Bankers to the Issue are called Controlling Branch. Press Releases. This very Branch is usually selected in the city where the Managers to the Issue/Registrar to the Issue/Registered office of the Company is situated. They send the application forms and the money received by them to a specified Branch. 20 . numbers of Banks are designated as Bankers to the Issue. The Company has to pay brokerage to them and statement to this effect should be given in prospectus. Publicity & Advertising Agents As per general perception. They are the members of recognized stock exchanges in India. Bankers to the issue They are the branches of the Scheduled banks which will receive the share application money along with the share application forms from the prospective investors. It is of vital importance that publicity is given before the public issue creating the right image about the Company to attract the prospective investor through the newspaper and T. Depending upon the size of the issue.
Financial Institutions At the time of sanctioning underwriting support/ Term Loans to the Company Term Lending Financial Institutions/Banks. if needed. usually stipulate that the draft of the prospectus and also the proposed for Public issue is approved by them. GIC. it might be essential to seek separate approvals from them. 21 . When all the Institutions jointly finance a project under their Participating Finance Scheme. In other cases where other institutions like LIC. So it is normally good enough if the Company obtains the necessary approvals from the said (Lead) Institution only. UTI etc. have also given financial assistance. one of them known as Lead financial Institution happens to act on behalf of others.
3 Crore for 3 full years. The minimum post-issue face value capital shall be Rs. with at least 50% to be mandatory allotted to the Qualified Institutional Buyers (QIBs). 1 Crore in three years. Distributable profits in at least three years. Net worth of at least Rs. The issue size does not exceed 5 times the pre-issue net worth. 10 crore or there shall be a compulsory market-making for at least 2 years. which are as follows: Entry Norm I (EN I): Net tangible assets of at least Rs. If change in name. They are as under: Entry Norm II (EN II) Issue shall be through book building route. SEBI has provided two other alternative routes to company not satisfying any of the above conditions to provide sufficient flexibility and also to ensure that genuine companies do not suffer on account of rigidity of the parameters. for accessing the primary Market.Chapter II ELIGIBILITY NORMS Eligibility norms laid down by SEBI must be met by the company bringing out the public issue. at least 50 % of revenue for preceding 1 year should be from the activity suggested by new name. 22 .
Right issue by the listed company 23 . The following are exempted from the ENs: Private Sector Banks Public sector banks An infrastructure company whose project has been appraised by a PFI or IDFC or IL&FS or a bank which was earlier a PFI and not less than 5% of the project cost is financed by any of these institutions. The minimum post-issue face value capital shall be Rs. Note: .OR Entry Norm III (EN III) The "project" is appraised and participated to the extent of 15% by FIs/Scheduled Commercial Banks of which at least 10% comes from the appraiser(s).The Company should also satisfy the criteria of having at least 1000 prospective allottees. 10 crore or there shall be a compulsory market-making for at least 2 years.
the one among them who has the primary responsibility of managing the affairs of the syndicate and the issue is the lead manager. The Lead Managers who are responsible for conducting due diligence exercise with respect to contents of the offer document. 24 . Due Diligence Certificate The lead merchant banker.Chapter V PRE-ISSUE OBLIGATIONS The pre-issue obligations are detailed below: 1. Memorandum of Understanding (MOU) No company shall make an issue of security through a public or rights issue unless a Memorandum of Understanding has been entered into between a lead merchant banker and the issuer company specifying their mutual rights. In case of a debenture issue. The lead merchant banker shall exercise due diligence. the lead merchant banker shall also furnish to the Board a due diligence certificate given by the debenture trustee in the format specified in Schedule IIIA along with the draft offer document. The Lead Merchant Banker responsible for drafting of the offer documents shall ensure that a copy of the MOU entered into with the issuer company is submitted to the Board along with the draft offer document. Lead Manager When new issues are floated. liabilities and obligations relating to the issue. as per inter-se allocation of responsibilities shall sign due diligence certificate. shall furnish to the Board a due diligence certificate as specified in Schedule III along with the draft prospectus. there may be a number of Underwriters.
25 lacs whichever is less. the underwriters' assets are adequate to meet their underwriting obligations. 25 . DLCs and ILCs carry out the legal due diligence. In respect of every underwritten issue. The issuer company shall submit to the Stock Exchanges on which securities are proposed to be listed. Bank Account Number and Passport Number of the promoters at the time of filing the draft offer document to them. the lead merchant banker(s) shall undertake a minimum underwriting obligation of 5% of the total underwriting commitment or Rs. Appointment of Merchant Bankers Appoint a Merchant Banker (BRLM). Merchant Banker should not be an Associate of the Company. At times DLCs and ILCs are separate for the Company and the Merchant Banker. Merchant Banker in consultation of the Company to appoint Domestic Legal Counsel (DLC) and International Legal Counsel (ILC – if issue to be marketed outside India). the Permanent Account Number.List of Promoters’ Group and other Details The issuer company shall submit to the Board the list of the persons who constitute the Promoters’ Group and their individual shareholding. b) Obtain Underwriters’ written consent before including their names as underwriters in the final offer document. The lead merchant banker shall: a) Incorporate a statement in the offer document to the effect that in the opinion of the lead merchant banker. Underwriting The lead merchant banker shall satisfy themselves about the ability of the underwriters to discharge their underwriting obligations.
Delhi. Mandatory Collection Centre The minimum number of collection centre for an issue of capital shall be: a) The four metropolitan centers situated at Mumbai. etc. ii) A statement by it whether it is proposed to amend the draft offer document or not. In respect of an underwritten issue. bankers to the issue.The outstanding underwriting commitments of a merchant banker shall not exceed 20 times its net-worth at any point of time. Calcutta and Chennai 26 . in advance as agreed upon. In the case of rights issues. Dispatch of Issue Material The lead merchant banker shall ensure that for public issues offer documents and other issue materials are dispatched to the various stock exchanges. No Complaints Certificate After a period of 21 days from the date the draft offer document was made public. the Lead Merchant Banker shall file a statement with the Board: i) giving a list of complaints received by it. investors associations. brokers. Offer Document to be made Public The draft offer document filed with the Board shall be made public for a period of 21 days from the date of filing the offer document with the Board. iii) Highlight those amendments. lead merchant banker shall ensure that the 76(abridged letters of offer) are dispatched to all shareholders at least one week before the date of opening of the issue. the lead merchant banker shall ensure that the relevant details of underwriters are included in the offer document. and. underwriters.
The offer documents and application forms shall specifically indicate that the acknowledgement of receipt of application moneys given by the collection agents shall be valid and binding on the issuer company and other persons connected with the issue. both in terms of infrastructure and manpower requirements. The investors from the places other than from the places where the mandatory collection centers and authorized collection agents are located. within a period of 2 weeks from the date of closure of the public issue. c) The regional division of collection centers is indicated in Schedule VII. can forward their applications along with stock invests to the Registrars to the Issue directly by Registered Post with Acknowledgement Due. drafts and stock invests. The application forms along with duly reconciled schedules shall be forwarded by the collection agent to the Registrars to the Issue after realization of Cheque and after weeding out the applications in respect of Cheque return cases. 27 . The authorized collection agent shall not collect application moneys in cash. The lead merchant banker shall ensure that the collection agents so selected are properly equipped for the purpose. The collection agents may collect such applications as are accompanied by payment of application moneys paid by Cheque. The applications collected by the collection agents shall be deposited in the special share application account with designated scheduled bank either on the same date or latest by the next working day.b) All such centers where the stock exchanges are located in the region in which the registered office of the company is situated. Authorized Collection Agents The issuer company can also appoint authorized collection agents in consultation with the Lead Merchant Banker subject to necessary disclosures including the names and addresses of such agents made in the offer document.
it may be a perforated part of the Abridged Prospectus. He shall also ensure that an option be given to the investors to receive allotment of securities in dematerialized form through any of the depositories. address. The Abridged Prospectus shall not contain matters which are extraneous to the contents of the prospectus. Branding of securities Securities may be branded describing their nature but not the quality. rules. Enough space shall be provided in the application form to enable the investors to file in various details like name. 28 . Alternatively. etc.The applications received through the registered post shall be dealt with by the Registrars to the Issue in the normal course. regulations and other directives issued by the Board and investor’s complaints related matter. Abridged Prospectus The Lead Merchant Banker shall ensure the following: Every application form distributed by the issuer Company or anyone else is accompanied by a copy of the Abridged Prospectus. Appointment of Compliance Officer An issuer company shall appoint a compliance officer who shall directly liaise with the Board with regard to compliance with various laws. Agreements with depositories The lead manager shall ensure that the issuer company has entered into agreements with all the depositories for dematerialization of securities. The application form may be stapled to form part of the Abridged Prospectus.
A clause that company shall refund the entire application money if minimum subscription is not received. as well as the "Risk Factors". Highlights of the issue.CHAPTER VI CONTENTS OF OFFER DOCUMENT The Offer document shall contain the following: THE PROSPECTUS The prospectus in addition to the Schedule II of the Companies Act. 1956. 29 . Net Asset value (NAV) High and Low price of the shares of the company for the last two years. if called. shall contain the following: True and adequate material information Information as summarized under Schedule VIIA of the guidelines Cover pages Table of Contents Definitions and abbreviations Risk Factors Introduction and summary of the business of the Company Details about the Issuer Company Financial statements of the issuer company Legal and other information including outstanding litigations Other Regulatory and Statutory Disclosures Offering Information Description of Equity shares and terms of Articles of Association Other Material Information Draft the Prospectus Apart from the notice of offer to issue shares to public prospectus should also disclose: Justification of premium.
Approval of Prospectus:The draft prospectus along with the application form for issue of shares should be approved by the solicitors/legal advisors/stock exchange & where application has been made seeking permission for shares to be draft in of the company to ensure that it contains all disclosures and information as required by various statutes. Obtain Approval from Board of Directors After the concerned parties / agencies have approved the draft prospectus and the application form. The fact that an application has / have been made to the stock exchange must be stated in the prospectus. the company should submit on application to the Stock Exchange (s) for enlistment of securities offered to the public by the said issue. Application to stock exchange to list shares: Before filing prospectus with the Registrar of companies. The prospectus must be registered with ROC within 3 months of vetting by SEBI. before filing with the Registrar of companies. 30 . etc. Registration of Prospectus with Roc Before the prospectus is issued to the public it must be filed with the Registrar of companies. A statement by the lead managers that in their opinion the assets of the underwriters are adequate to meet their obligations. rules. after being duly signed by every director or proposed director of the company. the board of directors of the company should approve the final draft. notifications.
requisite steps for printing and distribution amongst Banker. if any Change of name of the company and the registered office during the last five years 31 . Underwriter public etc. should be made. ABRIDGED PROSPECTUS Abridged prospectus means a Memorandum containing disclosures as specified from time to time including the following: General Information Capital Structure Terms of the Present Issue Particulars of the Issue Company Management and Project Basis for Issue Price Management Perception of Risk factors Outstanding litigation Whether all payments/refunds. Institutional dues have been paid up to date. Financial Performance of the company for the last five years Minimum subscription clause. Expert opinion obtained Change if any in director and auditor during the last three years and reasons thereof Option to subscribe Material contracts and time and place of inspection. the company should take steps to issue the prospectus within 90 days of it's registration with ROC For this compliance.Printing and distribution of prospectus and application forms: After Receipt of Acknowledgement card from the SEBI and the intimation from Registrar of Companies regarding registration of prospectus. Interest on deposits. Any material development after the date of the latest balance sheet and its impact on performance and projects of the company. debentures interest. debentures deposits of banks or companies.
Renunciation.6. Statement that a copy of the offer document of the immediately preceding public or rights issue is made available to the public as specified under clause 5. Rights entitlement ratio. 32 . Fractional entitlements. Contents of letter of offer: Front page Back cover page General Information o o Terms of the Present Issue Particulars of the Issue Company Management and Project Financial performance of the company for the last five years (Figures to be taken from the audited annual accounts in tabular form) Management discussion and analysis of the financial conditions and results of the operations as reflected in the financial statement. The abridged letter of offer shall also include the following disclosures: Provisions pertaining to applications referred earlier in Section II. Application for Additional equity shares.2(ii) and also as a document for public inspection. Intention of promoters to subscribe to their rights entitlement. Undertaking by Directors ABRIDGED LETTER OF OFFER The abridged letter of offer shall contain disclosures as specified in Section II of this Chapter.LETTER OF OFFER The letter of offer shall fulfill the requirements and shall contain the disclosures as specified under Section of this Chapter.
Redressal of Investor Grievances: The Post . for book built portion: The due date of the report shall be 3rd day from the date of allocation in the book built portion or one day prior to the opening of the fixed price portion whichever is earlier. The due date for this report shall be the 3rd day from the date of listing or 78 days from the date of closure of the subscription of the issue.Issue Lead Merchant Banker shall actively associate himself with postissue activities namely. refund and dispatch and shall regularly monitor Redressal of investor grievances arising there from.Issue Monitoring Reports: Irrespective of the level of subscription. Final post issue monitoring report for all issues. 33 . These reports shall be submitted within 3 working days from the due dates. including fixed price portion of book built issue: The due date for the report shall be the 3rd day from the date of closure of the issue. allotment. whichever is earlier. The due date for submitting Post Issue Monitoring report in case of public issues by listed and unlisted companies. the post-issue Lead Merchant Banker shall ensure the submission of the post-issue monitoring reports as per formats specified in Schedule XVI. 3 day monitoring report in case of issue through book building route. 3 day monitoring report in other cases.CHAPTER VII POST ISSUE OBLIGATIONS The post issue obligations shall be as follows: Post .
dispatch security certificates and refund orders completed and securities listed. Underwriters If the issue is proposed to be closed at the earliest closing date. advertisement giving details relating to oversubscription. In case there is a devolvement on underwriters. number. Co-ordination with Intermediaries: The Post-issue lead merchant banker shall maintain close coordination with the Registrars to the Issue and arrange to depute its officers to the offices of various intermediaries at regular intervals after the closure of the issue to monitor the flow of applications from collecting bank branches. Post-issue Advertisements Post-issue Lead Merchant Banker shall ensure that in all issues. the lead Merchant Banker shall satisfy himself that the issue is fully subscribed before announcing closure of the issue. the lead merchant banker shall furnish information in respect of underwriters who have failed to meet their underwriting devolvement to the Board in the format specified at Schedule . Any act of omission or commission on the part of any of the intermediaries noticed during such visits shall be duly reported to the Board. the lead Merchant Banker shall ensure that the underwriters honor their commitments within 60 days from the date of closure of the issue.e. processing of the applications including those accompanied by stock invest and other matters till the basis of allotment is finalized. is released by the said bank only after the listing permission under the said Section has been obtained from all the stock exchanges where the securities was proposed to be listed as per the offer document. as per the provisions of section 73(3) of the Companies Act 1956. Bankers to an issue The post-issue Lead Merchant Banker shall ensure that moneys received pursuant to the issue and kept in a separate bank (i. In case of undersubscribed issues. Bankers to an Issue).XVII. value and 34 . basis of allotment.
date of completion of dispatch of refund orders. rounded off to the nearest integer subject to a minimum allotment being equal to the minimum application size as fixed and disclosed by the issuer.) The basis of allotment shall be signed as correct by the Executive Director/Managing Director of the designated stock exchange and the public representative (where applicable) in addition to the lead merchant banker responsible for post issue activities and the Registrar to the Issue. 35 . Advertisement stating that "the subscription to the issue has been closed" may be issued after the actual closure of the issue. during the period when the public issue is still open for subscription by the public. Basis of Allotment In a public issue of securities. shall be done in the presence of a public representative on the Governing Board of the Designated Stock Exchange. Post-issue Lead Merchant Banker shall ensure that issuer company/advisors/ brokers or any other agencies connected with the issue do not publish any advertisement stating that issue has been oversubscribed or indicating investors’ response to the issue. the Executive Director/Managing Director of the Designated Stock Exchange along with the post issue Lead Merchant Banker and the Registrars to the Issue shall be responsible to ensure that the basis of allotment is finalized in a fair and proper manner in accordance with the following guidelines Proportionate Allotment Procedure Allotment shall be on proportionate basis within the specified categories. one Hindi National Paper and a Regional language daily circulated at the place where registered office of the issuer company is situated. value and percentage of successful allottees 112(). The designated stock exchange shall invite the public representative on a rotation basis from out of the various public representatives on its governing board. date of dispatch of certificates and date of filing of listing application is released within 10 days from the date of completion of the various activities at least in an English National Daily with wide circulation. number. The drawl of lots (where required) to finalize the basis of allotment.percentage of applications 111().
In case the issuer chooses to issue securities through the book building route then as per SEBI guidelines. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria. The process aims at tapping both wholesale and retail investors. It is a mechanism where.BOOK BUILDING What is book building? Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery. 75% of the net offer to the public through the book building process and 25% through the fixed price portion. 36 . bids are collected from investors at various prices. It is a process used for marketing a public offer of equity shares of a company. an issuer company can issue securities in the following manner: • • 100% of the net offer to the public through the book building route. during the period for which the book for the IPO is open. which are above or equal to the floor price.
Book Building through 100% offer to the Public Book Building through 75% offer to the Public 37 .
Bids cannot be entered less than the floor price. Bids can be revised by the bidder before the issue closes. the issue size gets frozen based on the price per share discovered through the book building process. On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation criteria which may include o o o • • • Price Aggression Investor quality Earliness of bids.What is the process for book building? The Process: • • • • • • • • The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'. This process is called 'bidding' and is similar to open auction. A Book should remain open for a minimum of 5 days. The book runner and the company conclude the final price at which it is willing to issue the stock and allocation of securities. Allocation of securities is made to the successful bidders. 38 . etc. The Issuer also appoints syndicate members with whom orders can be placed by the investors. Generally. Investors place their order with a syndicate member who inputs the orders into the 'electronic book'. the number of shares is fixed. The Issuer specifies the number of securities to be issued and the price band for orders.
Process of Book Building at a Glance 39 .
“a company desirous of availing the GSO shall in the resolution of the general meeting authorizing the public issue. According to SEBI guidelines.11). as the SA”.” GSO in the system of IPO using book-building method was recognized by SEBI in India through its new guidelines on 14th August 2003 (Vide SEBI/CFD/DIL/DIP/Circular No. used GSO in the first time in case of its public issue through book-building mechanism in India. which used this option for the first time throughout the world. The GSO means “an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism through a stabilizing agent (SA). seek authorization also for the possibility of allotment of further shares to the management team. who will be responsible for the price stabilization process.Green Shoe Option (GSO) A Company making an initial public offer of equity shares through the book building mechanism can avail of the GSO for stabilizing the post-listing price of its shares. Recently. It owes its origin to the Green Shoe Company. perhaps. ICICI Bank has. 40 . if required.
Issuing Company. Although. The book-building system works very efficiently in matured market conditions. The issuer company should be fundamentally strong and well known to the investors. The success of the book-building system depends on co-operation among the Book Runner Lead Manager.OBSERVATION AND COMMENTS Public issues have become a low cost source of raising finance for the Companies whereby expansion of business can be done on the basis of outside funds. 3. 41 . It is expected that over a period of time. 4. But. the system is still suffering from various limitations. It may not be possible in big issues since the risk-return preference of the investors cannot be estimated easily. such conditions are not commonly found in practice. the companies can adjust the attributes of the offer according to the preferences of the potential investors. and Investors. 2. book building system was introduced to remove the flaws in the then existing capital market. Book-building is appropriate for mega issues only. Securities and Exchange Board of India (Regulator). In such circumstances. There is a possibility of price rigging on listing as promoters may try to bail out syndicate members. Some of them are as are as follows: 1. The spirit beyond the introduction of book-building mechanism in India is to discover the right price for a public issue. the investors are aware of the various parameters affecting the market price of the securities. In the case of the potential investors. which in turn would eliminate unreasonable issue pricing by greedy promoters. market will adapt to the system and the same will become a successful mechanism in the times to come.
com www.investopedia.investorguide.wikipedia.moneycentral.essortment.BIBLIOGRAPHY www.ipohome.com www.bullishindian.ipoavenue.rupya.com www.moneycontrol.com www.com www.com www.com 42 .hoovers.com www.com www.com www.
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