ABOUT PUBLIC ISSUE OF SHARES

(IPO)

Initial Public Offering (IPO), also sometimes simply referred to as a "Public Issue," is the first sale of stock by a private company to the public. Public issues are done by both small as well as large companies seeking capital to expand business. It is also sometimes done by large privately-owned companies looking to become publicly traded. Note: When an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document, it is called Further Public Offering or FPO What are the entry norms for companies making Public Issue? The main entry norms for companies making a public issue (IPO or FPO) are as follows; a. b. c. d. e. Net tangible assets of atleast Rs. 3 crores for 3 full years Distributable profits in atleast three years Networth of atleast Rs. 1 crore in 3 years If there is any change in name, atleast 50% of revenue for the preceding year from new business activity. The issue size does not exceed 5 times the pre-issue net worth.

To provide sufficient flexibility and also to ensure that genuine companies do not suffer on account of rigidity of the parameters, SEBI has provided two other alternative routes to companies not satisfying any of the above conditions, for accessing the primary Market, as under: a. b. The issue shall be through the book building process, with 50% of the shares under issue to be mandatorily allotted to Qualified Institutional Buyers (QIB). The minimum post issue face value capital shall be Rs. 10 crore or there shall be a compulsory market making for at least 2 years.

OR a. b.
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 minimum post issue face value capital shall be Rs. 10 crore or there shall be a compulsory market making for at least 2 years.

In addition to satisfying the aforesaid eligibility norms, the company shall also satisfy the criteria of having at least 1000 prospective allotees in its issue Note: Public Sector Banks, Private Sector Banks and 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 are exempted from the aforesaid entry norms.

one where the Issuer and Merchant Banker fix a price (fixed price offer) and other. The final offer documents that are filed with SEBI/ROC are also put under the same section. The Issuer company can mention a price band of 20% (cap in the price band should not be more than 20% of the floor price) in the Draft offer documents filed with SEBI and actual price can be determined at a later date before filing of the final offer document with SEBI/ROC. Details about management and promoter group c.in) under Reports/Documents section and can be downloaded.What is the role of SEBI in a Public Issue? The primary issuances are governed by SEBI in terms of SEBI (Disclosures and Investor protection) guidelines. The draft offer documents are put up on the website (www. Business of the Company and industry review b. Financial statement and summarized data e. Any non compliance on their part. Pending litigations. But. There is no price formula stipulated by SEBI. SEBI issued “Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines. in terms of SEBI (Merchant Bankers) Regulations. approvals and other statutory disclosures How is the pricing of a Public Issue done? SEBI guidelines provides that the issuer in consultation with Merchant Banker shall decide the issue price. a.sebi. What are the important information an investor can obtain about the company from the offer document? An investor can obtain the following valuable information about the company from the offer document. Risk factors affecting the growth f. The Merchant Banker are the specialized intermediaries who are required to do due diligence and ensure that all the requirements of DIP are complied with while submitting the draft offer document to SEBI. Terms of offer and basis of issue price g. the company and the merchant banker are required to give disclosures on the basis for the issue price. where the Issuer and Merchant Banker stipulate a floor price or a price band and leave it to market to determine the final price (0ffer through book building).gov. In 2000. Fixed Price Offer An issuer company is allowed to freely price the issue. 2000” which is compilation of all circulars organized in chapter forms. . Capital structure and shareholding pattern d. . The basis of issue price is disclosed in the offer document where the issuer discloses in detail about the qualitative and quantitative factors justifying the issue price. There are two types of Public issues. attract penal action from SEBI. How does one know about upcoming Public Issues? SEBI issues press releases every week regarding the draft offer documents received and observations issued during the period.

In case the book built issues are made pursuant to the requirement of mandatory allocation of 60% to QIBs in terms of Rule 19(2)(b) of SCRR.1. the ‘cutoff’ price is determined. The applicants bid for the shares quoting the price and the quantity. Book building is a process of price discovery. What are the reservations available for different category of investors? In a book built issue allocation to Retail Individual Investors (RIIs). SEBI (DIP) guidelines permit only retail individual investors to apply at cut off price. 00. The actual discovered issue price can be any price in the price band. the bidding period shall be extended for a further period of three days. Only the retail investors have the option of bidding at ‘cutoff’. This is decided by the issuer and lead manager after considering the book and investors’ appetite for the stock.000/-. thus completing the issue process Price revision The price band can be revised and such a revision in the price band shall be widely disseminated by informing the stock exchanges. Non Institutional Investors (NIIs) and Qualified Institutional Buyers (QIBs) is in the ratio of 35:15: 50 respectively. the Red Herring prospectus does not contain a price. Instead. The final prospectus with all the details including the final issue price and the issue size is filed with ROC. Any bid made in excess of this will be considered in the HNI category. . This is a transitory provision pending harmonization of the QIB allocation in terms of the aforesaid Rule with that specified in the guidelines. the issuer is required to indicate either the price band or a floor price in the red herring prospectus.Offer through book building “Book Building” means a process undertaken by which a demand for the securities proposed to be issued by the Company is elicited and built up and the price for the securities is determined on the basis of the bids obtained for the quantity of securities offered for subscription. Cut Off Price In a book building issue. the respective figures are 30% for RIIs and 10% for NIIs. This method provides an opportunity to the market to discover price for securities. by issuing press release and also indicating the change on the relevant website and the locations of the syndicate members. Hence. In case the price band is revised. Note: ‘Retail individual investor’ means an investor who applies for bids for securities of or for a value of not more than Rs. subject to the total bidding period not exceeding thirteen days. After the bidding process is complete. the red herring prospectus contains either the floor price of the securities offered through it or a price band along with the range within which the bids can move. The basis of Allotment is then finalized and letters of allotment/refund is undertaken. This issue price is called “Cut off price”.

The syndicate member returns the counterfoil with the signature. The listing on the stock exchanges is done within 7 days from the finalization of the issue.8. The registrar then ensures that the shares are credited to applicant’s demat accounts or refund as applicable is completed within 15 days of the closure of the issue. Within each of these categories. In case of allotment for QIBs. the basis of allotment is finalized by the Book Running lead Managers within 2 weeks from the date of closure of the issue. In case of Book built issues. Qualified Institutional Buyers (QIBs). . An investor can change or revise the quantity or price in the bid using the form for changing/revising the bid that is available along with the application form.e. the bids are then segregated into different baskets based on the number of shares applied for. What is the procedure for refund of excess money? SEBI vide its circular dated January 20. etc. satisfying the requirements in Clause 2. it is subject to the discretion of the post issue lead manager. Firm Allotment. However. The oversubscription ratio is then applied to the number of shares applied for and the number of shares to be allotted for applicants in each of the baskets is determined. The oversubscription ratios are then calculated for each of the categories as against the shares reserved for each of the categories in the offer document.. Retail.1 (iii) of Chapter II may be kept open for a maximum period of 21 working days. Rights issues shall be kept open for at least 30 days and not more than 60 days. the process should be completed within the date of closure of the issue. As per clause 8. the investor is intimated about the CAN/Refund order within 30 days of the closure of the issue. Then.4. Applicants from major cities will get refund through it as it has been made mandatory by SEBI where the facility is available. Where will an investor get the bid cum application form? The form for applying/bidding of shares is available with all syndicate members. Applicants in other cities will get refunds through normal practice of registered / ordinary post. collection centers. the brokers to the issue and the bankers to the issue. In case of book built issues. The public issue made by an infrastructure company. How is the allotment of shares done to the bidders? After the closure of the issue. Non Institutional Buyers (NIBs).2. 2006. SEBI will enhance number of centers after reviewing feedback on the system. the minimum and maximum period for which the issue will be open is 3 – 7 working days extendable by 3 days in case of a revision in the price band. This process is followed in case of proportionate allotment. the bids received are aggregated under different categories i.How many numbers of days a public issue is kept open for subscription? Subscription for public issues will be kept open for at least 3 working days and not more than 10 working days. An investor can also visit the nearest bank or share/stock broker and get the application form. The investor can retain this as a sufficient proof that the bid has been considered. the number of successful allottees is determined. has permitted use of ECS for refunds in the issue process. date and stamp of the syndicate member. In case of fixed price issues..

Bandra (E). Bandra-Kurla Complex.argus-research. or delay in receipt of refund or allotment and payment of interest thereon. In case the investor does not receive any reply within a reasonable time. “G” Block.What is the recourse available to the investor in case of issue complaints? Most of the issue complaints pertain to non receipt of refund or allotment. mail@argus-research. Copyright (C) 2007. Mumbai – 400 051. www.in . investor may complain to SEBI. All rights reserved. Phone: 26598510-13 Note: This article is prepared by Argus Equity Research Private Limited solely for the purpose of education. Office of investors Assistance and Education in the following address. Argus Equity Research Private Limited.in. Securities and Exchange Board of India Office of Investor Assistance and Education (OIAE) Exchange Plaza. 4th Floor. who in turn will take up the matter with registrar to redress the complaints. This is not to be treated as a recommendation to invest in equities or IPO’s or any other similar schemes or products. These complaints shall be made to the post issue Lead Manger .

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