IFMSem1 Public Issues and Process

Semester 1 Introduction to Financial
Markets – Session 5 – Public Issues

and Process
©2015 BSE Institute Limited
Recap of Session 4
• Describe Regulators and their role

• List Various Regulations of Securities Markets

Session Objectives
• Describe issue of securities

• Describe Process of IPO
• List Category of Investors
• Describe FPO
• Describe payment methodology in IPO
• Describe Book Building Process
• Describe basis of allotment

Classroom activity/discussion
• Question 1: Name the 3 largest IPOs in the Indian

Market till date.
• Question 2: Who is the primary market regulator?
• Question 3: When the shares issued in the primary
market begin to trade, the market price is same as the
issue price. State True or False.
• Question 4: Which are the IPO Book building issues
that are currently open for subscription?

Issue of Securities
• Issue of securities refers to offering securities

for sale either to the public at large or a select
set of investors
• Here, the issuer and investor are in direct
contact
• The issuer raises money through sale of
securities
• The investor invests the money through
purchase of securities

1) Public Issue
 Initial Public Offering (IPO)
 Follow on public offering (FPO)
2) Private Placement
 Rights Issue
 Preferential Issue
 Offer for sale.

Types of Issues
Different Types of Issues :

• It refers to Initial Public Offering
• The company for the first time goes to the
public to raise money
• IPO market is also known as Primary market
• Includes both debt and equity
• Issued by companies seeking to become
publicly traded

• Ownership money
• Need not be returned to shareholders unless
company closes down
• No interest to be paid
• No mortgage of property
• Long term capital
• Liquidity
• Attracts foreign investment
• Employee motivation
• Alternative source of capital
IPO Process
Pre Issue Marketing Post Issue
 Due Diligence  Media Strategy for Wide  Price Discovery

 Drafting of Prospectus Publicity  Finalizing Basis of Allotment
 IPO Grading  Road shows  Documentation with
 Statutory Approvals  Press Depositories
 Appointing Intermediaries  Brokers  Credit into Investor Accounts
 Valuation and Pricing  Analyst  Listing Approvals from
 Marketing Strategy  One to One Meets the Stock Exchanges
 Arranging Firm Allotments  Analyst Meets / Plant Visits  Post Issue Research
 Circulating Quality Research NRI Investors Support for Sustained
Report  Retail Distribution Coverage
 Printing and Distribution of  Advertising campaigns  Long term value Creation
Stationery  Positioning & Marketing to
 Timing of Issue Institutional & Retail
Investors

1) Appointment of Merchant Banker and other
intermediaries.
 Merchant Bankers are:
 Financial intermediaries who assist in raising funds.
 Valid SEBI registration
 Responsibilities include managing and underwriting
IPO, market making for a period of 3 years.
 Other intermediaries include Lead manager,
Registrar, Bankers, Brokers and Underwriters to
the issue.

2) Registration of the offer document
 10 copies of the draft prospectus to be filed with
SEBI and Stock Exchanges.
 Any amendments to be done within 21 days of filing
the offer document.
 Entire promoters contribution of 20% of the post
issue capital to be made before issue opening.
 Promoters contribution to be locked in for a
minimum period of 3 years.

3) Marketing of the Issue
 Timing the issue
 Retail distribution
 Reservation in the issue:
 The total reservation for NRI/OCB should not exceed 10%
of the post-issue capital, and individually it should not
exceed 5% of the post issue capital. Same for FIIs.
 Employees: Reservation under this category should not
exceed 10% of the post issue capital.
 Group Shareholders: Reservation in this category should
not exceed 10% of the post issue capital.
 The net offer made to the public should not be less than
the 25% of the total issue at any point of time.

4) Post Issue activities
 90% minimum subscription
 In case of under subscription, underwriters to
cover shortfall.
 In case of oversubscription shares to be allotted
on pro rata basis.
 Complete formalities associated with listing.

4) Post Issue activities
 90% minimum subscription
 In case of under subscription, underwriters to
cover shortfall.
 In case of oversubscription shares to be allotted
on pro rata basis.
 Complete formalities associated with listing.

• Both are inter related
• Provides a link between the savers and the
company
• Secondary market provides liquidity to the
securities issued in the primary market.
• Stock Exchanges exercise control over the
primary market through listing requirements.
• Health of the primary market depends on the
secondary market and vice versa.
• Functions and set up of both the markets are
different from each other.
Evolution of Pricing norms
Bookbuilding
Pricing discovered through

Fixed Pricing bids from investors
Free Pricing, decided by Pricing more market driven

CCI Regime Lead Managers and Issuers Floor Price / Price band
Pricing based on projected decided 2 days before issue
Price decided by CCI opening (for an IPO), thereby
based on profit- financials
limiting market risk
earning capacity Pricing decided 45-60 days
before issue launch, No flexibility to change floor
GOI approval required
exposing issuer to the risk price
for pricing below par
of market volatility.
No issue price
flexibility
Pricing based on
historical data

Key Players
Escrow
Account
Red Herring
Prospectus
Book Building
Process
Categories
of Investors
Price Band &

Cut-off Price

Minimum Lot
size
Bidding
Period &
Bidding
Centers
Revision of
Bids
Book Building
Process
Margin
Amount
Basis of
Allotment

Bookbuilding, internationally a well-accepted practice,
was introduced in Indian Primary Markets in 1996
Evolution of
book However, lack of clarity on guidelines kept issuers
away till 1999
building
Hughes Software System became the first issuer to
adopt bookbuilding in Sept 1999
100% bookbuilding was introduced in 2001 and Bharti

Televentures IPO was the first case
Be default now all issues are book built
But fixed price option is kept open by law to enable

smaller issues to public

Book Building Process
Public Issue / Offer of securities through

book building process is designed to
ascertain demand for the security at
various prices within a price-band to
facilitate discovery of the issue price.

• Book Building is essentially a process used by companies
raising capital through Public Offerings-both Initial Public
Offers (IPOs) or Follow-on Public Offers ( FPOs) to aid
price and demand discovery. It is a mechanism where,
during the period for which the book for the offer is open,
the bids are collected from investors at various prices,
which are within the price band specified by the issuer.
• The process is directed towards both the institutional as
well as the retail investors. The issue price is determined
after the bid closure based on the demand generated in
the process.

• The Issuer who is planning an offer nominates lead
merchant banker(s) as 'book runners'.
• The Issuer specifies the number of securities to be
issued and the price band for the bids.
• The Issuer also appoints syndicate members with
whom orders are to be placed by the investors.
• The book normally remains open for a period of 5
days.
• Bids have to be entered within the specified price
band.
• Bids can be revised by the bidders before the book
closes.

• On the close of the book building period, the book
runners evaluate the bids on the basis of the demand
at various price levels.
• The book runners and the Issuer decide the final price
at which the securities shall be issued.
• Generally, the number of shares are fixed, the issue
size gets frozen based on the final price per share.
• Allocation of securities is made to the successful
bidders. The rest get refund orders.

• In Book Building following is the allocation of share
quota:
 50 % QIB
 15 % HNI
 35 % Retail investors
• 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, the respective figures
are 30% for RIIs and 10% for NIIs.
• Retail investors can bid at the cut off price which
means they are willing to get share whatever price is
decided
IPO Pricing
• Free Pricing
• Pricing decided by the Company
• No role played by SEBI
• Basis of issue price to be disclosed in Offer document
• Differential Pricing (upto 10% discount for
retail)
• One category allotted shares at a price different from
others.
• Firm Allotment to be at a Price equal to or Higher
• than IPO Price
• Composite Issue
• Public Issue
Price Band
• Price Band – gives the range for bid
price
• Lower end of price band is floor
price
• Higher end of price band is ceiling
price
• Price Band to be not more than 20%
• Can be revised – upwards or
downwards
• Revision not to exceed 20% of the
floor price
• Revised price band to conform
to guidelines
Cut-off price
• Option available only to Retail
Individual Investors
• Willingness to accept the shares at any
price in the price band
• Required to pay at the top end of the
price band
• Obviates need for calling balance
money from investors
• Cut off price determined after the bids
are closed
• Cut off price prohibited for QIB and HNI

Minimum Lot Size
Minimum lot size in the range Rs 10000/- to 15000
MLS multiplied by the floor price =or > Rs 10000
MLS multiplied by ceiling price = or < Rs 15000
MLS determined after price band is known
Flexibility to the issuer to fix the MLS

• It is a Follow on Public Offer
• An issuance of shares following a company’s
Initial Public Offer.
• Conducted by companies which are listed on
an exchange.
• Types of FPOs:
 Dilutive FPO
 Non-dilutive FPO

Red Herring Prospectus
Document submitted to ROC, by a Company intending
to have a Public offer of securities
Dictionary meaning of Red Herring is misleading or

deceit
Actual Issue price and in some cases number of shares

on offer is not known.
Only price band is given
Based on the offer size No: of shares on offer is

determined

Valuation Methodology
Discounted Cash Transaction
Trading Multiples Net Asset Value (NAV)
Flow (DCF) Analysis Multiples
• “Fundamental” or • “Market” Valuation • “Acquisition” related • Useful when the

“Theoretical” valuation Valuation historical costs of assets
• Investors view on purchased is not
• Estimates firm’s value by prospects of an • Applies Multiples of comparable to its
discounting expected entire industry sector related Industry Current Market Value
free cash flows at a rate and specific Transactions to the
which reflects the risk of companies valuation of a business • NAV is based on
the cash flows Expected Future Cash
• Terminal Value • Considerations for • Measures Premium Flows the market
peer group include paid for Acquiring expects from the asset
 Perpetuity
similar size, life of Control and places
 Discount Factor assets and similar value on intangible • Two Methods
(The resulting free cash management quality strategic factors
 Replacement Cost
flows at a cost of
capital that reflects • Difficult to establish  Future Cash Flows
company specific risk) peer group on account
of diverse business
activities

• The 3 kinds of investors in a Book Building Issue are:
 Retail Individual Investor (RII) - RII is an investor
who applies for stocks for a value of not more than
Rs 200,000.
 Non-Institutional Investor (NII) - Any bid exceeding
Rs 2,00,000 is considered in the NII category. NIIs
are commonly referred to as high net-worth
individuals or HNIs
 Qualified Institutional Buyers (QIBs) - Institutional
investors such as Mutual funds, Financial
Institutions, Scheduled commercial banks,
Insurance companies, Provident funds, State
industrial development corporations, etc.
• The Investors
• The Issuer
• Book Running Lead Managers
• Syndicate Members
• Bidding Centers
• Escrow Bankers
• Registrars
• Legal Advisors and Global coordinators
• Ad agencies/publicity
• With the support of
• The stock exchanges
• The Depositories
• The Postal System

Escrow Account
 Third party account
 Bid amount is called the Margin amount
 The margin amount is kept in a Escrow a/c
 Comprises of application money and refund due to

investors
 Registrars to Issue will identify the amount to be transferred

to Issuers Application money and Refund after basis of
allotment is approved
 Instruction will be given to Escrow bankers for transferring

funds
 Utilization of proceeds permitted after listing approval only.

Bidding Centres
• Investors submit bids to the bidding centres

listed in the application form for getting their
bids registered
• Mandatory to have all stock exchange
centers (23 operational earlier)
• Suggested size of bidding centers to be
around 50 to 60
• 15 centers caters to 85% of all India volumes
• Issue TRS to investors for each of the options
• Lodge BCAF with an escrow banker on daily
basis

Bidding Period
• Minimum of 3 working days

• Maximum of 7 working days
• To be extended by 3 days if price
band is revised
• On line Bidding time 10 AM to 3 PM
on all days except the last day
• On line Bidding time 10AM to 5 PM
on the last day
• Beyond 5 pm only for retail
• For QIB HNI only till 4 PM

Revision of Bids
• Investors can revise bids
• Revision of quantity and / or price
permitted
• Prescribed revision form to be used
• Unlimited revision permitted
• Should be done through same bidding
centres
• To pay differential amount where needed
• Excess paid will be refunded after
allotment

Payment Methodology
Method 1:
•Option for making part payment for Retail
•Normally done for Mega issues to get subscription from
retail
•If heavily over subscribed provision to adjust excess
payment
•Allotment under separate ISIN (international security
identification number)
•ISIN to be frozen for all trades
•Balance payment Notice
•Debit and Credit Corporate Action after Reconciliation

Payment Methodology
Method 2:
•Regular Method.
•100% along with application
•Available including to Retail Category.
•Shares – Credited and Tradable on Listing.

ASBA
Refers to Application Supported by Blocked Amounts

Bank account is blocked to the amount subscribed for
Application money debited from bank account only if
application is selected for allotment
Money remains with investor till allotment
Refund is not needed if application is rejected

Basis of Allotment
•Firm allotment is made when the issue is partly/ fully
subscribed
•Proportionate allotment in case of over subscription
•Book Building issues:
•Bids received are segregated under different
categories
•Over subscription ratios are calculated for each
category and no: of shares to be allotted is decided
•Allotment for QIBs at the discretion of lead manager

Basis of Allotment
•The Basis of allotment shall be proportionate for all
categories
•The allotment will be subject to the minimum lot size
prescribed
•Thereafter rounded of to the nearest integer
•Where the shares to be allotted is less than the
minimum number there will be drawl of lots

Green Shoe Option
• A provision contained in an underwriting

agreement that gives the underwriter the right
to sell investors more shares than originally
planned by the issuer.
• This would normally be done if the demand for
a security issue proves higher than expected.
• Legally referred to as an over-allotment option.

Rights Issue
• A rights issue is directly offered to all existing

shareholders of the Company in proportion to
their current holding.
• The company also sets a time limit for the
shareholder to buy the shares.
• Companies pursue Rights Issue as an avenue
to raise funds for various reasons, ranging
from expansion or acquisitions to paying down
debts.

Bonus
• Bonus issue refers to a further issue of shares made
by a company having share capital to its existing share
holders without receipt of any consideration from the
shareholders for issuance of the shares.
• It is an offer of free additional shares to existing
shareholders in proportion to their holdings.
• For example, the company may give one bonus share
for every five shares held.
• These are company’s accumulated earnings which are
not given out in the form of dividends, but are
converted into free shares for which the shareholders
need not pay anything.

Stock Split
• A stock split is a decision by a company to

increase the number of shares that are
outstanding by issuing more shares to current
shareholders.
• For example, in a 2-for-1 stock split, every
shareholder with one stock is given an
additional share. So, the shareholder now
owns 2 shares instead of the 1 held earlier.
• So, if a company had 10 lakh shares
outstanding before the split, it will have 20 lakh
shares outstanding after a 2-for-1 split.
Offer for Sale
• An offer for sale (OFS) is the way by which

stakeholders of a company sell their holding.
• OFS enables promoters to dilute their holdings
in listed companies in a transparent manner
with a wider participation through exchange
based bidding platform. SEBI has allowed
stock exchanges to set up a separate window
— OFS — wherein promoters can sell their
shares in listed companies.

Preferential issue
• Under the Companies Act, 2013:

• Preferential Offer means an issue of shares or
other securities, by a Company to any select
group of persons on a preferential basis
• It does not include shares or other securities
offered through a public issue, rights issue,
employee stock option scheme, employee
stock purchase scheme.

IPOs of 2014 with their listed prices and
profit for investors
Company Offer Price Listing List Price LTP Profit/Loss Value Volume
Rs. Date Rs. (Rs) (%) (Rs. in Lakhs) in ('000s)
GCM Capital Advisors 20 21-May-14 33.55 115.3 476.5 9.24 8
Raghuvansh Agro 11 28-Jan-15 11.55 28.2 156.36 2.82 10
Wonderla Holidays 125 09-May-14 164.75 272.2 117.76 30.99 11.309
Atishay Infotech 16 16-Oct-14 17.75 32 100 2.56 8
Sharda Cropchem 156 23-Sep-14 254.1 293.85 88.37 58.8 19.714
JLA Infraville 10 12-Nov-14 11.05 18.75 87.5 1.88 10
Dhabriya Polywood 15 17-Oct-14 16.5 27.5 83.33 8.74 32
Snowman Logistics 47 12-Sep-14 75 79.4 68.94 158.14 195.321
Encash Entertainment 40 29-Sep-14 44 58 45 1.74 3
Vishal Fabrics 45 20-Aug-14 45.2 65 44.44 3.8 6
Oasis Tradelink 30 14-Jul-14 35.9 41.75 39.17 3.34 8
ADCC Infocad 40 22-Oct-14 43.5 55 37.5 1.65 3
Ultracab 36 10-Oct-14 38 47.5 31.94 1.43 3
Shemaroo
170 01-Oct-14 180 203.9 19.94 13.32 6.488
Entertainment
SPS Finquest 75 03-Jun-14 78 82 9.33 1.31 1.6
Bansal Roofing 30 14-Jul-14 31 32.4 8 1.3 4
Karnavati Finance 10 05-Feb-15 10.6 10.7 7 2.12 20
Aryaman Capital Mkts 12 20-Oct-14 12.2 12.8 6.67 1.28 10
Akme Star Hsg. Fin 30 20-Mar-15 NA 31.75 5.83 20.31 64
Jet Infraventure 125 25-Nov-14 130 129 3.2 1.29 1

Recap
• Describe issue of securities

• Describe Process of IPO
• List Category of Investors
• Describe FPO
• Describe payment methodology in IPO
• Describe Book Building Process
• Describe basis of allotment

Exercise/Activity
1) Write a report on ASBA – when it was introduced? For whom
was it first made mandatory, etc. Also give advantages of ASBA
to investor and issuer.

1
Quiz
• Question 1: Which are the two methods by which an IPO can be made?
• Question 2: What is the role of SEBI with respect to public issues?
• Question 3: Difference between fixed price and book build issues?
• Question 4: When an already listed company makes a fresh issue of
securities or offer of sale to the public it is called a _________.
• Question 5: What is the maximum investment limit for retail investors in
an IPO?

1
Thank you

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Semester 1 Introduction to Financial

Markets – Session 5 – Public Issues

• Describe Regulators and their role

©2015 BSE Institute Limited

• Describe issue of securities

©2015 BSE Institute Limited

• Question 1: Name the 3 largest IPOs in the Indian

©2015 BSE Institute Limited

• Issue of securities refers to offering securities

©2015 BSE Institute Limited

©2015 BSE Institute Limited

©2015 BSE Institute Limited

©2015 BSE Institute Limited

 Due Diligence  Media Strategy for Wide  Price Discovery

©2015 BSE Institute Limited

©2015 BSE Institute Limited

©2015 BSE Institute Limited

©2015 BSE Institute Limited

©2015 BSE Institute Limited

©2015 BSE Institute Limited

Pricing discovered through

Free Pricing, decided by Pricing more market driven

©2015 BSE Institute Limited

Price Band &

©2015 BSE Institute Limited

©2015 BSE Institute Limited

100% bookbuilding was introduced in 2001 and Bharti

Be default now all issues are book built

But fixed price option is kept open by law to enable

©2015 BSE Institute Limited

Public Issue / Offer of securities through

©2015 BSE Institute Limited

©2015 BSE Institute Limited

©2015 BSE Institute Limited

©2015 BSE Institute Limited

©2015 BSE Institute Limited

MLS multiplied by the floor price =or > Rs 10000

MLS multiplied by ceiling price = or < Rs 15000

MLS determined after price band is known

Flexibility to the issuer to fix the MLS

©2015 BSE Institute Limited

©2015 BSE Institute Limited

Dictionary meaning of Red Herring is misleading or

Actual Issue price and in some cases number of shares

Only price band is given

Based on the offer size No: of shares on offer is

©2015 BSE Institute Limited

• “Fundamental” or • “Market” Valuation • “Acquisition” related • Useful when the

©2015 BSE Institute Limited

©2015 BSE Institute Limited

 Bid amount is called the Margin amount

 The margin amount is kept in a Escrow a/c

 Comprises of application money and refund due to

 Registrars to Issue will identify the amount to be transferred

 Instruction will be given to Escrow bankers for transferring

 Utilization of proceeds permitted after listing approval only.

©2015 BSE Institute Limited

• Investors submit bids to the bidding centres

©2015 BSE Institute Limited

• Minimum of 3 working days

©2015 BSE Institute Limited

©2015 BSE Institute Limited

©2015 BSE Institute Limited

©2015 BSE Institute Limited