Long Term Financing (Equity)

Private Equity

IPO

Presentation by:

CA Premal Doshi
 Disclaimer

This presentation has been prepared based on information obtained from sources believed to be reliable
but which it has not independently verified and make no guarantee, representation or warranty and
accepts no responsibility or liability as to its accuracy or completeness.

Expressions of opinion, if any, contained herein are those of the individual only and are subject to
change without notice. The information and opinions contained in the presentation are based upon
publicly available information, which are subject to change from time to time.

This presentation has been prepared for information purpose only. The individual makes no
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the information contained herein. While this presentation has been prepared in good faith, the
individual shall NOT have any responsibility or liability whatsoever in respect of any statements or
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permission.

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 Agenda

Private Equity IPO

o Introduction to Private Equity o IPO – An introduction

o Private Equity Placement Process o IPO – Timelines & Key Activities

o Approaches to Valuation o IPO – Key Roles

o Due Diligence Exercise o Key Activities prior to SEBI Filing

o Key Issues in DD/ SPA & SHA o DRHP to RHP Filing – Key Activities

o Certain Minimum Rights to PE o Closing Activities

Investors

o Monitoring

o Exit

o SEBI norms for private equity

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 PE Agenda

o Introduction to Private Equity

o Private Equity Placement Process

o Approaches to Valuation

o Due Diligence Exercise

o Key Issues in DD/ SPA & SHA

o Certain Minimum Rights to PE Investors

o Monitoring

o Exit

o SEBI norms for private equity

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 PE in India – Growth over the years

PE Investments in India o Private Equity firms invested about

USD 6,321 across 219 deals in first
half 2011 and USD 7,974 million over
Amount (US$ million) No. of Deals 325 deals in India during the 12
20,000 600
months ending December 2010.
501
478
o Energy-related companies attract the
500
maximum investments (in value
US$ Millions

15,000
terms) followed by IT & ITES
358 400
325
companies
290
10,000 300 o For the second year running in 2010,
219
companies based in South India
200 attracted the maximum PE capital
5,000 both in terms of volume and value.
100 Whereas companies from Western
India ranked second in terms of the
0 0 number of investments attracted,
2006 2007 2008 2009 2010 1H
2011 North-based companies received
slightly higher share of the value.
Source: Venture Intelligence, (These figures include VC
investments and exclude PE investments in Real Estate.)

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 Distribution of PE Investment (1)

Distribution of PE Investment by Deal Size - 2010

100
No. of Deals

80

60

40 88
73
20 49 42
37
18 10
0 8

0-5 5-10 10-15 15-25 25-50 50-100 100-200 200+

Size (US$M)

Total Value
Size (US$M) (US$M) % o Sub-$10 million investments that
0-5 188 2.4% accounted for 50% of the deals by
5-10 482 6.0% volume in 2010, accounted for just
10-15 557 7.0% 6% of the value pie.
15-25 685 8.6%
25-50 1376 17.3%
o The investments of $100 million and
50-100 1191 14.9% above, which accounted for just 6% of
100-200 1265 15.9% the deals, accounted for 44% of the
200+ 2230 28.0% value pie.
Total 7974 100.0%
Source: Venture Intelligence,

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 Distribution of PE Investment (2)

Distribution of PE Investment by Sector - 2010

3%
4% 10% 27%
10%
7% 13%
7% 8% 9%
2%

Energy BFSI IT & ITES Engg. & Construction

Healthcare & Life Sciences Manufacturing Education Telecom
Other Services Shipping & Logistics Other

Value / Amount (US$ M) Growth

Industry o Energy, Telecom & BFSI sector
2010 2009 %
IT & ITES 696 645 7.9% witnessed significant increase in the
BFSI 1054 453 132.7% amount of investment with each
Healthcare & Life Sciences 556 300 85.3% sector witnessing an incremental
Energy 2141 615 248.1% investment of 2.5x, 1.5x, 1.3x
Manufacturing 528 280 88.6% respectively as compared to
Engg. & Construction 677 339 99.7% investment in 2009
Education 162 129 25.6%
Telecom 828 341 142.8% o However investment in Media &
Shipping & Logistics 249 179 39.1% Entertainment has de grown by 0.3x
Media & Entertainment 196 289 -32.2%
Others 885 499 77.4%
Source: Venture Intelligence,

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 Distribution of PE Investment (3)

Distribution of PE Investment by Region - 2010

2% 4% 1% 1%

37%
26%

29%

South West North Overseas East Central Unknown

Region No. of Investments Value (US$M)

o For the second year running in
South 121 3015
2010, companies based in South India
West 95 2043
attracted the maximum PE capital
North 83 2164 both in terms of volume and value.
Overseas 7 513 Whereas companies from Western
East 12 155 India ranked second in terms of the
Central 3 59 number of investments
Unknown 4 16 attracted, North-based companies
Total 325 7965
received slightly higher share of the
Source: Venture Intelligence,
value.

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 Distribution of PE Investment (4)

Distribution of PE Investment by Stage - 2010

1% Venture Capital
7% 8%
10% Growth-PE
2% 22%
Late Stage

50% Pre-IPO
PIPE
Buyout
Other

Stage No $ mn % o Late Stage deals accounted 50% in

Venture Capital 118 641 8.0% value terms during 2010.
Growth-PE 29 1,731 21.7%
o Venture Capital investments
Late Stage 111 3,992 50.1% accounted 8% in value terms.
Pre-IPO 10 196 2.5%
o Listed company investments
PIPE 37 769 9.6%
accounted for just 10% of the value of
Buyout 8 123 1.5%
the PE pie in 2010.
Other 12 523 6.6%

Total 325 7,974 100.0%

Source: Venture Intelligence,

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 Investment Returns & IPO performance
of PE invested companies (1)
Investor Size (US$ Return Multiple at IPO
No Portfolio Company PE Firm(s) Date Price (Rs.) CMP
Sale Million) IPO Valuation Performance
Sequoia Capital India
11.08x
Unitus
16.80x
1 SKS Microfinance SVB Yes Aug-10 359 985 192.15 -80%
3.39x
Kismet Capital
3.28x
Sandstone
2 Orient Green Power Olympus Capital, Bessemer No Oct-10 200 47 14.57 -69%
India Equity Partners 1.27x,
3 A2Z Maintenance & Engg Yes Dec-10 172.5 400 167.8 -58%
Beacon India 1.22x
Goldman Sachs 2.65x
4 IL&FS Transportation Networks Trinity Capital Yes Mar-10 155 258 1.94x 203.95 -21%
SCI Asia 1.94x
Morgan Stanley 1.13x
5 Hathway Cable & Datacom ChrysCapital Yes Feb-10 145 240 1.26x 121.2 -50%
Infrastructure India Holdings 1.13x
IFC
6 Ramky Infrastructure IIML Yes Oct-10 120 450 240.45 -47%
Sabre Abraaj Capital
IIML
IDFC PE
7 Gujarat Pipavav Port NYLIM India Yes Aug-10 109 46 68.35 49%
AMP Capital
IDFC Project Equity
8 VA Tech Wabag ICICI Venture, GLG Partners Yes Oct-10 106 1310 349.85 -73%
Goldman Sachs 1.75x
9 PTC India Financial Services Yes Mar-11 97.5 28 15.1 -46%
Macquarie 1.75x
10 DB Corp Warburg Pincus No Jan-10 85 212 1.82x 218 3%
11 Shree Ganesh Jewellery Credit Suisse Yes Apr-10 81 260 1.73x 146.35 -44%
12 Sequans Communications Reliance Venture Yes Apr-11 77 450 5.00x 258 -43%
13 Jubilant FoodWorks JP Morgan No Feb-10 71 145 5.01x 805.5 456%
SAIF, Helion Ventures, Sierra
14 MakeMytrip.com Yes Aug-10 70 644 25x 1633 154%
Ventures

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 Investment Returns & IPO performance
of PE invested companies (2)

Investor Size (US$ Price Return Multiple at IPO

No Portfolio Company PE Firm(s) Date CMP
Sale Million) (Rs.) IPO Valuation Performance

15 Meru Networks JumpStartUp No Mar-10 66 690 270 -61%

16 Tecpro Systems Avigo Capital Yes Oct-10 58 355 9.50x 219.1 -38%
17 Electrosteel Steels IIML No Oct-10 56 11 1.10x 5.89 -46%
18 Claris Lifesciences Carlyle No Dec-10 55 228 1.80x 131.25 -42%
19 Ashoka BuildCon IDFC PE No Oct-10 51 324 2.31x 241.3 -26%
20 Parabolic Drugs BTS India No Jun-10 44 75 1.40x 38.7 -48%
21 Infinite Computer Solutions Temasek No Jan-10 41 165 2.32x 96.5 -42%
22 CEBBCO NYLIM India Yes Oct-10 38.8 127 4.16x 54.1 -57%
23 Vascon Engineers HDFC Venture No Feb-10 38 165 52.45 -68%

Intel Capital 7.80x

24 Persistent Systems Norwest No Apr-10 37 310 2.70x 310.6 0%
Gabriel Ventures 2.70x

Volrado Ventures 6.24x

25 Career Point Infosystems No Oct-10 26 310 282.15 -9%
Franklin Templeton PE 1.24x

Matrix Partners India 1.92x

26 Tree House Education Omidyar Network No Aug-11 25.3 135 0.90x 200.9 49%
Foundation Capital 1.21x

27 Flexituff International Clearwater Capital Yes Oct-11 21.4 155 1.51x 263 70%
28 123Greetings.com Intel Capital No Apr-10 12 145 1.32x 52.9 -64%
Source: Venture Intelligence,

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 Classification of PE Funds (1)

o Use leverage to do buyout deals, typically big deal sizes and

I. Buyout Fund long term financial and strategic decision

II. Growth Capital o Classic PE investors providing capital to established businesses

Fund to attain explosive growth through expansion – geography,
products, delivery channels etc.
III.Proprietary
Book of Banks o Similar to a PE fund which can be either pure equity or
structured to private/ public companies
IV. Distress/
Special o Funds focused on distress and invest in turnaround situations
Situation

V. Hedge Funds o Public market fund with high return and high risk appetite,
short term focus
VI. Venture Capital o Typically provide the first round of capital to companies,
smaller size and long term horizon

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 Classification of PE Funds (1)

$6,000
Fund Size in US$ million

Buyout Fund
$5,000
Hedge Fund
$4,000

$3,000
Growth Capital
$2,000
Distress/ Special Situations
$1,000 Proprietary Book
Venture Capital
$0
0 2 4 6 8 10

Investment Time Horizon in Years

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PE – What do they bring besides Capital

Quantitative Value Addition Qualitative Value Addition

Efficiency in management

Wider knowledge base and information

systems
Change of ownership/ capital
structure Experience with broader base of board

Strategy shift in terms of international

markets

Enhanced capital

Infusion of fresh capital Manufacturing expertise

Brand Image

Corporate Governance

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 Challenges to PE in India

Value of Private Equity Exit Strategy

o Important to be an active investor to
understand the value add from PE
o Must trade-off value, growth and risk
o Analyzing the relative merits of a
potential non-PE investment
o No relevant experience to guide
o Market and business tolerance for
public offerings
o Family business reluctant to relinquish
control
o Inevitability of an IPO

Challenges
Understanding Market Conditions Other Challenges
o Developing business plans and best
practices for privately held and family o Recent credit crunch – PE sponsors
run Indian firms more susceptible to volatility in the
o Questions of global competitiveness global debt market
o Discarding what is irrelevant and o Increased regulations
possibly damaging for Indian o Lower IRR on existing PE portfolios
companies
o Analysis Paralysis

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 PE Placement Process (1)

T+2 T+4 T+8 T+12 T+16

Information
Memorandum
Circulation

K Business
Evaluation
I
C
K Negotiations and
Term Sheet

O
F Financial and
F Legal Due
Diligence

Share
Purchase
Agreement
and Closure

Weeks

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 PE Placement Process (2)

o Business plan review by financial advisors in conjunction with

Information
Memorandum the top management team of the company
Circulation
o Preparation of sales collateral specific to the company and deal

o Varied forms of sales collateral are prepared by the Financial

Advisors – Teasers, Information memorandum, Financial
Model, Valuation Rationale etc.

o Short list PE investors based on industry, size of

investment, type and stage of investment

o Touching base with the targeted PE Investors

Week 1-2
o Circulation of specific sales collateral

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 PE Placement Process (3)

o Initiating discussion with PE investors and review of

Business
Evaluation Information Memorandum

o Financial Advisors continuously keep in touch with investors

and help resolve queries of the investors

o Further information flow and clarifications

o Market intelligence check on the business and industry players

Week 2-4 o Preliminary site visit and initial negotiations

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 PE Placement Process (4)

o Multiple rounds of Investor Meetings

Negotiations And
Term Sheet
o Investors get comfortable with the business
model, industry, management and growth plans of the
company and means and ways to achieve them

o Detailed negotiations on investment structure, terms and

valuations

o Submission and signing of term sheet

Week 4-8

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 PE Placement Process (5)

o Law firm appointed for legal due diligence

Financial and
Legal Due
o CA firm appointed for accounting due diligence
Diligence
o Factory and site visits

o Client referral checks

o Detailed report of the findings submitted to the PE Investor

o Any flags raised are discussed with the company and

appropriate steps taken
Week 8-12

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 PE Placement Process (6)

o Lawyers draft the Share Purchase Agreement on the lines of

Share Purchase
Agreement And the term sheet executed between the investor and the
Closure company

o Process of fund transfer and share certificate issuance clearly

defined and closing date confirmed to all parties involved

o Signing of SPA and transfer of funds to happen on the closing

date

Week 12-16

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 Approaches to Valuation

o Different assets may be valued using different valuation techniques.

o Usually there are three approaches to valuation which are as follows:

Approaches to Valuation

Cost based Market based Income based

Profit Earning
Net Asset Value Stock Market Quotes
Capacity Value

Discounted Cash
Fair Market Value Market Comparables
Flows

Precedent
Transactions

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 Valuing Young and Start Up Firms

o Why value:
o Startups are frequently funded by venture capitalists
o IPO/Other forms of Exit require valuation

o The VC Method
o Earnings/Revenue are forecast for the year of exit
o Earnings/Revenue multiple for comparable firms is then derived to
estimate “Terminal value”
o Discounted by a target rate of return higher than the cost of equity
o Estimation of Discounted Exit/Terminal value:

o Limitations in valuing young and start-up firms:

o Information constraints-lack of history
o Fewer comparable peers

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 Due diligence (DD) exercise

o Revenue and profitability trends

o Break-up of various costs and operating margins
o Fixed Assets
o Schedule of depreciation
o Revaluation of assets, if any
o Investments
o Method of valuation of investments (subsidiaries if any)
o Adequacy of provisions
o Liabilities
o Terms of the loans
o Inventory details
o Extent of working capital finance
o Taxation matters
o Contingent liabilities and implications thereof

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 Due diligence (DD) exercise-Cont’d

o Review of documents relating to title to property and other assets

o Review of leasehold agreements and comment on significant issues
relating to the same
o Review of agreements, contracts entered into by the company with major
suppliers and customers
o Review contractual arrangements with employees, trade union
agreements and comment of potential liability if any
o Review of all statutory compliance including status of licenses and permits
essential for running the business
o Review of current, pending or potential litigation / claims by or against
the Company, or its directors and comment on potential liability
o Review of such other matters that maybe relevant to the transaction

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 Key Issues in Due Diligence

o Accounting Methodologies

o Past/ Current/ Future tax liabilities

o Contingent Liabilities

o Legal contracts entered in to by the client with customers/ suppliers

o Clearances specific to business

o Debtors greater than normal

o Corporate MIS

26
 Key Issues in SPA/ SHA

o Unusual findings from DD

o Reps & Warrants

o Board Resolutions

o Indemnification

o Conditions Precedent

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Certain minimum rights to PE Investors

o Buyback clause
o In the event of IPO not being undertaken, typically in 3-5 year timeframe, most
investors include buyback clause for their investment exit. Such buyback
arrangements can be with either the Company; or – the Promoter
o Return Expectations: Depending on specifics of the investment, most investors
typically seek dollar-adjusted 18-24% p.a. IRR

o Information requirements
o A private equity investor looks for several information rights including access to
monthly MIS, quarterly financials and other confidential information presented to
the Board apart from Annual audited account

o Board Representation

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Certain minimum rights to PE Investors

o Anti-dilution or Ratchet clause

o “Ratchet clauses” or “anti-dilution protection” refer to mechanism through which
investors protect themselves from significant dilution. For example, to protect
oneself against the risk of promoters diluting to friends and families or related
entities at cheap valuation, investors typically seek “ratchet” provisions built in
the conversion/buyback terms, wherein the conversion price is adjusted
downwards or buyback clauses adjust for such dilution to allow investors protect
the percentage holding/IRR.

o Drag Along
o Investor shall have the right to drag along the holding of the Core Promoters and
their Relatives and investment companies to the extent of XX% stake of the
Company to facilitate an exit through a strategic sale or any other means.

o Tag Along
o In the event of the Promoters proposing to sell, assign, or transfer any of their
equity stake in the Company exceeding XX% to any third party, with the written
consent of the Investor during the tenure of the Agreement, in a single
transaction or a series of related transactions, the Investors, at their option, shall
have the right to participate in the sale, in proportion to their equity shareholding
in the Company at that time.

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Certain minimum rights to PE Investors

o Customary Reps & Warrants

o Customary representations and warranties including, but not limited
to, organization and qualification, financial statements, accuracy and
completeness of information, authorization, execution and delivery, validity and
enforceability of agreements, issuance of the shares, no material undisclosed
liabilities, actions pending, compliance with laws and environmental
regulations, governmental consent, taxes, insurance adequacy, no conflict with
agreements and charter provisions, capitalization, taxes, no default, cause all
employees and consultants to execute and deliver nondisclosure and
development agreements for the term of their engagement with the Company
plus six months in a form reasonably acceptable to the Board of Directors and no
material adverse change.

o Cash-flow Protection
o While a typical investor seeks significant say in the operations and management
of the Company, we believe that on a minimal basis as well, given buyback
provisions, such investors will like to monitor the cash-flow of the Company and
as such prefer to have a say in
o Capital Budgeting
o Other cash outflow related decisions such as working capital management, etc.

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Certain minimum rights to PE Investors

o Voting Rights
o Term sheets often address issues of control in order to allow investors in a
company to add value and also to exercise control if things go wrong. While
investors may not want majority board control if things are going well, they may
negotiate provisions that give them control if certain events occur. The golden
rule often applies: he who has the gold makes the rules.

o Covenants
o Most preferred stock issues and debt issues have associated covenants, or things
that the portfolio company promises to do (positive covenants), and not to do
(negative covenants). They are negotiated on a case-by-case basis and often
depend on other aspects of the deal. Failure to comply with covenants can have
serious consequences to the company such as automatic default and payments
due.

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 Full Ratchets Provision

Full Ratchets protect investors against future down rounds. A full ratchet
provision states that if a company issues stock to a lower price per share than
existing preferred stock, then the conversion price of the existing preferred
stock is adjusted (or “ratcheted”) downward to the new, lower price. This has
the effect of protecting the ratchet holder’s investment by automatically
increasing his number of shares. Of course, this occurs at the expense of any
stockholders who do not also enjoy full ratchet protection.

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 Key Approvals

o Board Resolutions required for approval to the Issue and to constitute a committee of
directors for facilitating the Issue;

o Shareholders’ Resolution under section 81 (1A) of the Companies Act, 1956 for fresh
issue of shares;

o SEBI Observation on the Offer Document

o RoC Filing Approval

o Approvals may be required from Lenders under the loan agreements (if applicable);

o Approvals from the Stock Exchanges, as necessary (pursuant to SEBI filing, but prior
to opening of the Issue).

o Other relevant approvals (if applicable) such as RBI/FIPB (whichever applicable)

permission for investments by FIIs for Real Estate Companies, for transfer and/ or
allotment of shares from residents to non-residents and vice versa, etc.

33
 Monitoring

o The Investor post investment closely follows the growth of the investee
company

o Makes sure the business plan presented during the investment is strictly
followed

o Various ways in which a PE investor plays a role post investment:

o Steering the company through board representation

o Making strategy for 5 years and

o Help in strengthening the management team wherever required

o Marketing the company and its products within its network and do synergistic tie-
ups cross sell within its investee companies

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 Exit Modes Available

o IPO

o Divestment/ Secondary buyout

o M&A
o Leveraged Buyout (LBO)

o Buyouts
o Management Buyback
o Strategic Buyout
o Management Buyout

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Mega Exits Through IPO

36
Mega Exits Through Other Modes

37
 Guidelines for preferential allotment

Companies Act

o Special resolution of the shareholders must be passed under S. 81 (1A) of

the Companies Act

SEBI Guidelines

o Issue price shall be not lower than the higher of the following
o Average of the weekly high and low of the closing prices of the shares during 6
months preceding relevant date i.e., 30 days prior to the date of meeting u/s. 81
(1A) of the Companies Act

o Average of the weekly high and low of the closing prices during 2 weeks
preceding relevant date

o Instruments allotted on preferential basis shall be locked in for 1 year

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 SEBI takeover code

Open offer

– When the acquirer acquires 25% or more of shares

– Public offer should be made for minimum 26% of the voting capital of the
company

– Offer price should not be lower than the highest of the following

• Highest negotiated price under the agreement which triggers the open offer

• Volume weighted average price (VWAP) paid by acquiror for acquisitions

during the 52 weeks prior to the public announcement of the offer

• Highest price paid by the acquiror during the 26 weeks preceding the date
of public announcement

• VWAP of the target company shares during a period of 60 trading days

preceding the date of public announcement, on the stock exchange where
maximum volume of trading is recorded during this period

– Offer price shall include any price paid towards non compete fee, control
premium etc.

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 PE Deal Structure

o Term Sheets
o are brief preliminary documents designed to facilitate and provide a framework
for negotiations between investors and entrepreneurs.
o generally focuses on a given enterprise’s valuation and the conditions under
which investors agree to provide financing.
o eventually forms the basis of several formal agreements including the “Stock
Purchase Agreement,” which is a legal document that details who is buying what
from whom, at what price, and when.
o Valuation
o Pre-money value is the valuation of a company immediately before an injection
of capital occurs. The pre-money value may be calculated as follows:
o Pre Money Value = Total Number of Old Shares * Share Price
o Pre Money Value = Post Money Value – New Investment
o Post-money value is the valuation of a company including the capital provided
by the current round of financing:
o Post Money Value = Pre Money Value + Investment
o Post Money Value = Investment / Percent Ownership Acquired
o Post Money Value = Total Shares (includes old and new) * Share Price
o Share Price = Investment / Number of new shares issued

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 PE Deal Structure

Valuation (Contd.)
Step-ups describe the increase in share price from one financing round to
the next. They also describe the increase in the value of the company since
the last round of financing. Step-ups help motivate all the shareholders (both
management and investors) to remain engaged in the enterprise’s effort to
build value. Note that if options have been issued between financings, each of
the two methods of calculating the step up will give different results. The
method using share price is the one generally cited.
– Step-up = New round share price / Previous round share price
– Step-up = New round pre-money valuation / Previous round post-money
valuation

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 PE Deal Structure

Securities

Common stock is a type of security representing ownership rights in a

company. Common stock is generally not convertible into any other type of
security. It usually entitles the owner to one vote per share as well as any
future dividend payments that may be issued at the discretion of the Board of
Directors. Furthermore, no special rights (e.g. anti-dilution
provisions, liquidation preferences, etc.) are generally associated with
common stock. Usually, company founders, management and employees own
common stock while investors own preferred stock. Claims of secured and
unsecured creditors, bondholders and preferred stockholders take precedence
over those of the common stockholders.

In the absence of restrictive covenants or a vesting period for the

founders, the founders maintain a controlling stake and are free to sell the
company under terms of their choosing.

42
 PE Deal Structure

Securities (Contd.)
Convertible preferred stock provides its owner with the right to convert to
common shares of stock. Usually, preferred stock has certain rights that
common stock does not have, such as a specified dividend that normally
accrues and senior priority in receiving proceeds from a sale or liquidation of
the company. Therefore, it provides downside protection due to its negotiated
rights and allows investors to profit from share appreciation through
conversion. The face value of preferred stock is generally equal to the amount
that the VC invested. For valuation purposes, convertible stock is usually
regarded as a common stock equivalent.
Typically, convertible preferred stock automatically converts to common stock
if the company makes an initial public offering (IPO). When an investment
banking underwriter is preparing a company to go public, it is critical that all
preferred investors agree to convert so the underwriter can show public
investors that the company has a clean balance sheet. Convertible preferred
is the most common tool for private equity funds to invest in companies.

43
 PE Deal Structure

Securities (Contd.)
Participating preferred stock is a unit of ownership that is essentially
composed of two elements -- preferred stock and common stock. The
preferred stock element entitles an owner to receive a predetermined sum of
cash (usually the original investment plus any accrued dividends) if the
company is sold or liquidated. The common stock element represents
additional continued ownership in the company (i.e. a share in any remaining
proceeds available to the common shareholder class). Like convertible
preferred stock, participating preferred stock usually converts to common
stock (without triggering the participating feature) if the company makes an
initial public offering (IPO).
Participation can be pari passu or based on seniority of rounds. For
example, if a C round has seniority, then rather than A, B and C rounds
sharing in the equity in accordance with their percentage ownership of
common, the C round will be paid first, then the B round, and if there is any
cash left, the A round.

44
 PE Deal Structure

Securities (Contd.)

Multiple Liquidation Preference is a provision that gives preferred stock

holders of a specific round of financing the right to receive a multiple
(2x, 3x, or even 6x) of their original investment if the company is sold or
liquidated. A multiple liquidation preference still allows the investor to convert
to common stock if the company does well, and it provides a higher return
(assuming the selling price is sufficient to cover the multiple) if an IPO is
unlikely.

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Q&A

46
 IPO Agenda

• Capital Market Update

• IPO – An introduction

• IPO – Timelines & Key Activities

• IPO – Key Roles

• Key Activities prior to SEBI Filing

• DRHP to RHP Filing – Key Activities

• Closing Activities

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 Capital Market Update (1)

Monthly Fund Flow Activity

Mututal Fund FIIs

35,000
28,563
30,000 24,979
25,000
18,293
20,000
Rs. crore

15,000
6,898 8,030
10,000
7,213
5,000 1,377 2,050 1,427 823 4,572 652 2,524
591 435
0
(5,000) (100) (253) (464) (777) (158)
(5,801) (4,813) (4,586)
(10,000) (7,236) (6,614)
(15,000) (10,834)
Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11

o Over past one year Indian markets are witnessing tremendous redemption of funds
both in terms of Domestic Mutual Funds and FII’s.

o From and inflow of INR 24,979 crs in Sep 2010, there has been a net outflow of INR
158 crs in Sep 2011.

o 5 out of the first 9 months of CY 2011, Indian markets have witnessed a net outflow
of money both from Domestic Mutual Funds and FII’s
Source: SEBI

48
 Capital Market Update (2)

Public Issue Fund Raising - Total Public Issue Fund Raising - Private
INR Crs No. of Deals INR Crs No. of Deals
80,000 80 30,000 70
71 60
70 60
25,000
60,000 60
INR Crs

50

INR Crs
50 20,000
38 38 40
40,000 38 39 40 15,000
19,618
15,483 30
30 19
21 10,000
20,000 20 9,177 20
10 5,000 10,740 10
17,122 19,556 69,304 9,610
0 0 0 0
2008 2009 2010 2011* 2008 2009 2010 2011*

Public IssueINRFund
Crs Raising
No. of Deals - PSU o Total fund raised through primary
market offerings reached a peak of
60,000 12 69,304 crs in 2010 mainly due to huge
11
50,000 10 amount of fund raising undertaken by
INR Crs

40,000 8 government to the tune of 50,136 crs

30,000 50,136 6
20,000 4 o The no of deals in both the Private and
2
10,000 1 1 2 PSU space a reduced significantly in
8,816
0 1,639 433
0 the year 2011 due mainly on account
2008 2009 2010 2011* of bearish equity markets over the last
Source: SEBI 6 months
49
 Capital Market Update (2)

Deal Size Breakup - 2008 Deal Size Breakup - 2009

INR Crs No. of Deals
INR Crs No. of Deals
15,000 13,674 25 20,000 9
22 8
7 8
12,000 20 16,000 7
INR Crs

16,901

INR Crs
6
6
9,000 15 12,000
12 5
4
6,000 10 8,000
3
3,000 2,466 4 5 4,000 2
2,212
982
443
1
0 0 0 0
< 100 Cr > 100 & < 500 500 + < 100 Cr > 100 & < 500 500 +

Deal Size Breakup - 2010 Deal Size Breakup – YTD 2011

INR Crs No. of Deals 61,086 INR Crs No. of Deals
35 15,000 30
60,000 30 25
30 25
50,000 12,000
25
INR Crs

INR Crs
21 20 20
40,000 20 9,000
30,000
6,373 15
15 6,000 10
20,000 10 10
10,000 7,074 3,000 1,367 1,870 4 5
5
1,144
0 0 0 0
< 100 Cr > 100 & < 500 500 + < 100 Cr > 100 & < 500 500 +
Source: SEBI

50
 Capital Market Update (3)

QIP Fund Raising QIP - Deal Size Breakup (Value)

< 100 Cr > 100 & < 500 500 +
INR Crs No. of Deals 30000
40,000 56 60 26014
52 25000
50
INR Crs

30,000 20000

INR crs
40
14967
15000
20,000 34,375 23,655 30

20 10000
8022 7822
10,000
7 8 10 5000 1790 2506
2,227 3,356 214 339 867 756
0 0 0 223 94
2008 2009 2010 2011* 2008 2009 2010 YTD 2011

QIP-Deal Size Breakup (No of Deals) o Total fund raised through QIP market
offerings reached a peak of 34,375 crs in
35 < 100 Cr > 100 & < 500 500 + 2009 in value terms where 52 companies
31
30 27 raised money through QIP with an average
25 deal size of INR 650 crs which reduced to
20
INR 400 crs in 2010 where 56 companies
INR crs

20
14 raised money aggregating to INR 23,655 crs
15 11
10
5 4 o The no of QIP offerings in 2011 has reduced
5 3 2 2 2 2 significantly with only 8 companies raising
0 money till date aggregating to INR 3356 crs
2008 2009 2010 YTD 2011
Source: SEBI

51
 IPO: Advantages & Commitments

• ADVANTAGES • COMMITMENTS

– Growth Capital – Regularly meet Shareholder

Expectations
– Unlocking value for existing stake
holders – Establish Predictability and
trends in Profitability
– Monetise Investment for the
Promoters – Management Time & Bandwidth
Commitment during the Process
– Flexibility to raise further capital of IPO
through various sources
– Consistent Regulatory Compliance
– Expanding & Diversifying investor
base – SEBI
– Stock Exchanges
– Currency Creation for M&A and – RoC
other strategic deals
– Implementation of best corporate
– Enhance Brand Visibility practices

– Employee Retention Tool - ESOPs

52
 IPO Team – Issuer Company

• Team of 10 - 12 personnel for the purpose of IPO

– Heads of each Departments
– 1 person from each department dedicated for the purpose of the IPO
– Team of 1-3 personnel dedicated for the purpose of IPO from the
Finance/Secretarial Department
– Compliance Officer generally the Company Secretary of the Issuer for
the purpose of IPO with 2 personnel under him from the Secretarial &
Legal Department
• A Key Senior member of the team to be one point contact for the BRLMs and
the Legal Counsels and also co-ordinating with various departments of the
Company
• Formation of an IPO Committee constituting of some of the Executive
Directors authorised by the Board of Directors - rights to appoint
intermediaries, making changes in the offer documents, co-ordination with
regulatory bodies etc.

53
 Intermediaries

• Book Running Lead Manager Appointment

• Domestic Legal Counsel Immediate Priority

• International Legal Counsel (in case of

144 A Transaction)

• Registrar
Intermediate Priority
(One week from the Kick-off Meeting)
• Advertising & PR Agency

• Printer & Grading Agency Closer to Filing with SEBI

(Two weeks prior to Filing DRHP)

• Monitoring Agency (if issue exceeds

Rs. 500cr) Closer to Filing with RoC
(Two weeks prior to Filing RHP)
• Bankers to the Issue

54
 Intermediary – Coordination

BRLM
BRLM
Book
BookRunners’
Runners’ Co-Book
Co-Book Broker/
Syndicate
Syndicate
SyndicateMembers
Members
Legal
LegalCounsel
Counsel Runners
Runners

Domestic
Domestic International
International Escrow
Escrow Advertising
Advertising
Legal
Legal Legal
Legal Registrars
Registrars Printers
Printers
Bankers
Bankers Agency
Agency
Counsel
Counsel Counsel
Counsel

Issuer
Issuer
Company
Company// Arrangement
Selling
Selling Co-ordination
Shareholder
Shareholder

55
 Key Regulators

Initial Public Offering (IPO’s) are primarily governed by:

• Securities and Exchange Board of India (SEBI)

– SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, as

amended – Updation from the earlier SEBI (DIP) Guidelines

• Stock Exchanges (BSE & NSE)

– Listing Agreement
– In-principle and Trading Approval
– Basis of Allotment to be finalised by the Exchange

• Companies Act

• Registrar of Companies (RoC)

– Filing of Red Herring Prospectus and Final Prospectus

56
 Key Approvals

• Board Resolutions required for approval to the Issue and to constitute a committee of
directors for facilitating the Issue;

• Shareholders’ Resolution under section 81 (1A) of the Companies Act, 1956 for fresh issue
of shares;

• SEBI Observation on the Offer Document

• RoC Filing Approval

• Approvals may be required from Lenders under the loan agreements (if applicable);

• Approvals from the Stock Exchanges, as necessary (pursuant to SEBI filing, but prior to
opening of the Issue).

• Other relevant approvals (if applicable) such as RBI/FIPB (whichever applicable) permission
for investments by FIIs for Real Estate Companies, for transfer and/ or allotment of shares
from residents to non-residents and vice versa, etc.

57
 Key Eligibility

Net tangible assets of Track record of distributable Net worth of at

atleast Rs.3 cr in the profits, on both standalone least Rs. 1 cr in
Option I* :
preceding 3 full years, of + and Consol basis in terms of + each of the
which not more than 50% Sec. 205 of Companies Act preceding 3 full
held in monetary assets for 3 out of immediately years.
preceding 5 years.

Issue through book building

route with at lest 50%
allotted to QIBs
Minimum post issue face
Option II : value of equity of the
or + company shall be Rs.10 cr
“Project” has at least 15%
participation by Public
Financial institutions /
scheduled commercial banks
, of which 10% comes from
appraiser and at least 10% of
the issue size is allotted to
QIBs

* Note - The aggregate of the proposed issue and all previous issues made in the same financial year in terms
of issue size does not exceed five times its pre-issue net worth as per the audited balance sheet of the
preceding financial year

58
 Key Regulations
Minimum Issue Size and Lock-in Requirements

Minimum Issue Size

Minimum • At least 25% of each class of securities (post issue) to be offered to the public
dilution • Else at least 10% of each class of securities (post issue) to be offered to the public
provided the post issue capital of the company calculated at offer price is more than
four thousand crore rupees
Offer for sale • Only securities held for more than one year can be offered for sale
Promoters’ Contribution and Lock-in Requirements (SEBI)
Promoters’ • Promoters contribution not less than 20% of post issue capital
contribution • Securities ineligible for computation of promoters’ contribution are those that are
– Acquired for consideration other than cash and revaluation of assets or
capitalization of intangible assets
– resulting from a bonus issue by utilisation of revaluation reserves or unrealized
profits of the issuer or from bonus issue against equity shares which are
ineligible for minimum promoters’ contribution;
– Issued to the promoters at a price lower than the IPO price during the
preceding 1 year from the date of SEBI filing, unless the difference in price is
brought in
Lock-in • Entire pre-issue capital locked-in for 1 year from date of allotment in IPO or
Requirements commencement of commercial production, whichever is later.
• Promoter’s holding up to 20% of post-issue capital locked-in for 3 years and excess
promoter’s holding locked-in for 1 year

59
 IPO – Tentative Timelines

• This is an estimated timeline and based on preparedness of the issuer and receipt of statutory approvals

60
 Preparation Stage

Selection of Intermediaries – BRLMs/Legal Counsel

Kick-Off Meeting

Management / Organizational Meetings

Business / Financial / Legal Due Diligence

Accounts for last 5 FYs / Stub Period as per Indian GAAP

Drafting

BRLMs & Registrar’s MoU

Selection of Printers

61
 RHP & Pricing Stage

Filing DRHP with SEBI & Stock Exchanges

Pre-Marketing exercise

SEBI Interim Comments & it’s replies

Stock Exchange In-principle Approval

SEBI Final Observations & it’s reply

Filing updated DRHP (termed RHP) with SEBI

Filing of RHP with RoC

62
 Marketing Stage

Road Shows

Signing of Escrow & Syndicate Agreement

Issue Open

Issue Closes

Final Pricing

63
 Closing Stage

Signing of Underwriting Agreement

Filing Prospectus with RoC with Pricing Information

Allocation / Allotment

Transfer of Funds to the Issuer Company

Listing

64
 Role of the CFO

• Key member of the IPO team – co-ordinates critical IPO related activities from the
Company

• Presents business plan to the issue management team

• Articulates the business strategy and financing requirements for presentation in the
Prospectus

• Co-ordinates with Auditors for financial statements required in the Prospectus

• Responsible for clearances, if any, from existing lenders/ credit rating agencies/
appraising institution

• Intermediates between the company management and lead management team on

issues such as

– Presentation of business strategy, MD&A, business related risk factors in the

Prospectus

– Receiving various documents and clearances from the Board members

• Co-ordinates the due diligence exercise on behalf of the Company with the lead
management team and lawyers

• Key member of the road show team

65
 Role of the Company Secretary

• Key member of the IPO team – co-ordinates all IPO related activities from the Company

• Co-ordinates secretarial activities with the lawyers and lead management team
– Authority for the issue
– Amendments in Articles of the Company
– Various Board Resolutions required for the Issue

• Presentation and clarifications with respect to the Capital Structure

• Co-ordinate Issue related approvals from FIPB and RBI

• Co-ordinate compliance with Corporate Governance guidelines and ESOP guidelines, if any

• Responsible for disclosures with respect to

– Subsidiaries, Promoter and promoter group companies
– Litigations
– Statutory approvals
– Material contracts
66
 Role of Legal Advisors

• Assists in preparation of and submitting application to FIPB and RBI

• Vetting of the MoA & AoA in lines with Listing Agreement

• Assistance in drafting various resolutions regarding the Issue

• Involvement in due diligence and drafting of the Red Herring

• Advising on book building procedure and interpretation of various regulations

• Advising on regulatory requirements for marketing the deal in other jurisdictions

• Drafting of legal agreements including Escrow, Syndicate and Underwriting

agreements

• Provide various opinions and comfort for the Issue and the Offer Document

67
 Role of Auditors

• Prepare financial statements in accordance with SEBI and ICAI guidelines

– Consolidated and recasted accounts for the last 5 years and the stub period
– Not older than six months from the date of the Offer Document

• Provide other statements on the financials of the Company for inclusion in the Offer
Document as per SEBI regulations including
– Key financial ratios
– Taxation statement
– Capitalisation statement
– Basis of Issue price
– Related party transactions

• Provide comfort letter on the financial information included in the various versions of
Offer Document

68
 Role of the International Legal Counsel

• In a book built IPO, issues are marketed to the QIBs in jurisdictions such as the
United States; Europe, predominantly the UK; Singapore and Hong Kong and India.

– For international marketing, ILC advises on local securities laws for marketing
the Issue in these jurisdictions

– An international “Wrap” consisting disclosures required under the various

securities laws is attached to the Offer Document circulated in these jurisdictions

– In order to reduce the liability risk under the US Securities Laws for an Indian
Issue marketed in the US, typically a 10 b 5 opinion is obtained from the ILC

69
 Key Activities prior to SEBI Filing

• Company to constitute dedicated “IPO team” with significant time allocation to the
IPO process

• Commence collation of information for the Draft Red Herring Prospectus (RHP) and
the due diligence process based on the list provided by the BRLM and the Legal
Counsel – Setup of Data Room

• Finalization on capital structure

• Commence process of due diligence and preparation of Draft RHP

• Legal Counsels to vet articles and shareholders’ agreement for current regulations &
any changes required in compliance with the listing requirements of the Stock
Exchanges

• Appoint Advertising and PR agency /Printer to the issue

70
 Key Activities prior to SEBI Filing

• Company Board approves the offer and appoints a committee and passes
various resolutions relating to the offer

• Final and signed auditors’ report to be received for the Draft RHP

• Sign tripartite agreement with NSDL, CDSL and Registrars

• Company furnishes all the certificates required prior to filing based on the
formats provided by the BRLM, DLC and ILC

• CEO, CFO, Directors, Selling shareholders sign the draft RHP for filing with
SEBI

• File Draft RHP with SEBI

71
 Accounting Requirements

• Audited Standalone financials for past 5 Financial Years as per Indian GAAP
(restated as required by SEBI)

• Audited, Restated Consolidated Numbers as per Indian GAAP

• Stub Period Accounts: Gap between the date upto the date of the Offer
Document and the last Audited accounts should not exceed 6 months

Crucial Role of Statutory Auditor:

- Audited Accounts
- Comfort Letter
- Certificates
- Consent

72
 Corporate Governance – Key Points

Corporate Governance

Board • Reconstitution of the Board of Directors

Composition
– At least one-half non executive Directors

– One-third independent Directors in case of a non-executive Chairman

– One-half independent Directors in case of an executive Chairman

Key Committee • Audit Committee

of the Board
– Should comprise at least three members

– Two-thirds of the members of audit committee shall be independent directors.

– All members of audit committee shall be financially literate and at least one
member shall have accounting or related financial management expertise

– The Chairman of the Audit Committee shall be an independent director

• Remuneration/compensation Committee; Shareholder’s/Investor Grievance

Committee

A report on Corporate Governance to be included in the Annual Report of the Company

73
 Key Disclosure Requirements

• General Information about the company

• Capital structure (both pre & post-issue) and information regarding major shareholders as well as
Promoters

• Objects for which the capital is being raised

• Information on the Company and management, including –

― Business & Industry

― History, Main objects of the Company & key Agreements

― Details of subsidiaries, if any

― Background of the promoters, Directors and key managerial personnel

― Litigation Details (if any)

• Financial Information (Audited Statements) and MD&A

• Group Companies

• Basis of the Issue Price

Information needs to be
• Issue Procedure updated at DRHP, RHP
& Prospectus level
• Main provisions of Articles

74
 DRHP to RHP Filing with ROC

• The following are the major stages between DRHP and RHP

– SEBI’s observations are received on the DRHP

– Rating Agency gives its grading to the IPO

– Stock Exchanges give their In-Principle Approval for listing of shares

– Feedback is obtained in the pre-marketing stage

– The DRHP is updated to incorporate SEBI observations, IPO grading, Stock

Exchange approvals, financial statements (wherever necessary), price band
based on the feedback received during the pre-marketing stage, any other
material developments and Issue Timetable

– This document which contains the price band is now referred to as RHP and is
filed with the RoC

75
 IPO Grading

• SEBI has made mandatory for all the companies who are coming up with an
IPO of its equity shares, to get IPO Grading from at least one of the credit
rating agencies like CRISIL, FITCH, CARE, ICRA etc

• SEBI (ICDR) Regulations further says

– disclosures of all the grades obtained, along with the

rationale/description furnished by the credit rating agency(ies) has to
be made in the Red Herring Prospectus; and

Grading Range: 1 – 5

1 – Low Fundamentals

5 – High Fundamentals

76
 Valuation methodologies

• Most commonly used multiples based on company performance are

– P/E
– P/BV
– EV/EBIDTA

• Industry comparables

– Secondary market multiples of similar companies in the industry (Indian and

global) are used for benchmarking
– Company specific discount, based on various financial metrics is used

• DCF methodology is usually not used as a tool for valuation of an IPO. It is only used
as a second check, especially in cases where there are no significant industry
comparables

77
 Marketing Strategy

TWO PRONGED MARKETING STRATEGY

Institutional Marketing Retail (HNI & Retail) Marketing

Detailed and clear “investment case” is essential to the success of any equity offering

78
 Marketing Strategy (contd . .)

Institutional
Non-Institutional
A wide Pre-marketing &
spectrum of Management
Road shows
marketing
Institutional Mgmt. Meetings and
tools will be
HNI
used to
Analyst Meet
achieve
significant
over
Elements
subscription Retail
from of Marketing
Advertisements
institutional as Strategy Press Meets
well as retail Institutional / Retail
investor
segments Management
Interviews in Press &
Electronic Media
Retail

Top Broker/ Press Site

Visit

79
 PR & Issue Advertising Campaign

• Press coverage
• Focused coverage including national & regional newspapers

• Electronic media coverage

• Coverage on national channels like CNBC, NDTV Profit, Star News, Zee News and
Doordarshan to the extent possible
• Coverage of roadshows, interviews of senior management, independent talk
shows, issue ads etc.

• Outdoor media coverage

• Hoardings at strategic traffic points in select cities like Mumbai, Delhi, Ahmedabad
etc.
• Banners / Posters at offices of Brokers

80
 Illustrative Pricing and Allocation Strategy

Pricing Factors

Results of Global • Analyze levels of demand and over-subscription at various price levels
Marketing • Assess quality of demand
Pricing Views by • Analyze demand and price views of global leadership investors
Leading Investors • Assess after-market price views
Relative Valuation • Apply IPO discount to secondary multiples of comparable companies
Market conditions • Assess relative performance of Asian, European and US markets
• Assess volatility in various markets
Other Important • Analyze issuer specific objectives
Factors • Allow demand overhang through optimal pricing to ensure after-market performance

Allocation Strategy
Credibility of • Analyze the timing and the pattern of changes in order
Order • Assess investments in comparable markets and companies
• Compare order size
• Assess consistency with the feedback during pre-marketing
Real Level of • Estimate real demand
Interest • Assess levels of price sensitivity
• Assess level of interest through feedback received during management road shows
Likely • Analyze trends during previous offerings
Aftermarket • Assess the expected holding period
Behaviour • Assess preferred shareholding of investors through an analysis of their holdings in
comparable companies

81
 Closing activities

• After the closure of the Issue, the final price is determined based on the response received
in the Issue

• After the price is determined, the Underwriting Agreement is signed

• The RHP is updated, including the final price and is referred to as the Prospectus which is
filed with the RoC

• The applications received in response to the Issue are processed by the Escrow Bankers to
the Issue and sent to the Registrars

• The Registrars process the applications received by them after which the BRLMs carry out
an inspection at the Registrar’s office

• After implementing the changes suggested by the BRLMs, the Registrars prepare a draft
Basis of Allocation to be submitted to the Stock Exchange for approval

• On receipt of the approval, the funds are transferred from the Escrow A/c to the Issue A/c &
Refund A/c and shares are allotted, demat credit of shares and dispatch of refund orders
and CANs are made

• Final listing applications are filed with the exchanges for obtaining trading permission

• Trading in the shares commences on receipt of trading permission

82
 Key Offer Related Costs

Advertising
Cost

Marketing Stationery &

expenses Printing Cost

Stock
Exchange & Offer Related Registrar’s
SEBI Costs costs
Payments

Lead Manager
Legal costs
Fees

Traveling

Other than this, refundable deposit to the designated Stock Exchange (1% of the issue size)

83
Q&A
Thank You