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PREFACE
The Indian economy is growing at a rapid pace & the rising of sensex from 6000 points to 13000 points is a proof of that. A number of foreign companies are coming every now & then & the Foreign Institutional Investors (FIIs) are
investing huge sums .The establishment of SEBI as a regulatory body has contributed towards the development of the stock market . The proceedings at the stock market has become much more transparent . The stock market has become much more strong & well regulated . It has attracted a large number of foreign investors. The contribution of Indian institutional investors are also increasing day by day . The growth of the stock market has prompted a number of companies to come up with their IPOs (Initial Public Offerings) . Moreover the companies are also getting a very good price for the shares on offer . All this has prompted a flurry of IPOs. The growth in the arrival rate of IPOs , the book building process & the fixing of price band has prompted me to choose this topic for my research report . I hope that this report will provide an insight to the readers into what actually IPOs are and book building process & price bands take place.
ACKNOWLEDGEMENT
I here by take this opportunity to acknowledge with gratitude Mr.T.B.Singh (Principal U.I.M) who is the real motivator for me.I would also like convey my gratitude towards Mr.Ravindra Tripathi (Faculty M.B.A) but for whose valuable guidance this project would not be possible.I also take this opportunity to thanks Mr.Rakesh Kumar Srivastava (Faculty M.B.A) whose valuable suggestions were of great help for me in completing this project. In the end I would like to thanks my parents especially my father (Mr.P.K.Srivastava) who has made a lot of sacrifices to see his daughter at this place where I am today.I would also like to thanks my friends who provided a lot of support to me during the completion of the project & I would also like to thank everyone who in any way helped me during the completion of the project.
LIST OF CONTENT
TOPIC CERTIFICATE PREFACE ACKNOWLEDGEMENT INTRODUCTION INITIAL PUBLIC OFFERING(IPO) ESSENTIALS OF IPO ABOUT BOOK BUILDING PROCESS CASE STUDIES DATA ANALYSIS FINDINGS & CONCLUSION RECOMENDATIONS BIBLIOGRAPHY & GLOSSARY
CHAPTER ONE-: INTRODUCTION WHAT IS AN IPO? OBJECTIVE OF THE STUDY RESEARCH METHODOLOGY LIMITATIONS OF THE STUDY
Understanding Issues
This portion tries to cover the basic concepts and questions related to issues (issues in the meaning of issuance of securities). The aim is towards understanding the various types of issues, eligibility norms, exemptions from the same. The disclosure requirements
regarding the issuance of securities are covered in detail in the SEBI (Disclosure and Investor Protection) Guidelines, 2000.
a. What
Primarily, issues can be classified as a Public, Rights or preferential issues (also known as private placements). While public and rights issues involve a detailed procedure, private placements or preferential issues are relatively simpler. The classification of issues is illustrated below: Public issues can be further classified into Initial Public offerings and further public offerings. In a public offering, the issuer makes an offer for new investors to enter its shareholding family. The issuer company makes detailed disclosures as per the DIP guidelines in its offer document and offers it for subscription. The significant features are illustrated below: Issues Public Preferential Rights Initial Public Offering Further Public Offering Fresh Issue Offer for sale Fresh Issue Offer for sale 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. This paves way for listing and trading of the issuers securities. A follow on 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, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations. Rights Issue (RI) is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. 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. A preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer company has to comply with the Companies Act and the requirements contained in Chapter pertaining to preferential allotment in SEBI (DIP) guidelines which inter-alia include pricing, disclosures in notice etc. What is an IPO? An initial public offering (IPO) is the first sale of a corporation's common shares to investors on a public stock exchange. The main purpose of an IPO is to raise capital for the corporation. While IPOs are effective at raising capital, being listed on a stock
exchange imposes heavy regulatory compliance and reporting requirements. The term only refers to the first public issuance of a company's shares. If a company later sells newly issued shares (again) to the market, it is called a "follow-on" offering. When a shareholder sells shares it is called a "secondary offering" and the shareholder, not the company who originally issued the shares, retains the proceeds of the offering. These terms are often confused. In distinguishing them, it is important to remember that only a company which issues shares can make a "primary offering". Secondary offerings occur on the "secondary market", where shareholders (not the issuing company) buy and sell shares with each other. Initial public offering (IPO) is the first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking capital for expansion. It can also be done by large privately-owned companies looking to having their shares publicly traded at the stock market. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market.IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value. According to a senior executive in Afribank, "I have refrained from participating in IPOs, and up till now am not contemplating doing that either." His argument is that most of the IPOs are hastily packaged and there is not adequate information that would give strong support to the confidence of the investor. "I feel safer going into the stock after allowing sometime for some of the elements of the offer prospectus to crystallize. However some IPOs have proved to be worthwhile investments. This is because the tendency for immediate and short term rapid price gain, which follows the listing of the new shares on the Exchange have provided opportunities for capital gains for the investors. Although a leading stock broker have condemned the attitude of some issuing houses to manipulate the prices of companies that went through IPO upon listing to achieve price rise even the firms fundamentals does not justify that. Beyond this manipulations, IPO firms have turned out to do better than when they were still private firms.
In addition, once a company is listed it will be able to issue further shares via a rights issue, thereby again providing itself with capital for expansion without incurring any debt. This regular ability to raise large amounts of capital from the general market, rather than having to seek and negotiate with individual investors, is a key incentive for many companies seeking to list.
The IPO process begins with contacting an investment bank and making certain decisions, such as the number and price of the shares that will be issued. Investment banks take on the task of underwriting, or becoming owners of the shares and assuming legal responsibility for them. The goal of the underwriter is to sell the shares to the public for more than what was paid to the original owners of the company.
Going public does have positive and negative effects, which companies must consider
Advantages - Strengthens capital base, makes acquisitions easier, diversifies ownership, and increases prestige. Going public helps companies raise cash, and usually a lot of it. Being publicly traded also opens many financial doors: Because of the increased scrutiny, public companies can usually get better rates when they issue debt. As long as there is market demand, a public company can always issue more stock. Thus, mergers and acquisitions are easier to do because stock can be issued as part of the deal. 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. Being on a major stock exchange carries a considerable amount of prestige. In the past, only private companies with strong fundamentals reasonable track record of performance could qualify for an IPO and it wasnt easy to get listed. Small companies looking to further the growth of their company often use an IPO as a way to generate the capital needed to expand. The financial benefit in the form of raising capital is the most distinct advantage. Capital can be used to fund research and development, fund capital expenditure or even used to pay off existing debt. Another advantage is an increased public awareness of the company because IPOs often generate publicity by making their products known to a new group of potential customers. Subsequently this may lead to an increase in market share for the company. An IPO also may be used by founding individuals as an exit strategy. Many venture capitalists have used IPOs to cash in on successful companies that they helped start-up.
Disadvantages-
Even with the benefits of an IPO, public companies often face many new challenges as well. One of the most important changes is the need for added disclosure for investors. Public companies are regulated by the Securities Exchange (SEC) in regard to periodic financial reporting, which may be difficult for newer public companies. They must also meet other rules and regulations that are monitored by the Commission. More importantly, especially for smaller companies, is the cost of complying with regulatory requirements can be very high. Some of the additional costs include the generation of financial reporting documents, audit fees, investor relation departments and accounting oversight committees. Public companies also are faced with the added pressure of the market which may cause them to focus more on short-term results rather than long-term growth. The actions of the companys management also become increasingly scrutinized as investors constantly look for rising profits. This may lead management to perform somewhat question-able practices in order to boost earnings. Before deciding whether or not to go public, companies must evaluate all of the potential advantages and disadvantages that will arise. This usually will happen during the underwriting process as the company works with an investment bank or issuing house to weigh the pros and cons of a public offering and determine if it is in the best interest of the company. It puts pressure on short-term growth, increases costs, imposes more restrictions on management and on trading, forces disclosure to the public, and makes former business owners lose control of decision making. For some entrepreneurs, taking a company public is the ultimate dream and mark of success, usually because there is a large payout. However, before an IPO can even be discussed, a company must meet requirements laid out by the underwriters. Here are some characteristics that may qualify a company for an IPO: In packaging an IPO the Issuing House first of all looks at the salability of the of the offer using such characteristics as the issuers (the companys) high growth prospects, innovative product or service, competitive strength in the industry, as well as its ability to meet financial and audit requirements.
Procedure
IPOs generally involve one or more investment banks as "underwriters." The company offering its shares, called the "issuer," enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares. The sale (that is, the allocation and pricing) of shares in an IPO may take several forms. Common methods include:
Dutch auction Firm commitment Best efforts Bought deal Self Distribution of Stock
A large IPO is usually underwritten by a "syndicate" of investment banks led by one or more major investment banks (lead underwriter). Upon selling the shares, the underwriters keep a commission based on a percentage of the value of the shares sold.
Usually, the lead underwriters, i.e. the underwriters selling the largest proportions of the IPO, take the highest commissionsup to 8% in some cases. Multinational IPOs may have as many as three syndicates to deal with differing legal requirements in both the issuer's domestic market and other regions. (e.g., an issuer based in the E.U. may be represented by the main selling syndicate in its domestic market, Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia. Usually the lead underwriter in the main selling group is also the lead bank in the other selling groups.) Because of the wide array of legal requirements, IPOs typically involve one or more law firms with major practices in securities law, such as the Magic Circle firms of London and the white shoe firms of New York City. Usually the offering will include the issuance of new shares, intended to raise new capital, as well the secondary sale of existing shares. However, certain regulatory restrictions and restrictions imposed by the lead underwriter are often placed on the sale of existing shares. Public offerings are primarily sold to institutional investors, but some shares are also allocated to the underwriters' retail investors. A broker selling shares of a public offering to his clients is paid through a sales credit instead of a commission. The client pays no commission to purchase the shares of a public offering, the purchase price simply includes the built in sales credit. The issuer usually allows the underwriters an option to increase the size of the offering by up to 15% under certain circumstance known as the green shoe or over-allotment option.
Business cycle
In the United States, during the dot-com bubble of the late 1990s, many venture capital driven companies were started, and seeking to cash in on the bull market, quickly offered IPOs. Usually, stock price spiraled upwards as soon as a company went public, as investors sought to get in at the ground-level of the next potential Microsoft and Netscape. Initial founders could often become overnight millionaires, and due to generous stock options, employees could make a great deal of money as well. The majority of IPOs could be found on the NASDAQ stock exchange, which is laden with companies related to computer and information technology. This phenomenon was not limited to the United States. In Japan, for example, a similar situation occurred. Some companies were operated in a similar way in that their only goal was to have an IPO. Some stock exchanges were set up for those companies, such as Nasdaq Japan. Perhaps the clearest bubbles in the history of hot IPO markets were in 1929, when closedend fund IPOs sold at enormous premiums to net asset value, and in 1989, when closedend country fund IPOs sold at enormous premiums to net asset value. What makes these
bubbles so clear is the ability to compare market prices for shares in the closed-end funds to the value of the shares in the funds' portfolios. When market prices are multiples of the underlying value, bubbles are clearly occurring.
Auction
A venture capitalist named Bill Hambrecht has attempted to devise a method that can reduce the inefficient process. He devised a way to issue shares through a Dutch auction as an attempt to minimize the extreme underpricing that underwriters were nurturing. Underwriters, however, have not taken to this strategy very well. Though not the first company to use Dutch auction, Google is one established company that went public through the use of auction. Google's share price rose 17% in its first day of trading despite the auction method. Perception of IPOs can be controversial. For those who view a successful IPO to be one that raises as much money as possible, the IPO was a total failure. For those who view a successful IPO from the kind of investors that eventually gained from the underpricing, the IPO was a complete success. It's important to note that different sets of investors bid in auctions versus the open market - more institutions bid, fewer private individuals bid. Google may be a special case; however, as many individual investors bought the stock based on long-term valuation shortly after it launched its IPO, driving it beyond institutional valuation.
Pricing
Historically, IPOs both globally and in the US have been underpriced. The effect of underpricing an IPO is to generate additional interest in the stock when it first becomes publicly traded. This can lead to significant gains for investors who have been allocated shares of the IPO at the offering price. However, underpricing an IPO results in "money left on the table," lost capital that could have been raised for the company had the stock been offered at a higher price. The danger of overpricing is also an important consideration. If a stock is offered to the public at a higher price than what the market will pay, the underwriters may have trouble meeting their commitments to sell shares. Even if they sell all of the issued shares, if the stock falls in value on the first day of trading, it may lose its marketability and hence even more of its value. Investment banks therefore take many factors into consideration when pricing an IPO, and attempt to reach an offering price that is low enough to stimulate interest in the stock, but high enough to raise an adequate amount of capital for the company. The process of determining an optimal price usually involves the underwriters ("syndicate") arranging share purchase commitments from lead institutional investors. Note: Not all IPOs are eligible for delivery settlement through the DTC system, which would then either require the physical delivery of the stock certificates to the clearing
agent bank's custodian, or a delivery versus payment ("DVP") arrangement with the selling group brokerage firm. This information is not sufficient.
Quiet Period
After the newly public company has its IPO, it enters a "quiet period." During this time, the insiders, and any underwriters involved in the IPO, are restricted from issuing any earnings forecasts or research reports for the company. The quiet period is in effect for 40 calendar days following the first trading day. Regulatory changes by the United States Securities and Exchange Commission, changed the quiet period of 25 days, to 40 days on July 9, 2002. When the quiet period is over, generally the lead underwriters will initiate research coverage on the firm.
RESEARCH METHODOLOGY
Research methodology is a systematic & schematic way to measure or discover the unknown facts & findings. It involves several steps, which a researcher has to follow during his findings. It starts with identification of the research problem, review of the previous research findings, determining a research design, analysis of a sampling method & collection of both primary & secondary data based on sampling method. Then it involves execution & interpretation of the entire data resulting into recommendations & conclusions. Research methodology used for the purpose of this research is based on secondary data collected.
The IPO market has undergone a sea change. We as investors can only sit back and remember the days of under priced IPOs in the Controller of Capital issue days-where getting allotment was akin to winning a lottery. Then came the era of free pricing-when many an over priced issue hit the market , still there were some pearls to be found as suddenly some sectors got re rated by the market and the price of the issues seemed reasonable. Then in 1998 Securities and Exchange Board of India (SEBI) allowed every issuer of equity shares of Rs 250 million and above to have an option to make an issue through the Book Building Process. The age of the big boys had arrived-the small investors role in the IPO market was to get marginalized. Book Building refers to the collection of bids from investors, which is based on an indicative price range, the issue price being fixed after the bid closing date. The principal intermediaries involved in a book building process are the company, Book Running Lead Manager (BRLM) and syndicate members who are intermediaries registered with SEBI and eligible to act as underwriters. Syndicate members are appointed by the BRLM. The book building process is undertaken basically to determine investor appetite for a share at a particular price. It is undertaken before making a public offer and it helps determine the issue price and the number of shares to be issued. The process begins with consultations between Issuer Company, the fund managers and the institutional investors. The above process is used to derive a price-band with a median point at which the demand for the companys stock is maximum. The issuer company, in tandem with the lead manager and the book runner, then fixes a price band for the issue. The investor is informed of the price band and he then bids at a price he thinks appropriate. The bidding is done just like an open auction. The bidding period is kept open for at least five working days. The advertisement announcing the bidding contains the date of the opening of the offer and the closing date. The issue document contains the name of syndicate members who are entitled to receive the bids. Even the offer document contains the conditions of accepting the bids and the procedure of bidding. The bidding centers are electronically connected to maintain transparency and also eliminate the time lag between making and receiving of the bid. Individual and institutional investors have to place their bids only through the syndicate members who have the right to vet the bids. The bids can be revised innumerable number of times before the issue closes. To maintain transparency in the bidding process, at the end of every bidding session the demand for the issue is shown in the graph format on the terminals. Once the company gets various bids from the investor, it decides the final price at which it is willing to issue the stock. Since the company has already decided the quantum of funds it wants to raise it finalizes the number of shares it will now issue at the price fixed. The issue price for the placement portion and offer to the public shall be the same. As per the SEBI rules known to everyone, a company going public has to offer its minimum 25 per cent of issued post-issue equity to the public and maximum of 75 per cent post issue equity can remain with the promoters. However, by a recent amendment large software companies making an issue of over Rs.200 crores (including premium) need offer only a minimum of 10 per cent of post issue equity. Out of the total public
issue size, 90 per cent of the issue can be offered through book building process while only 10 per cent of the issue can be offered via fixed price portion. Out of the book building portion, a minimum of 10 per cent of the issue size has to be reserved for retail bidders while 75 per cent of the issue can be offered to wholesale bidders. A retail investor in book building process is an investor who has to bid for a minimum of 100 equity shares and in multiples of 50 equity shares thereafter subject to a maximum of 2000 equity shares. In case of wholesale bidders the bid has to for a minimum of 500 equity shares and in multiples of 50 equity shares thereafter. In case of over-subscription in the retail category, allocation will be made on a proportionate basis and in consultation with the regional stock exchange. In case of balance book-built portion the same shall be available to wholesale bidders and the company in consultation with the Allocation Committee has the discretion to allocate to any of the investors, who have bid, at or above the issue price in wholesale bidder category. While bidding for the equity shares of the company in a book built portion, each bidder shall, with the submission of the bid-cum-application form, draw a cheque/demand draft/stockinvest for the maximum amount of this bid in favor of the escrow account of the escrow collection bank. Bid form accompanied by cash is not accepted. However, the syndicate member(s) at their discretion may waive such requirement of payment at the time of submission of the did form for wholesale bidders. Where such payment at the time of bidding is waived at the discretion of the syndicate member or where there is a shortfall as a result of cut-off price being more than highest price in the indicative price band, the issue price or the difference, as the case may be would be paid, favoring the escrow account within 4 days on communication by the BRLM of the list of bidders who have been allocated equity shares to the syndicate members. As a result of the book building process, by merely offering 6.25 per cent of the post issue equity, the shares of the company can get listed on the major stock exchanges like NSE and BSE. Here, after listing, due to low floating stock, it becomes very easy for the vested interests to manipulate the price. Also, out of 18.75 per cent of the post issue equity, reserved for wholesale bidders, the said shares are conveniently allotted by the company and BRLM to persons of their choice and selection. Ironically, these allottees can get the allotment of shares without paying a single penny along with their bids. Due to these flaws and inadequate provisions, SEBI has thought of streamlining book building norms and it was decided that to avoid conflict of interests during book-building and maintain the integrity of the process and an arms-length relationship between those involved in book building and their associates. Though still a new concept, book building is here to stay and represents a capital market which is in the process of maturing.
Though not an entirely new concept, IPOs have in recent times become very popular and have greatly advanced public awareness of capital market activities in the country, writes Chinedu Dike Over the years there have been concerns regarding the depth and capacity of the Nigerian capital market to absorb heavy offers. The initial public offerrings (IPOs) of heavy weights like Dangote Sugar Refinery plc and Transnational Corporation of Nigeria (Transcorp) plc may have just provided the test cases to confirm the much desired depth and capacity of the market.Dangote Refinery between November 15, and December 22, 2006 made an IPO to raise N54 billion from the market through the issue of 3.0 billion ordinary shares of 50 kobo each at N18 per share. The offer was 300 per cent subscribed. Also Transcorp made an IPO to raise N60 billion through the issue of 8.0 billion ordinary shares of 50 kobo each at N7.5 per share. The offer opened December 27, 2006 and closed January 31, 2007. The result of the offer is still awaited, but market expectation is that it will be oversubscribed. As the government prosecutes the privatization, is expected that other heavy IPOs from the power, oil and gas sectors will hit the market and provide needed depth. The financial sector reforms and particularly the consolidation programme of the banking sub-sector came with it a series of IPOs. The reason for this is not far-fetched. Prior to the consolidation, most of the banks in Nigeria were privately owned and their shares were not available for transaction at the stock market. Trailing on the success of the banks, other companies in other sectors also accessed the market either by way of IPO, rights issue, public offering or offer for subscription. The exercise, apparently because of the way it was prosecuted, also raised public awareness not only on IPOs but also on stock market investments. And the result is that there are presently more participants in the Nigerian capital market than ever before. Also the market has witnessed tremendous growth in the last few years.
CHAPTER THREE: ESSENTIALS OF IPO SEBI NORMS SECONDARY MARKET COMPANY PERFORMANCE OTHERS
Recommendations and Suggestions made by the Primary Market Advisory Committee (PMAC)
] The PMAC had constituted a subgroup (SG) to review the book building guidelines. Among other issues, the subgroup made various recommendations pertaining to the existing framework of book building. The subgroup report was also deliberated upon by PMAC. Pursuant to the same, the following recommendations have been approved by the PMAC.
1. Redefining allocation buckets: At present, in a book built issue Qualified Institutional Buyers (QIBs), Non Institutional Buyers (NIBs) and Retail investors are allotted in the ratio of 50:25:25 respectively. It was observed from the analysis of book built issues done by SEBI that in most of the cases, the NIBs leverage IPO financing and are the maximum sellers in the market as soon as the issue opens for trading.. There was also a possibility of bank/ NBFC financing leading to ramping up of prices on listing. In order to curb excessive speculation and also in a deliberate effort to increase retail participation, the subgroup recommends reduction in allocation to NIBs and increase in allocation to retail. The sub group recommends the following allocation criteria, which has also been approved by PMAC: (I) Mandatory Book Building: (a) Where Book Building is being used to satisfy the eligibility norms in terms of DIP Guidelines Not less than 35% to retail investors Not more than 15% to NIBs Not less than 50% to QIBs (b) Where Book Building is being used to satisfy Rule 19(2)(b) of SCRR 1957 Not less than 30% to retail investors Not more than 10 % to NIBs Not less than 60% to QIBs (II) Voluntary Book building (Where issuer is otherwise eligible in terms of DIP Guidelines and is using Book Building to discover the price) Not less than 35% to retail investors Not more than 15% to NIBs Not more than 50% to QIBs The above criteria would normally apply to the issues, the exception being Undersubscription. In the event of under subscription, the above allocation categories would not apply and there would be full fungibility among categories. The disclosures in the offer document should clearly specify the manner of allocation among categories in the event of undersubscription. For issues falling under category (I)(b), the allocation to NIBs and retail would be 30% and 10% respectively 2. Redefining retail investor (RII)
The guidelines presently define the RII, in value terms as one who can apply for shares upto a maximum amount of Rs.50, 000. It is observed that the said limit is too small, particularly in the context of large size book built issues. It also appears that the small limit is the prime reason for several investors to make multiple applications in order to satisfy their investment appetite. Also the transaction costs are relatively higher for the retail investment capped at Rs.50, 000/-. There is also a need to widen the retail investor base in general and particularly in view of the proposed increase in allocation to retail. In this regard, the SG recommends that a retail investor be defined as one who can apply upto Rs.1 lac in a primary issue. 3. Reduction in bidding period. The sub group also deliberated on the issue of the hype surrounding book building. In an open book system the price/bid details received are in public. As a result, there are frequent updates in the media regarding the oversubscription lead to hype. This practice could also mislead potential investors to overbid, quote higher prices as well as induce an otherwise unwilling investor to bid. The sub group opines that while regulating the media reporting was not possible, certain measures could be taken to address the hype and related consequences. One of the recommendations of the SG, which has also been approved by PMAC, is to reduce the bidding period from current 7 10 days to 3-7 working days. Further to address the same issue, the SG also recommends that NSE/ BSE should bring more transparency and congruency in reporting of the bid data along with relevant details. This aspect is detailed in next point 4. Data reporting at website of stock exchanges. The PMAC approves the recommendation of the SG that there should be uniform data display on the websites of both the stock exchanges. The Stock Exchanges should display the consolidated figures for both the exchanges and should ensure that they communicate among themselves to ensure congruency in the data displayed. The first set of data that is displayed about the book should be the consolidated figures of both these exchanges. Anyone further interested in knowing the breakup maybe given the details on clicking further.. There should be a common book between NSE & BSE. The graph should be separately showing the bids received category wise, preferably in the format as under: Sr.No Category No of shares bid % of total meant for the for category 1 2 3 3 (a) 3 (b) QIBs NIBs RIs Cut off Price bids All categories
The graph should have the title Graphical display of bids received A statement to the effect that the position indicated above is only bids position and does not convey in any way the subscription to the issue. The bids can be revised and/or withdrawn Clarificatory Notes like QIB category is not required to pay any margins NIBs and RIs have paid 100% margins while giving the bids All the categories can revise the bids till closure of bids QIBs are not allowed to withdraw their bids once made except for the purpose of revising the same. Statement as to how the multiple bids/ revision in bids etc are accounted for in the data and graph.
5. Role of discretion The SG deliberated extensively on the role of discretion granted to the BRLMs as regards the allocation to QIBs. In this regard, the group observed that, as per existing practice, the shares are allocated to QIBs based on various parameters, like prior commitment, investor quality, price aggression, earliness of bids etc. The SG explored various options viz., Doing away with discretion, in which case allocation to QIBs would be proportionate or based on some objective criteria. Prior disclosures of parameters in the document and reporting of the allocation done to QIBs, on the request of SEBI the subgroup observed that the guidelines envisage price discovery by QIBs, because of which, mandatory book building provides for upto 50% reservation in allocation to QIBs. It was also informed that in case of allocation to QIBs, various factors were to be considered including quality of investor, commitment to specific sector, investment objectives, prior track record etc. These factors could vary from one issue to another. As such, exhaustive disclosures of all the parameters would be difficult. In the absence of discretion, any QIB investor, irrespective of quality, investment objectives etc. could get the shares allocated, which arguably may not be in the best interests of the issuer, the market and the investor. The SG also observed that an analysis of the recent book built issues carried out by SEBI had revealed that QIBs are the most stable holders as against NIBs, who exit immediately on listing. The SG opines that while on the one hand objective parameters for QIBs may not be practicable, on the other hand, it is essential to ensure that the discretion granted to merchant bankers, is not misused. In view of the above, the SG recommends that the broad parameters, on which allocation is made to QIBs, should be disclosed in the offer document. The PMAC has also approved the said recommendation. 6. Announcement of Price Band/ Floor Price As regards announcement of price band, PMAC opined that disclosure of price band / floor price in the Red Herring Prospectus (RHP) / application form be retained, as a matter of price guidance to the investors. This was particularly important in case of an unlisted company in respect of whose shares; there is no secondary market price guidance. However in case of listed companies, since price guidance is available in form
of secondary market prices, the requirement of disclosing the price band in the RHP / application form may be done away with, subject to upfront disclosures in the offer document regarding the following : i. Advising investors to be guided by the secondary market prices. ii. Due disclosures stating that the price band / floor price would be announce by the issuer / merchant banker, one day before the bid opens iii. Mode of announcement whether through advertisement etc. iv. The name of the specific news papers and websites, television channels etc. wherein the said advertisement would be made. 7. Deletion of redundant provisions in the book building guidelines. The book building guidelines provide for 75% book building and 100% book building. While 100% book building has been widely used, the 75% book building has been rarely used. The guidelines pertaining to 75% book building, provides for issue of 75% of the net offer to the public through book building and the balance 25% at the price determined through book building. This results in extension of time, as in the first instance, there is bidding period for price discovery followed by a period of time for which the issue is open to 25% of the public to invest. There are also cost implications on account of different types of forms etc. The subgroup recommends deletion of provisions pertaining to 75% book building as well as consequential amendments. The PMAC has approved the same. In order to encourage Initial Public Offers (IPOs), the existing SEBI norm for IPO was relaxed by stipulating ability to pay in place of actual payment of dividend. Keeping in view the changes in capital market flowing from free pricing of shares and free access to market for funds, SEBI dispensed with the requirement to issue shares with a fixed par value of Rs.10 and Rs.100 and gave freedom to companies to determine the par value of shares issued by them in accordance with Section 13 (4) of the Companies Act, 1956. Companies with dematerialised shares have been allowed to alter the par value of a share indicated in the Memorandum and Articles of Association.The existing companies, which have issued shares at Rs.10 and Rs. 100 can avail of this facility by consolidating/splitting their existing shares. SEBI finalized the Regulations for Credit Rating Agencies (CRAs). These define a promoter as anyone holding 10 per cent or more of share capital of a CRA, and outline the categories eligible to promote CRAs, etc. With a view to popularize the book building mode of public issue, SEBI prepared a modified framework, which will serve as an alternative to the existing Guidelines. It is optional for investors to use either the existing framework or the modified framework. With a view to facilitating regulation of Collective Investment Schemes (CIS), the Securities Laws (Amendment) Bill, 1999 passed by the parliament in December, 1999 incorporates units of CIS also in the expanded definition of securities under the SCRA. Based on the feedback from investors and entities operating CIS on the draft regulations based on the interim report of the Dave Committee, SEBI approved the draft Regulations for CIS. These were notified on October 15, 1999.
The condition of the stock market also affects the decision of the company to issue fresh shares into the market in the form of an IPO (Initial Public Offering). Like we have seen recently in the case of Indian stock market as the sensex was rising in the early part of the year 2006 we have seen a flurry of IPOs but as the melt down of May 2006 came a number of IPOs which were in earlier were stopped and the companies started waiting for the right time to come. The IPOs which were stopped were DLF, IDEA etc .But when the stock market was in a Bullish phase a lot of IPOs came like RELIANCE PETROLEUM, TECH MAHINDRA etc and what was more exciting was that almost all of these IPOs were listed at a very good price at the stock exchange. Even as the stock market revived from the melt down the companies which held their IPOs earlier came up with them and what more they still got a very good price like IDEA CELLULAR, POWER FINACE CORPORATION etc.Hence there is a clear cut relationship between the health of the secondary market and the health of the primary market.
COMPANY PERFORMANCE
The performance of a company also affect the initiative of the company to come up with an IPO.If the companys financial position is good and the company is making continous profits and is also thinking about an expansion then the company may come up with an IPO as it has a very good chance not getting its IPO fully subscribed.On the contrary if the company is running through continous losses then such a phenomenon affects the goodwill of the of the company and such it might face problems in getting buyers for its issue as no one would like to apply for the issue of the company which is suffering from a bad financial position due to continous losses.As due to strict guidelines of the SEBI it is a compulsion on the part of the company to disclose the financial records of the previous five financial years therefore if the financial position of the company is not good then the subscribers may face problems as in such a case the company becomes unattractive for the investors.
OTHERS
The guidelines of the finance ministry and of the various controlling authorities also affects the IPOs like the recent guidelines by the RBI regarding the repo and reverse repo affects the liquidity in the market and there by such a policy has left the investors with a lesser amount to invest. The policy or guidelines of such authorities has deep rooted impact on the IPOs in line .Like due to such guidelines DLF has delayed its IPO.
CHAPTER FOUR-: ABOUT BOOK BUILDING THE PROCESS GUIDELINES FOR BOOK BUILDING BSES BOOK BUILDING SYSTEM UNDERSTANDING BOOK BUILDING
Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery. It is a process used for marketing a public offer of equity shares of a company. It is a mechanism where, during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The process aims at tapping both wholesale and retail investors. The offer/issue price is then determined after the bid closing date based on certainevaluationcriteria.
The Process:
The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'. The Issuer specifies the number of securities to be issued and the price band for orders. The Issuer also appoints syndicate members with whom orders can be placed by the investors. Investors place their order with a syndicate member who inputs the orders into the 'electronic book'. This process is called 'bidding' and is similar to open auction. A Book should remain open for a minimum of 5 days. Bids cannot be entered less than the floor price. Bids can be revised by the bidder before the issue closes. On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation criteria which may include Price Aggression Investor quality Earliness of bids, etc.
The book runner and the company conclude the final price at which it is willing to issue the stock and allocation of securities. Generally, the numbers of shares are fixed; the issue size gets frozen based on the price per share discovered through the book building process. Allocation of securities is made to the successful bidders. Book Building is a good concept and represents a capital market which is in the process of maturing.
BSE offers the book building services through the Book Building software that runs on the BSE Private network. This system is one of the largest electronic book building networks anywhere spanning over 350 Indian cities through over 7000 Trader Work Stations via eased lines, VSATs and Campus LANS The software is operated through book-runners of the issue and by the syndicate member brokers. Through this book, the syndicate member brokers on behalf of themselves or their clients' place orders. Bids are placed electronically through syndicate members and the information is collected on line real-time until the bid date ends. In order to maintain transparency, the software gives visual graphs displaying price v/s quantity on the terminals.
display of demand at the terminals optional. The reservation of 15 percent of issue size for individual investors bidding for upto 10 marketable lots is no longer compulsory; this may be offered to the public at price as determined through book building. Allotment and other requirements for this issue shall be the same as any other public issue. The issuer is allowed to disclose either the issue size or the number of securities to be offered to public. Allotment in the book-built portion shall be in demat mode only. Additional disclosures with respect to the scheme for making up the deficit in the sources of financing and the pattern of deployment of excess funds shall be made in the offer document.
Resource Mobilization
During April-December, 1999, a sum of Rs. 5723 crore was raised through public and rights issues from the primary market. This represented an increase of 46 percent over the amount raised in the comparable period of the previous financial year. During this period, the proportion of resources raised through public issues declined to 75.8 percent from 89.6 percent in the corresponding period of 1998- 99. The average issue size, however, remained virtually unchanged at about Rs. 95 crore during April-December, 1999. The share of Initial Public Offers (IPOs) increased from 7.8 percent to 31.9 percent, indicating improvement in the prospects of new/unlisted companies for resource mobilization from primary market. Most of the resource mobilisation from primary market in 1999-2000 has been (as in 1998-99) by the private sector. During April-December, 1999, the private sector made 57 issues for raising Rs. 5509 crore (96.3%) compared with 38 issues for Rs. 3825 crore (97.4%) during April-December, 1998. As in the previous financial year, banks and financial institutions were at the top, accounting for Rs. 3039 crore from 12 issues during April-December, 1999, followed by the information and technology sector raising Rs. 1393 crore through 20 issues, and cement and construction sector, which together raised Rs. 337 crore. Though banks and FIs raised the largest amount from primary market, their share in total resource mobilisation declined from 84.4 percent during April-December, 1998 to 53.1 percent during April-December, 1999. Debt issues contributed 38.8 percent of total resource mobilisation, closely followed by equity issues on premium with 34.4 percent and equity at par with 26.8 percent. The debt issues accounted for 82.1 percent of the total resource mobilisation from primary market in the previous financial year. The higher proportion of resource mobilisation through equity issues in the current financial year reflects greater
investor confidence in the capital market. Table 4.1 presents the trends in resource mobilization from the primary market. SEBI undertook several measures to promote efficiency and investor protection in the secondary market. In view of increased volatility and sharp uptrend in the market, SEBI advised the leading Stock Exchanges in the country to consider additional measures to ensure safety and stability in the market (Box 4.2). Dematerialization, which provides far-reaching benefits to the market, has therefore been placed at the top of SEBIs agenda. In order to facilitate development and regulation of markets for derivatives of securities, the Securities Laws (Amendment) Bill, 1999 proposing expanded definition of securities including derivatives has been passed by Parliament in December 1999. Other measures relate to rolling settlement, intial public offer (IPOs), internet trade, etc.
Dematerialization
The process of dematerialization of shares progressed further during the current financial year. SEBIs Working Group ondematerialisation decided to add 96 scrips in two phases (56 from November 29, 1999 and40 from January 17, 2000) to the existing list of104 scrips for compulsory dematerialisedtrading by all investors, bringing total number of such scrips to 200. The number of dematshares increased by 295 percent from1.8 billion as on March 31,1998 to 7.0 billion ason March 31,1999 and further up by83 percent to 12.7 billion by end-December, 1999. The addition to the list of shares under compulsorydemat trading is expected to raise the proportion of market deliveries in demat form from the current level of about 75 percent to 90 percent. The progress in dematerialization is also indicated by a dramatic rise in the proportion of demat shares in the total delivery value at NSE from 2.5 percent in April,1998 to 79.3 percent in December, 1999 (Figure 4.1). In the interest of small investors, SEBI has allowed investors with very small holdings to sell in the stock exchanges in physical form under a special scheme. Such securities are then dematerialised by the buyers. The market capitalization of demat shares rose by 38.9 percent from Rs.2883 billion as at end-March 1998 to Rs.4006 billion as at end-March 1999 and further by 51.7 per cent to Rs.6076 billion at end- December, 1999.
Market Making
The extensive reforms over the last two years have enhanced the integrity, transparency and efficiency of operations of the securities market. The introduction of electronic trading and order matching system in all the 23 stock exchanges in the country have reduced transaction costs. However, there are still a large number of shares that are not actively traded despite the fact that many of them have some intrinsic value. A Committee on Market Making under the Chairmanship of Shri. G.P. Gupta (Chairman, IDBI) was therefore set up by SEBI to study the various facets of market making, including the merits and demerits of the two trading systems, viz. the order-driven system and the quote-driven system. The Committee was of the view that shares could be classified into two categories viz. liquid and illiquid and that market making facility should be provided for illiquid shares. The Committee stressed the obligation of market makers to offer continuous two-way quotes and indicated that this would force them to
carry an inventory of stocks. The Committee also underscored the need to keep in mind the implications of this aspect in terms of commitment to capital and exposure to market risks while working out the operating mechanism for market making. Allottees to submit the application form and the amount payable for shares. The broker will open a separate escrow account for the primary market issue. The clearing house of the exchange will debit the primary issue account of the broker and credit the issuers account. The certificates will be delivered to investors or their depository account will be credited
Internet Trade
SEBI has proposed internet trading in a limited way under Order Routing System (ORS) through registered stock brokers on behalf of clients for execution of trades on stock exchanges. Investors can place buy/sell orders through the internet and would be able to execute trade on their computers by the brokers filter. While executing the trades, all the necessary safety and integrity measures need to be adhered to in the transactions. The stock exchanges must ensure that the systems used by brokers have provision for security, reliability and confidentiality of data through the use of encryption technology. Brokers must enter into an agreement with clients spelling out all obligations and rights. The exchanges also are required to ensure that the brokers have a system-based control on the trading limits of clients and exposures taken by them. The brokers on the other hand must set pre-defined limits on the exposure and turnover of each Client.
Rolling Settlement
Rolling settlement was introduced by SEBI for the first time in 1998 by making it optional for demat scrips. Accordingly, trading in demat shares commenced on the basis of a T+5 rolling settlement cycle with effect from January 15, 1998. Based on experience, SEBI has selected 10 scrips for rolling settlement on a T+5 basis with effect from January 10, 2000.This select list has been chosen on the basis of the criteria that they appear on the demat list and that each selected share has a daily turnover of Rs. one crore and above. The risk containment measures like margin requirements, exposure limits, etc. for rolling settlement would be the same as those for other settlements. After gaining experience, the list for rolling settlement will be expanded. The list of ten select scrips does not include badla or carry forward scrips, which would be covered in the next phase in the light of Varma Panels recommendations on introduction of daily and weekly badla in a rolling settlement mode.
institutional investors prior to pricing the offering in an attempt to gauge market demand for the issue. This demand information is then used to determine the size, price, and allocation of the offering. In practice, ensuring a successful book-building effort is somewhat more complicated than this simple description suggests, and generally requires use of discriminatory tactics that draw criticism from investors and regulators alike. Despite such criticism, book-building methods are now used in most large international equity offerings.iii It has been suggested that the decline of fixed-price offerings is related to recent efforts throughout Europe and Asia to privatize state-owned firms and the fact that many of these firms were simply too large to sell in a single market.iv As a consequence, privatization authorities and non-U.S. investment banks were introduced to book-building methods when they engaged U.S. investment banks to gain access to foreign capital. Finland offers a striking example of fixed-price offerings apparently giving way to book-building efforts as regulations limiting the exposure of domestic investment banks to the latter were relaxed. Prior to 1993, foreign ownership restrictions limited institutional investment in Finnish IPOs. Following the abolition of these restrictions, book-building efforts were used to place a secondary offering by Repola with Prospectus, a subsidiary of Kansallis bank and the leading Finnish investment bank, acting as a member of the underwriting syndicate. Prospectus went on to lead the book-building effort for Repola's convertible bond issue in March 1994. With this experience, Prospectus has gone on to lead or participate in book-building efforts for four of the six subsequent IPOs with proceeds greater than FIM 50 million.v Presumably, the increasing popularity of book-building practices reflects an expectation among issuing firms that this underwriting strategy will generate greater proceeds than existing alternatives. In this article we review a body of research that stems from a 1989 study by Lawrence Benveniste and Paul Spindt that supports this view.vi Simply put, a book-building strategy is efficient relative to many alternatives because it makes better use of information about market demand conditions. Even auction methods that also condition price and allocations on market demand conditions may be relatively inefficient because, unlike the book-building approach, auction methods generally fail to put the full power of the investment banker's relationships with potential investors to work for the issuing firm. A second goal of the article is to highlight several management strategies the issuing firm might follow to increase the efficiency of the book-building effort. Among other things, we suggest that being flexible with regard to the size of the issue and lining up alternative sources of financing can increase the expected proceeds from the offering. Finally, we consider several policy issues related to the use of book-building methods.
the filing. If the SEC is satisfied that the registration statement satisfies full and fair disclosure requirements, it may accelerate the effective date of the offering's registration. The issuing firm generally requests acceleration of the effective date when notified of SEC clearance of the registration statement. After the SEC has commented on the registration statement and the preliminary prospectus has been circulated among potential investors, the issuing firm's investment bank organizes a series of road shows designed to generate interest among potential investors. Based on these presentations and the information in the prospectus, including a suggested price range for the offering, participants are asked to provide nonbinding indications of interest in the issue. The "book" is built from these expressions of demand and, based on the information in the book; the terms of the offering are finalized shortly before distribution begins. Thus, in contrast to the common perception that roadshows are conducted for the purpose of providing potential investors with information about the firm, the practice of building a book suggests that roadshows provide a vehicle for the issuing firm and its banker to acquire information from potential investors. The relative importance of these two information flows is important. The investment banking industry has drawn criticism for excluding retail investors from roadshows. The force of such criticism depends on the degree to which the information provided during roadshow presentations are substantively different from the prospectus, and therefore confers an informational advantage on institutional investors. In principle, roadshows provide institutional investors with an opportunity to probe management for its assessment of the firm's prospects. However, the firm's legal counsel often discourages management from providing information beyond that in the prospectus. Bro Uttal's description of Microsoft's IPO provides a striking case in point by noting that Bill Gates was admonished by in-house counsel "to say nothing to anybody that deviated from the prospectus or added new information". Such admonitions come with good reason. George Adams and Katherine Ashton observe that the SEC may require revisions to the prospectus if the substance of a public statement is viewed as being used to stimulate market interest. Once incorporated in the prospectus, the issuer is liable for the accuracy of such statements. Moreover, the SEC can use its discretion over the acceleration of the effective date to encourage management to refrain from divulging information not generally available to the investing public. If these threats are sufficient to ensure that roadshows provide little additional information, the practice of limiting participation to institutional investors carries little cost for retail investors and streamlines the information-acquisition process.
cash flows. It is also likely that portfolio managers will have greater access to information about a firm's competitors simply because such firms are more likely to yield information to a manager considering the addition of the firm to his or her portfolio than to a competing firm. Even if the command of hard information by potential investors is negligible, each investor knows his or her own demand for the issue. This demand, or "soft", information is valuable if for no other reason than because in aggregate it represents the market demand for the issue. Moreover, there is reason to believe that some investors have market power in the sense that their level of interest in an issue can influence that of other investors and thereby "make or break" the issue. For example, Richard Spillane, director of research for Fidelity Investments, estimates that Fidelity is the dominant buyer of IPOs purchasing about 10% of newly issued shares. Not only is Fidelity likely to account for a relatively large share of the demand for any single issue, but it is conjectured that other institutions condition their demand on Fidelity's interest in the issue. Ivo Welch has suggested that such herd behavior can result in a "cascade" in which the success or failure of an issue can be determined by a market leader.vii One way of evaluating the level of uncertainty surrounding the pricing of IPOs is to examine the width of the price range suggested in the preliminary prospectus. Kathleen Hanley reports an average dollar width of $1.54 (median = $2.00) for a sample of 1,430 IPOs brought to market between January 1983 and September 1987.viii This translates into a percentage spread between the upper and lower bounds of the suggested price range of approximately 15% (median = 16.7%). If we take the midpoint of the suggested price range as the investment banker's best estimate of the per share market value prior to polling potential investors, an estimated price of 161/8 would therefore yield on average a suggested price range of 15 to 171/4. If the investment banker revises the initial estimate of the per share market value to reflect information implicit in investor indications of interest, we should observe deviations of the offer price from the suggested price range. Hanley finds that for 63% of her sample offerings such revisions are relatively modest in the sense that the offer price lies within the suggested price range. In contrast, for 10% of the sample offerings the offer price is greater than the upper bound of the suggested price range with a mean percentage deviation from the midpoint of the suggested price range of 20.9% and a maximum deviation of 78%.ix Similarly, the 27% of the sample offerings priced below the lower bound of the suggested price range exhibit a mean revision of -22.4% with a maximum of -50%. In addition to motivating significant price revisions, investor indications of interest appear to produce revisions to the offering size suggested in the preliminary prospectus. When the offer price is set above the upper bound of the suggested price range, Hanley finds that issuing firms increase the number of shares offered by 10% on average. Likewise, negative price revisions are associated with a 10% scaling back of the offering. In contrast, the size of offerings priced within the suggested price range reflect only a modest increase (1.4%) from the suggested offer size. Taken together, the price and offer size revisions for offerings priced outside the suggested price range imply a revision to expected proceeds of approximately 30%.
Unfortunately, when the true value is Vlow, the investment banker cannot even count on the maximum retail demand of 0.7 shares at the $9 offer price. If retail investors recognize that the institutional investor knows the true value of the firm's offering, they will expect to be crowded out of underpriced offerings and offered relatively large allocations of overpriced offerings. Kevin Rock has argued that faced with this winner's curse, retail investors will participate in the investment banker's offerings only if they believe they will break even on average.xi In this simple example, retail investors' break-even condition for participation is: (Vhigh- P)Dr[Dr / (Di + Dr)] = (P - Vlow)Dr, (1) Where P is the expected offer price. The right-hand-side of the equality is simply the loss retail investors expect to incur assuming they receive their full demand in overpriced offerings. Similarly, the left-hand-side of the equality is their expected profit from participating in underpriced offerings. The profit expected by retail investors assuming they are allocated their full demand is represented by (Vhigh- P)Dr. The bracketed term reflects the fact that the offer will be rationed across both retail and institutional investors when it is underpriced, and is perhaps best viewed as the probability that retail investors will be allocated the shares they demand. When there is no threat of being crowded out by institutional investors (Di = 0), retail investors are allocated their full demand of underpriced shares and (1) will be satisfied by an offer price of P = (Vhigh+ Vlow) / 2 = $9, Which is just the average value of the offering. Given our assumptions about Di and Dr, however, the naive strategy of setting the offer price at the estimated share value of $9 will not satisfy (1). Since retail investors do not expect to receive their full demand (as indicated by [Dr / (Di + Dr)] < 1), their participation can be ensured only if the offering is priced at a discount from the average share value of $9. In this case, retail investors will expect to break even at an offer price of $8.58 or nearly a 5% discount from the estimated share value of $9.xii This discount is the benchmark against which we will compare the outcome of a book-building effort. The preceding example higlights the leverage held by the institutional investor. Endowed with an informational advantage, the institutional investor can simply observe the offer price and buy only those offerings that appear to be underpriced. The goal of a book-building effort is to induce the institutional investor to yield this informational advantage. Although the institutional investor's cooperation will carry a price, the cost may be lower than the cost of leaving the institutional investor's leverage unchecked. In the context of our example, the institutional investor has an incentive to always claim Vlow as the true value in an attempt to drive the offer price below the investment banker's initial estimate of $9. Therefore, the investment banker must commit to pricing and allocating the offering in such a way that the institutional investor's expected profit
from truthfully revealing the true value to be Vhigh is at least as great as falsely claiming that the true value is Vlow. This condition can be characterized as follows: Ahigh(Vhigh - Phigh) > Alow(Vhigh - Plow), (2)where the institutional investor's share allocation, A, and the offer price, P, are now dependent on his indication of the true value of the issuing firm. Since any profits captured by the institutional investor (represented by the left-hand-side of (2)) come at the expense of the issuing firm, the investment banker's goal is to minimize the right-hand-side of (2), or minimize the cost of eliciting an honest indication when the firm's true value is Vhigh. Unfortunately, the investment banker's options are limited. For example, it appears that the right-hand-side of (2) could be driven to zero by setting the offer price at $10 whenever the institutional investor indicates that the true value is $8. However, if the investment banker followed this strategy, the institutional investor would be unwilling to participate when the true value is actually $8. Thus, in response to an indication that the issuing firm's true value is Vlow, the underwriter is forced to set Plow = Vlow = $8. The investment banker's only remaining leverage then is to minimize Alow. He can do this by committing to grant allocation priority to retail investors when the institutional investor provides an indication of Vlow. In other words, allocate only Alow = Q - Dr Shares to the institutional investor claiming Vlow. Since Vhigh > Plow, the expected profit necessary to elicit an indication of Vhigh is positive. However, the actual discount from the true price (V high - Phigh) can be minimized by favoring the institutional investor with a large allocation in response to an indication of Vhigh. In this example, Ahigh should then be 1 share. Thus, following the preceding logic (Plow = Vlow, Alow = Q - Dr, Ahigh = 1), satisfying (2) requires an offer price of $9.40 in response to an indication of Vhigh from the institutional investor. This implies that the issuing firm's expected offer price is $8.70 [0.5(9.40 + 8.00)] if it engages an investment banker to build a book for its offering. Comparing this to the expected offer price of $8.58 produced by the passive rationing strategy implied by (1), we see that active solicitation of information from the institutional investor increases expected proceeds by 1.4%. Although this example is simplistic, it illustrates several features of a successful book-building effort. First, the investment banker is able to determine that a price revision is appropriate. Despite this knowledge, when the true value is $10, the banker must be willing to offer shares at a $0.60 discount to ensure that institutional investors will be forthright with their indications of interest. Failure to do so will damage the banker's credibility with investors and therefore its ability to represent future offerings. The expected discount of $0.30 required to elicit information from the institutional investor is consistent with the large first-day average returns on IPOs.xiii The example also highlights the importance of being able to strategically allocate IPO shares among investors. Ideally, the banker would sell shares at a discount only to those investors who provide strong indications of interest. Doing otherwise only increases their incentive to understate their interest. Since the NASD Rules of Fair
Practice require that IPO shares be offered to all investors at a uniform price, however, a discounting strategy leaves money on the table for all initial investors, independent of their indication of interest. One feasible alternative to discriminatory pricing is to discriminate in the allocation of shares.xiv If there is sufficient demand among investors who claim to have strong interest in the issue, the problem can be solved by a committment to allocate the entire issue to these investors. Investors with strong interest will then recognize that they cannot profit by understating their interest because they will simply be excluded from the offering. In practice, the degree of interest expressed by investors will vary and it is unlikely that the investor expressing the strongest interest in the issue would be willing to purchase the entire issue. In spite of these caveats, the preceding discussion suggests two keys to a successful book-building effort: Maintain a direct link between discounts and the strength and breadth of interest demonstrated during the book-building effort. Give allocation priority to investors providing the strongest indications of interest.
The existing empirical evidence suggests that investment bankers follow these rules of thumb. For example, in her 1993 study, Hanley observes average discounts (first-day returns) of 0.6% for offerings priced below the lower bound of the suggested price range, increasing to 10% for offerings priced within the suggested price range and 20.7% for offerings priced above the upper bound of the suggested price range. Allocation policies are more difficult to examine because share allocations among various investor classes are rarely publicized. The only concrete evidence related to investment banker allocation policies is reported in a recent study by Hanley and Wilhelm.xv This study reports institutional and retail investor allocations for 38 IPOs managed (or co-managed) by a single investment bank during the period 1983-1988. The sample exhibits a 73% median allocation to institutional investors for offerings priced above the upper bound of the suggested price range. Consistent with the policy of reducing share allocations to roadshow participants when indications of interest are weak, median institutional allocations decline somewhat for offerings priced within the suggested price range (to 70.1%), and more sharply (to 64.5%) for offerings priced below the lower bound of the suggested price range. The study also confirms the widely-held belief that institutional investors dominate discounted offerings; the median institutional allocation for the 24 underpriced sample offerings is 73.3%. Although this concentration of IPO profits among institutional investors is often considered a problem with the primary equity markets, our research suggests that it promotes efficiency in the book-building process. Taking the view that discounts are provided in exchange for information, institutional investors should receive allocation priority over retail investors since retail investors do not participate in the book-building process.xvi Although these findings suggest that institutional investors capture the lion's share of the profits associated with discounted offerings, the preferential treatment they enjoy in discounted offerings appears to carry a quid pro quo expectation that they will
participate in less-attractive offerings as well. This conclusion is supported both by the median institutional allocation for overpriced offerings of 71.6% observed by Hanley and Wilhelm and discussions with investment bankers suggesting that participation in future offerings is contingent on broad participation in past offerings. Investors who gain a reputation for cream skimming are less likely to be included in future offerings. The possibility that institutional investors are induced to participate in lessattractive offerings should not be taken to suggest that IPOs are unprofitable for institutional investors. To the contrary, IPOs are far more frequently characterized by positive initial returns than by negative intial returns. Moreover, the positive returns are considerably larger on average than the negative returns. Thus, membership in an investment banker's pool of regular IPO investors should be profitable even if the investor participates indiscriminately. In fact, the attraction of regular participation can be used to enhance the efficiency of the book-building effort.xvii To see why, recall that the price of a successful effort is the expected discount necessary to solicit accurate indications of interest. If an investor expects future participation in IPOs to be profitable, the threat of losing the future income stream can be used to induce the investor to participate in a particular offering at an expected discount he would find unacceptably low in a one-time-only transaction. Thus, by bundling current and future offerings and requiring "all or nothing" participation from their investors, investment bankers can reduce the cost of book-building by reducing the expected discount necessary to elicit accurate indications of interest. The potential for bundling current and future offerings is perhaps the most important reason to believe that book-building dominates other methods used to place IPOs. For example, auctions offer alternative mechanisms for eliciting investor information prior to pricing an issue. However, the anonymity typically engendered by auction mechanisms does not promote a relationship between the issuer's representative and potential investors, and therefore limits the potential for bundling from which the book-building mechanism gains an extra measure of efficiency.
termination can increase the efficiency of the book-building effort, recall that in the absence of any countervailing force investors have an incentive to understate their interest in an issue if doing so can lead to a lower offer price. We demonstrated that the investment bank can mitigate this problem by favoring investors who provide strong indications of interest with relatively large allocations of discounted shares. A credible threat to terminate the offering can have a similar strategic effect. If investors believe that downplaying their interest increases the likelihood of termination, they will be less likely to do so for issues they find attractive. It does the investor no good to drive down the investment bank's perception of the issue's value if the consequence is to have the offering terminated. Thus, any action the firm takes to increase its reservation price for the offering and credibly convey this information to investors should reduce the discount necessary to elicit truthful indications of interest. A recent study of firms that have secured a line of credit prior to their public offering by Christopher James and Peggy Wier supports this conjecture. xix A credible source of alternative financing establishes a reservation price for an issuing firm because there is no need for the firm to go public on terms less attractive than it currently faces. Having alternative financing in place makes a firm's threat to terminate an offering more credible. Thus, James and Wier's finding that such firms experience smaller discounts is consistent with the idea that a credible threat to terminate the offering can improve the efficiency of the book-building effort. The final strategic consideration facing the issuing firm relates to the size of the offering. We observed earlier that issuing firms often revise the size of the offering in response to investor indications of interest. Perhaps equally important is the over allotment or Green Shoe option whereby the firm allows the investment bank to sell additional shares in response to exceptional demand during the distribution of the offering. Benveniste and BuSaba show that strategic use of the option to alter the offer size in response to indications of interest can also reduce the expected per share discount required to obtain accurate indications of interest. The reasoning is quite simple. As the example in the preceding section illustrates, the key to obtaining accurate indications of interest is to convince informed investors that they will be provided with a dollar profit for giving a strong indication of interest that exceeds the profit they expect from understating their interest. The profit captured by informed investors is the product of the dollar discount and the number of shares they receive. Thus, increasing the expected allocation to informed investors allows the investment bank to reduce the per share discount. By increasing the size of the offering only when demand for the offering is high, the investment bank can provide investors who expressed strong indications of interest with larger allocations and reduce the discount from the level necessary in the absence of the option. Moreover, if the additional shares are allocated only when demand is exceptionally strong, there should be no reason to allocate some fraction of the shares to investors providing relatively weak indications of interest. Used in this manner, the option to alter the size of the offering does nothing to weaken the incentives of investors to be forthright with their indications of interest.
What sets the most successful investment banks apart from their competitors? The preceding discussion suggests that if the perceived quality or reputation of an investment bank is related to its book-building success, there are several dimensions in which high quality banks will excel. The success of a book-building effort rests on the investment bank's ability to acquire information from potential investors. Thus, banks that excel at book-building should have strong relationships with the most sophisticated investors in IPOs. Little is gained from marketing an issue to investors who have neither significant private information nor the market power to influence the demand decisions of other investors. Our analysis also suggests there are economies of scale in underwriting. Banks that underwrite more and larger offerings have greater opportunities for the bundling of offerings described earlier. Moreover, these same banks present a larger expected future income stream to members of their investor pool. We suggested earlier that each of these characteristics provides the investment bank with greater leverage over its investor pool. Thus, other things equal, we would expect the most active banks to be the most efficient in their book-building efforts. A final dimension of an investment bank's reputation derives from its commitment to secondary market price stabilization for its offerings. Under the ant manipulation provisions of the Securities Exchange Act of 1934 investment bankers are permitted to support the secondary market price of IPOs by posting a stabilizing bid at the offer price. Investment bankers routinely reserve the right to support the secondary market price by announcing they may do so in the prospectus. In a recent study we have suggested that a credible commitment to price stabilization is closely related to the success of a book-building effort.xx Our argument rests on the fact that the benefits from book-building derive from the investment banker's ability in some cases to set the offer price above the initially suggested price range in response to strong indications of interest from the institutional investor pool. However, completion of the offering at a higher price depends on the investment banker's ability to persuade investors who had little interest in the issue at prices within the suggested price range that they should revise their expectations regarding the value of the offering to correspond with those of investors providing strong indications of interest. Unfortunately, since the underwriting commission is a fraction of the proceeds from the offering, the investment banker has an incentive to overstate the level of interest among institutional investors if by doing so a higher offer price can be achieved. Thus, it is natural for investors to be skeptical of banker claims that the information obtained through the book-building effort warrants a positive price revision. Such skepticism translates into lower expected proceeds for the issuing firm as prospective investors require larger discounts in exchange for providing accurate indications of interest. However, when the investment banker commits capital to support the secondary market price of an IPO, misrepresenting the outcome of the book-building effort will be costly because the bank is ultimately forced to repurchase overpriced shares. In this sense, a commitment to price stabilization bonds the banker against raising the offer price when it is not warranted by expressions of demand obtained during the book-building effort. A price stabilization commitment may also lead investors to accept smaller expected discounts on IPOs in exchange for the valuable put option implicit in the
stabilization commitment. The example presented earlier demonstrated that investors require a minimum level of compensation in exchange for providing strong indications of interest. In this study we show that this requirement will often be satisfied most efficiently by a bundle of expected price discounts and a commitment to price stabilization. This observation highlights an important point for managers attempting to assess the all-in costs associated with engaging an investment bank. Assuming that the underwriting business is competitive, the expected cost of the investment banker's commitment to price stabilization will be reflected in the fee charged to the issuing firm. Other things equal, banks with the strongest commitments to secondary market price stabilization will charge the highest fees. However, the cost of obtaining a strong stabilization commitment may be more than offset by an increase in expected proceeds. Thus, an issuing firm may face lower all-in costs by paying the fee necessary to retain a bank with a strong commitment to secondary market price stabilization.
of IPOs. On the other hand, retail investors can and do participate in the IPO market through ownership of mutual and pension funds. Perhaps the more legitimate focus of criticism in the allocation of IPOs are those retail investors, such as ex-Congressman Thomas Foley, who receive favored treatment yet seemingly contribute little to market efficiency in return. Finally, it is claimed that penalty bid systems provide a means of discriminating against retail investors during secondary market price stabilization efforts. Penalty bids are in essence incentive schemes designed to discourage initial investors from immediately selling or "flipping" their shares in the secondary market.xxii In our view, however, a commitment to price stabilization can substitute for price discounts as compensation for investor information. If this is true, it is inefficient to provide the commitment indiscriminately. Penalty bids are one means of extending the stabilization commitment selectively. Once again, if retail investors are not providing information used in pricing the offering, they have no claim to compensation.xxiii
Conclusion
The aim of this article has been to offer an economic rationale for the book-building method of marketing IPOs. In most cases, the fundamental problem facing the issuing firm's management and current owners is to minimize the fraction of firm value "given away" in the form of price discounts from the firm's true value. Our research suggests that, relative to marketing strategies that involve little effort to gauge investor sentiment prior to pricing the issue, a book-building strategy can diminish this cost of going public.
CHAPTER FIVE-: CASE STUDIES IPO OF BHARTI TELEVENTURES LTD. IPO OF TCS IPO OF IDEA CELLULAR LTD.
Issue Details
Issue Type: Book Building Issue Opens: 28th January, 2002 Issue Closes: 2nd February, 2002 Floor Price: Rs.45/Face Value: Rs.10/Shares offered: 185,336,700 Lead Managers: JM Morgan Stanley Private Ltd.and DSP Merrill Lynch Ltd Registrars to the Issue: Karvy Consultants Limited
Issue Structure
Qualified Institutional buyers Number of equity Minimum of shares 11,12,02,020 equity shares Percentage of Issue 60% Size Minimum Bid 1,100 and thereafter in multiples of 100 Maximum Bid Allotment mode Non-Institutional Investors Minimum of 2,78,00,505 equity shares` 15% Retail Portion Minimum 4,63,34,175 shares 25% of equity
1,100 and thereafter 100 and thereafter in in multiples of 100 multiples of 100 equity shares Not exceeding the Not exceeding the 1,000 equity shares total Issue size total Issue size Compulsory in Compulsory in Compulsory in Dematerialized Mode Dematerialized Dematerialized Mode mode
Investment Argument
The next big story in the Indian telecom sector could be that of Bharti Tele Ventures Limited. The company is coming out with an Initial Public Offering, with a 25% meted out only for the sake of retail investors. The issue is all set to revive the undertone of the primary market. The fundamentals of the company and the growth aspects justify investment in the scrip. Positives The following arguments are given in favour of an investment in the company.
Burgeoning telecom sector - India represents one of the world's largest, underdeveloped telecom markets. It has a strong, high-consumption middle-class population of around 300 mn. The current low telephone penetration offers telecom companies substantial growth potential in India, along with the opportunity to adapt newer technologies for the feasible and continuing change that is sweeping through the industry worldwide. According to the Cellular Operators Association of India (COAI), total number of cellular subscribers in India has increased from approximately 0.3 million in 1997 to 3.5 million in 2001. The total number of fixed-line subscribers has increased from approximately 14.5 million as of March 31, 1997 to approximately 32.4 million as of March 31, 2001. The telecom sector is now witnessing renewed interest, with the government initiating steps to improve infrastructure and increase the penetration rate.
As of March 31
1997
1998
Unique position of Bharti - Bharti Televentures is uniquely positioned to garner the maximum advantage of the growth in this sector. As of September 30, 2001, approximately 92% of Indias total cellular subscribers resided in BTLs six existing and nine proposed cellular circles. These 15 circles collectively accounted for approximately 56% of Indias land mass. They also provide fixedline services in the Madhya Pradesh circle, which is centrally located in India, and is the only circle sharing its boundaries with eight other circles. It is also developing fixed-line networks in the circles of Delhi, Haryana, Karnataka and Tamil Nadu. India Bharti - existing Bharti licensed area India 6 27% 525 16% % to all
Number of circles 22 Area of the circles (in square 3,278 kilometers, in thousands) Population in the licensed 1,027 164 16% areas Cellular subscribers in the 4.8 1.8 38% licensed areas (in millions) Focus on telecommunications - The Company is only engaged in providing telecommunications services in India. By focusing its resources on one industry, the company is better able to anticipate industry trends and capitalize on new telecommunications-related business opportunities Brand recognition - The Company enjoys strong brand name recognition and has a reputation for offering high quality service to is customers. These brands are widely recognized and identified with the services that the company offers. The company intends to leverage on the strength of their existing brand names to capture market share in the new markets. Brand Bharti Service/Products Corporate brand
Airtel Post-paid products Magic Pre-paid (cellular) brand Tango Mobile data Mantra Online ISP services Strong strategic and financial partners - The Company has strong relationships with international strategic and financial investors such as Singtel, Warburg Pincus, International Finance Corporation, Asia Infrastructure Fund Group and New York Life Insurance. SingTel is one of its key strategic partners and its position as one of Asias leading telecommunications service provider gives the company an access to valuable knowledge in implementing telecommunications projects and to their international expertise and managerial resources.
Quality Management team with vision and proven execution skills - The Company has a strong management team with proven ability to successfully plan and execute business strategies. The company has a team which is proactive in identifying new opportunities and capitalizing on them. The company's ability to win eight additional cellular licenses in the recent competitive bid, more than any other cellular operator is an indication of the team's strong execution skills. Operational Advantages - Bharti is one of the few fully integrated players in the Indian telecom landscape. Although its approach is mainly focused on developing a seamless nationwide footprint in cellular services, it has a strategic interest in fixed-line, National Long Distance and broadband services. Also a serious contender for the International Long Distance telephony services. Cellular business -BTLs strategic objective for cellular business is to rapidly become the leading provider of cellular services in India. To achieve this strategic objective, the company plans to: 1) Capture maximum telecommunications revenue potential with minimum geographical coverage to maximize its revenues and margins. 2) Build high quality cellular networks by deploying state-of-the art technology to offer superior services. As seen from its existing capabilities, the companyiswellsettomeetitsdesiredobjective.The company provides cellular services in six of the 22 circles using Global System for Mobile communication GSM) technology. It also intends to provide cellular services in nine additional circles, for which it has entered into licenses with the DoT, by the middle of next year. The six license circles are Delhi, Karnataka, Andhra Pradesh, Himachal Pradesh, Chennai and Kolkata. The nine circles in which it is in the process of developing cellular networks are Mumbai, Maharashtra, Gujarat, Tamil Nadu, Kerala, Uttar Pradesh, Madhya Pradesh, Haryana and Punjab. 1999 No. of cellular licenses held by 2 Bharti Total cellular subscribers in 1.34 India (in millions) Cellular subscribers in Bharti's0.23 2000 5 2.62 0.78 2001 15 ( existing & prose circles ) 4.8 4.43
license areas % of cellular subscribers residing in Bharti's circle to17% 30% 92% total cellular subscribers Fixed-line services-BTL is the first private operator of fixed-line services in India. They currently provide fixed-line services in 27 cities in the Madhya Pradesh circle. The company intends to provide fixed-line services in the four additional circles of Delhi, Haryana, Karnataka and Tamil Nadu for which it has recently entered into licenses with the DoT. The companys strategic objective for its fixed-line business is to have a presence in data centric circles having high telecommunications revenue potential, with particular focus on high density business and industrial districts, and to become the leading provider of fixed-line services to corporate customers in the markets it serves.
Long Distance Business-The Company is deploying an advanced fiber optic network across India to provide national long distance services for carrying voice and data services to corporate and residential customers. It presently carries international data traffic through its seven international satellite gateways located in India and operated under its broadband division. BTLs strategic objective for its long distance business is to become the leading private sector provider of national long distance telecommunications services in key Indian markets. To achieve this strategic objective, the company intends to leverage its existing strengths, experiences and strong presence in its cellular and fixed-line businesses. Besides this, the company intends to commence offering national long distance services in key markets in India by the middle of next year. Broadband business-The Company presently provides VSAT based communications services and Internet services to corporate and residential customers in India. BTL intends to offer broadband connectivity for various end users, including data, IT-enabled services and other high bandwidth demanding services. These solutions will enhance flexibility and scalability while reducing its clients maintenance cost.BTLs strategic objective for its broadband division is to become a leading provider of secure, reliable and customized end-to-end network solutions for data communication, especially to corporate customers. In accordance with its strategy, it has recently integrated its existing Internet and VSAT businesses with its proposed broadband business to develop a common platform for offering integrated business solutions for its customers. The primary focus of these two businesses would continue to be on corporate customers.The companys strong presence in the Indian telecommunications market, the depth and quality of the telecommunications services that it currently offers and plan to offer, and its extensive knowledge of customer preferences enhances its competitive position to provide such value added services. Concerns
BTL has not paid any dividends since its incorporation and does not anticipate paying any dividends for the foreseeable future. The company incurred a loss of Rs 1,043 mn for FY01 as compared to Rs 454 mn in FY00. The consolidated accumulated losses for BTL were Rs 2,046 mn. Given the expansion plans of the company, BTL is expected to incur losses in the coming years as well in light of the capital-intensive nature of the business. Public sector majors like BSNL, MTNL and VSNL have an upper hand when compared with new players like BTL in terms of depreciated assets and large subscriber base. Following the rate cut by BTL on the Domestic Long Distance (DLD) front, BSNL also slashed DLD tariffs by more than 60%. This could adversely affect revenue and profit growth of new entrants like BTL. Currently foreign direct investment limit in the Indian telecom sector is capped at 49%. Already, foreign shareholders own approximately 41.7% of the company's outstanding share capital thus leaving little room for BTL to raise additional equity investments in the company from foreign investors. Competition from WLL technology may adversely impact the companys revenues. Indian consumers may be willing to subscribe to limited mobility using WLL to take advantage of the lower call charges. If significant demand for these services develops in India and is successfully met by fixed-line providers, BTLs cellular business could be adversely affected. The attrition or churn rate of customers in BTLs cellular and fixed-line networks is high and this may result in additional costs. While presently the net cost of adding a new customer is substantially offset by the initial activation fee received by the company, there can be no assurance that this will continue in the future.
There is substantial competition in the Indian telecommunications industry. Competition with existing competitors in its cellular markets has been, and will continue to be intense. In its existing fixed-line business, the company competes with BSNL. In addition, the government has permitted unlimited competition throughout India
company to be one of the biggest wealth creator in the country. TCS will Differ 5.54 crore equity shares of Re one each, including a fresh issue of 2.27 crore shares, in its IPO through a book building route. The issue also com prices offer for sale of 3.26 crore shares by Tata Sons Ltd and certain other share holders of TCS and a further green shoe option by Tata Sons for 8.31 lakh shares each. The authorized share capital of the company is Rs60 crore and the current paid up capital is Rs 45.55 crore. The equity capital after the offer would be Rs 47:83 crore, according to the prospectus filed with the market regulator Securities and ExchangeBoardofIndia. Tata Sons is off-loading 3.1 7 per cent of pre-offer capital (1.44 crore shares) followed by Jamsetji Trust 2.09 per cent (95.31 lakh), Navajbai Ratan Trust 1.2 per cent (5.46 .lakh), 'Shapoorji Pallonji Mistry and Cyrus Pallonji Mistry 0.28 per cent each (12.61 lakh). Kalimati Investment Company Ltd is offloading 0.09 per cent (4.13 lakh shares), Indian Hotels Company Ltd 0.04 per cent (two lakh) and Camco Investment and Finance Ltd 0.02percent3, 231). TCS became India's first billion-dollar software firm in revenues last year. Its revenues for the fiscal ended March 31, 2003, touched Rs50.12 billion ($1.04 billion), up from Rs 41.87 billion ($908 million) in fiscal 2001-02. The company manages projects for over 1,000 clients in over 55 countries and employs nearly 28,000 software professionals acrosstheglobe.
Restrictions
According to the prospectus, TCS said that a restriction and 200 per cent cut on the number of Hl-B visas for Indian nationals and a backlash against out- sourcing in the US might adversely impact its future prospects. Over 60 per cent of TCS' revenues are from its businesses in US and is funneled in through both on shoring and off shoring "Most of our employees are Indian nationals and providing services in US, Europe and other countries depend on our ability to obtain necessary visas and work permits," the prospectus-says.TCS software professionals work in US on H1-B or L-1 visas, and with that country reducing Hl-B visas on October 1, 2003 to 65,000, from the earlier 1.95 lakh, would limit the company's ability to conduct operations in US. Further, US government has also increased the level of scrutiny in granting visas, apart from hiking visaprocessing fees. The demand for H-1B visas would "continue to be high," but these restrictions would make it difficult to obtain "as many H-IB visas as in the past," it added. TCS said it was possible that proposed legislation in US would impose stringent laws on the granting of Hl-B and L-1 visas, which would have an "adverse impact on our business and profitability." The software major also said that political opposition to outsourcing in US and. other countries where it has a presence could adversely affect its business. TCS plans takeovers TCS is planning to explore the possibility of acquisitions after launching its IPO and is believed to be scouting for acquisitions in countries like Latin America and China, according to senior executives of the company. The company would also use the proceeds to restructure Tata Sons balance sheet and support the group's new business initiatives. These would include floating of new companies and increasing the group's stake in existing entities. The group holding entity has a debt of around Rs 3,500 crore
and book value of its investment worth Rs 6,000 crore, which is expected to be restructured in the balance sheet.
such period as may be determined by the board of Tata Sons and TCS. The TCS IPO will thus bring a windfall for Tata Sons. An IPO would provide an opportunity to Tata Sons and shareholders of TCS to realise the value of their holdings through sale of their shares after TCS is listed on the Stock Exchange. Last year, the Mumbai High Court had granted approval as per the scheme of amalgamation on completion of the IPO. Two years back, as part of a rights issue, 10 per cent was picked up by a few Tata group companies. Tata Sons holds the balance 90 per cent in Orchid Print. Orchid Print would be renamed TCS Ltd. "The issue, which is large in size and with a big name behind it, can lead to a turnaround for the primary market. While people may not chase price but value, face value being Re 1 would make it affordable for small investors," Mr Haldea added. "The issue could be around Rs 5,500-6,000 crore and price the people generally expect is Rs 1,000," he added. While stating that the listing of TCS may not have any impact on other big IT companies like Infosys Tech and Wipro, Mr Haldea added that more money would be allocated to IT sector and some portfolio churning could be done by mutual funds. The money raised from the issue could be used for big acquisitions, he added.
Company overview
Idea Cellular was formed in 1995 as a JV of the Aditya Birla group and the AWS group. The latter sold its stake in 2005 to Tata Industries. The Tatas ceased to be shareholders, when, in June 2006, Tata Industries sold its stake (48.14% @ Rs 4,406cr) to the Aditya Birla group, valuing IDEA Cellular at about Rs 9,150 cr. Internal differences between the Tatas and the Birlas had resulted in the company lagging the competition in expanding its footprint in other parts of country, leading to loss of market share on an all-India basis from 12.2% to 10% now. But after the Birlas took over, growth in the company has matched the industry growth rate. Idea is one of the leading mobile operators, now operating in 11 circles, comprising one metropolitan circle, three categories circles, six category B circles and one category C circle. It ranks among the top three operators in six of the 11 circles and is one of the fastest-growing mobile operators. It is an experienced and well established GSM service provider, with original licenses in seven of 13 circles. As a result, it benefits from various incumbency advantages. Pre-IPO, the Aditya Birla group, through its group companies, holds about 65.8% equity; the rest is held by venture capital and other FIIs.
Profile
A national brand The company has sought to develop the Idea brand nationally to represent high quality customer service and a wide variety of innovative products. They believe their brand givs them a strong platform to market mobile services to new subscribers. As the company is emerging as a national player, they have begun associating themselves with visible and prestigious events such as the International Indian Film Academy Awards, the Zee Fashion Awards and the Idea News Headlines to give them brand national visibility.
2.Original licensee in seven of the Established Circles, providing incumbency advantages: Idea Cellular is the original licensee in seven of the Established Circles, namely the category A Circles of Andhra Pradesh, Gujarat and Maharashtra and the category B circles of Haryana, Kerala, Madhya Pradesh and Uttar Pradesh (West). Although initially the company paid higher fixed license fees, they believe that being an original licensee has enabled them to: a) Reduce their capital expenditure and operating costs as they were allocated Spectrum in the 900 MHz frequency band, which has allowed them to provide networks with a lower density of cell sites than is required for services in the 1800MHz frequency band typically made available to subsequent market entrants; b) Access the early subscribers, who tend to be more affluent and typically have higher ARPU; c) Cater to a critical mass of subscribers, thereby making it harder for new operators to enter the market and gain market share; and d) Benefit from the 2% reduction in their license fees for a period of four years with effect from April 1, 2004. 3. Market leader in three of, and established positions in the remainder of, the Established Circles: Idea Cellular Ltd. is the maret leader in the Haryana, Maharshtra and Uttar Pradesh (west) Circles by number of subscribers. As at December 31, 2006 they had over 0.75m subscribers and a market share of 20.3% in the Haryana Circle, over 2.5m subscribers and a market share of approximately 23% in Maharashtra Circle and they had nearly 1.5m subscribers and a market share of approximately 21.2% in Uttar Pradesh (west) Circle. They believe their leading market position has helped them to develop stron brand recognition and a high profileamong existing and potential customers. They believe this position also has allowed them to establish a strategy of developing a larger, more active pre-paid card distribution network than their competitors in these Circles. Critical mass of 12.4m subscribers The company provides services to approximately 12.44m subscribers in the Established Circles and the New Circles, as at December 31, 2006. They believe this subscriber base enables them to realize significant benefits from economies of scale in many aspects of their operations, such as equipment procurement, sales and marketing, billing and customer service and support.
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xv xvi xvii xviii xix xx xxi
CHAPTER SIX : DATA ANALYSIS SECONDARY DATA ANALYSIS FINDINGS CONCLUSION RECOMENDATIONS
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DATA ANALYSIS:
FINDINGS:
1. On the basis of analysis of the secondary data I found that about 71% of the total funds are raised by means of private placement & only 25% are raised by means of ipos This phenomenon is primarily due to the fact that a lot of complexities are involved in ipos .A lot of procedural complications serve as a hurdle in the path of the companies to go for ipos 2. On the basis of the study of the prospectus I found the price range of Bharti between Rs 35-45, of TCS Rs 775-900 & of Idea cellular of Rs 65-75.
3. On the studies of the offer prospectus I found that the companies offered that the number of shares offered by Bharti was Rs 1.85 crores, TCS awsRs.2.27crores& of Idea cellular was Rs .3.25 crores. 4..On the basis of the study of offer prospectus I found that the number of shares reserve for different categories of investors like QIB, NII/HNI & Retail investors are as follows in Bharti cellular,TCS, Idea cellular :60% ,15%, & 25% respectively. 5. In the present scenario the secondary data of the companies provided me a study on the current prices of Bharti of Rs 826, TCS of Rs 1234 & idea of Rs 112 respectively. 6.The maximum contribution is by private placement rather than IPO due to : Tough procedural norms of SEBI. High floatation costs Bulk purchasing by the institutional buyers.
CONCLUSION:
The Indian economy is growing at a rapid pace & the rising of sensex from 6000 points to 13000 points is a proof of that. A number of foreign companies are coming every now & then & the Foreign Institutional Investors (FIIs) are investing huge sums .The establishment of SEBI as a regulatory body has contributed towards the development of the stock market . The proceedings at the stock market has become much more transparent . The stock market has become much more strong & well regulated . It has attracted a large number of foreign investors. The contribution of Indian institutional investors are also increasing day by day . The growth of the stock market has prompted a number of companies to come up with their IPOs (Initial Public Offerings) . Moreover the companies are also getting a very good price for the shares on offer . All this has prompted a flurry of IPOs. The growth in the arrival rate of IPOs , the book building process & the fixing of price band has prompted me to choose this topic for my research report . I hope that this report will provide an insight to the readers into what actually IPOs are and book building process & price bands take place.
RECOMMENDATIONS:
Tough procedural norms of SEBI for the listing of shares of the companies should be smoothened a little so that the listing can take place easily
There is lot of unavailability of the informations to many investors due to shorter period of the duration of many IPOs; hence the duration for the IPO should be increased a little so that the investors can fetch the information easily.
Accessibility to the informations of the IPO should be enhanced. The should be proper & efficient rating of companies should be done of their IPO on the basis of following analysis: Economic analysis Industry analysis Company performance
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Book Running Lead Manager Reverse A Lead Merchant Banker who has been appointed by the Issuer Company as the Book Runner Lead Manager. The name of the Book Runner Lead Manager is mentioned in the offer document of the Issuer Company. Floor Price The minimum offer price below which bids cannot be entered. The Issuer Company in consultation with the Book Running Lead Manager fixes the floor price. Merchant Banker An entity registered under the Securities and Exchange Board of India (Merchant Bankers) Regulations, 1999. Syndicate Members Syndicate Members are the intermediaries registered with the Board and permitted to carry on activity as underwriters. The Book Running Lead Managers to the issue appoints the Syndicate Members. Order Book It is an 'electronic book' that shows the demand for the shares of the company at various prices. Delisting Exchange Delisting Exchange means the exchange from which the securities of the company are proposed to be delisted in accordance with these Guidelines. Exchange Exchange means any stock exchange, which has been granted recognition under section 4 of the Securities Contracts (Regulation) Act, 1956. Promoter Promoter means a promoter as defined in clause (h) of sub-regulation (1) of Regulation 2 of the Securities and Exchange Board of India (Substantial Acquisition of shares and Takeovers) Regulation, 1997 and includes a person who is desirous of getting the securities of the company delisted under these Guidelines. Public Shareholding Public Shareholding means the shareholding in a company held by persons other than the promoter, the acquirer or the persons acting in concert with him as defined in regulation 2(1)(j) of the Securities and Exchange Board of India (Substantial Acquisition of shares andTakeovers)Regulation,1997andtheterm'publicholdersofsecurities'shallbeconstruedaccordingly; Voluntary Delisting It means delisting of securities of a body corporate voluntarily by a promoter or an acquirer or any other person other than the stock exchange(s).