INTRODUCTION An initial public offer, as the name indicates, is the first (initial) instance of a company (called the issuer
) offering its commons stock (or shares) to the general public for subscription. It is a common misconception that only newly formed companies resort to raising money through an IPO. Even long established private companies can access the IPO route to raise capital, and become publicly traded companies as a result. An IPO is considered as a “rite of passage” into the big league of publicly traded stocks. Any company that needs to be listed on a stock exchange has to offer its shares to the public. In addition to IPO, an already listed and publicly traded company may issue an FPO – a Follow on Public Offer – to raise further capital for the company. At any given time, there are a number of IPO and FPO issues floating around in the market, therefore, it is essential to understand the difference between the two. Shares issued in an IPO are bought in the primary market, while shares brought from another investor are exchanged in the secondary market. The distinct between primary and secondary market is notional, there is no physical separation between the two. An important distinction between shares purchased during an IPO and shares purchased from the secondary market is that while in case of an IPO, the money goes directly into the company coffers; in case of secondary market, the money is transferred from one investor to another. IPO Lifecycle Stages The issuance of an IPO is a process with distinctive stages. the life cycle of an IPO can be understood to be spread over these steps or stages. The various stages in the life cycle of an Initial Public Offering are as follows
Initialization – In this stage, the company appoints various entities that are crucial in the management of the IPO. these entities include the issue managers or book runners (mostly investment banks) and registrars to the issue.
Pre Issue Activities – In this stage, the draft offer prospectus is prepared and submitted to SEBI. The lead manager may conduct road showswhich are basically marketing activities- to generate awareness about the issue.
it becomes the „Red Herring Prospectus‟.
Listing in the Stock Exchange – Once the date of listing is decided.
. This stage can be considered to be the “public face” of the IPO. checks are processed. and inform the stock exchange and SEBI. When the date of issue and the price band (and not the exact price) is decided and incorporated into the offer prospectus. the lead managers decide the final issue price. wherein the forms are collected. share allotment is completed.
Distribution of Red Herring Prospectus and IPO Forms – The prospectus and the forms are distributed to retail investors through the syndicate members.
Price Fixing – Once all the bids are collected.
Processing of IPO Applications by Registrar – This is the „clerical‟ stage.
Prospectus Review – SEBI reviews the prospectus submitted to it. Once the draft is approved by SEBI. and any changes and revisions suggested by SEBI are incorporated at this stage. the shares of the issuer company are listed on the stock exchange. The public issue closes at a predetermined date. shares are transferred to the demat accounts and any excess money is refunded. the issue is thrown open to the public and the bids are collected.
Public Issue – In this stage. it is termed as the Offer Prospectus
Submit Prospectus to Stock Exchange – The offer prospectus is now submitted to relevant stock exchange for approval.
stock exchanges facilitate the trading of shares for the general public. Once a stock is listed on an exchange. In a stock exchange the existing shareholders sell their shares to anyone who is willing to buy them at a price agreeable to both parties. it is by a process called the initial public offering (IPO). After the offer price is fixed. the company evaluates all the bids and decides on an offer price in that range.
. Once the bids come in. where the offer price is placed in a band or a range with the highest and the lowest value (refer to the newspaper clipping on the page). Individuals cannot buy or sell shares in a stock exchange directly. people can start trading in its shares. Secondary market is term used for stock exchanges. they have to execute their transaction through authorized members of the stock exchange who are also called STOCK BROKERS. Most IPO‟S these days do not have a fixed offer price.Primary and Secondary markets In the primary market securities are issued to the public and the proceeds go to the issuing company. SECONDRY MARKET
Once the offer price is fixed and the shares are issued to the people. In an IPO the company offloads a certain percentage of its total shares to the public at a certain price. Instead they follow a method called BOOK BUILDIN PROCESS. where stocks are bought and sold after they are issued to the public. PRIMARY MARKET The first time that a company‟s shares are issued to the public. The public can bid for the shares at any price in the band specified. the company allots its shares to the people who had applied for its shares or returns them their money.
Going public raises cash and usually a lot of it. It involves the offering of part ownership of the company to the public through the sale of debt or more commonly. equity securities (stock). Being publicly traded also opens many financial doors:
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.Why Go Public? Basically. going public (or participating in an "initial public offering" or IPO) is the process in which a business owned by one or several individuals is converted into a business owned by many.
It's all about the sales job. Founded on venture capital funding. but most of these firms had never made a profit and didn't plan on being profitable any time soon. As long as there is market demand. Thus. This makes it possible to implement things like employee stock ownership plans. a public company can always issue more stock. implying that there's no desire to stick around and create value for shareholders. IPOs were done by smaller start-ups seeking to expand their businesses. public companies can usually get better rates when they issue debt. Being on a major stock exchange carries a considerable amount of prestige. Instead. mergers and acquisitions are easier to do because stock can be issued as part of the deal. How can this happen? Remember: an IPO is just selling stock. Because of the increased scrutiny. companies might be suspected of doing an IPO just to make the founders rich. Firms no longer needed strong financials and a solid history to go public. you can raise a lot of money. This is known as an exit strategy. There's nothing wrong with wanting to expand. In cases like this. which help to attract top talent.
. they spent like Texans trying to generate enough excitement to make it to the market before burning through all their cash. Trading in the open markets means liquidity. In the past. The internet boom changed all this. If you can convince people to buy stock in your company. only private companies with strong fundamentals could qualify for an IPO and it wasn't easy to get listed. The IPO then becomes the end of the road rather than the beginning.
Items usually discussed include the amount of money a company will raise.it's just the way Wall Street works. Once the SEC approves the offering. This document contains information about the offering as well as company info such as financial statements. Credit Suisse First Boston. The company and the investment bank will first meet to negotiate the deal. You can think of underwriters as middlemen between companies and the investing public. Underwriting is the process of raising money by either debt or equity (in this case we are referring to equity). the underwriter guarantees that a certain amount will be raised by buying the entire offer and then reselling to the public. any legal problems. which aren't known at that time. With the red herring in hand. A company could theoretically sell its shares on its own. The SEC then requires a cooling off period. the type of securities to be issued and all the details in the underwriting agreement. the underwriter sells securities for the company but doesn't guarantee the amount raised. Also. investment banks are hesitant to shoulder all the risk of an offering. a process known as underwriting. The biggest underwriters are Goldman Sachs. where the money is to be used and insider holdings. the investment bank puts together a registration statement to be filed with the SEC. To understand why. the first thing it does is hire an investment bank. Merrill Lynch. During the cooling off period the underwriter puts together what is known as the red herring. For example. if not impossible. but realistically. Lehman Brothers and Morgan Stanley. we need to know how an IPO is done.
.also known as the "dog and pony show" where the big institutional investors are courted. in which they investigate and make sure all material information has been disclosed. however. Instead. management background.Getting In On an IPO
The Underwriting Process
Getting a piece of a hot IPO is very difficult. When a company wants to go public. they form a syndicate of underwriters. a date (the effective date) is set when the stock will be offered to the public. In a best efforts agreement. Once all sides agree to a deal. in a firm commitment. They go on a road show . One underwriter leads the syndicate and the others sell a part of the issue. The deal can be structured in a variety of ways. the underwriter and company attempt to hype and build up interest for the issue. an investment bank is required . This is an initial prospectus containing all the information about the company except for the offer price and the effective date.
You may have noticed that individual investors aren't involved until the very end. most importantly. they'll usually pad the pockets of their favorite institutional client with shares at the IPO price. The purpose of this memorandum is to provide a thumbnail sketch of the process. it's in both parties' interest to get as much as possible. Just keep in mind that the probability isn't high if you are a small investor.
Bottom line. There are several advantages and disadvantages to being a public company. Granted. Of course. If you do get shares. The only way for you to get shares (known as an IPO allocation) is to have an account with one of the investment banks that is part of the underwriting syndicate. it's probably because nobody else wants them. the road to an IPO is a long and complicated one. This isn't an easy decision: it depends on the company.000 and be showered with an allocation. But don't expect to open an account with $1. The reader should understand that the process is very time consuming and complicated and companies should undertake this process only after serious consideration of the advantages and disadvantages and discussions with qualified advisors. Finally. the underwriter and company sit down and decide on the price. current market conditions.As the effective date approaches. there are exceptions to every rule and it would be incorrect for us to say that it's impossible. hold little interest for the underwriters. You need to be a frequently trading client with a large account to get in on a hot IPO.
IPO – ADVANTAGES AND DISADVANTAGES
The decision to take a company public in the form of an initial public offering (IPO) should not be considered lightly. therefore. the securities are sold on the stock market and the money is collected from investors. This is because small investors aren't the target market.
. As you can see. If underwriters think an IPO will be successful. They don't have the cash and. This memorandum will discuss the advantages and disadvantages of conducting an IPO and will briefly discuss the steps to be taken to register an offering for sale to the public. the success of the road show and. your chances of getting early shares in an IPO are slim to none unless you're on the inside. which should thoroughly be considered.
Public companies are able to have access to larger pools of capital as well as different types of capital. These shares now have an ascertainable price and after any lockup period these shares may be sold to the public. and expanding plant and equipment. it also provides investors in the company the option to trade their shares thus enhancing investor confidence. this enables them to obtain a larger market for their goods or services. Moreover. Liquidity Once shares of a company are traded on a public exchange. marketing. This allows a company to attract and retain employees by offering stock incentive packages to those employees. Prior to the IPO these shares were illiquid and had a more subjective price. subject to limitations of federal and state securities laws. those shares have a market value and can be resold. acquisitions. Increased wealth The founders of the company often have the sense of increased wealth as a result of the IPO. Increased Prestige Public companies often are better known and more visible than private companies. research and development. It also allows the shareholders to know the value of the shares.Advantages of going public Increased Capital A public offering will allow a company to raise capital to use for various corporate purposes such as working capital. Valuation Public trading of a company's shares sets a value for the company that is set by the public market and not through more subjective standards set by a private valuator.
. This is helpful for a company that is looking for a merger or acquisition.
transactions with parties related to the company. Due to the time and expense of preparation of the IPO. In addition. Once a company is a reporting company it must provide information regarding compensation of senior management. These statements must also contain updated information regarding nonfinancial matters similar to information provided in the initial registration statement. In addition. This usually entails retaining lawyers and auditors to prepare these quarterly and annual statements.Disadvantages of going Public Time and Expense Conducting an IPO is time consuming and expensive. a company will be required to make financial disclosures required by the Securities and Exchange Act of 1934. conflicts of interest. once the offering statement is effective.
Disclosure The SEC disclosure rules are very extensive. material contracts. many companies simply cannot afford the time or spare the expense of preparing the IPO. Regulatory Review
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. how the company intends to develop future products. and competitors.
Decisions based upon Stock Price Management's decisions may be effected by the market price of the shares and the feeling that they must get market recognition for the company's stock. and printers. and lawsuits. competitive positions. the underwriter's fees can range from 3% to 10% of the value of the offering. In addition. The 1934 Act requires public companies to file quarterly statements containing unaudited financial statements and audited financial statements annually. A successful IPO can take up to a year or more to complete and a company can expect to spend several hundreds of thousands of dollars on attorneys. accountants. employees. a company must report certain material events as they arise. This information is available to investors.
decreased valuation of the company may effect lines of credits. The issuer discloses the addresses.
Who is eligible to be a BRLM?
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. Registrars to the issue. Falling Stock Price If the shares of the company's stock fall. etc. secondary offering pricing. In addition to this. if it decides that it would like to conduct an IPO it will have to retain a lead
Understanding the role of intermediaries
Who are the intermediaries in an issue? Merchant Bankers to the issue or Book Running Lead Managers (BRLM). are the intermediaries to an issue. Underwriters to the issue. and the personal wealth of insiders and investors. the company may lose market confidence. the issuer also discloses the details of the compliance officer appointed by the company for the purpose of the issue. Auditors of the company. syndicate members. the company may become a target for a takeover. telephone/fax numbers and email addresses of these intermediaries.The Company will be open to review by the SEC to ensure that the company is making the appropriate filings with all relevant disclosures. the company's ability to maintain employees. A takeover bid may be the result of shareholders being upset with management or corporate raiders looking for an opportunity. Solicitors. Once a company has weighed the advantages and disadvantages of being a public company. Vulnerability If a large portion of the company's shares are sold to the public. Bankers to the issue. causing insiders to lose control. Defending a hostile bid can be both expensive and time consuming.
A Merchant banker possessing a valid SEBI registration in accordance with the SEBI (Merchant Bankers) Regulations. The Lead manager co-ordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank
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. Printers. intimation of allocation and dispatch of refunds to bidders etc are performed by the LM. The LM also draws up the various marketing strategies for the issue.
What is the role of a registrar? The Registrar finalizes the list of eligible allottees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of refund orders to those applicable are sent. co-ordinate non-institutional allocation. Advertising Agency and Bankers to the Offer is also included in the pre-issue processes. Prospectus. The post issue activities including management of escrow accounts. with the various agencies connected with the work such as the Registrar(s) to the Offer and Bankers to the Offer and the bank handling refund business. statutory advertisements and memorandum containing salient features of the Prospectus. The BRLMs shall ensure compliance with stipulated requirements and completion of prescribed formalities with the Stock Exchanges. The merchant banker shall be responsible for ensuring that these agencies fulfill their functions and enable it to discharge this responsibility through suitable agreements with the Company. Appointment of other intermediaries viz. the Lead Manager (LM) takes up the due diligence of company‟s operations/ management/ business plans/ legal etc. Other activities of the LM include drafting and design of Offer documents.
What is the role of a Lead Manager? (pre and post issue) In the pre-issue process. Registrar(s). The post Offer activities for the Offer will involve essential follow-up steps. RoC and SEBI including finalization of Prospectus and RoC filing.. 1992 is eligible to act as a Book Running Lead Manager to an issue. which include the finalization of trading and dealing of instruments and dispatch of certificates and demat of delivery of shares.
other agencies.branches. patent disputes. projected profitability.
Question on Due diligence
The Lead Managers state that they have examined various documents including those relating to litigation like commercial disputes. as the name suggests. based on the correct figures. and other materials in connection with the finalization of the offer document pertaining to the said issue. disputes with collaborators etc. and on the basis of such examination and the discussions with the Company.
What is the role of bankers to the issue? Bankers to the issue. processing of the applications and other matters till the basis of allotment is finalized. The LM also ensures follow-up with bankers to the issue to get quick estimates of collection and advising the issuer about closure of the issue. It requires detailed discussions on information pertaining to:
Business product/service/markets Company Information Risk Factors
. etc. its Directors and other officers. carries out all the activities of ensuring that the funds are collected and transferred to the Escrow accounts. price justification. they state that they have ensured that they are in compliance with SEBI. the Government and any other competent authority in this behalf. The Lead Merchant Banker shall ensure that Bankers to the Issue are appointed in all the mandatory collection centers as specified in DIP Guidelines. dispatch security certificates and refund orders completed and securities listed. independent verification of the statements concerning the objects of the issue..
What is the Registration Process?
Going public requires a Registration Statement which is a carefully crafted document that is prepared by your attorneys and accountants.
When this process is completed. you‟ll receive your money. Then it's simple. it is submitted to the Securities and Exchange Commission and various other regulatory bodies for their detailed review.
Proceeds Use (How are you going to use the money) Officers and Directors Related party transactions Identification of your principal shareholders Audited financials
After your registration statement is prepared. your teams and the public investors stock. all you have to do is make a lot more money with the proceeds so as to increase the value of your. This is the second such incident. CASE The modus operandi adopted in manipulating the YES Bank Ltd (YBL)'s initial public offering (IPO) allotment involved opening of over 7. you and your management team will do a "road show" to present your company to the stock brokers who will then sell your stock to the public investors. SEBI unearths another IPO scam in IDFC SEBI on Thursday 12th Jan 06 unearthed yet another abuse of IPO norms in the IDFC's initial public offering (IPO) where a few investors opened over 14. after a similar such violations were detected in the YES Bank's IPO. 2 others fined
YES BANK Ltd. Assuming they can successfully sell your issue.500 benami dematerialised accounts.000 dematerialised accounts to corner large number of shares of the company.
IPO scam: HDFC Bank.
Prompt reporting of cash and suspicious transactions to Principal Officer by branches An effective audit machinery
. While scams may still happen despite best of preventive measures.Rs 10 lakh and IDBI Ltd Rs 5 lakh. non-face to face transactions. Documentation procedure for opening of all types of customer accounts. group companies. It is going to be a long fight with constant need to improve and innovate new strategies. Clarity in understanding of risk classification of accounts and proper customer profiling Ongoing monitoring of medium and high risk accounts Enhanced due diligence in respect of accounts with beneficial ownership.g.The Reserve Bank of India on 27th Feb 2006 fined HDFC Bank. It is important to understand that the risks banks run as a result of noncompliance with regulatory and statutory guidelines can cause severe reputational and financial damage to individual banks and the Indian banking system as a whole Need for comprehensive operational framework implementing important aspects of KYC instructions e. HDFC Bank has been slapped with the highest penalty of Rs 25 lakh. it should not undermine the efforts being made to insulate the financial sector from money laundering. It also raises serious concerns about the integrity of the systems & systemic risks. IDBI and ING Vysya Bank for violation of Know Your Customer norms and other irregularities in relation to the recent IPO scam. high risk businesses and wire transfers etc. Measures to prevent scams An analysis of IPO scam clearly brings out the laxity on the part of banks to scrupulously implement the KYC/AML guidelines issued from time to time. ING Vysya Bank .
Due diligence should be taken when investment is done. On the other hand the customers should do a proper study while applying for shares in an IPO. Good understanding of regulatory and statutory prescriptions in letter and spirit Clear demarcation of duties and responsibilities Violations to be dealt with sternly
When going for an IPO the company should consider the prevailing economic conditions and the market sentiments.