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Before 1992, Public issues were governed by Chief Controller of Capital Issues (CCCI). In 1992, CCCI has been abolished and SEBI has been formed.
Now IPO is governed by Followings: The Companies Act 1956 SEBI (Disclosure & Investor Protection) Guidelines, 2000 Securities Contracts (Regulation) Act, 1956 Listing norms/Guidelines of NSE/BSE
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IPO- ELIGIBILITY
Issue of Equity share or other securities to be converted into equity on later date by an unlisted company: A. Companies having track record must fulfill following conditions: Net tangible assets of at least Rs.3.00 Crore in each of preceding 3 full year (Full 12 months each) of which not more than 50% is held in monetary assets; if excess, than the company must have firm commitment to deploy such excess monetary assets in business or project.- Clause 2.2.1(a) Company must have track record of distributable profits for at least 3 years out of immediately preceding 5 years. - Clause 2.2.1(b)
Company must have net worth of Rs.1 Crore in preceding 3 years (full 12 months each). - Clause 2.2.1(c)
If name of the Company has been changed in last 1 year, 50% income of the Company must be earned from the activity suggested by new name. Clause 2.2.1(d) Aggregate of proposed issue & all previous issues made during that financial year does not exceed to 5 times to its pre issue net worth as per the last audited balance sheet. Clause 2.2.1(e)
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B. Companies not fulfilling conditions specified in Clause 2.2.1, have to fulfill following conditions: (i) Issue through book building process with at least 50% of net offer to public to be issued to QIB. Or Project has been appraised & at least 15% participation by FI/Sched. Commercial banks, of which at least 10% from appraiser & at least 10% of issue size from QIBs. Minimum post issue face value of capital Rs.10.00 Crore. Or Compulsory market making for at least 2 years from the date of listing subject to following: Market maker undertake to offer buy & sell quotes for a minimum depth of 300 shares. To ensure bid ask spread for their quotes shall not exceed at any time 10%. Inventory of market maker on each stock exchange shall be at least of 5% of the proposed issue.
(ii)
In case of partnership firms are converted into Company, track record for distributable profit shall be considered, if the accounts are revised in the format prescribed as per companies Act and conforming all accounting standards.
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PRICING
Companies are free to price its share or security to be converted into shares at a later date are: Listed companies for its Public/right issue Unlisted companies Infrastructure Companies IPO by Banks (Subject to approval of RBI).
DIFFERENTIAL PRICING: Unlisted Company : Firm allotment may be made on higher price than the price officer to Public. If equity shares or securities convertible into shares are issued to retail individual investor/retail individual share holder, the same can be issued at lower price than to other categories. The difference shall not exceed 10%. Listed Company: Differential price may be charged in composite issue of public and right offer. Justification of differential price in the offer document. PRICE BAND: For Fixed price issues, there may be price band of 20% at the time of filing offer documents with SEBI. Price shall be freezed in the final offer documents and before filing it to ROC. DENOMINATION OF SHARE: If issue price is more than Rs.500/- any face value denomination not less Re. 1/- and not in decimal. If Issue price is less than Rs.500/-, face value shall be Rs.10/Only one denomination at a given time. FACTORS DETERMINING PRICE: Financials of the Company Net worth, EPS, profit margin. Industry P/E Ratio. Standing of the Company in the relevant industry Future prospect of the Industry as well as the Company Background of the promoters.
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PROMOTERS CONTRIBUTION
In case of : Unlisted Companies: 20% of post issue capital For Offer for Sale : 20% of post issue capital Listed Companies: 20% of proposed issue or 20% of post issue capital Composite issue: 20% of proposed issue or 20% of post issue capital (Right issue component shall be excluded from Post Issue Capital) . SECURITIES ELIGIBLE FOR PROMOTORS CONTRIBUTION: Except following, all securities are eligible to form part of promoters contribution, if brought in by promoters: a. Issue of any share with in preceding 3 years out of revaluation of assets or capitalization of intangible assets. b. Resulting from Bonus issue out of revaluation reserves or reserves without cash generation or against the shares which are not eligible to form part of promoters contribution. c. Any securities acquired by promoters within one year at a price lower than the offer price. (whether issued to acquired by promoters otherwise) (If difference of the same has been brought out before opening of issue, than eligible). d. Funds brought in with in one year, in case of companies converted from partnership firm and shares allotted at lower price than offer price. (If partners capital existed on continuous basis since more than one year, than eligible) e. Application less than Rs.25000/- in case of individual and Rs.100000/- in case of firm or body corporate. f. Any private placement made by solicitation of subscription from unrelated person directly or through intermediary. g. Contributors who have not given their specific consent for promoters contribution and lock in period. h. Pledged securities held by promoters. Promoters contribution to be brought in before opening of Issue.
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LOCK IN PERIOD
In case of IPO, the locking period is as under:
Promoters contribution equal to 20% - start from date of allotment & end after 3 years from the date of allotment or date of commencement of commercial production, whichever is later. Promoters contribution in excess of 20% - 1 year Pre issue share capital: In excess of promoters contribution equal to 20%, for 1 year.
Basis of Lock in Last allotted share locked in first Omitted since 29.11.07.
Lock in of firm allotment security: For one year Inter se transfer amongst promoter permissible.
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B.
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In case of Book Building issue, Allotment shall be made not later than 15 days from the closure of the issue failing which interest at the rate of 15% shall be paid to the investors.
Trading Permission As per SEBI Guidelines, the issuer company should complete the formalities for trading at all the Stock Exchanges where the securities are to be listed within 7 working days of finalization of Basis of Allotment. A company should scrupulously adhere to the time limit for allotment of all securities and dispatch of Allotment Letters/Share Certificates and Refund Orders and for obtaining the listing permissions of all the Exchanges whose names are stated in its prospectus or offer documents. In the event of listing permission to a company being denied by any Stock Exchange where it had applied for listing of its securities, it cannot proceed with the allotment of shares. However, the company may file an appeal before the Securities and Exchange Board of India under Section 22 of the Securities Contracts (Regulation) Act, 1956.
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BOOK BUILDING
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 certain evaluation criteria. 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 3 days and maximum for 10 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 number 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.
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BOOK BUILDING
Guidelines for Book Building Rules governing book building is covered in Chapter XI of the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines 2000. Book building is a process by which demand of securities which are being offered, is elicited and price is determined. BSE's Book Building System 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 leased 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.
Initial Public Offerings Corporates may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. This Initial Public Offering can be made through the fixed price method, book building method or a combination of both.
In case the issuer chooses to issue securities through the book building route then as per SEBI guidelines, an issuer company can issue securities in the following manner: 100% of the net offer to the public through the book building route. 75% of the net offer to the public through the book building process and 25% through the fixed price portion.
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CONTENTS OF PROSPECTUS
Definitions & Abbreviations Risk Factors & Proposals to address the risks thereof Highlights PART I I. General information II. Capital structure of the company III. Terms of the present issue IV. Particulars of the issue V. Description of industry and business VI. Company, management and project VII. Management discussion and analysis of the financial condition and results of the operations as reflected in the financial statements. VIII. Financial of group companies IX. Basis for issue price X. Outstanding litigations or defaults XI. Risk factors and Proposals to address the risks on the same, if any PART II I. General information II. Financial information III. Statutory and other information PART III Declaration
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Application supported by Blocked Amount (ASBA) : Application for subscribing an issue with an authorization to block the amount in Bank account
ASBA Investor : an investor who is oa residential retail investor onot applying under any reservation, obidding on cut off price with single option and not revising his bid and oapplying through SCSB banks.
Self Certified Syndicate Bank (SCSB): Banker to the issue registered with SEBI, which offers the services of making ASBA.
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