Requirements for a First Time Issuer

of Securities – IPO Requirements

October 31, 2008

Agenda

• Fund Raising Options

• Fund Raising History – India
• Why IPO?
• Eligibility Criteria under SEBI DIP and BSE Regulations
• Minimum Public Shareholding
• Minimum Promoters Contribution and Lock-in
• Pricing
• Issue Structure – Book Building
• Corporate Governance Requirements
• Disclosures in the Offer Document
• Special Dispensation to PSUs
• Intermediaries involved and their Roles
• Process and Timeline

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 Options for Raising Funds

Fund Raising Options

Debt Equity Hybrid

From Banks & FIs IPO

Various forms of
Convertibles
FPO
In India
Public issue of
Rights Issue
Bonds/Debentures
Pref. Issue

outside India ECB ADR/GDR FCCB & FCEB

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 Fund Raising History – India

Capital Market Issues

45,000

40,000
35,000
30,000
25,000
20,000

15,000
10,000
5,000
0
FY-2004 FY-2005 FY-2006 FY-2007 FY-2008
Total Funds Rs. 18,812 cr Rs. 24,707 cr Rs. 27,477 cr Rs. 32,950 cr Rs. 104,937 cr
Raised
IPO FPO Rights Issue QIP
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Why IPO??
For Funding Needs
• Funding Capital Requirements for Organic Growth
– Expansion through Greenfield or Brownfield or De-bottle Necking Projects
– Diversification
• Funding Inorganic Growth through Acquisitions
• Funding Global Requirements
• Funding Joint Venture and Collaborations needs
• Funding Infrastructure Requirements, Marketing Initiatives and Distribution Channels
• Financing Working Capital Requirements
• Funding General Corporate Purposes
• Investing in businesses through other companies
• Repaying debt to strengthen the Balance Sheet
• Meeting Issue Expenses

For Non-funding Needs

• Enhancing Corporate Stature
• Retention and incentive for Employees through stock options
• Providing Investors exit options
• Provide liquidity to the shareholders

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IPO Requirements

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Exemptions
• A banking company
including a local area bank
set up under the Banking
Regulation Act, 1949
• A corresponding new bank
set up under the Banking
Companies Act, 1970
• An infrastructure company:
– Whose project has been
appraised by a public
financial institution (PFI)
– Not less then 5% of the
project cost is financed by
any of the PFI
• Rights issue by a listed
company
Eligibility Criteria for Unlisted Companies - SEBI
Primary Criteria
Companies with track record Companies without track record
• Track record of distributable profits for 3 out of the • 50% of the net offer to • In case of project
immediately preceding 5 years public being allotted to funding, 15%
• Pre-issue net worth of not less than Rs. 1 Crore in QIBs participation by Financial
each of the preceding 3 full years Institutions / Scheduled
Commercial Banks
• Net tangible assets of atleast Rs. 3 Crores for each of
– 10% of this must come
the preceding 3 full years
from appraiser
– Not more than 50% of these to be held in the form of – 10% of issue size to
monetary assets be allotted to QIBs
• (Proposed IPO + Previous Issues in the same financial
year) < 5 times the pre-issue net worth + +
• In case the company has changed its name within the • Minimum post-issue face • Minimum post-issue face
value capital must be Rs. value capital must be Rs.
last one year, atleast 50% of the revenue for the
preceding 1 full year is earned by the company from 10 Crores 10 Crores
the activity suggested by the new name OR OR
• Prospective allottees in the IPO should not be less • Compulsory market • Compulsory market
than 1000 in number making for at least 2 making for at least 2
years from the date of years from the date of
listing of shares listing of shares
Choice of Route: Fixed Price or Choice of Route: Book Choice of Route: Fixed
Book Building Building Price or Book Building
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Eligibility Criteria For IPO – Stock Exchange (BSE)
BSE Eligibility Criteria
Large Companies
• The minimum post-issue paid-up capital of
the applicant company (hereinafter referred
to as "the Company") shall be Rs. 3 crore;
and
• The minimum issue size shall be Rs. 10
crore; and
• The minimum market capitalization of the
Company shall be Rs. 25 crore (market
capitalization shall be calculated by
multiplying the post-issue paid-up number of
equity shares with the issue price).
Small Companies
• The minimum post-issue paid-up capital of
the applicant company (hereinafter referred
to as "the Company") shall be Rs. 3 crore;
and
• The minimum issue size shall be Rs. 3 crore;
and
• The minimum market capitalization of the
Company shall be Rs. 5 crore (market
capitalization shall be calculated by
multiplying the post-issue paid-up number of
equity shares with the issue price).
• The minimum income/turnover of the
Company shall be Rs. 3 crore in each of the
preceding three 12 – months period; and
• The minimum number of public shareholders
after the issue shall be 1000
• A due diligence study may be conducted by
an independent team of CAs or Merchant
Bankers appointed by BSE.
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 Minimum Public Shareholding
‘Promoter’ includes:
• The person or persons who are
in over-all control of the Clause 40A of the Listing Agreement
company;
• The person or persons who are
• At least 25% of the post issue paid up capital with the public (ie. other than promoter and promoter group)
instrumental in the formulation
of a plan or programme
pursuant to which the securities Exceptions under Rule 19(2)(b) of SCRR
are offered to the public;
• As per rule 19(2)(b), a minimum of 25% of each class of security must be offered to the public for subscription
• The persons or persons named
in the prospectus as • However, at least 10% can be offered if the following 3 conditions are fulfilled:
promoters(s). – Minimum 2 MM securities (excluding reservations, firm allotment & promoter contribution) to be offered to
Promoter Group the public
• Defined under clause 6.8.3.2 of
– Minimum offer size – Rs. 100 crores
SEBI DIP
Public – Issuance through book building with 60% QIB allocation
• Implies all investors other than
Promoter and Promoter Group
Continuous fulfillment of minimum shareholding criteria

In case of PSUs, the

Promoter is Government of
India (represented by
President of India).
SEBI has granted exemption
on issue structure from Rule
19(2)(b) on case to case
basis
• Continuous public shareholding needs to be maintained as per Clause 40A of the listing agreement since listing
Exemption
• The aforesaid requirement of maintaining minimum level of public shareholding on a continuous basis will not
be applicable to government companies (as defined under Section 617 of the Companies Act, 1956),
infrastructure companies (as defined under clause 1.2.1(xv) of the SEBI (DIP) Guidelines, 2000) and companies
referred to the Board for Industrial and Financial Reconstruction.

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 Government Cos & Infrastructure Cos

Section 617 of the Companies Act, 1956

Government company, means any company in which not less than fifty one per cent of the
paid-up share capital is held by the Central Government, or by any State Government or
Government
Governments, or partly by the Central Government and partly by one or more State
Companies
Governments, and includes a company which is a subsidiary of a Government company
as thus defined.

Clause 1.2.1(xv) of the SEBI (DIP) Guidelines, 2000

Infrastructure “Infrastructure Company” means, a company wholly engaged in the business of
Companies developing, maintaining and operating infrastructure facility.

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 Minimum Promoters Contribution and Lock-in

• Minimum of 20% of the post issue capital of the Company for unlisted companies; for listed
companies, either to extent of 20% in issue or to ensure post issue holding of 20%
Promoter’s • Following shares are ineligible for the computation of Promoter’s contribution
Contribution – Issued in last one year at a price lower than issue price, unless topped up
– Issued in last three years out of bonus issue or revaluation reserve for consideration other
than cash

• For Promoters:
– Lock-in for a period of 3 years from the date of allotment or from the date of commencement
of commercial production, whichever is later
Lock-in period • Balance pre-issue capital, other than held by Indian and Foreign Venture Funds (registered
with SEBI) and shares held for at least one year and being offered for sale in the issue
– Must be locked-in for a period of 1 year from the date of allotment
– Shares issued last will be locked-in first

• In case of public issue of securities by a company which has been listed on a stock exchange
for at least 3 years and has a track record of dividend payment for at least 3 immediately
Exemption preceding years.
• In case of companies where no identifiable promoter or promoter group exists.
• In case of rights issues.

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Pricing

• SEBI allows free pricing of equity shares in an IPO

– Approval of RBI might be required for public issues by banks

• Differential pricing is permissible in a public issue to retail individual investors and retail
individual shareholders
– Retail investors can be offered shares at a discount to the price offered to other investor
categories (Max discount can be 10%)

• Price Band: The cap price can be 20% more than the floor price. Price band can be revised by
20% from the floor price.

• No payment of commission by the promoter or issuer company to the public

• If the issue price is above Rs.500 then the issuer can fix the FV of shares below Rs.10 but a
minimum of Rs.1.

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Issue Structure – Book Building

Dilution = 25% Dilution = 10% to 25%

Of the Net Offer to Public Of the Net Offer to Public
• Maximum 50% to QIBs • At least 60% to QIBs
• At least 15% to HNIs • Maximum 10% to HNIs
• At least 35% to retail • Maximum 30% to retail

Net Offer to Public

• Net offer to the public shall mean the offer made to Indian public and does not include
reservations/ firm allotments/ promoters’ contribution.

Reservations

Reservations / Firm Allotment shall not be made to categories other than:

• ‘Permanent employees of the issuer company and in the case of a new company the permanent
employees of the promoting companies';
• ‘Shareholders of the promoting companies in the case of a new company and shareholders of
group companies in the case of an existing company’ either on a ‘competitive basis’ or on a ‘firm
allotment basis’.
• Persons who, on the date of filing of the draft offer document with the Board, have business
association, as depositors, bondholders and subscribers to services, with the issuer making an
initial public offering,

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 Corporate Governance Requirements

• Optimum number of executive and non executive directors with at least 50% being non-executive. If
Composition the chairman, has executive powers then 50% of Board comprises of Independent directors. While if
of the Board chairman has non-executive powers then 1/3 of the Board comprises of Independent directors.

• Mandatory constitution of Audit Committee with minimum three directors and headed by an
Audit Independent director.
Committee • All members shall be financially literate (should be able to understand financial statements) and at
least one member should have accounting and financial management expertise.

• Shareholder/Investor Grievances Committee to be formed under the chairmanship of a non

Investor
executive director to look into the redressing of shareholder and investor complaints like transfer of
Committee
shares, non-receipt of balance sheet, non-receipt of declared dividends

• At least one director on the Board of the holding company shall be a director on the Board of a
material non listed Indian subsidiary Company
Subsidiary - Material non-listed subsidiary means a subsidiary whose turnover or net worth exceeds 20% of
Company the consolidated turnover or net worth in the preceding accounting year
• Audit committee of the listed holding company shall also review the financial statements, in
particular, the investments by the unlisted subsidiary Company

Report on • A separate section on Corporate Governance to be included in the Annual Reports with disclosures
Corp. on compliance of mandatory and non-mandatory requirements
Governance • Submission of quarterly compliance report to the stock exchanges

CEO/CFO • CEO/CFO to certify the financial statements and cash flow statements
Certification

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 Disclosures in the Offer Document

• Shareholding Pattern (pre-issue and post-issue)

• Securities Premium Account (pre-issue and post-issue)
Capital Structure
• Holding of the promoter and promoter group
• Disclosure about ESOPs if any

• Total requirements of funds

• Means of Financing
Objects of the – Undertaking by the issuer company confirming firm arrangements of finance through
Issue verifiable means towards 75% of the stated means of finance (excluding proposed IPO)
• Details about the appraisal of the project
• Interim use of funds

• Description about the Industry in which the Company operates

Business
• Detailed description about the business of the Company

• Risks related to the Company

Risk Factors
• External Risk Factors

Company • Details about the Board of Directors and various committees

Management • Details about key management persons

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 Disclosures in the Offer Document (Cont’d)

• Auditors Report to have five year restated financials for the

– Issuer Company, and
– All Subsidiaries of the Issuer Company or Consolidated Financials of the Issuer Company
Financial
• Audited financials presented should not be more than six months old at the time of filing DRHP
Disclosures
with SEBI and must be updated to be not more than six months old on the date of filing the
prospectus with the ROC
• All financials should be presented based on Indian GAAP

• Detailed discussion on performance for the past 3 years

MD&A • Capital Expenditure
• Cash Flow and Liquidity

• All pending litigations in which the Company/Promoters / Promoter Group / Directors / Group
companies are involved.
– Both, litigations filed by or against the Company/Promoters / Promoter Group / Directors /
Group companies
Litigations and • Outstanding litigations, defaults, etc., pertaining to matters likely to affect operations and
Defaults finances of the company.
• The pending proceedings initiated for economic offences against the directors, the promoters,
companies and firms promoted by the promoters indicating their present status.

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 Special dispensation to PSU - Precedents
Only restated Audited
Financial Statements
needs to be disclosed in
Disclosures
the DRHP. However, SEBI Particulars Remarks
REC PFC Power Grid OIL India#
has granted exemption on
Government of India, represented
case to case basis to PSU by the President of India disclosed
Banks whereby, even Promoter Yes Yes Yes Yes
as promoter with no additional
limited review figures details
were disclosed in DRHP, No promoter group companies
so as to comply with the Promoter group disclosed. However, the
criteria of financial No No No No
companies disclosures w.r.t Subsidiaries need
statements being not to be made
more than six months old.
Corporate
Clause 49 of the listing agreement Yes Yes Yes Yes
governance

Compliance with rule 19(2)(b) of

Issue structure Yes No* No* Yes
SCRR

* Obtained relaxation from SEBI and issue structure is 50% to QIB, 15% to HNI and 35% Retail
# Based on DRHP filed with SEBI

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 Special dispensation to PSU

• SEBI guidelines do not

allow limited review or
unaudited numbers in
prospectus
– Limited review allowed
– Disclosure of promoter
and promoter group
• Need to comply with
– Corporate governance
norms
– Promoter’s contribution
and lock-in
• Has 2689 branches + subsidiaries in India (BOB Caps, BOB
Cards, BOB AMC) + foreign subsidiaries
Bank of • Limited Review for June 2005 numbers allowed. Limited Review
Baroda done for only select (around 20 branches) by auditors and rest
were relied on by auditors. Limited review of foreign subsidiary for
June 2005 allowed.
• Promoter is president of India
NTPC • Relaxation in disclosure of promoter and promoter group in
offer document

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Intermediaries Involved

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 Intermediaries and their Roles
• Overall Co-ordination
• Conduct due diligence and finalize disclosure in Offer Document
Lead Managers
• Assist the legal counsel in drafting of Offer Document
• Interface / ensure compliance protocol with SEBI / NSE / BSE

• Legal Due Diligence

Domestic & • Drafting the offer document
International Legal
• Guidance on any other incidental legal matters
Counsels
• Assistance in complying with requirement for selling in international geographies

• Acting as collecting agents

Bankers
• Escrow Account & Refund account

Self Certified Syndicate • Acting as collecting agents for ASBA (Application Supported by Block Amount) process
Bank (SCSB)

• Co-ordination with the Issuer and Bankers regarding collections, reconciliation, refunds etc
Registrars • Securing allocation approval from Stock Exchanges
• Post issue co-ordination collation and reconciliation of information

• Reviewing and auditing financials and preparing financial statements for inclusion in the Offer Document
Auditors
• Verify/audit various financial and other data used in the Offer document and provide Comfort Letter

• Bulk printing of the Red Herring Prospectus Bid Forms, final Prospectus, CAN, Refund orders etc.
Printers
• Ensure timely dispatch and distribution of stationery to all centers

• Preparing and getting published all statutory notices

Advertisers
• Creating all advertisement materials

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Process & Timeline

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 IPO Process – Fixed Price Issue

Decision to go for Funds transferred

IPO to issuer

Appointment of
BRLM and legal Listing
counsel
Issuer

Due diligence Allotment

Drafting of Draft
Issue Closure
Prospectus

Filing with SEBI & SEBI Clearance

Pre-Marketing & ROC Filing of Roadshows Issue Open
Stock Exchanges
the Prospectus
Preparation / Approvals Filing the Prospectus and Marketing Launch & Completion

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 IPO Process – Book Built Issue

Decision to go for Funds transferred

IPO to issuer

Appointment of
BRLM and legal Listing
counsel
Issuer

RoC filing of final

Due diligence
Prospectus

Drafting of Draft
Pricing & Allocation
Red Herring

Filing with SEBI & SEBI Clearance

Pre-Marketing Roadshows Book building
Stock Exchanges & ROC Filing

Preparation / Approvals Marketing and Estimation of Price Range Launch & Completion

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 Execution Process Timeline

Activity IPO Process - 23 weeks

Preparation Phase 2 weeks

Due Diligence 4 - 5 weeks

1
Filing of Draft Document
week
Sebi Observation 4 - 8 weeks

Finalization & filing of offer Document 2 - 3 weeks

Min. 3
Issue Period
Days
Post Issue Activities 2 - 3 weeks

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Thank You

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