Initial Public offer

Initial Public Offer (IPO)
‡ The first public offering of equity shares of a company, which is followed by a listing of its shares on the stock market ‡ Benefits of going public
± Access to larger capital ± Respectability ± Investor Recognition ± Signals from the market
2

IPO. ‡ Costs of going public ± Adverse selection by investors ± Dilution ± Loss of flexibility ± Disclosures ± Accountability ± Public pressure 3 ..

2. The Company must have a track record of dividend payment for the immediately preceding three years or a public financial institution or scheduled commercial bank must have appraised the project to be financed and have participated in financing the project by way of loan or equity to the extent of at least 10% of the project cost. It has net tangible assets of at least Rs. 1 crore in each of the preceding 3 financial years The issue size (offer through the offer document + firm allotment + promoters contribution through the offer document) does not exceed five times the pre issue net worth. . 3.3 crores in each of the preceding 3 years. It has a track record of distributable profits for at least 3 out of the immediately proceeding 5 years It has a net worth of at least Rs. 4 5.Eligibility for an IPO for company 1. 4.

The issue is made through the book-building process. with at least 50% of the issue size being allotted to the QIBs. failing which the full subscription monies shall be refunded or the project has at least 15% participation allotted to QIBs.Eligibility for unlisted company ‡ In case an unlisted co. 10 crores or there shall be a compulsory market making for at least 2 years from the date of listing of the shares subject to certain conditions. 2. failing which the full subscription monies shall be refunded. it can make an IPO of equity shares or convertibles only if it meets the following two conditions. 1. The minimum post-issue nominal value of equity capital of the company shall be Rs. 5 . doesn t satisfy any of the given conditions.

‡ The merchant banker fixes the floor price in consultation with the issuer ‡ Lead manager assesses the response to the issue. ascertains the highest price at which demand is sufficient to match the size of the issue. 6 . decides on the final subscription price in consultation with the issuer and works out the pattern of allotment.Book building ‡ Involves inviting subscriptions to a public offer of securities through a process of tendering.

LM prepares draft prospectus in consultation with management and seeks approval of the board. BODs approves proposal for raising capital from public. LM draws up the issue budget (fees for LM. 5. underwriters. registrars and bankers. stationery. brokerage. documents and certificates for the issue Company appoints intermediaries such as the registrar to the issue. shareholders pass a special resolution for public issue Appointment of merchant banker as a lead manager (LM) to the issue LM carries out due diligence checks all information. postage. 6. 7 7. 2.). the printers and advertiser. 3. issue marketing exps etc. . the bankers. company approves the same. 4. authorizes the MD to do all tasks for the same.Principal steps for public issue 1. Company organizes a meeting to seek shareholders approval.

Company enters into a tripartite agreement with the registrar and all the depositories for providing the facility of offering the shares in a demat mode. 9.Principal steps in an IPO 8. Company makes listing application to all the stock exchanges where the shares are proposed to be listed along with copies of the draft prospectus. 11. 12. If the issue is proposed to be underwritten. SEBI places the same on its website for public comments. The stock exchanges also suggest changes if any. SEBI makes its observations on draft prospectus. LM makes underwriting arrangements Within 21 days. 10. Company carries out modifications accordingly. 8 . LM files draft prospectus with SEBI for its observation along with a soft copy.

The LM and the printer dispatch the application forms to all stock exchanges.Principal steps in an IPO 13. underwriters and investor associations. The company releases a mandatory advertisement. SEBI collection centers. 9 16. . Every application form is accompanied by the abridged prospectus. 14. called the announcement advertisement 10 days prior to the opening of the issue. 17. The issue is kept open for minimum of 3 days and a maximum of 21 days. The company files the prospectus with the Registrar of Companies (ROC) The LM and company market the issue using combination of press meeting. investors meetings and so on. brokers meetings. 15. brokers.

the basis of allotment is finalized by the stock exchange. the LM and the registrar in conformity with SEBI prescribed rules. 19 The LM ensures that the demat credit or dispatch of shares certificates and refund orders to the allottees is completed within two working days after the basis of allotment is finalized and the shares are listed within 7 days of the finalization of the basis of allotment.Principal steps in an IPO 18 After the issue closure. 10 .

Private placement ‡ Sales of securities to a limited no. VCFs. 11 . little information available about this market and there is little transparency. of sophisticated investors such as FIs. ‡ The identity of investors may not be known when the offer document is prepared. private placement refers to sales of equity of equity related instruments of an unlisted company or sales of debentures of a listed or unlisted company. banks etc. ‡ Subject to much less compliance than public issue ‡ Cost effective ‡ Time effective. MFs. as deals can be easily and directly negotiated with a few investors ‡ But. ‡ In Indian context.

A young private company which is not yet ready or willing to tap the public financial market may seek venture capital Provided by venture capital funds which are prepared to finance an untried concept that appears to have promising prospects.Venture capital ‡ It is a type of private equity capital typically provided to early-stage. ‡ ‡ ‡ ‡ ‡ 12 . highpotential. Venture capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms. growth companies in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company. Venture capitalists are typically very selective in deciding what to invest in Represent financial investment in highly risky proposition made in the hope of earning a high rate of return.

SBI-cap 13 .g. ± GVFL (Gujarat Venture finance Ltd) ± APVCL ‡ VCFs promoted by public sector banks such as Canara finance.Venture capital ‡ The early stage financing of new and young enterprises seeking to grow rapidly ‡ Long period of 5-10 years ‡ Venture financing ensures continuing participation of venture capitalists in the management of entrepreneur's business. ‡ It is promoted by central government controlled development financial institutions ± IFCI (Industrial Finance Corporation of India) ± RCTFCI ‡ It is promoted by state government controlled development financial institutions e.

Key Steps in determining the viability of the project ‡ Estimation of the costs and benefits of the project ‡ Assessing the riskiness of the project ‡ Calculation of cost of capital ‡ Computation of the criterion of merit and judge whether the project is good or bad 14 .

‡ Negotiable certificates and are freely traded in the overseas financial markets ‡ For the issuing company no foreign exchange risk.Global Depository Receipts (GDRs) ‡ Internally traded equity investments ‡ Issued by international depositories and denominated in US$. 15 . as the transaction is reflected in its books only on rupee terms. ‡ Issue enhances the corporate image of the company in the international financial circles.

the counterpart of SEBI in India ‡ Trading could be done only by QIBs. ‡ Issuance requires strict compliance with the guidelines issued by USD Security Exchange Regulation Commission. ‡ Visible image of the company in the US financial markets 16 .American Depository Receipts (ADRs) ‡ US $ denominated equity instruments traded in US financial markets.

(DCR India) ‡ ONICRA Credit Rating Agency of India Ltd 17 .Credit Rating Agencies in India ‡ Credit Rating Information Services of India Limited (CRISIL) ‡ Investment Information and Credit Rating Agency of India (ICRA) ‡ Credit Analysis & Research Limited (CARE) ‡ Duff & Phelps Credit Rating India Private Ltd.

: High Safety A .: Adequate Safety BBB .: Sub -moderate Safety B .: Moderate Safety BB .Ratings awarded by major credit rating agencies ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ AAA .: Inadequate Safety C .: Substantial Risk D .: Default 18 .: Highest Safety AA .

It gives right to the issuer company to accept or not to accept the rating. economic and financial developments and industry trends. It requires the issuer company to provide all material information to the CRA for rating and subsequent surveillance. It requires the CRA (Credit Rating Agency) to keep the information confidential. As per the agreement ‡ ‡ ‡ 1. An agreement is entered into between the rating agency and the issuer company. The process/ procedure followed by all the major credit rating agencies in the country is almost similar and usually comprises of the following steps Receipt of the request: Receipt of formal request for rating from a company. 19 .Credit Rating Process A credit rating agency constantly monitors all ratings with reference to new political.

quality and cost of production. historical performance. The topics discussed during the management meeting are wide ranging including competitive position. financial policies. strategies. risk profile and strategies in addition to reviewing financial data. assess the state of equipment and main facilities. evaluate the quality of technical personnel and form an opinion on the key variables that influence level. The analytical team analyses the information relating to its financial statements. 20 4 Plant visits and meeting with management    .2 3 Assignment to analytical team Obtaining information   Issuers are usually provided a list of information requirements and broad framework for discussions. Interaction with company executives in visits Understanding of the production process. cash flow projections and other relevant information.

All the issue having a bearing on rating are identified. issuer does not participate directly. Here. The findings of the team are finally presented to Rating Committee. with the key issues getting greater attention. comprising senior analysts of the credit rating agency. 21 6 Rating committee meeting   .5 Presentation of findings     Discussion in the Internal Committee. The rating is arrived at after composite assessment of all the factors concerning the issuer. An opinion on the rating is also formed.

CRAs are obliged to monitor the accepted ratings over the life of the instrument. Any changes in the rating are made public through published reports by CRAs. The rejected ratings are not disclosed and complete confidentiality is maintained. The CRA constantly monitors all ratings with reference to new political. economic and financial developments and industry trends. Through printed reports to the public. 8 9 Dissemination to the public     Monitoring for possible change 22 .7 Communication of Decision   Ratings communicated along with reasons or rationale supporting the rating.

Rights Issue ‡ ‡ Issue of capital to the existing shareholders of the company on pro rata basis. A company sends a letter of offer along with a composite application form consisting of four forms (A. It also has a column through which a request for additional shares may be made.for acceptance of the rights and application for additional shares.B. Process 1.D) to the shareholders Form A. 23 .C. It shows the number of rights shares the shareholder is entitled to.

by the original allottee through form B.used to make a request for split forms.used for renouncing the rights in favor of someone. 24 . Form B . 2 The composite application form must be mailed to the company within a stipulated period which is usually about 30 days. Form C .. Form D .meant for application by the renouncee in whose favor the rights have been renounced.Rights Issue Process Contd.

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