Learning Outcomes

• Identify the different types of issues that can

be made by an Indian company?
• Analyze why the companies prefer IPOs?
• What is the role of Investment bankers in
IPOs?
 Options for Raising Funds
Fund Raising Options

Debt Equity Hybrid

From Banks & IP Various forms of

FIs O Convertibles
FP
In India O
Public issue of
Rights
Bonds/ Issue
Debentures Pref.
Issue

outside ECB ADR/GDR FCCB &

India FCEB
What are the different kinds of issues?
 Why IPOs?
• For Funding Needs
• •Funding Capital Requirements for Organic Growth
• •Expansion through Projects
• •Diversification
• 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
 Why IPOs?
• 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
 Learning Outcomes
• Understand the steps in IPO process.
• Determine the cut-off price in Book Building
process
• Determine the floor price in IPO issue.
Role of Merchant Banker as Issue Manager
• Main areas of issue management and functions of
merchant banker therein.
– Appointment, agreement and inter se allocation of
responsibilities
– Issue structuring and pricing
– Due diligence
– Preparation and filing of offer documents
– Underwriting and pre-issue compliance
– Liaison with SEBI and stock exchange
– Co-ordination with other functionaries
– Issue marketing
– Functions during the issue
– Post-issue compliance
 IPO Process – Book Built Issue
Decision to Funds
go for transferr
IPO ed to
Appointment issuer
of
BRLM and Listing
legal
Issuer
couns
el
RoC filing of
final
Due Prospectus
R
diligence

Drafting of oadshows Marketing and

Draft Pricing &
Red Allocation
Herring Estimation of Price Range

Filing with SEBI

Book
SEBI & Pre- Clearanc
building
Stock Marketing e & ROC
Exchanges Filing
Launch &
Preparation / Completion
Approvals
 IPO Grading
• What is ‘IPO Grading’?
– The grade assigned by a Credit Rating Agency
registered with SEBI, to the initial public offering (IPO)
of equity shares or any other security which may be
converted into or exchanged with equity shares at a
later date.
– IPO grade 1: Poor fundamentals
– IPO grade 2: Below-average fundamentals
– IPO grade 3: Average fundamentals
– IPO grade 4: Above-average fundamentals
– IPO grade 5: Strong fundamentals
 IPO Grading
• When the company required to obtain the grade for the IPO?
• Who bears the cost of the IPO grading process?
• Is grading optional?
• What are the factors that are evaluated to assess the
fundamentals of the issue while arriving at the IPO grade?
• Business Prospects and Competitive Position
•     i.Industry Prospects
•     ii.   Company Prospects
– Financial Position
– Management Quality
– Corporate Governance Practices
– Compliance and Litigation History
– New Projects—Risks and Prospects
 IPO Grading
• Does IPO grading consider the price at which the
shares are offered in the issue?
• Where can I find the grades obtained for the IPO
and details of the grading process?
• Does an IPO grade, which indicates ‘above
average or strong fundamentals’ mean I could
subscribe safely to the issue?
• How does IPO Grading help in deciding about
investing in an IPO?
• Will IPO Grading given by CRAs be a parameter for
SEBI to issue its observations?
 Book Building Process

• It allows the market to price the

IPO
• Demand from the investors
captured for pricing IPO
• Efficient price discovery
• Reduces wide
fluctuations/abnormalities in
prices in the post-issue
 Steps
• 1. Determine the Price
– Lower Price
– Upper
• 2. Rearrange the prices vis-à-vis no of applications (bids)
received in descending order. (It is called Book building
method).
• 3. Book Running Lead Manager decides the price for
allotment.
• 4. Bid applications less than BRLM price will be rejected
• 5. If the no of bids received > no of bids required
(oversubscribed), the shares are allotted on pro-rata basis.
• Example
 IPO Pricing
• Following points are worth noting:
– IPO pricing is all about setting an offer price but valuation
is about finding the intrinsic value of a company.
– Valuation for an acquisition is the consideration to the
seller for giving up the right to accrue future cash flow.
IPO pricing is about an entry price to the right to accrue
future cash flow.
– IPO pricing is a combination of various parameters in
addition to valuation.
– Companies that over-price the issue would eventually
find their share not being able to support its offer price.
Price may not sustain in long term.
– Under-pricing is also not a good feature.
Methodology in IPO Pricing
 Learning Outcomes
• What is P/E Ratio multiples and EPS
• What is offer for sale? How does OFS help the
companies?
• How Green Shoe option works?
• How to find Floor price, if P/E Ratio multiples
and EPS of an unlisted Company is not
available?
 P/E Ratio multiples and EPS
• https://youtu.be/O4DpzmMD6zo
 Basic EPS vs. Diluted EPS
• In a company with complex capital structure, if
all the potentially convertible financial
instruments are converted into common stock
& then the EPS is calculated, then the
resultant EPS will be diluted EPS.
• In contrast, a basic EPS is calculated using only
the common stock of the company (not other
convertible debt).
 What is offer for sale? How does OFS help the companies?

• A shorter and less complex way to sell stake than initial

and follow-on public offers.
• It is a route the government will take to sell its share in
some of the biggest companies it owns.
• Ex: Steel Authority of India – 5% stake – Rs 1725 Crore,
ONGC – 5%, Coal Indian- 10%, NHPC – 11.36%
Private Companies: Bharti Infratel, L&T Finance Holdings,
Orient Green Power Company, Schneider Electric
Infrastructure and Dalmia Bharat Sugar and Industries
 Offer for Sale
• Only top 200 companies by market
capitalisation in any of the four completed
quarters can use the facility.
• Non-promoters holding at least 10% share
capital can also sell shares through this route.
• The minimum offer size is Rs 25 crore. It can be
less if the aim of the issue is meeting the public
shareholding norm (25% for private companies
and 10% for government ones).
 Why OFS?
• No application form
• T+1
• More transparent than
IPO
• SEBI allowed 10%
allotment to retail
investors
– (Retail investors <Rs 2 lakh)
Mutual Funds and Insurance
Companies – 25% of the issue
 Offer for Sale
• Allocation

I. Minimum of 25% of the shares offered shall be reserved for mutual

funds and insurance companies.

II. No allocation will be made in case of order/ bid is below floor price.

III. No single bidder other than mutual funds and insurance companies
shall be allocated more than 25% of the size of offer for sale.

IV. Minimum 10% of the offer size shall be reserved for retail investors.
 Offer for Sale
• Settlement Schedule
• a. The allocation and the obligations resulting thereof shall
be intimated to the brokers on T day.

b. For non-institutional orders/bids and for institutional

orders with 100% margin, settlement shall take place on
T+1 day.

c. Funds collected from the bidders who have not been

allocated shares shall be released after the download of
the obligation.
 Green Shoe Option (Section 45)
• Green Shoe Option means allotting more shares than
the total issue size in a public offer of securities.
• When an issue is oversubscribed and there is a huge
demand in the market, then the company has the
option to issue additional shares to meet the demand.
• How Does Green Shoe Option Works?
– ABC Ltd wishes to raise additional capital through public
issue, which is expected to be oversubscribed.
– Oversubscription, huge demand and less supply create price
instability, which is bad for shareholders.
– To avoid above situation, company goes for GREEN SHOE
OPTION.
 Green Shoe Option
• Company appoint one of the merchant bankers as STABILIZING
AGENT.
• The STABILIZING AGENT (SA) will oversee the GSO process.
• S A will borrow the shares from the promoters and allot them to
subscribers on pro-rata (proportionate basis).
• When the trading starts, SA will purchase the shares from the
market and return to the promoters who had lend the shares.
This process is called PRICE STABILIZING MECHANISM.
• The SA has to complete the stabilizing mechanism within 30 days
from the date of trading on the stock exchange.
• If the SA fails to complete the process within 30 days, the
company will allot the remaining shares to the lending
promoters.
 Green Shoe Option

• The company will seek authorization from in AGM where the public issue was passed.

• Company will appoint one of the merchant bankers as

Stabilizing Agent.
• The SA will come to agreement with the Company.
• The SA will come to agreement with Promoters specifying the
maximum number of shares which can be borrowed which
shall not be in excess of 15% of the total issue size.

• The details of Agreement shall be specified in Draft

Prospectus, Draft Red Herring Prospectus, Red Herring
Prospectus and Final Prospectus.
• Details presented in Prospectus: Name of SA, Max no of
shares proposed to be over-allotted, period of price
stabilizing mechanism (Max: 30 days), Maximum increase in
the capital and the shareholding pattern-Post issue
 Green Shoe Option
• Who can lend shares in Green Shoe Option?
• Incase of IPO
– Promoters /pre-issue shareholders
• In case of FPO
– Promoters/pre-issue holders holding more than 5%.
– The borrowed shares will be in dematerialized form.
• SA will open a) Bank A/C (GSO Bank A/C) and Demat A/C (GSO Demat A/C)
• The money received from the applicants for over-subscription shall be kept in GSO
Bank Account.
• When the trading starts, SA will use the money in GSO Bank Account to purchase
shares from the market and credit them to GSO Demat Account.
• The shares in the GSO Demat Account should be returned to the lending promoters
maximum within 2 days of stabilization period.
• If SA fails to return all the shares borrowed, the company will issue the remaining
shares to the lending shareholders.
• The remaining money, if any, in GSO Bank Account will be transferred to INVESTOR
PROTECTION FUND.
 Types of Offer Documents
• What is an offer document?
Offer Document/Prospectus : Public
Issue/Offer for Sale
Document which contains Letter of Offer : Rights Issue

• information about the company

• Promoters
• Projects
• financial details
• objects of raising the money
• terms of the issue
 Types of Offer Document
• Draft offer document
– Draft Offer document" means the offer document in draft stage.
– The draft offer documents are filed with SEBI, at least 21 days
prior to the filing of the offer document with ROC/ SEs.
– Availability of draft offer document
• Red herring prospectus
– Red Herring Prospectus is a prospectus, which does not have
details of either price or number of shares being offered, or the
amount of issue.
– Price band can be disclosed.
– An issuer can state the issue size and the number of shares are
determined later.
– In case of FPO
– Incase of Book Building
 Types of Offer Document
• Prospectus
• Letter of Offer
• Abridged prospectus
• Abridged Prospectus means the memorandum as prescribed in
Form 2A under sub-section (3) of section 56 of the Companies
Act, 1956. It contains all the salient features of a prospectus. It
accompanies the application form of public issues.
• According to Sec. 56(3) of the Companies Act of 1956, a company
cannot issue applications for issue of share or debentures , if it
does not contain the salient features of the prospectus of the
memorandum. This is known as ‘abridged prospectus’. In other
words ‘abridged prospectus’ is a one that contains the salient
features of the memorandum of the prospectus
 Types of Offer Document
• Shelf Prospectus
– Issued by a financing bank or institution.
– This prospectus is part of Section 60A and 60B in the
Indian Code.
– When a financial institution wants financing from the
Central Government in India, it must provide a shelf
prospectus to the Registrar of Companies.
– Once it is filed, it remains valid for 1 year to the public.
– All securities wanted by the financial institution are
listed in the prospectus. If five securities are wanted,
only one shelf prospectus is needed.
 Follow on public offer
• A follow-on public offer (FPO) is an issuing of
shares to investors by a public company that is
already listed on an exchange.
• Dilutive FPO
• Non-Dilutive FPO

http://www.chittorgarh.com/
ipo_basis_of_allotment/ambition-mica-fpo/
765/
 Diluted Follow-on Offering
Vs Non-Diluted Follow-on Offering
• Diluted Follow-on Offering
Diluted follow-on offerings happen
when a company issues additional
shares to raise funding and offer
those shares to the public market.
As the number of shares increase,
the earnings per share (EPS)
 decrease. The funds raised during
an FPO are most frequently
allocated to reduce debt or change
a company's capital structure. The
infusion of cash is good for the long-
term outlook of the company, and
thus, it is also good for its shares.
• Non-Diluted Follow-on
Offering
Non-diluted follow-on
offerings happen when
holders of existing, privately-
held shares bring previously
issued shares to the public
market for sale. Cash
proceeds from non-diluted
sales go directly to the
shareholders placing the
stock into the open market.
 How to find Floor price, if P/E Ratio multiples
and EPS of an unlisted Company is not available?
EPS of a company
• Earnings Method
– Price of share = Earnings per share (based on FME) x
Adjusted price earnings ratio
• Net Asset Method
– Net assets = Total assets - Total liabilities = Total equity
and reserves
– Price of share = Net assets / Number of ordinary shares in
issue
• FME means Future Maintainable Earnings
 How to find Floor price, if P/E Ratio
multiples and EPS of an unlisted Company
is not available?
• Dividend yield method
– Price of Share = Ordinary dividend per share /
Adjusted dividend yield
• Discounted cash flow method
– CAPM = Risk free rate + Beta (Return on the
market - risk-free rate)
– Price of a share =
Total discounted cash flows / Number of ordinary
shares in issue
• P/E = price per share / Earnings per share or
Market Cap/ Net Income
• For a private company valuation
• Calculate the industry average P/E
• multiply it by net income of the private company
under consideration and it gives us the market
capitalisation
• then added to net debt of the company.
• The result is the Enterprise Value of the company.
 Learning Outcomes
• Decode what underwriting is?
• Analyse the types of underwriting along with
their roles in public issue.
• Determine the devolvement of underwriters
during under-subscription of issue.
 Underwriting
• An investment banking firm which enters into
a contract with the issuer of new securities to
distribute them to the investing public.
• SEBI (Underwriters) Regulations,1993
 Underwriting
• Decoding SEBI’s Definition
– Connected with the proposed issue of securities
by a body corporate
– Underwriting commitment must be documented.
– An agreement by underwriter to subscribe if the
subscription is not accepted by target
– It is a contingent obligation and responsibility to
market the issue
– It is primarily a fee based service, next fund based
– Careful assessment of issue
 Underwriting
• Sub-underwriting
– Used by an underwriter to spread the risk
assumed in underwriting an issue of shares.
 Underwriting Commission
• The underwriter is paid a commission as per
the agreement.
• Section 76 of Companies Act:
– Commission can be paid only at a rate authorized
by articles.
– It cannot exceed 2.5% of the issue price of
debentures and 5% of issue price of shares.
– It is paid only on the securities offered among the
public for subscription.
 Types of Underwriting
• Full underwriting
• Partial underwriting
• Joint underwriting
• Syndicate underwriting
• Firm underwriting
• Sub-underwriting
• Outright purchases of issues
 Underwriting Agreement
• Provisions to be covered
• Amount being underwritten
• Provision for sub-underwriting
• Computation of devolvement
• Procedure for effecting or discharge of underwriting
obligations
• Right to receive commission as per agreed terms
• Statutory declarations
 Responsibilities of Underwriters
1. An underwriter, not only has to underwrite the
securities but has to subscribe within 45 days
that part of shares which remain unsubscribed
by the public.
2. His underwriting obligations should not exceed,
at any time, 20 times of his net worth.
3. The underwriter cannot derive any other
benefit except the underwriting commission
which is 5% for shares and 2½% for debentures.
 Devolvement
• The amount of financial support to be provided by an
underwriter in an under-subscribed issue of securities.
• Devolvement happens when an underwriting firm
procures lesser subscriptions from investors
 Devolvement Computation
• ABC Ltd makes an issue of 10,000 shares of Rs 10 each
at par aggregating to Rs 1,00,000. The issue has been
underwritten fully by two underwriters X and Y to the
extent of Rs 50,000 each. The issue has been closed
and the following is the information available on the
subscriptions.
Valid subscriptions received - Rs 76,500
Received through underwriter X – Rs 27,500
Received through underwriter Y – Rs 34,800
Direct subscriptions received - Rs 14,200
Examine the underwriters devolvement.
 Assignment
• Students will be assigned a company which was listed in
BSE/NSE. The students are expected to make an analysis
what factors contributed and what financial disclosures
contributed to the success or failure of IPO. Student is
expected to explore/ identify any (minimum) key 25
financial data/financial indicators that contribute to success
of failure of IPO.
Primary market intermediary

Learning outcomes
1. Primary market
2. Primary market intermediaries
3. Primary market investors
 Constituent of primary market
• Investors
• Issuers
• Intermediaries
• Instruments
 Primary market investors
Institutional investors/HNI: Large investors like
1. Multilateral Financial institutions,
2. Domestic financial institutions,
3. Foreign portfolio investors,
4. Domestic alternate investment funds,
5. Domestic corporate investors like NBFCs,
6. Domestic non-corporate investors like UHNI, NRIs etc
 Primary market investors
Qualified Institutional Investors (accredited investor as defined in the Securities and
Exchange Commission’s (SEC) Rule 501 of Regulation D. A QIB owns and invests a minimum of
$100 million in securities on a discretionary basis; the broker-dealer threshold is $10 million):

1. Public financial institutions

2. Scheduled commercial banks
3. Institutional FPIs registered with SEBI
4. Multilateral /bilateral Financial institutions
5. Venture capital funds
6. SIDCs
7. Insurance companies registered with IRDA
8. Provident/ Pension funds with minimum corpus of Rs.25 crore
 Primary market intermediaries
• Issue managers
• Underwriters
• Brokers
• Registrar to Issues
• Bankers to Issues (ASBA (Applications Supported by Blocked Amount) is a
process developed by the India's Stock Market Regulator SEBI for applying to IPO. In ASBA, an
IPO applicant's account doesn't get debited until shares are allotted to them).

• Support service providers

 L11:Types of Public Offer

What are the different types of public

offerings ?
 Consideration for going public
• Strategic dimension
• Financial dimension
• Investment banking dimension
• Listing decision-on market or off-market
 Types of public offering
• IPOs
• FPOs
• Private equity
• Fixed income securities
• Right issue
• Bonus issue
 FPOs
IPOs are the initial public offering of equity to the public while FPOs are
supplementary issues made after a company has been established on an
exchange.

Types of FPOs:

• Dilutive: to investors, as the company’s Board of Directors agrees to increase the share float level. This type of follow-on
public offering seeks to raise money to pay debt or expand the business. This increases the number of shares outstanding.
• Non-dilutive: when directors or large shareholders sell privately held shares. This is non-dilutive, as no additional shares are
sold. This method is commonly referred to as a secondary market offering. There is no benefit to this method for the
company or current shareholders.
 Year No. of FPOs Amount Raised Issue Succeeded Issue Failed

    (In Rs Crore)    

2007 5 9,330.60 4 1
2008 1 23.07 1 0
2009 0 0 0 0
2010 8 31,583.58 8 0
2011 2 8,055.20 2 0
2012 0 0 0 0
2013 1 6,958.64 1 0
2014 1 505.4 1 0
2015 0 0 0 0
2016 1 9.99 1 0
2017 1 12.6 1 0
2018 * 0 0 0 0
Year No. of Amount Issue Issue
IPOs Raised Succeeded Failed
2007 108 33,946.22 104 4
2008 39 18,339.92 36 3
2009 22 19,306.58 21 1
2010 66 36,362.18 64 2
2011 40 6,043.57 37 3
2012 13 6,770.17 11 2
2013 5 1,283.95 3 2
2014 7 1,200.94 5 2
2015 21 11,362.30 21 0
2016 27 26,372.48 26 1
2017 38 75,475.37 38 0
2018 * 4 2,117.71 4 0
 Learning Outcomes
• Analyze the features of fixed income securities.
• Differentiate various types of debt instruments.
 Question
• Other than the two reasons, demonetization lead to reduction
in interest rates and adequate liquidity, what possible reasons
garner the corporate to proceed for bond markets for
financing?
• Will it be able for a company/corporate debt in the form of
unsecured debentures?
• What rate of interests do you presume for increasing
investments in bond market?
• What would you suggest for further strengthening (in terms of
investments & regulatory norms) of bond markets in India?
• What will be the impact on bond markets, if YTM increases? Do
you suggest the bond market investor for call or put option?
• Other than the two reasons, demonetization
lead to reduction in interest rates and
adequate liquidity, what possible reasons
garner the corporate to proceed for bond
markets for financing?
Ans: Credit Rating norms of recent budget
• Will it be able for a company/corporate to raise debt
financing in the form of unsecured debentures?
– A/C Sec 58A of Indian Companies Act (Companies
(Acceptance of Deposits) Rules, 1975.
– Amounts raised by issue of bonds/debentures by
mortgage of any immovable property
– Unsecured partly convertible debentures are treated as
deposits raised by companies (Sec. 58)
– Banks are exempted from Sec 58 but NBFCs are covered
under point 1 and point 2
• What rate of interests do you presume for
increasing investments in bond market?
– Nominal rate of interest
– Real rate of interest
– Effective rate of interest
What would you suggest for further strengthening (in
terms of investments & regulatory norms) of bond
markets in India?
What will be the impact on bond markets, if YTM increases? Do
you suggest the bond market investor for call or put option?
 Features of Debt Securities
• Coupon rate
• Yield and Yield to Maturity
• Fixed and Floating Rates
• Call and Put Options
 Yield to Maturity
• Consider a Rs 1000 par value bond, carrying a
coupon rate of 9%, maturing after 8 years. The
bond is currently selling for Rs 800. What is
the YTM on this bond?
 Entry Norms for an IPO:
• Entry Norms I or EN I: 
1. Net Tangible assets of atleast Rs. 3 crores for 3
full years
2. Distributable profits in atleast 3 years
3. Net worth of atleast 1 crore in 3 years
4. If there was a change in name, atleast 50% of
the revenue in the preceeding year should be from
the new activity
5. The issue size should not exceed 5 times the
pre-issue net-worth of the company
 Entry Norms for an IPO:
• Entry Norms II or EN II: 

1. Issue shall be only through the book building

route with atleast 50% allotted mandatorily to
Qualified Institutional Buyers (QIBs)

2. The minimum post issue face value capital shall

be Rs. 10 crores or there shall be a compulsory
market-making for atleast 2 years 
 Entry Norms for an IPO:
• Entry Norms III or EN III: 
1. The “Project” is appraised and participated to the extent
of 15% by FI’s/Scheduled Commercial Banks of which
atleast 10% comes from the appraiser(s). 

2. The minimum post issue face value capital shall be Rs. 10

crores or there shall be a compulsory market-making for
atleast 2 years 

3. In addition to the above mentioned 2 points, the

company shall also satisfy the criteria of having atleast 1000
prospective allotees in future. 
 Certain category of entities which are
exempted from the aforesaid entry norms, are
as under :
(a) Private Sector Banks
(b) Public sector banks
(c) An infrastructure company whose project has
been appraised by a Public Financial Institution
or IDFC or IL&FS or a bank which was earlier a
PFI and not less than 5% of the project cost is
financed by any of these institutions
 Besides entry norms, are there any mandatory provisions
which an issuer is expected to comply before making an issue?

• Minimum Promoters Contribution lock-in

– Unlisted issuer
– Listed Issuer
• IPO Grading
Who fixes the price of securities in an issue?

• Parameters: EPS, Net Worth of Company, PE Multiple

 Intermediaries and
Party their Roles Key Responsibility Appointm
ent

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

Domestic • Drafting the offer document

& • Guidance on any other incidental legal matters Upfront
Internatio • Assistance in complying with requirement for
nal Legal selling in international geographies
Counsels
• Reviewing and auditing financials and preparing
financial statements for inclusion in the Offer
Document Exis
Auditors
ting
• Verify/audit various financial and other data used in the
Audi
Offer document and provide Comfort Letter tors
• Co-ordination with the Issuer and Bankers regarding
4
collections,
weeks
Registrars reconciliation, refunds etc
before
• Securing allocation approval from Stock Exchanges filing
• Post issue co-ordination collation and reconciliation of DRHP
information with
SEBI
 2 weeks
IPO • Provides IPO Grading before
Gra filing RHP
ding with ROC

Age • Tripartite Agreement

ncy • Dematerialization of Company’s shares After
Deposi Appointme
• Demat transfer of Shares nt of
tory
(NSDL, • Credit of Shares to Allottees Registrar
CDSL)

• Bulk printing of the Red Herring Prospectus Bid

Forms, final Prospectus, CAN, Refund orders etc. Before
Printers Filing
• Ensure timely dispatch and distribution of stationery
DRHP with
to all centers
SEBI
• Preparing and getting published all statutory notices Before
Advertiser • Creating all advertisement materials Filing
s DRHP with
SEBI
• Acting as collecting agents
Escrow
• Escrow Account & Refund account Before
Collections
Filing
Banks &
RHP with
Bankers ot
ROC
the Issue
• To receive bids and block bid amount in the investor’s
bank account
Self based on applications submitted; Approv
Certified • To provide FC on account transfer/ unblock funds post ed
Syndicate finalization of basis of allotment, by
Bank • To address investor grievances on account of ASBA SEB
(SCSB) bids I
Various Legal Agreements undertaken by the
Issuer Company
Agreement Parties to the Purpose of
s Agreement Agreements
Engageme Company and individually Engaging the
nt with Investment Bankers, intermediaries for the
Letter Counsels to the Services
Company, Auditors,
Registrar and other
intermediaries Lays down the roles,
BRLM responsibilities, reps of
Company Lays down the roles,
MoU
Registrar Companyand
andBRLMs
Registrar BRLM and Company
responsibilities of
MoU
the Registrar

Escro Company, BRLMs, Syndicate Lays down the process for

w Members, Registrar and receipt of Issue proceeds
Agree Escrow Bankers to the and release of funds to
ment Issue the Company
 Various Legal Agreements
Agreement
(Cont..)
Parties to the Purpose of
s Agreement Agreements
Syndic Company, BRLMs and Lays down the process of
ate
Agreem Syndicate
Memb marketing and handling
ent ers the forms

Underwr Company and the Lays down the terms of

iting Underwriters (BRLM and Underwriting and the
Agree Syndicate members) extent of underwriting
ment
Tripart Company, NSDL and CDSL Lays down the provisions
ite of NSDL / CDSL acting
Agree as the Depositories of
ment the Company
wit
h Listin Company and Stock Binds the Company to the
g
Depos Exchanges requirements of the Listing
Agree
itory rules of the Stock
ment Exchanges
 Disclosures in the Offer
Document
•
•
Shareholding Pattern (pre-issue and post-issue)
Securities Premium Account (pre-issue and post-issue)
Capital • Holding of the promoter and promoter group
Structure
• Disclosure about ESOPs if any

• Total requirements of funds

• Means of Financing
– Undertaking by the issuer company confirming firm
arrangements of finance through verifiable means towards
Objects of the 75% of the stated means of finance (excluding proposed
Issue 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
• External Risk Factors
Factors

Company • Details about the Board of Directors and various committees

Management • Details about key management persons
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
Finan
cial • Audited financials presented should not be more than six months
Disclo old at the time of filing DRHP with SEBI and must be updated to
sures 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

• Capital Expenditure
MD&A • 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
Litigation • Outstanding litigations, defaults, etc., pertaining to matters
s and
likely to affect operations and finances of the company.
Defaul
• The pending proceedings initiated for economic offences
ts
against the directors, the promoters, companies and firms
promoted by the promoters indicating their present status.
 Offer for Sale
• A shorter and less complex way to sell stake than initial
and follow-on public offers.
• It is a route the government will take to sell its share in
some of the biggest companies it owns.
• Ex: Steel Authority of India – 5% stake – Rs 1725 Crore
ONGC – 5%, Coal Indian- 10%, NHPC – 11.36%
Private Companies: Bharti Infratel, L&T Finance Holdings,
Orient Green Power Company, Schneider Electric
Infrastructure and Dalmia Bharat Sugar and Industries
 Offer for Sale
• Only top 200 companies by market
capitalisation in any of the four completed
quarters can use the facility.
• Non-promoters holding at least 10% share
capital can also sell shares through this route.
• The minimum offer size is Rs 25 crore. It can be
less if the aim of the issue is meeting the public
shareholding norm (25% for private companies
and 10% for government ones).
 Why OFS?
• No application form
• T+1
• More transparent than
IPO
• SEBI allowed 10%
allotment to retail
investors
– (Retail investors <Rs 2 lakh)
Mutual Funds and Insurance
Companies – 25% of the issue
 Types of Offer Documents
• What is an offer document?
Offer Document/Prospectus : Public
Issue/Offer for Sale
Document which contains Letter of Offer : Rights Issue

• information about the company

• Promoters
• Projects
• financial details
• objects of raising the money
• terms of the issue
 Types of Offer Document
• Draft offer document
• Red herring prospectus
• Prospectus
• Letter of Offer
• Abridged prospectus
• Shelf Prospectus
• Placement Document
 Eligibility Norms for Issue
• Filing of Offer Document
• In the case of a public issue of securities, as well as any issue of security, by a
listed company through rights issue in excess of Rs. 50 lakh, a draft
prospectus should be filed with SEBI through an eligible registered
merchant banker at least 21 days prior to filing it with ROC.
• The companies intending to issue securities to public should apply for listing
them in recognized stock exchange(s). Also, all the issuing companies must
• (a) enter into an agreement with a depository registered with SEBI for
dematerialization of securities already issued / proposed to be issued and
• (b) give an option to subscribers / shareholder / investors to receive security
certificates or hold securities in a dematerialized form with a depository
Issue Related Activities and SEBI Guidelines
• Eligibility Norms
• Listed Companies:
– Filing of Offer Documents: Issue Size > Rs 50 laks (Draft Prospectus)
– Public Issue :
– All Co’s are eligible, issue size should not exceed five time of pre-
issue net-worth.
– Fixed Price or Book Building Method (60% of issue to be allotted for
QIPs)
Unlisted Companies:
Can issue the securities under conditions:
Net worth of Rs 1 Crore for last years (3/5)
Track record of distribution of profits
issue size should not exceed five time of pre-issue net-worth
 Issue Related Activities and SEBI Guidelines
• Exemptions:
• Private Sector Banks
• Infrastructure Companies: Sec 10 (23-G)
• Project Appraised by Fis
• Not less than 5% of project cost has been
financed by FIs
Issue Related Activities and SEBI Guidelines
• Credit Rating
– Mandatory disclosures
• Prohibited:
– Outstanding warrants
– Financial instruments entitling promoters to
receive after IPO
– Partly Paid up shares
 Issue Related Activities and SEBI Guidelines

• Pricing of Issue
– Differential Pricing
– Firm Allotment vis-à-vis Net fund Offer
• Price Band
– Should not exceed >20% cap. (cap in the price
should not exceed 20% of the floor price)
– Determination of price by BOD- Resolution
– Final Offer
– Payment of discount/commission
– Denomination of shares (Sec 13(4))
 Issue Related Activities and SEBI Guidelines
• Public issue by unlisted companies
• Offer for sale by unlisted companies
• Public issue by listed companies
• Composite issue by Listed Companies
• Public Issue by unlisted infrastructure
companies at premium
 Issue Related Activities and SEBI Guidelines
• Securities ineligible for computation of promoters
contribution
• Equity shares were acquired during the preceding three
years.
• Partners of the firm converted to Promoters & those shares
alloted
• Securities of any private placement
• Securities for which the written consent not received.
• Promoters participation in excess of required minimum
(pricing of preferential allotment)
• Promoters contribution before public issue (escrow account)
Issue Related Activities and SEBI Guidelines
• Exemption from requirement of promoters’
contribution
• Company listed in a stock exchange for
atleast 3 years
• Where no identifiable promoter/promoter
group exists
• Rights issue
 Issue Related Activities and SEBI Guidelines

• Lock-in requirements of Promoters contribution

• Lock in of minimum required contribution (locked for 3 years)
• Lock-in excess promoters contribution (In unlisted company-
One year)
• Securities issued last to be locked in first
– Financial institutions
– Non-FIs
• Lock-in of Pre-issue share capital of an unlisted company
• Lock-in of securities issued on firm allotment basis
• Pledge of Securities
• Inter-se transfer of securities
• Inscription of Non-transferability
 Issue of Capital by DFIs
• Promoters Contribution
• Reservation for employees
– Maximum of Rs 2000 per employee and subject
to 5% of issue size
– Locked in period for 3 years
• Pricing of issue
 Issue Allocation
• Issue Allocation: Determines the total availability of
securities for various types of investors collectively within a
given IPO/FPO under NPO.
• In case of fixed price IPO/FPO, allocation of NPO as follows:
Retail Individual Investors HNIs
50% should be reserved , 50% shall be allotted
applications for value of Rs
2,00,000 or less

• In case of book-built IPO/FPO, allocation of NPO as follows:

Retail individual Investors
35% should be reserved
for retail individual
investors, applications for
value of Rs 2,00,000 or
less
HNIs (not in QIB QIBs
Categry)
15% 50% shall be allocated to
QIBs of which a
minimum of 5% must be
for Mutual Funds.
 Green Shoe Option (Section 45)
• Green Shoe Option means allotting more shares
than the total issue size in a public offer of
securities.
• When an issue is oversubscribed and there is a
huge demand in the market, then the company has
the option to issue additional shares to meet the
demand.
• How Does Green Shoe Option Works?
– ABC Ltd wishes to raise additional capital through
public issue, which is expected to be oversubscribed.
– Oversubscription, huge demand and less supply create
price instability, which is bad for shareholders.
– To avoid above situation, company goes for GREEN
SHOE OPTION.
 Green Shoe Option
• Company appoint one of the merchant bankers as
STABILIZING AGENT.
• The STABILIZING AGENT (SA) will oversee the GSO process.
• S A will borrow the shares from the promoters and allot
them to subscribers on pro-rata (proportionate basis).
• When the trading starts, SA will purchase the shares from
the market and return to the promoters who had lend the
shares. This process is called PRICE STABILIZING
MECHANISM.
• The SA has to complete the stabilizing mechanism within 30
days from the date of trading on the stock exchange.
• If the SA fails to complete the process within 30 days, the
company will allot the remaining shares to the lending
promoters.
 Green Shoe Option

• The company will seek authorization from in GM where the public issue was
passed.

• Company will appoint one of the merchant bankers as

Stabilizing Agent.
• The SA will come to agreement with the Company.
• The SA will come to agreement with Promoters specifying
the maximum number of shares which can be borrowed
which shall not be in excess of 15% of the total issue size.
• The details of Agreement shall be specified in Draft
Prospectus, Draft Red Herring Prospectus, Red Herring
Prospectus and Final Prospectus.
• Details presented in Prospectus: Name of SA, Max no of
shares proposed to be over-allotted, period of price
stabilizing mechanism (Max: 30 days), Maximum increase
in the capital and the shareholding pattern-Post issue
 Green Shoe Option
• Who can lend shares in Green Shoe Option?
• Incase of IPO
– Promoters /pre-issue shareholders
• In case of FPO
• Promoters/pre-issue holders holding more than 5%.
• The borrowed shares will be in dematerialized form.
• SA will open a) Bank A/C (GSO Bank A/C) and Demat A/C (GSO Demat A/C)
• The money received from the applicants for over-subscription shall be kept in GSO
Bank Account.
• When the trading starts, SA will use the money in GSO Bank Account to purchase
shares from the market and credit them to GSO Demat Account.
• The shares in the GSO Demat Account should be returned to the lending promoters
maximum within 2 days of stabilization period.
• If SA fails to return all the shares borrowed, the company will issue the remaining
shares to the lending shareholders.
• The remaining money, if any, in GSO Bank Account will be transferred to INVESTOR
PROTECTION FUND.
Role of Merchant Banker as Issue Manager
• Main areas of issue management and functions of
merchant banker therein.
– Appointment, agreement and inter se allocation of
responsibilities
– Issue structuring and pricing
– Due diligence
– Preparation and filing of offer documents
– Underwriting and pre-issue compliance
– Liaison with SEBI and stock exchange
– Co-ordination with other functionaries
– Issue marketing
– Functions during the issue
– Post-issue compliance
 IPO Grading
• What is ‘IPO Grading’?
– The grade assigned by a Credit Rating Agency
registered with SEBI, to the initial public offering (IPO)
of equity shares or any other security which may be
converted into or exchanged with equity shares at a
later date.
– IPO grade 1: Poor fundamentals
– IPO grade 2: Below-average fundamentals
– IPO grade 3: Average fundamentals
– IPO grade 4: Above-average fundamentals
– IPO grade 5: Strong fundamentals
 IPO Grading
• When the company required to obtain the grade for the IPO?
• Who bears the cost of the IPO grading process?
• Is grading optional?
• What are the factors that are evaluated to assess the
fundamentals of the issue while arriving at the IPO grade?
• Business Prospects and Competitive Position
•     i.Industry Prospects
•     ii.   Company Prospects
– Financial Position
– Management Quality
– Corporate Governance Practices
– Compliance and Litigation History
– New Projects—Risks and Prospects
 IPO Grading
• Does IPO grading consider the price at which the
shares are offered in the issue?
• Where can I find the grades obtained for the IPO
and details of the grading process?
• Does an IPO grade, which indicates ‘above
average or strong fundamentals’ mean I could
subscribe safely to the issue?
• How does IPO Grading help in deciding about
investing in an IPO?
• Will IPO Grading given by CRAs be a parameter for
SEBI to issue its observations?
• Public issue / Offer for sale by Unlisted Companies:
• An unlisted company can make a public issue / offer for sale of equity shares /
security convertible into equity shares on a late date if it has in three out of
preceding five years
• (a) a pre issuenet worth of Rs. 1 crore
• (b) a track record of distributable profit in terms of Sec. 205 of the Companies
Act.
• The size of the issue should not exceed five times of the pre-issue net worth as
per last available audited accounts either at the time of filing of offer or at the
time of opening of issue.
• Public issue by listed companies:
• All listed companies are eligible to make a public issue of equity
shares/ convertible securities if the issue size does not exceed
five times its preissue net worth as per the last available audited
accounts at the time of either filing of documents with SEBI or
opening of the issue.
• A listed company which does not satisfy this condition would be
eligible to make issue only through book building process on the
condition that 60% of the issue size would be allotted to QIBs,
failing which full subscription
money would be refunded.
• Credit Rating for Debt Instruments:
• A debt instrument means an instrument / security which creates /
acknowledges indebtedness and includes debentures, bonds and such other
securities of a company whether constituting charge on its assets or not.
• For issue, both public and rights, of a debt instrument, including
convertibles, credit rating – irrespective of the maturity or conversion period
– is mandatory and should be disclosed.
• The disclosure should also include the unaccepted credit rating.
• Two ratings from two different credit rating agencies registered with SEBI
should be obtained in case of public/rights issue of Rs.100 crore and more.
• All credit ratings obtained during the three years preceding the public/rights
issue for any listed security of the issuing company should also be disclosed
in the offer document.
• Outstanding Warrants / Financial Instruments
• An unlisted company is prohibited from making a
public issue of shares /convertible securities in
case there are any outstanding financial
instruments / any other rights entitling the existing
promoters / shareholders any option to receive
equity share capital after the initial public offering
• Partly Paid-up Shares:
• Before making a public / rights issued of
equity shares / convertible securities, all the
existing partly paid up shares should be made
fully paid up or forfeited if the investor fails to
pay call money within 12 months.
• Pricing of Shares
• A listed company can freely price shares/convertible
securities through a public/ rights issue.
• An unlisted company eligible to make a public issue
and desirous of getting its securities listed on a
recognized stock exchange can also freely price
shares and convertible securities.
• The free pricing of equity shares by an infrastructure
company is subject to the compliance with disclosure
norms as specified by SEBI from time to time. While
freely pricing their initial public issue of shares/
• Differential Pricing
• Listed/unlisted companies may issue shares/convertible
securities to applicants in the firm allotment category at a
price different from the price at which the net offer to the
public is made, provided the price at which the securities
are offered to public.
• A listed company making a composite issue of capital may
issue securities at differential prices in its public and rights
issue. In the public issue, which is a part of a composite
issue, differential pricing in firm allotment category vis-à-vis
the net offer to the public is also permissible.
• Price Band
• The issuer / issuing company can mention a price
band of 20% (cap in the price band should not
exceed 20% of the floor price) in the offer document
filed with SEBI and the actual price can be
determined at a later date before filing it with the
ROC.
• Promoters’ Contribution and Lock-in Requirements
• Public issue by unlisted companies:
• The promoters should contribute at least 20% and 50% of the
post issue capital in public issue at par and premium respectively.
• In case the issue size exceeds Rs. 100 crores, their contribution
would be computed on the basis of total equity to be issued,
including premium at present and in the future, upon conversion
of optionally convertible instruments, including warrants. Such
contribution may be computed by applying the slab rated
mentioned below:
• Public issue by listed companies: The participation of the promoters should
either be (i) to the extent of 20% of the proposed issue or (ii) to ensure
shareholding to the extent of
20% of the post-issue capital.
• Composite issue by Listed Companies: At the option of the promoters, the
contribution would be either 20% of the proposed public issue or 20% of the
post-issue capital, excluding rights issue component of the composite issue
• Public Issue by unlisted infrastructure companies at premium: The promoters
contribution, including contribution by equipment suppliers and other strategic
investors, should be at least 50% of the post-issue capital at the same or a
price higher than the one at which the securities are being offered to public.
• Securities Ineligible for computation of promoters contribution:
• The securities specified below acquired by /allotted to promoters
would not be considered for computation of promoters’ contribution.
• Where before filing the offer document with SEBI, equity shares were
acquired during the preceding three years (a) for consideration other
than cash and revaluation of assets /capitalization of intangible assets
is involved in such transactions and (b) from a bonus issue out of
revaluation
reserves or reserves without accrual of cash revenues.
• P/E means price per share / Earnings per share
or Market Cap/ Net Income ( both are same).
For a private company valuation, we first
calculate the industry average P/E and then
multiply it by net incone of the private
company under consideration and it gives us
the market capitalisation which is then added
to net debt of the company.The result is the
Enterprise Value of the company.