Prospectus:

 A notice, circular, advertisement or other documents

inviting deposits from the public or inviting offers from
the public for the subscription or purchase of shares in or
debentures of a body corporate.”
Prospectus:

In Education In Finance

 a document sent to potential  a disclosure document that describes a financial

(prospective) students to attract them to apply for security for potential buyers. It commonly
admissions. It usually contains information about
provides investors with material information
the institution and the available courses,
about mutual funds, stocks, bonds and
including advice on how to apply and the benefits
of accepting a place. other investments, such as a description of the

company's business, financial statements,

biographies of officers and directors, detailed

information about their compensation, any

litigation that is taking place, a list of material

properties and any other material information.

Draft Prospectus:

 A draft prospectus provides the information on the financials

of the company, promoters, background, tentative issue price
etc.

 It is filed by the Lead Managers with the Securities &

Exchange Board of India (SEBI) to provide issue details.
Overview of the draft prospectus can be seen on
www.sebi.gov.in (SEBI's web site).

 The final prospectus is printed after obtaining the clearance

from SEBI and the Registrar of Companies (ROC).
A list of recent RHP’s
Learning to understand:

 Red Herring Prospectus

Red herring:

 A red herring is something that misleads or distracts from

a relevant or important issue. It may be either a
logical fallacy or literary device that leads readers or
audiences towards a false conclusion.
Red Herring:

 Some clue or indicator that is misleading.

Red Herring in Finance:

 In 1920’s, American Investment Bankers started calling

preliminary prospectus’ “red herring” as a warning to the
investors that the documents were not complete or final
and could be misleading.
What is meant by a RHP?
 Red Herring Prospectus is a prospectus also called offer document, which
does not have details of either price or number of shares being offered, or
the amount of issue.

 However, the number of shares and the upper and lower price bands are
disclosed.

 An RHP can be filed with the RoC without the price band and the issuer, in
such a case will notify the floor price or a price band by way of an
advertisement one day prior to the opening of the issue.

 Only on completion of the bidding process, the details of the final price are
included in the offer document. The offer document filed thereafter with
ROC is called a prospectus.
Modes of raising capital in PM:

 Prospectus;
 Private placement;
 Rights issue.
Raising Capital through Prospectus:

 Initial
Public Offer or IPO;
 Follow on Public Offer or FPO.
Appointment of Intermediaries:

 Investment Bankers – one of them acts as BRLM;

 Syndicate members;
 Underwriters;
 Registrar to the issue;
 Share Transfer Agent;
 Bankers to the Issue;
 Credit Rating Agency;
 Depositories;
 Legal Counsel and Auditors.
Definition of Prospectus:

 A prospectus is a formal legal document, which is

required by and filed with the Securities & Exchange
Board of India (SEBI), that provides details about an
investment offering for sale to the public.

 A prospectus should contain the facts that an investor

needs to make an informed investment decision.
What is meant by a RHP?

 A red herring prospectus contains most of the information

pertaining to the company's operations and prospects, but
does not include key details of the issue such as its price
and the number of shares offered.

 However, the upper and lower price bands are disclosed.

Preparation of DRHP:
 Finalisation of size and composition of the issue;

 Obtaining of authorisation to float a public issue from BOD’s and subsequently from
shareholders;

 Last five years accounts are recast and audited as per SEBI guidelines;

 Obtaining of FIPB and RBI approval for issuing and transfer of securities to
NRI/FIIs/FVCIs;

 Amendment in Memorandum and Articles of Association to allow a company seek listing;

 Obtaining of in-principle approval from the stock exchange before SEBI observations on
DRHP are received;

 BRLM to conduct due diligence on all pertinent matters.

Disclosures in DRHP:
 Financials;

 Objects of the issue;

 Reasons for raising money, the way money is proposed to be spent and the return expected on the money;

 Project details;

 Details of promoters and management;

 Outstanding Litigations against the company and Directors;

 Auditors reports;

 Management discussion and analysis of financial performance;

 Related party transactions and risk factors;

 Details of the Compliance Officer appointed for the issue.

A list of recent RHP’s
Template RHP:

 Red Herring Prospectus

Filing of DRHP with SEBI & SE’s:

 Filing of DRHP with SEBI who examines the DRHP and

communicates its observations within 30 days;

 Filing of DRHP with SE’s as a requirement of listing;

 DHRP to be amended as per the observations of SEBI and

SE’s;

 BRLM should confirm compliance of the observations and seek

concurrence;

 Filing of RHP with ROC.

DRHP v/s RHP
DRHP: RHP:

 Final prospectus containing

 A prospectus containing all price band and issue dates;
mandatory disclosures except
price of the proposed issue.

 Filed with Registrar of

 Filed with SEBI and SE’s.
Companies before bid opening
date.
Final Prospectus:

 Carries price of the Issue;

 To be file with ROC upon closure of the issue.
Pricing of issue:

 Fixed Price Public Issue: The issuing company and LM

fix a price. To ensure full subscription, they fix slightly
lower prices.

 Public Issue through Book Building Route: The issuing

company and LM stipulate a floor price or a price band
and leave it to market forces to determine the final price
(price discovery through book building process).
Book Building: Schematic Process

Determination
Appointment Drafting Filing of
of
of BRLM Prospectus Prospectus
Price Band

Closure Allotment Circulation of

of Book and Refunds Draft
Prospectus

Filing of Determining Opening

Building of
Final final cut off of issue for
Book
Prospectus rate Bids

sartaj.hussain
Book building:

 Book building is a process of price discovery.

 Red Herring prospectus does not contain a price.

 Applicants bid for the shares quoting the price and the
quantity that they would like to bid at. Only the retail
investors have the option of bidding at 'cut-off‘.

 After the bidding process is complete, the 'cut-off' price is

arrived at on the lines of Dutch auction.
Types of Auction:

 Dutch Auction:

It is a competitive bidding technique where all shares are sold at

the lowest price. All the allotments are made at a single price.

 French Auction:

This is a bidding technique where allotments are made at bid

price.
Dutch Auction:
 A Book recording all the bids received on daily basis is built during offer open time;

 Bids received on daily basis are consolidated in each price category in terms of bid
price, bid size;

 On closure of issue, consolidated bids are sorted from highest to lowest in terms of bid
price;

 From highest to lowest, bid size are cummulated;

 Price corresponding to cumulative bid size equal to offer size is the: “cut-off price”

 Bidders that would have bid at/above the cut-off price are made allotments depending
on response to the offer.

 In case of over-subscription, allotment is made on pro-rata basis.

Illustration:

 Suppose that an offer of IPO is made through book-

building with the following details:

 Issue size: 100 lakh equity share shares of Rs 10 each at a

premium to be worked out through book building process.

 Price Band: 100-120 book building example.xls

Retail investor and cut-off price:

 'Retail individual investor' means an investor who applies

or bids for securities for a value of not more than
Rs.2,00,000.

 The issue price is called "Cut off price". This is decided

by the issuer and LM after considering the book and
investors' appetite for the stock using a certain defined
formula.
Revision of Bids:

 During auction, a book is built on the NSE and BSE

which can be watched by the investors to make and
revise their bids.

 During Bidding process, issuer can revise the offer

floor price/price band subject to certain conditions.

 An applicant has also the option of revising his bid

during the issue.
How can bids be made:

 Bids can be submitted in online/offline mode to the

Syndicate members represented by a group of brokers
who have access to the online bidding platform.
How can issuer revise Price Band?

 Spread between the floor and the cap of the price band
should not be more than 20%

 Revising Price Band 50% either way, (Moving Price Band

concept).
How can an investor revise his bid?

 Can bid at cut off price;

 Can change or revise the quantity or price in the bid using

the form for changing/revising the bid that is available
along with the application form.
Issue open duration:

 Fixed price public issues: 3‐10 working days.

 Book built public issues: 3‐7 working days extendable by

3 days in case of a revision in the price band.

 Rights issues: 15‐30 days.

Listing and commencement of trading:

 The listing on the stock exchanges is done within 7 days

from the finalization of the issue. Ideally, it would be
around 3 weeks after the closure of the book built issue.

 In case of fixed price issue, it would be around 37 days

after closure of the issue.