You are on page 1of 43

"15 Critical Disclosure Requirements for IPO Document"

A Group Presentation by:


ABHIJEET ASHOK 7 PRATIK BEDEKAR 14 RAHUL BHARDWAJ 17 ASHRITA CHINDARKAR 24 SHREYAS DESHPANDE 33 MOUSHMI DUTTA 38 TRIPTI GAWANKAR 44 SUNIL GUPTA 48 BHUSHAN JOSHI 54

Table of Contents
INTRODUCTION .................................................................................................................................. 3 KEY TERMS INVOLVED .................................................................................................................... 7 IMPORTANT DISCLOSURES ........................................................................................................... 11 OBJECTS OF THE OFFERING ...................................................................................................... 11 PROMOTERS CONTRIBUTION .................................................................................................... 12 LOCK-IN REQUIREMENTS .......................................................................................................... 14 RISK FACTORS .............................................................................................................................. 16 IPO GRADING ................................................................................................................................. 17 CAPITAL STRUCTURE ................................................................................................................. 18 ELIGIBILITY NORMS .................................................................................................................... 20 PRICING METHODOLOGY........................................................................................................... 22 BASIS OF ALLOTMENT ................................................................................................................ 26 STATEMENT REGARDING MINIMUM SUBSCRIPTION ......................................................... 27 LITIGATIONS AND DEFAULTS .................................................................................................. 27 INDUSTRY AND BUSINESS OVERVIEW................................................................................... 29 MANAGEMENT DISCUSSION AND ANALYSIS: ...................................................................... 30 FINANCIAL STATEMENTS .......................................................................................................... 31 OTHER REGULATORY AND STATUTORY DISCLOSURES ................................................... 34 IPOS FROM THE PAST 2 YEARS ..................................................................................................... 35 CASE STUDIES ................................................................................................................................... 36 JUSTDIAL IPO ................................................................................................................................ 36 FACEBOOK IPO.............................................................................................................................. 38 CONCLUSION: .................................................................................................................................... 43

INTRODUCTION
Industry raises finance from the Capital Markets with the help of a number of instruments. A market consists of sellers of products and buyers thereof. Obviously, the securities market refers to investors i.e. wealth savers, who mobilize their savings and search for a remunerative source of investment thereof on the one hand, and on the other the capital seekers, that is, business, industry or government. These two constitute the core elements of the capital market. The capital market consists of Primary Markets and Secondary Markets. The Primary Market deals with the issue of new instruments by the corporate sector such as equity shares, preference shares and debt instruments. Central and State governments, various public sector industrial units (PSUs), statutory and other authorities such as state electricity boards and port trusts also issue bonds/debt instruments. The primary market in which public issue of securities is made through a prospectus is a retail market and there is no physical location. Offer for subscription to securities is made to the investing community. The Secondary Market or Stock Exchange is a market for trading and settlement of securities that have already been issued. The investors holding securities sell securities through registered brokers/sub-brokers of the stock exchange. Investors who are desirous of buying securities purchase securities through registered brokers/sub-brokers of the stock exchange. It may have a physical location like a stock exchange or a trading floor. In the secondary market, there are the Stockbrokers (who are members of the stock exchanges), The Mutual Funds, Financial Institutions, Foreign Institutional Investors (FIIs), and Individual Investors. Registrars and Transfer Agents, Custodians and Depositories are capital market intermediaries that provide important infrastructure services for both primary and Secondary market. For ensuring the smooth working of the capital market, certain regulatory frame works have been passed from time to time to meet this objective.

The Indian Scenario The Indian securities market is emerging from the slowdown that has affected all markets. It is expected the most likely outcome for Indian capital markets in the coming year to show a healthy upswing. The fundamentally sound situation that the Indian economy continues to experience promises a rosy future for domestic and international investors. The capital market is one of the most vibrant sectors in the financial system, marking an important contribution to the countrys economic development. With the sweeping economic changes witnessed globally towards more market oriented economies, the government of India too has embarked upon radical economic policy measures to revitalize its economy. The Indian capital markets, which have attained a remarkably high degree of growth in the last decade, are poised for a further leap forward over the next ten years. With the opening of the economy to multinationals and the adoption of more liberal economic policies, the economy is driven more towards the free market economy.

IPO
Initial public offering, or IPO, is the first sale of a corporation's common shares to investors on a public stock exchange. Cash exchanges hands between the company and the investors. The term IPO only refers to the first public issuance of a company's shares IPO is done in the Primary market. If a company later sells newly issued shares again to the market, it is called a Seasoned Equity offering or Follow-on Public Offering. When a shareholder sells shares, it is called a secondary offering and the shareholder, not the company that originally issued the shares, retains the proceeds of the offering. If a company later sells newly issued shares again to the market, it is called a Seasoned Equity offering or Follow-on Public Offering When a shareholder sells shares, it is called a secondary offering and the shareholder, not the company that originally issued the shares, retains the proceeds of the offering. For the company, the following diagram shows the various ways in which a company can raise funds:

A company goes for an IPO mainly for funding needs or non-funding needs. The following are the reasons why a company would go for an IPO:

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 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 Provide liquidity to the shareholders

IPO Process:

KEY TERMS INVOLVED


Promoter: The promoter has been defined as a person or persons who are in over-all control of the company, who are instrumental in the formulation of a plan or programme pursuant to which the securities are offered to the public and those named in the prospectus as promoters(s).

It may be noted that a director / officer of the issuer company or person, if they are acting as such merely in their professional capacity are not be included in the definition of a promoter. 'Promoter Group' includes the promoter, an immediate relative of the promoter (i.e. any spouse of that person, or any parent, brother, sister or child of the person or of the spouse). In case promoter is a company, a subsidiary or holding company of that company; any company in which the promoter holds 10% or more of the equity capital or which holds 10% or more of the equity capital of the Promoter; any company in which a group of individuals or companies or combinations thereof who holds 20% or more of the equity capital in that company also holds 20% or more of the equity capital of the issuer company. In case the promoter is an individual, any company in which 10% or more of the share capital is held by the promoter or an immediate relative of the promoter' or a firm or HUF in which the 'Promoter' or any one or more of his immediate relative is a member; any company in which a company specified in (i) above, holds 10% or more, of the share capital; any HUF or firm in which the aggregate share of the promoter and his immediate relatives is equal to or more than 10% of the total, and all persons whose shareholding is aggregated for the purpose of disclosing in the prospectus "shareholding of the promoter group".

ASBA: -Application Supported by Blocked Amount (ASBA) means an application for subscribing to an issue containing an authorisation to block the application money in a bank account. ASBA Investor means an investor who intends to apply through ASBA process , in case of public issue: (a) is a Resident Retail Individual Investor; (b) is bidding at cut-off, with single option as to the number of shares bid for;

(c) is applying through blocking of funds in a bank account with the SCSB; (d) has agreed not to revise his/her bid; (e) is not bidding under any of the reserved categories.

Book Building: Book-building is a process of price discovery used in public offers. Refers to collection of Bids from the Investors

Collection Centre: Collection Centre means a place where the application for subscribing to the public or rights issue is collected by the Banker to an Issue on behalf of the issuer company.

Firm Commitment offering: The underwriters will purchase the shares at a discount (of usually 7%) and resell them for the full public offering price to institutional and individual investors. Best Effort basis: Underwriters are only committing their best efforts to find good investors but they themselves wont buy the shares. Price Band: A price band is the range of price within which an investor can place his bid for the securities. The price mentioned by the investor in the bid-cum-application form can neither be less than the lower limit of the price band nor can it exceed the upper limit of the price band. For example, In the recent IPO of Coal India, the price band was Rs. 225-245 per share, which means that an investor can bid only within the range of Rs. 225 to Rs. 245

Maximum Subscription Limit Maximum Subscription Limit for Retail Investors is the maximum amount of investment which can be made though a single bid-cum-application form, or simply speaking, by a single individual, in a public issue. Previously, retail investors were allowed to make an application of a maximum of Rs.1,00,000, but now SEBI has increased this limit to Rs.2,00,000. Any application by an retail investor which exceeds Rs. 2,00,000 becomes an application by a

High Net Worth Individual (HNI), thus disabling the investor to enjoy the benefits of discount which are offered in some big ticket IPOs to the retail investors. BRLM (Book Running Lead Manager): BRLM are those financial institutions whose names you find at the bottom of the bid-cumapplication form like Karvy Securities, Kotak Mahindra, SBI Capital, Enam Securities etc. On a serious note, BRLMs or Merchant Bankers are those financial intermediaries which are involved in the IPO process right from the very first stage and play a vital role in preparation & submission of prospectus, price fixation, application processing, allotment and listing.

Green Shoe Option: A provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. Legally referred to as an overallotment option.

A green shoe option can provide additional price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges.

Qualified Institutional Buyer: - Qualified Institutional Buyer means a) a public financial institution as defined in section 4A of the Companies Act, 1956; b) a scheduled commercial bank; c) a mutual fund registered with the Board; d) a foreign institutional investor and sub-account registered with SEBI, other than a sub-account which is a foreign corporate or foreign individual; e) a multilateral and bilateral development financial institution; f) a venture capital fund registered with SEBI; g) a foreign venture capital investor registered with SEBI; h) a state industrial development corporation; i) an insurance company registered with the Insurance Regulatory and Development Authority (IRDA);

j) a provident fund with minimum corpus of Rs. 25 crores; k) a pension fund with minimum corpus of Rs. 25 crores; l) National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated November 23, 2005 of Government of India published in the Gazette of India.

Retail Individual Shareholder: - Retail Individual Shareholder means a shareholder of a listed company, who a) as on the record date (i.e., the date fixed for the purpose of determining eligible shareholders), is holding shares which, on the basis of the closing price of the shares as on the previous day, are worth up to Rs.1,00,000/-; and b) applies or bids for securities of or for a value of not more than Rs.1,00,000/-

Underwriting: Underwriting means an agreement with or without conditions to subscribe to the securities of a body corporate when the existing shareholders of such body corporate or the public do not subscribe to the securities offered to them.

Safety Net: A scheme "safety net" for retail investors where the company promoters assure that they will buy back shares from the retail applicants at the IPO price, if its stock falls sharply during the first six months after listing.

IMPORTANT DISCLOSURES
OBJECTS OF THE OFFERING 1. If one of the objects is investment in a joint venture or a subsidiary or an acquisition, the following additional disclosures shall be made: a) Details of the form of investment, i.e., equity, debt or any other instrument b) If the form of investment has not been decided, a statement to that effect; c) If the investment is in debt instruments, complete details regarding rate of interest, nature of security, terms of repayment, subordination, etc. d) If the investment is in equity, whether any dividends are assured; e) The nature of benefit expected to accrue to the issuer as a result of the investment; 2. If one of the objects of the issue is the grant of a loan to any entity, details of the loan agreements, including the rate of interest, whether secured or unsecured, duration, nature of security, terms of repayment, subordination etc. and the nature of benefit expected to accrue to the issuer as a result of the investment. If such loan is to be granted to a subsidiary, group or associate company, details of the same. 3. If one of the objects of the issue is utilisation of the issue proceeds for long term working capital, the following additional disclosures shall be made. a) Basis of estimation of working capital requirement along with the relevant assumptions. b) Reasons for raising additional working capital substantiating the same with relevant facts and figures. c) Details of the projected working capital requirement, including detailed assessment of working capital after implementation of the project or achievement of objects of the issue, as the case may be, capacity utilisation assumptions, break up of expected current assets into raw materials, finished goods, work in progress, sundry debtors etc., with assumption about the holding norms for each type of current asset, total current

liabilities, net current assets and envisaged sources of finance for net current assets, i.e., bank finance, institutional finance, own funds, etc.. d) The total working capital requirement, the margin money thereof and the portion to be financed by any bank(s) or otherwise. e) A complete perspective on the present working capital position vis--vis the projected one based on which the money is proposed to be raised in the public issue. 4. Disclosure of asset cover etc. in case of public issue of secured convertible debt instruments: The details of the assets on which security/ asset cover, if required, shall be created, the basis for computation of the security/asset cover, the valuation methods, the periodicity of such valuation and the ranking of the charge(s).

PROMOTERS CONTRIBUTION In a public issue by an unlisted company, the promoters shall contribute not less than 20% of the post issue capital. The promoters shareholding after offer for sale shall not be less than 20% of the post issue capital. Where the promoters of any company making an issue of securities have acquired equity during the preceding three years, before filing the offer documents with the Board, such equity shall not be considered for computation of promoters contribution if it is; acquired for consideration other than cash and revaluation of assets or capitalisation of intangible assets is involved in such transaction(s); or resulting from a bonus issue, out of revaluation reserves or reserves without accrual of cash resources. In respect of companies formed by conversion of partnership firms, where the partners of the erstwhile partnership firm and the promoters of the converted company are the same and there is no change in management, the shares allotted to the promoters during previous one year out of the funds brought in during that period shall not be considered eligible for computation of promoters contribution unless such shares have been issued at the same price at which the public offer is made. Provided that if the partners capital existed in the firm for

a period of more than one year on a continuous basis, the shares allotted to promoters against such capital shall be considered eligible. However in all cases such ineligible shares acquired in pursuance to a scheme of merger or amalgamation approved by a High Court shall be eligible for computation of promoters contribution. For the purposes of computing the promoters contribution referred to above, minimum contribution of Rs.25000 per application from each individual and minimum contribution of Rs.1 lac from firms and companies (not being business associates like dealers and distributors), shall be eligible to be considered towards promoters' contribution. No securities forming part of promoters contribution shall consist of any private placement made by solicitation of subscription from unrelated persons either directly or through any intermediary. The securities for which a specific written consent has not been obtained from the respective shareholders for inclusion of their subscription in the minimum promoters contribution subject to lock-in shall not be eligible for promoters contribution. Promoters Participation in Excess of the Required Minimum Contribution to be Treated as Preferential Allotment Participation by promoters in the proposed public issue in excess of the required minimum percentage shall attract the pricing provisions of Guidelines on preferential allotment, if the issue price is lower than the price as determined on the basis of said preferential allotment guidelines. Promoters Contribution to be Brought in Before Public Issue Opens Promoters shall bring in the full amount of the promoters contribution including premium at least one day prior to the issue opening date, which shall be kept in an escrow account with a Scheduled Commercial Bank and the said contribution / amount shall be released to the company along with the public issue proceeds. Provided that, where the promoters' contribution has been brought prior to the public issue and has already been deployed by the company, the company shall give the cash flow statement in the offer document disclosing the use of such funds received as promoters' contribution. Provided (further) that where the promoters minimum contribution exceeds Rs.100 crores, the promoters shall bring in Rs.100 crores before the opening of the issue and the remaining contribution shall be brought in by the promoters in advance on pro-rata (basis) before the calls are made on public. A copy of the resolution along with a Chartered Accountants' Certificate certifying that the promoters contribution has been brought in shall be filed with the Board before opening of the issue. The certificate of the Chartered Accountants shall also be accompanied by a list of

names and addresses of friends, relatives and associates who have contributed to the promoters' quota along with the amount of subscription made by each of them. Exemption from Requirement of Promoters Contribution The requirement of promoters contribution shall not be applicable a. 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 preceding years. Provided that if the promoters participate in the proposed issue to the extent greater than higher of the two options referred earlier, the subscription in excess of such percentage shall attract pricing guidelines on preferential issue, if the issue price is lower than the price as determined on the basis of said guidelines on preferential issue. b. in case of companies where no identifiable promoter or promoter group exists. c. in case of rights issues. Provided, in case of (a) and (c) above, the promoters shall disclose their existing shareholding and the extent to which they are participating in the proposed issue, in the offer document.

LOCK-IN REQUIREMENTS In case of any issue of capital to the public the minimum promoters contribution shall be locked in for a period of 3 years. The lock-in shall start from the date of allotment in the proposed public issue and the last date of the lock-in shall be reckoned as three years from the date of commencement of commercial production or the date of allotment in the public issue whichever is later.

In case of a public issue by unlisted company, if the promoters contribution in the proposed issue exceeds the required minimum contribution, such excess contribution shall also be locked in for a period of(one year).

In case of a public issue by a listed company, participation by promoters in the proposed public issue in excess of the required minimum percentage shall also be locked-in for a period of (one year) as per the lock-in provisions as specified in Guidelines on Preferential issue.

Provided that excess promoters contribution shall not be subject to lock-in 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 preceding years. In case shortfall in the firm allotment category is met by the promoter such subscription shall be locked in for a period of (one year).

Securities Issued Last to be Locked-in First The securities forming part of promoters contribution and issued last to the promoters shall be locked in first for the specified period. Provided that the securities issued to the financial institutions appearing as promoters, if issued last, shall not be locked-in before the shares allotted to the other promoters. The entire pre-issue share capital, other than that locked-in as promoters' contribution, shall be locked-in for a period of one year from the date of commencement of commercial production or the date of allotment in the public issue, whichever is later. However pre-issue share capital held by Venture Capital Funds and Foreign Venture Capital Investors registered with the Board shall not be locked-in. The same shall, however, be locked-in as per the provisions of the SEBI (Venture Capital Funds) Regulations, 1996 and SEBI (Foreign Venture Capital Investors) Regulations, 2000 and any amendments thereto held for a period of at least one year at the time of filing draft offer document with the Board and being offered to the public through offer for sale." Securities issued on firm allotment basis shall be locked-in for a period of one year from the date of commencement of commercial production or the date of allotment in the public issue, whichever is later. Locked-in Securities held by promoters may be pledged only with banks or financial institutions as collateral security for loans granted by such banks or financial institutions, provided the pledge of shares is one of the terms of sanction of loan. Transfer of locked-in securities amongst promoters as named in the offer document, can be made subject to the lock-in being applicable to the transferees for the remaining period of lock in. The securities which are subject to lock-in shall carry inscription `non transferable' along with duration of specified non-transferable period mentioned in the face of the security certificate.

RISK FACTORS The following clause on Risks in relation to the first issue (wherever applicable) shall be incorporated in a box format in case of a initial public issue: "This being the first issue of the company, there has been no formal market for the securities of the company. The face value of the shares is (-----) and the issue price/ floor price/ price band is X-times of the face value. The issue price/ floor price/ price band (has been determined and justified by the Lead Merchant Banker and the issuer company as stated under Justification of Premium paragraph - in case of premium issue) should not be taken to be indicative of the market price of the equity shares after the shares are listed. No assurance can be given regarding an active or sustained trading in the shares of the company nor regarding the price at which the equity shares will be traded after listing."

The following clause on general risk shall be incorporated: "Investment in equity and equity related securities involve a degree of risk and investors should not invest any funds in this offer unless they can afford to take the risk of losing their investment. Investors are advised to read the risk factors carefully before taking an investment decision in this offering. For taking an investment decision, investors must rely on their own examination of the issuer and the offer including the risks involved. The securities have not been recommended or approved by Securities and Exchange Board of India (SEBI) nor does SEBI guarantee the accuracy or adequacy of this document." Specific attention of investors shall be invited to the statement of Risk factors by indicating their page number(s) in the General Risks. The Risk factors, other than those mentioned above shall be classified as those which are specific to the project and internal to the issuer company and those which are external and beyond the control of the issuer company. The Risk factors shall be determined on the basis of their materiality. Materiality shall be decided taking the following factors into account: Some events may not be material individually but may be found material collectively. Some events may have material impact qualitatively instead of quantitatively. Some events may not be material at present but may be having material impacts in future. The Risk factors shall appear in the prospectus in the following manner: Risks envisaged by Management.

Proposals, if any, to address the risks.

IPO GRADING No unlisted company shall make an IPO of equity shares or any other security which may be converted into or exchanged with equity shares at a later date, unless the following conditions are satisfied as on the date of filing of Prospectus (in case of fixed price issue) or Red Herring Prospectus (in case of book built issue) with ROC: (i) the unlisted company has obtained grading for the IPO from at least one credit rating agency; (ii) disclosures of all the grades obtained, along with the rationale/ description furnished by the credit rating agency(ies) for each of the grades obtained, have been made in the Prospectus (in case of fixed price issue) or Red Herring Prospectus (in case of book built issue); (iii) the expenses incurred for grading IPO have been borne by the unlisted company obtaining grading for IPO.) The IPO grade represents a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India. Such grading is generally assigned on a five-point point scale with a higher score indicating stronger fundamentals and vice versa as below. 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

The IPO grading process is expected to take into account the prospects of the industry in which the company operates, the competitive strengths of the company that would allow it to address the risks inherent in the business(es) and capitalise on the opportunities available, as well as the companys financial position. While the actual factors considered for grading may not be identical or limited to the following, the areas listed below are generally looked into by the rating agencies, while arriving at an 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 ProjectsRisks and Prospects

It may be noted that the above is only indicative of some of the factors considered in the IPO grading process and may vary on a case to case basis.

IPO grade/s cannot be rejected by the issuer company. Irrespective of whether the issuer finds the grade given by the rating agency acceptable or not, the grade has to be disclosed as required under the DIP Guidelines. However the issuer has the option of opting for another grading by a different agency. In such an event all grades obtained for the IPO will have to be disclosed in the offer documents, advertisements etc.

CAPITAL STRUCTURE The capital structure shall be presented in the following manner in a tabular form: a) The authorised, issued, subscribed and paid up capital (number of securities, description and aggregate nominal value). b) Size of the present issue, giving separately the promoters contribution, reservation for specified categories and net offer to public, names of the group companies if reservation has been made for shareholders of the group companies and applicable percentages may be given in case of a book built issue.

c) Paid up capital: i. ii. After the issue. After conversion of convertible instruments (if applicable).

d) Share premium account (before and after the issue). The following notes shall be incorporated after the details of capital structure: a) Where shares have been issued for consideration other than cash or out of revaluation reserves at any point of time, the details shall be furnished in a separate table, indicating the date of issue, persons to whom issued, price, reasons for the issue and whether any benefits have accrued to the issuer out of the issue. b) Where shares have been allotted in terms of any scheme approved under sections 391394 of the Companies Act, 1956, the fact shall be distinctly stated and the details of such shares allotted shall be given, along with the page numbers of the offer document where extensive details of such scheme is given. c) If the issuer has made any issue of specified securities at a price lower than the issue price during the preceding one year, specific details of the names of the persons to whom such specified securities have been issued, whether they are part of promoters group, reasons for such issue and the price shall be given. d) The following details regarding major shareholders: The names of the ten largest shareholders of the issuer and the number of equity shares held by them as on the date of registering the offer document with the Registrar of Companies. Implication: Information of shares held by the largest shareholders need to be mentioned for as on date of registering offer document and 2 years prior is required to be submitted in order to see if they have purchased high no. Of shares in order to take the benefit of IPO or to tweak the price of share during IPO. e) The details of shareholding, if any, of the lead merchant bankers and their associates in the issuer. f) In case it is not possible to obtain information regarding sales and purchases of specified securities by any relative of the promoters, the information shall be disclosed on the basis of the transfers as recorded in the books of the issuer and/or the depository, as applicable and a statement to such effect shall be made in the offer document. g) A statement that an over-subscription to the extent of ten per cent. of the net offer to public can be retained for the purpose of rounding off to the nearer multiple of minimum allotment lot.

h) A disclosure to the effect that all securities offered through the issue shall be made fully paid-up or may be forfeited for non-payment of calls within twelve months from the date of allotment of securities i) A disclosure stating that: i. The unsubscribed portion in any reserved category may be added to any other reserved category. ii. The unsubscribed portion, if any, after such inter se adjustments among the reserved categories shall be added back to the net offer to the public portion. iii. In case of under-subscription in the net offer to the public portion, spill-over to the extent of under subscription shall be permitted from the reserved category to the net offer to public portion.

ELIGIBILITY NORMS

IPO By unlisted companies : An unlisted company may make an 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, only if it meets all the following conditions: a) The company has net tangible assets of at least Rs. 3 crores in each of the preceding 3 full years (of 12 months each), of which not more than 50% is held in monetary assets:

Provided that if more than 50% of the net tangible assets are held in monetary assets, the company has made firm commitments to deploy such excess monetary assets in its business/project. b) The company has a track record of distributable profits for at least three 3 out of immediately preceding five 5 years Provided further that extraordinary items shall not be considered for calculating distributable profits c) The company has a net worth of at least Rs. 1 crore in each of the preceding 3 full years.

d) In case the company has changed its name within the last one year, atleast 50% of the revenue for the preceding 1 full year is earned by the company from the activity suggested by the new name. e) The aggregate of the proposed issue and all previous issues made in the same financial year in terms of size (i.e., offer through offer document + firm allotment + promoters contribution through the offer document), does not exceed five (5) times its pre-issue networth as per the audited balance sheet of the last financial year.)

The unlisted company not fulfilling the above norms can issue IPO only if it meets both the conditions (a) and (b) given below :

(a) (i) The issue is made through the book-building process, with at least (50% of net offer to public) being allotted to the Qualified Institutional Buyers (QIBs), failing which the full subscription monies shall be refunded. OR (a) (ii) The project has at least 15% participation by Financial Institutions/ Scheduled Commercial Banks, of which at least 10% comes from the appraiser(s). In addition to this, at least 10% of the issue size shall be allotted to QIBs, failing which the full subscription monies shall be refunded

AND

(b) (i) The minimum post-issue face value capital of the company shall be Rs.10 crores. OR (b) (ii) There shall be a compulsory market-making for at least 2 years from the date of listing of the shares, subject to the following: a) Market makers undertake to offer buy and sell quotes for a minimum depth of 300 shares (b) Market makers undertake to ensure that the bid-ask spread (difference between quotations for sale and purchase) for their quotes shall not at any time exceed 10%: (c) The inventory of the market makers on each of such stock exchanges, as on the date of allotment of securities, shall be at least 5% of the proposed issue of the company.

Public Issue by Listed Companies :A listed company shall be eligible to make a public issue of equity shares or any other security which may be converted into or exchanged with equity shares at a later date: Provided that the aggregate of the proposed issue and all previous issues made in the same financial year in terms of size (i.e., offer through offer document + firm allotment + promoters contribution through the offer document), issue size does not exceed 5 times its pre-issue networth as per the audited balance sheet of the last financial year. Provided (further) that in case there is a change in the name of the issuer company within the last 1 year (reckoned from the date of filing of the offer document), the revenue accounted for by the activity suggested by the new name is not less than 50% of its total revenue in the preceding 1 full-year period.)

PRICING METHODOLOGY A company planning an IPO typically appoints a lead manager, known as a book runner, to help it arrive at an appropriate price at which the shares should be issued. There are two primary ways in which the price of an IPO can be determined. Either the company, with the help of its lead managers, fixes a price (fixed price method) or the price can be determined through analysis of confidential investor demand data, compiled by the book runner. That process is known as book building. The issuer shall undertake the book building process in a manner specified in Schedule XI. There are two types of Public Issues:

Issue Type

Offer Price Price at which the securities

Demand Demand for the securities offered is known only after the closure of

Payment 100 % advance payment is required to be made by the investors at

Reservations 50 % of the shares offered are reserved for applications below Rs. 1

Fixed Price Issues

are offered and would be allotted is made known

in advance to the investors

the issue

the time of application.

lakh and the balance for higher amount applications.

10 % advance A 20 % price band is offered by the issuer within which investors are BookBuildingIssues allowed to bid and the final price is determined by the issuer only after closure of the bidding. Demand for the securities offered , and at various prices, is available on a real time basis on the BSE website during the bidding period.. payment is required to be made by the QIBs along with the application, while other categories of investors have to pay 100 % advance along with the application. 50 % of shares offered are reserved for QIBS, 35 % for small investors and the balance for all other investors.

More About Book Building: Book Building is essentially a process used by companies raising capital through Public Offerings-both Initial Public Offers (IPOs) or Follow-on Public Offers ( FPOs) to aid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer. The process is directed towards both the institutional as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process..

TheProcess:

The Issuer who is planning an offer nominates lead merchant banker(s) as 'book runners'. The Issuer specifies the number of securities to be issued and the price band for the bids. The Issuer also appoints syndicate members with whom orders are to be placed by the investors.

The syndicate members input the orders into an 'electronic book'. This process is called 'bidding' and is similar to open auction.

The book normally remains open for a period of 5 days. Bids have to be entered within the specified price band. Bids can be revised by the bidders before the book closes. On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels.

The book runners and the Issuer decide the final price at which the securities shall be issued.

Generally, the number of shares are fixed, the issue size gets frozen based on the final price per share.

Allocation of securities is made to the successful bidders. The rest get refund orders.

Guidelines for Book Building Rules governing Book building are covered in Chapter XI of the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines

BSE's Book Building System

BSE offers a book building platform through the Book Building software that runs on the BSE Private network.

This system is one of the largest electronic book building networks in the world, spanning over 350 Indian cities through over 7000 Trader Work Stations via leased lines, VSATs and Campus LANS.

The software is operated by book-runners of the issue and by the syndicate members , for electronically placing the bids on line real-time for the entire bidding period.

In order to provide transparency, the system provides visual graphs displaying price v/s quantity on the BSE website as well as all BSE terminals.

Differential Pricing: An issuer may offer specified securities at different prices, subject to the following: A:retail individual investors or retail individual shareholders may be offered specified securities at a price lower than the price at which net offer is made to other categories of applicants. Provided that such difference shall not be more than ten per cent of the price at which specified securities are offered to other categories of applicants; B:In case of a book built issue, the price of the specified securities offered to an anchor investor shall not be lower than the price offered to other applicants.

Basis for Price Issue: The basis for issue price, floor price or price band, as the case may be, shall be disclosed and justified by the issuer in consultation with the lead merchant banker on the basis of the following information, which shall be also disclosed separately: 1. Earnings per Share and Diluted Earnings per Share, pre-issue, for the last three years (as adjusted for changes in capital). 2. Price Earnings ratio pre-issue. 3. Average Return on Net Worth in the last three years.

4. Minimum Return on Increased Net Worth required maintaining pre-issue Earnings per Share. 5. Net Asset Value per share based on last balance sheet. 6. Net Asset Value per share after issue and comparison thereof with the issue price.

BASIS OF ALLOTMENT

In a public issue of securities, the Executive Director/Managing Director of the Designated Stock Exchange along with the post issue Lead Merchant Banker and the Registrars to the Issue shall be responsible to ensure that the basis of allotment is finalised in a fair and proper manner in accordance with the following guidelines:

Proportionate Allotment Procedure : Allotment shall be on proportionate basis within the specified categories, rounded off to the nearest integer subject to a minimum allotment being equal to the minimum application size as fixed and disclosed by the issuer.

Reservation for Retail Individual Investor : The above proportionate allotments of securities in an issue that is oversubscribed shall be subject to the reservation for Retail individual investors as described below:

a) A minimum 50% of the net offer of securities to the public shall initially be made available for allotment to retail individual investors, as the case may be.

b) The balance net offer of securities to the public shall be made available for allotment to: i) individual applicants other than retail individual investors, and; ii) other investors including Corporate bodies/ institutions irrespective of the number of shares, debentures, etc. applied for. c) The unsubscribed portion of the net offer to any one of the categories specified in (a) or (b) shall / may be made available for allotment to applicants in the other category, if so required.

STATEMENT REGARDING MINIMUM SUBSCRIPTION For Non-underwritten Public Issues: If the company does not receive the minimum subscription of 90% of the issued amount on the date of closure of the issue, or if the subscription level falls below 90% after the closure of issue on account of cheques having being returned unpaid or withdrawal of applications, the company shall forthwith refund the entire subscription amount received. If there is a delay beyond 8 days after the company becomes liable to pay the amount, the company shall have to pay interest.

For Underwritten Public Issues: If the company does not receive the minimum subscription of 90% of the net offer to public including devolvement of Underwriters within 60 days from the date of closure of the issue, the company shall forthwith refund the entire subscription amount received. If there is a delay beyond 8 days after the company becomes liable to pay the amount, the company shall have to pay interest.

LITIGATIONS AND DEFAULTS 1. All pending litigations in which the promoters are involved, defaults to the financial institutions/banks, non-payment of statutory dues and dues towards instrument holders like debenture holders, fixed deposits, and arrears on cumulative preference shares by the promoters and the companies/firms promoted by the promoters, shall be listed in the prospectus together with the amounts involved and the present status of such litigations/defaults. The likely adverse effect of these litigations/defaults, etc. on the financial performance of the company shall also be mentioned. 2. Further, the cases of pending litigations, defaults, etc. in respect of

companies/firms/ventures with which the promoters were associated in the past but are no longer associated shall also be disclosed in case their name(s) continues to be associated with particular litigation(s). 3. a) The information is required to be furnished in addition to the litigations against the company or against any other company whose outcome could have a materially adverse effect of the position of the company.

b) Further, all the litigations against the promoter or directors involving violation of statutory regulations or criminal offence shall be furnished in the offer document. 4. a.) The pending proceedings initiated for economic offences against the directors, the promoters, companies and firms promoted by the promoters shall be disclosed separately indicating their present status. b.) The details of the past cases in which penalties were imposed by the concerned authorities. 5. Outstanding litigations, defaults, etc., pertaining to matters likely to affect operations and finances of the company including disputed tax liabilities, prosecution under any enactment in respect of Schedule XIII to the Companies Act, 1956 (1 of 1956) shall be furnished in the prospectus in the prescribed format. 6. The name(s) of small scale undertaking(s) or any other creditors to whom the company owes a sum exceeding Rs. 1 lakh which is outstanding more than 30 days; 7. i. If any of the above mentioned litigations, etc., arise after the filing of the offer document, the facts shall be incorporated appropriately in the prospectus (and as risk factors). ii. In case there are no such cases a distinct negative statement is required to be made in this regard in the prospectus. Caselet: RJGSM vs Reliance Power(ADAG company): Year 2007 The Bombay High Court had refused to intervene in a matter alleging fraud of more than Rs 9000 crore being comitted by Anil Dhirubhai Ambani Group in the proposed IPO of their group company stating this on 1st November 2007, Reliance Power Ltd. and disposed of the petition with direction to the Securities and Exchange Board of India(SEBI) to decide the concerned complaint as expeditiously as possible. An investors association, Rajkot Shahar/Jilla Grahak Suraksha Mandal, had filed the Public Interest Litigation alleging that the promoters of Reliance Power Ltd. had tried to subvert SEBI rules to evade more than Rs 9254 crore required to be invested by them towards promoters contribution under SEBI norms. When the matter came up before a division bench comprising Chief Justice Swatanter Kumar and Justice D Y Chandrachud, Mr K T S Tulsi, appearing for the petitioners, said that generally complaints are made after something happened and investigations are conducted after the frauds are committed. In this case, the petitioners have pointed out an alleged fraud when it was being committed. Before he could further his averments, the court pointed out that the petitioner association had filed complaints with SEBI on October 18 and with the Company Law Board on the next day and said that there was no reason to believe that SEBI

would not act on their representations. Upon which the Senior Counsel urged that SEBI be restrained from scheduling the IPO for at least two weeks after their representation was decided. But the court turned him down and simply directed SEBI to decide the complaint filed by the petitioner association expeditiously and disposed of the petition. Counsel for the Reliance Energy questioned the motive behind the filing of the petition, saying that the second and third petitioners Pradip Nambiar and Bhupendra Singh, respectively, had became shareholders of the company only while filing the complaints.

INDUSTRY AND BUSINESS OVERVIEW


Industry Overview:

Total turnover of each major industry segment in which the issuer company operated. The extent to which business is seasonal. Competitive Conditions.

Business overview:

(i) Details of the business of the issuer company: (a) Location of the project. (b) Plant, machinery, technology, process, etc. (i) In case of machines yet to be delivered, the date of quotations relied upon for the cost estimates given, shall also be mentioned. (ii) Percentage and value terms the plant and machinery for which orders are yet to be placed shall be stated and also be given by way of a risk factor. (c) Collaborations, any performance guarantee or assistance in marketing by the collaborators. (d) Infrastructure facilities for raw materials and utilities like water, electricity, etc. (e) Products/ services of the company. (ii) Business strategy: (a) Brief statement about business strategy. (b) Brief statement about future prospects, including capacity & capacity utilization and projections. No forecast of projections relating to financial performance of the issuer company shall be given in the prospectus.

(iii) Competitive strengths (to be disclosed on a voluntary basis). (iv) Insurance (to be disclosed on a voluntary basis). (v) Property. (vi) Purchase of property.

CaseLet: We provide users of our Just Dial search service with information and user reviews from our database of local businesses, products and services across India. Our search service is available to users through multiple platforms, such as the Internet, mobile Internet, over the telephone (voice) and text (SMS). In fiscal 2011, we addressed over 180 million search queries from millions of users across platforms. As of June 30, 2011, we were conducting approximately 139,500 campaigns for our paid advertisers.

MANAGEMENT DISCUSSION AND ANALYSIS: Detailed discussion on performance for past 3 years. Capital Expenditure. Cash Flow and Liquidity.

An analysis of reasons for the changes in significant items of income and expenditure shall also be given, inter alia, containing the following: a. unusual or infrequent events or transaction; b. significant economic changes that materially affected or (are likely to effect income from continuing operations; c. known trends or uncertainties that have had or are expected to have a material adverse impact on sales, revenue or income from continuing operations; d. future changes in relationship between costs and revenues, in case of events such as future increase in labour or material costs or prices that will cause a material change are known;

e. the extent to which material increases in net sales or revenue are due to increased sales volume, introduction of new products or services or increased sales prices; f. total turnover of each major industry segment in which the company operated

FINANCIAL STATEMENTS

Under this head financial statement and restatement as per the requirement of the Guidelines and differences between any other accounting policies and the Indian Accounting Policies (if the Company has presented its Financial Statements also as per either US GAAP/IFRS) are presented.

Selected Consolidated Financial and Operating data: 1. The consolidated financial statement prepared on the basis of Accounting Standard 21(AS 21) Consolidated Financial Statements issued by the Institute of Chartered Accountants of India shall be incorporated in the offer document. 2. All the notes to the accounts, significant accounting policies as well as the auditors qualifications shall be incorporated

Financial Information of the issuer:

1. A report by the auditors of the issuer with respect to: a) profits and losses and assets and liabilities is required b) the rates of dividends, if any, paid by the issuer in respect of each class of shares in the issuer for each of the five financial years immediately preceding the issue of the offer document, giving particulars of each class of shares on which such dividends have been paid and particulars of the cases in which no dividends have been paid in respect of any class of shares for any of those years; 2. If the issuer has subsidiaries, the report shall:

a) so far as regards profits and losses, deal separately with the issuers profits or losses i. as a whole with the combined profits or losses of its subsidiaries, so far as they concern the members of the issuer; or ii. individually with the profits or losses of each subsidiary, so far as they concern the members of the issuer; b) so far as regards assets and liabilities, deal separately with the issuers assets and liabilities as provided and in addition, deal either: i. as a whole with the combined assets and liabilities of its subsidiaries, with or without the issuers assets and liabilities; or ii. individually with the assets and liabilities of each subsidiaries;

3. If the proceeds, or any part of the proceeds, of the issue of the shares or debentures are, or is, to be applied directly or indirectly: a) in the purchase of any business; or b) in the purchase of an interest in any business and by reason of that purchase, or anything to be done in consequence thereof, or in connection therewith; the issuer will become entitled to an interest as respects either the capital or profits and losses or both, in such business exceeding fifty percent, thereof;

4. Accounting and other ratios: a. The following key accounting ratios shall be given for each of the accounting periods for which financial information is given. b. Earnings per Share and Diluted Earnings Per Share: This ratio shall be calculated after excluding extra ordinary items. c. Return on net worth: This ratio shall be calculated after excluding revaluation reserves and extra-ordinary items d. Net Asset Value per share. This ratio shall be calculated excluding revaluation reserves. e. Accounting and other Ratios shall be based on the Financial Statements prepared on the basis of Indian Accounting Standards.

f.

In the event of capital structure undergoing a change on account of capitalisation of reserves, its impact on the key ratios should be distinctly brought out. The impact of outstanding financial instruments, if any, on the ratios, should also be disclosed.

5.

It shall be disclosed in the offer document whether any of the sundry debtors is related to the directors or promoters or the issuer in any way. Similar disclosures shall be made in case of loans and advances

Caselet: GroupOn IPO

With the "deal market" nearing saturation and GroupOn not even profitable, the company decided to do an IPO to essentially monetize their massive top-line growth rate. But along the way, they had to restate their financial statements multiple times, both before and after the IPO which the SEC. There were major problems with the way the company accounted for their revenue and marketing costs. One thing GroupOn tried to do was to book the whole value of the deals they sold as revenue. There have been plenty of examples of companies in the past who have provided what is, essentially, a broker function make failed attempts to try to recognize the cost of the goods they are brokering as revenue. GroupOn's restructured revenue recognition lead to them changing their 2010 stated revenue from $713.4 million down to $312.9 million - a drop of 56%. These kinds of accounting problems are especially troubling considering how extremely simple GroupOn's business is. There is a lot more understanding from investors when a company like GE has accounting issues, considering that it earns tens of billions of revenue, in many different industries, and in many different countries. But GroupOn's accounting problems are much more morally troubling. These problems along with others (questions about whether or not their financial statements were audited, and unconventional accounting metrics) made the GroupOn IPO resemble an outright scam

OTHER REGULATORY AND STATUTORY DISCLOSURES

A: (a)For Issuer Company- "Promise Vs Performance - Last three issues" shall be given indicating whether all the objects mentioned in the respective offer documents relating to the earlier issues by the issuer company were met and whether all projections made in the said offer documents were achieved. If not, non-achievement of objects/projections shall be brought out distinctly shortfall and delays shall be quantified. (b)For Group/Associate companies- Last one Issue of group/associate companies" shall be given indicating whether all the objects mentioned in the respective offer documents relating to group/ associate companies were met and whether all projections made in the said offer documents were achieved. If not, non-achievement of objects/ projections shall be brought out distinctly. Shortfall and delays shall be quantified. B: Outstanding debentures or bonds and redeemable preference shares and other instruments issued by the issuer company outstanding as on the date of prospectus and terms of issue. C: High, low and average market prices of the share of the issuer company during the preceding three years; D: Under this there must be detailed explanation regarding Investor grievances such as Mechanism evolved by issuer company for redressal, time normally taken by issuer company for disposal of various types of investor grievances. E: Capitalisation of reserves or profits (during last five years). F: Revaluation of assets, if any (during the last five years)

IPOS FROM THE PAST 2 YEARS

IPO Name Muthoot Finance Future Ventures India Sanghvi Forging and Engg Indo Thai Securities Olympic Cards MT Educare Tribhovandas Bhimji Zaveri NBCC Channel Nine Entertainment Kavita Fabrics V mart Retail HPC Biosciences Bothra Metals and Alloy Repco Home Finance GCM securities Ashapura Intimates Fashion Just Dial India Finsec Edynamics Solutions

Face Value Floor Price Cap Price Issue Price 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 470 543 165 172 195 215 160 10 80 70 30 74 120 90 175 11 85 84 32 80 126 106 175 10 85 74 30 80 120 106 25 40 210 35 25 172 20 40 530 10 25

Issue type 100% Book Built issue 100% Book Built issue 100% Book Built issue 100% Book Built issue 100% Book Built issue 100% Book Built issue 100% Book Built issue 100% Book Built issue Fixed price issue Fixed price issue 100% Book Built issue Fixed price issue Fixed price issue 100% Book Built issue Fixed price issue Fixed price issue 100% Book Built issue Fixed price issue Fixed price issue

CMP(29/08/13) 119.25 6.05 15.30 10.00 33.70 95.00 142.00 115.35 44.55 33.60 189.50 103.50 30.00 225.05 180.00 72.00 670.00 17.65 45.25

Issue opening date 18/4/2011 25/4/2011 05-04-2011 30/9/2011 03-09-2012 27/3/2012 24/4/2012 22/5/2012 18/2/2013 20/2/2013 22/2/2013 03-01-2013 03-12-2013 13/3/2013 18/3/2013 28/3/2013 20/5/2013 24/5/2013 06-10-2013

CASE STUDIES

JUSTDIAL IPO

Just Dial
Incorporated in 1996, Justdial Limited (Just Dial) is popular local search service provider in India. Just Dials search services are available to users through Internet, mobile Internet, telephone and text (SMS). Selling advertisement and qualified leads is the main source of earning for Justdial. They have more than 145,000 paid advertisers. Companies promote their brand across the Just Dial network and reach millions people who are actively looking for information about the products and services. There are 4 ways available to promote brand or advertise on JustDial including Listing on Web, Listing on Phone Search, Listing on Mobile Search and Placing Video Ads. Objective of the Issue:-

1. Achieve the benefits of listing the Equity Shares on the Stock Exchanges 2. Carry out the sale of 17,497,458 Equity Shares by the Selling Shareholders. Just Dial IPO Grading:CRISIL assigned an IPO Grade 5/5 to the IPO of Just Dial Ltd. This grade indicates that the fundamentals of the Just Dial IPO are 'strong' relative to the other listed equity securities in India. CRISIL assigns IPO grading on a scale of 5 to 1, with Grade 5 indicating strong fundamentals and Grade 1 indicating poor fundamentals. Please note that this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy, sell or hold the graded instrument, or a comment on the graded instrument's future market price or its suitability for a particular investor. Investment Strategy It appeared that as promoters have to honour the "Safety Net" they too have opted for some dilution of stake to keep some buffer with them so that in the event of "Safety Net" clause application, it can pay from the buffer created and hence the issue size has more than doubles of its original plans and even higher than the CRISIL's consideration. On the performance front, the company had posted an average EPS of Rs. 6.05 (on consolidated and fully diluted basis-with a CAGR of 40.2% in top and 135.1% in bottom-line respectively) and its NAV as on 31.12.2012 is Rs. 57.51. For the first 9 months of the fiscal 2012-13 it had clocked turnover of Rs. 271.61 crore with a net profit of Rs. 47.08 crore and as the equity capital post IPO remained the same due to offer for sale, this translated into an annualized EPS of Rs. 8.99 and thus the asking price was at a P/E of 52 to 60 and at a P/BV of 8.2 to 9.4 based on lower and upper price band. Thus issue was aggressively priced. The company had no listed peer for comparison. The company faced competition from Askme, Asklaila, Getit, Sulekha etc and hence the first mover gains made in the past may see diminishing pattern going forward. On BRLM's front, Citi Group and Morgan Stanley had mandate for 17 and 11 IPOs and out of them 4 IPOs failed to give listing gains to investors from both of them.

Investors with high risk appetite could have listed for this IPO mainly because the capital is not being raised for the growth of the company and due to above reasons.

FACEBOOK IPO

The social networking company Facebook held its initial public offering (IPO) on May 18, 2012. The IPO was one of the biggest in technology, and the biggest in Internet history, with a peak market capitalization of over $104 billion. Media pundits called it a "cultural touchstone." Facebook's founder and chief executive Mark Zuckerberg had for years been unwilling to take the company public, and he resisted a number of buyout offers after Facebook's founding. The company did, however, accept private investments from companies--often technology firms. When the number of shareholders crossed the 500 threshold, Facebook had to take the company public. Zuckerberg retains control over the company, despite its being a public entity. Facebook's long-anticipated initial public offering was ultimately plagued by a series of problems. Its exchange, Nasdaq, suffered a computer malfunction during the first hours of the IPO, leading to tens of millions of dollars in trades being wrongly placed. Its underwriter, Morgan Stanley, faced claims that the initial price was too high and that they had issued too many shares. Facebook executives were accused of alerting industry insiders to Facebook's earnings before they were public. Facebook, Morgan Stanley, and Nasdaq are facing litigation over the matters. The stock lost over a quarter of its value in less than a month and went on to less than half its IPO value in three months. Valuation: Prior to the official valuation, the target price of the stock steadily increased. In early May, the company was aiming for a valuation somewhere from $28 to $35 per share ($77 billion to $96 billion). On May 14, it raised the targets from $34 to $38 per share. Some investors even suggested a $40 valuation, although a dip in the stock market on the day before the IPO canned such speculation.

Strong demand, especially from retail investors, suggested Facebook could choose a relatively high offering price. Ultimately underwriters settled on a price of $38 per share, at the top of its target range. This price valued the company at $104 billion, the largest valuation to date for a newly public company. On May 16, two days before the IPO, Facebook announced that it would sell 25% more shares than originally planned due to high demand. This meant the stock would debut with 421 million shares. The Facebook IPO brought inevitable comparisons with other technology company offerings. Some investors expressed keen interest in Facebook because they felt they had missed out on the massive gains Google saw in the wake of its IPO. LinkedIn stock, meanwhile, had doubled on its first day. At $26.81 per share, which Facebook closed at a week after its IPO, Facebook was valued like "an ultra-growth company," according to Robert Leclerc of the Financial Post. Its PE ratio was 85, despite a decline in both earnings and revenue in the first quarter of 2012. A number of commentators argued retrospectively that Facebook had been heavily overvalued because of an illiquid private market onSecondMarket, where trades of stock were minimal and thus pricing unstable. Facebook's aggregate valuation went up from January 2011 to April 2012, before plummeting after the IPO in May - but this was in a largely illiquid market, with less than 120 trades each quarter during 2010 and 2011. "Valuations in the private market are going to make it 'difficult to go public'", according to Mary Meeker, an American venture capitalist and former Wall Street securities analyst. Price targets: Prior to the IPO, several investors set price targets for the company. On May 14, before the offering price was announced, Sterne Agee analyst Arvind Bhatia pegged the company at $46 in an interview with The Street. The interviewer cautioned Bhatia against what she perceived as Bhatia's low valuation, suggesting the stock could rise to "60, 70, 80 dollars" and could shoot up to $60 on the first day of trading. On May 17, the day before the offering, analyst Jim Krapfel of Morningstar suggested that only a 50% or better increase on the first day would be seen positively; "anything under that would be underwhelming." Lee Simmons of Dun & Bradstreet predicted more modest first-day gains, in the range of 10 to 20%. No analysts Reuters interviewed projected a first-day decrease.

Others were less optimistic. Much of Wall Street expressed concerns over what it saw as a high valuation. Citing the price-to-earnings ratio of 108 for 2011, critics stated that the company would have to undergo "almost ridiculous financial growth [for the valuation] to make sense." Other companies trade at far lower ratios, although there are notable exceptions. Writers at TechCrunch expressed similar skepticism, stating, "That's a big multiple to live up to, and [Facebook] will likely need to add bold new revenue streams to justify the mammoth valuation". Early investors themselves were said to express similar skepticism. Warning signs before the IPO indicated that several such investors were interested in selling their shares of the company. Accel Partners planned to offload as many as 28% of their shares, whileGoldman Sachs was ready to sell up to 50% of theirs. Rolfe Winkler of the Wall Street Journal suggested that, given insider worries, the public should avoid snapping up the stock. Facebook employees were less concerned, with Mark Zuckerberg planning to sell just 6%. Price Movement:

Stock Trend:

(Source: Google Finance)

As is evident from the above graph, the price of the Facebook IPO fell sharply from the first day itself. Until about three months, it kept on falling to a value less than $20 per share. Then, from around Sep 2012, the share price was moving upwards. As of 29 August,2013 the share price of Facebook is $40.55.

Aftermath: The IPO had immediate impacts on the stock market. Other technology companies took hits, while the exchanges as a whole saw dampened prices. Investment firms faced considerable losses due to technical glitches. Bloomberg estimated that retail investors may have lost approximately $630 million on Facebook stock since its debut. UBS alone may have lost as much as $350 million. The Nasdaq stock exchange offered $40 million to investment firms plagued by offering-day computer glitches. While considerably higher than the usual $3 million limit on reimbursements, it was unlikely to make up for large investor losses. Additionally, the rival New York Stock Exchange lampooned the move as a "harmful

precedent" and an unnecessary subsidy in the wake of Nasdaq's missteps. Nasdaq claimed to fix the problems that beset the offering, and hired IBM for a technical review. The IPO impacted both Facebook investors and the company itself. It was said to provide healthy rewards for venture capitalists who finally saw the fruits of their labor. In contrast, it was said to negatively affect individual investors such as Facebook employees, who saw once-valuable shares become less lucrative. More generally, the disappointing IPO was said to lower interest in the stock by investors. That would make it more difficult for the company to accumulate cash reserves for large future expenditures such as acquisitions. CBS News said "the Facebook brand takes a pretty big hit for this," mostly because of the public interest that had surrounded the offering. Some suggested implications for companies other than Facebook specifically. The IPO could jeopardize profits for underwriters who face investors skeptical of the technology industry. In the long-run, the troubled process "makes it harder for the next social-media company that wants to go public." While the Wall Street Journal called for a broad perspective on the issue, they agreed that valuations and funding for future startup IPOs could take a hit. Online travel company Kayak.com delayed its IPO roadshow in the wake of Facebook's troubles. Analyst Trip Chowdhry suggested an even broader conclusion with regards to IPOs, arguing "that hype doesn't sell anymore, short of fundamentals." CBS News compared the situation to the dot-com bubble, warning that "You'd think we all would have learned our lesson" from that period of overvaluation. While expected to provide significant benefits to Nasdaq, the IPO resulted in a strained relationship between Facebook and the exchange. Facebook has considered moving its listing to a competing exchange.

CONCLUSION: Disclosures aim to enable the investor to make an informed decision and not blindly follow the QIBs It enables the investor to understand the purpose of the IPO If promoter participates in a good amount then it would give confidence to the investor Risk Factors for the IPO are clearly laid out. The IPO Grading assists the investor by providing an expert opinion The guidelines also disclose the litigations on the company which gives the legal position of the company Management Details, Discussion and Analysis gives the viewpoint of the company Financial Statements States the financial health of the company

You might also like