INITIAL PUBLIC OFFERINGS

(IPOs)
REGULATIONS, PROCESS AND
CURRENT SCENARIO

Vaibhav Jain
Associate Director
INMACS MANAGEMENT SERVICES LIMITED
Mobile: +91-98681 44380
Email: vaibhavjain@inmacs.com
Personal: vaibhav1986@gmail.com; vaibhavjain.personal@gmail.com
What’s happening ?

•Deregulation
•Complexities
•Globalization
•Consolidation
•Quick access to
information •Competition
•More perfect •Co-petition
Market place
•Obsolescence
•Technological
•Talent Retention
Convergence
•Volatility
•
Environment Enterprise
The Current Environment
 Equity Market

There are two segments in the equity market



» Primary market - Market for new issues of securities

» Secondary market - The market where securities are
traded after they are initially offered in the primary
market.
 Primary Market - Introduction

»Companies issue both equity and debt in the

primary market


»Governments, both Central and State, issue only

debt in the form of dated securities and treasury
bills in the primary market
»
»
 Primary Market - Introduction

»Through the primary market issues, governments

and companies raise funds for fresh
investments and repayment of previous loans
taken from the public
»An issue can be a public issue or private
placement
»An issue where allotment is made to less than 50
persons is a private placement.
 Primary Market-Key Concepts
»Different Types of Issues:
1.Public Issue
ØInitial Public Offering:
v Fresh Issue
v Offer for Sale

ØFuture Public Offering:

v Fresh Issue
v Offer for Sale

2.Right Issue
3.Preferential Allotment
v

Primary Market-Key Concepts

»Book Building
ØDesigned to ascertain demand
Øfor the securities at various price levels
Øwithin a price band
Øto facilitate discovery of
Øthe Issue Price

»Auction of Securities
Part A


 Related Regulations
 Capital Market Regulation-
Enabling Framework

Companies
Act, 1956
- Securities Securities
-Provisions Relating Contract and
to Prospectus
- (Regulation) Exchange
-Provisions on
Minimum
Act, 1956 Board of
Subscription, India
Allotment, Return
of Allotment
-
-Power to SEBI under
section 55 A
relating to Issue &
transfer of
securities
 SCRR- Rule 19(2)(b) - prior to 4.6.2010
ü
ü
ü
Initial Listing Requirement :
any is required to satisfy the exchange that :
securities are offered to the public for subscr
d to public ,
Rs . 100 core , and
uilding method
o QIBs .
or a Government company .

11
 SCRR- Amendment dated 4.6.2010
ü
ü
ü

Continuous Listing Requirement :

ber of issued shares of a class or kind , and

hin 2 years . It can increase the public shareholding by issuan

12
 Enabling Framework-SEBI
ü
ü
ü

of Capital Issues (Control) Repeal Ordinance and capital Issues (control) Re

protection of investor's interest is now primarily the responsibility of the Sec

13
 Enabling….SEBI Regulations
Date
Aug 26, 2009 Key
Issue of Regulations
Capital and Disclosure Requirement, Regulations 2009
May 19, 2009 Investor Protection and Education Fund, Regulations, 2009

July 17, 2003 Prohibition of Fraudulent and Unfair Trade Practices relating to the
Securities Market, Regulations, 2003
July 11, 2003 Prohibition of Insider Trading (Amendment) Regulations, 2003

Feb 20, 1997 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997

Dec 09, 1996 SEBI (Mutual Funds) Regulations, 1996

Nov 14, 1995 SEBI (Foreign Institutional Investors) Regulations, 1995
July 14, 1994 SEBI (Bankers to an Issue) Regulations, 1994
May 31, 1993 SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993

Dec 22, 1992 SEBI (Merchant Bankers) Regulations, 1992

14
 Enabling…. ICDR

E OF CAPITAL AND DISCLOSURE R

ations : 111
y ( Regulation 3 ):
ssue – IPO & FPO
sue
tial Issue
ares
d Institutional Placement ( QIP )
epository Receipts ( IDRs )
 ICDR Regulations 2009
ü
ü
ü
ns for Public Issues & Right Issue
for public
gard to Promoters contribution, lock-in
Public, Reservations, Green Shoe Option, Allotment Procedure, Basis
ures in the Offer Document
ns of Issuer & Intermediaries with respect to Public Issue & Right Issu
eferential Issue, QIP, Bonus Issue & IDRs
 ICDR……… Regulation 4

Reg4 provides for following general eligibility conditions for
the issue…
ü Issuer, its promoter group or directors or persons in control
of the issuer should not be debarred from accessing
capital market
ü Promoters, directors or persons in control of the issuer
should not be a promoter, director or person in control of
any other company which is debarred from accessing
capital market
ü Issuer to make application to one or more recognized stock
exchanges for listing of shares
ü Issuer to enter into agreement with a depository for demat of
specified securities
ü All partly-paid up equity shares have been made fully paid-up
ü Made firm arrangements of finance through verifiable means
towards 75% of the stated means of finance excluding the
amount to be raised through the issue or thru internal
accruals
 ICDR …….Reg. 5

Reg 5 deals with the appointment of merchant banker



and other intermediaries:



üIssuer to appoint one or more merchant bankers, one

of whom shall be a lead merchant banker
üRights, obligations and responsibilities of merchant
bankers shall be disclosed as “Inter-Se Allocation
of Responsibilities”
üIssuer to appoint other intermediaries such as
Registrar, collection bankers, syndicate members in
consultation with the lead merchant banker
üLead Merchant Bankers to submit a due diligence
certificate to SEBI at the time of submission of offer
document

 ICDR ……Reg. 26 (Regarding IPO)
Very Important
Reg 26(1) provides that issuer shall make an IPO if :


ü it has Net tangible assets of at least 3 crores in each of

the three preceding full years
ü It has a track record of distributable profits for at least 3
out of immediately preceding 5 years
ü its net worth of at least 1 crore rupees in each of the
preceding three full years
ü Aggregate of the proposed issue and all previous issues
made in the same financial year does not exceed 5
times its pre-issue net worth as per audited balance
sheet
ü In case of change in name within the last one year, at
least 50% of the revenue for the preceding full year
earned from the activity indicated by the new name.


 ICDR …….Regulation 26
Very Important
Reg 26(2) provides that if the issuer does not satisfy any of the
conditions , it can still make an IPO if :
1. Issue is made through book building process and at least 50%
BOTH CONDITIONS TO

of the net offer to public is allotted to QIBs;

 OR
BE SATISFIED

 At least 15% of the project cost is contributed by

scheduled commercial banks and at least 10% of the net
offer to public is allotted to QIBs


2. Minimum post-issue face value capital is Rs.10 crore

 OR
 Issuer undertakes to provide market making for at
least 2 years from the date of listing.


 Reg 27 relates to FPO and says that company can make an

FPO if last two conditions specified in Reg26(1) are fulfilled
otherwise it has to fulfill the conditions specified in Reg 26(2)


 ICDR ……Regulation 30-68
Reg 30 deals with pricing and price band:
üIssuer may mention floor price or price band in RHP
 OR

 Issuer may announce floor price or price band at

least 2 working days before bid opening in IPO

and at least 1 day before bid opening in FPO in
newspapers
üCap on the price</= 120% of the floor price
üFloor Price/Final Price not to be less than face value
ü
Reg 32 deals with Lock-in period:

üIn case of IPO promoters share not less than 20% of post
issue capital has to be locked in for 3 years
ü
Reg 46 - issue shall be open for minimum 3 days and max

10 days including days for which issue is kept open in

case of revision in price-band.

ICDR… Reg. 10 - Fast Track Issuance criteria
a . Listed on NSE & BSE > 3 years from date of
registering the Prospectus with RoC
b . Average Market Capitalization > Rs 5000
Crore
c . The annualised trading turnover of the
Equity Shares of the Company during 6
calendar months immediately preceding the
month > 2 % of the weighted avg . No . of
Equity Shares listed
d . Redressed > 95 % of the complaints of the
investors till the end of Qtr preceding
the month of registering Prospectus with
the RoC ;
e . Issuer has been in compliance with the
equity listing agreement for a period of
> 3 years preceding date of registering
ICDR… Reg 10 - Fast Track Issuance criteria

f.
 The impact of auditors ’ qualifications , on
the audited accounts in respect of those
financial years for which such accounts are
disclosed in Prospectus does not exceed 5 %
of the net profit or loss for respective
years ;
g.
 No show - cause notices have been issued or
prosecution proceedings initiated or
pending against the Company or its Promoter
h . The entire shareholding of the promoter


group is held in Demat form

i.
 No change in the Management since IPO
»
Part B


 The Process
 Process of collection of
Application to Refund
Bank

Application Form

Investor Bidding Center Registrar

Allotment Letters/
Refund Orders /

Stock
Certificates

Exchange

Processing Server Electronic Data Capture

and Dispatch

Verification
Stamping /

Reconciliation
Data Analysis

Printing of Refund Orders Preparation of Basis

Generation and Creation of Allotment as per basis,
evised Time Line Schedule for IPO / FP
Schedule with complete details
T+2
Application Form
with supporting
documents
Bank
Investor Bidding
Center

Bank T+6
Final Certificate by
Bank T+2
EB for validation by
Account

Trade T+12 Data

Credit of Shares to

Capture
Investors
T+11

El
In ec
al imt tr
ap lot ati on
Stock pr me on ic
Exchange ov nt o bi
al T f d
by +7 bas
SE by is T+
on RT A of 1
T+ &
8

RTA commence validation with Depositories RTA

Depositori T+2 till T+4 and prepare rejected
es schedule by T+5
Printi
ng of
Completion of despatch of refund warrants T+10 Refund
Orders
 Book Building

»The company appoints a merchant banker as a

book runner
»The company issues a prospectus that has
information about issue size, business,
promoters, etc. but not the price. The price
range is indicated.
»Period for bidding is indicated
»Bids are collected and the book is closed.
»On the basis of bids received, issue price is
decided.
Bidding-Normal Book Building Process
Issue Size : 10000 Category Allotment Allotment
shares Under Under
Price Band : Rs . 200 - Regulation Regulation
210 Deman Category % of 26(1) 26(2)
Price Allotment Allotment
Points d Built of Issue under Under QIB upto 50% Min 50
Investor Size Regulation Regulatio NIB 15 15
26(1) n 26(2) Retail 35 35
210 2000 QIB 20% No No
  1000 NIB 10% 5 Conditions U/r 26(1) of ICDR
2000 Retail 20%
5000   50 % 1.Net tangible Assets>Rs.3crore in
208 4500 QIB 45% Yes No preceding 3 years.
  1500 NIB 15% 2.Track Record of Distributable profits
5000 Retail 50% in 3 out of preceding 5 years
11000   110 % 3.Net worth >= Rs.1crore in each of
205 5000 QIB 50% Yes Yes preceding 3 years
  2000 NIB 20% 4.Proposed issue+all previous issues
5500 Retail 55% in one year<= 5 times pre-issue
12500   125 % net-worth
200 8000 QIB 80% Yes Yes 5.If name change in last 1 year then
  7000 NIB 70% 50% of revenues should be from
7000 Retail 70% activity indicated by new name.
22000   220 %

28
 Public Issue Pricing

»Till 1992, the price was fixed by the Controller of

Capital Issues.
»After SEBI was established in 1992, we have
moved to free pricing. The price is decided by
the company now with advice from the
merchant bankers.
 Free pricing of a public issue

»Fixed-price: The issuer fixes the price well

before the actual issue. To ensure full
subscription, they fix slightly lower prices.
»
»Book-building: The price is decided through the
book-building process. The prices are slightly
higher than the fixed-price method.
 Methods of pricing an IPO
Discounted Cash Flow Method - uses FCFF
FCFF = EBIT ( 1 - T )+ Depreciation - Capital
1 Expenditure + Change in WC
FCFF is discounted by WACC for a given
time horizon

Comparable trading multiple

2 EPS * P / E ratio = Price

factors are considered in combination before deciding

cing could be “fixed price” or “discovered thru auction

31
 Pricing issues for FPO

ü No guidelines exist for pricing FPO

ü FPOs are typically priced at a discount to CMP
CMP Discount FPO Price
(Rs)
ü
ü
NTPC 211.30 5% 201
ü
REC
ü 220 7.74% 203
NMDC 401.85 25.3% - 12.9% 300-350
 IPOs - Special issues
» Employee reservation is now capped at up to 5 % of the
post issue capital instead of 10 % of issue size ( as
under the DIP Guidelines ); application size for and
value of allotment to an employee under employee
reservation capped at Rs . 1 lakh ; retail discounts to
employees in the reservation portion also limited to
application size Rs . 1 lakh .
» ASBA process, introduced on July 30 , 2008 as an
alternate mode of payment for resident retail
investors , expanded in 2009 to all categories of
bidders excluding qualified institutional bidders .
» Pre - IPO allotment / transfer : Under ICDR Regulations ,
capital structure must be frozen at DRHP stage and
details of any proposed pre - IPO allotment / transfer
must be disclosed .
» The ICDR Regulations introduced the concept of
anchor investors in 2009 - allowing up to 30 %
allocation at a price equal to or above issue price
to QIBs buyers applying for shares of a minimum
value of Rs . 10 crore in a book built public issue .
 Performance of IPOs
 There is no guarantee that IPO performance will
always be profitable
»

 Company IPO price Price-02.07.2010 % change

 Parabolic Drugs Ltd 75.00 63.4 15.46
 Tarapur Transformers75.00 38.40 48.8
 Goenka Diamond &
 Jewels Ltd 135.00 74.90 44.5
 Shree Ganesh Jewellery
 House Ltd 260.00 114.25 56.05
 Persistent Systems 310.00 486.20 56.83

 IL & FS Transportation 258.00 288.35 11.76


IPO/FPO intermediaries and advisors
and transaction agreements
Intermediaries +
Advisors
Book running lead managers
Transaction agreements and
important documents
Letters of engagement for advisors

Auditors
 Auditors’ comfort letters

Legal Counsel: Domestic and


Registrar’s agreement

international

Issue agreement

Registrar to the issue Syndicate agreement

Depositories (NSDL/CDSL) Escrow agreement

Syndicate members Underwriting agreement

Escrow collection banks (incl. refund Legal opinions (including 10b-5 style

banks) disclosure letter)

Experts, if any

IPO Grading (for unlisted

companies)

35
Role of the Lead Merchant Banker
»Due diligence of the issue disclosures
»Making underwriting arrangements
»Setting up minimum number of collection centers
»Taking care of allotment, refund and dispatch of
certificates
 Registrar to Issue

1 . Collecting Forms
2 . Processing
3 . Record of applications received and
rejected and monies received ,
transferred to Public Offer Account
and refunds
4 . Providing correct data in time to
enable the Selling Shareholder and the
Company to determine and finalize the
basis of allocation and allotment
5 . In time and In Full Credit to Demat
Account
6 . Dispatch of letters of allotment /
Confirmation of Allocation Note
(“ CAN ”)/ refund orders
7 . Ensuring that proper grievance
handling mechanism is in place at its 37
 Auditor in Public Issue
üAccording to ICDR auditor to the issue will be
Auditor of the Company .
ü
üFurther SEBI ( ICDR ) Regulations , 2009 specify that :


 The financial information specified in DRHP / RHP /

Prospectus under Schedule VIII , PART - A ( 2 )( IX ) of
ICDR shall be certified by only those auditors who
have subjected themselves to the peer review
process of the Institute of Chartered Accountants
of India ( ICAI ) and hold a valid certificate issued
by the ‘ Peer Review Board ’ of the ICAI .


 All financial information specified in this item

must be re - audited for one full financial year and
the stub period , by the auditor certifying them in
case where the financial statements were audited by
Guidance - How to apply for a public issue?

»Get an application form from a share broker or

Apply Online
»Fill up the form and submit it with the amount to
the collecting centre.
»You can receive the shares in your demat
account.
»If the application form is incomplete, it will be
rejected and amount will be refunded.
Guidance - Factors to look for while applying for IPO

»Promoters track record in terms of experience,

performance, reputation
»Risk factors in the offer document
»Financial forecasts for the business/project
»Issue price in relation to the face value
»Listing details
»The registrar, lead manager, bankers to the issue
 Guidance - Sources of Information
»Read a reputed financial daily to understand the
economy and the market
»Watch the business news on television
» Bloomberg UTV, CNBC TV 18, etc
»Subscribe to the publications of investor
associations
»Attend the investors meetings of the investor
associations regularly
»Browse the websites of SEBI, NSE and BSE
Learn Continuously
or Die
to being flexible and adaptable,
new challenges”

-Jim Harris
‘The Learning Paradox’
 Thank You

Vaibhav Jain
Associate Director
INMACS MANAGEMENT SERVICES LIMITED
Mobile: +91-98681 44380
Email: vaibhavjain@inmacs.com
Personal: vaibhav1986@gmail.com; vaibhavjain.personal@gmail.com