IPO final 1

8/3/2019 IPO final 1

1/60

IPOs


2/60

What is an IPO?

IPO stands for Initial Public Offering.

An IPO happens when a privately ownedcompany issues shares of stock to be sold

to the general public.


3/60

What is an IPO?

This means the company is no longerprivately owned

Owned by a variety of investors

Investors simply own some of thecompany's stock


4/60

IPOs can vary greatly from onecompany to another

A way for the company to make

money based on expectations offuture success and profit.


5/60

Why Have an IPO?

Toraise Money or Capital


6/60

Having an IPO is not so much an event as itis a process.

It takes months of planning to prepare a

company to go public.


7/60

A board of directors

Audit accounts for accuracy

Hire consultants and advisers

In fact, a whole cast of characters must takethe stage to help an IPO happen.


8/60

Appoint one or more Investment orMerchant Banks.


9/60

The most important role of Investmentbankers is of lead managers andUnderwriters.

The lead manager assists thecompany in all aspects of the issueprocess like preparing the draft

prospectus, organizing Road Showsetc.


10/60

The Underwriter an investment banker

works for an investment company.


11/60

Underwriters have the distribution channels

business community contacts

And

help set the initial offering price

work to create enthusiasm for the stock

assist in creating the prospectus.


12/60

The underwriting deal Firm Commitment : the underwriter

guarantees a certain minimum amount


13/60

Best Efforts Agreement : theunderwriter does not guarantee theamount that will be raised.


14/60

Prospectus

An important document describes the company to potential

investors.


15/60

The prospectus is reviewed by theSEC

SEC approval means that the

prospectus follows the regulations forsuch documents


16/60

Road show

Company executives go on the road show,otherwise known as the dog-and-pony show.

A tour of major cities and cities where importantbrokerage houses have their headquarters.

Invitation-only slide shows a few elite investors will even get one-on-one presentations

potential investors are given "goodie bags" containingcalendars, pens, samples of the company's product

Whatever helps investors think favorably about thecompany.


17/60

The Day before the IPO Issue

The day before the stocks are issued, theunderwriter and the company must determine astarting price for the stocks.

A target price will have been set early on in the

process, but IPOs are rarely stable.


18/60

Setting the Price

the higher the price, the more money the companygets

if the price is set too high - not enough demand forthe stocks

and the price will drop on the aftermarket


19/60

The ideal stock price will keepdemand just higher than supply,resulting in a stable, gradual increase

in the stock's price on the aftermarket.


20/60

Who buys the Shares?

complicated matter

typical, individual investors don't getaccess

Instead, the underwriter gets toallocate the shares to

associates

clients and major investors of his choosing.


21/60

Most of the shares (about 80 percent) will go toinstitutional investors, which are major brokeragefirms and investment banks, and a few high-profileindividual investors.

The remaining shares that do make their way tosmall-time, individual investors are hard to obtain:

Stock brokers usually only offer access to IPOs tohigher volume traders, and traders with a long-term

relationship with the broker.


22/60

Open Stock Market

After the initial offering, the stocks hitthe open stock market, where theybegin trading at a price set by market

forces. IPO stocks tend to trade at a very high

volume on that first day -- that is, they

change hands many times.


23/60

Some IPOs can jump in price by a huge amount --some more than 600 percent.

Many IPOs do poorly, dropping in price the day ofthe offering.

Others fluctuate, rising and then dipping again -- itall depends on the confidence the market has inthe company, how strong the company is vs. the"hype" surrounding it, and what outside forces are

affecting the market at the time.


24/60

After about a month, the underwriterissues a report on the IPO, which isalways positive.

This tends to give the stock a slightboost.

After 180 days have passed, people

who held shares in the company priorto its going public are allowed to selltheir shares.


25/60

Parties Involved in the IPO

The manager to the issue, registrars to the issue,

underwriters,

bankers, advertising agencies,

financial institutions and

government /statutory agencies.


26/60

MANAGERS TO THE ISSUE

Lead managers are appointed by thecompany to manage the initial public offeringcampaign.

Their main duties are:

Drafting of prospectus Preparing the budget of expenses related to the

issue

Suggesting the appropriate timings of the public

issue Assisting in marketing the public issue

successfully

Advising the company in the appointment ofregistrars to the issue, underwriters, brokers,

bankers to the issue, advertising agents etc.


27/60

Many agencies are performing the role oflead managers to the issue.

The merchant banking division of thefinancial institutions, subsidiary ofcommercial banks, foreign banks, privatesector banks and private agencies areavailable to act as lead mangers.

Such as SBI Capital Markets Ltd., Bankof Baroda, Canara Bank, DSP FinancialConsultant Ltd. ICICI Securities &Finance Company Ltd., etc.


28/60

The company negotiates withprospective mangers to its issue andsettles its selection and terms of

appointment. Usually companies appoint lead

managers with a successful

background. There may be more than one manager

to the issue.


29/60

Some times the banks or financialinstitutions impose a condition whilesanctioning term loan or underwritingassistance to be appointed as one of the

lead managers to the issue. The fee payable to the lead managers is

negotiable between the company andthe lead manager.

The fee agreed upon is revealed in thememorandum of the understanding filedalong with the offer document.


30/60

REGISTRAR TO THE ISSUE

After the appointment of the leadmanagers to the issue, in consultationwith them, the Registrar to the issue isappointed.

Quotations containing the details ofthe various functions they would beperforming and charges for them are

called for selection. Among them the most suitable one is

selected.


31/60

The Registrars normally receive theshare application from various collectioncenters.

They recommend the basis of allotmentin consultation with the Regional StockExchange for approval.

They arrange for the dispatching of the

share certificates. They hand over the details of the share

allocation and other related registers tothe company.


32/60

Usually registrars to the issue retainthe issuer records at least for a periodof six months from the last date of

dispatch of letters of allotment toenable the investors to approach theregistrars for redressal of their

complaints.


33/60

Share Transfer Agents

The Share Transfer Agents maintainthe records of holders of securities onbehalf of companies and deal with all

matters connected with thetransfer/redemption of its securities.


34/60

UNDERWRITERS

Underwriting is a contract by means ofwhich a person

gives an assurance to the issuer to theeffect

that the former would subscribe to thesecurities offered in the event of non-subscription by the person to whom they

were offered. The person who assures is called an

underwriter.


35/60

The underwriters do not buy and sellsecurities.

They stand as back-up supporters and

underwriting is done for a commission. Underwriting provides an insurance

against the possibility of inadequate

subscription.


36/60

Underwriters are divided into twocategories:

Financial Institutions and Banks Brokers and approved investment

companies


37/60

Some of the underwriters are financialinstitutions, commercial banks,merchant bankers, members of the

stock exchange, Export and ImportBank of India etc.

The underwriters are exposed to the

risk of non-subscription and for suchrisk exposure they are paid anunderwriting commission.


38/60

Before appointing an underwriter, the financial strength of the

prospective underwriter is considered

because he has to undertake andagree to subscribe the non-subscribedportion of the public issue.


39/60

The other aspects considered are:

Experience in the primary market Past underwriting performance and

default

Outstanding underwriting commitment The network of investor clientele of the

underwriter and

His overall reputation.


40/60

The company after the closure of subscriptionlist communicates in writing to the underwriterthe total number of shares/debentures undersubscribed, the number of shares/debentures

required to be taken up by the underwriter. The underwriter would take up the agreed

portion.

If the underwriter fails to pay, the company is

free to allot the shares to others or take upproceeding against the underwriter to claimdamages for any loss suffered by thecompany for his denial.


41/60

BANKERS TO THE ISSUE

Bankers to the issue have theresponsibility of collecting the applicationmoney along with the application form.

The bankers to the issue generallycharge commission besides thebrokerage, if any.

Depending upon the size of the public

issue more than one banker to the issueis appointed.

When the size of the issue is large, 3 to4 banks are appointed as bankers to the

issue.


42/60

The bankers to the issue should havebranches in the specified collectioncenters.

In big or metropolitan cities more than

one branch of the various bankers to theissue are designated as collectingbranches.

Branches are also designated in the

different towns of the state where theproject is being set up. If the collection centers for application

money are located nearby people arelikely to invest the money in the companyshares.


43/60

ADVERTISING AGENTS

Advertising plays a key role in promotingthe public issue.

Hence, the past track record of theadvertising agency is studied carefully.

Tentative program of each advertisingagency along with the estimated cost arecalled for.

After comparing the effectiveness andcost of each program with the other, asuitable advertising agency if selected inconsultation with the lead managers to

the issue.


44/60

The advertising agencies take theresponsibility of giving publicity to theissue on the suitable media.

The media may benewspapers/magazines/hoardings/press release or a combination of all.


45/60

THE FINANCIAL INSTITUTIONS

Financial institutions generally underwrite theissue and lend term loans to the companies.

Hence, normally they go through the draft ofprospectus, study the proposed program for

public issue and approve them. IDBI, IFCI & ICICI, LIC, GIC and UTI are the

some of the financial institutions thatunderwrite and give financial assistance.

The lead manager sends copy of the draftprospectus to the financial institutions andincludes their comments, if any in the reviseddraft


46/60

GOVERNMENT AND STATUTORYAGENCIES

The various regulatory bodies relatedwith the public issue are:Securities Exchange Board of India

Registrar of companies

Reserve Bank of India (if the project involvesforeign investment)

Stock Exchange where the issue is going tobe listed

Industrial licensing authorities

Pollution control authorities (clearance for theproject has to be stated in the prospectus)


47/60

COLLECTION CENTERS

Generally there should be at least 30mandatory collection centers inclusive ofthe places where stock exchanges arelocated.

If the issue is not exceeding Rs.10 Cr(excluding premium if any) themandatory collection centers are the fourmetropolitan centers viz. Mumbai, Delhi,Kolkata and Chennai

and at all such centers where stockexchanges are located in the region inwhich the registered office of thecompany is situated.


48/60

In addition to the collection branch,authorized collection agents may also beappointed.

The names and addresses of such agent

should be given in the offer documents. The collection agents are permitted to collect

such application money in the form ofcheques, draft, and not in the form of cash.

The application money so collected should bedeposited in the special share applicationaccount with the designated scheduled bankeither on the same day or latest by the next

working day.


49/60

Types of IPO

Fixed Price IPO. Book Building

Dutch Auction Method


50/60

Fixed Price IPO

The price at which the share will beoffered is determined before the issueopens.


51/60

BOOK BUILDING

Book building is a mechanism throughwhich the initial public offerings (IPOS)take place in the U.S. and in India it is

gaining importance with every issue. Most of the recent new issue offered

in the market has been through Book

Building process.


52/60

In this process the price determination isbased on orders placed and investors havean opportunity to place orders at differentprices as practiced in international offerings.

An indicative price range is given toinvestors as a starting point and they arerequired to bid for different numbers of

shares at different prices. Alternatively, a floor price may be indicated.


53/60

Nirma by offering a maximum of 100lakh equity shares through thisprocess was set to be the first

company to adopt the mechanism.


54/60

Among the lead managers or the syndicatemembers of the issue or the merchantbankers as member.

The issuer company as a book runnernominates this member and his name is

mentioned in the draft prospectus. The book runner has to circulate the copy of

the draft prospectus to be filed with SEBIamong the institutional buyers who are

eligible for firm allotment. The draft prospectus should indicate the priceband within which the securities are beingoffered for subscription.


55/60

The offers are sent to the book runners. He maintains a record of names and number

of securities offered and the price offered bythe institutional buyer within the placementportion and the price for which the order is

received to the book runners. The book runner and the issuer company

finalize the price. The issue price for the placement portion and

offer to the public should be the same. Underwriting agreement is entered into after

the fixation of the price.


56/60

One day earlier to the opening of theissue to the public, the book runnercollects the application forms along withthe application money from the

institutional buyers and the underwriters. The book runner and other

intermediaries involved in the bookbuilding process should maintain recordsof the book building process.

The SEBI has the right to inspect therecords.


57/60

Green shoe Option

This is an option to subscribe to theoversubscribed portion of the Capital.

A Company is not free to decide about

the Green Shoe option. It must clearly state the proportion of

oversubscription it intends to

subscribe to in the offer document.


58/60

Dutch Auction Method

The Dutch Auction method is similar tothe Book Building method except thatin this system, the number of shares

allotted finally, at the lowest bidreached, must be the same as theoriginal number of shares bid.


59/60

In the past, investment bankers couldallocate a larger fraction of shares to thosewho agreed to pay higher commissions tothem a process called laddering or

To those who agreed to do more businesswith them A process called spinning.

Dutch auction eliminates the process of

laddering and spinning since neither thecompany nor the book runner has anydiscretion regarding how the allotment isdone.


60/60

The End

IPO final 1

Documents

Transcript of IPO final 1