Project on IPO of Cafe Coffee Day

8/17/2019 Project on IPO of Cafe Coffee Day

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EXECUTIVE SUMMARY

As we all know IPO – INITIAL PUBLIC OFFERING is the hottest topic in the current

industry, mainly because of India being a developing country and lot of growth in various sectors

which leads a country to ultimate success. And when we talk about country’s growth which is

dependent on the kind of work and how much importance to which sector is given. And when we

say or talk about industries growth which leads the economy of country has to be balanced and

given proper finance so as to reach the levels to fulfill the needs of the society. And industries

which have massive outflow of work and a big portfolio then it is very difficult for any company

to work with limited finance and this is where IPO plays an important role.

This report talks about how IPO helps in raising fund for the companies going public, what

are its pros and cons, and also it gives us detailed idea why companies go public. How and what

are the steps taken by the companies before going for any IPO and also the role of (SEBI) Securities

and Exchange Board of India the BSE and NSE , what are primary and secondary markets and

also the important terms related to IPO. It gives us idea of how IPO is driven in the market and

what are various factors taken into consideration before going for an IPO. And it also tells us how

we can more or less judge a good IPO. It also gives us some idea about what are the expenses that

a company undertakes during an IPO.

IPO has been one of the most important generators of funds for the small companies

making them big and given a new vision in past and it is still continuing its work and also for

many coming years.


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LITERATURE REVIEW

This section describes four key studies that have researched different forms of going public. It also

provides a brief account of a study which analyzed spreads.

1. Biasis and Faugeron-Crouzet (2007)

In their research, Biasis and Faugeron-Crouzet analyze different types of IPO auctions. They study

uniform price auctions, fixed price offerings, internet-based Open IPO mechanisms, and auctions

such as Mise en Vente in France. These were analyzed within a uniform theoretical model. (Biasis

and Faugeron-Crouzet 2002, 13-17). In fixed price offers, Biasis and Faugeron-Crouzet found high

initial returns. High returns were left both to institutional investors as well as small-uninformed

investors, because of a lack of adjustment for price and demand. For uniform price auctions,

underpricing was also evident, however with less underpricing than with fixed price offers.

The Mise en Vente auction is an auction type IPO procedure that is commonly used in France.

This auction has a fixed market clearing price and pro rata allocation. The highest market clearing

bids do not set the market-clearing price, instead it is set by a Bourse official, based on the function

of demand. It is noted that an explicit algorithm that maps demand into price does not set the

pricing in such cases.

The research found that for an optimal IPO auction, the IPO price must be set in a manner, which

reflects the information held by investors. If this is not done as in fixed price auctions, underpricing

is bound to be pervasive, whereas information gathering of the value of the stock during the IPO

process is bound to be insignificant. Biasis Faugeron-Crouzet viewed the Open IPO process as a

true Dutch auction when it in fact was not. An Open IPO process is a so-called ´Dirty Dutch´

auction as coined by Sherman (1999). Much like the Mise en Vente, the fixed market-clearing price is not set at the highest possible level, but instead it is marked down and set by the issuing

company and the underwriter based on their own perception of the function of demand.

Their study moreover identifies the problem of translating, i.e., mapping demand into prices and

into explicit computerized rules, which occur in Mise en Vente and in Book building. The authors


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also highlight the importance of established relationships between bidders and underwriters.

Finally, according to Biasis and Faugeron-Crouzet an established relationship can enhance the

ability to extract information from investors.

2. Kaneko and Pettway (2008)

Kaneko and Pettway attempt to provide an answer to the question “Does book building provide a

better mechanism for issuing firms than auctions?” Similar to Kenji and Smith (2004), the Japanese

market is used to test the assumption. The Japanese auction process uses price discriminating

auctions, instead of a fixed price or market-clearing price as in the Open IPO process.

The empirical research in Kaneko and Pettway (2003) is broken up into three parts.

Firstly the descriptive statistics are analyzed, which demonstrate that book building had

significantly higher initial returns than auction priced IPOs. In the following part, the auctioned

priced and book built IPOs are analyzed separately through regression analysis. In this section

seven independent variables are tested to uncover which variables have the most impact on

underpricing. In the test of auctioned IPOs, it was found that market volatility of daily index returns

one month prior to the issue is the most significant factor affecting underpricing. When the same

regressions were run on the book built IPOs, it was found that market change three months prior

to the IPO was the most significant factor affecting underpricing.

In the third part of Kaneko’s and Pettway’s research, regression analysis was run on both sets of

data, however controlling for the different firm specific characteristics. There, it was also found

that book built IPOs are underpriced significantly more than auction priced IPOs. When the book

built and auctioned priced IPOs were analyzed for effects of hot and cold markets, it was found

that book built IPOs are still much more frequently underpriced.

In conclusion, Kaneko and Pettway found that under all conditions and while controlling firm

specific characteristics, book built IPOs were much more frequently underpriced in comparison to

auctioned IPOs.


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3. Sherman and Jagannathan (2009)

In their study Sherman and Jagannathan identify the underlying reason for the relative unpopularity

of auctions as a means of going public. This study appears to be the most comprehensive endeavor

in terms of attempting to holistically identify the reasons auctions have not been as attractive as

other means of going public. Their research studies international trends in auctions use. Here, the

evidence overwhelmingly indicates that auctions have been tried in over 20 countries but are rarely

used today. “In other words, out of more than 45 countries, we have not been able to find even one

country in which auctions are currently the dominant method.” (Sherman and Jagannathan 2005,

14)

Sherman and Jagannathan delve into commonly used stereotypical explanations for why auctions

are not used. The two most common notions are (1) auctions are not used because they are still

experimental and unproven, and (2) issuers are pressured into book building due to higher fees.

Nonetheless, through international research, it was proven that even in markets where auctions

have been used for a long time, there was a decline in their use as soon as book building or some

other method became available. For the second issue, the authors found that competition in the

market would drive down prices of book building issues. Additionally, other research has shown

that fixed price offers lead to even lower spreads, compared to auctions.

In their study Sherman and Jagannathan find that on a global scale initial returns are not the most

important aspect of the issue for the issuer. This was evident from data collected on IPOs in

Singapore, where both auctions and fixed price offers were available. In this case, statistics

revealed that the fixed price method was chosen as the dominant means of going public, although

auctions consistently provided lower underpricing.

Finally, the study also deemed whether any perceivable effect can be distinguished from adding

modern Internet technologies to enable bidding for the IPO auction. The results illustrate that the

median return for Open IPOs is 2%, which is excellent. However, the research points out that there

are significant outliers in the group. In conclusion, Sherman and Jagannathan find that auctions

have been tried and tested in many markets, but have lost popularity due to poor control on the

part of the issuer in terms of the price and effort that are applied. They also identify that auctions


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provide lower underpricing. This would imply that issuers are not only looking to optimize

underpricing, but are moreover interested in other attributes of the issue. “Without some way of

screening out free-riders and the unsure participation of serious investors, IPO auctions are too

risky for both issuers and investors.”

4. Kenji and Smith (2009)

Kenji and Smith (2004) study the benefits and drawbacks of auctions versus book building as a

method of IPO issuance in Japan. Their reason for choosing Japan as a test environment was due

to the fact that book building has been a legal way of going public in Japan since 1997. Previously,

auctioning was the only way that a company could go public in Japan. In their research, Kenji and

Smith use the total issue cost as a percentage of the value of the issue to measure the benefits and

drawbacks of the different methods of going public.

The data that is used in this paper is a sample of 484 IPOs by companies that are listed on the

JASDAQ or JASDAQ-OTC markets during a five-year period from 1995 to 1999. This included

321 auction IPOs and 163 book built IPOs. However, due to varying market conditions during the

years spanning from 1995 to 1999, the research has been divided into two different sections. The

first uses all the data from the whole sample period, whereas the second section uses data only

from the years 1996 through 1998, when the market was characterized by very stable marketconditions. This provides a fairly similar setting for both auctions (January 1996 - September 1997)

and book built (October 1997 - December 1998) IPO data sets. Firm data that is used include: sales

revenue, equity to book value, shares outstanding, firm age, as well as number of employees. Issue

data includes offering date, number of shares issued, amount raised, offer price, first after market

price, and other offering details. Total issue cost in their research is defined as the first aftermarket

price instead of actual issue price.

During the whole period, the total issue cost against the aftermarket price in book built IPOs is an

average of 28,04%, whereas the auction priced cost is only 8,17%. However, the second sample

(1996-1998) notes values of 15,3% and 7% respectively. The data demonstrates that the book

building method provides more flexibility, making small issues appear to be more feasible, and

decreasing the cost of going public for larger companies.


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The empirical analysis demonstrates that under the auctions-only system, issuers are older and

larger than book built issuers. The analysis also reveals that underpricing is a substitute cost for

lower fees, thus when all else being equal, increased underpricing reduces the fee as a percentage

of the aftermarket price. The method used for analysis in Kenji’s and Smith’s study was regression

analysis, with reliance on previously identified variables.

When analyzing total issue cost and issue size, it was found that issuer age, sales revenue, and

equity to book value are not significantly related to the total cost of auctioned IPOs. In the book

built issues, the percentage cost is less for large issuers with established track records.

In the study, the difference in equally-weighted average issue cost compares what the issue cost

would have been in both book building and auction scenarios for any given company individually.

Kenji and Smith found that auctioning reduces mean total issue cost by an average of 6% of the

first aftermarket price. Additionally, they predicted that pricing through the auction method is

projected to have resulted in lower total costs at least in 82.5% of the subsample.

In conclusion, Kenji and Smith found that under the auction method, high quality issuers had a

limited ability to distinguish themselves from low quality issuers. Furthermore, the research found

that small and risky firms, as a group, incur higher costs with book building, whereas larger and

better-established issuers realize savings with this particular method. Overall in this sample of

Japanese IPOs, the average total issue cost, measured as a percentage of the initial aftermarket

price, was significantly higher in the book building regime than in the auction regime. However,

it was found that aggregate underpricing would have been lower under the book building, on the

basis of either the full sample, or the subsample.


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Summary of previous research

Below is a table summarizing the findings of the four key studies in the field:

Overview of Literature Review:

Study Objective Conclusion

Biasis and Faugeron- Crouzet

(2007)

Compared the performance of

the various auction methods

through a unified theoretical

model.

Fixed price auctions underprice

the most, market clearing

auctions also underprice but not

as much as fixed price offers.

An optimal solution is achieved

by the Mise en Vente in France

that encompasses some

characteristics of the book built

offers.

Kaneko and Pettway

(2008)

Examine whether book built

IPOs provide a better

mechanism for issuing firms

compare to auctions.

Underpricing was used as a

proxy, and overwhelmingly

auctions were found to be more

beneficial to issuers than book

built IPOs.

Sherman and Jagannathan

(2009)

A study of the underlying

reasons why auctions are

relatively unpopular all over the

world for issuing equity,

whereas they are extensively

used for selling everything else.

Auctions run higher risk than

book built IPOs, due to less

control by the issuer of the

freerider problem, as well as

less control over issue price.

Kenji and Smith

(2009)

Attempt to uncover why book building has been used more

than auctions in Japan, although

auctions seem to be more

beneficial to issuers.

Auctions leave less money onthe table, however larger and

older issuers benefit from book

building, since overall issuance

cost is lower for them.


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Initial Public Offering (IPO)

The first public offering of equity shares or convertible securities by a company, which isfollowed by the listing of a company’s shares on a stock exchange, is known as an ‘Initial Public

Offering’. In other words, it refers to the first sale of a company’s common shares to investors on

a public stock exchange, with an intention to raise new capital.

The most important objective of an IPO is to raise capital for the company. It helps a

company to tap a wide range of investors who would provide large volumes of capital to the

company for future growth and development. A company going for an IPO stands to make a lot

of money from the sale of its shares which it tries to anticipate how to use for further expansion

and development. The company is not required to repay the capital and the new shareholders get

a right to future profits distributed by the company.

Companies fall into two broad categories: Private and Public.

A privately held company has fewer shareholders and its owners don't have to disclose

much information about the company. When a privately held corporation needs additional

capital, it can borrow cash or sell stock to raise needed funds. Often "going public" is the best

choice for a growing business. Compared to the costs of borrowing large sums of money for ten

years or more, the costs of an initial public offering are small. The capital raised never has to be

repaid. When a company sells its stock publicly, there is also the possibility for appreciation of

the share price due to market factors not directly related to the company. Anybody can go out

and incorporate a company: just put in some money, file the right legal documents and follow the

reporting rules of jurisdiction such as Indian Companies Act 1956. It usually isn't possible to buyshares in a private company. One can approach the owners about investing, but they're not

obligated to sell you anything. Public companies, on the other hand, have sold at least a portion

of themselves to the public and trade on a stock exchange. This is why doing an IPO is also

referred to as "going public."


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Why go public??

Before deciding whether one should complete an IPO, it is important to consider the

positive and negative effects that going public may have on their mind. Typically, companies go

public to raise and to provide liquidity for their shareholders. But there can be other benefits. Going

public raises cash and usually a lot of it. Being publicly traded also opens many financial doors:

Because of the increased scrutiny, public companies can usually get better rates when they

issue debt.

As long as there is market demand, a public company can always issue more stock. Thus,

mergers and acquisitions are easier to do because stock can be issued as part of the deal.

Trading in the open markets means liquidity. This makes it possible to implement things

like employee stock ownership plans, which help to attract top talent.

Going public can also boost a company’s reputation which in turn, can help the company

to expand in the marketplace.


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DIFFERENT KINDS OF ISSUES

Issues

Public Rights Preferential

Initial Public Offering Further Public Offering

Fresh Issue Offer for Sale Fresh Issue

Offer for Sale


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SIGNIFICANCE OF IPO

Investing in IPO has its own set of advantages and disadvantages. Where on one hand, high

element of risk is involved, if successful, it can even result in a higher rate of return. The rule is:

Higher the risk, higher the returns.

The company issues an IPO with its own set of management objectives and the investor

looks for investment keeping in mind his own objectives. Both have a lot of risk involved. But

then investment also comes with an advantage for both the company and the investors.

The significance of investing in IPO can be studied from 2 viewpoints – for the company

and for the investors. This is discussed in detail as follows:

SIGNIFICANCE TO THE COMPANY:

When a privately held corporation needs additional capital, it can borrow cash or sell stock to

raise needed funds. Or else, it may decide to “go public”. "Going Public" is the best choice for a

growing business for the following reasons:

The costs of an initial public offering are small as compared to the costs of borrowing large

sums of money for ten years or more,

The capital raised never has to be repaid.

When a company sells its stock publicly, there is also the possibility for appreciation of the

share price due to market factors not directly related to the company.

It allows a company to tap a wide pool of investors to provide it with large volumes of

capital for future growth.


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SIGNIFICANCE TO THE SHAREHOLDERS:

The investors often see IPO as an easy way to make money. One of the most attractive

features of an IPO is that the shares offered are usually priced very low and the company’s stock

prices can increase significantly during the day the shares are offered. This is seen as a good

opportunity by ‘speculative investors’ looking to notch out some short-term profit. The

‘speculative investors’ are interested only in the short-term potential rather than long-term gains.


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PRIMARY MARKET AND SECONDARY MARKET

When shares are bought in an IPO it is termed primary market. The primary market does

not involve the stock exchanges. A company that plans an IPO contacts an investment banker who

will in turn called on securities dealers to help sell the new stock issue.

This process of selling the new stock issues to prospective investors in the primary market

is called underwriting.

When an investor buys shares from another investor at an agreed prevailing market price,

it is called as buying from the secondary market.

The secondary market involves the stock exchanges and it is regulated by a regulatory

authority. In India, the secondary and primary markets are governed by the Security and Exchange

Board of India (SEBI).

Kinds of Public Offerings:

1. Primary offering: - New shares are sold to raise cash for the company.

2. Secondary offering: - Existing shares (owned by VCs or firm founders) are sold, no new

cash goes to company. A single offering may include both of these initial public offering.


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THE RISK FACTOR

Investing in IPO is often seen as an easy way of investing, but it is highly risky and many

investment advisers advise against it unless you are particularly experienced and knowledgeable.

The risk factor can be attributed to the following reasons:

UNPREDICTABLE:

The Unpredictable nature of the IPO’s is one of the major reasons that investors advise

against investing in IPO’s. Shares are initially offered at a low price, but they see significant

changes in their prices during the day. It might rise significantly during the day, but then it may

fall steeply the next day.

NO PAST TRACK RECORD OF THE COMPANY:

No past track record of the company adds further to the dilemma of the shareholders as to

whether to invest in the IPO or not. With no past track record, it becomes a difficult choice for the

investors to decide whether to invest in a particular IPO or not, as there is basis to decide whether

the investment will be profitable or not.

POTENTIAL OF STOCK MARKET:

Returns from investing in IPO are not guaranteed. The Stock Market is highly volatile.

Stock Market fluctuations widely affect not only the individuals and household, but the economy

as a whole. The volatility of the stock market makes it difficult to predict how the shares will

perform over a period of time as the profit and risk potential of the IPO depends upon the state of

the stock market at that particular time.


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RISK ASSESSMENT

The possibility of buying stock in a promising start-up company and finding the next

success story has intrigued many investors. But before taking the big step, it is essential to

understand some of the challenges, basic risks and potential rewards associated with investing in

an IPO.

This has made Risk Assessment an important part of Investment Analysis. Higher the

desired returns, higher would be the risk involved. Therefore, a thorough analysis of risk

associated with the investment should be done before any consideration.

For investing in an IPO, it is essential not only to know about the working of an IPO, but

we also need to know about the company in which we are planning to invest. Hence, it is imperative

to know:

The fundamentals of the business

The policies and the objectives of the business

Their products and services

Their competitors

Their share in the current market

The scope of their issue being successful

It would be highly risky to invest without having this basic knowledge about the company.


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There are 3 kinds of risks involved in investing in IPO:

BUSINESS RISK:

It is important to note whether the company has sound business and management

policies, which are consistent with the standard norms. Researching business risk involves

examining the business model of the company.

FINANCIAL RISK:

Is this company solvent with sufficient capital to suffer short-term business setbacks? The

liquidity position of the company also needs to be considered. Researching financial risk involves

examining the corporation's financial statements, capital structure, and other financial data.

MARKET RISK:

It would beneficial to check out the demand for the IPO in the market, i.e., the appeal of

the IPO to other investors in the market. Hence, researching market risk involves examining the

appeal of the corporation to current and future market conditions.


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ANALYSING AN IPO INVESTMENT

POTENTIAL INVESTORS AND THEIR OBJECTIVES:

Initial Public Offering is a cheap way of raising capital, but all the same it is not consideredas the best way of investing for the investor. Before investing, the investor must do a proper

analysis of the risks to be taken and the returns expected. He must be clear about the benefits he

hope to derive from the investment. The investor must be clear about the objective he has for

investing, whether it is long-term capital growth or short-term capital gains.

The potential investors and their objectives could be categorized as:

INCOME INVESTOR:

An ‘income investor’ is the one who is looking for steadily rising profits that will be

distributed to shareholders regularly. For this, he needs to examine the company's potential for

profits and its dividend policy.

GROWTH INVESTOR:

A ‘growth investor’ is the one who is looking for potential steady increase in profits that

are reinvested for further expansion. For this he needs to evaluate the company's growth plan,

earnings and potential for retained earnings.

SPECULATOR:

A ‘speculator’ looks for short-term capital gains. For this he needs to look for potential of

an early market breakthrough or discovery that will send the price up quickly with little care about

a rapid decline.


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INVESTOR RESEARCH

It is imperative to properly analyze the IPO the investor is planning to invest into. He

needs to do a thorough research at his end and try to figure out if the objective of the company

match his own personal objectives or not. The unpredictable nature of IPO’s and volatility of the

stock market adds greatly to the risk factor. So, it is advisable that the investor does his homework,

before investing.

The investor should know about the following:

BUSINESS OPERATIONS:

What are the objectives of the business?

What are its management policies?

What is the scope for growth?

What is the turnover of the labor force?

Would the company have long-term stability?

FINANCIAL OPERATIONS:

What is the company’s credit history? What is the company’s liquidity position?

Are there any defaults on debts?

Company’s expenditure in comparison to competitors.

Company’s ability to pay-off its debts.

What are the projected earnings of the company


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MARKETING OPERATIONS:

Who are the potential investors?

What is the scope for success of the IPO?

What is the appeal of the IPO for the other investors?

What are the products and services offered by the company?

Who are the strongest competitors of the company?


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IPO INVESTMENT STRATEGIES

Investing in IPOs is much different than investing in seasoned stocks. This is because there

is limited information and research on IPOs, prior to the offering. And immediately following the

offering, research opinions emanating from the underwriters are invariably positive.

There are some of the strategies that can be considered before investing in the IPO:

UNDERSTAND THE WORKING OF IPO:

The first and foremost step is to understand the working of an IPO and the basics of an

investment process. Other investment options could also be considered depending upon the

objective of the investor.

GATHER KNOWLEDGE:

It would be beneficial to gather as much knowledge as possible about the IPO market, the

company offering it, the demand for it and any offer being planned by a competitor.

INVESTIGATE BEFORE INVESTING:

The prospectus of the company can serve as a good option for finding all the details of the

company. It gives out the objectives and principles of the management and will also cover the

risks.

KNOW YOUR BROKER:

This is a crucial step as the broker would be the one who would majorly handle your

money. IPO allocations are controlled by underwriters. The first step to getting IPO allocations is

getting a broker who underwrites a lot of deals.


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MEASURE THE RISK INVOLVED:

IPO investments have a high degree of risk involved. It is therefore, essential to measure

the risks and take the decision accordingly.

INVEST AT YOUR OWN RISK:

Finally, after the homework is done, and the big step needs to be taken. All that can be

suggested is to ‘invest at your own risk’. Do not take a risk greater than your capacity.


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PRICING OF AN IPO

The pricing of an IPO is a very critical aspect and has a direct impact on the success or

failure of the IPO issue. There are many factors that need to be considered while pricing an IPO

and an attempt should be made to reach an IPO price that is low enough to generate interest in the

market and at the same time, it should be high enough to raise sufficient capital for the company.

The process for determining an optimal price for the IPO involves the underwriters

arranging share purchase commitments from leading institutional investors.

PROCESS:

Once the final prospectus is printed and distributed to investors, company management

meets with their investment bank to choose the final offering price and size. The investment bank

tries to fix an appropriate price for the IPO depending upon the demand expected and the capital

requirements of the company.

The pricing of an IPO is a delicate balancing act as the investment firms try to strike a

balance between the company and the investors. The lead underwriter has the responsibility to

ensure smooth trading of the company’s stock. The underwriter is legally allowed to support the

price of a newly issued stock by either buying them in the market or by selling them short.

IPO PRICING DIFFERENCES:

It is generally noted, that there is a large difference between the price at the time of issue

of an Initial Public Offering (IPO) and the price when they start trading in the secondary market.

These pricing disparities occur mostly when an IPO is considered “hot”, or in other words,

when it appeals to a large number of investors. An IPO is “hot” when the demand for it far exceeds

the supply.

This imbalance between demand and supply causes a dramatic rise in the price of each

share in the first day itself, during the early hours of trading.


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UNDERPRICING AND OVERPRICING OF IPO’S

UNDERPRICING:

The pricing of an IPO at less than its market value is referred to as ‘Underpricing’. In other

words, it is the difference between the offer price and the price of the first trade.

Historically, IPO’s have always been ‘underpriced’. Underpriced IPO helps to generate

additional interest in the stock when it first becomes publicly traded. This might result in

significant gains for investors who have been allocated shares at the offering price. However,

underpricing also results in loss of significant amount of capital that could have been raised had

the shares been offered at the higher price.

OVERPRICING:

The pricing of an IPO at more than its market value is referred to as ‘Overpricing’. Even

“overpricing” of shares is not as healthy option. If the stock is offered at a higher price than what

the market is willing to pay, then it is likely to become difficult for the underwriters to fulfill

their commitment to sell shares. Furthermore, even if the underwriters are successful in selling

all the issued shares and the stock falls in value on the first day itself of trading, then it is likely

to lose its marketability and hence, even more of its value.

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PRINCIPAL STEPS IN AN IPO

Approval of BOD: Approval of BOD is required for raising capital from the public.

Appointment of lead managers: the lead manager is the merchant banker who orchestrates the

issue in consultation of the company.

Appointment of other intermediaries:

- Co-managers and advisors

- Underwriters

- Bankers

- Brokers and principal brokers

- Registrars

Filing the prospectus with SEBI: The prospectus or the offer document communicates

information about the company and the proposed security issue to the investing public. All the

companies seeking to make a public issue have to file their offer document with SEBI. If SEBI or

public does not communicate its observations within 21 days from the filing of the offer document,

the company can proceed with its public issue.

Filing of the prospectus with the registrar of the companies: once the prospectus have been

approved by the concerned stock exchanges and the consent obtained from the bankers, auditors,

registrar, underwriters and others, the prospectus signed by the directors, must be filed with the

registrar of companies, with the required documents as per the companies act 1956.

Printing and dispatch of prospectus: After the prospectus is filed with the registrar of companies,

the company should print the prospectus. The quantity in which prospectus is printed should be

sufficient to meet requirements. They should be send to the stock exchanges and brokers so they

receive them at least 21 days before the first announcement is made in the newspapers.


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Filing of initial listing application: Within 10 days of filing the prospectus, the initial listing

application must be made to the concerned stock exchanges with the listing fees.

Promotion of the issue: The promotional campaign typically commences with the filing of the prospectus with the registrar of the companies and ends with the release of the statutory

announcement of the issue.

Statutory announcement: The issue must be made after seeking approval of the stock exchange.

This must be published at least 10 days before the opening of the subscription list.

Collections of applications: The Statutory announcement specifies when the subscription would

open, when it would close, and the banks where the applications can be made. During the period

the subscription is kept open, the bankers will collect the applications on behalf of the company.

Processing of applications: Scrutinizing of the applications is done.

Establishing the liability of the underwriters: If the issue is undersubscribed, the liability of the

underwriters has to be established.

Allotment of shares: Proportionate system of allotment is to be followed.

Listing of the issue: The detail listing application should be submitted to the concerned stock

exchange along with the listing agreement and the listing fee. The allotment formalities should

be completed within 30 days.


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BOOK BUILDING (BASIC CONCEPT)

The company does not come out with a fixed price for its shares; instead, it indicates a price band

that mentions the lowest (referred to as the floor) and the highest (the cap) prices at which a share

can be sold.

Bids are then invited for the shares. Each investor states how many shares s/he wants and what

s/he is willing to pay for those shares (depending on the price band). The actual price is then

discovered based on these bids. As we continue with the series, we will explain the process in

detail.

According to the book building process, three classes of investors can bid for the shares:

1. Qualified Institutional Buyers: Mutual funds and Foreign Institutional Investors.

2. Retail investors: Anyone who bids for shares under Rs. 50,000 is a retail investor.

3. High net worth individuals and employees of the company.

Allotment is the process whereby those who apply are given (allotted) shares. The bids

are first allotted to the different categories and the over-subscription (more shares applied for

than shares available) in each category is determined. Retail investors and high net worth

individuals get allotments on a proportional basis.


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Example 1:

Assuming you are a retail investor and have applied for 200 shares in the issue, and the

issue is over-subscribed five times in the retail category, you qualify to get 40 shares (200

shares/5). Sometimes, the over-subscription is huge or the issue is priced so high that you can't

really bid for too many shares before the Rs 50,000 limit is reached. In such cases, allotments are

made on the basis of a lottery.

Example 2:

Say, a retail investor has applied for five shares in an issue, and the retail category has

been over-subscribed 10 times. The investor is entitled to half a share. Since that isn't possible, it

may then be decided that every 1 in 2 retail investors will get allotment. The investors are then

selected by lottery and the issue allotted on a proportional basis. That is why there is no way you

can be sure of getting an allotment.


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BOOK BUILDING PROCESS

Book Building is basically a capital issuance process used in Initial Public Offer (IPO)

which aids price and demand discovery. It is a process used for marketing a public offer of equity

shares of a company. It is a mechanism where, during the period for which the book for the IPO is

open, bids are collected from investors at various prices, which are above or equal to the floor

price. The process aims at tapping both wholesale and retail investors. The offer/issue price is then

determined after the bid closing date based on certain evaluation criteria.


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The Process:

The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'.

The Issuer specifies the number of securities to be issued and the price band for orders.

The Issuer also appoints syndicate members with whom orders can be placed by the

investors.

Investors place their order with a syndicate member who inputs the orders into the

'electronic book'. This process is called 'bidding' and is similar to open auction.

A Book should remain open for a minimum of 5 days.

Bids cannot be entered less than the floor price.

Bids can be revised by the bidder before the issue closes.

On the close of the book building period the 'book runner evaluates the bids on the basis of

the evaluation criteria which may include -

Price Aggression

Investor quality

Earliness of bids, etc.

The book runner the company concludes the final price at which it is willing to issue the

stock and allocation of securities.

Generally, the numbers of shares are fixed; the issue size gets frozen based on the price per

share discovered through the book building process.

Allocation of securities is made to the successful bidders.


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Book Building is a good concept and represents a capital market which is in the process of

maturing.

Book-building is all about letting the company know the price at which you are willing to

buy the stock and getting an allotment at a price that a majority of the investors are willing to pay.

The price discovery is made depending on the demand for the stock.

The price that you can suggest is subject to a certain minimum price level, called the floor

price. For instance, the floor price fixed for the Maruti's initial public offering was Rs 115, which

means that the price you are willing to pay should be at or above Rs 115.

In some cases, as in Biocon, the price band (minimum and maximum price) at which you

can apply is specified. A price band of Rs 270 to Rs 315 means that you can apply at a floor price

of Rs 270 and a ceiling of Rs 315.

If you are not still very comfortable fixing a price, do not worry. You, as a retail investor,

have the option of applying at the cut-off price. That is, you can just agree to pick up the shares at

the final price fixed. This way, you do not run the risk of not getting an allotment because you

have bid at a lower price. If you bid at the cut-off price and the price is revised upwards, then the

managers to the offer may reduce the number of shares allotted to keep it within the payment

already made. You can get the application forms from the nearest offices of the lead managers to

the offer or from the corporate or the registered office of the company.


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How is the price fixed?

All the applications received till the last date are analyzed and a final offer price, known as

the cut-off price is arrived at. The final price is the equilibrium price or the highest price at which

all the shares on offer can be sold smoothly.

If your price is less than the final price, you will not get allotment. If your price is higher

than the final price, the amount in excess of the final price is refunded if you get allotment. If you

do not get allotment, you should get your full refund of your money in 15 days after the final

allotment is made. If you do not get your money or allotment in a month's time, you can demand

interest at 15 per cent per annum on the money due.

How are shares allocated?

As per regulations, at least 25 per cent of the shares on offer should be set aside for retail

investors. Fifty per cent of the offer is for qualified institutional investors. Qualified

Institutional Bidders (QIB) are specified under the regulation and allotment to this class is

made at the discretion of the company based on certain criteria.

QIBs can be mutual funds, foreign institutional investors, banks or insurance companies. Ifany of these categories is under-subscribed, say, the retail portion is not adequately subscribed,

then that portion can be allocated among the other two categories at the discretion of the

management. For instance, in an offer for two lakh shares, around 50,000 shares (or generally

25 per cent of the offer) are reserved for retail investors. But if the bids from this category are

received are only for 40,000 shares, then 10,000 shares can be allocated either to the QIBs or

non-institutional investors.

The allotment of shares is made on a pro-rata basis. Consider this illustration: An offer is made

for two lakh shares and is oversubscribed by times, that is, bids are received for six lakh shares.

The minimum allotment is 100 shares. 1,500 applicants have applied for 100 shares each; and

200 applicants have bid for 500 shares each. The shares would be allotted in the following

manner:


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Shares are segregated into various categories depending on the number of shares applied for.

In the above illustration, all investors who applied for 100 shares will fall in category A and

those for 500 shares in category B and so on.

The total number of shares to be allotted in category A will be 50,000 (100*1500*1/3). That

is, the number of shares applied for (100)* number of applications received (1500)*

oversubscription ratio (1/3). Category B will be allotted 33,300 shares in a similar manner.

Shares allotted to each applicant in category A should be 33 shares (100*1/3). That is, shares

applied by each applicant in the category multiplied by the oversubscription ratio. As, the

minimum allotment lot is 100 shares, it is rounded off to the nearest minimum lot. Therefore,

500 applicants will get 100 shares each in category A — total shares allotted to the category

(50,000) divided by the minimum lot size (100).

In category B, each applicant should be allotted 167 shares (500/3). But it is rounded off to

200 shares each. Therefore, 167 applicants out of 200 (33300/200) would get an allotment of

200 shares each in category B.

The final allotment is made by drawing a lot from each category. If you are lucky you may get

allotment in the final draw.

The shares are listed and trading commences within seven working days of finalization of the

basis of allotment. You can check the daily status of the bids received, the price bid for and the

response from various categories in the Web sites of stock exchanges. This will give you an

idea of the demand for the stock and a chance to change your mind. After seeing the response,

if you feel you have bid at a higher or a lower price, you can always change the bid price and

submit a revision form.


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The traditional method of doing IPOs is the fixed price offering. Here, the issuer and the

merchant banker agree on an "issue price" - e.g. Rs.100. Then one have the choice of filling in

an application form at this price and subscribing to the issue. Extensive research has revealed

that the fixed price offering is a poor way of doing IPOs. Fixed price offerings, all over the

world, suffer from `IPO underpricing'. In India, on average, the fixed-price seems to be around

50% below the price at first listing; i.e. the issuer obtains 50% lower issue proceeds as

compared to what might have been the case. This average masks a steady stream of dubious

IPOs who get an issue price which is much higher than the price at first listing. Hence fixed

price offerings are weak in two directions: dubious issues get overpriced and good issues get

underpriced, with a prevalence of underpricing on average.

What is needed is a way to engage in serious price discovery in setting the price at the IPO.

No issuer knows the true price of his shares; no merchant banker knows the true price of the shares;

it is only the market that knows this price. In that case, can we just ask the market to pick the price

at the IPO?

Imagine a process where an issuer only releases a prospectus, announces the number of

shares that are up for sale, with no price indicated. People from all over India would bid to buy

shares in prices and quantities that they think fit. This would yield a price. Such a procedure should

innately obtain an issue price which is very close to the price at first listing -- the hallmark of a

healthy IPO market.

Recently, in India, there had been issue from Hughes Software Solutions which was a

milestone in our growth from fixed price offerings to true price discovery IPOs. While the HSS

issue has many positive and fascinating features, the design adopted was still riddled with flaws,

and we can do much better.


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Documents Required:

A company coming out with a public issue has to come out with an Offer Document/

Prospectus.

An offer document is the document that contains all the information you need about the

company. It will tell you why the company is coming is out with a public issue, its financials

and how the issue will be priced.

The Draft Offer Document is the offer document in the draft stage. Any company making a

public issue is required to file the draft offer document with the Securities and Exchange Board

of India, the market regulator.

If SEBI demands any changes, they have to be made. Once the changes are made, it is filed

with the Registrar of Companies or the Stock Exchange. It must be filed with SEBI at least 21

days before the company files it with the RoC/ Stock Exchange. During this period, you can

check it out on the SEBI Web site.

Red Herring Prospectus is just like the above, except that it will have all the information

as a draft offer document; it will, however, not have the details of the price or the number of shares

being offered or the amount of issue. That is because the Red Herring Prospectus is used in book

building issues only, where the details of the final price are known only after bidding is concluded.

Players:

Co-managers and advisors

Underwriters

Lead managers

Bankers

Brokers and principal brokers

Registrars

Stock exchanges.


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STUDY ON CAFÉ COFFEE DAY IPO

India’s favorite coffee shop, where the young at heart unwind.

Café Coffee Day is a part of India's largest coffee conglomerate, Amalgamated BeanCoffee Trading Company Ltd. (ABCTCL), the first to roll out the ‘coffee bar’ concept in India

with its first café in Bangalore. It’s a Rs. 750 crore, ISO 9002 certified company. With Asia’s

second-largest network of coffee estates (10,500 acres) and 11,000 small growers, making its

holder the largest individual coffee plantation owner in Asia, this in addition to being India's only

vertically integrated coffee company. Coffee Day has a rich and abundant source of coffee. This

coffee goes all over the world to clients across the USA, Europe and Japan, making us one of the

top coffee exporters in the country.

We all know that Café Coffee Day is one of the most popular hangout places. The coffee

joint is very famous among youngsters. Coffee is one of the favorite beverages and has become

more appealing because of its variety.

Coffee has been around in India since the 17th century. However, coffee drinking has

traditionally been largely restricted to domestic consumption, and mostly in the South Indian states

of Tamil Nadu, Karnataka, Kerala and Andhra Pradesh. Coffee has been around in India since the

17th century. However, coffee drinking has traditionally been largely restricted to domestic

consumption, and mostly in the South Indian states of Tamil Nadu, Karnataka, Kerala and Andhra

Pradesh.

India ranks sixth as a producer of coffee in the world accounting for 4.5% of the global

coffee production. India has about 170,000 coffee farms cultivating around 900,000 acres of coffee

trees. India is the largest producer and consumer of milk in the world with 98% of milk being

produced in rural India. Coffee consumption in India is growing at 6% per annum compared to the

global 2% plus.


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Café Coffee Day’s menu ranges from signature hot and cold coffees to several exotic

international coffees, tea, food, desserts and pastries. In addition, exciting merchandise such as

coffee powders, cookies, mugs, coffee filters, etc. is available at the cafés.

It was in the golden soil of Chikmagalur that a traditional family owned a few acres of

coffee estates, which yielded rich coffee beans. Soon Amalgamated Bean Coffee Trading

Company Limited, popularly known as Coffee Day was formed. With a rich coffee growing

tradition since 1875 behind it coupled with the opportunity that arose with the deregulation of the

coffee board in the early nineties, Coffee Day began exporting coffee to the connoisseurs across

USA, Europe & Japan. Coffee Day's two curing works at Chikmagalur and Hassan cure over

70,000 tons of coffee per annum, the largest in the country. Coffee Day has a well-equipped

roasting unit catering to the specific requirement of the consumers. The process is carried out under

the control of experienced personnel to meet highest quality standards. The most modern

technology available is used to maintain consistency and roast the coffee beans to the demanding

specifications of the discerning coffee consumers.

Café Coffee Day (CCD) pioneered the café concept in India in 1996 by opening its first

café at Brigade Road in Bangalore. Today, more than a decade later, Café Coffee Day is the largest

organized retail café chain in India with cafes functioning in every nook and corner of the country.

Drawing inspiration from this overwhelming success, Café Coffee Day today has cafes in Vienna,

Austria and Karachi. What’s more, new cafes are planned across Middle East, Eastern Europe,

Eurasia, Egypt and South East Asia in the near future.

In October 2009, CCD unveiled a new brand logo, a Dialogue Box, to weave the concept

of ‘Power of Dialogue’. In accordance with this new brand identity, CCD planned to give all its

existing outlets a new look by the end of 2009. Cafés would be redesigned to suit differentenvironments such as book, music garden and cyber cafes suitable for corporate offices, university

campus or neighborhood. The change plan included new smart menu, furniture design, among

others.


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VISION:

To be the only office for dialogue over a cup of coffee

MISSION:

“To be the best Cafe chain by offering a world class coffee experience at affordable prices.”

The offerings are designed in such a manner that one cannot be spelt without the other;

there are the hot coffee or cold coffee combinations with delectable desserts and special coffee and

eats combinations for even a group of four friends.

Coffee Day Comprises of the following Sub Brands

Coffee Day - Fresh & Ground

Café Coffee Day

Coffee Day – Vending

Coffee Day - Xpress

Coffee Day – Exports

Coffee Day - Perfect

Pioneers of the Café Concept in India with its first Café at Brigade Road, Bangalore in

1996. This Café was opened as a Cyber Café (first of its kind) but later, with the burst of cyber

cafes it reverted to its core competency i.e.; Coffee. Essentially a youth oriented brand with

majority of its customers falling in the 15-29 year age bracket .Each café, depending upon its

size attracts between 400 and 800 customers daily. It is a place where customers come to

rejuvenate themselves and be themselves.


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CAFÉ COFFEE DAY IPO DETAILS

Issue Period: 14-Oct-2015 to 16-Oct-2015

Post Issue Modification Period: 17-Oct-2015

Issue Size: Public Issue of Equity Shares aggregating up to

Rs.11500 million (including Anchor Portion

10,381,097 equity shares)

Issue Type: 100% Book Building

Face Value: Rs.10 /share

Floor Price: Rs.316 (31.6 times of the Face value)

Cap Price: Rs.328 (32.8 times of the Face value)

Market Lot: 45 Equity shares

Minimum Order Quantity: 45 Equity shares

Promotors Holdings: 54.78%

Book Running Lead Managers

& Global Co-ordinators: Kotak Mahindra Capital Company Limited,

Citigroup Global Markets India Private Limited and

Morgan Stanley India Company Private Limited.

Book Running Lead Managers: Axis Capital Limited, Edelweiss Financial Services

Limited and YES Bank Limited.

Syndicate Members: Edelweiss Securities Limited, Kotak Securities

Limited and Morgan Stanley India Company

Private Limited.


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COFFEE DAY ENTERPRISES LIMITED

Sr. No. Category No. of shares

offered/reserve

d

No. of

shares bid

for

No. of times of

total meant for

the category

1 Qualified InstitutionalBuyers (QIBs)

73,80,654 32384880 4.39

1(a) Foreign Institutional

Investors(FIIs)

0

1(b) Domestic Financial

Institutions(Banks/

Financial

Institutions(FIs)/

Insurance Companies)

762165

1(c) Mutual funds 0

1(d) Others 457290

2 Non Institutional

Investors

53,87,658 2920050 0.54

2(a) Corporates 0

2(b) Individuals(Other than

RIIs)

164925

2(c) others 0

3 Retail Individual

Investors(RIIs)

1,25,71,203 11363220 0.90

3(a) Cut Off 1749825

3(b) Price bids 253800

4 Employees 4,74,683 407655 0.86

3(a) Cut Off 36315

3(b) Price bids 180

Total 25814198 47075805 1.82

Updated as on 16 October 2015 at 20:00 hrs.


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OBJECTS OF THE ISSUE:

Company proposes to utilize the net proceeds towards funding the following objects:

A. Financing our coffee businesses

1. Setting-up of new Cafe Network outlets and Coffee Day Xpress kiosks;

2. Manufacturing and assembling of vending machines;

3. Refurbishment of existing Cafe Network outlets and vending machines; and

4. Setting-up of a new coffee roasting plant facility, along with integrated coffee packingfacility and tea packing facility.

B. Repayment or prepayment of loans of the Company and Subsidiaries; and

C. General corporate purposes.


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Issue Subscription Detail / Current Bidding Status

QIB(Qualified Institutional Buyers): A qualified institutional buyer (QIB) is a corporate

entity that falls within the "accredited investor" category, defined in SEC Rule 501 of

Regulation D. A Qualified Institutional Buyer (QIB) is one that owns and invests, on a

discretionary basis, at least $100 million in securities; for a broker-dealer the threshold is

$10 million. QIBs encompass a wide range of entities, including banks, savings and loans

associations, insurance companies, investment companies, employee benefit plans or

entities owned entirely by accredited investors. Banks and S&L associations must also have

a net worth of at least $25 million to satisfy the QIB criteria.

NII(Non-Institutional Investors): Individual investors, NRIs, Companies, Trusts etc.

who bid for more than Rs. 2 lakhs are known as non institutional bidders or NII. They need

not to register with SEBI like QIIs.

As on Date & Time QIB NII RII Employee Total

Shares Offered / Reserved 7,380,654 5,387,658 12,571,203 474,683 25,814,198

Day 1 - Oct 14, 2015 17:00 I

ST

0.1700 0.0300 0.1600 0.0800 0.1300

Day 2 - Oct 15, 2015 17:00 I

ST

1.9800 0.0700 0.3300 0.4500 0.7500

Day 3 - Oct 16, 2015 20:00 I

ST

4.3900 0.5400 0.9000 0.8600 1.8200


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RII(Retail Individual Investor): In retail individual investor category, investors can

apply up to Rs. 2 lakhs in an IPO. NRIs who apply with less than Rs. 2 lakhs are also

considered as RIIs.


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IPO REVIEW (ISSUE SUMMARY)

Coffee Day Enterprises Ltd (CDEL) is the parent company of the Coffee Day Group,

which houses Café Coffee Day that pioneered the coffee culture in the chained café segment in

India. It opened its first Café Coffee Day outlet in Bengaluru in 1996 and has established the

largest footprint of café outlets in India with a network of 1,538 café outlets spread across 219

cities, including under the established and recognized brand name “Café Coffee Day” (popularly

referred to as “CCD”), as of June 30, 2015.

In terms of the number of chained café outlets, CDEL had a market share of

approximately 46% in India, with its café footprint being nearly four times larger than the

cumulative footprint of the next four competitors. CDEL’s brand Café Coffee Day ranked

second in the Most Trusted Brands in the food service retail category in India, and was one of the

only four indigenous Indian brands to be recognized as the Most Exciting Indian Brand in India

in 2014.

The company is engaged in coffee business through its subsidiary, Coffee Day Global

Limited (earlier known as Amalgamated Bean Coffee Trading Company Limited). It is also

engaged in coffee trading through CDEL and Coffee Day Trading Limited. In addition to having

the largest chain of cafés in India, it operates a highly optimized and vertically integrated coffee

business which ranges from procuring, processing and roasting of coffee beans to retailing of

coffee products across various formats.

In addition to the coffee business, CDEL operates other select businesses that are aimed

at leveraging India’s growth potential, namely, development of IT- ITES technology parks,

logistics, financial services, hospitality and ITITES through its subsidiaries.

CDEL mulls expansion of its outlets and Kiosks, manufacturing and assembling of

vending machines refurbishing of existing outlets and vending machines and setting up of a newcoffee roasting plant. It has also planned prepayment/repayment of debts and raise corpus fund.

To part finance this objectives, the company is coming out with its maiden IPO of 3.64 crore to

3.51 crore equity shares of Rs. 10 each (based on lower and upper price band) with a price band

of Rs. Rs. 316-328. Out of the total issue, shares worth Rs. 15 crore are reserved for eligible

employees. Company hopes to mobilize Rs. 1150 crore. Issue opens for sub subscription on


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14.10.15 and will close on 16.10.15. Minimum application is to be made for 45 shares and in

multiples thereon, thereafter. Post allotment, shares will be listed on BSE/NSE. Issue is lead

managed by Kotak Mahindra Capital Co. Ltd., Citigroup Global Markets India Pvt Ltd, Morgan

Stanley India Co. Pvt Ltd, Axis Capital Ltd, Edelweiss Financial Services Ltd and Yes Bank Ltd.

Link Intime India Pvt Ltd is the registrar to the issue.

On performance front, the company has (on consolidated basis) posted an average

negative EPS of Rs. 6.29 for last three fiscals. For first three months of current fiscal it has

reported negative EPS of Rs. 1.72 (on basic as well as diluted basis). Its RONW for the said

periods are at negative 13.36 and 4.39 respectively. For FY 2015 it posted net loss of Rs. 159.47

crore on a turnover of Rs. 2548.72 crore. For Q1 of current fiscal it has reported net loss of Rs.

40.36 crore on a turnover of Rs. 634.97 crore. Based on this, the issue pricing is greedy. After

issue of initial equity at par, it has issued shares in a price range of Rs. 1768.00 to Rs. 2900 per

share during 2010 - 2015 and has issued bonus shares in the ratio of 7 shares for every 1 share

held in May 2015 and done conversion of CCDs in to shares in September 2015. Its current paid

up equity capital of Rs. 170.94 crore will stand enhanced to around Rs. 207 crore post IPO. Out

of IPO proceeds Rs. 635 crore will go for reducing debt of the holding company and the rest for

expansion and other funding needs.

According to management, its prime coffee business brings around 60 per cent revenue

and the rest from other activities. Its coffee business has shown 16% CAGR for last five years

and hopes to improve upon it with more outlets in years to come. Due to heavy expenditures in

increasing outlets, higher depreciation and initial break-even periods have caused negative

earnings so far. Turnaround will take few more years. All these along with its branding are well

discounted in asking price. CDEL mulls opening of 135 stores every year.

Teams of lead managers have mixed track records for its past mandates.


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BIBLIOGRAPHY

1. Business Standard Article Dated: November 02, 2015.

(Link- http://www.business-standard.com/article/markets/coffee-day-enterprises-

shares-close-18-lower-than-ipo-price-115110200212_1.html)

2. Economic Times Article Dated: October 22, 2015.

(Link- http://economictimes.indiatimes.com/markets/ipos/fpos/coffee-day-nets-rs-

1150-cr-from-ipo-price-fixed-at-rs-328/articleshow/49492734.cms)

3. http://www.chittorgarh.com/ipo/cafe_coffee_day_ipo/507/

4. http://www.nseindia.com/products/content/equities/ipos/ipo_current_ccd.htm

5. http://forbesindia.com/article/checkin/cafe-coffee-day-parents-ipo-oversubscribed-

but-not-enough/41379/1

6. www.wikipedia.org

7. Café Coffee Day Prospectus.
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Project on IPO of Cafe Coffee Day

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