Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
NOTE: PLEASE REFER TO DICTATION GIVEN IN CLASS FOR COMPLETE NOTES Initial Public Offer (IPO) 1. Definition IPO is a type of public offering where company invites general public to purchase or subscribe its shares for the first time. These shares are issued when a company is listed on a stock exchange for the first time. It has to undergo the process as per SEBI and file a prospectus and enlist underwriters and merchant bankers for the same. Once the shares are listed, the shares are then exchanged in the open market. 2. Process i. Thorough planning of an IPO – IPO is usually triggered after a thought of expansion or raising long term finance by the promoters of the company. All analysis of profits, capital structure, reporting requirements, etc. is done by the company before going public. ii. Appointment of Merchant Bankers – A merchant banker will play the role of a lead manager, underwriter, and advisor to the issuing company and is required by the SEBI rules. iii. Appointment of other syndicate members and intermediaries – The issuing company appoints a registrar as per SEBI rules to avail administrative support during the issue process for selecting bankers, centres for preparing application and allotment forms, and resolving grievances. A scheduled bank registered with SEBI is appointed as the banker to the issuing company whose main duty is to collect application forms and money, maintain reports for it and forwarding the application money to the registrar. An underwriter with a minimum net worth of Rs.20 lacs is appointed to subscribe the shares in case of under-subscription. A broker is appointed to promote market building making investors aware about the IPO. iv. Registration of Offer Documents – The issuing company is required to submit the draft prospectus (Red Herring) with SEBI which then becomes a public document. Merchant banker would fill the reports and documents with the stock exchange. It has to specify the number of shares being issues (minimum 20% promoter’s holding will stay locked-in for 3 years) and the price or price band at which the shares are to be issued or bid for, whatever the case may be. v. Marketing – Once all documents are registered and approved by SEBI and the stock exchange, the issue and its related advertising is undertaken to ensure subscription of shares by the public through means of publishing in newspapers, billboards, emails, etc. The total offer made to the public should be 25% or more of the total issue amount. vi. Post-issue – Once the window for subscription closes, the merchant bank has to report to the company whether there is under or over subscription. Accordingly, underwriters have a time of 60 days to to either subscribe in case of under-subscription, or company has 30 days to return the excess collection with a letter of regret in case of over-subscription. vii. Allotment of shares – Post the issue, shares are to be allotted categorically to QIBs, NIBs, Retails investors, etc. It is done proportionately and is reported as per SEBI rules to the public. 3. Types i. Fixed Price Issue – In this method of IPO, the issuing company fixes a the price of the shares before issue. This price is disclosed in the offer documents alongwith the number of shares to be issued. The quantitative and qualitative factors that determined the fixed price are specified in the offer documents. The features are as follows: a. Fixed Price – The price is not changed at all during the entire process after submission in the offer documents. b. Price Discovery – There is no element of price-discovery, and there is no price-demand analysis done to determine the appropriate price. c. Undesirable response – If the company cannot understand the public response to the pricing, the shares may be over-subscribed if underpriced and under-subscribed if overpriced. d. Full payment – The investor has to pay the full amount of share price during application, unlike in the other methods. e. Pro-rata allotment – Allotment is done on a pro-rata basis in cases of both over-subscription and under-subscription. ii. Book Building Method – In this method, unlike a fixed price issue, the price band is specified within which bids are accepted from the public. It is a price discovery mechanism. As per SEBI guidelines, an issuer company can issue securities to the public though prospectus in the following manner: a. 100% of the net offer to the public through book building process b. 75% of the net offer to the public through book building process and 25% at the price determined through book building. The Fixed Price portion is conducted like a normal public issue after the Book Built portion, during which the issue price is determined. The concept of Book Building is relatively new in India. However, it is a common practice in most developed countries. During the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer. The process is directed towards both the institutional as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process. The process for a Book-Building Issue is as follows: a. The Issuer who is planning an offer nominates lead merchant banker(s) as 'book runners'. b. The Issuer specifies the number of securities to be issued and the price band for the bids. c. The Issuer also appoints syndicate members with whom orders are to be placed by the investors. d. The syndicate members input the orders into an 'electronic book'. This process is called 'bidding' and is similar to open auction. e. The book normally remains open for a period of 5 days. f. Bids have to be entered within the specified price band with a floor price and a cap price. g. Bids can be revised by the bidders before the book closes. h. On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels. i. The book runners and the Issuer decide the final price at which the securities shall be issued. j. Generally, the number of shares are fixed, the issue size gets frozen based on the final price per share. k. Allocation of securities is made to the successful bidders. The rest get refund orders. For example, BSE IPO in recent times, had a Book Building IPO, help from Jan 23, 2017 - Jan 25, 2017. The issue size was 15.42 million Equity Shares of Rs 2 aggregating up to Rs 1,243.43 Crore. Rs. 805 - Rs. 806 Per Equity Share. Here, Rs. 805 is the floor price and Rs 806 is the cap price. Minimum order quantity was 18 shares per lot. The features of a book-building method are as follows: a. Price Discovery – The process depends on price discovery model based on the demand quoted by the investors. b. Open book building – It is compulsory for the issuing company to display the demand and bids online during the building period. The public has full information about the price-demand play. c. Price Band – A floor price and cap price are specified within which the public can bid for the shares. The difference can only be upto 20% of the floor price. d. Cut-off price – During this IPO, a price between the band is determined as the cut-off price. This is decided by the book-runner and the issuing company. Only retail investors can bid at cut-off price. 4. Advantages & Disadvantages of an IPO: -Advantages: i. Enlarging and diversifying the equity base – It dilutes the equity holding and increases the base as shares are issued to public. ii. Cheaper source of finance than debt – It is a cheaper source of finance than debt since it bears no interest payments. iii. Increasing exposure and enhancing public image – It improves credibility and enhances the corporate image with the public. iv. Imporves disclosure – It improves disclosure standards to the investors and enables transparency. v. Attracting and retaining talent – Once a company is listed through an IPO, it may issue Sweat Equity or ESOP to talented employees thereby retaining them. vi. Facilitating acquisition – The company can be valued easily at market price after being listed through an IPO and makes it easier to acquire. -Disadvantages: i. Costly – An IPO is an extremely costly means of raising equity capital because of legal fees, marketing expenses, banking fees, etc. ii. Information is made public – A lot of information regarding the company’s finances, operations, is made public which can be used by competitors, suppliers etc for their own benefit. iii. Time- consuming process – An IPO takes nearly a quarter of a year to be completed. iv. Restriction on usage of funds – The funds collected through IPO can not be used to for any purpose other than that mentioned in the Red Herring Prospectus v. Loss of control – Since the promoter’s stock is diluted, it leads to loss of control in the decisionmaking of the company. vi. Reporting Norms – Post-listing, the number of report a company has to generate increases by manifold and other compliance reporting increases too. Difference between Fixed Price IPO and Book-building IPO: Issue Type Fixed Price Issues Book Building Issues Offer Price Demand Payment Reservations Price at which the securities are offered and would be allotted is made known in advance to the investors Demand for the securities offered is known only after the closure of the issue 100 % advance payment is required to be made by the investors at the time of application. A 20 % price band is offered by the issuer within which investors are allowed to bid and the final price is determined by the issuer only after closure of the bidding. Demand for the securities offered , and at various prices, is available on a real time basis on the BSE website during the bidding period.. 10 % advance payment is required to be made by the QIBs along with the application, while other categories of investors have to pay 100 % advance along with the application. 50 % of the shares offered are reserved for applications below Rs. 1 lakh and the balance for higher amount applications. 50 % of shares offered are reserved for QIBS, 35 % for small investors and the balance for all other investors.