Initial Public Offerings(IPOs)

Meaning and Benefits of IPOs

An initial public offering is referred to as sale of equity of a company to the public by the promoters of the company.
Companies prefer to go for Initial Public offering due to following reasons:
Additional Capital resources for funding of projects/expansion plans. Dilution of existing promoters share holding or by venture capitalist Liquidity for shareholders. Enhances corporate image thus providing visibility.

Process for IPO

When a company wants to go public, the first thing it does is hire an investment bank You can think of underwriters as middlemen between companies and the investing public The company and the investment bank will first meet to negotiate the deal. Items usually discussed include the amount of money a company will raise, the type of securities to be issued, and all the details in the underwriting agreement

Red Herring
The underwriter puts together what is known as the RED HERRING. This is an initial prospectus containing all the information about the company except for the offer price and the effective date, which aren't known at that time. With the red herring in hand, the underwriter and company attempt to hype and build up interest for the issue. They go on a road show - also known as the "dog and pony show" where the big institutional investors are courted.

Issue Related Terms

Bid Bid Amount Issue Closing Date Bid-cum-Application Form BRLMs (Book Running Lead Managers) Cut-off Red Herring Prospectus

Issue Related Terms

Escrow Collection Bank (s) Margin Amount Prospectus. Revision Form. Escrow Account of the Company

Types of Public Issues

Fixed Price Issue Public Issue Private Placement Offer for Sale Book Building Issue

Types of Issues
Fixed Price:- Wherein the price band of the issue is fixed. For e.g Dwarikesh Sugar Industries Limited Public Issue of 50,00,000 equity shares of Rs 10/- each at a premium of Rs 55/- per share aggregating Rs 3250 lacs. Book Building Issue: -- Book Building is a price discovery mechanism which is undertaken to ascertain and determine the price of the security proposed to be issued by a body corporate. -- There is a price band which gives the bidder the facility to bid within a price band at different price levels. -- e.g National Thermal Power Corporation Limited wherein the price band was fixed between Rs 52 to Rs 62/-

Category of Bidders
Retail Individual Investor:- means an investor who applies or bids for securities of or for face value of not more than Rs 50,000/ Non-Qualified Institutional Buyer: Any investor who bids for an amount above Rs 50,000 and does not fall in the QIB category e.g HNI investors. Qualified Institutional Buyer(QIB) shall mean: a. public financial institution as defined in section 4A of the Companies Act, 1956; b. scheduled commercial banks; c. mutual funds; d. foreign institutional investor registered with SEBI; Contd.

QIBs-category
e. multilateral and bilateral development financial institutions; f. venture capital funds registered with SEBI. g. foreign Venture capital investors registered with SEBI. h. state Industrial Development Corporations. i. insurance Companies registered with the Insurance Regulatory and Development Authority j. provident Funds with minimum corpus of Rs. 25 crores k. pension Funds with minimum corpus of Rs. 25 crores

Key Factors to keep in mind before applying in a IPO

Investors need to carefully go through the red herring prospectus(preliminary prospectus and is subject to revision, the final is the one which is filed with ROC) that is available on the SEBI site. Objects of the issue. Risk factors related to the issue. Promoters track record and their experience in running a particular business. Financials. Issue Price. contd.

Key factors
Sector prospects. Capital structure of the company. Terms of the present offer. Outstanding litigation & defaults. Tax Benefits. Any published reports that forecast the future earnings.

Prospectus
Information contained in this Prospectus relative to markets for the company's products and trends in net sales, gross margin and anticipated expense levels, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect" and "intend" and other similar expressions, constitute forward-looking statements ...actual results of operations may differ materially from those contained in the forward-looking statements

Prospectus
"...risks for the company include, but are not limited to, an evolving and unpredictable business model and the management of growth .... There can be no assurance that the company will be successful in addressing such risks, and the failure to do so could have a material adverse effect on the company's business, prospects, financial condition and results of operations."

Recent IPO Performance

ONGC BIOCON NDTV TCS NTPC Mar-04 Mar-04 Apr-04 Aug-04 Oct-04 750 315 280 70 850 62 777 482 348 129 1301 81 3.6 53.02 24.29 84.29 53.06 30.65

ICICI BANK Apr-04

Curr Price Gain are absolute returns

Indian v/s Overseas scenario

In India the book is built directly while in the west the underwriter takes the shares on his books and then allots shares to investors.

In India the book-building process is transparent while in US it is done confidentially.

Abroad, the book can be opened and closed anytime. In India, the book has to be kept open for a minimum of five days;the period can be extended if price band is revised.

Indian v/s Overseas scenario

In India, 50 percent of the book is reserved for high net worth and retail individuals(25 percent each),the allotment being proportional to the bid. The allotment to QIBs is discretionary and there are no reservations. Retail investors account for barely 15 percent of the issue. Overseas, the price band is often a soft band,in the sense the underwriter is allowed to bid at a price outside the band;in India, we have a rigid price band,though it can be revised.

Retail investors here have to put in a cheque for the full amount, although QIBs pay no margins. Overseas, neither segment pays any margin.
(Source: Business Standard)

Required Changes in the current process-some thoughts

Bidding process to be made more convenient to retail. Increasing the retail investor quota to 30 to 35% to promote retail participation in IPOs. To increase the ceiling of investment for retail category from Rs 50,000 to Rs 1,00,000. Refund Process: currently sent in physical form; to be converted in ECS Registrars to be more proactive in solving IPO related queries. More Transparency in terms of QIBs Bidding.

Thank You