Initial Public Offering
“INITIAL PUBLIC OFFERING (IPO)”
Project submitted to
H & G H Mansukhani Institute of Management
in partial fulfilment of the requirements for
Master in Management Studies
By
JITENDER G. RAJAI
Roll No: 45
Specialization: FINANCE
Batch: 2010 - 2012
Under the guidance of
Ms.Anjali Sawlani.
H & G H Mansukhani Institute of Management
Ulhasnagar
-1-
Initial Public Offering
Student’s Declaration
I hereby declare that this report submitted in partial fulfillment of the requirement
of MMS Degree of University of Mumbai to H & G H Mansukhani Institute of
management. This is my original work and is not submitted for award of any degree
or diploma or for the titles or prizes.
Name: Jitender G. Rajai
Class: S.Y.M.M.S.
Roll No. : 45
Place: Ulhasnagar
Date:
Students Signature:
-2-
Initial Public Offering
Acknowledgement
I wish to thank and express my gratitude to those who
extended their valuable co-operation and contribution
towards the project who took out of their busy schedule and
provided easy access to the information required.
I would also like to thank my project guide Prof. Anjali
Sawlani for timely and unobtrusive guidance given to me.
Also thanks to my friends and colleagues for their enduring
patience and valuable criticism which shaped the project well.
Jitender G. Rajai
-3-
Initial Public Offering
TABLE OF CONTENTS
Sr. No.
Particulars
Page No.
1.
Financial markets and IPO
5
2.
Primary Market
7
3.
IPO- Features
8
4.
Trends
12
5.
Principle steps in IPO
16
6.
Cost of an Public Issue
18
7.
Pricing of issue
19
8.
Book Building
20
9.
Intermediaries in IPO
25
10.
SEBI Norms
29
11.
Marketing of IPO
35
12.
Inefficiencies/Bottlenecks In The Ipo Process
40
13.
IPO Note – Reliance Power Limited
48
14.
Future of IPO
55
15.
Conclusion
57
16.
Bibliography
58
17.
Annexure
59
-4-
Initial Public Offering
FINANCIAL MARKETS AND THE IPO
The Financial Market is an amorphous set of players who come together to trade in
financial assets.
Financial Markets in any economic system that acts as a conduit between the
organizations who need funds and the investors who wish to invest their money into
profitable opportunity. Thus, it helps institutions and organizations that need money to
have an access to it and on the other hand, it helps the public in general to earn savings.
Thus they perform the crucial function of bringing together the entries who are either
financially scarce or who are financially slush. This helps generally in a smoother
economic functioning in the sense that economic resources go to the actual productive
purposes. In modern economic systems Stock Exchanges are the epicenter of the financial
activities in any economy as this is the place where actual trading in securities takes place.
Modern day Stock Exchanges are most of the centers to trade in the existing financial
assets. In this respect, they have come a long way in the sense that these days, they act as
a platform to launch new securities as well as act as most authentic and real time indicator
of the general economic sentiment.
The zone of activities in the capital market is dependent partly on the savings and
investment in the economy and partly on the performance of the industry and economy in
general. In other words capital market constitutes the channel through which the capital
resources generated in the society and made available for economic development of the
nation.
As such, Financial Markets are functionally classified as having two parts, namely,
1. The Primary Market
2. The Secondary Market
-5-
Initial Public Offering
Primary Market comprises of the new securities which are offered to the public by new
companies. It is the mechanism through which the resources of the community are
mobilized and invested in various types of industrial securities. Whenever a new
company wants to enter the market it has to first enter the primary market.
Secondary Market comprises of further issues which are floated by the existing
companies to enhance their liquidity position. Once the new issues are floated and
subscribed by the public then these are traded in the secondary market. It provides easy
liquidity, transferability and continuous price formation of securities to enable investors
to buy and sell them with ease. The volume of activity in the Secondary Market is much
higher compared to the Primary Market
-6-
Initial Public Offering
PRIMARY MARKET-GENESIS AND GROWTH
When a business entity needs money the general
course of action that it follows is that it goes to the
bank. However banks may not be ready to provide
huge finance for a long time especially if the returns
are not fixed. The best way to raise money is
through offer of shares and for this: PRIMARY
MARKET is the answer.
The Primary Market deals with the new securities which were previously not tradable to
the public. The main function is to facilitate the transfer of resources from savers to
entrepreneurs seeking to establish or to expand and diversify existing events. The
mobilization of funds through the Primary Market is adopted by the state government and
corporate sector. In other words the Primary Market is an integral part of the capital
market of a country and together with the securities market. The development of security
as well as the scope for higher productive capacity and social welfare depends upon the
efficiency of the Primary Market.
What is an IPO?
The securities which the companies issue for the first time to the public either after
incorporation or on conversion from private to public company is called “INITIAL
PUBLIC OFFERING” or “IPO”
-7-
Initial Public Offering
INTIAL PUBLIC OFFERING (IPO)
The first public offer of securities by a company after
its inception is known as Initial Public Offering (IPO).
Going public (or participating in an “initial public
offering” or IPO) is a process by which a business
owned by one or several individuals is converted in to a
business owned by many. It involves the offering of
part ownership of the company to the public through the sale of equity securities (stock).
IPO dilutes the ownership stake and diffuses corporate control as it provides ownership to
investors in the form of equity shares. It can be used as exit strategy and finance strategy.
As a financing strategy, its main purpose is to raise funds for the company. When used as
an exit strategy, existing investors can offload equity holdings to the public.
REASONS FOR GOING PUBLIC
 To raise funds for financing capital expenditure needs like expansion
diversification etc.
 To finance increased working capital requirement
 As an exit route for existing investors
 For debt financing.
BENEFITS OF GOING PUBLIC

Access to Capital: The principal motivation for going public is to have access
to larger capital. A company that does not tap the public financial market may
find it difficult to grow beyond a certain point for want of capital.

Stockholder Diversification: As a company grows and becomes more
valuable, its founders often have most of its wealth tied up in the company.
By selling some of their stock in a public offering, the founders can diversify
their holdings and thereby reduce somewhat the risk of their personal
portfolios.
-8-
Initial Public Offering

Easier to raise new capital: If a privately held company wants to raise capital
a sale of a new stock, it must either go to its existing shareholders or shop
around for other investors. This can often be a difficult and sometimes
impossible process. By going public it becomes easier to find new investors
for the business.

Enhances liquidity: The stock of a closely held firm is not liquid. If one of the
holders wants to sell some of his shares, it is hard to find potential buyersespecially if the sum involved is large. Even if a buyer is located there is no
establishes price at which to complete the transaction. These problems are
easily overcome in a publicly owned company

Establishes value for the firm: This can be very useful in attracting key
employees with stock options because the underlying stock have a market
value and a market for them to be traded that allows for liquidity for them.

Image: The reputation and visibility of the company increases. It helps to
increase company and personal prestige.

Signals from the Market: Stock prices represent useful information to the
managers. Everyday, investors render judgment about the prospects of the
firm. Although the market may not be perfect, it provides a useful reality
check.

Other advantages:
 Additional incentive for employees in the form of the companies stocks.
This also helps to attract potential employees.
 Window of opportunity.
 It commands better valuation of the company.
 Better situated for making acquisitions.
-9-
Initial Public Offering
DISADVANTAGES\COSTS OF GOING PUBLIC
A public company, of course is not an unmixed blessing. There are several
disadvantages of going public.
 Disclosure: A public company is required to disclose information to investors
and others. Hence, it cannot maintain a strict veil of secrecy over its expansion
plans and product market strategies as its non-public counterpart can do.
Management may not like the idea of reporting operating data, because such
data will then be available to competitors.
 Dilution: When a company issues shares to public, existing shareholders suffer
dilution of their proportionate ownership in the firm.
 Loss of Flexibility: The affairs of a public company are subject to fairly
comprehensive regulation. Hence, when a non-public company is transformed
into a public company there is some loss of flexibility.
 Accountability: Understandably, the degree of accountability of a public
company is higher. It has to explain a lot to its investors.
 Public Pressure:
Because of its greater visibility a public company may be
pressurized to do things that it may not otherwise do.
 Adverse Selection: Investors, in general, know less than the issuers about the
value of companies that go public. Put differently, they are potential victims of
adverse selection. Aware of this trap, they are reluctant to participate in public
issues unless they are significantly underpriced. Hence, a company making an
IPO typically has to underprice its securities in order to stimulate investor interest
and participation.
- 10 -
Initial Public Offering
 Self dealings: The owner’s managers of closely held companies have many
opportunities for self-transactions, although legal they may not want to disclose to
the public.
 Inactive market low price: If a firm is very small and its shares are not traded
frequently, then its stock will not really be liquid and the market price may not be
truly representative of the stocks value.
 Control: Owning less than 50% of the shares could lead to a loss of control in the
management.
 Costs: Apart from the cost of issuing securities, a public company has to incur
recurring costs for providing investors with periodical reports, holding
shareholder meetings communicating with institutional investors and financial
analysts, and fulfilling various statutory obligations, like filing quarterly reports
with the Securities and exchange Board of India. These reports can be costly
especially for small firms
 Other disadvantages:

The profit earned by the company should be shared with its investors in the
form of dividend.

An IPO is a costly affair. Around 15-20% of the amount realized is spent on
raising the same.

A substantial amount of time and effort has to be invest
- 11 -
Initial Public Offering
TRENDS IN IPO
PRIMARY REASONS FOR A COMPANY GOING PUBLIC
Most people label a public offering as a marketing event, which it typically is. For the
majority of firms going public, they need additional capital to execute long-range
business models, increase brand name, to finance possible acquisitions or to take up new
projects. By converting to corporate status, a company can always dip back into the
market and offer additional shares through a rights issue.
PERFORMANCE IN 90s
Let us have a look at the general development of the Primary Markets in the nineties.
There have been many regulatory changes in the regulation of primary market in order to
save investors from fraudulent companies. The most path breaking development in the
primary market regulation has been the abolition of CCI (Controller of capital issues).
The aim was to give the freedom to the companies to decide on the pricing of the issue
and this was supposed to bring about a self-managing culture in the financial system. But
the move was hopelessly misused in the years of 1994-1995 and many companies came
up with issues at sky-high prices and the investors lost heavily. That phase took a heavy
toll on the investor’s sentiment and the result was the amount of money raised through
IPO route.
1993-96: SUNRISE, SUNSET
With controls over pricing gone, companies rushed to
tap the Primary Market and they did so, with
remarkable ease thanks to overly optimistic merchant
bankers and gullible investors. Around Rs20000 crores
were raised through 4053 issues during this period.
Some of the prominent money mobilizes were the so called ‘sunrise sectors’-polyester,
textiles, finance, aquaculture. The euphoria spilled over to the Secondary Market. But
reality soon set in. Issuers soon failed to meet projections, many disappeared or sank.
Result: the small investor deserted both markets-till the next boom!
- 12 -
Initial Public Offering
1998-2000: ICE ON A HOT STREAK
As the great Indian software story played itself out, software stocks led a bull charge on
the bourses. The Primary Market caught up, and issues from the software markets
flooded the market. With big IPOs from companies in the ICE (Information Technology,
Communication and Entertainment) sectors, the average issue price shot up from Rs.5
crore in 1994-96 to Rs.30 crore. But gradually, hype took over and valuations reached
absurd levels. Both markets tanked.
2001-2002-ALMOST CLOSED
There were hardly any IPOs and those who ventured, got a lukewarm response. A
depressed Secondary Market had ensured that the doors for the Primary Market remained
closed for the entire FY 2001-2002.There were hardly any IPOs in FY 2001-2002.
2002: QUALITY ON OFFER.
The Primary Market boom promises to be different. To start with, the cream of corporate
India is queuing up, which ensures quality. In this fragile market, issue pricing remains to
be conservative, which could potentially mean listing gains. This could rekindle the
interest of small investors in stocks and draw them back into the capital market. The taste
of gains from the primary issues is expected to have a spillover effect on the secondary
market, where valuations today are very attractive.
2003: IPO-IMPROVED PERFORMANCE OVERALL!
Even as the secondary market moved into top gear in 2003 the primary market too
scripted its own revival story, buoyed largely by the Maruti IPO which was
oversubscribed six and a half times. In 2003 almost all primary issues did well on
domestic bourses after listing, prompting retail investors to flock to IPO’s. All IPO’s,
including Indraprastha Gas and TV Today Network which was oversubscribed 51 times
showed the growing appetite for primary issues.
SEBI has taken enough care to force companies to make relevant disclosures for the
investor to judge the quality of new issues. Besides, the companies themselves have been
- 13 -
Initial Public Offering
careful not to over-price the shares. On the contrary, some of the companies have
deliberately under-priced them to let the issue get over-subscribed and to let the investor
share some of the capital gain after listing. With the care taken by SEBI and the
companies it is unlikely that the experience of 1995 will be repeated.
The latest development in the primary market has been the Indian players thirst for
money satiating offshore
2007: INITIAL PUBLIC OUTBURST
In 2007, the Indian equity market was in full swing with the index gaining ~53% Y-o-Y
and valuations edging beyond explanation. The total market capitalisation of the Indian
stock market increased 8% (INR 5,230 bn) on the back of 96 new listings in 2007. 2007
stood out in the history of Indian capital markets with the highest funds raised through
IPOs in any calendar year with maximum companies from the construction (16) and IT
sectors (11).• Almost 61 of the 96 IPOs (63%) debuted in premium in CY 07 as
compared to 54 out of 75 IPOs (72% of total IPOs) in 2006.
How the IPOs have fared in the past decade?
- 14 -
Initial Public Offering
The key highlights of all public issues in 2007 include the
following:
• Construction companies continue to dominate the IPO scene with as many as 16 companies
getting listed, raising money to the tune of INR 154 bn as against INR 36.5 bn last year through
10 IPOs.
• Only 3 companies came out with FPOs this year compared to 20 companies last year.
However, the absolute amount raised through FPOs increased significantly from INR 45 bn in
2006 to INR 107 bn. FPOs (as a proportion of total funds mobilised) declined to 24% from 31%
last year.
• 61 of the 96 IPOs (63%) debuted in premium compared with 54 out of 75 IPOs (72% of total
IPOs) in 2006.
• The simple average listing premium has improved to 29% from 24% last year. The average
issue size weighted listing premium for IPOs in 2007 was 24% as against 31% premium in
2006.
• 22 IPOs in 2007 were oversubscribed by over 50x with the highest over all oversubscription of
158x in Religare Enterprises.
• DLF was the largest IPO in 2007 mobilizing INR 92 bn and ICICI Bank came up with the
largest FPO of INR 100.5 bn. It was RPL in 2006 that came out with the biggest IPO for INR 27
bn and Bank of Baroda with the largest FPO of INR 16.3 bn.
• The highest listing gain of 242% was witnessed in Everonn Systems India with over all over
subscription of 144x, while the worst listing was seen by Broadcast Initiatives, at a discount of
41%.
• Orbit corp, Everonn Systems, and MIC Electronics, have created the maximum wealth for
investors in 2007 while, Abhishek mills, House of pearl fashion, and Asahi Songwon Colors
eroded maximum wealth.
- 15 -
Initial Public Offering
PRINCIPAL STEPS IN AN IPO
The issue of securities to members of the public through a prospectus involves a fairly
elaborate process, the principal steps of which are as follows.
1. The board of directors approves the proposal to raise capital from the public and authorises the
managing director (or a board committee) to do all the tasks relating to the public issue.
2. The company convenes a meeting to seek the approval of shareholders and the share holders
pass a special resolution under section 81(1A) of the Companies Act authorising the company
to make the public issue.
3. The company appoints a merchant banker as the lead manager (LM) to the issue.
4. The LM carries out due diligence to check all relevant information, documents, and
certificates for the issue.
5. The company, advised by the LM, appoints various intermediaries such as the registrar to the
issue, the bankers to the issue, the printers, and advertiser.
6. The LM draws up the issue budget, keeping in mind the guidelines issued by the Ministry of
Finance on issue expenses, and the company approves the same (The main components of the
issue expenses are fees for LM, underwriters, registrar and bankers, brokerage, postage,
stationery, issue marketing expenses, etc.)
7. The LM prepares the draft prospectus in consultation with management and seeks the
approval of the board.
8. The LM files the draft prospectus, approved by the board, with SEBI for its observation along
with a soft copy. SEBI places the same on its website for comments from the public.
9. The company makes listing application to all the stock exchanges where the shares are
proposed to be listed along with copies of the draft prospectus. The draft prospectus is also
hosted on the websites of the LM and the underwriters.
- 16 -
Initial Public Offering
10. The company enters into a tripartite agreement with the registrar and all the depositories for
providing the facility of offering the shares in a dematerialized mode.
11. If the issue is proposed to be underwritten (it is optional in a retail issue and mandatory
in a book built issue to the extent of the net public offer), the LM makes underwriting
arrangements.
12. Within 21 days, SEBI makes its observations on the draft prospectus. The stock exchanges
also suggest changes, if any. The company carries out the modifications to the satisfaction of
these authorities.
13. The company files the prospectus with the Registrar of Companies (ROC).
14. The LM and the company market the issue using a combination of press meetings, brokers'
meetings, investors' meeting and so on.
15. The company releases a mandatory advertisement, called the 'announcement advertisement'
10 days prior to the opening of the issue. This has to conform to Form 2A, also called the
abridged prospectus.
16. The LM and the printer dispatch the application forms to all stock exchanges, SEBI,
collection centres brokers, underwriters, and investor associations. Every application form is
accompanied by the abridged prospectus.
17. The issue is kept open for a minimum of 3 days and a maximum of 21 days.
18. After the issue is closed, the basis of allotment is finalised by the stock exchange, LM, and
the registrar, in conformity with certain SEBI- prescribed rules.
19. The LM ensures that the demat credit or dispatch of share certificates and refund orders to
the allottees is completed within two working days after the basis of allotment is finalised and
the shares are listed within 7 days of the finalisation of the basis of allotment.
- 17 -
Initial Public Offering
COST OF AN PUBLIC ISSUE
The cost of public issue is normally between 8 and
12 percent depending on the size of the issue and on
the level of marketing efforts. The important
expenses incurred for a public issue are as follows:

Underwriting
expenses:
The
underwriting
commission is fixed at 2.5 % of the nominal value (including premium, if any) of the
equity capital being issued to public.

Brokerage: Brokerage applicable to all types of public issues of industrial securities
are fixed at 1.5% whether the issue is underwritten or not. The managing brokers (if
any) can be paid a maximum remuneration of 0.5% of the nominal value of the
capital being issued to public.

Fees to the Managers to the Issues: The aggregate amount payable as fees to the
managers to the issue was previously subject to certain limits. Presently, however,
there is no restriction on the fee payable to the managers of the issue.

Fees for Registrars to the Issue: The compensation to he registrars, typically based
on a piece rate system, depends on the number of applications received, number of
allotters, and the number of unsuccessful applicants.

Printing Expenses: These relate to the printing of the prospectus, application forms,
brouchers, share certificate, allotment/refund letters, envelopes, etc.

Postage Expenses: These pertain to the mailing of application forms, brochures, and
prospectus to investors by ordinary post and the mailing of the allotment/refund
letters and share certificates by register posts.

Advertising and Publicity Expenses: These are incurred primarily towards statutory
announcements, other advertisements, press conferences, and investor’s conferences.

Listing Fees: This is the concerned fee payable to concerned stock exchange where
the securities are listed. It consists of two components: initial listing fees and annual
listing fees.

Stamp Duty: This is the duty payable on share certificates issued by the company. As
this is the state subject, it tends to vary from state to state.
- 18 -
Initial Public Offering
PRICING OF AN ISSUE
 Controller Of Capital Issue
During the Controller of Capital Issue (CCI) regime the issues were priced by the
company and approved by CCI. Generally the CCI was very conservative and hardly
allowed premium issues.
 Arrival of SEBI
After the Arrival of SEBI free market policy is followed for pricing of issue.
Merchant Bankers are responsible for justifying the premium. The company was
allowed to give future profit projections. A company can issue shares to applicants in
the firm allotment category at higher price than the price at which securities are
offered to public. Further, an eligible company is free to make public/rights issue in
any denomination determined by it in accordance with the Companies Act, 1956 and
SEBI norms.
 Deciding Premium by Bid System
Since year 2000 SEBI has changed pricing formula. The promoters cannot give future
projections and merchant banker alone cannot decide the pricing of IPO.
At present, 50%of the IPO is reserved for the wholesale investors and 50% is for the
small investor. The Lead-Manager starts road show in consultation with Institutional
Investors. Then they call for bid at recommended prices. Once, bids are received
pricing is open for discussion. The mean bid price is accepted and allocation is done.
The lead manager has to ensure full subscription of the full quota. Then the price is
declared in the newspapers. The retail investor has to follow this price and submit
application with cheque or demand draft. This part of the issue should also be fully
subscribed. If the issue is not underwritten and subscription received is less than 90%
then the IPO is considered as fail and whatever fund has been received has to
refunded. The company looses money it has spent on IPO.
Thus pricing is most important and difficult aspects of IPO. However in the present
scenario most of the issues are priced by the book building method. Accurate pricing
is essential for the success of IPO.
- 19 -
Initial Public Offering
BOOK BULIDING
THE LATEST AVTAAR OF PRICE DISOVERY
The basic motto of Book Building is that “the market knows the best”. Ever since SEBI
allowed companies with no profitability record to come up with IPO via Book Building
route, there has been a good rush of such issues.
What is Book Building?
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. Book Building is so-called because the collection of bids from
investors is entered in a "book". These bids are based on an indicative price range. The
issue price is fixed after the bid closing date.
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.
- 20 -
Initial Public Offering

On the close of the book building period the 'book runner evaluates the bids on
the basis of the evaluation criteria which may include -

o
Price Aggression
o
Investor quality
o
Earliness of bids, etc.
The book runner and the company conclude the final price at which it is willing to
issue the stock and allocation of securities.

Generally, the number 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.

Book Building is a good concept and represents a capital market which is in the
process of maturing.
The Initial Public Offering can be made through the fixed price method, book building
method or a combination of both.
In case the issuer chooses to issue securities through the book building route then as per
SEBI guidelines, an issuer company can issue securities in the following manner:
a. 100% of the net offer to the public through the book building route.
b. 75% of the net offer to the public through the book building process and 25%
through the fixed price portion.
c.
Under the 90% scheme, this percentage would be 90 and 10 respectively.
Persons Involved in the Book-Building Process
The principal intermediaries involved in the Book Building process are the company;
Book Running Lead Managers (BRLM) and syndicate members who are intermediaries
registered with SEBI and are eligible to act as underwriters. Syndicate members are
appointed by the BRLM.
- 21 -
Initial Public Offering
How is the book built?
A company that is planning an initial public offer appoints a category-I Merchant Banker
as a book runner. Initially, the company issues a draft prospectus which does not mention
the price, but gives other details about the company with regards to issue size, past
history and future plans among other mandatory disclosures. After the draft prospectus is
filed with the SEBI, a particular period is fixed as the bid period and the details of the
issue are advertised. The book runner builds an order book, that is, collates the bids from
various investors, which shows the demand for the shares of the company at various
prices. For instance, a bidder may quote that he wants 50,000 shares at Rs.500 while
another may bid for 25,000 shares at Rs.600. Prospective investors can revise their bids at
anytime during the bid period that is, the quantity of shares or the bid price or any of the
bid options.
Basis of Deciding the Final Price
On closure of the book, the quantum of shares ordered and the respective prices offered
are known. The price discovery is a function of demand at various prices, and involves
negotiations between those involved in the issue. The book runner and the company
conclude the pricing and decide the allocation to each syndicate member.
Payment for the shares
The bidder has to pay the maximum bid price at the time of bidding based on the highest
bidding option of the bidder. The bidder has the option to make different bids like
quoting a lower price for higher number of shares or a higher price for lower number of
shares. The syndicate member may waive the payment of bid price at the time of bidding.
In such cases, the issue price may be paid later to the syndicate member within four days
of confirmation of allocation. Where a bidder has been allocated lesser number of shares
than he or she had bid for, the excess amount paid on bidding, if any will be refunded to
such bidder.
- 22 -
Initial Public Offering
Advantage of the Book Building process versus the Normal IPO marketing process
Unlike in Book Building, IPO’s are usually marketed at a fixed price. Here the demand
cannot be anticipated by the merchant banker and only after the issue is over the response
is known. In book building, the demand for the share is known before the issue closes.
The issue may be deferred if the demand is less.
This process allows for price and demand discovery. Also, the cost of the public issue is
reduced and so is the time taken to complete the entire process.
Difference between shares offered through book building and offer of shares through
normal public issue:
Features
Pricing
Fixed Price Process
Book Building Process
Price at which the Security is Price at which the Security will be
offered/allotted
is
known
in offered/allotted is not known in
advance to the investor.
advance to the investor. Only an
indicative price range is known.
Demand
Demand
for
the
securities Demand for the securities offered
offered is known only after the can be known everyday as the
closure of the issue.
Payment
book is built.
Payment if made at the times of Payment only after allocation.
subscription wherein refund is
given after allocation
Guidelines for Issues to be made through 100% Book Building Route
SEBI had issued guidelines in October 1997 for book building which were applicable for
100% of the issue size and for issues above Rs.100 Crore. The guidelines were revised
subsequently to reduce the limit to issues of Rs.25 crore to encourage the use of this
facility. However, no issuer used this facility. SEBI modified the framework for Book
Building further in October 1999 to make it more attractive. The modified framework
does not replace the existing guidelines. The issuer would have option to issue securities
using book building facility under the existing framework:
- 23 -
Initial Public Offering
1. The present requirement of graphical display of demand at bidding terminals to
syndicate members as well as the investors has been made optional.
2. The 15% reservation for individual investors bidding for up to 10 marketable lots may
be merged with the 10% fixed price offer.
3. Allotment for the book built portions shall be made in demat form only.
4. The issuer may be allowed to disclose either the issue size or the number of securities
to be offered to the public.
5. Additional disclosure with respect to the scheme for making up the deficit in the
sources of financing and the pattern of deployment of excess funds shall be made in the
offer document.
Is the process followed in India different from abroad?
Unlike international markets, India has a large number of retail investors who actively
participate in IPO’s. Internationally, the most active investors are the Mutual Funds and
Other Institutional Investors. So the entire issue is book built. But in India, 25 per cent of
the issue has to be offered to the general public. Here there are two options to the
company. According to the first option, 25 per cent of the issue has to be sold at a fixed
price and 75 per cent is through Book Building. The other option is to split the 25 per
cent on offer to the public (small investors) into a fixed price portion of 10 per cent and a
reservation in the book built portion amounting to 15 per cent of the issue size. The rest
of the book built portion is open to any investor.
- 24 -
Initial Public Offering
INTERMEDIARIES IN IPO
The process of IPO is highly complex and its success is extremely important for the
company. In this process it is important that all the intermediaries should work cohesively
and within a framework of law. Any serious error by any intermediary can affect the IPO.
The following are the important intermediaries involved in the process MERCHANT BANKERS
Eligibility criteria-SEBI issues an authorization letter to the finance companies, which
are eligible to work as merchant bankers. The eligibility
criteria depend on network and infrastructure of the
company. The company should not be engaged in
activities that are banned for merchant bankers by SEBI.
SEBI issues authorization letter valid for 3 years and the
company has to pay necessary fees. Such merchant
banker can be appointed as lead manager for IPO.
Functions-Merchant banker can work as lead manager, co-lead manager, investment
banker, underwriter etc.
Responsibility-lead managers are fully responsible for the content and correctness of the
prospectus. They must ensure the commencement to the completion of the IPO. Certain
guidelines are laid down in section 30 of the SEBI act 1992 on the maximum limits of the
intermediaries associated with the issue.
Size of the Issue
No of Lead Managers
50 cr.
2
50-100 cr.
3
100-200 cr.
4
200-400 cr.
5
Above 400 cr.
1 or more as agreed by the board
- 25 -
Initial Public Offering
The number of co managers should not exceed the number of lead managers. There can
be only 1 adviser to the issue. There is no limit on the number of underwriters.
Informational Asymmetry-in general merchant bankers know the market better than the
issuing company. They would exploit the superior knowledge to under price issues. This
makes their job easier and helps them earn the goodwill of investors.
 BROKERS
All the recognized stock exchange members are called brokers and thus any member of a
recognized stock exchange can become a broker to the issue.
The brokers can work as broker and underwriter or both. In India usually a broker not
only does his normal broking business buying and selling securities for brokerage but
also works as an underwriter. They can give underwriting commitment in accordance
with their net worth. A broker offer marketing support, underwriting support,
disseminates information to investors about the issue and distributes issues stationary at
retail investor level. The brokers are governed by rules of SEBI and the respective stock
exchange.
The brokers are key to the success of the issue. The brokers appoint sub brokers who are
in direct contact with the investors.
 UNDERWRITERS
The underwriter is the principle player in the IPO providing the firm withReputation-as the underwriter is legally liable and because he has on going dealing with
the customers to whom he sells shares. The underwriter puts his reputation on the line.
Finding investors-the underwriter first puts together a syndicate of other underwriters to
distribute the shares. The syndicate finds investors willing to put their money into the
company. This has serious implications. Will the investors be institutional or private? Is
the company widely held or are the shares concentrated with just a few investors?
- 26 -
Initial Public Offering
Experience-the underwriter knows the detail of the process better than any other
participant since issuing shares is one of their primary business functions. Underwriters
are the ones who provide proper guidance.
After market support-the underwriter protects investors and thus makes the offering
more attractive. It is important for the firm to have a clear understanding with the
underwriter exactly how much support he plans to provide if the IPO is not fully
subscribed and accordingly his underwriting commission is fixed.
Future services-a good relationship with an underwriter can save time and money in
future dealings.
Pre offering assistance-the underwriter will conduct road shows with the company’s
management distribute the prospectus and marketing of the underwriters directly
generates talk to potential investors about appropriate pricing. Some part of the value that
the potential shareholders attach to shares.
Underwriting involves a commitment from the underwriter to subscribe to the shares of a
particular company to the extent it is under subscribed by the public or existing
shareholders of the corporate. An underwriter should have a minimum net worth of 20
lakhs and his total obligation at any time should not exceed 20 times his net worth. A
commission is paid to the writers on the issue price for undertaking the risks of under
subscription. The maximum rate of underwriting commission paid is as follows.
Nature of Issue
On amount Devolving On amounts subscribed
on Underwriters
Equity
shares
preference 2.5%
by the public
2.5%
shares and Debentures
Issue amount upto Rs5 lakhs 2.5%
2.5%
Issue amount exceeding %
1.0%
2.0%
The fees for underwriter and broker are decided by the company within the maximum
possible limit as fixed by the SEBI.
- 27 -
Initial Public Offering
 BANKERS TO THE ISSUE
Any scheduled bank registered with SEBI can be appointed as the banker to the issue.
Several commercial banks are working as bankers to the issue. They get fees on amount
collected by them. There are no restrictions on the number of bankers to the issue. The
main function of banker involves collection of duly filed application forms with money
(cheque/drafts) maintains a daily report, transferring the proceeds to the share application
money collected with the application forms to the registrar. The bank provides
application forms to the investors. They accept duly filled forms with cheque/ drafts.
They prepare collection reports and transfer funds and applications to the
company/registrar.
 REGISTRAR AND TRANSFER AGENTS
Registration with SEBI is mandatory to take on responsibilities as a registrar or share
transfer agent. The registrar provides administrative support to the issue process. Each
agent is registered with SEBI. Hey have to maintain net worth and infrastructure criteria.
They have to renew their License periodically. He collects all application from the bank
and ensures reconciliation of funds and of application amount and participates in process
of basis of allotment. If the IPO is oversubscribed they provide computerized program for
allotment. They manage refund orders and allotment letters. They provide the final list of
allotees to Lead Manager ROC and stock exchange. If the company wants they also
manage post issue IPO functions relating to shareholders register for the company.
 DEPOSITORIES
Since the year 2000 it’s compulsory that all fresh issue of shares must be made only in
the dematerialized format (DMAT). The Depository institute issues unique number of
every IPO or company, when shares are allotted to the company/registrar provides
shareholders register to depository in electronic form. Thus automatically all shareholders
get allotment in their DMAT account.
 LEGAL ADVISOR
Normally the company for the purpose of IPO does this appointment. He is responsible
legal compliance of IPO process. There are other intermediaries like Advertising Agents
etc. but the company governs their role.
- 28 -
Initial Public Offering
SEBI NORMS
SEBI has come up with Investor Protection and Disclosure
Norms for raising funds through IPO. These rules are amended
from time to time to meet with the requirement of changing
market conditions.
Disclosure Norms.

Risk Factor-The Company/Merchant Banker must specify the major risk factor in the
front page of the offer document.

Issuers Responsibility-It is the absolute responsibility of the issuer company about
the true and correct information in the prospectus. Merchant Banker is also
responsible for giving true and correct information regarding all the documents such
as material contracts, capital structure, appointment of intermediaries and other
matters.

Listing Arrangement- It must clearly state that once the issue is subscribed where the
shares will be listed for trading.

Disclosure Clause- It is compulsory to mention this clause to distinctly inform the
investors that though the prospectus is submitted and approved by SEBI it is not
responsible for the financial soundness of the IPO.

Merchant Bankers Responsibility-Disclaimer Clause the Lead Manager has to
certify that disclosures made in the prospectus are generally adequate and are in
conformity with the SEBI Guidelines.

Capital Structure- The company must give complete information about the
Authorised capital, Subscribed Capital with top ten shareholders holding pattern,
Promoters interest and their subscription pattern etc. Also about the reservation in the
present issue for Promoters, FII`s, Collaborators, NRI`s etc. Then the net public offer
must be stated very clearly.
- 29 -
Initial Public Offering

Auditors Report- The Auditors have to clearly mention about the past performances,
Cost of Project, Means of Finance, Receipt of Funds and its usage prior to the IPO.
Auditor must also give the tax-benefit note for the company and investors.
INVESTOR PROTECTION NORMS

Pricing of Issue-The pricing of all the allocations for the present issue must follow
the bid system. The reservation must be disclosed for different categories of investors
and their pricing must be specified clearly.

Minimum Subscription- If the company does not receive minimum subscription of
90% of subscription in each category of offer and if the issue is not underwritten or
the underwriters are unable to meet their obligation, then fund so collected must be
refunded back to all applicants.

Basis of Allotment- In case of full subscription of the issue, the allotment must be
made with the full consultation of the concerned stock exchange and the company
must be impartial in allotting the shares.

Allotment/Refund- Once the allotment is finalized, the refund of the excess money
must be made within the specified time limits otherwise the company must pay
interest on delayed refund orders.

Dematerialisation of Shares- As per the provisions of the Depositories Act, 1996,
And SEBI Rules, now all IPO will be in Demat form only.

Listing of Shares- It is mandatory on the part of the promoters that once the IPO is
fully subscribed, and then the underlying shares must be listed on the stock exchange.
This provides market and exit routes to the investors.
- 30 -
Initial Public Offering
SEBI GUIDELINES
IPO of Small Companies: Public issue of less than five crores
has to be through OTCEI (Over the Counter Exchange of India)
and separate guidelines apply for floating and listing of these
issues.
Public Offer of Small Unlisted Companies (Post-Issue Paid-Up Capital upto Rs.5 crores)
Public issues of small ventures which are in operation for not more than two years and
whose paid up capital after the issue is greater than 3 crores but less than 5 crores the
following guidelines apply.
1. Securities can be listed where listing of securities is screen based.
2. If the paid up capital is less than 3 crores then they can be listed on the Over The
Counter Exchange of India (OTCEI)
3. Appointment of market makers mandatory on all the stock exchanges where
securities are proposed to be listed.
Size of the Public Issue
Issue of shares to general public cannot be less than 25%of the total issue. Incase of IT,
Media and Telecommunication sectors, this stipulation is reduced subject to the
conditions that
1. Offer to the public is not less than 10% of the securities issued.
2. A minimum number of 20 lakh securities is offered to the public
3. Size of the net offer to the public is not less than Rs.30 crores.
Promoters Contribution
1. Promoters should bring in their contribution including premium fully before the
issue.
2. Minimum promoter’s contribution is 20-25% of the public issue.
3. Minimum lock in period for promoter’s contribution is five years.
4. Minimum lock in period for firm allotment is three years.
- 31 -
Initial Public Offering
Collection Centers for Receiving Applications
1. There should be at least 30 mandatory collection centers, which should include
invariably the places where stock exchanges have been established.
2. For issues not exceeding Rs.10 crores the collection centers shall be situated at:
The 4 metropolitan centres viz. Mumbai, Delhi, Kolkata & Chennai

All such centres where stock exchanges are located in the region in which
the registered office of the company is situated.
Regarding allotments of shares
1. Net Offer the general public has to be atleast 25% of the total issue size for listing
on a stock exchange
2. It is mandatory for a company to get its shares listed at the regional stock
exchange where the registered office of the issuer is located.
3. In an issue of more than 25 crores the issuer is allowed to place the whole issue
by book-building.
4. Minimum of 50% of the Net Offer to the public has to be reserved for the
investors applying for less than 1000 shares.
5. There should be atleast 5 investors for every 1 lakh equity offered.
6. Quoting of PAN or GIR No. in application for the allotment of securities is
compulsory where monetary value of investment is Rs.50000/- or above.
7. Indian development financial institutions and Mutual Fund can be allotted
securities up to 75% of the issue amount.
8. A venture capital fund shall not be entitled to get its securities listed on any stock
exchange till the expiry of 3 years from the date of issuance of securities.
9. Allotment to categories of FIIs and NRIs/OCBs is upto maximum of 24%, which
can be further extended to 30% by an application to the RBI-supported by a
resolution passed in the General Meeting.
- 32 -
Initial Public Offering
Timeframes for Issue and Post-Issue Formalities
1. The minimum period for which the public issue is to be kept open is 3
working days and the maximum for which it can be kept open is 10 working
days. The minimum period for right issue is 15 working days and the
maximum is 60 working days.
2. A public issue is effected if the issue is able to procure 90% of the total issue
size within 60 days from the date of the earliest closure of the public issue.
3. In case of oversubscription the company may have he right to retain the
excess application money and allot shares more than the proposed issue,
which is referred to as “green-shoe” option
4. Allotment has to be made within 30 days of the closure of the Public issue and
42 days in case of Rights issue
5. All the listing formalities of a Public Issue have to be completed within 70
days from the date of closure of the subscription list.
Dispatch of Refund Order
1. Refund orders have to be dispatched within 30 days of the closure of the issue.
2. Refunds of excess application money i.e. non-allotted shares have to be made
within 30 days of the closure of the issue.
Other Regulations
1. Underwriting is not mandatory but 90% subscription is mandatory for each issue
of capital to public unless it is disinvestment where it is not applicable.
2. If the issue is undersubscribed then the collected amount should be returned back
3. If the issue size is more than Rs500 crores, voluntary disclosures should be made
regarding the deployment of funds and an adequate monitoring mechanism put in
place to ensure compliance.
4. There should not be any outstanding warrants for financial instruments of any
other nature, at the time of the IPO.
- 33 -
Initial Public Offering
5. In the event of the initial public offer being at a premium and if the rights under
warrants or other instruments have been exercised within 12 months prior to such
offer, the resultant shares will be not taken into account for reckoning the
minimum promoters contribution further, the same will also be subject to lock-in.
6. Code of advertisement as specified by SEBI should be adhered to.
7. Draft prospectus submitted to SEBI should also be submitted simultaneously to
all stock exchanges where it is proposed to be listed.
Restrictions on Allotments
1. Firm allotments to mutual funds, FII and employees are not subject to any lock-in
period.
2. Within 12 months of the public issue no bonus issue should be made.
3. Maximum percentage of shares, which can be distributes to employees cannot be
more than 5% and maximum shares to be allotted to each employee cannot be
more than 200.
- 34 -
Initial Public Offering
MARKETING OF IPO
The role of marketing, and particularly promotion, in the pricing and trading of Securities
is fairly limited
PRELIMINARY REQUIREMENTS
The company has to complete all legal requirements, appoint all intermediaries and once
they get SEBI card (approval), the process of marketing of IPO can commence.
TIMING OF IPO
This the most important factor for the success of IPO. If, secondary
market is depressed, if there is political unrest, if serious international
problems are prevailing then it is considered to be negative factors for
timing of IPO’s. If these factors are favorable then the Company must
find out about the timing of other prestigious IPO’s. Normally in good
times many companies are crowding at the same time.
A question of Timing
Timing the issue is critical as it determines the success or failure of an issue to a great
extent.
During 1995-96, Primary Market boom, there was a period during which there were two
to three issues in a day. This is a dangerous situation.
The ideal time for marketing an issue is a boom in the Secondary Market, peaceful sociopolitical-economic environment and at least two days gap between two issues.
Marketing initial public offers (IPO’s) through the secondary market:
SEBI approved a proposal of marketing IPO’s through the secondary market. It proposes
to use the existing infrastructure of stock exchanges (terminals, brokers and systems),
presently being used for secondary market transactions, for marketing IPO’s with a view
to get rid of certain inherent disadvantages faced by issuers and investors like tremendous
load on banking and postal system and huge costs in terms of money and time associated
with the issue process. This system would confirm to all extant statutory requirements.
- 35 -
Initial Public Offering
 The investor would approach broker for placing an order for buying shares of
primary issues.
 The registrar in consultation with merchant banker and the regional stock
exchange of the issuer will finalize the basis of allotment and intimate the same to
the exchanges who in turn shall inform the brokers.
 The brokers will advise the successful allottees to submit the application form and
the amount payable towards the shares.
 The broker will deposit the amount received in a separate escrow account for the
primary market issue.
 The clearing house of the exchange will debit the primary issue account of the
broker and credit the issuer’s account.
 Subsequently, the certificates would be delivered to the investors or the
depository account of the investor would be credited.
 The securities can be listed on the stock exchange from the 15th day from the
closure of the issue as against 45-60days at present.
 As investors will have to part with their funds only on successful allotment, their
funds are not unnecessarily blocked. This would also ensure that refunds are done
away with. The system seeks to reduce the time taken presently for completion of
the issue process, as well as the cost of the issue.
The Effects of Marketing on IPO’s
An investment banker’s marketing campaign for an IPO is critical. This campaign, as
much as anything that precedes or follows it, will determine the success or failure of the
IPO. The key is to stimulate investor demand for the stock so that, the demand will
exceed the supply. Through the marketing effort, the underwriter attempts to create an
imbalance in the supply/demand equation for the issue, so that there are more buyers than
sellers when the stock is finally released for sale to the public.
- 36 -
Initial Public Offering
Before a company gets to market through an IPO, it spends a fortune on hype, Paperwork
and publicity to create demand. The buzz is stirred up before the shares are released. So
you never get in cheap. And the ones that are cheap are usually not worth holding five
minutes.
To understand the sense of these statements one must understand the relationship
between the marketing of an IPO and its initial returns, and how different parties benefit
from this relationship. A security’s value is an increasing function of the number of
investors who know about the security. Investor knowledge leads to greater value
consequently; the efforts taken by an investment banker to promote awareness in a firm
can affect the valuation of its stock by expanding the investor base.
The reputation of an investment banker could expand a firm’s investor base at a lower
cost than the firm can, since the promotional efforts of an investment banker on behalf of
the firm would be more creditable. The efforts of an investment banker to promote an
IPO through increased media coverage will increase retail interest in that stock.
The effects of an investment banker’s promotional efforts are not only important for
explaining the initial returns of some IPO’s, but also for explaining the rankings of
investment bankers Promoting an issue sufficiently to insure a run-up in its early
aftermarket prices attracts further investor interest catches the interest of analysts and
helps to maintain or expand the investor base of the stock
If the sole motivation of a road show were to sell IPO’s to their regular institutional
investors and if those investors were to hold onto these stocks, then there would be no
motivation for an investment banker to do more than a minimal amount of promotion
since there would be no need to attract retail investors in early aftermarket trading.
However, research contradict that these institutional investors do not hold onto the shares
allocated to them over the long-term, instead they sell their allocation, primarily to retail
customers in “hot” issues
- 37 -
Initial Public Offering
GENERAL PROCEDURE FOR MARKETING OF IPO
PRESS CONFERENCE
Promoters and Lead Managers call for press conference in each major investment center.
Reporters are briefed about the issue. They carry it as news-item in their papers.
INVESTORS CONFERENCE
The prospective investors are called by invitation. The
Promoters and Lead Managers give presentations. They
reply to the questions of the investors to boost their
confidence.
ROAD-SHOW
This is like the investors conference but normally is done abroad for marketing
ADR/GDR issues. It is an expensive process and requires a lot of legal compliances. The
company has to observe the rules of the concerned country. However, road shows are
becoming more and more popular in India.
NEWSPAPER ADVERTISEMENT
The company releases statutory advertisements in leading newspapers. The company has
to publish abridges prospectus in leading newspapers. It is
the responsibility of the promoters to ensure that the issuing
company and their group companies should not release any
commercial
advertisement,
which
may influence
the
investor’s decision for investment.
PRINTING STATIONERY-PROSPECTUS
The company has to print approved prospectus and provide enough copies to all
intermediaries. If any investor asks for a copy of prospectus it must be provided to him
without any fees. Sufficient quantities should be maintained at the registered office of the
company and with the Lead Managers.
- 38 -
Initial Public Offering
PRINTING APPLICATION FORMS
Sufficient number of application forms must be printed much before the opening of the
issue. Each form must contain abridged prospectus in SEBI approved format. Sometimes
different coloured forms are issued to FI, FII, NRI and general public. It is compulsory to
provide stationery to all underwriters and brokers. They will arrange distribution to their
sub-brokers and other clients. Sometimes, company makes direct dispatch of forms to
prospective investors.
- 39 -
Initial Public Offering
INEFFICIENCIES
INEFFICIENCIES/BOTTLENECKS IN THE IPO PROCESS
 Approval of the Draft Prospectus by SEBI: As per the SEBI guidelines, it
takes 3 weeks to approve a draft prospectus filed by the issuer company, but in
reality this procedure takes around 8 – 10 weeks. This increases the time line
required to come out with an IPO.
 Market Timing: The success of IPO’s depends to some extent on the health of
the capital markets in the country. If a company comes out with an IPO when the
sentiment of the investors towards the stock market is negative, it will get a very
lukewarm response. Market volatility is a concern for companies coming out with
IPO’s. Issuer companies are sometimes forced to extend the bidding period or cut
the price at the lower end of the price band as seen recently in the cases of Air
Deccan and Prime Focus IPO. Some other companies which were planning to
come out with an IPO are waiting for the sentiments to turn positive on the stock
market before taking a final call on public issues.
According to Prithvi Haldea of Prime Database, currently there are three
categories of IPO’s in the market. They are as follows,

Firms where issue date for the IPO has been announced.

Firms which have filed draft prospectus with SEBI and

Firms planning for IPO’s
It is estimated that there are around 4 - 6 firms where the issue date has been
announced, 8 – 10 firms whose prospectus has been cleared by SEBI but the date
of IPO has not been announced, around 48 firms whose prospectus has not been
cleared and around 350 firms planning to come out with an IPO in the near future.
 Market Manipulation: In some IPO’s there are cases of market manipulation i.e.
prices of the shares of the company are rigged by false information, false trading
etc. within days of its listing and in many such cases the shares are even delisted
- 40 -
Initial Public Offering
within years resulting in huge losses to the investors. This erodes the investor’s
confidence in the primary market.
 Multiple Allotments of Shares to a Single Investor: As seen in the recent IPO
scams, multiple allotments of shares were made to a single person in the retail
investor category, resulting in a single person cornering a huge proportion of the
allotments reserved for retail investors. This results in opportunity losses to
genuine retail investors who have applied for the shares under this category.
 Opening of Multiple Demat Accounts (Benami Accounts) by a Single
Investor: In recent investigations by SEBI relating to the IPO scams it was found
that the Depository Participants(DP’s) have not followed the stringent Know Your
Client (KYC) Norms prescribed by SEBI for opening of DEMAT accounts. This
resulted in opening of multiple demat accounts (benami accounts) by single
investors to corner significant portions of IPO’s reserved for retail investors. Some
of the discrepancies observed in following the KYC norms are as followed:

No signature across the photographs of the account holders.

Same signature for multiple accounts but different addresses.

Same addresses for multiple demat accounts.

No proof of identification submitted to the DP’s.

No proof of address provided by the account holders.

Photographs of the accountholders stapled and not affixed as per SEBI
guidelines.
The Depositories are aware of the possibility of the existence of accounts being
operated without following proper KYC norms, but they have not put in place a
system to detect such accounts and take proper actions.
 Inefficiency by Depositories: The depositories are required to have adequate
controls, systems and procedures for monitoring and evaluating its compliances
with the statutory requirements laid down by SEBI and prevent any conduct by
DP’s which is detrimental to the interest of the investors or the securities market.
In this respect, the depositories have failed to perform and supervise the
- 41 -
Initial Public Offering
operations of the DP’s and also failed to inform SEBI of the deficiencies. Some of
the deficiencies are as follows:

The penalties imposed on the DP’s for account opening deficiencies are as
low as Rs. 500 – 1000.

NSDL system allows accounts to be stored in the databases with no check
on the addresses and other details.

NSDL has to inspect the records of the DP’s on timely intervals but the
periodicity of inspection is not established as per any document.

NSDL does not impose penalties for violations rectified immediately after
inspection, does not impose penalties harsher than monetary penalties for
the remaining violations and also waives the penalties imposed if the DP
reports rectification of deficiencies. This system creates no disincentive or
deterrent for a DP to comply till NSDL inspects and finds the violation,
since rectification after inspection assures that no penalty of any kind is
imposed on DP.
 Deficiencies on the part of Bidders to the Issue: There are some technical
reasons for rejection of the bids made by the bidders in the retail and noninstitutional categories. Some of the reasons are as follows:

The amount paid does not tally with the amount payable for the highest
value of equity shares bid for.

Age of the first bidder not given.

Bids by minors or by person’s incompetent to contract as per the Indian
Contracts Act.

PAN not stated if the bid is for Rs. 50,000 or more.

GIR no. stated instead of PAN.

Proof of PAN not attached to bid cum application form.

Bids for lower number of equity shares than specified for that category of
investors.

Bids at a price less than lower end of price band.

Bids at a price more than the higher end of price band.

Bids for number of equity shares which are not in the multiples as
specified in the Red Herring Prospectus.
- 42 -
Initial Public Offering

Multiple Bids by a single person.

Signature of sole and/or joint bidders missing.

Bid cum application form does not have the stamp of the BRLM or
syndicate members.

Bid cum application form does not have the bidder’s depository account
details.

Bids for amounts greater than maximum permissible amounts prescribed
by the regulations.

Bids are not accompanied by applicable margin amounts.
 No requirement of PAN details for application below Rs.50000: As per the
current SEBI guidelines, investors are required to submit PAN details for
applications for shares in an IPO above Rs. 50000. This can be a loop-hole in the
system as investors in the retail allotment category can make multiple applications
as benami's by subscribing for less than Rs. 50000 as they need not submit their
PAN card details.
 Oversubscription of Public Issues: Generally there are three classes of investors
in the market; those who invest only in the primary market, then those who invest
only in the secondary market and those who invest in both. In the recent years the
primary market has witnessed a boom with many companies coming out with their
IPO’s. This provides huge investment opportunities fro investors interested in the
primary markets. This has led to so many issues in recent past being
oversubscribed by as much a 20 – 60 times. Such tremendous responses also
results in huge amounts of paper work and processing of applications. During
such times there may be a possibility of certain issues pertaining to the stringent
SEBI guidelines being overlooked as has been witnessed in the IPO scams in
recent years. The system currently in place may not be suited to efficiently handle
such enormous data and some lacunas may exist.
 Quotas for IPO Allotments: The IPO subscription in India is a quota based
system where SEBI has prescribed the quotas for the investors in the retail
investor, non- retail investors and institutional investor’s category. The reservation
- 43 -
Initial Public Offering
for retail investors limits their opportunity of investing in IPO’s and earning the
resulting gains. Such a quota based system may have fuelled the practice of
investors putting in multiple applications in public offerings to corner the shares.
Thousands of fictitious applications were found to have been put in in a spate of
IPO’s during the equity boom between 2003 and 2005 to cash in the gains when
the shares were listed.
 Problems faced by the Merchant bankers in the Due Diligence process: The
merchant bankers appointed by the issuer company are required to verify various
documents, reports, financial information, etc which requires some time. Many a
times the issuer company tries to show itself in positive light so that its issue gets
a fairly positive response in the market and to enable this they do not provide true
and fair data to the merchant bankers or they forge the documents etc. It becomes
then the duty of the appointed merchant bankers to uncover the true information
and only after carrying out the due diligence procedure to the best of available
resources proceed with the issue.
 Delays in Refunds to Unsuccessful bidders in IPO’s: According to the SEBI
guidelines the refunds to unsuccessful bidders should be done within 15 days and
30 days of deciding the allotment in case of book building issue and fixed price
issue respectively. But in reality many a times the refunds get delayed resulting in
blockage of funds of the unsuccessful bidders who could have used those funds to
invest in some other IPO. This is an opportunity loss for the investors.
IMPROVING EFFICIENCY IN THE IPO PROCESS
 PAN Cards Compulsory for opening DEMAT Accounts: From April 1, 2006
demat accounts can be opened only if PAN card details are furnished by the
intending demat account holders to the DP (Depository Participant). Also CDSL
(Central Depository Services (India) Limited has issued a notice regarding all the
demat accounts opened on or before 31st March 2006 saying that if the said demat
account holders want to continue the operation of their demat accounts they
should furnish the PAN card details to their respective DP’s on or before 30th
- 44 -
Initial Public Offering
September 2006. PAN card details in this case imply original Pan Card for
verification and photocopy for the DP’s record.
This step on the part of the DP’s will help reduce the instances of opening of
multiple demat accounts in the same name or using the same address.
 Removal of Quota System in the IPO Allotment Process:
The Finance
Ministry has given a suggestion to SEBI that the quota system in the IPO
allotment process should be done away with as it leads to investors putting in
multiple bids to corner portions of the public offerings. The ministry is of the
opinion that instead of the quota system a non-discretionary price discovery
process marked by an auction based method could be adopted.
 Restriction on Share Transfer before listing: Market regulator SEBI is
considering a proposal that seeks to restrict transfer of equity shares of a company
before it is listed, in a move aimed at reducing large scale off market transactions.
Large scale irregular transfer of shares before their listing was seen in the recent
IPO scams. Hence the proposal by SEBI aims at reducing such scams and
preventing the individuals who deal in such transactions from making big gains
when the securities are listed on the stock exchanges.
 Grading of Merchant Bankers: SEBI has also recently made a proposal to grade
the merchant bankers involved in the handling of a public issue. As per this
proposal, Merchant bankers will be graded on their track record; the issues
brought out in the past, the kind of documents that were submitted and other such
parameters. Also SEBI will not certify the grading agency’s assessment. The
grading would be merely aimed at assisting the investors particularly the small
investors in taking informed decisions.
 Improvement in the Refund process: Currently the refund process is a time
consuming procedure in the IPO process, as the unsuccessful bidders have to
undergo a long wait to get back the money they have paid for subscribing to an
IPO. An ECS (Electronic Clearing System) which is not mandatory as of now
- 45 -
Initial Public Offering
should be made mandatory in case of all the refunds. This will ensure efficiency
and will help do away with the irregularities in the refund process.
 IPO funding: Nowadays individuals who want to subscribe to a public issue but
do not have the resources can avail funding from various banks at reasonable
rates. Availability of easy funding will boost up the investors responses to the
public issues.
Some of the terms and conditions for an IPO funding by banks are as follows:

The shares should be subscribed in demat form only

The customer exercising such an option should have a demat account or
open a demat account with the bank etc.
Let us have a look at all the requirements prescribed by UTI Bank for IPO
funding for individuals:
ELIGIBILITY: Finance would be provided to those subscribing for shares in the
public/rights issues of reputed companies who should be listed with the listing
requirements of NSE/ BSE.
TERMS AND CONDITIONS:

Minimum Application: 200 shares

Loan Amount: 80% of the application amount (subject to a maximum
of Rs. 10 lakhs)

Margin: 50% or as per the directives issues by RBI from time to time.

Rate of Interest: 4% above the Prime Lending Rate (PLR) with a
minimum of 16%

Processing Charges: Rs. 250
OTHER REQUIREMENTS:

The shares should be in demat form only.

The customer exercising the option should either have or open a DP
account as also a non cheque Book/ ATM card Savings/ Current account
with the bank.

Processing charges, Interest amount and margin money to be recovered up
front by way of a pay order.
- 46 -
Initial Public Offering

A letter from the applicant irrevocably that he will not change the mandate
in the application, and if he does the application may be rejected by the
Registrars/ Company. This letter will be filed with the company along with
the share application form.

The scheme will close one day before the close of the issue when payment
towards fees is made in cash/ draft/banker’s cheque or three days before
the close of the issue when payment is made through a clearing cheque.

The customer shall open a savings account without a cheque book/ ATM
card with the bank and shall irrevocably mandate credit of refund if any to
the account. The customer will authorize the bank to recover the loan by
debiting this account in the event of non-allotment. No other debits would
be allowed in this account.
The requirement by other banks for IPO funding is more or less the same as seen
above in the UTI bank example.
Thus, IPO funding is a boon fro investors especially for the investors who prefer
to invest in the primary market.
- 47 -
Initial Public Offering
IPO NOTE
Reliance Power Limited (RPL)
Company background
Business
RPL is part of the Reliance Anil Dhirubhai Ambani (Reliance ADA) group and was
established with the purpose of developing, constructing and operating power projects
domestically and internationally. The company is currently in the process of
developing 13 medium and large sized power projects with a combined planned
installed capacity of 28,200 MW. The identified project sites are located in western
India (12,220 MW), northern India (9,080 MW) and northeastern India (2,900 MW)
and southern India (4,000 MW). They include 7 coal-fired projects (14,620 MW) to
be fueled by reserves from captive mines and supplies from India and abroad, 2 gasfired projects (10,280 MW) to be fueled primarily by reserves from the KrishnaGodavari Basin off the east coast of India, and 4 hydroelectric projects (3,300
MW), three of them in Arunachal Pradesh and one in Uttarakhand.
- 48 -
Initial Public Offering
Apart from the abovementioned 6 projects that will be part funded through the IPO
money, RPL shall also working on the following 7 projects:

Shahpur combined cycle gas-fired project - 2,800 MW

Gas-fired Dadri project - 7,480 MW

Krishnapatnam ultra-mega project - 4,000 MW

Coal-fired MP Power project - 3,960 MW

Hydroelectric projects - Siyom (1,000 MW), Tato II (700 MW) and Kalai II
(1,200 MW)
Key management profiles
Mr. Anil Dhirubhai Ambani is the non-executive Chairman of RPL. He holds a
Bachelor’s Degree in Science from the University of Bombay and a Master’s Degree
in Business Administration from The Wharton School, University of Pennsylvania,
US. Mr. Ambani is also the Chairman of Reliance Communications Limited, Reliance
Capital Limited, Reliance Energy Limited and Reliance Natural Resources Limited.
Mr. K.H. Mankad is the Manager, Company Secretary and Compliance
Officer of RPL. He is a Bachelor of Commerce and Laws. He is an Associate
Member of the Institute of Chartered Accountants of India, an Associate Member of
the Institute of Company Secretaries of India and an Associate Member of the
Institute of Cost and Works Accountants of India. He has over 32 years of
experience in corporate finance, taxation, accounts, management and laws. He has
been working with Reliance Energy since 1995 and was its Director (Finance). He has
been deputed to RPL since March 12, 2007.
- 49 -
Initial Public Offering
Objects of the issue
RPL is currently pursuing the development of 13 power generation projects,
which are currently under various stages of development. Out of these projects,
one is being executed by the company itself and the remaining 11 projects are
being developed by its nine subsidiaries which have been set up to develop
these projects. One project will be executed through a subsidiary that remains
to be transferred to RPL. The company intends to use around 75% to 80%
portion of the net proceeds to partially fund 6 of these projects (as shown in the
table below).
- 50 -
Initial Public Offering
Positives:
The ‘power’ful opportunity: India is a power-deficit country. The gap between
demand and supply has been increasing, leading to increased power shortages. The
peak deficit varies across India, ranging from 5.8% of peak demand requirements in
the southern region to 26.5% of peak demand requirements in the western
region. According to the government estimates, India's peak demand will reach
152,746 MW with an energy requirement of 968 billion units (BUs) by FY12.
Then, by FY17, peak demand will reach 218,209 MW with an energy requirement of
1,392 BUs.
The 11th Five-Year Plan recommends generation planning based on an estimated
9.5% growth in required energy each year. As a result, a capacity addition of
78,577 MW is recommended in the 11th Five-Year Plan. As per the XIth plan
documents, total investment in the electricity sector (including conventional and
non-conventional energy, mainly wind energy) is projected to amount to Rs 7,250 bn
(US$ 184 bn). The government’s projection assumes that private investment in the
sector will grow at an average rate of 25% per annum in the backdrop of
investments in Ultra Mega Power Projects during the period. Central and States’
investment, which includes rural electrification schemes, will grow annually at 16%
and 37% respectively.
According to the Ministry of Power, as of September 30, 2007, India has an
installed generation capacity of approximately 135,782 MW. Despite the fact
that the economic liberalization policies of the government, which began in
1992, were designed to fuel growth across all sectors, the power industry has
- 51 -
Initial Public Offering
not grown sufficiently to meet demand. The economy still faces an acute shortage of
power. And therein lies the opportunity for companies operating/planning to operate
in this space. RPL has a portfolio to develop 28,200 MW of generation capacity over
the next few years, which is one of the most aggressive plans as far as the sector is
concerns.
Negatives:
Execution risks: This is the biggest risk to applying to RPL, considering that the
company does not have a stream of revenues, which shall rather flow when it is able
to successfully execute its first project (Rosa-I) in March 2010. Investors need to
understand that power projects have high gestation periods and even small size
projects take a minimum of 2 to 3 years to complete. As far as large projects (like the
UMPPs) are concerned, they take a period of over 5 to 6 years to just begin
commercial production. But the way the issue of RPL has been promoted does not
speak much of the execution risks that entail the projects.
This most concerning part is that RPL’s promoter company, Reliance Energy has a
history of under-achievements as far as generation capacity additions are concerned.
Just last year, in a meeting with us, the management had indicated that generation
projects would be tough to come by from the company if the power distribution
segment (still a stronghold of the ailing state electricity boards) did not show signs of
improvement via deregulation.
Now, here is a company, having the same parentage, talking about ‘successfully’
executing 28,000 MW of projects over the next 10 years! Where have all the concerns
with respect to distribution gone? Where are the assured fuel supply arrangements?
What about the equipments? Understood that financing will not be a difficult part
(as seen from the readiness of so many banks to lend for these projects), but will the
success of the company depend of the capital it can raise? Or will it depend on
how efficiently and effectively it utilises this capital? Amidst the hysteria
surrounding this issue, people might seemingly be concerned only of the former,
giving little attention to the latter.
- 52 -
Initial Public Offering
Let’s talk about fuel first. RPL intends to procure coal and gas for some of its projects
through RNRL, but it has not entered into any definitive agreement with the latter.
Also, currently, RNRL does not have any rights to coal resources of its own.
In addition, RNRL is in litigation with respect to its gas reserves, which may
impact the availability or the pricing of fuel for RPL’s two gas-fired thermal projects.
Moving further, one of the three coal blocks allotted to the company’s Sasan ultramega project is the subject of litigation between the Ministry of Coal and third parties.
And what about equipments? As has been reported by so many power
generation companies and government agencies, there is a tremendous shortage of
power equipments in India. So much so, a large number of projects have been
shelved or delayed in the past due to non-availability of critical equipments
like boilers, turbines and generators. The Central Electricity Authority (CEA) has
estimated that for commissioning of 14,000 MW per year on the national scale (in
order to achieve the XIth plan targets), equipments worth Rs 78 bn will be
required. Out of this, equipments of value of Rs 17 bn are available and augmentation
would be required for equipments worth Rs 61 bn.
That
is
a
staggering
requirement and has been expressed as a major concern by power generating
companies. While RPL has indicated its intentions of manufacturing power
equipments in-house (though in joint ventures with global engineering companies),
the shortage will continue to hamper progress for years to come.
As far as the fund requirement is concerned, RPL shall need significant capital
resources to finance these projects. The prospectus indicates that the company will
need to raise Rs 1,120 bn (approximately US$ 28 bn) to finance its 13 planned
projects. Out of this, as per regulations, around 70% to 80% (Rs 780 bn to
Rs 900 bn) will have to raised as third-party debt. This is a huge sum and shall
increase the risk on the company’s balance sheet. Further, the company’s ability to
meet its debt service obligations (interest payment and capital repayment) will
depend primarily upon the cash flows generated through its business, which in itself
has a huge execution risk attached to it.
- 53 -
Initial Public Offering
No non-compete clause with Reliance Energy: RPL’s parent company, Reliance
Energy, currently operates 941 MW of power generation projects. While the group
has stated that it intends for RPL to be its primary vehicle for investments in the
power generation sector in the future, it has no non-compete agreement in
place with other companies of the group, including Reliance Energy. If these
other group companies develop power generation projects in the future and
compete with RPL, it will dilute the entire business rationale for the latter to
be in existence.
- 54 -
Initial Public Offering
Future of IPO
2008: The Road Ahead
In 2007, the Indian equity market was in full swing with the index gaining ~53% Y-oY and valuations edging beyond explanation. Year 2008 seems as a spectacular year
for the primary market equity issuance with possibility of enormous action in terms of
fund mobilisation and corporate actions. Moreover, the economic factors within the
country are expected to remain normal in 2008. Under these circumstances, the role of
enterprises will continue to remain instrumental in shaping up the fortunes of the
economy.
Companies from the core sectors like power, construction, and banking will look
forward for funds to augment their expansion plans. In short, 2008 will be the year of
mega IPOs, and with so much action scheduled to take place in the primary market,
2008 may go on to become the biggest primary market year in last 5-year bull run.
The amount of funds that would be raised via IPOs and FPOs in CY08 would
surmount all the previous records. As per sources, the issues pending with SEBI and
other mega issues that are in pipeline are around 485 (nearly 419 IPO and 66 FPO).
2008 could see mobilizing more than INR 375 bn through IPOs and FPOs. Expected
numbers may be manifold more than the previous capital raised in the market.
The primary and secondary markets are highly interdependent. The secondary market
conditions play a significant role in the over-subscription and the listing premium that
a stock commands. At the same time, mega IPOs that suck liquidity from the markets
at times result in lack of buyers/support in the markets. Surely, there are several pros
and cons associated with the mega IPOs and FPOs
With the Indian economy growing at a real GDP rate of 8.5% p.a., many mid-sized
businesses from different sectors have grown manifold. There has been a paradigm
shift from a human intensive business to capital intensive business. Such an expansion
in the scale of business certainly accentuates the requirement for funds. Hence, like
the past, 2008 too would see many mid-sized issues dominating the IPO space. Out of
the total 67 issues filed with SEBI, 34 issues (50%) are below INR 1 bn.
- 55 -
Initial Public Offering
Huge investments are slated to take place in the power sector under the 11th five year
plan. These investments are likely to be supplemented by a voracious demand for
funds by the power companies. One can expect many IPO's with few big ones being
Jai Prakash Power Ventures Ltd. (INR 40 bn) and National Hydroelectric Power corp
ltd. (INR 22 bn). Among the big ticket IPOs of CY 08, Reliance Power would be
mopping up around INR 120 bn followed by few other mega IPOs like BSNL and
Sahara Infrastructure &
Housing Ltd
The share of FPOs in the total fund raising has been on the decline over the past few
years. In CY 08 mega FPO (rights issue) of INR 120 bn by State Bank of India is
awaited. Indian Bank has filed an offer document with SEBI for raising INR 8 bn.
Barring the PSU banks there are only eight companies that have filed for FPO,
aggregating to a sum of INR 6.8 bn. Other PSUs that are expected to come up with
issue of shares (fresh issue or divestment or both) during the year include NTPC (INR
60 bn), HPCL (INR 50 bn), Coal India (INR 30 bn), and Gujarat State Petroleum
Corp Ltd. (INR 40 bn). The prospective merger of SBI and its listed subsidiaries,
slated to happen sometime in 2008, will also be a closely followed affair.
- 56 -
Initial Public Offering
CONCLUSION
The Indian initial public offer (IPO) market has always had more than its fair share of
doomsayers. Right from the Maruti issue, which pundits decried as being overpriced,
to the ONGC and TCS issues, where the huge sizes of the offerings drew predictions
of calamitous effects on the secondary markets, the opinions of the “experts” have
proved to be wide off the mark.
Not only did the mega issues sail through, but the secondary markets proved to be far
more resilient than anybody had anticipated.
Nevertheless, there is no denying the enormous interest retail and other investors have
shown in the primary market, perhaps even more so than in the secondary one. This
interest has been sustained despite the lack of bounce in the secondary market and is
not confined to the big issues; even smaller issues have sailed through with large
oversubscriptions.
If investors are gung-ho about IPO’s, there are several reasons for it. Unlike earlier
IPO booms, this one is being driven by a much better quality of offering. Missing in
action so far are the fly-by-night operators of the 1990s who made public offers only
to collect the money and vanish.
Next, most recent IPO’s have resulted in gains on listing for the investor. The listing
gains have probably initiated a kind of virtuous cycle, tempting investors who have
already made money to return to the primary market.
Companies have been quick to take advantage of the investor interest in IPO’s, and
banks, broking houses, retail outfits, media houses and government companies are
lining up issues.
Even mutual funds have got into the act, and are tailoring their offerings to match
current market fancies—mid-cap funds, dividend yield funds, and what-have-you. If
the government wants to get some money into its kitty through disinvestment
programmes, this is the time to make a dash for it.
- 57 -
Initial Public Offering
BIBLIOGRAPHY
Books and Magazine Indian Capital Markets
 Financial management –Prasanna Chandra
 Business World
 The Chartered Accountant- Journal of Institute of Chartered Accountants in India
 India Today
Newspapers The Economic Times
 DNA
Websites www.sebi.gov.in
 www.indiainfoline.com
 www.sify.com
 www.moneycontrol.com
 www.business-standard.com
 www.equitymaster.com
 www.edelcap.com
- 58 -
Initial Public Offering
ANNEXURE
- 59 -
Initial Public Offering
- 60 -
Initial Public Offering
- 61 -
Initial Public Offering
- 62 -