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RIZVI ACADEMY OF MANAGEMENT PANKAJ LIPARE
INIITAL PUBLIC OFFER Page 1
A
Project report
On
Initial Public Offering
In partial fulfillment of the requirements of
the Summer Internship of
Post Graduate Diploma in Business Management
Through
Rizvi Academy of Management
under the guidance of
Prof. Vishal Singhi
Submitted by
Pankaj Lipare
PGDBM
Batch: 20102012.
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INIITAL PUBLIC OFFER Page 2
CERTIFICATE
This is to certify that Mr. Pankaj Lipare, a student of Rizvi Academy of
Management, of PGDBM III bearing Roll No. 66 and specializing in
Finance has successfully completed the project titled
Initial Public Offering
under the guidance of Prof. Vishal Singhi in partial fulfillment of the
requirement of Post Graduate Diploma in Business Management by Rizvi
Academy of Management for the academic year 20102012.
_______________
Prof. Vishal Singhi
Project Guide
_______________
Prof. Umar Farooq
Academic Coordinator
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ACKNOWLEDGEMENT
I would like to express my gratitude towards my project guide Prof. Vishal Singhi
without whose continuous guidance and encouragement this project would not
have been possible.
Also I would like to thank our director Dr. Kalim Khan who has provided us with
the necessary infrastructure and guidance in the course of the project. Also I would
like to take this opportunity to thank all the teaching as well as non-teaching staff
for their continuous help and support.
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EXECUTIVE SUMMARY
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Table of Contents
Topics Page No.
IPOs (Initial Public Offerings) 2
Regulations for IPOs 5
Eligibility norms for making an IPO 7
Disclosures/Offer Documents 10
Pricing 13
Types of Issues: Fixed Price & Bookbuilding 15
Allocations in an IPO 20
Understanding an offer document 22
Applying in an IPO 25
Allotments in IPO 33
Anchor Investors 38
Listing & Trading 39
Key Intermediaries 40
Filing Investor Grievances 43
Other Aspects 43
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IPOS (INITIAL PUBLIC OFFERINGS)
What is an IPO?
An IPO is when a company which is presently not listed at any stock exchange makes
either a fresh issue of shares or makes an offer for sale of its existing shares or both for
the first time to the public. Through a public offering, the issuer makes an offer for new
investors to enter its shareholding family.
The shares are made available to the investors at the price determined by the promoters of
the company in consultation with its investment bankers.
The successful completion of an IPO leads to the listing and trading of the companys
shares at the designated stock exchanges.
2003-04 to 2007-08 saw an active market for IPOs. Though the number of IPOs was
small, the amounts being raised were increasing. Due to a huge downturn in the economy
and the secondary market, the amount mobilised in 2008-09 nosedived to a meager Rs.
2034 crore, through just 21 small IPOs. The year 2009-10 yet again witnessed a revival in
the IPO market.
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YEAR NO.OF
IPOs
AMOUNT
(Rs.crore)
2003-04 19 3191.10
2004-05 23 14662.32
2005-06 76 10797.88
2006-07 76 23706.16
2007-08 84 41323.45
2008-09 21 2033.99
2009-10 39 24948.31
2010-11 52 33097.77
2011-12
(till 31 May 2011)
10 2223.06
SOURCE : PRIME Database
Why does a company make an IPO?
Going public provides an opportunity to the companies to raise cash for setting up a
project or for diversification/expansion or sometimes for working capital or even to retire
debt or for potential acquisitions. This is called fresh issue of capital where the proceeds
of the issue go to the company.
Companies also go public to provide a route for some of the existing shareholders
including venture capitalists to exit fully or partially from the companys shareholding or
for promoters to partially dilute their holding. This is called an offer for sale where the
proceeds of the issue go to the selling shareholders and not to the company.
Given below is the table of monies raised through issue of fresh capital and through
offers for sale in IPOs.
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YEAR FRESH CAPITAL OFFERS FOR
SALE
TOTAL
NO.OF
IPOs
AMOUNT
(Rs.crore)
NO.OF
IPOs
AMOUNT
(Rs.crore)
NO.OF
IPOs
AMOUNT
(Rs.crore)
2003-04 16 1813.42 5 1377.68 19 3191.10
2004-05 21 8099.59 9 6562.73 23 14662.32
2005-06 76 9130.21 11 1667.67 76 10797.88
2006-07 74 22745.44 12 960.72 76 23706.16
2007-08 82 38634.65 9 2688.81 84 41323.45
2008-09 21 1985.08 3 48.92 21 2033.99
2009-10 39 21832.45 11 3115.86 39 24948.31
2010-11 49 13240.57 14 19857.20 52 33097.77
2011-12
(till 31 May 2011)
10 2223.06 0 0.00 10 2223.06
SOURCE : PRIME Database
Listing offers several benefits. For one, it increases the companys ability to raise debt at
finer rates. The company also gets a continuing window for raising more capital, both
from the domestic and overseas equity markets. Acquisitions also become simpler as
instead of cash payouts, companies can use shares as a currency.
Listing also lends liquidity to the stock, which is very critical for the success of employee
stock ownership plans, which help to attract top talent.
Of course, listing carries a considerable degree of prestige for the company.
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REGULATIONS FOR IPOS
Because of the public participation, SEBI oversees that such companies act in a
reasonable and fair manner, especially with reference to the minority shareholders. For
example, such companies should have a board of directors, where at least half the
members are independent of the promoters/company. Moreover, companies have to
comply with the listing agreement, which among other things, stipulate continuing
disclosures in specified formats and frequency.
SEBIs Role in IPOs/FPOs
Any company making an IPO/FPO is required to file a draft offer document with SEBI
for its observations. Draft offer document in respect of issues of size upto Rs. 100 crore
shall be filed with the concerned regional office of the Board under the jurisdiction of
which the registered office of the issuer company falls. Officials of SEBI at various levels
examine the compliance with SEBI ICDR Regulations 2009 and ensure that all necessary
material information is disclosed in the draft offer documents.
The validity period of SEBIs observation letter is three months only i.e. the company has
to open its issue within three months period.
Does it mean that SEBI recommends an issue?
SEBI does not recommend any issue nor does take any responsibility either for the
financial soundness of any scheme or the project for which the issue is proposed to be
made or for the correctness of the statements made or opinions expressed in the offer
document.
Does SEBI approve the contents of the offer document?
Submission of offer document to SEBI should not in any way be deemed or construed
that the same has been cleared or approved by SEBI. The Lead manager certifies that the
disclosures made in the offer document are generally adequate and are in conformity with
SEBI guidelines for disclosures and investor protection in force for the time being. This
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requirement is to facilitate investors to take an informed decision for making investment
in the proposed issue.
Does the SEBI clearance tag make the IPO/FPO safe for the investors?
The investors should make an informed decision purely by themselves based on the
contents disclosed in the offer documents. SEBI does not associate itself with any
issue/issuer and should in no way be construed as a guarantee for the funds that the
investor proposes to invest through the issue. However, the investors are generally
advised to study all the material facts pertaining to the issue including the risk factors
before considering any investment. They are strongly warned against any tips or news
through unofficial means.
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ELIGIBILITY NORMS FOR MAKING AN IPO
SEBI has stipulated the eligibility norms for companies planning an IPO which are as
follows:
a) Net tangible assets of at least Rs. 3 crore in each of the preceding three full years
b) Distributable profits for at least three out of the immediately preceding five years
c) Net worth of at least Rs. 1 crore in each of the preceding three full years
d) The issue size should not exceed 5 times the pre-issue net worth
e) If there has been a change in the companys name, at least 50% of the revenue for
preceding one year should be from the new activity denoted by the new name
Alternative routes
Recognizing that many good companies, for one reason or the other, may not be able to
comply with all the eligibility norms, two other alternative routes are available to such
companies:
Alternative I:
(a) Issue shall be through book building route, with at least 50% to be mandatory
allotted to the Qualified Institutional Buyers (QIBs). (b) The minimum post-issue face
value capital shall be Rs. 10 crore or there shall be a compulsory market-making for at
least 2 years
OR
Alternative II:
(a) The project is appraised and participated to the extent of 15% by FIs/Scheduled
Commercial Banks of which at least 10% comes from the appraiser(s).
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(b) The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a
compulsory market-making for at least 2 years. In addition to satisfying the aforesaid
eligibility norms, the company shall also satisfy the criteria of having at least 1000
prospective allottees in its issue.
Exemptions to certain category of entities from the eligibility norms
The following categories of entities are eligible for exemption from entry norms.
A banking company including a local area bank set up under the Banking Regulation Act,
1949
A corresponding new bank set up under the Banking Companies Act, 1970
An infrastructure company
Whose project has been appraised by a Public Financial Institution (PFI)
Not less than 5% of the project cost is financed by any of the PFI
Rights Issue by a listed company
Minimum Public Shareholding Requirements
Clause 40A of the BSE Listing Agreement requires at least 25% of the post issue paid up
capital to be with the public (i.e. other than promoter and promoter group).
As per rule 19(2) (b) of the Securities Contract (Regulation) Rules, a minimum of 25% of
each class of security must be offered to the public for subscription. However, at least
10% can be offered if the following 3 conditions are fulfilled:
Minimum 2 MM securities (excluding reservations, firm allotment & promoter
contribution) to be offered to the public
Minimum offer sizeRs. 100 crores
Issuance through book building with 60% QIB allocation
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Continuous public shareholding since listing also needs to be maintained as per Clause
40A of the listing agreement.
The aforesaid requirement of maintaining minimum level of public shareholding on a
continuous basis will not be applicable to government companies (as defined under
Section 617 of the Companies Act, 1956), infrastructure companies (as defined under
Chapter II Clause 14(4) of the SEBI ICDR Regulations 2009) and companies referred to
the Board for Industrial and Financial Reconstruction.
Note: Section 617 of the Companies Act, 1956 defines Government company as follows -
Government Company means any company in which not less than 51% of the paid-up
share capital is held by the Central Government, or by any State Government or
Governments, or partly by the Central Government and partly by one or more State
Governments, and includes a company which is a subsidiary of a Government company
as thus defined.
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DISCLOSURES/OFFER DOCUMENTS
Since 1992, the entire IPO/FPO regulation is driven by disclosures-inform the investors
as much as is possible and is relevant for him to take an informed investment decision.
The disclosure requirements regarding the issuance of securities are covered in detail in
the SEBI ICDR Regulations 2009.
Types of Offer Documents
Draft Offer Document
It refers to the first document filed by companies with SEBI and stock exchanges for
approval, who after reviewing, communicate their observations to the Company, which
the company has to incorporate in the offer document. SEBI typically requires a period of
30 days for processing a draft offer document. The draft offer document is placed by
SEBI on its website. It is also placed on the websites of recognized stock exchanges
where specified securities are proposed to be listed and merchant bankers associated with
the issue for public comments for a period of at least 21 days. Furthermore, the issuer
either on the date of filing the draft offer document with SEBI or on the next day has to
make a public announcement in one English national daily newspaper, one Hindi national
daily newspaper and one regional language newspaper at the place where its registered
office is situated, disclosing to the public the fact of filing of draft offer document and
inviting the public to give their comments to SEBI.
The lead merchant bankers, after expiry of the above period (of at least 21 days), file
with SEBI a statement giving information of the comments received by them or the issuer
on the draft offer document during that period and the consequential changes, if any, to
be made in the draft offer document.
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Red herring prospectus
A red herring prospectus (RHP) is a preliminary registration document that is filed with
SEBI in the case of bookbuilding issue which does not have details of either price or
number of shares being offered or the amount of issue. This means that in case price is
not disclosed, the number of shares and the upper and lower price bands are disclosed.
On the other hand, an issuer can state the issue size and the number of shares are
determined later. In the case of book-built issues, it is a process of price discovery as the
price cannot be determined until the bidding process is completed. Hence, such details
are not shown in the Red Herring prospectus filed with ROC in terms of the provisions of
the Companies Act. Only on completion of the bidding process, the details of the final
price are included in the offer document. The offer document filed thereafter with ROC is
called a prospectus.
Offer Document
It means the final prospectus in the case of a public issue/offer for sale which is filed and
registered with the Registrar of Companies and the stock exchanges. An offer document
covers all the relevant information required to be disclosed under various regulations and
incorporates the observations of the Registrar of Companies and SEBI.
Abridged Prospectus the memorandum as prescribed in Form 2A under sub-section (3) of
section 56 of the Companies Act, 1956. It contains all the salient features of a prospectus.
It accompanies the application form of public issues.
Accessing draft offer documents before even the IPO/FPO is cleared by SEBI
The draft offer document/letter of offer remains posted on SEBI website for a period of
21 days from the date of filing the same to SEBI and can also be downloaded from there
Public comments/complaints on the issuer company or others connected with the issue
The objective of making an offer document public is to invite public comments. The
comments should be submitted within 21 days of the filing of the draft offer document by
the company with SEBI.
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Obtaining full copy of the offer document
Full copy of the offer document is available from the company, its lead managers and
syndicate members. These are also available on the websites of SEBI, the lead managers,
the stock exchanges and the company.
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PRICING
Any restrictions on pricing by companies?
Since 1992, companies have been allowed to freely price their issues. SEBI does not play
any role in deciding the price for issues. As such, the single prices in case of fixed price
issue as well as the price band in the case of a bookbuilding issue are determined by the
company. The companies are however required to give in the offer document a detailed
justification of the price. The basis of issue price is disclosed in the offer document. The
issuer is required to disclose in detail about the qualitative and quantitative factors
justifying the issue price.
Differential Pricing
Pricing of an issue where one category is offered shares at a price different from the other
category is called differential pricing. Differential pricing is permitted, subject to the
following:
(a) retail individual investors or retail individual shareholders [or employees entitled
for reservation made under regulation 42 making an application for specified securities of
value not more than two lakh rupees] may be offered specified securities at a price lower
than the price at which net offer is made to other categories of applicants; provided that
such difference is not more than 10% of the price at which specified securities are offered
to other categories of applicants;
(b) in case of a book built issue, the price of the specified securities offered to an
anchor investor cannot be lower than the price offered to other applicants;
(c) in case of a composite issue, the price of the specified securities offered in thepublic issue can be different from the price offered in rights issue and justification for
such price difference needs to be given in the offer document.
(d) In case the issuer opts for the alternate method of book building in terms of Part D
of Schedule XI of the SEBI ICDR Regulations 2009, the issuer can offer specified
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TYPES OF ISSUES: FIXED PRICE & BOOKBUILDING
There are two types of issues :
Fixed Price Issues
An issuer company is allowed to freely price the issue. The basis of issue price is
disclosed in the offer document where the issuer discloses in detail about the qualitative
and quantitative factors justifying the issue price. The Issuer company can mention a
price band of 20% (cap in the price band should not be more than 20% of the floor price)
in the Draft offer documents filed with SEBI and actual price can be determined at a later
date before filing of the final offer document with SEBI/ROCs.
Price Discovery through Bookbuilding Process
Book Building means a process undertaken by which a demand for the securities
proposed to be issued by a body corporate is elicited and built up and the price for the
securities is assessed on the basis of the bids obtained for the quantum of securities
offered for subscription by the issuer. This method provides an opportunity to the market
to discover the price for securities.
The process is named so because it refers to collection of bids from investors, which is
based on a price range. The issue price is fixed after the closing date of the bid.
A company planning an IPO/FPO appoints a merchant bank as a book runner. A
particular time frame is fixed as the bidding period. The book runner then builds an order
book that collates bids from various investors. Potential investors are allowed to revise
their bids at any time during the bidding period. At the end of bidding period the order
book is closed and consequently the quantum of shares ordered and the respective pricesoffered are known. The determination of final price is based on demand at various prices.
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Bookbuilding has become the preferred route of raising capital, as can be seen from the
table below. Though there are fixed price issues, by amount, the bookbuilding IPO/FPOs
dominate.
YEAR BOOKBUILDING FIXED PRICE TOTAL
NO.OF
IPOs
AMOUNT
(Rs.crore)
% NO.OF
IPOs
AMOUNT
(Rs.crore)
% NO.OF
IPOs
AMOUNT
(Rs.crore)
2003-04 9 2641.04 82.8 10 550.07 17.2 19 3191.10
2004-05 15 14507.04 98.9 8 155.28 1.1 23 14662.32
2005-06 53 10225.43 94.7 23 572.45 5.3 76 10797.88
2006-07 65 23469.07 99.0 11 237.10 1.0 76 23706.16
2007-08 74 41068.98 99.4 10 254.47 0.6 84 41323.45
2008-09 17 1959.92 96.4 4 74.07 3.6 21 2033.99
2009-10 39 24948.13 100.0 0 0.00 0.0 39 24948.13
2010-11
(till 31 May
2011)
50 32982.20 99.8 2 69.50 0.2 52 33051.70
SOURCE : PRIME Database
Open Bookbuilding
In book-built issues, it is mandatory to have an online display of the demand and bids
during the bidding period. This is known as open book system. (Under closed book
building, the book is not made public and the bidders have to take a call on the price at
which they intend to make a bid without having any information on the bids submitted by
other bidders). As per SEBI, only electronic facility is allowed to be used in case of bookbuilding.
Price Band
The offer document may have a floor price for the securities or a price band within which
the investors can bid. The spread between the floor and the cap of the price band can not
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be more than 20%. In other words, it means that the cap should not be more than 120% of
the floor price. The company decides the price band in consultation with the investment
bankers, and typically after undertaking a pre-marketing exercise with some leading
QIBs.
The price band can have a revision. SEBI requires that any revision in the price band has
to be widely disseminated by informing the stock exchanges, by issuing press release and
also indicating the change on the relevant website and the terminals of the syndicate
members. When the price band is revised, the bidding period has to be extended for a
further period of three days, subject to the total bidding period not exceeding thirteen
days.
Floor Price
Floor price is the minimum price at which bids can be made.
Cut-off Price
In Book building issue, the issuer is required to indicate either the price band or a floor
price in the red herring prospectus. The actual discovered issue price can be any price in
the price band or any price above the floor price. This issue price is called Cut off
price. This is decided by the issuer and LM after considering the book and investors
appetite for the stock. SEBI ICDR Regulations 2009 permit only retail individual
investors to have an option of applying at cut off price.
Final Issue Price
The demand at various price levels within the price band is made available on the
websites of the designated stock exchanges during the entire tenure of the issue and once
the issue closes, the final price is determined by the issuer and made known to the
investors.
Minimum Number of Days for which an IPO/FPO Subscription List has to remain Open
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Except as otherwise provided in the SEBI ICDR Regulations 2009, public issue shall be
kept open for at least three working days but not more than ten working days including
the days for which the issue is kept open in case of revision in price band.
In case the price band in a public issue made through the book building process is
revised, the bidding (issue) period disclosed in the red herring prospectus shall be
extended for a minimum period of three working days, provided that the total bidding
period shall not exceed ten working days.
The public issue made by an infrastructure company, satisfying the requirements in
Clause 2.4.1 (iii) of Chapter II may be kept open for a maximum period of 21 working
days.
Pure Auction as an Additional Bookbuilding Mechanism
SEBI has decided to introduce an additional method of book building, to start with, for
FPOs, in which the issuer would decide on a floor price and may mention the floor price
in the red herring prospectus. If the floor price is not mentioned in the red herring
prospectus, the issuer shall announce the floor price at least one working day before
opening of the bid in all the newspapers in which the pre-issue advertisement was
released.
Qualified institutional buyers shall bid at any price above the floor price. The bidder who
bids at the highest price shall be allotted the number of securities that he has bided for
and then the bidder who has bided at the second highest price and so on, until all the
specified securities on offer are exhausted. Allotment shall be done on price priority basis
for qualified institutional buyers. Allotment to retail individual investors, non-
institutional investors and employees of the issuer shall be made proportionately as
illustrated in Schedule XI of SEBI ICDR Regulations 2009. Where, however the numberof specified securities bided for at a price is more than available quantity, then allotment
shall be done on proportionate basis. Retail individual investors, non-institutional
investors and employees shall be allotted specified securities at the floor price subject to
provisions of Clause (d) of Regulation 29 of SEBI ICDR Regulations 2009. The issuer
may:-
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(a) place a cap either in terms of number of specified securities or percentage of issued
capital of the issuer that may be allotted to a single bidder;
(b) decide whether a bidder be allowed to revise the bid upwards or downwards in terms
of price and/or quantity;
(c) decide whether a bidder be allowed single or multiple bids.
Fast Track Issues
In order to enable well established and compliant listed companies to access Indian
primary market in a time effective manner through follow-on public offerings and rights
issues, SEBI introduced the concept of Fast Track Issues (FTIs) in November 2007. SEBI
has relaxed certain requirements of FTIs such as reducing the average market
capitalization of public shareholding of the issuer to Rs. 5000 crore from Rs. 10000 crore,
pegging the annualized trading turnover to free float for companies whose public
shareholding is less than 15% of the issued capital. In case the clause relating to
composition of Board of Directors has not been complied with in one or more quarters, it
need not be deemed as non compliance, provided the company is in compliance in this
regard at the time of filing the offer document with stock exchange/ ROC and adequate
disclosures are made in the offer document in this respect.
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ALLOCATIONS IN AN IPO
Fixed Price Issues
There are two buckets in the fixed price IPO/FPOs: Investors applying for Rs. 2,00,000
or more and Investors applying for upto Rs. 2,00,000.
Bookbuilding Issues
In a book built issue, allocation to Retail Individual Investors (RIIs), Non Institutional
Investors (NIIs) and Qualified Institutional Buyers (QIBs) is in the ratio of 35:15: 50
respectively.
Definition of Retail Individual Investors (RIIs)
Retail individual investor means an investor who applies or bids for securities of or for
a value of not more than Rs. 2,00,000.
Definition of Non Institutional Investors (NIIs)
All applicants, other than QIBs or individuals applying for less than Rs. 2,00,000 are
considered as NIIs. Typically, this category includes High Net Worth Individuals (HNIs)and corporate bodies.
Definition of Qualified Institutional Buyers (QIBs)
QIBs are those institutional investors who are perceived to possess expertise and the
financial strength to evaluate and invest in the capital markets. A QIB is defined by SEBI
as
a) public financial institution as defined in section 4A of the Companies Act, 1956;
b) scheduled commercial banks;
c) mutual funds;
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d) foreign institutional investor registered with SEBI and sub-account (other than a
sub-account which is a foreign corporate or foreign individual) registered with
SEBI;
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 (IRDA).
j) provident Funds with minimum corpus of Rs. 25 crores
k) pension Funds with minimum corpus of Rs. 25 crores
l) National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated
November 23, 2005 of the Government of India published in the Gazette of India
m) insurance funds set up and managed by army, navy or air force of the Union of
India
n) Insurance funds set up by Department of Posts, India such as Postal Life
Insurance Fund (PLIF) and Rural Postal Life Insurance Fund (RPLIF)
These entities are not required to be registered with SEBI as QIBs. Any entities falling
under the categories specified above are considered as QIBs for the purpose of
participating in primary issuance process.
All types of investors are required to bring in 100% of the application money as margin
along with the application for securities in Public Issues. This has been done to avoid
inflated demand in Public Issues and to provide a level playing field to all investors
subscribing for securities.
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UNDERSTANDING AN OFFER DOCUMENT
This section basically deals with the contents in an offer document.
Cover Page
The Cover Page of the offer document covers full contact details of the issuer company,
lead managers and registrars, the nature, number, price and amount of instruments
offered and issue size, and the particulars regarding listing. Other details such as Credit
Rating, risks in relation to the first issue, etc are disclosed if applicable.
Risk Factors
Here, the issuers management gives its view on the Internal and external risks faced by
the company. Here, the company also makes a note on the forward looking statements.
This information is disclosed in the initial pages of the document and it is also clearly
disclosed in the abridged prospectus. It is generally advised that the investors should go
through all the risk factors of the company before making an investment decision.
Introduction
The introduction covers a summary of the industry and business of the issuer company,
the offering details in brief, summary of consolidated financial, operating and other data.
General Information about the company, the merchant bankers and their responsibilities,
the details of brokers/syndicate members to the Issue, credit rating (in case of debt issue),
debenture trustees (in case of debt issue), monitoring agency, book building process in
brief and details of underwriting Agreements are given here. Important details of capital
structure, objects of the offering, funds requirement, funding plan, schedule of
implementation, funds deployed, sources of financing of funds already deployed, sources
of financing for the balance fund requirement, interim use of funds, basic terms of issue,
basis for issue price, tax benefits are covered.
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About Us
This presents a review of on the details of the business of the company, business strategy,
competitive strengths, insurance, industry-regulation (if applicable), history and corporate
structure, main objects, subsidiary details, management and board of directors,
compensation, corporate governance, related party transactions, exchange rates, currency
of presentation dividend policy and management's discussion and analysis of financial
condition and results of operations are given.
Financial Statements
Financial statement, changes in accounting policies in the last three years and differences
between the accounting policies and the Indian Accounting Policies (if the Company has
presented its Financial Statements also as per Either US GAAP/IAS are presented.
Legal and Other Information
Outstanding litigations and material developments, litigations involving the company and
its subsidiaries, promoters and group companies are disclosed. Also material
developments since the last balance sheet date, government approvals/licensing
arrangements, investment approvals (FIPB/RBI etc.), all government and other approvals,
technical approvals, indebtedness, etc. are disclosed.
Other Regulatory and Statutory Disclosures
Under this head, the following information is covered: authority for the Issue, prohibition
by SEBI, eligibility of the company to enter the capital market, disclaimer clause,
disclaimer in respect of jurisdiction, distribution of information to investors, disclaimer
clause of the stock exchanges, listing, impersonation, minimum subscription, letters of
allotment or refund orders, consents, expert opinion, changes in the auditors in the last 3
years, expenses of the issue, fees payable to the lead managers, fees payable to the issue
management team, fees payable to the registrars, underwriting commission, brokerage
and selling commission, previous rights and public issues, previous issues for cash, issues
otherwise than for cash, outstanding debentures or bonds, outstanding preference shares,
commission and brokerage on, previous issues, capitalisation of reserves or profits,
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option to subscribe in the issue, purchase of property, revaluation of assets, classes of
shares, stock market data for equity, shares of the company, promise vis--vis
performance in the past issues, mechanism for redressal of investor grievances.
Offering Information
Under this head, the following information is covered: Terms of the Issue, ranking of
equity shares, mode of payment of dividend, face value and issue price, rights of the
equity shareholder, market lot, nomination facility to investor, issue procedure, book
building procedure if applicable, bid form, who can bid, maximum and minimum bid
size, bidding process, bidding bids at different price levels, escrow mechanism, terms of
payment and payment into the escrow collection account, electronic registration of bids,
build up of the book and revision of bids, price discovery and allocation, signing of
underwriting agreement and filing of prospectus with SEBI/ROC, announcement of
statutory advertisement, issuance of confirmation of allocation note("can") and allotment
in the issue, designated date, general instructions, instructions for completing the bid
form, payment instructions, submission of bid form, other instructions, disposal of
application and application monies, , interest on refund of excess bid amount, basis of
allotment or allocation, method of proportionate allotment, dispatch of refund orders,
communications, undertaking by the company, utilisation of issue proceeds, restrictions
on foreign ownership of Indian securities, etc.,
Other Information
This covers description of equity shares and terms of the Articles of Association, material
contracts and documents for inspection, declaration, definitions and abbreviations, etc.,
Past Track Record of Defaults/Economic Offences
Investors should also visit www.watchoutinvestors.com, a website aided and sponsored
by the Ministry of Company Affairs under its Investor Education & Protection Fund. This
website is a national registry of all entities and individuals who have been indicted by
various regulators ( like MCA, RBI, SEBI, BSE,NSE etc) for an economic offence and/or
for non-compliance laws/guidelines and/or who are no longer in the specified activity.
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APPLYING IN AN IPO
Prerequisites
1. Demat Account
An investor has the option to apply for and receive the shares in physical form. However,
it is advisable to get the allotment in demat form as the shares issued through an IPO/FPO
are tradable only in the demat form. In any case, for all IPO/FPOs of any security of issue
size of Rs. 10 crore or more, issues have to be compulsorily be only in dematerialized
form, while QIBs and large investors (applying for more than Rs. 2,00,000), can apply
only in demat form.
There are two depositories in the country-National Securities Depository Ltd. (NSDL)
and Central Depository Services ( India) Ltd. (CDSL) .Both have An extensive network
of authorized Depository Participants (DPs). An investor can open a demat account with
any of these DPs.
The investor should fill in his the correct DP ID and Client ID details in the application
forms.
2. Permanent Account Number (PAN)
Where the bids are for Rs. 50,000 or more, the bidder, or in case of a bid in joint names,
each of the bidders, should mention his/her PAN allotted under the Income Tax Act. The
copy of PAN card or PAN allotment letter is required to be submitted with the
application form. Applications without this information and documents are treated
incomplete and are liable to be rejected. (For more details, the investors should read the
application form)
3. Bank Account/DD
Applications for IPO/FPOs are valid only if payment is made through a cheque or a
demand draft. Application money cannot be paid in cash.
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Process of Applying in an IPO/FPO
An investor needs to first obtain an IPO/FPO application form. Forms are normally
available from share brokers, lead managers, syndicate members and collecting banks.
Application forms can also be picked up from the vendors at major commercial streets in
most towns (for example outside the Bombay Stock Exchange)
In the case of fixed price issues, the application form along with a cheque/demand draft
for the requisite amount has to be deposited with the designated collecting bankers to the
issue, whose names and addresses are printed on the application form.
Application forms should be filled carefully as incomplete/incorrect forms can be
rejected due to incomplete details
ASBA
In an endeavour to make the existing public issue process more efficient, SEBI
introduced a supplementary process of applying in public issues, viz., the Applications
Supported by Blocked Amount (ASBA) process. The ASBA process is available in all
public issues made through the book building route, as well as for all rights issues. ASBA
co-exists with the current process, wherein cheque is used as a mode of payment.
The main features of ASBA process are as follows:
a. Meaning of ASBA: ASBA is an application for subscribing to an issue, containing an
authorisation to block the application money in a bank account.
b. Availability of ASBA bid-cum application forms: Investors can obtain ASBA bid-
cum-application forms from Self Certified Syndicate Banks (SCSBs). These forms are
also easily available to investors from the website of BSE or NSE.
i. Self Certified Syndicate Bank (SCSB)
SCSB is a bank which offers the facility of applying through the ASBA process. A bank
desirous of offering ASBA facility shall submit a certificate to SEBI, for inclusion of its
name in SEBIs list of SCSBs. The said list will be displayed by SEBI on its website at
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www.sebi.gov.in. ASBAs can be accepted only by SCSBs, whose names appear in the
list of SCSBs displayed in SEBIs website. On inclusion in the list of SCSBs, a bank
shall commence its activities as an SCSB w.e.f. the 1st or 15th of a month, whichever is
earlier, from the date of such inclusion. It shall then be deemed to have entered into an
agreement with the issuer and shall be required to offer the ASBA facility to all its
account holders for all issues to which ASBA process is applicable.
Given below is the list of Banks which have been authorized to accept ASBAs in all
issues as on May 02, 2011.
SR. No. NAME OF THE BANK
1. ALLAHABAD BANK
2. ANDHRA BANK
3. AXIS BANK LTD.
4. BANK OF AMERICA,N.A.
5. BANK OF BARODA
6. BANK OF INDIA
7. BANK OF MAHARASHTRA
8. BNP PARIBAS
9. CANARA BANK
10. CENTRAL BANK OF INDIA
11. CITIBANK N.A.
12. CITY UNION BANK LTD.
13. CORPORATION BANK
14. DEUTSCHE BANK AG
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15. FEDERAL BANK LTD.,THE
16. HDFC BANK LTD.
17. HONGKONG & SHANGHAI BANKING CORP.LTD.,THE
18. ICICI BANK LTD.
19. IDBI BANK LTD.
20. INDIAN BANK
21. INDIAN OVERSEAS BANK
22. INDUSIND BANK LTD.
23. JP MORGAN CHASE BANK,N.A.
24. KALUPUR COMMERCIAL CO-OPERATIVE BANK LTD.,THE
25. KARUR VYSYA BANK LTD.,THE
26. KOTAK MAHINDRA BANK LTD.
27. NUTAN NAGARIK SAHAKARI BANK LTD.
28. ORIENTAL BANK OF COMMERCE
29. PUNJAB NATIONAL BANK
30. SOUTH INDIAN BANK LTD.,THE
31. STANDARD CHARTERED BANK LTD.
32. STATE BANK OF BIKANER & JAIPUR
33. STATE BANK OF HYDERABAD
34. STATE BANK OF INDIA
35. STATE BANK OF TRAVANCORE
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36. SYNDICATE BANK
37. TAMILNAD MERCANTILE BANK LTD.
38. UCO BANK
39. UNION BANK OF INDIA
40. UNITED BANK OF INDIA
41. VIJAYA BANK
42. YES BANK LTD.
An SCSB shall identify its Designated Branches (DBs) at which an ASBA investor shall
submit ASBA and shall also identify the Controlling Branch (CB) which shall act as a
coordinating branch for the Registrar to the Issue, Stock Exchanges and Merchant
Bankers. The SCSB, its DBs and CB shall continue to act as such, for all issues to which
ASBA process is applicable. The SCSB may identify new DBs for the purpose of ASBA
process and intimate details of the same to SEBI, after which SEBI will add the DB to the
list of SCSBs maintained by it. The SCSB shall communicate the following details to
Stock Exchanges for making it available on their respective websites; these details shall
also be made available by the SCSB on its website:
(i) Name and address of the SCSB
(ii) Addresses of DBs and CB and other details such as telephone number, fax
number and email ids.
(iii) Name and contact details of a nodal officer at a senior level from the CB.
ii BSE/NSE websites
Investors can download and print ASBA application forms from the websites of the
Stock Exchanges i.e. Bombay Stock Exchange (BSE) and National Stock Exchange
(NSE) which provideact as an electronic interface for ASBA facility i.e. Bombay Stock
Exchange (BSE) and National Stock Exchange (NSE). Each ASBA form, so downloaded,
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shall have a unique application number and can be used for making ASBA applications in
public issues. The ASBA form for a specific public issue is made available on the
websites of the Stock Exchanges at least one day before opening of a particular public
issue. Investors will also have online access to soft copy of the abridged
prospectus/prospectus of the public issue. For revisions of bids, investors can take print
of a bid revision form.
The unique application number on the form is important from a control and processing
perspective point of view. Therefore, applications made using photocopy of the
downloaded form shall not be accepted.
A hyperlink to the websites of BSE or NSE websites for this facility is also provided on
the websites of Merchant Bankers and SCSBs.
c. ASBA Process in brief
An ASBA investor shall submit an ASBA physically or electronically through the
internet banking facility, to the SCSB with whom the bank account to be blocked is
maintained. Syndicate/Sub-Syndicate members may also procure ASBA forms from the
investors and submit it to SCSBs (Syndicate / Sub- Syndicate members would be
required to upload the bid and other relevant details of such ASBA forms in the bidding
platform provided by the stock exchanges and forward the same to the respective SCSBs.
SCSBs shall carry out further action for such ASBA forms such as signature verification,
blocking of funds etc. and forward these forms to the registrar to the issue).
The application money shall remain blocked in the bank account till finalisation of the
basis of allotment in the issue or till withdrawal/ failure of the issue or till withdrawal/
rejection of the application, as the case may be. The application data shall thereafter be
uploaded by the SCSB in the electronic bidding system through a web enabled interfaceprovided by the Stock Exchanges. Once the basis of allotment is finalized, the Registrar
to the Issue shall send an appropriate request to the SCSB for unblocking the relevant
bank accounts and for transferring the requisite amount to the issuers account. In case of
withdrawal/ failure of the issue, the amount shall be unblocked by the SCSB on receipt of
information from the pre-issue merchant bankers.
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ASBA facility in rights issue shall enable a shareholder of the company as on record date
to apply through ASBA mode by selecting the option of ASBA either (i) in Part A of the
application form of rights issue, or (ii) in the plain paper application as to whether they
desire to avail of the ASBA option, to the Self Certified Syndicate Bank (SCSB) with
whom the bank account to be blocked, is maintained.
d. Obligations of the Issuer
The issuer shall ensure that adequate arrangements are made by the Registrar to the Issue
to obtain information about all ASBAs and to treat these applications similar to non-
ASBA applications while finalizing the basis of allotment, as per the procedure specified
in the Guidelines.
e. Applicability of ASBA process
ASBA process shall be applicable to all public issues and rights issues which provide for
not more than one payment option. The ASBA facility has been made mandatory for non-
retail investors (Qualified Institutional Buyers and Non-Institutional Investors) making
applications in public/rights issues with effect from May 01, 2011.
Applying for IPO/FPOs on the Internet
Websites of various brokerage firms now allow the facility to their clients to apply for
IPO/FPOs online.
Withdrawal of an Application after Closure of an IPO/FPO
The Indian laws allow for a withdrawal of an application before the date of allotment.
Proof a Bidder can Request from a Trading Member for Entering Bids
The syndicate member returns the counterfoil with the signature, date and stamp of the
syndicate member. The investor can retain this as a sufficient proof that the bids have
been taken into account.
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Changing/Revising the Bids
The investor can change or revise the quantity or price in the bid using the form for
changing/revising the bid that is available along with the application form. However, the
entire process of changing of revising the bids should be completed within the date of
closure of the issue.
Knowing about IPO/FPOs currently open or are about to hit the market
Every week SEBI issues press releases for information of the public, details of offer
documents filed with SEBI and observations issued.
At what Price should a Retail Investor apply?
A retail investor is not required to make his bid at a specific price. Since he is not able to
take a call on the right price, he should use the cut-off option. This would ensure that his
application will be considered valid at all prices, including the final price decided by the
issuer. For making bids at cut-off price, the payment has to be made at the highest price
of the price band. In case a lower price is finalized or in case the investor is an
unsuccessful allottee or is allotted lesser shares than applied for, he would get the
necessary refund.
How to improve the chances of allotment in an IPO/FPO?
As most IPO/FPOs get oversubscribed, a retail investor is often disappointed in not
getting any allotments or getting miniscule allotments. If an investor has decided on
investing in a specific IPO/FPO based upon merits, he should commit as much resources
as he can to that IPO/FPO. He should apply for as many shares as possible, within the
limit of Rs. 2,00,000. It would also be worthwhile to apply in the names of all family
members, provided all of them are applying from their own accounts and all of them have
a valid demat account.
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ALLOTMENTS IN IPOS
Firm Allotments
A company making an issue to public can reserve some shares on allotment on firm
basis for some categories as specified in SEBI ICDR Regulations 2009. Allotment on
firm basis indicates that allotment to the investor is on firm basis. SEBI ICDR
Regulations 2009 provide for maximum 25% of shares which can be reserved on firm
basis. The shares to be allotted on firm allotment category can be issued at a price
different from the price at which the net offer to the public is made provided that the
price at which the security is being offered to the applicants in firm allotment category is
higher than the price at which securities are offered to public.
Reservations on a Competitive Basis
Reservation on Competitive Basis means reservation wherein specified securities are
allotted in proportion of the number of specified securities applied for in respect of a
particular reserved category to the number of specified securities reserved for that
category.
In case of an issue made through the book building process, the issuer may make
reservation on competitive basis out of the issue size excluding promoters contribution
and net offer to public in favour of the following categories of persons:
(a) employees; and in case of a new issuer, persons who are in the permanent and full
time employment of the promoting companies excluding the promoters and an immediate
relative of the promoter of such companies
(b) shareholders (other than promoters) of:
(i) listed promoting companies, in case of a new issuer; and
(ii) listed group companies, in case of an existing issuer
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Provided that if the promoting companies are designated financial institutions or
state and central financial institutions, the shareholders of such promoting companies
shall not be eligible for the reservation on competitive basis;
(c) persons who, as on the date of filing the draft offer document with the Board, are
associated with the issuer as depositors, bondholders or subscribers to services of the
issuer making an initial public offer
Provided that the issuer shall not make the reservation to the issue management team,
syndicate members, their promoters, directors and employees and for the group or
associate companies of the issue management team and syndicate members and their
promoters, directors and employees;
In case of an issue made other than through the book building process, the issuer may
make reservation on competitive basis out of the issue size excluding promoters
contribution and net offer to public in favour of the following categories of persons:
(a) employees; and in case of a new issuer, persons who are in the permanent and full
time employment of the promoting companies excluding the promoters and an immediate
relative of the promoter of such companies
(b) shareholders (other than promoters) of:
(i) listed promoting companies, in the case of a new issuer; and
(ii) listed group companies, in the case of an existing issuer
Provided that if the promoting companies are designated financial institutions or
state and central financial institutions, the shareholders of such promoting companies
shall not be eligible for the reservation on competitive basis.
In case of a further public offer (not being a composite issue), the issuer may make
reservation on competitive basis out of the issue size excluding promoters contribution
and net offer to public in favour of retail individual shareholders of the issuer.
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In case of rights issues, the issuer may make reservation for employees subject to the
condition that value of allotment to any employee shall not exceed two lakh rupees.
The reservation on competitive basis shall be subject to following conditions:
(a) the aggregate of reservations for employees shall not exceed 5% of the post issue
capital of the issuer
(b) reservation for shareholders shall not exceed 10% of the issue size
(c) reservation for persons who as on the date of filing the draft offer document with
the Board, have business association as depositors, bondholders and subscribers to
services with the issuer making an initial public offer shall not exceed 5% of the issue
size
(d) no further application for subscription in the net offer to public category shall be
entertained from any person (except an employee and retail individual shareholder) in
favour of whom reservation on competitive basis is made
(e) any unsubscribed portion in any reserved category may be added to any other
reserved category and the unsubscribed portion, if any, after such inter-se adjustments
among the reserved categories shall be added to the net offer to the public category
(f) in case of under-subscription in the net offer to the public category, spill-over to
the extent of under-subscription shall be permitted from the reserved category to the net
public offer category
(g) value of allotment to any employee in pursuance of reservation made under sub-
regulations (1) or (2), as the case may be, shall not exceed two lakh rupees
In the case of reserved categories, a single applicant in the reserved category may make
an application for a number of specified securities which exceeds the reservation.
Any Preference while doing the Allotment?
No, there cannot be any discretion in the allotment process. Prior to the SEBI Circular on
DIP Guidelines dated September 19, 2005, the allotment to the Qualified Institutional
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Buyers (QIBs) was on a discretionary basis. This however has been amended and all
allottees are allotted shares on a proportionate basis within their respective categories.
Basis of Allotment
In case of over-subscription in a fixed price issue, the allotment is done on a
proportionate basis.
In the case of a bookbuilding issue, after its closure, the bids received are aggregated
under different categories, such as reserved allotments, Qualified Institutional Buyers
(QIBs), Non-Institutional Buyers (NIIs) and Retail Individual Investors. The
oversubscription ratios are calculated for each of the categories against the shares
reserved for each of the categories in the offer document. Within each of these segments,
the bids are segregated into different categories based on the number of shares applied
for. The oversubscription ratio is then applied to the number of shares applied for and the
number of shares to be allotted for applicants in each of the buckets is determined. Then,
the number of successful allottees is determined.
In the case of a fixed price issue, after its closure, the applications received are
aggregated under two categories; applications below Rs. 2,00,000 and those above this
amount. The oversubscription ratios are calculated for each of the categories against the
shares reserved for each of the categories in the offer document. Within each of these
segments, the bids are segregated into different categories based on the number of shares
applied for. The oversubscription ratio is then applied to the number of shares applied for
and the number of shares to be allotted for applicants in each of the buckets is
determined. Then, the number of successful allottees is determined.
Number of Days for an Investor to Receive the Refund Order/Allotment Advice
Companies are required to finalize the basis of allotment within 30 days from the closure
of the issue in case of a fixed price issue and within 15 days from the closure of the issue
in case of a book building issue or else they are liable to pay interest at the rate of 15%
per annum. The refund orders/allotment advice is dispatched within two working days of
finalizing the basis of allotment.
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ANCHOR INVESTORS
Out of the portion available for allocation to Qualified Institutional Buyers, up to 30%
may be allocated to Anchor Investors subject to the following:
Anchor Investors shall necessarily be Qualified Institutional Buyers who make an
application for a value of ten crore rupees or more in a public issue made through the
book building process in accordance with the SEBI ICDR Regulations 2009.
One-third of the Anchor Investor portion shall be reserved for domestic mutual
funds.
The bidding for Anchor Investors shall open one day before the issue opens and
shall be completed on the same day.
Allocation to Anchor Investors shall be on a discretionary basis subject to
minimum number of 2 investors for allocation of upto Rs.250 crore and 5 investors for
allocation of more than Rs.250 crore.
The number of shares allocated to Anchor Investors and the price at which the
allocation is made, shall be made available in public domain by the merchant bankerbefore opening of the issue.
If the price fixed for the public issue through book building process is higher than
the price at which the allocation is made to Anchor Investors, the additional amount shall
be paid by the Anchor Investors. However, if the price fixed for public issue is lower than
the price at which the allocation is made to Anchor Investors, difference shall not be
payable to the Anchor Investors.
There shall be a lock-in of 30 days on the shares allotted to the Anchor Investors
from the date of allotment in the public issue.
No person related to the book running lead managers/ promoters/promoter group
in the concerned public issue or the book running lead managers to the concerned public
issue can apply under Anchor Investor category.
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The parameters for selection of Anchor Investors shall be clearly identified by the
merchant banker and shall be available as part of records of the merchant banker for
inspection by SEBI.
The applications made by Qualified Institutional Buyers under Anchor Investor
category and under Non Anchor Investor category may not be considered as multiple
applications.
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LISTING & TRADING
Number of Days for a Company to get its Securities Listed after the Issue
The post-issue lead manager ensures that all steps for completion of the necessary
formalities for listing and commencement of trading at all stock exchanges where the
securities are to be listed are taken within 7 working days of finalisation of basis of
allotment.
With effect from May 1, 2010 the time between public issue closure and listing has been
reduced to 12 days from existing of up to 22 days.
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KEY INTERMEDIARIES
Merchant Bankers
A Merchant Banker possessing a valid SEBI registration in accordance with the SEBI
(Merchant Bankers) Regulations, 1992 is eligible to act as a Book Running Lead
Manager to an issue.
In the pre-issue process, the Lead Manager (LM) takes up the due diligence of companys
operations/ management/ business plans/ legal etc. Other activities of the LM include
drafting and design of Offer documents, Prospectus, statutory advertisements and
memorandum containing salient features of the Prospectus. The BRLMs shall ensure
compliance with stipulated requirements and completion of prescribed formalities with
the Stock Exchanges, RoC and SEBI including finalisation of Prospectus and RoC filing.
Appointment of other intermediaries viz., Registrar(s), Printers, Advertising Agency and
Bankers to the Offer is also included in the pre-issue processes. The LM also draws up
the various marketing strategies for the issue.
The post issue activities including management of escrow accounts, coordinate non-
institutional allocation, intimation of allocation and dispatch of refunds to bidders etc areperformed by the LM. The post Offer activities for the Offer will involve essential
follow-up steps, which include the finalisation of trading and dealing of instruments and
dispatch of certificates and demat of delivery of shares, with the various agencies
connected with the work such as the Registrar(s) to the Offer and Bankers to the Offer
and the bank handling refund business. The merchant banker shall be responsible for
ensuring that these agencies fulfill their functions and enable it to discharge this
responsibility through suitable agreements with the Company.
Syndicate Members
The Book Runner(s) may appoint those intermediaries who are registered with the Board
and who are permitted to carry on activity as an Underwriter as syndicate members. The
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syndicate members are mainly appointed to collect and entire the bid forms in a book
built issue.
Registrars
The Registrar finalizes the list of eligible allottees after deleting the invalid applications
and ensures that the corporate action for crediting of shares to the demat accounts of the
applicants is done and the dispatch of refund orders to those applicable are sent. The Lead
manager coordinates with the Registrar to ensure follow up so that that the flow of
applications from collecting bank branches, processing of the applications and other
matters till the basis of allotment is finalized, dispatch security certificates and refund
orders completed and securities listed.
Bankers to the Issue
Bankers to the issue, as the name suggests, carries out all the activities of ensuring that
the funds are collected and transferred to the Escrow accounts. The Lead Merchant
Banker shall ensure that Bankers to the Issue are appointed in all the mandatory
collection centers as specified in SEBI ICDR Regulations 2009. The LM also ensures
follow-up with bankers to the issue to get quick estimates of collection and advising the
issuer about closure of the issue, based on the correct figures.
Some of the Bankers have joined the new ASBA process
Issue Stationery Printers
These are firms that specialize in printing of issue stationery-offer documents, abridged
prospectuses and application forms, and in subsequently dispatching these to the
designated points.
IPO Grading Agencies
IPO grading has been made mandatory by SEBI as an endeavor to make additional
information available for the investors in order to facilitate their assessment of equity
issues offered through an IPO. IPO grades are assigned by a Credit Rating Agency
registered with SEBI.
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FILING INVESTOR GRIEVANCES
Most of the issue complaints pertain to non-receipt of refund or allotment, or delay in
receipt of refund or allotment and payment of interest thereon. These complaints shall be
made to the post issue Lead Manger, who in turn will take up the matter with registrar to
redress the complaints. In case the investor does not receive any reply within a reasonable
time, investor may complain to SEBI, Office of investors Assistance.
Investors can also lodge their complaints at www.investorhelpline.in, a website aided and
sponsored by the Ministry of Company Affairs under its Investor Education & Protection
Fund.
OTHER ASPECTS
Lock-in
Lock-in indicates a freeze on the shares. SEBI ICDR Regulations 2009 have stipulated
lock-in requirements on shares of promoters mainly to ensure that the promoters or main
persons, who are controlling the company, shall continue to hold some minimum
percentage in the company after the public issue. The requirements are detailed in
Chapter III Part IV of SEBI ICDR Regulations 2009.
Promoter
The promoter has been defined as a person or persons who are in over-all control of the
company, who are instrumental in the formulation of a plan or programme pursuant to
which the securities are offered to the public and those named in the prospectus as
promoters(s). It may be noted that a director / officer of the issuer company or person, if
they are acting as such merely in their professional capacity are not be included in the
definition of a promoter. 'Promoter Group' includes the promoter, an immediate relative
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of the promoter (i.e. any spouse of that person, or any parent, brother, sister or child of
the person or of the spouse). In case promoter is a company, a subsidiary or holding
company of that company; any company in which the promoter holds 10% or more of the
equity capital or which holds 10% or more of the equity capital of the Promoter; any
company in which a group of individuals or companies or combinations thereof who
holds 20% or more of the equity capital in that company also holds 20% or more of the
equity capital of the issuer company. In case the promoter is an individual, any company
in which 10% or more of the share capital is held by the promoter or an immediate
relative of the promoter' or a firm or HUF in which the 'Promoter' or any one or more of
his immediate relative is a member; any company in which a company specified in (i)
above, holds 10% or more, of the share capital; any HUF or firm in which the aggregate
share of the promoter and his immediate relatives is equal to or more than 10% of the
total, and all persons whose shareholding is aggregated for the purpose of disclosing in
the prospectus "shareholding of the promoter group"
The details are provided in the SEBI ICDR Regulations 2009.
Promoter's Contribution and Lock-in
In case of an IPO/FPO, the promoters have to necessarily offer at least 20% of the post
issue capital. In case of public issues by listed companies, the promoters shall participate
either to the extent of 20% of the proposed issue or ensure post-issue share holding to the
extent of 20% of the post-issue capital.
In case of any issue of capital to the public the minimum contribution of promoters shall
be locked in for a period of three years, both for an IPO/FPO and public issue by listed
companies. In case of an IPO/FPO, if the promoters' contribution in the proposed issue
exceeds the required minimum contribution, such excess contribution shall also be locked
in for a period of one year. In addition, the entire pre-issue share capital, or paid up share
capital prior to IPO/FPO, and shares issued on a firm allotment basis along with issue
shall be locked-in for a period of one year from the date of allotment in public issue.
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Greenshoe Option
A Green Shoe option means an option of allocating shares in excess of the shares
included in the public issue and operating a post-listing price stabilizing mechanism for a
period not exceeding 30 days in accordance with the provisions of Chapter III Part V of
SEBI ICDR Regulations 2009, which is granted to a company to be exercised through a
Stabilizing Agent. This is an arrangement wherein the issue would be over allotted to the
extent of a maximum of 15% of the issue size. From an investors perspective, an issue
with green shoe option provides more probability of getting shares and also that post
listing price may show relatively more stability as compared to market.
The name comes from the fact that Green Shoe Company was the first to issue this type
of option.
Safety Net
Any safety net scheme or buy-back arrangements of the shares proposed in any public
issue shall be finalized by an issuer company with the lead merchant banker in advance
and disclosed in the prospectus. Such buy back or safety net arrangements shall be made
available only to all original resident individual allottees limited up to a maximum of
1000 shares per allottee and the offer is kept open for a period of 6 months from the last
date of dispatch of securities.
Underwriting
There are two types of underwriting.
Hard Underwriting
Hard underwriting is when an underwriter agrees to buy his commitment at its earliest
stage. The underwriter guarantees a fixed amount to the issuer from the issue. Thus, in
case the shares are not subscribed by investors, the issue is devolved on underwriters and
they have to bring in the amount by subscribing to the shares. The underwriter bears a
risk which is much higher in soft underwriting.
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Soft Underwriting
Soft underwriting is when an underwriter agrees to buy the shares at later stages as soon
as the pricing process is complete. He then, immediately places those shares with
institutional players. The risk faced by the underwriter as such is reduced to a small
window of time. Also, the soft underwriter has the option to invoke a force Majeure (acts
of God) clause in case there are certain factors beyond the control that can affect the
underwriters ability to place the shares with the buyers.
Frequently Asked Questions on IPO Grading
All details regarding operational aspects of IPO grading like, grading methodology,
validity of grading, scope of grading etc, as given below are based on the information
obtained from the Credit Rating Agencies(CRAs) (including their FAQs) and are meant
only for general informational purpose regarding the overall functioning of the IPO
Grading system.
Specific details regarding IPO grading may be obtained directly from the respective
Credit Rating Agencies.
What is IPO Grading?
IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI, to the
initial public offering/ follow on public offering (IPO) of equity shares or any other
security which may be converted into or exchanged with equity shares at a later date. The
grade represents a relative assessment of the fundamentals of that issue in relation to the
other listed equity securities in India. Such grading is generally assigned on a five-point
point scale with a higher score indicating stronger fundamentals and vice versa as below.
IPO grade 1: Poor fundamentals
IPO grade 2: Below-average fundamentals
IPO grade 3: Average fundamentals
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IPO grade 4: Above-average fundamentals
IPO grade 5: Strong fundamentals
IPO grading has been introduced as an endeavor to make additional information available
for the investors in order to facilitate their assessment of equity issues offered through an
IPO.
By when is an Issuer required to obtain the grade for the IPO?
IPO grading can be done either before filing the draft offer documents with SEBI or
thereafter. However, the Prospectus/Red Herring Prospectus, as the case may be, must
contain the grade/s given to the IPO by all CRAs approached by the company for grading
such IPO. Further information regarding the grading process may be obtained from the
Credit Rating Agencies
Who bears the cost of the IPO grading process?
The company desirous of making the IPO is required to bear the expenses incurred for
grading such IPO.
Is grading optional?
No, IPO grading is not optional. A company which has filed the draft offer document for
its IPO with SEBI, on or after 1st May, 2007, is required to obtain a grade for the IPO
from at least one CRA.
Can the issuer company reject an IPO grade?
IPO grade/s cannot be rejected. Irrespective of whether the issuer finds the grade given
by the rating agency acceptable or not, the grade has to be disclosed as required under the
SEBI ICDR Regulations 2009. However the issuer has the option of opting for another
grading by a different agency. In such an event all grades obtained for the IPO will have
to be disclosed in the offer documents, advertisements etc.
Will IPO grading delay the process of issue?
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IPO grading is intended to run parallel to the filing of offer document with SEBI and the
consequent issuance of observations. Since issuance of observation by SEBI and the
grading process, function independently, IPO grading is not expected to delay the issue
process.
What are the factors that are evaluated to assess the fundamentals of the issue while
arriving at the IPO grade?
The IPO grading process is expected to take into account the prospects of the industry in
which the company operates, the competitive strengths of the company that would allow
it to address the risks inherent in the business (es) and capitalise on the opportunities
available, as well as the companys financial position.
While the actual factors considered for grading may not be identical or limited to the
following, the areas listed below are generally looked into by the rating agencies, while
arriving at an IPO grade
Business Prospects and Competitive Position
i. Industry Prospects
ii. Company Prospects
Financial Position
Management Quality
Corporate Governance Practices
Compliance and Litigation History
New ProjectsRisks and Prospects
It may be noted that the above is only indicative of some of the factors considered in the
IPO grading process and may vary on a case to case basis.
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Does IPO grading consider the price at which the shares are offered in the issue?
No. IPO grading is done without taking into account the price at which the security is
offered in the IPO. Since IPO grading does not consider the issue price, the investor
needs to make an independent judgment regarding the price at which to bid for/subscribe
to the shares offered through the IPO.
Where can one find the grades obtained for the IPO and details of the grading
process?
All grades obtained for the IPO along with a description of the grades can be found in the
Prospectus. Abridged Prospectus, issue advertisement or any other place where the issuer
company is making advertisement for its issue. Further the Grading letter of the Credit
Rating Agency which contains the detailed rationale for assigning the particular grade
will be included among the Material Documents available for Inspection.
Does an IPO grade, which indicates above average or strong fundamentals mean
one could subscribe safely to the issue?
An IPO grade is NOT a suggestion or recommendation as to whether one should
subscribe to the IPO or not. IPO grade needs to be read together with the disclosures
made in the prospectus including the risk factors as well as the price at which the shares
are offered in the issue.
How does one interpret the IPO Grades?
The grades are allocated on a 5-point scale, the lowest being Grade 1 and highest Grade
5.The meaning of these grades have been explained under Question 1 in this FAQ.
How does IPO Grading help in deciding about investing in an IPO?
IPO Grading is intended to provide the investor with an informed and objective opinion
expressed by a professional rating agency after analyzing factors like business and
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financial prospects, management quality and corporate governance practices etc.
However, irrespective of the grade obtained by the issuer, the investor needs to make
his/her own independent decision regarding investing in any issue after studying the
contents of the prospectus including risk factors carefully.
What is the role of SEBI in IPO grading exercise?
SEBI does not play any role in the assessment made by the grading agency. The grading
is intended to be an independent and unbiased opinion of that agency.
Will IPO Grading given by CRAs be a parameter for SEBI to issue its observations?
The grading is intended to be an independent and unbiased opinion of a rating agency.
SEBI does not pass any judgment on the quality of the issuer company. SEBIs
observations on the IPO document are entirely independent of the IPO grading process or
the grades received by the company.
Which credit rating agencies are registered with SEBI?
The following four credit rating agencies are registered with SEBI.
Credit Analysis & Research Ltd.
4th Floor, Godrej Coliseum
Somaiya Hospital Road
Off Eastern Express Highway
Sion (East)
Mumbai-400022
http://www.careratings.com
ICRA Ltd.
1105, Kailash Building, 11th Floor
26, Kasturba Gandhi Marg
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New Delhi-110 001
http://www.icra.in
CRISIL Ltd.
CRISIL House
121-122 Andheri Kurla Road
Andheri (East)
Mumbai400093
http://www.crisil.com
Fitch Ratings India Pvt.Ltd.
Apeejay House, 6th Floor
3, Dinshaw Vachha Road
Churchgate
Mumbai-400020
http://www.fitchindia.com
Brickwork Ratings India Pvt.Ltd.
#39/2,Sagar Complex,2nd Floor
Bannerghatta Road
Near Diary Circle
Bangalore-560029
http://www.brickworkratings.com