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IPO Initial Public OfferingBY: PRATIK SHAH [ I HAVE COMPLETED MY BACHELOR OF MANAGEMENT STUDIES AND I AMWORKING WITH WWW.MANAGEMENTFUNDA.COM I AM PROUD TO BE A PART OF ITS SUCCESS.CONTACT ME AT : - PRATIK@MANAGEMENTFUNDA.COM ]ON SEPTEMBER 10, 2009 2 COMMENTS

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v EXECUTIVE SUMMARY

As we all knowIPO INITIAL PUBLIC OFFERING is the hottest topic in the current

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

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

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

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

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

massive outflow of work and a big portfolio then its very difficult for any company to work withlimited finance and this is where IPO plays an important role.

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

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

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

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

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

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

more or less judge a good IPO. Then we all know that scams have always been a part of any sector

you go in for which are covered in it and also few recommendations are given for the same. It alsogives us some idea about what are the expenses that a company undertakes during an IPO.

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

big and given a new vision in past and it is still continuing its work and also for many coming years.

Public issues can be classified into Initial Public offerings and further public offerings. In a public

offering, the issuer makes an offer for new investors to enter its shareholding family. The issuer

company makes detailed disclosures as per the DIP guidelines in its offer document and offers it for

subscription. Initial Public Offering is when an unlisted company makes either a fresh issue of

securities or an offer for sale of its existing securities or both for the first time to the public. This

paves way for listing and trading of the issuers securities. IPO is new sharesOffered to thepublic in the Primary Market .The first time the company is traded on the stock exchange.

A prospectus is issued to read about its risk before investing. IPO is a companys first sale of stock to

the public. Securities offered in an IPO are often, but not always, those of young, small companies

seeking outside equity capital and a public market for their stock. Investors investing in an IPO must

be ready to bear high risk in their investment..

v INTRODUCTION

IPO stands for Initial Public Offering and means the new offer of shares from a company which

was previously unlisted. This is done by offering those shares to the public, which were held by the

promoters or the private investors prior to the IPO. In the case when other investors or Promoterheld the shares the stake holding comes down to the extent their shares are offered to the public. In

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other cases new shares are issued to the public and the shares, which are with the promoters stay

with them. In both cases the share of the promoters in the total capital comes down.

For example say there are 100 shares in a company and 50 of these are offered to the public in an

IPO then in such a case the promoters stake in the company comes down from 100% to 50%. In

another case the company issues 50 additional shares to the public and the stake of the promotercomes down from 100% to 67%.

Normally in an IPO the shares are issued at a discount to what is considered their intrinsic value and

thats why investors keenly await IPOs and make money on most of them. IPO are generally

priced at a discount, which means that if the intrinsic value of a share is perceived to be Rs.100 the

shares will be offered at a price, which is lesser than Rs.100 say Rs.80 during the IPO. When the

stock actually lists in the market it will list closer to Rs.100. The difference between the two prices is

known as Listing Gains, which an investor makes when investing in IPO and making money at the

listing of the IPO. A Bullish Market gives IPO investors a clear opportunity to achieve long term

targets in a short term phase.An IPO is the first sale of stock by a company to the public. A company can raise money by issuing

either debt or equity. If the company has never issued equity to the public, its known as an IPO.

Companies fall into two broad categories: private and public: A privately held company has fewer

shareholders and its owners dont have to disclose much information about the company. Anybody

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

follow the reporting rules of your jurisdiction. Most small businesses are privately held. But large

companies can be private too. Do you know that IKEA, Dominos Pizza and Hallmark Cards are all

privately held?

It usually isnt possible to buy shares in a private company. You can approach the owners about

investing, but theyre not obligated to sell you anything. Public companies, on the other hand, have

sold at least a portion of themselves to the public and trade on a stock exchange. This is why doing

an IPO is also referred to as going public

Public companies have thousands of shareholders and are subject to strict rules and regulations.

They must have a board of directors and they must report financial information every quarter. In the

United States, public companies report to theSecurities and Exchange

Commission(SEC). In other countries, public companies are overseen by governing bodies

similar to the SEC. From an investors standpoint, the most exciting thing about a public company is

that the stock is traded in the open market, like any other commodity. If you have the cash, you can

invest. The CEO could hate your guts, but theres nothing he or she could do to stop you from buying

stock.

The first sale of stock by a private company to the public, IPOs are often issued by smaller,

younger companies seeking capital to expand, but can also be done by large privately-owned

companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an

underwriting firm, which helps it determine what type of security to issue (common or preferred),

best offering price and time to bring it to market. IPOs can be a risky investment. For the

individual investor, it is tough to predict what the stock will do on its initial day of trading and in the

near future since there is often little historical data with which to analyze the company. Also, most

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IPOs are of companies going through a transitory growth period, and they are therefore

subject to additional uncertainty regarding their future value.

An IPO is the first sale of an entitys common shares to public investors. When an entity wants to

enter the market, it makes its share available to common investors in form of an auction sale.

Each application for an IPO has to be within a cut-off figure, which is eligible for allotment in the

retail investors category. But in this case, financiers and market players illegally cornered these

retail investors shares.

v WHY GO PUBLIC?

Basically, going public (or participating in an initial public offering or (IPO) is the process in which

a business owned by one or several individuals is converted into a business owned by many. It

involves the offering of part ownership of the company to the public through the sale of debt or more

commonly, equity securities (stock).

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

doors:

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

debt.

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

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

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

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

Being on a major stock exchange carries a considerable amount of prestige. In the past, only private

companies with strong fundamentals could qualify for an IPO and it wasnt easy to get listed.

The internet boom changed all this. Firms no longer needed strong financials and a solid history to

go public. Instead, IPOs were done by smaller startups seeking to expand their businesses. Theres

nothing wrong with wanting to expand, but most of these firms had never made a profit and didnt

plan on being profitable any time soon. Founded on venture capital funding, they spent like Texans

trying to generate enough excitement to make it to the market before burning through all their cash.

In cases like this, companies might be suspected of doing an IPO just to make the founders rich. This

is known as an exit strategy, implying that theres no desire to stick around and create value for

shareholders. The IPO then becomes the end of the road rather than the beginning.

How can this happen? Remember: an IPO is just selling stock. Its all about the sales job. If you canconvince people to buy stock in your company, you can raise a lot of money.

v PROCEDURE FOR GETTING IN AN IPO

The Underwriting Process

Getting a piece of a hot IPO is very difficult, if not impossible. To understand why, we need to know

how an IPO is done, a process known as underwriting.

When a company wants to go public, the first thing it does is hire an investment bank. A company

could theoretically sell its shares on its own, but realistically, an investment bank is required its

just the way Wall Street works. Underwriting is the process of raising money by either debt or

equity (in this case we are referring to equity). You can think of underwriters as middlemen between

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companies and the investing public. The biggest underwriters are Goldman Sachs, Merrill Lynch,

Credit Suisse First Boston, Lehman Brothers and Morgan Stanley.

The company and the investment bank will first meet to negotiate the deal. Items usually discussed

include the amount of money a company will raise, the type of securities to be issued and all the

details in the underwriting agreement. The deal can be structured in a variety of ways. For example,

in a firm commitment, the underwriter guarantees that a certain amount will be raised by buying the

entire offer and then reselling to the public. In a best efforts agreement, however, the underwriter

sells securities for the company but doesnt guarantee the amount raised. Also, investment banks are

hesitant to shoulder all the risk of an offering. Instead, they form a syndicate of underwriters. One

underwriter leads the syndicate and the others sell a part of the issue.

Once all sides agree to a deal, the investment bank puts together a registration statement to be filed

with the SEC. This document contains information about the offering as well as company info such

as financial statements, management background, any legal problems, where the money is to be

used and insider holdings. The SEC then requires a cooling off period, in which they investigate and

make sure all material information has been disclosed. Once the SEC approves the offering, a date

(the effective date) is set when the stock will be offered to the public.

During the cooling off period the underwriter puts together what is known as the red herring. This is

an initial prospectus containing all the information about the company except for the offer price and

the effective date, which arent known at that time. With the red herring in hand, the underwriter

and company attempt to hype and build up interest for the issue. They go on a road show also

known as the dog and pony show where the big institutional investors are courted.

As the effective date approaches, the underwriter and company sit down and decide on the price.This isnt an easy decision: it depends on the company, the success of the road show and, most

importantly, current market conditions. Of course, its in both parties interest to get as much as

possible.

Finally, the securities are sold on the stock market and the money is collected from investors.

As you can see, the road to an IPO is a long and complicated one. You may have noticed that

individual investors arent involved until the very end. This is because small investors arent the

target market. They dont have the cash and, therefore, hold little interest for the underwriters. If

underwriters think an IPO will be successful, theyll usually pad the pockets of their favorite

institutional client with shares at the IPO price. The only way for you to get shares (known as an IPO

allocation) is to have an account with one of the investment banks that is part of the underwriting

syndicate. But dont expect to open an account with $1,000 and be showered with an allocation. You

need to be a frequently trading client with a large account to get in on a hot IPO.

Bottom line, your chances of getting early shares in an IPO are slim to none unless youre on the

inside. If you do get shares, its probably because nobody else wants them. Granted, there are

exceptions to every rule and it would be incorrect for us to say that its impossible. Just keep in mind

that the probability isnt high if you are a small investor.

What is the Registration Process?

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Going public requires a Registration Statement which is a carefully crafted document that is

prepared by your attorneys and accountants. It requires detailed discussions on information

pertaining to:

Business product/service/markets

Company Information

Risk Factors

Proceeds Use (How are you going to use the money)

Officers and Directors

Related party transactions

Identification of your principal shareholders

Audited financials

After your registration statement is prepared, it is submitted to the Securities and Exchange

Commission and various other regulatory bodies for their detailed review. When this process is

completed, you and your management team will do a road show to present your company to the

stock brokers who will then sell your stock to the public investors. Assuming they can successfully

sell your issue, youll receive your money. Then its simple, all you have to do is make a lot more

money with the proceeds so as to increase the value of your, your teams and public investors stock.

v PROCEDURE FOR APPLYING IN AN IPO

When a company floats a public issue or IPO, it prints forms for application to be filled by the

investors. Public issues are open for a few days only. As per law, any public issue should be kept

open for a minimum of 3days and a maximum of 21 days. For issues, which are underwritten by

financial institutions, the offer should be kept open for a minimum of 3 days and a maximum of 21

days. For issues, which are underwritten by all India financial institutions, the offer should be keptopen for a maximum of 10 days. Generally, issues are kept open for only 3 to 4 days. The duly

complete application from, accompanied by cash, cheque, DD or stock invest should be deposited

before the closing date as per the instruction on the form. IPOs byinvestment

companies (closed end funds) usually contain underwriting fees which represent a load to buyers.

Before applying for anyIPO, analyze the following factors:

1. Who are the Promoters? What is their credibility and track record?

2. What is the company manufacturing or providing services Product, its potential.

3. Does the Company have any Technology tie-up? If yes, what is the reputation of the collaborators?

4. What has been the past performance of the Company offering the IPO?

5. What is the Project cost, what are the means of financing and profitability

projections?

6. What are the Risk factors involved?

7. Who has appraised the Project? In IndiaProjectsapprised by IDBI and ICICI have more

credibility than small Merchant Bankers?

How to make payments for IPOs:

The payment terms of any IPO or Public issue is fixed by the company keeping in view its fund

requirements and the statutory regulations. In general, companies stipulate that either the entire

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money should be paid along with the application or 50 percent of the entire amount be paid along

with the application and rest on allotment. However, if the funds requirements are staggered, the

company may ask for the money in calls, that is, the company demands for the money after

allotment as and when the cash flow demands. As per the statutory requirements, for public issue

large than Rs. 250 crore, the money is to be collected as under:

25 per cent on application

25 per cent on allotment

50 per cent in two or more calls

Understanding IPO Grading:

IPO grading is a unique concept involving an independent agency that is free from bias and with

the available tools for assessing the investment attractiveness of an equity security. IPO grading is

a service aimed at facilitating the assessment of equity issues offered to the public, says SEBI. IPO

grading can act as an additional decision-making tool for them. The idea is that IPO grading will

help the investor better appreciate the meaning of the disclosures in the issue documents, collapsing

all of the above information into a single digit. Thus, IPO grading could be seen as an added

investment guidance tool seeking to hide the ignorance of the above factors and still help the

investors make an informed decision. Grading of IPOs in terms of their fundamental quality

will enable investors steer clear of unsound offers. IPO grading in general would be a relative

assessment of the fundamentals of the equity security by credit rating agencies registered with SEBI.

But IPO grading is totally unheard of anywhere else and is a First-From-India initiative. The

grading, to be done by the SEBI-registered credit rating agencies, would be applicable to all

IPOs for which offer documents are filed after April 30, SEBI said in a circular. 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. The company needs to firstcontactone

of the grading agencies and mandate it for the grading exercise. Though this process will ideally

require 2-3 weeks for completion, it may be a good idea for companies to initiate the grading process

about 6-8 weeks before the targeted IPO date to provide sufficient time for any contingencies. IPO

grading is a service aimed at facilitating the assessment of equity issues offered to the public, says

SEBI.

IPO grading is the grade assigned by a Credit Rating Agency registered with

SEBI, to the initial 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

IPO Grade 4: Above-average fundamentals

IPO Grade 5: Strong fundamentals

IPO Grading is not a recommendation to invest:

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Even if a Company is Graded 5 (i.e. with strong fundamentals), IPO grading is not a

recommendation to invest in the graded instrument. It does not a comment on the price of the

graded security or its suitability for a particular investor. It does not comment on issue price, likely

price on listing or movement in price post listing.

v IPO ADVANTAGES AND DISADVANTAGESThe decision to take a company public in the form of an initial public offering (IPO) should not be

considered lightly. There are several advantages and disadvantages to being a public company,

which should thoroughly be considered. This memorandum will discuss the advantages and

disadvantages of conducting an IPO and will briefly discuss the steps to be taken to register an

offering for sale to the public. The purpose of this memorandum is to provide a thumbnail sketch of

the process. The reader should understand that the process is very time consuming and complicated

and companies should undertake this process only after serious consideration of the advantages and

disadvantages and discussions with qualified advisors.

Advantages of going public: Increased Capital

A public offering will allow a company to raise capital to use for various corporate purposes such as

working capital, acquisitions, research and development, marketing, and expanding plant and

equipment.

Liquidity

Once shares of a company are traded on a public exchange, those shares have a market value and

can be resold. This allows a company to attract and retain employees by offering stock incentive

packages to those employees. Moreover, it also provides investors in the company the option to

trade their shares thus enhancing investor confidence.

Increased Prestige

Public companies often are better known and more visible than private companies, this enables

them to obtain a larger market for their goods or services. Public companies are able to have access

to larger pools of capital as well as different types of capital.

Valuation

Public trading of a companys shares sets a value for the company that is set by the public market

and not through more subjective standards set by a private valuator. This is helpful for a company

that is looking for a merger or acquisition. It also allows the shareholders to know the value of theshares.

Increased wealth

The founders of the company often have the sense of increased wealth as a result of the IPO. Prior to

the IPO these shares were illiquid and had a more subjective price. These shares now have an

ascertainable price and after any lockup period these shares may be sold to the public, subject to

limitations.

Disadvantages of going Public:

Time and Expense

Conducting an IPO is time consuming and expensive. A successful IPO can take up to a year or more

to complete and a company can expect to spend several hundreds of thousands of dollars on

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attorneys, accountants, and printers. In addition, the underwriters fees can range from 3% to 10% of

the value of the offering. Due to the time and expense of preparation of the IPO, many companies

simply cannot afford the time or spare the expense of preparing IPO.

Disclosure

The SEC disclosure rules are very extensive. Once a company is a reporting company it must provide

information regarding compensation of senior management, transactions with parties related to the

company, conflicts of interest, competitive positions, how the company intends to develop future

products, material contracts, and lawsuits. In addition, once the offering statement is effective, a

company will be required to make financial disclosures required by the Securities and Exchange Act

of 1934. The 1934 Act requires public companies to file quarterly statements containing unaudited

financial statements and audited financial statements annually. These statements must also contain

updated information regarding nonfinancial matters similar to information provided in the initial

registration statement. This usually entails retaining lawyers and auditors to prepare these quarterly

and annual statements. In addition, a company must report certain material events as they arise.

This information is available to investors, employees, and competitors.

Falling Stock Price

If the shares of the companys stock fall, the company may lose market confidence, decreased

valuation of the company may effect lines of credits, secondary offering pricing, the companys

ability to maintain employees, and the personal wealth of insiders and investors.

Vulnerability

If a large portion of the companys shares are sold to the public, the company may become a target

for a takeover, causing insiders to lose control. A takeover bid may be the result of shareholdersbeing upset with management or corporate raiders looking for an opportunity. Defending a hostile

bid can be both expensive and time consuming. Once a company has weighed the advantages and

disadvantages of being a public company, if it decides that it would like to conduct an IPO it will

have to retain a lead

Regulatory Review

The Company will be open to review by the SEC to ensure that the company is making the

appropriate filings with all relevant disclosures.

v PARAMETERS TO JUDGE AN IPO

Good investing principles demand that you study the minutes of details prior to investing in an IPO.

Here are some parameters you should evaluate:-

Promoters

Is the company a family run business or is it professionally owned? Even with a family run business

what are the credibility and professional qualifications of those managing the company? Do the top

level managers have enough experience (of at least 5 years) in the specific type of business?

Industry Outlook

The products or services of the company should have a good demand and scope for profit.

Business Plans

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Check the progress made in terms of land acquisition, clearances from various departments,

purchase of machinery, letter of credits etc. A higher initial investment from the promoters will lead

to a higher faith in the organization.

Financials

Why does the company require the money? Is the company floating more equity than required?

What is the debt component? Keep a track on the profits, growth and margins of the previous years.

A steady growth rate is the quality of a fundamentally sound company. Check the assumptions the

promoters are making and whether these assumptions or expectations sound feasible.

Risk Factors

The offer documents will list our specific risk factors such as the companys liabilities, court

cases or other litigations. Examine how these factors will affect the operations of the company.

Key Names

Every IPO will have lead managers and merchant bankers. You can figure out the track record of the

merchant banker through the SEBI website.

Pricing

Compare the companys PER with that of similar companies. With this you can find out the P/E

Growth ratio and examine whether its earning projections seem viable.

Listing

You should have access to the brokers of the stock exchanges where the company will be listing

itself.

v PRIMARY AND SECONDARY MARKETS

In the primary market securities are issued to the public and the proceeds go to the issuingcompany. Secondary market is term used for stock exchanges, where stocks are bought and sold

after they are issued to the public.

Primary Market:

The first time that a companys shares are issued to the public, it is by a process called the initial

public offering (IPO). In an IPO the company offloads a certain percentage of its total shares to the

public at a certain price.

Most IPOS these days do not have a fixed offer price. Instead they follow a method calledBOOK

BUILDING PROCESS, where the offer price is placed in a band or a range with the highest and

the lowest value (refer to the newspaper clipping on the page). The public can bid for the shares at

any price in the band specified. Once the bids come in, the company evaluates all the bids and

decides on an offer price in that range. After the offer price is fixed, the company allots its shares to

the people who had applied for its shares or returns them their money.

Market for new issues of securities, as distinguished from the Secondary Market, where

previously issued securities are bought and sold.A market is primary if the proceeds of sales

go to the issuer of the securities sold.

This is part of the financial market where enterprises issue their new shares and bonds. It is

characterized by being the only moment when the enterprise receives money in exchange for sellingits financial assets.

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Secondary Market:

Once the offer price is fixed and the shares are issued to the people, stock exchanges facilitate the

trading of shares for the general public. Once a stock is listed on an exchange, people can start

trading in its shares. In a stock exchange the existing shareholders sell their shares to anyone who is

willing to buy them at a price agreeable to both parties. Individuals cannot buy or sell shares in astock exchange directly; they have to execute their transaction through authorized members of the

stock exchange who are also called STOCK BROKERS.

The market where securities are traded after they are initially offered in the primary market. Most

trading is done in the secondary market.

To explain further, it is trading in previously issued financial instruments. An organized market for

used securities. Examples are the New York Stock Exchange (NYSE), Bombay Stock Exchange

(BSE), National Stock Exchange NSE, bond markets, over-the-counter markets, residential

mortgage loans, governmental guaranteed loans etc.

UNDERSTANDING THE ROLE OF INTERMEDIARIES

Who are the intermediaries in an issue?

Merchant Bankers to the issue or Book Running Lead Managers (BRLM), syndicate members,

Registrars to the issue, Bankers to the issue, Auditors of the company, Underwriters to the issue,

Solicitors, etc. are the intermediaries to an issue. The issuer discloses the addresses, telephone/fax

numbers and email addresses of these intermediaries. In addition to this, the issuer also discloses

the details of the compliance officer appointed by the company for the purpose of the issue.

Who is eligible to be a BRLM?

A Merchant banker possessing a valid SEBI registration in accordance with the SEBI (MerchantBankers) Regulations, 1992 is eligible to act as a Book Running Lead Manager to an issue.

What is the role of a Lead Manager? (pre and post 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

finalization 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, co-ordinate non-institutional

allocation, intimation of allocation and dispatch of refunds to bidders etc are performed by the LM.

The post Offer activities for the Offer will involve essential follow-up steps, which include the

finalization 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.

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What is the role of a registrar?

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 co-ordinates 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.

What is the role of 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 DIP

Guidelines. 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.

Question on Due diligence

The Lead Managers state that they have examined various documents including those relating to

litigation like commercial disputes, patent disputes, disputes with collaborators etc. and other

materials in connection with the finalization of the offer document pertaining to the said issue; and

on the basis of such examination and the discussions with the Company, its Directors and other

officers, other agencies, independent verification of the statements concerning the objects of the

issue, projected profitability, price justification, etc., they state that they have ensured that they are

in compliance with SEBI, the Government and any other competent authority in this behalf.

v IPO SCAMSYES Bank Ltd. Case:

New Delhi: When the Securities Exchange Board of India (SEBI) started scanning an entire

spectrum of IPOs launched over 2003, 2004 and 2005, it ended digging up more dirt and

probably prevented a larger conspiracy to hijack the market.

Here is a lowdown on the IPO scam:

What was the scam?

It involved manipulation of the primary marketread initial public offers (IPOs)by financiers

and market players by using fictitious or benaami demat accounts.

While investigating the Yes Bank scam, SEBI found that certain entities had illegally obtained IPO

shares reserved for retail applicants through thousands of benaami demat accounts.

They then transferred the shares to financiers, who sold on the first day of listing, making windfall

gains from the price difference between the IPO price and the listing price.

The modus operandi adopted in manipulating the YES Bank Ltd (YBL)s initial public offering (IPO)

allotment involved opening of over 7,500 benami dematerialized accounts.

These accounts were with the National Securities Depository Ltd (NSDL) through Karvy Stock

broking Ltd (Karvy-DP).

When was the scam detected?

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The IPO scam came to light in 2005 when the private Yes Bank launched its initial public offering.

Roopalben Panchal, a resident of Ahmedabad, had allegedly opened several fake demat accounts

and subsequently raised finances on the shares allotted to her through Bharat Overseas Bank

branches.

The SEBIi started a broad investigation into IPO allotments after it detected irregularities in the

buying of shares of YES Banks IPO in 2005.

What triggered the SEBI probe?

On October 10 last year, an Income Tax raid on businessman Purushottam Budhwani accidentally

found he was controlling over 5,000 demat accounts. SEBI finds this suspicious.

On December 15, SEBI declared results of its probe, how a few people cornered a large chunk of YES

Bank IPO shares.

Roopalben Panchal was found to be controlling nearly 15,000 demat accounts.

It was found that once they obtained these shares, the fictitious investors transferred them tofinanciers.

The financiers then sold these shares on the first day of listing, reaping huge profits between the IPO

price and the listing price. The SEBI report covered 105 IPOs from 2003-2005.

The SEBI probe covered several IPOs dating back to 2005, 2004 and 2003 to detect misuse.

These included the offerings of Jet Airways, Sasken Communications, Suzlon Energy, Punj Lloyds,

JP Hydro Power, NTPC, PVR Cinema, Shringar Cinema and others. A lot more dubious accounts

across several IPOs are expected to tumble out in the next few days.

It also detected similar irregularities in the IDFC IPO, in which over 8 per cent of the allotment inthe retail segment was cornered by fictitious applicants through multiple demat accounts.

Who is Roopalben Panchal?

. Of the 13 erring entities, the chief culprits identified by SEBI were Ms Roopalben Panchal and

Sugandh Estates and Investments Pvt Ltd.

Roopalben Panchal of IndiaBulls Securities is allegedly the mastermind of the scam. Finance

Ministry officials are expected to act against her soon.

How is this different from Harshad Mehtas scam?

The securities scam involved price manipulation in the secondary market, read stocks. Whereas in

this case, the manipulation happened in the primary marketeven before the shares (IPOs)

entered the stocks market.

This time, fraudsters targeted the primary market to make a quick buck at the expense of the gullible

small investors.Direct Participants (DPs) used retail applicants shares for reaping benefits in

the stock market.

How big is the scam?

Apart from the YES Bank fraud, SEBI reportedly has definite data about two IPOs where retail

allotments were rigged, but market observers believe the scam is far bigger. The SEBI probe has

identified more operators and some market intermediaries involved in the misuse of the initialallotment process in public offerings dating back to 04-05.

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The Income-Tax Department in Ahmedabad has found that two major accused, Panchal and

Sugandh Investments, have together made Rs 60.62 crore in 18 months.

A Glance on the Scam:

YES Bank Ltd shares were listed on the BSE and the NSE on July 12, 2005. The modus operandi

adopted in manipulating the YES Bank Ltd (YBL)s initial public offering (IPO) allotment involved

opening of over 7,500 benami dematerialised accounts.

These accounts were with the National Securities Depository Ltd (NSDL) through Karvy

Stockbroking Ltd (Karvy-DP). Of the 13 erring entities, the chief culprits identified by SEBI were Ms

Roopalben Panchal and Sugandh Estates and Investments Pvt Ltd.

While Ms Panchal opened 6,315 benami DP accounts, another entity Sugandh opened 1,315 benami

accounts. Each of these accounts applications were made for 1,050 shares, paying application money

of Rs 47,250 each. By applying for small lots (1,050 shares through each accounts), they misused the

retail allotment quota stipulated for IPOs. The shares allotted in IPO to the benamis of Ms Panchaland Sugandh would have otherwise gone to genuine retail applicants.

The IPO of YBL opened on June 15, 2005 and It was observed that Ms Panchal had transferred

9,31,600 shares to various entities in seven off-market transactions on July 11 a day prior to the

listing and commencement of trading on the stock exchanges. In order to get an allotment of

9,31,600 shares, Ms Panchal would have had to apply for crores of shares involving many crores of

rupees in application money.

However, Ms Panchals name did not appear in the list of top 100 public issue allottees. Thus, it was

suspected that Ms Panchal must have made multiple applications or that other applicants were

acting as a front for her.

Ms Panchal had applied for only 1,050 shares in the YES Bank IPO, paying the application money of

Rs 47,250. And she did not receive any allotment in the IPO. On July 6, Ms Panchal received 150

shares each from 6,315 allottees through off-market transactions aggregating 9,47,250 YBL shares.

Curiously, as per the dematerialized account data furnished by NSDL, of the above 6,315 entities as

many as 6,221 entities have a same address in Ahmedabad. There are three more addresses of

locations in Ahmedabad, which have been linked to Ms Panchal. All the 6,315 entities have their

bank accounts with Bharat Overseas Bank and demat accounts with Karvy-DP.

By applying for the maximum possible number of shares per applicant while being categorised asretail applicant and by putting in large number of applications in the lot of 1,050 shares, Ms Panchal

and her associates (real or fictitious) have attempted to corner the maximum possible number of

shares in the IPO allotment.

This tantamount to an abuse of IPO allotment process, the SEBI order said. A similar modus

operandi was adopted by Sugandh, which received 150 shares each from 1,315 dematerialised

accounts aggregating 1, 97,250 shares in off market transactions.

According to SEBI findings, Ms Panchal and others booked profits to the tune of about Rs 1.70 crore

on the day of the listing of YES Bank shares.

Role of Depository Participants

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Suzlon Energy IPO: Rs 1,496.34 cr (September 23-29, 2005)

Key operators used 21,692 fictitious accounts to corner 3,23,023 shares which is equal to 3.74 per

cent of the total number of shares allotted to retail individual investors.

Jet Airways IPO: Rs 1899.3 crore (Feb 18-24, 2005)

Key operators used 1,186 fake accounts for cornering 20,901 shares which is equal to 0.52 per cent

of the total number of shares allotted to retail investors.

National Thermal Power Corporation IPO Rs 5,368.14 crore (Oct 7-14, 2004).

12,853 afferent accounts were used for cornering 27,50,730 shares representing 1.3 per cent of the

total number of shares allotted to retail investors.

Tata Consultancy Services IPO: Rs 4,713.47 crore

14,619 benami accounts were used to corner 2, 61,294 shares representing 2.09 per cent of the total

shares allotted to retail individual investors