Procedural Aspects of Public issues, Bought out deals

&Book building

Every Company needs funds for its business. Funds requirement can be for short term or for long term. To meet short term requirements, the may approach banks, lenders & may even accept fixed deposits from public/shareholders. To meet its long term requirements, funds can be raised either through loans from lenders, Banks, Institutions etc. (which carry financial burden) or through issue of capital. Capital can be raised through private placement of shares, public issue, right issue etc. Public issue means raising funds from public. Promoters of the Company may have plans for the Company, which may require infusion of money. The main purpose of the public issue, amongst others, is to raise money through public and get its shares listed at any of the recognized stock exchanges in India.

PRIMARY ISSUE

PUBLIC ISSUE

RIGHT ISSUE

PRIVATE ISSUE

PUBLIC ISSUE

INITIAL PUBLIC OFFERING

(IPO)

FOLLOW ON PUBLIC

OFFERING(FPO)

PRIVATE ISSUE

PRIVATE PLACEMENT

PREFERENTIALISSUE

QUALIFIEDINSTITUTIONA

LPLACEMENT

• IPO is an offering of either a fresh issue of securities or an offer for sale of existing securities or both by an unlisted company for 1st time to public .

• In case of IPO , the availability of the information regarding past performance of the company and its track record is generally inadequate and may lack credibility .

• A FPO is an offering of either a fresh issue of securities or an offer for sale to the public by an already listed company through an offer document .

Investors participating in these offerings take informed decision based on its past record and performance .

APPLICABLE LAWS FOR PUBLIC ISSUE  Provisions of the Companies Act, 1956.

Securities Contracts (Regulations) Act, 1956.

SEBI rules & regulations

Compliance of Listing Agreement with the concerned stock exchanges after the listing of securities.

RBI regulations in case of foreign/NRI equity participation.

Brought out deal is a method of offering securities to the public through a sponsor (bank ,financial institution or an individual).

The securities are listed in one or more stock exchange within a time frame mutually agreed upon by the company and the sponsor.

This option save the company cost & time involved in public issue. The cost of holding the share can be reimbursed by the company or the sponsor can offer the share to the public at as premium to earn profit terms agreed upon by the company and the sponsor .

A brought out deal is more risky for the investment bank , because it must then try to sell the securities to other investors . The investment bank takes all of the risk that the securities may not be able to be sold or more commodity , that they may lose value before they can be sold , resulting net lose.

WHAT IS BOOK BUILDING?

Book Building is the process of determining the price at which an Initial Public Offering will be offered. SEBI guidelines, 1995 defined book-building as “a process undertaken by which a demand for the securities proposed to be issued by a body of corporate is elicited and built up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document”.

In general, the word “Book building” is a method of marketing the shares of a company whereby the quantum and the price of the securities to be issued will be decided on the basis of the ‘bids’ received from the prospective shareholders by the lead merchant bankers. According to this method, share prices are determined on the basis of real demand for the shares at various price levels in the market

During the IPO or FPO, the company offers its shares to the public either at fixed price or offers a price range, so that the investors can decide on the right price. The method of offering shares by providing a price range is called as book building method.

Types of investors

There are three kinds of investors in a book-building issue.

The retail individual investor (RII),

The non-institutional investor (NII)

The Qualified Institutional Buyers (QIBs)

There are two types of Public Issues:

FIXED PRICE ISSUE: - When the issuer at the outset decides the issue price and mentions it in the offer document, it is commonly known as fixed price issue.

BOOK BUILT ISSUE:-When the price of an issue is discovered on the basis of demand received from the prospective investors at various price levels, it is called as book built issue.

TYPES OF BOOK-BUILDING:

The Companies are bound to the SEBI’s guidelines for book building offers in the following manner:Ø     75% book buildingØ     100% book building

BOOK BUILDING METHOD

FIXED PRICE METHOD

75% OF THE PUBLIC ISSUE CAN BE OFFERED TO INSTITUTIONAL INVESTORS WHO HAVE PARTICIPATED IN THE BIDDING PROESS.

25% OF THE PUBLIC ISSUE CAN BE OFFERED THROUGH PROSPECTUS AND SHALL BE RESERVED FOR ALLOCATION TO INDIVIDUAL INVESTORS WHO HAVE NOT PARTICIPATED IN THE BIDDING PROCESS.

TOTAL PUBLIC ISSUE

(i.e. net offer to the public)

CHART 1