1 nelson jacob. what are ipos???? when private companies, invite the public to subscribe to their...
TRANSCRIPT
1Nelson Jacob
What are IPOs????
When private companies, invite the public to subscribe to their
shares, this issue of shares is called an Initial Public Offering (IPO).
The shares issued could be in the form of fresh equity and/or the
promoters sell a portion of their equity to the public.
These shares are then listed on a stock exchange where they can be
bought and sold by investors.
IPOs are a very popular way of investing in the stock market as they
allow investors a simple entry route to buying stocks.
04/19/23 2IPO
Companies come out with IPO’s
Expand its existing facilities
E.g. Reliance Petroleum Ltd, Power Grid Corporation
Undertake a new project
E.g. GMR Infrastructure
Repay a high cost loan
Augment its working capital
04/19/23 IPO 3
Follow on Public Offer (FPO) When an already listed company makes either an offer for
sale to the public or a fresh issue of shares, this issue of
shares is called Follow on Public Offer (FPO).
ICICI Bank, Motilal Oswal Securities Ltd
04/19/23 IPO 4
Intermediaries in an IPO procedure
Merchant Banker or Book Running Lead Managers (BRLM)
to the issue
Syndicate Members
Underwriters to issue
Registrars to issue
Bankers to issue
Auditors
04/19/23 IPO 5
Role of BRLM / Merchant Bankers
Performs all the pre and post issue activities.
Pre-issue activities :
involves due diligence of company’s Operations/ Legal / Management / Business plans etc
designing & drafting Offer Document, Prospectus, memorandum for salient features of Prospectus and statutory advertisements.
04/19/23 IPO 6
Ensuring to comply with stipulated requirement and formalities in prescribed formats with SEBI, Stock Exchanges, Registrar of Companies (ROC).
They also have market the issue and appoint other intermediaries like Advertising Agency, Registrar, Bankers and Printers.
04/19/23 IPO 7
Post-issue Activities
Activities like managing escrow accounts
Allocation to non-institutional
Intimation of allocation
Dispatch of refunds to bidders
Necessary follow ups like Finalization of trading Dealing of instruments Dispatch certificates Demat of delivery of shares
04/19/23 IPO 8
Coordinating with Registrar and Escrow Bankers to ensure
follow up for proper flow of applications from bank branches to
registrar
Processing of these applications and other works till the Basis of
Allotment is finalized
Arranging necessary agreements and documents between these
agencies and the Company
Ensuring that these agencies fulfil their functions and discharge
responsibilities according to the agreements
04/19/23 9IPO
Role of a Registrar
Finalizes the list of eligible bidders after rejecting invalid
applications
Ensures credit of allotted shares to Demat accounts of
respective bidder by taking the corporate action and
dispatch refund orders & Confirmatory Allotment Note to
those applicable
E.g.: Karvy Computershare
04/19/23 IPO 10
Role of Bankers to issue
Collecting funds in the escrow accounts
Inform Issuers, Registrar and Lead Manager about the
figures collected.
04/19/23 IPO 11
How is the issue price decided on???
There are two ways in which the price
of an IPO can be determined –
The company could fix a price. The price could be arrived at through the process of book
building.
04/19/23 IPO 12
IPO Pricing
Fixed price IPOs
In this case, the company, together with the lead managers, decides at what price they would like to issue the shares. The share prices of competitor companies’ equities and others in the same league are also taken into consideration when the IPO price is fixed.
04/19/23 IPO 13
Book Built IPO’s
In the book building approach to price setting, the price of an IPO is demand driven
The issuing company sets a base price and a band within which an investor is allowed to bid for shares. Then the company, through its lead managers, invites price bids from investors
04/19/23 IPO 14
One of the lead managers, who is called the ‘book runner’, maintains an order book in which the investors demand and price bids are registered
Once the issue period is over, the book runner demarcates a cut off price
All bids that are below the cut off price are ignored and investors who have bid at the cut off price or above can purchase shares that have been allotted to them at the cut-off price
04/19/23 IPO 15
IPO Quotas
A company that is coming out with an IPO can reserve a part of its issue as “allotment on firm basis”
04/19/23 16IPO
Firm Allotment For certain categories such as Indian mutual funds,
FIIs, permanent/regular employees of the company, scheduled banks, merchant bankers, etc
Guidelines that indicate the maximum percentage of shares that can be reserved for firm allotment for each category
E.g. The total of reservations and firm allotment for employees cannot exceed 10 per cent of the issue size
04/19/23 IPO 17
Quotas for Specific investors
For allotment purposes, investors in a book building issue are divided into three categories :–
Retail Individual Investors (RIIs) Non Institutional Investors (NIIs) Qualified Institutional Buyers (QIBs)
04/19/23 18IPO
Retail Individual Investor
A retail investor is one whose application for shares does not exceed Rs 1 lakh in value.
04/19/23 IPO 19
Non Institutional Investors (NIIs) NIIs are investors whose bid values
amount to over Rs 1 lakh each
E.g. High Net worth Individuals
04/19/23 IPO 20
Qualified Institutional Buyers (QIBs) QIBs consist of
Mutual funds – E.g. Pru ICICI Mutual fund
Financial institutions–E.g. Reliance Capital
Scheduled Commercial banks - Axis Bank
Insurance companies - LIC
Provident funds, State industrial development
corporations, etc
04/19/23 IPO 21
SEBI guidelines
Each of these categories must be allocated a certain percentage of the total issue
The total amount allotted to RII must be at least 35% of the total issue
At least 15% must be given to NII QIB must be allotted no more than 50% cent of the issue In QIB 5% is reserved for mutual funds companies
04/19/23 IPO 22
Other Possibilities
In case an issue is over-subscribed, the company could decide to use the green shoe option - an option to retain a portion of the oversubscription amount by allotting more shares than initially offered
The excess shares are allotted on a pro-rata basis across different categories of investors
If there is any under-subscription in any of the categories, any over-subscription in another category can be allotted shares from the under-subscribed category
The method of allotment is at the discretion of the company and its lead managers
04/19/23 23IPO
Final Criteria for listing
The company must get a minimum subscription of 90% of the issue amount in order to be eligible to list its shares
If it does not, the company will have to return all the money and cancel the IPO
04/19/23 24IPO
IPO Procedure
Finding out about IPOs that are available From SEBI’s weekly press releases and monthly bulletins Draft and final offer documents are put up on SEBI’s website
under the ‘Reports/Documents’ section Hard copies of the draft offer documents can be obtained
from SEBI’s office by paying a small fee or from the lead managers
04/19/23 IPO 25
Some lead managers also post these documents on their websites
Through their advertisements in popular English, Hindi and regional daily newspapers
04/19/23 IPO 26
Number of days for which IPOs are open
Public issues are kept open for at least 3 and not more than 10 working days
In the case of book built issues, the minimum and maximum period for which bidding is open is 3–7 working days and can be extended by 3 days, in case the price band is revised
Public issue of some infrastructure companies can be kept open for a maximum period of 21 working days
04/19/23 IPO 27
Obtaining and submitting your form
The form for applying/bidding for IPO shares is available with all the issue managers, specified collection centres and brokers and bankers to the issue
The form elicits personal information like your name and address, your demat and bank account details, income tax PAN (in case your application is above a certain value), the number of shares that you are applying for and your bid price, in the case of book built issues
Also required to sign the form You can submit your form to the agency from which you
acquired it
04/19/23 IPO 28
Revising bids in case of book built IPOs
Must enter the revised quantity or price (in the case of book built issues) on a special form that is available along with the application form
However, you must make sure that you complete the entire process of revising your bid within the date of closure of the issue
04/19/23 IPO 29
Receiving allotment and refund
Public issues with a value in excess of Rs 10 crore are compulsorily in the demat mode
Fixed price issues, are intimated through a Confirmatory Allotment Note (CAN) or a refund order, within 30 days of the closure of the issue
In the case of book built issues, the registrar ensures that investors receive a CAN in case they have been allotted shares and the demat credit or a refund, as applicable, within 15 days of the closure of the issue
The stock is listed on the stock exchange within 7 days from the finalization of the issue
04/19/23 IPO 30
IPO listing
The equity shares allotted in the IPO are listed on the stock exchanges within 7 days from the finalization of the IPO
Total processing time between the closure of a book built issue and listing is around 3 weeks
Fixed price issue, 37 days after closure of the issue
04/19/23 IPO 31
Applying for an IPO online
IPO online, from the comforts of your home or office or anywhere else
Registered with an online broking house, which offers the facility to apply for IPOs online
Log on to the broking houses’ website page which lists the IPOs that are currently available and fill in the application form online
In the form, you will have to mention the number of shares that you wish to apply for and the bid price
The broking house will, fill in and sign the physical IPO application form and draw a cheque
The broking house will, fill in and sign the physical IPO application form and draw a cheque
Will receive an email from the broking house regarding your application status
04/19/23 IPO 32
IPO Funding
loan from banks and finance companies They provide finance for subscribing to shares in the public /
rights issues of reputed companies that are/will be listed as per the listing requirements of NSE / BSE
Interest Charged Processing Fee 50% of the total value of your application bid Balance – Margin Money
04/19/23 IPO 33
Benefits and Pitfalls of IPO funding
Access to a higher amount Chances of being allotted a larger number of shares Rate of interest on such loans is steeper than most other
loans in the market If the stock doesn't lists at a sufficient premium to the issue
price, investor could end up with losses over and above the interest payable
04/19/23 IPO 34
IPO funding procedure
Choosing financer (the lending bank) according to your loan requirements
Savings and a demat account with the bank Bank will apply for shares in the IPO
04/19/23 IPO 35
Dutch Auction Method of IPO Allocation
Bill Hambrecht, an American investment banker and chairman of W. R. HAMBRECHT & CO., devised the Dutch auction method of share allocation and pricing, and is known as "Open IPO" Model
Company reveals the maximum amount of shares being sold and sometimes a potential price for those shares
Investors then bid for the number of shares they want and the price they are willing to pay
Once a minimum clearing price is determined, investors who bid at least that price are awarded shares
04/19/23 IPO 36
Co XYZ wants to let 100 shares in market
04/19/23 IPO 37
Investor No. of Shares Applied for Bid Price Per Share (Rs.)
A 15 500
B 30 480
C 25 470
D 35 465
E 20 462
Benefits
Minimization in "Spike" or "Pop“ Small investor participation Role of investment banks
04/19/23 IPO 38
Shortcomings
Lack of information to small investors Mispricing Minimum Price Spike
E.g. Google Inc
04/19/23 IPO 39
IPO Listings on Private Exchange
Oaktree Capital Management LLC, which raised $ 800 million by selling a 15% stake through GS TRuE
American companies raised $ 221 billion last year by listing on private exchanges
This segment of securities market has touched $ 1 trillion
04/19/23 IPO 40
Individual or retail investors Goldman Sachs exchange is open only to institutional
investors with assets of more than $ 100 million
04/19/23 IPO 41
Why Private Exchanges????
Stocks of companies that trade in public exchanges need to be registered with Securities and Exchange Commission (SEC)
Numerous Disclosures
04/19/23 IPO 42
04/19/23 IPO 43
04/19/23 IPO 44
NELSON JACOB
07D 1836
BBM A