final report on ipo-654

7/28/2019 Final Report on IPO-654

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INITIAL

PUBLIC

OFFER


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Topics Covered

Executive Summary

----------------------------------------------------- 3

Introduction----------------------------------------------------------------- 4

What Is An IPO---------------------------------------------------------------- 5

Why Go Public----------------------------------------------------------------- 8

Getting In An IPO----------------------------------------------------------- 9

IPO Advantages & Disadvantages ----------------------11

Parameters To Judge An IPO----------------------------------- 14

Understanding The Role Of Intermediaries -- 16

Registration Process----------------------------------------------- 18

IPO Scams-------------------------------------------------------------------------19


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Salient Features Of IPO Scams ------------------------------26

Operational Deficiencies ---------------------------------------27

Measures To Prevent Scams ----------------------------------28

Recent IPOs------------------------------------------------------------------ 29

DEFINITIONS AND ABBREVIATIONS--------------------------- 30

Bibliography--------------------------------------------------------------- 34


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EXECUTIVE SUMMARY

As we all know IPO 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 with limitedfinance 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 also gives 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 comingyears.
http://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/India


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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 Promoter held the shares the stake holding comes

down to the extent their shares are offered to the public. In 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 inthe 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 promoter comes 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.


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What is an IPO

An IPO is the first sale of stock by a company to the public. A company can raisemoney by issuing either debt or equity. If the company has never issued equity to the public, it's

known as an IPO.

Companies fall into two broad categories: private and public.A privately held company has fewershareholders and its owners don't have to disclosemuch information about the company. Anybody can go out and incorporate a company: just put insome money, file the right legal documents and follow the reporting rules of your jurisdiction. Mostsmall businesses are privately held. But large companies can be private too. Did you know thatIKEA, Domino's Pizza and Hallmark Cards are all privately held?

It usually isn't possible to buy shares in a private company. You can approachthe owners about investing, but they're not obligated to sell you anything. Public companies, onthe other hand, have sold at least a portion of themselves to the public and trade on a stockexchange. This is why doing an IPO is also referred to as "going public."

Public companies have thousands of shareholders and are subject to strict rulesand regulations. They must have a board of directors and they must report financial informationevery quarter. In the United States, public companies report to the Securities and ExchangeCommission (SEC). In other countries, public companies are overseen by governing bodiessimilar to the SEC. From an investor's standpoint, the most exciting thing about a public companyis that the stock is traded in the open market, like any other commodity. If you have the cash, youcan invest. The CEO could hate your guts, but there's nothing he or she could do to stop you frombuying 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 companieslooking to become publicly traded. In an IPO, the issuer obtains theassistance of an underwriting firm, which helps it determine what typeof security to issue (common or preferred), best offering price and timeto bring it to market. IPOs can be a risky investment. For the individualinvestor, it is tough to predict what the stock will do on its initial day oftrading and in the near future since there is often little historical datawith which to analyze the company. Also, most IPOs are ofcompanies going through a transitory growth period, and they aretherefore subject to additional uncertainty regarding their future value.

Primary and Secondary markets In the primary market securities are issued to the public and the proceeds go tothe issuing company. Secondary market is term used for stock exchanges, where stocks arebought and sold after they are issued to the public.

PRIMARY MARKET


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The first time that a companys shares are issued to the public, it is by a processcalled the initial public offering (IPO). In an IPO the company offloads a certain percentage of itstotal shares to the public at a certain price.

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

method called BOOK BUILDIN PROCESS, where the offer price is placed in a band or a rangewith the highest and the lowest value (refer to the newspaper clipping on the page). The publiccan bid for the shares at any price in the band specified. Once the bids come in, the companyevaluates all the bids and decides on an offer price in that range. After the offer price is fixed, thecompany allots its shares to the people who had applied for its shares or returns them theirmoney.

SECONDRY MARKET

Once the offer price is fixed and the shares are issued to the people, stockexchanges facilitate the trading of shares for the general public. Once a stock is listed on anexchange, people can start trading in its shares. In a stock exchange the existing shareholderssell their shares to anyone who is willing to buy them at a price agreeable to both parties.Individuals cannot buy or sell shares in a stock exchange directly; they have to execute theirtransaction through authorized members of the stock exchange who are also called STOCK

BROKERS.


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Why Go Public?

Basically, going public (or participating in an "initial publicoffering" or IPO) is the process in which a business owned by one orseveral individuals is converted into a business owned by many. Itinvolves the offering of part ownership of the company to the publicthrough the sale of debt or more commonly, equity securities (stock).

Going public raises cash and usually a lot of it. Beingpublicly traded also opens many financial doors:


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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 considerableamount of prestige. In the past, only private companies with strongfundamentals could qualify for an IPO and it wasn't easy to get listed.

The internet boom changed all this. Firms no longer

needed strong financials and a solid history to go public. Instead, IPOswere done by smaller startups seeking to expand their businesses.There's nothing wrong with wanting to expand, but most of these firmshad never made a profit and didn't plan on being profitable any timesoon. Founded on venture capital funding, they spent like Texanstrying to generate enough excitement to make it to the market beforeburning through all their cash. In cases like this, companies might besuspected of doing an IPO just to make the founders rich. This is knownas an exit strategy, implying that there's no desire to stick around andcreate value for shareholders. The IPO then becomes the end of theroad rather than the beginning.

How can this happen? Remember: an IPO is just sellingstock. It's all about the sales job. If you can convince people to buystock in your company, you can raise a lot of money.

Getting In On an IPO

The Underwriting Process

Getting a piece of a hot IPO is very difficult, if notimpossible. To understand why, we need to know how an IPO is done, aprocess known as underwriting.

When a company wants to go public, the first thing it doesis hire an investment bank. A company could theoretically sell its


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shares on its own, but realistically, an investment bank is required - it'sjust the way Wall Street works. Underwriting is the process of raisingmoney by either debt or equity (in this case we are referring to equity).You can think of underwriters as middlemen between companies andthe investing public. The biggest underwriters are Goldman Sachs,

Merrill Lynch, Credit Suisse First Boston, Lehman Brothers and MorganStanley.

The company and the investment bank will first meet tonegotiate the deal. Items usually discussed include the amount ofmoney a company will raise, the type of securities to be issued and allthe details in the underwriting agreement. The deal can be structuredin a variety of ways. For example, in a firm commitment, theunderwriter guarantees that a certain amount will be raised by buyingthe entire offer and then reselling to the public. In a best effortsagreement, however, the underwriter sells securities for the company

but doesn't guarantee the amount raised. Also, investment banks arehesitant to shoulder all the risk of an offering. Instead, they form asyndicate of underwriters. One underwriter leads the syndicate and theothers sell a part of the issue.

Once all sides agree to a deal, the investment bank putstogether a registration statement to be filed with the SEC. Thisdocument contains information about the offering as well as companyinfo such as financial statements, management background, any legalproblems, where the money is to be used and insider holdings. TheSEC then requires a cooling off period, in which they investigate and

make sure all material information has been disclosed. Once the SECapproves the offering, a date (the effective date) is set when the stockwill be offered to the public.

During the cooling off period the underwriter puts togetherwhat is known as the red herring. This is an initial prospectuscontaining all the information about the company except for the offerprice and the effective date, which aren't known at that time. With thered herring in hand, the underwriter and company attempt to hype andbuild up interest for the issue. They go on a road show - also known asthe "dog and pony show" - where the big institutional investors are

courted.

As the effective date approaches, the underwriter andcompany sit down and decide on the price. This isn't an easy decision:it depends on the company, the success of the road show and, mostimportantly, current market conditions. Of course, it's in both parties'interest to get as much as possible.


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

As you can see, the road to an IPO is a long andcomplicated one. You may have noticed that individual investors aren't

involved until the very end. This is because small investors aren't thetarget market. They don't have the cash and, therefore, hold littleinterest for the underwriters. If underwriters think an IPO will besuccessful, they'll usually pad the pockets of their favorite institutionalclient 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 theinvestment banks that is part of the underwriting syndicate. But don'texpect to open an account with $1,000 and be showered with anallocation. You need to be a frequently trading client with a largeaccount to get in on a hot IPO.

Bottom line, your chances of getting early shares in an IPO are slim tonone unless you're on the inside. If you do get shares, it's probably because nobody elsewants them. Granted, there are exceptions to every rule and it would be incorrect for us to

say that it's impossible. Just keep in mind that the probability isn't high if you are a small

investor.

IPO ADVANTAGES ANDDISADVANTAGES

The decision to take a company public in the form of aninitial public offering (IPO) should not be considered lightly. There areseveral advantages and disadvantages to being a public company,which should thoroughly be considered. This memorandum will discuss


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the advantages and disadvantages of conducting an IPO and willbriefly discuss the steps to be taken to register an offering for sale tothe public. The purpose of this memorandum is to provide a thumbnailsketch of the process. The reader should understand that the processis very time consuming and complicated and companies should

undertake this process only after serious consideration of theadvantages 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 forvarious corporate purposes such as working capital, acquisitions,

research and development, marketing, and expanding plant andequipment.

Liquidity

Once shares of a company are traded on a public exchange,those shares have a market value and can be resold. This allowsa company to attract and retain employees by offering stockincentive packages to those employees. Moreover, it alsoprovides investors in the company the option to trade theirshares thus enhancing investor confidence.

Increased Prestige

Public companies often are better known and more visible thanprivate companies, this enables them to obtain a larger marketfor their goods or services. Public companies are able to haveaccess to larger pools of capital as well as different types ofcapital.

Valuation

Public trading of a company's shares sets a value for thecompany that is set by the public market and not through moresubjective standards set by a private valuator. This is helpful for


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a company that is looking for a merger or acquisition. It alsoallows the shareholders to know the value of the shares.

Increased wealth

The founders of the company often have the sense of increasedwealth as a result of the IPO. Prior to the IPO these shares wereilliquid and had a more subjective price. These shares now havean ascertainable price and after any lockup period these sharesmay be sold to the public, subject to limitations of federal andstate securities laws.

Disadvantages of going Public

Time and Expense

Conducting an IPO is time consuming and expensive. Asuccessful IPO can take up to a year or more to complete and acompany can expect to spend several hundreds of thousands ofdollars on attorneys, accountants, and printers. In addition, theunderwriter's fees can range from 3% to 10% of the value of theoffering. Due to the time and expense of preparation of the IPO,many companies simply cannot afford the time or spare theexpense of preparing the IPO.

Disclosure

The SEC disclosure rules are very extensive. Once a company isa reporting company it must provide information regardingcompensation of senior management, transactions with partiesrelated to the company, conflicts of interest, competitivepositions, how the company intends to develop future products,material contracts, and lawsuits. In addition, once the offeringstatement is effective, a company will be required to makefinancial disclosures required by the Securities and Exchange Actof 1934. The 1934 Act requires public companies to file quarterly

statements containing unaudited financial statements andaudited financial statements annually. These statements mustalso contain updated information regarding nonfinancial matterssimilar to information provided in the initial registrationstatement. This usually entails retaining lawyers and auditors toprepare these quarterly and annual statements. In addition, acompany must report certain material events as they arise. This


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information is available to investors, employees, andcompetitors.

Decisions based upon Stock Price

Management's decisions may be effected by the market price ofthe shares and the feeling that they must get market recognitionfor the company's stock.

Regulatory Review

The Company will be open to review by the SEC to ensure thatthe company is making the appropriate filings with all relevantdisclosures.

Falling Stock Price

If the shares of the company's stock fall, the company may losemarket confidence, decreased valuation of the company mayeffect lines of credits, secondary offering pricing, the company'sability to maintain employees, and the personal wealth ofinsiders and investors.

Vulnerability

If a large portion of the company's 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 ofshareholders being upset with management or corporate raiderslooking for an opportunity. Defending a hostile bid can be bothexpensive and time consuming. Once a company has weighedthe advantages and disadvantages of being a public company, ifit decides that it would like to conduct an IPO it will have toretain a lead

Parameters to judge an IPO


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Good investing principles demand that you study the

minutes of details prior to investing in an IPO. Here are some

parameters you should evaluate:-

PromotersIs 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

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 ahigher 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 theseassumptions or expectations sound feasible.


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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 stockexchanges where the company will be listing itself.

Understanding the role of intermediaries


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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 disclosesthe 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 (Merchant Bankers) 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 ofinstruments 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


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Company.

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 actionfor 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.


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What is the Registration Process?

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 pertainingto:

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 it's 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 the public investors stock.

IPO SCAMS

YES BANK Ltd. CASE


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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). Ofthe 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 MsPanchal and Sugandh would have otherwise gone to genuine retail

applicants.

The IPO of YBL opened on June 15, 2005 and its shares

were listed on the BSE and the NSE on July 12, 2005.

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 Panchalwould have had to apply for crores of shares involving many crores of

rupees in application money.

However, Ms Panchal's 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 notreceive 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 dematerialised account data

furnished by NSDL, of the above 6,315 entities as many as 6,221


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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 sharesper applicant while being categorised as retail 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 tantamounts 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.

SEBI unearths another IPO scam in IDFC SEBI on Thursday 12th Jan 06 unearthed yet another abuseof IPO norms in the IDFC's initial public offering (IPO) where a fewinvestors opened over 14,000 dematerialised accounts to corner largenumber of shares of the company. This is the second such incident,after a similar such violations were detected in the YES Bank's IPO.


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SEBI said in IDFC's IPO too four investors opened as manyas 14,807 dematerialized accounts with Karvy-DP and "strangely", allthese account holders have their bank accounts with Bharat OverseasBank Ltd, Ahmedabad. SEBI order said: "further probe is required forexamining the systemic fault, if any, of the registrar Karvy-RTI i.e.

Karvy Computer Shares P Ltd, and the lead managers Kotak MahindraCapital Company Ltd, DSP Merrill Lynch Ltd and SBI Capital Markets Ltdin identifying and weeding out the benami applications."

Reference is being made to the RBI to examine the role ofBhOB, HDFC Bank, Indian Overseas Bank, ING Vysya Bank and VijayaBank in opening the bank accounts of these benami entities andapparently funding them.

According to SEBI, Karvy-DP, which was also named in theYES Bank IPO case, has not adhered to `Know-your-Client' norms, as

per the reports of inspection submitted by NSDL and CDSL on the DP.Also, some of the documents collected by CDSL during the course ofinspection show that Karvy-DP has obtained letters purportedly issuedby the banks' concerned such as BhOB as proof of identity and proof ofaddress of the person for the purpose of opening dematerialisedaccounts.

"It is seen that one branch manager has on the same datesigned as authorized signatory of different branches of the bank. Thisraises a doubt as to the authenticity of the bank documents obtainedby Karvy-DP for opening dematerialised accounts," the SEBI order by

its Whole-time Director Mr G. Anantharaman said. SEBI also bannedfour investors (in whose names the multiple accounts were opened)viz., Ms Roopalben Nareshbhai Panchal (who was also named in theYES Bank IPO scam), Sugandh Estates & Investments P Ltd, MrPurshottam Ghanshyam Budhwani and Mr Manojdev Seksaria fromdoing any kind of transactions in the securities market, till furtherdirections.

Another 35 firms were also barred from participating in the IPOs in thefuture, till further orders, the SEBI order said.

MARUTI Case

Fictitious Demat A/cs opened in 2003 itself

`First IPO in which key players took part was Maruti'


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The Charges

DPs have been accused by SEBI of not fully implementing

the `maker-checker' concept, data entry errors, scanning of officials'

signatures, and appointing themselves as the second holder.

Description

Some of the demat accounts that were used to manipulate

allotments in the initial public offer of Yes Bank and IDFC were opened

during 2003, and not in the last year as was earlier believed. The first

IPO in which the key operators have participated was that of Maruti

Udyog Ltd, in June 2003, though the numbers of fictitious demat

accounts were not very high then, the interim order from Securities

and Exchange Board of India has said.

SEBI's investigations have now pegged that a "total of 24

key operators have indulged in abusive practices in respect of 21

IPOs".

The evidence against Karvy DP has stemmed from the fact

that almost all the demat accounts which served as conduits for these

master account holders were held with Karvy DP, according to the

order. These 24 operators have 34 demat accounts; of which 16 demat

accounts are held with Karvy DP.

Due Diligence Not Taken

The market regulator's investigations have pointed out

that, while opening demat accounts the depository participants were

not exercising due diligence. Persons involved in the scam have

collected proofs of identity and addresses from groups of persons and

used this to open bogus bank accounts.

Inter-linkages

The master account holders were found to have made off-

market transfer of the IPO shares to various common groups of entities

who appear to be their principals. It is seen that some of the master

account holders have also made off-market transfers amongst


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themselves. This shows that there are inter-linkages amongst the

master account holders as well as between groups of master account

holders and their principals, the order said.

Depository participants have been accused by SEBI of not

fully implementing the `maker-checker' concept, data entry errors,scanning of officials' signatures, and appointing themselves as the

second holder.

With some of the DPs also acting as brokers, stock

exchanges have been advised to examine the role and involvement of

brokers and sub-brokers by way of participation in IPOs either directly

or indirectly and their dealings in the shares subsequent to listing.

Exchanges are to submit a report on this within a month.

SEBI bars Karvy, 23 other entitiesAlleged involvement in IPO allotment scam

In the dock

Ban on several entities including HDFC Bank, IDBI Bank,

ING Vysya Bank and Motilal Oswal Securities from opening fresh demat

accounts.

The regulator also pulled up NSDL and CDSL for `grave management

lapses'.

Description

SEBI on Thursday 27th April 2006 came down heavily on

stock market intermediaries by banning several entities including

Karvy group of companies, Pratik DP and Indiabulls Securities, for their

alleged involvement in the IPO allotment scam. SEBI has also barred

several entities including HDFC Bank, IDBI Bank, ING Vysya Bank andMotilal Oswal Securities from opening fresh demat accounts.

In an interim order issued today after the second round of

investigations, the capital market regulator has banned 24 entities

from buying and selling securities till further orders.


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Common address

SEBI also said 15 Depository Participants at National

Securities Depository Ltd (NSDL) including Kotak Securities, Citibank,

ICICI Bank, Bank Paribas and IndusInd Bank had more than 500 demat

account holders sharing the common address.

It asked NSDL to conduct inspection on whether all the

demat account holders are genuine. NSDL has also been asked to

check whether the Know Your Customer norms of SEBI have been duly

complied with and take action against suspect accounts on verification.

Analysts felt the SEBI order was akin to capital punishment

for the entities involved in the securities market scam.

"In view of the detailed findings, Karvy DP and Pratik DP

prima facie do not appear to be fit to deal in securities market as SEBI-

registered intermediaries. Appropriate quasi-judicial proceedings are

being initiated against the two DPs," the 252-page order issued late in

the evening said.

SEBI said the other business groups of Karvy appear to

have acted in concert in the gamut of IPO manipulations. "I further

direct Karvy Stock Broking Ld, Karvy Computer Share PVT Ltd, Karvy

Investor Services and Karvy Consultants not to undertake freshbusiness as registrar to the issue and share transfer agent," Mr G

Anantharaman, Whole-Time Member, SEBI, said.

NSDL, CDSL pulled up

The regulator also pulled up NSDL and CDSL for `grave

management lapses'. The findings revealed "contributory negligence"

on the part of the depositories and their managements.

"The promoters of NSDL and CDSL are directed to take allappropriate actions including revamping of management which clearly

has allowed matters to come to such a sorry pass," the order said.

The order, to be treated as a `show-cause notice', has

given 15 days time to the parties named for filing objections.


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IPO scam: HDFC Bank, 2 others fined

The Reserve Bank of India on Monday 27th Feb 2006 fined

HDFC Bank, IDBI and ING Vysya Bank for violation of Know YourCustomer norms and other irregularities in relation to the recent IPO

scam.

HDFC Bank has been slapped with the highest penalty of

Rs 25 lakh; ING Vysya Bank - Rs 10 lakh and IDBI Ltd Rs 5 lakh.

This is the second time HDFC Bank has been fined for

violation of KYC norms. In January, the bank was imposed a penalty of

Rs 5 lakh.

According to an RBI release, these banks have been fined,

"for violation of regulations on KYC norms, for breach of prudent

banking practices and for not adhering to its directives/guidelines

relating to loans against shares/ IPO."

Salient Features of IPO scam

Modus operandi


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Current account opened in the name of multiple companies on

the same date in the same branch of a bank

Sole person authorized to operate all these accounts who was

also a Director in all the companies

Identity disguised by using different spelling for the same name

in different companies

Multiple accounts opened in different banks by the same group

of joint account holders

Huge funds transferred from companies accounts to the

individuals account which was invested in IPOs

Loans/ overdrafts got sanctioned in multiple names to bypass

limit imposed by RBI

Loans sanctioned to brokers violating guidelines

Multiple DP accounts opened to facilitate investment in IPO

Large number of cheques for the same value issued from a single

account on the same day

Multiple large value credits received by way of transfer from

other banks

Several accounts opened for funding the IPO on the request of

brokers, some were in fictitious names

Refunds received got credited in brokers a/cs

Margin money provided by brokers through single cheque

Nexus between merchant banker, brokers and banks suspected

Operational deficiencies

Factors that facilitated the scam


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P a g e | 2

Photographs not obtained

Proper introductions not obtained

Signatures not taken in the presence of bank official

Failure to independently verify the identity and address of all

joint account holders

Directors identity/ address not verified

Customer Due Diligence done by a subsidiary

Objective of large number of jt. account holders opening account

not ascertained

Purpose of relationship not clearly established

Customer profiling based on risk classification not done

Poor monitoring and reporting system due to inadequate

appreciation of ML issues

Absence of investigation about use and sources of funds

Unsatisfactory training of personnel

No system of fixing accountability of bank officials responsible

for opening of accounts and complying with KYC procedures

Ineffective monitoring and control

Measures to prevent scams

An analysis of IPO scam clearly brings out the laxity on the part

of banks to scrupulously implement the KYC/AML guidelines


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P a g e | 2

issued from time to time. It also raises serious concerns about

the integrity of the systems & systemic risks.

While scams may still happen despite best of preventive

measures, it should not undermine the efforts being made to

insulate the financial sector from money laundering. It is going tobe a long fight with constant need to improve and innovate new

strategies.

It is important to understand that the risks banks run as a result

of non-compliance with regulatory and statutory guidelines can

cause severe reputational and financial damage to individual

banks and the Indian banking system as a whole

Need for comprehensive operational framework implementing

important aspects of KYC instructions e.g.

Documentation procedure for opening of all types of customer

accounts;

Clarity in understanding of risk classification of accounts and

proper customer profiling

Ongoing monitoring of medium and high risk accounts

Enhanced due diligence in respect of accounts with beneficial

ownership, non-face to face transactions, group companies, high

risk businesses and wire transfers etc.

Prompt reporting of cash and suspicious transactions to Principal

Officer by branches

An effective audit machinery

Good understanding of regulatory and statutory prescriptions in

letter and spirit

Clear demarcation of duties and responsibilities

Violations to be dealt with sternly

Recent IPOs


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IPO Rating Offer Price Open Date Close Date

September

Richa Knits 30 13 Sep 2006 19 Sep 2006

Gwalior Chem 71-85 11 Sep 2006 14 Sep 2006

Usher Agro 15 05 Sep 2006 11 Sep 2006

Atlanta 150 01 Sep 2006 07 Sep 2006

HOV Services 200-240 04 Sep 2006 07 Sep 2006

Action Const 110-130 01 Sep 2006 07 Sep 2006

Deep Industries 36 29 Aug 2006 04 Sep 2006

KEW Industries 30 28 Aug 2006 01 Sep 2006

AugustVoltamp Trans 345 24 Aug 2006 29 Aug 2006

Tech Mahindra 365 01 Aug 2006 04 Aug 2006

GMR Infra 210 31 Jul 2006 04 Aug 2006

JulyShirdi Ind 67-78 29 Jun 2006 08 Jul 2006

JuneVigneshwara 110-124 07 Jun 2006 16 Jun 2006

Bluplast Ind 32 05 Jun 2006 09 Jun 2006

Allcargo Global 675 01 Jun 2006 06 Jun 2006

Prime Focus 417 25 May 2006 03 Jun 2006

DEFINITIONS AND ABBREVIATIONS
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I. CONVENTIONAL/ GENERAL TERMS

Term

Description

AGM

Annual General Meeting of Pratibha Industries Limited

Articles / Articles of

Association / AOA

Articles of Association of Pratibha Industries Limited

Companies Act / Act The Companies Act, 1956 as amended from time to time

Depository A Company formed and registered under the Companies Act, 1956

and which has been granted a certificate of registration under sub-section (1A) of Section 12 of the Securities and Exchange Board of

India Act, 1992

Depositories Act The Depositories Act, 1996, as amended from time to time

Depository Participant A depository participant registered as such under sub-section (1A) of

Section 12 of the Securities and Exchange Board of India Act, 1992

FEMA Foreign Exchange Management Act, 1999, as amended from time totime, and the regulations framed there under

FDI Foreign Direct Investment

FII Foreign Institutional Investor [as defined under FEMA (Transfer or

Issue of Security by a Person Resident Outside India) Regulations,

2000] registered with SEBI.

Financial year / Fiscal

year / FY

Period of twelve months ended March 31 of that particular year

Indian GAAP Generally accepted accounting principles in India

I.T. Act The Income-Tax Act, 1961, as amended from time to time

Memorandum / MOA Memorandum of Association of Pratibha Industries Limited

NRI / Non-Resident

Indian

A person resident outside India who is a citizen of India or is person

of Indian origin as defined in Foreign Exchange Management(Deposit) Regulations, 2000]

ROC Registrar of Companies, Maharashtra situated at 100, Everest

Building, Marine Lines, Mumbai 400002

RBI Reserve Bank of India

SCRR Securities Contracts (Regulation) Rules, 1957, as amended from

time to time.

SEBI The Securities and Exchange Board of India, constituted under the

SEBI Act, 1992

SEBI Act Securities and Exchange Board of India Act, 1992 as amended from

time to time

SEBI/(DIP) Guidelines SEBI (Disclosure and Investor Protection) Guidelines, 2000, as

amended, including instructions and clarifications issued by SEBIfrom time to time

II.OFFERING RELATED TERMS


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P a g e | 3

Allotment Issue of Equity Shares of the Company pursuant to the Public Issue

to the successful Bidders.

Allottee The successful Bidder to whom the Equity Shares are being issued.

Bankers to the Issue ICICI Bank Limited, Standard Chartered Bank, Deutsche Bank,Kotak Mahindra Bank Limited

Bid An indication to make an offer made during the Bidding Period by aprospective investor to subscribe to Equity Shares of the Company at

a price within the Price Band, including all revisions and

modifications thereto

Bid Price / Bid Amount The amount equal to highest value of the optional Bids indicated in

the Bid cum Application Form and payable by the Bidder on

submission of the Bid in the Issue

Bid Opening Dates / Issue

Opening Date

The date on which the Syndicate Members shall start accepting Bids

for the Issue, which shall be the date notified in a widely circulated

English national newspaper, a Hindi national newspaper and a

Marathi regional newspaper

Bid Closing Date / Issue

Closing Date

The date after which the Syndicate Members will not accept any

Bids for the Issue, which shall be notified in a widely circulated

English national newspaper, a Hindi national newspaper and a

Marathi regional newspaper

Bid cum Application

Form

The Form in terms of which the Bidder shall make an offer to

purchase the Equity Shares of the Company and which will be

considered as the application for allotment of the Equity Shares in

terms of this Red Herring Prospectus

Bidder Any prospective investor who makes a Bid pursuant to the terms of

this Red Herring Prospectus

Bidding Period / Issue

Period

The period between the Bid/Issue Opening Date and the Bid/Issue

Closing Date inclusive of both days and during which prospective

Bidders can submit their Bids

Book Building Process Book building route as provided under Chapter XI of the SEBI

Guidelines, in terms of which, this Issue is being made

BRLM Book Running Lead Manager to the Issue, in this case being Vivro

Financial Services Private Limited

CAN / Confirmation of

Allocation Note

The note or advice or intimation of allocation of Equity Shares sent

to the Bidders who have been allocated Equity Shares in accordance

with the Book Building Process

Cap Price The higher end of the Price Band, above which the Issue Price will

not be finalized and above which no bids will be accepted

Cut-off price Cut-off price refers to any price within the Price Band. A B id

submitted at Cut-off is a valid Bid at all price levels within the Price

Band

Designated Stock

Exchange

Bombay Stock Exchange Limited

Designated Date The date on which the funds are t ransferred from the Escrow

Account of the Company to the Public Issue Account after the

Prospectus is filed with the ROC, following which the Board of

Directors shall allot Equity Shares to successful bidders

Red Herring Prospectus This Red Herring Prospectus issued in accordance with Section60B of the Companies Act, which does not have complete


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particulars on the price at which the Equity Shares are offered and

size of the Issue. It carries the same obligations as are applicable in

case of a Prospectus and will be filed with ROC at least three days

before the bid/offer opening date. It will become a Prospectus after

filing with ROC after the pricing

Equity Shares Equity Shares of the Company of the face value Rs. 10 each, unless

otherwise specified in the context thereofEscrow Account Account opened with the Escrow Collection Bank(s) and in whose

favour the Bidder will issue cheques or drafts in respect of the Bid

Amount and refunds (if any) of the amount collected to the Bidders

Escrow Agreement Agreement entered into amongst the Company, the Registrar, theEscrow Collection Bank(s), the Syndicate Members and the BRLMs

for collection of the Bid Amounts and refunds (if any) of the

amounts collected to the Bidders

Escrow Collection

Bank(s)

ICICI Bank Limited, Standard Chartered Bank, Deutsche Bank,

Kotak Mahindra Bank Limited

First Bidder The Bidder whose name appears first in the Bid cum Application

Form or Revision Form

Floor Price The lower end of the Price Band, below which the Issue Price will

not be finalized and below which no Bids will be accepted

Fresh Issue / Issue /Public Issue / Offer

Public Issue of 42,85,000 new Equity Shares of Rs. 10/- each forcash at the Issue Price of Rs. [] per equity share aggregating to Rs.

[] Lakhs by the Company in terms of this Red Herring Prospectus

Issue Account Account opened with the Banker to the issue to receive monies from

the Escrow Accounts on the Designated Date

Issuer Pratibha Industries Limited

Issue Price The final price at which Equity Shares will be issued and allotted in

terms of this Red Herring Prospectus, as determined by the

Company in consultation with the BRLMs, on the Pricing Date

Margin Amount The amount paid by the Bidder at the time of submission of his/her

Bid, being 10% to 100% of the Bid Amount

Members of the Syndicate The BRLM and the Syndicate Members

Non-Institutional Bidders All Bidders that are not Qualified Institutional Buyers, or Retail

Individual Bidders and who have Bid for Equity shares for an

amount more than Rs.1,00,000.

Non-Institutional Portion The portion of the Issue being a minimum of 5,78,475 Equity Shares

of Rs. 10/- each available for allocation to Non-Institutional Bidders

Pay-in-date The last date specified in the CAN sent to the Bidders

Pay-in-Period This term means

(i) With respect to Bidders whose Margin Amount is 100% of the

Bid Amount, the period commencing on the Bid/issue Opening

Date and extending until the Bid/issue Closing Date, and(ii) With respect to Bidders whose Margin Amount is less than100% of the Bid Amount, the period commencing on the

Bid/issue Opening Date and extending until the closure of the

Pay-in-Date

Price Band The Price band of a minimum price (Floor Price) of Rs.100/- and the

maximum price (Cap Price) of Rs. 120/- and includes revision

thereof

Pricing Date The date on which the Company in consultation with the BRLM


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finalizes the Issue Price

Promoters Mr. Ajit B. Kulkarni, Mrs. Usha B. Kulkarni, Mr. Datta B. Kulkarni,

Mr. Vinayak B. Kulkarni, Mr. Ramdas B. Kulkarni and Pratibha

Shareholding Private Limited

Prospectus The Prospectus filed with the ROC containing, inter alia, the IssuePrice that is determined at the end of the Book Building Process, the

size of the Issue and certain other informationPublic Issue Account In accordance with Section 73 of the Companies Act, 1956, an

account opened with the Banker(s) to the Issue to receive monies

from the Escrow Account for the Issue on the Designated Date

QIB Portion The portion of the net issue being not less than mandatory 19,28,250

Equity Shares of Rs. 10 each at the Issue Price, available for

allocation to QIBs

Qualified Institutional

Buyers/ QIBs

Public Financial Institutions as specified in Section 4A of the

Companies Act, Scheduled Commercial Banks, Mutual Funds

registered with SEBI, Foreign Institutional Investors registered with

SEBI, Multilateral And Bilateral Development Financial Institutions,

Venture Capital Funds registered with SEBI, Foreign Venture

Capital Investors registered with SEBI, State Industrial DevelopmentCorporations, Insurance Companies registered with the Insurance

Regulatory And Development Authority (IRDA), Provident Funds

with a minimum corpus of Rs.2500 Lakhs and Pension Funds with a

minimum corpus of Rs. 2500 Lakhs.

Retail Individual Bidders Individual Bidders (including HUFs and NRIs) who have not Bid for

an amount in excess of Rs.1,00,000/- in any of the bidding options in

the Issue.

Retail Portion The portion of the Net Issue being a minimum of 13,49,775 Equity

Shares of Rs.10 each available for allocation to Retail Individual

Bidder(s)

Registrar/ Registrars to

the Issue

Intime Spectrum Registry Limited

Revision Form The Form used by the Bidders to modify the quantity of Equity

Shares or the Bid Price in any of their Bid cum Application Forms orany previous Revision Form(s).

Syndicate Agreement The agreement to be entered into among the Company and the

members of the Syndicate in relation to the collection of Bids in this

Issue

Syndicate Members Intermediaries registered with SEBI and eligible to act as

underwriters. Syndicate Members are appointed by the BRLM and

include the BRLM

Syndicate The Syndicate Members collectively

TRS or Transaction

Registration Slip

The slip or document issued by the Syndicate Members to the

Bidder as proof of registration of the Bid

Underwriters The BRLM and Syndicate Members

Underwriting Agreement The Agreement among the BRLM, the Syndicate Members and the

Company to be entered into on or after the Pricing Date


35/35

Bibliography

Web Based

www.investopedia.com

www.sebi.com

www.vivro.net

www.intimespectrum.com

www.pratibhagroup.com

Book Based

Share Market Book By Tarun Shah

IPO Decision By Jason Draho

Industry Based

PRATIBHA GROUP OF COMPANIES

final report on ipo-654

Documents