session 2-ipo building

8/3/2019 Session 2-IPO Building

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IPO AND BOOKBUILDING PROCESS


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CONTENTS

Importance of IPOProcess of Book Building IPO

Participants of Book Building IPO

Market Categorization

IPO and FPO-Significance and Timing

Equity and DerivativeClassification of Derivatives

Green Shoe Options

Red Herring Prospectus

Grey Market


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IMPORTANCE OF IPO

Most popular and coveted process all over the globeCompanies float their IPOs in primary market.

Final price of the IPO gets discovered only after the biddingprocess and hence is not prefixed

Helps Companies to:-

Bolstering and diversifying equity base

Enabling cheaper access to capital

Exposure and prestige

Attracting and retaining the best management and employees

Facilitating acquisitions

Creating multiple financing opportunities: equity, convertible debt,cheaper bank loans, etc.

Increased liquidity for equity holderP K C


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BOOK BUILDING AND THE PROCESS

Initial Public Offerings are issued to the primary market in variousways among which the most popular one is through book buildingprocess. This process utilizes the market forces for pricediscovery of the IPO.

According to the Book building method, the IPO issuing companydoesn't fix the price in advance, rather gives a price band to theinvestors within which they are entitled to bid.The investors, in turn, bid for the same by stating the quantity aswell as the price of the IPO shares at which they are interested to

purchase. IPO's final price is then determined on the basis of allthe bid prices.

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BOOK BUILDING AND THE PROCESSA company issuing an IPO through book building method follows thefollowing steps:

A leading merchant banker is nominated by the IPO issuing

company for book building, known as Book-Runner.

The concerned company then announces the total number of IPO

shares that it is willing to issue along with the price range/band.Investors are then allowed to bid for these issued shares for alimited time period.

Investors place their preferences (that is, quantity and price ofIPO shares) through a broker.

Brokers place these bids/orders on behalf of their clients throughthe electronic media into an electronic book where they arestored.

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BOOK BUILDING AND THE PROCESS

These stored bids are henceforth evaluated by the merchantbanker along with the IPO issuing company on the basis ofcertain criteria such as earliness of bid, aggression of price,quality of investor and many more.

A cut-off price is then decided by accepting the lowest price atwhich all the IPO securities can be disposed off.

IPOs are then allotted to those investors whose bid prices areabove the cut-off mark until the IPO shares get exhausted.

Book building method is considered more transparent and marketdetermined than the fixed price IPOs. Here, the IPO issuing priceis not predetermined and is discovered only after the closing ofbidding method to the companies for issuing their IPOs to the

primary market all through the world.

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Primary Marketvs.Secondary Market

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MONEY MARKET-SHORT TERMCall & Notice Money

Commercial Bills

Treasury Bills

Commercial Paper

Primary

Certificate Deposit

Inter Bank Participation

Money

Market Repo Instrument

Inter Corporate Deposit

Secondary DFHI

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CAPITAL MARKET-LONG TERMPublic & Rights Issue (OTCEI)

CapitalMarket

Primary

Secondary

Overseas Offering

Private Placement

STCI

Security Exchanges

Over the Counter transactions

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MARKET CATEGORIZATIONPRIMARY MARKET

The proceeds of sales go to the issuer of the securities sold.

Financial market where enterprises issue their new shares and

bonds.

Characterized by being the only moment when the enterprisereceives money in exchange for selling its financial assets

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TYPES OF ISSUE

Types of

Issue

Public IssuePopular method of raising funds from

Public

Bonus IssuePaid as dividends in ratio to existing

members. Without extra payment

Rights Issue

Raising Additional fund to existing

members on pro rata basis

Private PlacementSale of securities to select

sophisticated investors like UTI,LIC,GIC etc.

Bought Out DealSecurities placed with merchant

bankers to sell at an appropriate time.

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MARKET CATEGORIZATIONSECONDARY MARKET

Also known as the aftermarket, where previously issuedsecurities and financial instruments such as stock, bonds,options, and futures are bought and sold.

The term "secondary market also used to refer to the market for

any used goods or assets, or an alternative use for an existingproduct or asset where the customer base is the second market.

With primary issuances of securities or financial instruments, orthe primary market, investors purchase these securities directlyfrom issuers such as corporations issuing shares in an IPO orprivate placement, or directly from the federal government in thecase of treasuries. After the initial issuance, investors canpurchase from other investors in the secondary market.

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MARKET CATEGORIZATIONSECONDARY MARKET

Secondary marketing is vital to an efficient and modern capitalmarket fixed place regularly.

As a general rule, the greater the number of investors thatparticipate in a given marketplace, and the greater thecentralization of that marketplace, the more liquid the market.

Fundamentally, secondary markets mesh the investor's

preference for liquidity (i.e., the investor's desire not to tie up hisor her money for a long period of time, in case the investor needsit to deal with unforeseen circumstances)

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IPO AND FPO-SIGNIFICANCE AND TIMING

While FPO stands for follow up public offering. It has been a

common observation that the IPOs are usually more lucrativethan FPOs.

The basic difference between the IPO and FPO is that the latterinvolves a contribution of supplementary shares subsequent aninitial public offering by the company.

An IPO, an Initial Public Offering, is the first time a company'sstock will be available to the public for purchase. A FPO, aFollow-on Public Offering, is a stock offering subsequent to theIPO.

An FPO occurs when a company that is already publically traded

needs more capital and decides to issue more shares of its stock

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EQUITY AND DERIVATIVES

Equity is an asset class which refers to shares of a company.Equity - is the share capital of a company made available for saleto the public usually with face value of Rs.10,1 or 100

Derivatives on the other hand are only contracts to be executedon a later date and derive their value from the underlying asseti.e. shares, commodities etc.

Derivatives - are contracts to buy and sell shares at a future datewithout taking delivery immediately

Derivatives are designed to manage risks which arise from themovements in market

Derivatives market allow participants to hedge, speculate and

arbitrage in the market.

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CLASSIFICATION OF DERIVATIVESFutures

Hedgers

Types andParticipants of

Derivatives

Speculators

Options

Arbitrageurs

Hedgers- Seeks to protect s the risk of loss by buying future contracts . If the

prices are likely to fall, then put optionmay be purchased. If it is likely to rise,call optionis purchasedSpeculators- enter future or options contract to make profits as a result ofprice movements. They operate in a high level of risk and are largely

responsible for market liquidity. Also provide valuable market informationArbitrageurs- simultaneously buy and sell similar instruments in different

markets obtaining risk free profits. Arbitrageurs and speculators are more orless the same

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FUTURES AND OPTIONSFUTURESA future contract is a form of forward contract which convoys anagreement to buy or sell a specific amount of a commodity or financial

instrument at a particular price on a stipulated future date. The futurecontract obligates the buyer to purchase and the seller to sell unless

the contract is sold to another before the settlement date which may

happen to take a profit or limit a loss.

They are highly uniform and well specified commitments for acommodity to be delivered.

Traded in an organized exchange with standardized terms ofcontract

Trading is usually done through brokers as hedgers are notlocated on the exchange floor.

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FUTURES AND OPTIONSOPTIONOption is a contract that confers the right , but not an obligation to theholder to buy (call option) or to sell (put option) an underlying financialinstrument at an agreed price for a specific expiry date.

Every option is either a put or call option. For every option there

is a buyer and a seller.The seller of an option is also known as an option writer.

In options contract all the rights lie with the buyer.

Hence, the seller always acquires an obligation and a buyer

always acquires a right.

The buyer pays the seller an upfront amount known as premium

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GREEN SHOE OPTIONS

A green shoe option is one of several rules regarding an Initial

Public Offering that helps a company or business to go publicA provision contained in an underwriting agreement that givesthe underwriter the right to sell investors more shares (max 15%more) than originally planned by the issuer. It would be done ifthe demand for a security issue proves higher than expected.Legally referred to as an over-allotment option.

Green shoe option deals with being able to facilitate a stockvalue to stabilize price

There are several kinds of green shoe options that underwriterscan use to make sure that the stock is priced correctly.

When a company goes public, it does so with an initial publicoffering of stock. Investors can buy in at a defined stock price, butthey often must hold the stock for a certain amount of time. Thisis called an IPO lock-up period.

Can be threatening to the company in terms of debt

coverage or value per share in the secondary market


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RED HERRING PROSPECTUS

Red Herring is a prospectus which does not have details of eitherprice or number of shares being offered or the amount of issue.This means that in case the price is not disclosed, the number ofshares and the upper and lower price bands are disclosed

On the other hand, an issuer can state the issue size and thenumber of shares are determined later.

An RHP for and FPO can be filed with the RoC without the priceband and the issuer, in such a case will notify the floor price or aprice band by way of an advertisement one day prior to theopening of the issue.

In the case of book-built issues, it is a process of price discoveryand the price cannot be determined until the bidding process is

completed

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RED HERRING PROSPECTUS

Hence, such details are not shown in the Red Herring prospectusfiled with the RoC in terms of the provisions of the CompaniesAct.

Only on completion of the bidding process, the details of the finalprice are included in the offer document. The offer document filedthereafter with ROC is called a prospectus.

Abridged Prospectus" means contains all the salient features of aprospectus. It accompanies the application form of public issues.

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GREY MARKET

IPO Grey market is an unofficial market where IPO shares arebought and sold before they become officially available fortrading on the stock exchange.

IPO Grey Market is an over-the-counter market where dealersmay execute orders for preferred customers as well as providesupport for a new issue before it is actually issued.

Grey market trading include trading (selling or buying)applications at certain amount and trading (selling orbuying) allocated shares through IPO allotment before they liston stock exchanges.

Grey market trading is usually done among the small set ofpeople who trust each other as there is no official platform or

rules define for these trading.

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GREY MARKET

Two popular terms used in IPO grey market are Grey MarketPremium' and Kostak'.

Grey market premium (or grey market price) is a premiumamount in rupees at which IPO shares are being traded in GreyMarket before they get listed in stock exchange. Grey marketpremium can be in positive or in negative based on demand and

supply of the stock.Grey Market Premiums are also attached with words Buyer' orSeller'. They tell the price either at which buyers are willing tobuy shares or the price at which sellers are willing to sell theirIPO shares.

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GREY MARKETWho Decides the Grey Market Price?

Just like stock market or commodity market trading, IPO GreyMarket Premiums are decided on basis of demand and supply

If there are more buyers than sellers the price goes up and viceversa.

There are no regulatory bodies involved in Grey Market Tradingand hence no limitations on price momentum. Grey market

premium may rise or fall suddenly. Off course there are no circuitfilters in place

How one can buy and sell in Grey Market

As it's over the counter market, there are no official people orbusiness one can approach for IPO Grey Market trading.

If somebody is interested in buying or selling IPO stocks in GreyMarket, s/he has to find a local dealer for trading.

Grey market trading is mainly active in few cities including

Cities in Gujarat, Mumbai, Delhi, Jaipur etc.


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GREY MARKET-REAL LIFEEXAMPLEExample:Mundra Port and SEZ LimitedIssue Price:Rs440 per equity share Grey Market Premium: Rs 400

(Buyers)

This means buyers are ready to buy Mundra Port shares at 440+400

= Rs 840.

SVPCL Limited

Issue Price :Rs45 per equity share Grey Market Premium: Rs -6

(Seller)

This means sellers are ready to sell SVPCL shares at the discount of Rs 6.

i.e. 45-6 = Rs 39.


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KOSTAK

Kostak (or price of application) is the premium amount in rupeesat which IPO applications are being traded in IPO Grey Market.

Usually Kostak' value is defined as the premium of a maximumlot retail application in an IPO.

Kostak price is important mostly before issue is closed forsubscription and final bidding status is available to the IPO

investors. Very few IPOs applications are traded after finalbidding status is available to the investors.

Kostak' is especially for people who do not want to take risk withIPO allotment or listing gains.

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KOSTAKExampleBGR Energy LimitedIssue Price: Rs 480 Per Equity Share(at upper band)Lot Size:14

Grey Market Premium:Rs350 to Rs 360

Kostak (Rs 100000): Rs 2500 to Rs 2600

This means BGR applications of Rs 1 lakhs are being traded inIPO

Grey Market at Rs 2500 to Rs 2600.

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GREY MARKET AND KOSTAK ANALYSISEven though the Grey Market Premium of this IPO is around

75% of the issue price, the Kostak' is just 5% of theapplication amount. This is because Grey Market traders areassuming that the issue will highly oversubscribe and therewill not be firm allotment even for retail investors who willapply full Rs 1 lakhs. They are assuming one out of twopeople will get allotment and thus Rs 2 lakh investment will

give them approximate Rs 5000 return. This way they areready to buy 1 lakh application for Rs 2500.

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Questions???

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session 2-ipo building

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