Try to understand the tree chart given below;

Whenever a company needs funds, it finds generally two ways to raise funds i.e. to raise debt and second is to raise equity.

No, it is wrong, SEBI has laid down eligibility norms for accessing the primary market through IPO.

Yes, SEBI (DIP) guidelines have provided certain exemptions from the eligibility norms. The following are eligible for exemption from entry norms.

•  Private Sector Banks

(b) Public sector banks

(c) An infrastructure company whose project has been appraised by a PFI (Private Finance Initiative) or IDFC or IL&FS or a bank which was earlier a PFI and not less than 5% of the project cost is financed by any of these institutions.

There is no eligibility norms for a listed company making a Right Issue as it is an after made to the existing shareholders who are expected to know about their company.

After three months, observation letter will be invalid; thereafter company can not open the issue for public subscription.

The primary issuances are governed by SEBI in terms of SEBI (Disclosures and Investor protection) guidelines. SEBI framed its DIP guidelines in 1992. Many amendments have been carried out in the same in line with the market dynamics and requirements. In 2000, SEBI issued “Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000” which is a compilation of all circulars organized in chapter forms. These guidelines and amendments thereon are issued by SEBI India under section 11 of the Securities and Exchange Board of India Act, 1992. SEBI (Disclosure and investor protection) guidelines 2000 are in short called DIP guidelines. It provides a comprehensive framework for issuances by the companies.

To gain full knowledge regarding the Draft Offer Document, you should know the differences among Offer Document, Draft Offer Document, RHP, and an Abridged Prospectus.

“Abridged Prospectus” means the memorandum as prescribed in Form 2A under sub-section (3) of section 56 of the Companies Act, 1956. It contains all the salient features of a prospectus. It accompanies the application form of public issues.

To get a clear picture about it, you should know the intermediaries in an Issue and role of a lead manager in Pre and Post Issue.

But the merchant bankers shall be responsible for ensuring that these agencies appointed by them fulfill their functions and enable it to discharge this responsibility through suitable agreements with the Company .

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.

The Book Runner(s) may appoint those intermediaries who are registered with the Board and who are permitted to carry on activity as an ‘Underwriter' as syndicate members. The syndicate members are mainly appointed to collect the entire bid forms of the issue.

It is available on our site (www.smcindiaonline.com). In addition to this, SEBI brings out a monthly bulletin that is available at bookstores. A digital version of the same is available on the SEBI website under the “News/Publications” section. The Bulletin contains all the relevant historical figures of intermediary issue and intermediary particulars during the given period placed against historical figures.

Lets have an Example.

No at all… As per Clause 8.8.1, Subscription list for public issues shall be kept open for at least 3 working days and not more than 10 working days. In case of Book built issues, the minimum and maximum period for which bidding will be open is 3 – 7 working days extendable by 3 days in case of a revision in the price band. The public issue made by an infrastructure company, satisfying the requirements in Clause 2.4.1 (iii) of Chapter II may be kept open for a maximum period of 21 working days. As per clause 8.8.2., Rights issues shall be kept open for at least 30 days and not more than 60 days.

The issue of Sunil Hitech Ltd is called “Fixed Price Offer” and the issue of Suzlon Ltd comes under “Price discover through book building Process”. The offer price range of Suzlon Energy Ltd is called Price Band. But always price brand of the issue does not refer to the issue under book building, you have to confirm whether issue is under book building or fixed pricing offer through Red Herring Prospectus. You can see practical example of Sakuma Exports Limited.

An issuer company is allowed to freely price the issue. The basis of issue price is disclosed in the offer document where the issuer discloses in detail about the qualitative and quantitative factors justifying the issue price. The Issuer company can mention a price band of 20% (cap in the price band should not be more than 20% of the floor price) in the Draft offer documents filed with SEBI and actual price can be determined at a later date before filing of the final offer document with SEBI / ROCs.

“ Book Building ” means a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for the securities is assessed on the basis of the bids obtained for the quantum of securities offered for subscription by the issuer. This method provides an opportunity to the market to discover price for securities.

Book building is a process of price discovery. Hence, the Red Herring prospectus does not contain a price. Instead, the red herring prospectus contains either the floor price of the securities offered through it or a price band along with the range within which the bids can move. The applicants bid for the shares quoting the price and the quantity that they would like to bid at. Only the retail investors have the option of bidding at ‘cut-off'. After the bidding process is complete, the ‘cut-off' price is arrived at on the lines of Dutch auction. The basis of Allotment is then finalized and letters allotment/refund is undertaken. The final prospectus with all the details including the final issue price and the issue size is filed with ROC, thus completing the issue process.

As the red herring prospectus may contain either the floor price for the securities or a price band within which the investors can bid. The spread between the floor and the cap of the price band shall not be more than 20%. In other words, it means that the cap should not be more than 120% of the floor price. The price band can have a revision and such a revision in the price band shall be widely disseminated by informing the stock exchanges, by issuing press release and also indicating the change on the relevant website and the terminals of the syndicate members. In case the price band is revised, the bidding period shall be extended for a further period of three days, subject to the total bidding period not exceeding thirteen days.

It may be understood that the regulatory mechanism does not play a role in setting the price for issues. It is up to the company to decide on the price or the price band, in consultation with Merchant Bankers. The basis of issue price is disclosed in the offer document. The issuer is required to disclose in detail about the qualitative and quantitative factors justifying the issue price.

In Book building issue, the issuer is required to indicate either the price band or a floor price in the red herring prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called “Cut off price”. This is decided by the issuer and LM after considering the book and investors' appetite for the stock. SEBI (DIP) guidelines permit only retail individual investors to have an option of applying at cut off price.

See the Example:

After the closure of the issue, the bids received are aggregated under different categories i.e., firm allotment, Qualified Institutional Buyers (QIBs), Non-Institutional Buyers (NIBs), Retail, etc. The over subscription ratios are then calculated for each of the categories as against the shares reserved for each of the categories in the offer document. Within each of these categories, the bids are then segregated into different buckets based on the number of shares applied for. The over subscription ratio is then applied to the number of shares applied for and the number of shares to be allotted for applicants in each of the buckets is determined. Then, the number of successful allottees is determined. This process is followed in case of proportionate allotment. In case of allotment for QIBs, it is subject to the discretion of the post issue lead manager.

The allotment to the Qualified Institutional Buyers (QIBs) is on a discretionary basis. The discretion is left to the Merchant Bankers who first disclose the parameters of judgment in the Red Herring Prospectus. There are no objective conditions stipulated as per the DIP Guidelines. The Merchant Bankers are free to set their criteria and mention the same in the Red Herring Prospectus.

On the other hand, In a book built issue allocation to Retail Individual Investors (RIIs), Non Institutional Investors (NIIs) and Qualified Institutional Buyers (QIBs) are in the ratio of 35: 15: 50 respectively.

In case the book built issues are made pursuant to the requirement of mandatory allocation of 60% (Norm II of Entry to the primary market) to QIBs in terms of Rule 19(2)(b) of SCRR the respective figures are 30% for RIIs and 10% for NIIs. This is a transitory provision pending harmonization of the QIB allocation in terms of the aforesaid Rule with that specified in the guidelines.

Qualified Institutional Buyers are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets. In terms of clause 2.2.2B (v) of DIP Guidelines, a ‘Qualified Institutional Buyer' shall mean:

a. Public financial institution as defined in section 4A of the Companies Act, 1956;

b. Scheduled commercial banks;

c. Mutual funds;

d. Foreign institutional investor registered with SEBI;

e. Multilateral and bilateral development financial institutions;

f. Venture capital funds registered with SEBI.

g. Foreign Venture capital investors registered with SEBI.

h. State Industrial Development Corporations.

i. Insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA).

j. Provident Funds with minimum corpus of Rs.25 crores

k. Pension Funds with minimum corpus of Rs. 25 crores)

Any entities falling under the categories specified above are considered as QIBs for the purpose of participating in primary issuance process.

‘Retail individual investor' means an investor who applies or bids for securities of or for a value of not more than Rs.1,00,000.

A company making an issue to public can reserve some shares on “allotment on firm basis” for some categories as specified in DIP guidelines. Allotment on firm basis indicates that allotment to the investor is on firm basis. DIP guidelines provide for maximum % of shares, which can be reserved on firm basis. The shares to be allotted on “firm allotment category” can be issued at a price different from the price at which the net offer to the public is made provided that the price at which the security is being offered to the applicants in firm allotment category is higher than the price at which securities are offered to public.

Reservation on Competitive Basis is when allotment of shares is made in proportion to the shares applied for by the concerned reserved categories. Reservation on competitive basis can be made in a public issue to the Employees of the company, Shareholders of the promoting companies in the case of a new company and shareholders of group companies in the case of an existing company, Indian Mutual Funds, Foreign Institutional Investors (including non resident Indians and overseas corporate bodies), Indian and Multilateral development Institutions and Scheduled Banks.

For getting IPO/ FPO form you can get it from SMC Premises in Kolkata, Delhi , Mumbai, and many other States,(Please log in www.smcindiaonline.com for further details.). In addition , the form for applying/bidding of shares is available with all syndicate members, collection centers, the brokers to the issue and the bankers to the issue.

As per the requirement, all the public issues of size in excess of Rs.10 crore, are to made compulsorily in the dematerialized form. Thus, if an investor chooses to apply for an issue that is being made in a compulsory demat mode, he has to have a demat account and has the responsibility to put the correct DP ID and Client ID details in the bid/application forms.

The procedure of open a Demat A/C is available on our site (www.smcindiaonline.com) .The FAQs relating to demat have been covered in the Investor Education section of the SEBI website in a separate head. They are available on the http://investor.sebi.gov.in/faq/dematfaq.html.

Yes. The investor can change or revise the quantity or price in the bid using the form for changing/revising the bid that is available along with the application form. However, the entire process of changing of revising the bids shall be completed within the date of closure of the issue.

No, Syndicate Member cannot receive outstation cheque with the form of an IPO/FPO. Investor can draw “DD” or Cheque, which is “At Par”.

The syndicate member returns the counterfoil with the signature, date and stamp of the syndicate member. The investor can retain this as a sufficient proof that the bids have been taken into account.

In case of fixed price issues, the investor is intimated about the CAN (Confirmatory Allotment Note)/Refund order within 30 days of the closure of the issue. In case of book built issues, the basis of allotment is finalized by the Book Running lead Managers within 2 weeks from the date of closure of the issue. The registrar then ensures that the demat credit or refund as applicable is completed within 15 days of the closure of the issue. The listing on the stock exchanges is done within 7 days from the finalization of the issue.

In the case of book-built issues, the exchanges (BSE/NSE) display the data regarding the bids obtained (on a consolidated basis between both these exchanges). The data regarding the bids is also available category wise. After the price has been determined on the basis of bidding, the statutory public advertisement containing, inter alia, the price as well as a table showing the number of securities and the amount payable by an investor, based on the price determined, is issued.

The investor is entitled to receive a Confirmatory Allotment Note (CAN) in case he has been allotted shares within 15 days from the date of closure of a book Built issue. The registrar has to ensure that the demat credit or refund as applicable is completed within 15 days of the closure of the book built issue.

The listing on the stock exchanges is done within 7 days from the finalization of the issue. Ideally, it would be around 3 weeks after the closure of the book built issue. In case of fixed price issue, it would be around 37 days after closure of the issue.

Most of the issue complaints pertain to non-receipt of refund or allotment, or delay in receipt of refund or allotment and payment of interest thereon. These complaints shall be made to the post issue Lead Manager, who in turn will take up the matter with registrar to redress the complaints. In case the investor does not receive any reply within a reasonable time, investor may complain to SEBI, Office of investors Assistance.

Ok, All right, we have already discussed the basic background of issue (IPO/FPO) and investor awareness regarding IPO/FPO in full swing. Now what we are going to discuss that is no required to know for general investor but, on the other hand, an analyst should have depth knowledge of previous two sections, otherwise all efforts of discussion in this section will not bear any fruitful results in real sense.

Our agenda of this module will be like that:

However, an analyst should be very clear some terms which she / he may come across can see while doing analysis of an IPO / FPO in their professional practice.

Factors to be considered by an analyst while doing research.

At first he/she can download draft offer document. The draft offer documents are put up on the website of SEBI under Reports/Documents section. The final offer documents that are filed with SEBI/ROC are also put up for information under the same section. Copies of the draft offer documents in hard copy form may be obtained from the office of SEBI, Mittal Court, ‘A' wing, Ground Floor, 224, Nariman Point, Mumbai – 400021 on a payment of Rs.100 or from SES, LMs etc. The soft copies can be downloaded from the SEBI website under Reports/Documents section. Some LMs also make it available on their web sites for download. The final offer documents that are filed with SEBI/ROC can also be downloaded from the same section of the website of SEBI.

The SEBI Manual is a SEBI authorized publication that is a comprehensive databank of all relevant Acts, Rules, Regulations and Guidelines that are related to the functioning of the Board. The details pertaining to the Acts, Rules, Regulations, Guidelines and Circulars are placed on the SEBI website under the “Legal Framework” section. The periodic updates are uploaded onto the SEBI website regularly.

SEBI does not recommend any issue nor does it take any responsibility either for the financial soundness of any scheme or the project for which the issue is proposed to be made or for the correctness of the statements made or opinions expressed in the offer document.

The document is prepared by an independent specialized agency called Merchant Banker, which is registered with SEBI. They are required to do through due diligence while preparing an offer document. The draft offer document submitted to SEBI is put on website for public comments. In case, analysts have any information about the issuer or its directors or any other aspect of the issue, which in analysts' view is not factually reflected, analysts may send their complaint to Lead Manager to the issue or to SEBI, Division of Issues and Listing.

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.

Such as…… Underwriter agreement, Green Shoe option..

Generally two types of agreement can be heard in the market i.e. Hard Underwriting, and Soft Underwriting.

Hard Underwriting

Hard underwriting is when an underwriter agrees to buy his commitment at its earliest stage. The underwriter guarantees a fixed amount to the issuer from the issue. Thus, in case the shares are not subscribed by investors, the issue is devolved on underwriters and they have to bring in the amount by subscribing to the shares. The underwriter bears a risk, which is much higher in soft underwriting.

 Soft underwriting

Soft underwriting is when an underwriter agrees to buy the shares at later stages as soon as the pricing process is complete. He then, immediately places those shares with institutional players. The risk faced by the underwriter as such is reduced to a small window of time. Also, the soft underwriter has the option to invoke a force Majeure (acts of God) clause in case there are certain factors beyond the control that can affect the underwriter's ability to place the shares with the buyers.

This is mechanism for stabilizing post-listing price of the issue. To understand Green Shoe Option process is of great important for an analyst. At first I would like to clarify or present it from the reason of applying it.

The cause of applying Green shoe Option

The management of the issuer is not so confident about issue price what they are claiming from the investors due to high offer price compared to the peer groups in the market.

See an Example:

You see, Shree Renuka sugars Ltd is claming high price against the lower market capitalization from the market compared to share price and market capitalization of its peer group. As a result the management of the issuer (Shree Renuka Sugars Ltd) exercises the Green Shoe Option under chaper VIII A of the SEBI Guidelines.

Green Shoe Option is!

A Green Shoe option means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism for a period not exceeding 30 days in accordance with the provisions of Chapter VIIIA of DIP Guidelines, which is granted to a company to be exercised through a Stabilizing Agent. This is an arrangement wherein the issue would be over allotted to the extent of a maximum of 15% of the issue size.

Let's understand the framework of exercise of Green Shoe Option…

See further clarification of Green Shoe Option.

Issuer appoints Green Shoe Lender and Stabilizing Agent. (Say SRSL has appointed JM Morgan Stanley Private Limited as stabilizing agent for performance of the role of stabilizing agent And Murkumbi Industries Private Limited as Green Shoe Lender.)

Issuer makes stabilizing agreement with Green Shoe Lender and Stabilizing Agent in respect of fees of Stabilizing Agent and Green Shoe Lender other is quantity of loaned shares in numbers from Green Shoe Lender (if need). (See an example of Sree Renuka Sugars Limited)

Stabilizing agreement with Green Shoe Lender and Stabilizing Agent .

Post the bid/Issue closing date; the company in consultation with the BRLM shall take a decision relating to the exercise of the Green Shoe Option.

In the event, it is decided that the Green Shoe Option shall be exercised, the company in the consultation with the Stabilizing agent, shall make over allotment.

The allocation of overallotment share shall be pro rata with respect to the proportion of allotment in the issue to various categories (see an example, 60:10:30 =QIB: NIB: Retailer has been predefined in the Green Shoe Option section in RHP of Renuka Sugars Ltd).

Case: I

In the event the Equity Shares lying to the credit of the GSO Demat Account at the end of the Stabilization Period but before the transfer to the Green Shoe Lender is less than the Over Allotment Shares, upon being notified by the Stabilizing Agent and the equivalent amount being remitted to the issuer from the GSO Bank Account, the issuer shall receive within four (4) days of the receipt of notice from the Stabilizing Agent of the end of the Stabilization Period.

The issue will allot new Equity Shares in dematerialized form in an amount equal to such shortfall to the credit of the GSO Demat Account within 5 days of the end of the Stabilization Period. The newly issued Equity Shares shall be returned by the Stabilizing Agent to the Green Shoe Lender in final settlement of Equity Shares borrowed.

Even if you understand the process of exercise of Green Shoe Option but your confidence still not built until you can't see the basis of allotment of Shree Renuka Sugars Ltd and H T Medial Limited.

Basis of allotment of Shree Renuka Sugars Limited

The Issue received 54299 applications for 54967992 equity shares resulting in 14.24 times subscription. The details of the application received in the Issue from Qualified Institutional Buyers, Non-Institutional and Retail Investor categories are as under:

Basis of allotment of H T Media Limited

The Issue received 151,291 applications for 145,131,964 equity shares resulting in 18.87 times subscription. HT Media has decided to exercise the Green Shoe Option. The details of the application received in the Issue from Qualified Institutional Buyers, Non-Institutional and Retail Individual Investor categories are as under:

There is no concrete answer about it. Analyst to analyst it differs. But generally there are few common factors to be considered by analyst in analysis of IPO/FPO.

ISSUE

• Is the offer an FPO/IPO?
• If FPO, get a close look at the data of share prices/ volumes in the recent period.
• Is the offer a fixed price or a book building issue?

There is no reservation for QIB and NIB in a fixed price issue. 50% of the issue is reserved for retail investors (in book building it is 35%)

Underwriter

“The best IPOs get done by the largest, best known underwriters”- by Linda R. Killan, IPO Analyst with John Hancock Funds.

Keep in mind some underwriters are best known for their work within specific sectors (Say Technology IPOs,- Morgan Stanley

Investors should keep in mind that it doesn't mean that top underwriters don't have clunker IPOs- Say John Goldman, IPO Analyst

Examine the basis of The Company

Product / Services of the Company:

• Cyclical
• Favour of the season
• Upstream / Downstream
• Market outlook

Customer:

• Over dependence on one or a few customers
• Diversification of customer group
• Too many-fixed price, long term contracts with customers.

Financial:

• No. of the year in the business.
• Size of the company
• Growth rate
• Market share and growth
• Look at Fixed assets, investment, loan and advances
• Positive cash flow and negative cash flow
• PAT

Ratios:

EPS

• EPS measures the earnings a company makes for each share in existence.
• A higher EPS is counted as better than low EPS as it means investors are earnings bigger profits for every shares.

P/E Ratio

P/E ratio indicates whether company is cheap or expensive. As a rule, the higher the P/E, the fasters its earnings are growing but if the P/E is high compared with other companies in the same sector, it could also mean the shares are overvalued.

• The ratio enables any business to be compared with anther, or against the P/E on the entire market.

Objects of Issue:

• Finance a new project.
• Undertake expansion.
• Working Capital Expenditure.
• Repayment of debt.
• Do acquisition.
• Open branches.

Financing the objecs of issue:

• Is entire cost being financed by the present issue?
• Is company committing any internal accruals to the project?
• Is appraisal of any relevance?

• Family controlled or board based.
• No. of Independent directors.
• Key directors in terms of experience.
• Experience in same business / industry.
• Promoters holding pre and post issue.

Risk factors

• Serious litigation about the brand or trademark by others can affect the company.
• Are there any internal defaults / litigation against the company or its promoters?
• Criminal proceeding against the promoters.
• Check out record of past defaults of company.
• Identify critical internal risk factors such as family dispute, company, any agreement of sale for final out put of the company to only one customer. (say final product of GVKPIL directly bought by APDISCOM.)
• Identify critical external risk factors such as over dependency of one industry, impact of Govt. rule and regulation regarding the sector if it changes.