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A
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.
Allocation:
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.
Aftermarket
Trading
in the IPO subsequent to its offering is called the aftermarket. Trading
volume in IPOs is extremely high on the first day due to aftermarket
purchases. Trading volume can decline subsequently in the following days.
Aftermarket
Performance
The
price appreciation (or depreciation) in IPOs is measured from the offering
price going forward. However, to obtain a better benchmark of IPO
aftermarket performance, some investors track performance from the first
day close.
B
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
(Disclosure and Investment Protection) Guidelines 2000. 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.
Basis
of Allocation/Basis of Allotment
After
the closures 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.
Board
of Directors
The
composition of the Board of Directors is particularly critical for an IPO.
Typically, a board is composed of Directors who are also shareholders and
independent directors. Independent directors have no underlying financial
or personal relationship with the company that could create a conflict of
interest and are on the board for their experience, business judgment and
contacts. Independent directors may own the shares of the company but are
not large shareholders. Investors should look for a board that has at
least two independent directors. Typically, IPOs add their first outside
directors at or immediately after the offering.
Book Building
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
Book
Running Lead Manager (BRLM)
In
the pre-issue process, the Lead Manager (LM) takes up the due diligence of
company’s 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 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, coordinate 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 of
instruments 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 Company.
Bought
Out Deal
An
underwriter has a commitment to buy all the shares, from a company and
becomes financially responsible for selling them. Also called firm
allotment.
C
Calendar
This
refers to upcoming IPOs and secondary offerings.
Clearing
Price
The price at which all shares of an IPO can be sold to investors in a
Dutch Auction. Sometimes referred to as the “market-clearing price”.
Closed
Book
Under closed book building, the book is not made public and the
bidders will have to take a call on the price at which they intend to make
a bid without having any information on the bids submitted by other
bidders.
Co-Manager
Most
initial public offerings and secondary offerings have more than one
underwriter. The manager controlling the offering is called the lead
manager. Other underwriters are co-managers. The names of these
underwriters appear on the bottom of the front page of the prospectus,
with the most important manager appearing on the top left, and the
co-managers arrayed from left to right in order of importance.
Confirmatory
Allotment Note (CAN)
CAN
is a document received by the investor from the Book Running Lead Manager
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.
Cover
Page
The
Cover Page of the offer document covers full contact details of the Issuer
Company, lead managers and registrars, the nature, number, price and
amount of instruments offered and issue size, and the particulars
regarding listing. Other details such as Credit Rating, risks in relation
to the first issue, etc are disclosed if applicable.
Cut
off 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.
D
Differential
pricing
Pricing
of an issue where one category is offered shares at a price different from
the other category is called differential pricing. In DIP Guidelines
differential pricing is allowed only if the securities to applicants in
the firm allotment category is at a price higher than the price at which
the net offer to the public is made . The net offer to the public means
the offer made to the Indian public and does not include firm allotments
or reservations or promoters’ contributions.
Draft
Offer document
"Draft
Offer document" means the offer document in draft stage. The draft offer
documents are filed with SEBI, at least 21 days prior to the filing of the
offer document with ROC/ SEs. SEBI may specifies changes, if any, in the
draft offer document and the issuer or the Lead Merchant banker shall
carry out such changes in the draft offer document before filing the offer
document with ROC/SEs. The draft offer document is available on the SEBI
website for public comments for a period of 21 days from the filing of the
draft offer document with SEBI.
Direct
Public Offer
This
is an offering in which a company sell its shares directly to the public
without the help of the underwriter. Liquidity of this offering is very
limited.
E
E-IPO
A company proposing to issue capital to public through the on-line system
of the stock exchange for offer of securities can do so if it complies
with the requirements under Chapter 11A of DIP Guidelines. The appointment
of various intermediaries by the issuer includes a prerequisite that such
members/registrars have the required facilities to accommodate such an
online issue process.
Expected
Date
Expected offering date of issue in registration. This date comes directly
from the syndicate desk at the underwriter firm
F
Flipping
When an investor buys an IPO at the offering price and then sells
the stock soon after it starts trading on the open market. The
underwriters try to discharge flipping by initialing placing stock in the
hands of long term investors particularly once that have promised
aftermarket orders.
First Day
Close
The
closing price at the end of the first day of trading reflects not only how
well the lead manager priced and placed the deal, but what the near-term
trading is likely to be. For example, IPOs that shoot up 100% or 200% on
their first day of trading are likely to fall back in price on subsequent
days due to profit taking. Conversely, IPOs that break offer price
immediately are likely to drop further as institutions bail out. Breaking
IPO price right out of the box is a poor reflection on the lead manager's
pricing and placement.
Fixed
Price offers
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.
Float
When
a company is publicly traded, a distinction is made between the total
number of shares outstanding and the number of shares in circulation,
referred to as the float. The float consists of the company's shares held
by the general public. For example, if a company offers 2 million shares
to the public in an IPO and has 20 million shares outstanding, its float
is 2 million shares.
Follow
on public offering (FPO)
FPO
is when an already listed company makes either a fresh issue of securities
to the public or an offer for sale to the public, through an offer
document. An offer for sale in such scenario is allowed only if it is made
to satisfy listing or continuous listing obligations.
G
Green-shoe
Option
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. From an investor’s perspective, an
issue with green shoe option provides more probability of getting shares
and also that post-listing price may show relatively more stability as
compared to market.
H
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.
I
Issue
Price
Indian
primary market ushered in an era of free pricing in 1992. Following this,
the guidelines have provided that the issuer in consultation with Merchant
Bankers shall decide the price. There is no price formula stipulated by
SEBI. SEBI does not play any role in price fixation. The company and
merchant banker are however required to give full disclosures of the
parameters, which they had considered while deciding the issue price.
There are two types of issues one where company and LM fix a price (called
fixed price) and other, where the company and LM stipulate a floor price
or a price band and leave it to market forces to determine the final price
(price discovery through book building process).
L
Lock-in
Lock-in
indicates a freeze on the shares. SEBI (DIP) Guidelines have stipulated
Lock-in requirements on shares of promoters mainly to ensure that the
promoters, who control the company, shall continue to hold some minimum
percentage in the company after the public issue. The requirements are
detailed in Chapter IV of DIP guidelines.
M
Market
Capitalization
The
total market value of a firm. It is defined as the product of the
company's stock price per share and the total number of shares
outstanding. The market cap should not be confused with the float, which
is the amount of shares in circulation. A company's market cap can greatly
exceed the float, especially in the case of a new publicly traded company.
Market
Value
The
market value of a company is determined by multiplying the number of
shares outstanding by the current price of the stock.
O
Offer
Date
Offer
date of the issue is the first day the issue is traded publicly
Offer
document
Offer
document means Prospectus in case of a public issue or offer for sale and
Letter of offer in case of a rights issue, which is filed with the Registrar of
Companies (ROC) and Stock Exchanges. An offer document covers all the
relevant information to help an investor to make his/her investment
decision.
Offering
Price
This
is the price at which the IPO is first sold to the public. It is set by
the lead manager, usually after the close of stock market trading the
night before the shares are distributed to IPO buyers. In the case of some
foreign IPOs, the pricing occurs over the weekend.
Online
Bidding
An
investor may place his bids through online terminals offered by some
of the brokers. A company proposing to issue capital to public through the
on-line system of the stock exchange for offer of securities can do so if
it complies with the requirements under Chapter 11A of DIP Guidelines. The
appointment of various intermediaries by the issuer includes a
prerequisite that such members/registrars have the required facilities to
accommodate such an online issue process.
Open
book
Presently, in issues made through book building, Issuers and
merchant bankers are required to ensure online display of the demand and
bids during the bidding period. This is the Open book system of book
building. Here, the investor can be guided by the movements of the bids
during the period in which the bid is kept open.
Order
Book
When
the underwriter refers to how well orders are building for an IPO or a
secondary deal, he means the book or listing of buy orders from investors.
The book for a deal can be many times oversubscribed. In fact, an
oversubscribed deal is desired by both underwriters and investors, because
it means that there will be an initial pop in the stock when it begins
trading and subsequent aftermarket orders.
Over allotment
This
is the fancy name for the green shoe, the underwriting agreement which
allows the underwriters to buy up to an additional 15% of shares at the
offering prices for a period of several weeks after the offering.
Oversubscribed
When
an Initial Public Offering has more orders than there are shares available
it is said to be oversubscribed. Many underwriters like to see a book
several times oversubscribed because they know that investors inflate the
size of their indications of interest. When a book is grossly
oversubscribed it is said to be a hot deal.
P
Price
Band
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 are vision 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
priceband 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.
Price discovery
The
role of these entities is important. Both the lead managers and
underwriters have the implicit responsibility of raking up enough
investment for the issue. The first has its income attached to the
applications and second bears the market risk failing which it has to
cough up the amount which it may not recover in case of a below average
market response as this is the factor that decides the scrip's performance
in secondary market. Therefore, both play an important role in the price
determination of the issue. The issuing company obviously wants to raise
as much money as possible by selling as less number of securities
possible. This is definitely in the interest of shareholders of the
company as the dilution of equity is tried to be kept at minimum. Some of
the general aspects by which the issuing company decides the price are the
company image, project's strengths, business prospects and the incremental
cash flows that are expected to accrue as a result of the project. But the
lead managers and underwriters vet the price judging by the general market
sentiment at that point of time. This basic interlocution of different
opinion is what leads ultimately to price discovery for the issue.
Proceeds
Companies
go public to raise money. The money raised is referred to as proceeds. In
every prospectus there is a section entitled "Use of proceeds".
Investors should read this section to find out why the company plans to
raise money from the public.
Promoter
The
promoter has been defined as a person or persons who are in over-all
control of the company, who are instrumental in the formulation of a plan
or programme pursuant to which the securities are offered to the public
and those named in the prospectus as promoters(s). It may be noted that a
director / officer of the issuer company or person, if they are acting as
such merely in their professional capacity are not be included in the
definition of a promoter.
Promoter
Group
Promoter
group includes the promoter, an immediate relative of the promoter (i.e.
any spouse of that person, or any parent, brother, sister or child of the
person or of the spouse). In case promoter is a company, a subsidiary or
holding company of that company; any company in which the promoter holds
10% or more of the equity capital or which holds 10% or more of the equity
capital of the Promoter; any company in which a group of individuals or
companies or combinations thereof who hold 20% or more of the equity
capital in that company also holds 20% or more of the equity capital of
the issuer company. Incase the promoter is an individual, any company in
which 10% or more of the share capital is held by the promoter or an
immediate relative of the promoter' or firm or HUF in which the 'Promoter'
or any one or more of his immediate relative is a member; any company in
which a company specified in (i) above, holds 10% or more, of the share
capital; any HUF or firm in which the aggregate share of the promoter and
his immediate relatives is equal to or more than 10%of the total, and all
persons whose shareholding is aggregated for the purpose of disclosing in
the prospectus "shareholding of the promoter group"
Private
Placement
The
allotment of an issue is below 50 persons is called Private Placement.
Q
Qualified
Institutional Buyer (QIBs)
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)
These
entities are not required to be registered with SEBI as QIBs. Any entities
falling under the categories specified above are considered as QIBs
for the purpose of participating in primary issuance process.
R
Red
Herring Prospectus
Red Herring Prospectus is a prospectus which does not have details
of either price or number of shares being offered or the amount of issue.
This means that in case price is not disclosed, the number of shares and
the upper and lower price bands are disclosed. On the other hand, an
issuer can state the issue size and the number of shares are determined
later. An RHP for an FPO can be filed with the RoC without the price band
and the issuer, in such a case will notify the floor price or a price band
by way of an advertisement one day prior to the opening of the issue. In
the case of book-built issues, it is a process of price discovery and the
price cannot be determined until the bidding process is completed. Hence,
such details are not shown in the Red Herring prospectus filed with ROC in
terms of the provisions of the Companies Act. Only on completion of the
bidding process, the details of the final price are included in the offer
document. The offer document filed thereafter with ROC is called a
prospectus.
Registrar
The
Registrar finalizes the list of eligible allottees after deleting the
invalid applications and ensures that the corporate action for 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
coordinates 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.
Retail
Individual Investor
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.
Risk
Factors
The
disclosure of the issuer’s management to give its view on the Internal
and external risks faced by the company. Here, the company also makes a
note on the forward-looking statements. This information is disclosed in
the initial pages of the document and it is also clearly disclosed in the
abridged prospectus. It is generally advised that the investors should go
through all the risk factors of the company before making an investment
decision.
S
Safety
Net
Any safety net scheme or buy-back arrangements of the shares proposed in
any public issue shall be finalized by an issuer company with the lead
merchant banker in advance and disclosed in the prospectus. Such buyback
or safety net arrangements shall be made available only to all original
resident individual allottees limited up to a maximum of 1000 shares per
allottee and the offer is kept open for a period of 6 months from the last
date of dispatch of securities. The details regarding safety Net are
covered under Clause 8.18 of DIP Guidelines.
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.
Syndicate
Member
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 and entire the bid forms in a book built issue.
U
Underwriter
This
is a brokerage firm that raises money for companies using public equity
and debt markets. Underwriters are financial intermediaries that buy stock
or bonds from an issuer and then sell these securities to the public.
V
Valuation
Multiple
An
approach to valuing companies that relies on comparing a company’s stock
price to its income from operations, cash flow from operations, or
earnings per share. The higher the multiple, the more richly valued the
company is. Underwriters use valuation multiples of an IPO’s peers, or
comparables, to determine the appropriate level at which the IPO should be
priced.
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