Security Analysis

Semester III, Class of 2009

ICFAI Business School
Capital Issue
(Session 4)
Nupur Hetamsaria
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
 Book Building

“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”.
Book Building
 Used in Public offers to arrive at a price
 Price Discovery Mechanism
 Lets the investors arrive at a price
 Floor Price eg: DCL EQ IPO – Rs.45
 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
 Infrastructure company, issues may be kept open for a
maximum period of 21 working days
Intermediaries
 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 etc
Book Running lead manager
 Drafting and design of Offer document
 Certifying that the information in the offer document is
correct
 Advertisements
 Compliance with stipulated requirements and completion
of prescribed formalities with the Stock Exchange
 Marketing strategies for the issue
 Finalizing the cut off price
Book Running lead manager
 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 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.
Registrar
 Finalizes the list of eligible allottees after deleting the
invalid applications
 Ensures that the corporate action for crediting of shares to
the demat accounts of the applicants is done
 The dispatch of refund orders to those applicable are sent
 The lead manager co-ordinates with the Registrar on
these activities
Banker
 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
 Escrow Account – An account opened by a third party on
behalf of other two parties in a transaction. The funds are
held in the escrow account until the banker receives an
appropriate written communication from the BLRM
How is the cut off price fixed
 Number of shares known in advance
 Cut off price – Dutch Auction
 An auction where the price of an item is lowered until it
gets its first bid and then the item is sold at that price
 Retail Investors - Cut off price
 Retail investors can revise their bids
 Only electronic bidding
 The excess part refunded in 15 days ( else 15% interest
per annum)
How are the Shares Allocated
 Min 35% Retail Investors ( <=Rs.1 lakh)
 Not more than 50% 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.
 Mutual Funds, FIs, Banks, Insurance Comp, Provident Funds,
Pension Funds, State Industrial Development Corporations,
Foreign Institutional Investors, Venture Capitalists etc
 Min 15% Non Institutional Investors ( HNIs)
Allotment
 Allotment to Retail and non institutional investors made
on the basis of proportionate allotment system within 15
days of closing of the issue
 Confirmatory Allotment Note
 RPL Example
QIB allotment
 Allotment made by the Merchant Banker – Discretionary
basis
 SEBI is reviewing it
 Several QIBs have complained of favouritism and
arbitrary allotment by Merchant Bankers
 No bands earlier
 No need to put in money upfront
 Listing done within seven days of the finalization of the
issue (nearly 3 weeks from closure)
Green shoe option
 To stabilize prices post listing
 In case of over subscription the green shoe option is
mandatory
 Stabilizing Agent
 Promoter and Pre issue shareholders
 15% of shares max of the total issue size
 Pro-rata allotment
Prospectus
 “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
 “Draft Offer document” means the offer document in draft stage.
The draft offer documents are filed with SEBI, atleast 21 days prior
to the filing of the Offer Document with ROC/ SEs
 SEBI may specify changes to it
 Red herring prospectus
 Herring – A silver coloured edible fish
 Red Herring – A thing that draws attention from something more
important
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.
 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.
 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.
 “Abridged Prospectus” available with the application form of the
public issue.
Reverse Book Building
 SEBI (Delisting of Securities) Guidelines 2003
 Voluntary delisting by promoters
 Sell orders captured online for delisting
 Buyback shares from shareholders
 Floor price – average of 26 weeks trading price preceding the
date of public announcement
 Cut off price – Price at which maximum shares are offered
 No upper cap
 Bids below floor price are not accepted
 Bidding only in electronic form
Reverse Book Building
 Buyback offer should not be open for more than 30 days
 Verification – 15 days of closure of offer
 Payment – 7 days of completion of process