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IPO Process

The document discusses various ways that companies can issue securities to raise capital from investors. It covers initial public offerings (IPOs) where a company issues stock on a public exchange for the first time. It also describes the IPO process, including hiring investment banks, drafting offering documents, pricing the shares, and marketing the offering. Additionally, it mentions rights issues, where companies offer additional shares to existing shareholders, and private placements, which are private security offerings to institutional investors.

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Sakshi Sharma
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45 views32 pages

IPO Process

The document discusses various ways that companies can issue securities to raise capital from investors. It covers initial public offerings (IPOs) where a company issues stock on a public exchange for the first time. It also describes the IPO process, including hiring investment banks, drafting offering documents, pricing the shares, and marketing the offering. Additionally, it mentions rights issues, where companies offer additional shares to existing shareholders, and private placements, which are private security offerings to institutional investors.

Uploaded by

Sakshi Sharma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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How firms issue

securities
IPO
Initial Public Offering
• Not every firm/ big firm will go public
• TCS unlisted till 2004
• Aramark food tech company
• Leviss
• Whether to go public
• If yes, then when
IPO Process in India
Why companies issue IPO? To invest and create assets

Where companies go to issue IPO Primary Market

Will the company do the whole process? No

Which people from the company take part in this process?


• Chief Financial Officer
• Company Secretory
• Compliance Officer
• Support Staff
IPO Process

We want to issue IPO

Expertise in Issue Management Investment Banks


Merchant Banks
Each Investment Bank will give presentation to the Company
And they will also announce the fees that they will charge
Company will examine the proposal and
then it will finalize one investment bank
to handle the process
Com
pany
MoU will e
with nter
Lead into Lead Managers to the Issue
Ma n
ager Book Running Lead Managers

Can there be more than 1 lead manager? Yes


• Chief Financial Officer
• Company Secretory
V/s Lead Managers
• Compliance Officer
• Support Staff
Lead Managers will do the due diligence of the company

They will prepare Draft Offer Document (Draft Prospectus)


+
Final Budget
Guidelines of Ministry of Finance on issue expenses
has to be followed while preparing the Budget

Board will approve the Offer document and final Budget


SEBI

SEBI will give its Upload on its website


own suggestions for public comments
within 30 days

LM will also provide the Draft


Prospectus to public

As soon as the company submits Draft Prospectus to


SEBI, It enters into quite period
During this period, Corporate Communications and
advertisements are regulated
After filing draft prospectus with SEBI, the company has to make listing
applications to all the stock exchanges on which they want to list their company

Please list me !!!!

Also submit Draft Prospectus

Exchanges will also give their suggestions in the issue


Lead Manager

Lead Manager will modify the Draft Prospectus by


consulting exchanges and SEBI
Lead Manager will get the in-principle approval from the stock
exchanges within 15 days of submission of Draft Prospectus to them
and will submit it to SEBI

After all the suggestions and modifications, the final document of Draft
Prospectus again goes to the board of the company for approval

After the approval of board, the prospectus is submitted to SEBI


Price of the issue

Company can arrive at share prices in 2 ways

Fixed Price Offer Book Building Offer


Pricing decision
• 2 best ways to price:
• One is to see P/E ratios pf comparable firms
• Valuation by using discounted cash flow option
• Gauge sentiments of the people , whether they are enthusiastic about
an issue or not.:
• Managers are tempted to go for a higher price
• What happens if you overestimate the demand??
• You are left with unsold stock
• Underpricing is needed to tempt the people to buy stock.
Underpricing
• IPO of Ebay initially kept at 14-16 dollars.
• Enthusiasm of people was high so they kept it 18 dollars
• Stock closed at a price of 47.3 dollars

• Why underpricing ??
• In the interest of the issuing firm
Auctions or book building
• Auctions can be uniform and discriminatory
• Google in 2004 raised 1.7 billion by auction in worlds largest IPO
Fixed Price Offer

We want to issue 100 shares and the


share price will be Rs.100 per share

In fixed price offer, these figures have


to be mentioned in the prospectus
What if people subscribe to 50 shares only?

Company can mitigate this risk by making


and agreement with an organization

These organizations are called Underwriters to the issue


Ex. Banks, NBFCs, Merchant banks (Investment Banks), LMs,
Financial Institutions, Brokers
Underwriters promise to subscribe the unsubscribed portion
which was offered to the public before

Underwriters can dilute their risk by involving sub-underwriters

Condition: If a certain level of subscription is not achieved by the


company, then the IPO must be canceled and in that case the
underwriter does not have the obligation to buy the shares
The prospectus will have 90 days validity after filing with ROC during which the
shares should be issued

Now the company, along with lead managers will do marketing of the issue
with the help of marketing agencies – they are technically called “Road Shows”
Ex. Press meetings, Brokers’ meetings, Investors’ meetings etc.
All the marketing efforts need to comply with the regulatory requirements and
they should not be mislead the public

Finally, company will give the time period for applying to IPO by public
Note: The application window can be Min.3 days to Max.10 Days
Book Built Offers

So, in Book Building method, the initial draft which is submitted to


SEBI is called Draft Red Herring Prospectus

This DRHP does not have price of the shares and/or number of
shares to be issued

After submitting the DRHP, the company along with LMs starts
“Road Shows” to gauge the likely investor appetite for the issue

From these road shows, the company will have an idea of the
demand of shares in the market and the comfortable share price
Finally, company along with LMs decide the price band for the share
price, within which the investors will bid

After this, the company mentions the price band and the number of
shares to issue in the DRHP and also incorporates the suggestions
from SEBI and stock exchanges

The Final approval is given by Board members before submitting it to SEBI

After approval of Board, it is called Red Herring Prospectus

In Red Herring Prospectus, the issue price is still not written but the
number of shares to be issued are written
The bidding process

Ex. Price Band – Rs.100 to Rs.120 Tick Size – Rs.5

Floor Price Cap Price

Rs.100 – 10 Bid
Rs.105 – 20 Bid
Rs.110 – 40 Bid Issue Price
Rs.115 – 30 Bid Cut-off price
Rs.120 – 10 Bid
Bankers to the Issue

The investors make payments in favor of the escrow account opened


with the escrow bankers appointed for the issue.

Escrow Account

Goes to company if allotted

In Book-Building, the final draft is submitted to ROC after the allocation


• Types of investors
• RII less than 2 lakhs
• NII
• QIB/FII
Security sales by companies

• A company’s first public issue is seldom the last


• What are the other ways??
• 1. General Cash offers : Same process as in IPO
• However companies can file a shelf prospectus and issue debt or
equity without any hassle
• It is valid for only 2 years, can be used whenever needed, but you are
not obligated to use it.
• Example : You are the Financial manager might use shelf regsiteration
• Lets say Citibank comes across an insurance company willing to invest
10 million in corporate bonds.
• Your phone rings
• Citibank makes you the offer at 8.5%
• You say yes.Citibank acts as intermediary earns some profit
Example 2: Perceive a window of opportunity when interest rates are
low
What will you do ??
2.International Securities issue

• Instead of borrowing in Local Market you go to another international


market
• Eurobonds : underwritten by group of international banks
• Equity issues may also be sold overseas.
• Reliance issued the first GDR in 1992 in Luxemburg(highest number of
companies listed in Luxemburg stock exchange is of Indian origin)
• BPL cellular got listed in NASDAQ
3. Rights issue
• Companies give their shareholders right of first refusal
• In 2018, Tata steel needed to raise 12,800 crore of new equity
• 4 share for every 25 shares(price of new share 510 / share against a
pre issue price of 712rs)
• If you hold 25 shares your holding is 17,800rs
• Now additional 4 so holding becomes 19,840( 25*712+ 4*510)
• Overall value of share declines to 684
• What is your right ?? 684-510 = Rs. 174
• What if Tata chose 8 for 25 ?? At 255 a share
Private placement
• If more than 200 PP then it’s a public issue

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