Project Report

On
Initial Public Offer

Submitted to: Prof. Rupali Mohite

Oriental Institute of Management
MMS Finance 2007-2008
Initial Public Offer

Table of Contents

Sr. No. Topic Page No.

1. Introduction 2
2. What is Initial Public Offering? 7
3. Different kinds of issues 9
4. Intermediaries 13
5. Eligibility Norms 15
6. Pre-Issue Obligations 17
7. Prospectus 24
8.. IPO Grading 29
9. Pricing of an IPO 31
10. Valuation Parameters 52
11. Post-Issue Obligations 55
12. Listing 63
13. Green Shoe Option 69
14. Grey Market 85
15. Guidelines on Advertisements 86
16. Case Study – Vishal Retail Ltd. 89
18. Bibliography and Webliography 96

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Initial Public Offer

Introduction

The capital market is a important constituent of the financial system. It is a

market for long-term funds, both equity and debt- and funds raised within and
outside the country.

The capital market aids economic growth by mobilizing the savings of the
economic sectors and directing the same towards channel of productive uses.
This is facilitated through the following measures:-

 Issue of primary securities in the primary market, that is directing cash

flow from the surplus sector to the deficit sectors such as the
government and the corporate.
 Issue of secondary securities in the primary market, that is, directing
the cash flow from the surplus sector to financial intermediaries such
as banking and non- banking financial insititiutions.
 Secondary market transactions outstanding securities which facilitate
liquidity. The liquidity of the stock market is an important factor
affecting growth. Many profitable projects require long- term finance
and investment, which means locking up funds for a long period.
Investors do not like to relinquish control over their savings for a long
time. Hence, they are reluctant to invest in the long – gestation
projects. It is the presence of the liquid secondary market that attracts
the investors because it ensures quick exit without heavy losses or
costs.

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Initial Public Offer

Hence, the development of an efficient capital market is necessary for creating a

climate conducive to investment and economic growth.

1. Primary Capital Market and Secondary Capital Market

The capital market comprises of the primary capital market and the
secondary capital market.

Primary Market: Primary market refers to the long – term flow of the
funds form the surplus sector to the government and the corporate sector (
through primary issues ) and to banks and non- bank financial
intermediaries ( through secondary issues). Primary issues of the
corporate sector lead to the capital formation , (creation of net fixed assets
and incremental change in inventories)
The nature of the fund raising is as follows:

Domestic External
Equity Issues – Equity Issues -
 Corporates ADRS
 Financial Intermediaries GDRS

Debt Instruments - External Commercial

 Corporates Borrowings
 Government

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Initial Public Offer

Other External Borrowings:

Foreign Direct Investment (FDI) - in equity and debt form
Foreign Institutional Investors (FII) - in the form of the portfolio
investment.
Non- Resident Indian Deposits - in the form of short term and
medium term deposits.

Secondary Market:
Secondary market is a market for outstanding securities. An equity
instrument , being an eternal fund, provides an all- time market while a
debt instrument, with a defined maturity period, is traded at the
secondary market till maturity. Unlike the primary issues in the primary
market which result in capital formation , the secondary market provides
only liquidity and the marketability of outstanding debt and equity
instruments. The secondary market contributes to economic growth by
channelizing funds into the most efficient channel through the process of
disinvestment to reinvestment. The secondary market also provide instant
valuation of securities ( equity and debt) made possible by changes in the
internal environment, that is, through companywide and industrywide
factors.

The Indian secondary market can be classified into two:

1. Secondary market for the corporate and the financial intermediaries.

For trading in issues of the corporate and the financial intermediaries,
there are:
a) Recognized stock exchanges
b) National stock exchange of India ltd
c) Over the counter exchange of India Ltd (OTCEI)

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Initial Public Offer

The participants in this market are registered brokers – both individual

and institutions. They operate through a network of sub- brokers and
sub dealers and are connected through electronic networking system.

2. Secondary market for government securities and public sector

undertaking bonds. The trading in the government securities is
basically divided into short term money market instruments such as
treasury bills and long term government bonds ranging in maturity
from 5- 20 years.

Methods of Raising Capital

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 Initial Public Offer

L
Debentures Preference Public Public deposits
Shares Fresh Issue Bonds

Equity shares Loans From

Banks & FIs

Offer through Private Rights Issue

Prospectus Placements

Fixed Price Book

Process Building
Process

What is Initial Public Offering ?

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Initial Public Offer

An IPO stands for Initial Public offering. It is the initial share offering a company
makes to the pubic. This offering is normally made by the company in order to
raise public funds for its future projects. In return for the money the public
invests, it receives shares of the company. These shares entitle the investor to
part of the profits as returns, when the project becomes successful. A corporate
may raise capital in the primary market by way of an initial public offer, rights
issue or private placement. An Initial Public Offer (IPO) is the selling of securities
to the public in the primary market. It is the largest source of funds with long or
indefinite maturity for the company. IPO is the first sales of stock by a company
to the public through investment banking firms. IPOs often come from smaller,
younger companies seeking capital to expand their business. IPOs are the first
prices for shares of a company offered to the public.

The market decides that the IPO price is either undervalued or

overvalued. If invested in highly undervalued stock, the prices of the stock may
go up by a significant amount. Stock prices going up help in making lots of
money. IPO funds can be used to finance research and development, but stock
prices tend to decline during prolonged periods of product development, which
in turn generates a new set of challenges for founders or senior management of a
company. A successful initial public offering increases the visibility and appeal
of the company, thereby increasing the demand and value for shares of the
company. Investors can benefit from an IPO not only because of the potential
increase in market value for their stock, but also because publicly-held stock is
more liquid and can be readily sold if the business appears to weaken or if the
investor needs quick cash. The availability of a public market for shares will also
help determine the taxable values of the shares and assist in estate transfers.

The use of IPOs is limited because of the following reasons. There is a

very high cost and much complexity in complying with federal and state laws
governing the sale of business securities, offering business's ownership for
public sale does little good unless the company has sufficient investor

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 Initial Public Offer

awareness and appeal to make the IPO worthwhile; and management must be
ready to handle the administrative and legal demands of widespread public
ownership. An IPO also means a dilution of the existing shareholders interests.

IPOs can be a risky investment for the individual investor as it is difficult

to predict what the stock will do on its initial day of trading.

Different Kind of Issues

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Initial Public Offer

Public issues can be further classified into Initial Public offerings and further
public offerings. In a public offering, the issuer makes an offer for new investors
to enter its shareholding family. The issuer company makes detailed disclosures
as per the DIP guidelines in its offer document and offers it for subscription. The
significant features are illustrated below:

Initial Public Offering (IPO) is when an unlisted company makes either a fresh
issue of securities or an offer for sale of its existing securities or both for the first

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Initial Public Offer

time to the public. This paves way for listing and trading of the issuer’s
securities.

A Further public offering (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.

Rights Issue (RI) is when a listed company which proposes to issue fresh
securities to its existing shareholders as on a record date. The rights are normally
offered in a particular ratio to the number of securities held prior to the issue.
This route is best suited for companies who would like to raise capital without
diluting stake of its existing shareholders unless they do not intend to subscribe
to their entitlements.

A private placement is an issue of shares or of convertible securities by a

company to a select group of persons under Section 81 of the Companies Act,
1956 which is neither a rights issue nor a public issue. This is a faster way for a
company to raise equity capital. A private placement of shares or of convertible
securities by a listed company is generally known by name of preferential
allotment. A listed company going for preferential allotment has to comply with
the requirements contained in Chapter XIII of SEBI (DIP) Guidelines pertaining
to preferential allotment in SEBI (DIP) guidelines which interalia include pricing,
disclosures in notice etc, in addition to the requirements specified in the
Companies Act.

A Qualified Institutions Placement is a private placement of equity shares or

securities convertible in to equity shares by a listed company to Qualified
Institutions Buyers only in terms of provisions of Chapter XIIIA of SEBI (DIP)

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Initial Public Offer

guidelines. The Chapter contains provisions relating to pricing, disclosures,

currency of instruments etc.

Reasons For Going Public

 Raising funds to finance cap ex programs like expansion, diversification,
modernization.

 Financing of increased working capital requirements.

 Debt refinancing.

 Financing acquisitions like a manufacturing unit, brand acquisitions.

 Exit route for existing investors.

Pros and Cons

Advantages:
 Facilitates future funding Enables valuation of the company
 Provides liquidity to existing shares.
 Increases visibility of the company
 Commands better pricing than placement with few investors.

Disadvantages:

 Dilution of ownership stake

 Involves substantial expenses

 Need to make continuous disclosures

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Initial Public Offer

 Increased regulatory monitoring

 Takes substantial amount of management time and efforts.

Intermediaries

 Merchant Bankers play the most vital role amongst all intermediaries.
They assist the company right from preparing prospectus to the listing of
securities at the stock exchanges. Merchant Bankers have to satisfy
themselves about the correctness and propriety of all the information

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Initial Public Offer

provided in the prospectus. It is mandatory for them to carry due

diligence for all the information provided in the prospectus and they must
issue a certificate to this effect to SEBI.A Company may appoint more than
one Merchant Banker provided Inter-Se Allocation of Responsibilities
between the Merchant Bankers are properly structured.

 Underwriters are those intermediaries who underwrite the securities

offered to the public. In case there is under subscription (in short, the
company does not receive good response from public and amount
received from is less than the issue size), underwriters subscribe to the
unsubscribed amount so that the issue is successful.

 Registrar & Share Transfer Agents processes all applications received

from the public and prepare the basis of allotment. The dispatch of share
certificates / refund orders is handled by them.

 Bankers to the Issue are banks which accept application from the public
on behalf of the company. These applications are then forwarded to
Registrar & Share Transfer Agent for further processing.

 Stock Brokers & Sub-Brokers are those intermediaries who through their
contacts / sources invite the public for subscribing shares for which they
get commission.

 Depositories are the intermediaries who hold securities in dematerialized

form on behalf of the shareholders.

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Initial Public Offer

Eligibility Norms
Eligibility Norms – Unlisted Company:

The main entry norms for the companies making a public issue (IPO or FPO) are
summarized as under :

Entry norm I(EN I) :-

The company shall meet the following requirements:

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Initial Public Offer

 Net Tangible assets of as least Rs 3 crores for full 3 yrs.

 Distributable profits in at least three yrs.

 Net worth of at least 1cr in preceding three yrs.

 If change in name, at least 50% revenue for preceding 1 yr should be from

the new activity.

 The issue size does not exceed 5 times the pre-issue net worth

Entry Norm II (ENII):-

 Issue shall be through book building route, with at least 50% to be
mandatory allotted to the Qualified Institutional Buyers (QIBs)

 The minimum post-issue face value capital shall be Rs.10 crore or there
shall be a compulsory market-making for at least 2 years.

Entry Norm III (ENIII):-

 The “project” is appraised and participated to the extent of 15% by
FIs/Scheduled Commercial Banks.

 The minimum post-issue face value capital shall be Rs. 10 crore or there
shall be a compulsory market-making for at least 2 years.

 The company shall also satisfy the criteria of having at least 1000
prospective allotees in its issue

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Initial Public Offer

Eligibility Norms – Listed Company:

The aggregate of the proposed issue and all previous issues made in the same
financial year in terms of size (i.e., offer through offer document + firm allotment
+ promoters’ contribution through the offer document), issue size does not
exceed 5 times its pre-issue net worth as per the audited balance sheet of the last
financial year.

Exemptions from Eligibility Norms

The following are eligible for exemption from entry norms:

(a) Private Sector Banks
(b) Public sector banks
(c) An infrastructure company whose project has been appraised by a PFI
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.
(d) Rights issue by a listed company

Pre-issue Obligations
Appointment of Merchant Banker:
The company selects the merchant banker for handling the issue. The merchant
banker must have a valid registration with SEBI to be eligible for appointment.
The criteria normally used in selection of merchant banker are:

 Past track record in successfully handling similar issues;

 Distributional network with Institutional and Individual Investor;
 Trained manpower and skills for instrument designing and pricing;
 General reputation in the market;
 Good market rapport with other market intermediaries;

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Initial Public Offer

 Value added services such as providing bridge loans against public issue
proceeds.

Appointment of other intermediaries:

 Lead manager: it enters into a MOU with the issuer company. MOU
defines the mutual rights, liabilities and obligations relating to the issue.
The lead manager has to ensure that a copy of MOU is submitted to board
along with offer document. The SEBI has put restrictions on number of
lead manager to be appointed:

Size of the Issue No. of Lead Managers

Less than Rs. 50 crores 2
Rs.50 crores to Rs.100 crores 3
Rs.100 crores to Rs.200 crores 4
Rs.200 crores to Rs.400 crores 5
Above Rs.400 crores 5 or more

 Co-manager: the number of co-manager cannot exceed the number of lead

manager

Registrar to an Issue:
The registrar provides administrative support to the issue process. Registration
with SEBI is mandatory for acting as Registrar and Share transfer agent. There
are two categories of registrar:
 Category I: can act as both registrar to the issue and share transfer agent.
Minimum net worth required is 6 lacs.
 Category II: can act either as registrar t the issue or share transfer agent.
Minimum net worth required is 3 lacs.

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Initial Public Offer

The main function of registrar includes:

 Assist the lead manager in selection of banker to the issue;
 Assist the lead manager in devising application form for various
categories on investors;
 Instruction to collecting branches about the procedure to be followed and
dispatching bank schedules;
 Collection of daily subscription figure from collecting branches and
reporting the same to the company; etc

Banker to the Issue:

They open the Share Application Money Account (Escrow A/c) of the company.
All the issue proceeds are transferred only to this account the company cannot
withdraw the money from this account till the entire process of allotment and
listing is completed. Registration with SEBI is necessary for offering services as
Banker to the issue. SEBI also has the right to cancel or suspend the registration
granted; in case of violation of its regulation and guidelines. The following is
considered by SEBI before granting certificate of registration of banker to an
issue:
 Infrastructure, communication and data processing facilities;
 Manpower to effectively discharge the obligations;
 The bank is a scheduled bank;
There is no restriction o number of banks that can be associated with an issue.
The main function includes:
 Receive the duly completed application form along with application
money;
 Sending the cheques and drafts for collection;
 Giving the daily report on the collection figure to the registrar of the
issue; etc.

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Initial Public Offer

Debenture Trustees:
The debenture trustees are required to obtain a certificate of registration from
SEBI. The SEBI regulation 1993, provides following responsibilities for the
debenture trustees:
 Call the periodical report from the company;
 Inspect the record and account of the company;
 Enforce security in interest of investors;
 Resolving grievances of the debenture holders;
 To ensure continuous listing of debentures; etc.

Underwriters to the Issue:

The SEBI rules 1993, defines underwriting as “an agreement with or without the
condition to subscribe to the securities of the body corporate, when the existing
shareholders of such body corporate or the public do not subscribe to the
securities offered to them.”
Underwriting an issue is optional and not mandatory. However in case of
underwritten issue, the minimum underwritten commitment of the lead
manager shall be to the extent of 5% of the size of the offer.

Auditor:
The regulator auditor of the company acts as auditor for the purpose of the
public offering. The auditor has to give the following certificates and reports to
the issue:
 The auditor’s report along with financial statement for inclusion in the
prospectus.
 The tax benefit report
 The certificate stating that the promoters contribution has been brought in
before the opening of the issue;

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Initial Public Offer

 The certificate stating that the entire amount of reservation on the firm
basis has been brought in before the opening of the issue.

Registration of offer document:

Ten copies of the draft prospectus have to be filled with SEBI. The draft
prospectus has to be accompanied by following:
 Due diligence certificate from the lead manager;
 Statement of Inter se allocation of responsibilities;
 Copy of the MOU between the company and the lead manager
 Undertakings from the issue company

The registration fees payable to SEBI as under:

Size of the Issue Fees Rs.

Up to Rs.5 crores 10,000
Rs.5 cr. To Rs.10 cr. 15,000
Rs.10 cr. To Rs.50 cr 25,000
Rs.50 cr. To Rs.100 cr 50,000
Rs.100 cr. To Rs.500 cr. 2,50,000
Above Rs.500 cr. 5,00,000

The draft document filed will be treated as a public document. The lead manager
is also required to simultaneously file the draft prospectus with all the stock
exchanges where listing is proposed.

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Initial Public Offer

Promoter’s contribution:
In case of unlisted companies, the promoters shall contribution not less than 20%
of the post-issue capital. The promoter’s shareholding for after offer for sale
should not be less than 20% of the post-issue capital. In case of public issues of a
listed company, the promoter can participate either to the extent of 20% of the
proposed issue or ensure post-issue shareholding to the extent of 20% of the
post-issue capital.

Securities not eligible for computation of promoter’s contribution

 If the promoter of any company issuing securities acquire equity for
consideration other than cash during the preceding three years before
filing the offer document and if it involves revaluation of assets or
capitalization of intangible assets, then such securities are not eligible for
computation of promoter’s contribution.
 Shares resulting from bonus issues out of revaluation reserves or reserves
without accrual of cash resources are not eligible for computation of
promoter’s contribution.
 In case of public issue by unlisted companies, securities, which have been
issued to the promoter during the preceding one year, at a price lower
than the price at which equity is being offered to the public are not eligible
for computation for promoter’s contribution. Is the difference between the
offer price and issue price of the shares is brought in by the promoters,
then the shares are considered eligible for promoter’s contribution.
 Incase of companies formed by the conversion of partnership firms and if
there is no change in the management, the shares are allotted to the
promoters during the previous one year out of funds brought in during
that period are not eligible for computation of promoter’s contribution. If
the partner’s capital existed in the firm for the period of more than one

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Initial Public Offer

year on a continuous basis, the shares allotted to promoters against such

capital are considered eligible.
 If the shares, which are not eligible in the above four cases are acquired in
pursuance of a scheme of merger or amalgamation approved by a High
Court are eligible for computation of promoter’s contribution.
 The securities which lack a specific written consent from the respective
shareholders for inclusion of their subscription in the minimum
promoter’s contribution subject to lock in are not eligible for computation
for promoter’s contribution.

Lock-in Requirements:
The minimum promoter’s contribution shall be locked-in for a period of 3 years.
In case of promoters contribution in proposed issue exceeds the minimum
specified contribution, such access contribution will also locked-in for a period of
one year. The lock-I period commence from date of allotment or from the date
commencement of commercial production whichever is later.

The following are the other provisions associated with the lock in requirement:
 Pledge of securities forming part of promoter’s contribution: locked-in
securities held by the promoter may be pledged only with banks or
financial institution as collateral security for loans granted by such banks
or financial institutions, provided the pledge of shares is one of the terms
of sanction of the loan.
 Inter se transfer of securities amongst the promoters: transfer of lock-in
securities amongst promoters as named in the offer document can be

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Initial Public Offer

made, subject to the lock-in being applicable to the transferees for the
remaining period of lock-in.
 Inscription of non-transferable: the securities, which are subject to lock-
in, shall carry inscription “non-transferable” along with duration of
specified non-transferable period mentioned in the face of the security
certificate.

Prospectus

“It is any document described or issued as a prospectus and includes any notice,
circular, advertisement or other document inviting deposits from the public or
inviting offers from the public for the subscription or purchase of any shares in,
or debentures of, a body corporate.”
SEBI Guidelines

Contents Of Prospectus:

•General Information
-It consists of name , address, telephone no, fax no and email address.
-Credit rating (in case of debenture issue)

•Capital Structure of the company

-Authorized issue and subscribed no. of instruments.

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Initial Public Offer

-Size of present issue.

-Promoters contribution
-Firm allotment
-Reservation for specified categories
-Net offer to public

•Terms of Present Issue

-Authority of the issue
-Terms of payment
-Procedure and time for allotment and issue of certificates/refund orders

•Particulars of the Issue

-Purpose of the Issue
-Project cost
-Means of financing
-Name of appraising agency if any
-Name of monitoring agency if any

•Company, Management and Project

-Promoters and their background
-Location of the project
-Infrastructure facilities
-Nature of products and services

•Financial information of Group Companies

-Balance sheet data
-Profit and loss data
-Stock market quotation.

•Basis of Issue Price

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Initial Public Offer

-Weighted Average Return on Net Worth in the last 3 yrs.

-In case of a new issue, EPS pre issue, P/E pre-issue
-Comparison of all accounting ratios with the companies of comparable size.

•Outstanding Litigations or defaults

-Whether all payments / refunds debentures, deposits of banks, institutional
dues etc. have been paid up to date.

Disclosures In The Offer Document:

 The risk factor shall appear in offer document as internal risk and
external risk.

 Whether the company proposes to raise fund for a purpose like fixed
assets creation and/or for rotation such as working capital etc. shall be
disclosed clearly in the offer document.

 One standard financial unit shall be used in the offer document. (e.g.
lakhs, thousands).

 The issuer company may include in the offer document, the financial
statements prepared on the basis of more than one accounting standards.

Internal Risk Factors:

 Changes in technology may render the Companies current technologies
obsolete.
 The Company may require to make substantial new investments to seek to
remain competitive.
 Current Valuations are high and they may not be sustained in the future
External Risk Factors:

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Initial Public Offer

 A significant change in the regulatory environment.

 The tax liability may increase and the firm’s profitability may be reduced
in the event of termination or reduction of tax incentives.
 An economic downturn may adversely impact operating results.
 Expectations about an intensification in Global Competition.

What Is Red Herring Prospectus?

 A preliminary prospectus issued by stock-underwriting firms to measure
investor interest in a prospective stock offering. The document must
contain a warning, printed in red, that the document does not contain all
the information normally required by the stock exchange authority, and
that some parts may be changed before the final prospectus is issued to
the public.
 It is understood that the document will be modified significantly before
the final prospectus is published.
 It is a prospectus which does not have details of either price or number of
shares being offered or the amount of issue.
 Therefore, in case the price is not disclosed, the number of shares and the
upper and lower price bands have to be disclosed.
 On the other hand, an issuer can state the issue size and the number of
shares are determined later.
 In the case of book-built issues it is a process of price discovery hence only
on completion of the bidding process, the details of the final price are
included in the offer document.

Difference between an Offer Document, a Draft Offer

Document and an Abridged Prospectus:

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Initial Public Offer

 Offer document means Prospectus An offer document covers all the

relevant information to help an investor to make his/her investment
decision.
 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 the RoC.
 Abridged Prospectus contains all the salient features of a prospectus. It
accompanies the application form of public issues.

SEBI’s Role in an Issue:

 It is to be distinctly understood that submission of offer document to SEBI

should not in any way be deemed or construed that the same has been
cleared or approved by SEBI.
 SEBI does not recommend any issue nor does take any responsibility
either for the financial soundness of any scheme or the project for which
the issue is proposed to be made.

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IPO Grading

What is 'IPO Grading'?

 IPO grading is a service aimed at facilitating the assessment of equity

issues offered to public.
 The grade assigned to any individual issue represents an assessment of
the ‘fundamentals’ of that issue in relation to the universe of other listed
equity securities in India.
IPO Grading considers the following five parameters:
 Earnings per share
 Financial risks
 Accounting quality
 Corporate governance
 Management quality

Advantages of IPO Grading:

 Is likely to help SEBI regulate the IPO market by helping it protect the
investors from cases of vanishing companies.

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Initial Public Offer

 Retail investors, stand to benefit the most on account of the professional

perspective of the company's fundamentals.
 Neutral agencies can be more objective in their evaluation of a public offer
compared to other market participants.

Disadvantages of IPO Grading:

 The rating agencies, will not talk about ``what price'' and ``what time''
aspects of the offer.
 Rating agencies (experienced in debt rating) could face trouble with rating
the equities, which, unlike debt rating, is more dynamic and cannot be
standardized.
 Investors may get deluded by a low-graded IPO, which could become a
`missed opportunity' in the future.
 Given that the decision to invest or avoid investments in any IPO is most
often a function of the pricing, the lack of this aspect in the present IPO
grading system could make the whole process an unfinished task.
 Further, IPO grading mechanism is a globally-unique initiative; it could
increase the cost of raising capital in India and urge companies to seek
capital overseas.
That is to say that, at times, even good companies at a higher price could
be a bad investment choice, while the not-as-good ones could be a steal at
lower prices.

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Initial Public Offer

Pricing the Issue

Pricing the instrument is the most critical element of an issue. Since the abolition
of CCI, the onus of pricing the issue has fallen on Merchant Bankers. Companies
are not allowed to freely price their issues. The idea behind free pricing was that
if companies overpriced their issues, the market would penalize it by not
subscribing and by underpricing, the company would have to forego the
potential premium.

The Era of Controller of Capital Issues (CCI):

The CCI regime, when all the issues coming with a public issue had to price their
issue based on the CCI formula, was a case of anti-market practice, where all
companies whether fundamentally sound or not had to price their issues very
conservatively. As a result of this all the issues coming into the market were
easily oversubscribed leaving a few devolvements. The Merchant Bankers’ role
during this period was very limited.

With the abolition of CCI in June, 1992, the restriction was removed and
companies were allowed to price the equity at a premium subject to certain
conditions. This free pricing regime had its own quota of boons and banes. The
sound companies with good fundamentals were able to tap funds from the
capital market at a premium. On the other hand, companies with dubious
credentials issued capital with rosy projections and fleeced the uninformed
investor.

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Initial Public Offer

The Merchant Banking community too, moved into the numbers game and
became less concerned about the quality of the issues. This resulted in the
overpricing of many issues which often gave negative initial returns to the
investors.

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 Banker 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).

Fixed Pricing:
In fixed price offerings, market prices are determined before the sale of shares.
Shares are randomly rationed or prorated among all the bidders if they are
oversubscribed. In financial markets, institutional investors have an
informational advantage and more experience than retail investors. They
increase the demand when they have higher expected valuations regarding the
market value of shares. Retail investors, on the contrary, do not have such
information and thus cannot submit their demand contingent on such a
valuation. Thus when the value of shares is at the lowest level, the total demand
is the least and retail investors are allocated the largest proportion. To induce
uninformed investors to participate so that the shares can be fully subscribed at
any possible valuation, this winner’s curse problem has to be taken into account
when setting the fixed market price. Fixed price offering is chosen by firms if
firms know much information about the market value of shares and try to signal
the high value of shares by price discount.

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Initial Public Offer

Overpricing and Underpricing:

To test whether a stock has been priced at its intrinsic worth or not, returns are
computed. Returns on the stock market are compared with returns on the
market index. If these returns are positive, the indication is one of underpricing.
Similarly, if the returns are negative, it is an indication of overpricing.

Implications and Consequences of Underpricing:

 Underpricing can be related to timing of the issue and prevailing market
conditions particularly in the secondary market.
 An empirical study conducted at different periods (both bullish as well as
bearish) indicates that initial returns in the bullish phase are greater than that
in the bearish phase. This may be attributed to the behaviour of secondary
market during the listing.
 As a result of underpricing, the promoter or the company loses the
opportunity to raise more funds.
 Since an IPO is mainly intended as a long-term financing strategy,
underpricing would give its shareholders good returns thereby enhancing its
credibility. This would enable it to tap the market again for its future
ventures.
 Underpricing could result in a lower net worth on an increased equity, which
might make dividend pay-outs or investments in the future difficult.

Implications and Consequences of Overpricing:

 Overpricing might leave a bad feeling in the minds of the investors
particularly if initial returns to them are negative.
 The logic behind overpricing may have something to do with conditions
prevailing in the secondary market. Promoters may want to take advantage
of the boom in the primary market and would price the issue very high.

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Initial Public Offer

 The consequences of overpricing could be really vital, resulting in the

devolvement of the issue thereby making the promoters guilty of
overestimation which would degrade the image of the company in the
market.
 Another logic behind this practice could be to lend credibility to the
organization by getting the issue oversubscribed.
 The overpricing is done through rosy projections compared to its past
performance and, in the present scenario, the blame goes on to the merchant
bankers who price the issues without due diligence and ignore the market
rules and regulations thereby leading to strained relations between investors
and merchant bankers.

Therefore, underpricing or overpricing may be related to the problem of

information asymmetry which in turn depends upon an efficient market setting.

Factors underlying Underpricing and Remedies:

1. Asymmetric information: The most basic problem of the IPO process is

the presence of both ‘good’ and ‘bad’ firms going public, coupled with
asymmetric information between firms and investors. Firms know
themselves reasonably well but investors do not. When information and
analysis is costly, it is difficult for investors to learn about a firm
thoroughly.

Superior information disclosures can reduce this asymmetry and should

help reducing underpricing.

2. Fixing the offer price early: The firm sets the offer price at time O and the
issue opens at time T. Firms are likely to be risk-averse with respect to the

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Initial Public Offer

prospects of issues falling. Hence they underprice to forestall this

possibility.

The delay between choosing an offer price and the issue date has
diminished in some sense with the current SEBI policy allowing firms to
choose a price band at the time of vetting the prospectus instead of a
precise price.

3. Interest rate float: The issuing company controls the application money
for a month. Even if stock invest were widely used, the interest rate on
stock invest is quite low. At equilibrium, markets would compensate
investors for this low rate of return, through underpricing.

This problem can be solved if issuing firms and merchant bankers become
more efficient and shorten the lags between issue date and listing date.

4. Liquidity premium: Investors who apply for public issues lose liquidity
on the amount paid at issue price. Usually at equilibrium, the markets
would compensate them for this by paying a liquidity premium, which
would show up in IPO underpricing.

5. Building loyal shareholders: Firms may have an incentive to underprice

when they expect to return to the capital market to raise further resources
at a later date, via a rights issue or a public issue.

Though firms may want to build loyal shareholders at equilibrium, the

Japanese auction system, if prevalent, prevents from using underpricing
as a means towards this end.

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Initial Public Offer

6. Merchant Banker rewarding favored clients: The interaction between the

merchant banker and the company going public is typically a one shot
interaction, but the merchant banker is in a repeated game with many of
his clients, especially the large institutional investors. In this situation the
merchant banker has an incentive to underprice to retain his established
clients.

This repeated game between merchant banker and his institutional clients
is irrelevant in Japanese auction system.

Another method of reducing this underpricing would be by making the

IPO market more institutionalized where wholesale buyers in turn offload
it to the lay investors.

One of the big puzzles in finance is why the typical IPO underpricing (that is, the
return from the offering price to the price when the market starts trading) is
about 10%.

The academic consensus is that there are a number of reasons why issuers leave
so much money on the table:

 The Winner's Curse: If you are an investor who is asking for an allocation of
1,000 shares, and there are two IPO's. One is overpriced, the other is
underpriced by 20%. When the offering is overpriced, few other people will
have asked for shares and you typically get all 1,000 shares. When the
offering is underpriced, half the world will have asked for shares, and you
typically get shares only rarely. (It gets even worse when underwriters give
the "good shares" only to their friends, and you are not one of them.) For the
sake of argument, as consequently, an investor who participates in an
offering that is just fairly priced is likely to make a negative return and thus

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Initial Public Offer

would not wish to participate. To get investors to participate at all, issuers

must set a lower price for the IPO. It will look as if the average IPO left
money on the table, but the typical investor cannot profit from this money.
(This is not the case in the reasons described below, where investors are
presumed to get a bargain.)

 A Good Taste In Investors' Mouths: Issuers like to donate some money to

investors. They will want to come back to investors later for more funds, and
those investors will remember if they got a good or a raw deal at the IPO.

 Pre-Selling: Underpricing is necessary to solicit information from investors

about potential interest. Why would investors tell underwriters that they like
an offering, unless they knew that if they told the underwriters that they liked
it, the underwriter would give them more shares for a better price.

 Marketing: If one important investor defects, maybe all investors will follow.
(This is sometimes called a "herd mentality.") To make sure the important
first investor does not defect, it is better to play it safe, and leave too much
money on the table.

 Legal Liability: Investors tended to sue when shares where ex-post

overpriced, because IPO's were subject to unusually strong liability. Being
10% underpriced reduced the probability that IPO prices would soon drop
below the offering price.

 Agency: This reason concentrates on the conflict between investors and

underwriters. Because underwriters prefer to work less, especially when the
price is high which makes selling painful, it is best to make selling a little
easier for them and underprice the offering.

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Initial Public Offer

 Placement: The issuer cares more about who to place shares with than what
the price is. By giving shares at a bargain price, the issuer can pick and
choose.

Flip Side of Fixed Pricing

The lacuna in this method is that companies normally tend to select that
merchant banker who offers them the highest price. Merchant Bankers, in order
to get the mandate, price the IPO as aggressively as possible. The process, very
often, is reduced to competitive bidding, and later the merchant banker and the
company realize that the issue was priced much higher than its intrinsic value.

What is Book Building?

SEBI guidelines, 1995 defines book building as “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 such securities is assessed for the determination of
the quantum of such securities to be issued by means of a notice, circular,
advertisement, document or information memoranda or offer document.” Book
building process is a common practice used in most developed countries for
marketing a public offer of equity shares of a company. However, book building
is a transparent and flexible price discovery method of initial public offerings
(IPOs) in which price of securities is fixed by the issuer company along with the
Book Running Lead Manager (BRLM) on the basis of feedback received from
investors as well as market intermediaries during a certain period.

Why Book Building?

The abolition of the Capital Issue Control Act, 1947 has brought a new era in the
primary capital markets in India. Controls over the pricing of the issues,

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Initial Public Offer

designing and tenure of the capital issues were abolished. The issuers, at present,
are free to make the price of the issues. Before establishment of SEBI in 1992, the
quality of disclosures in the offer documents was very poor. SEBI has also
formulated and prescribed stringent disclosure norms in conformity to global
standards. The main drawback of free pricing was the process of pricing of
issues. The issue price was determined around 60-70 days before the opening of
the issue and the issuer had no clear idea about the market perception of the
price determined. The traditional fixed price method of tapping individual
investors suffered from two defects:
(a) Delays in the IPO process, and
(b) Under-pricing of issue.
In fixed price method, public offers do not have any flexibility in terms of price
as well as number of issues. From experience it can be stated that a majority of
the public issues coming through the fixed price method are either under-priced
or over-priced. Individual investors (i.e. retail investors), as such, are unable to
distinguish good issues from bad one. This is because the issuer Company and
the merchant banker as lead manager do not have the exact idea on the fixed
pricing of public issues. Thus it is required to find out a new mechanism for fair
price discovery and to help the least informed investors. That’s why, Book
Building mechanism, a new process of price discovery, has been introduced to
overcome this limitation and determine issue price effectively.

Public offers in fixed price method involve a pre-issue cost of 2-3% and carry the
risk of failure if it does not receive 90% of the total subscription. In Book Building
such cost and risks can be avoided because the issuer company can withdraw
from the market if demand for the security does not exist.
Book Building and Fixed Price Option in IPOs:

A company may raise capital in the primary capital market through initial public
offers (IPOs), rights issues and private placement. IPOs, the largest sources of

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Initial Public Offer

funds in the primary capital market, to the company are basically an invitation
by a company to the public to subscribe to its securities offered through
prospectus. In fixed price process in IPOs, allotments of shares to all investors are
made on proportionate basis.

Institutional investors normally are not interested to participate in fixed price

public issues due to uncertainty of allotment and lack of opportunity cost. On the
other, they like to participate largely in book built transactions as in this process
the costs of public issue and the time taken for the completion of the entire
process are much lesser than the fixed price issues. In Book Building the price is
determined on the basis of demand received or at price above or equal to the
floor price whereas in fixed price option the price of issues is fixed first and then
the securities are offered to the investors. In case of Book Building process book
is built by Book Runner Lead Manager (BRLM) to know the every day demand
whereas in case of fixed price of public issues, the demand is known at the close
of the issue.

Features Fixed Price process Book Building process

Pricing Price at which the securities Price at which securities will be

are offered/allotted is known offered/allotted is not known in
in advance to the investor. advance to the investor. Only an
indicative price range is known.

Demand Demand for the securities Demand for the securities offered can
offered is known only after be known everyday as the book is
the closure of the issue. built.

Payment Payment can be made at the Payment only after allocation.

time of subscription wherein
refund is given after

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Initial Public Offer

allocation.

Process of Book Building:

The main parties who are directly associated with book building process are the
issuer company, the Book Runner Lead Manager (BRLM) and the syndicate
members. The Book Runner Lead Manager (i.e. merchant banker) and the
syndicate members who are the intermediaries are both eligible to act as
underwriters. The steps which are usually followed in the book building process
can be summarized below:

1. The issuer company proposing an IPO appoints a lead merchant banker as

a BRLM.
2. Initially, the issuer company consults with the BRLM in drawing up a
draft prospectus (i.e. offer document) which does not mention the price of
the issues, but includes other details about the size of the issue, past
history of the company, and a price band. The securities available to the
public are separately identified as “net offer to the public”.
3. The draft prospectus is filed with SEBI which gives it a legal standing.
4. A definite period is fixed as the bid period and BRLM conducts awareness
campaigns like advertisement, road shows etc.
5. The BRLM appoints a syndicate member, a SEBI registered intermediary
to underwrite the issues to the extent of “net offer to the public”.
6. The BRLM is entitled to remuneration for conducting the Book Building
process.
7. The copy of the draft prospectus may be circulated by the BRLM to the
institutional investors as well as to the syndicate members.

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Initial Public Offer

8. The syndicate members create demand and ask each investor for the
number of shares and the offer price.
9. The BRLM receives the feedback about the investor’s bids through
syndicate members.
10. The prospective investors may revise their bids at any time during the bid
period.
11. The BRLM on receipts of the feedback from the syndicate members about
the bid price and the quantity of shares applied has to build up an order
book showing the demand for the shares of the company at various prices.
The syndicate members must also maintain a record book for orders
received from institutional investors for subscribing to the issue out of the
placement portion.
12. On receipts of the above information, the BRLM and the issuer company
determine the issue price. This is known as the market-clearing price.
13. The BRLM then closes the book in consultation with the issuer company
and determine the issue size of (a) placement portion and (b) public offer
portion.
14. Once the final price is determined, the allocation of securities should be
made by the BRLM based on prior commitment, investor’s quality, price
aggression, earliness of bids etc. The bid of an institutional bidder, even if
he has paid full amount may be rejected without being assigned any
reason as the Book Building portion of institutional investors is left
entirely at the discretion of the issuer company and the BRLM.
15. The Final prospectus is filed with the registrar of companies within 2 days
of determination of issue price and receipts of acknowledgement card
from SEBI.
16. Two different accounts for collection of application money, one for the
private placement portion and the other for the public subscription should
be opened by the issuer company.

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Initial Public Offer

17. The placement portion is closed a day before the opening of the public
issue through fixed price method. The BRLM is required to have the
application forms along with the application money from the institutional
buyers and the underwriters to the private placement portion.
18. The allotment for the private placement portion shall be made on the 2nd
day from the closure of the issue and the private placement portion is
ready to be listed.
19. The allotment and listing of issues under the public portion (i.e. fixed
price portion) must be as per the existing statutory requirements.
20. Finally, the SEBI has the right to inspect such records and books which are
maintained by the BRLM and other intermediaries involved in the Book
Building process.

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Initial Public Offer

Fig.: Steps involved in the Book Building Process

Types of Book Building:

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Initial Public Offer

According to the SEBI, a public issue through Book Building route should consist
of two portions:
(a) the Book Building portion and
(b) the fixed price portion.
The fixed price portion is conducted like normal public issues (conventionally
followed earlier) after the book built portion during which the issue price is fixed
after the bid closing date. In case the issuer chooses to issue securities through
the book building route then as per SEBI guidelines, an issuer company can issue
securities in the following manner:
(i) 100% of the net offer to the public through the book building route.
(ii) 75% of the net offer to the public through the book building process
and 25% through the fixed price portion.
Book Building process aims at fair pricing of the issue which is supposed to
emerge out of offers made by various investors. One question may arise whether
book building is the right mechanism for fair pricing discovery in IPOs? The
answer may be in the negative because a floor price is fixed for the Book Building
below which no bid can be accepted. Since investors participate through Book
Building process in making fair pricing of IPOs where there is no ceiling price,
there should not be any floor price. In addition to this, unlike international
market, India has not reached the stage of development of the institutional
framework to experiment with the book building process because retail investors
(i.e. individual investors) are still now an integral part of Indian capital market. If
the interests of the small investors are not safeguarded appropriately, this may
be very dangerous to the primary capital market.

It can be concluded that although the book building mechanism in Indian capital
market has not arrived with expected success but Indian capital market will also
move, like international capital market, with sufficient success through Book
Building process provided that lead merchant bankers (i.e. BRLMs), issuer

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Initial Public Offer

company, regulators (i.e. SEBI), and investors all discharge there responsibility to
the best interest of the investors.

Reservation:
 In a book built issue allocation to Retail Individual Investors (RIIs), Non
Institutional Investors (NIIs) and Qualified Institutional Buyers (QIBs) is
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% 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.

 ‘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.

 Any bid made in excess of this will be considered in the HNI category.

 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.

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Initial Public Offer

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.

Factors Influencing Pricing:

The qualitative factors mainly include:
 Company’s past record in consistent dividend pay-out and continuous profit
making.
 Experience of the promoters in the relevant field.
 The company’s Unique Selling Proposition which would include their marketing
edge over the competitors, their distribution network, brand equity for their product,
reputation of clients, etc.
 Company’s entitlement to sales tax and income-tax exemption for a particular period
particularly if the project is in some backward area.
 The industry scenario and the demand-supply gap.
 The awards received by the company for its past performance in the Indian and in
the international arena for its quality, etc.
 Credit rating received for its debt.

The quantitative factors include:

The Malegam Committee has prohibited the use of future projections for fixing the
premium. Hence pricing is done based on the historical track record:
 The current market price and the high/low for the last 3 years.
 The P/E multiple based on its offer price and comparing the same with the industry
P/E. The growth rate in PAT and EPS for the past year.

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Initial Public Offer

 The Book Value of the share and the Book Value multiple in relation to offer price.
 The return on net worth and the return on capital employed for the past years.
 The level of promoter’s contribution and the price at which shares have been allotted
to the promoters.

We can thus argue that both quantitative and qualitative factors have an impact on the
pricing of IPOs.

SEBI Pricing Guidelines:

Pricing by Companies Issuing Securities:

The companies eligible to make public issue can freely price their equity shares
or any security convertible at later date into equity shares in the following cases:

Public/ Rights Issue by Listed Companies:

A listed company whose equity shares are listed on a stock exchange, may freely
price its equity shares and any security convertible into equity at a later date,
offered through a public or rights issue.

Public Issue by Unlisted Companies:

An unlisted company eligible to make a public issue and desirous of getting its
securities listed on a recognised stock exchange pursuant to a public issue, may
freely price its equity shares or any securities convertible at a later date into
equity shares.

Infrastructure company:

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Initial Public Offer

An eligible infrastructure company shall be free to price its equity shares, subject
to the compliance with the disclosure norms as specified by SEBI from time to
time.

Initial public Issue by Banks:

The banks (whether public sector or private sector) may freely price their issue of
equity shares or any securities convertible at a later date into equity share,
subject to approval by the Reserve Bank of India.

Differential Pricing:
Any unlisted company or a listed company making a public issue of equity
shares or securities convertible at a later date into equity shares, may issue such
securities to applicants in the firm allotment category 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.

Explanation:
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.

A listed company making a composite issue of capital may issue securities at

differential prices in its public and rights issue.

In the public issue which is a part of a composite issue, differential pricing is also
permissible.

Justification for the price difference shall be given in the offer document.
Price Band:

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Initial Public Offer

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 offer documents filed with the
Board and actual price can be determined at a later date before filing of the offer
document with ROCs.

If the Board of Directors has been authorised to determine the offer price within
a specified price band such price shall be determined by a Resolution to be
passed by the Board of Directors.

The final offer document shall contain only one price and one set of financial
projections, if applicable.

Payment of Discounts/ Commissions, etc.:

No payment, direct or indirect in the nature of a discount, commission,
allowance or otherwise shall be made either by the issuer company or the
promoters in any public issue, to the persons who have received firm allotment
in such public issue.

Freedom to determine the denomination of shares for public / rights issues

and to change the standard denomination:
An eligible company shall be free to make public or rights issue of equity shares
in any denomination determined by it in accordance with Sub-section (4) of
Section 13 of the Companies Act, 1956 and in compliance with the following and
other norms as may be specified by SEBI from time to time:
(i) In case of initial public offer by an unlisted company,
a. If the issue price is Rs. 500/- or more, the issuer company shall have a
discretion to fix the face value below Rs. 10/- per share subject to
the condition that the face value shall in no case be less than Rs. 1 per
share;

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Initial Public Offer

b. If issue price is less than Rs. 500 per share, the face value shall be Rs.
10/- per share;
(ii) The disclosure about the face value of shares (including the statement about
the issue price being “X” times of the face value) shall be made in the
advertisement, offer documents and in application forms in identical font size as
that of issue price or price band.)

The companies which have already issued shares in the denomination of Rs.10/-
or Rs.100/- may change the standard denomination of the shares by splitting or
consolidating the existing shares.

The companies proposing to issue shares in any denomination or changing the

standard denomination in terms of clause 3.7.1 or 3.7.2 above shall comply with
the following:
a. The shares shall not be issued in the denomination of decimal of a rupee;
b. The denomination of the existing shares shall not be altered to a
denomination of decimal of a rupee;
c. At any given time there shall be only one denomination for the shares of
the company;
d. The companies seeking to change the standard denomination may do so
after amending the Memorandum and Articles of Association, if required;
e. The company shall adhere to the disclosure and accounting norms
specified by SEBI from time to time.

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Initial Public Offer

Valuation Parameters

Price Earning Ratio:

The P/E ratio gives you an indication of how many times you are paying for a
company's stock verse a company's earnings. P/E ratios can be used to compare
against other companies, or against a company's own historical P/E ratio. It is
believed by some that a company with a high (large) P/E ratio is expensive verse
a company with a low P/E ratio, since with a high P/E ratio you are paying a
larger multiple verses a company's earnings.  

Higher P/E ratios are often associated with "growth stocks", or companies that
are growing faster than average. The reason why some companies have a high
P/E is because investors believe that the company's earnings will be higher in the
future. P/E ratios can not be applied to companies without any earnings.

Enterprise Multiple:
A ratio used to determine the value of a company. The enterprise multiple looks
at a firm as a potential acquirer would, because it takes debt into account - an
item which other multiples like the P/E ratio do not include. A low ratio
indicates that the company might be undervalued.

Return on Net Worth:

Net Profit after Tax divided by Net Worth, this is the 'final measure' of
profitability to evaluate overall return. This ratio measures return relative to
investment in the company. Put another way, Return on Net Worth indicates
how well a company leverages the investment in it. May appear higher for
startups and sole proprietorships due to owner compensation draws accounted
as net profit.

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Initial Public Offer

Return on Net Assets:

The return on asset or ROA gives the return on every rupee invested in an asset.
This is an important ratio for companies deciding whether or not to initiate a
new project. The basis of this ratio is that if a company is going to start a project
they expect to earn a return on it, ROA is the return they would receive. Simply
put, if ROA is above the rate that the company borrows at then the project
should be accepted, if not then it is rejected.

Operating Cash Flow per Share:

Operating cash flow (OCF) is the cash generated by the company through its
operating activities. Cash Flow gives a better indication than EPS about the
financial strength of the company. A company might have a positive earning but
negative cash flow which doesn’t augur well for the company. Hence many
investors give more importance to OCF /share than EPS.

Price to Sales Ratio:

It is a ratio which compares the value of the stock with its past performance,with
peer companies or the market itself.. Price to sales is calculated by dividing a
stock's current price by its revenue per share for the trailing 12 months.

PEG Ratio:
It is a ratio used to determine a stock's value while taking into account earnings
growth. PEG is a widely used indicator of a stock's potential value. It is favored
by many over the price/earnings ratio because it also accounts for
growth. Similar to the P/E ratio, a lower PEG means that the stock is more
undervalued.

Market to Book Ratio:

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Initial Public Offer

A ratio used to find the value of a company by comparing the book value of a

firm to its market value. Book value is calculated by looking at the
firm's historical cost, or accounting value. Market value is determined in the
stock market through its market capitalization. If the ratio is more than 1 then the
stock is under priced and if the ratio is less than 1 then the stock is overpriced.

Post-Issue Obligations of IPO

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Initial Public Offer

The post issue obligations shall be as follows:

Post- issue Monitoring Reports:

1. Irrespective of the level of subscription, the post-issue Lead Merchant
Banker shall ensure the submission of the post-issue monitoring reports as
per formats specified in Schedule XVI. These reports shall be submitted
within 3 working days from the due dates.
2. The due date for submitting Post Issue Monitoring report in case of public
issues by listed and unlisted companies:

a. 3 day monitoring report in case of issue through book building route, for
book built portion.
b. The due date of the report shall be 3rd day from the date of allocation in
the book built portion or one day prior to the opening of the fixed price
portion whichever is earlier.
3 day monitoring report in other cases, including fixed price portion of
book built issue.
c. The due date for the report shall be the 3rd day from the date of closure of
the issue.

Final Post Issue Monitoring Report for all issues:

The due date for this report shall be the 3rd day from the date of listing or 78
days from the date of closure of the subscription of the issue, whichever is earlier

The due dates for submitting post issue monitoring report in case of Rights
issues: -

a. 3-Day Post-Issue Monitoring Report: The due date for this report shall be
the 3rd day from the date of closure of subscription of the issue
b. 50-Day Post-Issue Monitoring Report : The due date for this report shall be
the 50th day from the date of closure of subscription of the issue.

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Initial Public Offer

Redressal of Investor Grievances:

The Post -issue Lead Merchant Banker shall actively associate himself with post-
issue activities namely, allotment, refund and despatch and shall regularly
monitor redressal of investor grievances arising from there.

Co-ordination with Intermediaries:

1. The Post-issue lead merchant banker shall maintain close co-ordination

with the Registrars to the Issue and arrange to depute its officers to the
offices of various intermediaries at regular intervals after the closure of the
issue to monitor the flow of applications from collecting bank branches,
processing of the applications including those accompanied by stockinvest
and other matters till the basis of allotment is finalised, despatch security
certificates and refund orders completed and securities listed.
2. Any act of omission or commission on the part of any of the
intermediaries noticed during such visits shall be duly reported to the
Board.

Stock Invest:

The lead merchant banker shall ensure compliance with the instructions issued
by the RBI on handling of stock invest by any person including Registrars.

Underwriters:

a.  
i. If the issue is proposed to be closed at the earliest closing date, the
lead Merchant Banker shall satisfy himself that the issue is fully
subscribed before announcing closure of the issue.

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Initial Public Offer

ii. In case, there is no definite information about subscription figures,

the issue shall be kept open for the required number of days to take
care of the underwriters' interests and to avoid any dispute, at a
later date, by the underwriters in respect of their liability.
b. In case there is a devolvement on underwriters, the lead Merchant Banker
shall ensure that the underwriters honour their commitments within 60
days from the date of closure of the issue.
c. In case of under-subscribed issues, the lead merchant banker shall furnish
information in respect of underwriters who have failed to meet their
underwriting devolvements to the Board in the format specified at
Schedule - XVII.

Bankers to an Issue:

The post-issue Lead Merchant Banker shall ensure that moneys received
pursuant to the issue and kept in a separate bank (i.e. Bankers to an Issue), as per
the provisions of section 73(3) of the Companies Act 1956, is released by the said
bank only after the listing permission under the said Section has been obtained
from all the stock exchanges where the securities were proposed to be listed as
per the offer document.

Post-issue Advertisements:

Post-issue Lead Merchant Banker shall ensure that in all issues, advertisement
giving details relating to over-subscription, basis of allotment, number, value
and percentage of applications received along with stockinvest, number, value
and percentage of successful allottees who have applied through stockinvest,

56
Initial Public Offer

date of completion of despatch of refund orders, date of despatch of certificates

and date of filing of listing application is released within 10 days from the date of
completion of the various activities at least in an English National Daily with
wide circulation, one Hindi National Paper and a Regional language daily
circulated at the place where registered office of the issuer company is situated.

Post-issue Lead Merchant Banker shall ensure that issuer company / advisors /
brokers or any other agencies connected with the issue do not publish any
advertisement stating that issue has been over-subscribed or indicating investors'
response to the issue, during the period when the public issue is still open for
subscription by the public.

Advertisement stating that "the subscription to the issue has been closed" may be
issued after the actual closure of the issue.

Basis of Allotment:

In a public issue of securities, the Executive Director/Managing Director of the

Designated Stock Exchange along with the post issue Lead Merchant Banker and
the Registrars to the Issue shall be responsible to ensure that the basis of
allotment is finalised in a fair and proper manner in accordance with the
following guidelines:. Provided, in the book building portion of a book built
public issue notwithstanding the above clause, Clause 11.3.5 of Chapter XI of
these Guidelines shall be applicable.

Proportionate Allotment Procedure:

The allotment shall be subject to allotment in marketable lots, on a proportionate

basis as explained below:

a. Applicants shall be categorised according to the number of shares applied

for.

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Initial Public Offer

b. The total number of shares to be allotted to each category as a whole shall

be arrived at on a proportionate basis i.e. the total number of shares
applied for in that category (number of applicants in the category x
number of shares applied for) multiplied by the inverse of the over-
subscription ratio as illustrated below:

    Total number of applicants in category of 100s - 1,500

    Total number of shares applied for - 1,50,000
    Number of times over-subscribed - 3
    Proportionate allotment to category - 1,50,000 x 1/3 = 50,000

c. Number of the shares to be allotted to the successful allottees shall be

arrived at on a proportionate basis i.e. total number of shares applied for
by each applicant in that category multiplied by the inverse of the over-
subscription ratio. Schedule XVIII of basis of allotment procedure may be
referred to.

    Number of shares applied for by - 100

    each applicant
    Number of times oversubscribed - 3
    Proportionate allotment to each
    successful applicant - 100 x 1/3 = 33
    (to be rounded off to 100)

d. All the applications where the proportionate allotment works out to less
than 100 shares per applicant, the allotment shall be made as follows:
i. Each successful applicant shall be allotted a minimum of 100
securities; and
ii. The successful applicants out of the total applicants for that
category shall be determined by drawal of lots in such a manner

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Initial Public Offer

that the total number of shares allotted in that category is equal to

the number of shares worked out as per (ii) above.
e. If the proportionate allotment to an applicant works out to a number that
is more than 100 but is not a multiple of 100 (which is the marketable lot),
the number in excess of the multiple of 100 shall be rounded off to the
higher multiple of 100 if that number is 50 or higher.
f. If that number is lower than 50, it shall be rounded off to the lower
multiple of 100. As an illustration, if the proportionate allotment works
out to 250, the applicant would be allotted 300 shares.
g. If however the proportionate allotment works out to 240, the applicant
shall be allotted 200 shares. All applicants in such categories shall be
allotted shares arrived at after such rounding off.
h. If the shares allocated on a proportionate basis to any category is more
than the shares allotted to the applicants in that category, the balance
available shares for allotment shall be first adjusted against any other
category, where the allocated shares are not sufficient for proportionate
allotment to the successful applicants in that category.
i. The balance shares if any, remaining after such adjustment shall be added
to the category comprising applicants applying for minimum number of
shares.
j. As the process of rounding off to the nearer multiple of 100 may result in
the actual allocation being higher than the shares offered, it may be
necessary to allow a 10% margin i.e. the final allotment may be higher by
10 % of the net offer to public.

Other Responsibilities:

 The lead merchant banker shall ensure that the despatch of share
certificates / refund orders / cancelled stock invests and demat credit is

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Initial Public Offer

completed and the allotment and listing documents submitted to the stock
exchanges within 2 working days of finalisation of the basis of allotment.
 The post issue lead manager shall ensure that all steps for completion of
the necessary formalities for listing and commencement of trading at all
stock exchanges where the securities are to be listed are taken within 7
working days of finalisation of basis of allotment.
 Lead Merchant Banker shall ensure payment of interest to the applicants
for delayed dispatch of allotment letters, refund orders, etc. as prescribed
in the offer document.
 The Post-issue Lead Merchant Banker shall ensure that the despatch of
refund orders / allotment letters /share certificates is done by way of
registered post / certificate of posting as may be applicable.
 In case of all issues, advertisement giving details relating to over-
subscription, basis of allotment, number, value and percentage of
applications received along with stockinvest, number, value and
percentage of successful allottees who have applied through stockinvest,
date of completion of despatch of refund orders, date of despatch of
certificates and date of filing of listing application.
 Such advertisement shall be released within 10 days from the date of
completion of the various activities.
 Post-issue Lead merchant banker shall continue to be responsible for post
issue activities till the subscribers have received the shares/debenture
certificates or refund of application moneys and the listing agreement is
entered into by the issuer company with the stock exchange and listing/
trading permission is obtained.

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Initial Public Offer

Listing

Listing means admission of securities of an issuer to trading privileges on a

stock exchange through a formal agreement. The prime objective of admission to
dealings on the Exchange is to provide liquidity and marketability to securities,
as also to provide a mechanism for effective management of trading.

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 Initial Public Offer

Objectives of listing:
The objectives of listing are mainly to:

 Provide liquidity to securities;

 Mobilize savings for economic development;
 Protect interest of investors by ensuring full disclosures

Benefits of Listing:

Premier marketplace:

The sheer volume of trading activity ensure that the impact cost is lower on
the Exchange which in turn reduces the cost of trading to the investor.

Visibility:

The trading system provides unparallel level of trade and post-trade

information. The best 5 buy and sell orders are displayed on the trading system
and the total number of securities available for buying and selling is also
displayed. This helps the investor to know the depth of the market. Further,
corporate announcements, results, corporate actions etc are also available on a
trading system.

Eligibility Criteria for IPOs

Companies have been classified as large cap companies and small cap
companies. A large cap company is a company with a minimum issue size of Rs.
10 crores and market capitalization of not less than Rs. 25 crores. A small cap
company is a company other than a large cap company.

I. In respect of Large Cap Companies:

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 Initial Public Offer

The minimum post-issue paid-up capital of the applicant company (hereinafter

referred to as "the Company") shall be Rs. 3 crores; and

 The minimum issue size shall be Rs. 10 crores; and

 The minimum market capitalization of the Company shall be Rs. 25 crores

(market capitalization shall be calculated by multiplying the post-issue paid-
up number of equity shares with the issue price).

II. In respect of Small Cap Companies:

 The minimum post-issue paid-up capital of the Company shall be Rs. 3

crores;
 The minimum issue size shall be Rs. 3 crores;
 The minimum market capitalization of the Company shall be Rs. 5 crores
(market capitalization shall be calculated by multiplying the post-issue
paid-up number of equity shares with the issue price); and
 The minimum income/turnover of the Company should be Rs. 3 crores in
each of the preceding three 12-months period; and
 The minimum number of public shareholders after the issue shall be 1000.
 A due diligence study may be conducted by an independent team of
Chartered Accountants or Merchant Bankers appointed by the Exchange,
the cost of which will be borne by the company. The requirement of a due
diligence study may be waived if a financial institution or a scheduled
commercial bank has appraised the project in the preceding 12 months.

III For all companies:

 In respect of the requirement of paid-up capital and market capitalisation,

the issuers shall be required to include in the disclaimer clause forming a
part of the offer document that in the event of the market capitalisation
(product of issue price and the post issue number of shares) requirement

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Initial Public Offer

of the Exchange not being met, the securities of the issuer would not be
listed on the Exchange.
 The applicant, promoters and/or group companies, should not be in
default in compliance of the listing agreement.
 The above eligibility criteria would be in addition to the conditions
prescribed under SEBI (Disclosure and Investor Protection) Guidelines,
2000.

Listing Procedure (NSE Procedure):

An Issuer has to take various steps prior to making an application for listing
its securities on the NSE. These steps are essential to ensure the compliance of
certain requirements by the Issuer before listing its securities on the NSE. The
various steps to be taken include:

 Approval of Memorandum and Articles of Association

 Approval of draft prospectus
 Submission of Application

Approval of Memorandum and Articles of Association:

Rule 19(2) (a) of the Securities Contracts (Regulation) Rules, 1957 requires that
the Articles of Association of the Issuer wanting to list its securities must contain
provisions as given hereunder.

The Articles of Association of an Issuer shall contain the following provisions

namely:

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Initial Public Offer

 That there shall be no forfeiture of unclaimed dividends before the claim

becomes barred by law;
 That a common form of transfer shall be used;
 That fully paid shares shall be free from all lien and that in the case of
partly paid shares the Issuer's lien shall be restricted to moneys called or
payable at a fixed time in respect of such shares;
 That registration of transfer shall not be refused on the ground of the
transferor being either alone or jointly with any other person or persons
indebted to the Issuer on any account whatsoever;
 That any amount paid up in advance of calls on any share may carry
interest but shall not in respect thereof confer a right to dividend or to
participate in profits;
 That option or right to call of shares shall not be given to any person
except with the sanction of the Issuer in general meetings.
 Permission for Sub-Division/Consolidation of Share Certificate.

Note: The Relevant Authority may take exception to any provision contained in
the Articles of Association of an Issuer which may be deemed undesirable or
unreasonable in the case of a public company and may require inclusion of
specific provisions deemed to be desirable and necessary.

If the Issuer's Articles of Association is not in conformity with the provisions as

stated above, the Issuer has to make amendments to the Articles of Association.
However, the securities of an Issuer may be admitted for listing on the NSE on
an undertaking by the Issuer that the amendments necessary in the Articles of
Association to bring Articles of Association in conformity with Rule 19(2)(a) of
the Securities Contract (Regulation) Rules, 1957 shall be made in the next annual
general meeting and in the meantime the Issuer shall act strictly in accordance
with prevalent provisions of Securities Contract (Regulation) Act, 1957 and other
statutes.

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Initial Public Offer

It is to be noted that any provision in the Articles of Association which is not in

tune with sound corporate practice has to be removed by amending the Articles
of Association.

Approval of draft prospectus:

The Issuer shall file the draft prospectus and application forms with NSE. The
draft prospectus should have been prepared in accordance with the statutes,
notifications, circulars, guidelines, etc. governing preparation and issue of
prospectus prevailing at the relevant time. The Issuers may particularly bear in
mind the provisions of Companies Act, Securities Contracts (Regulation) Act, the
SEBI Act and the relevant subordinate legislations thereto. NSE will peruse the
draft prospectus only from the point of view of checking whether the draft
prospectus is in accordance with the listing requirements, and therefore any
approval given by NSE in respect of the draft prospectus should not be
construed as approval under any laws, rules, notifications, circulars, guidelines
etc. The Issuer should also submit the SEBI acknowledgment card or letter
indicating observations on draft prospectus or letter of offer by SEBI.

Submission of Application:

Application of the exchange that the IPO has to be listed should be submitted
according to the norms and conditions of that particular exchange.

Listing Fees (NSE Fees):

The listing fees depend on the paid up share capital of your Company:

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Initial Public Offer

Particulars Amount (Rs.)

Initial Listing Fees 7,500

Annual Listing Fees

Companies with paid up share and/or debenture capital:

Of Rs.1 crore 4,200

Above Rs.1 crore and up to Rs.5 crores 8,400

Above Rs.5 crores and up to Rs.10 crores 14,000

Above Rs.10 crores and up to Rs.20 crores 28,000

Above Rs.20 crores and up to Rs.50 crores 42,000

Above Rs.50 crores 70,000

Companies which have a paid up capital of more than Rs. 50 crores will pay
additional listing fees of Rs. 1400 for every increase of Rs. 5 crores or part thereof
in the paid up share/debenture capital.

Green Shoe Option

“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 in accordance with the provisions of Chapter VIII-A of these
Guidelines, which is granted to a company to be exercised through a Stabilising
Agent.

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Initial Public Offer

CHAPTER VIII-A
8A.1:
(a) An issuer company making a public offer of equity shares can avail of the
Green Shoe Option (GSO) for stabilizing the post listing price of its shares,
subject to the provisions of this Chapter.
(b) A company desirous of availing the option granted by this Chapter, shall
in the resolution of the general meeting authorizing the public issue, seek
authorization also for the possibility of allotment of further shares to the
‘Stabilizing Agent’ (SA) at the end of the stabilization period in terms of
clause 8A.15.
8A.2:
The company shall appoint one of the Merchant Bankers or Book Runners
(as the case may be) from amongst the issue management team, as the
“Stabilizing Agent” (SA), who will be responsible for the price
stabilization process, if required. The SA shall enter into an agreement
with the issuer company, prior to filing of offer document with SEBI,
clearly stating all the terms and conditions relating to this option
including fees charged / expenses to be incurred by SA for this purpose.
8A.3:
The SA shall also enter into an agreement with the promoter(s) or pre-
issue shareholders who will lend their shares under the provisions of this
Chapter, specifying the maximum number of shares that may be
borrowed from the promoters or the shareholders, which shall not be in
excess of 15% of the total issue size.
8A.4:
The details of the agreements mentioned in clause 8A.2 and 8A.3 shall be
disclosed in the draft prospectus (the draft Red Herring prospectus), Red
Herring prospectus and the final prospectus. The agreements shall also be
included as material documents for public inspection in terms of (clause
6.15.1).

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Initial Public Offer

8A.5:
Lead merchant banker or the Lead Book Runner, in consultation with the
SA, shall determine the amount of shares to be over-allotted with the
public issue, subject to the maximum number specified in clause 8A.3.
8A.6:
The draft prospectus, draft Red Herring prospectus, the Red Herring
prospectus and the final prospectus shall contain the following additional
disclosures:
a. Name of the SA.
b. The maximum number of shares (as also the percentage vis-à-vis the
proposed issue size) proposed to be over-allotted by the company.
c. The period, for which the company proposes to avail of the
stabilization mechanism.
d. The maximum increase in the capital of the company and the
shareholding pattern post issue, in case the company is required to
allot further shares to the extent of over-allotment in the issue.
e. The maximum amount of funds to be received by the company in case
of further allotment and the use of these additional funds, in final
document to be filed with RoC.
f. Details of the agreement/arrangement entered in to by SA with the
promoters to borrow shares from the latter which inter-alia shall
include name of the promoters, their existing shareholding, number &
percentage of shares to be lent by them and other important terms and
conditions including the rights and obligations of each party.
g. The final prospectus shall additionally disclose the exact number of
shares to be allotted pursuant to the public issue, stating separately
therein the number of shares to be borrowed from the promoters and
over-allotted by the SA, and the percentage of such shares in relation
to the total issue size.

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Initial Public Offer

8A.7:
a. In case of an initial public offer by an unlisted company, the promoters
and pre-issue shareholders and in case of public issue by a listed
company, the promoters and pre-issue shareholders holding more
than 5% shares, may lend the shares subject to the provisions of this
Chapter.
b. The SA shall borrow shares from the promoters or the pre-issue
shareholders of the issuer company or both, to the extent of the
proposed over-allotment. Provided that the shares referred to in this
clause shall be in dematerialized form only.
8A.8:
The allocation of these shares shall be pro-rata to all the applicants.
8A.9:
The stabilization mechanism shall be available for the period disclosed by
the company in the prospectus, which shall not exceed 30 days from the
date when trading permission was given by the exchange(s).
8A.10:
The SA shall open a special account with a bank to be called the “Special
Account for GSO proceeds of _____ company” (hereinafter referred to as
the GSO Bank account) and a special account for securities with a
depository participant to be called the “Special Account for GSO shares of
company” (hereinafter referred to as the GSO Demat Account).
8A.11:
The money received from the applicants against the over-allotment in the
green shoe option shall be kept in the GSO Bank Account, distinct from
the issue account and shall be used for the purpose of buying shares from
the market, during the stabilization period.
8A.12:

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Initial Public Offer

The shares bought from the market by the SA, if any during the
stabilization period, shall be credited to the GSO Demat Account.
8A.13:
The shares bought from the market and lying in the GSO Demat Account
shall be returned to the promoters immediately, in any case not later than
2 working days after the close of the stabilization period.
8A.14:
The prime responsibility of the SA shall be to stabilize post listing price of
the shares. To this end, the SA shall determine the timing of buying the
shares, the quantity to be bought, the price at which the shares are to be
bought etc.
8A.15:
On expiry of the stabilization period, in case the SA does not buy shares to
the extent of shares over-allotted by the company from the market, the
issuer company shall allot shares to the extent of the shortfall in
dematerialized form to the GSO Demat Account, within five days of the
closure of the stabilization period. These shares shall be returned to the
promoters by the SA in lieu of the shares borrowed from them and the
GSO Demat Account shall be closed thereafter. The company shall make a
final listing application in respect of these shares to all the Exchanges
where the shares allotted in the public issue are listed. The provisions of
Chapter XIII shall not be applicable to such allotment.
8A.16:
The shares returned to the promoters under clause 8A.13 or 8A.15, as the
case may be, shall be subject to the remaining lock in period as provided
in the proviso the clause 4.14.1.
8A.17:
The SA shall remit an amount equal to (further shares allotted by the
issuer company to the GSO Demat Account) * (issue price) to the issuer
company from the GSO Bank Account. The amount left in this account, if

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Initial Public Offer

any, after this remittance and deduction of expenses incurred by the SA

for the stabilization mechanism, shall be transferred to the investor
protection fund(s) of the stock exchange(s) where the shares of issuer
company are listed, in equal parts if the shares are listed in more than one
exchanges. The GSO Bank Account shall be closed soon thereafter.
8A.18:
The SA shall submit a report to the stock exchange(s) on a daily basis
during the stabilization period. The SA shall also submit a final report to
SEBI in the format specified in Schedule XXIX. (Flag B)This report shall be
signed by the SA and the company. This report shall be accompanied with
a depository statement for the “GSO Demat Account” for the stabilization
period, indicating the flow of the shares into and from the account. The
report shall also be accompanied by an undertaking given by the SA and
countersigned by the depository(ies) regarding confirmation of lock-in on
the shares returned to the promoters in lieu of the shares borrowed from
them for the purpose of the stabilization, as per the requirement specified
in 8A.16.
8A.19:
The SA shall maintain a register in respect of each issue having the green
shoe option in which he acts as a SA. The register shall contain the
following details of:
a. In respect of each transaction effected in the course of the stabilizing
action, the price, date and time
b. The details of the promoters from whom the shares are borrowed and the
number of shares borrowed from each; and
c. Details of allotments made under clause 8A.15.
8A.20:
The register must be retained for a period of at least three years from the
date of the end of the stabilizing period.
8A.21:

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Initial Public Offer

For the purpose of the Chapter VIII-A,

a. Promoter means a promoter as defined in Explanation I to clause 6.4.2.1of
these guidelines.”
b. Over allotment shall mean as an allotment or allocation of shares in excess
of the size of a public issue, made by the SA out of shares borrowed from
the promoters or the pre-issue shareholders or both, in pursuance of a
green shoe option exercised by the company in accordance with the
provisions of this Chapter.

(Clause 8A)

Final Report for Green Shoe Option

a. Name of the company :
b. Name of the SA (Registration No.):
c. Issue size (No. of shares):
d. Issue opened on:
e. Issue closed on:
f. Over-allotment in issue (%):
g. Date of commencement of trading :
h. Amount in the GSO Bank Account (Rs.):
i. Details of promoter(s) from whom shares borrowed (Name & Number of
shares borrowed):
j. Date on which the stabilisation period ended:
k. Number of shares bought during the stabilization period:
l. Date on which company allotted further shares to the extent of shortfall:
m. Date when the shares in the GSO Demat Account were returned to the
promoter(s):
n. Date when the money in the GSO Bank Account was remitted to the
company:

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Initial Public Offer

o. Details of the Depository account (Special account for GSO securities)

where shares purchased from the market were kept inter-alia the
following:
i. Depository Participant:
ii. Account No.:
iii. Number of shares purchased, date wise:
iv. Number of shares taken out, date wise:

ICICI Bank Limited:

The issue shall have a Green Shoe Option of 14,197,011 equity shares of
Rs. 10 each at a Price of Rs. 940.0 per equity share for non-institutional and QIB
bidders and Rs. 890.0 for existing retail shareholders and retail bidders for cash
aggregating Rs. 13,125.0 Million. The issue size would be up to Rs. 87,500.0
million assuming no exercise of the Green Shoe Option and up to Rs. 100,625.0
million assuming the Green Shoe Option is fully exercised. The issue would
constitute 9.5% of the fully diluted post issue paid up capital of ICICI bank
limited (“bank” or “issuer”), assuming no exercise of the green shoe option and
upto 10.8% assuming the Green Shoe Option is fully exercised.

Green Shoe Option Portion: 14,197,011 Equity Shares of Rs. 10 each

aggregating upto Rs. 13,125.0 million.
Green Shoe Lender: Life Insurance Corporation of India.

Green Shoe Option

We intend to establish an option for allocating Equity Shares in excess of the
Equity Shares that are included in the Issue in consultation with the BRLMs and
CBRLMs and the Stabilizing Agent to operate a price stabilization mechanism in
accordance with the applicable DIP Guidelines.

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Initial Public Offer

We have appointed DSPML as the Stabilising Agent, for performance of the role
of Stabilising Agent as envisaged in Chapter VIIIA of the DIP Guidelines,
including price-stabilizing post listing, if required. There is no obligation to
conduct stabilizing measures. If commenced, stabilization will be conducted in
accordance with applicable laws and regulations and such stabilization may be
discontinued at any time and will not continue for a period exceeding 30 days
from the date when trading permission is given by the Stock Exchanges. The
Stabilising Agent will borrow Equity Shares from Green Shoe Lender. The Equity
Shares borrowed from Green Shoe Lender or purchased in the market for
stabilizing purposes will be in demat form only. The Equity Shares available for
allocation under the Green Shoe Option will be available for allocation to
Qualified Institutional Buyers, Non-Institutional Bidders and Retail Bidders in
the ratio of 50:15:35 assuming full demand in each category. On June 11, 2007, we
entered into a Stabilization Agreement with Life Insurance Corporation of India,
the Green Shoe Lender and DSPML, the Stabilising Agent to lend 14,197,011
Equity Shares*.
* The total number of Equity Shares issued may be required to be adjusted inter
alia for the Rs.50 discount to be offered to Existing Retail Shareholders and Retail
Bidders and the exact number of Equity Shares allotted in this Issue, pursuant to
completion of Book Building Process.

The terms of the Stabilization Agreement provide that:

Stabilisation Period
“Stabilisation Period” shall mean the period commencing from the date we are
given trading permission from the Stock Exchanges for the Equity Shares allotted
in the Issue and ending 30 days thereafter, unless terminated earlier by the
Stabilising Agent.

Procedure for Over Allotment and Stabilisation:

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Initial Public Offer

(i) The monies received from the applications for Equity Shares in the Issue
against the over Allotment shall be kept in the GSO Bank Account, which
is a distinct account separate from the Public Issue Account and shall be
used only for the purpose of stabilization of the post listing price of the
Equity Shares.
(ii) The allocation of the Over Allotment Shares shall be done in conjunction
with the allocation of Issue so as to achieve pro-rata distribution.
(iii) Upon such allocation, the Stabilising Agent shall transfer the Over-
Allotment Shares from the GSO Demat Account to the respective
depository accounts of successful Bidders.
(iv) For the purpose of purchasing the Equity Shares from the market, the
Stabilizing Agent shall use the funds lying to the credit of GSO Bank
Account.
(v) The Stabilising Agent shall solely determine the timing of buying the
Equity Shares, the quantity to be bought and the price at which the Equity
Shares are to be bought from the market for the purposes of stabilization
of the post-listing price of the Equity Shares.
(vi) The Equity Shares purchased from the market by the Stabilising Agent, if
any, shall be credited to the GSO Demat Account and shall be returned to
the Green Shoe Lender immediately on the expiry of the Stabilisation
Period but in no event later than the expiry of two working days
thereafter.
(vii) In the event the Equity Shares lying to the credit of the GSO Demat
Account at the end of the Stabilisation Period but before the transfer to the
Green Shoe Lender is less than the Over Allotment Shares, upon being
notified by the Stabilising Agent and the equivalent amount being
remitted to us from the GSO Bank Account, we shall within four (4) days
of the receipt of notice from the Stabilising Agent of the end of the
Stabilisation Period allot new Equity Shares in dematerialized form in an
amount equal to such shortfall to the credit of the GSO Demat Account.

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The newly issued Equity Shares shall be returned by the Stabilising Agent
to the Green Shoe Lender in final settlement of Equity Shares borrowed,
within two (2) working days of them being credited into the GSO Demat
Account, time being of essence in this behalf.
(viii) Upon the return of Equity Shares to the Green Shoe Lender pursuant to
and in accordance with sub-clauses (vi) and (vii) above, the Stabilizing
Agent shall close the GSO Demat Account.

GSO Bank Account:

The Stabilising Agent shall remit from the GSO Bank Account to us, an amount,
in Indian Rupees, equal to the number of Equity Shares to be allotted by us to the
GSO Demat Account at Issue Price. The amount left in this account, if any, after
this remittance and deduction of expenses including depository, brokerage and
transfer fees and net of taxes, if any, incurred by the Stabilising Agent in
connection with the activities under the Stabilization Agreement, shall be
transferred to the Investor Protection Fund of the Stock Exchanges in equal parts.
Upon the return of Equity Shares to the Green Shoe Lender, the Stabilising Agent
will close the GSO Bank Account.

Reporting:
During the Stabilisation Period, the Stabilising Agent will submit a report to the
Stock Exchanges on a daily basis. The Stabilising Agent will also submit a final
report to SEBI in the format prescribed in Schedule XXIX of the DIP Guidelines.
This report will be signed by the Stabilizing Agent and us and be accompanied
by the depository statement for the GSO Demat Account for the Stabilisation
Period indicating the flow of shares into and from the GSO Demat Account.

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Rights and obligations of the Stabilising Agent:

 Open a special bank account “Special Account for GSO Proceeds of ICICI
Bank Limited” or GSO Bank Account and deposit the money received
against the over-Allotment in the GSO Bank Account.
 Open a special account for securities “Special Account for GSO Shares of
ICICI Bank Limited” or GSO Demat Account and receive the Equity
Shares lent by the Green Shoe Lender and allocate Equity Shares from that
account to successful bidders and credit the Equity Shares bought by the
Stabilising Agent, if any, during the Stabilisation Period to the GSO Demat
account.
 Stabilize the market price only in the event of the market price falling
below the Issue Price as per DIP Guidelines, including determining
quantity and the price at which Equity Shares to be bought and the timing
thereof.
 On exercise of Green Shoe Option at the end of the Stabilization Period, to
request us to issue Equity Shares and to transfer funds from the GSO Bank
Account to us within a period of five working days of close of the
Stabilisation Period.
 On expiry of the Stabilisation Period, to return the Equity Shares to the
Green Shoe Lender from the GSO Demat Account that were acquired
either through market purchases or issued by us on exercise of Green Shoe
Option as part of stabilizing process.
 To submit daily reports to the Stock Exchanges during the Stabilisation
Period and to submit a final report to SEBI.
 To maintain a register of its activities and retain the register for three
years. Net gains on account of market purchases in the GSO Bank Account
to be transferred net of all expenses and net of taxes, if any, equally to the
Investor Protection Fund of the Stock Exchanges.

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Rights and obligations of the Green Shoe Lender:

 The Green Shoe Lender undertakes to execute and deliver all necessary
documents and give all necessary instructions to procure that all rights, title
and interest in the Equity Shares lent shall pass to the Stabilising Agent in the
GSO Demat Account free from all liens, charges and encumbrances.
 On receipt of notice from the Stabilising Agent, to transfer the loaned Equity
Shares into the GSO Demat account.
 The Green Shoe Lender will not recall or create any lien or encumbrance on
the Equity Shares lent until the transfer of Equity Shares to the GSO Demat
Account under the terms of the Stabilization Agreement.

Fees and Expenses:

(i) We shall pay to the Green Shoe Lender a fee as agreed under the
Stabilisation Agreement for lending the Equity shares and facilitating
providing the stabilization process.
(ii) We will pay the Stabilising Agent a fee of Re. 1 plus applicable service tax
for providing the stabilizing services.
(iii) The Stabilizing Agent shall deduct from the GSO Bank Account the
following expenses:
a. Demat and transfer costs; and
b. Brokerage/underwriting fees and selling commission including
any service tax and securities transaction tax.
However, the expenses will be subject to the availability of any proceeds in the
GSO Bank Account and as stipulated in the DIP Guidelines in this regard.

Procedure for exercise of Green Shoe Option:

The primary objective of the Green Shoe mechanism is stabilization of the market
price of Equity Shares after listing. Towards this end, after listing of Equity
Shares, in case the market price of the Equity Shares fall below the Issue Price,

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then the Stabilisation Agent, at its sole and absolute discretion, may start
purchasing Equity Shares from the market with the objective of stabilization of
the market price of the Equity Shares. The Stabilising Agent, at its sole and
absolute discretion, would decide the quantity of Equity Shares to be purchased,
the purchase price and the timing of purchase. The Stabilisation Agent, at its sole
and absolute discretion, may spread orders over a period of time or may not
purchase any Equity Shares under certain circumstances where it believes
purchase of Equity Shares may not result in stabilization of market price.
Further, the Stabilisation Agent does not give any assurance that would it be able
to maintain the market price at or above the Issue Price through stabilization
activities.
The funds lying to the credit of GSO Bank Account would be utilized by the
Stabilisation Agent to purchase the Equity Shares from the market and such
Equity Shares would be credited to GSO Demat Account. The operations of GSO
Demat Account and GSO Bank Account are explained in the paragraphs above.

Example of working of green shoe option (Investors should note that the
following is solely for the purpose of illustration and is not specific to this Issue)
For example, in case of a public issue of 100,000 equity shares at a price of Rs. 100
each where a Green Shoe Option of 10% of the issue size is given:
Issue size - 100,000 equity shares aggregating Rs. 10,000,000
Green shoe - 10,000 equity shares aggregating Rs. 1,000,000
In this case 10,000 shares corresponding to the green shoe will be borrowed from
a green shoe lender. After the issue has closed and assuming bids have been
received for 110,000 equity shares the issuer company in consultation with the
book running lead managers will allot a total of 110,000 equity shares
aggregating Rs. 11,000,000 to valid applicants. After listing of the equity shares
on the exchanges the following two cases may arise:
1. Market price of equity shares falls below the issue price of Rs. 100 during
the stabilisation period

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In such a case the stabilising agent at its discretion may buy shares from
the market to stabilise the price. The stabilising agent can buy shares up to the
total number of shares borrowed from the green shoe lender which is the size of
the green shoe i.e. 10,000 equity shares, as the stabilising agent deems fit. The
stabilising agent will purchase shares at its discretion during the period the green
shoe option is valid. The stabilising agent may in certain instances decide not to
buy shares from the market. In the current illustration, say the green shoe period
is 30 days in which the stabilising agent bought 2,345 shares. After the
stabilization period has ended the stabilising agent will return the shares bought
from the market to the green shoe lender viz. 2,345 shares and the company will
issue fresh shares to the green shoe account for the balance shares which have to
be returned to the lender viz. 7,655 equity shares (10,000 less 2,345). Therefore,
the 10,000 shares which were borrowed from the lender will be duly returned. In
this case the total shares issued by the company will be 107,655 shares and the
issue size will be Rs. 10,765,500.
2. Market price of equity shares rises above the issue price during the
stabilisation period
In such a case the stabilising agent will not need to stabilise the price and
will not buy any equity shares from the market. At the end of the stabilization
period, the company will issue 10,000 fresh shares to the green shoe account
which will be duly returned to the green shoe lender. In this case the total shares
issued by the company will be 110,000 shares and the issue size will be Rs.
11,000,000.

The terms of the Green Shoe Option are as follows:

The maximum number of shares: 14,197,011 Equity Shares of Rs. 10 each

at a price of Rs. 940 per Equity Share
for Non-Institutional and QIB Bidders
and Rs. 890 for Existing Retail

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Shareholders and Retail Bidders,

aggregating Rs. 13,125.0 million
representing 15% of the Issue Size
The maximum increase in paid-up Rs. 142.0 million
capital in case of full exercise of the
Green Shoe Option*
Stabilisation Period The period commencing from the date
of obtaining trading permission from
the Stock Exchanges for the Equity
Shares under the Issue, and ending 30
days thereafter unless terminated
earlier by the Stabilising Agent.
* The total number of Equity Shares issued may be required to be adjusted inter
alia for the Rs. 50 discount to be offered to Existing Retail Shareholders and
Retail Bidders and the exact number of Equity Shares allotted in this Issue,
pursuant to completion of Book Building Process.

Grey Market

Various types of players constitute the grey market. Certain investors may want
to hold the shares, but may not expect to get allotment of these shares through
the IPO route. Hence, they may agree to buy the shares in the grey market.
Several other investors may be ready to offload the shares at the decided price.
Then there may be others who may want to speculate and make quick money
without much effort. Hence, they may conduct deals outside the system, before
the shares actually hit the market. Thus, Grey market is the unofficial trading in
a company’s share before it starts trading on the stock exchange after an IPO.

It’s a purchase from third party. The price quoted here is often used as a
benchmark for the market’s expectation regarding a certain issue. Before the

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issue opens for trading, a buyer agrees to buy certain shares of the IPO at a fixed
price from some other party. The execution of trade takes place once the listing is
done, or it may be settled without any transfer of shares, with the settlement
being done in cash. The fact that a share quotes at a certain price in the grey
market does not guarantee that when the share is actually listed and starts
trading on the exchange, it will attain the same price immediately. This is due to
several factors. First, several developments may have taken place during the
interim period. Hence, when the listing actually takes place, the situation could
be different from the time the premium was quoted in the share. This price is
based on the likely opening price.

Examples of shares of different companies traded in grey market.

 Everron System was traded on premium for its recent issue.
 Infosys was traded at discount.

Guidelines On Advertisement

 An issue advertisement shall be truthful, fair and clear and shall not
contain any statement which is untrue or misleading.

 Any advertisement reproducing or purporting to reproduce any

information contained in an offer document shall reproduce such
information in full and disclose all relevant facts and not be restricted to
select extracts relating to that item.

 An issue advertisement shall be considered to be misleading, if it

contains –

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1. Statements made about the performance or activities of the company

in the absence of necessary explanatory or qualifying statements,
which may give an exaggerated picture of the performance or
activities, than what it really is.
2. An inaccurate portrayal of past performance or its portrayal in a
manner which implies that past gains or income will be repeated in the
future.

 An advertisement shall be set forth in a clear, concise and understandable

language.

 Extensive use of technical, legal terminology or complex language and

the inclusion of excessive details which may distract the investor, shall be
avoided.

 An issue advertisement shall not contain statements which promise or

guarantee rapid increase in profits.

 An issue advertisement shall not contain any information that is not

contained in the offer document.

 No models, celebrities, fictional characters, landmarks or caricatures or

the likes shall be displayed on or form part of the offer documents or
issue advertisements.

 Issue advertisements shall not appear in the form of crawlers (the

advertisements which run simultaneously with the programme in a
narrow strip at the bottom of the television screen) on television.

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In case of issue advertisement on television screen:

(a) The risk factors shall not be scrolled on the screen; and
(b) The advertisement shall advise the vietheyrs to refer to the red herring
prospectus or other offer document for details.

 No advertisement shall include any issue slogans or brand names for the
issue except the normal commercial name of the company or commercial
brand names of its products already in use.

 No slogans, expletives or non-factual and unsubstantiated titles shall

appear in the issue advertisements or offer documents.

 If any advertisement carries any financial data, it shall also contain data
for the past three years and shall include particulars relating to sales,
gross profit, net profit, share capital, reserves, earnings per share,
dividends and the book values.

 No issue advertisement shall be released without giving “Risk Factors” in

respect of the concerned issue. Provided that an issue opening / closing
advertisement which does not contain the highlights need not contain
risk factors.

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Case Study

Vishal Retail Ltd - IPO

Company Profile:
The company follows the concept of value retail targeted towards the middle
and lotheyr-middle income groups. Its business approach is to sell quality goods
at reasonable prices by either manufacturing in-house or directly procuring from
manufacturers (primarily from small and medium size vendors and
manufacturers). The company started as a retailer of ready-made apparels but
subsequently diversified its portfolio to facilitate one-stop-shop convenience.
Currently, it sells ready-made apparels, home furnishing, household
merchandise, and consumer goods. As of April 30, 2007, the company had 50
retail stores, including two franchisees spreading across about 1,282,000 square

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feet and located in 18 states across India. It has also set up seven regional
distribution centers to strengthen its supply chain and an apparel manufacturing
plant.

Objective Of The Issue:

The objects of this Issue are to
• (a) Meet the expenses of establishing new retail stores by deploying
Rs.1,041.51 million, from the Net Proceeds of the Issue.
• (b) meet the expenses of the Issue (The Issue related expenses include,
among others, underwriting and selling commissions, printing and
distribution expenses, legal expenses, advertisement expenses, registrar’s
fees and depository fee.) and
• (c) to enhance their visibility and achieve the benefits of listing their
Equity Shares on the Stock Exchanges.

Issue Details of the Company:

Issue Period 11 JUNE TO 13 JUNE 2007
Issue Size 4074074 equity shares
Issue Type 100 % Book Building
Face Value Rs.10 each
Price Range Rs.230 to Rs.270
Market Lot 01 equity share
Minimum Order Quantity 25 equity shares
IPO Market Timings 10.00 a.m. to 3.00 p.m.

In terms of Section 68B of the Companies Act, the Equity Shares shall be allotted
only in dematerialised form. Allotment through this Issue will be done only in

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electronic form in multiples of 1 Equity Share subject to a minimum allotment of

25 Equity Shares.
Since trading of their Equity Shares is in dematerialised mode, the tradable lot is
one Equity Share.

Book Running Lead Manager:

Intime Spectrum Registry Limited

Enam Financial Consultants Private Limited

Issue Structure:
The company is making a Public Issue aggregating to Rs. 110 crores (Rs.1100
million)

The company issued 4074074 equity shares wherein 30 %, 10% and 60% theyre
reserved for Retail, Non Institutional Institution and QIBs respectively.

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Issue of 4074074 Equity shares

Retail (30%) Non Institutional (10%) QIBs (60%)

1222222 407407 2444445

Also 300000 shares they’re reserved for EMPLOYEES of the company.

Qualified Institutional Buyers:

The issue can be made to Public Financial Institutions, etc. The issue is allocated
proportionately. QIBs are offered 60% of the net offer made to public. Thus the
number of shares available for allocation are 2444445 equity shares. The
minimum bid is Such number of Equity Shares in multiples of 25 Equity Shares
so that the Bid Amount exceeds Rs 100,000. Mode of Allotment is compulsorily
dematerialised mode.

Non-Institutional Investors:
The issue can be made to Resident Indian individuals, HUF, companies,
corporate bodies, NRI’s, Societies and trust, etc.. The issue is allocated
proportionately. They are offered 10% of the net offer made to public. Thus the
number of shares available for allocation is 407407 equity shares. The minimum
bid is such number of Equity Shares in multiples of 25 Equity Shares so that the
Bid Amount exceeds Rs.100,000. Mode of Allotment is compulsorily
dematerialised mode.

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Retail Individual:
The issue can be made Individuals Including NRI’s and HUFs The issue is
allocated proportionately. They are offered 30% of the net offer made to public.
Thus the number of shares available for allocation is 1222222 equity shares. The
minimum bid is such number of Equity Shares in multiples of 25 Equity Shares
so that the Bid Amount exceeds Rs.100,000. Mode of Allotment is compulsorily
dematerialised mode.

Prime Risk Factors:

 Involvement in a number of legal proceedings that, if determined against
them, could adversely impact their business and financial condition.
 The validity of the lease agreement for their Registered Office has expired.
They had entered into an MOU dated November 3, 2003 with Des Raj Singh
(HUF), pursuant to which the property, over which their Registered Office is
situated, was agreed to be provided for their use, on lease basis for an aggregate
period of 12 years. The lease agreement dated May 6, 2004 entered into by them
with Des Raj Singh (HUF) has expired on November 30, 2006. They are in
process of obtaining renewal of the said lease agreement. In the event that they
are not able to renew the lease agreement, they may be required to shift their
registered office to another location.
 Contingent liabilities could adversely affect their financial condition.

 They are subject to third party claims of intellectual property

infringement.
They face litigation with regard to their usage of the term “Mega Mart” within
their trademark “Vishal Mega Mart” by Arvind Brands Limited as constituting
alleged passing-off and their claim with regard to the term being originally
owned by them. Any adverse decision by the judicial authorities in the said

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matter and in the event of them becoming liable for infringing their intellectual
property rights, could require them to pay substantial damages and resort to use
of a non-infringing trademark or brand, which could have an adverse impact on
their brand value and brand loyalty and consequently, can adversely affect their
business and operations.

 Business depends on their ability to obtain and retain quality retail spaces.
Their success in their business depends on their ability to identify and acquire
quality retail space at appropriate terms and conditions. They compete with
other large retailers for acquiring quality real estate restheirces. If they fail to
acquire targeted properties, they would face delays in execution of their
strategies, which may result in cost overruns or otherwise adversely affect their
business, operations and profitability. They face significant competition in the
retail industry.

 They face significant competition in the retail industry.

The Indian retail industry is highly competitive. Competition is characterized by
many factors, including assortment, advertising, price, quality, service, location,
reputation and credit availability, availability of retail space. They also face
competition from other forms of retail other than through stores including sale of
goods on-line over the internet, door-to door sales and sale of household
products from homes. Certain large domestic industrial and business groups
have evinced interest in this sector and seem to be in the process of establishing
retail chain in India. Such prospective competitors are larger and better placed to
take advantage of efficiencies created by size, and have better financial resources
or greater access to capital at lower costs, and may be better known nationally.
For instance, the launch of certain of their stores including that proposed at
Chandigarh, has been delayed as the properties identified by us for location of
their stores and for which certain arrangements they’re entered into, have been
taken up by their competitors for a higher consideration. Additionally, they may

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face competition from international players if foreign participation in the retail

sector is further liberalized. Moreover, as the industry is highly fragmented and
they also face competition from local stores, who may, for a variety of reasons
such as easier to access and personal relationships with the customers, be able to
cater to local demands better than us. Their inability to compete successfully in
their industry would materially affect their business prospects and financial
condition..

 The success of their business is highly dependent on their ability to attract

customers to their stores.
Various factors affect the customer footfalls, including choice of location and
nature of floor layout. Factors such as the regional economy, theyather
conditions, natural disasters, social unrest as theyll as government
regulations specific to the states in which they operate may affect the
customers coming to their stores. The disposable income available to the
customers also affects their spending potheyr on consumer products that they
sell in their stores. A change in economic conditions in the country may affect
the disposable income available to customers, which may in turn affect the
result from their operations, their financial position and their profitability.

Summary

 The cut-off price announced by Vishal Retail Ltd for its IPO was Rs. 270
per share.

 At the issue price of Rs 270, the size of the offering amounts to Rs 110
crores.

 The IPO was oversubscribed 81 times.

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Bibliography and Webliography

 New Issue Operations In India

– Krishna Kumar Agarwal

 Managing IPOs The Role Of Merchant Bankers

– Board Of Editors ICFAI University

 www.sebi.gov.in

 www.bseindia.com

 www.nseindia.com

 www.investopedia.com

 www.moneypore.com

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 www.way2wealth.com

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