Abha Mehta & Shivani Chaturvedi
INITIAL PUBLIC OFFERING
The first public offering of equity shares or convertible securities by a company, which is
followed by the listing of a company’s shares on a stock exchange, is known as an ‘Initial
Public Offering’. In other words, it refers to the first sale of a company’s common shares to
investors on a public stock exchange, with an intention to raise new capital.
The most important objective of an IPO is to raise capital for the company. It helps a company
to tap a wide range of investors who would provide large volumes of capital to the company for
future growth and development. A company going for an IPO stands to make a lot of money
from the sale of its shares which it tries to anticipate how to use for further expansion and
development. The company is not required to repay the capital and the new shareholders get a
right to future profits distributed by the company.
WHY GO PUBLIC??
Before deciding whether one should complete an IPO, it is important to consider the
positive and negative effects that going public may have on their mind. Typically, companies go
public to raise and to provide liquidity for their shareholders. But there can be other benefits.
Going public raises cash and usually a lot of it. Being publicly traded also opens many financial
doors:
Because of the increased scrutiny, public companies can usually get better rates when
they issue debt.
As long as there is market demand, a public company can always issue more stock. Thus,
mergers and acquisitions are easier to do because stock can be issued as part of the deal.
Trading in the open markets means liquidity. This makes it possible to implement things
like employee stock ownership plans, which help to attract top talent.
Abha Mehta & Shivani Chaturvedi
Going public can also boost a company’s reputation which in turn, can help the company
to expand in the marketplace.
PRINCIPAL STEPS IN AN IPO
Approval of BOD: Approval of BOD is required for raising capital from the public.
Appointment of lead managers: the lead manager is the merchant banker who orchestrates the
issue in consultation of the company.
Appointment of other intermediaries:
- Co-managers and advisors
- Underwriters
- Bankers
- Brokers and principal brokers
- Registrars
Filing the prospectus with SEBI: The prospectus or the offer document communicates
information about the company and the proposed security issue to the investing public. All the
companies seeking to make a public issue have to file their offer document with SEBI. If SEBI
or public does not communicate its observations within 21 days from the filing of the offer
document, the company can proceed with its public issue.
Filing of the prospectus with the registrar of the companies : once the prospectus have been
approved by the concerned stock exchanges and the consent obtained from the bankers, auditors,
registrar, underwriters and others, the prospectus signed by the directors, must be filed with the
registrar of companies, with the required documents as per the companies act 1956.
Abha Mehta & Shivani Chaturvedi
Printing and dispatch of prospectus : After the prospectus is filed with the registrar of
companies, the company should print the prospectus. The quantity in which prospectus is printed
should be sufficient to meet requirements. They should be send to the stock exchanges and
brokers so they receive them atleast 21 days before the first announcement is made in the news
papers.
Filing of initial listing application : Within 10 days of filing the prospectus, the initial listing
application must be made to the concerned stock exchanges with the listing fees.
Promotion of the issue: The promotional campaign typically commences with the filing of the
prospectus with the registrar of the companies and ends with the release of the statutory
announcement of the issue.
Statutory announcement: The issue must be made after seeking approval of the stock
exchange. This must be published atleast 10 days before the opening of the subscription list.
Collections of applications: The Statutory announcement specifies when the subscription would
open, when it would close, and the banks where the applications can be made. During the period
the subscription is kept open, the bankers will collect the applications on behalf of the company.
Processing of applications: Scrutinizing of the applications is done.
Establishing the liability of the underwriters : If the issue is undersubscribed, the liability of
the underwriters has to be established.
Allotment of shares: Proportionate system of allotment is to be followed.
Abha Mehta & Shivani Chaturvedi
Listing of the issue: The detail listing application should be submitted to the concerned stock
exchange along with the listing agreement and the listing fee. The allotment formalities should
be completed within 30 days.
BOOK BUILDING IS THE PROCESS OF PRICE DISCOVERY (BASIC
CONCEPT)
The company does not come out with a fixed price for its shares; instead, it indicates a price
band that mentions the lowest (referred to as the floor) and the highest (the cap) prices at which a
share can be sold.
Bids are then invited for the shares. Each investor states how many shares s/he wants and what
s/he is willing to pay for those shares (depending on the price band). The actual price is then
discovered based on these bids. As we continue with the series, we will explain the process in
detail.
According to the book building process, three classes of investors can bid for the shares:
1. Qualified Institutional Buyers: Mutual funds and Foreign Institutional Investors.
2. Retail investors: Anyone who bids for shares under Rs 50,000 is a retail investor.
3. High net worth individuals and employees of the company.
Allotment is the process whereby those who apply are given (allotted) shares. The bids are first
allotted to the different categories and the over-subscription (more shares applied for than shares
available) in each category is determined. Retail investors and high net worth individuals get
allotments on a proportional basis.
REGULATIONS WITH RESPECT TO INITIAL PUBLIC OFFER.
Before a company is allowed to make an Initial Public Offer (IPO), Regulation 5 of Issue of
Capital and Disclosure requirements mandates appointment of a one or more merchant bankers.
Abha Mehta & Shivani Chaturvedi
There should be atleast one merchant banker who shall be the lead merchant banker who will
appoint all other intermediaries.
Regulation 6 of ICDR, 2015 mandates that no offer for subscription can be made without draft
offer document which has to be submitted to the Securities and Exchange Board of India.
Pursuant to receiving the draft offer document SEBI can issue observations or suggest changes in
the offer document within 30 (thirty) days from:
1. Date of the receipt of draft offer document.
2. Date of the receipt of satisfactory reply received from the company on an additional
information sought by SEBI
3. Date of receipt of satisfactory reply received with regards to any additional information
sought by SEBI from any regulatory authority.
4. Date of receipt of in-principle approval letter received from recognized stock exchanges.
Regulation 11 deals with opening of an issue. It provides that an issue can be opened:
1. Within twelve months from the date of issuance of the observations by the Board as specified
in Regulation 6.
2. Within three months of expiry of 30 days within which SEBI had to suggest changes or issue
observations as provided in Regulation 6 of ICDR.
3. In case of shelf prospectus, the first issue may be opened within three months of issuance of
observations by the Board.
Regulation 14 lays down that minimum subscription to be received shall not be less than 90% of
the offer. In case of the criteria for minimum requirement is not met, then according to sub-
regulation (2) all the application money has to be refunded not later than 15 days of the closure
of issue, in case the issue is not underwritten. In the situation where the issue is underwritten, the
application money has to be refunded not later than 70 days.
The issuer shall, before registering the red herring prospectus (in case of a book built issue) or
prospectus (in case of a fixed price issue) with the Registrar of Companies or filing the letter of
offer with the designated stock exchange, as the case may be, file with the Board through the
lead merchant bankers, an updated offer document highlighting all changes made in the offer
document.
Under Regulation 32 of ICDR, Promoters are required to contribute not less than 20% of the
post issue capital during the initial public offer.
Abha Mehta & Shivani Chaturvedi
Regulation 32 has to be read with Regulation 36 which specifies the minimum lock-in period
of three years for the Promoter’s contribution made under Regulation 32.
If the promoter’s contribution is in excess of the minimum contribution has to be locked in for a
period of one year.
Eligibility criteria for the issue of IPO under ICDR Regulations, 2015.
Regulation 26 of SEBI ICDR 2015 lays down the eligibility requirements for making an initial
public offer: According to Regulation 26 of Issue of Capital and Disclosure Requirements, 2015
an issuer can make Initial Public Offer if:
1) It has a net tangible assets of Rs.3 Crores in each preceding three years out of which not
more than fifty percent is monetary assets.
2) It has a minimum average pre-tax operating profit of rupees fifteen crore, during the three
most profitable years out of the immediately preceding five years.
3) It has a net worth of at least one crore rupees in each of the preceding three full years.
4) The aggregate of the proposed issue and all previous issues made in the same financial year
in terms of issue size does not exceed five times its pre-issue net worth as per the audited
balance sheet of the preceding financial year;
5) If it has changed its name within the last one year, at least fifty per cent of the revenue for the
preceding one full year has been earned by it from the activity indicated by the new name.
If the above mentioned conditions are not satisfied, issuer can may make an initial public offer if
the issue is made through the book-building process and the issuer undertakes to allot, at least
seventy five percent of the net offer to public, to qualified institutional buyers and to refund full
subscription money if it fails to make the said minimum allotment to qualified institutional
buyers.
This leads us to Regulation 43 of ICDR, 2015 which provides for a procedure of net issue
through book building process. Sub-regulation (1) of 43 lays down that in case the net offer is
made through book building process, following will the allocation:
1. Retail individual investors will not be offered less than 35%
2. Similarly, non-institutional investors will be offered not less than 15%.
3. Qualified Institutional Investors on the other hand would not be offered more than 50% out
of which 5% has be compulsorily offered to the mutual funds.
Abha Mehta & Shivani Chaturvedi
Sub–regulation (2) of regulation 43 directs us to the situation in which the conditions laid down
in Regulation 26(1) of ICDR, 2015 are not satisfied. In such situation net offer can be made
through book building process, the allocation in such a situation will be as follows:
1. Retail Individual Investors will not be offered more than 10%.
2. Non-institutional investors will not be offered more than 15%.
3. On the contrary, qualified institutional investors will not be offered less than 70% of the total
net offer out of which 5% has to be compulsorily allotted to mutual funds.
According to sub-regulation 4 of Regulation 43, in case the net offer is made through a process
other than book building, following is the pattern of allocation:
(a) Minimum fifty per cent. to retail individual investors; and
(b) Remaining to:
(i) Individual applicants other than retail individual investors; and
(ii) Other investors including corporate bodies or institutions, irrespective of the number of
specified securities applied for;
(c) The unsubscribed portion in either of the categories specified in clauses (a) or (b) may be
allocated to applicants in the other categories.
