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INITIAL PUBLIC OFFERINGS (IPOs)
REGULATIONS, PROCESS AND CURRENT SCENARIO
INITIAL PUBLIC OFFERINGS (IPOs)
REGULATIONS, PROCESS AND CURRENT SCENARIO
Vaibhav JainAssociate Director
INMACS MANAGEMENT SERVICES LIMITED
Mobile: +91-98681 44380
Email: vaibhavjain@inmacs.com
Personal: vaibhav1986@gmail.com; vaibhavjain.personal@gmail.com
What’s happening ?
• Deregulation
• Globalization
• Quick access to information
• More perfect Market place
• Technological Convergence
Environment
• Complexities
• Consolidation
• Competition
• Co-petition
• Obsolescence
• Talent Retention
• Volatility
Enterprise
The Current Environment
Equity Market
There are two segments in the equity market
» Primary market - Market for new issues of securities
» Secondary market - The market where securities are traded after they are initially offered in the primary market.
Primary Market - Introduction
»Companies issue both equity and debt in the primary market
»Governments, both Central and State, issue only debt in the form of dated securities and treasury bills in the primary market
Primary Market - Introduction
»Through the primary market issues, governments and companies raise funds for fresh investments and repayment of previous loans taken from the public
»An issue can be a public issue or private placement
»An issue where allotment is made to less than 50 persons is a private placement.
Primary Market-Key Concepts
»Different Types of Issues:
1.Public IssueInitial Public Offering:
Fresh Issue
Offer for Sale
Future Public Offering: Fresh Issue
Offer for Sale
2. Right Issue
3. Preferential Allotment
Primary Market-Key Concepts
»Book Building Designed to ascertain demand
for the securities at various price levels
within a price band
to facilitate discovery of
the Issue Price
»Auction of Securities
Part A
Related Regulations
Capital Market Regulation-Enabling Framework
Companies Act, 1956
- Provisions Relating to Prospectus
- Provisions on Minimum Subscription, Allotment, Return of Allotment
- Power to SEBI under section 55 A relating to Issue & transfer of securities
Securities and Exchange Board of India
Securities Contract (Regulation) Act, 1956
11
SCRR- Rule 19(2)(b) - prior to 4.6.2010
Initial Listing Requirement: Rule 19(2)(b) provides that a public company is required to satisfy the exchange that :i. at least 10% of each class or kind of securities are
offered to the public for subscription subject to the conditions that:a. minimum 20 lakh securities are offered to public,b. the size of the offer to public is ≥ Rs. 100 core, andc. the issue is made only through book building methodd. with allocation of 60% of the size to QIBs.
ii. The above conditions can be relaxed for a Government company.
11
12
SCRR- Amendment dated 4.6.2010
Continuous Listing Requirement:
The following companies shall maintain the minimum level of public shareholding at 10%:
a) a company which offers or has in the past offered at the time of initial listing less than 25% but not less than 10% of the total number of issued shares of a class or kind, and
b) a company where the number of outstanding listed shares is two crore or more and the market cap is Rs.1000 crore or more.
In all other cases, the company shall maintain public holding of at least 25%.
If a company does not comply with the relevant level of public shareholding , it shall increase public shareholding to the relevant level within 2 years. It can increase the public shareholding by issuance of shares to public through prospectus, offer for sale of shares held by promoters, sale of shares by promoters in minority shareholders.
12
13
Enabling Framework-SEBI
The mechanism of administrative controls over capital issues dismantled in 1992 after the enactment of Capital Issues (Control) Repeal Ordinance and capital Issues (control) Repeal Bill leading to abolition of position of Controller of Capital Issues in DEA, MoF.
Pricing of capital issues is now essentially market determined. Regulation of the capital markets and protection of investor's interest is now primarily the responsibility of the Securities and Exchange Board of India (SEBI). SEBI was constituted vide an act of parliament in 1992.
SEBI has to be responsive to the needs of three groups: the issuers of securities the investors the market intermediaries.
13
Enabling….SEBI Regulations
Date Key RegulationsAug 26, 2009 Issue of Capital and Disclosure Requirement, Regulations 2009
May 19, 2009 Investor Protection and Education Fund, Regulations, 2009
July 17, 2003 Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market, Regulations, 2003
July 11, 2003 Prohibition of Insider Trading (Amendment) Regulations, 2003
Feb 20, 1997 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997
Dec 09, 1996 SEBI (Mutual Funds) Regulations, 1996
Nov 14, 1995 SEBI (Foreign Institutional Investors) Regulations, 1995
July 14, 1994 SEBI (Bankers to an Issue) Regulations, 1994
May 31, 1993 SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993
Dec 22, 1992 SEBI (Merchant Bankers) Regulations, 1992
14
Enabling…. ICDR
ICDR = ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTSTotal Regulations : 111Applicability (Regulation 3):
Public Issue – IPO & FPO Right Issue Preferential Issue Bonus Shares Qualified Institutional Placement (QIP) Indian Depository Receipts (IDRs)
ICDR Regulations 2009
Provides Conditions for Public Issues & Right Issue Pricing guidelines for public Conditions with regard to Promoters contribution,
lock-in Minimum Offer to Public, Reservations, Green Shoe
Option, Allotment Procedure, Basis of Allotment, Manner of Disclosures in the Offer Document General obligations of Issuer & Intermediaries with
respect to Public Issue & Right Issue Regulations for Preferential Issue, QIP, Bonus Issue &
IDRs
ICDR……… Regulation 4
» Reg 4 provides for following general eligibility conditions for the issue…Issuer, its promoter group or directors or persons in control of
the issuer should not be debarred from accessing capital market
Promoters, directors or persons in control of the issuer should not be a promoter, director or person in control of any other company which is debarred from accessing capital market
Issuer to make application to one or more recognized stock exchanges for listing of shares
Issuer to enter into agreement with a depository for demat of specified securities
All partly-paid up equity shares have been made fully paid-up Made firm arrangements of finance through verifiable means
towards 75% of the stated means of finance excluding the amount to be raised through the issue or thru internal accruals
ICDR …….Reg. 5
» Reg 5 deals with the appointment of merchant banker and other intermediaries:
Issuer to appoint one or more merchant bankers, one of whom shall be a lead merchant banker
Rights, obligations and responsibilities of merchant bankers shall be disclosed as “Inter-Se Allocation of Responsibilities”
Issuer to appoint other intermediaries such as Registrar, collection bankers, syndicate members in consultation with the lead merchant banker
Lead Merchant Bankers to submit a due diligence certificate to SEBI at the time of submission of offer document
ICDR ……Reg. 26 (Regarding IPO)Very Important
» Reg 26(1) provides that issuer shall make an IPO if :
it has Net tangible assets of at least 3 crores in each of the three preceding full years
It has a track record of distributable profits for at least 3 out of immediately preceding 5 years
its net worth of at least 1 crore rupees in each of the preceding three full years
Aggregate of the proposed issue and all previous issues made in the same financial year does not exceed 5 times its pre-issue net worth as per audited balance sheet
In case of change in name within the last one year, at least 50% of the revenue for the preceding full year earned from the activity indicated by the new name.
ICDR …….Regulation 26Very Important
» Reg 26(2) provides that if the issuer does not satisfy any of the conditions , it can still make an IPO if :
1. Issue is made through book building process and at least 50% of the net offer to public is allotted to QIBs;
»ORAt least 15% of the project cost is contributed by scheduled commercial banks and at least 10% of the net offer to public is allotted to QIBs
2. Minimum post-issue face value capital is Rs.10 croreOR
Issuer undertakes to provide market making for at least 2 years from the date of listing.
Reg 27 relates to FPO and says that company can make an FPO if last two conditions specified in Reg 26(1) are fulfilled otherwise it has to fulfill the conditions specified in Reg 26(2)
BO
TH
CO
ND
ITIO
NS
TO
B
E S
AT
ISF
IED
ICDR ……Regulation 30-68
» Reg 30 deals with pricing and price band:Issuer may mention floor price or price band in RHP
» OR» Issuer may announce floor price or price band at
least 2 working days before bid opening in IPO and at least 1 day before bid opening in FPO in newspapers
Cap on the price</= 120% of the floor priceFloor Price/Final Price not to be less than face value
» Reg 32 deals with Lock-in period: In case of IPO promoters share not less than 20% of post
issue capital has to be locked in for 3 years
» Reg 46 - issue shall be open for minimum 3 days and max 10 days including days for which issue is kept open in case of revision in price-band.
ICDR… Reg. 10 - Fast Track Issuance criteria
a. Listed on NSE & BSE > 3 years from date of registering the Prospectus with RoC
b. Average Market Capitalization > Rs 5000 Crore
c. The annualised trading turnover of the Equity Shares of the Company during 6 calendar months immediately preceding the month > 2% of the weighted avg. No. of Equity Shares listed
d. Redressed >95% of the complaints of the investors till the end of Qtr preceding the month of registering Prospectus with the RoC;
e. Issuer has been in compliance with the equity listing agreement for a period of > 3 years preceding date of registering Prospectus with RoC.
ICDR… Reg 10 - Fast Track Issuance criteria
f. The impact of auditors’ qualifications, on the audited accounts in respect of those financial years for which such accounts are disclosed in Prospectus does not exceed 5% of the net profit or loss for respective years;
g. No show-cause notices have been issued or prosecution proceedings initiated or pending against the Company or its Promoter
h. The entire shareholding of the promoter group is held in Demat form
i. No change in the Management since IPO
Part B
The Process
Investor Bidding Center Registrar
Preparation of BasisGeneration and Creation of Allotment as per basis,
Printing of Refund Orders
Processing Server
Bank
Application Form
Electronic Data Capture
Sta
mpi
ng /
an
d D
ispa
tch
Allo
tmen
t Lett
ers/
Ref
und
Ord
ers
/ Ce
rtific
ates
Verification Reconciliation Data Analysis
Process of collection of Application to Refund
Stock Exchange
Investor Bidding Center
RTA
Printing of Refund Orders
Bank
Application Form with supporting documents
Cred
it of
Sha
res
to
Inve
stor
s
Acc
ount
T+1
1
Schedule with complete details T+2
Stock Exchange
Electronic bid T+1
EB for validation by Bank T+2
DepositoriesRTA commence validation with Depositories T+2 till T+4 and prepare rejected schedule by T+5
Data Capture
Final Certificate by Bank T+6Intimation of basis of allotment T+7
by RTA & approval by SE on T+8
Completion of despatch of refund warrants T+10
Revised Time Line Schedule for IPO/FPO
Trade T+12
Book Building
»The company appoints a merchant banker as a book runner
»The company issues a prospectus that has information about issue size, business, promoters, etc. but not the price. The price range is indicated.
»Period for bidding is indicated
»Bids are collected and the book is closed.
»On the basis of bids received, issue price is decided.
Bidding-Normal Book Building Process
Price Points
Demand Built
Category of Investor
% of Issue Size
Allotment under Regulation 26(1)
Allotment Under Regulation 26(2)
210
2000QIB 20%
No No1000NIB 10%
2000Retail 20%5000 50%
208
4500QIB 45%
Yes No1500NIB 15%5000Retail 50%
11000 110%205
5000QIB 50%
Yes Yes2000NIB 20%5500Retail 55%
12500 125%200
8000QIB 80%
Yes Yes7000NIB 70%7000Retail 70%
22000 220%
Category
Allotment Under
Regulation 26(1)
Allotment Under
Regulation 26(2)
QIB upto 50% Min 50NIB 15 15Retail 35 35
5 Conditions U/r 26(1) of ICDR
1. Net tangible Assets>Rs.3crore in preceding 3 years.
2. Track Record of Distributable profits in 3 out of preceding 5 years
3. Net worth >= Rs.1crore in each of preceding 3 years
4. Proposed issue+all previous issues in one year<= 5 times pre-issue net-worth
5. If name change in last 1 year then 50% of revenues should be from activity indicated by new name.
Issue Size: 10000 shares Price Band: Rs. 200-210
Public Issue Pricing
»Till 1992, the price was fixed by the Controller of
Capital Issues.
»After SEBI was established in 1992, we have moved to free pricing. The price is decided by the company now with advice from the merchant bankers.
Free pricing of a public issue
»Fixed-price: The issuer fixes the price well before the actual issue. To ensure full subscription, they fix slightly lower prices.
»Book-building: The price is decided through the book-building process. The prices are slightly higher than the fixed-price method.
Methods of pricing an IPO
1
2
All factors are considered in combination before deciding the price
Pricing could be “fixed price” or “discovered thru auction route”
Discounted Cash Flow Method-uses FCFFFCFF=EBIT(1-T)+Depreciation-Capital Expenditure + Change in WCFCFF is discounted by WACC for a given time horizon
Comparable trading multipleEPS * P/E ratio = Price
Pricing issues for FPO
No guidelines exist for pricing FPO FPOs are typically priced at a discount to
CMP
CMP Discount FPO Price (Rs)
NTPC 211.30 5% 201
REC 220 7.74% 203
NMDC 401.85 25.3% - 12.9% 300-350
IPOs - Special issues
» Employee reservation is now capped at up to 5% of the post issue capital instead of 10% of issue size (as under the DIP Guidelines); application size for and value of allotment to an employee under employee reservation capped at Rs.1 lakh; retail discounts to employees in the reservation portion also limited to application size Rs. 1 lakh.
» ASBA process, introduced on July 30, 2008 as an alternate mode of payment for resident retail investors, expanded in 2009 to all categories of bidders excluding qualified institutional bidders.
» Pre-IPO allotment/transfer: Under ICDR Regulations, capital structure must be frozen at DRHP stage and details of any proposed pre-IPO allotment/transfer must be disclosed.
» The ICDR Regulations introduced the concept of anchor investors in 2009- allowing up to 30% allocation at a price equal to or above issue price to QIBs buyers applying for shares of a minimum value of Rs. 10 crore in a book built public issue. The option is not available in a fixed price issue.
Performance of IPOs
There is no guarantee that IPO performance will always be profitable
Company IPO price Price-02.07.2010 % change
Parabolic Drugs Ltd 75.00 63.4 15.46
Tarapur Transformers 75.00 38.40 48.8
Goenka Diamond &
Jewels Ltd 135.00 74.90 44.5
Shree Ganesh Jewellery
House Ltd 260.00 114.25 56.05
Persistent Systems 310.00 486.20 56.83
IL & FS Transportation 258.00 288.35 11.76
IPO/FPO intermediaries and advisors and transaction agreements
Intermediaries +Advisors
Transaction agreements and important documents
•Book running lead managers•Auditors •Legal Counsel: Domestic and international •Registrar to the issue •Depositories (NSDL/CDSL) •Syndicate members•Escrow collection banks (incl. refund banks)•Experts, if any•IPO Grading (for unlisted companies)
•Letters of engagement for advisors•Auditors’ comfort letters•Registrar’s agreement•Issue agreement •Syndicate agreement•Escrow agreement•Underwriting agreement•Legal opinions (including 10b-5 style disclosure letter)
Role of the Lead Merchant Banker
»Due diligence of the issue disclosures
»Making underwriting arrangements
»Setting up minimum number of collection centers
»Taking care of allotment, refund and dispatch of certificates
Registrar to Issue
1. Collecting Forms2. Processing 3. Record of applications received and rejected and
monies received, transferred to Public Offer Account and refunds
4. Providing correct data in time to enable the Selling Shareholder and the Company to determine and finalize the basis of allocation and allotment
5. In time and In Full Credit to Demat Account6. Dispatch of letters of allotment/ Confirmation of
Allocation Note (“CAN”)/ refund orders7. Ensuring that proper grievance handling mechanism
is in place at its office
According to ICDR auditor to the issue will be Auditor of the Company.
Further SEBI (ICDR) Regulations,2009 specify that:
» The financial information specified in DRHP/ RHP/ Prospectus under Schedule VIII , PART-A (2)(IX) of ICDR shall be certified by only those auditors who have subjected themselves to the peer review process of the Institute of Chartered Accountants of India (ICAI) and hold a valid certificate issued by the ‘Peer Review Board’ of the ICAI.
» All financial information specified in this item must be re-audited for one full financial year and the stub period, by the auditor certifying them in case where the financial statements were audited by an auditor who had not been subjected to peer review process of ICAI.
Auditor in Public Issue
Guidance - How to apply for a public issue?
»Get an application form from a share broker or Apply Online
»Fill up the form and submit it with the amount to the collecting centre.
»You can receive the shares in your demat account.
»If the application form is incomplete, it will be rejected and amount will be refunded.
Guidance - Factors to look for while applying for IPO
»Promoters track record in terms of experience, performance, reputation
»Risk factors in the offer document
»Financial forecasts for the business/project
»Issue price in relation to the face value
»Listing details
»The registrar, lead manager, bankers to the issue
Guidance - Sources of Information
»Read a reputed financial daily to understand the economy and the market
»Watch the business news on television
» Bloomberg UTV, CNBC TV 18, etc
»Subscribe to the publications of investor associations
»Attend the investors meetings of the investor associations regularly
»Browse the websites of SEBI, NSE and BSE
“Thriving in the future requires a willingness to
being flexible and adaptable, and constantly
questioning, learning & meeting new challenges”
-Jim Harris ‘The Learning Paradox’
Learn Continuously or
Die
Thank YouThank You
Vaibhav JainAssociate Director
INMACS MANAGEMENT SERVICES LIMITED
Mobile: +91-98681 44380
Email: vaibhavjain@inmacs.com
Personal: vaibhav1986@gmail.com; vaibhavjain.personal@gmail.com
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