chap 2- Pricing of IPO’s

8/4/2019 chap 2- Pricing of IPOs

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What is an IPO

An initial public offering (IPO), referred to simply as an "offering" or"flotation", is when a company (called the issuer) issues commonshares to the public for the first time.

They are often issued by smaller, younger companiesseeking capital to expand, but can also be done by large privatelyowned companies looking to become publicly traded.

In an IPO the issuer obtains the assistance of an underwriting firm,which helps determine what type of securityto issue (common

or preferred), best offering price and time to bring it to market.


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Types of public issue

ISSUE TYPE OFFER PRICE DEMAND ADVANCE PAYMENT(at the time ofapplication)

RESERVATIONS

Fixed Price Issues Price at which thesecurities are offeredand would be allotted

is made known in

advance to theinvestors

known only after theclosure of the issue

100 % 50 % -applicationsbelow Rs. 1 lakh50%- higher amountapplications.

Book BuildingIssues A 20 % price band isoffered by the issuer

within which investorsare allowed to bid and

the final price is

determined by theissuer only after

closure of the bidding.

available on a real timebasis on the BSE

website during thebidding period..

10 % - QIBs100 % - othercategories of investors

50 % -QIBS,35 % -small investors15%-other investors.


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Listing of shares Listing means admission of securities to dealings on a recognised stock

exchange. The securities may be of any public limited company,Central or State Government, quasi governmental and other financialinstitutions/corporations, municipalities, etc.

The objectives of listing are mainly to :

provide liquidity to securities;

mobilize savings for economic development;

protect interest of investors by ensuring full disclosures


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Advantages of Listing of shares Bolstering (boosting) and diversifying equity base

cheaper access to capital

Exposure, prestige and public image

Attracting and retaining better management and employees Facilitating acquisitions

Creating multiple financing opportunities: equity, convertible debt, cheaperbank loans, etc.

Increased liquidity for equity holder


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Through underwriters IPOs generally involve one or more investment banks known as "underwriters". The

company offering its shares, called the "issuer", enters a contract with a lead underwriterto sell its shares to the public. The underwriter then approaches investors with offers tosell these shares.

A large IPO is usually underwritten by a "syndicate" of investment banks led by one ormore major investment banks (lead underwriter). Upon selling the shares,the underwriters keep acommission based on a percentage of the value of the shares sold

(called the gross spread). Usually, the lead underwriters, i.e. the underwriters selling thelargest proportions of the IPO, take the highest commissionsup to 8% in some cases.

Multinational IPOs may have many syndicates to deal with differing legal requirementsin both the issuer's domestic market and other regions. For example, an issuer based inthe E.U. may be represented by the main selling syndicate in its domestic market,Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia.Usually, the lead underwriter in the main selling group is also the lead bank in the otherselling groups.

Because of the wide array of legal requirements and because it is an expensive process,IPOs typically involve one or more law firms with major practices in securities law, suchas theMagic Circle firms ofLondon and thewhite shoe firms ofNew York City.
http://en.wikipedia.org/wiki/Investment_bankhttp://en.wikipedia.org/wiki/Underwriterhttp://en.wikipedia.org/wiki/Syndicatehttp://en.wikipedia.org/wiki/Underwritershttp://en.wikipedia.org/wiki/Commission_(remuneration)http://en.wikipedia.org/wiki/Gross_spreadhttp://en.wikipedia.org/wiki/Commission_(remuneration)http://en.wikipedia.org/wiki/Law_firmhttp://en.wikipedia.org/wiki/Securities_lawhttp://en.wikipedia.org/wiki/Magic_Circle_(law)http://en.wikipedia.org/wiki/Londonhttp://en.wikipedia.org/wiki/White_shoe_firmhttp://en.wikipedia.org/wiki/New_York_Cityhttp://en.wikipedia.org/wiki/New_York_Cityhttp://en.wikipedia.org/wiki/White_shoe_firmhttp://en.wikipedia.org/wiki/Londonhttp://en.wikipedia.org/wiki/Magic_Circle_(law)http://en.wikipedia.org/wiki/Magic_Circle_(law)http://en.wikipedia.org/wiki/Magic_Circle_(law)http://en.wikipedia.org/wiki/Securities_lawhttp://en.wikipedia.org/wiki/Law_firmhttp://en.wikipedia.org/wiki/Commission_(remuneration)http://en.wikipedia.org/wiki/Gross_spreadhttp://en.wikipedia.org/wiki/Commission_(remuneration)http://en.wikipedia.org/wiki/Underwritershttp://en.wikipedia.org/wiki/Syndicatehttp://en.wikipedia.org/wiki/Underwriterhttp://en.wikipedia.org/wiki/Investment_bank


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Issue price: A company that is planning an IPO appoints lead managersto help it decide on an appropriate price at which the shares should be

issued. There are two ways in which the price of an IPO can bedetermined: either the company, with the help of its lead managers,fixes a price or the price is arrived at through the process of bookbuilding

Stag profit: Stag profit is a stock market term used to describe asituation before and immediately after a company's Initial publicoffering (or any new issue of shares). Astag is a party or individual

who subscribes to the new issue expecting the price of the stock to riseimmediately upon the start of trading. Thus, stag profit is the financial

gain accumulated by the party or individual resulting from the value ofthe shares rising.

For example, one might expect a certain I.T. company to doparticularly well and purchase a large volume of their stock or sharesbefore flotation on the stock market. Once the price of the shares has

risen to a satisfactory level the person will choose to sell their sharesand make a stag profit


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Documents

chap 2- Pricing of IPO’s