CA Vaibhav Jain - Final Ppt on Ipo for Icai Kanpur 3 Jul 2010

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: [email protected]

Personal: [email protected]; [email protected]

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: [email protected]

Personal: [email protected]; [email protected]