7/29/2019 FPO Pricing
1/51
Page 1 of51
INDIAN FINANCIAL SYSTEM
The heart that pumps blood,
The heart that pumps money,
The heart that needs to b strong,
The heart which sustains,
The heart of all life,
The centre part of the body,
The centre part of the economy,
Yes! This heart is INDIAs FINANCIAL SYSTEM.
Indian Financial System is like..
The core of the earth,
The core that protects,
The core that manages,
The core that holds,The core that integrates,
The core without vibrations..
7/29/2019 FPO Pricing
2/51
Page 2 of51
Indian Financial System.
The financial system is one of the most important inventions of modern
society. The phenomenon of imbalance of in the distribution of capital or
funds exists in every economic system. There are areas or people with
surplus funds and there are those with a deficit. A financial system
functions as an intermediary and facilitates the flow of funds from the
areas of surplus to the areas of deficit. A financial system is a
composition of various institutions, market, regulations and laws,
practices, money managers, analyst, transactions and claims and
liabilities.
7/29/2019 FPO Pricing
3/51
Page 3 of51
Financial Markets:
A financial market can be defined as the market in which financial assets
are created or transferred. Financial assets represent a claim to thepayment of a sum of money sometime in the future and/or periodic
payment in the form of interest or dividend.
Financial markets are sometimes classified as primary and secondary
markets. But, more often financial markets are classified as money
market and capital markets. The distinction between the two markets is
based on the differences in the period of maturity of the financial assets
issued in these markets. Money market deals with all transaction in short
term instruments (with a period of maturity of one year or less like
treasury bills, bills of exchange, etc). Whereas capital market deals with
transaction related to long term instruments (with a period of maturity of
above one year like corporate debentures, government bonds, etc) and
stock (equity and preference shares).
Financial Institutions:
In financial economics, a financial institution is an institution that
provides financial services for its clients or members. Probably the most
important financial service provided by financial institutions is acting as
financial intermediaries. Most financial institutions are regulated by the
government. Financial institutions provide service as intermediaries of
financial markets. They are responsible for transferring funds from
investors to companies in need of those funds. Financial institutions
facilitate the flow of money through the economy. To do so, savings are
brought to provide funds for loans. Financial institutions in most
countries operate in a heavily regulated environment as they are critical
7/29/2019 FPO Pricing
4/51
Page 4 of51
parts of countries' economies. Regulation structures differ in each
country, but typically involve prudential regulation as well as consumer
protection and market stability. Some countries have one consolidated
agency that regulates all financial institutions while others have separate
agencies for different types of institutions such as banks, insurance
companies and brokers.
Financial Services:
Financial services are the economic services provided by the finance
industry, which encompasses a broad range of organizations that
manage money, including credit unions, banks, credit card companies,
insurance companies, consumer finance companies, stock brokerages,
investment funds and some government sponsored enterprises. The
term "financial services" became more prevalent in the United States
partly as a result of the Gramm-Leach-Bliley Act of the late 1990s, which
enabled different types of companies operating in the U.S. financial
services industry at that time to merge.
Companies usually have two distinct approaches to this new type of
business. One approach would be a bank which simply buys an
insurance company or an investment bank, keeps the original brands of
the acquired firm, and adds the acquisition to its holding company simplyto diversify its earnings. Outside the U.S. (e.g., in Japan), non-financial
services companies are permitted within the holding company. In this
scenario, each company still looks independent, and has its own
customers, etc. In the other style, a bank would simply create its own
brokerage division or insurance division and attempt to sell those
products to its own existing customers, with incentives for combining allthings with one company.
7/29/2019 FPO Pricing
5/51
Page 5 of51
Financial Instruments:
A financial instrument is a tradable asset of any kind, either cash;evidence of an ownership interest in an entity; or a contractual right to
receive, or deliver, cash or another financial instrument.
Financial instruments can be categorized by form depending on whether
they are cash instruments orderivative instruments:
Cash instruments are financial instruments whose value is
determined directly by the markets. They can be divided into
securities, which are readily transferable, and other cash
instruments such as loans and deposits, where both borrower and
lender have to agree on a transfer.
Derivative instruments are financial instruments which derive
their value from the value and characteristics of one or more
underlying entities such as an asset, index, or interest rate. They
can be divided into exchange-traded derivatives and over-the-
counter (OTC)derivatives.
Alternatively, financial instruments can be categorized by "asset class"
depending on whether they are equity based (reflecting ownership of
the issuing entity) ordebt based (reflecting a loan the investor has made
to the issuing entity). If it is debt, it can be further categorised intoshort
term (less than one year) orlong term.
Foreign Exchange instruments and transactions are neither debt nor
equity based and belong in their own category.
Financial Markets Structure:
http://en.wikipedia.org/wiki/Loanshttp://en.wikipedia.org/wiki/Depositshttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Ownershiphttp://en.wikipedia.org/wiki/Ownershiphttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Depositshttp://en.wikipedia.org/wiki/Loans7/29/2019 FPO Pricing
6/51
Page 6 of51
Monet Market:
Money, Money, money,
I need it in a day.
7/29/2019 FPO Pricing
7/51
Page 7 of51
But everyone says nay.
Bank is a one, who says take,
With lot of documents to make.
Any other option I ask
Yes says the huge market mask.
With a wider mark, named as MONEY MARKET.
One of the important functions of a well-developed money market is to
channel savings into short-term productive investments like workingcapital. Call money market, treasury bills market and markets for
commercial paper and certificate of deposits are some of the examples
of a money market
Call Money Market
The call money market forms a part of the national money market, where
day-to-day surplus funds, mostly of the banks are traded. The call
money loans are of very short term in nature and the maturity period of
theses loans vary from 1 to 15 days. The money that is lent for one day
in this market is known as call money and if exceeds one day but less
than 15 days, is referred as notice money. In this market, any amount
could be lent or borrowed at a convenient interest rate, which is
acceptable to both borrower and lender. This loan are considered as
highly liquid, as they are repayable on demand at the option of either the
lender or the borrower
7/29/2019 FPO Pricing
8/51
Page 8 of51
Commercial papers
Commercial Paper are short term, unsecured promissory notes issued at
a discount to face value by well known companies that are financial
strong and carry high credit rating. They are sold directly by the issuers
to investor, or else placed by borrowers through agents like merchant
banks and security houses. The flexible maturities at which they can be
issued are one of the main attractions for borrowers and investors since
issues can be adapted to the needs of both. The Commercial Paper
market has the advantage of giving highly rated corporate borrowers
cheaper funds than they could obtain from the banks while still providing
institutional investor with higher interest earnings than they could obtain
from the banking system the issue of Commercial Paper imparts a
degree of financial stability to the system as the issuing company has an
incentive to remain financially strong.
7/29/2019 FPO Pricing
9/51
Page 9 of51
Certificates of deposits
With a view to further widen the range of money market instruments and
to give investors greater flexibility in the deployment of the short termsurplus funds, RBI permitted banks to issue Certificates of Deposits.
Certificates of Deposits the defined as short term deposit by way of
usance promissory notes having a short maturity of not less than three
months and not more than one year. They are bank deposits which are
transferable to one party to the other they are different from conventional
time deposits due to their free negotiability. Due this negotiable nature
they are also known as negotiable certificates of deposits.
Money market mutual funds
MMMF are mutual funds that invest primarily in money market
instruments of very high quality and of very short maturity commercial
banks, RBI and public financial institutions can set it either directly or
through their existing mutual funds subsidiaries. The schemes offered by
7/29/2019 FPO Pricing
10/51
Page 10 of51
MMMF can either be open ended or close ended. In case of open-ended
schemes the units are available on continuous basis and the MMMF
would be willing to repurchase the units, while a close ended scheme is
available for subscription for a limited period and is redeemed at
maturity.
Capital Markets:
A capital market is a market for securities (debt or equity), where
business enterprises (companies) and governments can raise long-term
funds. It is defined as a market in which money is provided for periods
longer than a year
Difference between Money Market and Capital Market:
Money market is distinguished from capital market on the basis of the
maturity period, credit instruments and the institutions:
7/29/2019 FPO Pricing
11/51
Page 11 of51
1. Maturity Period: The money market deals in the lending and
borrowing of short-term finance (i.e., for one year or less), while the
capital market deals in the lending and borrowing of long-term finance
(i.e., for more than one year).
2. Credit Instruments: The main credit instruments of the money
market are call money, collateral loans, acceptances, bills of exchange.
On the other hand, the main instruments used in the capital market are
stocks, shares, debentures, bonds, securities of the government.
3. Nature of Credit Instruments: The credit instruments dealt with in
the capital market are more heterogeneous than those in money market.
Some homogeneity of credit instruments is needed for the operation of
financial markets. Too much diversity creates problems for the investors.
4. Institutions: Important institutions operating in the' money market are
central banks, commercial banks, acceptance houses, nonbank financial
institutions, bill brokers, etc. Important institutions of the capital market
are stock exchanges, commercial banks and nonbank institutions, such
as insurance companies, mortgage banks, building societies, etc.
5. Purpose of Loan: The money market meets the short-term credit
needs of business; it provides working capital to the industrialists. The
capital market, on the other hand, caters the long-term credit needs of
the industrialists and provides fixed capital to buy land, machinery, etc.
6. Risk: The degree of risk is small in the money market. The risk is
much greater in capital market. The maturity of one year or less gives
7/29/2019 FPO Pricing
12/51
Page 12 of51
little time for a default to occur, so the risk is minimised. Risk varies both
in degree and nature throughout the capital market.
7. Basic Role: The basic role of money market is that of liquidity
adjustment. The basic role of capital market is that of putting capital to
work, preferably to long-term, secure and productive employment.
8. Relation with Central Bank: The money market is closely and
directly linked with central bank of the country. The capital market feels
central bank's influence, but mainly indirectly and through the money
market.
9. Market Regulation:
In the money market, commercial banks are closely regulated. In the
capital market, the institutions are not much regulated.
PRIMARY MARKET
The capital market consists of primary and secondary markets. The
primary market deals with the issue of new instruments by the corporate
sector such as equity shares, preference shares and debt instruments.
Central and State governments, various public sector industrial units
(PSUs), statutory and other authorities such as state electricity boards
and port trusts also issue bonds/debt instruments. The primary market
in which public issue of securities is made through a prospectus is a
retail market and there is no physical location. Offer for subscription to
7/29/2019 FPO Pricing
13/51
Page 13 of51
securities is made to investing community. The secondary market or
stock exchange is a market for trading and settlement of securities that
have already been issued. The investors holding securities sell
securities through registered brokers/sub-brokers of the stock exchange.
Investors who are desirous of buying securities purchase securities
through registered brokers/sub-brokers of the stock exchange. It may
have a physical location like a stock exchange or a trading floor.
Major players of primary market:
There are several major players in the
primary market. These include the
merchant bankers, mutual funds, financial
institutions, foreign institutional investors
(FIIs) and individual investors. In the
secondary market, there are the stock
brokers (who are members of the stockexchanges), the mutual funds, financial institutions, foreign institutional
investors (FIIs), and individual investors. Registrars and Transfer
Agents, Custodians and Depositories are capital market intermediaries
that provide important infrastructure services for both primary and
secondary markets.
SECONDARY MARKET
The secondary market consists of 23
stock exchanges including the National
Stock Exchange, Over-the-Counter
Exchange of India (OTCEI) and Inter
Connected Stock Exchange of India
7/29/2019 FPO Pricing
14/51
Page 14 of51
Ltd. The secondary market provides a trading place for the securities
already issued, to be bought and sold. It also provides liquidity to the
initial buyers in the primary market to reoffer the securities to any
interested buyer at any price, if mutually accepted. An active secondary
market actually promotes the growth of the primary market and capital
formation because investors in the primary market are assured of a
continuous market and they can liquidate their investments.
Market regulation: It is important to ensure smooth working of capital
market, as it is the arena where the players in the economic growth of
the country. Various laws have been passed from time to time to meet
this objective. The financial market in India was highly segmented until
the initiation of reforms in 1992-93 on account of a variety of regulations
and administered prices including barriers to entry. The reform process
was initiated with the establishment of Securities and Exchange Board of
India (SEBI).
The legislative framework before SEBI came into being consisted of
three major Acts governing the capital markets:
1. The Capital Issues Control Act 1947, which restricted access to
the securities market and controlled the pricing of issues.2. The Companies Act, 1956, which sets out the code of conduct for
the corporate sector in relation to issue, allotment and transfer of
securities, and disclosures to be made in public issues.
3. The Securities Contracts (Regulation) Act, 1956, which regulates
transactions in securities through control over stock exchanges. In
addition, a number of other Acts, e.g., the Public Debt Act, 1942,
7/29/2019 FPO Pricing
15/51
Page 15 of51
the Income Tax Act, 1961, the Banking Regulation Act, 1949, have
substantial bearing on the working of the securities market.
Capital Issues (Control) Act, 1947
The Act had its origin during the Second World War in 1943 when the
objective of the Government was to pre-empt resources to support the
War effort. Companies were required to take the Government's approval
for tapping household savings. The Act was retained with some
modifications as a means of controlling the raising of capital by
companies and to ensure that national resources were channeled into
proper lines, i.e., for desirable purposes to serve goals and priorities of
the government, and to protect the interests of investors.
Under the Act, any firm wishing to issue securities had to obtain
approval from the Central Government, which also determined the
amount, type and price of the issue. This Act was repealed and replacedby SEBI Act in 1992.
Securities Contracts (Regulation) Act, 1956
The previously self-regulated stock exchanges were brought under
statutory regulation through the passage of the SC(R)A, which provides
for direct and indirect control of virtually all aspects of securities tradingand the running of stock exchanges. This gives the Central Government
regulatory jurisdiction over (a) stock exchanges, through a process of
recognition and continued supervision, (b) contracts in securities, and (c)
listing of securities on stock exchanges. As a condition of recognition, a
stock exchange complies with conditions prescribed by Central
Government. Organized trading activity in securities in an area takes
place on a specified recognized stock exchange. The stock exchanges
7/29/2019 FPO Pricing
16/51
Page 16 of51
determine their own listing regulations which have to conform with the
minimum listing criteria set out in the Rules. The regulatory jurisdiction
on stock exchanges was passed over to SEBI on enactment of SEBI Act
in 1992 from Central Government by amending SC(R) Act.
Companies Act, 1956
Companies Act, 1956 is a comprehensive legislation covering all
aspects of company form of business entity from formation to winding-
up. This legislation (amongst other aspects) deals with issue, allotment
and transfer of securities and various aspects relating to company
management. It provides for standards of disclosure in public issues of
capital, particularly in the fields of company management and projects,
information about other listed companies under the same management,
and management perception of risk factors. It also regulates
underwriting, the use of premium and discounts on issues, rights and
bonus issues, substantial acquisitions of shares, payment of interest anddividends, supply of annual report and other information.
Securities and Exchange Board of India
With the objectives of improving market efficiency, enhancing
transparency, checking unfair trade practices and bringing the Indian
market up to international standards, a package of reforms consisting of
measures to liberalise, regulate and develop the securities market wasintroduced during the 1990s. The secondary market overcame the
geographical barriers by moving to screen-based trading. Trades enjoy
counterparty guarantee. Physical security certificates have almost
disappeared. The settlement period has shortened to three days. A
major step in the liberalisation process was the repeal of the Capital
Issues (Control) Act, 1947 in May 1992. With this, Government's control
over issue of capital, pricing of the issues, fixing of premia and rates of
7/29/2019 FPO Pricing
17/51
Page 17 of51
interest, on debentures, etc., ceased. SEBI Act, 1992 was enacted to
empower SEBI with statutory powers for (a) protecting the interests of
investors in securities, (b) promoting the development of the securities
market, and (c) regulating the securities market. Its regulatory jurisdiction
extends over corporates in the issuance of capital and transfer of
securities, in addition to all intermediaries and persons associated with
securities market.
The Depositories Act, 1996 is also administered by SEBI.
Disclosure and Investor Protection (DIP) Norms
A high level committee on capital markets has been set up to ensure co-
ordination among the regulatory agencies in financial markets. In the
interest of investors, SEBI issued Disclosure and Investor Protection
(DIP) Guidelines. Issuers are now required to comply with these
Guidelines before accessing the market. The guidelines contain a
substantial body of requirements for issuers/intermediaries. The mainobjective is to ensure that all concerned observe high standards of
integrity and fair dealing, comply with all the requirements with due skill,
diligence and care, and disclose the truth, the whole truth and nothing
but the truth. The Guidelines aim to secure fuller disclosure of relevant
information about the issuer and the nature of the securities to be issued
so that investor can take an informed decision.
Capital Market Intermediaries:
7/29/2019 FPO Pricing
18/51
Page 18 of51
There are several institutions,
which facilitate the smooth
functioning of the securities
market. They enable the issuers
of securities to interact with the
investors in the primary as well
as the secondary arena.
Merchant Bankers
Among the important financial intermediaries are the merchant bankers.
The services of merchant bankers have been identified in India with just
issue management. It is quite common to come across reference to
merchant banking and financial services as though they are distinct
categories. The services provided by merchant banks depend on their
inclination and resources - technical and financial.
Credit Rating Agencies
The 1990s saw the emergence of a number of rating agencies in the
Indian market. These agencies appraise the performance of issuers of
debt instruments like bonds or fixed deposits. The rating of an
instrument depends on parameters like business risk, market position,
operating efficiency, adequacy of cash flows, financial risk, financialflexibility, and management and industry environment. The objective and
utility of this exercise is twofold. From the point of view of the issuer, by
assigning a particular grade to an instrument, the rating agencies enable
the issuer to get the best price.
R & T Agents - Registrars to Issue
7/29/2019 FPO Pricing
19/51
Page 19 of51
R&T Agents form an important link between the investors and issuers in
the securities market. A company, whose securities are issued and
traded in the market, is known as the Issuer. The R&T Agent is
appointed by the Issuer to act on its behalf to service the investors in
respect of all corporate actions like sending out notices and other
communications to the investors as well as dispatch of dividends and
other non-cash benefits. R&T Agents perform an equally important role
in the depository system as well. These are described in detail in the
second section of this Workbook.
Stock Brokers
Stockbrokers are the intermediaries who are allowed to trade in
securities on the exchange of which they are members. They buy and
sell on their own behalf as well as on behalf of their clients. Traditionally
in India, individuals owned firms providing brokerage services or they
were partnership firms with unlimited liabilities. There were, therefore,restrictions on the amount of funds they could raise by way of debt. With
increasing volumes in trading as well as in the number of small
investors, lack of adequate capitalization of these firms exposed
investors to the risks of these firms going bust and the investors would
have no recourse to recovering their dues.
Custodians
In the earliest phase of capital market reforms, to get over the problems
associated with paper-based securities, large holding by institutions and
banks were sought to be immobilized. Immobilization of securities is
done by storing or lodging the physical security certificates with an
organization that acts as a custodian - a securities depository. All
7/29/2019 FPO Pricing
20/51
Page 20 of51
subsequent transactions in such immobilized securities take place
through book entries.
Mutual Funds
Mutual funds are financial intermediaries, which collect the savings of
small investors and invest them in a diversified portfolio of securities to
minimize risk and maximize returns for their participants. Mutual funds
have given a major fillip to the capital market - both primary as well as
secondary. The units of mutual funds, in turn, are also tradable
securities. Their price is determined by their net asset value (NAV) which
is declared periodically. The operations of the private mutual funds are
regulated by SEBI with regard to their registration, operations,
administration and issue as well as trading.
Depositories
The depositories are important intermediaries in the securities marketthat is scrip-less or moving towards such a state. In India, the
Depositories Act defines a depository to mean "a company formed and
registered under the Companies Act, 1956 and which has been granted
a certificate of registration under sub-section (IA) of section 12 of the
Securities and Exchange Board of India Act, 1992." The principal
function of a depository is to dematerialize securities and enable theirtransactions in book-entry form.
Depository Participants
A Depository Participant (DP) is described as an agent of the depository.
They are the intermediaries between the depository and the investors.
The relationship between the DPs and the depository is governed by an
agreement made between the two under the Depositories Act. In a
7/29/2019 FPO Pricing
21/51
Page 21 of51
strictly legal sense, a DP is an entity who is registered as such with SEBI
under the provisions of the SEBI Act. As per the provisions of this Act, a
DP can offer depository related services only after obtaining a certificate
of registration from SEBI.
Public Issues in Primary Market.
Initial Public Offer:
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
IPO
FPO
7/29/2019 FPO Pricing
22/51
Page 22 of51
both for the first time to the public. This paves way for listing and trading
of the issuers securities.
1.0 Book Building - About Book Building
Book Building is basically a capital issuance process used in Initial
Public Offer (IPO) which aids price and demand discovery. It is a
process used for marketing a public offer of equity shares of a company.
It is a mechanism where, during the period for which the book for the
IPO is open, bids are collected from investors at various prices, which
are above or equal to the floor price. The process aims at tapping both
wholesale and retail investors. The offer/issue price is then determined
after the bid closing date based on certain evaluation criteria.
1.1The Process:
The Issuer who is planning an IPO nominates a lead merchant
banker as a 'book runner'. The Issuer specifies the number of securities to be issued and the
price band for orders.
The Issuer also appoints syndicate members with whom orders
can be placed by the investors.
Investors place their order with a syndicate member who inputs the
orders into the 'electronic book'. This process is called 'bidding'and is similar to open auction.
A Book should remain open for a minimum of 5 days.
Bids cannot be entered less than the floor price.
Bids can be revised by the bidder before the issue closes.
On the close of the book building period the 'book runner evaluates
the bids on the basis of the evaluation criteria which may include -
o Price Aggression
7/29/2019 FPO Pricing
23/51
Page 23 of51
o Investor quality
o Earliness of bids, etc.
The book runner and the company conclude the final price at
which it is willing to issue the stock and allocation of securities.
Generally, the number of shares is fixed; the issue size gets frozen
based on the price per share discovered through the book building
process.
Allocation of securities is made to the successful bidders.
Book Building is a good concept and represents a capital market
which is in the process of maturing.
Difference between shares offered through book building and offer
of shares through normal public issue:
FeaturesFixed Price process Book Building process
Pricing Price at which the securities are
offered/ allotted is known in
advance to the investor.
Price at which securities will be
offered/ allotted is not known in
advance to the investor. Only an
indicative price range is known.
Demand Demand for the securities
offered is known only after the
closure of the issue
Demand for the securities offered
can be known everyday as the
book is built.
Payment Payment if made at the time of
subscription wherein refund is
given after allocation.
Payment only after allocation.
7/29/2019 FPO Pricing
24/51
Page 24 of51
Book Building Process:
7/29/2019 FPO Pricing
25/51
Page 25 of51
WHAT IS FPO?
A follow-on offering (often but incorrectly called secondary offering) is
an issuance of stock subsequent to the company's initial public offering.
A follow-on offering can be either of two types (or a mixture of both):
dilutive and non-dilutive. A secondary offering is an offering of securities
by a shareholder of the company (as opposed to the company itself,
which is a primary offering). A follow on offering is preceded by release
of prospectus similar to IPO: a Follow-on Public Offer (FPO).
For example, Google's initial public offering (IPO) included both a
primary offering (issuance of Google stock by Google) and a secondary
offering (sale of Google stock held by shareholders, including the
founders).
In the case of the dilutive offering, the company's board of
directors agrees to increase the share float for the purpose of selling
more equity in the company. This new inflow of cash might be used to
pay off some debt or used for needed company expansion. When new
shares are created and then sold by the company, the number of shares
outstanding increases and this causes dilution of earnings on a per
share basis. Usually the gain of cash inflow from the sale is strategic and
is considered positive for the longer term goals of the company and its
shareholders. Some owners of the stock however may not view the
event as favorably over a more short term valuation horizon.
7/29/2019 FPO Pricing
26/51
Page 26 of51
The non-dilutive type of follow-on offering is when privately held shares
are offered for sale by company directors or other insiders (such
as venture capitalists) who may be looking to diversify their holdings.
Because no new shares are created, the offering is not dilutive to
existing shareholders, but the proceeds from the sale do not benefit the
company in any way. Usually however, the increase in available shares
allows more institutions to take non-trivial positions in the company.
As with an IPO, the investment banks who are serving as underwriters of
the follow-on offering will often be offered the use of agreenshoeor
over-allotment option by the selling company.
A non-dilutive offering is also called a secondary market offering.
FPO Process:
FLOW CHART OF FPO PROCESS
The issue of securities to members of the public through a prospectus
involves a fairly elaborate process, the principal steps of which are
briefly described below:
Approval of Board
An approval of the board of directors of the company is required for
raising capital from the public.
http://en.wikipedia.org/wiki/Greenshoehttp://en.wikipedia.org/wiki/Greenshoehttp://en.wikipedia.org/wiki/Greenshoehttp://en.wikipedia.org/wiki/Greenshoe7/29/2019 FPO Pricing
27/51
Page 27 of51
Appointment of Lead Managers
The lead manager is a merchant banker who orchestrates the issue
in consultation with the company. The lead manager must be
selected carefully.
Appointment of Other Intermediaries
Several intermediaries facilitate the public issue process. A cop-
manager is appointed to share the work of the lead manager and an
advisor to provide counsel. An underwriter is appointed who agrees to
subscribe to a given number of shares in the event the public does
not subscribe to them. The underwriter, in essence, stands guarantee
for public subscription in consideration for the underwriting
commission. Bankers are appointed to collect money on behalf of the
company from the applicants. Brokers are appointed to the issue to
facilitate its subscription. Only members of recognized Stock
Exchanges can be appointed as brokers. The number of brokers
appointed has to bear a reasonable relationship to the size of the
issue. A company may, if such a need is felt, appoint a principal
broker to coordinate the work of brokers. Registrars are appointed to
the issue to perform a series of tasks from the time the subscription is
closed to the time the allotment is made. They may be selected on
the basis of experience, expertise, credibility, and cost.
7/29/2019 FPO Pricing
28/51
Page 28 of51
Filing of 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
companies seeking to make a public issue have to file their offer
document with SEBI. If SEBI or the public does not communicate its
observations within 21 days from the filing of the offer document, the
company can proceed with its public issue. The prospectus and
application form (along with Articles and Memorandum of Association)
must be forwarded to the concerned stock exchange, where the issue is
proposed to be listed, for approval.
Filing of the Prospectus with the Registrar of Companies
Once the prospectus is approved by the concerned stock exchange
and consents obtained from the bankers, auditors, legal advisors,
registrars, underwriters, and others, the prospectus, signed by the
directors, must be filed with the Registrar of Companies, along with
requisite documents as required by the Companies Act, 1956.
Filing of Initial Listing Application
Within ten days of filing the prospectus, the initial listing application
must be made to the concerned stock exchanges, along with the
initial listing fees.
Promotion of the Issue
The promotional campaign typically commences with the filing of the
prospectus with the Registrar of Companies and ends with the
7/29/2019 FPO Pricing
29/51
Page 29 of51
release of the statutory announcement of the issue. To promote the
issue the company holds conferences for brokers, press and
investors. Advertisements are also released in newspapers and
periodicals to generate interest among potential investors.
Statutory Announcement
The statutory announcement of the issue must be made after seeking
the approval of the lead stock exchange. This must be published at
least ten days before the opening of the subscription list.
Collection of Applications
The statutory announcement (as well as the prospectus) 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 to the issue collect application
money on behalf of the company and the managers to the issue, with
the help of the registrars to the issue, monitor the situation.
Information is gathered about the number of applications received in
various categories, the number of shares applied for, and the amount
received.
Processing of Applications
The applications forms received by the bankers are transmitted to the
registrars of the issue for processing. This mainly involves scrutinizing
the applications, coding the applications, preparing a list of
applications with all relevant details.
Establishing the Liability of Underwriters
7/29/2019 FPO Pricing
30/51
Page 30 of51
If the issue is under subscribed, the liability of the underwriters has to
be established.
Allotment of Shares
According to SEBI guidelines, one-half of the net public offers have to
be reserved for applications up to 1000 shares and the balance one-
half for larger applications. For each of these segments, the
proportionate system of allotment is to be followed.
Listing of the Issue
The detailed listing application should be submitted to the concerned
stock exchanges along with the listing agreement and the listing fee.
The allotment formalities should be completed within 30 days after
the subscription list is closed or such extended period as permitted by
the lead stock exchange.
The FPO process begins with the management making a presentation to
the board of directors, with business plan and financial projections,
proposing that the company enter the public market. If the directors
approve the proposal than the following steps are taken:
1. Pre-Issue
a) Due Diligence
b) Draft offer document to be filed with SEBI.
c) Final Offer document to be filed with SEBI.
d) Application for listing with Stock Exchange.
7/29/2019 FPO Pricing
31/51
Page 31 of51
e) Promoters contribution to be brought in priorto the issue.
f) Appointment of Compliance officer.
g) In-principal approval from the Stock Exchange to be obtained
and filed with SEBI.
h) Issue Advertisement.
i) Book-Building and Bidding processes to be followed.
2. Issue
j) Subscription list to be kept open for at least 3 days.
k) Issue to open within the time prescribed.
3. Post-Issue
l) Monitoring reports to be submitted to SEBI.
m) Final Post issue monitoring reports.
n) Post issue advertisement.
o) Dispatch of share certificates etc. and allotment and listingdocuments.
One of the keys to a smooth FPO is a thorough review of your
business. This due diligence process ensures you can back up
everything you say in your SEBI registration statement.
During the due diligence phase, the company, its underwriters, and
their attorneys will focus on the registration statement. This phase will
require the company to thoroughly review its business and to
substantiate all claims in the registration statement. For example, if a
company claims that it "will have significant first-mover and time-to-
market advantages as a software-based solution in the Internet postage
7/29/2019 FPO Pricing
32/51
Page 32 of51
market," the company must be able to back up that claim. Indeed, the
Securities and Exchange Commission may ask for such data. This
review may also uncover additional information that needs to be
addressed or disclosed.
Besides inspecting the registration statement, the underwriters and
counsel for both parties will also question company officers and key
employees. This will include a thorough discussion of the company's
business and marketing plans, revenue projections, product
development road map, and intellectual property portfolio, with an
emphasis on identifying potential pitfalls. The due diligence team will
also speak with third parties, such as customers, retailers, and suppliers.
After all, problems with partners in the supply and distribution chain can
cascade back to the company itself. For example, a financially troubled
customer may tie up a company's inventory in a bankruptcy court
proceeding, or a supplier of a key component may face an extended
shutdown as it irons out Y2K-related problems with its factoryautomation software.
This attention to detail is required for both brand-new dot.com
companies and well-seasoned corporations alike. Even Goldman Sachs,
a veteran investment banking firm, provided this litany of risk factors in
its registration statement.
The third leg of the due diligence review involves an audit ofcompany records. Again, the team will be looking for hidden problems in
the company's corporate documents, licenses, and material contracts.
Finally, the company and its employees should be sensitive to personal
matters that may affect an Follow on public offering. For example, a
confidential settlement between a senior executive and a plaintiff for a
fraud-related case, even if it had no merits, may affect public perception
of the company and its leadership. Accordingly, a frank discussion with
7/29/2019 FPO Pricing
33/51
Page 33 of51
counsel is encouraged.
The due diligence process aspires to achieve the following
1 To assess the reasonableness of historical and projected earnings
of cash flows.
2 To identify key vulnerabilities, risks and opportunities.
3 To gain an intimate understanding of the company and the market
in which the company operates such that the companys
management can anticipate and manage change.
4 To set in motion the planning for the post FPO operations.
It will result in a critical analysis of the control, accounting and reporting
systems of the company and concomitantly a critical appraisal of key
personal. It will identify the value drivers of the company thus enabling
the directors to understand where the value is and to focus there efforts
on increasing that value.
Due Diligence spans the entire Public issue process. The steps involvedin due diligence are given below:
1. Decision on Public issue.
2. Business due diligence
3. Legal and Financial Due diligence.
4. Disclosure in prospectus.
5.
Marketing to investors6. Post issue compliance
The following is the list of the key areas which would come under
scrutiny and a brief description of what the due diligence exercise should
focus on in each area:
1 The financial Statementsto ensure their accuracy.
2 The AssetsConfirm their value, condition existence and legal
7/29/2019 FPO Pricing
34/51
Page 34 of51
title.
3 The sales strategyanalyzing the policies and procedures in place
and assessing what works and what does not.
4 The marketingwhat is driving the business and is it effective.
5 The industry in which the company operatesunderstands trends
and new technology.
6 The competitionsidentify threats.
7 The systemshow effective are they? Are upgrades required?
8 Legal and corporate and tax issues
9 Company contracts and leaseidentify what the risks and
obligations are.
10 Suppliersare they expected to remain around.
At the center of the FPO is the prospectus. The prospectus is both a
disclosure document and a marketing document, since it is the only
information that the law allows to be disseminated about the offering.
Because the company, its directors and promoters are liable for any mis-
statement or omission of material information in the prospectus,
professionals involved should exercise due diligence in ensuring the
accuracy and adequacy of all the statements contained in the
prospectus.
The prospectus is required to contain a detailed description of the
business, a description of management structure, management
compensation figures, and a description of transactions between the
corporation and management discussions, operation and financial
conditions, together with information on the procedures, dividend policy
and capitalization. Also a statement of risk factors is essential.
7/29/2019 FPO Pricing
35/51
Page 35 of51
It normally starts with the table of contents, definitions, risk factors,
summary of the issuer and financial data. This is followed by a detailed
disclosure under three sections:
1. Issue Structure
2. Issuer Information
3. General and Statutory Information
1) Issue Structure
a. Capital structure of the
company.
b. Objects of the issue.
c. Description of Equity
shares and terms of AOA.
d. Build up of the capital
e. Funds requirement.
f. Funding plan.
g. Appraisal.
h. Schedule of
implementation
i. Funds deployed
j. Sources of financing of
funds already deployed.
k. Details of balanced funds
deployed
l. Interim use of funds.
m. Details of shareholding of
promoters.
n. Basis for issue price
o. Issue procedure
p. Tax benefit
q. Offering information
2) Issuer Information
a. Industry overview
b. Business overview
c. History and corporate
structure of the issuer
company.
d. Details of business
e. Business strategy
f. Property
g. Directors and key managerial
personnel
7/29/2019 FPO Pricing
36/51
Page 36 of51
h. Shareholders agreement
i. Management
j. Board of directors
k. Compensation and interest of
directors
l. Employees
m. Dividend policy
n. Financial performance for the
last 5 years
o. Group companies and
financial data
p. Changes in accounting
policies in the last three years
q. Legal and other information
r. Results of operations as
reflected in the financial
statements
s. Outstanding litigation and
material development
t. Government approvals and
licensing arrangements
u. Industry, competition and
regulatory environment
v. Other regulatory and statutory
disclosures
3) General and Statutory Information
a) Description of basis of allotment
b) Auditors report
c) Extracts of AOA
d) List of material contracts and documents
e) General information
f) Key industry regulation.
7/29/2019 FPO Pricing
37/51
Page 37 of51
Conditions for issue of securities
The companies issuing securities offered through an offer document
shall satisfy following at the time of filing the draft offer document with
SEBI and also at the time of filling the final offer document with the
registrar of companies/Designated Stock Exchange.
Filing of offer document
Public issue:
A draft prospectus is required to be filed with SEBI through an
eligible Merchant banker at least 21 days prior to the filing of prospectus
with the Registrar of Companies (ROCs). However, if, within 21 days
from the date of submission of draft prospectus, SEBI specifies
changes, if any, in the draft prospectus (without being under any
obligation to do so), the issuer or the Lead Merchant Banker shall
carry out such changes in the draft prospectus before filing the
prospectus with ROCs.
A company shall not make an issue of securities if the company has
been prohibited from accessing the capital market under any order ordirection passed by board.
A company is required to make an application for listening of those
securities in Stock Exchange(s) prior to any public issues of
securities.
A company shall make a public issue or an offer for sale of
securities, only after:
7/29/2019 FPO Pricing
38/51
Page 38 of51
(a) The company enters into an agreement with a depository for
dematerialization of securities already issued or proposed to be issued
to the public or existing shareholders; and
(b) The company gives an option to subscribers/ shareholders/
investors to receive the security certificates or hold securities
dematerialization from with a depository. As per the requirement, all
the public issues of size in excess of Rs. 1 crore, are to made
compulsorily in the demat more. Thus, if an investor chooses to apply for
an issue that is being made in a compulsory demat mode, he has to
have a demat account and has the responsibility to put the correct DP ID
and client ID details in the bid/application forms.
Unlisted Company is required to fulfill the following further
conditions:
An Unlisted Company may take an Follow on public offering(FPO) of equity shares or any other security which may be
converted into or exchanged with equity shares at a later date
only if it meets all the following conditions :
The company has net tangible assets of at least Rs. 3
crores in each of the preceding 3 full years (of 12 months
each), of which not more than 50% is held in monetary assets, ifmore than 50% of the net tangible assets are held in
monetary assets, the company is required to make firm
commitments to deploy such excess monetary assets in its
business/project
The company has a track record of distributable profits in
terms of Section 205 of the Companies Act, 1956, for at least
three (3) out of immediately preceding five (5) years. For the
7/29/2019 FPO Pricing
39/51
Page 39 of51
purpose of calculation of distributable profits in terms of
Section 205 of Companies Act, 1956, extraordinary items shall
not be considered.
The company has a net worth of at least Rs, 1 crore in
each of the preceding 3 full years (of 12 months each)
In case the company has changed its name within the last one
year, at least 50% of the revenue for the preceding 1 full
year is earned by the company from the activity suggested
by the new name, and
The aggregate of the proposed issue and all the previous
issues made in the financial year in terms of size (i.e., offer
through offer document + firm allotment + promoters`
contribution through the offer document ), does not exceed
five (5) times its pre-issue net worth as per the audited
balance sheet of the last financial year.
An Unlisted Company not complying with any of the conditions
specified above may take an Follow on public offering (FPO) of
equity shares or any other security which may be converted
into or exchanged with equity shares at a later date, only if it
meets both the conditions(a) and(b) given below :
(a) The issue is made through the bookbuilding process, with at least
50% of the net offer to the public being allotted to the Qualified
Institutional Buyers ( QIBs ), failing which the full subscription
monies shall be refunded.
OR
(a)The project has at least 15 % participation by Financial
Institutions / Scheduled Commercial Banks, of which at least 10%
7/29/2019 FPO Pricing
40/51
Page 40 of51
comes from the appraiser(s). In addition to this, at least 10% of the
issue size shall be allotted to QIBs, failing which the full
subscription monies shall be refunded
AND
(b)The minimum post-issue face value capital of the shall be Rs. 10
crores.
OR
(b) There shall be a compulsory market-making for at least 2 years from
the date of listing of the shares, subject to the following:
Market makers undertake to offer buy and sell quotes for a
minimum depth of 300 shares ;
Market makers undertake to ensure that the bid-ask spread
(difference between quotations for sale and purchase) for their
quotes shall not any time exceed 10%
The inventory of the market makers on each of such stock
exchanges, as on the date of allotment of securities, shall be at
least 5% of the proposed issue of the company.
An unlisted public company shall not make an allotment pursuant to
a public issue or offer for sale of equity shares or any
security convertible into equity shares unless the prospective allot
tees are not less than 1000 in number.
An offer for sale shall not be made of equity shares of a company
or any other security which may be converted into or exchanged
with equity shares of the company at a later date, unless the
7/29/2019 FPO Pricing
41/51
Page 41 of51
conditions laid down with respect to FPO by unlisted companies are
fulfilled.
Offer for sale can also be made if the provisions specified below are
compiled at the time of submission of offer document with the Board:
(a) The issue is made through the bookbuilding process, with at least
50% of the net offer to the public being allotted to the Qualified
Institutional Buyers ( QIBs ), failing which the full subscription
monies shall be refunded.
OR
(a)The project has at least 15 % participation by Financial
Institutions / Scheduled Commercial Banks, of which at least 10%
comes from the appraiser(s). In addition to this, at least 10% of the
issue size shall be allotted to QIBs, failing which the full
subscription monies shall be refunded
AND(c)The minimum post-issue face value capital of the shall be Rs. 10
crores.
OR
(b) There shall be a compulsory market-making for at least 2 years from
the date of listing of the shares, subject to the following:
Market makers undertake to offer buy and sell quotes for aminimum depth of 300 shares ;
Market makers undertake to ensure that the bid-ask spread
(difference between quotations for sale and purchase) for their
quotes shall not any time exceed 10%
The inventory of the market makers on each of such stock
exchanges, as on the date of allotment of securities, shall be at
least 5% of the proposed issue of the company.
7/29/2019 FPO Pricing
42/51
Page 42 of51
An unlisted public company shall not make an allotment pursuant to
a public issue or offer for sale of equity shares or any
security convertible into equity shares unless the prospective allot
tees are not less than 1000 in number.
Permission to use the name of the Exchange in an Issuer
Companys prospectus
The Exchange follows a procedure in terms of which companies
desiring to list their securities offered through public issues are required
to obtain its prior permission to use the name of the Exchange in their
prospectus or offer for sale documents before filing the same with
the concerned office of the Registrar of Companies. The Exchange
has since last three years formed a Listing Committee to analyze
draft prospectus/offer documents of the companies in respect of their
forthcoming public issue of securities and decide upon the matter of
granting them permission to use the name of The Stock Exchange,
Mumbai in their prospectus/ offer documents. The committee
evaluates the promoters, company, project and several other factors
before taking decision in this regard.
Submission of Letter of Application
As per Section 73 of the companies Act, 1956, a company seeking
listing of its securities on the Exchange is required to submit a
Letter of Application to all the Stock Exchanges where it proposes to
have its securities listed before filing the prospectus with the
Registrar of Companies.
7/29/2019 FPO Pricing
43/51
Page 43 of51
Allotment of Letter of Application
As per Listing Agreement, a company is required to complete allotment
of securities offered to the public within 30 days of the date of closure of
the subscription list and approach the Regional Stock Exchange, i.e.
Stock Exchange nearest its registered office for approval of the basis of
allotment.
In case of Book Building issue, Allotment shall be made not later than 15
days from the closure of the issue failing which interest at the rate of
15% shall be paid to the investors.
Biding Permission
As per Securities and Exchange Board of India Guidelines, the issuer
company should complete the formalities for trading at all the
Stock Exchanges where the securities are to listed within 7 working
days of finalization of Basis of Allotment. A company should
scrupulously adhere to the time limit for allotment of all securities and
dispatch of Allotment Letters/ Share certificates and Refund Orders
and for obtaining the listing permissions of all the Exchanges
whose names are stated in its prospectus or offer documents. In
the event of listing permission to a company being denied by any
Stock Exchange where it had applied for listing of its securities, it
can not proceed with the allotment of shares. However, the companymay file an appeal before the Securities and Exchange Board of India
under Section 22 of the Securities Contracts (Regulation) Act, 1956.
Requirement of 1% Security
The companies making public/ rights issues are required to deposit
1% of issue amount with the Regional Stock Exchange before theissue opens. This amount is liable to be forfeited in the event of the
7/29/2019 FPO Pricing
44/51
Page 44 of51
company not resolving the complaints of investors regarding delay in
sending refund orders/ share certificates, non payments of commission
to underwriters, brokers etc.
Payment of Listing Fees
All companies listed on the Exchange have to pay Annual Listing Fees
by the 30th April of every financial year to the Exchange as per the
schedule of Listing Fees prescribed from time to time.
EXEMPTION FROM ELIGIBILITY NORMS
The provisions of eligibility norms shall not apply in the following cases:
i) A banking company including a Local Area Bank ( Private Sector
Bank ) set up under sub-section (c) of Section 5 of the Banking
Regulation Act, 1949 and which has received license from the
Reserve Bank of India; or
ii) A corresponding new bank set up under the Banking Companies (
Acquisition and Transfer of Undertaking) Act, 1970 Banking Companies
( Acquisition and transfer of Undertaking) Act, 1980, State Bank of India
Act, 1955 and State Bank of India (Subsidiary Banks) Act, 1959
(Public Sector Bank);
iii) An infrastructure company:a) whose project has been appraised by a Public Financial
Institution (PFI) or Infrastructure Development Finance Corporation (
IDFC ) or Infrastructure Leasing and Financing Services Ltd. ( IL &
FS ) or a bank which was earlier a PFI; and
b) not less than 5 % of the project cost is Financed by any of
the institution referred to in sub - clause (a), jointly or severally,
7/29/2019 FPO Pricing
45/51
Page 45 of51
irrespective of whether they appraise the project or not, by way
of loan or subscription to equity or a combination of both ;
iv) Rights issue by a listed company.
In case the issuer company is making an issue of securities.
A. Under 100% of the net offer to the public.
B. Under 75% of the net offer to the public, it is required to be
compulsorily underwritten by the syndicate members/book runner(s)
The Syndicate members are required to enter into an underwriting
agreement with the Book Runner(s) indicating the number of securities
which they would subscribe at the predetermined price. The Book
Runner(s) are then required to enter into an underwriting agreement with
the issuer company.
Selecting the managing underwriter
The underwriter chosen by a company to manage its offering play a
critical role in the success of the FPO. The managing underwriter is
actively involved in the preparation of the companys registration
statement as well as managing the marketing and sale of the companys
stock. While many companies select to appoint mare than one managing
underwriter, the potential for differing views and approaches between
them is significant and companies must be prepared to resolve any
issues that may arise.
In selecting the managing underwriter, the following factors should be
considered:
7/29/2019 FPO Pricing
46/51
Page 46 of51
Industry Experience: The underwriter should have substantial
experience in FPOs in the companys industry and a good familiarity
with the company and its business.
Experienced Analyst: The underwriter should have a well known
analyst in the industry. Having an analyst with a high profile in the
relevant sector is the factor typically accorded great weight by
companies contemplating an FPO.
Individual Investment Bankers: The Company should feel free with
the individual investment bankers assigned to the transaction. The
right chemistry between the bankers and management is critical.
Reputation and Attention: While reputation is important, top tier
underwriters may not give smaller companies as much attention as
other underwriters. On the other hand, those less prominent
underwriters may not be able to provide the resources available to the
leading underwriters.
Distribution strength: The potential managing underwriters and the
company should discuss whether the issue should be sold primarily to
retail investors or institutional investors, or both. The underwriters
selected should have a substantial institutional or retail sales force, as
required.
Aftermarket Support: The underwriter should have a strong record of
aftermarket price performance for the stock of the companies that it
has recently taken public. A strong performance record indicates how
well the underwriter priced and supported recent transactions.
The company should discuss with potential underwriters and assess
critically any potential conflicts in the representation. Conflicts may result
from an underwriters relationship with competitors or an underwriters
relationship with the company aside from underwriting relationship. It is
7/29/2019 FPO Pricing
47/51
Page 47 of51
conceivable that an underwriter who holds an equity stake in the
company that would be counted as underwriters compensation would
forgo the assignment in order to maximize potential profits on the equity
stake. If made after FPO registration statement is filed, however, this
decision could cripple an FPO. These and related issues should be
thoroughly discussed with each potential underwriter
Price Mechanism:
7/29/2019 FPO Pricing
48/51
Page 48 of51
FAQs
Q: How is this auction process going to work?
A: At the outset my belief is this is another innovation for the capitalmarkets, new process of price discovery. In fact, we were the advisors to
the Maruti disinvestment tranche II that happened couple of years ago
and the way this will pan out is that this is popularly called as winners
curse. So, in this model every issue will have a floor price and the
institutional investors will bid above the floor price. Each investor will get
allocation or allotment based on price priority, i.e the price at which he orshe bids for that issue. So, taking an example if an institutional investor
A bids for 1 crore shares for an issue at a price of Rs 500 and a second
investor B bids for the same issue at a price of Rs 450 the investor who
has bid at Rs 500 will get the entire allotment for the shares he has bid
for. Second point in case two or more investors bid a certain quantity at
the same price then the allotment to these pairs of investors will be in
proportion because they have bid at the same price. So the model that
has been followed here is each investor will actually put his foot where
his mouth is. i.e the price at which he bids he will get full quantity.
Q: Different investors will get different amounts of shares at
different prices- right?
A: That is absolutely correct.
Q: So what is the benefit in this process versus the standard book
building process for instance does this mean that the issuer will
get better price determination and therefore more money in this
issue or does it mean that the institutional investor will get more
allocation if he is willing to put his money where his mouth is?
7/29/2019 FPO Pricing
49/51
Page 49 of51
A: My belief is that this is a win-win situation for both the issuer and the
investor for high quality issuances. There are some of the implications
that I see. One, this will lead to higher price realization for the issuer.
Two, investor who today are investing on the allotment system which is
proportionate will today understand that if they are able to analyze an
issue in more detail they are able to understand the management, the
business model and the business parameters in a better fashion will
probably be in a position to bid more accurately and at a higher price for
the issue. Three, today we have also seen in many of the issues which
have got oversubscribed in plenty, high quality investors have tended to
stay away because under the proportionate allotment system they have
got relatively smaller allotment because the number of investors joins
the band wagon once they see the issue is doing well.
In the system which is the current auction process, the same will not be
the case. An investor who does more work is more bullish on a story will
tend to bid at a price which is different and therefore stand technicallychance to get higher or better allotment.
Two or three points however that I want to point out the way currently
this is envisaged there will be a floor price and we are not envisaging
retail discount on this issue. Second thing is this as I mentioned in the
beginning of this programme this is winners curse so investor who doesmore homework, bids at a higher price tends to get larger quantity of
allotment in a conceptual framework. So he really has to put his bets on
the right and high quality issuances.
Q: Any data based on international proceeding because I know we
have only done this once before in India like I mentioned for the
Maruti follow on offer on how much higher the price that you
7/29/2019 FPO Pricing
50/51
Page 50 of51
achieve on an auction system like this will be compared to the price
that you would be achieving through regular book build mechanism
that we have been using all these years?
A: I frankly do not have the data off hand about international
precedence. But I am happy to state because we were involved in the
Maruti tranche two that happened. Both with respect to the floor price
and the floor price that was set the auction price that got achieved in the
tranche two disinvestment in my mind was a reasonably premium to the
floor price that was set. I am not able to recall the exact number but it
was probably close to 20% or 15-20%. Therefore it would depend on
issue to issue but issuances where investors are hungry and they
believe it is a high quality issue my belief is that the premium tend to be
definitely reasonable and beneficial to the issuer.
Q: Maruti aside this is the first time we are attempting this with
NTPC what are some of the challenges that you expect this processwill have to face as you try and ensure that institutional investors
understand how to play this game so to speak?
A: My belief is that Indian capital market especially the primary markets
under the Indian regulator has really been going from strength to
strength through its constant innovation process and if you look at the
thousand odd investors, institutional investors who has been followingthe Indian primary markets they are bound to understand this auction
process reasonably well. Having said that, in any new process that you
set for a market like Indian there will be a small learning phase and the
learning phase will not have any major stumbling box. This is one point.
The second point is, if you look at some of the successful issuances in
the last 2-3 years the institutional bucket which is close to 50-60% of the
issue physiologically the issuers and the market has tended to say it is
7/29/2019 FPO Pricing
51/51
Page 51 of51
60 times oversubscribed, 50 times oversubscribed so in a French
auction model physiologically you will see that since this follows a
certain auction process the number of times oversubscribed may not be
sort of large. But that should not sort of dissuade us from calling it a
successful issue. At the end of the day it will be successful based on the
quality of investors who bid for the issue and the premium above the
floor price that they tend to bid for it. So the way we have to measure a
successful issue will be a little different from what we have been doing
so far.