IPO & Its Requirments

8/2/2019 IPO & Its Requirments

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INITIAL PUBLIC OFFER.


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SeaWorld - Dolphindance

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Sea world Dolphin dance

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Initial Public Offer.- Types of public issues.

Initial Public

Offers. Public Issue. Offer for Sale.

Follow on Public

Offers. Public Issue.

Offer for Sale.

CompositeIssue.

Right Issue.

DepositoryReceipt Issue.

*Public Issue.

*SponsoredIssue.


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Going Public

WHETHER IPO DECISION IS PURELY MARKET DRIVEN?

company when its unlisted offers ownership opportunity tothe outside investor. Termed it as PRIVATE WINDOW.

What is difference between Promoters, Strategic Investorsand Financial Investors?

What is the difference between Private Window & MarketWindow?

Market worth of a company is dynamic and may not haverelevance with fundamentals.

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Going Public

Promoters prime concern is controlling interest in the company.

Strategic Investor has business interest in the company & isready to pay an entry premium on long term consideration.

Financial Investorlooks at the return on investment. Private Investor look for exit route different from Retail Investor.

Market Window unlike Private Window provides entry and exitroutes to investors (known as secondary offers in USA).

Pvt. Window is not market driven though has some influence inconsideration.

Market window which is market driven also performs validation ofcompanys worth on a continuous basis through stock exchange

route.

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Exit route for Pvt. Investor.

Private Investor look for exit route different fromRetail Investor.

Strategic Sale to another private investor/s.

Buy back by promoters.

Merger with or Take Over by another company.

Sometime Private Investors look forward for exit

route through market window by Offer for Sale oftheir shares to retail investors.

Financial Investor also has choice either throughPvt. Window or Market Window channel.

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Going Public-Strategic Dimension

When is it ripe to open Market Window for the company?

TheIPO is strategic, financial and Investment Banking decision.

The Strategic Dimension:

The Co. may remain private if its business model allows and thereare no compelling reason to go public. E.g. Maruti Udyog was oneof largest privately held co with sale of Rs.92.71billion.went forpublic I 2003. Others like Tata Sons; TCS; Nirma Consumer Care(Sale Rs.1840cr) ; Hero Cycles(Sale Rs.934cr); Cadila Pharma(SaleRs.420Cr) etc. Also several M N Cs like LG; Samsung; Ford India;Honda Siel etc.

Whether the company is matured for listing?

Timing an IPO is strategic decision mutually determined bypromoters and the investment banker.

Therefore whether to go public or not is primarily a corporatephilosophy. 8


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Going Public-Strategic Dimension

A source of finance for specific objectives.

Creates new ownership opportunity for retail investors.

Its liquidity event since creates an exit route for existing &future investors.

Creates market capitalization for the company. Generateswealth for Promoters; Share holders and other stake holders.

Once company is listed, its comparatively easy to drawcheaper global finance for expansion /diversification of

production capacity.

The listed company has better visibility & corporate image.

Market analyst & investors attach more credibility to wellperformed Co. They have market validation and regulatory

scrutiny besides corporate governance hence bettervaluations & human resources. 9


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Going public- Strategic Dimension.

IPO opens up the large retail window with immense potential forfund raising if company performs up to the market expectation.

Strategically the company should go for an IPO when it is maturedenough for it. Depends on following:

Does company need the IPO as liquidity event for the existinginvestors?

Is there an option for private exit route to postpone the IPO route?

Whether the company is matured to unlock the value?

Is companys business model retail-oriented with strong brandpresence to identify with retail investors?

Whether visibility of the company is sufficient in the market forinvestors to perceive the value for investment to unlock the valuefor the share holders?

Whether company is confident of strong top line & bottom linegrowth to sustain market expectations?

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I P O Financial Dimension

For some industry going public is no choice option. The capitalintensive industry i.e. cement; steel; shipping; power and powertransmission; heavy engineering etc. For balance capital structuregoing for IPO is essential. They may need multiple round of public

issue for growth and consolidation. Here IPO and Offer for sale ismore a financial decision rather strategic.

Unlocking value through an IPO is financial decision. But how togenerate more value is strategic decision.

Company can look to raise funds through strategic sale of equity

through private window that realises better value rather an IPO asprivate valuation offer significantly higher valuation than in theretail market.

Third aspect of financial dimension is to properly evaluate howmuch capital should be ideally raised through IPO and how it

should be optimally deployed.11


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IPO Financial Demension.

IPO with well laid down investment plans and convincingapplication of funds sell better.

Sometime requirement of funds through IPO is pretty large withoutcausing dilution of promoters stake. The issue structure in such

cases is determined in consultation with the MB and down size theissue if necessary and raise funds through alternate route.

Threats:

Listed co. face threat of hostile take over.

Future acquisition of stake by promoters become costlier. Brings additional cost of Issue exp; regulatory compliances

etc.

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I P O Investment Banking Dimension

Merchant Banker takes a call on the IPO proposal based on thebusiness plan and financial position of the company, expectedfuture performance, prevailing market condition, expected issuepricing. Size of the issue and the post issue capita structure.

The key drive for the MB is the market condition and his ownplacement strength. If post issue involves high dilution ofpromoters stake, may not receive well by the market. If promoter is

also enhancing his stake at offer price creates a confidence. If DFIalso contributes to the issue on firm allotment basis as project

appraiser, creates confidence in the market. The important factors are:

i; Credibility of the apprising institute;

ii; Institutional investment in the IPO;

iii; Rating/gradation of the IPO. iv; The impact of the past issue. 13


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Agenda

Fund Raising Options

Fund Raising HistoryIndia

Why IPO?

Eligibility Criteria under SEBI DIP and BSE Regulations

Minimum Public Shareholding

Minimum Promoters Contribution and Lock-in

Pricing

Issue StructureBook Building

Corporate Governance Requirements

Disclosures in the Offer Document

Special Dispensation to PSUs

Intermediaries involved and their Roles

Process and Timeline


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Options for Raising Funds

Fund Raising Options

HybridDebt Equity

In India

outside India

From Banks & FIs

Public issue ofBonds/Debentures

ECB ADR/GDR

IPO

FPO

Rights Issue

Pref. Issue

Various forms ofConvertibles

FCCB & FCEB


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Fund Raising History India

Capital Market Issues

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

FY-2004 FY-2005 FY-2006 FY-2007 FY-2008

IPO FPO Rights Issue QIP

Total Funds

Raised

Rs. 18,812 cr Rs. 24,707 cr Rs. 27,477 cr Rs. 32,950 cr Rs. 104,937 cr


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Why IPO??

For Funding Needs

Funding Capital Requirements for Organic Growth

Expansion through Greenfield or Brownfield or De-bottle Necking Projects

Diversification

Funding Inorganic Growth through Acquisitions

Funding Global Requirements

Funding Joint Venture and Collaborations needs

Funding Infrastructure Requirements, Marketing Initiatives and Distribution

Channels

Financing Working Capital Requirements

Funding General Corporate Purposes

Investing in businesses through other companies

Repaying debt to strengthen the Balance Sheet

Meeting Issue Expenses


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Why IPO??

For Non-funding Needs

Enhancing Corporate Stature

Retention and incentive for Employees through stock

options

Providing Investors exit options

Provide liquidity to the shareholders


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IPO Requirements


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Eligibility Criteria for Unlisted Companies - SEBI

Companies with track record Companies without track record

Track record of distributable profits for 3out of the immediately preceding 5 years

Pre-issue net worth of not less than Rs. 1Crore in each of the preceding 3 full years

Net tangible assets of atleast Rs. 3 Croresfor each of the preceding 3 full years

Not more than 50% of these to be held inthe form of monetary assets

(Proposed IPO + Previous Issues in thesame financial year) < 5 times the pre-issue

net worth

In case the company has changed its namewithin the last one year, atleast 50% of therevenue for the preceding 1 full year isearned by the company from the activitysuggested by the new name

Prospective allottees in the IPO should notbe less than 1000 in number

Primary Criteria

Choice of Route: Fixed Price orBook Building

Choice of Route: BookBuilding

In case of projectfunding, 15%

participation byFinancial Institutions/ ScheduledCommercial Banks

10% of this mustcome fromappraiser

10% of issue sizeto be allotted toQIBs

50% of the netoffer to public

being allotted toQIBs

Minimum post-issue face valuecapital must beRs. 10 Crores

OR Compulsory

market makingfor at least 2years from thedate of listing ofshares

+ +

Minimum post-issue face valuecapital must be Rs.10 Crores OR

Compulsory marketmaking for at least2 years from thedate of listing ofshares

Choice of Route: FixedPrice or Book Building

Exemptions A banking company

including a local areabank set up underthe BankingRegulation Act, 1949

A correspondingnew bank set upunder the BankingCompanies Act, 1970

An infrastructurecompany:

Whose project hasbeen appraised bya public financial

institution (PFI) Not less then 5% of

the project cost isfinanced by any ofthe PFI

Rights issue by alisted company


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Eligibility Criteria For IPO Stock Exchange (BSE)

Large Companies Small Companies

The minimum post-issue paid-up

capital of the applicant company(hereinafter referred to as "theCompany") shall be Rs. 3 crore; and

The minimum issue size shall be Rs.10 crore; and

The minimum market capitalization

of the Company shall be Rs. 25 crore(market capitalization shall becalculated by multiplying the post-issue paid-up number of equityshares with the issue price).

BSE Eligibility Criteria

The minimum post-issue paid-up capital of theapplicant company (hereinafter referred to as"the Company") shall be Rs. 3 crore; and

The minimum issue size shall be Rs. 3 crore; and

The minimum market capitalization of theCompany shall be Rs. 5 crore (marketcapitalization shall be calculated by multiplyingthe post-issue paid-up number of equity shareswith the issue price).

The minimum income/turnover of the Companyshall be Rs. 3 crore in each of the precedingthree 12 months period; and

The minimum number of public shareholdersafter the issue shall be 1000

A due diligence study may be conducted by an

independent team of CAs or Merchant Bankersappointed by BSE.


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Minimum Public ShareholdingPromoter includes: The person or persons

who are in over-allcontrol of the company;

The person or personswho are instrumental inthe formulation of a planor programme pursuantto which the securitiesare offered to the public;

The persons or personsnamed in the prospectusas promoters(s).

Promoter Group

Defined under clause6.8.3.2 of SEBI DIP

Public

Implies all investorsother than Promoter andPromoter Group

In case of PSUs, thePromoter is Governmentof India (represented byPresident of India).

SEBI has grantedexemption on issuestructure from Rule19(2)(b) on case to case

basis

Clause 40A of the Listing Agreement

At least 25% of the post issue paid up capital with the public (ie. other than promoter and

promoter group)

Exceptions under Rule 19(2)(b) of SCRR

As per rule 19(2)(b), a minimum of 25% of each class of security must be offered to the public

for subscription

However, at least 10% can be offered if the following 3 conditions are fulfilled:

Minimum 2 MM securities (excluding reservations, firm allotment & promoter

contribution) to be offered to the public

Minimum offer sizeRs. 100 crores

Issuance through book building with 60% QIB allocation

Continuous fulfillment of minimum shareholding criteria

Continuous public shareholding needs to be maintained as per Clause 40A of the listing

agreement since listing

Exemption

The aforesaid requirement of maintaining minimum level of public shareholding on a

continuous basis will not be applicable to government companies (as defined under Section

617 of the Companies Act, 1956), infrastructure companies (as defined under clause 1.2.1(xv)

of the SEBI (DIP) Guidelines, 2000) and companies referred to the Board for Industrial andFinancial Reconstruction.


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Government Cos & Infrastructure Cos

GovernmentCompanies

Section 617 of the Companies Act, 1956

Government company, means any company in which not less than fifty

one per cent of the paid-up share capital is held by the Central

Government, or by any State Government or Governments, or partly by

the Central Government and partly by one or more State Governments,

and includes a company which is a subsidiary of a Government company

as thus defined.

InfrastructureCompanies

Clause 1.2.1(xv) of the SEBI (DIP) Guidelines, 2000

Infrastructure Company means, a company wholly engaged in

the business of developing, maintaining and operating

infrastructure facility.


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Minimum Promoters Contribution and Lock-in

Promoters

Contribution

Minimum of 20% of the post issue capital of the Company for unlistedcompanies; for listed companies, either to extent of 20% in issue or to

ensure post issue holding of 20%

shares are ineligible for the computation of Promoters contribution. If

Issued in last one year at a price lower than issue price, unless topped

up Issued in last three years out of bonus issue or revaluation reserve

for consideration other than cash

Lock-in period

For Promoters:

Lock-in for a period of 3 years from the date of allotment or from the date ofcommencement of commercial production, whichever is later

Balance pre-issue capital, other than held by Indian and Foreign Venture Funds(registered with SEBI) and shares held for at least one year and being offered forsale in the issue

Must be locked-in for a period of 1 year from the date of allotment

Shares issued last will be locked-in first

Exemption

In case of public issue of securities by a company which has been listed on astock exchange for at least 3 years and has a track record of dividend payment forat least 3 immediately preceding years.

In case of companies where no identifiable promoter or promoter group exists.

In case of rights issues.


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Pricing

SEBI allows free pricing of equity shares in an IPO

Approval of RBI might be required for public issues by banks

Differential pricing is permissible in a public issue to retail individual investors and retail

individual shareholders

Retail investors can be offered shares at a discount to the price offered to other investor

categories (Max discount can be 10%)

Price Band: The cap price can be 20% more than the floor price. Price band can be revised

by 20% from the floor price.

No payment of commission by the promoter or issuer company to the public

If the issue price is above Rs.500 then the issuer can fix the FV of shares below Rs.10 but a

minimum of Rs.1.


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Issue Structure Book Building

Of the Net Offer to Public

Maximum 50% to QIBs

At least 15% to HNIs

At least 35% to retail

Dilution = 25% Dilution = 10% to 25%

Of the Net Offer to Public

At least 60% to QIBs

Maximum 10% to HNIs

Maximum 30% to retail

Net offer to the public shall mean the offer made to Indian public and does not include reservations/ firm allotments/ promoters contribution.

Net Offer to Public

Reservations / Firm Allotment shall not be made to categories other than: Permanent employees of the issuer company and in the case of a new company the permanent

employees of the promoting companies';

Shareholders of the promoting companies in the case of a new company and shareholders of

group companies in the case of an existing company either on a competitive basis or on a firm

allotment basis.

Persons who, on the date of filing of the draft offer document with the Board, have businessassociation, as depositors, bondholders and subscribers to services, with the issuer making aninitial public offering,

Reservations


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Corporate Governance Requirements

Compositionof the Board

Optimum number of executive and non executive directors with at least 50% being non-executive. Ifthe chairman, has executive powers then 50% of Board comprises of Independent directors. While ifchairman has non-executive powers then 1/3 of the Board comprises of Independent directors.

AuditCommittee

Mandatory constitution of Audit Committee with minimum three directors and headed by anIndependent director.

All members shall be financially literate (should be able to understand financial statements)and at least one member should have accounting and financial management expertise.

InvestorCommittee

Shareholder/Investor Grievances Committee to be formed under the chairmanship of a nonexecutive director to look into the redressing of shareholder and investor complaints liketransfer of shares, non-receipt of balance sheet, non-receipt of declared dividends

At least one director on the Board of the holding company shall be a director on the Board ofa material non listed Indian subsidiary Company

- Material non-listed subsidiary means a subsidiary whose turnover or net worth exceeds

20% of the consolidated turnover or net worth in the preceding accounting year Audit committee of the listed holding company shall also review the financial statements, inparticular, the investments by the unlisted subsidiary Company

A separate section on Corporate Governance to be included in the Annual Reports withdisclosures on compliance of mandatory and non-mandatory requirements

Submission of quarterly compliance report to the stock exchanges

CEO/CFO to certify the financial statements and cash flow statements

Subsidiary

Company

Report onCorp.

Governance

CEO/CFO

Certification


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Disclosures in the Offer Document

Capital

Structure

Shareholding Pattern (pre-issue and post-issue)

Securities Premium Account (pre-issue and post-issue)

Holding of the promoter and promoter group

Disclosure about ESOPs if any

Objects of theIssue

Total requirements of funds

Means of Financing

Undertaking by the issuer company confirming firm arrangements of financethrough verifiable means towards 75% of the stated means of finance(excluding proposed IPO)

Details about the appraisal of the project. Interim use of funds etc.

Business

Description about the Industry in which the Company operates

Detailed description about the business of the Company

Risks related to the Company

External Risk Factors

Details about the Board of Directors and various committees

Details about key management persons

Risk Factors

Company

Management


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Disclosures in the Offer Document (Contd)

FinancialDisclosures

Auditors Report to have five year restated financials for the

Issuer Company, and

All Subsidiaries of the Issuer Company or Consolidated Financials of theIssuer Company

Audited financials presented should not be more than six months old at the timeof filing DRHP with SEBI and must be updated to be not more than six months oldon the date of filing the prospectus with the ROC

All financials should be presented based on Indian GAAP

MD&A

Detailed discussion on performance for the past 3 years

Capital Expenditure

Cash Flow and Liquidity

Litigations

and Defaults

All pending litigations in which the Company/Promoters / Promoter

Group / Directors / Group companies are involved. Both, litigations filed by or against the Company/Promoters /

Promoter Group / Directors / Group companies

Outstanding litigations, defaults, etc., pertaining to matters likely toaffect operations and finances of the company.

The pending proceedings initiated for economic offences against the

directors, the promoters, companies and firms promoted by the

promoters indicating their present status.


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Special dispensation to PSU - Precedents

* Obtained relaxation from SEBI and issue structure is 50% to QIB, 15% to HNI

and 35% Retail#Based on DRHP filed with SEBI

REC PFC Power Grid OIL India#

Promoter

Government of India, represented

by the President of India disclosed

as promoter with no additional

details

Yes Yes Yes Yes

Promoter group

companies

No promoter group companiesdisclosed. However, the

disclosures w.r.t Subsidiaries need

to be made

No No No No

Corporate

governanceClause 49 of the listing agreement Yes Yes Yes Yes

Issue structureCompliance with rule 19(2)(b) of

SCRRYes No* No* Yes

DisclosuresRemarksarticulars Only restatedAudited FinancialStatements needsto be disclosed in

the DRHP.However, SEBIhas granted

exemption oncase to casebasis to PSU

Banks whereby,even limited

review figureswere disclosed in

DRHP, so as tocomply with thecriteria offinancial

statements beingnot more than sixmonths old.


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Special dispensation to PSU

Has 2689 branches + subsidiaries in India (BOB

Caps, BOB Cards, BOB AMC) + foreignsubsidiaries

Limited Review for June 2005 numbers allowed.Limited Review done for only select (around 20branches) by auditors and rest were relied on by

auditors. Limited review of foreign subsidiary forJune 2005 allowed.

Bank ofBaroda

NTPC

Promoter is president of India

Relaxation in disclosure of promoter andpromoter group inoffer document.

SEBI guidelinesdo not allowlimited review orunaudited

numbers inprospectus

Limited review

allowed Disclosure of

promoter andpromoter group

Need to complywith

Corporate

governancenorms

Promoters

contribution

and lock-in


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Intermediaries Involved

IntermediariesInvolved


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Intermediaries and their Roles

Lead Managers

Overall Co-ordination

Conduct due diligence and finalize disclosure in Offer Document

Assist the legal counsel in drafting of Offer Document

Interface / ensure compliance protocol with SEBI / NSE / BSE

Domestic &International

Legal Counsels

Legal Due Diligence

Drafting the offer document

Guidance on any other incidental legal matters

Assistance in complying with requirement for selling in international geographies

Bankers Acting as collecting agents

Escrow Account & Refund account

Co-ordination with the Issuer and Bankers regarding collections, reconciliation, refunds etc

Securing allocation approval from Stock Exchanges

Post issue co-ordination collation and reconciliation of information

Reviewing and auditing financials and preparing financial statements for inclusion in the Offer Document

Verify/audit various financial and other data used in the Offer document and provide Comfort Letter

Bulk printing of the Red Herring Prospectus Bid Forms, final Prospectus, CAN, Refund orders etc.

Ensure timely dispatch and distribution of stationery to all centers

Registrars

Auditors

Printers

Preparing and getting published all statutory notices

Creating all advertisement materials

Advertisers

Self Certified SyndicateBank (SCSB)

Acting as collecting agents for ASBA (Application Supported by Block Amount) process


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Process & Timeline

Process & Timeline


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IPO Process Fixed Price Issue

Due diligence

Appointment of

BRLM and legal

counsel

Drafting of Draft

Prospectus

Filing with SEBI &

Stock Exchanges

SEBI Clearance& ROC Filing ofthe Prospectus

Pre-Marketing

Decision to go for

IPO

Roadshows

Issuer

Issue Open

Allotment

Issue Closure

Listing

Funds transferred to

issuer

Preparation / Approvals Filing the Prospectus and Marketing Launch & Completion


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IPO Process Book Built Issue

Due diligence

Appointment of

BRLM and legalcounsel

Drafting of Draft

Red Herring

Filing with SEBI &

Stock Exchanges

SEBI Clearance& ROC Filing

Pre-Marketing

Decision to go for

IPO

Roadshows

Issuer

Book building

RoC filing of final

Prospectus

Pricing & Allocation

Listing

Funds transferred

to issuer

Preparation / Approvals Marketing and Estimation of Price Range Launch & Completion


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Execution Process Timeline

Activity

Preparation Phase

Due Diligence

Filing of Draft Document1

week

Sebi Observation

Finalization & filing of offer Document

Issue PeriodMin. 3

Days

Post Issue Activities 2 - 3 weeks

IPO Process - 23 weeks

2 weeks

4 - 5 weeks

4 - 8 weeks

2 - 3 weeks


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Thank You

Thank You

IPO & Its Requirments

Documents