Pricing Of Public Issues CPCFM Indian Institute of Foreign Trade Roll Number 13 [email protected][Pick the date] Vivaswan Pathak The report aims at providing an insight into the procedures involved in a public issue – namely the Initial Public Offer (IPO) and Follow-on Public Offer (FPO)
Pricing of Public Issues , Analysis of IPO and FPO along with Secondary Offer
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Pricing Of Public Issues
C P C F M
I n d i a n I n s t i t u t e o f F o r e i g n T r a d e
R o l l N u m b e r 1 3
v i v a s w a n _ o c f m 1 @ i i f t . a c . i n
[ P i c k t h e d a t e ]
Vivaswan Pathak
The report aims at providing an insight into the procedures involved
in a public issue – namely the Initial Public Offer (IPO) and Follow-on
Public Offer (FPO)
1
Objective of the Study……………………………………………………………………………………………………….2
First we address the fundamental question that why a company comes out with public offering. Let us explain with example .Let’s say that you’ve always dreamed of opening a pizzeria. You love pizza, and you’ve done your homework to figure out how much it would cost to launch a new pizza business and how much money you could expect to earn each year in profit.
The building and equipment would cost $500,000 up front, and annual expenses (ingredients, employee salaries, utilities) would cost an additional $250,000. With annual earnings of $325,000, you expect to make a $75,000 profit each year. Not bad. The only problem is that you don’t have $750,000 (building + equipment + expenses) in cash to cover all of those costs. You could take out a loan, but that accrues interest. What about finding investors who would give you money in exchange for a share of the ownership of the restaurant? This is the logic that companies use when they make the decision to issue stock to private or public investors.
An initial public offering (IPO) or stock market launch is a type of public offering where shares
of stock in a company are sold to the general public, on a securities exchange, for the first time.
Through this process, a private company transforms into a public company. Initial public offerings are
used by companies to raise expansion capital, to possibly monetize the investments of early private
investors, and to become publicly traded enterprises.
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).
The report aims at providing an insight into the various pricing techniques and the fundamental
difference between pricing of an Initial Public Offer and Follow-on Public Offer.
We summarize the basic definition and differences in an IPO and a FPO here.
An initial public offering (IPO) or stock market launch is a type of public offering where shares
of stock in a company are sold to the general public, on a securities exchange, for the first time.
Through this process, a private company transforms into a public company. Initial public offerings are
used by companies to raise expansion capital, to possibly monetize the investments of early private
investors, and to become publicly traded enterprises.
A follow-on offering (often but incorrectly called secondary offering) is one of the two types:-
1. This sort of secondary public offering is a way for a company to increase outstanding stock and spread market capitalization (the company's value) over a greater number of shares. Secondary offerings in which new shares are underwritten and sold dilute the ownership position of stockholders who own shares that were issued in the IPO. 2. Typically, such an offering occurs when the founders of a business (and perhaps some of the original financial backers) determine that they would like to decrease their positions in the company. This kind of secondary offering is common in the years following an IPO, after the termination of the lock-up period. Owners of closely held companies sell shares to loosen their position - usually gradually, so that the company's share price doesn't plummet as a result of high selling volume. This kind of offering does not increase the number of shares of stock on the market, and it is most commonly performed in the case of a company that is very thinly traded. Secondary offerings of this sort do not dilute owners' holdings, and no new shares are released. There is no "new" underwriting process in this kind of offering.
How follow on Public offering is different from initial public offering.
IPO is made when company seeks to raise capital via public investment while FPO is
subsequent public contribution.
First issue of shares by the company is made through IPO when company first becoming a
publicly traded company on a national exchange while Follow on Public Offering is the public
issue of shares for an already listed company.
Filing for an IPO and selling stock to the public is commonly called "going public" and can have several advantages. Going public gives business access to a large pool of potential investment capital that can help the business fund expansion. An IPO can also make a company more visible and recognizable to consumers, which can potentially help with marketing and attracting top talent. But on the other hand going through an IPO can be expensive because of fees associated with registration, commissions paid to underwriters, legal costs and other expenses. In addition, managers of corporations answer to a board of directors appointed by shareholders, which means they may not have freedom to act as they see fit. Publicly traded companies are also subject to oversight by the SEBI and must make certain financial and business information available to the public.
The role of the BRLM can be divided into two parts, viz., Pre Issue and Post Issue. The Pre Issue
role includes compliance with the stipulated requirements of the SEBI and other regulatory
authorities, completion of formalities for listing on the Stock Exchanges, appointing of various
agencies such as advertising agencies, printers, underwriters, registrars, bankers etc. Post Issue
activities include management of escrow accounts, deciding the final issue price, final allotment,
ensuring proper dispatch of refunds, allotment letters and ensuring that each agency is carrying out
their part properly.
Bankers to the Issue
Bankers to the issue, as the name suggests, carry out all the activities of ensuring that the funds are
collected and transferred to the Escrow accounts.
Underwriters to the Issue:
An investment banking firm enters into a contract with the issuer to distribute securities to the
investing public. They get an Underwriting Commission for their services. In case of under
subscription, they have the obligation to subscribe to the left over portion.
Registrars to the Issue:
The Registrar finalizes the list of eligible allottees after deleting invalid applications and ensures that
the corporate action for crediting shares to the demat accounts of the applicants is done and the
refund orders, where applicable, are sent.
Stock exchange
The stock exchange a company chooses for its IPO is critical to its asking price. Also, each stock exchange may have its own regulations for controlling IPOs. Once a company's valuation and road shows are complete, the company must meet with a stock exchange regulator to ensure that appropriate trading documents are filed and there isn't a problem with the IPO price. For instance, the stock exchange might look at a company's potential share price and determine that it is unfair. If this is the case, the company must alter its IPO price.
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1.3 PROCESS
The Beauty Contest A beauty contest is financial jargon for the courtship process that takes place as a company selects an investment bank to perform a transaction such as an initial public offering. During this process, each bank prepares pitches that demonstrate each bank’s expertise. Due Diligence Once the investment banks are chosen for the initial public offering, due diligence begins. An organizational meeting is held at company headquarters that usually consists of company management .Due diligence gives the underwriting managers an opportunity to kick the tires of the company and analyze it in as much detail as they can, diligence usually includes a tour of the company, a discussion of any legal issues including potential litigation, questions about how the company operates and what its plans are for future growth. Once the banks have collected enough information, they begin drafting the prospectus. The Prospectus A company that seeks to go public must have a prospectus. The prospectus is the legal document used to market the offering to investors. All the parties involved in the initial organizational meeting will have a hand in drafting the prospectus. A prospectus will go through dozens and dozens of drafts as lawyers, bankers and accountants scour over figures and legal wording. The drafting of the prospectus can take anywhere from five to ten weeks to complete. It is then filed with the SEBI and a preliminary prospectus or red herring is printed for marketing to potential investors. A red herring is so named because it has a disclaimer printed in red that the SEBI has not yet approved the offering. The preliminary prospectus is also printed without an offering price as the offering price will be determined after the syndicate has built a book for the offering. The Roadshow The roadshow is a term used to describe the marketing period of an initial public offering. During this period, the lead manager puts together a presentation for the management of the company as they travel to major financial centers meeting with investors. The lead manager also prepares a sales memo which contains key points for the syndicate to use as it pitches the offering to potential investors. The syndicate is the network of investment banks and their sales force of brokers that will sell the offering to the public. The syndicate will then use the red herring and the sales memo as they contact institutional investors and set up roadshow meetings. During the roadshow, the syndicate department builds the book for the offering. The book is a list of potential investors that includes how much stock they would like to purchase and at what price they are willing to buy it. The information compiled in the book is what is used to price the offering.
7
Pricing and Trading Once the final price of the offering is determined, the final draft of the prospectus is printed in preparation for the initial trading day. On trading day, shares are sold by each investment bank in the syndicate to investors. Each bank earns a fee — often around 7% — for each share that it sells and the net proceeds of the sale go to the company. Shares then immediately begin trading publicly as investors sell their shares to new investors — and a stock is born. By the end of the day, the market for the security will yield a closing price, which could be higher or lower than the price paid by the initial purchasers of the stock (the offering price). With publicly traded stock the company can now offer its shareholder liquidity and has a new avenue for raising money. Stock can also be used as a type of currency for acquiring other companies.
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2 ANALYSIS
The following section explains some analysis of the data for some select companies.
The companies so selected have been chosen because of some special attributes. They are as
follows:
(i) Coal India: The most outstanding performer IPO, strong fundamentals of the company
make this a viable candidate for analysis.
(ii) Reliance Power : This is the biggest IPO after Coal India to hit the Indian market , so the
sheer size makes it worth analyzing
(iii) Reliance Petroleum: Though the company is now a part of Reliance Industries, the
uniqueness of IPO was that this was company’s second IPO.
(iv) Tata Steel: This FPO was analyzed owing to its size, performance and reputation of the
TATA group of companies.
(v) ONGC: The FPO has not yet hit the Indian Market, but it has already set the fever and is
pitching higher.
(vi) Engineers India Limited: This was chosen as it is a PSU, with a promoter holding in the
name of president of India.
2.1 IPO
a) COAL INDIA
Objects of the Issue:
The objects of the Offer are to carry out the divestment of 631,636,440 Equity Shares by the Selling Shareholder and to achieve the benefits of listing the Equity Shares on the Stock Exchanges.
Issue Detail:
»» Issue Open: Oct 18, 2010 - Oct 21, 2010 »» Issue Type: 100% Book Built Issue IPO »» Issue Size: 631,636,440 Equity Shares of Rs. 10 »» Issue Size: Rs. 15,199.44 Crore »» Face Value: Rs. 10 Per Equity Share »» Issue Price: Rs. 225 - Rs. 245 Per Equity Share »» Market Lot: 25 Shares »» Minimum Order Quantity: 25 Shares »» Listing At: BSE, NSE
CRISIL has assigned an IPO Grade 5 to Coal India Ltd IPO. This means as per CRISIL company has
'Strong fundamentals'. CRISIL assigns IPO grading on a scale of 5 to 1, with Grade 5 indicating
strong fundamentals and Grade 1 indicating poor fundamentals
Day 1 - Oct 18, 2010 17:00 IST 0.6300 0.1800 0.1000 0.0000 0.3400
Day 2 - Oct 19, 2010 17:00 IST 3.3900 0.5400 0.3500 0.0100 1.7100
Day 3 - Oct 20, 2010 20:00 IST 24.7000 2.8900 1.1000 0.0400 11.8500
Day 4 - Oct 21, 2010 22:30 IST 24.7000 25.4000 2.3100 0.1000 15.2800
Listing Day Trading Information
BSE
Issue Price: Rs. 245.00
Open: Rs. 287.75
Low: Rs. 287.45
High: Rs. 344.75
Last Trade: Rs. 342.35
Volume: 192,839,607
NSE
Rs. 245.00
Rs. 291.00
Rs. 291.00
Rs. 344.90
Rs. 342.55
479,716,245
Price analysis after the release of the IPO
10
b) RELIANCE POWER
Objects of the Issue:
The objects of the Issue are to achieve the benefits of listing on the Stock Exchanges & to raise capital to 1. Fund subsidiaries to part-finance the construction and development costs of certain of 12 power generation projects currently under various stages of development; 2. General corporate purposes; 3. Achieve the benefits of listing on the Stock Exchanges.
Issue Detail:
»» Issue Open: Jan 15, 2008 - Jan 18, 2008 »» Issue Type: 100% Book Built Issue IPO »» Issue Size: 260,000,000 Equity Shares of Rs. 10 »» Issue Size: Rs. 11,563.20 Crore »» Face Value: Rs. 10 Per Equity Share »» Issue Price: Rs. 405 - Rs. 450 Per Equity Share »» Market Lot: 15 Shares »» Minimum Order Quantity: 15 Shares »» Listing At: BSE, NSE
Issue Subscription Detail / Current Bidding Status
Number of Times Issue is Subscribed (BSE + NSE)
As on Date & Time Qualified Institutional
Buyers (QIBs)
Non Institutional
Investors (NIIs)
Retail Individual
Investors (RIIs) Total
Shares Offered / Reserved
Day 1 - Jan 15, 2008 17:00 IST 16.2115 7.0231 0.8218 10.6800
Day 2 - Jan 16, 2008 17:00 IST 20.6947 6.9704 4.4065 14.4400
Day 3 - Jan 17, 2008 17:00 IST 30.6897 32.4070 9.0232 24.3600
Day 4 - Jan 18, 2008 17:00 IST 82.6190 190.0231 14.8716 73.0400
Listing Day Trading Information
BSE
Issue Price: Rs. 450.00
Open: Rs. 547.80
Low: Rs. 355.05
NSE
Rs. 450.00
Rs. 530.00
Rs. 355.30
11
High: Rs. 599.90
Last Trade: Rs. 372.50
Volume: 63,882,239
Rs. 530.00
Rs. 372.30
134,392,544
Reliance power before issuing bonus
Reliance power price analysis chart after issuing bonus
12
c) RELIANCE PETROLEUM
There have been two IPOs of Reliance Power. The first issue came in 1993 , then the company was
merged with Reliance Industries In 2002, which set up the 660,000 bpd refinery at Jamnagar in 1999.
. Later on , when it again became a separate entity it came out it again came out with another IPO
.Then again , it was merged with Reliance Industries in 2009
Reliance Petroleum opened for bidding on April 13, 2006. The price band was fixed at Rs 57 to Rs 62
and the bidding closed on April 20, 2006. This was the second time in the market for the
petrochemical major, after 1993 when it first came out with an IPO.
The company offered 45 Crore (450 million) equity shares for subscription.
Retail investors could bid for up to 1,600 shares at the upper end of the price band and they needed
to pay only Rs 16 per share at the time of bidding. The balance amount was to be payable on
allotment.
The company raised Rs 2,700 Crore (Rs 27 billion) through the IPO.
IPO size: Rs 2,172 Crore, year of issue: 1993
The company raised Rs 2,172 Crore (Rs 21.72 billion) through the IPO in 1993.
The original RPL, which was subsequently merged with Reliance Industries in 2002, floated the IPO
in September 1993 with a stated plan of commissioning its 9 million tonne capacity refinery by the
second quarter of 1996.
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2.2 FPO
a) TATA STEEL
Objects of the Issue:
The objects of the Issue are to:
1. Part finance the Company’s share of capital expenditure for expansion of existing works at Jamshedpur; 2. Payment of redemption amounts on maturity of certain redeemable non-convertible debentures issued by the Company on a private placement basis; and 3. General corporate purposes.
Issue Detail:
»» Issue Open: Jan 19, 2011 - Jan 21, 2011 »» Issue Type: 100% Book Built Issue FPO »» Issue Size: 57,000,000 Equity Shares of Rs. 10 »» Issue Size: Rs. 3,477.00 Crore »» Face Value: Rs. 10 Per Equity Share »» Issue Price: Rs. 594 - Rs. 610 Per Equity Share »» Market Lot: 10 Shares »» Minimum Order Quantity: 10 Shares »» Listing At: BSE, NSE
Issue Subscription Detail / Current Bidding Status
Day 1 - Jan 19, 2011 17:00 IST 0.4200 0.0700 0.0400 0.0000 0.2000
Day 2 - Jan 20, 2011 17:00 IST 0.6700 0.7900 0.2000 0.0000 0.4800
Day 3 - Jan 21, 2011 17:00 IST 10.4100 7.2100 1.6000 0.0600 6.0300
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Tata Steel FPO Listing Date
Listing Date: Wednesday, February 02, 2011
BSE Scrip Code: 500470
NSE Symbol: TATASTEEL
Listing In:
Sector: Steel
ISIN: INE081A01012
Issue Price: Rs. 610.00 Per Equity Share
Face Value: Rs. 10.00 Per Equity Share
Listing Day Trading Information
BSE
Issue Price: Rs. 610.00
Open: Rs. 630.15
Low: Rs. 615.65
High: Rs. 633.85
Last Trade: Rs. 625.70
Volume: 3,973,924
NSE
Rs. 610.00
Rs. 631.10
Rs. 615.80
Rs. 634.95
Rs. 626.25
15,400,454
Basis of allotment
Category No. of Applications No. of Shares No. of times subscription
A Retail Individual Bidders 185,711 30,289,150 1.52
B Non Institutional Bidders 475 59,819,760 7.01
C Qualified Institutional Buyers (excluding Anchor Investors) 169 202,756,450 10.07
D Eligible Employees 680 91,790 0.06
E Anchor Investors 33 9,659,680 1.16
Total 187,068 302,616,830 5.31
15
Tata steel price analysis before launch of FPO
Tata Steel price analysis post launch of FPO
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b) ONGC
Few highlights about ONGC:
1. ONGC is a Fortune Global 500 company ranked 413. 2. ONGC is Asia's largest and most active company. 3. ONGC is at Rank 18th in top Global Energy Company Rankings. 4. ONGC contribute 77% of India's crude oil production and 81% of India's natural gas
production.
5. Objects of the Issue:
6. The object of the Offer is to carry out the disinvestment of 427,774,504 Equity Shares by the
Selling Shareholder.
7. Issue Detail:
8. »» Issue Open: »» Issue Type: 100% Book Built Issue FPO »» Issue Size: 427,774,504 Equity Shares of Rs. 5 »» Issue Size: Rs. [.] Crore »» Face Value: Rs. 5 Per Equity Share »» Issue Price: Rs. - Rs. Per Equity Share »» Market Lot: »» Minimum Order Quantity: »» Listing At: BSE, NSE
9. ONGC Pre-FPO and Post-FPO Shareholding Pattern
Percentage of
Shareholding
Name of the Holder(s) Pre-
FPO
Post-
FPO
President of India 74.14%
Indian Oil Corporation Ltd. 7.69%
Gas Authority of India Ltd. 2.40%
Life Insurance Corporation of India 3.06%
Public 1.95%
Others 10.76%
Total 100%
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The FPO has been given a rating of 3.4
c) ENGINEERS INDIA LIMITED
Objects of the Issue:
The object of the issue is to carry out the divestment of 33,693,660 Equity Shares.
Issue Detail:
»» Issue Open: Jul 27, 2010 - Jul 30, 2010 »» Issue Type: 100% Book Built Issue FPO »» Issue Size: 33,693,660 Equity Shares of Rs. 5 »» Issue Size: Rs. 959.65 Crore »» Face Value: Rs. 5 Per Equity Share »» Issue Price: Rs. 270 - Rs. 290 Per Equity Share »» Market Lot: 20 Shares »» Minimum Order Quantity: 20 Shares »» Listing At: BSE, NSE
Engineers India FPO Tags:
Engineers India Ltd FPO, Engineers India FPO, Engineers India FPO Bidding, Engineers India FPO Allotment Status, Engineers India drhp and Engineers India Ltd FPO listing.
Issue Subscription Detail / Current Bidding Status
The social networking company Facebook, Inc. held its initial public offering (IPO) on May 18,
2012.[1] The IPO was one of the biggest in technology, and the biggest in Internet history, with a peak
market capitalization of over $104 billion.
There was an estimate cut by the underwriters signaling the weak growth of the company in the second quarter. The estimate cut, moreover, was followed by three additional pieces of information that were interpreted negatively by some institutional investors:
1) The price range for the deal was increased, which made the deal even less attractive in light of the estimate cut,
2) The size of the deal was increased, which meant that more stock would be sold, and
3) Many smart institutional Facebook shareholders like Goldman Sachs decided to sell more stock on the deal—the "smart money," in other words, was cashing out.
Institutional investors, having digested the news of the underwriter estimate cut, were comfortable buying Facebook stock at $32 a share.
Retail investors, meanwhile, who were presumably unaware of the estimate cut, were comfortable buying Facebook at $40 a share.
Knowing that a big percentage of the IPO stock could be sold to retail investors instead of institutional investors, Facebook and Morgan Stanley decided to price the IPO at $38. Ultimately underwriters settled on a price of $38 per share, at the top of its target range.
First day
Trading was to begin at 11:00 am Eastern Time on Friday, May 18, 2012. However, trading was
delayed until slightly half an hour due to technical problems with the NASDAQ exchange. Those early
jitters would foretell ongoing problems; the first day of trading was marred by numerous technical
glitches that prevented orders from going through, or even confused investors as to whether or not
their orders were successful.
Initial trading saw the stock shoot up to as much as $45. Yet the early rally was unsustainable. The
stock struggled to stay above the IPO price for most of the day, forcing underwriters to buy back
shares to support the price. Only the aforementioned technical glitches and underwriter support
prevented the stock price from falling below the IPO price on the first day of trading.