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IPO & Book BuildingSubmitted to:Prof. Mahesh RenguntwarSubmitted by:Prem Kumar Nayak (15043)Anurag Mishra (15044)Ritesh Raj Verma (15045)Gaurav Dwivedi (15046)Gaurav Kumar (15047)

What is an IPO?An initial public offering (IPO) is the first sale of stock by a company to the public.An initial public offering (IPO) occurs when a company first sells common shares to investors in the public. Generally, the company offers primary shares this way, although sometimes secondary shares are also sold as IPOs.Broadly speaking, companies are either private or public. Going public means a Company is switching from private ownership to public ownership.

Why IPO is done?New capitalAlmost all companies go public primarily because they need money to expand the businessFuture capitalOnce public, firms have greater and easier access to capital in the futureMergers and acquisitionsIts easier for other companies to notice and evaluate a public firm for potential synergiesIPOs are often used to finance acquisitions

SEBI Guidelines for IPOIt must have a pre-issue net worth of not less than Rs. 10,000,000 (Rupees One crore) in 3 out of the preceding 5 years, with a minimum net worth to be met during the 2 immediately preceding years.It must have a track record of distributing dividends for at least 3 out of the immediately preceding 5 years, andThe issue size, i.e., the offer through the offer document, the firm allotment and the promoters contribution through the offer document, should not exceed five times the pre-issue net worth as per the last available audited account, either at the time of filing the draft offer document with the Securities and Exchange Board of India (SEBI) or at the time of opening of the issue.

If the above conditions are not satisfied, then the IPO can be made only through a book-building process, provided that sixty percent (60%) of the issue size must be allotted to Qualified Institutional Buyers (QIBs).

Book BuildingBook Building is basically a process used in Initial Public Offer (IPO) for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.SEBI guidelines defines Book Building as "a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built-up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document".

SEBI GuidelinesAs per SEBI guidelines, an issuer company can issue securities to the public through prospectus in the following manner:

100% of the net offer to the public through book building process 75% of the net offer to the public through book building process and 25% at the price determined through Fixed Price. The Fixed Price portion is conducted like a normal public issue after the Book Built portion, during which the issue price is determined.

The concept of Book Building is relatively new in India. However it is a common practice in most developed countries.

How to invest?The Issuer who is planning an offer nominates lead merchant banker(s) as 'book runners'. The Issuer specifies the number of securities to be issued and the price band for the bids. The Issuer also appoints syndicate members with whom orders are to be placed by the investors. The syndicate members input the orders into an 'electronic book'. This process is called 'bidding' and is similar to open auction. The book normally remains open for a period of 5 days.Bids have to be entered within the specified price band.

How to invest?(contd.)Bids can be revised by the bidders before the book closes. On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels. The book runners and the Issuer decide the final price at which the securities shall be issued.Generally, the number of shares are fixed, the issue size gets frozen based on the final price per share.Allocation of securities is made to the successful bidders. The rest get refund orders.

Risk, Benefits & DrawbacksRisk- The issuer's management gives its view on the Internal and external risks faced by the company. The company also makes a note on the forward-looking statements. This information is disclosed in the initial pages of the document and it is also clearly disclosed in the abridged prospectus.Benefits- The price of an instrument is set in much more realistic fashion. The primary aim of book building process is to fix the highest market price for shares and securities. As investors have a voice in the pricing of the issue, they have a greater certainty of being allotted what they demand. The issue price is determined by the market.Drawbacks-Book building is suitable only for mega issues. The issuer firm must be fundamentally strong and well known to the investors. The book building system functions very well in matured market conditions. So, the investors are knowledgeable of the various parameters influencing the market price of the securities.

TaxationBesides other benefits, both BSE and NSE SME Exchange have a lot to offer in the form of Tax Benefits. Some of the tax benefits are listed below:

* depending upon assesses income slabIn case of listed share securities transaction tax (STT) must have been paid.Min & Max investment limits-The firm issuing the shares declares a price band. When a firm is offering shares to the public via book building process, it sets a price band that defines the minimum and maximum price limits at which investors can make bids for acquiring the shares of the company. The floor price signals the minimum price at which the investors may bid for the shares, cap is the maximum price at which investors can make bids.

Sl. No.Capital Gain Tax UnlistedListed1.Long-term Capital Gains20%NIL2.Short-term Capital Gains30%*15%

Withdrawal-The ability to withdraw IPOs when demand is weak increases expected proceeds and provides issuers with option value. To enhance this value, the SEC adopted in 2001 the public-to-private safe harbor Rule 155 and simplified Rule 477 for withdrawing offerings. The option value can exceed the underpricing associated with soliciting investor demand. Hence, issuers might prefer bookbuilding despite the associated underpricing even if they could sell via fixed price at full expected value. The option value increases faster than underpricing with ex ante uncertainty, generating predictions regarding the use of bookbuilding and the timing of IPOs, and leading to a distinct theory of hot IPO markets.

Target audience/Investors-Anybody can invest in an initial public offering.

Issue Type Offer Price Demand Payment ReservationsFixed Price Issues Price at which the securities are offered and would be allotted is made known in advance to the investors Demand for the securities offered is known only after the closure of the issue 100 % advance payment is required to be made by the investors at the time of application. 50 % of the shares offered are reserved for applications below Rs. 1 lakh and the balance for higher amount applications. Book Building Issues A 20 % price band is offered by the issuer within which investors are allowed to bid and the final price is determined by the issuer only after closure of the bidding. Demand for the securities offered , and at various prices, is available on a real time basis on the BSE website during the bidding period.. 10 % advance payment is required to be made by the QIBs along with the application, while other categories of investors have to pay 100 % advance along with the application. 50 % of shares offered are reserved for QIBS, 35 % for small investors and the balance for all other investors.

Comparison with nearest product-