WHITE PAPER ON INITIAL PUBLIC OFFERINGS

A PRODUCT OF RICKY CHOPRA INTERNATIONAL COUNSELS

This study includes the definition, types, procedures, regulatory

aspects and the various terms associated with the issue of initial

public offerings (IPOs) in Indian stock market.

An Initial Public Offer (IPO) is the selling of securities to the public. It is the

largest source of funds for the company.

Initial Public Offer (IPO) is a route for a company to raise capital from

investors to meet the expenses for its projects and to get a global exposure by

listed in the Stock Exchange.

IPOs are often issued by smaller, younger companies seeking capital to

expand, but can also be done by large privately owned companies looking to

become publicly traded.

Company raising money through IPO is also called as company ‘going public'.

For Funding Needs For Non-funding Needs

Funding Capital Requirements for

Growth

•Expansion through Projects

•Diversification

Retention and incentive for Employees

through stock options

Funding Global Requirements Provide liquidity to the shareholders

Funding Joint Venture and

Collaborations

Funding Infrastructure Requirements,

Marketing Initiatives and Distribution

Channels

Financing Working Capital

Requirements

Repaying debt to strengthen the

Balance Sheet

COMPANIES ACT

2013

SECURITIES

CONTRACT

(REGULATION)

ACT 1956

SECURITIES AND

EXCHANGE

BOARD OF INDIA

ACT, 1992

Provisions Relating to

Prospectus.

Provisions on

Minimum

Subscription;

Allotment; Return of

Allotment.

Power to SEBI

relating to Issue &

Transfer of Securities.

FUND RAISING OPTIONS

HYBRIDDEBT EQUITY

From Banks &

FIs

Public issue ofBonds/Debentures

IPO

FPO

Rights Issue

Private

Placement

Various forms

of

Convertibles

OVERSEAS ECB ADR/GDR FCCB & FCEB

INDIA

The classification of issues is as illustrated below:

(a) Public issue

(i) Initial Public offer (IPO)

(ii) Further public offer (FPO)

(b) Rights issue

(c) Bonus issue

(d) Private placement

PUBLIC ISSUE

Public issue :- When an issue / offer of securities is made to new investors

for becoming part of shareholders’ family of the issuer it is called a public

issue.

Public issue can be further classified into Initial public offer (IPO) and

Further public offer (FPO).

• (i) Initial Public offer (IPO) :-When an unlisted company makes either a

fresh issue of securities or offers its existing securities for sale or both for

the first time to the public, it is called an IPO. This paves way for listing

and trading of the issuer’s securities in the Stock Exchanges.

• (ii) Further public offer (FPO) :-When an already listed company makes

either a fresh issue of securities to the public or an offer for sale to the

public, it is called a follow on offer (FPO).

RIGHT ISSUE, BONUS ISSUE AND PRIVATE PLACEMENT

Rights issue (RI): When an issue of securities is made by an issuer to its

shareholders existing as on a particular date fixed by the issuer (i.e.

record date), it is called a rights issue.

Bonus issue: When an issuer makes an issue of securities to its existing

shareholders as on a record date, without any consideration from them, it

is called a bonus issue.

Private placement: When an issuer makes an issue of securities to a

selected group of persons not exceeding 49, and which is neither a rights

issue nor a public issue, it is called a private placement.

Investors are broadly classified under following

categories-:

(i) Retail Individual Investor (RIIs)

(ii) Non-Institutional Investors (NIIs)

(iii) Qualified Institutional Buyers (QIBs)

Investors are broadly classified under following categories-:

“Qualified Institutional Buyer” shall mean:

(a) a public financial institution as defined in section 4A of the Companies Act,

1956;

(b) a scheduled commercial bank;

(c) a mutual fund registered with the Board;

(d) a foreign institutional investor and sub-account registered with SEBI,

(e) a multilateral and bilateral development financial institution;

(f) a venture capital fund registered with SEBI;

(g) a foreign venture capital investor registered with SEBI;

(h) a state industrial development corporation;

(i) an insurance company registered with the Insurance Regulatory and

Development Authority (IRDA);

(j) a provident fund with minimum corpus of ` 25 crores;

(k) a pension fund with minimum corpus of ` 25 crores;

Investors are broadly classified under following categories-:

Retail Individual Investor (RIIs) :-

In retail individual investor category, investors can not apply for

more than one lakh (1,00,000) in an IPO.

Non-Institutional Investors (NIIs) :-

Investors who do not fall within the definition of the above two

categories are categorized as “Non-Institutional Investors” .

Intermediaries which are registered with SEBI are:-

Merchant Bankers to the issue (known as Book Running Lead

Managers (BRLM) in case of book built public issues).

Registrars to the issue.

Bankers to the issue.

Underwriters.

The addresses, telephone/fax numbers, registration number, and contact person and email

addresses of all the intermediaries are disclosed in the offer documents.

The merchant banker are those financial intermediary involved with the activityof transferring funds. Merchant banker does the due diligence to prepare theoffer document which contains all the details about the company. They are alsoresponsible for ensuring compliance with the legal formalities in the entire issueprocess and for marketing of the issue.

The activities of the merchant banking in India is very vast in nature of whichincludes the following:

a) The management of the customers securities.

b) The management of the portfolio.

d) The management of underwriting of shares and debentures .

f) Management of the interest and dividend etc.

Registrars to the Issue: They are involved in finalizing the basis ofallotment in an issue and for sending refunds, allotment etc. TheRegistrar finalizes the list of eligible allotters after deleting theinvalid applications and ensures that the corporate action forcrediting of shares to the Demat accounts of the applicants is doneand the dispatch of refund orders to those applicable are sent.

The Lead Manager coordinates with the Registrar to ensure followup so that that the flow of applications from collecting bankbranches, processing of the applications and other matters till thebasis of allotment is finalized, dispatch security certificates andrefund orders completed and securities listed.

Bankers to the Issue: “Banker to an issue” means ascheduled bank carrying on all or any of the followingactivities, namely acceptance of application andapplication monies, acceptance of allotment or callmonies, refund of application monies and payment ofdividend or interest warrants. The Bankers to the Issueenable the movement of funds in the issue process andtherefore enable the registrars to finalize the basis ofallotment by making clear funds status available to theRegistrars.

Underwriters: An underwriter is a company or other entity thatadministers the public issuance and distribution of securities froma corporation or other issuing body. An underwriter works closelywith the issuing body to determine the offering price of thesecurities buys them from the issuer and sells them to investors viathe underwriter's distribution network.

Underwriters are intermediaries who undertake to subscribe to thesecurities offered by the company in case these are not fullysubscribed by the public, in case of an underwritten issue.

Underwriters generally receive underwriting fees from theirissuing clients, but they also usually earn profits when selling theunderwritten shares to investors.

Source: SEBI

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

• Legal Due Diligence

• Drafting the offer document

• Assistance in complying with requirement for selling in international

geographies

• 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

Upfront

Existing

Auditors

4 weeks before

filing DRHP

with SEBI

Upfront

Party KEY RESPONSIBILITY Appointment

Registrars

Auditors

Domestic &

International

Legal Counsels

Reviewing and auditing financials and preparing financial statements for

inclusion in the Offer Document

• Bulk printing of the Red Herring Prospectus Bid Forms, final

Prospectus, Refund orders etc.

• Ensure timely dispatch and distribution of stationery to allcentersPrinters

• Preparing and getting published all statutory notices

• Creating all advertisement materialsAdvertisers

Escrow Collections

Banks & Bankers

ot the Issue

• Acting as collecting agents

• EscrowAccount & Refund account

Depository

(NSDL,

CDSL)

• TripartiteAgreement

• Dematerialization of Company’s shares

• Demat transfer of Shares

• Credit of Shares toAllottees

After

Appointment of

Registrar

Before Filing

DRHP with SEBI

Before Filing

DRHP with SEBI

Before Filing

RHP with ROC

Self Certified

Syndicate Bank

(SCSB)

• To receive bids and block bid amount in the investor’s bank

account based on applications submitted;

• To provide FC on account transfer/ unblock funds post

finalization of basis of allotment,

• To address investor grievances on account of ASBAbids

Approved by

SEBI

IPO Grading

Agency

• Provides IPO Grading 2 weeks before

filing RHP with

ROC

Agreements Parties to theAgreement Purpose ofAgreements

Engagement

Letter

BRLM MoU

Company individually with

Investment Bankers, Counsels to

the Company, Auditors, Registrar

and other intermediaries

Company and BRLMs

Engaging the intermediaries for the

Services.

Lays down the roles, responsibilities,

of BRLM and Company

Registrar MoU Company and Registrar Lays down the roles, responsibilities of

the Registrar

Escrow

Agreement

Company, BRLMs, Syndicate

Members, Registrar and Escrow

Bankers to the Issue

Lays down the process for receipt of

Issue proceeds and release of funds

to the Company

Agreements Parties to theAgreement Purpose ofAgreements

Syndicate

Agreement

Company, BRLMs and Syndicate

Members

Lays down the process of marketing

and handling the forms

Underwriting

Agreement

Company and the Underwriters (BRLM

and Syndicate members)

Lays down the terms of Underwriting

and the extent of underwriting

Tripartite

Agreement

with

Depository

Company, NSDL and CDSL Lays down the provisions of NSDL /

CDSL acting as the Depositories of

the Company

Listing

Agreement

Company and Stock ExchangesBinds the Company to the requirements

of the Listing rules of the Stock

Exchanges

‘Offer document’ is a document which contains all the relevant information about the

company, the promoters, projects, financial details, objects of raising the money,

terms of the issue etc. and is used for inviting subscription to the issue being made by

the issuer.

‘Offer Document’ is called “Prospectus” in case of a public issue or offer for sale and

“Letter of Offer” in case of a rights issue.

Terms used for offer documents vary depending upon the stage or type of the issue

where the document is used.

Draft offer document: It is an offer document filed with SEBI for specifyingchanges, if any, in it, before it is filed with the Registrar of companies (ROCs).Draft offer document is made available in public domain including SEBIwebsite, for enabling public to give comments, if any, on the draft offerdocument.

Red herring prospectus: It is an offer document used in case of a book builtpublic issue. It contains all the relevant details except that of price or number ofshares being offered. It is filed with Registrar of Companies before the issueopens.

Prospectus: It is an offer document in case of a public issue, which has allrelevant details including price and number of shares being offered. Thisdocument is registered with Registrar of Companies before the issue opens incase of a fixed price issue and after the closure of the issue in case of a bookbuilt issue.

Letter of offer: It is an offer document in case of a Rights issue and is filed with

Stock exchanges before the issue opens.

Abridged prospectus: It is an abridged version of offer document in public issue

and is issued along with the application form of a public issue. It contains all the

salient features of a prospectus. Abridged letter of offer is an abridged version of

the letter of offer. It is sent to all the shareholders along with the application

form.

Shelf prospectus: It is a prospectus which enables an issuer to make a series of

issues within a period of 1 year without the need of filing a fresh prospectus

every time. This facility is available to public sector banks /Public Financial

Institutions.

(a) Cover Page: Under this head full contact details of the Issuer Company, leadmanagers and registrars, the nature, number, price and amount of instrumentsoffered and issue size, and the particulars regarding listing are mentioned.

(b) Risk Factors: Under this head the management of the issuer company gives itsview on the internal and external risks envisaged by the company and theproposals, if any, to address such risks.

(c) Introduction: Under this head a summary of the industry in which the issuercompany operates, the business of Company, offering details in brief, summaryof financial statements and other data relating to general information about thecompany, the merchant bankers ,brokers/syndicate members to the Issue, creditrating, book building process in brief.

(d) About us: Under this head a review of the details of business of the company,business strategy, competitive strengths, corporate structure, main objects,subsidiary details, management and board of directors, compensation, corporategovernance, related party transactions, exchange rates, currency of presentationand dividend policy are given.

(e) Financial Statements: Under this head financial statement and differences between anyother accounting policies and the Indian Accounting Policies (if the Company haspresented its Financial Statements also as per either US GAAP/IFRS) are presented.

(f) Legal and other information: Under this head outstanding litigations, litigations involvingthe company, the promoters of the company, its subsidiaries, and group companies aredisclosed. Also material developments since the last balance sheet date, governmentapprovals/licensing arrangements, investment approvals (FIPB/RBI etc.), technicalapprovals, and indebtedness, etc. are disclosed.

(g) Other regulatory and statutory disclosures: Under this head, authority for the Issue,prohibition by SEBI, eligibility of the company to enter the capital market, disclaimerstatement by the issuer and the lead manager, disclaimer in respect of jurisdiction,distribution of information to investors, disclaimer clause of the stock exchanges, listing,impersonation, minimum subscription, letters of allotment or refund orders, expertopinion, changes in the auditors in the last three years, expenses of the issue, feespayable to the intermediaries involved in the issue process, details of all the previousissues.

(h)Offering information: Under this head Terms of the Issue, mode of payment ofdividend, face value and issue price, rights of the equity shareholder, issue procedure,book building procedure in details along with the process of making an application,signing of underwriting agreement and filing of prospectus with SEBI/ROC, basis ofallotment or allocation, method of proportionate allotment, dispatch of refund orders,are disclosed.

(i) Other Information: This covers description of equity shares and terms of the Articles ofAssociation, documents for inspection, declaration, definitions and abbreviations, etc.

Companies with track record Companies without track record

Primary Criteria

• Track record of distributable profits for 3 out of the

immediately preceding 5 years

• Pre-issue net worth of not less than Rs. 1 Crore in each

of the preceding 3 full years

• Net tangible assets of atleast Rs. 3 Crores for each of the

preceding 3 full years.

• (Proposed IPO + Previous Issues in the same financial

year) < 5 times the pre-issue net worth

• In case the company has changed its name within the

last one year, atleast 50% of the revenue for the

preceding 1 full year is earned by the company from the

activity suggested by the new name

• Prospective allottees in the IPO should not be less than

1000 in number

Choice of Route: Fixed Price or

Book Building

• 50% of the net offer

to public being

allotted to QIBs

• At least 15% of the project

cost is contributed by

scheduled commercial banks

and at least 10% of the net

offer to public is allotted to

QIBs

Choice of Route: Book

Building

• Minimum post-issue face

value capital must be

Rs. 10 Crores

OR

• Compulsory market

making for at least 2

years from the date

of listing of shares

• Minimum post-issue face

value capital must be Rs. 10

Crores

OR

• Compulsory market making for

at least 2 years from the date

of listing of shares

Choice of Route: Fixed Price or

Book Building

+

+

Book built route mandatory with 50% QIB participation if all issues during the same financial year (including proposed IPO) >

5X pre-issue net worth

SEBI does not play any role in price fixation. The issuer in consultation with themerchant banker on the basis of market demand decides the price.

The offer document contains full disclosures of the parameters which are taken in toaccount by merchant Banker and the issuer for deciding the price. The parametersinclude EPS, return on net worth and comparison of these parameters with peergroup companies.

On the basis of pricing, an issue can be further classified into fixed price issue orbook building issue. In case of a fixed price issue the issuer at the outset decides theissue price and mentions it in the Offer Document, whereas in case on a book builtissue the price of an issue is discovered on the basis of demand received from theprospective investors at various price levels.

Globally, the book building method is favoured for its mutually beneficial nature:investors get the shares at a fair price that typically has potential upside, and theissuing company receives fair compensation.

Book building is a process of price discovery. The issuer discloses a price band or floor pricebefore opening of the issue of the securities offered. On the basis of the demands received atvarious price levels within the price band specified by the issuer, Book Running Lead Manager(BRLM) in close consultation with the issuer arrives at a price at which the security offered bythe issuer, can be issued.

The price band is a band of price within which investors can bid.

The spread between the floor and the cap of the price band cannot be more than 20 percent. Theprice band can be revised.

For Example:-In this method, the company doesn't fix up a particular price for the shares, but instead gives a price range, e.g. Rs 80-100.

When bidding for the shares, investors have to decide at which price they would like to bid for the shares, for e.g. Rs 80, Rs 90 or Rs 100. They can bid for the shares at any price within this range.

Based on the demand and supply of the shares, the final price is fixed. The lowest price (Rs 80) is known as the floor price and the highest price (Rs 100) is known as cap price.

Features Fixed 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

Source: BSE

Every listed company shall maintain public shareholding of

at least 25%. If the public shareholding in a listed company

falls below 25% at any time, such company shall bring the

public shareholding to 25% within a maximum period of 12

months from the date of such fall.

Reg. 4 provides for following general eligibility conditions for the issue

• Issuer, its promoter group or directors or persons in control of the issuer

should not be debarred from accessing capital market.

• Promoters, directors or persons in control of the issuer should not be a

promoter, director or person in control of any other company which is

debarred from accessing capital market.

• Issuer to make application to one or more recognized stock exchanges for

listing of shares.

• Issuer to enter into agreement with a depository for demat of specified

securities.

• All partly-paid up equity shares have been made fully paid-up.

Reg32-40 – deals with Minimum Promoter’s Contribution,Lock-in

• Minimum of 20% of the post issue capital of the Company.

• For Promoters:

– Lock-in for a period of 3 years from the date of allotment or from the date

of commencement 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 for sale in the issue

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

• In case of public issue of securities by a company which has been listed on a

stock exchange for at least 3 years and has a track record of dividend

payment for at least 3 immediately preceding years.

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

• In case of rights issues.

Promoter’s

Contribution

Lock-in period

Exemption

Board

Members• Optimum number of executive and non executive directors with at least

50% being non- executive.

Audit

Committee

• Mandatory constitution of Audit Committee.

• All members shall be financially literate.

Investor

Committee• Investor Grievances Committee to be formed under the chairmanship of a

non executive director to look into the redressing of investor complaints.

• At least one director on the Board of the holding company shall be a director

on the Board of a non listed Indian subsidiary Company.

• A separate section on Corporate Governance to be included in the Annual Reports.

• Submission of quarterly compliance report to the stock exchanges.

Report on

Corporate

Governance

CEO/CFO

Certification • CEO/CFO to certify the financial statements and cash flow statements.

Subsidiary

company

IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI,to the initial public offering (IPO) of equity shares or other convertible securities.

The grade represents a relative assessment of the fundamentals of that issue inrelation to the other listed equity securities in India. Such grading is generallyassigned on a five-point point scale with a higher score indicating strongerfundamentals and vice versa as below.

IPO grade 1: Poor fundamentalsIPO grade 2: Below-average fundamentalsIPO grade 3: Average fundamentalsIPO grade 4: Above-average fundamentalsIPO grade 5: Strong fundamentals

Due diligence

Appointment of

BRLM and legal

counsel

Drafting of

Draft RPH

Filing with SEBI

& Stock

Exchanges

SEBI Clearance

& ROC FilingPre-Marketing

Decision to go for

IPO

Issuer

Book building

RoC filing of final

Prospectus

Pricing & Allocation

Listing

Funds transferred

to issuer

Preparation /

Approvals

Roadshows

Marketing and Estimation of Price Range Launch & Completion

Presented By:

Prepared By

Prachi Sharma

Counsel

Ricky Chopra Intea

lwww.rickychopra.co