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INITIAL
PUBLIC
OFFER
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Topics Covered
➢ Executive Summary
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➢ Introduction
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➢ What Is An IPO
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➢ Why Go Public
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➢ Getting In An IPO
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➢ Registration Process
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➢ IPO Scams
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➢ Recent IPO’s
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➢ Bibliography
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EXECUTIVE SUMMARY
This report talks about how IPO helps in raising fund for the
companies going public, what are its pros and cons, and also it gives
us detailed idea why companies go public. How and what are the steps
taken by the companies before going for any IPO and also the role of
(SEBI) Securities and Exchange Board of India the BSE and NSE , what
are primary and secondary markets and also the important terms
related to IPO. It gives us idea of how IPO is driven in the market and
what are various factors taken into consideration before going for an
IPO. And it also tells us how we can more or less judge a good IPO.
Then we all know that scams have always been a part of any sector
you go in for which are covered in it and also few recommendations
are given for the same. It also gives us some idea about what are the
expenses that a company undertakes during an IPO.
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INTRODUCTION
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What is an IPO
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PRIMARY MARKET
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can bid for the shares at any price in the band specified. Once the bids
come in, the company evaluates all the bids and decides on an offer
price in that range. After the offer price is fixed, the company allots its
shares to the people who had applied for its shares or returns them
their money.
SECONDRY MARKET
Once the offer price is fixed and the shares are issued to
the people, stock exchanges facilitate the trading of shares for the
general public. Once a stock is listed on an exchange, people can start
trading in its shares. In a stock exchange the existing shareholders sell
their shares to anyone who is willing to buy them at a price agreeable
to both parties. Individuals cannot buy or sell shares in a stock
exchange directly; they have to execute their transaction through
authorized members of the stock exchange who are also called STOCK
BROKERS.
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Why Go Public?
Basically, going public (or participating in an "initial public
offering" or IPO) is the process in which a business owned by one or
several individuals is converted into a business owned by many. It
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Getting In On an IPO
The Underwriting Process
Getting a piece of a hot IPO is very difficult, if not
impossible. To understand why, we need to know how an IPO is done,
a process known as underwriting.
When a company wants to go public, the first thing it does
is hire an investment bank. A company could theoretically sell its
shares on its own, but realistically, an investment bank is required - it's
just the way Wall Street works. Underwriting is the process of raising
money by either debt or equity (in this case we are referring to equity).
You can think of underwriters as middlemen between companies and
the investing public. The biggest underwriters are Goldman Sachs,
Merrill Lynch, Credit Suisse First Boston, Lehman Brothers and Morgan
Stanley.
The company and the investment bank will first meet to
negotiate the deal. Items usually discussed include the amount of
money a company will raise, the type of securities to be issued and all
the details in the underwriting agreement. The deal can be structured
in a variety of ways. For example, in a firm commitment, the
underwriter guarantees that a certain amount will be raised by buying
the entire offer and then reselling to the public. In a best efforts
agreement, however, the underwriter sells securities for the company
but doesn't guarantee the amount raised. Also, investment banks are
hesitant to shoulder all the risk of an offering. Instead, they form a
syndicate of underwriters. One underwriter leads the syndicate and the
others sell a part of the issue.
Once all sides agree to a deal, the investment bank puts
together a registration statement to be filed with the SEC. This
document contains information about the offering as well as company
info such as financial statements, management background, any legal
problems, where the money is to be used and insider holdings. The
SEC then requires a cooling off period, in which they investigate and
make sure all material information has been disclosed. Once the SEC
approves the offering, a date (the effective date) is set when the stock
will be offered to the public.
During the cooling off period the underwriter puts together
what is known as the red herring. This is an initial prospectus
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containing all the information about the company except for the offer
price and the effective date, which aren't known at that time. With the
red herring in hand, the underwriter and company attempt to hype and
build up interest for the issue. They go on a road show - also known as
the "dog and pony show" - where the big institutional investors are
courted.
As the effective date approaches, the underwriter and
company sit down and decide on the price. This isn't an easy decision:
it depends on the company, the success of the road show and, most
importantly, current market conditions. Of course, it's in both parties'
interest to get as much as possible.
Finally, the securities are sold on the stock market and the
money is collected from investors.
As you can see, the road to an IPO is a long and
complicated one. You may have noticed that individual investors aren't
involved until the very end. This is because small investors aren't the
target market. They don't have the cash and, therefore, hold little
interest for the underwriters. If underwriters think an IPO will be
successful, they'll usually pad the pockets of their favorite institutional
client with shares at the IPO price. The only way for you to get shares
(known as an IPO allocation) is to have an account with one of the
investment banks that is part of the underwriting syndicate. But don't
expect to open an account with $1,000 and be showered with an
allocation. You need to be a frequently trading client with a large
account to get in on a hot IPO.
Bottom line, your chances of getting early shares in an IPO are slim to
none unless you're on the inside. If you do get shares, it's probably because nobody else
wants them. Granted, there are exceptions to every rule and it would be incorrect for us
to say that it's impossible. Just keep in mind that the probability isn't high if you are a
small investor.
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➢ Valuation
Public trading of a company's shares sets a value for the
company that is set by the public market and not through more
subjective standards set by a private valuator. This is helpful for
a company that is looking for a merger or acquisition. It also
allows the shareholders to know the value of the shares.
➢ Increased wealth
The founders of the company often have the sense of increased
wealth as a result of the IPO. Prior to the IPO these shares were
illiquid and had a more subjective price. These shares now have
an ascertainable price and after any lockup period these shares
may be sold to the public, subject to limitations of federal and
state securities laws.
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➢ Promoters
Is the company a family run business or is it professionally
owned? Even with a family run business what are the credibility and
professional qualifications of those managing the company? Do the top
level managers have enough experience (of at least 5 years) in the
specific type of business?
➢ Industry Outlook
The products or services of the company should have a
good demand and scope for profit.
➢ Business Plans
Check the progress made in terms of land acquisition,
clearances from various departments, purchase of machinery, letter of
credits etc. A higher initial investment from the promoters will lead to
a higher faith in the organization.
➢ Financials
Why does the company require the money? Is the
company floating more equity than required? What is the debt
component? Keep a track on the profits, growth and margins of the
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➢ Risk Factors
The offer documents will list our specific risk factors such
as the company’s liabilities, court cases or other litigations. Examine
how these factors will affect the operations of the company.
➢ Key Names
Every IPO will have lead managers and merchant bankers.
You can figure out the track record of the merchant banker through
the SEBI website.
➢ Pricing
Compare the company’s PER with that of similar
companies. With this you can find out the P/E Growth ratio and
examine whether its earning projections seem viable.
➢ Listing
You should have access to the brokers of the stock
exchanges where the company will be listing itself.
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➢ Company Information
➢ Risk Factors
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➢ Audited financials
IPO SCAMS
YES BANK Ltd. CASE
The modus operandi adopted in manipulating the YES Bank
Ltd (YBL)'s initial public offering (IPO) allotment involved opening of
over 7,500 benami dematerialised accounts.
These accounts were with the National Securities
Depository Ltd (NSDL) through Karvy Stockbroking Ltd (Karvy-DP). Of
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Capital Company Ltd, DSP Merrill Lynch Ltd and SBI Capital Markets
Ltd in identifying and weeding out the benami applications."
Reference is being made to the RBI to examine the role of
BhOB, HDFC Bank, Indian Overseas Bank, ING Vysya Bank and Vijaya
Bank in opening the bank accounts of these benami entities and
apparently funding them.
According to SEBI, Karvy-DP, which was also named in the
YES Bank IPO case, has not adhered to `Know-your-Client' norms, as
per the reports of inspection submitted by NSDL and CDSL on the DP.
Also, some of the documents collected by CDSL during the course of
inspection show that Karvy-DP has obtained letters purportedly issued
by the banks' concerned such as BhOB as proof of identity and proof of
address of the person for the purpose of opening dematerialised
accounts.
"It is seen that one branch manager has on the same date
signed as authorized signatory of different branches of the bank. This
raises a doubt as to the authenticity of the bank documents obtained
by Karvy-DP for opening dematerialised accounts," the SEBI order by
its Whole-time Director Mr G. Anantharaman said. SEBI also banned
four investors (in whose names the multiple accounts were opened)
viz., Ms Roopalben Nareshbhai Panchal (who was also named in the
YES Bank IPO scam), Sugandh Estates & Investments P Ltd, Mr
Purshottam Ghanshyam Budhwani and Mr Manojdev Seksaria from
doing any kind of transactions in the securities market, till further
directions.
Another 35 firms were also barred from participating in the IPOs in the
future, till further orders, the SEBI order said.
MARUTI Case
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Description
Some of the demat accounts that were used to manipulate
allotments in the initial public offer of Yes Bank and IDFC were opened
during 2003, and not in the last year as was earlier believed. The first
IPO in which the key operators have participated was that of Maruti
Udyog Ltd, in June 2003, though the numbers of fictitious demat
accounts were not very high then, the interim order from Securities
and Exchange Board of India has said.
Inter-linkages
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In the dock
Description
SEBI on Thursday 27th April 2006 came down heavily on
stock market intermediaries by banning several entities including
Karvy group of companies, Pratik DP and Indiabulls Securities, for their
alleged involvement in the IPO allotment scam. SEBI has also barred
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several entities including HDFC Bank, IDBI Bank, ING Vysya Bank and
Motilal Oswal Securities from opening fresh demat accounts.
In an interim order issued today after the second round of
investigations, the capital market regulator has banned 24 entities
from buying and selling securities till further orders.
Common address
SEBI also said 15 Depository Participants at National
Securities Depository Ltd (NSDL) including Kotak Securities, Citibank,
ICICI Bank, Bank Paribas and IndusInd Bank had more than 500 demat
account holders sharing the common address.
It asked NSDL to conduct inspection on whether all the
demat account holders are genuine. NSDL has also been asked to
check whether the Know Your Customer norms of SEBI have been duly
complied with and take action against suspect accounts on
verification.
Analysts felt the SEBI order was akin to capital punishment
for the entities involved in the securities market scam.
"In view of the detailed findings, Karvy DP and Pratik DP
prima facie do not appear to be fit to deal in securities market as SEBI-
registered intermediaries. Appropriate quasi-judicial proceedings are
being initiated against the two DPs," the 252-page order issued late in
the evening said.
SEBI said the other business groups of Karvy appear to
have acted in concert in the gamut of IPO manipulations. "I further
direct Karvy Stock Broking Ld, Karvy Computer Share PVT Ltd, Karvy
Investor Services and Karvy Consultants not to undertake fresh
business as registrar to the issue and share transfer agent," Mr G
Anantharaman, Whole-Time Member, SEBI, said.
NSDL, CDSL pulled up
The regulator also pulled up NSDL and CDSL for `grave
management lapses'. The findings revealed "contributory negligence"
on the part of the depositories and their managements.
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Modus operandi
➢ Current account opened in the name of multiple companies on
the same date in the same branch of a bank
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Operational deficiencies
Factors that facilitated the scam
➢ Photographs not obtained
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Recent IPOs
September
Richa Knits 30 13 Sep 2006 19 Sep 2006
August
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July
Shirdi Ind 67-78 29 Jun 2006 08 Jul 2006
June
Vigneshwara 110-124 07 Jun 2006 16 Jun 2006
Term
Description
AGM Annual General Meeting of Pratibha Industries Limited
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Prospectus The Prospectus filed with the ROC containing, inter alia, the Issue
Price that is determined at the end of the Book Building Process,
the size of the Issue and certain other information
Public Issue Account In accordance with Section 73 of the Companies Act, 1956, an
account opened with the Banker(s) to the Issue to receive monies
from the Escrow Account for the Issue on the Designated Date
QIB Portion The portion of the net issue being not less than mandatory
19,28,250 Equity Shares of Rs. 10 each at the Issue Price,
available for allocation to QIBs
Qualified Institutional Public Financial Institutions as specified in Section 4A of the
Buyers/ QIBs Companies Act, Scheduled Commercial Banks, Mutual Funds
registered with SEBI, Foreign Institutional Investors registered
with SEBI, Multilateral And Bilateral Development Financial
Institutions, Venture Capital Funds registered with SEBI, Foreign
Venture Capital Investors registered with SEBI, State Industrial
Development Corporations, Insurance Companies registered with
the Insurance Regulatory And Development Authority (IRDA),
Provident Funds with a minimum corpus of Rs.2500 Lakhs and
Pension Funds with a minimum corpus of Rs. 2500 Lakhs.
Retail Individual Bidders Individual Bidders (including HUFs and NRIs) who have not Bid
for an amount in excess of Rs.1,00,000/- in any of the bidding
options in the Issue.
Retail Portion The portion of the Net Issue being a minimum of 13,49,775 Equity
Shares of Rs.10 each available for allocation to Retail Individual
Bidder(s)
Registrar/ Registrars to Intime Spectrum Registry Limited
the Issue
Revision Form The Form used by the Bidders to modify the quantity of Equity
Shares or the Bid Price in any of their Bid cum Application Forms
or any previous Revision Form(s).
Syndicate Agreement The agreement to be entered into among the Company and the
members of the Syndicate in relation to the collection of Bids in
this Issue
Syndicate Members Intermediaries registered with SEBI and eligible to act as
underwriters. Syndicate Members are appointed by the BRLM and
include the BRLM
Syndicate The Syndicate Members collectively
TRS or Transaction The slip or document issued by the Syndicate Members to the
Registration Slip Bidder as proof of registration of the Bid
Underwriters The BRLM and Syndicate Members
Underwriting Agreement The Agreement among the BRLM, the Syndicate Members and
the Company to be entered into on or after the Pricing Date
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Bibliography
Web Based
➢ www.investopedia.com
➢ www.sebi.com
➢ www.vivro.net
➢ www.intimespectrum.com
➢ www.pratibhagroup.com
Book Based
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