ABOUT PUBLIC ISSUE OF SHARES (IPO)

Initial Public Offering (IPO), also sometimes simply referred to as a "Public Issue," is
the first sale of stock by a private company to the public. Public issues are done by
both small as well as large companies seeking capital to expand business. It is also
sometimes done by large privately-owned companies looking to become publicly traded.

Note: When an already listed company makes either a fresh issue of securities to the
public or an offer for sale to the public, through an offer document, it is called Further
Public Offering or FPO

What are the entry norms for companies making Public Issue?
The main entry norms for companies making a public issue (IPO or FPO) are as follows;

a. Net tangible assets of atleast Rs. 3 crores for 3 full years

b. Distributable profits in atleast three years
c. Networth of atleast Rs. 1 crore in 3 years
d. If there is any change in name, atleast 50% of revenue for the preceding year
from new business activity.
e. The issue size does not exceed 5 times the pre-issue net worth.

To provide sufficient flexibility and also to ensure that genuine companies do not suffer
on account of rigidity of the parameters, SEBI has provided two other alternative
routes to companies not satisfying any of the above conditions, for accessing the
primary Market, as under:

a. The issue shall be through the book building process, with 50% of the shares
under issue to be mandatorily allotted to Qualified Institutional Buyers (QIB).
b. The minimum post issue face value capital shall be Rs. 10 crore or there shall
be a compulsory market making for at least 2 years.

OR

a. The “project” is appraised and participated to the extent of 15% by FIs/

Scheduled Commercial Banks of which at least 10% comes from the
appraiser(s).
b. The minimum post issue face value capital shall be Rs. 10 crore or there
shall be a compulsory market making for at least 2 years.

In addition to satisfying the aforesaid eligibility norms, the company shall also satisfy the
criteria of having at least 1000 prospective allotees in its issue

Note:
Public Sector Banks, Private Sector Banks and an infrastructure company whose
project has been appraised by a PFI or IDFC or IL&FS or a Bank which was earlier
a PFI and not less than 5% of the project cost is financed by any of these
institutions are exempted from the aforesaid entry norms.
What is the role of SEBI in a Public Issue?
The primary issuances are governed by SEBI in terms of SEBI (Disclosures and Investor
protection) guidelines. . In 2000, SEBI issued “Securities and Exchange Board of India
(Disclosure and Investor Protection) Guidelines, 2000” which is compilation of all
circulars organized in chapter forms. The Merchant Banker are the specialized
intermediaries who are required to do due diligence and ensure that all the requirements
of DIP are complied with while submitting the draft offer document to SEBI. Any non
compliance on their part, attract penal action from SEBI, in terms of SEBI (Merchant
Bankers) Regulations.

How does one know about upcoming Public Issues?

SEBI issues press releases every week regarding the draft offer documents received
and observations issued during the period. The draft offer documents are put up on
the website (www.sebi.gov.in) under Reports/Documents section and can be
downloaded. The final offer documents that are filed with SEBI/ROC are also put under
the same section.

What are the important information an investor can obtain about the company
from the offer document?
An investor can obtain the following valuable information about the company from the
offer document;
a. Business of the Company and industry review
b. Details about management and promoter group
c. Capital structure and shareholding pattern
d. Financial statement and summarized data
e. Risk factors affecting the growth
f. Terms of offer and basis of issue price
g. Pending litigations, approvals and other statutory disclosures

How is the pricing of a Public Issue done?

SEBI guidelines provides that the issuer in consultation with Merchant Banker shall
decide the issue price. There is no price formula stipulated by SEBI. But, the company
and the merchant banker are required to give disclosures on the basis for the issue
price.

There are two types of Public issues, one where the Issuer and Merchant Banker fix a
price (fixed price offer) and other, where the Issuer and Merchant Banker stipulate a
floor price or a price band and leave it to market to determine the final price (0ffer
through book building).

Fixed Price Offer

An issuer company is allowed to freely price the issue. The basis of issue price is
disclosed in the offer document where the issuer discloses in detail about the qualitative
and quantitative factors justifying the issue price. The Issuer company can mention a
price band of 20% (cap in the price band should not be more than 20% of the floor price)
in the Draft offer documents filed with SEBI and actual price can be determined at a later
date before filing of the final offer document with SEBI/ROC.
Offer through book building
“Book Building” means a process undertaken by which a demand for the securities
proposed to be issued by the Company is elicited and built up and the price for the
securities is determined on the basis of the bids obtained for the quantity of securities
offered for subscription. This method provides an opportunity to the market to discover
price for securities.

Book building is a process of price discovery. Hence, the Red Herring prospectus does
not contain a price. Instead, the red herring prospectus contains either the floor price of
the securities offered through it or a price band along with the range within which the
bids can move. The applicants bid for the shares quoting the price and the quantity. Only
the retail investors have the option of bidding at ‘cutoff’. After the bidding process is
complete, the ‘cutoff’ price is determined. The basis of Allotment is then finalized and
letters of allotment/refund is undertaken. The final prospectus with all the details
including the final issue price and the issue size is filed with ROC, thus completing the
issue process

Price revision
The price band can be revised and such a revision in the price band shall be widely
disseminated by informing the stock exchanges, by issuing press release and also
indicating the change on the relevant website and the locations of the syndicate
members. In case the price band is revised, the bidding period shall be extended for a
further period of three days, subject to the total bidding period not exceeding thirteen
days.

Cut Off Price

In a book building issue, the issuer is required to indicate either the price band or a floor
price in the red herring prospectus. The actual discovered issue price can be any price in
the price band. This issue price is called “Cut off price”. This is decided by the issuer
and lead manager after considering the book and investors’ appetite for the stock. SEBI
(DIP) guidelines permit only retail individual investors to apply at cut off price.

What are the reservations available for different category of investors?

In a book built issue allocation to Retail Individual Investors (RIIs), Non Institutional
Investors (NIIs) and Qualified Institutional Buyers (QIBs) is in the ratio of 35:15: 50
respectively.

In case the book built issues are made pursuant to the requirement of mandatory
allocation of 60% to QIBs in terms of Rule 19(2)(b) of SCRR, the respective figures are
30% for RIIs and 10% for NIIs. This is a transitory provision pending harmonization of
the QIB allocation in terms of the aforesaid Rule with that specified in the guidelines.

Note:
‘Retail individual investor’ means an investor who applies for bids for securities of or for
a value of not more than Rs.1, 00,000/-. Any bid made in excess of this will be
considered in the HNI category.
How many numbers of days a public issue is kept open for subscription?
Subscription for public issues will be kept open for at least 3 working days and not more
than 10 working days. In case of Book built issues, the minimum and maximum period
for which the issue will be open is 3 – 7 working days extendable by 3 days in case of a
revision in the price band. The public issue made by an infrastructure company,
satisfying the requirements in Clause 2.4.1 (iii) of Chapter II may be kept open for a
maximum period of 21 working days. As per clause 8.8.2., Rights issues shall be kept
open for at least 30 days and not more than 60 days.

Where will an investor get the bid cum application form?

The form for applying/bidding of shares is available with all syndicate members,
collection centers, the brokers to the issue and the bankers to the issue. An investor
can also visit the nearest bank or share/stock broker and get the application form.
The syndicate member returns the counterfoil with the signature, date and stamp of the
syndicate member. The investor can retain this as a sufficient proof that the bid has
been considered.

An investor can change or revise the quantity or price in the bid using the form for
changing/revising the bid that is available along with the application form. However, the
process should be completed within the date of closure of the issue.

How is the allotment of shares done to the bidders?

After the closure of the issue, the bids received are aggregated under different
categories i.e., Firm Allotment, Qualified Institutional Buyers (QIBs), Non Institutional
Buyers (NIBs), Retail, etc. The oversubscription ratios are then calculated for each of the
categories as against the shares reserved for each of the categories in the offer
document. Within each of these categories, the bids are then segregated into different
baskets based on the number of shares applied for. The oversubscription ratio is then
applied to the number of shares applied for and the number of shares to be allotted for
applicants in each of the baskets is determined. Then, the number of successful
allottees is determined. This process is followed in case of proportionate allotment. In
case of allotment for QIBs, it is subject to the discretion of the post issue lead manager.

In case of fixed price issues, the investor is intimated about the CAN/Refund order within
30 days of the closure of the issue. In case of book built issues, the basis of allotment is
finalized by the Book Running lead Managers within 2 weeks from the date of closure of
the issue. The registrar then ensures that the shares are credited to applicant’s demat
accounts or refund as applicable is completed within 15 days of the closure of the issue.
The listing on the stock exchanges is done within 7 days from the finalization of the
issue.

What is the procedure for refund of excess money?

SEBI vide its circular dated January 20, 2006, has permitted use of ECS for refunds in
the issue process. Applicants from major cities will get refund through it as it has been
made mandatory by SEBI where the facility is available. Applicants in other cities will
get refunds through normal practice of registered / ordinary post. SEBI will enhance
number of centers after reviewing feedback on the system.
What is the recourse available to the investor in case of issue complaints?
Most of the issue complaints pertain to non receipt of refund or allotment, or delay in
receipt of refund or allotment and payment of interest thereon. These complaints shall be
made to the post issue Lead Manger , who in turn will take up the matter with registrar to
redress the complaints. In case the investor does not receive any reply within a
reasonable time, investor may complain to SEBI, Office of investors Assistance and
Education in the following address;

Securities and Exchange Board of India

Office of Investor Assistance and Education (OIAE)

Exchange Plaza, “G” Block, 4th Floor,

Bandra-Kurla Complex,

Bandra (E), Mumbai – 400 051.

Phone: 26598510-13

Note: This article is prepared by Argus Equity Research Private Limited solely for the purpose of
education. This is not to be treated as a recommendation to invest in equities or IPO’s or any
other similar schemes or products.

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