Initial Public Offerings(IPOs)

Meaning and Benefits of IPOs

An initial public offering is referred to as sale of equity of a company to the public by the promoters of the company.
Companies prefer to go for Initial Public offering due to following reasons: Additional Capital resources for funding of projects/expansion plans. Dilution of existing promoters share holding or by venture capitalist Liquidity for shareholders. Enhances corporate image thus providing visibility. Subsequent issues Exit options M&A currency, visibility Analyst coverage Conducive market conditions driving business valuations

Costs of IPO
Spread paid to underwriters 2%-4% in India Management time Onerous compliances and disclosures SOX in USA, Listing Agreement in India, quarterly filings Restrictions on pre-IPO shareholders to cash out immediately Loss of control

Types of Public Issues

Fixed Price Issue Public Issue Private Placement Offer for Sale Book Building Issue

Types of Issues
Fixed Price:- Wherein the price band of the issue is fixed. For e.g Dwarikesh Sugar Industries Limited Public Issue of 50,00,000 equity shares of Rs 10/- each at a premium of Rs 55/- per share aggregating Rs 3250 lacs. Book Building Issue: -- Book Building is a price discovery mechanism which is undertaken to ascertain and determine the price of the security proposed to be issued by a body corporate. -- There is a price band which gives the bidder the facility to bid within a price band at different price levels. -- e.g National Thermal Power Corporation Limited wherein the price band was fixed between Rs 52 to Rs 62/-

Category of Bidders
Retail Individual Investor:- means an investor who applies or bids for securities of or for face value of not more than Rs 100,000/ Non-Qualified Institutional Buyer: Any investor who bids for an amount above Rs 100,000 and does not fall in the QIB category e.g HNI investors. Qualified Institutional Buyer(QIB) shall mean: a. public financial institution as defined in section 4A of the Companies Act, 1956; b. scheduled commercial banks; c. mutual funds; d. foreign institutional investor registered with SEBI; Contd.

QIBs-category
e. multilateral and bilateral development financial institutions; f. venture capital funds registered with SEBI. g. foreign Venture capital investors registered with SEBI. h. state Industrial Development Corporations. i. insurance Companies registered with the Insurance Regulatory and Development Authority j. provident Funds with minimum corpus of Rs. 25 crores k. pension Funds with minimum corpus of Rs. 25 crores

IPO Process
When a company wants to go public, the first thing it does is hire an investment bank You can think of underwriters as middlemen between companies and the investing public 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

IPO Valuation techniques

Discounting future free cash flows Comparable companies Generally both techniques are used to arrive at a value If results differ significantly then use recent IPOs comparables

Red Herring
The underwriter puts together what is known as the RED HERRING. This is an initial prospectus 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.`

Allocation of shares
Shares of the company start trading Underwriters make the market and assign an analyst to cover the stock to create liquidity

Underpricing
Benefits underwriters minimises risk Enables SEOs in the future Benefits investors attractive returns why does not all investors do it then they cannot Winners curse Cost of underpricing paid by pre-IPO shareholders Agency problem underwriters and issuers Green shoe option underwriters allowed to issue more stock, if issue is a success no problem, if issue is not a success support the price by repurchasing greenshoe shares in the after market

Key Factors to keep in mind before applying in a IPO

Investors need to carefully go through the red herring prospectus(preliminary prospectus and is subject to revision, the final is the one which is filed with ROC) that is available on the SEBI site. Objects of the issue. Risk factors related to the issue. Promoters track record and their experience in running a particular business. Financials. Issue Price. contd.

Key factors
Sector prospects. Capital structure of the company. Terms of the present offer. Outstanding litigation & defaults. Tax Benefits. Any published reports that forecast the future earnings.

Thank You