EXECUTIVE SUMMARY

As we all know IPO INITIAL PUBLIC OFFERING is the hottest topic in the current
industry, mainly because of India being a developing country and lot of growth in various sectors
which leads a country to ultimate success. And when we talk about countrys growth which is
dependent on the kind of work and how much importance to which sector is given. And when we
say or talk about industries growth which leads the economy of country has to be balanced and
given proper finance so as to reach the levels to fulfill the needs of the society. And industries
which have massive outflow of work and a big portfolio then it is very difficult for any company
to work with limited finance and this is where IPO plays an important role.
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. It also gives us some idea about what are the expenses that
a company undertakes during an IPO.
IPO has been one of the most important generators of funds for the small companies
making them big and given a new vision in past and it is still continuing its work and also for
many coming years.

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LITERATURE REVIEW
This section describes four key studies that have researched different forms of going public. It also
provides a brief account of a study which analyzed spreads.

1. Biasis and Faugeron-Crouzet (2007)

In their research, Biasis and Faugeron-Crouzet analyze different types of IPO auctions. They study
uniform price auctions, fixed price offerings, internet-based Open IPO mechanisms, and auctions
such as Mise en Vente in France. These were analyzed within a uniform theoretical model. (Biasis
and Faugeron-Crouzet 2002, 13-17). In fixed price offers, Biasis and Faugeron-Crouzet found high
initial returns. High returns were left both to institutional investors as well as small-uninformed
investors, because of a lack of adjustment for price and demand. For uniform price auctions,
underpricing was also evident, however with less underpricing than with fixed price offers.

The Mise en Vente auction is an auction type IPO procedure that is commonly used in France.
This auction has a fixed market clearing price and pro rata allocation. The highest market clearing
bids do not set the market-clearing price, instead it is set by a Bourse official, based on the function
of demand. It is noted that an explicit algorithm that maps demand into price does not set the
pricing in such cases.

The research found that for an optimal IPO auction, the IPO price must be set in a manner, which
reflects the information held by investors. If this is not done as in fixed price auctions, underpricing
is bound to be pervasive, whereas information gathering of the value of the stock during the IPO
process is bound to be insignificant. Biasis Faugeron-Crouzet viewed the Open IPO process as a
true Dutch auction when it in fact was not. An Open IPO process is a so-called Dirty Dutch
auction as coined by Sherman (1999). Much like the Mise en Vente, the fixed market-clearing
price is not set at the highest possible level, but instead it is marked down and set by the issuing
company and the underwriter based on their own perception of the function of demand.

Their study moreover identifies the problem of translating, i.e., mapping demand into prices and
into explicit computerized rules, which occur in Mise en Vente and in Book building. The authors
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also highlight the importance of established relationships between bidders and underwriters.
Finally, according to Biasis and Faugeron-Crouzet an established relationship can enhance the
ability to extract information from investors.

2. Kaneko and Pettway (2008)

Kaneko and Pettway attempt to provide an answer to the question Does book building provide a
better mechanism for issuing firms than auctions? Similar to Kenji and Smith (2004), the Japanese
market is used to test the assumption. The Japanese auction process uses price discriminating
auctions, instead of a fixed price or market-clearing price as in the Open IPO process.

The empirical research in Kaneko and Pettway (2003) is broken up into three parts.
Firstly the descriptive statistics are analyzed, which demonstrate that book building had
significantly higher initial returns than auction priced IPOs. In the following part, the auctioned
priced and book built IPOs are analyzed separately through regression analysis. In this section
seven independent variables are tested to uncover which variables have the most impact on
underpricing. In the test of auctioned IPOs, it was found that market volatility of daily index returns
one month prior to the issue is the most significant factor affecting underpricing. When the same
regressions were run on the book built IPOs, it was found that market change three months prior
to the IPO was the most significant factor affecting underpricing.
In the third part of Kanekos and Pettways research, regression analysis was run on both sets of
data, however controlling for the different firm specific characteristics. There, it was also found
that book built IPOs are underpriced significantly more than auction priced IPOs. When the book
built and auctioned priced IPOs were analyzed for effects of hot and cold markets, it was found
that book built IPOs are still much more frequently underpriced.

In conclusion, Kaneko and Pettway found that under all conditions and while controlling firm
specific characteristics, book built IPOs were much more frequently underpriced in comparison to
auctioned IPOs.

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3. Sherman and Jagannathan (2009)

In their study Sherman and Jagannathan identify the underlying reason for the relative unpopularity
of auctions as a means of going public. This study appears to be the most comprehensive endeavor
in terms of attempting to holistically identify the reasons auctions have not been as attractive as
other means of going public. Their research studies international trends in auctions use. Here, the
evidence overwhelmingly indicates that auctions have been tried in over 20 countries but are rarely
used today. In other words, out of more than 45 countries, we have not been able to find even one
country in which auctions are currently the dominant method. (Sherman and Jagannathan 2005,
14)

Sherman and Jagannathan delve into commonly used stereotypical explanations for why auctions
are not used. The two most common notions are (1) auctions are not used because they are still
experimental and unproven, and (2) issuers are pressured into book building due to higher fees.
Nonetheless, through international research, it was proven that even in markets where auctions
have been used for a long time, there was a decline in their use as soon as book building or some
other method became available. For the second issue, the authors found that competition in the
market would drive down prices of book building issues. Additionally, other research has shown
that fixed price offers lead to even lower spreads, compared to auctions.

In their study Sherman and Jagannathan find that on a global scale initial returns are not the most
important aspect of the issue for the issuer. This was evident from data collected on IPOs in
Singapore, where both auctions and fixed price offers were available. In this case, statistics
revealed that the fixed price method was chosen as the dominant means of going public, although
auctions consistently provided lower underpricing.

Finally, the study also deemed whether any perceivable effect can be distinguished from adding
modern Internet technologies to enable bidding for the IPO auction. The results illustrate that the
median return for Open IPOs is 2%, which is excellent. However, the research points out that there
are significant outliers in the group. In conclusion, Sherman and Jagannathan find that auctions
have been tried and tested in many markets, but have lost popularity due to poor control on the
part of the issuer in terms of the price and effort that are applied. They also identify that auctions
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provide lower underpricing. This would imply that issuers are not only looking to optimize
underpricing, but are moreover interested in other attributes of the issue. Without some way of
screening out free-riders and the unsure participation of serious investors, IPO auctions are too
risky for both issuers and investors.

4. Kenji and Smith (2009)

Kenji and Smith (2004) study the benefits and drawbacks of auctions versus book building as a
method of IPO issuance in Japan. Their reason for choosing Japan as a test environment was due
to the fact that book building has been a legal way of going public in Japan since 1997. Previously,
auctioning was the only way that a company could go public in Japan. In their research, Kenji and
Smith use the total issue cost as a percentage of the value of the issue to measure the benefits and
drawbacks of the different methods of going public.

The data that is used in this paper is a sample of 484 IPOs by companies that are listed on the
JASDAQ or JASDAQ-OTC markets during a five-year period from 1995 to 1999. This included
321 auction IPOs and 163 book built IPOs. However, due to varying market conditions during the
years spanning from 1995 to 1999, the research has been divided into two different sections. The
first uses all the data from the whole sample period, whereas the second section uses data only
from the years 1996 through 1998, when the market was characterized by very stable market
conditions. This provides a fairly similar setting for both auctions (January 1996 - September 1997)
and book built (October 1997 - December 1998) IPO data sets. Firm data that is used include: sales
revenue, equity to book value, shares outstanding, firm age, as well as number of employees. Issue
data includes offering date, number of shares issued, amount raised, offer price, first after market
price, and other offering details. Total issue cost in their research is defined as the first aftermarket
price instead of actual issue price.

During the whole period, the total issue cost against the aftermarket price in book built IPOs is an
average of 28,04%, whereas the auction priced cost is only 8,17%. However, the second sample
(1996-1998) notes values of 15,3% and 7% respectively. The data demonstrates that the book
building method provides more flexibility, making small issues appear to be more feasible, and
decreasing the cost of going public for larger companies.
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The empirical analysis demonstrates that under the auctions-only system, issuers are older and
larger than book built issuers. The analysis also reveals that underpricing is a substitute cost for
lower fees, thus when all else being equal, increased underpricing reduces the fee as a percentage
of the aftermarket price. The method used for analysis in Kenjis and Smiths study was regression
analysis, with reliance on previously identified variables.

When analyzing total issue cost and issue size, it was found that issuer age, sales revenue, and
equity to book value are not significantly related to the total cost of auctioned IPOs. In the book
built issues, the percentage cost is less for large issuers with established track records.
In the study, the difference in equally-weighted average issue cost compares what the issue cost
would have been in both book building and auction scenarios for any given company individually.
Kenji and Smith found that auctioning reduces mean total issue cost by an average of 6% of the
first aftermarket price. Additionally, they predicted that pricing through the auction method is
projected to have resulted in lower total costs at least in 82.5% of the subsample.

In conclusion, Kenji and Smith found that under the auction method, high quality issuers had a
limited ability to distinguish themselves from low quality issuers. Furthermore, the research found
that small and risky firms, as a group, incur higher costs with book building, whereas larger and
better-established issuers realize savings with this particular method. Overall in this sample of
Japanese IPOs, the average total issue cost, measured as a percentage of the initial aftermarket
price, was significantly higher in the book building regime than in the auction regime. However,
it was found that aggregate underpricing would have been lower under the book building, on the
basis of either the full sample, or the subsample.

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Summary of previous research

Below is a table summarizing the findings of the four key studies in the field:

Overview of Literature Review:

Study
Biasis and Faugeron- Crouzet

Objective

Conclusion

Compared the performance of Fixed price auctions underprice

the various auction methods the

(2007)

most,

market

clearing

through a unified theoretical auctions also underprice but not

model.

as much as fixed price offers.

An optimal solution is achieved
by the Mise en Vente in France
that

encompasses

some

characteristics of the book built

offers.
Kaneko and Pettway
(2008)

Examine whether book built Underpricing was used as a

IPOs

provide

better proxy,

and

overwhelmingly

mechanism for issuing firms auctions were found to be more

compare to auctions.

beneficial to issuers than book

built IPOs.

Sherman and Jagannathan

A study of the underlying Auctions run higher risk than

reasons

(2009)

why

auctions

are book built IPOs, due to less

relatively unpopular all over the control by the issuer of the

world

for

issuing

equity, freerider problem, as well as

whereas they are extensively less control over issue price.

used for selling everything else.

Kenji and Smith

Attempt to uncover why book Auctions leave less money on

building has been used more the table, however larger and

(2009)

than auctions in Japan, although older issuers benefit from book

auctions seem to be more building, since overall issuance
beneficial to issuers.

cost is lower for them.

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Initial Public Offering (IPO)

The first public offering of equity shares or convertible securities by a company, which is
followed by the listing of a companys shares on a stock exchange, is known as an Initial Public
Offering. In other words, it refers to the first sale of a companys common shares to investors on
a public stock exchange, with an intention to raise new capital.
The most important objective of an IPO is to raise capital for the company. It helps a
company to tap a wide range of investors who would provide large volumes of capital to the
company for future growth and development. A company going for an IPO stands to make a lot
of money from the sale of its shares which it tries to anticipate how to use for further expansion
and development. The company is not required to repay the capital and the new shareholders get
a right to future profits distributed by the company.

Companies fall into two broad categories: Private and Public.

A privately held company has fewer shareholders and its owners don't have to disclose
much information about the company. When a privately held corporation needs additional
capital, it can borrow cash or sell stock to raise needed funds. Often "going public" is the best
choice for a growing business. Compared to the costs of borrowing large sums of money for ten
years or more, the costs of an initial public offering are small. The capital raised never has to be
repaid. When a company sells its stock publicly, there is also the possibility for appreciation of
the share price due to market factors not directly related to the company. Anybody can go out
and incorporate a company: just put in some money, file the right legal documents and follow the
reporting rules of jurisdiction such as Indian Companies Act 1956. It usually isn't possible to buy
shares in a private company. One can approach the owners about investing, but they're not
obligated to sell you anything. Public companies, on the other hand, have sold at least a portion
of themselves to the public and trade on a stock exchange. This is why doing an IPO is also
referred to as "going public."

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Why go public??
Before deciding whether one should complete an IPO, it is important to consider the
positive and negative effects that going public may have on their mind. Typically, companies go
public to raise and to provide liquidity for their shareholders. But there can be other benefits. Going
public raises cash and usually a lot of it. Being publicly traded also opens many financial doors:
Because of the increased scrutiny, public companies can usually get better rates when they
issue debt.
As long as there is market demand, a public company can always issue more stock. Thus,
mergers and acquisitions are easier to do because stock can be issued as part of the deal.
Trading in the open markets means liquidity. This makes it possible to implement things
like employee stock ownership plans, which help to attract top talent.
Going public can also boost a companys reputation which in turn, can help the company
to expand in the marketplace.

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DIFFERENT KINDS OF ISSUES

Issues

Public

Rights

Initial Public Offering

Fresh Issue

Offer for Sale

Preferential

Further Public Offering

Fresh Issue

Offer for Sale

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SIGNIFICANCE OF IPO
Investing in IPO has its own set of advantages and disadvantages. Where on one hand, high
element of risk is involved, if successful, it can even result in a higher rate of return. The rule is:
Higher the risk, higher the returns.
The company issues an IPO with its own set of management objectives and the investor
looks for investment keeping in mind his own objectives. Both have a lot of risk involved. But
then investment also comes with an advantage for both the company and the investors.
The significance of investing in IPO can be studied from 2 viewpoints for the company
and for the investors. This is discussed in detail as follows:

SIGNIFICANCE TO THE COMPANY:

When a privately held corporation needs additional capital, it can borrow cash or sell stock to
raise needed funds. Or else, it may decide to go public. "Going Public" is the best choice for a
growing business for the following reasons:

The costs of an initial public offering are small as compared to the costs of borrowing large
sums of money for ten years or more,

The capital raised never has to be repaid.

When a company sells its stock publicly, there is also the possibility for appreciation of the
share price due to market factors not directly related to the company.

It allows a company to tap a wide pool of investors to provide it with large volumes of
capital for future growth.

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SIGNIFICANCE TO THE SHAREHOLDERS:

The investors often see IPO as an easy way to make money. One of the most attractive
features of an IPO is that the shares offered are usually priced very low and the companys stock
prices can increase significantly during the day the shares are offered. This is seen as a good
opportunity by speculative investors looking to notch out some short-term profit.

The

speculative investors are interested only in the short-term potential rather than long-term gains.

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PRIMARY MARKET AND SECONDARY MARKET

When shares are bought in an IPO it is termed primary market. The primary market does
not involve the stock exchanges. A company that plans an IPO contacts an investment banker who
will in turn called on securities dealers to help sell the new stock issue.

This process of selling the new stock issues to prospective investors in the primary market
is called underwriting.

When an investor buys shares from another investor at an agreed prevailing market price,
it is called as buying from the secondary market.

The secondary market involves the stock exchanges and it is regulated by a regulatory
authority. In India, the secondary and primary markets are governed by the Security and Exchange
Board of India (SEBI).

Kinds of Public Offerings:

1. Primary offering: - New shares are sold to raise cash for the company.

2. Secondary offering: - Existing shares (owned by VCs or firm founders) are sold, no new
cash goes to company. A single offering may include both of these initial public offering.

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THE RISK FACTOR

Investing in IPO is often seen as an easy way of investing, but it is highly risky and many
investment advisers advise against it unless you are particularly experienced and knowledgeable.
The risk factor can be attributed to the following reasons:

UNPREDICTABLE:
The Unpredictable nature of the IPOs is one of the major reasons that investors advise
against investing in IPOs. Shares are initially offered at a low price, but they see significant
changes in their prices during the day. It might rise significantly during the day, but then it may
fall steeply the next day.

NO PAST TRACK RECORD OF THE COMPANY:

No past track record of the company adds further to the dilemma of the shareholders as to
whether to invest in the IPO or not. With no past track record, it becomes a difficult choice for the
investors to decide whether to invest in a particular IPO or not, as there is basis to decide whether
the investment will be profitable or not.

POTENTIAL OF STOCK MARKET:

Returns from investing in IPO are not guaranteed. The Stock Market is highly volatile.
Stock Market fluctuations widely affect not only the individuals and household, but the economy
as a whole. The volatility of the stock market makes it difficult to predict how the shares will
perform over a period of time as the profit and risk potential of the IPO depends upon the state of
the stock market at that particular time.

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RISK ASSESSMENT
The possibility of buying stock in a promising start-up company and finding the next
success story has intrigued many investors. But before taking the big step, it is essential to
understand some of the challenges, basic risks and potential rewards associated with investing in
an IPO.
This has made Risk Assessment an important part of Investment Analysis. Higher the
desired returns, higher would be the risk involved. Therefore, a thorough analysis of risk
associated with the investment should be done before any consideration.
For investing in an IPO, it is essential not only to know about the working of an IPO, but
we also need to know about the company in which we are planning to invest. Hence, it is imperative
to know:
The fundamentals of the business
The policies and the objectives of the business
Their products and services
Their competitors
Their share in the current market
The scope of their issue being successful
It would be highly risky to invest without having this basic knowledge about the company.

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There are 3 kinds of risks involved in investing in IPO:

BUSINESS RISK:
It is important to note whether the company has sound business and management
policies, which are consistent with the standard norms. Researching business risk involves
examining the business model of the company.

FINANCIAL RISK:
Is this company solvent with sufficient capital to suffer short-term business setbacks? The
liquidity position of the company also needs to be considered. Researching financial risk involves
examining the corporation's financial statements, capital structure, and other financial data.

MARKET RISK:
It would beneficial to check out the demand for the IPO in the market, i.e., the appeal of
the IPO to other investors in the market. Hence, researching market risk involves examining the
appeal of the corporation to current and future market conditions.

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ANALYSING AN IPO INVESTMENT

POTENTIAL INVESTORS AND THEIR OBJECTIVES:
Initial Public Offering is a cheap way of raising capital, but all the same it is not considered
as the best way of investing for the investor. Before investing, the investor must do a proper
analysis of the risks to be taken and the returns expected. He must be clear about the benefits he
hope to derive from the investment. The investor must be clear about the objective he has for
investing, whether it is long-term capital growth or short-term capital gains.

The potential investors and their objectives could be categorized as:

INCOME INVESTOR:
An income investor is the one who is looking for steadily rising profits that will be
distributed to shareholders regularly. For this, he needs to examine the company's potential for
profits and its dividend policy.

GROWTH INVESTOR:
A growth investor is the one who is looking for potential steady increase in profits that
are reinvested for further expansion. For this he needs to evaluate the company's growth plan,
earnings and potential for retained earnings.

SPECULATOR:
A speculator looks for short-term capital gains. For this he needs to look for potential of
an early market breakthrough or discovery that will send the price up quickly with little care about
a rapid decline.

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INVESTOR RESEARCH
It is imperative to properly analyze the IPO the investor is planning to invest into. He
needs to do a thorough research at his end and try to figure out if the objective of the company
match his own personal objectives or not. The unpredictable nature of IPOs and volatility of the
stock market adds greatly to the risk factor. So, it is advisable that the investor does his homework,
before investing.
The investor should know about the following:
BUSINESS OPERATIONS:

What are the objectives of the business?

What are its management policies?

What is the scope for growth?

What is the turnover of the labor force?

Would the company have long-term stability?

FINANCIAL OPERATIONS:

What is the companys credit history?

What is the companys liquidity position?

Are there any defaults on debts?

Companys expenditure in comparison to competitors.

Companys ability to pay-off its debts.

What are the projected earnings of the company

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MARKETING OPERATIONS:

Who are the potential investors?

What is the scope for success of the IPO?

What is the appeal of the IPO for the other investors?

What are the products and services offered by the company?

Who are the strongest competitors of the company?

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IPO INVESTMENT STRATEGIES

Investing in IPOs is much different than investing in seasoned stocks. This is because there
is limited information and research on IPOs, prior to the offering. And immediately following the
offering, research opinions emanating from the underwriters are invariably positive.
There are some of the strategies that can be considered before investing in the IPO:

UNDERSTAND THE WORKING OF IPO:

The first and foremost step is to understand the working of an IPO and the basics of an
investment process. Other investment options could also be considered depending upon the
objective of the investor.

GATHER KNOWLEDGE:
It would be beneficial to gather as much knowledge as possible about the IPO market, the
company offering it, the demand for it and any offer being planned by a competitor.

INVESTIGATE BEFORE INVESTING:

The prospectus of the company can serve as a good option for finding all the details of the
company. It gives out the objectives and principles of the management and will also cover the
risks.

KNOW YOUR BROKER:

This is a crucial step as the broker would be the one who would majorly handle your
money. IPO allocations are controlled by underwriters. The first step to getting IPO allocations is
getting a broker who underwrites a lot of deals.
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MEASURE THE RISK INVOLVED:

IPO investments have a high degree of risk involved. It is therefore, essential to measure
the risks and take the decision accordingly.

INVEST AT YOUR OWN RISK:

Finally, after the homework is done, and the big step needs to be taken. All that can be
suggested is to invest at your own risk. Do not take a risk greater than your capacity.

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PRICING OF AN IPO
The pricing of an IPO is a very critical aspect and has a direct impact on the success or
failure of the IPO issue. There are many factors that need to be considered while pricing an IPO
and an attempt should be made to reach an IPO price that is low enough to generate interest in the
market and at the same time, it should be high enough to raise sufficient capital for the company.
The process for determining an optimal price for the IPO involves the underwriters
arranging share purchase commitments from leading institutional investors.
PROCESS:
Once the final prospectus is printed and distributed to investors, company management
meets with their investment bank to choose the final offering price and size. The investment bank
tries to fix an appropriate price for the IPO depending upon the demand expected and the capital
requirements of the company.
The pricing of an IPO is a delicate balancing act as the investment firms try to strike a
balance between the company and the investors. The lead underwriter has the responsibility to
ensure smooth trading of the companys stock. The underwriter is legally allowed to support the
price of a newly issued stock by either buying them in the market or by selling them short.
IPO PRICING DIFFERENCES:
It is generally noted, that there is a large difference between the price at the time of issue
of an Initial Public Offering (IPO) and the price when they start trading in the secondary market.
These pricing disparities occur mostly when an IPO is considered hot, or in other words,
when it appeals to a large number of investors. An IPO is hot when the demand for it far exceeds
the supply.
This imbalance between demand and supply causes a dramatic rise in the price of each
share in the first day itself, during the early hours of trading.

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UNDERPRICING AND OVERPRICING OF IPOS

UNDERPRICING:
The pricing of an IPO at less than its market value is referred to as Underpricing. In other
words, it is the difference between the offer price and the price of the first trade.
Historically, IPOs have always been underpriced. Underpriced IPO helps to generate
additional interest in the stock when it first becomes publicly traded. This might result in
significant gains for investors who have been allocated shares at the offering price. However,
underpricing also results in loss of significant amount of capital that could have been raised had
the shares been offered at the higher price.

OVERPRICING:
The pricing of an IPO at more than its market value is referred to as Overpricing. Even
overpricing of shares is not as healthy option. If the stock is offered at a higher price than what
the market is willing to pay, then it is likely to become difficult for the underwriters to fulfill
their commitment to sell shares. Furthermore, even if the underwriters are successful in selling
all the issued shares and the stock falls in value on the first day itself of trading, then it is likely
to lose its marketability and hence, even more of its value.

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PRINCIPAL STEPS IN AN IPO

Approval of BOD: Approval of BOD is required for raising capital from the public.

Appointment of lead managers: the lead manager is the merchant banker who orchestrates the
issue in consultation of the company.

Appointment of other intermediaries:

-

Co-managers and advisors

Underwriters

Bankers

Brokers and principal brokers

Registrars

Filing the prospectus with SEBI: The prospectus or the offer document communicates
information about the company and the proposed security issue to the investing public. All the
companies seeking to make a public issue have to file their offer document with SEBI. If SEBI or
public does not communicate its observations within 21 days from the filing of the offer document,
the company can proceed with its public issue.

Filing of the prospectus with the registrar of the companies: once the prospectus have been
approved by the concerned stock exchanges and the consent obtained from the bankers, auditors,
registrar, underwriters and others, the prospectus signed by the directors, must be filed with the
registrar of companies, with the required documents as per the companies act 1956.

Printing and dispatch of prospectus: After the prospectus is filed with the registrar of companies,
the company should print the prospectus. The quantity in which prospectus is printed should be
sufficient to meet requirements. They should be send to the stock exchanges and brokers so they
receive them at least 21 days before the first announcement is made in the newspapers.
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Filing of initial listing application: Within 10 days of filing the prospectus, the initial listing
application must be made to the concerned stock exchanges with the listing fees.

Promotion of the issue: The promotional campaign typically commences with the filing of the
prospectus with the registrar of the companies and ends with the release of the statutory
announcement of the issue.

Statutory announcement: The issue must be made after seeking approval of the stock exchange.
This must be published at least 10 days before the opening of the subscription list.

Collections of applications: The Statutory announcement specifies when the subscription would
open, when it would close, and the banks where the applications can be made. During the period
the subscription is kept open, the bankers will collect the applications on behalf of the company.

Processing of applications: Scrutinizing of the applications is done.

Establishing the liability of the underwriters: If the issue is undersubscribed, the liability of the
underwriters has to be established.

Allotment of shares: Proportionate system of allotment is to be followed.

Listing of the issue: The detail listing application should be submitted to the concerned stock
exchange along with the listing agreement and the listing fee. The allotment formalities should
be completed within 30 days.

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BOOK BUILDING (BASIC CONCEPT)

The company does not come out with a fixed price for its shares; instead, it indicates a price band
that mentions the lowest (referred to as the floor) and the highest (the cap) prices at which a share
can be sold.

Bids are then invited for the shares. Each investor states how many shares s/he wants and what
s/he is willing to pay for those shares (depending on the price band). The actual price is then
discovered based on these bids. As we continue with the series, we will explain the process in
detail.

According to the book building process, three classes of investors can bid for the shares:
1. Qualified Institutional Buyers: Mutual funds and Foreign Institutional Investors.
2. Retail investors: Anyone who bids for shares under Rs. 50,000 is a retail investor.
3. High net worth individuals and employees of the company.

Allotment is the process whereby those who apply are given (allotted) shares. The bids
are first allotted to the different categories and the over-subscription (more shares applied for
than shares available) in each category is determined. Retail investors and high net worth
individuals get allotments on a proportional basis.

Page | 26

Example 1:
Assuming you are a retail investor and have applied for 200 shares in the issue, and the
issue is over-subscribed five times in the retail category, you qualify to get 40 shares (200
shares/5). Sometimes, the over-subscription is huge or the issue is priced so high that you can't
really bid for too many shares before the Rs 50,000 limit is reached. In such cases, allotments are
made on the basis of a lottery.

Example 2:
Say, a retail investor has applied for five shares in an issue, and the retail category has
been over-subscribed 10 times. The investor is entitled to half a share. Since that isn't possible, it
may then be decided that every 1 in 2 retail investors will get allotment. The investors are then
selected by lottery and the issue allotted on a proportional basis. That is why there is no way you
can be sure of getting an allotment.

Page | 27

BOOK BUILDING PROCESS

Book Building is basically a capital issuance process used in Initial Public Offer (IPO)
which aids price and demand discovery. It is a process used for marketing a public offer of equity
shares of a company. It is a mechanism where, during the period for which the book for the IPO is
open, bids are collected from investors at various prices, which are above or equal to the floor
price. The process aims at tapping both wholesale and retail investors. The offer/issue price is then
determined after the bid closing date based on certain evaluation criteria.

Page | 28

The Process:
The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'.
The Issuer specifies the number of securities to be issued and the price band for orders.
The Issuer also appoints syndicate members with whom orders can be placed by the
investors.
Investors place their order with a syndicate member who inputs the orders into the
'electronic book'. This process is called 'bidding' and is similar to open auction.
A Book should remain open for a minimum of 5 days.
Bids cannot be entered less than the floor price.
Bids can be revised by the bidder before the issue closes.
On the close of the book building period the 'book runner evaluates the bids on the basis of
the evaluation criteria which may include

Price Aggression

Investor quality

Earliness of bids, etc.

The book runner the company concludes the final price at which it is willing to issue the
stock and allocation of securities.
Generally, the numbers of shares are fixed; the issue size gets frozen based on the price per
share discovered through the book building process.
Allocation of securities is made to the successful bidders.
Page | 29

 Book Building is a good concept and represents a capital market which is in the process of
maturing.
Book-building is all about letting the company know the price at which you are willing to
buy the stock and getting an allotment at a price that a majority of the investors are willing to pay.
The price discovery is made depending on the demand for the stock.
The price that you can suggest is subject to a certain minimum price level, called the floor
price. For instance, the floor price fixed for the Maruti's initial public offering was Rs 115, which
means that the price you are willing to pay should be at or above Rs 115.
In some cases, as in Biocon, the price band (minimum and maximum price) at which you
can apply is specified. A price band of Rs 270 to Rs 315 means that you can apply at a floor price
of Rs 270 and a ceiling of Rs 315.
If you are not still very comfortable fixing a price, do not worry. You, as a retail investor,
have the option of applying at the cut-off price. That is, you can just agree to pick up the shares at
the final price fixed. This way, you do not run the risk of not getting an allotment because you
have bid at a lower price. If you bid at the cut-off price and the price is revised upwards, then the
managers to the offer may reduce the number of shares allotted to keep it within the payment
already made. You can get the application forms from the nearest offices of the lead managers to
the offer or from the corporate or the registered office of the company.

Page | 30

How is the price fixed?

All the applications received till the last date are analyzed and a final offer price, known as
the cut-off price is arrived at. The final price is the equilibrium price or the highest price at which
all the shares on offer can be sold smoothly.
If your price is less than the final price, you will not get allotment. If your price is higher
than the final price, the amount in excess of the final price is refunded if you get allotment. If you
do not get allotment, you should get your full refund of your money in 15 days after the final
allotment is made. If you do not get your money or allotment in a month's time, you can demand
interest at 15 per cent per annum on the money due.

How are shares allocated?

As per regulations, at least 25 per cent of the shares on offer should be set aside for retail
investors. Fifty per cent of the offer is for qualified institutional investors. Qualified
Institutional Bidders (QIB) are specified under the regulation and allotment to this class is
made at the discretion of the company based on certain criteria.

QIBs can be mutual funds, foreign institutional investors, banks or insurance companies. If
any of these categories is under-subscribed, say, the retail portion is not adequately subscribed,
then that portion can be allocated among the other two categories at the discretion of the
management. For instance, in an offer for two lakh shares, around 50,000 shares (or generally
25 per cent of the offer) are reserved for retail investors. But if the bids from this category are
received are only for 40,000 shares, then 10,000 shares can be allocated either to the QIBs or
non-institutional investors.

The allotment of shares is made on a pro-rata basis. Consider this illustration: An offer is made
for two lakh shares and is oversubscribed by times, that is, bids are received for six lakh shares.
The minimum allotment is 100 shares. 1,500 applicants have applied for 100 shares each; and
200 applicants have bid for 500 shares each. The shares would be allotted in the following
manner:
Page | 31

Shares are segregated into various categories depending on the number of shares applied for.
In the above illustration, all investors who applied for 100 shares will fall in category A and
those for 500 shares in category B and so on.

The total number of shares to be allotted in category A will be 50,000 (100*1500*1/3). That
is, the number of shares applied for (100)* number of applications received (1500)*
oversubscription ratio (1/3). Category B will be allotted 33,300 shares in a similar manner.

Shares allotted to each applicant in category A should be 33 shares (100*1/3). That is, shares
applied by each applicant in the category multiplied by the oversubscription ratio. As, the
minimum allotment lot is 100 shares, it is rounded off to the nearest minimum lot. Therefore,
500 applicants will get 100 shares each in category A total shares allotted to the category
(50,000) divided by the minimum lot size (100).

In category B, each applicant should be allotted 167 shares (500/3). But it is rounded off to
200 shares each. Therefore, 167 applicants out of 200 (33300/200) would get an allotment of
200 shares each in category B.

The final allotment is made by drawing a lot from each category. If you are lucky you may get
allotment in the final draw.

The shares are listed and trading commences within seven working days of finalization of the
basis of allotment. You can check the daily status of the bids received, the price bid for and the
response from various categories in the Web sites of stock exchanges. This will give you an
idea of the demand for the stock and a chance to change your mind. After seeing the response,
if you feel you have bid at a higher or a lower price, you can always change the bid price and
submit a revision form.

Page | 32

The traditional method of doing IPOs is the fixed price offering. Here, the issuer and the
merchant banker agree on an "issue price" - e.g. Rs.100. Then one have the choice of filling in
an application form at this price and subscribing to the issue. Extensive research has revealed
that the fixed price offering is a poor way of doing IPOs. Fixed price offerings, all over the
world, suffer from `IPO underpricing'. In India, on average, the fixed-price seems to be around
50% below the price at first listing; i.e. the issuer obtains 50% lower issue proceeds as
compared to what might have been the case. This average masks a steady stream of dubious
IPOs who get an issue price which is much higher than the price at first listing. Hence fixed
price offerings are weak in two directions: dubious issues get overpriced and good issues get
underpriced, with a prevalence of underpricing on average.

What is needed is a way to engage in serious price discovery in setting the price at the IPO.
No issuer knows the true price of his shares; no merchant banker knows the true price of the shares;
it is only the market that knows this price. In that case, can we just ask the market to pick the price
at the IPO?
Imagine a process where an issuer only releases a prospectus, announces the number of
shares that are up for sale, with no price indicated. People from all over India would bid to buy
shares in prices and quantities that they think fit. This would yield a price. Such a procedure should
innately obtain an issue price which is very close to the price at first listing -- the hallmark of a
healthy IPO market.
Recently, in India, there had been issue from Hughes Software Solutions which was a
milestone in our growth from fixed price offerings to true price discovery IPOs. While the HSS
issue has many positive and fascinating features, the design adopted was still riddled with flaws,
and we can do much better.

Page | 33

Documents Required:

A company coming out with a public issue has to come out with an Offer Document/
Prospectus.

An offer document is the document that contains all the information you need about the
company. It will tell you why the company is coming is out with a public issue, its financials
and how the issue will be priced.

The Draft Offer Document is the offer document in the draft stage. Any company making a
public issue is required to file the draft offer document with the Securities and Exchange Board
of India, the market regulator.

If SEBI demands any changes, they have to be made. Once the changes are made, it is filed
with the Registrar of Companies or the Stock Exchange. It must be filed with SEBI at least 21
days before the company files it with the RoC/ Stock Exchange. During this period, you can
check it out on the SEBI Web site.
Red Herring Prospectus is just like the above, except that it will have all the information

as a draft offer document; it will, however, not have the details of the price or the number of shares
being offered or the amount of issue. That is because the Red Herring Prospectus is used in book
building issues only, where the details of the final price are known only after bidding is concluded.

Players:

Co-managers and advisors

Underwriters

Lead managers

Bankers

Brokers and principal brokers

Registrars

Stock exchanges.

Page | 34

STUDY ON CAF COFFEE DAY IPO

Indias favorite coffee shop, where the young at heart unwind.
Caf Coffee Day is a part of India's largest coffee conglomerate, Amalgamated Bean
Coffee Trading Company Ltd. (ABCTCL), the first to roll out the coffee bar concept in India
with its first caf in Bangalore. Its a Rs. 750 crore, ISO 9002 certified company. With Asias
second-largest network of coffee estates (10,500 acres) and 11,000 small growers, making its
holder the largest individual coffee plantation owner in Asia, this in addition to being India's only
vertically integrated coffee company. Coffee Day has a rich and abundant source of coffee. This
coffee goes all over the world to clients across the USA, Europe and Japan, making us one of the
top coffee exporters in the country.
We all know that Caf Coffee Day is one of the most popular hangout places. The coffee
joint is very famous among youngsters. Coffee is one of the favorite beverages and has become
more appealing because of its variety.
Coffee has been around in India since the 17th century. However, coffee drinking has
traditionally been largely restricted to domestic consumption, and mostly in the South Indian states
of Tamil Nadu, Karnataka, Kerala and Andhra Pradesh. Coffee has been around in India since the
17th century. However, coffee drinking has traditionally been largely restricted to domestic
consumption, and mostly in the South Indian states of Tamil Nadu, Karnataka, Kerala and Andhra
Pradesh.
India ranks sixth as a producer of coffee in the world accounting for 4.5% of the global
coffee production. India has about 170,000 coffee farms cultivating around 900,000 acres of coffee
trees. India is the largest producer and consumer of milk in the world with 98% of milk being
produced in rural India. Coffee consumption in India is growing at 6% per annum compared to the
global 2% plus.

Page | 35

Caf Coffee Days menu ranges from signature hot and cold coffees to several exotic
international coffees, tea, food, desserts and pastries. In addition, exciting merchandise such as
coffee powders, cookies, mugs, coffee filters, etc. is available at the cafs.

It was in the golden soil of Chikmagalur that a traditional family owned a few acres of
coffee estates, which yielded rich coffee beans. Soon Amalgamated Bean Coffee Trading
Company Limited, popularly known as Coffee Day was formed. With a rich coffee growing
tradition since 1875 behind it coupled with the opportunity that arose with the deregulation of the
coffee board in the early nineties, Coffee Day began exporting coffee to the connoisseurs across
USA, Europe & Japan. Coffee Day's two curing works at Chikmagalur and Hassan cure over
70,000 tons of coffee per annum, the largest in the country. Coffee Day has a well-equipped
roasting unit catering to the specific requirement of the consumers. The process is carried out under
the control of experienced personnel to meet highest quality standards. The most modern
technology available is used to maintain consistency and roast the coffee beans to the demanding
specifications of the discerning coffee consumers.

Caf Coffee Day (CCD) pioneered the caf concept in India in 1996 by opening its first
caf at Brigade Road in Bangalore. Today, more than a decade later, Caf Coffee Day is the largest
organized retail caf chain in India with cafes functioning in every nook and corner of the country.
Drawing inspiration from this overwhelming success, Caf Coffee Day today has cafes in Vienna,
Austria and Karachi. Whats more, new cafes are planned across Middle East, Eastern Europe,
Eurasia, Egypt and South East Asia in the near future.

In October 2009, CCD unveiled a new brand logo, a Dialogue Box, to weave the concept
of Power of Dialogue. In accordance with this new brand identity, CCD planned to give all its
existing outlets a new look by the end of 2009. Cafs would be redesigned to suit different
environments such as book, music garden and cyber cafes suitable for corporate offices, university
campus or neighborhood. The change plan included new smart menu, furniture design, among
others.

Page | 36

VISION:
To be the only office for dialogue over a cup of coffee

MISSION:
To be the best Cafe chain by offering a world class coffee experience at affordable prices.

The offerings are designed in such a manner that one cannot be spelt without the other;
there are the hot coffee or cold coffee combinations with delectable desserts and special coffee and
eats combinations for even a group of four friends.

Coffee Day Comprises of the following Sub Brands

Coffee Day - Fresh & Ground

Caf Coffee Day

Coffee Day Vending

Coffee Day - Xpress

Coffee Day Exports

Coffee Day - Perfect

Pioneers of the Caf Concept in India with its first Caf at Brigade Road, Bangalore in
1996. This Caf was opened as a Cyber Caf (first of its kind) but later, with the burst of cyber
cafes it reverted to its core competency i.e.; Coffee. Essentially a youth oriented brand with
majority of its customers falling in the 15-29 year age bracket .Each caf, depending upon its
size attracts between 400 and 800 customers daily. It is a place where customers come to
rejuvenate themselves and be themselves.

Page | 37

CAF COFFEE DAY IPO DETAILS

Issue Period:

14-Oct-2015 to 16-Oct-2015

Post Issue Modification Period:

17-Oct-2015

Issue Size:

Public Issue of Equity Shares aggregating up to

Rs.11500 million (including Anchor Portion
10,381,097 equity shares)

Issue Type:

100% Book Building

Face Value:

Rs.10 /share

Floor Price:

Rs.316 (31.6 times of the Face value)

Cap Price:

Rs.328 (32.8 times of the Face value)

Market Lot:

45 Equity shares

Minimum Order Quantity:

45 Equity shares

Promotors Holdings:

54.78%

Book Running Lead Managers

& Global Co-ordinators:

Kotak Mahindra Capital Company Limited,

Citigroup Global Markets India Private Limited and
Morgan Stanley India Company Private Limited.

Book Running Lead Managers:

Axis Capital Limited, Edelweiss Financial Services

Limited and YES Bank Limited.

Syndicate Members:

Edelweiss Securities Limited, Kotak Securities

Limited and Morgan Stanley India Company
Private Limited.

Page | 38

COFFEE DAY ENTERPRISES LIMITED

Sr. No.

Category

Qualified Institutional

No. of shares

No. of

No. of times of

offered/reserve

shares bid

total meant for

for

the category

73,80,654

32384880

4.39

Buyers (QIBs)
1(a)

Foreign Institutional

Investors(FIIs)
1(b)

Domestic Financial

762165

Institutions(Banks/
Financial
Institutions(FIs)/
Insurance Companies)
1(c)

Mutual funds

1(d)

Others

457290

Non Institutional

53,87,658

2920050

0.54

Investors
2(a)

Corporates

2(b)

Individuals(Other than

164925

RIIs)
2(c)

others

Retail Individual

0
1,25,71,203

11363220

0.90

Investors(RIIs)
3(a)

Cut Off

1749825

3(b)

Price bids

253800

Employees

3(a)

Cut Off

36315

3(b)

Price bids

180

Total

4,74,683

25814198

407655

47075805

0.86

1.82

Updated as on 16 October 2015 at 20:00 hrs.

Page | 39

OBJECTS OF THE ISSUE:

Company proposes to utilize the net proceeds towards funding the following objects:

A. Financing our coffee businesses

1. Setting-up of new Cafe Network outlets and Coffee Day Xpress kiosks;
2. Manufacturing and assembling of vending machines;
3. Refurbishment of existing Cafe Network outlets and vending machines; and
4. Setting-up of a new coffee roasting plant facility, along with integrated coffee packing
facility and tea packing facility.
B. Repayment or prepayment of loans of the Company and Subsidiaries; and
C. General corporate purposes.

Page | 40

Issue Subscription Detail / Current Bidding Status

As on Date & Time
Shares Offered / Reserved
Day 1 - Oct 14, 2015 17:00 I

QIB

NII

RII

Employee

Total

7,380,654

5,387,658

12,571,203

474,683

25,814,198

0.1700

0.0300

0.1600

0.0800

0.1300

1.9800

0.0700

0.3300

0.4500

0.7500

4.3900

0.5400

0.9000

0.8600

1.8200

ST
Day 2 - Oct 15, 2015 17:00 I
ST
Day 3 - Oct 16, 2015 20:00 I
ST

QIB(Qualified Institutional Buyers): A qualified institutional buyer (QIB) is a corporate

entity that falls within the "accredited investor" category, defined in SEC Rule 501 of
Regulation D. A Qualified Institutional Buyer (QIB) is one that owns and invests, on a
discretionary basis, at least $100 million in securities; for a broker-dealer the threshold is
$10 million. QIBs encompass a wide range of entities, including banks, savings and loans
associations, insurance companies, investment companies, employee benefit plans or
entities owned entirely by accredited investors. Banks and S&L associations must also have
a net worth of at least $25 million to satisfy the QIB criteria.

NII(Non-Institutional Investors): Individual investors, NRIs, Companies, Trusts etc.

who bid for more than Rs. 2 lakhs are known as non institutional bidders or NII. They need
not to register with SEBI like QIIs.

Page | 41

RII(Retail Individual Investor): In retail individual investor category, investors can

apply up to Rs. 2 lakhs in an IPO. NRIs who apply with less than Rs. 2 lakhs are also
considered as RIIs.

Page | 42

IPO REVIEW (ISSUE SUMMARY)

Coffee Day Enterprises Ltd (CDEL) is the parent company of the Coffee Day Group,
which houses Caf Coffee Day that pioneered the coffee culture in the chained caf segment in
India. It opened its first Caf Coffee Day outlet in Bengaluru in 1996 and has established the
largest footprint of caf outlets in India with a network of 1,538 caf outlets spread across 219
cities, including under the established and recognized brand name Caf Coffee Day (popularly
referred to as CCD), as of June 30, 2015.
In terms of the number of chained caf outlets, CDEL had a market share of
approximately 46% in India, with its caf footprint being nearly four times larger than the
cumulative footprint of the next four competitors. CDELs brand Caf Coffee Day ranked
second in the Most Trusted Brands in the food service retail category in India, and was one of the
only four indigenous Indian brands to be recognized as the Most Exciting Indian Brand in India
in 2014.
The company is engaged in coffee business through its subsidiary, Coffee Day Global
Limited (earlier known as Amalgamated Bean Coffee Trading Company Limited). It is also
engaged in coffee trading through CDEL and Coffee Day Trading Limited. In addition to having
the largest chain of cafs in India, it operates a highly optimized and vertically integrated coffee
business which ranges from procuring, processing and roasting of coffee beans to retailing of
coffee products across various formats.
In addition to the coffee business, CDEL operates other select businesses that are aimed
at leveraging Indias growth potential, namely, development of IT- ITES technology parks,
logistics, financial services, hospitality and ITITES through its subsidiaries.
CDEL mulls expansion of its outlets and Kiosks, manufacturing and assembling of
vending machines refurbishing of existing outlets and vending machines and setting up of a new
coffee roasting plant. It has also planned prepayment/repayment of debts and raise corpus fund.
To part finance this objectives, the company is coming out with its maiden IPO of 3.64 crore to
3.51 crore equity shares of Rs. 10 each (based on lower and upper price band) with a price band
of Rs. Rs. 316-328. Out of the total issue, shares worth Rs. 15 crore are reserved for eligible
employees. Company hopes to mobilize Rs. 1150 crore. Issue opens for sub subscription on
Page | 43

14.10.15 and will close on 16.10.15. Minimum application is to be made for 45 shares and in
multiples thereon, thereafter. Post allotment, shares will be listed on BSE/NSE. Issue is lead
managed by Kotak Mahindra Capital Co. Ltd., Citigroup Global Markets India Pvt Ltd, Morgan
Stanley India Co. Pvt Ltd, Axis Capital Ltd, Edelweiss Financial Services Ltd and Yes Bank Ltd.
Link Intime India Pvt Ltd is the registrar to the issue.
On performance front, the company has (on consolidated basis) posted an average
negative EPS of Rs. 6.29 for last three fiscals. For first three months of current fiscal it has
reported negative EPS of Rs. 1.72 (on basic as well as diluted basis). Its RONW for the said
periods are at negative 13.36 and 4.39 respectively. For FY 2015 it posted net loss of Rs. 159.47
crore on a turnover of Rs. 2548.72 crore. For Q1 of current fiscal it has reported net loss of Rs.
40.36 crore on a turnover of Rs. 634.97 crore. Based on this, the issue pricing is greedy. After
issue of initial equity at par, it has issued shares in a price range of Rs. 1768.00 to Rs. 2900 per
share during 2010 - 2015 and has issued bonus shares in the ratio of 7 shares for every 1 share
held in May 2015 and done conversion of CCDs in to shares in September 2015. Its current paid
up equity capital of Rs. 170.94 crore will stand enhanced to around Rs. 207 crore post IPO. Out
of IPO proceeds Rs. 635 crore will go for reducing debt of the holding company and the rest for
expansion and other funding needs.
According to management, its prime coffee business brings around 60 per cent revenue
and the rest from other activities. Its coffee business has shown 16% CAGR for last five years
and hopes to improve upon it with more outlets in years to come. Due to heavy expenditures in
increasing outlets, higher depreciation and initial break-even periods have caused negative
earnings so far. Turnaround will take few more years. All these along with its branding are well
discounted in asking price. CDEL mulls opening of 135 stores every year.
Teams of lead managers have mixed track records for its past mandates.

Page | 44

BIBLIOGRAPHY
1. Business Standard Article Dated: November 02, 2015.
(Link- http://www.business-standard.com/article/markets/coffee-day-enterprisesshares-close-18-lower-than-ipo-price-115110200212_1.html)
2. Economic Times Article Dated: October 22, 2015.
(Link- http://economictimes.indiatimes.com/markets/ipos/fpos/coffee-day-nets-rs1150-cr-from-ipo-price-fixed-at-rs-328/articleshow/49492734.cms)
3. http://www.chittorgarh.com/ipo/cafe_coffee_day_ipo/507/
4. http://www.nseindia.com/products/content/equities/ipos/ipo_current_ccd.htm
5. http://forbesindia.com/article/checkin/cafe-coffee-day-parents-ipo-oversubscribedbut-not-enough/41379/1
6. www.wikipedia.org
7. Caf Coffee Day Prospectus.

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