INTRODUCTION An initial public offer, as the name indicates, is the first (initial) instance of a company (called the issuer)

offering its commons stock (or shares) to the general public for subscription. It is a common misconception that only newly formed companies resort to raising money through an IPO. Even long established private companies can access the IPO route to raise capital, and become publicly traded companies as a result. An IPO is considered as a rite of passage into the big league of publicly traded stocks. Any company that needs to be listed on a stock exchange has to offer its shares to the public. In addition to IPO, an already listed and publicly traded company may issue an FPO a Follow on Public Offer to raise further capital for the company. At any given time, there are a number of IPO and FPO issues floating around in the market, therefore, it is essential to understand the difference between the two. Shares issued in an IPO are bought in the primary market, while shares brought from another investor are exchanged in the secondary market. The distinct between primary and secondary market is notional, there is no physical separation between the two. An important distinction between shares purchased during an IPO and shares purchased from the secondary market is that while in case of an IPO, the money goes directly into the company coffers; in case of secondary market, the money is transferred from one investor to another. IPO Lifecycle Stages The issuance of an IPO is a process with distinctive stages. the life cycle of an IPO can be understood to be spread over these steps or stages. The various stages in the life cycle of an Initial Public Offering are as follows

Initialization In this stage, the company appoints various entities that are crucial in the management of the IPO. these entities include the issue managers or book runners (mostly investment banks) and registrars to the issue.

Pre Issue Activities In this stage, the draft offer prospectus is prepared and submitted to SEBI. The lead manager may conduct road showswhich are basically marketing activities- to generate awareness about the issue.
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Prospectus Review SEBI reviews the prospectus submitted to it, and any changes and revisions suggested by SEBI are incorporated at this stage. Once the draft is approved by SEBI, it is termed as the Offer Prospectus

Submit Prospectus to Stock Exchange The offer prospectus is now submitted to relevant stock exchange for approval. When the date of issue and the price band (and not the exact price) is decided and incorporated into the offer prospectus, it becomes the Red Herring Prospectus.

Distribution of Red Herring Prospectus and IPO Forms The prospectus and the forms are distributed to retail investors through the syndicate members.

Public Issue In this stage, the issue is thrown open to the public and the bids are collected. The public issue closes at a predetermined date. This stage can be considered to be the public face of the IPO.

Price Fixing Once all the bids are collected, the lead managers decide the final issue price, and inform the stock exchange and SEBI.

Processing of IPO Applications by Registrar This is the clerical stage, wherein the forms are collected, checks are processed, share allotment is completed, shares are transferred to the demat accounts and any excess money is refunded.

Listing in the Stock Exchange Once the date of listing is decided, the shares of the issuer company are listed on the stock exchange.

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Primary and Secondary markets In the primary market securities are issued to the public and the proceeds go to the issuing company. Secondary market is term used for stock exchanges, where stocks are bought and sold after they are issued to the public. PRIMARY MARKET The first time that a companys shares are issued to the public, it is by a process called the initial public offering (IPO). In an IPO the company offloads a certain percentage of its total shares to the public at a certain price. Most IPOS these days do not have a fixed offer price. Instead they follow a method called BOOK BUILDIN PROCESS, where the offer price is placed in a band or a range with the highest and the lowest value (refer to the newspaper clipping on the page). The public 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 involves the offering of part ownership of the company to the public through the sale of debt or more commonly, equity securities (stock). Going public raises cash and usually a lot of it. Being publicly traded also opens many financial doors:
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 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. Being on a major stock exchange carries a considerable amount of prestige. In the past, only private companies with strong fundamentals could qualify for an IPO and it wasn't easy to get listed. The internet boom changed all this. Firms no longer needed strong financials and a solid history to go public. Instead, IPOs were done by smaller start-ups seeking to expand their businesses. There's nothing wrong with wanting to expand, but most of these firms had never made a profit and didn't plan on being profitable any time soon. Founded on venture capital funding, they spent like Texans trying to generate enough excitement to make it to the market before burning through all their cash. In cases like this, companies might be suspected of doing an IPO just to make the founders rich. This is known as an exit strategy, implying that there's no desire to stick around and create value for shareholders. The IPO then becomes the end of the road rather than the beginning. How can this happen? Remember: an IPO is just selling stock. It's all about the sales job. If you can convince people to buy stock in your company, you can raise a lot of money.

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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 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.

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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.

IPO ADVANTAGES AND DISADVANTAGES

The decision to take a company public in the form of an initial public offering (IPO) should not be considered lightly. There are several advantages and disadvantages to being a public company, which should thoroughly be considered. This memorandum will discuss the advantages and disadvantages of conducting an IPO and will briefly discuss the steps to be taken to register an offering for sale to the public. The purpose of this memorandum is to provide a thumbnail sketch of the process. The reader should understand that the process is very time consuming and complicated and companies should undertake this process only after serious consideration of the advantages and disadvantages and discussions with qualified advisors.

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Advantages of going public Increased Capital A public offering will allow a company to raise capital to use for various corporate purposes such as working capital, acquisitions, research and development, marketing, and expanding plant and equipment. Liquidity Once shares of a company are traded on a public exchange, those shares have a market value and can be resold. This allows a company to attract and retain employees by offering stock incentive packages to those employees. Moreover, it also provides investors in the company the option to trade their shares thus enhancing investor confidence. Increased Prestige Public companies often are better known and more visible than private companies, this enables them to obtain a larger market for their goods or services. Public companies are able to have access to larger pools of capital as well as different types of capital. 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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Disadvantages of going Public Time and Expense Conducting an IPO is time consuming and expensive. A successful IPO can take up to a year or more to complete and a company can expect to spend several hundreds of thousands of dollars on attorneys, accountants, and printers. In addition, the underwriter's fees can range from 3% to 10% of the value of the offering. Due to the time and expense of preparation of the IPO, many companies simply cannot afford the time or spare the expense of preparing the IPO.

Disclosure The SEC disclosure rules are very extensive. Once a company is a reporting company it must provide information regarding compensation of senior management, transactions with parties related to the company, conflicts of interest, competitive positions, how the company intends to develop future products, material contracts, and lawsuits. In addition, once the offering statement is effective, a company will be required to make financial disclosures required by the Securities and Exchange Act of 1934. The 1934 Act requires public companies to file quarterly statements containing unaudited financial statements and audited financial statements annually. These statements must also contain updated information regarding nonfinancial matters similar to information provided in the initial registration statement. This usually entails retaining lawyers and auditors to prepare these quarterly and annual statements. In addition, a company must report certain material events as they arise. This information is available to investors, employees, and competitors.

Decisions based upon Stock Price Management's decisions may be effected by the market price of the shares and the feeling that they must get market recognition for the company's stock. Regulatory Review
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The Company will be open to review by the SEC to ensure that the company is making the appropriate filings with all relevant disclosures. Falling Stock Price If the shares of the company's stock fall, the company may lose market confidence, decreased valuation of the company may effect lines of credits, secondary offering pricing, the company's ability to maintain employees, and the personal wealth of insiders and investors. Vulnerability If a large portion of the company's shares are sold to the public, the company may become a target for a takeover, causing insiders to lose control. A takeover bid may be the result of shareholders being upset with management or corporate raiders looking for an opportunity. Defending a hostile bid can be both expensive and time consuming. Once a company has weighed the advantages and disadvantages of being a public company, if it decides that it would like to conduct an IPO it will have to retain a lead

Understanding the role of intermediaries

Who are the intermediaries in an issue? Merchant Bankers to the issue or Book Running Lead Managers (BRLM), syndicate members, Registrars to the issue, Bankers to the issue, Auditors of the company, Underwriters to the issue, Solicitors, etc. are the intermediaries to an issue. The issuer discloses the addresses, telephone/fax numbers and email addresses of these intermediaries. In addition to this, the issuer also discloses the details of the compliance officer appointed by the company for the purpose of the issue.

Who is eligible to be a BRLM?

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A Merchant banker possessing a valid SEBI registration in accordance with the SEBI (Merchant Bankers) Regulations, 1992 is eligible to act as a Book Running Lead Manager to an issue.

What is the role of a Lead Manager? (pre and post issue) In the pre-issue process, the Lead Manager (LM) takes up the due diligence of companys operations/ management/ business plans/ legal etc. Other activities of the LM include drafting and design of Offer documents, Prospectus, statutory advertisements and memorandum containing salient features of the Prospectus. The BRLMs shall ensure compliance with stipulated requirements and completion of prescribed formalities with the Stock Exchanges, RoC and SEBI including finalization of Prospectus and RoC filing. Appointment of other intermediaries viz., Registrar(s), Printers, Advertising Agency and Bankers to the Offer is also included in the pre-issue processes. The LM also draws up the various marketing strategies for the issue. The post issue activities including management of escrow accounts, co-ordinate non-institutional allocation, intimation of allocation and dispatch of refunds to bidders etc are performed by the LM. The post Offer activities for the Offer will involve essential follow-up steps, which include the finalization of trading and dealing of instruments and dispatch of certificates and demat of delivery of shares, with the various agencies connected with the work such as the Registrar(s) to the Offer and Bankers to the Offer and the bank handling refund business. The merchant banker shall be responsible for ensuring that these agencies fulfill their functions and enable it to discharge this responsibility through suitable agreements with the Company.

What is the role of a registrar? The Registrar finalizes the list of eligible allottees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of refund orders to those applicable are sent. The Lead manager co-ordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank
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branches, processing of the applications and other matters till the basis of allotment is finalized, dispatch security certificates and refund orders completed and securities listed.

What is the role of bankers to the issue? Bankers to the issue, as the name suggests, carries out all the activities of ensuring that the funds are collected and transferred to the Escrow accounts. The Lead Merchant Banker shall ensure that Bankers to the Issue are appointed in all the mandatory collection centers as specified in DIP Guidelines. The LM also ensures follow-up with bankers to the issue to get quick estimates of collection and advising the issuer about closure of the issue, based on the correct figures.

Question on Due diligence

The Lead Managers state that they have examined various documents including those relating to litigation like commercial disputes, patent disputes, disputes with collaborators etc. and other materials in connection with the finalization of the offer document pertaining to the said issue; and on the basis of such examination and the discussions with the Company, its Directors and other officers, other agencies, independent verification of the statements concerning the objects of the issue, projected profitability, price justification, etc., they state that they have ensured that they are in compliance with SEBI, the Government and any other competent authority in this behalf.

What is the Registration Process?

Going public requires a Registration Statement which is a carefully crafted document that is prepared by your attorneys and accountants. It requires detailed discussions on information pertaining to:

Business product/service/markets Company Information Risk Factors

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Proceeds Use (How are you going to use the money) Officers and Directors Related party transactions Identification of your principal shareholders Audited financials

After your registration statement is prepared, it is submitted to the Securities and Exchange Commission and various other regulatory bodies for their detailed review. When this process is completed, you and your management team will do a "road show" to present your company to the stock brokers who will then sell your stock to the public investors. Assuming they can successfully sell your issue, youll receive your money. Then it's simple, all you have to do is make a lot more money with the proceeds so as to increase the value of your, your teams and the public investors stock.

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. SEBI unearths another IPO scam in IDFC SEBI on Thursday 12th Jan 06 unearthed yet another abuse of IPO norms in the IDFC's initial public offering (IPO) where a few investors opened over 14,000 dematerialised accounts to corner large number of shares of the company. This is the second such incident, after a similar such violations were detected in the YES Bank's IPO.

IPO scam: HDFC Bank, 2 others fined

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The Reserve Bank of India on 27th Feb 2006 fined HDFC Bank, IDBI and ING Vysya Bank for violation of Know Your Customer norms and other irregularities in relation to the recent IPO scam. HDFC Bank has been slapped with the highest penalty of Rs 25 lakh; ING Vysya Bank - Rs 10 lakh and IDBI Ltd Rs 5 lakh. Measures to prevent scams An analysis of IPO scam clearly brings out the laxity on the part of banks to scrupulously implement the KYC/AML guidelines issued from time to time. It also raises serious concerns about the integrity of the systems & systemic risks. While scams may still happen despite best of preventive measures, it should not undermine the efforts being made to insulate the financial sector from money laundering. It is going to be a long fight with constant need to improve and innovate new strategies. It is important to understand that the risks banks run as a result of noncompliance with regulatory and statutory guidelines can cause severe reputational and financial damage to individual banks and the Indian banking system as a whole Need for comprehensive operational framework implementing important aspects of KYC instructions e.g. Documentation procedure for opening of all types of customer accounts; Clarity in understanding of risk classification of accounts and proper customer profiling Ongoing monitoring of medium and high risk accounts Enhanced due diligence in respect of accounts with beneficial ownership, non-face to face transactions, group companies, high risk businesses and wire transfers etc. Prompt reporting of cash and suspicious transactions to Principal Officer by branches An effective audit machinery

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 Good understanding of regulatory and statutory prescriptions in letter and spirit Clear demarcation of duties and responsibilities Violations to be dealt with sternly

CONCLUSION
When going for an IPO the company should consider the prevailing economic conditions and the market sentiments. On the other hand the customers should do a proper study while applying for shares in an IPO. Due diligence should be taken when investment is done.

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