INITIAL PUBLIC

OFFERING

Beena 06
 Companies fall into two broad
categories: Public and Private
A privately held company has fewer shareholders
and its owners don't have to disclose much
information about the company.
Public companies, on the other hand, have sold at
least a portion of themselves to the public and
trade on a stock exchange.
Public companies have thousands of shareholders
and are subject to strict rules and regulations.
What is an IPO?
An initial public offering, or IPO, is the first
sale of stock by a company to the public with an
intention to raise new capital.
Why go Public?
Access to Capital
Liquidity
Compensation
Prestige
Image
Publicity
Mergers & Acquisitions
Future Capital
Disadvantages of Going Public
Profit-sharing
Loss of Confidentiality
Reporting and Fiduciary Responsibilities
Loss of Control
IPO Expenses
Liability
Significance to the Shareholders
An easy way to make money.
The shares offered are usually priced very
low.
 The Process of Going Public
When a company wants to go public, the first thing it does
is hire an investment bank.
Once a lead underwriter has been selected, that firm will
form a team of other underwriters and brokers to assist
it in achieving a broad distribution of the stock.
The company and the investment bank will then meet to
negotiate the deal.
There are three basic types of underwriting
arrangements:
A. Best efforts
B. All or none
C. Firm commitment
Once all sides agree to a deal, the investment bank puts
together a registration statement to be filed with the
SEBI.
 The Process of Going Public

The SEBI then requires a cooling off period, in which they

investigate and make sure all material information has been
disclosed.
During the cooling off period the underwriter puts together
what is known as the Red Herring prospectus.
Once the SEBI approves the offering, a date (the effective
date) is set when the stock will be offered to the public.
As the effective date approaches, the underwriter and
company sit down and decide on the price.
Finally, the securities are sold on the stock market and the
money is collected from investors.
 Pricing of an IPO
The pricing of an IPO has a direct impact on
the success or failure of the IPO issue.
Once the final prospectus is printed and
distributed to investors, company management
meets with their investment bank to choose
the final offering price.
The pricing of an IPO is a delicate balancing
act as the investment firms try to strike a
balance between the company and investors.
 Pricing Methods
Traditional Method:
The traditional method of doing IPO’s is the ‘Fixed Price
Offering’.
Here the issuer and the investment banker agree on an
‘issue price’ say Rs 100.
Book Building Method:
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 offer price is then determined after the bid closing
date based on certain evaluation criteria.
 Book Building 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.
 Book Building Process
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 and the company conclude the
final price at which it is willing to issue the
stock and allocation of securities.
Allocation of securities is made to the
successful bidders.
FEATURES TRADITIONAL BOOK BUILDING
METHOD METHOD
Pricing Price at which the share is Price at which the share
offered or allotted is will be offered or allotted
known in advance to the is not known in advance to
investor. the investor. Only an
indicative price range is
known.
Reservations 50 % of the shares 50 % of shares offered
offered are reserved for are reserved for QIBS,
applications below Rs. 1 35 % for small investors
lakh and the balance for and the balance for all
higher amount other investors.
applications.
Payment 100 % advance payment is 10 % advance payment is
required to be made by required to be made by
the investors at the time the QIBs while other
of application. categories of investors
have to pay 100 %
Demand Demand for the shares Demand for the securities
offered is known only offered can be known
after the closure of the everyday as the book is
issue. built.
 IPO Pricing Differences
Underpricing:
The pricing of an IPO at less than its market value is
referred to as Underpricing.
Underpriced IPO helps to generate additional
interest in the stock when it first becomes publicly
traded.
It also results in loss of significant amount of capital.
Overpricing:
The pricing of an IPO at more than its market value is
referred to as overpricing.
In such a situation the underwriters may have trouble
meeting their commitments to sell shares.
 The Risk Factor
The risk factor can be attributed to the
following reasons:
Unpredictable
No past track record of the company
Potential of stock market
There are three kinds of risk involved in
investing in IPO:
Business Risk
Financial Risk
Market Risk
 Risk Assessment
Here are some points that should be evaluated when
looking at a new issue:
1. Why has the company elected to go public?
2. What will the company be doing with the money raised
in the IPO?
3. What is the competitive landscape in the market for
the business's products or services?
4. What are the company's growth prospects?
5. What level of profitability does the company expect
to achieve?
6. What is the management like? Do the people involved
have previous experience running a publicly-traded
company? Does management itself own any shares in
the business?
7. What is the business's operating history, if any?
8. Who are the Promoters ? What is their credibility
and track record ?
 IPO Grading
IPO grade is supposed to be a measure of the
strength of the fundamentals of a company.
SEBI introduced this grading system to protect
interests of marginal investors.
SEBI made grading compulsory for all IPO’s
from April 2007.
SEBI has four credit rating agencies registered
with it- CARE, CRISIL, ICRA Ltd and Fitch
Ratings.
These agencies employ different techniques and
look at different parameters to grade IPOs.
 IPO Grading
Salient Features of SEBI GRADE ASSESSMENT
decision:
IPO grading has to be
carried out by a 5 Strong
recognized credit rating
agency. Fundamentals
The issuing company is 4 Above Average
free to choose a rating Fundamentals
agency to grade its IPO.
3 Average
A 5 point scale will be
used for the grading, with Fundamentals
1 being the lowest grade 2 Below Average
and 5 the highest.
The grading will not take Fundamentals
the price into 1 Poor Fundamentals
consideration.
 IPO Grading
Advantages
IPO grading has been made
compulsory to encourage
only serious companies.
It helps SEBI regulate the
IPO market by helping it
protect investors from
vanishing companies.
It helps investors establish
the credentials of the
company they plan to invest
in.
Disadvantages
The pricing of any IPO is
what influences the
decision of any investor.
IPO grading does not
focus on the price of the
issue.
Investors may get deluded
by a low graded IPO which
could become a ‘missed
opportunity’ in the future.
 Here are a few things you should know
The Lock-Up Period
Lock-up agreements are legally binding contracts
between the underwriters and insiders of the company,
prohibiting them from selling any shares of stock for a
specified period of time. The period can range
anywhere from three to 24 months.
Flipping 
Flipping is reselling a hot IPO stock in the first few
days to earn a quick profit. This isn't easy to do, and
you'll be strongly discouraged by your brokers. There
are no laws that prevent flipping, but your broker may
blacklist you from future offerings.
Here are a few things you should know
Direct Public Offering (DPO)
When a company raises capital by marketing its shares
directly to its own customers, employees, suppliers,
distributors and friends in the community. Direct public
offerings are considerably less expensive than
traditional underwritten offerings.

Follow On Public Offer (FPO)

An issuing of shares to investors by a public company
that is already listed on an exchange. FPOs are popular
methods for companies to raise additional equity capital
in the capital markets through a stock issue.
Let's review the basics of an IPO:
An IPO is the first sale of stock by a company to the
public.
Broadly speaking, companies are either private or
public. Going public means a company is switching from
private ownership to public ownership.
Going public raises cash and provides many benefits
for a company.
Getting in on a hot IPO is very difficult, if not
impossible.
The process of underwriting involves raising money
from investors by issuing new securities.
Companies hire investment banks to underwrite an
IPO.
 Let's review the basics of an IPO:
The road to an IPO consists mainly of putting
together the formal documents for SEBI and selling
the issue to institutional clients.
The only way for you to get shares in an IPO is to
have a frequently traded account with one of the
investment banks in the underwriting syndicate.
An IPO company is difficult to analyze because there
isn't a lot of historical info.
Lock-up periods prevent insiders from selling their
shares for a certain period of time. The end of the
lockup period can put strong downward pressure on a
stock.
Flipping may get you blacklisted from future
offerings.
Red Herrings are marketing events meant to get as
much attention as possible.
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