INITIAL PUBLIC OFFER.

Sea World - Dolphin dance

Sea world Dolphin dance

Initial Public Offer.- Types of public issues.

Initial Public Offers. Public Issue. Offer for Sale.

Follow on Public Offers

Public Issue. Offer for Sale. Composite Issue. Right Issue.

Depository Receipt Issue. *Public Issue. *Sponsored Issue.

Going Public
WHETHER IPO DECISION IS PURELY MARKET DRIVEN?

company when its unlisted offers ownership opportunity to the outside investor. Termed it as PRIVATE WINDOW.
What is difference between Promoters, Strategic Investors and Financial Investors? What is the difference between Private Window & Market Window? Market worth of a company is dynamic and may not have relevance with fundamentals.

Going Public
Promoters prime concern is controlling interest in the company.

Strategic Investor has business interest in the company & is ready to pay an entry premium on long term consideration.
Financial Investor looks at the return on investment. Private Investor look for exit route different from Retail Investor.

Market Window unlike Private Window provides entry and exit routes to investors (known as secondary offers in USA).
Pvt. Window is not market driven though has some influence in consideration.

Market window which is market driven also performs validation of companys worth on a continuous basis through stock exchange route.
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Exit route for Pvt. Investor.

Private Investor look for exit route different from Retail Investor. Strategic Sale to another private investor/s. Buy back by promoters.

Merger with or Take Over by another company.

Sometime Private Investors look forward for exit route through market window by Offer for Sale of their shares to retail investors. Financial Investor also has choice either through Pvt. Window or Market Window channel.
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Going Public-Strategic Dimension

When is it ripe to open Market Window for the company? The IPO is strategic, financial and Investment Banking decision. The Strategic Dimension: The Co. may remain private if its business model allows and there are no compelling reason to go public. E.g. Maruti Udyog was one of largest privately held co with sale of Rs.92.71billion.went for public I 2003. Others like Tata Sons; TCS; Nirma Consumer Care (Sale Rs.1840cr) ; Hero Cycles(Sale Rs.934cr); Cadila Pharma(Sale Rs.420Cr) etc. Also several M N Cs like LG; Samsung; Ford India; Honda Siel etc. Whether the company is matured for listing? Timing an IPO is strategic decision mutually determined by promoters and the investment banker.

Therefore whether to go public or not is primarily a corporate philosophy.

Going Public-Strategic Dimension

A source of finance for specific objectives. Creates new ownership opportunity for retail investors. Its liquidity event since creates an exit route for existing & future investors. Creates market capitalization for the company. Generates wealth for Promoters; Share holders and other stake holders. Once company is listed, its comparatively easy to draw cheaper global finance for expansion /diversification of production capacity. The listed company has better visibility & corporate image. Market analyst & investors attach more credibility to well performed Co. They have market validation and regulatory scrutiny besides corporate governance hence better valuations & human resources.

Going public- Strategic Dimension.

IPO opens up the large retail window with immense potential for fund raising if company performs up to the market expectation. Strategically the company should go for an IPO when it is matured enough for it. Depends on following: Does company need the IPO as liquidity event for the existing investors? Is there an option for private exit route to postpone the IPO route? Whether the company is matured to unlock the value? Is companys business model retail-oriented with strong brand presence to identify with retail investors? Whether visibility of the company is sufficient in the market for investors to perceive the value for investment to unlock the value for the share holders?

Whether company is confident of strong top line & bottom line growth to sustain market expectations?

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I P O Financial Dimension
For some industry going public is no choice option. The capital intensive industry i.e. cement; steel; shipping; power and power transmission; heavy engineering etc. For balance capital structure going for IPO is essential. They may need multiple round of public issue for growth and consolidation. Here IPO and Offer for sale is more a financial decision rather strategic. Unlocking value through an IPO is financial decision. But how to generate more value is strategic decision. Company can look to raise funds through strategic sale of equity through private window that realises better value rather an IPO as private valuation offer significantly higher valuation than in the retail market. Third aspect of financial dimension is to properly evaluate how much capital should be ideally raised through IPO and how it should be optimally deployed.
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IPO Financial Demension.

IPO with well laid down investment plans and convincing application of funds sell better. Sometime requirement of funds through IPO is pretty large without causing dilution of promoters stake. The issue structure in such cases is determined in consultation with the MB and down size the issue if necessary and raise funds through alternate route.

Threats: Listed co. face threat of hostile take over. Future acquisition of stake by promoters become costlier. Brings additional cost of Issue exp; regulatory compliances etc.

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I P O Investment Banking Dimension

Merchant Banker takes a call on the IPO proposal based on the business plan and financial position of the company, expected future performance, prevailing market condition, expected issue pricing. Size of the issue and the post issue capita structure. The key drive for the MB is the market condition and his own placement strength. If post issue involves high dilution of promoters stake, may not receive well by the market. If promoter is also enhancing his stake at offer price creates a confidence. If DFI also contributes to the issue on firm allotment basis as project appraiser, creates confidence in the market.

The important factors are:

i; Credibility of the apprising institute; ii; Institutional investment in the IPO; iii; Rating/gradation of the IPO. iv; The impact of the past issue.
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Agenda
Fund Raising Options

Fund Raising History India

Why IPO? Eligibility Criteria under SEBI DIP and BSE Regulations Minimum Public Shareholding

Minimum Promoters Contribution and Lock-in

Pricing Issue Structure Book Building Corporate Governance Requirements

Disclosures in the Offer Document

Special Dispensation to PSUs Intermediaries involved and their Roles Process and Timeline
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Options for Raising Funds

Fund Raising Options
Debt
From Banks & FIs

Equity
IPO FPO

Hybrid
Various forms of Convertibles

In India

Public issue of Bonds/Debentures

Rights Issue Pref. Issue

outside India

ECB

ADR/GDR

FCCB & FCEB

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Fund Raising History India

Capital Market Issues 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0
Total Funds Raised Rs. 18,812 cr

FY-2004

Rs. 24,707 cr

FY-2005 IPO

Rs. 27,477 cr

FY-2006 Rights Issue

Rs. 32,950 cr

FY-2007 QIP

Rs. 104,937 cr

FY-2008

FPO

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Why IPO??
For Funding Needs Funding Capital Requirements for Organic Growth Expansion through Greenfield or Brownfield or De-bottle Necking Projects Diversification Funding Inorganic Growth through Acquisitions Funding Global Requirements Funding Joint Venture and Collaborations needs Funding Infrastructure Requirements, Marketing Initiatives and Distribution Channels Financing Working Capital Requirements Funding General Corporate Purposes Investing in businesses through other companies Repaying debt to strengthen the Balance Sheet Meeting Issue Expenses
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Why IPO??

For Non-funding Needs Enhancing Corporate Stature Retention and incentive for Employees through stock options Providing Investors exit options Provide liquidity to the shareholders

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IPO Requirements

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Eligibility Criteria for Unlisted Companies - SEBI

Exemptions A banking company including a local area bank set up under the Banking Regulation Act, 1949 A corresponding new bank set up under the Banking Companies Act, 1970

Primary Criteria

Companies with track record

Track record of distributable profits for 3 out of the immediately preceding 5 years Pre-issue net worth of not less than Rs. 1 Crore in each of the preceding 3 full years Net tangible assets of atleast Rs. 3 Crores for each of the preceding 3 full years Not more than 50% of these to be held in the form of monetary assets (Proposed IPO + Previous Issues in the same financial year) < 5 times the pre-issue net worth In case the company has changed its name within the last one year, atleast 50% of the revenue for the preceding 1 full year is earned by the company from the activity suggested by the new name Prospective allottees in the IPO should not be less than 1000 in number

Companies without track record

50% of the net offer to public being allotted to QIBs Minimum postissue face value capital + must be Rs. 10 Crores OR Compulsory market making for at least 2 years from the date of listing of shares
Choice of Route: Book Building
In case of project funding, 15% participation by Financial Institutions / Scheduled Commercial Banks 10% of this must come from appraiser 10% of issue size to be allotted to QIBs

An infrastructure company:
Whose project has been appraised by a public financial institution (PFI) Not less then 5% of the project cost is financed by any of the PFI Rights issue by a listed company

Minimum postissue face value capital must be Rs. 10 Crores OR Compulsory market making for at least 2 years from the date of listing of shares Choice of Route: Fixed Price or Book Building
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Choice of Route: Fixed Price or Book Building

Eligibility Criteria For IPO Stock Exchange (BSE)

BSE Eligibility Criteria

Large Companies The minimum post-issue paid-up capital of the applicant company (hereinafter referred to as "the Company") shall be Rs. 3 crore; and The minimum issue size shall be Rs. 10 crore; and The minimum market capitalization of the Company shall be Rs. 25 crore (market capitalization shall be calculated by multiplying the postissue paid-up number of equity shares with the issue price).

Small Companies
The minimum post-issue paid-up capital of the applicant company (hereinafter referred to as "the Company") shall be Rs. 3 crore; and The minimum issue size shall be Rs. 3 crore; and The minimum market capitalization of the Company shall be Rs. 5 crore (market capitalization shall be calculated by multiplying the post-issue paid-up number of equity shares with the issue price). The minimum income/turnover of the Company shall be Rs. 3 crore in each of the preceding three 12 months period; and The minimum number of public shareholders after the issue shall be 1000 A due diligence study may be conducted by an independent team of CAs or Merchant Bankers appointed by BSE.

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Promoter includes:

The person or persons who are in over-all control of the company; The person or persons who are instrumental in the formulation of a plan or programme pursuant to which the securities are offered to the public; The persons or persons named in the prospectus as promoters(s). Promoter Group Defined under clause 6.8.3.2 of SEBI DIP Public Implies all investors other than Promoter and Promoter Group In case of PSUs, the Promoter is Government of India (represented by President of India). SEBI has granted exemption on issue structure from Rule 19(2)(b) on case to case basis

Minimum Public Shareholding

Clause 40A of the Listing Agreement At least 25% of the post issue paid up capital with the public (ie. other than promoter and promoter group) Exceptions under Rule 19(2)(b) of SCRR As per rule 19(2)(b), a minimum of 25% of each class of security must be offered to the public for subscription However, at least 10% can be offered if the following 3 conditions are fulfilled: Minimum 2 MM securities (excluding reservations, firm allotment & promoter contribution) to be offered to the public Minimum offer size Rs. 100 crores Issuance through book building with 60% QIB allocation Continuous fulfillment of minimum shareholding criteria Continuous public shareholding needs to be maintained as per Clause 40A of the listing agreement since listing Exemption The aforesaid requirement of maintaining minimum level of public shareholding on a continuous basis will not be applicable to government companies (as defined under Section 617 of the Companies Act, 1956), infrastructure companies (as defined under clause 1.2.1(xv) of the SEBI (DIP) Guidelines, 2000) and companies referred to the Board for Industrial and Financial Reconstruction.

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Government Cos & Infrastructure Cos

Section 617 of the Companies Act, 1956

Government company, means any company in which not less than fifty Government Companies one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary of a Government company as thus defined.

Clause 1.2.1(xv) of the SEBI (DIP) Guidelines, 2000

Infrastructure Companies

Infrastructure Company means, a company wholly engaged in the business of developing, maintaining and operating infrastructure facility.

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Minimum Promoters Contribution and Lock-in

Minimum of 20% of the post issue capital of the Company for unlisted companies; for listed companies, either to extent of 20% in issue or to ensure post issue holding of 20% shares are ineligible for the computation of Promoters contribution. If Issued in last one year at a price lower than issue price, unless topped up
For Promoters: Issued in last three years out of bonus issue or revaluation reserve for consideration of 3 years from the date of allotment or from the date of Lock-in for a period other than cash commencement of commercial production, whichever is later

Promoters Contribution

Lock-in period

Balance pre-issue capital, other than held by Indian and Foreign Venture Funds (registered with SEBI) and shares held for at least one year and being offered for sale in the issue Must be locked-in for a period of 1 year from the date of allotment Shares issued last will be locked-in first In case of public issue of securities by a company which has been listed on a stock exchange for at least 3 years and has a track record of dividend payment for at least 3 immediately preceding years.

Exemption

In case of companies where no identifiable promoter or promoter group exists. In case of rights issues.
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Pricing
SEBI allows free pricing of equity shares in an IPO Approval of RBI might be required for public issues by banks Differential pricing is permissible in a public issue to retail individual investors and retail individual shareholders Retail investors can be offered shares at a discount to the price offered to other investor categories (Max discount can be 10%) Price Band: The cap price can be 20% more than the floor price. Price band can be revised by 20% from the floor price. No payment of commission by the promoter or issuer company to the public If the issue price is above Rs.500 then the issuer can fix the FV of shares below Rs.10 but a minimum of Rs.1.
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Issue Structure Book Building

Dilution = 25%
Of the Net Offer to Public Maximum 50% to QIBs At least 15% to HNIs At least 35% to retail

Dilution = 10% to 25%

Of the Net Offer to Public At least 60% to QIBs Maximum 10% to HNIs Maximum 30% to retail

Net Offer to Public

Net offer to the public shall mean the offer made to Indian public and does not include reservations/ firm allotments/ promoters contribution.

Reservations
Reservations / Firm Allotment shall not be made to categories other than: Permanent employees of the issuer company and in the case of a new company the permanent employees of the promoting companies'; Shareholders of the promoting companies in the case of a new company and shareholders of group companies in the case of an existing company either on a competitive basis or on a firm allotment basis. Persons who, on the date of filing of the draft offer document with the Board, have business association, as depositors, bondholders and subscribers to services, with the issuer making an initial public offering,

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Corporate Governance Requirements

Composition of the Board

Optimum number of executive and non executive directors with at least 50% being non-executive. If the chairman, has executive powers then 50% of Board comprises of Independent directors. While if chairman has non-executive powers then 1/3 of the Board comprises of Independent directors.

Audit Committee

Mandatory constitution of Audit Committee with minimum three directors and headed by an Independent director. All members shall be financially literate (should be able to understand financial statements) and at least one member should have accounting and financial management expertise. Shareholder/Investor Grievances Committee to be formed under the chairmanship of a non executive director to look into the redressing of shareholder and investor complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends At least one director on the Board of the holding company shall be a director on the Board of a material non listed Indian subsidiary Company - Material non-listed subsidiary means a subsidiary whose turnover or net worth exceeds 20% of the consolidated turnover or net worth in the preceding accounting year Audit committee of the listed holding company shall also review the financial statements, in particular, the investments by the unlisted subsidiary Company A separate section on Corporate Governance to be included in the Annual Reports with disclosures on compliance of mandatory and non-mandatory requirements Submission of quarterly compliance report to the stock exchanges

Investor Committee

Subsidiary Company

Report on Corp. Governance

CEO/CFO Certification

CEO/CFO to certify the financial statements and cash flow statements

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Disclosures in the Offer Document

Shareholding Pattern (pre-issue and post-issue)

Capital Structure

Securities Premium Account (pre-issue and post-issue) Holding of the promoter and promoter group Disclosure about ESOPs if any Total requirements of funds Means of Financing

Objects of the Issue

Undertaking by the issuer company confirming firm arrangements of finance through verifiable means towards 75% of the stated means of finance (excluding proposed IPO) Details about the appraisal of the project. Interim use of funds etc. Description about the Industry in which the Company operates

Business

Detailed description about the business of the Company Risks related to the Company

Risk Factors

External Risk Factors

Company Management

Details about the Board of Directors and various committees Details about key management persons
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Disclosures in the Offer Document (Contd)

Auditors Report to have five year restated financials for the Issuer Company, and All Subsidiaries of the Issuer Company or Consolidated Financials of the Issuer Company Audited financials presented should not be more than six months old at the time of filing DRHP with SEBI and must be updated to be not more than six months old on the date of filing the prospectus with the ROC All financials should be presented based on Indian GAAP

Financial Disclosures

MD&A

Detailed discussion on performance for the past 3 years Capital Expenditure Cash Flow and Liquidity All pending litigations in which the Company/Promoters / Promoter Group / Directors / Group companies are involved. Both, litigations filed by or against the Company/Promoters / Promoter Group / Directors / Group companies Outstanding litigations, defaults, etc., pertaining to matters likely to affect operations and finances of the company. The pending proceedings initiated for economic offences against the directors, the promoters, companies and firms promoted by the promoters indicating their present status.
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Litigations and Defaults

Special dispensation to PSU - Precedents

Only restated Audited Financial Statements needs to be disclosed in the DRHP. However, SEBI has granted exemption on case to case basis to PSU Banks whereby, even limited review figures were disclosed in DRHP, so as to comply with the criteria of financial statements being not more than six months old.

Particulars

Remarks Government of India, represented by the President of India disclosed as promoter with no additional details No promoter group companies disclosed. However, the disclosures w.r.t Subsidiaries need to be made Clause 49 of the listing agreement

REC Yes

Disclosures PFC Power Grid Yes Yes

OIL India# Yes

Promoter

Promoter group companies

No

No

No

No

Corporate governance

Yes

Yes

Yes

Yes

Issue structure

Compliance with rule 19(2)(b) of SCRR

Yes

No*

No*

Yes

* Obtained relaxation from SEBI and issue structure is 50% to QIB, 15% to HNI and 35% Retail # Based on DRHP filed with SEBI
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Special dispensation to PSU

SEBI guidelines do not allow limited review or unaudited numbers in prospectus Limited review allowed Disclosure of promoter and promoter group

Has 2689 branches + subsidiaries in India (BOB Caps, BOB Cards, BOB AMC) + foreign subsidiaries

Bank of Baroda

Limited Review for June 2005 numbers allowed. Limited Review done for only select (around 20 branches) by auditors and rest were relied on by auditors. Limited review of foreign subsidiary for June 2005 allowed.

Need to comply with Corporate governance norms Promoters contribution and lock-in

Promoter is president of India NTPC Relaxation in disclosure of promoter and promoter group in offer document.

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Intermediaries Involved

Intermediaries Involved
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Intermediaries and their Roles

Overall Co-ordination Conduct due diligence and finalize disclosure in Offer Document Assist the legal counsel in drafting of Offer Document Interface / ensure compliance protocol with SEBI / NSE / BSE Legal Due Diligence

Lead Managers

Domestic & International Legal Counsels

Drafting the offer document

Guidance on any other incidental legal matters Assistance in complying with requirement for selling in international geographies Acting as collecting agents Escrow Account & Refund account

Bankers
Self Certified Syndicate Bank (SCSB)

Acting as collecting agents for ASBA (Application Supported by Block Amount) process

Co-ordination with the Issuer and Bankers regarding collections, reconciliation, refunds etc
Securing allocation approval from Stock Exchanges Post issue co-ordination collation and reconciliation of information

Registrars Auditors Printers Advertisers

Reviewing and auditing financials and preparing financial statements for inclusion in the Offer Document Verify/audit various financial and other data used in the Offer document and provide Comfort Letter

Bulk printing of the Red Herring Prospectus Bid Forms, final Prospectus, CAN, Refund orders etc.
Ensure timely dispatch and distribution of stationery to all centers Preparing and getting published all statutory notices Creating all advertisement materials 33

Process & Timeline

Process & Timeline

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IPO Process Fixed Price Issue

Decision to go for IPO

Funds transferred to issuer

Appointment of BRLM and legal counsel

Listing

Issuer
Due diligence Allotment

Drafting of Draft Prospectus

Issue Closure

Filing with SEBI & Stock Exchanges Preparation / Approvals

Pre-Marketing

SEBI Clearance & ROC Filing of the Prospectus

Roadshows

Issue Open Launch & Completion

Filing the Prospectus and Marketing

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IPO Process Book Built Issue

Decision to go for IPO

Funds transferred to issuer

Appointment of BRLM and legal counsel

Listing

Issuer
RoC filing of final Prospectus

Due diligence

Drafting of Draft Red Herring

Pricing & Allocation

Filing with SEBI & Stock Exchanges Preparation / Approvals

Pre-Marketing

SEBI Clearance & ROC Filing

Roadshows

Book building

Marketing and Estimation of Price Range

Launch & Completion

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Execution Process Timeline

Activity Preparation Phase Due Diligence Filing of Draft Document Sebi Observation Finalization & filing of offer Document Issue Period Post Issue Activities 2 weeks 4 - 5 weeks 1 week 4 - 8 weeks 2 - 3 weeks Min. 3 Days 2 - 3 weeks
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IPO Process - 23 weeks

Thank You

Thank You
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