IPO | Initial Public Offer

What is an Initial Public Offer?

IPO (Initial Public Offer) is basically the mechanism to list a Company's securities on recognised stock exchanges to be purchased and traded by public at large. It a mechanism whereby a privately owned firm becomes a publicly-traded company by first offering its shares to the public. A private company, which has a handful of shareholders, owns the property by trading the owns publicly. The company gets its name listed on the stock exchange through the IPO.

How does a company Launch an IPO?

A company hires an investment bank to handle the IPO until it becomes public. In the underwriting arrangement, the investment bank and the company are working out the financial specifics of the IPO. Afterwards, they file the statement of registration with SEC along with the underwriting agreement. SEC scrutinizes the published details and requires a date to be reported to the IPO if considered right.

PRerequisites of an IPO

The issuer has to fulfill all the conditions of any 1 of the following routes to make IPO:

ROUTE 1 (PROFITABILITY ROUTE)

(a) The issuer has net tangible assets of at least 3 crore rupees in each of the preceding 3 full years (of twelve months each), of which not more than 50% are held in monetary assets. However, the limit of fifty percent on monetary assets shall not be applicable in case the public offer is made entirely through an offer for sale.

(b) Includes a total average operating profit before tax of 15 crore rupees, calculated on a restated and consolidated basis, for the 3 most profitable years of the 5 years immediately preceding.

(c) It has a net worth of at least 1 crore rupees in each of the preceding 3 full years (of twelve months each)

(d) The aggregate of the proposed issue and all previous issues made in the same financial year in terms of issue size does not exceed 5 times its pre-issue Net worth as per the preceding financial year's audited balance sheet;

(e) If it has changed its name within the last 1 year, at least fifty percent. of the revenue for the preceding one full year has been earned by it from the activity indicated by the new name.

ROUTE 2 (ALTERNATIVE ROUTE OR QIB ROUTE)

I  (a) IPO is made through 100% book building Process + at least 50% of the net offer to the public (NOTP) shall be given to QIBs

OR

   (b) At least 15% of issue size shall be given to bank/FIs. Provided further that 10% out of  15% shall be given to appraiser + at least 10% of           issue size shall be given to QIBs

II (a) Post issue size face value less than or equal to 10 crore of capital

                                                                                                     OR

    (b) the issuer undertakes to provide market-making for at least two years from the date of listing of the specified securities, subject to the following:

➲ Market makers promise to buy and sell quotes of at least three hundred listed securities and ensure that the bid-ask spread for their quotes does not exceed ten percent at any time.

➲ The inventory of the market makers shall be at least five percent as at the date of allocation of the specified securities. Of the problem which was raised.

III. The minimum allottee should be 1000.

PROCESS OF IPO

(A) Appointment Of investment Banker.

All banks, public or private have an investment division which takes care of the IPO process

(B) Registration  forms to SEBI

 Every IPO has to mandatorily register with SEBI and once it gets the approval, the IPO is ready to get listed on the exchanges.

(C) Red Herring prospectus

The Red Herring Prospectus is a document which contains all the information about the IPO - the size of the IPO, financial statements, company history and the future plan of the company.

(D) ADVERTISING

Advertising includes everything from putting up hoardings to giving interviews to news channels and magazines. Basically, the more your company is talked about and known, the more demand it will attract from the investors, which in turn will help in a better listing price on the exchanges. 

(E) PRICE BAND SET BY INVESTMENT BANKER

The investment bank goes through all the financial statements of the company and sets a price band for prospective investors to bid within the price band. 

Appointment of Merchant Banker and his role in issue management

1. The issuer shall nominate one or more merchant bankers, at least one of whom shall be a lead merchant banker, and shall appoint other intermediaries to fulfill the obligations relating to the issue in consultation with the lead merchant banker.
2. The lead merchant bankers shall submit the following to the Board along with the draft offer document:

(i) a copy of the agreement entered into between the issuer and the lead merchant bankers;

(ii) a copy of inter-se allocation of responsibilities of each merchant banker, in case the issue is managed by more than one merchant banker;

(ii) a due diligence certificate as per Form A of Schedule VI;

(iv) in case of an issue of convertible debt instruments, a due diligence certificate from the debenture trustee as per Form B of Schedule VI;

(v) a certificate in the format specified in Part D of Schedule VII, confirming compliance of the conditions mentioned therein

1. After the Board has given observations or after the expiry of the time provided for in sub-regulation (2) of Regulation 6 (SBI ICDR Regulation), the lead merchant bankers shall send the following documents to the Board if the Board has not commented:

(A) a declaration certifying that all the amendments, recommendations and findings made by the Board have been integrated into the offer document;

(B) a certificate of due diligence as provided for in Form C of Schedule VI at the time of registration with the Prospectus Registrar of Companies;

(c) a copy of the resolution passed by the issuer's board of directors for the issuance of specified securities to promoters in respect of amounts obtained against the contribution of promoters, before the issue is opened;

(d) a certificate from a Chartered Accountant, before the opening of the issue, certifying that promoters’ contribution has been received in accordance with these regulations, accompanying therewith the names and addresses of the promoters who have contributed to the promoters’ contribution and the amount paid by each of them towards such contribution;

(e) a due diligence certificate as per Form D of Schedule VI, immediately before the opening of the issue, certifying that necessary corrective action, if any, has been taken;

(f) a due diligence certificate as per Form E of Schedule VI, after the issue, has opened but before it closes for the subscription.

1. The issuer shall, at the time of filing a draft offer document with the recognized stock exchange where the specified securities are proposed to be listed, submit the Permanent Account Number, bank account number and passport number of its promoters to such stock exchange.

Benefits & Diadvantages

ADVANTAGES:

1. Way to raise capital from public

2. Increase Liquidity

3. Increase Credibility

4. Helps in Merger & Acquisition

5. Enhance Goodwill & reputation

Disadvantages

1. Listing subject to many risks since the market is volatile

2. Brokerage commission decreases profit margin

3. Time Taking process

Minimum Subscription

a. Not less than ninety percent of the minimum subscription to be earned in issue

b. In the event of non-receipt of the minimum subscription referred to in sub-regulation (1), all applications received shall be reimbursed to the applicants without delay, but no later than:

i. fifteen days after the issue has been resolved, in the case of an unwritten issue; and

ii. Sixty days after the issue has been closed, in the case of an underwritten issue where the full fee including the devolving obligations paid by the underwriters is not provided within sixty days of the issue being closed.

c. The Offer Document shall include sufficient information concerning minimum subscription as set out in Schedule VIII, Part A.

Promoters contribution

The issuer's promoters shall invest in the public issue as follows:

1. Not less than twenty percent in the case of an initial public offer. Of the capital for post-issue;
2. Or to the twenty percent, in the case of a further public offer. Of the size of the proposed issue or to twenty percent. Of the Capital post-issue;
3. Either to twenty percent in the case of a composite issue. Of the size of the proposed issue or to twenty percent of post-issue capital excluding component of the rights issue;

Book building Process:

Book building is the mechanism by which an underwriter attempts to determine the price at which an initial public offering (IPO) is being offered. An underwriter, usually an investment firm, produces a book by inviting institutional investors (fund managers et al.) to request offers for the number of shares and the price(s) they will be prepared to pay for them.

Advantages of the book-building process

1. An efficient way to price the IPO
2. The share price is determined by investors 'aggregate demand and not by the fixed price set by the management of the company