What is an Initial Public Offer (IPO)?

An Initial Public Offer (IPO) is the selling of securities to the public in the primary
market. It is when an unlisted company makes either a fresh issue of securities or an
offer for sale of its existing securities or both for the first time to the public. This
paves way for listing and trading of the issuer’s securities. The sale of securities can
be either through book building or through normal public issue.
Who decides the price of an issue?
Indian primary market ushered in an era of free pricing in 1992. Following this, the
guidelines have provided that the issuer in consultation with Merchant Banker shall
decide the price. There is no price formula stipulated by SEBI. SEBI does not play
any role in price fixation. The company and merchant banker are however required
to give full disclosures of the parameters which they had considered while deciding
the issue price. There are two types of issues, one here company and Lead Merchant
Banker fix a price (called fixed price) and other, where the company and the Lead
Manager (LM) stipulate a floor price or a price band and leave it to market forces to
determine the final price (price discovery through book building process).
What does ‘price discovery through Book Building Process’
mean?
Book Building is basically a process used in IPOs for efficient price discovery. It is a
mechanism where, during the period for which 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 determined after the bid closing date. 20
What is the main difference between offer of shares through
book building and offer of shares through normal public issue?
Price at which securities will be allotted is not known in case of offer of shares
through Book Building while in case of offer of shares through normal public issue,
price is known in advance to investor. Under Book Building, investors bid for shares
at the floor price or above and after the closure of the book building process the
price is determined for allotment of shares. In case of Book Building, the demand
can be known everyday as the book is being built. But in case of the public issue the
demand is known at the close of the issue.
What is Cut-Off Price?
In a Book building issue, the issuer is required to indicate either the price band or a
floor price in the prospectus. The actual discovered issue price can e any price in the
price band or any price above the floor price. This issue rice is called “Cut-Off Price”.
The issuer and lead manager decides this after onsidering the book and the
investors’ appetite for the stock.
What is the floor price in case of book building?
Floor price is the minimum price at which bids can be made.
What is a Price Band in a book built IPO?
The prospectus may contain either the floor price for the securities or a price and
within which the investors can bid. The spread between the floor and he cap of the
price band shall not be more than 20%. In other words, it eans that the cap should
not be more than 120% of the floor pric e. Theice band can have a revision and such
a revision in the price band shall be idely disseminated by informing the stock
exchanges, by issuing a press elease and also indicating the change on the relevant
website and the erminals of the trading me mbers participating in the book building
process. case the price band is revised, the bidding period shall be extended for a
further period of three days, subject to the total bidding period not xceeding ten
days. 21
Who decides the Price Band?
It may be understood that the regulatory mechanism does not play a role in etting
the price for issues. It is up to the company to decide on the price or he price band,
in consultation with Merchant Bankers.
What is minimum number of days for which a bid should
remain open during book building?
The Book should remain open for a minimum of 3 days.
Can open outcry system be used for book building?
No. As per SEBI, only electronically linked transparent facility is allowed to be used in
case of book building.
Can the individual investor use the book building facility to
make an application?
Yes.
How does one know if shares are allotted in an IPO/offer for
sale? What is the timeframe for getting refund if shares not
allotted?
As per SEBI guidelines, the Basis of Allotment should be completed with 15 days
from the issue close date. As soon as the basis of allotment is completed, within 2
working days the details of credit to demat account / allotment advice and despatch
of refund order needs to be completed. So an investor should know in about 15 days
time from the closure of issue, whether shares are allotted to him or not.
How long does it take to get the shares listed after issue?
It would take around 3 weeks after the closure of the book built issue.
What is the role of a ‘Registrar’ to an issue?
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 coordinates with the Registrar to ensure
follow up so that that the flow of applications from collecting bank 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.
Does NSE provide any facility for IPO?
Yes. NSE’s electronic trading network spans across the country providing access to
investors in remote areas. NSE decided to offer this infrastructure for conducting
online IPOs through the Book Building process. NSE operates a fully automated
screen based bidding system called NEAT IPO that enables trading members to enter
bids directly from their offices through a sophisticated telecommunication network.
Book Building through the NSE system offers several advantages:
The NSE system offers a nation wide bidding facility in securities
It provide a fair, efficient & transparent method for collecting bids using the latest
electronic trading systems
Costs involved in the issue are far less than those in a normal IPO
The system reduces the time taken for completion of the issue process The IPO
market timings are from 10.00 a.m. to 3.00 p.m. On the last day of the IPO, the
session timings can be further extended on specific request by the Book Running
Lead Manager.
What is a Prospectus?
A large number of new companies float public issues. While a large number
of these companies are genuine, quite a few may want to exploit the
investors. Therefore, it is very important that an investor before applying for
any issue identifies future potential of a company. A part of the guidelines
issued by SEBI (Securities and Exchange Board of India) is the disclosure of
23
information to the public. This disclosure includes information like the reason
for raising the money, the way money is proposed to be spent, the return
expected on the money etc. This information is in the form of ‘Prospectus’
which also includes information regarding the size of the issue, the current
status of the company, its equity capital, its current and past performance,
the promoters, the project, cost of the project, means of financing, product
and capacity etc. It also contains lot of mandatory information regarding
underwriting and statutory compliances. This helps investors to evaluate
short term and long term prospects of the company.
What does ‘Draft Offer document’ mean?
‘Offer document’ means Prospectus in case of a public issue or offer for sale
and Letter of Offer in case of a rights issue which is filed with the Registrar
of Companies (ROC) and Stock Exchanges (SEs). An offer document covers
all the relevant information to help an investor to make his/her investment
decision.
‘Draft Offer document’ means the offer document in draft stage. The draft
offer documents are filed with SEBI, atleast 21 days prior to the filing of the
Offer Document with ROC/SEs. SEBI may specify changes, if any, in the
draft Offer Document and the issuer or the lead merchant banker shall carry
out such changes in the draft offer document before filing the Offer
Document with ROC/SEs. The Draft Offer Document is available on the SEBI
website for public comments for a period of 21 days from the filing of the
Draft Offer Document with SEBI.
What is an ‘Abridged Prospectus’?
‘Abridged Prospectus’ is a shorter version of the Prospectus and contains all
the salient features of a Prospectus. It accompanies the application form of
public issues.
Who prepares the ‘Prospectus’/‘Offer Documents’?
Generally, the public issues of companies are handled by ‘Merchant Bankers’
who are responsible for getting the project appraised, finalizing the cost of
the project, profitability estimates and for preparing of ‘Prospectus’. The
‘Prospectus’ is submitted to SEBI for its approval.
24
What does one mean by ‘Lock-in’?
‘Lock-in’ indicates a freeze on the sale of shares for a certain period of time.
SEBI guidelines have stipulated lock-in requirements on shares of promoters
mainly to ensure that the promoters or main persons, who are controlling
the company, shall continue to hold some minimum percentage in the
company after the public issue.
What is meant by ‘Listing of Securities’?
Listing means admission of securities of an issuer to trading privileges
(dealings) on a stock exchange through a formal agreement. The prime
objective of admission to dealings on the exchange is to provide liquidity
and marketability to securities, as also to provide a mechanism for effective
control and supervision of trading.
What is a ‘Listing Agreement’?
At the time of listing securities of a company on a stock exchange, the
company is required to enter into a listing agreement with the exchange.
The listing agreement specifies the terms and conditions of listing and the
disclosures that shall be made by a company on a continuous basis to the
exchange.
What does ‘Delisting of securities’ mean?
The term ‘Delisting of securities’ means permanent removal of securities of a
listed company from a stock exchange. As a consequence of delisting, the
securities of that company would no longer be traded at that stock
exchange.
What is SEBI’s Role in an Issue?
Any company making a public issue or a listed company making a rights
issue of value of more than Rs 50 lakh is required to file a draft offer
document with SEBI for its observations. The company can proceed further
on the issue only after getting observations from SEBI. The validity period of
SEBI’s observation letter is three months only i.e. the company has to open
its issue within three months period.
25
Does it mean that SEBI recommends an issue?
SEBI does not recommend any issue nor does take any responsibility either
for the financial soundness of any scheme or the project for which the issue
is proposed to be made or for the correctness of the statements made or
opinions expressed in the offer document. SEBI mainly scrutinizes the issue
for seeing that adequate disclosures are made by the issuing company in the
prospectus or offer document.
Does SEBI tag make one’s money safe?
The investors should make an informed decision purely by themselves based
on the contents disclosed in the offer documents. SEBI does not associate
itself with any issue/issuer and should in no way be construed as a
guarantee for the funds that the investor proposes to invest through the
issue. However, the investors are generally advised to study all the material
facts pertaining to the issue including the risk factors before considering any
investment. They are strongly warned against relying on any ‘tips’ or news
through unofficial means.