IPO AND BOOK BUILDING PROCESS:

Q1. What is an IPO?

Ans: An IPO is the process of offering shares of a private corporation to the public in a new stock issue has for
the first time and after that it becomes PUBLIC LISTED COMPANY.
Q2. What is an FPO?
Ans: Further Pubic offer – Selling it in the secondary market.
Q3. Who are the investors in the IPO??
Ans: Qualified institutional buyers, non-institutional buyers and retail investors
Q4. What is book building method?
Ans: Price Discovery method.
IPO Process (Book Building Method)

Step 1: Promoters decides to expand the business or repay the debt or exit of the existing shareholders (Angel
Investors, venture capitalist etc) or promoters wants to sell its shares

Step 2: Hire an investment Banks/ underwriters/ Merchant Banker/ Lead Manager

Step 3: Investment bank Prepares documents / Due Diligence and Draft Red herring Prospectus (DRHP)

Step 4: Board will approve the DRHP

Step 5: Filing of DRHP with SEBI by Intermediary (SEBI, ICDR regulations)

Step 6: Filing of DRHP to “concerned” stock Exchange.

Marketing and Advertising – Road shows

Step 7: Suggestions received by SEBI and stock exchange to be incorporated by intermediary in DRHP and file
again to SEBI.

Step 8: After all the changes the DRHP goes for the approval from the Board. After approval it becomes Red
Herring Prospectus (contains price band) and information about IPO.

Step 9: Filing of Red Herring prospectus with ROC

Bidding Process
Step 9 : Issue Open (over/under subscription)

Step 10: Issue Closes

Step 11: The “complete Prospectus” has to be filed with SEBI/ROC.

Step 12: Allotment of Securities on proportionate basis /lottery system (within 10 days of the last bidding date)

Step 13 : LISTING

Regulation 45 of the SEBI (Issue of Capital andDisclosure Requirements

Minimum Subscription

45- The minimum subscription to be received in the issue shall be at least ninety percent of the offer through the
offer document, except in the case of an offer for sale of specified securities:
Provided that the minimum subscription to be received shall be subject to the allotment of the minimum number
of specified securities, as prescribed under the Securities Contracts (Regulation) Rules, 1957.
In the event of non-receipt of minimum subscription referred to in sub-regulation (1), all application monies
received shall be refunded to the applicants forthwith, but not later than four days from the closure of the issue.

Public Issue of Shares

Public issue of shares means the selling or marketing of shares for subscription by the public by issuing a
prospectus. For raising capital from the public by the issue of shares or debentures, a public company must
comply with the provisions of the Companies Act, the Securities Contracts (Regulation) Act, 1956, including
the Rules made thereunder and the regulations and instructions issued by the concerned Government authorities,
the Stock Exchange, and the Securities and Exchange Board of India (SEBI), etc. Management of a public issue
involves coordination of activities and cooperation of several agencies such as managers to the issue,
underwriters, brokers, registrars to the issue, solicitors/legal advisors, printers, publicity and advertising agents,
financial institutions, auditors, and other Government/statutory agencies such as Registrar of Companies,
Reserve Bank of India, Stock Exchange, SEBI, etc.

IPO Pricing Methods:

The IPO price is determined by one of the two IPO methods - Book building or Fixed price . The issuing
company may use either method, depending on its preference. (Unless the mainboard-eligible company is
unable to meet the profitability norms prescribed by SEBI. In such a case, a company will have to go the QIB
route, where it is mandatory for the issue to follow the book-building route.

1. Book Building Method:

In the book-building method of issuance, the IPO price is not fixed in advance. The issuing company announces
an IPO price range (e.g., Rs 75 to Rs 80 per share) within which bids for the IPO are accepted. The IPO price is
determined at the end of the bidding period based on the demand for the shares at various price levels.
Book building is defined as a process by which demand for the securities proposed to be issued by a body
corporate is elicited and built-up, and the price for such securities is assessed for determining the quantum of
such securities to be issued by means of a notice, circular, advertisement, or other document.

Thus, in the case of a public issue through the process of book-building, though the total size of the issue is
known, the number of shares is not known. This is because the price at which shares will be allotted is not
known; it’s determined only through the process of book-building. The prospectus only mentions the price band,
i.e., the lowest (floor price) and the highest (maximum price). As per SEBI Regulations, 2009, the maximum
price cannot be more than 20% of the floor price. As part of the process, bids are invited from the prospective
investors, and the final price is determined (that is, the price at which the issue is likely to be fully subscribed).
By dividing the total issue size by the price so determined, the number of shares to be issued is arrived at.

As per SEBI Regulations, 2009, an issuer company may make an issue of securities to the public through a
prospectus by making 100% of the net offer to the public through the book-building process.
Advantages of Book-Building
Advantages of book-building include:
(i) The demand for the security proposed to be issued by a body corporate may be created and built-up.
(ii) The quantum of security to be issued may be determined with a certain degree of accuracy.
(iii) The price at which the issue is likely to be fully subscribed may be ascertained.
(iv) A realistic approach to pricing that is based on demand for the shares and not set by management.

IPO Price Band Rules:

The IPO price band is the range of the offer price within which investors can place their bids. Below are the key
facts and features of a price range:

 A price band has a lower price and an upper price (e.g., Rs 75 to Rs 80).
 The lower price of the price range is called the Floor Price or Base Price , and the upper price of the
price range is called the Cap Price or Ceiling Price.
 The difference between the lower price and the upper price should not exceed 20%.
 A retail investor can apply at any price within the specified price range or at the Cut-off price .
 The cutoff price is the final price within the price range at which the shares are allocated to investors.
 The cutoff price is known at the end of the bidding process.
 Cut-off price is only known as price discovery.
 The basis for the price determination is stated in the prospectus.
 The bidding will be done by general public, institutional buyers or investors.

Book Building Types:

An issuing company may conduct the IPO in one of the following ways:
100% Book Built Offer
In this type of offering, the entire 100% of the issue may be offered through the book-building process.
75% Book Building
In this type of offering, 75% of the net offering can be offered through the book-building process and 25% can
be offered at the threshold determined through the book-building process.

If oversubscribed then most of the applicants will get nothing and if undersubscribed like less than 90% then
you can’t be listed on stock exchange.

Role of Merchant Bankers

1. Raising Finance
Merchant bankers assist clients in raising capital through shares, debentures, and bank loans from both
domestic and international markets. Funds raised may support new ventures, expansions, or
modernization.
2. Promotional Activities
They support entrepreneurs by helping with project ideas, feasibility reports, government approvals,
and financial/technical collaborations.
3. Stock Exchange Brokerage
Merchant bankers buy and sell shares on behalf of clients, conduct equity research, and advise on share
purchases and sales.
4. Project Management
They aid in project location, preparation of reports, feasibility studies, financing plans, and information
on government incentives.
5. Advice on Modernization and Expansion
They provide guidance on mergers, acquisitions, joint ventures, foreign collaborations, and business
diversification.
6. Managing Public Issues
Merchant bankers oversee public issues, handling timing, size, pricing, applications, brokers,
underwriters, and listing on stock exchanges.
7. Credit Syndication
They assist in preparing project and loan applications for credit from banks and institutions, including
managing international Euro-issues.
 8. Services to PSUs
Merchant bankers support public sector units in raising capital, marketing securities, and arranging
foreign collaborations.
9. Revival of Sick Units
They help revive failing units by negotiating with banks and financial institutions and developing
recovery strategies.

GREEN SHOE OPTION

Companies that want to venture out and start selling their shares to the public have ways to stabilize their initial
share prices. One of these ways is through a legal mechanism called the green shoe option. A green shoe is a
clause contained in the underwriting agreement of an Initial Public Offering (IPO) that allows underwriters to
buy up to an additional 15% of company shares at the offering price. The investment banks and brokerage
agencies (the underwriters) that take part in the green shoe process have the ability to exercise this option if
public demand for the shares exceeds expectations and the stock trades above the offering price.

The Origin of the Green Shoe:

The term “green shoe” came from the Green Shoe Manufacturing Company (now called Stride Rite
Corporation), founded in 1919. It was the first company to implement the green shoe clause into their
underwriting agreement. In a company prospectus, the legal term for the greenshoe is “over-allotment option,”
because in addition to the shares originally offered, shares are set aside for underwriters.

How a Greenshoe Option Works?

A greenshoe option provides additional price stability to a security issue because the underwriter can increase
supply and smooth out price fluctuations.1 It is the only type of price stabilization measure permitted by the
Securities and Exchange Commission (SEC).23

Greenshoe options typically allow underwriters to sell up to 15% more shares than the original amount set by
the issuer for up to 30 days after the IPO if demand conditions warrant such action.1 For example, if a company
instructs the underwriters to sell 200 million shares, the underwriters can issue an additional 30 million shares
by exercising a greenshoe option (200 million shares x 15%).

Since underwriters receive their commission as a percentage of the IPO, they have the incentive to make it as
large as possible. The prospectus, which the issuing company files with the SEC before the IPO, details the
actual percentage and conditions related to the option.

Underwriters use greenshoe options in one of two ways. First, if the IPO is a success and the share price surges,
the underwriters exercise the option, buy the extra stock from the company at the predetermined price, and issue
those shares, at a profit, to their clients. Conversely, if the price starts to fall, they buy back the shares from the
market instead of the company to cover their short position, supporting the stock to stabilize its price. What
Impact Does a Greenshoe Option Have On Investors?

Greenshoe options can essentially result in more shares being available to buy at the IPO stage, opening the
doors up to more participants. They can also reduce initial share price volatility.

What Are the Types of Greenshoe Options?

There are three main types of greenshoe option: full, partial, and reverse. With the full option, the underwriter
sells the maximum amount of extra shares from the company. With the partial option, they sell more than the
originally agreed amount but less than the maximum permitted. And with a reverse option, the underwriter sells
the extra shares back to the issuing company.

What Is the Maximum Greenshoe?

Usually, the maximum amount of extra shares the underwriters can sell is 15% more than the initial agreed-upon
amount.

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