INDIAN IPO

INDIAN IPO

INTIAL PUBLIC OFFERING (IPO)

IPO stands for Initial Public Offering and means the new offer of shares from a company which was previously unlisted. This is done by offering those shares to the public, which were held by the promoters or the private investors prior to the IPO. In the case when other investors or Promoter held the shares the stake holding comes down to the extent their shares are offered to the public. In other cases new shares are issued to the public and the shares, which are with the promoters stay with them. In both cases the share of the promoters in the total capital comes down. For example say there are 100 shares in a company and 50 of these are offered to the public in an IPO then in such a case the promoters stake in the company comes down from 100% to 50%. In another case the company issues 50 additional shares to the public and the stake of the promoter comes down from 100% to 67%. Normally in an IPO the shares are issued at a discount to what is considered their intrinsic value and thats why investors keenly await IPOs and make money on most of them. IPO are generally priced at a discount, which means that if the intrinsic value of a share is perceived to be Rs.100 the shares will be offered at a price, which is lesser than Rs.100 say Rs.80 during the IPO. When the stock actually lists in the market it will list closer to Rs.100. The difference between the two prices is known as Listing Gains, which an investor makes when investing in IPO and making money at the listing of the IPO. A Bullish Market gives IPO investors a clear opportunity to achieve long term targets in a short term phase.

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Concept of an IPO
An IPO is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity. If the company has never issued equity public, its known as an IPO. Companies fall into two broad categories: private and public. The first sale of stock by a private company to the public, IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicity traded. In an IPO, the issuer obtain the assistance of a underwriter firm, which helps it determine what type of securities to issue (common preferred), best offering price and time to bring it to market. IPOs can be a risky investment. For the individual investors, it is though top predict what the stock will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value.

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ADVANTAGES AND DISADVANTAGES OF IPO

The decision to take a company public in the form of an initial public offering (IPO) should not be considered lightly. There are several advantages and disadvantages to being a public company, which should thoroughly be considered. This memorandum will discuss the advantages and disadvantages of conducting an IPO and will briefly discuss the steps to be taken to register an offering for sale to the public. The purpose of this memorandum is to provide a thumbnail sketch of the process. The reader should understand that the process is very time consuming and complicated and companies should undertake this process only after serious consideration of the advantages and disadvantages and discussions with qualified advisors.

Advantages of going public:

Increased Capital A public offering will allow a company to raise capital to use for various corporate purposes such as working capital, acquisitions, research and development, marketing, and expanding plant and equipment.

Liquidity Once shares of a company are traded on a public exchange, those shares have a market value and can be resold. This allows a company to attract and retain employees by offering stock incentive packages to those employees. Moreover, it also provides investors in the company the option to trade their shares thus enhancing investor confidence.

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Increased Prestige Public companies often are better known and more visible than private companies, this enables them to obtain a larger market for their goods or services. Public companies are able to have access to larger pools of capital as well as different types of capital. Valuation Public trading of a companys shares sets a value for the company that is set by the public market and not through more subjective standards set by a private valuator. This is helpful for a company that is looking for a merger or acquisition. It also allows the shareholders to know the value of the shares. Increased wealth The founders of the company often have the sense of increased wealth as a result of the IPO. Prior to the IPO these shares were illiquid and had a more subjective price. These shares now have an ascertainable price and after any lockup period these shares may be sold to the public, subject to limitations.

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Disadvantages of going Public:

Time and Expense Conducting an IPO is time consuming and expensive. A successful IPO can take up to a year or more to complete and a company can expect to spend several hundreds of thousands of dollars on attorneys, accountants, and printers. In addition, the underwriters fees can range from 3% to 10% of the value of the offering. Due to the time and expense of preparation of the IPO, many companies simply cannot afford the time or spare the expense of preparing IPO. Disclosure The SEC disclosure rules are very extensive. Once a company is a reporting company it must provide information regarding compensation of senior management, transactions with parties related to the company, conflicts of interest, competitive positions, how the company intends to develop future products, material contracts, and lawsuits. In addition, once the offering statement is effective, a company will be required to make financial disclosures required by the Securities and Exchange Act of 1934. The 1934 Act requires public companies to file quarterly statements containing unaudited financial statements and audited financial statements annually. These statements must also contain updated information regarding nonfinancial matters similar to information provided in the initial registration statement. This usually entails retaining lawyers and auditors to prepare these quarterly and annual statements. In addition, a company must report certain material events as they arise. This information is available to investors, employees, and competitors. Falling Stock Price If the shares of the companys stock fall, the company may lose market confidence, decreased valuation of the company may effect lines of credits, secondary offering pricing, the companys ability to maintain employees, and the personal wealth of insiders and investors.

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Vulnerability If a large portion of the companys shares are sold to the public, the company may become a target for a takeover, causing insiders to lose control. A takeover bid may be the result of shareholders being upset with management or corporate raiders looking for an opportunity. Defending a hostile bid can be both expensive and time consuming. Once a company has weighed the advantages and disadvantages of being a public company, if it decides that it would like to conduct an IPO it will have to retain a lead Regulatory Review The Company will be open to review by the SEC to ensure that the company is making the appropriate filings with all relevant disclosures.

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PRIMARY AND SECONDARY MARKETS

In the primary market securities are issued to the public and the proceeds go to the issuing company. Secondary market is term used for stock exchanges, where stocks are bought and sold after they are issued to the public.

Primary Market:
The first time that a companys shares are issued to the public, it is by a process called the initial public offering (IPO). In an IPO the company offloads a certain percentage of its total shares to the public at a certain price. Most IPOS these days do not have a fixed offer price. Instead they follow a method called BOOK BUILDING PROCESS, where the offer price is placed in a band or a range with the highest and the lowest value (refer to the newspaper clipping on the page).

Secondary Market:
Once the offer price is fixed and the shares are issued to the people, stock exchanges facilitate the trading of shares for the general public. Once a stock is listed on an exchange, people can start trading in its shares. In a stock exchange the existing shareholders sell their shares to anyone who is willing to buy them at a price agreeable to both parties. Individuals cannot buy or sell shares in a stock exchange directly; they have to execute their transaction through authorized members of the stock exchange who are also called STOCK BROKERS.

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HISTORY OF PRIMARY MARKET

Indian capital market was initial with establishing the Bombay stock exchange in the year 1875. at that time the main function of stock exchange was to provide place for trading in the stocks. Now the exchange has completed more than 25 years. It has undergone several charges. Initially the IPO was called New Issue and the issues in the Primary Market were controlled by CCI (Controller of capital issue). It was working as a department of MOF (ministry of finance). There were very few issues every year. CCI was highly conservative and hardly allowed any premium issues. Also, the regulatory framework was inadequate to control several issues relating to Primary Market. Therefore, in the year 1992 it was abolished.

There was no awareness of new issues among the investing public, during 1950s-1960s, the investment in stock market was considered to be gambling. It was prerogative to highly elite business community to participate in new issues. More than 99% of Indian population never participated in any issue during CCI regime.

There was tremendous growth in capital market in U.S.A an Western Europe. In these markets they had established Security Exchange Commission (SEC). It is most powerful autonomous body. The Government of India realized the importance of a similar body in India for healthy and fast growth of Capital Market. Thus Security Exchange Board of India (SEBI) was established with headquarters in Mumbai in1992. SEBI is the most powerful body in India. SEBI has up with the guidances for disclosures and investors protection. SEBI has framed rules for various intermediaries like Merchant Bankers, Underwriters, Brokers, Registrars and Transfer Agents, Depositories, Stock Exchange etc. This has attracted foreign institutional and individual investors to invest money in India. This has resulted in exponential growth of Capital Market in this last decade.

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STRATEGY TO INVEST IN PRIMARY MARKET

1. Collection of information regarding the new issueTyupe of security, kind of organisation making the issue, method of flotation of issue etc.

2. Product profile and companys future prospectus needs to be kept in mind. Management information like promoters past records needs to be sought.

3. No Investment decision must be done prior coolecting the information specified. As one knows the famous quote, GOD lies in the details, accordingly one must careful look at the risk factors and other points mentioned in the prospetus of the company before application. 4. Anm issue, which has got a lot of hype, must be subscribed but in limited quantity for it may happen that your capital is blocked and you are not alloted any shares. Sometimes it may happen that an over hyped issue when it comes to listing is a real flop and people turn out top make loses. 5. The premium if charged by the company must also be be taken a note of. As such a company coming with an issue with high premium without proper justification and backup by past performanve must be avoided. 6. Broadly, new issues incresses when stock values are rising and vice versa. So , the timing is a crucial phenamenon as one can get the same stock at a cheaper valuation from the open market. 7. The prospectus of the secondary market and the sector to which the IPO belongs m,ust also be taken a note of . Since if the secondary market or the sector is not performing the same is likely to be the case of the IPO irrespective of the prospects of the company as there exists a correlation between all of them.

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REASONS FOR GOING IN FOR IPO

Basically, going public (or participating in an initial public offering or (IPO) is the process in which a business owned by one or several individuals is converted into a business owned by many. It involves the offering of part ownership of the company to the public through the sale of debt or more commonly, equity securities (stock). Going public raises cash and usually a lot of it. Being publicly traded also opens many financial doors: Because of the increased scrutiny, public companies can usually get better rates when they issue debt. As long as there is market demand, a public company can always issue more stock. Thus, mergers and acquisitions are easier to do because stock can be issued as part of the deal. Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent. Being on a major stock exchange carries a considerable amount of prestige. In the past, only private companies with strong fundamentals could qualify for an IPO and it wasnt easy to get listed. The internet boom changed all this. Firms no longer needed strong financials and a solid history to go public. Instead, IPOs were done by smaller startups seeking to expand their businesses. Theres nothing wrong with wanting to expand, but most of these firms had never made a profit and didnt plan on being profitable any time soon.

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Improving the Prospectus for a Successful IPO

For most small business, the decision to go public is made gradually over time as changes in the companys performance and capital needs make an IPO seem more desireale and necessary. But many companies still fall to bring their plans to sell stock to completion due to a lack of planning. In an article for Enterpreneur, Devid R Evanson outlined a number of steps small business owners can take to improve the prospectus of an IPO long before their company formally considers going public. One step involves assessing and taking action to improve the companys image, which will be scrutinized by investors when the time comes for an IPO. It is also necessary to recognize as a corporation and beging keeping detailed fincial records. Another steps small business owners can take in advance to prepare their companies to go public is to supplement mangement with experienced professionals. Invesators like to see a maagement team that genrates confidence and respect within the industry, and that can be a source of innovative ideas for future growth. Forming this sort of management team may require a small business owner to hire outside of his or her own local network of business associates. It may also involve setting up lucrative benefit plans to help attract and retain top talent. Similarly, the smalll business should set about company maximisation shareholders value once it has become a public entity. It is also helpful for the small business owner to being making contacts with investment banks , attorneys, and accounts in advance of planning an IPO. Evanson recommended using a Big Six accounting firm, since they have earned the trust of investors nationwide. Finally, Evanson recommended that small business untrested in eventually going being acting like a large corporation in eventually going public being acting like a large corporation in their relationships with customers, suppl;iers employees, and the government contractors. They also favo formal human resource programs inducing hiring procedures, performing. Reviews, and benefits plans. It is also important for small business to protect their unique produce products and ideas buy applying for patents and trademarks as needed. All of these steps, when taken in advance, can help to smooth a small businesss passage to becoming a public entity.

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PARAMETERS TO JUDGE AN IPO

Good investing principles demand that you study the minutes of details prior to investing in an IPO. Here are some parameters you should evaluate:1. Promoters Is the company a family run business or is it professionally owned? Even with a family run business what are the credibility and professional qualifications of those managing the company? Do the top level managers have enough experience (of at least 5 years) in the specific type of business?

2. .Industry Outlook The products or services of the company should have a good demand and scope for profit.

3. Business Plans Check the progress made in terms of land acquisition, clearances from various departments, purchase of machinery, letter of credits etc. A higher initial investment from the promoters will lead to a higher faith in the organization.

4. Financials Why does the company require the money? Is the company floating more equity than required? What is the debt component? Keep a track on the profits, growth and margins of the previous years. A steady growth rate is the quality of a fundamentally sound company. Check the assumptions the promoters are making and whether these assumptions or expectations sound feasible.

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5. Risk Factors The offer documents will list our specific risk factors such as the companys liabilities, court cases or other litigations. Examine how these factors will affect the operations of the company.

6. Key Names Every IPO will have lead managers and merchant bankers. You can figure out the track record of the merchant banker through the SEBI website.

7. PRICING Compare the companys PER with that of similar companies. With this you can find out the P/E Growth ratio and examine whether its earnings projections seem viable.

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PROCEDURE FOR APPLYING IN AN IPO

When a company floats a public issue or IPO, it prints forms for application to be filled by the investors. Public issues are open for a few days only. As per law, any public issue should be kept open for a minimum of 3days and a maximum of 21 days. For issues, which are underwritten by financial institutions, the offer should be kept open for a minimum of 3 days and a maximum of 21 days. For issues, which are underwritten by all India financial institutions, the offer should be kept open for a maximum of 10 days. Generally, issues are kept open for only 3 to 4 days. The duly complete application from, accompanied by cash, cheque, DD or stock invest should be deposited before the closing date as per the instruction on the form. IPOs by investment companies (closed end funds) usually contain underwriting fees which represent a load to buyers.

Before applying for any IPO, analyze the following factors: 1. Who are the Promoters? What is their credibility and track record? 2. What is the company manufacturing or providing services Product, its potential. 3. Does the Company have any Technology tie-up? If yes, what is the reputation of the collaborators? 4. What has been the past performance of the Company offering the IPO? 5. What is the Project cost, what are the means of financing and profitability projections? 6. What are the Risk factors involved? 7. Who has appraised the Project? In India Projects apprised by IDBI and ICICI have more credibility than small Merchant Bankers?

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PROCEDURE FOR GETTING IN AN IPO

1.

Process of the company for issuing the IPOs

IPO generally involve one or more investment banks as Underwriter. The company offering its shares, called the Issuer enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares. The sale (that is the allocation and pricing) of shares in an IPO may take several forms. Common methods include. Best efforts Bought deal Dutch auction Firm commitment Self Distribution of Stock

A large IPO is usually underwritten by syndicate of investment banks led by one or more major investment banks (lead underwriter). Upon selling the sharers, the underwriters keep a commission based on a percentage of the value of the shares sold. Usually the lead underwriters, i.e. the underwriters selling the largest proportion of the IPO, take the highest commission-up5% in some cases. Public offering is primarily sold to institutional investors, but some shares are also allocated to the underwriters retail investors. A broker selling shares of a public offering to his client is paid through a sales credit instead of a commission. The client pays no commission top purchase the shares the shares of public offering: the purchase price simply includes the built-in credit.

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2.

The Underwriting Process

Getting a piece of a hot IPO is very difficult, if not impossible. To understand why, we need to know how an IPO is done, a process known as underwriting. When a company wants to go public, the first thing it does is hire an investment bank. A company could theoretically sell its shares on its own, but realistically, an investment bank is required its just the way Wall Street works. Underwriting is the process of raising money by either debt or equity (in this case we are referring to equity). You can think of underwriters as middlemen between companies and the investing public. The biggest underwriters are Goldman Sachs, Merrill Lynch, Credit Suisse First Boston, Lehman Brothers and Morgan Stanley. The company and the investment bank will first meet to negotiate the deal. Items usually discussed include the amount of money a company will raise, the type of securities to be issued and all the details in the underwriting agreement. The deal can be structured in a variety of ways. For example, in a firm commitment, the underwriter guarantees that a certain amount will be raised by buying the entire offer and then reselling to the public. In a best efforts agreement, however, the underwriter sells securities for the company but doesnt guarantee the amount raised. Also, investment banks are hesitant to shoulder all the risk of an offering. Instead, they form a syndicate of underwriters. One underwriter leads the syndicate and the others sell a part of the issue. Once all sides agree to a deal, the investment bank puts together a registration statement to be filed with the SEC. This document contains information about the offering as well as company info such as financial statements, management background, any legal problems, where the money is to be used and insider holdings. The SEC then requires a cooling off period, in which they investigate and make sure all material information has been disclosed. Once the SEC approves the offering, a date (the effective date) is set when the stock will be offered to the public. During the cooling off period the underwriter puts together what is known as the red herring. This is an initial prospectus containing all the information about the company except for the offer price and the effective date, which arent known at that time. With the red herring in hand, the underwriter and company attempt to

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hype and build up interest for the issue. They go on a road show also known as the dog and pony show where the big institutional investors are courted. As the effective date approaches, the underwriter and company sit down and decide on the price. This isnt an easy decision: it depends on the company, the success of the road show and, most importantly, current market conditions. Of course, its in both parties interest to get as much as possible. Finally, the securities are sold on the stock market and the money is collected from investors. As you can see, the road to an IPO is a long and complicated one. You may have noticed that individual investors arent involved until the very end. This is because small investors arent the target market. They dont have the cash and, therefore, hold little interest for the underwriters. If underwriters think an IPO will be successful, theyll usually pad the pockets of their favorite institutional client with shares at the IPO price. The only way for you to get shares (known as an IPO allocation) is to have an account with one of the investment banks that is part of the underwriting syndicate. But dont expect to open an account with $1,000 and be showered with an allocation. You need to be a frequently trading client with a large account to get in on a hot IPO. Bottom line, your chances of getting early shares in an IPO are slim to none unless youre on the inside. If you do get shares, its probably because nobody else wants them. Granted, there are exceptions to every rule and it would be incorrect for us to say that its impossible. Just keep in mind that the probability isnt high if you are a small investor.

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3.

Registration Process

Going public requires a Registration Statement which is a carefully crafted document that is prepared by your attorneys and accountants. It requires detailed discussions on information pertaining to: Business product/service/markets Company Information Risk Factors Proceeds Use (How are you going to use the money) Officers and Directors Related party transactions Identification of your principal shareholders Audited financials After your registration statement is prepared, it is submitted to the Securities and Exchange Commission and various other regulatory bodies for their detailed review. When this process is completed, you and your management team will do a road show to present your company to the stock brokers who will then sell your stock to the public investors. Assuming they can successfully sell your issue, you receive your money. Then its simple, all you have to do is make a lot more money with the proceeds so as to increase the value of your, your teams and public investors stock.

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METHODS OF ISSUE
1. AUCTION

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THE INTERMEDIARIES IN AN ISSUE

Merchant Bankers to the issue or Book Running Leading Managers (BRLM), syndicate members, Registers to the issue, Bankers to the issue, Auditors of the company, Underwriters to the issue, Solicitors, etc. The issuer discloses of these intermediaries to an issue. The issuer discloses the address, telephone/fax number and email address of these intermediaries. In addition to this, the issuer also discloses the details of the compliance officer appointed by the company for the purpose of the issue.

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IPO SCAMS
YES Bank Ltd. Case: New Delhi: When the Securities Exchange Board of India (SEBI) started scanning an entire spectrum of IPO launched over 2003, 2004 and 2005, it ended digging up more dirt and probably prevented a larger conspiracy to hijack the market.

Here is a lowdown on the IPO scam:

What was the scam? It involved manipulation of the primary market read initial public offers (IPOs)by financiers and market players by using fictitious or became demat accounts. While investigating the Yes Bank scam, SEBI found that certain entities had illegally obtained IPO shares reserved for retail applicants through thousands of benaami demat accounts. They then transferred the shares to financiers, who sold on the first day of listing, making windfall gains from the price difference between the IPO price and the listing price. The modus operandi adopted in manipulating the YES Bank Ltd (YBL)s initial public offering (IPO) allotment involved opening of over 7,500 became dematerialized accounts. These accounts were with the National Securities Depository Ltd (NSDL) through Karvy Stock broking Ltd (Kirby-DP). When was the scam detected? The IPO scam came to light in 2005 when the private Yes Bank launched its initial public offering. Roopalben Panchal, a resident of Ahmadabad, had allegedly opened several fake demat accounts and subsequently raised finances on the shares allotted to her through Bharat Overseas Bank branches.

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The SEBIi started a broad investigation into IPO allotments after it detected irregularities in the buying of shares of YES Bank IPO in 2005.

What triggered the SEBI probe?

On October 10 last year, an Income Tax raid on businessman Purushottam Budhwani accidentally found he was controlling over 5,000 demat accounts. SEBI finds this suspicious. On December 15, SEBI declared results of its probe, how a few people cornered a large chunk of YES Bank IPO shares. Roopalben Panchal was found to be controlling nearly 15,000 demat accounts. It was found that once they obtained these shares, the fictitious investors transferred them to financiers. The financiers then sold these shares on the first day of listing, reaping huge profits between the IPO price and the listing price. The SEBI report covered 105 IPOs from 2003-2005. The SEBI probe covered several IPO dating back to 2005, 2004 and 2003 to detect misuse. These included the offerings of Jet Airways, Sasken Communications, Suzlon Energy, Punj Lloyds, JP Hydro Power, NTPC, PVR Cinema, Shringar Cinema and others. A lot more dubious accounts across several IPOs are expected to tumble out in the next few days. It also detected similar irregularities in the IDFC IPO, in which over 8 per cent of the allotment in the retail segment was cornered by fictitious applicants through multiple demat accounts.

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FACTORS THAT FACILITATED THE SCAM

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EXAMPLE OF IPO
Issuer Company PG Electroplast Limited IPO TD Power Systems Ltd IPO SRS Limited IPO Issue Open Issue Close Offer Price 190/- to 210/Issue Size(Crore Rs.) 120.65

Sep 07, 2011 Sep 12, 2011

Aug 24, 2011 Aug 26, 2011 Aug 23, 2011 Aug 26, 2011

256/- to 261/58/- to 65/-

227.00 227.50

Brooks Laboratories Ltd IPO Aug 16, 2011 Aug 18, 2011 Tree House Education & Accessories Ltd IPO Aug 10, 2011 Aug 12, 2011 L&T Finance Holdings Limited IPO

90/- to 100/-

63.00

135/- to 153/-

113.83

Jul 27, 2011

Jul 29, 2011

51/- to 59/-

1,245.00

Inventure Growth & Securities Ltd IPO Jul 20, 2011 Bharatiya Global Infomedia Ltd IPO Readymade Steel India Ltd IPO

Jul 22, 2011

100/- to 117/-

81.90

Jul 11, 2011

Jul 14, 2011

75/- to 82/-

55.10

Jun 27, 2011 Jun 29, 2011

90/- to 108/63/- to 72/-

34.75 40.64

Rushil Decor Ltd IPO Jun 20, 2011 Jun 23, 2011 Birla Pacific Medspa Ltd IPO Jun 20, 2011 Jun 23, 2011

10/- to 11/-

65.18

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TRENDS IN IPO
India IPO activity by year

Key trends

In 2011, Indias IPO markets will be strong driven by an 8% GDP growth rate, healthy corporate earnings and steady growth in corporate profits. More than 100 Indian companies are expected to raise resources via IPOs and follow-on offerings. India saw a dramatic recovery in its IPO markets in 2010. This revival has been a domestic consumption ledgrowth story, driven by an influx of capital from Western economies and a booming local stock market. India saw a growth of 215% in the number of IPOs compared to 2009. 2010 saw a string of IPOs and follow-on offerings from many previously stateowned enterprises in the materials sector such as steel, oil and gas all of which helped the Indian Government raise funds to build roads, ports and power plants. This materials sector activity stems from Indias US$10 billion divestment program that spawned the largest IPO in India ever, the listing of the worlds largest coal producer, US$3.4 billion Coal India, a former state-owned enterprise. Driving industrial IPO activity is Indias investment plan to modernize its infrastructure worth US$1 trillion. This program has led to many new listings in the energy and power, natural resources, building and construction sectors, in particular

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Industry Overview
Infrastructure and Construction
India's infrastructure which had been expanding at an accelerated pace to support the economic growth rate of over 9% slowed down in FY09 as economic activity slowed down in the aftermath of the global turmoil. India's GDP growth slowed down from the 9% average growth experienced over the last three years, to 6.7% in FY09. The six core-infrastructure industries, which account for a combined weight of 26.68% in the index of industrial production (IIP), registered a growth of 2.7% in FY09, compared to 5.9% in the previous fiscal.

Fiscal measures taken by the Government to counter this slow-down include: - Approval for 37 infrastructure projects worth Rs700bn between August'08 and January'09 - In principle/final approval to 54 central sector infrastructure projects under PPP worth Rs677bn Authorization to India Infrastructure Finance Company Ltd (IIFCL) for raising Rs100bn to refinance bank lending of longer maturity to eligible PPP based infrastructure projects. There has been a revival with India's GDP growing in the first quarter of 2009-10 at 6.1 per cent representing a modest recovery over the 5.8 per cent growth recorded during the preceding two quarters in the second half of 2008-09. Growth in core infrastructure witnessed notable acceleration in August 2009, and for April-August 2009 it was higher at 4.8 per cent as against 3.3 per cent during the corresponding period of the previous year primarily due to considerable acceleration in coal, cement, and electricity. Source: RBI, Macroeconomic and Monetary Developments: Second Quarter Review 2009-10

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INTRODUCTION OF L&T

L&T Finance Holdings up to Rs 17.5 billion (USD 392 million) initial public offering will open on July 26 and close July 29, the company said in a filing with the Registrar of Companies. The offer will be open for anchor investors on July 26, while it will open for retail bids the next day. L&TFH, promoted by L&T, is a financial holding company offering a diversified range of financial products and services across the corporate, retail and infrastructure sectors and having presence in mutual fund products as well as investment management services through direct and indirect wholly owned subsidiaries. L&TFH is registered as a Non-Banking Finance Company (Non Deposit Taking Systemically Important) (NBFC-ND-SI) and has applied to RBI for registration as a Core Investment Company (CIC). L&TFH has two major subsidiaries, L&T Infrastructure Finance Company Ltd (L&T Infra) (which is registered with RBI as an Infrastructure Finance Company) and L&T Finance Ltd. (LTF) (which is registered as NBFC- Asset Finance Company with RBI and is into corporate and retail financing). L&TFH also has two wholly-owned indirect subsidiaries (whollyowned subsidiaries of LTF) L&T Investment Management Ltd (L&TIM) (which is registered as an asset management company with SEBI and has received a license from SEBI to conduct portfolio management services) and L&T Mutual Fund Trustee Ltd. (L&TMFT) (which is the trustee company for the Mutual Fund).

L&TFH is headquartered in Mumbai and has a presence through its subsidiaries in 21 States of India. As on February 28, 2011, L&TFH had 890

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points of presence across India through 113 branches, 330 meeting centres, 414 customer care centres and 33 Kisan Gaurav Seva Kendras (centres to run schemes for financing the acquisition of farm equipment by farmers) across its major direct and indirect subsidiaries.

HSBC, Citigroup, JM Financial, Barclays Capital, and Credit Suisse are the arrangers to the L&T Finance offer. Sharepro Services Private Limited is the registrar to the issue.

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Vision
The L&T vision reflects the collective goal of the company. It was drafted through a large scale interactive process which engaged employees at every level, worldwide.

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HISTORY OF L&T
The evolution of L&T into the country's largest engineering and construction organization is among the most remarkable success stories in Indian industry. L&T was founded in Bombay (Mumbai) in 1938 by two Danish engineers, Henning Holck-Larsen and Soren Kristian Toubro. Both of them were strongly committed to developing India's engineering capabilities to meet the demands of industry.

Henning Holck-Larsen (4.7.1907 - 27.7.2003)

Soren Kristian Toubro (27.02.1906 4.3.1982)

Beginning with the import of machinery from Europe, L&T rapidly took on engineering and construction assignments of increasing sophistication. Today, the company sets global engineering benchmarks in terms of scale and complexity.

Early days
Henning Holck-Larsen and Soren Kristian Toubro, school-mates in Denmark, would not have dreamt, as they were learning about India in history classes that they would, one day, create history in that land. In 1938, the two friends decided to forgo the comforts of working in Europe, and started their own operation in India. All they had was a dream. And the courage to dare. Their first office in Mumbai (Bombay) was so small that only one of the partners

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could use the office at a time! In the early years, they represented Danish manufacturers of dairy equipment for a modest retainer. But with the start of the Second World War in 1939, imports were restricted, compelling them to start a small work-shop to undertake jobs and provide service facilities. Germany's invasion of Denmark in 1940 stopped supplies of Danish products. This crisis forced the partners to stand on their own feet and innovate. They started manufacturing dairy equipment indigenously. These products proved to be a success, and L&T came to be recognised as a reliable fabricator with high standards. The war-time need to repair and refit ships offered L&T an opportunity, and led to the formation of a new company, Hilda Ltd., to handle these operations. L&T also started two repair and fabrication shops - the Company had begun to expand. Again, the sudden internment of German engineers (because of the War) who were to put up a soda ash plant for the Tatas, gave L&T a chance to enter the field of installation - an area where their capability became well respected. The Journey In 1944, ECC was incorporated. Around then, L&T decided to build a portfolio of foreign collaborations. By 1945, the Company represented British manufacturers of equipment used to manufacture products such as hydrogenated oils, biscuits, soaps and glass. In 1945, L&T signed an agreement with Caterpillar Tractor Company, USA, for marketing earthmoving equipment. At the end of the war, large numbers of warsurplus Caterpillar equipment were available at attractive prices, but the finances required were beyond the capacity of the partners. This prompted them to raise additional equity capital, and on 7th February 1946, Larsen & Toubro Private Limited was born. Independence and the subsequent demand for technology and expertise offered L&T the opportunity to consolidate and expand. Offices were set up in Kolkata (Calcutta), Chennai (Madras) and New Delhi. In 1948, fifty-five acres of undeveloped marsh and jungle was acquired in Powai. Today, Powai stands as a tribute to the vision of the men who transformed this uninhabitable swamp into a manufacturing landmark.

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Public Limited Company In December 1950, L&T became a Public Company with a paid-up capital of Rs.2 million. The sales turnover in that year was Rs.10.9 million. Prestigious orders executed by the Company during this period included the Amul Dairy at Anand and Blast Furnaces at Rourkela Steel Plant. With the successful completion of these jobs, L&T emerged as the largest erection contractor in the country. In 1956, a major part of the company's Bombay office moved to ICI House in Ballard Estate. A decade later this imposing grey-stone building was purchased by L&T, and renamed as L&T House - its Corporate Office. The sixties saw a significant change at L&T - S. K. Toubro retired from active management in 1962. The sixties were also a decade of rapid growth for the company, and witnessed the formation of many new ventures: UTMAL (set up in 1960), Audco India Limited ( 1961), Eutectic Welding Alloys (1962) and TENGL (1963). Today, L&T is one of India's biggest and best known industrial organisations with a reputation for technological excellence, high quality of products and services, and strong customer orientation. It is also taking steps to grow its international presence.

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About the Company L&T Finance Holdings Limited (L&TFH), the NBFC promoted by L&T Limited, has a highly diversified business model. It has a balanced mix of high growth business segments across four core business groups, namely the Infrastructure Finance Group, the Retail Finance Group, the Corporate Finance Group and the Investment Management Group, Offering a broad spectrum of financial products and services. With pan-India presence (across 23 states) and extensive network (837 points of presence), the company has been able to provide service to customers from proximate locations. L&TFH specifically emphasizes on financing income-generating assets and activities in order to control and maintain a high loan portfolio quality. With superior credit rating and strong brand equity, L&TFH has been in position to borrow at competitive rates. In addition, the capital structure, which currently comprises predominantly equity share capital, provides the opportunity to grow the business by raising additional Tier II capital. Foraying into new products & services and new lines of business; physical and geographic expansion The company intends to introduce new products & services as well as continue identifying opportunities to expand into new business segments as done in the past (Investment Management Jan 10; Microfinance Jun 08; Financial Products Distribution Sept 07; Infrastructure Finance Jan 07). This strategy will mitigate the risk associated with product concentration and enhance the profitability, thereby ensuring consistent growth.

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With an objective to increase the market penetration of the existing products and services, L&TFH continues to expand both physically and geographically, with the primary focus on rural and semi-urban areas that offer significant opportunities. The company proposes to develop its financial product distribution segment and sustain growth and profitability by cross-selling to the existing customer base.

Group Structure and Subsidiaries

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Growth of L&T and its subsidiaries

L&TFH through its subsidiaries L&T Finance and L&T Infra Finance offers a broad spectrum of financial products and services. The consolidated loan book of the company could be broken into: infrastructure finance (40%), retail finance (37%), corporate finance (20%) and others (3%).

Over the past two years, the consolidated loan book has witnessed 57% CAGR. More importantly, the book has become more diversified with the share of retail and corporate finance segments combined having declined from 69% in FY09 to 58% in FY11.

Wide pan-India presence; exploring opportunities to leverage it As of May 2011, L&TFH had 837 points-of-presence spread across 23 states thereby enabling the company to cater to a large customer base (especially in rural and semi-urban areas). Company further plans to strengthen its reach through expansion in areas offering significant opportunities to increase revenue and giving competitive advantage. Such an extensive distribution network would be leveraged by the company to provide new products and services and also foray into new business segments. With an edge over competition in terms of reach, robust loan growth momentum is likely to continue.

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Sanguine asset quality; however, some slippages may crop up Across segments, L&TFHs asset quality has improved substantially in FY11 despite the robust growth registered over the past few years. For L&T Finance (comprising retail and corporate finance business), the Gross and Net NPAs stood at 1.4% and 0.8% respectively at end-FY11. In L&T Infra Finance, the Gross and Net NPAs stood at 0.7% and 0.5% respectively at end-FY11. More importantly, about 71%, 91% and 90% of the Corporate, Retail and Infra segment advances are secured thereby providing high level of comfort. However, given the current challenging credit environment, one could expect some slippage in NPL ratios. Robust profitability reflected in high return ratios RoA and RoE have improved materially in the past two years for L&T Finance driven by significant expansion in NIM and improvement in asset quality. End-FY11, RoA of the company stood at 2.5%, remarkable in the light of the loan book mix. RoE was at 16% with the leverage at 5.3x. L&T Infra Finances RoA has been stable at 3.5% in the past two years. This is better than IDFC (like-to-like competitor) which has been earning around 3%. Further, RoE is impressive at 18%. With valuation reasonable at mean 2.5x P/BV (pre-IPO) we recommend subscribing to the IPO.

Key risks: a) Competition by banks and other NBFCs; b) Material exposure to microfinance and power sector c) Asset-liability mismatch d) Higher interest rate risk being wholesale funded

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Financial summary Y/e 31 Mar (Rs m) Total oper. Income yoy growth (%) Op. profit (pre-prov) yoy growth (%) Net profit yoy growth (%) EPS (Rs) BVPS (Rs) ROE (%) ROA (%) FY10 14,056 11,954 2,630 1.9 17.3 13.6 2.6 FY11 20,864 48.4 17,738 48.4 3,926 49.3 2.8 20.4 15.0 2.4

Sound Financials On a consolidated basis, L&TFH has an outstanding loan book of Rs179.43bn as on 31st Mar 11 as against Rs114.46bn in the previous year, recording a magnificent 57% y-o-y growth. The Company had income from operations of Rs20,864mn and PAT of Rs3,926mn during FY11 as against Rs14,056mn and Rs2,630mn during FY10, recording a 48.4% and 49.3%of y-o-y growth respectively.

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Total Income during FY11

Total Loans & Advances as on 31st Mar 2011

Source: Company RHP, India Infoline Research

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Objects of the Issue The Company intends to utilize the proceeds of the Issue for the following objects: Repayment of Inter-corporate deposit issued by the Promoter to the Company for an aggregate amount of Rs3.45bn; To augment the capital base of L&T Finance and L&T Infra, by infusing Rs5.15bn and Rs54.85bn respectively, to meet the capital adequacy requirements for supporting the future growth in the business; For other general corporate purposes including meeting the expenses of the Issue. Key concerns Company operates in a highly competitive environment as various public and private sector commercial banks and financial institutions deals in similar products and services. However, the Company has been able to borrow at competitive rates owing to strong credit rating, brand reputation and higher than required CARs. L&TFH is exposed to interest rate risk and liquidity risk amid a big assetliability mismatch in the more than 1 year maturity bucket, where the total advances are significantly above the liabilities for both L&T Infra & L&T Finance. Company has an exposure of 6.8% (Rs4.45bn) in the Microfinance segment of its Retail Finance Group; 28.7% of the infrastructure loans are accounted by the power sector.

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L&T Finance (Retail Finance & Corporate Finance Group) L&T Finance, a wholly owned subsidiary, provides financing to its retail customers through its Retail Finance Group and corporate customers through its Corporate Finance Group. It is registered with the RBI as an NBFC-ND-SI and an AFC. Over the last five years the loan book recorded a CAGR of 40%, revenues at a CAGR of 52% and PAT at 38.5%. It accounts for 66% of the total income and 57% of the loan portfolio. With various available sources of funding, the company has been able to pull in the required amount of capital to grow and fund its business in line with its business strategy and customers requirements. L&T Finance has been consistently maintaining its CAR above the regulatory requirements and improving it by 90bps in FY11 to 16.3%. Net NPA ratio declined significantly from 1.7% in FY10 to 0.7% FY11 reflecting significant improvement in asset quality.

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Source of funding

Higher than required CAR

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Retail Finance Group

Retail Finance Group provides financing to retail customers for the acquisition of income generating assets and activities that comprises construction equipment finance, transportation equipment finance, rural products finance and microfinance. At the end of the FY11, retail group accounted for Rs65.8bn (~37%) of the total loan book of L&TFH. Out of which, ~91% of the retail loans are secured. Its contribution towards income from operations was 48% in FY11. As on 31st Mar 11 the companys exposure to microfinance segment stood at Rs4.45bn, which accounts for 6.8% of the total loans of Retail Finance group. Out of this 50% are accounted by Andhra Pradesh, which may pose a threat to the asset quality. Retail Finance Group-Products

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Corporate Finance Group Corporate Finance Group offers financial products and services to corporate clients, and comprises the segments of corporate loans and leases (in the form of asset-backed loans, term loans, receivables discounting, short-term working capital facilities and operating and finance leases), supply chain finance (which includes vendor and dealer finance products) and capital markets products. At the end of FY11, corporate group accounted for Rs35.8bn (~20%) of the total loan book of L&TFH. Out of which, ~71% of the corporate loans are secured. Its contribution towards income from operations was Rs3.7bn during FY11 (~18%).

Retail loans and advances

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Corporate loans and advances

Source: Company RHP, India Infoline Research Corporate Finance Group-Products

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Yield on loans and advances & Cost of funds

Net Interest Margin

Source: Company RHP, India Infoline Research

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Return Ratios

Average leverage

Source: Company RHP, India Infoline Research Loan book as on 31st Mar 2011

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NPA ratios

Source: Company RHP, India Infoline Researc

L&T Infrastructure Finance Company (L&T Infra)

L&T Infra, a wholly-owned subsidiary, conducts infrastructure finance business, which provides financial products and services to customers engaged in infrastructure development and construction, with a focus on the power, roads, telecommunications, oil and gas, urban infrastructure and ports sectors in India. The Infrastructure Finance Group comprises the segments of project finance and corporate loans, equity investments and financial advisory services. L&T Infra is registered with the RBI as an NBFC-ND-SI and an IFC, which allows it to optimize its capital structure by diversifying its borrowings and accessing long term funding resources, thereby expanding its financing operations while maintaining its competitive cost of funds. In addition, L&T Infra has been notified as a Public Financial Institution (PFI). The income from operations of the Infrastructure Finance Group for FY11 was Rs7bn and recorded a robust CAGR of 88% over the last four years. Its contribution in the total income of L&TFH is 33.3%. The total loans and advances outstanding as on 31st Mar 11 were Rs71.9bn. Despite slowdown in the infrastructure sector in recent past, L&T Infra had negligible net NPA ratio of 0.53% in FY11. The company has an exposure of 28.7% in the power sector. Of the total infrastructure loans, 28.7% are accounted by the power sector. Infrastructure Finance Group-Products

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Loan book as on 31st Mar 11

Source of funding

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Yield on loans and advances & Cost of funds

Net Interest Margin

Income from operations

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PAT Margin

Return Ratios

Average leverage

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LTF offers a spectrum of financial products and services for trade, industry and agriculture. The company's focus segments are corporate products, construction equipment, CVs and tractors.

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IPO OF L&T

Objects of the Issue:

1. Repayment of inter corporate deposit issued by Promoter to the Company; 2. To augment the capital base of L&T Finance and L&T Infra, to meet the capital adequacy requirements to support the future growth in their business; 3. To achieve the benefits of listing on the Stock Exchanges; and 4. For other general corporate purposes including meeting the expenses of the Issue. Issue Detail: Issue Open: Jul 27, 2011 - Jul 29, 2011 Issue Type: 100% Book Built Issue IPO Issue Size: Equity Shares of Rs. 10 Issue Size: Rs. 1,245.00 Crore Face Value: Rs. 10 Per Equity Share Issue Price: Rs. 51 - Rs. 59 Per Equity Share Market Lot: 100 Shares Minimum Order Quantity: 100 Shares Listing At: BSE, NSE

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L&T Finance Holdings Ltd IPO Grading CARE / ICRA has assigned an IPO Grade 5 to L&T Finance IPO. This means as per CARE / ICRA, company has 'Strong Fundamentals'. CARE / ICRA assigns IPO grading on a scale of 5 to 1, with Grade 5 indicating strong fundamentals and Grade 1 indicating poor fundamentals. Read L&T Finance Holdings IPO Grading Report Issue Subscription Detail / Current Bidding Status Number of Times Issue is Subscribed (BSE + NSE) As on Date & Time Qualified Institutional Buyers (QIBs) Non Institutional Investors (NIIs) Retail Individual Investors (RIIs) Employee Reservations Others Total Shares Offered / Reserved 75,382,416 31,617,647 73,774,510 10,204,082 23,529,412 214,508,067 Day 1 - Jul 27, 2011 17:00 IST 0.6400 0.3900 0.4600 0.0300 0.1700 0.4600 Day 2 - Jul 28, 2011 17:00 IST 0.7200 0.5000 2.2100 0.5100 0.9600 1.2200 Day 3 - Jul 29, 2011 19:45 IST 1.9300 6.1800 9.6100 1.5300 3.3500 5.3400

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L&T Finance IPO News Alerts

Wednesday, August 10, 2011 5:40:17 AM IPO Listing - L&T Finance Holdings Limited Monday, August 08, 2011 10:00:16 AM IPO Allotment - L&T Finance Holdings Limited Sunday, July 31, 2011 3:56:55 AM Investors amazed by L&T Finance fixing its share price at Rs 52/Friday, July 29, 2011 12:46:46 PM L&T Finance IPO finally subscribed 5.34 times Thursday, July 28, 2011 10:01:50 AM L&T Finance IPO subscribed 1.22 times on day 2 Wednesday, July 27, 2011 2:15:53 PM L&T Finance IPO subscribed 0.46 times on day 1 Thursday, July 21, 2011 3:31:43 AM L&T Finance fixes it's IPO price band Monday, July 18, 2011 7:14:21 AM Upcoming IPO - L&T Finance Holdings Limited L&T Finance IPO Rating 1129 4.2 Rating:

IPO Reviews | IPO Gradings | Recommendations L&T Finance IPO Listing DateListing Date: Friday, August 12, 2011 BSE Scrip Code: 533519 NSE Symbol: L&TFH Listing In: B Group of Securities Sector: ISIN: INE498L01015

INDIAN IPO Issue Price: Face Value: Rs. 52.00 Per Equity Share Rs. 10.00 Per Equity Share BSE

Listing Day Trading Information Issue Price: Rs. 52.00 Open: Rs. 51.00 Low: Rs. 49.50 High: Rs. 52.50 Last Trade: Rs. 49.95 Volume: 44,321,154 NSE Rs. 52.00 Rs. 53.85 Rs. 49.30 Rs. 53.85 Rs. 50.05 98,188,151