EXECUTIVE SUMMARY

As we all know IPO INITIAL PUBLIC OFFERING is the hottest topic in the current industry, mainly because of India being a developing country and lot of growth in various sectors which leads a country to ultimate success. And when we talk about countrys growth which is dependent on the kind of work and how much importance to which sector is given. And when we say or talk about industries growth which leads the economy of country has to be balanced and given proper finance so as to reach the levels to fulfill the needs of the society. And industries which have massive outflow of work and a big portfolio then its very difficult for any company to work with limited finance and this is where IPO plays an important role.

This report talks about how IPO helps in raising fund for the companies going public, what are its pros and cons, and also it gives us detailed idea why companies go public. How and what are the steps taken by the companies before going for any IPO and also the role of (SEBI) Securities and Exchange Board of India the BSE and NSE , what are primary and secondary markets and also the important terms related to IPO. It gives us idea of how IPO is driven in the market and what are various factors taken into consideration before going for an IPO. And it also tells us how we can more or less judge a good IPO. Then we all know that scams have always been a part of any sector you go in for which are covered in it and also few recommendations are given for the same. It also gives us some idea about what are the expenses that a company undertakes during an IPO.

IPO has been one of the most important generators of funds for the small companies making them big and given a new vision in past and it is still continuing its work and also for many coming years.

LITERATURE REVIEW
This section describes five key studies that have researched different forms of going public. This chapter also provides a brief account of a study which analyzed spreads, in addition to outlining a study which analyzed the impact of Internet technology on investment banking.

1. Kenji and Smith (2009)

Kenji and Smith (2004) study the benefits and drawbacks of auctions versus book building as a method of IPO issuance in Japan. Their reason for choosing Japan as a test environment was due to the fact that book building has been a legal way of going public in Japan since 1997. Previously, auctioning was the only way that a company could go public in Japan. In their research, Kenji and Smith use the total issue cost as a percentage of the value of the issue to measure the benefits and drawbacks of the different methods of going public. The data that is used in this paper is a sample of 484 IPOs by companies that are listed on the JASDAQ or JASDAQ-OTC markets during a five-year period from 1995 to 1999. This included 321 auction IPOs and 163 book built IPOs. However, due to varying market conditions during the years spanning from 1995 to 1999, the research has been divided into two different sections. The first uses all the data from the whole sample period, whereas the second section uses data only from the years 1996 through 1998, when the market was characterized by very stable market conditions. This provides a fairly similar setting for both auctions (January 1996 September 1997) and book built (October 1997 - December 1998) IPO data sets. Firm data that is used include: sales revenue, equity to book value, shares outstanding, firm age, as well as number of employees. Issue data includes offering date, number of shares issued, amount raised, offer price, first after market price, and other offering details. Total issue cost in their research is defined as the first aftermarket price instead of actual issue price. During the whole period, the total issue cost against the aftermarket price in book built IPOs is an average of 28,04%, whereas the auction priced cost is only 8,17%. However, the second sample (1996-1998) notes values of 15,3% and 7% respectively. The data demonstrates that the book building method provides more flexibility, making small issues appear to be more feasible, and decreasing the cost of going public for larger companies. The empirical analysis demonstrates that under the auctions-only system, issuers are older and larger than book built issuers. The analysis also reveals that underpricing is a substitute cost for lower fees, thus when all else being equal, increased underpricing reduces the fee as a percentage of the aftermarket price. The method used for analysis in Kenjis and Smiths study was regression analysis, with reliance on previously identified variables. When analyzing total issue cost and issue size, it was found that issuer age, sales revenue, and equity to book value are not significantly related to the total cost of auctioned IPOs. In the book built issues, the percentage cost is less for large issuers with established track records. In the study, the difference in equally-weighted average issue cost compares what the issue cost would have been in both book building and auction scenarios for any given company individually. Kenji and Smith found that auctioning reduces mean total issue cost by an average

of 6% of the first aftermarket price. Additionally, they predicted that pricing through the auction method is projected to have resulted in lower total costs at least in 82,5% of the subsample. In conclusion, Kenji and Smith found that under the auction method, high quality issuers had a limited ability to distinguish themselves from low quality issuers. Furthermore, the research found that small and risky firms, as a group, incur higher costs with book building, whereas larger and better-established issuers realize savings with this particular method. Overall in this sample of Japanese IPOs, the average total issue cost, measured as a percentage of the initial aftermarket price, was significantly higher in the book building regime than in the auction regime. However, it was found that aggregate underpricing would have been lower under the book building, on the basis of either the full sample, or the subsample.

2. Sherman and Jagannathan (2009)

In their study Sherman and Jagannathan identify the underlying reason for the relative unpopularity of auctions as a means of going public. This study appears to be the most comprehensive endeavor in terms of attempting to holistically identify the reasons auctions have not been as attractive as other means of going public. Their research studies international trends in auctions use. Here, the evidence overwhelmingly indicates that auctions have been tried in over 20 countries but are rarely used today. In other words, out of more than 45 countries, we have not been able to find even one country in which auctions are currently the dominant method. (Sherman and Jagannathan 2005, 14) Sherman and Jagannathan delve into commonly used stereotypical explanations for why auctions are not used. The two most common notions are (1) auctions are not used because they are still experimental and unproven, and (2) issuers are pressured into book building due to higher fees. Nonetheless, through international research, it was proven that even in markets where auctions have been used for a long time, there was a decline in their use as soon as book building or some other method became available. For the second issue, the authors found that competition in the market would drive down prices of book building issues. Additionally, other research has shown that fixed price offers lead to even lower spreads, compared to auctions. In their study Sherman and Jagannathan find that on a global scale initial returns are not the most important aspect of the issue for the issuer. This was evident from data collected on IPOs in Singapore, where both auctions and fixed price offers were available. In this case, statistics revealed that the fixed price method was chosen as the dominant means of going public, although auctions consistently provided lower underpricing. Finally, the study also deemed whether any perceivable effect can be distinguished from adding modern Internet technologies to enable bidding for the IPO auction. The results illustrate that the median return for Open IPOs is 2%, which is excellent. However, the research points out that there are significant outliers in the group. In conclusion, Sherman and Jagannathan find that auctions have been tried and tested in many markets, but have lost popularity due to poor control on the part of the issuer in terms of the price and effort that are applied. They also identify that auctions provide lower underpricing. This would imply that issuers are not only looking to optimize underpricing, but are moreover interested in other attributes of the issue.

Without some way of screening out free-riders and the unsure participation of serious investors, IPO auctions are too risky for both issuers and investors.

3. Kaneko and Pettway (2008)

Kaneko and Pettway attempt to provide an answer to the question Does book building provide a better mechanism for issuing firms than auctions? Similar to Kenji and Smith (2004), the Japanese market is used to test the assumption. The Japanese auction process uses price discriminating auctions, instead of a fixed price or market-clearing price as in the Open IPO process. The empirical research in Kaneko and Pettway (2003) is broken up into three parts. Firstly the descriptive statistics are analyzed, which demonstrate that book building had significantly higher initial returns than auction priced IPOs. In the following part, the auctioned priced and book built IPOs are analyzed separately through regression analysis. In this section seven independent variables17 are tested to uncover which variables have the most impact on underpricing. In the test of auctioned IPOs, it was found that market volatility of daily index returns one month prior to the issue is the most significant factor affecting underpricing. When the same regressions were run on the book built IPOs, it was found that market change three months prior to the IPO was the most significant factor affecting underpricing. In the third part of Kanekos and Pettways research, regression analysis was run on both sets of data, however controlling for the different firm specific characteristics. There, it was also found that book built IPOs are underpriced significantly more than auction priced IPOs. When the book built and auctioned priced IPOs were analyzed for effects of hot and cold markets, it was found that book built IPOs are still much more frequently underpriced. In conclusion, Kaneko and Pettway found that under all conditions and while controlling firm specific characteristics, book built IPOs were much more frequently underpriced in comparison to auctioned IPOs.

4. Biasis and Faugeron-Crouzet (2007)

In their research, Biasis and Faugeron-Crouzet analyze different types of IPO auctions. They study uniform price auctions, fixed price offerings, internet-based Open IPO mechanisms, and auctions such as Mise en Vente in France. These were analyzed within a uniform theoretical model. (Biasis and Faugeron-Crouzet 2002, 13-17). In fixed price offers, Biasis and FaugeronCrouzet found high initial returns. High returns were left both to institutional investors as well as small-uninformed investors, because of a lack of adjustment for price and demand. For uniform price auctions, underpricing was also evident, however with less underpricing than with fixed price offers. The Mise en Vente auction is an auction type IPO procedure that is commonly used in France. This auction has a fixed market clearing price and pro rata allocation. The highest market clearing bids do not set the market-clearing price, instead it is set by a Bourse official, based on the function of demand. It is noted that an explicit algorithm that maps demand into price does not set the pricing in such cases.
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The research found that for an optimal IPO auction, the IPO price must be set in a manner, which reflects the information held by investors. If this is not done as in fixed price auctions, underpricing is bound to be pervasive, whereas information gathering of the value of the stock during the IPO process is bound to be insignificant. Biasis Faugeron-Crouzet viewed the Open IPO process as a true Dutch auction when it in fact was not. An Open IPO process is a so-called Dirty Dutch auction as coined by Sherman (1999). Much like the Mise en Vente, the fixed market-clearing price is not set at the highest possible level, but instead it is marked down and set by the issuing company and the underwriter based on their own perception of the function of demand. Their study moreover identifies the problem of translating, i.e., mapping demand into prices and into explicit computerized rules, which occur in Mise en Vente and in Book building. The authors also highlight the importance of established relationships between bidders and underwriters. Finally, according to Biasis and Faugeron-Crouzet an established relationship can enhance the ability to extract information from investors.

5. Wilhelm (2007)
Wilhelms research dwells into the issue of how the Internet has affected investment banking that has relied on relationship based production technology to date. The methodology applied in this study is based on previous research relating to investment banking. The author does not conduct his own empirical study; instead, he identifies a list of anomalies that other studies have found indicative of the phenomenon that investment banking, as we know it, could be changing. Indications of the change in traditional investment banking according to the author are that there has been a decline in the size of underwriter syndicates and there are fewer or more dominant intermediaries in the securities underwriting business (Pichler and Wilhelm 2001, 2256). The second observation was made on the point of low-cost communication and data processing, which might lead to a direct marketing business model. For example Wit Capital, a subsidiary of Goldman Sachs, seeks to identify affinity groups through data mining for a given firms offering. In sum, the study forecasts that new technologies will complement traditional technologies, rather than replace them, as has been witnessed with Wit Capital and W.R. Hambrechts Open IPO.

6. Summary of previous research

Below is a table summarizing the findings of the five key studies in the field: Overview of Literature Review:

Study
Kenji and Smith (2009)
Sherman and Jagannathan (2009) Kaneko and Pettway (2008)

Objective
Attempt to uncover why book building has been used more than auctions in Japan, although auctions seem to be more beneficial to issuers. A study of the underlying reasons why auctions are relatively unpopular all over the world for issuing equity, whereas they are extensively used for selling everything else. Examine whether book built IPOs provide a better mechanism for issuing firms compare to auctions.

Conclusion
Auctions leave less money on the table, however larger and older issuers benefit from book building, since overall issuance cost is lower for them. Auctions run higher risk than book built IPOs, due to less control by the issuer of the freerider problem, as well as less control over issue price. Underpricing was used as a proxy, and overwhelmingly auctions were found to be more beneficial to issuers than book built IPOs. Fixed price auctions underprice the most, market clearing auctions also underprice but not as much as fixed price offers. An optimal solution is achieved by the Mise en Vente in France that encompasses some characteristics of the book built offers. Results indicate that there is potential for the traditional relationship based production technology to be enhanced by Internet technologies, especially in issuing IPOs

Biasis and FaugeronCrouzet (2008)

Compared the performance of the various auction methods through a unified theoretical model.

Wilhelm (2007)

Questions whether new communication technologies could impact traditional relationship based production technology that has been used until now in investment banking.

THE INDIAN CAPITAL MARKET - AN OVERVIEW

Capital market in any country plays an important role in supporting technological progress and in economic development by channeling funds for investment in productive assets, contributing to long term growth prospects of the economy. The direct influence of capital market is seen in the growth of corporate sector, that have reduced the dependent on bank as a source of finance to raise in the capital market.

It consists of primary and secondary markets. The primary market deals with the issue of new instruments by the corporate sector such as equity shares, preference shares and debt instruments. Central and State governments, various public sector industrial units (PSUs), statutory and other authorities such as state electricity boards and port trusts also issue bonds/debt instruments.

The primary market in which public issue of securities is made through a prospectus is a retail market and there is no physical location. Offer for subscription to securities is made to investing community. The secondary market or stock exchange is a market for trading and settlement of securities that have already been issued. The investors holding securities sell securities through registered brokers/sub-brokers of the stock exchange. Investors who are desirous of buying securities purchase securities through registered brokers/sub-brokers of the stock exchange. It may have a physical location like a stock exchange or a trading floor. Since 1995, trading in securities is screenbased and Internet-based trading has also made an appearance in India.

The secondary market consists of 23 stock exchanges including the National Stock Exchange, Over-the-Counter Exchange of India (OTCEI) and Inter Connected Stock Exchange of India Ltd. The secondary market provides a trading place for the securities already issued, to be bought and sold. It also provides liquidity to the initial buyers 7

in the primary market to re-offer the securities to any interested buyer at any price, if mutually accepted. An active secondary market actually promotes the growth of the primary market and capital formation because investors in the primary market are assured of a continuous market and they can liquidate their investments. The securities market moved from T+3 settlement period to T+2 rolling settlement with effect from April 1, 2003

1.1 CAPITAL MARKET PARTICIPANTS:

There are several major players in the primary market. These include the merchant bankers, mutual funds, financial institutions, foreign institutional investors (FIIs) and individual investors. In the secondary market, there are the stock brokers (who are members of the stock exchanges), the mutual funds, financial institutions, foreign institutional investors (FIIs), and individual investors. Registrars and Transfer Agents, Custodians and Depositories are capital market intermediaries that provide important infrastructure services for both primary and secondary markets.

1.2 MARKET REGULATION:

It is important to ensure smooth working of capital market, as it is the arena where the players in the economic growth of the country come together. Various laws have been passed from time to time to meet this objective.

The financial market in India was highly segmented until the initiation of reforms in 1992-93 on account of a variety of regulations and administered prices including barriers to entry. The reform process was initiated with the establishment of Securities and Exchange Board of India (SEBI).

The legislative framework before SEBI came into being consisted of three major Acts governing the capital markets:

1. The Capital Issues Control Act 1947, which restricted access to the securities market and controlled the pricing of issues.

2. The Companies Act, 1956, which sets out the code of conduct for the corporate sector in relation to issue, allotment and transfer of securities, and disclosures to be made in public issues.

3. The Securities Contracts (Regulation) Act, 1956, which regulates transactions in securities through control over stock exchanges. In addition, a number of other Acts, e.g., the Public Debt Act, 1942, the Income Tax Act, 1961, the Banking Regulation Act, 1949, have substantial bearing on the working of the securities market.

1.3 PRIMARY MARKET:

Companies raise funds to finance their projects through various methods. The promoters can bring their own money of borrow from the financial institutions or mobilize capital by issuing securities. The funds maybe raised through issue of fresh shares at par or premium, preferences shares, debentures or global depository receipts. The main objectives of a capital issue are given below:

To promote a new company

To expand an existing company

To diversify the production 9

To meet the regular working capital requirements

To capitalize the reserves

Stocks available for the first time are offered through primary market. The issuer may be a new company or an existing company. These issues may be of new type or the security used in the past. In the primary market the issuer can be considered as a manufacturer. The issuing houses, investment bankers and brokers act as the channel of distribution for the new issues. They take the responsibility of selling the stocks to the public.

1.3.1 THE FUNCTION OF PRIMARY MARKET:

The main service functions of the primary market are origination, under writing and distribution. Origination deals with the origin of the new issue. The proposal is analyzed in terms of the nature of the security, the size of the issue, timing of the issue and floatation method of the issue. Underwriting contract makes the share predictable and removes the element of uncertainty in the subscription (underwriting is given in the latter part of this chapter). Distribution refers to the sale of securities to the investors. This is carried out with the help of the lead managers and brokers to the issue.

1.2 EVOLUTION AND GROWTH OF INDIAN PRIMARY MARKET.

Early Liberalization Phase: 1992-1995 (Fixed Pricing) The initiation of the process of reform in India also would not have been possible without changes in the regulatory framework. The New Economic policy (1991) led to a major change in the regulatory framework of the capital market in India. The Capital Issues (Control) Act 1947

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was repealed and the Office of the Controller of Capital Issues (CCI) was abolished. The Securities and Exchange Board of India (SEBI), established in 1988 and armed with statutory powers in 1992, came to be established as the regulatory body with the necessary authority and powers to regulate and reform the capital market. SEBI came to be recognized as a regulatory body for the capital market after the abolition of the CCI. The control on pricing of capital issue has been abolished and easy access is provided to the capital market. Initial Public Issue caught the attention of general public only after the success of Reliance, when millions of small investors made huge returns which were unheard of till then. Dhirubhai Ambani was the first promoter who raised huge amounts through the public issue route to finance large facilities. The issue process was smoothened, procedures were simplified and free pricing was allowed, although with certain restrictions, The Indian market had the concept of par value of equity shares, and anything above par was considered premium. The only companies that were allowed to come with premium issues were those, which had a three year profit-track record for the preceding five years. New companies without this record could float premium issues if their promoting companies had the same track record and they had to hold 50% of the post issue capital. Any new company floated by first generation entrepreneurs could only issue equity at par. There was no restriction about prices in a premium issue. The offer was always at a fixed price, whether premium or par. The companies had to appoint intermediaries like merchant bankers, registrars, bankers etc. Merchant bankers had the responsibility of fixing the prices, in consultation with the company, carrying out with due diligence, preparing the prospectus (offer documents) etc. The prospectus had to be submitted to SEBI for getting scrutiny. The trend continued in the early nineties as many large projects were launched after the economy was liberalised. Many of these companies came out with public issues and the retail participation increased dramatically. But many of the companies which raised money during this period just disappeared without a trace. Late Liberalisation Period: 1996-2005 (Book Building)

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The late nineties and the first few years of the current decade did not see much activity in the primary market even though we saw a huge bull run led by technology stocks at the turn of the decade. The bad experiences of retail investors kept them away from the market and made it difficult for companies to launch successful issues. The corporate sector was recovering from the damage caused by large capacity expansions and new projects set up in the nineties. The dormant primary issues market came alive after 2003 mostly because of the divestment programme of the government. The issue of Maruti Udyog, through which the government sold part of its stake in the company, rekindled retail investor interest in the primary market. The issue was made at a very reasonable price and investors made very good returns immediately. The year 2004 saw the primary market activity at its historic peak as some large private companies also came out with issues. Further divestment by the government; including the largest ever issue by an Indian company from ONGC, attracted more retail investors into the market. The IPO market continues to buzz in the current year as well. Taking advantage of the strength in the secondary market, many high profle companies are lining up to raise money from the market. The year started with the issue from Jet Airways which attracted a lot of interest from investors. As a result of tougher regulations, the quality of the issues has gone up substantially.

2006 onwards scenario: India's IPO market emerged as the eighth largest with $7.23 billion (Rs 30,000 crore) in net proceeds through 78 public issues, global research and consultancy firm Ernst & Young said in its Global IPO report. Across the world, the companies raised $246 billion, up from $167 billion in 2005, through a total of 1,729 IPOs, led by Chinese companies at the top with net proceeds of $56.6 billion. However, the biggest number of IPOs came from the United States with 187 offerings, followed by Japan with 185 and China with 175 IPOs. According to the study, India's increasing number of larger deals has been driven by the growth of Indian corporations and their need for additional capital for potential acquisitions. In 2007 Indian IPOs continue to surge in numbers. Continued strength is expected in the real estate and energy sector. "The rapid
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growth in emerging market economies has resulted in a migration of capital from the developed economies into the emerging markets," E&Y said. The localisation trend in India is evidenced by several billion-dollar IPOs hosted by Indian exchanges. In 2006, India's largest IPO, Reliance Petroleum raised $1.8 billion, followed by the oil production and exploration company, Cairn Energy, which raised $1.3 billion with both companies listing on domestic exchanges. However, some Indian companies are also listing abroad, especially London, Singapore and Luxembourg, primarily for higher valuations and visibility, the report noted. The private equity rush into India is creating the potential for many IPO exits. In 2006, private equity firms invested more than $7 billion in India. Top global private equity funds as well as local funds, have been key drivers of Indian IPO markets.

1.3.2 FACTORS CONSIDERED BY THE INVESTORS:

Promoter s Credibility

Promoter s past performance with reference to the companies promoted by them earlier. The integrity of the promoters should be found out with enquiries and from financial magazines and newspapers. the The managing director s background and experience in the field. The composition of the Board of Directors is to be studied to find out whether it is broad based and professionals are included. The credibility of the appraising institution or agency. The stake of the appraising agency in the forthcoming issue. Reliability of the demand and supply projections of the product. Competition faced in the market and the marketing strategy. If the product is export oriented, the tie-up with the foreign collaborator or agency for the purchase of products. Accounting policy. 13

Efficiency of Management

Project Details

Product

Financial Data

Revaluation of the assets, if any. Analysis of the data related to capital, reserves, turnover, profit, dividend record and profitability ratio. Litigation Pending litigations and their effect on the profitability of the company. Default in the payment of dues to the banks and financial institutions. A careful study of the general and specific risk factors should be carried out. A through reading of the auditor s report is needed especially with reference to significant notes to accounts, qualifying remarks and changes in the accounting policy. In the case of letter of offer the investors have to look for the recently audited working result at the end of letter of offer. Investor should find out whether all the required statutory clearance has been obtained, if not, what is the current status. The clearances used to have a bearing on the completion of the project. Promptness in replying to the enquiries of allocation of shares, refund of money, annual reports, dividends and share transfer should be assessed with the help of past record.

Risk Factors Auditor s Report

Statutory Clearance

Investor Service

HISTORY
The term initial public offering (IPO) slipped into everyday speech during the tech bull market of the late 1990s. Back then, it seemed you couldn't go a day without hearing about a dozen new dotcom millionaires in Silicon Valley who were cashing in on their latest IPO. The phenomenon spawned the term siliconaire, which described the dotcom entrepreneurs in their early 20s and 30s who suddenly found themselves living large on the proceeds from their internet companies' IPOs.

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INVESTORS are still wary of equities in the 1990s, to blame are the excesses in the primary market in the 1990s. Of the thousands of IPOs (initial public offerings) and offers for sale made between 1994 and 1996, less than a hundred were from companies with track record. Even in this shortlist, only a few managed to complete planned projects and deliver value to investors. The rest just frittered the money away. The primary market of the mid-1990s was merely used as a channel to move public funds into private hands. The Securities and Exchange Board of India (SEBI) was late to wake up to the excesses, but when it did, it improved the disclosure framework, tightened the prerequisites for an IPO, and towards the end of the decade, introduced book-building. ( This route brought to market quality, wealth-creating IPOs such as Hughes Software, i-flex solutions, Maruti, Bharti Tele-Ventures, TV Today and Divi's Labs, to name a few. Yet the corporate sector has still not fully lived down the consequences of the excesses of the mid1990s.)

INITIAL PUBLIC OFFERING (IPO)

The first public offering of equity shares or convertible securities by a company, which is followed by the listing of a companys shares on a stock exchange, is known as an Initial Public Offering. In other words, it refers to the first sale of a companys common shares to investors on a public stock exchange, with an intention to raise new capital. The most important objective of an IPO is to raise capital for the company. It helps a company to tap a wide range of investors who would provide large volumes of capital to the company for future growth and development. A company going for an IPO stands to make a lot of money

from the sale of its shares which it tries to anticipate how to use for further expansion and development. The company is not required to repay the capital and the new shareholders get a right to future profits distributed by the company.

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FPO
Further Public Offers are issued by companies or corporate bodies whose shares are already being traded in the capital market and they are issuing fresh shares either to fund the expansion of their existing business or to invest into other business activities.

Companies fall into two broad categories: Private and Public.

A privately held company has fewer shareholders and its owners don't have to disclose much information about the company. When a privately held corporation needs additional capital, it can borrow cash or sell stock to raise needed funds. Often "going public" is the best choice for a growing business. Compared to the costs of borrowing large sums of money for ten years or more, the costs of an initial public offering are small. The capital raised never has to be repaid. When a company sells its stock publicly, there is also the possibility for appreciation of the share price due to market factors not directly related to the company. Anybody can go out and incorporate a company: just put in some money, file the right legal documents and follow the reporting rules of jurisdiction such as Indian Companies Act 1956. It usually isn't possible to buy shares in a private company. One can approach the owners about investing, but they're not obligated to sell you anything. Public companies, on the other hand, have sold at least a portion of themselves to the public and trade on a stock exchange. This is why doing an IPO is also referred to as "going public."

Why go public??
Before deciding whether one should complete an IPO, it is important to consider the positive and negative effects that going public may have on their mind. Typically, companies go public to raise and to provide liquidity for their shareholders. But there can be other benefits. 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.
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 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.  Going public can also boost a companys reputation which in turn, can help the company to expand in the marketplace.

Reasons for Going Public

   Raising funds to finance capital expenditure programs like expansion, diversification, modernization, etc. Financing of increased working capital requirements Financing acquisitions like a manufacturing unit, brand acquisitions, tender offers for shares of another firm, etc.   Debt Refinancing Exit Route for Existing Investors

Advantages of Going Public

      Facilitates future funding by means of subsequent public offerings Enables valuation of company Provides liquidity to existing shares Increases the visibility and reputation of the company Commands better pricing than placement with few investors Enables the company to offer its shares as purchase consideration or as an exchange for the shares of another company

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Disadvantages of Going Public

       

Dilution of Stake makes co vulnerable to future takeovers Involves substantial Expenses Need to make continuous disclosures Increased regulatory monitoring Listing fees and Documentations Cost of maintaining Investor relations Takes substantial amount of management time and efforts

SIGNIFICANCE OF IPO

Investing in IPO has its own set of advantages and disadvantages. Where on one hand, high element of risk is involved, if successful, it can even result in a higher rate of return. The rule is: Higher the risk, higher the returns. The company issues an IPO with its own set of management objectives and the investor looks for investment keeping in mind his own objectives. Both have a lot of risk involved. But then investment also comes with an advantage for both the company and the investors. The significance of investing in IPO can be studied from 2 viewpoints for the company and for the investors. This is discussed in detail as follows:

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SIGNIFICANCE TO THE COMPANY:

When a privately held corporation needs additional capital, it can borrow cash or sell stock to raise needed funds. Or else, it may decide to go public. "Going Public" is the best choice for a growing business for the following reasons: 

The costs of an initial public offering are small as compared to the costs of borrowing large sums of money for ten years or more,

 

The capital raised never has to be repaid. When a company sells its stock publicly, there is also the possibility for appreciation of the share price due to market factors not directly related to the company.

It allows a company to tap a wide pool of investors to provide it with large volumes of capital for future growth.

SIGNIFICANCE TO THE SHAREHOLDERS: The investors often see IPO as an easy way to make money. One of the most attractive features of an IPO is that the shares offered are usually priced very low and the companys stock prices can increase significantly during the day the shares are offered. This is seen as a good The

opportunity by speculative investors looking to notch out some short-term profit.

speculative investors are interested only in the short-term potential rather than long-term gains.

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BRIEF INTORDUCTION ON CURRENT POSITION OF INDIAN IPO MARKET

India is being lauded as the savior of the ailing global IPO market with $3.3 billion worth of proceeds from eight deals. This makes India the largest IPO market in the world so far this year. According to Thomson Financial, the bulk of the volumes came from the biggest IPO deal so far this year Reliance Power's $3 billion IPO on January 21, 2008.

On January 15, 2008, Reliance Power attracted $27.5 billion of bids on the first day of its IPO, equivalent to 10.5 times the stock on offer, thereby, creating India's IPO record. Its upper cut off price was Rs. 450. The proposed IPO was to fund the development of its six power projects across the country.

Emaar MGFs IPO, at $1.6 billion is estimated to be the second largest IPO in the world so far this year, behind Reliance Power's $3 billion IPO.

Thomson Financial data reveals that India accounts for 49.1% of global IPO proceeds at the moment, compared to just 3.7% same time last year. Significant, given that global IPOs declined 36.1% over the last one year.

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The Indian capital market has performed quite well in 2007. It raised US$8.3 billion through 95 Initial Public Offers (IPOs). According to the Ernst & Young report, "Globalisation - Global IPO Trend Report 2007" India was the fifth largest market in the world in terms of the number of IPOs and the seventh largest in terms of the proceeds for the year

It was the real estate sector which took the maximum advantage of the bullish stock market trends in 2007. According to the industry body Assocham, real estate players raised the maximum amount of funds from the capital market through IPOs last year. Realty firms picked up around 42.7% of the total funds generated through IPOs. Of the Rs.34,119 crore raised in the primary market in the period starting from January 1, 2007 to mid-December, about Rs.14,591 crore was raised by the realty firms.

FINANCIAL YEAR 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

AMOUNT RAISED THROUHG IPO Rs 1039 crore Rs 17807 crore Rs 21432 crore Rs 23,676 crore Rs 24,994 crore Rs 52,253 crore

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WHAT IS PRIMARY MARKET AND WHAT IS SECONDARY MARKET?

When shares are bought in an IPO it is termed primary market. The primary market does not involve the stock exchanges. A company that plans an IPO contacts an investment banker who will in turn called on securities dealers to help sell the new stock issue. This process of selling the new stock issues to prospective investors in the primary market is called underwriting. When an investor buys shares from another investor at an agreed prevailing market price, it is called as buying from the secondary market. The secondary market involves the stock exchanges and it is regulated by a regulatory authority. In India, the secondary and primary markets are governed by the Security and Exchange Board of India (SEBI).

Kinds of public offerings

Primary offering new shares are sold to raise cash for the company Secondary offering existing shares (owned by VCs or firm founders) are sold, no new cash goes to company.A single offering may include both of these initial public offering.

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Some benefits/motivations:
Additional source of capital Increase debt capacity (give breathing room for debt) Stock prices give measure of performance Allows managers to be compensated with options, or have incentives otherwise directly tied to shareholder value Potentially more information about firm (analyst following), makes borrowing cheaper.

Understanding Issues
This portion tries to cover the basic concepts and questions related to issues (issues in the meaning of issuance of securities). The aim is towards understanding the various types of issues, eligibility norms, exemptions from the same. The disclosure requirements regarding the issuance of securities are covered in detail in the SEBI (Disclosure and Investor Protection) Guidelines, 2000.

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KINDS OF ISSUES
Primarily, issues can be classified as a Public, Rights or preferential issues (also known as private placements). While public and rights issues involve a detailed procedure, private placements or preferential issues are relatively simpler. The classification of issues is illustrated below:

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Public issues can be further classified into Initial Public offerings and further public offerings. In a public offering, the issuer makes an offer for new investors to enter its shareholding family. The issuer company makes detailed disclosures as per the DIP guidelines in its offer document and offers it for subscription. The significant features are illustrated below:

Initial Public Offering (IPO)

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 issuers securities.

Further public offering (FPO)

It is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations.

Rights Issue (RI)

It is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders unless they do not intend to subscribe to their entitlements.

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Private placement

It is an issue of shares or of convertible securities by a company to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. A private placement of shares or of convertible securities by a listed company is generally known by name of preferential allotment. A listed company going for preferential allotment has to comply with the requirements contained in Chapter XIII of SEBI (DIP) Guidelines pertaining to preferential allotment in SEBI (DIP) guidelines include pricing, disclosures in notice etc, in addition to the requirements specified in the Companies Act.

Free-pricing abused

As controls over pricing of equity were abolished in 1992, prudence took a backseat as companies set about raising funds at fancy prices; the pricing was justified with helpful projections of profitability dished out even by ICICI, IDBI, IFCI, Kotak Mahindra and Enam Securities, leave alone the plethora of lesser-known investment banking outfits. The earnings projections were vastly out of tune with reality. There was no element of the risk of business cycle built into them; in many cases, it appeared as if the price had been fixed, and the revenue and earnings numbers generated to justify it. That the IDBI's stock traded at the offer price for just a couple of days over an eight-year period and, subsequently, well below that price, tells the tale of abuse of free-pricing. Not surprisingly, this put investors off; they had patronised such IPOs in a big way as the first few offers in the free-pricing mode of IFCI, Bank of Baroda, Infosys and Satyam Computer delivered value. Corporate greed was penalised, as investor apathy ensured that between 1998 and 2001, the number of IPOs/offers for sale could be counted on the fingers of one hand. .

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A colossal misconception

This period was also witness to a popular notion that equity was the cheapest source of the funding, as the premium element was perceived as carrying no cost. What companies failed to recognise in this process they were also encouraged by investment banks seeking more IPO opportunities was that their capital cost could only be the same as the investor's expected rate return. By assuming and assigning a zero-cost to the premium element, companies converted what is, inarguably, the most expensive source of finance to the cheapest one. This led to an overhang on equity across Corporate India, with funds being mobilised in the domestic and global markets through the issuance of global depository receipts. As this understanding of the cost was not clued to reality, it soon fell apart.

Capacity overhang

The primary market boom of the mid-1990s also ensured excess of a different kind: A fad for capacity creation across a range of commodities, with the possible exception of aluminium and copper. Cement and steel were good examples. Buoyed by high cement and steel prices, and expectations of consistent double-digit growth in demand that was attributed to liberalisation of the economy, several firms set up cement and steel capacities. Binani Zinc, Sanghi Polesyter and the Rajan Raheja group and the DLF group (both cited backward integration to construction as the reason for their cement foray) set up large-sized cement units. Jindal Vijayanagar, Essar Steel, Bhushan Steel, Ispat Industries and Lloyds Steel completed the steel story. The effect of the overcapacity still exerts pressure on profitability. For instance, in cement, a better balance between demand and supply is expected only two years from now. This binge effectively ensured that even in the small number of companies where projects were implemented without exception marked by time and cost-overrun investors have had
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nothing to show by way of wealth accretion. Only the IPOs of the past two-and-half years have changed that. If the ongoing bullish phase is used to perpetrate excesses, the consequences would not be any different. Corporate India needs to walk a different path now, both for its sake as well as in the interest of investors.

Qualified Institutions Placement

It is a private placement of equity shares or securities convertible in to equity shares by a listed company to Qualified Institutions Buyers only in terms of provisions of Chapter XIIIA of SEBI (DIP) guidelines. The Chapter contains provisions relating to pricing, disclosures,

IPO GRADING
IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI, to the initial public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date. The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India. Such grading is generally assigned on a five-point point scale with a higher score indicating stronger fundamentals and vice versa as below.

IPO grade 1: Poor fundamentals IPO grade 2: Below-average fundamentals IPO grade 3: Average fundamentals IPO grade 4: Above-average fundamentals

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IPO grade 5: Strong fundamentals IPO grading has been introduced as an endeavor to make additional information available for the investors in order to facilitate their assessment of equity issues offered through an IPO. - IPO grading can be done either before filing the draft offer documents with SEBI or thereafter. However, the Prospectus/Red Herring Prospectus, as the case may be, must contain the grade/s given to the IPO by all CRAs approached by the company for grading such IPO. - Further information regarding the grading process may be obtained from the Credit Rating Agencies. - The company desirous of making the IPO is required to bear the expenses incurred for grading such IPO. - A company which has filed the draft offer document for its IPO with SEBI, on or after 1st May, 2007, is required to obtain a grade for the IPO from at least one CRA. - IPO grade/s cannot be rejected. Irrespective of whether the issuer finds the grade given by the rating agency acceptable or not, the grade has to be disclosed as required under the DIP Guidelines. - However the issuer has the option of opting for another grading by a different agency. In such an event all grades obtained for the IPO will have to be disclosed in the offer documents, advertisements etc. - IPO grading is intended to run parallel to the filing of offer document with SEBI and the consequent issuance of observations. Since issuance of observation by SEBI and the grading process, function independently, IPO grading is not expected to delay the issue process. - The IPO grading process is expected to take into account the prospects of the industry in which the company operates, the competitive strengths of the company that would allow it to address the risks inherent in the business(es) and capitalise on the opportunities available, as well as the companys financial position. - While the actual factors considered for grading may not be identical or limited to the following, the areas listed below are generally looked into by the rating agencies, while arriving at an IPO grad Business Prospects and Competitive Position
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i. ii.

Industry Prospects Company Prospects

Financial Position Management Quality Corporate Governance Practices Compliance and Litigation History New ProjectsRisks and Prospects

It may be noted that the above is only indicative of some of the factors considered in the IPO grading process and may vary on a case to case basis. - IPO grading is done without taking into account the price at which the security is offered in the IPO. Since IPO grading does not consider the issue price, the investor needs to make an independent judgment regarding the price at which to bid for/subscribe to the shares offered through the IPO. - All grades obtained for the IPO along with a description of the grades can be found in the Prospectus. Abridged Prospectus, issue advertisement or any other place where the issuer company is making advertisement for its issue. Further the Grading letter of the Credit Rating Agency which contains the detailed rationale for assigning the particular grade will be included among the Material Documents available for Inspection. - An IPO grade is NOT a suggestion or recommendation as to whether one should subscribe to the IPO or not. IPO grade needs to be read together with the disclosures made in the prospectus including the risk factors as well as the price at which the shares are offered in the issue. - The grades are allocated on a 5-point scale, the lowest being Grade 1 and highest Grade
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- IPO Grading is intended to provide the investor with an informed and objective opinion expressed by a professional rating agency after analyzing factors like business and financial prospects, management quality and corporate governance practices etc. However, irrespective of the grade obtained by the issuer, the investor needs to make his/her own independent decision regarding investing in any issue after studying the contents of the prospectus including risk factors carefully. - SEBI does not play any role in the assessment made by the grading agency. The grading is intended to be an independent and unbiased opinion of that agency. - The grading is intended to be an independent and unbiased opinion of a rating agency. SEBI does not pass any judgment on the quality of the issuer company. SEBIs observations on the IPO document are entirely independent of the IPO grading process or the grades received by the company.

Rating IPO

POWERFUL GUIDANCE TOOL

SEBI's proposal to make the IPO assessment available to investors is a step in the right direction. Though the move to make IPO assessment mandatory has drawn some critical comments, the need for a tool to help investors make better-informed decisions and judge the quality of issues hitting the market is undisputed. An IPO assessment brings four major pluses.

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 Firstly, it improves information content through a professional and independent assessment.  Secondly, it is relief for individual investors from information overload.  Thirdly, it provides disincentives for weak companies to come to the market in the hope of raising easy capital.  And fourthly, it brings about greater level of investor sophistication.

ARRANGING AN IPO
1. Select Underwriter - Provides procedural, financial advice - Ultimately buys issue from company (at issue price) - Ultimately sells it to public (at offer price)

2. Prepare Registration Statement for approval of SEC (in accord with Securities Act of 1933). Formal summary that provides information on an issue of securities.

3. Prepare Prospectus Streamlined version of registration statement, for consideration by potential investors.

4. Set price

Road show Talks organized to introduce company to potential investors, before the IPO.

Bookbuilding
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Book Building means a process undertaken by which a 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 the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document.

5.

Selling the shares

Best efforts offering IPO method in which underwriter promises to sell as much as possible, give best effort, not commit to selling all of issue.

Firm commitment offering: Method in which underwriter buys the whole issue, bears all risk.

y y

Syndicate: Group of underwriters formed to sell a particular issue Spread - Difference between public offer price and price paid by underwriter (issue price). Biggest part of underwriter compensation.

PROCEDURE OF SALE OF IPO S

IPOs generally involve one or more investment banks as "underwriters." 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:
y

Dutch auction
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y y y y

Firm commitment Best efforts Bought deal Self Distribution of Stock

A large IPO is usually underwritten by a "syndicate" of investment banks led by one or more major investment banks (lead underwriter). Upon selling the shares, 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 proportions of the IPO, take the highest commissionsup to 8% in some cases. Multinational IPOs may have as many as three syndicates to deal with differing legal requirements in both the issuer's domestic market and other regions. For example, an issuer based in the E.U. may be represented by the main selling syndicate in its domestic market, Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in the main selling group is also the lead bank in the other selling groups. Because of the wide array of legal requirements, IPOs typically involve one or more law firms with major practices in securities law, such as the Magic Circle firms of London and the white shoe firms of New York City. Usually, the offering will include the issuance of new shares, intended to raise new capital, as well the secondary sale of existing shares. However, certain regulatory restrictions and restrictions imposed by the lead underwriter are often placed on the sale of existing shares. Public offerings are 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 clients is paid through a sales credit instead of a commission. The client pays no commission to purchase the shares of a public offering; the purchase price simply includes the built-in sales credit. The issuer usually allows the underwriters an option to increase the size of the offering by up to 15% under certain circumstance known as the greenshoe or overallotment option.

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Three basic IPO costs

1. Administrative costs: for preparing registration, legal counsel, preparing and printing prospectus, etc. 2. Spread: Difference between public offer price and price paid by underwriter (issue price). 3. Underpricing: Difference between what stock is offered at and what its really worth  Can be measured, roughly, as end-of-first-trading-day price minus offer price  A hidden cost, but usually the biggest cost!

Public issues after the IPO

Seasoned Offering (SEO) An equity issue by a firm after its IPO General Cash Offer - Sale of securities open to all investors by an already public company. Used for virtually all U.S. equity and debt issues Shelf Registration A procedure created by SEC Rule 415 that allows firms to file one registration statement for several issues of the same security. Covers financing plans up to 2 years ahead Speeds up issue process; dont have to issue all at once Usually used for relatively garden variety issues, not complex issues where underwriters stamp of approval may have value.

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SOME TERMS IN IPO INDUSTRY

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 Registrar of Companies (ROC) and Stock Exchanges. 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 specifies 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.

Red Herring Prospectus

It is a prospectus which does not have details of either price or number of shares being offered or the amount of issue. This means that in case price is not disclosed, the number of shares and the upper and lower price bands are disclosed. On the other hand, an issuer can state the issue size and the number of shares are determined later. An RHP for and FPO can be filed with the ROC without the price band and the issuer, in such a case will notify the floor price or a price band by way of an advertisement one day prior to the opening of the issue. In the case of bookbuilt issues, it is a process of price discovery and the price cannot be determined until the bidding process is completed. Hence, such details are not shown in the Red Herring prospectus
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filed with ROC in terms of the provisions of the Companies Act. Only on completion of the bidding process, the details of the final price are included in the offer document. The offer document filed thereafter with ROC is called a prospectus.

Abridged Prospectus

Means the memorandum as prescribed in Form 2A under sub-section (3) of section 56 of the Companies Act, 1956. It contains all the salient features of a prospectus. It accompanies the application form of public issues.

Letter of offer

Means the offer document prepared by company for its rights issue and which is filed with the Stock Exchanges. The letter of offer contains all the disclosures as required in term of SEBI(DIP) guidelines and enable shareholder in making an informed decision.

Abridged letter of offer

Means the abridged version of the letter of offer. Listed company is required to send the abridged letter of offer to each and every shareholder who is eligible for participating in the rights issue along with the application form. A company is also required to send detailed letter of offer upon request by any Shareholder.

Placement Document

Means document prepared by Merchant Banker for the purpose of Qualified Institutions placement and contains all the relevant and material disclosures to enable QIBs to make an informed decision

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Lock-in

Lock-in indicates a freeze on the shares. SEBI (DIP) 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. The requirements are detailed in Chapter IV of DIP guidelines. There is lock-in on the shares held before IPO and also on shares acquired through preferential allotment route. However there is no lock- in on shares/ securities allotted through QIP route. The requirements are detailed in Chapter IV, Chapter XIII and Chapter XIIIA of DIP guidelines.

Promoter

The promoter has been defined as a person or persons who are in over-all control of the company, who are instrumental in the formulation of a plan or programme pursuant to which the securities are offered to the public and those named in the prospectus as promoters(s). It may be noted that a director / officer of the issuer company or person, if they are acting as such merely in their professional capacity are not be included in the definition of a promoter. 'Promoter Group' includes the promoter, an immediate relative of the promoter (i.e. any spouse of that person, or any parent, brother, sister or child of the person or of the spouse). In case promoter is a company, a subsidiary or holding company of that company; any company in which the promoter holds 10% or more of the equity capital or which holds 10% or more of the equity capital of the Promoter; any company in which a group of individuals or companies or combinations thereof who holds 20% or more of the equity capital in that company also holds 20% or more of the equity capital of the issuer company. In case the promoter is an individual, any company in which 10% or more of the share capital is held by the promoter or an immediate relative of the promoter' or a firm or HUF in which the 'Promoter' or any one or more of his immediate relative is a member; any company in which a company specified in, holds 10% or more, of the share capital; any HUF or firm in which the aggregate share of the promoter and his immediate relatives is equal to or more than 10% of the total, and all persons whose shareholding is aggregated for the purpose of disclosing in the prospectus "shareholding of the promoter group".
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Green-shoe Option

A Green Shoe option means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism for a period not exceeding 30 days in accordance with the provisions of Chapter VIIIA of DIP Guidelines, which is granted to a company to be exercised through a Stabilizing Agent. This is an arrangement wherein the issue would be over allotted to the extent of a maximum of 15% of the issue size. From an investors perspective, an issue with green shoe option provides more probability of getting shares and also that post listing price may show relatively more stability as compared to market.

E-IPO

A company proposing to issue capital to public through the on-line system of the stock exchange for offer of securities can do so if it complies with the requirements under Chapter 11A of DIP Guidelines. The appointment of various intermediaries by the issuer includes a prerequisite that such members/registrars have the required facilities to accommodate such an online issue process.

Safety Net

Any safety net scheme or buy-back arrangements of the shares proposed in any public issue shall be finalized by an issuer company with the lead merchant banker in advance and disclosed in the prospectus. Such buy back or safety net arrangements shall be made available only to all original resident individual allottees limited up to a maximum of 1000 shares per allottee and the offer is kept open for a period of 6 months from the last date of dispatch of securities. The details regarding Safety Net are covered under Clause 8.18 of DIP Guidelines

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Syndicate Member

The Book Runner(s) may appoint those intermediaries who are registered with the Board and who are permitted to carry on activity as an Underwriter as syndicate members. The syndicate members are mainly appointed to collect and entre the bid forms in a book built issue.

Flipping Flipping is reselling a hot IPO stock in the first few days to earn a quick profit. This isn't easy to do, and you'll be strongly discouraged by your brokerage. The reason behind this is that companies want long-term investors who hold their stock, not traders. There are no laws that prevent flipping, but your broker may blacklist you from future offerings Institutional investors flip stocks all the time and make big money. The double standard exists and there is nothing we can do about it because they have the buying power. Because of flipping, it's a good rule not to buy shares of an IPO if you don't get in on the initial offering. Many IPOs that have big gains on the first day will come back to earth as the institutions take their profits.

Open book/closed book

Presently, in issues made through book building, Issuers and merchant bankers are required to ensure online display of the demand and bids during the bidding period. This is the Open book system of book building. Here, the investor can be guided by the movements of the bids during the period in which the bid is kept open. Under closed book building, the book is not made public and the bidders will have to take a call on the price at which they intend to make a bid without having any information on the bids submitted by other bidders.

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Hard underwriting

Hard underwriting is when an underwriter agrees to buy his commitment at its earliest stage. The underwriter guarantees a fixed amount to the issuer from the issue. Thus, in case the shares are not subscribed by investors, the issue is devolved on underwriters and they have to bring in the amount by subscribing to the shares. The underwriter bears a risk which is much higher in soft underwriting.

Soft underwriting

Soft underwriting is when an underwriter agrees to buy the shares at later stages as soon as the pricing process is complete. He then, immediately places those shares with institutional players. The risk faced by the underwriter as such is reduced to a small window of time. Also, the soft underwriter has the option to invoke a force Majeure (acts of God) clause in case there are certain factors beyond the control that can affect the underwriters ability to place the shares with the buyers.

Cut Off Price

In Book building issue, the issuer is required to indicate either the price band or a floor price in the red herring prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called Cut off price. This is decided by the issuer and LM after considering the book and investors appetite for the stock. SEBI (DIP) guidelines permit only retail individual investors to have an option of applying at cut off price.

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Differential pricing

Pricing of an issue where one category is offered shares at a price different from the other category is called differential pricing. In DIP Guidelines differential pricing is allowed only if the securities to applicants in the firm allotment category is at a price higher than the price at which the net offer to the public is made. The net offer to the public means the offer made to the Indian public and does not include firm allotments or reservations or promoters contributions.
Basis of Allocation/Basis of Allotment

After the closure of the issue, the bids received are aggregated under different categories i.e., firm allotment, Qualified Institutional Buyers (QIBs), Non-Institutional Buyers (NIBs), Retail, etc. The oversubscription ratios are then calculated for each of the categories as against the shares reserved for each of the categories in the offer document. Within each of these categories, the bids are then segregated into different buckets based on the number of shares applied for. The oversubscription ratio is then applied to the number of shares applied for and the number of shares to be allotted for applicants in each of the buckets is determined. Then, the number of successful allottees is determined. This process is followed in case of proportionate allotment. In case of allotment for QIBs, it is subject to the discretion of the post issue lead manager.

Qualified Institutional Buyer (QIBs)

Qualified Institutional Buyers are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets. In terms of clause 2.2.2B (v) of DIP Guidelines, a Qualified Institutional

Buyer shall mean: A . public financial institution as defined in section 4A of the Companies Act, 1956; B . scheduled commercial banks; C . mutual funds;

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D . foreign institutional investor registered with SEBI; E . multilateral and bilateral development financial institutions; F . venture capital funds registered with SEBI. G . foreign Venture capital investors registered with SEBI. H . state Industrial Development Corporations. I . insurance Companies registered with the Insurance Regulator and Development Authority (IRDA). J . provident Funds with minimum corpus of Rs. 25 crores K . pension Funds with minimum corpus of Rs. 25 crores) These entities are not required to be registered with SEBI as QIBs. Any entities falling under the categories specified above are considered as QIBs for the purpose of participating in primary issuance process.

Application Supported by Blocked Amount (ASBA)

Means an application for subscribing to an issue containing an authorization to block the application money in a bank account. ASBA Investor Means an Investor who intends to apply through ASBA process and a. is a Resident Retail Individual Investor b. is bidding at cut-off, with single option as to the number of shares bid for; c. is applying through blocking of funds in a bank account with the SCSB; d. has agreed not to revise his/her bid; e. is not bidding under any of the reserved categories.

Self Certified Syndicate Bank (SCSB) It is a Banker to an Issue registered under SEBI (Bankers to an Issue) Regulations, 1994 which offers the service of making an Applications Supported by Blocked

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Amount and recognized as such by the Board)

Minority IPO An initial public offering in which a parent company spins off one of its subsidiaries or divisions, but retains a majority stake in the company after issuance. This means that after the public offering, the parent company will still have a controlling stake of the new public company. The parent company may retain this majority stake forever or may slowly dissolve their ownership over time. This type of IPO allows the company to raise funds, accessing the value of the subsidiary, to fund its own operation or return value to shareholders.

Public Offering Price - POP The price at which new issues are offered to the public by an underwriter. When underwriters determine the public offering price, they look at a number of factors. Some of these include the company's financial statements (how profitable it is), public trends, growth rates and even investor confidence.

Underpricing

The pricing of an initial public offering (IPO) below its market value. When the offer price is lower than the price of the first trade, the stock is considered to be underpriced. A stock is usually only underpriced temporarily because the laws of supply and demand will eventually drive it toward its intrinsic value.
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It is believed that IPOs are often underpriced because of concerns relating to liquidity and uncertainty about the level at which the stock will trade. The less liquid and less predictable the shares are, the more underpriced they will have to be in order to compensate investors for the risk they are taking. Because an IPO's issuer tends to know more about the value of the shares than the investor, a company must underprice its stock to encourage investors to participate in the IPO.

Direct Public Offering - DPO

When a company raises capital by marketing its shares directly to its own customers, employees, suppliers, distributors and friends in the community. DPOs are an alternative to underwritten public offerings by securities broker-dealer firms where a company's shares are sold to the broker's customers and prospects. Direct public offerings are considerably less expensive than traditional underwritten offerings. Additionally, they don't have the restrictions that are usually associated with bank and venture capital financing. On the other hand, a DPO will typically raise much less than a traditional offering.

Quiet Period

In terms of an IPO, the period where an issuer is subject to a SEC ban on promotional publicity. The quiet period usually lasts either 40 or 90 days from the IPO. In other words, If you take your company public, you can't talk about your stock to anybody for 3 months.

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There are two time windows commonly referred to as "quiet periods" during an IPO's history. The first and the one linked above is the period of time following the filing of the company's registration statement, but before SEC staff declare the registration statement effective. During this time, issuers, company insiders, analysts, and other parties are legally restricted in their ability to discuss or promote the upcoming IPO. The other "quiet period" refers to a period of 40 calendar days following an IPO's first day of public trading. During this time, insiders and any underwriters involved in the IPO, are restricted from issuing any earnings forecasts or research reports for the company. Regulatory changes enacted by the SEC as part of the Global Settlement, enlarged the "quiet period" from 25 days to 40 days on July 9, 2002. When the quiet period is over, generally the lead underwriters will initiate research coverage on the firm. Further to this, the NASD and NYSE have approved a rule mandating a 10-day quiet period after a secondary offering and a 15-day quiet period both before and after expiration of a "lock-up agreement" for a securities offering.

Pricing

Historically, IPOs both globally and in the US have been underpriced. The effect of initial underpricing an IPO is to generate additional interest in the stock when it first becomes publicly traded. This can lead to significant gains for investors who have been allocated shares of the IPO at the offering price. However, underpricing an IPO results in "money left on the table"lost capital that could have been raised for the company had the stock been offered at a higher price.

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The danger of overpricing is also an important consideration. If a stock is offered to the public at a higher price than the market will pay, the underwriters may have trouble meeting their commitments to sell shares. Even if they sell all of the issued shares, if the stock falls in value on the first day of trading, it may lose its marketability and hence even more of its value. Investment banks, therefore, take many factors into consideration when pricing an IPO, and attempt to reach an offering price that is low enough to stimulate interest in the stock, but high enough to raise an adequate amount of capital for the company. The process of determining an optimal price usually involves the underwriters ("syndicate") arranging share purchase commitments from lead institutional investors.

Issue price

A company that is planning an IPO appoints lead managers to help it decide on an appropriate price at which the shares should be issued. There are two ways in which the price of an IPO can be determined: y Either the company, with the help of its lead managers, fixes a price or y The price is arrived at through the process of book building. Note: Not all IPOs are eligible for delivery settlement through the DTC system, which would then either require the physical delivery of the stock certificates to the clearing agent bank's custodian, or a delivery versus payment ("DVP") arrangement with the selling group brokerage firm. This information is not sufficient.

Who decides the price of an issue?

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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 where company and LM fix a price (called fixed price) and other, where the company and 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).

a. What are Fixed Price offers?

An issuer company is allowed to freely price the issue. The basis of issue price is disclosed in the offer document where the issuer discloses in detail about the qualitative and quantitative factors justifying the issue price. The Issuer company can mention a price band of 20% (cap in the price band should not be more than 20% of the floor price) in the Draft offer documents filed with SEBI and actual price can be determined at a later date before filing of the final offer document with SEBI/ROCs.

b. What does price discovery through book building process mean?

Book Building means a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for the securities is assessed on the basis of the bids obtained for the quantum of securities offered for subscription by the issuer. This method provides an opportunity to the market to discover price for securities.

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Book Building in Detail

How does Book Building work?

Book building is a process of price discovery. Hence, the Red Herring prospectus does not contain a price. Instead, the red herring prospectus contains either the floor price of the securities offered through it or a price band along with the range within which the bids can move. The applicants bid for the shares quoting the price and the quantity that they would like to bid at. Only the retail investors have the option of bidding at cut-off. After the bidding process is complete, the cut-off price is arrived at on the lines of Dutch auction. The basis of Allotment (Refer Q. 15.j) is then finalized and letters allotment/refund is undertaken. The final prospectus with all the details including the final issue price and the issue size is filed with ROC, thus completing the issue process.

What is a price band?

The red herring prospectus may contain either the floor price for the securities or a price band within which the investors can bid. The spread between the floor and the cap of the price band shall not be more than 20%. In other words, it means that the cap should not be more than 120% of the floor price. The price band can have a revision and such a revision in the price band shall be widely disseminated by informing the stock exchanges, by issuing press release and also indicating the change on the relevant website and the terminals of the syndicate members. In case the price band is revised, the bidding period
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shall be extended for a further period of three days, subject to the total bidding period not exceeding thirteen days.

Who decides the price band?

It may be understood that the regulatory mechanism does not play a role in setting the price for issues. It is up to the company to decide on the price or the price band, in consultation with Merchant Bankers. The basis of issue price is disclosed in the offer document. The issuer is required to disclose in detail about the qualitative and quantitative factors justifying the issue price.

What is firm allotment?

A company making an issue to public can reserve some shares on allotment on firm basis for some categories as specified in DIP guidelines. Allotment on firm basis indicates that allotment to the investor is on firm basis. DIP guidelines provide for maximum % of shares which can be reserved on firm basis. The shares to be allotted on firm allotment category can be issued at a price different from the price at which the net offer to the public is made provided that the price at which the security is being offered to the applicants in firm allotment category is higher than the price at which securities are offered to public.

What is reservation on competitive basis?

Reservation on Competitive Basis is when allotment of shares is made in proportion to the shares applied for by the concerned reserved categories. Reservation on competitive basis can be made in a public issue to the Employees of the company, Shareholders of the
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promoting companies in the case of a new company and shareholders of group companies in the case of an existing company, Indian Mutual Funds, Foreign Institutional Investors (including non resident Indians and overseas corporate bodies), Indian and Multilateral development Institutions and Scheduled Banks.
Preference while doing the allotment

There cannot be any discretion in the allotment process. Prior to the SEBI Circular on DIP Guidelines dated September 19, 2005, the allotment to the Qualified Institutional Buyers (QIBs) was on a discretionary basis. This however has been amended and all allottees are allotted shares on a proportionate basis within their respective categories.

Who is eligible for reservation and how much?

In a book built issue allocation to Retail Individual Investors (RIIs), Non Institutional Investors (NIIs) and Qualified Institutional Buyers (QIBs) is in the ratio of 35:15: 50 respectively. In case the book built issues are made pursuant to the requirement of mandatory allocation of 60% to QIBs in terms of Rule 19(2)(b) of SCRR, the respective figures are 30% for RIIs and 10% for NIIs. This is a transitory provision pending harmonization of the QIB allocation in terms of the aforesaid Rule with that specified in the guidelines.

How is the Retail Investor defined as?

Retail individual investor means an investor who applies or bids for securities of or for a value of not more than Rs.1,00,000.

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GUIDELINES ON BOOK BUILDING

An issuer company proposing to issue capital through book building shall comply with the following:
75% Book Building Process

In an issue of securities to the public through a prospectus the option for 75% book building shall be available to the issuer company subject to the following: The option of book-building shall be available to all body corporate which are eligible to make an issue of capital to the public.

The book-building facility shall be available as an alternative the company to the extent of the percentage of the issue which can be reserved for firm allotment.

The copy of the draft prospectus filed with the Board may be circulated by the Book Runner to the institutional buyers who are eligible for firm allotment and to the intermediaries eligible to act as underwriters inviting offers for subscribing to the securities. The draft prospectus to be circulated shall indicate the price band within which the securities are being offered for subscription. The Book Runner on receipt of the offers shall maintain a record of the names and number of securities ordered and the price at which the institutional buyer or underwriter is willing to subscribe to securities under the placement portion. The underwriters shall maintain a record of the orders received by him for subscribing to the issue out of the placement portion. Securities as well as the price at which the underwriter shall subscribe to the securities. Provided that the Book Runner shall have an option of requiring the underwriters to the net offer to the public to pay in advance all monies required to be paid in respect of their underwriting commitment. (xv) On determination of the issue price within two day, thereafter the prospectus shall be filed with the Registrar of Company.

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(xvi) The issuer company shall open two different accounts for collection of application moneys, one f or the private placement portion and the other for the public subscription

The Book Runner and other intermediaries associated with the book building process shall maintain records of the book building process. The Board shall have the right to inspect such records.
Offer to Public Through Book Building Process

An issuer company may, subject to the requirements make an issue of securities to the public through a prospectus in the following manner a. 100% of the net offer to the public through book building process, or b. 75% of the net offer to the public through book building process and 25% at the price determined through book building.
) )

Procedure for bidding:

The method and process of bidding shall be subject to the following: Bid shall be open for at least three working days and not more than seven working days which may be extended to a maximum of ten working days in case the price band is revised. Bidding shall be permitted only if an electronically linked transparent facility is used.

Bidding Form

There shall be a standard bidding form to ensure uniformity in bidding and accuracy. The bidding form shall contain information about the investor, the price and the number of securities that the investor wishes to bid. The bidding form before being issued to the bidder shall be serially
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numbered at the bidding centres and date and time stamped.

)

Allocation / Allotment Procedure

In case an issuer company makes an issue of 100% of the net offer to public through 100% book building process. a) not less than 35% of the net offer to the public shall be available for allocation to retail individual investors; b) not less than 15% of the net offer to the public shall be available for allocation to non institutional investors i.e. investors other than retail individual investors and Qualified Institutional Buyers; c) not more than 50% of the net offer to the public shall be available for allocation to Qualified Institutional Buyers. Provided that 50% of net offer to public shall be mandatorily allotted to the Qualified Institutional Buyers, in case the issuer company is making a public issue.
Maintenance of Books and Records

(i) A final book of demand showing the result of the allocation process shall be maintained by the book runner/s. (ii) The Book Runner/s and other intermediaries in the book building process associated shall maintain records of the book building prices. (iii) The Board shall have the right to inspect the records, books and documents relating to the Book building process and such person shall extend full co-operation.

GUIDELINES ON INITIAL PUBLIC OFFERS THROUGH THE STOCK EXCHANGE

ON-LINE SYSTEM (e-IPO)

A company proposing to issue capital to public through the on-line system of the stock exchange for offer of securities shall comply with the requirements as contained in this Chapter in addition to other requirements for public issues as given in these Guidelines, wherever applicable.

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Agreement with the Stock exchange.

The company shall enter into an agreement with the Stock Exchange(s) which have the requisite system of on-line offer of securities. The agreement mentioned in the above clause shall specify inter-alia, the rights, duties, responsibilities and obligations of the company and stock exchange (s) inter se. The agreement may also provide for a dispute resolution mechanism between the company and the stock exchange.

Appointment of Brokers

The stock exchange, shall appoint brokers of the exchange, who are registered with SEBI, for the purpose of accepting applications and placing orders with the company. For the purposes of this Chapter, the brokers, so appointed accepting applications and application monies, shall be considered as collection centres. The broker/s so appointed, shall collect the money from his/their client for every order placed by him/them and in case the client fails to pay for shares allocated as per the Guidelines, the broker shall pay such amount.
Appointment of Registrar to the Issue

The company shall appoint a Registrar to the Issue having electronic connectivity with the Stock Exchange/s through which the securities are offered under the system.
Listing

The company may apply for listing of its securities on an exchange other than the exchange through which it offers its securities to public through the on-line system.
Responsibility of the Lead Manager
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The Lead Manger shall be responsible for co-ordination of all the activities amongst various intermediaries connected in the issue / System. The names of brokers appointed for the issue alongwith the names of the other intermediaries, namely, Lead managers to the issue and Registrars to the Issue shall be disclosed in the prospectus and application form.
Mode of operation

The company shall, after filing the offer document with ROC and before opening of the issue, make an issue advertisement in one English and one Hindi daily with nation wide circulation, and one regional daily with wide circulation at the place where the registered office of the issuer company is situated.

SHELF PROSPECTUS

Shelf prospectus shall apply to the issues of securities to be made by public sector banks, scheduled commercial banks and public financial institutions. The provisions of these guidelines relating to public issues shall apply in respect of such issues.

Role of intermediaries
a. Who are the intermediaries in an issue?

Merchant Bankers to the issue or Book Running Lead Managers (BRLM), syndicate members, Registrars to the issue, Bankers to the issue, Auditors of the company, Underwriters to the issue, Solicitors, etc. are the intermediaries to an issue. The issuer discloses the addresses, telephone/fax numbers and email addresses of these

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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.

b. Who is eligible to be a BRLM?

A Merchant banker possessing a valid SEBI registration in accordance with the SEBI (Merchant Bankers) Regulations, 1992 is eligible to act as a Book Running Lead Manager to an issue.

c. What is the role of a Lead Manager? (pre and post issue)

In the pre-issue process, the Lead Manager (LM) takes up the due diligence of companys operations/ management/ business plans/ legal etc. Other activities of the LM include drafting and design of Offer documents, Prospectus, statutory advertisements and memorandum containing salient features of the Prospectus. The BRLMs shall ensure compliance with stipulated requirements and completion of prescribed formalities with the Stock Exchanges, ROC and SEBI including finalisation of Prospectus and ROC filing. Appointment of other intermediaries viz., Registrar(s), Printers, Advertising Agency and Bankers to the Offer is also included in the pre-issue processes. The LM also draws up the various marketing strategies for the issue. The post issue activities including management of escrow accounts, coordinate non-institutional allocation, intimation of allocation and dispatch of refunds to bidders etc are performed by the LM. The post Offer activities for the Offer will involve essential follow-up steps, which include the finalization of trading and dealing of instruments and dispatch of certificates and demat of delivery of shares, with the various agencies connected with the work such as the Registrar(s) to the Offer and Bankers to the Offer and the bank handling refund business. The merchant banker shall be responsible for ensuring that these agencies fulfill their functions and enable it to discharge this responsibility through suitable agreements with
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the Company. A merchant banker is required to do the necessary due diligence in case of QIP mechanism.

d. What is the role of a registrar?

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.

e. What is the role of bankers to the issue?

Bankers to the issue, as the name suggests, carries out all the activities of ensuring that the funds are collected and transferred to the Escrow accounts. The Lead Merchant Banker shall ensure that Bankers to the Issue are appointed in all the mandatory collection centers as specified in DIP Guidelines. The LM also ensures follow-up with bankers to the issue to get quick estimates of collection and advising the issuer about closure of the issue, based on the correct figures.

f. Question on Due diligence

The Lead Managers state that they have examined various documents including those relating to litigation like commercial disputes, patent disputes, disputes with collaborators etc. and other materials in connection with the finalization of the offer
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document pertaining to the said issue; and on the basis of such examination and the discussions with the Company, its Directors and other officers, other agencies, independent verification of the statements concerning the objects of the issue, projected profitability, price justification, etc., they state that they have ensured that they are in compliance with SEBI, the Government and any other competent authority in this behalf.

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 - it's 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.

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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 doesn't 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 aren't known at that time. With the red herring in hand, the underwriter and company attempt to 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 isn't an easy decision: it depends on the company, the success of the road show and, most importantly, current market conditions. Of course, it's 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

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Guide to understand an Offer Document

This section basically tries to tell the reader about the structure of presentation of the content in the Offer Document. This is with a view to help the reader navigate through the content of an offer document.

A. Cover Page

The Cover Page of the offer document covers full contact details of the issuer company, lead managers and registrars, the nature, number, price and amount of instruments offered and issue size, and the particulars regarding listing. Other details such as Credit Rating, IPO Grading, if opted for, risks in relation to the first issue, etc are disclosed if applicable.

B. Risk Factors

Here, the issuers management gives its view on the Internal and external risks faced by the company. Here, the company also makes a note on the forward looking statements. This information is disclosed in the initial pages of the document and it is also clearly disclosed in the abridged prospectus. It is generally advised that the investors should go through all the risk factors of the company before making an investment decision.

C. Introduction

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The introduction covers a summary of the industry and business of the issuer company, the offering details in brief, summary of consolidated financial, operating and other data. General Information about the company, the merchant bankers and their responsibilities, the details of brokers/syndicate members to the Issue, credit rating (in case of debt issue), debenture trustees (in case of debt issue), monitoring agency, book building process in brief and details of underwriting Agreements are given here. Important details of capital structure, objects of the offering, funds requirement, funding plan, schedule of implementation, funds deployed, sources of financing of funds already deployed, sources of financing for the balance fund requirement, interim use of funds, basic terms of issue, basis for issue price, tax benefits are covered.

D. About us

This presents a review of on the details of the business of the company, business strategy, competitive strengths, insurance, industry-regulation (if applicable), history and corporate structure, main objects, subsidiary details, management and board of directors, compensation, corporate governance, related party transactions, exchange rates, currency of presentation dividend policy and management's discussion and analysis of financial condition and results of operations are given.

E. Financial Statements

Financial statement, changes in accounting policies in the last three years and differences between the accounting policies and the Indian Accounting Policies (if the

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Company has presented its Financial Statements also as per Either US GAAP/IAS are presented.

F. Legal and other information

Outstanding litigations and material developments, litigations involving the company and its subsidiaries, promoters and group companies are disclosed. Also material developments since the last balance sheet date, government approvals/licensing arrangements, investment approvals (FIPB/RBI etc.), all government and other approvals, technical approvals, indebtedness, etc. are disclosed.

G. Other regulatory and statutory disclosures

Under this head, the following information is covered: authority for the Issue, prohibition by SEBI, eligibility of the company to enter the capital market, disclaimer clause, disclaimer in respect of jurisdiction, distribution of information to investors, disclaimer clause of the stock exchanges, listing, impersonation, minimum subscription, letters of allotment or refund orders, consents, expert opinion, changes in the auditors in the last 3 years, expenses of the issue, fees payable to the lead managers, fees payable to the issue management team, fees payable to the registrars, underwriting commission, brokerage and selling commission, previous rights and public issues, previous issues for cash, issues otherwise than for cash, outstanding debentures or bonds, outstanding preference shares, commission and brokerage on, previous issues, capitalization of reserves or profits, option to subscribe in the issue, purchase of property, revaluation of assets, classes of shares, stock market data for equity, shares of the company, promise vis--vis performance in the past issues and mechanism for redressal of investor grievances.
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H. Offering information

Under this head, the following information is covered: Terms of the Issue, ranking of equity shares, mode of payment of dividend, face value and issue price, rights of the equity shareholder, market lot, nomination facility to investor, issue procedure, book building procedure if applicable, bid form, who can bid, maximum and minimum bid size, bidding process, bidding bids at different price levels, escrow mechanism, terms of payment and payment into the escrow collection account, electronic registration of bids, build up of the book and revision of bids, price discovery and allocation, signing of underwriting agreement and filing of prospectus with SEBI/ROC, announcement of statutory advertisement, issuance of confirmation of allocation note("can") and allotment in the issue, designated date, general instructions, instructions for completing the bid form, payment instructions, submission of bid form, other instructions, disposal of application and application moneys, , interest on refund of excess bid amount, basis of allotment or allocation, method of proportionate allotment, dispatch of refund orders, communications, undertaking by the company, utilization of issue proceeds, restrictions on foreign ownership of Indian securities, etc.,

I. Other Information

This covers description of equity shares and terms of the Articles of Association, material contracts and documents for inspection, declaration, definitions and abbreviations, etc.,

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GUIDELINES FOR OTCEI ISSUES

Any company making an initial public offer of equity share or any other security convertible at a later date into equity shares and proposing to list them on the Over The Counter Exchange of India (OTCEI) shall comply with all the requirements specified in these guidelines: - Eligibility norms - Any company making an initial public offer of equity share or any other security convertible at a later date into equity shares and proposing to list them on the OTCEI, is exempted from the eligibility norms specified in Clause 2.2 of Chapter II of these guidelines subject to its fulfilling the following besides the listing criteria laid down by the

OTCEI:

i. it is sponsored by a member of the OTCEI and; ii. has appointed at least two market makers (one compulsory and one additional market maker).

Any offer for sale of equity share or any other security convertible at a later date into equity shares resulting out of a Bought out Deal (BOD) registered with the OTCEI is exempted from the eligibility norms specified in Clause 2.2 of Chapter II of these guidelines subject to the fulfillment of the listing criteria laid down by the OTCEI. Provided that the issuer company which has made issue of capital under Clause above, shall not delist its securities from OTCEI for a minimum period of three years from the date of admission to dealing of such securities on OTCEI..

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Pricing Norms

- Any offer for sale of equity share or any other security convertible at a later date into equity shares resulting out of a Bought out Deal (BOD) registered with OTCEI is exempted from the pricing norms specified in Clause 3.2 of Chapter III of these guidelines subject to the following conditions: i) The promoters after such issue shall retain at least 20% of the total issued capital with the lock-in of three years from the date of the allotment of securities in the proposed issue; and ii) At least two market makers (One Compulsory and one additional market maker) are appointed in accordance with the Market Making guidelines stipulated by the OTCEI.

Projections

In case of securities proposed to be listed on OTCEI, for the purpose of Clause (6.12.1) of Chapter VI of these guidelines, projections based on the appraisal done by the sponsor who undertakes to do market making activity in the securities offered in the proposed issue can be included in the offer document subject to compliance with other conditions contained in the said clause.

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GUIDELINES FOR BONUS ISSUES

A listed company proposing to issue bonus shares shall comply with the following: (a) No company shall, pending conversion of FCDs/PCDs, issue any shares by way of bonus unless similar benefit is extended to the holders of such FCDs/PCDs, through reservation of shares in proportion to such convertible part of FCDs or PCDs. (b) The shares so reserved may be issued at the time of conversion(s) of such debentures on the same terms on which the bonus issues were made. The bonus issue shall be made out of free reserves built out of the genuine profits or share premium collected in cash only.

The Company

(a) has not defaulted in payment of interest or principal in respect of fixed deposits and interest on existing debentures or principal on redemption thereof and (b) has sufficient reason to believe that it has not defaulted in respect of the payment of statutory dues of the employees such as contribution to provident fund, gratuity, bonus etc. Board of Directors must implement the proposal within a period of six months from the date of such approval and shall not have the option of changing the decision.

(i) The Articles of Association of the company shall contain a provision for capitalisation of reserves, etc. (ii) If there is no such provision in the Articles the company shall pass a Resolution at its general body meeting making provisions in the Articles of Associations for capitalisation.

Resolution

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Consequent to the issue of Bonus shares if the subscribed and paid-up capital exceed the authorised share capital, a Resolution shall be passed by the company at its general body meeting for increasing the authorised Capital.

Certificate

A certificate duly signed by the issuer company and counter signed by statutory auditor or by Company Secretary in practice to the effect that the provision of clause.

THE RISK FACTOR

Investing in IPO is often seen as an easy way of investing, but it is highly risky and many investment advisers advise against it unless you are particularly experienced and knowledgeable. The risk factor can be attributed to the following reasons:

UNPREDICTABLE:

The Unpredictable nature of the IPOs is one of the major reasons that investors advise against investing in IPOs. Shares are initially offered at a low price, but they see significant changes in their prices during the day. significantly during the day, but then it may fall steeply the next day. It might rise

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NO PAST TRACK RECORD OF THE COMPANY:

No past track record of the company adds further to the dilemma of the shareholders as to whether to invest in the IPO or not. With no past track record, it becomes a difficult choice for the investors to decide whether to invest in a particular IPO or not, as there is basis to decide whether the investment will be profitable or not.

POTENTIAL OF STOCK MARKET:

Returns from investing in IPO are not guaranteed. The Stock Market is highly volatile. Stock Market fluctuations widely affect not only the individuals and household, but the economy as a whole. The volatility of the stock market makes it difficult to predict how the shares will perform over a period of time as the profit and risk potential of the IPO depends upon the state of the stock market at that particular time.

RISK ASSESSMENT:
The possibility of buying stock in a promising start-up company and finding the next success story has intrigued many investors. But before taking the big step, it is essential to understand some of the challenges, basic risks and potential rewards associated with investing in an IPO. This has made Risk Assessment an important part of Investment Analysis. Higher the desired returns, higher would be the risk involved. Therefore, a thorough analysis of risk associated with the investment should be done before any consideration.

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For investing in an IPO, it is essential not only to know about the working of an IPO, but we also need to know about the company in which we are planning to invest. Hence, it is imperative to know:  The fundamentals of the business  The policies and the objectives of the business  Their products and services  Their competitors  Their share in the current market  The scope of their issue being successful It would be highly risky to invest without having this basic knowledge about the company.

There are 3 kinds of risks involved in investing in IPO:

BUSINESS RISK:

It is important to note whether the company has sound business and management policies, which are consistent with the standard norms. Researching business risk involves examining the business model of the company.
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FINANCIAL RISK:

Is this company solvent with sufficient capital to suffer short-term business setbacks? The liquidity position of the company also needs to be considered. Researching financial risk involves examining the corporation's financial statements, capital structure, and other financial data.

MARKET RISK:

It would beneficial to check out the demand for the IPO in the market, i.e., the appeal of the IPO to other investors in the market. Hence, researching market risk involves examining the appeal of the corporation to current and future market conditions.

ANALYSING AN IPO INVESTMENT

POTENTIAL INVESTORS AND THEIR OBJECTIVES:

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Initial Public Offering is a cheap way of raising capital, but all the same it is not considered as the best way of investing for the investor. Before investing, the investor must do a proper analysis of the risks to be taken and the returns expected. He must be clear about the benefits he hope to derive from the investment. The investor must be clear about the objective he has for investing, whether it is long-term capital growth or short-term capital gains. The potential investors and their objectives could be categorized as:

INCOME INVESTOR:

An income investor is the one who is looking for steadily rising profits that will be distributed to shareholders regularly. For this, he needs to examine the

company's potential for profits and its dividend policy.

 GROWTH INVESTOR:

A growth investor is the one who is looking for potential steady increase in profits that are reinvested for further expansion. For this he needs to evaluate the company's growth plan, earnings and potential for retained earnings.

SPECULATOR:

A speculator looks for short-term capital gains. For this he needs to look for potential of an early market breakthrough or discovery that will send the price up quickly with little care about a rapid decline.

INVESTOR RESEARCH:

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It is imperative to properly analyze the IPO the investor is planning to invest into. He needs to do a thorough research at his end and try to figure out if the objective of the company match his own personal objectives or not. The unpredictable nature of IPOs and volatility of the stock market adds greatly to the risk factor. So, it is advisable that the investor does his homework, before investing. The investor should know about the following:
 BUSINESS OPERATIONS:

y What are the objectives of the business? y What are its management policies? y What is the scope for growth? y What is the turnover of the labour force? y Would the company have long-term stability?
 FINANCIAL OPERATIONS:

y What is the companys credit history? y What is the companys liquidity position? y Are there any defaults on debts? y Companys expenditure in comparison to competitors. y Companys ability to pay-off its debts. y What are the projected earnings of the company
 MARKETING OPERATIONS:

y Who are the potential investors? y What is the scope for success of the IPO? y What is the appeal of the IPO for the other investors? y What are the products and services offered by the company? y Who are the strongest competitors of the company?

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IPO INVESTMENT STRATEGIES

Investing in IPOs is much different than investing in seasoned stocks. This is because there is limited information and research on IPOs, prior to the offering. And immediately following the offering, research opinions emanating from the underwriters are invariably positive. There are some of the strategies that can be considered before investing in the IPO:

 UNDERSTAND THE WORKING OF IPO:

The first and foremost step is to understand the working of an IPO and the basics of an investment process. Other investment options could also be considered depending upon the objective of the investor.

 GATHER KNOWLEDGE:

It would be beneficial to gather as much knowledge as possible about the IPO market, the company offering it, the demand for it and any offer being planned by a competitor.

 INVESTIGATE BEFORE INVESTING:

The prospectus of the company can serve as a good option for finding all the details of the company. It gives out the objectives and principles of the management and will also cover the risks.
 KNOW YOUR BROKER:

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This is a crucial step as the broker would be the one who would majorly handle your money. IPO allocations are controlled by underwriters. The first step to getting IPO allocations is getting a broker who underwrites a lot of deals.
 MEASURE THE RISK INVOLVED:

IPO investments have a high degree of risk involved. It is therefore, essential to measure the risks and take the decision accordingly.

 INVEST AT YOUR OWN RISK:

Finally, after the homework is done, and the big step needs to be taken. All that can be suggested is to invest at your own risk. Do not take a risk greater than your capacity.

PRICING OF AN IPO

The pricing of an IPO is a very critical aspect and has a direct impact on the success or failure of the IPO issue. There are many factors that need to be considered while pricing an IPO and an attempt should be made to reach an IPO price that is low enough to generate interest in the market and at the same time, it should be high enough to raise sufficient capital for the company. The process for determining an optimal price for the IPO involves the underwriters arranging share purchase commitments from leading institutional investors.
PROCESS:

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Once the final prospectus is printed and distributed to investors, company management meets with their investment bank to choose the final offering price and size. The investment bank tries to fix an appropriate price for the IPO depending upon the demand expected and the capital requirements of the company. The pricing of an IPO is a delicate balancing act as the investment firms try to strike a balance between the company and the investors. The lead underwriter has the responsibility to ensure smooth trading of the companys stock. The underwriter is legally allowed to support the price of a newly issued stock by either buying them in the market or by selling them short.
IPO PRICING DIFFERENCES:

It is generally noted, that there is a large difference between the price at the time of issue of an Initial Public Offering (IPO) and the price when they start trading in the secondary market. These pricing disparities occur mostly when an IPO is considered hot, or in other words, when it appeals to a large number of investors. An IPO is hot when the demand for it far exceeds the supply. This imbalance between demand and supply causes a dramatic rise in the price of each share in the first day itself, during the early hours of trading.

UNDERPRICING AND OVERPRICING OF IPOs

UNDERPRICING:

The pricing of an IPO at less than its market value is referred to as Underpricing. In other words, it is the difference between the offer price and the price of the first trade.

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Historically, IPOs have always been underpriced. Underpriced IPO helps to generate additional interest in the stock when it first becomes publicly traded. This might result in significant gains for investors who have been allocated shares at the offering price. However, underpricing also results in loss of significant amount of capital that could have been raised had the shares been offered at the higher price.

OVERPRICING:

The pricing of an IPO at more than its market value is referred to as Overpricing. Even overpricing of shares is not as healthy option. If the stock is offered at a higher price than what the market is willing to pay, then it is likely to become difficult for the underwriters to fulfill their commitment to sell shares. Furthermore, even if the

underwriters are successful in selling all the issued shares and the stock falls in value on the first day itself of trading, then it is likely to lose its marketability and hence, even more of its value.

PRINCIPAL STEPS IN AN IPO

 Approval of BOD: Approval of BOD is required for raising capital from the public.

 Appointment of lead managers: the lead manager is the merchant banker who orchestrates the issue in consultation of the company.

 Appointment of other intermediaries:

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Co-managers and advisors Underwriters Bankers Brokers and principal brokers Registrars

y Filing the prospectus with SEBI: The prospectus or the offer document communicates information about the company and the proposed security issue to the investing public. All the companies seeking to make a public issue have to file their offer document with SEBI. If SEBI or public does not communicate its observations within 21 days from the filing of the offer document, the company can proceed with its public issue.

y Filing of the prospectus with the registrar of the companies: once the prospectus have been approved by the concerned stock exchanges and the consent obtained from the bankers, auditors, registrar, underwriters and others, the prospectus signed by the directors, must be filed with the registrar of companies, with the required documents as per the companies act 1956.

Printing and dispatch of prospectus: After the prospectus is filed with the registrar of companies, the company should print the prospectus. The quantity in which prospectus is printed should be sufficient to meet requirements. They should be send to the stock exchanges and brokers so they receive them atleast 21 days before the first announcement is made in the news papers.

y Filing of initial listing application: Within 10 days of filing the prospectus, the initial listing application must be made to the concerned stock exchanges with the listing fees.
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y Promotion of the issue: The promotional campaign typically commences with the filing of the prospectus with the registrar of the companies and ends with the release of the statutory announcement of the issue.

y Statutory announcement: The issue must be made after seeking approval of the stock exchange. This must be published atleast 10 days before the opening of the subscription list.

y Collections of applications: The Statutory announcement specifies when the subscription would open, when it would close, and the banks where the applications can be made. During the period the subscription is kept open, the bankers will collect the applications on behalf of the company.

y Processing of applications: Scrutinizing of the applications is done.

y Establishing the liability of the underwriters: If the issue is undersubscribed, the liability of the underwriters has to be established.

y Allotment of shares: Proportionate system of allotment is to be followed.

y Listing of the issue: The detail listing application should be submitted to the concerned stock exchange along with the listing agreement and the listing fee. The allotment formalities should be completed within 30 days.

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Book building is the process of price discovery (Basic concept)

y The company does not come out with a fixed price for its shares; instead, it indicates a price band that mentions the lowest (referred to as the floor) and the highest (the cap) prices at which a share can be sold. y Bids are then invited for the shares. Each investor states how many shares s/he wants and what s/he is willing to pay for those shares (depending on the price band). The actual price is then discovered based on these bids. As we continue with the series, we will explain the process in detail. y According to the book building process, three classes of investors can bid for the shares: 1. Qualified Institutional Buyers: Mutual funds and Foreign Institutional Investors. 2. Retail investors: Anyone who bids for shares under Rs 50,000 is a retail investor. 3. High net worth individuals and employees of the company.

y Allotment is the process whereby those who apply are given (allotted) shares. The bids are first allotted to the different categories and the over-subscription (more shares applied for than shares available) in each category is determined. Retail investors and high net worth individuals get allotments on a proportional basis.

Example 1: Assuming you are a retail investor and have applied for 200 shares in the issue, and the issue is over-subscribed five times in the retail category, you qualify to get 40
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shares (200 shares/5). Sometimes, the over-subscription is huge or the issue is priced so high that you can't really bid for too many shares before the Rs 50,000 limit is reached. In such cases, allotments are made on the basis of a lottery.

Example 2: Say, a retail investor has applied for five shares in an issue, and the retail category has been over-subscribed 10 times. The investor is entitled to half a share. Since that isn't possible, it may then be decided that every 1 in 2 retail investors will get allotment. The investors are then selected by lottery and the issue allotted on a proportional basis. That is why there is no way you can be sure of getting an allotment.

BOOK BUILDING PROCESS

Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery. It is a process used for marketing a public offer
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of equity shares of a company. It is a mechanism where, during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The process aims at tapping both wholesale and retail investors. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria.

The Process:
 The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'.

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 The Issuer specifies the number of securities to be issued and the price band for orders.  The Issuer also appoints syndicate members with whom orders can be placed by the investors.  Investors place their order with a syndicate member who inputs the orders into the 'electronic book'. This process is called 'bidding' and is similar to open auction.  A Book should remain open for a minimum of 5 days.  Bids cannot be entered less than the floor price.  Bids can be revised by the bidder before the issue closes.  On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation criteria which may include y Price Aggression y Investor quality y Earliness of bids, etc.  The book runner the company concludes the final price at which it is willing to issue the stock and allocation of securities.  Generally, the numbers of shares are fixed; the issue size gets frozen based on the price per share discovered through the book building process.  Allocation of securities is made to the successful bidders.  Book Building is a good concept and represents a capital market which is in the process of maturing.
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Book-building is all about letting the company know the price at which you are willing to buy the stock and getting an allotment at a price that a majority of the investors are willing to pay. The price discovery is made depending on the demand for the stock. The price that you can suggest is subject to a certain minimum price level, called the floor price. For instance, the floor price fixed for the Maruti's initial public offering was Rs 115, which means that the price you are willing to pay should be at or above Rs 115. In some cases, as in Biocon, the price band (minimum and maximum price) at which you can apply is specified. A price band of Rs 270 to Rs 315 means that you can apply at a floor price of Rs 270 and a ceiling of Rs 315. If you are not still very comfortable fixing a price, do not worry. You, as a retail investor, have the option of applying at the cut-off price. That is, you can just agree to pick up the shares at the final price fixed. This way, you do not run the risk of not getting an allotment because you have bid at a lower price. If you bid at the cut-off price and the price is revised upwards, then the managers to the offer may reduce the number of shares allotted to keep it within the payment already made. You can get the application forms from the nearest offices of the lead managers to the offer or from the corporate or the registered office of the company.

How is the price fixed?

All the applications received till the last date are analysed and a final offer price, known as the cut-off price is arrived at. The final price is the equilibrium price or the highest price at which all the shares on offer can be sold smoothly. If your price is less than the final price, you will not get allotment. If your price is higher than the final price, the amount in excess of the final price is refunded if you get
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allotment. If you do not get allotment, you should get your full refund of your money in 15 days after the final allotment is made. If you do not get your money or allotment in a month's time, you can demand interest at 15 per cent per annum on the money due.
How are shares allocated?

y As per regulations, at least 25 per cent of the shares on offer should be set aside for retail investors. Fifty per cent of the offer is for qualified institutional investors. Qualified Institutional Bidders (QIB) are specified under the regulation and allotment to this class is made at the discretion of the company based on certain criteria.

y QIBs can be mutual funds, foreign institutional investors, banks or insurance companies. If any of these categories is under-subscribed, say, the retail portion is not adequately subscribed, then that portion can be allocated among the other two categories at the discretion of the management. For instance, in an offer for two lakh shares, around 50,000 shares (or generally 25 per cent of the offer) are reserved for retail investors. But if the bids from this category are received are only for 40,000 shares, then 10,000 shares can be allocated either to the QIBs or non-institutional investors.

y The allotment of shares is made on a pro-rata basis. Consider this illustration: An offer is made for two lakh shares and is oversubscribed by times times, that is, bids are received for six lakh shares. The minimum allotment is 100 shares. 1,500 applicants have applied for 100 shares each; and 200 applicants have bid for 500 shares each. The shares would be allotted in the following manner:

y Shares are segregated into various categories depending on the number of shares applied for. In the above illustration, all investors who applied for 100 shares will fall in category A and those for 500 shares in category B and so on.
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y The total number of shares to be allotted in category A will be 50,000 (100*1500*1/3). That is, the number of shares applied for (100)* number of applications received (1500)* oversubscription ratio (1/3). Category B will be allotted 33,300 shares in a similar manner.

y Shares allotted to each applicant in category A should be 33 shares (100*1/3). That is, shares applied by each applicant in the category multiplied by the oversubscription ratio. As, the minimum allotment lot is 100 shares, it is rounded off to the nearest minimum lot. Therefore, 500 applicants will get 100 shares each in category A total shares allotted to the category (50,000) divided by the minimum lot size (100).

y In category B, each applicant should be allotted 167 shares (500/3). But it is rounded off to 200 shares each. Therefore, 167 applicants out of 200 (33300/200) would get an allotment of 200 shares each in category B.

y The final allotment is made by drawing a lot from each category. If you are lucky you may get allotment in the final draw.

y The shares are listed and trading commences within seven working days of finalisation of the basis of allotment. You can check the daily status of the bids received, the price bid for and the response form various categories in the Web sites of stock exchanges. This will give you an idea of the demand for the stock and a chance to change your mind. After seeing the response, if you feel you have bid at a higher or a lower price, you can always change the bid price and submit a revision form.
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y The traditional method of doing IPOs is the fixed price offering. Here, the issuer and the merchant banker agree on an "issue price" - e.g. Rs.100. Then one have the choice of filling in an application form at this price and subscribing to the issue. Extensive research has revealed that the fixed price offering is a poor way of doing IPOs. Fixed price offerings, all over the world, suffer from `IPO underpricing'. In India, on average, the fixed-price seems to be around 50% below the price at first listing; i.e. the issuer obtains 50% lower issue proceeds as compared to what might have been the case. This average masks a steady stream of dubious IPOs who get an issue price which is much higher than the price at first listing. Hence fixed price offerings are weak in two directions: dubious issues get overpriced and good issues get underpriced, with a prevalence of underpricing on average. What is needed is a way to engage in serious price discovery in setting the price at the IPO. No issuer knows the true price of his shares; no merchant banker knows the true price of the shares; it is only the market that knows this price. In that case, can we just ask the market to pick the price at the IPO?

Imagine a process where an issuer only releases a prospectus, announces the number of shares that are up for sale, with no price indicated. People from all over India would bid to buy shares in prices and quantities that they think fit. This would yield a price. Such a procedure should innately obtain an issue price which is very close to the price at first listing -- the hallmark of a healthy IPO market.

Recently, in India, there had been issue from Hughes Software Solutions which was a milestone in our growth from fixed price offerings to true price discovery IPOs. While the

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HSS issue has many positive and fascinating features, the design adopted was still riddled with flaws, and we can do much better.

Documents Required:
y A company coming out with a public issue has to come out with an Offer Document/ Prospectus. y An offer document is the document that contains all the information you need about the company. It will tell you why the company is coming is out with a public issue, its financials and how the issue will be priced. y The Draft Offer Document is the offer document in the draft stage. Any company making a public issue is required to file the draft offer document with the Securities and Exchange Board of India, the market regulator. y If SEBI demands any changes, they have to be made. Once the changes are made, it is filed with the Registrar of Companies or the Stock Exchange. It must be filed with SEBI at least 21 days before the company files it with the RoC/ Stock Exchange. During this period, you can check it out on the SEBI Web site. y Red Herring Prospectus is just like the above, except that it will have all the information as a draft offer document; it will, however, not have the details of the price or the number of shares being offered or the amount of issue. That is because the Red Herring Prospectus is used in book building issues only, where the details of the final price are known only after bidding is concluded.

Players:
y Co-managers and advisors y Underwriters
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y Lead managers y Bankers y Brokers and principal brokers y Registrars y Stock exchanges.

Reliance Power Limited

Type Founded Headquarters Key people Industry Website

Public company 2007 Mumbai, India Anil Ambani, Founder and Chairman Electricity generation http://www.reliancepower.co.in/

Reliance Power Limited, a part of the Reliance Anil Dhirubhai Ambani Group, was

established to develop, construct and operate power projects in the domestic and international markets. Reliance Energy Limited, an Indian private sector power utility company along with the Anil Dhirubhai Ambani Group promotes Reliance Power. Along with its subsidiaries, it is presently developing 13 medium and large-sized power projects with a combined planned installed capacity of 28,200
Initial public offering and controversies
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On January 15, 2008, the company attracted $27.5 billion of bids on the first day of its initial public offering (IPO), equivalent to 10.5 times the stock on offer, thereby, creating India's IPO record. The upper cut off price for the bid was Rs. 450. The proposed IPO was to fund the development of its six power projects across the country whose completion dates are scheduled from December 2009 to March 2014. A media report suggested that, if the companys stock price were to cross Rs. 650-700, Anil Ambani would go past L. N. Mittal to become the richest Indian. "It is a reflection of world community in the future of India... Investors seem to be confident in the future of Indian economy," Indian Finance Minister, P. Chidambaram told the media about the IPO. The Securities and Exchange Board of India, which is an organization that regulates the activity in the Indian stock market, placed some restrictions based on a complaint about the formulation of the IPO. The complaint also resulted in a public interest litigation being filed against the company. However, the Supreme Court of India passed a ruling that the IPO would go ahead even if any order is passed by any Indian court against the venture. Reliance Power debuted on the stock markets on February 11, 2008. However, the markets were still reeling after the January 2008 stock market volatility, and concerns over speculation that the issue was overpriced sent the stock plummeting soon after its listing. At markets. Reliance Energy Limited, an Indian private sector power utility company along with the Anil Dhirubhai Ambani Group promotes Reliance Power. Along with its subsidiaries, it is presently developing 13 medium and large-sized power projects with a combined planned installed capacity of 28,200.

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Jaypee Infratech Limited (JIL) IPO

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Incorporated in 2007, Jaypee Infratech Limited (JIL) is an Indian infrastructure development company engaged in the development of the Yamuna Expressway and related real estate projects. Jaypee Infratech Limited (JIL) is a part of the Jaypee Group and incorporated as a special purpose company to develop, operate and maintain the Yamuna Expressway in the state of Uttar Pradesh, connecting Noida and Agra. The Yamuna Expressway is a 165-kilometre access-controlled six-lane concrete pavement expressway along the Yamuna river, with the potential to be widened to an eight-lane expressway. The expressway is planned to begin at the existing Noida-Greater Noida Expressway, pass through various proposed SDZs and the proposed Taj International Hub Airport and end at District Agra. The company also has the right to develop 25 million square metres (approximately 6,175 acres) of land along the Yamuna Expressway at five locations for residential, commercial, amusement, industrial and institutional purposes. The Company commenced development of Noida land parcel and are presently developing an aggregate 13.09 million square feet of saleable area across three residential projects, which were approximately 88% sold on a square foot basis as of October 31, 2009. These three projects were launched between November 2008 and July 2009 and are expected to be completed by 2012. Through October 31, 2009, their average selling price for property under development was approximately Rs. 3,057 per square foot (including Extra Charges).
Company Promoters:
Companys promoter, since its inception, is Jaiprakash Associates Limited (JAL). JAL is engaged primarily in the business of (a) engineering and construction, (b) manufacture and marketing of cement, (c) real estate development, and (d) hospitality.

Company Financials:
Particulars 30-Sep-09 Total Income Profit After Tax (PAT) 276.45 103.20 For the year/period ended (Rs. in million) 31-Mar-09 5,562.57 2,667.31 31-Mar-08 7.66 (113.69)

Objects of the Issue:

The object of the issue are:

1. To partially finance the Yamuna Expressway Project; and 2. General corporate purposes.
Issue Detail:

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Issue Open: Apr 29, 2010 - May 04, 2010 Issue Type: 100% Book Built Issue IPO Issue Size: 161,764,706 Equity Shares of Rs. 10 Issue Size: Rs. 1,650.00 Crore Face Value: Rs. 10 Per Equity Share Issue Price: Rs. 102 - Rs. 117 Per Equity Share Market Lot: 50 Shares Minimum Order Quantity: 50 Shares Listing At: BSE, NSE

Jaypee Infratech Ltd IPO Grading / Rating

ICRA and CARE has assigned an IPO Grade 3 to Jaypee Infratech Ltd IPO. This means as per ICRA and CARE company has 'Average Fundamentals'. ICRA and CARE assigns IPO grading on a scale of 5 to 1, with Grade 5 indicating strong fundamentals and Grade 1 indicating poor fundamentals. Click here to download the ICRA and CARE IPO Grading Document for Jaypee Infratech Ltd. Check IPO Ratings from other stock analysts.
Bidding Status (IPO subscription detail):
Qualified Institutional Buyers (QIBs) 119,752,941 1.5264 1.5342 1.6273 1.7710 Number of Times Issue is Subscribed (BSE + NSE) Non Retail Individual Institutional Others Investors (RIIs) Investors 19,958,824 0.1027 0.3103 0.3490 1.1544 59,876,470 0.0156 0.0480 0.1208 0.6113 22,176,470 0.0027 0.0326 0.0444 0.1006

As on Date & Time Shares Offered / Reserved Day 1 - Apr 29, 2010 17:00 IST Day 2 - Apr 30, 2010 17:00 IST Day 3 - May 03, 2010 17:00 IST Day 4 - May 04, 2010 18:15 IST

Total

221,764,705 0.8400 0.8700 0.9500 1.2400

IPO Listing Detail

Listing Date: BSE Scrip Code: NSE Symbol: Listing In: Sector: ISIN: Issue Price: Face Value: Friday, May 21, 2010 533207 JPINFRATEC 'B' Group of Securities Infrastructure INE099J01015 Rs. 102.00 Per Equity Share Rs. 10.00 Per Equity Share

Listing Day Trading Information

BSE Issue Price: Open: Low: High: Last Trade: Volume: Rs. 102.00 Rs. 93.00 Rs. 90.00 Rs. 98.50 Rs. 91.30 16,051,602 NSE Rs. 102.00 Rs. 98.00 Rs. 90.00 Rs. 98.80 Rs. 91.45 36,263,455

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How to evaluate an IPO ?

Whether you are buying stock from the secondary market or subscribing to an initial public offering (IPO), make sure you have all the facts. That means going through the small print in the IPO document with a fine-toothed comb. Don't let market hype, investment trends or media reports influence you. Following these parameters should help: Promoters. Who runs the company? Professionals or a family? If the directors are

well known, it gives a company credibility. Check the credentials of the promoters, directors and key managerial persons. See if they have at least five years' experience in the company's line of business, Industry outlook. There should be demand for the company's product or service,

with adequate profit potential. Business plans. Check the progress made, and the money invested in aspects such

as land/office space, plant and machinery, utilities, regulatory clearances, personnel, financing, projects in hand, sales and marketing, technical and marketing tie-ups. High investments from promoters lend credibility to the IPO plan, as do project appraisals by merchant bankers. Financials. Check if the company is over-leveraged in terms of the equity and debt

on its books, and whether the additional issue of equity is justified.

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Check for consistency in revenue, profit growth and margins for at least three years before the IPO. A steady growth rate suggests a fundamentally sound company. More important, scale the historic trend into future projections: A company with a PAT (profit after tax) of Rs 10 lakh will find it difficult to reach a projected PAT of Rs 15 crore. Projections are based on assumptions, which give promoters leeway to manipulate figures. A good way to check if projections are true is to see whether the assumptions are realistic, given the company's scope of operations, and check how it compares with competitors' figures. Risk factors. This is the most relevant part of the offer document. General risk

factors are not as damaging as specific ones. Check for contingent liabilities, disputed tax claims, litigation against promoters and directors, and delay in government clearances. Assume a worst-case scenario, and see how such factors could impact the company's operations. Key names. An issue's lead managers and merchant bankers are the people who

manage the issue, from vetting the company's prospectus to seeing the issue through. Check their track record. You could look up the Sebi website (www.sebi.com) for the issues the merchant banker has managed in the recent past to see how they fared. Pricing. For valuation purposes, compare a company's issue price-earnings (P/E)

multiple with that of similar players. Check if the earning projections are achievable. If so, discount the issue price for the next two years to arrive at the growth-adjusted P/E

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multiple. You invest in a company purely for returns. In the case of primary equity issues, this can be a tricky proposition because there are no benchmarks in the form of secondary market prices to go by. When a stock is listed, market sentiment, technical factors and investor interest influence share prices. But in the medium- to long-term, fundamentals take over, which is what should matter to you if you're in for the long haul. Listing. Ensure you have access to brokers of stock exchanges where the company proposes to list. If you reside in, say, Delhi, and subscribe to an IPO that is likely to be listed on the Hyderabad Stock Exchange, the time lag in selling can eat into your returns

FINDINGS AND CONCLUSIONS

 The pro-rata system of allotment favors investors who bid for relatively large numbers of shares. Perhaps, the process should be changed such that those applying up to 1,000 shares are allotted in full and beyond this number on prorata basis.

 Book-building is preferred because the allotment of shares is generally done at a price determined by the lead merchant banker and issuer within the price band. Since QIBs are the dominant players and bid at somewhat higher prices within the band, the issuer and merchant banker fix the price at the higher end such that
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retail investors have to accept it. Thus, investors chipping in 35 per cent of the capital have little role in price discovery. As a matter of fact, the IPO demand curve is skewed by differing demands at different prices by various bidders. This indicates the need to use multiple pricing for allotment.

 There is considerable amount of difficulties for an investor today in the IPO market starting from sourcing the application to filling it and submitting it along with cheques. When we have one of the world's best trading and settlement infrastructure available why can't we use that infrastructure rather than insisting on a parallel market for IPOs? This will be a good time to provide a direction to the IPO market as well to attract new investors into the market.

 The grading process will not take into account price valuation, a key parameter in any stock investment decision. Said Prime Database MD Prithvi Haldea, The market does not work on fundamentals. A good company is a bad investment at a high price. The small investors, for whom the grading exercise is basically meant, would despite disclaimers expect a high graded IPO to quote above the offer price. The whole purpose of grading an IPO would be defeated if it cannot help an investor decide what stock to choose and at what price.

MORE:  According to my study the investment done in the securities by the investors is mainly done only by the image of the company but not on the basis of the fundamental analysis.

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 According to my study most probably, listing price is more compare to allotment price.

 According to my study, compare to year 2005 (61) and 2006 (85), in this year there are more IPO listed in the year 2007 (110).

 Immediate performance of IPO can be relied upon for the equity in the long run was rejected. It was proved from the fact that over last five years, there existed statistically insignificant positive correlation between percentage change in the issue price & list price of the IPO and percentage change in the issue price & current market price of the same. Therefore, We can conclude that immediate performance of a particular IPO can not be relied upon for the equity in the long run.

 More the subscription (times of issue size) of the IPO, more is the immediate performance, was accepted. As there existed statistically significant positive correlation between subscription (times of issue size) of the IPO and its immediate performance at the time of listing. Thus, we can judge that the IPO will give high immediate returns, by the times of its oversubscription.

 Out of 100, 53 investors i.e. Maximum Investors are in share trading for 2 to 10 years.  Out of 100, 43 investors i.e. Maximum Investors are interested in investing Secondary Securities than IPOs.

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 Out of 100, 77 investors i.e. maximum of the Investors invest in IPOs for Listing Gains.  Investors evaluate an IPO maximum from Promoters of the company, prevailing Market Trend & Recent IPO performance & Issue Size of the IPO and minimum from Suppliers of the company, Listing in Well Known Stock exchanges & Media Advertisements..

SUGGESTIONS

 The investment in IPO can prove too risky because the investor does not

know anything about the company because it is listed first time in the market so its performance cannot be measure.

 On the other hand it can be said that the higher the risk higher the returns

earned. So we can say that the though risky if investment is done then it can give higher returns as well.  For example- we can take the example of Reliance power. The Investors invested in huge amounts with the faith that they will get good returns but nothing happened so when the IPO got listed. So one should think and invest in IPO

 Primary market is more volatile than the secondary market because all the

companies are listed for the first time in the market so nothing can be said about its performance.

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 If higher risk is taken, it is always rewarded with the higher returns. So

higher the risk the more the returns rewarded for it.

 We can fairly predict the future, but cant make it happen as it is.

RECOMMENDATIONS
 Initial return given by the IPO should not be treated as indication of its success or failure in the long run.

 Investors of the secondary market must take part in the primary markets as it has been seen that IPO activity in Indian Stock Market has been tremendously growing. And IPO is the safest stock market investment.

 Over subscription should be treated as indication of success of the issue.

 Whole amount for shares applied should be received in advance from QIBs just like retail investor so that they can quote real worth of the company in terms of money that they are ready to pay for it.

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 Investors must analyze all the sectors before investing in the IPO, in order to get maximum returns.

 Investors should take into consideration the promoters of the business, the prevailing market trend & Recent IPO performance before investing in an IPO.

SUGGESTIONS

Keys to a Successful IPO: At the end to make its IPO effective, some important considerations that should be kept are: Obviously, having a successful company to offer to the public marketplace is essential. Beyond that, it is important to recognize this in not a place for do-it-yourselfers. While the road show represents the formal coming out of the firm, its success will partially depend on the groups selected for the audience, and this, in turn, depends upon the lead investment banker/underwriter in the IPO. Choosing the right underwriter is probably second in importance to choosing the right time to go public. The essential elements to look for in the ideal lead underwriter are as follows: 1. The underwriter is focused on your industry: The IPO marketplace is a crowded marketplace and the significant sums you are spending for professional advice to go public need to be targeted to a firm with real expertise in your industry. Partial evidence of appropriate expertise would be having an analyst devoted to your industry.

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2. The market relies heavily on analyst projections and recommendations: Specifically, the underwriting firm's analyst in your industry must: y Have the capacity to cover your company with sufficient attention. y Understand your company, customers, and competition. y Indicate sincere commitment to covering your company. 3. Due to the importance of a successful road show, the underwriter must have the ability and contacts to identify the right investor groups for your presentation and get them committed to attend. References from previous IPO successes are essential. 4. There must be sufficient evidence of being able to build a quality "book" of potential orders for your stock. 5. There should be a history regarding the ability to identify the right offer price and size. 6. Finally, but rarely understood by many companies, there must be significant aftermarket support in terms of maintaining and supporting trading in the stock, providing subsequent research reports on the company, and continuing institutional exposure to the company.

IPO GLOSSARY

A
Allocation

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This is the amount of stock in an initial public offering (IPO) granted by the underwriter to an investor. Aftermarket Trading in the IPO subsequent to its offering is called the aftermarket.

B
Board of Directors The composition of the Board of Directors is particularly critical for an IPO. Typically, a board is composed of inside and outside directors. Broken IPOs If an IPO trades below its IPO price in the aftermarket, it is said to be a broken IPO.

C
Calendar This refers to upcoming IPOs and secondary offerings. Brokerage houses have equity calendars, bond calendars and municipal calendars. Clearing Price The price at which all shares of an IPO can be sold to investors in a Dutch Auction. Sometimes referred to as the market clearing price.

F
First Day Close The closing price at the end of the first day of trading reflects not only how well the lead manager priced and placed the deal, but what the near-term trading is likely to be.

Float When a company is publicly traded, a distinction is made between the total number of shares outstanding and the number of shares in circulation, referred to as the float. The float consists of the company's shares held by the general public.

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Green Shoe A typical underwriting agreement allows the underwriters to buy up to an additional 15% of shares at the offering price for a period of several weeks after the offering. This option is also called the overallotment and is exercised when the IPO is oversubscribed and trading above its offer price. The term comes from the Green Shoe Company, which was the first to have this option.

H
Hot Issue When there is significantly more demand than supply for an IPO it is said to be a hot issue.

I
Initial Public Offering This is the event of a company first selling its shares to the public.

Insiders Management, directors and significant stockholders are regarded as insiders because they are privy to information about the operations of a company not known to the general public. IPO Price Individual investors often ask why the price at which an IPO starts trading is different from its offer price. This occurs because the offer price is set by the underwriters before the stock starts trading. Once the stock starts trading, the price is determined by actual supply and demand and can be higher or lower. IPO Research Prior to the offering, the underwriters involved in the IPO are prohibited from issuing research or recommendations for forty days. Following the IPO, the underwriter is allowed to issue a research report

M-N
Market Capitalization The total market value of a firm. It is defined as the product of the company's stock price per share and the total number of shares outstanding

Market Value
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The market value of a company is determined by multiplying the number of shares outstanding by the current price of the stock.

O
Offering Price This is the price at which the IPO is first sold to the public. It is set by the lead manager, usually after the close of stock market trading the night before the shares are distributed to IPO buyers. In the case of some foreign IPOs, the pricing occurs over the weekend. Oversubscribed When a deal has more orders than there are shares available it is said to be oversubscribed. P Preliminary Prospectus This is the offering document printed by the company containing a description of the business, discussion of strategy, presentation of historical financial statements, explanation of recent financial results, management and their backgrounds and ownership. Proceeds Companies go public to raise money. The money raised is referred to as proceeds.

R
Red Herring This is the term of art for the preliminary prospectus. It gets its name from the printed red disclaimer on the left side of the prospectus.

U-V
Underwriter This is a brokerage firm that raises money for companies using public equity and debt markets. Underwriters are financial intermediaries that buy stock or bonds from an issuer and then sell these securities to the public. Venture Capital
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Funding acquired during the pre-IPO process of raising money for companies. It is done only by accredited investors.

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