Discussion Material For Initial Public

Offerings
Presentation by: Abhiram Bhattacharjee

March 27, 2009

Agenda
Introduction
Initial Public Offer Key Requirements
IPO Sizing, Valuation and Marketing
Key Intermediaries and Timeline

Agenda
Introduction
Initial Public Offer Key Requirements
IPO Sizing, Valuation and Marketing
Key Intermediaries and Timeline

Trend of Funds Raised Through Domestic Capital Markets

Public Issues (IPOs + FPOs)

Rights Issues

21
28

20

29

10
07-08

06-07

05-06

04-05

Amount Raised (LHS)

No. of Issues (RHS)

15
10

36

50

41

37

10

4
-

03-04

02-03

100

20
08-09*

120

12

20

No. of Issues

40

150

19

22

Amount Raised (LHS)

08-09*

200

214

25

26

07-08

178

237

60

250

200

06-07

300

35
30

05-06

80

40

325

250

04-05

(Rs bn)

400

38

30

03-04

85

36

300

100

90

(Rs bn)

500

522

No. of Issues

102

100

350

120

02-03

600

No. of Issues (RHS)

Source: Prime Database; * Data upto Feb. 2009

Fund Raising at Different Stages of a Life Cycle

Investors and Instrument issued depend on the option and the stage of lifecycle
Depository
Shares
Receipts with
the underlying Strategic
being Shares Investment

Foreign
Currency Bond
Depository
convertible
ADR
Receipts with into Shares
the
underlying
US QIB
FCCB
being Shares
GDR

Shares
Shares / PCD
/ FCD

Shares /
Warrants /
FCD / PCD
Shares
Shares
Warrants /
Shares
Shares
Seed
Capital

Venture
Capital

Private
Equity

Follow-on
Public
Issue

Rights
Issue

Hedge Funds and FIIs

FII

QIB

Existing Shareholders

FIIs, FI, Banks, Insurance Cos, MF,

HNI, Individuals including NR

Promoters, Financial Investor,

Strategic Investor

FIIs, FI, Banks, Insurance Cos, MF,

HNI, Individuals including NR

Private Equity investors

Venture Capitalist

Personal Contribution,
Family, Friends, Angel
Investors

IPO

Private
Placement

Shares

QIP

Customer, Supplier,
Competitor

IPO: Initial
Initial Public
Public Offer
Offer
QIP: Qualified
Qualified Institutions
Institutions Placement
Placement
GDR: Global
Global Depository
Depository Receipts
Receipts
FCCB: Foreign
Foreign Currency
Currency Convertible
Convertible Bond
Bond
ADR: American
American Depository
Depository Receipts
Receipts
5

Benefits of Listing
Benefits

Description

High Liquidity and Depth

Indian Stock Exchanges have a high number of listed companies and provide significant liquidity
Additional recognition in case of presence in Sensex/ Nifty/ A group

Flexibility for future

capital raising
opportunities

Multiple choice: QIP, Rights, Follow-on public issue, GDR, ADR, FCCB

Establishes profile

Sharing history, business operations, strategy and growth plans helps develop franchise value
Enables branding and customer awareness; provides access to retail investors; lenders have higher
comfort with listed entities

Positive impact on
valuation

Greater awareness amongst research analysts, fund managers, investment advisors

Creates greater liquidity and market if part of the derivatives segment

Wealth creation

Ability to create wealth for promoters and shareholders

Provides a benchmark for Company valuation

Creation of currency

Ability to create currency for strategic initiatives

Leverage as currency for M&A, alliance etc.

Employee incentivization

Ability to serve HR initiatives; serves as an incentive mechanism for management and employees e.g.:
ESOS/ ESPS
Mechanism for tracking management performance

Agenda
Introduction
Initial Public Offer Key Requirements
IPO Sizing, Valuation and Marketing
Key Intermediaries and Timeline

Eligibility Criteria for Unlisted Companies for an IPO

Eligibility criteria for Unlisted Companies set forth by SEBI
Option I: Net tangible
assets, profitability and
net worth track record

Net tangible assets of at least Rs.30

mn in the preceding 3 full years, not
more than 50% held in monetary
assets

Issue through book building route

with at least 50% allotted to QIBs
Option II: No net
tangible assets,
profitability and net
worth track record

or

Track record of distributable profits in

terms of Section 205 of Companies
Act, 1956 (excl extra ordinary items)
for 3 out of preceding 5 years

Net worth of at least Rs. 10

mn in each of the preceding
3 full years

Minimum post issue face value capital

of the Company shall be Rs 100 mn
+

Project has at least 15%

participation by Financial
institutions/banks of which 10%
comes from appraiser and at least
10% of issue size allotted to QIBs

or
Compulsory market making for at
least 2 years

Book built route mandatory with 50% QIB participation if all issues during the same financial year (including proposed IPO) > 5X pre-issue net worth

Exemptions from SEBI Eligibility Norms

Banking company
Correspondent new bank (public sector banks)
Infrastructure company
Whose project is appraised by a FI/ IDFC/ IL&FS or bank which
was earlier an FI
5% of the project cost is financed by the appraiser(s)/ institutions
jointly or severally
Rights issues

Listing criteria of Bombay Stock Exchange Limited

For large cap companies:
Post Issue paid up equity capital - Rs. 30 mn
Issue size - Rs. 100 mn
Post Issue market capitalization Rs. 250 mn

Restructuring
Complete all capital restructuring exercise before going to the market
Promoter/promoter group holdings
-

Family shareholding

Bonus or split of shares

Consolidation or sub-division of Company
Holding structure of the Company or group of Companies
Leverage position of the Company

Issue Size and Minimum Dilution in terms of Securities

Contracts (Regulation) Rules, 1957 (SCRR)
Minimum Issue Size Regulations as governed by SCRR

Minimum dilution
(Unlisted
companies)

At least 10% of each class of securities (on post-IPO capital) to be offered to the public under Rule
19(2)(b) of SCRR subject to following conditions:
Minimum 2 million securities to be offered;
Minimum Issue size of Rs. 1 billion;
Issue through book building with allocation of 60% of issue size to QIBs
However, exemption granted by SEBI to PFC and PGCIL to allocate 50% to QIBs and higher
proportion to Retail
If the company does not meet any of the three conditions, it shall offer at least 25% of post-IPO
capital
A recognized stock exchange may relax any of the above conditions with the previous approval of
SEBI, in respect of a Government Company
Net offer to public would exclude reservations and firm allotments to select category of investors
Infrastructure companies are exempt from these requirements

Continuous Listing and Offer for Sale Requirements

Continuous Listing

Minimum postIPO market cap of Rs. 10 bn and total number of shares issued 20 million, where the
IPO is in terms of Rule 19(2)(b)

Offer for Sale

Only securities held for more than one year can be offered for sale
Bonus shares issued during last one year may not be eligible for offer for sale
10

Promoters Contribution and Lock-in of Shares

Promoters Contribution and Lock-in Requirements (SEBI)

Promoters contribution

At least 20% of post-IPO capital of the company to be held by the Promoters, which is referred to
as Promoters contribution
The Promoters can comply with the Promoters contribution condition by bringing in the full
amount of promoters contribution, including premium, at least one day prior to the issue opening
date
Securities ineligible for computation of promoters contribution are those that are
Acquired for consideration other than cash and revaluation of assets or capitalization of
intangible assets is involved
A result of bonus issues out of revaluation reserves or reserves without accrual of cash
resources or against shares which are ineligible for computation of promoter contribution
Acquired by the promoters at a price lower than the IPO price during the preceding 1 year
from the date of filing the DRHP with SEBI, unless the difference in price is brought in.
However, this is not valid if these acquired shares result from an inter-se promoter transfer
and (i) such shares were acquired by the transferor promoter during the past 1 year at or
more than the IPO price; or (ii) such shares were acquired by the transferor promoter prior to
the past 1 year
Ineligible shares acquired in pursuance to a scheme of merger or amalgamation approved by
a High Court shall be eligible for computation of promoters contribution
Compliance with norms for Promoters contribution shall be required at the time of filing the
DRHP with SEBI

11

Promoters Contribution and Lock-in of Shares (Contd.)

Promoters Contribution and Lock-in Requirements (SEBI)

Lock-in Requirements
(Unlisted companies)

Entire pre-IPO capital locked in for 1 year from date of allotment in IPO (exempt for (a) Venture
Capital Funds which have held shares for a minimum of 1 year; (b) pre-IPO shares held by
employees which were issued under ESOP or ESPS before the IPO). Transfer of locked-in
shares among pre-IPO shareholders allowed, provided lock-in continues with transferee
Promoters holding up to 20% of post-IPO capital locked-in for 3 years from the date of allotment
in IPO and excess promoters holding locked-in for 1 year

Pledge

Pledged securities held by promoters shall not be eligible for computation of Promoters
contribution
Other locked-in securities may be pledged only with Banks/ FIs as collateral provided the pledge
is a term of sanction
If securities are locked-in as Promoters contribution, the same may be pledged if the loan has
been granted by such Banks/ FIs for the purpose of financing one or more objects of the Issue

12

Reservation of Shares in an IPO for Allotment to Select

Segments
Reservation on a competitive basis
Employees

Shareholders

Business Associates

New Company

Permanent employees of
the Issuer and promoting
companies

Shareholders of the
promoting companies

Persons who have business

association with the Issuer,
as depositors, bondholders
and subscribers to services

Existing Company

Permanent employees of
the issuer company

Shareholders of group
companies

Limit as a % of Issue size

10%*

10%

5%

Available for bidding in

net Public issue

Yes

Yes

No

* Firm allotment + Reservation

No reservation can be made for the issue management team, syndicate members, their promoters, directors and
employees and for the group/associate companies of issue management team

Net Public Offer i.e. the size of the offer, net of reservations and firm allotments, if any, has to be greater than 10%
of post issue capital

13

Corporate Governance Requirements

Composition of Board of Directors

Reconstitution of the Board of Directors

At least one-half non executive Directors

One-third independent Directors in case of a non-executive Chairman

One-half independent Directors in case of an executive Chairman

One-half independent Directors in case non-executive Chairman being a promoter or related to the promoters or persons occupying
management positions at the Board level or at one level below the Board

Committees of the Board

Audit Committee

Should comprise at least three members

Two-thirds of the members shall be independent Directors

At least one Director should have financial and accounting knowledge

Committee Chairman to be an independent Director

Shareholders/Investor Grievance Committee

A board committee under the chairmanship of a non-executive director

Redressal of shareholder and investors complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends
etc.
Remuneration Committee (optional)

Should comprise at least three members

Have all non-executive Directors

Committee Chairman to be an independent Director

A report on Corporate Governance to be included in the Annual Report of the Company

Clause 49 requirements of the Listing Agreement of the Stock Exchanges to be met at the time of filing the DRHP with SEBI
Instances in the past where DRHP filed with SEBI by certain PSUs without Clause 49 compliance, with an undertaking to

comply with the same prior to opening of the Issue

14

IPO Grading Process

IPO grading is a service aimed at facilitating the assessment of equity issues offered to
public and is mandatory as per SEBI guidelines
Aimed at providing an independent assessment of fundamentals to aid comparative
assessment
Intended to serve as an Information and Investment tool for investors
IPO grading does not take cognizance of the price of the security. It is not an investment
recommendation.
IPO Grading is required prior to marketing of the IPO and needs to be disclosed in the
RHP and Prospectus
IPO Grading process involves a review of the Company background, Corporate
Governance, Business, financial performance and SEBI observations

15

Relaxations available to a Government Company

Definition
Government Company: Section 617 of the Companies Act, 1956 defines a Government company to mean any
company in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, or by
any State Government or Governments, or partly by the Central Government and partly by one or more State
Governments and includes a company which is a subsidiary of a Government company as thus defined.
Relaxations available to a Government Company

Certain provisions of the SEBI (Disclosure and Investor Protection) Guidelines, 2000 to not apply to a Government
Company:
-

Face value of shares to be Rs. 10 if issue price is less than Rs. 500

Securities acquired by promoters in the preceding one year at a price lower than the IPO issue price not to
be considered as eligible for promoters contribution

Offer for Sale shares to be held for at least one year at the time of filing of the Offer document

Disclosure of financial information of group companies in the Offer document

Disclosure of Outstanding litigations involving the promoter and group companies in the Offer document

16

Agenda
Introduction
Initial Public Offer Key Requirements
IPO Sizing, Valuation and Marketing
Key Intermediaries and Timeline

17

Issue Sizing Considerations

A correct IPO size has a favourable impact on quality of
demand, achievable price and aftermarket performance
Motivation for a Small
Offering

Requirement

Motivation for a Large

Offering

Minimise Dilution

Use of Proceeds

Expectation of better
valuation in future,
especially as operations
and cashflows improve

Significant improvement
to the balance sheet size
Funding requirements
over the next 2 3 years

Scarcity perception
Limit supply to achieve
best pricing

IPO Size

Minimum Float
In a Book Built IPO,
Institutional Investors
prefer a minimum
investment size
Regulations allow a
minimum of 10%
dilution, subject to
adherence to certain
conditions, chiefly min.
60% allocation to QIBs

Liquidity
Optimising size for
liquidity, which is an
important consideration
for most investors

IPO Size
Recommendation

Net Public Offer

Key Considerations
Large enough float to attract
good quality institutional
investors and have adequate
liquidity
Meet additional investment
requirements

Potential
Distribution Plan

Key Considerations

Minimum 60%* to
Qualified
Institutional Buyers
(QIBs)

In accordance with SEBI

guidelines; 5% of the 60%
reserved for domestic mutual
funds

10%* to Corporate/
HNI and 30%* to
Retail Investors

Significant enough retail

distribution to enhance liquidity;
but not so much as to affect
immediate aftermarket
adversely

Net Public Offer: Total Issue Size less firm allotments and /or reservations
* Assuming a dilution of less than 25%. If dilution is more than 25%, distribution plan shall be as follows: Up to 50% to QIBs, not less than 15% to HNI and not less than 35% to Retail Investors

18

Approach to Valuation of Company

Valuation on an Enterprise Value basis or on a per share basis

A unlisted company relies on its inherent cash flows or valuation of comparable companies to derive its valuation

Pre-IPO, if considered, plays an important aspect in valuation creates a benchmark and improves perception

Valuation parameter is based on the valuation driver

As a multiple of EPS

As a multiple of operating profit

As a multiple of Sales

Globally Accepted valuation parameter

Globally Accepted valuation parameter

Start-ups

Directly related to the profits, which is

supposed to be distributed to the
shareholders

Financial jugglery and capex below the

operating profit levels distorts the P/E

Net profit and operating profit not the right

parameters due to initial stages of business

As a multiple of Book Value

Net Asset Value/Replacement Value

PEG

Banks

Real Estate, Shipping companies

Retail, Media and Entertainment, IT

Assets suggest true value of business

Fixed assets are the valuation driver

High growth companies

EV/EBITDAR

Sum of Parts

As a multiple of operating asset

Airline companies

Diversified companies

Per tonne for Cement, steel etc

Lease value forms a significant portion

Synergy value may be an addition

Per square feet for retail

Valuation are based on a one year forward earnings

Discounted Cash Flow (DCF)

Future cash flow discounted by WACC (Weighted cost of capital with the proportion of Debt and Equity as weights)

Cost of Equity is Rf + Beta * Market premium

IPO discounts built into the price to make the Issue attractive to investors

19

A Typical Allocation Plan in an IPO

If issuer company meets eligibility
norms and IPO dilution ## 25% of postIPO capital

If issuer company does not meet

eligibility norms and IPO dilution is ##
25% of post-IPO capital
15%
NonInstitutional
Investors#

15%
NonInstitutional
Investors*

35%
Retail
Individual
Investors*

Up to 50%
QIB@*

IPO dilution is more than 10%, but less

than 25% of post-IPO capital
10%
NonInstitutional
Investors#

35%
Retail
Individual
Investors#

At least 50%
QIB@

30%
Retail
Individual
Investors #

At least 60%
QIB@

Notes:
@ 5% of the issue in the QIB portion is available for allocation to Indian Mutual Funds on proportionate basis and balance is available to QIBs including Indian
Mutual Funds on a proportionate basis.
* SEBI Guidelines specify not less than specified level of allocation for respective category of investors. However, in case of under subscription in any category, spill
over from any other category is allowed.
# SEBI Guidelines specify not less than specified level of allocation for respective category of investors. However, in case of mandatory book built IPO, QIB allotment
of 60% or 50%, as the case may be, is mandatory and under subscription in retail and non-institutional categories can be met by spill over from other categories.

SEBI Guidelines require allotment of shares to be done on a proportionate basis in relation to available shares in the respective
category, for all three categories of investors
20

Marketing Strategy
TARGET INVESTORS

Indian public, HNI and

Institutional Investors

International Investors in US
(Rule 144A of the SEC Act)

International Investors other

than that of US (Reg S of the
SEC Act

Marketing Plan

Direct marketing to
shareholders/
stakeholders

Public Relation
Plan

Stationery
distribution
schedule (Form &
Prospectus

Conference Plan i.e.

Press & Broker
Conferences, Analysis

Corporate Ads

Media Plan

21

Marketing Strategy (Contd.)

Retail and Non Institutional Marketing in India

Communication of the equity story to the investors prior to

management roadshow

Almost all the investors that the Issuer Company would

meet on the roadshow would have been warmed up in
the pre-marketing stage to maximize investor interest and
enable optimal targeting of the right investor set.

Roadshow schedule will comprise one-on-one meetings

and group presentations

In Mumbai, Hong Kong, Singapore, Europe and US, oneon-one meetings will dominate the schedule; small-group
meetings would supplement the one-on-ones

Global Institutional Marketing

Asia
Hong Kong

Singapore

Europe
Edinburgh
London
Amsterdam
Frankfurt
Rotterdam

US

Boston

San Francisco

New York
Philadelphia
Philadelphia
Baltimore
Washington
Texas

22

Agenda
Introduction
Initial Public Offer Key Requirements
IPO Sizing, Valuation and Marketing
Key Intermediaries and Timeline

23

Key Parties and Responsibilities for an IPO

Intermediary Structure
Book Runners
Legal Counsel

Legal
Counsels

IPO Grading
Agency

BRLM

Registrars

Broker / Syndicate

Escrow
Bankers

Printers

Advertising
Agency

Issuer Company /
Selling Shareholder
Arrangement
Coordination
24

Role Played By Book Running Lead Manager

Suggesting optimal Capital structure for the Company
Appropriately positioning the Company vis--vis its peers
Advising on all critical aspects related to the Issue
Overall transaction management responsibility
Navigating transaction strategy, including structuring, timeline and execution
Conducting due-diligence and participating in the Drafting sessions
Co-ordination with all parties involved in the transaction; liaison with SEBI and
Stock Exchanges
Issue marketing, including co-ordination of Research briefing and management
road shows
Managing the Book, advice on pricing and allocation and assisting in post-issue
management
25

Preliminary IPO Timeline

The Preliminary Timeline Can be Refined Based on the Specific Case
Auditors
Report
Delivered

Research
Briefing

All hands
Meeting

Research Re port
Dispatch

Road Shows & Bidding

Period

P rint Red Herring

Prospectus

SEBI Filing

Offer document
w riting / update
due diligence
continuation

Research Report Preparation and Dispatch

Dr aft Offer Document Finalization for SEBI filing

Receive SEBI Observations

Complete SEBI compliance and final
clearance
File Red Herr ing Prospectus

Listing

Issue Marketing
Bidding
Settlement

Commence
Process
Pre Research
Data Room

Finalization of
Business Plan
Circulation of
Research
Guidelines
Research
Presentation

Before SEBI Filing

Compliance with Corporate
Governance - Appointment
of Independent Directors,
formation of various
committees
Appointment of
intermediaries

Week
3-5

In-principle approval from Stock

Exchanges
SEBI Approval
Complete IPO grading

Completion of Due
Diligence

Pre-marketing feedback

Offer document finalization

Printing of RHP and Bid-cumApplication Forms

Commence IPO Grading

Week
1-2

Prior to Transaction Launch

Week
6-7

Week
8

Prior to Listing
Roadshow
Bidding, Pricing,
Allocation, Allotment
and Settlement

Filing RHP with RoC

Week
9-15

Week
16

Week
17-21

Week
22
26

Thank you