Study Circle meet by WIRC th July 2010 on 18 at Bhavans College Presentation by

CS B Narasimhan

GOA CONCLAVE ( ICDR AND IPO NEW PROCESS )

DIP VS ICDR IPO NEW PROCESS

UNDERWRITING IN IPO
IPO GRADING (THE FLIP SIDE) Basis of Allotment

BROAD BASIS FOR THE CHANGES

DIP guidelines stands rescinded ( Aug 2009) Broadly the framework remains the same Some more clarification provided in the new Regulations Guidelines does not have the force of law Regulations does Enforcement to be more strict Unwanted guidelines deleted from the new regulations

Group Companies & Eligibility norms

The term "group companies" not explained.
The term "group companies" explained to avoid confusion. The new norms also bans firm allotment to privileged people like relatives, associates and friends in IPOs. Exemption has been removed. Eligibility norms have been made applicable uniformly to all types of issuers.

Exemptions were available to banking company, and infrastructure company.

Definition of Employee
Definition of "employee" Includes permanent employee/ director of subsidiary or holding company of the issuer. (DIP Guidelines) Excludes permanent employee/ director of subsidiary or holding company of the issuer and promoters and immediate relatives of promoters. employee means a permanent and full-time employee of the issuer, working in India or abroad or a director of the issuer, whether whole time or part time Reservations to employees will not be subject to lockin.

Key managerial person and Anchor Investor

Definition of "Key Management Personnel"

Definition of Anchor Investor (AI)

Officers vested with executive powers and the officers at the level immediately below the board of directors of the issuer and includes any other person whom the issuer may declare as a key management personnel. anchor investor" (AI) means a qualified institutional buyer Concept of AI notified by SEBI on 9th July 2009

Public Issues
Firm allotment in public issues was permitted. There is no provision for firm allotment in public issues. This has been done away since there is a separate window for AI and also for QIPs now 75% book building route has been omitted.

Book building process could be made through 75% or 100% of issue size.

Public Issues
The allotment and /or refund period was 30 days for fixed price issues and 15 days for book built issues. Disclosure of price or price band was required in draft prospectus in case of fixed price public issues. The allotment/refund period has been made 15 days for both fixed price and book built issues ( Possibly keeping SMEs in mind)

For Book Built issues price band / Floor price needs to be announced 2 days before issue opening and for Fixed price at the time of ROC filing

Surplus money in Green Shoe Option (GSO) Bank Account was required to be transferred to the investor Protection Fund of stock exchanges Issue period for Infrastructure companies in public issues was 21 days, as against 10 days for other issues.

Public Issues

Surplus money would now be transferred to the Investor Protection and Education Fund (IPEF) established by the Board

The issue period has been made uniform to 10 days for all types of issuers. The need to give more time for this sector was dispensed with since money comes only on the last day

Particulars as per audited financial statements would not be more than 6 months old from the issue opening date for all issuers, except Government Companies. Disclosure on pledge of shares by promoters Financial institution as a monitoring agency not defined before

Public Issues

Both the Government and non-government issuers would now be treated at par. The New Regulations provides for Disclosure on pledge of shares by promoters consequent to amendment in the listing agreement Replaced by "public financial institution or a scheduled commercial bank" who would be acting as monitoring agency.

Book Building Issue

If issue opening and closing advertisement contained highlights, then the advertisement would contain risk factors. Forfeiture of money on unexercised warrants in preferential issues If advertisement contains information other than the details specified in the format, the advertisement shall contain risk factors.

Where the warrant holder exercises his option to convert only some of the warrants held by him, upfront payment made against only such warrants can be adjusted. Balance will stand forfeited

Book Building Issues

Minimum promoters' contribution brought in by promoters/ persons belonging to promoter group/friends, relatives and associates Issue period was not clear in case of revision in price band in book built public issues. Promoters contribution shall be brought in only by promoters whose identity, photograph, etc are disclosed in the offer document. The New Regulations provide that total issue period shall not exceed 10 days, including any revision in price band.

Monetary Control
Pre-issue advertisement to be made immediately after receipt of observations from the Board Documents such as M of A and A of A of the Company, audited balance sheet to be attached with due diligence certificate. Pre-issue advertisement would be made after registering of Prospectus / red herring prospectus with Registrar of Companies but before opening of the issue. The New Regulations require for attachment of checklist only.

Other Highlights
For follow on public offers (FPO) the notice of Board meeting had to be given as per clause 19 of the listing agreement a week before the board meeting. The underwriting obligations will be for the entire amount
Since the price band is required to be announced one day before the issue opening notice period to Stock Exchange for the Board meeting to be held for this purpose has been reduced to 48 hours

Underwriting obligations will not be restricted to the minimum subscription amount of 90% of the issue size but for 100% of the issue size.

Stock Exchanges and Public Representative

Stock Exchanges would be required to disclose complaints lodged by investors against trading members and companies listed on the exchange in their website

These disclosures will also include details pertaining to arbitration penal action etc against trading members. The reference to PR has been omitted from ICDR. It has been clarified by SEBI that it is intentional.

Where there is drawal of lots it has to be done in the presence of the PR from the governing Board of the Stock Exchange

Debarment and offer for sale

Companies prohibited if debarred from accessing Capital Market Order or Direction by Board No provision for offer for sale by listed entities The Issuer, any of its promoters, directors or persons in control are debarred O F S Provided for. Promoters with majority shareholding in listed entities can do offer for sale. Disinvestment and increasing in public holding to 25% Provisions relating to OTCEI, E-IPO Omitted

Post Issue Monitoring report

3 day report (working days from the closure of the issue) Final 50 days post issue monitoring report (50 calendar days from closure of the issue)
3 Day report ( calendar days). 15 days within fifteen days of the date of finalization of basis of allotment or within fifteen days of refund of money incase of failure of issue, from closure.

Other changes notified later 9th Nov 2009

Reservation for Employees
Upto 5 % of the issue size Ceiling of Rs 1 Lakh Extend reservation for Rights Issue also Discount for Employees also

New process

19

New process 14th August 2003

Notification dated 14th August 2003

Visualized electronic IPO with secondary

market settlement Process involved limited KYC by SM Elimination of paper work Elimination of duplication of effort

Seamless process of allotment and listing

Trading to commence on (T+6)
20

New process 14th August 2003

Market participants objection (BRLM and SM) This portion of notification shelved ONGC Fiasco 29th March 2004 SMILE committee recommendations

GRIP (ASBA process)

ASBA phase I and Phase II Lukewarm response (can not be made compulsory . Provisions of the Companies Act )
21

Timelines & deliverables

# This day.. These deliverables..

1
2 3

T day
T + 1 days T + 2 days

Book closes
Price determination Determination of offer size Registrar draws the allocation list All bids entered assumed as valid

T + 3 days

Stock Exchanges approve the basis of allocation Final prospectus printed and dispatched CANs sent to QIBs Allocation details electronically communicated by Registrar/Company to brokers
Pay in (only high-value) Bankers to confirm clearance of fund Board meeting Stock Exchanges to issue the listing and trading permission Brokers account to be credited with shares Broker to credit shares to the demat account of investors Company to instruct NSDL/CDSL to credit shares to the demat account of brokers Trading to commence
22

T + 4 days

T + 5 days

T + 6 days

Post issue activities

23

Book building Post issue activities

Pricing based on demand (Bids) Finalization of prospectus Filing with SEBI and ROC Collection of bid data Non ASBA & ASBA Cleaning and validation of bid data DP ID Ben ID and PAN matched with Depository database Invalid cases submitted to BRLM/SM & Sub SM (1 day window for rectification) Final book taken after rectification from both SE
24

Book building Post issue activities

bids Submission of base documents to SE SM to send data and bids to EB (T+2) RTI to give data file to EB to facilitate validation of

Cheques to be cleared by EB (T+4)

Bids and bank schedule from EB to RTI Technical rejections RTI to obtain soft copy of schedule (T+4) and FC

from EB (T+6)
25

Book building Post issue activities

Recon. of electronic book with schedule and FC (gross

level)
Bidded not banked Banked not bidded Technical rejections Invalid bids ( not matched cases) Amount mismatch (treatment thereof) PAN mismatch and multiple applications
26

Book building Post issue activities

Preparation and submission of basis to DSE Approval of basis by DSE (T+8) Apply the basis on data and give instructions for transfer of funds to EB (T+8)

Similar exercise for ASBA bids (T+8)

Lock-in of pre issue capital (T+8) Fund transfer confirmation by EB (T+9) RTI to upload file for credit of shares (T+9)
27

Book building Post issue activities

Confirmation from Depository for lock-in (T+9) Filing of distribution schedule etc with SE (T+10)

Completion of all formalities for listing with SE

Confirmation for demat credit from depositories RTI to confirm refund despatch SE to inform members of commencement of trading

Commencement of trading (GONG ceremony)

(T+12)
28

Book building guidelines 22nd April, 2010

Electronic book the base Validation by Syndicate Member one day Gross recon with Escrow Banker and electronic book

T+7 - submission of basis

T+8 - approval of allotment T+10 & 11 - submission of all documents T+12 - listing and trading
29

 BOOK BUILDING UNDERWRITING & IPO GRADING

Underwriting
UNDERWRITING = INSURANCE

Hard Underwriting

Underwriter agrees to buy his commitment at its earliest stage

Guarantees a fixed amount to the issuer from the issue If the shares are not subscribed by investors Where the issue is devolved on underwriters and they have to bring in the amount by subscribing to the shares

Underwriting
UNDERWRITING = INSURANCE

Hard Underwriting Underwriting agreement signed before the issue opening Underwriting not mandatory for Fixed Price Issue If FP is underwritten fully underwriters will have to bring in their obligations IN Book Built Issue Underwriting is mandatory.

Underwriting
UNDERWRITING = INSURANCE Soft Underwriting

Underwriting agreement only after the issue closes Pricing is determined only after issue closing in Book Built Issues

Paradox of some sorts

Underwriting obligations have been met in the past???? HOW?? Underwriter agrees to buy the shares at later stages as soon as the pricing process is complete

Underwriting
UNDERWRITING = INSURANCE
Soft Underwriting

Subsequently, he places those shares with Institutional Investors Also holds an option to invoke a force majeure (acts of God) clause In case there are certain factors beyond the control that can affect the underwriter's ability to place the shares with the buyers

IPO Grading (Unlisted Companies)

IPO Grading Compulsory from May 1, 2007 Five-point point scale Higher score indicating stronger Fundamentals and vice versa All the grades to be disclosed Activity to run parallel to the filing of draft offer document Price of the IPO not taken into account for Grading

IPO Grade : Price Matrix High Grade High Price Low Grade High Price High Grade Low Price Low Grade Low Price

First IPO Grading CRISIL

Kiri Dyes and Chemicals Ltd 2/5 (Subscription 1.3 times)

ICRA
SRS Entertainment 2/5

IPO Grading (Unlisted Companies)

Factors Considered for IPO Grading Business Prospects and Competitive Position
Industry Prospects Company Prospects

Financial Position Management Quality Corporate Governance Practices Compliance and Litigation History New Projects Risks and Prospects Key Components of Investment Decision

Fundamental Analysis

Returns Analysis

Investor Preference

Market Price Offer Price

ORBIT CORP.LTD.
OFFER P RICE OP ENING DATE LISTING DATE ISSUE AM OUNT : Rs.110.00 : 20/ 03/ 2007 : 12/ 04/ 2007 : Rs.100.10 CRORE

TIMES SUBSCRIBED
Q IB

NIB RETAIL

: 7.23 : 4.06 : 0.74

250.00 225.00 200.00 175.00 150.00 125.00 100.00 75.00 50.00 16.32%

TOTAL : 4.48
108.54%

IPO GRADING : 1/5

1-May

2-May

3-May

4-May

5-May

6-May

7-May

8-May

9-May

10-May

11-May

12-May

13-May

14-May

15-May

16-May

17-May

18-May

19-May

20-May

39 Days

21-May

12-Apr

13-Apr

14-Apr

15-Apr

16-Apr

17-Apr

18-Apr

19-Apr

20-Apr

21-Apr

22-Apr

23-Apr

24-Apr

25-Apr

26-Apr

27-Apr

28-Apr

29-Apr

30-Apr

100.00

110.00

120.00

30.00
163.03%

40.00 200.79% Offer Price Market Price

OFFER P RICE OP ENING DATE LISTING DATE ISSUE AM OUNT

50.00

60.00

70.00

80.00

90.00

IPO GRADING : 2/5

CAMBRIDGE TECHNOLOGY ENTERPRISES TIMES SUBSCRIBED LTD. QIB : 3.76

: Rs.38.00 : 29/ 12/ 2006 : 07/ 02/ 2007 : Rs.15.40 CRORE

103 Days

NIB RETAIL

TOTAL : 6.71

: 3.29 : 11.21

07-Feb 09-Feb 11-Feb 13-Feb 15-Feb 17-Feb 19-Feb 21-Feb 23-Feb 25-Feb 27-Feb 01-Mar 03-Mar 05-Mar 07-Mar 09-Mar 11-Mar 13-Mar 15-Mar 17-Mar 19-Mar 21-Mar 23-Mar 25-Mar 27-Mar 29-Mar 31-Mar 02-Apr 04-Apr 06-Apr 08-Apr 10-Apr 12-Apr 14-Apr 16-Apr 18-Apr 20-Apr 22-Apr 24-Apr 26-Apr 28-Apr 30-Apr 02-May 04-May 06-May 08-May 10-May 12-May 14-May 16-May 18-May 20-May

54.34%

50.00

60.00

70.00

80.00

90.00

4.40 8.93% Offer Price IPO GRADING

OFFER P RICE OP ENING DATE LISTING DATE ISSUE AM OUNT

Market Price

AMD METPLAST LTD.

63 Days

: 3/5

: Rs.75.00 : 15/ 02/ 2007 : 19/ 03/ 2007 : Rs.68.22 CRORE

QIB N IB R ET A I L : 1. 3 1 : 10 . 16 : 7. 6 6

TOTAL : 4.42

TIMES SUBSCRIBED

19-Mar 20-Mar 21-Mar 22-Mar 23-Mar 24-Mar 25-Mar 26-Mar 27-Mar 28-Mar 29-Mar 30-Mar 31-Mar 1-Apr 2-Apr 3-Apr 4-Apr 5-Apr 6-Apr 7-Apr 8-Apr 9-Apr 10-Apr 11-Apr 12-Apr 13-Apr 14-Apr 15-Apr 16-Apr 17-Apr 18-Apr 19-Apr 20-Apr 21-Apr 22-Apr 23-Apr 24-Apr 25-Apr 26-Apr 27-Apr 28-Apr 29-Apr 30-Apr 1-May 2-May 3-May 4-May 5-May 6-May 7-May 8-May 9-May 10-May 11-May 12-May 13-May 14-May 15-May 16-May 17-May 18-May 19-May 20-May 21-May
-7.93%

100.00

110.00

120.00

130.00

140.00

150.00

50.00 -38.54% Offer Price Market Price -9.17%

OFFER P RICE OP ENING DATE LISTING DATE ISSUE AM OUNT

60.00

70.00

80.00

90.00

IPO GRADING : 2/5

EVINIX ACCESSORIES LTD.

75 Days

: Rs.120.00 : 12/ 02/ 2007 : 07/ 03/ 2007 : Rs.42.00 CRORE

QIB NIB RETAIL : 1.16 : 11.98 : 2.27

TIMES SUBSCRIBED

TOTAL : 3.42

7-Mar 8-Mar 9-Mar 10-Mar 11-Mar 12-Mar 13-Mar 14-Mar 15-Mar 16-Mar 17-Mar 18-Mar 19-Mar 20-Mar 21-Mar 22-Mar 23-Mar 24-Mar 25-Mar 26-Mar 27-Mar 28-Mar 29-Mar 30-Mar 31-Mar 1-Apr 2-Apr 3-Apr 4-Apr 5-Apr 6-Apr 7-Apr 8-Apr 9-Apr 10-Apr 11-Apr 12-Apr 13-Apr 14-Apr 15-Apr 16-Apr 17-Apr 18-Apr 19-Apr 20-Apr 21-Apr 22-Apr 23-Apr 24-Apr 25-Apr 26-Apr 27-Apr 28-Apr 29-Apr 30-Apr 1-May 2-May 3-May 4-May 5-May 6-May 7-May 8-May 9-May 10-May 11-May 12-May 13-May 14-May 15-May 16-May 17-May 18-May 19-May 20-May 21-May

-23.92%

IPO GRADING
Was grading not a factor in investors' decision making process? Or is that the bullish secondary market conditions will always overweigh? Good to remember that IPOs can be floated only in buoyant markets. Even the best issues will not sell in a bear market Market replete with examples

IPO GRADING
It is being assumed by most that IPO grading is a perfect and an objective process. If that was the case, there are no problems. In reality, it appears to be a hugely subjective and an imperfect process.

BASIS OF ALLOTMENT
HISTORIC TRENDS OF THE PAST WEIGHTAGE FOR LOWER CATEGORY HIGHER PERCENTAGE OF ALLOCATION MULTIPLE APPLICATIONS (EXAMPLES) EXAMPLES OF RS/RPPL/ REPL STOCK INVESTS

BASIS OF ALLOTMENT
CHANGE TO PRORATA ALLOTMENT IN 1993/94 SEGREGATION OF APPLICATIONS 2 CATEGORIES SMALL INVESTORS GRIEVANCES REVERSE NUMBERING ALLOTMENT IN DEMAT FORM 2001 PREREQUISITES FOR OPENING DEMAT A/C TILL 2005 REQUIREMENT SPECIFIED POST IPO SCAM

BASIS OF ALLOTMENT
FORMATION OF COMMITTEE FOR MULTIPLE APPLICATIONS IN 2001 UNDER CHAIRAMNSHIP OF JK VERMA SCAM AS IT UNFOLDED CASE OF PARAG JHAVERI 2007 MISUSE OF THE SYSTEM

BASIS OF ALLOTMENT
EXAMPLES OF NEW BASIS MINIMUM APPLICATION SIZE Rs.5,000/- TO Rs.7,000/ MINIMUM APPLICATION LOT IN THE RANGE PRICE BAND IS SAY 500/- TO 530- LOT SIZE CAN BE 10 TO 13 ISSUER TO DECIDE IN CONSULTATION WITH BRLM BIDS TO BE IN MULTIPLE OF MINIMUM LOT IF 12 IS LOT, BID LOTS WILL BE 24,36,48,60, 72,84,96 UPTO 192 FOR RETAIL

(contd)

BASIS OF ALLOTMENT

(contd)

TOTAL SHARES ON OFFER @Rs.500/PER SHARE SAY 10 CRORE FOR RETAIL SAY 3.5 CRORES RETAIL OVERSUBSCRIBED 6 TIMES 12/6=2, 24/6=4, 48/6=8 ----LOTTERY 72/6=12 ----FIRM 84/6=14 ---- FIRM 96/6=16 ----FIRM 192/6=32----FIRM IF RETAIL IS 7 TIMES 12/7=1.71=2 24/7=3.42=3 } LOTTERY 48/7=6.85=7 72/7=10.28=10 } 84/7=12 ---- FIRM 192/7=27 FIRM

KARVY

BASIS OF ALLOCATION - BOOK BUILT PORTION FOR RETAIL INVESTORS

Public issue of 68400000 equity shares of Rs 10/- each issued for cash at a price of Rs.430/- per share.

NAME OF THE COMPANY : RELIANCE POWER LIMITED

(1) No.of allottees per Rs.1 Lakh of offer (upto 225 shares) : 610.22 Number of Shares Shares issued vide Offer Document dated 19.01.2008 Net quantum available for allotment No. of Shares applied for (Category wise) (2) 15 30 45 60 75 90 105 120 135 150 165 180 195 210 225 (3) 60176 82844 67812 112793 40359 70934 151763 66497 19057 57122 14203 30708 19752 172499 3656564 Number of applications received Total No.of Shares applied in each category (5) 902640 2485320 3051540 6767580 3026925 6384060 15935115 7979640 2572695 8568300 2343495 5527440 3851640 36224790 822726900 (7) 66506 183117 224835 498630 223022 470373 1174087 587934 189554 631306 172667 407258 283786 2669016 60617909 Propor tionate shares available 68400000 68400000 Allocation per Applicant Before off (8) 1.11 2.21 3.32 4.42 5.53 6.63 7.74 8.84 9.95 11.05 12.16 13.26 14.37 15.47 16.58 After off (9) 15 15 15 15 15 15 15 15 15 15 15 15 15 15 1 16 1 4623083 928348080 68400000 2 4 2 8 10 4 14 16 2 20 5 8 1 1 1 1 10 (10) 27 27 9 27 27 9 27 27 3 27 6 9 1 1 147 1 17 rounding rounding (2) Subscription as multiple of offer (upto 225 shares): 13.572340 Face value Rs. 10 10 Ratio of allottees to applicants Amount (Face value) 684000000 684000000 Number of successful applicants (after rounding off) (12) 4457 12273 15069 33420 14948 31526 78692 39406 12705 42313 11836 27296 19752 172499 1173 3656564 2150923 4173929 (14) 66855 184095 226035 501300 224220 472890 1180380 591090 190575 634695 177540 409440 296280 2587485 1173 58505024 2150923 68400000 Subscription List Opening : Closing : Total No. of Shares allocated/ allotted (7)-(14) (16) -349 -978 -1200 -2670 -1198 -2517 -6293 -3156 -1021 -3389 -4873 -2182 -12494 81531 -1173 2112885 -2150923 0 Surplus/ Defecit 15-01-2008 18-01-2008

GRAND TOTAL

THANK YOU
CS B. Narasimhan, Vice President Karvy Computershare Pvt Ltd 24, Maharashtra Chamber of Commerce Lane Fort, Mumbai - 400 023 bn@karvy.com Phone Off 22838497 Mob 9004089490