INITIAL PUBLIC OFFER & ANALYSIS
(A study on RELIANCE POWER, GMR IPO’s)
Under the Esteemed guidance of
Lecturer of Business Management
Project Report submitted in partial fulfillment for the award of Degree of
DECLARATION
I here by declare that the project work titled “ Report on Initial Public
!ffer" done by me as a project work# submitted as partial fulfillment for the
award of degree M$%&R !' B($I)&$$ DMI)I$%R%I!) to the
faculty of finance *********+
Abstract
Initial Public !ffer ,IP!- is one of the ways of raising capital for the
companies which proposes to e.pand their operations or they want to start a
new /enture+ s this is the effecti/e way of getting funds from public for the
first time for e/ery company which wants to go public# that company has to
follow a certain set of guidelines which we call as Disclosure and In/estor
Protection ,DIP- guidelines+ nd the process of coming to IP! has been
/ery important for the company# this project has been describing about the
issue procedure along with the ad/antages and disad/antages for coming to
an IP!+ 'or the better understanding of how the companies ha/e to raise
funds# the analysis of some companies which recently came for an IP! and
the success of their IP! has been clearly e.plained+ %he main aim for
undertaking this project is to aware about how the companies come for an
IP! route for raising funds to achie/e the proposed target+ nd another thing
is the procedure to be followed by the company for the raising of funds and
how to work with all the parties in/ol/ed in the IP! process# their duties and
responsibilities for the better results+
%he conclusion regarding this project is getting to know the students how the
companies come for an IP! with certain procedure and make them aware
about the issues in an IP!+
Recommendations about this project are
&/ery company whiche/er wants to go public for the first time has to know
what procedure has to be implemented and the success factors for winning in
an IP!+
ACKNOWLEDGEMENTS
I would like to thank the finance faculty **** for assisting me in doing
this project by gi/ing specific and rele/ant guidance and gi/ing certain clues
for preparation of this project# and I would like to thank my friends for
gi/ing ad/ice to do this project and for pro/iding certain information
rele/ant for this topic+
****
TABLE OF CONTENTS
CONTENTS PAGE NUMBERS
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Introduction
Objectives
• %o aware the intending in/estors about the procedure what has to be
followed in the issue of securities for public subscription+
• %o pro/ide them the guidelines which are to be followed by
companies in an IP!B
• %o know the key terms and /arious stages in an IP! process+
• bout the /arious parties in/ol/ed along with the company for
making an IP!+
• %o look into the aspects of different companies which ha/e come for
an IP! recently along with their respecti/e strengths and weaknesses+
• %o know how the shares are /alued and the different methods of
pricing them in an IP!+
• %o know the /arious parties in/ol/ed in an IP! and their respecti/e
formalities to be completed+
• %o know the factors which can lead to success or failure of an IP!B
Scope of the study
In initial public offering ,IP!-# the companies ha/e to look into the
/arious aspects like what guidelines it has to follow# the procedure for
coming to public issue of shares for the proposed objecti/e+ $o the
company has to fulfill /arious formalities and regulations specified by the
controller $&BI before coming to an IP!+ $cope of this project is limited
to the guidelines and procedures for coming to an IP! along with the
factors which leads to the success or failure of an IP! of different
companies+ nd the scope is limited to mentioned companies which
recently came for an IP! and their strengths and weaknesses for
succeeding in an IP!+
Limitations
• %he project is prepared in limitation to the a/ailability of data+
• %he regulations and procedure to be followed is mentioned according
to the $&BI rules+
• $tudy is limited to companies which are used in analysis of an IP!
performance at the end+
• %he data is limited to recent amendments which are to be followed+
• %he duties mentioned for each and e/ery participant are in
consideration to the recommendations from $&BI+
INTRODUCTION
%he word IP! is /ery much often used in the issues of shares by the
companies when they want to go for public for the huge amount of
in/estment into the purpose of the company for achie/ing the desired
objecti/es+
%he word IP! stands for Initial Public !ffer and this is uniCue in more ways
than one since it permanently changes the profile of a company and the way
the promoters and the management need to think thereafter+ %he
responsibility of li/ing up to the e.pectation of the market and shareholders
is a mammoth task+ 4i/en the fact that there is always a temptation for
companies to look at the primary market as a source of finance through IP!
route# the regulator $&BI has e/ol/ed an IP! code in the form of the $&BI
,Disclosure and In/estor Protection- guidelines+ $&BI has also brought in
se/eral structural impro/ements in the way the public offers are made in the
primary market+
WHAT IS AN IPO?
Selling Stock
An initial public offering, or IPO, is the first sale of stock by a
company to the public. A company can raise money by issuing
either debt or equity if the company has never issued equity to the
public, it's known as an IPO.
ompanies 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. Anybody can go out and incorporate a company! "ust put in some money, file the right
legal documents and follow the reporting rules of your "urisdiction. #ost small businesses are privately held.
$ut large companies can be private too. %id you know that I&'A, %omino's Pi((a and )allmark ards are all
privately held*
It usually isn't possible to buy shares in a private company. +ou 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 e,change. -his is why doing an IPO is also referred
to as .going public..
Public companies have thousands of shareholders and are sub"ect to strict rules and regulations. -hey must
have a board of directors and they must report financial information every quarter. In the /nited 0tates,
public companies report to the 0ecurities and ',change ommission 10'2. In other countries, public
companies are overseen by governing bodies similar to the 0'. 3rom an investor's standpoint, the most
e,citing thing about a public company is that the stock is traded in the open market, like any other
commodity. If you have the cash, you can invest. -he 'O could hate your guts, but there's nothing he or
she could do to stop you from buying stock.
WhyGo Public?
4oing public raises cash, and usually a lot of it. $eing publicly traded
also opens many financial doors!
• Because of the increased scrutiny# public companies can usually get
better rates when they issue debt+
• s long as there is market demand# a public company can always
issue more stock+ %hus# mergers and acCuisitions are easier to do
because stock can be issued as part of the deal+
• %rading in the open markets means liCuidity+ %his makes it possible to
implement things like employee stock ownership plans# which help to
attract top talent+
$eing on a ma"or stock e,change carries a considerable amount of
prestige. In the past, only private companies with strong
fundamentals could qualify for an IPO and it wasn't easy to get listed.
-he internet boom changed all this. 3irms no longer needed strong financials and a solid history to go public.
Instead, IPO5s were done by smaller startups seeking to e,pand their businesses. -here's nothing wrong
with wanting to e,pand, but most of these firms had never made a profit and didn't plan on being profitable
any time soon. 3ounded on venture capital funding, they spent like -e,ans trying to generate enough
e,citement to make it to the market before burning through all their cash. In cases like this, companies might
be suspected of doing an IPO "ust to make the founders rich. -his is known as an e,it strategy, implying that
there's no desire to stick around and create value for shareholders. -he IPO then becomes the end of the
road rather than the beginning.
Significance of an IPO
s the facts mentioned in the abo/e paragraph bring us to the discussion on
whether the IP! decision is purely market dri/en or not+ Before we discuss
the determinants of the IP! decision# it is imperati/e to understand the
significance of an IP! and what it does to the company+
&/ery company when it is unlisted offers an ownership or eCuity opportunity
to an outside in/estor which# for the purpose of discussion# has been termed
as the “pri/ate window"+ %he pri/ate window also does not pro/ide any
price /alidation for the companyDs unlisted stock# which has to be deri/ed
from time to time through comple. /aluation methodologies+
Ehen a company makes an IP!# what it actually creates is second
ownership opportunity that can be termed as Fmarket windowD# unlike the
pri/ate window# pro/ides any time entry and e.it facility to in/estors from
the companyDs eCuity capital+ %herefore# it is meant either for the retail
in/estors who would wish to ha/e instant liCuidity for their in/estments or
for speculators who intend to make profits through regular trading in the
companyDs stock+ Being a continuous e/aluation mechanism# the market
window is market dri/en2 it can be o/erheated at times or be completely
indifferent to the companyDs fundamentals+ During times of frenetic market
acti/ity# the market window may o/er /alue a companyDs share while in dull
phasesG the market price can be e.tremely low+ Due to this phenomenon#
though empirically speaking# the market price tends to conform to the trends
in the intrinsic worth of a share in the long term# at any gi/en point of time#
it represents the instant entry or e.it price for an in/estor+
strategic in/estor would be prepared to pay an entry premium for the
companyDs share# which may result in the companyDs share being /alued at
much more than its current market price+ %he premium that a strategic
in/estor would want to pay is arri/ed at based on long2term considerations
that ha/e more of a business perspecti/e than a pure financial perspecti/e+
Lastly# financial in/estors may just want the company to make an IP! and
open up the market window which can be used by them from time to time to
make gradual sale of their holdings at the best a/ailable market prices+
%his brings us to the discussion on how e.actly an IP! should be percei/ed+
$ince an IP! is a significant milestone in the life of a company# it could
ha/e se/eral implications such as the following mentioned belowH
Implications
• It can be a source of finance if it is meant to finance a specified use+
• It creates a new ownership opportunity called the market window and
a class of in/estors called the Fretail in/estorsD+
• It can be liCuidity e/ent since it creates an e.it route for the e.isting
and future in/estors of company
• It creates market capitaliIation for the company# which is the
aggregate /alue of all its issued shares as multiplied by the current
market price+
• Being listed can open up the gates for hostile takeo/er attempts on
the company
• It makes future acCuisition of stakes in the company by the promoters
Cuite e.pensi/e and cumbersome+
• It brings with it additional costs of regulatory compliance# certain
restrictions on future capital transactions and cumbersome procedures+
'rom the abo/e implications# it is Cuite e/ident that an IP! can act as a
double edged sword+ $o in good times it enhances share holder wealth
but in difficult times# listed status can become a hindrance and a drag on
the companyDs performance and prospects+
The IPO Decision
%he IP! decision is depends on the following two stages the pre IP! stage
and the post IP! stage+ %he pre IP! stage relates to the timing of an IP!
decision# while the post IP! stage is about continuance or discontinuance of
the listed status+
%iming of an IP! is a strategic# financial and merchant banking decision+
%he strategic decision is to determine whether listing fits into the companyDs
o/erall strategy and if so# whether the company is mature enough for it+
%he financial decision to make is to decide whether a company needs the
capital proposed to be raised# how much is to be raised and how effecti/ely
it should be deployed+ %he merchant banking decision is made to determine
the appropriate structure# pricing# timing and marketing strategy for the IP!+
$trategically speaking a company should go for an IP! only when it is
mature enough for it+ %his depends on the following pointsH
• Does the company need the IP! as a liCuidity e/ent for its e.isting
in/estorsB In other words# are there no pri/ate e.it options a/ailable
so that the IP! can be pushed further into the futureB
• >as the company matured enough to unlock the /alueB
• Is the companyDs business model retail2oriented with a strong brand
presence so as to identify with the retail in/estorB
• Is the companyDs /isibility in the market is sufficient enough for
in/estors to percei/e its business model to the full e.tent and unlock
/alue for its share holders through the IP!B
• Is the company confident of strong financial growth in the future so as
to sustain the pressure of constant market /alidation after the IP!B
Dimensions in an IPO
The Financial Dimension
%he ne.t dimension of the IP! decision is a financial one+ In capital
intensi/e industries and large industries such as hea/y engineering#
automobiles# infrastructure and some other industries the business model is
so large that going public could become ine/itable in order to maintain
balance in the capital structure+ %hey would reCuire IP! and some multiple
rounds of offers after IP! to keep financing their growth and consolidation+
%herefore# in such cases# IP! and public offers are more of financing
decisions than strategic+
%he same is true of certain start2up businesses that need to look at an IP!
more as a source of finance than as a strategic mo/e+
%he second financial aspect relating to the IP! decision is to e/aluate if
unlocking /alue through an IP! is the need of the hour or whether other
options are a/ailable+ $trategic sale of eCuity happens through the pri/ate
window that realiIes better /alue for the company than an IP! since pri/ate
in/estors offer /aluations significantly higher than what the company gets
from an IP!+
%he third aspect of the financial decision is to e/aluate how much capital is
proposed to be raised through the IP! and its deployment+ 4enerally# IP!Ds
that ha/e well laid out in/estment plans sell better than those that do not
ha/e con/incing application for the funds+ In/estors need to be shown an
in/estment a/enue in the company that can generate the e.pected return on
their funds+ $ometimes# the reCuire of funds for the company could be too
large to be raised through an IP! without causing too much dilution of
promoters stakes+ t such times# the company has to formulate an ideal issue
structure in consultation with the merchant banker and prune down the siIe
of the issue if necessary+
The Merchant Banking Dimension
Lastly# the IP! is also dri/en by merchant banking considerations+ Merchant
bankers take a call on the IP! proposal based on the business plan and
financial position of the company# e.pected future performance# pre/ailing
conditions in the primary market# e.pected issue pricing# siIe of the offer
and post issue capital structure+ %he key dri/ers for the merchant banker are
the market conditions# own placement strength and the main selling points in
the issue+ !n the other hand# if the promoters are bringing in additional
contribution in the issue at the same issue price# it adds to the marketability
of the issue+
(sually in strong market conditions# merchant bankers tend to be aggressi/e
and push companies to go public+ %he logic put forward in such times is that
when there is money for the taking at good pricing# issuers go ahead and
make use of best opportunity e/en if they ha/e no use of for the funds right
away+
In depressed markets# it would be difficult for a company to plan an IP! and
get a good pricing and response for the issue+ It would e/en difficult in such
a market to find a merchant banker who would be confident of selling the
issue comfortably+ %herefore# most companies would defer their IP! plans
e/en if they ha/e matured enough and ha/e a reCuirement for funds+
%o summariIe and conclude the decision of IP! the following points are
prominent+
• %iming is an important criterion in the IP! decision+
• %he IP! decision should be taken considering the strategic# financial
and merchant banking considerations+
• 'or certain projects and business# going public is an imperati/e+ In
such cases# the IP! should be structured to deli/er the best results+
Important Aspects of an IPO
It has been e/ident that an IP! can be made for listing a company either by a
public issue# i+e+ an offer of fresh shares to the public or through an offer for
sale by the e.isting share holders of the company to the public+ Before going
to the /arious aspects of the IP! in particular# it is important to know the
some key terms that are used in merchant banking parlance and their
definitions+
Key Concepts:
IPO2 Initial Public !ffer is the first public issue of fresh eCuity or
con/ertibles by a company due to which its share gets listed on the stock
e.change+
Public Issue 2 n in/itation by a company to public to subscribe to the
securities offered through a prospectus+
!ffer for sale2 n offer of securities by the e.isting share holders to the
public for subscription+
Rights Issue 2 n issue of cap ital under sub2section ,1- of sec <1 of the
companies ct# 1=35 to be offered to the e.isting shareholders of the
company through a letter of offer+
Preferential Allotment2 n issue of capital made by a body corporate in
pursuance of a resolution passed under sub2sec ,1- of sec <1 of the
companies ct# 1=35+
Private Placement2 n offer made to select pri/ate in/estors known to the
issuer through a pri/ate arrangement to the e.clusion of the general public+
Lock-in2 specified time period during which shares are cannot be sold#
transferred and pledged in any way+
QIBs2 Jualified Institutional Buyers shall mean public financial institutions
as defined under sec 6 of companies ct# scheduled commercial banks#
mutual funds# foreign institutional in/estors registered with $&BI# /enture
capital funds and insurance companies registered with $&BI# pro/ident
funds and pension funds with a minimum corpus of Rs+ 83 crore and state
industrial de/elopment corps+
Issue Pricing
%he $ecurities and &.change Board of India ,$&BI- introduced free pricing
of shares for public offerings in 1==8+ s per the current guide lines
,Disclosure and In/estor Protection guide lines 8???-# e/ery company either
unlisted or listed# which is eligible to make a public issue can freely price its
shares+
%he first step in formulating an issue structure is pricing of the issue+ %his is
one important thing done by the merchant banker in public offering+
ppropriate price can not only ensure success of the issue but pro /ide good
returns to the prospecti/e in/estors as well+ %herefore# proper issue pricing
can be a win2win situation for the company and in/estor as well+
%he merchant banker usually arri/es at an appro.imate pricing for the issue
and tries to carry the management of the company with him on the pricing+
!/er pricing an issue is an o/er kill that should be a/oided e/en if it results
in short term gain for the issuer and the merchant banker+ t the same time
the price should pro/ide reasonable returns to e.isting in/estors in a
company who wish to make an e.it in the issue+ %herefore issue pricing is
considered a trade off between immediate gains long2term returns to the
issuing company and its promoters+
Pricing issue is done keeping in mind the Cualitati/e features# and by using
selecti/e multiples as benchmarks than through the con/entional approach
of the discounted cash flow method+ %he usual parameters used are the Pric
to &arning Ratio and Price to Book /alue Ratio+ In addition to the abo/e# the
following points ha/e to be kept in mindH
• Projected earnings of the company cannot be used as a justification
for the issue price in the offer document+
• %he accounting ratios should be calculated after gi/ing effect to the
conseCuent increase in capital on account of compulsory con/ersions
outstanding# as well to subscribe for additional capital shall be
e.ercised+
• 0omparison of all the accounting ratios of the issuer company as
mentioned abo/e has to be made with the industry a/erage and with
the other companies+
Capital Structuring
%he capital structure of the company post2issue has to be structured so as to
reflect the desirable position for the company and for the marketability of
the issue as well+ %he starting point for this e.ercise is the pre2issue capital
structure+ %he following steps ha/e to be followed in this regard in the case
of 1??K retail issue+
1+ -aking into consideration the issue si(e and proposed
pricing, the total number of new shares to be issued is
determined.
8+ $ased on the pre6issue paid6up capital and the number of
new shares determined under step7, the total issued and
paid up post6issue capital is arrived at.
;+ -he post6issue paid up capital is superimposed over the pre6
issue capital structure to determine the post6issue capital
structure.
6+ -he individual shareholder components in the post6issue
capital are e,amined for regulatory compliance under the
companies Act, %IP guide lines, the securities 1contract2
regulation Act, foreign e,change management Act and the
listing agreement of the stock e,change.
3+ -he merchant banker has to be satisfied on the capital
structure from the marketability aspect as well. Otherwise
suitable changes are made with in the permissible statutory
parameters.
Issue Structuring
%he issue structure refers to the following points
• %he face /alue of the share# the premium thereon and the final price+
In book built issues# the final price is not done until after the bidding
is o/er# but a floor price is determined+
• %he minimum amount of subscription per applicant and the
ma.imum+
• %he terms of the issue with regard to payment of the offer price and
eligibility criteria for applicants+
• 'irm allotments if any and any other details thereof# as per applicable
DIP guide lines+
• )et public offer+
• (nderwriting# either mandatory or discretionary+
• 0ost parameters for the issue and an acceptable issue budget+
The issue size and structure is determined as follows:
• %he issue siIe L FpromotersD CuotaM firm allotments M net public
offer+
• Public offer L firm allotments M net public offer+
• )et public offer L issue siIe N promoters Cuota N firm allotment+
Important Regulatory Provisions for an IPO
Let us look at the core of the DIP guide lines with respect to the public
offers and more importantly IP!s+ Basically# all public offers# irrespecti/e
of whether they are IP! or secondary offers ha/e to comply with these
pro/isions+
A. Eligibility to go Public
!ne of the most important pro/isions in the DIP guide lines is
about the eligibility of a company to go public for the first time through a
public issue or an offer for sale+ $&BI has o/er the years brought in
se/eral changes to this criterion to ensure that good Cuality issues are
brought to the market+ %he important guide lines on this criterion are
mentioned below based on the currently applicable guide lines+
Mandatory Conditions for a 100º Retail Issue
company can make an IP! of pure eCuity or con/ertibles only if it meets
all of the following conditions+
• %he company has net tangible assets of at least Rs+; crore in each of
the preceding ; full years# of which not more than 3?K of the net
tangible assets in mandatory assets+
• %he company has a track record of ha/ing profits distributable as
di/idends as per the pro/isions of section 8?3 of the companies ct
out of its normal business acti/ity without reckoning e.tra2ordinary
profits# for at least three out of the immediately preceding fi/e years+
• %he company has a net worth of at least Rs one crore in each of the
preceding three ; full financial years+
• %he aggregate siIe of the proposed issue and all pre/ious issues made
in the same financial year by the company does not e.ceed fi/e times
its pre2issue net worth as per the audited balance sheet of the last
financial year+
• In case the company has changed its name within the last one year# at
least 3?K of the re/enue for the preceding 18 months is earned by the
company from the acti/ity suggested by the new name+
Additional Conditions
n unlisted company not complying with any of the abo/e conditions may
make an IP! of eCuity shares or con/ertibles only if it meets following
conditions+
a+ %he project has at least 13K participation by financial
institutions of which at least 1?Kcomes from the appraisers+ In
addition to this at least 1?K of the issue siIe is allotted to JIBs#
failing which the full subscription monies shall be refunded+
b+ %he minimum post2issue nominal /alue of eCuity capital of the
company shall be R$+ 1? crore+
%he mandatory conditions ensure that the company has a track record of at
least ; years with minimum net worth and profit record+ %his would ensure
that paper companies couldnDt go public just after incorporation making tall
claims of future business potential+
B. Promoters Contribution
$&BI has also introduced the concept of minimum promotersD
contribution to be present in companies going public so that they
become interested parties in preser/ing the interests of the
shareholders+ In terms of DIP guide lines# following are the main
points that apply to promotersD contribution in case of IP!sH
• In an IP! the promotersD contribution shall not be less than
8?K of the post2issue capital+
• %he 8?K in case of IP!# shares acCuired by the promoter with
in the preceding one year for a price less than the IP! price
shall be ignored+
• %he minimum promotersD contribution criterion does not apply
to companies with no promoters+
• PromotersD contribution where reCuired to be brought in the
issue shall be brought in one day before the issue opens+
Firm Allotments and Reservations
%hese are no/el concepts that help in pre2marketing of a siIeable part of
issue thereby bringing down the risk in the issue+ In a firm allotment# a
particular in/estor or category of them are approached in ad/ance by the
lead manager or the issuer of the company to subscribe the issue on firm
basis+
%he pro/isions on firm allotments and reser/ations in IP! are as gi/en
belowH
• %he net public offer for issuing companies shall not be less than 83K
of the post2issue capital# e.cept in case of I% and infrastructure
companies it can be 1?K+
• %he issuer can make reser/ations on competiti/e basis or on firm
basis for allotments to the permanent employees# shareholders of
group companies# mutual funds# foreign institutional in/estors and
banks+
• ll firm allotments which ha/e not subscribed after filling the
prospectus shall be brought in before opening the issue and treated as
preferential one+
• ll reser/ed categories can be adjusted inter2se and with the net
public offer as well+
Lock-in of Shares
Lock2in of promotersD shares and other share capital is also a no/el concept
brought in for the purpose of pre/enting such shareholders in making unfair
gains and e.its from the company+ %he pro/isions are as followsH
• %he minimum promotersD contribution of 8?K shall be locked2in for ;
yrs from the allotment date+
• &.cess contribution by the promotersD in an issue o/er what is
reCuired is shall be lock2in for one year+
• 'irm allotments made in any issue shall be locked in for one year+ %he
amount brought in by promoters to make good under2subscribed
portion of firm allotments would also be locked in for ; years+
• %he entire pre2issue capital in case of an IP! shall be locked in for
one year+ $imilarly# shares held by /enture capitalists and shares held
for more than one year preceding the IP! and are being offered for
sale in the IP! are e.cluded from lock2in pro/isions+
Differential Pricing and Price Band
• ny unlisted company making an IP! for eCuity shares or
con/ertibles may issue such securities to applicants in the firm
allotment category at a price different from the price at which net
offer to the public is made pro/ided that the price at which the
security is offered to the applicant is higher than the price to the
public issue made+
• justification has to be furnished in the offer document on the price
differential for the firm allotment category+
• %he issuer company can mention a price band of 8? K, the cap should
not be more than the floor by 8?K- in the offer documents filed with
$&BI and the actual price can be determined at a later date before
filing the offer document with the R!0+
Other Important Issue Requirements
• ll new issues shall be in dematerialiIed form can also be made
through online interface following the necessary guide lines+
• %he minimum application siIe shall be worth Rs+ 8???+ %he ma.imum
siIe of an application can be eCual to the net public offer+
• In an offer for sale# the entire subscription amount shall be brought in
at the time of application+
• If there are calls on shares# they should be completed with in 18
months of the issue+
• !/er2subscription of a ma.imum of 1?K of the net offer to public can
be retained+
• Buy back arrangements can be made with a minimum period of 5
months and for a ma.imum of 1??? shares per allottee+
• Issues should be opened within ;53 days from the date of $&BI
appro/al or after 81 days of filing with $&BI+
• IP! shall be kept open for a min of ; days and ma. of 1? working
days+
Additional Requirements under Companies Act
• (nder the companies ct# no public issue shall be made with out the
issue of prospectus or offer document+ In terms of section 35# the
prospectus shall contain the matters specified in parts I and II of
schedule II of the ct+
• &/ery application form in/iting subscriptions from prospecti/e
in/estors shall be accompanied by a memorandum in form 8 of the
companies ct+
• &/ery prospectus should be dated and such date would be deemed to
be the date of its publication+ In addition e/ery prospectus shall be
registered with the Registrar before the date of its publication+ It
should be signed by all the directors or their agents+ ll those
Registered shall be issued within =? days of publication+
• Mis2statements in a prospectus can become ci/il and criminal
offences+
• &/ery company before making an issue shall make an application to
the stock e.change for listing the shares of the company+ If permission
is not recei/ed# allotment is /oid+ ll the application money has to be
refunded within < days without interest or with 13K interest
thereafter+
• ll o/er subscriptions should be returned within < days of allotment
or otherwise with 13K interest+
• )o allotment is made unless the minimum subscription is recei/ed+ In
compliance of this reCuirement# the DIP guide lines pro/ide that the
company has to satisfy the designated stock e.change that =?K of the
stated minimum subscription has been recei/ed before utiliIing the
issue proceeds+
• )o allotments can be made until the beginning of the fifth day of the
issue of prospectus ,section :8-+ ll allotments should be followed by
filling of a return of allotment with the Registrar with in ;? days in the
prescribed form ,'orm 8-+
• ll the abo/e pro/isions shall apply to offers for sale as they apply to
public issues+
The Stock Exchange Listing Agreement
0ompliance with the stock e.changeDs listing guide lines under its listing
agreement is also important in order to be able to seek listing of shares
pursuant to an IP!+
%he conditions for listing shares by an unlisted company pursuant to an
IP! on the B$& are listed belowH
1+ )ew companies can be listed on the e.change# if their issued and
subscribed eCuity capital after the public issue is eCual to or more
than Rs+ 1? crore+ In addition to this# the company should ha/e a
post2issue net worth of Rs+8? crore+
8+ 'or new companies in high technology sectors# the following
criteria will be applicable+
a+ %he total in comeOsales from the main acti/ity should not be
less than :3K of the total income during the two preceding
years+
b+ %he minimum post2issue paid2up capital should be Rs+3 crore+
c+ %he minimum market capitaliIation should be Rs+3? crores+
d+ Post2issue net worth of Rs+8? crore+
The conditions for listing on the NSE are given below:
1+ )ew companies can be listed on the e.change# if issued and subscribed
capital after the issue is eCual to or more than Rs+ 1? crore and post2issue net
worth of Rs+ 8? crore+
8+ 'or new companies in knowledge based industries# the applicable capital
criterion is Rs+ 3 crore with a minimum market capitaliIation of Rs+ 3?
crore+ %he total incomeOsales should not be less than :3K of the total income
during the immediately two preceding years+
;+ %he applicant company should ha/e a track record of three years of
e.istence+ If the applicant is promoted by another company# that company
should ha/e the minimum stipulated e.istence+
6+ %he application for listing in the case of an IP! shall be made within 5
months of the closure of the issue+
3+ %he project should ha/e been appraised by specified agencies such as the
all India financial institutions+
Contents of a Prospectus/Offer Document for an IPO
%he DIP guide lines pro/ide e.clusi/e pro/isions for the presentation of the
prospectusOoffer document since this is an important area of regulation for
$&BI+
In the following we discuss some of the important disclosures in an offer
document and their presentation as specified in chapter 5 of the DIP guide
lines+ %he prospectus consists of two parts# part I and part II+
Main Disclosures in Part I
1+ Disclaimers to be included on behalf of $&BI# the stock e.changes
and the issuer company+
8+ %he minimum subscription clause under section 5= of the companies
ct in the specified format+
;+ 0apital structures of the company and the notes to the capital structure
ha/e to be pro/ided in detail disclosing the pre2issue and post2issue
period+
6+ %he terms of the issue specifying all the rele/ant information to the
applicants on making the subscriptions and methodologies to be
adopted for applications# allotments and refunds+
3+ %he objects of the issue shall be disclosed stating whether the
company proposes to raise funds for fi.ed assets creation or for
rotation in working capital+
5+ %he details of the company# management and the project# which inter
alia include the followingH
a+ >istory# main objects and present business of the company+
b+ complete profile of the promoters# their education and
background# e.perience in the line of business and other details+
c+ Particulars of key management personnel+
d+ 0omplete prescribed details of the project+
:+ 'inancial details of other company in the same business as the issuer
company for the past three years+
<+ )o future financial projection of the issuer company can be furnished
in the offer document+
=+ %he basis for the issue price+
1?+%he risk factors ha/e to be presented in the prospectus+
Main Disclosures in Part II
1+ 4eneral information relating to consents gi/en by professionals#
e.perts and other agencies associated with the issue to include their
names in prospectus+
8+ 'inancial in formation on the issuer company by way of specific
certification by the auditors as pro/ided in schedule II of the
companies ct+
;+ $tatutory in formation on underwriting commissions# fees to lead
managers# brokerage and issue e.penses# properties purchased by
the company# managerial remuneration and interests of directors
and promoters in the company# re/aluation of assets in the
preceding fi/e years+
6+ %he material contracts and documents of the company# a copy of
each of which is made a/ailable for inspection at the time and
/enue specified starting from the date of prospectus till closure+
3+ Declaration and /erification by the signatories to the prospectus
together with signatures by themsel/es or thro ugh their constituted
attorney+
Methodologies for Making Issues
(nder the DIP guide lines# it is possible to make an IP! in the form of a
1??K retail issue# a book built issue or as a bought out deal either for listing
on the main stock e.changes or on the !%0 e.change+ %he different
methods are e.plained as followsH
100º Retail (Fixed Price) Issues
(nder this method# the issue is made by offering the same directly to the
in/estors from the public that could include the retail small in/estors as well
as other categories of in/estors+ (sing this method ob/iates the need to sell
the issue initially to the wholesale in/estors and them in turn marketing it to
retail in/estors+ %he main ad/antage of this system is that it is possible to get
a wide dispersal of shareholding among the retail in/estors that would add
depth to the trading in the stock after listing+ $econdly# it does not reCuire
approaching JIB in/estors to subscribe to the issue# which could sometimes
pro/e to be difficult# as these in/estors need to be thoroughly con/inced+
!n the other hand# small in/estors can be persuaded easily if a reasonable
short2term market opportunity is /isible in the issue+ Due to apparent
infle.ibility in a fi.ed price issue# it has a lot of uncertainty attached to it in
difficult market conditions+ %herefore# after the introduction of the book
built system of making issues most companies prefer to use that route+
Book Built Issues
book built mechanism allows the issuer company to make a public issue
through the process of Fprice disco/eryD rather than through a price that is
fi.ed beforehand+ %his mechanism# to a large e.tent# o/ercomes the
deficiency in the fi.ed price mechanism of o/er pricing or under2pricing an
issue+ It howe/er operates on the basis of a Ffloor priceD# which is fi.ed by
the company in consultation with the merchant banker+
0ompanies now can make an issue to the e.tent of 1??K or :3K of the net
public offer as they may decide# through the book built route+ If the :3K
route is followed# the price applicable to the balance 83K under the retail
route would be the issue price under the book built portion+ nd under the
1??K route# the entire issue happens through one bidding process applicable
to both categories in/estors+
Applicable Provisions for a Book-built Issue
In a book2built issue# reser/ation and firm allotment may be made only in
respect of permanent employees of the issuer companyOpromoting company
and share holders of the promoting companies to the e.tent they permitted in
the DIP guide lines+
%he other allocation norms for a 1??K and :3K book2built issue are as
listed belowH
• )ot more than 3?K of the net public offer shall be allocated to JIBs+
• )ot less than 83K of the net public offer shall be allocated to non2
institutional bidders+
• )ot less than 83K issue shall be a/ailable for allocation to retail
in/estors+
Procedural Aspects of an Issue
1+ %he first task is to hold a Board Meeting to consider the proposal for a
public issue# authoriIe the managing director to do all tasks relating to
this issue and including e.penses for the issue+
8+ !n the appointed day# the &4M is held and the shareholders pass a
special resolution under section <1,1- of the companies ct
authoriIing the company to make public issue+
;+ Before embarking on an IP!# the first task is to identify the good
merchant banker who can be appointed as lead manager for the issue+
%he details of the companyDs project or fund raising plan are
discussed with the merchant banker+ fter the discussion the company
finaliIes the appointment and enters into a memorandum of
understanding with the lead manager+
6+ %he LM immediately on being appointed starts a due diligence on the
company+ (sually they go through the all documents and certificates
and e/ery rele/ant information for the issue+
3+ In parallel# the LM starts preparation of the draft prospectus or offer
document+ ll disclosure reCuirements and DIP guide lines ha/e to be
filled in+
5+ %he LM ad/ises the company in the appointments of other
intermediaries for the issue+ %hese are the registrar to the issue#
bankers to the issue# the printer and ad/ertising agency+ %he registrar
and bankers ha/e to be registered with $&BI+
:+ %he LM also draws up the issue budget estimated to be spent on the
issue+ %he main components of these are fees for LM# underwriters#
registrar and banker# brokerage# postage# stationery# issue marketing
e.penses and statutory costs+
<+ %he draft prospectus is finaliIed by the LM in all respects in
consultation with the management and placed before the board of
directors for the appro/al so that it can be issued for filing+ %he draft
prospectus has to be accompanied by the memorandum of
understanding signed by the LM with the company+
=+ $imultaneously# the company has to make listing applications to all
stock e.changes where the shares are proposed to be listed
accompanied by at least 1? copies of the draft prospectus+ nd that
prospectus has to be made a/ailable to the public by the LM+ %he LM
should also obtain and furnish to $&BI# an in2principle listing
appro/al of the $& within 13 days of filing the draft offer documents
with them+
1?+%he company has to enter into a tripartite agreement with the registrar
and all depositories2,presently )$DL or 0D$L- for offering the
facility of offering the shares on dematerialiIed mode+ In/estors ha/e
to be gi/en the facility to recei/e allotments through any one of the
depositories or in physical mode according to option+
11+Eithin 81 days# $&BI would come out with their obser/ations on the
prospectus+ %he $& would also /et any changes to be made to the
prospectus+ %he LM has to file a certificate with $&BI that all
amendments and suggestions made by the $&BI ha/e been
incorporated in the offer document+
18+!nce the draft prospectus is ready in its final form# a board meet has
to be held to appro/e the filing of the same with R!0 after being
signed by all the directors+
1;+%his filing should be accompanied by all the material contracts
pertaining to the issue and the company and all other documents listed
in the prospectus+
16+%he marketing of the issue is usually co2coordinated by the LM with
the ad/ertising agency+
13+d/ertisements are regulated by DIP guidelines and the rules of the
stock e.change+
15+%he mandatory collection centers are finaliIed as per the $&BI
guidelines in consultation with the bankers and the LM+
1:+%he LM and the printer finaliIe the dispatch schedule to all $&# $&BI#
collection centers# in/estor associations# brokers and underwriters+
1<+%he marketing should be completed one week before the opening of
the issue+
Post-Issue Procedures
1+ In issues wherein there is more than one LM# it is usual to entrust the
entire post2issue responsibility to one LM in inter2se allocation+
8+ %here are two reports that are reCuired to be furnished to $&BI by the
post2issue LM in the case of an IP! in the retail route in the
prescribed form+
;+ %he main task of the post2issue LM is to coordinate the process of
collection of subscription figures from the bankers to the issue#
processing of applications by the registrar# dispatch of allotment
letters and refund orders to all applicants with in time+
6+ %he issue is to be closed on the earliest closing date# the LM should
ensure that issue is fully subscribed before announcing closure+
3+ In the case of de/ol/ed issues# the LM shall ensure that the
underwriters honor their commitments with in 5? days from the date
of closure of issue+
5+ %he LM has to ensure that all issue proceeds are kept in separate bank
accounts as pro/ided in the companies ct and the funds are released
to the company only after obtaining listing appro/als from the
respecti/e stock e.changes+
:+ %he LM has to release an ad/ertisement announcing the closure of the
issue on the last day+
<+ %he responsibility of finaliIing the basis of allotment in a fair and
proper manner lies with the e.ecuti/e director of the designated stock
e.change along with the post2issue LM and the registrar+
=+ %he post issue LM shall ensure that the demat credit and refund orders
to the allottees is completed within two working days after the basis of
allotment is done+
1?+%he LM is responsible for following duties+
a+ Refund of subscription money to all non2allottees+
b+ Refund of e.cess application money to all+
c+ ttending to all in/estors grie/ances+
d+ $anction of listing and trading permission by the stock
e.changes+
e+ 'iling of return of allotment with R!0+
Role of Merchant Banker in Issue Management
Merchant bankers with /alid registration certificates from $&BI ha/e been
pro/ided with statutory e.clusi/ity in managing public offers such as IP!#
rights and secondary issues of eCuity as well as issues of debt securities+
%herefore# whene/er there is an offer of securities to the public# the
in/ol/ement of a merchant banker is mandatory# subject to the minor
e.ceptions+ 'rom a business perspecti/e too# issue management forms the
biggest chunk of re/enue for in/estment bankers in those years when the
primary market for public flotation is /ery /ibrant+
In the o/erall process of issue management# the merchant banker plays a
/ariety of roles as an e.pert ad/isor to the management of the company# as
an auditor who performs due diligence on the company# as an e/ent manager
and coordinator to ensure timely completion of the issue# as a watch dog for
statutory compliance and as a person in fiduciary capacity for the protection
of the interests of in/estor+
)ow we ha/e a look at the /arious functions of the merchant banker+
1. Appointment, MOU and Inter-se allocation of Responsibilities:
%he appointment of merchant banker as lead manager has to be
accepted carefully+ %he DIP guidelines stipulate him Fshall not lead manage
the issue if he is a promoter or director of the issuer companyD+ %herefore#
before taking up an assignment# the guidelines ha/e to be interpreted and it
has to be ascertained if appointment is legal+ 4enerally# the preparation of
offer document and pre2issue compliance# marketing and syndication of
underwriting and post2issue compliance are the main responsibilities+
2. Issue Structuring and Pricing
s mentioned pre/iously# capital and issue structuring has to be made
carefully assessing market factors# dilution of promoter eCuity# fulfillment of
lock2in reCuirements# possibility of pre2marketing the issue through firm
allotments and related issues+ In deciding the pricing he has to look at
/arious aspects which are the deciding factors like PO& ratio and book /alue
of shares+
3. Due diligence
%he due diligence has an implication on the disclosures in the
prospectus and the Cuality of issue+ It is customary for the merchant banker
to issue a due diligence Cuestionnaire to the company before the
commencement of process taking into account the standard reCuirements and
the specific reCuirements of the issue in Cuestion+ format of the due
diligence certificate to be filed with $&BI by the lead manager+
4. Preparation and Filing of Offer Document
%he offer document has to be prepared with care and craft+ ll the
certifications reCuired to be included in the offer document ha/e to be
obtained in specific formats+
5. Pre-issue Compliance
%his work is cumbersome as it in/ol/es se/eral reCuirements of the
DIP guidelines# tying and underwriting if reCuired# selection and negotiation
of terms of other intermediaries# formulating the issue budget and making
preparations for the roll out of issue+ %he lead manager shall asses the
o/erall e.posure of the underwriters belonging to the same group+
6. Liaison with SEBI and Stock Exchange
fter filing of the prospectus with $&BI and stock e.changes and
making it public# lead manager has to e.peditiously attend to the
modifications reCuired at short notice+ %he lapses in the due diligence
also come to the light during this stage+
7. CO-ordination with other functionaries
Issue management being a concerted effort is performed with the help
of se/eral agencies and intermediaries apart from the lead managers+ %hese
are registrars# bankers# and ad/ertisement agencies# brokersD underwriters to
issue and printers and couriers+
8. Issue Marketing
Issue marketing includes road shows# pre2issue meets with journalists
and media# brokers# in/estor associations+
%he merchant banker has to co2ordinate with the ad agency to ensure that all
important persons attend road shows and other issue meetings+ %he merchant
banker has to ensure that the ad is gi/en with the proper data specified in the
offer document+
9. Functions during the Issue
%he main function during the issue is to ascertain daily figures from
the bankers or stock e.change and to take decision on the closure of issue
based on procurement of minimum subscription+ nd he has to
ad/ertisement carefully when the issue is o/ersubscribed during the opening
period+
11. Post-issue Compliance
%he DIP guidelines pro/ide that the post2issue manager has to look
after the refund of money to in/estors and regularly monitor the grie/ances
of in/estors arising there from+ $&BI has to kept informed of the important
de/elopments about the issue during the inter/ening period of filing post2
issue reports+
s we ha/e looked at the procedure to be followed in an IP! by e/ery
company in accordance with the $&BI guidelines for the in/estor protection
and for the success of the company in raising funds through an IP!+ In order
to look into these prospects in a practical way# one has to go through some
companies which ha/e come to IP! and succeeded in raising funds from the
in/estors+ t the same time some companies may not raise funds from
public in an effecti/e way and there may a chance for failure because of
/arious reasons which are essential in an IP! offering+
Let us look into the /arious companies which ha/e raised the capital
e.penditure for the intended objecti/e as mentioned in filing for an IP! with
$&BI+
A study on IPO’s of
Different Companies
And
Analysis
Study on Reliance power IPO
Company 1
Reliance power Ipo
Company Overiew : Reliance Power Limited is part of the Reliance ADA
group and is established to de/elop# construct and operate power projects
domestically and internationally+Reliance Power is currently de/eloping 13
medium and large siIed power projects with a combined planned installed
capacity of 24,200 MW# one of the largest portfolios of power generation
assets under de/elopment in India+
nil mbani2 owned Reliance Power LtdDs mega initial public offer ,IP!-
was opened for subscription on13th Panuary to raise Rs 11#3?? crore+ %he
company proposed to issue 85 crore eCuity shares of Rs+ 1? each# including
promotersD contribution of ;+8 crore shares allotted at the IP! price+ %he
balance 88+< crore eCuity shares constituted the net issue to the public+%he
price band for the book building was Rs 6?3 to Rs 63? for e/ery fully paid
up share of Rs 1? each+ %he issue was managed by (B$# B) MR!#
PPMorgan# Deutsche Bank# &nam $ecurities# I0I0I $ecurities# PM
'inancial#and @otak Mahindra 0apital+ MacCuarie and $BI 0apital Markets
are co2managers+
%his was the largest IP! e/er+ %he pre/ious largest was that of the real estate
de/eloper DL' which raised Rs =#1<: crore in Puly 8??:
Reliance power Ipo oversubscribed 73 times
s per market e.pertDs e.pectation# Reliance Power Initial Pubic
!ffering has closed with :; times o/erbooking as against the
released shares on Panuary 1< breaking o/er all records in the Indian
stock history as bourses informed media+
ccording to data information collected from )ational $tock
&.change and Bombay $tock &.change at here : pm on Panuary 1<#
the concluding day of the IP!# Fthe trading operators ha/e
cumulati/ely collected all time high 3+
1 million applications from the retail in/estors for the shares worth
Rs+ 1#<<#??? ,Q6:billion-+
Jualified Institutional Buyers ,JIBs- and >igh net worth in/estors ,>)Is-
ha/e also submitted the record2breaking applications that
o/ersubscribed the allotted Cuota of both the institutes by :?2<? times
and 8?? times respecti/ely+
%he retail in/estorDs Cuota was subscribed by 13 times+
s per the estimated calculation# nil mbani backed Reliance Power
Ltd has raised nearby Q1<? billion ,Rs+:#38#??? crores- for its shares
worth offered price of Q8+= billion ,Rs+188 crores-+ %he total collected
price has been more than that of the combined market capitalisation
of companies listed in Portugal and the 0Iech Republic as
Bloomberg# a famous business magaIine said yesterday+
'or making better comfort to retail in/estors# Reliance nil Dhirubhai
mbani 4roup# D4 has pro/ided two options to them# either they
can submit the entire price ,Rs+6;?- of the asking lot or they can only
deposit the one2Cuarter price ,Rs+113- of the asking shares+ %he rest
price of the shares can be submitted after getting the allotment of the
shares+ Besides# R2Power has also pro/ided a subsidy of Rs+8? for
each share of Reliance power IP! to the retailers+
%hus the retailer in/estors ha/e submitted appro.imately Rs+ 3?#???
crores collecti/ely# which is one2fourth of the total direct ta.
collections for last year+
$e/eral public sector banks ha/e also subscribed the offer joylessly
tremendously+ Punjab )ational Bank# $tate Bank of India# Bank of
India and Indian !/erseas Bank put in bids worth Rs 1#3??28#???
crore# as the sources reported+
Reliance Power had offered a total of 88<2milion eCuity shares with
face /alue of Rs+1? each in the price band of Rs+6?3263? for the
public through 1??K book2building process+ It has targeted to collect
as much as Rs 11#:??2crore from this offer# which has now gone
beyond Rs+:3#???2crore+
'rom this collected money# D4 is planning to complete its 1;
power projects across the country and somewhere o/erseas in the
ne.t couple of years+ %he e.perts belie/e that the sale of the shares
of Reliance Power can make nil mbani the richest person of the
country who is still on the third position+
Before this his Reliance &nergy share has tripled his total asset by
going Cuadruple in /alue last year in the Indian stock market+
ccording to 'orbes# a famous business magaIine# only his elder
brother Mukesh mbani and $teel king Lakshmi )iwas Mittal are
only ahead to nil by cementing his position on no+1 and no+8
simultaneously+
Before this @ P $ingh# the chairperson of DL' ,a construction
company- has offered the biggest IP! offered that o/ersubscribed
only three times as against ;8+<< crore eCuity shares+
Mukesh mbani backed Reliance Mukesh Dhirubhai mbani group
had also offered a gigantic IP! offered for its
subsidiary refinery
company Reliance Petroleum Ltd+ that had showed the similar
response to Reliance Power IP! and o/erbooked 38 times for 632
crore released shares+ Mukesh had collected Rs+ 1#63#?<? crore from
this+
Reliance Power to give 3 bonus shares for every five held
Buy back
buyback is essentially a financial tool in the hands of the corporate that
affords fle.ibility in the capital structure+ buyback allows the company to
sustain a higher debt2eCuity ratio+ It is also a tool to defend against possible
takeo/ers+ 4enerally# companies buyback their shares when they percei/e
their own shares to be under/alued or when they ha/e surplus cash for which
there is no ready capital in/estment need+$hare buybacks also pre/ent
dilution of earnings+ In other words# a buyback programme enhances the
earnings per share# or con/ersely# it can pre/ent an &P$ dilution that may be
caused by e.ercises of stock option grants# etc+ Last# but not the least# a
buyback also ser/es as a substitute for di/idend payments+ %his brings us to
the crucial issue of ta. implications of a buyback+ /ery important
consideration is whether the amount paid on buyback is di/idend or
consideration for transfer of shares+ If it is indeed considered to be di/idend#
the same will not be ta.able in the hands of the in/estors+ lso# to what
e.tent# if at all# can the amount paid on buyback be taken as di/idendB Is the
entire amount paid di/idend or is it only the premium paid o/er the face
/alueB
Strengths
1+ !ne of the largest potfolios of Power 4eneration Projects
under De/elopment in India+
8+ Portfolio of Power Projects that di/erse in 4eographic
Location# 'uel2type# 'uel source and off2take+
;+ $trategically Located Power Projects+
6+ Part of the Reliance D 4roup+
Projects Currently handled by Reliance Power Limited
R Rosa Phase I, a 5?? ME coal2fired project in (ttar Pradesh scheduled to
be commissioned in March 8?1?+
R Rosa Phase II, a 5?? ME e.pansion of Rosa Phase I which is scheduled to
be commissioned in $eptember 8?1?+
R Butibori, a 300 MW coal2fired project scheduled to be commissioned in
Pune 8?1?+
R Sasan 3,960MW UMPPs promoted and awarded by the 4o/ernment of
India is e.pected to be the largest pithead coal2fired power project at a single
location in India#scheduled to be commissioned by pril 8?15+
R Shahapur, a 4,000 MW coal-fired,1#8?? ME- and combined cycle gas2
fired ,8#<?? ME- project in $hahapur# scheduled to be commissioned in
March 8?11+
R Urthing Sobla (400 MW)# a run2of2the2ri/er hydroelectric project# located
on the Daulinganga Ri/er in (ttarakhand scheduled to be commissioned in
March 8?16+
Five other projectsSthe gas2fired Dadri project ,:#6<? ME-# the coal2
fired MP Power project ,;#=5? ME- and three run2of2the2ri/er
hydroelectric projects# Siyom ,1#??? ME-# Tato II ,:?? ME- and Kalai II
,1#8?? ME-+
Weaknesses
• Due to the nature of the business# Reliance power projects typically
reCuire a long gestation period and substantial capital outlay before
completion+ It may be months or years before positi/e cash flows can
be generated+ 'urther# power# property de/elopment# and infrastructure
and construction projects are capital intensi/e and will reCuire high
le/els of debt financing+ %hey will also lead to continuous dilution of
eCuity+ one should become long2term in/estors with a two2three year
/iew+ %here are no short term re/enue generating opportunities in the
power sector now# he said+ In/estors canDt e.pect to make money in a
month in the power sector+
Reliance power : Issue Highlights
Issue Highlights
$ector Di/ersified
$ector %%M PO& )ot applicable
)o of fresh shares 88+<crore
Price band ,Rs- Rs 6?3 N Rs 63?
Post issue eCuity ,Rs crore- 88+<
Post2issue promoter stake :3K
Issue open O 0lose 132?128??< O1<2?128??<
Listing B$&# )$&
0M Rating 3?O1??
Analysis of Reliance power IPO
%he abo/e mentioned company issue of shares in IP! fund raising acti/ity
has been o/er subscribed by :3 times o/erall from the in/estors+ nd looking
at the /arious aspects# which are pre/iously discussed are applied in this IP!
process and the post2IP! performance is also good+ nd the strengths and
weaknesses are also mentioned which form a part of success for the
company+
part from the compliance of issue procedure and the documentation part#
the success of an IP! is depends on the financial prospects of the company
for the last ; years+
It is because of the strengths which the company has got and good financial
record the company maintained+
Regarding the pricing of share /alue# it has used the past &P$ and other
considerations like its business and de/elopment+
%o conclude about this case# it has maintained good financial track record
and fair /aluation of share price along with the timing of coming for an IP!+
GMR Infrastructure
Company 2 High valuation, high gestation
Retail investors better wait than get on board
4MR Infrastructure ,4MR- is an infrastructure holding company formed to
fund the capital reCuirement of the 4MR group initiati/e in the
infrastructure sector+ %he 4MR group de/elops /arious infrastructure
projects in power# road and airport sectors through 4MR Infrastructure+
Strengths
4MR has won many big2ticket projects in /arious infrastructure sectors+
0urrent projects of the company areH
Power :
` 88?2ME naphtha2fired power plant at Mangalore in @arnataka# which
commenced commercial operation in 8??1+
T 8??2ME L$>$2fired power plant in 0hennai in %amil )adu# which
commenced commercial operation in 1===+
;<<+32ME gas2fired power plant in 9emagiri in ndhra Pradesh# which is in
the de/elopment stage+ )atural gas is e.pected to be made a/ailable for use
end Puly 8??5 and the plant is to begin commercial operations within one
month of such date of a/ailability of natural gas+
In addition# 4MR has the right to de/elop a 16?2ME hydroelectric power
plant on the ri/er laknanda in the 0hamoli district of (ttaranchal+ 4MR
&nergy# a fully2owned subsidiary of 4MR Infrastructure# and >ong @ong2
based 0hina Light and Power ,0LP- ha/e signed a memorandum of
understanding to jointly bid for the 6#???2ME pit head domestic coal2fired
$asan (ltra Mega Power Project+
Road :
T 3=2km stretch on the 0hennai2@olkata ,)>23- highway ,%uni2nakapalli
Road Project-# which commenced commercial operation in December 8??6+
T =;2km stretch on the 0hennai2Dindigul ,)>263- highway ,%ambaram2
%indi/anam Road Project-# which commenced commercial operation in
!ctober 8??6+
T <52km stretch between dloor Aellareddy and @alkallu and an additional
1:2km stretch on the >yderabad2)agpur ,)>:- highway ,dloor
Aellareddy2@alkallu Road Project-# which is currently under de/elopment
and e.pected to enter into commercial operation by end 8??<+
In addition# 4MR has won three concessions to de/elop# operate and
maintain roads+
Airports :
T 4MR owns 5;K of 4MR >yderabad International irport ,4>IL-+ It
e.pects the >yderabad airport to be operational end first Cuarter of 8??<+
T In Panuary 8??5# a consortium led by 4MR was awarded a long2term
agreement to operate# manage and de/elop the Delhi airport following
competiti/e bidding+ !ther members of the consortium consist of 'raport
4# Malaysia irports ,Mauritius-# and the India De/elopment 'und+
Weaknesses
%he power purchase agreement ,PP- for the Mangalore power plant
e.pires in 8??<+ In 'A 8??5# the Mangalore power plant generated about
6?K of the total re/enue and operating income of the company+ %his plant is
based on /ery high2cost naphtha and# hence# used only for meeting peak load
reCuirement# resulting in capacity utilisation of just 18+3K in 'A 8??5+ ItDs
only because of the current PP that it is paid as per supply# irrespecti/e of
the poor output+ $o it will be in a highly unfa/ourable position when the
PP comes for re/iew and if it has to pro/ide power at competiti/e rates+
Part of the issue proceeds will be paid to promoters for acCuiring 49L
In/estments ,49LI-+ %he main holding of 49LI is the =K stake in Delhi
airport project+ )otably# 49LI has in/estments of book /alue of only around
Rs 3? crore ,including the =K stake- for which it will be paid Rs ;==+;
crore+
Infrastructure projects by nature are long2gestation projects and subject to lot
of legal# financial# political and en/ironmental risks# specially in India where
policies and frameworks are just e/ol/ing and political mindset is not tuned
to pri/ate operation of infrastructure projects+
Valuation
4MR InfrastructureDs consolidated net profit after minority interest and
share of profit from associates was Rs :?+33 crore in 'A 8??5+ Post2issue
diluted &P$ stood at Rs 8+1 in 'A 8??5+ t the offer price band of Rs 81?2
Rs 83?# P& range works out to 1?? to 11=# respecti/ely+ In 'A 8??5# <3K of
the companyDs re/enue came from the power generation business+ %railing
twel/e2month ,%%M- P& of power generation was 11+6+ )aturally# the price
band takes into account future re/enue that will be generated once the
/arious ,high /alue- projects are fully commissioned+ Retail in/estors will
get 3K discount to the issue price+ >owe/er# it should be remembered that
risks in/ol/ed and gestation periods for infrastructure projects are /ery high#
specially when the issue price already factors in lot of benefits that these
projects may accrue to the company in the distant future+ Moreo/er# capital
reCuirement of holding companies to carry infrastructure projects are
e.orbitant and they need to dilute their eCuity regularly to take up more
projects+
GMR Infrastructure : Issue Highlights
$ector Di/ersified
$ector %%M PO& )ot applicable
)o+ of shares on offer ,lakh- ;:5+6
Price Band ,Rs- 81?283?
Post issue eCuity ,Rs crore- ;;1+1
Post2issue promoter stake :=+13K
Issue open date ;1st Puly 8??5
Issue close date 6th ug#?5
Listing B$&# )$&
Rating 6;O1??
Analysis of GMR IPO
%he abo/e mentioned company issue of shares in IP! fund raising acti/ity
has been o/er subscribed by :3 times o/erall from the in/estors+ nd
looking at the /arious aspects# which are pre/iously discussed are applied in
this IP! process and the post2IP! performance is also good+ nd the
strengths and weaknesses are also mentioned which form a part of success
for the company+
part from the compliance of issue procedure and the documentation part#
the success of an IP! is depends on the financial prospects of the company
for the last ; years+
It is because of the strengths which the company has got and good financial
record the company maintained+
Regarding the pricing of share /alue# it has used the past &P$ and other
considerations like its business and de/elopment+
%o conclude about this case# it has maintained good financial track record
and fair /aluation of share price along with the timing of coming for an IP!+
Typical expenses Related to the IPO
%he major e.penses of an initial public offering are the in/estment bankerDs
fees# legal fees# accounting fees and printing costs+ In addition# there are
registration and state filing fees+
%he in/estment bankerDs gross underwriting commission# or “gross spread#"
for an initial public offering is typically :K of the public offering price
depending primarily upon the siIe of the offering+ 'inal terms are
determined at the time of pricing and will be the result of discussions with
management concerning# among other things# underwriting discounts for
recent offerings that are similar in siIe# by similar companies+ ny /ariation
within the suggested range will ultimately be based on the siIe and price of
the offering# and the degree of difficulty encountered in marketing the issue+
ppro.imately 3?K to 5?K of the gross spread is paid to the brokers who
actually sell the shares# 8?K to 83K is paid to the in/estment banking firm
itself and the balance is paid to the syndicate for e.penses# as well as
compensation for sharing in the underwriting risk+
%he following additional fees are typical for an initial public offeringH
Legal fees: Legal fees will /ary considerably depending upon the
circumstances surrounding each situation+ Legal ser/ices generally include
corporate “housekeeping" work related to the offering# the preparation and
clearance of the registration statement# negotiation of the underwriting
agreement and the preparation of closing documents+ %he fees /ary# but
typically range from Q13?#??? to Q3??#???+
In addition# the company will pay a fee for the legal work in connection with
state2by2state “Blue $ky" filings and clearances+ %his e.pense is generally
Q83#???# but can /ary depending on the number of jurisdictions where
filings are made and the nature of the comments raised+
Accounting fees: ccounting fees will /ary widely with the siIe of the
company and the comple.ity of its operations+ 'ees may be somewhat lower
if the auditors ha/e conducted regular audits for the past few years and ha/e
just completed the companyDs annual audit+ %hey tend to be significantly
higher if no prior audits ha/e been conducted and new accountants are
engaged at the time of the offering+
%he accountantsD fees include their preparation of the financial statements#
their ser/ices in helping to respond to $&0 staff accounting comments# and
their preparation and deli/ery of the “cold comfort" letter to the
underwriters# which assures that information in the registration statement
and prospectus is correct and that no material changes ha/e occurred since
its preparation+
Printing expenses: %he registration statement and prospectus account for
the largest portion of the printing e.penses# which a/erage Q:3#??? to
Q13?#???+ &.penses are significantly impacted by the length of the
prospectus# the number of proofs and corrections made# and the number of
prospectuses printed+ &.penses will also be somewhat higher if color
photographs are used in the prospectus+
Registrar and transfer agent fees: %hese are fi.ed fees# depending on the
number of certificates issued and the number of certificates transferred+ 'ees
are usually under Q1?#???# but this should be /erified with the bank or banks
the company intends to use+
Travel and other: %he 0ompany can e.pect to incur a minimum of
appro.imately Q83#??? in other e.penses in connection with an initial public
offering+ %hese may include unusual legal# accounting or printing charges
and tra/el e.penses incurred during the marketing phase of the offering+
In addition# there will be incremental ongoing e.penses in the legal#
accounting and in/estor communications areas as a result of being a public
company+
The advantages and disadvantages of going public
%o owners of pri/ate businesses# the decision to go public is one of the most
important they will make in the life of their company+ In making the
decision# the principals should rely upon their own judgment and that of
their ad/isors as they weigh the ad/antages# disad/antages and alternati/es
before proceeding+
%he following is a general o/er/iew of the ad/antages and disad/antages
that are associated with becoming a public company
Advantages
Capital: %he most persuasi/e benefit of going public is the increased access
to capital# as well as the relati/ely fa/orable financing terms afforded by the
public market+ public offering is an e.cellent way to accommodate growth
by pro/iding eCuity capital for increased in/entories# recei/ables# facilities#
eCuipment and long2term capital e.penditures+
Ehen a company goes public# financing is no longer limited to the profits
generated from operations and bank borrowings+ &/en the most successful
businesses are hard2pressed to stretch retained earnings and bank loans far
enough to finance ongoing e.pansion or a major new in/estment+
In summary# going public can gi/e a company the funds it needs to in/est in
acCuisitions# e.pansion and facilities# without depleting the ownerDs capital
or the companyDs store of ready cash used for daily operational e.penses+
&Cually important to a firm with high growth prospects is the ability to
secure the financial stability and balance sheet that will pro/ide a defense
against well2capitaliIed competitors and enable the company to aggressi/ely
pursue opportunities+
More capital: !nce an initial offering is completed# and assuming the stock
performs well# subseCuent offerings will usually be readily accepted by the
market so that additional eCuity capital can be raised on /ery fa/orable
terms+
successful public offering will also increase a companyDs net worth and
impro/e its debt2to2eCuity ratio+ %his# along with the increased disclosure
and diligence reCuired of a public company# will substantially impro/e the
companyDs credibility as a borrower# making it easier for the company to
borrow funds in the future on more fa/orable terms+
public company also has significantly more options a/ailable to it in terms
of financing+ %he public debt and con/ertible securities markets are
e.amples of fa/orable alternati/es a/ailable only to publicly held
companies+
public company can use its own securities to finance acCuisitions and
e.pansions# as long as acCuisitions can be made with eCuity rather than with
after2ta. profits+ s a general rule# acCuires will not accept a minority eCuity
position in a pri/ately held company in e.change for their business# whereas
this is a /ery common and attracti/e N from a ta. perspecti/e N alternati/e
with a publicly held company+
Liquidity: Because it is difficult to place a /alue on a pri/ately held
company or to establish a ready market for its stock# such companies are
often an asset without liCuidity+ !nce a company goes public# howe/er# its
founders and principals ha/e a more effecti/e way of /aluing and marketing
that stock+
In all likelihood# the /ast majority of the foundersD and principalsD net worth
is tied up in the company+ public offering makes it easier for them to
di/ersify their in/estments or simply pro/ide capital for di/ersification or
personal use+
Wealth: In most cases# a public offering will increase the /alue of a
pri/ately held company+ %he growth prospects and security of a public
company are generally greater than those of a pri/ate firm+ %his higher /alue
can translate into significant wealth for founders and principals+
&/en if they donDt realiIe immediate proceeds by selling a portion of their
e.isting stock during the initial offering# key indi/iduals can use their
publicly traded stock as collateral to secure borrowings for other
in/estments+ %his opportunity is rarely# if e/er# a/ailable to shareholders in
pri/ately held companies+
Prestige: 4oing public is an important measure of success for many
companies and is recogniIed as a significant step in corporate growth+
Public offerings increase the companyDs /isibility in the community and in
financial circles# and this greater /isibility can generate new interest from
customers and suppliers# as well as from financial and business associates+ It
can be particularly attracti/e to companies with high retail customer
interaction or firms that can benefit from the increased publicity+
0arefully managed# this new prestige and higher /isibility can be a real and
ongoing asset+
Personnel: !ffering stock as a benefit or as an option for employees# or
simply making it a/ailable for their purchase# can be a powerful incenti/e
for attracting and retaining Cuality personnel+ In general# higher caliber
management and employees can be obtained by a public company that
permits the sharing of its financial successes with its employeeOshareholders+
Disadvantages
Preparation: 4oing public is not a decision that can be implemented
o/ernight+ It can reCuire se/eral months or more of ad/ance planning+
'ew pri/ately held companies are structured to handle the disclosure
reCuirements of public companies+ Before a company is ready to file a
public offering with the $&0# substantial preparation and legalOaccounting
work is likely to be reCuired+ Eritten documentation for major financial
transactions and customer arrangements will ha/e to be supplemented and
additional documentation may ha/e to be prepared+
0ompanies with e.isting bylaws may ha/e to amend to clarify them and
those without bylaws will ha/e to draft them+ %he minutes of all board
meetings will ha/e to be re/iewed to ensure that the record is clear and
complete+ ll contracts and agreements will ha/e to be scrutiniIed carefully+
0ertain leasing and licensing arrangements with shareholders may ha/e to
be terminated or amended+ $imilarly# internal agreements between multiple
owners# or owners and key personnel# on /oting rights andOor buying and
selling rights will ha/e to be forfeited+ !n the other hand# the company may
also be ad/ised to draft contracts for certain key personnel to ensure their
continued employment and loyalty+
$ome companies may also reCuire some restructuring to accommodate the
change from a pri/ate company to a public company+ %he capital structure
must accommodate a large number of shares to be held by the public+ In
addition# special classes of stock that had been designed to meet specific
financial and estate planning objecti/es of family members or principals are
generally eliminated+ %a.2oriented structures# such as “$" corporations# will
also be eliminated# which may or may not ha/e ad/erse conseCuences for
e.isting shareholders+
ccounting procedures and relationships may ha/e to be significantly
upgraded to ensure compliance with statutory reporting deadlines# increased
financial statement disclosure reCuirements and public comfort+
lthough stock2based compensation can be a significant ad/antage to the
company# the design of a program appropriate to furthering the companyDs
objecti/es can be difficult and e.pensi/e to de/elop+
Costs: In addition to the time and effort reCuired to prepare for the filing and
offering# a company must also be prepared to incur the cost of going public+
%he principal costs include the underwriterDs compensation# legal and
accounting fees# printing charges and transfer agent and filing fees+
company e.pecting to go public with a high2Cuality offering should
anticipate spending between Q6??#??? and Q1#???#???# e.cluding
underwriterDs commissions+ %he magnitude of these costs usually makes
public offerings grossing less than Q83 to Q;? million impractical+
'urthermore# principals must remember that there is no guarantee the
offering will be a success+ Eith the e.ception of underwriterDs
compensation# the costs are incurred regardless of the outcome+
Ongoing expenses: %he cost of going public does not stop with the initial
offering+ !ther costs associated with being a public company are ongoing+
Management must de/ote time and money to new areas such as shareholder
relations# public relations# public disclosures# periodic filings with the $&0
and re/iewing stock acti/ity+ ll of this time# and the time of the personnel
hired to handle these functions# would be spent on other management tasks
in a pri/ately held company+
%here are also /arious out2of2pocket e.penses+ $hareholder meetings# annual
and Cuarterly reports# public relations efforts# and legal# accounting and
auditing fees must all be paid+ %he total cost of these e.penses will /ary
from company to company# but in most cases they range from Q3?#??? to
Q13?#??? annually+
Disclosure: In addition to the reCuired disclosure of results of operations
and financial condition# public companies must be prepared to disclose
information about the company# the officers# the directors and certain
shareholders+ %his information might include company sales and profits by
product line# salaries and other compensation of officers and directors# as
well as data about major customers# the companyDs competiti/e position# any
pending litigation and related party transactions+
By releasing the information# it will become a/ailable to competitors#
customers# employees and the general public# and is reCuired in the initial
registration statement and updated annually through annual reports# 1?2@s#
pro.ies and other public disclosure documents+
Pressure: nother disad/antage of going public is the internal and e.ternal
pressures publicly held company management may feel to maintain earnings
and growth patterns+ %hese pressures are generally tied to the Cuarterly
reports filed with the $&0 and deli/ered to shareholders+
Because shareholders will# therefore# e/aluate company progress Cuarterly
rather than annually# management may be tempted to make short2term
decisions at the e.pense of long2term profitability+ In their efforts to
anticipate the stock market and satisfy outside shareholders# management
may begin to lose the operating fle.ibility it e.ercised before going public+
Loss of control: If a sufficiently large proportion of the companyDs shares
are sold to the public# the principals may be faced with the e/entual loss of
/oting control of the company+ %he principals will also be reCuired to
maintain a fiduciary responsibility to the outside shareholders in regards to
the decisions they make for the company# regardless of whether the
principals retain a majority of the companyDs stock+ %his responsibility will
be under constant scrutiny and may limit the fle.ibility that the pri/ately
held company pre/iously enjoyed+
%here are conflicting considerations and risks in any serious business
decision and the decision to go public is no e.ception+
If the company is of sufficient siIe and profitability and has competent
management# it is likely that it will benefit substantially from a well2planned
public offering+
s with any important decision# howe/er# it is essential that the owners and
principals of a pri/ate corporation carefully weigh the ad/antages and
disad/antages in light of the plans and goals they ha/e for themsel/es and
their company+ %hey should consider the alternati/es and acti/ely discuss
the matter N much more thoroughly than this document can re/iew N with
their attorneys# accountants# in/estment bankers and other professional
ad/isors+
Conclusion of IPO
s we ha/e seen the procedural aspects regarding the opening of an IP! for
a company or any other organiIation which wants to come for public by
offering shares to public for the first time+ $o e/ery company has to follow
certain guidelines before coming to public and it has to fulfill the DIP
guidelines specified by the $&BI for the in/estor protection# who want to
in/est in the company+
%he main points which conclude the IP! are as followsH
1+ &/ery company planning to come for IP! has to comply with all
the abo/e mentioned procedure+
8+ IP! is one of the forms of raising the capital and which is the
effecti/e one though it has defects+
;+ s the price factor plays major role along with the time of the
issue# e/ery company must specify the proper pricing strategy for
the shares+
6+ Merchant banker also plays a significant role in an IP! process by
operating the IP! and looking into /arious aspects+
3+ In order to succeed in the fund raising through IP! route one has
to be through with DIP guidelines+
5+ s the in/estor protection is important# the company has to ensure
in/estors by offering good prospects in the prospectus+
:+ Before coming to an IP! e/ery company has to ha/e a good track
record of financial performance+
<+ $&BI is the regulator for all IP!Ds it has to ensure its due diligence
in issue of shares+
=+ %he utiliIation of the funds from IP! is significant and as per the
objecti/e mentioned in prospectus+
1?+Listing is important for the company on the stock e.change# so it
has to be done with proper pricing+
Bibliography
%he abo/e information regarding the project has been collected from the
following different sources+
Secondary information
Books referred
In/estment Banking and nalysis+
“In/estment# nalysis and management" by 'rancis+
“$ecurity nalysis" by 4raham and Dodd+
Sites visited
www+sebi+go/+in
www+moneycontrol+com
www+in/estopedia+com
www+reliancemoney+com
doc_267350324.doc
(A study on RELIANCE POWER, GMR IPO’s)
Under the Esteemed guidance of
Lecturer of Business Management
Project Report submitted in partial fulfillment for the award of Degree of
DECLARATION
I here by declare that the project work titled “ Report on Initial Public
!ffer" done by me as a project work# submitted as partial fulfillment for the
award of degree M$%&R !' B($I)&$$ DMI)I$%R%I!) to the
faculty of finance *********+
Abstract
Initial Public !ffer ,IP!- is one of the ways of raising capital for the
companies which proposes to e.pand their operations or they want to start a
new /enture+ s this is the effecti/e way of getting funds from public for the
first time for e/ery company which wants to go public# that company has to
follow a certain set of guidelines which we call as Disclosure and In/estor
Protection ,DIP- guidelines+ nd the process of coming to IP! has been
/ery important for the company# this project has been describing about the
issue procedure along with the ad/antages and disad/antages for coming to
an IP!+ 'or the better understanding of how the companies ha/e to raise
funds# the analysis of some companies which recently came for an IP! and
the success of their IP! has been clearly e.plained+ %he main aim for
undertaking this project is to aware about how the companies come for an
IP! route for raising funds to achie/e the proposed target+ nd another thing
is the procedure to be followed by the company for the raising of funds and
how to work with all the parties in/ol/ed in the IP! process# their duties and
responsibilities for the better results+
%he conclusion regarding this project is getting to know the students how the
companies come for an IP! with certain procedure and make them aware
about the issues in an IP!+
Recommendations about this project are
&/ery company whiche/er wants to go public for the first time has to know
what procedure has to be implemented and the success factors for winning in
an IP!+
ACKNOWLEDGEMENTS
I would like to thank the finance faculty **** for assisting me in doing
this project by gi/ing specific and rele/ant guidance and gi/ing certain clues
for preparation of this project# and I would like to thank my friends for
gi/ing ad/ice to do this project and for pro/iding certain information
rele/ant for this topic+
****
TABLE OF CONTENTS
CONTENTS PAGE NUMBERS
I)%R!D(0%I!) 123
IP! M&)I)4 )D
D&0I$I!) 5216
DIM&)$I!)$ 7 $P&0%$ 13281
PRI0I)4 )D $%R(0%(R& 88285
PR!9I$I!)$ !' IP! 8:2;<
PR!$P&0%($ ;=261
M&%>!D!L!4I&$
)D PR!0&D(R& 6823?
M&R0>)% B)@&R 31233
0!MP)I&$ )LA$I$ 512::
%API0L &*P&)$&$ :<2<1
D9)%4&$ )D
DI$D9)%4&$ <82=1
0!)0L($I!) =82=;
BIBLI!4RP>A =6
Introduction
Objectives
• %o aware the intending in/estors about the procedure what has to be
followed in the issue of securities for public subscription+
• %o pro/ide them the guidelines which are to be followed by
companies in an IP!B
• %o know the key terms and /arious stages in an IP! process+
• bout the /arious parties in/ol/ed along with the company for
making an IP!+
• %o look into the aspects of different companies which ha/e come for
an IP! recently along with their respecti/e strengths and weaknesses+
• %o know how the shares are /alued and the different methods of
pricing them in an IP!+
• %o know the /arious parties in/ol/ed in an IP! and their respecti/e
formalities to be completed+
• %o know the factors which can lead to success or failure of an IP!B
Scope of the study
In initial public offering ,IP!-# the companies ha/e to look into the
/arious aspects like what guidelines it has to follow# the procedure for
coming to public issue of shares for the proposed objecti/e+ $o the
company has to fulfill /arious formalities and regulations specified by the
controller $&BI before coming to an IP!+ $cope of this project is limited
to the guidelines and procedures for coming to an IP! along with the
factors which leads to the success or failure of an IP! of different
companies+ nd the scope is limited to mentioned companies which
recently came for an IP! and their strengths and weaknesses for
succeeding in an IP!+
Limitations
• %he project is prepared in limitation to the a/ailability of data+
• %he regulations and procedure to be followed is mentioned according
to the $&BI rules+
• $tudy is limited to companies which are used in analysis of an IP!
performance at the end+
• %he data is limited to recent amendments which are to be followed+
• %he duties mentioned for each and e/ery participant are in
consideration to the recommendations from $&BI+
INTRODUCTION
%he word IP! is /ery much often used in the issues of shares by the
companies when they want to go for public for the huge amount of
in/estment into the purpose of the company for achie/ing the desired
objecti/es+
%he word IP! stands for Initial Public !ffer and this is uniCue in more ways
than one since it permanently changes the profile of a company and the way
the promoters and the management need to think thereafter+ %he
responsibility of li/ing up to the e.pectation of the market and shareholders
is a mammoth task+ 4i/en the fact that there is always a temptation for
companies to look at the primary market as a source of finance through IP!
route# the regulator $&BI has e/ol/ed an IP! code in the form of the $&BI
,Disclosure and In/estor Protection- guidelines+ $&BI has also brought in
se/eral structural impro/ements in the way the public offers are made in the
primary market+
WHAT IS AN IPO?
Selling Stock
An initial public offering, or IPO, is the first sale of stock by a
company to the public. A company can raise money by issuing
either debt or equity if the company has never issued equity to the
public, it's known as an IPO.
ompanies 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. Anybody can go out and incorporate a company! "ust put in some money, file the right
legal documents and follow the reporting rules of your "urisdiction. #ost small businesses are privately held.
$ut large companies can be private too. %id you know that I&'A, %omino's Pi((a and )allmark ards are all
privately held*
It usually isn't possible to buy shares in a private company. +ou 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 e,change. -his is why doing an IPO is also referred
to as .going public..
Public companies have thousands of shareholders and are sub"ect to strict rules and regulations. -hey must
have a board of directors and they must report financial information every quarter. In the /nited 0tates,
public companies report to the 0ecurities and ',change ommission 10'2. In other countries, public
companies are overseen by governing bodies similar to the 0'. 3rom an investor's standpoint, the most
e,citing thing about a public company is that the stock is traded in the open market, like any other
commodity. If you have the cash, you can invest. -he 'O could hate your guts, but there's nothing he or
she could do to stop you from buying stock.
WhyGo Public?
4oing public raises cash, and usually a lot of it. $eing publicly traded
also opens many financial doors!
• Because of the increased scrutiny# public companies can usually get
better rates when they issue debt+
• s long as there is market demand# a public company can always
issue more stock+ %hus# mergers and acCuisitions are easier to do
because stock can be issued as part of the deal+
• %rading in the open markets means liCuidity+ %his makes it possible to
implement things like employee stock ownership plans# which help to
attract top talent+
$eing on a ma"or stock e,change carries a considerable amount of
prestige. In the past, only private companies with strong
fundamentals could qualify for an IPO and it wasn't easy to get listed.
-he internet boom changed all this. 3irms no longer needed strong financials and a solid history to go public.
Instead, IPO5s were done by smaller startups seeking to e,pand their businesses. -here's nothing wrong
with wanting to e,pand, but most of these firms had never made a profit and didn't plan on being profitable
any time soon. 3ounded on venture capital funding, they spent like -e,ans trying to generate enough
e,citement to make it to the market before burning through all their cash. In cases like this, companies might
be suspected of doing an IPO "ust to make the founders rich. -his is known as an e,it strategy, implying that
there's no desire to stick around and create value for shareholders. -he IPO then becomes the end of the
road rather than the beginning.
Significance of an IPO
s the facts mentioned in the abo/e paragraph bring us to the discussion on
whether the IP! decision is purely market dri/en or not+ Before we discuss
the determinants of the IP! decision# it is imperati/e to understand the
significance of an IP! and what it does to the company+
&/ery company when it is unlisted offers an ownership or eCuity opportunity
to an outside in/estor which# for the purpose of discussion# has been termed
as the “pri/ate window"+ %he pri/ate window also does not pro/ide any
price /alidation for the companyDs unlisted stock# which has to be deri/ed
from time to time through comple. /aluation methodologies+
Ehen a company makes an IP!# what it actually creates is second
ownership opportunity that can be termed as Fmarket windowD# unlike the
pri/ate window# pro/ides any time entry and e.it facility to in/estors from
the companyDs eCuity capital+ %herefore# it is meant either for the retail
in/estors who would wish to ha/e instant liCuidity for their in/estments or
for speculators who intend to make profits through regular trading in the
companyDs stock+ Being a continuous e/aluation mechanism# the market
window is market dri/en2 it can be o/erheated at times or be completely
indifferent to the companyDs fundamentals+ During times of frenetic market
acti/ity# the market window may o/er /alue a companyDs share while in dull
phasesG the market price can be e.tremely low+ Due to this phenomenon#
though empirically speaking# the market price tends to conform to the trends
in the intrinsic worth of a share in the long term# at any gi/en point of time#
it represents the instant entry or e.it price for an in/estor+
strategic in/estor would be prepared to pay an entry premium for the
companyDs share# which may result in the companyDs share being /alued at
much more than its current market price+ %he premium that a strategic
in/estor would want to pay is arri/ed at based on long2term considerations
that ha/e more of a business perspecti/e than a pure financial perspecti/e+
Lastly# financial in/estors may just want the company to make an IP! and
open up the market window which can be used by them from time to time to
make gradual sale of their holdings at the best a/ailable market prices+
%his brings us to the discussion on how e.actly an IP! should be percei/ed+
$ince an IP! is a significant milestone in the life of a company# it could
ha/e se/eral implications such as the following mentioned belowH
Implications
• It can be a source of finance if it is meant to finance a specified use+
• It creates a new ownership opportunity called the market window and
a class of in/estors called the Fretail in/estorsD+
• It can be liCuidity e/ent since it creates an e.it route for the e.isting
and future in/estors of company
• It creates market capitaliIation for the company# which is the
aggregate /alue of all its issued shares as multiplied by the current
market price+
• Being listed can open up the gates for hostile takeo/er attempts on
the company
• It makes future acCuisition of stakes in the company by the promoters
Cuite e.pensi/e and cumbersome+
• It brings with it additional costs of regulatory compliance# certain
restrictions on future capital transactions and cumbersome procedures+
'rom the abo/e implications# it is Cuite e/ident that an IP! can act as a
double edged sword+ $o in good times it enhances share holder wealth
but in difficult times# listed status can become a hindrance and a drag on
the companyDs performance and prospects+
The IPO Decision
%he IP! decision is depends on the following two stages the pre IP! stage
and the post IP! stage+ %he pre IP! stage relates to the timing of an IP!
decision# while the post IP! stage is about continuance or discontinuance of
the listed status+
%iming of an IP! is a strategic# financial and merchant banking decision+
%he strategic decision is to determine whether listing fits into the companyDs
o/erall strategy and if so# whether the company is mature enough for it+
%he financial decision to make is to decide whether a company needs the
capital proposed to be raised# how much is to be raised and how effecti/ely
it should be deployed+ %he merchant banking decision is made to determine
the appropriate structure# pricing# timing and marketing strategy for the IP!+
$trategically speaking a company should go for an IP! only when it is
mature enough for it+ %his depends on the following pointsH
• Does the company need the IP! as a liCuidity e/ent for its e.isting
in/estorsB In other words# are there no pri/ate e.it options a/ailable
so that the IP! can be pushed further into the futureB
• >as the company matured enough to unlock the /alueB
• Is the companyDs business model retail2oriented with a strong brand
presence so as to identify with the retail in/estorB
• Is the companyDs /isibility in the market is sufficient enough for
in/estors to percei/e its business model to the full e.tent and unlock
/alue for its share holders through the IP!B
• Is the company confident of strong financial growth in the future so as
to sustain the pressure of constant market /alidation after the IP!B
Dimensions in an IPO
The Financial Dimension
%he ne.t dimension of the IP! decision is a financial one+ In capital
intensi/e industries and large industries such as hea/y engineering#
automobiles# infrastructure and some other industries the business model is
so large that going public could become ine/itable in order to maintain
balance in the capital structure+ %hey would reCuire IP! and some multiple
rounds of offers after IP! to keep financing their growth and consolidation+
%herefore# in such cases# IP! and public offers are more of financing
decisions than strategic+
%he same is true of certain start2up businesses that need to look at an IP!
more as a source of finance than as a strategic mo/e+
%he second financial aspect relating to the IP! decision is to e/aluate if
unlocking /alue through an IP! is the need of the hour or whether other
options are a/ailable+ $trategic sale of eCuity happens through the pri/ate
window that realiIes better /alue for the company than an IP! since pri/ate
in/estors offer /aluations significantly higher than what the company gets
from an IP!+
%he third aspect of the financial decision is to e/aluate how much capital is
proposed to be raised through the IP! and its deployment+ 4enerally# IP!Ds
that ha/e well laid out in/estment plans sell better than those that do not
ha/e con/incing application for the funds+ In/estors need to be shown an
in/estment a/enue in the company that can generate the e.pected return on
their funds+ $ometimes# the reCuire of funds for the company could be too
large to be raised through an IP! without causing too much dilution of
promoters stakes+ t such times# the company has to formulate an ideal issue
structure in consultation with the merchant banker and prune down the siIe
of the issue if necessary+
The Merchant Banking Dimension
Lastly# the IP! is also dri/en by merchant banking considerations+ Merchant
bankers take a call on the IP! proposal based on the business plan and
financial position of the company# e.pected future performance# pre/ailing
conditions in the primary market# e.pected issue pricing# siIe of the offer
and post issue capital structure+ %he key dri/ers for the merchant banker are
the market conditions# own placement strength and the main selling points in
the issue+ !n the other hand# if the promoters are bringing in additional
contribution in the issue at the same issue price# it adds to the marketability
of the issue+
(sually in strong market conditions# merchant bankers tend to be aggressi/e
and push companies to go public+ %he logic put forward in such times is that
when there is money for the taking at good pricing# issuers go ahead and
make use of best opportunity e/en if they ha/e no use of for the funds right
away+
In depressed markets# it would be difficult for a company to plan an IP! and
get a good pricing and response for the issue+ It would e/en difficult in such
a market to find a merchant banker who would be confident of selling the
issue comfortably+ %herefore# most companies would defer their IP! plans
e/en if they ha/e matured enough and ha/e a reCuirement for funds+
%o summariIe and conclude the decision of IP! the following points are
prominent+
• %iming is an important criterion in the IP! decision+
• %he IP! decision should be taken considering the strategic# financial
and merchant banking considerations+
• 'or certain projects and business# going public is an imperati/e+ In
such cases# the IP! should be structured to deli/er the best results+
Important Aspects of an IPO
It has been e/ident that an IP! can be made for listing a company either by a
public issue# i+e+ an offer of fresh shares to the public or through an offer for
sale by the e.isting share holders of the company to the public+ Before going
to the /arious aspects of the IP! in particular# it is important to know the
some key terms that are used in merchant banking parlance and their
definitions+
Key Concepts:
IPO2 Initial Public !ffer is the first public issue of fresh eCuity or
con/ertibles by a company due to which its share gets listed on the stock
e.change+
Public Issue 2 n in/itation by a company to public to subscribe to the
securities offered through a prospectus+
!ffer for sale2 n offer of securities by the e.isting share holders to the
public for subscription+
Rights Issue 2 n issue of cap ital under sub2section ,1- of sec <1 of the
companies ct# 1=35 to be offered to the e.isting shareholders of the
company through a letter of offer+
Preferential Allotment2 n issue of capital made by a body corporate in
pursuance of a resolution passed under sub2sec ,1- of sec <1 of the
companies ct# 1=35+
Private Placement2 n offer made to select pri/ate in/estors known to the
issuer through a pri/ate arrangement to the e.clusion of the general public+
Lock-in2 specified time period during which shares are cannot be sold#
transferred and pledged in any way+
QIBs2 Jualified Institutional Buyers shall mean public financial institutions
as defined under sec 6 of companies ct# scheduled commercial banks#
mutual funds# foreign institutional in/estors registered with $&BI# /enture
capital funds and insurance companies registered with $&BI# pro/ident
funds and pension funds with a minimum corpus of Rs+ 83 crore and state
industrial de/elopment corps+
Issue Pricing
%he $ecurities and &.change Board of India ,$&BI- introduced free pricing
of shares for public offerings in 1==8+ s per the current guide lines
,Disclosure and In/estor Protection guide lines 8???-# e/ery company either
unlisted or listed# which is eligible to make a public issue can freely price its
shares+
%he first step in formulating an issue structure is pricing of the issue+ %his is
one important thing done by the merchant banker in public offering+
ppropriate price can not only ensure success of the issue but pro /ide good
returns to the prospecti/e in/estors as well+ %herefore# proper issue pricing
can be a win2win situation for the company and in/estor as well+
%he merchant banker usually arri/es at an appro.imate pricing for the issue
and tries to carry the management of the company with him on the pricing+
!/er pricing an issue is an o/er kill that should be a/oided e/en if it results
in short term gain for the issuer and the merchant banker+ t the same time
the price should pro/ide reasonable returns to e.isting in/estors in a
company who wish to make an e.it in the issue+ %herefore issue pricing is
considered a trade off between immediate gains long2term returns to the
issuing company and its promoters+
Pricing issue is done keeping in mind the Cualitati/e features# and by using
selecti/e multiples as benchmarks than through the con/entional approach
of the discounted cash flow method+ %he usual parameters used are the Pric
to &arning Ratio and Price to Book /alue Ratio+ In addition to the abo/e# the
following points ha/e to be kept in mindH
• Projected earnings of the company cannot be used as a justification
for the issue price in the offer document+
• %he accounting ratios should be calculated after gi/ing effect to the
conseCuent increase in capital on account of compulsory con/ersions
outstanding# as well to subscribe for additional capital shall be
e.ercised+
• 0omparison of all the accounting ratios of the issuer company as
mentioned abo/e has to be made with the industry a/erage and with
the other companies+
Capital Structuring
%he capital structure of the company post2issue has to be structured so as to
reflect the desirable position for the company and for the marketability of
the issue as well+ %he starting point for this e.ercise is the pre2issue capital
structure+ %he following steps ha/e to be followed in this regard in the case
of 1??K retail issue+
1+ -aking into consideration the issue si(e and proposed
pricing, the total number of new shares to be issued is
determined.
8+ $ased on the pre6issue paid6up capital and the number of
new shares determined under step7, the total issued and
paid up post6issue capital is arrived at.
;+ -he post6issue paid up capital is superimposed over the pre6
issue capital structure to determine the post6issue capital
structure.
6+ -he individual shareholder components in the post6issue
capital are e,amined for regulatory compliance under the
companies Act, %IP guide lines, the securities 1contract2
regulation Act, foreign e,change management Act and the
listing agreement of the stock e,change.
3+ -he merchant banker has to be satisfied on the capital
structure from the marketability aspect as well. Otherwise
suitable changes are made with in the permissible statutory
parameters.
Issue Structuring
%he issue structure refers to the following points
• %he face /alue of the share# the premium thereon and the final price+
In book built issues# the final price is not done until after the bidding
is o/er# but a floor price is determined+
• %he minimum amount of subscription per applicant and the
ma.imum+
• %he terms of the issue with regard to payment of the offer price and
eligibility criteria for applicants+
• 'irm allotments if any and any other details thereof# as per applicable
DIP guide lines+
• )et public offer+
• (nderwriting# either mandatory or discretionary+
• 0ost parameters for the issue and an acceptable issue budget+
The issue size and structure is determined as follows:
• %he issue siIe L FpromotersD CuotaM firm allotments M net public
offer+
• Public offer L firm allotments M net public offer+
• )et public offer L issue siIe N promoters Cuota N firm allotment+
Important Regulatory Provisions for an IPO
Let us look at the core of the DIP guide lines with respect to the public
offers and more importantly IP!s+ Basically# all public offers# irrespecti/e
of whether they are IP! or secondary offers ha/e to comply with these
pro/isions+
A. Eligibility to go Public
!ne of the most important pro/isions in the DIP guide lines is
about the eligibility of a company to go public for the first time through a
public issue or an offer for sale+ $&BI has o/er the years brought in
se/eral changes to this criterion to ensure that good Cuality issues are
brought to the market+ %he important guide lines on this criterion are
mentioned below based on the currently applicable guide lines+
Mandatory Conditions for a 100º Retail Issue
company can make an IP! of pure eCuity or con/ertibles only if it meets
all of the following conditions+
• %he company has net tangible assets of at least Rs+; crore in each of
the preceding ; full years# of which not more than 3?K of the net
tangible assets in mandatory assets+
• %he company has a track record of ha/ing profits distributable as
di/idends as per the pro/isions of section 8?3 of the companies ct
out of its normal business acti/ity without reckoning e.tra2ordinary
profits# for at least three out of the immediately preceding fi/e years+
• %he company has a net worth of at least Rs one crore in each of the
preceding three ; full financial years+
• %he aggregate siIe of the proposed issue and all pre/ious issues made
in the same financial year by the company does not e.ceed fi/e times
its pre2issue net worth as per the audited balance sheet of the last
financial year+
• In case the company has changed its name within the last one year# at
least 3?K of the re/enue for the preceding 18 months is earned by the
company from the acti/ity suggested by the new name+
Additional Conditions
n unlisted company not complying with any of the abo/e conditions may
make an IP! of eCuity shares or con/ertibles only if it meets following
conditions+
a+ %he project has at least 13K participation by financial
institutions of which at least 1?Kcomes from the appraisers+ In
addition to this at least 1?K of the issue siIe is allotted to JIBs#
failing which the full subscription monies shall be refunded+
b+ %he minimum post2issue nominal /alue of eCuity capital of the
company shall be R$+ 1? crore+
%he mandatory conditions ensure that the company has a track record of at
least ; years with minimum net worth and profit record+ %his would ensure
that paper companies couldnDt go public just after incorporation making tall
claims of future business potential+
B. Promoters Contribution
$&BI has also introduced the concept of minimum promotersD
contribution to be present in companies going public so that they
become interested parties in preser/ing the interests of the
shareholders+ In terms of DIP guide lines# following are the main
points that apply to promotersD contribution in case of IP!sH
• In an IP! the promotersD contribution shall not be less than
8?K of the post2issue capital+
• %he 8?K in case of IP!# shares acCuired by the promoter with
in the preceding one year for a price less than the IP! price
shall be ignored+
• %he minimum promotersD contribution criterion does not apply
to companies with no promoters+
• PromotersD contribution where reCuired to be brought in the
issue shall be brought in one day before the issue opens+
Firm Allotments and Reservations
%hese are no/el concepts that help in pre2marketing of a siIeable part of
issue thereby bringing down the risk in the issue+ In a firm allotment# a
particular in/estor or category of them are approached in ad/ance by the
lead manager or the issuer of the company to subscribe the issue on firm
basis+
%he pro/isions on firm allotments and reser/ations in IP! are as gi/en
belowH
• %he net public offer for issuing companies shall not be less than 83K
of the post2issue capital# e.cept in case of I% and infrastructure
companies it can be 1?K+
• %he issuer can make reser/ations on competiti/e basis or on firm
basis for allotments to the permanent employees# shareholders of
group companies# mutual funds# foreign institutional in/estors and
banks+
• ll firm allotments which ha/e not subscribed after filling the
prospectus shall be brought in before opening the issue and treated as
preferential one+
• ll reser/ed categories can be adjusted inter2se and with the net
public offer as well+
Lock-in of Shares
Lock2in of promotersD shares and other share capital is also a no/el concept
brought in for the purpose of pre/enting such shareholders in making unfair
gains and e.its from the company+ %he pro/isions are as followsH
• %he minimum promotersD contribution of 8?K shall be locked2in for ;
yrs from the allotment date+
• &.cess contribution by the promotersD in an issue o/er what is
reCuired is shall be lock2in for one year+
• 'irm allotments made in any issue shall be locked in for one year+ %he
amount brought in by promoters to make good under2subscribed
portion of firm allotments would also be locked in for ; years+
• %he entire pre2issue capital in case of an IP! shall be locked in for
one year+ $imilarly# shares held by /enture capitalists and shares held
for more than one year preceding the IP! and are being offered for
sale in the IP! are e.cluded from lock2in pro/isions+
Differential Pricing and Price Band
• ny unlisted company making an IP! for eCuity shares or
con/ertibles may issue such securities to applicants in the firm
allotment category at a price different from the price at which net
offer to the public is made pro/ided that the price at which the
security is offered to the applicant is higher than the price to the
public issue made+
• justification has to be furnished in the offer document on the price
differential for the firm allotment category+
• %he issuer company can mention a price band of 8? K, the cap should
not be more than the floor by 8?K- in the offer documents filed with
$&BI and the actual price can be determined at a later date before
filing the offer document with the R!0+
Other Important Issue Requirements
• ll new issues shall be in dematerialiIed form can also be made
through online interface following the necessary guide lines+
• %he minimum application siIe shall be worth Rs+ 8???+ %he ma.imum
siIe of an application can be eCual to the net public offer+
• In an offer for sale# the entire subscription amount shall be brought in
at the time of application+
• If there are calls on shares# they should be completed with in 18
months of the issue+
• !/er2subscription of a ma.imum of 1?K of the net offer to public can
be retained+
• Buy back arrangements can be made with a minimum period of 5
months and for a ma.imum of 1??? shares per allottee+
• Issues should be opened within ;53 days from the date of $&BI
appro/al or after 81 days of filing with $&BI+
• IP! shall be kept open for a min of ; days and ma. of 1? working
days+
Additional Requirements under Companies Act
• (nder the companies ct# no public issue shall be made with out the
issue of prospectus or offer document+ In terms of section 35# the
prospectus shall contain the matters specified in parts I and II of
schedule II of the ct+
• &/ery application form in/iting subscriptions from prospecti/e
in/estors shall be accompanied by a memorandum in form 8 of the
companies ct+
• &/ery prospectus should be dated and such date would be deemed to
be the date of its publication+ In addition e/ery prospectus shall be
registered with the Registrar before the date of its publication+ It
should be signed by all the directors or their agents+ ll those
Registered shall be issued within =? days of publication+
• Mis2statements in a prospectus can become ci/il and criminal
offences+
• &/ery company before making an issue shall make an application to
the stock e.change for listing the shares of the company+ If permission
is not recei/ed# allotment is /oid+ ll the application money has to be
refunded within < days without interest or with 13K interest
thereafter+
• ll o/er subscriptions should be returned within < days of allotment
or otherwise with 13K interest+
• )o allotment is made unless the minimum subscription is recei/ed+ In
compliance of this reCuirement# the DIP guide lines pro/ide that the
company has to satisfy the designated stock e.change that =?K of the
stated minimum subscription has been recei/ed before utiliIing the
issue proceeds+
• )o allotments can be made until the beginning of the fifth day of the
issue of prospectus ,section :8-+ ll allotments should be followed by
filling of a return of allotment with the Registrar with in ;? days in the
prescribed form ,'orm 8-+
• ll the abo/e pro/isions shall apply to offers for sale as they apply to
public issues+
The Stock Exchange Listing Agreement
0ompliance with the stock e.changeDs listing guide lines under its listing
agreement is also important in order to be able to seek listing of shares
pursuant to an IP!+
%he conditions for listing shares by an unlisted company pursuant to an
IP! on the B$& are listed belowH
1+ )ew companies can be listed on the e.change# if their issued and
subscribed eCuity capital after the public issue is eCual to or more
than Rs+ 1? crore+ In addition to this# the company should ha/e a
post2issue net worth of Rs+8? crore+
8+ 'or new companies in high technology sectors# the following
criteria will be applicable+
a+ %he total in comeOsales from the main acti/ity should not be
less than :3K of the total income during the two preceding
years+
b+ %he minimum post2issue paid2up capital should be Rs+3 crore+
c+ %he minimum market capitaliIation should be Rs+3? crores+
d+ Post2issue net worth of Rs+8? crore+
The conditions for listing on the NSE are given below:
1+ )ew companies can be listed on the e.change# if issued and subscribed
capital after the issue is eCual to or more than Rs+ 1? crore and post2issue net
worth of Rs+ 8? crore+
8+ 'or new companies in knowledge based industries# the applicable capital
criterion is Rs+ 3 crore with a minimum market capitaliIation of Rs+ 3?
crore+ %he total incomeOsales should not be less than :3K of the total income
during the immediately two preceding years+
;+ %he applicant company should ha/e a track record of three years of
e.istence+ If the applicant is promoted by another company# that company
should ha/e the minimum stipulated e.istence+
6+ %he application for listing in the case of an IP! shall be made within 5
months of the closure of the issue+
3+ %he project should ha/e been appraised by specified agencies such as the
all India financial institutions+
Contents of a Prospectus/Offer Document for an IPO
%he DIP guide lines pro/ide e.clusi/e pro/isions for the presentation of the
prospectusOoffer document since this is an important area of regulation for
$&BI+
In the following we discuss some of the important disclosures in an offer
document and their presentation as specified in chapter 5 of the DIP guide
lines+ %he prospectus consists of two parts# part I and part II+
Main Disclosures in Part I
1+ Disclaimers to be included on behalf of $&BI# the stock e.changes
and the issuer company+
8+ %he minimum subscription clause under section 5= of the companies
ct in the specified format+
;+ 0apital structures of the company and the notes to the capital structure
ha/e to be pro/ided in detail disclosing the pre2issue and post2issue
period+
6+ %he terms of the issue specifying all the rele/ant information to the
applicants on making the subscriptions and methodologies to be
adopted for applications# allotments and refunds+
3+ %he objects of the issue shall be disclosed stating whether the
company proposes to raise funds for fi.ed assets creation or for
rotation in working capital+
5+ %he details of the company# management and the project# which inter
alia include the followingH
a+ >istory# main objects and present business of the company+
b+ complete profile of the promoters# their education and
background# e.perience in the line of business and other details+
c+ Particulars of key management personnel+
d+ 0omplete prescribed details of the project+
:+ 'inancial details of other company in the same business as the issuer
company for the past three years+
<+ )o future financial projection of the issuer company can be furnished
in the offer document+
=+ %he basis for the issue price+
1?+%he risk factors ha/e to be presented in the prospectus+
Main Disclosures in Part II
1+ 4eneral information relating to consents gi/en by professionals#
e.perts and other agencies associated with the issue to include their
names in prospectus+
8+ 'inancial in formation on the issuer company by way of specific
certification by the auditors as pro/ided in schedule II of the
companies ct+
;+ $tatutory in formation on underwriting commissions# fees to lead
managers# brokerage and issue e.penses# properties purchased by
the company# managerial remuneration and interests of directors
and promoters in the company# re/aluation of assets in the
preceding fi/e years+
6+ %he material contracts and documents of the company# a copy of
each of which is made a/ailable for inspection at the time and
/enue specified starting from the date of prospectus till closure+
3+ Declaration and /erification by the signatories to the prospectus
together with signatures by themsel/es or thro ugh their constituted
attorney+
Methodologies for Making Issues
(nder the DIP guide lines# it is possible to make an IP! in the form of a
1??K retail issue# a book built issue or as a bought out deal either for listing
on the main stock e.changes or on the !%0 e.change+ %he different
methods are e.plained as followsH
100º Retail (Fixed Price) Issues
(nder this method# the issue is made by offering the same directly to the
in/estors from the public that could include the retail small in/estors as well
as other categories of in/estors+ (sing this method ob/iates the need to sell
the issue initially to the wholesale in/estors and them in turn marketing it to
retail in/estors+ %he main ad/antage of this system is that it is possible to get
a wide dispersal of shareholding among the retail in/estors that would add
depth to the trading in the stock after listing+ $econdly# it does not reCuire
approaching JIB in/estors to subscribe to the issue# which could sometimes
pro/e to be difficult# as these in/estors need to be thoroughly con/inced+
!n the other hand# small in/estors can be persuaded easily if a reasonable
short2term market opportunity is /isible in the issue+ Due to apparent
infle.ibility in a fi.ed price issue# it has a lot of uncertainty attached to it in
difficult market conditions+ %herefore# after the introduction of the book
built system of making issues most companies prefer to use that route+
Book Built Issues
book built mechanism allows the issuer company to make a public issue
through the process of Fprice disco/eryD rather than through a price that is
fi.ed beforehand+ %his mechanism# to a large e.tent# o/ercomes the
deficiency in the fi.ed price mechanism of o/er pricing or under2pricing an
issue+ It howe/er operates on the basis of a Ffloor priceD# which is fi.ed by
the company in consultation with the merchant banker+
0ompanies now can make an issue to the e.tent of 1??K or :3K of the net
public offer as they may decide# through the book built route+ If the :3K
route is followed# the price applicable to the balance 83K under the retail
route would be the issue price under the book built portion+ nd under the
1??K route# the entire issue happens through one bidding process applicable
to both categories in/estors+
Applicable Provisions for a Book-built Issue
In a book2built issue# reser/ation and firm allotment may be made only in
respect of permanent employees of the issuer companyOpromoting company
and share holders of the promoting companies to the e.tent they permitted in
the DIP guide lines+
%he other allocation norms for a 1??K and :3K book2built issue are as
listed belowH
• )ot more than 3?K of the net public offer shall be allocated to JIBs+
• )ot less than 83K of the net public offer shall be allocated to non2
institutional bidders+
• )ot less than 83K issue shall be a/ailable for allocation to retail
in/estors+
Procedural Aspects of an Issue
1+ %he first task is to hold a Board Meeting to consider the proposal for a
public issue# authoriIe the managing director to do all tasks relating to
this issue and including e.penses for the issue+
8+ !n the appointed day# the &4M is held and the shareholders pass a
special resolution under section <1,1- of the companies ct
authoriIing the company to make public issue+
;+ Before embarking on an IP!# the first task is to identify the good
merchant banker who can be appointed as lead manager for the issue+
%he details of the companyDs project or fund raising plan are
discussed with the merchant banker+ fter the discussion the company
finaliIes the appointment and enters into a memorandum of
understanding with the lead manager+
6+ %he LM immediately on being appointed starts a due diligence on the
company+ (sually they go through the all documents and certificates
and e/ery rele/ant information for the issue+
3+ In parallel# the LM starts preparation of the draft prospectus or offer
document+ ll disclosure reCuirements and DIP guide lines ha/e to be
filled in+
5+ %he LM ad/ises the company in the appointments of other
intermediaries for the issue+ %hese are the registrar to the issue#
bankers to the issue# the printer and ad/ertising agency+ %he registrar
and bankers ha/e to be registered with $&BI+
:+ %he LM also draws up the issue budget estimated to be spent on the
issue+ %he main components of these are fees for LM# underwriters#
registrar and banker# brokerage# postage# stationery# issue marketing
e.penses and statutory costs+
<+ %he draft prospectus is finaliIed by the LM in all respects in
consultation with the management and placed before the board of
directors for the appro/al so that it can be issued for filing+ %he draft
prospectus has to be accompanied by the memorandum of
understanding signed by the LM with the company+
=+ $imultaneously# the company has to make listing applications to all
stock e.changes where the shares are proposed to be listed
accompanied by at least 1? copies of the draft prospectus+ nd that
prospectus has to be made a/ailable to the public by the LM+ %he LM
should also obtain and furnish to $&BI# an in2principle listing
appro/al of the $& within 13 days of filing the draft offer documents
with them+
1?+%he company has to enter into a tripartite agreement with the registrar
and all depositories2,presently )$DL or 0D$L- for offering the
facility of offering the shares on dematerialiIed mode+ In/estors ha/e
to be gi/en the facility to recei/e allotments through any one of the
depositories or in physical mode according to option+
11+Eithin 81 days# $&BI would come out with their obser/ations on the
prospectus+ %he $& would also /et any changes to be made to the
prospectus+ %he LM has to file a certificate with $&BI that all
amendments and suggestions made by the $&BI ha/e been
incorporated in the offer document+
18+!nce the draft prospectus is ready in its final form# a board meet has
to be held to appro/e the filing of the same with R!0 after being
signed by all the directors+
1;+%his filing should be accompanied by all the material contracts
pertaining to the issue and the company and all other documents listed
in the prospectus+
16+%he marketing of the issue is usually co2coordinated by the LM with
the ad/ertising agency+
13+d/ertisements are regulated by DIP guidelines and the rules of the
stock e.change+
15+%he mandatory collection centers are finaliIed as per the $&BI
guidelines in consultation with the bankers and the LM+
1:+%he LM and the printer finaliIe the dispatch schedule to all $&# $&BI#
collection centers# in/estor associations# brokers and underwriters+
1<+%he marketing should be completed one week before the opening of
the issue+
Post-Issue Procedures
1+ In issues wherein there is more than one LM# it is usual to entrust the
entire post2issue responsibility to one LM in inter2se allocation+
8+ %here are two reports that are reCuired to be furnished to $&BI by the
post2issue LM in the case of an IP! in the retail route in the
prescribed form+
;+ %he main task of the post2issue LM is to coordinate the process of
collection of subscription figures from the bankers to the issue#
processing of applications by the registrar# dispatch of allotment
letters and refund orders to all applicants with in time+
6+ %he issue is to be closed on the earliest closing date# the LM should
ensure that issue is fully subscribed before announcing closure+
3+ In the case of de/ol/ed issues# the LM shall ensure that the
underwriters honor their commitments with in 5? days from the date
of closure of issue+
5+ %he LM has to ensure that all issue proceeds are kept in separate bank
accounts as pro/ided in the companies ct and the funds are released
to the company only after obtaining listing appro/als from the
respecti/e stock e.changes+
:+ %he LM has to release an ad/ertisement announcing the closure of the
issue on the last day+
<+ %he responsibility of finaliIing the basis of allotment in a fair and
proper manner lies with the e.ecuti/e director of the designated stock
e.change along with the post2issue LM and the registrar+
=+ %he post issue LM shall ensure that the demat credit and refund orders
to the allottees is completed within two working days after the basis of
allotment is done+
1?+%he LM is responsible for following duties+
a+ Refund of subscription money to all non2allottees+
b+ Refund of e.cess application money to all+
c+ ttending to all in/estors grie/ances+
d+ $anction of listing and trading permission by the stock
e.changes+
e+ 'iling of return of allotment with R!0+
Role of Merchant Banker in Issue Management
Merchant bankers with /alid registration certificates from $&BI ha/e been
pro/ided with statutory e.clusi/ity in managing public offers such as IP!#
rights and secondary issues of eCuity as well as issues of debt securities+
%herefore# whene/er there is an offer of securities to the public# the
in/ol/ement of a merchant banker is mandatory# subject to the minor
e.ceptions+ 'rom a business perspecti/e too# issue management forms the
biggest chunk of re/enue for in/estment bankers in those years when the
primary market for public flotation is /ery /ibrant+
In the o/erall process of issue management# the merchant banker plays a
/ariety of roles as an e.pert ad/isor to the management of the company# as
an auditor who performs due diligence on the company# as an e/ent manager
and coordinator to ensure timely completion of the issue# as a watch dog for
statutory compliance and as a person in fiduciary capacity for the protection
of the interests of in/estor+
)ow we ha/e a look at the /arious functions of the merchant banker+
1. Appointment, MOU and Inter-se allocation of Responsibilities:
%he appointment of merchant banker as lead manager has to be
accepted carefully+ %he DIP guidelines stipulate him Fshall not lead manage
the issue if he is a promoter or director of the issuer companyD+ %herefore#
before taking up an assignment# the guidelines ha/e to be interpreted and it
has to be ascertained if appointment is legal+ 4enerally# the preparation of
offer document and pre2issue compliance# marketing and syndication of
underwriting and post2issue compliance are the main responsibilities+
2. Issue Structuring and Pricing
s mentioned pre/iously# capital and issue structuring has to be made
carefully assessing market factors# dilution of promoter eCuity# fulfillment of
lock2in reCuirements# possibility of pre2marketing the issue through firm
allotments and related issues+ In deciding the pricing he has to look at
/arious aspects which are the deciding factors like PO& ratio and book /alue
of shares+
3. Due diligence
%he due diligence has an implication on the disclosures in the
prospectus and the Cuality of issue+ It is customary for the merchant banker
to issue a due diligence Cuestionnaire to the company before the
commencement of process taking into account the standard reCuirements and
the specific reCuirements of the issue in Cuestion+ format of the due
diligence certificate to be filed with $&BI by the lead manager+
4. Preparation and Filing of Offer Document
%he offer document has to be prepared with care and craft+ ll the
certifications reCuired to be included in the offer document ha/e to be
obtained in specific formats+
5. Pre-issue Compliance
%his work is cumbersome as it in/ol/es se/eral reCuirements of the
DIP guidelines# tying and underwriting if reCuired# selection and negotiation
of terms of other intermediaries# formulating the issue budget and making
preparations for the roll out of issue+ %he lead manager shall asses the
o/erall e.posure of the underwriters belonging to the same group+
6. Liaison with SEBI and Stock Exchange
fter filing of the prospectus with $&BI and stock e.changes and
making it public# lead manager has to e.peditiously attend to the
modifications reCuired at short notice+ %he lapses in the due diligence
also come to the light during this stage+
7. CO-ordination with other functionaries
Issue management being a concerted effort is performed with the help
of se/eral agencies and intermediaries apart from the lead managers+ %hese
are registrars# bankers# and ad/ertisement agencies# brokersD underwriters to
issue and printers and couriers+
8. Issue Marketing
Issue marketing includes road shows# pre2issue meets with journalists
and media# brokers# in/estor associations+
%he merchant banker has to co2ordinate with the ad agency to ensure that all
important persons attend road shows and other issue meetings+ %he merchant
banker has to ensure that the ad is gi/en with the proper data specified in the
offer document+
9. Functions during the Issue
%he main function during the issue is to ascertain daily figures from
the bankers or stock e.change and to take decision on the closure of issue
based on procurement of minimum subscription+ nd he has to
ad/ertisement carefully when the issue is o/ersubscribed during the opening
period+
11. Post-issue Compliance
%he DIP guidelines pro/ide that the post2issue manager has to look
after the refund of money to in/estors and regularly monitor the grie/ances
of in/estors arising there from+ $&BI has to kept informed of the important
de/elopments about the issue during the inter/ening period of filing post2
issue reports+
s we ha/e looked at the procedure to be followed in an IP! by e/ery
company in accordance with the $&BI guidelines for the in/estor protection
and for the success of the company in raising funds through an IP!+ In order
to look into these prospects in a practical way# one has to go through some
companies which ha/e come to IP! and succeeded in raising funds from the
in/estors+ t the same time some companies may not raise funds from
public in an effecti/e way and there may a chance for failure because of
/arious reasons which are essential in an IP! offering+
Let us look into the /arious companies which ha/e raised the capital
e.penditure for the intended objecti/e as mentioned in filing for an IP! with
$&BI+
A study on IPO’s of
Different Companies
And
Analysis
Study on Reliance power IPO
Company 1
Reliance power Ipo
Company Overiew : Reliance Power Limited is part of the Reliance ADA
group and is established to de/elop# construct and operate power projects
domestically and internationally+Reliance Power is currently de/eloping 13
medium and large siIed power projects with a combined planned installed
capacity of 24,200 MW# one of the largest portfolios of power generation
assets under de/elopment in India+
nil mbani2 owned Reliance Power LtdDs mega initial public offer ,IP!-
was opened for subscription on13th Panuary to raise Rs 11#3?? crore+ %he
company proposed to issue 85 crore eCuity shares of Rs+ 1? each# including
promotersD contribution of ;+8 crore shares allotted at the IP! price+ %he
balance 88+< crore eCuity shares constituted the net issue to the public+%he
price band for the book building was Rs 6?3 to Rs 63? for e/ery fully paid
up share of Rs 1? each+ %he issue was managed by (B$# B) MR!#
PPMorgan# Deutsche Bank# &nam $ecurities# I0I0I $ecurities# PM
'inancial#and @otak Mahindra 0apital+ MacCuarie and $BI 0apital Markets
are co2managers+
%his was the largest IP! e/er+ %he pre/ious largest was that of the real estate
de/eloper DL' which raised Rs =#1<: crore in Puly 8??:
Reliance power Ipo oversubscribed 73 times
s per market e.pertDs e.pectation# Reliance Power Initial Pubic
!ffering has closed with :; times o/erbooking as against the
released shares on Panuary 1< breaking o/er all records in the Indian
stock history as bourses informed media+
ccording to data information collected from )ational $tock
&.change and Bombay $tock &.change at here : pm on Panuary 1<#
the concluding day of the IP!# Fthe trading operators ha/e
cumulati/ely collected all time high 3+
1 million applications from the retail in/estors for the shares worth
Rs+ 1#<<#??? ,Q6:billion-+
Jualified Institutional Buyers ,JIBs- and >igh net worth in/estors ,>)Is-
ha/e also submitted the record2breaking applications that
o/ersubscribed the allotted Cuota of both the institutes by :?2<? times
and 8?? times respecti/ely+
%he retail in/estorDs Cuota was subscribed by 13 times+
s per the estimated calculation# nil mbani backed Reliance Power
Ltd has raised nearby Q1<? billion ,Rs+:#38#??? crores- for its shares
worth offered price of Q8+= billion ,Rs+188 crores-+ %he total collected
price has been more than that of the combined market capitalisation
of companies listed in Portugal and the 0Iech Republic as
Bloomberg# a famous business magaIine said yesterday+
'or making better comfort to retail in/estors# Reliance nil Dhirubhai
mbani 4roup# D4 has pro/ided two options to them# either they
can submit the entire price ,Rs+6;?- of the asking lot or they can only
deposit the one2Cuarter price ,Rs+113- of the asking shares+ %he rest
price of the shares can be submitted after getting the allotment of the
shares+ Besides# R2Power has also pro/ided a subsidy of Rs+8? for
each share of Reliance power IP! to the retailers+
%hus the retailer in/estors ha/e submitted appro.imately Rs+ 3?#???
crores collecti/ely# which is one2fourth of the total direct ta.
collections for last year+
$e/eral public sector banks ha/e also subscribed the offer joylessly
tremendously+ Punjab )ational Bank# $tate Bank of India# Bank of
India and Indian !/erseas Bank put in bids worth Rs 1#3??28#???
crore# as the sources reported+
Reliance Power had offered a total of 88<2milion eCuity shares with
face /alue of Rs+1? each in the price band of Rs+6?3263? for the
public through 1??K book2building process+ It has targeted to collect
as much as Rs 11#:??2crore from this offer# which has now gone
beyond Rs+:3#???2crore+
'rom this collected money# D4 is planning to complete its 1;
power projects across the country and somewhere o/erseas in the
ne.t couple of years+ %he e.perts belie/e that the sale of the shares
of Reliance Power can make nil mbani the richest person of the
country who is still on the third position+
Before this his Reliance &nergy share has tripled his total asset by
going Cuadruple in /alue last year in the Indian stock market+
ccording to 'orbes# a famous business magaIine# only his elder
brother Mukesh mbani and $teel king Lakshmi )iwas Mittal are
only ahead to nil by cementing his position on no+1 and no+8
simultaneously+
Before this @ P $ingh# the chairperson of DL' ,a construction
company- has offered the biggest IP! offered that o/ersubscribed
only three times as against ;8+<< crore eCuity shares+
Mukesh mbani backed Reliance Mukesh Dhirubhai mbani group
had also offered a gigantic IP! offered for its
subsidiary refinery
company Reliance Petroleum Ltd+ that had showed the similar
response to Reliance Power IP! and o/erbooked 38 times for 632
crore released shares+ Mukesh had collected Rs+ 1#63#?<? crore from
this+
Reliance Power to give 3 bonus shares for every five held
Buy back
buyback is essentially a financial tool in the hands of the corporate that
affords fle.ibility in the capital structure+ buyback allows the company to
sustain a higher debt2eCuity ratio+ It is also a tool to defend against possible
takeo/ers+ 4enerally# companies buyback their shares when they percei/e
their own shares to be under/alued or when they ha/e surplus cash for which
there is no ready capital in/estment need+$hare buybacks also pre/ent
dilution of earnings+ In other words# a buyback programme enhances the
earnings per share# or con/ersely# it can pre/ent an &P$ dilution that may be
caused by e.ercises of stock option grants# etc+ Last# but not the least# a
buyback also ser/es as a substitute for di/idend payments+ %his brings us to
the crucial issue of ta. implications of a buyback+ /ery important
consideration is whether the amount paid on buyback is di/idend or
consideration for transfer of shares+ If it is indeed considered to be di/idend#
the same will not be ta.able in the hands of the in/estors+ lso# to what
e.tent# if at all# can the amount paid on buyback be taken as di/idendB Is the
entire amount paid di/idend or is it only the premium paid o/er the face
/alueB
Strengths
1+ !ne of the largest potfolios of Power 4eneration Projects
under De/elopment in India+
8+ Portfolio of Power Projects that di/erse in 4eographic
Location# 'uel2type# 'uel source and off2take+
;+ $trategically Located Power Projects+
6+ Part of the Reliance D 4roup+
Projects Currently handled by Reliance Power Limited
R Rosa Phase I, a 5?? ME coal2fired project in (ttar Pradesh scheduled to
be commissioned in March 8?1?+
R Rosa Phase II, a 5?? ME e.pansion of Rosa Phase I which is scheduled to
be commissioned in $eptember 8?1?+
R Butibori, a 300 MW coal2fired project scheduled to be commissioned in
Pune 8?1?+
R Sasan 3,960MW UMPPs promoted and awarded by the 4o/ernment of
India is e.pected to be the largest pithead coal2fired power project at a single
location in India#scheduled to be commissioned by pril 8?15+
R Shahapur, a 4,000 MW coal-fired,1#8?? ME- and combined cycle gas2
fired ,8#<?? ME- project in $hahapur# scheduled to be commissioned in
March 8?11+
R Urthing Sobla (400 MW)# a run2of2the2ri/er hydroelectric project# located
on the Daulinganga Ri/er in (ttarakhand scheduled to be commissioned in
March 8?16+
Five other projectsSthe gas2fired Dadri project ,:#6<? ME-# the coal2
fired MP Power project ,;#=5? ME- and three run2of2the2ri/er
hydroelectric projects# Siyom ,1#??? ME-# Tato II ,:?? ME- and Kalai II
,1#8?? ME-+
Weaknesses
• Due to the nature of the business# Reliance power projects typically
reCuire a long gestation period and substantial capital outlay before
completion+ It may be months or years before positi/e cash flows can
be generated+ 'urther# power# property de/elopment# and infrastructure
and construction projects are capital intensi/e and will reCuire high
le/els of debt financing+ %hey will also lead to continuous dilution of
eCuity+ one should become long2term in/estors with a two2three year
/iew+ %here are no short term re/enue generating opportunities in the
power sector now# he said+ In/estors canDt e.pect to make money in a
month in the power sector+
Reliance power : Issue Highlights
Issue Highlights
$ector Di/ersified
$ector %%M PO& )ot applicable
)o of fresh shares 88+<crore
Price band ,Rs- Rs 6?3 N Rs 63?
Post issue eCuity ,Rs crore- 88+<
Post2issue promoter stake :3K
Issue open O 0lose 132?128??< O1<2?128??<
Listing B$&# )$&
0M Rating 3?O1??
Analysis of Reliance power IPO
%he abo/e mentioned company issue of shares in IP! fund raising acti/ity
has been o/er subscribed by :3 times o/erall from the in/estors+ nd looking
at the /arious aspects# which are pre/iously discussed are applied in this IP!
process and the post2IP! performance is also good+ nd the strengths and
weaknesses are also mentioned which form a part of success for the
company+
part from the compliance of issue procedure and the documentation part#
the success of an IP! is depends on the financial prospects of the company
for the last ; years+
It is because of the strengths which the company has got and good financial
record the company maintained+
Regarding the pricing of share /alue# it has used the past &P$ and other
considerations like its business and de/elopment+
%o conclude about this case# it has maintained good financial track record
and fair /aluation of share price along with the timing of coming for an IP!+
GMR Infrastructure
Company 2 High valuation, high gestation
Retail investors better wait than get on board
4MR Infrastructure ,4MR- is an infrastructure holding company formed to
fund the capital reCuirement of the 4MR group initiati/e in the
infrastructure sector+ %he 4MR group de/elops /arious infrastructure
projects in power# road and airport sectors through 4MR Infrastructure+
Strengths
4MR has won many big2ticket projects in /arious infrastructure sectors+
0urrent projects of the company areH
Power :
` 88?2ME naphtha2fired power plant at Mangalore in @arnataka# which
commenced commercial operation in 8??1+
T 8??2ME L$>$2fired power plant in 0hennai in %amil )adu# which
commenced commercial operation in 1===+
;<<+32ME gas2fired power plant in 9emagiri in ndhra Pradesh# which is in
the de/elopment stage+ )atural gas is e.pected to be made a/ailable for use
end Puly 8??5 and the plant is to begin commercial operations within one
month of such date of a/ailability of natural gas+
In addition# 4MR has the right to de/elop a 16?2ME hydroelectric power
plant on the ri/er laknanda in the 0hamoli district of (ttaranchal+ 4MR
&nergy# a fully2owned subsidiary of 4MR Infrastructure# and >ong @ong2
based 0hina Light and Power ,0LP- ha/e signed a memorandum of
understanding to jointly bid for the 6#???2ME pit head domestic coal2fired
$asan (ltra Mega Power Project+
Road :
T 3=2km stretch on the 0hennai2@olkata ,)>23- highway ,%uni2nakapalli
Road Project-# which commenced commercial operation in December 8??6+
T =;2km stretch on the 0hennai2Dindigul ,)>263- highway ,%ambaram2
%indi/anam Road Project-# which commenced commercial operation in
!ctober 8??6+
T <52km stretch between dloor Aellareddy and @alkallu and an additional
1:2km stretch on the >yderabad2)agpur ,)>:- highway ,dloor
Aellareddy2@alkallu Road Project-# which is currently under de/elopment
and e.pected to enter into commercial operation by end 8??<+
In addition# 4MR has won three concessions to de/elop# operate and
maintain roads+
Airports :
T 4MR owns 5;K of 4MR >yderabad International irport ,4>IL-+ It
e.pects the >yderabad airport to be operational end first Cuarter of 8??<+
T In Panuary 8??5# a consortium led by 4MR was awarded a long2term
agreement to operate# manage and de/elop the Delhi airport following
competiti/e bidding+ !ther members of the consortium consist of 'raport
4# Malaysia irports ,Mauritius-# and the India De/elopment 'und+
Weaknesses
%he power purchase agreement ,PP- for the Mangalore power plant
e.pires in 8??<+ In 'A 8??5# the Mangalore power plant generated about
6?K of the total re/enue and operating income of the company+ %his plant is
based on /ery high2cost naphtha and# hence# used only for meeting peak load
reCuirement# resulting in capacity utilisation of just 18+3K in 'A 8??5+ ItDs
only because of the current PP that it is paid as per supply# irrespecti/e of
the poor output+ $o it will be in a highly unfa/ourable position when the
PP comes for re/iew and if it has to pro/ide power at competiti/e rates+
Part of the issue proceeds will be paid to promoters for acCuiring 49L
In/estments ,49LI-+ %he main holding of 49LI is the =K stake in Delhi
airport project+ )otably# 49LI has in/estments of book /alue of only around
Rs 3? crore ,including the =K stake- for which it will be paid Rs ;==+;
crore+
Infrastructure projects by nature are long2gestation projects and subject to lot
of legal# financial# political and en/ironmental risks# specially in India where
policies and frameworks are just e/ol/ing and political mindset is not tuned
to pri/ate operation of infrastructure projects+
Valuation
4MR InfrastructureDs consolidated net profit after minority interest and
share of profit from associates was Rs :?+33 crore in 'A 8??5+ Post2issue
diluted &P$ stood at Rs 8+1 in 'A 8??5+ t the offer price band of Rs 81?2
Rs 83?# P& range works out to 1?? to 11=# respecti/ely+ In 'A 8??5# <3K of
the companyDs re/enue came from the power generation business+ %railing
twel/e2month ,%%M- P& of power generation was 11+6+ )aturally# the price
band takes into account future re/enue that will be generated once the
/arious ,high /alue- projects are fully commissioned+ Retail in/estors will
get 3K discount to the issue price+ >owe/er# it should be remembered that
risks in/ol/ed and gestation periods for infrastructure projects are /ery high#
specially when the issue price already factors in lot of benefits that these
projects may accrue to the company in the distant future+ Moreo/er# capital
reCuirement of holding companies to carry infrastructure projects are
e.orbitant and they need to dilute their eCuity regularly to take up more
projects+
GMR Infrastructure : Issue Highlights
$ector Di/ersified
$ector %%M PO& )ot applicable
)o+ of shares on offer ,lakh- ;:5+6
Price Band ,Rs- 81?283?
Post issue eCuity ,Rs crore- ;;1+1
Post2issue promoter stake :=+13K
Issue open date ;1st Puly 8??5
Issue close date 6th ug#?5
Listing B$&# )$&
Rating 6;O1??
Analysis of GMR IPO
%he abo/e mentioned company issue of shares in IP! fund raising acti/ity
has been o/er subscribed by :3 times o/erall from the in/estors+ nd
looking at the /arious aspects# which are pre/iously discussed are applied in
this IP! process and the post2IP! performance is also good+ nd the
strengths and weaknesses are also mentioned which form a part of success
for the company+
part from the compliance of issue procedure and the documentation part#
the success of an IP! is depends on the financial prospects of the company
for the last ; years+
It is because of the strengths which the company has got and good financial
record the company maintained+
Regarding the pricing of share /alue# it has used the past &P$ and other
considerations like its business and de/elopment+
%o conclude about this case# it has maintained good financial track record
and fair /aluation of share price along with the timing of coming for an IP!+
Typical expenses Related to the IPO
%he major e.penses of an initial public offering are the in/estment bankerDs
fees# legal fees# accounting fees and printing costs+ In addition# there are
registration and state filing fees+
%he in/estment bankerDs gross underwriting commission# or “gross spread#"
for an initial public offering is typically :K of the public offering price
depending primarily upon the siIe of the offering+ 'inal terms are
determined at the time of pricing and will be the result of discussions with
management concerning# among other things# underwriting discounts for
recent offerings that are similar in siIe# by similar companies+ ny /ariation
within the suggested range will ultimately be based on the siIe and price of
the offering# and the degree of difficulty encountered in marketing the issue+
ppro.imately 3?K to 5?K of the gross spread is paid to the brokers who
actually sell the shares# 8?K to 83K is paid to the in/estment banking firm
itself and the balance is paid to the syndicate for e.penses# as well as
compensation for sharing in the underwriting risk+
%he following additional fees are typical for an initial public offeringH
Legal fees: Legal fees will /ary considerably depending upon the
circumstances surrounding each situation+ Legal ser/ices generally include
corporate “housekeeping" work related to the offering# the preparation and
clearance of the registration statement# negotiation of the underwriting
agreement and the preparation of closing documents+ %he fees /ary# but
typically range from Q13?#??? to Q3??#???+
In addition# the company will pay a fee for the legal work in connection with
state2by2state “Blue $ky" filings and clearances+ %his e.pense is generally
Q83#???# but can /ary depending on the number of jurisdictions where
filings are made and the nature of the comments raised+
Accounting fees: ccounting fees will /ary widely with the siIe of the
company and the comple.ity of its operations+ 'ees may be somewhat lower
if the auditors ha/e conducted regular audits for the past few years and ha/e
just completed the companyDs annual audit+ %hey tend to be significantly
higher if no prior audits ha/e been conducted and new accountants are
engaged at the time of the offering+
%he accountantsD fees include their preparation of the financial statements#
their ser/ices in helping to respond to $&0 staff accounting comments# and
their preparation and deli/ery of the “cold comfort" letter to the
underwriters# which assures that information in the registration statement
and prospectus is correct and that no material changes ha/e occurred since
its preparation+
Printing expenses: %he registration statement and prospectus account for
the largest portion of the printing e.penses# which a/erage Q:3#??? to
Q13?#???+ &.penses are significantly impacted by the length of the
prospectus# the number of proofs and corrections made# and the number of
prospectuses printed+ &.penses will also be somewhat higher if color
photographs are used in the prospectus+
Registrar and transfer agent fees: %hese are fi.ed fees# depending on the
number of certificates issued and the number of certificates transferred+ 'ees
are usually under Q1?#???# but this should be /erified with the bank or banks
the company intends to use+
Travel and other: %he 0ompany can e.pect to incur a minimum of
appro.imately Q83#??? in other e.penses in connection with an initial public
offering+ %hese may include unusual legal# accounting or printing charges
and tra/el e.penses incurred during the marketing phase of the offering+
In addition# there will be incremental ongoing e.penses in the legal#
accounting and in/estor communications areas as a result of being a public
company+
The advantages and disadvantages of going public
%o owners of pri/ate businesses# the decision to go public is one of the most
important they will make in the life of their company+ In making the
decision# the principals should rely upon their own judgment and that of
their ad/isors as they weigh the ad/antages# disad/antages and alternati/es
before proceeding+
%he following is a general o/er/iew of the ad/antages and disad/antages
that are associated with becoming a public company
Advantages
Capital: %he most persuasi/e benefit of going public is the increased access
to capital# as well as the relati/ely fa/orable financing terms afforded by the
public market+ public offering is an e.cellent way to accommodate growth
by pro/iding eCuity capital for increased in/entories# recei/ables# facilities#
eCuipment and long2term capital e.penditures+
Ehen a company goes public# financing is no longer limited to the profits
generated from operations and bank borrowings+ &/en the most successful
businesses are hard2pressed to stretch retained earnings and bank loans far
enough to finance ongoing e.pansion or a major new in/estment+
In summary# going public can gi/e a company the funds it needs to in/est in
acCuisitions# e.pansion and facilities# without depleting the ownerDs capital
or the companyDs store of ready cash used for daily operational e.penses+
&Cually important to a firm with high growth prospects is the ability to
secure the financial stability and balance sheet that will pro/ide a defense
against well2capitaliIed competitors and enable the company to aggressi/ely
pursue opportunities+
More capital: !nce an initial offering is completed# and assuming the stock
performs well# subseCuent offerings will usually be readily accepted by the
market so that additional eCuity capital can be raised on /ery fa/orable
terms+
successful public offering will also increase a companyDs net worth and
impro/e its debt2to2eCuity ratio+ %his# along with the increased disclosure
and diligence reCuired of a public company# will substantially impro/e the
companyDs credibility as a borrower# making it easier for the company to
borrow funds in the future on more fa/orable terms+
public company also has significantly more options a/ailable to it in terms
of financing+ %he public debt and con/ertible securities markets are
e.amples of fa/orable alternati/es a/ailable only to publicly held
companies+
public company can use its own securities to finance acCuisitions and
e.pansions# as long as acCuisitions can be made with eCuity rather than with
after2ta. profits+ s a general rule# acCuires will not accept a minority eCuity
position in a pri/ately held company in e.change for their business# whereas
this is a /ery common and attracti/e N from a ta. perspecti/e N alternati/e
with a publicly held company+
Liquidity: Because it is difficult to place a /alue on a pri/ately held
company or to establish a ready market for its stock# such companies are
often an asset without liCuidity+ !nce a company goes public# howe/er# its
founders and principals ha/e a more effecti/e way of /aluing and marketing
that stock+
In all likelihood# the /ast majority of the foundersD and principalsD net worth
is tied up in the company+ public offering makes it easier for them to
di/ersify their in/estments or simply pro/ide capital for di/ersification or
personal use+
Wealth: In most cases# a public offering will increase the /alue of a
pri/ately held company+ %he growth prospects and security of a public
company are generally greater than those of a pri/ate firm+ %his higher /alue
can translate into significant wealth for founders and principals+
&/en if they donDt realiIe immediate proceeds by selling a portion of their
e.isting stock during the initial offering# key indi/iduals can use their
publicly traded stock as collateral to secure borrowings for other
in/estments+ %his opportunity is rarely# if e/er# a/ailable to shareholders in
pri/ately held companies+
Prestige: 4oing public is an important measure of success for many
companies and is recogniIed as a significant step in corporate growth+
Public offerings increase the companyDs /isibility in the community and in
financial circles# and this greater /isibility can generate new interest from
customers and suppliers# as well as from financial and business associates+ It
can be particularly attracti/e to companies with high retail customer
interaction or firms that can benefit from the increased publicity+
0arefully managed# this new prestige and higher /isibility can be a real and
ongoing asset+
Personnel: !ffering stock as a benefit or as an option for employees# or
simply making it a/ailable for their purchase# can be a powerful incenti/e
for attracting and retaining Cuality personnel+ In general# higher caliber
management and employees can be obtained by a public company that
permits the sharing of its financial successes with its employeeOshareholders+
Disadvantages
Preparation: 4oing public is not a decision that can be implemented
o/ernight+ It can reCuire se/eral months or more of ad/ance planning+
'ew pri/ately held companies are structured to handle the disclosure
reCuirements of public companies+ Before a company is ready to file a
public offering with the $&0# substantial preparation and legalOaccounting
work is likely to be reCuired+ Eritten documentation for major financial
transactions and customer arrangements will ha/e to be supplemented and
additional documentation may ha/e to be prepared+
0ompanies with e.isting bylaws may ha/e to amend to clarify them and
those without bylaws will ha/e to draft them+ %he minutes of all board
meetings will ha/e to be re/iewed to ensure that the record is clear and
complete+ ll contracts and agreements will ha/e to be scrutiniIed carefully+
0ertain leasing and licensing arrangements with shareholders may ha/e to
be terminated or amended+ $imilarly# internal agreements between multiple
owners# or owners and key personnel# on /oting rights andOor buying and
selling rights will ha/e to be forfeited+ !n the other hand# the company may
also be ad/ised to draft contracts for certain key personnel to ensure their
continued employment and loyalty+
$ome companies may also reCuire some restructuring to accommodate the
change from a pri/ate company to a public company+ %he capital structure
must accommodate a large number of shares to be held by the public+ In
addition# special classes of stock that had been designed to meet specific
financial and estate planning objecti/es of family members or principals are
generally eliminated+ %a.2oriented structures# such as “$" corporations# will
also be eliminated# which may or may not ha/e ad/erse conseCuences for
e.isting shareholders+
ccounting procedures and relationships may ha/e to be significantly
upgraded to ensure compliance with statutory reporting deadlines# increased
financial statement disclosure reCuirements and public comfort+
lthough stock2based compensation can be a significant ad/antage to the
company# the design of a program appropriate to furthering the companyDs
objecti/es can be difficult and e.pensi/e to de/elop+
Costs: In addition to the time and effort reCuired to prepare for the filing and
offering# a company must also be prepared to incur the cost of going public+
%he principal costs include the underwriterDs compensation# legal and
accounting fees# printing charges and transfer agent and filing fees+
company e.pecting to go public with a high2Cuality offering should
anticipate spending between Q6??#??? and Q1#???#???# e.cluding
underwriterDs commissions+ %he magnitude of these costs usually makes
public offerings grossing less than Q83 to Q;? million impractical+
'urthermore# principals must remember that there is no guarantee the
offering will be a success+ Eith the e.ception of underwriterDs
compensation# the costs are incurred regardless of the outcome+
Ongoing expenses: %he cost of going public does not stop with the initial
offering+ !ther costs associated with being a public company are ongoing+
Management must de/ote time and money to new areas such as shareholder
relations# public relations# public disclosures# periodic filings with the $&0
and re/iewing stock acti/ity+ ll of this time# and the time of the personnel
hired to handle these functions# would be spent on other management tasks
in a pri/ately held company+
%here are also /arious out2of2pocket e.penses+ $hareholder meetings# annual
and Cuarterly reports# public relations efforts# and legal# accounting and
auditing fees must all be paid+ %he total cost of these e.penses will /ary
from company to company# but in most cases they range from Q3?#??? to
Q13?#??? annually+
Disclosure: In addition to the reCuired disclosure of results of operations
and financial condition# public companies must be prepared to disclose
information about the company# the officers# the directors and certain
shareholders+ %his information might include company sales and profits by
product line# salaries and other compensation of officers and directors# as
well as data about major customers# the companyDs competiti/e position# any
pending litigation and related party transactions+
By releasing the information# it will become a/ailable to competitors#
customers# employees and the general public# and is reCuired in the initial
registration statement and updated annually through annual reports# 1?2@s#
pro.ies and other public disclosure documents+
Pressure: nother disad/antage of going public is the internal and e.ternal
pressures publicly held company management may feel to maintain earnings
and growth patterns+ %hese pressures are generally tied to the Cuarterly
reports filed with the $&0 and deli/ered to shareholders+
Because shareholders will# therefore# e/aluate company progress Cuarterly
rather than annually# management may be tempted to make short2term
decisions at the e.pense of long2term profitability+ In their efforts to
anticipate the stock market and satisfy outside shareholders# management
may begin to lose the operating fle.ibility it e.ercised before going public+
Loss of control: If a sufficiently large proportion of the companyDs shares
are sold to the public# the principals may be faced with the e/entual loss of
/oting control of the company+ %he principals will also be reCuired to
maintain a fiduciary responsibility to the outside shareholders in regards to
the decisions they make for the company# regardless of whether the
principals retain a majority of the companyDs stock+ %his responsibility will
be under constant scrutiny and may limit the fle.ibility that the pri/ately
held company pre/iously enjoyed+
%here are conflicting considerations and risks in any serious business
decision and the decision to go public is no e.ception+
If the company is of sufficient siIe and profitability and has competent
management# it is likely that it will benefit substantially from a well2planned
public offering+
s with any important decision# howe/er# it is essential that the owners and
principals of a pri/ate corporation carefully weigh the ad/antages and
disad/antages in light of the plans and goals they ha/e for themsel/es and
their company+ %hey should consider the alternati/es and acti/ely discuss
the matter N much more thoroughly than this document can re/iew N with
their attorneys# accountants# in/estment bankers and other professional
ad/isors+
Conclusion of IPO
s we ha/e seen the procedural aspects regarding the opening of an IP! for
a company or any other organiIation which wants to come for public by
offering shares to public for the first time+ $o e/ery company has to follow
certain guidelines before coming to public and it has to fulfill the DIP
guidelines specified by the $&BI for the in/estor protection# who want to
in/est in the company+
%he main points which conclude the IP! are as followsH
1+ &/ery company planning to come for IP! has to comply with all
the abo/e mentioned procedure+
8+ IP! is one of the forms of raising the capital and which is the
effecti/e one though it has defects+
;+ s the price factor plays major role along with the time of the
issue# e/ery company must specify the proper pricing strategy for
the shares+
6+ Merchant banker also plays a significant role in an IP! process by
operating the IP! and looking into /arious aspects+
3+ In order to succeed in the fund raising through IP! route one has
to be through with DIP guidelines+
5+ s the in/estor protection is important# the company has to ensure
in/estors by offering good prospects in the prospectus+
:+ Before coming to an IP! e/ery company has to ha/e a good track
record of financial performance+
<+ $&BI is the regulator for all IP!Ds it has to ensure its due diligence
in issue of shares+
=+ %he utiliIation of the funds from IP! is significant and as per the
objecti/e mentioned in prospectus+
1?+Listing is important for the company on the stock e.change# so it
has to be done with proper pricing+
Bibliography
%he abo/e information regarding the project has been collected from the
following different sources+
Secondary information
Books referred
In/estment Banking and nalysis+
“In/estment# nalysis and management" by 'rancis+
“$ecurity nalysis" by 4raham and Dodd+
Sites visited
www+sebi+go/+in
www+moneycontrol+com
www+in/estopedia+com
www+reliancemoney+com
doc_267350324.doc