initial public offering
DESCRIPTION
Initial public offering explainTRANSCRIPT
Initial Public Offering(IPO)
The Ultimate Dream of an ENTREPRENEUR
A $100 billion company Around 10 billionaires
Youngest Billionaires
• Health and Nutrition products• Gym Services• Registered as a Pvt. Ltd. Firm• In operation for 3 years• Small manufacturing facility worth `1.2
crore and Gym worth `1.8 crore, total tangible assets around `3 crore.
Oorja Health & Nutrition Pvt. Ltd
Grow
• Huge demand for its products and service• There is an opportunity for expansion• Needs capital
– Around ` 6 crore for expanding gym services– Around ` 4 crore for health product plant
• Founders are hardworking middle class MBA graduates but don’t have enough money for expanding their company
• Business loan around 22% + 2.5% as processing charges, way to costly
• Private investors loss of control with major equity dilution
What can it do?
Outline
What is an IPO ?
Why does the company get listed ?
How does the IPO happen ?
Pricing of the IPO.
Practical demo from a retail investor side.
Present scenario.
Grey Market of IPOs.
Outline
What is an IPO ?
Why does the company get listed ?
How does the IPO happen ?
Pricing of the IPO.
Practical demo from a retail investor side.
Present scenario.
Grey Market of IPOs.
An IPO or an initial public offering is the first sale of ownership units of a company or
shares to general public which can then be traded on a stock exchange.
What is an IPO ?
• The company raises money, this money is the capital which is not required to be repaid
• A private company gets converted into a public company
• It gets listed on the stock exchange– Shares can be traded on the stock exchange
• Investors are able to buy shares of the company for the first time
OutlineWhat is an IPO ?
Why does the company get listed ?
How does the IPO happen ?
Pricing of the IPO.
Practical demo from a retail investor side.
Present scenario.
Grey Market of IPOs.
• To raise capital for growth• Working capital• Monetize investment of the promoters and
early private investors• Easier and multiple access to finance• Diversifying the investor base• Employee compensation
Why does the company get listed ?
Our company finds this as the best possible solution to raise money with the advantages
listed out earlier
Oorja Health & Nutrition Pvt. Ltd
Outline
What is an IPO ?
Why does the company get listed ?
How does the IPO happen ?Pricing of the IPO.
Practical demo from a retail investor side.
Present scenario.
Grey Market of IPOs.
How does the IPO happen ?
1• Approval of Board of Directors/Initial Procedure
2• Appointment of Lead Managers/Underwriters
3• Filing the prospectus with SEBI
4• Filing the prospectus with the registrar of
Companies
5• Filing of initial listing application
6• Promotion of the Issue
7• Statutory Announcement
8• Collections of Applications
9• Processing Applications
10• Establishing underwriters’ liability
11• Allotment of shares
• Approval by board of directors
Eligibility Criteria• Registered as a private Ltd company for 3
years• Regulation 26(1)(a) Net tangible assets of
at least Rs. 3 Crore not more than 50% in Monetary assets
• Minimum post issue face value is Rs. 10 crores
1• Approval of Board of Directors/Initial Procedure
• Approved by the founders who are directors of the company
• Registered as a Pvt. Ltd. Firm• In operation for 3 years• Small manufacturing facility worth Rs. 1.2
crore and Gym worth Rs. 1.8 crore, total tangible assets around Rs. 3 crore.
Oorja Health & Nutrition Pvt. Ltd
• Underwriters: The underwriters which are the Investment banks take the risks of distributing the shares i.e. should they not be able to find investors for the shares they have to hold the shares.
E.g. Goldman Sachs, Morgan Stanley
Deutsche Bank,
ICICI Securities, SBI capital markets
2• Appointment of Lead Managers/Underwriters
• Underwriters works as a liaison (dealer), finding buyers for the shares that their client is offering
• Help in Valuation of the company• Take the risk on behalf of the company
who wants to gets listed• Big issues by a consortium of banks• Fees for underwriting
What information do the underwriters need ?
• Throughout the IPO process the underwriters– ask for financial projections– Historical performance– Budgeting and forecasting process– Market share
Valuation of the Company
• Discounted Cash Flow Method• Adjusted Net Asset Value Method• Multiple Value Method• Statutory Valuations
Discounted Cash Flow Method
Concept of Time Value of Money: It’s the value of money with a given amount of
interest earned or inflation accrued over a given amount of time.
Time Value of Money
=
=Today
After 5 years
Time Value of Money
=
=Future value (5 years)
Present Value
Oorja Health & Nutrition Pvt. Ltd
The company hires Deutsche Bank as its underwriter
Valuation of Oorja Pvt. Ltd.After 5 years company will cumulatively earn
` 90 Crore
It has assets of around ` 10 crore
The rate at which the company would grow
20%
2018 2017 2016 2015 20140.0
20.0
40.0
60.0
80.0
100.0
120.0
Valuation
Valuation
Year
Cro
res
` 40 Crore
A red herring prospectus is a document submitted by company as part of the public offering of ownership units to the Registrar
of Companies and SEBI (Securities and Exchange Board of India)
3• Filing the prospectus with SEBI
4• Filing the prospectus with the registrar of
Companies
Red Herring Prospectus Contents
1. Purpose of issue
2. Disclosure of any option agreement
3. Underwriter’s commissions and discounts
4. Promotion expenses
5. Net proceeds
6. Balance sheet
7. Earnings statements of last 3 years
8. Names and address of all officers, directors
9. Copy of under writing agreement
10.Legal opinion on the issue
11.Copies of Articles of incorporation
• Initial Listing Application with the concerned stock exchanges with the listing fees
5• Filing of initial listing application
6• Promotion of the Issue
7• Statutory Announcement
• Promotional Campaign and roadshows
• Approval from stock exchanges and disclosures
8• Collections of Applications
9• Processing Applications
10• Establishing underwriters’ liability
11• Allotment of shares
The Auction Process
• Traditional Book Building
• Fixed Price Method
Traditional Book Building• The lead underwriter of the deal determines a price range of the
offering through frequent contacts with investors as well as their own valuations
• Then during the road show process, orders for the shares are taken—investors invited to the road show can state the quantity of shares they are interested in acquiring, and the price they are willing to pay per share
• These orders are compiled to “build a book” and eventually used to determine the final offering price and allocations
Dutch Auction
• Company wants to issue 1000 shares through IPO
• Potential investors specify how many shares they want and how much are they willing to pay per share
Company discovers the “Clearing Price” at which it couldsell all of its 1000 shares.
Accounting Treatment
Outline
What is an IPO ?
Why does the company get listed ?
How does the IPO happen ?
Pricing of the IPO.Practical information from a retail investor
sidePresent scenario.
Grey Market of IPOs.
• Retail Individual Investor : means an investor who applies or bids for securities of value not more than Rs. 2,00,000/-
• Qualified Institutional Buyer(QIB) :– Public financial institution as defined in section 4A of the
Companies Act, 1956– Scheduled commercial banks– Mutual funds/venture funds/insurance companies/provident
funds – Foreign Institutional Investor(FII) registered with SEBI
• Non qualified Institutional Buyer : an investor who bids for an amount above Rs. 2,00,000/- but does not fall in the QIB
category e.g. HNI investors.
Type Of Investors
Factors to watch as a retail investor before investing in IPOs
• Get to know the promoters ,their background and experience• What is the lock-in period of promoter share holding?• How has been the performance of the company and are the
financials, specially the recent ones, reliable?• What is the objective of the issue?• What has been the utilization of existing capacity?• What are the key risk factors ?
How to apply in an IPO ?
• Non ASBA route • ASBA route
Demat account
• Account where securities are stored in electronic form• Safe and convenient way of holding securities• Securities can be transferred at an instruction immediately without
any stamp duty to be paid on it • It results in significant reduction in paperwork, transaction costs and
time spent• Four major charges usually levied on a Demat account: Account
opening fee, annual maintenance fee, custodian fee and transaction fee
Demat account snapshot
Applying through non ASBA route
Application supported by blocked amount (ASBA)
• It is a payment procedure to pay for the shares you buy through an offering without paying anything before the allotment of shares
ASBA Procedure
Benefits of ASBA over traditional cheque route
• No loss of interest• Enhances the transparency of the share allotment process• Amount for which no shares have been allotted is available
immediately on completion of allotment process• No need to wait for the amount to be refunded• Multiple bidding facility available• Customer can revise/withdraw the bid
If I get an allotment, how much and when should I sell?
• There is no perfect answer. Exit depends upon your investment policy. Best is to set a target
• If you treat IPOs as a pure trading opportunity , sell upon listing if profits are available
• If you are convinced about a company, do not sell in panic if it lists below the offer price
• If you invest in an IPO not to buy a trading instrument but to own a part of that business, then hold on
Outline
What is an IPO ?
Why does the company get listed ?
How does the IPO happen ?
Pricing of the IPO.
Practical demo from a retail investor side.
Present scenario
Grey Market of IPOs.
Largest IPO in India And World
Worth Rs. 15000 CroreAround $22 billion
Or ` 130000 Crores
Largest IPOs in 2012-2013
` 950 crore ` 609 crore
` 4500 crore
Return over Investment over 3 years
` 10000 ` 10960 9.6%
` 10000 ` 6340 36.6%
Such Negative Return because string of IPOs losing money
In Dec 2012• Bharti Infratel• PC Jewelers• Care• Veto Switch• Tara Jewels
In October 2011• Vaswani Industries• M and B Switch• Flexituff• Taksheel• Onelife Capital
Financial Crisis started in 2008
IPO Scams
No confidence in stocks
Gold Price Slump
Thank you