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PRICING MECHANISM OF AN IPO

SUBMITTED BY:

VAIBHAV TIWARI (45)

ANKITA BAHL (65)

MANISHA SINGH (79)

VARTIKA SAXENA (165)

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CONTENTS

Pricing mechanism Book building process Steps involved in book building process SEBI’s guidelines Types of book building process Greenshoe option About CIL French auction

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INITIAL PUBLIC OFFERINGS

The primary market instrument wherein securities of a

business entity are sold out to the investors, for which the

investors invest their money for generating a positive return

with listing in the secondary market.

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PRICING MECHANISM

The pricing mechanism in an IPO basically deals with fixing

a price for allotment of stocks to the given investors.

Book Building Method

Fixed Price Method

Auction Method

Dutch Auction Method

French Auction Method

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BOOK BUILDING PROCESS

SEBI guidelines, 1995 defined book-building as “a process

undertaken by which a demand for the securities

proposed to be issued by a body of corporate is elicited

and built up and the price for such securities is assessed

for the determination of the quantum of such securities to

be issued by means of a notice, circular, advertisement,

document or information memoranda or offer document”.

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BOOK BUILDING PROCESS CONTD…

It was introduced by SEBI on recommendations of Mr. Y.H. Malegam in October 1995.

It is most practical, fast and efficient management of Mega Issues. Book Building involves sale of securities to the public and the institutional bidders on the basis of predetermined price range.

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Steps involved in the Book Building Process

Nominate Book Runner

Form Syndicate of Brokers, Arrangers, Underwriters, Financial Institutions, etc.

Submit Draft Offer Document to SEBI without mentioning Coupon Rate or Price

Circulate offer Document among the Syndicate Members

Ask for Bids on Price and Quality of Securities

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Aggregate and forward all offers to Book Runner

Run the Book to maintain a record of Subscribers and their Orders

Consult with Issuer and Determine the issue Price as Weighted Average of the Offers Received

Firm up Underwriting Commitments

Allot Securities Among Syndicate MembersSecurities Issued and ListedTrading Commences on Exchanges

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SEBI’s Guidelines

After the price has been determined on the basis of bidding, statutory public advertisements for a continuous three days containing, inter alia, the price as well as a table showing the number of securities and the amount payable by an investor, based on the price determined, shall be issued and the interval between the advertisement and issue opening date should be a minimum of five days.

The draft prospectus to be circulated has to indicate the price band within which the securities are being offered for subscription. The bids have to be within the price bands. Bidding is permissible only if an electronically-linked transparent facility is used. An issuing company can also fix a minimum bid size. An initial bid can be changed before the final rate is determined.

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TYPES OF BOOK BUILDING PROCESS

The Companies are bound to adhere to the SEBI’s guidelines for book building offers in the following manner:1. 75 per cent Book-Building Process2. 2. Offer to Public through Book-Building

Process

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Recent Trends in India

A transparent mechanism…. Number of Mega issues including many

well established…..

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GREENSHOE OPTION

The GSO means “an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilising mechanism through a stabilising agent (SA).”

Basically a process of stabilising demand and supply imbalances.

A book runner is appointed as stabilising agent(SA).

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Book Building process aims at fair pricing of the issue which is supposed to emerge out of offers made by various investors.

“Is it the right mechanism?”- As a floor price is fixed below which bidding cannot be done.

India has not reached the stage of development of the institutional framework to experiment with the book building process because retail investors (i.e. individual investors) are still now an integral part of Indian capital market. If the interests of the small investors are not safeguarded appropriately, this may be very dangerous to the primary capital market.

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COAL INDIA LIMITED

Coal India Limited is the largest coal producing company in the world, based on raw coal production of 431.26 million tons in fiscal 2010.

As of March 31, 2010, Coal India operated 471 mines in 21 major coalfields across eight states in India, including 163 open cast mines, 273 underground mines and 35 mixed mines

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COAL INDIA LIMITED CONTD…

ISSUE PERIOD: OCT 18 – 21 OCT, 2010 (TILL OCT 20 FOR QIBs)

PRICE BAND: RS. 225 - 245

ISSUE SIZE: 631,636,440 equity shares of face value of Rs. 10 each

IPO GRADING/AGENCY: CRICIL 5/5

BOOK RUNNING LEAD MANAGERS: CITI GROUP, DEUTSCHE BANK, BofA

Merrill Lynch, ENAM, KOTAK, MORGAN STANLEY.

REGISTRAR TO THE OFFER: Link Intime India Private Limited

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COAL INDIA LIMITED CONTD..

ISSUE TYPE: 100% BOOOK BUILDING

OBJECT: Divestment. The Company will not receive any proceeds from the issue.

DATE OF LISTING: 04/11/2010

EXCHANGES: BSE and NSE

PROMOTER OF THE COMPANY : The President of India, acting through the ministry of coal, government of India

It was subscribed 15.28 times, including major contribution from qualified institutional buyers (QIBs) followed by non-institutional investors (NIIs) and retail investors.

The government's stake is 89.99% post the issue

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The Refund Orders were decided to be dispatched to the address of the investors as registered with the depositories on or before 2 November, 2010

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FRENCH AUCTION MODEL

Recent FPOs like NTPC, REC and NMDC followed this model for their pricing.

Under this alternative book building model, institutional buyers would be free to bid above a certain floor price and the allotment would be on price-priority basis and at differential prices.

The model seeks to get higher valuation of the institutional part of the shares.

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