ipo process: an overview sumat singhal. page 2 of 43 objective to give insight into the applicable...

IPO Process: an OverviewIPO Process: an Overview

Sumat Singhal

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Objective

To give insight into the Applicable Guidelines, Issue Process and Critical Issues pertaining

to the Initial Public Offer (IPO).

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Agenda

IPO Size and Promoters Contribution IPO Size and Promoters Contribution

Key RegulationsKey Regulations

Restructuring Restructuring

IPO Valuation Methodology IPO Valuation Methodology

Pre-Issue Placements Pre-Issue Placements

Eligibility and Listing Criteria Eligibility and Listing Criteria

Underwriting Underwriting

IPO Grading IPO Grading

IPO Process and Timeline IPO Process and Timeline

Green Shoe Option Green Shoe Option

Fast Track Issues Fast Track Issues

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IPO – A Complex Process

SyndicateAgreement

OfferorsPoA

Registrars

MoU

UnderwritingAgreement

Prospectus

Software usage agreements with

Stock Exchanges

Depository 3-party

agreements

Red Herring Prospectus

EscrowAgreement

CAN

SyndicateAgreement

ISSUER COMPAN

Y

OfferorsPoA

Book RunnersMOU

ListingAgreements

Listing Agreements

International Wrap

International Wrap

Registrars

MoU

UnderwritingAgreement

Prospectus

Software usage Agreements with

Stock Exchanges

DepositoryTri-party

Agreements

DRHP RHP

EscrowAgreement

CAN

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IPO Process

Price Discovery Finalizing Basis of

Allotment Documentation with

Depositories Credit into Investor

Accounts Listing Approvals from

the Stock Exchanges Post Issue Research

Support for Sustained Coverage

Long term value Creation

Due Diligence Drafting of Prospectus IPO Grading Statutory Approvals Appointing Intermediaries Valuation and Pricing Marketing Strategy Arranging Firm Allotments Circulating Quality Research

Report Printing and Distribution

of Stationery Timing of Issue

Media Strategy for Wide Publicity

Road shows Press

Brokers

Analyst

One to One Meets Analyst Meets / Plant Visits NRI Investors Retail Distribution Advertising campaigns Positioning & Marketing to

Institutional & Retail Investors

Pre IssuePre Issue MarketingMarketing Post IssuePost Issue

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IPO Timeline

Appointment of Merchant Banker

Due Diligence of Company

Preparation of Offer Document

Appointment of Intermediaries

Marketing Strategy Development

SEBI Filing and Observations

Stock Exchanges Formalities

Decide Pricing & File with ROC

Distribution of Stationery

Issue Marketing

Issue Period

Basis of Allotment

Despatches and Payouts

Listing Formalities

Complete Post Issue Reports

W1 W3 W5 W7 W9 W11 W13 W15 W17 W19 W21 W23 W25

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Eligibility Criteria for IPO

Net Tangible Assets

Rs. 3 Crores

(3 Years)

Track Record of Distributable Profits

Sec 205 of Cos. Act

(3 / 5 Years)

Category I

Net Tangible Assets, Profitability and Net Worth Track Record

Net Worth

Rs. 1 Crore

(3 Years)

(a)

Issue through

Book Building Route

at least 50% Allotted to QIBs

(b)

Minimum Post Issued Capital

Rs. 10 crores

Category II

(Companies Not Falling under Category–I)

Participation by

FIs / Banks

>= 15% of Project

(10% from Appraisers)

Compulsory Market Making

>= 2 years

(Min 300 Shares)

+10% Quote end 5% Inventory

OR +

++

OR

IPO Size

<= 5X

Pre-issueNetworth

+

+

Eligibility Criteria for Unlisted Companies

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Exemptions - Eligibility Criteria

Banking Company under Section 5 of Banking Regulation Act, 1949

Correspondent New Bank

Infrastructure Company

whose Project is Appraised by a PFI / IDFC / IL&FS or Bank which was earlier an PFI

5% of the Project Cost is Financed by Appraiser(s) / Institutions Jointly or Severally

Rights Issues

Exemptions from Eligibility Norms

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Issue Size

>= 10% or 25% as the case may be of each kind of securities are offered to the Public through Advertisement in the Newspapers

Minimum Issue Size

10% of Size Offer

Pursuant to Exemption u/s 19 (2)(b) of SCRR, 1957

• Minimum 20 lakh securities to be offered

• Minimum Issue Size of Rs. 100 Crs

• Issue through Book Building

• Allocation of 60% of Issue Size to QIBs

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Promoter’s Contribution

Promoter’s Contribution and Lock-in Requirements

Promoters’ Contribution

Not less than 20% of Post Issue CapitalSecurities Ineligible for Computation of Promoters’ Contribution”• Acquired for consideration other than Cash and Revaluation of

Assets or Capitalization of Intangible Assets in last 3 years

• Bonus Issues out of Revaluation Reserves or Reserves without Accrual of Cash Resources in last 3 years

• Issued to the Promoters at a Price Lower than the IPO Price during the preceding One year from the date of SEBI filing, unless the difference in price is brought in

Lock-in Requirements (Unlisted Companies)

Entire Pre-issue Capital locked-in for One year from date of allotment in IPO or Commencement of Commercial Production, whichever is later. Transfer of Locked-in shares among pre-issue shareholders allowed, provided lock-in continues with transfereePromoter’s holding up to 20% of Post-issue Capital Locked-in for Three years and excess Promoter’s Holding locked-in for One year on LIFO basis

Public Issue by Listed Companies

No requirement for Promoters Contribution if company listed for Three Years and has paid Dividends for last Three Years – In case of Excess over Minimum Promoter's Contribution, will attract Preferential Issue Guidelines

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Key Regulations

Allotment Allotment on Proportionate Basis to all categories

• 50% allocation to QIBs

• 15% to Non-Institutional Investors applying for an amount > Rs. 1,00,000

• 35% to Retail investors applying for an amount of <= Rs. 1,00,000

• Spill-over permitted amongst all above categories including the reserved categories

Bidding Bidding Mandatory on Electronically-linked Platform of the Stock Exchanges

Bidding Terminals at all Centers where there is a Stock Exchange

On-line Display

On-line, Real Time Graphical Display of Demand and Price at the Bidding Terminals is mandatory

Price Discovery

Bidding Permitted by using a Price Band having 20% Range

Price Band during the Bidding Period can be revised within a 20% band, provided Book is kept open for 3 days after Revision

Bidding at different Price Levels Permitted (3 Price Bids)

Retail Investor may Bid at “CUT-OFF”

Book Building Guidelines

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Restructuring

Essential Ingredient of IPO

Complete all Capital Restructuring Exercise before

going to the Market

Promoter / Promoter Group Holdings

Split of Shares (Clause 3.7.1 (i)(a))

• No restriction on Face Value of shares if issue price is higher than Rs.500/- subject to minimum of Re.1/-

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

Consolidation or De-merger of Companies

Holding structure of the Company or Group of Companies

Leverage Position of the Company

Market Prefers a Clean Company and Places Higher Value

Track Record of the Promoters and Associate Companies

Capital and Corporate Restructuring

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IPO Pricing

Valuation Methodology

• Discounting Cash Flows

• Trading Multiple

• P/E Multiple

• EV / EBIDTA

• NAV or Price to Book Value Multiple

• Return on Net worth

• Transaction Multiple

Free Pricing

Differential Pricing

• Firm Allotment to be at a Price equal to or Higher than IPO Price

• Composite Issue

• Public Issue

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Valuation Methodology

Discounted Cash Flow (DCF) Analysis

Trading MultiplesTransaction

MultiplesNet Asset Value

(NAV)

“Fundamental” or “Theoretical” valuation

Estimates firm’s value by discounting expected free cash flows at a rate which reflects the risk of the cash flows

Terminal Value Perpetuity Discount Factor

(The resulting free cash flows at a cost of capital that reflects company specific risk)

“Market” Valuation

Investors view on prospects of an entire industry sector and specific companies

Considerations for peer group include similar size, life of assets and similar management quality

Difficult to establish peer group on account of diverse business activities

“Acquisition” related Valuation

Applies Multiples of related Industry Transactions to the valuation of a business

Measures Premium paid for Acquiring Control and places value on intangible strategic factors

Useful when the historical costs of assets purchased is not comparable to its Current Market Value

NAV is based on Expected Future Cash Flows the market expects from the asset

Two Methods

Replacement Cost

Future Cash Flows

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Pre-IPO Placements

Further Issue of Shares

Company is prohibited to make further issue of Capital after filing a Draft Offer Document with SEBI till the listing of the shares referred in offer document

Now permitted to issue further shares, provided full disclosure in regards to total capital to be raised is given in Draft Offer Document (Circular dated March 31, 2006)

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IPO Grading (Unlisted Companies)

IPO Grading Compulsory from May 1, 2007

Five-point point scale

Higher score indicating stronger Fundamentals and vice versa

All the grades to be disclosed

Activity to run parallel to the filing of draft offer document

Price of the IPO not taken into account for Grading

IPO Grade : Price Matrix

High GradeHigh Price

High GradeLow Price

Low GradeHigh Price

Low GradeLow Price

First IPO Grading

CRISIL Kiri Dyes and Chemicals Ltd – 2/5

(Subscription – 1.3 times)

ICRA SRS Entertainment – 2/5

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IPO Grading (Unlisted Companies)

Business Prospects and Competitive Position• Industry Prospects

• Company Prospects

Financial Position

Management Quality

Corporate Governance Practices

Compliance and Litigation History

New Projects — Risks and Prospects

Key Components of Investment Decision

Fundamental Analysis

Fundamental Analysis

Returns Analysis

Returns Analysis

Investor Preference

Investor Preference

Factors Considered for IPO Grading

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Green Shoe Option

Agreement of Stabilizing Agent with Promoter or Pre-Issue Shareholder for Borrowing Shares for Price stabilization

Excess Allotment upto 15%15% of the Total Issue Size to Stabilizing Agent

Disclosure on :

• Name of SA

• Stabilisation Period : 30 Days

• Maximum increase in Capital in case of Allotment of shares

• Maximum Amount to be received by the Issuer Company in case of Further Allotment

• Separate GSO Account Amount to be Maintained

Stabilisation of Post Listing Price

Step IIIStabilisation Process

Step IIIStabilisation Process

Step IISourcing of Additional

Shares by SA

Step IISourcing of Additional

Shares by SA

Step IOver-allotment

Step IOver-allotment

Security trades Down on Listing

Security trades Down on Listing

Security trades Up on Listing

Security trades Up on Listing

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Fast Track Issue

Clause 2.1.1 and 2.1.2 – Filing of Offer Document Not Applicable

Listed > 3 years w.r.t. Reference Date

Average MCap >= Rs. 10,000 Crs. for One Year (upto previous quarters)

Trading Turnover >= 2% (Six months preceding the month of Reference Date)

>= 95% of Inventors Grievance Redressed (Quarter preceding the month of Reference Date)

Compliance with Listing Agreement – 3 Years

Qualification by Auditors <= 5% Impact on Net Profit (respective year)

No prosecution by SEBI against the Issuer Company’s Promoters and Whole-time Director

Amendment on November 29, 2007

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Fast Track Issue

Promoter Group Holding – 100% Dematerialised Form

Notes :

Reference Date

• Date of Filling of RHP / Prospectus with ROC

Reference Date – Rights Issue

• Date of filling of Letter of Offer with Designated SE

Average MCap –

Daily MCap (of Public Shareholdings)

No. of Trading Days

Thank You…

Sumat Singhal

ipo process: an overview sumat singhal. page 2 of 43 objective to give insight into the applicable...

Documents

ipo grading ipo process

issue process

end dates

agenda ipo size

issue marketing3120055720050

issue period43020055720050

gantt chart tab

initial public offer