IPO Process: an Overview

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IPO 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 Process and Timeline
Eligibility and Listing Criteria
IPO Size and Promoters Contribution
Key Regulations
Restructuring
IPO Valuation Methodology
Pre-Issue Placements
Underwriting
IPO Grading
Green Shoe Option
Fast Track Issues
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IPO A Complex Process
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IPO Process
Pre Issue
Marketing
Post Issue

• 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

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IPO Timeline
W1 W3 W5 W7 W9
W11 W13 W15 W17 W19
W21 W23 W25
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Eligibility Criteria for IPO
Eligibility Criteria for Unlisted Companies
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)
IPO Size lt 5X Pre-issue Networth



(b) Minimum Post Issued Capital Rs. 10 crores
Category II (Companies Not Falling under
CategoryI)
(a) Issue through Book Building Route at least
50 Allotted to QIBs

OR
OR
Compulsory Market Making gt 2 years (Min 300
Shares) 10 Quote end 5 Inventory
Participation by FIs / Banks gt 15 of Project
(10 from Appraisers)

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Exemptions - Eligibility Criteria
Exemptions from Eligibility Norms

• Banking Company under Section 5 of Banking
  Regulation Act, 1949
• Correspondent New Bank
• Infrastructure Company
• whose Project is Appraised by a PFI / IDFC /
  ILFS or Bank which was earlier an PFI
• 5 of the Project Cost is Financed by
  Appraiser(s) / Institutions Jointly or Severally
• Rights Issues

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Issue Size
Minimum Issue Size

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

• 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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Promoters Contribution
Promoters Contribution and Lock-in Requirements
Promoters Contribution Not less than 20 of Post Issue Capital Securities 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 transferee Promoters holding up to 20 of Post-issue Capital Locked-in for Three years and excess Promoters 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
Book Building Guidelines
Allotment Allotment on Proportionate Basis to all categories 50 allocation to QIBs 15 to Non-Institutional Investors applying for an amount gt Rs. 1,00,000 35 to Retail investors applying for an amount of lt 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
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Restructuring
Capital and Corporate 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

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IPO Pricing

• Free Pricing
• Differential Pricing
• Firm Allotment to be at a Price equal to or
  Higher than IPO Price
• Composite Issue
• Public Issue

• 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

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Valuation Methodology
Discounted Cash Flow (DCF) Analysis Trading Multiples Transaction Multiples Net Asset Value (NAV)
Fundamental or Theoretical valuation Estimates firms 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
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)
Factors Considered for IPO Grading

• Business Prospects and Competitive Position
• Industry Prospects
• Company Prospects
• Financial Position
• Management Quality
• Corporate Governance Practices
• Compliance and Litigation History
• New Projects Risks and Prospects

Key Components of Investment Decision
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Green Shoe Option
Stabilisation of Post Listing Price

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

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Fast Track Issue
Amendment on November 29, 2007

• Clause 2.1.1 and 2.1.2 Filing of Offer Document
  Not Applicable
• Listed gt 3 years w.r.t. Reference Date
• Average MCap gt Rs. 10,000 Crs. for One Year
  (upto previous quarters)
• Trading Turnover gt 2 (Six months preceding the
  month of Reference Date)
• gt 95 of Inventors Grievance Redressed (Quarter
  preceding the month of Reference Date)
• Compliance with Listing Agreement 3 Years
• Qualification by Auditors lt 5 Impact on Net
  Profit (respective year)
• No prosecution by SEBI against the Issuer
  Companys Promoters and Whole-time Director

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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

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Thank You

• Sumat Singhal