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  1. 1. CLARITY AND DISCLOSURE IN THE CAPITAL RAISING PROCESS AT INDIAN CAPITAL MARKET Presented By: mandeep singh vicky gupta varun sawhney
  2. 2. ABSTRACT <ul><li>The regulatory setup in india has come a long way from the days of the capital issues (control) Act in early 1990s to highly advanced and transparent setup. </li></ul><ul><li>Information available to potential investors </li></ul><ul><li>Transparency and variety </li></ul><ul><li>Highly desirable corporate governance signal </li></ul><ul><li>Information revealing </li></ul>
  3. 3. INTRODUCTION <ul><li>The process of raising capital from the capital market presents unique challenges for firms. </li></ul><ul><li>For unlisted firms, the challenges are multiplied manifold because of the information asymmetries that exist between the firm and the outside world. </li></ul><ul><li>Stock exchanges play an important role in minimizing such information asymmetries by formulating a set of regulation which govern the admission of such firms to the stock exchange listing </li></ul>
  4. 4. IPOs PROCESS <ul><li>Two major components of such process are: </li></ul><ul><li>Pricing of shares </li></ul><ul><li>Allocation of shares </li></ul>
  5. 5. PRICING OF SHARES <ul><li>Pricing is done in such a way that on the first day of trading, the share price of the firm is much higher than the offer price thus </li></ul><ul><li>This give the chance to the shareholders to make good profit on their investment </li></ul>
  6. 6. ALLOCATION OF SHARES <ul><li>Stock market allow the underwriters to have full discretion on allocation. </li></ul><ul><li>Usually leads to favoured investors being allocated shares in hot IPOs while the retail investors are usually left out </li></ul>
  7. 7. Initial Public Offer <ul><li>An initial public offering ( IPO ), referred simply as an &quot;offering&quot; or &quot;flotation&quot;, is when a company (called the issuer ) issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. </li></ul><ul><li>In an IPO the issuer may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market. </li></ul>
  8. 8. Reasons for listing <ul><li>The money paid by investors for the newly-issued shares goes directly to the company. </li></ul><ul><li>An IPO, allows a company to tap a wide pool of stock market investors to provide it with large volumes of capital for future growth. </li></ul><ul><li>The company is never required to repay the capital, but instead the new shareholders have a right to future profits distributed by the company and the right to a capital distribution in case of a dissolution. </li></ul><ul><li>Once a company is listed, it will be able to issue further shares via a rights issue, thereby again providing itself with capital for expansion without incurring any debt. </li></ul>
  9. 9. Procedure <ul><li>IPOs generally involve one or more investment banks known as &quot;underwriters&quot;. The company offering its shares, called the &quot;issuer&quot;, enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares. </li></ul><ul><li>A large IPO is usually underwritten by a &quot;syndicate&quot; of investment banks led by one or more major investment banks (lead underwriter). Upon selling the shares, the underwriters keep a commission based on a percentage of the value of the shares sold (called the gross spread). Usually, the lead underwriters, i.e. the underwriters selling the largest proportions of the IPO, take the highest commissions—up to 8% in some cases. </li></ul><ul><li>IPOs typically involve one or more law firms with major practices in securities law. </li></ul>
  10. 10. Top 5 IPOs <ul><li>Agriculture Bank of China (raising a total of $22.1 billion on August 13, 2010after all the allotments were fully exercised.) </li></ul><ul><li>Industrial and Commercial Bank Of China was simultaneously listed on 27 October 2006. The IPO at that time valued at US$21.9 billion. </li></ul><ul><li>Nippon Telegraph and Telephone is a Japanese telecom giant issued its IPO valued US$18.4 billion. </li></ul><ul><li>Visa Inc. $17.9B in 2008 </li></ul><ul><li>AT&T Wireless $10.6B in 2000 </li></ul>
  11. 11. Capital Market <ul><li>A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds (more than one year). </li></ul><ul><li>The capital market includes the stock market (equity securities) and the bond market (debt). </li></ul><ul><li>Classification </li></ul><ul><li>Primary markets – In primary market, new stock or bond issues are sold to investors via a mechanism known as underwriting. </li></ul><ul><li>Secondary markets - In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere. </li></ul>
  12. 12. Indian Stock Markets <ul><li>Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. </li></ul><ul><li>By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850. </li></ul><ul><li>In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87). </li></ul>
  13. 13. Post Independence Growth S.No As on 31 st Dec. 1946 1961 1971 1975 1980 1985 1991 1995 1 No. of Stock Exchanges 7 7 8 8 9 14 20 22 2 No. of Listed Cos. 1125 1203 1599 1552 2265 4344 6229 8593 3 No. of Stock Issues of Listed Co. 1506 2111 2838 3230 3697 6174 8967 11784 4 Capital of Listed Cos. (Cr. Rs.) 270 753 1812 2614 3973 9723 32041 59583 5 Market value of Capital of Listed Cos. (Cr. Rs.) 971 1292 2675 3273 6750 25302 110279 478121 6 Capital per Listed Cos. (4/2) (Lakh Rs.) 24 63 113 168 175 224 514 693 7 Market Value of Capital per Listed Cos. (Lakh Rs.) 86 107 167 211 298 582 1770 5564 8 Appreciated value of Capital per Listed Cos. (Lak Rs.) 358 170 148 126 170 260 344 803
  14. 14. Information Disclosure at the time of IPO <ul><li>It is usually assumed that the developed capital markets professing greater market transparency and better corporate governance. However this is not always true. The Indian IPO process has certain unique institutional features, which are not seen in the developed capital markets. Some of them are as follow - </li></ul><ul><li>Disclosure about the intended use of the issue proceeds from the IPO – it is mandatory for firms to clearly specify (in the IPO prospectus) how much amount they intend to seek for each of the intended activities like modernization, capital expenditure, working capital amongst others. And also have to indicates phase wise expenditure if they intended the use of IPO money for execution of projects in a phased manner. </li></ul>
  15. 15. Continue…. <ul><li>2. Lock up agreements – In India, it is mandatory for the owners of the firms to bring in 20% of the post issue capital themselves, by pledging their shares, which get locked up for a period of three years from the time of the IPO. </li></ul><ul><li>3. Grading – The Indian capital market regulations require an IPO to be graded. Equity grading is unique steps not tried anywhere else in the world. In this, IPOs are graded on the scale of 1 to 5, 1 indicated lowest grade and 5 highest. </li></ul><ul><li>4. Pricing parameters – Indian regulation also requires a disclosure of pricing parameters in the IPO prospectus </li></ul>
  16. 16. IPO Processing- A Comparison with USA & UK IPO process/information INDIA USA UK Intended use of issue proceeds They are disclosed activity wise, phase wise and year wise A broad outline of the intended uses is given-no details on activity, phase or year wise break up. A broad outline of the intended uses is given-not a detailed breakup activity, phase or year wise. Lock up of owner’s equity 20% of owner’s equity gets locked for three years by regulation No requirements No requirements
  17. 17. No such disclosure in the IPO prospectus No such disclosure in the IPO prospectus Disclosure required on P/E ratios, comparison with listed peers, RONW and EPS Pricing parameter of issue No requirements No requirements All IPOs are compulsorily graded on the scale of 1 to 5, where 5 means best Grading UK USA INDIA IPO process/information
  18. 18. What is book Building? <ul><li>Book building is a process fair price discovery. The issuer discloses a price band or floor price before opening of the issue of the securities offered. </li></ul><ul><li>On the basis of the demands received at various price levels within the price band specified by the issuer, Book Running Lead Manager (BRLM) in close consultation with the issuer arrives at a price at which the security offered by the issuer, can be issued. </li></ul>
  19. 19. What is a price band? <ul><li>The price band is a band of price within which investors can bid. The spread between the floor and the cap of the price band shall not be more than 20%. The price band can be revised. </li></ul><ul><li>If revised, the bidding period shall be extended for a further period of three days,subject to the total bidding period not exceeding thirteen days. </li></ul>
  20. 20. How does Book Building work? <ul><li>Book building is a process of price discovery. A floor price or price band within which the bids can move is disclosed at least two working days before opening of the issue in case of an IPO and atleast one day before opening of the issue in case of an FPO. </li></ul><ul><li>The applicants bid for the shares quoting the price and the quantity that they would like to bid at. </li></ul><ul><li>After the bidding process is complete, the ‘cut‐off’ price is arrived at based on the demand of securities. </li></ul><ul><li>The basis of Allotment is then finalized and allotment/refund is undertaken. </li></ul><ul><li>The final prospectus with all the details including the final issue price and the issue size is filed , thus completing the issue process. </li></ul><ul><li>Only the retail investors have the option of bidding at ‘cut‐off’. </li></ul>
  21. 21. HOW DOES “CUT‐OFF” OPTION WORKS FOR INVESTORS ? <ul><li>“ Cut‐off” option is available for only retail individual investors i.e investors who are applying for securities worth up to Rs 1,00,000 /‐ only. Such investors are required to tick the cut‐off option which indicates their willingness to subscribe to shares at any price discovered within the price band. Unlike price bids (where a specific price is indicated) which can be invalid, if price indicated by applicant is lower than the price discovered, the cut‐off bids always remain valid for the purpose of allotments to retail investor. </li></ul>
  22. 22. BOOK BUILDING ACTIVITY OF OMNITECH Book building of omnitech No . Of times issue is subscribed As on date QIBs Non institutional Retail Employee Day 1 – 19 July 1.4226 0.1824 0.178 0 Day 2 -20 July 1.4226 0.3577 0.2813 0 Day 3- 23 July 2.8451 0.3779 0.1692 0 Day 4- 24 July 7.848 0.4078 2.8663 0.8887 Day 5 -July 25 61.755 108.6629 108.6629 1.5926
  24. 24. PRICE OBTAINING TECHNIQUE <ul><li>Dutch auction technique (DAM) </li></ul><ul><li>French auction method (FAM) </li></ul><ul><li>Since 2005, listing regulation in india mandate that the book built demand must be shown live on the web-site of the two main stock exchange in india. </li></ul><ul><li>The live book building in india also shows the category wise investment after the close of every day of book building of the IPOs. </li></ul>
  25. 25. CONCLUSION <ul><li>Almost a quarter of the GDP is attributable to household saving, transparency in capital market would encourage greater participation of small investor. It would also safeguard their interest. </li></ul><ul><li>In developed markets the pricing and allocation of shares in an IPO is done behind closed door. However in india, this process is shown live on the stock exchanges. </li></ul><ul><li>The live demonstration of the book building process ensures greater welfare of the uninformed investors who can use the information to make informed decisions on their investment </li></ul>