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Initial public offering

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Initial public offering

  1. 1. INITIAL PUBLIC OFFERING By:- Karan Singh
  2. 2. WHAT IS INITIAL PUBLIC OFFERING?  Public offering in which shares of stock in a company are sold to institutional investors  Which is then sold to the general public on a security exchange  Through this a private company transforms into a public company  Is also known as Stock Market Launch
  3. 3. WHY IPO…??  Funding capital requirements for organic growth  Financing working capital requirements  IPO’s are often used to do finance acquisitions  Repaying debt to strengthen the balance sheet  Retention and incentive for Employees through stock options
  4. 4. DISADVANTAGES OF IPO  Promoter have to give up control and answer to shareholders with quarterly earnings report  Public disclosure of information which can be useful to competitors, suppliers, etc  Time, effort and attention required of senior management  Always a risk that required funding might not be raised
  5. 5. DEBT VS. IPO
  6. 6. WHEN IPO AND WHEN DEBT..?  Borrow money from someone  Pay a fixed rate of interest and also repay the principle  High risk  Mostly bonds  Short-term targets  Take money and offer partnership  Dividends among the shareholders  Low risk  Exiting of investors  Long-term targets  Mergers and Acquisitions DEBT IPO
  7. 7. ELIGIBILITY FOR IPO  Net tangible assets of at least Rs.3 Crore of the preceding three years  Minimum of Rs. 15 crore as average pre-tax operating profit in at least three years  Net Worth of at least 1 crore in each of the preceding three years  The issue size should not exceed 5 times the pre- issue net worth
  8. 8. IPO PROCESS  Company hires investment bank (I.B) to do the underwriting  Underwriters act as intercessors between the public, who are investing and the companies  Company and I.B negotiate the money that company wants to raise and type of security to be issued  I.B sets a registration statement which will be submitted to SEBI
  9. 9. IPO PROCESS  SEBI needs a cooling off period during which it will examine all the submitted documents  During the cooling off period underwriter publishes an initial prospectus  After approval a date will be fixed in which company will offer the stock to public  The company and underwriter decide the price of the stock
  10. 10. UNDERWRITER  A company that administers the public issuance and distribution of securities from a corporation  Works closely with the issuing body to determine the offering price of the securities  Buys them from the issuer  Sells them to investors via the his distribution network.
  11. 11. Two Types Of IPO Issues Fixed Price Issues Book Building Issues
  12. 12. FIXED PRICE ISSUE  Issuer company freely prices the issue  Price is disclosed in the offer document  Details are also mentioned justifying the issue price  Only one price in which issue will be offered
  13. 13. BOOK BUILDING ISSUES  Price is discovered not fixed  Issuing company arrives at a price band  Lowest price is known as floor price and highest price is known as cap price  Applicants bid for the shares  The final price is then discovered based on the bids
  14. 14. REVERSE BOOK BUILDING  The overall framework for voluntary delisting from stock exchanges is reverse book building  Promoter appoints a merchant banker and a trading member for placing bids  Public announcements and letters along with bidding form are dispatched to shareholders  The final price is determined at which maximum shares are offered  Once the promoter agrees to the final price the shareholders tender shares to the promoter
  15. 15. RED HERRING PROSPECTUS(RHP)  Document submitted as a part of public offering  A red herring prospectus contains most of the information pertaining to the company’s operations and prospects  Does not include key details of the issue such as its price and the number of shares offered  An issuer can state the issue size and the number of shares are determined later  Upon registration becoming effective, the final prospectus includes the final price and shares issued
  16. 16. GREENSHOE OPTION  Legally referred to as an over-allotment option  Allows underwriters to sell investors more shares than originally planned by the issuer  Done if demand for a security issue proves higher than expected  The green shoe can not be more than 15% of the original number of shares offered  Greenshoe can provide additional price stability to a security issue

Editor's Notes

  • If there has been a change in company’s name then 50% of the revenue for preceding 1 year should be from new activity denoted by the new name
  • Not agreeing on the final price, the offer shall be deemed and the company remains listed
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