Initial public offers and due diligence the role of a investment banker conducted at kotak securities ltd

2. Company is committed to achieve profitable progress, consistently.Company freely shares investment experience across all ages and strata of society to encourage wise investment for a better future.

3. Company understands and respects customer needs to consistently deliver total quality solutions through constant skills up gradation

5. COO-chief operating officer

6. CTO-chief Technological officer

7. CMC-chief manager corporate commodities

8. CWC-chief officer wealth centre

10. Company continues to achieve cost efficiencies through the application of technology.

11. Kotak is a charter member of the financial planning standards board of India and is one of the largest brokers in the country.

12. It is listed on the BSE & NSE and its market capitalization is over Rs.777.6 crores

13. It is the first Indian stock broking company to commence domestic retail brokerage operations in any foreign country through its joint venture

14. Kotak renders quality equity trading services.

15. It launched branches exclusively for women investors.

16. It brand is popular and the brand image can be capitalised.

17. It has well experienced staff and good infrastructure.

18. It follows corporate governance norms and adopts best management practices.

19. Wide number of products and services and also branches.

21. Many of their competitors have significantly greater financial, technical, marketing and other resources than available to Kotak.

22. Unable to compete with the brokerage rates of their competitors.

23. Less number of branches in north India.

24. Lack of efficient and effective strategies in attracting customers.

26. Trapping new markets.

27. Target the rural and sub urban areas.

28. Growing India economy opens up huge market for stock broking companies.

29. Company believes that their culture helps to attract and retain the best talent.

30. Company is committed to achieve profitable progress consistently

31. The manifold increase in capital mobile station from the primary market.

32. Increase the resource mobilization by mutual funds

33. Phenomenal growth in secondary market volumes.

34. THREAT:

35. The stock broking industry has recently witnessed intense competition falling brokerage rates & the entry of several big player. Increased level of competition is a cause of concerns.

36. Competition from financial institution like banks investing firms etc.

37. Uncertainty in the market.

38. Changes in India political economic conditions.

39. Changes in government polices and regulation.Dependency on international market CHAPTER 3<br /> REVIW AND LITRATURE<br /> <br /> <br /> <br />REVIEW AND LITRATUER <br />2.2 What is an IPO?<br />An IPO or an Initial Public Offer is a company's first sale of equity shares to general public. Shares offered in an IPO are often, but not always, those of newly set up companies seeking outside equity capital and a public market for their shares. <br />“An initial public offer is an equity product that allows you to buy cheap tomorrow’s possible winners”<br /> -George Mathew<br />An Initial Public Offering (IPO) can be a good investment avenue for equity investors. While the IPO market is dry these days, a fresh crop is expected soon. Let us take five minutes to understand IPOs and to decide whether to invest in them or not. <br />Suppose your friend owns a business, his company is profitable and he wants to grow the company faster. For this he needs money. Instead of debt, he wants to offer a part of his company for sale in the stock market. He will make, what is called, a ‘public offer’ of shares (after a number of procedures and regulatory processes). If the issue is successful, his company will ‘list’ or begin to trade in a stock exchange. So, an IPO is a fresh offer, where a company that is not yet trading, wants to sell shares directly to the investors. The shares can be offered ‘at par’, that is, at face value of Rs 2 Rs 5 or Rs 10, or at a premium. After this, your friend is no longer the only owner but will have ‘diluted’ his share. The ‘owners’ of the company may now be thousands of people he may not even know. Yet, if he holds the majority shares, he will still take all the decisions about the company. All the share holders are now entitled to vote, may get dividends and bonuses. They also have the option to exit from the shares by selling their stock in the secondary market, making a capital appreciation or loss as the price changes from the issue price. <br />Why may a Company need an IPO?<br /> To meet short-term requirements, the company may approach banks, lenders or may even accept fixed deposits from the public/shareholders. To meet its long-term requirements, funds can be raised either through loan from lenders, Banks, Institutions etc., (which carry financial burden) or through the issue of capital. Capital can be raised through private placement of shares, public issue, rights issue, etc. Public Issue means raising funds from the public. Promoters of the company may have plans for the company that may require infusion of money. The main purpose of the public issue, amongst others, is to raise money through the public and to get its shares listed at any of the recognized stock exchanges in India. The following may be some other reasons for a company to go public:<br />Raising funds to finance capital expenditure programs like expansion, diversification, modernization, etc;<br />Financing of increased working capital requirements;<br />Financing acquisitions like a manufacturing unit, brand acquisitions, tender offers for shares of another firm, etc;<br />Debt financing ;<br />Exit route for exiting investors. <br /> An IPO has two sides to it, consisting of advantages and disadvantages. Moreover, it needs to be balanced, and this is done by the Regulatory Bodies such as The Securities and Exchange Board of India (SEBI), so that it does not fall on one side. Due to this property of an IPO, it has been referred to as a “Coin” in this report. <br />What are the two sides of IPO coin?<br />AdvantagesDisadvantagesMoney non-refundable except in the case of winding up or buy back of shares No financial burden i.e. no fixed rate of interest payable. However, in order to service the equity, dividend may be paid. Enhances shareholder's value if the company performs well Greater Transferability Trading & Listing of securities at stock exchanges Better Liquidity of securities Helps building reputation of promoters, company & its products / services, provided the company performs well Time consuming process Expensive Several Legal formalities. Involvement of many intermediaries Transparency Requirements and public disclosure of information may lead to lack of privacy Continuous Compliance of provisions of listing agreement and other legal requirements Constant scrutiny of performance by investors May lead to takeover of the company Securities of the company may be made subjective to speculative attacks. <br />How is the “coin” made to balance (Controls)?<br />Applicable Laws<br />A Company is required to comply with the following laws in connection with a public issue:<br />Provisions of The Companies Act, 1956 <br />Securities Contracts (Regulations) Act, 1956 <br />SEBI Rules & Regulations <br />Compliance to the Listing Agreement with the concerned stock exchanges after the listing of securities. <br />RBI regulations in case of foreign/NRIs equity participation. <br />The Regulatory Framework<br />Up to 1992, the Controller of Capital Issue (CCI) formed under the Capital Issues Control Act controlled the capital primary market. The premium on issue of equity shares issued through the primary markets was done in accordance with the Capital Issues Control Act.<br />The CCI guidelines were abolished with the introduction of Securities & Exchange Board of India (SEBI) .The SEBI Act came into force on 30th January, 1992 and with its establishment, all public issues are governed by the rules & regulations issued by SEBI.<br />SEBI – The Regulatory Body<br />SEBI was formed to promote fair dealing in issue of securities and to ensure that the capital markets function efficiently, transparently and economically in the better interests of both the issuers and the investors.<br />The promoters should be able to raise funds at a relatively low cost. At the same time, investors must be protected from unethical practices and their rights must be safeguarded so that there is a steady flow of savings into the market. There must be proper regulation and code of conduct and fair practice by intermediaries to make them competitive and professional.<br />Since its formation, SEBI has been instrumental in bringing greater transparency in capital issues. Under the umbrella of SEBI, companies issuing shares are free to fix the premium, provided adequate disclosure is made in the offer documents.<br />The greater focus being investor protection, SEBI has become a vigilant watchdog.<br />2.3 Role of Intermediaries<br />Many intermediaries are involved in connection with the public issue. The following are the intermediaries who have to be registered with SEBI and must have a valid certificate from SEBI to act as intermediaries: -<br />Investment Bankers <br />Registrar and Share Transfer Agents <br />Bankers to the Issue <br />Underwriters <br />Stock Brokers and Sub Brokers <br />Depositories <br />Investment Bankers play the most vital role amongst all intermediaries. They assist the company right from preparing the prospectus to the listing of securities at the stock exchanges. Investment Bankers play a fiduciary role between SEBI, the Client Company and the investors. Investment Bankers also have to verify the correctness and propriety of all the information provided in the prospectus. It is mandatory for them to carry out Due Diligence for all the information provided in the prospectus and they must issue a certificate to this effect to SEBI. A Company may appoint more than one Investment Banker provided Inter-Se Allocation of Responsibilities between the Investment Bankers is properly structured.<br />Underwriters are those intermediaries who underwrite the securities offered to the public. In case there is under subscription, underwriters subscribe to the unsubscribed amount so that the issue is successful. Before the opening of the Issue, decisions such as who will be the underwriter and what amount can be underwritten have to be taken. This information must be disclosed to not only the Regulatory Framework, but also to the investors.<br />Registrar & Share Transfer Agents processes all applications received from the public. Invalid applications have to be rejected, and the valid ones considered. At times, there may be an oversubscription. In such cases, they must arrive at a valid basis of allotment of shares among the applicants. They handle the dispatch of share certificates and refund orders.<br />Bankers to the Issue are banks that accept application from the public on behalf of the company. These applications are then forwarded to the Registrar and Share Transfer Agent for further processing.<br />Stock Brokers & Sub-Brokers are those intermediaries who, through their contacts, invite the public for subscribing shares for which they get commission. The stockbrokers and Sub Brokers play an important part in the distribution of shares to the public, and need to also be informed about the company and its performance.<br />Depositories are the intermediaries who hold securities in dematerialized form on behalf of the shareholders.<br /> <br />SEBI lays down guidelines and regulations for all the above intermediaries. The main purpose is to maintain discipline and transparency in the Issue Process. The intermediaries, in turn, are bound to adhere to the guidelines and rules put down by SEBI.<br />2.4 The Investment Banker Enters<br />The Investment Banker must prove his competence to his clients and show his areas of core competency to attract clients. Moreover, he must do so while adhering to the strict regulatory framework put down by SEBI, The Companies Act, The Government, and other regulatory bodies. Therefore, the only way for him to strive to stay in the competition and be among the best is neither through great innovations or entrancing creativity, but rather through just being excellent at his job.<br /> <br />The following illustration is an attempt to depict the role of an Investment Banker:<br />REGULATORY BODIES<br />Compliance to Regulatory Framework<br />INVESTORISSUERINVESTMENT BANKER<br />Capital Market Info.<br />Interest Protectn.<br />The Investment Banker plays a vital role in channeling the financial surplus of the society into productive investment avenues. The Investment Banker has a fiduciary role in relation to the investors. He has to ensure that only quality paper emanates from his firm. He is required to exercise due diligence to ensure the adequacy and appropriateness of the disclosures made in offer document.<br />The Investment Banker is the leader among all the intermediaries associated with the issue. He is required to guide and co-ordinate the activities of the Registrar to the issue, Banker to issue, Advertising Agency, Printers, Underwriters, Brokers, etc.<br />The Investment Banker has to ensure the compliance of all the laws and regulations governing the securities market. He may also be called upon to assist the statutory authorities in developing a regulatory framework for the orderly growth of capital markets. <br />General Obligations and Responsibilities<br />The Investment Banker must meet the following general obligations and responsibilities:<br />Every Investment Banker must abide by the code of conduct as specified by SEBI.<br />An Investment Banker should not carry on any business other than that in the securities market. An exception to this rule is a bank or a public financial institution that has been granted a certificate of registration under these regulations.<br />Every Investment Banker must maintain his own books of accounts, records and documents. This includes the balance sheets, Profit and Loss Accounts, Copy of Auditor’s Report, Statements of Financial Position, etc. This must also be easily accessible to SEBI. This must be done so that SEBI can monitor the capital adequacy of the Investment Banker.<br />All issues should be managed by at least one Investment banker functioning as the lead Investment banker.<br />Every lead Investment banker must enter into an agreement with his client company and other Investment Bankers setting out their mutual rights, liabilities and obligations relating to such issue and in particular to disclosures, allotment and refund, before taking up the assignment relating to an issue. <br />Size of IssueNo. of Investment bankersLess than Rs. 50 CroresTwoBetween Rs. 50-100 CroresThreeBetween Rs. 100-200 CroresFourBetween Rs. 200-400 CroresFiveAbove Rs. 400 CroresFive or more as may be agreed by SEBI<br />Where there are more than one lead Investment Banker to the issue, the responsibilities of each such Investment Banker must be clearly demarcated and a statement furnished to SEBI.<br />A Lead Investment Banker cannot manage the issue of any associated Body Corporate.<br />A Lead Investment Banker cannot associate with any other Investment Banker without registration under SEBI.<br />The Investment Banker may even have to accept Underwriting obligations in some cases.<br />The lead Investment banker, who is responsible for verification of the contents of the prospectus in respect of an issue and the reasonableness of the views expressed therein, must submit to SEBI at least two weeks prior to the opening of the issue for subscription, a Due Diligence Certificate.<br />The Lead Investment Banker must submit the Particulars of the Issue, the Draft Prospectus and any other literature intended to be circulated among the shareholders.<br />The lead manager undertaking the responsibility for refunds or allotment of securities in respect of any issue must continue to be associated with the issue till the subscribers have received the share certificates or refund of excess application money.<br />The above obligations and responsibilities may be considered as constraints within which the Investment Banker must operate. Keeping these constraints in mind, the Investment Banker’s <br />objective function becomes that of maximizing the benefit derived by the Client Company and the investors out of the Issue.<br />The next chapter will explain the procedure involved in managing the Issue of an IPO, from the Investment Banker’s point of view.<br />2.5 The Procedure for the Issue of an IPO<br />Many of these steps can be undertaken prior to formal launch of the offering and filing of the offer document with SEBI and other regulators<br />Preparing for IPO.<br />Review business plan.<br />Capital structuring.<br />Initiate research.<br />Corporate governance.<br />Financial statements.<br />Due diligence.<br />Business and legal due diligence.<br />Re-stated audited financials.<br />Exemptions and approvals.<br />Offer document.<br />Business overview.<br />Management discussion.<br />Statutory disclosures.<br />Pre-issue marketing.<br />Meeting with institutional investors.<br />Research briefings.<br />Corporate publicity.<br />Launch IPO<br />File with SEBI.<br />Road shows.<br />Preparing for IPO – Financial Statements<br />SEBI Guidelines require disclosure of previous five years accounts after making the following adjustments: <br />Audit qualifications for all non-standard accounting practices, failure to make provisions or other adjustments<br />Prior period items <br />Changes in accounting policies or incorrect accounting policy<br />All financial information (EPS, book value, etc.) presented in the Offer Document should be based on the adjusted accounts <br />The above accounts have to be certified by the auditors<br />Management Discussion and Analysis Report (MD&A) along with the Annual Report<br />Besides the accounts the financial ratios, capitalization statement and statement of tax benefits have to be certified by the auditors<br />Matters which needs to be addressed while re-stating accounts<br />Accounting for deferred taxed; segmental reporting;<br />Complete disclosure will be required regarding joint ventures and foreign operations<br />Preparing for IPO – Capital Structuring<br />Examine need for corporate action to arrive at optimal capital structure and attractive issue price<br />Bonus issue of shares<br />Split face value of shares<br />SEBI Guidelines require<br />No outstanding convertible instruments/ securities<br />No partly paid shares<br />Recent amendments to the DIP guidelines - In case of initial public offer by an unlisted company,<br />If the issue price is Rs 500/- or more, the issuer company shall have a discretion to fix the face value below Rs. 10/- per share subject to the condition that the face value shall in no case be<br />Less than Rs. 1 per share.<br />If issue price is less than Rs 500 per share, the face value shall be Rs. 10/- per share.<br />2.6 Due Diligence – Process Overview<br />The process involves understanding the gamut of the company’s operations, compliance with procedures and guidelines and presenting a fair picture to investors.<br />Approvals, regulations, litigations<br />Risk factors associated with the company and the external environment<br />Analysis of applicable regulations like FDI/FII, etc<br />Business activities past performance financial results<br />Industry background, competition & business environment<br />Description of the company’s business<br />Financial performance for the last five years<br />Objects of the issue<br />Future plans and strategy of the company<br />Management’s discussion and analysis of the financial results<br />Material contracts agreements<br />Enabling provisions of MoA & AoA for allowed lines of business<br />Letters of Contract with each member of the issue management team<br />Loan agreements & sanction letters with FIs/ Banks<br />Deeds of hypothecation executed in favor of the lenders<br />Underwriting agreements<br />Agreement with the KMP<br />Purchase order with major suppliers<br />All utilities contracts & permissions <br />Syndicate & Escrow agreement<br />Promoters & Management<br />Quality, experience, qualifications, reporting structures, composition of Board of Directors<br />Quality of human resources <br />Details of KM.<br />Offer Document – Three Distinct Sections<br />Formally divided into Part I & II as per Companies Act format, covering three sections - issue structure, operating details, and general & statutory information<br />Issue structure<br />Capital structure of the company<br />Terms and conditions governing the instruments being issued<br />Operating details<br />Information gathered during the Due Diligence process<br />Highlight the company's strengths and operations<br />General and statutory information<br />Description on the basis of allotment<br />Auditors report<br />Extracts of the Articles of Association<br />List of Material Contracts and Documents<br />Reservations and Firm Allotment<br />Reservations can be made for the following investors<br />Permanent employees (not exceeding 10% of the issue)<br />Indian Mutual Funds<br />Foreign Institutional Investors<br />NRI investors<br />Indian and Multilateral Development Financial Institutions<br />Scheduled Banks<br />Firm allotment can be made to the following investors<br />Permanent employees (not exceeding 10% of the issue)<br />Indian Mutual Funds<br />Foreign Institutional Investors<br />NRI investors<br />Indian and Multilateral Development Financial Institutions<br />Scheduled Banks<br />IMPORTANT NOTES TO REMEMBER<br />Firm allotment can be made at a price higher than the issue price<br />Firm allotments are locked in for one year<br />Persons to whom firm allotment has been made cannot apply in the portion for the public<br />Category of investors for whom reservation has been made cannot apply in the portion for the public<br />Above mentioned condition is not applicable to employees<br />NOTE:<br />The Investment Banker Representative only has an advisory role in selection of the above intermediaries. The final decision for selection will rest with the Issuer Company.<br />Filing of the prospectus with SEBI along with due-diligence certificate and SE's (only draft prospectus)<br />10 Copies of the Draft Prospectus, the Inter Se Certificate, and a floppy containing the Draft Prospectus, MOU, Filing Fee and a Due-Diligence Certificate is submitted to the Regional SEBI Office / SEBI Mumbai (as the case may be).IB representative submits 10 Copies of the Draft Prospectus to SE’s where listing is sought. A copy of the draft prospectus is filed along with a request letter from the Company for Demat of shares to both NSDL & CDSL. An acknowledgment is obtained from the SEBI Office, wherever submitted.<br />Replying to all observations<br />On receipt of observations from SEBI, IB representative to SEBI covering all the observations within the stipulated time submits a reply.<br />Submission of complaints / material changes report<br />A complaint / material changes report is submitted by the IB Representative to SEBI, 21 days after filing of the Draft Prospectus, stating the complaints received, if any, from public/institutions and the amendments to be made in the Draft Prospectus.<br />Receipt of SEBI card<br />All the observations given by SEBI are incorporated and the final prospectus is filed to SEBI.<br />Underwriting of the issue<br />On receipt of SEBI Card, if the company intends to get its issue underwritten the following documents are sent to the Brokers/Investment Bankers by the IB Representatives inviting them to participate in the underwriting:<br />Draft prospectus<br />Underwriting agreements<br />Performa for devolvement made by the Underwriters (if any)<br />Certificate regarding the net worth of the Underwriters (confirmation letter )<br />Consent letter to act as Brokers to the issue <br />Finalization of underwriting<br />On receipt of underwriting confirmations, the IB In charge in consultation with the Company finalizes the underwriting amount.<br />Filing of Final Draft Prospectus <br />The Final Draft Prospectus is filed to SEBI after incorporating all the observations as specified in the acknowledgment card before filing with ROC.<br />Filing of material documents with ROC:<br />On finalization of underwriters to the issue by IB representative, all material documents as mentioned in the Prospectus along with a copy of the Prospectus duly signed by the Board of Directors (of the Issuer Company) are filed with ROC. <br />Filing of Due-Diligence Certificate with SEBI<br />A Due - Diligence Certificate is filed with SEBI by IB Representative on filing of prospectus to ROC.<br />Preparation of Application Form<br />Issue Application Form is prepared as per the Ministry of Finance and SEBI guidelines.<br />Printing of Share Application Forms and Prospectus.<br />On receipt of the ROC card the IB Representative arranges for the Issue Application Forms and Prospectus to be printed.<br />Preparation of distribution schedule for dispatch of Issues Applications Forms & Prospectus.<br />A distribution schedule is prepared by the IB Representative for dispatch of Issue Application Forms and Prospectus to Brokers, SEs, Underwriters, and Bankers to the issue, Advertisement agency, Investment Bankers etc. <br /> <br />Submission of printed copies of Prospectus to SEBI <br />IB representative submits 5 printed copies of prospectus to SEBI Regional and Mumbai offices, at least 10 days before the opening of the issue.<br />Arranging for the Opening of the Issue.<br />IB representative makes all necessary arrangements for opening of issue.<br />Filing of the Due-Diligence Certificate with SEBI.<br />A Due - Diligence Certificate is filed with SEBI by IB representative before the opening of the issue informing that no corrective action is required.<br />Filing of the Auditor's Certificate regarding receipt of promoter's contribution.<br />IB representative ensures that Auditor's certificate, confirming the receipt of promoter's contribution, giving the detailed list of Promoter's group, is filed with SEBI and SE's (where listing is sought) by the Issuer Company, at least one day before the opening of the issue. He also ensures that 1% of the issue amount is deposited with Regional Stock Exchange at least one day before the opening of the issue by the Issuer Company.<br />Filing of Final Compliance Certificate with SEBI:<br />A Final Compliance Certificate is filed with SEBI before the closure of issue.<br />Closure of issue<br />On receipt of 90 % subscription (as per the details provided by Bankers to the issues and Registrar's to the issue) the issue is closed on the earliest closing date, if any. If the issue is still unsubscribed, it is kept open for a total period of 10 working days, before the devolvement notices are served to the underwriters of the issue.<br />Filing of 3- Day Compliance Report with SEBI<br />IB representative files a 3-Day Compliance Report with SEBI.<br />Filing of 78- Day Compliance Report with SEBI<br />IB representative files a 78-Day Compliance Report with SEBI <br />Assisting the Issuer Company in completion of listing formalities<br />Whenever and wherever required, IB representative assists the issuer company in completing the listing formalities by referring to the checklist of documents to be filed with the stock exchanges for listing securities in case of public issues. <br />The above procedure brings out the involvement of the Investment banker in the Issue Process. The next few chapters will focus on some key points such as the Prospectus, the Due Diligence, Post-Issue Monitoring Reports, and so on.<br />The Investment Banker must work diligently in order to ensure that all relevant and updated information is captured aptly and truly in the Prospectus. The importance of the Prospectus must therefore be understood. The next chapter explains the Prospectus in detail, so that the reader may understand its significance and purpose.<br />2.7 The Prospectus<br />The `Prospectus’ is the most important document for the company to come out with a public issue. Pursuant to Section 2(36) of The Companies Act, `Prospectus’ means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body corporate. The purpose of the Prospectus is to provide all the necessary and true information to investors about a Company in order to enable him to make an investment decision.<br />The Prospectus is a document by way of which the investor gets all the information pertaining to the company in which he is going to invest. It gives the detailed information about the company, its promoters and directors, group companies, capital structure, terms of the present issue, details of the proposed project, particulars of the issue etc.<br />There may be two kinds of Prospectus: <br />An Ordinary Prospectus is a formal written offer to sell securities that provides an investor with the necessary information to make an informed decision. It is used in case of an IPO Issue under the Fixed- Price Process, where the investors know the Price of the IPO beforehand. It explains a proposed or existing business enterprise and must disclose any material risks and information according to the securities laws. <br />A Red Herring Prospectus is a preliminary prospectus issued by underwriters or issuers to gauge interest in a prospective offering. It is used in the case of an IPO issue under the book-building process, where applicants are to bid for the IPOs. It receives its name from the warning, printed in red, that information in the document is incomplete or subject to change before the issue. It relates to a registration statement filed with the Securities and Exchange Board of India that has not yet become effective. <br />There are certain mandatory disclosures that have to be made in the prospectus. These are included in Schedule II of the Companies Act, 1956. Moreover, SEBI (Disclosure and Investor Protection), Guidelines, 2000 give details about the contents of prospectus<br />Vetting by SEBI/Stock Exchanges<br />A Company cannot come out with public issue unless a Draft Prospectus is filed with SEBI. <br />A Company cannot file the Prospectus directly with SEBI. It has to be filed through an Investment Banker. After the preparation of the Prospectus, the Investment Banker along with the Due Diligence Certificate and other compliance sends the same to SEBI for vetting<br />SEBI on receiving the same scrutinizes it and may suggest changes within 21 days of receipt of the Prospectus. <br />If the issue size is upto Rs. 20 crores, the Investment Bankers is required to file the Prospectus with the regional office of SEBI falling under the jurisdiction in which the registered office of the Company is situated. If the issue size is more than Rs. 20 crores, Investment bankers are required to file prospectus at SEBI, Mumbai office. <br />The Prospectus is also to be filed with the concerned Stock Exchanges along with the application for listing of securities. Presently, Companies approaching the Stock Exchange for public issues should obtain In-Principal Approval from such Stock Exchanges. <br />Contents of the Prospectus<br />The word quot;
Prospectusquot;
.<br />The name of the Issuer Company and address of the registered office of the company, along with telephone fax number and E-mail address. <br />The nature, number, price and amount of the instruments offered. <br /> Risk in Relation to First Issue and General Risk of Investment Clauses.<br />Issuer’s Absolute Responsibility Clause.<br />Various Disclaimer Clauses of the SEBI, the Stock Exchanges, the Investment Banker, and the Company.<br />Various Undertakings by the Company and its Board of Directors.<br />The names and address of the Investment bankers, and other intermediaries involved in the Issue.<br />The Issue Opening and Closing Dates.<br />Risk Factors associated with the Issue and Management Perception to handle these factors thereof.<br />Information on various transactions by the issuer Company.<br />Government Approvals and Filing.<br /> Listing with the Stock Exchanges.<br />Credit Rating.<br />Instructions to investors on who can apply and how to apply.<br />Information on the utilization of Issue Proceeds.<br />Full details on the Capital Structure of the Company and Shareholding Pattern.<br />Terms of the Offer and Rights of Shareholders.<br />Basis of Allotment of Shares.<br />History of the Company and details on its present business, market position, etc.<br /> Details of existing facilities.<br /> Details of project cost and means of financing the project.<br />Full Financial Details and Financial Statements for last five years, complete with the Auditor’s Report.<br />Details on Promoters and their Background.<br />Basis of the Issue Price.<br />Statutory and other Information.<br /> Outstanding litigation, defaults, adverse events and material developments.<br />Material contracts and Inspection of Documents.<br />The Prospectus is prepared after much verification and clarification between the Client Company, the Regulatory Bodies and the Investment Banker. The contents of the Prospectus must be reliable and relevant. The Investment Banker performs Due Diligence in order to ensure this and Issues Certificates of Due Diligence at various stages. The next chapter explains the concept of Due Diligence in detail.<br />Due Diligence<br /> A Company that wants to issue IPOs needs to first gets listed. Several other formalities are also involved in the entire process of issuing IPOs. An Investment Banker is thus appointed for managing the process for the issue of IPOs.<br />The Investment Banker must perform a fiduciary role by balancing the interests of the investors, the client companies and the regulatory bodies (e.g., SEBI), all at once. Within these constraints, he must perform DUE DILIGENCE, which is making sure that all relevant and updated information of the Client Company is captured in the Prospectus. This is because the Prospectus is the main document that an investor would go through while deciding on whether to invest in a company. This is why the Prospectus is aimed at revealing every detail about the company, which could have an impact on the investor’s decision.<br />The process of Due Diligence is a time-consuming one and it involves a number of mental efforts. It involves the verification of various documents provided by the Client Company. The information and calculations in these documents need to be checked, summarized, modified and updated so that it may be accurately stated in the Prospectus. Any wrong inaccurate information needs to be identified and corrected by the Investment Banker. If left uncorrected, it is passed on to the Prospectus. This could ultimately put the Investment Banker’s reputation and license at stake in extreme cases.<br />In order to ensure a flawless Prospectus, the Investment Banker must therefore work diligently and skeptically. All relevant details about the client must be backed with supporting evidence.<br />The following are some details that need to be scrutinized for a typical client company:<br />General:<br />The MOA and AOA provide information on the company, its business, and its norms, rules and regulations. These documents need to be checked in order to get a good picture about the kind of business the company is engaged in, the risk attached to it, and the procedures followed by it. Various clearances and approvals also need to be looked into in order to be sure that the company has been carrying on a fully legal and approved business.<br />Company Details:<br />A brief history of the company gives an insight into the changes in office addresses, conversion to Public Limited Company, and so on. The present business of the company gives investors an idea on the risk attached. Further details may be provided, regarding the achievements and milestones attained, in order to give an idea about the success of the company.<br />Project Details:<br />Full project details give the investor a chance to determine the viability of the very project for which the company is issuing IPOs. Project cost estimates, technology to be adopted, Project Appraisal Report, and other such statements enable the investor to decipher the potential of a particular project.<br />A SWOT Analysis of the company and the industry in which it is operating also illustrates the areas that it can exploit and the ones that it is vulnerable to. An overview of the industry in which it operates is also needed in order to judge the present and future performance of the company, and also to know the external factors that may affect its performance. Any unusual events and future anticipated changes must also be brought to the attention of the investors.<br />Promoters:<br />The promoters’ reputation and capability affects the success of the company. Therefore, their age, qualifications and work experience have to be revealed. Also, the other ventures that they may be promoting and the number of shares held by them need to be known, in order to know the promoters’ share in the control of the company and their ownership stake.<br />Directors:<br />The Directors of the company must also have a good reputation and must be capable enough to run the company. Their brief bio-data must be disclosed and any changes in directors, details of other directorships and details of remuneration must be known.<br />Auditors:<br />The names and addresses of the Auditors and any changes in Auditors need to be disclosed. The Auditors employed must have a good recognition in the market and must be of repute. They must be known to be accurate in their work.<br />Product Details, Raw Materials, Plant & Machinery:<br />The entire details on the availability of raw material, technology used to make the product, existing cost of Plant & Machinery, import of raw material, approvals and even the method of manufacture of the product need to be disclosed. The description of the product itself, its market demand scenario, price trend and relative market position must be captured aptly. <br />This information illustrates the performance of the product in the market and the profit the company would be expected to make. The disclosures on input and output are needed so that any future scarcity or unfavorable events that may affect the company can be anticipated.<br />Marketing:<br />Existing competition and the proposed marketing strategy should be effectively summarized so that the standing of the company in the market is brought out. The chances of a successful performance can also be brought out from this information.<br />Outstanding Litigation:<br />Criminal prosecution, non-payments or pending disputes are likely to affect the finances and operations of the company. In turn, they affect the investor’s decision since he may not be willing to take the risk of investing in a company with too much outstanding litigation.<br />Companies under the same management:<br />Details such as names and addresses of companies under the same management and details of the capital issue made by them during the last three years need to be furnished. Also, any particulars of strikes/ lockouts or any form of labor unrest should be specified. Promise vs. Performance should also be given. Such details are necessary since the performance of a company under the same management can be used as a parameter to predict the performance of the concerned company.<br />11. Consents:<br />Consent Letters from Auditors, Company Secretary, Legal Advisors, Lead Managers, Bankers, etc. need to be obtained to act in their capacity.<br />12. Land, Civil Work and Assets:<br />Land may have been leased; architects and contractors may have been appointed. Supporting papers for all such agreements need to be scrutinized and the terms and conditions weighed. Any change in assets must also be mentioned.<br />Financial Assistance:<br />Applications made by the company to Banks/ Financial Institutions must be checked. The corresponding Sanction Letters, Principle terms of the loan and assets charged, as security must also be disclosed.<br />Financial Information:<br />The performance of the company in the past has to be evaluated on the basis of financial figures. The Balance Sheet, Profit & Loss Account, Key Accounting Ratios, Capitalization Statements, Tax Shelter Statements, etc. have to be provided for the company, for the last five years, and for its subsidiaries, for the last three years. The Auditor’s Certificate regarding the financial statements is also needed. It is on this basis that one can see if the company is doing well in the market, whether it is healthy, what its credit worthiness is how its profitability is, etc. These calculations form the crucial crux of the investor’s decision.<br />Miscellaneous:<br />Notes on Investor Grievances and Redressed, Notes on Corporate Governance, Amalgamations/ Mergers need to be additionally provided.<br />The above disclosures need to be made in order to open up the information on the company before the investors. SEBI is a ‘vigilant watchdog’ for the protection of the investors’ interests, and is thus justified in laying down the Disclosure and Investor Protection Guidelines for any Public Issue. The Investment Banker’s duty is to follow these Guidelines and to perform Due Diligence, so that the investors are given a Prospectus that they can rely on and make a suitable investment decision.<br />2.8 The Application Form<br />The Application Form is an Instrument whereby investors can apply for an IPO. An investor’s signature on an Application Form means that he has gone through the Prospectus of the Company and that he would like to be registered as the holder of Equity Shares that would be allocated to him. The Investor may apply for an IPO anytime between the Opening and the Closing of the Issue.<br />The Application Form must contain Undertakings by Investors about their acceptance of the Terms of the Offer, the decision of the Board of Directors, etc. It also contains all the necessary details about the denomination in which shares will be issued, minimum subscription, mode of payment, and so on.<br />In brief, the main contents of an Application Form are as follows:<br />Name of the Issuer Company along with registered office address, telephone number, and fax and email id.<br />Nature, numbers, price and amount of the issue.<br />Offer Opening and Closing Dates.<br />Broker, Sub-Broker, Bank Branch and Registrar’s respective Stamps and Codes.<br />Applicant’s undertaking.<br />Minimum Subscription and other instructions for payment.<br />Applicant’s details on address, Father’s/Husband’s Name, Bank Particulars, Details of Nominee, if any, Age, Status (whether Individual, Body Corporate, Company, NRI, Bank or Other) and Occupation.<br />Applicant’s PAN/ GIR No.<br />Applicant’s Depository Account details.<br />Bank’s Counterfoil details.<br />An Abridged Prospectus of the Issuer Company which contains all details of the Prospectus in brief, as specified by the SE