1. Initial Public Offers
CONCEPT & KEY REGULATORY PROVISIONS
By
Manoj Kumar
AVP, Corporate Professionals Capital Private Limited
SEBI Registered Merchant Banker
21.07.2012
West Delhi Study Circle Meeting, NIRC
2. AGENDA
• Concept IPO – What, Why &
How
• Procedure & Timeline
• Regulatory Framework
• Procedural Aspects of IPO
• New Concept – SME IPO
• Key Considerations
4. “Initial Public Offer” means an offer of specified securities
by an unlisted issuer
to the public for subscription
and includes
an offer for sale of specified securities to the public
by any existing holders
of such securities in an unlisted issuer”
THE CONCEPT
WHAT IS INITIAL PUBLIC OFFER?
5. IPO is not just an event of fund raising… it’s a PROCESS OF
TRANSFORMATION:
It can be successful only if PLANNED WELL IN ADVANCE and
executed well - at least one year of planning and practicing like a
Listed Company is required
The Company should outperform the Peers on key Performance
Measures
IPO should be considered only after reaching certain Level of
Corporate Life Cycle
THE CONCEPT …cont
6. THE CONCEPT …cont
WHEN SHOULD ONE GO FOR IPO?
Private Equity
Funding
Support of VC/ Angel
Investors
IPO
Decline due to
lack of funds
Nascent
Stage
Growt
h
Stage
Developing
Stage
Expansion
Stage
UnlockingtheCapitalMarket
Opportunities
Profitabilit
y
High Risk & Lower
Profit Margins
Increase in Sales
& Rise in Profit
Stable
Profit
Margins
Profit Margin tends to
rise as the business
expands
7. THE CONCEPT …cont
It helps to raise low cost funds for the business
It Unlocks access to new financing means – QIP, ADR/GDR/FCCB
Provides an exit opportunity for Private Equity or other investors
Improves perceptions of your business and brand with customers,
suppliers and employees
Creates opportunities to expand your business into new markets
Offers Market Capitalization / Visibility
WHY IS IPO IMPORTANT?
8. HOW TO GET READY FOR IPO?
Appropriate Stage for IPO
Approach Market only when minimum level Financial Status reached
Do not wait for dire fund situation as Capital Market is Volatile and might
get delayed
Company should be top growth phase and should outperform the Peers on
Financial Parameters –
Sales & Sales Growth Rate
EBDITA & EBDITA Growth Rate
Debt Equity Ratio
EPS & Return on Equity
There should be a Growth Story which is Compelling and Convincing
PLAN WELL & PREPARE WELL IN ADVANCE
9. HOW TO GET READY FOR IPO ..cont
Good Governance
Create habit of Transparency in Disclosure & Financial Reporting
Create Systems & Procedures
Develop Good Management Team
To the extent possible remove dependency on a few
Visible Risk Mitigation strategies
Learn not only to Create Wealth but to Share Wealth (Good
Governance)
Start acting as a Widely Held Company well in advance & Learn to Explain
Public queries
BEHAVIOURAL CHANGES
10. HOW TO GET READY FOR IPO ..cont
Create Strong Systems & Procedures
Develop Good Management Team
To the extent possible remove dependency on a few KMPs
Create visible Risk Mitigation strategies
Develop Good Governance behavior
Create habit of Transparency in Disclosure & Financial Reporting
Learn not only to Create Wealth but to Share Wealth (Good
Governance)
Start acting as a Widely Held Company well in advance & Learn to Explain
Public queries
BEHAVIOURAL CHANGES
11. OPTIMAL GOVERNANCE CONCEPT
A widely held company must learn not only create and mange Wealth
but also ready to share it
15. A COMPARATIVE ANALYSIS
15
Fixed Price Issue Book-Building Issue
Pre-determination of price / price
band, which is made known to the
investors
Determination of price on the basis of
bids received from the investors.
Investors are made known only an
indicative floor price / price range.
Demand for the securities offered is
known only after the closure of the
issue.
Demand for the securities offered
can be known everyday as the book
is built.
Underwriting is not compulsory in
case of Fixed Price Issue
Underwriting is compulsory in case
of Book-Built Issue
17. PUBLIC ISSUES FRAMEWORK
Book Build
Issue
Fixed
Issue
Type &
Procedure
Eligibility
Requirements
Allocation
of Issue
Pricing
Promoters’
Contribution
& Lock-in
Public Issue
Framework under
SEBI (ICDR)
Regulations
Issue Period
18. CORPORATE GOVERNANCE IMPLEMENTATION
Corporate
Governance
Clause 49 of the Listing Agreement
Board
Composition
Optimum number of executive and non executive directors with at least 50%
being non-executive.
If the chairman, has executive powers then 50% of Board comprises of
Independent directors.
If Chairman has non-executive powers then 1/3 of the Board comprises of
Independent directors
Audit Committee Mandatory constitution of Audit Committee with minimum three directors
and headed by an Independent director
The audit committee should meet at least four times in a year and not
more than four months shall elapse between two meetings
Key Responsibilities
• Oversight of the company’s financial reporting process and the
disclosure of its financial information to ensure that the financial
statement is correct, sufficient and credible
• Recommending appointment and remuneration of statutory auditors
• Reviewing annual and quarterly financial statements, management
19. CORPORATE GOVERNANCE IMPLEMENTATION
Corporate
Governance
Clause 49 of the Listing Agreement
Subsidiary
Company
• At least one director on the Board of the holding company shall be a director on the
Board of a material non listed Indian subsidiary Company
• Audit committee of the listed holding company shall also review the financial
statements, in particular, the investments by the unlisted subsidiary Company
Report on
Corporate
Governance
• A separate section on Corporate Governance to be included in the Annual Reports
with disclosures on compliance of mandatory and non-mandatory requirements
• Submission of quarterly compliance report to the stock exchanges
CEO/CFO CEO/CFO to certify the financial statements and cash flow statements
Investor
Committee
Shareholder/Investor Grievances Committee to be formed under the chairmanship
of a non executive director to look into the redressing of shareholder and investor
complaints like transfer of shares, non-receipt of balance sheet, non-receipt of
declared dividend
21. ALTERNATE ELIGIBILITY REQUIREMENTS
Alternate Eligibility Requirements:
Issue through Book-Building
Process with minimum 50% net
offer to QIBs
‘Project’ has 15% participation from
public financial
institutions/scheduled commercial
banks of which 10% comes from
appraisers and min. 10% net offer
to QIBs
Minimum post issue face value
capital – Rs. 10 Crores
2 years of compulsory market
making from the date of listing of
specified securities
OR
OR
AND
22. OTHER PRE-REQUISITES
• Prospective allottees to be not less than 1000.
• Compulsory IPO Grading by credit rating agency registered with SEBI
before filling RHP with ROC
• No outstanding convertible securities or other right which would entitle
the existing promoters or shareholders any option to receive equity shares
after public offer.
• Firm arrangements of finance, through verifiable means, for 75% of the
stated means of finance excluding the amount to be raised through the
public issue to be made.
• Partly paid up shares to be made fully paid or forfeited in the manner
specified, before the public offering.
24. MINIMUM LISTING REQUIREMENT -BSE
New Companies Listing (IPO)
Small Cap Companies Large Cap Companies
Minimum issue size of Rs. 3 crore Minimum issue size of Rs. 10 crore
Market capitalization of not less than
Rs. 5 crore
Market capitalization of not less than
Rs. 25 crore
Minimum post-issue paid-up capital of
Rs. 3 crore
Minimum post-issue paid-up capital of
Rs. 3 Crores
Minimum income/turnover of Rs. 3 crore
in preceding 3 Years
Compulsory due diligence by CA or Merchant
Banker. No Requirement of Due Diligence if FIs
or SCB has appraised the project in 12 months
Minimum No. of Public Shareholders after the
Issue shall be 1000.
25. MINIMUM LISTING REQUIREMENT -NSE
25
New Companies Listing (IPO)
Minimum paid-up capital of Rs. 10 crore
However, if Market Capitalization > Rs. 100 Crore, then Minimum Post-
issue paid-up capital is Rs. 5 Crore.
Minimum Market capitalization of Rs. 25 crore
Minimum 3 years of track record of Issuer Company or its promoter
company.
26. PRICING NORMS
26
• Free Pricing – Price to be determined by Issuer in consultation with Lead
Merchant Banker
• Differential Pricing
– Retail Individual Investor my be offered shares at less price than that of
other categories
– Anchor investors can not be offered shares at less price than any that of
other categories
– In case of Composite issue, the price of public issue and right issue can be
different.
– In case of alternate method of book building, shares may be issued to
employees at lower price.
(the differential pricing shall not be more than 10% of the floor price)
31. SECURITIES INELIGIBLE FOR PROMOTERS’
CONTRIBUTION
• Securities acquired during the preceding 3 years for consideration other than
cash and revaluation of assets or capitalisation of intangible assets is involved
• Specified securities acquired during the preceding 1 year at a price below
Issue price,
However, if promoters pay the difference, or acquired pursuant to merger etc.,
then such securities are eligible.
• Securities allotted to promoters acquired during the preceding 1 year at a price
below Issue price against funds brought in by them in case of conversion of
partnership firm into company.
• Securities pledged with any creditor.
33. ALLOCATION OF ISSUE – BOOK BUILDING
ROUTE
Retail individual
investor
QIB
Offer through offer
document
Promoters’
Contribution
Issue Size
Non-institutional
investor
Anchor
Investor
Mutual
Funds
Reservation
Net offer to
public
Min. 20% of
Issue Size
Min. 25% of
Issue Size
Min. 15% of NOPMax. 50% of NOP Min. 35% of NOP
Min. 5% of NOP Max. 30% of QIB
34. ALLOCATION OF ISSUE – FIXED PRICE
ISSUE
Other investors
Offer through offer
document
Promoters’
Contribution
Issue Size
Retail Individual
Investors
Reservation
Net offer to
public
Min. 20% of
Issue Size
Min. 25% of Issue Size
Min. 50% of NOP Max. 50% of NOP
37. APPROVALS FOR IPO
Authorities Approvals
Board of Directors • Fresh issue of shares under Section 81(1A) of the Companies Act
(including reservations, green shoe etc.)
• Offer for sale, if applicable;
• Increase in authorised capital, if any
• Amendment in the Articles of Association of the Company
• Constitution of the IPO Committee
• Increase the number of directors to comply with Corporate
Governance Norms
• Finalization of Offer Price based on demand
• Approve the basis of allotment as passing of allotment resolution
Shareholders
Approval
• Fresh issue of shares under Section 81(1A) of the Companies Act
(including reservations, green shoe etc.)
• Offer for sale, if applicable;
• Increase in authorised capital, if any
• Amendment in the Articles of Association of the Company
38. APPROVALS FOR IPO ..cont.
Authorities Approvals/Observations
SEBI • Filing of the draft offer document (DRHP) with SEBI
• Observations on the offer documents filed with the SEBI
• Modifications and corrections in DRHP & Re-submission
• Final approval from SEBI post the release of observations and
prior to filing the Red Herring Prospectus with ROC
FIPB/ RBI • Key Approvals required from FIPB or any other industry regulator
• Approval may be required for the participation by FII and NRI in
the Issue
• Post the allotment filing of the report with RBI for final
allotment/subscription by FIIs and NRIs
Stock Exchanges • In-Principle Approval for putting names in DRHP
• Post Issue Decisions and Actions along with the Company
• Finalization of the basis of allotment with the Designated Stock
Exchanges
• Approval for listing and trading from the Stock Exchange
40. 06/22/15 40
KEY INTERMEDIARIES
Intermediaries Role Timing
Merchant Banker • Structuring the Issue & Planning
• Due diligence & drafting
• Develop the key “equity story” and selling
the IPO
• Representing before SEBI
• Managing the whole show
Immediately upon decision to
go ahead with the IPO
Underwriter • Manage the retail and institutional investor
offers and pricing process
• Target and distribute shares to specific
investors
• Help to ensure a strong and stable market
for shares,
Anytime before the finalisation
of RHP, but better to appoint
simultaneously with MB
Auditors • Fulfill regulators’ requirements for
independent audit of historical financial
statements
• Statement of Tax Benefits
• Various Certifications
Immediately upon decision to
go ahead with the IPO
41. 06/22/15 41
KEY INTERMEDIARIES…cont
Intermediaries Role Timing
Legal Advisor • Participation in due diligence & drafting
• Provision of legal opinion
• Participation in due diligence & drafting
• Advisory on Indian legal/ regulatory issues
Immediately upon decision to go
ahead with the IPO
Registrar (RTA) • Co-ordination with the Issuer and Bankers
regarding
• collections, reconciliation, refunds etc
• Post issue co-ordination, collation and
reconciliation of information
2-3 weeks prior to filing DRHP
with SEBI
IPO Grading Agency • Issuer is required to appoint one IPO Grader to
assign an IPO grade
• Disclose the grades obtained, along with the
rationale in the Red Herring Prospectus
Around the time of filing DRHP
with SEBI
PR Agency • Preparation of PR & Marketing Strategies
• Financial PR
• Organizing Road Shows
Immediately upon decision to go
ahead with the IPO
43. THE NEW CONCEPT - SME IPO
SME ELIGIBLE FOR IPO:
• Issuer with post issue face value capital up to Rs.10 crores shall be covered under
the SME Platform;
• Issuer with post issue face value capital between Rs.10 – 25 crores may get listed
at SME Platform and Issue with post issue face value capital above Rs.25 crores
has to necessarily listed at main board of the Exchanges
SME IPO REGULATORY PROVISIONS:
• Simplified and fast track process
• Offer Document will be vetted by SE (BSE or NSE) only in place of SEBI
• Mandatory 100% underwritten issues and Merchant Banker/s shall underwrite 15%
in their own account
• The minimum application amount as well as minimum trading lot shall not be less
than Rs.1,00,000/-
• Mandatory market making by the Merchant Banker for 3 years through a stock
broker who is registered as Market Maker with SME Exchange.
• Possibility of shifting to Main Board after reaching paid-up equity of Rs. 10 Cr.
44. 06/22/15 44
Objects and
Requirement of
Funds
• Requirement of funds need to be specifically identified
• Raising funds for unidentified purposes are restricted
• Firm arrangement for 75% of requirement after excluding issue proceeds
to be in place
• Memorandum of Association should allow for proposed use
Offer for Sale in IPO • If there is any plan for Offer for Sale or Sale of existing capital
• This generally to give exist opportunity to PE investor etc.
Selection of
Intermediaries
Selection of various intermediaries in consultation with the Merchant Banker
Timing for appointments
Pre-IPO Placement &
Anchor Investor
• Whether there is a plan for placement of certain portion of shares as Pre-
IPO Placement
• Whether there will be some Anchor Investor
Appropriate time • Success of IPO depends upon many internal as well as external factors
hence appropriateness of timing is very crucial
KEY CONSIDERATIONS &
DECISIONS
45. TO SUM UP…
For fast-growing companies……. an IPO can be a very crucial
phase to funding growth…...so:
…….Prepare early.Prepare early
………….Prepare Well.Prepare Well
……………….Prove yourself BEFORE….DURING and even.Prove yourself BEFORE….DURING and even
AFTER the IPOAFTER the IPO
While challenging markets will come and go, it’s the companies
that are fully prepared that will best be able to leverage the
windows of IPO opportunity whenever they open.
46. Thank
You
Manoj Kumar
Asst. Vice President
CORPORATE PROFESSIONALS CAPITAL PVT.
LTD.
D-28, South Extension -I,
New Delhi-110 049
M: +91.9910688433 | E: manoj@indiacp.com
