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100510165 21050379-ipo-project-report


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100510165 21050379-ipo-project-report

  1. 1. Downloaded from INITIAL PUBLIC OFFER Page |1
  2. 2. Downloaded from a2zmba.blogspot.comTopics Covered  Executive Summary ----------------------------------------------------- 3  Introduction ----------------------------------------------------------------- 4  What Is An IPO ---------------------------------------------------------------- 5  Why Go Public ----------------------------------------------------------------- 8  Getting In An IPO ----------------------------------------------------------- 9  IPO  Advantages & Disadvantages ---------------------- 11  Parameters To Judge An IPO ----------------------------------- 14  Understanding The Role Of Intermediaries -- 16  Registration Process ----------------------------------------------- 18  IPO Scams ------------------------------------------------------------------------- 19  Salient Features Of IPO Scams ------------------------------ 26  Operational Deficiencies --------------------------------------- 27  Measures To Prevent Scams ---------------------------------- 28 Page |2
  3. 3. Downloaded from  Recent IPO’s ------------------------------------------------------------------ 29  DEFINITIONS AND ABBREVIATIONS --------------------------- 30  Bibliography --------------------------------------------------------------- 34 Page |3
  4. 4. Downloaded from EXECUTIVE SUMMARY As we all know IPO – INITIAL PUBLIC OFFERING is thehottest topic in the current industry, mainly because of India being adeveloping country and lot of growth in various sectors which leads acountry to ultimate success. And when we talk about country’s growthwhich is dependent on the kind of work and how much importance towhich sector is given. And when we say or talk about industries growthwhich leads the economy of country has to be balanced and given properfinance so as to reach the levels to fulfill the needs of the society. Andindustries which have massive outflow of work and a big portfolio thenits very difficult for any company to work with limited finance and this iswhere IPO plays an important role. This report talks about how IPO helps in raising fund for thecompanies going public, what are its pros and cons, and also it gives usdetailed idea why companies go public. How and what are the stepstaken by the companies before going for any IPO and also the role of(SEBI) Securities and Exchange Board of India the BSE and NSE , whatare primary and secondary markets and also the important terms relatedto IPO. It gives us idea of how IPO is driven in the market and what arevarious factors taken into consideration before going for an IPO. And italso tells us how we can more or less judge a good IPO. Then we all knowthat scams have always been a part of any sector you go in for which arecovered in it and also few recommendations are given for the same. Italso gives us some idea about what are the expenses that a companyundertakes during an IPO. IPO has been one of the most important generators of fundsfor the small companies making them big and given a new vision in pastand it is still continuing its work and also for many coming years. Page |4
  5. 5. Downloaded from INTRODUCTION IPO stands for Initial Public Offering and means the newoffer of shares from a company which was previously unlisted. This isdone by offering those shares to the public, which were held by thepromoters or the private investors prior to the IPO. In the case whenother investors or Promoter held the shares the stake holding comesdown to the extent their shares are offered to the public. In other casesnew shares are issued to the public and the shares, which are with thepromoters stay with them. In both cases the share of the promoters inthe total capital comes down. For example say there are 100 shares in a company and 50of these are offered to the public in an IPO then in such a case thepromoter’s stake in the company comes down from 100% to 50%. Inanother case the company issues 50 additional shares to the public andthe stake of the promoter comes down from 100% to 67%. Normally in an IPO the shares are issued at a discount towhat is considered their intrinsic value and that’s why investors keenlyawait IPOs and make money on most of them. IPO are generally priced ata discount, which means that if the intrinsic value of a share is perceivedto be Rs.100 the shares will be offered at a price, which is lesser thanRs.100 say Rs.80 during the IPO. When the stock actually lists in themarket it will list closer to Rs.100. The difference between the two pricesis known as Listing Gains, which an investor makes when investing inIPO and making money at the listing of the IPO. A Bullish Market givesIPO investors a clear opportunity to achieve long term targets in a shortterm phase. Page |5
  6. 6. Downloaded from What is an IPO An IPO is the first sale of stock by a company to the public.A company can raise money by issuing either debt or equity. If thecompany has never issued equity to the public, its known as an IPO. Companies fall into two broad categories: private and public.A privately held company has fewer shareholders and its owners donthave to disclose much information about the company. Anybody can goout and incorporate a company: just put in some money, file the rightlegal documents and follow the reporting rules of your jurisdiction. Mostsmall businesses are privately held. But large companies can be privatetoo. Did you know that IKEA, Dominos Pizza and Hallmark Cards are allprivately held? It usually isnt possible to buy shares in a private company.You can approach the owners about investing, but theyre not obligatedto sell you anything. Public companies, on the other hand, have sold atleast a portion of themselves to the public and trade on a stockexchange. This is why doing an IPO is also referred to as "going public." Public companies have thousands of shareholders and aresubject to strict rules and regulations. They must have a board ofdirectors and they must report financial information every quarter. In theUnited States, public companies report to the Securities and ExchangeCommission (SEC). In other countries, public companies are overseen bygoverning bodies similar to the SEC. From an investors standpoint, themost exciting thing about a public company is that the stock is traded inthe open market, like any other commodity. If you have the cash, youcan invest. The CEO could hate your guts, but theres nothing he or shecould do to stop you from buying stock. The first sale of stock by a private company to the public,IPO’s are often issued by smaller, younger companies seeking capital toexpand, but can also be done by large privately-owned companieslooking to become publicly traded. In an IPO, the issuer obtains theassistance of an underwriting firm, which helps it determine what type ofsecurity to issue (common or preferred), best offering price and time tobring it to market. IPO’s can be a risky investment. For the individualinvestor, it is tough to predict what the stock will do on its initial day oftrading and in the near future since there is often little historical datawith which to analyze the company. Also, most IPO’s are of Page |6
  7. 7. Downloaded from a2zmba.blogspot.comcompanies going through a transitory growth period, and they aretherefore subject to additional uncertainty regarding their future value. Primary and Secondary markets In the primary market securities are issued to the public andthe proceeds go to the issuing company. Secondary market is term usedfor stock exchanges, where stocks are bought and sold after they areissued to the public.PRIMARY MARKET The first time that a company’s shares are issued to thepublic, it is by a process called the initial public offering (IPO). In an IPOthe company offloads a certain percentage of its total shares to the publicat a certain price. Most IPO’S these days do not have a fixed offer price. Insteadthey follow a method called BOOK BUILDIN PROCESS, where the offerprice is placed in a band or a range with the highest and the lowest value(refer to the newspaper clipping on the page). The public can bid for theshares at any price in the band specified. Once the bids come in, thecompany evaluates all the bids and decides on an offer price in thatrange. After the offer price is fixed, the company allots its shares to thepeople who had applied for its shares or returns them their money. Page |7
  8. 8. Downloaded from a2zmba.blogspot.comSECONDRY MARKET Once the offer price is fixed and the shares are issued to thepeople, stock exchanges facilitate the trading of shares for the generalpublic. Once a stock is listed on an exchange, people can start trading inits shares. In a stock exchange the existing shareholders sell their sharesto anyone who is willing to buy them at a price agreeable to both parties.Individuals cannot buy or sell shares in a stock exchange directly; theyhave to execute their transaction through authorized members of thestock exchange who are also called STOCK BROKERS. Page |8
  9. 9. Downloaded from Why Go Public? Basically, going public (or participating in an "initial publicoffering" or IPO) is the process in which a business owned by one orseveral individuals is converted into a business owned by many. Itinvolves the offering of part ownership of the company to the publicthrough the sale of debt or more commonly, equity securities (stock). Going public raises cash and usually a lot of it. Beingpublicly traded also opens many financial doors: Page |9
  10. 10. Downloaded from  Because of the increased scrutiny, public companies can usually get better rates when they issue debt.  As long as there is market demand, a public company can always issue more stock. Thus, mergers and acquisitions are easier to do because stock can be issued as part of the deal.  Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent. Being on a major stock exchange carries a considerableamount of prestige. In the past, only private companies with strongfundamentals could qualify for an IPO and it wasnt easy to get listed. The internet boom changed all this. Firms no longer neededstrong financials and a solid history to go public. Instead, IPOs weredone by smaller startups seeking to expand their businesses. Theresnothing wrong with wanting to expand, but most of these firms hadnever made a profit and didnt plan on being profitable any time soon.Founded on venture capital funding, they spent like Texans trying togenerate enough excitement to make it to the market before burningthrough all their cash. In cases like this, companies might be suspectedof doing an IPO just to make the founders rich. This is known as an exitstrategy, implying that theres no desire to stick around and create valuefor shareholders. The IPO then becomes the end of the road rather thanthe beginning. How can this happen? Remember: an IPO is just sellingstock. Its all about the sales job. If you can convince people to buy stockin your company, you can raise a lot of money. Getting In On an IPOThe Underwriting Process Getting a piece of a hot IPO is very difficult, if not impossible.To understand why, we need to know how an IPO is done, a processknown as underwriting. When a company wants to go public, the first thing it does ishire an investment bank. A company could theoretically sell its shares on P a g e | 10
  11. 11. Downloaded from a2zmba.blogspot.comits own, but realistically, an investment bank is required - its just theway Wall Street works. Underwriting is the process of raising money byeither debt or equity (in this case we are referring to equity). You canthink of underwriters as middlemen between companies and theinvesting public. The biggest underwriters are Goldman Sachs, MerrillLynch, Credit Suisse First Boston, Lehman Brothers and MorganStanley. The company and the investment bank will first meet tonegotiate the deal. Items usually discussed include the amount of moneya company will raise, the type of securities to be issued and all thedetails in the underwriting agreement. The deal can be structured in avariety of ways. For example, in a firm commitment, the underwriterguarantees that a certain amount will be raised by buying the entire offerand then reselling to the public. In a best efforts agreement, however, theunderwriter sells securities for the company but doesnt guarantee theamount raised. Also, investment banks are hesitant to shoulder all therisk of an offering. Instead, they form a syndicate of underwriters. Oneunderwriter leads the syndicate and the others sell a part of the issue. Once all sides agree to a deal, the investment bank putstogether a registration statement to be filed with the SEC. This documentcontains information about the offering as well as company info such asfinancial statements, management background, any legal problems,where the money is to be used and insider holdings. The SEC thenrequires a cooling off period, in which they investigate and make sure allmaterial information has been disclosed. Once the SEC approves theoffering, a date (the effective date) is set when the stock will be offered tothe public. During the cooling off period the underwriter puts togetherwhat is known as the red herring. This is an initial prospectus containingall the information about the company except for the offer price and theeffective date, which arent known at that time. With the red herring inhand, the underwriter and company attempt to hype and build upinterest for the issue. They go on a road show - also known as the "dogand pony show" - where the big institutional investors are courted. As the effective date approaches, the underwriter andcompany sit down and decide on the price. This isnt an easy decision: itdepends on the company, the success of the road show and, mostimportantly, current market conditions. Of course, its in both partiesinterest to get as much as possible. P a g e | 11
  12. 12. Downloaded from Finally, the securities are sold on the stock market and themoney is collected from investors. As you can see, the road to an IPO is a long and complicatedone. You may have noticed that individual investors arent involved untilthe very end. This is because small investors arent the target market.They dont have the cash and, therefore, hold little interest for theunderwriters. If underwriters think an IPO will be successful, theyllusually pad the pockets of their favorite institutional client with sharesat the IPO price. The only way for you to get shares (known as an IPOallocation) is to have an account with one of the investment banks that ispart of the underwriting syndicate. But dont expect to open an accountwith $1,000 and be showered with an allocation. You need to be afrequently trading client with a large account to get in on a hot IPO. Bottom line, your chances of getting early shares in an IPO are slim tonone unless youre on the inside. If you do get shares, its probably because nobody elsewants them. Granted, there are exceptions to every rule and it would be incorrect for us tosay that its impossible. Just keep in mind that the probability isnt high if you are a smallinvestor. IPO – ADVANTAGES AND DISADVANTAGES The decision to take a company public in the form of aninitial public offering (IPO) should not be considered lightly. There areseveral advantages and disadvantages to being a public company, whichshould thoroughly be considered. This memorandum will discuss theadvantages and disadvantages of conducting an IPO and will briefly P a g e | 12
  13. 13. Downloaded from a2zmba.blogspot.comdiscuss the steps to be taken to register an offering for sale to the public.The purpose of this memorandum is to provide a thumbnail sketch of theprocess. The reader should understand that the process is very timeconsuming and complicated and companies should undertake thisprocess only after serious consideration of the advantages anddisadvantages and discussions with qualified advisors. Advantages of going public  Increased Capital A public offering will allow a company to raise capital to use for various corporate purposes such as working capital, acquisitions, research and development, marketing, and expanding plant and equipment.  Liquidity Once shares of a company are traded on a public exchange, those shares have a market value and can be resold. This allows a company to attract and retain employees by offering stock incentive packages to those employees. Moreover, it also provides investors in the company the option to trade their shares thus enhancing investor confidence.  Increased Prestige Public companies often are better known and more visible than private companies, this enables them to obtain a larger market for their goods or services. Public companies are able to have access to larger pools of capital as well as different types of capital.  Valuation Public trading of a companys shares sets a value for the company that is set by the public market and not through more subjective standards set by a private valuator. This is helpful for a company that is looking for a merger or acquisition. It also allows the shareholders to know the value of the shares. P a g e | 13
  14. 14. Downloaded from  Increased wealth The founders of the company often have the sense of increased wealth as a result of the IPO. Prior to the IPO these shares were illiquid and had a more subjective price. These shares now have an ascertainable price and after any lockup period these shares may be sold to the public, subject to limitations of federal and state securities laws. Disadvantages of going Public  Time and Expense Conducting an IPO is time consuming and expensive. A successful IPO can take up to a year or more to complete and a company can expect to spend several hundreds of thousands of dollars on attorneys, accountants, and printers. In addition, the underwriters fees can range from 3% to 10% of the value of the offering. Due to the time and expense of preparation of the IPO, many companies simply cannot afford the time or spare the expense of preparing the IPO.  Disclosure The SEC disclosure rules are very extensive. Once a company is a reporting company it must provide information regarding compensation of senior management, transactions with parties related to the company, conflicts of interest, competitive positions, how the company intends to develop future products, material contracts, and lawsuits. In addition, once the offering statement is effective, a company will be required to make financial disclosures required by the Securities and Exchange Act of 1934. The 1934 Act requires public companies to file quarterly statements containing unaudited financial statements and audited financial statements annually. These statements must also contain updated information regarding nonfinancial matters similar to information provided in the initial registration statement. This usually entails retaining lawyers and auditors to prepare these quarterly and annual statements. In addition, a company must report certain material events as they arise. This information is available to investors, employees, and competitors.  Decisions based upon Stock Price P a g e | 14
  15. 15. Downloaded from Managements decisions may be effected by the market price of the shares and the feeling that they must get market recognition for the companys stock.  Regulatory Review The Company will be open to review by the SEC to ensure that the company is making the appropriate filings with all relevant disclosures.  Falling Stock Price If the shares of the companys stock fall, the company may lose market confidence, decreased valuation of the company may effect lines of credits, secondary offering pricing, the companys ability to maintain employees, and the personal wealth of insiders and investors.  Vulnerability If a large portion of the companys shares are sold to the public, the company may become a target for a takeover, causing insiders to lose control. A takeover bid may be the result of shareholders being upset with management or corporate raiders looking for an opportunity. Defending a hostile bid can be both expensive and time consuming. Once a company has weighed the advantages and disadvantages of being a public company, if it decides that it would like to conduct an IPO it will have to retain a lead Parameters to judge an IPO Good investing principles demand that you study theminutes of details prior to investing in an IPO. Here are some parametersyou should evaluate:-  Promoters P a g e | 15
  16. 16. Downloaded from Is the company a family run business or is it professionallyowned? Even with a family run business what are the credibility andprofessional qualifications of those managing the company? Do the toplevel managers have enough experience (of at least 5 years) in the specifictype of business?  Industry Outlook The products or services of the company should have a gooddemand and scope for profit.  Business Plans Check the progress made in terms of land acquisition,clearances from various departments, purchase of machinery, letter ofcredits etc. A higher initial investment from the promoters will lead to ahigher faith in the organization.  Financials Why does the company require the money? Is the companyfloating more equity than required? What is the debt component? Keep atrack on the profits, growth and margins of the previous years. A steadygrowth rate is the quality of a fundamentally sound company. Check theassumptions the promoters are making and whether these assumptionsor expectations sound feasible.  Risk Factors The offer documents will list our specific risk factors such asthe company’s liabilities, court cases or other litigations. Examine howthese factors will affect the operations of the company. P a g e | 16
  17. 17. Downloaded from  Key Names Every IPO will have lead managers and merchant bankers.You can figure out the track record of the merchant banker through theSEBI website.  Pricing Compare the company’s PER with that of similar companies.With this you can find out the P/E Growth ratio and examine whether itsearning projections seem viable.  Listing You should have access to the brokers of the stockexchanges where the company will be listing itself. Understanding the role of intermediaries  Who are the intermediaries in an issue? Merchant Bankers to the issue or Book Running LeadManagers (BRLM), syndicate members, Registrars to the issue, Bankersto the issue, Auditors of the company, Underwriters to the issue,Solicitors, etc. are the intermediaries to an issue. The issuer disclosesthe addresses, telephone/fax numbers and email addresses of these P a g e | 17
  18. 18. Downloaded from a2zmba.blogspot.comintermediaries. In addition to this, the issuer also discloses the details ofthe compliance officer appointed by the company for the purpose of theissue.  Who is eligible to be a BRLM? A Merchant banker possessing a valid SEBI registration inaccordance with the SEBI (Merchant Bankers) Regulations, 1992 iseligible to act as a Book Running Lead Manager to an issue.  What is the role of a Lead Manager? (pre and post issue) In the pre-issue process, the Lead Manager (LM) takes upthe due diligence of company’s operations/ management/ businessplans/ legal etc. Other activities of the LM include drafting and design ofOffer documents, Prospectus, statutory advertisements andmemorandum containing salient features of the Prospectus. The BRLMsshall ensure compliance with stipulated requirements and completion ofprescribed formalities with the Stock Exchanges, RoC and SEBIincluding finalization of Prospectus and RoC filing. Appointment of otherintermediaries viz., Registrar(s), Printers, Advertising Agency andBankers to the Offer is also included in the pre-issue processes. The LMalso draws up the various marketing strategies for the issue. The post issue activities including management of escrowaccounts, co-ordinate non-institutional allocation, intimation ofallocation and dispatch of refunds to bidders etc are performed by theLM. The post Offer activities for the Offer will involve essential follow-upsteps, which include the finalization of trading and dealing ofinstruments and dispatch of certificates and demat of delivery of shares,with the various agencies connected with the work such as theRegistrar(s) to the Offer and Bankers to the Offer and the bank handlingrefund business. The merchant banker shall be responsible for ensuringthat these agencies fulfill their functions and enable it to discharge thisresponsibility through suitable agreements with the Company.  What is the role of a registrar? The Registrar finalizes the list of eligible allottees afterdeleting the invalid applications and ensures that the corporate actionfor crediting of shares to the demat accounts of the applicants is doneand the dispatch of refund orders to those applicable are sent. The Lead P a g e | 18
  19. 19. Downloaded from a2zmba.blogspot.commanager co-ordinates with the Registrar to ensure follow up so that thatthe flow of applications from collecting bank branches, processing of theapplications and other matters till the basis of allotment is finalized,dispatch security certificates and refund orders completed and securitieslisted.  What is the role of bankers to the issue? Bankers to the issue, as the name suggests, carries out allthe activities of ensuring that the funds are collected and transferred tothe Escrow accounts. The Lead Merchant Banker shall ensure thatBankers to the Issue are appointed in all the mandatory collectioncenters as specified in DIP Guidelines. The LM also ensures follow-upwith bankers to the issue to get quick estimates of collection andadvising the issuer about closure of the issue, based on the correctfigures.  Question on Due diligence The Lead Managers state that they have examined variousdocuments including those relating to litigation like commercial disputes,patent disputes, disputes with collaborators etc. and other materials inconnection with the finalization of the offer document pertaining to thesaid issue; and on the basis of such examination and the discussionswith the Company, its Directors and other officers, other agencies,independent verification of the statements concerning the objects of theissue, projected profitability, price justification, etc., they state that theyhave ensured that they are in compliance with SEBI, the Governmentand any other competent authority in this behalf. What is the Registration Process? Going public requires a Registration Statement which is acarefully crafted document that is prepared by your attorneys andaccountants. It requires detailed discussions on information pertainingto:  Business product/service/markets  Company Information P a g e | 19
  20. 20. Downloaded from  Risk Factors  Proceeds Use (How are you going to use the money)  Officers and Directors  Related party transactions  Identification of your principal shareholders  Audited financials After your registration statement is prepared, it is submittedto the Securities and Exchange Commission and various other regulatorybodies for their detailed review. When this process is completed, you andyour management team will do a "road show" to present your company tothe stock brokers who will then sell your stock to the public investors.Assuming they can successfully sell your issue, you’ll receive yourmoney. Then its simple, all you have to do is make a lot more moneywith the proceeds so as to increase the value of your, your teams and thepublic investors stock. IPO SCAMS YES BANK Ltd. CASE The modus operandi adopted in manipulating the YES BankLtd (YBL)s initial public offering (IPO) allotment involved opening of over7,500 benami dematerialised accounts. These accounts were with the National Securities DepositoryLtd (NSDL) through Karvy Stockbroking Ltd (Karvy-DP). Of the 13 erringentities, the chief culprits identified by SEBI were Ms Roopalben Panchaland Sugandh Estates and Investments Pvt Ltd. P a g e | 20
  21. 21. Downloaded from While Ms Panchal opened 6,315 benami DP accounts,another entity Sugandh opened 1,315 benami accounts. Each of theseaccounts applications were made for 1,050 shares, paying applicationmoney of Rs 47,250 each. By applying for small lots (1,050 sharesthrough each accounts), they misused the retail allotment quotastipulated for IPOs. The shares allotted in IPO to the benamis of MsPanchal and Sugandh would have otherwise gone to genuine retailapplicants. The IPO of YBL opened on June 15, 2005 and its shareswere listed on the BSE and the NSE on July 12, 2005. It was observed that Ms Panchal had transferred 9,31,600shares to various entities in seven off-market transactions on July 11 - aday prior to the listing and commencement of trading on the stockexchanges. In order to get an allotment of 9,31,600 shares, Ms Panchalwould have had to apply for crores of shares involving many crores ofrupees in application money. However, Ms Panchals name did not appear in the list of top100 public issue allottees. Thus, it was suspected that Ms Panchal musthave made multiple applications or that other applicants were acting asa front for her. Ms Panchal had applied for only 1,050 shares in the YESBank IPO, paying the application money of Rs 47,250. And she did notreceive any allotment in the IPO. On July 6, Ms Panchal received 150shares each from 6,315 allottees through off-market transactionsaggregating 9,47,250 YBL shares. Curiously, as per the dematerialised account data furnishedby NSDL, of the above 6,315 entities as many as 6,221 entities have asame address in Ahmedabad. There are three more addresses oflocations in Ahmedabad, which have been linked to Ms Panchal. All the6,315 entities have their bank accounts with Bharat Overseas Bank anddemat accounts with Karvy-DP. By applying for the maximum possible number of shares perapplicant while being categorised as retail applicant and by putting inlarge number of applications in the lot of 1,050 shares, Ms Panchal and P a g e | 21
  22. 22. Downloaded from a2zmba.blogspot.comher associates (real or fictitious) have attempted to corner the maximumpossible number of shares in the IPO allotment. This tantamounts to an abuse of IPO allotment process, theSEBI order said. A similar modus operandi was adopted by Sugandh, whichreceived 150 shares each from 1,315 dematerialised accountsaggregating 1,97,250 shares in off market transactions. According to SEBI findings, Ms Panchal and others bookedprofits to the tune of about Rs 1.70 crore on the day of the listing of YESBank shares. SEBI unearths another IPO scam in IDFC SEBI on Thursday 12th Jan 06 unearthed yet another abuseof IPO norms in the IDFCs initial public offering (IPO) where a fewinvestors opened over 14,000 dematerialised accounts to corner largenumber of shares of the company. This is the second such incident, aftera similar such violations were detected in the YES Banks IPO. SEBI said in IDFCs IPO too four investors opened as manyas 14,807 dematerialized accounts with Karvy-DP and "strangely", allthese account holders have their bank accounts with Bharat OverseasBank Ltd, Ahmedabad. SEBI order said: "further probe is required forexamining the systemic fault, if any, of the registrar Karvy-RTI i.e. KarvyComputer Shares P Ltd, and the lead managers Kotak Mahindra CapitalCompany Ltd, DSP Merrill Lynch Ltd and SBI Capital Markets Ltd inidentifying and weeding out the benami applications." P a g e | 22
  23. 23. Downloaded from Reference is being made to the RBI to examine the role ofBhOB, HDFC Bank, Indian Overseas Bank, ING Vysya Bank and VijayaBank in opening the bank accounts of these benami entities andapparently funding them. According to SEBI, Karvy-DP, which was also named in theYES Bank IPO case, has not adhered to `Know-your-Client norms, as perthe reports of inspection submitted by NSDL and CDSL on the DP. Also,some of the documents collected by CDSL during the course ofinspection show that Karvy-DP has obtained letters purportedly issuedby the banks concerned such as BhOB as proof of identity and proof ofaddress of the person for the purpose of opening dematerialisedaccounts. "It is seen that one branch manager has on the same datesigned as authorized signatory of different branches of the bank. Thisraises a doubt as to the authenticity of the bank documents obtained byKarvy-DP for opening dematerialised accounts," the SEBI order by itsWhole-time Director Mr G. Anantharaman said. SEBI also banned fourinvestors (in whose names the multiple accounts were opened) viz., MsRoopalben Nareshbhai Panchal (who was also named in the YES BankIPO scam), Sugandh Estates & Investments P Ltd, Mr PurshottamGhanshyam Budhwani and Mr Manojdev Seksaria from doing any kindof transactions in the securities market, till further directions.Another 35 firms were also barred from participating in the IPOs in thefuture, till further orders, the SEBI order said. MARUTI CaseFictitious Demat A/c’s opened in 2003 itself `First IPO in which key players took part was MarutiThe Charges DPs have been accused by SEBI of not fully implementingthe `maker-checker concept, data entry errors, scanning of officialssignatures, and appointing themselves as the second holder.Description P a g e | 23
  24. 24. Downloaded from Some of the demat accounts that were used to manipulateallotments in the initial public offer of Yes Bank and IDFC were openedduring 2003, and not in the last year as was earlier believed. The firstIPO in which the key operators have participated was that of MarutiUdyog Ltd, in June 2003, though the numbers of fictitious demataccounts were not very high then, the interim order from Securities andExchange Board of India has said. SEBIs investigations have now pegged that a "total of 24 keyoperators have indulged in abusive practices in respect of 21 IPOs". The evidence against Karvy DP has stemmed from the factthat almost all the demat accounts which served as conduits for thesemaster account holders were held with Karvy DP, according to the order.These 24 operators have 34 demat accounts; of which 16 demataccounts are held with Karvy DP.Due Diligence Not Taken The market regulators investigations have pointed out that,while opening demat accounts the depository participants were notexercising due diligence. Persons involved in the scam have collectedproofs of identity and addresses from groups of persons and used this toopen bogus bank accounts.Inter-linkages The master account holders were found to have made off-market transfer of the IPO shares to various common groups of entitieswho appear to be their principals. It is seen that some of the masteraccount holders have also made off-market transfers amongstthemselves. This shows that there are inter-linkages amongst the masteraccount holders as well as between groups of master account holdersand their principals, the order said. Depository participants have been accused by SEBI of notfully implementing the `maker-checker concept, data entry errors,scanning of officials signatures, and appointing themselves as thesecond holder. P a g e | 24
  25. 25. Downloaded from With some of the DPs also acting as brokers, stockexchanges have been advised to examine the role and involvement ofbrokers and sub-brokers by way of participation in IPOs either directly orindirectly and their dealings in the shares subsequent to listing.Exchanges are to submit a report on this within a month. SEBI bars Karvy, 23 other entities Alleged involvement in IPO allotment scamIn the dock Ban on several entities including HDFC Bank, IDBI Bank,ING Vysya Bank and Motilal Oswal Securities from opening fresh demataccounts.The regulator also pulled up NSDL and CDSL for `grave managementlapses.Description SEBI on Thursday 27th April 2006 came down heavily onstock market intermediaries by banning several entities including Karvygroup of companies, Pratik DP and Indiabulls Securities, for their allegedinvolvement in the IPO allotment scam. SEBI has also barred severalentities including HDFC Bank, IDBI Bank, ING Vysya Bank and MotilalOswal Securities from opening fresh demat accounts. In an interim order issued today after the second round ofinvestigations, the capital market regulator has banned 24 entities frombuying and selling securities till further orders.Common address SEBI also said 15 Depository Participants at NationalSecurities Depository Ltd (NSDL) including Kotak Securities, Citibank,ICICI Bank, Bank Paribas and IndusInd Bank had more than 500 demataccount holders sharing the common address. P a g e | 25
  26. 26. Downloaded from It asked NSDL to conduct inspection on whether all thedemat account holders are genuine. NSDL has also been asked to checkwhether the Know Your Customer norms of SEBI have been dulycomplied with and take action against suspect accounts on verification. Analysts felt the SEBI order was akin to capital punishmentfor the entities involved in the securities market scam. "In view of the detailed findings, Karvy DP and Pratik DPprima facie do not appear to be fit to deal in securities market as SEBI-registered intermediaries. Appropriate quasi-judicial proceedings arebeing initiated against the two DPs," the 252-page order issued late inthe evening said. SEBI said the other business groups of Karvy appear to haveacted in concert in the gamut of IPO manipulations. "I further directKarvy Stock Broking Ld, Karvy Computer Share PVT Ltd, Karvy InvestorServices and Karvy Consultants not to undertake fresh business asregistrar to the issue and share transfer agent," Mr G Anantharaman,Whole-Time Member, SEBI, said.NSDL, CDSL pulled up The regulator also pulled up NSDL and CDSL for `gravemanagement lapses. The findings revealed "contributory negligence" onthe part of the depositories and their managements. "The promoters of NSDL and CDSL are directed to take allappropriate actions including revamping of management which clearlyhas allowed matters to come to such a sorry pass," the order said. The order, to be treated as a `show-cause notice, has given15 days time to the parties named for filing objections. IPO scam: HDFC Bank, 2 others fined The Reserve Bank of India on Monday 27th Feb 2006 finedHDFC Bank, IDBI and ING Vysya Bank for violation of Know Your P a g e | 26
  27. 27. Downloaded from a2zmba.blogspot.comCustomer norms and other irregularities in relation to the recent IPOscam. HDFC Bank has been slapped with the highest penalty of Rs25 lakh; ING Vysya Bank - Rs 10 lakh and IDBI Ltd Rs 5 lakh. This is the second time HDFC Bank has been fined forviolation of KYC norms. In January, the bank was imposed a penalty ofRs 5 lakh. According to an RBI release, these banks have been fined,"for violation of regulations on KYC norms, for breach of prudent bankingpractices and for not adhering to its directives/guidelines relating toloans against shares/ IPO." Salient Features of IPO scamModus operandi  Current account opened in the name of multiple companies on the same date in the same branch of a bank  Sole person authorized to operate all these accounts who was also a Director in all the companies P a g e | 27
  28. 28. Downloaded from  Identity disguised by using different spelling for the same name in different companies  Multiple accounts opened in different banks by the same group of joint account holders  Huge funds transferred from companies accounts to the individual’s account which was invested in IPO’s  Loans/ overdrafts got sanctioned in multiple names to bypass limit imposed by RBI  Loans sanctioned to brokers violating guidelines  Multiple DP accounts opened to facilitate investment in IPO  Large number of cheques for the same value issued from a single account on the same day  Multiple large value credits received by way of transfer from other banks  Several accounts opened for funding the IPO on the request of brokers, some were in fictitious names  Refunds received got credited in brokers a/cs  Margin money provided by brokers through single cheque  Nexus between merchant banker, brokers and banks suspected Operational deficienciesFactors that facilitated the scam  Photographs not obtained  Proper introductions not obtained P a g e | 28
  29. 29. Downloaded from  Signatures not taken in the presence of bank official  Failure to independently verify the identity and address of all joint account holders  Directors identity/ address not verified  Customer Due Diligence done by a subsidiary  Objective of large number of jt. account holders opening account not ascertained  Purpose of relationship not clearly established  Customer profiling based on risk classification not done  Poor monitoring and reporting system due to inadequate appreciation of ML issues  Absence of investigation about use and sources of funds  Unsatisfactory training of personnel  No system of fixing accountability of bank officials responsible for opening of accounts and complying with KYC procedures  Ineffective monitoring and control Measures to prevent scams  An analysis of IPO scam clearly brings out the laxity on the part of banks to scrupulously implement the KYC/AML guidelines issued from time to time. It also raises serious concerns about the integrity of the systems & systemic risks. P a g e | 29
  30. 30. Downloaded from  While scams may still happen despite best of preventive measures, it should not undermine the efforts being made to insulate the financial sector from money laundering. It is going to be a long fight with constant need to improve and innovate new strategies.  It is important to understand that the risks banks run as a result of non-compliance with regulatory and statutory guidelines can cause severe reputational and financial damage to individual banks and the Indian banking system as a whole  Need for comprehensive operational framework implementing important aspects of KYC instructions e.g.  Documentation procedure for opening of all types of customer accounts;  Clarity in understanding of risk classification of accounts and proper customer profiling  Ongoing monitoring of medium and high risk accounts  Enhanced due diligence in respect of accounts with beneficial ownership, non-face to face transactions, group companies, high risk businesses and wire transfers etc.  Prompt reporting of cash and suspicious transactions to Principal Officer by branches  An effective audit machinery  Good understanding of regulatory and statutory prescriptions in letter and spirit  Clear demarcation of duties and responsibilities  Violations to be dealt with sternly Recent IPOs P a g e | 30
  31. 31. Downloaded from IPO Rating Offer Price Open Date Close DateSeptemberRicha Knits 30 13 Sep 2006 19 Sep 2006Gwalior Chem 71-85 11 Sep 2006 14 Sep 2006Usher Agro 15 05 Sep 2006 11 Sep 2006Atlanta 150 01 Sep 2006 07 Sep 2006HOV Services 200-240 04 Sep 2006 07 Sep 2006Action Const 110-130 01 Sep 2006 07 Sep 2006Deep Industries 36 29 Aug 2006 04 Sep 2006KEW Industries 30 28 Aug 2006 01 Sep 2006AugustVoltamp Trans 345 24 Aug 2006 29 Aug 2006Tech Mahindra 365 01 Aug 2006 04 Aug 2006GMR Infra 210 31 Jul 2006 04 Aug 2006JulyShirdi Ind 67-78 29 Jun 2006 08 Jul 2006JuneVigneshwara 110-124 07 Jun 2006 16 Jun 2006Bluplast Ind 32 05 Jun 2006 09 Jun 2006Allcargo Global 675 01 Jun 2006 06 Jun 2006Prime Focus 417 25 May 2006 03 Jun 2006 DEFINITIONS AND ABBREVIATIONSI. CONVENTIONAL/ GENERAL TERMS P a g e | 31
  32. 32. Downloaded from Term DescriptionAGM Annual General Meeting of Pratibha Industries LimitedArticles / Articles of Articles of Association of Pratibha Industries LimitedAssociation / AOACompanies Act / Act The Companies Act, 1956 as amended from time to timeDepository A Company formed and registered under the Companies Act, 1956 and which has been granted a certificate of registration under sub- section (1A) of Section 12 of the Securities and Exchange Board of India Act, 1992Depositories Act The Depositories Act, 1996, as amended from time to timeDepository Participant A depository participant registered as such under sub-section (1A) of Section 12 of the Securities and Exchange Board of India Act, 1992FEMA Foreign Exchange Management Act, 1999, as amended from time to time, and the regulations framed there underFDI Foreign Direct InvestmentFII Foreign Institutional Investor [as defined under FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000] registered with SEBI.Financial year / Fiscal Period of twelve months ended March 31 of that particular yearyear / FYIndian GAAP Generally accepted accounting principles in IndiaI.T. Act The Income-Tax Act, 1961, as amended from time to timeMemorandum / MOA Memorandum of Association of Pratibha Industries LimitedNRI / Non-Resident A person resident outside India who is a citizen of India or is personIndian of Indian origin as defined in Foreign Exchange Management (Deposit) Regulations, 2000]ROC Registrar of Companies, Maharashtra situated at 100, Everest Building, Marine Lines, Mumbai 400002RBI Reserve Bank of IndiaSCRR Securities Contracts (Regulation) Rules, 1957, as amended from time to time.SEBI The Securities and Exchange Board of India, constituted under the SEBI Act, 1992SEBI Act Securities and Exchange Board of India Act, 1992 as amended from time to timeSEBI/(DIP) Guidelines SEBI (Disclosure and Investor Protection) Guidelines, 2000, as amended, including instructions and clarifications issued by SEBI from time to timeII.OFFERING RELATED TERMSAllotment Issue of Equity Shares of the Company pursuant to the Public Issue to the successful Bidders. P a g e | 32
  33. 33. Downloaded from a2zmba.blogspot.comAllottee The successful Bidder to whom the Equity Shares are being issued.Bankers to the Issue ICICI Bank Limited, Standard Chartered Bank, Deutsche Bank, Kotak Mahindra Bank LimitedBid An indication to make an offer made during the Bidding Period by a prospective investor to subscribe to Equity Shares of the Company at a price within the Price Band, including all revisions and modifications theretoBid Price / Bid Amount The amount equal to highest value of the optional Bids indicated in the Bid cum Application Form and payable by the Bidder on submission of the Bid in the IssueBid Opening Dates / Issue The date on which the Syndicate Members shall start accepting BidsOpening Date for the Issue, which shall be the date notified in a widely circulated English national newspaper, a Hindi national newspaper and a Marathi regional newspaperBid Closing Date / Issue The date after which the Syndicate Members will not accept anyClosing Date Bids for the Issue, which shall be notified in a widely circulated English national newspaper, a Hindi national newspaper and a Marathi regional newspaperBid cum Application The Form in terms of which the Bidder shall make an offer toForm purchase the Equity Shares of the Company and which will be considered as the application for allotment of the Equity Shares in terms of this Red Herring ProspectusBidder Any prospective investor who makes a Bid pursuant to the terms of this Red Herring ProspectusBidding Period / Issue The period between the Bid/Issue Opening Date and the Bid/IssuePeriod Closing Date inclusive of both days and during which prospective Bidders can submit their BidsBook Building Process Book building route as provided under Chapter XI of the SEBI Guidelines, in terms of which, this Issue is being madeBRLM Book Running Lead Manager to the Issue, in this case being Vivro Financial Services Private LimitedCAN / Confirmation of The note or advice or intimation of allocation of Equity Shares sentAllocation Note to the Bidders who have been allocated Equity Shares in accordance with the Book Building ProcessCap Price The higher end of the Price Band, above which the Issue Price will not be finalized and above which no bids will be acceptedCut-off price Cut-off price refers to any price within the Price Band. A Bid submitted at Cut-off is a valid Bid at all price levels within the Price BandDesignated Stock Bombay Stock Exchange LimitedExchangeDesignated Date The date on which the funds are transferred from the Escrow Account of the Company to the Public Issue Account after the Prospectus is filed with the ROC, following which the Board of Directors shall allot Equity Shares to successful biddersRed Herring Prospectus This Red Herring Prospectus issued in accordance with Section 60B of the Companies Act, which does not have complete particulars on the price at which the Equity Shares are offered and size of the Issue. It carries the same obligations as are applicable in case of a Prospectus and will be filed with ROC at least three days P a g e | 33
  34. 34. Downloaded from before the bid/offer opening date. It will become a Prospectus after filing with ROC after the pricingEquity Shares Equity Shares of the Company of the face value Rs. 10 each, unless otherwise specified in the context thereofEscrow Account Account opened with the Escrow Collection Bank(s) and in whose favour the Bidder will issue cheques or drafts in respect of the Bid Amount and refunds (if any) of the amount collected to the BiddersEscrow Agreement Agreement entered into amongst the Company, the Registrar, the Escrow Collection Bank(s), the Syndicate Members and the BRLMs for collection of the Bid Amounts and refunds (if any) of the amounts collected to the BiddersEscrow Collection ICICI Bank Limited, Standard Chartered Bank, Deutsche Bank,Bank(s) Kotak Mahindra Bank LimitedFirst Bidder The Bidder whose name appears first in the Bid cum Application Form or Revision FormFloor Price The lower end of the Price Band, below which the Issue Price will not be finalized and below which no Bids will be acceptedFresh Issue / Issue / Public Issue of 42,85,000 new Equity Shares of Rs. 10/- each forPublic Issue / Offer cash at the Issue Price of Rs. [•] per equity share aggregating to Rs. [•] Lakhs by the Company in terms of this Red Herring ProspectusIssue Account Account opened with the Banker to the issue to receive monies from the Escrow Accounts on the Designated DateIssuer Pratibha Industries LimitedIssue Price The final price at which Equity Shares will be issued and allotted in terms of this Red Herring Prospectus, as determined by the Company in consultation with the BRLMs, on the Pricing DateMargin Amount The amount paid by the Bidder at the time of submission of his/her Bid, being 10% to 100% of the Bid AmountMembers of the Syndicate The BRLM and the Syndicate MembersNon-Institutional Bidders All Bidders that are not Qualified Institutional Buyers, or Retail Individual Bidders and who have Bid for Equity shares for an amount more than Rs.1,00,000.Non-Institutional Portion The portion of the Issue being a minimum of 5,78,475 Equity Shares of Rs. 10/- each available for allocation to Non-Institutional BiddersPay-in-date The last date specified in the CAN sent to the BiddersPay-in-Period This term means (i) With respect to Bidders whose Margin Amount is 100% of the Bid Amount, the period commencing on the Bid/issue Opening Date and extending until the Bid/issue Closing Date, and (ii) With respect to Bidders whose Margin Amount is less than 100% of the Bid Amount, the period commencing on the Bid/issue Opening Date and extending until the closure of the Pay-in-DatePrice Band The Price band of a minimum price (Floor Price) of Rs.100/- and the maximum price (Cap Price) of Rs. 120/- and includes revision thereofPricing Date The date on which the Company in consultation with the BRLM finalizes the Issue PricePromoters Mr. Ajit B. Kulkarni, Mrs. Usha B. Kulkarni, Mr. Datta B. Kulkarni, Mr. Vinayak B. Kulkarni, Mr. Ramdas B. Kulkarni and Pratibha P a g e | 34
  35. 35. Downloaded from Shareholding Private LimitedProspectus The Prospectus filed with the ROC containing, inter alia, the Issue Price that is determined at the end of the Book Building Process, the size of the Issue and certain other informationPublic Issue Account In accordance with Section 73 of the Companies Act, 1956, an account opened with the Banker(s) to the Issue to receive monies from the Escrow Account for the Issue on the Designated DateQIB Portion The portion of the net issue being not less than mandatory 19,28,250 Equity Shares of Rs. 10 each at the Issue Price, available for allocation to QIBsQualified Institutional Public Financial Institutions as specified in Section 4A of theBuyers/ QIBs Companies Act, Scheduled Commercial Banks, Mutual Funds registered with SEBI, Foreign Institutional Investors registered with SEBI, Multilateral And Bilateral Development Financial Institutions, Venture Capital Funds registered with SEBI, Foreign Venture Capital Investors registered with SEBI, State Industrial Development Corporations, Insurance Companies registered with the Insurance Regulatory And Development Authority (IRDA), Provident Funds with a minimum corpus of Rs.2500 Lakhs and Pension Funds with a minimum corpus of Rs. 2500 Lakhs.Retail Individual Bidders Individual Bidders (including HUFs and NRIs) who have not Bid for an amount in excess of Rs.1,00,000/- in any of the bidding options in the Issue.Retail Portion The portion of the Net Issue being a minimum of 13,49,775 Equity Shares of Rs.10 each available for allocation to Retail Individual Bidder(s)Registrar/ Registrars to Intime Spectrum Registry Limitedthe IssueRevision Form The Form used by the Bidders to modify the quantity of Equity Shares or the Bid Price in any of their Bid cum Application Forms or any previous Revision Form(s).Syndicate Agreement The agreement to be entered into among the Company and the members of the Syndicate in relation to the collection of Bids in this IssueSyndicate Members Intermediaries registered with SEBI and eligible to act as underwriters. Syndicate Members are appointed by the BRLM and include the BRLMSyndicate The Syndicate Members collectivelyTRS or Transaction The slip or document issued by the Syndicate Members to theRegistration Slip Bidder as proof of registration of the BidUnderwriters The BRLM and Syndicate MembersUnderwriting Agreement The Agreement among the BRLM, the Syndicate Members and the Company to be entered into on or after the Pricing Date P a g e | 35
  36. 36. Downloaded from BibliographyWeb Based      www.pratibhagroup.comBook Based  Share Market Book  By Tarun Shah  IPO Decision  By Jason DrahoIndustry Based  PRATIBHA GROUP OF COMPANIES P a g e | 36