4. Public Offerings_Augiust 07

8/8/2019 4. Public Offerings_Augiust 07

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For Private Circulation Only

Public Offering

An Insight


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Basics of Public Offering


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Public Offering An Understanding

Initial Public Offering (IPO) is the first sale ofa Company's common sharesto investors on a public stock exchange

The main purpose ofan IPO is to raise capital for the Company.

If a Company later sells newly issued shares again to the market, it iscalled a Follow on Public Offering"

When a shareholder sells shares through public offer, it is called a Offerfor Sale" and the shareholder, not the company who originally issued theshares, retains the proceeds of the offering


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Benefits

Public Issue is an efficient way to raise long term capital

Public Issue helps in expanding and diversifying the investor base

Prestige and public awareness for Company

Liquidity to shareholders

Improved financial positioning and leveraging

Ability to attract and retain key personnel (ESOP)

Facilitates mergers and acquisitions

Attended responsibilities and concerns

Stringent eligibility and compliance norms

Elaborate disclosures and continuous information sharing

Concerns of control, Management and Corporate governance

On going costs Listing fees, Information dissemination, Public Disclosuresthrough newspapers, etc.

Public Offering An Analysis


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Types of Public Offering

Initial Public Offering (IPO) (by Unlisted Companies)

Booking Building Issue

Fixed Price

Composite Issue

Follow on Public Offering (FPO) (by Listed Cos)

Booking Building Issue

Fixed Price

Rights (by Listed Cos)

Fixed Price


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Issue Company A Public Limited Company

Plans to raise long term resources

Planning to provide liquidity to existing holders

BookRunning Lead Managers

Conduct Due Diligence

Preparation of Offer Document

Assisting in SEBI and Stock Exchange Clearances

Preparing the Marketing Strategy

Marketing the Issue

Post Issue Formalities

Syndicate Members /Sub-Syndicate andBrokers

Distribution Channels

Collection and Bidding of Application Forms

Participants of Public Offering


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Legal Counsels Domestic Legal Counsel to the Issue

International Legal Counsel to the Issue

Domestic Legal Counsel to the Underwriters

Assist in Due Diligence and Drafting of Document

Registrar

Allotment of Shares and Refund of Money

Handles Shareholders registrar

Dematerialization of the Company's shares

Processing ofBid-cum Application forms

Printer

Printing of Draft Red Herring Prospectus, Red Herring Prospectus and Prospectus

Printing and Distribution ofForms and other Stationery



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Advertising Agency Prepare Media Strategy

Managing Logistics of Domestic Road Shows

Issue Advertisements Statutory and Other

Corporate Advertisements

PR activities

Collection /RefundBankers to the Issue

Collection of Application Money

Preparing various reports

Co-ordination with Registrars

ECS and RTGS facilities



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Fixed Price Issue

Entire allotment on a proportionate basis to Retail Investors (RIs), Non-InstitutionalInvestors (NIIs) and Qualified Institutional Buyers (QIBs)

At least 50% of the issue to be allotted to Retail Investors (applying for up to anamount of Rs.100,000)

Balance to be allotted to Non-Institutional Investors and QIBs (applying for an amountof > Rs.100,000)

Pros

Lesser number of Market Intermediaries

Wider distribution since no requirement of electronic bidding

Operationally simpler

Retail participation (due to proportionate allotment) leads to wide spread shareholding

Cons

Price discovery not as efficient as book-building since price decided at SEBI filing stage

Longer time between finalisation of price and closure of issue (30-35 days)

Very low institutional appetite since, QIBs required to pay full amount on application

Model


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Book Built Issue

Upto 50% allocation on a proportionate basis to QIBs with upto 15% allotment to AnchorInvestors , i.e., Banks, FIIs, Mutual Funds, VCs, etc.

At least 35% offer on a proportionate basis to Retail Investors (individuals bidding for anamount upto Rs.100,000)

At least 15% offer on a proportionate basis to Non-Institutional Investors (bidding for anamount of > Rs.100,000)

Pros Efficient price discovery could lead to potential to capture a higher valuation

Large institutional appetite

Shorter time gap between determination of the price band and closure of the book (15-20 days) reduces market risk

Shorter timeline for allotment

Compulsory underwriting

Cons

Institutional investors prefer bigger bites, hence large IPO size a prerequisite

Need significant institutional demand since retail participation alone may not lead toefficient price discovery

Higher Issue expenses

Model


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Key Regulations


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Key Regulations

Companies Act, 1956

SEBI (Disclosure for Investor Protection) Guidelines, 2000

Securities Contracts and Regulations Act, 1956

SEBI Act, 1992

Listing Guidelines by Stock Exchanges

Listing Agreement


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Initial Public Offerings by Unlisted Companies

Option I

(a) Net tangible assets ofat least Rs.3 crores in each of the preceding 3 full years, of which notmore than 50% is held in monetary assets; and

(b) The company has a track record of distributable profits in terms of Section 205 of theCompanies Act (excl. extra ordinary items) for at least 3 out of immediately preceding 5years; and

(c) The company has a net worth ofat least Rs.1 crore in each of the preceding 3 full years

(d) In case the Company has changed its name in the preceding one year then at least 50% ofthe revenue earned for the preceding one full year should have been earned from the activitysuggested by the name.

(e) The aggregate of the proposed issue and all previous issues made in the same financial year

in terms of size should not exceed 5times the pre-issue net worth as per the last auditedfinancials

Eligibility and Listing Criteria


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Issue thru Book building process withatleast 50% allotment to QIBs

project hasat least 15% participationby FIs / Banks, of which 10% comes

from the appraiser(s) and atleast 10%of issue size isallotted to QIBs

Minimum post issue capital of thecompany shall be Rs.10 crores

Compulsory market making for

atleast 2 years

or

or+

Option II - Ifan unlisted company does not meet the above eligibility norms, then,



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Exemptions from Eligibility Norms(a) Banking Company

(b) Correspondent New Bank (Public Sector Bank)

(c) Infrastructure Company

(i) Whose project has been appraised by FI / IDFC / ILFS or bank which was earlier an FI

(ii) 5% of the project cost is financed by the appraiser(s) / institutions jointly or severally

(d) Rights Issue

Listing Criteria (Stock Exchanges)

BSE

NSE

Post Issue Equity Capital Rs.100mn

Post Issue Networth Rs.200mn

Post Issue Equity Capital Rs.100mn

Market Capitalisation Rs.250mn


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PromotersContribution

Promoters Contribution not less than 20% of post issue capital

Lock-in

Requirements

Promoters holding upto 20% of post issue capital locked-in for 3 years and

excess of promoters holding locked-in for 1 year

Entire pre-issue capital locked-in for 1 year from the date ofallotment in IPO orcommencement of commercial production, whichever is later

Minimum Dilution(Unlisted Cos)

Atleast 10% or 25% ofIssue Size to be offered to public Net offer to public would exclude reservationsand firm allotments

Infrastructure companies exempt from these requirements

Offer for Sale Only securities held for more than 1 year can be offered for sale

Public Issue byListed Cos

No requirement for promoters contribution if company listed for 3 yearsandhas paid dividends for 3 years

Promoters Contribution and Lock-in Requirements


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Key Book Building Guidelines

Allotment

50% allocation to QIBs on proportionate basis, of which 5% to Mutual Funds

and upto 15% allotment to Anchor Investors on discretionary basis

50% offer to non-QIBs on a proportionate basis

35% to retail investors applying for upto an amount of Rs.100,000

15% to non-institutional investors applying for an amount > Rs.100,000

Spill over permitted among categories

Bidding Bidding mandatory on electronically linked platform of Stock Exchanges

Bidding terminals at all centres where there is a Stock Exchange

On line display Graphical display of demand and price at the bidding terminals is mandatory

Price Discovery Bidding permitted by using a floor price or a price band having 20% range

Price band during the bidding period can be revised within a 20% band, provided

bid open for 3 days after revision, and not more than 10 days in all

Bidding at different price levels, expect retail investors who can bid at cut off

Underwriting Signed post price discovery and allocation

Bidding Period Mandatory period of 3 days and upto 7 days, in case of price revision upto 10

days. QIBs bidding may close 1 day prior to issue closure

Offer Document Red Herring Prospectus filed with RoC with price band used for bidding

Prospectus filed along with discovered price post bidding


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Public Offering Process


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Public Offering Process

Appoints MerchantBankersasBook

Running Lead Managers

Appointment ofBRLMs

IssuerCompany

Understanding IssuerCompanys revenuemodel

Identify key sellingpoints

Build case for valuation Fiduciary obligations Identify key concerns Statutory obligations

BRLMs conductsDue Diligence

Disclosures aboutbusiness strategy,objectives, managementand financial condition

Emphasize key growthdrivers for the IssuerCompanys

Positioning of theCompany

Drafting of DRHP

Listing ofsecurities on theExchangeMonies transferred to

Issuer Company

SEBI Comments

1on1 meetingsarranged withinstitutionalinvestors

Brokers meetingfor HNI and Retailinvestors in variouscities

Pre-Marketing andRoadshows

Fixation of Price Band Date Fixation Issue opening Collection of bid cum

application forms Bidding by investors

on online system Closure ofIssue

Bidding/Issue periodand Pricing

Filing of

DRHP

withSEBI

and SEs

Filing of

RHP

withSEBI &

SEs

Final Cut-off Price Allocation for QIBs Finalisation of Basis of

Allotment Board Meeting ofIssuer Filling of Prospectus

Finalisation of Issue Priceand

Post Issue formalities

IPO Grading

On designated dateamount transferred fromEscrow to the Issueaccount

Allotment of shares iscompleted

Designated Date


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To constitute dedicated

IPO team with significant time allocation to the

IPO process

Selection and appointment of the Legal Counsel team

Domestic Legal Counsels (DLCs)

International Legal Counsel (ILC), if necessary

Commence collation of information for the Draft Red Herring Prospectus (DRHP) and thedue diligence process based on the list provided by the BRLMs and LCs

Finalization on capital structure and composition of the issue

Discuss with the Company and auditor the audit requirements of the issue

Commence process of due diligence and preparation of DRHP

Appoint other intermediaries for the Issue

Registrar to the Issue

Advertising and PR agency

Printer to the issue

Steps prior to SEBI filing


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Steps prior to SEBI filing

Final and signed auditors report received for the draft RHP

Finalize communication strategy, corporate advertising plan and issue advertising plan

Ensure compliance with SEBI code on issue advertising

Company to furnish all the certificates required prior to filing based on the formatsprovided by the BRLM and LCs

Research report published and circulated

CMD, Directors and CFO to sign the draft RHP for filing with SEBI

File DRHP with SEBI and SEs


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Critical Disclosure Requirements..

Risk Factors Business related risks

Factors that could adversely impact revenues or profitability of the company

Dependence on one / few customers

Dependence on key employees

Seasonality in business

Project related risks, etc.

Non-business related risk Material litigations of the company and its group companies, promoters, directors

Approvals for the business / IPO not received

Loss making group companies, etc.

External Risks

Competition

Changes in Government policies which impact the company

Changes in, economic conditions in India and markets which impact the companysbusiness

Force majeure


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..Critical Disclosure Requirements..

Capital Structure Composition of the offer primary and secondary

Build up of capital structure since inception

Promoters contribution and lock-in

Details of top ten shareholders, 2 year prior, 10 days prior and as on SEBI filing date

Details of equity transactions by the promoters during the last six months

Details of ESOP scheme, ifany

Terms of the Issue Authority of the issue

Rights of the shareholders

Category-wise offer size QIBs, non-institutional and retail investors

Trading and market lot

Eligible investors in each category

Terms, mode and process of payment

Allotment mode and process ofallotment Bidding process

General Instructions


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Objects ofIssue Project cost and details ofappraisal, ifany

Use of proceeds

Means of financing firm arrangements of finance through verifiable means towards75% of the stated means of finance, excluding IPO should have been made

Deployment of funds raised in the issue

Actual expenditure already made

Year-wise break-up of expenditure

Investment avenues for funds raised, pending utilisation

History of the Company

Key events since inception

Changes in name, registered office, memorandum and articles ofassociation

Objects clause of the company

Promoters and Promoter Group Companies

In case of individual promoters, profile including age, qualification, experience inbusiness, credentials, etc.

In case of corporate promoters, history of the company, its promoters, financialhighlights, etc.


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Management Board of Directors name, address, occupation, other directorships, independent non-

independent, brief profile, terms of directorship including remuneration, shareholding in thecompany, litigations, interest in property, changes in directors and reasons thereof in the last3 years, etc.

Key Management Personnel name, address, educational qualifications, date of joining thecompany, previous employment, years of experience, brief profile, remuneration,shareholding in the company, changes in key personnel and reasons thereof in the last 1

year, etc. Business of the Company

Brief Overview of the business offerings products and services

Industry Overview

Competitor landscape

Plant, machinery, technology, process details

Approach to marketing

Employee details Facilities, technology, property


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Auditors Report 5 years and the stub period(not older than six months as on the date of issue opening)

Financial accounts for five years and the stub period balance sheet, profit and loss,notes to accounts, significant accounting policies, changes in accounting policies,auditors qualification, cash flow statement, previous year adjustments, if any afterrecasting

Indian GAAP accounts on stand alone basis

Indian GAAP accounts on a consolidated basis

US GAAP accounts for past 5 years and stub period not mandatory but recommended

Dividend policy, taxation and capitalisation statements

Loans and Advances

Related Party Transactions

Key Financial Ratios

Basis ofIssue Price

Comfort letter from the auditors on all financial information in the Draft RHP

Tax Benefit Certificate from auditors


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Management Discussion and Analysis on Performance Summary of past financial results based on Indian accounts

Reasons of change in significant items of income and expenditure

Management Discussion on

Unusual or infrequent events

Significant economic changes that are material

Known trends or uncertainties that may adversely impact sales, revenues or income

Future changes in relationship between costs and revenues Total turnover of each major industry segment in which the company operates

Status of publicly announced new products/business segments

Extend to which business is seasonal

Competitive conditions

Dependence on single or few suppliers or customers

Material developments, ifany, since the last balance sheet date


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..Critical Disclosure Requirements

Previous or current Credit Ratings Details of financial indebtedness by the Company

Financial of Group Companies

In case of listed group companies, details of previous issue, stock market data

Litigations against the company, promoters, directors, group companies

Statutory Information as per Companies Act

Details on previous issue

Expenses of the issue

Consents, expert advice

Purchase of property

Main provisions of the Articles of Association

Material Contracts and documents

Declaration and sign-off by the Board, CEO and CFO of the company on the SEBI andROC filed Red Herrings


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After SEBIFiling


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File Draft Red Herring with SEBI and SEs where shares are listed

Prepare drafts and commence discussions on various agreements like Escrow, Syndicateand Underwriting Agreements

Discuss the marketing plan including

Public relations plan

Corporate ads (can be issued without risk factors during this period)

Advertising campaign, ad budget, ad media

Conferences plan, i.e., press and broker conferences, analyst meets

Statutory distrbution schedule (forms and prospectus)

Direct marketing to shareholders / stakeholders

Sign tripartite agreement with NSDL and CDSL

Finalise the arrangements with Escrow Bankers

Receive all relevant clarifications / exemptions from various regulators

Obtain initial listing permission from the SEs

Obtain comments from SEs on Draft RHP

Steps after SEBI Filing


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Valuation Methodology

Overall

ValuationMethodology

The pricing of the issue will be driven by the following broadfactors:

Brand Equity

Fundamental Strengths and Track Record

Sector Valuation

Earnings and asset based valuation

Market sentiments prevailing at the time of the issue

Industry

Comparables

The secondary market multiples ofsimilar companies in the industry areused for benchmarking

Company specific discount based on various financial metrics

An additional IPO discount of 20%-30% is applied to the company (IPOPop)


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Marketing Strategy

Insurance Investors

Banks and

Mutual Funds

Corporates

Retail

HNIs /NRIs

Financial Institutions /

FIIs

Optimize on the Timing - Be ready Proper focus on Retail andInstitutional Investor


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Marketing Strategy

Target few Large Investors Information dissemination One on One interaction Positioning and Valuations Continue interaction Arrive at pre marketing feedback

Ensure interest in the IPO at ahigher price band

NIIsNIIsNIIsNIIs

Target Platinum, A, B and C classInvestors

Research material, conference calls andinvestor meetings

Positioning and Valuations Continue interaction and prepare for

management meetings Arrive at pre marketing feedback Ensure interest in the IPO at a higher

price band

Tie up with aggressive brokers Information dissemination One on one interaction with brokers Positioning and Valuations Continue interaction Arrive at pre marketing feedback Ensure interest in the IPO at a

higher price band

QIBsQIBsQIBsQIBs RetailRetailRetailRetail

KKC

BOOK

NII

15%

Retail

35%

QIB

50%


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Marketing Strategy

Top 15 cities contribute to90%+ of the IPO demand.

Finalisation of cities based onI

ssuers presence across thelength and breadth of thecountry to further enhancethe retail reach,

Internationally - London,NewYork, Tokyo, Dubai, HonkKong, Singapore needs to becovered at least, dependingon the marketing strategy

finalised

Supported by

Adequate and timely supply of issuestationery

In top cities in India

A week prior to issue opens

Need to cover influencers

Broker and Press meets

Sustained awareness programme

Press Releases and Relations

Develop equity storythrough equity research

Communicate equity storyduring pre-marketing one toone meetings with fundmanagers

Collate pre-marketingfeedback and decide priceband

One-on-one meetings andgroup functions withmanagement of thecompany.

Regular interf ace bysalespersons with fundmanagers


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Receive SEBI observations (expected after 45-60 days of filing), valid upto 1 year ofissue opening

Incorporate changes in the Red Herring as per comments from SEBI and SEs

Discuss with SEBI clarifications / deviations on their observations and inform them ofmaterial changes

Send reply to the SEBI observations based on discussions with them and obtain written/ verbal concurrence on the same

All corporate advertisements whilst conforming to SEBI guidelines must contain riskfactors

Product advertisements can continue as usual without risk factors

Steps before Bid Opening..


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..Steps before Bid Opening..

Pre-marketing to investors to receive guidance on Floor Price/Band Price

Analysis of pre-marketing feedback

Demand Assessment

Price Band/Floor Price discussion

Identify issues that need to be addressed during road-shows

Tie-up of NSE/BSE for the book building software

Finalise Price Band and file Red Herring Prospectus with RoC along with materialcontracts and documents

In case ofa price band, it should be a 20% band, from the floor

Price band can be revised during the bidding period, limited to 20% from the floor and cap, butissue to be open for an additional 3 days, subject to maximum issue period of 10 days

Give strike order for Red Herring and Bid forms and commence distribution

Commence management road shows retail and QIB

Finalise the syndicate and escrow agreements and file the same with SEB

I


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Bidding Period


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Finalise the Underwriting agreement

Deposit 1% of the issue with DSE, at least 1 day before bid opening

Commence bidding

Analyse demand and built-up of the book on an on-going basis

Announce movements in the price band, ifany

Co-ordinate with the Registrars on a daily basis For collection of bid forms from syndicate members

Complete management road-shows

Co-ordinate with the bankers for collection and clearance of instruments

Complete bidding

Steps during the Bidding Period


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Steps during the Bidding Period

Minimum bidding period of 3 days, maximum 7 days, can be extended to maximum 10days in case of price revision

Bidding permitted only on an electronically linked platform, linking all bidding centres

BSE / NSE platform is used

Investors to place bids through brokers / syndicate only

Brokers / Syndicate can vet the bids

However, they cannot reject technically valid bids accompanied by appropriate payment

Bidding Form

Should be serially numbered, should bear brokers / syndicatesstamp and date and time of biddingand accompanied with the Revision Form and Form 2A

Graphical display of price and demand mandatory on terminals

Floor price / Price Band to be decided before RoC filing of the Red Herring

Bidding at cut off price is allowed for retail individual investors

Mandatory to offer bid revision facility to bidders

Revision can be of price or of quantity, can be at any time prior to bid closure only

Revision can be done with brokers / syndicate where the bid was originally registered


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Post Issue


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Steps after Bid Closing

Finalise Issue Price

Complete QIB Allocation

Update information in the Red Herring like stock market data, audited results, etc. asapplicable

Organise Board / Committee meeting to

Accept letters of underwriting

Approve, sign and authorise filing of Prospectus with RoC

Note the listing application made with SEs

Authorise opening ofaccounts with the bankers

File the Prospectus with RoC, after pricing, along with material contracts and documents


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Receive provisional collection certificate from bankers and file 3-day repot to SEBI

Obtain approval of the basis ofallotment from designated SE

Obtain Board / Committee approval for allotment and other post issue formalities

Ensure printing ofallotment letters and refund orders

Despatch security certificates, allotment letters and refund orders

Advertise the basis ofallotment and despatch details for the public issue

Upload shares in demat accounts of the successful bidders

Apply for listing and trading permission

Obtain listing and trading approvals

Obtain permission to utilise the proceeds of the issue from the Designated StockExchange

Submit the 78 day report to SEBI

Post Issue Activities


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Thank You

Documents

4. Public Offerings_Augiust 07