Guide to the Indian Primary Capital Market

IPOs (Initial Public Offerings)

What is an IPO?

An IPO is when a company which is presently not listed at any stock exchange makes either a fresh issue of shares or makes an offer for sale of its existing shares or both for the first time to the public. Through a public offering, the issuer makes an offer for new investors to enter its shareholding family.
 
The shares are made available to the investors at the price determined by the promoters of the company in consultation with its investment bankers.
 
The successful completion of an IPO leads to the listing and trading of the company's shares at the designated stock exchanges.
 
2003-04 to 2007-08 saw an active market for IPOs. Though the number of IPOs was small, the amounts being raised were increasing. Due to a huge downturn in the economy and the secondary market, the amount mobilised in 2008-09 nosedived to a meager Rs. 2034 crore, through just 21 small IPOs. The year 2009-10 yet again witnessed a revival in the IPO market.

YEAR NO.OF
IPOs
AMOUNT
(Rs.crore)
2003-04 19   3191.10  
2004-05 23   14662.32  
2005-06 76   10797.88  
2006-07 76   23706.16  
2007-08 84   41323.45  
2008-09 21   2033.99  
2009-10 39   24948.31  
2010-11 52   33097.77  
2011-12 33   5885.67  
2012-13 9   6289.28  
2013-14 1   919.14  
2014-15 8   2769.72  
2015-16 24   14500.06  
2016-17 25   28225.00  
2017-18
(till 31 October 2017)
25   42913.32  

SOURCE : PRIME Database

Why does a company make an IPO?

Going public provides an opportunity to the companies to raise cash for setting up a project or for diversification/expansion or sometimes for working capital or even to retire debt or for potential acquisitions. This is called fresh issue of capital where the proceeds of the issue go to the company.

Companies also go public to provide a route for some of the existing shareholders including venture capitalists to exit fully or partially from the company's shareholding or for promoters to partially dilute their holding. This is called an offer for sale where the proceeds of the issue go to the selling shareholders and not to the company.

Given below is the table of monies raised through issue of fresh capital and through offers for sale in IPOs.

YEAR FRESH CAPITAL OFFERS FOR SALE TOTAL
NO.OF
IPOs
AMOUNT
(Rs.crore)
NO.OF
IPOs
AMOUNT
(Rs.crore)
NO.OF
IPOs
AMOUNT
(Rs.crore)
2003-04 16   1813.43   5   1377.68   19   3191.10  
2004-05 21   8099.58   9   6562.73   23   14662.32  
2005-06 76   9130.23   11   1667.67   76   10797.88  
2006-07 74   22745.43   12   960.72   76   23706.16  
2007-08 82   38634.64   9   2688.81   84   41323.45  
2008-09 21   1985.08   3   48.92   21   2033.99  
2009-10 39   21832.47   11   3115.86   39   24948.31  
2010-11 49   13240.58   14   19857.20   52   33097.77  
2011-12 31   4998.53   4   887.15   33   5885.67  
2012-13 8   4712.75   4   1576.53   9   6289.28  
2013-14 0   0.00   1   919.14   1   919.14  
2014-15 6   1645.76   5   1123.95   8   2769.72  
2015-16 19   6806.03   19   7694.05   24   14500.06  
2016-17 17   10187.46   20   18037.55   25   28225.00  
2017-18
(till 31 October 2017)
17   6808.32   22   36104.98   25   42913.32  

SOURCE : PRIME Database

Listing offers several benefits. For one, it increases the company's ability to raise debt at finer rates. The company also gets a continuing window for raising more capital, both from the domestic and overseas equity markets. Acquisitions also become simpler as instead of cash payouts, companies can use shares as a currency.

Listing also lends liquidity to the stock, which is very critical for the success of employee stock ownership plans, which help to attract top talent.

Of course, listing carries a considerable degree of prestige for the company.  

FPOs (Follow-on Public Offerings)

What is an FPO?

Fresh issue of shares by an already-listed company is called a Follow-on Public Offer (FPO). The following table provides details of FPOs in the past 6 years:

YEAR NO.OF
FPOs
AMOUNT
(Rs.crore)
2003-04 9   14616.02  
2004-05 6   6769.24  
2005-06 26   12867.82  
2006-07 9   1287.20  
2007-08 6   10895.55  
2008-09 0   0.00  
2009-10 5   21992.98  
2010-11 5   13083.89  
2011-12 1   4578.20  
2013-14 2   7455.96  
2014-15 0   0.00  

SOURCE : PRIME Database

Why does a company make an FPO?

Typically, when a company requires capital for its growth/expansion or it wishes to increase the market float, but does not wish to reach its existing shareholders for a variety of reasons ( the existing shareholders may not be interested, the base of existing shareholders is small to be able to meet the company's capital requirements, the promoters are not in a position or are not interested in maintaining their stake which is accomplished through a rights offer, it makes a follow-on public offering.

The Government uses the FPO route to divest part of its shareholding.

FPOs ,through Offers for Sale, have been done only by PSUs:

YEAR FRESH CAPITAL OFFERS FOR SALE TOTAL
NO.OF
FPOs
AMOUNT
(Rs.crore)
NO.OF
FPOs
AMOUNT
(Rs.crore)
NO.OF
FPOs
AMOUNT
(Rs.crore)
2003-04 2   480.00   7   14136.02   9   14616.02  
2004-05 6   6769.24   0   0.00   6   6769.24  
2005-06 26   12867.83   0   0.00   26   12867.82  
2006-07 9   1287.21   0   0.00   9   1287.20  
2007-08 6   10895.55   0   0.00   6   10895.55  
2008-09 0   0.00   0   0.00   0   0.00  
2009-10 3   2704.46   3   19288.52   5   21992.98  
2010-11 4   7820.70   3   5263.19   5   13083.89  
2011-12 1   3433.65   1   1144.55   1   4578.20  
2013-14 1   5321.31   2   2134.65   2   7455.96  
2014-15 0   0.00   0   0.00   0   0.00  

SOURCE : PRIME Database

 

Types of Issues: Fixed Price & Bookbuilding

There are two types of issues

Fixed Price Issues

An issuer company is allowed to freely price the issue. The basis of issue price is disclosed in the offer document where the issuer discloses in detail about the qualitative and quantitative factors justifying the issue price. The Issuer company can mention a price band of 20% (cap in the price band should not be more than 20% of the floor price) in the Draft offer documents filed with SEBI and actual price can be determined at a later date before filing of the final offer document with SEBI/ROCs.

Price Discovery through Bookbuilding Process

"Book Building" means a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for the securities is assessed on the basis of the bids obtained for the quantum of securities offered for subscription by the issuer. This method provides an opportunity to the market to discover the price for securities.

The process is named so because it refers to collection of bids from investors, which is based on a price range. The issue price is fixed after the closing date of the bid.

A company planning an IPO/FPO appoints a merchant bank as a book runner. A particular time frame is fixed as the bidding period. The book runner then builds an order book that collates bids from various investors. Potential investors are allowed to revise their bids at any time during the bidding period. At the end of bidding period the order book is closed and consequently the quantum of shares ordered and the respective prices offered are known. The determination of final price is based on demand at various prices.

Bookbuilding has become the preferred route of raising capital, as can be seen from the table below. Though there are fixed price issues, by amount, the bookbuilding IPO/FPOs dominate.

YEAR BOOKBUILDING FIXED PRICE TOTAL
NO.OF
IPOs
AMOUNT
(Rs.crore)
% NO.OF
IPOs
AMOUNT
(Rs.crore)
% NO.OF
IPOs
AMOUNT
(Rs.crore)
2003-04 9   2641.04   82.8   10   550.07   17.2   19   3191.10  
2004-05 15   14507.04   98.9   8   155.28   1.1   23   14662.32  
2005-06 53   10225.43   94.7   23   572.45   5.3   76   10797.88  
2006-07 65   23469.07   99   11   237.10   1   76   23706.16  
2007-08 74   41068.98   99.4   10   254.47   0.6   84   41323.45  
2008-09 17   1959.92   96.4   4   74.07   3.6   21   2033.99  
2009-10 39   24948.31   100   0   0.00   0   39   24948.31  
2010-11 50   33028.27   99.8   2   69.50   0.2   52   33097.77  
2011-12 32   5825.67   99   1   60.00   1   33   5885.67  
2012-13 9   6289.28   100   0   0.00   0   9   6289.28  
2013-14 1   919.14   100   0   0.00   0   1   919.14  
2014-15 8   2769.72   100   0   0.00   0   8   2769.72  
2015-16 24   14500.06   100   0   0.00   0   24   14500.06  
2016-17 25   28225.00   100   0   0.00   0   25   28225.00  
2017-18
(till 31 October 2017)
24   42877.36   99.9   1   35.95   0.1   25   42913.32  

SOURCE : PRIME Database

Open Bookbuilding

In book-built issues, it is mandatory to have an online display of the demand and bids during the bidding period. This is known as open book system. (Under closed book building, the book is not made public and the bidders have to take a call on the price at which they intend to make a bid without having any information on the bids submitted by other bidders). As per SEBI, only electronic facility is allowed to be used in case of book building.

Price Band

The offer document may have a floor price for the securities or a price band within which the investors can bid. The spread between the floor and the cap of the price band can not be more than 20%. In other words, it means that the cap should not be more than 120% of the floor price. The company decides the price band in consultation with the investment bankers, and typically after undertaking a pre-marketing exercise with some leading QIBs.

The price band can have a revision. SEBI requires that any revision in the price band has to be widely disseminated by informing the stock exchanges, by issuing press release and also indicating the change on the relevant website and the terminals of the syndicate members. When the price band is revised, the bidding period has to be extended for a further period of three days, subject to the total bidding period not exceeding thirteen days.

Floor Price

Floor price is the minimum price at which bids can be made.

Cut-off Price

In Book building issue, the issuer is required to indicate either the price band or a floor price in the red herring prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called "Cut off price". This is decided by the issuer and LM after considering the book and investors' appetite for the stock. SEBI ICDR Regulations 2009 permit only retail individual investors to have an option of applying at cut off price.

Final Issue Price

The demand at various price levels within the price band is made available on the websites of the designated stock exchanges during the entire tenure of the issue and once the issue closes, the final price is determined by the issuer and made known to the investors.

Any restrictions on pricing by companies?

Since 1992, companies have been allowed to freely price their issues. SEBI does not play any role in deciding the price for issues. As such, the single prices in case of fixed price issue as well as the price band in the case of a bookbuilding issue are determined by the company. The companies are however required to give in the offer document a detailed justification of the price. The basis of issue price is disclosed in the offer document. The issuer is required to disclose in detail about the qualitative and quantitative factors justifying the issue price.

Differential Pricing

Pricing of an issue where one category is offered shares at a price different from the other category is called differential pricing. Differential pricing is permitted, subject to the following:

  1. retail individual investors or retail individual shareholders [or employees entitled for reservation made under regulation 42 making an application for specified securities of value not more than two lakh rupees] may be offered specified securities at a price lower than the price at which net offer is made to other categories of applicants; provided that such difference is not more than 10% of the price at which specified securities are offered to other categories of applicants;
  2. in case of a book built issue, the price of the specified securities offered to an anchor investor cannot be lower than the price offered to other applicants;
  3. in case of a composite issue, the price of the specified securities offered in the public issue can be different from the price offered in rights issue and justification for such price difference needs to be given in the offer document.
  4. In case the issuer opts for the alternate method of book building in terms of Part D of Schedule XI of the SEBI ICDR Regulations 2009, the issuer can offer specified securities to its employees at a price lower than the floor price provided that the difference between the floor price and the price at which specified securities are offered to employees is not more than 10% of the floor price.

The effect of differential pricing, if any, in a public issue is being given to eligible investors only at the stage of allotment of specified securities and not at the time of filing an application for such allotment. This takes away certain benefits from investors such as lower cash outflow at a price net of discount, the ability to apply for more shares with the same cash outlay etc.

Effective June 15, 2011, it has been decided to allow investors eligible for differential pricing in public issues to make the payment at a price net of discount, if any, at the time of bidding itself.

Minimum Number of Days for which an IPO/FPO Subscription List has to remain Open

Except as otherwise provided in the SEBI ICDR Regulations 2009, public issue shall be kept open for at least three working days but not more than ten working days including the days for which the issue is kept open in case of revision in price band.

In case the price band in a public issue made through the book building process is revised, the bidding (issue) period disclosed in the red herring prospectus shall be extended for a minimum period of three working days, provided that the total bidding period shall not exceed ten working days.

The public issue made by an infrastructure company, satisfying the requirements in Clause 2.4.1 (iii) of Chapter II may be kept open for a maximum period of 21 working days.

Pure Auction as an Additional Bookbuilding Mechanism

SEBI has decided to introduce an additional method of book building, to start with, for FPOs, in which the issuer would decide on a floor price and may mention the floor price in the red herring prospectus. If the floor price is not mentioned in the red herring prospectus, the issuer shall announce the floor price at least one working day before opening of the bid in all the newspapers in which the pre-issue advertisement was released. 

Qualified institutional buyers shall bid at any price above the floor price. The bidder who bids at the highest price shall be allotted the number of securities that he has bided for and then the bidder who has bided at the second highest price and so on, until all the specified securities on offer are exhausted. Allotment shall be done on price priority basis for qualified institutional buyers. Allotment to retail individual investors, non-institutional investors and employees of the issuer shall be made proportionately as illustrated in Schedule XI of SEBI ICDR Regulations 2009. Where, however the number of specified securities bided for at a price is more than available quantity, then allotment shall be done on proportionate basis. Retail individual investors, non-institutional investors and employees shall be allotted specified securities at the floor price subject to provisions of Clause (d) of Regulation 29 of SEBI ICDR Regulations 2009. The issuer may:-

  1. place a cap either in terms of number of specified securities or percentage of issued capital of the issuer that may be allotted to a single bidder;
  2. decide whether a bidder be allowed to revise the bid upwards or downwards in terms of price and/or quantity;
  3. decide whether a bidder be allowed single or multiple bids.

Fast Track Issues

In order to enable well established and compliant listed companies to access Indian primary market in a time effective manner through follow-on public offerings and rights issues, SEBI introduced the concept of Fast Track Issues (FTIs) in November 2007. SEBI has relaxed certain requirements of FTIs such as reducing the average market capitalization of public shareholding of the issuer to Rs. 5000 crore from Rs. 10000 crore, pegging the annualized trading turnover to free float for companies whose public shareholding is less than 15% of the issued capital. In case the clause relating to composition of Board of Directors has not been complied with in one or more quarters, it need not be deemed as non compliance, provided the company is in compliance in this regard at the time of filing the offer document with stock exchange/ ROC and adequate disclosures are made in the offer document in this respect.

Eligibility Norms

For IPO's

SEBI has stipulated the eligibility norms for companies planning an IPO which are as follows:

  1. Net tangible assets of at least Rs. 3 crore in each of the preceding three full years
  2. Distributable profits for at least three out of the immediately preceding five years
  3. Net worth of at least Rs. 1 crore in each of the preceding three full years
  4. The issue size should not exceed 5 times the pre-issue net worth
  5. If there has been a change in the company's name, at least 50% of the revenue for preceding one year should be from the new activity denoted by the new name

Alternative routes

Recognizing that many good companies, for one reason or the other, may not be able to comply with all the eligibility norms, two other alternative routes are available to such companies:

Alternative I:

  1. Issue shall be through book building route, with at least 50% to be mandatory allotted to the Qualified Institutional Buyers (QIBs). (b) The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a compulsory market-making for at least 2 years

OR
Alternative II:

  1. The "project" is appraised and participated to the extent of 15% by FIs/Scheduled Commercial Banks of which at least 10% comes from the appraiser(s).
  2. The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a compulsory market-making for at least 2 years. In addition to satisfying the aforesaid eligibility norms, the company shall also satisfy the criteria of having at least 1000 prospective allottees in its issue.

Exemptions to certain category of entities from the eligibility norms

The following categories of entities are eligible for exemption from entry norms.

  • A banking company including a local area bank set up under the Banking Regulation Act, 1949
  • A corresponding new bank set up under the Banking Companies Act, 1970
  • An infrastructure company
    • Whose project has been appraised by a Public Financial Institution (PFI)  
    • Not less than 5% of the project cost is financed by any of the PFI
  • Rights Issue by a listed company

Minimum Public Shareholding Requirements

Clause 40A of the BSE Listing Agreement requires at least 25% of the post issue paid up capital to be with the 'public' (i.e. other than promoter and promoter group).

As per rule 19(2) (b) of the Securities Contract (Regulation) Rules, a minimum of 25% of each class of security must be offered to the public for subscription. However, at least 10% can be offered if the following 3 conditions are fulfilled:

  • Minimum 2 MM securities (excluding reservations, firm allotment & promoter contribution) to be offered to the public
  • Minimum offer size – Rs. 100 crores
  • Issuance through book building with 60% QIB allocation

Continuous public shareholding since listing also needs to be maintained as per Clause 40A of the listing agreement.

The aforesaid requirement of maintaining minimum level of public shareholding on a continuous basis will not be applicable to government companies (as defined under Section 617 of the Companies Act, 1956), infrastructure companies (as defined under Chapter II Clause 14(4) of the SEBI ICDR Regulations 2009) and companies referred to the Board for Industrial and Financial Reconstruction.

Note: Section 617 of the Companies Act, 1956 defines Government company as follows - Government Company means any company in which not less than 51% of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary of a Government company as thus defined.

For FPOs

A listed company can make a public issue of equity shares or any other security which may be converted into or exchanged with equity shares at a later date provided that the aggregate of the proposed issue and all previous issues made in the same financial year in terms of size (i.e., offer through offer document + firm allotment + promoters' contribution through the offer document), issue size does not exceed 5 times its pre-issue net worth as per the audited balance sheet of the last financial year. Moreover, in case there is a change in the name of the issuer company within the last 1 year (reckoned from the date of filing of the offer document), the revenue accounted for by the activity suggested by the new name should not be less than 50% of its total revenue in the preceding 1 full-year period.

A listed company which does not fulfill the conditions given above can make an FPO subject to complying with the conditions specified for IPOs in the SEBI ICDR Regulations 2009.

Common Regulations for IPOs/FPOs

Because of the public participation, SEBI oversees that such companies act in a reasonable and fair manner, especially with reference to the minority shareholders. For example, such companies should have a board of directors, where at least half the members are independent of the promoters/company. Moreover, companies have to comply with the listing agreement, which among other things, stipulate continuing disclosures in specified formats and frequency.

SEBI's Role in IPOs/FPOs

Any company making an IPO/FPO is required to file a draft offer document with SEBI for its observations. Draft offer document in respect of issues of size upto Rs. 100 crore shall be filed with the concerned regional office of the Board under the jurisdiction of which the registered office of the issuer company falls. Officials of SEBI at various levels examine the compliance with SEBI ICDR Regulations 2009 and ensure that all necessary material information is disclosed in the draft offer documents.

The validity period of SEBI's observation letter is three months only i.e. the company has to open its issue within three months period.

Does it mean that SEBI recommends an issue?

SEBI does not recommend any issue nor does take any responsibility either for the financial soundness of any scheme or the project for which the issue is proposed to be made or for the correctness of the statements made or opinions expressed in the offer document.

Does SEBI approve the contents of the offer document?

Submission of offer document to SEBI should not in any way be deemed or construed that the same has been cleared or approved by SEBI. The Lead manager certifies that the disclosures made in the offer document are generally adequate and are in conformity with SEBI guidelines for disclosures and investor protection in force for the time being. This requirement is to facilitate investors to take an informed decision for making investment in the proposed issue.

Does the SEBI clearance tag make the IPO/FPO safe for the investors?

The investors should make an informed decision purely by themselves based on the contents disclosed in the offer documents. SEBI does not associate itself with any issue/issuer and should in no way be construed as a guarantee for the funds that the investor proposes to invest through the issue. However, the investors are generally advised to study all the material facts pertaining to the issue including the risk factors before considering any investment. They are strongly warned against any 'tips' or news through unofficial means.

Offer Documents

This section basically deals with the contents in an offer document.

Cover Page

The Cover Page of the offer document covers full contact details of the issuer company, lead managers and registrars, the nature, number, price and amount of instruments offered and issue size, and the particulars regarding listing. Other details such as Credit Rating, risks in relation to the first issue, etc are disclosed if applicable.

Risk Factors

Here, the issuer's management gives its view on the Internal and external risks faced by the company. Here, the company also makes a note on the forward looking statements. This information is disclosed in the initial pages of the document and it is also clearly disclosed in the abridged prospectus. It is generally advised that the investors should go through all the risk factors of the company before making an investment decision.

Introduction

The introduction covers a summary of the industry and business of the issuer company, the offering details in brief, summary of consolidated financial, operating and other data.

General Information about the company, the merchant bankers and their responsibilities, the details of brokers/syndicate members to the Issue, credit rating (in case of debt issue), debenture trustees (in case of debt issue), monitoring agency, book building process in brief and details of underwriting Agreements are given here. Important details of capital structure, objects of the offering, funds requirement, funding plan, schedule of implementation, funds deployed, sources of financing of funds already deployed, sources of financing for the balance fund requirement, interim use of funds, basic terms of issue, basis for issue price, tax benefits are covered.

About Us

This presents a review of on the details of the business of the company, business strategy, competitive strengths, insurance, industry-regulation (if applicable), history and corporate structure, main objects, subsidiary details, management and board of directors, compensation, corporate governance, related party transactions, exchange rates, currency of presentation dividend policy and management's discussion and analysis of financial condition and results of operations are given.

Financial Statements

Financial statement, changes in accounting policies in the last three years and differences between the accounting policies and the Indian Accounting Policies (if the Company has presented its Financial Statements also as per Either US GAAP/IAS are presented.

Legal and Other Information

Outstanding litigations and material developments, litigations involving the company and its subsidiaries, promoters and group companies are disclosed. Also material developments since the last balance sheet date, government approvals/licensing arrangements, investment approvals (FIPB/RBI etc.), all government and other approvals, technical approvals, indebtedness, etc. are disclosed.

Other Regulatory and Statutory Disclosures

Under this head, the following information is covered: authority for the Issue, prohibition by SEBI, eligibility of the company to enter the capital market, disclaimer clause, disclaimer in respect of jurisdiction, distribution of information to investors, disclaimer clause of the stock exchanges, listing, impersonation, minimum subscription, letters of allotment or refund orders, consents, expert opinion, changes in the auditors in the last 3 years, expenses of the issue, fees payable to the lead managers, fees payable to the issue management team, fees payable to the registrars, underwriting commission, brokerage and selling commission, previous rights and public issues, previous issues for cash, issues otherwise than for cash, outstanding debentures or bonds, outstanding preference shares, commission and brokerage on, previous issues, capitalisation of reserves or profits, option to subscribe in the issue, purchase of property, revaluation of assets, classes of shares, stock market data for equity, shares of the company, promise vis-à-vis performance in the past issues, mechanism for redressal of investor grievances.

Offering Information

Under this head, the following information is covered: Terms of the Issue, ranking of equity shares, mode of payment of dividend, face value and issue price, rights of the equity shareholder, market lot, nomination facility to investor, issue procedure, book building procedure if applicable, bid form, who can bid, maximum and minimum bid size, bidding process, bidding bids at different price levels, escrow mechanism, terms of payment and payment into the escrow collection account, electronic registration of bids, build up of the book and revision of bids, price discovery and allocation, signing of underwriting agreement and filing of prospectus with SEBI/ROC, announcement of statutory advertisement, issuance of confirmation of allocation note("can") and allotment in the issue, designated date, general instructions, instructions for completing the bid form, payment instructions, submission of bid form, other instructions, disposal of application and application monies, interest on refund of excess bid amount, basis of allotment or allocation, method of proportionate allotment, dispatch of refund orders, communications, undertaking by the company, utilisation of issue proceeds, restrictions on foreign ownership of Indian securities, etc.,

Other Information

This covers description of equity shares and terms of the Articles of Association, material contracts and documents for inspection, declaration, definitions and abbreviations, etc.,

Past Track Record of Defaults/Economic Offences

Investors should also visit www.watchoutinvestors.com, a website aided and sponsored by the Ministry of Company Affairs under its Investor Education & Protection Fund. This website is a national registry of all entities and individuals who have been indicted by various regulators ( like MCA, RBI, SEBI, BSE,NSE etc) for an economic offence and/or for non-compliance laws/guidelines and/or who are no longer in the specified activity.

Offer Documents

This section basically deals with the contents in an offer document.

Cover Page

The Cover Page of the offer document covers full contact details of the issuer company, lead managers and registrars, the nature, number, price and amount of instruments offered and issue size, and the particulars regarding listing. Other details such as Credit Rating, risks in relation to the first issue, etc are disclosed if applicable.

Risk Factors

Here, the issuer's management gives its view on the Internal and external risks faced by the company. Here, the company also makes a note on the forward looking statements. This information is disclosed in the initial pages of the document and it is also clearly disclosed in the abridged prospectus. It is generally advised that the investors should go through all the risk factors of the company before making an investment decision.

Introduction

The introduction covers a summary of the industry and business of the issuer company, the offering details in brief, summary of consolidated financial, operating and other data.

General Information about the company, the merchant bankers and their responsibilities, the details of brokers/syndicate members to the Issue, credit rating (in case of debt issue), debenture trustees (in case of debt issue), monitoring agency, book building process in brief and details of underwriting Agreements are given here. Important details of capital structure, objects of the offering, funds requirement, funding plan, schedule of implementation, funds deployed, sources of financing of funds already deployed, sources of financing for the balance fund requirement, interim use of funds, basic terms of issue, basis for issue price, tax benefits are covered.

About Us

This presents a review of on the details of the business of the company, business strategy, competitive strengths, insurance, industry-regulation (if applicable), history and corporate structure, main objects, subsidiary details, management and board of directors, compensation, corporate governance, related party transactions, exchange rates, currency of presentation dividend policy and management's discussion and analysis of financial condition and results of operations are given.

Financial Statements

Financial statement, changes in accounting policies in the last three years and differences between the accounting policies and the Indian Accounting Policies (if the Company has presented its Financial Statements also as per Either US GAAP/IAS are presented.

Legal and Other Information

Outstanding litigations and material developments, litigations involving the company and its subsidiaries, promoters and group companies are disclosed. Also material developments since the last balance sheet date, government approvals/licensing arrangements, investment approvals (FIPB/RBI etc.), all government and other approvals, technical approvals, indebtedness, etc. are disclosed.

Other Regulatory and Statutory Disclosures

Under this head, the following information is covered: authority for the Issue, prohibition by SEBI, eligibility of the company to enter the capital market, disclaimer clause, disclaimer in respect of jurisdiction, distribution of information to investors, disclaimer clause of the stock exchanges, listing, impersonation, minimum subscription, letters of allotment or refund orders, consents, expert opinion, changes in the auditors in the last 3 years, expenses of the issue, fees payable to the lead managers, fees payable to the issue management team, fees payable to the registrars, underwriting commission, brokerage and selling commission, previous rights and public issues, previous issues for cash, issues otherwise than for cash, outstanding debentures or bonds, outstanding preference shares, commission and brokerage on, previous issues, capitalisation of reserves or profits, option to subscribe in the issue, purchase of property, revaluation of assets, classes of shares, stock market data for equity, shares of the company, promise vis-à-vis performance in the past issues, mechanism for redressal of investor grievances.

Offering Information

Under this head, the following information is covered: Terms of the Issue, ranking of equity shares, mode of payment of dividend, face value and issue price, rights of the equity shareholder, market lot, nomination facility to investor, issue procedure, book building procedure if applicable, bid form, who can bid, maximum and minimum bid size, bidding process, bidding bids at different price levels, escrow mechanism, terms of payment and payment into the escrow collection account, electronic registration of bids, build up of the book and revision of bids, price discovery and allocation, signing of underwriting agreement and filing of prospectus with SEBI/ROC, announcement of statutory advertisement, issuance of confirmation of allocation note("can") and allotment in the issue, designated date, general instructions, instructions for completing the bid form, payment instructions, submission of bid form, other instructions, disposal of application and application monies, interest on refund of excess bid amount, basis of allotment or allocation, method of proportionate allotment, dispatch of refund orders, communications, undertaking by the company, utilisation of issue proceeds, restrictions on foreign ownership of Indian securities, etc.,

Other Information

This covers description of equity shares and terms of the Articles of Association, material contracts and documents for inspection, declaration, definitions and abbreviations, etc.,

Past Track Record of Defaults/Economic Offences

Investors should also visit www.watchoutinvestors.com, a website aided and sponsored by the Ministry of Company Affairs under its Investor Education & Protection Fund. This website is a national registry of all entities and individuals who have been indicted by various regulators ( like MCA, RBI, SEBI, BSE,NSE etc) for an economic offence and/or for non-compliance laws/guidelines and/or who are no longer in the specified activity.

Types of Offer Documents

Since 1992, the entire IPO/FPO regulation is driven by disclosures-inform the investors as much as is possible and is relevant for him to take an informed investment decision. The disclosure requirements regarding the issuance of securities are covered in detail in the SEBI ICDR Regulations 2009.

Types of Offer Documents

Draft Offer Document refers to the first document filed by companies with SEBI and stock exchanges for approval, who after reviewing, communicate their observations to the Company, which the company has to incorporate in the offer document. SEBI typically requires a period of 30 days for processing a draft offer document. The draft offer document is placed by SEBI on its website. It is also placed on the websites of recognized stock exchanges where specified securities are proposed to be listed and merchant bankers associated with the issue for public comments for a period of at least 21 days. Furthermore, the issuer either on the date of filing the draft offer document with SEBI or on the next day has to make a public announcement in one English national daily newspaper, one Hindi national daily newspaper and one regional language newspaper at the place where its registered office is situated, disclosing to the public the fact of filing of draft offer document and inviting the public to give their comments to SEBI.

The lead merchant bankers, after expiry of the above period (of at least 21 days), file with SEBI a statement giving information of the comments received by them or the issuer on the draft offer document during that period and the consequential changes, if any, to be made in the draft offer document.

Red herring prospectus A red herring prospectus (RHP) is a preliminary registration document that is filed with SEBI in the case of bookbuilding issue which does not have details of either price or number of shares being offered or the amount of issue. This means that in case price is not disclosed, the number of shares and the upper and lower price bands are disclosed. On the other hand, an issuer can state the issue size and the number of shares are determined later. In the case of book-built issues, it is a process of price discovery as the price cannot be determined until the bidding process is completed. Hence, such details are not shown in the Red Herring prospectus filed with ROC in terms of the provisions of the Companies Act. Only on completion of the bidding process, the details of the final price are included in the offer document. The offer document filed thereafter with ROC is called a prospectus.

Offer Document means the final prospectus in the case of a public issue/offer for sale which is filed and registered with the Registrar of Companies and the stock exchanges. An offer document covers all the relevant information required to be disclosed under various regulations and incorporates the observations of the Registrar of Companies and SEBI.

Abridged Prospectus the memorandum as prescribed in Form 2A under sub-section (3) of section 56 of the Companies Act, 1956. It contains all the salient features of a prospectus. It accompanies the application form of public issues.

Accessing draft offer documents before even the IPO/FPO is cleared by SEBI

The draft offer document/letter of offer remains posted on SEBI website for a period of 21 days from the date of filing the same to SEBI and can also be downloaded from there

Public comments/complaints on the issuer company or others connected with the issue

The objective of making an offer document public is to invite public comments. The comments should be submitted within 21 days of the filing of the draft offer document by the company with SEBI.

Obtaining full copy of the offer document

Full copy of the offer document is available from the company, its lead managers and syndicate members. These are also available on the websites of SEBI, the lead managers, the stock exchanges and the company.

 

Allocations

Fixed Price Issues

There are two buckets in the fixed price IPO/FPOs: Investors applying for Rs. 2,00,000 or more and Investors applying for upto Rs. 2,00,000.

Bookbuilding Issues

In a book built issue, allocation to Retail Individual Investors (RIIs), Non Institutional Investors (NIIs) and Qualified Institutional Buyers (QIBs) is in the ratio of 35:15: 50 respectively.

Definition of Retail Individual Investors (RIIs)

'Retail individual investor' means an investor who applies or bids for securities of or for a value of not more than Rs. 2,00,000.

Definition of Non Institutional Investors (NIIs)

All applicants, other than QIBs or individuals applying for less than Rs. 2,00,000 are considered as NIIs. Typically, this category includes High Net Worth Individuals (HNIs) and corporate bodies.

Definition of Qualified Institutional Buyers (QIBs)

QIBs are those institutional investors who are perceived to possess expertise and the financial strength to evaluate and invest in the capital markets. A QIB is defined by SEBI as

  1. public financial institution as defined in section 4A of the Companies Act, 1956;
  2. scheduled commercial banks;
  3. mutual funds;
  4. foreign institutional investor and sub-account (other than a sub-account which is a foreign corporate or foreign individual) registered with SEBI;
  5. multilateral and bilateral development financial institutions;
  6. venture capital funds registered with SEBI.
  7. foreign venture capital investors registered with SEBI.
  8. state Industrial Development Corporations.
  9. insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA).
  10. provident Funds with minimum corpus of Rs. 25 crores
  11. pension Funds with minimum corpus of Rs. 25 crores)
  12. National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated November 23, 2005 of the Government of India published in the Gazette of India
  13. insurance funds set up and managed by army, navy or air force of the Union of India
  14. Insurance funds set up by Department of Posts, India such as Postal Life Insurance Fund (PLIF) and Rural Postal Life Insurance Fund (RPLIF)

These entities are not required to be registered with SEBI as QIBs. Any entities falling under the categories specified above are considered as QIBs for the purpose of participating in primary issuance process.

All types of investors are required to bring in 100% of the application money as margin along with the application for securities in Public Issues. This has been done to avoid inflated demand in Public Issues and to provide a level playing field to all investors subscribing for securities.

Anchor Investors

Out of the portion available for allocation to Qualified Institutional Buyers, up to 30% may be allocated to Anchor Investors subject to the following:

  • Anchor Investors shall necessarily be Qualified Institutional Buyers who make an application for a value of ten crore rupees or more in a public issue made through the book building process in accordance with SEBI ICDR Regulations 2009.
  • One-third of the Anchor Investor portion shall be reserved for domestic mutual funds.
  • The bidding for Anchor Investors shall open one day before the issue opens and shall be completed on the same day.
  • Allocation to Anchor Investors shall be on a discretionary basis subject to minimum number of 2 investors for allocation of upto Rs.250 crore and 5 investors for allocation of more than Rs.250 crore.
  • The number of shares allocated to Anchor Investors and the price at which the allocation is made, shall be made available in public domain by the merchant banker before opening of the issue.
  • If the price fixed for the public issue through book building process is higher than the price at which the allocation is made to Anchor Investors, the additional amount shall be paid by the Anchor Investors. However, if the price fixed for public issue is lower than the price at which the allocation is made to Anchor Investors, difference shall not be payable to the Anchor Investors.
  • There shall be a lock-in of 30 days on the shares allotted to the Anchor Investors from the date of allotment in the public issue.
  • No person related to the book running lead managers/ promoters/promoter group in the concerned public issue or the book running lead managers to the concerned public issue can apply under Anchor Investor category.
  • The parameters for selection of Anchor Investors shall be clearly identified by the merchant banker and shall be available as part of records of the merchant banker for inspection by SEBI.
  • The applications made by Qualified Institutional Buyers under Anchor Investor category and under Non Anchor Investor category may not be considered as multiple applications.

Applications

Prerequisites

  1. Demat Account
    An investor has the option to apply for and receive the shares in physical form. However, it is advisable to get the allotment in demat form as the shares issued through an IPO/FPO are tradable only in the demat form. In any case, for all IPO/FPOs of any security of issue size of Rs. 10 crore or more, issues have to be compulsorily be only in dematerialized form, while QIBs and large investors (applying for more than Rs. 2,00,000), can apply only in demat form.

    There are two depositories in the country-National Securities Depository Ltd. (NSDL) and Central Depository Services ( India) Ltd. (CDSL) .Both have An extensive network of authorized Depository Participants (DPs). An investor can open a demat account with any of these DPs.
    The investor should fill in his the correct DP ID and Client ID details in the application forms.
  2. Permanent Account Number (PAN)
    Where the bids are for Rs. 50,000 or more, the bidder, or in case of a bid in joint names, each of the bidders, should mention his/her PAN allotted under the Income Tax Act. The copy of PAN card or PAN allotment letter is required to be submitted with the application form. Applications without this information and documents are treated incomplete and are liable to be rejected. (For more details, the investors should read the application form)
  3. Bank Account/DD
    Applications for IPO/FPOs are valid only if payment is made through a cheque or a demand draft. Application money cannot be paid in cash.

Process of Applying in an IPO/FPO

An investor needs to first obtain an IPO/FPO application form. Forms are normally available from share brokers, lead managers, syndicate members and collecting banks. Application forms can also be picked up from the vendors at major commercial streets in most towns (for example outside the BSE Ltd.)

In the case of fixed price issues, the application form along with a cheque/demand draft for the requisite amount has to be deposited with the designated collecting bankers to the issue, whose names and addresses are printed on the application form.

Application forms should be filled carefully as incomplete/incorrect forms can be rejected due to incomplete details

ASBA

In an endeavour to make the existing public issue process more efficient, SEBI introduced a supplementary process of applying in public issues, viz., the "Applications Supported by Blocked Amount (ASBA)" process. The ASBA process is available in all public issues made through the book building route, as well as for all rights issues. ASBA co-exists with the current process, wherein cheque is used as a mode of payment.

The main features of ASBA process are as follows:

  1. Meaning of ASBA: ASBA is an application for subscribing to an issue, containing an authorisation to block the application money in a bank account.

  2. Availability of ASBA bid-cum application forms: Investors can obtain ASBA bid-cum-application forms from Self Certified Syndicate Banks (SCSBs). These forms are also easily available to investors from the website of BSE or NSE.

    1. Self Certified Syndicate Bank (SCSB): SCSB is a bank which offers the facility of applying through the ASBA process. A bank desirous of offering ASBA facility shall submit a certificate to SEBI, for inclusion of its name in SEBI's list of SCSBs. The said list will be displayed by SEBI on its website at www.sebi.gov.in. ASBAs can be accepted only by SCSBs, whose names appear in the list of SCSBs displayed in SEBI's website. On inclusion in the list of SCSBs, a bank shall commence its activities as an SCSB w.e.f. the 1st or 15th of a month, whichever is earlier, from the date of such inclusion. It shall then be deemed to have entered into an agreement with the issuer and shall be required to offer the ASBA facility to all its account holders for all issues to which ASBA process is applicable.

      Given below is the list of Banks which have been authorized to accept ASBAs in all issues as on Feb 03, 2014. 


      Sl. No.   Name of the bank
      1.     AHMEDABAD MERCANTILE CO-OP BANK LTD.,THE
      2.     ALLAHABAD BANK
      3.     ANDHRA BANK
      4.     AXIS BANK LTD.
      5.     BANK OF BARODA
      6.     BANK OF INDIA
      7.     BANK OF MAHARASHTRA
      8.     BARCLAYS BANK PLC
      9.     BNP PARIBAS
      10.     CANARA BANK
      11.     CATHOLIC SYRIAN BANK LTD.,THE
      12.     CENTRAL BANK OF INDIA
      13.     CITY UNION BANK LTD.
      14.     CORPORATION BANK
      15.     DBS BANK LTD.
      16.     DENA BANK
      17.     DEUTSCHE BANK AG
      18.     DHANLAXMI BANK LTD.
      19.     FEDERAL BANK LTD.,THE
      20.     HDFC BANK LTD.
      21.     HONGKONG & SHANGHAI BANKING CORP.LTD.,THE
      22.     ICICI BANK LTD.
      23.     IDBI BANK LTD.
      24.     INDIAN BANK
      25.     INDIAN OVERSEAS BANK
      26.     INDUSIND BANK LTD.
      27.     JAMMU & KASHMIR BANK LTD.,THE
      28.     JANATA SAHAKARI BANK LTD.
      29.     JP MORGAN CHASE BANK,N.A.
      30.     KALUPUR COMMERCIAL CO-OPERATIVE BANK LTD.,THE
      31.     KARNATAKA BANK LTD.,THE
      32.     KARUR VYSYA BANK LTD.,THE
      33.     KOTAK MAHINDRA BANK LTD.
      34.     LAKSHMI VILAS BANK LTD.,THE
      35.     MEHSANA URBAN CO-OPERATIVE BANK LTD.,THE
      36.     NUTAN NAGARIK SAHAKARI BANK LTD.
      37.     ORIENTAL BANK OF COMMERCE
      38.     PUNJAB & SIND BANK
      39.     PUNJAB NATIONAL BANK
      40.     RAJKOT NAGARIK SAHAKARI BANK LTD.
      41.     RBL BANK LTD.
      42.     SARASWAT CO-OPERATIVE BANK LTD.,THE
      43.     SOUTH INDIAN BANK LTD.,THE
      44.     STANDARD CHARTERED BANK LTD.
      45.     STATE BANK OF INDIA
      46.     SURAT PEOPLE'S CO-OPERATIVE BANK LTD.,THE
      47.     SYNDICATE BANK
      48.     TAMILNAD MERCANTILE BANK LTD.
      49.     TJSB SAHAKARI BANK LTD.
      50.     UCO BANK
      51.     UNION BANK OF INDIA
      52.     UNITED BANK OF INDIA
      53.     VIJAYA BANK
      54.     YES BANK LTD.

      An SCSB shall identify its Designated Branches (DBs) at which an ASBA investor shall submit ASBA and shall also identify the Controlling Branch (CB) which shall act as a coordinating branch for the Registrar to the Issue, Stock Exchanges and Merchant Bankers. The SCSB, its DBs and CB shall continue to act as such, for all issues to which ASBA process is applicable. The SCSB may identify new DBs for the purpose of ASBA process and intimate details of the same to SEBI, after which SEBI will add the DB to the list of SCSBs maintained by it. The SCSB shall communicate the following details to Stock Exchanges for making it available on their respective websites; these details shall also be made available by the SCSB on its website:

      1. Name and address of the SCSB
      2. Addresses of DBs and CB and other details such as telephone number, fax number and email ids.
      3. Name and contact details of a nodal officer at a senior level from the CB.
    2. BSE/NSE websites: Investors can download and print ASBA application forms from the websites of the Stock Exchanges i.e. BSE Ltd. (BSE) and National Stock Exchange (NSE) which act as an electronic interface for ASBA facility. Each ASBA form, so downloaded, shall have a unique application number and can be used for making ASBA applications in public issues. The ASBA form for a specific public issue is made available on the websites of the Stock Exchanges at least one day before opening of a particular public issue. Investors will also have online access to soft copy of the abridged prospectus/prospectus of the public issue. For revisions of bids, investors can take print of a bid revision form.

      The unique application number on the form is important from a control and processing perspective. Therefore, applications made using photocopy of the downloaded form shall not be accepted.

      A hyperlink to the websites of BSE or NSE for this facility is also provided on the websites of Merchant Bankers and SCSBs.

  3. ASBA Process in brief: An ASBA investor shall submit an ASBA physically or electronically through the internet banking facility, to the SCSB with whom the bank account to be blocked is maintained. Syndicate/Sub-Syndicate members may also procure ASBA forms from the investors and submit it to SCSBs (Syndicate/Sub-Syndicate members would be required to upload the bid and other relevant details of such ASBA forms in the bidding platform provided by the stock exchanges and forward the same to the respective SCSBs. SCSBs shall carry out further action for such ASBA forms such as signature verification, blocking of funds etc. and forward these forms to the registrar to the issue).
     
    The application money shall remain blocked in the bank account till finalisation of the basis of allotment in the issue or till withdrawal/ failure of the issue or till withdrawal/ rejection of the application, as the case may be. The application data shall thereafter be uploaded by the SCSB in the electronic bidding system through a web enabled interface provided by the Stock Exchanges. Once the basis of allotment is finalized, the Registrar to the Issue shall send an appropriate request to the SCSB for unblocking the relevant bank accounts and for transferring the requisite amount to the issuer's account. In case of withdrawal/ failure of the issue, the amount shall be unblocked by the SCSB on receipt of information from the pre-issue merchant bankers.
     
    ASBA facility in rights issue shall enable a shareholder of the company as on record date to apply through ASBA mode by selecting the option of ASBA either (i) in Part A of the application form of rights issue, or (ii) in the plain paper application as to whether they desire to avail of the ASBA option, to the Self Certified Syndicate Bank (SCSB) with whom the bank account to be blocked, is maintained.

  4. Obligations of the Issuer: The issuer shall ensure that adequate arrangements are made by the Registrar to the Issue to obtain information about all ASBAs and to treat these applications similar to non-ASBA applications while finalizing the basis of allotment, as per the procedure specified in the Guidelines.
  5. Applicability of ASBA process: ASBA process shall be applicable to all public issues and rights issues which provide for not more than one payment option. The ASBA facility has been made mandatory for non-retail investors (Qualified Institutional Buyers and Non-Institutional Investors) making applications in public/rights issues with effect from May 01, 2011.

Applying for IPO/FPOs on the Internet

Websites of various brokerage firms now allow the facility to their clients to apply for IPO/FPOs online.

Withdrawal of an Application after Closure of an IPO/FPO

The Indian laws allow for a withdrawal of an application before the date of allotment.

Proof a Bidder can Request from a Trading Member for Entering Bids

The syndicate member returns the counterfoil with the signature, date and stamp of the syndicate member. The investor can retain this as a sufficient proof that the bids have been taken into account.

Changing/Revising the Bids

The investor can change or revise the quantity or price in the bid using the form for changing/revising the bid that is available along with the application form. However, the entire process of changing of revising the bids should be completed within the date of closure of the issue.

At what Price should a Retail Investor apply?

A retail investor is not required to make his bid at a specific price. Since he is not able to take a call on the right price, he should use the cut-off option. This would ensure that his application will be considered valid at all prices, including the final price decided by the issuer. For making bids at cut-off price, the payment has to be made at the highest price of the price band. In case a lower price is finalized or in case the investor is an unsuccessful allottee or is allotted lesser shares than applied for, he would get the necessary refund.

Allotments

Firm Allotments

A company making an issue to public can reserve some shares on "allotment on firm basis" for some categories as specified in SEBI ICDR Regulations 2009. Allotment on firm basis indicates that allotment to the investor is on firm basis. SEBI ICDR Regulations 2009 provide for maximum 25% of shares which can be reserved on firm basis. The shares to be allotted on "firm allotment category" can be issued at a price different from the price at which the net offer to the public is made provided that the price at which the security is being offered to the applicants in firm allotment category is higher than the price at which securities are offered to public.

Reservations on a Competitive Basis

Reservation on Competitive Basis means reservation wherein specified securities are allotted in proportion of the number of specified securities applied for in respect of a particular reserved category to the number of specified securities reserved for that category.

In case of an issue made through the book building process, the issuer may make reservation on competitive basis out of the issue size excluding promoters' contribution and net offer to public in favour of the following categories of persons:

  1. employees; and in case of a new issuer, persons who are in the permanent and full time employment of the promoting companies excluding the promoters and an immediate relative of the promoter of such companies
  2. shareholders (other than promoters) of:
    1. listed promoting companies, in case of a new issuer; and
    2. listed group companies, in case of an existing issuer
    Provided that if the promoting companies are designated financial institutions or state and central financial institutions, the shareholders of such promoting companies shall not be eligible for the reservation on competitive basis;
  3. persons who, as on the date of filing the draft offer document with the Board, are associated with the issuer as depositors, bondholders or subscribers to services of the issuer making an initial public offer
    Provided that the issuer shall not make the reservation to the issue management team, syndicate members, their promoters, directors and employees and for the group or associate companies of the issue management team and syndicate members and their promoters, directors and employees;

In case of an issue made other than through the book building process, the issuer may make reservation on competitive basis out of the issue size excluding promoters' contribution and net offer to public in favour of the following categories of persons:

  1. employees; and in case of a new issuer, persons who are in the permanent and full time employment of the promoting companies excluding the promoters and an immediate relative of the promoter of such companies
  2. shareholders (other than promoters) of:
    1. listed promoting companies, in the case of a new issuer; and
    2. listed group companies, in the case of an existing issuer
    Provided that if the promoting companies are designated financial institutions or state and central financial institutions, the shareholders of such promoting companies shall not be eligible for the reservation on competitive basis.

In case of a further public offer (not being a composite issue), the issuer may make reservation on competitive basis out of the issue size excluding promoters' contribution and net offer to public in favour of retail individual shareholders of the issuer.
 
In case of rights issues, the issuer may make reservation for employees subject to the condition that value of allotment to any employee shall not exceed two lakh rupees.

The reservation on competitive basis shall be subject to following conditions:

  1. the aggregate of reservations for employees shall not exceed 5% of the post issue capital of the issuer
  2. reservation for shareholders shall not exceed 10% of the issue size
  3. reservation for persons who as on the date of filing the draft offer document with the Board, have business association as depositors, bondholders and subscribers to services with the issuer making an initial public offer shall not exceed 5% of the issue size
  4. no further application for subscription in the net offer to public category shall be entertained from any person (except an employee and retail individual shareholder) in favour of whom reservation on competitive basis is made
  5. any unsubscribed portion in any reserved category may be added to any other reserved category and the unsubscribed portion, if any, after such inter-se adjustments among the reserved categories shall be added to the net offer to the public category
  6. in case of under-subscription in the net offer to the public category, spill-over to the extent of under-subscription shall be permitted from the reserved category to the net public offer category
  7. value of allotment to any employee in pursuance of reservation made under sub-regulations (1) or (2), as the case may be, shall not exceed two lakh rupees

In the case of reserved categories, a single applicant in the reserved category may make an application for a number of specified securities which exceeds the reservation.

Any Preference while doing the Allotment?

No, there cannot be any discretion in the allotment process. Prior to the SEBI Circular on DIP Guidelines dated September 19, 2005, the allotment to the Qualified Institutional Buyers (QIBs) was on a discretionary basis. This however has been amended and all allottees are allotted shares on a proportionate basis within their respective categories.

Basis of Allotment

In case of over-subscription in a fixed price issue, the allotment is done on a proportionate basis.

In the case of a bookbuilding issue, after its closure, the bids received are aggregated under different categories, such as reserved allotments, Qualified Institutional Buyers (QIBs), Non-Institutional Buyers (NIIs) and Retail Individual Investors. The oversubscription ratios are calculated for each of the categories against the shares reserved for each of the categories in the offer document. Within each of these segments, the bids are segregated into different categories based on the number of shares applied for. The oversubscription ratio is then applied to the number of shares applied for and the number of shares to be allotted for applicants in each of the buckets is determined. Then, the number of successful allottees is determined.

In the case of a fixed price issue, after its closure, the applications received are aggregated under two categories; applications below Rs. 2,00,000 and those above this amount. The oversubscription ratios are calculated for each of the categories against the shares reserved for each of the categories in the offer document. Within each of these segments, the bids are segregated into different categories based on the number of shares applied for. The oversubscription ratio is then applied to the number of shares applied for and the number of shares to be allotted for applicants in each of the buckets is determined. Then, the number of successful allottees is determined.

Number of Days for an Investor to Receive the Refund Order/Allotment Advice

Companies are required to finalize the basis of allotment within 30 days from the closure of the issue in case of a fixed price issue and within 15 days from the closure of the issue in case of a book building issue or else they are liable to pay interest at the rate of 15% per annum. The refund orders/allotment advice is dispatched within two working days of finalizing the basis of allotment.

Listing & Trading

Number of Days for a Company to get its Securities Listed after the Issue

The post-issue lead manager ensures that all steps for completion of the necessary formalities for listing and commencement of trading at all stock exchanges where the securities are to be listed are taken within 7 working days of finalisation of basis of allotment.

With effect from May 1, 2010 the time between public issue closure and listing has been reduced to 12 days from existing of up to 22 days.

Other Aspects

Lock-in

"Lock-in" indicates a freeze on the shares. SEBI ICDR Regulations 2009 have stipulated lock-in requirements on shares of promoters mainly to ensure that the promoters or main persons, who are controlling the company, shall continue to hold some minimum percentage in the company after the public issue. The requirements are detailed in Chapter III Part IV of SEBI ICDR Regulations 2009.

Promoter

The promoter has been defined as a person or persons who are in over-all control of the company, who are instrumental in the formulation of a plan or programme pursuant to which the securities are offered to the public and those named in the prospectus as promoters(s). It may be noted that a director / officer of the issuer company or person, if they are acting as such merely in their professional capacity are not be included in the definition of a promoter. 'Promoter Group' includes the promoter, an immediate relative of the promoter (i.e. any spouse of that person, or any parent, brother, sister or child of the person or of the spouse). In case promoter is a company, a subsidiary or holding company of that company; any company in which the promoter holds 10% or more of the equity capital or which holds 10% or more of the equity capital of the Promoter; any company in which a group of individuals or companies or combinations thereof who holds 20% or more of the equity capital in that company also holds 20% or more of the equity capital of the issuer company. In case the promoter is an individual, any company in which 10% or more of the share capital is held by the promoter or an immediate relative of the promoter' or a firm or HUF in which the 'Promoter' or any one or more of his immediate relative is a member; any company in which a company specified in (i) above, holds 10% or more, of the share capital; any HUF or firm in which the aggregate share of the promoter and his immediate relatives is equal to or more than 10% of the total, and all persons whose shareholding is aggregated for the purpose of disclosing in the prospectus "shareholding of the promoter group"

The details are provided in the SEBI ICDR Regulations 2009. 

Promoter's Contribution and Lock-in

In case of an IPO/FPO, the promoters have to necessarily offer at least 20% of the post issue capital. In case of public issues by listed companies, the promoters shall participate either to the extent of 20% of the proposed issue or ensure post-issue share holding to the extent of 20% of the post-issue capital.

In case of any issue of capital to the public the minimum contribution of promoters shall be locked in for a period of three years, both for an IPO/FPO and public issue by listed companies. In case of an IPO/FPO, if the promoters' contribution in the proposed issue exceeds the required minimum contribution, such excess contribution shall also be locked in for a period of one year. In addition, the entire pre-issue share capital, or paid up share capital prior to IPO/FPO, and shares issued on a firm allotment basis along with issue shall be locked-in for a period of one year from the date of allotment in public issue.

Greenshoe Option

A Green Shoe option means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism for a period not exceeding 30 days in accordance with the provisions of Chapter III Part V of SEBI ICDR Regulations 2009, which is granted to a company to be exercised through a Stabilizing Agent. This is an arrangement wherein the issue would be over allotted to the extent of a maximum of 15% of the issue size. From an investor's perspective, an issue with green shoe option provides more probability of getting shares and also that post listing price may show relatively more stability as compared to market.

The name comes from the fact that Green Shoe Company was the first to issue this type of option.

Safety Net

Any safety net scheme or buy-back arrangements of the shares proposed in any public issue shall be finalized by an issuer company with the lead merchant banker in advance and disclosed in the prospectus. Such buy back or safety net arrangements shall be made available only to all original resident individual allottees limited up to a maximum of 1000 shares per allottee and the offer is kept open for a period of 6 months from the last date of dispatch of securities.

Underwriting

There are two types of underwriting.

Hard Underwriting

Hard underwriting is when an underwriter agrees to buy his commitment at its earliest stage. The underwriter guarantees a fixed amount to the issuer from the issue. Thus, in case the shares are not subscribed by investors, the issue is devolved on underwriters and they have to bring in the amount by subscribing to the shares. The underwriter bears a risk which is much higher in soft underwriting.

Soft Underwriting

Soft underwriting is when an underwriter agrees to buy the shares at later stages as soon as the pricing process is complete. He then, immediately places those shares with institutional players. The risk faced by the underwriter as such is reduced to a small window of time. Also, the soft underwriter has the option to invoke a force Majeure (acts of God) clause in case there are certain factors beyond the control that can affect the underwriter's ability to place the shares with the buyers.

Frequently Asked Questions on IPO Grading

All details regarding operational aspects of IPO grading like, grading methodology, validity of grading, scope of grading etc, as given below are based on the information obtained from the Credit Rating Agencies(CRAs) (including their FAQs) and are meant only for general informational purpose regarding the overall functioning of the IPO Grading system.

Specific details regarding IPO grading may be obtained directly from the respective Credit Rating Agencies.

What is 'IPO Grading'?

IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI, to the initial public offering/ follow on public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date. The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India. Such grading is generally assigned on a five-point point scale with a higher score indicating stronger fundamentals and vice versa as below.

IPO grade 1: Poor fundamentals
IPO grade 2: Below-average fundamentals
IPO grade 3: Average fundamentals
IPO grade 4: Above-average fundamentals
IPO grade 5: Strong fundamentals

IPO grading has been introduced as an endeavor to make additional information available for the investors in order to facilitate their assessment of equity issues offered through an IPO.

By when is an Issuer required to obtain the grade for the IPO?

IPO grading can be done either before filing the draft offer documents with SEBI or thereafter. However, the Prospectus/Red Herring Prospectus, as the case may be, must contain the grade/s given to the IPO by all CRAs approached by the company for grading such IPO. Further information regarding the grading process may be obtained from the Credit Rating Agencies

Who bears the cost of the IPO grading process?

The company desirous of making the IPO is required to bear the expenses incurred for grading such IPO.

Is grading optional?

No, IPO grading is not optional. A company which has filed the draft offer document for its IPO with SEBI, on or after 1st May, 2007, is required to obtain a grade for the IPO from at least one CRA.

Can the issuer company reject an IPO grade?

IPO grade/s cannot be rejected. Irrespective of whether the issuer finds the grade given by the rating agency acceptable or not, the grade has to be disclosed as required under the SEBI ICDR Regulations 2009. However the issuer has the option of opting for another grading by a different agency. In such an event all grades obtained for the IPO will have to be disclosed in the offer documents, advertisements etc.

Will IPO grading delay the process of issue?

IPO grading is intended to run parallel to the filing of offer document with SEBI and the consequent issuance of observations. Since issuance of observation by SEBI and the grading process, function independently, IPO grading is not expected to delay the issue process.

What are the factors that are evaluated to assess the fundamentals of the issue while arriving at the IPO grade?

The IPO grading process is expected to take into account the prospects of the industry in which the company operates, the competitive strengths of the company that would allow it to address the risks inherent in the business (es) and capitalise on the opportunities available, as well as the company's financial position.

While the actual factors considered for grading may not be identical or limited to the following, the areas listed below are generally looked into by the rating agencies, while arriving at an IPO grade

  • Business Prospects and Competitive Position
    1. Industry Prospects
    2. Company Prospects
  • Financial Position
  • Management Quality
  • Corporate Governance Practices
  • Compliance and Litigation History
  • New Projects—Risks and Prospects

It may be noted that the above is only indicative of some of the factors considered in the IPO grading process and may vary on a case to case basis.

Does IPO grading consider the price at which the shares are offered in the issue?

No. IPO grading is done without taking into account the price at which the security is offered in the IPO. Since IPO grading does not consider the issue price, the investor needs to make an independent judgment regarding the price at which to bid for/subscribe to the shares offered through the IPO.

Where can one find the grades obtained for the IPO and details of the grading process?

All grades obtained for the IPO along with a description of the grades can be found in the Prospectus. Abridged Prospectus, issue advertisement or any other place where the issuer company is making advertisement for its issue. Further the Grading letter of the Credit Rating Agency which contains the detailed rationale for assigning the particular grade will be included among the Material Documents available for Inspection.

Does an IPO grade, which indicates 'above average or strong fundamentals' mean one could subscribe safely to the issue?

An IPO grade is NOT a suggestion or recommendation as to whether one should subscribe to the IPO or not. IPO grade needs to be read together with the disclosures made in the prospectus including the risk factors as well as the price at which the shares are offered in the issue.

How does one interpret the IPO Grades?

The grades are allocated on a 5-point scale, the lowest being Grade 1 and highest Grade 5.The meaning of these grades have been explained under Question 1 in this FAQ.

How does IPO Grading help in deciding about investing in an IPO?

IPO Grading is intended to provide the investor with an informed and objective opinion expressed by a professional rating agency after analyzing factors like business and financial prospects, management quality and corporate governance practices etc. However, irrespective of the grade obtained by the issuer, the investor needs to make his/her own independent decision regarding investing in any issue after studying the contents of the prospectus including risk factors carefully.

What is the role of SEBI in IPO grading exercise?

SEBI does not play any role in the assessment made by the grading agency. The grading is intended to be an independent and unbiased opinion of that agency.

Will IPO Grading given by CRAs be a parameter for SEBI to issue its observations?

The grading is intended to be an independent and unbiased opinion of a rating agency. SEBI does not pass any judgment on the quality of the issuer company. SEBI's observations on the IPO document are entirely independent of the IPO grading process or the grades received by the company.