PRE-ISSUE OF IPO

By:Pratik ChandraSubhadip BagchiSudipto Das

IPO is

• An Initial Public Offering of a company’s stock issued to the public

• A mechanism for companies to sell ownership stakes to investors who believe in the companies’ futures

• Purposes:– Growth– Recapitalization– Original shareholders diversify

BENEFITS of being a Public Company

• Expand and diversify equity base:

• Public exposure and prestige• Equity-based compensation opportunities for attracting and

retaining key management and employees• Creation of ‘Currency’ for acquisitions• Facilitates other financing opportunities: equity, convertible debt,

cheaper bank loans, etc.

Individuals

Management & Venture Capital Funds

Pension FundsMutual Funds

Other Institutions

COSTS of being a Public Company

• Disclosure requirements

• Scrutiny by and pressure from shareholders and security analysts

• Shareholder Relations

• Vulnerability to hostile takeovers

• Corporate governance

• Cultural considerations

Evolution – Capital Issues

Merchant Bankers

Regulated and Monitored by SEBI

Parties Involved

- BRLM - Broker/Sub-Broker- Co-Managers - Printer- Merchant Bankers - Advertising Agency- Underwriters’ counsel - Solicitors/Advocates

- Accountants - Registrars

Preparation for IPO

• Understand and fulfill due diligence requirements

• Develop budgeting and reporting processes

• Develop timely reporting of key metrics

• Develop investor relations and communication methods to disclose performance changes

• Identify key persons to provide communications to investors

• Train investor relations staff for - responses to outsider inquiries - information disclosures

Planning – Capital Issues

• Put together Strategic working group

• Devise structure of offering

• Schedule and assign tasks

• Put together Legal Team

• Publicity

• Make sure Accounting Team has credibility and expertise

• Balance between Funds

Structuring the Offering

SizeNumber of

shares authorized

Follow-on issues

Status of mezzanine financing

- pay in cash- give shares

Review existing

shareholders

Determine lock-up agreements with

company, principal shareholders, officers,

directors

Underwriter distribution

objectives/syndication

Selection of listing

exchange

Selection of stock symbol

Use of proceeds

Selection – Lead Manager

• Ability to sell issue to investors

• Status and Organizational competence

• Providing efficient service

• Company should have the confidence in the banker

• Should have SEBI authorization

• Availability of Infrastructure

Book Building Process

Stepsinvolved in BookBuilding Process

Total Public Issue

Book Building Method

75% of net offer to public can be offered to Institutional and Non

Institutional Buyers

Not less than 25% shall be available

to non QIBs

Not more than 50% shall be

available to QIBs

Fixed Price Method

25% of net offer to public is offered to individual retail investors IPO MIX

Time Line

Prior to filing

- Due diligence Valuation- Choose co- managers- Documentation- Positioning- File

registration statement

SEC Review

- Prepare for roadshow presentation- Respond to SEC Comments

Marketing the Issue

- “Red herrings” – print and distribute- Stock Analysts present

to underwriters’ sales forces- Target key investors- Create underwriting syndicate- Presentations to sell-

side analyst- Roadshow presentations- Develop the “Book”

i.e. institutional and retail demand

Pricing, Trading andFollow-on Support

- Analyze pricing issues

and investor feedback- Determine

allocation to retail & institution- Begin aftermarket trading- Closing details- On-going research- Investor relations begins and continues in earnest

2 –3 months 2 months 1 month Continuing…

Pricing OverviewTeams meet, share feedback and ascertain demand and pricing

When final pricing date has been determined investors are told the deadline for submitting indications of interest and the closing of the book

After closing the book the lead manager and co-managers assess: Demand, Price sensitivity, Allocation issues, Aftermarket behavior

The lead manager meets the co-management and recommends an offering price that maximizes the offering proceeds to company and favorable aftermarket performance

Company and the underwriter agree on offering price, and sign underwriting and syndicate agreements

Typical Pricing ProcessPricing Process

Last Days of Roadshow Pricing Day

‘Book’ of Demand• Size• Quality• Price Sensitivity• Likely aftermarket demand

External Factors• Recent Developments - Stock Price levels - Market in general - Industry - Comparables - New Issues

Analysis Agreement on

Price/Size

Allocations to investors at

agreed initial price

Market determines

price

Trading begins

Price Support Activity

Green Shoe Option

Exercised

Due Diligence ProcessCorporate Level Company

- History- Mission statement/vision- SWOT (Strength Weaknesses Opportunity Threats) analysis- Objectives and key challenges- Management team/organizational chart- Key investment highlights- Strategic position in the industry- Industry size/growth rates- Market drivers- Major industry trends(spending, commissions, etc.)- Consolidation- Segmentation/target markets- Cyclicality- Regulatory environment

Roadshow Presentation

• The company’s opportunity to sell itself to investors - Domestic roadshow - 8 – 10 days (typical in U.S.) - Approximately 100+ face-to-face meetings - International roadshows usually shorter than domestic

• Prior to meeting management investors read prospectus, discuss company with research analysts and securities salespeople

• Group and individual meetings

• “Makes or Breaks” the deal - Investors will ask everything - Demanding and stressful on top management - Distracts from running the company - Must have a compelling story to tell

Roadshow Formats• Group Presentations

- company tells its story in detail generally during a meal: can be lunches with hundreds of investors to smaller groups- generally conducted by two teams but sometimes they will combine when necessary

• One-on-One Presentations- expected to generate the majority of quality institutional demand- range from meetings with a single portfolio manager/buyside analyst to small group sessions with multiple portfolio managers and buyside analysts- will take place in cities throughout the United States and Europe- will be conducted by the two teams separately with the exception of certain key accounts where the teams will combine for maximum impact

• Conference Calls- on as-needed basis with select investors who cannot attend roadshow meeting- maybe group calls as well as one-on-one

SEBI Guidelines

• Major amendments made by SEBI on 14-8-2003, in the Disclosure and Investor Protection Guidelines 2000.

• Purpose :(a) to enhance the level of investors’ protection

(b) to increase the transparency and efficiency of the primary market (c) to strengthen the disclosure and eligibility norms for issuer companies and (d) to rationalize and simplify various operational procedures in the primary market so as to facilitate raising of resources by the issuer companies.

Processing of draft offer documents1. Grading of Initial Public offerings (IPOs)

– Mandatory grading by credit rating agencies– required to disclose all the grades in the

prospectus, abridged prospectus, issue advertisements and all other places where the issuer is advertising for the IPO.

SEBI Guidelines(contd.)

2. Guidelines on preferential allotment– existence of listing history of at least six months in a

company proposing a preferential allotment.– Companies with listing history of less than six

months to raise money through preferential allotment

3. Guidelines on Qualified Institutions Placement (QIP)

– Company is required to have a listing history of at least one year [Sec 81(1A) of Companies act,1956]

SEBI Guidelines(contd.)

4. Eligibility of pledged shares for computation of minimum promoters’ contribution– Securities which have been pledged with banks or

financial institutions as collateral security for loans granted by such banks or financial institutions shall not be eligible for computation of minimum promoters’ contribution

SEBI Guidelines(contd.)

Reliance Power IPOKey Highlights:

- Till date, India’s largest Public Issue launched in 2008

- Public Issue of 260,000,000 equity shares of Rs 10 each

- Of the above 32,000,000 equity shares were promoters’

contribution

- Price Band: Rs 405 – Rs 450 per equity share

- Promoted by ADAG

Book Running Lead Managers &Co-Lead Managers

Registrar

THANK YOU