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Fund Raising
&
Overview of IPO
Sharing NTPC Experience18th November 2008
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Capital Creation
What are the sources Promoters Capital Equity
Preference Shares
Private Equity
Venture Capital
FCDs & PCDs Borrowings
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Capital Creation
Sources for a newly formed company is
Promoters Capital
Equity Capital Preference Shares have a preferential claim overEquity Share - in respect of Dividend & Liquidation
Borrowings from Commercial BanksShort term OD
Medium term ( Cash Credits , Bridge Loans etc)
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Capital Creation Sources of BorrowingsCommercial Banks
Development Banks having specific agenda
Capital MarketsMulti national- Bilateral credits
External Commercial Borrowings
Syndicated loans
FCCB
MTNs etc
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Capital Creation
Commercial BanksShort Term OD facility
Cash Credit & Commercial paper ( fund based &
non- fund based limits ) LC , BGs etc
Bridge loans
Medium Term Loans
Available to established companiesLong term Loans Only to very high quality Borrowers
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Capital Creation
Major Terms of loanSecurity
Short Term loan on the basis of
hypothecation
Medium term and long term
- Mortgage of title and creation of charge
English Mortgage with POA With negative lien and financial covenants
available to very high quality borrowers
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Capital CreationMajor Terms of loan
Interest rate Fixed rate with a review clause
Floating rate with or without spread
Periodicity of Service
Repayment Moratorium
Installments
Other terms Upfront fee Prepayment fee
Commitment fee for non- drawal
Penalty rate delayed payment
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Capital CreationCapital Market Debt Instruments
FD scheme under section 58 A of Companies Act ,1956 Bond / Debentures
Fully Convertible Partly Convertible Fully redeemable
Terms To be rated by two rating agencies To be secured by asset cover of 1.25 times Debenture trustee to be appointed
Other terms
Bullet payment Gradual redemptionCall/ put option Fixed/ Floating coupon rate / zero coupon bonds Public/ Private placement
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Capital Creation
Long term investment plans form the base
Issues to be addressed are
How to fund ?
Whether equity or debt ?
Why to borrow ?
Which structure to follow ?
What should be the gearing ? What will be the impact of gearing ?
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Capital Creation
Why to borrow ?Comparative cheapness , due to
lower pre- tax rate of interest than the
return expectations of the shareholders
Interest is a charge against the profit for
tax computation
Lower Issue & Administration Cost than
equity
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Capital Creation
Debt is thus an attractive optionHow much to borrow ?
What is the optimum level up to which
company can borrow ?
How to choose the debt equity ratio ?
Select a D E ratio , which maximizes the value of the firm
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Capital Gearing
Capital Gearing ( CG) is the ratio of all longterm liabilities to the shareholders funds asshown in the Balance Sheet
CG = LTLShareholders funds
How Capital Gearing ( CG) impacts the
returns to the shareholders?Let us examine with an example
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Bad ( p =0.25) Neutral ( p =0.50) Good ( p =0.25)
Net Operating Income before interest 5 20 35
Zero Gearing ( Rs. 100 mln , Rs.0 mln )
Interest 0 0 0
Shareholders' earnings 5 20 35
Return on Equity 5% 20% 35%
25 % Gearing ( Rs. 75 mln , Rs. 25 mln)
Interest on 10 % 2.5 2.5 2.5
Shareholders' earnings 2.5 17.5 32.5
Return on Equity 3% 23% 43%
50 % Gearing ( Rs.50 mln , Rs. 50 mln )
Interest on 10 % 5 5 5
Shareholders' earnings 0 15 30
Return on Equity 0% 30% 60%
CG v The Business Scenario
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Capital Gearing
Returns to the shareholders is differentunder various CapitalGearing ( CG) ratios
In Scenario A the shareholders earnings are completelywiped out , due to interest charge .Thus any higher gearing
in this scenario will lead to negative earnings to theshareholders .
So more reliable the earning stream more is the borrowingcapacity
Return expectations of the shareholders also changes withthe gearing , due to change in the risk perception.
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Raising EquityRaising Equity
There are may rules and regulationssurrounding the process of raising equity
The company can either issue a newsecurity to the Public or can sell it as
private issue
Public issues is of two kinds : Offer to the general Public
Rights offer ,ie to existing shareholdersThe first public issue is known as IPO
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Raising EquityRaising Equity Broad procedure
Approval BOD/Shareholders
Appointment of Lead Managers
Appointment of Legal Counsel
Due Diligence Exercise
Appointment of Registrar/Bankers to Issue/Printers
Filing Draft Red Herring Prospectus/Due Diligence Certificate with SEBI
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Clearance of DRHP from SEBI
Deciding Price Band and Issue Opening/Closing dates
File Red Herring Prospectus with ROC
In Principle approval from NSE/BSE
Agreement with NSDL/CDSL
Approval from RBI/FIPB
Opening of Issue
Closing of Issue
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Deciding the Issue Price
Updating of Prospectus & file with ROC
Finalisation of Basis of Allotment
Allotment of Shares by BOD
Dispatch of allotment/Refund Orders within 15 days of
closing of Issue
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Regulatory FrameworkRegulatory Framework
Company can issue IPO providedCompany is not prohibited from accessing thecapital market under any order or direction passedby the SEBI
Company has applied for listing of those securitieswith a recognized Stock Exchange
Company complying with norms stipulated inSEBI(DIP) Guidelines in addition to those specifiedin Companies Act
Unlisted companies have to get grading of IPO atleast from one Credit rating agency and disclosethe same
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Requirements of SEBI (DIP) Guidelines, 2000Requirements of SEBI (DIP) Guidelines, 2000
Eligibility Requirement
Promoters contribution and lock-in
requirements Procedural requirements
Disclosure requirements
Other miscellaneous requirements
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Eligibility requirements- Unlisted Companies
The 2nd set of eligibility requirements
At least 15% participation by FIs/SCBs ,of which
at least 10% comes from the appraiser(s).
In addition ,at least 10% of the issue size shall
be allotted to the QIBs. Post issue paid-up capital is at least Rs.10 crore
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Eligibility Requirements Contd.Eligibility Requirements Contd.
The issuer not satisfying the aboverequirements can still issue an IPO,
provided:
The issue is made through book-building process, withat least 50% of the issue size allotted to the Qualified
Institutional Buyers( QIBs)
Post issue paid-up capital is at least Rs.10 crore
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Eligibility Requirements Contd.Eligibility Requirements Contd.
Other Eligibility requirements
Filing of offer document with SEBI
Application for listing
Issue of securities in dematerialised form
No outstanding warrants or financial instruments
No partly paid-up shares
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Promoters contribution and lock-in RequirementsPromoters contribution and lock-in Requirements
Promoters contribution:
At least 20% of the post issue capital
Lock-in Requirement
Min Promoters contribution lock-in of 3 years from thedate of allotment
Rest of the pre-issue paid-up capital will be locked-infor a period of one year
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All issues to be managed by at least one merchant banker
functioning as Lead Merchant Banker.
As per SEBI (DIP) Guidelines, 2000 , no Company to make an
issue of security unless a Memorandum of Understanding enteredbetween Lead Merchant Banker and Company.
MOU to specify the mutual rights, liabilities and obligations
relating to the Issue and the same are to be clearly demarcated for
each Merchant Banker.
Appointment Of Lead Managers And Other Agencies
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Other intermediaries include :Registrar to the Issue
Bankers to the Issue
Legal Counsel (Domestic and International) to the
IssueBrokers / Syndicate members
All intermediaries to be appointed by Company in consultation
with the Lead Merchant Banker.
Lead Merchant Banker to independently assess the
capability and capacity of various intermediaries.
Appointment Of Lead Managers And Other Agencies
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Contents of the Offer Document
The contents of the Offer document have beenprescribed in the DIP guidelines The Offer document shall contain all material
information which shall be true and adequate so
as to enable the investors to make informeddecision on the investments in the Issue; such as
Utilisation of Issue Proceeds , Project Cost, Means
of Financing, Appraisal etc
Company, Management and ProjectPromoters and Their BackgroundKey Managerial Personnel
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INITIAL PUBLIC OFFER
BY
National Thermal Power Corporation
Limited
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Employees Portion 2.17 times
Retail Portion 3.73 timesNIB Portion 11.93 times
QIB Portion 19.54 times
Overall 13.14 times
Subscription Pattern
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Basis of allotmentBasis of allotment
I. Retail Portion :No. of shares Allotment
applied
100 shares 100 shares to 11 out of 39 applicants
200 shares 100 shares to 22 out of 41 applicants
300 shares 100 shares to 33 out of 41 applicants
400 to 800 shares No.of shares applied X 26.81%
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II.NIB Portion:
No. of shares Allotment
applied
900 shares 100 shares to 11 out of 14 applicants
1000 shares 100 shares to 5 out of 6 applicants
1100 shares 100 shares to 10 out of 11 applicants
1200 shares & above No. of shares applied X 8.38%
III. QIB Portion: Discretionary Basis
IV. Employees Portion: No. of shares applied X46.08%, all
employees were allotted shares
Basis Of AllotmentBasis Of Allotment
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Post Issue Shareholding PatternPost Issue Shareholding Pattern
Government 89.5%
Employees 0.25%
QIBs 5.13%
NIBs 2.56%Retail Investors 2.56%
100%
Number of Shareholders
after Issue 1246232
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NTPC IPO A Success StoryNTPC IPO A Success Story
Issue gets oversubscribed within 3 minutes of
opening
Highest ever number of applications received for
a book built offer - over 14.68 lacs offers received
Employee category gets oversubscribed by 2.17times
The first company whose securities started trading in bothcash and Futures / Options Segments immediately on listing
The first company to be ranked third by Market Capitalisation
on the day of Listing
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Capital Creation
PromotersEquity
Loan
BankOD
Cash CreditFund Based
Non- Fund BasedBridge Loan
Term Loan
Capital Markets
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