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What is an Initial Public Offering?
Initial Public Offering (IPO) is when an unlisted company
makes either a fresh issue of securities or an offer for sale of its existing
securities or both for the first time to the public. This paves way for listing
and trading of the issuer’s securities.
What is a Follow on Public Offering?
A follow on public offering (FPO) is when an already listed
company makes either a fresh issue of securities to the public or an offer for
sale to the public, through an offer document. An offer for sale in such
scenario is allowed only if it is made to satisfy listing or continuous listing
obligations.
What is a Rights Issue?
Rights Issue (RI) is when a listed company which proposes to
issue fresh securities to its existing shareholders as on a record date. The
rights are normally offered in a particular ratio to the number of securities
held prior to the issue. This route is best suited for companies who would like
to raise capital without diluting stake of its existing shareholders unless
they do not intend to subscribe to their entitlements.
What is a Preferential Issue?
A preferential issue is an issue of shares or of convertible
securities by listed companies to a select group of persons under Section 81 of
the Companies Act, 1956 which is neither a rights issue nor a public issue.
This is a faster way for a company to raise equity capital. The issuer
company has to comply with the Companies Act and the
requirements contained in Chapter pertaining to preferential allotment in SEBI
(DIP) guidelines which inter-alia include pricing, disclosures in notice etc.
What is SEBI’s Role in an Issue?
Any company making a public issue or a listed company making
a rights issue of value of more than Rs.50 lakhs is required to file a draft
offer document with SEBI for its observations. The company can proceed further
on the issue only after getting observations from SEBI. The validity period of
SEBI’s observation letter is three months only ie. 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 issue?
It is to be distinctly understood that 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 SEBI tag make my money safe?
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.
What are Disclosures and Investor protection guidelines?
The primary issuances are governed by SEBI in terms of SEBI
(Disclosures and Investor protection) guidelines. SEBI framed its DIP
guidelines in 1992. Many amendments have been carried out in the same in line
with the market dynamics and requirements. In 2000, SEBI issued “Securities and
Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000”
which is compilation of all circulars organized in chapter forms. These
guidelines and amendments thereon are issued by SEBI India under section 11 of
the Securities and Exchange Board of India Act, 1992. SEBI (Disclosure and
investor protection) guidelines 2000 are in short called DIP guidelines. It
provides a comprehensive framework for issuances buy the companies.
How does SEBI ensure compliance with Disclosures and Investor
protection?
The Merchant Banker are the specialized intermediaries who
are required to do due diligence and ensure that all the requirements of DIP
are complied with while submitting the draft offer document to SEBI. Any non
compliance on their part, attract penal action from SEBI, in terms of SEBI
(Merchant Bankers) Regulations. The draft offer document filed by Merchant
Banker is also placed on the website for public comments. Officials of SEBI at
various levels examine the compliance with DIP guidelines and ensure that all
necessary material information is disclosed in the draft offer documents.
With the presence of the Central Listing Authority, what
would be the role of SEBI in the processing of Offer documents for an issue?
The Central Listing Authority’s , CLA, functions have been
detailed under Regulation 8 of SEBI (Central Listing Authority) Regulations,
2003 (CLA Regulations) issued on August 21, 2003 and amended up to October 14,
2003. In brief, it covers processing applications for letter precedent to
listing fromapplicants; to make recommendations to the Board on issues
pertaining to the protection of the interest of the investors in securities and
development and regulation of the securities market, including the listing
agreements, listing conditions and disclosures to be made in offer documents;
and; to undertake any other functions as may be delegated to it by the Board
from time to time. SEBI as the regulator of the securities market examines all
the policy matters pertaining to issues and will continue to do so even during
the existence of the CLA. Since the CLA is not yet operational, the reply to
this question would be updated thereafter.
What is the difference between an offer document, Red
Herring Prospectus, a prospectus and an abridged prospectus? What does it mean
when someone says “draft offer doc”?
“Offer document” means Prospectus in case of a
public issue or offer for sale and Letter of Offer in case of a rights issue,
which is filed Registrar of Companies (ROC) and Stock Exchanges. An offer
document covers all the relevant information to help an investor to make
his/her investment decision. “Draft Offer document” means the offer document in
draft stage. The draft offer documents are filed with SEBI, atleast 21 days
prior to the filing of the Offer Document with ROC/ SEs. SEBI may specifies
changes, if any, in the draft Offer Document and the issuer or the Lead
Merchant banker shall carry out such changes in the draft offer document before
filing the Offer Document with ROC/ SEs. The Draft Offer document is available
on the SEBI website for public comments for a period of 21 days from the filing
of the Draft Offer Document with SEBI.
What is a Red Herring Prospectus?
Red Herring Prospectus is a prospectus, 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.
An RHP for and FPO can be filed with the RoC without the price band and the
issuer, in such a case will notify the floor price or a price band by way of an
advertisement one day prior to the opening of the issue. In the case of
book-built issues, it is a process of price discovery and 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.
What is an Abridged Prospectus?
Abridged Prospectus means 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.
What does one mean by Lock-in?
Lock-in indicates a freeze on the shares. SEBI (DIP)
Guidelines 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.
How the word Promoter has been defined?
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 theperson 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".
Who decides the price of an issue?
Indian primary market ushered in an era of free pricing in
1992. Following this, the guidelines have provided that the issuer in
consultation with Merchant Banker shall decide the price. There is no price
formula stipulated by SEBI. SEBI does not play any role in price fixation. The
company and merchant banker are however required to give full disclosures of
the parameters which they had considered while deciding the issue price. There
are two types of issues one where company and LM fix a price (called fixed
price) and other, where the company and LM stipulate a floor price or a price
band and leave it to market forces to determine the final price (price
discovery through book building process).
What is Fixed Price offers?
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.
What does “price discovery through book building process”
mean?
“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 price for
securities.
How does Book Building work?
Book building is a process of price discovery. Hence, the
Red Herring prospectus does not contain a price. Instead, the red herring
prospectus contains either the floor price of the securities offered through it
or a price band along with the range within which the bids can move. The
applicants bid for the shares quoting the price and the quantity that they
would like to bid at. Only the retail investors have the option of bidding at
‘cut-off’. After the bidding process is complete, the ‘cut-off’ price is
arrived at on the lines of Dutch auction. The basis of Allotment (Refer Q.
15.j) is then finalized and letters allotment/refund is undertaken. The final
prospectus with all the details including the final issue price and the issue
size is filed with ROC, thus completing the issue process.
What is a price band?
The red herring prospectus may contain either the 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 shall not be more
than 20%. In other words, it means that the cap should not be more than 120% of
the floor price. The price band can have a revision and such a revision in the
price band shall 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. In case the price band is revised,
the bidding period shall be extended for a further period of three days,
subject to the total bidding period not exceeding thirteen days.
Who decides the price band?
It may be understood that the regulatory mechanism does not
play a role in setting the price for issues. It is up to the company to decide
on the price or the price band, in consultation with Merchant Bankers. 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.
What is firm allotment?
A company making an issue to public can reserve some shares
on “allotment on firm basis” for some categories as specified in DIP
guidelines. Allotment on firm basis indicates that allotment to the investor is
on firm basis. DIP guidelines provide for maximum % 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.
What is reservation on competitive basis?
Reservation on Competitive Basis is when allotment of shares
is made in proportion to the shares applied for by the concerned reserved
categories. Reservation on competitive basis can be made in a public issue to
the Employees of the company, Shareholders of the promoting companies in the
case of a new company and shareholders of group companies in the case of an
existing company, Indian Mutual Funds, Foreign Institutional Investors
(including non resident Indians and overseas corporate bodies), Indian and
Multilateral development Institutions and Scheduled Banks.
Is there any preference while doing the allotment?
The allotment to the Qualified Institutional Buyers (QIBs)
is on a discretionary basis. The discretion is left to the Merchant Bankers who
first disclose the parameters of judgment in the Red Herring Prospectus. There
are no objective conditions stipulated as per the DIP Guidelines. The Merchant
Bankers are free to set their criteria and mention the same in the Red Herring
Prospectus.
Who is eligible for reservation and how much? (QIBs, NIIs,
etc.,)
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. In case
the book built issues are made pursuant to the requirement of mandatory
allocation of 60% to QIBs in terms of Rule 19(2)(b) of SCRR, the respective
figures are 30% for RIIs and 10% for NIIs. This is a transitory provision
pending harmonization of the QIB allocation in terms of the aforesaid Rule with
that specified in the guidelines.
How is the Retail Investor defined as?
‘Retail individual investor’ means an investor who applies
or bids for securities of or for a value of not more than Rs.1,00,000.
Can a retail investor also bid in a book-built issue?
Yes. He can bid in a book-built issue for a value not more
than Rs.1,00,000. Any bid made in excess of this will be considered in the HNI
category.
Where can I get a form for applying/ bidding for the shares?
The form for applying/bidding of shares is available with
all syndicate members, collection centers, the brokers to the issue and the
bankers to the issue.
What is the amount of faith that I can lay on the contents
of the documents? And whom should I approach if there are any lacunae?
The document is prepared by an independent specialized
agency called Merchant Banker, which is registered with SEBI. They are required
to do through due diligence while preparing an offer document. The draft offer
document submitted to SEBI is put on website for public comments. In case, you
have any information about the issuer or its directors or any other aspect of
the issue, which in your view is not factually reflected, you may send your
complaint to Lead Manager to the issue or to SEBI, Division of Issues and
Listing.
Is it compulsory for me to have a Demat Account?
As per the requirement, all the public issues of size in
excess of Rs.10 crore, are to made compulsorily in the demat more. Thus, if an
investor chooses to apply for an issue that is being made in a compulsory demat
mode, he has to have a demat account and has the responsibility to put the
correct DP ID and Client ID details in the bid/application forms.
What is the procedure for getting a demat account?
The FAQs relating to demat have been covered in the Investor
Education section of the SEBI website in a separate head. They are available on
the http://investor.sebi.gov.in/faq/dematfaq.html.
What are the dos and don’ts for bidding / applying in the
issue?
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
relying on news obtained through unofficial means.
How many days is the issue open?
As per Clause 8.8.1, Subscription list for public issues
shall be kept open for at least 3 working days and not more than 10 working
days. In case of Book built issues, the minimum and maximum period for which
bidding will be open is 3–7 working days extendable by 3 days in case of a
revision in the price band. 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. As per clause 8.8.2., Rights
issues shall be kept open for at least 30 days and not more than 60 days.
Can I change/revise my bid?
Yes. 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 shall be completed within the date of closure of the issue.
What proof can bidder request from a trading member or a
syndicate 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.
Can I know the number of shares that would be allotted to
me?
In case of fixed price issues, the investor is intimated
about the CAN/Refund order within 30 days of the closure of the issue. In case
of book built issues, the basis of allotment is finalized by the Book Running
lead Managers within 2 weeks from the date of closure of the issue. The
registrar then ensures that the demat credit or refund as applicable is
completed within 15 days of the closure of the issue. The listing on the stock
exchanges is done within 7 days from the finalization of the issue.
Which are the reliable sources for me to get information
about response to issues?
In the case of book-built issues, the exchanges (BSE/NSE)
display the data regarding the bids obtained (on a consolidated basis between
both these exchanges). The data regarding the bids is also available
categorywise. After the price has been determined on the basis of bidding, the
statutory public advertisement containing, inter alia, the
price as well as a table showing the number of securities and the amount
payable by an investor, based on the price determined, is issued.
How do I know if I am allotted the shares? And by what
timeframe will I get a refund if I am not allotted?
The investor is entitled to receive a Confirmatory Allotment
Note (CAN) in case he has been allotted shares within 15 days from the date of
closure of a book Built issue. The registrar has to ensure that the demat
credit or refund as applicable is completed within 15 days of the closure of
the book built issue.
How long will it take after the issue for the shares to get
listed?
The listing on the stock exchanges is done within 7 days
from the finalization of the issue. Ideally, it would be around 3 weeks after
the closure of the book built issue. In case of fixed price issue, it would be
around 37 days after closure of the issue.
How does one come to know about the issues on offer? And
from where can I get copies of the draft offer document?
SEBI issues press releases every week regarding the draft
offer documents received and observations issued during the period. The draft
offer documents are put up on the website under Reports/Documents section. The
final offer documents that are filed with SEBI/ROC are also
put up for information under the same section. Copies of the
draft offer documents in hard copy form may be obtained from the office of
SEBI, Mittal Court, ‘A’ wing, Ground Floor, 224, Nariman Point, Mumbai – 400021
on a payment of Rs.100 or from SES, LMs etc. The soft copies can be downloaded
from the SEBI website under Reports/Documents section. Some LMs also make it
available on their web sites for download. The final offer documents that are
filed with SEBI/ROC can also be downloaded from the same section of the
website.
Who are the intermediaries in an issue?
Merchant Bankers to the issue or Book Running Lead Managers
(BRLM), syndicate members, Registrars to the issue, Bankers to the issue,
Auditors of the company, Underwriters to the issue, Solicitors, etc. are the
intermediaries to an issue. The issuer discloses the addresses, telephone/fax
numbers and email addresses of these intermediaries. In addition to this, the
issuer also discloses the details of the compliance officer appointed by the
company for the purpose of the issue.
Who is eligible to be a BRLM?
A Merchant banker possessing a valid SEBI registration in
accordance with the SEBI (Merchant Bankers) Regulations, 1992 is eligible to
act as a Book Running Lead Manager to an issue.
What is the role of a Lead Manager? (pre and post issue)
In the pre-issue process, the Lead Manager (LM) takes up the
due diligence of company’s operations/ management/ business plans/ legal etc.
Other activities of the LM include drafting and design of Offer documents,
Prospectus, statutory advertisements and memorandum containing salient features
of the Prospectus. The BRLMs shall ensure compliance with stipulated
requirements and completion of prescribed formalities with the Stock Exchanges,
RoC and SEBI including finalisation of Prospectus and RoC filing. Appointment
of other intermediaries viz., Registrar(s), Printers, Advertising Agency and
Bankers to the Offer is also included in the pre-issue processes.
The LM also draws up the various marketing strategies for
the issue. The post issue activities including management of escrow accounts,
coordinate non-institutional allocation, intimation of allocation and dispatch
of refunds to bidders etc are performed by the LM. The post Offer activities
for the Offer will involve essential follow-up steps, which include the
finalization of trading and dealing of instruments and dispatch of certificates
and demat of delivery of shares, with the various agencies connected with the
work such as the Registrar(s) to the Offer and Bankers to the Offer and the
bank handling refund business. The merchant banker shall be responsible for
ensuring that these agencies fulfill their functions and enable it to discharge
this responsibility through suitable agreements with the Company.
What is the role of a registrar?
The Registrar finalizes the list of eligible allottees after
deleting the invalid applications and ensures that the corporate action for
crediting of shares to the demat accounts of the applicants is done and the
dispatch of refund orders to those applicable are sent. The Lead manager
coordinates with the Registrar to ensure follow up so that that the flow of
applications from collecting bank branches, processing of the applications and
other matters till the basis of allotment is finalized, dispatch security
certificates and refund orders completed and securities listed.
What is the role of bankers to the issue?
Bankers to the issue, as the name suggests, carries out all
the activities of ensuring that the funds are collected and transferred to the
Escrow accounts. The Lead Merchant Banker shall ensure that Bankers to the
Issue are appointed in all the mandatory collection centers as specified in DIP
Guidelines. The LM also ensures follow-up with bankers to the issue to get
quick estimates of collection and advising the issuer about closure of the
issue, based on the correct figures.
What is the recourse available to the investor in case of
issue complaints?
Most of the issue complaints pertain to non-receipt of
refund or allotment, or delay in receipt of refund or allotment and payment of
interest thereon. These complaints shall be made to the post issue Lead
Manager, who in turn will take up the matter with registrar to redress the
complaints. In case the investor does not receive any reply within a reasonable
time, investor may complain to SEBI, Office of investors Assistance
Where do I get data on primary issues? (issuer, total
issues, issue size, the intermediaries, etc., during a given period)
SEBI brings out a monthly bulletin that is available off the
shelf at bookstores. A digital version of the same is available on the SEBI
website under the “News/Publications” section. The Bulletin contains all the
relevant historical figures of intermediary issue and intermediary particulars
during the given period placed against historical figures.
What are the relevant regulations and where do I find them?
The SEBI Manual is SEBI authorized publication that is a
comprehensive databank of all relevant Acts, Rules, Regulations and Guidelines
that are related to the functioning of the Board. The details pertaining to the
Acts, Rules, Regulations, Guidelines and Circulars are placed on the SEBI
website under the “Legal Framework” section. The periodic updates are uploaded
onto the SEBI website regularly.
What are 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.
What is an 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.
What is 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.
What is a 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.
What are 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.
What is a Green-shoe Option?
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 VIIIA of DIP Guidelines, 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.
What is an e-IPO?
A company proposing to issue capital to public through the
on-line system of the stock exchange for offer of securities can do so if it
complies with the requirements under Chapter 11A of DIP Guidelines. The
appointment of various intermediaries by the issuer includes a prerequisite
that such members/registrars have the required facilities to accommodate such
an online issue process.
What is 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. The details regarding Safety Net
are covered under Clause 8.18 of DIP Guidelines.
Who is a Syndicate Member?
The Book Runner(s) may appoint those intermediaries who are
registered with the Board and who are permitted to carry on activity as an
‘Underwriter’ as syndicate members. The syndicate members are mainly appointed
to collect and entire the bid forms in a book built issue.
What is Open book/closed book?
Presently, in issues made through book building, Issuers and
merchant bankers are required to ensure online display of the demand and bids
during the bidding period. This is the Open book system of book building. Here,
the investor can be guided by the movements of the bids during the period in
which the bid is kept open. Under closed book building, the book is not made
public and the bidders will 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.
What is 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.
What is 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.
What is a 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 (DIP) guidelines permit only retail individual
investors to have an option of applying at cut off price.
What is Differential pricing?
Pricing of an issue where one category is offered shares at
a price different from the other category is called differential pricing. In
DIP Guidelines differential pricing is allowed only if the securities to
applicants in the firm allotment category is at a price higher than the price
at which the net offer to the public is made. The net offer to the public means
the offer made to the Indian public and does not include firm allotments or
reservations or promoters’ contributions.
What is Basis of Allocation/Basis of Allotment?
After the closure of the issue, the bids received are
aggregated under different categories i.e., firm allotment, Qualified
Institutional Buyers (QIBs), Non-Institutional Buyers (NIBs), Retail, etc. The
oversubscription ratios are then calculated for each of the categories as
against the shares reserved for each of the categories in the offer document.
Within each of these categories, the bids are then segregated into different
buckets 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. This process is followed in case
of proportionate allotment. In
case of allotment for QIBs, it is subject to the discretion
of the post issue lead manager.
Who is Qualified Institutional Buyer (QIBs)?
Qualified Institutional Buyers are those institutional
investors who are generally perceived to possess expertise and the financial
muscle to evaluate and invest in the capital markets. In terms of clause 2.2.2B
(v) of DIP Guidelines, a ‘Qualified Institutional Buyer’ shall mean:
a. Public financial institution as defined in section 4A of
theCompanies Act, 1956;
b. Scheduled commercial banks;
c. Mutual funds;
d. Foreign institutional investor registered with SEBI;
e. Multilateral and bilateral development financial
institutions;
f. Venture capital funds registered with SEBI.
g. Foreign Venture capital investors registered with SEBI.
h. State Industrial Development Corporations.
i. Insurance Companies registered with the Insurance
Regulatoryand Development Authority (IRDA).
j. Provident Funds with minimum corpus of Rs.25 crores
k. Pension Funds with minimum corpus of Rs. 25 crores)
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.
Source: http://www.sebi.gov.in
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