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.
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.
Trading in the IPO subsequent to
its offering is called the aftermarket. Trading volume in IPOs is extremely high
on the first day due to aftermarket purchases. Trading volume can decline subsequently
in the following days.
The price appreciation (or depreciation)
in IPOs is measured from the offering price going forward. However, to obtain a
better benchmark of IPO aftermarket performance, some investors track performance
from the first day close.
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 (Disclosure and Investment Protection) Guidelines 2000. 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.
Basis of Allocation/Basis
After the closures 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 over subscription 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 over subscription 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
The composition of the Board of
Directors is particularly critical for an IPO. Typically, a board is composed of
Directors who are also shareholders and independent directors. Independent directors
have no underlying financial or personal relationship with the company that could
create a conflict of interest and are on the board for their experience, business
judgment and contacts. Independent directors may own the shares of the company but
are not large shareholders. Investors should look for a board that has at least
two independent directors. Typically, IPOs add their first outside directors at
or immediately after the offering.
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 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
Book Running Lead Manager
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 finalization 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.
Bought Out Deal
An underwriter has a commitment
to buy all the shares, from a company and becomes financially responsible for selling
them. Also called firm allotment.
This refers to upcoming IPOs and
The price at which all shares of an IPO can be sold to investors in a
Dutch Auction. Sometimes referred to as the “market-clearing price”.
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
Most initial public offerings and
secondary offerings have more than one underwriter. The manager controlling the
offering is called the lead manager. Other underwriters are co-managers. The names
of these underwriters appear on the bottom of the front page of the prospectus,
with the most important manager appearing on the top left, and the co-managers arrayed
from left to right in order of importance.
Confirmatory Allotment Note
CAN is a document received by the
investor from the Book Running Lead Manager 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.
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.
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
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.
Draft Offer document
"Draft Offer document"
means the offer document in draft stage. The draft offer documents are filed with
SEBI, at least 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.
Direct Public Offer
This is an offering in which a company
sell its shares directly to the public without the help of the underwriter. Liquidity
of this offering is very limited.
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.
Expected offering date of issue in registration. This date comes directly
from the syndicate desk at the underwriter firm
When an investor buys an IPO at the offering price and then sells
the stock soon after it starts trading on the open market. The
underwriters try to discharge flipping by initialing placing stock in the
hands of long term investors particularly once that have promised
First Day Close
The closing price at the end of
the first day of trading reflects not only how well the lead manager priced and
placed the deal, but what the near-term trading is likely to be. For example, IPOs
that shoot up 100% or 200% on their first day of trading are likely to fall back
in price on subsequent days due to profit taking. Conversely, IPOs that break offer
price immediately are likely to drop further as institutions bail out. Breaking
IPO price right out of the box is a poor reflection on the lead manager's pricing
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.
When a company is publicly traded,
a distinction is made between the total number of shares outstanding and the number
of shares in circulation, referred to as the float. The float consists of the company's
shares held by the general public. For example, if a company offers 2 million shares
to the public in an IPO and has 20 million shares outstanding, its float is
2 million shares.
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.
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 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.
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.
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 Bankers 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).
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, who control the company, shall continue
to hold some minimum percentage in the company after the public issue. The requirements
are detailed in Chapter IV of DIP guidelines.
The total market value of a firm.
It is defined as the product of the company's stock price per share and the total
number of shares outstanding. The market cap should not be confused with the float,
which is the amount of shares in circulation. A company's market cap can greatly
exceed the float, especially in the case of a new publicly traded company.
The market value of a company is
determined by multiplying the number of shares outstanding by the current price
of the stock.
Offer date of the issue is the first
day the issue is traded publicly
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 with the 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.
This is the price at which the IPO
is first sold to the public. It is set by the lead manager, usually after the close
of stock market trading the night before the shares are distributed to IPO buyers.
In the case of some foreign IPOs, the pricing occurs over the weekend.
An investor may place his bids through
online terminals offered by some of the brokers. 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.
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.
When the underwriter refers to how
well orders are building for an IPO or a secondary deal, he means the book or listing
of buy orders from investors. The book for a deal can be many times oversubscribed.
In fact, an oversubscribed deal is desired by both underwriters and investors, because
it means that there will be an initial pop in the stock when it begins trading and
subsequent aftermarket orders.
This is the fancy name for the green
shoe, the underwriting agreement which allows the underwriters to buy up to an additional
15% of shares at the offering prices for a period of several weeks after the offering.
When an Initial Public Offering
has more orders than there are shares available it is said to be oversubscribed.
Many underwriters like to see a book several times oversubscribed because they know
that investors inflate the size of their indications of interest. When a book is
grossly oversubscribed it is said to be a hot deal.
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 are vision 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 priceband 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.
The role of these entities is important.
Both the lead managers and underwriters have the implicit responsibility of raking
up enough investment for the issue. The first has its income attached to the applications
and second bears the market risk failing which it has to cough up the amount which
it may not recover in case of a below average market response as this is the factor
that decides the scrip's performance in secondary market. Therefore, both play an
important role in the price determination of the issue. The issuing company obviously
wants to raise as much money as possible by selling as less number of securities
possible. This is definitely in the interest of shareholders of the company as the
dilution of equity is tried to be kept at minimum. Some of the general aspects by
which the issuing company decides the price are the company image, project's strengths,
business prospects and the incremental cash flows that are expected to accrue as
a result of the project. But the lead managers and underwriters vet the price judging
by the general market sentiment at that point of time. This basic interlocution
of different opinion is what leads ultimately to price discovery for the issue.
Companies go public to raise money.
The money raised is referred to as proceeds. In every prospectus there is a section
entitled "Use of proceeds". Investors should read this section to find
out why the company plans to raise money from the public.
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 hold 20% or more of the equity capital in that company
also holds 20% or more of the equity capital of the issuer company. Incase 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 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 allotment of an issue is below
50 persons is called Private Placement.
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:
Public financial institution as defined in section 4A of the Companies Act, 1956;
Scheduled commercial banks;
Foreign institutional investor registered with SEBI;
Multilateral and bilateral development financial institutions;
Venture capital funds registered with SEBI.
Foreign Venture capital investors registered with SEBI.
State Industrial Development Corporations.
Insurance Companies registered with the Insurance Regulatory and Development Authority
Provident Funds with minimum corpus of Rs.25 crores
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
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 an 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.
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.
Retail Individual Investor
Retail individual investor’ means
an investor who applies or bids for securities of or for a value of not more than
The disclosure of the issuer’s management
to give 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.
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 buyback
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.
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.
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.
This is a brokerage firm that raises
money for companies using public equity and debt markets. Underwriters are financial
intermediaries that buy stock or bonds from an issuer and then sell these securities
to the public.
An approach to valuing companies
that relies on comparing a company’s stock price to its income from operations,
cash flow from operations, or earnings per share. The higher the multiple, the more
richly valued the company is. Underwriters use valuation multiples of an IPO’s peers,
or comparables, to determine the appropriate level at which the IPO should be priced.