Initial Public Offer meaning and Eligibility Norms

Sanoj Kumar

(CS Management Trainee)

E-mail: cssanoj.icsi@gmail.com

Meaning

An initial public offering, or IPO, is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity. (In simple word; when a company first time publicly sells their shares in the open market)

Qualification for listing

Eligibility Norms for making an IPO

Eligibility Norm I (Profitability Route)

A). Net Tangible assets of at least Rs. 3 Crores in each of the preceding three full years of which;

                              Not more than 50% held are in monetary assets.

      However, limit of 50% on monetary assets shall not be applicable in case the public offer is made entirely through offer for sale.

B). Minimum of Rs. 15 Crores as average pre-tax operating profit in at least three years of the immediately preceding five years.

C). Net worth of at least Rs. 1 Crores in each of the preceding three full years.

D). if there has been change in the company’s name, at least 50% of revenue for preceding one year should be from the new activity denoted by the new name

E). Issue size should not exceed 5 times the pre-issue net worth

Alternative Routes

To provide sufficient flexibility and also to ensure that genuine companies are not limited from fund raising on account of strict parameters, SEBI has provided the alternative route to the companies not satisfying any of the above conditions, for accessing the primary market, as under:

QIB Route

Issue shall be through book building route, with at least 75 % of net offer to the public to be mandatory allotted to the Qualified Institutional Buyers (QIBS)

Company shall refund the subscription money if the minimum subscription of QIBS not attained.

(NOTP: - Issue Size – Promoters contributions, firm allotment and Reservation made for SHs)

Qualified Institutional Buyers

QIBS 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,  

'Qualified Institutional Buyer' shall mean:
a. Public financial institution defined as per Companies Act, 2013
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 Regulatory and 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.

IPO Process in India

 

A). Appointment of Merchant Banker and other intermediaries

One of the crucial steps for successful implementation of the IPO is appointment of Merchant Banker (Registered with SEBI)

A Merchant Banker can be any of the following- Lead managers, Co- manager, Underwriters or advisor to the issue. 

B). Registration of The Offer Document

For registration, 10 copies of the draft prospectus should be filed with SEBI. The draft prospectus filed is treated as a public document.

C). Marketing of the Issue

• Timing of the Issue 
• Retail distribution 
• Reservation of the Issue 
• Advertising Campaign 

Some Important Provisions Related to Initial Public Offers.

What is the restrictions on pricing by companies?

The companies have no any restrictions on pricing ,  can freely price their equity shares. However they have to give justification of the price in the offer document / letter of offer.

What aboutpromoters contribution and lock-in?

In case of IPO	In case of FPO
The promoters have to necessarily offer at least 20% of the post issue capital.	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.

The minimum contribution of promoters shall be locked in for a period of 3 years, both for an IPO and Public Issue by listed companies.

In case of an IPO, 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.

Beside the above, in case of IPO the entire pre-issue share capital i.e. paid up share capital prior to IPO 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.

Basis of allotment.

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

In case of a book building issue, allotment to Qualified Institutional Buyers and Non-Institutional buyers are done on a discretionary basis. Allotment to retail investors is done on a proportionate.

What is Book Building?

The methodology of issuing securities by giving a price range is known as book building method. A book building is a price discovery mechanism.

Under this methodology, issuers don't fix up a single price for the securities but provide a price range. Investors put their bid within the price range and depending on the demand supply of the units, the final price is decided. The lowest price of the range is called the floor price and the highest price is called as cap price. Cut off price is the price at which the shares are allotted.

Book Building is essentially a process used by companies raising capital through Public Offerings-both Initial Public Offers (IPOs) or Follow-on Public Offers ( FPOs) to aid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer. The process is directed towards both the institutional as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process.

The Process:

·       The Issuer who is planning an offer appoints lead merchant banker(s) as 'book runners'.

·       The Issuer specifies the number of securities to be issued and the price band for the bids.

·       The Issuer also appoints syndicate members with whom orders are to be placed by the investors.

·       The syndicate members input the orders into an 'electronic book'. This process is called 'bidding' and is similar to open auction.

·       The book normally remains open for a period of 5 days.

·       Bids have to be entered within the specified price band.

·       Bids can be revised by the bidders before the book closes.

·       On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels.

·       The book runners and the Issuer decide the final price at which the securities shall be issued.

·       Generally, the number of shares is fixed, the issue size gets frozen based on the final price per share.

·       Allocation of securities is made to the successful bidders. The rest get refund orders.

Difference between Book Building Issue and Fixed Price Issue and their Important Provisions

	Book Building Issue	Fixed Price Issue
Offer Price	A 20 % price band is offered by the issuer within which investors are allowed to bid and the final price is determined by the issuer only after closure of the bidding.	Price at which the securities are offered and would be allotted is made known in advance to the investors
Demand	Demand for the securities offered , and at various prices, is available on a real time basis on the BSE website during the bidding period..	Demand for the securities offered is known only after the closure of the issue
Payment	10 % advance payment is required to be made by the QIBs along with the application, while other categories of investors have to pay 100 % advance along with the application.	100 % advance payment is required to be made by the investors at the time of application.
Reservations	50 % of shares offered are reserved for QIBS, 35 % for small investors and the balance for all other investors.	50 % of the shares offered are reserved for applications below Rs. 1 lakh and the balance for higher amount applications.

Checklist of Documents to be submitted to the Exchange by the company for seeking permission to use the name of the Exchange in the offer document

S. No.	Particulars
1	Certified true copy of the Annual Reports of the Company for the last 5 financial years. (If the Company is in existence for less than 5 years then all the annual reports since Company inception)
2	Certificate from the applicant company /promoting companies stating the following: The Company has not been referred to the Board for Industrial and Financial Reconstruction (BIFR). The net worth of the Company has not been wiped out by accumulated losses resulting in a negative net worth. The company has not received any winding up petition accepted by a court.
3	Certificate from the Issuer confirming Ø  That it would meet the post issue share capital and post issue market capitalization requirement of the Exchange That the issuer has adhered to conditions precedent to listing as emerging inter-alia from Securities Contracts (Regulations) Act, Companies Act 1956, Securities and Exchange Board of India Act, 1992, any rules and/or regulations framed under foregoing statues, and also any circular, clarifications, guidelines issued by the appropriate authority under foregoing statues. Ø  That the applicant company, its promoters/ promoting company (ies), group companies, companies promoted by the promoters/promoting company (ies), has not been in default in payment of listing fees to any stock exchange in the last three years or has not been delisted or suspended in the past and not been proceeded against by SEBI or other regulatory authority in connection with investor related issues or otherwise. Ø  That 100% of Promoter Shareholding shall be held in dematerialized form post listing of equity shares of the company. Ø  That the 50% of Non-Promoter Shareholding shall be held in dematerialized form post listing of equity shares of the company. Ø  That there are no restrictive clauses in  the Articles of Association of the Company Ø  That the provisions of the Memorandum and Articles of Association are not inconsistent with the clauses of the Listing agreement or any other applicable law, Rules or Regulations.
4	Details of Disciplinary action taken by any stock exchange/ regulatory authority against the applicant company, its promoters/ promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies), in the past three years.
5	Copy of all show cause notice (s)/ order (s)/ issued by any regulatory authority (e.g. SEBI, ROC, RBI, CLB, Stock exchange etc.) and correspondence there to.
6	Confirmation regarding the applicant company’s, its promoters’/ promoting companies’, companies promoted by the promoters’/promoting company(ies), group companies’: a.      Track record in redressal of investor grievances b.     Arrangements envisaged for servicing its investor c.      General approach and philosophy to the issue of investor service and protection. d.     Defaults in respect of payment of interest and/or principal to the debenture /bond /fixed deposit holders if any. In case of defaults in such payments the securities, the applicant company may not be listed till such time it has cleared all pending obligations relating to the payment of interest and/or principal. Auditor’s certificate shall also be obtained in this regard.
7	The applicant’s shareholding pattern on March 31 for last three years separately showing promoters and other groups’ shareholding pattern in the specified format of Listing agreement.
8	Details on the track record of the directors as regards to status of criminal cases filed or nature of the investigation being undertaken with regard to alleged commission of any offence by any of its directors and its effect on the business of the company, where all or any of the directors of issuer have or has been charge-sheeted with serious crimes.
9	Details regarding compliance with the latest provisions of Clause 49 of the Listing agreement relating to Corporate Governance from the Company Secretary of the Company. Confirmation from Statutory Auditor/ Practicing C.A./ Practicing Company Secretary stating the issuer is compliant with the latest Clause 49 of the Listing Agreement
10	Certified true copy of Memorandum & Articles of Association of the Company
11	Appendix A (pertaining to Articles of Association) to be filled up in the format enclosed. Further the Company is required to confirm that
12	Certified true copy of Form 32 filed with the Registrar of Companies for appointment of Company Secretary and receipt issued by ROC acknowledging the same.
13	Certified true copies of the holding of the promoters/promoting companies in the applicant company for last 3 years as on 31st March in the format as given below: Name Address No. of shares % shareholding In case the Company has been promoted by promoting companies then the details of the shareholding of the promoters in the promoting company as on March 31 of the last 3 financial years shall also be provided in the above format.
14	Copy of letter issued by bank sanctioning loan
15	All the Correspondences with SEBI pursuant to filing of DRHP
16	Merchant Bankers Undertaking in the format prescribed by the Exchange
17	Copies of all the Material contracts and documents
18	PAN Details of Promoters & Directors (In Excel Format)
19	DIN Details of Directors (In Excel Format)
20	3 copies of the DRHP (In Soft Copy also)
21	Processing Fee + Service Tax