IPO and Primary Markets

1. Initial Public Offering (IPO)

2. Introduction: Financing through
Capital Markets
• Capital markets financing is long – term funding
obtained through the issuance of a security in a
regulated market.
• The security can be:
 Debt (bonds, debentures, or notes)
 Equity (common stock)
 Hybrid (security with characteristics of both
debt and equity (eg. convertibles)

3. Capital Market Functions
• Mobilization Of Savings And Acceleration Of Capital
Formation
• Raising Long-Term Capital
• Promotion Of Industrial Growth
• Ready And Continuous Market
• Technical Assistance
• Serves as a reliable guide to the performance and financial
position of corporate, and thereby promotes efficiency.
• Proper Channelization & utilisation Of Funds
• Easy Liquidity and access to foreign market
• With the help of secondary market, investors can sell off their
holdings and convert them into liquid cash. Commercial banks
also allow investors to withdraw their deposits, as and when
they are in need of funds.

5. Classification of Issues
Issues
Public Rights Preferential
Initial Public
Offering (IPO)
Follow on Public
Offering (FPO)
Fresh
Issue
Offer for
Sale
Fresh
Issue
Offer for
Sale

6. Financing through IPO
• 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. If
the company has never issued equity to the public, it's known as an IPO.
• Companies fall into two broad categories: private and public.
• A privately held company has fewer shareholders and its owners don't
have to disclose much information about the company. It usually isn't
possible to buy shares in a private company. You can approach the owners
about investing, but they're not obligated to sell you anything.
• Public companies, on the other hand, have sold at least a portion of
themselves to the public and trade on a stock exchange. This is why doing
an IPO is also referred to as "going public.“
• Public companies have thousands of shareholders and are subject to strict
rules and regulations. They must have a board of directors and they must
report financial information every quarter. In the United States, public
companies report to the Securities and Exchange Commission (SEC).

7. Why go Public
Advantages of financing through IPO
1. Access to public market funding: for a U.S. offering, registration with the SEC
enables the broadest exposure to investors, not only for the initial public offering
but also for subsequent “follow - on” offerings. This allows the company to have a
broad, diverse ownership structure that could help stabilize share prices during
market down cycles.
2. Enhanced profile and marketing benefits: public companies receive more
attention from the public media, which can result in heightened interest in
company products and increased market share.
3. Creation of an acquisition currency and compensation vehicle: public stock
can be used instead of cash for future acquisitions.
4. Liquidity for shareholders: an IPO allows founders to reduce exposure to their
company by selling shares.

8. However, there are CONS too
Initial Public Offerings
Principal disadvantages of going public include:
1. Reporting requirements
2. Costs
3. Disclosure
4. Short – term management focus

9. The Underwriting process:
How to conduct an IPO
• When a company wants to go public, the first thing it does is hire
an investment bank.
• Underwriting is the process of raising money by either debt or
equity (in this case we are referring to equity). Underwriters like
Morgan Stanley are middlemen between companies and the
investing public.
• The company and the investment bank will first meet to negotiate
the deal. Items usually discussed include the amount of money a
company will raise, the type of securities to be issued and all the
details in the underwriting agreement.
• Once all sides agree to a deal, the investment bank puts together a
registration statement to be filed with the SEC. This document
contains information about the offering as well as company info
such as financial statements, management background, any legal
problems, where the money is to be used and insider holdings

10. Cont. (The underwriting process)
• The SEC then requires a cooling off period, in which they investigate and
make sure all material information has been disclosed. Once the SEC
approves the offering, a date (the effective date) is set when the stock will
be offered to the public.
• During the cooling off period the underwriter puts together what is known
as the red herring. This is an initial prospectus containing all the
information about the company except for the offer price and the effective
date, which aren't known at that time.
• With the red herring in hand, the underwriter and company attempt to
hype and build up interest for the issue. They go on a road show - also
known as the "dog and pony show" - where the big institutional investors
are courted.
• As the effective date approaches, the underwriter and company sit down
and decide on the price, depending on the company, the success of the
road show and, most importantly, current market conditions.
• Finally, the securities are sold on the stock market and the money is
collected from investors.

11. Methods of Placement
Initial issues can be floated
1. Through prospectus
2. Bought out deals/offer for sale
3. Private placement
4. Right issue
5. Book building

12. OFFER THROUGH PROSPECTUS
• Invites offers for subscription or purchase of any shares or debentures
from the public
The salient features of the prospectus are:
1. General Information about company
2. Capital structure of the company
3. Terms of the present issue
4. Particulars of the Issue - issue-opening, closing and earliest closing date of
the issue
5. Company Management and Project
6. Details of the outstanding litigations
7. Management perception of risk factors
8. Justification of the issue premium
9. Financial Information - cost of the project, projected earnings

13. OFFER FOR SALE
• Promoter places his shares with an investment banker
(bought out dealer or sponsor) who offer it to the public at a
later date
• Hold on period is 70 days to more than a year
• Bought out dealer decides the price after analyzing the
viability, the gestation period, promoters’ background and
future projections
• Boughs out dealer sheds the shares at a premium to the
public
Promoter Investment Banker Public

14. Contd. (Offer for sale)
Advantages for the issuing company
 helps the promoters to realize the funds without any loss of time
 the cost of raising funds is reduced - For issuing share cost as high as 10
percent of the cost of the project
 helps the new entrepreneurs, not familiar with the capital market, to raise
adequate capital from the market.
 a company with no track record of projects, public issues at a premium
may pose problems
 possess low risk to investors since the sponsors have already held the
shares for a certain period
Disadvantages
 sell at a hefty premium, manipulation of the results, insider trading and
price rigging

15. PRIVATE PLACEMENT
The sale of securities to a relatively small number of select investors as a way
of raising capital. Investors involved in private placements are usually large
banks, mutual funds, insurance companies and pension funds. Private
placement is the opposite of a public issue, in which securities are made
available for sale on the open market.
Advantages:
 less expensive and time-consuming.
 only source of capital available to risky ventures or start-up firms.
 enable a small business owner to hand-pick investors with compatible
goals and interests.
 private placements enable small businesses to maintain their private
status.

16. RIGHTS ISSUE
• A rights issue is when a company issues its existing
shareholders a right to buy additional shares in the
company. The company will offer the shareholder a specific
number of shares at a specific price. The company will also
set a time limit for the shareholder to buy the shares. The
shares are often offered at a discounted price to encourage
existing shareholders to take the company up on their offer.
• If a shareholder does not take the company up on their
rights issue then they have the option to sell their rights on
the stock market just as they would sell ordinary shares,
however their shareholding in the company will weaken.
• Rights issues however are sometimes issued by companies
with healthy balance sheets in order to fund research and
development projects or to purchase new companies.

17. BOOK BUILDING
• The process by which an underwriter attempts to determine at what price to offer an IPO based on
demand from institutional investors.
• Malegam Committee - introduction of the book building process Oct 1995.Originally, companies
issuing more than Rs 100 cr allowed; Later SEBI allowed for issue of any size

18. BOOK BUILDING
• First company to adopt the mechanism- Nirma offering a maximum
of 100 lakh equity shares
• Example : Before Facebook's IPO, the book building process was
used to determined how much the stock was worth before it was
sold to the public. Morgan Stanley was the lead investor for
Facebook's IPO. Initially, the stock was thought to be determined
between $28 and $35 a share. The week before the stock was sold,
the demand for the stock was sufficient to increase the price
between $34 to $38 a share. Once the stock was offered Morgan
Stanley tried to prevent the stock from falling below $38 a share in
order to prevent the IPO from being considered a failure. Since
Facebook stock initially had a high demand, but this demand fell
and its price consequently fell it was considered that Facebook was
overvalued when it was sold at its initial public offering.

19. 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.
• 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.
• It is known as a red herring because it contains a
passage in red that states the company is not
attempting to sell their shares before the registration is
approved by the SEBI

20. Pricing of the issue
• Prior to 1992, governed by Controller of Capital Issues Act 1947
Fixation of a fair price on the basis of the net asset value per
share
• Era of free pricing in 1992; SEBI does not play any role in price
fixation
• Issuer in consultation with Merchant Banker shall decide the
price
• FIXED PRICE - company and LM fix a price
PRICE DISCOVERY THROUGH BOOK BUILDING - company
and LM stipulate a floor price or a price band and leave it to
market forces to determine the final price
• At premium Companies are permitted to price their issues at
premium
At par value In certain cases companies are not permitted to
fix their issue prices at premium

21. Intermediaries To The Issue
Intermediaries to an issue are:
• Merchant Bankers to the issue or Book Running Lead
Managers (BRLM)
• Registrars to the issue
• Bankers to the issue
• Auditors of the company
• Underwriters to the issue
• Solicitors
• Advertising agencies
• Financial institutions
• Government/ statutory agencies

22. LEAD MANAGER
• Appointed by company to manage the public issue programmes.
• BRLM - A Merchant banker possessing a valid SEBI registration
• Main duties
(a) drafting of prospectus
(b) preparing the budget of expenses related to the issue
(c) suggesting the appropriate timings of the public issue
(d) assisting in marketing the public issue successfully
(e) advising the company in the appointment of registrars to the
issue, underwriters, brokers, bankers to the issue, advertising
agents etc.
(f) directing the various agencies involved in the public issue.

23. Contd.
• The merchant banking division of the financial
institutions, subsidiary of commercial banks, foreign
banks, private sector banks and private agencies are
available to act as lead managers
• Some of them are SBI Capital Markets Ltd., Bank of
Baroda, Canara Bank, DSP Financial Consultant Ltd.
ICICI Securities & Finance Company Ltd., etc.

24. Role of Lead Manager in the Pre & Post
Issue
Pre issue: Post issue:
Design of offer doc,
prospectus, memo…
Ensure the formalities
with SE, ROC & SEBI
Appointment wd
intermediaries
Marketing strategy
Mgt of escrow a/ct
 Co-ordinate non institutional
allocation
 Intimation of allocation
 Dispatch of refunds to
bidders
 Follow up steps-
finalization of trading,
Dealing of instruments,
dispatch of certificates &
demat of delivery of shares
 Look at the functioning of
agencies

25. REGISTRAR
• Finalizes the list of eligible
allotees after deleting the
invalid applications
• Corporate action for
crediting of shares to the
demat accounts of the
applicants
• Dispatch of refund orders to
those applicable
• Receive the share application
from various collection
centres
• Recommend the basis of
allotment in consultation with
the Regional Stock Exchange
for approval
• Arrange for the dispatching
of the share certificates
BANKERS TO THE
ISSUE
• Ensure that the funds
are collected and
transferred to the
Escrow accounts.
• Estimates of collection
and advising the issuer
about closure of the
issue

26. UNDERWRITERS
• Underwriting means they will subscribe to the balance shares if
all the shares offered at the IPO are not picked up
• Could be a banker, broker, merchant banker or financial
institution
• Insurance against the possibility of inadequate subscription
• Done for a commission
• The aspects considered before appointing are
(a) experience in the primary market
(b) past underwriting performance and default
(c) outstanding underwriting commitment
(d) the network of investor clientele of the underwriter and
(e) his overall reputation

27. Stock Exchanges
• A market for securities- It is a wholesome market where securities of
government, corporate companies, semi-government companies are bought
and sold.
• Second-hand securities- It associates with bonds, shares that have
already been announced by the company once previously.
• Regulate trade in securities- The exchange does not sell and buy bonds
and shares on its own account. The broker or exchange members do the
trade on the company’s behalf.
• Dealings only in registered securities- Only listed securities recorded in
the exchange office can be traded.
• Transaction- Only through authorised brokers and members the
transaction for securities can be made.
• Recognition- It requires to be recognised by the central government.
• Measuring device- It develops and indicates the growth and security of a
business in the index of a stock exchange.
• Operates as per rules– All the security dealings at the stock exchange are
controlled by exchange rules and regulations and SEBI guidelines.

28. Stock Exchanges
1. Role of an Economic Barometer: Stock exchange serves as an economic barometer that is
indicative of the state of the economy. It records all the major and minor changes in the share
prices. It is rightly said to be the pulse of the economy, which reflects the state of the economy.
2. Valuation of Securities: Stock market helps in the valuation of securities based on the factors of
supply and demand. The securities offered by companies that are profitable and growth-oriented
tend to be valued higher. Valuation of securities helps creditors, investors and government in
performing their respective functions.
3. Transactional Safety: Transactional safety is ensured as the securities that are traded in the
stock exchange are listed, and the listing of securities is done after verifying the company’s
position. All companies listed have to adhere to the rules and regulations as laid out by the
governing body.
4. Contributor to Economic Growth: Stock exchange offers a platform for trading of securities of
the various companies. This process of trading involves continuous disinvestment and
reinvestment, which offers opportunities for capital formation and subsequently, growth of the
economy.
5. Making the public aware of equity investment: Stock exchange helps in providing information
about investing in equity markets and by rolling out new issues to encourage people to invest in
securities.
6. Offers scope for speculation: By permitting healthy speculation of the traded securities, the
stock exchange ensures demand and supply of securities and liquidity.
7. Facilitates liquidity: The most important role of the stock exchange is in ensuring a ready
platform for the sale and purchase of securities. This gives investors the confidence that the
existing investments can be converted into cash, or in other words, stock exchange offers liquidity
in terms of investment.
8. Better Capital Allocation: Profit-making companies will have their shares traded actively, and so
such companies are able to raise fresh capital from the equity market. Stock market helps in
better allocation of capital for the investors so that maximum profit can be earned.
9. Encourages investment and savings: Stock market serves as an important source of
investment in various securities which offer greater returns. Investing in the stock market makes
for a better investment option than gold and silver.

29. KEY TERMS
Green-shoe Option
• An option of allocating shares in excess of the shares included in
the public issue
• Post-listing price stabilizing mechanism for a period not
exceeding 30 days through a Stabilizing Agent
• Issue would be over allotted to the extent of a maximum of 15%
of the issue size
• Provides an investor more probability of getting shares
• Post listing price may show relatively more stability as compared
to market.
Qualified Institutional Buyer (QIBs)
• Institutional investors who are perceived to possess expertise
and the financial muscle to evaluate and invest in the capital
markets

30. Kalyan Jwellers IPO

32. THANK YOU