Entry Norms For IPO

1
Entry Norms For IPO FPO

• Entry Norm I (EN I(a) Net Tangible Assets of at
  least Rs. 3 crores for 3 full years.(b)
  Distributable profits in atleast three years(c)
  Net worth of at least Rs. 1 crore in three
  years(d) If change in name, atleast 50 revenue
  for preceding 1 year should be from the new
  activity.(e) The issue size does not exceed 5
  times the pre- issue net worth
• To provide sufficient flexibility and also to
  ensure that genuine companies do not suffer on
  account of rigidity of the parameters, SEBI has
  provided two other alternative routes to company
  not satisfying any of the above conditions, for
  accessing the primary Market, as under

2

• Entry Norm II (EN II)(a) Issue shall be through
  book building route, with at least 50 to be
  mandatory allotted to the Qualified Institutional
  Buyers (QIBs).
• (b) The minimum post-issue face value capital
  shall be Rs. 10 crore or there shall be a
  compulsory market-making for at least 2 years
• OREntry Norm III (EN III)(a) The "project" is
  appraised and participated to the extent of 15
  by FIs/Scheduled Commercial Banks of which at
  least 10 comes from the appraiser(s).(b) The
  minimum post-issue face value capital shall be
  Rs. 10 crore or there shall be a compulsory
  market-making for at least 2 years.
• In addition to satisfying the aforesaid
  eligibility norms, the company shall also satisfy
  the criteria of having at least 1000 prospective
  allotees in its issues

3
Private Placement Market

• It refers to the direct sale of newly issued
  securities to a small number of investors
  through merchant bankers.
• These investors are selected clients
• Financial institutions
• Corporate
• Banks
• High net worth individuals
• Benefits
• Less time and cost of issue
• Greater flexibility
• Simplified procedure

4

• 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)
• Advantages
• To enhance promoters holding
• To issue shares by way of employees stock option
  plans
• For fresh issue to shareholder other than
  promoters and for take over of company by mgt.
  groups.

5
Qualified institutional placement (QIP)

• is a capital raising tool, primarily used in
  India, whereby a listed company can issue equity
  shares, fully and partly convertible debentures,
  or any securities other than warrants which are
  convertible to equity shares to a Qualified
  Institutional Buyer (QIB).
• Apart from preferential allotment, this is the
  only other speedy method of private placement
  whereby a listed company can issue shares or
  convertible securities to a select group of
  persons.
• QIP scores over other methods because the issuing
  firm does not have to undergo elaborate
  procedural requirements to raise this capital.
• Why was it introduced?
• The (SEBI) introduced the QIP process to prevent
  listed companies in India from developing an
  excessive dependence on foreign capital.

6
Who can participate in the issue?

• The specified securities can be issued only to
  QIBs, who shall not be promoters or related to
  promoters of the issuer.
• The issue is managed by a Sebi-registered
  merchant banker. There is no pre-issue filing of
  the placement document with Sebi.
• The placement document is placed on the websites
  of the stock exchanges and the issuer, with
  appropriate disclaimer to the effect that the
  placement is meant only for QIBs on private
  placement basis and is not an offer to the public.

7
Book building

• Book building is actually a price discovery
  method. In this method, the company doesn't fix
  up a particular price for the shares, but instead
  gives a price range, e.g. Rs 80-100. When
  bidding for the shares, investors have to decide
  at which price they would like to bid for the
  shares, for e.g. Rs 80, Rs 90 or Rs 100. They can
  bid for the shares at any price within this
  range. Based on the demand and supply of the
  shares, the final price is fixed. The lowest
  price (Rs 80) is known as the floor price and the
  highest price (Rs 100) is known as cap price.
  The price at which the shares are allotted is
  known as cut off price. The entire process begins
  with the selection of the lead manager, an
  investment banker whose job is to bring the issue
  to the public.

8
The Process

• The Issuer who is planning an offer nominates
  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 are 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.

9
Types of investors

• There are three kinds of investors in a
  book-building issue.
• The retail individual investor (RII), the
  non-institutional investor (NII) and the
  Qualified Institutional Buyers (QIBs).
• RII is an investor who applies for stocks for a
  value of not more than Rs 100,000. Any bid
  exceeding this amount is considered in the NII
  category.
• NIIs are commonly referred to as high net-worth
  individuals.
• Each of these categories is allocated a certain
  percentage of the total issue. The total
  allotment to the RII category has to be at least
  35 of the total issue. RIIs also have an option
  of applying at the cut-off price. This option is
  not available to other classes of investors. NIIs
  are to be given at least 15 of the total issue.
• And the QIBs are to be issued not more than 50
  of the total issue. Allotment to RIIs and NIIs is
  made through a proportionate allotment system.
  The allotment to the QIBs is at the discretion of
  the BRLM.

10
Book building vs fixed price

• The main difference between the book building
  method and the fixed price method is that in the
  former, the issue price is not decided initially.
  
• The investors have to bid for the shares within
  the price range given and based on the demand and
  supply of the shares, the issue price is fixed.
  On the other hand, in the fixed price method, the
  price is decided right at the start. Investors
  cannot choose the price, but must buy the shares
  at the price decided by the company. In the book
  building method, the demand is known every day
  during the offer period, but in fixed method, the
  demand is known only once the issue closes.

11
Qualified Institutional Buyers (QIBs)

• Qualified Institutional Buyers (QIBs) those
  institutional investors who are generally
  perceived to possess expertise and the financial
  muscle to evaluate and invest in the capital
  markets.
• a Qualified Institutional Buyer shall mean
• a) Public financial institution as defined in
  section 4A of the Companies 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 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."

12

• A "Merchant Banker" could be defined as "An
  organisation that acts as an intermediary between
  the issuers and the ultimate purchasers of
  securities in the primary security market"
• Merchant Banker has been defined under the
  Securities Exchange  Board of India (Merchant
  Bankers) Rules,  1992  as "any person who is
  engaged in the business of issue  management
  either by making arrangements regarding selling,
  buying or subscribing to securities as manager,
  consultant, advisor or rendering corporate
  advisory service in relation to such issue
  management".

13
Reverse Book Building

• It is a price discovery mechanism for the
  companies who want to delist their shares or buy
  back shares from the shareholders.
• Green Shoe Option It is also referred to as an
  over allotment option. It is a mechanism to
  provide post listing price stability to an
  initial public offering.