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FINANCIAL MARKET ANALYSIS AND INFORMATION CONTENT OF IPO GRADES BY: Ankit Wankhede [ VJTI Mumbai ] S u n d a y , J u n e 1 2 , 2 0 2 2 1

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  2. 2. SESSION OBJECTIVES To gain an understanding of the Securities Market in India Primary Markets Secondary Markets Initial Public Offering IPO Process IPO Rating/Grading 17 December 2014 2
  3. 3. REFORMS IN THE SECURITIES MARKET Establishment of SEBI on April 2, 1992 Depositories Act 1996 Demutualisation of stock exchanges Screen based nation-wide trading Dematerialisation and electronic transfer of securities Rolling settlement and ban on deferral products Sophisticated risk management and derivatives trading Book building 17 December 2014 3
  4. 4. REFORMS IN THE SECURITIES MARKET 251 securities most active securities put on rolling settlement on T + 5 basis in 2001 T+3 rolling settlement commenced for listed securities in 2002, subsequently in T+2 basis in 2003 Commencement of trading in derivatives Futures in 2000, Options in 2001 T+1 settlement system for transaction in government securities in 2005 SEBI allowed the short selling and Direct Market Access (DMA) facility for all investors in India in 2008. 17 December 2014 4
  5. 5. PRODUCTS IN SECURITIES MARKET Securities is defined in the Securities Contracts (Regulation) Act, 1956 and includes: 1. Shares, scripts, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or body corporate; (a) derivatives; (b) units of any other instrument issued by any collective investment scheme to the investors in such schemes; (c) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (d) units or any other such instrument issued to the investors under any mutual fund scheme; (e) any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortagage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be. 17 December 2014 5
  6. 6. PRODUCTS IN SECURITIES MARKET Securities is defined in the Securities Contracts (Regulation) Act, 1956 and includes: 2. Government Securities such other instruments as may be declared by the Central Government to be securities; and 3. Rights or interest in securities. 17 December 2014 6 Market Participants in Securities Market 1. Issuers of Securities 2. Investors in Securities 3. Intermediaries
  7. 7. DCA Department of Company Affairs, DEA Department of Economic Affairs 17December2014 7
  8. 8. SECURITIES MARKET Primary Market 1) This is the market for new long term equity capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the new issue market (NIM). 2) In a primary issue, the securities are issued by the company directly to investors. 3) The company receives the money and issues new security certificates to the investors. 4) Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. 5) Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as "going public. Secondary Market (Stock) OTC Exchange Traded Market 17 December 2014 8
  9. 9. LEGISLATIONS GOVERNING SECURITIES MARKET The SEBI Act, 1992 which established SEBI to protect investors and develop and regulate securities market; The Companies Act, 1956, which sets out the code of conduct for the corporate sector in relation to issue, allotment and transfer of securities, and disclosures to be made in public issues; The Securities Contracts (Regulation) Act, 1956, which provides for regulation of transactions in securities through control over stock exchanges; The Depositories Act, 1996 which provides for electronic maintenance and transfer of ownership of demat securities; and The Prevention of Money Laundering Act, 2002 which prevents money laundering and provides for confiscation of property derived from or involved in money laundering. 17 December 2014 9
  10. 10. FUNCTIONS OF STOCK MARKETS Provide liquidity to securities Enable Price discovery Provide Marketability Provide Safety and Transparency Mobilisation of Resources Enable investors to buy or sell securities at prices close to their intrinsic value Provide educative value to investors by making available various kinds of information 17 December 2014 10
  11. 11. STOCK MARKET INDICATORS Stock Market Capitalizations to GDP ratio Turnover ratio total value of shares traded on countrys stock exchange divided by stock market capitalization BOMBAY STOCK EXCHANGE(BSE) Oldest stock exchange in asia(Estd.1875) Demutualised in 2005 17 December 2014 11
  12. 12. SENSEX Sensex is an index. It is an indicator of all the prices of the major companies of the BSE It is calculated using a market-captialisation weighted methodology. As per this methodology , the level of index at any point of time reflects the total market value of 30 components stock relative to base period. SENSEX was coined by Deepak Mohoni around 1990 while writing market analysis columns for business newspaper. OBJECTIVES OF SENSEX Measure market movement Benchmark for fund performance Benchmark for index based derivative products 17 December 2014 12
  13. 13. BSES ONLINE TRADING SYSTEM (BOLT) Trading on BOLT from Monday to Friday Scrips traded on the BSE (based on qualitative and quantitative parameters) A - Scrips with most liquidity and credible track record B1 - Scrips with relatively liquidity and good track record B2 - Scrips with comparatively low liquidity T Settled on a trade-to-trade basis as a surveillance measure S Scrips forming part of the BSE Indonext Segment TS Scrips in BSE Indonext Segment, settled on a trade-to- trade basis as a surveillance measure F Fixed Income securities G Government Securities Z Scrips that have failed to comply with the listing requirement of BSE. 17 December 2014 13
  14. 14. NATIONAL STOCK EXCHANGE (NSE) Objectives for being set up (a) establishing a nationwide trading facility for all types of securities, (b) ensuring equal access to all investors all over the country through an appropriate communication network, (c) providing a fair, efficient and transparent securities market using electronic trading system, (d) enabling shorter settlement cycles and book entry settlements, and (e) meeting the international benchmarks and standards. 17 December 2014 14
  15. 15. MARKET SEGMENTS Capital Market Segment Wholesale Debt Market Segment Futures and Options Segment NIFTY Nifty is an indicator of the major companies of NSE Comprises of 50 stocks OBJECTIVES OF NSE Establishing nationwide trading facilities for all types of securities Providing fair, efficient and transparent securities market using electronic trading system Meeting international benchmark and standards 17 December 2014 15
  16. 16. DEPOSITORIES Depositories Act 1996 Purpose of the act Ensuring free transferability of securities with speed, accuracy & security by Making securities of public limited companies freely transferable, subject to certain exceptions; Dematerializing the securities in the depository mode; and Providing for maintenance of ownership records in a book entry form. Depositories in India NSDL & CSDL 17 December 2014 16
  17. 17. NATIONAL SECURITIES DEPOSITORY LIMITED (NSDL) NSDL is the first depository to be set up in India. It was registered by SEBI on June 7, 1996 It is a joint venture of: IDBI (Industrial Development Bank of India Limited); NSE (National Stock Exchange); and UTI (Unit Trust of India). DEPOSITORY PARTICIPANTS It is an agent of the depository It is the intermediary between the depository and the investor They perform their actions in variety of securities at Depository on behalf of the client 17 December 2014 17
  18. 18. 17December2014 18 Market Trades
  19. 19. Step: 1 Seller gives delivery out instructions to his DP to move securities from his account to his brokers account. Step: 2 Securities are transferred from brokers account to CC on the basis of a delivery out instruction. Step: 3 On the pay-out day securities are moved from CC to buying brokers account. Step: 4 Buying broker gives instructions and securities move to the buyers account. 17 December 2014 19
  20. 20. INITIAL PUBLIC OFFERING (IPO) 17December2014 20
  21. 21. An initial public offering (IPO) or stock market launch is a type of public offering where shares of stock in a company are sold to the general public for the first time. This is done by offering those shares to the public, which were held by the promoters or the private investors. IPO Grading is based on risk and return on an Investment. It is classified as grade1(High risk ,High Return) to Grade5(Low risk, Low return) This is why doing an IPO is also referred to as "going public." IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. 17December2014 21
  22. 22. IPO PROCESS Decision to Go for IPO Appointment of BRLM and Legal Counsel Due Diligence Drafting and Draft Red Herring Filing with SEBI & Stock Exchanges Funds Transferred to Issuer Listing ROC Filing & Final Prospectus Pricing & Allocation Book Building Pre- Marketing SEBI Clearance & ROC Filing Road shows 17December2014 22
  23. 23. INTERMEDIARY STRUCTURE PARTIES INVOLVED Book Running Lead Managers (BRLM) Book Runners Legal Counsel (Underwriters) Broker Or Syndicate Advertising Agency PrintersEscrow BankersRegistrars IPO Grading Agency Legal Counsels Issuer Company Self Certified Syndicate Banks (SCSB) Auditors 17December2014 23
  24. 24. IPO RATING 17December2014 24 IPO Ratings, IPO Grading and IPO Ranking are among the few popular inputs investor's uses before applying in an initial public offerings IPO. IPO Grading is provided by SEBI approved rating agencies including CRISIL, CARE and ICRA. IPO Grading is designed to provide investors an independent, reliable and consistent assessment of the fundamentals of IPO Issuer Companies. CRISIL IPO Rate Assessment 5/5 Strong fundamentals 4/5 Above average fundamentals 3/5 Average fundamentals 2/5 Below average fundamentals 1/5 Poor fundamentals
  25. 25. IPO GRADING REPRESENTS AN INDEPENDENT RELATIVE ASSESSMENT OF FUNDAMENTALS OF THE EQUITY BASED ON THE FOLLOWING: 17December2014 25 A) Business Prospects: This comprises: 1. Industry prospects 2. Company prospects - the alignment between industry opportunities, the company's strategy and its capabilities. B) Financial Prospects - This includes a rigorous assessment of accounting quality using advanced tools devised by Research. C) Management quality - An assessment of the ability of the management to handle uncertainty in terms of capitalizing on future business opportunity and mitigating the impact of contingencies. 4) Corporate governance - An evaluation of the company's governance architecture to determine if it is structured such that the risks and rewards of business are equally available to all shareholders in keeping with the basic tenets of a joint-stock company
  26. 26. ELIGIBILITY CRITERIA 17December2014 26
  27. 27. PRIMARY CRITERIA FOR IPO a) Net tangible assets of at least Rs. 3 crore in each of the preceding three full years b) Distributable profits for at least three out of the immediately preceding five years c) Net worth of at least Rs. 1 crore in each of the preceding three full years d) The issue size should not exceed 5 times the pre- issue net worth e) If there has been a change in the companys name, at least 50% of the revenue for preceding one year should be from the new activity denoted by the new name 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 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 allottees in its issue. 17December2014 27
  28. 28. EXEMPTIONS TO CERTAIN CATEGORY ENTITIES FROM ELIGIBILITY NORMS The following categories of entities are eligible for exemption from entry norms:- A banking company including a local area bank set up under the Banking Regulation Act, 1949 A corresponding new bank set up under the Banking Companies Act, 1970 An infrastructure company Whose project has been appraised by a Public Financial Institution (PFI) Not less than 5% of the project is financed by any of the PFI Rights Issue by a listed company 17December2014 28
  29. 29. PRICING There are two ways in which the price is determined in the IPO. FIXED PRICE ISSUES Offer Price :- 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 is known only after the closure of the issue Payment:- 100 % advance payment is required to be made by the investors at the time of application. Reservations:- 50 % of the shares offered are reserved for applications below Rs. 1 lakh and the balance for higher amount applications. BOOK BUILDING ISSUES 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. 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 Payment:- 10% advance payment is required to be made by QIBs along with the application, while other categories of investors have to pay 100% advance along with the application Reservations:- 50% of the shares offered are reserved for QIBs, 35% of small investors and the balance of all other investors. 17December2014 29
  30. 30. MARKETING PLAN FOR IPO Direct marketing to shareholders/ stakeholders Public Relation Plan Conference Plan i.e. Press & Broker Conferences, Analysis Media Plan Stationery distribution schedule (Form & Prospectus Corporate Ads 17December2014 30
  31. 31. WHY DO COMPANIES GO PUBLIC? Prestige Getting Rich Because of the increased scrutiny, public companies can usually get better rates when they issue debt. it possible to implement things like employee stock ownership plans, which help to attract top talent A listed company can issue more stock and raise fresh capital faster than an unlisted company. They can also offer their own stock to buy out a company. Hence, mergers and acquisitions are easier for listed companies since they can issue stock as part of the deal. 17December2014 31
  32. 32. WHAT SHOULD INCLUDE IN IPO GRADING? IPO grading should consider the valuation aspect of the companys IPO. It should also take into account market factors such as: 1)Liquidity ,Demand, Supply situation of the scrip 2)Market Sentiment at the time of issue Issue price from scope of grading It should have ongoing Validity 17December2014 32
  33. 33. CASE STUDY JUST DIAL 17December2014 33
  34. 34. Introduction Just Dial Just Dial has established itself as the undisputed leader of local search in India. It provides comprehensive and updated B2B and B2C services in India. The service is available on a number of platforms like phone, internet, mobile internet and SMS. In keeping with the latest technological trends, Just Dial has also launched its own mobile app for Android, IOS and blackberry. According to CRISIL research, the business plan for Just Dial is stable and reliable as it is a negative working capital and a debt-free business model. Also, being the first mover in the niche and by having superiority in technology, databases and having a business model that is hard to replicate exactly, Just Dial is likely to remain the market leader in local search for quite some time to come. Profit and Revenue:- According to CRISIL research report, Just Dial has maintained an astounding 39% Compounded Annual Growth Rate (CAGR) over the last four year. Starting off with Rs. 50,000 investment in 1997, Just Dial's revenue grew from Revenues grew from Rs 85 lakh in March 1997 to Rs 200 crore in March 2011. For the nine months of FY13, Just Dial recorded revenues of Rs 271.6 crore and net profits of Rs 47 crore. 17December2014 34
  35. 35. IPO:- On March 20, 2013, Justdial had obtained approval from Securities and Exchange Board of India (SEBI) for its proposed Initial public offering (IPO). Just Dial sold shares worth Rs. 950 crore in the IPO which was the largest sale by a domestic internet company in India. The IPO opened on 20 May 2013 with existing stakeholders selling nearly 17.5 million shares in a price band of Rs.470-543. The public issue saw a sale of a 25.02% stake in Just Dial, valuing the company at between Rs.3,290 crore and Rs.3,800 crore. Unlike previous public offers, Just Dial adopted a scheme "safety net" for retail investors proposed by the capital market regulator SEBI in 2012 where the company promoters assure that they will buy back shares from the retail applicants at the IPO price, if its stock falls sharply during the first six months after listing. Citigroup Global Markets India Pvt. Ltd. And Morgan Stanley India Co. Pvt. Ltd. Managed the share sale for Just Dial IPO. Just Dial is also the biggest success story over the past year in terms of stock market listing. Its initial public offering received bids for nearly 12 times the shares on sale. Despite stock market volatility and most investors sitting on the sidelines, the company made an impressive debut in June 2013. From its offer price of Rs 530 a share, the stock almost doubled to hit a record high of Rs 1,046.05 on October 7, 2013. Though the stock is off its peak now, the price rise has catapulted the company into the top 200 companies in the BT 500 listing - it's ranked 180. 17December2014 35
  36. 36. Share Price of Just Dial Stock since the Initial Public Offering 6th June 2013 July 2013 September 2013 November 2013 January 2014 February 2014 March 2014 3rd April 2014 605.1 686 767.05 1128.25 1547.65 1478.55 1630.35 1596.80 17December2014 36
  37. 37. Just Dial plans post IPO:- They believe that investment in brand building campaign will help us further strengthen our brand and lead to greater search volume from our users and greater number of paid advertisers. Just Dial intends to further develop dedicated category portals to attract SMEs in particular businesses. They are a local search player and there is no competition to talk about. We see huge opportunity in Online to offline. Just Dial plans to expand our operations to other markets as opportunity rise by licensing the Just Dial brand and selling our rights and offering service arrangements to other parties to conduct these operations as we are doing in US and Canada. 17December2014 37
  38. 38. Going public raises cash and provides many benefits for a company. IPO is one of the forms of raising the capital and which is the effective one though it has defects. Getting in on a hot IPO is very difficult, if not impossible. An IPO company is difficult to analyze because there isn't a lot of historical info. Lock-up periods prevent insiders from selling their shares for a certain period of time. The end of the lockup period can put strong downward pressure on a stock. Road shows and red herrings are marketing events meant to get as much attention as possible. But one should not get influenced by the hype. The valuation aspect of the IPO should also be taken into consideration while grading so that it can be of much use to the retail investors. A few market factors such as liquidity in the market demand and supply of the scrip, market sentiment etc. should also be taken care of while grading an IPO. 17December2014 38
  39. 39. BIBILIOGRAPHY Web Based Invetopedia - Bombay Stock Exchange - Just Dial - Wikipedia - 17December2014 39
  40. 40. THANK YOU 17December2014 40