IPO (Through Book Building)
Basic Concepts(Part I)CPCM
AtBSE BTI
On14th June 2010
by
B. NARASIMHAN
Types of Issues Different Types of Issues :
Key Players
Price Band & Cut-off Price
Categories of Investors
Red Herring Prospectus
Book Building Process
Escrow Account
Minimum Lot size
Basis of Allotment
Margin Amount
Revision of Bids
Book Building Process
Bidding Period & Bidding Centers
KEY PLAYERS The Investors The Issuer Book Running Lead Managers Syndicate Members Bidding Centers Escrow Bankers Registrars Legal Advisors and Global coordinators Ad agencies/publicity• With the support of The stock exchanges The Depositories The Postal System
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Evolution of Pricing Norms in Indian Primary Market
Price decided by CCI based on profit-earning capacity GOI approval required for pricing below par No issue price flexibility
Pricing based on historical data
Free Pricing, decided by Lead Managers and Issuers Pricing based on projected financials
Pricing decided 45-60 days before issue launch, exposing issuer to the risk of market volatility.
Pricing discovered through
bids from investors Pricing more market driven Floor Price / Price band decided 2 days before issue opening (for an IPO), thereby limiting market risk No flexibility to change floor
price
ICDR Changes Pricing before Issue opening, 15days completion
CCI Regime
Fixed Pricing
Bookbuilding
21
Bookbuilding, internationally a well-accepted practice, was introduced in Indian Primary Markets in 1996
However, lack of clarify on guidelines kept issuers away till 1999
Hughes Software System became the first issuer to adopt bookbuilding in Sept 1999
100% bookbuilding was introduced in 2001 and Bharti Televentures IPO was the first case
Evolution of Evolution of book buildingbook building
Book Building Process
Public Issue / Offer of securities through book building process is designed to ascertain demand for the security at various prices within a price-band to facilitate discovery of the issue price.
ESCROW ACCOUNT Bid amount is called the Margin amount
The margin amount is kept in a Escrow a/c
Margin amount comprises of application and refund
to investors
RTI will identify the amount to be transferred to
Issuers Application money and Refund after basis is
approved
Instruction given to Escrow bankers for transferring
funds
Utilization of proceeds after Listing approval only
Red Herring Prospectus
Dictionary meaning of Red Herring is misleading or deceitCritical information is not made knownActual Issue price and in some cases number of shares on offerOnly price band is given Based on the offer size No: of shares on offer is determinedRequirement of the Companies Act ?
A Prospectus for raising money from Public
DR HP to RHP To Prospectus?
Categories of InvestorsQualified Institutional Investors 50% or 60%Non Institutional Investors / HNI 15% or 10%Retail Individual Investors 35% or 30%
•Additionally there can be reservations for
Employees / Existing retail shareholders (market value is less than 1,00,000/- (Ref 29th Nov 2007) as of the cut of date) of the issuer.5% of the issue size can be reserved for EmployeesValue of allotment to be not more than 1 Lakh
IPO Process Price Discovery Finalizing Basis of
Allotment Documentation with
Depositories Credit into Investor
Accounts Listing Approvals from
the Stock Exchanges Post Issue Research
Support for Sustained Coverage
Long term value Creation
Due Diligence Drafting of Prospectus IPO Grading Statutory Approvals Appointing
Intermediaries Valuation and Pricing Marketing Strategy Arranging Firm
Allotments Circulating Quality
Research Report Printing and Distribution
of Stationery Timing of Issue
Media Strategy for Wide Publicity
Road shows Press Brokers Analyst
One to One Meets Analyst Meets / Plant
Visits NRI Investors Retail Distribution Advertising campaigns Positioning &
Marketing to Institutional & Retail Investors
Pre IssueMarketing
Post Issue
Valuation MethodologyDiscounted
Cash Flow (DCF) Analysis
Trading Multiples
Transaction Multiples
Net Asset Value (NAV)
• “Fundamental” or “Theoretical” valuation
• Estimates firm’s value by discounting expected free cash flows at a rate which reflects the risk of the cash flows
• Terminal Value – Perpetuity– Discount Factor(The resulting free cash flows at a cost of capital that reflects company specific risk)
• “Market” Valuation
• Investors view on prospects of an entire industry sector and specific companies
• Considerations for peer group include similar size, life of assets and similar management quality
• Difficult to establish peer group on account of diverse business activities
• “Acquisition” related Valuation
• Applies Multiples of related Industry Transactions to the valuation of a business
• Measures Premium paid for Acquiring Control and places value on intangible strategic factors
• Useful when the historical costs of assets purchased is not comparable to its Current Market Value
• NAV is based on Expected Future Cash Flows the market expects from the asset
• Two Methods– Replacement Cost
– Future Cash Flows
IPO Pricing
Valuation Methodology• Discounting Cash Flows• Trading Multiple• P/E Multiple• EV / EBIDTA• NAV or Price to Book Value Multiple• Return on Net worth• Transaction Multiple
Free PricingDifferential Pricing (upto 10% discount for retail)• Firm Allotment to be at a Price equal
to or Higher than IPO Price• Composite Issue• Public Issue
Price Band Scientific method of
determination Participation in Issue By
QIB’s/ FII’s/ MF/ Institutions (atleast 50%)
Other factors Comparison with Peers Performance indicators Advantages enjoyed
Price BandTrack record of the
PromotersIn case of FPO-current
market valueProduct EnhancementPerformance of the
BRLM for past IssuesIssuers Right to higher
Valuation
Price Band• Price Band – gives the range for bid
price• Lower end of price band is floor price• Higher end of price band is ceiling
price• Price Band to be not more than 20%• Can be revised – upwards or
downwards• Revision not to exceed 20% of the
floor price• Revised price band to conform
to to guidelines
Cut-off price• Option available only to Retail
Individual Investors• Willingness to accept the shares at
any price in the price band• Required to pay at the top end of
the price band• Obviates need for calling balance
money from investors• Cut off price determined after the
bids are closed• Cut off price prohibited for QIB and
HNI
Minimum Lot SizeMinimum lot size in the range Rs 5000/- to 7000
MLS multiplied by the floor price =or > Rs 5000
MLS multiplied by ceiling price = or < Rs 7000
MLS determined after price band is known
Flexibility to the issuer to fix the MLS
Bidding Centres• Investors submit bids to the bidding centres
listed in the application form for getting their bids registered
• Mandatory to have all stock exchange centers (23 operational earlier)
• Suggested size of bidding centers to be around 50 to 60
• 15 centers caters to 85% of all India volumes• Issue TRS to investors for each of the
options• Lodge BCAF with an escrow banker on daily
basis
Bidding period• Minimum of 3 working days• Maximum of 7 working days• To be extended by 3 days if
price band is revised• On line Bidding time 10 AM
to 3 PM on all days except the last day
• On line Bidding time 10AM to 5 PM on the last day
• Beyond 5 pm only for retail• For QIB HNI only till 4 PM
Revision of Bids• Investors can revise bids• Revision of quantity and / or price
permitted• Prescribed revision form to be used• Unlimited revision permitted• Should be done through same
bidding centres• To pay differential amount where
needed• Excess paid will be refunded after
allotment
Payment Methodology
Method 1:Option for making part payment for Retail
Normally done for Mega issues to get subscription from retail
If heavily over subscribed provision to adjust excess payment
Allotment under separate ISIN
ISIN to be frozen for all trades
Balance payment Notice
Debit and Credit Corporate Action after Reconciliation
Payment Methodology
Method 2:
Regular Method.
100% along with application
Available including to Retail Category.
Shares – Credited and Tradable on Listing.
Margin Amount Money received is against Auction Bid amount is margin money Bid amount comprises of
Allocation amount and refund On approval basis allocation amount
transferred to “Public Issue A/C” Margin amount for QIB’s is at least 10 %
and others full bid amount
Basis of Allotment•The Basis of allotment shall be proportionate
for all categories
•The allotment will be subject to the minimum
lot size prescribed
•Thereafter rounded of to the nearest integer
•Where the shares to be allotted is less than the
minimum number there will be drawl of lots
Basis of Allotment•The Basis of allotment shall be proportionate
for all categories
•The allotment will be subject to the
minimum lot size prescribed
•Thereafter rounded of to the nearest integer
•Where the shares to be allotted is less than
the minimum number there will be drawl of
lots
IPO APPLICATION e.g. Edelweiss IPOPrice BandRs 735/- to Rs 825/-
Lot size 8Rs 100000/825/-= 121…15*8 = 120120*825= 99000/-
Lot size 8Rs 100000/735= 136….17*8 = 136136*735=99960/-
Lot size 8100000/128=781.2 781*128=99968/-
Total Bids = 3Amount paid = 99968/-
Advantage if cop =735/- entitlement is larger
IPO APPLICATION e.g. RECPrice BandRs 90/-to Rs 105/-
Lot size 60Rs 100000/105/-= 952…15*60 = 900900*105= 94500/-(1)
Lot size 60Rs 100000/90/-= 1111….….18*60 = 10801080*90/-=97200/-(2)
Lot size 60960 or 1020 alternate lot size100000/1020=98…1020*98=99960/-(3)100000/960=104…960*104 =99840/-.(4)
Total Bids = 4Maximum Bid Amount equals= 99960/- (3) Opt for 1,3,4 since good sub is reported
Advantage if cop is below ceiling entitlement is larger
BASIS OF ALLOTMENT HISTORIC TRENDS OF THE PAST WEIGHTAGE FOR LOWER
CATEGORY HIGHER PERCENTAGE OF
ALLOCATION MULTIPLE APPLICATIONS
(EXAMPLES) EXAMPLES OF RS/RPPL/ REPL STOCK INVESTS
BASIS OF ALLOTMENT
CHANGE TO PRORATA ALLOTMENT IN 1993/94
SEGREGATION OF APPLICATIONS – 2 CATEGORIES
SMALL INVESTORS – GRIEVANCES REVERSE NUMBERING ALLOTMENT IN DEMAT FORM
2001 PREREQUISITES FOR OPENING
DEMAT A/C TILL 2005 REQUIREMENT SPECIFIED POST
IPO SCAM
BASIS OF ALLOTMENT
FORMATION OF COMMITTEE FOR MULTIPLE APPLICATIONS IN 2001 UNDER CHAIRAMNSHIP OF JK VERMA
SCAM AS IT UNFOLDED CASE OF PARAG JHAVERI
2007 MISUSE OF THE SYSTEM
BASIS OF ALLOTMENT (contd)
EXAMPLES OF NEW BASIS MINIMUM APPLICATION SIZE
Rs.5,000/- TO Rs.7,000/- MINIMUM APPLICATION LOT IN
THE RANGE PRICE BAND IS SAY 500/- TO 530-
LOT SIZE CAN BE 10 TO 13 ISSUER TO DECIDE IN
CONSULTATION WITH BRLM BIDS TO BE IN MULTIPLE OF
MINIMUM LOT IF 12 IS LOT, BID LOTS WILL BE
24,36,48,60, 72,84,96 UPTO 192 FOR RETAIL
BASIS OF ALLOTMENT (contd)
TOTAL SHARES ON OFFER @Rs.500/- PER SHARE SAY 10 CRORE
FOR RETAIL SAY 3.5 CRORES RETAIL OVERSUBSCRIBED 6 TIMES
12/6=2, 24/6=4, 48/6=8 ----- LOTTERY72/6=12 ----FIRM 84/6=14 ---- FIRM96/6=16 ----FIRM 192/6=32----FIRM
IF RETAIL IS 7 TIMES12/7=1.71=2 24/7=3.42=3 }LOTTERY48/7=6.85=7 72/7=10.28=10 }84/7=12 ---- FIRM 192/7=27 FIRM
610.22 13.572340 Number of Amount Subscription Shares (Face value) List
68400000 10 684000000 Opening :
68400000 10 684000000 Closing :No. of Total No.of Propor - Number of Total No. of
Shares Number of Shares tionate successful Shares Surplus/applied for applications applied in shares Before After applicants allocated/ Defecit(Category received each available rounding rounding (after rounding allotted
wise) category off off off) (7)-(14)(2) (3) (5) (7) (8) (9) (10) (12) (14) (16)
15 60176 902640 66506 1.11 15 2 27 4457 66855 -34930 82844 2485320 183117 2.21 15 4 27 12273 184095 -97845 67812 3051540 224835 3.32 15 2 9 15069 226035 -120060 112793 6767580 498630 4.42 15 8 27 33420 501300 -267075 40359 3026925 223022 5.53 15 10 27 14948 224220 -119890 70934 6384060 470373 6.63 15 4 9 31526 472890 -2517
105 151763 15935115 1174087 7.74 15 14 27 78692 1180380 -6293120 66497 7979640 587934 8.84 15 16 27 39406 591090 -3156135 19057 2572695 189554 9.95 15 2 3 12705 190575 -1021
150 57122 8568300 631306 11.05 15 20 27 42313 634695 -3389165 14203 2343495 172667 12.16 15 5 6 11836 177540 -4873180 30708 5527440 407258 13.26 15 8 9 27296 409440 -2182195 19752 3851640 283786 14.37 15 1 1 19752 296280 -12494210 172499 36224790 2669016 15.47 15 1 1 172499 2587485 81531
1 1 147 1173 1173 -1173225 3656564 822726900 60617909 16.58 16 1 1 3656564 58505024 2112885
1 10 17 2150923 2150923 -2150923
4623083 928348080 68400000 4173929 68400000 0
Allocation per
GRAND TOTAL
Face value Rs.
toapplicants
allottees
15-01-2008
Ratio of18-01-2008
KARVY Public issue of 68400000 equity shares of Rs 10/- each issued for cash at a price of Rs.430/- per share.
NAME OF THE COMPANY : RELIANCE POWER LIMITED
BASIS OF ALLOCATION - BOOK BUILT PORTION FOR RETAIL INVESTORS
(1) No.of allottees per Rs.1 Lakh of offer (upto 225 shares) : (2) Subscription as multiple of offer (upto 225 shares):
Net quantum available for allotment
Shares issued vide Offer Document dated 19.01.2008
Applicant
THANK YOUCS B. Narasimhan, Vice President
Karvy Computershare Pvt Ltd24, Maharashtra Chamber of Commerce
Lane Fort, Mumbai - 400 023
[email protected] Off 22838497 Mob 9004089490