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PRESENTED BY:

ANKIT GOYAL

BIMNEET SINGH

AMITY BUSINESS SCHOOL, AMITY UNIVERSITY HARYANA, GURGAON

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Contents

DefinitionAdvantages of IPODisadvantages of IPOEligibility CriteriaProcess of IPORole of Investment Banker in IPO

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DefinitionAn 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, on a securities exchange, for the first time.Through this process, a private company transforms into a public company.Initial public offerings are used by companies to raise expansion capital, to possibly monetize the investments of early private investors, and to become publicly traded enterprises.

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Advantages of IPOAn IPO accords several benefits to the previously private company:

Enlarging and diversifying equity base

Enabling cheaper access to capital

Increasing exposure, prestige, and public image

Attracting and retaining better management and employees through liquid equity participation

Facilitating acquisitions (potentially in return for shares of stock)

Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.

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DisadvantagesThere are several disadvantages to completing an initial public offering:

Significant legal, accounting and marketing costs, many of which are ongoing

Requirement to disclose financial and business information

Meaningful time, effort and attention required of senior management

Risk that required funding will not be raised

Public dissemination of information which may be useful to competitors, suppliers and customers.

Loss of control and stronger agency problems due to new shareholders

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Eligibility Criteria

Net Tangible Assets of Rs. 3 Crores in each of the preceding 3 years.

Track record of distributable profits at least 3 out of 5 preceding years.

The company has a net worth of Rs. 1 Crore in preceding 3 years.

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Process

Pitching MandateDue-

DiligenceFiling Red

Herring with Sebi

Regulator Observation

Filing Red Herring with

ROCIssue OpenAllotmentListing

1 month 1 month 3-4 months

After 21 Days

Approval

Within 15 daysAfter 7 Days

Kick off Meeting

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Process of IPO : Part 1 – The PitchIn most cases, bankers from many firms have been speaking with the company in question and developing relationships for years – so they’re likely to know the company’s intentions well in advance.If not, the company itself will reach out to bankers and invite them in to pitch for the business.This is when you, the banking analyst or associate, get to stay up all night crafting 100-page pitch books.Afterwards, the company selects banks for book runner roles and picks other banks to be co-managers, based on its relationships with them, their pitches, and what the banks have done for them in the past. Other factors might include banks’ IPO track records and their reputation and relationships with institutional investors.

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Part 2 – The Kick-Off MeetingInvolves MANDATE and DUE DILIGENCEEveryone involved in the IPO – company management, auditors, accountants, the underwriting banks, and lawyers from all sides – attends this meeting.You spend the day discussing the offering, the required registration forms, figure out who’s doing what, and determining the timing for the filing.After that initial kick-off meeting, all the bankers, accountants, and lawyers involved need to do a lot of due diligence on the company to make sure that their registration statements are accurate.

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Due Diligence Involves:Industry / Market Due Diligence – You’ll have to research the market, speak with experts, and figure out where it might be headed in the future.Legal and IP Due Diligence – Lawyers handle most of this – it consists of reviewing contracts, registrations, and other documents. Financial and Tax Due Diligence – Accountants do most of this and comb through historical financial statements, tax returns, and so on, and look for irregularities.

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Part 3 – The Red Herring FilingThe end result of this entire process, which might take months, is the Red herring prospectus (names vary in other countries).This is where all the juicy information comes out – historical financial statements, key data, who’s selling shares and how many they’re selling, the company overview, risk factors, and more.The company waits 30 calendar days (21 day in INDIA) for comments from the SEC (SEBI in INDIA), and the legal team responds to everything once they hear back. Projections are never shown in red herring.

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Part 4 – Pre-Selling the OfferingOnce the Red Herring is filed and the team is working through revisions, the company can hold a pre-IPO analyst meeting where they educate bankers and analysts on the company and “teach” them how to sell it to investors.

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Part 5 – The RoadshowAnd now ,exhausting part of the process: management gets to travel all over to meet with investors and market the company for 1-2 weeks.Sometimes management teams make themselves very open and accessible and go out of their way to win over investors and answer questions.For normal companies, though, this process is extremely important because orders are also taken at this time – investors can state how many shares they want and what price they’re willing to pay.

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Part 6 – The Pricing MeetingOnce the roadshow is over and the order book is closed, the management team will meet with bankers and decide on the final price of the deal based on the orders received.If a deal is over-subscribed, the company will price the company at the high end of the range and will do the opposite for under-subscribed deals.Sometimes management will deliberately price the company at a lower price (leaving some money on the table) so the stock can trade up on the 1st day of trading – always a positive indicator to the market.Usually companies that tank after the 1st day of trading have a hard time recovering and getting back to their initial price.

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Part 7 – AllocationOnce the deal is priced, the syndicate team of the banks will allocate shares to investors.While banks try to allocate to investors who will be long-term holders of the stock, banks may be biased at times to reward investors that generate the highest brokerage commissions (e.g. hedge funds who are trade very actively).The syndicate team usually works overnight to allocate the deal.

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ListingOnce all the allocated shares are transferred in investors Demat account s, Lead managers with the help of stock exchange decides Issue listing date.Finally share of the issuer company gets listed in stock market.SEBI guidelines provide that the issuer in consultation with Investment Banker shall decide the issue price. The company and the Investment Banker are required to give disclosures on the basis for the issue price.

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Part 8 – TradingOnce the deal is allocated and everyone has their shares, the stock starts trading and “the general public” can buy and sell shares.IPO fees typically range from 3 – 7% depending on the size of the company, how well-known it is, and how much extra work and risk banks have to take on to sell it.Yes, you read that correctly: for a $100 million offering,investment banks could potentially make $7 million (now you really understand why they make so much money).

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Role of Investment BankInvestment bankers play the most vital role in amongst all the intermediaries involved in IPO.They assist the company from preparing of the prospectus to listing of the securities at stock exchanges.They play a fiduciary role between SEBI, the client company and investors.It is mandatory for investment bakers to carry out Due Diligence for the information mentioned in prospectus and issue a certificate at SEBI.It plays an important role in channelling the financial surplus of the society into productive investment.

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They are also required to guide and co-ordinate the activities of the Registrar to the issue, banker to issue, advertising agency, printers, underwriters, brokers, etc.They also have to ensure compliance of laws and regulations governing the securities market.

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THANK YOU