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STUDY CIRCLE MEET 27 TH August 2010 Presentation by CS B Narasimhan

STUDY CIRCLE MEET 27 TH August 2010 Presentation by CS B Narasimhan. ICDR AND IPO NEW PROCESS. DIP VS ICDR IPO NEW PROCESS Significance of some changes made Green Shoe Option UNDERWRITING IN IPO IPO GRADING (THE FLIP SIDE). BROAD BASIS FOR THE CHANGES.

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STUDY CIRCLE MEET 27 TH August 2010 Presentation by CS B Narasimhan

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  1. STUDY CIRCLE MEET27TH August 2010Presentation byCS B Narasimhan

  2. ICDR AND IPO NEW PROCESS • DIP VS ICDR • IPO NEW PROCESS • Significance of some changes made • Green Shoe Option • UNDERWRITING IN IPO • IPO GRADING (THE FLIP SIDE)

  3. BROAD BASIS FOR THE CHANGES DIP guidelines standsrescinded ( Aug 2009) Broadly theframework remains the same Some moreclarification providedin the new Regulations Guidelines does not have theforce of law Regulations does Enforcementto be more strict Unwanted guidelines deletedfrom the new regulations

  4. The term "group companies" not explained. Exemptions were available to banking company, and infrastructure company. The term "group companies" explained to avoid confusion. The new norms also bans firm allotment to privileged people like relatives, associates and friends in IPO’s. Exemption has been removed. Eligibility norms have been made applicable uniformly to all types of issuers. “Group Companies” & Eligibility norms

  5. Definition of "employee" Includes permanent employee/ director of subsidiary or holding company of the issuer.(DIP Guidelines) Excludes permanent employee/ director of subsidiary or holding company of the issuer and promoters and immediate relatives of promoters. employee means a permanent and full-time employee of the issuer, working in India or abroad or a director of the issuer, whether whole time or part time Reservations to employees will not be subject to lock-in. Definition of Employee

  6. Definition of "Key Management Personnel" Definition of “Anchor Investor”(AI) Officers vested with executive powers and the officers at the level immediately below the board of directors of the issuer and includes any other person whom the issuer may declare as a key management personnel. “anchor investor" (AI) means a qualified institutional buyer Concept of AI notified by SEBI on 9th July 2009 Key managerial person and Anchor Investor

  7. Firm allotment in public issues was permitted. Book building process could be made through 75% or 100% of issue size. There is no provision for firm allotment in public issues. This has been done away since there is a separate window for AI and also for QIPs now 75% book building route has been omitted. Public Issues

  8. The allotment and /or refund period was 30 days for fixed price issues and 15 days for book built issues. Disclosure of price or price band was required in draft prospectus in case of fixed price public issues. The allotment/refund period has been made 15 days for both fixed price and book built issues( Possibly keeping SMEs in mind) For Book Built issues price band / Floor price needs to be announced 2 days before issue opening and for Fixed price at the time of ROC filing Public Issues

  9. Surplus money in Green Shoe Option (GSO) Bank Account was required to be transferred to the investor Protection Fund of stock exchanges Issue period for Infrastructure companies in public issues was 21 days, as against 10 days for other issues. Surplus money would now be transferred to the Investor Protection and Education Fund (IPEF) established by the Board The issue period has been made uniform to 10 days for all types of issuers. The need to give more time for this sector was dispensed withsince money comes only on the last day Public Issues

  10. Particulars as per audited financial statements would not be more than 6 months old from the issue opening date for all issuers, except Government Companies. Disclosure on pledge of shares by promoters Financial institution as a monitoring agencynot defined before Both the Government and non-government issuers would now be treated at par. The New Regulations provides for Disclosure on pledge of shares by promoters consequent to amendment in the listing agreement Replaced by "public financial institution or a scheduled commercial bank" who would be acting as monitoring agency. Public Issues

  11. If issue opening and closing advertisement contained highlights, then the advertisement would contain risk factors. Forfeiture of money on unexercised warrants in preferential issues If advertisement contains information other than the details specified in the format,the advertisement shall contain risk factors. Where the warrant holder exercises his option to convert only some of the warrants held by him, upfront payment made against only such warrants can be adjusted. Balance will stand forfeited Book Building Issue

  12. Minimum promoters' contribution brought in by promoters/ persons belonging to promoter group/friends, relatives and associates Issue period was not clear in case of revision in price band in book built public issues. Promoter’s contribution shall be brought in only by promoters whose identity, photograph, etc are disclosed in the offer document. The New Regulations provide that total issue period shall not exceed 10 days, including any revision in price band. Book Building Issues

  13. Pre-issue advertisement to be made immediately after receipt of observations from the Board Documents such as M of A and A of A of the Company, audited balance sheet to be attached with due diligence certificate. Pre-issue advertisement would be made after registering of Prospectus / red herring prospectuswith Registrar of Companies but before opening of the issue. The New Regulations require for attachment of checklist only. Monetary Control

  14. For follow on public offers (FPO) the notice of Board meeting had to be given as per clause 19 of the listing agreement a week before the board meeting. The underwriting obligations will be for the entire amount Since the price band is required to be announced one day before the issue opening notice period to Stock Exchange for the Board meeting to be held for this purpose has been reduced to 48 hours Underwriting obligations will not be restricted to the minimum subscription amount of 90% of the issue size but for 100% of the issue size. Other Highlights

  15. Stock Exchanges would be required to disclose complaints lodged by investors against trading members and companies listed on the exchange in their website Where there is drawal of lots it has to be done in the presence of the PR from the governing Board of the Stock Exchange These disclosures will also include details pertaining to arbitration penal action etc against trading members. The reference to PR has been omitted from ICDR. It has been clarified by SEBI that it is intentional. Stock Exchanges and Public Representative

  16. Companies prohibited if debarred from accessing Capital Market –Order or Direction by Board No provision for offer for sale by listed entities The Issuer, any of its promoters, directors or persons in control are debarred O F S Provided for. Promoters with majority shareholding in listed entities can do offer for sale…. Disinvestment and increasing in public holding to 25% Provisions relating to OTCEI, E-IPO Omitted Debarment and offer for sale

  17. 3 day report (working days from the closure of the issue) Final 50 days post issue monitoring report (50 calendar days from closure of the issue) 3 Day report ( calendar days). 15 days within fifteen days of the date of finalization of basis of allotment or within fifteen days of refund of money incase of failure of issue, from closure. Post Issue Monitoring report

  18. Other changes notified later 9th Nov 2009 • Reservation for Employees • Upto 5 % of the issue size • Ceiling of Rs 1 Lakh • Extend reservation for Rights Issue also • Discount for Employees also

  19. New process 19

  20. New process – 14th August 2003 • Notification dated 14th August 2003 • Visualized electronic IPO with secondary market settlement • Process involved limited KYC by SM • Elimination of paper work • Elimination of duplication of effort • Seamless process of allotment and listing • Trading to commence on (T+6) 20

  21. New process – 14th August 2003 • Market participants objection (BRLM and SM) • This portion of notification shelved • ONGC Fiasco 29th March 2004 • SMILE committee recommendations • GRIP (ASBA process) • ASBA phase I and Phase II • Lukewarm response (can not be made compulsory …. Provisions of the Companies Act ) 21

  22. Timelines & deliverables 22

  23. New Process Post issue activities 23

  24. Book building – Post issue activities • Pricing based on demand (Bids) • Finalization of prospectus • Filing with SEBI and ROC • Collection of bid data • Non ASBA & ASBA • Cleaning and validation of bid data • DP ID Ben ID and PAN matched with Depository database • Invalid cases submitted to BRLM/SM & Sub SM (1 day window for rectification) • Final book taken after rectification from both SE 24

  25. Book building – Post issue activities • Submission of base documents to SE • SM to send data and bids to EB (T+2) • RTI to give data file to EB to facilitate validation of bids • Cheques to be cleared by EB (T+4) • Bids and bank schedule from EB to RTI • Technical rejections • RTI to obtain soft copy of schedule (T+4) and FC from EB (T+6) 25

  26. Book building – Post issue activities • Recon. of electronic book with schedule and FC (gross level) • Bidded not banked • Banked not bidded • Technical rejections • Invalid bids ( not matched cases) • Amount mismatch (treatment thereof) • PAN mismatch and multiple applications 26

  27. Book building – Post issue activities • Preparation and submission of basis to DSE • Approval of basis by DSE (T+8) • Apply the basis on data and give instructions for transfer of funds to EB (T+8) • Similar exercise for ASBA bids (T+8) • Lock-in of pre issue capital (T+8) • Fund transfer confirmation by EB (T+9) • RTI to upload file for credit of shares (T+9) 27

  28. Book building – Post issue activities • Confirmation from Depository for lock-in (T+9) • Filing of distribution schedule etc with SE (T+10) • Completion of all formalities for listing with SE • Confirmation for demat credit from depositories • RTI to confirm refund despatch • SE to inform members of commencement of trading • Commencement of trading (GONG ceremony) (T+12) 28

  29. Book building guidelines – 22nd April, 2010 • Electronic book the base • Validation by Syndicate Member one day • Gross recon with Escrow Banker and electronic book • T+7 - submission of basis • T+8 - approval of allotment • T+10 & 11 - submission of all documents • T+12 - listing and trading 29

  30. Changes in the Guidelines / Regulations • MARGIN MONEY FOR QIB • Was Zero initially • Made 10 % from Sep 2005 • Made 100% from May 2010 • ASBA made available for all • DISCRETIONARY ALLOTMENT • PROPORTIONATE ALLOTMENT FROM SEP 2005 • 5% RESERVATION FOR MF FROM SEP 2005

  31. Changes in the Guidelines / Regulations • Definition of Retail / HNI Aug 2003 • 25% upto Rs 50,000/- • Increased to 35 % and amount < Rs 100,000/- from March 2005 • 25% for HNI > Rs 50,000/- • 15 % for amount >1,00,000/- Mar 2005 • Proposal to increase it to Rs 2 Lakhs

  32. Changes in the Guidelines / Regulations • Time line in Public Issues • 30 days for completion plus 7 working days for Listing ( 40 days) • 15 days for completion plus 7 working days for Listing (22 days) • Completion of all activities within 12 working days ( Sunday & Public Holiday excluded)

  33. Changes in the Guidelines / Regulations • MODE OF PAYMENT & RECON • By cheque /DD through SM • Electronic IPO and secondary market settlement T + 6 For listing • Payment through ASBA for Retail only from July 2008 • Extension of ASBA for all from Jan 2009 • QIB covered through ASBA since 100% payment upfront

  34. BOOK BUILDING GREEN SHOE OPTION UNDERWRITING & IPO GRADING

  35. CONCEPT OF GREEN SHOE OPTION • SIMPLE THEORY OF ECONOMICS • OVER ALLOTMENT OF SHARES • APPROVAL OF SHAREHOLDERS • MONEY RECEIVED THROUGH THIS PROCESS USED FOR STABILISATION • ADDITIONAL ALLOTMENT UPTO 15% OF ISSUE SIZE • LENDING BY PROMOTERS • STABILIZING AGENT (SA) BRLM

  36. CONCEPT OF GREEN SHOE OPTION • DISCLOSURES IN OFFER DOCUMENT • GSO BANK AND DEMAT ACCOUNT • SA CAN ONLY BUY IF MARKET PRICE IS BELOW ISSUE PRICE • SA CANNOT SELL SINGLE SHARE • CANNOT BUY BEYOND OVER ALLOTMENT

  37. CONCEPT OF GREEN SHOE OPTION • ADDITIONAL ALLOTMENT IN CASE OF SHORTFALL • BALANCE TRANSFERRED TO IPEF OF SEBI • AVAILABLE FOR 30 DAYS ONLY • CALLED SO AFTER A COMPANY NAMED GS ADOPTED THIS CONCEPT IN ITS IPO

  38. Green shoe option XYZ Limited Existing capital by Mr.A - 300 lakh shares Issue Size - 200 lakh shares GSO (15%) - 30 lakh shares Shares lent by Mr.A - 30 lakh shares Promoter holding on IPO - 270 lakh shares Public holding - 230 lakh shares Issue price - Rs.100/share Promoter/Lender - Mr. A GSO Bank A/c. - Rs.30 Crores

  39. SITUATIONS EMERGING AT THE END OF 30 DAYS

  40. Underwriting UNDERWRITING = INSURANCE • Hard Underwriting • Underwriter agrees to buy his commitment at its earliest stage • Guarantees a fixed amount to the issuer from the issue If the shares are not subscribed by investors • Where the issue is devolved on underwriters and they have to bring in the amount by subscribing to the shares

  41. Underwriting UNDERWRITING = INSURANCE • Hard Underwriting • Underwriting agreement signed before the issue opening • Underwriting not mandatory for Fixed Price Issue • If FP is underwritten fully underwriters will have to bring in their obligations • IN Book Built Issue Underwriting is mandatory.

  42. Underwriting UNDERWRITING = INSURANCE • Soft Underwriting • Underwriting agreement only after the issue closes • Pricing is determined only after issue closing in Book Built Issues • Paradox of some sorts • Underwriting obligations have been met in the past???? HOW?? • Underwriter agrees to buy the shares at later stages as soon as the pricing process is complete

  43. Underwriting UNDERWRITING = INSURANCE • Soft Underwriting • Subsequently, he places those shares with Institutional Investors • Also holds an option to invoke a force majeure (acts of God) clause • In case there are certain factors beyond the control that can affect the underwriter's ability to place the shares with the buyers

  44. High Grade High Price High Grade Low Price Low Grade High Price Low Grade Low Price IPO Grading (Unlisted Companies) • IPO Grading Compulsory from May 1, 2007 • Five-point point scale • Higher score indicating stronger Fundamentals and vice versa • All the grades to be disclosed • Activity to run parallel to the filing of draft offer document • Price of the IPO not taken into account for Grading IPO Grade : PriceMatrix First IPO Grading • CRISIL • Kiri Dyes and Chemicals Ltd – 2/5 (Subscription – 1.3 times) • ICRA • SRS Entertainment – 2/5

  45. Fundamental Analysis Returns Analysis Investor Preference IPO Grading (Unlisted Companies) Factors Considered for IPO Grading • Business Prospects and Competitive Position • Industry Prospects • Company Prospects • Financial Position • Management Quality • Corporate Governance Practices • Compliance and Litigation History • New Projects — Risks and Prospects Key Components of Investment Decision

  46. 39 Days

  47. 103 Days

  48. 63 Days

  49. 75 Days

  50. IPO GRADING • Was grading not a factor in investors' decision making process? • Or is that the bullish secondary marketconditions will always overweigh? • Good to remember that IPOs can be floated only in buoyant markets. • Even the best issues will not sell in a bear market • Market replete with examples

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