Guide to the Indian Primary Capital Market
IPOs (Initial Public Offerings) What is an IPO? An IPO is when a company which is presently not listed at any stock exchange makes either a fresh issue of shares or makes an offer for sale of its existing shares or both for the first time to the public. Through a public offering, the issuer makes an offer for new investors to enter its shareholding family. The shares are made available to the investors at the price determined by the promoters of the company in consultation with its investment bankers. The successful completion of an IPO leads to the listing and trading of the company’s shares at the designated stock exchanges. 2003-04 to 2007-08 saw an active market for IPOs. Though the number of IPOs was small, the amounts being raised were increasing. Due to a huge downturn in the economy and the secondary market, the amount mobilised in 2008-09 nosedived to a meager Rs. 2034 crore, through just 21 small IPOs. The year 2009-10 yet again witnessed a revival in the IPO market.
Why does a company make an IPO? Going public provides an opportunity to the companies to raise cash for setting up a project or for diversification/expansion or sometimes for working capital or even to retire debt or for potential acquisitions. This is called fresh issue of capital where the proceeds of the issue go to the company. Companies also go public to provide a route for some of the existing shareholders including venture capitalists to exit fully or partially from the company’s shareholding or for promoters to partially dilute their holding. This is called an offer for sale where the proceeds of the issue go to the selling shareholders and not to the company. Given below is the table of monies raised through issue of fresh capital and through offers for sale in IPOs.
Listing offers several benefits. For one, it increases the company’s ability to raise debt at finer rates. The company also gets a continuing window for raising more capital, both from the domestic and overseas equity markets. Acquisitions also become simpler as instead of cash payouts, companies can use shares as a currency. Listing also lends liquidity to the stock, which is very critical for the success of employee stock ownership plans, which help to attract top talent. Of course, listing carries a considerable degree of prestige for the company.
FPOs (Follow-on Public Offerings)
What is an FPO? Fresh issue of shares by an already-listed company is called a Follow-on Public Offer (FPO). The following table provides details of FPOs in the past 6 years:
Why does a company make an FPO? Typically, when a company requires capital for its growth/expansion or it wishes to increase the market float, but does not wish to reach its existing shareholders for a variety of reasons ( the existing shareholders may not be interested, the base of existing shareholders is small to be able to meet the company’s capital requirements, the promoters are not in a position or are not interested in maintaining their stake which is accomplished through a rights offer, it makes a follow-on public offering. The Government uses the FPO route to divest part of its shareholding. FPOs ,through Offers for Sale, have been done only by PSUs:
Types of Issues: Fixed Price & Bookbuilding
There are two types of issues Fixed Price Issues An issuer company is allowed to freely price the issue. The basis of issue price is disclosed in the offer document where the issuer discloses in detail about the qualitative and quantitative factors justifying the issue price. The Issuer company can mention a price band of 20% (cap in the price band should not be more than 20% of the floor price) in the Draft offer documents filed with SEBI and actual price can be determined at a later date before filing of the final offer document with SEBI/ROCs.
Price Discovery through Bookbuilding Process “Book Building” means a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for the securities is assessed on the basis of the bids obtained for the quantum of securities offered for subscription by the issuer. This method provides an opportunity to the market to discover the price for securities. The process is named so because it refers to collection of bids from investors, which is based on a price range. The issue price is fixed after the closing date of the bid. A company planning an IPO/FPO appoints a merchant bank as a book runner. A particular time frame is fixed as the bidding period. The book runner then builds an order book that collates bids from various investors. Potential investors are allowed to revise their bids at any time during the bidding period. At the end of bidding period the order book is closed and consequently the quantum of shares ordered and the respective prices offered are known. The determination of final price is based on demand at various prices. Bookbuilding has become the preferred route of raising capital, as can be seen from the table below. Though there are fixed price issues, by amount, the bookbuilding IPO/FPOs dominate.
Fast Track Issues In order to enable well established and compliant listed companies to access Indian primary market in a time effective manner through follow-on public offerings and rights issues, SEBI introduced the concept of Fast Track Issues (FTIs) in November 2007. SEBI has relaxed certain requirements of FTIs such as reducing the average market capitalization of public shareholding of the issuer to Rs. 5000 crore from Rs. 10000 crore, pegging the annualized trading turnover to free float for companies whose public shareholding is less than 15% of the issued capital. In case the clause relating to composition of Board of Directors has not been complied with in one or more quarters, it need not be deemed as non compliance, provided the company is in compliance in this regard at the time of filing the offer document with stock exchange/ ROC and adequate disclosures are made in the offer document in this respect.
Eligibility Norms For IPOs SEBI has stipulated the eligibility norms for companies planning an IPO which are as follows:
If there has been a change in the company’s name, at least 50% of the revenue for preceding one year should be from the new activity denoted by the new name
Alternative routes Recognizing that many good companies, for one reason or the other, may not be able to comply with all the eligibility norms, two other alternative routes are available to such companies: Alternative I:
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
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).
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.
Exemptions to certain category of entities from the eligibility norms The following categories of entities are eligible for exemption from entry norms.
Common Regulations for IPOs/FPOs Because of the public participation, SEBI oversees that such companies act in a reasonable and fair manner, especially with reference to the minority shareholders. For example, such companies should have a board of directors, where at least half the members are independent of the promoters/company. Moreover, companies have to comply with the listing agreement, which among other things, stipulate continuing disclosures in specified formats and frequency. SEBI’s Role in IPOs/FPOs Any company making an IPO/FPO is required to file a draft offer document with SEBI for its observations. Draft offer document in respect of issues of size upto Rs. 100 crore shall be filed with the concerned regional office of the Board under the jurisdiction of which the registered office of the issuer company falls. Officials of SEBI at various levels examine the compliance with SEBI ICDR Regulations 2009 and ensure that all necessary material information is disclosed in the draft offer documents. The validity period of SEBI’s observation letter is three months only i.e. the company has to open its issue within three months period. Does it mean that SEBI recommends an issue? SEBI does not recommend any issue nor does take any responsibility either for the financial soundness of any scheme or the project for which the issue is proposed to be made or for the correctness of the statements made or opinions expressed in the offer document. Does SEBI approve the contents of the offer document? Submission of offer document to SEBI should not in any way be deemed or construed that the same has been cleared or approved by SEBI. The Lead manager certifies that the disclosures made in the offer document are generally adequate and are in conformity with SEBI guidelines for disclosures and investor protection in force for the time being. This requirement is to facilitate investors to take an informed decision for making investment in the proposed issue. Does the SEBI clearance tag make the IPO/FPO safe for the investors? The investors should make an informed decision purely by themselves based on the contents disclosed in the offer documents. SEBI does not associate itself with any issue/issuer and should in no way be construed as a guarantee for the funds that the investor proposes to invest through the issue. However, the investors are generally advised to study all the material facts pertaining to the issue including the risk factors before considering any investment. They are strongly warned against any ‘tips’ or news through unofficial means.
Offer Documents This section basically deals with the contents in an offer document. Cover Page The Cover Page of the offer document covers full contact details of the issuer company, lead managers and registrars, the nature, number, price and amount of instruments offered and issue size, and the particulars regarding listing. Other details such as Credit Rating, risks in relation to the first issue, etc are disclosed if applicable. Risk Factors Here, the issuer’s management gives its view on the Internal and external risks faced by the company. Here, the company also makes a note on the forward looking statements. This information is disclosed in the initial pages of the document and it is also clearly disclosed in the abridged prospectus. It is generally advised that the investors should go through all the risk factors of the company before making an investment decision. Introduction The introduction covers a summary of the industry and business of the issuer company, the offering details in brief, summary of consolidated financial, operating and other data. General Information about the company, the merchant bankers and their responsibilities, the details of brokers/syndicate members to the Issue, credit rating (in case of debt issue), debenture trustees (in case of debt issue), monitoring agency, book building process in brief and details of underwriting Agreements are given here. Important details of capital structure, objects of the offering, funds requirement, funding plan, schedule of implementation, funds deployed, sources of financing of funds already deployed, sources of financing for the balance fund requirement, interim use of funds, basic terms of issue, basis for issue price, tax benefits are covered. About Us This presents a review of on the details of the business of the company, business strategy, competitive strengths, insurance, industry-regulation (if applicable), history and corporate structure, main objects, subsidiary details, management and board of directors, compensation, corporate governance, related party transactions, exchange rates, currency of presentation dividend policy and management's discussion and analysis of financial condition and results of operations are given. Financial Statements Financial statement, changes in accounting policies in the last three years and differences between the accounting policies and the Indian Accounting Policies (if the Company has presented its Financial Statements also as per Either US GAAP/IAS are presented. Legal and Other Information Outstanding litigations and material developments, litigations involving the company and its subsidiaries, promoters and group companies are disclosed. Also material developments since the last balance sheet date, government approvals/licensing arrangements, investment approvals (FIPB/RBI etc.), all government and other approvals, technical approvals, indebtedness, etc. are disclosed. Other Regulatory and Statutory Disclosures Under this head, the following information is covered: authority for the Issue, prohibition by SEBI, eligibility of the company to enter the capital market, disclaimer clause, disclaimer in respect of jurisdiction, distribution of information to investors, disclaimer clause of the stock exchanges, listing, impersonation, minimum subscription, letters of allotment or refund orders, consents, expert opinion, changes in the auditors in the last 3 years, expenses of the issue, fees payable to the lead managers, fees payable to the issue management team, fees payable to the registrars, underwriting commission, brokerage and selling commission, previous rights and public issues, previous issues for cash, issues otherwise than for cash, outstanding debentures or bonds, outstanding preference shares, commission and brokerage on, previous issues, capitalisation of reserves or profits, option to subscribe in the issue, purchase of property, revaluation of assets, classes of shares, stock market data for equity, shares of the company, promise vis-à-vis performance in the past issues, mechanism for redressal of investor grievances. Offering Information Under this head, the following information is covered: Terms of the Issue, ranking of equity shares, mode of payment of dividend, face value and issue price, rights of the equity shareholder, market lot, nomination facility to investor, issue procedure, book building procedure if applicable, bid form, who can bid, maximum and minimum bid size, bidding process, bidding bids at different price levels, escrow mechanism, terms of payment and payment into the escrow collection account, electronic registration of bids, build up of the book and revision of bids, price discovery and allocation, signing of underwriting agreement and filing of prospectus with SEBI/ROC, announcement of statutory advertisement, issuance of confirmation of allocation note("can") and allotment in the issue, designated date, general instructions, instructions for completing the bid form, payment instructions, submission of bid form, other instructions, disposal of application and application monies, interest on refund of excess bid amount, basis of allotment or allocation, method of proportionate allotment, dispatch of refund orders, communications, undertaking by the company, utilisation of issue proceeds, restrictions on foreign ownership of Indian securities, etc., Other Information This covers description of equity shares and terms of the Articles of Association, material contracts and documents for inspection, declaration, definitions and abbreviations, etc., Past Track Record of Defaults/Economic Offences Investors should also visit www.watchoutinvestors.com, a website aided and sponsored by the Ministry of Company Affairs under its Investor Education & Protection Fund. This website is a national registry of all entities and individuals who have been indicted by various regulators ( like MCA, RBI, SEBI, BSE,NSE etc) for an economic offence and/or for non-compliance laws/guidelines and/or who are no longer in the specified activity.
Types of Offer Documents Since 1992, the entire IPO/FPO regulation is driven by disclosures-inform the investors as much as is possible and is relevant for him to take an informed investment decision. The disclosure requirements regarding the issuance of securities are covered in detail in the SEBI ICDR Regulations 2009. Types of Offer Documents Draft Offer Document refers to the first document filed by companies with SEBI and stock exchanges for approval, who after reviewing, communicate their observations to the Company, which the company has to incorporate in the offer document. SEBI typically requires a period of 30 days for processing a draft offer document. The draft offer document is placed by SEBI on its website. It is also placed on the websites of recognized stock exchanges where specified securities are proposed to be listed and merchant bankers associated with the issue for public comments for a period of at least 21 days. Furthermore, the issuer either on the date of filing the draft offer document with SEBI or on the next day has to make a public announcement in one English national daily newspaper, one Hindi national daily newspaper and one regional language newspaper at the place where its registered office is situated, disclosing to the public the fact of filing of draft offer document and inviting the public to give their comments to SEBI. The lead merchant bankers, after expiry of the above period (of at least 21 days), file with SEBI a statement giving information of the comments received by them or the issuer on the draft offer document during that period and the consequential changes, if any, to be made in the draft offer document. Red herring prospectus A red herring prospectus (RHP) is a preliminary registration document that is filed with SEBI in the case of bookbuilding issue which does not have details of either price or number of shares being offered or the amount of issue. This means that in case price is not disclosed, the number of shares and the upper and lower price bands are disclosed. On the other hand, an issuer can state the issue size and the number of shares are determined later. In the case of book-built issues, it is a process of price discovery as the price cannot be determined until the bidding process is completed. Hence, such details are not shown in the Red Herring prospectus filed with ROC in terms of the provisions of the Companies Act. Only on completion of the bidding process, the details of the final price are included in the offer document. The offer document filed thereafter with ROC is called a prospectus. Offer Document means the final prospectus in the case of a public issue/offer for sale which is filed and registered with the Registrar of Companies and the stock exchanges. An offer document covers all the relevant information required to be disclosed under various regulations and incorporates the observations of the Registrar of Companies and SEBI. Abridged Prospectus the memorandum as prescribed in Form 2A under sub-section (3) of section 56 of the Companies Act, 1956. It contains all the salient features of a prospectus. It accompanies the application form of public issues. Accessing draft offer documents before even the IPO/FPO is cleared by SEBI The draft offer document/letter of offer remains posted on SEBI website for a period of 21 days from the date of filing the same to SEBI and can also be downloaded from there Public comments/complaints on the issuer company or others connected with the issue The objective of making an offer document public is to invite public comments. The comments should be submitted within 21 days of the filing of the draft offer document by the company with SEBI. Obtaining full copy of the offer document Full copy of the offer document is available from the company, its lead managers and syndicate members. These are also available on the websites of SEBI, the lead managers, the stock exchanges and the company.
Allocations Fixed Price Issues There are two buckets in the fixed price IPO/FPOs: Investors applying for Rs. 2,00,000 or more and Investors applying for upto Rs. 2,00,000. Bookbuilding Issues In a book built issue, allocation to Retail Individual Investors (RIIs), Non Institutional Investors (NIIs) and Qualified Institutional Buyers (QIBs) is in the ratio of 35:15: 50 respectively. Definition of Retail Individual Investors (RIIs) ‘Retail individual investor’ means an investor who applies or bids for securities of or for a value of not more than Rs. 2,00,000. Definition of Non Institutional Investors (NIIs) All applicants, other than QIBs or individuals applying for less than Rs. 2,00,000 are considered as NIIs. Typically, this category includes High Net Worth Individuals (HNIs) and corporate bodies. Definition of Qualified Institutional Buyers (QIBs) QIBs are those institutional investors who are perceived to possess expertise and the financial strength to evaluate and invest in the capital markets. A QIB is defined by SEBI as
multilateral and bilateral development financial institutions;
Anchor Investors Out of the portion available for allocation to Qualified Institutional Buyers, up to 30% may be allocated to Anchor Investors subject to the following:
Applications Prerequisites
An SCSB shall identify its Designated Branches (DBs) at which an ASBA investor shall submit ASBA and shall also identify the Controlling Branch (CB) which shall act as a coordinating branch for the Registrar to the Issue, Stock Exchanges and Merchant Bankers. The SCSB, its DBs and CB shall continue to act as such, for all issues to which ASBA process is applicable. The SCSB may identify new DBs for the purpose of ASBA process and intimate details of the same to SEBI, after which SEBI will add the DB to the list of SCSBs maintained by it. The SCSB shall communicate the following details to Stock Exchanges for making it available on their respective websites; these details shall also be made available by the SCSB on its website:
ii. BSE/NSE websites: Investors can download and print ASBA application forms from the websites of the Stock Exchanges i.e. BSE Ltd. (BSE) and National Stock Exchange (NSE) which act as an electronic interface for ASBA facility. Each ASBA form, so downloaded, shall have a unique application number and can be used for making ASBA applications in public issues. The ASBA form for a specific public issue is made available on the websites of the Stock Exchanges at least one day before opening of a particular public issue. Investors will also have online access to soft copy of the abridged prospectus/prospectus of the public issue. For revisions of bids, investors can take print of a bid revision form. The unique application number on the form is important from a control and processing perspective. Therefore, applications made using photocopy of the downloaded form shall not be accepted. A hyperlink to the websites of BSE or NSE for this facility is also provided on the websites of Merchant Bankers and SCSBs.
Allotments Firm Allotments A company making an issue to public can reserve some shares on “allotment on firm basis” for some categories as specified in SEBI ICDR Regulations 2009. Allotment on firm basis indicates that allotment to the investor is on firm basis. SEBI ICDR Regulations 2009 provide for maximum 25% of shares which can be reserved on firm basis. The shares to be allotted on “firm allotment category” can be issued at a price different from the price at which the net offer to the public is made provided that the price at which the security is being offered to the applicants in firm allotment category is higher than the price at which securities are offered to public. Reservations on a Competitive Basis Reservation on Competitive Basis means reservation wherein specified securities are allotted in proportion of the number of specified securities applied for in respect of a particular reserved category to the number of specified securities reserved for that category. In case of an issue made through the book building process, the issuer may make reservation on competitive basis out of the issue size excluding promoters’ contribution and net offer to public in favour of the following categories of persons:
employees; and in case of a new issuer, persons who are in the permanent and full time employment of the promoting companies excluding the promoters and an immediate relative of the promoter of such companies
shareholders (other than promoters) of:
listed group companies, in case of an existing issuer
Provided that if the promoting companies are designated financial institutions or state and central financial institutions, the shareholders of such promoting companies shall not be eligible for the reservation on competitive basis;
persons who, as on the date of filing the draft offer document with the Board, are associated with the issuer as depositors, bondholders or subscribers to services of the issuer making an initial public offer Provided that the issuer shall not make the reservation to the issue management team, syndicate members, their promoters, directors and employees and for the group or associate companies of the issue management team and syndicate members and their promoters, directors and employees;
listed group companies, in the case of an existing issuer
Provided that if the promoting companies are designated financial institutions or state and central financial institutions, the shareholders of such promoting companies shall not be eligible for the reservation on competitive basis.
reservation for persons who as on the date of filing the draft offer document with the Board, have business association as depositors, bondholders and subscribers to services with the issuer making an initial public offer shall not exceed 5% of the issue size
any unsubscribed portion in any reserved category may be added to any other reserved category and the unsubscribed portion, if any, after such inter-se adjustments among the reserved categories shall be added to the net offer to the public category
in case of under-subscription in the net offer to the public category, spill-over to the extent of under-subscription shall be permitted from the reserved category to the net public offer category
In the case of reserved categories, a single applicant in the reserved category may make an application for a number of specified securities which exceeds the reservation. Any Preference while doing the Allotment? No, there cannot be any discretion in the allotment process. Prior to the SEBI Circular on DIP Guidelines dated September 19, 2005, the allotment to the Qualified Institutional Buyers (QIBs) was on a discretionary basis. This however has been amended and all allottees are allotted shares on a proportionate basis within their respective categories. Basis of Allotment In case of over-subscription in a fixed price issue, the allotment is done on a proportionate basis. In the case of a bookbuilding issue, after its closure, the bids received are aggregated under different categories, such as reserved allotments, Qualified Institutional Buyers (QIBs), Non-Institutional Buyers (NIIs) and Retail Individual Investors. The oversubscription ratios are calculated for each of the categories against the shares reserved for each of the categories in the offer document. Within each of these segments, the bids are segregated into different categories based on the number of shares applied for. The oversubscription ratio is then applied to the number of shares applied for and the number of shares to be allotted for applicants in each of the buckets is determined. Then, the number of successful allottees is determined. In the case of a fixed price issue, after its closure, the applications received are aggregated under two categories; applications below Rs. 2,00,000 and those above this amount. The oversubscription ratios are calculated for each of the categories against the shares reserved for each of the categories in the offer document. Within each of these segments, the bids are segregated into different categories based on the number of shares applied for. The oversubscription ratio is then applied to the number of shares applied for and the number of shares to be allotted for applicants in each of the buckets is determined. Then, the number of successful allottees is determined. Number of Days for an Investor to Receive the Refund Order/Allotment Advice Companies are required to finalize the basis of allotment within 30 days from the closure of the issue in case of a fixed price issue and within 15 days from the closure of the issue in case of a book building issue or else they are liable to pay interest at the rate of 15% per annum. The refund orders/allotment advice is dispatched within two working days of finalizing the basis of allotment.
Listing & Trading Number of Days for a Company to get its Securities Listed after the Issue The post-issue lead manager ensures that all steps for completion of the necessary formalities for listing and commencement of trading at all stock exchanges where the securities are to be listed are taken within 7 working days of finalisation of basis of allotment. With effect from May 1, 2010 the time between public issue closure and listing has been reduced to 12 days from existing of up to 22 days.
Other Aspects Lock-in “Lock-in” indicates a freeze on the shares. SEBI ICDR Regulations 2009 have stipulated lock-in requirements on shares of promoters mainly to ensure that the promoters or main persons, who are controlling the company, shall continue to hold some minimum percentage in the company after the public issue. The requirements are detailed in Chapter III Part IV of SEBI ICDR Regulations 2009. Promoter The promoter has been defined as a person or persons who are in over-all control of the company, who are instrumental in the formulation of a plan or programme pursuant to which the securities are offered to the public and those named in the prospectus as promoters(s). It may be noted that a director / officer of the issuer company or person, if they are acting as such merely in their professional capacity are not be included in the definition of a promoter. 'Promoter Group' includes the promoter, an immediate relative of the promoter (i.e. any spouse of that person, or any parent, brother, sister or child of the person or of the spouse). In case promoter is a company, a subsidiary or holding company of that company; any company in which the promoter holds 10% or more of the equity capital or which holds 10% or more of the equity capital of the Promoter; any company in which a group of individuals or companies or combinations thereof who holds 20% or more of the equity capital in that company also holds 20% or more of the equity capital of the issuer company. In case the promoter is an individual, any company in which 10% or more of the share capital is held by the promoter or an immediate relative of the promoter' or a firm or HUF in which the 'Promoter' or any one or more of his immediate relative is a member; any company in which a company specified in (i) above, holds 10% or more, of the share capital; any HUF or firm in which the aggregate share of the promoter and his immediate relatives is equal to or more than 10% of the total, and all persons whose shareholding is aggregated for the purpose of disclosing in the prospectus "shareholding of the promoter group" The details are provided in the SEBI ICDR Regulations 2009. Promoter's Contribution and Lock-in In case of an IPO/FPO, the promoters have to necessarily offer at least 20% of the post issue capital. In case of public issues by listed companies, the promoters shall participate either to the extent of 20% of the proposed issue or ensure post-issue share holding to the extent of 20% of the post-issue capital. In case of any issue of capital to the public the minimum contribution of promoters shall be locked in for a period of three years, both for an IPO/FPO and public issue by listed companies. In case of an IPO/FPO, if the promoters' contribution in the proposed issue exceeds the required minimum contribution, such excess contribution shall also be locked in for a period of one year. In addition, the entire pre-issue share capital, or paid up share capital prior to IPO/FPO, and shares issued on a firm allotment basis along with issue shall be locked-in for a period of one year from the date of allotment in public issue. Greenshoe Option A Green Shoe option means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism for a period not exceeding 30 days in accordance with the provisions of Chapter III Part V of SEBI ICDR Regulations 2009, which is granted to a company to be exercised through a Stabilizing Agent. This is an arrangement wherein the issue would be over allotted to the extent of a maximum of 15% of the issue size. From an investor’s perspective, an issue with green shoe option provides more probability of getting shares and also that post listing price may show relatively more stability as compared to market. The name comes from the fact that Green Shoe Company was the first to issue this type of option. Safety Net Any safety net scheme or buy-back arrangements of the shares proposed in any public issue shall be finalized by an issuer company with the lead merchant banker in advance and disclosed in the prospectus. Such buy back or safety net arrangements shall be made available only to all original resident individual allottees limited up to a maximum of 1000 shares per allottee and the offer is kept open for a period of 6 months from the last date of dispatch of securities. Underwriting There are two types of underwriting. Hard Underwriting Hard underwriting is when an underwriter agrees to buy his commitment at its earliest stage. The underwriter guarantees a fixed amount to the issuer from the issue. Thus, in case the shares are not subscribed by investors, the issue is devolved on underwriters and they have to bring in the amount by subscribing to the shares. The underwriter bears a risk which is much higher in soft underwriting. Soft Underwriting Soft underwriting is when an underwriter agrees to buy the shares at later stages as soon as the pricing process is complete. He then, immediately places those shares with institutional players. The risk faced by the underwriter as such is reduced to a small window of time. Also, the soft underwriter has the 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.
Frequently Asked Questions on IPO Grading All details regarding operational aspects of IPO grading like, grading methodology, validity of grading, scope of grading etc, as given below are based on the information obtained from the Credit Rating Agencies(CRAs) (including their FAQs) and are meant only for general informational purpose regarding the overall functioning of the IPO Grading system. Specific details regarding IPO grading may be obtained directly from the respective Credit Rating Agencies. What is ‘IPO Grading’? IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI, to the initial public offering/ follow on public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date. The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India. Such grading is generally assigned on a five-point point scale with a higher score indicating stronger fundamentals and vice versa as below. IPO grade 1: Poor fundamentals IPO grade 2: Below-average fundamentals IPO grade 3: Average fundamentals IPO grade 4: Above-average fundamentals IPO grade 5: Strong fundamentals IPO grading has been introduced as an endeavor to make additional information available for the investors in order to facilitate their assessment of equity issues offered through an IPO. By when is an Issuer required to obtain the grade for the IPO? IPO grading can be done either before filing the draft offer documents with SEBI or thereafter. However, the Prospectus/Red Herring Prospectus, as the case may be, must contain the grade/s given to the IPO by all CRAs approached by the company for grading such IPO. Further information regarding the grading process may be obtained from the Credit Rating Agencies Who bears the cost of the IPO grading process? The company desirous of making the IPO is required to bear the expenses incurred for grading such IPO. Is grading optional? No, IPO grading is not optional. A company which has filed the draft offer document for its IPO with SEBI, on or after 1st May, 2007, is required to obtain a grade for the IPO from at least one CRA. Can the issuer company reject an IPO grade? IPO grade/s cannot be rejected. Irrespective of whether the issuer finds the grade given by the rating agency acceptable or not, the grade has to be disclosed as required under the SEBI ICDR Regulations 2009. However the issuer has the option of opting for another grading by a different agency. In such an event all grades obtained for the IPO will have to be disclosed in the offer documents, advertisements etc. Will IPO grading delay the process of issue? IPO grading is intended to run parallel to the filing of offer document with SEBI and the consequent issuance of observations. Since issuance of observation by SEBI and the grading process, function independently, IPO grading is not expected to delay the issue process. What are the factors that are evaluated to assess the fundamentals of the issue while arriving at the IPO grade? The IPO grading process is expected to take into account the prospects of the industry in which the company operates, the competitive strengths of the company that would allow it to address the risks inherent in the business (es) and capitalise on the opportunities available, as well as the company’s financial position. While the actual factors considered for grading may not be identical or limited to the following, the areas listed below are generally looked into by the rating agencies, while arriving at an IPO grade