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Primary and Secondary market

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Primary and Secondary market

  1. 1. Let’s start with the positive energy…
  2. 2. Primary Market
  3. 3. This boy is struggling with a problem!!!!! I want to invest money in shares!!!! In which market I should go?
  4. 4. Types of capital market There are two types of capital market: Primary market, Secondary market
  5. 5. Primary Market • It is that market in which shares, debentures and other securities are sold for the first time for collecting long-term capital. • This market is concerned with new issues. Therefore, the primary market is also called NEW ISSUE MARKET.
  6. 6. • In this market, the flow of funds is from savers to borrowers (industries), hence, it helps directly in the capital formation of the country. • The money collected from this market is generally used by the companies to modernize the plant, machinery and buildings, for extending business, and for setting up new business unit.
  7. 7. Features of Primary Market It Is Related With New Issues It Has No Particular Place It Has Various Methods Of Float Capital: Following are the methods of raising capital in the primary market: i) Public Issue ii) Offer For Sale iii) Private Placement iv) Right Issue v) Electronic-Initial Public Offer It comes before Secondary Market
  8. 8. • Initial public offering (IPO) The first sale of a company’s stock to the general public. • Investment bankers Financial specialists who handle the sales of most corporate and municipal securities. • Underwriting Process of purchasing an issue from a firm or government and then reselling the issue to investors.
  9. 9. Factors to be considered by Investors • Promoters Credibility • Project Details • Product • Financial data • Risk factors • Auditors report
  10. 10. Secondary Market The secondary market is that market in which the buying and selling of the previously issued securities is done. The transactions of the secondary market are generally done through the medium of stock exchange. The chief purpose of the secondary market is to create liquidity in securities.
  11. 11.  If an individual has bought some security and he now wants to sell it, he can do so through the medium of stock exchange to sell or purchase through the medium of stock exchange requires the services of the broker presently, their are 24 stock exchange in India. .
  12. 12. Features of Secondary Market • It Creates Liquidity • It Comes After Primary Market • It Has A Particular Place • It Encourage New Investments • Aids in financing the industry • Ensures safe & fair Dealing (MEDIA BROADCASTING)
  13. 13. Functions of Secondary Markets • Provides regular information about the value of security. • Helps to observe prices of bonds and their interest rates. • Offers to investors liquidity for their assets. • Secondary markets bring together many interested parties. • It keeps the cost of transactions low.
  14. 14. Famous Secondary Markets worldwide • New York Stock Exchange • NASDAQ • The London Stock Exchange • The Tokyo Stock Exchange • Shanghai Stock Exchange
  16. 16. LEGAL FRAMEWORK Legal Framework Companies Act, 1956 Securities And Exchange Board of India Act, 1992 The Depositories Act, 1996 All the Rules & Regulations Listing Agreements Securities Contract (Regulation) Act, 1956
  17. 17. Fund Raising in a Company at Different Stages Seed Capital Shares Personal Contribution, Family, Friends, Angel Investors IPO: Initial Public Offer QIP: Qualified Institutions Placement GDR: Global Depository Receipts FCCB: Foreign Currency Convertible Bond ADR: American Depository Receipts Venture Capital Warrants / Shares Venture Capitalist Private Equity Shares Private Equity investo rs IPO Shares FIIs, FI, Banks, Insuran ce Cos, MF, HNI, Individu als includin g NR Private Placeme nt Shares / Warrants / FCD / PCD Promoters, Financial Investor, Strategic Investor Follow- on Public Issue Shares FIIs, FI, Banks, Insurance Cos, MF, HNI, Individual s including NR Rights Issue Shares / PCD / FCD Existing Shareholders QIP Shares QIB GDR, FCCB & ADR Depository Receipts with the underlying being Shares, Foreign Currency Bond convertible into shares, Depository receipts with the underlying being shares. FII, Hedge funds and FII, US QIB Strategic Investment Customer, Supplier, Competitor
  18. 18. Seed capital • The initial capital used to start a business. • Seed capital often comes from the company founders' personal assets or from friends and family. • The amount of money is usually relatively small because the business is still in the idea or conceptual stage. • Such a venture is generally at a pre-revenue stage and seed capital is needed for research & development, to cover initial operating expenses until a product or service can start generating revenue, and to attract the attention of venture capitalists
  19. 19. Venture Capital • Venture capital (VC) is financial capital provided to early-stage, high- potential, growth startup companies. • The venture capital fund earns money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries • This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.
  20. 20. Private Equity • There is no universally agreed definition of private equity • Private equity as an illiquid investment since there is no active secondary market for such investments, investors have little control over how capital is invested and the investment profile covers a long horizon. • Venture capital is a subset of private equity and refers to equity investments made for the launch, early development, or expansion of a business • They generally act as partner
  21. 21. IPO • Initial public offering (IPO) or stock market launch is a type of public offering in which shares of stock in a company usually are sold to institutional investors that in turn sell to the general public, on a securities exchange, for the first time. • Through this process, a private company transforms into a public company.
  22. 22. Private Placement • A private placement is an issue of shares or of convertible securities by a company to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital • A private placement of shares or of convertible securities by a listed company is generally known by name of preferential allotment
  23. 23. Private Placement • Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds. • Private placement is the opposite of a public issue, in which securities are made available for sale on the open market • Since a private placement is offered to a few, select individuals, the placement does not have to be registered with the Securities and Exchange Commission.
  24. 24. Follow-on Public Issue • A Further public offering (FPO) is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations
  25. 25. Rights Issue • Rights Issue (RI) is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. • The rights are normally offered in a particular ratio to the number of securities held prior to the issue. • This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders unless they do not intend to subscribe to their entitlements
  26. 26. QIP • A Qualified Institutions Placement is a private placement of equity shares or securities convertible in to equity shares by a listed company to Qualified Institutions Buyers only in terms of provisions of Chapter XIIIA of SEBI (DIP) guidelines
  27. 27. GDR, FCCB & ADR • Foreign Currency Convertible Bond is a type of convertible bond issued in a currency different than the domestic currency • (ADR)Let us take Infosys example – trades on the Indian stock at around Rs.2000/- • This is equivalent to US$ 40 – assume for simplicity(1:50) • Now a US bank purchases 10000 shares of Infosys and issues them in US in the ratio of 10:1 • This means each ADR purchased is worth 10 Infosys shares. • Quick calculation means 1 ADR = US $400 • Once ADR are priced and sold, its subsequent price is determined by supply and demand factors, like any ordinary shares.
  28. 28. GDR, FCCB & ADR • Both ADR and GDR are depository receipts, and represent a claim on the underlying shares. The only difference is the location where they are traded. • Depositary receipts traded in USA – ADR • Depositary receipts traded in a country other than USA - GDR
  29. 29. Strategic Investment • A Qualified Institutions Placement is a private placement of equity shares or securities convertible in to equity shares by a listed company to Qualified Institutions Buyers only in terms of provisions of Chapter XIIIA of SEBI (DIP) guidelines
  30. 30. Investor Categories QIB means; A MF, VCF, FVCF Foreign Institutional investor Public Financial Institution Scheduled commercial bank Multilateral and bilateral development financial institution State Industrial development corporation Insurance Company Provident Fund (Min Corpus 25 Cr ) Pension fund ( R 25 Cr ) National Investment Fund Insurance funds setup and managed by the Dept of Posts, India” as per the amendment of SEBI (ICDR) Reg, 09 on 12th November,2010) Retail Investor means an investor who applies or bids for specified securities for a value of not more than Rs. 2 Lakh (as per the amendment of SEBI (ICDR) Reg, 09 on 12th November,2010) Non Institutional investor means an investor other than a retail individual investor and qualified institutional buyer
  31. 31. COMMON CONDITIONS FOR PUBLIC ISSUES AND RIGHTS ISSUES Issue Opening date Within 12 months from the date of issuance of OBSERVATIONS from SEBI Underwriting & Minimum Subscription The issuer may appoint Syndicate Members to the extent of the minimum subscription. The Minimum subscription shall not be less than 90% of the offer through offer document. Appoint of Syndicate Member mandatory in case of Issue through Book Building Mechanism. Call money The issue shall be made fully paid up within 12 months from the date of allotment. This 12 months not applicable where the size of the issue is more than Rs. 500 Cr, wherein the call money shall be at least 25%. Filing of Offer Document The issuer shall submit the draft prospectus / RHP enclosing certain documents. The MB give due diligence certificates. In – principle approval from Stock exchange The issuer must obtain the in-principle approval at least from one of the recognised SE having nation wide trading platform SEBI ( ICDR ) Regulations, 2009
  32. 32. INITIAL PUBLIC OFFER ( IPO) – ICDR REG, ‘09 Eligibility criteria for Unlisted Companies for I P O Book building route mandatory with 50% QIB participation if all issues during the same financial year (including proposed IPO) > 5X pre-issue net worth Exemptions from SEBI Eligibility Norms Listing criteria of Bombay Stock Exchange Limited  Banking company  Correspondent new bank (“public sector banks”)  Infrastructure company  Whose project is appraised by a FI/ IDFC/ IL&FS or bank which was earlier an FI  5% of the project cost is financed by the appraiser(s)/ institutions jointly or severally  Rights issues For large cap companies:  Post Issue paid up equity capital - Rs. 3 Crores  Issue size - Rs. 10 Crores  Post Issue market capitalization – Rs. 25 Crores Option I: Net tangible assets, profitability and net worth track record Net tangible assets of at least Rs.3 Crores in the preceding 3 full years, not more than 50% held in monetary assets + Track record of distributable profits in terms of Section 205 of Companies Act, 1956 (excl extra ordinary items) for 3 out of preceding 5 years + Net worth of at least Rs. 1 Crore in each of the preceding 3 full years Option II: No net tangible assets, profitability and net worth track record Issue through book building route with at least 50% allotted to QIBs Minimum post issue face value capital of the Company shall be Rs 10 Crores Or + or ‘Project’ has at least 15% participation by Financial institutions/banks of which 10% comes from appraiser and at least 10% of issue size allotted to QIBs Compulsory market making for at least 2 years
  33. 33. Pricing Pricing There exists free pricing. The issuer may determine the price in consultation with the lead merchant banker or through book building process. Different ial Pricing Specified securities may be offered at different prices, subject to the following: Retail individual investors or retail individual shareholders may be offered specified securities at a price lower than the price at which net offer is made to other categories of applicants. difference shall not be more than ten per cent of the price offered to other categories In Book built issue, the price of the specified securities offered to an anchor investor shall not be lower than the price offered to other applicants. In composite issue, the price of specified securities offered in public issue may be different from the price offered in rights issue and justification for such price difference shall be given in the offer document. Initial Public Offer ( IPO) – ICDR Reg, ‘09
  34. 34. Initial Public Offer ( IPO) – ICDR Reg, ‘09 Price and price band The issuer may mention a price or price band and floor price or price band in the red herring prospectus and determine the price at a later date before registering the prospectus with the ROC. If floor price or price band is not mentioned in the RHP, the same shall be announced at least two working days before the opening of the bid in IPO and one working day bin FPO. Such announcement shall contain relevant financial ratios and a statement titled “BASIS OF ISSUE PRICE” in the prospectus. The cap on the price band shall be less than or equal to 120% of the floor price. ( Cap includes cap on the coupon rate in case of convertible debt instruments ). Floor price shall not be less than the face value. Face Value of Equity Shares Issuer company free to fix the face value of the shares offered, subject to :  If price of share is Rs. 500 or more, then face value can be less than Rs. 10 but should be more than Re. 1 If price of share is less than Rs. 500, then the face value must be Rs. 10.
  35. 35. Reservation on a competitive basis Employees Shareholders Business Associates New Company Permanent employees of the Issuer and promoting companies Shareholders of the promoting companies Persons who have business association with the Issuer, as depositors, bondholders and subscribers to services Existing Company Permanent employees of the issuer company Shareholders of group companies Limit as a % of Issue size 10%* 10% 5% Available for bidding in net Public issue Yes Yes No • No reservation can be made for the issue management team, syndicate members, their promoters, directors and employees and for the group/associate companies of issue management team • Net Public Offer” i.e. the size of the offer, net of reservations and firm allotments, if any, has to be greater than 10% of post issue capital * Firm allotment + Reservation Initial Public Offer ( IPO) – ICDR Reg, ‘09
  36. 36. Promoters’ Contribution and Lock-in Requirements Promoters’ contribution  At least 20% of post-IPO capital of the company to be held by the Promoters, which is referred to as Promoters’ contribution  The Promoters’ can comply with the Promoters’ contribution condition by bringing in the full amount of promoters contribution, including premium, at least one day prior to the issue opening date  Securities ineligible for computation of promoters’ contribution are those that are  Acquired for consideration other than cash and revaluation of assets or capitalization of intangible assets is involved  A result of bonus issues out of revaluation reserves or reserves without accrual of cash resources or against shares which are ineligible for computation of promoter contribution  Acquired by the promoters at a price lower than the IPO price during the preceding 1 year from the date of filing the DRHP with SEBI, unless the difference in price is brought in. However, this is not valid if these acquired shares result from an inter-se promoter transfer and (i) such shares were acquired by the transferor promoter during the past 1 year at or more than the IPO price; or (ii) such shares were acquired by the transferor promoter prior to the past 1 year  Ineligible shares acquired in pursuance to a scheme of merger or amalgamation approved by a High Court shall be eligible for computation of promoter’s contribution  Compliance with norms for Promoters’ contribution shall be required at the time of filing the DRHP with SEBI Initial Public Offer ( IPO) – ICDR Reg, ‘09
  37. 37. Promoters’ Contribution and Lock-in Requirements Lock-in Requirements (Unlisted companies) Entire pre-IPO capital locked in for 1 year from date of allotment in IPO (exempt for (a) Venture Capital Funds which have held shares for a minimum of 1 year; (b) pre-IPO shares held by employees which were issued under ESOP or ESPS before the IPO). Transfer of locked-in shares among pre-IPO shareholders allowed, provided lock-in continues with transferee Promoter’s holding up to 20% of post-IPO capital locked-in for 3 years from the date of allotment in IPO and excess promoter’s holding locked- in for 1 year Pledge Pledged securities held by promoters shall not be eligible for computation of Promoters’ contribution If securities are locked-in as Promoters’ contribution, the same may be pledged if the loan has been granted by such Banks/ FIs for the purpose of financing one or more objects of the Issue Initial Public Offer ( IPO) – ICDR Reg, ‘09
  38. 38. Key Parties and Responsibilities for an IPO Intermediary Structure BRLM Book Runners’ Legal Counsel Broker / Syndicate Advertisi ng Agency Printers IPO Grading Agency Registrar s Escrow Bankers Issuer Company / Selling Shareholder Arrangement Coordination Legal Counsels
  39. 39. Green shoe option
  40. 40. Definition • A green shoe is a clause contained in the underwriting agreement of an initial (IPO) that allows underwriters to buy up to an additional 15% of company shares at the offering price (of the total IPO size).
  41. 41. What is it ? •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. •It is a provision, in underwriting agreement, that allows the underwriter to sell the additional shares then the original number of shares offered.
  42. 42. Origination •The term Green Shoe Option derived from a Company named Green Shoe Manufacturing Company, founded in 1919. •This company is now called as Stride Rite Corp. •This Company was the 1st who initiated this option in 1960. •It is also known as GSO.
  43. 43. Why GSO? •This would normally done to reduce the risk of the IPO (Initial Public offering). •Also, when the public demand for the shares exceeds expectations and the stock trades above the offering price. •It is mainly practiced in US and European Market.
  44. 44. Objectives •Price stability. •Reduce the risk.
  45. 45. SEBI Guidelines •A pre-issue contract is required to be entered into for this purpose with an existing shareholders. 1. Underwriter can issue 15% additional shares of the original offer price. 2. Underwriter can exercise that option within 30 days from the date of allotment of shares.
  46. 46. Requirements (process) 3. The SA shall enter into a agreement with promoter's and per issue share holders who will lend their shares up to 15% of the issue size. 4. The details of the agreements shall be disclosed in the draft Red Herring prospectus, Red Herring prospectus and the final prospectus. 5. In case of an initial public offer unlisted company and in case of public issue by a listed company, the promoters and pre- issue shareholders holding more than 5% shares, may lend the shares.
  47. 47. Requirements (process) 6. The SA shall borrow shares from the promoters or the pre-issue shareholders of the issuer company or both, to the extent of the proposed over- allotment (not more than 15%). 7. Provided that the shares shall be in dematerialized form only. 8. The allocation of these shares shall be pro-rata to all the applicants. 9. The stabilization mechanism shall be available for the period not exceed 30 days from the date when trading permission was given by the exchange(s)
  48. 48. Requirements (process) 10. The SA shall open a special account with a bank to be called the “Special Account for GSO proceeds of _____ company” and a special account for securities with a depository participant to be called the “Special Account for GSO shares of company” 11. The money received from the applicants against the overallotment in the green shoe option shall be kept in the GSO Bank Account and shall be used for the purpose of buying shares from the market, during the stabilization period.
  49. 49. Requirements (process) 12. The shares bought from the market by the SA, if any during the stabilization period, shall be credited to the GSO Demat Account. 13. The shares bought from the market and lying in the GSO Demat Account shall be returned to the promoters immediately, in any case not later than 2 working days after the close of the stabilization period.
  50. 50. Requirements (process) 14. On expiry of the stabilization period, in case the SA does not buy shares to the extent of shares over-allotted, the issuer company shall allot shares to the extent of the shortfall in dematerialized form to the GSO Demat Account, within five days of the closure of the stabilization period. 15. The shares returned to the promoters under shall be subject to the lock in period
  51. 51. Requirements (process) 16. The SA shall remit an amount equal to (further shares allotted by the issuer company to the GSO Demat Account) * (issue price) to the issuer company from the GSO Bank Account. The amount left in this account, if any, after this remittance and deduction of expenses incurred by the SA for the stabilization mechanism, shall be transferred to the investor protection fund(s) of the stock exchange(s) where the shares of issuer company are listed. 17. The SA shall submit a report to the stock exchange(s) on a daily basis during the stabilization period
  52. 52. SA Requirements The SA shall maintain a register in respect of each issue having the green shoe option in which he acts as a SA. The register shall contain the following details of: 1. Record each transaction effected in the course of the stabilizing action, the price, date and time. 2. The details of the promoters from whom the shares are borrowed and the number of shares borrowed from each. 3. The register must be retained for a period of at least three years from the date of the end of the stabilizing period.
  53. 53. Additional Disclosures The draft Red Herring prospectus, the Red Herring prospectus and the final prospectus shall contain the following additional disclosures: 1. Name of the SA 2. The maximum number of share (in % also) proposed to be over- allotted by the company. 3. The period, for which the company proposes to avail of the stabilization mechanism. 4. The maximum increase in the capital of the company and the shareholding pattern post issue 5. The maximum amount of funds to be received by the company in case of further allotment.
  54. 54. Additional Disclosures 6. Details of the agreement entered in to by SA with the promoters to borrow shares, agreement shall include 1. Name of the promoters, 2. Existing shareholding, 3. Number & percentage of shares to be lent by them 4. Other important terms and conditions including the rights and obligations of each party. 7. The final prospectus shall additionally disclose the exact number of shares to be allotted in the public issue, stating separately therein the number of shares to be borrowed from the promoters and over allotted by the SA, and the percentage of such shares in relation to the total issue size.
  55. 55. Example • For example, if a company decides to publicly sell 1 lakh shares, the underwriters (or "stabilizers") can exercise their green shoe option and sell 1.15 lakh shares. When the shares are priced and can be publicly traded, the underwriters can buy back 15% of the shares. This enables underwriters to stabilize fluctuating share prices by increasing or decreasing the supply of shares according to initial public demand. • If the market price of the shares exceeds the offering price that is originally set before trading, the underwriters could not buy back the shares without incurring a loss. This is where the green shoe option is useful: it allows the underwriters to buy back the shares at the offering price, thus protecting them from the loss.
  56. 56. Continued….. • If a public offering trades below the offering price of the company, it is referred to as a "break issue". This can create the assumption that the stock being offered might be unreliable, which can push investors to either sell the shares they already bought or refrain from buying more. • To stabilize share prices in this case, the underwriters exercise their option and buy back the shares at the offering price and return the shares to the lender.
  57. 57. Why we need prospectus
  58. 58. There is two type of companies Genuine Want to exploit investors
  59. 59. Who will save us from these type of companies SEBI
  60. 60. What is red – herring prospectus
  61. 61. Prospectus without full Information about price, Number of securities offered
  62. 62. REASON FOR PREPARING • First thing to attract people without disclosing much information about the deal. • The “red herring” is a reference to a legal disclosure, printed in red. • Informing to readers that the SEC has not yet reviewed and approved the document. • Securities may not be sold or may offers to buy be accepted prior to the time the Registration Statement becomes effective.
  63. 63. REASON FOR PREPARING • Investors can get an idea of upcoming offerings. • How much they can get away with before the SEC registration.
  64. 64. RED HERRING PROSPECTUS ISSUERS 1.Apollo health street limited. 2.Power finance corporation ltd. 3.Engineers India limited. 4.Tata steel limited.
  65. 65. Sir, who prepares the prospectus Generally Merchant banker
  66. 66. • IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI, to the initial public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date. • Such grading is generally assigned on a five-point point scale with a higher score indicating stronger fundamentals.
  67. 67. • 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
  68. 68. • 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.
  69. 69. • 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.
  70. 70. • 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 DIP Guidelines. • 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.
  71. 71. The IPO grading process is expected to take into account the prospects of the industry in which the company operates The areas listed below are generally looked into by the rating agencies, while arriving at an IPO grade Ø Business Prospects and Competitive Position i. Industry Prospects ii. Company Prospects Ø Financial Position Ø Management Quality Ø Corporate Governance Practices Ø Compliance and Litigation History Ø New Projects—Risks and Prospects It may be noted that the above is only indicative of some of the factors considered in the IPO grading process and may vary on a case to case basis.
  72. 72. • No. IPO grading is done without taking into account the price at which the security is offered in the IPO. • Since IPO grading does not consider the issue price, the investor needs to make an independent judgment regarding the price at which to bid for/subscribe to the shares offered through the IPO.
  74. 74. WHAT IS BOOK BUILDING? • Book Building is the process of determining the price at which an Initial Public Offering will be offered. • SEBI guidelines, 1995 defined book-building as “A process undertaken by which a demand for the securities proposed to be issued by a body of corporate and built up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document”.
  75. 75. WHAT IS BOOK? Buy side book Sell side book An book is the list of orders that a trading venue uses to record the interest of buyers and sellers in a particular financial instrument
  76. 76. WHAT IS BOOK BUILDING? • Book building is a process in which share prices are determined on the basis of real demand for the shares at various price levels in the market
  77. 77. Types of investors for book building There are three kinds of investors in a book-building issue. 1. The retail individual investor (RII), 2. The non-institutional investor (NII) 3. The Qualified Institutional Buyers (QIBs)
  78. 78. Retail Individual Investor (RII): • In the retail individual investor category, investors cannot apply more than Rs 2 lakh (Rs 2, 00,000) in an IPO. • Retail Individual investors have an allocation of 35% of shares of the total issue size in Book build IPOs. • NRI’s who apply with less than Rs 200000/ are also considered as RII category. • Retail Individual investor can bid for more than Rs 200000 in an IPO by applying in NON institutional Investors Category. There is no upper limit for bidding amount in ‘NON institutional Investors Category.
  79. 79. HNI and NIBs • High Networth Individual (HNI): If Retail Investor applies for more than Rs 200000 of shares in an IPO , they are considered as HNI • Non Institutional bidders :Individual investors , NRI’s, Companies , trusts, etc. who bid for more than Rs 2 lakh are known as Non Institutional bidders , Non Institutional bidders have an allocation of 15% of shares of the total issue size in Book build IPOs.
  80. 80. QIBS • Qualified Institutional Bidders (QIBs): Financial institutions , banks , FII’s and Mutual funds who are registered with SEBI are called QIB’s. They usually apply in very high quantities. QIBs are mostly representatives of small investors who invest through mutual funds, ULIP schemes of insurance companies and pension schemes . QIB have an allocation of 50% of shares of the total issue size in book build IPOs.
  81. 81. GUIDELINES BY SEBI • On the recommendations of Malegam committee, The concept of Book Building assumed significance in India as SEBI approved, with effect from November 1, 1995, the use of the process in pricing new issues. • SEBI issued the guidelines under which the option of 100%book-building was available to only those issuer companies which are to make an issue of capital of and above Rs.100crore. • These guidelines were modified in 1998-99.The ceiling of issue size was reduced to Rs. 25crore.
  82. 82. Modified Guidelines 1. Compulsory display of demand at the terminals was made optional. 2. The reservation of 15% of the issue size for individual investors. 3. The issuer was allowed to disclose either the issue size or the number of securities being offered. 4. The allotment of the book built portion was required to be made in Demat mode only. 5. In an issue made through the book building process, the allocation in the net offer to public category is made as follows I. Not less than 35 % to retail individual investors. II. Not less than 15 % to non institutional investors i.e. investors other than retail individual investors and qualified institutional buyers. III.Not more than 50% to Qualified Institutional Buyers; 5 % of which would be allocated to mutual funds
  83. 83. Modified Guidelines In an issue made other than through the book building process, allocation in the net offer to public category will be made as follows: 1. Minimum 50% to retail individual investors; and 2. Remaining to individual applicants other than retail individual investors and other investors including corporate bodies or institutions, irrespective of the number of equity shares and convertible securities applied for; 3. The unsubscribed portion in either of the categories specified above (point a and b) may be allocated to applicants in the other category
  84. 84. TYPES OF BOOK-BUILDING: There are two type of book building process according to SEBI’s guidelines. 1. 75% book building 2. 100% book building
  86. 86. ADVANTAGE OF BOOK BUILDING 1. less cost 2. Fast process 3. Fair price
  87. 87. DUTCH AUCTION METHOD FOR FPO SEBI on 10th nov 2009 introduced an additional method of pricing shares via the book building route, namely dutch auction method or the pure action method. Unlike the present system known as the french auction method, where companies fix a band of prices for public offers, Under the dutch auction method companies making public issue will fix only floor prices However, the dutch auction method has not been made mandatory by SEBI. A company can choose dutch auction but only for FPO
  88. 88. Case study
  89. 89. CASE STUDY Incorporated in 2008, Birla Pacific Medspa Limited is an India based healthcare provider. Birla Pacific Medspa is a joint venture of Yash Birla Group, a Rs 30 billion (group of over 20 diversified companies) and Pacific Healthcare, East Asia’s leading healthcare provider, with healthcare facilities in Singapore, Hong Kong, and China.
  90. 90. CASE STUDY Company Promoters: Company is promoted by Mr. Yashovardhan Birla and one of his group companies, Birla Wellness & Healthcare Private Limited. Objects of the Issue: The objects of the issue are 1. To meet the capital 2. To meet expenses towards brand promotion. 3. To meet the working capital requirements 4. To meet Issue related expenses. 5. To enlist the Company's Shares on Bombay Stock Exchange Limited (BSE).
  91. 91. CASE STUDY »» Issue Open: Jun 20, 2011 - Jun 23, 2011 »» Issue Type: 100% Book Built Issue IPO »» Issue Size: 65,175,000 Equity Shares of Rs. 10 »» Issue Size: Rs. 65.18 Crores »» Face Value: Rs. 10 Per Equity Share »» Issue Price: Rs. 10 - Rs. 11 Per Equity Share »» Market Lot: 500 Shares »» Minimum Order Quantity: 500 Shares »» Listing At: BSE
  92. 92. CASE STUDY Birla Pacific Medspa Ltd IPO Grading BWR (Brickworks Ratings India Pvt Ltd) has assigned an IPO Grade 2 to Birla Pacific Medspa IPO. This means as per BWR, company has 'Below Average Fundamentals'. BWR assigns IPO grading on a scale of 5 to 1, with Grade 5 indicating strong fundamentals and Grade 1 indicating poor fundamentals. Read Birla Pacific Medspa IPO Grading Report.
  93. 93. CASE STUDY As on Date & Time Qualified Institutional Buyers (QIBs) Non Institutional Investors (NIIs) Retail Individual Investors (RIIs) Total Shares Offered / Reserved 32,587,500 9,776,250 22,811,250 65,175,000 Day 1 - Jun 20, 2011 17:00 IST 0.3300 0.0000 0.2500 0.2500 Day 2 - Jun 21, 2011 17:00 IST 0.6700 0.0000 0.3700 0.4600 Day 3 - Jun 22, 2011 17:00 IST 0.9900 0.0000 0.5800 0.7000 Day 4 - Jun 23, 2011 17:00 IST 1.0400 0.1700 1.8200 1.1800
  94. 94. CASE STUDY Public Issue Of 65,175,000 Equity Shares Of Rs.10/- The equity shares of the Company are proposed to be listed on Bombay Stock Exchange Limited ("BSE") and Trading is expected to commence on 7th july 2011 ISSUE PRICE: RS. 10/- PER EQUITY SHARE OF THE FACE VALUE OF RS. 10/- EACH
  95. 95. CASE STUDY BID/ISSUE OPENED ON JUNE 20, 2011 CLOSED ON JUNE 23, 2011 This Issue was made through a 100% Book Building Process in terms of regulation 26(2)(a)(i) and b(i) of SEBI (ICDR) Regulations, 2009 whereby at least 50% of the Issue was to be allocated to Qualified Institutional Buyers (QIBs) on a proportionate basis, subject to valid bids being received at or above the Issue Price. 5% of the QIB Portion was available for allocation on proportionate basis to Mutual Funds only and the remaining Net QIB portion was available for allocation on a proportionate basis to all Qualified Institutional Buyers, including Mutual Funds, subject to valid bids being received at or above Issue Price.
  96. 96. CASE STUDY Further, upto 15% of the Issue was available for allocation on a proportionate basis to Non Institutional Bidders and upto 35% of the Issue was available for allocation on a proportionate basis to Retail Individual Bidders, subject to valid bids being received at or above the Issue Price. The Issue received 3138 applications for 74670000 equity shares resulting in 1.15 times subscription.
  97. 97. CASE STUDY(THIS IS THEN BIGGEST IPO EVER) Incorporated in 1946, DLF Limited is a real estate development company based in India. DLF is the largest Indian company in terms of the area of completed residential and commercial developments. DLF’s main area of operation is Delhi and surrounding areas. DLF is in almost each and every area of real estate development including identification and acquisition of land, planning, execution, marketing and maintenance of the projects.
  98. 98. DLF's major line of business DLF's major line of business includes: Residential business - DLF builds and sells a wide range of properties including houses, duplexes and apartments of varying sizes, with a focus on the higher end of the market. Commercial business - DLF builds and sells or lease commercial office space, with a focus on properties attractive to large multinational tenants. Retail business - DLF develop and manages leases based shopping malls, which in many cases include multiplex cinemas. DLF is now focusing on more infrastructure, SEZs(special economic zones) and hotel projects.
  99. 99. Few more facts: Developed approximately 220 million square feet, including approximately 195 million square feet of plots, 17 million square feet of residential properties, 6 million square feet of commercial properties and 2 million square feet of retail
  100. 100. Properties. Land Reserves of approximately 10,255 acres. for the three years ended March 31, 2006, 2005 and 2004, DLF's consolidated total income was Rs. 12,420 million, Rs. 6,260 million and Rs. 5,266 million, respectively, and consolidated net profit was Rs. 1,917 million, Rs. 865 million and Rs. 538 million, respectively.
  101. 101. Objects of the Issue: The objects of the Issue are to achieve the benefits of listing on the Stock Exchanges & to raise capital for 1. Finance expenditure for acquisition of land and development rights; 2. Finance the construction and development costs for some of our existing projects; 3. Repay certain loans of the Company.
  102. 102. DLF issue the shares at Rs 525/sh • The IPO comprised 175 million shares, out of which 1 million shares were reserved for employees resulting in a net issue of 174 million shares. • 60% of the net issue was offered to qualified institutional buyers (QIBs), • 10% was offered to non institutional investors (including high net worth individuals) • 30% was offered to retail investors. • The offering was launched with a price band of Rs 500 to Rs 550 per share. The issue was subscribed approximately 2.75 times at the top end of the price band (Rs 550 per share).
  103. 103. Cont… • At Rs 550 per share, the QIB portion was subscribed 3.94 times. • The retail portion was 0.96 times subscribed • The non – institutional was subscribed 1.08 times. The offering received nearly 5,90,000 bids. • Overall, DLF issue subscribed 3.47 times. Qualified institutional investors were the major supporter to the issue, in which contribution was seen from FIIs.
  104. 104. Cont… • The company could have comfortably priced the issue at top end of the price band. • However, the company chose to price the IPO at Rs 525 per share as a gesture of their appreciation to the tremendous response and keeping in mind the long-term relationship with investors. • At he issue price, the offering size is Rs. 9, 187.5 corer. The global coordinators to the issue were Kotak Investment
  105. 105. Issue Detail: »» Issue Open: Jun 11, 2007 - Jun 14, 2007 »» Issue Type: 100% Book Built Issue IPO »» Issue Size: 175,000,000 Equity Shares of Rs. 2 »» Issue Size: Rs. 9,187.50 Crore »» Face Value: Rs. 2 Per Equity Share »» Issue Price: Rs. 500 - Rs. 550 Per Equity Share »» Market Lot: 10 Shares »» Minimum Order Quantity: 10 Shares »» Listing At: BSE, NSE
  106. 106. Payment Method Payment Methods for Retail Individual Bidders: DLF IPO has two payment methods for retail applicants. Payment Method 1: Retail Individual Bidders can pay Rs. 150 per share on application of which Re. 1 will be credited to face value and Rs.149 towards premium. The payment of the balance amount will be payable by the due date. Payment Method 2: Retail Individual Bidders can pay full application money while submitting the bid.
  107. 107. CASE STUDY Global Coordinators and Book Running Lead Managers Kotak Mahindra Capital Company Ltd. and DSP Merrill Lynch Ltd. Senior Book Running Lead Manager Lehman Brothers Securities Pvt. Ltd. Book Running Lead Managers Citigroup Global Markets India Pvt. Ltd., Deutsche Equities India Pvt. Ltd., ICICI Securities Primary Dealership Ltd. and UBS Securities India Pvt. Ltd. Co - Book Running Lead Manager SBI Capital Markets Ltd. Syndicate Members Kotak Securities Ltd., ICICI Securities Ltd. and SBICAP Securities Ltd.. Categories FI, MF, IC, FII, VC, OTH, IND, HUF, NRI, BC and EMP. No. of Cities with Bidding Centers 69 Inclusion in F&O segment Eligible, subject to SEBI approval
  108. 108. Number of Times Issue is Subscribed Number of Times Issue is Subscribed (BSE + NSE) As on Date & Time Qualified Institutional Buyers (QIBs) Non Institutional Investors (NIIs) Retail Individual Investors (RIIs) Employee Reservations Total Shares Offered / Reserved Day 1 - Jun 11, 2007 17:00 IST 1.2806 0.0160 0.0328 0.0000 0.7800 Day 2 - Jun 12, 2007 17:00 IST 2.0813 0.0260 0.1018 0.0768 1.2800 Day 3 - Jun 13, 2007 17:00 IST 3.1755 0.0491 0.2012 0.5047 1.9600 Day 4 - Jun 14, 2007 17:00 IST 5.1288 1.1434 0.9752 0.7862 3.4700
  109. 109. DLF Ltd. - Bid details Sr.No. Category No.of shares offered/reserved No. of shares bid for No. of times of total meant for the category 1 Qualified Institutional Buyers (QIBs) 104400000 535447120 5.1288 1(a) Foreign Institutional Investors (FIIs) 485470830 1(b) Domestic Financial Institutions(Banks/ Financial Institutions(FIs)/ Insurance Companies) 35172900 1(c) Mutual Funds 14585870 1(d) Others 217520 2 Non Institutional Investors 17400000 19894650 1.1434 2(a) Corporates 11118540 2(b) Individuals (Other than RIIs) 8335190 2(c) Others 440920 3 Retail Individual Investors (RIIs) 52200000 50903990 0.9752 3(a) Cut Off 47556030 3(b) Price Bids 3347960 4 Employee Reservation 1000000 786150 0.7862 4(a) Cut Off 59870 4(b) Price Bids 726280
  110. 110. DUTCH AUCTION METHOD FOR FPO SEBI on 10th nov 2009 introduced an additional method of pricing shares via the book building route, namely dutch auction method or the pure action method. Unlike the present system known as the french auction method, where companies fix a band of prices for public offers, Under the dutch auction method companies making public issue will fix only floor prices However, the dutch auction method has not been made mandatory by SEBI. A company can choose dutch auction but only for FPO
  111. 111. ALLOTMENT OF SHARES • As per section 69(1) a public limited company cannot make any allotment of shares unless 1. Subscription less than 90% 2. Application money is paid by applicants and received by the company
  112. 112. Subscription less than 90% • As per SEBI guidelines, if subscription is less than 90% I. Within 60 days of the closure of the issue, all money must be refunded II. If not, company shall be to pay interest@15% from the 70th day
  113. 113. Price and price band • The issuer may mention a price or price band in the draft prospectus (in case of a fixed price issue) and floor price or price band in the red herring prospectus (in case of a book built issue) • If the floor price or price band is not mentioned in the red herring prospectus, the issuer shall announce the floor price or price band at least 2 working days before the opening of the bid (for IPO) and at least 1 working day before the opening of the bid (for FPO)
  114. 114. Price and price band • The cap on the price band shall be less than or equal to 100 and 20% of the floor price. • The floor price or the final price shall not be less than the face value of the specified securities.
  115. 115. Escrow account • An escrow is: • A contractual arrangement in which a third party receives and disburses money or documents for the primary transacting parties, with the disbursement dependent on conditions agreed to by the transacting parties. • This account is used in ipo subscription. • All the money received from application must go in this account • All refund is done by this account. • After allotting shares to shares holder money sent to companies account
  116. 116. Margins
  117. 117. Margins • A margin is cash or marketable securities deposited by an investor with his or her broker • The balance in the margin account is adjusted to reflect daily settlement • Margins minimize the possibility of a loss through a default on a contract
  118. 118. Margin requirement • NSCCL imposes stringent margin requirements as part of its risk containment measures. The categorisation of stocks for imposition of margins is as given below: • The stocks, which have traded at least 80% of the days during the previous 18 months, should constitute as the • Group I and Group II. • Out of the scrips identified above, those having mean impact cost of less than or equal to 1% should be under • Group I and
  119. 119. Margin requirement • The scrips where the impact cost is more than 1, should be under • Group II. • The remaining stocks should be under • Group III.
  120. 120. VaR Based Margins • All securities are classified into three groups for the purpose of calculating VaR margin. • For the securities listed in Group I, • Scrip wise daily volatility is calculated using the exponentially weighted moving average should be 3.5 times the volatility. • For the securities listed in Group II • The VaR margin should be higher of scrip VaR (3.5 δ) or three times the index VaR. • For the securities listed in Group III, • The VaR margin would be equal to five times the index VaR .
  121. 121. Margins… • Initial margin : Amount that is deposited at the time of contract At the end of each trading day the margin account is adjusted to reflect the investor’s gain or loss - marking to market the account. • Maintenance margin: To ensure that the balance never becomes negative ( if balance falls below this level margin call – investor required to top up the margin account to the initial margin level)
  122. 122. Example of a Futures Trade •An investor takes a long position in 2 December gold futures contracts on June 5 • Contract size is 100 oz. • Futures price is US$400/oz • Margin requirement is US$2,000/contract (US$4,000 in total) • Maintenance margin is US$1,500/contract (US$3,000 in total)
  123. 123. Example of a Futures Trade • Total margin requirement = 2 x 2000 = $ 4000 • Maintenance margin requirement = 2 x 1000 = $ 3000 Suppose the price goes down to 397 the next day Loss = (397-400) x 2 x 100 = (600)
  124. 124. Day Closing price Daily p/l Cumulative p/l Margin Margin call 5 June 400* 4000 5 June 397 6 June 396.1 9 June 398.2 10 June 397.1 11 June 396.7 12 June 395.4 13 June 393.3 16 June 393.6 17 June 391.8 18 June 392.7 19 June 387 20 June 387 23 June 388.1 24 June 388.7
  125. 125. Day Futures price Daily gains ($) Cumulative gains ($) Margin account balance Margin call 400.00 4000 5-Jun 397.00 (600) (600) 3400 6-Jun 396.10 (180) (780) 3220 9-Jun 398.20 420 (360) 3640 10-Jun 397.10 (220) (580) 3420 11-Jun 396.70 (80) (660) 3340 12-Jun 395.40 (260) (920) 3080 13-Jun 393.30 (420) (1340) 2660 1340 16-Jun 393.60 60 (1280) 4060 17-Jun 391.80 (360) (1640) 3700 18-Jun 392.70 180 (1460) 3880 19-Jun 387.00 (1140) (2600) 2740 1260 20-Jun 387.00 0 (2600) 4000 23-Jun 388.10 220 (2380) 4220 24-Jun 388.70 120 (2260) 4340 25-Jun 391.00 460 (1800) 4800 26-Jun 392.30 260 (1540) 5060
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