What is an IPO

What is an IPO?

IPO or Initial Public Offer is a way for a company to raise money from investors for its future projects and get listed to Stock Exchange. Or An Initial Public Offer (IPO) is the selling of securities to the public in the primary stock market.

Company raising money through IPO is also called as company µgoing public'.

From an investor point of view, IPO gives a chance to buy shares of a company, directly from the company at the price of their choice (In book build IPO's). Many a times there is a big difference between the price at which companies decides for its shares and the price on which investor are willing to buy share and that gives a good listing gain for shares allocated to the investor in IPO.

From a company prospective, IPO help them to identify their real value which is decided by millions of investor once their shares are listed in stock exchanges. IPO's also provide funds for their future growth or for paying their previous borrowings.

Who decides the Price Band?

Company with help of lead managers (merchant bankers or syndicate members) decides the price or price band of an IPO.

SEBI, the regulatory authority in India or Stock Exchanges do not play any role in fixing the price of a public issue. SEBI just validate the content of the IPO prospectus.

Companies and lead managers does lots of market research and road shows before they decide the appropriate price for the IPO. Companies carry a high risk of IPO failure if they ask for

higher premium. Many a time investors do not like the company or the issue price and doesn't apply for it, resulting unsubscribe or undersubscribed issue. In this case companies' either revises the issue price or suspends the IPO.

Who decides the date of the issue?

Once µDraft Prospectus' of an IPO is cleared by SEBI and approved by Stock Exchanges then it's up to company going public to finalize the date and duration of an IPO. Company consult with the Lead Managers, Registrar of the issue and Stock Exchanges before decides the date.

What is the role of registrar of an IPO?

Registrar of a public issue is a prime body in processing IPO's. They are independent financial institution registered with SEBI and stock exchanges. They are appointed by the company going public.

Responsibility of a registrar for an IPO is mainly involves processing of IPO applications, allocate shares to applicants based on SEBI guidelines, process refunds through ECS or cheque and transfer allocated shares to investors Demat accounts.

What is the role of Lead Managers in an IPO?

Lead managers are independent financial institution appointed by the company going public. Companies appoint more then one lead manager to manage big IPO's. They are known as Book Running Lead Manager and Co Book Running Lead Managers.

Their main responsibilities are to initiate the IPO processing, help company in road shows, creating draft offer document and get it approve by SEBI and stock exchanges and helping company to list shares at stock market.

What is the life cycle of an IPO prospectus?

Stage 1: Draft Offer document

"Draft Offer document" is prepared by Issuer Company and the Book Building Lead Manager of the public issue. This document is submitted to SEBI for review. After reviewing this document either SEBI ask lead managers to make changes to it or approve it to go ahead with IPO processing.

Draft document are available on SEBI's website in the section of µReports -> Public Issues: Draft Offer Documents filed with SEBI" at:http://www.sebi.gov.in/SectIndex.jsp?sub_sec_id=70

"Draft Offer document" is usually a PDF file having information of an investor who needs to know about the public issue. It mainly contain information about the company, its business, management, risk involve in applying to this issue, company financials and the reason why company is raising money through IPO.

Stage 2: Offer Document

Once the µDraft Offer document' cleared by SEBI, it becomes "Offer Document". Offer Document is the modified version of µDraft Offer document' with SEBI suggestions.

"Offer Document" is submitted to the registrar of the issue and stock exchanges where Issuer Company is willing to list.

Stage 3: Red Herring Prospectus

Once "Offer Document" gets clearance from Stock Exchanges, Issuer Company add Issue size and price of the issue to the document and make it available to the public. The issue prospectus is now called "Red Herring Prospectus".

Red

Herring

Prospectus

also

can

be

found

on

SEBI

website

at:

http://www.sebi.gov.in/SectIndex.jsp?sub_sec_id=72

What is the life cycle of an IPO?

Below is the detail process flow of a 100% Book Building Initial Public Offer IPO. This process flow is just for easy understanding for retail IPO investors. The steps provided below are most general steps involve in the life cycle of an IPO. Real processing steps are more complicated and may be different. Please visit SEBI website, stock exchange website or consult an expert for most current information about IPO life cycle in Indian Stock market.

1. Issuer Company - IPO Process Initialization a) Appoint lead manager as book runner. b) Appoint registrar of the issue. c) Appoint syndicate members. 2. Lead Manager's - Pre Issue Role - Part 1 a) Prepare draft offer prospectus document for IPO. b) File draft offer prospectus with SEBI. c) Road shows for the IPO. 3. SEBI ± Prospectus Review a) SEBI review draft offer prospectus. b) Revert it back to Lead Manager if need clarification or changes (Step 2).

c) SEBI approve the draft offer prospectus, the draft offer prospectus is now become Offer Prospectus. 4. Lead Manager - Pre Issue Role - Part 2 a) Submit the Offer Prospectus to Stock Exchanges, registrar of the issue and get it approved. b) Decide the issue date & issue price band with the help of Issuer Company. c) Modify Offer Prospectus with date and price band. Document is now called Red Herring Prospectus. d) Red Herring Prospectus & IPO Application Forms are printed and posted to syndicate members; through which they are distributed to investors. 5. Investor ± Bidding for the public issue a) Public Issue Open for investors bidding. b) Investors fill the application forms and place orders to the syndicate members (syndicate member list is published on the application form). c) Syndicate members provide the bidding information to BSE/NSE electronically and bidding status gets updated on BSE/NSE websites. d) Syndicate members send all the physically filled forms and cheques to the registrar of the issue. e) Investor can revise the bidding by filling a form and submitting it to Syndicate member. f) Syndicate members keep updating stock exchange with the latest data. g) Public Issue Closes for investors bidding. 6. Lead Manager ± Price Fixing a) Based on the bids received, lead managers evaluate the final issue price. b) Lead managers update the 'Red Herring Prospectus' with the final issue price and send it to SEBI and Stock Exchanges. 7. Registrar - Processing IPO Applications a) Registrar receives all application forms & cheques from Syndicate members. b) They feed applicant data & additional bidding information on computer systems. c) Send the cheques for clearance. d) Find all bogus application.

e) Finalize the pattern for share allotment based on all valid bid received. f) Prepare 'Basis of Allotment'. g) Transfer shares in the demat account of investors. f) Refund the remaining money though ECS or Cheques. 8. Lead manager ± Stock Listing a) Once all allocated shares are transferred in investors dp accounts, Lead Manager with the help of Stock Exchange decides Issue Listing Date.

Finally share of the issuer company gets listed in Stock Market.

What is the difference between Book Building Issue and Fixed Price Issue?

Initial Public Offering can be made through the fixed price method, book building method or a combination of both.

Features

Fixed Price process

Book Building process

Price at which the securities are Price at which securities will be offered/allotted Pricing offered/allotted is known in is not known in advance to the investor. Only an indicative price range is known.

advance to the investor.

Demand for the securities offered Demand is known only after the closure of the issue.

Demand for the securities offered can be known everyday as the book is built.

Payment if made at the time of Payment subscription wherein refund given after allocation. is Payment only after allocation

What is the difference between Floor Price and Cut-Off Price for a Book Building Issue?

Company coming up with Book Building Public Issue decided a price band for the issue. The price band usually contains an upper level and a lower level.

Floor Price is the minimum price (lower level) at which bids can be made for an IPO.

Investors can bid for the Book Build IPO at any price in the price band decided by the company. In Book Build process retail investors have an addition option to choose "Cut-Off" price for bidding.

Cut-off price means the investor is ready to pay whatever price is decided by the company at the end of the book building process. Retail investor has to pay the highest price while placing the bid at Cut-Off price. If company decides the final price lower then the highest price asked for IPO, the remaining amount is return to the retail investor.

What is the difference between retail investor, Non-institutional bidders and Qualified Institutional Bidders (QIB¶s)?

Answer: Investors can apply for shares in an IPO in 4 different categories:

1. Retail

Individual

Investor

(RII)

In retail individual investor category, investors can not apply for more then Rs one lakh (Rs 1,00,000) in an IPO. Retail Individual investors have an allocation of 35% of shares of the total issue size in Book Build IPO's.

NRI's who apply with less then Rs 1,00,000 /- are also considered as RII category. 2. High Networth Individual (HNI)

If retail investor applies more then Rs 1,00,000 /- of shares in an IPO, they are considered as HNI. 3. Non-institutional bidders

Individual investors, NRI's, companies, trusts etc who bid for more then Rs 1 lakhs are known as Non-institutional bidders. They need not to register with SEBI like RII's. Non-institutional bidders have an allocation of 15% of shares of the total issue size in Book Build IPO's. 4. Qualified Institutional Bidders (QIB's)

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's have an allocation of 50% of shares of the total issue size in Book Build IPO's.

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.

QIB's are prohibited by SEBI guidelines to withdraw their bids after the close of the IPOs. Retail and non-institutional bidders are permitted to withdraw their bids until the day of allotment.

As a retail investor I want to apply more then Rs 1 lakhs in an IPO. Can I invest in Noninstitutional bidder¶s category? If yes then what are advantages or disadvantages of this?

Answer:

Yes, a retail individual investor can bid for more then Rs 1 Lakhs in an IPO by applying in 'Non Institutional Investors' category. There is no upper limit for bidding amount in 'Non Institutional Investors' category.

Advantage:

You can apply for more then Rs 1 Lakhs and may get much better allocation then a retail bidder.

Disadvantage:

Non-institutional bidders have an allocation of 15% of shares of the total issue size in Book Build IPO's, while retail Individual investors has 35% (remaining 50% is for QIB's). As Noninstitutional category has much smaller in size, issue usually oversubscribed much higher (then in retail category) and less shares allocation.

Is it mandatory to have PAN number to apply in an IPO?

Answer:

Yes, Since July 2006, SEBI made PAN number mandatory for IPO applicants. Forms submitted without PAN number or wrong PAN numbers are considered as faulty application and they are not considered for IPO allotment.

It's highly recommended that you double check your PAN number information before submitting the IPO application form. If you are filling the IPO application through online stock broker, make sure he has correct information.

How many days is the issue open?

Answer:

(Information

source

SEBI)

As per Clause 8.8.1, Subscription list for public issues shall be kept open for at least 3 working days and not more than 10 working days. In case of Book built issues, the minimum and maximum period for which bidding will be open is 3 - 7 working days extendable by 3 days in case of a revision in the price band. The public issue made by an infrastructure company, satisfying the requirements in Clause 2.4.1 (iii) of Chapter II may be kept open for a maximum period of 21 working days. As per clause 8.8.2., Rights issues shall be kept open for at least 30 days and not more than 60 days.

What information should I keep after I submit the IPO application form?

Answer:

This is a very important question for all IPO investors. If you are applying for an IPO, make sure you retain following information for future correspondence with the company or registrar of the issue.

1. Application form photo copy 2. Cheque photo copy 3. Application number in case of online IPO submission

What is 'Market Lot Size' and 'Minimum Order Quantity' for an IPO?

IPO 'Market Lot' and 'Minimum Order Quantity' are two important factors investor should know while bidding for an IPO.

Minimum Order Quantity, as name says, is the minimum number of shares investor can apply while bidding in an IPO. If investor wants to bid for more shares, they can apply in multiples of IPO market lot (lot Size or IPO bid lot) of shares.

Usually (Market Lot * Lower side of the issue price) values around Rs 5500/- to Rs 6000/-.

Example: IPO: Power Public Market Minimum Order Quantity: 125 Shares Issue Grid Price: Rs. Corporation 44/to Lot: 125 of Rs. India 52/Per Limited Equity IPO Share Shares

Investor can apply in this IPO as below:

At At

Rs Rs

44/44/-

* *

125 125

Shares Shares

* *

1 2

Lot Lot

= =

Rs Rs

5500/11000/-

At Rs 44/- * 125 Shares * 18 Lot = Rs 99000/-

At At

Rs Rs

52/52/-

* *

125 125

Shares Shares

* *

2 1

Lot Lot

= =

Rs Rs

13000/6500/-

At Rs 52/- * 125 Shares * 15 Lot = Rs 97500/-

Does applying in an IPO guarantee me to get certain amount of shares?

No, applying for shares in an IPO or actually bidding for shares in an IPO doesn't give any guarantee to get the shares.

As it's a bidding process, allotment depend on number of bids received in different categories, the price at which investor applied for shares etc.

Once IPO closes, registrar of the issue collect all the bidding information and prepares a µBasis of Allotment'. This document provides information about the bids received by verity of investors at different prices and the pattern of allotment.

Investing in IPO¶s is much less riskier then directly investing in stock market. Is that true?

Not really. But IPO's are excellent way to enter in to some stocks. Not all the IPO's give good returns.

Few risks involve in applying in IPO's are:

1. Stock list at lower then issue price. 2. Issue oversubscribed heavily and investor doesn't get allotment. 3. Any mishandling in processing refund could delay in getting the money back for shares not allocated.

Can I apply in an IPO through multiple applications on same name?

No, one person cannot apply multiple times through multiple applications for an IPO. It's a rule and if you apply in an IPO though multiple applications with same name or same demat account or same PAN Number, all of your application will be rejected.

If you would like to place order for multiple application, it works if you apply one each of your family member's name. But again all eligible family members should have a demat account and a PAN number.

How many days is the issue open?
Answer: Book Building IPO remains open for 3 to 7 days and may extend for another 3 days in case of revision in price if issue remain unsubscribe in initially decided days. Number of days issue remain open is decided by the issuer company and its issue lead manager.

Right issues remain open for minimum 30 day and no longer then 60 days.

What is Basis of Allocation or Basis of Allotment?

Answer: Basis of Allotment or Basis of Allocation is a document publishes by registrar of an IPO to stock exchanges and IPO investors. This document provides information about final price fixed for an IPO, issue subscription (bidding) information or demand of an IPO and share allocation ratio.

The IPO allotment information is categorized by number of shares applied by an applicant. For each such category detail bidding information is provided in this document including number of valid application received, total number of share applied, ratio of the allotment and number of shares allocated to the applicants.

Ratio of the allotment is a critical field for IPO's oversubscribed multiple times. This field tells how many applicants will receive single lot of shares among a certain number of applicants. For example, ratio 1:8 means only one out of eight applicant received one lot of shares; ratio value 'FIRM' means all the applicants are eligible to receive certain amount of share.

Can I revise or cancel my IPO application?

Answer: Book Building IPO: Yes an investor can revise bided quantity and price of an already applied Book Building IPO anytime if the issue is still open for subscription. Investor has to fill a revision form and give it to the syndicate member.

Where do I get an IPO application form?

Answer: Investor 1) Nearest stock

can

get

the

IPO broker

Application

Forms

from: office or

2) From the syndicate member office of an IPO. Syndicate members are usually banks or other financial institutions (i.e. SBI). List of syndicate members of an IPO are published in IPO Prospectus.

IPO application forms are available for free. Filled application can be submitted to any stock broker office or syndicate member office.

Can a minor apply in IPO?

Answer: Some companies allow minors to bid for their IPO and other doesn't. So it depends on IPO to IPO.This information is usually provided under section "Who can apply?" of the IPO Prospectus.

For example:

Religare

Enterprises

Limited

IPO

prospectus

says:

Indian national's resident in India who are majors, or in the names of their minor children as natural/legal guardians in single or joint names (not more than three) can bid for this IPO.

Power

Grid

Corporation

of

India

Limited

IPO

prospectus

says:

Bidders are advised to note that Bids are liable to be rejected on, inter alia, the following technical grounds - Bids by persons not competent to contract under the Indian Contract Act, 1872, including minors and persons of unsound mind etc.

Investor has to disclose age of the applicant in IPO Application Form.

Can a person apply in the non-institutional bidder category of an IPO?

Answer: Yes an individual investor can apply in Non Institutional Investors category of an IPO.

"Individual investors, NRI's, companies, trusts etc who bid for more then Rs 1 lakhs are known as Non-institutional bidders. They need not to register with SEBI like RII's. Non-institutional bidders have an allocation of 15% of shares of the total issue size in Book Build IPO's."

There are few advantages and disadvantages for retail investor to apply under non-institutional category of the IPO.

Advantage is that there is no upper cap on application amount. An individual investor can bid for any amount in this category where there is limit of Rs 100'000 in Retail category.

Disadvantage is that only 15% of total shares are part of Non Institutional Investors category. The Retail Individual Investors (RIIs) category has 35% of total shares available for investors. This means that Non Institutional category oversubscribed heavily and chances of getting allotment are much lesser.

What is the minimum & maximum investment one could do in HNI category?

Answer: Any bid made by the Retail Investor in excess of Rs 1,00,000 is considered in the HNI category (Non Institutional Investors category of IPO).

Thus minimum investment amount for HNIs in an IPO is Rs 1,00,000 and the maximum investment amount is the max amount in the Non Institutional Investors of the IPO.

Can I place a buy order during after hour session before the listing date of an IPO?

Answer: No, you can not place the buy/sell order for shares which are not yet listed in stock exchange. Shares can only be traded after they get listed on stock exchange.

Remember that this is not the case in grey market or over the counter trades. Share holders can trader shares on personal basis before they get listed in stock exchanges. As stock exchanges are not involved in these deals, they are not responsible for any failure in the deal.

How one can apply in IPO¶s online?

Answer: To apply in IPO's online an investor has to open an account with financial institution that provides this facility.

Most of the banks and stock brokers allow its account holders to apply in IPOs online. Few popular banks and brokers are ICICI, HDFC, Religare, Motilal Oswal Securities etc. You can find more detail about these brokers at:

http://www.theequitymarkets.com/broker_comparison.htm

There is almost none paperwork involves in applying IPO's online.

Please note that applying in IPO online doesn't give you guarantee to receive the refund amount through ECS or direct deposit in your account. Refunds are processed by the registrar of the public issues and its up to them to choose the way they want to refund your money back which may include refund through cheques.

Why does the retail Individual Investor RII bidding status is not getting updated every hour?

Answer: IPO subscription detail or bidding status for book building IPO is provided by the stock exchanges when IPO is open for bidding. NSE and BSE websites usually publish this information.

Only part of bidding status gets updated every hour and remaining information is made available at the end of the day.

Usually Total Bids Received, Total Bids Received at Cut-off Price and total number of times issue is subscribed information is updated every hour.

The detail bidding status including category wise bidding detail (i.e detail for Qualified Institutional Buyers (QIBs) - Foreign Institutional Investors (FIIs), Domestic Financial Institutions (Banks/ Financial Institutions(FIs)/ Insurance Companies), Mutual Funds, Non Institutional Investors - Corporates, Individuals (Other than RIIs), Retail Individual Investors (RIIs) etc.) is updated once in a day.

What are the determining factors for the selection of an ipo to invest?

1. The issue size has to be big, the bigger the issue, the higher is the capability of the promoters.

2. Money begets more money, so if they have raised more money, be sure, they will be able to earn more.

3. A higher promoters stake is a must, instills a sense of responsibility.

4. A background check on the promoters capabilities

5. Size of projects in the pipeline, will indicate the scalability of the company

6. Last but not the least, in big companies, look for long term wealth creation and not speculative gains.

How much tax I have to pay on returns (capital gains) for a particular IPO?

Answer: If any Capital Asset (stock, property, precious metal etc) is sold or transferred, the profits arising out of such sale are taxable as capital gains in the year in which the transfer takes place.

Capital Assets are of two types i.e., long term and short term.

Shares, debentures and mutual funds are considered as Long-term capital assets when they are held for more than 12 months before they are sold or transferred. If they are sold or transferred before 12 months they are considered as short-term capital.

Different rates of tax apply for gains on transfer of the long term and short-term capital assets. Gains on short-term capital asset are taxed as regular income.

If an investor sells IPO allocated shares with in 12 month of IPO Allotment, he comes under short-term capital gains. All such gains are taxed along with the investor's regular income i.e tax on his salary etc.

For long term capital gains and more detail about taxation in India visit:

http://incometaxindia.gov.in/general/computation.asp

What is the procedure to withdraw from an IPO?

To withdraw from IPO the applicant have to inform the registrar of the issue in written within 7 days of IPO closing or can also make stop payment of the cheque (if applied through paper form).

Which are the reliable sources for me to get information about response to issues? In the case of book-built issues, the exchanges (BSE/NSE) display the data regarding the bids obtained (on a consolidated basis between both these exchanges). The data regarding the bids is also available category wise. After the price has been determined on the basis of bidding, the statutory public advertisement containing, inter alia, the price as well as a table showing the number of securities and the amount payable by an investor, based on the price determined, is issued.

How do I know if I am allotted the shares? And by what timeframe will I get a refund if I am not allotted?

The investor is entitled to receive a Confirmatory Allotment Note (CAN) in case he has been allotted shares within 15 days from the date of closure of a book Built issue. The registrar has to ensure that the demat credit or refund as applicable is completed within 15 days of the closure of the book built issue.

How

long

will

it

take

after

the

issue

for

the

shares

to

get

listed?

The listing on the stock exchanges is done within 7 days from the finalization of the issue. Ideally, it would be around 3 weeks after the closure of the book built issue. In case of fixed price issue, it would be around 37 days after closure of the issue.

What is the recourse available to the investor in case of issue complaints? Most of the issue complaints pertain to non-receipt of refund or allotment, or delay in receipt of refund or allotment and payment of interest thereon. These complaints shall be made to the post issue Lead Manager, who in turn will take up the matter with registrar to redress the complaints. In case the investor does not receive any reply within a reasonable time, investor may complain to SEBI, Office of investors Assistance.

How will the investor confirm that bonus/rights entitlement is credited into the account? An allotment advice will be sent by the issuer for bonus/rights entitlement. The transaction statement given by the DP, will also show the bonus/rights credit into the account. The quantity shown in the advice and transaction statement should match.

What

will

happen

if

my

DP

goes

bankrupt

or

stops

operation?

In a rare event of your DP going bankrupt or closing its operations, the interests of the investors will be fully protected. In such situation, the investor will be given an option of either transferring the securities to a new DP or rematerialize the securities

Withdrawn IPOs: Trick or treat?
Of late, Initial Public Offerings (IPO) have given investors more pain than gain. Not only were a few withdrawn after accepting money from investors, some had a terrible listing on the stock exchange too.

Till some time back investors would blindly invest in any IPO and exit on listing thus making some quick money. Many might have enjoyed this µflipping¶ game but in the present scenario only fundamentally strong companies have stood the market crisis. And hence it is no surprise to witness a few companies

withdrawing their IPOs such as Emaar MGF and Wockhardt where the fundamentals looked weak. So, what else was the reason behind this failure?

Overvalued price: Investment banks, promoters and even IPO rating agencies have tried to sell stone for the price of gold by giving most IPOs a grade of four on five.

I feel extremely bad for investors who applied for these IPOs. Not only did their money get blocked but they also lost the opportunity to buy cheap undervalued stocks available in the market.

I feel that companies that have withdrawn their IPOs should be penalised either by making them pay a fine or at least giving compensation to the investors.

Promoters need to realise that the IPO market is a serious platform. Companies and institutions are not just built on profits but on trust and faith. And once the trust is broken, it is very difficult to rebuild it.

What¶s worse is that promoters and investment banks are not even apologetic about what they have done. Instead they are blaming the market sentiments and investors. I do not believe in the fact that these IPOs were withdrawn because of poor market conditions. The reason why they got a poor responce was because of their overvalued price. Had the pricing been logical and fair, people would have surely invested. This can be said from the fact that the IPO of IRB Infrastructure Developers was subscribed over four times in the same market conditions.

Should you still invest?

These companies have plans to issue their IPOs again once the market bounces back in the next few months. I don¶t know if they would come back with a reduced price but in any case I wouldn¶t be comfortable in subscribing to their IPOs anymore. Investing money in a company that took investors' money for a ride is not at all inspiring.

Values and ethics are very important in any business. And when this itself becomes questionable I might as well find different avenues to make money.

Should

you

invest

in

IPOs?

Sound investment principles always suggest that you apply in an IPO only after doing a complete study of the company.

Some ------Industry

parameters Background outlook Reasons Business

you

must of

consider

are: promoters

to for plans

which

the

company raising

belongs funds company Financials

of

the

Risk

factors

-- Pricing of the IPO

How to invest?

-- To begin with, you need a demat and trading account. You can contact any popular broking firm to open an account.

-- You can invest in an IPO by filling out a simple subscription form. You also need to attach your PAN copy along with the form. You can get this form from your broker. The simplest way to invest in an IPO is to do it online. All you need is an online trading account.

What should you do?

Look before you leap and learn to take informed decisions. When I think about these IPOs it makes me wonder if they really needed such huge capital or if it was an unrealistic plan. I don¶t know how many

investors in future would apply in these companies. Atleast I wouldn¶t. Instead I would look for several other undervalued stocks that will give good returns in the coming few years.

Had it not been for their greed, both Emaar MGF and Wockhardt IPOs could have witnessed a success story. And when it comes to investing in the stock market, it¶s about playing the cards well and of course not succumbing to greed or fear factors. So, the next time you decide to invest in an IPO you know what to look for.

y What is an Initial Public Offering?

Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer¶s securities.

y What is a Follow on Public Offering?

A follow on 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.

y What is a 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.

y What is a Preferential Issue?

A preferential issue is an issue of shares or of convertible securities by listed companies 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. The issuer

company has to comply with the Companies Act and the requirements contained in Chapter pertaining to preferential allotment in SEBI (DIP) guidelines which inter-alia include pricing, disclosures in notice etc.

y What is SEBI¶s Role in an Issue?

Any company making a public issue or a listed company making a rights issue of value of more than Rs.50 lakhs is required to file a draft offer document with SEBI for its observations. The company can proceed further on the issue only after getting observations from SEBI. The validity period of SEBI¶s observation letter is three months only ie. the company has to open its issue within three months period.

y 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.

y Does SEBI approve the contents of the issue?

It is to be distinctly understood that 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.

y Does SEBI tag make my money safe?

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 µtips¶ or news through unofficial means.

y What are Disclosures and Investor protection guidelines?

The primary issuances are governed by SEBI in terms of SEBI (Disclosures and Investor protection) guidelines. SEBI framed its DIP guidelines in 1992. Many amendments have been carried out in the same in line with the market dynamics and requirements. In 2000, SEBI issued ³Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000´ which is compilation of all circulars organized in chapter forms. These guidelines and amendments thereon are issued by SEBI India under section 11 of the Securities and Exchange Board of India Act, 1992. SEBI (Disclosure and investor protection) guidelines 2000 are in short called DIP guidelines. It provides a comprehensive framework for issuances buy the companies.

y How does SEBI ensure compliance with Disclosures and Investor protection?

The Merchant Banker are the specialized intermediaries who are required to do due diligence and ensure that all the requirements of DIP are complied with while submitting the draft offer document to SEBI. Any non compliance on their part, attract penal action from SEBI, in terms of SEBI (Merchant Bankers) Regulations. The draft offer document filed by Merchant Banker is also placed on the website for public comments. Officials of SEBI at various levels examine the compliance with DIP guidelines and ensure that all necessary material information is disclosed in the draft offer documents.

y With the presence of the Central Listing Authority, what would be the role of SEBI in the processing of Offer documents for an issue?

The Central Listing Authority¶s , CLA, functions have been detailed under Regulation 8 of SEBI (Central Listing Authority) Regulations, 2003 (CLA Regulations) issued on August 21, 2003 and amended up to October 14, 2003. In brief, it covers processing applications for letter precedent to listing fromapplicants; to make recommendations to the Board on issues pertaining to the protection of the interest of the investors in securities and development and regulation of the securities market, including the listing agreements, listing conditions and disclosures to be made in offer documents; and; to undertake any other functions as may be delegated to it by the Board from time to time. SEBI as the regulator of the securities market examines all the policy matters pertaining to issues and will continue to do so even during the existence of the CLA. Since the CLA is not yet operational, the reply to this question would be updated thereafter.

y What is the difference between an offer document, Red Herring Prospectus, a prospectus and an abridged prospectus? What does it mean when someone says ³draft offer doc´?

³Offer document´ means Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a rights issue, which is filed Registrar of Companies (ROC) and Stock Exchanges. An offer document covers all the relevant information to help an investor to make his/her investment decision. ³Draft Offer document´ means the offer document in draft stage. The draft offer documents are filed with SEBI, atleast 21 days prior to the filing of the Offer Document with ROC/ SEs. SEBI may specifies changes, if any, in the draft Offer Document and the issuer or the Lead Merchant banker shall carry out such changes in the draft offer document before filing the Offer Document with ROC/ SEs. The Draft Offer document is available on the SEBI website for public comments for a period of 21 days from the filing of the Draft Offer Document with SEBI.

y What is a Red Herring Prospectus?

Red Herring Prospectus is a prospectus, 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. An RHP for and FPO can be filed with the RoC without the price band and the issuer, in such a case will notify the floor price or a price band by way of an advertisement one day prior to the opening of the issue. In

the case of book-built issues, it is a process of price discovery and 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.

y What is an Abridged Prospectus?

Abridged Prospectus means 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.

y What does one mean by Lock-in?

Lock-in indicates a freeze on the shares. SEBI (DIP) Guidelines 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.

y How the word Promoter has been defined?

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 theperson 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".

y Who decides the price of an issue?

Indian primary market ushered in an era of free pricing in 1992. Following this, the guidelines have provided that the issuer in consultation with Merchant Banker shall decide the price. There is no price formula stipulated by SEBI. SEBI does not play any role in price fixation. The company and merchant banker are however required to give full disclosures of the parameters which they had considered while deciding the issue price. There are two types of issues one where company and LM fix a price (called fixed price) and other, where the company and LM stipulate a floor price or a price band and leave it to market forces to determine the final price (price discovery through book building process).

y What is Fixed Price offers?

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.

y What does ³price discovery through book building process´ mean?

³Book 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 price for securities.

y How does Book Building work?

Book building is a process of price discovery. Hence, the Red Herring prospectus does not contain a price. Instead, the red herring prospectus contains either the floor price of the securities offered through it or a price band along with the range within which the bids can move. The applicants bid for the shares quoting the price and the quantity that they would like to bid at. Only the retail investors have the option of bidding at µcut-off¶. After the bidding process is complete, the µcut-off¶ price is arrived at on the lines of Dutch auction. The basis of Allotment (Refer Q. 15.j) is then finalized and letters allotment/refund is undertaken. The final prospectus with all the details including the final issue price and the issue size is filed with ROC, thus completing the issue process.

y What is a price band?

The red herring prospectus may contain either the floor price for the securities or a price band within which the investors can bid. The spread between the floor and the cap of the price band shall not be more than 20%. In other words, it means that the cap should not be more than 120% of the floor price. The price band can have a revision and such a revision in the price band shall be widely disseminated by informing the stock exchanges, by issuing press release and also indicating the change on the relevant website and the terminals of the syndicate members. In case the price band is revised, the bidding period shall be extended for a further period of three days, subject to the total bidding period not exceeding thirteen days.

y Who decides the price band?

It may be understood that the regulatory mechanism does not play a role in setting the price for issues. It is up to the company to decide on the price or the price band, in consultation with Merchant Bankers. The basis of issue price is

disclosed in the offer document. The issuer is required to disclose in detail about the qualitative and quantitative factors justifying the issue price.

y What is firm allotment?

A company making an issue to public can reserve some shares on ³allotment on firm basis´ for some categories as specified in DIP guidelines. Allotment on firm basis indicates that allotment to the investor is on firm basis. DIP guidelines provide for maximum % of shares, which can be reserved on firm basis. The shares to be allotted on ³firm 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.

y What is reservation on competitive basis?

Reservation on Competitive Basis is when allotment of shares is made in proportion to the shares applied for by the concerned reserved categories. Reservation on competitive basis can be made in a public issue to the Employees of the company, Shareholders of the promoting companies in the case of a new company and shareholders of group companies in the case of an existing company, Indian Mutual Funds, Foreign Institutional Investors (including non resident Indians and overseas corporate bodies), Indian and Multilateral development Institutions and Scheduled Banks.

y Is there any preference while doing the allotment?

The allotment to the Qualified Institutional Buyers (QIBs) is on a discretionary basis. The discretion is left to the Merchant Bankers who first disclose the parameters of judgment in the Red Herring Prospectus. There are no objective conditions stipulated as per the DIP Guidelines. The Merchant Bankers are free to set their criteria and mention the same in the Red Herring Prospectus.

y Who is eligible for reservation and how much? (QIBs, NIIs, etc.,)

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. In case the book built issues are made pursuant to the requirement of mandatory allocation of 60% to QIBs in terms of Rule 19(2)(b) of SCRR, the respective figures are 30% for RIIs and 10% for NIIs. This is a transitory provision pending harmonization of the QIB allocation in terms of the aforesaid Rule with that specified in the guidelines.

y How is the Retail Investor defined as?

µRetail individual investor¶ means an investor who applies or bids for securities of or for a value of not more than Rs.1,00,000.

y Can a retail investor also bid in a book-built issue?

Yes. He can bid in a book-built issue for a value not more than Rs.1,00,000. Any bid made in excess of this will be considered in the HNI category.

y Where can I get a form for applying/ bidding for the shares?

The form for applying/bidding of shares is available with all syndicate members, collection centers, the brokers to the issue and the bankers to the issue.

y What is the amount of faith that I can lay on the contents of the documents? And whom should I approach if there are any lacunae?

The document is prepared by an independent specialized agency called Merchant Banker, which is registered with SEBI. They are required to do through due diligence while preparing an offer document. The draft offer document submitted to SEBI is put on website for public comments. In case, you have any information about the issuer or its

directors or any other aspect of the issue, which in your view is not factually reflected, you may send your complaint to Lead Manager to the issue or to SEBI, Division of Issues and Listing.

y Is it compulsory for me to have a Demat Account?

As per the requirement, all the public issues of size in excess of Rs.10 crore, are to made compulsorily in the demat more. Thus, if an investor chooses to apply for an issue that is being made in a compulsory demat mode, he has to have a demat account and has the responsibility to put the correct DP ID and Client ID details in the bid/application forms.

What is the procedure for getting a demat account?

The FAQs relating to demat have been covered in the Investor Education section of the SEBI website in a separate head. They are available on the http://investor.sebi.gov.in/faq/dematfaq.html.

y What are the dos and don¶ts for bidding / applying in the issue?

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 µtips¶ or relying on news obtained through unofficial means.

y How many days is the issue open?

As per Clause 8.8.1, Subscription list for public issues shall be kept open for at least 3 working days and not more than 10 working days. In case of Book built issues, the minimum and maximum period for which bidding will be open is 3±7 working days extendable by 3 days in case of a revision in the price band. The public issue made by an infrastructure company, satisfying the requirements in Clause 2.4.1 (iii) of Chapter II may be kept open for a maximum

period of 21 working days. As per clause 8.8.2., Rights issues shall be kept open for at least 30 days and not more than 60 days.

y Can I change/revise my bid?

Yes. The investor can change or revise the quantity or price in the bid using the form for changing/revising the bid that is available along with the application form. However, the entire process of changing of revising the bids shall be completed within the date of closure of the issue.

y What proof can bidder request from a trading member or a syndicate member for entering bids?

The syndicate member returns the counterfoil with the signature, date and stamp of the syndicate member. The investor can retain this as a sufficient proof that the bids have been taken into account.

y Can I know the number of shares that would be allotted to me?

In case of fixed price issues, the investor is intimated about the CAN/Refund order within 30 days of the closure of the issue. In case of book built issues, the basis of allotment is finalized by the Book Running lead Managers within 2 weeks from the date of closure of the issue. The registrar then ensures that the demat credit or refund as applicable is completed within 15 days of the closure of the issue. The listing on the stock exchanges is done within 7 days from the finalization of the issue.

y Which are the reliable sources for me to get information about response to issues?

In the case of book-built issues, the exchanges (BSE/NSE) display the data regarding the bids obtained (on a consolidated basis between both these exchanges). The data regarding the bids is also available category wise. After the price has been determined on the basis of bidding, the

statutory public advertisement containing, inter alia, the price as well as a table showing the number of securities and the amount payable by an investor, based on the price determined, is issued.

y How do I know if I am allotted the shares? And by what timeframe will I get a refund if I am not allotted?

The investor is entitled to receive a Confirmatory Allotment Note (CAN) in case he has been allotted shares within 15 days from the date of closure of a book Built issue. The registrar has to ensure that the demat credit or refund as applicable is completed within 15 days of the closure of the book built issue.

y How long will it take after the issue for the shares to get listed?

The listing on the stock exchanges is done within 7 days from the finalization of the issue. Ideally, it would be around 3 weeks after the closure of the book built issue. In case of fixed price issue, it would be around 37 days after closure of the issue.

y How does one come to know about the issues on offer? And from where can I get copies of the draft offer document?

SEBI issues press releases every week regarding the draft offer documents received and observations issued during the period. The draft offer documents are put up on the website under Reports/Documents section. The final offer documents that are filed with SEBI/ROC are also

put up for information under the same section. Copies of the draft offer documents in hard copy form may be obtained from the office of SEBI, Mittal Court, µA¶ wing, Ground Floor, 224, Nariman Point, Mumbai ± 400021 on a payment of Rs.100 or from SES, LMs etc. The soft copies can be downloaded from the SEBI website under Reports/Documents section. Some LMs also make it available on their web sites for download. The final offer documents that are filed with SEBI/ROC can also be downloaded from the same section of the website.

y Who are the intermediaries in an issue?

Merchant Bankers to the issue or Book Running Lead Managers (BRLM), syndicate members, Registrars to the issue, Bankers to the issue, Auditors of the company, Underwriters to the issue, Solicitors, etc. are the intermediaries to an issue. The issuer discloses the addresses, telephone/fax numbers and email addresses of these intermediaries. In addition to this, the issuer also discloses the details of the compliance officer appointed by the company for the purpose of the issue.

y Who is eligible to be a BRLM?

A Merchant banker possessing a valid SEBI registration in accordance with the SEBI (Merchant Bankers) Regulations, 1992 is eligible to act as a Book Running Lead Manager to an issue.

y What is the role of a Lead Manager? (pre and post issue)

In the pre-issue process, the Lead Manager (LM) takes up the due diligence of company¶s operations/ management/ business plans/ legal etc. Other activities of the LM include drafting and design of Offer documents, Prospectus, statutory advertisements and memorandum containing salient features of the Prospectus. The BRLMs shall ensure compliance with stipulated requirements and completion of prescribed formalities with the Stock Exchanges, RoC and SEBI including finalisation of Prospectus and RoC filing. Appointment of other intermediaries viz., Registrar(s), Printers, Advertising Agency and Bankers to the Offer is also included in the pre-issue processes.

The LM also draws up the various marketing strategies for the issue. The post issue activities including management of escrow accounts, coordinate non-institutional allocation, intimation of allocation and dispatch of refunds to bidders etc are performed by the LM. The post Offer activities for the Offer will involve essential follow-up steps, which include the finalization of trading and dealing of instruments and dispatch of certificates and demat of delivery of shares, with the various agencies connected with the work such as the Registrar(s) to the Offer and Bankers to the Offer and the bank handling refund business. The merchant banker shall be responsible for ensuring that these

agencies fulfill their functions and enable it to discharge this responsibility through suitable agreements with the Company.

y What is the role of a registrar?

The Registrar finalizes the list of eligible allottees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of refund orders to those applicable are sent. The Lead manager coordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank branches, processing of the applications and other matters till the basis of allotment is finalized, dispatch security certificates and refund orders completed and securities listed.

y What is the role of bankers to the issue?

Bankers to the issue, as the name suggests, carries out all the activities of ensuring that the funds are collected and transferred to the Escrow accounts. The Lead Merchant Banker shall ensure that Bankers to the Issue are appointed in all the mandatory collection centers as specified in DIP Guidelines. The LM also ensures follow-up with bankers to the issue to get quick estimates of collection and advising the issuer about closure of the issue, based on the correct figures.

y What is the recourse available to the investor in case of issue complaints?

Most of the issue complaints pertain to non-receipt of refund or allotment, or delay in receipt of refund or allotment and payment of interest thereon. These complaints shall be made to the post issue Lead Manager, who in turn will take up the matter with registrar to redress the complaints. In case the investor does not receive any reply within a reasonable time, investor may complain to SEBI, Office of investors Assistance

y Where do I get data on primary issues? (issuer, total issues, issue size, the intermediaries, etc., during a given period)

SEBI brings out a monthly bulletin that is available off the shelf at bookstores. A digital version of the same is available on the SEBI website under the ³News/Publications´ section. The Bulletin contains all the relevant historical figures of intermediary issue and intermediary particulars during the given period placed against historical figures.

y What are the relevant regulations and where do I find them?

The SEBI Manual is SEBI authorized publication that is a comprehensive databank of all relevant Acts, Rules, Regulations and Guidelines that are related to the functioning of the Board. The details pertaining to the Acts, Rules, Regulations, Guidelines and Circulars are placed on the SEBI website under the ³Legal Framework´ section. The periodic updates are uploaded onto the SEBI website regularly.

y What are 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.

y What is an 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.

y What is 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.

y What is a 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.

y What are 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.

y What is a Green-shoe Option?

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 VIIIA of DIP Guidelines, 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.

y What is an e-IPO?

A company proposing to issue capital to public through the on-line system of the stock exchange for offer of securities can do so if it complies with the requirements under Chapter 11A of DIP Guidelines. The appointment of various intermediaries by the issuer includes a prerequisite that such members/registrars have the required facilities to accommodate such an online issue process.

y What is 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. The details regarding Safety Net are covered under Clause 8.18 of DIP Guidelines.

y Who is a Syndicate Member?

The Book Runner(s) may appoint those intermediaries who are registered with the Board and who are permitted to carry on activity as an µUnderwriter¶ as syndicate members. The syndicate members are mainly appointed to collect and entire the bid forms in a book built issue.

y What is Open book/closed book?

Presently, in issues made through book building, Issuers and merchant bankers are required to ensure online display of the demand and bids during the bidding period. This is the Open book system of book building. Here, the investor can be guided by the movements of the bids during the period in which the bid is kept open. Under closed book

building, the book is not made public and the bidders will have to take a call on the price at which they intend to make a bid without having any information on the bids submitted by other bidders.

y What is 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.

y What is 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.

y What is a Cut Off Price?

In Book building issue, the issuer is required to indicate either the price band or a floor price in the red herring prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called ³Cut off price´. This is decided by the

issuer and LM after considering the book and investors¶ appetite for the stock. SEBI (DIP) guidelines permit only retail individual investors to have an option of applying at cut off price.

y What is Differential pricing?

Pricing of an issue where one category is offered shares at a price different from the other category is called differential pricing. In DIP Guidelines differential pricing is allowed only if the securities to applicants in the firm allotment category is at a price higher than the price at which the net offer to the public is made. The net offer to the public means the offer made to the Indian public and does not include firm allotments or reservations or promoters¶ contributions.

y What is Basis of Allocation/Basis of Allotment?

After the closure of the issue, the bids received are aggregated under different categories i.e., firm allotment, Qualified Institutional Buyers (QIBs), Non-Institutional Buyers (NIBs), Retail, etc. The oversubscription ratios are then calculated for each of the categories as against the shares reserved for each of the categories in the offer document. Within each of these categories, the bids are then segregated into different buckets 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. This process is followed in case of proportionate allotment. In

case of allotment for QIBs, it is subject to the discretion of the post issue lead manager.

y Who is Qualified Institutional Buyer (QIBs)?

Qualified Institutional Buyers are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets. In terms of clause 2.2.2B (v) of DIP Guidelines, a µQualified Institutional Buyer¶ shall mean:

a. Public financial institution as defined in section 4A of the Companies Act, 1956;

b. Scheduled commercial banks;

c. Mutual funds;

d. Foreign institutional investor registered with SEBI;

e. Multilateral and bilateral development financial institutions;

f. Venture capital funds registered with SEBI.

g. Foreign Venture capital investors registered with SEBI.

h. State Industrial Development Corporations.

i. Insurance Companies registered with the Insurance Regulatoryand Development Authority (IRDA).

j. Provident Funds with minimum corpus of Rs.25 crores

k. Pension Funds with minimum corpus of Rs. 25 crores)

These entities are not required to be registered with SEBI as QIBs. Any entities falling under the categories specified above are considered as QIBs for the purpose of participating in primary issuance process

Tax implications of investing in IPOs
YOU can buy stocks either from the stock market directly or during a company's Initial Public Offer (IPO).

You can subscribe to a company's IPO at the issue price, that is, the price at which the shares are offered.

Once the IPO period is over, the shares get listed on the exchange and you can either sell them (to make listing gains) or continue to hold them.

Depending on when you sell the shares you got during an IPO, you will need to pay tax on the gains.

we explain how.

Capital

gains

tax

-- If you sell IPO shares within a year of the issue, you will have to pay a short-term capital gains tax of 10 per cent on the gains.

-- If you sell the shares after a year of purchase, you will have to pay a long-term capital gains tax. The good news is that long term gains are tax free as per current tax laws.

Tax on dividend

Dividend income you receive on shares is tax free in your hands

We recommend that you invest in IPOs only if you have the aptitude and information to take the right decision