An IPO or Initial Public Offering is referred to the issue of shares to the public by the
promoters of a company for the first time. The shares are made available to the
investors at the face value of the share or with a premium as per the perceived market
value of the share by the promoters. The IPO can be in the form of a fixed price
portion or in the form of Book Building portion.
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Primary Market is usually referred to buying of shares in an Initial Public Offering.
The shares are bought by applying for the shares in the respective application form.
Then once the shares are alloted these share transactions are then done in the secondary
market or stock exchanges.
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Secondary Market is referred to those transactions where one investor buys shares from
another investor at the prevailing market price or at whatever price both the buyer and
seller agree upon. The secondary market or the stock exchanges are regulated by the
regulatory authority. In India, the secondary and primary markets are governed by the
Security and Exchange Board of India (SEBI).
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You need to obtain an IPO Application Form through a Share Broker or your Investment
Consultant or they are available at the collecting banks. Then fill up the form, remit the
amount after calculating the number of shares applied for in the bank that is designated
as collecting center for that particular Initial Public Offer. If you have a demat account,
then you can apply for the shares directly through your demat account or there is an
option of physical delivery of share certificates. Some IPOs offer only Demat form of
shares and many other IPOs offer both Demat as well as regular Shares. Care should be
taken to provide all the details specified in the application form, because the application
form has the chance of getting rejected due to not providing of the complete details.
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Book Building is a public offer of equity shares of a company. Book building is so
called because it refers to the collection of bids from investors, which is based on an
price range. The issue price is fixed after the bid closing date.
- How is the book built process done?
A company that is planning an initial public offer (IPO) appoints a merchant banker as
a book runner. The company issues a prospectus which does not mention the price, but
gives other details about the company with regards to issue size, the business the
company is in, the promoters and future plans among other disclosures.
Then a particular period is fixed as the bid period. The book runner builds an order
book, that is, collates the bids from various investors, which shows the demand for the
shares. For example, a bidder may quote that he wants 10,000 shares at Rs 500 while
another may bid for 15,000 shares at Rs 600. Prospective investors can revise their bids
at any time during the bid period.
- On what basis is the final price decided?
On closure of the book, the quantum of shares ordered and the respective prices
offered are known. The price discovery is a function of demand at various prices, and
involves negotiations between those involved in the issue. The book runner and the
company conclude the pricing and decide the allocation to each syndicate member.
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An investor has to look for many important things in an IPO to ascertain the risk
factors before deciding to buy the shares of a company. Few of them are listed below:
Promoters Track Record for consistent performance over the previous years and their
experience in running this particular business.
Risk Factors listed in the Offer Document.
Risk Factors specific to this particular venture, nature of the market, government
policies associated with this particular industry or field and the performance of that
particular sector in the previous years and any available forecasts for this industry for
the near future.
Listing in as many Stock Exchanges in India, allows for easy liquidity.
Transparent and regular reporting of the company's performance and investor
friendly policies adopted by the promoters.
The registrars, bankers to the issue. |
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| Price at which securities will be allotted is not known in case of offer of shares
through book building while in case of offer of shares through normal public issue,
price is known in advance to investor. In case of Book Building, the demand can be
known everyday as the book is built. But in case of the public issue the demand is
known at the close of the issue.
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| Book should remain open for minimum of 5 days. |
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| No. As per SEBI, only electronically linked transparent facility is allowed to be used
in case of book building.
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| Floor price is the minimum price at which bids can be made.
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Whenever a bid is entered by trading members in to the system, a unique transaction
registration slip is automatically generated. Transaction registration slip gives details
regarding number of shares bided for, price, the client name etc.
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| No. The system automatically rejects the bids if price is less than floor price.
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| Every week SEBI issues press releases for information of the public, details of offer
documents filed with SEBI and observations issued. Details can be obtained from the
"Primary Market ' page of the SEBI website. The draft offer document can also be
purchased from the SEBI office where the document is filed on payment of Rs.100/-
by way of DD drawn in favor of SEBI. The draft offer document/letter of offer
remains posted on SEBI website for a period of 21days from the date of filing the
same to SEBI and can also be downloaded from there.
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| Application form can be obtained from the lead manager and brokers to the issue. The
application forms are also generally available at collecting bankers. Name and
addresses of the Lead Manager are available in the prospectus/letter of offer
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| Yes, the objective of making offer document public is to invite public comments. The
comments should be given within 21 days of the filing of the Draft offer document
with SEBI.
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| The Primary Market Division in SEBI |
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| Despatch of refund orders / allotment advice is to be within 2 working days of
finalisation of the basis of allotment Companies are required to finalise the basis of
allotment within 30 days from the closure of the issue in case of a fixed price issue
and within 15 days from the closure of the issue in case of a book building issue or
else they are liable to pay interest @ 15% p.a.
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| The investor should give his complaint in writing to the lead manger/ registrar/
Investor Grievance Cell of SEBI.
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The post issue lead manager ensures that all steps for completion of the necessary
formalities for listing and commencement of trading at all stock exchanges where the
securities are to be listed are taken within 7 working days of finalisation of basis of
allotment.
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| An investor has the option to apply for and receive the shares in physical form.
However, it is advisable to get the allotment in Demat form as the shares in IPO shall
be compulsorily tradable in Demat segment in Stock Exchanges. Dealing of physical
shares (allocated in IPO) will not be accepted. In case of an IPO of any security of
issue size of Rs. 10 crore or more, security shall be issued only in dematerialised
form. In book built issues, for QIBs and large investors (applying for more than 1000
shares) allotment shall be only in Demat form and hence they should have a Demat
account.
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| From the stock exchanges and Registrar of Companies |
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| The companies can freely price their equity shares. However they have to give
justification of the price in the offer document.
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| IPO grading (initial public offering grading) is a service aimed at facilitating the
assessment of equity issues offered to public. The grade assigned to any individual
issue represents a relative assessment of the ‘fundamentals’ of that issue in relation to
the universe of other listed equity securities in India. Such grading is assigned on a
five-point point scale with a higher score indicating stronger fundamentals.
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| Investment recommendations are expressed as ‘buy’, ‘hold’ or ‘sell’ and are based on
a security specific comparison of its assessed ‘fundamentals factors’ (business
prospects, financial position etc.) and ‘market factors’ (liquidity, demand supply etc.)
to its price. On the other hand, IPO grading is expressed on a five-point scale and is a
relative comparison of the assessed fundamentals of the graded issue to other listed
equity securities in India. As the IPO grading does not take cognizance of the price of
the security, it is not an investment recommendation. Rather, it is one of the inputs to
the investor to aiding in the decision making process. All other things remaining
equal, a security with stronger fundamentals would command a higher market price.
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| SEBI has been taking a pioneering role in investor protection by increasing disclosure
levels by entities seeking to access equity markets for funding. This has caused India
to be amongst one of the more transparent and efficient capital markets in the world.
However, these disclosures demand fairly high levels of analytical sophistication of
the reader in order to effectively achieve the goal of information dissemination.
IPO grading is positioned as a service that provides ‘an independent assessment of
fundamentals’ to aid comparative assessment that would prove useful as an
information and investment tool for investors. Moreover, such a service would be
particularly useful for assessing the offerings of companies accessing the equity
markets for the first time where there is no track record of their market performance.
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| As mentioned above, the IPO grade assigned to any issue represents a relative
assessment of the ‘fundamentals’ of that issue in relation to the universe of other listed
equity securities in India. This grading can be used by the investor as tool to make
investment decision. The IPO grading will help the investor better appreciate the
meaning of the disclosures in the issue documents to the extent that they affect the
issue’s fundamentals. Thus, IPO grading is an additional investor information and
investment guidance tool.
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| Credit Rating agencies (CRAs) registered with SEBI will carry out IPO grading. |
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| No. IPO grading is optional. |
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| It is intended that IPO fundamentals would be graded on a five point scale from grade
5 (indicating strong fundamentals) to grade 1 (indicating poor fundamentals). The
grade would l read as:" Rating Agency name " IPO Grade 1 viz CARE IPO Grade 1,
CRISIL IPO Grade 1 etc.
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| In case of over-subscription in a fixed price issue, the allotment is done in marketable
lots and on a proportionate basis. In case of a book building issue, allotment to
Qualified Institutional Buyers (QIBs) and Non-Institutional Buyers (NIBs) are done
on a discretionary basis. Allotment to retail investors is done on a proportionate basis.
After the closure of the issue, the bids received are aggregated under different
categories, such as firm allotment, Qualified Institutional Buyers (QIBs), Non-
Institutional Buyers (NIBs) and Retail Individual Investors. The oversubscription
ratios are 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
segregated into different segments 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.
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A company making an issue to public is eligible to reserve some shares on 'allotment
on firm basis' for certain categories. The shares to be allotted on 'firm allotment
category' can be issued at a price different from the price at which the net offer to the
public is made, provided that the price at which the security is being offered to the
applicants in firm allotment category is higher than the price at which securities are
offered to public.
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| The allotment to the Qualified Institutional Buyers (QIBs) is made on a discretionary
basis. The discretion is left to the merchant bankers who first disclose the parameters
of judgment in the Red Herring Prospectus. The merchant bankers are free to set their
criteria and mention the same in the Red Herring Prospectus.
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| Retail individual investor refers to an investor who applies or bids for securities of or
for a value of not more than Rs.1,00,000.
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