Public Offers

In public offers, securities of a company are offered to the general public.

Initial Public offer (IPO)

It is first time offer of equity shares to public by a company

It is a significant milestone in the life of the company.
Can be a source of finance.
Creates a new ownership opportunity called the market window and a class of investors called the ‘ retail investors’.
Can be a liquidity event.
Creates Market capitalization for the company.
Can act as an enhancement or deterrent for future fund raising.
Open up gates of hostile takeover attempts.
Makes future acquisition of stakes by the promoters quite expensive and cumbersome.
Brings with it additional costs of regulatory compliance, restrictions on future capital transactions and cumbersome procedures.

The Listing Decision

Two stages:

Pre-IPO stage- Do we need listing?
Strategic
Financial
Merchant Banking

Post-IPO stage-Continuance or discontinuance
Shall we continue listing?

Do we need listing?

The Strategic Dimension

Most fundamental and needs sufficient introspection.
A company may remain private if its business model allows it.
A company should go for an IPO only when it is mature enough for it. This depends on the following:
Does the company need the IPO as a liquidity event for its existing investors?
Has the company matured enough to unlock value?
Is the company’s business model retail-oriented?
Is the company’s visibility in the market sufficient enough for investors to perceive its business model to the full extent?
Is the company confident of strong financial growth in the future?

The Financial Dimension

Due to Business model :
So large operation that going public is inevitable in order to maintain balances in capital structure. eg: Cement, Steel, Pharma, etc.
May require not just one but multiple rounds of public offers.
Some start-up business looks at an IPO as a source of finance than as a strategic move. eg: Reliance Petroleum
Unlocking value through an IPO becomes the need of the hour.
All other options looks unattractive
Strategic sale of equity are not enough
Example of BPCL(Public issue) and HPCL (Strategic sale)
Evaluating how much capital is proposed to be raised through the IPO and its deployment.
IPO with well laid out investment plans sell better
If fund requirement is too large or too small


The Merchant Banking Dimension

Merchant bankers takes calls based upon:
Business Plan
Financial position of the company
Expected future performance
Prevailing Conditions in the Primary market:
Strong (1999-2000) ex: Wipro, Infosys
Depressed (2001-2002) ex: Postponement by BioCon India, TCS
Expected issue pricing
Size of the offer
Post-issue capital structure
Own placement strength



Follow on public offer

It is a public offer that is made by a listed company. Any offer to sale shares after the initial public offer is a follow on offer.

The different types of FPOs are –
A. Public issue
B. Offer for sale
C. Composite issue

Difference between a right issue and an FPO

In case of rights shares are offered only the existing registered shareholders.
In an FPO, general public are offered the shares.
Hence in an FPO some subscribers may be subscribing to the issue for the first time.
A composite issue is a combination of a rights and public issue at the same time and is also referred to as

Considerations for an FPO

Price of the offer has to align with the performance of the share in the market in the recent past. Factors that affect the pricing is the market capitalization , expected future profits , size of the issue, the addition to the floating stock, the expected future price, investors experience with the company etc.
Choice of a secondary public offer needs to be assessed with respect to other alternatives in the equity and the debt market.
Secondary offer adds to the equity base and would therefore affect the future market capitalization.
Pricing of the offer determines the extent to which the promoters can subscribe to the secondary public offer. DIP guidelines allow free pricing of secondary offers.
Timing of the issue is important and determines the size and pricing of the issue. In a strong market, company may look at secondary offer favourably.
Merchant banker takes a call on the appropriate timing of the issue so that it satisfies both the issuer and the investor.

Rights Issue

Made to existing share holders only.
Entitlement to apply for and receive additional shares.
It’s a RIGHT, not an OBLIGATION.
For ascertaining the right, record date is fixed.
Entitlement ratio is fixed e.g. 1:2
- Thus if a shareholder has 200 shares he is entitled for 100 shares.

Shareholder can exercise or renounce his right to a third party.
Renouncee is entitled to subscribe & receive rights shares.
If the right is neither exercised nor renounced, it lapses and the issue is undersubscribed to that extent.
Promoters can seek to apply for those shares. The impact is change in shareholding pattern.
Oversubscription can occur if shareholders apply for additional shares. The letter of offer should specify the right to apply for more shares.

Considerations for Issuer for Issuing Rights

Objective of the Issue: Fund raising, consolidation or shareholder reward.
Is this an adequate source of financing?
If seeking shareholder loyalty, compare vis-à-vis bonus issue & higher dividend payout.
Overall condition of the primary markets.
Likelihood of poor response and its effect on market price of share.
Analysis of alternate sources of funding such as private placement.

Investor Considerations for Investing in Rights Issue

Cost of rights share vis-à-vis carrying cost or renouncing price.
Future prospects of company & fund utilization.
Medium term expectations of company’s market performance.


Composite Issue

Composite issue is a simultaneous issue of a rights issue and a public issue by a listed company and is also known as “rights-cum-public issue”.
Company prices it according to the value that the share can command.
DIP guidelines provide that a company making a composite issue of capital may issue securities at differential prices in the rights issue and the public issue. Justification for differential pricing has to be provided for in the offer document for the public issue.
Promoters contribution shall, at the option of the promoters, be either 20% of the proposed public issue or 20% of the post issue capital. Rights component of the composite issue is excluded to calculate the Post issue capital .
Other provisions under the DIP guidelines, the Companies Act, SCRA and the listing guidelines apply to composite issues as they apply separately to a rights issue and a public issue separately.

Dividend and bonus track record of company.

OTC Issue

Companies making OTC issues are exempt from the eligibility norms discussed earlier. The following conditions should be fulfilled
The company should be sponsored by a member of OTCEI
It should appoint at least 2 market makers
Minimum promoters contribution shall be 20% of the post issue capital with a lock in of 3 years
Listing Criteria of the OTCEI are as follows
Minimum paid up capital of 30 lakh and the minimum offer to the public should be 25% of the issued capital or Rs 20 Lakh which ever is higher
Company should be sponsored by a merchant banker
Companies need not fulfill any dividend paying track record


Public Issue of Debt Securities

Rationale for Public offers of Debt Instruments

Accessing Capital market better option than raising term loans from financial Institutions and Banks.
a) Syndication process for term loans would be a longer process than accessing the capital markets. b) In case of buoyant primary debt market cost of public floatation would be cheaper than interest and other costs payable on term loans.
Accessing public issue market is better than private placement of debt securities.


Issue of Debt Convertibles

Sometimes a company cannot afford to expand its equity base immediately with a public equity offering. This happens in large capital intensive projects where gestation period to yield good cash flow is very long.

In the past several major projects such as Reliance Petroleum (first issue) Essar Oil, MRPL and other had relied on the debt convertible route to raise funds from the pubic issue market.

Debt Market for Public Offers and Private Placement

Capital market has three main segments.
The debt market
The equity market
The derivatives market

Debt markets are a source of funds for foreign issuers also.
Debt market can three components.
Domestic debt or bond market
Foreign bond market
Eurobond market

In domestic bond market, the issuers within the country make issues.
In foreign bond market, the issuers are from other countries and investors are residents of a country.
In Euro bond markets, the issuers as well as the currency do not belong to the country.
For example, India may make a euro issue of yen and Americans, who are holding yen may subscribe to the issue.

Foreign Bond Market

Local regulations of a host country have to allow issue of foreign bonds.
USA
Japan
Germany
Switzerland and
UK
are the largest markets for foreign bonds

Other countries that permit foreign bond issues

France
Belgium
Sweden
Spain
Netherlands


USA
Yankee Bonds
Japan
Samurai Bonds (through public issue)
Shibosai Bonds (through private placement)
Shogun Bonds (non-Yen denominated)
UK
Bulldogs
Spain
Matador Bonds
Netherlands
Rembrandt Bonds


US Foreign Bond market

Public issue requires compliance with local listing requirement of the SEC in the US.
This includes stringent disclosure requirements and compliance with US GAAP accounting.
144A
An alternative to public issue is 144A Route

Euro Bond Market

There are regulations in several countries that govern the issuance of euro bonds denominated in their currencies.
Secondary market trades in euro bonds are largely self regulated under the auspices of International Securities market association.

Equity Issues Through Depository Issues


Important Concepts Associated with Public Offer

Firm Allotments
Reservations
Net public offer
Lock-in
Basis of allotment
Fixed Price Offer
Book Built Offer

Firm Allotments and Reservations
Allotment and Reservation are tools for pre-marketing a sizable part of issue thereby bringing down the risk of the issue.
Allotment – Investor or category of investor are approached by lead manager or the issuer company to subscribe the issue on a firm basis. ‘FIRM’ - ability to get same quantity as subscribed for in full. Investors have to make commitment to bring in their firm subscription even before issue is floated. This indicates the offer document showing certain amount of share being set aside for such investors, balance available for public subscription.
Reservation - It’s a modification of allotment, where allotment is done on competitive basis among certain category of investors. Reservation is without any prior commitments. If there is an over-subscription, then allotment happens on pro-rata basis.
Permanent Employees (not exceeding 10% of issue size), shareholders of group companies (not exceeding 10%, no firm allotments), mutual funds, Foreign Institutional Investors, Banks and Financial Institution and Multilateral Institution are category of person which are eligible for allotment or reservation.

Lock-in of Shares
Concept of Lock-in of promoters’ share and other share capital is for purpose of preventing such shareholders in making an unfair gains or exits from company and also for providing stabilization period for company’s post-script issue.
Provisions of lock-in of promoters’ share and other share capital are provided in Page 234
Differential Pricing and Price Band
Any unlisted company making an IPO of equity shares or convertibles may issue such securities to applicants in the firm allotment category at a price different from price at which 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 net offer is being made to Indian Public.
A justification has to be furnished in offer document on the price differential for the firm allotment category
The issuer company can mention a price band of 20% (the cap should not be more than the floor by 20%) in the offer documents filed by SEBI and the actual price can be determined at a later date before filing of offer document with ROC (Registrar of Companies)

Public Issue
Offer for Sale
Right Issue
Preferential Allotment
Private Placement
QIBs
Offer Document

Green Shoe Option

Refers to the option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism thru a Stabilizing Agent
The GSO can be exercised for a maximum of 15% of the size of the issue
The SA operates a special de-mat account for the purpose of allotment of shares and trading in case the GSO is exercised
SA uses the proceeds from allotment of shares to buyback shares from market to suck excess liquidity in any to stabilize the price

On-line IPO (e-IPO)

Applicants -> Brokers -> Stock Exchanges -> issuer company

There is change in only the procedure in which applications are made and proceeds are received the rest is same as Retail IPO
Applicant places order through the online system of the broker- application need not me submitted at this stage
The broker may collect a margin money from applicant which may be upto 100% of the bid amount
This margins are placed in escrow account of brokers with the clearing house bank
The broker sends at the end of each day of the issue, figures of valid orders/bids to the registrar and the final position at the closure of the issue
After the basis of allotment is finalized, registrar sends the allocation details to the stock brokers through stock exchanges.

The brokers inform the successful bidders to fill the application forms and remit the money to brokers. The margin money paid earlier is adjusted
The applications are then forwarded by the brokers to the exchange.
On the pay-in day brokers remits the amount collected into the escrow account. The broker shall pay the application money on behalf of defaulted successful bidders
The clearing house debits this account and credits the proceeds to the company’s issue account
The registrar then after receipt of funds instructs the depository to credit the escrow securities account of each brokers. The brokers in turn credits the demat accounts of its clients with the depositary participants. The broker then confirms the same to the registrar


Process Overview of Public Issues in India

Methodologies for Making Issues in India

100% Retail (Fixed Price Issue)
Book Built (Price Discovery Issue)
Online IPOs
Bought out Deals
OTC issues

Fixed Price Offer - 100% Retail (Fixed Price Issue)

Issue is made by offering directly to the investors from public.

Advantages:
Wide dispersal of shareholding among retail investors.
No need to approach QIB’s to subscribe to the issue

Disadvantages:
High floatation costs as more investors need to be approached through marketing campaigns.
Lot more issue stationary has to be issued
Issue is made with fixed pricing

Book Built Offers (Price Discovery Issue)

Book building allows issuer to make a public issue through process of price discovery.
A Floor Price of the issue is determined in consultation with the merchant banker.
Companies can make an issue to the extent of 100% or 75% of Net Public Offer (NPO) through book build route. In case of 75% route the rest 25 % would be under retail route at the cut off price.
A company that does not fulfill the criteria for 100% retail issue has no option but to make an IPO through book built route.

Bought out Deals

Common occurrence in the IPO boom of early nineties.
Alternative to a straight IPO
A company places certain amount of stock with private investors with the understanding that these investors would take the company public by offering their shares for sale within an agreed time frame.
Investors are typically Investment banks, institutional investors such as Mutual funds, Non banking financial institutions, banks and financial institutions.
BOD is a recognized route for companies to go public on the OTC Exchange of India.
It provides several advantages to smaller companies:
In saving time
Reducing expenses of retail IPO
Assured of funds from the investors that are not guaranteed in a public issue unless it is fully underwritten
Normal maturity profile of 6-12 months.



Online IPOs

The entire process of receiving applications and application proceeds as well as making allotment are done online.
No involvement of the banking channels and registrar for the verification of applicants instead brokers of concerned exchange are used for all these.
Reduce time elements to as little as possible.
Company has to enter into a separate agreement to issue online IPOs.




Approvals and Appointments

Pre-Issue Procedures

Hold a board meeting, consider Public Issue, empower MD
Hold an EGM where shareholders approve and authorize the amount of funds to be raised by passing a special resolution under section 81 (A) of Companies Act.
Identify a good merchant banker, appoint as lead manager (LM) for the issue, enter into a MoU with LM.
In case of more than one LM for the issue, finalize the inter-se allocation of responsibilities between them

Role of Merchant Banker in issue management

Appointment of other required intermediaries, MoU and Inter- se allocation of Responsibilities
Issue structuring and pricing
Due Diligence
Preparation of Offer Document
Pre-Issue Compliance
Liaison with SEBI and Stock Exchange
Co-ordination with other functionaries
Issue Marketing
Functions during the Issue
Post Issue Compliance


Procedural Aspects of a 100% Retail IPO

LM starts Due Diligence on the company, checks all documents, supporting documents, certificates and all relevant information (2-3 weeks)
In parallel LM prepares draft prospectus / draft offer document
LM advises the company in appointments of other intermediaries-
Registrar to the issue (registered with SEBI)
Bankers to the issue (registered with SEBI)
Printer
Advertising agency
LM draws up the issue budget
Fees of LM, underwriters, registrar and bankers,
Brokerages
Postage, stationary
Issue marketing
LM finalizes draft prospectus, approval of BoD, filed with SEBI
SEBI conveys observations, objections regarding draft prospectus in 21 days, places draft prospectus on their website and invites comments from general public
Company makes listing applications to Stock Exchanges accompanied by 10 copies of draft prospectus. Draft prospectus uploaded on websites of LM, underwriters
Company enters agreement with registrar and Depositories (NSDL, CDSL) for offering shares in Demat mode
LM solicits underwriting from prospective underwriters (optional in case of Retail issue, mandatory in book-building)
Company carries out all modifications in draft prospectus suggested by SEBI, Stock exchanges
Get the approval of Board of the final format of Draft prospectus and file the same with ROC
File a second due diligence statement with SEBI at the same time
The prospectus filed with ROC has validity period of 90 days
LM and company decides plan of marketing the issue, release of advertisements, dispatch of stationary, finalizing the collection centers and date of opening the issue
Marketing of the issue
LM along with advertising agency
Press meetings, brokers’, investors’, journalists meetings
Advertisements regulated with DIP and rules of Stock Exchange
A mandatory advertisement 10 days prior to the opening of issue- ‘announcement advertisement’ (a.k.a. Abridged Prospectus)
Optional advertisements subject to certain rules



Post- Issue Procedures


2 reports are required to be furnished to SEBI post issue
The 3 day report from the day of closure of the issue
The 78 day report from the day of closure of the issue
in prescribed formats
LM must coordinate the process of collection of subscription figures from the bankers to the issue, processing of applications by the registrar, despatch of allotment letters and refund orders to all applicants within the prescribed time, attending to investor grievances and ensuring the listing of shares on the Stock exchange
LM should ensure the full subscription of issue before announcing closure
In case of undersubscribed issues LM should ensure that underwriters honour their commitments within 60 days from the date of closure.
LM has to furnish to SEBI the list of defaulted underwriters
LM ensures issue proceeds are kept in separate bank
LM releases the advertisements announcing the closure of the issue
Basis of allotment is finalized the responsibility of which lies on executive director and MD of the designated stock exchange along with LM and the registrar
LM shall ensure that the demat credit or despatch of shares and refund orders to the allottees is completed within 2 working days after the basis of allotment is finalised
LM shall ensure all steps for completion of all formalities for listing of shares at all stock exchanges completes within 7 days, an advertisement furnishing details of basis of allotment has to be issued in 10 days of finalizing the basis of allotment