Capital Markets and Investment Banking

Individual Assignment 1

Anamika Mundhra
PGP/15/004 18th March, 2012

Indian Institute of Management, Kozhikode

Discontinuing the requirement for preparing offer documents for public issues
A draft offer document is prepared by the lead man-agers appointed by the company showing the details the IPO like the purpose of raising the fund, information about the company, its financial position, future projection and risk factors involved. This draft is then submitted to the SEBI for review and approval. The SEBI can approve or make suggestions for changes wherever necessary. After approval by SEBI the final offer document is submitted to the Registrar of the issue and also the stock exchanges where the shares are to be traded. The final offer document when offered to the public along with the volume and price of the shares, it is known as Red Herring Prospectus. Investors get to know the details of any IPO through the Offer Document, which is one of the most important sources of information for the investors. Investments by the investor are governed by the principle of caveat emptor i.e. let the buyer beware. An offer document contains the following information about the company: 1. Cover Page - full contact details of the Issuer Company, lead managers and registrars, the nature, number, price and amount of instruments offered and issue size, and the particulars regarding listing are mandatory 2. Risk Factors - Under this head the management of the issuer company gives its view on the Internal and external risks envisaged by the company and the proposals, if any, to address such risks. The company also makes a note on the forward looking statements. 3. Introduction - head a summary of the industry in which the issuer company operates, the business of the Issuer Company, offering details in brief, summary of consolidated financial statements and other data relating to 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, IPO Grading in case of First Issue of Equity capital and details of underwriting Agreements are given. 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 also covered. 4. About us : Under this head a review of the details of business of the company, business strategy, competitive strengths, insurance, industryregulation (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 and dividend policy are given. 5. Financial Statements: Under this head financial statement and restatement as per the requirement of the Guidelines and differences between any other accounting policies and

6. 7. 8.

9.

the Indian Accounting Policies (if the Company has presented its Financial Statements also as per either US GAAP/IFRS) are presented. Legal and other information Other regulatory and statutory disclosures Offering information - Under this head Terms of the Issue, ranking of equity shares, mode of payment of dividend, face value and issue price, rights of the equity shareholder, market lot, nomination facility to investor, issue procedure, book building procedure in details along with the process of making an application, signing of underwriting agreement and filing of prospectus with SEBI/ROC, announcement of statutory advertisement, issuance of confirmation of allocation note("can") and allotment in the issue, designated date, general instructions, instructions for completing the bid form, payment instructions, submission of bid form, other instructions, disposal of application and application moneys, , interest on refund of excess bid amount, basis of allotment or allocation, method of proportionate allotment, dispatch of refund orders, communications, undertaking by the company, utilization of issue proceeds, restrictions on foreign ownership of Indian securities, are disclosed. Other Information - This covers description of equity shares and terms of the Articles of Association, material contracts and documents for inspection, declaration, definitions and abbreviations, etc. Source: http://www.sebi.gov.in/faq/faqoffer.html

Recommendation
As discussed above the contents of an offer document are so important that we cannot do away with it. A large number of new companies float public issues. While a large number of these companies are genuine, quite a few may want to exploit the investors. Therefore, it is very important that an investor before applying for any issue identifies future potential of a company. The offer document is the best source of such information and it helps investors to evaluate short term and long term prospects of the company.

Doing away with the concept of face value of equity shares and introducing equity shares without face value
At present, companies decide their individual face value between Rs 1 and Rs 100. This multiple face value system creates confusion among investors. It has been noticed that investors tend to look at the market price of a particular stock without knowing its face value, and the confusion is compounded when companies declare dividend as a percentage of the face value.

It was argued that the practice of declaring a percentage dividend based on a low face value was misleading, especially when the company has raised money at a hefty premium or when its stock was trading at a high price in the secondary market.

Recommendation
The concept of multiple face values should be done away with. A more practical solution to this problem is a uniform face value. There will be no confusion in the minds of the investors. Abolition of the multiple face value concepts would lead to the merger of the capital of a company with its share premium account and the declaration of dividend per share would then provide a much clearer picture of corporate performance. Also, investors often compare the prices of one stock with another although they did not have the same face value. For this, share prices, even of weak companies, often go up abnormally, ultimately upsetting the market. The practice of uniform face value is already being followed in Pakistan and few other countries.

Making listing optional for public issues

Listing means admission of securities to dealings on a recognised stock exchange. The securities may be of any public limited company, Central or State Government, quasi governmental and other financial institutions/corporations, municipalities, etc. Source: http://www.bseindia.com/about/abintrobse/listsec.asp After the approval of the exchange the company can raise capital through public issue. However, if the company wishes to raise capital without listing it can very well do it through private placements. It is in the companys own interests to get it listed in a recognised stock exchange as an investor perceives an unlisted company from an unfavourable point of view simply because it makes the investor apprehensive of the liquidity of his investment. Also, institutional investors would not show much interest in an unlisted company as again these investors essentially run funds of small investors. Also, listing on an exchange makes sure that there is transparency in all its dealings.

Recommendation
We should not possibly make listing optional. If at all it is made an optional phenomenon, then the only gainers would be the companies as they could escape the huge costs involved in listing besides having control on information that becomes public especially related to financial disclosures and other regulatory and reporting requirements that become mandatory once a company gets listed. But on the flip side, the company would seize to see investors as investors would fear a liquidity crunch plus the confidence would be low as the investor might think that the option of no listing by the company was to avoid regulatory and reporting requirements. So, an investor would not take a not listed company in favourable lights.

Making offering of equity shares with differential voting rights mandatory in IPOs
DVR shares are like ordinary equity shares but with differential voting rights. They are listed and traded in the same manner as ordinary equity shares. However, they mostly trade at a discount as they provide fewer voting rights compared to ordinary equity shares. Companies generally compensate DVR investors with a higher dividend. In India, Tata Motors were the first ones to issue Differential Voting Rights (DVRs) shares. Tata Motors had made a rights issue in 2008 to fund the Jaguar Land Rover acquisition. Following the Tata Motors DVR issue, two more Indian companies, Pantaloon Retails India and Gujarat NRE Coke, have made DVR issues. Globally, a large number of global giants have raised funds through DVR issues, prominent among them are Google, NewsCorp and Berkshire Hathaway. For the company DVR shares allow a company to dilute its equity without matching dilution in the promoters stake. At times companies issue DVR shares to fund new large projects, as due to the fewer voting rights, even a big issue does not trigger an open offer. But on the contrary, investors may be apprehensive that the company would not act in their best interests. For the investors Retail investors are primarily not much concerned with voting rights anyway. DVRs give them an opportunity to make a strategic investment as they do not want control but want a reasonably big investment in the company. But on the contrary, the retail investors would fear transparency and also the fact that the promoters could possibly very well misuse their voting rights.

Recommendation
DVRs mostly trade at a discount, largely due to the fewer voting rights they enjoy. However there are other reasons as well for the price differentials - lack of awareness, hesitation by investors and lower liquidity in the counter. For an investor, the only caveat is that before investing in a DVR, he needs to be comfortable about the fundamentals and also about the management of the company. Investing in DVR (differential voting rights) shares can be a good option for generating higher returns, given the huge discounts they are trading at as well as the higher dividend. As more companies start making DVR issues, market awareness about this would spread and the discount on DVRs would be determined by market dynamics. But since it is a new concept in India, DVRs should not be made mandatory given the pros and cons we have analysed above. It should be left to the company to decide.