The money one earns is partly spent and the rest saved for meeting future expenses. Instead of keeping the saving idle one may like to use saving in order to get return on it in the future. This is called investment. Investing is not about putting all your money into the "Next big thing," hoping to make a killing. Investing isn't gambling or speculation; it's about taking reasonable risks to reap steady rewards.
When to Invest?
The sooner one start investing the better. By investing into the market right away you allow your investments more time to grow, whereby the concept of compounding interest swells your income by accumulating your earnings and dividends. Considering the unpredictability of the markets, research and history indicates these three golden rules for all investors 1. Invest early 2. Invest regularly 3. Invest for long term and not short term
Types of Investment
1) Financial Instruments Equities
Equities are a type of security that represents the ownership in a company. Equities are traded (bought and sold) in stock markets. Alternatively, they can be purchased via the Initial Public Offering (IPO) route, i.e. directly from the company. Investing in equities is a good long-term investment option as the returns on equities over a long time horizon are generally higher than most other investment avenues. However, along with the possibility of greater returns comes greater risk.
Mutual funds
Mutual funds are financial intermidiaries which collect the savings of investors and invest them in a large and well diversified portfolio of securities such as money market instruments, corporate and government bonds and equity shares of joint stock companies. Mutual funds are conceived as institution for providing small investors with avenues of investment in capital market.since small investors generally do not have adequte time knowledge experience and resources for directly accessing the capital market, they have to rely on an intermidiary which undertakes informed investment decisions and provides the consequential benefits of professional expertise. A mutual fund allows a group of people to pool their money together and have it professionally managed, in keeping with a predetermined investment objective. This investment avenue is popular because of its cost-efficiency, risk-diversification, professional management and sound regulation. You can invest as little as Rs. 1,000 per month in a mutual fund. There are various mutual funds to choose from and the risk and return possibilities vary accordingly.
Debt instruments
Debt instruments represents a contract whereby one party lends money to another on predetermined terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to the lender. Bonds: Bonds are fixed income instruments which are issued for the purpose of raising capital. The Central or State government and public sector organizations sell bonds. The bond is generally a promise to repay the principal amount with a fixed rate of interest on a specified date, called the maturity period.
Debentures: The term debentureis used for instruments issued by private corporate sector.
Both private entities, such as companies, financial institutions, and the central or state
government and other government institutions use this instrument as a means of garnering funds. Bonds issued by the Government carry the lowest level of risk but could deliver fair returns.
Deposits
Investing in bank or post-office deposits is a very common way of securing surplus funds. These instruments are at the low end of the risk-return spectrum.
Cash equivalents
These are relatively safe and highly liquid investment options. Treasury bills and money market funds are cash equivalents.
2) 3) Non-financial Instruments
Real estate
With the ever-increasing cost of land, real estate has come up as a profitable investment proposition.
Gold
The 'yellow metal' is a preferred investment option, particularly when markets are volatile. Today, beyond physical gold, a number of products which derive their value from the price of gold are available for investment. These include gold futures and gold exchange traded funds.
Other Commodities
Other than gold other commodities are also traded. Some of them are silver, crude oil, agricultural commodities and other base metals
SECTION II MARKET
In economics, typically, the term market means the aggregate of possible buyers and sellers of a thing and the transactions between them. Financial markets are an important component of a financial system in an economy. Financial system aims at establishing regular, smooth, efficient and cost effective link between savers and investors so it helps encouraging both saving and investment. Financial systems facilitate expansion of financial market over space and time and promote efficient allocation of financial resources for socially desirable and economically productive purpose. The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. Much trading of stocks takes place on an exchange; still, corporate actions (merger, spin-off) are outside an exchange, while any two companies or people, for whatever reason, may agree to sell stock from the one to the other without using an exchange.
Types of Financial Market:The financial markets can be divided into three parts Money market Capital market Forex market
MONEY MARKET:Money market is the market for short term financial assets which are near substitutes for money. Money markt instruments are liquid and can be turned over quickly at low transaction cost and without loss.The money market is a wholesale market. The volumes are very large and generally transactions are settled on daily bases. Trading in the money market is conducted over the telephone followed by written confirmation from both the borrowers and lenders. There are large numbers of participants in the money market : commercial banks, mutual funds, investment institutions, financial instutions and finally RBI. Money market performs the crucial role of providing an equilibrating mechanism to evenout short term liquidity and in the process, facilitating the conduct of monetary policy. Short term surpluses and deficits are evenedout. The money market is the major mechanism through which the reserve bank of india influences liquidity and the general level of interest rates.
FOREX MARKET:Eevey sovereign nation has its own currency. Theoretically the monetary unit of a country can be exchnged with any other currency of any other country. Most of the international financial transactions involve an exchange of one currency for another. The ratio in which they are exchanged, or prices in terms of each other are known as exchange rate. Countries when they trade with each other require money flows. Foreign exchange markets provides the mechanism for exchanging different monetary units for each other. Sometimes, nationals of one country may prefer to hold financial assets in a foregin or dominated in a foregin because Domestic currency may be subject to variable and high inflation, rendering it a poor store of value; Foreign currency balance may reduce risks; Foreign currency assets help hedge anticipated foreign currency liabilities. The efficiency of the internation financial system and its degree of integration with individual sovereign financial system depends to a large extent on how cheaply and quickly, foregin exchange transaction can be effected.
CAPITAL MARKET:-
The capital markets consist of primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets. Secondary markets allow investors to sell securities that they hold or buy existing securities.
Primary market:The primary is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue to meet their requirements of investment and/or discharge some obligation. This is the market for new long term capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called New Issue Market (NIM). It facilitates direct conversion of savings into corporate investment or diversion of resources from the rest of the system to the corporate sector. Primary market deals in only new securities which acquire for the first time i.e. which were not available previously. They are offered to the investors for the first time.
be raising capital for converting private capital into public capital; this is known as going public.
Secondary Market:The capital market apart from the primary market also includes the secondary market where existing issues are traded. These secondary market also referred to as stock markets predominantly deal in the stock or equity shares. They enable shareholders to sell their holdings readly thereby ensuring liquidity. Any trading of a share subsequent to its primary offering, is the secondry transection. The initial buyer (in the primary market) may reoffer the securities to an intrested buyer at a price which is mutually satisfectory. An active secondary market in fact promotes the growth of the primary market and aids capital formation. For the general investors, the secondary market provides an efficient platform for trading of a securities The indian security market, in the last decade, witnessed a significant transformation in the market design, to a paperless market characterised by a transparent screen-based trading system with complete restructuring of the trading, clearing and settelement infrastructure. The indian securities market has developed and grown voluminously on several counts such as the number of stock exchanges, intermediaries and institutional investors, the number of listed stock, market captilisation, trading volumes and turnover on stock exchanges. The two major stock exchange in india are BSE (Bombay Stock Exchange) and NSE (National Stock Exchange).
Results in raising fresh resources for the Facilitate transfer of securities from one corporate corporate sector. investor to another. Securities of only listed companies can be traded at stock exchanges.
4.
5.
No tangible form or administrative setup. Has a definite administrative setup and a tangible Recognised only by the service it renders. form.
6.
Subjected to outside control by SEBI, Subjected to control both from within and outside. stock exchange and the companies act.
Advantages of IPO
The advantages of IPO are numerous. The companies are launching more and more IPOs to raise funds which are utilized for undertakings various projects including expansion plans. All types of companies with the idea of enhancing growth launch IPOs to generate funds to cater the requirements of capital for expansion, acquiring of capital instruments, undertaking new projects. IPO helps the company to create a public awareness about the company as these public offerings generate publicity by inducing their products to various investors.
The increase in the capital: - An IPO allows a company to raise funds for utilizing in
various corporate operational purposes like acquisitions, mergers, working capital, research and development, expanding plant and equipment and marketing.
Liquidity: - The shares once traded have an assigned market value and can be resold.
This is extremely helpful as the company provides the employees with stock incentive packages and the investors are provided with the option of trading their shares for a price.
Valuation: - The public trading of the shares determines a value for the company and
sets a standard. This works in favor of the company as it is helpful in case the company is looking for acquisition or merger. It also provides the share holders of the company with the present value of the shares.
Increased wealth: - The founders of the companies have an affinity towards IPO as it
can increase the wealth of the company, without dividing the authority as in case of partnership.
Low price: - Public issues provide an opportunity for picking up share at relatively low
price. Newly formed companies usually offer their share for subscription at par value,
whereas existing companies price their new issues at level which are sometimes as much as 20 to 30 % lower than the market price of their existing shares.
S. No 1 2 3 4 5
Size Of Issue Below Rs50 crore From Rs50 crore to below Rs100 crore From Rs100 crore to below Rs200 crore From Rs200 crore to below Rs400 crore Rs400 crore and above
Maximum Number Of Lead Managers Two Three Four Five More than five with SEBI approval
Enter into a contract with the issuing company clearing specifying their mutual rights,
obligation and liabilities relating to the issue. Submit a copy of the above contract to SEBI at least one month before the opening of the issue for subscription. In case of more than one LM simultaneously submit a statement detailing their respective responsibilities. Refuse acceptance of appointment as LM, if the issuing company is its associate. Not to associate with a merchant banker who does not hold SEBI registration certificate. Submit a Due Diligence Certificate to SEBI at least 2 weeks before the opening of the issue for subscription after verification of the contents of the prospectus.
Submit to SEBI various documents such as particulars of the issue, draft prospectus/ letter of
offer and other literature to be circulated to the investors/ shareholders etc. at least 2 weeks before the date of filling them with the registrar of the companies and regional stock exchanges. Ensure the modification and suggestion made by SEBI regarding above documents. Submit complete particulars with SEBI within 15 days of the acquisition of securities of the company whose issue the merchant banker is managing. Disclose to SEBI the following: a. Its responsibilities regarding the management of the issue.
b. Any change in the information previously furnished with SEBI having bearing on certificate of registration granted to it. c. Names and addresses of the company whose issue it has managed or has been associated with. d. Information regarding its activities as manager, underwriter, consultant or advisor to an issue.
Underwriters
Sound origination services represent the first essential step, but, by it self, do not guarantee that issue will be successful, i.e., will get fully subscribe. In case the issue is not well received in the market, the plan of the company/ promoters receive a set back and all expenses incurred in origination get wasted. To insure success of an issue the company/ promoters get the issue underwritten. Underwriter guarantees that he would buy the portion of issue not subscribe by the public. Such service is called underwriting and is always rendered for a commission. Underwriting guarantees success of the issue and benefits of the issuing company. underwriter to the issue could be a banker, broker, merchant or a financial institution. Suppose there is an issue is for Rs. 100crore and subscription are received only for Rs80 crore. It is then left to the underwriters to pick up the balance Rs20 crore. If underwriters dont pay up, SEBI will cancel their licenses. An
Any other details regarding the arrangements made by the underwriters for fulfilling the underwriting obligation.
Bankers to an Issue
Bankers to an issue help functioning in primary market by engaging in activities of acceptance of applications for shares/ debentures along with application money from investors in respect of issue of securities and also refund of application money to the applicants whom securities could not be allotted. They perform this function for and on behalf of the company.
An agreement with issuing company: Each banker to an issue has to enter into an agreement
with the issuing company detailing the number and address of collection centers at which applications and application money are to be received, the fee for the services and other terms and conditions of the appointment.
Submission of daily Statement: Banker to an issue has to submit to the issuing company/
registrar to an issue a daily statement giving the details regarding the number of applications and the amount of money received from the investors.
Furnish information to SEBI: Bankers to an issue has to submit the following information
to the SEBI:
a. The detail of issues for which he has been engaged as a banker to an issue.
b. The number of application and the details of application money received. c. The date wise detail when applications from investors were forwarded to the issuing company/ registrar to an issue. d. The date wise details of the amount of refund to the investors.
Inform SEBI about Disciplinary action by RBI: Banker to an issue is duty bound to inform
SEBI about any RBI action taken against him regarding issue payment.
Maintain books and records: A banker to an issue has to maintain books of accounts, records
and documents pertaining to all matters regarding which he may be required details to SEBI including name and addresses of the investors.
a. Do not keep blank application forms bearing brokers stamp at the bank premises or at the
entrance of the bank. b. Do not accept application after office hours or on bank holiday or after the date of the closure of issue. c. Do not act at any time in collusion with other agents in a manner detrimental to the interest of small investors. d. Abide by all acts, rules, regulations, notifications, directions, circular, instruction and guidelines issued by the government, RBI, Indian Bank Association and SEBI which are relevant to his operations as banker to an issue.
c. Assist in finalizing allotment of securities and processing and dispatching allotment letters d. Assist in processing and dispatching refund order, share and debenture certificate and other documents related to the capital issue e. They can also function as Depository Participants.
OF OF SECURITIES SECURITIES
Fixed price
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. In fixed price method the offer price of share is decided by the company in consultation with the lead manager much before the issue actually opens. The price at which securities will be allotted is known in advance to investors.
Placement of Securities
Under this method the securities are acquired by the issuing houses directly from the issuing company at an agreed price, and than these are placed only with their investor-clients, both individual and institutional investors at a higher price. The difference represents their remuneration out of which they bear various expenses relating to placement. And this case no underwriting is required as issue houses guarantee cent percent placement. However, sometimes, though rarely, issue houses may agree to arrange placement of shares for a fee. In this case they act only as an agent of the issuing company. Placing of unquoted securities is called private placing, an of newly quoted securities is called stock exchange placing.
Right Issue
A fresh issue of shares by an existing company to which existing shareholders in proportion to the number of share already held by them is called right issue. Rules regarding right issue are:
Only a company whose shares are already listed can make right issue.
Stock Option
Stock option or Employees Stock Option Scheme (ESOP) is a voluntary scheme of the part of the company to encourage employees participation in the company. The scheme also offers an incentive to employee to stay in the company. The scheme is particularly useful in case of companies whose business activity is dominantly based on the talent of the employees.
In case the issuer chooses to issue securities through the book building route then as per SEBI guidelines, an issuer company can issue securities in the following manner: a. 100% of the net offer to the public through the book building route. b. 75% of the net offer to the public through the book building process and 25% through the fixed price portion. c. Under the 90% scheme, this percentage would be 90 and 10 respectively.
The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'. The
bank or financial institution which takes overall control of structuring, pricing and inviting other underwriters into a dept or equity issue. Appointment of other intermediaries with consultation with book runner Underwriters
Registrar to an issue Bankers to an issue Printers Advertising agency The Issuer specifies the number of securities to be issued and the price band for orders. The Issuer also appoints syndicate members Syndicate member should be member of NSE or Over The Counter Exchange Of India (OTCEI) Issues the Draft Prospectus with consultation of book runner (containing all mandatory disclosure other than price) Draft Prospectus is filled with SEBI 21 days prior filling it with ROC and stock exchanges. 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 filling the Offer Document with ROC/ stock exchanges.
Red Herring Prospectus is issued which does not have details of either price or number of
shares being offered or amount of sale. The investors approach syndicate members to get their demand registered indicating the number of shares demanded and the prices offered. Investors have to submit the bid-cum-application form, containing the investors price and volume options, to syndicate member, who have an electronically linked platform across the country. The electronic system of BSE and NSE are used for the purpose. Syndicate member inputs the bid into the 'electronic book', then it is uploaded on BSE and NSE system. This process is called 'bidding' and is similar to open auction.
Transfer of funds to Escrow accounts a third party account which holds money safely while
a sale is in progress. A Book should remain open for a minimum of 5 days. Bids cannot be entered less than the floor price. Bids can be revised by the bidder before the issue closes. On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation criteria which may include o o o Price Aggression Investor quality Earliness of bids, etc.
The book runner and the company conclude the final price (cutoff price) at which it is willing
to issue the stock and allocation of securities. Generally, the numbers of shares are fixed; the issue size gets frozen based on the price per share discovered through the book building process.
Allocation of securities is made to the successful bidders. 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 Investors. Crediting Demat account Refund to refuse applicant by BRLM.
The listing on 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. Book Building is a good concept and represents a capital market which is in the process of maturing.
Red Herring Prospectus:The most important and time-consuming task facing the IPO team is the development of the prospectus, a business document that basically serves as a brochure for the company. The prospectus includes all financial data for a company for the past five years, information on the management team, and a description of a company's target market, competitors, and growth strategy. There is a lot of important information in the prospectus, and the underwriting team must make sure it is accurate. Every company intending to bring an IPO necessarily submits a document with SEBI. This is known as Red Herring Prospectus. It contains all the information and the factors which can influence the decision of an investor. Prospectus contains information relating to Companys name and address of its registered office
Names and address of the companys promoters, managing director, directors, company secretary, legal advisers, auditors, bankers, brokers etc. The date of opening and closing subscription list The name and address of underwriters, the amount underwritten and underwriting commission Material details regarding the project, i.e., location, plant and machinery, technology, collaboration, infrastructure facilities etc. Nature of product, marketing set-up, export potentials and obligations Past performance and future prospects Credit rating obtained from CRISIL or any other recognize rating agency A statement that the company will make an application to specified stock exchange(s) for listing of securities; and soon The director, promoters and experts can be held liable, both under civil law and under criminal law, for any misrepresentation in the prospectus or any material omission.
Price band
The offer document may have a 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 can not be more than 20%. In other words, it means that the cap should not be more than 120% of the floor price. The company decides the price band in consultation with the investment bankers, and typically after undertaking a pre-marketing exercise with some leading QIBs.
The price band can have a revision. SEBI requires that any revision in the price band has to 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. When the price band is revised, the bidding period has to be extended for a further period of three days, subject to the total bidding period not exceeding thirteen days.
Floor price
Floor price is the minimum price at which bids can be made.
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 Cut 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.
Categories of Investors
In any IPO there are three categories of investor to whom shares are offered for subscription. QIB (Qualified institutional buyers): Institutions like banks, mutual funds, FII. At least 50% of the shares are reserved for this category. NIB (Non institutional bidders): individual investors who apply for more than one lac rupees. Retail Investors: Individual investors who apply for less than one lac rupees. At least 25% is reserved for this category. The bids are first allotted to the different categories and the over-subscription (more shares applied for than the shares available) in each category is determined. Retail investors and high net worth individuals get allotments on a proportional basis. Assuming you are a retail investor and have applied for 200 shares in the issue, and the issue is over-subscribed five times in the retail category, you qualify to get 40 shares (200 shares/5). Sometimes, the over-subscription is huge or the issue is priced so high that you can't really bid for too many shares before the Rs50,000 limit is reached. In such cases, allotments are made on the basis of a lottery. Say a retail investor has applied for 5 shares in an issue, and the retail category has been oversubscribed 10 times, the investor is entitled to half a share. Since that isn't possible, it may then be decided that every 1 in 2 retail investors will get allotment. The investors are then selected by lottery and the issue allotted on a proportional basis among. That is why there is no way you can be sure of getting an allotment. In its recent amendments, SEBI has reduced the allocation of equity to Qualified Institutional Buyers (QIBs), which includes financial Institutions, banks and the newly added insurance
companies, and increased the share of retail investors. Prior to the amendments, QIB's could be allotted 'upto 60%' shares, which now stands reduced to 'upto 50%'. Also, another change was the definition of retail investors, which previously meant those investors who bid for less than 1,000 shares. However, the definition now stands changed to an investor who bids for shares less than worth Rs 50,000. New SHAPE \* norms MERGEFORMAT
Earlier
norms
Undersubscribed:A situation in which the demand for an initial public offering of securities is less than the number of shares issued. Also known as an "underbooking".
Oversubscribed:A situation in which the demand for an initial public offering of securities exceeds the number of shares issued.
Fully Subscribed:A situation in which an underwriting firm has successfully sold to investors all of its available issues of a public offering of securities. When the issue is fully subscribed, the underwriter's risk of being undersubscribed (being unable to sell its allotment of the issue) is completely removed. Also referred to in slang terms as "pot is clean".
Unsubscribed:-
Newly issued securities that have not seen much interest, or subscriptions, from investors ahead of the issue date or have not been offered by brokerages. If you wanted to own the newly issued shares, you'd only be able to purchase them as you would any other stock - through the secondary markets.
SECTION VI
SEBIs Guidelines for IPO
1. IPOs of small companies
Public issue of less than five crores has to be through OTCEI and separate guidelines apply
for floating and listing of these issues. 2. Size of the Public Issue
Issue of shares to general public cannot be less than 25% of the total issue, incase of information technology, media and telecommunication sectors this stipulation is reduced subject to the conditions that:
Offer to the public is not less than 10% of the securities issued. A minimum number of 20 lakh securities is offered to the public and Size of the net offer to the public is not less than Rs. 30 crores. 3. Promoter Contribution Promoters should bring in their contribution including premium fully before the issue Minimum Promoters contribution is 20-25% of the public issue. Minimum Lock in period for promoters contribution is five years Minimum lock in period for firm allotments is three years. 4. Collection centers for receiving applications There should be at least 30 mandatory collection centers, which should include invariably the
places where stock exchanges have been established. For issues not exceeding Rs.10 crores (including premium, if any), the collection centers shall be situated at:-
The four metropolitan centers viz. Mumbai, Delhi, Calcutta, Chennai; and at all such centers where stock exchanges are located in the region in which the registered office of the company is situated.
6. Timeframes for the Issue and Post- Issue formalities The minimum period for which a public issue has to be kept open is 3 working days and the
maximum for which it can be kept open is 10 working days. The minimum period for a rights issue is 15 working days and the maximum is 60 working days.
A public issue is effected if the issue is able to procure 90% of the Total issue size within 60
days from the date of earliest closure of the Public Issue. In case of over-subscription the company may have the right to retain the excess application money and allot shares more than the proposed issue, which is referred to as the green-shoe option.
A rights issue has to procure 90% subscription in 60 days of the opening of the issue. Allotment has to be made within 30 days of the closure of the Public Issue and 42 days in
case of a Rights issue.
All the listing formalities for a public Issue has to be completed within 70 days from the date
of closure of the subscription list.
7. Dispatch of Refund Orders Refund orders have to be dispatched within 30 days of the closure of the Public Issue. Refunds of excess application money i.e. for un-allotted shares have to be made within 30
days of the closure of the Public Issue.
The response to Reliance Power IPO by the investors was excellent for the issue got subscribed fully within a minute of its opening on 15th January, 2008. By the time bidding closed for Reliance Power IPO on 18th January, 2008, it had been subscribed 52 times and had received a commitment of around Rs. 145,080 crores. This huge response to the issue of Reliance Power IPO made it the Largest IPO in India till then. The total proceeds from Reliance Power IPO are estimated to be around Rs. 11,700 crores. JM Financial, JP Morgan, Deutsche Equities, Enam Securities, Kotak Mahindra Capital, ABN AMRO, ICICI Securities and UBS are the lead managers of Reliance Power IPO. The company Reliance Power Limited plans to use the proceeds from the IPO to set up power plants all over India.
Disadvantages of IPO
It is true that IPO raises huge capital for the issuing company. But, in order to launch an Initial Public Offering (IPO), it is also necessary to make certain investments. Setting up an IPO does not always lead to an improvement in the economic performance of the company. A continuing expenditure has to be incurred after the setting up of an IPO by the parent company. A lot of expenses have to be incurred in the form of legal fees, printing costs and accounting fees, which are connected to the registering of an IPO. Apart from such enormous costs, there are other factors as well that should be taken into consideration by the company while introducing an IPO. Such factors include the rules and regulations involved to set up public offerings and this entire process on the other hand involve a number of complexities which sometime require the services of experts in relevant fields. Some companies hire experts to do the needful to ensure a hasslefree execution of the task. After the IPO is introduced, the expenses become a routine in every activity involved. Besides, the CEO of the company would have to spend a lot of time in handling it or sometimes he hires experts to do the same. All these aspects, if not handled with efficiency, prove to be some major drawbacks related to the launch of IPOs. The launch of IPO also brings about shareholders of the company. Shareholders have ownership in the company. The primary owners of the company or the people holding maximum authority in the company cannot take decisions all by themselves once an IPO has been launched and shareholders have been formed. The shareholders have an active participation in every decision
that is being taken even if they do not hold 50 percent share of the company. They have their individual demands to be met as they own a certain percentage of stakes in the company. A major risk with shareholders is that, they can sell off their stocks any time they want, in case they see the price band of the stakes of that company is going down. This will lead to a further drop of the value of shares in the market which in turn will decrease the overall value of the company.
Forming the right team is essential before going for an IPO. Apart from the Chief Executive Officer (CEO) or the Chairman, the main members are the Chief Financial Officer (CFO), Chief Operating Officer (COO), the Company Secretary, the auditors, professional merchant bankers, and the Chief Information Officer (CIO) in the current age of information and legal advisors. It is very important for the board of directors involved in the venture to have a progressive outlook. Only an intelligent team can contribute to the success of the venture. Team building and the professional team that you bring in is very important. You should be very careful not only about land and equipment but also while deploying money and manpower. Apart from the CFO and the Company Secretary, choosing appropriate auditors makes a world of difference. Unlike other members of the team, the auditor has the additional job of assessing whether the entire accounting system is in order, is transparent and analyzing whether the numbers and projections as shown in the Excel sheet are realistic and practical. If you have a good auditor, half your battle is won. In fact, one should employ auditors at least one or two years before the IPO is launched. When the company goes public, it must make a note of disclosures about the company operations and past records. It can't afford to make any observations which are incorrect or not backed by strong evidence. You should have a team who can strategies and can plan the inflow and outflow of resources and money. 3. Definite Goals and Purposes A company should be focused and clear about the purpose of the IPO. Usually, the purpose behind making an IPO is to accumulate funds and finances for expansion and investments and above all woo the investors and consolidate as a brand. This requires a purely corporate structure. Currently, there are stringent SEBI guidelines to be followed before any company goes public. Keeping this in mind, the valuations which the company wishes to command will depend on the future goals and projects of the company, and the management team. Unless the management is fully sure of the ultimate goals, the company will not be able to come up with a high valuation for the proposed issue of shares. 4. Choosing the Right Merchant Bankers
The primary role of a merchant banker should be to act as a bridge between the organization and the investors. Firstly, the merchant banker should have a brand image in the market. A merchant banker should have the capability and the experience to handle a large-scale IPO. And they should be able to reach a larger mass of people because investors today are just not located in the metros but also in tier-II and tier-III cities." Simultaneously, they also chalk out the risk management strategies for the company since risks and ventures are two sides of the same coin. Hence a company should choose such a merchant banker who is just not professional but who understands the logistics and mechanics of the industry. Apart from being a link between the organization and the investors, a banker also has to generate interest and build up the confidence of the investors. 5. Capital Restructuring Companies should decide on the ways to deploy their capital, namely capital restructuring. Companies should be clear about the debt and equity ratio. This boils down to setting the ideal Debt-Equity Ratio (DER), which can vary from 1:1 to 2:2. "You have to work out your ratio according to the cash and the growth rate, so that they can accordingly structure their profits. In capital restructuring, you have to be sure of the DER maintained, what are the facilities you are planning to set up and what is the land value you are going to purchase. The way you are going to deploy your capital is also very important. You have to be very careful while deploying the resources and forecast the profit you will incur in three-four years' time." 6. Creating Investor Interest Confidence building and generating investor interest should be on the priority list for a company. A Company must project an image of transparency and good governance to the investors. Infosys should be the role model for all companies going in for an IPO. Many of the experts agree that IT giant Infosys is a role model because their balance sheet is very clear, they value their managers as assets and year after year they expand rapidly. A company is accountable to its investors, which is why when they go public they have to disclose company projectionspast, present and future prospects. This is where the team of advisors, consultants and legal experts comes into the picture. IPO is all about building investors' confidence so we over perform to hike up investor confidence. If you raise the expectations and do not meet them, then investors will not excuse you for the next two-
three years. Infosys, for instance, follows this strategy and gets higher multiples because they understate their plans.The projections given to the public should be realistic. The excel sheet might project rosy details of growth, but if they do not live up to the expectations then public confidence is sure to plummet to the lowest level. 7. Media Campaigns A few years ago, marketing and media campaigns were considered a luxury, but today they are absolutely necessary. They contribute to the relative success of an IPO venture. The campaigns can be in the form of road shows and extensive investor meetings. They are required because the investors need to be made aware of the company and its past performances and any important projects undertaken/completed. During the campaigns, various facets related to company performance, the need to raise money and future plans are disclosed, information that investors seek. A successful media campaign ensures complete participation in the IPO by one and all. In fact, recently when a bigwig real estate company went public, a few crores went in media campaigns alone. However, there is no short cut to success. A step-by-step approach always pays in the end.
Company
ALKALI METALS LIMITED IPO CHEMCEL BIOTECH LIMITED IPO
Issue Close Oct 15, 2008 Sep 12, 2008 Sep 11, 2008 Aug 13, 2008 Aug 13, 2008 Aug 1, 2008 Jul 24, 2008 Jul 09, 2008
20 MICRONS LIMITED IPO RESURGERE MINES & MINERALS INDIA LIMITED IPO AUSTRAL COKE & PROJECTS LTD IPO NU TEK INDIA LIMITED IPO VISHAL INFORMATION TECHNOLOGIES LTD IPO BIRLA COTSYN (INDIA) LIMITED IPO
Sep 08, 2008 Aug 11, 2008 Aug 07, 2008 Jul 29, 2008 Jul 21, 2008 Jun 30, 2008
58
55/-
43.50632
NSE, BSE NSE, BSE NSE, BSE NSE, BSE NSE, BSE NSE, BSE
Oct 6, 2008
50
to Rs 272/Rs 164/-
270/-
44.5
Sep 1, 2008 Sep 4, 2008 Aug 27, 2008 Aug 11,2008 Jul 30, 2008
65
to Rs 196/Rs 170/-
196/-
72.6
56
to Rs 192/Rs 140/-
192/-
45
7 8
49 60
150/14/-
aggregating to Rs. 10,753 Lakhs excluding Promoter Contribution of Rs 3665 Lacs 9 KSK ENERGY VENTURES LIMITED IPO SOMI CONVEYOR BELTINGS LIMITED IPO LOTUS EYE CARE HOSPITAL LIMITED IPO ARCHIDPLY INDUSTRIES LIMITED IPO FIRST WINNER INDUSTRIES LTD IPO SEJAL ARCHITECTURAL GLASS LTD IPO AVON WEIGHING SYSTEMS LTD IPO BAFNA PHARMACEUTICALS LTD IPO NIRAJ CEMENT STRUCTURAL LTD IPO ANU'S LABORATORIES LIMITED IPO GOKUL REFOILS AND SOLVENT LIMITED IPO Jun 23, 2008 Jun 24, 2008 Jun 12, 2008 Jun 11, 2008 Jun 09, 2008 Jun 09, 2008 Jun 09, 2008 May 27, 2008 May 22, 2008 May 12, 2008 May 08, 2008 Jun 25, 2008 Jun 27, 2008 Jun 20, 2008 Jun 17, 2008 Jun 17, 2008 Jun 12, 2008 Jun 12, 2008 May 30, 2008 May 28, 2008 May 15, 2008 May 13, 2008 52 52 59 48 56 48 Rs 240/60 to Rs 255/Rs 35/Rs36/- to Rs38/Rs70/- to Rs80/Rs115/-to Rs125/Rs 105/to Rs 115/Rs 10/240/346.11 NSE, BSE Jul 14, 2008
10
BSE NSE, BSE NSE, BSE NSE, BSE NSE, BSE BSE Jul 11, 2008 Jul 4, 2008 Jul 8, 2008
11 12 13
38/74/125/-
100 66.1572 55
14
58
115/-
91.94155
Jul 1, 2008
15
16
BSE
17
BSE
18
BSE
19
NSE, BSE
Jun 4, 2008
20
AISHWARYA TELECOM LIMITED IPO TITAGARH WAGONS LIMITED IPO KIRI DYES AND CHEMICALS LTD IPO SITA SHREE FOOD PRODUCTS LTD IPO
Apr 17, 2008 Mar 27, 2008 Apr 02, 2008 Mar 14, 2008 Mar 13, 2008 Feb 22, 2008 Feb 21, 2008 Feb 15, 2008 Feb 13, 2008 Feb 11, 2008 Feb 05, 2008 Feb 63 69 42 50 60 60 57 48 48 53 50 64
35/-
40
NSE, BSE NSE, BSE NSE, BSE Apr 21, 2008 Apr 22, 2008
21
540/-
23.83768
22
150/-
23
Rs 27/- to Rs 30/-
NSE, BSE
Apr 7, 2008
24
GAMMON INFRASTRUCTURE PROJECTS LTD IPO RURAL ELECTRIFICATION CORPORATION LTD IPO V-GUARD INDUSTRIES LIMITED IPO GSS AMERICA INFOTECH LTD IPO
Mar 10, 2008 Feb 19, 2008 Feb 18, 2008 Feb 11, 2008
Rs 167/to Rs 200/Rs 90/- to Rs 105/Rs 80/- to Rs 85/Rs 400/to Rs 440/Rs 80/- to Rs 90/400/34.97495 105/1561.2 167/165.5
Apr 3, 2008 Mar 12, 2008 Mar 13, 2008 Mar 7, 2008 Issue
25
26
82/-
80
27
28
40
NSE, BSE
29
NSE, BSE
30 31
85/-
57 250.87097
HOSPITALS LIMITED IPO 32 MANJUSHREE EXTRUSION LIMITED FPO IRB INFRASTRUCTURE DEVELOPERS LTD IPO SHRIRAM EPC LIMITED IPO BANG OVERSEAS LIMITED IPO KNR CONSTRUCTIONS LIMITED IPO
2008 Jan 31, 2008 Jan 31, 2008 Jan 29, 2008 Jan 28, 2008 Jan 24, 2008 Jan 24, 2008 Jan 21, 2008 Jan 18, 2008 Jan 15, 2008 Jan 11, 2008
07, 2008 Feb 06, 2008 Feb 05, 2008 Feb 01, 2008 Jan 31, 2008 Jan 29, 2008 Jan 29, 2008 Jan 24, 2008 Jan 23, 2008 Jan 18, 2008 Jan 16, 2008 56 48 58
to Rs 260/Rs 45/Rs 185/to Rs 220/Rs 290/to Rs 330/Rs200/to Rs207/Rs170/42 to Rs180/Rs425/48 to Rs450/Rs125/57 to Rs135/Rs110/49 to Rs120/Rs405/128 to Rs450/Rs700/59 to Rs 765/765/64.228 450/2280 110/65 135/30.85 440 109.00545 170 78.7457 207/35 300/50 185/510.57666
BSE
withdrawn
BSE
33
NSE, BSE NSE, BSE NSE, BSE NSE, BSE NSE, BSE NSE, BSE NSE, BSE NSE, BSE NSE, BSE
Feb 25, 2008 Feb 20,2008 Feb 20, 2008 Feb 18, 2008 Feb 19, 2008 Feb 13, 2008 Feb 12, 2008 Feb 11, 2008 Feb 1, 2008
34
35
36
37
38
39
40
41
IPO ratings and grading are among the few popular inputs investor's uses before applying in initial public offerings IPO. IPO Ratings are provided by various financial institutions & independent brokers. Few popular IPO Rating providers in India are Capital Market, Money Control, S P Tulsian's IPO recommendations etc. IPO Grading is provided by SEBI approved rating agencies including CRISIL, CARE and ICRA. IPO Grading is designed to provide investors an independent, reliable and consistent assessment of the fundamentals of new initial public offering. As IPO Grading is decided much earlier then the issue price or issue dates are finalize (usually on the IPO filing) and they just tell about the fundamentals of the company, investors should not consider them as 'Buy IPO' or 'Skip IPO' recommendations.
CRISIL / CARE / ICRA / FITCH IPO GRADING S.NO COMPANY SCALE 1 2 3 ALKALI METALS LIMITED CHEMCEL BIOTECH LIMITED 20 MICRONS LIMITED RESURGERE MINES & MINERALS 4 INDIA LIMITED AUSTRAL COKE & PROJECTS 5 LIMITED NU TEK INDIA LIMITED VISHAL INFORMATION 7 TECHNOLOGIES LTD BIRLA COTSYN (INDIA) LIMITED KSK ENERGY VENTURES LIMITED SOMI CONVEYOR BELTINGS 3 2 1 2 1 3 1-5
8 9 10
3 3 2
LIMITED LOTUS EYE CARE HOSPITAL 11 LIMITED ARCHIDPLY INDUSTRIES LIMITED FIRST WINNER INDUSTRIES 13 LIMITED SEJAL ARCHITECTURAL GLASS 14 LIMITED AVON WEIGHING SYSTEMS 15 LIMITED BAFNA PHARMACEUTICALS 16 LIMITED NIRAJ CEMENT STRUCTURALS LTD ANU'S LABORATORIES LIMITED GOKUL REFOILS AND SOLVENT 19 LIMITED AISHWARYA TELECOM LIMITED TITAGARH WAGONS LIMITED KIRI DYES AND CHEMICALS 22 LIMITED SITA SHREE FOOD PRODUCTS 23 LIMITED 2 2 3 2 3
12
17 18
1 2
20 21
GAMMON INFRASTRUCTURE 24 PROJECTS LIMITED (GIPL) RURAL ELECTRIFICATION 25 CORPORATION LIMITED (REC) GSS AMERICA INFOTECH LTD V-GUARD INDUSTRIES LIMITED SVEC CONSTRUCTIONS LTD TULSI EXTRUSIONS LIMITED SHRIRAM EPC LIMITED WOCKHARDT HOSPITALS LIMITED EMAAR MGF LAND LIMITED MANJUSHREE EXTRUSIONS LTD 33 (MEL) FPO IRB INFRASTRUCTURE 34 DEVELOPERS LIMITED 4 3 4
26 27 28 29 30 31 32
3 3 4 4
35 36 37 38 39
BANG OVERSEAS LIMITED KNR CONSTRUCTIONS LIMITED ONMOBILE GLOBAL LIMITED CORDS CABLE INDUSTRIES LIMITED J. KUMAR INFRAPROJECTS LIMITED
2 3 4 3 2
40
41
LIMITED