Having decided to go public, the company must do a series of things to ensure a successful initial public offering. The first and foremost step would be to appoint a merchant banker. Merchant bankers are called Book Running Lead Managers (BRLM)/Lead Managers (LM). (View Highlight)
The job of a merchant banker is to assist the company with various aspects of the IPO process, including:
• • Conduct due diligence on the company filing for an IPO, ensure their legal compliance and issue a due diligence certificate.
• Work closely with the company and prepare their listing documents, including Draft Red Herring Prospectus (DRHP). We will discuss this in a bit more detail at a later stage.
• Underwriting shares – In underwriting shares, merchant bankers agree to take up the unsubscribed portion of an IPO. The underwriting is taken up for fresh shares issued during the IPO. The merchant banker takes up the remaining shares if the subscription is above a defined threshold but is not subscribed fully. If the subscription is below the threshold, the IPO is deemed to have failed. All investor money is unblocked in the investors’ accounts. In March 2020, Anthony Waste Limited IPO’s subscription was below the threshold.
• Help the company arrive at the price band for the IPO. A price band is the lower and upper limit of the share price within which the company will sell its shares to IPO applicants. For example, the current IPO of Keystone Realtors Limited has a price band of Rs.514 to Rs.541.
• Help the company with the roadshows. The roadshow is like a promotional/marketing activity for the company’s IPO
• Appointment of other intermediaries, namely, registrars, bankers, advertising agencies, etc. The Lead manager also makes various marketing strategies for the issue. (View Highlight)
Every step in the IPO sequence must happen under the SEBI guidelines. In general, the following is the sequence of steps involved.
• • Appoint a merchant banker. In case of a large public issue, the company can appoint more than one merchant banker
• Apply to SEBI with a registration statement – The registration statement contains details on what the company does, why the company plans to go public, and the financial health of the company
• Getting a nod from SEBI – Once SEBI receives the registration statement, SEBI takes a call on whether to issue a go-ahead or a ‘no go’ to the IPO
• DRHP – If the company gets the initial SEBI nod, then the company needs to prepare the DRHP. A DRHP is a document that gets circulated to the public. Along with a lot of information, DRHP should contain the following details:
• The estimated size of the IPO
• The estimated number of shares being offered to the public
• Why the company wants to go public, and how does the company plan to utilize the funds along with the timeline projection of fund utilization
• Business description including the revenue model, expenditure details
• Complete financial statements
• Management Discussion and Analysis – how the company perceives future business operations to emerge
• Risks involved in the business
• Management details and their background
• • Market the IPO – This would involve TV and print advertisements to build awareness about the company and its IPO offering. This process is also called the IPO roadshow.
• Fix the price band – Decide the price band between which the company would like to go public. Of course, this can’t be way off the general perception. If it is, then the public will not subscribe to the IPO
• Book Building – Once the roadshow is done and the price band fixed, the company has to officially open the window during which the public can subscribe for shares. For example, if the price band is between Rs.100 and Rs.120, the public can choose a price they think is fair enough for the IPO issue. The process of collecting all these price points and the respective quantities is called Book Building. Book building is perceived as an effective price discovery method.
• Closure – After the book building window is closed (generally open for a few days), the price point at which the issue gets listed is decided. This price point is usually the price at which maximum bids have been received.
• Listing Day – This is the day when the company gets listed on the stock exchange. The listing price is the price decided based on market demand and supply on that day and the stock is listed at a premium, par, or discount of the cut-off price. (View Highlight)
During the bidding process, investors can bid for shares at a particular price within the specified price band. This whole system is referred to as the Primary Market around the date of the issue where one bids for shares. The moment the stock gets listed and debuts on the stock exchange, the stock starts to trade publicly. This is called the secondary market. (View Highlight)
Under subscription – Let’s say the company wants to offer 100,000 shares to the public. During the book-building process, it was discovered that only 90,000 bids were received, then the issue is said to be under-subscribed. This is not a great situation, as it indicates negative public sentiment. (View Highlight)
Oversubscription – If there are 200,000 bids for 100,000 shares on offer, then the issue is said to be oversubscribed two times (2x) (View Highlight)
Green Shoe Option – Part of the issue document that allows the issuer to authorize additional shares (typically 15 percent) to be distributed in the event of oversubscription. This is also called the overallotment option. (View Highlight)
Fixed Price IPO *–*Sometimes, the companies fix the price of the IPO and do not opt for a price band. Such issues are called fixed-price IPO (View Highlight)
Price Band and Cut off price *–*A price band is a price range between which the stock gets listed. For example, if the price band is between Rs.100 and Rs.130, then the issue can list within the range. Let’s say it gets listed at 125; 125 is the cut-off price. (View Highlight)
