What is an Initial Public Offer-IPO

March 31, 2008

An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities. The sale of securities can be either through book building or through normal public issue.
Who decides the price of an issue?
Indian primary market ushered in an era of free pricing in 1992. Following this, the guidelines have provided that the issuer in consultation with Merchant Banker shall decide the price. There is no price formula stipulated by SEBI. SEBI does not play any role in price fixation. The company and merchant banker are however required to give full disclosures of the parameters which they had considered while deciding the issue price. There are two types of issues, one where company and Lead Merchant Banker fix a price (called fixed price) and other, where the company and the Lead Manager (LM) stipulate a floor price or a price band and leave it to market
forces to determi ne the final price (price discovery through book building process).
What does ‘price discovery through Book Building Process’ mean?
Book Building is basically a process used in IPOs for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.
What is the main difference between offer of shares through book building and offer of shares through normal public issue?
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. Under Book Building, investors bid for shares at the floor price or above and after the closure of the book building process the price is determined for allotment of shares. In case of Book Building, the demand can be known everyday as the book is being built. But in case of the public issue the demand is known at the close of the issue.
What is Cut-Off Price?
In a Book building issue, the issuer is required to indicate either the price band or a floor price in the 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”. The issuer and lead manager decides this after considering the book and the investors’ appetite for the stock.
What is the floor price in case of book building?
Floor price is the minimum price at which bids can be made.
What is a Price Band in a book built IPO?
The prospectus may contain either the 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 shall not be more than 20%. In other words, it means that the cap should not be more than 120% of the floor price. The price band can have a revision and such a revision in the price band shall be widely disseminated by informing the stock exchanges, by issuing a press release and also indicating the change on the relevant website and the terminals of the trading members participating in the book building process. In case the price band is revised, the bidding period shall be extended for a
further period of three days, subject to the total bidding period not exceeding ten days.
Who decides the Price Band?
It may be understood that the regulatory mechanism does not play a role in setting the price for issues. It is up to the company to decide on the price or the price band, in consultation with Merchant Bankers.
What is minimum number of days for which a bid should remain open during book building?
The Book should remain open for a minimum of 3 days.
Can open outcry system be used for book building?
No. As per SEBI, only electronically linked transparent facility is allowed to be used in case of book building.
Can the individual investor use the book building facility to make an application?
How does one know if shares are allotted in an IPO/offer for sale? What is the timeframe for getting refund if shares not allotted?
As per SEBI guidelines, the Basis of Allotment should be completed with 15 days from the issue close date. As soon as the basis of allotment is completed, within 2 working days the details of credit to demat account / allotment advice and despatch of refund order needs to be completed. So an investor should know in about 15 days time from the closure of issue, whether shares are allotted to him or not.
How long does it take to get the shares listed after issue?
It would take around 3 weeks after the closure of the book built issue.
What is the role of a ‘Registrar’ to an issue?
The Registrar finalizes the list of eligible allottees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of refund orders to those applicable are sent. The Lead Manager coordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank branches, processing of the applications and other matters till the basis of allotment is finalized, dispatch security certificates and refund orders completed and securities listed.

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