Topic: pricing of a public issue

Kinds of issue or methods of floating new issue public issue Right issue Private placement Employees stock option plan(esop) Bonus issue

Contents of prospectus Name &brief history of company Address of the registered office Location of industry Objectives Names &address of directors Date of opening & closing of subscription list Minimum subscription Names of brokers, underwriters, bankers, managers etc.

Initial public offering (ipo) Ipo simply as an offering or floatation is when a company issues common stock or shares to the public for the first time. It can be a risky investment. It is the selling of securities to the public in the primary stock market.

Methods of pricing Fixed price method Book building process Reverse book building Green shoe option(g s o) Differential pricing

Fixed price method A fixed price of offer is decided and it is mentioned in the offer document

Book building process It is the process of price discovery It determined on the basis of demand from investors. It is the process of fixing price for an issue of securities on a feedback from potential investors based upon their perception about the company The issue price is not determined in advances, the book running lead manager(b r l m) arrives at a price at which the issue is to be made.

There is auction of shares and the issuer discloses a floor price in the red herring prospectus Price band is the price range with floor price Cap price within which the investors can bid spread of it shalln’t exceed20% In the case of ipo disclosure it at least 2 working days before the opening

In fpo(follow up public offer)at least 1day before Bid price below cutoff will reject The final prospectus with all the details will be filled with the registrar of companies The cutoff option is available for only retail individual investors .such investors need to tick the option ,which means the willingness to subscribe any price within the price band.

The process of book building In the case of it the company will first of all appoint a lead manager to the issue. Then the price band of the issue is decided A price band is a range of lower level and the upper level within which the investors can bid. The lower level of the price band is called floor price . The upper level is cap price The lead manager is book runner

He will open a book in which the no: of shares applied for all as well as the price quoted by the select group of investors are recorded. On the closure of the issue, based on the demand received at various price levels within the specified price band, the cutoff price is determined. normally all bids below cutoff price will be rejected.

Types of book building system It is a type where the demand for the securities and the bids need to be displayed online on the website of the stock exchange It is the book which is not made public and cannot know about the bids submitted .by other bidder Open book Closed book

factor Fixed price Book building price Exact price at which securities are available are known in advance Only an indicative price range is known in advance. exact price is not known in advance demand Market demand for the securities is known only after the closure of issue Demand for the securities can be known daily based on bids payment Payment for the securities is to be given at the time of application Payment need to be given only at the time of allotment refund Refund will be made after allocation No question of refund

Book building Helps issuers to find out price and demand in advance Underwriting is not required Reduce cost and time Simple procedure Offer price would be dependable Chance of security price falling will be less Companies may be forced to issue at lower price due to the collective bargaining power of the institutional bidders Retail investors have only limited role in determining the offer price advantages disadvantages

Reverse book building It is used to delist the company’s share .it is used to find the price at which the shares are available for buyback from the shareholders. It would be above or equal to floor price done under the provisions of SEBI guidelines2003,co-ordinated by BRLM. It is a process by a company to determine the price at which its own shares shall be bought back from the shareholders

Offers are collected from the shareholders at various price levels for selling their shares to company. The buyback price is determined after the offer closing date.

Green shoe option (GSO) There could be much difference between the issue price and market price of a share, immediately after listing .It would either affect the existing shareholders or the new shareholders. In order to avoid such situation companies adopt a new method called GSO.it is also called over allotment option.

It was green shoe company which adopted this method for the first time and thus got this name The money raised through this over allotment will be kept in a separate bank a/c under the control of a merchant banker called stabilising agent

The merchant banker is responsible for stabilising the price for the specified period after the listing of the securities in the stock exchange It help the investors due to 2 reason It help to reduce instability in post listing price The chances of getting allotment is more in the case of such issues due to over allotment to the extent of15%

Differential pricing It is a system of offering shares at a different price for a particular category of investors . it would be allotted at a discount .the difference shall not be more than 10%of price

Categories of investors who can invest in an IPO Qualified institutional bidders(QIB) Non institutional investors Retail investors

QIB Under this head , financial institutional such as bankers , mutual fund , insurance companies , foreign institutional investors etc are permitted to bid A maximum of 50%of issue kept reserved for investors falling under QIB category Out of 50%shares ,5%are reserved for mutual funds These are commercial banks , state industrial development corporation(SIDC),provident fund(PF),pension fund , venture capital fund , public financial institutions etc.

Non institutional investors Under this , resident Indian individuals, HUF’s, companies , corparate bodies ,NRI’s ,societies and trusts whose application size in terms of value of more than 1lakh are alloted to bid. At least 15%of total issue reserved for non instituitonal bidders.

RETAIL INVESTORS Under this, only individuals , both resident and NRI’s along with HUF’s are alloted to bid At least 35% of issue is reserved for such investors If one want to apply under this the application size in terms of value shouldn’t exceed 1lakh

THANK YOU PRESENTED BY, JITHU T REJI