Getting In And Retaining On An Initial Public Offering

If it’s not impossible, it’s very difficult to get a piece of an IPO. It is done by a process known as Underwriting. When a company wants to go public, first thing it has to do is hire an Investment Bank to act as an underwriter. These underwriters raise money by way of debt or equity. To make the term very simple, underwriters are middlemen between the company and the investing public. The biggest underwriters are Merrill Lynch, Golden Sachs, Morgan Stanley, First Boston and Lehman Brothers.

Companies and underwriters group together for negotiations and the deal can be structured in a variety of ways. Here they generally discuss about nature of shares, number of shares, value of shares, etc. The company and underwriter will disclose all the information related to the issue and file with the recognized stock exchange regulators.

Stock exchange regulator then requires a Cooling off period. During this period, Stock exchange regulators will undergo a thorough verification and investigation of information provided by the company. Once they get satisfied with the reports of such investigation, they will approve the offerings after which a company can go public.

During the cooling off period, underwriter puts together commonly known as Red herring. It is an initial prospectus containing all the required information about the company. But this will not contain any information regarding the offer price and effective date.

QUIET PERIOD

During an IPOs history there are two time windows known as Quiet periods.

OVER SUBSCRIPTION

In India IPOs are recently oversubscribed due to the following reasons:

Super performance of specific sectors which increases the confidence of investors.

For example:
Power, Oil and Gas, Real estates, IT, Research and Development, Tele Communication, Infra Structure, etc.

Lesser price band

For example:

S. No. COMPANY RATE PRICE BAND
1 Idea Cellular 42 times Rs. 65 – 75 per share
2 Maytas Infra 2 times Rs. 320 – 370 per share
3 Power Finance Corporation (PFC) 73 times Rs. 77 – 91 per share
4 Deccan Aviation 1.23 times Rs, 150 – 175 per share

Best bids made by Qualified Institutional Buyers followed by Non – institutional investors.

PLAY OF MUTUAL FUNDS

During recession, most of our foreign investors sold their shares. But institutions involved in Mutual funds have pumped in or invested capital thereby showing they are BEARS.

COMPETING COMPONENTS

A comparison is always imminent when one is talking about developments. Yes, India and China are akin in rapid GDP growth, huge urbanization, growth in middle class spends, organized retail malls, infra structure, education, real estates and a growing choice of products. India and China are now global players.

RISK AND RISK MANAGEMENT

No History:

It’s hard to scrutinize the history of an established company. Its even trickery to investigate and analyze since there won’t be a lot of historical information.

Lock – up period:

Underwriters make employees of the company to sign a lock – up agreement when a company goes public. Lock – up agreements are legally binding contracts between the underwriters and employees, prohibiting them from selling any share for a specified period of time.

Flipping

It is reselling a hot IPO stock to earn profits. It’s not easy to do and it will be discouraged by low brokerage. This is because company always prefers long term investors than those short term investors.

Hype avoids:

The process of underwriting is intentionally hyped to be an enticement for investors. Hence, do not buy a stock only because it is an IPO but do it because it’s a good investment.

Regulatory Risks:

- Requirement of stock exchange.
- Enhanced corporate governance.
- Increased regulatory scrutiny.
- New regulation in relation to the publication of financials.
- Insider trading post IPO.

Share holder related risks:

- Misstatements in the listing offer document.
- Increase in number of share holders.
- Change in geographical location of share holders.
- Share price.
- Poor earnings.

Counterparty risks:

If the listing company is sued for misstatements in the prospectus, not only directors and officers be potentially liable, but further indemnities have to be provided to counterparties.

Employee risks:

Change to pension plans following an IPO may cause employees to sue the company’s pension scheme.

FUTURE OF IPO (Initial Public Offering)

“Going public is like planning a child. Once the idea catches hold, it just grows and grows. Your life becomes more complicated. It will cost you a lot of money. And… it can be a very, very rewarding experience”.
- Anonymous

Future Capital IPO gets clearance from SEBI and may hit the market soon if the news is true; this is considered one of the good IPO as it’s from the Future Group. The company is looking to raise Rs 400 crore through IPO. Future Capital Holdings is offering 64.2 lakh shares via IPO and diluting 10.16% of equity. Promoters holding will reduced to 74% from current 83%.Currently the listed Pantaloon holds 61%, which will come down to 55% post IPO. Kishore Biyani's stake will come down from 6.6% to 6% post IPO.

Source: CNBC

In India only 3-4% of the population is involved in capital marketing. It is expected that if rate of risk taking and smart investing investors increases, India can also reach nearly 35000 points.

By: Pooja Gupta

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