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Introduction of Initial public offering (IPO)

Initial public offering (IPO) or stock market launch is a type of public offering
in which shares of a company are sold to institutional investors and usually
also retail (individual) investors; an IPO is underwritten by one or more
investment banks, who also arrange for the shares to be listed on one or
more stock exchange. Through this process, colloquially known as floating,
or going public, a privately held company is transformed into a public
company. Initial public offerings can be used: to raise new equity capital for
the company concerned; to monetize the investments of private
shareholders such as company founders or private equity investors; and to
enable easy trading of existing holdings or future capital raising by
becoming publicly traded enterprises.

After the IPO, those shares which trade freely in the open market are
known as the free float. Stock exchanges stipulate a minimum free float
both in absolute terms (the total value as determined by the share price
multiplied by the number of share sold to the public) and as a proportion of
the total share capital (i.e., the number of shares sold to the public divided
by the total shares outstanding). Although IPO offers many benefits, there
are also significant costs involved, chiefly those associated with the process
such as banking and legal fees, and the ongoing requirement to disclose
important and sometimes sensitive information.

Details of the proposed offering are disclosed to potential purchasers in the

form of a lengthy document known as a prospectus. Most companies
undertake an IPO with the assistance of an investment banking firm acting
in the capacity of an underwriter. Underwriters provide several services,
including help with correctly assessing the value of shares (share price) and
establishing a public market for shares (initial sale). Alternative methods
such as the dutch auction have also been explored. In terms of size and
public participation, the two most notable examples of this method is the
Google IPO[2] and Snapchat's parent company Snap Inc.[3] China has
recently emerged as a major IPO market, with several of the largest IPOs
taking place in that country.

History :

The earliest form of a company which issued public shares was the case of
the publicani during the Roman Republic. Like modern joint-stock
companies, the publicani were legal bodies independent of their members
whose ownership was divided into shares, or partes. There is evidence that
these shares were sold to public investors and traded in a type of over-the-
counter market in the Forum, near the Temple of Castor and Pollux. The
shares fluctuated in value, encouraging the activity of speculators, or
quaestors. Mere evidence remains of the prices for which partes were sold,
the nature of initial public offerings, or a description of stock market
behavior. Publicani lost favor with the fall of the Republic and the rise of the

In the early modern period, the Dutch were financial innovators who helped
lay the foundations of modern financial system.[14][15] The first modern
IPO occurred in March 1602 when the Dutch East India Company offered
shares of the company to the public in order to raise capital. The Dutch East
India Company (VOC) became the first company in history to issue bonds
and shares of stock to the general public. In other words, the VOC was
officially the first publicly traded company, because it was the first company
to be ever actually listed on an official stock exchange. While the Italian city-
states produced the first transferable government bonds, they did not
develop the other ingredient necessary to produce a fully fledged capital
market: corporate shareholders. As Edward Stringham (2015) notes,
"companies with transferable shares date back to classical Rome, but these
were usually not enduring endeavors and no considerable secondary
market existed (Neal, 1997, p. 61)."[16]

In the United States, the first IPO was the public offering of Bank of North
America around 1783.

Procedure :

IPO procedures are governed by different laws in different countries. In the

United States, IPOs are regulated by the United States Securities and
Exchange Commission under the Securities Act of 1933.[19] In the United
Kingdom, the UK Listing Authority reviews and approves prospectuses and
operates the listing regime.[20]

Advance planning :
Planning is crucial to a successful IPO. One book[21] suggests the following
7 advance planning steps:

develop an impressive management and professional team

grow the company's business with an eye to the public marketplace

obtain audited financial statements using IPO-accepted accounting

clean up the company's act

establish antitakeover defences

develop good corporate governance

create insider bail-out opportunities and take advantage of IPO windows.

Retention of underwriters

IPOs generally involve one or more investment banks known as

"underwriters". The company offering its shares, called the "issuer", enters
into a contract with a lead underwriter to sell its shares to the public. The
underwriter then approaches investors with offers to sell those shares.

A large IPO is usually underwritten by a "syndicate" of investment banks,

the largest of which take the position of "lead underwriter". Upon selling
the shares, the underwriters retain a portion of the proceeds as their fee.
This fee is called an underwriting spread. The spread is calculated as a
discount from the price of the shares sold (called the gross spread).
Components of an underwriting spread in an initial public offering (IPO)
typically include the following (on a per share basis): Manager's fee,
Underwriting fee—earned by members of the syndicate, and the
Concession—earned by the broker-dealer selling the shares. The Manager
would be entitled to the entire underwriting spread. A member of the
syndicate is entitled to the underwriting fee and the concession. A broker
dealer who is not a member of the syndicate but sells shares would receive
only the concession, while the member of the syndicate who provided the
shares to that broker dealer would retain the underwriting fee.[22] Usually,
the managing/lead underwriter, also known as the bookrunner, typically
the underwriter selling the largest proportions of the IPO, takes the highest
portion of the gross spread, up to 8% in some cases.
Multinational IPOs may have many syndicates to deal with differing legal
requirements in both the issuer's domestic market and other regions. For
example, an issuer based in the E.U. may be represented by the main selling
syndicate in its domestic market, Europe, in addition to separate syndicates
or selling groups for US/Canada and for Asia. Usually, the lead underwriter
in the main selling group is also the lead bank in the other selling groups.

Because of the wide array of legal requirements and because it is an

expensive process, IPOs also typically involve one or more law firms with
major practices in securities law, such as the Magic Circle firms of London
and the white shoe firms of New York City.

Financial historians Richard Sylla and Robert E. Wright have shown that
before 1860 most early U.S. corporations sold shares in themselves directly
to the public without the aid of intermediaries like investment banks.[23]
The direct public offering or DPO, as they term it,[24] was not done by
auction but rather at a share price set by the issuing corporation. In this
sense, it is the same as the fixed price public offers that were the traditional
IPO method in most non-US countries in the early 1990s. The DPO
eliminated the agency problem associated with offerings intermediated by
investment banks.

Allocation and pricing :

The sale (allocation and pricing) of shares in an IPO may take several forms.
Common methods include:
Best efforts contract

Firm commitment contract

All-or-none contract

Bought deal

Public offerings are sold to both institutional investors and retail clients of
the underwriters. A licensed securities salesperson (Registered
Representative in the USA and Canada) selling shares of a public offering to
his clients is paid a portion of the selling concession (the fee paid by the
issuer to the underwriter) rather than by his client. In some situations,
when the IPO is not a "hot" issue (undersubscribed), and where the
salesperson is the client's advisor, it is possible that the financial incentives
of the advisor and client may not be aligned.

The issuer usually allows the underwriters an option to increase the size of
the offering by up to 15% under certain circumstance known as the
greenshoe or overallotment option. This option is always exercised when
the offering is considered a "hot" issue, by virtue of being oversubscribed.

In the USA, clients are given a preliminary prospectus, known as a red

herring prospectus, during the initial quiet period. The red herring
prospectus is so named because of a bold red warning statement printed on
its front cover. The warning states that the offering information is
incomplete, and may be changed. The actual wording can vary, although
most roughly follow the format exhibited on the Facebook IPO red herring.
[25] During the quiet period, the shares cannot be offered for sale. Brokers
can, however, take indications of interest from their clients. At the time of
the stock launch, after the Registration Statement has become effective,
indications of interest can be converted to buy orders, at the discretion of
the buyer. Sales can only be made through a final prospectus cleared by the
Securities and Exchange Commission.

The Final step in preparing and filing the final IPO prospectus is for the
issuer to retain one of the major financial "printers", who print (and today,
also electronically file with the SEC) the registration statement on Form S-1.
Typically, preparation of the final prospectus is actually performed at the
printer, where in one of their multiple conference rooms the issuer, issuer's
counsel (attorneys), underwriter's counsel (attorneys), the lead
underwriter(s), and the issuer's accountants/auditors make final edits and
proofreading, concluding with the filing of the final prospectus by the
financial printer with the Securities and Exchange Commission.[26]

Before legal actions initiated by New York Attorney General Eliot Spitzer,
which later became known as the Global Settlement enforcement
agreement, some large investment firms had initiated favorable research
coverage of companies in an effort to aid corporate finance departments
and retail divisions engaged in the marketing of new issues. The central
issue in that enforcement agreement had been judged in court previously. It
involved the conflict of interest between the investment banking and
analysis departments of ten of the largest investment firms in the United
States. The investment firms involved in the settlement had all engaged in
actions and practices that had allowed the inappropriate influence of their
research analysts by their investment bankers seeking lucrative fees.[27] A
typical violation addressed by the settlement was the case of CSFB and
Salomon Smith Barney, which were alleged to have engaged in
inappropriate spinning of "hot" IPOs and issued fraudulent research reports
in violation of various sections within the Securities Exchange Act of 1934.
Pricing :

A company planning an IPO typically appoints a lead manager, known as a

bookrunner, to help it arrive at an appropriate price at which the shares
should be issued. There are two primary ways in which the price of an IPO
can be determined. Either the company, with the help of its lead managers,
fixes a price ("fixed price method"), or the price can be determined through
analysis of confidential investor demand data compiled by the bookrunner
("book building").

Historically, many IPOs have been underpriced. The effect of underpricing

an IPO is to generate additional interest in the stock when it first becomes
publicly traded. Flipping, or quickly selling shares for a profit, can lead to
significant gains for investors who were allocated shares of the IPO at the
offering price. However, underpricing an IPO results in lost potential capital
for the issuer. One extreme example is theglobe.com IPO which helped fuel
the IPO "mania" of the late 1990s internet era. Underwritten by Bear
Stearns on 13 November 1998, the IPO was priced at $9 per share. The
share price quickly increased 1000% on the opening day of trading, to a
high of $97. Selling pressure from institutional flipping eventually drove the
stock back down, and it closed the day at $63. Although the company did
raise about $30 million from the offering, it is estimated that with the level
of demand for the offering and the volume of trading that took place they
might have left upwards of $200 million on the table.

The danger of overpricing is also an important consideration. If a stock is

offered to the public at a higher price than the market will pay, the
underwriters may have trouble meeting their commitments to sell shares.
Even if they sell all of the issued shares, the stock may fall in value on the
first day of trading. If so, the stock may lose its marketability and hence
even more of its value. This could result in losses for investors, many of
whom being the most favored clients of the underwriters. Perhaps the best
known example of this is the Facebook IPO in 2012.

Underwriters, therefore, take many factors into consideration when pricing

an IPO, and attempt to reach an offering price that is low enough to
stimulate interest in the stock, but high enough to raise an adequate
amount of capital for the company. When pricing an IPO, underwriters use a
variety of key performance indicators and non-GAAP measures.[28] The
process of determining an optimal price usually involves the underwriters
("syndicate") arranging share purchase commitments from leading
institutional investors.

Some researchers (Friesen & Swift, 2009) believe that the underpricing of
IPOs is less a deliberate act on the part of issuers and/or underwriters, and
more the result of an over-reaction on the part of investors (Friesen & Swift,
2009). One potential method for determining underpricing is through the
use of IPO underpricing algorithms.

Dutch auction :

A Dutch auction allows shares of an initial public offering to be allocated

based only on price aggressiveness, with all successful bidders paying the
same price per share.[29][30] One version of the Dutch auction is OpenIPO,
which is based on an auction system designed by Nobel Memorial Prize-
winning economist William Vickrey. This auction method ranks bids from
highest to lowest, then accepts the highest bids that allow all shares to be
sold, with all winning bidders paying the same price. It is similar to the
model used to auction Treasury bills, notes, and bonds since the 1990s.
Before this, Treasury bills were auctioned through a discriminatory or pay-
what-you-bid auction, in which the various winning bidders each paid the
price (or yield) they bid, and thus the various winning bidders did not all pay
the same price. Both discriminatory and uniform price or "Dutch" auctions
have been used for IPOs in many countries, although only uniform price
auctions have been used so far in the US. Large IPO auctions include Japan
Tobacco, Singapore Telecom, BAA Plc and Google (ordered by size of

A variation of the Dutch Auction has been used to take a number of U.S.
companies public including Morningstar, Interactive Brokers Group,
Overstock.com, Ravenswood Winery, Clean Energy Fuels, and Boston Beer
Company.[31] In 2004, Google used the Dutch Auction system for its Initial
Public Offering.[32] Traditional U.S. investment banks have shown
resistance to the idea of using an auction process to engage in public
securities offerings. The auction method allows for equal access to the
allocation of shares and eliminates the favorable treatment accorded
important clients by the underwriters in conventional IPOs. In the face of
this resistance, the Dutch Auction is still a little used method in U.S. public
offerings, although there have been hundreds of auction IPOs in other

In determining the success or failure of a Dutch Auction, one must consider

competing objectives.[33][34] If the objective is to reduce risk, a traditional
IPO may be more effective because the underwriter manages the process,
rather than leaving the outcome in part to random chance in terms of who
chooses to bid or what strategy each bidder chooses to follow. From the
viewpoint of the investor, the Dutch Auction allows everyone equal access.
Moreover, some forms of the Dutch Auction allow the underwriter to be
more active in coordinating bids and even communicating general auction
trends to some bidders during the bidding period. Some have also argued
that a uniform price auction is more effective at price discovery, although
the theory behind this is based on the assumption of independent private
values (that the value of IPO shares to each bidder is entirely independent
of their value to others, even though the shares will shortly be traded on
the aftermarket). Theory that incorporates assumptions more appropriate
to IPOs does not find that sealed bid auctions are an effective form of price
discovery, although possibly some modified form of auction might give a
better result.

In addition to the extensive international evidence that auctions have not

been popular for IPOs, there is no U.S. evidence to indicate that the Dutch
Auction fares any better than the traditional IPO in an unwelcoming market
environment. A Dutch Auction IPO by WhiteGlove Health, Inc., announced
in May 2011 was postponed in September of that year, after several failed
attempts to price. An article in the Wall Street Journal cited the reasons as
"broader stock-market volatility and uncertainty about the global economy
have made investors wary of investing in new stocks".[35][36]

Quiet period :

Main article: Quiet period

Under American securities law, there are two time windows commonly
referred to as "quiet periods" during an IPO's history. The first and the one
linked above is the period of time following the filing of the company's S-1
but before SEC staff declare the registration statement effective. During this
time, issuers, company insiders, analysts, and other parties are legally
restricted in their ability to discuss or promote the upcoming IPO (U.S.
Securities and Exchange Commission, 2005).

The other "quiet period" refers to a period of 10 calendar days following an

IPO's first day of public trading.[37] During this time, insiders and any
underwriters involved in the IPO are restricted from issuing any earnings
forecasts or research reports for the company. When the quiet period is
over, generally the underwriters will initiate research coverage on the firm.
A three-day waiting period exists for any member that has acted as a
manager or co-manager in a secondary offering.[37]

Delivery of shares :
Not all IPOs are eligible for delivery settlement through the DTC system,
which would then either require the physical delivery of the stock
certificates to the clearing agent bank's custodian, or a delivery versus
payment (DVP) arrangement with the selling group brokerage firm.

Stag profit (flipping) :

"Stag profit" is a situation in the stock market before and immediately after
a company's Initial public offering (or any new issue of shares). A "stag" is a
party or individual who subscribes to the new issue expecting the price of
the stock to rise immediately upon the start of trading. Thus, stag profit is
the financial gain accumulated by the party or individual resulting from the
value of the shares rising. This term is more popular in the United Kingdom
than in the United States. In the US, such investors are usually called
flippers, because they get shares in the offering and then immediately turn
around "flipping" or selling them on the first day of trading.
Advantages and disadvantages

·0 Enlarging and diversifying equity base

·1 Enabling cheaper access to capital

·2 Increasing exposure, prestige, and public image

·3 Attracting and retaining better management and employees through

liquid equity participation

·4 Facilitating acquisitions (potentially in return for shares of stock)

·5 Creating multiple financing opportunities: equity, convertible debt,

cheaper bank loans, etc

·6 Significant legal, accounting and marketing costs, many of which
are ongoing

·7 Requirement to disclose financial and business information

·8 Meaningful time, effort and attention required of management

·9 Risk that required funding will not be raised

·10 Public dissemination of information which may be useful to

competitors, suppliers and customers.

·11 Loss of control and stronger agency problems due to new

·12 Increased risk of litigation, including private securities class actions
and shareholder derivative actions

Introduction of Right issue

A rights issue is a dividend of subscription rights to buy additional

securities in a company made to the company's existing security
holders. When the rights are for equity securities, such as shares, in a
public company, it is a non-dilutive pro rata way to raise capital.
Rights issues are typically sold via a prospectus or prospectus
supplement. With the issued rights, existing security-holders have the
privilege to buy a specified number of new securities from the issuer
at a specified price within a subscription period. In a public company,
a rights issue is a form of public offering (different from most other
types of public offering, where shares are issued to the general

Rights issues may be particularly useful for all publicly traded

companies as opposed to other more dilutive financing options. As
equity issues are generally preferable to debt issues from the
company's viewpoint, companies usually opt for a rights issue in
order to minimize dilution and maximize the useful life of tax loss
carryforwards. Since in a rights offering there is no change of control
and a "no-sale theory" applies, companies are able to preserve tax
loss carry-forwards better than via either follow-on offerings or other
more dilutive financings. It's one of the types in modes of issue of
securities both in public and private companies.

How it works ?

A rights issue is directly distributed as a tax free dividend to all

shareholders of record or through broker dealers of record and may
be exercised in full or partially. Subscription rights may either be
transferable, allowing the subscription-rightsholder to sell them on
the open market or not at all. A rights issue to shareholders is
generally made as a tax-free dividend on a ratio basis (e.g. a dividend
of three subscription rights for two shares of common stock issued
and outstanding). Because the company receives shareholders'
money in exchange for shares, a rights issue is a source of capital in
an organization.

Underwriting :

Rights issues may be underwritten. The role of the underwriter is to

guarantee that the funds sought by the company will be raised. The
agreement between the underwriter and the company is set out in a
formal underwriting agreement. Typical terms of an underwriting
require the underwriter to subscribe for any shares offered but not
taken up by shareholders. The underwriting agreement will normally
enable the underwriter to terminate its obligations in defined
circumstances. A sub-underwriter in turn sub-underwrites some or all
of the obligations of the main underwriter; the underwriter passes its
risk to the sub-underwriter by requiring the sub-underwriter to
subscribe for or purchase a portion of the shares for which the
underwriter is obliged to subscribe in the event of a shortfall.
Underwriters and sub-underwriters may be financial institutions,
stock-brokers, major shareholders of the company or other related or
unrelated parties.

Over‐subscription privilege :

Some rights issues include an "over-subscription privilege", allowing

investors to buy additional shares beyond the number offered with
the basic subscription privilege, if those additional shares are
available.[1] Typically the number of over-subscription shares that
can be purchased by an investor is capped as no more than the
amount of his/her basic subscription. If not all the over-subscription
rights can be filled, they will be partially filled on a pro rata basis.

Basic example :

An investor: Mr. A had 100 shares of company X at a total investment

of $40,000, assuming that he purchased the shares at $400 per share
and that the stock price did not change between the purchase date
and the date at which the rights were issued.

Assuming a 1:1 subscription rights issue at an offer price of $200, Mr.

A will be notified by a broker-dealer that he has the option to
subscribe for an additional 100 shares of common stock of the
company at the offer price. Now, if he exercises his option, he would
have to pay an additional $20,000 in order to acquire the shares, thus
effectively bringing his average cost of acquisition for the 200 shares
to $300 per share ((40,000+20,000)/200=300). Although the price on
the stock markets should reflect a new price of $300 (see below), the
investor is actually not making any profit nor any loss. In many cases,
the stock purchase right (which acts as an option) can be traded at an
exchange. In this example, the price of the right would adjust itself to
$100 (ideally).

The company: Company X has 100 million outstanding shares. The

share price currently quoted on the stock exchanges is $400 thus the
market capitalization of the stock would be $40 billion (outstanding
shares times share price).

If all the shareholders of the company choose to exercise their stock

option, the company's outstanding shares would increase by 100
million. The market capitalization of the stock would increase to $60
billion (previous market capitalization + cash received from owners of
rights converting their rights to shares), implying a share price of
$300 ($60 billion / 200 million shares). If the company were to do
nothing with the raised money, its earnings per share (EPS) would be
reduced by half. However, if the equity raised by the company is
reinvested (e.g. to acquire another company), the EPS may be
impacted depending upon the outcome of the reinvestment.

Stock dilution :
Rights offerings offset the dilutive effect of issuing more shares. For
this reason, stock-exchange rules don't require that shareholders
approve rights offerings if the company offers at least 20% of
outstanding shares at a discount.[1]:1 However, some investors see
rights offers as an "unwelcome choice between stumping up more
cash or seeing their existing holding diluted", as a result of which
rumors that a company might undertake an offering can hurt its share
price.[2] Because rights offerings are unpopular, companies typically
choose them as a last resort,[2] perhaps due to insufficient investor

Tax treatment in the United States :

If rights are exercised, they aren't taxed. Like with an ordinary

security purchase, taxation happens when the security is sold. The
cost basis of the shares is "the subscription price plus the tax basis for
the exercised rights".[4] The holding period begins at the time of

If rights are let to expire, they don't count as a deductible loss,[4] as

they have no tax basis in this case.

SEBI guidelines for IPO

Any company making a public issue or a rights issue of securities of
value more than Rs 50 lakh is required to file a draft offer document
with SEBI for its observations. The validity period of SEBI’s
observation letter is twelve months only i.e. the company has to open
its issue within the period of twelve months starting from the date of
issuing the observation letter.

There is no requirement of filing any offer document / notice to SEBI

in case of preferential allotment and Qualified Institution Placement
(QIP). In QIP, Merchant Banker handling the issue has to file the
placement document with Stock Exchanges for making the same
available on their websites.

Given below are few clarifications regarding the role played by SEBI:

(a) Till the early nineties, Controller of Capital Issues used to decide
about entry of company in the market and also about the price at
which securities should be offered to public. However, following the
introduction of disclosure based regime under the aegis of SEBI,
companies can now determine issue price of securities freely without
any regulatory interference, with the flexibility to take advantage of
market forces.

(b) The primary issuances are governed by SEBI in terms of SEBI

(ICDR) Regulations, 2009. SEBI framed its Disclosures and Investor
Protection (DIP) guidelines initially for public offerings which were
later converted into Regulations i.e. in 2009 by way of ICDR
Regulations. The SEBI DIP Guidelines, and subsequently ICDR
Regulations, over the years have gone through many amendments in
keeping pace with the dynamic market scenario. It provides a
comprehensive framework for issuing of securities by the companies.

(c) Before a company approaches the primary market to raise money

by the fresh issuance of securities it has to make sure that it is in
compliance with all the requirements of SEBI (ICDR) Regulations,
2009. The Merchant Banker are those specialised intermediaries
registered with SEBI, who perform the due diligence and ensures
compliance with ICDR Regulations before the document is filed with

(d) Officials of SEBI at various levels examine the compliance with

ICDR Regulations and ensure that all necessary material information
is disclosed in the draft offer documents.

(e) Draft offer document in respect of issues of size upto Rs. 100 crore
shall be filed with the concerned regional office of the Board under
the jurisdiction of which the registered office of the issuer company

Does it mean that SEBI recommends an issue?

SEBI does not recommend any issue nor does take any responsibility
either for the financial soundness of any scheme or the project for
which the issue is proposed to be made or for the correctness of the
statements made or opinions expressed in the offer document.

Does SEBI approve the contents of the offer document?

Submission of offer document to SEBI should not in any way be

deemed or construed that the same has been cleared or approved by
SEBI. The Lead manager certifies that the disclosures made in the
offer document are generally adequate and are in conformity with
SEBI guidelines for disclosures and investor protection in force for the
time being. This requirement is to facilitate investors to take an
informed decision for making investment in the proposed issue.

Does the SEBI clearance tag make the IPO/FPO safe for the investors?

The investors should make an informed decision purely by

themselves based on the contents disclosed in the offer documents.
SEBI does not associate itself with any issue/issuer and should in no
way be construed as a guarantee for the funds that the investor
proposes to invest through the issue. However, the investors are
generally advised to study all the material facts pertaining to the
issue including the risk factors before considering any investment.

SEBI Guidelines Regarding Rights Issues of a

SEBI guidelines regarding rights issues of a company are as follows:

1. Applicability:

These guidelines apply to the rights issues made by existing listed

companies (the companies whose equity capitals listed) Therefore a
company whose debentures/bonds are listed but not the equity (i.e.
shares) will not be governed by those guidelines. These guidelines are
not applicable where the size of the issue is below Rs. 50 lakhs.

2. Withdrawal of a Rights Issue:

Rights issue cannot be withdrawn after the announcement of the

record date. If done, then no security of the company shall be eligible
for listing up to 12 months.

3. Underwriting:

The underwriting of rights issue shall be optional.

4. Appointment of Registrar:
Appointment of Registrars to Issue shall be compulsory.

5. Appointment of Merchant Banker:

Appointment of Category-1 Merchant Banker holding a valid

certificate of registration issued by SEBI shall be compulsory.

6. Partly Paid Shares:

Partly paid shares, if any, must either be made fully paid or forfeited.

7. Letter of Offer:

Letter of offer shall contain disclosures specified by SEBI See Section

III of SEBI guidelines relating to contents of offer document.

(i) Ensure compliance of the requirements of SEBI guidelines with

respect to the offer document relating to rights issues.

(ii) File with SEBI a copy of the offer document at least 21 days before
filing of the same with the Regional Stock Exchange.

8. Agreement with Depository:

The company shall enter into an agreement with the depository for

(i) Of securities already issued;

(ii) Proposed to be issued;

(iii) The subscribers/shareholders must be given an option of holding

the shares in a dematerialised mode or by way of share certificates.

9. Closure of Rights Issue:

The rights issue must be kept open for a minimum period of 30 days.
It cannot remain open for more than 60 days.

10. Minimum Subscription:

SEBI requires the following clauses in respect of minimum

subscription to be stated in the letter of offer.

Where the company does not receive the minimum subscription of

90% of the issue the entire subscription will be refunded to the
applicants within 42 days from the date of closure of the issue. If
there is delay in the refund of the application money by more than 8
days after the company becomes liable to pay the amount, i.e. forty
two days after closure of the issue, the company will pay interest for
the delayed period, @ 15% per annum as prescribed in sub-sections
(2) and (2A) of section 73 of the Companies act, 1956.

11. No Reservation in Rights Issues:

No reservation shall be allowed in rights issue.

12. Promoters Contribution and Lock‐in‐period:

The requirement of promoter’s contribution shall not be applicable in

case of rights issues.

13. Rights of FCD/PCD Holders:

No company shall, pending conversion of fully convertible

debentures/partly convertible debentures (FCD/PCD) issue any
shares by way right unless similar benefit is extended to the holders
of such FCDs or PCDs. The benefit shall be extended by making a
reservation of shares in proportion to the convertible part of
FCDs/PCDs. The shares so reserved may be issued at the time of
conversion of such debentures on the same terms on which the
rights issue was made.
14. Restriction on Further Capital Issues:

No company shall make any further issue of capital in any manner,

whether by way of issue or otherwise, during the period commencing
from the submission of offer document to SEBI on behalf of the
company for rights issue, till the securities referred to in the said offer
document have been listed or application moneys refunded on
account of non-listing or under subscription, etc.

15. Over Subscription not to be retained:

Over-subscription shall not be retained under any circumstances.

16. Issue to be made fully Paid‐up:

Issue shall be made fully paid-up within 12months except where the
total issue size exceeds Rs. 500 crore.

17. Offer Document to be made Public:

The draft offer document filed with SEBI shall be made public for a
period of 21 days from the date of filing the offer document with
The Lead Merchant Banker shall:

(a) Simultaneously file copies of the draft offer document with the
stock exchanges where the securities offered through the issue are
proposed to be listed.

(b) Make copies of offer document available to the public.

Lead merchant banker or stock exchanges may charges an

appropriate sum to the person requesting for the copy of offer

18. No Complaints Certificate:

After a period of 21 days from the date the draft offer document was
made public, the Lead Merchant Banker shall file a statement with

(a) Giving a list of complaints received by it.

(b) A statement by it whether it is proposed to amend the draft offer

document or not, and

(c) Highlight of those amendments.

19. Dispatch of letter of offer:

In the case of rights issues, lead merchant banker shall ensure that
the letters of offer are dispatched to all shareholders at least one
week before the date of opening of the issue.

After the prospectus or letter of offer has been filed with the
Registrar of Companies or stock exchange the printed prospectus or
letter of offer shall be forwarded to SEBI at least 10 days prior to the
issue opening date.

20. Composite Issues:

The Lead Merchant Banker shall ensure that the requirements of

‘minimum subscription’ is satisfied both jointly and severally, i.e.,
independently for both rights and public issues.

21. Underwriters:

(a) (i) If the issue is proposed to be closed at the earliest closing date,
the Lead Merchant Banker shall satisfy himself that the issue is fully
subscribed before announcing closure of the issue.
(ii) In case, there is no definite information about subscription figures,
the issue shall be kept open for the required number of days to take
care of the underwriters’ interests and to avoid any dispute, at a later
date, by the underwriters in respect of their liability.

(c) In case there is a devolvement on underwriters, the Lead

Merchant Banker shall ensure that the underwriters honour their
commitments within 42 days from the date of closure of the issue.

(d) In case of under-subscribed issues, the lead merchant banker shall

furnish information in respect of underwriters who have failed to
meet their under writing devolvement’s to SEBI in the specified

22. Additional Facility for Applying:

The Lead Merchant Banker shall ensure that an advertisement giving

the date of completion of dispatch of letters of offer is released in at
least in one English National Daily with wide circulation, one Hindi
National Paper and a Regional language daily circulated at the place
where registered office of the issuer company is situated. The
advertisement must be published at least 7 days before the date of
opening of the issue.

23. Utilisation of Funds in Case of Rights Issues:

The issuer company may utilise funds collected against rights issues
after satisfying Regional Stock Exchange that minimum 90%
subscription has been received.

24. Compliance Report:

The Post-Issue Lead Merchant Banker shall file.

(a) 3 Day Post Issue Monitoring Report:

The report shall be filed on the 3rd day from the date of closure of
the subscription of the issue.

(b) 50-Day Post-Issue Monitoring Report:

This report shall be filed on the 50th day from the date of closing of
subscription of the issue.

Difference between IPO and Rights Issue :

What is the difference between IPO And Right issue. What are formalities
required to be complied with in both of them. When a listed public
company offers its shares, it has to offer them first to its existing
shareholders, then how IPO is possible ?

FPO is open for public at large

Right issues is offer only for existing shareholders on a date.

When a privately owned organization decides to raise capital by offering

shares of stock or debt securities to the public for the first time, it conducts
an initial public offering (IPO), at which point it becomes a publicly traded
company. When an existing publicly traded company decides to raise
additional capital by selling more shares of its stock or debt instruments to
the existing shareholders, the share offering is considered a Right issue.

All companies in the U.S. start as privately owned entities, which are
generally created by an individual or a group of founders. The owners
typically hold all or most of the stock, which is authorized within the
company's articles of incorporation, a legal instrument created when the
corporation is first established.

To fund operations during the early years, the owners typically put up their
own money (known as self-funding), seek venture capital backing, and/or
obtain loans or other forms of private financing from banks or other
financial entities.

If and when a company decides to sell shares of its stock to the public for
the first time to raise money for operations or other uses, it engages the
services of one or more investment banks to act as the underwriters
responsible for managing the underwriting process of the IPO.

The underwriters help the company organize and file information that is
required by regulators; create a prospectus disclosing all relevant
information about the company (covering investing basics regarding
finances and operations) and making it available to the public; assess the
value of the stock to be issued; and determine the initial price the new
shares sell for to the public. Once the initial shares are purchased in the
IPO, they start to trade among the public in the secondary market.

Right issues involve the issuance of additional shares of a publicly traded

company to the existing shareholder. Given that the company's shares
already trade in the secondary market, the underwriters handling the
offering price the shares at the prevailing stock market price on the day of
the offering.


·13 An initial public offering (IPO) is the first sale of stock issued
by a company to the public.

·14 Broadly speaking, companies are either private or public. Going

public means a company is switching from private ownership
to public ownership, where public shareholders get the right to
vote in company decisions.

·15 Public companies can have thousands of different


·16 Going public raises cash and provides many benefits for a

·17 Companies hire a syndicate of investment banks to underwrite

an IPO.

·18 An IPO company is difficult to analyze in the market because

there isn't a lot of historical info.

·19 Don't consider tracking stocks to be the same as a normal IPO,

as you are essentially a second-class shareholder.

·20 While The Right Shares allow preferential treatment to existing

shareholders, where existing shareholders have the right to
purchase shares at a lower price on or before a specified date.
The shares are issued at a discount as a compensation for the
stake dilution that will take place post issue of additional

·21 The existing shareholders can trade the rights to other

interested market participants until the date at which the new
shares can be purchased. The rights are traded in a similar way
as the normal equity shares.

·22 The amount of rights issue to the shareholders is usually at a

proportion of existing holding.

·23 The existing shareholders can also choose to ignore the rights;
however, one may not do so as existing shareholding will be
diluted post issue of additional shares and will result in a loss
(in valuation) for existing shareholder.