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Procedure for IPO & Book Building Introduction To keep pace with the globalization and liberalization process,

the government of India was very keen to bring the capital market in line with international practices through gradual deregulation of the economy. It led to liberalisation of capital market in the country with more expectations from primary market to meet the growing needs for funds for investment in trade and industry. Therefore, there was a vital need to strengthen the capital market which, it felt, could only be achieved through structural modifications, introducing new mechanism and instruments, and by taking steps for safeguarding the interest of the investors through more disclosures and transparency. As such, an important mechanism named as Book building in the system of initial public offerings (IPOs) was recognised by SEBI in India after having the recommendations of the committee under the chairmanship of Y. H. Malegam in October, 1995. SEBI guidelines recognized book building as an alternative mechanism of pricing. Under this approach, a portion of the issue is reserved for institutional and corporate investors. SEBI guidelines, 1995 defines book building as a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document. Book building process is a common practice

used in most developed countries for marketing a public offer of equity shares of a company. However, book building is a transparent and flexible price discovery method of initial public offerings (IPOs) in which price of securities is fixed by the issuer company along with the Book Running Lead Manager (BRLM) on the basis of feedback received from investors as well as market intermediaries during a certain period. Initial purchase offer (IPO) An initial public offering or initial purchase offer (IPO), referred to simply as an "offering" or "flotation", and is when a company (called the issuer) issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately owned companies looking to become publicly traded. In an IPO the issuer obtains the assistance of an underwriting firm, which helps determine what type of security to issue (common or preferred), best offering price and time to bring it to market. Procedure IPOs generally involve one or more investment banks known as "underwriters". The company offering its shares, called the "issuer", enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares. 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 Dutch auction A large IPO is usually underwritten by a "syndicate" of investment banks led by one or more major investment banks (lead underwriter). Upon selling the shares, the underwriters keep a commission based on a percentage of the value of the shares sold (called the gross spread). Usually, the lead underwriters, i.e. the underwriters selling the largest proportions of the IPO, take the highest commissionsup 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 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. Public offerings are sold to both institutional investors and retail clients of underwriters. A licensed securities salesperson ( Registered Representative in the USA and Canada ) selling shares of a public offering to his clients is paid a commission from their dealer rather than their client. In cases where the

salesperson is the client's advisor it is notable that the financial incentives of the advisor and client are not aligned. In the US sales can only be made through a final prospectus cleared by the Securities and Exchange Commission. Investment dealers will often initiate research coverage on companies so their Corporate Finance departments and retail divisions can attract and market new issues. 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 Why Book Building? The abolition of the Capital Issue Control Act, 1947 has brought a new era in the primary capital markets in India. Controls over the pricing of the issues, designing and tenure of the capital issues were abolished. The issuers, at present, are free to make the price of the issues. Before establishment of SEBI in 1992, the quality of disclosures in the offer documents was very poor. SEBI has also formulated and prescribed stringent disclosure norms in conformity to global standards. Book building acts as scientific method through which a consensus price of IPOs may be determined on the basis of feedback received from most informed investors who are institutional and corporate investors like, UTI, LICI, GICI, FIIs, SFCI etc. The method helps to make a correct evaluation of a companys potential and the price of its shares.

The main drawback of free pricing was the process of pricing of issues. The issue price was determined around 60-70 days before the opening of the issue and the issuer had no clear idea about the market perception of the price determined. The traditional fixed price method of tapping individual investors suffered from two defects: (a) delays in the IPO process and (b) under-pricing of issue. In fixed price method, public offers do not have any flexibility in terms of price as well as number of issues. From experience it can be stated that a majority of the public issues coming through the fixed price method are either under-priced or over-priced. Individual investors (i.e. retail investors), as such, are unable to distinguish good issues from bad one. This is because the issuer Company and the merchant banker as lead manager do not have the exact idea on the fixed pricing of public issues. Thus it is required to find out a new mechanism for fair price discovery and to help the least informed investors. Thats why, Book Building mechanism, a new process of price discovery, has been introduced to overcome this limitation and determine issue price effectively. Public offers in fixed price method involve a pre issue cost of 23% and carry the risk of failure if it does not receive 90% of the total subscription. In Book Building such cost and risks can be avoided because the issuer company can withdraw from the market if demand for the security does not exist. Book Building and Fixed Price Option in the IPOs A company may raise capital in the primary capital market through initial public offers (IPOs), rights issues and private placement. IPOs, the largest sources of funds in the primary

capital market, to the company are basically an invitation by a company to the public to subscribe to its securities offered through prospectus. In fixed price process in IPOs, allotments of shares to all investors are made on proportionate basis. Institutional investors normally are not interested to participate in fixed price public issues due to uncertainty of allotment and lack of opportunity cost. On the other, they like to participate largely in book built transactions as in this process the costs of public issue and the time taken for the completion of the entire process are much lesser than the fixed price issues. In Book Building the price is determined on the basis of demand received or at price above or equal to the floor price whereas in fixed price option the price of issues is fixed first and then the securities are offered to the investors. In case of Book Building process book is built by Book Runner Lead Manager (BRLM) to know the everyday demand whereas in case of fixed price of public issues, the demand is known at the close of the issue.

Steps Involved in Book Building Process:

Regulatory Framework: The Book Building guidelines were first introduced by SEBI in 1995 (clarification XIII, dated 12.10.95) for optimum price discovery of corporate securities. The SEBI, from time to time modifies the guidelines in order to upgrading the existing mechanism. The SEBI in its press release dated 7th September, 1998 prescribed the fresh guidelines for book building mechanism after thorough modification and it was again modified in 2001(dated 6.12.2001) and 2003(dated 14.08.2003). According to the SEBI, a public issue through Book Building route should consist of two portions: (a) The Book Building portion and (b) The fixed price portion. The fixed price portion is conducted like normal public issues (conventionally followed earlier) after the book built portion during which the issue price is fixed after the bid closing date. Basically, an issuer company proposing to issue capital through book building shall comply with the guidelines prescribed by SEBI. However, the main theme of SEBI guidelines regarding book building can be presented at a glance in the following manner: Offer to public through Book building process The process specifies that an issuer company may make an issue of securities to the public through prospectus in the following manner:

100% of the net offer to the public through book building process, or 75% of the net offer to the public through book building process and 25% of the net offer to the public at the price determined through book building process. 100% of the net offer to the public through100% Book Building process

The net offer to the public, under this process shall be fully underwritten by the syndicate members/book running lead managers. The syndicate members are to enter into an underwritten agreement with the BRLMs indicating the number of securities which they would like to subscribe at the predetermined price and BRLMs shall in turn enter into an underwritten agreement with the issuer company. If the syndicate members are not able to fulfill their underwritten obligations, the BRLMs shall be responsible for bringing in the amount involved. The bid remains open for at least five days. The date of opening as well as closing of the bidding, the names

and addresses of BRLMs, syndicate members, bidding terminals for accepting the bids must be mentioned in the advertisement.
SEBI is regulator to control Indian capital market. Since its establishment in 1992, it is doing hard work for protecting the interests of Indian investors. SEBI gets education from past cheating with naive investors of India. Now, SEBI is more strict with those who commit frauds in capital market. The role of security exchange board of India (SEBI) in regulating Indian capital market is very important because government of India can only open or take decision to open new stock exchange in India after getting advice from SEBI. If SEBI thinks that it will be against its rules and regulations, SEBI can ban on any stock exchange to trade in shares and stocks. Now, we explain role of SEBI in regulating Indian Capital Market more deeply with following points: 1. Power to make rules for controlling stock exchange : SEBI has power to make new rules for controlling stock exchange in India. For example, SEBI fixed the time of trading 9 AM and 5 PM in stock market. 2. To provide license to dealers and brokers : SEBI has power to provide license to dealers and brokers of capital market. If SEBI sees that any financial product is of capital nature, then SEBI can also control to that product and its dealers. One of main example is ULIPs case. SEBI said, " It is just like mutual funds and all banks and financial and insurance companies who want to issue it, must take permission from SEBI."

3. To Stop fraud in Capital Market : SEBI has many powers for stopping fraud in capital market. It can ban on the trading of those brokers who are involved in fraudulent and unfair trade practices relating to stock market. It can impose the penalties on capital market intermediaries if they involve in insider trading. 4. To Control the Merge, Acquisition and Takeover the companies : Many big companies in India want to create monopoly in capital market. So, these companies buy all other companies or deal of merging. SEBI sees whether this merge or acquisition is for development of business or to harm capital market. 5. To audit the performance of stock market : SEBI uses his powers to audit the performance of different Indian stock exchange for bringing transparency in the working of stock exchanges. 6. To make new rules on carry - forward transactions : Share trading transactions carry forward can not exceed 25% of broker's total transactions. 90 day limit for carry forward. 7. To create relationship with ICAI : ICAI is the authority for making new auditors of companies. SEBI creates good relationship with ICAI for bringing more transparency in

the auditing work of company accounts because audited financial statements are mirror to see the real face of company and after this investors can decide to invest or not to invest. Moreover, investors of India can easily trust on audited financial reports. After Satyam Scam, SEBI is investigating with ICAI, whether CAs are doing their duty by ethical way or not. 8. Introduction of derivative contracts on Volatility Index : For reducing the risk of investors, SEBI has now been decided to permit Stock Exchanges to introduce derivative contracts on Volatility Index, 9. To Require report of Portfolio Management Activities : SEBI has also power to require report of portfolio management to check the capital market performance. Recently, SEBI sent the letter to all Registered Portfolio Managers of India for demanding report. 10. To educate the investors : Time to time, SEBI arranges scheduled workshops to educate the investors Functions of Investment Banking: Investment banks carry out multilateral functions. Some of the most important functions of investment banking are as follows:

Investment banking helps public and private corporations in issuance of securities in the primary market. They also act as intermediaries in trading for clients. Investment banking provides financial advice to investors and helps them by assisting in purchasing and trading securities as well as managing financial assets

Investment banking differs from commercial banking as investment banks don't accept deposits neither do they grant retail loans. Small firms which provide services of investment banking are called boutiques. They mainly specialize in bond trading, providing technical analysis or program trading as well as advising for mergers and acquisitions

Core activities of Investment Banking

Investment banking: is the traditional aspect of investment banks that involves helping customers raise funds in the capital markets and advise them on mergers and acquisitions. Investment banking can also involve subscribing investors to a security issuance, negotiating with a merger target and coordinating with bidders. Sales and trading: Depending on the needs of the bank and its clients, the main function of a large investment bank is buying and selling products. In market making, the traders will buy and sell securities or financial products with the goal of earning an incremental amount of money on every trade. Sales is the term that is used for the sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas and take orders Research: is the division of investment banks which reviews companies and makes reports about their prospects, often with "buy" or "sell" ratings. Although the research division generates no revenue, its resources can be used to assist traders in trading, can be used by the sales force in suggesting ideas to the customers, and by the investment bankers for covering their clients.