CAPITAL RAISING PROCESS

IPO: INITIAL PUBLIC OFFER

FPO: FURTHER PUBLIC OFFER
QIP: QUALIFIED INSTITUTIONAL PLACEMENT

This document is not for circulation

Introduction

Companies raise funds from the markets to meet their various requirements including capital
expenditure.

One of the most popular ways of raising capital is through an IPO: Initial Public Offering.
• A company not listed on the stock market, issues shares for the first time to the public.
• On completion of the IPO process, the shares are listed and traded on the stock exchanges:
now, the private company becomes a publicly listed company.

Appointment of Lead Managers (LMs)

One of the first steps for a company/issuer planning an IPO, is to appoint Lead Managers (Investment
Bankers) to manage the IPO.

Lead Managers are SEBI registered intermediaries. They undertake due diligence on the
company/issuer and prepare the offer document which contains all the details about the company.
They are also responsible for ensuring compliance with the legal formalities in the entire issue
process and for marketing of the issue.

Some of the well-known Investment Bankers who perform the role of lead managers are:

Axis Capital
Citigroup
ICICI Securities
India Infoline
JM Financial
Jeffries
JP Morgan Chase
Kotak Mahindra Capital
Morgan Stanley
SBI Capital Markets

Key responsibilities of the LM/Lead Manager:

1)Preparation of the offer document: The offer document for an IPO goes through several iterations
starting with the Draft Red Herring Prospectus (DRHP). This is discussed in detail further below.

2)Compliance with the SEBI regulation “Issue of Capital and Disclosure Requirements” (ICDR).

ICDR: optional reading

https://www.sebi.gov.in/legal/regulations/feb-2023/securities-and-exchange-board-of-india-issue-of-
capital-and-disclosure-requirements-regulations-2018-last-amended-on-january-13-2023-
_68231.html

Securities and Exchange Board of India regulates the securities market.

3)Marketing the issue

Meeting of the issuer and LMs: allocation of responsibilities

In an IPO, usually more than one Lead Manager (LM) is appointed: for example, in the Zomato IPO,
there were 5 lead managers:
Kotak Mahindra
Morgan Stanley
Credit Suisse (now part of UBS)
Bofa Securities (Bank of America)
Citigroup

Responsibilities as listed below are allocated among the LMs

• Structuring the issue
• Due Diligence of the company, DRHP drafting, ICDR compliance, obtaining SEBI’s go-ahead
for the IPO
• Marketing the issue
• Managing the book (for book built issues) and finalising the issue price
• Post issue activities including advising the issuer about the closure of the issue, finalisation of
the basis of allotment, listing of the shares in the stock exchange, crediting the shares to
demat account of investors, refund/unblocking of bank account to unsuccessful applicants,
and co-ordination with various agencies connected with the post-issue activity such as
registrars to the issue and bankers to the issue. Most of the post issue activities are carried
out by the Registrars to the issue, but the LM is held responsible by SEBI.

More than one LM could be associated with each of the above. One LM acts as the coordinator for
each activity.

STRUCTURING OF THE CAPITAL ISSUE

Types of issues
a) Public issue: Issue of shares to new investors.
(i) Initial Public offer (IPO): When an unlisted company makes
• a fresh issue of shares or
• offers its existing shares for sale or
• both
for the first time to the public, it is called an IPO. This results in listing and trading of the shares on
the Stock Exchanges.

(ii) Further Public offer (FPO): When an already listed company makes a fresh issue of shares to the
public or an offer for sale to the public, it is called a FPO. Vodafone Idea raised about Rs 18,000
crores through a FPO in 2024. This is the largest FPO till date.

b) Rights issue: Issue of shares by a listed company to its existing shareholders in proportion to their
holding.
c) Public cum rights issues (known as Composite Issue): shares are issued to both the public and to
existing shareholders

d) Private placement (by a listed company): issue of shares to a select group of persons not
exceeding 49. Issuing shares through private placement is faster and less expensive compared to
public/rights issues.

Private placement of shares can be of three types:

(i) Qualified institutions placement (QIP): Issue of equity shares by a listed company to Qualified
Institutions Buyers (QIBs). It can also include offer for sale by promoters.

Following entities are considered to be QIBs

• mutual funds
• banks
• financial institutions
• insurance companies
• venture capital funds
• alternative investor funds
• foreign portfolio investors
• pension funds
• provident funds

Promoters are not eligible to invest in QIP.

(ii) Preferential issue: Issue of shares by a listed company to a select group of persons, not restricted
to QIBs. Shares can be issued to promoters/others through this process; for example, Maruti, issuing
shares to its promoter Suzuki, Japan.

(iii) Institutional Placement Programme (IPP): Issue of equity shares by a listed company, or offer for
sale of shares by promoter. The shares are issued only to qualified institutional buyers (QIBs) for the
purpose of achieving minimum public shareholding (25%). This route can be used by promoters to
divest their shareholding in a listed company to the extent required to achieve the minimum public
holding of 25%.

Unlisted issuers can go for IPO only as all the other issue types described above are for listed
companies.

Often, an IPO involves both

• Fresh issue of shares: the funds raised go to the company. This involves additional issue of
shares.
• Offer for sale: sale of shares by the existing shareholders (e.g., promoters, private
equity/venture capital investors). The funds raised go to the selling shareholders. OFS
provides exit for early investors like private equity/venture capital funds and partially to
promoters. There is no additional issue of shares.
IPO’s and FPO’s can be further classified into fixed price and book built issues

Fixed Price Issue

The issuer at the outset decides the issue price and mentions it in the Offer Document(prospectus).

Book built Issue

The price of the issue is discovered on the basis of demand received from the prospective investors
at various price levels. It is a price discovery mechanism. Issue price is known after issue closure.

The issuer would publish a price band, within which investors can submit their bid, when the IPO is
open. The price band is a range of price. The lower end of the price band is called the floor and the
higher end, the cap.

The spread between the floor and the cap of the price band cannot not be more than 20%. The cap
of the price band should be at least 105% of the floor price.

Cap should be
• at least 5% above the floor
• up to a maximum of 20% above the floor

For example, if the floor price is Rs 100

• Minimum cap price: Rs 105
• Maximum cap price: Rs 120

So, the book built issue’s price range can be

• 100-105
• 100-110
• 100-115
• 100-120

In case of a book built issue, the lead manager(s) appointed by the issuer act as the book running
lead manager(s) (BRLMs) for the purposes of book building i.e., lead managers are called BRLMs in
case of a book built issue.

Underwriting of the issue

Underwriters undertake to subscribe to the securities offered by the company in case they are not
fully subscribed by the public.

Underwriting is mandatory for book built issues while it is optional for fixed price issues.
IPO eligibility

The issuer should have an average operating profit of at least fifteen crore rupees, during the
preceding three years, with operating profit in each of these three years.

• If not, issue shall be through book building route, with at least 75% of net offer to the public
to be compulsorily allotted to the Qualified Institutional Buyers (QIBs).

The company has to refund the subscription money if the minimum subscription of QIBs is not
attained.

A startup issuer is unlikely to meet the profit criterion. Hence it may have to go for compulsory book
building only (there are other criteria like minimum net worth of Rs 1 crore).

In case of compulsory Book-Built Issues

a) at least 75% of net offer to public should be allotted to the Qualified Institutional Buyers (QIBs),
failing which the full subscription monies should be refunded.
b) Not more than 15% the net offer to the public is available for allocation to non-institutional
investors
c) Not more than 10% the net offer to the public is available for allocation to retail individual
investors

The rest of this document discusses the process of issuing capital through an IPO, from a book
building perspective.

Categories of investors in an IPO

a) Retail individual investors: individual investors applying or bidding for a value of not more than
two lakhs rupees. A maximum of 10% discount on the issue price can be offered to retail investors,
compared to the other categories of investors mentioned below.

b) Institutional: these are mainly QIBs: Qualified Institutional Buyers

Anchor investors (applicable to book built issues): they are QIB's who invest a minimum amount of
Rs 10 crores. Up to sixty per cent. of the portion available for allocation to qualified institutional
buyers can be made available for allotment to the anchor investors (“anchor investor portion” of the
issue).

Anchor investors apply 1 day before the IPO and get allotment on the same day. Allotment need not
be proportionate to their applied amount, and is discretionary.

Anchor investors are typically mutual funds and foreign portfolio investors.
• They bring credibility to the IPO from a retail investor perspective.
• The company has also the advantage of receiving firm investment even before the IPO is
opened for bidding.

c)Non Institutional: bidders who submit application for an amount above Rs 2 lakhs. They are
investors other than a retail individual investor and qualified institutional buyer.
d)Employees

Note:
• Qualified institutional buyers and non-institutional investors can neither lower or withdraw
their bids at any stage
• Retail individual investors can withdraw or revise their bids till issue closure date.

THE IPO PROCESS CONTINUED

Appointment of key back office intermediary: Registrar to the issue.

They are involved in finalizing the basis of allotment in an issue and for sending refunds to
unsuccessful investors, allotment details, etc.

Due diligence and preparation of the DRAFT RED HERRING PROSPECTUS (DRHP)

The Lead Manager conducts due diligence on the company and prepares the offer document known
as DRHP. In a book built issue, DRHP will typically have the issue amount but not issue price/no of
shares.

The lead manager(s) have to exercise due diligence and satisfy themselves about all aspects of the
issue including the veracity and adequacy of disclosures in the offer document (DRHP).

The DRHP has tremendous number of disclosures, including:

Overview of the industry and the issuer; business strategy; history of the issuer
Management
Promoters
Objects of the issue: how will the funds raised through the IPO be utilised, for example, new
projects/working capital
Means of finance of the project, if applicable
Financial information
Auditor qualifications in the financial statements
Capital structure of the issuing company, shareholding pattern, promoter’s stake in the company
Risk factors
Related party transactions
Outstanding litigations
Terms of the issue
Basis of offer price

Sample DRHP of Zomato (optional reading)

https://www.sebi.gov.in/web/?file=/sebi_data/attachdocs/apr-
2021/1619584567739.pdf#page=1&zoom=page-width,-16,842
Filing the DRHP with SEBI

Prior to making an initial public offer, the issuer has to file the DRHP with SEBI through the lead
manager(s). The lead manager(s) have to file the DRHP with SEBI along with a due diligence
certificate.

It can be clearly seen that the regulator puts the responsibility for the offer document/DRHP on the
Lead Managers to the issue. Hence DRHP preparation is a critical activity in the IPO process. With
several Lead Managers associated with an IPO, the LM who takes up the responsibility of due
diligence/DRHP preparation and ICDR compliance would be playing a comparatively more significant
role.

The issuer also files the draft offer document with the stock exchange(s) where the specified
securities are proposed to be listed, along with an application for in principle listing approval.

The DRHP is now available on the website of SEBI, stock exchanges and the LMs (in the case of the
recently introduced pre filing process, the DRHP is not publicly available at this stage: this document
does not address the pre filing process).

The IPO process continued

Receipt of in principle listing approval from stock exchanges.

SEBI examines the compliance of the DRHP with ICDR Regulations and ensures that all necessary
material information is disclosed in the DRHP. SEBI may seek changes to be made in the DRHP. Lead
Manager carries out the changes.

SEBI ISSUES OBSERVATION LETTER

This is the most important step from a regulatory perspective. SEBI does not approve the offer
document/DRHP, but receipt of the observation letter is a “green signal” from SEBI to the Lead
Managers/issuer to proceed with the IPO.

The LM incorporates SEBI’s observations and files updated DRHP with SEBI.

A public issue needs to be opened within twelve months from the date of issuance of the
observation letter by SEBI. Otherwise, the issuer/LM have to start the process afresh.

Marketing the issue

Subsequent to the filing of DRHP, an issuer can undertake publicity and marketing activities for its
issue for attracting subscription from institutional and retail investors as below.

Institutional Investors
The LMs conduct road shows with institutional investors to gauge their interest in the IPO. This
would also be an opportunity to get commitment from anchor investors (QIBs), who receive firm
allotment before the IPO opens.

Retail Investors

• Appointment for advertising agency for media campaign

• Broker conferences, investor conferences and press meetings

Appoint bankers to the issue/printer

Decide IPO dates

File RHP (Red Herring Prospectus) containing updated financial information, and issue dates with
SEBI and Registrar of Companies (ROC) closer to the issue date. Issuers generally open the IPO within
3-5 days of filing RHP. It has issue opening and closing dates. Red herring prospectus is an offer
document used in case of a book built public issue. It contains all the relevant details except the price
or number of shares being offered. RHP is not applicable for fixed price issues.

Deciding the price band

• Announcement of the price band at least two working days before the opening of the issue
in newspapers

Issuer is required to make price band advertisement after RHP filing but at least two days before
issue opening.

SEBI does not play any role in price fixation. The issuer in consultation with the Lead Manager
decides the price. Pricing is based on market demand and is determined based on a mix of
qualitative and quantitative factors.

The offer document contains full disclosures of the parameters which are taken into account by the
LM and the issuer for deciding the price. The quantitative parameters include EPS (earnings per
share), PE ratio (Price divided by EPS), return on net worth and comparison of these parameters with
peer group companies.

Anchor investor bidding and allotment

The bidding for anchor investors opens one day before the issue opening date. Allocation to anchor
investors is completed on the same day. If the price fixed as a result of book building is higher than
the price at which the allocation is made to the anchor investors, the anchor investors have to pay
the additional amount. However, if the price fixed as a result of book building is lower than the price
at which the allocation is made to the anchor investors, the excess amount is not refunded to the
anchor investors.

Issue opens: Bidding process

The bidding process is through an electronically linked transparent bidding facility provided by the
stock exchanges. During the period the issue is open to the public for bidding, the applicants may
approach the stock brokers of the stock exchange/s through which the securities are offered under
on-line system to place their bids.

The applicants bid for the shares quoting the price and the quantity that they would like to bid for.
The bid has to be made within the price band.

At the end of each day of the bidding period, the demand, is shown graphically on websites of the
stock exchanges BSE/NSE, for information of the public.
• The demand for the shares is known during the period when the issue is open in case of a
book built issue, while in the case of a fixed price issue, it is known only after the issue in
closed.

The retail individual investors may either withdraw or revise their bids until the closure of the issue.
The qualified institutional buyers and the non-institutional investors are not permitted to withdraw
or lower the size of their bids at any stage of the issue.

The bidding period is a minimum of three days for all categories of applicants.

On closure of the issue, the issue price also known as “cut off price” is determined.

On closure of the book building period, the Book Runner/BRLM evaluates the bids on the basis of the
demand at various price levels. Book runners and the issuing Company decide the final price at which
the securities shall be issued.

Determination of the final price, known as "cut off price"

• It is typically the highest bid price at which cumulative demand from the IPO investors
matches/exceeds the number of shares being offered.

Example for determining cut off price

Number of shares being offered: 1000
Price band: Rs 100-Rs 110

Bid price No of shares applied Cumulative

for: demand demand
110 50 50
109 150 200
108 200 400
107 150 550
106 300 850
105 450 1300
104 300 1600
103 200 1800
102 400 2200
101 200 2400
100 600 3000

In the above example, the cut off price would be Rs 105.

Only retail individual investors may bid at the "cut off" price instead of a specific bid price.

The issuer in consultation with the lead manager(s), determines the final issue price based on the
bids received as explained above, and on determination of the same, the number of shares to be
offered or issue size is determined.

Once the final issue price is determined, all bidders whose bids have been at and above the final
price shall be considered for allotment of the shares. All successful bidders would be allotted the
shares at the same price i.e., at the cut off price.

In the event of the issue being oversubscribed, retail investors are allotted shares based on a
“lottery”. For example, if the number of shares offered is 1000 and the number of bids received at or
above the cut off prices is 10,000, then the probability of getting allotment would be 10%.

The allotment to each retail individual investor cannot be less than the minimum bid lot. For
example, an issuer may specify the bid lot as 50 i.e., the minimum number of shares to be subscribed
is 50. Applications for more than 50 shares would be in multiples of 50.

Registrar to the issue finalises the basis of allotment in consultation with issuer/LM

The basis of allotment provides details of category wise demand for shares and how shares have
been allotted.

SE approval has to be obtained for the basis of allotment and approval for listing and trading.

Allocation of shares is made to the successful bidders; demat account of investors is credited and
bank account debited.

• Applications Supported by Blocked Amount (ASBA) is a method developed by SEBI to block

the funds for application in Initial Public Offer (IPO), Rights issue and Further Public Offer
(FPO). In ASBA, an IPO applicant's bank account will not be debited until they receive the
allotment of shares.

Excess application money received from successful bidders and application money from unsuccessful
bidders: the funds are unblocked in their bank account.

What if the IPO fails i.e., undersubscribed?

The minimum subscription to be received in the issue/IPO is ninety per cent. In the event of non-
receipt of minimum subscription, all application monies received shall be refunded to the applicants.

In case of underwritten issues, the issue would devolve on the underwriters, who have to meet their
obligation to the extent of devolvement/their underwriting obligation.

The final prospectus with issue price and number of shares is filed with SEBI and ROC(Registrar of
Companies) for book built issues.
[Prospectus is an offer document in case of a public issue, which has all relevant details including
price and number of shares being offered. This document is registered with Registrar of Companies
before the issue opens in case of a fixed price issue and after the closure of the issue in case of a
book built issue].

The shares now commence trading on the stock exchanges. The timeline is T+3, where T is the date
of closure of issue; within 3 working days the shares have to be listed on the stock exchange.

Issuer finally receives the IPO funds

The lead manager confirms to the bankers to the issue by way of copies of listing and trading
approvals that all formalities in connection with the issue have been completed and that the banker
is free to release the money to the issuer or release the money for refund in case of failure of the
issue.

This document aims to provide an overview of the IPO process; it does not purport to be an accurate description of primary
market regulations/ICDR.