Principal Steps in Floating a Public Issue

Principal Steps in Floating a Public Issue

In a public issue, investors are allowed to subscribe to the shares being issued by the company during a specified period ranging from a minimum of three days to a maximum of ten days. The issue remains open during this period for subscription by the public. This is the principal activity in the process of a public issue. Before the issue is opened for public subscription, several activities/ legal formalities have to be completed. These are the pre-issue steps or obligations. Similarly, after the issue is closed, several activities are to be carried out to complete the process of public issue. These activities may be designated as the post-issue tasks. Thus, we can identify three distinct stages in the successful completion of a public issue.

Pre-issue tasks

Opening and closing of the issue

Post-issue tasks.

Pre-Issue Tasks

These are the preparatory obligations to be complied with before the actual opening of the issue.

Drafting and finalisation of the prospectus Prospectus is an essential document in a public issue. The Companies Act 1956 defines a prospectus as: “Any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchasnharr debentures oody corporate”hffcumenh contains all the information pertaining to the company which will be useful to the investors to arrive at a proper decision regarding investing in the company. It is a communication from the issuer to the investor. The prospectus contains detailed information about the company, its activities, promoters, directors, group companies, capital structure, terms of the present issue, details of proposed project, details regarding underwriting arrangements, etc. SEBI has issued guidelines regarding the contents of the prospectus and these have to be complied with by the company.

The draft prospectus has to be approved by the Board of Directors of the company. The draft prospectus has also to be filed with SEBI and the Registrar of companies. The final prospectus has to be prepared as per the suggestions of SEBI and filed with SEBI and the Registrar of companies.

Selecting the intermediaries and entering into agreements with them Several intermediaries are involved in the process of a public issue. These intermediaries have to be registered with SEBI. Important categories of intermediaries are the following:

Merchant Banker: Merchant banker is any person or institution which is engaged in the business of issue management either as manager, consultant, adviser, or by rendering corporate advisory service in relation to such issue management. Merchant bankers play an important role in the process of managing a public issue. It is the duty of the merchant bankers to ensure correctness of the information furnished in the prospectus as well as to ensure compliance with SEBI rules, regulations and guidelines regarding public issue of securities. Merchant bankers are registered with SEBI in four categories, with different eligibility criteria for each category.

Registrar to an Issue: Registrar to an issue is any person or institution entrusted with the following functions in connection with a public issue:

Collecting applications from investors.

Keeping a record of applications and monies received from investors

Assisting the stock issuing company in determining the basis of allotment of securities in consultation with the stock exchange.

Finalising the list of persons entitled to allotment of securities.

Processing and despatching allotment letters, refund orders, certificates and other related documents.

Share Transfer Agent: Share transfer agent is a person or institution which maintains the records of holders of securities of a company on behalf of that company. The share transfer agent is authorised to effect the transfer of securities as well as the redemption of securities wherever applicable.

BANKER TO AN ISSUE: Banker to an issue is a scheduled bank entrusted with the following activities in connection with a public issue:

Acceptance of application and application monies

Acceptance of allotment or call monies

Refund of application monies

Payment of dividend or interest warrants.

The intermediaries are service providers possessing professional expertise in the relevant areas of operation. The market regulator, SEBI, regulates the various intermediaries in the primary market through its regulations for these intermediaries.

SEBI has defined the role of each category of intermediary, the eligibility criteria for granting registration, their functions and responsibilities, and the code of conduct to which they are bound.

The stock issuing company has to select the intermediaries such as merchant banker, registrar to the issue, share transfer agent, banker to the issue, underwriters, etc. and sign separate agreements with each of them to engage them for the public issue.

Attending to Other Formalities

The prospectus and application forms have to be printed and despatched to all intermediaries and brokers for wide circulation among the investing public. An initial listing application has to be filed with the stock exchange where the issue is proposed to be listed. An abridged version of the prospectus along with the issue opening and closing dates has to be published in newspapers.

Opening and Closing of The Issue

The public issue is open for subscription by the public on the pre-announced opening date. The application forms and application monies are received at the branches of the bankers to the issue and forwarded by these bankers to the Registrar to the issue. Two closing dates are prescribed for the closing of the public issue.

Thirsheshearliesatehould nohahreays from the opening date. If sufficient applications are received by the company, the company may choose to close the issue on the earliest closing date itself. The other closing date is the final or latest closing date which shall not exceed ten days from the opening date.

Post-Issue Tasks

After closing of the public issue, several activities are to be carried out to complete the process of public issue. They are:

All the application forms received have to be scrutinised, processed and tabulated.

When the issue is not fully subscribed to, it becomes the liability of the underwriters to subscribe to the shortfall. The liability of each underwriter has to be determined.

When the issue is oversubscribed, the basis of allotment has to be decided in consultation with the stock exchange.

Allotment letters and share certificates have to be despatched to the allottees. Refund orders have to be despatched to the applicants whose applications are rejected.

Shares have to be listed in the stock exchange for trading. For this purpose. the issuing company has to enter into a listing agreement with the stock exchange.

Book Building

Companies may raise capital in the primary market by way of public issue, rights issue or private placement. A public issue is the selling of securities to the public in the primary market. The usual procedure of a public issue is through the fixed price method where securities are offered for subscription to the public at a fixed price. An alternative method is now available which is known as the book building process. Although book building has been a common practice in most of the developed countries, the concept is relatively new in India. SEBI announced guidelines for the book building process, for the first time, in October 1995.

Under the book building process, the issue price is not fixed in advance. It is determined by the offer of potential investors about the price which they are willing to pay for the issue. The price of the security is determined as the weighted average at which the majority of investors are willing to buy the security. Thus, under the book building process, the issue price of a security is determined by the demand and supply forces in the capital market.

SEBI guidelines define 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 memorandffcument”.

Book building is a process of price discovery. It puts in place a pricing mechanism whereby new securities are valued on the basis of the demand feedback following a period of marketing. It is an alternative to the existing system of fixed pricing.

A public issue of securities may be made through the fixed price method, the book building method, or a combination of both. In case the issuing company chooses to issue securities through the book building route, then as per SEBI guidelines the issuer company can select any of the following methods:

100 per cent of the offer to the public through the book building process.

Seventy-five per cent of the offer to the public through the book building process and twenty-five per cent through the fixed price method at the price determined through book building.

Ninety per cent of the offer to the public through the book building process and ten per cent through the fixed price method.

The issue of the fixed price portion is conducted like a normal public issue after the book built portion is issued.

The steps involved in the process of book building may be listed out as follows:

The issuer appoints a merchant banker as the lead manager and book runner to the issue.

The book runner forms a syndicate of underwriters. The syndicate consists of book runner, lead manager, joint lead managers, advisors, co-managers and underwriting members.

A draft prospectus is submitted to SEBI without a price or price band. The draft prospectus is then circulated among eligible investors with a price band arrived at by the book runner in consultation with the issuer. Such a prospectus is known as a Red Herring prospectus.

The book runner conducts awareness campaigns, which include advertising, road shows and conferences.

Investors place their orders with syndicate members. These members collect orders from their clients on the amount of securities required by them as well as the price they are willing to pay.

The book runner builds up a record known as Book after receiving orders from members of the syndicate. He maintains detailed records in this regard. The book is thus built up to the size of the portion to be raised through the book building process. When the book runner receives substantial number of orders, he announces closure of the book. A book should remain open for a minimum of three working days. The maximum period for which the bidding process may be allowed is seven working days.

On the basis of the offers received, the book runner and the issuer company then determines the price at which the securities shall be sold.

The book runner finalises the allocation to syndicate members. Procurement agreements are signed between issuer and the syndicate members for the subscription to be procured by them.

The final prospectus along with the procurement agreements is then filed with the Registrar of companies within two days of the determination of the offer price.

The book runner collects from the institutional buyers and the underwriters the application forms along with the application monies to the extent of the securities proposed to be allotted to them/subscribed by them.

Book building is a process wherein the issuer of securities asks investors to bid for their securities at different prices. These bids should be within an indicative price band decided by the issuer. Here investors bid for different quantity of shares at different prices. Considering these bids, issuer determines the price at which the securities are to be allotted. Thus, the issuer gets the best possible price for his securities as perceived by the market or investors.