Sunday, April 11, 2010

Intermediaries involved in an IPO Process

In one of my earlier articles about Equity Shares – I had explained about how an IPO process happens. Let us dig deeper into an IPO process and discuss on the details.
An IPO stands for Initial Public Offering – the first time a company offers shares to the various sections of the investor population in our country. In the primary market when a share is issued/offered to public, the money that we pay towards the share goes directly to the promoters of the company.

To Refresh – An IPO is a process where the promoters of a company issue shares to the public to raise money to expand and run their business more effectively. Once an IPO is complete, the shares are delivered to the public and the promoters can use the money for their business. Once every year the company would declare its results and maybe a Dividend to keep its share holders happy. When an IPO is offered it can be either at face value or at a premium.

Issue at Face Value:
This is an issue where the promoters of the company issue shares to the public at the face or base value of the share. The face value of shares is usually Rs. 10 or Rs. 5 or Rs. 1 or any other denomination that the promoters deem appropriate. Such issues are very rare.

Assuming the company issues 100,000,000 shares @ Rs. 5 per share face value the company would make Rs. 500,000,000/-

Issue at a Premium:
This is an issue where the promoters of the company issue shares to the public at a price which is much higher than its face value. The value that an investor pays for a share over and above its face value is termed as the “Premium”

Assuming the company issues 100,000,000 shares of Rs. 5 face value @ Rs. 50 per share, the company would make Rs. 5,000,000,000/-

Here an investor is willing to pay Rs. 45/- extra per share over and above the original price of Rs. 5/- per share because of the history of profit making and strong business presence over the previous years. Since the investor feels that this company can continue to exhibit such strong business performance he is willing to offer this Premium.

Now that we know the basics of what an IPO is let us see the various intermediaries in a public issue.

When a company launches an IPO inviting the public to buy its shares, it has to appoint various intermediate people who will enable them t successfully complete the issue process. They are:

1. Book Running Lead Managers (BRLMs)
2. Bankers for the Issue
3. Underwriters
4. Registrars etc...

Book Running Lead Managers:

The company issuing shares appoints the BRLM or the Lead Merchant Bankers. The role of the BRLM can be divided into two parts, viz., Pre Issue and Post Issue.
The Pre Issue role includes compliance with the stipulated requirements of SEBI and other regulatory authorities, completion of formalities for listing of the shares on the Stock Exchanges (NSE or BSE in India) appointing of various agencies like advertising agencies, printers, underwriters, registrars, bankers etc.
The Post Issue activities include management of escrow accounts (The bank accounts where the money from all share applicants will get deposited), deciding the final share issue price, share allotment to applicants, ensuring proper refund to unsuccessful applicants, allotment letters and ensuring that each agency is carrying out their requisite functions properly and by abiding by the laws laid down by SEBI for an IPO process.

Bankers to the Issue:
Bankers to the issue, as the name suggests are the people who carry out all banking activities like accepting the money from the applicants, transfer of funds to the promoters and transfer of refunds to unsuccessful applicants.

The Registrar finalizes the total list of all applicants and comes up with the list of eligible applicants after deleting all invalid applications. Then he ensures that shares are credited to the allottees accounts and refunds are sent to unsuccessful applicants.

Underwriters to the Issue:

Underwriters are the institutions/individuals who agree to buy the shares of the company in case the company is unable to sell all its shares to the public. For providing this safety, the underwriters charge a commission to the company for providing this service.

Happy Investing!!!

1 comment:

  1. this was a good article. I am currenlty working at understanding the entire IPO process for an unlisted company.
    can you touch upon very briefly the regulation that one needs to comply with pre SEBI and post SEBI filing


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