Issue Management: Public Issue

1. Public Issue: The Primary Method

• Definition: A Public Issue refers to a fundraising process where a company invites the general public to subscribe to its shares. It's the most common method of mobilizing capital for new ventures and expansion projects.
• Process:
  • Pre-issue: Company gets the documents set to SEBI and to the Stock Exchange(s) where the issue is proposed to be listed.
  • Launch Company can advertise about the launch after it sets all the documents and obtains required registrations.
  • Issue: After following all legal proceedings the company makes the stock live in the market.
  • Post Issue: Manages the post issues pertaining to the issue by post-issue management process and gives data and information to the various involved parties.
• Key Documents: The process is carried out through a prospectus.
• This document has to have all essential factors.
• The prospectus has to show information about the share market.

2. Classification of Companies in a Public Issue (IPO)

When a company decides to raise capital through an Initial Public Offering (IPO), it's important to understand how they are classified, as this impacts regulatory requirements and investor perception. Here's a simplified breakdown:

Key Classifications:

• Large Cap Companies:
  • These are generally well-established companies with a large market capitalization (the total value of their outstanding shares).
  • They typically have a proven track record of profitability and stability.
  • IPOs from large-cap companies are often considered relatively less risky compared to those from smaller companies.
• Small and Medium Enterprises (SMEs):
  • SMEs are smaller companies with lower market capitalization.
  • They often have higher growth potential but also carry higher risks.
  • In India, SME IPOs are typically listed on specialized platforms like the BSE SME or NSE Emerge platforms, which have different listing requirements than the main exchanges.
• Startup Companies:
  • These are relatively new companies, often in the technology or innovation sectors.
  • They may have high growth potential but also significant uncertainty and risk.
  • Regulations are being updated to help these companies raise capital.
• Infrastructure Companies:
  • Companies that work in the infrastructure sector, like road, railway, and power generation.
  • These companies often require large amounts of capital, and therefore often use IPO's to raise that capital.
• Financial Institutions:
  • Banks, insurance companies, and other financial services companies.
  • These companies are highly regulated, and their IPO's are also highly scrutinized.

Regulatory Considerations:

• The Securities and Exchange Board of India (SEBI) sets the regulations for IPOs in India.
• SEBI regulations vary depending on the size and type of the company.
• SME IPOs have less stringent requirements than main board IPOs.
• The type of company impacts the amount of disclosures that must be made to potential investors.

Eligibility Criteria:

Companies must meet certain requirements to launch an IPO. These vary depending on the exchange and the type of company (main board vs. SME). Here's a simplified overview:

• Main Board IPOs (Large Cap):
  • Net Tangible Assets: The company must have a minimum level of net tangible assets (e.g., land, buildings, equipment).
  • Profitability: A track record of profitability is usually required.
  • Net Worth: A minimum net worth is necessary.
  • Track Record: A minimum operating history is often mandated.
  • Compliance: Compliance with all applicable laws and regulations.
  • Minimum Public Offering Size: There is a minimum amount of capital that must be raised.
• SME IPOs:
  • SME IPOs have less stringent eligibility criteria compared to main board IPOs.
  • Focus is more on the potential of the business and its growth prospects.
  • Net worth and track record requirements are generally lower.
  • These IPOs are often listed on specialized exchanges.

Issue Pricing:

Issue pricing refers to the price at which the company's shares are offered to the public. Several methods are used to determine this price:

• Fixed Price Issue:
  • The company sets a fixed price for its shares.
  • Investors apply for shares at that predetermined price.
  • This method is less common due to the risk of over or underpricing.
• Book Building Issue:
  • This is the most common method.
  • A price band is set, and investors bid for shares within that range.
  • The final issue price is determined based on the demand received from investors.
  • This allows for price discovery based on market forces.
• Factors Affecting Issue Pricing:
  • Financial Performance: Historical and projected financial performance.
  • Industry Outlook: The growth prospects of the company's industry.
  • Market Conditions: Overall market sentiment and investor appetite.
  • Company's Growth Potential: The company's future growth prospects.
  • Peer Comparisons: Valuation of comparable companies.
  • Demand: The level of investor demand during the book-building process.
• Role of Investment Bankers:
  • Investment bankers play a crucial role in determining the issue price.
  • They conduct due diligence, analyze financial data, and provide advice on pricing.

3. Promoter Contribution in a Public Issue (IPO)

What is Promoter Contribution?

• Promoters are the individuals or entities who establish and drive the company.
• Promoter contribution refers to the portion of the company's capital that these promoters already own before the IPO.
• Essentially, it's their existing stake in the company.

Why is it Important?

• Demonstrates Commitment:
  • It shows that the promoters have "skin in the game."
  • Their existing investment signals their belief in the company's future.
• Aligns Interests:
  • By maintaining a stake, promoters' interests are aligned with those of the new public shareholders.
  • If the company performs well, both benefit.
• Investor Confidence:
  • A significant promoter contribution can instill confidence in potential investors.
  • It suggests that the promoters are invested in the company's long-term success.

SEBI's Role:

• The Securities and Exchange Board of India (SEBI) regulates promoter contributions.
• SEBI sets minimum promoter contribution requirements.
• This is to ensure that promoters maintain a meaningful stake.
• SEBI also sets lock-in periods, so promoters cannot sell all their shares immediately after the IPO. This is to ensure long term commitment.

Example:

• Imagine a company called "TechStart" going public.
• The founders (promoters) have invested their own money and built the company.
• Before the IPO, they own 70% of the company's shares.
• This 70% is their promoter contribution.
• SEBI may require that a certain percentage of that 70% must be locked in for a certain amount of time after the IPO.

In Simple Terms:

Think of it like this: If you're starting a restaurant, you'd want to invest your own money first. This shows you believe in your restaurant. Similarly, promoters invest their money in their company, and this investment is their contribution.

Promoter contribution is a measure of the promoters' commitment and confidence in their company. It's a vital factor for investors to consider when evaluating an IPO.