Skip to main content

Issue Management: Public Issue

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.

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.
Back to top